Level1 F.acc

UNIVERSITY OF RWANDA
School of Business and Economics

Bachelor of Business Administration
First Years 2015/2016 First semester
Module: ACC111 Introduction to Financial Accounting
CONTENTS
Page
CHAPTER ONE : INTRODUCTION TO FINANCIAL ACCOUNTING ...........................................2

CHAPTER TWO: ACCOUNTING CONCEPTS ...................................................................................5
CHAPTER THREE: DOUBLE ENTRY CONCEPTS............................................................................9
CHAPTER FOUR: BANK RECONCILIATION...................................................................................31
CHAPTER FIVE: ADJUSTMENTS (ACCRUALS AND PREPAYMENTS, BAD AND DOUBTFUL
DEBTS, DEPRECIATION AND DISPOSAL)................................................................................................................ 34
CHAPTER SIX: RECTIFICATION OF ERRORS AND SUSPENSE ACCOUNTS..........................60
CHAPTER SEVEN: CONTROL ACCOUNTS......................................................................................67
CHAPTER EIGHT: FINANCIAL STATEMENTS - SOLE TRADER ...............................................77
Recommended readings
1. Text Book: Business Accounting Volume 1 by Frank Wood and Allan Sangster
2. CPA Study text: Financial Accounting for CPA
3. ACCA study text: Financial accounting Paper F3 or Preparing financial statements Paper 1.1
2 Course Description
CHAPTER ONE: INTRODUCTION TO FINANCIAL ACCOUNTING
1.1.Nature of Financial Accounting
Accounting is defined as the process of identifying, recording, classifying and summarizing economic data
so as to come up with useful information to help users make informed decisions.
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either
cash is received or paid out. Examples of these transactions include selling goods, buying goods, paying
employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on
these transactions. If a firm employs a new staff member then this may not be an accounting transaction.
However when the firm pays the employee salary, then this is related to accounting as cash involved. This
has an economic impact on the organization and will be recorded for accounting purposes. A process is put
in place to collect and record this information; it is then classified and summarized so that it can be reported
to the interested parties.
1.2. Users of Accounting Information
Accounting information is produced in form of financial statement. These financial statements provide
information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners and
others.
The financial performance reflects how the business has performed, whether it has made profits or losses.
Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the information
contained in the financial statements will affect the decision making process.
The following are the users of accounting information:
i. Owners:
They have invested in the business and examples of such owners include sole traders, partners
(partnerships) and shareholders (company). They would like to have information on the financial
performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing whether
the business is profitable or not and whether to make drawings or put in additional capital.
ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is
performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
iii. Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers
would like to have information on the financial performance and position so as to assess whether the
business would be able to pay up for the goods and services provided as and when the payments fall
due.
2 CBE-IntroFinAcc-2015/6 Notes 1
iv. Managers
The managers are involved in the day-to-day activities of the business. They would like to have
information on the financial position, performance and changes in financial position so as to determine
whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to
ensure that the set plans are met.
v. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks and
other financial institutions. They would like to have information on the financial performance and
position of the business to assess whether the business is profitable enough to pay the interest on loans
and whether it has enough resources to pay back the principal amount when it is due.
vi. The Government and its agencies

The Government is interested in the financial performance of the business to be able to assess the tax to
be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the
business to be able to come with National Statistics. This statistics measure the average performance of
the economy.
vii. The Financial Analyst and Advisors

Financial analyst and advisors interpret the financial information. Examples include stockbrokers who
advise investors on shares to buy in the stock market and other professional consultants like
accountants. They are interested with the financial position and performance of the firm so that they can
advise their clients on how much is the value their investment i.e. whether it is profitable or not and
what is the value.
Others advisors would include the press who will then pass the information to other relevant users.
viii. The Employees

They work for the business/entity. They would like to have information on the financial position and
performance so as to make decisions on their terms of employment. This information would be
important as they can use it to negotiate for better terms including salaries, training and other benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are secure.
ix. The general Public

Institutions and other welfare associations and groups represent the public. They are interested with the
financial performance of the firm. This information will be important for them to assess how socially
responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and the
effect of firm’s activities on the environment.
1.3.Forms of businesses
i. Sole trader business – is owned by one person, the sole trader. Sole trader is not legally separate from
the business.
ii. Partnership – is owned by two or more persons the partners. Partners are legally not separate from the
partnership.
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CBE-IntroFinAcc-2015/6 Notes 1
iii. Company – is a legally separate business owned by two or more persons, the shareholders.
iv. Other forms of businesses

- Cooperatives – members come together to start the business to satisfy their needs/common interest
- Not for profit entity – they are started to just offer a given service or good but are they do not have profit
as the motive.
- Parastatal – is a company wholly owned by the government
1.4.Qualitative characteristics of Financial Information
i. Understandability: an essential quality of the information provided in the financial statements is that
it is readily understandable by users. For these reason users are assumed to have a reasonable
knowledge of business and economic activities and accounting.
ii. Relevance: information has the quality of being relevant when it influences the economic decisions of
users by helping them evaluate past, present or future events or confirming or correcting their past
evaluations. The relevance of information is affected by its nature and materiality.
iii. Reliability: information is useful when it is free from material error and bias and can be depended
upon by users to represent faithfully that which it purports to represent or could reasonably be expected
to represent. To be reliable then the information should:
- Be represented faithfully,
- Be accounted for and presented in accordance with their substance and economic reality and not merely
their legal form,
- Be neutral i.e. free from bias,
- Include some degree of caution especially where uncertainties surround some events and transactions
(prudence),
- Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information
to be false.
iv. Comparability: users must be able to compare the financial statements of an enterprise through time
in order to identify trends in its financial position and performance. Users must also be able to compare
the financial statements of different accounting policies, changes in the various policies and the effect
of these changes in the accounts. Compliance with accounting standards also helps achieve this
comparability.
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CHAPTER TWO: ACCOUNTING CONCEPTS
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business
enterprises. Examples of concepts include:
i. The going concern concept:

It implies that the business will continue in operational existence for the foreseeable future, and that there is
no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going
to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must also
disclose any significant doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the business should not be valued at
their ‘break-up’ value, which is the amount that they would sell for it they were sold off piecemeal and the
business were thus broken up.
ii. The accruals concept (and matching concept):

It states that transactions must be recognized as they are earned or incurred, not just when money is received
or paid. Matching concept requires that incomes and expenses must be matched with one another so far as
their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of
the period to which they relate.
Assume that a firm makes a profit of FRw100 by matching the revenue (FRw200) earned from the sale of
20 units against the cost (FRw100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect to charge profit and loss
account with the cost of twenty units; there is still two units in stock. If the firm intends to sell them later, it
is likely to make a profit on the sale. Therefore, only the purchase cost of eighteen units (FRw90) should be
matched with the sales revenue, leaving a profit of FRw90. The balance sheet would therefore look like this:
FRw
Assets
Stock (at cost, i.e. 2 x FRw5) 10
Debtors (18 x FRw10) 180
190
Liabilities
Creditors 100
90
Capital (profit for the period) 90
If, however the firm had decided to give up selling units, then the going concern concept would no longer
apply and the value of the two units in the balance sheet would be a break-up valuation rather than cost.
Similarly, if the two unsold units were now unlikely to be sold at more than their cost of FRw5 each (say,
because of damage or a fall in demand) then they should be recorded on the balance sheet at their net
realizable value (i.e. the likely eventual sales price less any expenses incurred to make them saleable, e.g.
paint) rather than cost. This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked. Because the business is assumed to
be a going concern it is possible to carry forward the cost of the unsold units as a charge against profits of
the next period.
Essentially, the accruals concept states that, in computing profit, revenue earned must be matched against
the expenditure incurred in earning it.
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iii. The Prudence Concept (and realization concept):
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the
one selected should be the one that gives the most cautious presentation of the business’s financial position
or results. Assets and profits should not be overstated, but a balance must be achieved to prevent the
material overstatement of liabilities or losses.
Therefore, realization concept requires that revenue and profits are not anticipated but are recognized by
inclusion in the income statement only when realized in the form of either cash or of other assets the
ultimate cash realization of which can be assessed with reasonable certainty: provision is made for all
liabilities (expenses and losses) whether the amount of these is known with certainty or is best estimate in
the light of the information available.
The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated and taken
into account immediately. If a business purchases stock for FRw1,200 but because of a sudden slump in the
market only FRw900 is likely to be realized when the stock is sold the prudence concept dictates that the
stock should be valued at FRw900. It is not enough to wait until the stock is sold, and then recognize the
FRw300 loss; it must be recognized as soon as it is foreseen.
A profit can be considered to be a realized profit when it is in the form of:

• Cash
• Another asset that has a reasonably certain cash value. This includes amounts owing from debtors,
provided that there is a reasonable certainty that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth FRw100,000 during the year to 31
December. At 31 December there are debts outstanding of FRw15,000. Of these, the company is now
doubtful whether FRw6,000 will ever be paid.
The company should make a provision for doubtful debts of FRw6,000. Sales for 20x5 will be shown in the
profit and loss account at their full value of FRw100,000, but the provision for doubtful debts would be a
charge of FRw6,000. Because there is some uncertainty that the sales will be realized in the form of cash,
the prudence concept dictates that the FRw6,000 should not be included in the profit for the year.
iv. The consistency concept:
The consistency concept states that in preparing accounts consistency should be observed in two respects.
a) Similar items within a single set of accounts should be given similar accounting treatment.
b) The same treatment should be applied from one period to another in accounting for similar items.
This enables valid comparisons to be made from one period to the next.
v. The business entity concept:

The concept is that accountants regard a business as a separate entity, distinct from its owners or managers.
The concept applies whether the business is a limited company (and so recognized in law as a separate
entity) or a sole proprietorship or partnership (in which case the business is not separately recognized by
the law.
vi. The money measurement concept:

The money measurement concept states that accounts will only deal with those items to which a monetary
value can be attributed.
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For example, in the balance sheet of a business, monetary values can be attributed to such assets as
machinery (e.g. the original cost of the machinery; or the amount it would cost to replace the machinery)
and stocks of goods (e.g. the original cost of goods, or, theoretically, the price at which the goods are likely
to be sold).
The monetary measurement concept introduces limitations to the subject matter of accounts. A business
may have intangible assets such as the flair of a good manager or the loyalty of its workforce. These may
be important enough to give it a clear superiority over an otherwise identical business, but because they
cannot be evaluated in monetary terms they do not appear anywhere in the accounts.
vii. The separate valuation principle:
The separate valuation principle states that, in determining the amount to be attributed to an asset or
liability in the balance sheet, each component item of the asset or liability must be determined separately.
These separate valuations must then be aggregated to arrive at the balance sheet figure.
For example, if a company’s stock comprises 50 separate items, a valuation must (in theory) be arrived at
for each item separately; the 50 figures must then be aggregated and the total is the stock figure which
should appear in the balance sheet.
viii.The materiality concept:
An item is considered material if it’s omission or misstatement will affect the decision making process of
the users. Materiality depends on the nature and size of the item. Only items material in amount or in their
nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In
preparing accounts it is important to assess what is material and what is not, so that time and money are not
wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute measure
of materiality. It is common to apply a convenient rule of thumb (for example to define material items as
those with a value greater than 5% of the net profit disclosed by the accounts).
But some items disclosed in accounts are regarded as particularly sensitive and even a very small
misstatement of such an item would be regarded as a material error. An example in the accounts of a
limited company might be the amount of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment in the accounts. For example,
the profit and loss account of a business will show the expenses incurred by he business grouped under
suitable captions (heating and lighting expenses, rent and rates expenses etc); but in the case of very small
expenses it may be appropriate to lump them together under a caption such as ‘sundry expenses’, because a
more detailed breakdown would be inappropriate for such immaterial amounts.
Example:
a) If a balance sheet shows fixed assets of FRw2 million and stocks of FRw30,000 an error of FRw20,000 in
the depreciation calculations might not be regarded as material, whereas an error of FRw20,000 in the
stock valuation probably would be. In other words, the total of which the erroneous item forms part must
be considered.
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b) If a business has a bank loan of FRw50,000 balance and a FRw55,000 balance on bank deposit account, it
might well be regarded as a material misstatement if these two amounts were displayed on the balance
sheet as ‘cash at bank FRw5,000’.
In other words, incorrect presentation may amount to material misstatement even if there is no monetary
error.
ix. The historical cost convention:
A basic principle of accounting (some writers include it in the list of fundamental accounting concepts) is
that resources are normally stated in accounts at historical cost, i.e. at the amount that the business paid to
acquire them. An important advantage of this procedure is that the objectivity of accounts is maximized:
there is usually objective, documentary evidence to prove the amount paid to purchase an asset or pay an
expense. Historical cost means transactions are recorded at the cost when they occurred.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is because valuations tend
to be subjective and to vary according to what the valuation is for. For example, suppose that a company
acquires a machine to manufacture its products. The machine has an expected useful life of four years. At
the end of two years the company is preparing a balance sheet and has decided what monetary amount to
attribute to the asset.
x. Objectivity (neutrality):
An accountant must show objectivity in his work. This means he should try to strip his answers of any
personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result
of this should be that any number of accountants will give the same answer independently of each other.
Objectivity means that accountants must be free from bias. They must adopt a neutral stance when
analyzing accounting data. In practice objectivity is difficult. Two accountants faced with the same
accounting data may come to different conclusions as to the correct treatment. It was to combat subjectivity
that accounting standards were developed.
xi. The realization concept:
Realization: Revenue and profits are recognized when realized. The concept states that revenue and profits
are not anticipated but are recognized by inclusion in the income statement only when realized in the form
of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable
certainty.
xii. Duality:
Every transaction has two-fold effect in the accounts and is the basis of double entry bookkeeping.
xii. Substance over form:
The principle that transactions and other events are accounted for and presented in accordance with their
substance and economic reality and not merely their legal form e.g. a non current asset on Hire purchase
although is not legally owned by the enterprise until it is fully paid for, it is reflected in the accounts as an
asset and depreciation provided for in the normal accounting way.
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CHAPTER THREE: DOUBLE ENTRY CONCEPTS
a)THE ACCOUNTING EQUATION

A business owns properties. These properties are called assets. The assets are the business resources that
enable it to trade and carry out trading. They are financed or funded by the owners of the business who put
in funds.
These funds, including assets that the owner may put is called capital. Other persons who are not owners of
the firm may also finance assets. Funds from these sources are called liabilities.
The total assets must be equal to the total funding i.e. both from owners and non-owners. This is expressed
inform of accounting equation which is stated as follows:
ASSETS = LIABILITIES + EQUITY
Each item in this equation is briefly explained below.

Assets:
An asset is a resource controlled by a business entity/firm as a result of past events for which economic
benefits are expected to flow to the firm.
An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the
sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will
flow towards the firm i.e. in form of cash once the customers pays.
Assets are classified into two main types:
i) Non current assets (formerly called fixed assets).
ii) Current assets.
Non current assets are acquired by the business to assist in earning revenues and not for resale. They are
normally expected to be in business for a period of more than one year.
Major examples include:
 Land and buildings
 Plant and machinery
 Fixtures, furniture, fittings and equipment
 Motor vehicles
Current assets are not expected to last for more than one year. They are in most cases directly related to the
trading activities of the firm. Examples include:
 Stock of goods – for purpose of selling.
 Trade debtors/accounts receivables – owe the business amounts as a resort of trading.
 Other debtors – owe the firm amounts other than for trading.
 Cash at bank.
 Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which is expected to result to an
economic outflow of amounts from the firm. An example is when a business buys goods on credit, then the
firm has a liability called creditor. The past event is the credit purchase and the liability being the creditor
the firm will pay cash to the creditor and therefore there is an out flow of cash from the business.
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Liabilities are also classified into two main classes.

i) Non-current liabilities (or long term liabilities)
ii) Current liabilities.
Non-current liabilities are expected to last or be paid after one year. This includes long-term loans from
banks or other financial institutions. Current liabilities last for a period of less than one year and therefore
will be paid within one year. Major examples:
Trade creditors/ or accounts payable – owed amounts as a result of business buying
goods on credit.
 Other creditors - owed amounts for services supplied to the firm other than goods.
Bank overdraft - amounts advanced by the bank for a short-term period.
Equity:
This is the residual amount on the owner’s interest in the firm after deducting liabilities from the assets.
Items like introduced capital, profit/loss and drawings appear under equity.
The Accounting equation can be expressed in a simple report called the Balance Sheet. The basic format is
as follows:
Balance Sheet using the vertical format which is shown below.
Name of business
Balance sheet as at date.
ASSETS
Non Current Assets FRw FRw
Land & Buildings xx
Plant & Machinery xx
Fixtures, furniture & fittings xx
Motors vehicles xx
Total non-current assets Xx

Current Assets
Stocks/inventories xx
Debtors/ trade receivables xx
Cash at bank xx
Cash in hand xx
Total current assets Xx
Total assets Xxx
EQUITY AND LIABILITIES

Capital
-Opening balance xx
-Profit/(Loss) xx/(xx)
-Drawings (xx)
-Closing balance Xx
Non Current Liabilities
5 Years loan xx
2 Years loan xx
Total non current liabilities Xx

Current Liabilities
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Creditors/trade payables xx
5 Months Loan xx
Bank Overdraft xx
Total current liabilities (xx)
Total Xx
liabilities Xx
Total equity and
liabilities
Please pay attention to the format. The Non Current assets are listed in order of permanence as shown i.e.
from Land and Buildings to motor vehicles. The Current Assets are listed in order of liquidity i.e. which
asset is far from being converted into cash.
Example, stock is not yet sold, (i.e. not yet realized yet) then when it is sold we either get cash or a debtor (if
sold on credit). When the debtor pays then the debtor may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is
payable on demand by the bank, then followed by creditors.
Note that in the vertical format, current liabilities are deducted from current assets to give net current assets.
This is added to Non Current assets, which give us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
b)Double Entry rules

The Accounting equation forms the basis of double entry and therefore it should always be maintained. Any
change in assets, liabilities or capital will have a double effect such that assets will always be equal to liabilities
plus capital. If the owners put in additional capital then this will increase the cash at bank and the capital
amount therefore the equation is still maintained. The T account
Name
Debit/Dr Credit/Cr
Date Detail Folio Amount Date Detail Folio Amount
In this account the date will show the opening period of the asset , liability or capital i.e. the balance brought
forward. It will also show the date when a transaction took place (i.e. either an asset was bought or liability
incurred).
The detail column (also called the particulars column) shows the nature of the transaction and reference to the
corresponding account. The Folio Column for purposes of detailed recording shows the reference number of
the corresponding account. The amount column shows the amount of the asset, liability or capital. The left
side of the account is called the debit side and the right side is called the credit side. All assets are shown or
recorded on the debit side while all the liabilities and capital are recorded on the credit side. Each type of
asset or liability must have its own account whereby all transactions affecting them are recorded in this
account. Therefore there should be an account for Premises, Plant and Machinery, Stock, Debtors, Creditors
etc.
Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should
be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit entry.
The transactions affecting these accounts are posted in the account as debit entry and credit entry to complete
the double entry.
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When we make a debit entry we are either:

i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.
When we make a credit entry we are either:
i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.
Let us now consider other transactions that take place in a business and the accounting entries to be made.
c)Accounting for sales, purchases, incomes and expenses.
Sales:
This is the sale of goods that were bought by a firm (the goods must have been bought with the purpose of
resale). Sales are divided into cash sales and credit sales. When a cash sale is made, the following entries are to
be made.
i. Debit cash either at bank or in hand.
ii. Credit sales account.
For a credit sale:
i. Debit debtors/ Accounts receivable account.
ii. Credit sales account.
A new account for sales is opened and credited with cash or credit sales.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For cash purchases:
i. Debit purchases.
ii. Credit cash at bank/cash in hand
For credit purchases, we:
i. Debit purchases.
ii. Credit creditors for goods.
A new account is also opened for purchases where both cash and credit purchases are posted. NOTE: NO
ENTRY IS MADE INTO THE STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales). Such incomes include:
 Rent
 Discounts received.
When the firm receives cash, from these incomes, the following entries are made:
 Debit cash in hand/at bank.
 Credit income account.
Each type of income should have its own account e.g. rent income, interest income.
Incomes increase the value of capital and that is the reason why they are posted on the credit side of their
respective accounts.
Expenses:
These are amounts paid out for services rendered other than those paid for purchases. Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills
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• Motor vehicle running expenses.

• Bank charges.
When a firm pays for an expense, we:

i. Debit the expense account.
ii. Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will be posted. Expenses
decrease the value of capital and thus the posting is made on the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and expenses.
Debit cash book/bank/in hand
INCOME
Credit Income
INCOMES/EXPENSES Debit Expense A/C
EXPENCES
Credit cash book /bank/in hand
d)Returns Inwards and Returns Outwards.

Returns Inwards: These are goods that have been returned by customers due to various reasons e.g.
i. They may be defective/damaged,
ii. Being of the wrong type .
iii. Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in relation to cash sales and cash
is refunded to the customer the following entries are made:
i. Debit returns – inwards
ii. Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer, the following entry is to be
made.
i. Debit returns inwards.
ii. Credit debtors.
Returns Outwards: These are goods returned to suppliers/creditors. They may be for cash purchases or for
credit purchases. For cash purchases a cash refund given to the firm by the supplier,
i. Debit the cashbook (cash at bank/hand).
ii. Credit returns outwards.
For credit purchases and no refund has been made:
i. Debit creditors.
ii. Credit returns outwards.
Diagrammatically shown as follows:

Debit returns
inwards.
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Cash
Credit cashbook.
Inwards Debit returns inwards
Credit
Credit debtors
Debit cash Returns Cash
Outwards Credit returns outwards

Debit creditors
Credit
Credit returns outwards

Now lets us take one example that includes most of the above transactions.
e)Accounting for drawings, discounts allowed and discounts received.
Drawings
The owner makes drawings from the firm in various ways:
i) Cash or bank withdrawals
When the owner withdraws money from the business we debit drawings and credit cashbook (cash in hand or
cash at bank).
ii) Taking goods for own use and
When the owner takes out some of the goods for his own use, we debit drawings and credit purchases.
iii) Personal expenses, paid by the business
Here we debit the drawings and credit expense account
Taking some of the other assets from the business e.g. motor vehicles or using part of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle or converting business
premises into living quarters or not paying into the business cash collected personally from the customers.
When this happens we debit drawings and credit the relevant asset e.g. motor vehicles, premises or some
building or even debtors.
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the firm to pay the amount dues
within the agreed time. It is an amount deducted from the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit discounts received e.g. A.
Ltd sells some goods on credit to B Ltd. ₤1,000 under the terms of sale, B Ltd, will receive a discount of 5% if
they pay the amount due within one month. B decides to take up the offer and pays the amount within the given
time. B will record the transaction as follows.
Debit: Creditor – A Ltd
Credit: Discounts Received
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customers to encourage prompt
payment. The amounts deducted from the sales invoice. In the previous example when A Ltd issued the
discount and was taken up by B the entries will be:
i.Debit - discount allowed
ii.Credit - debtors - B Ltd.
f) Trial Balance
The trial balance is a simple report that shows the list of account balances classified as per the debits and
credits. The purpose of the trial balance is to show the accuracy of the double entries made and to facilitate the
preparation of final accounts i.e. the trading, profit & loss account and a balance sheet.
15
The debits of the trial balance should be the same as the credits, if not then there is an error in one or more of
the accounts.
Name
Trial balance as at 31 May 2009
Debit Credit
FRw FRw
Rent – income 5,000
Debtor – U Foot 7,000
Motor vehicle 300,000
Bank 1,555,000
Purchases 289,000
Wages 117,000
Capital 2,000,000
Creditor – M Rooks 152,000
Furniture & Fittings 150,000
Sales 352,000
Cash in hand 72,000
Creditor – P Scot 114,000
Expenses – Rent 15,000
Expenses – Stationery 27,000
Returns Outwards 23,000
Drawings 44,000
2,464,000 2,464,000
From the trial balance please note that assets and expenses are on the debit side. Capital, liabilities and incomes
are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all the postings have been made
in the relevant accounts.
g) Source documents and Books of original entry
16
The diagram below shows the components of an accounting system for a firm that carries out trading activities
from the source documents that record the evidence of transactions, where the documents are recorded and the
postings to be made.
Source Books of The List of the Final
Documents Original entry Ledger Balances Accounts
Source documents - Books of original entry -The ledgers -Trial balance -Financial statements
A brief description of each component is explained below.
SOURCE DOCUMENTS
17
This shows the evidence transactions. They are collected, filed and posted in the books of prime entry.
Example, if a firm sells goods on credit, then an invoice is raised. The source documents as shown in the above
include:
 Sales invoice
 Purchases invoice
 Credit note
 Debit note
 Receipts, cheques and petty cash vouchers
 Other correspondences.
(i) Sales Invoice

The sales invoice is raised by the firm and sent to the debtor/customer when the firm makes a credit sale.
The sales invoice contains the following:
i. Name and address of the firm
ii. Name and address of the buying firm
iii. Date of making the sale – invoice date.
iv. Invoice number
v. Amount due (net of trade discount)
vi. Description of goods sold
vii. Terms of sale
(ii) Purchases Invoice

A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It
shows the following:
i. Name and the address of the creditor/seller
ii. Name and address of the firm
iii. Date of the purchase (invoice date)
iv. Invoice number
v. Amount due
vi. Description of goods sold
vii. Terms of sale
(iii) Credit note

A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to the
firm. It’s contents include:
ii. Name and address of the debtor
iii. Amount of credit
iv. Credit note number
v. Reason for credit e.g. if goods sent but of the wrong type.
The purpose of the credit note is to inform the debtor or customer that the debtor’s account with the firm has
been credited i.e. the amount due to the firm has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors.
From the context we can assume that all credit notes are issued when goods are returned.
(iv) Debit note
18
This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It
includes the following items:
ii. Name and address of the creditor
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or
cancelled.
The The
Firm Credit sales (sales invoice)
Debtor
Returns inwards (credit note)
Credit purchase (purchase invoice)

The The
Firm Creditor
Returns outwards (debit note)
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they make payments in the form of cash
or cheques. It shows:
i. The name and address of the firm

ii. The date of the receipt
iii. Amount received (cash or cheque or other means of payment)
iv. Receipt number.
(vii) Cheques
When a firm opens a current account with the bank, a chequebook containing cheques issued. The cheques
allow the firm to make payments against the account with the bank. When a firm issues a cheque to its
creditors for payments, it authorizes the bank to honor payments against the firm’s account with the bank. The
cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
(viii) Petty cash vouchers

19
A petty cash voucher is raised by a cashier to seek authority for payments (payments of small value in the firm
which require cash payments e.g. fuel, bus-fare, office snacks), which is approved by a senior manager and
filed for record purpose. It shows:
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how the money was utilized e.g. fuel
receipt, bus ticket e.t.c.
(ix) Other correspondence

These include information received within or outside the firm that has a financial implication in the
accounts.
Examples are:
i. Letters from the firm’s lawyers about a debtors balance.

ii. Hire-purchase/credit sale or credit purchase agreements that relate to non-current assets.
iii.Memorandum from a senior manager requiring changes to be made in the accounts.
iv.Bank statement from the bank, e.g. bank charges.
Books of Original Entry
They record the source documents.

Sales Daybook
It is also called a Sales journal. It records all the sales invoices issued by the firm during a particular financial
period. The format is as follows (with simple records of invoice).
SALES Daybook Page 5

Date 19x8 Detail Folio Amount FRw
1st March S. Spikes SL.10 200.00

3rd March T. Binns SL.19 350.00
5th March L.Thompson SL,8 150.00
Total 700.00
The individual entries in the sales journal are posted to the debit side of the debtor’s accounts in the sales ledger
and the total is posted on the credit side of the sales account in the general ledger.
This is shown below:
Sales Ledger General Ledger
S Spikes General Account

19x8 FRw 19x8 FRw 19x8 FRw 19x8 FRw
1/3 Sales 200 5/3 Credit sales for 700
20
period
T Binus
19x8 FRw 19x8
3/3 Sales 350
L Thompson
19x8 FRw 19x8 FRw
3/3 Sales 150
Purchases Daybook
Purchases journal is also called a purchases Daybook. It records all the purchase invoices received by the firm
during a particular financial period. It has the following format (including records of invoices).
PURCHASES Daybook Page 15
Date 19x6 Description/Detail Folio Amount
1/5 C. Kelly PL. 10 400

2/5 L. Smailes PL. 20 350
TOTAL 750
The individual entries in the purchases journal are posted to the credit side of the creditor’s accounts in the
purchases ledger and the total is posted to the debit side of purchases account of the general ledger. This is
shown below:
C Kelly Purchases a/c
19x6 FRw 19x6 FRw 19x6 FRw 19x6 FRw

1/5 Purchases 400 31/5 Sundry 750
Creditors
s
L Smaile
19x6 FRw 19x6 FRw
2/5 Purchases 350
Returns Inwards Daybook

It is also called the returns inwards journal. It records all the credit notes raised by the firm and sent to
customers during a particular financial period, it has the following format.
21
RETURNS INWARDS Daybook Pg 10
Date Detail Folio Amount

1 March S. Spikes SL. 22 FRw20,000
2 March C. Kelly SL. 18 FRw18,000
5 March T. Bills SL. 9 FRw15,000
TOTAL FRw53,000
Individual entries in a return inwards journal are posted to the credit of the debtors accounts in the sales ledger
and the total is posted to the debit side of the return-inwards account of the general ledger.
Sales Ledger General Ledger
S. Spikes a/c Returns Inwards a/c
FRw FRw FRw FRw

1/3 Returns In 20 31/3 Sundry 53
Debtors
C Kelly a/c T. Bills a/c
FRw FRw FRw FRw

2/3 Returns In 18 5/3 Returns In 15
Returns Outwards Daybook

It is also called the returns outwards journal. It records all the debit notes received by the firm from the
creditors during a particular financial period. It has the following format.
22
RETURNS OUTWARDS Daybook
DATE DETAILS FOLIO AMOUNT (FRw)
2 May L. Thompson PL. 15 14,000

3 May M. Hyatt PL. 10 12,000
4 May T. Bills PL. 7 19,000
TOTAL 35,000
Individual entries are posted on the debit side of the creditors account in the purchases ledger and on the total to
credit side of the returns outwards account in the general ledger.
Purchases Ledger General Ledger

L. Thompson a/c Returns Outwards a/c
` FRw
2
FRw FRw FRw

/5 Returns out 14 31/5 sundry
creditors 35
FRw
3/5 Returns out 12
M. Hyatt a/c
FRw
T. Bills a/c Example (Frank wood adapted)

You are to enter the following items in
FRw FRw the books, post to personal accounts, and
4/5 Returns Out 19 show transfers to the general ledger.
19x5
July 1 Credit purchases from: K Hill FRw3800; M Norman FRw500; N Senior FRw106.
“ 3 Credit sales to: E Rigby FRw510; E Phillips FRw246; F Thompson FRw356.
5 Credit purchases from: R Morton FRw200; J Cook FRw180; D Edwards FRw410; C Davies
FRw66.
“ 8 Credit sales to: A Green FRw307; H George FRw250; J Ferguson FRw185.
“ 12 Returns outwards to: M Norman FRw30; N Senior FRw16.
“ 14 Returns inwards from: E Phillips FRw18; F Thompson FRw22.
“ 20 Credit sales to: E Phillips FRw188; F Powell FRw310; E Lee FRw420.
“ 24 Credit purchases from: Ferguson FRw550; K Ennevor FRw900.
23
CBE-IntroFinAcc-2015/
PURCHASES Daybook
DATE DETAIL AMOUNT (FRw)
1 July K. Hill 380

1 July M. Norman 500
1 July N. Senior 106
5 July R. Mortan 200
5 July J. Cook 180
5 July D. Edwards 410
5 July C. Davies 66
24 July C. Ferguson 550
24 July K. Ennevor 900
Total 3,292
Purchases Ledger
N. Senior
1995 1995
FRw FRw
12/7 Returns out 16 1/7 Purchases
22
M. Norman
1995 1995
FRw FRw
30/7 Returns out 30 1/7 Purchases 500
J. Cook
1995 1995
FRw FRw
C. Davies
1995 1995
FRw FRw
K. Hill
1995 1995
FRw FRw
1/7 Purchases 380
24
R. Morton
1995 1995
FRw FRw
5/7 Purchases 200
D. Edwards
1995 FRw 1995
FRw
5/7 Purchases 410
C. Ferguson
1995 1995
FRw FRw
27/7 Purchases 550
K. Ennevor
1995 1995
FRw FRw
24/7 Purchases 900
RETURNS INWARDS Daybook
DATE DETAILS AMOUNT

14 July E. Phillips 18
14 July F. Thompson 22
31 July E. Phillips 27
31 July E. Rigby 30
97
RETURNS OUTWARDS Daybook
12 July M. Norman 30
12 July N. Senior 16
31 July J. Cook 13
31 July C. Davies 11
70
General Ledger
Sales a/c
1995 1995
FRw FRw
31/7 Sundry debtors 2772
Purchases a/c
1995 1995
FRw FRw
25
31/7 Sundry creditors 3292
Returns Inwards a/c

1995 1995 FRw
FRw
31/7 Sundry debtors
97
Returns Outwards a/c

1995 1995
FRw FRw 31/7 Sundry creditors
70
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of income)
and all the payments (to creditors or suppliers and other expenses) for a particular financial period. The
cashbook will also show us the cash at bank and cash in hand position of the firm.
There are two types of cashbooks:
i. Cash in hand cashbook, which records the cash transactions in the firm or business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of the general ledger and records
the source documents (receipts and cheques). The cash at bank cashbook and cash in hand cashbook are
combined together to get a two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
Date Details Cash Bank Date Details Cash Bank

(FRw) (FRw) (FRw) (FRw)
Additional columns for discounts allowed and discounts received can be included with the cash at bank
columns to get a 3 – column cashbook. The format is as follows:
26
Date Details Discount Cash Bank Date Details Discounts Bank Cash
Allowed (FRw) FRw) Received FRw) (FRw)
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger balances and
the discounts allowed and discounts received columns will be added and the totals posted to the respective
discount accounts. The discount allowed total will be posted to the debit side of the discount allowed account
in the general ledger and the total of the discount received will be posted to the credit side of the discount
received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the firm has some cash at the
bank and a credit balance means that the account at the bank is overdrawn. (the firm owes the bank some
money).
Example
Write up a two-column cashbook from the following details, and balance off as at the end of the month:
2003
May 1 Started business with capital in

cash FRw1,000.
“ 2 Paid rent by cash FRw100.
“ 3 F Lake lent us FRw5,000, paid by
cheque.
“ 4 We paid B McKenzie by cheque
FRw650.
“ 5 Cash sales FRw980.
“ 7 N Miller paid us by cheque
FRw620.
“ 9 We paid B Burton in cash FRw220.
“ 11 Cash sales paid direct into the bank
FRw530.
“ 15 G Moore’s paid us in cash
FRw650.
“ 16 We took FRw500 out of the cash till and paid it
into the bank account.
“ 19 We repaid F Lake FRw1,000 by cheque.
“ 22 Cash sales paid direct into the bank FRw660.
“ 26 Paid motor expenses by cheque FRw120.
“ 30 Withdrew FRw1,000 cash from the bank for
business use.
“ 31 Paid wages in cash FRw970.
27
Cash Book
Cash Bank Cash Bank

Capital 1000 Rent 100
F. Lake (Loan) 5000 B McKenzie 650
Sales 980 B Burton 220
N Miller 620 Bank C 500
Sales 530 F Lake (loan) 1000
G Moore’s 650 Motor Expenses 120
Cash C 500 Cash C 1000
Sales 660 Wages 970
Bank C 1000 Balances c/d 1840 4540
3630 7310 3630 7310
Example (Frank wood adapted)

A three-column cashbook is to be written up from the following details, balanced off, and the relevant
discount accounts in the general ledger shown. 2009
Mar 1 Balances brought forward: Cash FRw230; Bank FRw4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton FRw140; E Taylor FRw220; R Harris FRw800.
“ 4 Paid rent by cheque FRw120.
“ 6 J Cotton lent us FRw1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per cent cash
discount: N Black FRw360; P Towers FRw480; C Rowse FRw300.
“ 10 Paid motor expenses in cash FRw44.
“ 12 H Hankins pays his account of FRw77, by cheque FRw74, deducting FRw3 cash discount.
“ 15 Paid wages in cash FRw160.
“ 18 The following paid their accounts by cheque, in each case deducting 5 per cent cash
discount: C Winston FRw260; R Wilson & Son FRw340; H Winter FRw460.
“ 21 Cash withdrawn from the bank FRw350 for business use.
“ 24 Cash Drawings FRw120.
“ 25 Paid T Briers his account of FRw140, by cash FRw133, having deducted FRw7 cash discount.
“ 29 Bought fixtures paying by cheque FRw650.
“ 31 Received commission by cheque FRw88.
Answer
Cash Book
Disct Cash Bank Disct Cash Bank

Bank
Bal b/d 230 4756 Rent 120
R Burton 7 133 N Black 9 351
E Taylor 11 209 P Towers 12 468
R Harris 15 285 C Rowse 20 780
J Cotton: loan 1000 Motor expenses 44
H Hankins 3 74 Wages 160
C Winston 13 247 Cash 350
R Wison & Son 17 323 Drawings 120
H Winter 23 437 T Briers 7 133
Bank 350 Fixtures 650
28
Commission 88 Balances c/d 123 4833

89 580 7552 48 580 7552
Discounts Received
3/1 Sundry Creditors 48
Discounts ed
Allow
3/1 Sundry Debtors 89
Petty Cash Book and the imprest system of Accounting.

Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. The petty cash
vouchers will show summary expenses paid by the cashier and this information is listed and classified in the
petty cash book under the headings of the relevant expenses such as:
 Postage and stationery

 Traveling
 Cleaning expenses.
The format is as shown:

Petty Cash Book
Receipts Date Detail Payments Expenses The

Amount Postage Stationery Traveling Ledger
The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand.
The totals of the expenses are posted to the debit side of the expense accounts. If a firm operates another
cashbook in addition to the petty cash book, then the totals of the expenses will also be posted on the credit side
of the cash in hand cashbook.
The Imprest system

This system of accounting operates on a simple principle that the cashier is refunded the exact amount spent
on the expenses during a particular financial period. At the beginning of each period, a cash float is agreed
upon and the cashier is given this amount to start with. Once the cashier makes payments for the period he
will get a total of all the payments made against which he will claim a reimbursement of the same amount that
will bring back the amount to the cash float at the beginning of the period. This is demonstrated as follows:
29
FRw
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000
Example
A cashier in a firm starts with FRw2,000 in the month of March (that is the cash float). I n the following week,
the following payments are made:
FRw
1 March – bought stamps for
st
80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
3 March – bought fuel
rd
150
3rd March – cleaning wages 300
4 March – bought stamps
th
200
4th March – paid L. Thompson (creditor) 400
5 March – fuel costs
th
150
On the 5thof March the cashier requested for a refund of the cash spent and this amount was reimbursed
back. Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the relevant
expense accounts, as they would appear on the General Ledger.
Answer
Receipts Date Detail Payments Expenses THE
LEDGER
Amount Postage Cleaning Travel
(FRw) (FRw) (FRw) (FRw) (FRw) (FRw)
2000 1/3 Bal b/d
1/3 Stamps 80 80
2/3 Bus Fare 120 120
2/3 Cleaning Materials 240 240
3/3 Fuel 150 150
3/3 Cleaning wages 300 300
4/3 Stamps 200 200
4/3 L Thompson 400 400
5/3 Fuel 150 . . 150 .
1640 280 540 420 400
1640 5/3
5/3 Bal c/d 2000
3640 3640
2000 6/3 Bal b/d
The General Journal

30
It records information from other correspondence (information that is not recorded in the above books of prime
entry). It explains the type of entries that will be made in the ledger accounts giving a reason for these entries.
The type of transactions recorded here are:
i. Writing off of assets from the accounts e.g. bad-debts.
ii. Drawings for goods or other assets from the business by the owner, not cash drawings.
iii. Purchase or sale of non-current assets on credit. The format is as shown:
The General Journal
GENERAL JOURNAL
Date Detail Debit Credit
1/3 Account to be debited x

Account to be credited x
(Narrative)
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability, incomes and expenses and
capital.
The ledger accounts can also be classified as follows:
31
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
Real Nominal
Accounts a/cs
DEBTORS CREDITORS
Other
Non-current Liabilities
assets
Other
Inventories/ Assets
Stocks
Income
Expenses
Capital
32
CHAPTER FOUR: BANK RECONCILIATIONS
The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements of the
account held with the bank. The bank will send information relating to this account using a bank statement for
the firm to compare.
Ideally, the records as per the bank and the cashbook should be the same and therefore the balance carried
down in the cashbook should be the same as the balance carried down by the bank in the bank statement.
In practice however, this is not the case and the two (balance as per the bank and firm) are different. A bank
reconciliation statement explains the difference between the balance at the bank as per the cashbook and
balance at bank as per the bank statement.
Causes of the differences:
Items Appearing In the Cashbook And Not Reflected In The Bank Statement.
Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but have
not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and other sources for which
the firm has banked but the bank has not yet availed the funds by crediting the firm’s account. Errors made
in the cashbook These include:
• Payments over/understated
• Deposits over/understated
• Deposits and payments mis posted
• Overcasting and under casting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the cashbook:
Bank charges: These charges include service, commission or cheques.

Interest charges on overdrafts.
Direct Debits (standing orders) e.g. to pay Alico insurance.
Dishonored cheques
A cheque would be dishonored because:
• Stale cheques
• Post – dated cheques
• Insufficient funds
• Differences in amounts in words and figures.
Direct credits
Interest Income/Dividend incomes
Errors of The Bank Statement (Made By The Bank).
Such errors include:
• Overstating/understating.
• Deposits
• Withdrawals
The Purposes of a bank reconciliation statement.
1. To update the cashbook with some of the items appearing in the bank statement e.g. bank charges,
interest charges and dishonored cheques and make adjustments for any errors reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.
33
Steps in preparing a bank reconciliation statement.

1. To update the cashbook with the items appearing in the bank statement and not appearing in the
cashbook except for errors in the bank statement. Adjustments should also be made for errors in the
cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to determine the
uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to determine the
unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)
Name:
Bank Reconciliation Statement as at date
Frw Frw
Balance at bank as per cashbook (updated) x
Add:
Un presented cheques x
Errors on Bank Statement (see note 1)x x
x
Less:
Un-credited deposits x
Errors on Bank Statement (see note 2) (x)
x
Balance at bank as per bank statement x
Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit or
an understated payment by the bank.
Note 2:These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit or
an overstated payment by the bank, or making an unknown payment.
Format 2
Name:
Bank Reconciliation Statement as at date
Frw Frw
Balance at bank as per bank statement x
Add:
Un-credited deposits x
Errors on Bank Statement (see note 2) x
x
Less:
Un presented cheques x
Errors on Bank Statement (see note 1) x
(x)
34
Balance at bank as per cashbook (updated) x
Example
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on the
bank statement, from the following as on 31 March 2003:
FRw
Cash at bank as per bank column of the cashbook (Dr) 38,960
Bankings made but not yet entered on bank statement 6,060
Bank charges on bank statement but not yet in cashbook 280
Un presented cheques C Clarke 1170
Standing order to ABC Ltd entered on bank statement, but not in cash book 550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook 1,890
Solution
Cashbook – Bank
19X9 FRw19X9 FRw
31/3 Bal b/d 38960 Bank charges
280
ABC (standing order) 550
A Wood (credit transfer) 1890 31/3 Bal C/D 40,020
40,850 40,850
Bank Reconciliation as at 31/03/2003

FRw FRw
Balance at bank as per cashbook 40,020
Add: Unpresented cheques 1,170
41,190
Less: Uncredited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
35
CHPATER FIVE: ADJUSTMENTS
5.1. ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as money is received or paid.
They must be matched with one another so far as their relationship can be established or justifiably
assumed, and dealt with in the profit and loss account of the period to which they relate. Therefore all
incomes and expenses that relate to a particular financial period will be matched together to determine the
profit for the year.
5.1.1 ACCRUALS
Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should be
reported in the profit & loss account and the same income will be shown in the balance sheet as a current
asset.
Example
A firm lets out part of its properties and receives rent of FRw2,000 per month, assuming that this is the first
year of renting and rent is received in arrears (rent 4 January is received early Feb).
The ledger accounts of the firm will be as follows:
Cashbook
Year 1 FRw
Feb (rent 4 Jan) 2,000

Mar (rent 4 Feb) 2,000
April (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 Jun) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000
22,000
Rent – Income
Year 1 FRw Year 1 FRw
Jan C/B 2,000
Feb C/B 2,000
Mar C/B 2,000
36
31/12 P&L 24,000
24,000
April C/B 2,000

May C/B 2,000
Jun C/B 2,000
July C/B 2,000
Aug C/B 2,000
Sept C/B 2,000
Oct C/B 2,000
Nov C/B 2,000
Dec Accrued c/f 2,000
24,000
Although the cashbook is showing that rent received amounts FRw22,000, the full rental income of
FRw24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of FRw2,000
will be reported in the balance sheet as a current asset.
Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid during that
period.
An accrued expense should be charged in the P&L account and shown in the balance sheet as a current liability.
Assume in the above example that the firm is meant to pay the rent, thus it becomes an expense with the facts
still the same i.e. FRw2,000 payable in arrears. The ledger account will be as follows.
Cashbook
Year 1 Rw Year 1 FRw
F Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
Apr (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 June) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Year 1 FRw
Oct (rentYear 1
4 Sept) FRw
2,000
C/B Rent for Jan 2,000
Nov (rent 4 Oct) 2,000
Rent for Feb Dec (rent 4 Nov)
2,000 2,000
Rent for Mar 2,000

Rent for Apr 2,000 Rent – Expenses
Rent for May 2,000
Rent for June 2,000
Rent for July 2,000
Rent for Aug 2,000
Rent for Sept 2,000
Rent for Oct. 2,000
Rent for Nov 2,000
31/12 Bal c/d 2,000 31/12 P&L 24,000 37
24,000 24,000
The cashbook shows that the rent for the 11 months was paid for. However in the P&L a/c we should report
rent for the full year of FRw24,000 and the FRw2,000, rent for Dec being the accrued expense will be shown in
the balance sheet as a current liability.
5.1.2. PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an income is payable in
advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should be carried forward and reported in
the period it relates to.
The accounting treatment will be to show it as a current liability.
Example
A firm receives rent income of FRw5,000 per month payable quarterly in advance. Assuming that the firm’s
rental income began in 1st March and the financial year, end is on 31st Dec. The ledger accounts will be:
15,000 15,000 15,000 15,000 15,000
1.3 1.6 1.9 1.12 1.3
F
Year 1 R w Year 1
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
Cashbook
FRw
1/12 Rent 15,000
Rent – Income
FRw
Year 1 FRw Year 1
1/3 Cashbook 15,000
1/6 Cashbook 15,000
P&L (10 x 5,000) 50,000 1/9 Cashbook 15,000
31/12 Bal c/d 10,000 1/12 Cashbook 15,000
60,000 60,000
38
year is at 31 Dec, rent for 2 months is pre-paid. This FRw10
Rent for the 4 quarters of 12 months has been received as per the cashbook but because the end of the financial
,000 is not charged in the P&L but is carried
forward as current liability in the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid expense should
not be charged in the P&L a/c but should be carried forward to the next financial period and should be shown in
the balance sheet as a current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense. The ledger
accounts is as follows:
Cashbook
Year 1 FRw Year 1 FRw
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Expenses
Year 1 F FRw
1/3 C/B (Mar, April, May) 15,000
1/6 C/B (June, July, Aug) 15,000 Rw Year 1 P&L
1/9 C/B (Sept, Oct, Nov) 15,000 (10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb) 15,000 31/12 Bal c/d (2 x 5,000) 10,000
60,000 60,000
Rent of FRw10,000 for 2 months is carried forward to the next financial period and shown in the balance sheet
as a current asset.
The following is the summary of treatment for Accruals and Prepayments:
P&L B/Sheet
Accrued -Report as Current

Income Assets
Income
Prepaid -Not
reported Current
Liability
Accruals/
39
Prepayments
Accrued - Charge as Current

an expense Liability
Expense
Prepaid - Not charged Current

In P& L Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance Sheet as follows:
Balance Sheet Extracts

FRw FRw
Current Assets
Stock x
Debtors x
Accrued Incomes/Prepaid Expenses x
Cash at bank x
Cash in hand
x
x
Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x
X
The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that the
correct amount of expense or income is reported in the profit and loss account for the year.
5.2. BAD AND DOUBTFUL DEBTS
Some debtors may not pay up their accounts for various reasons e.g. a debtor may go out of business. When a
debtor is not able to pay up his/her account this becomes a bad debt. Therefore the business/firm should write
it off from the accounts and thus it becomes an expense that should be charged in the profit & loss account. In
practice a firm may also be unable to collect all the amounts due from debtors. This is because a section of the
debtors will not honor their obligations. The problem posed by this situation is that it is difficult to identify the
debtors who are unlikely to pay their accounts. Furthermore the amount that will not be collected may also be
difficult to ascertain. These debts that the firm may not collect are called doubtful debts. A firm should
therefore provide for such debts by charging the provision in the profit and loss account. Provision for
40
doubtful debts maybe specific or general. Specific relate to a debtor whom we can identify and we are doubtful
that he may pay the debt (if one of our debtor goes out of business).
ACCOUNTING FOR BAD DEBTS DOUBTFUL DEBTS
Bad debts
When a debt becomes bad the following entries will be made:
i.Debit bad debts account
Credit debtors account with the amount owing.
ii.Debit Profit and Loss Account.
Credit bad – debts account to transfer the balance on the bad – debts account to the Profit and Loss
Account.
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A specific provision is where
a debtor is known and chances of recovering the debt are low.
The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad
debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be
as follows. If it is the 1st year of trading (1st year of making provision):
i. Debit P&L a/c.
ii. Credit provision for doubtful debts (with total amount of the provision).
In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision.
If it is an increase:
i. Debit P&L a/c.

ii. Credit provision for doubtful debts (with increase only).
If it is a decrease:
i. Debit provision for doubtful debts.
ii. Credit P&L a/c (with the decrease in provision only).
Example
FRw
Debtors x
Bad debts (x)
Balance sheet amount x
Specific Provision (x)
x
General Provision (x)
Realizable amount x
A firm started trading in the year 1999, the balance on the debtor’s account was FRw400,000. Bad debts
amounting to FRw40,000 were written off from this balance, there was a specific provision of FRw5,000 to be
made to one of the debtors and a general provision of FRw5% was to be made on the balance of the debtors.
The ledger accounts of 1999 were as follows:
41
w 1999 FRw
1999 FR
FRw1999
Bal c/d 360,000 1999
400,000
400,000
Debtors
Provision for doubtful debts
FRw
Bal B/d 400,000 Bad debts 40,000 31/12 Bal c/d 22,750 31/12 P&L 22,750
Bad debts
1999 R
F w 1999 FRw
Debtors 40,000 31/12 P&L 40,000
FRw
Debtors 400,000
Bad debts (40,000)
360,000
Specific Provision (5,000)
355,000
General Provision (5%) (17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
FRw FRw
Expenses:
Bad debts 40,000
Increase in provision for D/debts 22,750
Balance Sheet (Extract) as at 31/12/99

FRw FRw
Current Assets
Stocks x
Debtors 360,000
Provision for D/debts (22,750) 337,250
337,250 337,250
42
In the year 2,000, the debtors balance goes up to FRw500,000 from which bad debts of FRw50,000 needs to be
written off there is no specific provision but the general provision is to be maintained at 5%. The ledger
accounts will be as follows:
Debtors 500,000
Bad debts (50,000)
450,000
General Provision (5%) 22,500
427,500
Debtors
2000 FRw 2000 FRw
Bal b\d 500,000 Bad Debts 50,000
______ Bal c\d 450,000
500,000 500,000
Provision for Doubtful Debts

2000 FRw 2000 FRw
P\L 250 1\1 Bal b\d 22,750
Bal c\d 22,500 22,750
22,750
Bad Debts
2000 FRw 2000 FRw
Debtors 50,000 31\12 P& L 50,000
Profit And Loss Account (Extract) for year ended 31/12/2002.

FRw FRw
Incomes
Decrease in provision for D/debts 250
Expenses
Bad debts 50,000

FRw FRw
Current Assets
Debtors 450,000
Provision for bad debts (22,500)
427,500
43
In the year 2001 the debtors balance goes up to FRw600,000 from which bad debts of FRw50,000 need to be
written off, there is no specific provision but the general provision is to be maintained at 5% the ledger
accounts is as shown:
FRw
Debtors 600,000
Bad debts (50,000)
550,000
General provision % (27,500)
522,500
Debtors
2001 FRw 2001 FRw
Bal b\ Bad Debts 50,000
600,000
______ Bal c\d 550,000
600,000 600,000
Provision for Doubtful Debts

2001 FRw 2001 FRw
1\1 Bal b\d 22,500
Bal c\d 27,500 P& L 5,000

22,500 27,500
Bad Debts
2001 FRw 2001 FRw
Debtors 50,000 31\12 P& L 50,000
Profit And Loss Account (Extract) for the year ended 31/12/2001
FRw FRw
Expenses
Bad debts 50,000
Increase in provision 5,000

FRw FRw
44
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a business grows or
expands then some buildings may become inadequate due to space. Also some machines that are unable
to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil.
Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation

These are the methods developed to assist in estimating the amount of depreciation to be charged in the P&L
a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting practice, accounting
standards and suit the firm’s non-current assets. There are 2 main methods of estimating depreciation and 5
others that will apply in a firm’s situation.
The main methods are: Straight-line method and Reducing Balance method. The other 5 methods include:
i. Sum of the digits methods – uses a formula.

ii. Revaluation method – applies to a non-current asset of low value.
iii. Machine-Hour method – depreciation is based on number of hours a machine is expected to operate
(manufacturing process).
iv. Unit of output method – depreciation is based on the number of units a machine is expected to
produce.
v. Depletion of units – depreciation is based on number of units extracted from the asset.
1. Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c for a particular asset and
is based on the following formula:
Depreciation for year = Cost of asset – Residual Value = FRw100,000 - FRw20,000

Estimated useful life 8
= FRw10,000 per year.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value / Scrap
Value.
Estimated Useful Life

The period the asset is expected to be used in the firm.
Example
A firm buys a machine for FRw100,000 which it expects to use in the firm for eight years. After the eight years
the machine will be sold for FRw20,000. Under the straight-line method, the depreciation amount will be
computed as follows:
45
This means for this asset FRw10,000 will be charged in the P&L account as depreciation expense on the
machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly over
the life of the asset e.g. buildings use straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
2. Reducing Balance Method

The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of use.
The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value of the
asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier periods
of use and lower amounts in the latter periods of use as shown in the following example:
Example
Assume a firm buys machinery for FRw100,000 and provides depreciation on machines at 20% p.a. on
reducing balance method. The depreciation charged to the Income statement will be as follows for the next 3
years.
Year 1
FRw
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1
Balance to YR 2 80,000
Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2
Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3
Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of an
asset are higher in the first periods of use and lower in the latter periods e.g.
 Fixtures, furniture and fitting.
 Plant and machinery.
 Motor vehicles.
46
Accounting Treatment of Depreciation

When non-current assets are depreciated, a new account for each type of asset is opened; this account is called a
provision for depreciation whereby the following entries will be made:
Debit – Income statement (Deprecation)
Credit – accumulated depreciation a/c
With the amount of depreciation charged for the period.
Example on straight-line method

The entries will be as follows:
Debit – P&L a/c with FRw10,000
Credit – Provision for depreciation. Machines a/c with FRw10,000 being depreciation provided for the
machine.
The ledger accounts will be as follows:

Machinery Accumulated Depreciation Machinery
FRw FRw FRw FRw
Cashbook 100,000 31/12 Bal c/d 100,000 31/12 Bal c/d 10,000 P&L 10,000
The final accounts extracts will be shown as follows:
(a) Income statement (Extract) for the year ended
Expenses FRw FRw

Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x
(b) Balance sheet (Extract)

Name of business
ASSETS Cost Acc Dep Net

Non Current Assets FRw FRw FRw
Land & Buildings xx (xx) xx
Plant & Machinery 100,000 (10,000) 90,000
Fixtures, furniture & fittings xx (xx) xx
Motors vehicles xx (xx) xx
Total non-current assets xx
Types of non-current assets

Recall: Non-current assets are those that are expected to be used or realized for a period more than one year.
Non-current assets can be classified to the following:
47
(i) Tangible non-current asset – is asset with physical existence (they can be touched) e.g. land and
buildings, plant and machinery, equipment, motor vehicle. They are depreciated.
(ii) Intangible non-current assets – those without physical existence e.g. goodwill, copyright, patent,
computer software, long term license, franchise, research and development cost. They are amortized
(the depreciable amount is spread over the useful life of the intangible asset.
(iii) Long-term investments – these are assets that cash or other investments are expected to be received in
future e.g. acquired shares of another company, acquired bonds/debentures, long term loans advanced
to others. They are not depreciated. They are measured at market values.
(iv) Investment property – assets acquired primarily for renting/leasing to others or for price appreciation.
e.g. land, building, equipment, machinery acquired for leasing or just for price appreciation. They are
measured at market values or depreciated.
(v) Agricultural assets – these are biological assets (living animal or plant) e.g. tea/coffee/cassava
plantation, cows/goats/chicken/rabbit. They are measured at market value less cost to sell.
Methods of determining depreciation
Depreciation has to be determined to be in a systematic amount of allocation of the depreciable amount. The
depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the
enterprise. A number of methods exist of depreciation calculation.
(i) Straight-line method – results to a constant charge/amount spread over the useful life.
Depreciation= (Cost - residaul value)or

Useful life
Depreciation= Fixed % Cost
(ii) Reducing balance method – result in a reducing or diminishing charge/amount over the useful life of
the asset. Depreciation= Fixed %×carrying amount
Carrying amount=cost less accumulated depreciation so far
(iii) Unit of production method – results in a charge based on the number of production units in the period
compared to the expected total units of an asset.
No. of production units of the year
Depreciation= x depreciable amount
Total expected for the asset
(iv) Sum of digits – results to decreasing charge over the useful life of an asset, but the depreciation is
calculated as follows.
No. of years remaining from start of the year
Depreciation= x depreciable amount
Sum of digits
n(n + 1)
sum of digits = 2 Where n=useful life
(v) Revaluation method –The method is used for a business with small items like in a kitchen and garage.
The depreciation is determined as follows
FRw
Valuation at the start xx
Acquisitions xx
Disposal (xx)
Expected value xx
48
Valuation at the end (xx)

Depreciation xx
Recall:
Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life.
Depreciation for the accounting period is charged to net profit or loss for the period either directly or indirectly.
It is accumulated to be reduced from the cost of the asset to get the carrying amount (cost less accumulated
depreciation).
Depreciable assets are tangible non-current assets as defined and do have a limited useful life (so land is not
included here) that is held for use in the business.
Useful life is either:
• The period over which a depreciable asset is expected to be used by the enterprise or
• The number of production or similar units expected to be obtained from the asset by the enterprise.
Depreciable amount is the historical cost or other amount substituted for historical cost in the financial
statements, less the estimated residual value.
Residual value/salvage value is the net amount, which the enterprise expects to obtain for an asset at the end of
its useful life after deducting the expected costs of disposal.
Accounting for depreciation
The depreciation charge for each period should be recognised as an expense. Once the amount of depreciation
for the period is determined, it is accounted for in the following way
Dr FRw Cr FRw
Debit Income statement (Depreciation) X
Credit Accumulated depreciation account X
Depreciation for the year
Assumptions on depreciation for assets acquired or disposed during the year
(i) Proportional depreciation for assets acquired or disposed during the year (pro rata – according to the
number of months the asset was used)
(ii) Full years depreciation in the year of acquisition but none in the year of disposal
(iii) Proportional depreciation in the year of acquisition but none in the year of disposal
(iv) Full years depreciation in the year of acquisition and proportional depreciation in the year of disposal
a)Disposal of non-current assets
On disposal of non-current assets, the profit or loss from the disposal has to be determined. The following steps
are followed.
(i) Transfer cost to non-current asset disposal account
Dr Non-current asset a/c X
Cr Disposal a/c X
(ii) Transfer accumulated depreciation so far to disposal account

Dr Disposal a/c X
Cr Accumulated depreciation a/c X
(iii) Record sales proceeds from the disposal

Dr Cash/bank/Account receivable/Asset a/c X
Cr Disposal a/c X
(iv) Determine profit or loss from disposal

49
Profit exists if the credit totals exceed the debit totals

Dr Disposal a/c X
Cr Profit and loss a/c/Income statement X
Loss exists if the debit exceeds the credit totals

Dr Profit and loss a/c/Income statement X
Cr Disposal a/c X
Take note:
On disposal of assets, there may be part exchange (value of asset being exchanged is taken as sales value) or
may be written off by insurance companies and insurance may settle the claim. (The settlement is the sales
value). If not settled then the scrap value on sale of the scrap is taken as sales value.
Example
Unipharm, at 31 December 2006 had a balance on its equipment a/c of FRw.100,000. This balance represents
the equipment at cost. The balance on the accumulated depreciation account was FRw.40,000.
On 31 December 2007 the company sold one of its equipment for FRw.1,500. It had been purchased five years
earlier on 1 January 2003, for FRw.15,000, at which time the company had estimated its useful economic life at
five years and its residual value after that time of FRw.1,000.
The company policy is to write off such equipment at 20% straight line. The vehicle had been subject to a
depreciation charge of (FRw.15,000 – FRw.1,000)/5 = FRw.2,800 per annum. The company policy is also to
depreciate assets in the year of purchase but not in the year of sale.
Solution
There is a need to determine the profit or loss on disposal and the current year must reflect that.
This is determined as:
FRw
Purchase Cost (1 Jan 93) 15,000
Depreciation (93, 94, 95 & 96) 4 years x
11,200
FRw.2,800
Net Book Value 31 December 1996 3,800

Sale Proceeds 1,500
Loss on Disposal 2,300
The depreciation charge for 2007 was agreed as 20% straight line on FRw85,000 i.e., FRw17,000.
To account for this disposal the company would make the following entries to the accounts.
Motor cycles account

FRw. FRw.
Balance b/f 100,000 Disposal account 15,000
Balance c/f 85,000
100,000
100,000
Accumulated depreciation account

FRw. FRw.
Disposal account 11,200 Balance b/f 40,000
50
Balance c/f Profit & loss a/c
57,000
Disposal account
FRw. FRw.
Motor cycle account 11,200 Accumulated depreciation 11,200
Cash/bank (sales proceeds) 1,500
Profit & loss a/c (Loss on Disposal)
11,200
Extract from income statement for year:
FRw
Depreciation 17,000
Loss on disposal of vehicle 2,300
Extract from Balance Sheet

Cost Depn NBV
Non-current Assets FRw FRw FRw
Motor cycles 85,000 45,800* 39,200
FRw.
* NB: the Accumulated depreciation to previous year 40,000 end
Additional Depreciation for current year
Less accumulated depreciation on disposal of

vehicle
Balance c/f
b)Revaluation of non-current assets.

An allowed alternative that subsequent to the initial recognition an asset, could be carried at a revalued amount
less any subsequent accumulated depreciation. The revalued amount is the fair value (market value) at the date
of revaluation.
In such a case the revaluation should be done regularly and it should be for an entire class of the assets
concerned.
At the time of revaluation the accumulated depreciation is either reduced from the non-current asset before
revaluation or transferred directly to the revaluation reserve. The increase/decrease in cost/carrying amount is
then transferred to the revaluation reserve.
The accounting entry for an asset that is not depreciated and there is a revaluation increase is as follows:
Dr Non-current asset X
Cr Revaluation reserve X
Revaluation increase
51
Example
Kurusha’s business has some land that cost FRw.1,000,000 and want to revalue it to Sh.1,200,000
Solution
The revaluation increase is

FRw.
Revalued amount 1,200,000
Cost
The journal entries are as follows.
FRw FRw
Dr Land 200,000
Cr Revaluation reserve 200,000
The account will look as follows

Land account
FRw. FRw.
Balance b/f 1,000,000
Revaluation account Balance c/f 1,200,000
1,200,000 1,200,000
eserve account
Revaluation r
FRw. FRw.
Balance c/f 200,000 Land account 200,000
For asset that is depreciated, and there is a revaluation increase.

The revaluation is from the carrying amount at the time of revaluation. In other words, depreciation already
provided on the asset being revalued must be transferred out to the revaluation account as part of the
revaluation process. The main point to understand is that after the revaluation we start depreciating using the
revalued amount. The revalued amount is apportioned over the remaining useful life.
The accounting entries are as follows

Either
Dr Accumulated depreciation a/c X
Cr Non-current asset a/c X
Accumulated depreciation so far
Cr Revaluation increase a/c X
Revaluation increase from carrying amount
52
Or
Dr Accumulated depreciation a/c X

Cr Revaluation reserve a/c X
Cr Revaluation reserve a/c X
Revaluation increase from cost
Example
Kurusha’s business has a building that cost FRw.500,000 on which depreciation of FRw.100,000 has been
provided. We want to revalue it to FRw.700,000 as at the current balance sheet date.
Solution
The carrying amount of the asset so far is FRw.500,000 less FRw.100,000 = FRw.400,000.
The revaluation increase is then FRw.700,000 less FRw.400,000 = FRw.300,000.
Using the first way of journal entries,
FRw FRw
Dr Accumulated depreciation a/c 100,000
Cr Non-current asset a/c 100,000
Dr Non-current asset a/c 300,000

Cr Revaluation increase a/c 300,000
Revaluation increase from carrying amount
The accounts will look as follows

Buildings account
FRw. FRw.
Balance b/f 500,000 Accumulated depreciation 100,000
Revaluation account Balance c/f 700,000
800,000 800,000
d depreciation account
Buildings
accumulate
FRw. FRw.
Buildings account 100,000 Balance b/f 100,000
Revaluation reserve account
FRw. FRw.
Balance c/f 300,000 Buildings account 300,000
Using the second way of journal entries,
FRw FRw
Dr Non-current asset a/c 200,000
Revaluation increase from cost
53
The accounts will look as follows

Buildings account
FRw. FRw.
Balance b/f 500,000
Revaluation account Balance c/f 700,000
800,000 800,000
Buildings Accumulated depreciation account

FRw. FRw.
Revaluation account 100,000 Balance b/f 100,000
on account
Revaluati
FRw. FRw.
Accumulated depreciation 100,000
Balance c/f Buildings account 200,000
300,000
300,000
The second method is preferred.
Example
Kurusha’s business has a building that cost FRw.500,000 of which depreciation of FRw.100,000 has been
provided. We want to revalue it to FRw.460,000 as at the current balance sheet date.
Solution
This time the cost goes down from FRw.500,000 to FRw.460,000, but there is an overall upward revaluation of
FRw.60,000. Following the same steps as before, the following figures can be calculated:
FRw.
Revalued amount 460,000
Carrying amount
Revaluation increase 60,000
Using the second method of journal entries,

FRw FRw
Dr Revaluation a/c 40,000
Cr Non-current asset a/c 40,000
Revaluation decrease from cost
The accounts are as follows

54
Buildings account
FRw. FRw.
Balance b/f 500,000 Revaluation account 40,000
Balance c/f 460,000
500,000 500,000
d depreciation account
Buildings
accumulate
FRw. FRw.
Revaluation account 100,000 Balance b/f 100,000
on account
Revaluati
FRw. FRw.
Buildings account 40,000 Accumulated depreciation 100,000
Balance c/f 60,000
100,000
100,000
Example
The accounting records of Riffon, a limited liability company included the following balances at 30 June 2008:
FRw
Office buildings – cost 1,600,000
Office buildings – accumulated depreciation (10 years at 2% per year) 320,000 Plant
and machinery – cost (all purchased in 2000 or later) 840,000 and machinery –
accumulated depreciation 306,000 Office buildings – (straight line basis at 25% per
year)
During the year ended 30 June 2009 the following events occurred:
2008
1 July It was decided to revalue the office building to FRw2,000,000, with no change to the estimate of its
remaining useful life.
1 October New plant costing FRw200,000 was purchased.
2009
1 April Plant, which had cost FRw240,000 and with accumulated depreciation at 30 June 2008 of
FRw180,000 was sold for FRw70,000.
It is the company’s policy to charge a full year’s depreciation on plant in the year of acquisition and none in the
year of sale.
Required:
Prepare the following ledger accounts to record the above balances and events:
(a) Office building: cost/valuation
(a) Office building: accumulated depreciation (a) Office building: revaluation
reserve.
(b) Plant and machinery: cost
(b) Plant and machinery: accumulated depreciation
(b) Plant and machinery: disposal.
Solution
Office building – cost/valuation account
FRw FRw
55
Balance b/f 1,600,000
Revaluation Balance c/f

2,000,000
Office building – accumulated depreciation account
FRw FRw
Revaluation reserve 320,000 Balance b/f 320,000
Balance c/f Income statement (W1)
370,000
Revaluation account
FRw FRw
Offices building 400,000
Balance c/f Accumulated depreciation 320,000
720,000 720,000
Plant andchinery – cost

ma
FRw FRw
Balance b/f 840,000 Disposal 240,000
Cash/bank Balance c/f 800,000
1,040,000 1,040,000
Plant and machinery accumulated depreciation account

FRw FRw
Disposal 180,000 Balance b/f 306,000
Balance c/f Income statement (W2)

506,000
Plant and machinery – disposal account

FRw FRw
Plant & machinery – cost 240,000 Accumulate depreciation 180,000
Income statement - profit 10,000 Cash/bank 70,000
250,000
250,000
Workings
W1 Depreciation of office building
FRw2m/40 (remaining useful life) = FRw50,000
W2 Depreciation of plant and machinery
25% x (FRw840,000 – FRw240,000 + FRw200,000) = FRw200,000
Example
a) Distinguish between a revaluation reserve and accumulated depreciation
56
b) The balance sheet of Mugozi as at 31 October 2000 included the following note on non-current assets:
Freehold Leasehold land Motor Furniture

land and and buildings vehicles and
Non-current asset buildings equipment
FRw ‘000’ FRw ‘000’ FRw ‘000’ FRw ‘000’
Cost 17,000 13,000 4,200 1,560
Accumulated depreciation - 1,600 2,050 625
Net book value 17,000 11,400 2,150 935
The company’s policy on depreciation of non-current assets requires that the straight line method be used and
the following rates to be applied:
Freehold land and buildings NIL
Leasehold land and buildings 5%
Motor vehicles 25%
Furniture and equipment 12%
A full year’s depreciation is provided in the year of acquisition but no charge is made in the year of disposal.
Additional information:
A piece of equipment purchased in May 1996 at a cost of FRw.400,000 was disposed of for FRw.240,000
during the year ended 31 October 2001.
The freehold land and buildings were revalued at FRw.29,000,000 by Valuesure Consultants Ltd., a firm of
professional valuers
A motor vehicle purchased in July 1998 for FRw.1,200,000 was traded-in in part payment for a new vehicle
costing FRw.2,250,000. Additional cash amounting to FRw.1,500,000 was paid.
A typewriter, which had cost FRw.60,000 in June 1990, was scrapped during the year and FRw.15,000 received
from the “waste” equipment dealer for the scrap.
Required:
(i) A disposal account
(ii) Income statement extract showing the item(s) that would appear in the account of the year in regard to
non-current assets
Solution
a)A revaluation reserve is a capital reserve (a reserve that can never be used for the payment of dividends)
that is created on revaluations due to increase in value of a non-current asset.
A provision for depreciation on the other hand is an amount written off or retained by way of providing for
depreciation, renewals or diminution in value of assets.
Workings:
(a) The Freehold land and buildings were revalued. There was an increase in the value of
FRw ‘000’
Fair value 29,000
57
Previous value 17,000

Revaluation increase 12,000
The revaluation recorded as follows Dr FRw ‘000’ Cr FRw ‘000’

Dr Freehold land and buildings 12,000
Cr Revaluation reserve 12,000
Being increase in value
(b) Accumulated depreciation on disposal

Piece of equipment purchased in May 1996 at FRw 400,000
Number of years 1996,1997, 1999, 2000 = 4 years.
Straight-line method – 121/2%

121/2 x 400,000 = 50,000 per year
For four years = 50,000 x 4 = FRw.200,000
Typewriter cost FRw.60,000 in June 1990

Number of years = 11
Straight-line method = 121/2%
Depreciation per year = 121/2 x 60,000 = FRw.7,500
For 11 years = FRw.7,500 x 11 = 82,500
Total for furniture and equipment = FRw.282,500
Motor vehicle purchased in July 1998 at 1,200,000

Number of years = 3
Depreciation per year = 1,200,000 x 25% = 300,000
For 2 years = 300,000 x 3 = FRw.900,000
Depreciation for the year (straight-line basis)

Leasehold land and buildings FRw
‘000’
Cost at end of year
Depreciation = 5% x 13,000
Motor vehicles
Cost at end of year
Depreciation = 25% x 5,250
Furniture & Equipment

Cost at end of year 1,100
Depreciation = 121/2% x 1,100 137.5
(d) Furniture & Equipment disposal

One purchased in May 1996 400
Typewriter purchased in June 1990 60
Total amount of disposal 460
58
(e) Motor vehicle sales proceeds/trade in value

New vehicle 2,250
Cash addition 1,500
Trade in value 750
(ii)
Disposal account
FRw FRw.
Furniture& equipment –cost 460,000 Accumulated depreciation: (b)
(e)
Motor vehicle – cost 1,200,000 Furniture and fittings 282,500
Motor vehicle 900,000
Cash/bank (Furniture & Equip) 255,000
Income statement Motor vehicle (d) 750,000
2,187,500 2,187,500
(iii)
Mugozi
Income statement (extract) for the year ended 31 October 2001
FRw.
Gross profit XXXXX
Add: Profit from disposal of non-current assets 527,500 Expenses
Depreciation:
Leasehold land and buildings 650,000
Motor vehicles 1,312,500
Furniture and equipment 137,500
(iv)
Effective this year ending 31 October 2001, the freehold land and building were revalued by Valuesure
Consultants Ltd due to the current market condition the amount of revaluation surplus of FRw. 12,000,000 to
FRw 29,000,000.
Notice that the typewriter being disposed had already been fully depreciated by 1997.
Since the typewriter was still being used and no revision of estimate of useful life was done then the following
can be done:
A provision for depreciation can still be made of the same amount as per the last depreciation amount. This
should be credited to a capital reserve account or still the Accumulated depreciation account.
The extra benefit can be realized on disposal because of the profit from scrapping the asset like in this case.
Example
a) Explain why
• It is considered necessary to provide for depreciation on non-current assets
• Some business enterprises do not provide depreciation on freehold land and buildings
b) On 1 July 2006 Wako Enterprises had the following categories of assets:
Freehold Plant and Motor Furniture and
59
land and equipment vehicles fittings

buildings
FRw FRw FRw FRw
Cost 825,000 1,312,500 970,000 187,500
Accumulated depreciation - 507,300 316,500 48,000
Net book value 825,000 805,200 654,000 139,500
Depreciation policy: All assets are depreciation on a straight-line basis.
Plant and equipment 10%

Motor vehicles 25%
Furniture and fittings 12%
A full year’s depreciation is charged on new items.
Additional information:
An item of equipment bought in December 2000 for FRw.157,500 is now recognised to have a useful life of at
least 20 years.
Freehold land and buildings were professionally revalued during the year at FRw.1,462,500.
A motor vehicle bought in May 2003 for FRw.127,500 was traded in at a value of FRw.66,000 in part exchange
for a new vehicle costing FRw.210,000.
Included with furniture and fittings is an item which had cost FRw.22,500 and which is already fully
depreciated and not expected to last much longer.
Required:
(i) Items that must be shown in the Income statement
(ii) The two disposal accounts
Solution
a)
(i) Because of prudence and matching concepts. The benefits accruing from the use of an asset should be
charged with the costs incurred to produce them. This is to show cost or expense of non-current asset
consumed within a given period. The causes of consumption include wear and tear, depletion, time
factors and economic factors.
(ii) Freehold land and buildings usually have unlimited life (or very long life). Depreciation should only
be provided on non-current assets that have limited life.
b)
Income statement (extract) FRw.
Gross profit XXX

Add: Profit from disposal of non-current 66,000
60
assets
Expenses
Depreciation:
Plant & equipment 119,996
Motor vehicles 263,250
Furniture & fittings 20,625
Motor vehicle Disposal account

FRw FRw.
Motor vehicle 127,500 Accumulated depreciation 127,500
Profit & loss account Motor vehicle trade in 66,000
193,500 193,500
nt Disposal account
Plant & Equipme
FRw FRw.
Plant & Equipment 22,500 Accumulated depreciation 22,500
Workings
Amount of revaluation
FRw
Current revaluation 1,462,500
Initial valuation 825,000
Amount of revaluation 637,500
Change in estimate of depreciation for item of equipment

Cost = FRw.157,500
Number of years = 6
Accumulated depreciation to date
= 10% x 157,500 x 6 = 94,560
Net book value at start of 01/07/96
=157,500 – 94,560 = 62,940
Revised useful life = 20 years
Initial useful life = 10 years
Years already elapsed = 6
So remaining years = 20 – 6 = 14
So the depreciation per year = = FRw.4,496
In percentage = x 100 = 7.14%

Depreciation for plant and equipment
Cost balance b/f = 1,312,500
Less equipment charge = 157,500
1,155,000
Depreciation = 10% x 1,155,000
= 115,500
Add equipment charge = 4,496
Total depreciation 119,996
Depreciation on motor vehicles
Balance b/f cost = FRw 1,053,000
61
Depreciation = 25% x 1,053,000

= 263,250
Furniture & fittings
Balance b/f cost = 165,000
Depreciation =
62
CHAPTER SIX: RECTIFICATION OF ERRORS AND SUSPENSE ACCOUNTS
While recording transactions, posting to the various accounts and extraction of list of account balances, it is
possible for errors to be committed. Such errors may or may not affect the totals of the list of account balances.
Recall that if the totals of the list of account balances equal, then this shows arithmetical accuracy in recording
and posting of transactions. Now it should be said, this does not mean non-existence of errors. It is possible for
some errors not to affect the totals being equal for the list of account balances. Some errors can affect too the
total of list of account balances.
There are two major types of errors in accounts:
•Errors that do not affect the List of account balances (trial balance)
•Errors that do affect the List of account balances (trial balance)
a)Errors that do not affect the List of account balances (trial balance)
The totals of the list of account balances equal each other. However, on taking a close check on the balances
and transactions posted, errors may have been made and therefore the balances shown on the list of account
balances may be incorrect.
The following errors will not affect the totals of list of account balances
(i) Error of omission

Here, a transaction is completely omitted from the accounts and therefore the double entry is not made. For
example a sales invoice of FRw.400 is not posted in the sales journal therefore no entry is made in the debtor’s
account and the sales account. That is both debit of FRw.400 in debtor’s account and credit of FRw. 400 in the
sales account.
To correct such an error:
FRw FRw
Debit Account to be debited XX
Credit Account to be credited XX
To correct error of omission
The effect of the omission error of the sales invoice is that it understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
FRw FRw
Debit Debtors account 400
Credit Sales account 400
(ii) Error of Commission

This error occurs when a transaction is posted to a wrong account but the account is of the correct class of
account. Example: a credit sale to T Thierry is posted to L Thierry’s account for an amount of FRw. 200.
Instead of a debit to T Thierry’s account it is made to L Thierry’s account and the corresponding credit in the
sales account is correct.
To correct this error
FRw FRw
Debit Account to be debited XX
Credit Account to be credited XX
To correct error of commission
Although the debit entry is made into the wrong account, the two accounts are of the same class of Debtors.
63
To correct this error a transfer is made from L Thierry’s account to T Thierry by:
FRw FRw
Debit T Thierry account 200
Credit L Thierry account 200
(iii) Error of principle

This type of error occurs when a transaction is posted to the wrong class of account. For example, Furniture
purchased for FRw. 4,000 cash is debited to the Furniture repairs account instead of debiting Furniture account,
and the credit entry in the cashbook is correct.
The furniture is a non-current asset, and a furniture repair is an expense. Therefore a capital expenditure has
been posted as revenue expenditure.
To correct such an error, the amount in the wrong class of account has to be removed and transferred to the
right class of account.
For this example
FRw FRw
Debit Furniture account 4,000
Credit Furniture repairs account 4,000
To correct error of principle
(iv) Complete reversal of entries

A transaction is posted to the correct accounts but to the wrong sides of the accounts. That is a debit is posted as
a credit and a credit is posted as a debit in the right accounts. For example, discount received of FRw.560 is
debited in the Discount received account and credited in the Creditor’s account.
To correct such an error, the entries have to be reversed first to cancel or correct the initial mistake then
record the transaction rightly. As such the amounts will double. For this example:
FRw FRw
Debit Creditor’s account 1,120
Credit Discount received account 1,120
To correct error of complete reversal of entries
This involves the two steps as follows

FRw FRw
Debit Creditor’s account 560
Credit Discount received account To 560
correct error
FRw FRw
Credit Discount received account 560
To record the transaction
Notice the account to be debited is debited twice and account to be credited is credited twice too.
(v) Error of Original entry

Here a transaction is posted to the correct accounts but the amount posted is not correct. That is, it is either
under/over stated. It is possible that the figure in the amount might be interchanged. Such is a transposition
error.
64
For example, cash received from a debtor of FRw.980 is credited to the customer’s account as FRw.890. The
amounts were understated by FRw.90 (always a factor of 9)
To correct this error, the amount understated or overstated is posted to these accounts so as to increase or
reduce the amounts in the accounts to get the right amount. For this example:
FRw FRw
Credit Discount received account 90
To correct error of original entry
(vi) Compensating Errors

These are errors that have the effect that tend to cancel out each other in amounts. That is, if the effect of one
error is to understate the debits or credits then another error may take place to overstate the debits or credits by
the same amount, hence canceling out each other. For example, if the balance c/d of the purchases a/c is
FRw.3,980 but shown in the trial balance as FRw.3,890 and another error carried to the trial balance of fixture
amounting to FRw.4,540 instead of FRw.4,450:
Purchases FRw
Right amount 3,980
Wrong amount
Understatement
Fixtures
Right amount 4,450
Wrong amount
Overstated
The overall effect is nil on the debit side. Notice that the two accounts involved have debit balances. It is
possible to have canceling effect even accounts with credit balances or even a mixture. The main thing is that,
the effect on totals is nil.
To correct such errors, the accounts involved have to be corrected to take care of the amounts overstated or
understated. For this example
FRw FRw
Debit Purchases account 90
Credit Fixtures account 90
To correct compensating error
Example
Give the journal entries needed to record the corrections of the following. Narratives are required.
(i) Extra capital of FRw. 10,000 paid into the bank had been credited to Sales account.
(ii) Goods taken for own use FRw. 700 had been debited to General Expenses.
(iii) Private insurance FRw. 89 had been debited to Insurance account.
(iv) A purchase of goods from C Kelly FRw. 857 had been entered in the books as FRw. 587.
(v) Cash banked FRw. 390 had been credited to the bank column and debited to the cash column in the
cashbook.
(vi) Cash drawings of FRw. 400 had been credited to the bank column of the cashbook.
(vii) Returns inwards FRw. 168 from M McCarthy had been entered in error in J Charlton’s account.
(viii) A sale of a motor van FRw. 1,000 had been credited to Motor Expenses.
65
Solution
FRw FRw
Debit Sales account 10,000
Credit Capital account 10,000
To correct principle error
Debit Drawings account 700
Credit General expenses account To 700
correct principle error
Debit Drawings account 89
Credit Insurance account 89
Debit Purchases account 270
Credit C Kelly account 270
To correct error of original entry
Debit Bank account 780

Credit Cash account 780
To correct compensating error
Debit Bank account 400
Credit Cash account 400
To correct commission error
Debit J Charlton account 168
Credit M McCarthy account 168
Debit Motor expenses account 1,000
Credit Motor disposal account 1,000
b)Errors that do affect the List of account balances (trial balance) and the suspense account
These errors will affect the totals of the list of account balances. That means that the arithmetical accuracy of
accounts will be in doubt. The totals of debit balances will not equal the totals of credit balances.
The likely causes may be as follows:
(i) Transaction amount is posted only on one side of the accounts. That is, only a debit entry or a credit
entry. Example cash received from a debtor is debited to the cashbook and not credited to the debtor’s
account
(ii) A transaction is posted only on one side of both accounts. That is, two debits or two credits instead of
following double entry. Example, a payment to a creditor of FRw. 300 is credited in the cashbook and
also credited in the creditor’s accounts.
(iii) A transaction is posted correctly following double entry but different amounts. That is, debit amount is
not the same as the credit amount. Example, cash received from a debtor of FRw. 450 is debited in the
cashbook as FRw. 450 and credited as FRw. 540 in the debtor’s account.
(iv) Error on balances of accounts. For example, understatement or overstatement of an account balance
due to mathematical errors.
(v) Balance on an account is shown on the wrong side of the account when opening the ledger accounts or
when taken up to the trial balance. Example Balance c/d in the cashbook for cash at bank of FRw.
2,000 is shown as a credit that is, an overdraft, instead of a debit in the list of account balances. The
balance may also be brought down as an overdraft instead of a debit balance in the trial balance.
(vi) A balance is omitted from the trial balance.
66
To correct such errors, only one account will be needed. The other account to fulfill double entry will be the
suspense account. Suspense account is a temporary account that is opened to take care of differences between
the total in the list of account balances. This account can also be used in case a bookkeeper does not know the
other account to debit or credit. Once the other account is known then it is debited or credited and the
corresponding entry to be in the suspense account.
While correcting the error, the difference in the totals of the list of account balances is placed in the suspense
account pending correction. During correction, one account to be corrected is debited or credited then the
suspense account is credited or debited respectively.
The balance to be shown on the suspense accounts depends on which side of the list of account balances has the
lower total.
If the debits totals exceed total credits, then an amount is included on the credit side of the list of account
balances so that the debits equal credits and is called Suspense account. This is a credit balance and will be
taken to the suspense account on the credit side.
If the credits totals exceed total debits, then an amount is included on the debit side of the list of account
balances so that the debits equal credits. This is a debit balance and will be taken to the suspense account on
the debit side.
For example
Debit Credit
FRw FRw
Totals 65,200 63,800
Suspense account
65,200 65,200
Suspense account
FRw. FRw.
Balance b/f 1,400
The balance in the suspense account has to be cleared by correction of errors or recording the other side of
transaction that had not been recorded. All efforts should be done to clear the suspense account.
If the balance is not cleared:
If material the amount is carried to the balance sheet as a current asset (if debit balance) or current liability (if
credit balance).
If immaterial, the amount is shown in the income statement as an expense (if debit balance) or income (if credit
balance).
Materiality will depend on amounts and the cut-off-point given for a given organization.
Example
A bookkeeper extracted a list of account balances on 31 December 2009 that failed to agree by FRw.3,300, a
shortage on the credit side of the list of account balances. A suspense account was opened for the difference.
In January 2010 the following errors made in 2009 were found:
(i) Sales daybook had been undercast by FRw.1,000.
(ii) Sales of FRw.2,500 to J Church had been debited in error to J Chane account.
(iii) Rent account had been undercast by FRw.700.
(iv) Discounts received account had been under cast by FRw.3,000.
(v) The sale of a motor vehicle at book value had been credited in error to Sales account FRw.3,600.
67
You are required to:

Show the journal entries necessary to correct the errors.
Draw up the suspense account after the errors described have been corrected.
Solution
FRw FRw
Debit Suspense account 1,000
Credit Sales account 1,000
Sales undercast now corrected
Debit J Church account 2,500
Credit J Chane account 2,500
Debit Rent account 700
Credit Suspense account 700
To correct undercast in rent account
Debit Suspense account 3,000
Credit Discount received account 3,000
To correct undercast in the account
Debit Sales account 3,600
Credit Disposal account 3,600
Suspense account
FRw. FRw.
Sales 1,000 Balance b/f 3,300
Discount received 3,000 Rent 700
4,000
4,000
c)Statement of corrected profit and revised balance sheet
It is possible after preparation of financial statements, that errors are discovered and corrected. In there
correction, profit originally calculated may be affected. Furthermore the balances reported in the balance sheet
may also change.
Continuing from previous example
If the net profit had previously been calculated at FRw.79,000 for the year ended 31 December 2009, show the
calculations of the corrected net profit
The errors that will affect the net profit are those in (i), (iii) and (iv) only. Notice the error in note (ii) does not
affect net profit since there is no income or expense item affected. Error (v) does not affect net profit since both
items are incomes and increase in one decreases the other.
Statement of corrected net profit
FRw. FRw.
Net profit as per account 79,000
Add:
Sales 1,000
68
Discount received 3,000

83,000
Less:
Rent
Corrected net profit 82,300
Example
The balance sheet of N Patel, a sole trader, as at 31 March 2010 was as follows:
FRw000 FRw000 FRw000 FRw000
Capital 1 April Land and
2009 1,890 buildings (at 1,650
valuation)
Profit for the year Machinery (at
ended 31 March 450 cost) 1,200
2010
Deduct: drawings 150 300 Deduct: 750 450
depreciation
Creditors 630 Inventory at cost 570
Bank overdraft 270 Debtors 420 990
3,090 3,090
Further investigation reveals the following information:

(i) The closing inventory includes damaged goods, which, although they had cost FRw.10,000 have an
estimated sale value of FRw.7,500.
(ii) Debtors include FRw.20,000 in respect of a customer who has gone bankrupt. Allowance for doubtful
debts of 2 ½% is also required on the balance of the debtors.
(iii) The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-line
basis over eight years. A more realistic estimate indicates that the life span will be 10 years.
(iv) Wages owing at 31 March 2010 amounted to FRw.9,500 but this has not been reflected in the accounts.
(v) Charges for the bank overdraft, amounting FRw.8,000 have not been reflected in the accounts.
(vi) In arriving at the profit for the period, a drawing of FRw.100,000 paid to Mr. Patel had been deducted
as an expense.
(vii) FRw.20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party
had not been received and no entry had been made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions.
b) A statement of revised profit for the year ended 31 March 2010
c) A revised balance sheet as at 31 March 2010.
Solution
FRw FRw
Debit Income statement 2,500
Credit Inventory account 2,500
Write off of stock to net realizable value
Debit Bad debts account 20,000
Credit Debtors account 20,000
Write off of bad debt for a debtor gone bankrupt
Debit Income statement 10,000
69
Credit Allowance for bad debt account 10,000

Providing for doubtful debts (2½%x(420,000-20,000))
Debit Wages expense account 9,500
Credit Accrued wages expense account 9,500
To record an wages owing
Debit Bank charge account 8,000
Credit Bank account 8,000
To record bank overdraft charge
Debit Drawings account 100,000
Credit Income statement account 100,000
To correct error of principle (drawings treated as an
expense)
Debit Accrued rent income account 20,000
Credit Rent income account 20,000
To record bank overdraft charge
Statement of adjusted net profit

FRw FRw
Net profit as per the account 450,000
Add:
Drawings 100,000
Accrued rent income 20,000
Less:
Stock reduction 2,500
Bad debts 20,000
Allowance for doubtful debts 10,000
Accrued expenses 9,500
Bank charges 8,000 (50,000)
Revised Net profit 520,000
To prepare the revised balance sheet, it necessary to find out the effects of each additional information and see
the effect on the assets, liabilities and capital. From the journal entries, all the additional notes affect the
balance sheet items.
Revised balance sheet as at 31 March 2010
Non-current assets FRw FRw FRw

Land and buildings 1,650,000 - 1,650,000
Machinery 1,200,000 (750,000)
Current Assets
Inventory 567,500
Debtors 400,000
Allowance for doubtful debts (10,000) 390,000
Accrued rent income 20,000
977,500
3,077,500
70
Capital 1,890,000
Net Profit
Drawings
Current liabilities
Creditors 630,000
Accrued wage expense 9,500
Bank overdraft 278,000
917,500
3,077,500
CHAPTER SEVEN: CONTROL ACCOUNTS
7.1. DEFINITIONS
(i) Control account is a summary account appearing in the general ledger for the purpose of controlling
the accuracy of the detailed postings to other ledgers. Control accounts are so called because they
control a section of the ledgers. By control we mean that the total on the control accounts should be
the same as the totals on the ledger accounts. They are like the list of account balances (trial balance)
for given ledgers extracted at short intervals to check on accuracy of postings to the ledgers. They
contain summary information of a number of similar accounts in ledgers. There are two main types of
71
control accounts since businesses usually have numerous transactions in relation to customers and
suppliers.
(ii) Sales ledger control Account (also known as debtors or accounts receivable control account). The
balance on the sales ledger control account should be the same as the total of the balances in the sale
ledger (total of balances in customers accounts).
(iii) Purchases Ledger Control Account (also known as creditors or accounts payable control account) .The
balance on the purchases Ledger Control Account should be the same as the total of the balances in the
purchases ledger (total of balances in suppliers accounts).
Notice that the customers and suppliers considered here are those sold for goods/service of trade and not
others (since the others represent a small number of transactions).
7.2. PURPOSE OF CONTROL ACCOUNTS
(i) Provide for arithmetical check on the postings made in the individual accounts (either in the sales
ledger or purchases ledger.)
(ii) To provide for a quick total of the balances to be shown in the list of account balances as debtors and
creditors.
(iii) To detect and prevent errors and frauds in the customers and suppliers account.
(iv) To facilitate delegation of duties among the debtors and creditors clerks.
Summary information is obtained from the books of original entry (totals) and not the personal accounts. So it
means that as much as totals postings will be done to accounts in the general ledger, additional entries will be
made to the control accounts even though not to fulfill double entry. The additional entries will just be
memorandum.
7.3. FORMATS OF CONTROL ACCOUNTS
The formats will just be similar to the personal accounts of customers and suppliers, but contain total
information.
Sales ledger control account
FRw. FRw.
Balance b/f XX Balance b/f XX
Credit sales XX Cash/Bank (receipts from debtors) XX
Bank (refunds to customers) XX Bills of exchange receivable XX
Bank (dishonoured cheque) XX Returns inwards XX
Bad debts recovered XX Bad debts XX
Discounts allowed
Other allowances XX
Contras XX
Balance c/f XX Balance c/f XX
XX XX
Purchases ledger control account
FRw. FRw.
Balance b/f XX Balance b/f XX
Cash/bank (payment to suppliers) XX Credit purchase XX
Bill of exchange payable XX Cash/bank (refunds by suppliers) XX
72
Discount received
Other allowance (by supplier) XX
Returns out XX
Contra XX
Balance c/f XX Balance c/f XX
XX
XX
Notes
The credit balances and debit balances in the sales ledger control and purchases ledger control accounts
respectively:
The credit balance represent customers account balances which due to them paying more and goods have no
been supplied or discounts/ returns given/accepted and amounts received for the whole sale. This can be
reduced or cleared by either supplying more goods or refunding the given amounts.
The debit balances in supplier accounts represent a situation where the business has paid for goods and yet they
have not been supplied. Also another possibility is if returns or discounts taken and the business still pays for
the whole purchase without consideration of this. The supplier giving other allowances or the business getting
cash refund can clear this.
Bills of exchange:
Bills of exchange represent means of clearing account, in a similar manner like cheques. Although bill
receivable once accepted by customers will still be held as current asset until discounted. Bills payable on the
other hand once accepted by the business will be carried as current liabilities until paid for.
Contras:
This represents a situation where a supplier is also a customer. The contra is a settlement between creditor and
debtor so as to find out how much to pay or receive as the difference in the account.
Think of a situation where a business sales to its customer Rwacom containers, paint which they use to mark on
their containers. Rwacom Containers on the other hand supply’s the business with tins to pack the paint. As
such for the business, Rwacom Containers is both a supplier and a customer. Take that at the end a given period
the accounts of Rwacom containers in sales ledger and purchases ledger were as follows:
In the sales ledger – FRw.67,400
In the purchases ledger – FRw.42,700
In such a case, the business owes Rwacom Containers FRw.42,700 and while Rwacom Containers owes the
business FRw.67,400. Instead of each writing cheques to each other of those amounts, settlement can be done
and only the difference paid by that who owes the other. The settlement is the contra. It is like an entry in same
personal account.
The accounts with the contras and settlement by cheque will be as follows:
In the sales ledger
Rwacom Containers account
FRw. FRw.
Balance b/f 67,400 Contra 42,700
Bank
67,400 67,400
In the purchases ledger
Rwacom Containers account

FRw. FRw.
Contra 42,700 Balance b/f 42,700
Example
From the following prepare a sales ledger and purchases ledger control accounts for the business of Inkweto
73
FRw
Opening debtors 44,000
Opening creditors 24,900
Sales 143,766
Purchases 87982
Sales returns 2,890
Purchses returns 742
Cheques in 140,809
Cheques out 80,234
Bad debts 2,890
Contras 874
Discounts received 540
Discounts allowed 1,034
Customers cheque dishonoured 500
Bill of exchange accepted by customer 700
Solution
FRw. FRw.
Balance b/f 44,000 Returns inwards 2,890
Credit sales 143,766 Bank (Cheques in) 140,809
Bank (dishonoured cheque) 500 Bad debts 2,890
Contras 874
Bill of exchange accepted 700
Balance c/f
188,266

FRw. FRw.
Returns out 742 Balance b/f 24,900
Cash/bank (payment to suppliers) 80,234 Credit purchase 87,982
Contra 874
Discount received 540
Balance c/f
112,882 112,882
It is possible that the control accounts be part of double entry. In such a case the personal accounts in the
ledgers become part of memorandum. The choice on whether to make control accounts as depends on the
policy of the organization.
Example
a) Explain the purposes for which control accounts are prepared.
b) The balances and transactions affecting the control accounts of Koropesho for the month of November
2009 are listed below:-
FRw.
Balances on 1 November 2009:
Sales ledger 9,123,000 (debit)
211,000 (credit)
74
Purchases ledger 4,490,000 (credit)

88,000 (debit)
Transactions during November 2009:
Purchases on credit 18,135,000
Allowances from suppliers 629,000
Receipts from customers by cheques 27,370,000
Sale on credit 36,755,000
Discount received 1,105,000
Payments to creditors by cheques 15,413,000
Contra settlements 3,046,000
Bills of exchange receivable 6,506,000
Allowances to customers 1,720,000
Customers cheques dishonored 489,000
Cash received from credit customers 4,201,000
Refunds to customers for overpayments 53,000
Balances on 30 November 2009
Sales ledger 136,000 (credit)
Purchases ledger 67,000 (debit)
Required:
The sales ledger and purchases ledger control accounts for the month of November 2009 and show the
respective debit and credit closing balances on 30 November 2009
Solution
a)
(i) Provide for arithmetical check on the postings made in the individual accounts (either in the sales
ledger or purchases ledger.)
75
Gross profit x 100

25 =
20,000
 = Gross Profit
FRw 5,000 = Gross Profit
* Sales – (Opening Inventory + Purchases – Closing Inventory)= Gross Profit
 20,000 – ( 4,500 + Purchases – 4,800) = 5000
 20,000 + 300 – Purchases = 5000
 20,300 – 5,000 = Purchases
 FRw 15,300 = Purchases
a)Use of all techniques Steps:

(i) Draw a statement of affairs at the commencement of the period
(ii) Prepare cash and bank accounts if not existing
(iii) Determine the sales and purchases of the period by use of control accounts (sales ledger control account
and purchases ledger control account.)
(iv) Determine expenses and income for the period after adjusting for accruals and prepayments.
(v) Adjust other current assets like debtors and inventory. Depreciate the non-current assets taking care of
any acquisitions and disposal during the year.
(vi) Get other information like drawings (of cash or goods), additional capital, any theft or other disaster.
(vii) Prepare the final accounts in the light of all the information given. There may be use of common ratios
to determine missing figures like sales, purchases, other balances or loss due to natural disaster.
Example
Lynette Sangini is a sole trader selling antiques from a rented shop. She has not kept proper accounting records
for the year ended 31 January 2009, in spite of her accountant’s advice after the preparation of her accounts for
the year ended 31 January 2008.
Her assets and liabilities at 31 January 2008 and 31 January 2009 were as follows:
Balance as at 31 January 2008 2009

Assets FRw
FRw FRw FRw
Shop equipment: Cost 14,800 ?
Less Depreciation 6,900 7,900 ? ?
146,400 128,700
Inventory
Accounts receivable 14,400 15,700
Rent in advance 1,000 ?
Cash at bank. - 4,850
Cash in hand 800 900
Liabilities
Loan: Soapstone finance bank 24,000 12,000
Accounts payable 12,100 14,200
Accrued expenses 2,300 ?
Bank overdraft 2,600 ?
76
The following summary shows receipts and payments by Lynette.
Cash Book Summary

Receipts Payments
FRw FRw
Sales revenue banked 131,600 Opening balance 2,600
Shop equipment sale 300 Purchases payments 81,400
Rent paid 8,250
Shop equipment Purchase 1,800
Sundry expenses 18,600
Interest on loan 2,400
Repayment of loan 12,000
Closing balance 4,850
131,900
131,900
Before banking the shop takings, Lynette took various amounts as drawings.
Notes
(i) Lynette fixes her selling prices by doubling the cost of all items purchased.
(ii) During the year, Lynette sold for FRw.300 equipment that had cost Sh.800, and had a written down
value at 1 February 2008 of FRw.200. She purchased further equipment on 1 August 2008 for
FRw.1,800. Depreciation is charged at 10% per year on the straight-line basis, with no depreciation in
the year of sale and proportionate depreciation in the year of purchase.
(iii) Rent is payable quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. On 1 July
2008, the annual rent was increased from FRw.6,000 to FRw.9,000.
(iv) The loan from Soapstone finance bank carries interest at 10% per year payable annually on 31
December. On 31 December 2008, Lynette repaid FRw.12,000 of the loan. The balance is repayable
on 31 December 2010.
(v) The accrued expenses at 31 January 2008 consist of the FRw.200 interest accrued on Soapstone
finance bank loan (see Note 4) and sundry expenses of FRw.2,100. At 31 January 2009, accruals for
sundry expenses amounted to FRw.3,300.
Required:
Prepare for Lynette’s income statement (Income statement) for the year ended 31 January 2009 and a balance
sheet as at that date.
Solution
To answer this question it will be good to follow the steps for use of control accounts where there is partial
double entry.
Workings:
W1
77
Statement of affairs as at 31st January 2008 is first prepared as follows
Statement of affairs As at 31st January 2008
FRw. FRw. FRw.

Non-current Assets Cost Dep’n Net
Shop equipment 14,800 (6,900) 7,900
Current assets
Inventory 146,400
Accounts receivable 14,400
Rent in advance 1,000
Cash 800 162,600
170,500
Capital* 129,500
Non-current liabilities
Loan: Soapstone Fin Bank 24,000
Current liabilities
Accounts payable 12,100
Accrued expenses 2,300
Bank overdraft 2,600 17,000
170,500
* Notice that opening capital balance is obtained as a balancing figure.
W2
Then a cash and bank account are to be prepared. Notice that this is already done for the bank account as shown
in the cashbook summary. For the cash account
Cash account
FRw. FRw.
Opening balance 800 Bank (Cash banked)
Debtors (W3) 201,100 Drawings (balancing figure) 69,400
Closing balance
201,900 201,900
Notice the way the cash account has assisted in determination of cash drawings as a balancing figure. In the
question it was stated that Lynette took cash drawings before banking cash from customers.
W3
It is now necessary to calculate sales and purchases. For this question it will be good to determine the purchases
first then sales.
Calculation of purchases
78

FRw. FRw.
Cash payments for purchases 81,400 Opening balance 12,100
Closing balance 14,200 Purchases (balancing figure) 83,500
95,600 95,600
Calculation of sales
Notice that there is no need of sales ledger control account to assist determine the sales. Sales is determined by
doubling the cost of goods sold as per note 1. From the income statement, the cost of goods sold=Sh.101,200.
So the sales = FRw.101,200 x 2 = FRw.202,400
The sales ledger control account will be necessary to determine amount of cash from debtors (trade receivables)
as follows.
FRw. FRw.
Opening balance 14,400 Cash (balancing figure) 201,100
Sales (W3) Closing balance
216,800
W4
The fourth step is to determine the expenses and incomes for the period.
These will be the amounts paid from the bank or cash account if there are no adjustments due to accruals and
prepayments. Go through the statement of affairs for opening balance to start from the expenses and income
found here first.
The first expense met is the rent expense. Going through the bank account and cash account and the notes it is
possible to prepare the rent account as follows.
Rent expense account

FRw. FRw.
Prepaid b/f 1,000 Profit and loss a/c (balancing) 7,750
Bank 8,250 Prepaid c/f (note 4) 1,500
9,250
9,250
Prepaid amount as per 31st January is determined as follows
9,000
Amount paid for 3 months to 31st March = 12×3 = Sh.2,250
2,250
Amount prepaid as at 31st January is for 2 months = 3 ×2 = Sh.1,500
The next expense is the sundry expense. Once more, go through the statement of affairs, the bank account and
the cash account with any balances and any note affecting sundry expenses.
Sundry expense account

FRw. FRw.
Bank 18,600 Accrued b/f (note 6) 2,100
Accrued c/f (note 6) 3,300 Profit and loss a/c (balancing) 19,800
21,900
79
21,900
Notice the amount shown, as accrued b/f is the amount net of interest accrued.
The other expense is interest on loan.
From the statement of affairs, notes and bank account the interest account is as follows:
Interest expense account

FRw. FRw.
Bank 2,400 Accrued b/f (note 6) 200
Accrued c/f 100 Profit and loss a/c (balancing) 2,300
2,500
2,500
Accrued c/f is determined as follows;

FRw
Loan balance b/f 24,000
Loan repaid on 31st December 12,000
Loan balance 12,000
Loan interest accrued to 31st January (1 month)
100
(10%×12,000)/12
The next step is adjust any current assets and depreciate the non-current assets
There is no Allowance for bad debts or for unrealized profit. So the depreciation is calculated as follows:
Note 2 and 3 are used.

Non-current assets and depreciation
Accumulateddepreciation
Cost
FRw. FRw.
Balance As at 1 February 2008 14,800 6,900
Less: Items sold (800) (600)
14,000 6,300
Additions 1,800
15,800
Depreciation for year
Old equipment FRw.14,000 at 10% 1,400
Old equipment FRw.1,800 at 10% for six 90
months
As at 31 January 2009 15,800 7,790
There is disposal of equipment, so it will be necessary to find out profit or loss on disposal by preparing
disposal account as follows:
Equipment disposal account

FRw. FRw.
Equipment (cost) 800 Accumulated for depreciation 600
Profit and loss a/c (balancing) 100 Bank 300
80
900
900
The next step is to get any extra information about drawings or additional capital or other matters like natural
disasters. So far there is no extra information other than drawings which has been dealt with in the working W1
The last step is to prepare the final statements in the light of all the information and
workings. Take note that as the workings are done the amounts determined are shown in the
appropriate final statements (income statement and balance sheet). In such a situation both
statements are prepared concurrently allowing space for items that are still being determined.
The Income statement and balance sheet will look as follows:
Income statement For year ended 31st January 2009
FRw FRw
Sales (W3) 202,400
Opening stock 146,400

Purchases (W3) 83,500
Closing stock (128,700) 101,200
Gross profit 101,200
Profit on disposal of equipment 100
101,300
Expenses
Rent (W4) 7,750
Sundry expense (W4) 19,800
Interest on loan (W4) 2,300
Depreciation (W5) 1,490 31,140
Net profit 69,960
Balance sheet As at 31st January 2009

FRw. FRw. FRw.
Non-current Assets Cost Dep’n Net
Shop equipment (W5) 15,800 (7,790) 8,010
Current assets
Inventory 128,700
Rent in advance 1,500
Bank 4,850
Cash 900 151,650
159,660
Capital Balance b/f 129,500

Profit for the year 69,960 199,460
Drawings (W2) (69,400)
130,060
Non-current liabilities
81
Loan: Soapstone Fin Bank (W3) 12,000
Current liabilities
Accrued expenses (3,300+100) (W3) 3,400 17,600
159,660
Note: As you work through, following the steps as shown, always prepare the statements concurrently putting
in information as you work out. Leave space for other items by sparing a whole page for each final statement.
Tick out balances, notes items in the cashbook as you deal with them and have completed with them.
CHAPTER EIGHT: FINANCIAL STATEMENTS - SOLE TRADER
8.1. INCOME STATEMENT
It shows the net profit or net loss that the business has made from all the activities during a financial period.
The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same financial
period.
In practice, the trading account is combined together with the net profit and loss account into one report the
income statement so that the format is as shown below:
Name of business
Income Statement for the year ended date.
FRw FRw
Sale xx
Returns in (xx)
xx
Cost of sales
Opening inventory xx
Purchases xx
82
Return out (xx)

Carriage in xx
Closing inventory (xx)
Total cost of sales (xx)

Gross profit xx
Other income
Discount received xx
Rent received xx
Interest received xx
xx
xx
Expenses
Carriage Outwards xx
Discounts allowed xx
Postage & stationary xx
Salaries & wages xx
Rent paid xx xx
Insurance & rates xx
Interest expense xx
Advertising xx
Other expenses xx
Total (xx)
Expenses Profit xx
for the year
8.2. BALANCE SHEET

This is a simple report that shows the assets and liabilities of the business and the capital of the owner as at a
certain point in time. The format is at shown below:
Name of business
ASSETS Cost Acc Dep Net

Non Current Assets FRw FRw FRw
Land & Buildings xx (xx) xx
Plant & Machinery xx (xx) xx
Fixtures, furniture & fittings xx (xx) xx
Motors vehicles xx (xx) xx
Total non-current assets xx

Current Assets
Stocks/inventories xx
Debtors/ trade receivables xx
Allowance for doubtful debt (xx)
83
Realizable xx
Prepaid expense & accrued income xx
Cash at bank xx
Cash in hand xx
Total current assets xx
Total assets xxx
EQUITY AND LIABILITIES
Capital
-Opening balance xx
-Profit/(Loss) xx/(xx)
-Drawings (xx)
-Closing balance xx
Non Current Liabilities
5 Years loan xx
2 Years loan xx
Total non current liabilities xx

Current Liabilities
Creditors/trade payables xx
5 Months Loan xx
Accrued expense & Prepaid income xx
Bank Overdraft xx
Total current liabilities (xx)
Total liabilities xx
Total equity and liabilities xx
EXAMPLE
Account balances extracted from the books of MBUNDIKO

as at 31 March 2012 FRW
Sales 608,000
Purchases 314,000
Shop fittings 260,000
Equipment 60,000
Capital 290,000
84
Opening Inventory (1 April 2011) 94,000

Bank 12,200
Cash 1,900
Shop wages 92,000
Commission income 60,000
Drawings 70,000
Returns out 3,500
Light and heat 5,200
Rent expense 85,000
Carriage in 600
Insurance 1,800
Returns in 8,000
In preparing the year-end accounts, the following should be accounted for:

i) The inventory at the end of the year was valued at FRw8,800;
ii) Insurance prepaid amounted to Frw400;
iii) Shop wages accrued FRw6,700;
iv) Commission income prepaid FRw 4,600
You are required to:

(a) prepare Mbundiko's List of account balances as 31 March 2012 (Before adjustments)
(b) prepare Mbundiko's Income statement for the year ended 31 March 2012
(c) draft Mbundiko's Balance sheet as at 31 March 2012
85

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UNIVERSITY OF RWANDA

School of Business and Economics

CHAPTER ONE : INTRODUCTION TO FINANCIAL ACCOUNTING ...........................................2

1.1.Nature of Financial Accounting

1.2. Users of Accounting Information

The following are the users of accounting information:

vi. The Government and its agencies

vii. The Financial Analyst and Advisors

viii. The Employees

ix. The general Public

iv. Other forms of businesses

1.4.Qualitative characteristics of Financial Information

CHAPTER TWO: ACCOUNTING CONCEPTS

i. The going concern concept:

ii. The accruals concept (and matching concept):

iii. The Prudence Concept (and realization concept):

A profit can be considered to be a realized profit when it is in the form of:

iv. The consistency concept:

v. The business entity concept:

vi. The money measurement concept:

vii. The separate valuation principle:

viii.The materiality concept:

ix. The historical cost convention:

xi. The realization concept:

xii. Substance over form:

CHAPTER THREE: DOUBLE ENTRY CONCEPTS

a)THE ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

Each item in this equation is briefly explained below.

Liabilities are also classified into two main classes.

Total non-current assets Xx

EQUITY AND LIABILITIES

Total non current liabilities Xx

b)Double Entry rules

Date Detail Folio Amount Date Detail Folio Amount

When we make a debit entry we are either:

c)Accounting for sales, purchases, incomes and expenses.

• Motor vehicle running expenses.

When a firm pays for an expense, we:

Debit cash book/bank/in hand

INCOMES/EXPENSES Debit Expense A/C

Credit cash book /bank/in hand

d)Returns Inwards and Returns Outwards.

Diagrammatically shown as follows:

Outwards Credit returns outwards

Credit returns outwards

g) Source documents and Books of original entry

Source Books of The List of the Final

Documents Original entry Ledger Balances Accounts

(i) Sales Invoice

(ii) Purchases Invoice

(iii) Credit note

(iv) Debit note

Credit purchase (purchase invoice)

i. The name and address of the firm

(viii) Petty cash vouchers

(ix) Other correspondence

i. Letters from the firm’s lawyers about a debtors balance.

Books of Original Entry

They record the source documents.

SALES Daybook Page 5

1st March S. Spikes SL.10 200.00

Sales Ledger General Ledger

S Spikes General Account