Principles of Accounts KIT - G10 - G12

1.
INTRODUCTION
Principles of Accounts TO PRINCIPLES
7110 A Supplementary OF ACCOUNTS
Study Text 1
MINISTRY OF EDUCATION
LUSAKA PROVINCE
PRINCIPLES
OF
ACCOUNTS7110
SUPPLEMENTARY STUDY TEXT
FOR GCE/ ‘O’ LEVEL
Grade 10 – 12
NOT FOR SALE

BUSINESS STUDIES TEACHERS ASSOCIATION OF ZAMBIA
Business Studies Teachers Association of Zambia – Lusaka Province NOT FOR SALE
1.INTRODUCTION
Study Text 2
PRINCIPLES OF ACCOUNTS7110
SUPPLEMENTARY STUDY TEXT FOR GCE/’O’LEVEL
2nd Edition
Authors
RICHARD FISONGA MBA Fin, ZiCATech, BBA Ed, Dip. Ed.
Head of Business Studies Department – Highland Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
JAMES GWENANI MBA Fin, ZiCATech, BBA Ed, Dip. Ed.

Deputy Headteacher - Arakan Boys Secondary School,
Formerly Head of Business Studies Department - Nelson Mandela Secondary School,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
Past National Treasurer General for the Business Studies Teachers Association of Zambia.
EDGAR SHILUWE BBA Ed, Group Dip. Marketing, Dip. Ed.

Deputy Headteacher, Roma Girls Secondary School,
Formerly Head of Business Studies Department - Roma Girls Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
JOHN KAPUTULA MBA Fin, ZiCALic, BBA Ed, Dip. Ed.

Head Teacher, Mahatma Gandhi Combined School,
Formerly Head of Business Studies Department - Chilenje South Secondary School,
Past Vice Secretary General for the Business Studies Teachers Association of Zambia,
Lusaka Province.
Business Studies Teacher’s Association of Zambia

Lusaka Province
1.INTRODUCTION
Study Text 3
©2022 BUSTAZ Lusaka Province

Principles of Accounts - Supplementary Study Text for GCE/’O’ Level
The right of Richard Fisonga, James Gwenani, Edgar Shiluwe and John Kaputula as authors
of this work under the umbrella of the Business Studies Teachers Association of Zambia has
been asserted by them. This supplementary book is not for sale, however express permission
for free distribution and education purposes has been granted.
Disclaimer
Although the authors have made every reasonable effort to ensure that the information in this
book was correct at press time, they make no express or implied representation, with regard
to the accuracy of the content herein and hereby disclaim any legal responsibility or liability to
any party caused by errors or omissions. Note that some pictures of products and services
that are referred to may be either trademarks and/or registered trademarks of their respective
owners. The authors make no claim to these trademarks.
1.INTRODUCTION
Study Text 4
PROVINCIAL EDUCATION OFFICER’S STATEMENT
The Ministry of Education envisions to achieve access to high quality education across the
nation and Lusaka province is no exception. One of the main indicators of quality education is
Examination results to which the availability of quality books is irrefutably one of the main
contributing factors. There is therefore a need at all times to have material written with the
teacher and learner in mind and which adheres to the official syllabus and the associated
learner outcomes.
The production of this supplementary book by the BUSTAZ is one of the provincial initiatives
to improve teacher and learner performance in class assessments and National
Examinations. The book has been written in such a way as to meet these needs and ensure
that teachers and learners have access to up to date subject content. The association and
authors deserve commendation for the job well done.
This initiative started in 2018 when the first edition of this book was produced. The province
would therefore like to express sincere thanks to the then, Provincial Education Officer, Mr.
Paul Ngoma, the Principal Education Standards Officer Mrs. Grace Sinkolongo and the Senior
Education Standards Officer – Business Studies, Dr. John S. Chola, for the administrative
support given to the association.
I sincerely believe that this supplementary material will go a long way in achieving the goals of
the Ministry of Education and improve learner performance in Lusaka Province and beyond.
School administrators are therefore encouraged to distribute the material to teachers and
learners in hard and soft copy at no cost to the recipients.
Allan Lingambe PhD

Provincial Education Officer
LUSAKA PROVINCE
1.INTRODUCTION
Study Text 5
FOREWORD
The compilation of this supplementary book was necessitated by the need to provide
comprehensive material in the subject area to cover all aspects of the syllabus in order to
improve examination results. The authors ensured that the contents of the book conformed
to the requirements of the official Curriculum Development Centre (CDC) Syllabus as well as
the Examination Syllabus for the Examinations Council of Zambia.
The information contained in this supplementary book is professionally written by qualified and
experienced teachers of the subject. Teachers and learners are therefore assured that the
information is well researched and relevant to the current curriculum and lesson outcomes as
contained in the syllabus.
The book has been developed with the teacher and learner in mind. The teacher will be
equipped with a well summarised all-in-one resource that will enhance their preparedness for
effective delivery of lessons in class, thus improving teacher performance. The learner, on the
other hand will find this book easy to use with its well summarised notes and easy to
understand illustrations which will aid their understanding of concepts. This will equip them
with knowledge, values and skills necessary for the business environment and in turn help to
improve learner performance in the final examinations.
This book will prove to be a helpful resource for both teachers and learners in their quest to
achieve the intended syllabus outcomes and improve results in Principles of Accounts.
Mrs. Lenny N. Longwe

Senior Education Standards Officer – Business Studies
1.INTRODUCTION
Study Text 6
ACKNOWLEDGEMENTS
The authors would like to acknowledge the help and support received from the Provincial
Education Officer, Dr. Allan Linganbe for the encouragement to have this material edited and
the permission to have it distributed in soft copy to teachers and learners. We also
acknolwedge the professional help and advise received from the Senior Education Standards
officer, Mrs. Lenny Longwe in the preparation of the Second edition of this book.
We appreciate the efforts of many teachers who provided reviews and advice on a number of
topics.
Special thanks to key stakeholders in Business and Financial Education such as the
Curriculum Development Centre (CDC), Examinations Council of Zambia (ECZ), Securities
and Exchange Commission (SEC), Pensions and Insurance Authority (PIA), Competition and
Consumer Protection Commission (CCPC), the Zambia Institute of Chartered Accountants
(ZICA) and the Bankers Association of Zambia (BAZ). These organisations availed valuable
information through seminars, workshops and electronic means without which some topics in
this book could not have been updated.
This book is a result of many years of the authors’ practical teaching experiences in the
classroom. The bigger part of the book is a compilation of the authors’ self-generated notes.
Other resources used are here acknowledged which have been used particularly for
education purposes as provided for under Fair Use. They include:
David Cox, (2005) ‘Success in Book-keeping and Accounts’ John Murray Publishers
Favell A. J. (1965) ‘Practical Bookkeeping and Accounts’ University Tutorial Press
Gwenani J. (2022) ‘Principles of Accounts A Complete Course’ James Gwenani, Lusaka
Hamakoko R, (2015) ‘Senior Secondary Principles of Accounts’ MK Publishers
Wood F. and Sangster A. (2012) ‘Business Accounting 1, 12th Edition’ Pearson

Education Limited
1.INTRODUCTION
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TABLE OF CONTENTS
1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS ........................................... 10

Importance of accounting/financial information................................................................. 10
Users of Accounting Information ......................................................................................... 10
Job Prospects/Career Prospects........................................................................................... 10
2.ACCOUNTING CONCEPTS AND ASSUMPTIONS ............................................. 11
Accounting Concepts............................................................................................................ 11
3.BUSINESS TRANSACTIONS .............................................................................. 14
Types of transactions ........................................................................................................... 14
Cash Transaction............................................................................................................... 14
Bank Transactions ............................................................................................................. 14
Credit Transactions ........................................................................................................... 14
Barter transactions ........................................................................................................... 14
4.THE ACCOUNTING CYCLE ................................................................................. 15
Source Documents ............................................................................................................... 15
Books of Accounts ................................................................................................................ 16
Subsidiary books ............................................................................................................... 16
Ledger ............................................................................................................................... 16
The Trial Balance .................................................................................................................. 16
Final Accounts ...................................................................................................................... 16
5.THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE ..................................... 17
Double Entry Bookkeeping ................................................................................................... 17
Role of Double Entry ............................................................................................................ 17
Ledger Accounts and their Classification ............................................................................. 17
6.SUBSIDIARY BOOKS .......................................................................................... 19
Advantages of keeping books of original entry.................................................................... 19
Books of Prime Entry, Transaction Type and Source Documents ........................................ 19
The Cash Book ...................................................................................................................... 20
Single Column Cash Book (Cash Account) ........................................................................ 20
Single Column Cash Book (The Bank Account) ................................................................. 21
Two Column Cash Book .................................................................................................... 22
Three Column Cash Book.................................................................................................. 23
Petty Cash Book and the Imprest System ........................................................................ 25
Purchases Day Book/Purchases Journal ........................................................................... 26
Sales Day Book .................................................................................................................. 28
Purchases Returns Day Book ............................................................................................ 29
Sales Returns Day Book .................................................................................................... 31
General Journal................................................................................................................. 32
1.INTRODUCTION
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7.THE TRIAL BALANCE ......................................................................................... 34

Purpose of the trial balance ................................................................................................. 34
Preparation of the Trial Balance .......................................................................................... 34
8.FINAL ACCOUNTS .............................................................................................. 36
The Trading Account ............................................................................................................ 36
The Profit and Loss Account ................................................................................................. 37
Balance Sheet/Statement of Financial Position ................................................................... 38
The Accounting Equation.................................................................................................. 38
Order of the Balance Sheet .............................................................................................. 39
9.ADJUSTMENTS TO FINAL ACCOUNTS ............................................................. 42
Accrued Expenses................................................................................................................. 42
Accrued Incomes .................................................................................................................. 43
Prepaid Expenses ................................................................................................................. 43
Prepaid Incomes ................................................................................................................... 44
Bad Debts ............................................................................................................................. 45
Provision for Doubtful Debts................................................................................................ 46
Bad Debts with Provision for Bad/Doubtful Debts .............................................................. 49
Depreciation ......................................................................................................................... 51
Disposal of Fixed Assets ....................................................................................................... 55
Full question on Final Accounts with Adjustments .............................................................. 59
10.LIMITATION OF THE TRIAL BALANCE ............................................................ 62
Errors not disclosed by the Trial Balance ............................................................................. 62
Errors disclosed by the Trial Balance ................................................................................... 63
11.BANK RECONCILIATION .................................................................................. 66
Definition and Explanation ................................................................................................... 66
Discrepancies between Bank statement and Cash book ..................................................... 66
Preparation of Bank Reconciliation Statements .................................................................. 66
Method 1: Starting with the Cash Book Balance .............................................................. 67
Method Two: Starting with the Bank Statement Balance ................................................ 67
12.CONTROL ACCOUNTS ..................................................................................... 70
Reasons for Preparing Control Accounts ............................................................................. 70
Debtors Ledger Control Account .......................................................................................... 71
Creditors Ledger Control Account ........................................................................................ 71
13.FINAL ACCOUNTS OF NON PROFIT MAKING ORGANISATIONS ................. 74
Sources of Income for Non Profit Concerns ......................................................................... 74
Expenditure streams for Non Profit Concerns ..................................................................... 74
Financial Statements of Non Profit Concerns ...................................................................... 74
Receipts and Payments Account ...................................................................................... 74
Income and Expenditure Account .................................................................................... 75
Treatment of special items in Non Profit Concerns ......................................................... 76
Trading activies in Non Profit Concerns ........................................................................... 79
1.INTRODUCTION
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The Accumulated Fund ..................................................................................................... 80

Capital and Revenue Expenditure and Receipts............................................................... 80
14.INCOMPLETE RECORDS/SINGLE ENTRY ...................................................... 90
Meaning of Incomplete records ........................................................................................... 90
Difference Between Single Entry and Double Entry ............................................................ 90
Important Formulae ............................................................................................................. 91
Calculation of Profit.............................................................................................................. 91
Net Profit as Increase in Net Worth ................................................................................. 91
Net Profit as an increase in capital ................................................................................... 93
Calculation of Missing Figures .......................................................................................... 94
Margin and Mark Up......................................................................................................... 96
15.PARTNERSHIP ACCOUNTS ............................................................................. 99
Formation of Partnerships ................................................................................................... 99
Partnership Deed .............................................................................................................. 99
Partnership Act, 1890 ....................................................................................................... 99
Accounts in Partnerships .................................................................................................... 100
Profit and Loss Appropriation Account .......................................................................... 100
Capital and Current Accounts ......................................................................................... 100
16.MANUFACTURING ACCOUNTS ..................................................................... 109
Classification of a Manufacturer’s Costs ............................................................................ 109
Direct Manufacturing Costs ............................................................................................ 109
Indirect Manufacturing Costs - (Factory Overhead Expenses) ....................................... 109
Administration, Finance, Selling And Distribution Expenses.......................................... 110
Preparation of a manufacturing firm’s Final Accounts ...................................................... 111
17.ETHICS IN ACCOUNTANCY ........................................................................... 115
Importance of Ethics .......................................................................................................... 115
Elements of Good Accountany Ethics ................................................................................ 115
Unethical Accountancy Behavoiur ..................................................................................... 115
Effects of Non – Adherence to Ethics................................................................................. 115
18.ANALYSIS AND INTERPRETATION OF FINAL ACCOUNTS ........................ 116
Importance of Financial Ratios ........................................................................................... 116
Profitability Ratios .............................................................................................................. 116
Capital Efficiency Ratios ..................................................................................................... 118
1.INTRODUCTION
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1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS

Principles of Accounts is a subject concerned with the systematic recording, analysing,
reporting and interpreting of financial transactions using a set of rules and regulations.
Bookkeeping is the recording of business transactions from source documents into the
books of accounts in a systematic and chronological order.
Importance of accounting/financial information
Accounting/Financial information is important for the following reasons:

 Calculating profit
 Following up credit transactions
 Used for checks and balances
 Helps business managers to plan
 Provides proof of financial position
 Helps to calculate the tax to be paid to the tax authorities.
Users of Accounting Information
Users of accounting information include the following:

 Managers of businesses
 Prospective investors
 The lenders (banks)
 The government
 Tax authorities
 Suppliers
 Customers
 Employees
Job Prospects/Career Prospects
The following are the job prospects available to students of accounting:

 Entrepreneur
 Chief Finance Officer
 Financial Accountant
 Cost and Management Accountant
 Accounting teacher/lecturer
 Credit controller
 Tax advisor
 Auditor
 Banker
 Cashier
 Consultant etc.
2. ACCOUNTING
Principles of Accounts CONCEPTS AND
7110 A Supplementary ASSUMPTIONS
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2. ACCOUNTING CONCEPTS AND ASSUMPTIONS

Accounting concepts and conversions are standard rules that must be followed in the
preparation of accounting records and financial statements.
This helps to make sure that financial statements provide true information about the financial
position, performance and changes in the financial position of an entity that is useful to a
wide range of users in making business decisions.
Accounting concepts help to maintain uniformity in the recording, reporting and interpretation
of financial information.
Accounting Concepts
The following are some of the Accounting concepts and conversions:
 The Money Measurement Concept

This concept says that only those transactions which can be expressed in monetary
value should be recorded in the books of accounts. For example, if the bookkeeper is
told that during the day, 80 people entered the shop and bought goods for K30 000, the
bookkeeper should only record the value of the goods sold in the books of accounts and
not the number of people who bought.
 Business entity concept

This is also known as the Separate Entity Concept. This principle states that the
business and the owner are two different entities existing as two separate persons. This
means that the private affairs of the proprietor should be separated from the affairs of the
business. Therefore, the assets of the business are not the assets of the owner, and the
liabilities of the business are not the liabilities of the owner and vice versa.
 Going Concern Concept

This concept says that the financial reports of a business should be prepared with the
assumption that the business will continue operating for a foreseeable future, i.e. a fairly
long period of time. This concept is only rejected when the business is going to close
down in the near future.
 Realisation Concept
This is also referred to as Revenue Recognition Concept. This principle states that
revenue is recognised to have been earned by the seller when goods or services have
been sold and accepted by the buyer irrespective of whether cash has been received or
not.
 Historical Cost Concept

This concept tells us that assets bought by a business should be recorded in the books
of accounts at their cost price (i.e. the price at which they were bought).
 Objectivity Concept
The objectivity concept states that accounting information and financial reporting should
be independent and supported by unbiased evidence. This means that accounting
2. ACCOUNTING
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information must be based on research and facts and not merely on the preparer’s
opinion. This concept is aimed at making financial statements more relevant and reliable.
 Periodic Concept
All the transactions are recorded in the books of accounts on the assumption that profits
on these transactions are to be ascertained for a specified period.
This is known as accounting period concept. 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.
Further, this concept assumes that, indefinite life of business is divided into parts. These
parts are known as Accounting Period. It may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period which may be a
calendar year or a financial year.
 Dual aspect Concept

Dual aspect is the foundation or basic principle of accounting. It provides the very basis
of recording business transactions in the books of accounts.
This concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects 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) (ii) Receiving of goods. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental accounting
equation:
Assets = Liabilities + Capital
The above accounting equation entails that the assets of a business are always equal to
the claims of owner/owners and the outsiders. This claim is also termed as capital or
owner’s equity and that of outsiders, as liabilities or creditors’ equity.
 Accrual Concept
The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that
revenues are recognised when they become receivable.
Though cash is received or not received and the expenses are recognised when they
become payable though cash is paid or not paid. Both transactions will be recorded in
the accounting period to which they relate. Therefore, the accrual concept makes a
distinction between the accrual receipt of cash and the right to receive cash as regards
revenue and actual payment of cash and obligation to pay cash as regards expenses.
 Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised,
the next step is to allocate it to the relevant accounting period.
2. ACCOUNTING
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 Prudence Concept
Prudence requires that accountants should exercise a degree of caution in the adoption
of policies and significant estimates such that the assets and income of the entity are not
overstated whereas liability and expenses are not under stated. The rationale behind
prudence is that a company should not recognize an asset at a value that is higher than
the amount which is expected to be recovered from its sale or use. Conversely, liabilities
of an entity should not be presented below the amount that is likely to be paid in its
respect in the future.
 Materiality Concept
This principle demands that accountants would only recognise and include material
items and leave out immaterial or minor items when preparing accounting records of a
business organisation.
Information is considered to be material if its removal influences the economic decisions
of users taken on the basis of the financial statements or records prepared. Materiality is
therefore about how significant the transaction or item is in the financial statements or
records to users of that information.
3. BUSINESSStudy
Principles of Accounts 7110 A Supplementary TRANSACTIONS
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3. BUSINESS TRANSACTIONS
A transaction is an exchange of values. It can also be defined as the exchange of goods,
money and services between persons. In other words, a business transaction is a form of
interaction between a business and its customers, suppliers and others with whom it does
business.
Types of transactions
There are generally four types of transactions:
Cash Transaction
A cash transaction is a transaction that involves the exchange of goods or services for an
immediate payment of cash
e.g. Bought goods by cash K10 000
Bank Transactions
A bank transaction is a transaction that involves the exchange of goods or services for an
immediate payment by cheque.
e.g. Bought goods by cheque K1 000
Credit Transactions
A credit transaction is a transaction that involves the exchange of goods or services for a
deferred payment i.e. postponed payment,
e.g. Bought goods on credit, payment is to be made the following week.
Barter transactions
A barter transaction is a transaction that involves the exchange of goods for goods, services
for services or goods for services.
e.g. Sold furniture to Bwalya in exchange for maize.
4. THE ACCOUNTING
Principles of Accounts 7110 A Supplementary Study TextCYCLE 15
4. THE ACCOUNTING CYCLE

The accounting cycle is a description of how financial information flows in an organisation.
It starts with the source documents which provide the details of transactions. These details
are entered in the Subsidiary books. The details in the subsidiary books are posted to the
ledger using the double entry system.
To prove the accuracy of the double entry in the ledger, a Trial Balance is extracted from
which the Final Accounts are prepared.
Below is the flow of financial information presented in diagrammatic form.
Documents providing proof of SOURCE DOCUMENTS

transactions are collected Receipts, cheques, Credit notes, Debit Notes, Invoices,
SUBSIDIARY BOOKS
Details of transactions are Cash Books, Purchases Journal, Purchases
entered in the books of prime Returns Journal, Sales Journal, Sales Returns
entry Journal, General Journal
LEDGER
Information is then posted to the
Sales Ledger (Debtors Ledger)
ledger accounts
Purchases Ledger (Creditors ledger)
General Ledger (Nominal Ledger)
A trial balance is extracted from TRIAL BALANCE

the ledger accounts
FINAL ACCOUNTS
Finally, Final Accounts are Trading Account, Profit and Loss Account, Balance
prepared Sheet
Source Documents
Source documents are accounting records that are used to record business transactions in
the books of accounts. They provide proof of a transaction. They include: invoice,
(Purchases and sales), credit note (Purchases Returns and Sales Returns), Receipts,
Cheques, cheque stabs, Bank Statements (Cashbook), Petty Cash Voucher (Petty
Cashbook)
4. THE ACCOUNTING
Principles of Accounts 7110 A Supplementary Study TextCYCLE 16
Books of Accounts
These are books in which business transactions are entered. There are two types of books
of accounts namely:
Subsidiary books
These are books in which transactions are first entered before (prior to) posting to the
ledger. These are also called books of prime entry, books of original entry, books of first
entry, daybooks or journals. They include:
- Sales Daybook,
- Purchases Daybook,
- Purchases Returns Daybook,
- Sales Returns Daybook,
- Cashbook (i.e. Single Column, Two Column, Three Column, and Petty Cashbooks),
and
- The General Journal.
Ledger
This is the main (principal) book of accounts where the double entry is completed. It is
divided into four (4) sub – ledgers namely:
- Sales Ledger,
- Purchases Ledger,
- General Ledger and
- Cash Ledger (Cash book),
The Trial Balance
A trial balance is a list of debit and credit balances extracted from ledger as at a particular
date.
Since transactions in the ledger are entered on the basis of double entry, it follows that for
every transaction, there must be two entries: a debit entry; and a credit entry. This means
that if all entries are done correctly, the total of the debit entries should be equal to the total
of the credit entries.
The test/trial of the accuracy can then be determined by picking balances from the ledger
accounts. Balances are picked because they represent a summary of the entries made in
each account.
Final Accounts
Final Accounts are financial statements prepared at the end of a trading period (usually,
twelve months) to calculate the profit or loss made and to ascertain the financial position of
the business. They include the Trading Account, Profit and Loss Account and the Balance
sheet
5.THE LEDGER
Principles of Accounts 7110 AAND THE DOUBLE ENTRY
Supplementary PRINCIPLE
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5.THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE

The double entry principle states that for every debit entry, there is a corresponding credit
entry of the same amount arising from the same transaction.
It is derived from the Dual Aspect Concept
The double entry concept assumes that every transaction has a dual effect.
For example, goods purchased for cash has two aspects which are:
(i) Giving of cash
(ii) Receiving of goods
These two aspects are to be recorded.
Double Entry Bookkeeping
Double Entry Bookkeeping is a system of maintaining books of accounts on the basis of the
double entry principle.
There are three Golden rules of bookkeeping which are:
Personal accounts Real accounts Nominal accounts

Debit the Credit the Debit what Credit what Debit Credit
receiver giver comes in goes out expenses incomes
The other type of bookkeeping is Single entry bookkeeping which does not recognise the
Double Entry Principle.
Role of Double Entry
The role/importance of double entry can be summarised as follows:

1. provides a method for quick checking the accuracy of the ledger
2. Confirms the dual aspect of every transaction
3. helps to track the movement of value from one account to another
4. Double entry keeps the accounting equation in balance
Ledger Accounts and their Classification
An Account is a page or series of pages in the ledger where business transactions of a

particular aspect of the business are recorded. E.g a record of rental payment
An account may also be defined as a summarized record of business transactions that have
taken place with a particular person or organisation.
Format of an account
An account can either be presented in columnar/vertical form or in T-account form.
The columnar format

Date Details F DR CR
5.THE LEDGER
Principles of Accounts 7110 AAND THE DOUBLE ENTRY
Supplementary PRINCIPLE
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The T-format
Dr Cr
Date Details K Date Details K
Accounts can be classified according to what they contain, thus:
Personal Accounts
These are accounts of people or businesses. They are usually accounts of debtors and
creditors. Examples of personal accounts include: Shoprite Account, Mulimbika Account,
Trade Kings Account etc.
Real Accounts
Real accounts are accounts for assets of a business. Examples of real accounts include:
furniture account, stock account, cash account, machinery account, buildings account etc.
Nominal Accounts
Nominal accounts are accounts of expenses and incomes (revenues) of the business.
Examples of nominal accounts include fuel expenses account, advertising account, rent
account, stationery account, drawings account, capital account, etc.
6. SUBSIDIARY
Principles of Accounts 7110 A Supplementary BOOKS
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6. SUBSIDIARY BOOKS
Books of original entry are books in which transactions are recorded as they are posted to
the relevant ledger accounts.
Advantages of keeping books of original entry
- Accounts can be found more easily by the use of the cross referencing nature of the
books of original entry being kept.
- If records are lost, then the ledgers and the books of original entry acts as a backup
for each other.
- Acts as a 'listing device' for posting totals to various accounts, thereby saving labour.
- The commonly used books of original entry together with source document used to
record transactions are:
Books of Prime Entry, Transaction Type and Source Documents
BOOK TRANSACTION TYPE SOURCE DOCUMEN

Sales daybook (or Sales For credit sales Duplicate Invoice
journal) for
Purchases daybook (or For credit purchases Original Invoice
Purchases journal)
Sales returns day Returns inwards Original Credit notes
book/Returns inwards journal)
daybook (or
Purchases returns Returns outwards Duplicate Credit notes
daybook/Returns outwards journal
daybook
Cashbook for receipts and Cheque counterfoils (From
payments of cash and The cheque book to show cheques
cheques paid out),
paying in slips (Evidence of money
paid into bank accounts),
Till rolls (Evidence of cash being
received)
Petty cashbook For small expenses Petty cash vouchers
General journal All transactions where All of the above
Everything else not
covered are first
entered before posting
them to the ledger
6. SUBSIDIARY
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The Cash Book
This is a book used for recording all cash transactions. (i.e. all cash receipts to the business
and all cash payments by the business). The cash book is a book of prime entry and is also
part of the double entry system. For this reason, the cash book is also called the cash
ledger.
Types of Cash books

There are four types of cash books. These are:
- Single Column cash book
- Two column cash book
- Three column cash book
- Petty Cash Book
Single Column Cash Book (Cash Account)

This is a book with the Cash Account only. The cash account is an account used for all cash
receipts and payments. All cash received is recorded on the debit side and all cash paid out
is recorded on the credit side of the cash account.
The source documents for the cash account are:

- For cash receipts (money received) - Duplicate receipt/Duplicate cash invoice
- For cash payments (money paid out) - Original Receipt/Original cash invoice
-
Source document Subsidiary book Account to Dr Account to Cr.
Original Receipts, original Cash Book Corresponding Cash A/C
Cash Sale A/C
Duplicate receipt/Cash Cash book Cash A/C Corresponding A/C
Sale
Double Entry for Cash Transactions
Cash Account
- Money received by cash/cash withdrawn from the bank for business use –
Dr. Cash Account
Cr. Corresponding account
- Money paid by cash/Cash deposited in the bank
Dr. Corresponding account
Cr. Cash Account
Example
From the following information pertaining to the business of Willie Simwinga, prepare a
Single Column Cash Book and balance the account at the end of the month.
2017
1 Jan Willie Simwinga started in business with K20 000 cash.
2 Jan Deposited K3 000 in the bank
3 Jan Bought land and buildings by cash K4 500
4 Jan Bought fixtures and fittings by cash K1 700
5 Jan Bought furniture by cash K2 500
6. SUBSIDIARY
Study Text 21
7 Jan Paid for electricity by cash K250

10 Jan Bought goods by cash K6 000
12 Jan Sold goods by cash K2 000
14 Jan Bought stationery by cash K30
14 Jan Bought goods by cash K3 400
15 Jan Withdrew cash from the till for personal use K250
15 Jan Withdrew K300 from the bank for business use.
18 Jan Bought a motor van by cash K11 000
21 Jan Cash sales K500
24 Jan Cash purchases K1 400
29 Jan Bought a Cash Register (till) by cash K1 300
30 Jan Paid wages and salaries by cash K2 400.
Willie Simwinga’s
One Column Cash Book (Cash Account)
Date Details F Dr (K) Cr (K)
2017
Jan 1 Capital 30,000
2 Bank 3,000
3 Land and Buildings 4,500
4 Fixtures and Fittings 1,700
5 Furniture 2,500
7 Electricity 250
10 Purchases 6,000
12 Sales 2,000
14 Stationery 30
14 Purchases 3,400
14 Sales 3,600
15 Drawings 250
15 Bank 300
15 Sales 4,100
18 Motor Van 11,000
21 Sales 500
24 Purchases 1,400
29 Cash Register 1,300
30 Wages and Salaries 2,400
31 Balance c/d 2,770
40,500 40,500
Feb 1 Balance b/d 2,770
Single Column Cash Book (The Bank Account)

The bank account is an account used for all cash receipts and payments involving the
money kept in the bank account.
The source documents used in the two column cash book include the following
6. SUBSIDIARY
Study Text 22
- For money received - Duplicate receipt, The cheque

- For money paid - Original Receipt, cheque counterfoil
Cheque Cash Book Bank A/C Corresponding A/C
Cheque counterfoil/Stabs Cash book Corresponding A/C Bank A/C
Double entry for Bank transactions

- Money received by cheque/cash deposited in the bank account
Dr. Bank Account
Cr. Corresponding Account
- Money paid by cheque/cash withdrawn from the Bank Account

Dr. corresponding Account
Cr. Bank Account
Two Column Cash Book

This is a cash book that has both the Cash Account and Bank account side by side.
Example
M Kachesa started business on 1st March, 2016 with K30 000 cash and K25 000 at bank.
The following transactions took place during the month. You are required to enter them in
her Cash book and balance it at the end of the month.
2016
March 02 Bought Land and buildings by cash K5 600.
March 03 Bought Furniture and Fittings by cheque K3 000.
March 05 Purchased Furniture and Fittings by cheque K1 500.
March 07 Paid by cash for advertising K250.
March 09 Bought goods for K5 000 by cash.
March 12 Sold goods by cheque K3 000.
March 15 withdrew K550 from the cash till for personal use.
March 19 Sold goods by cash K1 200.
March 20 Bought goods by cheque K3 400.
March 20 Sold goods for K3 500 cash
March 22 Withdrew cash K400 from the bank for business use.
March 23 Bought a Motor car for K10 000 by cheque.
March 26 Received a bank loan for K7 000 by cheque.
March 28 Received K2 000 cash from Deli Tembo.
March 30 Sold goods by cash and immediately deposited into the bank K2 100.
March 30 Paid cash into bank K500
6. SUBSIDIARY
Study Text 23
M. Kachesa’s
Two Column Cash Book
Date Details F Cash Account Bank Account
Dr (K) Cr (K) Dr (K) Cr (K)
2016
March 1 Capital 20,000 15,000
2 Land and buildings 5,600
3 Furniture and fittings 3,000
5 Furniture and fittings 1,500
7 Advertising 250
9 Purchases 5,000
12 Sales 3,000
15 Drawings 550
19 Sales 1,200
20 Purchases 3,400
20 Sales 3,500
22 Cash/Bank C 400 400
23 Motor Car 10,000
26 Loan 7,000
28 Deli Tembo 2,000
30 Sales 2,100
30 Bank/Cash C 500 500
31 Balance c/d 15,200 3,300
37,100 37,100 24,600 24,600
April 1 Balance b/d 15,200 3,300
Three Column Cash Book

This is a cash book with the cash account, bank account and discount columns. The
discount column is divided into two columns namely; discount allowed and discount
received.
Discount received
When a business is making payment by either cash or cheque, the creditor might decide to
reduce the price by a percentage, fraction or just a block sum. This is called discount
received. The cash discount received is an income to the business.
Discount allowed
When a business is receiving payment by either cash or cheque, a decision may be made to
reduce the amount to be paid by a percentage, fraction or a block sum. This is called cash
discount allowed. Cash discount allowed is an expense to the business.
6. SUBSIDIARY
Study Text 24
Reason for granting cash discounts

The main reason for granting cash discounts to a customer is to appreciate them for paying
promptly (in time). The other reason is to encourage the customer to continue buying from a
particular trader.
Example
From the following details, prepare Victoria Phiri’s three column cash book.
2016
July 01 Cash in K12 000 and Cash at Bank K24 000.
July 02 Bought land by cheque K10 000.
July 03 Bought equipment by cheque K6 000.
July 04 Bought goods by cash K4 000.
July 05 Sold goods by cheque K5 000.
July 06 Received K4 000 cash from Norah Choono, less 10% cash discount.
July 07 Paid K2 000 by cheque to Miriam Makayi, less cash discount of 5%.
July 12 Paid for land Rates by cheque K1 000.
July 14 Withdrew K1 300 from the bank for business use.
July 16 Withdrew K670 from the till for own use.
July 18 Paid K1 800 to Chiputa by cheque, less cash discount of 5%
July 28 Habeenzu paid us K2 600 by cash; cash discount of K500.00
Victoria Phiri’s
Three Column Cash Book
Date Details F Cash Account Bank Account Discounts
Dr (K) Cr (K) Dr (K) Cr (K) Allow Receive
ed (K) d (K)
2016
July 1 Balance B/F 12,000 24,000
2 Land 10,000
3 Equipment 6,000
4 Purchases 4,000
5 Sales 5,000
6 Norah Choono 3,600 400
7 Miriam Makayi 1,900 100
12 Rates 1,000
14 Cash/Bank C 1,300 1,300
16 Drawings 670
18 Chiputa 1,710 90
28 Habeenzu 2,600 500
31 Balance C/D 14,830 7,090
19,500 19,500 29,000 29,000 900 190
Aug 1 Balance B/D 14,830 7,090
6. SUBSIDIARY
Study Text 25
Petty Cash Book and the Imprest System

A petty cash book is a book for recording small payments made by the business. Petty
means small. The petty cash book is maintained on the Imprest system. The Imprest system
is a system where the cashier gives the petty cashier enough cash to meet the petty cash
expenses for a particular period of time. The petty cashier will be disbursing the cash during
that period as per requests presented to him/her. The requests are presented using Petty
Cash Vouchers which act as a source document for the petty cash book. At the end of the
period, the total used up is calculated to know the amount that has remained unspent. The
cashier then gives an amount equal to what was spent in the period so as to start the next
period with the same amount as in the previous period. This amount given to the petty
cashier to top up (replace) what was spent is called the Petty Cash Float and this system of
maintaining the petty cash is called the Imprest system.
How the Imprest system works

K
March – The petty cashier receives from the cashier 10 000
The petty cashier pays out during the period - 7 500
Petty cash remaining at the end of the period (K10 000 – K7 500) 2 500
The cashier now gives the petty cashier the amount spent +7 500
Petty cash which the petty cashier will start with in April 10 000
Example
The following is a summary of the petty cash transactions of Machima Investments Ltd for
April 2017.
K
April 1 Received from Cashier K10 000.00 as petty cash float 10 000
April 2 Postage 800
3 Travelling 200
4 Cleaning 150
7 Petrol for van 220
8 Travelling 170
9 Stationery 180
11 Cleaning 50
14 Postage 400
15 Travelling 900
18 Stationery 250
18 Payment to Busaka cleaning services for Cleaning 230
20 Postage 100
24 Payment to A.M Motors for Van servicing 800
26 Petrol 180
27 Cleaning 210
29 Postage 50
30 Petrol 400
You are required to:
1. Rule up a suitable petty cash book with analysis columns for expenditure on cleaning,
motor expense, postage, stationery, travelling.
2. Enter the month’s transactions.
3. Enter the receipt of the amount necessary to restore the Imprest and carry down the
balance for the commencement of the following month.
6. SUBSIDIARY
Study Text 26
Machima Investment Ltd’s

Petty Cash Book
Date Details Pcv Amt Amt Analysis Columns
No. Rec(K) Spent Cleani Motor Postag Station Travell
(K) ng(K) Expen e(K) ery(K) ing(K)
ses (K)
2017
April 1 Cash 7,000
2 Postage 800 800
3 Travelling 200 200
4 Cleaning 150 150
7 Petrol 220 220
9 Stationery 180 180
11 Cleaning 50 50
14 Postage 400 400
18 Stationery 250 250
18 Cleaning 230 230
20 Postage 100 100
24 Van Servicing 800 800
26 Petrol 180 180
27 Cleaning 210 210
29 Postage 50 50
30 Petrol 400 400
30 Balance C/D 1,710
7,000 7,000 640 1,600 1,350 430 1,270
May 1 Balance B/D 1,710
1 Imprest Restored 5,290
1 Cash
7,000
Purchases Day Book/Purchases Journal

This is a book used for recording trading goods bought on credit from suppliers.
Trading goods are those bought with the intention of reselling. Therefore, we can define
purchases as goods bought either on credit or by cash or cheque and are meant for re-sale.
When goods are bought on credit form suppliers, the buyer is given a Purchases Invoice
(Original Invoice or Top Invoice) to be used as a source document for information which
should be entered in the purchases Day book.
The following table describes the flow of information and how it is posted to the ledger.
6. SUBSIDIARY
Study Text 27
1 Original Invoice Purchases Day Purchases Creditor’s

Book Account (in the Account (in the
General Ledger) Purchases
Ledger)
Question
The following transactions for the month of February 2022 were extracted from the books of
Mweempe Rodwell. Prepare his Purchases Day book and Post to the ledger
February 2 Goods bought on credit worth K30,000, invoice No 0283 from E. Njobvu.
February 9 Credit purchases amounting to K42,000, invoice No 20122 from J. Sinyangwe
February 19 Credit purchases worth K54,000, invoice No 715 from m. Daka wholesalers.
February 25 Purchased goods on credit amounting to K 210,000, invoice No 012 from
Lukwesa traders
February 26 Bought goods on credit from Vivante traders worth K34,000, invoice No 416.
Solution
Rodwell Mweempe’s
Purchases Day Book
Date Details Invoice No. Amount
2022 K
Feb. 2 E. Njobvu. 0283 30,000
Feb.9 J. Sinyangwe 20122 42,000
Feb.19 M.Daka wholesalers. 715 54,000
Feb.25 Lukwesa traders 012 210,000
Feb. 28 To. Purchases Account - GL 336 000
Rodwell Mweempe’s Creditors Ledger

Date Details F. DR. CR.
K K
E. Njobvu. Account
2 Feb 2022 Purchases 30,000
J. Sinyangwe Account
9 Feb.2022 Purchases 42,000
M.Daka wholesalers Account

Lukwesa traders Account

6. SUBSIDIARY
Study Text 28
Rodwell Mweempe’s General Ledger

K K
02 Feb 2022 E. Njobvu. 30,000
09 Feb.2022 J. Sinyangwe 42,000
19 Feb.2022 M.Daka wholesalers. 54,000
25 Feb.2022 Lukwesa traders 210,000
28 Feb. 2022 Balance c/d 336 000

336 000 336 000
01 Mar. 2022 Balance b/d 336 000
Sales Day Book

This is a book used for recording trading goods sold on credit to customers.
When goods are sold on credit to customers, the customer (buyer) is given the Original
Invoice and the seller (supplier) remains with the duplicate Invoice (Sales Invoice). The seller
uses the duplicate Invoice as a source document for the Sales Day book.

Duplicate Invoice Sales Day Book Customer’s (Debtor’s) Sales Account (in
A/C (in the debtors the general ledger)
Ledger)
Question
Chakulya General Dealers made the following credit sales to the following customers in the
month of February 2022:
Feb 4 Ndavwa; K25,000 invoice No. 0345
Feb 6 Malumbe K60,000, invoice No. 0346
Feb 10 Munkanta K85,000, Invoice No. 0347; Whiteson K28,000 Invoice No. 0348
Feb 15 Juventio K17,000, Invoice No. 0349
Enter the above information in the sales day book and post to the ledger.
Solution
Chakulya General Dealers’
Sales Day Book
Date Details Invoice No. Amount
2022 K
Feb. 4 Ndavwa 0345 25,000
Feb.6 Malumbe 0346 60,000
Feb.10 Munkanta 0347 85,000
Feb.10 Whiteson 0348 28,000
Feb.15 Juventio 0349 17,000
Feb. 28 To Sales A/C 215 000
6. SUBSIDIARY
Study Text 29
CHAKULYA GENERAL DEALERS’ SALES LEDGER

K K
Ndavwa Account
04 Feb 2022 Sales 25,000
Malumbe Account
06 Feb.2022 Sales 60,000
Munkanta Account
10 Feb.2022 Sales 85,000
Whiteson Account
10 Feb.2022 Sales 28,000
Juventio Account
15 Feb. 2022 Sales 17,000
CHAKULYA GENERAL DEALERS’ GENERAL LEDGER

K K
Sales Account
04 Feb 2022 Ndavwa 25,000
06 Feb.2022 Malumbe 60,000
10 Feb.2022 Munkanta 85,000
10 Feb.2022 Whiteson 28,000
15 Feb. 2022 Juventio 17,000
28 Feb. 2022 Balance c/d 215,000
215,000 215,000
01 Mar. 2022 Balance b/d 215,000
Purchases Returns Day Book

This is a book used for recording trading goods previously bought but which the business
has returned to its suppliers.
Goods may be returned to the supplier for any of the following reasons:
- If goods are expired
- If goods are damaged
- If goods are of the wrong colour, type, size, make etc.
- If the buyer has been oversupplied.
When the buyer returns goods to the seller for one of the above reasons, and the seller
agrees to take back the goods and refund part or all of the amount paid by the buyer, the
seller sends a document called a credit note (original Credit note) to the customer to show
6. SUBSIDIARY
Study Text 30
the amount by which the total bill has been reduced. The credit note is called so because the
customer’s account in the debtors’ ledger is credited with the value of goods returned to
show the reduction in the amount owed. Credit notes are always printed in red to avoid
mistaking them for invoices.
Source Subsidiary book Account to Dr Account to Cr.

document
Original Credit Purchases Returns Creditor’s (Supplier) A/C Purchases Returns A/C
note Day Book (in the creditors ledger) (in the general ledger)
Question
The following transactions took place during the month of September 2022 in the business of
Taonga Chilongo.
Sept 5 Returned goods to Kampango Dealers amounting to K45,000 and were issued with
a credit Note No. 131
Sept 15 Returned goods to Oxilia Enterprises amounting to K76,000 and were issued with
a credit Note No. 305
Sept 20 Returned goods to Mwape Investments amounting to K12,000 and were issued
With a credit note No. 541
Enter this information in the Purchases Returns day book and post to the ledger
Solution
Taonga Chilongo’s
Purchases Returns Day Book
Date Details CN. No. Amount
2022 K
Sept 5 Kampango 131 45,000
Sept 15 Oxilia Enterprises 305 76,000
Sept 20 Mwape 541 12,000
Sept 30 To Purchases Returns A/C 133,000
TAONGA CHILONGO’S CREDITORS LEDGER

K K
Kampango Account
05 Sept 2022 Purchases Returns 45,000
Oxilia Enterprises Account

Mwape Account
6. SUBSIDIARY
Study Text 31
TAONGA CHILONGO’S GENERAL LEDGER

K K
Purchases Returns Account
05 Sept 2022 Kampango 45,000
15 Sept 2022 Oxilia Enterprises 76,000
20 Sept 2022 Mwape 12,000
30 Sept 2022 Balance c/d 133,000
133,000 133,000
01 Mar. 2022 Balance b/d 133,000
Sales Returns Day Book

This is a book used for recording trading goods previously sold but which the customers
have returned back to the business.
When goods have been returned by the customer, the customer sends an Original Debit
Note to the seller (supplier) giving details of goods returned and the reasons for their return.
The supplier (seller) will then send the original credit note to the customer whose main
purpose is to show proof that he (seller) has agreed to get back the goods and to reduce the
amount the customer is owing. The seller remains with the duplicate Credit Note from which
information is derived for the Sales Returns Day Book.
Question
The following transactions took place during the month of July 2022 in the businesses of
Melody Musonda.
July 5 Sikaala Merchants returned goods amounting to K40, 000.They were issued with a
credit note No 101
July 15 Sinyangwe returned part of the goods sold to him amounting to K20,000. He was
issued with a credit note No 102
July 20 Hakasenke returned goods which had been sold to her earlier on, worth K90,000.
She was issued with credit note No. 103.
Enter this information in the sales returns day book and post to the ledger.
Solution
Melody Musonda’s
Sales Returns Day Book
Date Details CN. No. Amount
2022 K
July 5 Sikaala Merchants 101 40,000
July 15 Sinyangwe 102 20,000
July 20 Hakasenke 103. 90,000
July 31 To Sales Returns A/C 150,000
6. SUBSIDIARY
Study Text 32
MELODY MUSONDA’S CREDITORS LEDGER

K K
Sikaala Merchants Account
05 July 2022 Sales Returns 40,000
Sinyangwe Enterprises Account

Hakasenke Account
MELODY MUSONDA’S GENERAL LEDGER

K K
Sales Returns Account
05 Sept 2022 Kampango 45,000
15 Sept 2022 Oxilia Enterprises 76,000
20 Sept 2022 Mwape 12,000
30 Sept 2022 Balance c/d 150,000
150,000 150,000
01 Mar. 2022 Balance b/d 150,000
General Journal
Journal is a book of prime entry which records transactions which are not routine (and not
recorded in any other book of prime entry), for example:
- year-end adjustments
- Depreciation charge for the year
- Irrecoverable debt write-off
- Record the movement in the provision for doubtful debts.
- Accruals and prepayments
- Closing inventory
- Acquisitions and disposals of non-current assets
- Opening balances for statement of financial position items
- Correction of errors
The journal is a clear and comprehensible way of setting out a bookkeeping double entry
that is to be made. It shows if transactions are to be posted to the debt or credit side of the
relevant ledger account.
Question
From the following information, you are required to prepare Humphrey’s General Journal
2017
Jan 1 Machinery K13,200; Bank K 17, 690; Creditors: Hilda K 5,000, Ngungu
K 4,000, Cecilia K 3,000; Debtors: Ngululu K 8,000, Rodgers K 2,500,
Mulilo K 6,000; Stock K2,900, Cash K 860; Furniture K 9,700.
Jan 14 Sold Furniture on credit to Rodgers at K 4,000.
Jan 27 Bought a Motor Vehicle on credit from Hilda at K 25,000.
6. SUBSIDIARY
Study Text 33
Solution
Humphrey’s
General Journal
DATE DETAILS F Dr (K) Cr (K)
2017
Jan 1 Machinery 13,200
Bank 17,690
Debtors: Ngululu 8,000
Rodgers 2,500
Mulilo 6,000
Stock 2,900
Cash 860
Furniture 9,700
Creditors: Hilda 5,000
Ngungu 4,000
Cecilia 3,000
Capital 48,850
60,850 60,850
(Being opening balances)
Jan 14 Rodgers 4,000

Furniture 4,000
(Being Furniture sold on credit)
Jan 27 Motor Vehicle 25,000

Hilda 25,000
(Being a Motor Vehicle bought on credit)
7.THE
Principles of Accounts 7110 A Supplementary TRIALText
Study BALANCE 34
7.THE TRIAL BALANCE

A trial balance is a list of debit and credit balances extracted from ledger accounts as at a
particular date.
Since transactions in the ledger are entered on the basis of double entry, it follows that for
every transaction, there must be two entries: a debit entry; and a credit entry. This means
that if all entries are done correctly, the total of the debit entries should be equal to the total
of the credit entries.
The test/trial of the accuracy can then be determined by picking balances from the ledger
accounts. Balances are picked because they represent a summary of the entries made in
each account.
Purpose of the trial balance
1. To prove the arithmetic accuracy of the double entry in the ledger accounts.
2. To see if the double entry rule has been followed.
3. To show all ledger balances.
4. To prevent fraud.
5. To be used as a source of information for preparing the final accounts.
Preparation of the Trial Balance
The Trial balance is prepared as at a particular date (end of the accounting period) when the
accounts in the ledger are balanced. When preparing the trial balance, Debit balances are
listed on the Debit side of the trial balance; and Credit balances are listed on the Credit side
of the trail balance. The total of balances on the Debit side is calculated as well as the total
on the Credit side. If the balances tally (i.e. if they are the same), it is proof that the double
entry in the ledger was done correctly.
The position of Assets, Liabilities, Expenses and Incomes in the trial balance
The usual positions of the balances are as follows:
Assets and expense accounts normally have Debit balances; hence, their balances appear
on the Debit side of the trial balance.
Liabilities and Income accounts normally have credit balances; hence, their balances appear
on the Credit side of the trial balance.
A L E G
Dr Cr Dr Cr
Question
From the details below, prepare Gwenani J’s trial balance as at 31 March 2023.
K
Capital 40 000
Bank 5 000
Cash 8 000
Purchases 80 000
Purchases Returns 1 200
Sales 120 000
7.THE
Principles of Accounts 7110 A Supplementary TRIALText
Study BALANCE 35
Sales Returns 1 500

Discount allowed 2 100
Discount received 3 400
Commission 5 000
Commission received 4 300
Advertising 3 400
Transport costs 2 000
Rent 1 300
Rent received 5 300
Debtors 3 000
Creditors 2 400
Equipment 20 000
Machinery 18 000
Motor vehicles 12 500
Furniture 27 700
Loan 10 000
Bank overdraft 2 900
Solution
Gwenani J’s
Trial Balance
as at 31st March 2016
Dr Cr
K K
Capital 40 000
Bank 5 000
Cash 8 000
Purchases 80 000
Purchases Returns 1 200
Sales 120 000
Sales Returns 1 500
Discount received 3 400
Commission 5 000
Advertising 3 400
Transport costs 2 000
Rent 1 300
Rent received 5 300
Debtors 3 000
Creditors 2 400
Equipment 20 000
Machinery 18 000
Furniture 27 700
Loan 10 000
189 500 189 500
8.FINAL
Principles of Accounts 7110 A Supplementary StudyACCOUNTS
Text 36
8.FINAL ACCOUNTS
Final Accounts are financial statements prepared at the end of a trading period (period of
twelve months) to calculate the profit or loss made and to ascertain the financial position of
the business. They include the Trading Account, Profit and Loss Account and the Balance
sheet.
The Trading Account
This account is used for calculating the Gross Profit or Gross Loss for the business. The
Gross Profit/loss of a business is the unrefined result of business activities. This means that
there are other items to consider but which have not yet been taken into account.
To calculate the Gross Profit or Loss we use the formula:

Gross profit = Turn Over – Cost of sales
Where:
Turnover = Sales–Sales returns
Cost of Sales = Opening Stock+ (Purchases + Carriage inwards–Purchases returns)–
Closing stock + Wages.
Presentation of the Trading account
Question
From the details below, prepare F. Malunga’s Profit and Loss account for the year ended 30
September 2022.
K
Sales 130 000
Returns outwards 4 000
Sales returns 6 000
Wages 8 000
Opening stock 8 000
Purchases 55 000
Carriage inwards 3 000
Closing stock (30 Sept. 2022) 6 000
F. Malunga’s
Trading Account
for the year ended 30 September 2022
K K K
Sales 130 000
Less: Sales returns (6 000)
Turnover/Net Sales 124 000
Less Cost of sales
Opening stock 8 000
Purchases 55 000
Add: carriage inwards 3 000
58 000
8.FINAL
Text 37
Less: Returns outwards 4 000

Net Purchases 54 000
Total stock available for sale 62 000
Less: Closing stock 6 000
Cost of goods sold 56 000
Add Wages 8 000
Cost of Sales 64 000
Gross Profit 60 000
Note:
Please add carriage inwards to purchases before subtracting purchases returns.
The Profit and Loss Account
The Profit and Loss Account is used for calculating the Net Profit or Net loss of the business.
This is important because even after arriving at the gross profit/loss, there may still be some
expenses and incomes which took place but cannot be absorbed in the trading account.
To calculate the Net Profit or Net Loss, we use the following formula:
Net Profit/Loss = Gross Profit/Loss + Other Incomes – Other expenses
Preparation of the Profit and Loss Account
Question
Use the following list of balances to prepare the profit and Loss account for H. Jolezya for
the year ended 30 September 2022
K
Gross Profit 68 000
Rent and Rates paid 1 400
Insurance 3 000
Discount received 400
Repairs 800
Commission received 600
Interest received 500
General expenses 5 000
Rent received 900
Advertising expenses 3 000
Fuel costs 1 200
Stationery 500
Salaries and wages 25 400
Electricity 380
Commission paid 750
Motor vehicle expenses 900
Lighting and heating expenses 2 000
8.FINAL
Text 38
Solution
H. Jolezya’s
Profit and Loss Account
for the year ended 30 September 2022
K K K
Gross Profit 68 000
Add: Other Income
Commission received 600
Interest received 500
Rent received 900
Total Income 2 400
Net Income 70 400
Less: Expenses
Advertising expenses 3 000
Fuel costs 1 200
Stationery 500
Salaries and wages 25 400
Rent and Rates paid 1 400
Electricity 380
Commission paid 750
Repairs 800
Motor vehicle expenses 900
Insurance 3 000
Lighting and heating expenses 2 000
44 330
NET PROFIT 26 070
Balance Sheet/Statement of Financial Position
A balance sheet is a statement showing the financial position of a business as at a particular

date. It is also defined as a statement of assets and liabilities as at a particular date or a
statement of affairs which show the financial position of the business through assets owned
and liabilities owed at a particular date.
The Accounting Equation

The Accounting equation states that at any point in time, the assets of the business will be
equal to its capital and liabilities.
If the proprietor is the only supplier of the resources to the business, the equation is
recorded as: Assets = Capital.
If the resources are supplied by the proprietor and others, the equation is recorded as:
Capital = Assets – Liabilities

Assets = Capital + Liabilities
Liabilities = Assets – Capital
8.FINAL
Text 39
The balance sheet follows the Accounting equation where: Assets = Capital + Liabilities
Since, the accounting equation depicts the fundamental relationship among the components
of the balance sheet; it is also called the Balance Sheet Equation. As the name suggests,
the balance sheet is a statement of assets, liabilities and capital.
Capital
Capital is money or money’s worth invested in the business by the owner/proprietor or
Capital are resources used to start up a business, e.g. money, machinery, motor vehicles,
etc.
Liabilities
Liabilities are money which the business owes other persons or businesses or Liabilities are
resources used in the business but do not belong to the business. Liabilities can be divided
into two types namely, short term liabilities and long term/Non-current liabilities.
Long term liabilities/Non-current liabilities are liabilities that will come due for payment
beyond one year or beyond a period of twelve months, e.g. loan, bonds, mortgages, etc.)
Short term liabilities/Current liabilities are liabilities that are due to be paid within one
year or within a period of twelve months, e.g. Creditors/payables, overdrafts etc.)
Assets
Assets are things/resources that belong to the business and are used in the business. They
are legal possessions of a business. They are acquired using the resources provided by
capital and liabilities. There are two types of assets namely, fixed assets and current assets.
Fixed assets are assets bought for use in the business to generate profit and not for resale
e.g. land and buildings, motor vehicles, equipment, machinery etc.)
Current assets are cash and other assets which can easily be converted to cash within one
year, e.g. stock/inventory, debtors/receivables, cash at bank, cash in hand etc.)
Order of the Balance Sheet

Fixed assets and current assets in the balance sheet are usually listed beginning with the
asset that is most difficult to turn into cash moving down to the asset which is easiest to turn
into cash. This method of listing is called Increasing order of liquidity or Decreasing order of
permanence. Liquidity means the ease with which an asset can be turned into cash.
The balance sheet below is arranged in the increasing order of liquidity.
NOTE: Most businesses use the Decreasing order of permanence when preparing
their balance sheets.
Types of Capital
a) Owners capital/capital employed
This is the total amount in the business that belongs to the owner
Owners capital = starting capital – Drawings + Net Profit
b) Circulating capital/net Current assets

This is the excess of current assets over current liabilities. It is the capital that is
available in the business for the day today expenses. It is also called Circulating capital,
capital in circulation or capital at work.
Working capital = Current assets – current liabilities
8.FINAL
Text 40
c) Fixed capital
This is the total value of all fixed assets in the business.
d) Loan capital
This is the total value of all long term liabilities
Preparation of a balance sheet
Question
The following balances remained in the books of Fisonga R. after the preparation of his profit
and loss account for the year ended 30 September 2022. You are required to prepare his
balance sheet as at that date.
K
Net Profit 47 670
Land and buildings 25 000
Premises 23 000
Fixtures and fittings 12 000
Machinery 18 000
Equipment 6 000
Office furniture 6 000
Closing stock 6 000
Debtors 14 000
Cash at bank 31 000
Cash at hand 5 670
Creditors 3 400
Capital 60 000
Drawings 4 000
Mortgage 25 000
Loan 32 000
R. Fisonga’s
Balance Sheet
as at 30 September 2022
K K K
Fixed Assets
Land and buildings 25 000
Premises 23 000
Fixtures and fittings 12 000
Machinery 18 000
Equipment 6 000
Office furniture 6 000
Total Fixed Assets 113 000
8.FINAL
Text 41
Current Assets
Closing stock 6 000
Debtors 14 000
Cash at bank 31 000
Cash at hand 5 670
56 670
Less: Current Liabilities
Creditors 3 400
Total Current Liabilities 9 000
Working Capital 47 670
Net Assets 160 670
FINANCED BY:
Capital 60 000
Add/Less: Net Profit/loss 47 670
107 670
Less: Drawings 4 000
Owners capital 103 670
Add: Long term Liabilities
Mortgage 25 000
Loan 32 000
Total Long term liabilities 57 000
Capital employed 160 670
Principles of Accounts 71109.ADJUSTMENTS TO FINAL
A Supplementary StudyACCOUNTS
Text 42
9.ADJUSTMENTS TO FINAL ACCOUNTS

Accrued Expenses
An accrued expense is an item of expense that has been incurred during the accounting
period but has not yet been paid for.
When preparing final accounts, an accrued expense for the year should be included as an
expense in the profit and loss account and also shown in the balance sheet under
current liabilities.
Question:
Funduluka’s business has an accounting year-end of 31st December. He rents a factory at a
rental cost of K6 000 per quarter payable in arrears. During the year 31st December 2022
his cash payment for rent has been as follows:
March 31 K6 000
June 29 K6 000
October 28 K6 000
The final payment due on 31st December 2004 for the quarter to that date was not paid until
4th January 2023.
You are required to prepare the following:

(a) The Rent account
(b) A profit and loss account and the Balance Sheet extracts as at 31st December 2004.
Rent Account
Date Details F Dr Cr
2022 K K
Mar 31 Bank 6 000
June 29 Bank 6 000
Oct. 28 Bank 6 000
Dec 31 Profit and loss 24 000
Dec 31 Balance (Accrued Rent) c/d 6 000
24 000 24 000
2023
Jan 01 Balance b/d 6 000
Profit and Loss account extract for the year ended 31 December 2022
Less: Expenses:
Rent (amount paid) 18 000
Add: Rent Accrued 6 000
24 000
Balance sheet extract as at 31st December 2022

Current liabilities:
Rent accrued 6 000
Text 43
Accrued Incomes
An accrued income is income receivable during the accounting period but has not yet been
received. When preparing final accounts, the accrued amount should be included as an
income in profit and loss account since it relates to the current accounting period. In the
balance sheet, the accrued income should be shown under current assets.
Question:
In the books of L. Sombaile, rent is receivable annually at K8 400. During the year 31st
December 2022, the following receipts were made:
31 May K3 600
31 Dec. K4 400
You are required to prepare the following:
(a) The Rent Receivable Account
(b) The profit and loss account and the Balance Sheet extracts as at 31 December 2022.
Rent Receivable Account

2022 K K
May 31 Bank 3 600
Dec 31 Bank 4 400
Dec 31 Profit and Loss 8 400
Dec 31 Balance (Rent Receivable Accrued) c/d 400
8 400 8 400
2018
Jan 01 Balance b/d 400
Profit and loss account (extract) for the year ended 31 December 2022
Add: Gains:
Rent receivable 8 000
Add: accrued rent 400
8 400
Balance sheet extract as at 31 December 2017

Current assets:
Rent receivable accrued 400
Prepaid Expenses
A prepaid expense is an expense that has been paid for during the accounting period but
relates to the future accounting period(s).
When preparing the final accounts, a prepaid expense should be excluded/Subtracted
from the current profit and loss account, but should be shown in the balance sheet
under current assets.
Text 44
Example
V. Mwanza pays insurance on his motor vehicles at an annual cost of K6 000.
During the year to 31st December 2017, he paid a total of K4,000 on 1 June 2022 and
K3,500 on 3rd September, 2022 for insurance costs.
Show the following:
(a) The insurance Account
(b) The profit and Loss account and balance sheet extract as at 31st December 2017.
Insurance Account
2022 K K
June 01 Bank 4 000
Sept 03 Bank 3 500
Dec 31 Balance c/d 1 500
7 500 7 500
2023
Profit and loss account extract for the year ended 31 December 2022
Less: Expenses:
Insurance 7 500
Less: Prepaid Insurance 1 500
6 000

Current assets:
Insurance prepaid 1 500
Prepaid Incomes
This is income received during the current accounting period but which relates to the future
Accounting period(s). Since the income relates to the next accounting period(s), it should be
subtracted from the total income received in the profit and loss account for the current
accounting period. In the balance sheet, prepaid income should appear under current
liabilities.
Question:
A Mugala receives an annual commission of K7 200. During the year to 31st December
2022, he received the following commission:
2nd Feb 2022 received by cash K3 200
1st April 2022 received by cheque K2 200
rd
3 Sept 2022 received by cheque K4 400
(a) Show the Commission Receivable Account
(b) The Profit and Loss account and the balance sheet extract as at 31 December 2022.
Text 45
Commission Receivable Account

Date Details F. Dr Cr
2022 K K
Feb 02 Cash 3 200
Apr 01 Bank 2 200
Sept 03 Bank 4 400
Dec 31 Balance (Commission receivable prepared) c/d 2 600
9 800 9 800
2023
Profit and Loss account extract for the year ended 31st December 2022
Add: Gains:
Less: prepaid commission 2 600
7 200

Current liabilities:
Commission receivable prepaid 2 600
Summary on Accruals and Prepayments
An Expense Accrued is added in the Profit and Loss Account

and is treated as a Current Liability in the balance sheet.
An Income Accrued is added in the Profit and Loss Account
and is treated as a Current Asset in the Balance sheet.
An Expense Prepaid is subtracted in the Profit and Loss Account
and is treated as a Current Asset in the Balance Sheet.
An Income Prepaid is subtracted in the Profit and Loss Account
and is treated as a Current Liability in the Balance Sheet.
Bad Debts
Some debtors may fail to pay for their debts and so it is prudent accounting to write off such
debts as bad. A bad debt is a debt that is considered to be uncollectable. A bad debtor is a
debtor who fails to pay parts or the whole debt for a number of reasons such as: Running
away without trace, Bankruptcy, Insanity, Death etc
Question
On 30th September 2022, we are told that our debtor, Justine Chibwe, who owes us K7 000
has become legally bankrupt. It is decided to write off the debt as bad.
Text 46
You are required to show:

(a) Justine Chibwe Account
(b) The Bad Debts Account
(c) Profit and loss account extract for the year ended 31 December 2017
Justine Chibwe Account

2022 K K
Jan 01 Balance 7 000
Sept 30 Bad debts 7 000
7 000 7 000
Bad Debts Account

2022 K K
Sept 30 Justine Chibwe 7 000
7 000 7 000
Profit and Loss Account extract for the year ended 31 December 2017
Less: Expenses
Bad debts 7 000
Provision for Doubtful Debts
A provision for doubtful debts is an estimated expense of debtors that are likely to become
bad. A provision for doubtful debts is set aside when there is some doubt as to whether all
the debts of the business will be recovered in full. The provisin for doubtful debts figure is
calculated on the outstanding debtors figure (i.e. debtors figure after subtracting bad debts
for the year)
Question:
A business started trading on 1 January, 2014. During the first four years ended 31
December 2014, 2015, 2016 and 2017, the outstanding debtors’ figures were as follows:
2014 K60 000
2015 K50 000
2016 K50 000
2017 K70 000
It was decided to estimate the provision for doubtful debts as 5% of the outstanding debtors
figure at each year end.
Required:
(a) A provision for doubtful debts account for 2014, 2015, 2016 and 2017 showing
transfers to the profit and loss account.
(b) The Profit and Loss account and balance sheet extracts for the years 2014, 2015,
2016 and 2017.
Text 47
Solution
Provision for doubtful Debts Account
2014 K K
Dec 31 Profit and Loss Account 3 000
3 000 3 000
2015
Dec 31 Profit and Loss (Reduction in Provision) 500
3 000 3 000
2016
2 500 2 500
2017
Dec 31 Profit and Loss account (Increase in Provision) 1 000
3 500 3 500
2018
Jan 01 Balance b/f 3 500
Profit and Loss Account (extract) for the year ended 31 December, 2014
K K K
Less: Expenses
Provision for bad debts 3 000
Note:
When a provision for bad/doubtful debts is created for the first time, the full amount of
provision is entered in the Profit and Loss account as an expense and in the balance
sheet as a reduction on the outstanding debtors figure.
K K K
Add: Other Income
Reduction in Provision for bad debts 500
(Old Provision - New Provision = 3 000 –
2,500)
Note:
When the current year’s provision is lower than the provision for the previous year, it
is referred to as a reduction in provision for bad debts. In such a case, what is
transferred to the Profit and Loss account is the amount by which the provision has
decreased which is treated as an income under Gains. This is because the only
effect on the profit and loss of the business is the reversal of part of the estimated
cost of bad debts to the profit of the business in the current accounting year. In the
Text 48
balance sheet, the full amount of provision for that year is subtracted from the
outstanding debtors figure.
Note: 2016
For the year ended 31 December, 2016, there shall be no entry in the Profit and Loss
account for Provision for bad/doubtful debts as there is neither an increase nor a
reduction in provision. Hence, the profit figure is neither affected negatively nor
positively. In the balance sheet, the full amount of provision for that year is subtracted
from the outstanding debtors figure.
K K K
Less: Expenses
Increase in Provision for bad debts 1 000
(New Provision – Old Provision
= 3,500 – 2,500
Balance sheet (extract) as at 31st December 2014

K K K
Current Assets
Debtors 60 000
Less: Provision for bad debts 3 000
57 000

K K K
Current Assets
Debtors 50 000
47 500
K K K
Current Assets
Debtors 50 000
47 500

K K K
Current Assets
Debtors 70 000
66 500
Text 49
Bad Debts with Provision for Bad/Doubtful Debts
Question
A business started trading on 1 January, 2015. During the first three years ended 31
December 2015, 2016 and 2017, the following debts were written off to the bad debts
account on the following dates:
31 March 2015 Joyce Choono K6 000

30 September 2015 Prisca Chilumba K2 000
28 February 2016 Kraus Bbabbi K3 000
30 June 2017 Lucy Tapi K7 000
Debtors outstanding for the same period were as follows:

31 December 2015 K70 000
31 December 2016 K50 000
31 December 2017 K90 000
It is the policy of the firm to make a provision for bad debts of 5% of the total debtors at each
year end.
You are required to show the following:

(a) The Bad Debts Account for 2015, 2016 and 2017
(b) The Provision for Doubtful Debts Account 2015, 2016 and 2017
(c) The Profit and Loss Account extracts for 2015, 2016 and 2017
(d) The Balance sheet extracts for 2015, 2016 and 2017.
Solution
Bad Debts Account (2015)
2015 K K
Sept 30 Joyce Choono 6 000
Mar 31 Prisca Chilumba 2 000
8 000 8 000

2016 K K
Feb 28 Kraus Bbabbi 3 000
3 000 3 000

2017 K K
June 30 Lucy Tapi 7 000
8 000 8 000
Text 50
Provision for doubtful Debts Account

2015 K K
3 500 3 500
2016
Dec 31 Profit and Loss (Reduction in Provision) 1 000
3 500 3 500
2017
Dec 31 Profit and Loss (Increase in Provision) 2 000
4 500 4 500
2018
K K K
Less: Expenses
Bad debts 8 000
Provision for bad debts 3 500
K K K
Add: Other Income
Reduction in Provision for bad debts 1 000
(Old Provision - New Provision = 3 500 – 2
500
Less: Expenses
Bad debts 3 000
K K K
Less: Expenses
Bad debts 7 000
Increase in Provision for bad debts 2 000
(New Provision – Old Provision = 4 500 – 2
500
Balance sheet (extract) as at 31 December 2015

K K K
Current Assets
Debtors 70 000
66 500
Text 51

K K K
Current Assets
Debtors 50 000
47 500

K K K
Current Assets
Debtors 90 000
85 500
Depreciation
Depreciation is the measure of the wearing out, consumption or other reductions in the
useful economic life of a fixed asset. It is loss of value of a fixed asset.
Causes of depreciation
Depreciation may be cause by:
- use of the asset e.g., Plant and machinery, motor vehicles etc.
- passing of time e.g., a term, year lease of property.
- Obsolescence through technology and market changes e.g., machinery of a
specialised nature.
- Depletion e.g., extraction of minerals from a mine.
Purpose of accounting for depreciation

The purpose of depreciation is to allocate the cost of the fixed asset over the expected life of
that asset. It is not a method for providing for, or saving up for, replacement of fixed assets.
Methods of Calculating Depreciation

There are several methods of calculating depreciation, but the following are the three most
common ones:
1 Straight line method or Equal/fixed instalment method
2 Reducing balance method or diminishing balance method
3 Revaluation Method
Straight Line Method

Under this method, an equal amount is charged as depreciation for each year of the
expected life of the asset. To calculate the depreciation charge, the following information is
necessary:
 the original or historical cost of the asset
 an estimate of its useful life to the business
 an estimate of its residual value at the end of its useful life
Text 52
The depreciation charge is calculated as follows:
- By formula:
Annual depreciation = Original cost - estimated residual value
Estimated useful life
- Or as a percentage of the original cost:

Annual Depreciation = %Rate X Original cost
100
Note: When Depreciation is expressed as a percentage of the original cost e.g., 20%
on cost, the residual value is not specified, and in such cases, the residual value
should be taken to be zero.
Question
A motor vehicle was purchased on 1st January 2015 at a cost of K25 000. It is estimated
that its useful life is eight years, after which it will have a scrap value of
K5 000. Calculate the annual depreciation charge.
Solution:
Annual depreciation = cost of asset - estimated residual value

Estimated useful life
= 25 000 - 5 000
8
= K2 500
Question:
A Firm purchased a machine on 1st January 2015 at a cost of K25 000. It was decided to
depreciate it at an annual rate of 15% on cost. Calculate the annual depreciation charge.
Solution:
Annual Depreciation = 15 X K25 000
100
= K3 750
Reducing Balance Method

Under this method the annual depreciation charge is higher in the earlier years of the life of
the asset and lower in the later years. It is calculated using a fixed percentage on the net
book value. Net book value (NBV) of a fixed asset is its cost less the accumulated
depreciation on the asset to date.
Question:
A trader bought a machine at K10 000. Depreciation is charged at a rate of 20% per annum
on net book value. Calculate the depreciation charges for the first 3 years of its life.
Text 53
Solution
Year NBV Depreciation charge Accumulated depreciation
K K
1 10 000 x 20% 2 000 2 000
2 8 000 x 20% 1 600 3 600
3 6 400 x 20% 1 280 4 880
Revaluation Method
This is the method used for fixed assets which are difficult to value as single items but which
are grouped in order to arrive at their value. Such fixed assets include loose tools and
equipment such as:
- Tools in a garage like spanners, screwdrivers, etc.
- Kitchen utensils in a restaurant like spoons, folks, plates, serving dishes etc.
For these items, the depreciation figure can be arrived at by compairing their value at the
beginning of the year and at the end of the year.
Question
Ifintu Kulya Restaurant valued its kitchen equipment at K20 000 on 1 Jnanuary, 2017. On 31
December, the estimated value of the same equipment was K17 500 after a revaluation of
the same equipment.
Calculate the depreciation charge for kitchen equipment for the year.
Solution
Depreciation = Opening value – Closing value
= K20 000 – K17 500
= K2 500
Double Entry for Depreciation

Recording depreciation involves maintaining the asset account at cost while charging
depreciation to a separate ledger account where depreciation to date is recorded. This
account is known as the Accumulated Provision for Depreciation Account or simply Provision
for Depreciation Account.
The double entry for Depreciation is:

Dr. Profit and Loss Account
Cr. Accumulated Provision for Depreciation account
In the balance sheet, the Accumulated Provision for depreciation to date is deducted from
the Original cost of the fixed asset.
Question
A trader bought a machine at K10 000 on 1 January 2015 the financial year end being 31
December. Depreciation is charged at a rate of 20% per annum on net book value.
(a) The depreciation charges for the first 3 years of its life.
Text 54
(b) The machine Account.

(c) The Provision for Depreciation account.
(d) The Profit and Loss Account and Balance sheet extracts for the years 2015, 2016
and 2017.
Solution
Depreciation Charges for the first three years
Year NBV Depreciation charge Accumulated depreciation

K K
Dec 2015 10 000 x 20% 2 000 2 000
Dec 2016 8 000 x 20% 1 600 3 600
Dec 2017 6 400 x 20% 1 280 4 880
Machine Account
2015 K K
Jan 1 Bank 10 000
10 000 10 000
2016
10 000 10 000
2017
10 000 10 000
2018
Machine Provision for Depreciation Account

2015 K K
2 000 2 000
2016
3 600 3 600
2017
4 880 4 880
2018
Text 55
K K K
Less: Expenses
Provision for depreciation: Machine 2 000
K K K
Add: Other Income
K K K
Less: Expenses

K K K
Fixed Assets Cost Dep. N.B.V
Machine 10 000 2 000 8 000

K K K
Machine 10 000 3 600 6 400

K K K
Machine 10 000 4 880 5 120
Disposal of Fixed Assets
Disposal involves the selling of fixed assets that are no longer useful. The accounting
process for the disposal of fixed assets is as follows:
i) When the asset is sold, the first step is to remove the original cost of that asset from
our accounting records. The double entry being:
Dr - Disposal of fixed assets account
Cr - Fixed asset account
ii) The next step is to remove all the depreciation that has been charged on that asset
from our accounting records. The double entry being:
Dr - Provision for depreciation account
Cr - Disposal of fixed asset account
Text 56
iii) When the proceeds from the disposal are received, the double entry is:
Dr - Cash book
If the asset is sold on credit, then the double entry is:
Dr - Debtor account
iv) The balance in the disposal account, which represents a profit or loss on disposal,
will be transferred to the profit and loss account at the end of the year as follows:
- If there is a profit:
Dr - Disposal of fixed asset account
Cr - Profit and loss account
- If there is a loss:
Dr - Profit and loss account
Question
Hakasenke, a trader, makes up her accounts to 31st December. On 1st April 2014, she
bought a Lorry at a cost of K50 000. The Lorry had an estimated useful life of five years,
with a residual value of K6 000.
On 1st February 2015, she bought another Lorry for K42 000. This lorry was estimated to
have a useful life of ten years after which its residual value was estimated at K8 000.
Hakasenke sold the first lorry on 30th September, 2016 for K30 000, receiving the amount by
cash. The company provides a full year’s depreciation on all its fixed assets using the
straight line method but no depreciation is charged in the year of sale.

a) The lorry account for the years ended 31st December 2014, 2015 and 2016.
b) The Lorry provision for depreciation account for the years ended 31st December 2014,
2015 and 2016.
c) The Motor Van Disposal account.
d) Extracts from the profit and loss account for the year ended 31st December 2014,
2015 and 2016.
e) Extracts from the balance sheet for the years ended 31st December 2014, 2015 and
2016.
Text 57
Solution:
Lorry Account
2014 K K
April 1 Bank 50 000
50 000 50 000
2015
Feb 1 Bank 42 000
92 000 92 000
2016
Sept 30 Lorry disposal 50 000
92 000 92 000
2017
Lorry Provision for Depreciation Account

2014 K K
8 800 8 800
2015
21 000 21 000
2016
Mar 31 Lorry Disposal 17 600
24 400 24 400
2017
Lorry Disposal Account

2014 K K
Mar 31 Lorry 50 000
Mar 31 Lorry provision for depreciation 17 600
Mar 31 Bank 30 000
50 000 50 000
Text 58
K K K
Less: Expenses
Provision for depreciation: Lorry 8 800
K K K
Less: Expenses
K K K
Less: Expenses
Loss on disposal of old Lorry 3 000

K K K
Lorry 50 000 8 800 41 200

K K K
Lorry 92 000 21 000 71 000

K K K
Lorry 42 000 6 800 35 200
Text 59
Full question on Final Accounts with Adjustments
Bright Tembo has a retail business. The following balances were extracted from his
books at the end of his financial year on 31 March 2016.
K
Leasehold property – 25 years (cost) 50 000
Equipment (cost) 54 000
Provisions for depreciation:
Leasehold property 10 000
Equipment 17 000
6% Bank loan 25 000
Bank Dr 5 150
Trade receivables 6 750
Trade payables 4 010
Provision for doubtful debts 700
Revenue 78 580
Purchases 18 240
Purchase returns 1 600
Stock at 1 April 2015 4 690
Equipment repairs 850
Equipment running expenses 2 650
Wages 15 300
Insurance 3 640
Power and water 2 300
Advertising 5 100
Capital at 1 April 2015 50 000
Drawings 8 500
Additional information at 31 March 2016

1) Stock was valued at K3 870.
2) Bright Tembo took stock valued at K450 for his own use.
3) Equipment running expenses, K750, were accrued and insurance, K1350, was
prepaid.
4) The 6% bank loan was received on 1 December 2015.
5) An appropriate amount is to be written off the lease.
6) The purchase of additional equipment, K10 000, had been omitted from the books.
7) Payment was K5 000 by cheque with the remainder on credit.
8) Equipment is to be depreciated at the rate of 20% per annum using the diminishing
(reducing) balance method.
9) Provision for doubtful debts is to be maintained at 8% of trade receivables.
Required
(a) Prepare the Trading and Profit and Loss Account for the year ended 31 March 2016.
(b) Prepare the balance sheet as at 31 March 2016.
Text 60
Solution
Bright Tembo’s
Trading and Profit and Loss Account for the year ended 31 March 2016
K K K
Revenue 78 580
Less: Cost of Sales
Opening stock 4 690
Purchases 18 240
Less: Drawings (450)
Returns (1 600)
16 190
20 880
Less: Closing stock (3 870)
Cost of sales (17 010)
Gross profit 61 570)
Add: Gains
Decrease in Provision for doubtful debts 160
490
62 060
Less: Expenses
Loan interest 500
Equipment repairs 850
Equipment running expenses (2650 + 750) 3 400
General running expenses 8 400
Wages 15 300
Insurance (3640 – 1350) 2 290
Power and water 2 300
Advertising costs 5 100
Depreciation:
Lease 2 000
Equipment 9 400
(51190)
Net Profit 10,870
Text 61
Bright Tembo’s
Balance sheet as at 31 March 2016
K K K
Cost Accum. Dep. N.B.V
Fixed Assets
Leasehold 50 000 12 000 38 000
Equipment 64 000 26 400 37 600
114 000 46 000 75 600
Current assets
Closing stock 3870
Trade debtors 6 750
Less: Provision for doubtful debts 540
6 210
Insurance prepaid 1 350
Bank (5150 – 5000) 150
11 580
Less: Current liabilities
Trade creditors (4010 + 5000) 9 010
Equipment running expenses 750
Loan interest outstanding 500
(10 260)
Net assets 76 920
Financed by:
Capital 50 000
Net profit 10 870
60870
Less: Drawings (8500 + 450) (8950)
51 920
Add: Long Term Liabilities
6% Bank loan (25 000)
Capital employed 76 920
Principles of Accounts 711010.LIMITATION OF THE
A Supplementary TRIALText
Study BALANCE 62
10.LIMITATION OF THE TRIAL BALANCE

When the trial balance agrees, it is prima facie true that the ledger accounts have been done
correctly. This is because a deeper look into the ledger may reveal errors which could not
be noted at first look. These errors affect the calculation of profit and the ascertainment of
the financial position of a business for a particular period. For this reason it is important that
the errors are located and corrected in order to have as accurate the profit figure and the
financial position of a business as possible.
Errors contained in the trial balance are of two classes:
(a) Errors disclosed by the trial balance
(b) Errors not disclosed by the trial balance
Errors not disclosed by the Trial Balance
It is a well appreciated rule that every debit entry in ledger accounts must have a
corresponding credit entry arising from the same transaction; and every credit entry must
have a corresponding debit entry. Therefore, if the entries in the ledger accounts are
correctly done, then when the trial balance is extracted the total of its debit and credit side
must agree i.e. must be equal. However, there are certain kinds of error which would not
affect the agreement of the trial balance totals. The following are the errors not disclosed by
the trial balance:
(a) Errors of omission

This is an error committed by completely leaving out (omitting) a transaction from the
books. For example, if we sold goods to C. Chansa for K1 000 but did not enter it in
either the dales or C. Chansa account, the trial balance would still agree.
(b) Errors of commission

This is where the correct amount is entered but in the wrong person’s account.
For example, a sale of goods for K2 000 to A. Banda is entered in the account of C.
Banda. In this case, the class of account is correct but the name of the account is
wrong.
(c) Errors of principle

This is where an item is entered in the wrong class of accounts, e.g. if the purchase
of a fixed asset such as a motor van is debited to an expenses account such as
motor expenses account. In this case, the purchase of motor van is capital
expenditure but it has been treated as revenue expenditure.
(d) Compensating errors

This is a type of error where errors cancel out each other. If the sales account was
added up to be K100 too much and the purchases account was also added up to be
K100 too much, then these errors would cancel out in the trial balance. This is
because the totals of both the debit side of the trial balance and of the credit side will
be K100 too much.
Study BALANCE 63
(e) Errors of original entry

This is where the original figure is incorrect, yet double entry is still observed using
the incorrect figure, e.g. where sales of K1 500 were made but an error was made in
calculating the sales invoice. If the sales invoice was calculated as K 1 600, and K1
600 was credited to the sales account and debited to the personal account of the
customer, the trail balance would still agree.
(f) Complete reversal of entries

This is where the correct accounts are used but each item is shown on the wrong
side of the account.
For example, if we had paid a cheque to D. Kangwa for K2 000, the double entry is
supposed to be;
Debit D. Kangwa account K2 000 and;
Credit Bank account K2 000.
If, in error it is entered as
Credit D. Kangwa K2 000 and;
Debit Bank Account K2000
The trial balance totals will still agree.
(g) Errors of transposition

This happens where the wrong sequence of the individual characters within a
number was entered, e.g. K597 entered as K579. Although this error occurs more
commonly on one side of the double entry only, it may also occur on both sides.
Correction of errors disclosed by the trial balance

Errors not disclosed by the trial balance can be corrected in two steps:
(1) Show the entries needed for correction in the journal.
(2) Post the journal entries to the ledger accounts.
Errors disclosed by the Trial Balance
Errors disclosed by the trial balance are those that cause the trial balance totals to disagree.
They include the following:
(a) Wrong additions
This is due to adding or subtracting figures wrongly.
(b) Single entries
This is caused by failure to observe the double entry system, i.e. by making an entry
on only one side of the accounts, e.g. a debit but no credit: a credit but no debit.
(c) Entry of different amounts
This is where the amount entered on the debit side differs from the one entered on
the credit side arising from the same transaction, e.g. entering K300 on the debit of
cash account and K330 on the credit of the sales account.
When the trial balance totals disagree, effort must be made to locate the errors that have
caused the disagreement. If all efforts cannot locate the errors, the trial balance totals can
be made to agree with each other by inserting the amount of the difference between the two
sides in a suspense account.
For example
Study BALANCE 64
A trial balance is presented as follows:
Trial balance as at 31 December 2012

DR CR
K K
Totals after all balances from ledger accounts have been listed 100 000 95 000
Suspense ( to make trial balance to agree) 5 000
A suspense account is therefore opened and will look like this:

Suspense account
Date Details F DR CR
K K
31 Dec Trial balance (difference as per trial 5 000
2012 balance)
The above action is taken to temporarily hold the difference between the trial balance totals
until the errors are found and corrected.
Example
Rupiah Banda prepared a trial balance on 31st January 2011, which showed that the total of
the credit balance was K110 more than the total of the debit balances. A Suspense Account
was opened with this figure to make the books balance. Later investigations revealed the
following errors in her books.
(i) A Purchase of K300 was entered wrongly as K200 in the account of the supplier, J.
Zimba.
(ii) The purchase by cheque of a piece of office equipment for use in the office, at the cost
of K600 had been posted to the Purchases Account
(iii) The total of the Sales Returns Book, amounting to K120, had not been posted to the
ledger.
(iv) A debit balance on P. Bwalya’s Account of K540 was brought down as K450 and this
later was included in the Debtors’ total entered in the trial balance.
Required:
a) Make necessary journal entries to correct the errors.
(a) Write up a Suspense Account duly balanced.
Study BALANCE 65
Journal
Date Details Folio Dr (K) Cr (K)
2011
31 Jan Suspense 100
J. Zimba 100
Being correction error where a purchase figure was
wrongly entered in the account of the supplier.
31 Jan Office Equipment 600
Purchases 600
Being correction of an error of principle.
31 Jan Sales Returns 120
Suspense 120
Being correction of error of single entry.
31 Jan P. Bwalya 90
Suspense 90
Being correction of error of transposition in one
account.
Suspense Account
Date Details Folio Dr. (K) Cr. (K)
2011
Difference in books 110
J. Zimba 100
Sales Returns 120
P. Bwalya 90
210 210
11.BANK Study
Principles of Accounts 7110 A Supplementary RECONCILIATION
Text 66
11.BANK RECONCILIATION
Definition and Explanation
From time to time the balance shown by the bank and cash column of the cash book
required to be checked. The balance shown by the cash column of the cash book must
agree with the amount of cash in hand on that date. Thus reconciliation of the cash column
is a simple matter. If it does not agree it means that either some cash transactions have
been omitted from the cash book or an amount of cash has been stolen or lost. The reason
for the difference is ascertained and cash book can be corrected. So far as the bank balance
is concerned, its reconciliation is not so simple. The balance shown by the bank column of
the cash book should always agree with the balance shown by the bank statement, because
the bank statement is a copy of the customer's account in the banks ledger. But the bank
balance as shown by the cash book and bank balance as shown by the bank statement
seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation
statement to find out the reasons for disagreement between the bank statement balance
and the cash book balance of the bank, and to test whether the apparently conflicting
balance do really agree.
Discrepancies between Bank statement and Cash book
Usually the reasons for the disagreement in the bank statement and Cash book balances
are:
1. That our banker might have allowed interest which have not yet been entered in our
cash book.
2. That our banker might have debited our account for any such item as interest on
overdraft, commission for collecting cheque, incidental charges etc., which we have
not entered in the cash book.
3. That some of the cheques which we drew and for which we credited our bank
account prior to the date of closing, were not presented at the bank and therefore,
not debited in the bank statement.
4. That some cheques or drafts which we have paid into bank for collection and for
which we debited our bank account, were not realised within the due date of closing
and therefore, not credited by the bank.
5. The banker might have credited our account with amount of a bill of exchange or any
other direct payment into bank and the same may not have been entered in the cash
book.
6. That cheques dishonoured might have been debited in the bank statement but have
not been given effect to in our books.
Preparation of Bank Reconciliation Statements
To prepare the bank reconciliation statement, the following rules may be useful:
1) Check the cash book receipts and payments against the bank statement.
2) Tick the items that appear in both the cashbook and the bank statement
3) Items not ticked on either side of the cash book will represent those which have not
yet passed through the bank statement.
11.BANK Study
Text 67
4) Items not ticked on either side of the bank statement will represent those which have
not yet been passed through the cash book. Circle these items.
5) Adjust the cash book by recording therein those items which do not appear in it but
which are found in the bank statement, thus computing the correct balance of the
cash book.
6) Prepare the bank reconciliation statement reconciling the bank statement balance
with the correct cash book balance in either of the following two ways:
- First method (Starting with the cash book balance)
- Second method (Starting with the bank statement balance)
-
Method 1: Starting with the Cash Book Balance

Deduct from the balance as per cash book, all cheques, drafts etc., paid into the bank
but not collected and credited by the bank and;
add to it all cheques drawn on the bank but not yet presented for payment.
The new balance will agree with the balance as per bank statement.
Revised Cash Book

Date Details F. Dr (K) Cr (K)
‘’ 20 Credit transfer: Sam 3 000
‘’ 26 Direct debit: Zesco 4 500
‘’ 31 Bank charges 500
‘’ 31 Balance c/d 20 000
25 000 25 000
Feb 1 Balance b/d 20 000
Bank Reconciliation statement as at 31 January 2017

Balance as per cash book 20 000
Add: Unpresented cheques:
Phillip 3 500
23 500
Less: Uncredited cheques:
David 4 000
Balance as per bank statement 19 500
Method Two: Starting with the Bank Statement Balance

Add to the bank statement balance all cheques, drafts, etc., paid into bank but not
collected and credited by the bank and;
Subtract all cheques drawn on the bank but not yet presented for payment.
The new balance will then agree with the balance as per revised cash book.
11.BANK Study
Text 68
Revised Cash Book

Date Details Dr (K) Cr (K)
‘’ 20 Credit transfer: Sam 3 000
‘’ 26 Direct debit: Zesco 4 500
‘’ 31 Bank charges 500
‘’ 31 Balance c/d 20 000
25 000 25 000
Feb 1 Balance b/d 20 000
Bank Reconciliation statement as at 31 January 2017

K
Balance as per bank statement 19,500
Add: Uncredited cheques: David 4,000
23 500
Less: Unpresented cheque: Phillip 3,500
Balance as per revised cashbook 20,000
Example 1
On December 31 2017 the balance of the cash at bank as shown by the cash book of a
trader was K1,401 and the balance as shown by the bank statement was K2,253.
On checking the bank statement with the cash book it was found that a cheque for K116
paid in on the 31st December was not credited until the 1st January, 2018 and the following
cheques drawn prior to 31 December were not presented at the bank for payment until the
5th January 2018. Susan K29, Grace K801, Maureen K6, Ruth K132.
Prepare a statement recording the two balances:
Solution:
Bank Reconciliation Statement as at 31 December 2017
First Method:
Balance as per cash book - Dr. 1,401
Less cheques paid in but not collected 116
1,285
Add cheques drawn but not presented:
Susan 29
Grace 801
Maureen 6
Ruth 132 968
Balance as per bank statement - Cr. 2,253
11.BANK Study
Text 69
Second Method:
Balance as per bank statement - Cr. 2,253
Susan 29
Grace 801
Maureen 6
Ruth 132 968
1,285
Add cheques paid in but not collected 116
Balance as per cash book - Dr. 1,401
12.CONTROL
Text 70
12.CONTROL ACCOUNTS
Control accounts are accounts that are used to check on the arithmetic accuracy of ledgers.
Types of Control Accounts

1) Debtors Ledger Control Account or Sales Ledger Control Account or Total Debtors
Control Account.
2) Creditors Ledger Control Account or Purchases Ledger Control Account or Total
Creditors Control Account.
Reasons for Preparing Control Accounts
(1) To confirm accuracy of postings

If the total of the individual balances in the subsidiary ledger agrees with the balance
on the control account, we can conclude that postings have been made accurately.
(2) To assist in finding errors quickly
If the total of the individual balances in the subsidiary ledger is compared with the
balance on the control account regularly (say weekly), errors can be identified
quickly, and the volume of entries to be checked to find the nature of the errors will
be manageable.
(3) To extract figures more quickly
When preparing draft final accounts, it is necessary to extract the balance on the
control account for inclusion in the accounts, rather than totalling the balances on the
individual accounts.
(4) To provide an internal check
The use of control accounts means that individual staff can be given specific
responsibility for maintaining a part of the book-keeping system. The accuracy of the
postings made by each individual can therefore be checked
The Principle
The principle on which the control accounts are based is as follows:
If the Opening balance of an account is known together with information of the Additions and
Subtractions during the period, the Closing balance can be known.
The balances in the control accounts are transferred to the balance sheet as the final figures
for debtors and creditors as at the end of the financial year.
NOTE THAT Contra’s (Latin = against) occur when a credit customer also sells on credit to a
business. Instead of exchanging cheques the two indebtednesses are set against each other
and one cheque only is sent. If A owes B K600, and B owes A K200, it is convenient for A to
pay B K400.
12.CONTROL
Text 71
Debtors Ledger Control Account
Sources of information for the Debtors Ledger Control A/C

Item Source
1 Opening debtors List of debtors’ balances drawn up at the end of the previous period.
balances
2 Credit sales Total from the Sales Day Book
3 Returns Inwards Total of the Returns Inwards Day Book
4 Cheques Cash Book: Bank column on received side. List extracted or the total
received of a special column for cheques which has been included in the Cash
Book.
5 Cash received Cash book: Cash column on received side. List extracted or the total
of a special column for cash which has been included in the Cash
Book.
6 Discount allowed Total of discounts allowed column in the Cash Book
7 Closing debtors List of debtors’ balances drawn up at the end of the period.
balances

Date Details Fo. Dr Cr
2020 K K
Jan 1 Balance B/F XXXXX XXXX
Credit Sales XXXXX
Sales Returns XXXX
Cash received from debtors XXXX
Cheques received from debtors XXXX
Bad debts XXXX
Discounts allowed XXXX
Interest charged to debtors XXXX
Dishonoured cheques XXXX
Set offs XXXX
Cash refunds to customers XXXX
Jan 31 Balance B/F XXXXXXX XXXXXXX
XXXXXX XXXXXXX
Creditors Ledger Control Account
Sources of information for the Creditors Ledger Control A/C

Item Source
1 Opening creditors List of creditors’ balances drawn up at the end of the previous
balances period.
2 Credit purchases Total from Purchases Day Book
3 Returns Outwards Total of the Returns Outwards Day Book
4 Cheques paid Cash Book: Bank column on payments side. List extracted or the
total of a special column for cheques which has been included in the
Cash Book.
5 Cash paid Cash book: Cash column on payments side. List extracted or the
total of a special column for cash which has been included in the
Cash Book.
12.CONTROL
Text 72
6 Discount received Total of discounts received column in the Cash Book

7 Closing creditors List of creditors’ balances drawn up at the end of the period.
balances

Date Details Fo. Dr Cr
2020 K K
Jan 1 Balance B/F XXXXX XXXX
Credit Purchases XXXXX
Purchases Returns XXXX
Cash paid to creditors XXXX
Cheques paid to creditors XXXX
Discounts received XXXX
Interest charged by suppliers XXXX
Dishonoured cheques XXXX
Set offs XXXX
Cash refunded by creditors XXXX
Jan 31 Balance B/F XXXXX XXXXX
XXXXXX XXXXXXX
Example
On 31 December 2022 Mumbi prepared control accounts to check the accuracy of this sales
and purchases ledgers. He provided the following information.
K
Control account balances, 1 December 2022

Sales ledger control account debit balance 6 520
Sales ledger control account credit balance 290
Purchases ledger control account credit balance 8 480
Purchases ledger control account debit balance 310
Cash book totals

Receipts from trade receivables 5 990
Payments to trade payables 8 630
Discounts allowed 240
Dishonoured cheques (from trade receivables) 180
Cash purchases 3 920
Cash sales 15 870
Day book totals

Sales book 7 440
Purchases book 9 300
Returns inwards book 510
Returns outwards book 450
12.CONTROL
Text 73
General Journal totals

Bad debts written off 270
Contra entry between sales ledger and purchases ledger 880
Balances shown in the sales ledger at 31 December 2022

Total of debit balances 6 350
Total of credit balances 390
Balances shown in the purchases ledger at 31 December 2022

Total of debit balances 520
Total of credit balances 7 270
(a) Prepare the sales ledger control account and the purchases ledger control account
for December 2022.
Sales Ledger Control Account

Date Details F Dr. (K) Cr. (K)
2022
Dec 1 Balance b/d 6 520 290
Dec 31 Credit sales 7 440
Dec 31 Dishonoured cheque 180
Dec 31 Returns inwards 510
Dec 31 Bank receipts 5 990
Dec 31 Discount allowed 240
Dec 31 Bad debts written off 270
Dec 31 Contra entry with purchases ledger 880
Dec 31 Balance c/d 390 6 350
14 530 14 530
Jan 01 Balance b/d 6 350 390
Purchases Ledger Control Account

Date Details F Dr. (K) Cr. (K)
2022
Dec 1 Balance b/d 310 8 480
Dec 31 Credit purchases 9 300
Dec 31 Returns outwards 450
Dec 31 Bank payments 8 630
Dec 31 Discounts received 450
Dec 31 Contra entry with sales ledger 880
Dec 31 Balance c/d 7 580 520
18 300 18 300
Jan 01 Balance b/d 520 7 580
13.FINAL
Principles ACCOUNTS7110
of Accounts OF NON PROFIT MAKING Study
A Supplementary ORGANISATIONS
Text 74
13.FINAL ACCOUNTS OF NON PROFIT MAKING

ORGANISATIONS
Non Profit Making Organisations are Organisations that do not aim at making profit but at
proving a service to there members and the community. They are however required to
prepare final accounts mainly for accountability and efficient utilisation of resources.
Examples of such Organisations include:
 Social Clubs
 Societies
 Associations
 Religious Bodies
 Educational Institutions
 Hospitals
Sources of Income for Non Profit Concerns
Although Non Profit Making Organisations are not involved in trade, they still need funds to
curry out their activities. Sources of income include:
 Membership fees
 Subscriptions
 Grants from government
 Donations
 Fundraising ventures (fundraising ventures include: Dinner dances, Raffle draws,
walks, car wash, Tea parties, etc.
Expenditure streams for Non Profit Concerns
These are similar to those made by profit making organisations. The only difference is that
those made by non profit making organisations are not for profit purposes. They are aiming
at maintaining or improving the organization and the services offered. These may include:
 Salaries and wages
 Stationery
 Advertising,
 Payments for affiliations
 Refreshments
 Transport
 Events expenses etc.
Financial Statements of Non Profit Concerns
The common financial records prepared for non profit making organisations include the
following:
Receipts and Payments Account

The receipt and payment is the summary of the transactions recorded in the cash book, it
starts with balance brought down from the previous trading period and ends with the closing
balance for the current period. It shows the classified actual in flow and out flow of cash in
13.FINAL
Text 75
and from the organization. The Receipts and Payment Account does not show whether the
amounts are current, a prepayment, or accrued. It does not differentiate or classify the
capital and revenue income or the expenditure. The Receipt and Payment Account is similar
to the Cash Book for trading businesses (profit making organisation).
Below is the format for the receipts and payment:
Format 1
Kaleya’s Football Club’s
Receipts and Payment Account for the year ended ………
20…..
Jan 1 Balance b/f XXXX
Donations XX
Subscriptions XXX
Membership fees XX
Ground man’s Wages XX
Stationery XX
Rent of Ground XX
Dec 31 Balance c/d XX
20……. XXXX XXXX
Jan 1 Balance b/d XX
Format 2
Kaleya’s Football Club’s
Receipts and Payment Account for the year ended ………
Date Details Dr(K) Date Details Cr(K)
20…. 2017
Jan 1 Balance b/f XXXX Jan 1 Ground man’s wages XX
Donations XX Stationery XX
Subscriptions XXX Rent of Ground XX
Membership fees XX Dec 31 Balance c/d XX
20….. XXXX XXXX
Income and Expenditure Account

An Income and Expenditure Account is prepared to show the results of the financial activities
that took place during the year.
The Income and Expenditure Account is similar to the trading and profit and loss account for
trading businesses (profit making organisations). The two are prepared following the same
principle of deducting expenses from the incomes in order to determine whether there was a
profit/loss, or Surplus/Deficit resulting from their operations.
The Income and Expenditure Account is prepared using information contained on the
receipts and payments Account plus the possible adjustments.
13.FINAL
Text 76
When preparing the Income and Expenditure Account we only use revenue income and
revenue expenditure. Capital income and capital expenditures are reserved for the balance
sheet. Since the income and expenditure account requires income earned not income
received, expenses incurred and not expenses paid, some adjustments have to be made.
When subtracting expenditure from incomes and answer is positive, it is said to be a Surplus
of income over expenditure. A trading business would call it net profit. If the answer is
negative, it is said to be Surplus of expenditure over income. It shows that the organization
received less income compared to its expenditure. A trading business would refer to this as
net profit. For the purpose of differentiation, we shall refer to Surplus of income over
expenditure as “Surplus”, and surplus of expenditure over income as “deficit”.
Differences between receipts and payment account and income and expenditure
account are
Receipt and Payment Account Income and Expenditure Account

1 It shows the actual cash received 1 It shows the income earned and
and paid out expenses incurred after adjustments
have been made to receipts and
expenses whether paid or not.
2 It shows all the receipts and 2 It only deals with revenue incomes
payments, without grouping them and revenue expenditure.
into capital and revenue items.
3 It does not show clearly whether the 3 It shows whether the incomes were
income received was sufficient to more than the expenses (surplus), or
meet expenses. the expenses were more than the
incomes (deficit).
Treatment of special items in Non Profit Concerns

Special Funds
This is a donation or funds raised by non-profit making organisations to finance special
expenses or for the purchase of a particular asset.
The money received for purchase of a particular asset is treated as a capital income
(additional capital) and is recorded separately on the balance sheet just below the
accumulated fund.
Life Membership Fees

This is money paid at once by a member in order to use the facilities of the organisations
for the rest of their life. Life Membership fees is not recurring in nature and received once
for a whole life from a member. Thus, as Life Membership Fees are capital receipts,
these are added to the Capital Fund on the Liabilities side of the Balance Sheet.
Subscription Adjustment
Subscription is the most common income received by non-profit making organisations. It
may be paid for the current year, by members, others pay in advance and others are in
arrears. In order to sort out the different categories of subscription, we need to prepare
the subscription account. Out of these categories it is only the current year’s
subscription (income earned) that goes to the income and expenditure account.
13.FINAL
Text 77
Below is an illustration of the subscription account:
Subscription Account
Date Details F Dr(K) Cr(K)
20…..
Jan 1 Balance (Subs. In advance) b/f XX
Jan 1 Balance (Subs. Owing) b/f XX
Refund of overpayment XX
Receipts XXX
Income & Expenditure XX
Dec 31 Balance (Subs. In advance) c/d XX
Dec 31 Balance (Subs. Owing) c/d XX
20….. XXXX XXXX
Jan 1 Balance (Subs. In advance) b/d XX
Jan 1 Balance (Subs. Owing) b/d XX
The following format can also be used for the computation of subscription for the
current year:
Receipts……………………………………………………………………… XXX
Add: Subscriptions in advance at start………………………. XX
Subscriptions owing at end……………………………… XX
XX
Less: Subscriptions in advance at end………………………. XX
Subscriptions owing at start…………………………… XX
Refund of overpayments………………………………….XX
XX
Subscriptions for the year (To: Income & Expenditure a/c) XXX
Expenses Adjustments
Only expenses incurred in the current year are to be included in the income and
expenditure account, therefore it is necessary for adjustments to be made.
Below is an illustration of the expenses account:
Expenses Account
20…..
Jan 1 Balance (Expenses In advance) b/f XX
Jan 1 Balance (Expenses Owing) b/f XX
Bank/cash (amount paid) XX
Income & Expenditure XX
Dec 31 Balance (Expenses In advance) c/d XX
Dec 31 Balance (Expenses Owing) c/d XX
20….. XXXX XXXX
Jan 1 Balance (Expenses In advance) b/d XX
Jan 1 Balance (Expenses Owing) b/d XX
13.FINAL
Text 78
The following format can be used to compute the expense for the year:
Bank/cash (Amount paid)…………………………………………………… . XXX
Add: Expenses in advance at start………………………. XX
Expenses owing at end……………………………….. XX
XX
XX
Less: Expenses in advance at end………………………. XX
Expenses owing at start……………………………….. XX
XX
Expenses for the year (To: Income & Expenditure a/c) XX
Depreciation
Non profit making organisations do own assets in form of equipment, motor vehicles,
premises, etc. they do lose value through use, passage of time, etc. depreciation is treated
as one of the expenses and is recorded in the income and expenditure account.
For examination purposes the figure for depreciation may not be provided, hence the need
for computation of the depreciation figure.
Below is an illustration on how to compute the figure for depreciation:
Asset Account
20…..
Jan 1 Balance b/f XX
Bank/cash (Purchase) XX
Depreciation (To: Income & expenditure) XX
20….. XXXX XXXX
The following format can be used to compute the figure for depreciation:
Opening balance……………………………………………………………………XXX
Add: Purchase of new asset…………………………………………………….. XX
XX
Less: Closing balance……………………………………………………………….XX
Depreciation figure………………………………………………………………….. XX
Disposal of Assets
Non profit making organisations may decide to dispose (sale) of assets that may no longer
be required. There is a need to ascertain whether there was a profit or loss on the sale of an
asset. Whatever the case be it, be it a profit or loss it will be recorded in the income and
expenditure account. If it is a profit it will be recorded under income and if it is a loss it will
be recorded under expenditure.
The illustration is shown below:
13.FINAL
Text 79
Asset Disposal Account

20…..
Jan 31 Cost of asset XXX
Jan 31 Bank/cash (Proceeds) XX
Jan 31 Provision for depreciation (Acc. Dep) XX
Jan 31 Income and Expenditure XX
XXXX XXXX
The following format can be used to calculate profit earned or loss sustained on the sale of
an asset:
Cost of asset…………………………………………………………………………XXX
Less: Bank/cash (proceeds)……………………………………………. XX
Accumulated Depreciation……………………………………….. XX
XX
Profit/Loss on sale of an asset………………………………………………….. XX
Trading activies in Non Profit Concerns

Profit made from trading activities and functions must be recorded in the income and
expenditure under income and if there is a loss as an expense.
When the trading account is to be prepared for examination purposes in most cases
purchases figure will have to be calculated and in rare cases sales will also have to be
calculated using control accounts.
Below is the sample of the Purchases Control Account:
Purchases Control Account

20…..
Bank/cash (Payment to suppliers) XX
Purchases (To:Trading Account) XX
20….. XXXX XXXX
The following format may also be used to calculate the purchases figure:
Bank/cash (payment to suppliers)……………………………………………. XXX
Add: Balance at end (creditors figure) ……………………………………… XX
XX
Less: Balance at start (creditors figure) ……………………………………. XX
Purchases figure (To: Trading Account) …………………………………… XX
13.FINAL
Text 80
Below is an illustration for the Sales Control Account:
Sales Control Account

20…..
Bank/cash (Receipts from customers) XX
Sales (To: Trading Account) XX
20….. XXXX XXXX
The following format may also be used to calculate the sales figure:
Bank/cash (receipts from customers)………………………………………. XXX
Add: Balance at end (debtors figure)……………………………………….. XX
XX
Less: Balance at start (debtors figure)……………………………………... XX
Sales figure (To: Trading Account)…………………………………………… XX
The Accumulated Fund

In non profit making organisations instead of capital, the money contributed by members and
well wishers is known as accumulated fund. In the beginning the amount is normally small
and grows as more contributions are made from subscriptions. Treatment of accumulated
fund is same as capital for trading businesses. They are both recorded in the same position
as capital. Accumulated fund is calculated using the opening balances of assets and
liabilities at the beginning of the year. The following formula is used to calculate
accumulated fund:
Accumulated Fund = Assets(at start) – Liabilities (at start)
Capital and Revenue Expenditure and Receipts

Be aware that ‘capital expenditure’ has nothing to do with the owner’s Capital Account. The
two terms happen to start with the same first word and they are both things that are likely to
be around the business for quite a long time. While both are, in a sense, long-term
investments, one made by the business, and the other made by the owner, they are, by
definition, two very different things.
Capital expenditure
Is incurred when a business spends money either to
 buy fixed assets,
 add to the value of an existing fixed asset.
Included in such amounts should be spending on
 acquiring fixed assets
 bringing them into the business
 legal costs of buying buildings
 carriage inwards on machinery bought
 Any other cost needed to get a fixed asset ready for use.
13.FINAL
Text 81
Revenue expenditure
Expenditure which is not spent on increasing the value of fixed assets, but on running the
business on a day-to-day basis, is known as revenue expenditure.
The difference between revenue expenditure and capital expenditure can be seen clearly
with the: -
 Total cost of using a van for a business.
Buying a van is capital expenditure. The van will be in use for several years and is,
therefore, a fixed asset.
 Paying for petrol to use in the van is revenue expenditure. This is because the
expenditure is used up in a short time and does not add to the value of fixed assets.
Revenue receipts are sales and other revenue items that are added to gross profit, such as
rent receivable and commissions receivable.
The rules are:

1. If expenditure is directly incurred in bringing a fixed asset into use for the first time, it
is capital expenditure.
2. If expenditure improves a fixed asset (by making it superior to what it was when it
was first owned by the organization, e.g. building an extension to a warehouse), it is
capital expenditure.
3. All other expenditures are revenue expenditure.
Capital and Revenue Receipts:
When the business receives money it is again of two sorts. It may be a long-term receipt, a
contribution by the owner, either to start the business off or to increase the funds available to
it. It might be a mortgage or a loan which brings money into the business for a long-term, but
in this case it is not the owner of the business but some other investor who is supplying the
money.
On the other hand, the receipt may be a short-term receipt, one which is truly a profit of the
business. It may be rent received, commission received or cash for sale of goods made that
day, or at some previous time.
Capital Receipt:
Receipts which are non-recurring (not received again and again) by nature and whose
benefit is enjoyed over a long period are called "Capital Receipts", e.g. money brought into
the business by the owner (capital invested), loan from bank, sale proceeds of fixed assets
etc. Capital receipt is shown on the liabilities side of the Balance Sheet.
Revenue Receipt:
Receipts which are recurring (received again and again) by nature and which are available
for meeting all day to day expenses (revenue expenditure) of a business concern are known
as "Revenue receipts", e.g. sale proceeds of goods, interest received, commission received,
rent received, dividend received etc.
13.FINAL
Text 82
Distinction between Capital Receipt and Revenue Receipt:
Revenue Receipt Capital Receipt
1. It has short-term effect. The benefit 1. It has long-term effect. The benefit is
is enjoyed within one accounting enjoyed for many years in future.
period.
2. It occurs repeatedly. It is recurring 2. It does not occur again and again. It is
and regular. nonrecurring and irregular.
3. It is shown in profit and loss account 3. It is shown in the Balance Sheet on
on the credit side. the liability side.
4. It does not produce capital receipt. 4. Capital receipt, when invested,
produces revenue receipt e.g. when
capital is invested by the owner,
business gets revenue receipt (i.e.
sale proceeds of goods etc.).
5. This does not increase or decrease 5. The capital receipt decreases the
the value of asset or liability. value of asset or increases the value
of liability e.g. sale of a fixed asset,
loan from bank etc.
6. Sometimes, expenses of capital 6. Sometimes expenses of revenue
nature are to be incurred for revenue nature are to be incurred for such
receipt, e.g. purchase of shares of a receipt e.g. on obtaining loan (a
company is capital expenditure but capital receipt) interest is paid until its
dividend received on shares is a repayment
revenue receipt.
Worked example 1.
The Treasurer of the Chisamba Farmers Football Club had the following details from the
summary Cash Book at 30 November 2007.
Bank balance at 1 December 2006 630, 000

Cash balance at 1 December 2006 100, 000
Cash receipts during the year 2007:

Supporters subscriptions: for 2006 140, 000
for 2007 1, 360, 000
for 2008 200, 000
Games gate takings 1, 700, 000

Annual social party collections 1, 340, 000
The following expenses were made during the year 2007

Rent 2, 340, 000
Printing and stationery 180, 000
Affiliation fees 120, 000
13.FINAL
Text 83
Secretarial expenses 370, 000

Visitors refreshments during games 610, 000
Annual social party expenses 1, 020, 000
Equipment purchased 260, 000
The treasurer also had the following details:
Amounts due to the club 1 Dec 30 Nov

2006 2007
Supporters’ subscriptions 140, 000 120, 000
Games gate takings 780, 000 530, 000
Annual social party collections 160, 000 -
Amounts owed by the club

Rent 720, 000 540, 000
Printing - 30, 000
Secretarial expenses 40, 000 80, 000
Visitors refreshments expenses 130, 000 120, 000
On 1 December 2006 the club’s equipment had book value of K1, 500, 000. It was decided
that 10% of total book value of the equipment be written off at 30 November 2007.
(a) Show the summary receipts and payments account for the year and calculate the
cash balance at bank.
(b) Prepare the income and expenditure account for the year ended 30 November
2007 and the balance sheet as at that date.
13.FINAL
Text 84
Chisamba Farmers Football Club’s

Receipts and payments Account
For the year ended 30 November 2007
K K
Receipts
Opening Bank balance 630 000
Opening Cash balance 100 000
Supporters subscription – 2006 140 000
Supporters subscription – 2007 1 360 000
Supporters subscription – 2008 200 000
Games gate takings 1 700 000
Annual social party collections 1 340 000
5 470 000
Less: Payments
Rent 2 340 000
Printing and stationery 180 000
Affiliation fees 120 000
Secretarial expenses 370 000
Visitors refreshments during the year 610 000
Annual social party expenses 1 020 000
Equipment purchased 260 000
(4 900 000)
Closing cash/bank balance 570 000
13.FINAL
Text 85
Chisamba Famers football Club’s

Income and Expenditure Account
for the year ended 30 November 2007
K K K
Income
Supporters subscription 1 480 000
Games gate takings 1 700 000
Less: 2006 Games gate takings 780 000
920 000
Add: Games Gate takings accrued 530 000
1 450 000
Annual social party collections 1 340 000
Less: 2006 Annual social party collections owing 160 000
1 180 000
Total Income 4 110 000
Less: Expenditure
Rent
Less: 2006 rent owing 2 340 000
720 000
Add: 2007 Rent owing 1 620 000
540 000
Printing and stationery 2 160 000
Add: 2007 Printing owing 180 000
30 000
210 000
Affiliation fees
Secretarial expenses 120 000
370 000
Less: 2006 secretarial expenses owing
40 000
Add: 2007 Secretarial expenses owing 330 000

80 000
Visitors refreshments during the year 410 000
Less: 2006 visitors refreshments owing 610 000
130 000
Add: 2007 visitors refreshments owing 480 000
120 000
Annual social party expenses 600 000
Equipment written off(Depreciation) 1 020 000
176 000
Total expenditure 4 696 000
Deficit 586 000
13.FINAL
Text 86
Chisamba Farmers’ Football Club’s

Balance Sheet as at 30 November 2007
K K K
Fixed assets Cost Acc. Dep. N.B.V
Equipment 1 760 000 176 000 1 584 00
Current Liabilities
Closing Cash /bank balance 570 000
2007 Supporters subscription owing 120 000
2007 Games Gate takings owing 530 000
1 220 000
Rent owing 540 000
Printing owing 30 000
Visitors Refreshments owing 120 000
Secretarial expenses owing 80 000
2008 Subscriptions prepaid 200 000

250 000
Net Assets 1 834 000
FINANCED BY:
Accumulated fund at start 2 420 000
Less: Deficit (586 000)
Accumulated fund at close 1 834 000
Subscription Account
1 Dec 06 Balance (subscription owing) b/d 140 000
Bank ( 2006) 140 000
Bank (2007) 1 360 000
Bank (2008) 200 000
30 Nov 07 Income and Expenditure 1 480 000
30 Nov 07 Balance(subscription prepaid/owing) c/d 200 000 120 000
1 820 000 1 820 000
01 Dec 07 Balance(Subscription Owing/Prepaid) b/d 120 000 200 000
13.FINAL
Text 87
Worked example 2
The receipts and payment account of the Lusaka Badminton club for the year ended
31st December 1999 was as follows:
RECEIPTS PAYMENT
K K
Balance 1st January 1999 580, 000 Rent and Rates 1, 640, 000
Subscriptions 2, 470, 000 Postage and Stationery 470, 000
Donations 130, 000 Cost of refreshments 860, 000
Gifts (for purchase of equipment) 400, 000 New equipment 700, 000
Sales of refreshments 1, 240, 000 Sundry expenses 510, 000
Wages (for refreshments
Preparation) 200, 000
Balance c/f ?
4, 820, 000 4, 820, 000
The following additional information is available.
1st January 1999 31st December1999

K K
Stock of refreshments 70, 000 60, 000
Owing to suppliers for refreshments 50, 000 -
Subscriptions in arrears - 50, 000
Subscriptions in advance 80, 000 -
Equipment at valuation 680, 000 1, 180, 000
Required:
(a) The Refreshment Trading Account for the year ended 31st December 1999.
(b) The Income and Expenditure Account for the year ended 31st December 1999.
(c) The balance sheet as at 31st December 1999.
Lusaka Badminton Club’s

Refreshment trading account
for the year ended 31 December 1999
K K
Sales of refreshments 1 240 000
Less: Cost of Sales
Opening stock of refreshments 70 000
Cost of refreshments purchased
(K860 000 –K 50 000) 810 000
Less: closing stock of refreshments 880 000

60 000
Wages for refreshments 820 000
200 000
Cost of sales of Refreshments (1 020 000)

Profit on refreshments 220 000
13.FINAL
Text 88
Lusaka Badminton’s
Income and Expenditure account
for the year ended 31 December 1999
K K K
Income
Profit on refreshments 220 000
Subscriptions 2 600 000
Donations 130 000
2 950 000
Less: Expenditure
Rent and rates 1 640 000
Postage and stationery 470 000
Sundry expenses 510 000
Depreciation of equipment 200 000
2 820 000
Surplus 130 000
Lusaka Badminton’s
Balance Sheet as at 31 December 199930 November 2007
K K K
Fixed assets Cost Accu. Dep. N.B.V
1 380 000 200 000 1 180 00

Equipment (680 000 + 700 000)
Current Assets 440 000

Closing Cash balance 50 000
Subscription owing 60 000
Stock of refreshments 550 000
Less: current Liabilities -
- 550 000
Working capital
Net Assets
1 730 000
FINANCED BY:
Accumulated fund at start
Add: Surplus 1 200 000
130 000
1 340 000
Add: Gift for purchase of equipment 400 000
Accumulated Fund At Close 1 730 000
13.FINAL
Text 89
Workings
1. Subscription Account

1 Jan 99 Balance (subscription prepaid) b/d 80 000
Bank 2 470 000
31 Dec 99 Income and Expenditure 2 600 000
31 Dec 99 Balance(subscription in arrears) c/d 50 000
2 600 000 2 600 000
01 Jan 2000 Balance b/d 50 000
2. Gifts for purchase of equipment

Purchase of equipment is capital expenditure; hence, gifts received for this purpose are a
capital receipt and should be added to the accumulated fund.
3. Accumulated fund = total assets at start – total liabilities at start

= opening bank balance + opening stock of refreshments
+ Equipment – (owing to suppliers for refreshments
+ subscription in advance)
= (580 000 + 70 000 + 680 000) – (50 000 + 80 000)
= K1 200 000
14.INCOMPLETE
Principles of Accounts 7110 RECORDS/SINGLE
A Supplementary Study TextENTRY 90
14.INCOMPLETE RECORDS/SINGLE ENTRY

Meaning of Incomplete records
is a situation where we do not have full set of double entry accounts maintained but we are
able to prepare the final accounts
Single entry refers to any type of book keeping which is not double entry. This is common
with small traders (e.g, small shopkeepers, market stalls, internet café) who deal with only
cash, they do not offer credit, and they don’t receive credit
Single entry is a system of accounting in which only one aspect of a transaction is recorded.
Some of the information is missing.
Difference Between Single Entry and Double Entry
Double Entry System Single Entry System

Both the aspects of a transaction are 1. For some transactions both the aspects are
recorded in it. So complete analysis recorded, while for some other transactions only
of a transaction is possible. one aspect is considered. Again, some
transactions are not recorded at all. Thus,
complete analysis of a transaction is not always
possible.
All the difference classes of accounts 2. Only cash accounts and personal accounts are
- assets a/c, liability a/c, capital a/c, maintained.
expense a/c and revenue a/c - are
maintained.
It is possible to verify the arithmetical 3. As under this system both the aspects of all
accuracy of books through trial transactions are not recorded, it is not possible
balance. to prepare trial balance and thereby verify
arithmetical accuracy of books of account.
In this system profit and loss account 4. Under this system no account is maintained in
can be prepared and the result of the respect of income or expenditure. So it is not
business can be determined thereby possible to prepare profit and loss account.
However, profit and loss is determined through a
statement by comparing closing capital with the
opening capital, but is not so reliable.
The financial position of the business 5. No account is maintained in respect of assets
can be compared through balance and liabilities. So, balance sheet cannot be
sheet. prepared. However, a statement of affairs is
prepared on the lines of balance sheet. But it is
not regarded as a reliable document, since the
values of assets and liabilities are not obtained
from the regular books of accounts.
14.INCOMPLETE
Important Formulae
• Net profit = Capital at end – Capital at start.

• Net profit = Capital at end + Drawings – Capital at start – Additional Capital.
• Capital = Assets – Liabilities.
• Turnover = Gross Sales – Sales Returns.
• Cost of Sales = Opening Stock + Net Purchases – Closing Stock.
• Gross Profit = Net Sales – Cost of Sales
• Net Sales = Gross Profit + Cost of Sales.
• Net Profit = Gross Profit – Expenses.
• Net Assets = Fixed Asset + Net Current Assets
• Capital Employed = Owner’s Capital + Borrowed Capital/Long Term Liabilities.
• Mark Up = Selling Price – Cost Price.
• Gross Profit Margin = Gross Profit X 100%
Sales
• Net Profit Margin = Net Profit X 100%
Sales
• Rate of stock Turnover = Cost of Sales
Average Stock
• Average Stock = Opening Stock + Closing Stock
2
• Net Current Assets/Working Capital = Current Assets – Current Liabilities.
• Owner’s Equity = Opening Capital + Net Profit – Drawings.
Calculation of Profit
Net Profit as Increase in Net Worth

Net worth is the value of a business at a particular moment in time and is based on the
value of assets that belong to the business. Assets which don’t belong to the business are
those that are not yet paid for. Net worth is equivalent to capital and is derived by
deducting liabilities from assets. By increased net worth we mean that the difference
between the capital at the start of the period and capital at the end of the period should be
net profit.
Example
Mutaba did not keep proper books of account for his business, but was able to supply the
following information:
30 Sept 2016 30 Sept 2017
K K
Stock 47,000 64,000
Debtors 19,000 20,000
Bank 8,500
Bank overdraft 24,500
Creditors 25,500 17,500
Premises 200,000 210,000
Equipment 43,000 39,000
Motor vehicles 52,000
14.INCOMPLETE
He took cash drawings of K3,500 per month for his private uses.
Mutaba also paid his private motoring expenses of K7,000 from the business bank account.
In August 2017, he sold some of his private Airtel shares for K30,000 and put this sum in the
business bank account.
- Prepare a statement showing profit or loss for the year ended 30 September 2017.
- Prepare a Balance Sheet as at 30 September 2017.
Solution
Assets = Capital + Liabilities
Net profit = Capital at end + Drawings – Capital at start – Additional Capital
Mutaba’s
Statement of Profit/Loss
For The Year Ended 30 September 2017
K K K
Fixed Assets
Premises 210,000
Equipment 39,000
Motor vehicles 52,000
Total Fixed Assets 301,000
Current assets
Stock 64,000
Debtors 20,000
Total Current Assets 84,000
Total Assets as at 30 September 2017 385,000
Creditors 17,500
Bank overdraft 24,500
Total Current Liabilities 42,000
Capital as at 30 September 2017 343,000
Add: Drawings 49,000
392,000
Less: Capital at 30 September 2016:
Fixed Assets
Premises 200,000
Equipment 43,000
Total Fixed Assets 243,000
Current assets
Stock 47,000
Debtors 19,000
Bank 8,500
Total Current Assets 74,500
Total Assets as at 30 September 2017 317,500
Creditors 25,500
Capital as at 30 September 2017 292,000
100,000
Less: Additional Capital 30,000
Net Profit 70,000
14.INCOMPLETE
Net Profit as an increase in capital
This year’s capital last year’s capital

K3,000 K2,000
Therefore, the profit will be K1,000
If drawings had been for instance K700

The profit must have been K1,700
Last year capital + profits – drawings = this years capital

K2,000 + X – 700 = K3,000
K2,000 = X – 700 = K3,700
2,000 + X = 3,700
X = 3,700 – 2,000
X = 1,700
==========
The statement of affairs is a balance sheet at the beginning of a Trading period. Prepared
using the word equation;
Opening Capital + Profit – Drawings = Closing Capital
Question
The position of Mr Hakasenke as at 31st December 2016 was as follows

Premises 5 000
Plant and Machinery 3 000
Stock 6 500
Debtors 8 750
Cash at bank 1 500
Creditors 9 375
On 1st January 2016, his capital was K27 000 and during the year his drawings
amounted to 2 500. He paid into his business K1 000 which was the sale proceeds of
his private car.
Prepare the statement of affairs and ascertain his profit or loss for the year.
14.INCOMPLETE
Solution
Mr Hakasenke
Statement of affairs as at 31st December, 2016 (Balance Sheet)
FIXED ASSETS COST DEP NBV
Premises 5 000 - 5 000
Plant and machinery 3 000 - 3 000
8 000 - 8 000
CURRENT ASSETS
Stock 6 500
Debtors 8 750
Cash at bank 1 500
16 750
CURRENT LIABILITIES 9 375

Creditors
7 375
FINANCED BY
Opening capital 27 500
Add additional capital 1 000
Less Net Loss 28 500
10 625
Less Drawings 17 875
2 500
15 375
Calculation of Missing Figures

In finding the missing information, the following techniques can be used:
 The accounting equation (statement of affairs or balance sheet)
 Debtors and creditors control accounts
 The cash book
 The gross profit percentages.
Single entry records of accounts are records that have not observed the double entry
system of book-keeping. Recorded only one side of account without observing the rule of
double entry e.g. sales of goods to Kalu recorded in Kalu’s account.
Double entry is where records of accounts observes the rule of “debit the receiver and
credit the giver”. These are records that go through the prime entry books, the ledger
and then extraction of Trial balance.
14.INCOMPLETE
Calculation of Purchases Figure

Closing Balance ………………………… XXX
Add:
Payment to Suppliers ………………… XXX
Purchases Returns …………………… XX
Discount received ……………………… XX
XXX
Less:
Opening Balance……………………… XXX
Purchases …………………………… XXX

01/01/…. Balance b/f XX
Purchases (balancing figure) XX
Discount Received XX
Cash/cheques paid(Payments) XX
Returns Outwards XX
Contra – Sales XX
31/12/…. Balance c/d XX
XXX XXX
01/01/….. Balance b/d XX
Calculation of Sales Figure
Closing Balance ………………………………………XXX

Add:
Receipts from Customers ………… XXX
Sales Returns ……………………… XX
Bad debts …………………………… XX
Discount allowed …………………… XX
XXX
XXX
Less:
Opening Balance………………………..XXX
Dishonoured Cheques………………. XX
XXX
Sales …………………………………………… XXX
14.INCOMPLETE

01/01/…… Balance b/f XX
Sales XX
Cash/cheque received(Receipts) XX
Dishonoured cheques XX
Interest on overdue Accounts XX
Discount Allowed XX
Returns Inwards XX
Bad Debts XX
Cash refunds XX
Contra – Purchases XX
31/12/……. Balance c/d XX
XXX XXX
01/01/…… Balance b/d XX
Margin and Mark Up

Some incomplete records questions involve the relationship between sales, cost of sales
and gross profit. Using this relationship and provided the gross profit percentage is given any
of the three items can be computed.
Gross Profit Percentages

Gross profit can be written or expressed either as percentage of sales or as a percentage of
cost of sales. When gross profit is expressed as a percentage of sales, it is known as the
Margin. Whereas when gross profit is expressed as a percentage of cost of sales, it is
known as the Mark Up.
- Margin is gross profit percentage on sales
- Mark up is gross profit percentage on cost price i.e. cost of sales
Relationship between margin and mark up

Both mark up and margin are profit percentages of difference amount. Therefore, if one is
known then the other can be calculated or found. e.g.
Mark up then margin
Where +1= or =
Convention to margin from mark up and the vice versa
14.INCOMPLETE
Question
J. Kawaya lost the whole of his stock in fire on 17th March 2017.
The last time that a stock taking had been done was on 31st December 2016. The last
balance sheet date, when stock was valued at cost @1950, purchases from then until 17th
March 2017 was 6,870 and sales in that period were K9,600. All sales were made at a
uniform gross profit margin of 20 per cent.
The Trading account can be drawn from the known

K K K
Sales 9,600
Less: Cost of Sales
Opening stock 1,950
Purchases 6,870
Less: Closing stock 8,820
Cost of sales C ( )
Gross profit B( )
A________?
Workings
(a) Gross profit = x 9,600
= 1,920
(b) 9,600 – 1,920 = 3,680
1,140
(c) Closing stock = 8,820 – 7680 =
Cost of goods avails able – cost of
sales
Example
Moonga a sole Trader has provided you with the following information relating to the year
ended 31-12-2014.
(a) He has not made a note of cash drawings or cash receipt/received. The following
items were paid from taking profit prior to banking.
Purchases 760
Sundry expenses 400
(a) Moonga has estimated that his gross profit percentage is 25% on cost. Calculate
Moonga’s profit for fee year.
Calculate Moonga’s net profit for the year.
14.INCOMPLETE
Moonga’s Income statement for the year ended

K K K
Sales 950
Less: Cost of sales
Purchases 760
Gross profit 190
Less: Expenses
Sundry expenses 400
Net loss (210)
15.PARTNERSHIP
Text 99
15.PARTNERSHIP ACCOUNTS
A Partnership is defined by the Partnership Act of 1890 as a relationship which subsists
between persons carrying on a business in common with a view of profit.
Each person contributes money, property, labor or skill, and expertise to share in the profits
and losses of the business. The people who own the partnership business are known as
Partners.
Formation of Partnerships
Partnership Deed
Before starting a partnership business, the partners need to come to a common
understanding and prepare a written agreement called a Partnership Deed or Agreement.
Matters that partners have to agree upon include:
1. Capital contributions –the amount of capital to be contributed by each partner,
which will include both money and equipment and other capital goods.
2. Interest on capital- the rate of interest, if any, to be paid on capital before the
profits are shared.
3. Responsibilities of each Partner. The role and responsibilities of each partner.
The Partner/s involved in active running of the affairs of the business are known as
Ordinary/Active or General Partners and are entitled to a Salary.
4. Profit/loss sharing ratios- Partners have to agree how they are going to share
profits and losses made by the business.
5. Drawings-They have to agree on the amount of drawings allowed to each partner.
6. Interest on drawings- the rate of interest if any to be charged on the partner’s
drawings.
7. The salary-the amount to be paid as salary to the partner/s involved in running of
the business.
8. Admission of new partners and dissolution of the Partnership-Procedure for
admitting new partners and for dissolving the partnership, including the retirement,
death or long-term illness of a partner.
9. Management of the finances-bank account, signing of cheques and orders
10. Hours of work and holidays allocated.
11. Dispute resolution- how disagreements or disputes will be resolved e.g. through
Arbitration.
Partnership Act, 1890

Should the partners fail to come up with a Partnership Agreement/ Deed the Partnership Act
1890 states that the following will apply on a piecemeal basis:
1. Equal Capital Contributions
2. No interest shall be paid on capital
3. Partners will receive interest at 5% on excess capital (i.e. over and above that which
they have agreed to contribute)
4. No interest on drawings
5. No partner will be entitled to a salary
6. Profits / losses are to be shared equally among partners
15.PARTNERSHIP
Text 100
Accounts in Partnerships
Profit and Loss Appropriation Account

The books of a Partnership business are kept in the same manner as those of a Sole trader.
From the double entry system, the balancing of ledgers accounts and extraction of the trial
balance to the Profit and loss account where the Net Profit is calculated, there is no
difference between the Sole trader and the Partnership accounts.
Once the Net Profit/loss has been calculated in the Profit and loss account, a special
account which shows how the Profits/losses are distributed among the partners is prepared.
This account is known as the Profit and Loss Appropriation Account.
Preparation of the Profit and Loss Appropriation Account

a) Bring down the net profit from the profit and loss account (on the credit side of the
Appropriation account)
b) In the credit column, record interest on drawings for each partner, marking it
accordingly.
c) In the debit column enter interest on capitals for each partner marking each entry
accordingly.
d) In the debit column record the value of individual partners’ salaries marking each one
accordingly.
e) Again in the debit column record the individual profit shares of each partner, marking
each one accordingly. Show the proportion e.g. ⅟₂ or 50%.
f) Total up and balance this account- the two sides will equal hence no balance C/D.
Annie and Dorcas Partnership Business

Profit and Loss Appropriation Account
DATE DETAILS F DR CR
K K
Net profit Balance b/f XXX
Interest on drawings XXX
Interest on capital: Partner A XXX
Partner D XXX
Salary: Partner A XXX
Share of profit: Partner A XXX
Partner D XXX
XXX XXX
Capital and Current Accounts

There are two ways of maintaining the partners’ Capital accounts
(i) Fluctuating Capital accounts

(ii) Fixed Capital accounts
Fluctuating Capital Accounts

Under this approach to maintaining the Capital account, all transactions that are likely to
increase or decrease the Partners’ Capital figures are entered directly into the partners’
15.PARTNERSHIP
Text 101
Capital accounts such that the balance in the capital accounts keeps changing or fluctuating
year after year.
The share of residual profit for the partner every year would be credited to his/her capital
account while the drawings and interest on drawings would be debited.
Fixed Capital Accounts plus Current Accounts

Under this approach, the Capital for each partner remains the same as at the formation of
the partnership. All items that have an effect of either increasing or decreasing the capital
figure are instead recorded in a separate Current Account for the partner. This means that
the Profits, interest on capital, and the Salaries would be credited in the Partners, Current
account while the drawings and the interest on drawings are debited in the same account.
NB: The Fixed Capital accounts are usually more preferred and examination questions
usually require candidates to prepare Capital accounts and Current accounts for the
partners.
Loans from Partners

When a partner makes a cash loan separate from the capital, it is credited to the partner’s
Capital Account. A separate Loan Account is created and credited with the loan amount. The
amount received by the firm is debited to the Cash account.
Interest is payable to the partner who makes the loan. The interest amount is
- Credited to the partner’s Current Account.
- Loan Interest Account is debited as it is an expense for the firm.
Partners’ Salaries
Salaries paid to the partners is Credited to their respective Current Account
If Salary is paid in Cash, then Cash Book is credited instead of Partner’s Current Account,
Debited to Partnership Salaries Account which is later on transferred to the Profit and Loss
Appropriation Account.
Worked example 1
Kabwe and Kamba are in partnership, sharing profits and losses in the ratio 4:3 respectively. Below
is the trial balance of Kabwe and Kamba partnership as at 31 March 2021:
K K
Opening inventory 43,000
Buildings at cost 384,000
Machinery at cost 192,000
Accumulated depreciation:
Buildings 168,000
Machinery 76,800
Purchases 503,000
Sales 995,000
Returns inwards 5,248
Carriage inwards 7,840
Returns outwards 20,500
Rent 76,000
Bank 137,500
Bank charges 12,005
15.PARTNERSHIP
Text 102
Selling expenses 5,461

General expenses 9,449
Trade receivables and trade payables 211,600 325,505
Wages and salaries 321,000
Current accounts at 1 April 2020:
Kabwe 31,913
Kamba 31,070
Drawings:
Kabwe 64,000
Kamba 175,070
Capital accounts: 1 April 2020:
Kabwe 85,000
Kamba 67,050
Allowance for receivables 8,475
10% loan note ________ 400,000
2,178,243 2,178,243
The following additional information is available as at 31 March 2021:

(i) Inventory was valued at K41.2 million.
(ii) Interest on drawings for the year was:
Kabwe K2.145 million
Kamba K1.424 million
(iii) The 10% loan was given to the partnership by Kamba on 1 April 2020. The accrued interest
on the loan has not yet been accounted for.
(iv) Kamba is entitled to a salary of K14.5 million per annum commencing 1 January 2021.
(v) Rent amounting to K5 million was paid in advance.
(vi) Irrecoverable debts of K2.2 million are to be written off and an allowance for receivables is to
be adjusted to 4% of receivables remaining balance.
(vii) Depreciation is to be provided for as follows:
Buildings 25% reducing balance method
Machinery 10% straight line method
(viii) Partners receive 5% interest per annum on their capital contribution.
Required:
Prepare the following statements for Kabwe and Kamba partnership:
a) The statement of profit or loss and appropriation account for the year ended 31 March 2021.
b) The partners’ current accounts.
Note: the statement of financial position as at 31 March 2021 is not required.
15.PARTNERSHIP
Text 103
Solution
Kabwe and Kamba’s

Partnership Statement of Profit or Loss and Appropriation Account
for the year ended 31 March 2021.
K K K
Revenue 995,000
Less Returns in (5,248)
Net sales 989,752
Less cost of sales:
Opening inventory 43,000
Purchases 503,000
510,840
Returns outwards (20,500)
Net purchases 490,340
533,340
Less closing inventory (41,200)
(492,140)
Gross profit 497,612
Less expenses:
Rent (28,000-5,000) 23,000
Bank charges 12,005
Selling expenses 5,461
Wages and salaries 321,000
Loan interest 40,000
Receivables expense(2,200-99) 2,101
Depreciation expense:
Buildings (25% x (384-168) 54,000
Plant (10% x 192,000) 19,200
(486,216)
Net profit before appropriation 11,396
Less appropriation:
Add interest on drawings:
Kabwe 2,145
Kamba 1,424
Total for distribution to partners 14,965
Less: interest on capital:
Kabwe (5% x 85,000) 4,250
Kamba (5% x 67,050) 3,353
Salary – Kamba (14,500 x 3/12) 3,625
(11,228)
Residual profit 3,737
Share of residual profit
Kabwe (4/7 x 3,737) (2,135)
Kamba (3/7 x 3,737) (1,602)
0
15.PARTNERSHIP
Text 104
Partners Current Accounts

Details F Kabwe Kamba
Dr Cr Dr Cr
Balance b/f 31,913 31,070
Interest on drawings 2,145 1,424
Drawings 64,000 175,070
Interest on capital 4 250 3,353
Salary 3,625
Share of residue profit 2,135 1,602
Loan interest - 40,000
Balance c/f 27,847 158,984
66,145 66,145 207,564 207,564
Balance b/f 27,847 158,984
Question:
Reid and Benson are in partnership as lecturers and tutors. Interest is to be allowed on capital and
on the opening balances on the current accounts at a rate of 5% per annum and Reid is to be given
a salary of K18,000 per annum. Interest is to be charged on drawings at 5% per annum (see notes
below) and the profits and losses are to be shared Reid 60% and Benson 40%.
The following trial balance was extracted from the books of the partnership at 31 December 2022.
K K
Capital account – Benson 50,000
Capital account – Reid 75,000
Current account – Benson 4,000
Current account – Reid 5,000
Drawings – Reid 17,000
Drawings – Benson 20,000
Sales – goods and services 541,750
Purchases of textbooks for distribution 291,830
Returns inwards and outwards 800 330
Staff salaries 141,150
Rent 2,500
Insurance – general 1,000
Insurance – public indemnity 1,500
Compensation paid due to Benson error 10,000
Bad debts written off 1,150
Fixtures and fittings – cost 74,000
Fixtures and fittings – depreciation 12,000
Debtors and creditors 137,500 23,400
Cash 400
Total 711,480 711,480
15.PARTNERSHIP
Text 105
a) A provision for doubtful debts is to be carried forward of K1,500.

b) Insurances paid in advance at 31 December 2021 were General K50; Professional Indemnity
K100.
c) Fixtures and fittings are to be depreciated at 10% on cost.
d) Interest on drawings are: Benson K550, Reid K1,050.
e) Stock of books at 31 December 2021 was K1,500.
Required:
Prepare a profit and loss account together with an appropriation account at 31 December 2022 and
a balance sheet as at that date.
Solution
Reid and Benson’s

Trading and Profit and Loss Account
For the year ended 31 December 2022
K K K
Sales 541 750
Less: Returns inwards 800
Turnover 540 950
Less: Cost of Sales
Purchases of text books for distribution 291 830
Add: Carriage inwards 3 150
294 980
Less Returns outwards 330
Cost of Purchases 294 650
Less Closing stock 1 500
Cost of sales 293 150
Gross Profit 247 800
Less: Expenses
Staff Salaries 141 150
Rent 2 500
Insurance – General 1 000
Less General insurance prepaid 50
950
Insurance – Public indemnity 1 500
Less Public indemnity insurance prepaid 100
1 400
Compensation paid due to Benson error 10 000
Bad debts written off 1 150
Depreciation on fixtures and fittings (10/100 x 74 000) 7 400
Provision for doubtful debts 1 500
175 550
NET PROFIT 72 250
15.PARTNERSHIP
Text 106
REID AND BENSON’S

PROFIT AND LOSS APPROPRIATION ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2022
Details F. Dr. Cr.
K K
Net Profit b/f 72 250
Add: Interest on drawings:
- Reid 1 050
- Benson 550
Less: Interest on capital
- Reid (5/100 x 75 000) 3 750
- Benson (5/100 x 50 000) 2500
Interest on current Accounts with Cr. Balance:
- Reid (5/100 x 5 000) 250
- Benson (5/100 x 4 000) 200
Salaries to partners
- Salary – Reid 18 000
Share of residue profit
- Reid (60/100 x 49 150) 29 490
- Benson (40/100 x 49 150) 19 660
73 850 73 850
CURRENT ACCOUNTS
Details F. Reid Benson
Dr. Cr. Dr. Cr.
K K K K
Balance b/f 5 000 4 000
Drawings 17 000 20 000
Interest on drawings: 1 050 550
Interest on capital 3 750 2 500
Interest on current Accounts with Cr. 250 200
Balance
Salaries to partners 18 000 -
Shae of residue profit 29 490 19 660
Balance 38 440 5 810
56 490 56 490 26 360 26 360
38 440 5 810
15.PARTNERSHIP
Text 107
REID AND BENSON’S

BALANCE SHEET AS AT 31 DECEMBER 2022 (1)
K K K
Fixed Assets Cost Acc. N.B.V.
Dep.
Fixtures and Fittings 74 000 19 400 54 600
Current Assets
Closing stock 1 500
Debtors 137 500
Less: Provision for Bad Debts 1 500
136 000
General insurance prepaid 50
Public indemnity insurance prepaid 100
Cash 400
138 050
Creditors 23 400
Net Assets/Net Worth 169 250
FINANCED BY:
Capital - Reid 75 000
- Benson 50 000
125 000
Current Accounts
Opening Balances 5 000 4 000
Drawings (17 000) (20 000)
Interest on drawings (1 050) (550)
Interest on capital 3 750 2 500
Interest on current Accounts with Cr. Balance 250 200
Salaries to partners 18 000 -
Shae of residue profit 29 490 19 660
Closing balances 38 440 5 810 44 250
Capital Employed 169 250
15.PARTNERSHIP
Text 108
BALANCE SHEET AS AT 31 DECEMBER 2022 (2)

K K K
Fixed Assets Cost Acc. N.B.V.
Dep.
Fixtures and Fittings 74 000 19 400 54 600
Current Assets
Closing stock 1 500
Debtors 137 500
Less: Provision for Bad Debts 1 500
136 000
General insurance prepaid 50
Public indemnity insurance prepaid 100
Cash 400
138 050
Creditors 23 400
Net Assets/Net Worth 169 250
FINANCED BY:
Capital - Reid 75 000
- Benson 50 000
125 000
Current Accounts
- Reid 38 440
- Benson 5 810
Closing balances 44 250
Capital Employed 169 250
16.MANUFACTURING
Text 109
16.MANUFACTURING ACCOUNTS
Manufacturing firms are firms that:
a) Buy raw materials;
b) Process raw materials into finished goods and;
c) Sell the finished goods at a profit to either wholesalers, retailersor final consumers.
For such firms the following accounts are prepared at the end of the financial year:
a) Manufacturing account for internal use;
b) Trading and Profit and Loss account and;
c) Balance sheet.
Manufacturing businesses can be carried on by sole traders, partnerships, limited
companies or with other modes of ownership.
Classification of a Manufacturer’s Costs
Direct Manufacturing Costs

These are costs that can be traced directly to the product being manufactured. They are
entered in the manufacturing Account.
Direct Material Cost

These are raw materials which eventually become part of the manufactured product e.g.
cost of maize in mealie meal production, sunflower in cooking oil production.
Direct Labour Cost

(Direct wages, manufacturing wages, production wages, factory wages)
These are wages or allowances paid to employees who actually work on the goods
produced.
Direct Expenses
These are expenses other than direct materials and direct labour which relate directly to
the goods manufactured e.g. Royalties paid for goods manufactured.
Indirect Manufacturing Costs - (Factory Overhead Expenses)

These are costs which occur in the factory or other place where production is being done,
but which cannot easily be traced to the items being manufactured. These are also entered
in the manufacturing account.
Examples include:
Wages of cleaners
Wages of crane drivers
Rent and rates of factory
Depreciation of plant and machinery
Factory fuel and power
Factory heating and lighting
Plant insurance
General factory expenses
16.MANUFACTURING
Text 110
Administration, Finance, Selling And Distribution Expenses

These are entered in the Trading and Profit and Loss account of the firm.
Administration expenses consist of such items as:

- Managers’ salaries,
- Legal and accountancy charges,
- Depreciation of accounting machinery and
- Secretarial salaries.
Financial expenses are expense items such as

- Bank charges and
- Discounts allowed.
Selling and distribution expenses are items such as:

- Sales staff’s salaries and commission,
- Carriage outwards,
- Depreciation of delivery vans,
- Advertising and display expenses.
NOTE: Administration, Finance, Selling and Distribution Expenses are entered in the
Profit and Loss account and not in the manufacturing acccount.
WORK IN PROGRESS
Work in progress is the value of materials which are still in the manufacturing process i.e.
they are partly finished goods.
These cannot appear in the Trading account because they cannot be sold but have to
appear in the manufacturing account.
PURCHASE OF FINISHED GOODS

Sometimes, if a business has produced less than the customers have demanded, then
already finished goods may be bought to offset the defincit in demand. In this case, the
trading account will have both a figure for Cost of finished Goods and Purchases of Finished
goods.
Market value of goods Vs manufactured and profit on manufacturing
Market value of finished goods symbolises what cost the manufacturing firm could have
incurred if the goods had been bought in their finished state instead of being manufactured
by the business. This figure is credited to the manufacturing account and debited to the
trading account. This results in two gross profits in the trading account instead of one. The
second gross profit is called Gross profit on manufacture which is obtained by finding the
difference between the actual cost of finished goods and the market value of finished goods.
It is also possible to have net loss on manufacture where the market value of finished goods
is lower than the actual cost of finished goods. It must be noted that the net profit remains
unaltered even with this treatment in place.
16.MANUFACTURING
Text 111
Preparation of a manufacturing firm’s Final Accounts
Manufacturing Account For The Year Ended 31 December 2010

K K K
Raw Materials(Direct Materials)
Opening stock 20,000
Purchases of raw materials 6,500
Add: Carriage inwards on Raw Mat 500
7,000
Less: Purchases returns on raw materials 2 000
5 000
Cost of raw materials available 25,000
Less: Closing stock of raw materials 3 000
Cost of Raw materials consumed 22,000
Add: Direct Expenses

Direct wages 2,000
Royalties 1,500
Prime Cost 25,500
Add: Factory Overheads

Factory rates 200
Wages for supervisors 500
Factory power and fuel 400
Factory heating and lighting 300
Depreciation of machinery, 200
Factory rent and rates 400
Repairs to plant 600
Factory insurance 900
Other factory expenses 50
3,550
29,050
Add: opening work in progress 750
29,800
Less: closing work in progress 500
Cost Of Finished Goods/Cost Of
Production 29,300
16.MANUFACTURING
Text 112
Question:
The following balances were extracted from the books of Chungu Mwamba Manufacturing
on 30 April 2017.
K
Inventory at 1 May 2016
Raw materials 18 200
Work in progress 23 000
Finished goods 37 000
Purchases of raw materials 210 000
Purchases of finished goods 135 000
Manufacturing wages 102 000
Direct factory expenses 8 800
Factory management salaries 36 500
Buildings maintenance 31 000
Administration salaries 71 400
Revenue 755 000
Rent 24 000
Insurance 9 800
Selling expenses 18 500
Other operating expenses 32 300
Factory machinery (cost) 120 000
Office fixtures and fittings (cost) 18 000
Provisions for depreciation
Factory machinery 30 000
Office fixtures and fittings 12 500
Provision for doubtful debts 3 500
Capital 150 000
Drawings 45 000
Trade receivables 63 100
Trade payables 59 000
Bank (Debit) 9 700
Additional information at 30 April 2017

1 Closing stock
2 Manufacturing wages of K2500 are owing.
3 Rent and insurance are to be apportioned 50% to the factory and 50% to
administration.
4 K25 000 of the buildings maintenance relates to the factory.
5 Selling expenses of K1400 were prepaid.
6 Office fixtures and fittings costing K5000 had been purchased by cheque. No entries
had been made in the books
7 Depreciation is to be charged as follows:
(i) Factory machinery at 25% per annum using the diminishing (reducing)
balance method
(ii) Office fixtures and fittings at 10% using the straight-line method
16.MANUFACTURING
Text 113
8 A debt of K3100 was considered irrecoverable. The provision for doubtful debts is to
be maintained at 5%.
Required
a) Prepare the manufacturing account of Chungu Mwamba Manufacturing for the year
ended 30 April 2017. Show clearly the prime cost and the cost of production.
b) Prepare Chungu Mwamba’s Balance Sheet as at 30 April 2017.
Solution
Chungu Mwamba’s
Manufacturing Account for the year ended 30 April 2017
K K K
Opening stock of Raw materials 18 200
Purchases of Raw material 210 000
228 200
Less Closing stock of Raw materials (16 500)
Cost of raw materials consumed 211 700
add: Manufacturing wages (102 000 +2 500) 104 500
add: Direct factory expenses 8 800
Prime cost 325 000
Add: Factory overheads:
Factory management salaries 36 500
Rent 12 000
Insurance 4 900
Depreciation -machinery 22 500
100 900
425 900
Add: Opening Work in progress 23 000
448 900
Less: Closing Work in Progress (18 100)
Cost of production 430 800
16.MANUFACTURING
Text 114
Chungu Mwamba Manufacturing’s

Trading and Profit and Loss Account for the year ended 30 April 2017
K
Revenue 755 000
Less: Cost of Sales
Opening stock of finished goods 37 000
Cost of production 430 800
Purchases of finished goods 135 000
602 800
Less: Closing stock of finished goods (41 500)
Cost of sales (561 300)
Gross profit 193 700
Add: Gains
Decrease in provision for doubtful debts 500
3 800
197 500
Less expenses:
Administration salaries 71 400
Rent 12 000
Insurance 4 900
Selling expenses (18 500 – 1 400) 17 100
Other operating expenses 32 300
Depreciation – fixtures and fittings 2 300
Bad debts 3 100
(149 100)
Net Profit 48 400
Balance Sheet as at 30 April 2017

K K K
Fixed assets Cost Accu. Dep. N.B.V.
Factory machinery 120 000 52 500 67 500
Fixtures and fittings 23 000 14 800 8 200
143 000 67 300 75 700
Current assets
Closing Stock
Trade debtors (63 100 – 3100) 60 000
Less Provision for doubtful debts (3 000)
57 000
Selling expenses prepaid 1 400
Bank (9 700 – 5 000) 4 700
139 200
Less: Current liabilities
Trade creditors 59 000
Manufacturing wages accrued 2 500
61 500
Net Assets 153 400
Financed by:
Capital 150 000
Net Profit 48 400
198 400
Less: Drawings (45 000)
Owners Capital at close/Capital employed 153 400
17.ETHICS INStudy
Principles of Accounts 7110 A Supplementary ACCOUNTANCY
Text 115
17.ETHICS IN ACCOUNTANCY
Ethics in Accountancy refers to the standards of right and wrong conduct that apply to the
Accounting profession.
It is also the study of moral values and judgements as they apply to accountancy.
Importance of Ethics
 It’s a legal requirement

 It’s a moral requirement
 In order to present a true and fair view of the company, i.e. Final Books of Accounts.
Elements of Good Accountany Ethics
 Integrity
 Professional competence and due care
 Trustworthy
 Discipline
 Objectivity
 Confidentiality
Unethical Accountancy Behavoiur
 Corruption
 Fraud
 Money laundering
 Embezzlement of funds.
Effects of Non – Adherence to Ethics
 Losing one’s job

 Losing reputation as an Accountant
 Being deregistered and out of practice
 Imprisonment
 Payment of fines as a business
Principles 18.ANALYSIS
of AccountsAND
7110INTERPRETATION OF FINAL
Text 116
18.ANALYSIS AND INTERPRETATION OF FINAL ACCOUNTS

Importance of Financial Ratios
 Ratios show important relationships between financial figures.

 Compare the business’ performance over several financial periods.
 Compare the business’ performance with that of other business within the same industry.
1) Profitability of the business

- Gives an indication of the level of returns that the owner is getting:
- Gross profit margin
- Mark-up on cost
- Net profit margin
- Rate of return on capital
2) Level of efficiency of business activity
- Indicates the way the business uses its assets:
- Rate of stock turn or Rate of stock turnover
3) Liquidity of the business
- Indicates the business’ ability to pay its debt and manage its working capital:
- Working capital
- Current ratio
- Quick ratio
4) Capital structure of the business
- Show the composition of and relationship between equity capital and other long-
term sources of finance e.g. long-term loan:
- Owner’s equity
- Capital employed
Profitability Ratios
Profit is the reward for doing business. The business person takes the risk of manufacturing
something or providing some service so as to get profit. The profitability of a business can be looked
at from the point of view of gross profit or net profit.
Gross profits
Gross profit is the difference between the cost of goods sold and the proceeds from their sale. Put
simply, gross profit is selling price minus cost price. Gross profit is not the true profit since the
expenses incurred in selling the goods have not been taken into account. It is calculated as:
Gross Profit = Turnover minus Cost of goods sold.
Net Profit
Calculated as:
Net Profit = Gross Profit (plus other incomes) minus Expenses.
of AccountsAND
Text 117
Profit Mark-Up
Profit mark-up is when gross profit is expressed as a percentage of cost price.
i.e. Mark-up = Gross profit X 100
Cost price (cost of sales)
Gross Profit Margin

Profit margin is when gross profit is expressed as a percentage of selling price.
Gross profit margin = Gross profit X 100
Selling price
Turnover
The turnover or net sales is the net value of goods sold during an accounting period calculated as
follows:
Turnover = Sales minus Returns inwards
Or Turnover = Sales minus Cost of goods sold plus gross profit.
Cost of goods sold

This is the cost price of the goods that have been sold. It is calculated as:
Cost of goods sold = Opening Stock plus Net Purchase minus Closing Stock
Or Cost of goods sold = Turnover minus Gross profit.
Rate of turnover or rate of stock turn

It is the number of times the average stock can be sold in an accounting period. (It is actually the
number of times a firm orders and sells out its stock each year). It is calculated as follows:
Rate of stock turn = Turnover or Rate of stock turn = Cost of goods sold
Average Stock Average stock
Average stock
This is the average number of stock held in the business for the accounting period. It is actually the
average of the opening and closing stock. It is calculated as:
Average Stock = Opening Stock + Closing Stock
2
Gross profit percentage
This shows the average profit made from trading. It is sometimes called the gross profit percentage
of turnover. It is calculated as follows:
Gross Profit Percentage = Gross Profit x 100
Turnover
Net profit percentage

The Net Profit percentage shows actual average profit made after taking into account all costs and
expenses incurred. It is also known as the net profit percentage of turnover. It is calculated as
follows:
Net Profit Percentage = Net Profit x 100
Turnover
of AccountsAND
Text 118
Capital Efficiency Ratios
Rate of Return on Capital Invested

The rate of return on capital invested is extremely important to a businessman or woman for it tells
him/her exactly how much he/she is getting from the investment. It is calculated as:
Rate of Return on Capital Invested = Net Profit x 100
Capital at start of the year
This ratio helps the businessperson to determine the profitability of his/her business. He/she is thus
able to decide whether it is worthwhile or not to keep his/her money in that investment.
Earnings per Share

EPS = Net Profit
Number of ordinary shares issued
Current Ratio (Working Capital Ratio)

This is the measure of the business’s ability to pay its current debts. A ratio of 2:1 is considered
favourable.
Current ratio = Current assets
Current liabilities
Acid Test Ratio (Quick Ratio)

This is the measure of the ability of the business to pay off maturing short term financial obligations
without relying on the sales of stock. A ratio of 1:1 is considered satisfactory.
Acid test ratio = Current assets – Closing stock
Current liabilities
Debtor/Sales Ratio (Or Debtor Ratio)

This ratio measures money tied up in debts
Debtors/sales ratio = Debtors or Debtors X 365 days
Sales Sales
Creditors/Purchases Ratio
This ratio measures money owed by the business to the suppliers of goods.
Creditors/Purchases ratio = Creditors or Creditors X 365days
Purchases Purchases
Gearing Ratio
Gearing ratio = Long term liabilities + Preference shares
Ordinary share capital + Preference shares + reserves + Long term liabilities
of AccountsAND
Text 119
Worked examples
T. Mashamba, a businessman, prepares his Final Accounts annually and the following
information relates to the year ended 31 March, 2002.
K
Capital 468, 000
Sales 460, 000
Stock on 1st April, 2001 50, 000
Stock on 31 March 70, 000
Returns inwards 40, 000
Gross profit 180, 000
Expenses are 15% of Turnover
Required:
Calculate for the year

(a) Turnover
(b) Cost of sales
(c) Cost of purchases
(d) Rate of stock turn
(e) Gross profit as a percentage of turnover
(f) Expenses
(g) Net profit
(h) Net profit as a percentage of capital
(i) Gross profit as a percentage of cost price
Solution
(a) Turnover = Sales – Sales Returns
= K460 000 – K40 000
= K420 000
(b) Cost of Sales = Turnover - Gross Profit

= K420 000 – K180 000
= K240 000
(c) Cost of Purchases= (Closing Stock + Cost of Sales) - Closing Stock

= (70 000 +240 000) – 50 000
= 310 000 – 50 000
= K260 000
(d) Rate of stock turn= Cost of Stock

Average Stock
of AccountsAND
Text 120
Average stock= Opening stock +closing Stock

2
= K50 000 + K240 000
2
= K60 000
Therefore:
Rate of Stock Turn = K240 000
K60 000
= 4 times
(e) Gross Profit as a percentage of Turnover = Gross profit X100

Turnover
= K180 000 X100
K420 000
= 42.85%
(f) Expenses = 15 X Turnover

100
= 15 X K420 000
100
= K63 000
(g) Net Profit = Gross profit – Expenses

= K180 000 – K63 000
= K117 000
(h) Net Profit as a percentage of capital

= Net profit X 100
Capital
=K117 000 X 100
K468 000
=25%
(i) Gross Profit as a percentage of Cost price = Gross profit X 100

Cost price
= K180 000 X 100
K240 000
= 75%
of AccountsAND
Text 121
Worked example 2
F. Chisaka, a business man, prepares his final accounts annually and the following
information relates to the year ended 31 March, 2008.
K
Capital 50, 000, 000
Sales 60, 000, 000
Stock on 1 April 10, 000, 000
Stocks on 31 March 2008 12, 000, 000
Returns inwards 4, 000, 000
Gross profit 20, 000, 000
Expenses are 15% of turnover
Required: Calculate for the year
(i) Turnover
(ii) Cost of sales
(iii) Cost of purchases
(iv) Rate of stockturn
(v) Expenses
(vi) Net profit
Solution
(a) Turnover = Sales – Returns inwards
= K60 000 000 – K4 000 000
= K56 000 000
(b) Cost of Sales = Turnover - Gross Profit

= K K56 000 000 – K20 000 000
= K36 000 000
(c) Cost of Purchases = (Cost of Sales + Closing stock) – Opening Stock

= (K36 000 000 +K12 000 000) – K10 000 000
= K48 000 000 – K10 000 000
= K38 000 000
(d) Rate of stock turn= Cost of Sales

Average Stock
Average stock = Opening stock +closing Stock

2
= K12 000 000 + K10 000 000
2
= K11 000 000
of AccountsAND
Text 122
Therefore:
Rate of Stock Turn = K36 000 000
K11 000 000
= 3.27 times
(e) Expenses = 15 X Turnover
100
= 15 X K56 000 000
100
= K8 400 000
(f) Net profit = Gross profit – Expenses

= K20 000 000 – K8 400 000
= K11 600 000

Principles of Accounts KIT - G10 - G12

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NOT FOR SALE

JAMES GWENANI MBA Fin, ZiCATech, BBA Ed, Dip. Ed.

EDGAR SHILUWE BBA Ed, Group Dip. Marketing, Dip. Ed.

JOHN KAPUTULA MBA Fin, ZiCALic, BBA Ed, Dip. Ed.

Business Studies Teacher’s Association of Zambia

©2022 BUSTAZ Lusaka Province

PROVINCIAL EDUCATION OFFICER’S STATEMENT

Allan Lingambe PhD

Mrs. Lenny N. Longwe

Favell A. J. (1965) ‘Practical Bookkeeping and Accounts’ University Tutorial Press

Gwenani J. (2022) ‘Principles of Accounts A Complete Course’ James Gwenani, Lusaka

Hamakoko R, (2015) ‘Senior Secondary Principles of Accounts’ MK Publishers

Wood F. and Sangster A. (2012) ‘Business Accounting 1, 12th Edition’ Pearson

1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS ........................................... 10

7.THE TRIAL BALANCE ......................................................................................... 34

The Accumulated Fund ..................................................................................................... 80

1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS

Importance of accounting/financial information

Accounting/Financial information is important for the following reasons:

Users of Accounting Information

Users of accounting information include the following:

Job Prospects/Career Prospects

The following are the job prospects available to students of accounting:

2. ACCOUNTING CONCEPTS AND ASSUMPTIONS

The following are some of the Accounting concepts and conversions:

 The Money Measurement Concept

 Business entity concept

 Going Concern Concept

 Historical Cost Concept

 Dual aspect Concept

There are generally four types of transactions:

4. THE ACCOUNTING CYCLE

Below is the flow of financial information presented in diagrammatic form.

Documents providing proof of SOURCE DOCUMENTS

A trial balance is extracted from TRIAL BALANCE

The Trial Balance

5.THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE

Double Entry Bookkeeping

Personal accounts Real accounts Nominal accounts

Role of Double Entry

The role/importance of double entry can be summarised as follows:

Ledger Accounts and their Classification

An Account is a page or series of pages in the ledger where business transactions of a

The columnar format

Date Details K Date Details K

Accounts can be classified according to what they contain, thus:

Advantages of keeping books of original entry

Books of Prime Entry, Transaction Type and Source Documents

BOOK TRANSACTION TYPE SOURCE DOCUMEN

The Cash Book

Types of Cash books

Single Column Cash Book (Cash Account)

The source documents for the cash account are:

Double Entry for Cash Transactions

7 Jan Paid for electricity by cash K250

Single Column Cash Book (The Bank Account)

- For money received - Duplicate receipt, The cheque

Double entry for Bank transactions

- Money paid by cheque/cash withdrawn from the Bank Account

Two Column Cash Book

Three Column Cash Book

Reason for granting cash discounts