Class Exercise

The following are transactions of Mali traders for the month of September, 2019
Sept 1 started in business with sh.1,000,000 cash.
” 2 deposited sh.200,000 of the cash into a bank account.
” 3 Bought goods for cash sh.15,500.
” 4 Bought goods on credit from Waki Ltd sh.18,000
” 5 Bought stationery on credit from Kibera Ltd sh.4,800.
” 6 Sold goods on credit to Rongai traders sh.62,000.
” 8 Paid rent by cheque sh.32,200.
” 10 Bought Furniture on credit from Waga Ltd sh.13,000.
” 14 Returned goods to Waki Ltd valued at sh.4,200
” 15 Bought Motor van paying by cheque sh.450,000.
” 16 Received loan from a bank by cheque sh.98,000.
” 18 Goods returned to us by Rongai traders amounted to sh 7,300
” 21 Paid Waki ltd by cash sh.6,500.
” 24 Sold goods on credit to Nairobi traders for sh 48,000
” 26 Paid by cheque salaries and wages sh, 14,000
” 29 Received a cheques from a tenant of sh 24,000
” 30 Paid school fees for his children from business bank account of sh.35,000.
Required:
1. Post the above business transaction to relevant ledger accounts, and balance off
2. Extract a trial Balance

Types of Financial Statements

Businesses are required to prepare a set of financial statements:
1. Statement of Profit or Loss and Other Comprehensive Income (Trading, Profit and
Loss Account)
2. Statement of financial position (Balance Sheet)

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 Preparing Statement of Profit or Loss and Other Comprehensive Income
Definition of elements of Statement of Profit or Loss and Other Comprehensive Income:
1. Revenue-The term revenues means the sales value of goods and services that have
been supplied to customers.
2. Expenses-The term expenses means the cost value of all the assets that have been
used up to obtain those revenues.
Profit means the amount by which revenues are greater than expenses for a set of
transactions.
Capital and Revenue Transactions
In the previous lesson, we balanced of and extracted a Trial Balance for a business at the end
of its financial year.
The next step is of course to proceed and prepare a set of financial statements for the firm.
To achieve this end, it is necessary to ensure that the various income earned and expenditures
incurred by the firm are properly classified.

The business transactions can be broadly classified into two categories: Capital and Revenue
transaction.

Capital Expenditure
Capital expenditure is either that which is incurred in the purchase of fixed assets or that
which adds to the value of fixed assets.
Capital expenditure benefits not only the current accounting period but also future accounting
period. E.g.
If the expenditure is directly incurred in bringing a fixed asset into use for the first time, or
If expenditure improves a fixed asset by making it superior to what it was when it was first
owned by the organisation, e.g. building an extension to a warehouse,
Revenue expenses relating to the acquisition of non-current assets

Revenue Expenditure
Revenue expenditure is that which does not add to the value of fixed assets but is merely the
cost incurred in running the business or for goods or services which will be consumed within
the current accounting period.
Examples are:
Cash payments to suppliers of goods and services; (iv) Cash receipts and payments relating to
insurance, taxes, claims, annuities and other benefits.

It is that to be matched or set off against the revenue earned during a particular accounting
period.
it relates to the current period only and not to succeeding periods.

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It is therefore shown as operating expenses in the statement of Profit or Loss, and other
comprehensive income at the end of the financial year.
Examples of revenue expenditure are wages, electricity, purchases and so on.

Effects of Error in Classification

If the expenditures are wrongly classified, both the profit and loss as well as the assets in the
financial statements can be over or understated.
For example, if an item of capital expenditure is wrongly classified as revenue expenditure,
the profit in the profit and loss statement will be reduced. At the same time, the fixed asset
will be understated in the statement of financial position.
Likewise, if an item of revenue expenditure is wrongly classified as capital expenditure, the
profit, as well as the asset, will be overstated.

A list of various items of expenditure is given below.

State which type of expenditure: whether capital or revenue
1. Purchase of furniture for use in the business
2. The cost of installing the new machinery.
3. The cost of maintaining the machine.
4. The cost of extending the buildings.
5. Legal cost incurred in the purchase of property.
6. Legal cost incurred to obtain loan.
7. Purchase of goods for resale.
8. Depreciation of office equipment.
9. Purchase of packing material.
10. Purchase of a small calculator for office use.
11. Decoration expenses for festive seasons.
12. Payment for freight charges for goods exported.
13. Payment for insurance of machinery.
14. Repair of premises.
15. Cost of cleaning the factory buildings.

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 Revenue receipts and capital receipts
Revenue receipts
Operating activities are considered. Examples are: (i) Cash receipts from the sale of goods
and rendering of services; (ii) Cash receipts from royalties, fees, commission and other
revenue;

Capital receipts
These are proceeds arising from disposal/sell of non-current assets/capital expenditure item.

Format (With hypothetical amounts)

Waki traders
Statement of profit or loss and other comprehensive income
for the year ended 31 December 2019
Sh. Sh. Sh.
Sales 200,000
Less Return inwards 5,000
195,000

Less Cost of Goods Sold

Opening stock 25,000
Add : Purchases 45,000
Carriage inwards 2,000
Custom duty 1,000
48,000
Less : Return outwards 3,000 45,000
70,000
Less: Closing stock 20,000
50,000
Add: Wages 10,000 60,000
Gross Profit 135,000
Add: other income
Profit on sale of fixed assets 1,500
Rent received 20,000
Discount received 500
Provision for doubtful debts no longer 500
required
157,500

Less Operating Expenses

Rent 3,000
Salary 5,000
Water and Light 2,000
Stationery 1,000
Insurance 500
Depreciation 2,000

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Carriage outwards 1,200
Discount allowed 300
Interest on loan 1,300
Advertisement 900
Bad debts 1,500
Postage 200
Telephone 400
Legal costs 1,100
Loss on sales of fixed assets 700 21,000
Net Profit 136,400

Format for Statement of financial position

Waki Enterprise
Statement of financial position as at 31 December 2019
Non-current Assets Cost Acc. Dep. NBV

Land 100,000 - 100,000

Buildings 200,000 10,000 190,000
Plant and Machinery 50,000 15,000 35,000
Office equipment 30,000 8,000 22,000
Furniture and fittings 10,000 5,000 5,000
Motor and vehicles 80,000 30,000 50,000
470,000 68,000 402,000

Investments (Quoted) 30,000

432,000

Current Assets
Stock 35,000
Debtors 46,000
Less : Provision for doubtful debt 2,000 44,000
Bank 11,000
Prepayment 500 90,500
522,500
Finance by

Capital 250,000
Add: Net Profit 136,400
386,400
Less: Drawings 80,900
305,500

Loan 150,000
455,500

Creditors – amount falling due within a year

Creditors 50,000
Accruals 2,000
Bank overdraft 15,000 67,000
522,500

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 Question 1
The following is a list of ledger balances of weka
enterprises for the year ended 31 December 2019 Sh “000”

Capital 30,000
Sales 67,710
Trade creditors 4,000
Rent 500
Furniture 8,000
Purchases 41,200
Trade debtors 6,650
Investments 1,909
Salaries 12,000
Motor vehicles 14,330
Return outwards 200
Return inwards 175
Stock 1 Jan 2019 10,300
Bad Debts 300
Bank Overdrafts 2,490
Cash 350
Interest on overdraft 53
Commission paid 1,300
Motor vehicles expenses 1,605
Rates 250
Postage and stationery 493
General expenses 415
Leasehold property 4,900
The stock as at 31 December 2019 as per stock take was valued at sh 9,500,000
Required:
(a)Statement of profit or loss and other comprehensive income for the year ended 31
December 2019
(b) Statement of financial position as at 31 December 2019.

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Question 2
The following information was extracted from the books of Mambo traders for the year ended
30 June 2019
Trial Balance as at 30 June 2019
Dr. Cr.
sh “000” Sh “000”
Capital 80,750
Investments 16,299
Stock as at 1 July 2018 4,000
Purchases 36,000
Sales 70,000
Salaries 10,000
Wages 3,000
Sales returns 2,025
Purchase returns 120
Discount allowed 210
Discount received 180
Rent 4,480
Stationery 160
Bank charges 50
Rates 522
Freight inwards 111
General expenses 428
Debtors 8,020
Creditors 4,000
Office furniture 2,740
Loan from Chartered Bank 3,365
Plant and Machinery 9,280
Buildings 61,000
Motor vehicles 1,590
Bank 1,500
159,915 159,915
Required:
(a) Statement of profit or loss and other comprehensive income for the year ended 30
June 2019
(b) Statement of financial position as at 30 June 2019.