Course Pack (FOA)

COURSE TITLE:
FUNDAMENTALS OF ACCOUNTING
COURSE CODE:
AF1001
PREPARED BY:
OMER YUSUF
FCCA
MS ACCOUNTING & FINANCE (GOLD
MEDALIST)]
EMAIL:
omeryusuf078@gmail.com
CONTACT:
0300-4520939
1
ACCOUNTING BASICS
Business
It is any activity undertaken with a view to make profit.
Types of Business
(A) By Ownership
1) Sole Tradership
One man controls and operates the business.
2) Partnership
Business is controlled and operated by 2 to 20 persons (2 to 10 in banking business)
3) Company
Controlled and operated by many persons. Can be a public company or private company
(B) By Nature
1) Manufacturing
These organizations manufacture goods and then sell them at a profit e.g. Honda, Toyota, Bata etc.
2) Trading
These organizations buy already manufactured goods and resell them at a profit e.g. super stores, car dealers,
cloth stores etc.
3) Services
These organizations provide services at a profit e.g. colleges, hospitals, restaurants etc.
Accounting
Accounting is the process of recording transactions pertaining to a business.
Transaction
Whenever goods or property changes hands it is called transaction e.g. sale and purchase of goods/property,
payment of expenses etc. It can be either of the following.
Cash Transaction
Here buyer pay cash to the seller at the time of exchange of goods/services.
Credit Transaction
Here buyer pays cash to the seller at a later date, not at the time of exchange of goods/services.
Branches of Accounting
1) Financial Accounting
Financial accounting is a specific branch of accounting involving a process of recording, classifying, summarizing,
and reporting the transactions resulting from business operations over a period of time.
2) Management Accounting
Management accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating
financial information to managers for the pursuit of an organization's goals.
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Elements of financial statements
(1) Assets
Resources owned by a business which are expected to benefit in the future operations of a business.
Types of Assets
Non- Current Assets
Assets which have a long life and are expected to benefit for more than one accounting period are called non-
current or fixed assets. For example Plant and Machinery, Land and Building, Moto Vehicles, Furniture and
fixtures, Office Equipment’s, Properties, Premises, Long Term Investments etc.
Current Assets
Assets which have a short life and which can converted into cash quickly to meet short term obligations are called
current assets. Their benefit is for one accounting period only. For example Cash, Bank Balance, Stocks
(Inventory), Debtors (Receivables), Bills Receivables, Short Term Investments etc.
Intangible Assets
Assets which have no physical existence and which cannot be seen, touched and felt are intangible assets. For
example Goodwill, Trade Mark, Copy Rights, Software, Brands, Licenses, Patents (Exclusive rights) etc.
(2) Liabilities
Liabilities are the obligations of the business. The business is legally bound to pay this amount to the outsiders.
Types of Liabilities
Non-Current Liabilities
These are payable after one year (i.e. after one accounting period). For example long term loans, Debentures,
Mortgages, Redeemable Preference Shares etc.
Current Liabilities
These are payable within one year e.g. Bank Overdraft, Creditors (Payables), Bills Payable, etc.
(3) Capital/Owner’s Equity
These are the funds supplied by the owner. It is the internal liability of a business.
(4) Expenses
It is the cost of goods and services used up in process of obtaining revenue.
Types of Expenses
Direct Expenses
Expenses related with the purchase or manufacturing of goods are all direct expenses. For example Purchase
Price, Wages, Carriage & Transportation in, Freight in, Taxes on Purchases etc.
Indirect Expenses
These expenses are related mainly with administration selling and distribution activities. For example Rent,
Salaries, Telephone charges, printing and Stationery, Advertisement, Insurance, Discounts Allowed, Bad Debts,
Audit Fees, Director Remuneration, Carriage Outwards, Depreciation, etc.
(5) Income
It is the value generated through customers on providing them goods and services (or) the value generated by
business through its business activities
Types of Income
Direct Income
It is the income earned through business related activities. For example sale proceeds from goods and services.
Indirect income
It is the income earned through sources other than normal business activities. For example Commission Received,
Interest Received, Rent Received, Discounts Received, Investment income etc.
Accounting Equation
Resources of the Business = Sources of funds (or)
Assets = Capital + Liabilities
Accounting Cycle
It is the movement (process) of an accounting transaction.
Journal à Ledger à Trail Balance à Financial Statements
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Journal (Recording Book)
Journal is a book where the first entry of a transaction is made. It is also called Books of Original/Principal Entry.
Ledger (Classification Book)

The book in which T-accounts are maintained is called ledger. It is also known as books of double entry.
Trail Balance (Summarizing document)

It is a list of account titles and their balances in the books on a specific date, shown in debit and credit columns.
Financial Statements (Interpretation document)

These are as follows.
(1) Income Statement/Statement of comprehensive income
Income Statement is a statement which shows the financial performance of a business over a particular
accounting period. It contains two accounts:
a) Trading Account
b) Profit & Loss Account
Trading Account shows the gross profit/loss for the period

Profit & Loss Account shows the net profit/loss for the period
(2) Balance Sheet /Statement of financial position

Balance Sheet is a statement which shows the financial position of a business, on a particular day.
Assets = Liabilities + Owner’s Equity/Capital
(3) Statement of Cash Flows
Cash flow statement is a single document to analyze the cash and cash equivalents movements of a business.
Duality concept
Every accounting transaction has got two effects.
i. Debit effect
ii. Credit effect
Classes Debit Credit
Expenses
Incomes
Assets
Liabilities
Capital
Debit
The Left Hand Side of an account in double entry.
Credit
The Right Hand Side of an account in double entry.
Double Entry Book Keeping

A system where each transaction is entered twice. Once on the debit side and once on the credit side of the
account.
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Accounting concepts & Accounting conventions
(1) Accounting Concepts (Broad accounting assumptions & conditions)

These are the broad assumptions and conditions on which financial statements are prepared. For example
concept of prudence says that inventory must be recorded at cost or NRV whichever is less. It determines the
dimensions of profits reported to shareholders and the value of assets in the balance sheet.
(2) Accounting Bases (Methods available to apply accounting concept)

These are the methods developed for applying fundamental accounting concepts e.g. as inventory may be valued
by using FIFO, LIFO, AVCO (these are the 3 bases available for valuing closing inventory).
(3) Accounting Policies (Selected accounting base)

These are specific bases, rules, guidelines adopted by the management for the purpose of preparing financial
statements e.g. company may choose FIFO base for valuing closing inventory. So this will become the accounting
policy.
Accounting Accounting
Accounting bases
concepts policies
ACCOUNTING CONCEPTS
(1) Business Entity Concept
The concept assumes that the business entity is independent of its owners. The statute recognizes the entity as
an artificial person. The entity must prepare its own set of financial statements and record its business
transactions accordingly. For example, when the owner invests money in the business $50000, it is recorded as
liability of the business to the owner. Goods taken away by the owner for his personal use $1000 is not included
in business expense. It is recorded as drawings. Insurance premium of personal house $5000 of the owner is not
included in business expenses.
(2) Money Measurement Concept
This concept assumes that all business transactions must be recorded in monetary terms. For example, sale of
goods worth $20000, rent paid $1000 etc. are expressed in terms of money, and so they are recorded in the
books of accounts. But the transactions which cannot be expressed in monetary terms are not recorded in the
books of accounts. For example, sincerity, loyalty are not recorded in books of accounts because these cannot be
measured in terms of money although they do affect the profits and losses of the business.
(3) Going Concern Concept
This concept assumes that business will continue its existence in foreseeable future. Simply stated, it means that
every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important
assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet. For
example, a company purchases a plant and machinery of $10000 and its life span is 10 years. According to this
concept every year some amount will be shown as expenses (depreciation) and the balance amount as an asset
(net book value of asset). It is inappropriate to charge all $10000 as expense once, as business will continue in
foreseeable future and benefit of the asset will come in future years also. Similarly possible losses from closure of
business are not recorded in accounts. If business is not a going concern then financial statements are prepared
on break up basis.
(4) Accounting Cost Concept
The cost concept assumes that any asset that the entity records shall be recorded at historical cost value, i.e., the
asset’s acquisition cost. It is not recorded at its current value. For e.g. plant & machinery was purchased by
company. The purchase price paid was $5000, transport cost $1000 and installation cost is $2000. The total cost
will be shown in SOFP will be $8000.Further, it may be clarified that cost means original or acquisition cost only
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for new assets and for the used ones, cost means original cost less depreciation. The effect of cost concept is that
if the business entity does not pay anything for acquiring an asset this item would not appear in the books of
accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price.
(5) Duality Concept
This concept assumes that every transaction has a dual effect. One is called the debit effect and the other is called
credit effect. It means, both the effects of the transaction must be recorded in the books of accounts. For
example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. Similarly
property purchased for cash also has two aspects (i) Receiving of property (ii) Paying of cash. Getting loan from
bank also has two aspects (i) Receiving of cash (ii) Liability to payback loan. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental accounting equation.
Assets = Liabilities + Capital

(6) Periodicity Concept
This concept states that all transactions are recorded in the books of accounts for a specified period. It is also
known as accounting period concept. For e.g. goods purchased and sold during the period, rent, salaries etc. paid
for the period are accounted for and against that period only. Thus, this concept requires that a balance sheet
and profit and loss account should be prepared at regular intervals. This is necessary for different purposes like,
calculation of profit, ascertaining financial position, tax computation etc. The period for drawing financial
statements can vary from monthly to quarterly to annually.
(7) Realization Concept
This concept states that revenue is said to have been realized when cash has been received or right to receive
cash on the sale of goods or services or both has been created. For e.g. XYZ received an order to supply gold
ornaments worth $5000. They supplied ornaments worth $2000 up to the year end. Revenue of $2000 will be
recorded by XYZ. Mere getting an order is not considered as revenue until the goods have been delivered. Bobby
sold goods for $1000 for cash during the year. $1000 will be recorded as revenue is realized because cash is
received plus goods are delivered during the year. Albert sold goods on credit for $50000 during the year. The
goods were delivered during the year but the payment will be received next year. In this case Albert will
recognize revenue of $50000. Revenue is realized when the goods are delivered to the customers.
(8) Accrual Concept
Accrual means something that becomes due (specially an amount of money that is yet to be paid or received) at
the end of the accounting period. Accrual concept requires that revenue is recognized when realized and
expenses are recognized when they become due and payable without regard to the time of cash receipt or cash
payment. For e.g. For example, a firm sells goods for $40000 on 25th December 2005 and received the amount
on 10th January 2006. This amount is due & receivable on 25th December 2005. Although nothing is received
from customer but still $40000 must be included in the revenue for the year ending 31 st December 2005 and the
customer will be shown as a receivable of business. For example, if the firm received goods costing $20000 on
29th December 2005 but the payment is made on 2nd January 2006. The accrual concept requires that expense
of $20000 must be recorded for the year ending 31st December 2005. Although no payment was made but
services has been received so the supplier of goods to whom the payment should have been made is shown as
payable of business.
(9) Matching Concept
The matching concept is linked to the Periodicity concept and Accrual concept. The matching concept implies that
all revenues earned during an accounting year, whether received/not received during that year and all cost
incurred, whether paid/not paid during the year should be taken into account (matched) while ascertaining profit
or loss for that year. If the revenue is more than the expenses, it is called profit. If the expenses are more than
revenue it is called loss. For e.g. goods sold for cash & credit totaled $10000 during the year. Expenses include
purchases, salaries and rent paid of $2000, $1000 and $500 respectively. Whereas depreciation for the year was
$500. So now by matching revenue and expenses for the year we can calculate the net profit which will be (10000
– 1000 – 2000 – 500 – 500) $6000 for the year.
Importance of Accounting Concepts
 The importance of the accounting concept is visible in the fact that its application is involved in every step of
recording a financial transaction of the entity.
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 Following the generally accepted accounting concepts helps save the accountants’ time, effort, and energy, as the
framework is already set.
 It improves the quality of financial statements and reports concerning the understandability, reliability, relevance,
and comparability of such financial statements and reports.
Accounting Conventions
Accounting conventions are the customs and practices that are widely accepted by the accounting bodies and are
adopted by the firm to work as a guide in the preparation of final accounts.
(1) Conservatism
This conservatism states that the entity needs to prepare and maintain its book of accounts on a prudent basis.
Conservatism says that the entity has to provide for any expected losses or expenses; however, it does not
recognize future revenue expected. The main objective of this convention is profit should not be overstated. If
profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair policy and it
will lead to the reduction in the capital of the enterprise. Overstated profits can also misguide potential investors
regarding their future investments and they may not be able to take correct future economic decisions.
Recording of inventory at the lower of cost or NRV is the best example For example, valuing inventory at cost or
net realizable value (NRV) whichever is less, creating provision for doubtful debts, discount on receivables, writing
off intangible assets like goodwill, patent, etc. The convention of conservatism is a very useful tool in situation of
uncertainty and doubts
(2) Materiality
Materiality explains that the financial statements should show all the items having a significant economic effect
on the business. It allows to ignore items which are insignificant. The question that arises here is what a material
fact is? The materiality of a fact depends on its nature and the amount involved. Material fact means the
information of which will influence the decision of its user. For e.g. small stationary items like pencils, sharpeners,
paper clips etc. should be written off to income statement, although they can last for more than one accounting
period. Small payments like postage, stationery cleaning charges etc. should not be disclosed separately. They
can be shown together as sundry expenses.
(3) Consistency
Consistency explains that the adopted accounting policies should be consistently applied to achieve comparability
between the financial statements of various periods or for that matter of multiple entities. However, changes can
be made only in special circumstances. For e.g. if company chooses to record closing inventory using first in first
out (FIFO) method. It should not be changed to weighted average method. If company chooses to record
depreciation of non-current asset on straight line basis it should not adopt reducing balance method next year.
Remember consistency does not mean that transactions of different categories must be consistent. It means that
transactions from the same category must be consistent. So if a company records at cost and inventories at NRV
(because it is less than cost) it will not be considered as inconsistent treatment.
(4) Full Disclosure
Financial statements should be prepared to reflect the true & fair view of the financial position and financial
performance of the entity. All material and relevant information must be disclosed in the financial statements.
Full disclosures can be made either on the face of financial statements or in the notes to the accounts. Events
occurring after the balance sheet date but before financial statements issued to stakeholders must be fully
disclosed. For example showing contingent liability, market value of investment and law suit against the company
in notes to the accounts are examples of full disclosure.
Differences between accounting concept and accounting convention
(1) Meaning
Accounting concept is defined as the accounting assumptions which the accountant of a firm follows while
recording business transactions and preparing final accounts. Accounting conventions imply procedures and
principles that are generally accepted by the accounting bodies and adopted by the firm to guide at the time of
preparing the financial statement.
(2) What it is?
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Accounting concept is a theoretical notion that is applied while preparing financial statements. Accounting
conventions are the methods and procedure which are followed to give a true and fair view of the financial
statement.
(3) Setting Bodies
Accounting concept is set by the accounting bodies whereas accounting conventions emerge out of common
accounting practices which are accepted by general agreement.
(4) Concerned With
The accounting concept is related to the recording of transactions and maintenance of accounts. Accounting
conventions mainly concerned with the preparation and presentation of financial statements.
(5) Biasness
There is no possibility of biases or personal judgment in the adoption of accounting concept, whereas the
possibility of biases is high in case of accounting conventions.
Key Characteristics of Accounting Information
(1) Understandability
This implies the expression, with clarity, of accounting information in such a way that it will be understandable to
users - who are generally assumed to have a reasonable knowledge of business and economic activities
(2) Relevance
This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view
- usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I
work for this business?)
(3) Consistency
This implies consistent treatment of similar items and application of accounting policies
(4) Comparability
This implies the ability for users to be able to compare similar companies in the same industry group and to make
comparisons of performance over time. Much of the work that goes into setting accounting standards is based
around the need for comparability.
(5) Reliability
This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant
missed out) and capable of being verified (e.g. by a potential investor).
(6) Objectivity
This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not
biased towards a particular user group or vested interest
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PRACTISE QUESTIONS
QUESTION 1
Prepare Journal, Ledger and Trail balance from the following transactions of James Limited:
1. Business started with cash £10,000.
2. Business started with bank £ 5,000.
3. Purchased goods for cash £500.
4. Goods purchased from Mr. Babar £400.
5. Goods returned to Mr. Babar £100.
6. Cash paid to Mr. Babar £200.
7. Goods sold for cash £1,000.
8. Goods sold to Mr. Ali £ 800.
9. Goods returned by Mr. Ali £300.
10. Cash received from Mr. Ali £400.
11. Paid salaries by cash £500.
12. Paid rent by cheque £300.
13. Commission received in cash £200.
14. Cash withdrawn from business for personal use £100.
15. Goods withdrawn from business for personal use £200.
16. Purchased motor van by cheque £1,000.
17. Purchased furniture by cash £600.
18. Loan taken from bank £ 500.
19. Cash given away as Charity £ 100.
20. Goods given away as Charity £ 100.
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Answer
JOURNAL ENTRIES
Transactions Account Debit (£) Credit (£)
1 Cash (A+) 10,000
Capital (C+) 10,000
2 Bank (A+) 5,000
Capital (C+) 5,000
3 Purchases (E+) 500
Cash (A-) 500
Babar (L+) 400
5 Babar (L-) 100
Purchases return (E-) 100
6 Babar (L-) 200
Cash (A-) 200
7 Cash (A+) 1000
Sales (I+) 1000
8 Ali (A+) 800
Sales (I+) 800
9 Sales return (I-) 300
Ali (A-) 300
10 Cash (A+) 400
Ali (A-) 400
11 Salaries (E+) 500
Cash (A-) 500
12 Rent (E+) 300
Bank (A-) 300
13 Cash (A+) 200
Commission (I+) 200
10
14 Drawings (C-) 100
Cash (A-) 100
15 Drawings (C-) 200
Purchases (E-) 200
16 Motor van (A+) 1000
Bank (A-) 1000
17 Furniture (A+) 600
Cash (A-) 600
18 Bank (A+) 500
Loan (L+) 500
19 Charity (E+) 100
Cash (A-) 100
20 Charity (E+) 100
Purchases (E-) 100
T- ACCOUNTS
Cash Account
Debit (£) Credit (£)
Capital 10,000 Purchases 500
Sales 1,000 Babar 200
Ali 400 Salaries 500
Commission 200 Drawings 100
Furniture 600
Charity 100
Closing balance 9,600

(balancing figure)
Total 11,600 Total 11,600
11
Capital Account
Closing balance 15,000 Cash 10,000

(balancing figure)
Bank 5,000
Bank Account
Capital 5,000 Rent 300
Loan 500 Motor Van 1,000
Closing balance 4,200

(balancing figure)
Purchases Account
Cash 500 Drawings 200
Babar 400 Charity 100
Closing balance 600

(balancing figure)
Total 900 Total 900
Babar Account
Purchases Return 100 Purchases 400
Cash 200
Closing balance 100

(balancing figure)
Total 400 Total 400
12
Purchases Return Account
Closing balance 100 Babar 100

(balancing figure)
Total 100 Total 100
Sales Account
Closing balance 1,800 Cash 1,000

(balancing figure)
Ali 800
Ali Account
Sales 800 Sales return 300
Cash 400
Closing balance 100

(balancing figure)
Total 800 Total 800
Sales Return Account

Ali 300 Closing balance 300

(balancing figure)
Total 300 Total 300
Salaries Account
Cash 500 Closing balance 500

(balancing figure)
Total 500 Total 500
Rent Account
Bank 300 Closing balance 300

(balancing figure)
13
Total 300 Total 300
Commission Account
Closing balance 200 Cash 200

(balancing figure)
Total 200 Total 200
Drawings Account

(balancing figure)
Purchases 200
Total 300 Total 300
Motor Van Account

Bank 1,000 Closing balance 1,000

(balancing figure)
Furniture Account

(balancing figure)
Total 600 Total 600
Loan Account
Closing balance 500 Bank 500

(balancing figure)
Total 500 Total 500
Charity Account
Cash 100
Purchases 100
Closing balance 200

(balancing figure)
Total 200 Total 200
14
TRAIL BALANCE (JAMES LIMITED)
Account Debit (£) Credit (£)
Cash 9,600
Capital 15,000
Bank 4,200
Purchases 600
Babar 100
Purchases return 100
Sales 1,800
Ali 100
Sales return 300
Salaries 500
Rent 300
Commission 200
Drawings 300
Motor Van 1,000
Furniture 600
Loan 500
Charity 200
Total 17,700 17,700
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QUESTION 2
Prepare Journal, Ledger and Trail balance from the following transactions of Kamal Limited:
2. Deposited £5,000 into bank.
3. Goods purchased from Mr. Babar £400.
4. Goods returned to Mr. Babar £100.
5. Cash paid to Mr. Babar £250 in full and final settlement of his account.
6. Goods sold to Mr. Ali £800.
7. Goods returned by Mr. Ali £300.
8. Cash received from Mr. Ali £400 in full and final settlement of his account.
10. Paid rent by cheque £300.
11. Purchased motor van by cheque £1,000.
12. Goods distributed as free samples £100.
Answer
JOURNAL ENTRIES
Transactions Account Debit (£) Credit (£)
1 Cash (A+) 10,000
Capital (C+) 10,000
2 Bank (A+) 5,000
Cash (A+) 5,000
Babar (L+) 400
4 Babar (L-) 100
Purchases return (E-) 100
5 Babar (L-) 300
Cash (A-) 250
Discount received (I+) 50
6 Ali (A+) 800
Sales (I+) 800
7 Sales return (I-) 300
Ali (A-) 300
16
8 Cash (A+) 400
Discount allowed (E+) 100
Ali (A-) 500
9 Salaries (E+) 500
Cash (A-) 500
10 Rent E+) 300
Bank (A-) 300
11 Motor Van (A+) 1,000
Bank account (A-) 1,000
12 Advertisement (E+) 100
Purchases (E+) 100
T- ACCOUNTS
Cash Account
Capital 10000 Bank 5000
Ali 400 Babar 250
Salaries 500
Closing balance 4650

(balancing figure)
Total 10400 Total 10400
Capital Account

(balancing figure)
17
Bank Account
Cash 5000 Rent 300
Motor Van 1000

(balancing figure)
Purchases Account
Babar 400 Advertisement 100
Closing balance 300

(balancing figure)
Total 400 Total 400
Babar Account
Purchases Return 100 Purchases 400
Cash 250
Discount received 50
Total 400 Total 400
Purchases Return Account


(balancing figure)
Total 100 Total 100
Discount Received Account


(balancing figure)
Total 50 Total 50
18
Sales Account
Closing balance 800 Ali 800

(balancing figure)
Total 800 Total 800
Ali Account
Sales 800 Sales return 300
Cash 400
Discount allowed 100
Total 800 Total 800
Sales Return Account


(balancing figure)
Total 300 Total 300
Discount Allowed Account


(balancing figure)
Total 100 Total 100
Salaries Account

(balancing figure)
Total 500 Total 500
19
Rent Account
Bank 300 Closing balance 300

(balancing figure)
Total 300 Total 300
Motor Van Account

Bank 1,000 Closing balance 1,000

(balancing figure)
Advertisement Account
Purchases 100 Closing balance 100

(balancing figure)
Total 100 Total 100
TRAIL BALANCE (KAMAL LIMITED)

Cash 4650
Capital 10000
Bank 3700
Purchases 300
Purchases return 100
Sales 800
Sales return 300
Salaries 500
Rent 300
Motor Van 1,000
Advertisement 100
Total 10950 10950
20
QUESTION 3
Answer
JOURNAL ENTRIES
Date Account Debit (Rs) Credit (Rs)
1-1-1989 Cash & other assets 77,000
Capital 77,000
3-1-1989 Bank 38,000
Cash 38,000
5-1-1989 Purchases 9,000
Imran 9,000
6-1-1989 Babar 6,000
Sales 6,000
8-1-1989 Office supplies 200
Cash 200
10-1-1989 Cash 2,000
Sales 2,000
11-1-1989 Travelling expenses 600
Cash 600
12-1-1989 Drawings 1,000
Bank 1,000
16-1-1989 Cash 3,000
Bank 3,000
21
19-1-1989 Imran 9,000
Bank 8,800
22-1-1989 Carriage 400
Cash 400
25-1-1989 Bank 6,000
Babar 6,000
31-1-1989 Rent 300
Bank 300
31-1-1989 Cash 200
Commission 200
31-1-1989 Bank charges 25
Bank 25
T- ACCOUNTS
Cash & other assets Account
Debit (Rs) Credit (Rs)
Capital 77000 Bank 38000
Sales 2000 Office supplies 200
Bank 3000 Travelling expenses 600
Commission 200 Carriage 400

(balancing figure)
Capital Account
Closing balance 77000 Cash & other 77000

(balancing figure) assets
22
Bank Account
Cash 38000 Cash 3000
Babar 6000 Rent 300
Bank charges 25
Drawings 1000
Imran 8800

(balancing figure)
Purchases Account
Imran 9000 Closing balance 9000

(balancing figure)
Imran Account
Cash 8800 Purchases 9000
Sales Account

(balancing figure)
Cash 2000
Babar Account
Sales 6000 Bank 6000
23
Office Supplies Account

(balancing figure)
Total 200 Total 200
Travelling expenses Account


(balancing figure)
Total 600 Total 600
Drawings Account

(balancing figure)
Discount Received Account

Closing balance 200 Imran 200

(balancing figure)
Total 200 Total 200
Carriage Account

(balancing figure)
Total 400 Total 400
Rent Account
24

(balancing figure)
Total 300 Total 300
Commission Account

(balancing figure)
Total 200 Total 200
Bank Charges Account


(balancing figure)
Total 25 Total 25
TRAIL BALANCE (NADEEM)

Account Debit (Rs) Credit (Rs)
Cash & other assets 43000
Capital 77000
Bank 30875
Purchases 9000
Sales 8000
Office supplies 200
Travelling expenses 600
Drawings 1000
Carriage 400
Rent 300
Commission 200
Bank charges 25
Total 85400 85400
QUESTION 4 (ASSIGNMENT)
25
Prepare Journal, Ledger and Trail balance from the following transactions of JOSEPH Limited:
2. Deposited into bank £3,000.
3. Goods purchased for cash £500.
4. Goods purchased from Lamb £200 and Botham £300
5. Goods returned to Botham £100.
6. Cash paid to Lamb £200.
7. Goods sold for cash £1000.
8. Goods sold to Gooch £800 and Gatting £400.
9. Goods returned by Gooch £300.
10. Cash received from Gatting £400.
12. Received commission £200.
13. Cash withdrawn for personal use £100.
14. Purchased motor van by cheque £1000.
PREPARATION OF BASIC FINANCIAL STATEMENTS
26
EXAMPLE 1
Trial Balance for Joe’s Diner, year ending 31/07/01 is given below. Prepare Trading and Profit & Loss Account and
Balance Sheet from this data
Dr Cr
£ £
Purchases 42,370
Sales 95,800
Stock (01/08/00) 3,050
Returns 3,000 4,500
Discounts 1,250 1,300
Drawings 5,200
Equipment 6,000
Vans 8,000
Wages and salaries 18,750
Motoring expenses 2,575
Bank overdraft 1400
Debtors and Creditors 2,010 3,075
Capital 18,590
Heat and light 1,340
Sundry expenses 1,000
Land and buildings 50,000
Loan 20,000
Bank charges 120
144,665 144,665
Note:
1) Stock (31/07/01) £1,900
ANSWER
Joe’s Diner
Income Statement for the year ended 31st July 2001
27
Details £ £
Sales Less: Return inwards(95,800 – 3,000) 92,800
Less Cost of Sales :
Opening Inventory 3,050
+ Purchases Less: Return outwards (42,370 – 4,500) 37,870

(39,020)
-Closing Stock (1,900)
Gross Profit 53,780
Add: Other Incomes
Discount received 1,300 1,300
Less: Expenses :
Wages & Salaries 18,750
Bank Charges 120
Heating & lighting 1,340

(25,035)
Net Profit 30,045
Joe’s Diner
Balance sheet, as on 31st July 2001
Assets £ £
Non-Current Assets :
Land & Building (Premises) 50,000
Equipment 6,000
64,000
Motor Vehicles 8,000
Current Assets :
Closing Inventory 1,900
2,010 3,910
Trade Receivables (Debtors)
Total Assets 67,910
Liabilities and Capital
Non-Current Liabilities:
Loans 20,000 20,000
Current Liabilities :
Trade Payables (CREDITORS) 3,075
1,400 4,475
Bank Overdraft (O/D)
Capital:
18,590
28
Opening balance 30,045
+Net Profit (5,200) 43,435
- Drawings
Total Liabilities and Capital 67,910
EXAMPLE 2
The following trial balance was extracted from the books of B Jackson on 30 April 2013. From it, and the note
restock, prepare his trading and profit and loss account for the year ended 30 April 2013, and a balance sheet as
at that date.
Dr Cr
£ £
Long term Loan 1,000
Sales 18,600
Purchases 11,556
Stock 1 May 2012 3,776
Carriage outwards 326
Carriage inwards 234
Returns inwards 440
Returns outwards 355
Salaries and wages 2,447
Motor expenses 664
Rent 576
Motor vehicles 2,400
Fixtures and fittings 600
Debtors 4,577
Creditors 3,045
Bank 3,876
Cash in hand 120
Drawings 2,050
Capital 11,844
34,844 34,844
Stock at 30 April 2013 was £4,998
ANSWER
B. Jackson
29
Income Statement for the year ended 30th April 2013
Details £ £
Sales Less: Return inwards (18,600 – 440) 18,160
+ Purchases Less: Return outwards (11,556 – 355) 11,201

(10,213)
+Direct expenses (Carriage Inward) 234
Gross Profit 7,947
Less: Expenses :
Salaries & Wages 2,447
Rent 576
Carriage out 326
Motor expenses 664

(5,215)
Net Profit 2,732
B. Jackson
Balance Sheet As on 30th April 2013
Assets £ £
600 3,000
Fixtures & Fittings
Current Assets :
Trade Receivables/Debtors 4,577
Bank 3,876
13,571
Cash 120
Total Assets 16,571
Long term loans 1,000 1,000
Trade Payables/ Creditors 3,045 3,045
Capital:
30
+Net Profit 2,732
- Drawings (2,050) 12,526
Example 3
From the following trial balance of R Graham draw up a trading and profit and loss account for the year ended 30
September 2012, and a balance sheet as at that date.
Dr Cr
£ £
Short term loan 2,000
Stock 1 October 2011 2,368
Returns inwards 205
Purchases 11,874
Sales 18,600
Rent 304
Insurance 78
Motor expenses 664
Office expenses 216
Lighting and heating 166

expenses
General expenses 314
Premises 5,000
Debtors 3,896
Creditors 1,731
Bank 482
Drawings 1,200
Capital 10,636
33,289 33,289
Stock at 30 September 2012 was £2,946.
31
ANSWER
R Graham
Income statement for the year ended 30th September 2012
Details £ £
Sales Less: Return inwards(18,600 – 205) 18,395
+ Purchases Less: Return outwards (11,874 - 322) 11,552

(11,284)
Carriage inward 310
Gross Profit 7,111
Less: Expenses :
Salaries & Wages 3,862
Rent 304
Insurance 78
Heating & lighting 166
Motor expenses 664
Office expenses 216
Carriage out 200 (5,804)
General expenses 314
Net Profit 1,307
R Graham
Balance Sheet As on 30th September 2012
Assets £ £
Premises 5,000

7,150
Fixtures & Fittings 350
Current Assets :

7,324
Bank 482
Total Assets 14,474
32
Trade Payables/ Creditors 1,731
2,000 3,731
Short term loan
Capital:
+Net Profit 1,307

10,743
- Drawings (1,200)
Example 4
Trail Balance for Jean’s Jeans, year ending 31/12/01. Prepare Trading and Profit & Loss Account and Balance
Sheet from this data
Dr Cr
£ £
Purchases 35,200
Sales 75,800
Stock (01/01/01) 6,570
Returns in 800
Returns out 200
Discount received 1,200
Drawings 12,000
Land & Building 75,000
Office furniture 15,000
Office expenses 200
Advertising 2,420
Bank 4,250
Cash 100
Debtors 4,710
Creditors 4,520
Capital 52,930
Short term Loan 40,000
174,650 174,650
Stock at 31st December 2001 was £5,000.
33
ANSWER
Jean’s Jeans
Income Statement for the year ended 31st December 2001
Details £ £
Opening Stock 6,570

(36,570)
-Closing Stock (5000)
Gross Profit 38,430
Add: Other Incomes
Less: Expenses :
Wages & Salaries 18,000
Office expenses 200
Advertising 2,420
(21,020)
Net Profit 18,610
Jean’s Jeans
Balance sheet as on 31st December 2001
Assets £ £
Office Furniture 15,000

90,000
Current Assets :
Closing Stock 5,000
Trade Debtors 4,710
Bank 4,250
14,060
Cash 100
Total Assets 104,060
Trade Creditors 4,520
40,000 44,520
Short term loan
Capital:
34
+Net Profit 18,610

59,540
- Drawings (12,000)
Trial Balance of Wintergreen Services Station as at 31 December 20-1
Dr Cr
£ £
Premises 120,000
Long term loan 60,000
Capital 70,000
Debtors 1,900
Creditors 1,500
Drawings 5,000
Cash 150
Stock: 1 Jan 20-1 4,200
Fixtures and fittings 4,000
Vehicles 8,000
Bank overdraft 750
Sales 195,000
Purchases 154,000
Wages 20,500
327,250 327,250
Stock at 31 December 20-1 was valued at £5,200.
35
Trial Balance of John Adams, antique dealer, as at 31 December 20-1.
Dr Cr
£ £
Purchase 50,280
Sales 87,114
Rent 3,650
Wages 12,438
Heat & light 1,696
Sundry expenses 952
Capital 34,770
Premises 40,000
Ovens & equipment 6,560
Vehicles 7,580
Debtors and creditors 2,098 2,440
Stock at 1 Jan 20-1 2,000
Bank 2,620
Cash 50
Drawings 4,400
Long term loan 10,000
Returns 4,000 4,550
142,624 142,624
Stock at December 20-1 was valued at £2,745.
36
INCOMPLETE RECORDS
EXAMPLE 1 (CALCULATION OF SALES)
ANSWER
Debtors Account
DEBIT SIDE (£) CREDIT SIDE (£)
O/B 43,125 CASH 546,725

RECEIVED
CREDIT SALES 569,799 C/B 66,199
(OR)
EXAMPLE 2 (CALCULATION OF PURCHASES)
In Company G, the payables at 1.1.X7 and 31.12.X7 were £30,005 and £50,227, respectively, and cash paid to
suppliers was £241,382. What were the purchases in 20X7?
ANSWER
Creditors Account
DEBIT SIDE (£) CREDIT SIDE (£)
CASH PAID 241,382 O/B 30,005
C/B 50,227 CREDIT 261,604

PURCHASES
(OR)
PURCHASES = CLOSING BALANCE – OPENING BALANCE + CASH PAID
= 50,227 – 30,005 + 241,382
= £ 261,604
EXAMPLE 3 (CALCULATION OF GROSS PROFIT)
37
REQUIRED:
Calculate the Gross Profit. (Use the data from example 1 and 2 for sales and purchases)
ANSWER
EQUATION
[COST (100) + PROFIT (70) = SELLING PRICE (170)]
SO, CLOSING STOCK (AT COST) = 61,953/170 x100 = 36,443
ASSIGNMENTS
Answers to assignment questions
Debtors Account
DEBIT (£) CREDIT (£)
O/B 40999 CASH 640407
CREDIT SALES 652467 DISCOUNT ALLOWED 10550
BAD DEBTS 6000
C/B 36509
TOTAL 693466 TOTAL 693466
38
Creditors Account
CASH 200010 O/B 13913
DISCOUNT RECEIVED 5555 PURCHASES 221557
C/B 29905
Inventory value (at cost price)
Opening inventory (at cost) = 31500 x 100/140 = £22500
Closing inventory (at cost) = 36400 x 100/140 = £26000
Gross Profit
£ £
Sales 652467
Less: Cost of sales
Opening stock 22500
Purchases 221557
Closing stock (26000) (218057)
Gross profit 434410
EXAM TYPE QUESTION
39
ANSWER
Debtors Account
O/B 43000 CASH 550000
CREDIT SALES 653100 SALES RETURN 85000
BAD DEBTS 21100
C/B 40000
Inventory value (at cost price)
Opening inventory (at cost) = 38500 x 100/140 = £27500
Closing inventory (at cost) = 45500 x 100/140 = £32500
Gross Profit
£ £
Sales 653100
Less: Cost of sales
Opening stock 27500
Purchases 471500
Closing stock (32500) (466500)
Gross profit 186600
40
CONTROL ACCOUNTS
DEFINITION
It is an account which checks the arithmetical accuracy of the debtors and creditors ledger.
TYPES OF CONTROL ACCOUNTS
(1) DEBTORS CONTROL ACCOUNT
The debtors control account reflects the total amount owed by all the individual debtors. The balance of the
debtor’s control account must equal the total of the debtors’ list, which represents the amounts owed by the
individual debtors obtained from the individual balances in the various subsidiary ledger accounts for each
debtor. This subsidiary ledger is known as the debtors' ledger.
(2) CREDITOR CONTROL ACCOUNT
The creditors control account reflects the total amount owed to all the individual creditors. The balance of the
creditor’s control account must equal the total of the creditors list, which represents the amounts owed by the
individual creditors obtained from the individual balances in the various subsidiary ledger accounts for each
creditor. This subsidiary ledger is known as the creditors' ledger.
ADVANTAGES OF CONTROL ACCOUNTS
1) Quick checking of errors.
2) Speedy information about debtors and creditors.
3) Provides the figure of debtors and creditors for the balance sheet.
4) It acts as a control over debtors and creditors in individual ledgers.
5) Independent check on arithmetical accuracy on the balances in debtors and creditors ledger.
WHY CONTROL ACCOUNTS ARE MAINTAINED
1) To know the total value of debtors and creditors from one account.
2) An internal check on personal/individual account.
3) Time saving.
4) To assist in calculating the missing figures of the accounting records.
CONTRA
It means setting off the balance in one account against the balance in the other account. Due to this exercise one
a/c balance is eliminated and then the other account is settled easily.
EXAMPLE
‘A’ buys goods from ‘B’ for $130 and sold goods to ‘B’ for $250. Now in the books of A, B is debtor by $250
creditor by $130. In this case business (A) may set off the balance of debtor and creditor by passing the following
entry:
DEBIT: CREDITOR CONTROL ACCOUNT 130
CREDIT: DEBTOR CONTROL ACCOUNT 130
41
FORMATS
DEBTORS/RECEIVABLE CONTROL ACCOUNT
DEBIT SIDE (+) ($) CREDIT SIDE(-) ($)
O/B XX O/B XX
CREDIT SALES XX BAD DEBTS XX
BANK (DISHONOURED CHEQUES) XX SALES RETURN XX
CASH (REFUNDS TO CUSTOMERS) XX DISCOUNT ALLOWED XX
INTEREST ON DEBT XX CASH RECEIVED FROM CREDIT CUSTOMERS XX
CONTRA/SET OFF XX
C/B XX C/B XX
TOTAL XX TOTAL XX
CREDITORS/PAYABLES CONTROL ACCOUNT
DEBIT SIDE (-) ($) CREDIT SIDE(+) ($)
O/B XX O/B XX
PURCHASES RETURN XX CREDIT PURCHASES XX
DISCOUNT RECEIVED XX CASH (REFUNDS FROM SUPPLIERS) XX
CASH PAID TO CREDIT SUPPLIERS XX INTEREST CHARGED BY CREDITORS XX
CONTRA/SET OFF XX C/B XX
C/B XX
TOTAL XX TOTAL XX
EXAMPLE 1 (BASIC CONTROL ACCOUNTS)
Natalia prepares control accounts on monthly basis. As at 1st January 2014 debtors control account balance was
$10,000 (debit) and $1,000 (credit). On the other hand creditors control balance was 7,000 (credit) and 500
(debit). The following information was extracted for the month of January from the Co records:
PARTICULARS ($)
CREDIT SALES 25,000
CREDIT PURCHASES 12,000
CREDIT SALES RETURN 2,000
CREDIT PURCHASES RETURN 1,000
CHEQUES DISHONOURED 1,000
CASH RECEIVED FROM CREDIT CUSTOMERS 8,000
CASH PAID TO CREDIT SUPPLIERS 5,000
DISCOUNT ALLOWED 1,000
DISCOUNT RECEIVED 3,000

42
BAD DEBTS WRITTEN OFF 1,000
SET OFF 4,000
INTEREST CHARGED TO CUSTOMERS 2,000
INTEREST CHARGED BY CREDITORS 1,000
REFUNDS TO CUSTOMERS 1,000
REFUNDS FROM SUPPLIERS 500
Required:
Prepare debtors control account a/c and creditors control a/c for the month of January and find out the
balances.
Answer
O/B 10000 O/B 1000
CREDIT SALES 25000 BAD DEBTS 1000
CASH (REFUNDS TO CUSTOMERS) 1000 SALES RETURN 2000
INTEREST ON DEBT 2000 DISCOUNT ALLOWED 1000
DISHONOURED CHEQUES 1000 CASH RECEIVED FROM CREDIT CUSTOMERS 8000
CONTRA/SET OFF 4000
C/B 22000
O/B 500 O/B 7000
PURCHASES RETURN 1000 CREDIT PURCHASES 12000
DISCOUNT RECEIVED 3000 CASH (REFUNDS FROM SUPPLIERS) 500
CASH PAID TO CREDIT SUPPLIERS 5000 INTEREST CHARGED BY CREDITORS

1000
CONTRA/SET OFF 4000
C/B 7000
43
EXAMPLE 2 (ASSIGNMENT)
The financial year of ABC Ltd ends on 31-12-2014.The following information is available for the year:
PARTICULARS ($)
CASH SALES 344,890
CREDIT SALES 268,187
CASH PURCHASES 14,440
CREDIT PURCHASES 496,600
TOTAL RECEIPTS FROM CUSTOMERS 600,570
TOTAL PAYMENTS TO SUPPLIERS 503,970
DISCOUNTS TO CREDIT CUSTOMERS 5,520
DISCOUNTS FROM CREDIT SUPPLIERS 3,510
SET OFF 70
INCCREASE IN PROVISION FOR DOUBTFUL DEBTS 90
BAD DEBTS 780
CREDIT NOTES ISSUED TO CREDIT CUSTOMERS 4,140
CREDIT NOTE RECEIVED FROM CREDIT SUPPLIERS 1,480
Debtors and creditors balance at the start of the year was $26,555 and $43,450 respectively.
Required:
Prepare debtors and creditors control accounts for the year ended 31-12-2014.
ANSWER
O/B 26555 BAD DEBTS 780
DISCOUNT ALLOWED 5520
CASH RECEIVED FROM CREDIT CUSTOMERS 255680
CONTRA/SET OFF 70
C/B 28552
44
PURCHASES RETURN 1480 O/B 43450
DISCOUNT RECEIVED 3510 CREDIT PURCHASES 496600
CASH PAID TO CREDIT SUPPLIERS 489570
CONTRA/SET OFF 70
C/B 45420
CONTROL ACCOUNT RECONCILIATION
An exercise carried out periodically to ensure that the control a/c balances agree with the total of individual
account balances in their respective personal ledgers.
Example 3 (Debtors reconciliation)
REQUIRED:
Reconcile the control account balance with the list of balances
ANSWER
DEBTORS CONTROL ACCOUNT
O/B 1422 CASH RECEIVED (160-116) 44
INVOICE RECORDED TWICE 50
C/B 1328
LIST OF BALANCES
45
($)
O/B 1360
SALES UNDERCASTED (86 – 68) 18
INVOICE RECORDED TWICE (50)
C/B 1328
Example 4 (Creditors reconciliation)
REQUIRED:
Reconcile the control account balance with the list of balances
ANSWER
CREDITORS CONTROL ACCOUNT
CB 324 OB 290
PAYMENT OVERCATSED 9
( 65 – 56)
PURCHASES 25
TOTAL 324 TOTAL 324
LIST OF BALANCES
($)
O/B 279
PURCHASES 60
CASH PAID (40)
PURCHASES 25
C/B 324
EXAM TYPE QUESTION

46
QUESTION 1
ANSWER
O/B 95852 CASH FROM CUSTOMER 2878
WRONG REFUND 1210 CB 94184
LIST OF BALANCES
($)
O/B 92084
ADDITIONS TO KANE (3380 – 1380) 2000
SALES UNDERCASTED 100
( 360 – 260)
CB 94184
QUESTION 2
47
ANSWER
O/B 39909 BAD DEBTS 2110
DISCOUNT ALLOWED 1200
CASH RECEIVED FROM CREDIT CUSTOMERS 240005
CONTRA/SET OFF 1500
C/B 45205
CREDITORS CONTROL ACCOUNT
PURCHASES RETURN 4589 O/B 23405
DISCOUNT RECEIVED 1240 CREDIT PURCHASES 175111
CASH PAID TO CREDIT SUPPLIERS 167550
CONTRA/SET OFF 1500
C/B 23637
STOCK VALUATION
DEFINITION
48
Inventories are assets: (Raw Material + WIP + Finished goods)
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
MEASUREMENT
Inventories shall be measured at the lower of cost and net realizable
value.
COST
The cost of inventories = purchase cost + conversion cost
PURCHASE COST
It is equal to purchase price+ import duties+ freight charges+ other taxes+ transportation and handling costs+ all
other costs directly attributable to the inventory (cost of designing products for specific customers) less Trade
discounts and rebates.
CONVERSION COSTS
The costs of conversion = direct labour+ direct expenses + production overheads.
COSTS NOT INCLUDED IN INVENTORY

Some costs which are related to inventory are not shown as an inventory cost. Instead they are expensed in
income statement. These are:
(a) Abnormal losses.
(b) Storage costs.
(c) Administrative costs.
(d) Selling costs.
NET REALIASABLE VALUE (NRV)

NRV is an accounting estimate. Its value can be calculated as under:
NRV = Estimated selling price - costs to complete (i.e. modification costs) -

selling costs
SITUATIONS WHERE NRV IS LESS THAN COST OF INVENTORY
a) Physical damage of inventory.
b) Obsolescence (technological decline in value of product).
c) Knock out Impacts (organizational policy to sell product at a loss to gain more customers).
d) Errors in production /purchase.
e) Fall in the market value of product (fall in demand).
METHODS TO RECORD COST OF CLOSING INVENTORY
1) FIRST IN FIRST OUT (FIFO)

According to the first-in-first-out (FIFO) inventory valuation method, it’s assumed that inventory items are sold in
the order in which they’re manufactured or purchased. In other words, the oldest inventory items are sold first.
The FIFO method is widely used because companies typically sell products in the order in which they’re
purchased, so it best represents the actual flow of goods in a business .
2) LAST IN FIRST OUT (LIFO)
49
The last-in-first-out (LIFO) inventory valuation method assumes that the most recently purchased or
manufactured items are sold first – so the exact opposite of the FIFO method. When the prices of goods increase,
Cost of Goods Sold in the LIFO method is relatively higher and ending inventory balance is relatively lower.
International Financial Reporting Standards banned the use of LIFO.
3) PERIODIC WEIGHTED AVEGARE COST (WAC)

In a periodic inventory system, the company does an ending inventory count and applies product costs to
determine the ending inventory cost. COGS can then be determined by combining the ending inventory cost,
beginning inventory cost, and the purchases throughout the period. In this method firstly we figure out the rate
of closing stock by taking total cost of goods available for sale and dividing it by the number of units. It is helpful
to separate the purchases from the sales. Secondly physical count is then performed on the ending inventory to
determine the number of goods left. Finally, the rate (calculated in step1) is multiplied by the closing stock units
to get the value of closing stock.
4) PERPETUAL WEIGHTED AVERAGE COST (WAC)
A perpetual inventory system keeps continual tracking of inventories and COGS. The perpetual inventory system
provides more timely information for the management of inventory levels. However, this method of inventory
tracking can be costly for a company. In a perpetual inventory system, the weighted average cost method is
referred to as the “moving average cost method.” Assume that both Opening Inventory units and Opening
inventory cost are known. From them the Cost per Unit of Opening Inventory can be calculated. During the year,
multiple purchases are made. Each time, purchase costs are added to beginning inventory cost to get Cost of
Current Inventory. Similarly, the number of units bought is added to opening inventory to get total units. After
each purchase, Cost of Current Inventory is divided by the total units to get Current Cost per Unit on Goods.
5) ACTUAL COSTS
Actual costs are normally used where items of inventory are not ordinarily interchangeable and can be
individually traced i.e. for one off specific order contracts.
NOTE
FIFO, LIFO, periodic WAC & perpetual WAC are used normally for items that are ordinarily interchangeable
(regular course of items) and are not individually traced. These are estimated costs of inventory. FIFO is better to
be used for perishable goods whereas periodic WAC, continuous WAC and LIFO for durable goods.
Actual costs are used for stock valuation mostly when items are specific customer requirement orders. One off
customer order.
EXAMPLE 1 (Cost OR NRV)

Following figures relates to inventory held at the year end
PARTICULARS PRODUCT A PRODUCT B PRODUCT C
COST PER UNIT ($) 20 9 12
EXPECTED SALE PRICE 30 12 22

PER UNIT ($)
MODIFICATION 1 2 8
COSTS PER UNIT ($)
MARKETING COSTS 7 2 2
PER UNIT ($)
UNITS HELD 200 150 300

Required:
Record the inventory at reporting date in the balance sheet.
Answer
PARTICULARS PRODUCT A PRODUCT B PRODUCT C
50
COST PER UNIT ($) 20 9 12
NRV PER UNIT ($) 30 – 1 – 7 = 22 12 -2 -2 = 8 22 - 8 – 2 = 12
VALUATION PER UNIT 20 8 12

($)
TOTAL UNITS 200 150 300
TOTAL VALUE ($) 4,000 1,200 3,600
Total value of closing inventory = $8,800

Journal Entry
Debit: Closing inventory $8,800
Credit: Cost of sales $8,800
Example 2 (COST OR NRV)
ANSWER
EXAMPLE 3 (Inventory write down)
A product sells for $2,000. The costs incurred so far are $987 and the costs to complete the product are
estimated to be $800.Marketing costs will be $400.Inventory is already recorded at its cost in the balance sheet.
Required:
Do inventory write down required?
Answer
Cost= $987
NRV = 2,000 – 800 – 400 =$800. (SELLING PRICE – COST TO COMPLETE – MARKETING COST)
As NRV is less than cost. So the inventory write down is required from $987 to $800 = $187.
Journal Entry
Debit: Cost of sales $187
Credit: Closing inventory $187
EXAMPLE 4 (INCOME STATEMENT)
The following is the extract of trail balance of Data Limited for the year ended 31-12-2018
51
Debit ($) Credit ($)
Opening inventory 1,000
Purchases 10,000
Sales 15,000
Returns 500 1,200
The value of closing inventory at reporting date was $1,800 at cost. It included a damaged item whose cost at
reporting date is $ 400 and which normally sells for $600. But due to damage it was sold in JANUARY 2019 for
$300. Calculate the value of gross profit and closing inventory value as on 31-12-2018.
Answer
($) ($)
Sales 15,000
Less: Returns (500) 14,500
Cost of Sales:
Opening inventory 1,000
Purchases ( 10,000 – 1,200) 8,800
Closing inventory (W1) (1,700) (8,100)
Gross Profit 6,400
W1 (CLOSING INVENTORY)
($) ($)
Total Closing inventory (at cost) 1,800
Damaged part (at cost) 400
NRV of the damaged part 300
Write down (As NRV < cost) (100)
Adjusted closing inventory at reporting date 1,700
EXAMPLE 5 (CLOSING STOCK VALUATION METHODS)
d. Calculate the gross profit of the business also by all 4 methods
ANSWER
(a) FIFO
52
DATE PURCHASES ISSUES BALANCE
1-2-08 40 26 1040
2-2-08 70 28 1960 40 26 1040
70 28 1960
11-2-08 40 26 1040 20 28 560
50 28 1400
13-2-08 60 31 1860 20 28 560
60 31 1860
17-2-08 65 29 1885 20 28 560
60 31 1860
65 29 1885
25-2-08 20 28 560
60 31 1860
45 29 1305
20 29 580
(b) LIFO
1-2-08 40 26 1040
2-2-08 70 28 1960 40 26 1040
70 28 1960
11-2-08 70 28 1960 20 26 520
20 26 520
13-2-08 60 31 1860 20 26 520
60 31 1860
17-2-08 65 29 1885 20 26 520
60 31 1860
65 29 1885
25-2-08 65 29 1885 20 26 520
35 31 1085 25 31 775
(c) PERIODIC WAC

Closing stock rate
= (OPENING STOCK COST + PURCHASES COST)
(OPENING STOCK UNITS + PURCHASED UNITS)
= (1040 +5705) = $28.7 per unit
(40 +195)
CLOSING STOCK VALUE = Closing stock rate x Closing stock units
28.7 X 45 UNITS = $1,292 APPROXIMATELY
(c) PERPEETUAL WAC
53
1-2-08 40 26 1040
2-2-08 70 28 1960 110 27.28 3000
11-2-08 90 27.28 2455 20 27.2 545
13-2-08 60 31 1860 80 30.06 2405
17-2-08 65 29 1885 145 29.59 4290
25-2-08 100 29.59 2959 45 29.59 1331
(d) INCOME STATEMENT
DETAILS FIFO ($) LIFO ($) PERIODIC WAC ($) PERPETUAL WAC ($)
SALES 10900 10900 10900 10,900
(90 X 60) +
(100 X 55)
LESS: COST OF
SALES:
OPENING 1040 1040 1040 1040

STOCK
+ PURCHASES 5705 5705 5705 5705
-CLOSING (1305) (1295) (1292) (1331)

STOCK
COS (TOTAL) 5440 5450 5453 5414
GROSS PROFIT 5460 5450 5447 5486
EXAMPLE 6 (Mark-up & Margin)
a) Company M buys goods for £1,300 and then marks up those goods at 40 per cent. What is the selling price?
COST + PROFIT = SALE PRICE
100 + 40 = 140
SALE PRICE = 1300/100 X 140 = £ 1820
b) Company N owns goods with a selling price of £1,820 and it sells these goods at a margin of 40 per cent.
What is the cost price?
60 + 40 = 100
COST = 1820 /100 X 60 = £ 1092
EXAMPLE 7 (Inventory accounting)
54
Polly decided to sell T-shirts on the internet. On day one, she pays £100 into her new business bank account. On
day two, she buys 100 T-shirts for £1 each, paying for them immediately. On day three, she sells 70 of them for £3
each for cash. On day four, Polly buys 120 T-shirts for £1 each and sells 65 of them for £3 each. On day five, Polly
buys 90 T-shirts for £1.60 each and sells 150 T-shirts for £3.40 each. Prepare inventory movement schedule using
FIFO method, journal entries, statement of comprehensive income and statement of financial position for each
day.
Answer
Inventory movement schedule
Days 1 (£) 2 (£) 3 (£) 4 (£) 5 (£)

Opening Inventory 0 0 100 x 1 = 100 30 x 1 = 30 85 x 1 = 85
Add: Purchases 0 100 x 1 = 100 0 120 x 1 = 120 90 x 1.6 = 144
Less: Cost of goods 0 0 70 x 1 = 70 (30 x 1) + (35 x1) = 65 (85 x 1) +(65 x1.6)
sold =189
Closing Inventory 0 100 x 1 = 100 30 x 1= 30 85 x 1 = 85 25 x 1.6 = 40
Formula to calculate COGS
COGS = Opening stock + Purchases – Closing stock
COGS on day 3 = 100 + 0 – 30 = 70
COGS on day 4 = 30 + 120 – 85 = 65
COGS on day 3 = 85 + 144 – 40 = 189
Journal Entries
Days Account Debit (£) Credit (£)
1 Bank 100
Capital 100
2 Inventory 100
Bank 100
3 Bank 210
Sales 210
3 Cost of sales 70
Inventory 70
4 Inventory 120
Bank 120
4 Bank 195
Sales 195
4 Cost of sales 65
Inventory 65
5 Inventory 144
Bank 144
55
5 Bank 510
Sales 510
5 Cost of sales 189
Inventory 189
Statement of comprehensive Income

Days 1 (£) 2 (£) 3 (£) 4 (£) 5 (£)
Sales 210 195 510
Cost of goods sold 70 65 189
Gross profit 140 130 321
Statement of financial position

Days 1 (£) 2 (£) 3 (£) 4 (£) 5 (£)
Bank 100 0 (100 – 100) 210 210 – 120 + 195 285 – 144 + 510
= 285 = 651
Closing Inventory 0 100 30 85 40
Total assets 100 100 240 370 691
Capital 100 100 100 100 100
Accumulated profits 0 0 140 270 591
Total Equity 100 100 240 370 691
EXAM TYPE QUESTIONS
QUESTION 1
d. Calculate the gross profit of the business also by all 4 methods
ANSWER
56
(a) FIFO
1-2-08 20 5 100
2-2-08 80 6 480 20 5 100
80 6 480
11-2-08 20 5 100 50 6 300
30 6 180
13-2-08 25 8 200 50 6 300
25 8 200
17-2-08 75 7 525 50 6 300
25 8 200
75 7 525
25-2-08 50 6 300
25 8 200
40 7 280
35 7 245
(b) LIFO
1-2-08 20 5 100
2-2-08 80 6 480 20 5 100
80 6 480
11-2-08 50 6 300 20 5 100
30 6 180
13-2-08 25 8 200 20 5 100
30 6 180
25 8 200
17-2-08 75 7 525 20 5 100
30 6 180
25 8 200
75 7 525
25-2-08 75 7 525 20 5 100
25 8 200 20 6 120
10 6 60
(c) PERIODIC WAC

Closing stock rate
57
= (OPENING STOCK COST + PURCHASES COST)
(OPENING STOCK UNITS + PURCHASED UNITS)
= (100 + 1,205) = $6.525
(20 +180)
CLOSING STOCK VALUE = Closing stock rate x Closing stock units
6.525 X 40 UNITS = $261 APPROX
(c) PERPETUAL WAC
1-2-08 20 5 100
2-2-08 80 6 480 100 5.8 580
11-2-08 50 5.8 290 50 5.8 290
13-2-08 25 8 200 75 6.53 490
17-2-08 75 7 525 150 6.77 1015
25-2-08 110 6.77 745 40 6.77 270
(d) INCOME STATEMENT
DETAILS FIFO ($) LIFO ($) PERIODIC PERPETUAL

WAC ($) WAC ($)
SALES 2,350 2,350 2,350 2,350
(50 X 14 ) +
(110 X 15)
LESS: COST OF
SALES:
OPENING 100 100 100 100

STOCK
+ PURCHASES 1,205 1,205 1,205 1,205
-CLOSING (280) (220) (261) (270)

STOCK
COS (TOTAL) 1,025 1,085 1,044 1,035
GROSS PROFIT 1,325 1,265 1,306 1,315
QUESTION 2
ANSWER
100 + 70 = 170
COST = 150750/170 X 100 = £ 88676 approximately
58
35 + 65 = 100
COST = 150750/100 X 35 = £ 52762.5 approximately
QUESTION 3
If inventory at 1.1.X7 and 31.12.X7 are £154,996 and £166,705, respectively, and goods purchased in 20X7 are
£978,127, what is the cost of goods sold figure that will appear in the 20X7 income statement?
ANSWER
COGS = Opening stock + Purchases – Closing stock
= 154996 + 978127 – 166705 = £966418

QUESTION 4
ANSWER
PRODUCT Cost price £ Selling price £ Lower of cost or NRV £

A 1400 2100 1400
B 2300 2400 2300
C 3500 2400 2400
D 7250 9450 7250
Total 14450 16350 13350
So, in accordance with the prudence concept, the inventory’s value in the statement of financial position is
£13350 and this value will be used as closing inventory to calculate the cost of goods sold
NON-CURRENT ASSETS ACCOUNTING
59
DEFINITION
Asset
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the
expectation that it will provide a future benefit. Assets are reported on a company's balance sheet. They're
classified as current, non-current, financial, and intangible. They are bought or created to increase a firm's value
or benefit the firm's operations.
Non- Current Asset

Non-current assets are assets whose benefits will be realized over more than one year and cannot easily be
converted into cash. The assets are recorded on the balance sheet at acquisition cost, and they include property,
plant and equipment, motor vehicles, furniture & fixtures, intangible assets (like goodwill, patents, licenses,
trademarks, copy rights etc.)
Recording of non-current assets
Non- current assets are recorded in financial statements in the following way:
Cost model
The asset is carried at historical cost less accumulated depreciation
Revaluation model
The asset is carried at a revalued amount less accumulated depreciation
Important Definitions
Historical Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition.
Carrying Value /Net Book Value is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. (It is the
consumption cost of non-current asset)
Depreciable amount is the Historical cost of an asset less its residual value.
The Residual Value (RV) of an asset is the estimated amount that an entity would currently obtain from disposal
of the asset, after deducting all disposal costs.
Useful Economic Life (UEL) is the period over which an asset is expected to be available for use by an entity.
Causes of Depreciation
Following are the causes of depreciation:
1) Time factor 2) Physical wear and tear 3) Obsolescence 4) Inadequacy
Methods of Depreciation
Following are the methods of depreciation
1) Straight Line Method (SLM)
It means to provide depreciation on cost. This method is adopted when the pattern of benefit from a NCA is
constant. Its formula is (HISTORICAL COST- RESUDUAL VALUE/UEL)
2) Reducing Balance Method (RBM)
60
It means to provide depreciation on NBV .This method is adopted when the pattern of benefit from a NCA is
diminishing. Formula for RBM [1- (RESIDUAL VALUE / COST) 1/n].
Depreciation Policies
Following are the policies of depreciation
1) Monthly Basis Depreciation
IT means to provide depreciation on monthly basis.
2) No-Full Method
It means no depreciation in the year of sale and 100 % depreciation in the year of purchase.
Accounting Entries for cost model and revaluation model
To record NCA
(DEBIT) Non-current asset
(CREDIT) Cash/Bank/Payable
To record Depreciation
(DEBIT) Depreciation
(CREDIT) Accumulated Depreciation (or)
(DEBIT) Depreciation
(CREDIT) Non-Current Asset
To record revaluation surplus for non-depreciable asset
Debit: NON-CURRENT ASSET
CREDIT: REVALUATION SURPLUS/ (Equity)
To record revaluation loss for non-depreciable asset
Debit: REVALUATION LOSS/ (Profit & loss)
CREDIT: NON-CURRENT ASSET
To record revaluation surplus for depreciable asset
Debit: Accumulated depreciation
Debit: NON-CURRENT ASSET (BALANCING FIGURE)
CREDIT: REVALUATION SURPLUS
To record revaluation loss for depreciable asset
Debit: Accumulated depreciation
Debit: REVALUATION LOSS
CREDIT: NON-CURRENT ASSET (BALANCING FIGURE)
Example 1 (Cost model- SLM depreciation)
Company X buys a car on 1.1.X6 for £10,000. The UEL of car is 4 years and its residual value is £1,000. Company
decided to use straight line method for its depreciation. Record the non-current asset in the books of X as on 31-
12-X6 and 31-12-X7.
Answer
In 20X6 car was bought
(DEBIT) Car 10,000
(CREDIT) Cash 10,000
Now recording depreciation of asset at the end of year 1 by using straight line method.
10,000 – 1,000/4 = £2,250.
DR: Depreciation expense £2,250
CR: Car £2,250
In the income statement for 20X6 the depreciation expense for the year will be recorded at £2,250 and in
statement of financial position, the non-current asset (Car) will be shown at its NBV (£10,000 -£2,250) = £7,750.
In 20X7 depreciation will be recorded
DR: Depreciation expense £2,250
CR: Car £2,250
In the income statement for 20X7 the depreciation expense for the year will be recorded at £2,250 and in
statement of financial position, the non-current asset (Car) will be shown at its NBV (£10,000 -£4,500) = £5,500.
Example 2 (Cost model- RBM depreciation)

Company X buys a lorry for £100,000 on 1.1.X6.
61
(DEBIT) Non-current asset 100,000
(CREDIT) Cash 100,000
Company adopts a policy of depreciating it at the rate of 40 per cent on a reducing balance basis.
The depreciation expense in 20X6 will be: £100,000 × 40% = £40,000. In the 20X6 statement of financial position,
the cost will be £100,000, the accumulated depreciation will be £40,000 and the net book value will be £60,000.
The double entry arising from this adjustment is:
Dr: Depreciation expense £40,000
Cr: NCA £40,000
The depreciation expense in 20X7 will be: £60,000 × 40% = £24,000. In the 20X7 statement of financial position,
the cost will be £100,000, the accumulated depreciation will be £40,000 + £24,000 = £64,000 and the net book
value will be £36,000. The double entry arising from this adjustment is:
Dr: Depreciation expense £24,000
Cr: NCA £24,000
Adil acquired two lands on 1-1-2001, land A at cost of $20,000 and land B at a cost of $10,000. Adil choose
revaluation model to record land. At reporting date on 31-12-2001 land A had a fair value of $25,000 and land B
had a fair value of $7,000.
Calculate revaluation gain/loss as on 31-12.2001 and prepare Journal entries for the year ended 31-12-2001.
Land A ($) Land B ($)
Cost 20,000 10,000
Revalued Amount 25,000 7,000
Revaluation surplus / (Revaluation Loss) 5,000 (3,000)
Journal Entries ($) ($)
(Debit) Land A 5,000
(Credit) Revaluation Surplus 5,000
(Debit) Revaluation Loss 3,000
(Credit) Land B 3,000
Example 4 (Revaluation of depreciable assets)
Find the revaluation gain/loss on the following depreciable assets and prepare journal entries for the year ended
31-12-2013
PARTICULARS Building Plant & Machinery
HISTORICAL COST ($) 2,000,000 200,000
SCRAP VALUE NIL 20,000
DEPRECIATION 50 YEARS (SLM) 10 % PER ANNUM (SLM)
PURCHASE DATE 1-1-2003 1-1-2008
REVALUATION DATE 1-1-2013 1-1-2013
REVALUED AMOUNT ($) 3,000,000 60,000
REMAINING UEL UNCHANGED 3 YEARS
Answer
62
BUILDING ($) PLANT & MACHINERY ($)
Cost 2,000,000 200,000
Accumulated depreciation 2,000,000/50 = 40,000 x 10 = (200,000 – 20,000) = 180,000 x10

(400,000) %= 18,000 x 5 =( 90,000)
Net book value (1-1-2013) 1,600,000 110,000
Revaluation surplus/(loss) 1,400,000 (10,000)
Revalued amount 3,000,000 100,000
Depreciation for the year 2013 3,000,000 / 40 = (75,000) 100.000/3 = (33,333)
NBV AT END OF THE YEAR 3000,000 – 75,000 = 2,925,000 100,000 – 33,333 = 66,667
(DEBIT) Depreciation 400000

(CREDIT) BUILDING 400000
Debit: BUILDING 1,400,000

Credit: REVALUATION SURPLUS 1,400,000

(CREDIT) BUILDING 75000

(CREDIT) PM 90000
DEBIT: REVALUATION LOSS 10,000

CREDIT: PM 10000

(CREDIT) PM 33333
Disposal of Non-Current Assets
Upon disposal the gain/loss of NCA is charged to PL a/c.
Accounting Entries with disposal account

1) Transfer of NCA to disposal account
(DEBIT) Disposal
(CREDIT) Non-Current Asset
2) Transfer the accumulated depreciation to disposal a/c
(DEBIT) Accumulated Depreciation
(CREDIT) Disposal
3) Record cash received on disposal
(DEBIT) Cash
(CREDIT) Disposal
4 (a) Record gain/loss on disposal (for gain)
(DEBIT) Disposal
(CREDIT) Profit & Loss
4 (b) Record gain/loss on disposal (for loss)
(DEBIT) PL
(CREDIT) Profit & Loss
Accounting Entry without disposal account (if there is a gain on disposal)

(DEBIT) Cash
(CREDIT) Profit & loss (balancing figure)
(CREDIT) NCA
Accounting Entry without disposal account (if there is a loss on disposal)

(DEBIT) Cash
63
(DEBIT) Profit & loss (balancing figure)
(CREDIT) NCA
Example 5 (Calculation of disposal gain/loss)
Calculate the gain/loss on disposal for the following cases FOR THE YEAR ENDED 31-12-2012
PARTICULARS Motor Van Building
PURCHASE COST ($) 100,000 200,000
PURCHASE DATE 1-1-2010 1-7-2010
DEP.POLICY MONTHLY BASIS NO-FULL

METHOD
DEP.METHOD RBM (20 %) SLM (10 %)
SALE DATE 30-6-2012 30-9-2012
CASH RECEIVED ($) 60,000 125,000
Answer
Motor Van ($) BUILDING ($)
Cost 100,000 200,000
Accumulated depreciation 100,000x 20 % = 20000 200,000 X 10 % = 20,000 X 2 YEARS =

(40,000)
80000 x 20 % = 16,000
64000 x20 % x 6/12 = 6400
Total = (42,400)
NBV at disposal date 57,600 160,000
DISPOSAL GAIN / (LOSS) 2,400 (35,000)
CASH PROCEEDS 60,000 125,000
NO FULL METHOD MEANS NO DEP IN YEAR OF SALE AND FULL DEP IN THE YEAR OF PURCHASE.
Accounting entries (Motor van)

(CREDIT) NCA 42400
(DEBIT) Cash 60000

(CREDIT) PL 2400 (BAL.FIG)
(CREDIT) NCA 57,600
Accounting entries (Building)

(CREDIT) NCA 40000
(DEBIT) Cash 125000

(DEBIT) PL 35000 (BAL.FIG)
(CREDIT) NCA 160000
EXAMPLE 6
The following is the extract of trail balance of Basit Limited for the year ended 31-12-2018
64
Land 150,000
Plant & Equipment 360,000
Accumulated depreciation (Plant & Equipment) 108,000
Delivery van 86,000
Accumulated depreciation (Van) 44,000
Depreciation is to be provided as follows:

Plant & Equipment 20% per annum SLM
Delivery van 40% per annum RBM
Land was revalued on 31-12-2018 at $160,000. In December 2018 Company sold a van for $20,000. It was
purchased in 2016 for $40,000. No entries have been made in the financial statements regarding disposal.
Company uses no-full policy of depreciation. Show how the above mentioned will be adjusted in financial
statements as on 31-12-2018
Answer
LAND
Asset Land
($)
Cost 150,000
Revaluation surplus 10,000
Revalued amount 160,000
(DEBIT) Land 10,000

(CREDIT) Revaluation Surplus 10,000
DELIVERY VAN
ASSET Sold asset ($) Others ($) Total ($)
Cost 40000 46000 86000
Accumulated depreciation 40,000 x 40 % = (18,400) (44000)

(16000)
24,000 x 40% =
(9,600)
Total = (25,600)
NBV ( AT START) 14,400 27600 42000
DISPOSAL (14,400) 0 (14,400)
New NBV 0 27,600 27,600
LESS: DEPRECIATION FOR THE 0 (27,600 X 40%)= (11,040)

YEAR (11,040)
NBV (AT END) 0 16,560 16,560
DISPOSAL GAIN /LOSS
65
($)
CASH PROCEEDS 20000
LESS: NBV (AT DISPOSAL)

(14,400)
DISPOSAL GAIN/(LOSS) 5,600

(CREDIT) NCA 11040
(DEBIT) Cash 20000

(CREDIT) PL 5600 (BAL.FIG)
(CREDIT) NCA 14400
PLANT & EQUIPMENT
Asset PLANT &EQUIPMENT
($)
Cost 360000
Less: Accumulated Depreciation (108000)
NBV (at start) 252000
Less: Depreciation for the year (360000 X20%)= (72000)
NBV (at end) 180000

(CREDIT) NCA 72000
EXTRACT AS ON 31-12-2018
INCOME STATEMENT (SOCI) ($)
Depreciation (11040 + 72000) 83,040
Disposal gain 5600
Balance sheet (SOFP)
Land 160000
Delivery van 16560
Plant & Equipment 180000
Revaluation surplus (Equity section) 10000
EXAM TYPE QUESTION
QUESTION 1
66
ANSWER
LAND &BUILDING
Land (£) Building (£) Total Valuation (£)
Cost 500,000 240,000 740,000
Accumulated depreciation 0 (125,000) (125,000)
Net book value (AT START) 500,000 115,000 615,000
Revaluation surplus/(loss) 0 285,000 285,000
Revalued amount at the start of the year 500,000 400,000 900,000
Depreciation for the year 0 400,000 x 2% = (8,000)

(8,000)
NBV AT END 500,000 392,000 892,000
Debit: Depreciation 125,000

Credit: NCA 125,000
Debit: NON-CURRENT ASSET 285,000

Credit: REVALUATION SURPLUS 285,000
67
Credit: NCA 8,000
MOTOR VIHICLES
*Assuming full depreciation in the year of purchase and no depreciation in the year of sale for disposed -off asset
Sold asset (£) Others (£) Total (£)
Cost 8,000 17,000 25,000
Accumulated depreciation 8000 X 25% = (2,000) (10,000) (12,000)
NBV ( AT START) 6,000 7,000 13,000
DISPOSAL (6,000) 0 (6,000)
NEW NBV 0 7,000 7,000
LESS: DEPRECIATION FOR THE YEAR 17,000 X 25% = (4,250) (4,250)
NBV (AT END) 0 2,750 2,750
DISPOSAL GAIN /LOSS
(£)
CASH PROCEEDS 1,500
NBV (AT DISPOSAL) (6,000)
DISPOSAL GAIN/(LOSS) (4,500)
Disposal gain/loss
(DEBIT) Cash 1500
(DEBIT) PL 4500 (BAL FIG)
(CREDIT) NCA 6000
Depreciation for the year

Credit: NCA 4,250
PLANT & MACHINERY
PLANT & MACHINERY (£)
Cost 20,000
Accumulated depreciation (4,000)
Net book value (AT START) 16,000
Depreciation for the year 16,000 X 20 % = (3,200)
NBV AT END 12,800

Credit: NCA 3,200
QUESTION 2
68
ANSWER
(£) (£)
Cash proceeds 15000
Cost 32000
Accumulated depreciation
32000 x 20% = 6400 x 2 years (12800)
NBV at disposal (19200)
DISPOSAL GAIN/(LOSS) (4,200)
69
a Disposal 32000
Furniture 32000
b Accumulated depreciation 12800
Disposal 12800
c Cash 15000
Disposal 15000
d Profit & loss 4200
Disposal 4200
Land (£) Property (£) Total (£)
Cost 140000 800000 940000
Accumulated depreciation 0 (40000) (40000)
Net book value 140000 760000 900000
Revaluation surplus/(loss) 0 190000 190000
Revalued amount 140000 950000 1090000
(a) Depreciation 40000
Property 40000
(b) Property 190000
Revaluation surplus 190000
70
QUESTION 3
ANSWER
ASSET Sold asset (£) Others (£) Total (£)
Cost 12000 84000 96000
Accumulated depreciation 12000 x 5% = 600 x (7800) (9000)

2 years = (1200)
NBV ( AT START) 10800 76200 87000
DISPOSAL (10800) 0 (10800)
New NBV 0 76200 76200
LESS: DEPRECIATION FOR THE 0 84000 x 5% = (4200) (4200)

YEAR
NBV (AT END) 0 72000 72000
DISPOSAL GAIN /LOSS
(£)
CASH PROCEEDS 7000
LESS: NBV (AT DISPOSAL)

(10800)
DISPOSAL GAIN/(LOSS) (3800)
BAD DEBTS & PROVISIONS

71
BAD DEBTS
A debt owing to a business which it considers uncollectable.
ACCOUNTING TREATMENT
(Debit) Bad debts expense
(Credit) Debtors
PROVISION FOR DOUBTFUL DEBTS
It is the estimate by the business of the likely % of its debtors which may go bad during any one accounting
period.
If provision is increased
(Debit) P&L
(Credit) PROVISION FOR DOUBTFUL DEBTS
If provision is decreased
(Debit)PROVISION FOR DOUBTFUL DEBTS
(Credit) P&L
BAD DEBTS RECOVERED
It is debt which was declared bad previously, now recovered in full or in part.
(Debit) Cash
(Credit) BAD DEBTS RECOVERED (P/L)
EXAMPLE 1
On 31.12.X7, Company X received a letter from a liquidator stating that Armstrong plc had gone into liquidation
and it was very unlikely that any of its suppliers would be paid. The directors of Company X estimate that 5% of
the remaining trade receivables are likely to be unable to be paid.
Required:
Prepare journal entries, income statement and balance sheet extracts for the year 20X7.
Answer
DR: Bad debts expense 300

CR: Debtors 300

CR: Provision for doubtful debts 110
72
(2500 – 300 = 2200 x 5% = 110)
Extracts
Income statement
Bad debts expense = £ 410
Balance sheet
Debtors (2500 – 300 – 110) = £ 2090
EXAMPLE 2
Supposing in the following year, 20X8, the trade receivables of Company X are £2,900. There is a bad debt of £
100 to be written off and the provision for bad debts is to be six per cent of remaining trade receivables
Required:
Prepare journal entries, income statement and balance sheet extracts for the year 20X8.
ANSWER

CR: Debtors 100

(2900 – 100 = 2800 x 6% = 168 – 110 =58)
Extracts
Income statement
Bad debts expense = £ 158
Balance sheet
Debtors (2900 – 100 – 168) = £ 2632
EXAMPLE 3
The following is the extract of trail balance of Alpha limited for the year ended 31-12-2018
Bad debts 1,000
Provision for doubtful debts 800
Debtors 10,000
Mr. Ali got bankrupt and now $500 is not to be received. Company’s policy is to create 10 % provision on
remaining receivables. Show the profit and loss and balance sheet extracts for the year.
Answer
INCOME STATEMENT ($) BALANCE SHEET ($)
OLD BAD DEBTS 1,000 DEBTORS( IN TRAIL 10,000

BALANCE)
(IN TB)
+NEW BAD DEBTS 500 - NEW BAD DEBTS (500)
( IN ADJ)
+ NEW PROVISION (IN 950 - NEW PROVISION (950)

ADJ)
- OLD PROVISION (800)
(IN TB)
TOTAL DEBTOR 1,650 CLOSING DEBTORS 8,550

EXPENSES
NEW PROVISION = DEBTORS (IN TRAIL) - NEW BAD DEBTS = NET DEBTORS X %age
73
10,000 – 500 = 9,500 X 10 % = 950
NOTE
The bad debts shown in the trail balance are already recorded. So no double entry is required $1000. The new
bad debts in adjustment below needs recording
DR: Bad debts expense (PL) 500

CR: Debtors 500

(950 – 800)
EXAMPLE 4
The following is the extract of trail balance of Beta limited for the year ended 31-12-2019
Bad debts 1,500
Provision for doubtful debts 2,250
Debtors 20,000
Cash 4,000
A customer got bankrupt and now $500 is not to be received. Company’s policy is to create 10 % provision on
remaining receivables. Bad debts recovered during the period were $400.Show the profit and loss and balance
sheet extracts for the year.
Answer

BALANCE)
(IN TB)
( IN ADJ)
+ NEW PROVISION (IN 1,950 - NEW PROVISION (1,950)

ADJ)
- OLD PROVISION (2,250)
(IN TB)

EXPENSES
20,000 – 500 = 19,500 X 10 % = 1,950

CR: Debtors 500
DR: Provision for doubtful debts 300

CR: Bad debts expense (PL) 300
(2250 – 1950)
DR: Cash 400

CR: Bad debts recovered (PL) 400
74
EXAMPLE 5
The following is the extract of trail balance of Gamma limited for the year ended 31-12-2019
Bad debts 0
Debtors 20,000
Provision for doubtful debts will be decreased by $250. Show the profit and loss and balance sheet extracts for
the year.
Answer
OLD BAD DEBTS 0 DEBTORS( IN TRAIL 20,000

BALANCE)
(IN TB)
+NEW BAD DEBTS 0 - NEW BAD DEBTS 0
( IN ADJ)

ADJ)
(IN TB)
TOTAL DEBTOR (250) CLOSING DEBTORS 18,000

EXPENSES
As the current year provision will be decreased by $250. So the new provision will be $2,250 – $250 = $2,000
The following is the extract of trail balance of Top limited for the year ended 31-12-2019
Bad debts 100
Debtors 20,000
Further bad debts are $200. Provision for doubtful debts will be increased by $250. Show the profit and loss and
balance sheet extracts for the year.
Answer

BALANCE)
(IN TB)
75
( IN ADJ)

ADJ)
(IN TB)
TOTAL DEBTOR 550 CLOSING DEBTORS 17,300

EXPENSES
As the current year provision will be increased by $250. So the new provision will be $2,250 + $250 = $2,500
EXAMPLE 7
The following is the extract of trail balance of Theta limited for the year ended 31-12-2020
Bad debts 5,000
Debtors 50,000
A customer got bankrupt and now $1,000 is not to be received. Company makes a general provision of 5% on
debtors. The credit rating of one of company’s old customer Mr. Karan falls from whom company has to receive
10,000. Due to these developments company now wishes to provide 25% on receivable from Karan.
Answer

BALANCE)
(IN TB)
+NEW BAD DEBTS 1,000 - NEW BAD DEBTS (1,000)
( IN ADJ)

ADJ)
(IN TB)

EXPENSES
General provision = 50,000 – 1,000 – 10,000 = 39,000 x 5% = 1,950
Specific provision = 10,000 x 25% = 2,500
Total provision = 4,450

CR: Debtors 1000

(4450 – 4000)
76
EXAM TYPE QUESTION
QUESTION 1
Transaction Account Debit (£) Credit (£)
(a) Purchases 15000
Creditors 15000
(b) Cash 47500
Loan 47500
Non-current asset 47500
Cash 47500
(c) 42340 x 5% = 2117
So decrease in provision by
3000 – 2117 = 883
Profit & loss 883
77
QUESTION 2
ANSWER
(a) Bad debts 1506
Debtors 1506
(b) 50266 – 1506 = 48760 x 5% =

2438.
So decrease in provision by
3210 – 2438 = 772
Profit & loss 722
Debtors expense in income statement = 1506 – 772 = £734
Debtors in SOFP = 50266 – 1506 – 2438 = £46322
78
ACCRUALS AND PREPAYMENTS
ITEMS DEFINITION ACCOUNTING TREATMENT
ACCRUED THESE ARE EXPENSES INCURRED BUT NOT YET IT IS ADDED IN RELATED EXPENSE IN PROFIT AND LOSS
EXPENSES PAID. FOR E.G. ACCRUED SALARIES, ACCRUED ACCOUNT.
RENT ETC.
IT IS SHOWN AS A CURRENT LIABILTY IN BALANCE
SHEET.
ACCRUED THESE ARE INCOMES INCURRED BUT NOT YET IT IS ADDED IN RELATED INCOME IN PROFIT AND LOSS
INCOMES RECEIVED.FOR E.G. ACCRUED INVEMTMENT ACCOUNT.
INCOME, ACCRUED COMMISSION ETC.
IT IS SHOWN AS A CURRENT ASSET IN BALANCE SHEET
PREPAID THESE ARE EXPENSES PAID IN ADVANCEFOR E.G. IT IS SUBTRACTED FROM THE RELATED EXPENSE IN
EXPENSES PREPAID INSURANCE,PREPAID ADVERTISEMENT PROFIT AND LOSS ACCOUNT.
COSTS ETC.
IT IS SHOWN AS A CURRENT ASSET IN BALANCE SHEET
PREPAID THESE ARE INCOMES RECEIVED IN ADVANCE.FOR IT IS SUBTRACTED FROM THE RELATED EXPENSE IN
INCOMES E.G. PREPAID RENT, PREPAID INSURANCE ETC. PROFIT AND LOSS ACCOUNT.
IT IS SHOWN AS A CURRENT LIABILTY IN BALANCE SHEET
EXAMPLE 1 (BASIC QUESTION)
The following is the extract of trail balance of Lamb Limited for the year ended 31-12-2018
Salaries 500
Insurance 200
Investment income 400
Rent income 100
Salaries of $200 are accrued. Insurance of $40 is prepaid. Investment income receivable (accrued) is $50. Rent
prepaid $10
Pass journal entries and show the profit and loss and balance sheet extracts for the year 31-12-2018
Answer
ACCRUED EXPENSE
DR: Salaries 500

CR: Cash 500
DR: Salaries 200

CR: Accrued salaries 200
One compound entry can also be passed
DR: Salaries 700 (balancing figure)

CR: Cash 500
CR: Accrued salaries 200
79
PREPAID EXPENSE
DR: Insurance 200
CR: Cash 200
DR: Prepaid Insurance 40

CR: Insurance 40
DR: Insurance 160 (balancing figure)

DR: Prepaid Insurance 40
CR: Cash 200
ACCRUED INCOME
DR: Cash 400
CR: Investment income 400
DR: Accrued investment income 50

CR: Investment income 50

DR: Cash 400
DR: Accrued investment income 50
CR: Investment income 450 (balancing figure)
PREPAID INCOME
DR: Cash 100

CR: Rent income 100
DR: Rent income 10
CR: Prepaid rent income 10
DR: Cash 100

CR: Prepaid rent income 10
CR: Rent income 90 (balancing figure)
Income statement
($)
Salaries expense ( 500 + 200) 700
Insurance expense (200 – 40) 160
Investment income (400 + 50) 450
Rent income (100 – 10) 90
Balance sheet
($)
Current assets:
Prepaid insurance 40
Accrued investment income 50
Current liabilities:
80
Accrued Salaries 200
Prepaid rent 10
EXAMPLE 2
The following is the extract of trail balance of Richards Limited for the year ended 31-12-2011
Electricity 10,000
Insurance 5,000
Rental income 500
Paid electricity $600 on 28-2-2012 for the previous quarter. Insurance cost paid on 1-6-2011 covering period of 9
months $ 1,800. Accrued rent income $100. Show the profit and loss and balance sheet extracts for the year 31-
12-2011
Answer
Accrued electricity = 600 x 1/3 = 200
Prepaid insurance = 1,800/9= 200 x 3 = 600
Income statement
($)
Electricity expense (10,000 + 200) 10,200
Insurance expense (5,000 – 600) 4,400
Rent income (500 + 100) 600
Balance sheet
($)
Current assets:
Prepaid insurance expense 600
Accrued rent income 100
Electricity payable 200
The following is the extract of trail balance of Gooch Limited for the year ended 31-12-2011
Electricity 5,000
Insurance 7,000
81
Rental income 1,000
Paid electricity $1,500 on 31-1-2012 for the previous quarter. Insurance cost paid on 1-10-2011 covering period
of 12 months $1,200. Prepaid rent income $200. Show the profit and loss and balance sheet extracts for the year
31-12-2011
Answer
Accrued electricity = 1,500 x 2/3 = 1,000
Prepaid insurance = 1,200/12 = 100 x 9 = 900
Income statement
($)
Electricity expense (5,000 + 1,000) 6,000
Insurance expense (7,000 – 900) 6,100
Rent income (1,000 – 200) 800
Balance sheet
($)
Current assets:
Prepaid insurance expense 900
Electricity payable 1,000
Prepaid Rent income 200
EXAM TYPE QUESTION
82
Answer
Bad debts & Provisions
INCOME STATEMENT (£) BALANCE SHEET (£)

BALANCE)
(IN TB)
+NEW BAD DEBTS 7,000 - NEW BAD DEBTS (7,000)
( IN ADJ)

ADJ)
(IN TB)

EXPENSES
167,000– 7,000 = 160,000 X 5 % = 8,000
Accruals & Prepayments
Accrued electricity = 4,500/3 =1,500 x 1 = 1,500
Prepaid rent = 9,000/6 = 1,500 x 4 = 6,000
Income statement extract
(£)
Electricity expense (10,000 + 1,500) 11,500
Rent expense (38,000 – 6,000) 32,000
Debtors expense 10,400
Balance sheet extract
(£)
Current assets:
Debtors 152,000
Prepaid rent 6,000
Electricity payable 1,500
83
EXAM TYPE QUESTION
QUESTION 1
ANSWER
(a) Inventory 7000
Cash 7000
Debtor 12300
Sales 12300
Cost of sales 7000
Inventory 7000
(b) Rent 6000
Cash 6000
Prepaid rent (6000 x 2/3) 4000
Rent 4000
(c) Electricity (600 x2/3) 400
Accrued electricity 4000
QUESTION 2
Answer
Date Account Debit (£) Credit (£)
2-12-2022 Cash 9050
Rent 9050
84
31-12-2022 Rent 9050
Prepaid rent 9050
Rental income will be cancelled in income statement at reporting date and a current liability of £9050 for prepaid rent will be shown
in SOFP.
PREPARATION OF FINANCIAL STATEMENTS (WITH ADJUSTMENTS)

EXAMPLE 1
Trial Balance for Julia year ending 31/07/01 is given below. Prepare income statement & Balance Sheet from this data as on 31 st July
2001.
Dr Cr
$ $
Purchases 42,370
Sales 95,800
Stock (01/08/00) 3,050
Returns 3,000 4,500
Drawings 5,200
Equipment 18,000
Vans 8,000
Accumulated dep (Van) 2,000
Debtors and Creditors 2,010 4,405
Capital 18,590
Heat and light 1,340
Land and buildings 50,000
Accumulated dep (Building) 10.000
Loan 20,000
Bad debts 120
156,665 156,665
Adjustments:
2) Stock (31/07/01) $1,900. The net realizable value of the inventory is $2,500.
3) Accrued motor expenses $500
4) Prepaid wages $200
5) A customer got bankrupt and $200 will not to be received. General provision of 5% needs to be created on remaining debtors.
6) Buildings are depreciated 10% per annum on straight line basis whereas Vans are depreciated at 20 % diminishing balance
method.
85
Julia
Income Statement
For the year ended 31st July 2001
Details $ $
Sales Less: Return inwards(95,800 – 3,000) 92,800
+ Purchases Less: Return outwards (42,370 – 4,500) 37,870
-Closing Stock (1,900) (39,020)
Gross Profit 53,780
Add: Other Incomes
Less: Expenses :
Wages & Salaries (18750 - 200) 18,550
Motoring expenses (2575 + 500) 3,075
Heating & lighting 1,340
Discount allowed 1,250
Debtors expenses 340
Depreciation (Building) 5,000

(31,755)
Depreciation (Van) 1,200
Net Profit 23,325
Julia
Balance sheet
As on 31st July 2001
Assets £ £
Land & Building (Premises) 35,000
Equipment 18,000
Motor Vehicles 4,800 57,800
Current Assets :
Trade Receivables (Debtors) 1,720
Prepaid wages 200 3,820
Total Assets 61,620
86
Loans 20,000 20,000
Trade Payables (CREDITORS) 4,405
Accrued motor expenses 500 4,905
Capital:
+Net Profit 23,325
- Drawings (5,200) 36,715
Workings
Bad debts and provision
OLD BAD DEBTS 120 DEBTORS( IN TRAIL BALANCE) 2010
(IN TB)
( IN ADJ)
+ NEW PROVISION (IN ADJ) 90 - NEW PROVISION (90)
(IN TB)
TOTAL DEBTOR EXPENSES 340 CLOSING DEBTORS 1720
2010 - 200 = 1810 x 5% = 90 approximately.
Depreciation and NBV of Non-Current Assets
Assets Land & Building ($) Vans ($)
Cost 50000 8000
Accumulated (10000) (2000)

Depreciation
NBV (at start) 40000 6000
Depreciation 50,000 x 10 % 6000 X 20% =

(1200)
for the year = (5,000)
NBV (at end) 35000 4800
87
EXAMPLE 2
The following trial balance was extracted from the books of Babar on 30 April 2013. Prepare his income statement for the year
ended 30 April 2013, and a balance sheet as at that date.
Dr Cr
$ $
Long term Loan 1,000
Sales 18,600
Purchases 11,556
Stock 1 May 2012 3,776
Returns inwards 440
Motor expenses 664
Rent 576
Bad debts 1,202
Accumulated dep (MV) 400
Accumulated dep (FF) 100
Debtors 4,577
Creditors 3,045
Provision for debtors 150
Bank 4,526
Cash in hand 120
Drawings 2,050
Capital 11,844
35,494 35,494
1) Stock at 30 April 2013 was $4,998

2) Prepaid rent $100
3) Outstanding wages $200
4) Further bad debts amounted to $100. Create provision for doubtful debts 4% on remaining debtors.
5) Provide depreciation on furniture 20 % straight line method and vehicles 10% reducing balance method
88
Babar
Income Statement
For the year ended 30th April 2013
Details $ $
Sales Less: Return inwards (18,600 – 440) 18,160
+Direct expenses (Carriage Inward) 234 (10,213)
Gross Profit 7,947
Less: Expenses :
Salaries & Wages (2447 + 200) 2,647
Rent (576 – 100) 476
Carriage out 326
Motor expenses 664
Debtors expenses 1,331
Depreciation (FF) 120

(5,764)
Depreciation (Vehicles) 200
Net Profit 2,183
Babar
Balance Sheet
As on 30th April 2013
Assets $ $
Fixtures & Fittings 380 2,180
Current Assets :
Bank 4,526
Cash 120
100 14,042
Prepaid rent
Total Assets 16,222
89
Long term loans 1,000 1,000
Outstanding wages 200 3,245
Capital:
+Net Profit 2,183
- Drawings (2,050)
11,977
(IN TB)
( IN ADJ)
(IN TB)
4577 - 100 = 4477 x 4% = 179 approximately.
Assets Furniture & Fixtures Vehicles ($)

($)
Cost 600 2400

Depreciation
Depreciation 600 x 20 % 2000 x 10% =

(200)
for the year = (120)
NBV (at end) 380 1800
SLM = PROVIDE DEP ON COST
RBM = PROVIDE DEP ON NBV AT START
90
Example 3
From the following trial balance of Ghalib draw up a trading and profit and loss account for the year ended 30 September 2012, and
a balance sheet as at that date.
Dr Cr
$ $
Stock 1 October 2011 2,368
Returns inwards 205
Purchases 11,874
Sales 18,600
Rent 304
Insurance 78
Motor expenses 664
Office expenses 216
Lighting and heating expenses 166
Bad debts 314
Premises 5,000
Accumulated dep (MV) 180
Accumulated depreciation (FF) 50
Debtors 3,896
Creditors 1,731
Bank 732
Drawings 1,200
Capital 10,636
33,539 33,539
1) Stock at 30 September 2012 was £2,946.

2) Insurance paid in advance $ 50
3) Salaries payable $200
4) Provision for doubtful debts has been increased by $ 10.
5) The UEL of furniture was 7 years. Provide depreciation on furniture based upon straight line basis. MV is depreciated 10%
reducing balance method.
91
Ghalib
Trading and profit & loss account
For the year ended 30th September 2012
Details $ $
+ Purchases Less: Return outwards (11,874 - 322) 11,552
Carriage inward 310 (11,284)
Gross Profit 7,111
Less: Expenses :
Salaries & Wages (3862 + 200) 4,062
Rent 304
Insurance (78 – 50) 28
Heating & lighting 166
Motor expenses 664
Office expenses 216
Carriage out 200
Depreciation (Furniture) 50
(6,176)
Depreciation (MV) 162
Net Profit 935
Ghalib
Balance Sheet
As on 30th September 2012
Assets $ $
Premises 5,000
Fixtures & Fittings 250 6,708
Current Assets :
Bank 732
Prepaid insurance 50 7,594
Total Assets 14,302
92
Salaries payable 200 3,931
Capital:
+Net Profit 935
- Drawings (1,200) 10,371
(IN TB)
+NEW BAD DEBTS 0 - NEW BAD DEBTS 0
( IN ADJ)
(IN TB)
NEW PROVISION = Old provision was $20 and new provision was increased by $10. It means that new provision will be $30.
Assets Furniture & Fixtures Vehicles ($)

($)
Cost 350 1800

Depreciation
Depreciation 350/7 = (50) 1620 X 10 % =

(162)
for the year
NBV (at end) 250 1458
93
Example 4
Trail Balance for Karol, year ending 31/12/01. Prepare Trading and Profit & Loss Account and Balance Sheet from this data
Dr Cr
$ $
Purchases 35,200
Sales 75,800
Stock (01/01/01) 6,570
Returns in 800
Returns out 200
Discount received 1,200
Drawings 12,000
Accumulated dep (LB) 6,000
Office furniture 15,000
Accumulated dep (FUR) 1,500
Bad debts 200
Advertising 2,420
Bank 4,250
Cash 7,670
Debtors 4,710
Creditors 4,520
Provision for debtors 70
Capital 52,930
Short term Loan 40,000
182,220 182,220
1) Stock at 31st December 2001 was £5,000.

2) Advertising cost paid in advance $ 50
3) Salaries outstanding $200
4) Further bad debts $50. Provision for doubtful debts has decreased by $ 30 in the current year.
5) Provide depreciation on land & building based upon straight line basis. The UEL is 50 years. Furniture is depreciated 10% reducing
balance method.
94
Karol
Income Statement
For the year ended 31st December 2001
Details $ $
Opening Stock 6,570
-Closing Stock (5000) (36,570)
Gross Profit 38,430
Add: Other Incomes
Less: Expenses :
Wages & Salaries (18000 + 200) 18,200
Advertising (2420 – 50) 2,370
Depreciation (LB) 1,500
1,350 (24,040)
Depreciation (Furniture)
Net Profit 15,590
Karol
Balance sheet
As on 31st December 2001
Assets £ £
Office Furniture 12,150
79,650
Current Assets :
Closing Stock 5,000
Trade Debtors 4,620
Bank 4,250
Cash 7,670
50 21,590
Prepaid advertisement
Total Assets 101,240
95
Trade Creditors 4,520
Salaries payable 200 44,720
Capital:
+Net Profit 15,590
- Drawings (12,000) 56,520
(IN TB)
( IN ADJ)
(IN TB)
TOTAL DEBTOR EXPENSES 220 CLOSING DEBTORS 4,620
NEW PROVISION = Old provision was $70 and new provision was decreased by $30. It means that new provision will be $ 40.
Assets Land & Building ($) Furniture ($)
Cost 75000 15000

Depreciation
NBV (at start) 69000 13500
Depreciation 75000 / 50 = (1500) 13500 x 10 % =
for the year (1350)
NBV (at end) 67500 12150
96
CASH BOOK
It is a book in which cash; bank and discount transactions are recorded. Its debit side is the receipt side where as its
credit side is the payment side.
There are three types of cash book:
1) Single column cash book (cash column)

2) Double column cash book (cash and bank column)
3) Triple column cash book ( cash , bank and discount column)
Discount allowed is shown on the debit side of triple column cash book because it is treated as expense. Discount
received is shown on the credit side of triple column cash book because it is treated as an income.
EXAMPLE 1
ANSWER
97
Example 2 (ASSIGNMENT)
98
BANK RECONCILIATION STATEMENT
It is a statement which is prepared to reconcile the cash book (bank balance) balance with the bank statement
balance.
CASH BOOK
It is book in which all cash; bank and discount transactions are recorded. It is the book maintained by the owner
of the business.
BANK STATEMENT (PASS BOOK)
It is a statement in which all the transactions between bank and its customers are recorded. It is a book
maintained by the bank
DIFFERENCES BETWEEN CASH BOOK AND BANK STATEMENT
CASH BOOK(BANK COLUMN) BANK STATEMENT
It is prepared by the depositor/owner. It is prepared by the bank.
Money deposited is written on debit side and money Money deposited is written on credit side and
withdrawn on credit side. money withdrawn on debit side.
Its favorable balance is debit and it’s Its favorable balance is credit and it’s
unfavorable/overdraft balance is credit. unfavorable/overdraft balance is debit.
Issued cheque is recorded at the date of issue. Issued cheque is recorded when it is paid by the
bank to the creditor.
Received cheque is recorded on the date when it is

received. Received cheque is recorded on the date when
it is actually collected from the debtor’s bank.
REASONS OF DIFFERENCES BETWEEN CASH BOOK AND BANK STATEMENT
(1) Unpresented cheques (2) Uncredited cheques (3) Dishonored cheques (4) Standing orders (5) Errors (6)
Omissions (7) Casting Errors (8) Account wrongly debited/credited
UNPRESENTED CHEQUES (SUPPLIER’S CHEQUE)
Cheques issued to creditors but not presented for payment owner’s bank, till the date of reconciliation.
UNCREDITED CHEQUES (CUSTOMER’S CHEQUE)
Cheques received from debtors lodged into the bank account, but funds still not credited in the bank account till
the date of reconciliation.
DISHONOURED CHEQUES
Customer’s cheque deposited into the bank but the cheque is dishonor by the customer’s bank due to insufficient
funds.
99
STEPS FOR PREPARING RECONCILIATION
(1)Calculate the opening balance of cash book (bank column).
(2)Prepare the adjusted cash book.
(3)Prepare bank reconciliation statement.
RULES FOR BANK RECONCILIATION
CHEQUES DEBIT BALANCE OF ADJUSTED CASH BOOK CREDIT BALANCE OF ADJUSTED CASH BOOK
UNPRESENTED CHEQUES ADD LESS
UNCREDITED CHEQUES LESS ADD
EXAMPLE 1
Wordsworth opened a business bank account with $500 on 1-4-2006. During April he issued cheques totaling
$3,638 and banked cheques totaling $4,003. These transactions were entered in cash book for the month of April.
On receiving the bank statement for April, he discovered the following:
1) A cheque of $240 which was banked (included in receipts above) had been returned by bank marked ‘No funds
available’. No adjustment has been made in the cash book.
2) Cheques paid totaling $843 recorded in cash book and sent to supplier were not presented to the bank until
May 2006.
3) Cheques received totaling $605 had been entered in cash book but were not credited by the bank until May
2006.
Required: Calculate the corrected bank balance as on 30-4-2006 and prepare bank reconciliation statement as on
30-4-2006 for Wordsworth.
ANSWER
CALCULATE OPENING BALANCE OF ADJUSTED CASH BOOK
= 16000 + 4003 – 3638 = 865 DEBIT
ADJUSTED CASH BOOK
OPENING 865 DISHONOURED 240

BALANCE CHEQUES
CLOSING BALANCE 625
TOTAL 865 TOTAL 865
($)
BALANCE AS PER ADJUSTED CASH BOOK 625 DEBIT
+ UNPRESENTED CHEQUES 843
- UNCREDITED CHEQUES (605)
BALANCE AS PER BANK STATEMENT 863 (CREDIT)
100
Example 2
Waits opened a business bank account with $16,000 on 1-4-2009. During April he issued cheques totaling
$72,760 and banked cheques totaling $80,060. These transactions were entered in cash book for the month of
April. On receiving the bank statement for April, he discovered the following:
1) A cheque of $4,800 which was banked (included in receipts above) had been returned by bank marked ‘No
funds available’. No adjustment has been made in the cash book.
2) Bank charges debited by bank $600 for the month of April. No entries have been made in the cash book.
3) Cheques paid totaling $16,860 recorded in cash book and sent to supplier were not presented to the bank until
May 2009.
4) Cheques received totaling $12,100 had been entered in cash book but were not credited by the bank until May
2009.
Required:
Calculate the corrected bank balance as on 30-4-2009 and prepare bank reconciliation statement as on 30-4-2009
for Waits.
ANSWER
= 16000 + 80060 - 72760 = 23300 DEBIT
ADJUSTED CASH BOOK

BALANCE CHEQUES
BANK CHARGES 600
CLOSING BALANCE 17900
($)
On 30-4-2006, the cash book of Wooster showed a debit balance of $2,600. On examination of cash book and
bank statement the following was revealed:
1) Cheques issued to creditors amounting $935 and entered in cash book before 30 th April were not presented for
payment until after that date.
2) Cheques received amounting $230 had been recorded in cash book and were paid into the bank on 30 th April
but were entered in bank statement on 3rd May.
101
3) A cheque of $70 was received and banked had been dishonored prior to 30 th April but no record of this fact
appeared in cash book.
Required:
Calculate the corrected bank balance for cash book on 30th April 2006 and prepare bank reconciliation statement
on 30th April 2006
ANSWER
ADJUSTED CASH BOOK

BALANCE CHEQUES
CLOSING BALANCE 2530
($)
Example 4
The following items were identified in course of reconciling cash book with the bank statement of Atlee as on 31-
5-2007:
1) Balance on hand as per cash book was $46,400.
2) Cheques deposited into the bank and entered into cash book before 31-5-2007 of $22,700 were not cleared by
the bank until after that date.
3) A favorable balance at bank of $23,400 had been carried forward from the foot of page 117 to the top of page
118 as $32,400.
4) Cheques paid to suppliers and entered in cash book before 31 st may amounting $36,840 were not presented
for payment until after that date.
5) $11,400 was received from a customer by direct bank transfer had not been entered in cash book.
6) Bank charges of $36 has been entered twice in cash book.
Required:
Calculate the corrected bank balance for cash book on 31st May 2007 and prepare bank reconciliation statement
on 31st May 2007 for Atlee
102
ANSWER
ADJUSTED CASH BOOK
OPENING 46400 DEBIT BANK 9000

BALANCE BALANCE
OVERSTATED
BANK TRANSFER 11400
BANK CHARGES 36 CLOSING BALANCE 48836
($)
EXAMPLE 5
Amir opened a bank account with $1,000 on 1-1-2001. During the month he received and banked cheques
totaling $500 and issued cheques for $300.On receiving bank statement for the month of January it showed a
credit balance of $1,890. The following was discovered:
(1) Cheque of $100 banked and dishonored before 31st January but not recorded in cash book.
(2) Cheques issued but not presented into the bank till 31st January $500.
(3) Cheques deposited but not credited by bank before 31 st January $200.
(4) $400 received from a customer by direct bank transfer had not been entered in cash book.
(5) Bank charges $50 debited by bank, not deducted from cash book.
(6) Dividend income of $100 had not been entered in the cash book.
(7) Bank charges of $40 had been deducted twice from cash book.
(8) Interest credited by bank but not recorded in cash book $50.
(9) Bank charged (debited) commission $30 on 31-1-2001, not recorded in cash book.
(10) Collection charges of $20 entered in bank statement but not in cash book.
Required:
Calculate the corrected bank balance as on 31-1-2001 and prepare bank reconciliation statement as on 31-1-2001
for Amir.
ANSWER
103
= 1000+ 500– 300 = 1200 DEBIT
ADJUSTED CASH BOOK

BALANCE CHEQUES
DIRECT BANK 400 BANK CHARGES 50

TRANSFER
DIVIDEND INCOME 100 COMMISSION 30
BANK CHARGES 40 COLLECTION 20

CHARGES
INTEREST INCOME 50 CLOSING BALANCE 1590
($)
Example 6
On 30-6-1990, the cash book of Mr. Zubair showed a credit balance of $16,000. On examination of cash book and
bank statement the following was revealed:
1) Cheques of $4,000 were paid into the bank for collection on 28 th June 1990 has not yet been collected.
2) Cheques for $3,000 issued on 26th June 1990 have not yet been presented for payment.
3) Interest on O/D debited in bank statement debited $600 but was intimated to Zubair on 2 nd July 1990.
4) Collection charges entered in pass book $14 but not in cash book.
5) Zubair paid $2,000 into his bank account but it was wrongly credited by bank to Yusuf’s account.
6) Interest received and credited by bank $1,500. This information was revealed to Zubair on 4-7- 1990.
Required:
Calculate the corrected bank balance for cash book on 30-6-1990 and prepare bank reconciliation statement on
30-6-1990 for Zubair.
ANSWER
104
= 16000 + 80060– 72760= 865 DEBIT
ADJUSTED CASH BOOK
INTEREST 1500 OPENING 16000

RECEIVED BALANCE
CLOSING BALANCE 17114 INTEREST ON OD 600
COLLECTION 14
CHARGES
WRONG CREDIT 2000
($)
BALANCE AS PER ADJUSTED CASH BOOK 17114 (CREDIT)
- UNPRESENTED CHEQUES (3000)
+ UNCREDITED CHEQUES 4000
BALANCE AS PER BANK STATEMENT 18114 (DEBIT)
EXAM TYPE QUESTIONS
QUESTION 1
Answer
105
= 1000 + 8006 – 7276 = 1730 DEBIT
ADJUSTED CASH BOOK

BALANCE CHEQUES
LOST BY FIRE 65 CLOSING BALANCE 1315

(PAYMENT
ENTERED TWICE)
($)
+ UNPRESENTED CHEQUES (1686 – LOST BY FIRE 65) 1621
BALANCE AS PER BANK STATEMENT 2027(DEBIT)
QUESTION 2
Answer
106
ADJUSTED CASH BOOK
OPENING 139200 CLOSING BALANCE 193508

BALANCE
UNDERSTATED 20000
BALANCE
DIRECT TRANSFER 34200
BANK CHARGES 108
($)
RECTIFICATION OF ERRORS
107
ERROR
A measure of the estimated difference between the observed or calculated value of a quantity and its true value.
RECTIFICATION OF ERROR
In financial accounting, every single event is recorded in monetary terms. But sometimes it just so happens that

some events are either not recorded or recorded in wrong head of account or with a wrong figure.
Whatever the reason may be, there is always a chance of error in the books
of accounts. These errors inaccounting require rectification. The procedure adopted to rectify errors in financial
accounting is called “rectification of errors”.
TYPES OF ERRORS
There are two types of errors:
1) Errors where trail balance is balanced.
2) Errors where trail balance is not balanced.
Errors where trail balance is balanced

1) Error of Omission
It is an error where transaction is completely omitted from records. For example cash sales of $100 completely omitted from
records.
Cash 100 NOT RECORDED CASH 100

Sales 100 SALES 100
2) Error of Commission
It is an error where the correct amount is entered but in wrong personal account. For example goods purchased for $50 from simon
was credited to simpson a/c
Purchases 50 Purchases 50 Simpson 50

Simon 50 Simpson 50 Simon 50
3) Principle Error
It is an error where an item is entered in wrong type of account. For e.g. machine purchased for $1000 was debited to repairs to
machine a/c.
Machine 1000 Repairs 1000 Machine 1000
Cash 1000 Cash 1000 Repairs 1000
4) Transposition Error
It is an error where characters with in the amount are entered in wrong sequence. For example cash purchases of $56 were
recorded as $65.
Purchases 56 Purchases 65 Cash 9

Cash 56 Cash 65 Purchases 9
5) Error of Original Entry

The errors in which recording is in correct account but the figure is incorrect are called ERRORS OF
ORIGINAL ENTRY. For example, a receipt of $ 50,000 from a debtor is recorded as $ 5,000 in his account.
Cash 50000 Cash 5000 Cash 45000

Debtor 50000 Debtor 5000 Debtor 45000
6) Compensating Error
It is an error where the errors of 2 equal amounts cancel out each other’s effects. For example sales and wages both overcastted by
$200.Its correction will be (debit) sales 200 (credit) wages 200
7) Complete Reversal of Entries
108
It is an error the correct amount is posted in accounts but on the wrong side. For e.g. a payment of $16 to D was entered on receipt
side of cash book and credited to D
D 16 Cash 16 D 32
Cash 16 D 16 Cash 32
Example 1
Prepare the rectified entries.
1) A sale of goods of $678 to J HARRIS had been entered to J HART’S a/c.
2) Purchase of machine on credit from P.PYLE for $4,390 had been completely omitted from the books.
3) Purchase of motor van $3,800 and had been entered in error in motor expenses account.
4) Sale of $221 to E has been entered in books as $212.
5) Commission received $257 has been entered in error to sales a/c.
6) A receipt of $77 from K has been entered on the credit side of cash book and on the debit side of K account.
7) A cash purchase of goods $189 has been entered in error on the debit side of drawings account.
8) Discount allowed of $366 had been entered in error on the debit side of discount received account.
Answer
Correct Entry Wrong Entry Rectified Entry
J Harris 678 J Hart 678 J Harris 678
Sales 678 Sales 678 J Hart 678
Machine 4,390 Not recorded Machine 4,390
P.Pyle 4,390 P.Pyle 4,390
Motor Van 3,800 Motor expenses 3,800 Motor van 3,800
Cash 3,800 Cash 3,800 Motor expenses 3,800
E 221 E 212 E9
Sales 221 Sales 212 Sales 9
Cash 257 Cash 257 Sales 257
Commission 257 Sales 257 Commission 257
Cash 77 K 77 Cash 154
K 77 Cash 77 K 154
Purchases 189 Drawings 189 Purchases 189
Cash 189 Cash 189 Drawings 189
Discount allowed 366 Discount received 366 Discount allowed 366
A 366 A 366 Discount received 366
Prepare the rectified entries.
1) Purchases of $699 on credit from K Ward have been entered in K Wood’s account.
2) A cheque of $189 paid for advertisement has been entered in error in cash column of cash book.
3) Sales of $443 on credit to B Gordon had been entered in error in B.ORTON’S a/c.
4) Purchase of goods for $89 from C has been entered in error as $99.
5) Cash paid to H Moore $89 entered on the debit side of cash book and on the credit side of H Moore a/c.
6) A sale of furniture & fittings $500 has been entered in sales a/c.
7) Cash withdrawn from bank $100 had been entered in the credit side of cash account and on debit side of bank
account.
8) Purchase of goods $428 has been entered in error in the fixtures account.
109
Answer
Purchases 699 Purchases 699 Wood 699
Ward 699 Wood 699 Ward 699
Advertisement 189 Advertisement 189 Cash 189
Bank 189 Cash 189 Bank 189
Gordon 443 Orton 443 Gordon 443
Sales 443 Sales 443 Orton 443
Purchases 89 Purchases 99 C 10
C 89 C 99 Purchases 10
Moore 89 Cash 89 Moore 178
Cash 89 Moore 89 Cash 178
Furniture 500 Sales 500 Furniture 500
Cash 100 Bank 100 Cash 200
Bank 100 Cash 100 Bank 200
Purchases 428 Fixtures 428 Purchases 428
Cash 428 Cash 428 Fixtures 428
Errors where trail balance is not balanced

In this case a suspense account is prepared.
Suspense Account
A suspense account is a temporarily opened when the trail balance is not balanced. It helps to balance trail
balance temporarily until the differences are ascertained. After all corrections suspense account balance must
become zero. Suspense account is also opened when the bookkeeper is unsure where to post an item and enters
it to a suspense account before any other instructions received. Suspense account is mainly opened due to the
following errors:
1) Addition Errors
Figures are incorrectly added in a ledger account. For e.g. sales under cast or purchase overcast etc.
2) Posting error
a) an entry made in one record is not posted at all
b) an entry in one record is incorrectly posted to another for e.g. cash $10,000 entered in the cash book for the
purchase of a car is: ) not posted at all in purchases account b) posted to purchases account as $1,000
3) Trial balance errors
A balance is omitted, or incorrectly extracted, in preparing the trial balance. For e.g. purchases balance
calculated correctly as $20,000, and written in trail balance as $2,000 or the balance of salaries account
$5,000was omitted in extracting the trail balance.
Example 3
A trail balance was extracted on 31-12-1998 which failed to agree by $330 a shortage on the credit side of the
trail balance. A suspense a/c was opened for the difference. Later on following errors were discovered:
1) Sales day book had been under cast by $100.
2) Sales of $250 to J.CANTRELL had been debited in error to J.COCHRANE’S a/c.
3) Rent a/c had been under cast by $ 70.
4) Discount received had been under cast by $300.
5) A sale of motor car had been credited in error to sales a/c $360.
Required:
110
Pass rectified entries and prepare suspense a/c. If unadjusted net profit is $7,900 for the year ended 31-12-
1998.Show the calculation of corrected profit.
Answer
Sales was under casted Suspense 100

only.
Sales 100
Cantrell 250 Cochrane 250 Cantrell 250

Sales 250
Sales 250 Cochrane 250
Rent has been under Rent 70

casted only
Suspense 70
Discount received has Suspense 300

been under casted only.
Motor car 360 Sales 360 Motor car 360
Suspense account
Sales 100 Opening balance 330
Discount received 300 Rent 70
Total 400 Total 400
Adjusted profit
Details ($)
Unadjusted profit 7,900
Sales 100
Rent (70)
Sales (360)
Adjusted profit 7,870
A trail balance was extracted on 31-12-1996 which failed to agree by $292 a shortage on the credit side of the
trail balance. A suspense a/c was opened for the difference. Later on following errors were discovered:
1) Purchase day book overcast by $60.
2) $55 received from the sale of furniture has been entered in sales account.
3) Private purchase of $115 had been entered as a business purchase.
4) Bank charges of $38 entered in cash book but not posted to bank charges a/c.
5) A sale of goods to B Cross $690 was correctly entered in sales day book but entered in the personal a/c as
$960.
111
Required: Pass rectified entries and prepare suspense a/c. If unadjusted net profit is $11,370 for the year ended
31-12-1996.Show the calculation of corrected profit.
Answer
Purchases have been over Suspense 60

casted only
Purchases 60
Furniture 55 Sales 55 Furniture 55
Drawings 115 Purchases 115 Drawings 115
Cash 115 Cash 115 Purchases 115
Bank charges 38 Bank charges 0 Bank charges 38
Bank 38 Bank 38 Suspense 38
B Cross 690 B Cross 960 Suspense 270
Sales 690 Sales 690 B Cross 270
Suspense account
Purchases 60 Opening balance 292
B cross 270 Bank charges 38
Total 330 Total 330
Adjusted profit
Details ($)
Unadjusted profit 11,370
Purchases 60
Sales (55)
Purchases 115
Bank charges (38)
Adjusted profit 11,452
EXAM TYPE QUESTION

QUESTION 1
112
Answer
Sales were over-casted by Sales 36000
£ 36,000 Suspense 36000
Receivable was omitted £9000 Receivable 9000
Suspense 9000
Cash was over stated by Suspense 4000

£4000
Cash 4000
Suspense account
Opening balance 41000 Sales 36000
Cash 4000 Receivable 9000
QUESTION 2
Answer
Opening inventory not listed Opening inventory 4000
Suspense 4000
Cash 800 Cash 800 Debtors 800
Bad debts recovered/expense Bad debts expense 800 Suspense 800

800
Debtors 800
Suspense account
Opening balance 4800 Debtors 800

(balancing figure)
Opening inventory 4000
113
114

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COURSE TITLE:

Journal à Ledger à Trail Balance à Financial Statements

Ledger (Classification Book)

Trail Balance (Summarizing document)

Financial Statements (Interpretation document)

Trading Account shows the gross profit/loss for the period

(2) Balance Sheet /Statement of financial position

Double Entry Book Keeping

(1) Accounting Concepts (Broad accounting assumptions & conditions)

(2) Accounting Bases (Methods available to apply accounting concept)

(3) Accounting Policies (Selected accounting base)

Assets = Liabilities + Capital

(2) What it is?

(3) Setting Bodies

(4) Concerned With

Key Characteristics of Accounting Information

1. Business started with cash £10,000.

2. Business started with bank £ 5,000.

3. Purchased goods for cash £500.

4. Goods purchased from Mr. Babar £400.

5. Goods returned to Mr. Babar £100.

6. Cash paid to Mr. Babar £200.

7. Goods sold for cash £1,000.

8. Goods sold to Mr. Ali £ 800.

9. Goods returned by Mr. Ali £300.

10. Cash received from Mr. Ali £400.

11. Paid salaries by cash £500.

12. Paid rent by cheque £300.

13. Commission received in cash £200.

14. Cash withdrawn from business for personal use £100.

15. Goods withdrawn from business for personal use £200.

16. Purchased motor van by cheque £1,000.

17. Purchased furniture by cash £600.

18. Loan taken from bank £ 500.

19. Cash given away as Charity £ 100.

20. Goods given away as Charity £ 100.

Transactions Account Debit (£) Credit (£)

1 Cash (A+) 10,000

Capital (C+) 10,000

2 Bank (A+) 5,000

Capital (C+) 5,000

3 Purchases (E+) 500

Cash (A-) 500

4 Purchases (E+) 400

Babar (L+) 400

5 Babar (L-) 100

Purchases return (E-) 100

6 Babar (L-) 200

Cash (A-) 200

7 Cash (A+) 1000

Sales (I+) 1000

8 Ali (A+) 800

Sales (I+) 800

9 Sales return (I-) 300

Ali (A-) 300

10 Cash (A+) 400

Ali (A-) 400

11 Salaries (E+) 500

Cash (A-) 500

12 Rent (E+) 300

Bank (A-) 300

13 Cash (A+) 200

Commission (I+) 200

Cash (A-) 100