FINANCIAL ACCOUNTING

Mr. Gabriel
kgabriel@uok.ac.rw

25/09/2021 FINANCIAL ACCOUNTING 1

 Brief Outline
• Accounting Errors
• Accounting Adjustments
• Single Entry and Incomplete records
• Accounts for non-trading organizations
• Partnership Accounts: Introduction
 TOPIC ONE: ACCOUNTING ERRORS
• Some errors committed in accounting may not be detected
easily because their effect do not make the trial balance not
to balance.
 1.1 Types
1. Errors of Omission
2. Errors of Commission
3. Errors of Principle
4. Compensating Errors
5. Errors of Original Entry
6. Errors of complete reversal of entries
7. Transposition Errors
 1. Errors of omission
These errors occur when a transaction is completely omitted
from the books. If for instance, we sold Rwf. 9,000 goods to
James Mugwaneza, but did not enter this sale in either the
sales account or Mugwaneza’s personal account, the trial
balance would still balance.
 2. Errors of commission
This type of error occurs when the correct account is entered
but in the wrong person’s account, e.g. where a sale of Rwf
1,100 to Charles Gahamanyi is entered in the account of
Christopher Gahamanyi.
It will be noted that the correct class of account was used,
both accounts being personal accounts but the wrong personal
debtors account was debited.
 3. Errors of principle
These errors occur where an item is entered in the wrong class
of account, e.g. if a purchase of non-current (fixed) asset, such
as a motor-van, is debited to an expense account, such as
motor vehicles expenses account.
 4. Compensating errors
• These errors occur where the errors cancel each other out.
If the sales account was added up to be Rwf.1,000 too much
and the purchase account was also added up to be Rwf.
1,000 too much, then these errors would cancel out in the
trial balance. This is because the two sides of the trial
balance will be Rwf. 1, 000 too much.
 5. Errors of original entry
• These errors occur where the original figure is incorrect, yet
double entry is still observed using this incorrect figure. An
instance of this could be where there were sales of Rwf.
15,000 but an error is made in calculating the sales invoice.
If it were calculated as Rwf. 13,000, and Rwf. 13,000 were
credited as sales and Rwf. 13,000 were debited to the
personal account of the customer, the trial balance would
still balance.
 6. Errors of complete reversal of entries
This occurs where the correct accounts are used but each
item is shown on the wrong side of the account. Suppose we
had paid a cheque to Mr Damien Witegereza for Rwf. 20,000,
the double entry of which is Credit Bank Rwf. 20,000 and Debit
Damien Witegereza Rwf. 20,000, and by error it is entered as
Credit; Damien Witegereza Rwf. 20,000 and Debit; Bank Rwf.
20,000, the trial balance would still balance despite the error.
 7. Transposition errors
• These occur where the wrong sequence of the individual
characters within a number was entered. For example, Rwf.
14,200 is entered instead of Rwf.12,400.
• This is quite a common error and is very difficult to spot
when the error has occurred in both the debit and credit
entries, as the trial balance would still balance.
• (It is more common for this error to occur on one side of the
double entry only).
 1.2 Correction of Errors
• Most errors are found at a date later than the one on which
they are first made.
• Corrections of these errors are made to double entry
accounts by preparing journal entries.
1. Show the corrections by means of journal entries, then,
2. Show the corrections in the double entry set of accounts,
by posting these journal entries to the ledger accounts
affected.
 1. Correction of Error of omission
• Eg. A credit sale of Rwf. 59,000 to George has been
completely omitted from the books.
• We must correct this by entering the sale in the books.
Rwf. Rwf.
Dr. George 59,000
Cr. Sales Account 59,000
To record the correction of error of commission
 2. Correction of Error of commission
• Eg. A credit purchase of goods worth Rwf. 44,000 from C.
Simons was entered in error in C. Simpson’ account. To
correct this, the purchase must be cancelled out from C.
Simpson’s account, and then entered where it should be in
C. Simons’ account.
Rwf. Rwf.
Dr. C. Simpson 44,000
Cr. C. Simons
44,000
(To correct Purchase Entered in the wrong personal
account now corrected)
The double entry will be:
C. Simpson
2015 Rwf 2015 Rwf
Sept. 30 C. Simons: Error corrected 44,000 Sept. 30 Purchases 44,000

C. Simons
2015 Rwf 2015
Rwf
Sept. 30 Purchases:
Entered originally in
C. Simpson’s account 44,000
 3. Correction of Error of principle.
• Eg. A purchase of machine worth Rwf. 200,000 is debited to
the purchases account instead of being debited to a
machinery account.
• To correct the error we have to cancel out the item from
the purchases account by crediting the purchases account.
It is then entered where it should be by debiting the
machinery account
• Journal entries
Rwf. Rwf.

200,000
Dr. Machinery account 200,000
Cr. Purchases account
(Correction of error: Purchase of non-current asset debited to
purchases account)
 4. Correction of Compensating errors
• Eg. Supposing the sales account is overstated by Rwf.
250,000, as also is the wages expense account.
• The trial balance therefore still balances.
• Journal entry
Rwf. Rwf.
250,000
Dr. Sales account
Cr. Wages expense account 250,000
(Correction of overcasts of Rwf. 250,000 each
in the sales account and the wages expense
account which compensated for each other)
 5. Correction of Errors of original entry.
• Eg. A sale of Rwf. 38,000 to Abraham Shukurani was entered
in the books as Rwf. 28,000. This means it needs another
Rwf. 10,000 of sales entering:
Rwf. Rwf.
10,000
Dr. Abraham Shukurani 10,000
Cr. Sales Account
(Correction of error whereby sales were understated by
Rwf.10,000)
 6. Correction of error of Complete reversal of
entries:
• Eg. A payment of cash of Rwf. 16,000 to Musa Dusabimana
was entered on the receipts side of the cash book in error
and credited to Musa Dusabimana’s account.
• First to be done should be the amount needed to cancel the
error, then comes the actual entry itself. Because of this,
the correcting entry is double the actual amount first
recorded.
• Journal entry
Rwf. Rwf.
Dr. Musa Dusabimana 32,000
Cr. Cash 32,000
(Payment of cash Rwf. 16,000 debited to cash and credited to
Musa Dusabimana in error on … Error now corrected)
 7. Correction of Transposition error
• Eg. A credit purchase from Peter Maniraguha costing Rwf.
56,000 was entered in the books as Rwf. 65,000. The Rwf.
9,000 error needs to be corrected.
• The Journal entry:
Rwf. Rwf.
Dr. Peter Maniraguha
9,000
Cr. Purchases Account
9,000
(Correction of error whereby purchases
were overstated by Rwf 9,000)
 1.3 Suspense Accounts
Many errors will make the trial balance totals not to be equal.
Some of these errors include:
a) Incorrect additions in any account.
b) Making an entry on only one side of the accounts, e.g. a
debit but no credit; or a credit but no debit.
c) Entering a different amount on the debit side from the
amount on the credit side.
• A suspense account is a temporary resting place for an entry
that will end up somewhere else once its final destination is
known.
There are two reasons why suspense accounts could be opened:
1. A bookkeeper is unsure where to post an item and enters it to a
suspense account pending instructions.
2. There is a difference in the trial balance and a suspense
account is opened with the amount of the difference so that the
trial balance agrees (pending the discovery and correction of the
errors causing the difference).
• Example; Trial Balance (extract) as at 31 December 2020
Dr Cr.
Rwf. Rwf.
Totals after all the accounts have 1,000,000 999,600
been listed
Suspense 400

1,000,000 1,000,000
• Suspense Account

2020 Rwf.
Dec 31 Difference per Trial Balance 400
Alternatively, a suspense account may be said to be a nominal
ledger account which is created in two main situations:
1. If the trial balance does not balance and it is proving
difficult to detect the error; the difference is placed in a
suspense account.
2. If the bookkeeper is unsure of the posting of one side of the
double entry he may post the debit/or credit to the
suspense account
• Therefore a suspense account is a temporary
account. Once the errors are identified or the correct
double entry has been ascertained the suspense
account is cleared out.
Eg1. After preparation of a trial balance, an unexplained difference of Dr. Rwf
406,000 remains. A suspense account for that amount is opened. Subsequent
investigations reveal the following errors:
i. Rwf. 35,000 received from A. Jalloh and credited to his account has not
been entered in the bank account.
ii. A payment of Rwf. 47,000 to M. Straus has been credited to that account
iii. Discount allowed of Rwf. 198,000 and Discount received of Rwf. 213,000
have been posted to the discounts as credits and debits respectively.
iv. Bank interest received of Rwf. 111,000 has not been entered in the bank
account
v. Carriage outwards of Rwf. 98,000 has been treated as a revenue item.
Required
Prepare the Suspense Account making the necessary entries to eliminate the
debit balance which exists.
• Note:
• If the errors are not found before the financial statements
are prepared, the suspense account balance will be included
in the balance sheet. Where the balance is a credit balance,
it should be included on the capital and liabilities side of the
balance sheet. When the balance is a debit balance, it should
be shown on the assets side of the balance sheet.
 TOPIC TWO: ACCOUNTING ADJUSTMENTS
• Accruals and Prepayments
• Trade Receivables, Bad Debts, Provision for Doubtful Debts
• Control Accounts (Trade Receivables, Trade Payables)
 2.1 Accruals and Prepayments
Prepayments
i). Prepaid Expenses — Expenses paid in cash and
recorded as assets before they are used or
consumed.
ii). Unearned Revenues — Revenues received in cash
and recorded as liabilities before they are earned.
Accruals
1. Accrued Revenues — Revenues earned but not yet
received in cash or recorded.
2. Accrued Expenses — Expenses incurred but not yet
paid in cash or recorded.
 Accrual vs Cash Accouting
• Accrual accounting:
Revenue earned in the period should be matched with costs
incurred in earning it, not as money is received or paid
The accrual basis of accounting records revenues when
goods have been delivered or services have been performed,
regardless of when cash is received
This basis also records expenses when resources are
consumed, regardless of when payment is made.
• The Cash Basis Accounting:
The cash basis of accounting records revenue when
cash is received.
This basis also records expenses when cash is paid.
The cash basis of accounting records revenue when
cash is received.
This basis also records expenses when cash is paid
Note: The accrual accounting is preferred
 Journal Entries
• Journal entries to adjust for accruals:
Dr. Expense A/c
Cr. Accrued Expense A/c
The expense account will be closed and the amount shown in
the Income statement.
The accrual will appear in the Statement of Financial Position
under current liabilities.
• Journal entries to adjust for prepayments:
Dr. Prepaid Expense A/c
Cr. Expense A/c
The expense account will be closed and the amount shown in
the Income statement.
The accrual will appear in the Statement of Financial Position
under current asset
Eg1. During the year ended 31st Dec 2020, ABC limited had the
following information: (all amounts in 000Rwf)
Jan 1: Paid rent to cover for half the year amounting to 1,080
March 1: Paid for insurance cover amounting to 432 for twelve-
months period
July1: Decided to pay rent to cover twelve-months period
amounting to 2,160
Dec 31: The following expenses were yet to be paid:
Salaries =6,700
Electricity =12
Water=34
• Required:
• Show journal entries for above transactions as at 31 Dec
2020.
Eg2. The following unadjusted trial balance relates to XYZ Ltd.
for the year ended 31st March 2021
XYZ Ltd
Unadjusted Trial Balance
As at 31st March 2021 000 Rwf 000Rwf
Sales 54,200
Furniture, at cost 1,000
Motor vehicle, at cost 2,400
Provision for Depreciation:
Furniture 200
Motor Vehicle 960
Rent 23,100
Insurance 2,000
Heat and Light 14,000
Capital 33,200
Bank 20,500
Stock 10,000
Accounts Receivable 3,000
Accounts Payable 4,500
Salaries 12,040
Admnistration Expenses 5,020
93,060 93,060
• The following has not yet being adjusted (all amount in
000Rwf)
i) Rent was paid to cover up to June 2022
ii) There was a prepaid insurance of 120 not yet recorded
iii) Heat and light expenses of 450 still not yet paid
iv) Salaries amounting to 1,200 still outstanding
Required:
a) Show the journal entries of the above adjustments
b) Prepare an adjusted trial balance as at 31st March 2021
 2.2 Trade Receivables and Bad Debts
• Credit sales lead to trade receivables (Debtors) who are
considered as assets to the company
• Some customers promise to pay in future, but they may fail
to honor this promise.
• This leads to bad debts which should be written off as an
expense in the income statement
• Journal entries:
1. When a company sells goods/services
Dr. Trade Receivables
Cr Sales
2. When the cash/cheque has been received:
Dr. Bank
Cr. Trade Receivable
3. When the debt is declared as bad debt
Dr. Bad Debt
Cr. Trade Receivables
• At the end of the period, close the Bad Debts account and
transfer the expense to the Statement of Comprehensive
Income.
• The net effect of this is that the asset is not being
recognized and the benefit of the sale is not recognized in
the profit and loss for the period
4. However, if at a later date the company receives the money,
the following entries are made
Dr. Trade Receivables
Cr. Bad Debts Recovered
Dr. Bank
Cr. Trade Receivable
At the end of accounting period, the balance in Bad Debts
recovered account is transferred to income statement as other
income
Eg3A. During the year ended Dec 2020, Tridmill Company made
credit sales to Fall Company amounting to 350,000Rwf.
However, by July 2020 Tridmill received a notification about
the liquidation of Fall Company when the account balance was
300,000Rwf. This was considered as irrecoverable debt.
Required: Show the journal entry for these transactions
Eg3B. On Oct 2020, the Company was informed by the
liquidator that half of the balance from Fall Company will be
cleared. The Company received the cheque the same month
Required: Show the journal entries
 Provision for Doubtful Debts
• Companies will estimate the possibilities that a customer will fail
to pay. This is provision for doubtful debts
5. Journal entries
Dr. Statement of comprehensive Income (as an expense)
Cr. Provision for Doubtful debts
• The balance in the Provision for Doubtful Debt A/c is shown in
the Statement of Financial Position, under Current Assets,
deducted from the Trade Receivables figure.
• The provision has the effect of reducing the asset, while the
amount written off to the Statement of Comprehensive Income
ensures that the benefit of the sale is not recognized in the
Statement of Comprehensive Income for the period.
• In the second and subsequent years, the closing balance from
the previous year becomes the opening balance for the next
year.
• The company will review this every year:
6. If the amount for the provision for this year is higher than the
provision for last year. Journal entry is:
Dr. Statement of comprehensive Income (as an expense)
Cr. Provision for Doubtful debts
If the amount is less than last year, journal entries:
Dr. Provision for Doubtful debts
Cr. Statement of comprehensive Income (as other income)
NOTE: a) If the amount for this year’s provision agrees exactly
with the provision for last year, there is no change in the
provision for doubtful Debts account.
b) At the end of accounting period, the increase in provision for
doubtful Debts is transferred to income statement as an
expense while a decrease is transferred as other income
c) In the statement of financial position, the full amount of the
provision is deducted from the trade receivables
• Eg4. At the beginning of the year Tridmill Ltd had a balance
of 439,000Rwf as trade receivable and 4,000Rwf as provision
for doubtful debts. During the year, the management decided
to review the provision by providing 1% as the provision for
doubtful debts.
Required:
i) Show the journal entries
ii) Extract of Income Statement if the gross profit for the year
was 3,402,000Rwf and SoFP
 2.3 Other provisions
• A company may give a discount to their trade receivables -
discount allowed - or receive a discount from their trade
payables - discount received.
• At period end the management must review both the Trade
Receivables accounts and the Trade Payables accounts to
estimate the amount of discounts involved.
• Once agreed upon, the necessary journal entries must be
made
 Provision for discount allowed
7. Where a discount is being established for the first year, the
journal entry is:
Dr. Statement of comprehensive Income (as an expense)
Cr Provision for Discount Allowed Account
In the second and subsequent years, the closing balance from
the previous year becomes the opening balance for the next
year.
• The company will review this every year:
8. If the amount for the provision for this year is higher than
the provision for last year. Journal entry is:
Dr. Statement of comprehensive Income (as an expense)
Cr. Provision for Discount Allowed
If the amount is less than last year, journal entries:
Dr. Provision for Discount Allowed
Cr. Statement of comprehensive Income (as other income)
• The full amount of the provision for discount allowed account is
deducted from Trade Receivables in the Statement of Financial
Position.
• The provision has the effect of reducing the Trade Receivables
shown in the Statement of Financial Position.
• However, only the change is shown in the income statement (the
same way we treated the provision for doubtful debts)
• The discount allowed provision is usually calculated as a
percentage of Trade Receivables after deducting the year end
bad debt provision
Eg5. The year end Trade Receivables figure for ALL Ltd was
20,400,000Rwf.
• You are supplied with the following information:
i) A customer has been declared bankrupt owing 400,000Rwf. This
is to be written off.
ii) It has been decided that a 1% provision for discounts allowed
should be made.
iii) The provision for doubtful debts should be 3% of Trade
Receivables.
iv) The provision for doubtful debts was 360,000Rwf.
Required: Show the journal entries and extracts for IS (assume a
gross profit of 4M Rwf) and SoFP
 Provision for discount Received
9. Where a discount provision is being set up and
received for the first year, the journal entry is:
Dr. Provision for Discount Received Account
Cr. Statement of Comprehensive Income (as other income)
Every year, this is reviewed
10. Where a discount provision is being set up and received for
the first year, the journal entry is:
Dr. Provision for Discount Received Account
Cr. Statement of Comprehensive Income (as other income)
If the amount is less than last year, journal entries:
Dr. Statement of comprehensive Income (as an expense)
Cr. Provision for Discount Received
Eg6. ABC had the following transactions in the first quarter of the
year 2021:
Jan 1: Opening balances of account receivables, accounts payables
and Bank were 145,000Rwf, 88,000Rwf and 302,000Rwf
respectively. The bal b/d for provision for doubtful debts was
11,000Rwf
Jan 4: Made credit sales of 56,000Rwf. Received cash amounting to
6,000Rwf.
Jan 12: 10,000Rwf was written off as bad debts
Jan 30: Recovered 5,000Rwf which had been written off as bad
debts the previous year
Feb 4: Made credit purchases of 20,000Rwf
Feb 8: Made sales amounting to 65,000Rwf receiving ¾ in cash
Feb 15: Settled creditors amounting to 49,000Rwf
Feb 16: Made cash sales of 40,500Rwf allowing a 10% discount
Feb 20: Received a discount of 1,000Rwf and paid creditors a
total of 11,000Rwf
March 2: ABC decided to review the provision of doubtful debts
to 1% of the accounts receivables.
Required: Show journal entries
 2.4 Control Accounts
• A control account (or total account) is an account showing
the total amounts of all transactions which have been
debited and credited in detail to individual ledger accounts.
• The two most common examples of control accounts are:
i) Sales ledger (Trade Receivables) control account
ii) Purchases ledger (Trade Payables) control account
 Format
Dr. Trade Receivables Control Account Cr.
Opening debit balance Opening credit balance
Credit Sales made during the period Cash received from Trade Receivables
Dishonoured cheques and bills Discounts allowed
Bad Debts Recovered Returns inwards
Closing credit balance Bills receivable
Bad debts written off
Closing debit balance
Dr. Trade Payables Control Account Cr.
Opening debit balance Opening credit balance
Cash paid to Trade Payables Credit Purchases during the period
Discounts received Closing debit balance
Bills Payable Accepted
Returns Outwards
Closing credit balance
Eg7. The following information relates to transactions with the
Trade Receivables of David Busingye Company for the year
ended 31st December 2020.
Customer Cash/ Bal. at 1st Sales Sales Cash Discount
Credit Jan RWF Returns Received Allowed
RWF RWF RWF RWF
L K & Co Credit 20,000 116,000 8,000 109,000 3,000
Mr. Bekker Credit 16,000 24,000 2,000 32,000 -
SM Ltd Credit 14,000 160,000 - 125,000 1,000
BS Ltd. Cash - 20,000 - 20,000 -
Total 50,000 320,000 286,000 4,000
10,000
• The balance on Mr. Bekker’s account proved irrecoverable
during the year and was written off.
Required:
a. Write up the Trade Receivables ledger as at 31st
December 2020
b. Prepare the Trade Receivables Control Account as at
31st December 2020
Eg8. The following information relates to transactions with
regard to Trade Payables by Camille Cyuzuzo Limited for the
Year ended 31st December 2020.
Supplier Cash/Cr Bal. at Purchas Purchases Cash Discount
edit 1st Jan es Returns Paid Receive
RWF RWF RWF RWF d
RWF
Mr Marx Credit 8,000 40,000 2,000 34,000 2,000
CLO Ltd. Credit - 20,000 - 12,000 -
NAV Ltd. Credit 28,000 140,000 4,000 130,000 2,000
JZR Ltd. Cash - 40,000 - 40,000 -
Total 36,000 240,000 6,000 216,000 4,000
Required:
a. Write up the Trade Payables Ledger as at 31st December
2020
b. Prepare the Trade Payables Control account as at 31st
December 2020
Eg8. From the following details you are required to write up the
debtors’ (trade receivables) ledger and creditors’ (trade
payables) ledger control accounts for the month of January.
 000Rwf
Trade Receivables at January 1 9,753
Trade Payables at January 1 3,456
Credit Sales for month 19,506
Credit Purchases for month 6,912
Returns Outward for month 115
Returns Inward for month 97
Cash Received from Customers 18,912
Customers Cheques Dishonored 100
Cash Paid to Suppliers 5,814
Discount Allowed 178
Discount Received 117
Cash sales 21,200
Cash Purchases 8,900
Interest Charged to Customers on Overdue Accounts 5
Irrecoverable Debts Written Of 76
Accounts Settled by “Contra” 345
DR Balances in Trade Payables Ledger at January 31 28
CR Balances in Trade Receivables Ledger at January 31 49