Professional Documents
Culture Documents
CHAPTER 1...................................................................................................................1
RECORDING OF TRANSACTIONS USING ACCRUAL BASED ACCOUNTING 1
CHAPTER 2.................................................................................................................12
ACCOUNTING STANDARDS..................................................................................12
CHAPTER 3.................................................................................................................18
CASH BOOK AND BANK RECONCILIATION......................................................18
CHAPTER 4.................................................................................................................33
SUBSIDIARY BOOKS OF ACCOUNTS...................................................................33
CHAPTER 5.................................................................................................................42
TRIAL BALANCE AND CONTROL ACCOUNTS..................................................42
CHAPTER 6.................................................................................................................52
PRESENTATION OF FINANCIAL STATEMENTS................................................52
CHAPTER 7................................................................................................................61
ADJUSTMENTS TO FINAL ACCOUNTS................................................................61
CHAPTER 8.................................................................................................................67
STATEMENT OF CASH FLOW................................................................................67
CHAPTER 9.................................................................................................................79
ACCOUNTING FOR NON CURRENT ASSETS......................................................79
CHAPTER 10...............................................................................................................93
FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION....................93
1
CHAPTER 1
RECORDING OF TRANSACTIONS USING ACCRUAL
BASED ACCOUNTING
Introduction
A business entity must necessarily keep a systematic record of what happens from day
to day so that it can know where it stands and so that it can satisfy the income-tax
officers and other interested parties of that entity. A systematic record of the daily
events of a business leading to presentation of a complete financial picture is known
as accounting, on in its elementary stage as book-keeping. The financial picture
mostly has two parts, one showing how much profit has been earned, (or loss
suffered) and the other showing assets and liabilities and the owners’ interest in the
firm. Even institutions which profit earning is not an objective, for example a social
association, needs to know periodically whether the current income is sufficient to
meet the current expenditure and what the financial state of affairs is. The recording
must be in terms of money as being the most accepted common measure.
Financial reports prepared for this purpose meet the common needs of most users and
these are known as general purpose financial reports. However, financial reports do
not provide all the information that users may need to make economic decisions since
they largely portray the financial effects of past events and do not necessarily provide
non-financial information.
Financial reports also show the results of the stewardship of management, or the
accountability of management for resources entrusted to it. Those users who wish to
assess the stewardship or accountability of management do so in order that they may
make economic decisions. These decisions may include, for example, whether to
borrow, or to open a branch or whether to reappoint or replace management, etc.
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(d) Government and their agencies - The statements are important for
ascertaining the taxes and other levies.
(e) Employees - Knowledge of the results of operations helps them in conducting
negotiations for better wages and also to assess security of their employment.
(f) Suppliers – They would like to be satisfied that their customer will continue
in the business and they don’t lose him.
(g) Grant Providers – To assess whether to give the grant and also to assess
whether the money granted were used for the purpose intended.
(h) Public in general – To assess how socially responsible the entity is. Also to
assess the environment issues and how the entity addressed them.
Accounting transactions
A firm constantly enters into transactions with outsiders. A transaction may be
defined as the actions and reactions of one person or firm in relation to another person
or firm. Only those transactions, which involves transfer of money or money worthy
(goods or services) from one person to another are recorded in the books of account.
Examples of business transactions are tuition fees, sales of goods, payment of various
bills, purchase of goods, etc.
Definition of Accounting
Accounting has been defined by the American Institute of Certified Public
Accountants as “the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least, of a
financial character, and interpreting the results thereof”. This definition brings out the
following as attributes of accounting:
(a) Events and transactions of financial nature are recorded. Events of a non-
financial nature cannot be recorded.
(b) The record must be in such a way as to be able to portray the significant of all
averts and transactions.
(c) The parties concerned must be able to gather the true message of the results
embodied in the statements prepared.
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The first three of these activities are considered to be book-keeping.
3
Elements of Financial Reports.
Financial reports portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics. These
broad classes are termed the elements of financial reports. A complete set of financial
reports comprises:
1. Statement of Financial Position – which shows the financial position of the firm;
2. The Comprehensive Statement of Income which show the performance of the
firm; and
3. The Cash Flow Statement – which shows how the firm generated and utilized
cash;
4. Statement of Changes in Net Assets – which shows what contributed to the
change of net assets during the period; and
5. Accounting policies and other explanatory notes.
Financial Position
Elements directly related to measurement of financial position in the balance sheet are
assets, liabilities and equity.
(a) Assets – An asset is a resource controlled by entity. These are categorized into
non-current assets and current assets. Non-current assets are for the use by the
entity for more than one accounting period, for example, building, equipments,
investments, etc. Current assets are those, which are circulating. (Working
capital).
(b) Liabilities – A liability is a present obligation of the entity. Liabilities may also be
categorized into non-current and current liabilities. Non-current liabilities are
those interests bearing liabilities payable in a long term (in more than one
accounting period). For example Bank loans, Debentures, etc. Current liabilities
are those obligations payable within twelve months.
(c) Equity – Equity is the residual interest in the assets of the entity after deducting
all liabilities.
Performance
The elements directly related to the measurement of performance in the income
statement are income and expenses.
(a) Income – Income encompasses both revenue and gains. Revenue arises in the
course of the ordinary activities of an entity and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent.
Gain represent other items may or may not arise in the course of ordinary
activities of the entity, e.g. interest received on investments.
(b) Expenses - Expenses encompasses losses as well as those expenses that arise
in the course of ordinary activities of the entity. For example cost of sales,
wages, interests paid on loans, depreciation, etc.
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Changes in Cash Position
The Cash Flow Statement usually reflects changes in cash position brought by income
statement and changes in balance sheet elements.
Accounting Policies
Accounting policies are specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial reports. Users of financial
reports need to be able to compare the financial reports of an entity over time to
identify trends in financial position and performance. Therefore, the same accounting
policies must be applied consistently within each period and from one period to the
next. An entity is also required to disclose in the summary in its financial reports
significant accounting policies applied in preparing the financial reports.
Accounting Assumptions
In the preparation of financial reports a number of assumptions are made. Among
others include:
Accrual Basis
In order to meet the objective of the financial reports, financial reports are prepared
on accrual basis of accounting. Under accrual basis of accounting, the effects of
transactions and other events are recognized when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in the accounting records and
reported in the financial reports of the periods to which they relate. Financial reports
prepared on accrual basis inform users not only past transactions involving payment
and receipts of cash but also of the obligations to pay cash in future and of resources
that represent cash to be received in future. Hence, they provide the type of
information about past transactions and other events that is most useful to users in
making economic decisions.
Going Concern
The financial reports are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the unforeseeable future. Hence it is
assumed that an entity has neither the intention nor the need to liquidate or curtail
materially the scale of its operations; if such an intention or need exists, the financial
reports may have to be prepared on a different basis and, if so, the basis used is
disclosed.
Business Entity
In preparing financial reports, it is assumed that a business entity is a legal entity
separate from not only its owner but also from other businesses owned by the same
owner. Hence transaction of entity should be reported separate from owner’s other
transactions.
Accounting Equation
The business entity needs assets whether in cash or other forms to carry on its daily
activities. These assets may be provided by owner of the business or borrowed
from external sources. The accounting equation expresses the relationship between
assets owned by the business and how these assets have been funded. Assets are
described as kinds of property that the business owns, such as buildings, motor
vehicles, machinery, cash in hand etc. The liabilities and the stockholders’ equity
represent the total claims against those assets. Because a company’s assets must
5
always equal its liabilities plus its stockholders’ equity, their relationship can be
expressed in an equation form as follows:
By using this equation, the stockholders Equity (capital) on a company’s total assets
can be determined. For example, if total assets of a company are known to be TZS.
2,000,000 and total liabilities are TZS. 800,000 the stockholders’ equity therefore are
TZS. 1,200,000. This is true because total assets are always equal to total claims
against those assets.
The accounting equation will always be true regardless of the number of transactions
take place in the business. The transaction may always affect accounting equation in
one of the following ways.
(i) Either may increase assets side and increase capital and liabilities side; or
(ii) May decrease asset side and decrease capital and liabilities side; or
(iii) May increase and decrease assets side only.
For example:
(a) Cash purchases - decrease asset (cash) and increase asset (stocks).
(b) Bank loan - increase asset (cash in the bank) and increase liabilities (loan).
(c) Owner moved personal car into the business - increase asset (car) increase capital
Recording of Transactions.
Recording of business transaction is one of the main activities of accounting. All
business transaction that results into a transfer of money or money worth must be
recorded in the books of account. Theoretically, there are two systems of recording
business transactions namely double entry and single entry systems. But in practice
the universally accepted system is the double entry system.
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Example of an Account.
ACCOUNT NO.
DEBIT ACCOUNT NAME CREDIT
Date Particulars Folio Amount Date Particulars Folio Amount
Every transaction is recorded twice. Once in the debit side of the account which
receives value and then in the credit side of the account which gives value. Therefore
every debit entry will have a corresponding credit entry.
A/C NO.1
Dr. CASH ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
A Capital No .2 20,000,000 B Furniture No. 3 2,800,000
F Sales No. 6 1,500,000 C Bank No. 4 6,000,000
J Sales No. 6 4,000,000 D Purchases No. 5 2,000,000
H Rent No. 8 200,000
I Purchases No. 5 3,000,000
A/C NO.2
7
Dr. CAPITAL ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
A Cash No.1 20,000,000
A/C NO.3
Dr. FURNITURE ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
B Cash No.1 2,800,000
A/C NO. 4
Dr. BANK ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
C Cash No.1 6,000,000 F Motor van No.7 5,000,000
G Sales No.6 1,800,000 G
A/C NO. 5
Dr. PURCHASES ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
D Cash No.1 2,000,000
I Cash No. 1 3,000,000
A/C NO. 6
Dr. SALES ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
F Cash No. 1 1,500,000
E Bank No. 4 1,800,000
J Cash No. 1 4,000,000
A/C NO.7
Dr. MOTOR VAN ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
H Cash No.1 100,000
A/C NO. 8
Dr. RENT ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
H Cash No.1 100,000
The total of the debit entries at any point of time must be equal to the total of credit
entries.
Balancing of Accounts
At the end of each month the accounts are balanced to find out the difference
(balance). The account is balanced off by comparing the two sides (debit and credit
sides) and establishes the difference. The difference between the two sides is called
the balance and is carried forward to the next month.
Let’s take account No. 1 - cash account as an example. The total of the debit side is
TZS 25,500,000 and the total of the credit side entries is TZS 14,000,000. The
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difference between the two sides is TZS 11,500,000. This is the balance in the cash
account and is a debit balance because debit side was greater than the credit side by
TZS 11,500,000. This balance will be carried forward to next month as an opening
balance. (Balances in the accounts at the end of the period represent
accumulation/balances for the whole period).
A/C NO.1
Dr. CASH ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
A Capital No .2 20,000,000 B Furniture No. 3 2,800,000
F Sales No. 6 1,500,000 C Bank No. 4 6,000,000
J Sales No. 6 4,000,000 D Purchases No. 5 2,000,000
H Rent No. 8 200,000
I Purchases No. 5 3,000,000
Balance c/d 11,500,000
25,500,000 25,500,000
Balance b/d 11,500,000
All accounts will be balanced and carry forward the balances. The balances of every
account are then listed in one schedule called a Trial balance.
Questions
1. Define double entry book-keeping system.
2. What is the Accounting Equation?
3. Why prepare a trial balance?
4. Complete the following table
5. From the following transactions write down account to be debited and account
to be credited.
(i) is an example.
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A C L
(i) Started a business with
TZS.10,000,000 Cash. +10,000,000 (cash) +10,000,000
(ii) Purchased Furniture for
TZS.800,000 cash
(iii) Bought goods for cash TZS.1,500,000
(iv) Opened bank account and paid in
TZS.4,000,000 cash
(v) Sold goods for cash TZS.1,200,000.
The goods cost TZS.800,000.
(vi) Sold good cost TZS.900,000
to Iddi for TZS.660,000.
(vii) Bought good by cheque
TZS.2,000,000.
(viii) Bought goods on credit from IPP
TZS.1,000,000.
(ix) Iddi paid by cheque TZS.760,000.
(x) Paid IPP by cheque TZS. 1,000,000.
(xi) Cash sales TZS.980,000
goods cost TZS.662,000
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February 5 Cash sales TZS.1,800,000
February 6 Opened bank account and paid in TZS.7,500,000 cash
February 8 Cash sales paid directed into the bank TZS.1,900,000
February 10 Cash sales TZS.800,000
February 11 Credit sales to Jannat TZS.1,400,000
February 13 Bought goods on credit from General stores TZS.3,900,000.
February 14 Credit sales to Sului TZS.1,600,000
February 16 Received cheque from Jannat 1,400,000
February 17 Cash sales TZS.1,650,000
February 19 Cash sales paid into bank TZS.1,700,000
February 20 Bought goods by cheque TZS.2,200,000
February 22 Cash sales TZS.1,900,000
February 23 Cash paid into bank TZS.2,400,000
February 24 Paid General Store by cheque TZS.2,500,000
February 27 Paid the following by cash salaries TZS.600,000. Rent TZS.450,000,
sundry expenses TZS.750,000.
February 28 Cash sales TZS.1,300,000.
ygt
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CHAPTER 2
ACCOUNTING STANDARDS
Introduction
Accounting standards are rules or principles set out by accounting professional boards
which states how particular types of transactions and other events should be dealt with
in preparation of financial reports i.e. how transactions are measured, recognized and
disclosed in the financial statements. Traditionally, standard setters were setting
standards responding to a problem. The problem of responding to a problem
(firefighting approach) in producing accounting standard only tends to close loopholes
by producing rules on how to deal with transaction. Modern accounting standards
focus on principles rather than rules.
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economic decisions, and to promote the use and rigorous application of those
standards.
Under IASC there are two committees International Accounting Standard Board
(IASB) and International Financial Reporting Interpretation Committee (IFRIC). The
duties of IASB are to set international Financial Reporting Standards and to promote
its use. While the role of IFRIC is to prepare interpretations of all IFRS and to provide
timely guidance on IFRS issues.
International Accounting
Standards Committee (IASC)
IASB IFRIC
IFRS is designed to apply to general purpose financial statements and other financial
reporting of all profit-oriented entities. Profit oriented entities include those engaged
in commercial, industrial, financial and similar activities, whether organised in
corporate or in other form. Although IFRS are not designed to apply to not for profit
activities in the private sector, public sector or government, entities with such
activities may find them appropriate. The Public sector Committee of International
Federation of Accountants has issued a guideline stating that IFRSs are applicable to
government business entities.
International Federation of
Accountants (IFAC)
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statements. In setting IPSAS, IPSASB ensures that pronouncements are consistent
with those of IASB to the extent those pronouncements are applicable and appropriate
to the public sector.
14
Construction Contracts IPSAS 11 IAS 11
Inventories IPSAS 12 IAS 2
Leases IPSAS 13 IAS 17
Events After the Reporting Dates IPSAS 14 IAS 10
Financial Instruments: Disclosures and Presentations IPSAS 15 IFRS 7 & IAS
32
Investment Properties IPSAS 16 IAS 40
Property, Plant and Equipment IPSAS 17 IAS 16
Segment Reporting IPSAS 18 IFRS 8
Provisions, Contingent Liabilities and Contingent Assets IPSAS 19 IAS 37
Related Party Disclosures IPSAS 20 IAS 24
Impairment of Non Cash Generating Assets IPSAS 21 IAS 36
Disclosure of Information About the General Government IPSAS 22
Sector
Revenue From Non-Exchange Transactions (Taxes and IPSAS 23
Transfers)
Presentation of Budget Information in Financial Statements IPSAS 24
Cash Basis IPSAS – Financial Reporting under Cash basis of
Accounting
IFRSs & IASs not found in IPSASs
First Adoption of International Financial Reporting Standards IFRS 1
Share-Based Payment IFRS 2
Business Combinations IFRS 3
Insurance Contracts IFRS 4
Non-Current Assets Held for Sale and Discontinued Operations IFRS 5
Exploration for and Evaluation of Mineral Resources IFRS 6
Income Taxes IAS 12
Leases IAS 17
Revenue IAS 18
Employee Benefits IAS 19
Accounting for Government Grants and Disclosure of IAS 20
Government Assistance
Accounting and Reporting by Retirement Benefit Plans IAS 26
Earnings per Share IAS 33
Interim Financial Reporting IAS 34
Intangible Assets IAS 38
Financial Instrument: Recognition and Measurements IAS 39
Investment Property IAS 40
Agriculture IAS 41
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IFRS- International Financial Reporting Standards issued after 2001 at present,
there are 8 IFRSs.
Interpretations of accounting standards, giving specific guidance on unclear
issues.
In narrow term, IFRS are the International Financial Reporting Standards issued after
2001 by the International Accounting Standard Board (IASB).
IASs are older set of standards stating how particular types of transactions and other
events should be reflected in financial statements. IASs were issued between 1973
and 2001 by the board of the International Accounting Standards Committee (IASC).
In April 2001 the IASB adopted all IAS and continued their development, calling the
new standards IFRS. Although IASs are no longer produced, they are still in effect
unless replaced by an IFRS, whether in its entirety or partially.
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guidelines of identified topics in 1990. In 2001, NBAA consolidate various
accounting guidelines into accounting standards and come up with Tanzania Financial
Accounting Standards (TFAS). By 2002, NBAA had issued 30 TFASs that were
formulated to be in line with International accounting standards. From 1 st of July
2004, Tanzania adopted wholesale the International Financial Reporting Standards
(IFRS) which are formed by International Accounting Standards Board.
Objectives of NBAA
Setting high quality standards where necessary.
Regulating registration of members and students and their conduct
Monitoring Accountancy training and conducting professional examinations.
Providing continued professional development programmes to enhance member’s
professional knowledge and skills.
Adoption of IFRS
In July 2004 Tanzania adopted wholesale the IFRS and therefore stopped using TFAS
except for those which there was no IFRS/IAS dealing with the respective item. There
are a number of advantages and disadvantages of adopting wholesale the IFRS.
Advantages
Costs and expenses incurred by NBAA in developing accounting standards are
shifted to IASB.
Developing countries benefit from IASB experienced staff.
International comparability of financial statements is enhanced.
Better access to capital from local and foreign.
International mobility of professionals through out the world.
Improved management information for decision making.
Reduce costs preparation for international companies.
Disadvantages
Standards may be too general not fitting the particular requirement of the country.
Comments and opinions of Developing countries may be negligible and hence not
taken in developing the standards.
Adoption under develop local talents of Tanzanian.
Priority of development of standards may not be right. IASC will follow their own
program where as a developing country may be in an urgent need of a specific
standard which falls latter in the grogram. The requirements of various countries
differ.
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CHAPTER 3
CASH TRANSACTIONS AND BANK RECONCILIATION
Introduction
Cash book is the prime book for recording cash transactions. Despite of having all
features of a ledger, cash book is a book of original entry for recording cash
transactions. It records all cash receipts and cash payments before posted to the
ledgers. A cash book can have single column, two columns, three columns or can
have many columns commonly known as analytical cash book with a number of
analysis columns. Single column cash book (cash a/c) is used where a business does
not have a bank a/c. The balance on the cash book (cash a/c) at any time should be
the same as the cash in hand.
The bank columns contain details of transactions made through the bank, that is the
money received and deposited into the bank account, and payments made by cheques.
The bank as a firm will also have a copy of businesses account in its own books. The
bank will periodically for example monthly, send a copy of the account in the bank’s
books to the firm, known as bank statement. When the firm receives bank statement,
will compare it with entries in its own cash book in the bank columns to ensure that
there are no discrepancies and bank reconciliation statement may be prepared to
reconcile the two balances as shown by the cash book and bank statement.
Contra-Entries
Deposit of cash in hand to bank account and withdraw of cash from bank account and
put it into cash account are both recorded in the same two columnar cash book. Since
both entries occur in the same cash book no ledger entry is required and this is know
as Contra entries.
Example:
Jan. 1. Walwah a sole trader started a business with, TZS.10,000,000 in cash
Jan. 2. She opened bank account and paid in TZS. 7,500,000 cash
Jan. 4. Purchased goods for resale by cheque TZS.5,000,000
Jan. 6. Bought Furniture’s by Cheque 1,500,000
Jan. 6. Paid for transport TZS. 20,000 cash
Jan. 9. Cash sales 3,000,000
Jan.12. Cash sales paid direct into bank 2,000,000
Jan.15 Received cheque from Mussa TZS.1,500,000
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Jan.18. Cash sales 780,000
Jan.20 Paid cash into bank TZS.1,700,000
Jan.22. Cash sales 1,700,000
Jan.24. Paid IPA by cheque 2,500,000
Jan.26. Withdraw cash from bank TZS.1,200,000 and paid salaries TZS.750,000, rent
TZS.750,000 by cash.
Jan.29 Cash sales TZS.720,000
At the end of each month the cash book is balanced off to determine the cash on hand
and at bank. To balance off the cash book the debit column of the cash column is
compared with the credit column of the cash column. Likewise the debit side of the
bank column is compared with the credit side of the bank columns. The difference in
the cash columns is the cash on hand and the difference in the bank columns is the
balance at the bank. These balances are carried forward to the next month as starting
balances. From the previous example the balances in the cash and bank columns are:
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Cash Discount
Cash discount is allowance given to a customer (debtor) to speed up payments. The
purpose of cash discount is to encourage customers to pay their accounts promptly.
The discount rates are quoted in percentage. The period within which payment is to
be made are also quoted on all sales documents by selling company. Typical period is
one month or 30 days since the date of original transactions.
The firm will encounter cash discounts from two different angles, it may allow cash
discounts to firms to whom it sells goods known as discount allowed or it may receive
cash discounts from firms from whom it buys goods, known as discount received.
Discount allowed is an expense to the firm while discount received is an income. The
discount column on the debit side records discount allowed, while the discount
column in the credit side records discount received. The discounts are then posted to
respective customers and suppliers accounts. The total from discounts columns are
transferred to discount allowed account and discount received account respectively in
the general ledger at the end of each month to complete the double entry book-
keeping for discounts.
Example:
Jan. 1. Balances brought forward cash TZS. 960,000, bank TZS. 6,750,000.
2. Cash Sales TZS.2,700,000.
4. Received cheque from Anna TZS.4,000,000 less 10 percent cash discount.
5. Cash sales paid direct into bank TZS.1,900,000.
7. Paid IPA by cheque TZS.5,000,000 less TZS.250,000 cash discount.
9. Cash sales TZS. 2,800,000.
11. Cash purchases TZS.4,000,000 less 5 percent cash discount.
11. Paid for transport TZS.50,000 cash.
13. Cash sales 2,560,000 less TZS.60,000 cash discount.
15. Paid cash into bank TZS.5,000,000
17. Received cheque from Iddi TZS.3,000,000 less 10 percent cash discount
20. Received cheque TZS.2,100,000 from Anna.
24. Paid M.T. Patel by cheque TZS.3,200,000 less 5% cash discount.
27. Cash sales TZS.2,000,000 less 10% trade discount and 5% cash discount.
29. Withdraw cash from bank TZS.2,000,000 and paid TZS.1,200,000 salaries.
30. Paid rent TZS. 1,200,000 by cash and deposit all cash except TZS. 1,000,000.
20
Debit Cash Book Credit
Date Particulars Folio Discount Cash Bank Date Particulars Folio Discount Cash Bank
allowed received
Jan 1 Balance bld 960,000 6,750,000 Jan 7 IPA 250,000 4,750,000
“ 2 Sales 2,700,000 “ 11 Purchases 200,000 3,800,000
“ 4 Anna 400,000 3,600,000 “ 11 Transport 50,000
“ 5 Sales 1,900,000 “ 15 Bank C 5,000,000
“ 9 Sales 2,800,000 “ 24 M.T. Patel 160,000 3,040,000
“ 13 Sales 60,000 2,500,000 “ 29 Cash C 2,000,000
“ 15 Cash C 5,000,000 “ 29 Salaries 1,200,000
“ 17 Iddi 300,000 2,700,000 “ 29 Rent 1,200,000
“ 20 Anna 2,100,000 “ 30 Bank C 1,320,000
“ 27 Sales 90,000 1,710,000 “ 31 Balance C/d 100,000 13,580,000
“ 29 Bank C 2,000,000
“ 30 Cash C 1,320,000
850,000 12,670,000 23,370,000 610,000 12,670,000 23,370,000
Feb. 1 Balance b/d 100,000 13,580,000
22
Posting of discounts.
The discount allowed or received together with the amount received or paid are posted to
respective ledger accounts after being recorded in the cash book. For example:
SL
Dr. Anna A/C Cr.
Date Particular Folio Amount Date Particular Folio Amount
Jan.4 Bank CB 3,600,000
Jan.4 Disc.allowed CB 400,000
PL
Dr. IPA A/C Cr.
Date Particulars Folio Amount Date Particular Folio Amount
Jan.7 Bank CB 4,750,000
Disc. Received CB 250,000
The total discounts are posted to respective discounts accounts in the General ledger, at
the end of each month.
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Example of Analytical cash book.
Date Particulars Folio Total Tuition Fees Consultancy Hostel Laboratory Drilling Others
Rent Income
Jan 1 Kauye 700,000 700,000
“ 2 FTCB Co. 2,700,000 2,700,000
“ 4 Anna 600,000 600,000
“ 5 UDSMA 3,000,000 3,000,000
“ 9 Zanzibar ST 2,800,000 2,800,000
“ 13 Tusiime 2,500,000 2,500,000
“ 15 Cash 5,000,000 5,000,000
“ 17 Iddi 2,700,000 2,700,000
“ 20 Amrani 2,100,000 2,100,000
“ 27 Kijakazi 1,710,000 1,710,000
“ 29 Bank 2,000,000 2,000,000
“ 30 Cash (Juma Imprest returned) 1,320,000 4,710,000 1,320,000
27,130,000 6,100,000 9,600,000 9,420,000 2,700,000 2,700,000 1,320,000
24
PETTY CASH BOOK
This book is usually under the control of the petty cashier. A fixed amount is supplied to
him from which he makes payments. The amount supplied is known as cash FLOAT.
The need for petty cash arises in a business where all receipts are banked and all
payments are made by cheques, therefore writing cheques for each small expenditures
becomes uneconomical.
The amount received is entered in the debit side of the petty cash book and the
corresponding credit is made in the cash book. The conventional system for recording
petty cash is known as the imprest system. At the start of each accounting period cashier
is supplied with a round sum in cash “The Float”. This amount should be enough to
cover the estimated petty expenditure for a stated period, for example a month or a week.
Cashier must ascertain the total amount spent, and shall be reimbursed with cash for such
amount spent. The balance plus the amount reimbursed should restore the imprest, which
is bringing the total amount to original starting figure.
Example:
The following are petty transactions for the first week of January. Record them in the
petty cash book, with the following analytical columns: Postage, Traveling, Stationeries,
Sundry expenses, and Ledger accounts.
January:
1. Received Float TZS.200,000 and Paid for stamps TZS.12,000 and Paid for
transport (bus fare) TZS.12,500
2. Paid for envelopes, pens and other stationeries TZS.30,000
3. Paid for bus fare TZS.4,000 and Paid for refreshments TZS.36,000
4. Paid K. Joana a creditor TZS.50,000
4. Received TZS.4,800 from R.Juliet for a private call made.
5. Paid TZS.20,000 for taxi fare and bought the following, refreshments
TZS.5,000,stationeries TZS.10,000, tea TZS.2,000, sugar TZS.4,000.
6. Paid for transport TZS.10,00
25
DR COLUMNAR PETTY CASH BOOK CR
TZS. Date Details Pv. No Total Postage Travelling Stationeries Sundry exp. Folio Ledger
exp. A/cs.
200,000 Jan 1 Cash book CB
1 Stamps PV I 12,000 12,000
1 Transport PV2 12,500 12,500
2 Envps.Pens PV3 30,000 30,000
3 Bus fare PV4 4,000 4,000
3 Refresh PV5 36,000 36,000
4 K.Joana PV6 50,000 PL 50,000
4,800 4 R.Juliet
5 Train fare PV 7 20,000 20,000
5 Refresh PV 8 5,000 5,000
5 Stationeries PV 9 10,000 10,000
5 Tea & Sugar PV10 6,000 6000
5 Transport PV11 10 000 10,000
Total 195,500 12,000 46,500 40,000 47,000
Balance c/d 9,300
204,800 204,800
9,300 Jan.8 Balance b/d
190,700 Jan.8 Cash book CB
25
The total of each column are posted to respective ledger accounts at the end of the month/ petty
cash period:
General Ledger
Dr. Postage A/C Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan.7 Petty cash PCB 12,000
book
Purchases Ledger
Dr. K. Joana A/C Cr.
Date Particular Folio Amount Date Particulars Folio Amount
Jan.7 Petty cash book PCB 50,000
1) Un-presented cheques.
These are cheques written by the firm to various suppliers of goods and services. The person
having firm’s cheque may present to the bank for payment any time within 6 months
from the date writen before it becomes stale. Since bank statements are prepared
monthly it is possible that some of the cheques written may not yet be presented for
payment.
26
2) Un-credited cheques :
This usually happens for cheques deposited at the end of the month. Some banks take 2 or
nore days to clear the cheque; customer account is credicted after the clearance, and
therefore causing the differences in the two balances.
1) Direct Credit:
Firm’s Customers may pay directly to the firms bank account. Firm ‘s may also receive
interest or other incomes credited direct to firm’s bank account. The firm will not be
aware of these transactions until and when receiving the bank statement.
2) Bank charges:
The bank as a firm may charge its Customers for services rendered, and debit the firm’s
account with the amount so charged. The firm will be aware of the charges after receiving
the statement.
3) Standing orders
The firm may order its bank to pay certain transactions on his behalf from its account. For
example insurance premium, electicity bills etc. Until the firm’s receive the bank
statement that is when will be aware of the transactions.
4) Dishonoured cheques:
Some of the cheques deposited by the firm, may be returned due to insufficient funds. These
are known as dishonoured cheques. Dishounored cheques are debited in the firms account
by the bank. This is communicated to the firm through bank statement.
7) Errors:
Errors are very common and may be made in the bank statement or cash book or both,
and cause the two balances to differ.
27
BANK RECONCILIATION STATEMENT
Balance as per bank statement xxxx
add uncredited cheques xxx
xxx
less unpresented cheques xx
balance as per updated cash book xxx
OR
BANK RECONCILIATION STATEMENT
Balance as per updated cash xxx
add Unpresented cheques xx
xxx
less uncredited cheques xx
Balance as per bank statement xxx
Example:
CASH BOOK
1.1 Balance b/d 120,000 21 Sarah chq. 000926 300,000
3.1 Cash 400,000 51 IPT 000927 600,000
6.1 Stella 150,000 91 Patel 000928 200,000
10.1 Cash 500,000 101 Julliet 000929 300,000
14.1 Haule 250,000 12.1Chambenga 000930 400,000
18.1 STACO 580,000 19.1 Sudi 000931 200,000
24.1 Cash 200.000 24.1 IPT 000932 250,000
29.1 Shulli 300.000 31.1 Balance c/d 500,000
31.1 Stella 250,000
2,750,000 2,750,000
BANK STEMENT
Date Particulars Debit Credit Balance
1.1 Balance b/d 300,000
2.1 Cheque 000924 180,000 120,000
3.1 Cash 400,000 520,000
9.1 Cheque (Stella) 150,000 670,000
10.1 Cash 500,000 1,170,000
12.1 Cheque 000927 600,000 570,000
15.1 Bank charges 10,000 560,000
16.1 Cheque (Haule) 250,000 810,000
17.1 Cheque 000926 300,000 510,000
18.1 Cheque 000929 300,000 210,000
20.1 Cheque (Morogoro) 500,000 710,000
21.1 Cheque (STACO) 580,000 1290,000
24.1 Cheque 000930 400,000 890,000
24.1 Cash 200,000 1,090,000
25.1 Insurance Co (SO) 190,000 900,000
26.1 Cheque dishounoured 250,00 650,000
28
26.1 Cheque 000931 200,000 450,000
Note:
(i.) Cheque No.000924 was outstanding on previous months and presented in this month.
(ii.)Un-presented cheques
Cheque No. 000926 TZS.200,000
Cheque No. 000932 TZS.250,000
450,000
The difference in opening balances was caused by unpresented cheque No. 000924 of
TZS.180,000 presented on 2nd January.
OR
29
Exercises
1. Record the following cash transactions into a two column cash book.
2008
July 1 Zudica started business with TZS.1,500,000.
“ 2 Bought Furnitures for use in the business TZS.500,000 by cash
“ 3 Opened bank account and paid in TZS.800,000 cash
“ 4 Bought goods for resale TZS.300,000 by cheque and paid transport
expensesTZS.20,000 cash
“ 5 Cash sales TZS.120,000
“ 8 Cash sales paid direct into bank TZS.240,000
“ 10 Paid PK Ltd TZS.390,000 by cheque.
“ 12 Received cheque from Sambwe TZS.270,000
“ 16 Cash sales TZS.190,000
“ 18 Cash sales TZS. 180,000
“ 20 Paid cash into bank TZS.400,000
“ 22 Received cheque from Sauna TZS.300,000
“ 24 Cash sales 310,000
“ 26 Cash Purchases 250,000
“ 28 Received cheque from Sambwe TZS.240,000
“ 29 Cash sales 350,000
“ 30 Paid the following by cash salries TZS.180,000, Rent TZS.50,000
3. Enter the following in a three-column cash book. Balance off the cash book at the end of the
month and show the discount accounts in the general ledger.
2007
30
June 1 Balance brought forward: Cash 97,000, Bank 2,186,000
2 The following paid us by cheque in each case deducting 5 percent
cash discount; Beda TZS.1,000,000, Nandonde TZS.180,000, Kei
TZS.600,000.
3 Cash sales paid direct into bank TZS.134,000
5 Paid rent by cash TZS.80,000.
6 Paid the following accounts by cheque in each case deducting 5 percent cash
discount Juliet TZS.400,000, Kibo TZS.640,000, Chaula TZS.200,000.
8 Withdraw cash from the bank for business use TZS.250,000
10 Cash sales TZS.220,000
12 Dedes paid his account TZS.89,000 by cheque less TZS.2,000 cash discount
13 Cash sales 250,000
14 Paid wages by cash TZS.250,00
16 We paid the following accounts by cheque
Lucas TZS.170,000, less cash discount TZS.6,000, Fundikira
TZS.206,000 less cash discount TZS.8,000
20 Bought funitures by cheque TZS.800,000
24 Cash sales 500,000.
25 Paid cash into bank TZS.750,000
27 Bought motor vehicles TZS.7,000,000
29 Received cheque from Sultan’ s Ltd TZS.370,000.
30 Cash sales TZS.160,000
30 Bought stationery by cash TZS.60,000
4. The following cash book extract (bank columns) of Gulujaisi & Sons for may, 2007
Dr. CASH BOOK Cr.
May 1 Balance b/d 200,000 May 5 Samson Cheque No.110 300,000
“ 5 Cash 1,000,000 “ 9 Chelca “ “ 111 500,000
“ 7 Huria 700,000 “ 10 Maige “ “ 112 100,000
“ 12 Cash 300,000 “ 14 Cash “ “ 113 340,000
“ 15 Shozi 200,000 ,, 19 Surua Cheque No. 114 260,000
“ 17 Huria 400,000 “ 22 Cheka “ “ 115 410,000
“ 20 Cash 800,000 “ 25 Samson “ “ 116 390,000
“ 23 Ngowi 210,000 “ 27 Cash “ “ 117 600,000
“ 25 Cash 190,000 “ 31 Balance c/d 2,200,000
“ 27 Soloa 350.000
“ 30 Katundu 750,000
5,100,000 5,100,000
BANK STATEMENT
Date Particulars Debit Credit Balance
May 1 Balance b/d 200,000
“ 5 Cash 1,000,000 1,200,000
“ 7 Samson Cheque No.110 300,000 900,000
“ 9 Cheque 700,000 1,600,00
“ 12 Cash 300,000 1,900,000
31
“ 14 Cash Cheque No.113 340,000 1,560,000
“ 15 Maige Cheque No.112 100,000 1,460,000
“ 16 Cheque Morogoro 1,200,000 2,660,000
“ 16 Charges 10,000 2,650,000
“ 18 Shozi Cheque 200,000 2,850,000
“ 20 Cash 800,000 3,650,000
“ 21 Insurance premium 500,000 3,150,000
“ 22 Surua Cheque No.114 260,000 2,890,000
“ 25 Cash 190,000 3,080,000
“ 26 Samson Cheque No.116 390,000 2,690,000
“ 27 Cash 600,000 2,090,000
“ 30 Soloa Cheque 350,000 2,440,000
“ 31 Charges 40,000 2,400,000
You are required to reconcile the cash book and bank statement of Gulujaisi & Sons for
may, 2007
5. On 31st December 2007 the bank column of C.Tesha’s cash book showed a debit
balance of TZS. 660,000 while Bank statement showed a credit balance of
TZS.2,950,000. On checking the cash book with the bank statement the following
transactions had been discovered.
(i.) Dividends of TZS.200,000 had been paid directly to the bank.
(ii.) A credit transfer from on of customers S. Ngowi of TZS.260,000 had
been collected by the bank.
(iii.) Bank charges TZS.300,000
(iv) A direct debit of TZS.70,000 for association membership subscription had
been paid by the bank.
(v) A standing order of TZS.200,000 for loan repayment had been paid by the
bank.
(vi) C.Tesha’s deposit account balance TZS.1,400,000 was transfered into his bank
curreent account.
(vii) Unpresented cheques amounted to TZS.1,800,000 and
(viii) Uncredited cheques totaled TZS.800,000
Required
(a) Update C. Tesha’s cash book
(b) Prepare bank Reconciliation Statement.
32
CHAPTER 4
SUBSIDIARY BOOKS OF ACCOUNTS
In order to keep the ledger free from unnecessary details, separate books are kept for recording
transactions before posting to the ledger. Such books are known as books of prime entry or
subsidiary books of account as, as they help the main book (the ledger) in recording business
transactions. Examples of such books are Sales Day Book, Purchases Day Book, Returns Inward
Book, Returns Outward Book and General Journal. These books are known. They are called
books of original entry or prime books of accounts, because transactions are recorded in these
books first, before posted to the ledger. There are six subsidiary books of accounts in use, these
are:
(i) Sales day book/Sales Journal - Records credit sales of goods only.
(ii) Purchases day book/Purchases Journal - Records credit purchases of goods
only.
(iii) Returns Inward book/Sales returns Journal - Records credit sales returns.
(iv) Returns Outward book/Purchases returns Journal - Records credit Purchases
returns.
(v) Cash book - Records all cash transactions.
(vi) General Journal/ Journal Proper - Records all other transactions which does not fall on
any of the above prime books of account.
Example uses of General Journal are:
(a) To record credit sale of non current assets
(b) To record credit purchase of non current assets
(c) To record correction of errors
(d) To record adjusting entries
(e) To record opening entries
(f) To record closing entries
(g) To record any other transaction not mentioned above.
33
Generally, there are three types of ledgers: sales ledger in which the customers accounts are kept;
purchases ledger, which keeps suppliers accounts, and General ledger which keeps the
remaining other accounts.
The sales day book itself is merely a list, is not an account and therefore does not of itself form
part of double entry book-keeping. Double entry book keeping system is therefore completed by
taking the total of credit sales in the sales day book, and entering it on the credit side of the sales
account in the General ledger at the end of each period (usually monthly).
Example:
The following are credit sales for the months of January 2006. You are required to record them
in the sales day book, post to respective customers accounts in the sales ledger and show the
transfer to sales account in the General ledger.
January: 1. Credit sales to Jaria TZS. 200,000
2. Credit sales to Haji TZS.1,200,000 less 10 percent trade discount.
4. Credit sales to Chetu TZS. 600,000
8. Credit sales to Jaria TZS. 300,000
10. Credit sales to Tulja TZS. 450.000
14. Credit sales to Haji TZS. 300,000
16. Credit sales to Chetu TZS.1,000,000 less 10 percent trade discount.
20. Credit sales to Jaria TZS. 300,000
25. Credit sales to Haji TZS. 450,000
28. Credit sales to Tulja TZS. 450,000
30. Credit sales to Aisha TZS. 170,000
Sales Ledger
SL. 1
Dr. AISHA A/C Cr.
Date Particulars Folio Amount Date Particular Folio Amount
Jan.30 Sales day book pg. 1 170,000
SL2
Dr. CHETU A/C Cr.
34
Date Particulars Folio Amount Date Particular Folio Amount
Jan.4 Sales day book pg. 1 600,000
Jan16 sales day book pg. 1 900,000
SL 3
Dr. HAJI A/C Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan. Sales day book Pg. 1 1,080,000
Jan.14 Sales day book Pg. 1 300,000
Jan.25 sales day book Pg. 1 450,000
SL 4
DR JARIA A/C CR
Date particulars Folio Amount Date Particular Folio Amount
Jan.1 sales day book pg. 1 200,000
Jan.8 sales day book pg. 1 300,000
Jan.20 sales day book pg. 1 300,000
SL 5
DR TULJA ACCOUNT CR
Date particulars Folio Amount Date Particular Folio Amount
Jan.10 sales day book 450,000
Jan.28 Sales day book 450,000
General Ledger
Dr. SALES ACCOUNT Cr.
Date particulars Folio Amount Date Particular Folio Amount
Jan.31 sales day book pg. 5,200,000
Example:
The following are credit purchases made by Sumbwi Trading for the month of January 2006.
You are required to record them in the purchases day book, post to purchase ledger and transfer
the total to purchases A/c in the General ledger.
Jan. 5 Bought goods on credit from IPP TZS. 800,000
11 Bought goods on credit from Kwanza Ltd. TZS.1,800,000 less 5 % trade discount.
17 Bought goods on credit from Zenu TZS. 750,000
22 Bought goods on credit from IPP TZS. 500,000
35
27 Bought goods on credit from Zenu TZS. 600,000
29 Bought goods on credit from IPP TZS. 700,000
Purchases Ledger
PL 1
DR IPP ACCOUNT CR
Date particulars Folio Amount Date Particular Folio Amount
Jan. 5 Purchases day book PG.1 800,000
Jan 22 Purchases day book PG.1 500,000
Jan 29 Purchases day book PG.1 700,000
PL2
Dr. KWANZA A/C CR.
Date particulars Folio Amount Date Particulars Folio Amount
Jan.11 Purchases day book PG.1 1,710,000
PL 3
DR ZENU ACCOUNT CR
Date particulars Folio Amount Date Particular Folio Amount
Jan. 17 Purchases day book PG.1 750,000
Jan 27 Purchases day book PG.1 600,000
GL.7
GENERAL LEDGER
DR PURCHASES A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan 31 Purchasing day book Pg. 1 5,060,000
36
Using credit notes raised, credit sale returns are listed in the return inward book. After being
recorded in the returns inward book the transactions are then posted to the credit side of customer
personal account in the sales ledger. The monthly total returns inward are transferred to the debit
side of the returns inward account in the General ledger to complete the double entry book-
keeping.
Example:
Using the credit sales example above, assume the following customers returned goods to the firm
during the month of January.
January 3: Haji returned goods worth TZS. 80,000
12. Tulja returned goods worth TZS. 90,000
21. Jaria returned goods worth TZS. 10,000
In the same personal accounts opened in the sales ledger the credit sales returns are posted to
respective customers’ accounts.
SALES LEDGER
SL 3
Dr. HAJI A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan 3 return inward book Pg 1 80,000
SL 5
Dr. TULJA A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan 3 return inward book Pg 1 90,000
SL 4
Dr. JARIA A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan 3 return inward book Pg 1 10,000
General Ledger
DR. Returns Inward A/C CR
Date Particulars Folio Amount Date Particulars Folio Amount
Jan.31 Return inward book pg. 1 180,000
37
from supplier, a debit note may be raised and sent to supplier stating the amount of allowance to
which the firm is entitled.
Using the credit notes received from suppliers or debit notes raised, credit purchase returns are
recorded in the returns outward book. The transactions are then posted to the debit side of
suppliers’ personal accounts in the purchases ledger. The monthly total returns outward are
transferred to the credit side of returns outward account to complete the double entry book-
keeping system.
Example:
Using the same example as on credit purchase, assume the following are the purchases returns
made by the firm for the month of January.
January 15 returned goods to Kwanza Ltd. worth TZS. 210,000
January 25 returned goods to IPP and received a credit note for TZS. 50,000
Using same suppliers’ accounts in the purchases ledger as we have seen on credit purchases
example, post the transactions.
Purchases Ledger
PL 2
Dr. KWANZA A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan. 15 Returns outward book 210,000
PL 1
Dr. IPP A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan. 25 Returns outward book Pg. 1 50,000
General Ledger
GL
Dr. Returns outward A/C CR.
Date Particulars Folio Amount Date Particulars Folio Amount
Jan 3 return outward book Pg 1 260,000
38
Common uses of the General Journal are:
1) To record opening and closing entries.
2) To recode correction of errors.
3) To record transfer between accounts.
4) To record credit purchases and credit sales of non current asset.
5) To record adjusting entries.
6) To record any other transaction not recorded in another book of original entry.
Example 2
Opening Entry.
The following are balances at the beginning of 2006 in books of account of Masai Trading. Cash
TZS. 200,000, Bank TZS. 1,800,000, Motor van TZS. 5,000,000, Debtors- Juma TZS. 50,000,
Solo TZS. 150,000, Stock TZS. 300,000, Furniture TZS. 500,000 Creditors-IPP TZS. 700,000,
Bank loan TZS. 3,000,000 capital TZS. 4,300,000,
GENERAL JOURNAL
39
Exercises
1. Record the following credit sales in the sales day book, post to the sales ledger and show
the transfer to the sales account in the general ledger.
2007 March 2 Credit sales to Mwambao trading TZS. 50,000.
4 Credit sales to Haroon TZS. 1,800,000 less 10 percent trade discount.
9 Credit sales to Sudi TZS. 750,000.
18 Credit sales to Sauna Ltd TZS. 800,000 less 10 percent trade discount.
20 Credit sales to Mwambao Ltd TZS. 300,000
24 Credit sales to Sudi TZS. 180,000
27 Credit sales to Sauna TZS.410,000
29 Credit sales to Sudi TZS. 80,000 Mwambao Ltd. TZS. 600,000 and Sauna
TZS. 240,000.
2. Record the following credit purchases in the purchases day book, post to the purchases
ledger and show the transfer to purchases account in the general ledger.
2007 March 1 Credit purchases from Tunakopesha Ltd, TZS. 2,000,000.
5 Credit purchases from HONDA TZS. 4,800,000 less 10% trade discount.
13 Credit purchases from General stores Ltd TZS. 500,000
19 Credit purchases from HONDA TZS. 900,000.
21 Credit purchases from general Stores TZS. 780,000
26 Credit Purchases from HONDA TZS. 600,000. General stores TZS.
750,000 and Prakash Ltd TZS. 1,400,000.
3. Record the following transactions in the books of original entry and post to the ledger
accounts.
2007
April 1 Credit sales to Daud & Sons TZS. 190,000
7 Credit sales to H & H Ltd TZS. 380,000
9 H. & H Ltd returned goods worth TZS. 80,000
12 Credit sales to Haule Ltd TZS. 470,000
17 Credit sale to Zay & Zey TZS. 510,000
20 Zay & Zey returned goods worth TZS. 10,000
22 Credit sales to Samurai TZS. 70,000. Daud & Sons TZS. 320,000
25 Credit sales to Haule Ltd TZS. 370,000. Zay & Zey TZS. 500,000.
26 Daudi & Sons returned goods worth TZS. 20,000
27 Credit sales to Zay & Zey TZS. 340,000 Samurai TZS. 280,000 and
Kei Ltd TZS. 190,000.
4. Record the following transactions in the books of original entry and post to the ledger
accounts.
2007
April 3 Credit Purchases from Honolulu Ltd TZS.940,000, Kambani Ltd TZS. 400,000.
5 Received a credit note from Honolulu Ltd TZS. 40,000 for goods returned.
7 Credit purchases from Napco TZS. 250,000 and TACO TZS. 240,000.
11 Credit Purchases from Kambani Ltd TZS. 190,000 Saibaba trading TZS. 640,000.
40
14 Returned goods to saibaba TZS. 40,000 Kambani TZS 20,000.
20 Credit purchases from Kambani Ltd TZS. 190,000 Saibaba trading TZS. 640,000.
27 Credit Purchases from saibaba TZS. 250,000 and Napco TZS. 140,000
29 Returned goods to Napco TZS. 10,000, and Honolulu TZS. 30,000
5. Record the following transactions in the prime books of accounts, post to the ledger and
show the transfers to general ledger.
2008
Jan. 1 Opening balances: cash TZS. 100,000, Bank 1,500,000, Motor Van TZS.
1,000,000 Debtor - Damco TZS. 90,000 Creditors - Hugo TZS. 500,000 NBC
loan TZS. 1,500,000 Capital TZS. 1,690,000.
3 Credit purchases from SADCO TZS. 300,000 HANDCO TZS. 560,000.
6 Credit sales to Damco TZS. 310,000, Haule TZS. 120,000, and Judi traders TZS.
340,000.
17 Bought new Motor van on credit from Cooper Motors TZS. 8,000,000.
24 Credit purchases from SADCO TZS. 390,000, HANDCO TZS. 600,000 and
SALAMAT TZS. Ltd.
25 Returned goods worth TZS. 30,000 to SALAMAT Ltd.
28 Credit sales to DAMCO TZS. 180,000JULY’s traders TZS. 310,000, Samson &
Son TZS. 410,000 and Haule TZS. 340,000.
29 Issued credit notes to Haule TZS. 10,000 and Samson and Sons TZS. 15,000 for
goods returned.
41
CHAPTER 5
TRIAL BALANCE AND CONTROL ACCOUNTS
A trial balance is a list of ledger balances at any particular date. It is prepared to check whether
the double entry book-keeping system has been followed properly, and also to check the
arithmetical accuracy of the records. If the book-keeping has been done properly the total of all
debit balances will equal to the total of all credit balances. The trial balance is also used as a
first step of the preparation of the final accounts. Every trial balance should bear the name of the
firm and the date to which it refers. The trial balance is usually prepared at the end of each
month.
All ledger accounts must be totaled and balance calculated. The closing balances at the end of
the month forms the opening balances of the same accounts for the following month. It is these
balances that are listed on the trial balance. If the total debit balances and credit balances do not
agree the difference must be found and corrected.
Example of a Trial balance:
MALINGUMU TRADING
TRIAL BALANCE AS AT 31ST JULY 1997
NAME OF ACCOUNT FOLIO DEBIT CREDIT
Stock 1 July GL 181,600
Sales GL 923,400
Purchases GL 691,850
Carriage in wards GL 15,700
Returns outwards GL 6,400
Wages and Salaries GL 102,400
Rent and rates GL 30,150
Postage GL 6,240
Electricity expenses GL 4,200
Commissions payable GL 2,160
Insurance expenses GL 4,050
Sundry expenses GL 3,180
Buildings GL 200,000
Debtors SL 143,200
Creditors PL 81,600
Fixtures GL 28,500
Cash at bank CB 29,700
Loan from NBC GL 100,000
Cash in hand CB 1,150
Drawings GL 76,200
Capital GL 408,880
1,520,280 1,520,280
42
Usually the debit of the trial balance contains asset, items, expenses, and losses, while credit
contains capital, liabilities and gain /income items.
For example.
The following errors were found in the books of account.
1. Cash sales TZS. 28,000 has been completely omitted from in the books.
2. Credit sales made to H.Moshi TZS.90,000 has been debited in H.Mosha’s Account.
3. Motor van purchased for TZS.3,000,000 has been recorded in the Purchases account.
4. Cash Purchases TZS.140,000 has been credited in the Purchases account and cash
account being debited.
5. Credit sales TZS.49,000 to Janifer has been recorded in the sales day book as 94,000 and
posted as 94,000.
6. Sales account has been overcastted by TZS.10,000 and rent account overcasatted by
TZS.10,000.
7. Cash sales TZS.20,000 has been entered and posted twice in the books of accounts.
43
Journal Entries
Dr. Cr.
1. Dr. Cash account 28,000
Cr. Sales account 28,000
(being transaction omitted)
2. Dr.H,Moshi account 90,000
Cr.H. Mosha account 90,000
(Error being rectified)
3. Motor Van Account 3,000,000
Cr.Purchases 3,000,000
(Error of Original entry being rectified)
4. Dr.Purchases account 280,000
Cr. Cash account 280,000
(Error being rectified)
5. Dr.Sales 45,000
Cr. Janifer 45,000
(being rectification of error of original
entry)
6. Dr.Sales 10,000
Cr. rent 10,00
(being errors rectified)
7. Dr.Sales 20,000
Cr.Cash 20,000
(being error rectified)
Control Accounts
Trial balance is usually drawn up as a test of the arithmetical accuracy of the accounts.
Although certain errors may not be revealed by a trial balance, but disagreement of at trial
balance shows that there are errors in the records. For a small business the books could easily
and quickly be checked so as to find the errors. However for big firm with so many ledgers
errors could be very difficult to find. What is required is to draw up sort of trial balance for each
ledger. For It is only the ledger whose control accounts do not balance that need detailed
checking to find errors.
44
because ledgers which have a control account system are proved to be correct as far as the
double entry is concerned.
Set-off
This is whereby the same firm is both a supplier and a customer, and inter indebtedness is
set-off. The set off is also entered in the control accounts.
For example
The Firm sold to IPT Ltd goods worth TZS.20,000 and bought goods from IPT Ltd worth
TZS.30,000. TZS. 20,000 owing to IPT Ltd therefore is set-off against TZS.30,000
owing to him. This leaves TZS.10,000 owing to IPT Ltd. The transfer of TZS.20,000
will therefore appear on the credit side of sales ledger control account and on the debit
side of the purchases ledger control account.
Abnormal balances.
Sometimes there are credit balances in the sales ledger as well as debit balances, and
debit balances in the Purchases ledger as well as credit balances. For instance we sold
goods worth TZS.58,000 to A. Jena who paid in full, and then Jena returned goods worth
TZS.8,000. This would leave a credit balance of TZS.8,000 in Jena account. Whereas the
normal balance in the sales ledger are debit balances. The abnormal balances must be
shown in the control accounts and not set-off.
45
Examples of control accounts:
Sales ledger control account
The following totals were extracted from ledgers. Prepare sales ledger control accounts
July 1 Sales ledger - debit balances 763,200
Sales ledger - credit balances 4,400
July 31 Transactions for the month
Cash received 20,800
Cheques received 1,247,800
Credit Sales 1,418,000
Bad debts written off 61,200
Discount allowed 59,600
Cash refunded to customers 7,400
Dishonoured cheques 5,800
Interest charged on overdue debts 10,000
Returns inward 132,800
Balances set off against purchases leger 108,000
At the end of the month:
Sales ledger - debit balances 675,000
Sales ledger - credit balances 8,000
46
Dr. Purchases Ledger Control Account Cr.
Returns out 264,800 July 1 Balance b/c 1,187,400
Bank 14,610,000 Purchases 15,456,200
Cash 7,800
Discount received 213,400
Set-off 10,800
Balance c/d 1,453,000
16,559,800 16,643.600
47
Exercises:
1. From the following list of balances, prepare a trial balance.
Sales 20,000,000
Purchases 14,000,000
Returns inwards 100,000
Carriage inwards 300,000
Rent 500,000
Salaries 1,400,000
Electricity 200,000
Insurance 300,000
Cash 700,000
Bank 2,300,000
Debtors 3,400,000
Creditors 2,100,000
Motor vehicles 4,000,000
Furniture’s 1,500,000
Drawings 500,000
Loan from CRDB 5,000,000
Capital 1,100,000
2. Record the following transactions in the books of original entry, Post to the ledger,
balance off the accounts and extract a trial balance.
48
Jan. 24 Paid cash into bank TZS.1,000,000
Jan. 25 Salama returned goods worth TZS.90,000 (credit not for
TZS.90,000 wa sent to her).
Jan.27 Cash sales 580,000.
Jan. 28 Received cheque from the following; in each case less 10
percent cash discount Johani TZS.500,000 Iddi TZS.750,000.
Jan. 28 Bought Furniture on credit from KIFUMA TZS.700,000.
Jan. 29 Paid the following by cash, rent TZS.150,000, salaries
TZS.300,000 and electricity TZS.50,000.
Jan. 30 Cash sales TZS.200,000
4. The financial year of Washamba Trading ended 31st December 1996. You have been
asked to prepare a sales ledger control Account and a purchases ledger control
Account in order to produce end-of-year figures for debtors and creditor for the draft
final accounts. You are able to obtain the following information for the financial
year from the books of original entry:
TZS.
Sales - cash 3,500,000
- credit 2,800,000
Purchases - cash 150,000
- credit 4,100,000
Total payments to supplies 500,000
Total receipts from customers 6,200,000
Discounts allowed (all to credit customers) 55,000
Discounts received (all from credit suppliers) 35,000
Refunds given to cash customers 50,000
Balance in the sales ledger set-off against 7000
balances in the purchases ledgers
Bad debts written off 7,800
Increase in the provision for bad debts 900
Credit notes issued to credit customers 41,000
Credit notes received from credit suppliers 14,000
49
According to the audited financial statements for their previous year debtors and creditors
as at 1st January 1996 were TZS.260,000 and TZS.430,000 respectively.
5. The trial balance of Tumaini Ltd, revealed a difference in the books. In order that the
error(s) could be located it was decided to prepare purchases and sales ledger control
accounts. From the following prepare the control accounts and show where an error may
have been made.
1996 TZS.
January 1 Purchases ledger balances 1,187,400
Total for the year Sales ledger balances 1,974,400
1996 Purchases journal 15,456,200
Sales journal 19,966,200
Returns outward journal 264,800
Returns inward journal 455,600
Cheques paid to suppliers 14,610,000
Petty cash paid to suppliers 7,800
Cheques and cash received from customers 18,596,000
Discounts allowed 583,000
Discount received 213,400
Balances on the sales ledger set off against 103,600
balances in the purchases ledger.
Dec. 31 The list of balances from the purchases ledger
shows a total of TZS.1,453,000 and that from the
sales ledger a total of TZS. 2,202,400
6. The financial year of ABC Agency ended December 31, 2000. You have been requested
to prepare a Sales ledger Control Account and a purchases ledger control account in order
to produce end-of-year figures for debtors and creditors for the draft final accounts. You
are able to obtain the following information for the financial year form the books of
original entry.
Shs.
Sales - Cash 3,500,000
- Credit 6,800,00
Purchases - Cash 150,00
- Credit 4,100,000
Total payments to suppliers 3,500,000
Total receipts form customers 6,200,000
Discounts allowed (all to credit customers) 55,000
Discounts received (all from credit suppliers) 35,000
Refunds given to cash customers 50,000
Balance in the sales ledger set-off against balances in the
purchases ledger 7,000
Bad debts written off 7,800
Increase in the provision for bad debts 900
50
Credit notes issued to credit customers 41,000
Credit notes received from credit suppliers 14,000
According to the audited financial statements for the previous year debtors and creditors
as at January 1, 200 were Shs.260,000 and Shs.430,000 respectively.
51
CHAPTER 6
PRESENTATION OF FINANCIAL STATEMENTS
Introduction
In order to ascertain the profit or loss made during a period, and to know the financial position of
the firm is it necessary on the final date of the period, to close the books of account and prepare
financial statements. International Accounting Standard number 1 (IAS 1) covers the form and
content of financial statements to be prepared. The main components of financial statements as
explained by IAS 1are:
- Statement of Financial Position (Balance sheet),
- Statement of Comprehensive Income (Income statement),
- Statement of changes in equity,
- Cash flow statement, and
- Notes to the financial statements
IAS 1 Presentation of financial statements gives substantial guidance on the form and content of
publisher financial statements. The standard looks at the balance sheet and income statement
(the cash flow statement is covered by IAS 7).
Computation of Profit
Net profit is computed in two stages. The first stage computes the gross profit and the second
stage computes net profit.
Net Sales is defined as sales less sales returns. Cost of sales is calculated by taking the stock of
goods on hand at the beginning of the period, add net purchase. Net purchases are computed by
adding carriage inwards and deducting purchases returns from total purchases. Opening stock,
plus net purchases is the cost of goods available for sale. The value of closing stock is then
deducted from the cost of goods available for sale to come up with the cost of goods sold. If
there are any other expenses incurred in bringing the goods to a saleable condition e.g. packing
or grading expenses, these are known as trading expenses and are added to the cost of goods sold
52
to come up with the cost of sales. In absence of trading expenses the cost of goods sold become
the cost of sales.
53
In order to ensure that that the gross profit disclosed in the income statement is not overstated,
the unsold stock (closing stock) should be reported at cost or its current realizable value
whichever is lower. The amount of any loss caused by stock being damaged or stolen is not a
loss arising in trading. Therefore such losses should be reduced from goods available for sale
and treated as loss in the second part of the income statement.
In determining net profit other incomes and gains such as income from investments, gains from
sale of non current assets and discounts received are added to the gross profit. The balance in the
income statement (net profit after tax or net loss) represents the net Profit or Loss for the
accounting period, which is transferred to the statement of changes in equity.
The Balance Sheet is a statement showing on one hand the amount of capital employed in the
business and the sources from which it is derived (e.g. capital provided by proprietors, loan
capital, and retained profits), and on the other hand, the form in which such capital is employed,
i.e. the unexplored expenditure, at the date of Balance Sheet, on the various assets normally
valued at cost less provision for depreciation, and current assets at cost or not realizable value,
whichever is the lower.
Items in the balance sheet should be grouped under suitable headings to render intelligible the
most important aspects of the financial position to people who know little about accounts. On
the assets full details should be supplied of assets comprised in each group. On capital and
liabilities side, equity, non current liabilities and current liabilities should be disclosed
separately. Starting with equity i.e. the share capital, reserves and undistributed profits are shown
first, being added there to disclose, in an extended total, the amount of the proprietor’s interest in
the net assets. Separate heading and sub-totals are then given to non current liabilities i.e. long
term interest bearing loans and debentures, and current liabilities respectively.
54
X X
Current assets
Stock X X
Trade Debtors X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
Equity and liabilities
Equity: Share capital X X
Other reserves X X
Retained earnings X X
Total equity X X
Non-current liabilities
Long-term borrowings X X
Deferred tax X X
Long-term provisions X X
Total non-current liabilities X X
Current liabilities
Trade and other creditors X X
Short-term borrowings X X
Current portion of long-term X X
borrowings
Short-term provisions X X
Total current liabilities X X
Total liabilities X X
Total equity and liabilities X X
55
Net Profit for the year xxxxx xxxxx
Drawings (Dividends) (xxx) (xxx)
Balance at 31 Dec. 2006 xxxx xxxxx xxxx Xxxxx
Changes in equity for 2007
Valuation of assets xxx xxx
Net Profit for the year xxxxx xxxxx
Drawings (Dividends) (xxx) (xxx)
Balance at 31 Dec. 2007 xxxx xxxxx xxxx Xxxxx
Illustrative example.
Hussein and Sons
Trial Balance as at 31st December, 2006
DEBIT CREDIT
TZS. TZS.
Sales 1,860,000
Purchases 1,155,600
Stock 1.1.06 377,600
Carriage outwards 32,600
Carriage inwards 23,400
Returns inwards 44,000
Returns outwards 35,500
Salaries and Wages 244,700
Motor expenses 66,400
Rent 57,600
Sundry expenses 120,200
Motor vehicles 240,000
Furniture 60,000
Debtors 457,700
Creditors 304,500
Cash at bank 387,600
Cash in hand 12,000
Drawings 205,000
Capital 1,284,400
3,484,400 3,484,400
56
Hussein and Sons
Statement of Comprehensive Income
For the Period ending 31st December, 2006
TZS TZS TZS
Sales 1,860,000
Less sales returns 44,ooo
Net sales 1,816,000
Less Cost of sales:
Opening Stock 377,600
Purchases 1,155,600
add carriage in 23,400 1,179,000
less Purchases returns 35,500
Net Purchases 1,143,500
goods available for sale 1,521,100
less closing stock 500,000
cost of goods sold 1,021,100
Gross Profit 794,900
Less Expenses:
Distribution expenses 32,600
Administrative expenses 368,700
Other expenses 120,200
Total Expenses 521,500
Net Profit Before Tax 273,400
Notes forms part of the financial statements.
Notes:
Distribution Expenses
Carriage out TZS 32,600
Total 32,600
Administrative expenses
Salaries and Wages TZS 244,700
Motor expenses 66,400
Rent 57,600
Total administrative expenses 368,700
Other Expenses
Sundry expenses TZS 120,200
Total 120,200
57
Hussein and Sons
Balance Sheet as at 31st December, 1996
TZS. TZS. TZS.
Non Current Assets:
Property, Plant & Equipment 300,000
Current Assets:
Stock 500,000
Debtors 457,700
Cash & Cash Equivalent 399,600
Total Current Assets 1,357,300
Total Assets 1,657,300
Creditors
Equity and Liabilities:
Equity:
Capital & Reserves 1,352,800
Net profit for the period
1,352,800
Current Liabilities:
Creditors 304,500
Total Equity and Liabilities 1,657,300
Notes
Property, Plant and Equipment
Furniture TZS. 60,000
Motor Vehicles 240,000
Total 300,000
58
Exercise
1. From the following trial balance of Hina traders draw up a trading and Profit and Loss
account for the year ended 30th September, 2006 and a balance sheet as at that date.
Dr. CR
Stock 1. October, 2005 473,600
carriage outward 40,000
carriage inwards 62,000
Returns inwards 41,000
Returns outwards 64,400
Purchases 2,374,800
Sales 3,720,000
Salaries and Wages 772,400
Rent 60,800
Insurance 15,600
Motor expenses 132,800
Office expenses 43,200
Lighting and heading expenses 33,200
General expenses 62,800
Premises 100,000
Motor Vehicles 360,000
Furniture’s 70,000
Debtors 779,200
Creditors 346,200
Cash at bank 96,400
Drawings 240,000
Capital 2,527,200
6,657,800 6,657,800
2. The following is the trial balance of Jamima traders as at 31st December, 2007. Draw
up a trading and profit and Loss account for the year ended 31st December 2007, and balance
sheet as at that date.
Debit Credit
TZS TZS
Stock 1 January 96 2,368,000
carriage outwards 200,000
carriage inwards 310,000
Returns 205,000 322,000
Purchases and Sales 11,874,000
Salaries and Wages 3,862,000
Rent 304,000
Insurance 78,000
Motor expenses 664,000
Office expenses 216,000
Lighting expenses 166,000
59
General expenses 314,000
Premises 5,000,000
Motor Vehicles 1,800,000
Furniture’s 350,000
Debtors and Creditors 3,896,000 1,731,000
Cash at bank 482,000
Drawings 1,200,000
Capital 31,236,000
33,289,000 33,289,000
60
CHAPTER 7
ADJUSTMENTS TO FINAL ACCOUNTS
Introduction
The Purpose of preparing Income statement is to determine net profit made or loss suffered
during the period. In order to ascertain true results of the operations, the revenue and expenses
related to that particular period should be matched. If there is any revenue or expense item not
related to that period, this must be excluded in determining the profit or loss. And if an expense
has been incurred but not paid for, a liability for the unpaid amount must be created. The
adjustments that have to be made at the end of the year include: adjustments for accruals,
prepayments, depreciation, and provision for bad and doubtful debts.
Adjustments for Accruals
It is common practice for example to receive electricity bills on the first week of the next month.
Electricity bills of December are generally paid in January. If the accounts are being made up to
31st December, one must take into account the unpaid electricity for December. The entry is:
Dr. Electricity Expenses Account
Cr. Outstanding Electricity Account
The electricity outstanding is a liability and will appear in the balance sheet. The above is true
for all expenses. All expense relating to the period that has not been paid yet, must be adjusted to
show its correct position by means of debiting the expense account and crediting expense
outstanding account.
Outstanding income
Similar as to outstanding expense, income may be due but not yet received. This is an
outstanding income and must be accounted for during the period. For example, the firm is
renting part of its building for TZS.600,000 per annum payable at the end of each quarter, the
last quarter was outstanding by 31st December. Adjusting entry is:
The rent receivable Account is an asset and will appear in the balance sheet.
61
be for six months this year and six months next year. Therefore TZS.300,000 paid as insurance
premium should be apportioned between this year and next in the ratio of 50:50. That is TZS.
150,000 of the insurance premium is paid in ad is prepaid.
The adjusting entry is:
TZS. TZS.
Dr. Insurance Prepaid Account TZS. 150,000
Cr. Insurance expense Account 150,000
By crediting insurance expense account by TZS.150,000, it reduces the total figure of insurance
expense to appear in the income statement. The prepaid insurance should appear as an asset in
the Balance Sheet as the benefits are not yet received.
Prepaid Incomes
Income received in advance should also be adjusted as do not belong to the current accounting
period. For example premises have been sublet on 1st December and three months’ rent of TZS.
900,000 have been received in advance. If the firm is makes up its accounts at 31st December
every year, then only one month’s rent should be taken to the income statement as the revenue
for the period for the purpose of determining profit or loss for the period. The remaining two
months’ rent received, is for the next year and should be deducted from revenue to be accounted
for the period.
Rent Received in Advance Account is a liability and should be recorded as current liability in the
balance sheet.
The above adjustments for accruals and prepayments can be done straight to the profit and Loss
account, by adding outstanding amount or deducting prepaid amount to the balance shown in the
Trial balance.
For example;
The Trial balance showed a balance of TZS.400,000 in salaries account and TZS.140,000 in
insurance expenses account. At the end of the year it was found that TZS.50,000 of salaries is
yet to be paid and TZS.20,000 of insurance were paid in advance.
Income Statement Extract
Salaries Expenses 400,000
add outstanding salaries 50,000 450,000
Insurance Expenses 140,000
Less prepaid 20,000 120,000
Adjustments for bad debts and Provision for bad and doubtful debts
Bad debts:
Some people fail to pay their debts when become due. They are known as bad debts and the
amount which is irrecoverable is a loss. For example if a person is declared bankrupt, his
creditors will generally write him off as a bad debt.
62
The entry is:
Dr. Bad debts Account
Cr. Debtor’s (personal) Account
The debtor’s account is then closed and the bad debts account is transferred, at the end of the
year, to the income statement as a loss. Sometimes, the amount written off is later recovered
wholly or partially. In that case the account to be credited is not the debtor’s personal account,
but Bad Debts Recovered Account. The Bad Debt recovered account is a clear profit, and
therefore credited to the income statement.
The provision for Bad and Doubtful Debts will be reduced from debtors balance appear in the
Balance Sheet. Next year, the actual amount of bad debts will be debited not to income statement
but to the Provision for Bad and Doubtful Debts Account which will then stand reduced. The
provision may be brought up to the required amount again by debiting the income statement and
Crediting the Provision for Bad and Doubtful Debts Accounts.
An example of provision for bad debts account:
Assume in year 2002 estimated bad debts were TZS 100,000. In year 2003 actual bad debts
written off were TZS 80,000, estimated bad debts TZS 140,000. Show how the estimates for bad
debts and actual bad debts written off would appear in the provision for bad debts account.
Dr. Provision for Bad Debts Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
31.12.02 Balance c/d 100,000 31.12.02 Income Stat. 100,000
100,000 100,000
31.12.03 Bad Debts 80,000 1.1.03 Balance b/d 100,000
Balance c/d 140,000 Income Stat. 120,000
140,000 220,000
1.1.04 Balance b/d 140,000
In 2002 a provision of TZS. 100,000 was created. The entry to record creation of the provision
for bad debts is by debiting income statement and crediting Provision for bad and doubtful debts
A/C. In 2003 bad debts written of TZS. 80,000 was debited in the provision set aside, and leave a
balance of TZS. 20,000. The provision required for bad and doubtful debts for 2003 was TZS.
140,000, however we still have 20,000 remained in the account, so we only need to credit
63
provision for bad debts account with TZS. 120,000, i.e. TZS. 140,000 minus TZS. 20,000
already existing. The amount that will be reduced from the debtors balance in the Balance sheet
is TZS. 140,000 shown as balance c/d in the Provision for bad debts account
For examination purposes, it is usual and common to write off bad debts straight from the
income statement instead of writing if off from Provision set aside. The provision for bad debts
is then adjusted by increasing it or decreasing it to the new balance required.
For example:
Trial balance extract
Debit Credit
Debtors 2,800,000
bad debts written off 160,000
Provision for bad debts 200,000
Bad debts has been taken straight to income statement. The new Provision required is
TZS. 280,000, therefore the existing provision of TZS.200,000 has to be increased by
TZS.80,000 which is also charged to income statement.
64
Exercises
1. Three of the accounts in the ledger of Malumbano LTD indicated the following balances
at 1 January, 2003.
insurance paid in advance TZS. 560,000
wages outstanding TZS. 300,000
Rent Receivable, received in advance TZS. 350,000.
During 2003 Malumbano paid for insurance TZS. 1,000,000, wages TZS. 15,000,000 and
Received TZS. 2,600,000 rent, from the tenant.
At 31st December, 2003 insurance prepaid was TZS. 345,000, rent receivable in arrears
TZS. 100,000, and wages accrued amounted to TZS. 420,000.
(a) Prepare the insurance, wages, and rent receivable accounts for the year ended 31 st
December 2003, showing the year end transfers and the balances brought down.
(b) Prepare the income statement extract showing clearly the amounts transferred from
each of the above accounts for the year ended 31st December, 2003.
2 A business, which started trading on 1st January, 2000, adjusted its bad debt provisions at
the end of each year on a percentage basis. 10 percent of debtors balance was agreed.
The following details are available for the three years ended 31 December, 2000, 2001
and 2002.
Year Bad Debts written off Debtors balance as at 31/Dec.
2004 600,000 12,000,000
2005 1,800,000 30,000,000
2006 3,500,000 28,000,000
You are required to show how the above will appear from:
(i) Bad debts account and provision for bad debts account for each of the three
years; and
(ii) Balance sheet extracts as at 31st December 2004, 2005, and 2006.
3 The following trial balance was extracted from the books of A. Haidari at the close of
the period on 31st March 2007. You are required to draw up the income statement for the
year ending 31st March, 2007 together with balance sheet as at that date.
Dr. Cr.
Purchases and Sales 11,000,000 19,500,000
Cash at bank 1,400,000
Cash in hand 600,000
Drawings 2,500,000
Capital 9,600,000
Furniture 1,500,000
Rent 1,200,000
Wages and salaries 2,000,000
Discounts 600,000 300,000
65
Debtors and creditors 4,900,000 2,500,000
Stock 1 April 2002 2,900,000
Provision for bad debts 300,000
Delivery van 2,400,000
Van running expenses 400,000
Bad debts written off 800,000
32,200,000 32,200,000
Notes
(a) Stock 31st March 2007 TZS. 3,500,000
(b) Wages and salaries accrued at 31st March 2007 TZS.90,000.
(c) Rent prepaid at 31st March 2007 TZS.140,000
(d) Van running expenses owing at 31st March 2007 TZS.60,000.
(e) Increase the provision for bad debts by TZS.100,000
66
CHAPTER 8
STATEMENT OF CASH FLOW
Definition and meaning of Statement Cash flow
A statement of cash flow is a statement showing the changes in cash position during the year.
The statement of cash flow lists, cash receipt s and payments. A statement cash flow provides
useful predictive information for decision makers. The management and outside users of
financial statements are more concerned with the ability of a business to meet maturing
obligations and remain solvent. Thus a statement of cash inflows (receipts) and outflows
(payments) will include other significant financing and investing activities. The users of
financial statements view statement of cash flow as a barometer of financial strength. A
statement of cash flow is a requirement of the financial statements to be prepared by each entity.
This is presented as per IAS 7.
67
(iii) Historical cash flow information is often used as an indicator of the organization’s
financial adaptability how able it is to react to future events; how adaptable to it is
to future threats and opportunities.
(iv) Useful in checking the accuracy of past assessments of future cash flows and in
examining the relationship between profitability and net cash flow and the impact
of inflation (changing prices).
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. Equity investments are excluded from cash equivalents.
68
(c) Financing activities
These cash flows consist of the proceeds from the raising of long term finance
(shares and loan capital) less any repayments or redemptions. This is an indicator
of likely future interest and dividends payment. Examples are:
Financing activities
Examples are:
Cash proceeds from issuing shares.
Cash payments to owners to purchase or redeem company’s shares.
Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and
other share or long term borrowings.
Principal repayments of amounts borrowed under finance leases.
Under this method, all information pertaining to major classes of gross cash receipts and
gross payment may be obtained clearly either from accounting records or by adjusting
sales, cost of sales, interest and similar incomes and interest expenses and similar charges
for a financial institution.
Example:
The statement of Comprehensive Incomes of Mudunku Ltd. appears as follows:
Figures “000”
31.12.2004 31.12.2005
Tzs. Tzs.
69
Sales 2,004,800 3,485,000
Cost of sales 1,432,000 2,788,000
Gross profit (i) __572,800 __697,000
Expenses:
Salaries 157,200 172,400
Rent 24,000 24,000
Advertising 13,000 18,000
Bad debts 2,000 6,000
Other expenses 62,200 61,000
Depreciation 90,400 70,160
Loss on disposal of vehicle ______- __9,440
Total expenses (ii) 348,800 361,000
Net profit for year (i) – (ii) 224,000 336,000
Taxation (112,000) (168,000)
Dividends (60,000) (120,000)
Profit b/f __74,000 _126,000
_126,000 _174,000
31.12.2004 31.12.2005
Current Assets: Tzs. Tzs.
Stock in trade 113,000 232,400
Trade debtors (net) 136,400 191,600
Prepayments - 24,000
Cash _23,000 __6,600
Total current assets (i) 272,400 454,600
FINANCED BY:
Ordinary Share Capital 300,000 360,000
Share Premium Account - 6,000
Profit and Loss Account 126,000 174,000
Long term loan _60,000 _40,000
486,000 580,000
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It has been ascertained that a non current asset acquired at a cost of Tzs. 120,000,000 on April 1,
2003 and depreciated at 20% p.a. on reducing balance basis has been disposed off on June 30 th,
2005 for Tzs. 64,000,000.
Required:
Prepare in a suitable form the statement of Cash Flow for the year ended December 31, 2005
under
(a) Direct method
(b) Indirect method
SOLUTION
(a) Direct Method
Mudunku Ltd.
STATEMENT CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2005
Figures “000”
(i) Cash Flows from Operating Activities:
Cash receipts from debtors (1) 3,423,800
Less: Cash paid to creditors (2) 2,890,800
Cash generated from operations before exp 533,000
Less: Operating expenses paid:
Salaries paid 172,400
Rent paid 24,000
Advertising paid 18,000
Other expenses (3) 88,600 303,000
Cash generated from operations 230,000
Taxes paid (4) 180,400
Net Cash fro Operating activities 49,600
(ii) Cash Flows from Investing Activities:
Cash Inflows:
Proceed from sale of non-current asset 64,000
Cash outflows:
Purchase of non current assets (5) (120,000)
Net cash used in investing activities (56,000)
(iii) Cash flows from Financing Activities:
Proceeds from issue of shares 66,000 (56,000)
Repayment of long term loan (20,000)
Dividends paid (6) (112,000)
Net cash used in financing activities (66,000)
NET DECREASE IN CASH & CASH EQUIVALENTS (72,400)
Add: CCEs at the beginning of year _23,000
CASH AND CASH EQUIVALENTS AT END (49,400)
NB:
(a) CCEs = Cash and Cash Equivalents
(b) Cash and Cash Equivalents at end:
71
Cash balance at end Tzs. 6,600
Bank overdraft (56,000)
CCEs at end (49,400)
72
Less: Dividends payable closing 145,000
Paid _33,000
112,000
Indirect Method
STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2005
Figures “000”
73
Exercises
1 USAI SUPPLY COMPANY
Figures “000”
The Statement of Comprehensive Income for the year ended
December 31, 2007
Tzs. Tzs.
Opening Stock 1,200,000 Sales (net) 3,210,000
Purchases 1,500,000
2,700,000
Less: Closing Stock _900,000
Cost of sales 1,800,000
Gross Profit c/d 1,410,000 ________
3,210,000 3,210,000
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Additional information:
(i) Equipment was acquired for Tzs. 540,000 Cash, and additional equipment with a fair value
of Tzs. 360,00 was acquired in exchange for 1,000 shares of ordinary shares on July 1.
(ii) Cash of Tzs. 240,000 was borrowed on a long term basis (a note due in 2012).
(iii) Cash dividend of Tzs. 150,000 was declared at the year end.
Required:
Prepare statement of cash flow for the year ended – December 31, 2007.
Figures “000”
NOTES:
(i) The movement in Non current assets during 2006 is as follows:-
Cost
Tzs.
Balance as at December 31, 2005 660,000
Less: Deductions 70,000
590,000
Add: Addition – paid Cash 290,000
Balance as at December 31, 2006 880,000
Balance of Accumulated Depreciation as at Dec. 31, 2005 150,000
Less: Deductions/Adjustments _30,000
120,000
Add: Charge during the year _80,000
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Accumulated Depreciation as at Dec. 31, 2006 200,000
(ii) A non current asset was sold at a loss of Tzs. 15,000 during 2006.
(iii) Preference shares redemption was carried out at par on January 1, 2006.
(iv) Dividends of 15% was paid on Ordinary shares for the current year.
Required:
Prepare a statement for cash flow for the year ended December 31, 2006.
Figures “000”
(i) Statement of Comprehensive Income for 2008:
Tzs.
Net Sales 3,000,000
Cost of goods sold 1,800,000
Manufacturing margin 1,200,000
Variable selling expenses _200,000
Contribution margin 1,000,000
(iii) Further information taken from the company concerning the year 2008:
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BALANCES
ENDING BEGINNING
Assets Tzs. Tzs.
Cash and banks 100,000 390,000
Investments (long term) - 60,000
Accounts receivable 510,000 450,000
Inventories 850,000 760,000
Prepaid expenses 30,000 20,000
Autos, net 200,000 150,000
Buildings, net 145,000 160,000
Land at cost 500,000 -
Patent No. 2126 - 70,000
Goodwill 60,000 20,000
2,395,000 2,080,000
Required:
Prepare a statement of cash flow in a suitable form as per IAS 7 for the year ended December 31,
2008.
4 During the Annual General Meeting of Wajuvi Limited, the directors were concerned
about decline in cash reserves of the Company. One director in particular, Mbaba, could
not understand why, “if the company has made profits before Tax. 100,000,000 there
should be a decline in the Company’s liquidity”. Provided below are the statements of
Financial position of the Company for the year, ended 31st December 2007.
Figures “000”
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Building at cost 590,000 740,000
Land at cot 400,000 -
Organization cost 20,000 30,000
Patent No. 4115 - 50,000
Goodwill _120,000 __70,000
3,910,000 3,470,000
Additional information:
(a) A machine with an original cost price of Tzs. 90,000,000 was sold at a loss of Tzs.
20,000,000. Provision for depreciation on this machine is Tzs. 40,000,000. Additional
machines were purchased for a total of Tzs. 260,000,000.
During the year 2007, Tzs. 120,000,000 was spent on extraordinary repairs on machinery.
The expenditure were debited to the provision for depreciation on machinery account.
(b) A separate building with original cost price of Tzs. 150,000,000, was sold at a profit of
Tzs. 130,000,000. Provision for depreciation on this building is Tzs. 60,000,000.
(d) Patent NO. 4115 was sold at the end of the year for a loss of Tzs. 25,000,000. The patent
was amortized for Tzs. 10,000,000 in 2007.
(e) Additional ordinary shares were issued and sold cash at a discount.
(f) 10% dividend was paid in 2007 to Shareholders before the issue of new shares.
Required:
Prepare a statement of cash flow for Wajuvi Ltd. for the year ended December 31, 2007 and
explain to the Directors why liquidity of the Company declined during the year.
78
CHAPTER 9
ACCOUNTING FOR NON CURRENT ASSETS
Basic Definition
Non Current assets (Fixed Assets) are those tangible assets which are intended to be used on
continuing basis by a firm in the process of earning revenue or in the support of the activities of
the entity rather than for sale in the ordinary course of business. Non Current Assets include
Land and buildings, plant and Equipment, Motor Vehicles, Furniture etc. owned by the firm.
They also include assets held on lease where amounts have been capitalized.
Definition
Property, plant and equipment are tangible assets that are:
(a) Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) Expected to be used during more than one period.
Recognition
Recognition means incorporation of the item in the business’s accounts, in this case as a non-
current asset. The recognition of property, plant and equipment depends on two criteria.
(a) It is probable that future economic benefits associated with the asset will flow to the
entity.
(b) The cost of the asset to the entity can be measured reliably.
These recognition criteria apply to subsequent expenditure as well as costs incurred initially.
Property, plant and equipment can amount to substantial amounts in financial statements,
affecting the presentation of the company’s financial position (in the balance sheet) and the
profitability of the entity, through depreciation and also if an asset is wrongly classified as an
expense and taken to the income statement.
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Cost measured reliably
It is generally easy to measure the cost of an asset as the transfer amount on purchase, i.e.
what was paid for it. Self-constructed assets can also be measured easily by adding together the
purchase price of all the constituent parts (labour, material etc.) paid to external parties.
Separate items
Most of the time assets will be identified individually, but for smaller items such as tools, dies
and moulds, should be grouped together and sometimes are classified as inventory and written
off as an expense.
Components of cost
The standard lists the components of the cost of an item of property, plant and equipment as:
(a) Purchase price, less any trade discount or rebate.
(b) Import duties and non-refundable purchase taxes.
(c) Directly attributable costs of bringing the asset to working condition for its intended
use, e.g.:
- The cost of site preparation
- Initial delivery and handling costs
- Installation costs
- Testing
- Professional fees (architects, engineers)
(d) Initial estimate of the unavoidable cost of dismantling and removing the asset and
restoring the site on which it is located.
Nandule Ltd acquired milling Machine for TZS. 2,500,000 (gross) from SUKITA. A 10 percent
trade discount was given to Nandule Ltd. The firm commissioned Gurumo Engineering
consultants to carry out survey of site, to install the machine and to test run it. The
consultants charges TZS. 800,000 as a consultancy fees. The machine was transported to the site
and transport charges amounted to TZS. 150,000.
80
The following costs will not be part of the cost of property, plant or equipment unless they can
be attributed directly to the asset’s acquisition, or bringing it into its working condition.
(a) Administration and other general overhead costs,
(b) Start-up and similar pre-production costs, and
(c) Initial operating losses before the asset reaches planned performance.
Exchanges of assets
IAS 16 specifies that exchange of items of property, plant and equipment, regardless of whether
the assets are similar or not, are measured at fair value, unless the exchange transaction lacks
commercial substance or the fair value of neither of the assets exchanged can be measured
reliably. If the acquired item is not measured at fair value, its cost is measured at the carrying
amount of the asset given up.
Revaluations
The market value of land and buildings usually represents fair value, assuming existing use and
line of business. Such valuations are usually carried out by professionally qualified valuers. In
the case of plant and equipment, fair value can also be taken as market value. Where a market
value is not available, however, depreciated replacement cost should be used. There may be no
market value where types of plant and equipment are sold only rarely or because of their
specialized nature (i.e. they would normally only be sold as part of an ongoing business). Most
81
importantly, when an item of property, plant and equipment is revalued, the whole class of
assets to which it belongs should be revalued.
All the items within a class should be revalued at the same time, to prevent selective
revaluation of certain assets and to avoid disclosing a mixture of costs and values from different
dates in the financial statements. A rolling basis of revaluation is allowed if the revaluations are
kept up to date..
The increase in value should be debited in the asset account and credited to a revaluation
surplus (i.e. part of owners’ equity), unless the increase is reversing a previous decrease which
was recognized as an expense. To the extent that this offset is made, the increase is recognized
as income; any excess is then taken to the revaluation reserve.
Solution
The double entry 2005 is:
DEBIT Income Statement 10,000,000
CREDIT Land 10,000,000
The case is similar for a decrease in value on revaluation. Any decrease should be
recognized as an expense, except where it offsets a previous increase taken as a
revaluation surplus in owners’ equity. Any decrease greater than the previous upwards
increase in value must be taken as an expense in the income statement.
Solution
The double entry in 2005 is:
DEBIT Land 10,000,000
CREDIT Revaluation Reserve 10,000,000
Being increase in value of land
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DEBIT Revaluation Reserve 10,000,000
DEBIT Income statement 6,000,000
CREDIT Land 16,000,000
Being decrease in value of land.
There is a further complication when a revalued asset is being depreciated. As we have seen,
an upward revaluation means that the depreciation share will increase. Normally, a revaluation
surplus is only realized when the asset is sold, but when it is being depreciated, part of that
surplus is being realized is the difference between depreciation charged on the revalued amount
and the (lower) depreciation which would have been charged on the asset’s original cost. This
amount can be transferred to retained (i.e. realized) earnings but not through the income
statement.
Account for the revaluation and state the treatment for depreciation from 2008 onwards.
Solution
On 1 January, 2008 the carrying value of the asset is TZS 10,000,000 – (2 x 10,000,000 5) =
6,000,000. For the revaluation
The depreciation for the next three years will be 12,000,000 3 = 4,000,000 compared
to depreciation on cost of 10,000,000 5 = 2,000,000. So each year, the extra 2,000,000
can be treated as part of the surplus which has become realized:
This is a movement on owners’ equity only, not an item in the income statement.
Depreciation
The standard states:
The depreciable amount of an item of property, plant and equipment should be allocated on
a systematic basis over its useful life.
The depreciation method used should reflect the pattern in which the asset’s economic
benefits are consumed by the entity.
The depreciation charge for each period should be recognized as an expense unless it is
included in the carrying amount of another asset.
83
Land and buildings are dealt with separately even when they are acquired together because land
normally has an unlimited life and is therefore not depreciated. In contrast buildings do have a
limited life and must be depreciated. Any increase in the value of land on which a building is
standing will have no impact on the determination of the building’s useful life.
Depreciation is usually treated as an expense, but not where it is absorbed by the entity in the
process of producing other assets. For example, depreciation of plant and machinery can be
incurred in the production of goods for sale (inventory items). In such circumstances, the
depreciation is included in the cost of the new assets produced.
Example - An asset cost TZS. 2,200,000 with estimated scrap value TZS. 200,000 and estimated
life of 5 years. The depreciation each year will be:
84
Sum of the years’ Digits Method
Under this method, the amount of the depreciation to be written off each year is calculated by the
formula.
remaining life x (cost - srap value)
Sum of the years digits
Example. An asset cost TZS. 5,000,000 have estimated life of 5 years and scrap value 500,000.
The depreciation to be provided in the 5 years will be:
Recording of Depreciation
Whatever method one is using used to calculate depreciation the recording of depreciation is the
same.
The entry is:
Dr. Depreciation expenses account
Cr. provision for depreciation account
The provision for depreciation is used to accumulate deprecations charged each year. The
balance in the provision for depreciation account at the end of the year is reduced from the cost
of the asset in the Balance sheet to determine the Net book value (carrying value) of the Asset.
Example; On 1.1.2006 Zudica trading purchased Motor vehicle cost TZS. 2,000,000 this motor
vehicle has estimated life of 5 years and zero scrap value at the end of year 5. The firm’s policy
to charge depreciation using straight line method. Show how the deprecation would be recorded.
Each depreciation calculated will be debited to the depreciation expense account, and provision
for depreciation being credited. The depreciation account expense account is closed to income
statement.
85
Dr. DEPRECIATION EXPENSE ACCOUNT Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
31.12.06 Prov. For depr. 400,000
INCOME STATEMENT
Administrative expenses:
At the end of the estimated economic life net book value of the asset will be equal to estimated
scrap value.
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Assets purchased and sold during the year
Basically there are two methods of calculating provision for depreciation for assets bought or
sold during the accounting period.
(i) Ignore dates of purchase and sale
To ignore the dates and provide full depreciation for asset in existence at the end of the
year irrespective of how many months they were used. This means no depreciation will
be calculated for assets sold.
On 1 January 2005 the total useful life was reviewed and revised to 7 years.
What will be the depreciation charge for 2007
Solution
TZS
Original cost 8,000,000
Depreciation 2003 – 2004 (8,000,000 x 3/10) (2,400,000)
Carrying amount at 1 December 2005 5,600,000
Remaining useful life (7 -3) = 4 years
Depreciation charge year 2005 - 2008 (5,600,000/4) 1,400,000
87
A reversal of an impairment loss should be treated in the same way as a revaluation increase,
i.e. a revaluation increase should be recognized as income to the extent that it reverses a
revaluation decrease or an impairment loss of the same asset previously recognized as an
expense.
1.14 Disclosure
The standard has a long list of disclosure requirements, for each class of property, plant
and equipment.
(a) Measurement bases for determining the gross carrying amount (if more than one,
the gross carrying amount for that basis in each category).
(b) Depreciation methods used
(c) Useful lives or depreciation rates used
(d) Gross carrying amount and accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.
(e) Reconciliation of the carrying amount at the beginning and end of the period
showing:
(i) Additions
(ii) Disposals
(iii) Acquisitions through business combinations
(iv) Increases/decreases during the period from revaluations and from
impairment losses.
(v) Impairment losses recognized in the income statement
(vi) Impairment losses reversed in the income statement
(vii) Depreciation
(viii) Net exchange differences (from translation of statements of foreign entity)
(ix) Any other movements.
The following format (with notional figures) is commonly used to disclose non-current
assets movements.
88
At 1 January 2004 16,000 10,000 6,000
Charge for year 4,000 1,000 3,000
Eliminated on disposals _(500) _____- (500)
At 31 December 2004 19,500 11,000 8,500
Net book value
At 31 December 2004 45,500 41,000 4,500
At 1 January 2004 34,000 30,000 4,000
Question
(a) In a balance sheet prepared in accordance with IAS 16, what does the net book
value (carrying value) represent?
(b) In a set of financial statements prepared in accordance with IAS 16, is it correct to
say that the net book value (carrying value) figure in a balance sheet cannot be
greater than the market (net realizable) value of the partially used asset as at the
balance sheet date? Explain your reasons for you answer.
Answer
(a) In simple terms the net book value of an asset is the cost of an asset less the
‘accumulated depreciation’, that is, all deprecation charged so far. It should be
emphasized that the main purpose of charging depreciation is to ensure that profits
are fairly reported. Thus depreciation is concerned with the income statement
rather than the balance sheet. In consequence the net book value figure in the
balance sheet can be quite arbitrary. In particular, it does not necessarily bear any
relation to the market value of an asset and is of little use for planning and decision
making.
An obvious example of the disparity between net book value and market value is
found in the case of buildings, which may be worth more than ten times as much as
their net book value.
(b) Net book value can in some circumstances be higher than market value (net
realizable value). IAS 16 Property, plant and equipment states that the value of an
asset cannot be greater than its ‘recoverable amount’. However ‘recoverable
amount’ as defined in IAS 16 is the amount recoverable from further use. This may
be higher than the market value.
This makes sense if you think of a specialized machine which could not fetch much
on the secondhand market but which will produce goods which can be sold at a
profit for many years.
Property and/or other non-current assets are likely to be tested as they have come
up on a number of papers.
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Exercises
1. Mwasada trading bought the following machines for the use by the business during 2003
to 2006 you are required to show how the purchase of machinery and depreciation
expenses will be recorded in the books of account in 2003 to 2006. Assume depreciation
rate of 10 percent monthly ownership basis is used.
Depreciation is at the rate of 10 percent per annum, using the straight line method, using
one month ownership basis.
2 A business whose financial year endes at 31st December each year, Purchased on 1
January 2004 a machine for TZS. 5,000,000. The machine was depreciated on reducing
balance method at the rate of 25 percent per annum. On 4th October, 2006 the machine
was sold for TZS. 3,400,000. Assume monthly ownership depreciation is in use, show the
relevant entries for each of the following accounts for the years ended 31 December,
2004, 2005 and 2006.
3 The following trial balance was extracted from the books of A. Sichone at the close
of business on 31st March, 2007.
Dr. Cr.
Purchases and Sales 5,640,000 9,860,000
Cash at Bank 570,000
Cash in hand 105,000
Capital 1 April 96 4,950,000
Drawings 1,425,000
Furniture 1,040,000
Provision for depreciation Furniture 320,000
Rent 510,000
Wages and Salaries 1,290,000
Discounts 345,000 180,000
Debtors and Creditors 2,460,000 1,245,000
Stock 1 April 96 1,485,000
Provision for bad debts 135,000
Motor Vehicles 1,800,000
Provision for depr. Motor vehicle 610,000
Van running expenses 225,000
Bad debts written off 405,000
17,300,000 17,300,000
90
Notes:
a) Stock 31 March 2007 TZS. 1,500,000
b) Wages and Salaries accrued at 31 March TZS. 45,000
c) Rent prepaid at 31 March TZS. 70,000
d) Van running expenses owing at 31 March TZS. 30,000
e) Increase the provision for Bad debts by TZS. 35,000
f) Provide for depreciation as follows Furniture 10% on costs, Motor vehicles 25% on
balance.
Required
Prepare Income statement for the year ending 31 March 2007 together with a Balance sheet as on
31 March, 2007.
4. T. Kondo, a sole trade, extracted the following trial balance from his books at the close
of business on 31 December, 2006.
Dr. Cr.
TZS. 000 TZS. 000
Purchases and Sales 22,000 41,970
Stock 1.1.06 5,000
Bank balance 5,160
Cash 90
Discounts 1,440 930
Returns 810 570
Rent and Insurance 2,160
Provision for bad debts 660
Furniture 2,500
Provision for depreciation: Furniture 1,500
Vehicles 3,000
Provision for depreciation: Vehicles 900
Debtors and Creditors 11,910 6,060
Drawings 2,880
Wages and Salaries 8,940
General office expenses 450
Capital 13,750
66,340 66,340
Notes:
a) Stock 31 December TZS. 4,200,000
b) Wages and Salaries accrued TZS. 200,000
c) Office expenses owing TZS. 20,000
d) Rent prepaid TZS. 180,000
e) Provision for bad debts to be 7 per cent of debtors
f) Provide 5 percent for discount allowed
g) Provide for depreciation as follows: Furniture TZS. 120,000, vehicles at 10 percent on
cost.
h) T. Kondo took goods valued TZS. 400,000 for personal use, no records for goods taken.
91
Required:
Prepare the income statement for the year ended 31 December 2006 and the statement of
financial position at the date.
92
CHAPTER 10
FINANCIAL STATEMENTS ANALYSIS AND INTERPRETATION
Objective
The objective of financial statement analysis and interpretation is to try to achieve the
following:-
(i) Identify the sources of financial information about an organization.
(ii) Enable the financial analyst in computation of the various ratios used in financial
statements analysis and explanation on what each ratio attempts to tell.
(iii) Give the uses and limitations of the ratios in financial analysis.
General Introduction
For any user of the financial information in order to make inferences and draw rational
conclusions about the operations of an organization, it is necessary that he develops in somehow
reliable tool of analyzing the financial information. Thus financial ratio analysis is used to
develop the required information for decision making. The financial ratio analysis is one of the
analytical techniques applied diagnostically to financial statements of a firm with a goal of
getting meaningful and understandable messages from these statements. Financial ratio analysis
is an assignment in selection, relation and evaluation of various items featured in these
statements. This technique can be used by an interested party who would like to read these
financial statements.
Thus, financial ratio analysis is a study of ratios between various items or groups of items in
financial statements.
Financial ratios are mainly categorized into the following groups:
(i) Liquidity ratios
(ii) Leverage ratios
(iii) Turnover ratios
(iv) Profitability ratios
(v) Valuation ratios
Time series a trend analysis in which the ratios of the firm are compared over time.
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(a) Comparative analysis
This requires comparison of the ratio of one firm with that of another or with
some other given standard like industrial average
(c) Statement of Cash Flows which communicates information relating to the causes
of changes in cash position and the impact of those changes on the management
of the organization.
(d) Changes of Owners Equity Statement which flashes out the causes of changes in
the owners equity.
(c) The members of the public and the organizations responsible for safeguarding
their interests and promoting their welfare.
(d) The Government of Tanzania with its various ministries and several agencies and
regulatory authorities.
Types of Ratios
Information requirements by the above groups are not always homogenous. Each of the
interested party has somewhat different needs and accordingly each group tends to concentrate
94
on a particular aspect of an organizations’ financial position. Therefore as far as financial ratio
analysis is concerned, the interested parties have been classified mainly into five categories
based on user oriented.
Liquidity ratios
Liquidity is the ability to realize value in cash which is the most liquid asset an organization can
have. Liquidity mainly refers to the time it would take in order to realize the asset into cash and
the certainty of value realizable. In ratio analysis, liquidity measures the ability of an
organization to meet its obligations as they fall due. It also measures the adequacy of liquidity at
any point in time, considering the amount and severity of obligations that are likely to become
due and payable over a give period of time. In addition, liquidity assesses the ease and speed
with which an organization can redeploy its resources in reaction to an anticipation of changed
business conditions.
In fact, the liquidity ratios relate largely to the trading (Working Capital Cycle) items namely
cash, marketable securities, notes receivable, debtors, stocks and creditors. The below figure
17.1 depicts the working capital cycle concept.
CREDITORS DEBTORS
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Types of Liquidity ratio
Current Assets
(i) Current Ratio
Current Liabilities
Current assets include cash, current investments, debtors, stocks, loans and advances, and
prepaid expenses. Current liabilities represent liabilities that are expected to mature in the next
twelve months. These include loans (secured or unsecured) that are due in the next twelve
months and current liabilities and provisions.
Current ratio sometimes referred to as a working capital ratio because it shows the cushion of
current assets over current liabilities which are the working capital. This ratio portrays overall
liquidity of the organization. But still it leaves some of the liquidity problems unanswered such
as how liquid are the debtors, stocks etc. or what effect will the act of excluding stocks have on
the liquidity?
Quick assets
(ii) Quick (Acid Test) Ratio
Current liabilities
Quick or acid test assets is defined as current asses minus stock and prepayments.
Stock and prepayments are considered to be relatively less liquid assets in the current assets.
Thus acid test ratio is a fairly stringent measure of liquidity. It is based on current assets which
are highly liquid. Stocks and prepayments are excluded because are deemed to be the least
liquid component of current assets.
Thus a low ratio will generally indicate relatively difficulties in meeting short-term maturing
obligations.
Defensive assets
(iii) Defensive internal ratio
Projected daily operting expenditures
This ratio is usually expressed in terms of number of days. Defensive assets are
defined as cash, liquid securities and net debtors. On the other hand, projected
daily expenditures from operations are calculated by dividing cost of sales plus
selling and distribution expenses and establishment and administrative expenses
and other ordinary cash expenses for 365 days i.e. one year.
The only adjustment required to be made to the total expenses is by deducting all
non cash charges such as depreciations, amortizations, depletion, write offs etc.
The defensive internal ratio measures the time frame an entity can operate on
present liquid assets without resorting to revenue from next periods income
sources. This ratio is considered to establish a safety factor or margin for the
creditors (Short term).
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Cash and Bank balance current investments
(iv) Cash Ratio
Current liabilitie s
Cash and bank balances and short term marketable securities are the most liquid
assets of an organization. Thus, financial analysts look at cash ratio as means of
determination of the liquidity soundness of the organization.
Definitely, the cash ratio is perhaps the most stringent measure of liquidity.
However, lack of immediate cash may not mater if the organization can stretch its
payments or borrow money at short notice like bank overdrafts.
Cost of Sales
(i) Stock turnover
Average Stock
This ratio is expressed in times or number of days. Stock turnover measures how fast stock or
merchandize is sold out of the stores. Normally the higher the stock turnover rate the better for
the organization. But excessively high turnover may be as a result of possible incidence of stock
outs.
Average stock is usually approximated well by dividing the sum of beginning and ending stock
figures by two. Where there are pronounced seasonal variations, weighted averages are
preferred.
Stock turnover over time is 365 days divided by stock turnover which gives the number of days
the stock takes to be sold out. A declining stock turnover over time and rising stock turnover
period will give an indication of stock build up or pile up. The bad sign of stock management is
reflected by stock build up or pile up.
Net Sales
(ii) Debtors turnover
Average Debtors
This ratio is expressed in terms of time as well as number of days. This ratio tries to measure the
efficiency of management in debt collection from trade debtors. A declining debtors turnover
over time all other things being equal means pile up in debtors or slackening in efforts to collect
debtors with possible rising cost of default. Debtors turnover period commonly known as
average collection period is 365 days divided by debtors turnover. This is the number of days
required to collect a debt. This is usually compared with established credit terms of the
organizations credit policies.
Net Purchases
(iii) Creditors turnover Average creditors
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This ratio is expressed in terms of time as well as number of days. This ratio measures
the effectiveness of management in debt payment to trade creditors.
Average creditors
Average credit period grant x 365
Purchases
This ratio tries to measure the number of credit days enjoyed by the firm from its credit
suppliers. Sometimes the ratio is called average credit period allowed/granted.
This ratio is intended to measure the efficiency which non current assets are employed. The
higher the ratio indicates a higher degree of efficiency in asset utilization. Likewise, a lower
ratio reflects inefficient use of assets. But in interpretation of this ratio, caution should be borne
in mind. Where non-current assets of an organization are old and substantially depreciated, the
non current assets turnover tends to be higher because the denominator of this ratio is very low.
Profitability Ratios
Profitability ratios indicate the economic soundness of the organization’s performance in
periodic operations. In other words, profitability measures the effectiveness with which the
organization’s resources are utilized. In general terms, profitability is evaluated in two aspects:-
(a) Management Competence – In this case profitability assesses the competence of
management as represented by the amount of profits managed to get out of the
organization’s assets employed in the year. Usually the following basic questions are
raised in relation to profits:
(1) Is the level of profit adequate taking into consideration the assets and other
resources that were at management’s disposal in that particular period?
(2) Could it be possible for a better management to earn higher profits?
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business opportunities that they could have taken. For example investing in “fixed
deposits” with NBC, treasury bonds, etc. as opposed to putting your funds in
merchandising enterprise.
Therefore the following are some of famous profitability ratios used to assess an organization.
This ratio may also be calculated using before tax net profit. The ratio
attempts to measure how much of each one shilling of sales turnout to be
net profit.
Net Profit
(iii) Re turn on Assets Investment
Total assets
This ratio gives the return on the assets invested in the organization.
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Total debt
(i) Debt to networth ratio
Capital
OR
Capital
Total Assets
OR
Total Debt
Total assets
In all the above cases, the organization is capable of determining the stake of the creditors or
shareholders in relation to total asset investment and how reliant the organization is on either
type of financing.
In using this ratio, the following cautions should be taken into account:
(a) The book value of equity may be an understatement of its correct value during periods of
rising prices. This is due to the fact that assets are normally carried at their historical
values less depreciation and not at current values.
(b) Some types of debt (i.e. term loans, secured short term bank loans and secured
debentures) are usually covered by specific collaterals and then enjoy superior protection.
(iii) Cash flow coverage ratio Annual Cash flow before Interest and tax
Interest + Principal payments.
This ratio measures the amount of money required to cover for the principal loan repayment
plus interest.
Valuation Ratios
Valuation ratios show how the ordinary shares of the company is assessed in the capital market.
The market value of ordinary share reflects the combined influence of risk and return. Thus
valuation ratios are most comprehensive measures of an organization’s performance.
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The following are the common valuation ratios:
The market price per share is the price prevailing on a certain day or average price over a period
of time.
The earnings per share is profit after tax less preference dividend divided by the number of
ordinary shares outstanding.
The price – earnings ratios is a summary of
- growth prospects
- risk characteristics
- shareholder orientation
- corporate image
- degree of liquidity
This ratio essentially shows the contribution of an organization to the wealth of society. When
the ratio is greater than one (1) it means that the organization has contributed to the creation of
wealth in the society. For instance if the ratio is 2, the organization has created a wealth of one
Tzs. for every Tzs. invested in it. However, when the ratio say is one (1), it means that the
organization has neither contributed to nor detracted from the wealth of society.
When the market value to book value ratio is one, it means that all the three ratios are equal
which are return on equity, earning price ratio and total yield.
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The following is a list of some of the more commonly used ratios in financial statements
analysis:
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Shareholders Equity Preference dividends on Ordinary Shareholders’
Average Ordinary Equity.
Shareholders Equity
15. Return on total assets Net Profit plus Interest Measures the productivity
expense/Average
investment in assets
Note that, in the case of public sector companies where stock prices are not
applicable, the average annual compound growth rate in net worth (excluding new
capital issues) is used.
The determination of the top companies is based on a combined ranking over the five indicators
which are equally weighted. For example, if a company gets a ranking of say 15 on first
indicator, 24 on the second, 34 on the third, 20 on the fourth and 32 on the fifth. That means its
15 24 34 20 32
combined ranking will be equal to 25
5
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Forecasting Bankruptcy
The widely used method in this area is the scientific multivariate analysis based on the classic
study by Altman on prediction of corporate bankruptcy. In his study Altman examined a sample
of 33 bankrupt organizations with a pair of 33 non-bankrupt organizations. He considered 22
accounting and non-accounting variables in various combinations as predictors of failure. He
found out that the following function discriminated best between the bankrupt and non-bankrupt
organization.
Z 1.2 x1 1.4 x 2 3.3 x3 0.6 x 4 1.0 x 5
Whereby:
Working capital
X1 This is a liquidity measure
Total assets
Re tained Earnings
X2 This is a measure of reinvestme nt earnings
Total Assets
Earning before Interest and Taxes
X3
Total Assets
Market value of equity
X4 This is a measure of leverage
book value of total debt
Sales
X5 - This is a measure of turnover
Total Assets
In conclusion Altman found that organizations which had a Z score below 1.81 almost
went bankrupt, organizations which had a Z score value above 2.99 remained healthy and
organizations which had a Z score between 1.81 and 2.99 fall in grey area.
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technique is still very powerful. However, the following are the major weaknesses of this tool
which call for care, circumspection and judgment when applying.
(a) Lack of Objective Comparison Criteria
The Comparison based on the past is unreliable especially in these changing times. Also
comparison with industrial average is superfluous because industrial average in
developing countries usually is non-existing. Sometimes also even the comparison with
budget is not reliable as the budgets are usually unrealistic due to scarce resources. On
the other hand ratios are static measures or indices. Thus ratio ignores one of the most
important issue, inflation which is one of the dynamic forces in the economy.
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very comfortable liquidity position and a high turnover of stock. When window dressing
of this type is suspected, the financial analyst should look at the average level of stock
over a period of time and note the level of stock at just one point in time.
Example
The financial statements of Pugu Coal Mines Co. Ltd. showed the following balances as at the
end of December, 2004 and 2005.
Figures “000”
2005 2004
Assets Tzs. Tzs.
Cash 35,000 25,000
Debtors 91,000 90,000
Stock 160,000 140,000
Prepaid expenses 4,000 5,000
Land 90,000 100,000
Equipment 880,000 640,000
Provision for depreciation: Equipment (260,000) (200,000)
1,000,000 800,000
Liabilities and Capital
Creditors 105,000 46,000
Accrued expenses 40,000 25,000
8% Bonds payable 280,000 280,000
Premium on bonds payable 3,600 4,000
P & L A/C 406,400 335,000
Ordinary Shares, Tzs. 5,000 par 165,000 110,000
1,000,000 800,000
Statement of Comprehensive Income
Sales (net) 2,200,000 1,600,000
Cost of sales 1,606,000 1,120,000
Gross Profit 594,000 480,000
Operating Expenses (22,400 interest) (330,000) (352,000)
Net Profit before tax 264,000 128,000
Tax (50%) (132,000) (64,000)
Net Profit after tax 132,000 64,000
Notes:
(i) Cash dividends of TZS. 40,000,000 were paid and a 5% ordinary shares was declared as
dividends.
(ii) All sales were made on credit.
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(iii) Stocks and Debtors did not fluctuate materially.
Required:
Calculate the following for 2004 and 2005:
(i) Current ratio
(ii) Acid Test ratio
(iii) Defensive internal ratio
(iv) Stock turnover
(v) Gross Profit to sales ratio
(vi) Net profit ratio
(vii) Return on Assets Investments
(viii) Earnings Power Ratio
(ix) Total Assets turnover
(x) Equity ratio
(xi) Debt ratio
(xii) Interest coverage ratio.
Solution:
Figures “000”
2005 2004
(i) Current ratio: 290,000
2:1
145
260,000
3.7:1
71,000
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(vii) Net Profit ratio: 132,000 x 100
6%
2,200,000
64,000 x 100
4%
1,600,000
(viii) Return on assets 132,000 x 100
13.2%
Investments: 1,000,000
64,000 x 100
8%
800,000
(ix) Earnings Power ratio: 2,200,000 x 132,000
13.2%
1,000,000 x 3,200,000
1,600,000 x 64,000
8%
800,000 x 1,600,000
(x) Total Asset turnover: 2,200,000
2.2 times
1,000,000
1,600,000
2 times
800,000
(xi) Equity Ratio 571,400
57%
1,000,000
445000
56%
800,000
(xii) Debt Ratio 428,600
43%
1,000,000
355,000
44%
800,000
(xiii) Interest Coverage Ratio: 286,400
12.8 times
22,400
150,400
6.7 times
22,400
Exercises
1. Information for Nadulah Company Ltd. is presented below:
Figures “000”
2007 2006
Tzs. Tzs.
Cash and bank 60,000 90,000
Debtors (net) 180,000 120,000
Stocks 135,000 105,000
Fixed Assets 825,000 645,000
Accumulated depreciation (120,000) (90,000)
1,080,000 870,000
Creditors 150,000 120,000
6% Debentures 300,000 300,000
Ordinary shares Tzs. 5,000 par 390,000 300,000
Profit and Loss A/C 240,000 150,000
1,080,000 870,000
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Sales 540,000 360,000
Cost of sales 300,000 210,000
Gross profit 240,000 150,000
Operating expenses including tax 150,000 _90,000
Net Profit _90,000 _60,000
2 Mninga Ltd. and Mvule Ltd. are companies doing business in a similar range of products in
Dodoma and Singida areas respectively. Each company prepares its accounts on the
calendar year basis and the following information is related to 2007:
Required:
A full discussion of the financial ratios for each of the two Companies based on the
following ratios:-
(a) Profit ratio (operating profit as a percentage of sales).
(b) Asset turnover.
(c) Percentage return on capital employed (Capital employed defined as gross assets).
(d) Percentage returns on long term funds.
(e) Percentage return on shareholders’ equity.
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3 Mapera Ltd. is a company with owners’ equity of Tzs. 100,000,000 and the ratios for the
Company are as follows:-
(i) Short term debt to total debt = 0.40
(ii) Total debt to owners’ equity = 0.60
(iii) Noncurrent Assets to owners’ equity = 0.60
(iv) Total assets turnover rate = 2 times
(v) Stock turnover = 8 times
From the above information, complete the following Statement of Financial Position.
Figures “000”
Capital and Liabilities Tzs. Assets Tzs.
Owners’ Equity 100,000 Non-current ……………
Long term debt ……….. Stock ……………
Short term debt ……….. Cash ……………
……….. ……………
MATUNDA COMPANY
A STATEMENT OF FINANCIAL POSITION AS AT DECEMBER, 31
Figures “000”
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A STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEAR ENDED DECEMBER, 31
2007 2006
Sales 1,500,000 1,300,000
Required:
(a) Compute the stock turnover for 2006 and 2007.
(b) Compute the current ratio for 2006 and 2007.
(c) Compute the rate of return of shareholders equity for 2006 and 2007.
(d) Prepare a statement for cash flows for the year ended December 31, 2007.
(e) Comment on the operating results for the year ended December 31, 2007 and the cash
management.
5 An organization’s current assets and current liabilities are Tzs. 4,800,000 and Tzs.
4,000,000 respectively. How much can be borrowed on a short-term basis without
reducing the current ratio below 1.25?
6 The following ratios were obtained from the financial statements of Maarifa Co. Ltd.
Net profit margin ratio 4%
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Current ratio 1.25
Return on net worth 15.23%
Total debt to total assets ratio 0.40
Stock turnover ratio 25
Required:
Reconstruct the Statement of Comprehensive income and Statement of Financial Position
of the company using the above ratios.
Tzs.
Sales ………..……
Cost of goods sold …….………
Operating expenses 700,000,000
Interest 45,000,000
Profit before tax …………….
Tax (50%) …………….
Profit after tax …………….
7. Complete the balance sheet and sales data using the below given financial data:
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Equity capital 300,000 Non current assets ……………..
Retained Earnings 360,000 Stock ……………..
Debt ………... Debtors ……………..
_______ Cash ……………..
………… ……………..
Sales …………………..
Cost of sales ………….
Assets:
Non-current assets (net) 90,000,000
Current assets:
Stock 60,000,000
Prepaid expenses 7,500,000
Debtors 45,000,000
Other (marketable securities) 7,500,000
Cash and Bank 15,000,000 135,000,000
225,000,000
Tzs.
Net sales 285,000,000
Cost of sales 216,000,000
Gross profit 69,000,000
Operating expenses 31,500,000
Operating profit 37,500,000
7,800,000
Non-operating incomes
Profit before Interest and Tax 45,300,000
Interest 15,000,000
Profit before tax 30,300,000
Tax (50%) 15,150,000
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Profit after tax 15,150,000
Dividends 5,400,000
Retained earnings 9,750,000
Standard Ratios:
Current ratio 1.5
Aced test ratio 0.80
Debt-Equity ratio 1.5
Times Interest covered ratio 3.5
Stock turnover ratio 4.0
Average collection period 60 days
Total assets turnover ratio 1.0
Net profit margin ratio 6%
Earnings power 18%
Return on Equity 15%
Required:
Compute the financial ratios of the company and evaluate the company’s performance
with reference to the standards provided above
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