F5 Notes-1

PRINCIPLES OF ACCOUNTING
TEACHING BOOKLET
TEACHING NOTES
FORM 5
TEACHER’S RESOURCE BANK
1|Page HUNTERPOWERCHINGS
ETHICAL PRINCIPLES
Ethical values, translated into active language establishing standards or rules describing the kind
of behavior an ethical person should and should not engage in, are ethical principles. The
following list
of principles incorporate the characteristics and values that most people associate with ethical
behavior.
1 . HONESTY
Ethical executives are honest and truthful in all their dealings and they do not deliberately
mislead or deceive others by misrepresentations, overstatements, partial truths, selective
omissions, or any other means.
2. INTEGRITY
Ethical executives demonstrate personal integrity and the courage of their convictions by doing
what they think is right even when there is great pressure to do otherwise; they are principled,
honorable and upright; they will fight for their beliefs. They will not sacrifice principle for
expediency, be hypocritical, or unscrupulous.
3. PROMISE-KEEPING & TRUSTWORTHINESS
Ethical executives are worthy of trust. They are candid and forthcoming in supplying relevant
information and correcting misapprehensions of fact, and they make every reasonable effort to
fulfill the letter and spirit of their promises and commitments. They do not interpret agreements
in an unreasonably technical or legalistic manner in order to rationalize non-compliance or create
justifications for escaping their commitments.
4. LOYALTY
Ethical executives are worthy of trust, demonstrate fidelity and loyalty to persons and
institutions by friendship in adversity, support and devotion to duty; they do not use or disclose
information learned in confidence for personal advantage. They safeguard the ability to make
independent professional judgments by scrupulously avoiding undue influences and conflicts of
interest. They are loyal to their companies and colleagues and if they decide to accept other
employment, they provide reasonable notice, respect the proprietary information of their former
employer, and refuse to engage in any activities that take undue advantage of their previous
positions.
5. FAIRNESS
Ethical executives and fair and just in all dealings; they do not exercise power arbitrarily, and do
not use overreaching nor indecent means to gain or maintain any advantage nor take undue
advantage of another’s mistakes or difficulties. Fair persons manifest a commitment to justice,
the equal treatment of individuals, tolerance for and acceptance of diversity, the they are open-
minded; they are willing to admit they are wrong and, where appropriate, change their positions
and beliefs.
6. CONCERN FOR OTHERS

Ethical executives are caring, compassionate, benevolent and kind; they like the Golden Rule,
help those in need, and seek to accomplish their business objectives in a manner that causes the
least harm and the greatest positive good.
7. RESPECT FOR OTHERS

Ethical executives demonstrate respect for the human dignity, autonomy, privacy, rights, and
interests of all those who have a stake in their decisions; they are courteous and treat all people
with equal respect and dignity regardless of sex, race or national origin.
8. LAW ABIDING
Ethical executives abide by laws, rules and regulations relating to their business activities.
9. COMMITMENT TO EXCELLENCE
Ethical executives pursue excellence in performing their duties, are well informed and prepared,
and constantly endeavor to increase their proficiency in all areas of responsibility.
10. LEADERSHIP
Ethical executives are conscious of the responsibilities and opportunities of their position of
leadership and seek to be positive ethical role models by their own conduct and by helping to
create an environment in which principled reasoning and ethical decision making are highly
prized.
11. REPUTATION AND MORALE

Ethical executives seek to protect and build the company’s good reputation and the morale of its
employees by engaging in no conduct that might undermine respect and by taking whatever
actions are necessary to correct or prevent inappropriate conduct of others.
12. ACCOUNTABILITY
Ethical executives acknowledge and accept personal accountability for the ethical quality of
their decisions and omissions to themselves, their colleagues, their companies, and their
communities.
USERS OF ACCOUNTING INFORMATION
Banks
They need to assess the quality of the assets upon which loans are secured that is collateral
security.
Shareholders
Need accounting information so as to ensure that they are getting a good return on their
investment. This will enable the shareholders to decide if they wish to increase or dispose their
investment.
Employees
Seek to assess how secure their future is and how much profit the company has made. This
information will be used to support their claim for a pay rise.
Customers
Want to know whether the company will be in existence in the near future by checking if it is
making a profit or loss. This will help customers when products need parts for servicing or
replacing.
Managers
Require accounting information so as to make quality decisions. Managers’ interest in the
accounts lies in whether the firm makes profit, which would normally result in their receiving a
good bonus or pay rise.
Public
Need to know how much profit the company has made as this will secure their jobs.
Suppliers
Need accounting information so as to know the profitability/liquidity position of the company.
This will enable suppliers to know how much to credit to offer basing on the information
provided in the financial statements.
Government
Need accounting information so as to assess economic growth and fiscal planning.
Tax authorities(ZIMRA)
Use the financial statements as the basis for tax computations.
ACCOUNTING CONCEPTS
GOING CONCERN CONCEPT

This concept is concerned with the amount at which assets are shown in the balance sheet. It
requires that business accounts shall be prepared on the assumption that a business is a going
concern.
MATERIALITY CONCEPT
This convention can be applied in two different ways, but the convention in essence, is that it is
not worthwhile spending hours or effort over small amounts. The effort is only worthwhile if the
item is of a reasonable (material) value.
COST CONCEPT
It states that figures shown in accounts must be valued at a figure that all parties can agree on. It
also states that the correct value to record items at is the only value to which all users would
agree, that is the amount paid for them, or initial cost of the item.
ACCRUALS CONCEPT
It states that items should be recorded when used and not paid for.
MONEY MEASUREMENT CONCEPT

It states that only items that that have a clear monetary value can be included in the accounts ,all
other items must be ignored.
MATCHING CONCEPT
The purpose of this concept is to ensure that revenue, other income and expenses are recognised
in the financial period in which they accrue or are incurred, for example capitalisation of
development costs.
CONCEPT OF REALIZATION
This concept states that revenue should not be recorded in the accounts before it has been
realised. Revenue should not be overstated by sales which have not been realised.
CONSISTENCY CONCEPT
This concept enable sensible comparisons to be made of the results of a business and its financial
position from one year to another. All items of a similar nature should be treated in a similar
manner both within the same accounting period and from one period to the next.
DUAL ASPECT CONCEPT
It states that every transaction will affect two items.
COST CONCEPT
It states that figures shown in the accounts must be valued at a figure that all parties can agree on.
It also states that the correct value to record items at is the only value to which all users would
agree, that is the amount paid for them or initial cost of the item.
PRUDENCE CONCEPT
This concept states that profits should not be overstated and also losses must be provided as soon
as recognised. Valuing stock at the lower of cost or net realisable value is an application of the
prudence concept. Prudence is an overiding concept ,if in a given situation, the application of
another concept would conflict with prudence, prudence takes precedence over that other
concept.
SUBSTANCE OVER FORM

The term is mainly used to describe the accounting treatment of something that does not reflect
the legal position. It mainly relates to assets bought on hire purchase which remains the property
of the seller until the final instalment has been paid. The seller can repossess the asset if the
purchaser fails to pay the instalments on time.
SUMMARY
(i) Going concern

The enterprise will continue in operational existence for the foreseeable future. It will not
liquidate or curtail significantly its scale of operation/activities.
Historical cost concept thus arises – we record an asset at its cost, and not its realised value
or market value as there is no intention to sell it.
(ii) Accrual / Matching

Revenues are recognised when they are earned in a financial period, and not when cash is
received.
Costs and expenses are recognised when they are incurred in a financial period, and not
when cash is paid.
Profit is calculated by matching the revenues earned with the expenses incurred.
If more cash is paid on an expenses, prepayment should be made, and shown on the balance
sheet as an asset.
If less cash is paid on an expenses, accrual should be made, and shown on the balance sheet
as a liability.
The same treatments apply to revenues.
(iii) Consistency
Similar treatments must be given to similar items with a financial period, and from one
period to the next.
Once an accounting policy is adopted, we should not change it normally, except that a new
policy is believed to be better and necessary. Even so, the reason and nature of the change
should be disclosed as a note in the financial statements.
(iv) Prudence / Conservatism

Revenues and profits should not be anticipated or overstated.
Expenses and losses should not be understated.
When two or more treatments are acceptable, we always choose one that can reduce the
profit. (This may contradict with the “true and fair view”.)
Provision should be made for all known liabilities or losses. (This may contradict with the
“accrual concept” or the “objectivity concept”.)
Realisation concept - A revenue is considered to be earned only when it is realised. In the
case of a sale, it is realised when
 The transaction (earning process) is completed

 The goods are delivered and invoiced
 Receipt is made or future payment is very certain
Accounting bases
They are defined in financial statements as the methods developed for applying fundamental
accounting concepts to transactions and items.
Accounting policies
They are the accounting bases chosen by management as being best suited for used in that
business. The polices (and their changes, if any) should be disclosed by way of notes to
the accounts. The explanations should be clear , fair , and brief . They should normally be
followed consistently.
More about accounting concepts
1. Conservatism / Prudence
Meaning:
(a) Revenues and profits should not be anticipated but recognised only when they are
realised in the form of cash or of other assets which can be treated as cash.
(b) Provision should be made for any known liabilities at the end of the
financial period.
Examples
(a) Inventory is valued at lower of cost and net realisable value.(Stock is an asset for resale
to earn a profit.)
(b) Provision is made for depreciation and doubtful debts.
2. Going concern
Meaning:
(a) An enterprise will continue in operational existence for the foreseeable future.
(b) An enterprise will not liquidate or curtail significantly its scale of activities.
(c) The financial statements do not indicate assets at net realizable value (market value).
Examples
(a) On the balance sheet, fixed assets are shown at their net book value,mie, cost less
accumulated depreciation.
(b) If the accountant has reasons to believe that the enterprise will liquidate soon, he should
indicate all assets at the NRV, and make a note of the account.
3. Historical cost
Meaning:
(a) All assets should be recorded at their cost. This method is consistent, simple and less
costly.
(b) Historical cost is an objective and verifiable cost.
(c) Cost includes the purchase price and all expenses incurred in bringing the asset to its
present location and condition.
Examples
(a) Investment in shares is recorded at its cost, even though the share prices change over
time.
4. Business entity
Meaning:
(a) The business and its owners are separate existence entity.
(b) The business transactions are separate from its owners’ private transactions.
Examples
(a) Any payments for the owners’ personal expenses by the business are treated as
drawings, and not expenses.
5. Materiality
Meaning:
(a) Any insignificant items and events may be disregarded, but important information
should be disclosed.
(b) If the information may affect the users in making decision, it is regarded as material. A
material item is regarded as an asset and should be shown as a separate item on the
balance sheet.
Examples
(a) Stationery involves small amount of capital expenditure, so it is treated as an expense
and to be written of in the profit and loss account.
6. Consistency
Meaning:
(a) Similar items should be treated by similar methods. Such methods, once adopted,
should not be change within an accounting period or from one period to another.
(b) If a new policy is considered better and necessary, the nature and reason for the change
must be disclosed as a note to the accounts.
Examples
(a) depreciation method
(b) inventory valuation method
8. Accrual / Matching
Meaning:
(a) Revenues and expenses are recognised as they are earned and incurred, and not as
money is received or paid.
(b) The profit and loss account is prepared on this basis.
(c) The revenues earned must be matched with the expenses incurred in calculating the
profit in an accounting period.
(c) If an expense has been paid but the related revenue has not been earned, the cost should
be carried forward as a prepayment.
If a revenue has been earned but the related expense has not been paid, the cost should
also be counted and carried forward as an accrual.
(d) The cost of capital expenses (assets) should be spread over a period of time during
which the benefits are going to be received.
Examples
(a) Credit sales but not yet received should still be treated as an income in the profit and loss
account, and the receivable amount is treated as an asset in the Statement of financial
position.
10 | P a g e H U N T E R P O W E R C H I N G S
DIFFERENCE BETWEEN BAD DEBT & DOUBTFUL DEBT
Both these words are related to the finance. When a client has purchased goods or taken a service
without paying a price for it and making a promise to pay it later but it doesn't happen. Which
means a money has been owed to a company, by its clients or customer. So the loss occurred in
this is treated as a debt. Bad debt and doubtful debt both are a type of debt.
When a company has given goods and services to its customer on a credit for some period it
becomes receivables for the company.
When creditors turn out not to repay the money and a company is unable to collect the amount
ever, it is declared as bad debt.
In a bad debt, a debtor fails to collect his accounts for the items sold on a credit in a certain
period of time.
A bad debt is written off by debtors and it is accounted as an expense to a company.
This situation occurs when the creditor has been declared a bankruptcy by the debtor.
So, the loss incurred on the credit given to the client sometimes interest also considered as a bad
debt.
This money is the account receivable means the company is a debtor and the customer is a
creditor.
So in a simple language, when a company is owed to its customer and a business entity is not
able to collect and will not be able to collect in future, that amount of money goes to bad debt.
A company makes provision for this type of loss.
It looks like same as the bad debt but both are a little bit different.
Doubtful debts, which are not included in the bad debt, are considered or counted as a doubtful
debt.
When a creditor turns out not to pay money and a company may be able to collect the money so
there is a chance of an amount will be recollected, it is called a doubtful debt.
So, as the name suggests that doubtful debt, there is a possibility that the money will come, so
this possibility makes doubtful debt.
When an uncertainty comes to an end for the receivables doubtful debt turns to a bad debt.
A company makes provision for this type of loss to cover in future like provision for doubtful
debts.
Bad debt
When a money, which is owed to its customer and a business entity is not able to collect and will
not be able to collect in future, that amount of money goes to bad debt. When a creditor turns out
not to pay money and a company may be able to collect the money so there is a chance of an
amount will be recollected, it is called a doubtful debt.
In bad debt, a creditor is declared as a bankrupt by the debtor. In doubtful debt, a creditor turns
out not to pay the money.
In bad debt, there is no possibility that a money will be collected by a debtor. In doubtful debt,
there is a possibility that a debtor may collect the money.
Bad debt has a direct relation with the doubtful debt because when the possibility to collect
money ends, a bad debt occurs. Doubtful debt doesn’t depend on the bad debt.
Provision for Doubtful Debts
Recoverability of some receivables may be doubtful although not definitely irrecoverable. Such
receivables are known as doubtful debts. Prudence requires that an allowance be created to
recognize the potential loss arising from the possibility of incurring bad debts.
The allowance for doubtful debts is created by forming a credit balance which is deducted from
the total receivables balance in the statement of financial position. This works in the same way as
accumulated depreciation is deducted from the fixed asset cost account. The allowance for
doubtful debts reduces the receivable balance to the amount that the entity prudently estimates to
recover in the future.
Allowance for doubtful debts consist of two types:
Specific Allowance
This is allowance created in respect of specific receivables which are known to be facing serious
financial problems or have a trade dispute with the entity. Such balances may be identified by
examining an aged receivable analysis which details the time lapsed since the creation of a
receivable. Long outstanding balances identified from such analyses could be considered for
inclusion in the allowance for doubtful debts.
The difference between the treatment of a bad debt and a specific allowance for doubtful debt is
that in the latter case, the receivable ledger of the specific debt is not removed in case the debtor
actually pays whereas in the case of bad debts, the receivable ledger is reduced to nil. Also,
specific allowance may not be created for the entire amount of the doubtful receivable but only a
portion of it. For instance, if there is a 50% chance of recovering a doubtful debt in respect of a
certain receivable, a specific allowance of only 50% may be required. On the contrary, bad debt
is normally recognized in full.
General Allowance
Past history of a business may show that a portion of receivable balances is not recovered due to
unforeseen circumstances. Therefore, it may be prudent to create a general allowance for
doubtful debts in addition to the specific allowance. The general allowance may be calculated on
the basis of past experience concerning recoverability of debts.
The practice of creating general provisions is on the decline after revisions in the International
Financial Reporting Standards (IFRS). Specifically, IAS 39 prohibits creation of general
provisions on the basis of past experience due to the subjectivity involved in creating such an
estimate. Instead, reporting entity is required to carry out impairment review to determine the
recoverability of the receivables and any associated allowance.
DEPRECIATION
It is the loss in value of a fixed asset during its useful life.
CAUSES OF DEPRECIATION
Wear and tear-Assets become worn out through use.
Time factor-This affects assets with a fixed period of legal life, for example, copyrights and
leases.
Depletion-It refers to assets with a wasting nature, for example mines or oil wells.
Economic factors-Obsolescence(out of date),inadequacy of capacity.
Why providing for depreciation on fixed assets

 to spread the depreciation cost over the asset’s useful life.
 to set aside monies for replacement.
 to reflect that the fixed assets are of second hand value at the balance sheet date.
METHODS OF DEPRECIATION
STRAIGHT LINE METHOD

Advantages
 it is easier to calculate
 same amount is charged each year
Disadvantages
 some assets are used on and off, so depreciation plan should reflect use not passage of
time.
 other assets operate faster, produce more when they are new. Therefore more
depreciation should be allocated in early years.
REDUCING BALANCE METHOD

Advantages
 some assets operate faster, produce more when they are new so more depreciation should
be allocated in early years.
 in the latter years the assets become less efficient, therefore repair and maintenance costs
will be heavy during these years, thus the combined influence of depreciation and repair
costs will tend to equalise charges against profits – over the useful life of the asset.
Disadvantages
 complicated since the depreciation charge will be different each year.
 the amount will not be depreciated fully that is not completely provided for.
MACHINE HOURS METHOD
Advantages
 it relates to actual use of the asset
 easy and simple to use
Disadvantages
 problem of excessive use, which may necesitate a more than normal rate of depreciation.
 with this method when the asset is not in use there is no charge. Assets deteriorate even if
they are not in use.
CONTROL ACCOUNTS
These are accounts which record all trade payables and trade receivables accounts, in other
words it is a summary of all these transactions.
Purposes of control accounts

 to locate errors
 to deter fraud
 fraud or errors are easier to check
 checking is made easier as sectional ledgers are created
 to provide totals for creditors and debtors quickly
Reasons why a debtor’s account might have a credit balance

 payment in advance
 credit note issued
 overpayment
Limitations of control accounts

 control accounts do not guarantee the accuracy of individual accounts, which may
contain compensating errors, for example items posted to wrong accounts.
 control accounts may themselves contain errors.
WHAT TO NOTE WHEN AMENDING AND RECONCILING CONTROL ACCOUNTS
TYPE OF ERROR ADJUSTED IN RECONCILIATION

CONTROL STATEMENT
ACCOUNTS
Errors in source documents Yes No
Complete omission of a transaction Yes Yes
Casting errors in books of original entry No Yes
Errors in personal account or Individual error yes yes
SET-OFFS
Some firms may find that they have customers who are also suppliers. In this case, there will be
an account for this firm or person both in the sales ledger (as a customer) and in the purchases
ledger (as a supplier). It could appear to be common sense that rather than both parties send a
cheque to each other, the amounts owing (both to and by the firm) should be partly offset against
each other. If you owe someone £5 who also owes you £10, then it would be sensible for you to
offset the debt and accept £5 in full settlement of both debts. This can also be achieved with
firms and are known as set-offs.
As a general rule, set-offs will appear in both control accounts and on the following sides:
In the sales ledger control account - on the credit side
In the purchases ledger control account - on the debit side
Memorandum records
For some firms, the control account will be used as a check on the numerical accuracy of the
sales and purchases ledger. The control account in this case is not part of the double-entry system.
In this case, the control accounts would be known as memorandum records - they are simply
there as a back up to the normal double entry system.
However in some larger firms, all the control accounts are kept as an integral part of the double-
entry system of bookkeeping. The personal accounts as found in the sales and purchases ledger
would then become the memorandum records and would be used for information only. Here, the
control accounts, as found in the general ledger, would be used for the trial balance and so on.
Benefits of maintaining control accounts
If the control accounts are kept purely as memorandum records then they are not necessary for
the double entry system to function fully. However the control accounts will still have some uses
for the firm and these are as follows:
If the control accounts do not balance then it is obvious that a mistake has taken place in the
respective ledger. This will save time in the locating of the error. If we relied on the trial balance
alone then we would have to check all the three main ledgers as well as the cashbook.
Control accounts can be kept by a person who is not the same person who maintains the personal
accounts of debtors and creditors. In this case, fraud is less likely to occur (unless both the ledger
clerks and the person maintaining the control accounts are in collaboration together!).
The debtors and creditor figures can be ascertained more speedily for construction of the trial
balance, than having to balance off each individual personal account in the sales and purchases
ledgers.
Control Accounts are memorandum accounts for debtors and creditors. They are prepared as:
Sales Ledger Control Account – for debtors (or accounts receivable)
Sales Ledger Control Account Source of Information

(Items included)
Opening balances Total of balances in debtors accounts under sales
ledger
Credit sales Total of sales day book
Return Inwards Total of sales return day book
Bad Debts / Bad Debt Recovered General Journal
Bank and Cash received from debtors Cash Book (Receipt side)
Discount Allowed Cash Book (Receipt Side)
Interest Received on overdue payments from General Journal
debtors
Set off / Contra General Journal
Closing Balance Total of balances in debtors accounts under sales
ledger
Purchases Ledger Control Account – for creditors (or accounts payable)
Purchases Ledger Control Account Source of Information

(Items included)
Opening balances Total of balances in creditors accounts under
purchases ledger
Credit Purchases Total of purchases day book
Return Outwards or Purchase Return Total of purchases return day book
Bank and Cash paid to creditors Cash Book (Payment side)
Discount Received Cash Book (Payment Side)
Interest charged by creditors General Journal
Closing Balance Total of balances in creditors accounts under
purchases ledger
Sales Ledger Control Account
Date Details folio $ Date Details folio $
Balance b/d xxx Balance b/d xxx

Credit Sales xxx Sales Return xxx
Dishonoured Cheque xxx Bad Debts xxx
Interest received xxx Discount Allowed xxx
Balance c/d xxx Bank and Cash xxx
Set off: contra xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx Balance c/d xxx
Purchase Ledger Control Account
Date Details folio $ Date Details folio $
Balance b/d xxx Balance b/d xxx

Purchases Return xxx Credit Purchases xxx
Set off: SL xxx Interest due xxx
Discount Received xxx Balance c/d xxx
Bank and Cash xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx Balance c/d xxx
Uses / Advantages of Control Account
 Control accounts provide a check on the internal accuracy of the ledger accounts
 They identify the ledger or ledgers in which errors have been made when there is
difference on trial balance
 Provide the final balances of debtors or creditors
 Limit the frauds or deception with respect to sales and purchases or cash / cheque
payments or receipts
 Any missing figure such as credit sales or credit purchases can be identified
Limitations/Drawbacks of Control Account
 If control account itself is based on some errors such as posting or entering of data
from day books or ledgers, it might not restrict the errors.
 If the system of maintaining day books, ledgers and control accounts are prepared by
the same group or individuals, the frauds might not be restricted.
 Control accounts are only limited to debtors and creditors, they do not focus on other
items such as stocks, or accruals.
EXAMPLE 1
Tuen Mun Ltd keeps control accounts for the purchases and sales ledgers. The following details
were extracted from the books for the month of March 1993:
$
Balances on 1 March 1993
Purchases ledger – debit 212
Purchases ledger – credit 5 185
Sales ledger – debit 9 364
Sales ledger – credit 510
Goods purchased on credit 19 283
Discounts allowed 356
Bad debts written off 237
Goods returned to suppliers 615
Discounts received 241
Cash received from credit customers 24 607
Legal expenses charged to customers 112
Provision for bad and doubtful debts 300
Total sales 38 940
Cash paid to creditors 16 824
Cash sales 11 500
Sales ledger credit balances on 31 March 1993 376
Purchases ledger debit balances on 31 March 1993 143
An investigation of the books of Tuen Mun Ltd revealed the following errors:
1. An invoice for $1 600 had been posted to a customer's account as $160;
2. A month's total of $7 859 in the purchases day book had been posted to the control
account as $7 589, although posted correctly to the purchases account;
3. Discounts received of $280 had been posted twice to a supplier's account;
4. A debit note $440 received from a customer had been completely forgotten;
5. A debit note $200 issued to a supplier had been credited to another supplier's account;
6. A refund of $120 to a debtors who had a credit balance in the books had been
completely omitted;
7. It was found that a major supplier, Smith, who had a credit balance of $1 200 on 31
March 1993 also owed Tuen Mun Ltd $300 because of a credit sales during the month.
It was the policy of the company to set off these balances.
Required:
a) Prepare control accounts for the month ended 31 March 1993 for the purchases ledger and
for the sales ledger BEFORE any adjustments are made to correct the errors;
b) Adjust the purchases ledger control account and the sales ledger control account after
revealing the errors;
a. Purchases Ledger Control Account and Sales Ledger Control Account
Sales Ledger Control a/c
Mar 1 Balance b/d 9364 Mar 1 Balance b/d 510
Ledger expenses charged to 112 Discounts allowed 356

debtors
Credit sales (38940 – 11500) 27440 Bad debts written off 237
Balance c/d 376 Cash received from debtors 24607
Balance c/d 11582
37292 37292
Purchases Ledger Control a/c
Mar 1 Balance b/d 212 Mar 1 Balance b/d 5185
Purchases returns 615 Credit purchases 19283
Discounts received 241 Balance c/d 143
Cash paid to creditors 16824
Balance c/d 6719
24611 24611
b. Adjustments of Purchases Ledger Control Account and Sales Ledger Control Account
Sales Ledger Control a/c
Balance b/d 11582 Balance b/d 376

Refund to debtors 120 Sales returns omitted 440
Balance c/d (376+120) 256 Contra 300
Balance c/d 10842
11958 11958
Purchases Ledger Control a/c
Balance b/d 143 Balance b/d 6719
Contra 300 Purchases undercast 270
Balance c/d 6689 (7859 – 7589)
Balance c/d 143
7132 7132
BANK RECONCILIATION STATEMENT
Businesses maintain cash book to record both the cash as well as bank transactions. A Cashbook
has a cash column which shows cash available with the business and a bank column which
shows cash at bank.
Bank also keeps an account for every customer in their books. All the deposits are recorded on
credit side of customer’s account and withdrawals are on the debit side of their account. An
account statement is sent regularly to the customers by the bank.
Sometimes the bank balances as per cash book and bank statement doesn’t match. In case
balance available in the passbook doesn’t match the bank column of the cash book, the business
should identify the reasons for the same. It is important to reconcile the differences.
For reconciling the balances as shown in the Cash Book and passbook a reconciliation statement
is prepared known as Bank Reconciliation Statement or BRS. In other words, BRS is a statement
which is prepared for reconciling the difference between balances as per cash book’s bank
column and passbook on a given date.
Why Prepare a BRS?
It‘s not compulsory to prepare a BRS and there’s no fixed date for preparing BRS. BRS is
prepared on a periodical basis for checking that bank related transactions are recorded properly
in cash book’s bank column and also by the bank in their books. BRS helps to detect errors in
recording transactions and determining the exact bank balance as on a specified date.
How to prepare a BRS
1. The first step is to compare opening balances of both the bank column of the cash book as well
as bank statement; these could be different due to un-credited or un-presented cheques from a
previous period.
2. Now, compare credit side of the bank statement with debit side of the bank column of cash
book and debit side of the bank statement with the credit side of the bank column of the cash
book. Place a tick against all the items appearing in both the records.
3. Analyze the entries both in the bank column of the cash book as well as pass book and look
for entries which have been missed to be posted in the bank column of the cash book. Make a list
of such entries and make the necessary adjustments in the cash book.
4. Correct if any mistakes or errors appear in cash book.
5. Calculate the corrected and revised balance of cash book’s bank column.
6. Now, start bank reconciliation statement with updated cash book balance.
7. Add the un-presented cheques (cheques which are issued by the business firm to its creditors
or suppliers but not presented for payment – Expense) and deduct un-credited cheques (Cheques
paid into the bank but not yet collected – Income).
8. Make all the necessary adjustments for the bank errors. In case the bank reconciliation
statement begins with the debit balance as per bank column of the cash book, add all the amounts
erroneously credited by the bank and deduct all the amounts erroneously credited by the bank.
Do vice-versa in case its start with the credit balance.
9. The resultant figure must be equal to the balance as per the bank statement.
Benefits of preparing a BRS
Accounting errors could lead to circumstances which are more than just embarrassing when the
cheques bounce or companies start getting annoying calls from creditors or suppliers for
payments which are already released. Bank reconciliations assist you in spotting fraud and
reducing the risk of transactions which could cause penalties and late fees. BRS offers several
advantages to a business which includes:
Detecting errors: A bank reconciliation helps you in spotting accounting errors which are
common to every business. These mistakes include errors such as addition and subtraction,
missed payments and double payments.
Tracking Interest and Fee: Banks might add interest payments, fees or penalties on your account.
Monthly bank reconciliation allows you to add or subtract such amounts in your books.
Detecting Fraud: You may not be able to prevent employees from stealing your money once,
however, you could prevent it in future. Bank reconciliations statement helps you in detecting
and spotting fraudulent transactions. It is advisable to employ an independent person to perform
the reconciliations for preventing the accounting employee from falsifying your books and
reconciliations.
Tracking Receivables: BRS allows you to confirm all your receipts, assisting you to avoid
awkward situations and also identifying entries for receipts which you didn’t deposit.
Tips to ensure efficient BRS
1. Firstly, it’s essential to have all the required documentation and information in hand. That
means, if all the required documentation and information are at your disposal you get a better
view of things.
2. Avoiding common errors, such as:
a. Error relating to duplication of entries.
b. Not accounting for a transaction that would cause a difference equal to the missed amount
c. Errors while entering commas and dots, which cause discrepancies that, could be of significant
value. For instance, instead of entering INR 2,401.30, entering INR 240.13.
d. Transposition errors while entering figures in the books. For instance, instead of entering INR
221,200, entering INR 212,200.
3. Banks can make mistakes too: It is possible that your bank might have committed a mistake.
They might debit incorrect amounts from your account, or credit deposits which doesn’t belong
to you. For this reason, in case you find errors for which you don’t find any explanations, or for
which you’re in doubt, the best thing is to consult your bank.
4. Reconciling items : Listing differences and reconciling them and then forgetting it is possible.
In case differences keep on accumulating with no action taken, your bank reconciliation would
become meaningless. It is needed that a constant check is kept on the reconciled transactions so
that they are reflected in the right way in the bank column of the cash book and in the bank
statement.
SUSPENSE ACCOUNT
Accounting errors can occur in double entry bookkeeping for a number of reasons. Accounting
errors are not the same as fraud, errors happen unintentionally, whereas fraud is a deliberate and
intentional attempt to falsify the bookkeeping entries.
An accounting error can cause the trial balance not to balance, which is easier to spot, or the
error can be such that the trial balance will still balance due to compensating bookkeeping entries,
which is more difficult to identify.
ERRORS WHICH DO NOT AFFECT THE TRIAL BALANCE
Accounting errors that do not affect the trial balance fall into one of six categories as follows:
1. Error of Principle in Accounting
2. Errors of Omission in Accounting
3. Error of Commission
4. Compensating Error
5. Error of Original Entry
6. Complete Reversal of Entries
Error of Principle in Accounting
An error of principle in accounting occurs when the bookkeeping entry is made to the wrong
type of account. For example, if a 1,000 sale is credited to the sundry expenses account instead
of the sales account, the correcting entry would be as follows:
Accounting Errors – Error of Principle in Accounting Example
Account Debit Credit
Sundry expenses 1,000

Sales 1,000
Error of Omission in Accounting
Errors of omission in accounting occur when a bookkeeping entry has been completely omitted
from the accounting records. If the payment 2,000 to a supplier has been omitted then the
correcting entry would be as follows:
Accounting Errors – Errors of Omission in Accounting Example
Accounts payable 2,000

Cash 2,000
Error of Commission
An accounting error of commission occurs when an item is entered to the correct type of account
but the wrong account. For example is cash received of 3,000 from Customer A is credited to the
account of Customer B the correcting entry would be.
Accounting Errors – Error of Commission
Accounts receivable – Cust. B 3,000

Accounts receivable – Cust. A 3,000
Compensating Error
A compensating error occurs when two or more errors cancel each other out. For example, if the
fixed assets account is incorrectly totalled and understated by 600, and the rent account is
incorrectly totalled and overstated by 600, then the posting to correct the error would be as
follows:
Accounting Errors – Compensating Error
Fixed assets 600

Rent 600
Error of Original Entry
An error of original entry occurs when an incorrect amount is posted to the correct account.
A particular example of an error of original entry is a transposition error where the numbers are
not entered in the correct order. For example, if cash paid to a supplier of 2,140 was posted as
2,410 then the correcting entry of 270 would be.
A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9.
Accounting Errors – Error of Original Entry

Cash 270
Accounts payable 270
Complete Reversal of Entries

Complete reversal of entries errors occur when the correct amount is posted to the correct
accounts but the debits and credits have been reversed. For example if a cash sale is made for
400 and posted incorrectly as follows:
Accounting Errors – Incorrect posting

Sales 400
Cash 400
Then to correct the accounting error the original entry must be reversed and the correct entry
made, this can be achieved by doubling the original amounts as follows:
Accounting Errors – Complete Reversal of Entries

Cash 800
Sales 800
SUMMARY OF ACCOUNTING ERROR TYPES
Accounting Errors Description
Error of Principle in Accounting Correct amount, wrong type of account
Errors of Omission in Accounting Entry missed from accounting records
Error of Commission Correct amount and type of account but wrong

account
Compensating Error Two or more errors balance each other out
Error of Original Entry Correct accounts, wrong amounts
Complete Reversal of Entries Correct amount and account, entries reversed
UNDERSTANDING SUSPENSE ACCOUNT
Suspense accounts and error correction are popular topics for examiners because they test
understanding of bookkeeping principles so well
A suspense account is a temporary resting place for an entry that will end up somewhere else
once its final destination is determined. There are two reasons why a suspense account 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 a 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). This is the only time an entry is made in the records without a
corresponding entry elsewhere (apart from the correction of a trial balance error – see error type
8 below).
Types of error
Before we look at the operation of suspense accounts in error correction, we need to think about
types of error – not all types affect the balancing of the records and hence the suspense account.
SUSPENSE
ERROR TYPE ACCOUNT
INVOLVED
1. Omission– a transaction is not recorded at all NO

2. Error of commission – an item is entered to the correct side of the NO
wrong account (there is a debit and a credit here, so the records
balance)
3. Error of principle – an item is posted to the correct side of the wrong NO
type of account, as when cash paid for plant repairs (expense) is
debited to plant account (asset)
4. Error of original entry– an incorrect figure is entered in the records NO

and then posted to the correct account.
Example: Cash $1,000 for plant repairs is entered as $100;

Plant repairs account is debited with $100
5. Reversal of entries – the amount is correct, the accounts used are NO

correct, but the account that should have been debited is credited and
vice versa
6.Addition errors – figures are incorrectly added in a ledger account YES
7. Posting error YES

a. an entry made in one record is not posted at all
b. an entry in one record is incorrectly posted to another
Examples: cash $10,000 entered in the cash book for the purchase of a
car is:
a. not posted at all
b. posted to Motor cars account as $1,000
8. Trial balance errors – a balance is omitted, or incorrectly extracted, in YES

preparing the trial balance
9. Compensating errors – two equal and opposite errors leave the trial Yes, to correct each
balance balancing (this type of error is rare, and can be because a of the errors as
deliberate second error has been made to force the balancing of the discovered
records or to conceal a fraud).
For examination purposes we are more often concerned with the second of these –
differences and error correction.
Correcting errors
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the
accounts affected. Errors 6 to 9 also require journal entries to correct them, but one side of the
journal entry will be to the suspense account opened for the difference in the records. Type 8,
trial balance errors, are different. As the suspense account records the difference, an entry to it is
needed, because the error affects the difference. However, there is no ledger entry for the other
side of the correction – the trial balance is simply amended.
An illustrative question
The bookkeeping system of Power is not computerised, and at 30 September 2015 the
bookkeeper was unable to balance the accounts. The trial balance totals were:
Debit $1,796,100 Credit $1,852,817
Nevertheless, he proceeded to prepare draft financial statements, inserting the difference as a

balancing figure in the statement of financial position. The draft Income Statement showed a
profit of $141,280 for the year ended 30 September 2015.
He then opened a suspense account for the difference and began to check through the accounting
records to find the difference. He found the following errors and omissions:
1. $8,980 – the total of the sales returns book for September 2015, had been credited to the
purchases returns account.
2. $9,600 paid for an item of plant purchased on 1 April 2015 had been debited to plant repairs
account. The company depreciates its plant at 20% per annum on a straight line basis, with
proportional depreciation in the year of purchase.
3. The cash discount totals for the month of September 2015 had not been posted to the general
ledger accounts. The figures were:
Discount allowed $836
Discount received $919
4. $580 insurance prepaid at 30 September 2014 had not been brought down as an opening
balance
5. The balance of $38,260 on the telephone expense account had been omitted from the trial
balance
6. A car held as a non-current asset had been sold during the year for $4,800. The proceeds of
sale were entered in the cash book but had been credited to the sales account in the general
ledger. The original cost of the car $12,000, and the accumulated depreciation to date $8,000,
were included in the motor vehicles account and the accumulated depreciation account. The
company depreciates motor vehicles at 25% per annum on a straight line basis with proportionate
depreciation in the year of purchase but none in the year of sale.
Required:
(a) Prepare the journal entries necessary to correct the errors and eliminate the balance on the
suspense account. Narratives are not required.
(b) Open a suspense account for the difference between the trial balance totals.
(c) Draw up a statement showing the revised profit after correcting the above errors.
DISCUSSION
The approach to the question should be:
1. Read the requirement paragraph at the end of the question.
2. Attack the question – note that narratives are not required. Begin by opening the suspense
account. Which side? More debit is needed to balance the trial balance, so debit the suspense
account with $56,717.
Then deal with the errors in order:
1. Sales returns should have been debited to the sales returns account and they have been
credited to the purchases returns account. There are two errors here – the wrong account has
been used and an entry which should have been a debit has been entered as a credit. The
suspense account entry must therefore be for 2 x $8,980 or $17,960.
2. An error of principle – no suspense account entry. Depreciation must be adjusted.
3. Items have not been posted, therefore the suspense account is involved.
4. Effectively a posting error – the suspense account is again involved.
5. A trial balance error must affect the suspense account – but no ledger entry.
6. This one needs thought. Take it one sentence at a time. Is the suspense account involved? No,
because we have an error of commission followed by some unrecorded transactions.
Solution
Journal Entries
$ $
1. Sales returns account 8,980

Suspense account 8,980
Purchases returns account 8,980
2. Plant account 9,600

Plant repairs account 9,600
Depreciation (income statement) 960
Plant depreciation account 960
3. Discount allowed account 836

Suspense account 836

Discount received account 919
4. Insurance account 580

5 Trial balance (no ledger entry) 38,260
6 Sales account 4,800
Motor vehicles disposal account 4,800
Motor vehicles asset account 12,000
Motor vehicles depreciation account 8,000
Motor vehicles disposal account 800
Income statement 800
Suspense Account
$ $
Difference as per TB 56,717 Sales returns 8,980
Discount received 919 Purchases returns 8,980
Discount allowed 836
Insurance 580
Telephone (trial balance) 38,260
57,636 57,636
Adjustment to profit - +
$ $
Profit as in draft income statement 141,280
1 Sales returns adjustment (2 x $8,980) 17,960
2 Plant: reduction in repairs 9,600
depreciation – 6/12 x 20% x$9,600 960 960
3 Discount allowed 836
Discount received 919
4 Insurance – opening balance omitted 580
5 Telephone expense omitted 38,260
6 Profit on sale of car 800
Proceeds taken out of sales 4,800 -----
63,396 152,599
(63,396)
Revised net profit 89,203
Some hints on preparing suspense accounts

Does a correction involve the suspense account? The type of error determines this. Practice, and
study of Table 1 should ensure that you see immediately which errors affect the balancing of the
records and hence the suspense account.
Which side of the suspense account must an entry go? This is one of the most awkward problems
in preparing suspense accounts. The best way of solving it is to ask yourself which side the entry
needs to be on in the other account concerned. The suspense account entry is then obviously to
the opposite side.
Look out for errors with two aspects. In the illustrative question earlier, error 1 is a case in point.
An entry has been made to the wrong account, but also to the wrong side of the wrong account.
Both errors must be corrected. It is very easy to fall into the trap of correcting only one of the
errors, especially when working quickly under examination conditions.
CLASS DISCUSION
Debit ($) Credit ($) Net Profit ($)

1 Purchases of $600 by cheque from C. Pang Purchases Bank Overstated
completely omitted from the books. ($600) ($600)
2 A sale of goods of $678 to H. Luen had H. Luen H. Lui N/A

been entered in H. Lui’s account. ($678) ($678)
3 The purchase of a machine on credit from Machinery L. Po Overstated

L. Po for $4,390 had been completely ($4,390) ($4,390) (Depreciation)
omitted from the books.
4 The purchase of a motor van $38,000 had Motor van Motor Understated
been entered in error in the motor expenses ($38,000) expenses
account. ($38,000)
5 A sale of $250 to Frederick had been Frederick Sales Understated

entered in the books, both debit and credit, ($250 – $205) ($45)
as $205.
6 Commission received $257 had been Sales Commission N/A

entered in error in the sales account. ($257) received
7 Cheque paid to H. Kwong $89 entered on H. Kwong Bank N/A

the debit side of the bank account and the ($89 x 2) ($178)
credit side of H. Kwong’s account.
8 Chang issues a cheque for $160 in respect Drawings Bank Overstated

of rent due to his landlord. Of this amount, ($100) ($160)
one hundred dollar is for rent of Chang’s
private apartment and the balance is rent of Rent
his business premises. This transaction is ($60)
completely omitted from his accounting
records.
9 Returns inwards of $1,000 from Chan was Returns Chan Overstated

omitted in his accounting records. inwards ($1,000)
($1,000)
10 The wages and salaries figure includes Drawings Wages and Understated
$1,010 paid for work done on Cheng’s ($1,010) salaries
private residence. ($1,010)
INDIVIDUAL WORK
1 No entries have been made for the goods Drawings Purchases Understated
taken for own use amounting to $1,033. ($1,033) ($1,033)
2 P. Lam paid us by cheque $50 was correctly P. Lam P. Lau N/A

entered in the bank account, but it is entered ($50) ($50)
by mistake in the account of P. Lau.
3 Sales of $150 to T. Lok has been entered as T. Lok Sales Understated

$130 in both debit and credit entry. ($150 - $130) ($20)
4 Payment of $200 by cheque to Mr. Cheung Mr. Cheung Bank N/A

was incorrectly credited to his account and ($200 x 2) ($400)
debited to bank account.
5 Goods taken for own use $250 have been Drawings Purchases Understated
debited to purchases account and credited to ($250 x 2) ($500)
drawings account.
6 A loan from Mr. X $5,000 has been entered Capital Loan – Mr. X N/A
on the credit side of the capital account. ($5,000) ($5,000) (Loan interest
*)
7 Returns inwards of $833 have been entered Returns Returns N/A
on the debit side of the returns outwards inwards outwards
account. ($833) ($833)
8 Goods amounting to $620 returned to a Supplier Returns Overstated

supplier have not been recorded. ($620) outwards
($620)
9 A credit purchase of $7,667 from Mr. B was Purchases Mr. B Overstated

entered as $6,776 in both purchases and Mr. ($7,667 - ($891)
B’s account. $6,776)
10 Goods returned by Mr. C of $124 has been Returns Mr. C. Overstated

credited to returns outwards account and inwards ($124) ($248)
debited to Mr. C’s account. Returns
outwards
($124)
INCLASS EXERCISE
When the trial balance of Musendo Power Ltd as at 30 September 2018 was prepared, a
difference was found. A Suspense Account was created in order to achieve the balance:
Examination of the books showed the following:
1. Discount allowed of $76 had been credited to the Discount Received Account
2. A sale of $151 to Mr. A had been posted correctly to the personal account but entered in the
Sales Day Book as $115
3. A cheque received from Mr. B entered correctly in the Cash Book as $766 had been posted to
the company’s account as $760
4. The purchase of new machinery for $1,200 had been posted to the Stock Account.
Depreciation is ignored for the year in which the machinery is purchased
5. A sale of $265 to Mr. C had not been posted to his account
6. A petty cash balance of $100 was omitted from Trial Balance
7. Bank interest charges of $720 were correctly entered in the Cash Boo but the other side of the
double entry had been omitted.
Required:
(a) Prepare Journal entries to correct the above errors, without narrations. [14 marks]
(b) Prepare a Suspense Account [7 marks]
(c) Final accounts, prepared from the original trial balance, show the working capital to
be $16,217. Prepare a statement showing the effect of the above correction of this
figure. [ 4 marks]
ANSWERS
(a) Journal entries to correct errors ( without narrations)
Debit($) Credit($)
Discount Received 76
Discount Allowed 76
Suspense 152
Suspense 36
Sales 36
Suspense 6 6
Mr. B
Machinery 1 200 1 200
Stock
Mr. C 265 265
Suspense
Petty Cash 100 100
Suspense
Bank Interest Charges 720 720
Suspense
(b) Suspense Account
Debit($) Credit($)
Difference as per Trial Balance 1 195 Discount received 76

Mr. B Discount allowed 76
Sales 6 Mr. C 265
36 Cash 100
Bank Interest Charges 720
1 237 1 237
(c) Statement of the Correction on Working Capital
($) ($)
Working Capital as per Original Trial Balance (given) 16,217
Add: Mr. C 265

Petty Cash 100 365
16,582
Less: Mr. B 6
Stock 1,200 (1,206)
Working Capital after adjustments 15,376

F5 Notes-1

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PRINCIPLES OF ACCOUNTING

TEACHER’S RESOURCE BANK

3. PROMISE-KEEPING & TRUSTWORTHINESS

6. CONCERN FOR OTHERS

7. RESPECT FOR OTHERS

11. REPUTATION AND MORALE

GOING CONCERN CONCEPT

MONEY MEASUREMENT CONCEPT

SUBSTANCE OVER FORM

(i) Going concern

(ii) Accrual / Matching

(iv) Prudence / Conservatism

 The transaction (earning process) is completed

More about accounting concepts

A bad debt is written off by debtors and it is accounted as an expense to a company.

A company makes provision for this type of loss.

Provision for Doubtful Debts

Allowance for doubtful debts consist of two types:

Why providing for depreciation on fixed assets

STRAIGHT LINE METHOD

REDUCING BALANCE METHOD

Purposes of control accounts

Reasons why a debtor’s account might have a credit balance

Limitations of control accounts

WHAT TO NOTE WHEN AMENDING AND RECONCILING CONTROL ACCOUNTS

TYPE OF ERROR ADJUSTED IN RECONCILIATION

Errors in source documents Yes No

Complete omission of a transaction Yes Yes

Casting errors in books of original entry No Yes

Errors in personal account or Individual error yes yes

In the sales ledger control account - on the credit side

In the purchases ledger control account - on the debit side

Benefits of maintaining control accounts

Sales Ledger Control Account – for debtors (or accounts receivable)

Sales Ledger Control Account Source of Information

Purchases Ledger Control Account – for creditors (or accounts payable)

Purchases Ledger Control Account Source of Information

Date Details folio $ Date Details folio $

Balance b/d xxx Balance b/d xxx

Purchase Ledger Control Account

Date Details folio $ Date Details folio $

Balance b/d xxx Balance b/d xxx

Uses / Advantages of Control Account

 Provide the final balances of debtors or creditors

Sales Ledger Control a/c

Mar 1 Balance b/d 9364 Mar 1 Balance b/d 510

Ledger expenses charged to 112 Discounts allowed 356

Balance c/d 376 Cash received from debtors 24607

Balance c/d 11582

Purchases Ledger Control a/c

Mar 1 Balance b/d 212 Mar 1 Balance b/d 5185

Purchases returns 615 Credit purchases 19283

Discounts received 241 Balance c/d 143

Cash paid to creditors 16824

Balance c/d 6719

Sales Ledger Control a/c

Balance b/d 11582 Balance b/d 376

Balance c/d (376+120) 256 Contra 300

Balance c/d 10842

Purchases Ledger Control a/c

Balance b/d 143 Balance b/d 6719

Contra 300 Purchases undercast 270

Balance c/d 6689 (7859 – 7589)