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1 WHAT IS ACCOUNTING?
2.3 PARTNERSHIP
2.4 COMPANY
Credit suppliers are interested in the ability of the company to pay its
debts should they supply to it.
(d) Lenders
Tax authorities would also want to know the business profits in order
to assess
the tax payable by the company.
Companies are found where people live. Companies provide jobs for
the people and they also use local suppliers. Companies may also
affect the environment through pollution.
It is
Example:
On one side the balance sheet must have assets and on the
other side capital and liabilities and the two sides must be equal
as illustrated above.
3.2.3 ASSETS
ACTIVITY 3.1
- Land
- Buildings Tangible non current assets
- Machinery
- Furniture and fittings
- Long term investments
- Goodwill, development costs and other intangible
assets.
ACTIVITY 3.2
3.2.5 LIABILITIES
ACTIVITY 3.3
What is the difference between tangible and intangible non current assets.
Less: Drawings XX
___
Capital at end of period XX
ACTIVITY 3.5
In vertical format:
Name of organisation:
CURRENT ASSETS
Inventory ---------------------------------XX
Receivables ------------------------------XX
Prepayments ---------------------------- XX
Cash in Bank --------------------------- XX
Cash in Hand --------------------------- XX
XX
TOTAL ASSETS ------------------------------------------------- XX
FINANCED BY:
Current Liabilities
Trade creditors -------------------------XX
Accrued expenses --------------------- XX
Bank overdraft ------------------------- XX
Taxation -------------------------------- XX
XX
TOTAL EQUITY & LIABILITY XX
SOLUTION
K
Land and buildings 80,000
Inventory 2,500
Payables 4,000
Profit for the year to 31.12. 20X4 6,600
Capital introduced during the year 5,000
Receivables 3,000
Fixtures and fittings 27,000
Expenses not yet paid by business 500
Example:
If the goods had been sold on cash basis, the profit will
remain at K50 but cash will be K150.
The income statement is divided into two parts. The gross profit
part and the net profit part.
Examples:
- Carriage inwards
- Customs duty
The gross profit part answers questions such as “are you doing
fine in what you are buying and selling”. Is it a profitable
business?
- Salaries of workers
- Rentals
- Electricity etc.
- Carriage outwards.
Please note that the business may have gross profit but end up
with Net loss.
Calculate:
(b)Net profit
K000
Gross profit 180
Less: Indirect Expenses
Salary (55)
Net profit 125
Sales 450
Cost of sales:
Purchases 250
Carriage Inwards 20
(270)
Gross profit 180
Less Indirect Expense
Salaries (55)
Net profit 125
ACTIVITY 3.6
(c) He borrowed K2,000 from his bank and the interest cost of the loan
was K25 per month.
(d) His main business was selling ice cream from the van, but he also did
some special catering supplying ice creams for office parties. Sales to
these customers were usually on credit.
(e) For the three months to 31 August 20X5, his total sales were K10,000
(K8,900, credit K1,100).
(f) He purchased his ice cream from a local manufacturer, Palmer Ltd.
The cost of purchases in the three months to 31 August 20X5 was
K6,200 and at 31 August he had sold every item of stock. He still owed
K700 to Palmer Ltd for purchases on credit.
(g) One of his credit sale customers has gone bankrupt, owing Snow White
K250. Snow White has decided to write off the debt in full.
(h) He used his own home for his office. Telephone and postage expenses
for the three months to 31 August were K150.
Required:
Prepare an income settlement for the three months 1 June to 31 August 20X5
3.2.18 Inventory
When a business buys goods for resale, they are called inventory.
These are goods unsold at the end of the accounting period. Closing
inventory is determined by physical stock taking.
Calculate profit
Solution:
Thus: K K
Sales (7 x 8) 56
Cost of sales:
Purchases (10 x 5) 50
Less: closing inventory
(3 x 5) (15)
(35)
Profit 21
Calculate profit?
Solution
Note that in year 1, 3 shirts at K5 each were not sold and so they
are brought to year 2 as opening inventory.
K K
Sales (11 x 10) 110
Cost of Sales
Opening stock (3 x 5) 15
Add: purchases (14 x 5)70
85
Less: Closing inventory
(6 x 5) (30)
(55)
Profit 55
Thus:
Purchases XX
Less: purchases
Returns (XX)
Net purchases XX
Sales XX
Less: Sales Returns (XX)
Turnover/Net sales XX
Name of organization
Sales XX
Less: Sales returns (XX)
Turnover XX
Cost of Sales
Opening inventory XX
Purchases XX
Less purchases returns (XX)
Net purchases XX +
Direct expenses
Carriage inwards XX +
Customs duty XX
XX
Cost of purchases XX
Total cost of inventory XX
Less closing inventory (XX)
(XX)
Gross profit/loss XX
Add other income
Discount received XX
Commission received XX
XX
Less Expenses:
Carriage outwards XX
Discount allowed XX
Salaries & wages XX
Rent XX __
Bad debts XX
Depreciation XX
Light & heat e.t.c XX
(XX)
Net Profit/Loss XX
Plus
Direct expenses
Solution:
MUNGO
Turnover 24,500
Cost of sales:
Opening inventory 5,000
Purchases 12,000
Less purchases returns 2,000
Net purchases 10,000
Carriage Inwards 50
Cost of purchases 10,050
Total cost of inventory 15,050
Less closing inventory (3,000)
(12,050)
Gross profit 12,450
Add: Discount received 250
12,700
Less: Indirect Expenses
Discount allowed 300
Salaries and wages 8,000
Rent 400
Electricity 100
Bad debts 75
Postage and stationery 80
Carriage outwards 95
9,050
ACTIVITY 3.7
Required:
Prepare income statement for the year end 30 June 20X3 and a
Balance Sheet as at that date.
3.2.23 Working capital
EXERCISES
A. Machinery
B. Stock
C. Prepayments
D. Debtors
6. Three sources of income other than the sale of goods which could
appear in the income statement are:
(i) ____________________________________
(ii) ____________________________________
(iii) ____________________________________
(i) ____________________________________
(ii) ____________________________________
(iii) ____________________________________
(iv) ____________________________________
CHAPTER 3
REVENUE AND CAPITAL EXPENDITURE
- Repairing machinery
- Replacing broken window panes to a building
- Electricity expenses in running machinery
- Petrol costs in running the vehicle
- Purchase of goods for resale
4.5 Warning
EXAMPLE
When the vehicle was in use, he insured it against theft and fire and this cost
K100. In running the vehicle fuel costs amounted to K150, and replaced
tyres with new ones and this cost K70. He decided to put in a musical
system which cost K40. Insurance cover to bring the vehicle into business
premises amounted to K80.
Required:
(a) Identify items which are capital expenditure and what will be the cost
the vehicle in the books.
Capital income are proceeds arising from the sale of non current
assets and long term investments. The profits or losses from the
sale of non current assets are included in the income statement
for the year in which the sale took place.
ACTIVITY 4.2
A business obtains a loan from the bank to finance the purchase of a non
current asset. The business would be paying interest annually.
How would you identify the loan and loan interest? Is it capital or revenue
income.
ACTIVITY 4.3
Capital income does not include raising capital from the owner(s)
of the business, or raising and repaying loans. These
transactions add to the cash assets of the business, thereby
creating a corresponding increase in capital or loan. When the
loans is repaid, it reduces the liability (loan) and the asset of
cash.
EXERCISES
Required:
This concept states that a business is a separate entity or person from its
owner. Like a biological person the business can exercise rights to own assets
and powers to borrow and incur liabilities. At law the business (applied to
limited liability companies) is a legal person. For accounting purposes even
an unincorporated entity is treated as a ‘person’ separate from the owner
who formed it
The implication of this concept is that assets and liabilities of the business
should be kept separate from those of its owner. The student is in the
position of the accountant for the business, not for the owner of the
business. He should view the owner as if he were an out side party or entity.
This concept states that there are two aspects to every transaction:
a) the giving aspect, which creates a liability, and
b) the receiving aspect, which creates an asset.
The rule of double entry states that for every debit entry to an account there
is a corresponding credit entry in another account. ‘Corresponding’ means of
equal magnitude in value. Consequently to post transactions to the ledger,
you debit the receiving account and credit the giving account
THE
FLOW
GOODS CASH
This is a book of prime entry in which transactions that are infrequent are
recorded. Because of their infrequence, the transactions are not provided
with a separate day book. Such transactions include the purchase of non-
current assets, correction of errors and year end transfers and adjustments.
All these terms will be explained in subsequent chapters.
The first journal written is the one when a business just starts. For example:
Fix-it, a retired engineer, received interest on his fixed deposit account of K 8
000 000. He opened a business bank account.
The bank account represents the cash available to the business to finance
business activities. The capital account represents the amount the business
owes its owner. In case of cessation of trading activities, the business would
pay the owner the amount shown on the capital account.
The owner injects funds into the business as initial capital. The capital is
expected to grow (i.e increase by the amount of profits he later makes
through trading activities).
The journal above shows that bank account in the ledger will be debited, and
capital account will be credited.
DR CR
ASSETS: K 000 K 000
Furniture & Fittings 5 245
Inventory 8 692
Cash at Bank 8 000
Trade Receivables: Chibuye 235
Mambwe 390
625
Rent prepaid 332
LIABILITIES:
Loan 5 000
Trade Payables: Chibale 160
Mwape 164
324
Electricity due 221
Value Added Tax outstanding 2 375
Capital (Balancing figure) 14 974
TOTALS 22 894 22 894
The capital is obtained by deducting total liabilities from total assets.
Suffice to mention here that assets are debit balances and liabilities are
credit balances as shown above.
April 29. Paid L-Stone Motors K 10 000 000 by cheque for the truck bought
earlier.
The entries in the journal for the above transactions would be:
Debit Credit
K 000 K 000
Motor Vehicles account 40 000
L-stone Motors account 40 000
Purchase on credit of a truck S/no. ……….
from L-Stone (Invoice No. ……….)
EXERCISES
Credit transactions are those business activities in which one person gives
goods (or provides a service) to another without the immediate exchange of
cash.
1) those involving trading goods and cash, and take place frequently,
2) those that are infrequent. Transactions that occur regularly are recorded
in Day Books.
Those that rarely occur are recorded in the Journal Proper as their book of
prime entry (explained in the preceding chapter).
The structure of the day book is often determined by the type of information
required by the user (in this case, management). The information must be
comprehensive when it comes to reporting on business activities. In practice
the day books may have more columns than are illustrated below.
Nevertheless, we will include here all columns that are relevant for
accounting purposes.
In this chapter we will explain how books of prime entry (Day books) are
compiled for credit transactions. Credit transactions include those for sales of
goods on credit, purchases of goods on credit, and returns of goods either to
suppliers or by customers. In this type of transaction what is given or
received are goods (Refer to the chart in Chapter 2).
1.0 ANALYTICAL SALES DAY BOOK
1.1 ILLUSTRATION
April 1 Sold goods on credit to Chisakaila K 540 000 net. VAT is charged at
the rate of
17.5 %.
April 5 Sold goods on credit to Ngosa K 800 000 net. The customer is
entitled to
2% prompt discount if payment is made within 14 days.
Posting the totals to the ledger will be explained in the next chapter. For now
it suffices to mention that the two accounts identifiable from entries in the
sales day book are:
DEBIT CREDIT
K K
Trade Receivable 2 922 950
Sales account 2 490 000
Value Added Tax account 432 950
a) Sales by product
Sales returns day book is a book of prime entry in which goods initially
sold on credit but are now returned are recorded. The source document
for goods returned is the credit note. The seller prepares the credit note in
duplicate and issues the top copy to the customer. The duplicate is the one
used to compile the sales returns day book.
2.1 ILLUSTRATION
April 7. Ngosa returned goods, K 200 000 net (He is entitled to prompt
discount of
2 %)
April 17. We sent a credit note to Mambwe, K 150 000, net
The commentary on Value Added Tax and prompt discount applies here
too. A separate section is included later on Value Added Tax. Value
Added Tax will further be discussed in much more detail in a later
chapter.
3.1 ILLUSTRATION
April 12. Purchased goods on credit from Kunda K 282 000. The invoice
stated a tax inclusive amount.
April 13. Received an invoice for the 10 ton truck bought on credit from L-
Stone Motors K 40 000 000 gross
April 18. Purchased Goods on credit from Mwape K 270 000 gross value.
April 19. Received a bill for electricity from Zam Hydropower. The total of
the invoice was K 320 000
Added
TAX PAYABLE PAYABLE
April K K K K
2005
12 Kunda 282 42 240
000.00 000.00 000.00
13 L-Stone Motors Ltd 40 000 40 000
000 .00 000.00
18 Mwape 270 40 229
000.00 212.76 787.24
19 Zam Hydropower 320 320
000.00 000.00
The amounts above are all tax inclusive. The amount of Value Added
Tax is obtained as follows:
K 282 000 x 7/47 = K 42 000 The net amount is the difference
between the two figures, ie K 282 000 –K 42 000 = K 240 000
The column for other payables can be sub-divided into: Other Payables
–Expenses,
K 272 340.43 and Other Payables –Non current Assets, K 40 000
000.00. In the
ledger these accounts have been referred to as L-Stone Motors and
Zamhydro Power
Company, more specifically.
The Value Added Tax on the non-current asset is not claimable since
the business is taken as the final consumer of the motor vehicle that
has been bought for use in business. This is the reason why no tax is
recorded in the column for Value Added Tax in respect of the purchase
for the motor vehicle.
When posting to the ledger, the payables accounts are credited with
the gross amounts ( i. e. tax inclusive figures). So there is need to
accurately identify the amounts involved and the specific names of
payables who will be paid.
DEBIT CREDIT
K K
Purchases account 469 787.24
Value Added Tax account 82 212.76
Motor Vehicles 40 000 000.00
Electricity 320 000.00
Note that when a journal has been prepared correctly the total of amounts in
the debit column will always be equal to the total in the credit column. This is
also a sign that you have understood the principle of double entry.
a) purchases by product
4.1 ILLUSTRATION
April 13 Returned goods worth K 42 600 to Kunda . This is a tax inclusive
figure.
April 19. Received a credit note from Mwape for K 35 700 (gross amount).
The calculation of Value Added Tax is the same as explained for entries
in the purchases daybook.
The day books are mere listings of transactions that took place in the
period. They are maintained as memorandum information for future
reference.
JOURNAL ENTRY
In the next section the cash book will be discussed as the day book for cash
transactions.
EXERCISES
1. Enter the following transactions in the appropriate day books. VAT is
charged at the
rate of 17.5%.
a)
March 8. Sold goods on credit to Mubita K 780 000 net. The customer is
entitled to
2% prompt discount if payment is made within 14 days.
March 18. Akabondo returned goods, K 325 000 net (He is entitle to prompt
discount of 2%)
b)
March 7. Purchased goods on credit from Siwale K 424 000. The invoice
stated a tax inclusive amount.
March 12. Received an invoice for the 10 ton truck bought on credit from
Del Equipment K40 000 000 gross
March 15. Purchased Goods on credit from Simpasa K 380 000 gross
value.
March 19. Received a bill for electricity from Solarpower Co.The total of the
bill was K502000
April 24. Received a credit note from Simpasa for K 42 500 (gross
amount).
2. Write the journals for the totals of the Day books you prepared in
Question 1.
CHAPTER 7
INTRODUCTION
TOPICS
LEARNING OBJECTIVES
The cash book is a book of prime entry in which cash transactions are
recorded. Cash transactions are those in which goods are exchanged for cash
in the form of notes and coins, or are paid for using the cheque system and
the debit cards (ATM Cards). Cash transactions involving the exchange of
notes and coins with goods are used to compile the cash account.
Transactions involving cheques are used to compile the bank account. A
section on the bank payment systems will be discussed in the chapter on
bank reconciliation.
The entries in the cash book are analysed by type of receipts and type of
expenditure. Entries in the cash account would be analysed as follows:
ILLUSTRATION
Fix-it, a retired engineer, received interest from his fixed deposit account of
K8 000 000. He opened a business bank account withdrew K3 000 000 for
office use. The following are the transactions for the first month of trading:
April 2005
April 1. Sold goods for cash K 540 000 net. VAT is charged at the rate of
17.5 %
April 4. Borrowed K 12 000 000 from Credit Funds Bank, cheque
received same day
April 8. Paid wages in cash K 150 000
April 13. Cash sales K400 000 net.
April 13. Banked K200 000 from cash till.
April 14 Drew from bank for private use K 100 000
April 19. Paid cash for repairs to furniture K130 000
April 20. Cash purchases of stationery K150 000 (all tax-exempt).
April 22. Ngosa paid his account in full less 5% cash discount K 667 755.
April 25. Paid Salaries in by cheque K 300 000
April 26 Bought goods for re-sale in cash, K 246 750 gross.
April 28 Paid rent K 520 000 by cheque and received commission for
selling scratch cards K 270 000 by cash
April 29. Paid L-Stone Motors K 10 000 000 by cheque for the truck bought
earlier.
April 30 Settled Kunda’s account by cheque, less cash discount of 5%
K227 430.
Enter the transactions in the appropriate day books, post to the ledger and
extract a trial balance at the end of the month.
The cashbook is the only book of prime entry that is also part of the
ledger. The ledger is the main book of account and will be discussed in
much more detail in the next chapter.
The column for Trade Receivables capture amounts received from our
customers as payments on account. Value Added Tax is not calculated
on amounts from customers since it is already recorded in the sales
daybook. Value Added Tax is, however, calculated on cash sales and
recorded in the Value Added Tax column for posting the amount to the
ledger.
The cash book usually starts with a balance representing the cash that
remained in the till when the accounts for the preceding accounting
period were prepared. This is the K 8 000 000 you can see in the cash
book above. The balance at start is not a transaction and so it will not
be posted to any account in the ledger.
DATE PARTICULARS FOLI TOTAL Value CASH TRADE WAGES & REPAIRS STATIONERY
Added
The payments side of the cash book is analysed into amounts paid to
suppliers (Trade Payables), amounts paid for expenses (e.g repairs) and
amounts paid for non-current assets bought for cash. The term Other
payables would be used if payment was made as a settlement of an
outstanding amount owed to a supplier of a non-current asset, or to a
provider of a service on credit. The cash book would therefore have
more columns in practice than are illustrated above.
Amounts transferred from the cash account to the bank account and
vice versa are marked with ‘c’, meaning contra entry. Two accounts are
involved: the cash and bank accounts, and so the double entry
completes within the cash book. Such amounts are not posted to any
account in the ledger because the two accounts involved are already in
the cashbook
Posting the totals to the ledger will be explained in the next chapter.
For now it suffices to mention that the two accounts identifiable from
entries in the cash book are: cash account (the Total Column),
purchases account, Value Added Tax account, repairs account, wages
and salaries, stationery and trade payables accounts.
The Bank Account is also part of the cash book and entries in it are those for
receipt of cheques and payments by cheque or credit cards.The bank
account is analysed much the same way the cash account was done above.
The column for other receivables would further be analysed into rent
receivable, commission receivable, etc. In practice there would also be
columns for discount allowed, capital and contra entries;
DATE PARTICULARS FOLIO TOTAL Value CASH TRADE WAGES & RENT MOTOR
Added
Accounts that are similar can be combined (eg wages and salaries).
Rent payable and motor vehicles are examples of other payables. In
practice the payments side of the cashbook would also have columns
for drawings, discount received, and contra entries. Amounts in the
columns for contra entries are not posted to the ledger because double
entry is completed between the cash account and the bank account,
both of which are within the cash book itself.
At the end of the month (or year as the period of account may be), a
balance is found separately for cash account and for bank account. The
total columns are used to find the balance on each account. The
balance represents the amount of cash remaining at the end of the
period of account and will be the opening balance for the cashbook of
the following period.
Posting the totals to the ledger will be explained in the next chapter.
For now it suffices to mention that the accounts identifiable from
entries in the cash book above are: cash account (total columns), Trade
Receivables, sales account, other receivables account, and loan
account.
CHAPTER SUMMARY
The cash book is compiled for all cash transactions and preserved for
future reference
The receipts and cash payment requests are the source documents for
preparing the Cash book
EXERCISES
1. Clatus
Clatus started business with K15 000 000 in his bank account and owned a
truck worth K30 000 000 which he intended to use exclusively for business
purposes. The following are his cash transactions for the month of March
2006:
March 1. 2006
March 2. Drew from bank for office use K 5 000 000
March 4. Paid rent in cash K 600 000
March 8. Bought furniture by cheque K 3 500 000
March 8. Drew cash for private use K 250 000
March 13. Cash sales K420 000 net. VAT is charged at the rate of 17.5 %
March 13. Bought stationery K350 000 for cash.
March 14 Sold goods for cash K 540 000 net. VAT is charged at the rate of
17.5 %
March 19. Paid cash for repairs to furniture K180 000
March 20. Paid delivery expenses in cash K630 000.
March 22. Mini-Finance Bank lent us K30 000 000 and paid Del Equipment
K25 000
000 for the truck we earlier bought on credit.
March 25. Paid Salaries in by cheque K 800 000
March 26 Bought goods for re-sale by cheque, K 720 550 gross.
March 27 Settled Simpasa’s account of K337500 by cheque, less 2%
discount
March 28 Paid rates K 330 000 by cheque
March 29. Paid in cash wages K 220 000, Solarpower for electricity K400
000
March 30 Akabondo paid K 400 000 on account.
Enter the transactions in the appropriate Cash book and find the closing
balance at the end of the month.
2. Refer to Question 1:
Prepare journal entries for the cash sale on March 13, the cash purchase
on March 26 and the
supplier payment on March 27
SOLUTIONS TO EXERCISES
QUESTION ONE
CASH BOOK (CASH-RECEIPTS SIDE)
Note: Some entries have not been extended in the analysis columns
because of computer field limitation.
QUESTION TWO
JOURNAL ENTRIES
K K
Bank 493 000
Sales 420 000
Value Added Tax 73 500
Cash sales with Value Added Tax at 17-1/2 %
CHAPTER 8
THE ANALYTICAL PETTY CASH BOOK
INTRODUCTION
TOPICS
LEARNING OUTCOMES
After you have studied this chapter, you should be able to:
1.1 Analytical means the petty cash book is separated into columns
for different categories of expenses, for example,different columns for
expenses relating to postage, stationery, cleaning, and motor
expenses.
1.2 Petty means small items of expenditure the business may incur
in the course of its daily operations.
4.1 PERSONNEL
Cash by nature is highly open to misappropriation. It is for his reason
that whatever amount is involved, it must be entrusted in the hands of
a responsible officer. For petty cash this responsibility is given to a
petty cashier. In the absence of petty cashier a deputy can takeover
the responsibility.
4.2 SECURITY
It is the responsibility of the petty cashier to ensure that:
4.3 CONTROL
Petty cash should be used only for small items of expenditure and not
for large expenses, such as office furniture or airfares. Paying large
amounts from petty cash would be an obvious target for theft.
5.1 The initial payment of record of payment is the petty cash voucher.
The petty
cash voucher is prepared by the petty cashier whenever a payment
is requested. Petty cash vouchers are serially–numbered slips in a
padded booklet. The booklets are obtainable from stationery
suppliers. The following details are found on the petty cash
voucher:
NO………………
DATE……………..
DESCRIPTION/DETAILS AMOUN
T
PREPARED BY:
AUTHORISED BY:
RECEIVED BY:
5.2 RECEIPTS
A person buying items using petty cash must obtain a receipt from the
supplier. The receipt should be given to the petty cashier as evidence
of purchases. The petty cashier will then attach the receipt to the
petty cash voucher as supporting document for payment. The petty
cashier can then record in the book that payment has been made.
If there’s an amount for Value Added Tax in a payment, and the tax can
be claimed from Zambia Revenue Authority (ZRA), the receipt must
show the following details:
6.1 The imprest system is where a petty cashier is reimbursed what has
been spent in order to restore the petty cash float.
6.2 Float is the sum of money the petty cashier must start with at the
beginning of every month. It’s decided by management and is usually
fixed but can be adjusted to suit current requirement.
7.1 Some organizations allow individuals to borrow money from petty cash,
just for a short period of time, say a day or two.
In such cases the petty cashier must prepare an IOU slip, which shows
o Amount borrowed
o Name and signature of borrower
o The date the amount is borrowed.
MARY BANDA
20/02/07
IOU is a good as cash, and the document should be placed in cash box
and be treated as cash. When counting cash in cash box IOU must be
added as cash equivalent.
The monthly petty cash float is K500, 000. During the month total
expenditure amounted to K285, 000 and an individual borrowed out of
petty cash K35, 000.
At the time of balancing the petty cash book, the individual had not
paid back the
K35, 000. How much cash is available at that time?
The following format will help you calculate the cash balance
remaining.
7.3 When the borrowed money is paid back, the petty cashier will put back
the money in cash box and remove IOU slip, which is torn as if nothing
happened.
8.1 All payments before being recorded in petty cash book must be
supported with petty cash vouchers and receipts. It is highly
recommended that the petty cash book be updated (recorded) on daily
basis in order to have accurate information on petty cash expenditure.
The petty cash book is divided into two parts, left and right hand sides.
o The left hand is the debit side. This side is used to record any
cash received by petty cashier.
o The right hand side is the credit side. This is where expenses in
the period are analysed.
o The analysis columns in petty cash book will vary depending on
the organization’s pattern and nature of expenditure.
Example: Analytical petty cash book.
You are required to draw up a petty cash book for the month using
analysis columns for stationery cleaning, entertainment, traveling and
postage.
Show clearly the receipt of the amount necessary to restore the float
and the balance brought forward for the start of the following month.
SOLUTION
Receipts Date Details V/n Total Stat Cleanin Entert Travel Postag
g t e
700,000 Jun 1 Cash
Jun 2 C/Mat 1 30,000 30,00
0
Jun 3 Stamps 2 25,000 25,000
Jun 6 Envelops 3 10,000 10,000
Jun 8 T/Fares 4 65,000 65,000
Jun Petrol 5 100,000 100,000
10
Jun T/Paper 6 80,000 80,000
14
Jun C/Mat 7 29,000 29,00
15 0
Jun B/Fares 8 10,000 10,000
16
Jun V/Lunch 9 45,000 45,0
20 00
Jun21 Mops/Brushe 10 56,000 56,00
s 0
Jun Stamps 11 15,000 15,000
23
Jun Envelops 12 7,000 7,000
27
Jun V/Lunch 13 60,000 60,0
29 00
Jun P/Paper 14 95,000 95,000
30
627,000 192,00 115,00 105,0 175,00 40,000
0 0 00 0
627,00 Jun Cash
0 30
Bal c/d 700,000
1,327,0 1,327,0
00 00
700,000 Jul 1 Bal b/d
DR (K) CR(K)
N.B
When petty cash is established and restored every month double entry
is:
Dr-petty cash
Cr- Bank A/C (when money is withdrawn from bank in the above
example:
For expenses the petty cash book is used as on accumulative book for
small expenses, where each expense account is updated on monthly
basis after they have accumulated. As in example the double entry
would be;
Dr Stationery A/C Cr
Dr Cleaning A/C Cr
K K
June 30 Petty cash 115,000
Dr Entertainment A/C Cr
K K
June 30 Petty cash 105,000
Dr Traveling A/C Cr
K K
June 30 Petty cash 175,000
Dr Postage A/C Cr
K K
June 30 Petty cash 40,000
N.B
When balancing the petty cash book, balance c/d and b/d is the actual
imprest amount (or float). The amount remaining with the petty
cashier is not shown as part of balance. It therefore means that,
before balancing the petty cash book the cash spent should first be
reimbursed to the cashier, then put in petty cash box with the amount
that remained. This is restoring the imprest amount, which is the
balance.
Date: Date:
01.06.05 02.06.05
Amount Amount
K K
4 Reams A4 90,000 Repairs to computer
Paper 145,000
Value Added Tax 17.5% Add 17.5%
15.75 Value Added Tax
Total 105.75 25,375
170,375
The two Value Added Tax receipts will be recorded as follows in the
petty cash book
PAYMENTS SIDE
9. CHAPTER SUMMARY
Thus: FLOAT xx
Less expenditure xx
Balance xx
Reimbursement xx
FLOAT xx
EXERCISES
7. The following petty cash transactions were recorded during the month
of December
20x6.
All expenses and income listed above are inclusive of Value Added Tax at
17.5%.
Required:
Record all the transactions in petty cash book and balance off as at 31
December 20x6 and restore the imprest amount.
SOLUTIONS TO EXERCISES
In this chapter we will discuss how credit transactions recorded in the day
books are posted to the accounts in the ledger. The ledger is the main book
of account. It is in this book that the rule of double entry must be applied. At
the end of the exercise of posting entries to ledger accounts, the accounts
are closed and balances extracted in the form of a trial balance. The trial
balance is then used to prepare the Income Statement and Balance sheet.
TOPICS
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
1.1 ILLUSTRATION
April 5. Sold goods on credit to Ngosa K800 000 net. The customer is
entitled to less 2 % prompt discount if payment is made within
14 days.
April 7. Ngosa returned goods, K200 000 net (He is entitled to prompt
discount of
2%)
April 12. Purchased goods on credit from Kunda K282 000. The invoice
stated a tax inclusive amount.
April 13. Received an invoice for the 10 ton truck bought on credit from L-
Stone Motors K40 000 000 gross
April 13. Issued an invoice to Mulota K400 000 net.
April 13 Returned goods worth K42 600 to Kunda. This is a tax inclusive
figure.
April 15 Sold goods on credit to Mambwe K750 000 net.
April 17. We sent a credit note to Mambwe, K150 000, net
April 18. Purchased Goods on credit from Mwape K270 000 gross value.
April 19. Received a bill for electricity from Zam Hydropower. The total of
the invoice was K320 000
April 19. Received a credit note from Mwape for K35 700 (gross amount).
1.2 LEDGERS
Explanatory notes follow after all the accounts have been written.
TRADE RECEIVABLES
K
K
Sales 2 922 950.00 Sales Returns
410 550.00
SALES
SALES RETURNS
TRADE PAYABLE
MOTOR VEHICLES
ELECTRICITY
1.3 COMMENTS
In the accounts above credit transactions have been posted to the ledger.
What was given/received were goods. The names of the outside entities were
given (see the day books reproduced here also).
Sales on credit
Sales Returns
The customers gave the goods they returned to us and so the trade
receivable account is credited with the gross amount of K 410 550.00. We
received the goods and the account representing our business, sales returns
account, has been debited with the net amount whereas the associated tax
is debited to the Value Added Tax account as amount not payable to the
govt.
Purchases on credit
The term ‘purchases’ conventionally refer to goods bought for re-sale and so
excludes purchases of non current assets.
The double entry can be represented in the following journal:
DR (K) CR(K)
Purchases 469 787.24
Value Added Tax 82 212.76
Electricity 320 000.00
Trade Payable (for goods) 552 000.00
Other Payable –(Electricity) 320 000.00
The amount in the other payables –electricity account is the gross amount
because Value Added Tax on this purchase has been ignored for simplicity’s
sake
The journal for the non current asset is : Debit the Motor Vehicles account
(representing the business, or the activity done) and credit the Other Payable
–Non Current asset account (representing the giver, L-Stone Motors). The
cost of the motor vehicle is gross because the Value Added Tax component is
not passed on to the customer. The vehicle is not for re-sale.
EXERCISES
INTRODUCTION
In this chapter we explain how the rule of double entry is applied when
posting entries from the cash account and from the bank account (the cash
book is part of the ledger also). It is important to refer to the page with
guidelines on identifying the flow, account to debit and account to credit
before you proceed.
TOPICS
1. Cash transactions
2. Posting entries in the cash book to the ledger
3. Summary
LEARNING OUTCOMES
After you have studied this chapter, you should be able to:
April 2005
April 1. Sold goods for cash K540 000 net. VAT is charged at the rate of
17.5 %
April 4. Borrowed K12 000 000 from Credit Funds Bank, cheque
received same day
April 8. Paid wages in cash K150 000
April 13. Cash sales K400 000 net.
April 13. Banked K200 000 from cash till.
April 14 Drew from bank for private use K100 000
April 19. Paid cash for repairs to furniture K130 000
April 20. Cash purchases of stationery K150 000 (all tax-exempt).
April 22. Ngosa paid his account in full less 5% cash discount K667 766.
April 25. Paid Salaries by cheque K300 000
April 26 Bought goods for re-sale in cash, K246 750 gross.
April 28 Paid rent K520 000 by cheque and received commission for
selling scratch cards K270 000 by cash
April 29. Paid L-Stone K10 000 000 by cheque for the truck bought earlier.
April 30 Settled Kunda’s account by cheque, less 5% cash discount K227
430.
DATE PARTICULARS FOLIO TOTAL VALUE ADDED CASH TRADE OTHER LOANS
TAX SALES RECEIVABLES RECEIVABLES
APRIL
1 Bank 3 000
000
1 Sales 634 94 500 540
500 000
13 Sales 470 70 000 400
000 000
22 Ngosa 667 667 755
755
28 Commission 270 270 000
rec. 000
DATE PARTICULARS FOLIO TOTAL VALUE CASH TRADE WAGES & REPAIRS STATIONERY
ADDED
TAX PURCH PAYABLES SALARIES
APR
8 Wages 150 150
000 000
13 Bank 200
000
19 Repairs 130 130 000
000
20 Stationery 150 150 00
000
26 Purchases 246 36 210
750 750 000
Since the cash book is part of the ledger, the receipts are effectively on the
debit side of the cash/bank account, and payments are correspondingly on
the credit side of the cash/bank account. The ledger accounts which follow
below therefore will carry only the other entry of the double entry. Journal
entries would also be written for each of the transactions, for example:
TRADE PAYABLE
Bank 227 430
TRADE RECEIVABLES
COMMISSION
Cash 270
000
SALES
PURCHASES
WAGES
REPAIRS
STATIONERY
RENT
LOAN
Bank 12 000
000
L-STONE MOTORS
The entries in the Value Added Tax account show that tax arise both
from credit transactions and cash transactions. The net of the credit
entries and the debit entries is the amount that becomes payable to
the tax authorities.
The entry in the Lstone-Motors account is a part payment for the truck
we bought on credit from them (Refer to the entries in the Purchases
Day Book in the previous chapter)
Note also that an account can capture both amounts from the cash and
the bank accounts, which are in the cash book.
In the next chapter we discuss how ledger accounts are closed for
preparation of the trial balance and eventually the financial statements.
3.0 SUMMARY
When cash is paid the cash account is credited and the account
representing the activity is debited
When cash is received the cash account is debited and the account
representing the activity is credited.
Where the cash is paid / received by an outside entity, then the
account for that entity will also be updated with the transaction.
CHAPTER 11
INTRODUCTION
In the previous chapters we applied the rule of double entry to post original
transactions to the ledger. In this chapter we will move a step further and
illustrate how accounts are closed and a trial balance extracted.
TOPICS
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
When handling transfers you should first note where the funds are in an
account: debit or credit, and then introduce an entry on the opposite side.
Then complete double entry in one of the accounts in the income statement
or in the same account but of the following period of account.
SALES
SALES RETURNS
The entry described ‘Trade Receivables’ completes double entry with the
Trade Receivables account. The entry described as ‘Trading’ completes
double entry with the trading account which is a segment of the Income
Statement. For example, the total of sales K3 430 000.00 is being transferred
to the Income Statement for reporting purposes. The transfer starts with a
debit entry in the Sales account and so it will end with a credit entry in the
trading account of the Income Statement.
TRADE PAYABLE
Purchases Returns 78 300.00 Purchases
552 000.00
Bank 227 430.00
Discount Received 11 970.00
Balance c/d 234 300.00
Closing books would literally mean that accounts with something continuing
on them are re-opened in the books of the following period of account. We
would have to transfer the unpaid amount on the Trade Payables above to a
Trade Payables account for the following month. The transfer would start with
a debit of K 234 300.00 described as Balance c/d above and end with a credit
entry in the Trade Payables account of the following period and described as
balance b/d. In the ledger we simply write the two entries on the same
account: one above the total lines and the other below the total lines but on
the opposite side as can be seen above.
PURCHASES
PURCHASES RETURNS
66 638.30 66 638.30
MOTOR VEHICLES
ELECTRICITY
DRAWINGS
TRADE RECEIVABLES
COMMISSION
REPAIRS
STATIONERY
Cash 150 000.00 Profit & Loss c/d 150
000.00
RENT
LOAN
CAPITAL
DISCOUNT ALLOWED
35 145.00 35 145.00
DISCOUNT RECEIVED
11 970.00 11 970.00
The amounts in the cash and bank accounts below are a summary of the
entries in the cash book prepared in the preceding chapter. Drawings are
principally transferred to capital account because in the balance sheet the
amount of drawings is deducted from the balance on the capital account.
BANK ACCOUNT
CASH
Total Receipts 5 042 255 Total Payments 876
750
Balance c/d 4 165
505
Amounts are listed on the trial balance on the side they appear or would
appear below the total lines on the account. For example, Value Added Tax of
K429 598.94 is listed on the credit side in the trial balance because it is on
the credit side below total lines on the account in the ledger.
Purchases account balance of K679 787.24 is listed on the debit side of the
trial balance because the entry described as ‘trading’ on the account would
be on the debit side if it were written (by extension) below the total lines on
the ledger account itself. Alternatively, the transfer of funds to Trading
account will throw funds on the debit side of that account. It is that debit that
is effectively listed on the trial balance.
FIX-IT
TRIAL BALANCE AS AT 30 APRIL 2005
DR CR
Sales 3 430 000.00
Sales Returns 350 000.00
Trade Payables 234 300.00
L-Stone Motors 30 000 000.00
Zam Hydro Power Co. 320 000.00
Purchases 679 787.24
Purchases Returns 66 638.30
Motor Vehicles 40 000 000.00
Electricity 320 000.00
Drawings 100 000.00
Trade Receivables 1 809 500.00
Commissioned Received 270 000.00
Wages & Salaries 450 000.00
Repairs 130 000.00
Stationery 150 000.00
Rent 520 000.00
Value Added Tax 429 598.94
Loan 12 000 000.00
Capital 8 000 000.00
Discount Allowed 35 145.00
Discount Received 11 970.00
Bank 6 052 570.00
Cash 4 165 505.00
______________ ______________
54 762 507.24 54 762 507.24
______________ _____________
CHAPTER SUMMARY
You have seen that to prepare ledger accounts that lead to a balancing trial
balance you need to be thorough when recording entries in the books of
prime entry ( day books) and to apply the rule of double entry to every
transaction without exception. You also need to understand the logic of
account transfers to the income statement (profit and loss account), and
transfers to the same account but of the following period (balance c/d and
balance b/d). These balances are the amounts that are reported in the
balance sheet as a summary of ledger account balances. The challenge is all
yours to master the application of the rule of double entry. You will convince
yourself that you have developed the competence if you manage to balance
the illustrative question again and the question in the exercises section of
this chapter. Your progression will be steady and sure if you do this.
SELF-TEST QUESTIONS
1. Re-attempt the whole exercise and see whether you can do it up Trial
balance
2. What is the accounting treatment of discount allowed and discount
received?
EXERCISES
Question 1
Lambdar started business with K15 000 000 in his bank account and owned a
truck worth K30,000 000 which he intended to use exclusively for business
purposes. The following are his cash transactions for the month of March
2006:
March 2005
March 2. Drew from bank for office use K5 000 000
March 2. Sold goods on credit to Akabondo K845 000 net.
VAT is charged at the rate of 17.5 %
March 4. Paid rent in cash K 600 000
March 7. Purchased goods on credit from Siwale K424 000. The invoice
stated a tax inclusive amount.
March 8. Bought furniture by cheque K3 500 000
March 8. Sold goods on credit to Mubita K780 000 net. The customer is
entitled to
2 % prompt discount if payment is made within 14 days.
March 8. Drew cash for private use K250 000
March 12. Received an invoice for the forklift bought on credit from Del
Equipment
K30 000 000 gross
March 13. Cash sales K420 000 net. VAT is charged at the rate of 17.5 %
March 13. Bought stationery K350 000 for cash.
March 14 Sold goods for cash K540 000 net. VAT is charged at the rate of
17.5 %
March 14. Issued an invoice to Mubiana K680 000 net.
March 15. Purchased Goods on credit from Simpasa K 380 000 gross
value.
March 16 Sold goods on credit to Mundia K750 000 net.
March 18. Akabondo returned goods, K325 000 net (He is entitle to prompt
discount of 2 %)
March 19. Received a bill for electricity from Solarpower Co. The total of the
bill was
K502 000
March 19. Paid cash for repairs to furniture K180 000
March 20. Paid delivery expenses in cash K630 000.
March 21. We sent a credit note to Mundia, K300 000, net
March 22. Mini-Finance Bank lent us K30 000 000 and later the same day
paid Del Equipment K25 000 000 for the forklift we earlier
bought on credit.
March 22 Returned goods worth K83 600 to Siwale . This is a tax inclusive
figure.
March 24. Received a credit note from Simpasa for K42 500 (gross amount).
March 25. Paid Salaries in by cheque K800 000
March 26 Bought goods for re-sale by cheque, K 720 550 gross.
March 27 Paid Simpasa’s account in full by cheque, less 2% discount
March 28 Paid rates K330 000 by cheques.
March 29. Paid in cash wages K220 000, Solar power for electricity K400
000
March 30 Akabondo paid K400 000 on account.
Enter the transactions in the appropriate day books, post to the ledger and
extract a trial balance at the end of the month.
Question 2
Refer to Question 1: Prepare journal entries for the transactions on March 13,
March 26
and March 27.
Question 3
Winwell owns a fast-food store, which is Value Added Tax registered. During
the day’s
trading he entered into the following transactions:
At the start of the day there was nil balance on the Value Added Tax account.
The rate of Value Added Tax is 17.5%
What is the closing balance on Winwell’s Value Added Tax account following
the above transactions?
Question 4
During February 20X6 Vumbi paid ZRA K6 800 000. Calculate the amount
owing to ZRA on 28 February 20x6.
SOLUTIONS TO EXERCISES
SOLUTION ONE
(Note: In this solution some words have been abbreviated to their
consonants only for convenience)
==========
JOURNAL ENTRIES
DR CR
March 8 Furniture 3 500 000
Bank 3 500 000
Purchases of office desk by cheque
Workings
2 Other Payables
Solarpower Co. 502 000.00
Del Equipment 30 000 000.00
Total 30 502 000.00
SALES
SALES RETURNS
TRADE PAYABLE
PURCHASES
PURCHASES RETURNS
MOTOR VEHICLES
ELECTRICITY
DRAWINGS
TRADE RECEIVABLES
FURNITURE
FURNITURE REPAIRS
STATIONERY
RATES
LOAN
CAPITAL
Motor Vehicles 15 000 000
DELIVERY EXPENSES
Cash 630 000 Profit & Loss 630 000
DISCOUNT RECEIVED
6 750 6 750
BANK ACCOUNT
CASH
LAMBDAR
TRIAL BALANCE AS AT 31 MARCH 2006
DR CR
K K
Sales 4 015 000
Sales Returns 625 000
Trade Payables 340 400
Del Equipment 5 000 000
Solarpower Co. 102 000
Purchases 1 297 489
Purchases Returns 107 319
Motor Vehicles 60 000 000
Electricity 502 000
Drawings 250 000
Trade Receivables 2 453 657
Furniture 3 500 000
Wages & Salaries 1 020 000
Repairs 1 80 000
Stationery 350 000
Rates 930 000
Value Added Tax 383 377
Loan 30 000 000
Capital 45 000 000
Delivery Expenses 630 000
Discount Received 6 750
Bank 9 318 700
Cash 3 898 000
SOLUTION 2
DR CR
Cash account 493 500
Sales 420 000
Value Added Tax 73 500
Cash sales with Value Added Tax
SOLUTION 3
SOLUTION 4
VALUE ADDED TAX
INTRODUCTION
So far what has been covered in the previous chapters is the recording of
transactions in the books of original entry and posting to the ledger to
complete double entry. The trial balance is the next progression towards the
preparation financial statements.
Before financial statements are prepared, it is important to carry out a test
on the accuracy of records in the books of the prime entry and the ledger.
TOPICS
LEARNING OBJECTIVES
The word trial is taken from the word try. Which is an attempt,
experiment or test to see whether work done is satisfactory.
Required:
Solution
K K
Capital 10,000 Bank
8,000
Sales 600 Stationery 75
Wages 325
Drawings 50
Balance c/d 2,150
10,600 10,600
K K
Cash 8,000 Rent 250
Purchases 400
Electricity 25
Balance c/d 7,325
8,000 8,000
Balance b/d 7,325
Dr. Capital account Cr.
K K
Cash 10,000
Using the accounts in the ledger we can now prepare a trial balance.
Thus:
Dr. Cr.
K K
Cash in hand 2,150
Cash in bank 7,325
Capital 10,000
Rent 250
Purchases 975
Stationery 75
Sales 1,380
Payables 575
Wages 325
Receivables 780
Electricity 25
Drawings 50 ______
11,955 11,955
The order in which accounts appear in the trial balance does not
matter, because it is not mandatory that a business must prepare a
trial balance.
CHAPTER SUMMARY
EXERCISES
K
Capital 1 January 20X5 204,235
Opening inventory 46,000
Purchases 234,000
Sales 288,000
Light & heat 2,000
Advertising 3,000
Insurance 5,000
Bad debts 150
Rent 13,000
General 13,850
Drawings 8,000
Receivables 48,000
Payables 35,000
Bank overdraft 50,000
Returns inwards 1,000
Returns outwards 350
Carriage inwards 780
Carriage outwards 475
Machinery 132,000
Discounts allowed 880
Discount received 550
Required:
SOLUTION TO EXERCISES
3. B Stepson
Trial balance as at 31 December 20X5
Dr. Cr.
K K
Capital 1 January 20X5 204,235
Opening inventory 46,000
Purchases 234,000
Sales 288,000
Light & heat 2,000
Advertising 3,000
Insurance 5,000
Bad debts 150
Rent 13,000
General 13,850
Drawings 8,000
Receivables 48,000
Payables 35,000
Bank overdraft 50,000
Returns inwards 1,000
Returns outwards 350
Carriage inwards 780
Carriage outwards 475
Machinery 132,000
Discounts allowed 880
Discount received 550
543,135 543,135
CHAPTER 13
CONTROL ACCOUNTS
INTRODUCTION
TOPICS
1. Manual and computer accounting systems
2. Need for control accounts
3. Posting to personal accounts
4. Posting to Control accounts
5. Errors and their correction
6. Summary
LEARNING OBJECTIVES
In a manual system records are kept in the form of books. First transactions
are recorded in ink in the books of prime entry. Then at another time the
entries in the day books are posted to the ledger. The exercise becomes
tedious when the organization grows big in size. Large numbers of
transactions would have to be posted to the personal accounts of suppliers
and customers. The need for computerizing the accounting system arises.
Posting to any ledger must always be guided by the rule of double entry.
You have to trace the flow of goods: who is giving and who is receiving.
Even though you write one entry in the control account, you still have to
see the second entry in the other account mentally.
CHISAKAILA
NGOSA
MULOTA
MAMBWE
MWAPE
The listings made of account balances in the sales and purchases ledgers
agree with the total balance on the corresponding total (control account)
in the general ledger. The control accounts are shown below accordingly
TRADE RECEIVABLES
TRADE PAYABLE
Let us suppose that the following errors were made in the account. We will
show what the balances would be on the accounts and the eventual
correction of the errors.
1. The Value Added Tax amount on sales returns from Ngosa did not take
into account the entitlement to cash discounts. The mistake was made
in the personal account only.
TRADE RECEIVABLES
CORRECTION OF ERRORS
The amounts due from suppliers at the end of the year were K 63 000.
Write the trade payables account and determine the closing
balances on account at the end of the year?
2. Kenny trades with Cynthia with whom she both buys and sells goods on
credit. At the end of the financial year Kenny owes Cynthia K 150 000
and she owes him
K 130 000. They both agree to setting off the amounts outstanding.
3. For the month of October 20X5 Kawape’s purchases totaled 225 600
with Value Added Tax of K 33 840. The total of K 259 440 has been
credited to the trade payables control account as K254 940.
4. Ignatius had the following balances on his trade receivables and trade
payables on 1 December 2006.
Customers owed K40 250 and he owed suppliers 26 423. Credit
balances in the trade receivables ledger amounted to K3 845 and debit
balances in the trade payables ledger amounted to K1 985.
REQUIRED
CHAPTER 14
BANK RECONCILIATION
INTRODUCTION
The receipts and payments we make in our cash book are also recoded by
the bank in there books. The cash book contains the cash account and the a
bank Account. The balance on the bank account must be exactly equal to the
amount the bank will show on the bank statement sent to us at the end of
the month. If the two balances are not the same then investigations should
be instituted to establish the causes of the difference. The cash book is
thereafter updated with entries that are on the bank statement but not in the
cash book, and a bank reconciliation statement is compiled for the entries
that are in the cash book but are not on the bank statement.
Direct debits:
Direct credits:
Standing order:
The name is derived from the activity that creates it. The
business issues a standing order to the bank by letter. The letter
contains an instruction to the bank to pay a specified fixed
amount on a stated date at regular interval (eg quarterly). When
the time is due for the matter the bank acts on the standing
order and pay the amount. The amount is shown on the debit
side of the bank statement and so it will be recorded on the
credit side of the updated cashbook.
Such deposits are usually made on the last day of the month or
year. The processing of the deposit slips by the bank takes place
the following day. So the bank statement for the month or year
under review does not show entries for such deposits, even
though they have already been recorded in the cash book.
Unpresented cheques:
These are cheques we issued to pay for goods or services but the
cheques have not been taken to the bank for cashing by the
suppliers we paid. The cheques are already recorded in our cash
book but have not been reflected on the bank statement.
Dishonoured cheques:
Cheques that once were received, recorded in the cash book but
the bank refuses to honour them for one reason or the other.
Such cheques are returned to the customer (trade receivable)
who paid the amount, and the earlier receipt is reversed.
3.0 PREPARING A BANK RECONCILIATION STATEMENT
EXERCISE
The bank columns in the cashbook for May 2005 and the bank
statement for that month for G Hoglah are as follows:
CASH BOOK
Debit side Credit side
K000 K000
May 1 Balance b/d 3 250 May 6 Kundananji 165
May 8 R Mbewe 720 May 13K Mwila 454
May 17B Jere 685 May 17P Muma 38
May 29F Banda 372 May 30Daka Bowling 44
May 31D Phiri 582 May 31Balance c/d 4 908
5 609 5 609
BANK STATEMENT
1. Identify entries appearing on both the cash book and the bank statement.
The matching field is either the date or the description. The amount
should be matched last. These entries represent transactions that have
been processed in both sets of accounts correctly.
2. Starting with the closing balance on the cash book, prepare an updated
cashbook by debiting amounts that appear in the credit column of the
bank statement, and vice versa.
3. Starting with the revised cashbook balance in step 2, prepare a bank
reconciliation statement. The amounts recorded in the cashbook but not
processed by the bank are reversed accordingly.
In practice more rigorous verification is done since a lump sum shown on the
bank statement may have to be broken down into several transactions and
matching entries identified separately. Extensive schedules of unmatched
entries are prepared, and totals used for preparation of bank reconciliation
statements.
SOLUTION
UPDATED CASHBOOK
K000 K000
May 31Balance b/d 4 908 May 31Suwilanji 220
May 31Akazipo 85 May 31GYM Club 63
May 31Bank Charges 52
May 31Balance c/d 4 658
5 609 5 609
The rationale of how entries are treated in the bank reconciliation statement
is that cashbook entries not processed by the bank are reversed. Thus
payments made are added to the cashbook-revised balance as if they were
not made, and receipts are deducted accordingly:
The double entry for dishonoured cheques is similar to that done for bank
charges when updating the cashbook with entries that appeared on the bank
statement but not in the cashbook:
DR CR
K000 K000
Bank charges 52
Bank account (in CB) 52
GYN Club 63
Bank account (in CB) 63
EXERCISES
1. Your firm’s cash book shows a credit balance of K12 400 at 30 June
2005. Upon comparison with the bank statement you determine that
there are unpresented cheques totalling K4 500, and a receipt of K1
400 which has not been passed through the bank. The bank statement
shows bank charges of K740 which have not been entered in the cash
book.
Trotters Grotto Ltd make all payments by cheques and all monies
received are banked immediately.
a) The balance brought forward from March 2006 in the cash book
should be
K750 000 and not K770 000
b) A cheque drawn for K128 000 for advertising had been incorrectly
entered in the cash book as K125 000.
c) Dividends received in the month of April of K89 000 were credited
by the bank but no entries were made in the cash book.
d) Business rates are paid directly by the bank under a standing order
arrangement. An amount of K120 000 was paid on 30 April 2006
and no entries have been made in the cash book.
e) A cheque received from Kebby for K207 000 had been returned by
the bank and marked ‘insuffficient funds’. No adjustment has been
made in the cashbook.
f) A cheque for K35 000 for miscellaneous consumables was entered
in the cashbook as a receipt instead of as a payment.
g) Cheques received totalling K807 000 had been entered in the
cashbook and paid into the bank, but had not been credited by the
bank until 3 May.
h) Cheques drawn amounting to K345 000 had not been presented to
the bank for payment.
i) Bank service charges of K67 000 appearing on the bank statement
have not been entered in the cashbook.
REQUIRED:
By doing so the business is taking a risk because some customers may fail to
pay for various reasons which may include:
When a business fails to recover its money from credit customers, after
making all efforts, the amount is written off as a bad debt.
During the year 2016, on 1 November it sold goods on credit to one of its
regular customer Mr. Fix, for $276,000.
Mr. Fix owes the business K276,000 and therefore, he is an asset to the
business by virtual of the amount owed.
If at year end 31 December 20X6, Mr. Fix is still owing the amount, he will
appear together with others in balance sheet, under current assets as Trade
receivables.
20X6 $ $
Nov. 1 Sales 276,000 Balance c/d
276,000
______ _______
276 000 276000
20X7
Jan. 1 Balance b/d 276,000
When the new year begins on 1 January 20X7, Mr. Fix is still a receivable
(debtor) with $276,000.
Assuming Mr. Fix’s credit period expires and the business fails to recover the
money, then the business has incurred bad debts.
Double entry:
20X7 K K
Jan. 1 Balance 276,000 Bad debts 276,000
_______ ______
276,000 276,000
K K
Mr. Fix 276,000
K K
Mr. Fix 276,000 Income Statement
276,000
_______ ______
276,000 276,000
NOTES:
Steps in recovery:
A debt previously written off Mr. Fix K276,000 has now been fully
recovered with a payment by cheque.
K K
Balance b/d 276,000 Bad debts 276,000
_______ _______
276,000 276,000
276,000 276,000
K K
Income statement 276,000 Mr. Fix
276,000
_______ _______
276,000 276,000
NOTES:
- The bad debts recovered account is closed off to income
statement as income. It will be added to gross profit.
Example:
The financial year of Mafuso ends on 31 December each year.
On 31 December 20X7 receivables accounts totaled K50 000. It
was decided to write off K5 000 as bad debts. It is also
estimated that 3% of the remaining receivables may eventually
prove to be bad and it is decided to make a provision for doubtful
debts.
In income statement
K K
Expenses:
Allowance for doubtful Gross profit XX
debts 1,350
OR
Gross profit XX
Less: Expenses
Allowance for doubtful debts (1,350)
K 31 Dec. 20X7 K
Balance c/d 1,350 Income statement 1,350
____ ____
1,350 1,350
Current Assets
Receivables (50,000 – 5,000) 45 000
Less: Allowance for Bad Debts 1,350
43 650
NOTES:
Income statement K K
Gross profit XX
Less: Expenses
Bad debts 5,000
Allowance for bad debts 1,350
6,350
3% X K54,000 = K1,620
In Income Statement:
K K
Balance c/d 1,620 Balance b/d 1,350
____ Income statement 270
1,620 1,620
Current assets K K
Receivables 54 000
Less: Bad Debts 1,620
52 380
Example:
The allowance for doubtful debts has been in existence for the
past two (2) years in the books of Mafuso. At 31 December
20X9, receivables were K30,000. After reviewing the receivables
ledger it is discovered that K1,500 will not be recovered and 3%
allowance for doubtful be maintained on remaining receivables.
K
Receivables 30,000
Less: Bad debts (1,500)
28,500
NOTE:
Where bad debts (expense) exist when the reduction takes place,
it is advisable to net off the two since they are related. Thus in
given example, instead of adding decrease to gross profit it will
be:
K
Bad debts (Expense) 1,500
Decrease in allowance for
Doubtful debts (income) 765
735 to be shown as bad debt in income
statement
K K
Income statement 765 Balance b/d
1,620
Balance c/d 855
____ _____
1,620 1,620
Balance b/d 805
Gross profit XX
Add: other income
Decrease in provision for doubtful debts 765
XX
Less: Expenses
Bad debts 1,500
15.5.2 When bad debts are incurred where allowance for doubtful debts
exists.
DR. – Allowance for doubtful debts account (with amount of bad debt)
CR. – Bad debts account
K K
Balance 268,000 Bad debts 18,000
Balance c/d 250,000
______ _______
268,000 268,000
K K
Receivables 18,000 Allowance for doubtful
debts 18,000
_____ _____
18,000 18,000
K K
Bad debts 18,000 Balance b/f
27,800
Income statement
15,200
Balance c/d 25,000 _____
43,000
43,000
Balance b/d 25,000
NOTES:
- Bad debts K18,000 is a charge against the allowance for
doubtful debts.
- The net charge is K15,200 (18,000 – 2,800) to income
statement.
K K
20x6
Balance c/d 570 Income statement
570 570
570
20x7
Balance c/d 713 Balance b/d 570
___ Income statement 143
713 713
20x8
Income statement 59 Balance b/d
713
Balance c/d 654 ___
713 713
Balance b/d 654
Income Statement
K K
Gross profit for (20X6, 20X7, 20X8) XX
Expenses:
20X6 Allowance for discounts allowed (570)
20X7 Increase in allowance for discounts allowed (143)
(20X8) Add decrease in allowanced for discounts 59
In Balance Sheet
Current Assets K
20X6 Receivables (20,000 – 1,000 - 570) 18,430
INTRODUCTION
Gross profit less expenses equals net profit. The precise amount of net profit
is calculated on the accruals or matching concept.
TOPICS
Example
A business rents a shop for K1,200 per annum (K100 per month). If at
year end, the business has only paid K1000, a full years charge of
K1,200 will be expensed in income statement. The K200 though not
paid will be included because it relates to the same period.
Using the above example the rent expense account would look like:
Dr. Rent Account Cr.
K K
Bank 1 000 Income Statement 1 200
Balance c/d 200
_____ ____
1 200 1 200
Balance b/d 200
Assuming in the following year K1 400 is paid for rent, the account will
be as follows:
K K
Bank 1 400 Opening balance from
previous year 200
Income Statement
Account 1 200
_____ ____
1 400 1 400
The K1 400 paid is first to pay the previous years balance of K200 and
the remainder K1 200 is what should be charged to the second year’s
income statement.
The K200 has now been paid and will not appear anywhere in financial
statements.
Solution:
K K
Bank 23.50 Income Statement 108.10
Bank 27.20
Bank 33.40
Balance c/d 24.00
_____ _____
108.10
108.10
Balance b/d 24.00
While the business may owe others for expenses, the business may
also be owed for other amounts apart from trade among others:
- Rent receivables
- Commission receivable
- Unsettled claims for insurance etc.
Example 1.
Solution:
K K
Income Statement 1 200 000 Bank 1 000 000
Balance c/d 200 000
________ ________
1 200 000 1 200 000
Balance b/d 200 000
Example 2:
K K
Balance b/f 200 000 Bank 1 400 000
Income Statement 1 200 000 ________
1 400 000 1 400 000
- When the tenant pays K1 400 000, the whole amount is not for
20X9. Part of it is to clear the debt K200 000 from 20X8 and the
remaining amount is the rent income for 20X9 to be added to
gross profit in income statement. In this example there’s nothing
owing at year end.
16.2 PREPAYMENTS
A business has a fixed rate for electricity of K74 000 per month. It is
the business tendancy that when their liquidity position is favourable
they pay in advance for certain services including for electricity.
For the year ended 31.12.20X8 the business had paid for electricity
total of K1 036 000 to cover a period of 14 months to 28 February
20X9.
DOUBLE ENTRY
Therefore:
Dr. Electricity Account Cr.
K K
Bank (14 x 74) 1 036 000 Income statement 888 000
Balance c/d 148 000
________ ________
1 036 000 1 036 000
Balance b/d 148 000
Notes:
- Though K1 036 000 was paid during the year, the only expenses
is K888 000
(74 000 x 12 months). The other amount K148 000 is for the
year to come (prepayment) and it will be accounted for in that
year.
Example 2:
Solution:
K K
Balance b/f 148 000 Income statement 888 200
Bank 740 000
_______
888 000 888 000
Notes:
- Though only K740 000 has been paid for current year, i.e. for 10
months, the other amount of K148 000 paid in advance the
previous accommodates the first 2 months of the year making a
full payment for the year of K888 000 to be charged to income
statement.
- K148 000 is no longer an advance payment because it has now
been used in the year for which it was paid.
Gas Pipe runs a service station and sales fuel among other services.
During the year ended 31.12.20X7, a payment of K3 000 000 was paid
in advance for fuel by a customer.
Show the necessary account to record the above information and state
the unused amount which will be shown in financial statements.
Solution:
Double entry
K K
Income statement 2 488 000 Bank 3 000 000
Balance c/d 512 000
________ ________
3 000 000 3 000 000
Balance b/d 512 000
Notes:
The business is holding K512 000 cash for which fuel is yet to be
withdrawn. The fact that this amount could be claimed by customer
before fuel is withdrawn makes it become a liability to the business.
Example 1:
K K
Balance b/f 150 000 Income statement 675 000
Bank 700 000 Balance c/d 175 000
_______ ______
850 000 850 000
Balance b/d 175 000
Notes:
K
(a) The 3 months, 1 March – 31 May 20X7 ( /12 x 600 000)
3
150 000
(b) The 9 months, 1 June 20X7 – 20 February (20X8) 9/12 x 700 000
525 000
(c) Insurance cost for year charged to income statement
675 000
EXERCISES
1. If a business has paid rent of K1 000 000 for the year to 31 March
20X7, what is the prepayment in the accounts for the year to 31
December 20X6.
2. Define an accrual
- At 1 January 20X5, there was K250 000 rates which had been
paid in advance in 20X4, and K500 000 rent was owing on the
same date.
- The following payments were made during 20X5, rent K4 000
000 and rates
K3 6000 000.
Required:
Prepare the rent and rates account (combined and appropriately bring
down the balance).
CHAPTER 17
INTRODUCTION
This chapter deals with non current assets and depreciation. It looks at what
non currents are, depreciation and how it is provided and eventually leading
to disposal. The non current asset register is also discussed.
Additionally the chapter covers the basics of research and development costs
and goodwill
11.1 DEFINITION
A non current asset is one bought by the business not for resale
but to be used in the business to help generate income over a
number of years.
Land
Buildings
Fixtures and fittings
Motor vehicles
Goodwill
Patents
Trade marks
- Inventory
- Receivables
- Cash in bank and
- Cash in hand
Current assets are easily convertible into cash.
11.3 DEPRECIATION
N.B.V
TIME
A vehicle cost K500 000 will be in use in the business for 4 years
after which it will have residual value of K20 000. Annual
depreciation over 4 years will be:
160 000
x 100 = 20%
800 000
Every year for 5 years 20% will be calculated on K800 000 to find
annual depreciation.
120 000
x 100 = 25%
480 000
Every year for 4 years, 25% will be used on K480 000 which is
the depreciable amount.
11.8 The Reducing Balance Method
This method assumes that the business will benefit more from
the use of the asset in earlier years than later years.
K
Year 1 20% x 150 000
(30 000) Depreciation
Year 2 20% x 120 000 N.B.V
(24 000) Depreciation
Year 3 20% x 96 000 N.B.V
(19 200) Depreciation
76 800
What is referred to as sum of digits are the years the asset will
be in use i.e. estimated life.
If the life of an asset is 5 years then the sum of digits will be:
Year 1
+
Year 2
+
Year 3
+
Year 4
+
Year 5
15 is the sum of digits
Since depreciation is more in the first year than later years, each
year depreciation charge will be:
Year 1 5
/15 x depreciable amount
Year 2 4
/15 x depreciable amount
Year 3 3
/15 x depreciable amount
Year 4 2
/15 x depreciable amount
Year 5 1
/15 x depreciable amount
Example: Sum of digits method
Year 1 5
/15 x K570 000 = K190 000
Year 2 4
/15 x K570 000 = K152 000
Year 3 3
/15 x K570 000 = K114 000
Year 4 2
/15 x K570 000 = K 76 000
Year 5 1
/15 x K570 000 = K 38 000
K570 000
+
K 30 000 Residual value
K600 000
Solution:
200 000
15
= K13 333
Solution:
K
Net book value at 31 December 20X6: 275 000 cost
44 000 accumulated
depreciation
231 000 N.B.V.
K
Gain in value: Net book value 231 000
Net value 260 000
29 000
The buildings would now be stated in the books at K260 000 and
will be depreciated over a period of 21 years.
K260 000
21
= K12 381
Required: Show
(a)The machinery account
(b) The fixtures account
(c)The two separate allowance for depreciation
account
(d) Extracts of the income statement and
balance sheet
for each of the years 20X1, 20X2, 20X3 and
20X4.
Solution:
Machinery Account
20X1 K 20X1 K
Balance c/d 9 000 Income statement
9 000
_____ _____
9 000 9
000
20X2 20X2 Balance b/d 9
000
Balance c/d 36 000 Income statement
27 000
36 000 36
000
20X3 20X3 Balance b/d 36 000
Balance c/d 66 750 Income statement
30 750
66 750 66
750
20X4 20X4 Balance b/d 66
750
Balance c/d 97 500 Income statement
30 750
97 500 97
500
Fixtures Account
K K
20X1 20X1
Balance c/d 1 900 Income statement
1 900
_____ _____
1 900 1
900
20X2 20X2 Balance b/d 1
900
Balance c/d 3 705 Income statement
1 805
3 705 3
705
20X3 20X3 Balance b/d 3 705
Balance c/d 5 420 Income statement
1 715
5 420 5
420
20X4 20X4 Balance b/d 5
420
Balance c/d 7 949 Income statement
2 529
7 949 7
949
K K
Gross profit XX
Less: Expenses
XX
20X2 Depreciation: Machinery 27 000
Fixtures 1 805
(28 805)
XX
20X3 Depreciation: Machinery 30 750
Fixtures 1 715
(32 465)
Dr Cr
Machinery 180 000
Accumulated depreciation 9 000
Fixtures 38 000
Accumulated depreciation 1 900
Examples:
Solution
= K12 500
When the life span of an asset changes i.e. increased or reduced, the
net book value of the asset at the time of change is what will be spread
on the remaining life.
Solution:
Net book value to be spread over new life i.e. 6 years. From year 3
onwards annual depreciation will be:
K266 666
6 years = K44 444
Solution
K77 143
3 = K25 714
Solution:
Using straight line method
K80 000
5 years = K16 000 annual depreciation
Net book value after 2 years K80 000 – K32 000 = K48 000
When a business buys non current assets, they are meant to be used in
generating income for the business over a period time (more than 1
year). They are not meant for resale to make a profit.
However, the non current assets might be sold off at some stage
before even their useful life is over. Reasons for selling or disposal
may include:
Step 1:
Step 2:
Step 3:
Step 4
Solution:
= K10 000
Green Grass owned the asset for two years and six months,
thus the total depreciation charged since acquisition is K10
000 x 21/2 years = K25 000.
This means that the net book value at the date of disposal
was K100 000 – K25 000 = K75 000.
Since the sale proceeds amounted to K55 000, a loss on
disposal of
K55 000 – K75 000 = K20 000 has been made.
20X5 K K
1 Jan. Bank 100 000 31 Dec. Balance c/d 100
000
_______ ______
100 000 100 000
20X6
1 Jan. Balance b/d100 000 31 Dec. Balance c/d 100
000
______ _______
100 000 100 000
20X7
1 Jan. Balance b/d100 000 June 30 Disposal 100
000
______ ______
100 000 100 000
K 20X5 K
31 Dec. Bal. c/d 10 000 31 Dec. Inc. statement
10 000
(Depreciation)
______ _____
10 000 10
000
20X6
31 Dec. Bal. c/d 20 000 1 Jan. Balance b/d
10 000
31 Dec. Inc. statement 10
000
(Depreciation)
______ ______
20 000 20
000
20X7
30 June Disposal 25 000 1 Jan. Balance b/d
20 000
30 June Inc. statement 5
000
(Depreciation) _____
25 000 25
000
Dr Disposal account Cr
20X7 K 20X7 K
Required:
Solution:
Annual depreciation: K600 000 – K80 000
5 years = K104 000
For old vehicle
Ledger accounting:
20X8 K K
Dr Disposal account Cr
20X8 K 20X8 K
Most organizations will own a number of non current assets and their
control is vital to the efficient running of the organization. A non
current asset register should be maintained for this purpose.
This register will contain the following information for each non current
asset.
Definitions
KEY TERMS
Cost is the amount of cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its
acquisition or construction.
Recognition
(b) The cost of the asset to the entity can be measured reliably.
Initial measurement
Components of cost
11.19.7 The standard lists the components of the cost of an item of
property, plant and
equipment.
Purchase price, less any trade discount or rebate
Initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located
Directly attributable costs of bringing the asset to working
condition for its intended use, eg:
o The cost of site preparation
o Initial delivery and handling costs
o Installation costs
o Professional fees (architects, engineers)
11.19.8 The following costs will not be part of the cost of property,
plant or equipment unless they can be attributed directly to the
asset’s acquisition, or bringing it into its working condition.
Exchange of assets
11.19.9 Exchange or part exchange of assets occurs frequently for items
of property, plant and equipment. IAS 16 states that the cost of
an item obtained through (part) exchange is the fair value of
the asset received (unless this cannot be measured reliably).
Subsequent expenditure
(a) Cost model. Carry the asset at its cost less depreciation
and any accumulated impairment losses.
(b) Revaluation model. Carry the asset at a revalued
amount, being its fair value at the date of the revaluation
less any subsequent accumulated depreciation.
Revaluations should be made regularly enough so that the
carrying amount approximates to fair value at the balance
sheet date. The revaluation model is only available if the
item can be measured reliably.
Revaluations
11.19.14 The market value of land and buildings usually represents fair
value, assuming existing use and line of business. Such
valuations are usually carried out by professionally qualified
valuers.
11.19.15 In the case of plant and equipment, fair value can also be
taken as market value. Where a market value is not available,
however, depreciated replacement cost should be used. There
may be no market value where types of plant and equipment are
sold only rarely or because of their specialized nature (i.e. they
would normally only be sold as part of an ongoing business).
11.19.18 All the items within a class should be revalued at the same
time, to prevent selective revaluation of certain assets and to
avoid disclosing a mixture of costs and values from different
dates in the financial statements. A rolling basis of revaluation is
allowed if the revaluations are kept up to date and the
revaluation of the whole class is completed in a short period of
time.
Depreciation
11.19.22 Land and buildings are dealt with separately even when they
are acquired together because land normally has an unlimited
life and is therefore not depreciated. In contrast buildings do
have a limited life and must be depreciated. Any increase in the
value of land on which a building is standing will have no impact
on the determination of the building’s useful life.
11.19.29 Gains or losses are the difference between the estimated net
disposal
proceeds and the carrying amount of the asset. They should
be recognized as
income or expense in the income statement.
Disclosure
o Additions
o Disposals
o Increases/decreases from revaluations
o Reductions in carrying amount
o Depreciation
o Any other movements
11.19.31 The financial statements should also disclose the following:
CHAPTER 18
Opening inventory xx
Add: purchases xx
xx
Less: closing inventory (xx)
Cost of goods sold xx
Example
During the year to 31 March 20x8 he continued with his business and
the following took place.
Required:
Solution:
K K
Year to 31 March 20x7
Cost of sales
Purchases (30 x K40 000) 1 200 000
Less: closing inventory
(9 x K40 000) (360 000)
(840 000)
NOTE: Though 30 radios were bought only 21 radios were sold. Profit
will be calculated on the 21 radios sold, thus 21 x K40 000 = K840 000
is cost of radios sold at (21 x K55 000 = K1 155 000). The 9 radios not
sold will be considered as closing inventory.
Cost of sales:
Opening inventory (9 x 40 000) K360 000
Add: Purchases (35 x K40 000) K1 400 000
K1 760 000
NOTE: For the year to 31 March 20x8, the business had a total of 44
radios i.e. 9 from 20x7 plus 35 bought during the year. Out of 44
radios only 38 were sold leaving 6 unsold (closing inventory).
Therefore profit is calculated of the cost of the 38 radios sold. The
concept of going concern is in play for taking closing inventory to the
next accounting period.
Using example 12.4, assuming 2 radios were stolen, the situation will
now be as follows:
Cost of sales:
Opening inventory (9 x 40,000) K360 000
Add purchases (35 x K40,000) K1 400 000
K1 760 000
Less closing inventory
(4 x K40 000) (K160 000)
(K1 600 000)
In the above example, since only 4 radios are remaining, the 2 radios
stolen will be included as part of cost of sales when calculating profit.
An alternative method will be to deduct the stolen radios from the total
inventory and show it as a separate expense as follows:
Cost of sales:
Opening inventory (9 x K40 000) K360 000
Add: Purchases (35 x K40 000) K1 400 000
K1 760 000
Less: Inventory stolen (2 x 40,000) (K80,000)
K1 680 000
Less: Closing inventory (4 x 40 000) (K160,000)
K1 520 000
Gross profit K646 000
Expenses:
Inventory stolen (2 x 40 000) (K80
000)
K566 000
Required:
DR – Income Statement
CR – Purchases Account
DR – Income Statement
CR – Inventory account (with value of opening inventory)
Sky Ltd sets up business with capital in cash of K750 000. During the
first year trading to 31 December 20X8, recorded the transactions
below:
Required:
Solution:
Dr Cash account Cr
K’000 K’000
Capital 750 Purchases 95
Sales 150 Payables 60
Receivables 70 Motor van 50
Expenses 25
___ Balance c/d 740
970 970
Balance b/d740
Dr Capital account Cr
K’000 K’000
Cash
750
Dr Trade Payables Cr
K’000 K’000
Cash 60 Purchases 80
Balance c/d 20 __
80 80
Balance b/d 20
Dr Purchases account
Cr
K’000 K’000
Payables 80 Income Statement
175
Cash 95
___ ___
175
175
Dr Trade Receivables Cr
K’000 K’000
Sales 105 Cash 70
___ Balance c/d 35
105 105
Dr Sales account Cr
K’000 K’000
Income Statement 255 Cash
150
___ Receivables
105
255 255
K’000 K’000
Cash 50 Balance c/d
50
50 50
K’000 K’000
Cash 25 Income statement
25
25 25
Dr Inventory account Cr
K’000 K’000
Income statement 35 Balance c\d
35
====
====
Balance b/d 35
SKY LTD
Income statement for the year ended 31 December 20x8
(using vertical format)
K’000 K’000
Sales 255
Cost of sales:
Purchases 175
Less: Closing inventory 35
(140)
Gross profit 115
Less: Expenses
Sundry expenses (25)
Net profit 90
===
SKY LTD
Income statement for the year ended 31 December 20x8
Using T Format)
Dr Cr
K’000 K’000
Purchases 175 Sales 255
Gross profit c/d 115 Closing inventory 35
290 290
N.B. The balance on the inventory account is K35 000 which will
appear in balance sheet as a current asset.
(a) close down the business while stock take takes place
(b) maintain continuous inventory records manually or using a
computerized system where records are updated
immediately an entry is made for receipts and issues.
Inventory accruals
This is where goods have been received before the year end and
included in inventory, but no invoice has yet been received. Without
an invoice no record can be made in accounting books to show the
business indebtedness or liability to suppliers.
DR – Purchases account
CR – Payables (Liability)
(a) because selling price may include profit before goods are sold
thus going against the prudence and realization concepts.
In this case the appropriate valuation will cost K45 000 because
it is lower of N.R.V. of K53 000.
At the year end on 31 March 20x6, a business has three (3) items
of inventory remaining in warehouse, for which the cost and
N.R.V. is given below.
48 500 51 100
45 000
====== ======
======
Example 3:
A B C
K K K
Cost 20 000 9 000 12 000
Selling price 30 000 12 000 22 000
Modification costs - 2 000 8 000
Marketing costs 7 000 2 000 2 000
Required:
8 800 000
========
Note:
Net Realisable Value
Item
A: K300 000 – K7 000 = K23 000
B: K12 000 - K4 000 = K8 000
C: K22 000 - K10 000 = K12 000
(i) raw materials i.e. if the business is producing its own goods
(ii) finished goods which could have been produced or bought
elsewhere for resale.
(iii) Work in progress (WIP) i.e. work yet to be completed.
There are many techniques which are used to value such items of
inventory. They include the following:
(b) LIFO
(c) AVCO
The following transactions took place during the month of June 20x8
QUANTITY UNIT COST
K’000’
1 June Opening inventory 200
12
6 June Purchases 400 17
9 June Sales 300 30
15 June Sales 250 32
17 June Purchases 100 18
21 June Sales 60 32
Required:
(a) FIFO
(b) LIFO
(c) AVCO
21 June - 60 @ 32 each 50 @ 17
(850)
K1 920 10 @ 18 (180)
90 @ 18 1 620
K8 600 K18 920
Closing inventory using FIFI is 90 units remaining from the last cost of
100 @ K18 each thus 90 units @ K18 each = K1620.
600
9 June - 300 @ K30 (300 @ 17)
K9000 100 @ 17 1 700
200 @ 12 2 400
300 4 100
21 June - 60 @ 32 150
K1 920 60 @ 18
40 @ 18 K720
50 @ 12 K600
K8 600 K18 920 90 1320
40 @ 18 = K720
50 @ 12 = K600
K1 320
(c) Using AVCO
On 15 June 250 units are sold. The remaining 50 units will be valued
still at K15 each
On June 17, 100 units are purchased. The number of units are now 100
+ 50 units from 15 June making a total of 150 units.
K2550
150 = K17 each
(i) FIFO
Income Statement
K K
Sales 18 920
Purchases 8 600
Closing inventory (1 620)
(6 980)
Profit 11 940
(ii) LIFO
Income Statement
K K
Sales 18 920
Purchases 8 600
Closing inventory (1 320)
(7 280)
Profit 11 640
(iii) AVCO
Income Statement
K K
Sales 18 920
Purchases 8 600
Closing inventory (1 530)
(7 070)
Profit 11 850
CHAPTER 19
These are errors where trial balance totals are equal but with mistakes.
It is not possible to draw up an exhaustive list of all the errors which
might be made. Below are some of the common ones which might
cover most of the errors.
- Errors of transposition
- Errors of Omission
- Errors of Principle
- Errors of Commission
- Compensating errors
- Errors of Original entry
- Complete reversal of entries
Example
Example 1
DR – Furniture account
CR – Cash account
DR – Purchases account
error of principle
CR – Cash account
Example 1:
Example 2:
Example
Stamps account
Cash 10
Rent account
Cash 5
Cash account
Stamps 5
Rent 15
Trial Balance
Dr. Cr.
Stamps 10
Rent 5
Cash __ 15
15 15
Please note that figures in stamps and rent are switched. Error
made in stamps has been compensated by another error in rent.
Trial balance totals will be equal but with errors.
(f) Complete reversal of entries
Example:
Dr – Stationery account K4
Cr – Cash account K4
Reversed entry
Dr – Cash account K4
Cr – Stationery account K4
Activity 1
In some cases, the trial balance totals may not be the same. This may
mean a lot of things.
The suspense account is opened for the difference in the trial balance
because it is not clear what caused the difference. However, it is not
encouraged to all the time open suspense account when trial balance
totals disagree, except under certain circumstances e.g. where it is
suspected that the difference may be as a result of many errors which
might take sometime to discover.
Also where the bookkeeper does not know where to post one side of a
transaction e.g. a cash payment is credited to cash, but the
bookkeeper does not know what the payment was for and so will not
know which account to debit.
With the suspense in trial balance, the financial statements could now
be prepared.
All errors once detected are corrected via the journal. When correcting
errors it is important that some will affect suspense account and others
not.
Both T Flash light and T Flash bulb are our customers. On 1 January
20X5 sold goods to T Flash light but by mistake it was recorded in T
Flash bulb account K150.
Solution:
It is assumed that the sales account was correctly credited with K150
but instead of debiting T Flash light with K150, T Flash bulb was
debited instead. The trial balance is not affected by this error because
double entry in figure terms is correct. To correct this error it should
be:
Solution
The trial balance totals will not be equal. One side (Cr) will be greater
than debit side by K70. This error should be corrected via suspense
account.
Trial balance before error is corrected will be:
Dr Cr
Rent 100
Cash 170
Suspense 70
170 170
Dr Suspense account Cr
Balance 70
- error corrected
Dr Rent account Cr
Cash 100
Suspense account 70
Dr Suspense account Cr
Balance 70 Rent 70
70 70
(i) A page of sales day book totaling K576 had not been
posted to sales account.
(ii) An accrual of rates K371 had not been taken into account
(iii) A repayment part of the loan from the bank K300 had been
entered on the loan interest account
(iv) The petty cash balance had been included as K57 instead
of K75.
(v) A bad debt of K120 had been entered in the customers
account but not in the expense account.
(vi) Drawings K200 had been entered in the sundry expenses
account
(vii) An invoice for car repairs K380 had been entered in the
wages account.
(viii) The rent received account balance of K600 had been
entered on the wrong side of the trial balance and income
statement.
(ix) Advertising account with a balance of K2,759 had been
omitted altogether.
(x) Closing inventory had omitted some items valued at cost
K2,000.
(xi) Discount allowed of K150 had been credited to discounts
received.
Required:
Solution:
Dr Cr
(i) Suspense account 576
Sales account 576
Income Statement
371
(ii) Rates account 371
Advertising 2759
(ix) Suspense account (advertising) 2759
Balance 1421
Sales 576 Petty cash 18
Rent 1200 Bad debts 120
Advertising 2759
Discount all. 150
____ Discount rec. 150
3197 3197
Notes
- Error (iv) this error will affect the trial balance and
suspense account is involved in correcting it. Petty cash is
an asset and was transposed. The debit side of trial
balance will be less by K18. However, profit is not affected
by this error because cash does not appear in Income
Statement but as a current asset in balance sheet.
- Error (viii) The rent account in the ledger was correct with a
credit entry. On taking it to trial balance it was recorded on
the debit side instead of credit side. This made the debit
side of trial balance to be twice bigger the amount, and the
trial balance would not balance. The trial balance should
be credited with rent receivable by K1200 (600 x 2). The
first K600 to cancel the debit and the other K600 to
reinstate the rent receivable. Rent receivable is an income
and increases profit by crediting the income statement.
Now that it was debited in income statement, the profit
were understated by twice the amount, so add back twice
the amount.
- Error (ix) advertising account is the ledger but was not
transferred to trial balance. This will cause an imbalance in
trial balance. Therefore, it should just be included by
crediting suspense account with advertising. Its omission
from trial balance also means that it was omitted from
income statement thus overstating profits. This profits
should now be reduced by the amount.
EXERCISES
4. The trial balance of John Black as at 31 March 20X9 did not agree,
there being a shortage of K 874 on the debit side. A suspense account
was opened for the difference. Subsequent investigation showed:
(i) Discount allowed K480 had been entered on the credit side of
discount allowed account.
(ii) The bank statement balance of K560 overdraft had been
included in trial balance instead of the cashbook balance of K63
debit.
(iii) The provision for bad debts account of K150 had been entered on
wrong side of trial balance
(iv) Rent receivable account was over cast by K20
(v) Drawings of K250 had been included in purchases account
(vi) The sale of furniture (non current asset) had been included in
sales account of K300
(vii) Payment for insurance of K45 was entered in insurance account
as K54
(viii) Discounts received was overstated by K100.
(ix) A cheque for K200 for car repairs had been posted to the building
repairs account
(x) Provision for depreciation account K270 was entered on wrong
side of trial balance
(xi) The scrapping of an old lorry with net book value of K375 was
omitted from the books.
Required:
- prepayments
- accruals
- bad debts and provision for depreciation
- opening and closing inventory
Exercise 1
K’000 K’000
Distribution expenses 1460
10% Loan 1000
Trade payables 820
Cash at bank 140
Allowance for doubtful debts 18
Trade receivables 810
Motor vehicles at cost 1680
Accumulated depreciation motor vehicles 620
Warehouse at cost 1800
Accumulated depreciation warehouse 290
Buildings at cost 8300
Accumulated depreciation buildings 1020
Land at cost 1510
Interest on loan paid 50
Salaries and wages 1590
Discounts allowed and received 80
100
Returns inwards 400
Returns outwards 150
Carriage inwards 700
Carriage outwards 250
Inventory 1 January 20X7 1530
Purchases 8100
Sales 13600
Capital 1 January 20X7 10782
28400 28400
NOTE: The goods received had been included in the year end
inventory figures given at (a) above, and the goods sold had been
excluded from it.
- Land nil
- Buildings 2% on cost per annum
- Warehouse 15% on cost per annum
- Motor vehicles 25% on cost per annum
Required:
(a) Prepare income statement for the year ended 31 December 20X7 and
Exercise 2
Mr. Bird Rock has been in business for some time trading in motor spares.
The list below has been taken from his books for the financial year ended 30
September 20X8.
K
Fixtures and fittings 910,000
Accumulated depreciation 136,500
Discounts received 15,400
Trade receivables 400,000
Carriage inwards 95,000
Postage and stationery 15,210
Telephone expenses 10,625
Bad debts 55,000
Returns inwards 110,300
Carriage outwards 5,266
Drawings 315,000
Rent & rates 88,000
Insurance 11,000
Heating and lighting 50,781
Advertising 16,000
Cash in hand 4,242
Cash at bank 112,000
Inventory 1 October 20X7 156,000
Purchases 1,200,400
Discounts allowed 14,000
Allowance for doubtful debts 40,000
Returns outwards 2,745
Trade payables 271,000
Capital 1 October 20X7 1,103,179
Sales 2,000,000
(ii) Depreciation charge for the year is 10% on reducing balance method.
Required:
Prepare income statement for Mr. Bird Rock for the year ended 30 September
20X8 and a balance sheet as at that date.
Solution
Cost of Sales:
Inventory 1/10/20X7 156,000
Purchases 1,200,400
Returns outwards (2,745)
Carriage inwards 95, 000
_________
1,448,685
Less: Closing inventory (127,666)
1,320,989
Gross Profit 568,711
Discount Received 15,400
584,111
Expenses:
Postage and stationery 15,210
Telephone expenses (10,625 + 1,000) 11,625
Bad debts (55,000 – 20,000) 35,000
Carriage outwards 5,266
Rent and rates (88,000 – 910) 87,090
Insurance 11,000
Heating and lighting (4,616 + 50,781) 55,397
Advertising 16,000
Discounts allowed 14,000
Depreciation: Fixtures and fittings 77,350
(327,938)
Net Profit 256,173
Financed by:
Current liabilities
Trade payables 271,000
Accruals (1,000 + 4,616) 5,616
276,616
1,320,968
a) Cash basis
Under this system the main book of accounting is the cash book.
Entered in the cash book are simply cash receipts and cash
expenditure using receipts and payments vouchers. This is where
the analysis cash book column cash book is used with columns
for cash receipts and expense columns. Double entry is
completed with the cash book.
e) Accruals accounting
Revenue and costs are accrued (i.e recognized as they are
earned or incurred, and not as money is received or paid),
matched with one another so far as their relationship can be
established or justifiably assumed, and dealt with in the income
statement of the period to which they relate.
Meaning:
i) The earning of revenue is generally taken to mean that
invoices have been issued.
ii) Costs are incurred when services are received. Therefore
recognition of income and costs is not when cash is
received or paid.
There has been critical argument that the accruals accounting is
too
subjective and hide crucial information about an organisation’s
performance.
Advantages:
Disadvantages:
CHAPTER 23
PARTNERSHIP ACCOUNTING
This chapter introduces a type of business called partnership. Partnership is
wide. At this stage emphasis is on the nature and principles on which
financial statements of partnerships are prepared.
- .
- Limited Partners
These are partners with limited liability. They are only liable or
limited to the amount of capital they have provided. Such
partners usually do not participate in management of the
business.
- General Partners
Advantages:
- While risks are spread among many persons, some partners may
feel uncomfortable to share profits.
- Disputes may arise on management issues and this may lead to
partnership closure.
- A decision made by a partner in relation to business, is usually
binding to other partners. This means if a partner is being sued
in relation to the business, other partners are equally affected.
Partnerships also keep books of prime entry and ledgers, but there are
certain important differences as shown in the table.
N.B. Net profit in sole trader is all his and thus the whole amount
is added to capital in balance sheet.
Banda and Bwalya have been in partnership just for one year.
K K
Net profit 70,000
Add: Interest on drawings
Banda 2,000
Bwalya 1,500
73,500
Less: Appropriations:
Salaries: Banda 3,000
Bwalya 5,000
(8,000)
Interest on capitals:
Banda 10,000
Bwalya 20,000
(30,000)
35,500
Share of profits:
======
Banda ½ 17,750
Bwalya ½ 17,750
35,500
======
(ii) Capital accounts
The capital will usually remain fixed for the duration of the
business but could change under the following circumstances:
Capital accounts
K K K K
Bal. 100,000 200,000
- Share of profits
- Interest on capital
- Drawings
- Interest on drawings
- Partners salaries
For drawings
Current Accounts
Using example 1
Financed by:
Capitals: Banda 100,000
Bwalya 200,000
300,000
Current accounts: Banda 22,750
Bwalya 36,250
59,000
359,000
The balance sheet will then only show capital accounts as follows:
Financed by:
The net profit of the firm, before interests and salary for the year
ended 30 June 20X7 was K25,800.
Required:
Dr. Cr.
K K
Sales 334,618
Returns Inwards 10,200
Purchases 196,239
Carriage Inwards 3,100
Inventory 1 Jan. 20X1 68,127
Discounts allowed 190
Salaries and wages 54,117
Bad debts 1,620
Provision for doubtful debts
1 January 20X1 950
General expenses 1,017
Business rates 2,900
Postage 845
Computers at cost 8,400
Office equipment at cost 5,700
Provision for depreciation at
1 January 20X1:
Computers 3,600
Office equipment 2,900
Payables 36,480
Receivables 51,320
Cash at bank 5,214
Drawings: X 39,000
Y 16,000
Z 28,000
Current accounts: X 5,940
Y 2,117
Z 9,618
Capital accounts: X 60,000
Y 10,000
Z 30,000
_______ _______
494,106 494,106
Additional information
(i) Inventory 31 December 20X1 K74,223
(ii) Business rates paid in advance K200
(iii) Stock of postage stamps K68
(iv) Increase provision for doubtful debts to K1,400
(v) Partners salaries: Y K18,000, Z K14,000
(vi) Interest on drawings: X K300, Y K200, Z K240
(vii) Interest on capital is at 8 percent per annum.
(viii) Depreciate computers by K2,800 and office equipment by
K1,100.
Required:
SOLUTIONS TO EXERCISES
Dr. A B A B Cr.
Current accounts
Dr. X Y Z X Y Z Cr.
XYZ
Balance sheet as at 31 December 20X1
Current assets
Inventory 31.12.20X1 (74,223 + 68) 74,291
Receivables (51,320 – 1,400) 49,920
Prepayments 200
Cash at bank 5,214
129,625
Total assets 133,325
Financed by:
Capital accounts: X 60,000
Y 10,000
Z 30,000
100,000
Current accounts:X (14,988)
Y 3,876
Z 7,957
(3,155)
Current liabilities
Payables 36,480
133,325
CHAPTER 24
ACCOUNTING FOR NON-PROFIT MAKING
ORGANISATIONS
INTRODUCTION
Since running organisations involves cash and other assets and liabilities,
there’s need to also keep records of all activities (transactions).
They may be engaged in profit making activities, but profits arising from
such is not shared by members but ploughed back in the organisation to
improve on services to members.
Smaller clubs and charities with no other assets (apart from cash) and
no liabilities will use the receipts and payments account as a financial
statement. No balance sheet is produced.
N.B. The receipts side is same as debit and payments side credit of
the cash
book.
Advantages
Disadvantages
(a) Only accounts for cash. There could be other assets in use.
(b) Does not account for any amounts paid in advance or owing.
(c) Does not distinguish between capital and revenue expenditure
(d) Does not account for depreciation of non current assets.
Organisations apart from cash asset may have other assets and
liabilities. Therefore, the receipts and payments account may be
inadequate to be used as a financial statement, because it does not
show the other assets and liabilities.
The receipts and payments account does not also show whether the
members contributions are being used effectively.
(a) To reveal a complete picture of assets and liabilities a Balance
Sheet must be prepared.
(b) To show any increase or decrease in capital the income and
expenditure account is prepared.
For other profit ventures such as dinner dance or fete income and
expenses are netted and the resultant profit or loss also transferred to
income and expenditure account.
Example: Bar income statement.
K K
Bar Sales 240
Less cost of sales:
Bar opening inventory 30
Bar purchases 160
___
190
Less: Bar closing inventory (80)
(110)
130
Less: Bar man’s wages (70)
___
Net profit (transferred to income and
expenditure account) 60
The North East Rotary Club had the following assets and liabilities as at
1 January 20X1, the beginning of the year.
Required:
Calculate the accumulated fund as at 1 January 20X1, to be included in
balance sheet.
Solution:
Assets: K K
Cash and bank balance 210
Subscriptions in arrears 65
Equipment 975
Inventory of competition prizes 38
1288
Liabilities:
Subscriptions in advance 10
Owing to suppliers 58
68
Accumulated fund at 1 January 20X1 1220
22.8 Subscriptions
This may be the main source of income for not profit making
organisations.
Example: Subscriptions
The North East Rotary Club had the following details relating to
subscriptions for the year 1 January 20X1 to 31 December 20X1.
On 1 January 20X1, some members still owed the club K65 for
20X0, and some members had also not paid K85 for 20X1.
Required:
Solution:
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
The amount of K65 appearing on the debit side is an asset.
Money is for the club though not yet paid. K10 is liability. Money
is not yet for club though the club has it.
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
Cash 1987
K K
Subscriptions 1987
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
2082 2082
Balance b/d 85 Balance b/d 37
The club takes credit for subscriptions when it becomes due, but takes
a prudent view
on overdue subscriptions. What amount is credited to the income and
expenditure
account for the year 20X2.
If a member dies before the life period, the remaining amount should
be transferred to accumulated fund (capital).
In this case the investment will remain fixed over a period of years and
will be shown as non current asset in balance sheet.
The old timers Bowling Club has introduced a life membership scheme
for its members. It is decided that life membership will be for five
years i.e. any amounts received for life membership will be spread
over a period of five (5) years from year of payment.
At the start of the year ended 31 December 20X3, the amount on life
membership account stood at K7,480. Of this amount K1,850 should
be treated as subscriptions for the year 20X3.
During the year ended 31 December 20X3, some members had paid
another K3,000 for life membership.
Required:
Show how entries will be made in the subscriptions account and the life
membership account.
K K
Life membership 2450
K K
Subscription 2450 Balance 7480
Balance c/d 8030 Cash 3000
____ _____
10,480
10,480 Balance b/d
8030
Workings: 3,000 ÷ 5
= K600 per annum for new life members
+
1850 per annum for old life members
____
2450 amount deducted from life membership
account and
credited to subscriptions account for 20X3.
If profit or loss is made using (i) above, the profit or loss will be directly
added or subtracted – to or from accumulated fund in balance sheet.
Dr K K Cr.
Required:
EXERCISES
3. A club has 150 members who pay K10 each for membership. The
opening subscription receivable was K70 and 5 members had paid
subscriptions in advance at the year end. How much money was
collected from members?
(a) K1,500
(b) K1,740
(c) K1,620
(d) K1,520
(a) K21,200
(b) K19,650
(c) K19,500
(d) K200,000
5. The accounting records of Up Hill cricket club are given in the following
trial balance as at 31 December 20X4:
Dr. Cr.
K K
Clubhouse 140,000
Equipment 18,000
Profits from raffles 6,000
Accumulated fund 40,000
Bar inventory 1 January 20X4 9,000
General expenses 31,500
Wages of bar workers 30,000
Subscription received 190,000
Bar purchases 40,000
Caretakers wages 20,400
Bar sales 90,000
Cash in hand 900
Cricket professional’s salary 36,200
326,000 326,000
Required:
INCOMPLETE RECORDS
INTRODUCTION
Sole traders do not often keep an elaborate set of books of accounts. The
books they keep comprise mainly a record of receipts and payments and file
of unpaid invoices in the correspondence file.
Joel Mutale is a sole trader and provides you with the following summarized
data . He would like you to prepare appropriate statements to show
1. Capital on 1 July 2004
2. Profit for the year ended 30 July 2005
3. A list of assets and liabilities as at 30 June 2005
The following additional notes were extracted from Joel’s correspondence box
files:
As at As at
1 July 2004 30 June 2005
K 000 K 000
Equipment 8 200 12 500
Inventory 3 200 4 500
Bank loan 10 000 10 000
Rates due 420 -
Rent prepaid - 380
Electricity owing 300 320
Trade receivables 6 300 8 400
Trade payables 3 800 4 600
As you settle down to do work, Joel tell you that he pays loan interest at 12 %
and there is an amount that is not yet paid. He further say that during the
year he received cash discounts of K 800 000, issued credit notes for K 450
000 and cancelled irrecoverable debts of K 325 000
SOLUTION
The ledger accounts follow then the Income Statement and Balance Sheet
finally. It is always better to draw up nominal accounts on separate pages
from the ones on which real and control accounts are. Doing so will facilitate
thoroughness in ensuring that no transfer to the Income Statement is
missed, and that work is properly organized.
TRADE RECEIVABLES
K 000 K 000
Balance b/d 6 300 Bank 42 870
Sales 59 045 Sales Returns 450
Cash 12 500
Discount All 800
Bad Debts 325
Balance c/d 8 400
65 345 65 345
Balance b/d 8 400
TRADE PAYABLES
K 000 K 000
Balance b/d 3 800
Purchases 34 800
Bank 34 000
EQUIPMENT
K 000 K 000
Balance b/d 8 200 P/L -Deprec 1 220
Bank 5 520
Balance c/d 12 500
13 720 13 720
Balance b/d 12 500
LOAN
K 000 K 000
Balance b/d 10 000
Balance c/d 10 000
10 000 10 000
Balance b/d 10 000
CAPITAL
K 000 K 000
Balance b/d 4 880
Balance c/d 4 880
4 880 4 880
Balance b/d 4 880
INVENTORY
K 000 K 000
Balance b/d 3 200
Trading c/d 3 200
3 200 3 200
PURCHASES
K 000 K 000
Trade Payables 34 800
Trading c/d 34 800
38 400 38 400
SALES RETURNS
K 000 K 000
Trade Receivable 450
Trading c/d 450
450 450
SALES
K 000 K 000
Cash 4 200
Trade Receivables 59 045
Trading c/d 63 245
63 245 63 245
BAD DEBTS
K 000 K 000
Balance b/d 325
P/L c/d 325
325 325
DISCOUNT ALLOWED
K 000 K 000
Trade Receivables 800
P/L c/d 800
800 800
DEPRECIATION
K 000 K 000
Equipment 1 220
P/L c/d 1 220
1 220 1 220
STATIONERY
K 000 K 000
Bank 2 700
P/L c/d 2 700
2 700 2 700
K 000 K 000
Bank 8 300
P/L c/d 8 300
8 300 8 300
LOAN INTEREST
K 000 K 000
Bank 700 P/L c/d 1 200
Balance c/d 500
700 700
Balance b/d 500
INSURANCE
K 000 K 000
Bank 909
P/L c/d 909
909 909
K 000 K 000
Balance b/d 420
Bank 3 640 P/L c/d 2 840
Balance c/d 380
3 640 3 640
Balance b/d 380
ELECTRICITY
K 000 K 000
Balance b/d 300
Bank 1 580 P/L c/d 1 600
Balance c/d 320
1 900 1 900
Balance b/d 320
DRAWINGS
K 000 K 000
Bank 1 200
Capital c/d 1 200
1 200 1 200
COMMISSION
K 000 K 000
Bank 3 700
P/L c/d 3 700
3 700 3 700
COST OF SALES
K 000 K 000
Inventory b/d 3 200
Purchases 34 800 Trading (I/S) 33 500
Inventory c/d 4 500
38 000 38 000
Inventory b/d 4 500
COMMENTS
The full ledger accounts have been written here to illustrate how they would
be drawn up in practice. A student who has understood the principles of
double entry would list the amounts straight on the Income Statement,
depending on whether the amount is earned/incurred or not. For example,
the amounts to charge as expenses in respect of Electricity and Rent & Rates
are shown below:
ELECTRICITY
Amount paid 1 580
Add: Amount owing at end 320 Incurred but not yet paid for
1 900
Less: Amounts owing at start 300 settled now but incurred last year
Profit & Loss charge 1 600 Incurred for this year only
The rationale flows because referring to the accounts, amounts on the same
side are added, whereas amounts on the opposite sides of an account are
netted. This logic can be applied to any account without exception. You only
need to understand double entry and the format of ledger accounts.
JOEL MUTALE
INCOME STATEMENT for the year ended 30 June 2005
K000 K000
Sales (less Sales Returns) 62 795
Less: Cost of Sales 33 500
Gross Profit 29 295
Add: Income
Commission received 3 700
32 995
Less: Expenses
Bad Debts 325
Discount Allowed 800
Depreciation 1 220
Electricity 1 600
Rent & Rates 2 840
Insurance 909
Loan Interest 1 200
Wages & Salaries 8 300
Stationery 2 700
19 894
Net Profit 13 101
Joel Mutale
BALANCE SHEET as at 30 June 2005
Km Km
Non current Assets:
Equipment 12 500
Current Assets:
Inventory 4 500
Trade receivables 8 400
Rent & Rates 380
Cash at bank & in hand 10 980
24 260
Total assets 36 760
Capital
Balance at start 4 880
Add: Net Profit 13 101
Current Liabilities:
Trade Payables 4 600
Loan Interest 500
Electricity 320
Bank Overdraft 4 559
9 979
36 760
Note also that depreciation has been deducted directly from Equipment
account because the closing balance given for this account imply that non
current assets are kept at their net book value (not at cost, in which case
there would be a separate account for Accumulated depreciation).
INCOMPLETE RECORDS
EXERCISE
Mpomwa has been trading for the last five years. He has been using the front
half of the house he has rented as a shop, with the consent of the landlord.
Mpomwa maintains no formal accounting system for the purpose of
recording business transactions. He, however, needs to calculate the profit
earned during the year 2006 for tax purposes.
RECEIPTS: K000
Cash from customers 48 120
Sales of private motor car 650
Total 48 770
PAYMENTS:
Cash paid to suppliers 32 890
Rent of entire premises 2 400
Wages of part-time staff 760
New counter and shelving 800
General expenses 3 650
Drawings 5 870
Total 46 370
REQUIRED:
CHAPTER 26
CASHFLOW STATEMENTS
INTRODUCTION
In this chapter we discuss the contents of IAS 7 and the essence of preparing
a cash flow statement.
TOPICS
LEARNING OBJECTIVES
The cashflow statement provides information about the sources of cash and
the uses to which cash was put for a specified period. Some writers refer to
these as sources and applications of cash. Admittedly the information on
cash can be obtained from the cash and bank accounts in the Cashbook. In
practice the cash transactions are so numerous that it becomes tedious to
obtain cashflow information from the Cashbook. Consequently, the entries
for cashflows are obtained from individual ledger accounts where they are
already summarised.
Cashfow: The volume of cash that comes into and goes out of the
business for a given period of time.
Cash flows are classified under three major headings in the cashflow
statements: operating activities, investing activities and financing activities.
The format below outline the contents of a cash flow statement as required
by IAS 7.
Under the direct method cashflow figures are obtained from the ledger
accounts for trade receivables, trade payables and expenses. Depending on
the information provided there might be need to adjust the cashflow figure
with amounts for non cash items such as depreciation and
increases/decreases in allowances for bad debts.
ABC Ltd
CASHFLOW STATEMENT (DIRECT METHOD)
for the year ended 31 December 2005
K000 K 000
Cashflow from Operating Activities:
Receipts from customers X
Payments to suppliers X
Payments for expenses X
X
Adjustments for Non-cash items:
Depreciation X
Loss on sale of non current assets X
Decrease in provisions for bad debts X
X
Net cashflow from Operating profit X
Interest paid X
Income tax X
Dividends paid X
Net cash from operating activities X
There are two methods of preparing cashflow statements: The direct method
and the indirect method. The difference between the two methods lies in the
way cashflow from operating activities is calculated.
ABC Ltd
CASHFLOW STATEMENT (INDIRECT METHOD)
for the year ended 31 December 2005
K000 K 000
Cashflow from Operating Activities:
Profit before tax X
Adjustments for Non-cash items:
Depreciation X
Loss on sale of non current assets X
Decrease in provisions for bad debts X
X
Changes in working capital:
Decrease in inventory X
Increase in debtors X
Increase in creditors X
X
Net cashflow from operating profit X
Interest paid X
Income tax paid X
Dividends paid X
Net cash from operating activities X
Under the indirect method operating activities is adjusted from the accruals
figure to a pure cashflow amount with non-cash items and movements in
working capital. The rest of the cashflow statement is prepared as is done
under the direct method. You should be able to obtain cashflow figures from
the appropriate accounts by applying knowledge acquired in previous
chapters. The cashflow figure is the entry that goes to the account from
either the cash account of bank account.
We now use a question to illustrate how to prepare the cash flow statement.
ILLUSTRATION
The balance sheets of Prenodia Plc as at 30 June 2004 and 2005 and the
summary income Statement for the year ended 30 June 2005 were as
follows:
2004 2005
Km Km Km Km
Non current Assets:
Premises 130 130
Less: Accumulated Depreciation 30 32
100 98
Plant & Machinery 70 80
Less: Accumulated Depreciation 17 23
53 57
Current Assets:
Inventory 25 24
Trade receivables 16 26
Short term investments - 12
Cash at bank & in hand - 7
41 69
Total assets 194 224
Current Liabilities:
Trade Payables 19 22
Income Tax 7 8
Proposed dividend 12 14
38 44
194 224
Prenodia
Income Statement for the year ended 30 June 2005
Km Km
Sales 173
Less: Cost of Sales 96
Gross Profit 77
Less: Expenses
Sundry expenses 24
Interest payable 2
Loss on sale of non current assets 1
Depreciation –Premises 2
Depreciation –Plant 16
45
Operating profit 32
Interest receivable 2
Profit before tax 34
Income Tax (16)
Profit after tax 18
Proposed dividend (14)
Retained profit for the year 4
ADDITIONAL INFORMATION
During the year a machine costing K15 was sold for K 4m. Depreciation on
the machine had accumulated to K10m.
REQUIRED
Prepare a cashflow statement for Prenodia Plc for the year ended 30 June
2005
SOLUTION
The following part of the cashflow statement can be done as a working in the
notes to the statement or it can be included on the main Cashflow
Statement.
Direct method
Cash flow from Operating Activities:
Km Km
Receipts from customers 163
Payments to suppliers (92)
Payments for expenses (45)
26
Adjustments for Non-cash items:
Depreciation 18
Loss on sale of non current assets 1
Interest payable (Has its own entry ) 2
21
Net cash flow from Operating profit 47
Indirect method Km Km
Cash flow from Operating Activities:
Profit before tax 34
Interest payable (Has its own entry on the statement) 2
Interest receivable (Has its own entry on the statement) (2)
Adjustments for Non-cash items:
Depreciation (2 + 16) 18
Loss on sale of non current assets 1
Decrease in provisions for bad debts -
19
Movements in working capital:
Decrease in inventory 1
Increase in trade receivables (10)
Increase in trade payables 3
(6)
Net cash flow from operating profit 47
Net cash flow from operating profit has been calculated in different ways
under the two methods. Under the direct method the figure of expenses was
obtained straight from the Income Statement and so it is a figure after
deducting depreciation and loss on disposal. Consequently it was necessary
to adjust for these non-cash items. Otherwise they would not have been
added back to net profit.
Under the indirect method interest was adjusted for because it is dealt with
separately on the face of the Cash flow Statement. This reversal was not
necessary for interest receivable under the direct method because it was not
part of the expenses figure mentioned above.
The rest of the cashflow statement is completed in the same way under both
methods as follows:
The following are the steps to follow when obtaining cash flow figures from
ledger accounts:
1. Write the account and, using the information in the balance sheet as at
the end of the preceding year, put the opening balance on the side it
would appear depending on whether it is an asset or a liability.
2. Using information from the balance sheet as at the end of the current
year, insert the closing balances on the account on the side they would
be above total lines and below total lines depending on whether they
are assets or liabilities.
3. In between the two balances (enough space should have been left for
this depending on the expected number of entries) project ‘back
wards’ the figure from the income statement on the side it would be
when the entry for the transfer of funds to the trading, profit and loss
was made.
4. Complete the account, slotting in the missing figure on the side with a
smaller total. This figure is the amount of cash flow, the entry from
either the bank account or cash account.
The accounts are now shown below with the cashflow figure highlighted in
bolt type.
TRADE RECEIVABLES
Balance B/d 16 Bank 163
Sales 173 Balance c/d 26
189 189
Balance b/d 26
PURCHASES
Inventory 95
Trade Payables 95 Balance c/d 0
95 95
TRADE PAYABLES
Balance B/d 19
Bank 92 Purchases 95
Balance c/d 22
114 114
Balance b/d 22
DIVIDEND
Balance B/d 12
Bank 12 IS 14
Balance c/d 14
26 26
Balance b/d 14
TAXATION
Balance B/d 7
Bank 15 Income statement 16
Balance c/d 8
23 23
Balance b/d 8
ACCUMULATED DEPRECIATION
OTHER OBSERVATIONS
The cash flow from debentures is simply the difference between the closing
balance and the opening balance. There being an increase of K20m then this
was a credit entry in the account implying that the debit was in the bank
account. The debit in the bank account represents a cash inflow.
CHAPTER SUMMARY
EXERCISES
QUESTION ONE
The balance sheet given below together with comparative figures are a for
Tokozile Ltd, a private company that has been operating for the last three
years.
TOKOZILE LTD
BALANCE SHEET AS AT 30 JUNE
2006 2005
K000 K000 K000 K000
Non current assets:
Property, plant & equip 2 800 2 100
Accumulated depreciation (650)
(490)
2 150 1 610
Current assets:
Inventory 1 100 850
Trade receivables 540 470
Bank 120 -
1 760 1 320
Total assets 3 910 2 930
2 860 2 465
Non current liabilities:
Loan notes 340 140
Current liabilities:
Trade payables 430 110
Bank overdraft - 45
Taxation 280 170
710 325
3 910 2 930
Additional information:
a) During the year the company sold a piece of equipment with a net
book value of K 135,000 at a profit of K75,000.
b) Depreciation charged for the year ended 30 June 2006 was
K220,000.
c) Interest paid during the year ended 30 June 2006 was K37,000.
d) Income tax paid during the year amounted to K 230,000.
e) The company paid no dividend in the year under review.
REQUIRED:
(a) Calculate the operating profit of Tokozile Ltd for the year ended 30
June 2006
(b) Prepare a cashflow statement for Tokozile Ltd for the year ended
30 June 2006 in accordance with IAS 7 (revised).
QUESTION TWO
KONKOLA
INCOME STATEMENT for the year ended 31 March 2007
K000 K000
Revenue 2,150
Cost of sales (1,250)
Gross profit 900
Distribution cost 98
Administration expenses 122
(220)
Operating profit 680
Profit on disposal of non current assets 12
Dividend received 14
Interest paid (36)
(10)
Profit before tax 670
Taxation (132)
Profit after tax 538
1,440 2,240
Non current liabilities:
Loan notes 160 60
Current liabilities:
Trade payables 540 565
Proposed dividend 35 80
Taxation 105 125
680 770
2,280 3,070
a) Vehicles which had cost K145 000 were sold during the year when
their net book value was K 55,000.
b) There were no accruals or prepaid expenses at the end of the year.
REQUIRED:
SOLUTION TO EXERCISES
SOLUTION ONE
Workings:
Calculation of operating profit:
Retained profit at end –30 June 2006 400
Retained profit at end –30 June 2005 865
Loss for the year 2006 (465)
Add: Dividend -
Taxation 340
Interest charge 37
Operating loss (88)
ACCUMULATED DEPRECIATION
TAXATION
SOLUTION TWO
Direct method
Cash flow from Operating Activities:
K000 K000
Receipts from customers 1,932
Payments to suppliers (1066)
Payments for expenses (220)
646
Adjustments for Non-cash items:
Depreciation -Furniture 55
Depreciation –Motor Vehicles 135
190
Net cash flow from Operating profit 836
TRADE RECEIVABLES
PURCHASES
Inventory 1,091
Trade Payables 1,091 0000
1,091 1,091
TRADE PAYABLES
DIVIDEND
Balance B/d 35
Bank 53 IS 98
Balance c/d 80
133 133
Balance b/d 80
TAXATION
MOTOR VEHICLE
KONKOLA
CASHFLOW STATEMENT For the year ended 31 March 2007
K000 K000
Cashflow from Operating Activities:
Net cash flow from operating profit(W1) 836
Interest paid (36)
Income tax paid (112)
Dividends paid (53)
Net cash from operating activities 635
COMPANY ACCOUNTS
INTRODUCTION
TOPICS
1. Company finance
2. Classes of shares
3. Debentures
4. Issue of shares
5. Share capital structure
6. Preparation of financial statements
LEARNING OUTCOMES
a) Ordinary shares
These are the normal shares issued by the company. The normal
rights of ordinary
shareholders are to vote at company meetings and to receive
dividends from the
remainder of profits.
b) Preference shares
These are shares carrying a fixed rate of dividend, the shareholders
of which have a
prior claim to any company profits for distribution. Preference shares
do not carry
a voting right. Preference shares could either be cumulative or non-
cumulative.
26.3 Debentures
This is a written acknowledgement of a loan to a company, given under
the
company's seal, which carries a fixed rate of interest. The conditions
and regulations
of the debenture are set out in a debenture trust deed.
Debentures are not part of the company's share capital - they are third
party liabilities.
Debenture interest is a charge against profit and must be paid whether
or not a company makes profit.
Each share issued has a stated nominal value (also called a par value),
for example
20 000 shares of K1 each, the K1 per share is the nominal value.
Shares could be issued at par value or at a premium. The double entry
for recording the issue of shares is as follows:
Dr - Cash book
Cr - Share capital account
For example, suppose 100 000 ordinary shares of K1 each are issued
at nominal value. The ledger accounts recording this issue will be as
shown below:
Bank account
___________________________________________________________________
K'000 K'000
Ordinary share capital 100
Dr - Cash book
Cr - Share capital account, with nominal value
Cr - Share premium account, with excess over the nominal value
Dr - Reserves
Cr - Share capital, with the amount of bonus issue
iv) Paid-up share capital: - is that part of the nominal value that is
paid at current date.
v) Calls in arrears: - is the amount requested for (called for) but not
yet received.
ACTIVITY 1
Hightech Ltd was formed with the legal right to be able issue 100 000
shares of K100 each. The company has actually issued 80 000 shares.
None of these shares have been fully paid up. So far the company has
made calls of K60 per share. All the calls have been paid by shareholders
except for K200 000 unpaid by one shareholder.
The double entry bookkeeping for both the interim dividend and final
dividend is as
follows:
The total of the interim dividend and the final dividend appear in the
income
statement but it is only the final proposed dividend that will appear
in the balance
sheet as a liability.
a) Capital reserve
b) Revenue reserve
Example:
You are provided with the following Trial Balance of Hightech Ltd at 31st
December
2006:
Dr Cr
K'000 K'000
Ordinary share capital (K1 000 shares) 400 000
10% preference share capital (K1 000 shares) 120 000
Freehold Premises at cost 920 000
Provision for depreciation - buildings 400 000
Plant and machinery (cost K300 million) 180 000
Sales 364 000
Purchases 196 000
Carriage inwards 4 000
Receivables and Payables 64 000 8 000
You are required to prepare the Income Statement for the year ended 31st
December 2006 and a Balance Sheet as at that date.
SOLUTION
Hightech Ltd
Income statement for the year ended 31st December 2006
K’000 K’000
Sales revenue 364 000
Opening inventory 40 000
Purchases 196 000
Carriage inwards 4 000
240 000
Less: closing inventory 60 000
Cost of sales 180 000
Gross profit 184 000
Add Gains:
Discount received 800
Total income 184 800
Less Expenses:
Discount allowed 1 600
Carriage outwards 3 200
Administrative expenses 16 000
Staff salaries 16 000
Directors' salaries accrued 20 000
Audit fee accrued 4 000
Depreciation: - buildings 18 400
- Plant and machinery 30 000
Debenture interest 20 000
Total expenses 129 200
Net profit before tax 55 600
Less: Income tax 8 600
Net profit after tax 47 000
Transfer to plant replacement reserve 4 000
Dividends: - Preference (paid) 4 000
- Preference (proposed) 8 000
- Ordinary (proposed) 4 000
20 000
Retained profit for the year 27 000
Retained earnings b/d 32 000
Retained earnings c/d 59 000
Hightech Ltd
Balance sheet as at 31st December 2006
Cost Dep. Value
Non current assets: K’000 K’000
K’000
Freehold land and buildings 920 000 418 400
501 600
Plant and machinery 300 000 150 000
150 000
1 220 000 598 400 651
600
Current assets:
Inventory 60 000
Receivables 64 000
Cash at bank 60 000
184
000
Total assets 835
600
583 000
Non-current liabilities
10% debentures 2009 200
000
Current liabilities
Payables 8 000
Taxation 8 600
Dividends payable (4 000 + 8 000) 12 000
Accruals (20 000 + 4 000) 24 000
52 600
Total Equity and liabilities 835
600
CHAPTER SUMMARY
The chapter has also looked at the preparation of financial statements for
internal use in a company.
EXERCISES
QUESTION ONE
You are presented with the following summarised Trial Balance of MK Ltd in
respect of the year ended 31st March 2007:
Dr Cr
K'000 K'000
Ordinary share capital (K500 shares) 200 000
Plant and machinery:
Cost 616 000
Depreciation (1 April 2006)
st
170 000
Receivables 104 000
Payables 76 000
Cash at bank 82 000
Inventory at 1st April 2006 180 000
Sales 2 000 000
Purchases 1 542 000
9% debentures 2010 150 000
Share premium account 40 000
Administrative costs 200 000
Provision for doubtful debts 4 000
Interim dividends paid 6 000
Profit and loss account balance 90 000
2 730 000 2 730 000
The following final adjustments are required:
You are required to prepare the Income Statement account for the year
ended 31st March 2007 and a Balance Sheet as at that date.
QUESTION TWO
The following Trial Balance was extracted from the books of Hillside Plc at
31st March 2006:
K’000 K’000
K1 000 ordinary shares 200 000
8% K1 000 preference shares 70
000
7% debentures 100 000
Land and buildings: cost 130 000
Accumulated depreciation on buildings on 1 April 2005
st
30 000
Plant and machinery (K348 million cost) 262 500
Motor vans at cost 140 000
Accumulated depreciation on vans on 1 April 2005
st
56
800
Profit and loss account b/f 20 000
Share premium account 60
200
Inventory at 1st April 2005 35 000
Sales 344 600
Trade Receivables and Payables 45 000 27
000
Bank 5 800
Purchases 166 100
Distribution costs 18 000
General administration expenses 44 900
Debenture interest 7 000
Interim dividends:
Ordinary 10 000
Preference 2 800
Allowance for doubtful debts 1
500
890 100 890 100
a) A new motor van was purchased on 1st January 2006 on credit for K24
million. The amount was still due to the supplier on 31st March 2006.
b) A motor van which had cost K16 million four years ago when new was
sold for
K6.6 million. The proceeds from the sale had not yet been received on
31 March
st
2006.
None of the above matters had been recorded in the books of the
company.
5. On 31st March 2006 the company issued bonus shares to the ordinary
shareholders on a one (1) to ten (10) basis. No entry relating to this has
yet been made in the books.
6. Inventory at 31st March 2006 was valued at K51 million.
7. A bill for administrative expenses for K150 000 was unsettled as at 31st
March 2006.
Required:
a) Using additional information (1) and (2), prepare the following ledger
accounts:
(14 marks)
(NATech: December 2006)
SOLUTIONS TO EXERCISES
SOLUTION ONE
MK Ltd
Income statement for the year ended 31st March 2007
K’000 K’000
Sales revenue 2 000 000
Opening inventory 180 000
Purchases 1 542 000
1 722 000
Less: closing inventory 122 000
Cost of sales 1 600 000
Gross profit 400 000
Less Expenses:
Administrative expenses 200 000
Increase in allowance for doubtful debts 1 200
Debenture interest accrued (9% x 150 000) 13 500
Depreciation on Plant and machinery 61 600
Total expenses 276 300
Net profit before tax 123 700
Less: Income tax 62 400
Net profit after tax 61 300
Dividends: - interim 6 000
- proposed 24 000
30 000
Retained profit for the year 31 300
Retained earnings b/d 90 000
Retained earnings c/d 121 300
MK Ltd
Balance sheet as at 31st March 2007
Cost Dep. Value
Non current assets: K’000 K’000
K’000
Plant and machinery 616 000 231 600
384 400
Current assets:
Inventory 122 000
Receivables (104 000 – 5 200) 98 800
Cash at bank 82 000
302
800
Total assets 687
200
361 300
Non-current liabilities
9% debentures 2009 150
000
Current liabilities
Payables 76 000
Taxation 62 400
Dividends payable 24 000
Accruals 13 500
175 900
Total Equity and liabilities 687
200
SOLUTION TWO
c) Hillside Plc
Balance Sheet as at 31st March 2006.
COST DEP.
NBV
Non-current Assets: K’000 K’000
K’000
Land and buildings 130 000 32 000
98 000
Plant and machinery 348 000 120 300
227 700
Motor van 148 000 73 600 74
400
626 000 225 700
400 100
Current Assets:
Inventory 51 000
Trade receivables 48 000
Less: allowance for doubtful debts 1 200
46 800
Receivable for the motor van 6 600
Bank 5 800
Prepayment 50
110 250
Total assets
510 350
Current liabilities:
Trade payables 10 000
Creditor for the motor van 24 000
Taxation 18 000
Dividends payable - preference 2 800
- ordinary 11 000
Accrual 150
82
950
Total Equity and liabilities 510
350
CHAPTER 27
ACCOUNTING CONCEPTS AND PRINCIPLES
INTRODUCTION
This chapter looks at the accounting concepts and principles which underlie
the preparation of financial statements. Some of these concepts have
already been explained in the previous chapters.
TOPICS
LEARNING OUTCOMES
- These concepts are not necessarily obvious, nor are the only
concepts which could
be used, but they the ones in use currently.
- These concepts look at why certain items are treated in specific ways
and
a) Fair Presentation
b) Going Concern
c) Accruals
d) Consistency
a) Fair Presentation
Fair presentation requires the faithful representation of the effects
of transactions,
other events and conditions in accordance with the definitions and
recognition
criteria for assets, liabilities, income and expenses.
OTHER CONCEPTS
e) Prudence Concept
This states that where alternative procedures or alternative
valuations, are possible,
the one selected should be the one which gives the most cautious
presentation of
the business financial position or results.
k) Neutrality/Objective Concept
This states that accountants should be free from bias when
preparing financial
statements e.g. internally generated goodwill should not be
recorded in the books
because of its uncertainty as to its true value.
CHAPTER SUMMARY
The chapter has looked at the accounting concepts and principles that
underlie the preparation of Financial Statements. Accounting concepts
influence the assets, liabilities, income and expenditure and the amounts at
which these are recorded in the balance sheet.
CHAPTER 28
INTRODUCTION
TOPICS
LEARNING OUTCOMES
1. Profitability ratios
2. Liquidity ratios
3. Efficiency ratios
4. Solvency ratios
5. Investors’ ratios
Formula:
The capital employed is taken to be the total assets less current liabilities
of the
business or share capital plus reserves plus long term liabilities. This
ratio is further
broken down into two ratios:
Formula:
Formula:
Formula:
Gross profit margin = Gross profit x 100
Turnover
These ratios indicate how capable a business is in meeting its short term
obligations as they fall due.
a) Current ratio
The ratio, also referred to as the working capital ratio, measures
whether the business can
pay debts due within one year from assets that it expects to turn into
cash within that year.
A ratio of less than one (1) is often a course of concern, particularly if it
persists for any
length of time.
Formula:
Formula:
Note: Higher current and quick ratios are not always good indicators.
Sometimes, this may
indicate that working capital is inefficiently used. The efficiency
ratios below will
highlight this. In other words, such ratios should be within
acceptable range, i.e. not
too high and not too low.
These ratios tell us how efficiently the business is employing the resources
invested into fixed assets and working capital.
Formula:
Formula:
b) Receivables turnover
This ratio shows the average period taken by receivables to pay. It
indicates whether the
receivables are being allowed excessive credit. A decreasing trade
receivables turnover
figure or one less than the industry average may suggest general
problems with debt
collection (such as delays in invoicing or failure to screen the credit
worthiness of new
customers) or the financial position of major customers.
Formula:
Formula:
d) Payables turnover
This ratio tells us whether a business is taking full advantage of full trade
credit available to
it. A decreasing trade payables turnover or one lower than the average
industry indicates
that you are taking longer to pay suppliers. This may not give any room
to the business to
be able to negotiate better credit terms from suppliers, cash discounts
lost and future supplies
being at risk.
Formula:
Trade payables turnover = Credit Purchases
Trade payables
Formula:
Note: Where the purchases figure can not be calculated then the cost of
sales figure
may be used.
Formula:
a) Total gearing
This ratio shows the proportion of the company’s assets which are
financial by
borrowing and so gives an indication of the amount of further secured
borrowings that
might be undertaken.
Formula:
Formula:
Interest cover
This measures the ability of the business to service its debts. The ratio
answers the
question: Are the profits sufficient to be able to pay interest and other
finance obligations?
A high rate indicates that the company is in a strong position (security) as
regards payment
of interest. The measure should indicate the number of times the profits
can meet interest
obligations.
Formula:
Formula:
b) Dividend Cover
This ratio shows the proportion of profit on ordinary activities that is
available for
distribution to shareholders and what proportion will be retained in the
business to finance
future growth. A dividend cover of 2 times would indicate that the
company had paid 50%
of its distributable profits as dividends, and retained 50% in the business
to help finance
future operations. A decreasing dividend cover would indicate a fall in
profits but the
dividend level is maintained as in the previous years, so as to keep
shareholder expectations
satisfied.
Formula:
c) Dividend yield
Dividend yield is the return a shareholder is currently expecting on the
shares of a
company. On the stock market the dividend yield is normally stated gross
of tax. This
enables the yield on shares to be compared with yields on interest stocks
(company and
government stocks).
Formula:
Dividend yield = Dividend on the share for the year x 100
Current market value of the share
Formula:
Formula:
f) Earnings yield
Earnings yield is measured as earnings per share expressed as a
percentage of the
current share price. It indicates what the dividend yield would be if the
company paid
out all its profits as dividends and retained nothing in the business.
Formula:
Profit and loss account for the year ended 31st December 2006
K’000 K’000
Sales revenue 209 000
Opening inventory 37 000
Purchases 162 000
199 000
Closing inventory 42 000
157 000
Gross profit 52 000
Distribution costs 10 000
Administration expenses 13 000
Interest 2 000
25 000
Net profit 27 000
Taxation 10 000
Net profit after taxation 17 000
Dividends: Ordinary shares 6 000
Preference shares 2 000
8 000
Retained profit for the year 9 000
From the above details, you are required to calculate the following ratios:
SOLUTION
d) Current ratio
Current ratio = Current assets
Current liabilities
e) Quick ratio
Quick ratio = Current assets – Inventory
Current liabilities
g) Inventory days
Inventory days = Average inventory x 365 days
Cost of sales
h) Receivables turnover
Receivables turnover = Credit Sales
Trade receivables
j) Payables turnover
Trade payables turnover = Credit Purchases
Trade payables
m) Total gearing
Total gearing = Preference share capital + interest bearing loans x 100
Assets employed (or Total capital)
o) Interest cover
Interest cover = Profit before interest and tax
Interest payable on loans
q) Dividend Cover
Dividend cover = Profit for the financial year or = Earnings per
share
Ordinary dividend Net dividend per share
r) Dividend yield
Dividend yield = Dividend on the share for the year x 100
Current market value of the share
= 86 x 100 = 4.2%
2 040
= 2 040 = 9.5
214
u) Earnings yield
Earnings yield = Earnings per share x 100
Current market value
Example:
The following information has been extracted from the published accounts of
Gideon Plc.
Required:
a) Calculate comparable ratios (to two decimal places where appropriate) for
Gideon Plc for the years 2003 and 2004.
SOLUTION
a)
365
= 40 days = 40 days
000 x 365
= 37 days = 32 days
ii) Comments:
Liquidity ratios:
The current ratio has improved slightly over the year and is
marginally higher than the industry average.
The quick ratio has declined marginally but is still better than the
industry average.
This suggests that Austin Plc has no short term liquidity problems
and should have
no difficulty in paying its debts as they become due.
Efficiency ratios:
Inventory turnover has fallen slightly and is much lower than the
industry average.
The chapter has looked at the Accounting Ratios used in interpreting the
financial performance and position of companies. The four main categories
of accounting ratios are: Profitability, Liquidity, Efficiency, Solvency and
Gearing. Calculating one ratio is not an end in itself, but should help one
draw conclusions about the company. You should also remember that ratio
analysis has its own draw backs such as being subjective and being based on
historical information.
Overall, ratios are very useful in interpreting the financial performance and
position of companies beyond the traditional income statement and balance
sheet. When used appropriately they are good tools in predicting the future
outcome of the company.
EXERCISES
QUESTION ONE
The following are the summarised financial statements for X Ltd for 2005 and
2006:
Required:
The following ratios were calculated from the financial statements of H Ltd
and G Ltd:
H Ltd G Ltd
Profitability
Return on capital employed 27.5% 15.5%
Gross profit margin 34% 28%
Net profit/sales ratio 19% 15%
Gearing
Total gearing 29.5% 13.5%
Interest cover 6 times 9 times
Liquidity
Current ratio 1.0 1.4
Quick ratio 0.6 1.0
Efficiency
Receivables collection period 63 days 250 days
Inventory turnover 4.5 times 3 times
SOLUTIONS TO EXERCISES
SOLUTION ONE
a)
2005 2006
= 28.5% 29.6%
= 2.5 2.3
= 1.4 1.2
The earnings per share have increased by K54 per share. This is due to
the improved profits
in 2006. The dividends cover has improved. This is as a result of the
decrease in profits
paid out as dividends which is not proportional to the increase in profits.
SOLUTION TWO
Profitability
H Ltd has performed better than G Ltd both in terms of profitability to capital
employed and profitability to sales.
Gearing
H Ltd is highly geared in comparison to G Ltd. G Ltd has a better interest
cover that H Ltd. However, the interest cover for H Ltd of 6 times is quite
good despite the company having a high gearing ratio. This might indicate
that H Ltd used the funds borrowed to acquired profit generating assets.
Liquidity
G Ltd shows better current and quick ratios than H Ltd, indicating a better
liquidity position. A comparison with the industry average would help to
identify as to how poor or good the ratios of the two companies are.
Efficiency
H Ltd has better receivables collection period and inventory turnover than G
Ltd. The receivables collection period is too long for G Ltd which might
indicate that G Ltd has a poor credit control policy.
Conclusion
Provided that the two companies are in the same industry and are of the
same size, then it can be concluded that H Ltd’s finance performance and
position is better than that of G Ltd.
CHAPTER 29
MANUFACTURING ACCOUNTS
INTRODUCTION
TOPICS
1. Manufacturing account
2. Work in progress
3. Transfers of goods at market value
4. Provision for unrealized profits
LEARNING OUTCOMES
Direct materials, labour, and expenses are all those costs involved in
production that are traceable to units of goods produced. The total of all
direct costs incurred in a year is called the prime cost. Production
overheads are all those costs incurred in a factory, but cannot be easily
traced to the units of goods produced.
At the end of the year, the cost of goods manufactured is then transferred,
as the figure equivalent to purchases, to the income statement.
Example:
Joshua Muleya is a manufacturer. His Trial Balance as at 31st December 2006
is as follows:
Dr Cr
K’000 K’000
Capital 274 912
Drawings 17 120
Premises 80 000
Machinery 65 000
Office equipment 22 000
Delivery van expenses 5 000
Lighting and heating: Factory 5 718
Office 2 220
Manufacturing wages 90 940
General expenses: Office 7 632
Factory 11 280
Purchases of raw materials 78 108
Salesmen commission 15 720
Rent: Factory 9 600
Office 4 400
Office salaries 12 570
Receivables and Payables 56 740 38 900
Bank 26 674
Sales revenue 273 000
Inventory at 1st January 2006:
Raw materials 15 130
Finished goods 48 500
Work in progress 10 460 ______
586 812 586 812
Additional information:
Required: From the above details, prepare the Manufacturing Account, the
Income Statement for the year ended 31st December 2006 and a Balance
Sheet as at that date.
SOLUTION:
Joshua Muleya
Manufacturing account for the year ended 31st December 2006
K’000 K’000
Raw materials:
Opening inventory 17 130
Purchases 78 108
Total inventory available 95 238
Less: closing inventory 18 100
Cost of raw materials consumed 77 138
Direct labour:
Wages 90 940
Prime cost 168 078
Add: production overheads:
Lighting and heating 5 718
General expenses 11 280
Rent 9 600
26 598
194 676
Add: opening work in progress 10 460
205 136
Less: closing work in progress 12 840
Production cost 192 296
Joshua Muleya
Income Statement for the year ended 31st December 2006
K’000 K’000
Sales revenue 273 000
Opening inventory 48 500
Production cost 192 296
240 796
Less: closing inventory 49 560
Cost of sales 191 236
Gross profit 81 764
Less expenses:
Administrative expenses 5 000
Lighting and heating 2 220
General expenses 7 632
Rent 4 400
Office salaries 12 570
Salesmen's commission 15 720
Total expenses 47 542
Net profit 34 222
Joshua Muleya
Balance sheet as at 31st December 2006
Cost Dep. Value
Non-current assets: K’000 K’000
K’000
Premises 80 000 - 80
000
Machinery 65 000 - 65
000
Office equipment 22 000 - 22
000
167 000 - 167
000
Current assets:
Inventory: - Raw materials 18 100
- Work in progress 12 840
- Finished goods 49 560
Receivables 56 740
Cash at bank 26 674
163 914
Total assets 330
914
292 014
Current liabilities:
Payables 38 900
Total capital and liabilities 330
914
When goods are transferred at market value, there will be a balance in the
manufacturing account representing a profit or a loss arising from
manufacturing the goods instead of buying them as finished products. To
close the manufacturing account, the profit or loss should be transferred to
the income statement.
Example:
The following information has been extracted from the books of Meleki
manufacturing company for the year to 30th September 2006:
K'000
Deprecation for the year to 30th September 2006:
Factory equipment 21 000
Office equipment 12 000
Direct wages 120 000
Factory: insurance 3 000
Heat 45 000
Indirect materials 15 000
Power 60 000
Salaries 75 000
Finished goods at 1 October 2005
st
72 000
Office: electricity 55 000
General expenses 27 000
Postage and telephones 8 700
Salaries 210 000
Raw material purchases 600 000
Carriage inwards on raw materials 6 000
Raw material inventory at 1st October 2005 24 000
Advertising 6 000
Sales revenue 1 537 200
Work in progress at 1 October 2005
st
36 000
Notes:
4. For the purpose of inventory valuation, finished goods have been valued
at cost.
SOLUTION:
Example:
The following balances as at 31st December 2006 have been extracted from
the books of Simon Choolwe, a manufacturer:
K'000
Inventory at 1 January 2006:
st
Additional information:
4. Amounts accrued due on 31st December 2006 for direct labour amounted
to K3 000 000 and rent and rates prepaid at 31st December 2006
amounted to K2 000 000.
Required:
Prepare the Manufacturing Account, Income Statement for the year ended
31st December 2006, and a Balance Sheet as at that date.
SOLUTION:
Simon Choolwe
Manufacturing account for the year ended 31st December 2006
K’000 K’000
Raw materials:
Opening inventory 7 000
Purchases 38 000
Total inventory available 45 000
Less: closing inventory 9 000
Cost of raw materials consumed 36 000
Direct labour:
Wages 28 000
Add: wages accrued 3 000
31 000
Prime cost 67 000
Add: factory overheads:
Variable 16 000
Fixed 9 000
Depreciation - plant and machinery 3 000
28 000
95 000
Add: opening work in progress 5 000
100 000
Less: closing work in progress 8 000
Factory cost 92 000
Simon Choolwe
Income Statement for the year ended 31st December 2006
K’000 K’000 K’000
Sales revenue 192 000
Opening inventory 6 900
Market value 115 000
121 900
Less: closing inventory 10 350
Cost of sales 111 550
Gross profit on trading 80 450
Add: profit on manufacturing 23 000
103 450
Less expenses:
Rent and rates 19 000
Less: prepayment 2 000 17 000
Provision for unrealised profit (w1) 690
Heat and light 6 000
Stationery and postage 2 000
Staff salaries 19 380
Depreciation - motor vehicles 4 000
Motor vehicle running costs 4 500
Total expenses 53 570
Net profit 49 880
86 380
Current liabilities:
Payables 5 500
Direct labour accrued 3 000 8
500
94 880
Workings
1.
Allowance for Unrealised Profit Account
___________________________________________________________________
K'000 K'000
Balance c/d 2 070 Balance b/d 1
380
Income Statement
690
2 070 2 070
Note: Closing balance amount = K10 350 000 x /125 = K2 070 000
25
EXERCISES
QUESTION ONE
The following is a trial balance for J Mutinta as at 31st December 2006:
Dr Cr
K’000 K’000
Capital 59 360
Drawings 4 000
Productive machinery (cost K56m) 46 000
Accounting machinery (cost K4m) 2 400
Royalties 1 400
Carriage inwards on raw materials 700
Purchases of raw materials 74 000
Inventory at 1st January 2006:
Raw materials 4 200
Finished goods 7 780
Work in progress 2 700
Wages (direct K36m, factory K29m) 65 000
General factory expenses 6 200
Lighting 1 500
Factory power 2 740
Administrative salaries 8 800
Salesmen's salaries 6 000
Commission on sales 2 300
Rent 2 400
Insurance 840
General administrative expenses 2 680
Bank charges 460
Discount allowed 960
Carriage outwards 1 180
Receivables 28 460
Payables 25 000
Bank 11 360
Cash 300
Sales revenue 200 000
284 360 284 360
Required:
Prepare the Manufacturing Account, Income Statement for the year ended
31st December 2006 and a Balance sheet as at that date.
QUESTION TWO
The following trial balance was extracted from the books of Panuka Ltd after
completion of the manufacturing account for the year ended 31st March
2003.
Dr Cr
K’000 K’000
Ordinary share capital 40 000
7% preference share capital 20 000
Sales revenue 200 000
Production cost 106 400
Receivables 21 400
Payables 10 000
Inventory:
Finished goods (1st April 2002) 52 000
Raw materials (31st March 2003) 11 000
WIP (31st March 2003) 6 200
Premises at cost 35 000
Accumulated depreciation on buildings 2 000
Plant and machinery at cost 12 000
Depreciation on plant and machinery:
Accumulated provision 4 800
Charge for the year 1 200
Retained profit (1st April 2002) 27 080
Bank 8 528
Rent 3 500
General expenses 3 060
Distribution costs 21 316
Bad debts 400
Administrative salaries 21 615
Advertising expenses 5 590
Preference divided paid 700
Suspense 3 629
308 709 308 709
Additional information:
1. Closing inventory of finished goods on 31st March 2003 was valued at K46
600 000.
ii) The total of the discounts received column in the cash book, K120
000, had not
been posted to the nominal ledger.
iv) A sales invoice for K8 000 000 had been omitted from the sales
account.
v) A cheque issued for general expenses for K50 000 had been
posted to the debit
of the bank account.
Required:
a) Show the journal entries to correct the errors in six (6) above. Narratives
are not
required.
(5 marks)
b) Open up the suspense account to clear the difference in books.
(3 marks)
i) Panuka Ltd’s Income Statement for the year ended 31st March
2003.
(12 marks)
ii) Panuka Ltd’s Balance Sheet as at 31st March 2003.
(11 marks)
SOLUTIONS TO EXERCISES
SOLUTION ONE
J Mutinta
Manufacturing account for the year ended 31st December 2006
K’000 K’000
Raw materials:
Opening inventory 4 200
Purchases 74 000
Carriage inwards 700
Total inventory available 78 900
Less: closing inventory 4 800
Cost of raw materials consumed 74 100
Direct labour:
Wages 36 000
Direct expenses:
Royalties 1 400
Prime cost 111 500
Add: factory overheads:
Indirect wages 29 000
General factory expenses 6 200
Lighting (5/6 x 1 500) 1 250
Factory power 2 740
Rent (5/6 x 2 400) 2 000
Insurance ( /6 x 840)
5
700
Depreciation on productive machinery (10% x 56) 5 600
47 490
158 990
Add: opening work in progress 2 700
161 690
Less: closing work in progress 3 000
Production cost 158 690
J Mutinta
Income Statement for the year ended 31st December 2006
K’000 K’000 K’000
Sales revenue 200 000
Opening inventory 7 780
Market value 158 690
166 470
Less: closing inventory 8 000
Cost of sales 158 470
Gross profit 41 530
Less expenses:
Lighting (1/6 x 1 500) 250
Administrative salaries 8 800
Salesmen’s salaries 6 000
Commission on sales 2 300
Rent (1/6 x 2 400) 400
Insurance ( /6 x 840)
1
140
General administrative expenses 2 680
Bank charges 460
Discount allowed 960
Carriage outwards 1 180
Depreciation on accounting machine (10% x 4m) 400
Total expenses 23 570
Net profit 17 960
J Mutinta
Balance sheet as at 31st December 2006
Cost Dep. Value
Non current assets: K’000 K’000
K’000
Productive machinery 56 000 15 600
40 400
Accounting machinery 4 000 2 000
2 000
60 000 17 600
42 400
Current assets:
Inventories: - raw materials 4 800
- work in progress 3 000
- finished goods 8 000 15 800
Receivables 28 460
Cash at bank 11 360
Cash in hand 300
55 920
Total assets 98
320
Capital account
Balance on 1st January 2006 59 360
Add: net profit 17 960
77 320
Less: drawings 4 000 73
320
Current liabilities:
Payables 25 000
Total capital and liabilities 98
320
SOLUTION TWO
a) Journal entries
K’000 K’000
i) Receivables in Trial balance 4 600
Suspense 4 600
iii) Suspense 9
Administrative salaries 9
v) Suspense 100
Bank 100
b) Suspense Account
K’000
K’000
Discount Received 120 Balance b/d
3 629
Administrative salaries 9 Receivables in Trial balance
4 600
Sales revenue 8 000
Bank 100
8 229 8
229
c)
(i) Panuka Ltd Income Statement for the year ended 31st March
2003.
K’000 K’000
Sales revenue (200 000 + 8 000) 208 000
Opening inventory 52 000
Production cost 106 400
158 400
Less: closing inventory 46 600
Cost of sales 111 800
Gross profit 96 200
Add: Gains:
Discount received 120
Total income 96 320
Less: Expenses:
Rent [3 500 – (1680 ÷ 16 x 7 months)] 2 765
General expenses 3 060
Distribution costs 21 316
Bad debts 400
Administrative salaries (21 615 – 9) 21 606
Advertising expenses 5 590
Depreciation on Buildings 400
55 137
Profit before taxation 41 183
Less: Income tax 15 000
Profit after taxation 26 183
Dividends
Preference -paid 700
- proposed 700
Ordinary – proposed 4 000
5 400
Retained profit for the year 20 783
Add: Retained profit brought forward 17 080
Retained profit carried forward 37 863
COST DEP.
NBV
Non current Assets: K’000 K’000
K’000
Premises 35 000 2 400 32
600
Plant and machinery 12 000 6 000
6 000
47 000 8 400
38 600
Current Assets:
Inventory:
Finished goods 46 600
Raw materials 11 000
W-I-P 6 200
63 800
Receivables (21 400 + 4 600) 26 000
Bank (8 528 – 100) 8 428
Rent prepaid 735
98 963
Total assets 137
563
TERMINOLOGY
1. Assets: A resource or right under the entity’s control acquired as a result of a past
transaction or event, and the business expects to derive economic benefits as a result of
that control.
Items of possession and have value. The owner has a right of claim to the value of the
assets. An example would be inventory, trade receivables (debtors), cash, motor vehicles,
etc
A legal obligation to pay money or in kind to somebody else. An example would be a bank
loan, trade payables account balance, electricity bill still outstanding, etc.
4. A supplier: someone we buy trading goods from on credit. Consequently we owe him
money. An account for a supplier is called a trade payables account.
6. Credit transactions: Business trading activities in which goods or services are provided
without any immediate exchange of cash. The name of the outside entity is always
mentioned in a credit transaction because it is implied that actual cash will be paid or
received in future.
7. Cash can refer to amounts paid in notes and coins or by cheque, debit card (ATM access
card) and credit card.
8. An item of income is a source of revenue, which comes in the form of cash. An example
would be sales, rent receivable, commission received, etc.
9. An expense is an item of expenditure and cash is paid out as a result of it. An example
would be electricity paid, purchases of goods for resale, rent payable, carriage inwards,
carriage outwards, etc
10. A gain is a form of income. It is extra funds generated after undertaking some business
transaction. An example would be cash proceeds of a sale of a fixed asset above its book
value, discount received, etc.
11. A loss is an amount that reduces owner’s wealth and arises from operating activities. It
is an item of expenditure that could not generate a corresponding cash receipt. An
example would be discount received, bad debts, etc.
12. Non current assets: Items of value, which the business intends to use operationally for
more than one accounting period (usually 1 year). They are not intended to be re-sold.
E.g. Buildings, motor vehicles, machinery, etc
13. Current assets: Assets that are continuously changing, kept up-to-date, kept current.
E.g. stock, debtors, cash,etc
14. Long term liabilities: amounts that we owe and repayment will be in more that one
accounting period, e.g. bank loans, debentures, finance leases, etc
15. Current Liabilities: amounts we owe others and payment for them will be made within
the next 12 months (one accounting period).
16. Owners’ wealth: This is the amount the owner contributed from his private resources
into the business, plus any profits he has made. This is sometimes called owners’ equity
or capital
17. Drawings: Amounts the owner of the business withdraws from the business to go and
use in his private capacity at home. It is a reduction in the owners’ wealth.
18. Recognition: This term refers to inclusion in the statement totals of an element in one
of the financial statements. This is achieved by journalizing the entry either to add to or
deduct from the existing balance. For example, the value of a car just bought would be
added to the balance of motor vehicles in the balance sheet. Reducing a statement total
is referred to as de-recognition, e.g. When part of the loan is settled, the loan balance in
the balance sheet would be reduced.
19. Elements of financial statements: This term refers to the major classifications adopted
in the financial statements into which all transactions would fall. These are assets,
liabilities, contributions, distributions, gains, losses, income, expenses and owner’s
wealth.
20. Contributions: Refers to amounts the owner of the business inject into it as capital from
his private recourses, e.g. new share capital.
21. Distributions: Refers to amounts of resources the owner withdraws from the business
for private use, e.g. drawings, dividends.