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KALULUSHI TRUST SCHOOL

PRINCIPLES OF ACCOUNTS GRADE 11
ADJUSTMENTS TO FINAL ACCOUNTS
P.S.B.A.T
Explain the purpose of adjustments to final accounts.
Identify adjustments to final accounts.
Record all the adjustments correctly.

1) DEPRECIAITON

EXPLAIN DEPRECIATION
Depreciation is the measure of the wearing out, consumption or other reductions in the useful
economic life of a fixed asset. It is loss of value of a fixed asset.
This may arise from:
use of the asset eg, Plant and machinery, motor vehicles etc.
passing of time eg, a term, year lease of property.
Obsolescence through technology and market changes eg, machinery of a specialised nature.
Depletion eg, extraction of minerals from a mine.
Purpose of depreciation
The purpose of depreciation is to allocate the cost of the fixed asset over the expected life of that asset. It is not
a method for providing for, or saving up for, replacement of fixed assets.

DESCRIBE METHODS OF DEPRECIATION

METHODS OF CALCULATING DEPRECIATION
There are several methods of calculating depreciation, but the following are the two most common ones:
1) Straight line method or Equal/fixed instalment method
2) Reducing balance method or diminishing balance method
3) Revaluation Method
Examiners will specify which method is to be used in an examination. If they do not, the straight line method
should generally be adopted as it is the easiest to use.

i) STRAIGHT LINE METHOD

Under this method, an equal amount is charged as depreciation for each year of the expected life of the asset. To
calculate the depreciation charge, the following information is necessary:
the original or historical cost of the asset
an estimate of its useful life to the business
an estimate of its residual value at the end of its useful life
The depreciation charge is calculated as follows:

Annual depreciation = Original cost - Estimated residual value

Estimated useful life

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CALCULATE DEPRECIATION ON FIXED ASSETS
QUESTION:
A motor vehicle was purchased on 1st January 2005 at a cost of K25 000 000. It is
estimated that its useful life is eight years, after which it will have a scrap value of
K5 000 000. Calculate the annual depreciation charge.
Solution:
Annual depreciation = Cost of Asset - Estimated residual value
Estimated useful life
Annual depreciation = 25 000 000 - 5 000 000
8
Annual depreciation = K2 500 0000
Notes:
Depreciation is often expressed as percentage of the original cost eg, 20% on cost p.a.
In most cases the residual value is not specified, and in such cases, it should be taken to be zero.

ii) REDUCING BALANCE METHOD

DESCRIBE THIS METHOD OF DEPRECIATION
Under this method the depreciation charge is higher in the earlier years of the life of the
Asset. It is calculated using a fixed percentage on the net book value. Net book value
(NBV) of a fixed asset is its cost less the accumulated Depreciation on the asset to date.

CALCULATE DEPRECIATION ON FIXED ASSETS

QUESTION:
A trader bought a machine at K10 000 000. Depreciation is charged at a rate of 20% pa on
net book value. Calculate the depreciation charges for the first 4 years of its life.

Solution

Year NBV Depreciation charge Accumulated depreciation

K K
1 10 000 000 x 20% 2 000 000 2 000 000
2 8 000 000 x 20% 1 600 000 3 600 000
3 6 400 000 x 20% 1 280 000 4 880 000
4 5 120 000 x 20% 1 024 000 5 904 000
Solution depreciation charge for 4 years
Year K
1 10,000 000 x 20% 10 000 000
( 2 000 000)

8 000 000

2 800000 x 20% (1600 000)

6 400 000

3 6 400 000 x 20% ( 1 280 000)

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 5 120 000

4 5 120 000 x 20% (1 024 000)

Total NBV 4,096,000

iii) REVALUATION METHOD

DESCRIBE THIS METHOD OF DEPRECIATION
The two previous methods of depreciation applied a certain percentage each year either to cost of the asset
(straight-line depreciation), or to reduced balance (reducing- balance depreciation. A third method for
calculating depreciation is to value the fixed assets each year, and the resultant fall in value during the year is
the amount of depreciation for the year.
Furthermore, this method of depreciation is mostly used for the calculation of depreciation for trivial,
inexpensive and small fixed assets that are normally accounted for as a collective unit.
This method makes calculation easier, because it is usually much complicated and time consuming to assess
depreciation of each of such assets separately.
The revaluation method is especially suitable for calculating depreciation on the following:
 Assets that are small in value
 Assets prone to breakage e.g. livestock, loose tools, engineering tools

How to calculate depreciation
k
Assets at the start of the year xxxx
Add: asset addition during the year xxxx
Assets available for use during the year xxxx
Less: asset at the end of the year xxxx
Depreciation charge for the year xxxx

Example 1
A business deals in a lot of steel containers. These are not sold but used by the business.
On 1 January, 2009 the containers were valued at k3, 500, during the year to 31 December containers were purchased
costing k1, 300. And on 31 December 2009 the containers were valued at k3, 800. Calculate depreciation charge for the
year end.

Solution
Containers at 1 Jan 2009 3500
Add: cost of items bought during the year 1300
Containers available for use during the year 4800
Less: containers at 31 December 2009 (3800)
Depreciation charge for the year 1,000

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Example 2
Office equipment is bought for k2000 on 1 January 2003. It is revalued as follows:
31 December 2003 k 1600
31 December 2004 k 1350
31 December 2005 k 1000

Therefore, depreciation amounts will be:

31 December 2003 (k2000 – 1600) k400
31 December 2004 (k1600 - k 1350) k250
31 December 2005 (k 1350 - k 1000) k350

Example 3
Balance sheet extract

Fixed Assets COST DEP NBV

Motor Vehicle 50,000
Equipment

Note below
The motor vehicle was revalued at k45000 on 31.12.2020. Calculate its depreciation charge.
K50, 000 – 45,000
=k5, 000 depreciation charge

DOUBLE ENTRY RECORD FOR DEPRECIATION

Once the business has decided which method of depreciation is to be used and rate to be applied, the next step isto
record the entries in the books of accounts. There are two different ways of doing this: the traditional method and the
modern method.
Different methods of recording double entry;
a) Traditional Method
 Fixed Asset account is maintained for each class of asset and amount provided for depreciation each
year are credited to the account.
 Thus records both transactions in one account.
Example
A machine is purchased for k6000 on 1 January 2005; it is to be depreciated by the straight line method at 10% each
year. The firm’s financial year end is 31 December. The Machinery Account appears as follows for the first three years of
ownership:

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 Machinery Account
DATE DETAILS F DR CR
2005
JAN 1 Bank 6000
Dec 31 Profit and loss 600
Dec 31 Balance C/d 5400

6000 6000
2006
Jan 1 Balance b/d 5400
Dec 31 Profit and loss 600
Dec 31 Balance c/d 4800

5400 5400

2007
Jan 1 Balance b/d 4800
Dec 31 Profit and loss 600
Dec 31 Balance c/d 4200

4800 4800
2008
Jan 1 Balance 4200

b) Modern method - While the traditional method shows the fixed asset account with provisions for depreciation
included on it, the modern method uses two separate accounts for the same transaction.
 A fixed asset account, which records the cost price of the asset.
 A Provision for Depreciation Account, which records the amount of depreciation set aside each year.

Example
A machine is purchased for k6000 on 1 January 2005; it is to be depreciated by the straight line
method at 10% each year. The firm’s financial year end is 31 December.

Required to prepare

I. The Machinery Account for the first three years of ownership

II. Provision for depreciation account.

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Solution
MACHINERY ACCOUNT
DATE DETAILS F DR CR
2005
JAN 1 BANK 6000
DEC 31 BALANCE c/d 6000

6000 6000
2006
JAN 1 6000
Balance b/d
DEC 31 Balance
6000
c/d

2007 6000 6000

JAN 1 Balance b/d 6000

DEC 31 Balance c/d 6000

2008 6000 6000

JAN 1 6000
b/d

Provision for depreciation Account

DATE DETAILS F DR CR
2005
DEC 31 Profit and loss 600
DEC 31 BALANCE c/d 600

600 600

2006
JAN 1 Balance b/d
600
DEC 31 Profit and loss A/C
1200 600
Dec 31 Balance c/d

1200 1200
2007
JAN 1 Balance b/d 1200
DEC 31 Profit and loss a/c c/d 600
Dec 31 Balance b/d 1800

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 1800 1800
2008 1800
b/d
JAN 1

The profit and loss Account extract for each year, using the same example above:

For the year ended 31 December 2005

Gross profit xxx
Less expenses :
Provision for depreciation – 600
Machinery

For the year ended 31 December 2005

Gross profit xxx
Less expenses :
Provision for depreciation – 600
Machinery

For the year ended 31 December 2005

Gross profit xxx
Less expenses :
Provision for depreciation – 600
Machinery

THE BALANCE SHEET EXTRACT

As at 31 December 2005
Fixed asset COST DEP
K’ K’ K’
Machinery 6000 600 5400

THE BALANCE SHEET EXTRACT

As at 31 December 2006
Fixed asset COST DEP
K’ K’ K’
Machinery 5400 1200 4800

THE BALANCE SHEET EXTRACT

As at 31 December 2006
Fixed asset COST DEP
K’ K’ K’

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Machinery 4800 1800 4200

DISPOSAL OF FIXED ASSETS

DESCRIBE THIS METHOD OF DEPRECIATION
Asset disposal/Asset realization basically involves;
 The selling of fixed assets that is no longer useful.
 Getting rid or the removal of an asset from the entity’s (company) accounting book.
Therefore, when an asset is disposed of, it must be removed from the books. The disposal is recorded in the
fixed asset register.
If an asset is sold or traded in, the profit or loss on disposal (if any) must be calculated and disclosed as an
income (profit/gain) or expense (loss).
An Asset may be disposed of in a number of ways:
 By selling it.
 By trading it in as part payment for a new asset.
 By scrapping it.
 By donating.
 The owner may use it for his/her personal use.
A disposal Account, known also as a Sale of Asset Account, is used to bring together:
i. The cost price of the asset being sold.
ii. Depreciation to date relating to the asset.
iii. Sale proceeds of the asset.
The accounting process
Steps to follow in the disposal of an asset
Step 1
i) When the asset is sold, the first step is to remove the original cost of that asset from our accounting
records. The double entry being:
Dr - Disposal of fixed assets account
Cr - Fixed asset account
Step 2
ii) The next step is to remove all the depreciation that has been charged on that asset from our
accounting records. The double entry being:
Dr - Provision for depreciation account
Cr - Disposal of fixed asset account
Step 3
iii) When the sale proceeds from the disposal are received, the double entry is:
Dr – Cash/bank Account
Cr - Disposal of fixed asset account
If the asset is sold on credit/t, then the double entry is:
Dr - Debtor account
Cr - Disposal of fixed asset account

Step 4

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Iv Profit or loss on sale asset.
The balance in the disposal account, which represents a profit or loss on disposal, will be
Transferred to the profit and loss account at the end of the year as follows:
a) If there is a profit, the double entry is:
Dr - Disposal of fixed asset account
Cr - Profit and loss account

b) If there is a loss, the double entry is:

Dr - Profit and loss account
Cr - Disposal of fixed asset account

Example 1
A machine is bought on 1 January 2005 for k1, 000 and another one on 1 October 2006 for k1, 200. The
first machine is sold on 30 June 2007 for k720. The business’s financial year ends on 31 December. The
Machinery is to be depreciated at 10%, using the straight line method. Machinery in existence at the end
of each year is to be charged on any machinery disposed of during disposed of during the year. No
depreciation is to be charged on any machinery disposed of during the year.

Solution
MACHINERY ACCOUNT
DATE DETAILS F DR CR
2005
JAN 1 Cash 1,000
DEC 31 BALANCE c/d 1,000

1,000 1,000
2006
JAN 1 1,000
Balance b/d
1,200
Oct 31 Cash
Dec 31 2,200
Balance c/d
2,200 2,200
2007
JAN 1 Balance b/d 2,200
June 30 Machinery disposals 1,000
DEC 31 Balance c/d 1200
2,200 2,200
2008

JAN 1 1,200
b/d

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Provision for depreciation: Machinery
DATE DETAILS F DR CR
2005
Dec 31 Profit and loss 100
DEC 31 Balance c/d 100

100 100

2006
100
JAN 1 Balance b/d
220
Dec 31 Profit and loss
Dec 31 Balance c/d
320
320 320
2007
JAN 1 Balance b/d 320
June 30 Machinery disposals (2years x 200
10% x k1,000)
DEC 31 Profit and loss 120
Dec 31 Balance c/d 240
440 440

2008
240
JAN 1 b/d

Machinery Disposal Account

DATE DETAILS F DR CR
2007
June 30 Machinery 1,000
June 30 Cash 720
June 30 Provision for depreciation 200
Dec 31 Profit and loss c/d 80
1,000 1,000

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Profit and loss Account for the year ended 31 December

Gross profit Xxxxx

Less : expenses
2005 Provision for depreciation Machinery (100)
2006 Provision for depreciation Machinery (220)
2007 Provision for depreciation Machinery (120)
(80)

Balance sheet (extracts) as at 31 December

DATE DETAILS COST DEP Value
FIXED ASSETS K’ K’ K’
2005 Machinery at cost 1000 (100) 900
2006 Machinery at cost 2200 (320) 1880
2007 Machinery at cost 1200 (240) 960

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ACCRUALS AND PREPAYMENTS

EXPLAIN EACH TYPE OF ADJUSTMENT AND SHOW EACH

CALCULATION OF ADJUSTMENT

ACCRUED EXPENSES
An accrued expenses is an item of expense that has been incurred during the accounting period but has
not yet been paid for.
When preparing final accounts, an accrued expense for the year should be included as an expense in the
profit and loss account and also shown in the balance sheet under current liabilities.

QUESTION:
Mwanawina’s business has an accounting year-end of 31st December. He rents a factory at a
rental cost of K 6 000 000 per quarter payable in arrears. During the year 31st December 2004
his cash payment for rent has been as follows:
March 31 K6 000 000
June 29 K6 000 000
October 28 K6 000 000
The final payment due on 31st December 2004 for the quarter to that date was not paid until
4th January 2004.
You are required to prepare the transfer to the profit and
loss account, and the balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000

Less: Expenses:
Rent (amount paid) 18 000
Add: accrued rent 6 000
24 000

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current liabilities:
Rent accrued 6 000
Note:
Where the adjustment is being made from a given trial balance, the common way of adjusting
the figure that goes to the profit and loss account is as follows:

2) ACCRUED INCOME
An accrued income is income receivable during the accounting period but has not yet been received.
When preparing final accounts the accrued amount should be included as an income in profit and loss
account since it relates to the current accounting period. In the balance the accrued income should be
shown under current assets.

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QUESTION:
In the books of J. Kafula, rent is receivable annually at K8 400 000. During the year
31st December 2004, the following receipts were made:
31 May 2004 K3 600 000
31 Dec. 2004 K4 400 000
Prepare the profit and loss account and show the balance sheet extracted as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Add: Gains:
Rent receivable 8 000
Add: accrued rent 400
8 400

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Rent receivable accrued 400

3) PREPAID EXPENSES:
A prepaid expense (paid in advance) is an expense that has been paid for during the accounting period but
relates to the next accounting period(s).
When preparing the final accounts, a prepaid expense should be excluded from the current profit and
loss account, but should be shown in the balance sheet under current assets.
Example 1:
J. Chibale pays insurance on his motor vehicles at an annual cost of K12 000 000.
During the year to 31st December 2004, he paid a total of K 14 000 000 on insurance costs.
Show the profit and loss extract and balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Less: Expenses:
Insurance 14 000
Less: prepaid insurance (2 000)
12 000

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Insurance prepaid 2 000

Note:
Had the adjustment been made from a given trial balance without using the account method, the
adjustment for the figure that goes to the profit and loss account would have been:

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3) PREPAID INCOME
This is income received during the current accounting period but relates to the next
accounting period(s).
Since the income relates to the next accounting period(s), it should not be included as income in the
current accounting period. In the balance sheet, prepaid income should appear under current liabilities.

QUESTION:
S. Phiri receives an annual commission of K3 600 000. During the year to 31st December 2004, he
received a total commission of K4 000 000.
Prepare the profit and loss account and show the balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Add: Gains:
Commission received 4 000
Less: prepaid commission (400)
3 600

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current liabilities:
Commission receivable prepaid 400

Summary
1. An expense accrued is a liability to the business whereas on income accrued is an asset to the business.
2. An expense prepaid is an asset to the business whereas an income prepaid is a liability to the
business.

BAD DEBTS/BAD DEBTS RECOVERED/ PROVISIONS FOR

DOUBTFUL DEBTS AND PROVISION FOR DISCOUNTS ALLOWED.

a) BAD DEBTS
Some debtors may fail to pay for their debts and so it is prudent accounting to write off such debts as
bad debts. A bad debt is a debt that is considered to be uncollectable. A bad debtor is a debtor who fails to
pay parts or the whole debt for a number of reasons such as:
Running away without trace
Bankruptcy
Insanity
Death etc.

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QUESTION:
On 1st May 2004, we are told that our debtor, Matumbo Walikolwa who owes us K300 000 has
disappeared without trace. The balance is to be written off as a bad debt.
c) PROVISION FOR DOUBTFUL DEBTS
A provision for doubtful debts is an estimated expense of debtors that are likely to become
bad. A provision for doubtful debts is set aside when there is some doubt as to whether all the
debts of the business will be recovered in full.

QUESTION:
During the first year of trading, Kalilo wrote off bad debts amounting to K330 000. In view
of this, Kalilo decided to create a 5% provision for doubtful debts on the total debtors of
K30 000 000 as at 31st December 2003.

Profit and loss account extract

K’000 K’000
Less: Expenses:
Bad debts 330
Provision for doubtful debts 1 500

Balance sheet extract as at 31st December 2003

K’000 K’000 K’000
Current assets:
Debtors 30 000
Less: provision for doubtful debts (1 500)
28 500

1. PROVISION FOR DISCOUNTS ALLOWED

A provision for discounts allowed is an estimated expense of the discounts to be allowed on
debtors who pay promptly. The provision for doubtful debts should first be deducted from
debtors before the provision for discounts allowed is estimated.
A provision for discounts allowed is accounted for in the same manner as that provision for
doubtful debts. Thus, an increase in the provisions is an expense while a decrease is a gain
to the business.

QUESTION:
During the year to 31st December 2004, Mubita wrote off bad debts amounting to K400 000
and allowed discounts totalling K100 000.
At the end of the year, debtors outstanding amounted to K5 000 000. A 10% provision for
doubtful debts was set aside, with a further 10% provision for discounts allowed on the
remaining debtors:

Profit and loss account extract

K’000 K’000
Less: Expenses:
Bad debts 400
Discount allowed 100
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Provision for doubtful debts 500
Provision for discounts allowed [(10% x 500) 500-50] 450

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Debtors 5 000
Less: Provision for doubtful debts 500
Provision for discounts allowed 450
4 050

REVIEW QUESTION ON FINAL ADJUSTMENTS

The following trial balance appeared in the books of M Kapya as at 31.12.2018

Dr Cr
K’ K’
Stock (01.01.2018 4800.00
Capital (01.01.2018) 29,200.00
Drawings 3450.00
Sales 64,200.00
Purchases 38,400.00
Carriage inwards 1,240.00
Carriage outwards 2330.00
Returns inwards 1200.00
Returns outwards 1,760.00
Discount allowed 1,550.00
Discount received 3,850.00
Advertising 2200.00
Insurance 1000.00
Salaries 3,000.00
Motor van 9500.00
Furniture 16,800.00
Debtors – creditors 6,500.00 8,490.00
Cash in hand 5,400.00
Cash at bank 9170.00

Total 107,500.00 107,500.00

Adjustments
a) Stock at 31/12/2018 ……………..k4,780.00
b) Salaries accrued k1560.00 and insurance prepaid k300
c) Provide 10% for bad debts
d) Depreciate motor van by 10% and furniture by 5% on cost.
Required:
a) Prepare M kapya’s trading profit and loss account for the year ended 31/12/18. (15marks)
b) Prepare M kapya’s balance sheet as at 31.12.2018. (15marks)

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