Professional Documents
Culture Documents
NGMATERI
AL
FI
NANCI
ALACCOUNTI
NG
Pr
epar
edby
xxx
DEPARTMENTOFACCOUNTING
FACULTYOFCOMMERCE
MAKEREREUNIVERSI
TYBUSI
NESSSCHOOL
1
I
ntr
oduct
ion
Thi
sreadi
ngmat
eri
al/st
udypackhasbeenspeci
fi
cal
l
ydev
elopedt
o
pr
ovi
de a compl
ete cour
se of st
udy f
or Fi
nanci
al Account
ing
exami
nat
ionf
ort
hebusi
nesspr
ogr
ammef
ir
sty
ear
s.Theai
m oft
he
sy
ll
abusi
stodev
elopanappr
eci
ati
onoft
her
oleofaccount
ingandan
under
standi
ngoft
het
echni
ques.Ther
eadi
ngmat
eri
algi
vesacompl
ete
cov
erageoft
heappr
ovedsy
ll
abus.
I
tisessent
ialt
haty
ouwor
kthr
ought
hequest
ionsatt
heendofeach
t
opi
cassoonasy
oucompl
etet
het
opi
c.Theyhav
ebeenspeci
all
y
wr
it
tent
oref
lectexami
nat
iont
ypeofquest
ions.
2
Fi
nanci
alaccount
ingsy
ll
abus
1.
0 Cour
seObj
ect
ive
Preparat
ionofBooksofAccount sandPeri
odicFinanci
alStatementsisav i
tal
functi
onineveryorgani
sat
ion.Theobj
ect
iveofthi
scoursethereforeistoequip
students wi
thf undament
alaccounti
ng ski
ll
s and pri
nciples necessar
yf or
preparat
ionofbooksofaccountandfi
nanci
alstat
ements.
Studentsareexpectedbyt heendofthecoursetobeabletopreparevar
ious
booksofaccount ,f
inalaccount
sandotheraccount
ingrecor
ds/
statementsin
accordancewit
hGener alAccept
edAccount
ingPri
nci
ples(GAAP)
2.
0 Cour
seCont
ent
/Out
li
ne
2.
1 Theor etical framewor kofaccount ing
Intr
oduct ion
Whataccount ingi sandi tsrole
User sofaccount ingi nformat ion
Di ffer entbr anches/ discipli
newi t
hinaccount ing
2.
2 Account ingr egul ator yf r
amewor k( account ingr ules)
Account i
ngpr inci ples/conv ent i
ons/ concept s
Account i
ngst andar ds.
2.
3 Fundament al account i
ngequat ionandel ement arytreat
mentofBal anceSheet .
2.
4 Doubl eEnt rySy st em andpr eparat ionofBooksOfAccount
Whatdoubl eent ryi s,account ingpr ocess
Jour nal s–Booksofor i
ginalent r
y
a)Gener al Jour nal
b)Daybooks
c)Cashbook
Ledger s
a)Gener al Ledger
b)Subsi di ar yLedger s
2.
5 Checki ngaccur acyofdoubl eent ry–Tr ialbal ancei ncl
udingerrorsnotdet ected
byit.
2.
6 Year-endadj ust ment s/prov i
sions–Depr eciati
on,baddebt s,prepaymentsand
accrual s.
2.
7 Prepar ationOfFi nalAccount s/Fi nanci alSt atement sforinternaluse( vertical
format s–I AS1)
I ncomest atementi ncludingappr opriati
ons
Bal ancesheet
2.
8 Cashbookpr epar ations
2.
9 BankReconci li
at ion
2.
10 Manuf act uri
ngaccount s
2.
11 FixedAsset s–Depr eciationanddi sposal s
2.
12 Suspenseaccount sandcor recti
onofer rors
2.
13 Cont r
ol account s
2.
14 Account sf ornon- prof itmaki ngor ganizat i
on( r
eceiptsandpay mentaccount s)
3
Howt
ost
udyf
inanci
alaccount
ing
Gener
alTi
psf
orSt
udy
ingAccount
ing
Maki
ng The Best
Use Of
Cl
ass Ti
me
1)Nev ermi ssal ecturesessi on, youwi llfi
ndi tdiff
icultandtimeconsumi ng
tolear nbyy ourselfwhatwascov er
edi nclass.
2)Classesar enev erinteresti
ngunl essy ouact iv
elyt akepart.
3)Alway sbepr eparedbef orey ougot ocl ass.Readwhaty oucov eredinthe
prev i
ousl ecture;attemptt hequest i
onsandi ll
ustrati
onprov i
dedbyt he
l
ect urer.
4)Don' tbeaf r
aidt oaskquest ions. Ifyouhav eaquest i
on,atleasttenother
student sormor epr obablyhav et hesamequest i
onbutar eaf raidtoask.
Soy ouask.
5)Not e:Student s,whof ailtoat t
endcl asses,f ai
lt opayat tentionduring
class, f
ailtodot heirhomewor k,andf ailtoaskt hei nst
ruct
orf orhelpunti
l
i
ti stoolateal sofallti
eraccount ingexami nations.
4
Pr
epar
ing For
Exams
1.Bespeci fici ny ourst udy ;concent rateont het hings,whi chseem t obe
mosti mpor tant .Not ei temst hatt hel ect ur eremphasi zesi ncl assand
cour sewor kquest i
onst hatar eassi gned.
2.Ever yexam hasanel ementofspeed. Ify ouar esl ow,y oupr obabl yneed
tost udyandpr act icemor e. Al l
ocat eappr opr iatet i
met oal lquest ionsy ou
areat tempt ingi nanexami nat i
on.I ncasey ouf i
ndt haty ouar espendi ng
mor et imeonaquest i
ont hany ouhadal locat edi t,itwi sey oust ar ton
anot herquest ion.I nmostcasest heext rat ime, abov et heal locat edt i
me.
3.Thequest ionst hatappearonexamsappr oacht hemat er ial from asl ightl
y
diff
er entdi rect iont ot esty ourabi lityt or easonandunder st andr at hert han
yourabi li
tyt omemor i
ze.
4.Whenr eadi ngorr ev i
sing, don’ tstopwi thj ust“ gettingt hei dea” . Iti sof t
en
agr eatshockt ost udent swhot houghtt heyunder st oodt hemat erialbut
did poor lyont heexam.Thi sisbecauset heynev erunder st ood and
pract i
cedt heski llsandknowl edget heyl ear nt.Unl essy oucan“ appl y”
whaty ouhav el ear ned,t her esul tsy ougetonanexam wi l
lbev er
y
disappoi nt i
ng.Youshoul dbeabl et owor koutanumberofaccount i
ng
quest ionsf rom eacht opiccor rectlydur ingy ourr ev isionwi thoutl ooki ng
att hesol ut ions.I fy oucan’ tdot hat ,youar enotr eadyt ot aket heexam
andappl ywhaty ouhav el earned.
5.Agai n,r eadt hequest ionmor et hanonce.Endeav ourt ounder st andt he
requirementoft hequest ion.Av oidget ti
ngov erexci tedi ft heexami nat i
on
quest ionseemssi mi lart oaquest i
ony ouhav eat tempt edbef or e.They
mayseem si milarbutv erydi ffer enti n cont entand r equi rement s.A
numberofst udent sf ai ltheiraccount i
ngex ami nat i
onsbecauset heydo
notcar eful lyr eadt heexami nationquest i
onsbef or eat tempt ingt hem.
Readwhatt hequest ioni sreal l
yaski ng,notwhaty out hinkory ouwanti t
toask. Av oidcar el esser rors. Att heendoft heexam al l
owenought ime
tolookexam, er r
or sandomi ssions.
6.Anexcel lentst r
at egyt ousewhent akinganexam i st oqui cklyl ook
throught heent ireexam andi dent i
f ythequest i
onst hatar eeasyf ory ou.
Attemptt hosequest i
onsf i
rstast heyhel pt or eli
ev et hepr essur ewhen
yougobackt owor kont hemor edi ffi
cul tandt ime-consumi ngpr obl ems.
7.Readt hei nst r
uct ionsandf low t hem.A numberofst udent sf ailt heir
account ing exami nat ion,because of f ailur et of ol l
ow exami nat i
on
i
nst ruct i
ons.
8.Comet ot heexami nat ionhal lequi ppedwi tht henecessar yi tem, incl uding
calcul ator s,r ul ers,pens,penci ls,wat ch,exami nationcar d,i dent it
ycar d
etc.
9.Arriveatt heexami nat ion hal lat30 mi nut esbef oret heexami nat i
on
startingt ime.
5
6
Topi
c1
Theor
eti
cal
Framewor
kofAccount
ing
Learni
ngobjectiv
es
Bytheendoft hetopic,youwi l
lbeableto;
Defi
neAccount i
ng
Todi scussthecat egori
esofper sonswhouseaccount sandthei
rinf
ormation
needs
Explainanddiscusst heaccountingprinci
plesandconcept
s
ExplaintheQualit
ativecharact
erist
icsoffinanci
alst
atementsandtheextentto
whichaccount i
ngst atementsdisplaysuchcharact
eri
sti
cs
Intr
oducti
on
Likeanyotherprofession,accountancyhasrules.Thesear enormall
y,i
norderforthe
consist
encytobeexhi bit
ed,enshr i
nedinaframewor k.Everysyst
em hasusers;
sot he
outputsofthepr ocessoff i
nancialaccount
inghav einterest
edusers.Theseoutputs
must hav e character
isti
cs that make t hem usef ul
.These t oget
her wit
ht he
component softheaccount i
ngsy stem ar
eexempl i
fi
edbelow.
Whati sfinancialaccount
ing?
FinancialAccount ingistheartandsci enceofr ecordi
ngandcl assifyi
ngf inancial
transacti
onsi nt hebooks,summar izingandcommuni cat
ingfi
nancialinformation
through pr oduction of fi
nanci
alst atements/r
epor t
s,and i nt
erpretat
ion of t he
operating result
s portr
ayed i
nf i
nancialst at
ement s/r
eportstof aci
li
tate decisi
on-
maki ng(Omonuk, 1999)
FinancialAccount i
ngi sthepr ocessofi dentify
ing,measur i
ngandcommuni cati
ng
economi cinformationt opermitinfor
medandr ati
onaldecisi
onst obemade.Rat ional
decisionsmadebyt heor ganizati
onincludef orexampl e;workingcapi taldecisions,
capitalbudgetingdeci si
ons,investmentdecisions,etc.Itisbeyondt hescopeoft hi
s
bookt ogointodet ai
lsoft hesedecisi
ons.Wi thoutli
mi t
ingaccountingt of i
nances,in
gener aluse,account i
ng meansexpl aining and defending orjustif
ying actionsor
resultsoft hoseact ions.Allthosewhohav ebeenent rust
edwi thsaf ecust odyof
othersr esourcesar eusual lyrequir
edt oaccountorsubmi taccount abil
it
yt ot he
owner softher esources.
Bywhatmeanscanwepr ovi
deFinancialAccount abi
li
ty?
Managers and accountants arer equired to show ev idence ofgood f i
nancial
managementbysubmi tt
ingaccountabili
tyofmoneyr ecei
vedandspent .Thef
oll
owing
aremethodsofaccountabili
ty:
1.Product
ionofdocument aryevi
dence
Thi
sinvol
vesproducingdocument sasev i
denceofmoneyr eceivedandwellspent.
Thekeyaccountabi
l
itydocument sarer ecei
pts,voucher
s,invoices,etc.
Receipt–i
sadocumentprepar
edasevi
denceofmoneyr ecei
ved
Voucher–isadocumentt
hatshowsdetai
l
sandsupportspayment
I
nvoice–isadocumentsubmitt
edbysuppli
ersdemandi
ngpay mentf
orgoods
7
andser
vicespr
ovi
dedoncr
edi
t
2.Booksofaccount s
Afterdocumentingtransact
ions,theset
ransact
ionsshoul
dber ecordedintobooks
ofaccounts.Incaseofaquer yorev eni
nt henormalmonitor
ingoftransacti
onsby
ownersoft hewealth,examinati
onofbooksofaccounti snor mal
lycarriedout.I
n
ordertoaccountproper l
y,t
ransacti
onsmustbeaccur at
elyrecor
dedi ntobooksof
accountse.g.acashbook.
3.Financialstatements/r eport
s
Financialstatements( alsocal
ledfi
nalaccounts)arepreparedtoshowr esult
sof
theoper ati
onsf orthey earended.Themaj orfi
nanci
alstatementsar etheincome
statement,t he balance sheetand t he cash fl
ow statements.Some mont hl
y
statementssuchasbankr econci
li
ationstat
ements,budgetper f
ormancer eport
s
andmont hlyt r
ialbal
ancear ealsor equi
redforaccountabil
it
ypur posesinmany
organisati
ons.
4.Out put/r esult
Apar tfrom paperaccount abi
l
ity,t
hereisneedf ortangi
bleoutput
sandconcrete
resultstoshowev i
denceofmoneywel luti
li
zed.Forexample,i
fsomeoneisgiven
UGX500mi ll
ionforbui
ldi
ngclassr
oom blocks,t
hefir
staccountabi
l
ityt
obelooked
atar ethecl assroomsthemselves-somet i
mescalledeff
ecti
veness.
Whyaccount i
ng?
Theul ti
mat eroleofaccount i
ngistoprovideinfor
mationtodecisi
onmakers.Besides
that
, preparati
onofaccount splaysthefol
lowingrol
es:
1.Ascer tai
nmentofpr ofitandloss
Oneoft hemai npurposesofanybusi nessistomakepr ofi
ts.Fort
hisr eason,
accur ateandcompl eterecordi
ngofallbusinesstr
ansacti
onsisessent
ialbecause
thisinformationwillbehelpfultodeterminewhetherther
ewasapr of
itorlossin
anyt radingperi
od.
2.Assessmentoft ax
Governmentsinallcount
ri
esimposet axes.Fort heaccurateassessmentoftax,
accur
aterecordsmustbemai nt
ainedproperl
y ;otherwi
se,abusinessenter
pri
se
mayber equi
redtopayhightaxestothegov ernment .Account
ingther
efor
eforms
anobject
iveandreli
abl
ebasisofcomputingtaxes.
3.Tof aci
li
tatethecr edittransacti
ons
Mostbusi nesst ransactionsaremadeoncr editbasis.Inthi
scase,goodsar e
purchasedorsol dwi t
houtcashpay ment .Theset ransacti
onsaremadeont he
basis ofpr omi ses to make pay mentsi nf uture.Wi t
houtcredittr
ansacti
ons,
businesscannotbeexpandedbey ondcertainli
mi t
s.Ifgoodsarepurchasedfr
om a
suppli
eroncr editbasi s,thenthissuppli
eri sknownast hecredi
tor
.Simil
arl
y,if
goodsar esol dt oacust omeroncr edi
tthent hiscustomeri sknownasadebt or.
Account i
ngr ecordsf acil
itat
esuchcr edi
tt r
ansact i
onsbecauset heserecor
dswi l
l
determinetheamount sduet ocredi
torsandduef r
om debt or
s.
Foreasymonit
ori
ngofdebt
orsandcr
edi
tor
s,properaccount
ingrecor
dsmustbe
mai
ntai
ned.ThealsoactasaBaseforcredi
tfacil
it
iesforexample,al
oan. A
8
businessent erpri
secanbeabl etoacquirecreditf
rom fi
nanciali
nsti
tut
iononceit
haspr operandaccur at
eaccounti
ngr ecords.
4.Atoolforcontrol
A businessent er
pri
secanmaxi mizei tsprofi
tsbyi ncr
easingthegapbet ween
income and expenses. Pr oper cont rol of unnecessar y expenses and
mi sappropr
iati
onoff undsisessenti
al.Apr operandaccurateaccounti
ngsystem
willbehelpfultomaintai
nthiscontr
ol.
5.Basef orfurt
herplanning
Forfurtherexpansion,abusinessent
erpri
secanformul
atei
tsplansbasedont he
resentandpastachi evements.Accounti
ngrecor
dscanpr ovi
desuffi
cientdata
rel
atingtosal es,profi
t,i
nvestmentsetc,formaki
ngdecisionaboutthef ut
ure
programme.
6.Monit
oringofmanagement
Preparati
onofaccount shelpsshareholderstomoni tormanagementandot her
stakeholderstoevaluat
etheperf
ormanceoft heorganisati
on.Themanagersar e
nottheowner soft hebusi
nessandthereforeaccounti
ngf or
msanobj ect
ivebasis
formoni tor
ingtheacti
onsofmanagersbyt heownersoft hebusiness.
Whoar etheUser s/int
er estedpartiesofaccounti
nginformat i
on?
Itiseasyt oassumet hatt heonlyuser sofaccountinginformat i
onar eshareholders-
sinceitisarequirementoft hecompanyl awthatshareholdersmust Hreceiveperiodic
account i
ngst at
ement s.Howev er,inreal
ityther
ear emanyuser sofaccount s.Ev ery
organisati
onwhet herpr ofi
tmaki ngornothaspeopl eorpar t
iesinter
estedinit.These
i
nt er
ested par t
ies ( stakehol der
) hav et o make deci sions connect ed witht he
organisati
on.Account inginf ormationisv er
ynecessaryifdeci sionsaret obemade
accuratelyandr ationally.Var i
ouspar t
iesareinter
estedinaccount i
nginformationto
facil
i
tatetheirdecision-maki ng.
Account
inginfor
mati
onisinform off
inanci
alst
atements/reports,
entr
iesinbooksof
account
s and busi
ness documents.The users ordecision makersinter
ested i
n
account
inginfor
mati
onar ebroadlydiv
idedint
ot wogr oups,i
.e.int
ernaluser
sand
exter
naluser
s.
Internalusers
Thesear einv olv
edi nt hedaytodayrunningoft heor gani
sation.
1.Management
Themanager soft hebusinesswillwantt oknow how t hingsaregoing.Theyneed
financialinfor mationi nordertoplanf orthef utur
e;theyt henneedmor eup-to-date
i
nf ormationi nor dert ocheckwhetheract ualperfor
mancei sont ar
get.Thi
sprocessi s
known as cont roll
ing the cost
s and f inances.I n accounti
ng itis known as
managementaccount i
ng.So,managementaccount i
ngi sdonebyt hemanager s,for
themanager s,forthepur posesofplanningandcont rol.
2.Employees
Employ
ees (and or
gani
sat
ions t
hatrepresentthem – e.gtrade unions)requi
re
i
nfor
mat i
onaboutthest
abi
lit
yandcontinui
ngprofit
abi
l
ityoft
hebusi ness.Theyare
9
cruci
all
yinterestedininf or
mat i
onaboutemploymentpr ospectsandt hemai nt
enance
ofpensionf undingandr et
ir
ementbenefit
s.Theyarealsolikel
ytobei nter
estedinthe
payandbenef it
sobt ainedbyseniormanagement .Empl oyeeswil
l,theref
orelookfor
i
nf or
mationon:
Rev enueandpr ofi
tgrowth
Level sofinv
est mentinthebusiness
Over all
employ mentdat a(numbersemployed,
wageandsal arycosts)
Statusandv aluati
onofcompanypensi onschemes/l evelsofcompany
pensi oncontri
but i
ons.
External users
Theyar eext ernalint hesenset hatt heyar enoti nvolvedinthedayt o-dayr unningof
theor ganisat i
on.
1.Shar eholder s
Thesear et hepr imar yst akehol der soft hebusi nessbecauset heyinvestcapi t
alin
thebusi ness.I nvest orsar econcer nedaboutr i
skandr eturninr elati
ont ot heir
invest ment s.Theyr equirei nformat i
ont odeci dewhet hertheyshoul dcont i
nuet o
investi nabusi ness.Theyal soneedt obeabl et oassesswhet herabusi nesswi ll
beabl et o paydi vidends,and t o measur et heper formanceoft hebusi ness’
managementov erall
.Thekeyaccount ingi nformat i
onforani nvestorist herefore:
I nformat i
onaboutgr owt h–sal es, volumes
Pr of i
tabil
ity(pr ofi
tmar gins, overal ll
evel ofprofi
t)
I nvestment s(amount sinv ested, asset sowned)
Busi nessv alue( shar epr i
ce)
Compar ativeinf or
mat ionofcompet it
or s
2.Pot entialinvestors
Theseneedaccount inginf ormat ioni nor dertobeabl etodeci dewhet herinvest i
ng
inacompanyi swor thwhi l
e.Thi smaybewi t
hhel pofananal ystwhoanal ysest he
company ’
spastandpr oj
ect edf inancialper f
or mancebef oretheycanbuyshar esin
it.
Thekeyaccount i
ngi nfor mat i
onf orapot enti
al i
nvestori
st heref
ore:
I nformat i
onaboutgr owt h–sal es,volumes
Pr ofitabi
lit
y( prof i
tmar gins,overalll
ev elofprofi
t)
I nvestment s( amount si nvested,asset sowned)
Busi nessv alue( shar epr i
ce)
Compar ati
v einfor mat i
onofcompet i
tors
3.Creditors
Suppliersandt radecr editorsr equireinformat i
onthathelpst hem underst
andand
assesst heshor t-t
er ml iquidityofabusi ness.Theyneedaccount i
nginf
ormationto
establi
sht hecr editwor thinessoft hecust omer sorcli
entsi.e.i
sthebusinessable
topayshor t
-t
erm debtwheni tf al
lsdue?Cr edit
orswilltherefor
e,belookingfor
i
nformat ionon:
Cashf l
ow
Managementofwor kingcapi tal
Pay mentpol i
cy
10
4.Lender
s
Banksandf i
nancialinsti
tut
ionswhol endmoneyt oabusi
nessrequi
reinf
ormati
on
thathel
psthem determinewhet herloansandi nter
estwi
l
lbepaidwhentheyfal
ldue.
Thekeyaccounti
ngi nformati
onf orlender
stherefor
e:
Cashf l
ow
Securi
tyofasset sagainstwhichthelendingmaybesecur
ed
Invest
mentr equir
ement sinthebusiness
5.Debt ors
Cust omer sandt radedebt orsr equi r
ei nfor mat ionaboutt heabi lityoft hebusi nesst o
surv i
veandpr osper .Ascust omer soft hecompany ’spr oduct s,t heyhav eal ong- ter
m
i
nter esti nt he company ’sr ange ofpr oduct s and ser vi
ces.They may ev en be
dependenton t he busi ness f orcer tain pr oduct s orser vi
ces.Cust omerwi l
lbe
particularlyinter est edi n:
Sal esgr owt h
Newpr oductdev elopment
I nvest menti nt hebusi ness( e.g.pr oduct ioncapaci ty)
6.Donor /fundi ngagenci es
Nonpr ofi
tmaki ngor gani sationsl ikeNGOsgetf undi ngf rom donoragenci es.These
agenci esar eal way si nterest edi nmaki ngsur et hatt hemoneyt heydonat ei susedt o
achiev et heobj ect i
v esf orwhi chi twasr el
eased.Theymoni torut il
izationoft heir
moneybyexami ni ngaccount ingr ecor dsi .e.financi alr epor ts,booksofaccount sand
document soft heor gani sat iont hatt heysuppor t.
7.Gov ernment
Ther e ar e many gov ernmentagenci es and depar tment st hatar ei nterest ed in
account i
ng i nfor mat ion.Forexampl e,t he I nland Rev enue needs i nf ormat ion on
businesspr ofitabi l
ityi nor dert ol ev yandcol l
ectcor por ati
ont ax.Val ueAddedTax ;
l
ocalgov ernmentneed si mi lari nfor mat ion t ol ev yl ocalt axes and r ates.The
gov ernmental soneedsaccount ingi nfor mat ionf rom st at eownedpubl iccompani es
existingal ongsi depr iv
at eones,t omoni t ort heirper formance.I tneedsaccount i
ng
i
nfor mat ionf r
om compani est o enabl ei tanal yzet heef fecti t
spol icieshav eon
business.Thi senabl esf ormul ationofpol iciest hatpr omot esect ordev elopment .
8.Compet itors
Theseneedaccount ingi nfor mat ionoff irmsi nt hesamei ndust rysoast oj udge
whet hert heyar eper for mi ngpoor lyorf ai rl
yi ncompar i
sonwi thot herpl ayersi nt he
samebusi ness.
9.Gener al public
Thesei ncludei ndi vidual sandor gani sat ionswhi chensur et hatbusi nessesmaket heir
profitsi nasoci all
yaccept abl emannerwi thoutdamaget ot heenv i
ronmentand
consumer s.They hav e speci fici nt er esti nt he act iv i
ti
es and per for mance of
businesses.Env ironment alpr essur egr oupspushf ormi ni mizationofpol l
utionoft he
env i
ronmentwhi leconsumergr oupsl ikeUgandaNat ional BureauofSt andar ds( UNBS)
tr
yt oensur et hatbusi nessesof fersaf epr oduct sanddon’ tchar gehi ghpr icesf or
poorqual ityproduct s.
Desi
rabl
equali
tat
ivechar
acter
isti
csofaccountinginf
ormati
on
Havi
ngident
if
iedtheusersoffinanci
alr
eports,theprobl
em ar
isesast
owhatar
ethe
11
quali
ti
esofusef ulaccountinginformati
on?Thesecharacter
ist
icsaretheattr
ibut
es
thatmakethei nfor
mat i
oni nfinanci
alstatement
susefultoi
nvestor
s,credi
tor
s,and
other
s.Fourprinci
palquali
tati
vecharacteri
sti
csar
eident
if
iedi
.e.
:
Understandabil
it
y
Relevance
Reli
abil
ity
Compar abil
it
y
Under
standabi
l
ity
Thisimpli
est heexpression, wit
hcl ar
ity
, ofaccounti
ngi nf
ormationinsuchawayt hat
i
twi l
lbeunder standabl
et ouser s-whoar egenerall
yassumedt ohavear easonable
knowledgeofbusi nessand economi cact iv
iti
es.In otherwor ds,theinformation
shouldbei naf orm whichi sunder standablet ousergr oups.Howev er
,thisposes
probl
ems.User shav ev erydi f
fer
entl evelsoffinanci
alsophisti
cati
oni naddit
ion;the
very complexit
y ofbusi ness transactions makes i tdiff
icul
tt o prov
e adequat e
discl
osurewhi l
stmaintainingsimplici
ty.
Relevance
Thisimpliesthat,tobeusef ul,accounti
ngi nformat i
onmustassi stausert of orm,
confi
rm ormay bereviseav i
ew -usual l
yi nthecont extofmaki ngadeci sion( e.
g.
shouldIinvestinthisbusiness?shoul dIlendmoneyt othisbusiness?ShouldIwor k
forthis business?). Relevantaccount ing informat i
on is capabl e ofmaki ng a
dif
fer
encei nadeci si
onbyhel pinguserst oform pr edict
ionsaboutt heoutcomesof
past,present,and f utur
e ev ent s orto conf ir
m orcor r
ectpr iorexpectati
ons.
Inf
ormat i
on can make a di ff
erence to decisions byi mpr ovi
ng decisi
on maker s'
capaciti
estopredictorbypr ovidingfeedbackonear l
ierexpectat
ions. Theprobl
em i s
howt oidenti
fytheseneedsgi vent hevari
etyofuser s.
Mat eriali
tyi
sacomponentofr el
evance.I
nformationismat er
iali
fitsomi ssi
onor
mi sstatementcoul
dinfl
uencetheeconomicdecisionsofusers.A decisionnotto
disclosecertai
ninf
ormati
onmaybemade,say ,becauseinv
estorshavenoneedf or
thatki ndofinf
ormati
on(iti
snotrel
evant
)orbecauset heamount sinv
olvedaretoo
smal ltomakeadi f
fer
ence(t
heyar
enotmat er
ial
).
Timeli
nessi sanothercomponentofr elev
ance.Tobeusef ul,inf
ormati
onmustbe
prov
idedt ouser swithinthetimeper i
odinwhi chiti
smostl i
kelytobearont hei
r
deci
sions.Ifinfor
mationi snotavailabl
ewheni ti
sneededorbecomesav ail
ableso
l
ongaf t
erther eport
edev entsthatithasnov alueforf
utur
eact i
on,itl
acksrel
evance
andisofl i
ttl
eornouse. Ti
mel i
nessal onecannotmakeinformat i
onrelev
ant,buta
l
ackoft i
melinesscanr obinf
ormat i
onofr el
evanceitmi
ghtotherwisehavehad.
Ver
if
iabi
l
ity
Inf
ormati
oninfi
nancialr
eport
sisrel
i
ableifitisfr
eef rom mater
ialer
rorandbiasand
canbedepended uponbyuser stor epresentev entsand tr
ansacti
onsfaithf
ully
.
Inf
ormati
onisnotreli
abl
ewhenitispurposelydesignedtoinfl
uenceusers'
decisions
i
napar t
icul
ardi
rect
ion.Thi
simpli
esthattheaccount i
nginf
ormationt
hatispresented
12
i
struthful,accurate,complet
e( nothi
ngsi gni
fi
cantmissedout)andcapabl
eofbeing
ver
if
ied( f
ori nstance,byapot enti
alinvestor
).Thecomplexi
ti
esofmoder nbusi
ness
maker el
iabil
itydiff
icul
ttoachi
ev ei
nal l
cases.
Obj ectivi
ty;Thisi mpliest hataccount i
ng i nformation isprepar ed and
repor tedina" neutral"way .Financialstatement sshoul dnotbei ncli
ned
(biased)t owardst heneedsofoneuser ;theyshoul dbeobj ective.The
probl em herei sthatf inancialreport
sar epr eparedbyoneusergr oup,
management .Anext ernalaudi t(anauditisani ndependentexami nati
on
oft hebooksofaccount st oascer t
aint hedegr eeofcor respondence
bet weenasser tions andt het r
uthandf ai
r nessoff i
nanci
alr eportsin
ordert oform anopi nionont hesestatement s)shouldremov et hisbias,
butsome aut horit
iesquest i
on t he ef
fectivenessoft he auditi nt hi
s
respect .
Compar
abi
l
ityandconsi
stency
Informat i
onaboutapar t
icularorganizationgainsgr eat l
yinusefulnessifitcanbe
compar ed wit
h simi l
ari nformati
on aboutot heror ganizati
ons;and wi t
h simi l
ar
i
nf ormat i
onaboutt hesameor ganizati
onf orsomeot herper iodorsomeot herpointin
time. Compar abil
i
ty between ent er
prises and consi stency i
nt he appli
cati
on of
met hodsov ert imei ncreasest hei nformationalvalueofcompar isonsofr el
ative
economi copportunit
iesorper formance. Thesi gni
fi
canceofi nf
ormat i
on,especial
ly
quant i
tati
veinformation,dependst oagr eatextentont heuser'
sabilit
ytorelat
ei tto
somebenchmar k.
Muchoft hewor
kt hatgoesi ntosetti
ngaccount
ingst andar
dsisbasedar oundthe
needf orcompar
abili
ty.Themai npr obl
em hasbeent heuseofaccount i
ngpolici
es
(Thesewi l
lbeexplainedlaterintheTopic)bydiff
erentor gani
zat
ions.Accounti
ng
standards(al
soexplainedlateri
nt heTopic)hav
er educed,butnotelimi
nated,thi
s
problem.
I
nor dertohaveusef
ulfi
nanci
ali
nfor
mationpresent
edt otheusers,t
hefoll
owing
general
l
yaccept
edaccounti
ngpri
nci
plesshoul
dbef oll
owed. Theseareexpl
ained
hereunder
.
Account i
ngconcept s/principl
es/postulat
es/assumptions/conventi
ons
Tof acil
i
tatetheexpl anat i
onofphenomena,somef actor smustbet akenforgranted
(al
lotherthingsbeingequal )asthepl atf
orm orbasisfrom whichtheexplanati
oncan
proceed.Thef actorst akenf orgr antedinexpl ai
ningt heconceptualstruct
ureof
accountingaret hef undament alassumpt i
onswhoseaccept anceassuch,andusei n
thesy st
emat i
cexpl anationareassumed.I nthescienceandar tofaccounti
ng,these
havecomet obecal led“fundament alaccountingpri
nciples”
.
Againindrawing up account
ing st
atement
s,whethertheyareexter
nal"fi
nanci
al
account
s"orinter
nal
ly
-focused"managementaccounts"
,aclearobj
ect
ivehastobe
13
t
hattheaccountsfair
lyrefl
ectt
hetrue"substance"ofthebusinessandt heresul
tsof
i
tsoperat
ion.Thet heoryofaccounti
nghas,t her
efor
e,developedt heconceptofa
"
tr
ueandf ai
rview".Thet rueandf airview isappli
edi nensuringandassessi ng
whet
heraccountsdoi ndeedpor
trayaccuratel
ythebusiness'
activi
ti
es.
Tosupportt heappli
cati
onoft he"tr
ueandf airvi
ew",account
inghasadopt edcert
ain
concepts and conventi
ons which helpt o ensurethataccounti
ng informati
on is
present
ed accuratel
y and consistent
ly.Attenti
on is now to be focused on the
fundamentalpostul
atesfrom whichrat
ionalaccounti
ngjudgmentsproceed.Fir
stwith
theassumpt i
ons;
BusinessEnt i
tyConcept
Thi sconv ention seekst o ensur et hatpr ivatef i
nancialt r
ansact ionsand mat ter s
relati
ng t ot he ownerofa busi ness i srecor ded and separ ated from f inanci al
transact ionst hatr elat
et ot hebusi ness.I tshoul dbenot edt hatabusi nessexi sts
separ atef rom i tsowner .Abusi nessownerusual lyownsper sonali temsaswel las
businessi tems.Thebusi ness’ fi
nanci alrecordsandr eport
sshoul dnotbemi xedwi th
theowner ’
sper sonalrecor dsandr epor ts.Fori nstance,abusi nessownermayi ncur
rentf orhi shomeandr entf ort hebusi ness.Onl yt herentr elatedt ot hebusi ness
shouldber ecor dedi nthebusi ness’f inancialrecordswhi l
et hehomer enti sr ecor ded
i
nt he per sonalf i
nancialr ecor ds.The busi nessent it
yconceptensur est hatt he
amounti nvestedbyt heowner si nthebusi nessi sdef i
ned(capital)andal lowsar etur n
oncapi talempl oy edtobecomput edt oshowwhet hertheinvestmenti swor thwhi le.
Limitation
Themai nl imitati
onoft heconcepti st hatt heownerandt hebusi nessar eact ual ly
i
nsepar able.Fori nstance, i
fasol et radersel l
sanddwel l
sont hesamepr emi ses, then
rentandut i
li
ti
espai dwillbedi ffi
cultt oappor tionbet weent heownerandt hebusi ness
especi allyiftherear enocl earappor tionmentbases.
Fi
nanci
aldat aisgenerall
yquant i
fiedandt hemeasur ementsexpressedi nunit
sof
money.Pr esentati
oninvolvesadding,subt r
acti
ng,multi
plyi
nganddi vidi
ngnumber s
depi
cti
ngeconomi cthi
ngsofv alueandev ents.
Li
mitat
ions
Itassumesmoneyhasast abl
ev alueovertime,yetactual
l
ymoneymayl ose
valuewi thti
me.
Itl
imi tsrecogni
ti
onoft ransacti
onst othosethatcanbequant i
fiedandleaves
outqual i
tat
ivefactorsthatcanhav eadi r
ectimpactont hebusinesse.g.
wor kforce ski
ll
,mor al
e,mar ketl eadershi
p,brand recognit
ion,quali
ty of
managementet c
14
GoingConcern/continuit
y
Thi
sr equi
restheaccount i
ngr ecordst
obemai ntai
nedinsuchawayt hatthebusiness
i
sseent ocontinueinitsforeseeablefut
ure.Thati
s,t
hefinancialr
eportsareprepared
wit
ht heexpectat
ionthatabusi nesswill
remaininoperat
ionindefi
nit
ely.Thismakesit
possibl
efortheaccount anttopr epar
eorpr oj
ectest
imatesforal ongperiodint
ot he
fut
ure.
Forexample,abusinessboughtmachineryforshs25,000,000/.Thi
smachi neryis
expectedtolastfor10y ear
s.They earl
ydepreciat
ionthereforeisrecor
dedand
repor
tedbasedont heexpect
edlif
eoft hemachinery
.Att heendofev eryyear,the
bookv al
ue(
costlessaccumul
ateddepr
eciat
ion)i
sreport
ed.
Periodici
tyanddisclosureconcept
Thisrequi r
esacompanyt opr epareanddi sclosefinanci
alr eportsatt heendofev er y
account i
ng or f i
nancialy ear.Thi s enables compar abili
ty,timely per f
ormance
measur ementand t ax comput ations.Ofcour se,t he impactoft r ansacti
ons is
measur edf oraspeci f
ictimeper i
odusuallyknownast hef inancialy ear.Thus,itis
assumedt hatt
hecont i
nuousl i
fet i
meoft heent i
ty(seegoi ngconcer nassumpt i
on)
canbebr okendowni ntospecifictimeper i
ods.Thent her esultsofoper ati
onforeach
ti
meper iodcanbemeasur ed.Att heendofeachper i
od,a“ stati
c”pi ctureoft he
resourcesandcl aimst othoser esourcesist aken.Thisdepi ctsthef i
nanci alposit
ion
oftheent it
yatthatspecifi
cpoi ntinthelif
etimeoft heent i
ty.Inpractice, thi
sfinancial
yearhascomet o be12 mont hsper i
od and i nUganda,t hispr i
nci plehasbeen
enshrinedinlaw( seecompani es’ActofUganda) .
Generall
yAccept edAccount ingPr inciples
Letusnowl ookatasecondcat egor yofideast hatarei
nessencet hebasicgui delines
i
nt heaccounti
ngpr ocess.Gener allyAccept edAccountingPr i
ncipl
es( GAAP)isat erm
usedt odescribebr oadlyther ulesandgui deli
nesthatgov ernst heaccount ingf or
fi
nancialtr
ansact ionsunder lyi
ngt hepr epar at
ionofasetoff i
nancialstatement s.
Generall
y accept ed principles ar e der i
ved f rom a v ar
iety ofsour ces,incl uding
promulgati
onsoft heFi nancialAccount i
ngSt andardsBoardandi t
spr edecessor ,the
Accounting Principles Boar d,and t he Amer i
can Instit
ute of Cer ti
fied Publ i
c
Accountants.Ot hersour ces i nclude t he gener albody ofaccount i
ng literature
consist
ingoftextbooks, ar
ticles,paper s,etc.
Hist
ori
calcost
Thispr
inci
plerequi
rest
ransact
ionst
ober
ecor
dedatt
hepr
icer
uli
ngatt
het
ime,and
15
forassetst obev aluedattheirori
ginalcost.Thatis,theact ualamountpaidf oritems
boughtisr ecorded.Theact ualamountpai dforani t
em i nabusi nesst
ransactionmay
bedifferentfrom thev al
ue.Forinstance,off
icefurni
tur eisvaluedatshs12, 000,000/
.
Abusi nessar rangest obutt hefurni
tureatshs9, 000,000/ .Theamountr ecor dedin
theaccount i
ngr ecordsfortheof f
icefurni
tureisthehi stori
calcost–shs9, 000,000/-
theactual amountpai d.
Intheprocessofacquiri
ngasset
sbyanent ity
,suchassetsarevaluedandr ecordedin
booksofaccount satthecostatwhi chtheywer eacquir
edi.e.t
hepr icepaid.Thus,
assets are ent
ered i
n account
ing r
ecords attheircost.Thisi s gener
allycalled
hist
ori
calcostbasi cal
lybecause itis alwayst he v
aluat
ion ofa consummat ed
tr
ansaction.
Li
mitati
on
Duri
ngi nf
lat
ion,histori
calcostwil
lnotr ef
lectt hetr
uev al
ueoftheassetsofthe
busi
ness.e.g.ifanassetwasboughtatshs.1, 000,
000/atthebegi
nni
ngoftheyear,
andtheannuali nf
lati
onr at
eis90%,i t
sv alueatt heendoft heyearwil
lbeshs.
1,
900,000/.Thehi stor
icalcostconceptwil
lr equir
eshs.1,000,
000/andnotshs.1,
900,
000t oberecorded.
Reali
zationconcept
Thisconceptr equirest hatt r
ansact
ions(and anypr ofi
tsarisi
ng from them)ar e
recogni
zedandr ecordedatt hepointofsal
eort ransferofl
egalowner shi
p–r at
her
thanjustwhencashact uallychangeshands.Forexampl e,acompanyt hatmakesa
saletoacust omercanr ecognizethatsal
ewhent hetransact
ionislegal–atthepoint
ofcontract.Theact ualpay mentduef r
om thecustomermaynotar i
seuntilsever
al
weeks( ormonths)later–i fthecust
omerhasbeengr antedsomecr editt
erms.
Forexample,abusinesssell
sgoodsf orshs2,500,000.Thebusi nessagreestoan
i
niti
alpaymentofshs1,000,
000withtheremainingbalancetobepai dintwomonthl
y
i
nstall
mentsofshs750, 000/each.Thef ullamountofshs2, 500,000/ofrev
enue
shouldberecor
dedatthetimeofsaleeventhoughshs1, 500,
000/willbepai
dlat
er.
Not
et hatareal
izat
ioniswhenasal eismadetoacustomer.Thebasicrul
eisthat
r
evenueiscr
eatedatthemomentasal eismade,andnotwhenthepri
ceislat
erpaid
i
ncash.Prof
itcanbet akentot
heprofi
tandl
ossaccountonsal
esmadeev enthough
t
hemoneyhasnotbeencol l
ect
ed.
16
ent
it
y.
Mat eri
alit
y
Thisrequi rest her ecognit
ionofonl ymateri
alitemsandexcludingimmat eri
alort ri
vial
i
tems.I nformat ioni smat erialifit
somi ssionormi sst
atementcoul di nfluencet he
economi cdeci sionsofuser stakenont hebasi softhef i
nancialreports.Fi nancial
statement sshoul dt heref
or eshow mat eri
ali t
emssepar at
ely,butimmat erialit
ems
maybeaggr egatedwi thamount sofasimilarnatur
e.Forexamplebuy ingfur nit
urefor
shs14, 000, 000/r epresentsanamountl argeenought osigni
fi
cantlyaff
ectt heamount
ofneti ncomer epor t
edifr ecordedasanexpense.Ther efor
e,thef ur
nitureshoul dbe
recordedasanassetanddepr eci
atedeachy earofi
tsusefull
if
e.
Consistency
Accordingt othisconcept,tr
ansactionsandv al
uati
onmet hodsar et reatedthesame
wayf rom y eartoy ear,orperiodtoper i
od.Businessdeci si onsar eof tenmadeby
compar ingcurrentfi
nancialr
eportswi t
hprevi
ousfinancialrepor t
s.User sofaccounts
canther ef
oremakemor emeaningfulcompari
sonsoff inancial performancef rom y
ear
toyear .Account i
nginformationrecordedandr eporteddi f
f erentlyeachaccount i
ng
peri
odmakescompar i
sonsfrom oneaccountingperiodt oanot herimpossible.Where
accountingpol i
ciesarechanged,compani esarerequi r
edt odi scloset hi
sf actand
expl
aint heimpactofanychange.
Prudence/conser vatism
Thisconceptr equirest hepr ofitsar enotr ecogni zedunt i
lasalehasbeencompl eted.
Inaddition,acaut iousv i
ew shoul dbet akenf orf uturepr oblemsandcost soft he
businessassoonast herei sar easonabl echancet hatsuchcost swi
llbei ncurr
edi n
thefuturei .
e.providef oral lpossi blelosses,forexampl e,provi
sionforbaddebt s.The
conceptcanbesummar izedbyt hephr ase‘ anticipatenopr ofitandprov i
def orall
possiblelosses.Fur therst il
l,theconceptt endst ounder val
ueasset si.e.whenev er
ther
ear eal ter
nat i
vemet hodsofv aluinganasset ,anaccount antshoul dchooset he
onet hatl eadst oal owerv alueorpr ofitandahi gherl i
abili
ty.Thisstemsf r
om t he
accountant s’fearthati ftheypr eparet hef i
nanci alr eportswitht oomuchopt imism
theymayov erstatepr ofi
tsandcausedi vi
dendst obepai doutofcapi t
alifthese
profi
tsar enotr eal
ized.
Accrual concept
Thisr equir
est her ecogniti
onofi temsatt heoccurrenceoft het ransacti
onandnot
whencashi sr eceivedorpai d.Forexample,Incomei srecordedasear nedev en
thoughi tmi ghthav enotbeenr ecei
ved.Thepor ti
onofi ncomet hathasnotbeen
receivedisr ecor dedasanasset( accr
uedincomeordebt ors)
.Expensesorcost s
shouldber ecordedasi ncurr
edal t
houghcashmaynothav ebeenpai d.Forexampl e,i
f
rentexpensespai dbyt hey earclosewasshs1, 500,000/andy etsomeel ectr
icit
y
equivalenttoshs200, 000/wasusedbutnotpai dfor,theamountofr entexpensebe
consideredshoul dbeshs.1, 700,
000/(i.
e.1,500,
000/+200, 000/).Theunpai dshs.
200,000/shoul dber ecor dedasanaccr uedexpense.Itshouldber ecor dedascurrent
l
iabil
it
yi nthebal ancesheet .
17
Mat ching
This concept r equir
es t hat r evenues f r
om busi ness act ivi
ti
es and expenses
associ at
edwi t
hear ningt hatr evenuear erecor dedi nt hesameaccount ingper i
od.
Businessact i
vit
iesforanaccount ingper i
odar esummar izedi nf inanci alreports.To
adequat el
yreporthowabusi nessper f
ormeddur i
nganaccount i
ngper iod,allrev enue
earnedasar esultofbusi nessoper ationsmustber epor ted.Li kewi se,allexpenses
i
ncur red dur
ing the same account ing period i n produci ng t he r evenue mustbe
reported.Matchingexpenseswi t
hr evenuegi vesat r
uepi ct ureofbusi nessoper at i
ons
foranaccount i
ngper i
od.f orexampl e,ifi ncomeofshs.50, 000,000/wasear ned
duringapar ti
cularaccount ingper iod,andr entofshs.1, 800, 000/hadbeenpai dfor
oneandhal fyears,nott hewhol eshs1, 800,000shoul dbewr i
ttenof forsubt racted
from t heshs.50,000,000/becausepar toft her entbel ongst ot henexty ear.The
correctamountt obesubt ractedfrom t heincomeshs. 50, 000,000/i sshs. 1,200, 000/
andnotshs. 1,800,000/.Thedi fferencei srecor dedaspr epai dr ent.
Likewise,ifelectr
ici
tyexpensespai
dwasshs. 500,00/butsomeelectr
ici
tyequi
valent
to200, 000/wasusedbutnotpai d,thatamountshoul daswellbemat chedagainst
theincomei .e.theamountofelectr
ici
tyexpensetobesubtract
edfrom i
ncomeofshs.
50,000,000/shoul dbeshs.700,000/(i.
e.500,000/+200,000/)
.Theunpaidshs.200,
000/shoul dber ecordedasanaccrual.
Indeterminingwhet her,duri
ngt heaccount ingperi
odofconcer n,theaccount ingentit
y
hashadanexcessofi nflowingv aluesov ertheoutf l
owingv al
uesorv i
cev er
sa,the
i
nflowingv alues–r evenues–ar emat chedagainstoutflowingvalues–expensesor
expir
edcost s.Thus,ear nedr evenuesar emat chedagainstthecost si ncurr
edt oearn
suchr evenueswhet hercashpay ment sorcashr ecei
ptsar einvolvedornot .This
guidel
ineisgener all
yknownasaccr ualaccounti
ng.I nordertodev elopt hi
sprinci
ple
ful
ly,l
etusr eferbacktohi stori
calcostconv enti
onandf ocusspeci f
icallyonexpenses.
Accrualaccounti
ngrecordst hefi
nancialeffectsoftr
ansact i
onsandot hereventsand
cir
cumstancesi ntheperiodinwhi chtheytakeplacerat hert
hanonlyint heperi
odsin
whichcashi sreceivedorpai d.Theaccount ingprocessr ecogni
zesthatt hebuying,
produci
ng,sell
ingandot heroper ati
onsoft heent er
priseduringaper i
od,aswel las
othereventsthataf fectenterpr
iseper f
ormance,of tendonotcoi ncidewi t
hcash
recei
ptsandpay ment softheperi
od.
Precisel
yt hen,recogni
ti
on ofr evenue,expenses,gai
ns and l
osses and relat
ed
i
ncr ementsanddecr ementsi
nasset sandl i
abi
li
ti
esincl
udi
ngmatchingofcostsand
revenues,all
ocat
ionandamor t
izati
on–i stheessenceofusi
ngaccrualaccount
ingto
18
measur
eper
for
manceofcommer
cial
ent
erpr
ises.
Substanceov erform
Thisstatesthattransacti
onsandot hereventsshouldber ecordedi
naccor
dancewith
fi
nancialandeconomi creali
ty(substance)otherthantheirlegalf
orm.E.
g.inahire
purchase,thebuy ertakespossessionanduseoft heassetbutdoesnotbecomet he
l
egalownerunt i
lthelastinstal
lmenthasbeenpai d.Thoughhei snotthel
egalowner
,
hehast orecognizethistransacti
oninhisbooks.
Account
ingRegul
ator
yFramewor
k( Accounti
ngRules)
Havingl
ookedatthefundament
alprinci
plesofaccount
s,qual
i
tat
ivechar
act
eri
sti
cs,
usersandsof ort
h,wenow hav etosummar i
zeanumberofr ul
esthatunder
li
e
account
ingpr
acti
ce.
Account i
ng rul
esar ei mposed on account ant
si n ordert o make sur ethattheir
reportingi sfreef r
om bi as.Accountingl egisl
ationr equi
resf inancialaccountsbe
prepar edandpr esentedinconf ormitywithGAAP ( Gener allyAccept edAccounti
ng
Principles).GAAP r efer
st o accounting princi
plesorpr act i
cest hatar eregar
ded
permi ssibl
ebyt heaccount i
ngprofession.Itincludesr equirementsoft hecompany
acts,st ockexchangeet c.thekeyt ermsusedi naccount ingr egulator
yf r
amework
i
ncl ude:
Account ingprinci
ples/concepts/conventi
ons
Account ingbases
Account ingpolici
es
Account ingstandards
Account i
ngprinci
ples
Alsoknownasaccount ingconcepts,conv ent
ionsorpostulat
es,arebasicgr ound
rules which mustbe fol l
owed when f i
nancialaccount
s are bei
ng prepared and
presented.Theyarealsor efer
redt
oasassumpt ionsorpr
epositi
onsthatunderl
iethe
preparati
onandpr esentationoffi
nancialreports.Mostofthesehaveal r
eadybeen
discussedearli
er.
Accounti
ngbases
These are methods dev
eloped f
orappl
yi
ng f
undament
alconcept
stof
inanci
al
19
t
ransacti
onsanditemsforthepurposeoffi
nalaccountsandinpar
ti
cul
ar:
Fordetermini
ngtheaccountingperi
odsinwhichr ev
enueandcostsshoul
dbe
recogni
zedintheprofi
tandlossaccount
.
Fordetermini
ngtheamount satwhichmat eri
alit
emsshouldbestatedinthe
balancesheet
.
Account
ingpoli
cies
Thesearet hespecificaccount
ingbasessel ect
edandconsistent
lyfol
lowedbya
busi
ness enter
prise as bei
ng i
nt he opini
on ofmanagement ,appr
opriatetoi
ts
ci
rcumstancesandbestsui t
edtopresentf
air
lyit
sresul
tsandf
inanci
alposi
tion.
Accounti
ngstandar
ds
Thesear egui
deli
nestat
ementsorrulesi
ssuedbypr of
essi
onalaccounti
ngbodi
es
governi
ngaccounti
ngpract
ice,r
elat
ingtohow accountsshoul
dbepr epar
edand
present
ed.
Fi
eldsofAccounting
Havinglookedatt hemaj orpartoft heconceptualframeworkofaccounting,letus
nowl ookattheparti
cularfi
eldsofaccounti
ng.Ther earesever
alaccounti
ngf i
eldsas
aresultofv ar
iedusesofaccount i
nginfor
mat i
on.Thecommonf i
eldsaref i
nancial
accounti
ng,manager i
alaccounting,costaccounting,taxaccount
ing,envi
ronment al
accounti
ngandaudi t
ing.
Fi
nancialaccount i
ng
Thisisaf ieldofaccount i
ngt hatisconcernedwiththecl assi
fi
cation,measurement
and recording ofbusi ness transact
ions ofan enti
tyi n monet aryterms and in
accor
dance wi t
h Gener al
lyAccept ed Account
ing Princi
ples.The maj orfocus of
fi
nancialaccount i
ngi st oprov i
deinformati
ontoext ernalusers.Externalusersof
fi
nancial account i
ng informat i
on include shar
eholders, credi
tors, government
,
fi
nanciali
nst i
tut
ions,andthepubl i
c.
Manageri
alaccount
ing
Thi
sdeal swiththeanalysi
sandi nt
erpr
etat
ionoffinanci
alaccount
ingi nf
ormat i
on.
Manageri
alaccounti
ngprovidesmanagementwi t
hinf or
mati
onf ori
nternaldecision
making concer
ning dai
l
y operat
ions as wellas planni
ng and contr
oloff uture
oper
ati
ons.
Costaccount i
ng
Thedet erminati
onandal locat
ionofcost stoproduct
sandser v
icesofabusi ness
organi
zationiscalledCostAccounting.Thi
sfiel
dofaccount
ingprovidesi
nformati
on
for i
nternaldeci sion making concerni
ng the cost
s of oper
ating ser
v i
ce and
manufacturi
ngbusi nesses
Taxaccount i
ng
Thisist hepreparat
ionoftaxreturnsaswel last axplanni
ng.Taxaccount
antsuse
fi
nancialstat
ementi nf
ormati
ontopr epar
etaxreturns.Thesetaxr
etur
nsarefi
ledwi
th
thetaxauthori
tiesli
keUgandaRev enueAuthori
tyincaseofUganda.
20
Envi
ronment
alaccount
ing
Thi
si sthe r
eporti
ng ofenvironmentalacti
vi
ti
es undert
aken byan or
ganizati
on.
Envi
ronment
alaccount i
ng provides i
nfor
mat i
on for ext
ernaluser
s concerning
env
ironment
alachi
evements.
Auditing
Thei ndependentreviewingandi ssui
ngofanopi ni
onont hereli
abil
i
tyofaccount i
ng
recordsi scalledAudi ti
ng.Thisi susual
lythedut yofanaudi tor
.Theaudi toris
supposed to checkwhet hert
hebooksofaccount sar eprepared and presented
accordingtot hegener al
lyacceptedaccounti
ngprincipl
esandwhet herpoli
ciesand
procedurespr escr
ibedbymanagementar ebei ngf oll
owed.Theaudi t
or’
sopi ni
on
enablesexternaluser stobeconf i
dentoftheinformationreportedinthef inancial
reports.
Account
ingPr of
ession
Account
ingisagr owingprof
essi
onwor
ldwi
de.Account
ingempl
oymenti
susual
l
yin:
Priv
ateaccount i
ng
Publicaccounti
ng
Gov er
nmentaccount i
ng
PrivateAccount i
ng
Thisi swher equalifi
edaccount ant
sar eengagedi naccounti
ngwor kofi ndiv i
duals,
corpor at
ions,non–pr ofi
tmaki ngor gani
zat
ionsandorot her
wise.Per sonsempl oyed
i
npr ivat
eaccount ingwor kf oronlyonebusi ness.Theseper sonsmayper for
ma
vari
et yofdut i
es.I
nsmal lorganizat
ionstheydoallofthesummar i
zing, analyzingand
i
nter pret
ing of financi
ali nformation for management .Inl arge or gani zations,
account antst ypi
call
y speciali
ze in one fiel
d ofaccount i
ng such as Fi nancial
account i
ng,Costaccount ing,Managementaccount i
ng,Taxaccount ingandSoci al
responsibili
ty/
envir
onment al
/greenaccounti
ng
Publicaccounting
Thisi st he pr
ov isi
on ofaccount i
ng servi
ces byhi ghlyqual ifi
ed Certi
f i
ed Publ i
c
Account ant
st ov ari
ous cli
ents,which mayi nclude i
ndiv i
duals,corpor ati
ons and
government .Personsempl oyedinpubli
caccount i
ngmaywor kindependent l
yorasa
memberofapubl icaccounti
ngf i
rm.Publi
caccount antssel lservi
cestoi ndi
v i
duals,
businesses,gov ernmentuni t
sandnonpr ofi
tmaki ngor ganizati
ons.Theseser vi
ces
i
nclude;audi ti
ng wor k,pr ovi
ding managementadv i
sory ser vi
ces,pr ov i
ding tax
consultancyservicessuchaspr epari
ngincomet axretur
ns, etc.
Gov ernmentAccount i
ng
Thisi stheaccount ingf orgov ernmentinsti
tuti
onse.g.cent r
algovernment,local
gov er
nment ,etc.governmentaccount sareuniquefr
om pr i
vat
ecompani esandot her
organizat
ions.Gov er
nmentof fi
cial
srelyonfinanci
alinf
ormationtohelpthem direct
affair
softheiragencies.
Uganda Rev enue Authority
;i s one oft he gover
nmentagenci es thatperforms
extensiveaccount i
ngwor k.Ithandlesincomet axreturnsfi
ledbyi ndiv
idual
sand
21
corporat
ions,andfrequentl
yperformsaudi ti
ngf uncti
onsrel
ati
ngtotheseincomet ax
retur
nsandt heaccount i
ngrecor
dsonwhi chtheyar ebased.
UgandaSecur iti
esExchangeCommi ssionisalsoanothergover
nmentagencyinvolved
i
naccount ing.USECest abl
ishesther equir
ement sregardi
ngthecontentoffinancial
report
sandt hereport
ingstandards,andt her ul
esandr egul
ati
onstobef oll
owedi n
ordertobel i
stedontheexchangemar ket.
22
Topi
c2
Account
ingEquat
ion
Learni
ngobj
ecti
ves
Bytheendofthi
st opic,
youwillbeableto;
Demonstratetheaccountingequation
Defi
netheelement softheaccountingequati
on
Drawupsi mplebalancesheetsafterdif
fer
enttr
ansact
ionshav
eoccur
red
I
ntr
oduction
Theaccountingequat i
oni st
hepr i
mar yresul
tofthedualef fect/doubl
eent
rysystem.
Ati
tssimplest, t
heequat ionmi ghtbest atedas;
Ownings=Owi ngs
Asset s=Liabil
it
ies+Capi t
al
Wherewedef i
net heseas;
Asset sar et heresourcest hatareownedbyt hebusiness
Li abi
lit
iesar eamount sowedordebt st oot herorganizati
ons–inshort,the
fi
nancial obligat
ionsofabusi ness
Capi talisthatamountofmoney( orotherresources)thattheowneri
nvestsin
thebusi ness
I
ll
ustr
ati
on
Mukasaisasol et r
aderwhosetuphi sbusi nessi nKiseny
i.Thefoll
owingwer ethe
t
ransact
ionsthattookplaceinthemont hofJanuar y.AmountsareinUGX
i
) Start
edbusinesswithcashof10, 000,000andcashatbankof20, 000,
000
i
i
) Purchasedstockofgoodsoncr editof3,000,000
i
i
i) BoughtaMot orvehi
cleforbusi nessoper ati
onsusingthecashatbankof
2,
000,000
i
v) Sol dgoodstoJamesf or600,
000cashwhi chhadcosthim 500,
000
v
) Paidtheshopkeeper50,000cashassal ary
v
i) Boughtmor estockofgoodsf or500, 000cash
v
ii
) Usedbusi nesscashof300, 000t obuyf orhiswif
eandchi l
drenChrist
mas
cl
othes
Requir
edConst
ructanaccounti
ngequati
onforeachoft
het
ransact
ionsabov
eand
ext
ractpr
epar
easi mpl
ebalancesheetattheend.
i
)
Asset
s = Liabil
i
ties +Owner sequi
ty
Bank 20,
000,
000 --
---
--
--
--
---
- Capi
tal
30,
000,
000
Cash 10,
000,
000
30,
000,
000
30,
000,
000
23
Mukasa’
sBal
anceSheetasat
………
NonCur r
entAssets Equityandl i
abil
i
ties
Mot orvehi
cle 2,
000,000 Capital 30,
000,000
Currentasset
s Profi
t 50,000
Stock 3,000,000 l
essdr awi ngs (300,000)
Bank 18,000,000 Currentliabil
it
ies
Cash 9,750,000 Tradecr editor
s 3,000,000
TotalAssets 32,750,000 Total Equity&Liabil
iti
es 32, 750,00
Exerci
se
Mukwano i s a busi nessperson deal ing in generalmer chandise.Bel ow isthe
tr
ansacti
onsf orthemont hofJanuar y.Showt heaccountingequat i
onandt hebal
ance
sheetfort
het ransact i
onsbel ow.
i
) He st arted busi ness wi t
hal orry of30,000,000and cash atbank of
20,000,000.
i
i) Amot orv ehicleof10,000, 000wasboughtoncr editfr
om Lonhrol t
d
i
ii) Heboughti nventoryof6, 000,000usi ngacheque
i
v ) Boughtf urnit
ureof4,200, 000f r
om HwanSungoncr edit
v) Heusedhi ssalarytobuyashi rtof80,000
vi) Hesol d2/ 3oft heinventor yfor3,000,000cash
vii
) Secur ed a DFCU l oan of5, 000,000,whi ch wasdeposi ted on hisbank
accountt obepai dwi thinoney ear.
vii
i
) Pai dHwansung2, 200, 000cash
i
x) Pai dut il
iti
esof800, 000bycheque
x) Heusedt hebusi nessdebi tcardt owi t
hdr
aw1, 000,000forbuyingamobi l
e
phonef orhisgi rl
fri
end.
24
Topi
c3
Doubl
e-Entr
yaccount
ing
Learni
ngobjecti
ves
Bytheendoft hi
stopic,youwil
lbeabl
eto;
Demonst rat
etheconceptofdoubl
eentryandhowitf
oll
owst
her
ulesoft
he
basi
caccount i
ngequat i
on.
Recordt r
ansacti
onsfoll
owingt
hedoubl
eentryrul
e
Extr
actasi mpletri
albal
anceandbal
ancesheet
.
I
ntroduction
Thedoubl eentr
ysy st
em ofaccounti
ng recogni
zest hefactthatev
erybusi
ness
tr
ansactionhast wo effect
s;thatofthebusiness‘recei
vi
ng’(+)
,andthatofthe
business‘gi
ving’
(-)
.Thi
spr i
nci
plef
ormsthebasisofaccounti
ng.
T-Account
s:
Simpli
fi
edversionofthestandar
dfor
m ofaccount
Looksli
kethecapitall
ett
erT.
Contai
nsti
tle,debi
tandcreditsi
de
Titl
eofAccount
Debitside Creditsi
de
Leftside Ri ghtside
Debi
tsandcr
edi
ts
25
Theleftsi
deofanyaccounti sthedebitsi
de,andtheri
ghtsidei
st hecr edi
tside.
Todebi tanaccountist oenteranamountontheleft
,ordebitside.
Tocr editanaccountistoent eranamountontheri
ght,orcr
editside.Debitand
cr
edit
Dr usedf ordebit
Cr usedf orcredit.
Theruleofdebitandcreditarebasedonthelocat
ionofassets,
liabil
it
ies,andowner’
s
equit
y.
Thet
ablebelowsummar izesthei
temst
hatar
er epresentedbydebi t
sandcredit
s.
Adebi
tentryr epr
esents Acreditentryrepresents
1)Ani ncreaseinthev al
ueofan 1)Adecr easeinthev al
ueofan
asset asset
Or Or
2)Adecr easeintheamountofa 2)Ani ncreasei ntheamountofa
l
iabi
lit
y l
iabi
lit
y
Or Or
3)Ani tem ofexpenditur
e 3)Ani tem ofincome
Consi
dert
heT-account
sbel
ow;
Assets Li
abi
li
ti
es
Dr Anyasset Cr Dr AnyLiabi
l
ity Cr
I
ncrease Decr
ease Decr
ease I
ncrease
+ - - +
Capi
tal
Dr Capi t
al Cr
Decr
ease I
ncrease
- +
Expenses Revenue/Income
Dr Expense Cr Dr Rev enue/I
ncome Cr
I
ncrease Decr
ease Decrease I
ncrease
+ - - +
Il
l
ustrat
ion
a. Al iMusastart
sat ravelagencywithaninvest
mentofUGX25,000incash.The
owner’sinv
estmentincr
easest heassetscashbyUGX25,000.Assetsaccount
sare
debi
tedtorecordanincr
ease.Thus,thecashaccountmustbedebi
tedf
orUGX25,000.
(a)Entry
Cash Al
iMusa,
Capi
tal
+ - - +
26
(
a)25,
000 (
a)25,
000
(b)Ent
ry
Of
fi
ceEqui
pment Account
sPay
abl
e
+ - - +
(
b)9,
000 (b)9,
000
c) Al iMusabuysoffi
cessuppl
iesfort
hebusi nessforUGX300i ncash.Theassets
off
icesuppli
esaredebit
edtorecordani ncrease.Thus,t
heof fi
cesuppliesaccount
mustbedebitedwit
hUGX300.Theassetof fi
cesuppli
esincreasesbyUGX300.Asset s
accountsar
edebit
edtorecor
dani ncr
ease.Thus, t
heoffi
cesuppliesaccountmustbe
debit
edforUGX300.
(c)Ent
ry
Of
fi
cesuppl
i
es Cash
+ - + -
(
c)300 (
a)25,
000 (
c)300
d) Al iMusapaysUGX3000oft heamountherbusi
nessowesf oroffi
ceequi
pment
prev
iouslybroughtoncredit
.
Thel iabi
li
typayabl
edecr easesbyUGX3000.Thus,theaccountpay abl
emustbe
debi
t edforUGX3000.
Theassetcashdecr easesbyUGX3000.Assetsaccount
sarecr edi
tedtorecor
da
decrease.Thus,t
hecashaccountmustbecredi
tedf
orUGX3000.
(
d)Ent
ry
Account
sPay
abl
e Cash
- + + -
(
d)3,
000 (b)9,
000 (
a)25,
000 (c) 300
27
(
d)3,
000
Exer
cise
1.Showt
hef
oll
owi
ngt
ransact
ions,
ast
heyar
eent
eredi
nthedoubl
eent
rysy
stem
2.Showt
hef
oll
owi
ngt
ransact
ions,
ast
heyar
eent
eredi
nthedoubl
eent
rysy
stem
a)Boughtgoodsint r
adef orUGX7,000oncr
edi
t
b)SoldgoodsforUGX5, 000cash
c)Soldgoodsoncr edi
tf orUGX2,000
d)PaidSalar
iesUGX2, 000cash
e)BoughtGoodsUGX3, 000cash
f) Sol
dgoodsUGX6, 000bycheque
g)Paidcredi
torsUGX3, 000bycheque
28
29
Topi
c4
Thepr
epar
ati
onofbooksofaccount
Learni
ngobjectiv
es
Bytheendoft hetopic,youwi l
lbeableto;
Classi
fyaccount s
Explai
nt hesubsidiarybooksandsourcesofaccount
ingi
nfor
mat
ion
Postandbal anceof faccounts
Entertr
ansact i
onsusi ngthedoubleent
rysy
stem
Prepareat ri
albalance.
Intr
oducti
on
InthisTopic,
wei nt
roducethebookskeptbyanent
erpri
seandeconomict
ransact
ions
recordedthere.Weshallacknowledgeandil
l
ust
rat
et hatt
heledgeri
sthemainbook
accounts.
Subsi
diarybooks
Thesearebooksofor iginalent ry.Wepostt het ransact i
onsr ecor dedi nt hesubsi diary
bookst ot hel edgeraccount satt heend ofev erymont hand i ncaseofsome
tr
ansacti
ons, onlytotal amount sar epost ed.Thebooksusedt orecor dal ltransactions
ofapar ticul
arcat egor ypr i
ort opost ingt ot hel edger sar et hebooksknownas
subsi
diar
ybooksorbooksofpr imeent r
y .Theyi nclude;
Thepur chaseday bookorj our nal;t hisbookr ecordst hedet ailsofal lgoods
purchasedoncr edi t
.Wewr i
teupt hepur chase’ sday booki sf r
om t hei ncomi ng
invoices.
Salesday bookorj ournal ;t hisbookr ecor dst hedet ail
sandamount sofal l
goodssol d on cr edit.We wr it
e up t he sal esday bookf rom t he out going
invoices.
Pur chasesr etur n bookorr eturnsout war dsj ournal ;thisbookr ecor dst he
detailsandamount sofgoodsr etur nedt ot hecr edit
or s.Wewr it
eupt heretur ns
outwar dday booki swr i
ttenupf r
om t hei ncomi ngcr edi tnotes
Salesr eturnbookorr eturni nwar dsj ournal;t hisbookr ecor dst hedet ai
lsand
amount sofgoodsr eturnedbyt hedebt ors.Wewr iteupt her eturni nwar ds
day bookf rom theoutgoi ngcr editnot es.
Pett ycashbook;t hisbookr ecor dst hesmal lcashr eceipt sorpay ment s.Thi s
booki sal sousedt oanal y zet heexpensest heexpensespai di ncash
Jour nalordiar y;thej ournali st hatday booki nwhi chwecanr ecor dt hedet ai l
s
ofanyt ransact i
ont hatcannotber ecor dedi nanyot hersubsi diarybook.We
callallotherbooksofor i
gi nalent ryt hedi vi
sionofj our nalforr ecor dingspeci f i
c
typeoft ransact i
ons.Themai nusesoft hejour nal aret hef oll
owi ng.
Tor ecor dpur chasesorsal esofasset s
Tocor recttheer rors
Tor ecor dopeni ngandcl osi ngent ries
Wr i
tingof fofbaddebt s; etc
30
JOURNALS
Aj ournalmayal sobedef i
nedasabookofor i
ginalentr
ywher etransactionsarefirst
recordedwhent heyoccur .Busi nessesmai nt
ainsev er
alt ypesofj ournalsandt he
natureofoper ati
onsdet ermi net henumberandt het y
pesofj ournalsneeded.The
j
our nalwasoncet hemostusedbooki nbookkeeping,butt odayent r
iesint hejournal
arel i
mi t
edtor ecordsof‘ unusual ’t r
ansacti
ons,whi chareimpr operlyrecordedi nany
ofot herbooksofor i
ginalent rythatwi l
lbedescr i
bed.Sucht ransactionsar ethose
whi chdonotpur elyinvolvet her eceiptorpay mentofmoney( whet heri ncashor
throught hebank) ,andwhi char enotcr edi
tsalesorpur chasesorr eturnsi nwardsor
returns.Howev er,thetypesofJour nalsare;
a.Gener alj
ournal
b.Sal esdaybook/ salesjour nal
c.Pur chasesdaybook/ pur chasesj ournal
d.Cashbook
e.Ret urnsinwardsdaybook
f. Ret urnsoutwar ddaybook
Gener
alJour
nal
Wecanal sousethisjournalforallty
pesoft r
ansacti
onswi thtwomoneycol umns,
al
though inthe diagram abov e we have saiditused tor ecor d othert
ypes of
tr
ansacti
onotherthant hosespeci
fical
lyi
denti
fi
edwithotherjournals.Wealsocal
li
ta
j
ournalproper
.XYZLt djournal
sbelowar eexamplesofgeneraljournal.
Pr
oceduralstepsforrecordi
ngtransacti
onsintheGener al
journal
a.Recordingthedateonwhi chthet r
ansacti
onoccur r
ed.
b.Wr i
tethenameoft heaccountt obedebi t
edandr ecor
dingt heamountinthefi
rst
moneycol umn
c.Wr i
tethenameoft heaccounttobecr edi
tedinthesecondmoneycol umn
d.Abr i
efexplanati
oni sgiv
enaboutt hetransact
ionimmedi atel
yaft
ertheaccountis
credit
ed
e.JournalshaveaLedgerpagecol umn.Thi scolumnpr ovi
desaconv eni
entcross-
refer
encewi t
hthel edger
.
I
ll
ust
rati
on
Thef
ollowingweret hetr
ansactionsofXYZl tdforthemont hofJanuary
st
i
) OnJanuary1 XYZl tdstartedbusinesswi t
hcashofUGX2, 000,
000andmoney
atthebankofUGX3, 000,000
i
i) 3rdJanPurchasedgoodsf orUGX600, 000cash
t
h
i
ii
) 6 JanBoughtaMot orvehi cl
eforUGX1, 500,000bycheque
i
v) 7thJanSoldgoodsf orUGX300, 000cash.
v) 15thJanPur chasedmor egoodsoncr edi
tfrom TKltdworthUGX500,000
v) 20thJanobt
i ainedabankl oanofUGX3, 000,000cash.
vi
i) 23rd JanSoldgoodsf orUGX200, 000oncr edittoMary
31
vi
i
i) 25thJanMar ypai
dUGX80, 000cash.
th
i
x) 26 JanSol dgoodsoncr editt
oPeterforUGX100, 000.
x) 29thJanpurchasedgoodsf r
om Johnoncr edi
tforUGX300, 000
RequiredEntertheabovetr
ansactionsi
ntheGener alJournal
XYZLTD
GENERALJOURNALFORTHEMONTHOFJANUARY
Date Accounttit
le& LP/
Fol
io Debi
t Cr
edi
t
explanat
ions
1st Jan CashA/ C 01 2,
000,
000
BankA/ C 02 3,
000,
000
CapitalA/C 03 5,
000,
000
Forstart
ingthebusi
ness
3rd PurchasesA/ C 04 600,
000
CashA/ C 01 600,
000
Beingpur chaseofgoods
usingcash
6th Mot orv ehi cleA/ C 05 1,
500,
000
Bank A/ C 02 1,
500,
000
Beingf orpur chaseofa
mot orv ehicleusi ngcash
7th CashA/ C 01 300,
000
SalesA/ C 06 300,
000
Beingsal eofgoodsf or
cash
15th PurchasesA/ C 04 500,
000
TKLt dA/ C( Credi
tors) 11 500,
000
Forpur chaseofgoodsf rom
TKLt doncr edit
20th CashA/ C 01 3,
000,
000
LoanA/ C 08 3,
000,
000
Beingal oanobt ained
23rd Mar yA/ C( Debt or‘sA/c) 09 200,
000
SalesA/ C 06 200,
000
Tor ecor dsal eofgoodson
credittoMar y
25th CashA/ C 01 80,
000
Mar yA/ C( DebtorsA/ c) 09 80,
000
Tor ecor dr eceiptofcash
26th PeterA/ C( Debt or’
sA/ C) 09 100,
000
SalesA/ C 06 100,
000
Tor ecor dsol dofgoodst o
Peteroncr edi t
32
29th PurchasesA/C 04 300,
000
JohnA/ C(Cr edi
tor
’s 07 300,
000
A/C)
Torecordpurchaseof
goodsfrom Johnoncredit
11,
080,
00 11,
080,
000
0
Exercise
KyeswacommencedaHar dwar eent erpri
seonMar ch1wi thUGX50, 000, 000onhi s
accounti nSt anbi cBank.Thef oll
owi ngt r
ansactionswer ecar ri
edouti nt hatmont h.
Mar2Pur chasedgoodsofUGX10, 000,000from Br idgest oneLt donCr edit.
3.Wi thdr ewUGX3, 000,000f rom thebankandkepti tinthesaf easpet t
ycash.
5.Sol dgoodswor thUGX5, 000, 000toMukozi whopai dUGX2, 000, 000bycheque;
UGX1, 500, 000cashandi ssuedanot esr ecei vablefort hebal ance.
7.Boughtl andofUGX8,000, 000bychequef rom Akr i
ghtLt dt oconst ructthe
busi nesspr emises
9.Pai dasal arychequeofUGX800, 000tohi saccount ant
11Ret ur nedgoodsofUGX100, 000toBr i
dgest oneLt dbecauset heyhaddamages
13.Pai di nsur ancet oA. I
.GofUGX200, 000cash
15Pur chasedgoodswor thUGX7, 000,000f r
om Ki sekaMar ketandi ssuedaNot es
Pay abl e.
17Mukozi rejectedandr etur
neddef ecti
vegoodswor thUGX300, 000.
18Pai dBr idgest oneachequeofUGX6, 000,000f orgoodspur chasedoncr edit
.
19Recei vedachequeofUGX500, 000f r
om Mukozi f
orgoodssol dt ohi m.
21Di sposedof fPartoft helandatUGX2, 000,000cashbecausei twasr edundant.
22Achequef rom Mukozibouncedbecauset her ewer einsuf fi
ci entf undsonhi s
account .
23Pai dr entofUGX600, 000cash.
25Sol dgoodst oKiyembeLt df orUGX2, 000,000oncr edit
27Mukozi Pai d400, 000cashf orgoodssol dtohi m oncr edit.
29Pur chsedgoodsofUGX4, 800,000f r
om Ci tytyresoncr edi t
30Recei v edacashofUGX1, 000, 000f r
om Kiy embeLt dt ocl earhi sdebt .
31Usedbusi nesscashofUGX200, 000t oor gani zeadi nnerpar tyatFang- fang
Rest aur antf orhisempl oyees.
Required
Entert heabov et ransactionsint hegener alJournal .
B) SALESDAYBOOK( SALESJOURNAL)
I
nalmostallbusinessessaleswil
lbemadeoncr edit.Thesal
esdaybookisused
forr
ecordi
ngthecreditsal
es.Thesalesdaybookcontainst
hefol
l
owing:
Dateonwhi chthetransacti
onoccurr
ed
Nameoft hecust omer.Thepersonwhoboughtt hegoodsoncredi
t(i
ndi
vi
dual
33
orcompany)
I
nvoice number.The numberon the sal
es invoice.A sales i
nvoi
ce i
sa
documentshowingdet
ail
sofgoodssoldandthepricesatwhichtheyhavesol
d
Fol
iocolumn
AmountsorPr i
cesatwhichgoodshav
ebeensol d
I
ll
ust
rati
on
Thecompanysoldgoodsoncr editt
othef oll
owingpeopl
e.
st
OnMay1 soldgoodst oJackieof400, 000andt hei
nvoi
cenumberwas011
OnMay4thsol
dgoodst oJamesof300, 000,i
nvoicenumber016
On7thsol
dgoodstoPeter700,000,i
nv oicenumber018
On10thsol
dgoodstoMey er500,000inv oi
cenumber020
Requi
red:
Prepar
eaSal
esday
book
SALESDAYBOOK
Dat
e Nameof I
nvoi
ce Fol
i
o amount
customer number
May1st Jackie 011 400,
000
4th James 016 300,
000
7th Peter 018 700,
000
10th Mey er 020 500,
000
1,
900,
000
C) PURCHASESDAYBOOK
Thepur chasesdaybooki
sbookofori
ginalent
ryf
orr
ecor
dinggoodsboughton
cr
edit
.
Thepurchasesdaybookcont
ainst
hef
oll
owing
Date
Nameofcr edi
tor
Invoicenumber
Foliocolumn
Amount
Anotheri
l
lust
ration
Thecompanyboughtt hefol
l
owi nggoodsoncr editinthemont hofMay
rd
i
) OnMay3 boughtgoodsf r
om Stephenf or1, 500,000,
inv
oicenumber10
i
i
) On7thpurchasedfr
om Brianfor3,000,000,ivoicenumber14
i
i
i) On20thpur chasedfr
om Der r
ickfor2,000,000,invoicenumber18
i
v) On22ndboughtgoodsf rom Adr i
anf or700,000, invoi
cenumber20
Requir
ed Recordtheabovetransacti
onsi nthepur chasesdaybook
PURCHASESDAYBOOK
Dat
e Nameofcr
edi
tor I
nvoi
ce Fol
io Amount
number
34
May 3rd St
ephen 10 1,
500,
000
7th Bri
an 14 3,
000,
000
Derr
ick 18 2,
000,
000
20th
Adr
ian 20 700,
000
22nd
7,
200,
000
D) CASHBOOK
Thecashbooki
sabookofor i
ginalent
ryforrecor
dingcashandbanktransact
ions.I
t
showsthebusi
nessrecei
ptsandpay ments.Weal socl
assi
fyacashbookasal edger
.
Acashbookcanhavetwocolumnsort hreecolumns.
Two-col
umncashbook
Thetwo-
columncashbookhasthebankandcashcol
umnbothonthedebi
tandcredi
t
si
de.Thecashbookt
heref
orei
sacombi nat
ionoft
hebankandt
hecashaccount
.
For
matofat
wo-col
umncashbook
Tit
le
Dat
e Par
ti
cul
ars Bank Dat
e Par
ti
cul
ars Cash Bank
Usi
ngt
hei
l
lust
rat
ionofXYZl
tdpr
epar
ea2-
col
umncashbook
XYZt
wo-
col
umncashbook
Date Parti
cular Cash Bank Dat
e Particul
ar Cash Bank
s s
Jan Capi tal 2, 000,
000 Jan Purchase 600,000
1st 3rd s
Jan Capi tal 3,
000,
000 Jan M. 1,
500,
000
1st 6th vehicle
7t Sal
es 300,
000
h
Loan 3,
000,
000 Bal
c/d 4,
780,
000 1,
500,
000
20th
Mar
y 80,
00
25th 0
5,
380,
000 3,
00,
000 5,
380,
000 3,
000,
000
Useoff
oliocol
umnsint
hecashbook
Thepart
icul
arscol
umnoft hecashbookj
ustcont
ainst
henameoft
heot
her
35
account
sandtr
acingsuchaccount
smaybedi
ff
icul
t.Fol
i
ocolumnswi
l
lindi
cat
e
wherewefi
ndsuchaccount
swhenweneedmor
einfor
mation.
Discountr
eceived
Thisisadi scountrecei
vedbythebusi nessfrom i
tssuppl
ier
s.I
treducest he
amountpai dtosupplier
s.Thediscount
sr ecei
vedareenter
edinthediscounts
columnont hecredi
tsi
deofthecashbook.
I
ll
ustr
ati
on
Thecompanypurchasedgoodsoncr editf
rom Mar
yforUGX2, 000,
000.
i) Thecompanywasabl et opayon4May( inti
me)usi ngachequeand
ther
efor
equalif
iedf
oradi scountof5%.
ii
) Thecompanyhasadebt orJohnwhosebal ancewasUGX200,000.He
paidcashon10Apr il(
int i
me)andt hi
smadehi m quali
fyf
ordiscountof
2%.
Requi
redShowhowt heabovetransacti
onswill
appeari
nthecashbook
Di
scountreceived
2,
000,000*5/100=100,
000(
Tobeent
eredont
hecr
edi
tsi
deoft
hecashbook)
Theamountofmoneythatt
hecompanypai
dtoMar
yamount
edt
o
2,000,
000-
100,
000=1,
900,
000
Discountall
owed
2/100*
200,000=4,
000
Thediscountall
owedisUGX4,000(
wil
lappeari
nthedi
scountcol
umnont
hedebi
t
sideofthecashbook)
Theamountr
ecei
vedf
rom Johnadebt
orwas200,
000-
4,000=196,
000
Three-
columncashbook
Dat
e Detai
l Di
scount Cash Bank Dat e Det
ail Di
scount Cas Bank
s s h
10/
4 John 4,000 196,
000 4/05 Mary 100,000 1,
900,
000
Exerci
se:
Refert
otheGener
alJour
nal
ofKy
eswaLt
dandpr
epar
eaCashbook
RETURNSDAYBOOKS/ JOURNALS
Theret
urnsdaybooksr
ecor
dgoods,
whi
chhav
ebeenr
etur
nedt
oandbyt
hebusi
ness
36
Thesebooksare:
Retur
ninwardsdaybook
Retur
noutwardsdaybook
I
ll
ustr
ation
Thefoll
owingcust
omer sr
eturnedgoodst othecompany :
i
) On3rdSeptemberDav i
dretur
nedgoodsf orUGX50,000,cr
editnot
enumber
012
i
i
) On8thSeptemberIsaacret
urnedgoodsf orUGX80, 000,cr
editnot
enumber
019
i
i
i) On20th Sept emberDebor ahr eturnedgoodsforUGX100, 000,cr
edi
tnote
number020
Requir
ed Recor dtheabovet r
ansacti
onsi nret
urninwardsdaybook
Ret
urni
nwar
dsdaybook
Dat
e Detai
l
s Credi
t not
e Fol
i
o Amount
number
3rd Sept
ember Davi
d 012 50,
000
th
8 “ I
saac 019 80,
000
t
h
20 “ Debor
ah 020 100,
000
Amount s t o be
transfer
red t
o the 230,
000
return i
nwar
ds
account
Returnoutwardsaccount
Thereturnoutwar dsdaybookr ecordst hegoodswhi chhaveretur
nedbythebusi
ness
toitssupplier
s. Whengoodsar er eturned, t
hebusinessissuesadebitnotetothe
suppli
erandgi vesreasonsforthei
rr eturn.
Theamount softhedebitnotewillber ecordedthus;
Ret urnoutwar dsaccount
Pur chasesledgerbydebiti
ngi nt heindi
vidual
accounts
37
I
ll
ust
rati
on
Thecompanyr et
urnedgoodst othefol
lowingsuppl
i
ers
i
) On4thMayr eturnedgoodstopeterofUGX80,000,debi
tnot enumber013
t
h
i
i) On28 Mayr eturnedgoodstoIv
anofUGX130, 000,debitnotenumber015
i
i) On30thMayr
i eturnedgoodstoMar kofUGX200,000,debitnotenumber018
Requi
red:
Recor
dtheabov
etr
ansact
ionsi
nther
etur
nout
war
dsday
book
Ret
urnoutwardsday
book
Dat
e Detai
ls Debi tnot
e Fol
i
o Amount
number
4thMay Peter 013 80,
000
t
h
28 May Iv
an 015 130,
000
t
h
30 May Mark 018 200,
000
Amount stobe 410,
000
transfer
redtothe
returnoutwards
account
Afterrecordi
ng tr
ansactions i
nt he j
our
nals,we postthem tot he l
edger
s.We
sometimesr ef
ertoal edgerast hebookofsecondaryent
ry.Aledgeri
sagr oupof
accounts(A/C)andint hemanualaccounti
ngsystem t
heledgeri
sabookwher ethe
accountsarekept
.
THELEDGER
Therecordingfunct
ionofaccounti
ngiscall
edprepar
ati
onofbooksofaccounts/book
keeping.Thepurposeofbookkeepingistoprovi
deanaccur
ateanddetai
l
edr ecordof
everytransact
ioninvolv
ingtheexchangeofmoneyormoney ’
swort
hbet weent he
enter
priseandothers,whet
hertheyareindi
vi
dual
sororgani
zat
ions.
38
ti
me,andt
heamountofthatpr
ofi
torloss;
H) Theamountofwor
kingcapi
tal
avai
labl
et ot
hebusi
nessatt
hepoi
nti
nti
me
Aledgercompr i
sesmanydi fferentsect i
ons, eachofwhi chi scal l
edanaccount .Ina
l
edger‘book’ ,therewi l
l usuall
ybeoneaccountoneachpageofi t
;inal argebusi ness,
eachaccountmayhav ei tsowncar dorsheet–al ltheaccount–car dsoraccount–
sheetstogetherj ointl
ymakeupt hebusi ness’ ledger .
Thefollowingi mpor tantpoi ntsmustbenot edaboutl edgeraccount s:
1.Eachi ndi vi
dual accounti sheadedbyanameorbyat itl
e.Thatnameort i
tlemay
bet henameofaper sonoranor ganizat i
onorat ypeofasset s,at y peofl iabil
it
y,
at ypeofexpenseorasour ceofi ncome
2.Onl yinformat ionaboutt het ransactionsconcer ningt heper son, or gani zat
ionor
it
em namedati t
sheadmayber ecor dedi nt hataccount .
3.Eachaccountmustbekeptsepar ate,ort reatedsepar atel
y ,from al ltheot her
account si nthel edger ,
andt heremustbeonl yoneaccounti nt henl edgerf or
anyonepar t
icularper son, or ganizationori tem.
4.Eachl edgeraccounti sdi videdi ntot wosi desbyal ine–orbyt wocl osepar all
el
(alt
houghf orpur posesoft hisbook, weonel i
ne)li
nes–dr awndownt hemi ddl
e
ofit,fr
om t opt obot tom ( seet hespeci menbel ow) .
5.Thel eft-handsi deofanaccounti scal ledi tsdebi tside, andi tr ecor dsal lvalues
receivedbyt heper son, organi zationori tem namedatt heheadofi t .
6.Ther i
ght -
handsi deofanaccounti scal leditscr editside, andi tr ecor dsall
valuesgi ven( orpai doutby )theper son, organizationori t em namedati t
shead.
Inaddit
iont oanameort it
le,eachaccountal sohasanumberl ocat edt oi t; t
hat
numberi scalledaf oli
ooranaccountnumber .
Aspeci
menledgeraccount
Debi
tsi
de(
recei
pt) CLARENDONHOTEL cr
edi
tsi
de(
val
uegi
venout
)
19–--
--
- UGX 19-
--
--- UGX
May2 purchases SB7 474.60 May4 r et
urns R13 14.00
8 purchases SB7 339.40 15 payment CB43 800.00
12pur
chases SB7 162. 50 balance c/
d 458.70
14pur
chases SB7 296. 20
1,
272.
20 1,
272.
20
June1bal
ance b/
d 551.
10
39
Thet r
ansact i
ons–orent ri
es–ar er ar elyrecor
deddirectintotheledgeraccount.
Generally,i
nformationisfirstrecor dedi noneoft he‘subsidiarybooks’or‘
daytoday’
–whi char ecollect
ivel
yoftencal led‘ thebooksofor i
ginalentry’
.Theinfor
mationis
thentransferred–or‘ posted’,ast hepr ocessiscal
ledi nbookkeeping–t othe
appropr i
ateledgeraccount sinasummar i
zedform.Themostcommonl yused
subsidiarybooksar ethecashbook, thesal esbook,thepur chasesbookandt he
retur
nsi nwardsandout wardsbook, whi chhaveallbeendescr ibedi
nt hi
sTopic
alr
eady .
Balancingal edger
Aftermaki ngtheent ryf orthepay mentf rom Cl arendonont he15th,Mr .Traderneeded
toknow how muchwasst i
l
lowedt ohi sbusi nessbyCl arendon.Toobt ai
nt hat
i
nf ormation,hecar r
iedoutapr ocesscal ledbal anci ng.Whathedi dwasf i
rstt oaddup
thev aluesoft heent r
iesont hedebi tsideofCl arendon’ saccounti nthel edger;t
heir
totalamountt oUGX1, 272.70.Hewr otet hattotalbel owt hefourthent r
y–r emember
thatf i
g.1/1showsan‘ histori
calr ecord’,andt hatont he14tht heot herent ri
esshows
i
nt heaccounthadnoty etbeenmade.
Next ,headdedupt hev alueofent ri
esont hecredi tsideoft heaccount–t hei
rtotal
,
whi chwasUGX.814,wasdeduct edf rom UGX1, 272. 70t ogi vet hebal ance–t he
amountst i
llowingbyCl arendon–ofUGX458. 70.t hatamountwasent eredont he
creditside,makingt het otalsoft heent riesonbot hsi desequal ,andsot het ot
alwas
enteredont hecr edi
tside, ont hesamel ineast het otal ofthedebi tentri
es; andboth–
equal –t ot
alsareneat lyunder l
ined, or‘r
ul edoff ’
ast hepr ocessiscal l
ed.
Finally
,thebalancewascar ri
eddownf rom t hecr editsi det othedebi tside,showi ng
40
thatClar
endonhadr
ecei
vedanexcessv
alueofUGX458.
70ov
erwhati
thadbeen
givenout
.
Balancingisaneasypr ocessandcanbecar r
iedoutonanyaccountatanyt i
meitis
considerednecessaryt odoso.Iti
sgeneral
l
ycar r
iedoutont heaccountofal
ldebt
ors
andcr edit
orsatt heendofeachmont h,
andoneachaccountatt heendofaf i
nancial
ortradingy earorotheraccounti
ngperi
odandy ouwi l
llearnwhyt hati
sdoneasy ou
progresswi thyourstudi
es.
Beforewepr oceed,i
tisimport
anttol
ookattheclassi
fi
cationofaccounts.
Cl
assi
fi
cat
ionofaccount
s
Anaccountmaybedef inedasar ecor
doftransacti
onsofaparticularty
peorwi t
ha
part
icul
arper sonusuallyexpressedinfi
nancialter
msandmai ntainedinal edger.
Eachpageofal edgerisgivenaheadingortit
leanditisusedtor ecordtr
ansacti
ons
ofasimilarnature.Forexample,al
lsal
esofgoodsar erecor
dedononepageandi ti
s
knownassal esaccountandsoon.
Inaledger,weclassifyvari
ousaccount
sasunder;
ACCOUNTS
I
MPERSONALACCOUNTS PERSONALACCOUNTS
NOMI
NALACCOUNTS REALACCOUNTS
Adopt
edf
rom:Sal
eemi(
1982)
Weexplai
ntheseasunder ;
Per
sonalaccount s-Theseaccount scontainthenameofabusi ness,personorf ir
m.
I
naledger,t
heremaybet hreety pesofper sonalaccounts.
Capitalaccount ;t his accountr ecords the transact
ions bet ween t he
proprietorandt hebusi ness.Anyamounti nvestedorwi thdrawnbyt he
proprietori
srecor dedi nt hi
saccount .
Creditors’account ;theper sonst owhom moneyi sowedbyt hebusiness
arecal ledcreditors.Thegoodspur chasedoncr editbasi
sf rom suppliers
createal i
abili
tyoft hebusi ness.Theseamount sowingt ocr edi
torsar e
recordedi ntheirper sonalaccount s,whichar eopenedsepar atelyforeach
creditor.
Debtor s’account ;debt orsaret hepersonsowi ngmoneyt othebusi ness.
Thismoneyi sowedt othebusi nessagainstgoodssol dt othecust omer s
oncr editbasis.Asepar ateaccountisopenedf oreachdebt or.
41
I
mpersonal account s–Theaccount s,whichdonotcont ainthenameofanyper sonor
busi
ness,
ar ecal ledimpersonal accounts.Theymaybeoft wokinds;
Realaccount s;theser el
at etot angibleitems.Thesear eaccountsalways
repr esentsomet hingwecansee,t ouch,ormov e.Theaccount sofassets
l
ikel andandbui ldings,pl antandmachi ner
y ,mot orv ehi
cles,f
urni
tur
eand
fi
ttingsandcashar ereal account s.
Nomi nalaccount s;theser el
atetoi ntangibl
ei tems.Theseaccount sr ecor
d
transact i
onsf orwhi chwehav enot hingt angiblet oshow;f orexampl e,
purchases,r ent,sal es,wages and sal aries,el ectri
cit
y,print
ing and
stationeryandsoon.
Accountsandt hedualconcept
Theclassifi
cat
ionofaccount senabl esust oestabl
ishrulesf ormaki ngdoubl
eentry
(we saw doubl e entr
y pri
ncipl
ei n operati
on in Topic 4)i n case ofdiffer
ent
tr
ansacti
ons.Whenf acedwi t
hanyt r
ansacti
on,thef ol
l
owi ngt hreepointsmustbe
consi
dered.
1)Whatt woaccount sareaff
ect ed?
2)Whatt ypeofaccountsaret hey ?
3)Whi chaccountistobedebi tedandwhi chonet obecr edit
ed?
The fol
lowing fi
gure gi
ves an idea ofmaki ng double entryi n case ofdi
ffer
ent
tr
ansacti
ons.
ACCOUNTS
Nomi
nal
a/cs Real
a/cs Per
sonal
a/cs
Wediv
ideal
lthemanyaccounts,whichjoi
ntl
ymakeupt hel
edgerofabusiness,i
nto
t
hesethr
eecl
asses–Realaccounts,
personalaccount
sandnominal
accounts.
Gener
all
edger
I
tisaledgerforal
laccountsi
nanorganisat
ion.Inanorganisati
onthegenerall
edger
wi
llcont
ainaccountssuchascashaccount,
bankaccount,purchasesaccountetcbut
ondiff
erentpages.Itisimpor
tantt
onot et hatthegeneralledgerwil
lnotcontain
42
i
ndi
vidualaccountsf
orthedebt or
sandcr edit
ors.Forexampl
e,theaccountf
orMar y
asadebt orwil
lnotappeari
nt hegeneralledgerbutthedebt
orsaccountwil
lappear
hav
inginformati
onaboutal
lthedebtor
s.
Subsi
diar
yledger
s
Businesseshav esomanycust omersandsupplier
stherefor
ei ti
snecessarytohave
eachindividualdebt
ororcredit
orsaccountsepar
atetodetermineeachone’sbal
ance.
We cal lthese indi
vidualaccount
s subsidi
aryledger
s because theysupportand
generalledgercontr
olsthem.
Ty
pesofsubsi di
aryl
edger s
Debtorssubsidi
aryledger
Credi
torssubsidi
aryledger
Pri
vateledger
Cashbook
Debtors’
subsidi
aryledger
Thisisasummar yofani ndividualdebtor
’str
ansact
ion.Thegeneralledgershows
i
nformationconcerningal
lthedebt orsbutdoesnotbringoutthedetai
lsabouteach
i
ndivi
dualdebtor.Thesubsidiaryledgerbri
ngsoutthesedetai
ls.Forexampl e,Mar
y
whoi sadebt orwillhavetransacti
onsconcerni
ngheral onesummar i
zedi nMary’
s
account.
Credi
tor
s’subsi
diar
yledger
Thisisasummar yofindividualcredi
tor
’str
ansact
ions.Thegeneralledgerwil
lshow
i
nformati
onconcerni
ngal lthecredit
orsbutwil
lnotdetai
lsofeachindivi
dualcr
edit
or.
I
nt hecr
edit
orssubsidi
aryledgereachcredi
torwil
lhavethei
raccount.
Pr
ivat
eledger
Thepri
vateledgercol
umnscont ai
naccount
sthatthepropr
iet
orswisht
okeepsecret
fr
om otherpeople.Theseaccountsmayincl
ude:capi
talA/C,drawi
ngsA/
C,income
A/Cdependi
ngont heorgani
zati
onetc
Posti
ngt r
ansactionsfrom theJour nalstot heLedger
s
Thetransferoftransactionsfrom thej ournal
stotheledger
sisrefer
redtoasposti
ng.
Thetransacti
onst hatappearint hedebi tcolumnoft hegener
aljour
nalwil
lbeposted
tothedebitsideofther espectiv
eledger .
Thetransacti
onst hatappearint hecr editcol
umnoft hegener
aljour
nalwil
lbeposted
onthecreditsideofther espectiv
el edgeraccount.
Balanci
ngofftheledgeraccount
s(y
oumaywi
sht
oref
ert
othespeci
menofl
edger
accountofCl
arendonHotel)
There,wenotedt
hattheledgeraccount
sarebal
ancedofft
odeter
minethebalanceby
theendoft he financi
alperi
od.Balanci
ngofftheaccount
sinvol
vesthefoll
owing
stages:
43
i
) Addingbot hsi desoft heaccountt odet erminet het otalf
oreachsi de
i
i
) Forexampl et hedebi tsideoftheaccountbel owaddsupt o5,000,000whi l
et he
creditsidet o700, 000
i
i
i) Leav espaceaf terallthetransactionshav ebeenpost edforinsertingintheend
ofper i
odbal ances.
i
v) TheLar geramountaf teraddingbot hsideswi llbecomet het otalf
orbot hsides.
v
) iv
)Subt r
actt hesmal l
ertotalfrom thel argert otal (e. g.5,000,
000- 700.
000=
4,300,000)
v
i) Ent erthedi fference( 4,300,000)ont hesi dewi tht hesmal l
eramount
anditi srepresent edasbal ancecar ri
eddown( bal c/d)
v
ii
) Nowbot hthedebi tandcr editsi
dewi llhav ethesamet ot
al
vii
i
) Doubl eent ryoft hebal ancesshoul d bef ulfi
ll
ed bycar r
ying down t he
balancet ot hebegi nningoft henextper iod.
ix) I fthebal ancecar r
ieddowni sont hecr editsideoft heaccountt hent he
balancebr oughtdownwi l
lbeont hedebi tsideoft hesameaccount .
Wi
tht
hisi
nmi
nd,
thel
edgeraccount
sforXYZLt
dnowappearasf
oll
ows;
Gener
all
edger
sforXYZl
td
CashA/
C
Jan1 Capit
al 2,000,000 Jan3Pur
chases 600,
000
7 Sales 300,000
20 Loan 80,
000
31Bal
c/f 4,780,000
5,
380,
000 5,380,000
Feb1Bal
b/f 4,
780,
000
BankA/
C
Jan1Capi
tal
3,000,
000 Jan6M.vehi
cle 1,500,000
31Bal
c/f 1, 500,000
3,
000,
000 3,000,000
Feb1Bal
b/f1,
500,
000
Capi
tal
A/C
Jan31Bal
c/f3,
000,
000 Jan1Cash 2,000,
000
1 Bank 3,
000,
000
44
5,
000,
000 5,
000,
000
Feb1Bal
b/f3,
000,
000
Pur
chasesA/
C
Mot
orv
ehi
cleA/
C
Jan6bank 1,500,
000 Jan31Bal
c/f 1,
500,000
1,500,
000 1,
500,000
Feb1Balb/
f1,500,
000
Debt
orsA/
C
Cr
edi
tor
sA/
C
Jan31Bal
c/f 800,
000 Jan15 Purchases 500,000
29 Purchases 300,000
800,
000 800,
000
Feb1Bal
b/f 300,
000
LoanA/
C
Jan31Bal
c/f 3,
000,
000 Jan20Cash 3,
000,
000
45
3,
000,
000 3,
000,
000
Feb1Bal
b/f 3,
000,
000
Sal
esA/
C
Jan31Bal
c/d 600,
000 Jan7Cash 300, 000
23Debt
or(Mar y
) 200, 000
26Debt
or(Peter) 100, 000
600,
000 600,000
Feb1Balb/f 600,000
XYZsubsi
diar
yledger
s
Debtor
s’subsi
diar
yledger
s
Thedebtor
sforXYZLtdareMar yandPet
er.
Wear
egoi
ngt
ohav
eMar
yandPet
er
account
ssepar
atel
y.
Mar
y’sA/
C
Jan23Sal
es 200,
000 Jan25 Cash 80,
000
31Bal
c/f 120,
000
200,
000 200,
000
Feb1Bal
b/f120,000
Pet
er’
sA/
C
Jan26 Sal
es100,000 Jan31 Bal
c/F 100,
000
100,
000 100,
000
Feb1Balb/
f100,000
Notethatthebal
anceinthedebtors’account(220,
000)shouldal
waysbeequalto
t
het ot
alofalli
ndivi
dualbal
ances.Inthisexamplethetotalofi
ndi
vi
dualbal
ances
(
forMar yandPeteri
s120,000+100,000=220, 000
Cr
edi
tor
s’subsi
diar
yledger
s
Thecr
edi
tor
sforXYZLt
dar
eJohnandTKl
td
46
TKLt
dA/
C
Jan31Bal
c/f 500,
000 Jan15Pur
chases500,
000
500,
000
Feb1Bal
b/f 500,
000
JohnsA/
C
Jan31 Bal
c/f 300,
000 Jan29 Purchases 300,000
300,
000 300,
000
Feb1 Bal b/f 300,000
Simil
arl
y,t
hebalancei
nt hecredi
torsaccountint
heGenerall
edger(
800,
000)shoul
d
alwaysbeequaltothetotalofal
lindi
vidualcr
edi
tor
s(i
.e.ofTKLtdandJohninthi
s
example)(
500,
000+300,
000=800,000))
Exer
cise
Ref
ertojournalofKyeswaLt
d,postt
othel
edger
sincl
udi
ngt
hegener
all
edgerand
ext
ractatr
ialbalance
Thetr
ial
bal
anceal
wayshastobal
ancet
hatisthedebi
tsideal
way
shast
obeequal
to
thecr
edi
tsi
deasshownintheXYZlt
dtr
ial
balanceabove.
Fai
lur
eoft het r
ialbalancetoagreeimpl
iesthat:
Arit
hmet ical err
orsmayhavebeencommi tt
edwhi lebal
ancingofftheaccounts
Thedoubl eent ryrul
ewasnotpr operlyobserved.Forexampl e,i
fgoodswer e
soldf orcash,t hecashaccounthast obedebi t
edwhi l
et hesalesaccount
credited.Ifthecashaccounti sdebitedbutt hesalesaccounti snotcredi
ted
thet r
ialbalancewi l
lnotagr
ee
However,thet r
ialbalancecanagreewhent heresti
llerr
orsthathavebeencommi tted.
Thesearer eferredt oaser ror
sthatcannotbedet ect
edbyt het r
ialbalance–t ri
al
bal
ancewi l
lbecov eredindetai
lsi
nthelat
erchapters.
47
Topi
c5
Thecashbookpr
epar
ati
on
Learni
ngobj
ecti
ves
Bytheendofthi
stopic,youwi ll
beableto;
Toenterupandbal anceof faCashbookunderv
ari
ouscolumnarf
ormat
s
Tocompleteentr
iesf ordiscountal
l
owedanddiscountr
ecei
ved.
Wr i
teupandkeepapet t
ycashbookunderimprestsyst
em.
Int
roduct
ion
Cash and Cash tr
ansact
ions i
s an impor
tantand easy ar
ea t
o under
stand i
n
accounti
ngandbookkeepi
ng.Everybusi
nessandindeedever
yper
sonrecei
vescash
andmakespay ments.
Allbusi
nessesandmanypeopleshouldkeeprecordsofal
lrecei
ptsandpayments.I
t
i
si mportanttonot
ethatalt
houghcashi sst i
llused,mostbusinessr
eceipt
sand
paymentsaremadethr
oughthebankingsyst
em.
Receipt
sandpay mentsarerecordedinabookcal l
edt hecashbook.Thecashbook
ther
eforeisabooki nwhichar erecor
deddet ai
ledpar t
icul
arsofallmoney srecei
ved
andpaid.From thebegi
nni
ngoft hedoubleentrybookkeepi ng,busi
nesseshav efound
thatav erylar
genumberoft ransact
ionsconsi stofreceivingandpay ingsumsof
money .Ori
ginal
ly,t
hesetransacti
onsi nv
olv
edact ualpaymentandr eceiptofcash.
Hencet heneedtodrawandkeepacashbook
I
nlatert
imes,whi
lecashissti
ll
used,recei
ptsandpaymentsareal
somadebycheque
t
hroughabankaccount .Othersmallandf ew casht
ransact
ionsasdohappenare
r
ecordedint hepett
ycashbook.Thus,acashbooki snow usedtorecor
dbank
t
ransact
ionsbuti
tissti
l
lcal
ledthecashbook.
Si
ngleCol
umnCashBook
Thi
si satypeofcashbookmai
ntai
nedwher
esmal
lbusi
nessowner
sret
aincash
48
receivedf oruseinthebusinessandther
eforethecashrecei
vedi
sdebitedint
heonly
cashcol umn.
Mor eov er,wherethemoneyi spaidoutf r
om cash,theentr
yiscredi
tedintheonly
cashcol umn.
Thist raditi
onalt
ypeofcashbooki sphasingoutsincealmostever
ybusinessowner
operatesanaccountwi ththebank.Thus,giv
ingri
setoatwo-col
umncashbook.
TwoColumnCashBook
Thi
sisthemostcommonlyusedf
ormatoft
hecashbook.I
tinv
olv
esr
ecor
dingbank
andcasht
ransact
ions.
Bank tr
ansact
ions ar
er ecor
ded i
nt he bank col
umn and cash t
ransact
ions ar
e
recor
dedinthecashcolumnonDebitandCredi
tsiderespect
ivel
y.
Three-ColumnCashbook
Wher eabusi nessenti
tyfr
equentl
yal l
owsorrecei
vescashdiscount
,iti
susuall
y
convenienttouseat hr
ee-
columncashbooksoast oincl
udealltheinf
ormati
on
rel
atingtocashandbal ktransact
ionsinasi
nglebook.Inthi
sTopi cemphasi
sis
mor eont woandthr
eecolumncashbooks.
DrawingupaCashBook
Alreadyy ouhav ebeent oldthatinr eal
it
yacashbooki saledgeraccount,whichfor
convenienceandal sobecauseoft hemul ti
pli
cit
yoftheentri
espassingthroughit
,it’
s
notincl
udedi ntheledger,butit’
sboundasasepar atevolume.
Iti
si mportanttonotet hatcasht ransact
ionsneednott obej our
nal
izedbecauset he
cashbookf ulf
il
sthef uncti
onsbot hofal edgeraccountandbookof“ ori
ginalentr
y”in
whichcasht ransacti
onsar erecordedast heyoccur.
Nowletusl
ookathy
pothet
icalexampl
eofhowwedesi
gnacashbook.Theexampl
e
adopt
satwo-
col
umncashbook.
Date Det
ail
s Cash Bank Dat
e Det
ail
s Cash Bank
2004
Oct1 Balb/f 10,
000 2 Rent 1000
2 Cashsales 3300 10 Purchase 4000
3 Debtors 2500 11 s 2000
9 Rentincome 3000 19 Fuel 1500
30 I
nterest 20,
000 Telephon
I
ncome 29 e
1200
Payment
31 s t
o 2800 26300
8800 30,
000 suppl
i
ers 8800 30,
00
0
Bal
c/d
49
Not
ethef ollowi ng:-
a) Recei ptsar eont helef thandsi deandpay ment sareont her ighthandsi de
oft hecashbook.
b) Ont hel ef tsideoft hedebi tandoft hecr edi tsidei st hedat ef oreach
transact ion.Thecashbooki songoi ngandmayl astf ory ear s,sot hisisvery
impor tant
c) Ther eceipt sandpay ment scoul dbebycashorbycheque
TheBankcol umncont ainsdet ail
soft hepay ment smadebychequeandoft he
moneyr eceiv edandpai dintot hebankaccount .
Thebankwi llhav eacopyoft heaccounti nitsownbooks.Thebankwi llsenda
copyoft heaccountweknowast hebankst at
ementi ni tsbookst ot hef i
rm or
organi zation.Whent hef ir
mr eceiv esthebankst atement ,itwi llchecki tagainst
thebankcol umn i nit
sowncashbookt oensur et hatther ear enoer rors.
d) As r eceipt s ar e entered on t he debitsi de oft he cashbook,t heyar e
subsequent lypost edt othecr editsideoft heappr opriateaccount sint he
ledger .Mor eov er
,whenpay ment sar eent er edont hecr editsi deoft he
cashbook, theyaresubsequent lypost edtot hedebi tsi deoft heappr opri
ate
ledgeraccount s.Wedot hist ocompl ywitht hepr i
nci pleofdoubl eent ry.
Thedet ai l
scol umnshowst heent ri
esagai nsteachi tem st atingt henameof
theaccounti nwhi chthecompl etionoft hedoubl eent r
yhast akenpl ace.
e) Atthebeginningoftheperi
odthatisOct1st2004thebalanceinthebank
was10,000andt hi
sappearsonthedebi
tside.
Attimes,af i
rm mayhav ebothcashandbankbal ances.Theyshouldbot h
appearont hedebitsideofthecashbookatthebeginni
ngoft heper
iod.Itis
onlyonfew occasionsthatacashbookwillhaveBal
ancebroughtforwardon
thecredi
tsideinthebankcolumn.I
nadditi
on,thi
siswhenafirm madeanov er
drafti
nthepreviousperi
od.
CashpaidintotheBank
From ourprevi
oushypot
heti
calexample,t
hepaymentsi
ntot
hebankhav
ebeen
chequesreceivedbythefir
mt hathav ebeenbankedimmedi
atel
y.Wemust
nowconsidercashbeingpai
dintothebank.
A.Letuslookatt heposi
ti
onwhenacust omerpayshisaccountincash,and
l
aterpar
tofthiscashispai
dintothebank.Therecei
ptoft
hecashi sdebit
edto
thecashcolumnont hedaterecei
ved,t
hecr edi
tent
rybei
ngint hecustomer’
s
50
personalaccount
.Thecashbankedhast
hef
oll
owi
ngef
fectneedi
ngact
ionas
shown.
Eff
ect Acti
on
1.Assetofcashi
sdecr
eased Credi
tassetaccount,thatist hecash
accountwhichisr epresentedbyt he
cashcolumninthecashbook
2.Assetofbanki
sincr
eased. Debittheassetaccount,whi chisthe
bankaccount,whi
chi srepresentedby
thebankcolumninthecashbook.
Forexample,cashr
eceiptof10,
000f
r oon3rdJune2004,
om Kat lat
erf
oll
owed
bythebankingon5thJune2004of6000ofthisamount
.Thi
swouldappeari
n
thecashbookasfol
lows.
Cashbook
Date Det
ail
s Cash Bank Date Det
ail
s Cash Bank
2004 UGX UGX 2004 UGX UGX
June3 Kato 10,
000 June5 Bank 6000
5 Cash 6000
Thedet ai
lscol
umnaswehav esaidbeforeshowsent r
iesagai
nsteachit
em stati
ng
thenameoft heaccounti
nwhi cht
hecompl et
ionofthedoubleent
ryhastakenplace.
AgainstthecashpaymentofUGX6000appear st
hewor d“bank”meaningthatthe
debi
tofUGX6000i st obefoundinthebankcolumn,andtheopposi
teappl
ies.
B.Wher et
hewhol eofthecashr ecei
vedisbankedi mmediat
ely,
therecei
ptcanbe
tr
eatedinexact l
ythesamemannerasachequer ecei
vedi.e. i
tcanbeent ered
dir
ectl
yinthebankcolumn.
C.I fthefir
mr equir
escash,i tmaywi t
hdraw cashfrom thebank.Thi
si sdoneby
makingoutachequet opayi t
selfcert
ainamounti ncash.Thebankwi l
lgivecashin
exchangeforthechequeov ert
hecount er.
Hereisthetwo-fol
deffectandtheactionrequi
red.
Eff
ect Action
1.Assetofbankdecr
eased Creditassetaccount,i.
e.the bank
columninthecashbook
2.Assetofcashi
ncr
eased. Debittheassetaccount,i
ethecash
columninthecashbook.
Forexampl
eaf i
rm madeawi t
hdr
aw from t
hebankon4t hAugust2004of
UGX.
75000/
=.I
nthecashbook,
thi
str
ansacti
onwoul
dappearasf
oll
ows.
CASHBOOK
Date Det
ail
s Cash Bank Date Det
ail
s Cash Bank
2004 UGX UGX UGX UGX
51
August Bank 75000 August4 Cash 75000
4
Note:Bot
ht hedebi
tandcr
editentr
iesf
ort
hisi
tem ar
eint
hesamebook.Whent
his
happensi
tisknownasacontr
aitem.
Theuseoff oli
ocolumns
Asy ouhav eal
readyseen,t
hedetai
l
scolumni nanaccountcontai
nsthenameofthe
otheraccountinwhichdoubleentr
ycompleted.Anyonelookingthr
oughthebooks
wouldtherefor
ebeabletofindwher
etheotherhal
fofthedoubl
eentrywas.
Howev er
,whenmanybooksar ebei ngused,justtoment ionthenameoft heother
accountwoul dnotbeenoughi nformati
ont ofindt heotheraccountquickly
.Mor e
i
nformati
oni sneeded,andthi
sisgi v
enbyusi ngfoli
ocolumns.
Ineachaccountandi neachbookbei ngused,afoli
ocolumni sadded,alwaysshown
ontheleftofthemoneycolumns.
Inthi
scolumnt henameoft heot herbook,i
nabbr evi
atedform andthenumberoft he
pageinotherbookwher edoubleentryiscompletedisstat
edagai nsteachent
ryinthe
books.
Anent r
yofr ecei
ptofcashf rom Kal
i
sawhoseaccountwasonpage45ofthesal
es
l
edgerandt hecashr ecordedonpage37ofthecashbookwoul
duset
hef
oli
ocolumn
thus;
I
nt hecashbook,thefoli
ocolumnwouldappearSL45.
I
nt hesalesl
edger,thefoli
ocolumnwoul
dappearCB37.
Bythi
smet hodful
lcr
oss-r
eferencewouldbegi v
en.Eachoft hecont
raitemsbei ng
shownonthesamepageoft hecashbookwouldusethelett
er“C”i
nthefoli
ocolumn.
Theactofusi
ngonebookasameansofent eri
ngthetr
ansacti
ontotheotheraccount
soastocomplet
edoubleentryisknownas“posti
ng”t
heitems.
Exampl e1
Enterthef ol
lowingtransacti
onsi nt
oacashbook-Year2005,Mont
hofOct
Oct.1.Kibongest art
edbusi nesswi t
hcashatbankamounti
ngtoUGX940,
000
2.Recei vedachequef r
om G. W KatoworthUGX115000
4.Cashsal es102000
6.Pai dr entbycash3500
7.Banked50, 000oft hecashhel dbythefi
rm
15.Cashsal espaiddirecti
nt othebank40,000
23.Pai dbychequet oS.For ks277000
29.Wi thdrewcashf rom bankf orbusinessuse120,
000
30.Pai dwagesi ncash118000
52
CASHBOOK
Date Detail
s Fol i
o Cash Bank Date Detail
s Fol io Cash Bank
2005 UGX UGX 2005 UGX UGX
Oct Capi tal GL1 940,
000 Oct Rent GL65 35000
1 G.
W. SL98 115000 6 Bank C 50,
000
“ 2 Kat o GL 102000 Oct S.For ks PL23 277000
“ 4 sal es 87 50,
000 7 Cash C 120,
000
“ 7 Cash C 40,
000 Oct Wages GL39 118000
“15 Sal es GL87 120,000 23
“29 Bank C Oct Balances C/ d 19000 748000
29
222000 1145000 Oct 222000 1145000
19000 748000 30
Nov Bal ances B/ d
1 Oct
30
Theabbr ev
iati
onsusedinthef
oli
ocolumnar easf
ollows:
-
GL= Gener alLedger
,SL =Sal
esLedger,C=Contra,PL=PurchasesLedger
Thefoliocol
umni snotal way
sanexami nat
ionrequir
ementandli
tt
leemphasisis
usual
lyputonthis;butv
eryimpor
tanti
npract
icalwr
it
ingupofbooksofaccount
sfor
anyorgani
sati
on/ f
irm.
Letuslookatthecomprehensi
veexample
Exer
cise
Thefollowi ngbal anceswer eext r
actedf r
om thebooksofO&M on31/ 05/2005.
UGX
Cash 5000
Bank(cr editbalance) 3300
Duri
ngt hemont hofJune2005, t
hef ollowingtransact
ionsoccurred.
June 1. Boughtgoodsoncr editforUGX6500
2. Sol dgoodsoncr editforUGX8000
4. Recei vedachequef rom UGX5000f r
om adebtorandbankedi t.
7. Pai dcr edi
tor
sUGX1500cashandUGX500bycheque
10. Rej ect edandr eturnedgoodswor thUGX300t oacr edit
or
12 Adebt orrej
ectedandr eturnedgoodswor t
h100/=
14. BankedUGX1500cash
16. Pai dr entUGX400cashandUGX800bychequeandel ectr
icit
yUGX250
cash
20. Wi thdrew UGX 1000 f rom t hebankand puti tint hecash boxf or
pay mentofCashexpenses.
22. Pai dUGX2000bychequef orreti
rementloan
25. Sol dl andi nherit
ed=f rom f atherforUGX10, 000cashandt heresthe
putintot hebusiness
27. Recei vedcashofUGX100andchequeofUGX2000f rom adebtorand
bankedbot hcashandcheque.
30. Usedbusi nesscashUGX300f orasocialev
eningwithhisfri
endataclub
53
Requir
ed
Prepar
eO&M’
sCashBookf
orJune2005pr
oper
lybal
ancedof
fasat30/
62005.
54
Topi
c6
Pr
epar
ingbankr
econcil
i
ati
onst
atement
s
Learningobjecti
ves
Bytheendoft hi
stopi
c,youwillbeableto;
Amendt hecashbookf oranyer r
orsoromi
ssions
Pr epareast atementreconcil
i
ngt heamendedcashbookbal
ancewi
tht
hebank
statement
Intr
oducti
on
Thecashbookr ecordsalltr
ansact i
onswi t
ht hebank.Thebankst at
ementr ecordsall
thebank’stransactionswiththebusi ness.Amoment ’sthoughtwi l
lsuggestt hatthe
content
soft hecashbookar ethesameast her ecordpr ov i
dedbyt hebanki nt hef or
m
ofabankst atement,andt hereforeourr ecor dsshoul dcor respondwi t
ht hebank
statement.Thisisinfactso,butwi t
htwoi mpor t
antpr ovi
sos;
Thel edgeraccountmai ntainedbyt hebanki st heopposi t
ewayar oundt othe
cashbook.Thi sis because the bankr ecords the balance inf av orofan
indiv
idualasacr edi
tbal ancethati sal i
abil
ityoft hebankt ot heindi v
idual
.
From t heindivi
dual’
spoi ntofv i
ew,i tis,ofcour se,anasset ,thatisadebi t
balancei nhiscashbook( orbankcont rol accounti nthegeneral l
edger )
Timingdi ff
erencesmusti nevit
ablyoccur .Achequepay mentisr ecordedi nthe
cashbookwhent hechequei sdispat ched.Thebankonl yr ecordssucha
chequewheni tispaidbyt hebank,whi chmaybesev er
aldayslat er
.
Inthistopi
ct herel
ati
onshi
pbetweenthebalancei
nt hecashbook(orcashaccount)
,
andt hebalanceonthebankstatementwi
llbeconsidered.Theli
kel
yreasonsforany
dif
ferences wil
lbe invest
igat
ed and a st
atementr econcil
i
ng the t
wo balances
prepared.
Bankreconci
l
iati
onistheprocessofbr
ingi
ngcashbookandbankstatementbal
ances
i
ntoagreementbyadjusti
nganaccountbalancerepor
tedbyabanktoref
lect
tr
ansacti
onsthathaveoccurr
edsincet
hereporti
ngdate.
Theprocessbywhichyoucomparetheinf
ormati
oninthecompany'srecor
dswi
tht
he
st
atementsprovi
dedeachmont hbythebankforthebankaccountanddealwi
tht
he
di
ff
erencesothatthebank'
srecor
dsandthecompany'
srecordsbal
ance.
Banksfur
nishadeposi
torwit
habankstatementonceeachmonth.I
ncl
udedwiththe
st
atementareusual
l
ythecancel
edchequesandanydebitorcr
editmemosthathave
aff
ect
edtheamount .Duri
nganymonth,besi
desthechequesdrawn,thebankmay
55
deductfrom theaccountamount sf orserv
icecharges,retur
nedchequesandf or
err
ors.Thebanknot i
fi
est hedeposit
orofeachdeduct i
onwi t
hadebi tmemo.The
bankmayal soaddamount stothedeposit
or'
saccountforerr
orsandint
erest
.Acredi
t
memoi susedt onotifyofanyaddi t
ions.Acopyofeachmemor andum shoul
dbe
i
ncludedwiththemonthlystat
ement.
Entriesont hecustomer ’
sbankaccounti nthebank
Whenachequeorcashi sdeposi ted,thecust omeraccountwi llbecr edit
edi nthe
bank.Whent hecustomerwi thdrawscashorwhenpay ment sar emadeoutoft he
customer ’saccount ,t
heaccounti sdebi t
ed.
Entriesint hecustomer ’
scashbook( bankcolumn)
Thebankcol umnoft hecashbookshowst het ransact i
onsoft hecust omerwi t
hi t
s
banker s. A cust omerwho deposi ts money debi ts his cashbook and when a
withdrawal i
smade, thecashbooki scr edi
ted.
Agree mentoft hecashandba nkba l
ance s
Whenal lreceiptsaredeposi tedintactandal lpay ment saremadebycheck,t hebank
statementbecomesadev i
cef orprov i
ngthecashi nbankaccount .Thepr oofnor mall
y
beginswi tht hepr eparati
onofar econcil
iati
onoft hebankbal ance.Tosi mplif
yt hi
s
process, requestthecut offdat eofthe bankst atementt obet hel astwor ki
ngdayof
themont h.Thus,i fallcredit
si nthebankwer eal sodebi tedt ot hecashbookandal l
debitsi nt hebankwer ecr editedint hecashbookandv ice-
ver sa,thet wobal ances
woul dagr eeandt herewoul dbenoneedofbankr econcili
ati
on.Howev er,thisisnot
alway sthecase.Thebal anceasperbankst atementr ar
elyagr eeswi tht hebalance
aspercashbookandt hust heneedt opr epareabankr econcil
iationst at
ement .
Numerousthi
ngsmaycausethebankst
atementbal
ancet
odi
ff
erf
rom t
hecash
bal
anceint
hegener
all
edger
i
) OutstandingChecks/Unpresentedcheques:
These are checks thathav e been wr i
tten and arel i
sted on t
he cash
di
sbur sementjournalbuthav enotcl earedt hrought hebank. Theyar e
drawnandcr edit
edi nthecashbookbutnotpr esent
edt ot hebankf or
payment .Thesechequesar enotdebitedt othebankst at
ement .
i
i
) UnrecordedDeposits/Uncredi
tedcheques( al
socal l
edDeposi t
sinTransi
t):
Oftendepositsaremadeont hedayf ol
lowingt helastdayoft hemont h;
consequently
,thesedepositsdonotappearont hebankst atementforthat
mont hbuttheyappearont hecashr eceiptsjournal.Depositedtothebank
anddebi t
edtothecashbookbutnotcr editedbyt hebank.
i
i
i) Di
rectdebi
ts,
Char
gesf
orSer
vicesandNon-
Col
l
ect
abl
eIt
ems:
A bankof t
endeduct samount sfrom adeposit
or'
saccountf orservi
ces
renderedandf orret
urnedchecks.Thebanknotif
iesyouofeachdeduct ion
withadebi tmemo.Thesededuct ionsshoul
dber ecordedassoonast hey
arer ecei
ved.Theyar edebit
si nthebankst at
ementnotcr edit
edt othe
cashbookandpay mentseff
ectedbythebankwithoutrequi
ri
ngachequet o
bei ssuedbyt heaccountholder.Sincechequesarenoti ssuedf orsuch
payment s,theyarenotrecordedinthecashbooky etdebi
tedi nt hebank
statement.Theyincl
udethefoll
owing.
Bankchar ges,
56
Thebank,f
orser v
icesoffer
edt
otheaccounthol
der
,lev
iest
hesechar
ges;
theyi
ncl
udeledgerfees,
commissi
onandmanyother
s.
Standingorders(SO)
Thesear ear rangement swher et heaccounthol derinstr
uctst hebankt o
makecer tainroutineandf i
xedt ypeofpay ment sdir
ectl
yt ot hepay eeson
behalfoftheaccounthol der.Theaccounthol derdoesnoti ssuecheques
fort hese types ofpay ment s. Such t ransacti
ons include;i nsurance
premiums,pay i
ngut il
i
tyor ganizati
onssuchaswat erbil
lsandt el
ephone
charges.Ot hersincludepay ingi nt
erestandamor t
izi
ngf ixedi nst
all
ment
l
oans.
Ifthededuct i
onoccur scloset ot heendoft hemont h,itmaynotshowon
thebankst atement .
i
v) Directcredit
s and I nterestear ned:(cr
editsint he bank st
atementnot
debitedtothecashbook)
Thesear ereceiptsthatar edirectl
ycredit
edtot hebankstatementwithout
hav i
ngbeendebi t
edt ot hecashbook. Fori nstance,somedebt or
smay
clearthei
rindebtednessbypay i
ngdirect
lytothepay ee’
sbankaccountand
someaccount searni nterestthatispostedt otheaccountbyt hebankat
theendoft hemont hmaki ngthebankst atementtheonlynoti
fi
cati
on.
Cr
edi
tadv
icenot
es(
credi
tmemo)a
nddebi
tadv
icenot
es
Acr edi
tadv i
cenot e(creditmemo)andadi rectdebitnotef ordir
ectcredi
tsand
directdebi t
sar esentt ot heaccounthol derandmaynotbei ncludedinthe
cashbook.
v
) Cler
icalerr
ors
Error smadei nr ecor
dingamount sorwr ongpost ingsi nthecashbookorbank
statementmaket hecashbookandbankst atementbal ancesdi sagr
ee.Regardl
ess
ofcar eandsy stemsofi nternalcont
rol
,bot
ht hebankandt hedeposi t
ormaymake
errorsthataffectabankbal ance.Theseerrorsarenotdi scoveredunti
l t
hebal
ance
i
sr econciled.
v
i) Di shonour
edcheques
When a bank r
efuses t
o pay orrecogni
ze a cheque as an i
nst
rumentf or
tr
ansfer
ri
ngmoneyf r
om onepersontoanother
,suchachequei sadishonour
ed
cheque.
Whyar
echequesdishonoured?
Lackofsuf f
ici
entfundsont heaccount
Amounti nwordsdi ff
eringf r
om amounti nfi
gures
Drawer’
ssignaturedifferingfrom specimensi gnat
uresheldbythebank
Expir
edcheques( chequesgetst aleorexpi resixmont hsfr
om thedateon
thecheque).
Alter
ati
onsont hechequenotcount ersigned.
Ift
hereisnoaccountt itleont hecheque
Wher edrawer’
sconf irmat i
oni srequir
edbycont ractandchequesarenot
confi
rmed.
57
Whenthepayee’
sident
it
yisdoubted
Forsomecheques,i
fpaymentvoucher
sar
erequi
redandar
enotpr
esent
ed
St
epst
ofol
l
owr
econci
l
ingaccountbal
ances:
STEP ONE:Comparet hedeposit
sl ist
edont hebankst atementwithdeposits
recor
dedi nthechequer egist
erandt hecashr ecei
ptsjournal
.
I
dentif
yanydi f
ferencesanddeterminewhichiscorrect
.Listthe
depositsi
ntr
ansitforeachaccountonthereconci
li
ati
onform.
STEPTWO:Comparet hecancel edcheckslistedoneachbankst atement .Not e
anydi screpancies.Review thepr ev
iousmont h'
sr econcili
ati
on
andcheckof fthechequest hatclear
eddur i
ngthecur r
entmont h
thatwer eout st
andinglastmont h.Listanycheckst hatarest i
l
l
outstandi
ng.Ver i
fyal
ldeposi tsintransi
tt hatwerel i
stedl ast
mont htoassur ethattheyhav ebeenrecordedbythebankont he
currentstatement.
STEP THREE: Compar e each oft he cheques wi
thits ent
ryint he cash
di
sbursementjournal
.Identi
fyanycorr
ect
ionsordiscr
epancies.
Li
stanyoutstandi
ngchecksont her
econci
l
iati
onfor
m.
STEPFOUR:Determineifanydebi tsorcr editsappear i
ngont hebankst at
ement
needt ober ecordedi nt hechequer egist
er .Makegener aljournal
entri
est or ecordt hem.Anycor r
ectionst odepositsorcheques
notedshoul dbemadebygener aljournalentri
es.Donotgoback
and change t he cash di sbursementorcash r eceipt
sj our nals.
Changest ot hoser ecordsmustbemadei nthefoll
owingmont h
throughgener aljournalent ri
es.Thepur poseofr econcili
ng t he
bankst at
ementi st ov eri
fybal ancespery ourchequebookandt o
resolvediscrepancies.I fdiscrepanciesorbanker r
orsar ef ound,
notif
ythebanki mmedi ately.
STEPFI
VE:Compar eeachoft hechequeswi t hitsentryi
nthecashdi sbursement
j
our nal. Identi
fyanycor r ecti
onsordi screpancies.Li stany
outstandingchecksont hereconci li
ati
onform. Det ermi neifany
debitsorcr editsappearing ont hebankst atementneed t o be
recordedi nt hechequer egi
ster .Makegener aljour
nalent ri
esto
recordthem.Anycor r
ecti
onst odeposi tsorchequesnot edshould
bemadebygener alj
ournalentries.Donotgobackandchanget he
cashdi sbursementorcashr eceiptsjour
nals.Changest othose
recordsmustbemadei nthef oll
owingmont ht hroughgener al
j
our nalentri
es.Thepur poseofr econcil
i
ngthebankst at ementisto
veri
fybal ancespery ourchequebookandt oresolvediscrepancies.
If discrepancies or bank er rors arefound,not ifyt he bank
i
mmedi ately.
58
Bankstatement
Thisisasummar yoft r
ansacti
onsbet weent heaccountholderandthebank.The
tr
ansacti
onsincludedepositandwi thdrawalstoandf r
om theaccountrespect
ivel
y.
Thebankst at
emental soshowst her unningbal
anceaf t
ereverytr
ansact
ion.Banks
prepar
ebankst atementsfortheiraccountholder
satt heendofeachmont horany
ti
meonr equest.
Rel
evanceofBankr econci l
iation
Bankr econci
li
ati
onst rengt hensanor gani
zat
ionsinter
nalcontrolsystem through
det
ecti
onandpr ev enti
onoff r
aud.Whenbankt r
ansactionsareinvolved,
manipulat
ionsi nt hecashbookcanbedi scovered.
Itenhancesaccuracyofr ecor ds.
A mistake in ei thert he cashbook ort he bank statementcan be
di
scoveredandcor rect
eddur i
ngtheprocessofbankr econci
liat
ion.
Met
hodsofbankr
econci
li
ati
on
Therear
et hr
eemaj ormet hodsofbankr econcili
at i
on
i
) Youcanbegi nwi ththecashbookbal ance,adj usting,updat i
ngorcorrecti
ng
thecashbookandt henprepar ingabankr econcili
ationst atement.Theai m
ofthismethodi stoarr
iveatt hebankst at
ementbal ance.
i
i) Beginning wi
tht he bank st at ementbal ance and wor king t
owards the
cashbookbalance.
i
i
i) Adj usti
ngthecashbookbal anceandadj ustingthebankst atementbalance.
Theai mistoshowwhet herthet woadj ustedbal ancesagr ee.
Asareanumberofmet hodsorway sbywhi chabankr econci li
ati
oncanbepr epared
themethodadopt edbyt hisbookist hatpr epareanadj ust edcashbook( Bri
ngingthe
cashbookupt odate)andt henproceedi ngt oprepar ear econci l
iat
ionst at
ement.
ASimpleil
l
ust rat
ion:
Mr.Bukenyarunsacur r
entaccountwithNil
eBank.Hehasr eceiv
edabankst atement
showinghi
st r
ansact i
onswiththebankinthemonthofDecember2004asf oll
ows.
M.Bukenya
Bankst at
ementf ort
hemont hofDec.2004
Dat
e Part
icul
ars Dr.(UGX) Cr.(UGX) Balance(
UGX)
1/12/
20 Bal anceB/ f 1,
600,
000
04
Chq.No.202 9,
600,
000
8,
000,000√
Chq.No.1002 1,000,
000√ 8,
600,
000
Chq.No.204 500√ 9,
100,
000
Chq.No.1003 2,000,
000√ 7,
100,
000
Salarydeposit 1,700,
000 8,
800,
000
S.
O- MTN( Airt
ime) 100,
000 8,
700,
000
Bankchar ges 200,
000 8,
500,
000
Thef
oll
owi
ngi
sanext
ractofhi
scashbook.
59
M.Bukeny
a’sCashbook
Date Par ti
cul
ars Debit(UGX) Dat
e Par t
icul
ars Cr
edi
t(UGX)
1/12/ Bal
anceb/f 1,
600,
000 Chq.No.1001 500,
000
04
Chq. No. 1,
000,
000 Chq.No.1002 1,
000,
000√
201
Chq. No. 8,000,
000√ Chq.No.1003 2,
000,
000√
202
Chq. No. 4,
500,
000 Chq.No.1004 2,
500,
000
203
Chq. No. 500,
000√ Balc/f 9,
600,
000
204
Total 15,600,
000 Tot
al 15,
600,
000
Note:I
gnoreDates
Requir
ed:Reconci
let
hebankst
atementandcashbookbal
ances
Sol
uti
on
St
ep1:Checkoffallt
hetransact
ionsthatappearbothinthecashbook
andbankst at
ementwi thri
ghtamountont herightsi
des.(See
it
emswi t
hthesymbol(√)inthequesti
onabov e)
.
St
ep2:Prepar
eanadjust
edcashbookasf oll
ows
M.Bukeny
a’sadjustedCashbook
Date Par ti
cular
s Debi
t(UGX) Dat
e Part
icul
ars Credit(
UGX)
1/1/
0 Bal anceb/ f 9,
600,
000 D.Dr.S.
O-MTN( Ai
rt
ime) 100,000
5
D.Cr.Salary 1, 700,
000 D.Dr.Bankchar
ges 200,
000
Balc/f 11,
000,
000
Total 15,
600,
000 Tot
al 15,
600,
000
St
ep3:Prepareabankreconcil
i
ati
onstat
ementasf
oll
ows
M.Bukeny
a’sBankreconci
l
iat
ionstat
ement
I
ll
ust
rat
ion Balance as per adj
ust
ed 11,
000,
000
Two cashbook
Using the
foll
owing Add: Unpresentedcheques
i
nf ormati
on, Chq.No.1001 500,
000
prepare a
Chq.No.1004 2,
500,
000 3,
000,
000
bank
reconcil
i
ation 14,
000,
000
statementf or Less: Uncredi
tedcheques
GoodshedLt d C hqN o.2 01 1,
000,
000
forthemont h ChqNo.203 4,
500,
000 (5,500,000)
Balanceasperbankst atement 8,500,000
60
ofaugust.
Ext
ractsfor
m GoodshedLt d’
sBankr
econci
l
iat
ionstat
ementf
ort
hepr
evi
ousmont
h
Bankchar ge 200,
000
Commi ssion 100,
000
Uncredit
edcheques
ChequeNo.004 1,
000,000
ChequeNo.623 4,
500,000
Unpresent
edcheques
ChequeNo.10 500,
00
ChequeNo.12 0
2,
500,
000
Cashbooker
ror
:chequeNo.14 1, 700,000
Goodshed
Cashbookf orthemont hofAug.2004
Dr.(
(UGX) ) Cr.(UGX)
Balb/f 9,600,
000 ChequeNo.20 800,
000
ChequeNo.2515 1,000,
000 ChequeNo.21 1,200,
000
ChequeNo.1119 500,000 ChequeNo.22 2,000,
000
ChequeNo.990 3,000,
000 ChequeNo.23 600,
000
ChequeNo.224 2,400,
000 ChequeNo.24 200,
000
Cash 900,000 ChequeNo.26 1,400,
000
ChequeNo.414 1,800,
000 ChequeNo.27 2,400,
000
ChequeNo.666 700,000 ChequeNo.28 700,
000
Cash 1,300,
000 ChequeNo.30 1,800,
000
ChequeNo.804 2,100,
000 S.O-I
nsurance 900,
000
ChequeNo.707 3,400,
000
ChequeNo.31 1,300,
000
C.M Pet
er 900,000 Bal.C/f 16,
900,
000
Total 28,900,000 Total 28,
900,
000
61
Goodshed
Bankst
atementfort
hemont
hofaugust2004
62
Addit
ionalinf
ormat
ion;
i
) Anymist
akeinamount
swasmadeinthecashbooksbyani nexper
ienced
Dr.(
UGX) Cr
.(UGX) Bal ance(UGX)
Balb/f 8,500,
000
Cheque No.
22 2,
000,000 6,500,
000
24 200,
000 6,
300,
000
623 4,
500,
000 10,
800,
000
990 3,
000,
000 13,
800,
000
C.
M –Peter 900,
000 14,
700,
000
Cheque No.
21 2,
100,
000 12,
600,
000
12 2,
500,
000 10,
100,
000
20 800,
000 9,
300,
000
2515 1,
000,
000 10,
300,
000
1119 500,
000 10,
800,
000
S.O–Insur
ance 900,
000 9,
900,
000
Cheque No.
224 4,
200,
000 14,
100,
000
Cash 900,
000 15,
000,
000
Cheque No.
26 1,
400,
000 13,
600,
000
27 2,
400,
000 11,
200,
000
6001 5,
000,
000 16,
200,
000
414 1,
800,
000 18,
000,
000
804 2,
100,
000 15,
900,
000
31 3,
100,
000 12,
800,
000
C.
M –John 1,
300,
000 14,
100,
000
Cheque No.
28 700,
000 13,
400,
000
Ledgerf
ee 50,
000 63 13,
350,
000
Di
vi
dend 1,
500,
000 14,
850,
000
bookkeeper
.
i
i
) ChequeNo.31and804wer eenter
edont
hewr
ongsi
desoft
hecashbook
andbankstatementr
espect
ivel
y.
Sol
uti
on
Goodshed
Adj
ustedcashbook
(UGX. (UGX.
000) 000)
Bal
b/f 16,
900 Jul
y2004D.Debi
ts
Er
roronchequeNo224 1,
800 Bankchar
ge 200
Cheque No 6001( D.
Credi
t.
) 5,
000 Commissi
on 100
C.
M( John) 1,
300 Aug2004D.Debi
ts
Di
vi
dend 1,
500 Ledgerf
ee 50
Err
oronchequeNo.
Er
roronchequeNo14 1,
700 21 900
Err
oronchequeNo.
31 4,
400
Bal
.C/
f 22,
550
Tot
al 28,
200 Tot
al 28,
200
Goodshedbankreconci
l
iat
ionst
atement
(
UGX.
(
UGX.000) 000) (
UGX.000)
Bal
anceasperadjust
edcashbook 22,
550
Add:Unpr
esentedCheques
ChequeNo.10 500
ChequeNo.23 600
ChequeNo.30 1,
800 2,
900
Less:
Uncredi
tedcheques 25,
450
ChequeNo.
004 1,
000
ChequeNo.666 700
ChequeNo.707 3,
400 5,
100
Uncr
edi
tedcash 1,
300
Banker
ror
;ChequeNo.804 4,
200 10,
600
64
Bal
anceasperbankst
atement 14,
850
Exer
cise
Thefoll
owinginf
ormati
onrelat
estothetr
ansact
ionsofBRI TTLt
danditsbanker
sf or
themonthofJanuary2005.
CASHBOOK
Detai
ls Dr.UGX (
Mill
i
ons) Detail
s Cr.UGX (Mi
ll
ions)
Chq No.
Bal
anceb/d 1300 400 150
Chq No.
ChqNo.650 2000 444 5000
Chq No.
ChqNo.256 1750 455 1000
Chq No.
ChqNo.181 3000 477 3700
Chq No.
Cash 3500 488 1700
Chq No.
ChqNo.555 4100 500 1100
Chq No.
ChqNo.284 550 511 1950
Chq No.
ChqNo.922 1650 544 600
Chq No.
Cash 2000 588 2800
Chq No.
ChqNo.805 7200 600 1900
Chq No.
ChqNo.695 6850 774 3900
Bal
ance
ChqNo.885 3650 c/d 13750
Total 37550 Total 37550
BANKSTATEMENT
Dr.
Par
ti
cul
ars (Mi
ll
ions) Cr
.(Mi
l
li
ons) Bal
.(Mi
l
li
ons)
65
Balanceb/ f 1300
ChqNo.411 100 1400
ChqNo.922 1650 (250)
Cash 2000 (2250)
ChqNo.477 37000 34750
ChqNo.511 1950 36700
ChqNo.495 4000 32700
ChqNo.905 4500 28200
ChqNo.544 600 28800
ChqNo.588 2800 31600
Minorit
yinterestdi
vi
dends 400 32000
Cash 2500 29500
ChqNo.444 500 30000
ChqNo.455 1000 31000
ChqNo.181 300 30700
Cash 3500 27200
ChqNo.379 1800 25400
ChqNo.488 1700 27100
ChqNo.500 1100 28200
ChqNo.805 2700 25500
ChqNo.774 3900 21600
ChqNo.695 6850 14750
Bankchar ges 1000 13750
S.
O- I
nterest 200 13550
Err
orsonchequesnumber ed805and181wer emadeinthebankbutanyot
hererr
ors
ar
ecashbookerrors,whil
et hebankdishonour
edchqNo.650.
Requi
red:
Reconci
lethecashbookandbankst atementbalancesanddeter
minewhethert
here
wasanyfraud/
undiscoverederrorandbyhowmuch?
Exerci
se2
On30/ 6/2004,t heba nks t
ateme ntofMUBSGui ldshowe dtheba nkaccounttoha vetohave
adebitba lanceofUGX715, 400,000.Howe v
er,ont hes ameda te,thecashbookshowe dthe
bankac c
ountt oha v eanov erdraftofUGX1, 195,900,000.
Acheckoft hebankst atementagai nstthecashbookr eveal
edt hefoll
owi ng:
i
) Che quest otal
ingUGX3, 168,
400,000pa idt ocredi
torshadnotbe enpresentedto
theba nkf orpayme nt.
i
i) AnamountofUGX150Mi ll
ionspai dascont r
ibuti
ont oassi sttheTsunami
Victimswasr ecordedasUGX15Mi lli
ons.
i
ii) Chequesamount ingt o2, 574,500,000Shi l
li
ngsbankedi nthemont hdidnot
appearont hebankst atement .
i
v ) Bankchar gesof13, 750, 000Shi ll
i
ngshadbeenr ecordedint hecashbookas
17,350, 000.
v) Achequeof35Mi ll
i
onShi l
li
ngsf ordr awinghadbeenr ecordedas53mi ll
ion
i
nt hecashbook.
66
Requi
red:
a) Adj ustMUBSGui l
dcashbook.
b) Reconci l
etheadjustedcashbookbalancewiththebankbalance.
c) St atefourmaj
orr easonswhyt hecashbookbal ancemostoftendiff
ersfrom
thebankstat
ementbal anceasatanydat e.
d) Ther eisnormall
ynoser iousneedf orprepar
at i
onofabankr econci
li
ation
stat
ementDiscuss.
67
Topi
c8
Account
ingcy
cleandYear-endAdj
ust
ment
s
Learni
ngobj ecti
ves
Bytheendoft hi
st opic,y
ouwillbeableto;
Demonst ratetheaccountingcycle
Expl ai
nt het ypesandnat ureoftheadjust
mentsr
equi
redi
nor
dert
opr
epar
e
financialstatements
Pr epareschedul esofend-ofyearadj
ust
ments.
Int
roduction
Regardlessofthetypeofbusinessortheaccounti
ngsystem used,i
tisnotpossi
bleto
keepal laccount
supt odateatallti
mes.Att heendofeachf i
nancial(
accounti
ng)
year,cert
ainaccountsmustbeupdat edbyadj usti
ngentri
es,torefl
ectthestat
usof
theorganizati
onandfinanci
alstat
ementscanthenbepr epar
ed.
Theaccount
ingcy
cle
Aft
erexami ni
ngdocument
s,journal
s,l
edgersandt hetri
albalance,weestabl
isha
sequence known as t
he accounti
ng cy
cle.The accounti
ng cyclerefer
st othe
sequenceinwhichdat
aisrecordedandprocessedunti
lthefi
nancialst
atement
sare
extr
acted.
68
Fi
nanci alstatementsar etheout putsofr ecordi
ngor ganizat i
ontr ansactions.
Thef inancialstatementsincludet heIncomest atement ,Bal ancesheet ,and
Cash-flowst atement,St
atementofchangesi nequityandNot estot hefinancial
statements.Nomi nalaccountsshowni nt het r
ialbalancear et akent ot he
i
ncomest atement .Netprof
itisaddedt othecapitalfi
gurebr oughtf orwardand
any dr awings ar e deducted tof i
nd the adjusted capi talf i
gur e.These
adjustment stakepl aceint hebalancesheet .Ther emainingbal ancesi nt he
tr
ialbalancear etakentothebalancesheet .
Year–endadj
ust
ment
s
Whyi stheadjustmentnecessary?
Profitf
ortheper i
od
Thepr ofi
torl ossofabusi nessiscalcul
atedbydeducti
ngt heexpensesincur
red
within a def
ined period fr
om t he i
ncome earned wi
thi
nt hatsame peri
od.The
accountantisconcer nedwi thincomeearnedandexpendi t
ureincur
redduringthe
periodandnott hereceipt
sandpay mentsactual
l
ymade.
Themat chi
ngconcept
The adjust
mentsf oraccrual
s and prepayment
s aret he r
esultofapplying t
he
matchingpri
nci
ple.Youshoul
drecal
lthatthi
sstat
esthatcashrecei
vedandcashpaid
shoul
dbeadj ust
edf oranypartperi
odt hatdoesnotrelat
etot heover
allperi
odin
quest
ion.
Accrual
sandPr epayment s:
Whent heincomest atementisbei
ngpr eparedforaspeci
fi
cper i
od,wemustbr i
ng
i
ntoaccount:
a)Allexpensesrelat
ingtot
hatper
iodwhet herwehav
eactuall
ypaidthem ornot.
b)Alli
temsofi ncomeandgainswhet herwehaveact
ual
lyrecei
vedthem ornot.
Forthi
spurpose,someadj
ust
ment
sar
eneededatt
heendoft
heaccount
ingper
iod
rel
ati
ngto:
i
)Accr uedexpenses–Thesear eexpenses,whi chareout st
andingandhav enoty et
beenpaid.Inor
dertoensurethatt
hef ul
lexpensesoft heperi
odhav ebeenincludedi n
theincomestatement,t
heaccountantmustensur ethattheexpenseaccount sincl
ude
notonlythoseitemsthathavebeenpai df orduringtheperiodbutanyout st
anding
amount sduef orexpenses.Accr
uedexpensesappearascur rentli
abi
li
tiesi nthe
balancesheet
.
Theaccountingentr
yi sasfoll
ows;
Dr.I
ncomestatementorr especti
veexpenseaccount
Cr.Accruedexpenseaccount
Il
l
ustrati
on;
Salar
iesandwagespai dduringtheyearamount edtoUGX6,200,
000=.Accr
uedwages
asat31stDec.amount edt
oUGX250, 000=.Showtheentr
ies
69
Dr
.Sal
ari
esandwages 250, 000
Cr.Accr
uedSal
ari
esandwages 250,
000
I
ncomest at
ement(ext
ract
) Bal
ancesheet(ext
ract
)
Sal
ari
esandwages: Curr
entl
i
abili
ti
es:
Pai
d: 6,200,
000 Accr
uedsalari
esandwages:
250,
000
Add:accr
ued 250,
000 6,
450,
000
i
i)Prepaidexpenses–Theseareexpenses, whichhavealr
eadybeenpaidbutr el
ateto
thefoll
owingaccountingperi
odort henor maloperati
ngcy cl
e.Aswellasensur ing
thatalloftheexpensesincur
redint heperiodappearint heincomestat
ement ,the
accountantmustalsoensurethatit
emsofexpenset hatrelat
etofut
ureperiods,but
havealreadybeenpaidfor
,areseparated.Pr
epaidexpensesappearascurrentassets
i
nt hebalancesheet.
Account
ingentr
yisasfoll
ows;
Dr
.Prepaymentsaccount.
Cr
.Incomestatementorr
espect
iveexpenseaccount
I
ll
ust
rati
on
I
nsur
ancepaidduri
ngthey
earamountedt
oUGX. 380,000ofwhi
chUGX. 120,
000was
pr
epaidasat31/
12.Showtheent
ri
esasarenecessar
yt obr
ingt
hissum i
ntoaccount
.
Dr
.Pr
epaymentsaccount120,
000
Cr
.Incomestatementorr
espect
iveexpenseaccount 120,
000
Incomestat
ement(
extract
) Balancesheet(ext
ract)
Insur
ance: Cur
rentassets:
Paid: 380,000 Prepaidi
nsurance:120,
000
Less:Pr
epaid 120,000 260,
000
i
ii
)Accr uedincome– Thisisi ncomer
elat
ingtothecur
rentaccount
ingperi
odor
operat
ingcyclebuthasnoty etbeenrecei
ved.Accr
uedi
ncomei spresent
edasa
curr
entassetinthebal
ancesheet.
Account
ingentr
yisasf ol
l
ows;
Dr.Accruedincomeaccount
Cr
.Incomestat
ementorr
espect
ivei
ncome/
gai
naccount
I
ll
ustr
ation
Rentrecei
veddur
ingt
heyearamountedtoUGX.650,000.Accr
uedorowedrentasat
31/12amountedtoUGX.
70,000.Showtheent
ri
esasar enecessar
ytobr
ingthi
ssum
70
i
ntoaccount
.
I
ncomest atement(extr
act) Balancesheet(extr
act)
Rentrecei
vabl
e: Currentasset
s:
Recei
v ed: 650,000 accruedrent/
rentali
ncome:
70,
000
Add:Accrued 70,000
720,000
i
v)Incomei nadvance/prepai
dincome–Thi si
sincomewhichhasalreadybeen
r
eceivedbutrel
atestothefoll
owingaccount
ingper
iodoroperat
ingcy
cle.Prepai
d
i
ncomei st
reat
edascurr
entli
abil
it
iesi
nthebal
ancesheet
.
Account
ingent
ri
esi
sasf
oll
ows;
Dr
.Incomestat
ement/r
especti
veincomeaccount
Cr.I
ncomeinadvance/pr
epaidi
ncomeaccount
I
llust
rati
on
Rentreceivedduringt
heyearamount
edtoUGX.800,000ofwhichUGX.
80,000was
recei
vedinadv anceasat31/
12.Showtheent
ri
esasarenecessar
ytobr
ingthi
ssum
i
nt oaccount.
Incomestatement(
ext
ract
) Balancesheet(extr
act
)
Rentrecei
vabl
e: Currentl
iabi
li
ti
es:
Cash/Bank: 800,0000 rentinadvance:80,
000
Less:Renti
nadvance 80,
000
720,
000
Reser
ves
Thesearethoseamounts,whicharesetasideoutofprof
it
storet
ainassetsinthe
busi
ness.Themotivemaybet ost
rengt
henthefi
nanci
alposi
ti
onoft
hebusiness.The
Amountstransf
err
edtoreser
vesaretr
eatedasunder
.
Account
ingent
ryi
sasf
oll
ows;
Dr
.Incomest at
ementaccount
Cr.Reservesaccount
Morespeci
fi
call
y,howev
er,t
heseamountsar
eshownasappr
opr
iat
ionswi
thi
nequi
ty
asshowninthestat
ementofchangesi
nequi
ty.
Pr
ovi
sions
Ar
ethoseamountswhi charesetasi
deofprof
it
sforaspeci
fi
cpur
pose.Forexampl
e;
a)Pr ov
isi
onforbaddebts,
b)Pr ov
isi
onsfordi
scountsall
owedorrecei
ved
c)Pr ov
isi
onsfordepreci
ati
on,et
c.
71
Theseprovi
sionsar
emadei nvi
ew ofsomeexpect edev
ents.Anyexpect
edfutur
e
l
oss rel
ati
ng tothe cur
rentaccount
ing per
iod mustbe char
ged t
ot he i
ncome
st
atementofthecur
rentyear
.
Baddebt
sandpr
ovi
sionf
ordoubt
ful
debt
s
Baddebt s:Debtsduef r
om debtorsar eshownasanasset .Whenadebtbecomes
i
rrecover
able,itmustbewrit
tenoffasbaddebt ;otherwise,thebalancesheetwi l
lnot
show at rueandf ai
rv i
ew ofreceivables/debt
ors.Act uall
yifadebti sconsidered
uncoll
ecti
blethenitwouldbepr udentt oremov eittotall
yf r
om theaccount sandt o
chargetheamountasanexpenset ot heincomest atement .Theorigi
nalsaleremains
i
nt hebooksast hisdi
dactuall
ytakepl ace.Thedebti showev erremov edasitisnow
consider
edt hatthedebtwi
llneverbepai dandanexpensei schargedt otheincome
statement.Thisbaddebti
sregardedasal osstothebusi ness.
Wet
reatthi
sasunder:
Dr.Baddebtswri
tt
enoffaccount
Cr.TheRecei
vabl
es/
debtorsaccount
.
Attheendoft heyear:
Dr
.Incomest at
ement
Cr.Baddebtswr i
tt
enoffaccount
Theseentrieseff
ectiv
elycl
osetheBaddebtswri
ttenoffaccount
,creat
eachargeto
theincomest at
ementandt heReceivabl
es/
debt
orsrestat
edtoar ecover
abl
efigur
e
(net
).
I
ll
ustrat
ion
Asat31/ 12,UGX.200,000owingfrom PBushwaswr
it
tenof
fasbaddebt
.Showt
he
necessaryentr
iesi
nt hel
edgeraccount
s.
PBush
Dec31Bal
b/f 200,
00031-Dec
B/debt
s
W/O 200,
000
200,
000 200,
000
Baddebtswrit
tenoffaccount
De31PBush 200,00031-Dec
Incomestatement 200,
000
200,000 200,
000
Baddebtsrecovered:Baddebtswri
tt
enoffi
ntheprev
iousaccountingperiodsmaybe
recov
eredatalaterstageinsomecases.Inot
herwordst hereisapossiblesit
uati
on
wheredebtiswritt
enoffasbadinoneaccount
ingper
iod,perhapsbecauset hedebt
or
hasbeendecl ared bankr
upt,and t
hemoney ,orpartoft hemoney ,duei sthen
72
unexpect
edlyreceivedinasubsequentaccount
ingper
iod.Theser
ecov
eredbaddebt
s
areregar
dedasgai nandar et r
eat
edasunder:
Step1Reinstat
et hedebt or
:
Dr
.Receivables/debtors
Cr.Baddebtsr ecovered
St
ep2Recordthereceiptofcashorcheque:
Dr
.Bank
Cr
.Receiv
able/debtors
Notet
hatthi
sistheusual ent
ryforcashr
ecei
vedf
rom acust
omer
.
Thisdoubleentr
ymaybesi mpli
fi
edt o:
Dr
.Cashaccount
Cr
.Baddebt sr
ecov eredaccount
Ast hedebitentryandcr edi
ttot herecei
vablesaccountcancel
souteachot her
.
Howev er
,itmaybeusef ultopasst hetr
ansact
ionthr
oughthecustomer’
saccountso
thatthef
actthatthedebtwasev entual
lypai
d,orpart
lypai
d,i
srecordedt
her
e.
Step3
Dr
.Baddebt srecoveredaccount
Cr
.Incomest at
ement
Thisl
astentryeff
ectivel
ycl osestheBaddebt
srecov
eredaccountandr
ecogni
zes
i
ncomeintheincomest atement .
Not
e:I
nexami nati
ons,i
tispossi
blet
oci
rcumv entt
heabovestepsbysi
mpl
y:
Dr.Bank/cash
CrIncomest atement
Ast
hesewill
bet heonlyaccount
swhosebalanceswil
lbeaff
ected.
Provisi
onf orbadanddoubt fuldebt
s:I ti
samat terofcommonexper i
encet hatsome
partofdebt s outstanding att he lastdat e oft he accounti
ng per iod becomes
i
rrecoverablelat
er.Inotherwor ds,adoubt fuldebti soneaboutwhi cht hereissome
causeforconcer nbutwhi chisnoty etdefi
nitel
yirrecover
able.Therefore,alt
houghiti
s
prudentimmedi atel
yt orecognizethepossi bleexpenseofnotcol lectingthedebtin
theincomest atement ,i
twoul dalsobewi set okeept heorigi
naldebti nt heaccount
s
i
ncaset hedebt ordoesi nfactpayup.Thi si
sachi evedasbelow.
Theanti
cipatedlossmustbeal sot akenintoaccountf orthecomput ationofcor r
ect
amountofnetpr ofit
.Fort hispur pose, aprovi
sionforbadanddoubt f
uliscr eatedand
i
tischargedt othei ncomest atement .Thisprov i
sioniscredit
edt othepr ovisionfor
baddebtsaccountandi sshownasadeduct i
onf r
om Totalreceiv
ables/debtorsi nthe
bal
ancesheet .Thepr ovisionf orBaddebt smaybecomput edi nthef oll
owi ngtwo
ways.
i.Anti
cipatedbaddebt smaybeaddedupt oat otalfi
gureforthepr ovisi
onf orbad
debts.
i
i.Aspeci fi
cper centageoft otalr eceiv
ables/debtor
smaybecomput edt ogett he
provi
sion figure.This per cent age depends upon debt s notr ecov er
ed i nt he
73
pr
evi
ousper
iodsandi
twi
l
lbedi
ff
erentf
ordi
ff
erentf
ir
ms.
Pr
ovisi
onf ordiscountal l
owed.
(
i)Oncr eati
on;
Dr
.Incomest atement
Cr.Provisi
onf ordi scountal
lowedaccount.
(
ii
)ToI ncrease:
Dr
.Incomest atement( wit
hincrease)
Cr.Provi
sionf ordiscountall
owedaccount
(
ii
i)Todecrease:
Dr
.Provisi
onf ordi scountall
owedaccount
Cr.Incomest at ement( wi
ththedecrease)
Provisi
onf orDiscountr ecei ved:
(j
)Oncr eati
on;
Dr.Provisi
onf ordiscountr eceivedaccount
Cr .I
ncomest at
ement
(i
i
)ToI ncrease:
Dr.Provisi
onf ordiscountr eceivedaccount)
Cr.Incomest atement( wi ththeincr
ease)
(i
i
i)Todecr ease:
Dr.I
ncomest atement( wi thdecr ease)
Cr.Provisi
onf ordiscountr eceivedaccount
.
The balance on t he pr ovision f ordiscountrecei
ved accounti
s shown as a
deducti
onf rom credit
orsi nt hebal ancesheet
Depreci
ati
on:
AllTangi
blenon-curr
entassetsexceptlanddepreci
ate.Depreciat
ionisdefi
nedasthe
all
ocati
onofcostoft hedepreciabl
eamountofat angiblenon-curr
entassettothe
yearsinwhichbenef i
tisexpectedfrom theuseofthatasset .(‘
Depreci
abl
eamount’
meansbookv aluelessresi
dualv al
ue).I
AS16:Property
,plantandequipment;r
equi
res
thedepreci
ati
onmet hodusedt or efl
ectthepat
ternintheasset ’
seconomicbenefi
ts
74
areconsumedbyt
heent
erpr
ise.(
Depr
eci
ati
onaccount
ingwi
l
lbedeal
twi
thl
ateri
n
thet
ext).
Attheendoft heyear,depreci
ati
onmustbepr
ovi
dedonTangi
blenon-cur
rentasset
s.
Her
e;
Dr.Depreci
ati
onexpenseaccount
Cr.Accumulated/provi
sionf
or/
aggr
egat
edepr
eci
ati
onaccount
Att
heendoftheoperati
ngcycle/fi
nancial
y ear,
Dr.I
ncomestatement(wit
ht hedepreci
at i
onexpense)
Cr.Theassetaccount(
withtheaggr egatedepr
eciat
ion)
Note:
Thisent
ryi
snecessaryasfarasiti
snecessaryt
ocomplywit
hther
equi
rement
s
ofIAS16:Tangi
blenon-cur
rentasset
stoshow t henetbookval
ueoftheasseti
n
quest
ion.
Corporationtax:
Ifdraf
taccount soft hebusi nesssuggestt hatnetprofitisearned,apr ovi
sionmustbe
madef orcorporationt axtobepai d.Taxat i
onisreal.Apr ovisi
onf orcorporat
iontax
theref
or ebecomesal i
abil
it
yi nthebalancesheetbecausei tsatisf
iest hedefi
nit
ionof
al i
abi
lity;apresentobl i
gationarisingfrom pastev ents,theset t
lementofwhi chis
expectedt oresultinanout flowofr esourcesfrom t
heent erpri
se.
Thust heaccount ingent r
yrequiredis:
Dr .I
ncomest atement( wi
tht heprovisi
onforcor porati
ontax)
Cr.Corpor at
iontaxpay able
ProposedDividends:
Divi
dendsar ear ewar dtoShar eholders.Ifprofi
tsar emade,someofi tmustbe
appropri
atedt oshareholdersasdi v
idends.Wher edi
videndshav ebeenpr oposedafter
thebalancesheetdat e,thenonlydi sclosur
easanot etof inanci
alstatementsi s
requi
red.Thisisonl ynecessarytocompl ywit
hIAS10:Ev entsaf t
erthebalancesheet.
Howev er
,wher ethedi vi
dendsarepr oposedbef orethebal ancesheetdat e,thenan
obli
gati
onexi stsatt hebalancesheetdat eandapr ovisi
ont hatbecomesal i
abil
it
yas
perIAS37i srequired.
Thus;
Dr.I
ncomest atementAppr opri
ationaccount(proposeddi vi
dend)
Cr.Dividendspay able(Bal
ancesheeti tem)
75
Topic9
Pr
epar
ati
onoff
inanci
alst
atement
s
Learningobjecti
ves
Bytheendoft hi
stopic,y
ouwi llbeabl eto;
Pr epareawor ksheetIncl
udingt headjustmentofatrialbal
ance
Dr aw upasetoff inancialst at
ement sfrom at r
ialbalancepl
usaddi
ti
onal
i
nformation.
Incor por
atetheadjustment slearntfr
om theprevi
oust opic
Int
roduction
Thefinancialcondit
ionandt heresultsofoper ati
onsofbusinessent er
pr i
sesar
eof
a maj or interest to many gr oups including owner s,manager s,cr edi
tor
s,
governmentagenci esparticularl
yt hetaxbody ,employeesandpr ospectiveowners
andcr edit
ors.Thef i
nancialst at
ement sar etheout put
sofanaccount ingsystem.
Thepr inci
palf i
nancialst
at ement s,togetherwi thsupplementar
yst atementsand
schedules,pr esentmuch oft he needed basi cinformat
ion to make sound
economi cdecisionsregar
di ngbusi nessenterprises.
Inthepr evioustpics,t
hemainareasofdoubleentr
ybookkeepi ngthatr
esult
edin
thet r
ialbalancehav ebeencovered.Toget
herwi t
ht hi
s,wel ookedatthemost
frequentendofy earadj
ust
ments.Thi
sTopicwillbr
ingtogetheranassimil
ati
onof
allsuchi nformationandaful
lset(exceptf
orcash- f
low st
atements)offi
nanci
al
statement sprepared
Acompletesetoffinancialst
atement sincludesthef
ollowi
ngcomponents:
B al
ancesheet
Incomest atement
As tatementshowi ngeither:
o Allchangesi nequity
, or
o Changesi nequi t
yot herthant hoseari
singfr
om capi
talt
ransact
ions
wi
thowner sanddi stri
buti
onst oowners.
C ashflowstatement
A ccounti
ngpol i
ciesandexpl anatorynotes.
Asment i
onedearl
ier,weshal
lrest
ri
ctoursel
vest
otheincomestat
ement ,
Statement
ofchangesinequi
tyandthebalancesheetf
orpur
posesofthi
spaper.Theotherones
weshallcometolaterint
hecourse.
INCOMESTATEMENT
Thisst at
ementdi scl
osest hefi
nancialperformanceoft heent erpri
seduri
ngagi ven
year/operat
ingcy cl
e.Thati swhethert heoper ati
onsoft heent er
pri
seresult
edi na
profi
torl oss.Itisthereforeapr of
itabil
i
tystat ementthatshowsanor ganizat
ion’s
revenuesandexpendi turesorcost sinapar t
icularperi
odended.Thi sstatementi s
normal l
y prepared beforet he balance sheetbecause t he ending fi
gure after
subtracti
ngexpendi t
uresf r
om incomes( netorr etai
nedpr of
its/l
oss)connectsthe
76
i
ncomest
atementandbal
ancesheet
.
I
nit
ial
l
yitiscr
it
icalt
oappreciat
ethatt
heincomestat
ementi
spar
toft
hedoubl
eent
ry
bookkeepi
ngsystem,whereasthebal
ancesheeti
snot.
Theincomest at
ementhast hreecomponent s:Thet r
adingaccountt
hatrangesfrom
thesalesr
evenueupt ot
hegr osspr of
it
,thepr of
itandlossaccountt
hatrangesfrom
grossprof
itupt onetprof
itaf t
ertax.Manuf act
uringcompanieshaveanaddi t
ional
accountcall
edt heManufacturi
ngaccountormanuf actur
ingcoststat
ement.This
stat
ementwillbegiv
enit
sduet r
eat
mentl at
er.
Howev
er,t
heIncomeSt at
ementforser
vicef
ir
msl
i
keNat
ionalwat
erandsewer
age
Cor
por
ati
onar
esl i
ght
lydif
fer
enti
nfor
matThus;
XYXI
ncomest
atementf
ory
earended_
___
___
__
77
Incomes/revenues xxxx
Less:Expenditures: xxxx
Netincomesbef orefi
nancecostsandt
axat
ion xxxx
Financecosts (xxx)
Netincomes/ profi
tbeforet
axati
on xxxx
Taxation (xxx)
Netincomes/ profi
tfortheyear xxxx
Note:Financecost
sincl
udeitemsofI
nter
estonloans,over
draf
ts,debent
ures;Lease
chargesandanyothercost
sincur
redi
nrai
singf
inances.
St
atementofchangesi nequi
ty
I
llustrati
veStat
ementofchangesi
nequi t
yFormatBasedonI AS1
Shar
e Shar e Revaluati
on Transl
ati
on Acc. Tot
al
capi
tal premium r eser
v e reser
ve prof
it
Openi ngbal ance x X x x x x
Changes in accounting - - - - x x
policies
Rest atedopeni ngbal ance x X x x x x
Rev aluati
ons - - x - - x
Transl ati
ondifferences - - - x - x
Net gai ns or l osses not
recogni zed i
n income - - x x - x
statement
Netpr ofi
tfortheper i
od - - - - x x
Dividendspai d - - - - (x) (
x)
Issueofshar ecapital X X - - - x
Closingbal ance X X x x x x
Acompar at
ivest atementf ort
hepr i
orper i
odmustalsobepublished.
Adjustment st ot heopeni ngbalancef igur
esforchangesinaccount ingpol
icyappear
fi
rst.Thecor recti
onofaf undamentaler r
orwouldappearinthesameposi ti
on.The
orderoft her emai ningit
emsi ssigni
ficant.Theordertor
ememberi s:
Rev aluati
ons
Subt otalofnetgai nsandl osesnotr ecogni
zedinthei
ncomest at ement
Netpr of
it
/ l
ossf ortheper i
od
Di videndspai dintheper i
od
I ssuesorr eductionsofshar ecapital
BALANCESHEET
Thisstatementshowst hef i
nanci
alposit
ionofanor ganizati
onatapar ti
cul
ardate.
Thebalancesheetsati
sfiestheAccounti
ngequati
onofASSETS=OWNER’ SEQUITY+
LI
ABILITIES.Thebal
ancesheeti smuchmor eaki
ntothet r
ialbalance,
beingabalance
ofthel edgeraccount
saf t
erdouble-
entr
yhasbeencompl eted,andrequir
ingthat
debit
st hereonmustequalcr edi
ts.I
tisanor deredlistofal ltheledgeraccount
bal
ancesr emaini
ngoncet heincomestat
ementhasbeenpr epared.
78
Asami ni mum,t hef aceoft hebal ancesheetshoul
dincludelineitemswhi chpresent
thefol
l
owi ngamount s.
1.Itemsofpr operty,plantandequi pmenteg.Land,Buil
dings,fixt
uresandf i
tti
ngs
Machi nery,etc.
2.Intangi bl
easset slikeGoodwi l
l
,Patent
sandt r
ademar ks,Developmentcost s,
etc.
3.Financi alasset s(excl udingamount sshownunder4, 6and7)
4.Inv estment s
5.Inv entori
es
6.Tr adeandot herpay ableslikedebtorsetc
7.Cashandcashequi v alents
8.Tr adeandot herpay ableseg.Tr adecredi
tor
s
9.Taxl i
abili
ti
esandasset sasr equi
redbyIAS12:Incomet axeseg.Cor porati
on
taxpay able
10.
Pr ov i
sions
11. Non- currentinterestbear i
ngbor r
owings
12.
Mi nor i
tyinterest
13.
Issuedcapi talandr eser ves.
79
Minority
I
nterests* * Xx
xx
Noncur r
entLiabili
ties:
Bankl oans xxxx
Debent ures xxxx
Preferenceshar es( redeemable) xxxx Xx
xx
Currentliabil
i
ties:
Tradeandot herpay ablese.g.cr
edi
tors xxxx
Shortterm bor rowingse. g.
overdrafts xxxx
Taxation xxxx Xx
xx
Totalequi t
yandl iabili
ti
es Xx
xx
**Thisitem isdeal twi t
hinthethi
rdyearofst
udy
.
Exampl e1
Thef oll
owi ngbalanceswereext
ractedfr
om t
hebooksofEl
gonHeightsLt
daty
ear
-
end31Dec. 2002.
AccountTi tle UGX’000s
Shar ecapi tal 75,
000
Creditor s 22,
472
Invent ory31.12.2001 41,
415
Debt ors 28,
560
Bank 16,
225
Machi neryatcost 28,
000
Accumul ateddepr eci
ati
on–Machinery 18,
000
Accumul ateddepr eci
ati
on–Motorvehicl
e 12,
600
Sales 97,
500
Purchases 51,
380
Mot orexpenses 8,
144
Mai ntenance 2,
308
Uti
liti
es 1,
076
Wagesandsal ar
ies 11,
372
Dir
ect orsr emuner at
ion 6,
200
Retainedear ni
ngs 6,
138
Gener al reserve 8,
000
Thefol
lowinginformati
onisalsor elev
anttothecompanyf ortheper
iodf orwhi
chthe
bal
anceswer eextract
ed.
i) StockatDecember31wasUGX. 54,
300,
000
ii
) Mot orexpensesofUGX. 445,000werenotpaidorrecordedany wher
einthe
books
ii
i) Ut il
i
tiesofUGX.500,000wer eprepaid
iv) Adi v i
dendofUGX.7,500,000waspr oposedon28thDec.butisnotpaid
v) At r
ansferofUGX. 2,000,000tot hegener
alreserv
ewasappr ovedbutnot
made
80
v
i) Depr
eciat
iononnoncurr
entasset
stobepr
ovi
dedatt
her
ateof20%usi
ng
ther
educi
ngbalancemet
hod
Required
PrepareJournalentr
ies,I
ncomest
atement
,st
atementofchangesi
nequi
tyandt
he
balancesheetfort
hecompany .
Sol
uti
on
El
egonHeightsGener aljour
nalshowingadj usti
ngent
ri
es
i
) Cl osi nginventory 54,
300,
000
Tradingaccount 54,
300,
000
i
i) Mot orvehicl
eexpenses 445,
000
Accruedmot orvehicl
eexpenses 445,
000
i
ii
) Pr epaidutili
ti
es 500,
000
Util
i
tiesexpenseaccount 500,
000
i
v) Ret ainedear ni
ngs 7,
500,
000
Di
v i
dendspay abl
e 7,
500,
000
v) Ret ainedear ni
ngs 2,
000,
000
Gener alr
eser v
es 2,
000,
000
vi
) Depr eci
ati
onexpense–mot orv ehicl
e 3,
080,
000
Accumul ateddepreciati
on–Mot orvehicl
e 3,
80,
0000
Depr eci
ati
onexpense–Machi ner y 5,
400,
000
Accumul ateddepreciati
on–Machi nery 5,
400,
000
ElgonHei
ghts
I
ncomest atementsfort
heyearended31.12.2002
(Amountsi
nUGX’000s)
Sales 97,500
Less:Costofsal es
Openi ngst ock 41,
415
Add: Pur chases 51,380
Goodsav ailabl
eforsale 92,795
LessCl osi ngSt ock 54,300
Costofgoodssol d (38,495)
Grosspr ofit 59,005
Less: Oper at i
ngexpenses
Mot orexpenses 8,
589
Mai ntenance 2,
308
Uti
liti
es 576
Wagesandsal ari
es 11,372
Dir
ect ors’ remunerati
on 6,
200
Depr eciation: Motorvehicl
e 3,
080
Machiner
y 5,
400 (37,525)
Profitfort hey ear 21,480
81
El
gonHei
ght
sStat
ementofchangesi
nequi
ty
(
Amountsi
nUGX’000)
Shar
ecapi
tal General Acc.pr
ofi
t Tot
al
reserv
e
Openi ngbal ance 75,
000 8,000 6,
138 89,
138
Net pr of
itf or the - 21,
480 21,
480
period
Transf er t o G. 2,000 (
2,000)
reserve
Divi
dendspay abl
e– (
7,500) (
7,500)
Ordinar y
Closingbal ance 75,
000 10,000 18,
118 103,
118
ElgonHeight
s
Bal
ancesheetasat31.12.
2002
Amount
( si
nUGX’000s)
EQUITYANDLI ABI
LITI
ES
Shar
ecapital
andreserves:
Shar
ecapital 75,
000
General
reser
ve 10,
000
82
Retainedearnings/accumulat
edprof
it
s 18,
118 103,
118
Currentli
abi
lit
ies
Tradecredit
ors 22,
472
Accruedmot orv ehicl
eexpenses 445
Divi
dendspay able 7,
500 30,417
Totalequit
yandl i
abil
i
ties 133,535
Exampl
e2
TheBookkeeperofMwengeCompanypr
epar
edt
hef
oll
owi
ngt
ri
albal
anceatt
heend
ofit
sfi
nanci
alyearon31December
.
Tr
ial
bal
anceasat31/
12
Dr. CR.
(UGX.'
000)(UGX.'
000)
Cashathand 2,
000
Cashatbank 4,
000
Land, cost 100,
000
Mot orv ehicle,cost 10,
000
Accumul ateddepr eciation-mot orvehi
cle 2,
000
Equi pment ,cost 20,
000
Accumul ateddepr eciation–equi pment 4,
000
Invent ory1/ 1( Openi ngi nventory) 1,
000
Pay abl es( debtors) 5,
000
Prov isionf orbaddebt s 2,
000
Tradecr editors 3,
000
Sales 200,
000
Purchases 110,
000
Discountal l
owed 2,
000
Discountr eceived 1,
000
Purchasesr eturns( Ret urnsoutwar ds) 5,
000
Salesr eturns( Returnsi nwar ds) 10,
000
Carriagei nwar ds 6,
000
Salar i
es 8,
000
Salar i
espay able(accr uedsal ar
ies) 15,
000
Rent 1,
800
Electr i
city 7,
000
Baddebt s 1,
200
Capi tal 26,
000
Long- ter m BankLoan 30,
000
288,
000 288, 000
Youascer
tai
nthef
oll
owi
ng
83
(a)Closi
ngInv entor
yatt heendoft hey earwasv aluedatUGX. 20,
000,000
(b)Salar
iesofUGX. 2,
000,000accr uedorr emainedout standingattheendoft he
yearandwasnotr ecordedi nthetri
albalance
(c)Halfofther entpai
di sfortheforthcomingfinancial
y ear
(d)Depreci
ateTangi bl
enon- currentassetsby20%oncostatt heendoftheyear
(e)20% oft r
adedebt or sareexpect edt odefault
;apr ov i
sionagainstbaddebts
needstobemade.
Required:
Ast hecompany ’sAccount ant,pr
epar eMwengeCompany ’sIncomest atementf
orthe
yearendi ng31/ 12andt hebal ancesheetasatt hatdat e.Besur et ojour
nal
ize
adjusti
ngentri
es.
Soluti
on:
MwengeCcompany .General
Journal
fortheperiodending31/ 12
DR. CR.
(a)Closingi nv entory 20, 000,000
Tradi ngaccount 20,000,
000
(b)Salariesexpense 2,
000,000
Sal ariespay able 2,
000,000
(c)Rentpr epai d 900,
000
Rentex penseaccount 900,
000
(d)Depreci ationexpenseaccount( motorvehi
cle) 2,
000,000
Accumul ateddepreci
ati
onaccount 2,
000,
000
Depreciat i
onexpenseaccount( Equipment) 4, 000,000
Accumul ateddepreci
ati
onaccount 4,
000,
000
(e)Baddebt sexpense 1,000,000
Baddebt spr ovi
sion 1,
000,
000
MWENGECOMPANY
INCOMESTATEMENTFORTHEYEARENDED31/ 12
(
Amountsinthousandsofshil
li
ngs)
Salesrevenue 200,
000
Returnsinwar ds (10,000) 190,
000
Costofsal es:
Openingi nv entory 1,000
Purchases 110,000
Returnsoutwar ds (5,000)
Carri
agei nwar ds 6,
000
Closi
ngi nv entory (20,000) (92,
000)
Grosspr ofit 98,
000
Other(mi scel l
aneous)i ncomes–discountrecei
ved 1,
000
Less:oper at i
ngi ncomes:
Depreciation–Mot orvehi
cles 2,
000
_Equi pment 4,000
Baddebt s( 1000+1200) 2,200
Discountal lowed 2,000
Salari
es: Pai
d 8,
000
84
Accrued 2,000 10,
000
Rent
: Paid 1,800
Prepai
d (900) 900
El
ectr
ici
ty 7,
000 (
28,
100)
Netprof
itf
ort
heper
iod 70,
900
MWENGECOMPANY
BALANCESHEETASAT31/ 12
Amount
( sint
housandsofshi
l
li
ngs)
ASSETS
Tangi
bleNon-cur
rentasset
s: COST AGG.DEPN NBV
Land 100,
000 Nil 100,
000
Motorvehi
cle 10,
000 4,
000 6,
000
Equi
pment 20,
000 8,
000 12,
000
130,
000 12,
000 118,
000
Currentassets:
I
nv entory 20,
000
Trader ecei
vabl
es 5,000
Provision(2000+1000) (3,000) 2,
000
Prepay ments–Rent 900
Cashandcashequi val
ents(
2000+4000) 6,
000 28,
900
Total asset
s 146,
900
Exercise1
Thet ri
albalanceofFut iBit
angwaLt dhadthefoll
owi
ngt
ransact
ionsforthey
ear
st
ending31
Parti
culars Debi
t Credit
10% pr eference share Capi
tal(redeemabl
e) 50,000,
000
@1000
Ordinarysharecapital
@ 1000 80,000,
000
Incomest atementbalance31.12.
2003 26,800,
000
85
Inventory1. 1.2004 99,
000,
000
Salesr evenue 886,
000,
000
Returnsi nwar ds 42,
000,
000
P++. -
u02/ rchases 328,
600,
000
Salari
esandwages 118,
000,
000
Debent urei nterest 46,
800,
000
Directors’remuner ati
on 97,
000,
000
Baddebt s 7,
000,
000
Legal andaudi tfees 43,
000,
000
Returnsout war ds 68,
000,
000
Freehol dpr operty,cost 180,
000,
000
Costofpl antandmachi nery 350,
000,
000
Costofmot orVehi cles 62,
000,
000
Cashandbankbal ances 31,
000,
000
Tradedebt or s 36,
000,
000
Debent ures( r
edeemabl ein5y ears) 239,
000,
000
Provisionsf orbaddebt s 15,
000,
000
Accumul ateddepr eciati
on–Mot orVehi
cles 8,
000,
000
_Plantandmachinery 35,
000,
000
Tradecr edi tors 36,
600,
000
Int
erim pr eferencedi vi
dend 4,
000,
0000
1,
444,
400 1,
444,
400
Youascert
ainthat ;
a.Inv entoryv alueon31. 12.2004wasUGX. 33,000,
000
b.Depr eciat
ioni schar gedatar ateof10%onmot orVehicl
esand5%on
Pl
antandMachi neryalloncost.
c.LegalandAudi tfeesofUGX. 13,000,
000r el
atetot heyearstar
tingon
1.
1. 2005
d.UGX. 2,000, 000accr uedonsal ar
iesandwageswhi l
e1,200,
000accr ued
ondebent urei nt
erest.
e.The di rectors agr eed to pay the remai ni
ng amountofpr eference
di
v i
dendsatt hecloseoft heyear.Theyal soproposedtopayadi vidend
of200=pershar etoordinar
yshareholderson29thDec.2004.
Requir
ed:
i
)Showt hejournal entr
iesf oralltheaboveadjustment s.
i
i)Prepar
ethei ncomest atement ,st
atementofchangesi nequityandbalancesheet
ofthecompanyatt heendoft heyear2004.
Exer
cise2
TheAccountantofSmar tPart
ner
shipLt d.prepar
edt hefol
l
owi
ngt
rai
lbal
ancef
ort
he
fi
nancial
yearended31/8/99.
Dr.UGX. Cr.UGX.
Land,cost 150,000,000
Machinery,
costUGX.60,
000,000 54, 000,000
Cash 15,000,000
Bank 3,000,
000
86
Tradepay abl
esand
receiv
ables 8,
000,
000 6,
800,
000
I
nv entor
y,1/9/
1998 5,
000,
000
Salesrevenue 200,
000,
000
Purchases 100,
000,
000
Returns 5,
000,
000 10,
000,
000
10%t reasurybi l
ls 60,
000,
000
El
ect r
ici
ty 1,
000,
000
Baddebt s 500,
000
Salari
es 6,
500,
000
Rent 2,
000,
000
Prepaidrent 4,
800,
000
Accumul atedl osses,
1/9/98 2,
000,
000
Baddebt spr ov i
si
on 4,
000,
000
4y earUDBl oan 40,
000,
000
Ordinaryshar ecapital
Issuedand
fullypaidshar esofUGX. 50,
000
@ 150,
000,
000
413,
800,
000413,
800,
000
Exercise3
Thef oll
owingtr
ail
bal
ancewasextr
act
edf
rom t
hel
edgerofNy
abushozi
Plcatt
heend
ofit
sf inanci
aly
earon28/2/
1999.
87
Dr.
UGX. Cr
.UGX.
'
000 '
000
Ordi nar yshar ecapi t
al(40,000shar
es) 40,
000
Pref erenceShar eCapital(10,
000shar
es) 20,
000
Machi ner ycost 30,
000
Mot orv ehiclescost 20,
000
Land, cost 63,
000
Pat ent 5,
000
Recei vables 4,
000
Pay abl es 6,
000
CashBal ance 14,
000
Bankbal ance 2,
000
10%Tr easur ybills 3,
000
Tradi ngI nv entory
1/3/ 1998 2,
500
Gener al expenses 1,
400
Sales 200,
000
Ret urnsi nwar ds 1,
500
Baddebt s 100
Pur chases 150,
000
Discount s 1,
000
Car riagei nwar ds 3,
500
Ret urnsout war ds 6,
500
Salar ies 4,
200
Insur ance 1,
800
Aggr egat edepr eciat
ion:
Machinery 6,
000
MotorVehicl
es 8,
000
Interim pr eferencedi vi
dends 1,
500
Baddebt sprov i
sion1/3/98 500
5y ear 'sbankl oanacqui r
edon1/ 9/
98ati
nter
estof20%pa 10,
000
Accumul atedpr ofits 7,
500
306,
500 306,
500
Thef
ollowinginf ormati
oni salsor el
evant.
1.Tr adingI nventor
yon28/ 2/1999wasv aluedatUGX.4, 000,000
2.InterestonTr easurybil
lsandbankl oanaccr ued.
3.Machi neryist obedepr eciatedby10%andMot orVehicl
esby20%onr educing
balancemet hod.
4.Thepr ov i
sionforbaddebt sshoul dbeincreasedto20%ofdebt ors.
5.Inaddi t
iont otheinteri
m div i
dendpaidonpr efer
enceshar es,afurt
herdi
vi
dend
ofUGX. 200perPr efer
enceShar e,waspr oposedon3/ 3/2000
6.AnamountofUGX. 2,000,000wasappr opriatedtoPlantreplacementr
eserv
e.
88
I
gnor
eTaxat
ion
Required:
(a)Jour nal
izeadj
ust
ingent
ries
(b)Prepar ethe company’
sI ncome stat
ementf orthe yearended 28/
2/99,a
statementofchangesinequityandabalancesheetasatthatdat
e.
+-
-
*
.
89
Topi
c10
SuspenseAccountsandcor
rect
ionofer
ror
s
Learni
ngobjecti
ves
Bytheendoft hetopicyouwillbeableto;
Describetheerrorsnotdetectedbythetr
ialbal
ance
Correcttheerrors
Describethereasonswhysuspenseaccount sar
eestabl
i
shed
Prepareast at
ementofcor rectednetpr
ofit
Restatethebalancesheetaf t
erthecorr
ecti
onoferror
s
Int
roduct i
on
Asuspenseaccounti sat empor alaccount .Iti
sanaccounti nwhi chdebi t
sorcr edi
ts
areheldt empor aril
yunt ilsuff
ici
enti nfor mati
onisav ail
ablefort hem tobepost edt o
thecorrectaccount s.Ther earet wosi tuati
onswher easuspenseaccountmi ghtbe
needed.
The bookkeeperknows i n whi ch accountt o make t he debitent ryf ora
transacti
onbutdoesnotknowwher etomaket hecor r
espondi ngcr editentry
.
Unt i
lthemy steryi ssortedout ,thecreditentr
ycanber ecordedi nasuspense
account .At ypicalexampl eiswhent hebusi nessr eceivescasht hr ought he
postf rom asour cewhi chcannotber eadil
ydet ermined.Thedoubl eent ryin
theaccount swoul dbeadebi tint hecashbook,andacr edittoasuspense
account .Simi larl
y ,whent hebookkeeperknowsi nwhi chaccountt omakea
creditent ry,butf orsome r eason does notknow wher et o make t he
correspondi ngdebi t,
thedebi tcanbepost edtoasuspenseaccount .
Whenat rialbal ancei spreparedandi tfai
lstobalance.Thedi f
ferencebywhi ch
i
tf ai
lstobal ancei stempor ar
il
yr ecordedinasuspenseaccountunt iltheer r
ors
arediscov eredandcanbecor r
ect ed.
Recal
lthatthepur poseoft hetr
ialbal
anceistochecktheaccuracyofthebooks.
Speci
fi
call
yitdet ectswhether;
Thepr inciplesofdoubleentr
ywerefol
lowedornot
Thear i
t hmet i
cerr
or sweremadeinbalanci
ngof
fthel
edgeraccount
s.
Whenent r
iesar emadei nthebooksofaccount , somewr ongposti
ngsorcalcul
ations
are possible and these are known as er r
or s.When di scover
ed,the necessary
corr
ectingentriesmustbemadei nt heaccounts.Theer r
orsmaybeoft wotypes;
Thosewhenmade, donotaf f
ectthetrial balance
Thosewhenmade, wil
laff
ectthet r
ialbal ance
Oncet heseerror sar
ef ound,theymustbecor rect ed;and,forthecor
rect
ionoft hese
err
ors,t he necessaryj our
nalent r
ies are made.The use oft he j
ournalfort he
corr
ectionofer rorsi
sacommonf eature.
Theref
ore,t
heseer
rorsrel
atet
oincor
rectaddi
ti
ons,subtr
acti
ons,orentr
iesont he
wrongsideofthebooks.Fort
hecorr
ecti
onoftheseerrors,asuspenseaccountis
90
openedandt hedi f
ferencei nt hetri
albal anceispostedinthisaccount.Ifthedebit
si
deofat r
ialbalancei ssmal lerthenthisamounti sdebit
edint hesuspenseaccount
andwhent hecr editsidei ssmal l
er,thent hisamountcr edit
edt othesuspense
account.When t hose errors affecti
ng t he tr
ialbal
ance are di
scovered,theyare
correct
edinbyt hedoubl eent ryt
hrought hesuspenseaccount .Asweshal lseelat
er,
whenal ltheseer r
orsar edi scoveredandcor rect
ed,thebalanceont hesuspense
accountiseliminated.Inthiscase;
Dr .Respecti
v eA/ CifOmi tted
Cr
.Suspenseaccount
Dr .Suspenseaccount
Cr
.Respect iveaccounti fomitted
I fanydebi tent r
yhasbeenmadeont hecredi
tsidethent ocorrectit,doubl
e
amountsmustbedebi tedandv i
cev ersa.
Ty
pical
ly,t
herearet womai nreasonswhysuspenseaccount smaybecr eat
ed:
1)Ont heextracti
onoft hetr
ialbal
ance,t
hedebitsarenotequalt
ot hecredit
sand
thediff
erenceisputt oasuspenseaccount
2)Ofcour se,theot heroneiswhent hebookkeeperper
formingdoubleentryisnot
surewher et opostonesi deofanentryhemaydebi tarecreditasuspense
account.
Note:Therul
eforcor r
ecti
ngt heseerror
s(thati
sthoset
hatdoanddonotaffectthe
agreementofthet r
ialbalance)is;Theentrywhichwasmadecorr
ectl
y,maket hat
entryi
ntothesuspenseaccountandt heentr
ywhichwasnotmadeprev
iousl
y,make
thatent
ryi
ntherespectiv
eaccount .
Err
orsthatcannotbedetect
edbythet
ri
albal
ance
Speci
fi
call
y,thefol
lowi
ngerror
sdonotaf
fectt
heagr
eementoft
het
ri
albal
ance.
i
. Er r
or sofOmi ssion. Thisiswhenat r
ansact i
oni scompl etelyomi ttedfr
om
thebooksofaccount .Forexampl ei fgoodswer esol dSar ahf or300, 000cash
buti tisnotr ecor dedany wher ethet ri
albalancewi llagree
i
i
. Er r
or sofCommi ssion;Thi st y
peofer roroccur swhent hecor rectamounti s
ent eredinwr ongper sonsaccount .Itisimportantt onot ethather edoubl eentry
i
sobser ved.Forexampl eifthecompanysol dgoodst oMar t
haTendooncr edit
butbymi stakeMar i
asTendoaccounti sdebited.
i
i
i. Er r
or sofOr iginalent r
y.Thesear eer rorsmadeont heor i
ginaldocument s
whenat ransact ioni sbei ngr ecorded.Thedoubl eent ryisobser vedbutt he
originalfigurei snotcor rect.Forexampl e goodsf or1, 500,000cashar esol d
butbymi stake5, 100,000i sr ecordedont her ecei
pt,thewr ongamountwi l
lbe
transf err
edt ot hej our nal
, l
edgersandt ri
albalance
i
v. Er r
or sofPr incipleThi ser r
oroccur swhent ransactionsar eent er
edi nt he
wr ongt y
pesofaccount s.Forexampl eacomput er(fixedasset )issoldand
creditedt ot hesal esaccountt het r
ialbalancewi l
lagree.Suchat ransacti
oni s
supposedt ober ecor dedi nthedisposal account
v
. Er r
or sofCompl eter ev
ersalofent riesThist ypeofer roroccur swhencor rect
amount sar er ecor dedont hewr ongsi desoft heaccount .Forexampl eifacash
91
saleismadet hecashaccounti ssupposedt obedebi tedwhilesal
esaccount
credi
ted,butther everseisdonebydebiti
ngthesalesaccountandt hecredit
ing
thecashaccount .
v
i. Compensatinger rors
Thisisoccurswhent hesameer rormadeont hedebitismadeal soont he
credi
tsidewhi chi mplieserr
orscancelouteachother.Forexamplei ft
hecash
accountwasov erdebi tedby200,
000UGXatt hesamet imet hesalesaccount
wasov ercreditedbyt hesamef i
gurethensucher r
orswi l
lcanceloutandt he
tri
albal
ancewi llagree.
Weemphasizeagaint
hatev
enift
heaboveerr
orsdonotaff
ecttheagr
eementofthe
t
ri
albal
ance,oncedet
ect
edorf
oundout
,theymustbecor
rectedandmustst
il
lfol
l
ow
t
hedualconcept.
Now l
etuslookatanexampl
einvol
vi
ngt
hecor
rect
ionofer
ror
s(usi
ngt
hej
our
nal
)
t
hatdonotaff
ectt
hetr
ial
bal
ance.
Sol
uti
on
Date Parti
cular
s f
oli
o DR CR
Dec.31.
2004 Machineryaccount 1,
200,
000
Purchasesaccount 1,
200,
000
(Bei
ngt hecorrecti
onoferroras
machinerydebitedtopurchases
account)
-do- Bakanya 150,
000
Bukeny a 150,
000
(bei
ngaTr ansferofamount
i
ncorrectl
ycreditedtoBakanya)
-do- Purchasesaccount 270,
000
Orobia 270,
000
(Bei
ngpur chaseofgoods
92
prev i
ouslyommi t
ed)
-
do- Akileng 18,
000
Salesaccount 18,
000
(Beingadj ustmentforunderchar
ge
ofsal es)
-
do- Rentr eceivableaccount 35,
000
Salari
esandwagesaccount 35,
000
(Beinganadj ust
mentf or
over char
ge)
Il
lust
rati
on1
Youar etheaccount antofBBALt d.Wheny oucomet opr eparet heaccountsfort he
yearended31Dec.2005, youfindt hatthebookkeeperhasr aisedasuspenseaccount
withacr edi
tbalanceofUGX. 80,530.Onf urtheri nvest
igat i
ony ouascer
tainthatt hi
s
balanceismadeupoft hefoll
owi ngitems;
1.Pr oceedsfrom ani ssueofshar es(atnomi nalvalue)dur ingtheyearamount ing
toUGX.50,000;
2.Pr oceedsf r
om sal eofl and,showni nt hebooksatacostofUGX. 20,000,
amount i
ngtoUGX. 30,
000;
3.Anexcessoft hetotaloft hedebi tsideov ert hecr editsideofthetr i
albalance
dueto:
a)SalariesofUGX. 690bei ngincor r
ectl
yent eredasUGX. 960
b)Cashr eceivedfrom adebt or,Eric,amount ingt oUGX. 130whi chwas
i
ncorrectl
ydebi t
edt ohisaccount .
Yourj obist ocleart hesuspenseaccount ,showi ngt het ransferstot herelevant
accounts.
Sol
ution
Thejournal
sforthecor rect
ionoft
heabov eent
ri
esmayl
ookasf ol
lows
Accounttit
les Accountdebi
ted Accountcredi
ted
1 Suspenseaccount 50,
000
Capitalaccount 50,
000
2 Di sposalaccount 20,
000
Profi
tondi sposal 10,
000
Suspenseaccount 30,
000
3 Suspenseaccount 270
Sal
aries 270
3 Suspenseaccount 260
Debtors–Er i
c 260
Not
es:
1. Theshar ecapit
alist hepropriet
or’
scapi
tali
nal i
mitedcompany .Anew share
issueraisescashofUGX. 50,000andaddsUGX.50,000tocapital.Pr
esumablyin
thisexampl e,t
hecashaccounthasbeendebi t
edcorrect
ly,butthesharecapit
al
accounthasnoty etbeencr edi
ted.
2. TheUGX. 30,000r eceivedf r
om thesaleofthelandinthesuspenseaccount
indicat
est hatt
hedi sposalhasnotbeenrecor
dedintheaccount satall
.Notonly
93
shouldthedi sposaloflandaccountbecr edi
tedwit
hUGX. 30,000,butalsothe
Non-currentasstsaccountshouldbecreditedandthedisposalaccountdebit
ed
wit
ht hecostoft heland,t
ocompletetheledgerent
ri
es.
3. Theer r
oroft ransposi
ti
onin3(a)ander r
orofcommi ssi
onin3( b)arecorrect
ed
i
nt heway sdescr i
bedearl
ier
.
Suspenseaccount
31/
12/
05 Sharecapital 50,
000 31/
12/
05Bal
B/f 80,
530
DisposalofLand 30,
000
Salaries(
over
Statement) 270
Debt ors(
130+130) 260
80,
530 80,
530
Shar
ecapi
tal
1/1/05 Balanceb/
f X
31/12/05 Suspense 50,
000
Land(
cost
)
1/1/05 Bal
ance 20,
000 31/
12/
05 Di
sposal
ofl
and
20,000
Di
sposal
ofl
and
31/
12/05 Land 20,
000 31/
12/
05 Suspense
30,
000
Pr
ofi
tonsal
e 10,
000
30,
000
30,
000
Sal
ari
es
31/
1/05 Bal
ance X 31/
12/
05 Suspense 270
94
Debt
or-Er
ic
1/
1/05 Bal
ance 130 31/
12/
05 Suspense 260
Cash(i
ncor
rect
) 130
260 260
Il
l
ustrati
on2
JALIALTDi sanoldfashi
onedfir
m withahandwri
ttensetofbooks.At r
ialbal
anceis
extr
actedattheendofeachmont h,andanincomest at
ementandbal ancesheetare
comput ed.Thi
s mont h howev
ert he t
ri
albalance wil
lnotbal ance,t he cr
edi
ts
exceedingdebi
tsbyUGX.1,536,
000
Youar
easkedt ohel pandaf terinspectionoft hel edger sdiscov erthef ollowingerrors;
1.Abal anceofUGX. 87,000onadebt orsaccounthasbeenomi ttedf r
om the
schedul eofdebt ors,t het otalofwhi chwasent er edasdebt or sint het r
ial
balance.
2.Asmal lpi eceofmachi nerypurchasedf orUGX. 1,200, 000hadbeenwr i
tt
enof f
torepai rs.
3.Ther ecei ptssideoft hecashbookhadbeenundercastbyUGX. 720, 000
4.Thet otalofonepageoft hesal esdaybookhadbeencar riedf orwardas
UGX. 8,154, 000,wher east hecor r
ectamountwasUGX. 8,
514,000
5.Acr editnot eforUGX. 179,000r eceivedf rom asuppl ierhadbeenpost edtothe
wrongsi deofhi saccount .
6.Anel ectr i
citybilli
nt hesum ofUGX. 152, 000, noty etaccr uedf or, i
sdiscov er
ed
inaf i
lingt ray.
7.Mr .Magaduwhosepastdebt st ot hecompanyhadbeent hesubj ectofa
provision,atl astpaidUGX. 731,000t ocl earhi saccount .Hisper sonalaccount
hasbeencr editedbutt hecheckhasnoty etbeenent eredint hecashbook.
Youar
erequi
redto;
a)Wr i
teupthesuspenseaccounttocl
earthetr
ial
balancedif
fer
ence;
and
b)Statetheef
fectontheaccountsofcor
rect
ingeacherror
.
Solut
ion
(a)
Suspenseaccount
Openi
ngbal
ance 1,
536,000 Debt ors–balanceomi tt
ed 87,
000
Sal
es–under-
recor
ded 360,
000 Cashbook–r eceipt
sundercast 720,000
Credi
tors–creditnotepostedto
Wrongside 358,
000
Cashbook:Mr .Magadu’sdebtpai
d
Butcashreceiptnotrecorded
731,
000
1,
896,
000 1,
896,
000
Notes;
i
. Er r
orno.
2isaner
rorofpr
inci
ple,wher
ebyanon-
cur
rentasseti
tem (
capi
tal
95
expenditur
e– seet heTopi con depr eciati
on)hasbeen account ed foras
revenueexpendi ture.Thecor rectwillbel oggedi nt
hejour
nal ,butsincet he
err
ordi dnotr esultinani nequalit
ybetweendebi t
sandcredi
t s,thesuspense
accountwoul dnothav ebeenused.
i
i
. Theel ectr
ici
tybillhasbeenomi tt
edf r
om t heaccountsent
irely.Theer rorof
omi ssi
onmeanst hatbothdebi t
sandcr edi t
swillbel
oggedint heJournal,but
thesuspenseaccountwi l
lnotbei nvolved,sincether
eisequal i
tybetween
debitsandcreditsi ntheerror
.
(
b)
1.Theer rormeanst hatdebt or sar eunder stat ed.Thecor rect i
onofer rorwi ll
i
ncr easet het otal amountf ordebt orst obeshowni nbal ancesheet .
2.Thecor rect ionoft hiser rorwi lladdUGX. 1,200, 000t of ixedasset satcost
(balancesheeti tem)andr educer epai rcostsbyUGX. 1,200, 000.TheI ncome
statementwi l
lther efor eshow ani ncr easedpr ofitofUGX. 1,200, 000,l essany
depr eciationnowchar gedont hef i
xedasset .
3.Theunder cast i
ng( i.e.under -
addi ng)ofUGX. 720, 000ont her ecei ptssi deoft he
cashbookmeanst hatdebi t
sofcashwi l
lbeUGX. 720, 000l esst hant heyhav e
been.Thecor rect ionoft heer rorwi lladdUGX. 720,000t ot hecashbal ancei n
balancesheet .
4.Thist ransposi tioner rormeanst hatt otalsal eswoul dbeunder -recor dedby
UGX. 8,514, 000–UGX. 8,154, 000=UGX. 360,000i nt hesal esaccount .The
correct i
onoft heer rorwi l
laddUGX. 360,000t ot otalsal es,andt husadd
UGX. 360, 000t ot hepr ofitsint hei ncomest atement .
5.Thecr edi tnot emusthav ebeeni ssuedf orapur chaser eturnt ot hesuppl i
erby
thebusi ness.I tshoul dhav ebeendebi tedt ot hecr editor ’
saccount ,buti nstead
hasbeencr edited.Assumi ngt hatt hepur chaser etur nsaccountwascr edited
correct l
y ,t heef fectoft heer rorhasbeen t o ov erst atet otalcr editorsby
2*UGX. 179,000=UGX. 358,000,andt hi
samountshoul dbecr edi t
edf rom t he
suspenseaccountanddebi tedt ot hecr edit
or saccount .Theef fectwi l
lbet o
reducet het otal forcr editorsi nt hebal ancesheetbyUGX. 358, 000.
6.Theel ect ricitybi ll,whenent er edi nt heaccount s,wi llincr easecr edit orsby
UGX. 152,000,assumi ngt hatnoneoft hiscosti sapr epay mentofel ectricit
y
char ges.
7.Sincet hechequehasnoty etbeenr ecor dedi nt hecashbook, thecor rect i
onof
theer rorwi lladdUGX. 731, 000t ot hecashbal ancei nt hebal ancesheet .Att he
samet i
me,t hepr ov isionf ordoubt fuldebt scanber educed.Thi swi llincrease
thenetamountf ordebt orsi nt hebal ancesheetbyUGX. 731,000( i.
e.debt ors
l
esspr ovisi onf ordoubt fuldebt s,al thought her educt ioni ngr ossdebt orsby
UGX. 731,000hasal readybeenaccount edf or ,duet ot hecashr ecei ved)and
i
ncr easei npr of i
tsbyUGX. 731, 000( becauset hebaddebtwasapr evi
ous
businessexpense) .
96
st
atement
saf
tercor
rect
ingt
heabov
eer
ror
s.
Exerci
se1
Fri
day,hav
ingbeenunabletobalancehi
str
ialbal
anceat31Dec.openedupa
suspenseaccountandenter
edinittheamounthewasoutofbalance.Thedebi
tshad
exceededthecredi
tsbyUGX.736,000
Exer
cise2
Thefoll
owingt r
ial bal
ancewasdr
awnbyBamwineenter
pri
seson28/2/05.
Accountt i
ttl
es Dr(UGX) Cr(UGX)
Vehicles 20,000
Cash 5,
000
Bank 6,
000
Openinginv entor
y 3,
000
Purchases 14,910
Sales 36,360
Tradecreditors 5,226
Tradedebt ors 7,
500
Discounts 560 35
Returns 50 121
Drawings 1,
400
Baddebt s 150
Rent 500
Capital 18,883
Salari
es 1,
500
Suspense 55
97
60,
625 60,
625
Thef
ollowi nger rorswer erev ealedaf t
ert horoughexami nat i
onoft hebooks.
Ani nv oicef orUGX. 130wasent eredi nthepur chasesdaybookasUGX. 310
ii
.Di scountal lowedandr ecei vedofUGX. 34andUGX. 58respect iv
elyhadbeen
post edt othewr ongsi desoft hedi scount saccount s
ii
i.Acr editnot ef orUGX. 81i ssuedt oJanuarywascr editedtoJenuar i
oaccount
int hepur chasesl edgerandal socr edit
edtor et urnsout war dsaccountandno
otherent rywasmade.
iv.Achequef orUGX. 450r ecei vedf r
om adebt orwascor rectlyenteredi nthe
debt ors’cont rolaccountbutwasr ecordedbymi st akei nthedi scountal lowed
columnoft hecashbookasUGX. 540
v.Thesal esdaybookon10/ 2/ 05hadbeeni ncor rect l
ycast .Thecor r
ectamount
shoul dhav ebeenUGX. 11,360andnotUGX. 11, 330whi chwasr ecorded
vi.Goodst akenbyBamwi nef orhi sownusecost i
ngUGX. 600hadnotbeen
recor dedi nt hebooks.
vii
.Adebt orwhoowedUGX. 186di edi nsol
vent.Thi samountwaswr i
ttenof fhi
s
accountbutnoot herent rywasmade
vi
ii.Thedebi tsi deoft hecashbookcol umnwasov er-addedbyUGX. 150
ix.Acr editorwhosentani nv oiceofUGX. 500pr omi sedadi scountof1%f orearl
y
pay ment .Hewasf ul
lyset t
ledbychequel esst heamount .Thebookkeeper
debi t
edt hecr edi t
or’
saccountbyUGX. 505andcr edi tedt hebookbyUGX. 500
x.Nor ecordwasmadef orBamwi ne’spersonalv ehiclesv alueatUGX. 4,000
whi chwassur renderedt ot hebusi ness.
Requir
ed
a)Journalent
ri
estocor
rectal
ltheerr
ors
b)Suspenseaccount
c)Theamendedt r
ial
bal
anceafterthecor
rect
ionoft
heer
ror
s.
98
Topi
c11
Depr
eci
ati
onaccounti
ng&disposaloft
angi
ble
Non-
current(
fi
xed)asset
s
Learni
ngobjectives
Bytheendoft histopi
c,youwil
lbeableto
Def i
neandexplaintheprocessofdepr
eciati
on
Ill
ustr
atethediff
erentmethodsofcomputingdepr
eciati
on
Explaintheaccounti
ngtreatmentofdi
sposalsoft
angibl
enon-
cur
rentasset
s.
Int
roduct i
on
At angi bl
enon- currentasseti sacqui redf orusewi thinabusi nesswi t
hav i
ew t o
earni
ngpr ofit
s.I t
sl i
feextendsov ermor et hanoneaccount i
ngper i
od,andsoi tear ns
profi
tsov ermor et hanoneper i
od.Wi tht heexcept i
onofl andhel donfreehol dorv ery
l
ong l easehol d,ev eryt angibl
enon- currentassetev entuall
ywear soutov ertime.
Machi nes, carsandot hervehicles,fi
xturesandf i
tt
ings,andev enbuildi
ngsdonotl ast
forever.Whenabusi nessacqui resanon- currentasset,itwillhavesomei deaabout
howl ongi t’
susef ul l
ifewillbe,anditmi ghtbedeci dedei t
her;
Tokeeponusi ngtheassetunt i
litbecomescompl etel
ywor nout ,useless,and
worthless;or
Tosel loffthenon- currentassetatt heendoft heusef ulli
fe,eit
herbysel li
ngi t
asasecond- handi t
em orasscr ap–t hisgivesr i
set otheideaofdi sposalof
thenon- currentasset s
SinceNon-curr
entassethasacost,andali
mitedusefull
if
e,andit
sv al
ueeventual
ly
decli
nes,i
tfoll
owsthatachargeshouldbemadei ntheincomestatementtorefl
ect
theusethatismadeoftheassetbythebusi
ness.Thi
schargeiscal
l
eddepreci
ation.
Def
ini
ti
onofdepr
eci
ati
on:
Thereareasmanydef
ini
ti
onsofdepr
eciat
ionasal
mostt
heaut
hor
sinaccount
ing,
never
thel
esst
hefol
l
owi
ngneedemphasis.
Depreci
ati
on i
sthe al
l
ocat
ion oft
he depr
eci
abl
e amountofan assetov
eri
ts
est
imatedusef
ull
i
fe.
Iti
sameasur eofthewearingout,consumpti
onorotherlossofval
ueofadepr eci
able
assetari
singfr
om use,effluxionoft i
meorobsolescencet hr
ought echnologyand
marketchanges.Iti
st heal l
ocat
ionoft hecostoftheassettot hey ear
si nwhi ch
benefi
tisexpectedfr
om itsuse.I ti
samet hodofspr eadi
ngthel ossinv alueofa
capit
alassetov
erseveral
per i
ods
Depreciat
ioniscommonlydefinedaswearandt ear
,buti
naccount
ingt
hisdef
ini
ti
on
i
si nadequateorinappr
opri
atebecausewearandt earisj
ustoneofthecausesof
depreci
ati
on.
Somet ermssuchasdepl et
ion,amort
izat
ionet
c.maysometimesbeusedinst
eadof
depreci
ati
on.
99
Notet
hatsomei nt
angi
bleassetssuchaspat ent,copyr
ight
,trademar
kgoodwil
letc
al
sodoloseval
ueexceptthatdi
ff
erentter
msot herthandepreci
ati
onareusedf
orthe
l
ossofthei
rval
ueforst
anceamor t
izat
ionofgoodwill
Forsi
mplici
tyinaccounting,
depr
eci
ati
onofcapi t
alassetsi
susual
lydetermi
nedatthe
cl
oseofeachf iscalyearandthedepreci
ati
onexpense(aporti
onoft heexpir
edcost
oftheasset
)fort heaccounti
ngper
iodischargedtoIncomestat
ementi naccor
dance
wit
hthemat chi
ngconcept .
I
mpor
tantDef
ini
ti
ons,
Ter
msandI
ssuesi
nDepr
eci
ati
on
Therearesomei mport
antdefi
niti
ons,termsandissuesthatneedtobegraspedat
thi
sstagetoenhancet heunderstandi
ngoft hesubsequentcont
ent
sinthisTopi
c.
Theyincl
udebutarenotli
mit
edtot hefol
lowi
ng.
1.Depr eciabl
eassets.Thesear
easset
swhichareexpectedtobeuseddur i
ngmore
thanoneaccount ingperi
odwithal
imit
edusefull
i
feandar eheldbyanenter
pri
sef
or
usei nt heproducti
onorsupplyofgoodsandser v
ices,forrent
altoother
s,orf
or
admi ni
strati
vepurposesandnotforthepurposeofsalei ntheordi
nar
ycourseof
business.
2.Useful
lie.Thi
f siseit
hertheper
iodov
erwhi
chadepreciabl
eassetisexpectedt
obe
usedbyt heenterpri
se,orthenumberofpr
oducti
onorsi mil
aruni
tsexpectedtobe
obtai
nedfrom theuseoft heassetbyt
heenter
pri
se.I
tisalsocall
edthelif
espanof
theasset
.
3.Depreci
ableamount.Depreciabl
eamountofadepr eci
ableasseti
si t
shistor
ical
cost,orot
heramountsubsti
tutedforhi
stor
icalcosti
nt hefi
nanci
alst
atements,l
ess
theesti
matedresi
dual
value.
4.Histor
icalcost
.Histor
icalcostofadepr eci
ableassetrepresent
sitsmoneyoutlay
oritsequival
enti
nconnect ionwit
hitsacquisi
ti
on,inst
all
ati
onandcommi ssi
oningas
wellasadditi
onstoorimpr ovementsther
eof.Capit
alassetsarerecor
dedathi
stor
ical
costor,i
fdonated,att
heirestimat
edfairmarketval
ue.
5.Residualv
alue.Thisi
sthenetamount
,whichtheenter
pr i
seisexpect
edtoobtai
n
fr
om anassetatt heendofitsusef
ulli
feafterdeduct
ingt heexpect
edcostsof
disposal
.Iti
sot her
wisecal
l
edthescrapval
ueort heresidualval
ueorthesal
vage
value.
6.Allnoncurrentasset
s(f
ixedasset
s)ot
herthanl anddepreci
atetozerooralmost
zerobookv al
ues. Normall
ylandandsomet ypesofi mprovementsoni tarenot
depreci
atedbecauseinmostcasesdonotdet
eriorateduetouseandt hepassageof
ti
me.
7.Somei nt
angibl
eassetssuchaspat ent
,copyri
ght,t
rademark,goodwil
l
,mineral
resour
cesetcdolosevalueexceptthatdif
fer
enttermsot hert
handepreci
ati
onare
usedforthelossoft
heirval
uef orst
anceamor t
izati
onofgoodwi l
ldepl
eti
onofthe
resour
cesetc.
Consi
stencyandDi
scl
osur
eRequi
rement
s
100
Once a depr
eciat
ion method is select
ed fora par
ti
cul
arasset
,itbecomes an
account
ingpoli
cy.Itisar equi
rementt hati
tshouldbeusedconsi
stent
lyandt
hat
si
mi l
ari
temsaretreat
edusingasimilarmethod.
Themethodofdepr
eci
ati
onshoul
dbeappliedconsi
stentl
ysoast oenhancethe
compar
abil
i
tyoft
her
esul
tsoft
heoper
ati
onsoftheent
erpr
isefr
om per
iodt
operi
od.
Iti
spert
inentt
onotet hatachangeint hemethodofdepr
eci
ati
onist r
eatedasa
changei
nanaccount
ingpoli
cyandther
eforeshoul
dbedi
scl
osedaccor
dingl
y.
Itisarequirementthatthedepreciati
onmet hodsused,t hetotaldepreciat i
onf orthe
periodforeachclassofassets,
thegr ossamountofeachcl assofdepr eciabl eassets
andt herelatedaccumulateddepreciati
onbedi scl
osedi nthef i
nancialst at ements
alongwi t
ht hediscl
osureofotheraccountingpol i
cies.Butdepreciati
onr atesort he
usefulli
vesoft heassetsaredisclosedonl yiftheyar edif
ferentfrom t hepr i
nci
pal
ratesspecif
iedinthestat
utegoverningtheenterpri
se.
Capit
alExpendit
ureandRev enueExpendi
tur
eDisti
ngui
shed
Iti
sv er
yimpor t
anttomakeadi sti
ncti
onbetweencapit
alexpendi
tur
esandrevenue
expendi
turesfordepr
eciati
onpurposesbecausecapit
alexpendi
tur
esaredepr
eci
ated
whereasrevenueexpendit
uresarenot.
Rev
enueexpendi
tur
eont
heot
herhand,i
sthatexpendi
tur
ethati
sincur
redi
nthe
101
maintenanceandrepairoffixedasset sandoperat
ingexpendi
tur
esnecessar
ytocar
ry
onthebusinesse.g.r
ent,rates,salari
esandwageset c.
Notet hatr
evenueexpendituredoesnoti ncr
easethev al
ueoftheassetofabusi
ness
andt heref
orecannotbedepr eciatedbutratherisdebitedtoappropr
iat
eexpense
accountandwr i
tt
enof fatt heendoft heaccountingyearintheprofi
tandloss
account.
Reasonsf
orPr
ovi
dingForDepr
eci
ati
on
Depreciati
onisacostt hathast or educepr ofits.I
fdepr eci
ati
oni snotprovi
ded
for,i
ncomewi l
lbeov er
statedandt axl iabili
tyisal soov erstated.Therefore
sincefixedassetsareusedt ogener ater ev enuei tfoll
owst hatt hepartoft he
costoft heassetusedi nearningt hatr evenueshoul dbechar gedt otheprof i
t
andlossaccountsoast ogetar ealisticfigur eofnetpr ofi
t.
To por tr
aya true and fairv i
ew oft he st ate ofaf fair
sofa busi nessby
subtracti
ngtheaccumul at
eddepr eciat i
onf rom t hecostoft heasset.Thi s
enablesdiscl
osureofbookv aluesi nt hebal ancesheett obef air
lyaccurate.
Itgui
despol i
cyforplanni
ngmai ntenanceandr epl
acementoft heassets
Fact
orsConsider
edInDetermining/
Calcul
ati
ngDepreci
ation
Theassessmentofdepr
eciati
onandt heamounttobechar gedinrespectt
her
eofi
n
anaccounti
ngperi
odareusuallybasedonthefol
lowingthreefact
ors:
1.Thehistor
icalcostoft
heassetoranyot heramountsubsti
tut
edforthehist
ori
cal
costofthedepreciabl
eassetwhent heassethasbeenreval
ued.Thehist
ori
calcost
i
ncludesthepurchasecostplustranspor
tati
oncosts,
inst
all
ati
oncosts,t
axati
on,t
ri
al
runsandallothercostst
hatputtheassetinaservi
ceableorusabl
estateand
ther
efor
ewhi chshouldbecapital
ized.
2.Esti
matedsalvage/scr
ap/r
esidualval
ue.Thisi
stheesti
matedamountthatthe
ownerofthefi
xedassetexpectstorecov
eratthet
imeofdi
sposi
ngof
ftheassetl
ess
anycostofdi
sposal.
3.Estimatedusefull
ife.Thi
si st
heesti
mat edti
meper i
oddur
ingwhichbenef i
tor
servi
ceisexpectedfr
om useofanon-cur
rentasset
.Suchanest
imatedti
meper i
odis
ofteninform ofyearshowev eri
tcanalsobei nter
msofmont hs,hours,uni
tsof
producti
onetc.
CausesofDepr
eci
ati
on
1.Phy si
caldeterior
ation
a)Wearandt ear;t
hisrefer
st othewear
ingoutoffi
xedassetsaf
terhav i
ngbeeni n
useforanumberofy ears.
b)Rust ,rotand decay ;Materi
alsinvehi
clesormachineseventuall
yr ust,wood
eventuall
yrotsordecay saft
erhavi
ngbeenusedforsomet i
me–hencedepr eci
ati
on
ofthatasset.
c)Acci dents;maycausedepr eci
ati
onoffi
xedassetsthr
oughphysicaldamagesay
by f i
re,explosionetc.
102
2.Economi cfactors
a)Obsol escence;thisrefer
st othefixedassetsbecomingoutdat
ed.E.g.duet o
changesi ntechnology.E.
g.typewr
it
ershavebeendepreci
atedbycomputers,r
ecord
player
sbyr adiocassett
esorCDpl ayerset
c.Sincetheyareoutdated,t
heyareno
l
ongerusef ul.
b)Inadequacy ;t
hisari
seswhenanasseti snolongerusedbecauseofthegrowthor
changesi nthesizeofthefir
m.
Met
hodsofComput
ingDepr
eci
ati
on
Therearev
ariousmet
hodsofcalcul
ati
ngdepreciat
ionandthemethodemploy
edmay
var
yf r
om oneassettoanother.Thedepreciat
ionmethodchosenbymanagement
dependsonthecompany’
spoli
cyanditsr
elevancytotheasseti
nquest
ion.
Whenamet hodissel
ectedf orapar t
icul
arasset,itshouldbeusedconsi stentl
yand
si
mi laritemsshoul dbet reatedusi ngasi mil
armet hodi .
e.inaccordancewi t
hthe
consi st
encyconcept( as alreadyseen) .Changing met hods is di
scouraged as it
createsdi st
orti
onsinfi
nanci alreporti
ng,never
thelesswher echangeisjusti
fiabl
e,t
he
effectoft hechangeont her eportednetprofitandbal ancesheetpositi
onmustbe
di
scl osedasear l
ierdi
scussed.
Thef
oll
owingmet hodsmaybeusedf orcomput i
ngdepreci
ati
on;
Straight-l
inemet hod(SLM)/
Fixedinstal
l
ment smethod.
Reduci ngbal ancemethod(Dimini
shingbalancemethod)
Sum ofy ears’digi
tsmethod
Unitsofout putmet hod
Hour lyratemet hod
Rev aluati
onmet hod
StraightLineMet hod(SLM)
Thisi sother wisecalledfixedi nst
all
ment smet hodorf ixedpercentagemet hod.I
ti s
thesi mplestandmostwi del yusedmet hod.Itisbasedont hesi
mpl eaveragepri
nciple.
i
.ei tinvolvesdi v
idingthet otalcostbyanest i
mateofhow manyy ear
swet hi
nkthe
assetwi l
lr emainusabl eandappl yther esultyeari ny earout.Weal soneedt o
estimat eanyr esidualorsal vagev al
uethatwecanr ecl
aim attheendoft heasset’s
wor kingusef ulli
fe.Thismet hodi sespecial
lygoodf orasset st
hatar eusedunifor
ml y
from y eartoy ear.Howev eritisnotr eal
isti
cbyassumi ngconstantdepr eci
ati
onov er
thelifeti
meofanasset .I
tisgi v
enas:
Depr eci
ati
onperannum (p. a)=Cost–Scr ap/sal
vage/r
esi
dualval
ue
Est i
matedNumberofy ear
sofusefull
i
fe
Forexample,itis1/1/99andwehav ej ustboughtanewassetf orshs100,
000thatwe
est
imatewillhav eausefull
if
eof5y ears;andthatwet hi
nkwewi l
lbeabletodi
spose
offorshs20,000.
Requir
ed:
a.Calculatetheannualdepr
eciationprovisi
onfortheasset.
b.Showt hedepreci
ati
onschedul eforthi
sasset.
Sol
uti
on
103
Depr
eci
ati
onperannum (
p.a)=Cost–Scrap/
salvage/
resi
dualval
ue
Est i
matedNumberofyearsofusef
ulli
fe
=100,000–20,000
5
=16,000peryear
Depr
eci
ationSchedul
e
YEAR Depr eci
ati
onexpense Accumulated NetBookVal
ue
Depreci
ati
on
1 16,000 16,
000 84,
000
2 16,000 32,
000 68,
000
3 16,000 48,
000 52,
000
4 16,000 64,
000 36,
000
5 16,000 80,
000 20,
000
Exampl e:
Anequi pmentwaspur chasedf r
om EnglandatCI FNamanv eatav alueofUGX
10,000,000. The i nstall
ati
on cost was UGX 2, 000,000 while tri
al runs and
commi ssioningamount edtoUGX2, 600,
000.Theequipmenti sexpectedt obeuseful
for6year safterwhichi
ti sesti
matedtohaveasalvagev alueofUGX2,600,000.
Required:
Calculatet hedepreci
ationexpenseforeachyearandaccumul ateddepreciati
onupto
year6.
Sol
uti
on
Cal
cul
ati
onoft
hecostoft
heequi
pment
;
Depr
eci
ati
onexpensep.a.=Cost–Sal
vage/
Scrap/
resi
dualval
ue
Esti
matedNumberofyear
sofusefull
i
fe
14,600,000-2,
600,
000
6
=2,
000,000
Depr
eci
ationSchedul
e
YEAR Depr eci
ati
onexpense Accumulated NetBookVal
ue
Depreci
ati
on
1 2,000,
000 2,
000,000 12,
600,
000
2 2,000,
000 4,
000,000 10,
600,
000
3 2,000,
000 6,
000,000 8,
600,
000
104
4 2,
000,
000 8,
000,
000 6,
600,
000
5 2,
000,
000 10,
000,
000 4,
600,
000
6 2,
000,
000 12,
000,
000 2,
600,
000
Not
ethatdepr
eci
ati
onp.
acanbeexpr
essedasaper
cent
ageofdepr
eci
abl
ecostas
f
oll
ows:
2,
000,
000 x100=16.
667%
12,
000,
000
ReducingBalanceMet hod
Thisisotherwisecal l
eddi mi nishi
ngordecl ini
ngbalancemethod.Underthismet hod,
mor edepreciat
ioni sallocatedt otheear l
ieryearsthantolat
eryear
soft heasseti.e.
depreci
ati
onchar georal l
ocat ionreducesast heassetgetsolder
.Thi smet hodi s
sui
tableforasset st hatar emor eusef uli nearl
ieryearsthaninlatery earslike
automobiles.Undert hismet hoddepr eciati
onchar geisont hebookv al
ueatt he
beginni
ngoft hey earandnott heor i
ginalcost.Thi
smet hodhastwotypes:
Nor mal reducingbal ancemet hod
Doubl edecl i
ningbal ancemet hod
NormalReduci
ngBalanceMethod
Undert
hismethod,
annualdepreci
ati
oni
scal
cul
atedas;
Depr
eci
ati
onp.
a=BookvaluexDepreci
ati
onpercent
age
=(Cost–Accumul
ateddepreci
ati
on)xDepr
eci
ati
onper
cent
age
Butdepr
eci
ati
onper
cent
age= x100%
Wher
e: n=est
imatednumberofusef
ull
i
fe
R=Resi
dualorscr
apvalue
C=Cost
Exampl
e
Foranassetcost
ingsh1,000,
000wi
tha5-
yearl
i
feandsmal
lresi
dual
val
ue(
sayshs
30,
000)
n=5y ear
s
C=shs1,000,000
R=shs30, 000
Depr
eci
ati
onr
ate= x100%=appr
ox50%
Toprov
et hattherat
eis50%y
ouwi
l
lneedasci
ent
if
iccal
cul
atororasui
tabl
e
computerpackage.
Cal
cul
ati
onofr
educi
ngbal
ancedepr
eci
ati
on
105
Year Annual Accumul ate Netbook
depreci
ati
on d v
alueatend
depreci
atio ofyear
n
50%of (shs) (shs)
NBV(shs)
1 500,
000 500,
000 500,000
2 250,
000 750,
000 250,
000
3 125,
000 875,
000 125,
000
4 62,
500 937,
500 62,
500
5 31,
250 968,
750 31,
250
DOUBL
EDECL
INI
NGBAL
ANCEMETHOD
Underthismethoddepreci
ati
onper
cent
agei
sgotbydoubl
i
ngt
her
ate(
Depn%ge)on
St
raightLinemethodi
.e.
Depr
.per
cent
age=2xDepr
eci
ati
onper
cent
ageusi
ngSt
rai
ght
-Li
neMet
hod(
SLM)
Remember
:
Depr
.Expensep.a
Depr
.Rat
e(SLM)= x100
Depr
eci
abl
ecost
Howev
er;
Depr
eci
abl
ecost=Cost–Sal
vagev
alue.
Ther
efor
e:
Cost-Scrapval
ue
No.ofyears x100 x2
De
pr.
per
cent
age=
Cost-Scr
ap
Depr
eci
ati
onp.
a.(
SLM)
DDBM Deprper
cent
age= x100x2
106
Depr
eci
abl
ecost
Example:
AnequipmentwasboughtatacostofUGX50,000,
000.I
thasanest
imat
edusef
ull
ife
of5yearsatt
heendofwhichtheresi
dual
val
ueisesti
matedtobeUGX5,
000,
000=.
Required:
Calculat
et hedepreciati
onexpensef oreachy earusi
ngt hesum ofyear
s’di
git
s
met hod.
Soluti
on:
Year Depr eciat
ionrate Depreci
ati
onExpense
1 5
= 5/15 (5/
15)X( 50000000-
5000000=15000000
1+2+3+4+5
2 4/15 (4/15)X45000000=12000000
3 3/15 (3/
15)X 45000000=9000000
4 2/15 (2/
15)X 45000000=6000000
5 1/15 (1/15)X 45000000=3000000
NOTE:
Reducingbal ancemet hodandsum ofy ears’di
git
smethodar ecall
edaccel
erat
ed
depreciationmet hodsbecausehi
gherdepr eci
ati
onchar
gesorall
ocati
onsaremadein
theearlieryearsthaninthelat
eryear
s.
Theset womet hodsareusedast axincentiv
esinsomecountr
iesbecauset
heyactas
ataxr eliefsincetheyleadtoalowerr eport
ednetprof
iti
ntheearli
eryear
swhenan
i
nv est
menti sstil
li
nfant.
Uni
tsofOutputMethod
Heredepr
eciat
ioni
scomput
edinproport
iont
otheuseoft heassetf
orproduct
ioni
.e.
i
tisbasedonthenumberofuni
tsesti
matedtobeproducedbytheassetinit
susef
ul
l
if
e.
Uni
tspr
oduceddur
ingt
hey ear
Depr
.Expensep.
a.= XDepr
eci
abl
ecost
Est
imat
edunit
stobeproducedint
heusef
ull
i
fe
107
Exampl e:
Amachi neisexpectedt opr
oduce400,000uni
tsi
nit
susefulli
fe.I
tproduces75,
000
st
uni
tsi ni t
s1 y earofexist
ence.Ifthemachi
newasboughtat5, 500,000=andit
s
sal
v agev al
ueisestimatedat500,
000=.
Calculatethedepreciat
ioni
nthe1styearusi
ngt
heuni
tsofout
putmet hod.
Uni
tsproduceddur
ingt
hey ear =75,000
Est
imatedunit
stobeproducedinusef
ull
if
e=400, 000
Cost =5,
500,000
Sal
vagevalue =500,000
75,
000
Depn.Expense= x(
5,500,
000–500,
000)
400,
000
=0.
1875x5,
000,
000
=937,
500
Wor ki
ngHour sMet hod(Hourl
yRat
eMet hod)
Thismet hodt akesintoaccounttherunningt
imeoft hemachinef
ordepreci
ati
on
purposes.Depr eci
ati
oni scomputedbasingont henumberofhourstheassetis
expectedtoruni ni
tsusefull
if
e.
Numberofhoursworkedi
ntheyear
Depn.Expense= XDepr
eci
abl
ecost
Est
imat
edwor ki
nghoursi
nusefull
i
fe
Exampl e:
A machi nei sexpectedt owor kfor100,000hour sdur i
ngi t
susef ull
ife.Itranf
or
40,
000hour sduringi s1st y
t earofuse.I thadbeenboughtat22, 000,000=and
esti
mat edt ohaveasal vageval
ueof2,000,000=att heexpir
yof100,000hour s.
Required:
Calculatethedepreciati
onexpenseinyear1usi ngthewor ki
nghoursmet hod.
Soluti
on:
Hour swor kedinyear1 =40, 000
Esti
mat edNo.ofhour sduri
ngtheli
fet
ime =100, 000
Cost =22,000,000=
Salvagev alue =2,000,000=
40,
000
Depr
.Expense = x(
22,
000,
000–2,
000,
000)
100,
000
=0.
4x20,
000,
000
108
=8,
000,
000
Revaluati
onMet hod
Undert hi
smet hodpr ofessionalv aluer
sorExper t
sareusedt ov aluethenoncur rent
assets/fi
xedassetssuchasl andandbui l
dings,l
i
vestock,packages,looset ool
set c.
Att heendoft hey eart hev alueoft heasseti scompar edwi t
ht hev alueatt he
beginningoftheyearandt hedifferencei sdepreci
ati
onexpense.
Thismet hodisdiscouragedi naccount ingbecauseoft hesubjecti
vityi
nvolvedandt he
hi
storicalcostconceptexceptwher eal
l othermethodscannotbeusedconv enientl
y.
NOTE:
Ift
hev alueoftheassetattheendoftheyearisgreat
erthanatt
hebeginningofthe
year,
thenitisappr
eciat
ionandnotdepreci
ati
onthoughinmostcasesdepreci
ati
onis
expected.
Example:
KAKConst r
ucti
onltdhadUGX12, 000,000wor t
hofloosetool
satthebeginni
ngof
2004anddur i
ngtheyearmor eloosetoolsworthUGX7,000,
000werebought.Atthe
endoftheyearthevaluersest
abli
shedthev al
ueoft
hetoolsatUGX13,
700,000,t
here
wasnodisposalduri
ngt heYear.
Requi
red:
Computethedepreci
ationexpensefort
hey ear:
Sol
uti
on:
Tool
satthebeginni
ngoftheyear 12,
000,
000
Tool
spurchasedduri
ngtheyear 7,
000,
000
19,
000,
000
Lesst
hev
alueoft
ool
satt
heendoft
hey
ear 13,
700,
000
Valueofthetool
suseddur
ingt
hey
ear 5,
300,
000
(Depreci
ati
on)
Disposal orRetir
ementofFi xedAsset s
Whenf ixedasset sar ewor nout ,becomeobsol et
eoruseless,theyaredisposedoff
(soldoff).Not ethatdi sposingof fofanasseti snotli
keanor di
narysaleofgoods
becausei tisnotr outi
nebuti ncidentalandforthatmatt
eritshouldnotbecr edi
tedto
thesalesa/ cbutr athert hecostoft heasseti str
ansferr
edt oanaccountcal led
Disposal a/c(debitsi
de) .
Theaccumul ateddepr eci
ationa/ cisal soclosedofftothedi sposala/csoast o
determinewhet herther eisei theragai norl ossondisposal.Ifthereisagai non
disposal,iti
scr edit
edt ot hepr ofitandlossaccountasmi scel
laneousincomeandi f
thereisal ossondi sposalt heni ti
sdebi t
edt otheprofi
tandl ossaccountasan
expense.
109
Account
ingEnt r i
esr equi r edfort heDisposal ofFi
xedAsset s.
i
. Tot ransf ert hecostoft heassett ot hedisposalaccount ,openanoncur rent
asset( fixedasset )di sposalaccountanddebi titwitht hecostofthef ixed
assetdi sposedof fasy oucreditt hefixedassetaccounti .e.
Dr Di sposal A/ C xxxx
Cr Noncur rentasset /Fixedasset A/ C xxxx
ii
. Tr ansfert heaccumul ateddepr eciati
onoft heassetbei ngdisposedofftot he
disposal accounti .e.
Dr Accumul at eddepr eciationA/ C xxxx
Cr DisposalA/ C xxxx
i
ii
. Onsal eoft heasset ,recordt her eceiptofcashbydebi ti
ngt heCashbook(Cash
A/ CorBankA/ C)asusual andcr edit
ingthedi sposalaccounti.
e.
Dr Cash/ BankA/ C xxx
Cr Disposal A/ C xxx
i
v. Oncl osingt hedi sposalaccountt othePr ofitandLossAccount ,t
hebalancing
fi
gurei sei theragai noral ossondi sposal i
.e.
a.Gai nondi sposal
DrDi sposal A/C xxx
CrPr of i
tandLossA/ C xxx
b.Lossondi sposal
DrPr of i
tandLossA/ C xxx
CrDi sposalA/ C x
xx
NOTE:
Alt
ernat
ivel
ygainorlossondisposalcanbecomput edbydeduct
ingt henetbook
val
ueofthedisposedassetf
rom t
heproceedsr
ecei
vedupondi
sposal.Fori
nst
ance;
1.Tr
avell
ers’ChoiceLtdsoldoffoneofi tsbuses,whichhadbecomeol dandcoul d
notcopeupwi t
ht hehighcondit
ions.It
scost /
carr
yingv aluewas200, 000,000/=.It
wassoldfor100,000,
000/=andithadanaccumul at
eddepr eciat
ionof125,000,000/=.
Youarerequir
edtocomput etheprofi
t/
gainorlossondi sposal.
Sol
uti
on:
UGX UGX
Proceedsrecei
vedupondi
sposal 100,
000,
000
LessNBV:
Carryi
ngvalue 200,
000,
000
LessAccDepn 125,
000,
000
75,
000,
000
Gai
nondi
sposal 25,
000,
000
2.Travel
ler
s Choice Ltd sold offanot
herbus,whi ch had become economical
l
y
unvi
abl
e.Itscost
/carr
yingv aluewas250,000,
000/=.I
twassoldf or70,
000,
000/=and
i
thadanaccumul at
eddepr eci
ati
onof150,000,
000/=.Youarer equi
redtocompute
thepr
ofit
/gai
norlossondi sposal.
110
Sol
uti
on:
UGX. UGX
Proceedsrecei
vedupondi
sposal 70,
000,
000
LessNBV:
Carryi
ngvalue 250,
000,
000
LessAccDepn 150,
000,
000
100,000,000
Lossondi
sposal 30,000,000
Il
lustrati
on1
Acomput erwasbr oughton1stJan1991atshs2,000, 000/=.Itwast hensoldor
disposedof f31/ 12/93atshs1, 200,
000/-.Thecomput
erwasexpect edtolastfora
periodof10y ear satt heendofwhi chitwouldhavezer
osalvagev al
ue.Usingthe
straightli
nemet hodofdepr eci
ati
on.Iti
sthecompanypoli
cytoignoredepreci
ati
onin
they earofdi sposal.
Prepar e:
a)Comput eraccount
b)Comput erDisposal account
c)Accumul ateddepr eciat
ionofcomput eraccount
Sol
uti
on:
Depr
eciat
ionexpense =cost–salv
agev al
ue
No.ofyear
sofuseful
li
fe
=2,
000,000–0
10
=200,
000
ֶ Accumul
ateddepr
eci
ati
on=200,
000x2y
ear
s=400,
000
Dr Comput
erA/
C Cr
2,
000,
000 2,
000,
000
111
Dr Comput
erDi
sposal
A/C Cr
2,
000,
000 2,
000,
000
Dr AccDepr
eci
ati
onf
orComput
erA/
C Cr
400,
000 400,
000
Il
l
ustration2
Acompanypur chasedapi ckupcost i
ngshs25,000,000/on1stJan1999,andt hen
solditatshs18, 000/on31stDec2000.I
000, ti
sthecompany ’
spolicytoprov
idefor
depreciati
onat10%onast r
aightl
inebasis.I
gnoredepreci
ati
oni
nt heyearofdi
sposal
Required:Prepare:
Pi ckupaccount
Pi ckupdi sposalaccount
Accumul ateddepreciat
ionforpickupaccount
Soluti
on:
Depreciati
onexpense: 10%x25, 000,000=2,500,
000
ֶ Accumul
ateddepr
eci
ati
on=2,
500,
000x1y
ear=2,
500,
000
Dr Pi
ckupA/
C Cr
25,
000,
000 25,
000,
000
Dr Pi
ckupDi
sposal
A/C Cr
112
LossonDi
sposal 4,
500,
000
25,
000,
000 25,
000,
000
Dr AccDepr
eci
ati
onf
orPi
ckupA/
C Cr
2,
500,
000 2,
500,
000
Il
lust
rati
on3
Acomput erwaspur chasedon1stJan1991atShs2, 000,000/
.Itwast hensoldor
disposedof fon31/ 12/93atShs1, 200,
000/.Pr ovi
sionf ordepreci
ati
oni s10% on
reducing balance met hod.A f ul
ly ear’
s depreciat
ion is charged i
nt he yearof
acquisit
ionandnonei ntheyearofdisposal.
Required:prepare;
Comput eraccount
Accumul ateddepreci
ationforcomput eraccount
Comput erdisposalaccount
Solut
ion
Cost=Shs2,
000,
000
Year Deprexpense Accum depr NetbookVal
ue
1991 200,
000 200,
000 1,
800,
000
1992 180,
000 380,
000 1,
620,
000
Note:whenusi
ngreduci
ngbal
ancemethod,
depreci
ati
onforthe1styeari
sdet
ermined
ast heprov
isi
onratexcostofasset.Int hesubsequentyears,thedepr
eciati
on
expenseist
herat
exnetbookvalue.
Dr Comput
erA/
C Cr
2,
000,
000 2,
000,
000
1992 1992
Jan1Bal
b/d 2,
000,
000 Dec31Bal
c/d 2,
000,
000
2,
000,
000 2,
000,
000
113
1993 1993
Jan1Bal
b/d 2,
000,
000 Dec31Di
sposal 2,
000,
000
2,
000,
000 2,
000,
000
Dr AccDepr
eci
ati
onf
orcomput
erA/
C Cr
1993 1993
Dec31Di
sposal 380,
000 Jan1 Bal
b/d 380,
000
380,
000 380,
000
Dr Comput
erDi
sposal
A/C Cr
2,
000,
000 2,
000,
000
Exer
cise1
MercuryComputersLtdownsacomput erconsultancyfir
m.Ithasmanycomput ers
someofwhi chhavegotol
dduet ochangesintechnology.
Thefoll
owinginf
ormati
onrel
atestosomecomput ers.
Thefir
stcomputerwasboughton2/ 3/1998atUGX4, 000,
000,thesecondcomputer
on4/6/1999atUGX6,000,
000andt hethi
rdcomput eron30/ 9/
2000atUGX8,000,
000.
The fi
rstcomput
ert hatwas boughton 2/ 3/
1998 was sol
d( di
sposed of
f)on
5/10/
2001forUGX.2,
400,000andthesecondcomput
erthatwasboughton4/6/1999
wassoldon10/1/
2002f orUGX3,600,
000.
114
Youarer equiredtopr epar
et hefoll
owingaccount
s:
a.I)Comput ersAccount
i
i)Disposal ofComput ersAccount
i
ii
)Accumul ateddepreciat
ionAccount
b.Show theext ractofthePr of
itandLossAccountandt
heBal
ancesheetatt
he
endofeachy ear.
Exercise2
Thef oll
owingi
nfor
mat i
onregardi
ngAkri
ghtPr
oject
sLt
dwasobt
ained.
Extr
actf r
om 31.
12.2002Balancesheet
On2Feb2003,anaddi ti
onalequipmentwasboughtatacostof2, 500,000/=.Duet o
expansi
oninthemar ketforserv
icedplots,anotherequipmentwasboughton24th
June2003atacostof3, 750,
000/=.Howev eranequipmentwhichhadbeenacqui red
atacostof2,000,
000/=on7thApr i
l2000andwasexpect edtohav eausef ulli
feof5
yearsandascrapval
ueof125,000/=couldnotcopeupwi thbiggerpr
ojectseffi
cientl
y.
On5t hJul
y2003,Managementdisposeditoffat750,000/
=
Anot
herequi
pmentwhichwasboughton20thMay2000atacostof4,000,
000/=and
wasexpect
edtohaveasal
vageval
ueof250,000/
=attheendofthetenthyearbr
oke
downandwasdisposedof
fat1,
750, =on3rdSept
000/ ember2003.
Thecompany ’
spol i
cyistochar gefulldepreci
ati
oni ntheyearofpurchaseandnone
atalli
nt hey
earofsal e(disposal
).
Thecompanyf oll
owed doubl edeclini
ng met hod ofdepr eci
ati
on butchanged t
o
chargedepreciati
onatar ateof10%oncostf ort heequipment,whi
chwasav ail
abl
e
bytheendof31December2003.Al l
transacti
onswer ebycheque.
Required:
Showhowt hef ol
lowingaccount swil
lappearat31December2003.
(
i) Equi pmentA/ C
(
ii) Equi pmentDi sposalA/C
(
iii
) Accumul ateddepr eci
ati
on-Equipment ’
sA/C
115
Topic12
Pr
epar
ingManufact
uri
ngAccount
s
Learni
ngobjecti
ves:
Bytheendoft hi
stopic,
y ouwil
lbeablet
o:
Definethecoststhatfor
m amanufacturi
ngcoststatement
Preparefi
nancialstat
ementsforManufactur
ingconcerns
Int
roduct i
on
Despi tethediver
sityofent er
priseswhi chjoi
ntl
ymakeupwhati scommonl ycall
ed
‘
thecommer cialwor l
d’,int
hisTopicwear econcernedwiththosewhi char einvolv
ed
i
nt hemanuf acture,duringwhichmaterialsandlabourareuti
l
izedint hepr oducti
onof
art
iclesforsale.(
Dependi ngont hety
pesofent erpri
ses,pr
oductsmayr angefrom raw
mat erial
sorcomponent sforusebyot hermanuf actur
ingorproducingor ganizati
ons,
tofinishedproductsreadyforeventualsaletousersorconsumer s)
.
Manufacturi
ngf ir
msunl i
ker et
ail
ingfi
rmsIncurcost soft r
ansfor
mingraw materi
als
i
ntofi
nishedgoods.Thi scostofgoodsmanuf acturedbecomespar tofthecostof
sal
esinthet radingaccount.Forthisr
eason,apr el
iminarystat
ement/Accountcal
l
ed
themanuf actur
ingstatement/Account
,whichisanext ensionofthetradi
ngaccount,
i
spreparedt odeterminethecostofgoodscompl eted/ful
l
ymanuf act
ured
Divi
sionsofCostsi
naManuf actur
ingAccount/
Stat
ement
Forconv eni
enceofcompar
isonandanal ysi
stheitemsmaki
ngupthetotalcostare
broadlydivi
dedi
nthemanuf
act uri
ngaccountasdir
ect(
Pri
me)andI
ndi
rect(Over
head)
Costs.
A)Pri
me/Dir
ectCos
ts
Thesearecoststhatcanbespeci f
ical
l
yandexhausti
velyident
if
iedwithapar t
icular
costCent
reorcostunitforexampleaDepartmentorprocess.Theyconsistofdirect
materi
al(
Rawmat eri
al)cost
;di
rectl
abourcost(
dir
ectwages)anddirectexpenses.
DirectMat eri
al
Itismat er i
althatcanbespeci f
icall
yandexhaust i
vel
yident
if
iedwithapar ti
cul
ar
product( Costunit)andcostCent r
eandbecomespar tofthefini
shedproduct,f
or
examplet hecostoft i
mberint hef urni
tur
ei ndustr
y.itcanbei dent
if
ied wi
tha
parti
cularitem off
urni
turesayaparti
cularchai
r,desketc
Dir
ectlabourcost(Dir
ectWages)
Dir
ectlabouri
straceablet oapar t
icularcostCentr
e.Wagespaidt oworker
swhoar e
dir
ectl
yinvol
vedint hemanuf acturingprocessarecall
eddirectwages.Ifaworker’s
Wagecanbeassoci ated withonl yonecostCent r
esayaDepar t
ment,process,
machineetc,andtheni ti sadi r
ectwage.Forexampl ewagespai dtothecarpenter
andthehiri
ngchargeoft hemachi neusi ngformakingfur
nit
ure.Thecostofgl
ueand
varni
shusedinthefurniture,
wagespai dtoawatchmanetcareindir
ect/
over
head.
116
Dir
ectexpenses
Theseareexpensest hatar
etr
aceabl
eorcanbel
i
nkedt
ospeci
fi
ccostCent
ref
or
exampleroyal
tycost
s
B)Ov erhead/Indi
rectCosts.
Factory overhead costs are al
lthose cost s which occurint he factor
y wher e
product i
on i
sbei ng donebutwhi ch cannoteasil
ybet r
aced tothei t
emsbei ng
manuf actur
ed
Indi
rectcost s,orov er
headcostsar ecomposedofi ndi
rectmateri
alcosts,indi
rect
l
abourcost sandi ndir
ectexpenses.Sinceov er
headcost scannotbel i
nkedt oone
parti
cular costCent r
e e.g.Depar t
ment ,process,pr ogram etc,they mustbe
apportionedt othosecostcent er
sandt hereaf
tert ocostunitsbyuseofsui t
able
bases
NOTE:Abil
it
ytotr
aceacostt
oacostcent
erorcostuni
tdet
ermi
neswhet
heracosti
s
di
rectori
ndir
ect
St
ockint r
adeofamanuf acturi
ngf i
rm
Atanygiventi
me,amanuf acturi
ngconcernmayhav estocksinthr
eeforms,namel
y
Rawmat eri
als
Wor kinprogress.Thesear epart
lyf
inishedgoodsatanyt imedur i
ngthe
accounti
ngperiod.OpeningWor kinprogressist hatatthebeginni
ngofthe
accounti
ngperiodwhileclosi
ngstocki
sthatattheend
Fini
shedgoods
Manufact
uri
ngfirmsdiscloseal lt
hesestockitemsascur r
entassetsin the
bal
ancesheet
Manuf
act
uri
ngcostst
atement/Manufactur
ingAccount
I
tshowsthecostoft hemanuf act
uredgoods.Expi redCostsnotrelat
edtot he
manuf
act
urear
enotshowninthisaccountbuti
ntradingandprof
itandl
ossaccount
El
ement
soft
heManuf
act
uri
ngaccount
/st
atement
Theel
ementsoft hisaccountar easf ol
lows
A)PRI
MECOST.( Thet otal ofdir
ectmat erial
s,di
rectl
abouranddi
rectexpenses)
I
) Costofrawmat erialsconsumed/ used.
I
tisarr
ivedatasf oll
ows
Openi
ngst ockofr awmat er i
als x
Add:Purchasesofr awmat eri
als x
Carriageinwar ds x
X
Less: Discount s(I
fany ) x
Returns x
X
X
117
Less: closingst ock x x
Costofr awmat erials x
(Discount sr eceivedcoul daswel lbeaddedt othegr ossprofitinsteadofbei ng
subtractedf rom pur chases)
i
i)Directl abourcost /wages
Thisi saddedt ot hecostofr awmat erialconsumed
i
ii)Directexpensesconcer nedwi thproduct i
oni ncl
udingr oy
alt
iesonpr oductionare
addedt ocostofr awmat eri
al consumedanddi rectl
abourcost(Directwages)
B)Fact or yov erheadsar eaddedt ot hepr imecost .Factoryover
headsi ncludebutar e
notlimi t
edt ot hef ollowi ng:
a)Rentandr atesoft hef actory
b)Fact or ypower
c)Fact or ylight i
ng
d)Depr eciat i
onofpl antandmachi ner y
e)Super visors, wagesandsal aries
C).Openi ngwor k
-i
n- prog r
es s
Thev al ueofopeni ngwor k-i
n-progressi saddedt ocostsalreadycol lect
ed as
describedabov e.
vi)
. Cl osingwor k-in-progr ess
Thecostofcl osingwor k-in-pr
ogr essi ssubtractedinarri
vingatt hecostof
goodscompl etedorf ullymanuf actured.
PROFORMAMANUFACTURI
NGACCOUNT/
COSTSTATEMENT
PRI
MECOS T
Raw-mater
ial
(Di
rectmat
eri
alcost
)
Openi
ngstock xxx
Add:Pur
chases xxx
Xxx
Less:Cl
osi
ngst
ock xxx
Costofrawmat er
ial
sconsumed xxxx
Add:Di
rectl
abourcost(di
rectwages) xxxx
Di
rectexpenses xxxx
xxxx
Add:
FACTORYOVERHEADCOSTS:
Rent xxx
I
nsurance xxx
Depreci
ati
on xxx
Etc. xxx
xxxx
xxx
Add:
OPENI
NGW.
I.
P xxx
xxx
Less:CLOSI
NGW.
I.
P xxx
COSTOFGOODSCOMPLETED/
FULLY MANUFACTURED) xxx
118
The f
igureforcostofgoods completed orfull
y manufactur
ed i
s
tr
ansf
erredt
othet
radi
ngaccountt
oconst
itut
ecostofgoodssold.
Manuf
act
uredGoodsmaybetransfer
redeitherat
Costpriceor
Costplusmarkup(
Thi
swillbediscussedlat
er)
El
ementsofaTr adingandPr ofi
tandLossAccountPar t
Thi
saccounti ncl udes:
Costofgoodsf ull
ymanuf actured/ Producti
oncostbr oughtdownfr
om the
manuf act uringaccount .Thi
sreplacesthepur chases
Openi ngandcl osingstocksoff i
nishedgoods
Sal es
Inotherwor ds,t hetradingaccountofamanuf acturi
ngfi
rmissimil
art
othatofa
ret
ail
ingf irmi nmanyaspect s.Theonl ydiffer
encei sthatthecostofgoods
manuf act
ur edr eplacest hepurchasesf i
gure
Thegr osspr of i
tiscar r
iedforwardtot heProfi
tandl osspar
t
119
PROFORMATRADI
NGANDPROFI
TANDLOSSACCOUNTOFAMANUFACTURI
NG
FI
RM
Sales xxxx
Less:Costofgoodssold:
Fi
nishedgoodsopeni
ngst
ock xxxx
Costofgoodscomplet
ed(
ful
l
ymanuf
act
ured) xxxx
Xxxx
Less:Fi
nishedgoodscl
osi
ngst
ock xxxx
Costofgoodssol
d xxxx
Grossprof
it xxxx
Less:
Offi
ceandadmi ni
str
ati
onexpenses
Off
icesalar
ies xxx
Postageandstat
ioner
y xxx
e.
t.
c xxx xxxx
Sel
li
nganddi stribut
ionexpenses
Adverti
si
ng xxx
Sal
escommi ssion xxx
Carr
iageoutwar dse. t
.c xxx xxxx
Fi
nancialcharges
Bankcharges xxx
I
nterestonloanse. t
.c xxx xxxx xxxx
NETPROFI
T/I
NCOME xxxx
120
WHEREMANUF
ACTUREDGOODSARETRANS
FERREDATTHEI
RCOS
TPRI
CE
EXAMPL
E
Carri
ageout war ds 13,
000
Elect
ri
city-
Fact ory 14,
000
-
Of f
ice 17,
000
Groundr ent(factory) 3,
000
Baddebt sexpense 4,
000
Insur
ance
-Offi
cebui l
dings 6,
000
-Fact orypremi ses 3,
000
Depreciati
on
-Offi
cebui l
dings 1,
000
-Factorymachi nes 7,
000
Legalfees 1,
000
TheSt ocktakingexer
ciser
eveal
edt
hef
ollowingbal
ances
Stockatcost 1/1/2004 31/ 12/
2004
(UGX000) ( UGX000)
Raw- mater
ials 8,
000 7,
000
Wor k-
in-
progress 4,000 3,000
Fi
nishedgoods 9,
000 8,
000
Requir
ed:
Prepar
ethecompany
’smanuf
act
uri
ng,t
radi
ngandpr
ofi
tlossaccountf
ort
hey
ear
ended31/12/
2004
121
S
OLUTI
ON
ROOFCLADLTD
MANUFACTURI NG,
TRADI
NGANDPROFI TANDLOSSACCOUNT
FORTHEYEARENDED31/12/
2004
(UGX000) (
UGX000) ( UGX000)
Rawmater
ial
s
Openi
ngst
ock(1/
1/1999) 8,
000
Add:Pur
chases 50,
000
58,
000
Less:
Discountonr
awmat
eri
als 2,
000
56,
000
Less:Cl
osi
ngst
ock(
31/
12/
1999) 7,
000
Costofrawmateri
alsconsumed 49,
000
Add:Otherdi
rectcost
s
Fact
orydir
ectwages 40,
000
PRIMECOST 89,
000
Add:Factory(Manuf act
uri
ng)ov
erheadcost
s
Wagesofcr aneDr i
vers 45,
000
Manufactur
ingexpenses 15,
000
Depreci
ati
onoff actorymachi
nes 7,
000
Factor
yinsurance 3,
000
El
ectri
cit
y(Factory) 14,
000
Groundrent(Factory) 3,
000 87,
000
176,
000
Add:
Openi
ngW.
I.
P(1/
1/2004) 4,
000
180,
000
Less:
Closi
ngW.
I.
P(31/
12/
2004) 3,
000
122
Offi
ceelect
ri
cit
y 17,
000
Depreci
ati
on-Off
ice 1,
000 60,
000
Sell
i
nganddi st
ri
buti
onexpenses
Promoti
on 20,
000
Carri
ageoutwards 13,
000 33,
000
Fi
nanci
alchar
ges
Discountall
owed 3,000
Legalfees 1,000
Salesmen’scommissi
on 14,000
Baddebt s 4,
000 22,
000 115,
000
Netpr
ofi
t 907,
000
NOTE:Manuf
act
uri
ngex
pensesar
eal
way
stakent
obeov
erheadsunl
essst
ated
Ot
herwi
se
MANUFACTUREDGOODSTRANSFERREDTOTHETRADI
NGACCOUNTATTHEIR
CURRENTMARKETVALUEANDTHETREATMENTOFTHEARISI
NGUNREALI
SED
PROFI
T
Whyt
ransf
eratcur
rentmar
ketv
alue(
costpl
usmar
kup)r
athert
hant
hecostpr
ice?
How i
stheunr
eal
i
zedpr
ofi
tonunsol
dgoodsel
i
minat
edf
rom t
hePr
ofi
tandl
oss
123
account ?
Apr ovisionaccountisusedt oeliminat
etheunreal
izedpr of
itontheunsol ditems.I
f
theprov isi
onforunreal
izedpr of
itonclosi
ngstockexceedst heprovisiononopeni ng
stockt hentheprofi
tandl ossaccountwi l
lbedebit
ed( subtr
actedfrom pr ofi
ts).I
fon
theot herhandt hepr ovisi
ononcl osi
ngstockdecr easesbel ow thepr ovisionon
openingst ock,
thenthepr of
itandlossaccounti
scredited(addedtopr ofi
ts).
EXAMPLE
MukwanoLTD,amanuf acturingcompanyhadt hef ol
lowingf ini
shedgoodsst ock
balancesatcost
1/1/2004 31/ 12/2004
(UGX) (UGX)
Fi
nishedgoodsatcost 2,500,000 4,
000,000
Duringt heper i
odt hecostofgoodscompl etedamount edt oUGX30, 000,
000.The
companyt ransf ersgoodsatcostpl usamar k-upof10%t ocat erforfact
oryprofi
ts.
Requi redpr epar e
Apr ovisi
onf orunr eali
zedpr of
itaccount
Manuf acturi
ngst at ementext r
act
At r
adingandpr ofitandlossAccountext ract
Solution
Note:Whent hecostofgoodsmanuf act
uredi sinfl
ated,stocksmustal sobei nfl
ated
byt hatsameper centage.
Prof i
tforunr eali
zedpr ofi
t=2, 500,000x110%-2, 500,
000
Onopeni ngst ock
=UGX250, 000
Pr
ovi
sionf
orunr
eal
ized
Pr
ofi
toncl
osi
ngstock =4,
000,
000x110%-
4,000,
000
=UGX400,
000
Pr
ovi
sionf
orunr
eal
i
zedpr
ofi
tA/
C
Bal
.b/
d 250,
000
P&LA/ C 150,
000
Bal
c/d 400,
000
(
Incr
easei
npr
ovi
sion)
400,
000 400,
000
Tr
ansferval
ueofFini
shedgoods =30,
000,
000x110%
UGX33,000,
000.
Manuf
a c
turi
nga
ccount(
ext
rac
t)
Costofgoodsmanufactur
ed/f
ull
ycompl
eted 30,
000,
000
Addmar kup(
10%of30,000,
000) 3,
000,
000
124
Tr
ansf
erv
alueofgoodsmanuf
act
ured 33,
000,
000
Not
e
a)Itist he I
nfl
ated (t
ransfer)val
ue ofUGX 33, 000,
000 ,notthe costof
30,
000,000thatist
ransferr
edtothetradi
ngaccount
b)Whengoodsmanuf acturedaret r
ansfer
redatani nf
lat
edval
ue,t
hef i
nished
goodsopeningandcl osingstocksar ealsoi
nfl
atedasshowninthetrading
accountext
ract
Tradi
ngandpr ofitandlossaccount(
Ext
ract
)
Sales xxxxxxxxx
Less:Costofgoodssol d
Finishedgoodsopeningstock 2,
750,
000
(Costx110%)
Val ueofgoodscompl et
edor
Manuf actur
ed( t
ransf
erpri
ceorval
ue) 33,000,
000
35,
750,
000
Less:
Fini
shedgoodscl
osi
ngst
ock 4,
400,000
(
Costx110%)
31,
350,
000
Grossprof
it xxxxxxxx
Add:f
actorypr
ofit 3,000,
000
Less:Incr
easei
npr
ovi
sionf
orunr
eal
i
zedpr
ofi
t
150,000
I
LLUS
TRATI
ONTWO
Thef
oll
owi
ngi
nfor
mat
ionwasext
ract
edf
rom TRISTARmanuf
act
urer
s
Debi
tsi
deoft
hecashbook(
recei
pts) UGX
Receipt
sfrom debt
ors 60,000,
000
Cashsales 650,
000,000
I
nterestr
ecei
ved 9,
000,000
Cr
edi
tsi
deoft
heCashbook(
Pay
ment
s)
Directf actor
ywages 30,
000,
000
El
ect ricity 5,
700,
000
Salespr omoti
onexpenses 900,
000
Roy altycosts 5,
000,
000
I
ndi rectmat eri
al 12,
000,
000
Pay mentt ocredi
tor
s 45,
000,
000
Account ancyfees 2,
400,
000
Discountonr awmat er
ial
sboughtoncr
edi
t 1,
500,
000
125
Rawmat eri
alcashpurchases 32,000,
000
Off
iceequi pment 150,
000,000
Bankchar ges 400,000
Carr
iagei nwards 18,
000,000
Rent 15,
000,000
Rawmat eri
alret
urns 1,
000,000
Carr
iageout wards 3,
000,000
Manuf acturi
ngexpenses 20,000,000
Sal
aries 16,000,000
Ther
ecor
dsoft
hemanuf
act
urer
sal
soshowedt
hef
oll
owi
ng
Fact
ory Admi
nist
rat
ion Sal
es
Area(Squaremet res) 70 20 10
ApportionmentofOt her
Ov er
heads
Salari
es ½ ¼
El
ectrici
ty 50% 30%
4.Manuf actur
edgoodsar etr
ansf
err
edf r
om t
hefactor
ytothesalesdepar
tment
atmanuf actur
ingcostplusamar kupof20%forfactor
yprof
it
.Fini
shedgoods
stocksar ei
nfl
atedbyt hesamepercent
age.
Requi
red
PrepareTRI
-STARManuf act
uri
ng,t
radi
ngandpr
ofi
tandl
ossaccountf
ort
he
year-
ended31.12.
2003.
126
SOLUTI
ON
TRISTAR
MANUFACTURI
NG,TRADI
NGANDPROFI TANDLOSSA/
C
FORTHEYEARENDED31.12.
2003(
UGX000)
Ra
wma
ter
ial
s
Openingstockofr
awmat eri
als 10,
000
Add:Purchaseofr
awmat eri
als 82,
500
Carri
ageonrawmat er
ials 18,
000
100,
500
Less:Rawmat er
ial
returns 10,
000 99,
500
109,
500
Less: Closingst ockofrawmat er
ial
s 4,
000
Costofr awmat eri
alsconsumed 95,
500
Add: Directf actor
ywages 30,
000
Add: directexpenses
Roy al
ty 5,
000
Manuf acturi
ngexpenses 10,000 15,
000
PRIMECOSTS 140,
500
Add: FACTORYOVERHEADS
Manuf actur i
ngex penses 10,000
Indir
ectmat erial 12,000
Factoryr ent 10.500
Electr
icity 3,
000
Salari
es 8,
000 43,500
184,
000
Add:
openi
ngwor
kinpr
ogr
ess 4,
000
188,
000
Less:Cl osi ngWor kinpr ogress 3,
000
Costoff ullymanuf acturedgoods 185,
000
Add:Mar k- Up/Factoryprofit(20%of185, 000) 37,000
Transferv alueoffini
shedgoods 222,000
Sales 716, 000
Less:Costofsal es
Fini shedgoodsopeni ngst ock 40,
800
Tr ansf erval
ueofgoodsmanuf actured 222, 000
Val ueofgoodsav ail
ableforsale 262, 800
Less: Finishedgoodscl osi
ngst ock 28,
800
Costofsal es 234,000
Grosspr ofit 482,000
Add:Fact or yprofi
t 37,000
Inter estr ecei
ved 9,
000
Decr easei nprov i
sionf orunreali
zedpr ofi
t 2,
000
127
Di
scountonr
awmat
eri
alpur
chases 1,
500
531,
500
Less:Oper ati
ngexpenses
Off
iceandadmi nist
rat
ionexpenses
Rent 3,
000
El
ectricit
y 1,
800
Sal
aries 4,000
Depreciati
on-
officeequipment 15, 000 23,
800
Sel
li
nganddi stribut
ioncosts
Carr
iageoutwards 3,
000
Sal
espr omoti
on 600
Rent 1,
500
El
ectrici
ty 1,
200
Sal
aries 4,
000 10,
300
Fi
nancecharges
Bankcharges 400
Account
ancyfees 2,
400 2,
800 36,
900
Netprof
it 494,
600
Pr
ovi
si
onf
orUnr
eal
i
zedpr
ofi
t
Decreasei
nprov
isi
on Bal
b/d 6,
800,
000
Forunreal
i
zedprof
it 2,
000,
000
Bal
c/d 4,
800,
000
6,
800,
000 6,
800,
000
Tr
adedebt
ors
Bal
b/f 14,
000,
000 Cash 60,
000,
000
Cr
edi
tsal
es 66,
000,
000 Bal
c/f 20,
000,
000
80,
000,
000 80,
000,
000
128
Tr
adeCr
edi
tor
s
Cash 45,
000,
000 Bal
b/f 12,
000,
000
Di
scount 1,
500,
000
Bal
c/d 16,
000,
000 Cr
edi
tpur
chases 50,
500,
000
62,
500,
000 62,
500,
000
Note:
Totalpurchases=Cashpurchases+creditpur
chases
TotalSales =Cashsal es+cr edi
tsales.
Discounton r aw mat eri
als purchased coul
d as wel
lbe subt
ract
ed f
rom t
he
purchasesfigurei
nthemanuf acturi
ngaccount/
Stat
ement
Exer cise
MukwanoGr oupmanuf acturesandRet
ail
sCookingOi l
;thef ol
lowi
ngbal
anceswer
e
extract edf rom i t
sledgeron31stDecember
2003
(UGX000)
Sales 7,000,000
Salesr etur ns 100,000
Purchasesofr awmat erial
s 50,000
Carriagei nwar ds 2,
000
Carriageoutwar ds 1,000
Fact orydi rectwages 60,000
Roy altycost s 50, 000
Product ionmanager ’
scommi ssi
on 3,000
Manuf act uringexpenses 40,000
Plantmai nt enance 30,000
Insur ance
-Pr oduct ionmachi nes 25,000
-Del iver yv ans 15,000
Headof ficesal ari
es 10,000
Gener al expenses 2,000
Salespr omot ion 1,
500
Depr eci at i
onofOf f
icebui l
dings 1,000
Salesmencommi ssion 800
Thest
ockr
ecor
dsdi
scl
osedthefol
lowi
ngbal
ances
1/1/2003 31/12/2003
(UGX.000) (UGX.000)
129
Rawmat er
ial
s 4,000 3,
000
Workinprogr
ess 3,
000 4,
500
Fi
nishedGoods 100,000 150,
000
Requir
ed
PreparetheCompany ’
smanufact
uri
ng,t
radi
ngandpr
ofi
tandl
ossaccountf
ort
he
yearended31stDecember2003
130
Topi
c13
Cont
rol
account
sandreconci
l
iat
ions
Learni
ngobjectives
Bytheendoft hisTopi c,youwillbeableto:
Explainthenat ureandf uncti
onofcont r
olaccount
s
Ill
ustr
atety pi
cal entr
iesinacontrolaccount
Preparecont rolaccount sprovi
ngt heaccuracyoftheaccount
srecei
vabl
eand
accountspay abl eledgers.
I
ntr
oduct
ion
Thewholepr ocessofbookkeepingr
evol
v esaroundtheideathattherecords‘
bal
ance’
;
everydebithasacr edi
tandt hetot
aloft hedebit
sequalst hetotalofthecr
edi
ts.In
otherwords,i
ftherearenoerror
sintherecords,t
hetri
albalancewi l
lbal
ance.
I
fthetrialbal
ancedoesnotbal ance,thedif
fer
encehastobef ound.I
nasy st
em that
i
snotcomput eri
zed,i tmayt akeal otofexpensiv
et i
meand ef for
ttof i
nd the
di
ff
erence.Howev er
,therei
sat echniquewhichsimpli
fi
estheprocessconsi
derabl
y–
bal
ancingsecti
onsoft hebookkeepingsyst
em separat
ely
.
Earli
erinthet ext,wesaw thatthel edgerisbrokendowni nt
ot hr
eeparts:accounts
receiv
ableledger,accountspay
abl eledgerandthegenerall
edger.I
nmostbusi nesses,
byf arthegr eatestvolumeofent riespassest hroughtheaccountsrecei
vableand
payableledgers.I ti
sf ai
rl
yeasyt oprovet heaccuracyoftheaccount sreceivabl
e
l
edgerandt heaccount spayabl
el edgerseparatel
y.Thetechni
quesofdoingsoar ethe
subjectofthi
sTopi c.
Acont rolaccountisdefi
nedasasummar yaccountappeari
ngi nthegener
alledger
forthepur poseofcont
roll
i
ngal
lthedetai
l
edent r
iesi
nt hel
edgert owhi
chitrel
ates–
i
nshor t,itisanaccountinwhicharecordiskeptoft hetotalval
ueofanumberof
simil
arbuti ndi
vi
dualitems.Cont
rolaccounts are used chief
lyfordebtor
s and
credit
ors.
Examplesofcontr
olaccountsi
nclude;
Debtorscontr
ola/corAccountsrecei
vablecontr
ola/c
Credi
torscontr
ola/corAccountspayablecontr
ola/c
Etc
Note;Thebal anceofthecont r
ola/cshoul
dbethesameast hesum ofal
lindi
vidual
l
edgerbal ancestowhi chitrel
atese.g.Xlt
dhadthefoll
owi
ngdebtorsforthey ear
ended31.3.2004
Peter 200,000/
=
Joy 300,000/
=
Therefor
eatt heyear-
end31.3.2004,t
hedebtor
scontr
ola/cwoul
dhav eabalanceof
500,000/=
131
Cont r
ol accountr
econcil
i
ations
Theobj ecti
vewehav eint hi
sTopicist o est
abli
shat echni
queforpr
ovi
ng the
correctnessofa sect i
on oft hebookkeepi
ng system.Letust aket
heaccounts
receivableledger
/debt
orsledgerf
ir
st.
Provi
ngtheaccur acyofthedebtor
’sledgerentr
ies
Thetotalofthedebtor’
sledgerbal
ancesi sthekeytotheoperat
ion.Wecanest
abli
sh,
i
ndependent l
yoftheaccountsreceiv
ableledger,acont
rolt
otalwithwhi
chthet
otalof
thesebalancescanbeagr eed.
Theentri
esintheaccount
srecei
vablel
edgercomepr edominant
lyf
rom:
Sal
esjournal -cr
editsal
es
Cashbook -Cashrecei
vedfrom cust
omers
Cashbookdiscountcol
umn -
Discountal
l
owed
Ther
ewi l
lbesomeot hermi nori temsl i
kebaddebt swr i
tt
enoffand,ofcour
se,the
bal
ancesbroughtf
orwar dfrom t hepr evi
ousper iod.I
tispossibl
etoobtai
nthetot
als
ofthese i
tems withoutr eference t ot he accountsr ecei
vabl
eledgeras allthe
i
nfor
mationwill
bereadilyavail
abl e.Foreexampl e;
It
em Sourceoft otal
Openingbalances Li
stofl astmont h’sbalances
Creditsal
es Totalofsalesj ournal
Cash fr
om Account sreceivableledger(debt
ors’l
edger
)col
umni
nthecash
customers book( Wemeant heanalyzedcashbook
Discountsal
lowed Discountscol umnsi nthecashbook
Alltheseitemsareputt oget
herinaledgeraccountint
hegenerall
edger– the
Accountr ecei
vabl
e/debt
ors’l
edgercont
rolaccount.An exampl
e ofthe f
ormat
appearsbelow
Sal
esledgerorDebt
ors’controlA/c
Balb/f xx Returnsinwar ds xx
Credi
tSales xx Cash/ chequesr ecei
vedf
rom debt
ors xx
Debtor
s’chequesdi
shonored xx Discountsallowed xx
Debtor
s’ref
undforoverpayments xx Baddebt swr it
tenoff xx
Bal c/
f xx
xxx xxx
Notethatt
heitemsappearonthesamesi deasthatonwhi chtheindi
vi
duali
tems
appeari
ntheaccountsr
ecei
vabl
eledger
.Wehaveincludetheposit
ionofther
etur
ns
i
nwards/sal
esr et
urns– i
twouldofcourse,beobtainabl
ef r
om thesalesr
etur
ns
j
ournal
.
132
Thebalancec/
fwoul
dthenbeagr
eedwi
tht
het
otaloft
heaccount
srecei
vabl
eledger
bal
ances
Provingtheaccuracyoftheaccountspayabl
e(credit
ors)ledger
Exactlythe same processi sfoll
owed to agree the accountspayabl
eledgerby
prepari
nganaccount spay abl
eledgercontr
olaccountwhi chleadstoabalancewi
th
whichthetotaloftheaccountspayabl
eledgerbalancescanbeagr eed.
Aswel
last
hei
temscov
eredsof
ar,
sev
eral
other
scanappear
:
Account
srecei
vabl
eledgercont
rol
account Account
s pay
abl
e l
edger cont
rol
account
Cashref
undstocustomers Cashr
efundsf
rom suppl
i
ers
Baddebtswri
tt
enoff
Oneot heradditi
onalit
em appearsi nmostexaminat i
onquestionsoncont
rolaccounts
–t heContra.Acont r
aisat r
ansferbetweentwol edgeraccountsfort
hesameper son.
Itsomet i
meshappenst hatacust omerinthedebt ors’l
edgerisal
soasupplieri
nt he
credit
ors’ledger
.Inmanycases,t heaccount
sar eset tl
edbyeachpar t
ypay i
ngt he
otherinfullfort
hegoodssuppl i
ed.Howev er,i
tispossi bl
etosetofft
hebalancesand
forthepar tywiththegreaterbalancetopayt hedi ffer
ence(seethequesti
onint he
exerci
sesf orsuchascenar i
o).
Themosti mport
antpointtogr
aspaboutcont
rasisthattheymustappearinbot
ht he
accountsreceiv
abl
el edgerand accounts payableledger,and ther
efor
e must
necessar
il
ybei nboththeaccount
srecei
vabl
el edgercontr
olaccountandaccounts
payablel
edgercont
rolaccount
.
Af
ormatf
ort
hePur
chasesl
edger(
account
spay
abl
e)cont
rol
accountnowappear
s
Pur
chasesledger(cr
edit
ors)control
A/c
Returnsout
wards xx Bal b/
f xx
Paymentstocredi
tor
s xx Credi
tpurchases xx
Discount
srecei
ved xx Chequeswr it
tentocredit
orsdishonouredxx
Balc/f xx Ref undsfrom credi
tor
sf oroverpaymentxx
xxx xxx
Reconci
l
ingI
tems
133
Inpracti
ce(andinexaminati
onquest ions)thebalanceont hecontrolaccountmaynot
agreewi t
hthetotaloft
heledgeraccount s,andinsuchani nst
ancet hecausesoft he
dif
ference mustbe i denti
fi
ed and adj ust
ment s made wher e necessary.Such
dif
ferencesmaybecausedby :
Er ror
sintheaccount
sr eceivabl
eoraccount spayableledgercontrolaccount
s
Er ror
sintheaccount
sr eceivabl
eoraccount spayableledger
Er ror
sinboththecontr
ol accountsandt heledgeraccounts
Adv
antagesofcont rol account s
1.Det ectionoff r
aud;
Cont r
ola/ cs ar e usual ly pr epar ed by r esponsi bl
e of fi
cials who hav et he
responsi bil
it
yofcont rolli
ngf r aud,andsi nceal lent ri
espasst hrought hese
account s,management /officialswi llbeabl et oi dent if
yt hef r
audcommi ttedby
mani pulation of account si nt he l edger .Thi s hel ps t o st rengthen t he
organizat i
on’si nternal cont rol systems.
2.Checki nger r
or s;
Sincet hebal anceoft hecont r
ola/ chast or econci lewitht het otalofi ndiv i
dual
l
edgerbal ances, anymi stakewi l
lbeeasi lydet ect edorl ocat edandcor r
ect ed.
3.Impr ov i
ngmanagementef f i
ciency ;
Cont rolaccount s enhance managementef f
iciencybecause cr edi t
ors’and
debtors’ balancescanbeobt ainedatf irstgl anceonadul ybal anced- off(closed)
controlaccount .Thi ssav est imet hatwoul dhav ebeenwast edinbal ancingof f
andaddi ngupi ndi v
idual debt or sandcr editor sbal ances.
4.Enhanci ngdeci si onmaki ng;
Decisionsr elatingt ohowmuchshoul dbesol doncr edit,prov i
sionst obemade
forbad&doubt fuldebt sont hesesal es,andhowmucht obeboughtoncr edi
t
areeasi lyreachedbyl ookingatt heout standi ngbal ancesont heDebt ors’and
Creditors’cont rol account s.
5.Det ermi nati
onofcr editsal esandcr edi tpur chases;
Insi ngleent r y&i ncompl eter ecor ds,andi nr ecei ptsandpay ment sa/ c,t he
creditsal esandcr editpur chasesar eof tenmi ssing.Thesef igurescanbe
determi nedbyconst r
uct i
ngcont rola/ c
I
ll
ustrat i
on1
Thef ollowingdet ai
lswer eext
ract
edf
rom t
hebooksofacompanyfortheyearended
31.12.2003. (
UGX)
Debtor sbal ance 1.
1.2003 1,
600,
000
Creditorsbal ance 1. 1.
2003 2,
300,
000
Cashpai dtosuppl i
ers 7,
000,
000
Cashr ecei vedfrom debtors 15,
000,
000
Creditpur chases 12,
000,
000
Discount sr ecei
ved 670,
000
Baddebt swr itt
enoff 140,
000
Salesr eturns 490,
000
134
Purchasesretur
ns 590,
000
Debtorschequedishonour
ed 450,
000
Discountall
owed 650,
000
Creditsal
es 26,
500,
000
Required;Drawupt hedebtor
s’andcr
edi
tor
s’cont
rol
accounts.
Sol
uti
on
Debt orscontrolA/c
Balb/d 1,600,000 Cash 15,000,000
Debtor
schequedi
shonor
ed 450,000 Baddebt swr
it
tenof
f 140,
000
Sal
esr et
urns 490,000
Di
scountall
owed 650,000
Credi
tsal
es 26,500,000 Bal c/ d 12,270,000
28,
550, 000 28,550,000
Cr
edi
tor
s’cont
rolA/
c
Cashpai dtosuppl
ier
s 7,000,000 Balb/d 2,
300,
000
Discountrecei
ved 670,000 Credi
tpur
chases
12,000,000
Purchasesretur
ns 590,000
Bal c/
d 6,040,000
14,300,000 14,
300,
000
Agreementofthecont
rolaccountbal
ancewi
tht
hesum oft
hebal
ancesont
he
underl
yi
ngaccount
s
Exampl e
Thef ol
lowingexampleil
lust
rat
esthetypesofprobl
em l
ikel
ytoari
seinsuchasy stem.
Fullexplanati
onsoft he amendmentsar e gi
ven – such expl
anati
onswoul d not
normallybenecessaryintheexaminat
ionquest
ion.Thi
sill
ust
rati
onandtheentriesto
correcttheerr
orsarebasedont heaccountspayabl
eledgercontr
olaccountbeingin
thedoubl eent
rysyst
em.
Kagutema’saccountspayabl
eledgercontr
olaccountisani nt
egr
alpartoft
hedoubl
e
entr
ysystem.Indiv
iduall
edgeraccountbalancesarelist
edandtotal
edonamont hl
y
basi
s,andr econci
ledtothecontrolaccountbalance.Inf
ormati
onforthemonthof
135
Mar
chisasf oll
ows;
1.I
ndividuall edgeraccountbal ancesat31 Mar chhav ebeenl isted outand
tot
aledasf ol l
ows;
Tot al ofdebi tbal ances GX. 1,012,000
Tot al ofcr editbal ances UGX.20, 778,000
2.Theaccount spay ablel edgercont rolaccountbal anceat31Mar chisUGX. 21,
832,
000( net ).
3.Onfur therexami nat i
ont hefoll
owinger r
orsaredi scov ered;
Thet otalofdi scountr eceived forthemont h,amount ing to UGX.1,
715, 000, hasnotbeenent eredinthecont r
ol account .
Onl isti
ng- out,ani ndi
vidualcreditbalanceofUGX. 205,000hasbeen
incor rectlyt r
eatedasadebi t
Apet tycashpay mentt oasuppl i
eramount i
ngt oUGX. 63,000hasbeen
cor rectlyt reatedi nt hecont r
olaccount,butnoent ryhasbeenmadei n
thesuppl ier ’
sindiv i
dualledgeraccount
Thepur chasesj ournaltotalforMarchhasbeenunder -
cast( underst
ated)
byUGX. 2,000, 000.
Cont r
as( set -
offs)wi t
ht heaccount sr eceivabl eledger,amount i
ngi n
totalt o UGX. 2,
004, 000,hav ebeencor rectlyt reat
edi nt heindivi
dual
ledgeraccount sbutnoent ryhasbeenmadei nt hecontrol account.
Requi
red
a)Preparethepartoftheaccountspayabl
eledgercont
rolaccountr
efl
ecti
ngthe
aboveinfor
mation.
b)Prepareast at
ementr econci
l
ingtheorigi
naltot
alofthei ndi
vi
dualbal
ances
withcorr
ectedbalanceonthecontr
olaccount
.
Sol
uti
on
136
account s.Amendment sshoul dbemadet ot helistofbal ances.Again,noamendment
i
sr equi r
edt ocontrol accounts.
Step4
Thet otaloft hepur chasesj ournalispost edbydebi ti
ngpur chasesandcr edit
ing
account spay ablel edgercont r
olaccount .Ifthet otali sunder st
ated,thefol
lowing
bookkeepi ngent rymustbemade, post
ingUGX. 2, 000,000under -st
atement
Dr.Pur chases
Cr.Account spay ableledgercontrol
As t he i ndividuall edgeraccount si nt he account s pay abl
el edgerare posted
i
ndividual l
yf rom thepur chasesjournal,t
het otaloft hej ournalbei
ngunderstat
edwi l
l
notaf fectt helisti
ngoft hebal ancesintheaccount spay ableledger.
Step5
Herei ti scl earthatt heer roraffectsthecont rolaccount ,nott heaccountspayable
l
edger .Cor rect i
onshoul dbemadebyt hebookkeepi ngent ry:
Dr.Account spayablel edgercontrol
Cr.Account sreceivableledgercontrol
Account spayableledgercont rolaccount
Discountr
eceiv
ed(S1) 1,
715,0001Mar
ch Bal
ance (
Net
)
21,832,
000
Accountsrecei
vabl
eledgercont
rol
(S5)2,004,000 Pur
chase (
S4)
2,
000,000
Balancec/d 20,
113,
000
23,
832,
000 23,
832,
000
Reconcili
ati
onofi ndi
v i
dualbal
anceswit
hcontr
olaccountbalance
DR(UGX. ) CR( UGX.
)
Balancesextracted 1,
012,000 20, 778,
000
Creditbal
ancei ncorr
ectlyt
reat
ed2*205,
000(S2) 410,
000
Pettycashpay ment( S3) 63,000
1,
075,000 21, 188,
000
1,
075,
000
Nettotalagreeingwithcontrol
account 20,
113,
000
137
138