Interm - Financ.acc-Acc1232 - Updated On 27may 2019

Lecturer :Mr.
HATEGEKIMANA Uzziel
MBA IN FINANCE & Msc International Trade Policy

and Law
Phone : 0788620046
MODULE TITLE :
INTERMIDIATE FINANCIAL ACCOUNTING
Module Code:
ACC1232
CONTENTS
1. Control Accounts
2. Manufacturing accounts
3. Accounting for Incomplete records and non

profit making entities
4. Partnerships Accounts
5. Regulatory framework for companies
6. Issue of share capital for companies
7. Introduction to analysis of financial statements

CHAPTER ONE :
CONTROL ACCOUNT
CONTROL ACCOUNT
 Control account is a summary account appearing in the
general ledger(Sales a/c; purchases a/c; returns in a/c;
returns out a/c) for the purpose of controlling the accuracy
of the detailed postings to other ledgers(Sales ledger;
purchases ledger).
 Control accounts are so called because they control a section

of the ledgers. By control we mean that the total on the
control accounts should be the same as the totals on the
ledger accounts.
 There are two main types of control accounts since businesses usually
have numerous transactions in relation to customers and suppliers.
 Sales ledger control Account (also known as debtors or accounts
receivable control account).
 The balance on the sales ledger control account should be the same as
the total of the balances in the sale ledger (total of balances in
customers’ accounts).
 Purchases Ledger Control Account (also known as creditors or
accounts payable control account) .
 The balance on the purchases Ledger Control Account should be the
same as the total of the balances in the purchases ledger (total of
balances in suppliers accounts).
SALES LEDGER
Sales ledger
Allen Account
May 1 Bal b/d 850,000 May 7 bank 820,000
4 sales 900,000 9 discount allowed 30,000
30 sales 350,000 30 Bal c/d 1,250,000
2,100,000 2,100,000
June 1 Bal b/d 1,250,000
Mary Account
May 1 Bal b/d 1,500,000 May 10 sales returns 200,000
28 sales 400,000 11 bank 900,000
14 discounts allowed 20,000
31 Bal c/d 780,000
1,900,000 1,900,000
June 1 Bal b/d 780,000
White Account
May 1 Bal b/d 750,000 May 20 sales returns 110,000
15 sales 600,000 31 Bal c/d 1,240,000
1,350,000 1,350,000
June 1 Bal b/d 1,240,000
Young Account
May 1 Bal b/d 450,000 May 28 bad debts 450,000
450,000 450,000
Sales Ledger Control account
 A control account in this case, a Sales Ledger Control account
would consist only of the totals of each of the items in the sales
ledger:
 May 1 balance b/d : 850,000+1,500,000+750,000+450,000=
3,550,000
 Sales in May : 900,000+350,000+400,000+600,000= 2,250,000
 Cheques received in May : 820,000+900,000 = 1,720,000
 Discount allowed in May : 30,000+20,000 = 50,000
 Sales returns in May : 200,000+110,000 = 310,000
 Bad debts written off in may = 450,000
 Balances c/d = 1,250,000+780,000+1,240,000= 3,270,000

 Note: It will be the same process in case of Purchases ledger
control account

Sales ledger control Account
May 1 Bal b/d 3,550,000 May 31 bank 1,720,000
sales for the month 2,250,000 31 discounts allowed 50,000
31 sales returns 310,000
31 Bad debts 450,000
31 Bal c/d 3,270,000
5,800,000 2,100,000
June 1 Bal b/d 3,270,000
. INFORMATION FOR CONTROL ACCOUNTS
Sales ledger control Source
account
A Opening debtors List of debtors’ balances drawn up at the end
(bal b/d) of the previous period
B Credit sales Total from sales day book
C Sales returns Total of sales returns day book
D Cheques received Cash book: Total of cheques received from
debtors
E Cash received Cash book: Total of cash received from
debtors
F Discounts allowed Total of discount allowed to debtors
G Closing debtors(bal c/d) List of debtors’ balances drawn up at the end
of the period
Sales ledger control account
Balances b/d A Sales returns C
sales B Bank D
Cash E
Discount allowed F
Balances c/d G
Totals H Totals H
. INFORMATION FOR CONTROL ACCOUNTS
Purchases ledger control Source
A Opening creditors List of creditors’ balances drawn up at
(bal b/d) the end of the previous period
B Credit purchases Total from purchases day book
C Purchases returns Total of purchases returns day book
D Cheques paid Cash book: total of all cheques paid to
creditors
E Cash paid Cash book: total of all cash paid to
creditors
F Discounts received Total of discount received from creditors
G Closing creditors List of creditors’ balances drawn up at
(bal c/d) the end of the period
Purchases ledger control account
Purchases returns C Balances b/d A
Bank D Purchases B
Cash E
Discount received F
Balances c/d G
Totals H Totals H
PURPOSE OF CONTROL ACCOUNTS
 Provide for arithmetical check on the postings

made in the individual accounts (either in the
sales ledger or purchases ledger.)
 To provide for a quick total of the balances to be

shown in the list of account balances as debtors
and creditors.
 To detect and prevent errors and frauds in the

customers and suppliers account.
D. ORMATS OF CONTROL ACCOUNTS
The formats will just be similar to the personal accounts of customers and suppliers, but cont
total information.
FRw. FRw.
Balance b/f XX Balance b/f XX
Credit sales XX Cash/Bank (receipts from XX
debtors)
Bank (refunds to customers) XX Bills of exchange receivable XX
Bank (dishonored cheque) XX Returns inwards XX
Interest on overdue debtors XX Bad debts XX
Discounts allowed
Contra XX
Balance c/f XX Balance c/f XX
XX XX

FRw. FRw.
Balance b/f XX Balance b/f XX
Cash/bank (payment to XX Credit purchase XX
suppliers)
Bill of exchange payable XX Cash/bank (refunds by XX
suppliers)
Discount received XX Interest on bills payables XX
Returns outwards XX Bills payables withdrawn XX
Contra XX
Balance c/f XX Balance c/f XX
Notes
 The credit balance in debtors accounts represent customers
account balances which due to them paying more and goods have
not been supplied .
 The debit balances in supplier accounts represent a situation
where the business has paid for goods and yet they have not been
supplied
 Bills of exchange: it represents means of clearing account, in a

similar manner like cheques
 Bad debts: there may also be reason to write off a debt as bad
where a business finds it impossible to collect the debt. The sales
ledger control account would be also credited.
 Contras: This represents a situation where a supplier is also a

customer. The contra is a settlement (agreement) between creditor
and debtor so as to find out how much to pay or receive as the
difference in the account.
Contras: This represents a situation where a supplier is
also a customer
 Example 1:
(i)The business has sold to Hoang Rwf 600,000

goods on 1 July
(ii) Hoang has supplied the business with Rwf

880,000 goods on 15 July
(iii)The Rwf 600,000 owing by Hoang is set off

against Rwf 880,000 owing to him on 30 July
(iv) This leaves Rwf 280,000 owing to Hoang on

31 July
Sales ledger
Dr Hoang account Cr
FRw.
1 July Balance b/f (i) 600,000
Purchases ledger
Dr Hoang account Cr
Rwf.
15 July purchases (ii) 880,000
The set off now takes place

Sales ledger
Dr Hoang account Cr
Rwf.
1 July Balance b/f (i) 600,000 30 July set off : purchases ledger (iii) 600,000
Purchases ledger
Dr Hoang account Cr
Rwf. Rwf.
30 July set off : sales ledger (iii) 600,000 15 July 880,000
31 July balance c/d (iv) 280,000
880,000 880,000
1 august balance b/d (iv) 280,000
From the following prepare a sales ledger and purchases ledger control
accounts for the business of genuine spares.
FRw
Opening debtors 44,000
Opening creditors 24,900
Sales 143,766
Purchases 87,982
Sales returns 2,890
Purchases returns 742
Cheques in 140,809
Cheques out 80,234
Bad debts 2,890
Contras 874
Discounts received 540
Discounts allowed 1,034
Customers cheque dishonored 500
Bill of exchange accepted by customer 700
FRw. FRw.
Balance b/f 44,000 Returns inwards 2,890
Credit sales 143,766 Bank (Cheques in) 140,809
Bank (dishonored cheque) 500 Bad debts 2,890
Contras 874
Bill of exchange accepted 700
Balance c/f 39,069
188,266 188,266

FRw. FRw.
Returns out 742 Balance b/f 24,900
Cash/bank (payment to suppliers) 80,234 Credit purchase 87,982
Contra 874
Discount received 540
Balance c/f 30,492
112,882 112,882
FRw. FRw.
Balance b/f 44,000 Returns inwards 2,890
Credit sales 143,766 Bank (Cheques in) 140,809
Bank (dishonored cheque) 500 Bad debts 2,890
Contras 874
Bill of exchange accepted 700
Balance c/f 39,069
188,266 188,266

FRw. FRw.
Returns out 742 Balance b/f 24,900
Cash/bank (payment to suppliers) 80,234 Credit purchase 87,982
Contra 874
Discount received 540
Balance c/f 30,492
112,882 112,882
QUESTION 78
Poesha Limited keeps sales and purchases control accounts in the General
Ledger. The transactions for the month ended 30 April 2010 were as follows:
FRw
Credit balances on 1 April 2010 -Sales ledger 154,000
-Purchases ledger 569,000
Debit balances on 1 April 2010 -Sales ledger 956,000
-Purchases ledger 196,000
Credit balances on 30 April 2010 -Sales ledger 178,000
Debit balances on 30 April 2010 Purchases ledger 189,000
Credit purchases 2,450,000
Credit sales 4,563,000
Cheques received from accounts receivable 3,140,000
Cash received from accounts receivable 1,367,000
Cheque payments to accounts payable 1,994,000
Cash payments to accounts payable 352,000
Bad debts written off 68,000
Discounts received 104,000
Contra entry to sales ledger from purchases ledger 234,000
Refunds to accounts receivable 62,000
Returns outwards 138,000
Returns inwards 231,000
Required : Sales ledger and purchases ledger control accounts on 30 April 2010
QUESTION 79: Janet had the following information for the month of May 2010
regarding transactions of sales and purchases. FRw
Debtors opening debit balance 840,000
Creditors opening credit balance 646,000
Debtors opening credit balance 42,000
Creditors opening debit balance 38,000
Total Sales (30% in cash) 4,800,000
Total Purchases (40% cash) 3,500,000
Bad debts 130,000
Allowance for doubtful debts 150,000
Cash received from debtors 400,000
Cash paid to creditors 500,000
Cheques received from debtors 2,400,000
Cheques paid to creditors 1,200,000
Cash Refund to debtors 89,000
Returns inwards 52,000
Discounts received 45,000
Interest charged on overdue debtors 145,000
Returns outwards 43,000
Debtors cheques dishonoured 140,000
Contras 53,000
Creditors closing debit balance 23,000
Debtors closing credit balance 35,000
Required: Prepare control accounts for the month of May 2010 for Janet
CHAPTER TWO: MANUFACTURING ACCOUNTS
 A Company can decide to manufacture instead of

buying finished goods for sale.
 Such company will need to collect costs of

manufacturing the goods before coming up with cost
of goods sold
 for the trading account.
 A manufacturing account will therefore need to be

prepared before preparation of the other final
accounts (Income statement and balance sheet)
Different kindof costs that are included in the
manufacturing account.
Direct costs-
 These are easily identified to the product being
manufactured. They include
 Direct material- for example raw material
 Direct labour- for example wages to technicians,
salaries to technicians
 Direct expenses- for example royalty payments, special
hire of equipment
Prime cost –this is a total of all the direct costs. (direct
labour, direct expenses and direct material).
 Indirect costs
 These are not easily identified to the product being
manufactured. They include:
 Indirect material- for example cleaning material
 Indirect labour- for example wages and salaries of
supervisors and factory manager
 Indirect expenses- for example factory property,
plant and equipment depreciation and there
maintenance, rent for the factory building, heat,
electricity and power for the factory
Factory overheads- these are the indirect costs as listed
above. They cannot be easily traceable to the product
but are part of cost of manufacture.
 Overheads may need to be apportioned between the
factory and other function of the enterprise like selling
and administration.
 These will be overheads that cannot be allocated

directly to the factory
Work in progress
 This may arise if at the end of a given period there

exists some goods that are incomplete.
 Some costs would have already been incurred. For

example raw material would have been incurred.
 Some part of direct labour would have been incurred.

Such costs should not be charged on the trading
account, since the goods would not have been sold.
GOODS TRANSFERRED AT A TRANSFER PRICE OR
AGREED MARKET PRICE
 It is possible to carry the amounts from manufacturing

account at market value rather than production cost.
 This is just to show the contribution that
manufacturing department brings in terms of profit.
 In such a situation the finished good, opening stock

and closing stock will be containing an element of
profit from manufacture, which has not been realized
Unrealised manufacturing profit from unsold stock
 Unrealized Profit occurs where it is the policy of the firm to
value stocks of finished goods at market value rather than at
cost. The factory profit included in the value of closing
finished goods inventory is known as unrealized profit.
 This provision for unrealized profit on unsold stock should be

treated in the same way as any other provision. This means
that the change in the provision should appear in the profit
and loss account as a debit (if it is increased) or as a credit (if it
is decreased) which means this would be added on to the gross
profit.
ACCOUNTING FOR UNREALIZED PROFIT
 Any increase from previous allowance is treated as

follows:-
 Debit: Income statement
 Credit: Allowance for unrealized profit
 Any decrease from previous Allowance is treated as
follows:
 Debit: Allowance for unrealized profit
 Credit: Income statement
Balance sheet (extract)
 Current assets FRw FRw
 Inventory
 - work in progress XX
 - raw materials XX
 - finished goods XX
Less: Allowance for unrealized profit (XX) XX
FORMAT OF THE MANUFACTURING ACCOUNT
XYZ enterprises
Manufacturing &Income statement for the year ended ……
FRw FRw
Raw materials
Opening stock XX
Purchases XX
Carriage in XX
Returns out (XX)
Closing stock (XX) XX
Direct labour XX
Direct expenses XX
Prime cost XX
Factory overheads
Depreciation of factory property XX
Depreciation of factory plant XX
Depreciation of factory equipment XX
Rent for the factory building XX
Electricity, heat and power XX XX
XX
Work in progress adjustment
Opening XX
Closing (XX) XX
Production cost XX
Manufacturing profit XX
Transfer price XX
INCOME STATEMENT FOR THE YEAR ENDED …..
Sales XX
Returns in (XX)
Net Sales XX
Finished goods
Opening stock XX
Production cost/transfer price XX
Closing stock (XX) (XX)
Gross profit XX
Manufacturing profit XX
Other income XX
Decrease in Allowance for UP XX
Expenses
Other expenses XX
Increase in Allowance for UP XX (XX)
Net profit XX
Example 1 : TOM manufacturers had the following balances as at 31st December 2009
Stocks as at 1st Jan 2009 Rwf. Rwf.
Raw materials 7,000
Work in progress 5,000
Finished goods (Cost) 5,520
Purchases of raw materials 38,000
Direct labour 28,000
Factory overheads
Electricity and power 16,000
Rent and rates 9,000
Administrative expenses
Lighting 6,000
Stationery and postage 2,000
Staff salaries 19,380
Sales 192,000
Plant and machinery Cost & Acc. deprec. 30,000 12,000
Motor vehicles (for sales deliveries) Cost & Acc. deprec. 16,000 4,000
Debtors & Creditors 28,000 5,500
Drawings 11,500
Bank 16,600
Capital 48,000
Motor vehicles expenses 4,500
Additional information
•Raw materials Rwf.9,000 ; Work in progress Rwf.8,000; Finished goods Rwf.8,280
•Depreciation is provided at 10% and 25% of cost for plant and machinery and motor vehicles respectively.
•accrued direct labour amounted to Rwf.3,000 and administrative rent and rates prepaid amounted to Rwf.2,000
Required: Manufacturing account & income statement and balance sheet on 31st December 2009 .
Solution
TOM manufacturers Manufacturing account for the year ended 31st Dec 2009
Raw materials Rwf. Rwf.
Opening stock 7,000
Purchases 38,000
Closing stock (9,000) 36,000

Direct labour (W1) 31,000
Prime cost 67,000
Factory overheads

Plant & machinery depreciation (W2) 3,000 28,000
95,000
Opening 5,000
Closing (8,000) (3,000)
Production cost 92,000
Income statement for the ended 31st Dec 2009
Sales 192,000
Finished goods /Cost of Goods sold
Opening stock 5,520
Closing stock (8,280) (89,240)
Gross profit 102,760
Expenses
Rent and rates (W1) 17,000
Lighting 6,000
Staff salaries 19,380
Depreciation of motor vehicle (W2) 4,000
Motor vehicles expense 4,500 (52,880)

Net profit 49,880
BALANCE SHEET AS AT 31 DECEMBER 2009
Non-current assets FRw. FRw. FRw.
Plant and machinery 30,000 (15,000) 15,000
Motor vehicles 16,000 (8,000) 8,000
23,000
Current assets
Inventory
Raw materials 9,000
Finished goods 8,280
Debtors 28,000
Prepaid rates 2,000
Bank 16,600 71,880
94,880
Capital 48,000
Net profit 49,880 97,880
Drawings (11,500)
86,380
Current liabilities
Creditors 5,500
Accrued expenses 3,000 8,500
94,880
 Notes:
 Since there is no profit from manufacture, it is the
production cost after adjusting for work in progress
that is transferred to the trading account as indicated.
 The inventory of finished goods is at cost.
 The aspects of accruals and prepayments are still

followed.
 Assume that in the previous example that the finished
goods are transferred to the trading account at a mark
up of 25% (that is cost plus a percentage of cost).
 This will bring about unrealized profit (UP), thus

necessitating preparation of Allowance for unrealized
profit account.
As such, the inventory of finished goods will be valued as follows at transfer price
Opening 5,520 + 25% X 5,520 =FRw 6,900 (UP =6,900-5,520=FRw1,380)
Closing 8,280 + 25% X 8,280 =FRw 10,350 (UP =10,350-8,280=FRw2,070)
The unrealized profit in the opening stock is the balance b/f and the unrealized profit
in the closing stock is the balance c/f. The provision for UP account will therefore
look as follows.
The manufacturing account and the other final statements will look as follows
Allowance for UP account

FRw FRw
Balance b/f 1,380
Balance c/f 2,070 Profit & loss 690
2,070 2,070
Manufacturing profit 25%X92,000 23,000
Transfer price 115,000

Income statement for the year ended 31st Dec 2009
Sales 192,000
Finished goods
Opening stock 6,900
Transfer price 115,000
Closing stock (10,350) (111,550)
Gross profit 80,450
Manufacturing profit 23,000
103,450
Ex2. Mr. Shah is a local manufacturer and owns a factory. His trial balance as at 30th April 2010
Materials purchased 45,600
Wages 28,800
Sales 117,180
Work in progress 1 May 2009 (at cost) 5,100
Stocks of raw materials 1 May 2009 (at cost) 2,520
Stocks of finished goods 1 May 2009 (at cost) 3,000
Salary of factory management staff 5,700
Salaries of clerical staff 8,806
Repairs- Factory building 240
Machinery and plant 1,200
Light and power 3,840
Canteen subsidy 960
Motor expenses 2,490
Postage and telephone 1,800
Printing and stationery 696
Carriage and packing 4,896
Capital account 21,600
Drawings 9,600
Trade debtors & Trade creditors 19,284 19,200
Freehold property (at cost) 5,400
Machinery and plant (written down value) 4,200
Motor van (written down value) 3,300
Bank overdraft 2,452
Notes on Example 2:
(1) Depreciation : Machinery and plant : 20%; Motor van : 25% on the reducing balance
(2) Inventory at 30 April 2010 were: Raw materials : Rwf. 3,300,000 at cost ; Finished
goods : Rwf. 2,760,000 at transfer price ; Work in progress : Rwf. 5,400,000 at cost
(3) Rates are prepaid to the extent of Rwf 216,000
(4) Outstanding : Audit & Acc. Rwf 900,000; Power Rwf 720,000; phone Rwf 108,000
(5) Wages are paid in arrears. Thus , the week worked to Saturday 20 April 2010 was paid
for on Thursday 25 April 2010. All weeks are five days, Monday to Friday:
The amount paid for the subsequent weeks are as follows:
Worked week ending Saturday 27 April paid on Thursday 2 May 2010- Rwf 640,000
Worked week ending Saturday 4 May paid on Thursday 9 May 2010- Rwf 612,000
(vi)The following expenses are to be allocated as 60% to the factory and 40% to the office:
Rent and rates; Light and power ; Canteen subsidy
(vii) Goods are transferred from the factory to the sales department at cost plus 20%.
(viii) Mr. Verma is the factory manager and he is entitled to a commission of 10% of profit
of the factory after charging such commission, for which Allowance has yet to be made.
(ix)Allowance for doubtful debts is to be made amounting to 1% of debtors.
Required: 1. Manufacturing a/c and income statement for the year ended 30 April 2010
2. Balance sheet as at 30 April 2010
Mr. Shah Manufacturing Account For the year ended 30 April 2010
Raw Materials Rwf ‘000’ Rwf. ‘000’
Opening stock 2,520
Purchases 45,600
Closing stock (3,300) 44,820
Direct labour: Wages (W1) 29,684.80
Prime cost 74,504.80
Factory overheads
Salary of factory management 5,700
Repairs to: Factory building 240
Machinery & plant 1,200
Rent and rates (W3) 1,670.4
Light and Power (W3) 2,736
Canteen subsidy 576
Depreciation – Machinery & Plant (W4) 840
Factory manager commission (W6) 1,584.86 14,547.26
89,052.06
Opening balance 5,100
Closing balance (5,400) (300)
Production cost 88,752.06
Manufacturing profit (20% x 88,752.06) 17,750.41
Transfer price 106,502.47
Income statement For year ended 30 April 2010
Sales 117,180
Finished goods
Opening stock (W2) 3,600
Transfer price 106,502.47
Closing stock (W2) (2,760) (107,342.47)
Gross profit from trading 9,837.53
Profit from manufacture 17,750.41
Decrease Allowance for UP 140
27,727.94
Expenses
Salaries of clerical staff 8,806
Rent and rates (W3) 1,113.6
Light and power (W3) 1,824
Canteen subsidy 384
Motor expenses 2,490
Postage and Telephone (W3) 1,908
Audit and Accounting 900
Printing & stationery 696
Carriage & Packing 4,896
Allowance for doubtful debts (W4) 192.84
Depreciation motor van (W4) 825 (24,035.440)
Net profit 3,692.50
BALANCE SHEET AS AT 30 APRIL 2010
Non Current Assets COST Rwf. ‘000’ Acc. Depr. Rwf. ‘000’ Rwf. ‘000’
Freehold property 5,400 - 5,400
Machinery & plant 4,200 (840) 3,360
Motor van 3,300 (825) 2,475
11,235
Current Assets
Stocks: Raw materials 3,300
Work-in-progress 5,400
Prv’n for UP (W2) (460) 2,300
Debtors 19,284
Prov.for bad debts (W4) (192.84) 19,091.16
Pre-paid rates 216 30,307.16
41,542.16
Capital 21,600
Net profit 3,692.50
Drawings (9,600)
Current liabiliies 15,692.50
Creditors 19,200
Accrued expenses 884.8
Wages (W1) 900
Power 720
Telephone 108
Managers commission (W6) 1,584.86
Bank overdraft 2,452 25,849.66
41,542.16
Exercise 1: The following balances were taken from Simon’s books at 31/01/2010:
Inventory at 1 February 2009 RWF
- Raw materials 450,500
- Work in progress 440,000
Purchases – raw material 980,720
Returns – raw materials 10,150
Rents and rates 300,000
Lighting and heating 280,800
Insurance 40,400
Production wages 600,200
Workshop equipment (Cost Rwf 2,500,000) 1,600,000
Water 20,800
Factory supervision 220,200
Discount received 10,000
Discount allowed 4,500
The following information is also relevant at 31 January 2010
•Inventory at 31 January 2010 were raw materials Rwf 360,100; W.I.P Rwf 300,000
•prepaid Insurance Rwf 10,600; Water Rwf 8,000
•outstanding rent and rates Rwf 90,600 ; lighting and heating Rwf 20,400
•¾ of insurance relates to factory, ¼ relates to office.
• 2/3 of lighting and heating relates to factory, 1/3 relates to office.
• 80% of rent and rates relates to factory, 20% to office.
•Water is to be apportioned evenly between factory and office.
•Workshop equipment is to be depreciated at 25% per annum on the reducing balance
Required: Prepare Simoni’s manufacturing account for the year ended 31 January 2010
EXERCISE 2: Rimcorwa manufactures a number of small electrical
equipment. For the year ended 31 March 2017 the following balances were
extracted.
FRw
Inventories as at 1 April 2016
Raw materials 720,000
Finished goods (at valuation) 643,500
Purchases of raw materials 3,856,000
Direct labor 828,000
Factory overheads
Other expenses
Lighting 60,000
Managers salaries 190,000
Plant and machinery Cost 300,000
Accumulated depreciation (Plant & machinery) 120,000
Additional information
1.Inventories as at 31st December 2017 were as follows
Raw materials FRw910,000
Work in progress FRw856,000
Finished goods FRw 536,800(at valuation)
2. Depreciation is provided at 10% of cost for plant and machinery
3. Amounts accrued as at 31st December 2017 for direct labour amounted to FRw30,000
and rent and rates prepaid as at 31st December 2017 amounted to Frw25,000
4. The other expenses are to be apportioned to the factory and administration expenses as
follows
5. Goods are transferred to finished goods inventory at a factory mark up of 10%
6. The factory manager is entitled to commission of 20% of the manufacturing profit
before the commission.
Factory % Administration %
Lighting 60 40
Stationery and postage 10 90
Managers salaries 50 50
Required:
a) Manufacturing account for the year ended 31 March 2017 (Show clearly the
prime cost, factory cost and transfer amount.
b) Manager commission
c) Prepare a provision for unreleased profit account for the year ended 31 March
2017
Exercise3:ABC Industries had the following balances for the year ended 31/5/ 2017
Purchase of raw materials 3,500,000
Inventory on 01 June 2016:
Work-In-Progress 350,000
Raw materials 150,000
Factory wages and salaries 1,400,000
Factory other expenses 800,000
Sales 15,500,000
Rent of factory 1,200,000
Rent of offices and showroom 400,000
Factory machinery cost & acc. Depre 12,000,000 4,500,000
Office equipment cost & Acc. Depr 4,300,000 1,200,000
Furniture cost & acc. Depr 850,000 350,000
Sales managers salary 1,300,000
Marketing expenses 250,000
Factory fuel, electricity and water 1,600,000
Other administration expenses 460,000
Additional information:
1. Inventory on 31/5/2017: W.I.P Rwf 200,000; Raw material 195,000; Finished goods Rwf 420,000
2. Accruals and prepayment : Electricity prepaid FRw250,000 ; Office Rent accrued FRw140,000 ; Factory
wages unpaid FRw60,000
3. 3. Depreciation is provided on reducing balance basis : Factory machinery 25% ; Office equipment 20% ;
Furniture10%. 40% of the furniture is used in the factory
4. Manufacturing profit: Goods are transferred to the warehouse at 20% mark up.
5. The factory manager is entitled to commission of 5% of the manufacturing profit before the commission.
Required: Prepare: Manufacturing account & Income statement at 31/5/ 2017
Allowance for Unrealized profit
a) You have been given Inventory of finished goods :
 Opening stock : 4,000,000 (at cost)
 closing stock : 6,000,000(at transfer price)
 Goods are transferred from the factory to the sales
department at cost plus 20%.
a. Calculate unrealized profit in the opening stock and
b. unrealized profit in the closing stock
c. Show the provision for UP account.
Closing stock:
At transfer price = FRw. 6,000,000
At cost = transfer price =. 5,000,000

100%+20%
So the UP is 6,000,000-5,000,000=FRw 1,000,000
Opening stock:
At cost= FRw. 4,000,000
At transfer price= 120% x 4,000,000 = 4,800,000 ; (4,000,000 + 20% x4,000,000)
So the UP is 4,800,000-4,000,000=FRw. 800,000
The Allowance for UP account will look as follows :
Allowance for UP account

FRw ‘000’ FRw ‘000’
Balance b/f 800
Profit(loss) 200
Balance c/f 1,000
1,000 1,000
Allowance for Unrealized profit
b) You have been given Inventory of finished goods :
 Opening stock : 5,000,000 (at cost)
 closing stock : 4,800,000(at transfer price)
 Goods are transferred from the factory to the sales
department at cost plus 20%.
a. Calculate unrealized profit in the opening stock and

b. unrealized profit in the closing stock
c. Show the provision for UP account.
CHAPTER 3:ACCOUNTING FOR INCOMPLETE
RECORDS
Definitions
 Incomplete records are any accounting records, which fall short of complete
double entry. (Recall double entry where every transaction is recorded twice in
two different accounts.)
 When accounts are kept whereby double entry is not followed or followed
partly then this is single entry. There are different degrees of incompleteness.
There may be no records at all that are kept

There may be partial/single entry
Reasons for incomplete records may be due to:

- Lack of accounting knowledge by owners of businesses, expensive accounting
expertise due to size of the business or
- Records may have been destroyed in a natural disaster like fire, floods, war or
theft.
If no records are kept at all
This may be due to lack of accounting knowledge or loss of records due to
natural disaster. In such circumstances the accounts will need to be
reconstructed from estimates and whatever evidence that can be
collected.
Single entry alone

 This may be due to lack of accounting knowledge and that expertise
being expensive. Here records may be kept of personal accounts
(debtors and creditors but the nominal accounts will not be kept.) In
such a situation it will be hard to extract a trial balance to enable
preparation of final accounts (to show the profit or loss for the period
and financial position).
Preparation of final accounts
1. Use of extended accounting equation
 To know the financial performance and position, the opening and

closing capital information is obtained and compared. Any other
information like drawings and additional capital is also obtained. The
accounting equation is then used to determine the profit or loss for the
period.
 The accounting equation in extended format is as follows

 Opening capital + additional capital + Profit(loss) –
Drawings = Closing capital
Example 1
The following information is provided for Johnson traders.
(i) Capital at 1 October 2017, FRw230,000.
(ii) Total assets at 30 September 2018, FRw1,010,000.
(iii) Total liabilities at 30 September 2018, FRw530,000.
(iv) Inventory taken by Johnson, the proprietor, for his personal use on 1
April 2018, FRw50,200.
(v) Cash drawings by Johnson during the year to 30 September 2018,
FRw3,500 per week.(52 weeks the year)
(vi) Legacy received by Johnson on the death of a relative and paid into
the business bank account on 1 September 2018, FRw70,300.
Required:
 Calculate the profit of JohnsonTraders for the year to 30
September 2018.
Example2
Nsabimana who runs a small supplies store in Rusizi, had the following assets
and liabilities at the start of the year and end of the year 2018.
Assets and liabilities 1st 31st
January December
FRw. FRw.
Furniture 3,000 6,000
Stock 6,000 7,500
Debtors 4,500 5,400
Cash 450 600
Creditors 3,600 4,500
Expenses owing 300 1,200
Income accrued 600 2,100
During the year Nsabimana withdrew FRw.4,500 and introduced FRw.3,000 which was
a donation to him by a leading non-governmental organization in the area.
He decided to depreciate furniture 10% of cost at the end of the year and to
create an Allowance for bad debts of 10% on the debtors balance at the end of
the year.
Required: Determine profit or loss the year 2018.
Solution
To determine the opening and closing capital balance it will be necessary to
draw the statement of affairs as at the 1st January and 31st December 2018 as
follows.
Statement of affairs As at 1st January 2018
Rwf Rwf. Rwf.
Non-current Assets
Furniture 3,000
Current assets
Stocks 6,000
Debtors 4,500
Income accrued 600
Cash 450 11,550
14,550
Capital* 10,650
Current liabilities
Creditors 3,600
Expenses owing 300 3,900
14,550
*Capital is obtained as the balancing figure
Statement of affairs As at 31st December 2009
FRw. FRw. FRw.
Non-current Assets Cost Depr’n Net
Furniture 6,000 (600) 5,400
Current assets
Stocks 7,500
Debtors 5,400
Prov’n for bad debts (540) 4,860
Income accrued 2,100
Cash 600 15,060
20,460
Capital* 14,760
Current liabilities
Creditors 4,500
Expenses owing 1,200 5,700
20,460
*Capital is obtained as the balancing figure
To obtain the profit or loss for the period, a statement of profit or loss is
drawn as follows, following the accounting equation.
Statement of profit or loss for the year ended 31st December 2018
FRw
Closing capital balance (as at 31st December) 14,760
Drawings 4,500
Additional capital (3,000)
Opening capital (as at 1st January) (10,650)
Profit for the year 5,610
Exercise 2
Bill Biruta took out a statement of his financial position on 1 April 2018 which showed
the following: in Frw
 Sundry accounts payable 850,500
 Sundry accounts receivable 720,000
 Inventory in trade 135,000
 Cash and bank 45,000
 Furniture and fittings 265,500
After one year, during which Bill Biruta introduced additional capital of FRw50,000 and
withdrew FRw22,500 for his own requirements, his position was:
 Sundry accounts payable 683,100
 Sundry accounts receivable 540,000
 Inventory in trade 84,000
 Cash and bank 135,000
 Furniture and fittings 239,000
Required:
(a) statements of affairs to show Bill Biruta's capital position as at 1 April 2018 and
his new capital position one year later.
(b) a statement showing the profit or loss made by Bill Biruta for the year.
2. Use of control accounts
-The Total Trade receivables account is used to calculate total credit & cash sales and
- The Total Trade payables account is used to calculate total credit & cash purchases.
Example 1
Antoine Traders had the following figures for the Years ended:
31st December 2017 31st December 2018
FRw FRw
Trade receivables 34,500 53,600
For the year ended 31st December 2018:
Cash sales :FRw1,500 ; Cash receipts from debtors: FRw1060
Discounts allowed: FRw45 ; Bad debts: FRw56
Trade receivables control account

FRw. FRw.
Opening balance 34,500 Discounts allowed 45
Bad debt 56
Cash from customers 1060
Cash sales 1,500
Sales (Cash and credit) 21,761 Closing balance 53,600
56,261 56,261
Example 2
Calculate the total purchases for the year ended 31st December 2009 from the following
information:
Trade payables at 1st Jan 2009 : FRw 2,450
Trade payables at Dec 31st 2009 :FRw1,200
Payments to creditors during the year : Cash FRw3,609;
Cheque FRw2,870
Cash purchases for the year : FRw1,000
Discounts received: FRw35
3. Use of ratios
Gross profit x 100 =MU%
Mark – up% =
Cost of sales
Gross profit x 100 =M%
Margin %=
Sales
Relationship between the two ratios
1) If the margin is known, the mark – up can be found out: Take the same numerator of
the margin; the denominator is the difference of the denominator and the numerator
of the Margin e.g. If the Margin is 20% (1/5) then the Mark-up is 1/4
M x 100
Mu%= 100 - M
2) If the mark – up is known, the margin can be found out: Take the same numerator to
be the numerator of the margin; the denominator is the total of the markup’s
numerator and denominator. e.g. if Mark – up is 25% ( ¼) then the Margin is 1/5
(20%)
Mux100
M% =
100  Mu
Use of ratios
Items Frw
Stock on 1/10/2014 970,000
Stock on 30/09/2015 1,480,000
Purchases 2,750,000
Drawings ( Goods ) 850,000
Drawings ( cash ) 980,000
Gross Profit Margin 25%
Given the following Information:

Required: determine (i) Gross profit ( 3 marks ); (ii) Sales ( 2marks )
1) Opening stock + purchases – Drawings of goods – closing stock
= cost of sales
970,000 + 2,750,000 – 850,000 – 1,480,000 = 1,390,000
2) Mark up = Gross profit margin

1 – Gross profit margin
= 0.25/1-0.25 = 0.25/0.75 = 25/75 = 1/3(1Marks)
After getting the markup; Gross profit is = cost of sales x markup

Gross profit = 1,390,000 x 1/3 = 463,333 (1Marks)
Sales = Gross profit + cost of sales =
463,333 + 1,390,000 = 1,853,333(2Marks)
Sales = 1,853,333frw
Example
Tom provides the following information for the year ended 31st December 2009:
Rwf
Margin = 25%
Sales 20,000
Inventory at 1st January 2009 4,500
Inventory at 31st December 2009 4,800
Prepare a Trading Account to show the calculation of the purchases for the year.
Solution:
Tom’s Income statement for the year ended 31st Dec., 2009
Rwf Rwf
Sales 20,000
Less Cost of Goods sold:
Inventory at 1st Jan., 2009 4,500
Add Purchases * 15,300
Less Inventory at 31st Dec. 2009 4,800
Cost of sales (15,000)
Gross Profit 5,000
Workings:
Gross profit x 100
** Margin %=
Sales
25 = Gross profit x 100
20,000
25 x 20,000 = Gross Profit
100
Rwf 5,000 = Gross Profit
* Sales – (Opening Inventory + Purchases – Closing Inventory)= Gross Profit
20,000 – ( 4,500 + Purchases – 4,800) = 5000
20,000 + 300 – Purchases = 5000
20,300 – 5,000 = Purchases
Rwf 15,300 = Purchases

4. Use of all techniques
Steps:
1. Draw a statement of affairs at the commencement of the period
2. Prepare cash and bank accounts if not existing
3. Determine the sales and purchases of the period by use of control
accounts (sales ledger control account and purchases ledger control
account.)
4. Determine expenses and income for the period after adjusting for
accruals and prepayments.
5. Adjust other current assets like debtors and inventory. Depreciate
the non-current assets taking care of any acquisitions and disposal
during the year.
6. Get other information like drawings (of cash or goods), additional
capital, any theft or other disaster.
7. Prepare the final accounts in the light of all the information given.
There may be use of common ratios to determine missing figures
like sales, purchases, other balances or loss due to natural disaster.
Example 1 : The following is a summary of Jane’s account for the year ended
31/12/2010
1.1.2010 31.12.2010
Inventory 108,000 122,000
Accounts payables for goods 127,000 141,000
Accounts receivables for goods 212,000 198,000
Insurance prepaid 4,200 4,400
Rent owing 3,900 -
Fixtures at valuation 18,000 16,000
All of the business takings have been paid into the bank with the exception of
Rwf 174,000. Out of this, Jane has paid wages of Rwf 112,600, drawings
Rwf 12,000 and purchases of goods Rwf 49,400.
The following additional information is available for Bank Account
Rwf Rwf
Balance 1.1.2010 41,000 Payments to creditors for goods 673,600
Cash banked 911,900 Rent 39,500
Balance 31.12.2010 63,000 Insurance 14,700
Sundry expenses 6,100
Drawings 282,000
1,015,900 1,015,900
Required: Drawing up financial statements for the year ended 31/12/2010.
Show all of your workings
Answer 1
Statement of affairs as at 1/1/2010
Non-current asset
Fixtures 18,000
Current assets
Inventory 108,000
Accounts receivable 212,000
Insurance prepaid 4,200
Bank 41,000 365,200
Total assets 383,200
Current liabilities
Rent owing 3,900
Accounts payable 127,000 (130,900)
Opening Capital 252,300
Cash a/c
Sales – cash 1,085,900 wages 112,600
drawings 12,000
Purchases 49,400
Cash sales banked 911,900
Total 1,085,900 1,085,900
Sales ledger control a/c
Balance b/d 212,000 Receipts : cash 1,085,900

Sales(missing figure) 1,071,900 Balance c/f 198,000
1,283,900 1,283,900
Purchases ledger control a/c

Paid to suppliers – bank 673,600 Balance b/d 127,000
cash 49,400 Purchases(missing figure) 737,000
Balance c/d 141,000
Total 864,000 864,000
Income Statement for the year ending 31 December 2005
Sales 1,071,900
Less Cost of sales
Inventory at 1.1.2010 108,000
Purchases 737,000
Inventory at 31.12.2010 (122,000) 723,000
Gross profit 348,900
Less expenses
Wages 112,600
Rent (39,500-3,900) 35,600
Insurance(14,700 + 4,200 – 4400) 14,500
Sundry expenses 6,100

Depreciation fixtures 2,000 (170,800)
Net profit 178,100
Balance sheet as 31 December 2008
Non current assets
Fixtures at valuation 18,000
Less depreciation 2,000
16,000
Current assets
inventory 122,000
Accounts receivables 198,000
Prepayments 4,400 324,400
TOTAL ASSETS 340,400
Liabilities
Accounts payables 141,000
Bank overdraft 63,000 (204,000)
Net current assets 136,400
Financed by :
Opening capital 252,300
Net profit 178,100
430,400
Less drawings (282,000+12,000) (294,000)
136,400
Example1: The following is a summary of Max’s bank account for the year ended 31/12/ 2009
FRw FRw
Balance 1st Jan. 2009 5,000 Payment to creditors 20,000
Receipts from debtors 35,000 Rent 12,000
Balance 31st Dec. 2009 6,220 Insurance 400
Office expenses 270
Drawings 13,550
Total 46,220 Total 46,220
All of the business takings have been paid into the bank with the exception of FRw5,600. Out
of this, Max paid wages of FRw2,500,drawings of FRw600 and purchase of goods FRw2,500
Additional information available:
As at 31/12/2008 As at 31/12/ 2009
Rwf Rwf
Inventory 22,000 17,000
Trade payables 5,300 5,000
Trade receivables 12,000 19,000
Rent prepaid 0 50
Insurance owing 150 200
Machinery at valuation 4,700 4,350
Required: Prepare the financial statements for the year ended 31st December 2009.
ACCOUNTING FOR NON- PROFIT MAKING ENTITIES
Definitions
 Non Profit Making entities are some form of organizations that are set up
to promote or to cater for the welfare of the members involved and not to
make a profit. These include clubs like football clubs and sports clubs,
welfare associations and any other societies like charitable institutions.
 They are not governed by any statutory regulations governing the keeping
of proper books of account nor the form of financial statements that are to
be prepared.
 Most of the time the records kept are of cash basis. So most of the time the
financial statements are prepared in either:
 Receipts and payments account with a list of assets and liabilities or

Income and expenditure account and balance sheet
Since the organization is not trading, then the main source of income is
from members.
 Subscriptions income : Subscriptions represent the contribution by
members of the organization towards the income for the period.
 Other incomes: may be through donations from well wishers and even
sometimes from small trading activity or investing activity. Expenses
will be similar to that of trading concerns other than the slight
difference in nature.
 Accumulated fund: This represents the accumulated income overtime.

It is similar to capital for trading concerns. This exists because there is
no specific owner for the organization but for the members in whole.
Accounting for non-trading organizations
Since accounting records may not be up to date or may be lacking, the
following procedures will be followed:
I. Obtain the opening information about the assets, liabilities and
Accumulated fund.
II. This is determined by preparing a statement of affairs at the start
of the period. From the accounting equation it is possible to get the
opening balance of accumulated fund. Assets – Liabilities =
Accumulated fund
III. Prepare a summary of receipts and payments if it is not prepared yet

from the scanty information available.
IV. Use control accounts to determine missing figures of subscriptions
income or balances and other income and expenses.
V. Do other adjustments for non-current assets, current assets and

current liabilities.
VI. Use all the information from previous steps to prepare the financial
statements
•Format of the Financial statements
Name of Organization
Income and Expenditure Account for the year ended date
FRw FRw
Incomes
Subscriptions XX
Profit from trading activities XX
Income from investments XX
Donations XX
Income from other activities like dance or festival XX
XX
Expenditure
Depreciation XX
Salaries and wages XX
Expenses on other activities [prizes] XX
Loss from trading activities XX
All other expenses XX
(XX)
SURPLUS/(DEFICIT) XX
Balance sheet as at date
FRw FRw FRw
Non-current assets Cost Dep’n Net
Land and buildings XX (XX) XX
Furniture and Equipment XX (XX) XX
Motor Vehicles XX (XX) XX
Investments XX - XX
XX
Current Assets
Inventory for the bar XX
Debtors (or accounts receivable) XX
Prepaid expense XX
Accrued subscriptions XX
Bank XX
Cash XX
XX
XX
Accumulated fund XX
Surplus/(deficit) XX XX
XX
Other funds
Life membership XX
Non-current liabilities :
5 Year loan XX
Current liabilities
Creditors (bar supplies) XX
Accrued expense XX
Notes To The Above Format:
(i)Subscriptions:
 These are the amounts received by the club from the members to renew their
membership. It is often paid on an annual basis.
It is an income for the club and therefore reported in the income and expenditure
account.
Depending on the policy of a club, any subscriptions due but not received are shown
as accrued income (debtors for subscriptions) in the balance sheet.
 Any amounts prepaid are shown as prepaid (creditors for subscriptions).
 Some clubs will not report subscriptions as income until it is received in form of cash.
(ii)Income from Investments:

 Some clubs invest excess cash in the bank (fixed deposit account), shares of limited
companies, treasury bills and any other investment that may be available.
 If the club is investing with no specific intention (i.e a general investment) then
income from this investment should be reported in the income and expenditure
account.
 If the investment is for a specific purpose and relates to a specific fund (e.g building
fund) it will not be reported in the income and expenditure account but credited
directly to the fund.
Other funds
These are funds set up for a specific purpose and not general. They will be shown
together with the accumulated fund.
 Any incomes relating to these funds will be credited directly to the funds and
any expenses will be taken off from these funds e.g. building fund, education
fund.
Life Membership Fund

 Some members may pay some amount to become life members of the club and
if this happens, there may be a need to spread out this income over the
expected life of the members in the club.
 Depending on the policy of a club, the following accounting treatment
may be allowed:
 The full amount is reported in the Income and Expenditure account in the year
it is received and therefore no balance is retained in the life membership
account.
 The amount is shown separately in the life membership fund with no transfer
in the Income and Expenditure account and hence no balance in the life
membership account.
 To transfer some amounts from the life membership funds to the income and
expenditure account over the expected life of membership to the club.
Example
The Secretary of the Green lodge Club issued the following receipts and payments account to
members:
Receipts and Payments Account for the year to 30 June 2009
FRw‘000’ FRw‘000’
Cash balance 1,620 Wages 15,300
Subscriptions 22,410 Secretary's salary 2,700
Bank loan 4,500 Rent of hall 900
Games' fees 270 Printing and postage 2,115
Drink machine receipts 936 Purchase of new chairs 3,240
Loss on dance 198
Cash balance 5,283
29,736 29,736
The Secretary gave the following information:

Subscriptions included FRw180,000 from previous year, FRw72,000 received in respect of advance
payment for next year, and that FRw225,000 was due but unpaid.
Games' fees included FRw27,000 paid in advance for the following year's matches.
The cleaner had not been paid FRw108,000 for June and was to be paid this amount in July 2009
Stationery purchased in the year and held in stock on 30 June was valued at FRw180,000.
The furniture at 30 June valued at FRw3,105,000 , this included what was purchased during the year.
The accumulated fund at the previous 1 July was FRw1,800,000.
You are required to prepare an income and expenditure account for the club for the year ended
30 June 2009 and a balance sheet at that date.
Workings
Subscription account
FRw‘000’ FRw‘000’
Accrued b/f 180 Receipts and payments 22,410
Income and expenditure 22,383

Prepaid c/f 72 Accrued c/f 225
22,635 22,635
Games fees account

FRw‘000’ FRw‘000’
Income and expenditure 243 Receipts and payments 270
Prepaid c/f 27
270 270
Wages account
FRw‘000’ FRw‘000’
Receipts and payments 15300 Income and expenditure 15408
Accrued c/f 108
15408
15048
Workings
Printing and postage account

FRw‘000’ FRw‘000’
Receipts and payments 2,115 Income and expenditure 1,935
Inventory c/f 180
2,115 2,115
Furniture FRw.‘000’
Acquired during the year 3,240
Balance c/f 3,105
Depreciation 135
Notes:
In this question the accumulated fund was given
Receipts and payments account had already been prepared
Depreciation was calculated assuming there was no other balance at the start of the year because of
lack of that information
Take care of the adjustments of income and expenses as shown in the workings
Solution: Greenlodge Club
Income and Expenditure Account for the year ended 30 June 2009
FRw‘000’ FRw‘000’
Incomes
Subscriptions (w1) 22,383
Games fees (w2) 243
Drink machine receipts 936
23,562
Expenditure
Wages (w3) 15,408
Printing and postage (w4) 1,935
Secretary’s salary 2,700
Rent 900
Loss on dance 198
Depreciation (w5) 135
21,276
Surplus 2,286
Balance sheet as at 30 June 2009
FRw‘000’ FRw‘000’
Non-current assets Net
Furniture (w5) 3,105
Current Assets
Stationery stock (w4) 180
Accrued subscription (1) 225
Cash 5,283
5,688
8,793
Accumulated fund 1,800
Surplus 2,286
4,086
Non-current liabilities
Bank loan 4,500
Current liabilities
Prepaid subscriptions (w1) 72
Prepaid games fees (w2) 27
Accrued wages (w3) 108
207
8,793
Notes:
In this question the accumulated fund was given
Receipts and payments account had already been prepared
Depreciation was calculated assuming there was no other balance at the start of the year becaus
of that information
Take care of the adjustments of income and expenses as shown in the workings
Workings
Printing and postage account

FRw‘000’ FRw‘000’
Receipts and payments 2,115 Income and expenditure 1,935
Inventory c/f 180
2,115 2,115
Furniture FRw.‘000’
Acquired during the year 3,240
Balance c/f 3,105
Depreciation 135
Exercise (Q21)
The assets and liabilities of the Safari Social Club as at 1 November 2015 were:
Cash held at bank Rwf380,000; furniture and equipment Rwf420,000; bar stock Rwf120,000; rent
owing on premises Rwf30,000. The following is a summary of receipts and payments for the club for
the year ended 31 October 2016:
Receipts Rwf Payments Rwf
Balance 1 November 2015 380,000 Bar purchases 1,485,000
Subscriptions 1,420,000 Annual dance expenses 580,000
Annual dance 750,000 Rent of premises 840,000
Bar sales 2,040,000 Secretary's expenses 225,000
Purchase of furniture 200,000
Wages of caretaker 580,000
Balance 31 October 2016 680,000
4,590,000 4,590,000
The following information was also available:
- Bar stock at 31 October 2016 was FRw150,000
- Rent for premises of FRw110,000 was owing at 31 October 2016
- Depreciation on furniture is 10% of value of furniture at the end of the year
You are required to:
(a) Calculate the accumulated fund at 1 November 2015
(b) Prepare an income and expenditure account for the year ended 31 October 2016,
showing clearly the profit/loss on the bar and the dance
(c) Prepare a balance sheet for the club as at 31 October 2016
Q23: CBESA a students welfare organization at CBE provided for you the following balances and ‘receipts
and payments’ for the year ended 31 May 2017. CBESA operates a shop for the students at the campus.
Receipts FRw Payments FRw

Subscriptions 2,560,000 Advertising 345,000
Shop sales receipts 1,540,000 Shop Purchases 857,000
Donations received 1,500,000 Loan repayment 400,000
Government Subsidies 1,890,000 Interest paid 120,000
Shop assistants Wages 560,000
Shop rent 750,000
Additional equipment 250,000
31 May 2018 FRw 2017FRw
Equipment (Net book value) ? 340,500
Shop furniture and fittings (Net book value) ? 246,700
Shop inventory 350,500 400,400
Accounts payable 210,000 145,000
Bank overdraft ? 52,000
Bank loan ? 1,200,000
Shop assistants wages unpaid 135,000 89,000
Subscriptions accrued 524,000 845,000
Additional information Depreciation:
Equipment 15% reducing balance basis ; Shop furniture and fittings 10% reducing balance basis
Required: a) Calculation of the accumulated fund as at 01 June 2017
b) Income and expenditure account on 31 May 2018(showing profit or loss from the shop)
c) Balance sheet as at 31 May 2018
CHAPTER FOUR: PARTNERSHIP ACCOUNTS
A. DEFINITION
A partnership is a relationship that subsists between two or more persons

carrying on a business in common with a view to making profit.
B. THE NEED FOR PARTNERSHIPS

 There are various reasons for multiple ownership:
 The capital required is more than one person can provide
 Many people want to share management instead of doing everything on
their won
 Partners will be members of the same family
 Two types of multiple ownership; partnership and limited companies
C. NATURE OF PARTNERSHIPS
It has the following characteristics:

 It is formed to make profits
 It must obey the law as given in partnership
 Normally minimum of Two partners and a maximum of 20 partners
 Exceptions: banks not more than 10 partners; No limit for firms

of accountants, Solicitors, stock exchange members and other
professionals’ bodies.
 Each partner (except for limited partners) must pay their share of
any debts that the partnership could not pay. If necessary they could be
forced to sell all their private possessions to pay their share of the
debts. This can be said to be unlimited liability.


D. LIMITED PARTNERS(LPs)
 LPs are not liable for the debts. They have the following characteristics:
 Their liability for the debts of the partnership is limited to the capital
they have put in. they can lose that capital, but they cannot be asked
for any more money to pay the debts.
 They are not allowed to take part in the management of the
partnership business.
 All the partners cannot be limited partners so that there must be at
least one partner with unlimited liability.
 E. PARTNERSHIP DEED
A partnership deed is an agreement written showing the terms of the
partnership. This is to be point of reference in case there is there is a
dispute between the partners.
Contents of partnership agreement include:
1) Name(s) and address(s) of the partnership and the partners
2) Capital amount to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a

percentage. This is a rate of division of residual profit depending on
participation of the partners in the partnership
4) Interest on capital – is interest to be paid on capital contributed by

partners usually expressed as a percentage or a given rate.
5) Salaries to be paid to any partners who will be involved in the active

management of the business as a share of profit from the partnership has
to be stated
E. PARTNERSHIP DEED(Con’t)
5) Drawings – the maximum amount to be withdrawn by partners for

given period has to stated so that partners do not take the whole
capital.
6) Any interest to be charged on drawings made by the partners so as to

discourage the partners from drawings.
7) Procedures to be taken on the retirement, admission of a partner and

dissolution of partnership. Also procedures to be taken in case of
disputes
E. PARTNERSHIP DEED(Con’t)
In case a partnership deed is not prepared and yet persons operate as
partnership, then the provisions of The laws relating to companies will be
taken to operate. These are as follows:
 The capital of the partnership is to be contributed equally by the partners
 No interest is payable by the firm on capital introduced by the partners
 If a person lends additional money to the firm, he is entitled to interest at 5%
per annum
 Each partner is entitled to act in the management of affairs of the firm
 No partner is entitled to a salary for acting in this capacity as manager
 If a partner dies, his estate is entitled to his share of the capital that stands to
the credit of his capital account.
 If a partner retires and leaves his capital in the partnership, then he is entitled
to interest at 5% per annum on the amount
 If the partnership is dissolved, the creditors take priority over the partners. Any
funds available after settling the creditors’ claims are used to repay any
partners’ loans and then their capital.
F. ACCOUNTING FOR PARTNERSHIP
 The interest of the partners in the business is either long term or short-
term.
 The long-term interest is the capital contributed by each partner and the
balance is expected to remain fixed. It will only change when the partners
agree or in case of any changes in the partnership like admission or
retirement of a partner.
 The short-term interest is reflected in form of a current account, which

is affected by the business activities of the partnership (that is the profits
or losses) and any drawings made by the partners.
 Each partner’s short term and long-term interest must be shown separately
in his/her account.
CAPITAL ACCOUNT
A B C A B C
FRw. FRw. FRw. FRw. FRw. FRw.
Balance b/d XX XX XX
Balance c/d XX XX XX Cashbook (Add XX XX XX
capital)
XX XX XX XX XX XX
CURRENT ACCOUNT
A B C A B C
Balance b/d XX Balance b/d XX XX
Interest on XX XX XX Interest on capital XX XX XX
drawings
Drawings XX XX XX Salaries - XX XX
Share of profits XX XX XX
Loan interest - XX -
Balance c/d XX XX - Balance c/d - - XX
XX XX XX XX XX XX
Balance b/d - - XX Balance b/d XX XX -
F. ACCOUNTING FOR PARTNERSHIPS(Con’t)
Note that the current account is just like the capital account. It is maintained
separately to indicate the short-term interest.
It is possible to have a current account that has a debit balance like for
partner B at the start of period and partner C at the end of the period.
This shows that a partner has withdrawn more than what is

accumulated in the short-term interest.
INTEREST ON CAPITAL
This interest is treated as a deduction prior to the calculation of profits and
their distribution according to the profit-sharing ratio.
The rate of interest is a matter of agreement between the partners, but it

should equal the return which they would have received if they had
invested the capital elsewhere.
INTEREST ON DRAWINGS
In the best interest of the firm the cash is withdrawn from the firm by the
partners in accordance with the two basic principles:
 As little as possible
 As late as possible
To discourage the partners from taking out cash unnecessarily the concept
can be used of charging the partners interest on each withdrawal.
 The amount charged to them helps to increase the profits divisible
between the partners.
SALARIES TO PARTNERS
One partner may have more responsibility or tasks than others. As a reward
for this, rather than change profit and loss sharing ratio, he may have a
salary which is deducted before sharing the balance of profits.
PROFIT(LOSS) SHARING RATIOS

Partners can agree to share profits/losses in any ratio or any way that they may wish.
Example: capital: John Rwf 2,000,000
Tom Rwf 1,000,000
They would share the profits in the ratio of ⅔ to ⅓
Alan, Bob and Colin shared profits in the ratio 3:2:1.

Fluctuating capital account
When the entries in the current account are passed through the capital account
then we have a fluctuating capital account. This is as follows:
FLUCTUATING CAPITAL ACCOUNTS

A B C A B C
Interest on drawings XX XX XX Balance b/d XX XX XX
Drawings XX XX XX Cashbook (Add) - XX -
Interest on capital XX XX XX
Salaries - XX XX
Share of profits XX XX XX
Balance c/d XX XX XX Loan interest - XX -
XX XX XX XX XX XX
F. ACCOUNTING FOR PARTNERSHIPS(Con’t)
The entries on the credit side represent share of the profit from the business, which is
form of interest on capital, salaries to partners and share of residual profit. The
journal entries are as follows;
Debit Appropriation account
Credit Partners current accounts
With interest on capital, salaries and share of residual profit
Debit Income statement
Credit Partners current accounts
With interest on loan
Loan interest is an expense and not a share of profit. It is credited to the partners
current/capital account if not paid.
The entries on the debit side represent the charges to partners’ capital.
These include interest on drawings and drawings, which reduce capital just like for a sole
trader. The journal entries are as follows:
Debit Partners current accounts
Credit Appropriation account
With the amount of interest on drawings
Debit Partners current account
Credit Drawings
With the amount of drawings for the year
Division of profits and losses
Profit or loss is usually determined in the normal way like a sole trader. The difference comes in
when sharing out the profit or loss. An appropriation account is opened and the profit or loss for the
period is transferred to it. An appropriation account is an account that shows how profit or
loss is shared amongst the partners. It has the following format:
A, B and C Appropriation account for the year ended date
FRw. FRw
.
Net profit/(loss) XXX
Add:
Interest on drawings
A XX
B XX
C XX
XX
Less:
Interest on capital
A XX
B XX
C XX
XX
Salaries
B XX
C XX
XX
Residual profit
XXX
A (Share Ratio or percentage for A) x Residual profit XX
B (Share Ratio or percentage for B) x Residual profit XX
C (Share Ratio or percentage for C) x Residual profit XX
XXX
Statement of financial position
The income statement is completely the same as for a sole trader other
than the additional part of appropriation account as shown previously.
 The Statement of financial position is also the same, as that for a sole
trader but the interest of each partner in the business should be shown
separately.
 That is the capital and current accounts balances for each partner are
shown separately. Any loan given by a partner to the firm is also shown
separately in the non- current liability section therefore, the format will
be as follows.
Statement of financial position as at date
ASSETS FRw FRw FRw

Non-current assets Cost Dep’n Net
Land and buildings XX (XX) XX
Furniture and Equipment XX (XX) XX
Motor Vehicles XX (XX) XX
Investments XX - XX
XX
Current Assets
Inventory XX
Receivables (or accounts receivable) XX
Prepaid expense
Accrued income XX
Bank XX
Cash XX
XX
TOTAL ASSETS
XX
EQUITY AND LIABILITIES
Capital accounts
A XX
B XX
C XX
XX
Current accounts
A XX
B XX
C (XX)
XX
TOTAL EQUITY XX
Non-current liabilities
Loan from B XX
Current liabilities
Payables XX
Accrued expense XX
Prepaid income XX
Bank overdraft XX
TOTAL LIABILITIES XX
TOTAL EQUITY AND LIABILITIES XX
Example
A and B own a grocery shop. Their first financial year ended on 31 December 2017. The
following balances were taken from the books on that date:
Capital:
A- FRw.60,000;
B - FRw.48,000.
Partnership salaries:
A - FRw.9,000;
B - FRw.6,000.
Drawings:
A - FRw.12,000;
B - FRw.13,400.
The firm’s net profit for the year ended 31 December 2017 was FRw.32,840.
Interest on capital is to be allowed at 10% per year. Profits and losses are to be shared
equally.
From the information above prepare the firm’s appropriation account and the partners’
current accounts.
SOLUTION
A& B partnship Appropriation account for the year ended 31 December 2017
FRw. FRw.
Net profit/(loss) 32,840
Less
Interest on capital
A 6,000
B 4,800
(10,800)
Salaries
B 9,000
C 6,000
(15,000)
Residual profit
7,040
A (1/2) x 7,040 3,520
B (1/2) x 7,040 3,520
7,040
CURRENT ACCOUNTS
A B A B
FRw. FRw. FRw. FRw.
Drawings 12,860 13,400Interest on capital 6,000 4,800
Bal c/d 5,660 920Salaries 9,000 6,000
Profit share 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920
Example 2
Draw up an appropriation account for the year ended 31 December 2017 and
Statement of financial position extracts at the date, from the following:
(i) Net profits FRw.30,350
(ii) Interest to be charged on capitals: W FRw.2,000; P FRw.1,500;
H FRw.900
(iii) Interest to be charged on drawings; W FRw.240; P FRw.180;
H FRw.130
(iv) Salaries to be credited: P FRw.2,000; H FRw.3,500.
(v) Profits to be shared: W 50%; P 30%; H20%.
(vi) Current accounts: balances b/f W FRw.1,860; P FRw.946; H FRw.717
(vii) Capital accounts: balances b/f W FRw.40,000; P FRw.30,000;
H FRw.18,000
(viii) Drawings: W FRw.9,200; P FRw.7,100; H FRw.6,900.
Appropriation account for the year ended 31 December 2017
FRw. FRw.
30,350
Net profit/(loss)
Add:
Interest on drawings
W 240
P 180
H 130 550
Less:
Interest on capital
W
2,000
P 1,500
H 900
(4,400)
Salaries
P 2,000
H 3,500
(5,500)
Residual profit 21,000
W (50% x 21,000) 10,500
P (30% x 21,000) 6,300
H (20% x 21,000) 4,200
21,000
Current Account
W P H W P H
Interest on drawings 240 180 130Balance b/d 1,860 946 717
Drawings 9,200 7,100 6,900Interest on capital 2,000 1,500 900
Salaries ------ 2,000 3,500
Balance c/d 4,920 3,466 2,287Share of profits 10,500 6,300 4,200
14,360 10,746 9,317 14,360 10,746 9,317

Statement of financial position (extract) as at 31 December 2017
FRw FRw
Capital accounts
W 40,000
P 30,000
H 18,000 88,000
Current accounts
W 4,920
P 3,466
H 2,287
10,673
98,673
 PARTNERSHIP ACCOUNTS
EXERCISES(Q2, Q3, Q4)

CHANGES IN OWNERSHIP OF PARTNERSHIP
 These include:
 1. Admission of a partner;
 2. Retirement/Death of a partner;
 3. Amalgamation of sole traders;
 4. Dissolution;
 5. Conversion into a limited liability company; and
 6. Changes in agreement among existing partners.
Admission of a partner
A new partner(s) can be introduced after all partners are in agreement to this
effect. The old partnership ceases to exist and a new partnership starts.
The accounts of the old partnership can be closed then a new set of accounts
prepared for the new partnership. This is really followed. So admission of a
partner merely entails addition of a capital column for the new partner and the
following entries thereafter:
 Dr Asset accounts
 Cr Capital account (with assets received from the joining partner which can be
cash) However, both admission and retirement/death bring about the
following additional issues:
 1. Goodwill;
 2. Revaluations;
 3. Changes taking place partway through the year.
Goodwill
 Goodwill is the benefit arising from connection and reputation in
respect of continuing business.
 It arises due to the good relationship a business has with the customers.
It also arises due to the good staff.
 It cannot be separated from the business. It is intangible since it has no

physical existence. For a partnership
 it is usually introduced after being determined by the partners as an

asset to compensate the partners for its existence.
 Goodwill will be recorded during any change in ownership as follows:
Dr Goodwill account
Cr Capital accounts (in old profit sharing ratio)
 This can remain in the accounts like this or it can be eliminated. If it

remains in the accounts then the partners’ capital would have
increased.
 Goodwill can be eliminated as soon as transition in ownership is
complete by:
Dr Capital accounts (in new profit sharing ratio)
Cr Goodwill
 This is of course, subject to continuance of the business. Goodwill will
not be eliminated if there is no business continuance like in
dissolution.
 This process ensures that the joining partner pays for the goodwill
that had already existed. This is because the new profit share ratio
will include the new partner.
Revaluation account
Revaluation of assets and liabilities are usually carried out during changes in ownership. In such
cases a account will be opened. After opening the revaluation account is just to find increase or
decrease due to revaluation, which is dealt with in the following way
Dr Revaluation account X X
Cr Assets accounts
Decrease of the assets amounts that have been revalued
Dr Liabilities accounts X
Cr Revaluation account X
Decrease of the liabilities amounts that have been revalued
Dr Assets account X
Cr Revaluation accounts X
Increase in assets amounts that have been revalued
Dr Revaluation accounts X
Cr Liabilities account X
Increase in liabilities amounts that have been revalued
If a credit balance remains this is a profit on revaluation

Dr Revaluation account X
Cr Current accounts X
Profit from revaluation (using the old profit sharing ratios)
If a debit balance remains the this is a loss on revaluation

Dr Current accounts X
Cr Revaluation account X
Example
Bikeke and Wasonga are partners who share profits and losses equally. On 31st December 2016,
the Statement of financial position of the firm appeared as follows
Bikeke and Wasonga
Statement of financial position As at 31st December 2016
‘
NON-CURRENT ASSETS Net Dep’n Net

Freehold property 2,100
CURRENT ASSETS
Inventory 850
Receivables 960
Cash 340 2,150
4,250
Capital accounts: Bikeke 2,170
Wasonga 1,490 3,660
CURRENT LIABILITIES
Payables 590
4,250
On this date they agreed to admit a new partner, Gisore. It was agreed however, that the above assets
are to be taken at the following valuations:
Freehold property Frw1,960 ; Inventory Frw 810
A provision of 5% is to be provided on the Receivables; Goodwill is agreed at FRw 80,000 and it is not
to be maintained in the accounts. These adjustments are to be carried out before the admission of the
new partner. The new partner is to introduce FRw 500,000 cash and Inventory valued FRw 400,000.
The new partnership profit/loss sharing ratios are to be 3:3:2
Required: a) Show the journal entries required ;
b) Show the Statement of financial position just after the admission
Solution
It will be better to deal with the goodwill first
Dr FRw Cr FRw
Dr Goodwill account 80,000
Cr Capital account- Bikeke ½ X 80,000 40,000
Capital account- Wasonga ½ X 80,000 40,000
To introduce goodwill (old profit share ratio)
Dr Capital account- Bikeke 3/8 X 80,000 30,000
30,000
Capital account- Wasonga 3/8 X 80,000
20,000
Capital account- Gisore 2/8 X 80,000 80,000
Cr Goodwill account
To write off the goodwill (new profit share ratio)
To deal with the revaluation of assets, using the first method
Dr Revaluation account 3,910
Cr Freehold property account 2,100
Inventory 850
Receivables 960
Book value of the assets that have been revalued
Dr Freehold property account 1,960
Inventory 810
Receivables (960,000-(5%X960,000)) 912
Cr Revaluation account 3,682
Revalued amounts of the assets that have been revalued
Dr Capital accounts- Bikeke ½X(3,682,000-3,910,000) 114
Capital accounts- Wasonga ½X(3,682,000-3,910,000) 114
Cr Revaluation account (3,682,000-3,910,000) 228
Loss from revaluation (using the old profit sharing ratios)
To show introduction of capital by Gisore

Dr Cash account 500
Inventory 400
Cr Capital account- Gisore 900
To introduce Capital in form of assets
The Statement of financial position just after admission of Gisore will look as follows:
Bikeke, Wasonga and Gisore
NON-CURRENT ASSETS Net Dep’n Net

Freehold property (W3) 1,960
CURRENT ASSETS
Inventory (W2) 1,210
Receivables 960
Provision for bad debts 48 912
Cash (W1) 840 2,962
4,922
TOTAL ASSETS
Capital accounts: Bikeke (W5) 2,066

Wasonga(W5) 1,386
Gisore (W5) 880 4,332
CURRENT LIABILITIES
Payables 590
TOTAL EQUITY AND LIABILITIES 4,922

’ W1 _______________Cash account ____________________________
Balance b/f 340
Capital account- Gisore 500 Balance c/f 840
840 840
W2 Inventory account_____________________
Balance b/f 850 Revaluation 850

Revaluation 810
Capital account- Gisore 400 Balance c/f 1,210
2,060 2,060
W3 Freehold property account

Balance b/f 2,100 Revaluation 2,100
Revaluation Balance c/f 1,960
1,960
4,060 4,060
W4 Revaluation account
FRw‘000’ FRw‘000’
Freehold property 2,100 Freehold property 1,960
Inventory 850 Inventory 810
Receivables 960 Receivables 912
Capital account-Bikeke 114
Wasonga
114
3,910 3,910
W5 Capital accounts
B W G B W G
FRw FRw FRw FRw
FRw FR ‘000’ ‘000’ ‘000’
‘000’ ‘000’ ‘000’
Goodwill 30 30 20 Bal b/f 2,170 1,490 -

Revaluation 114 114 Gdwill 40 40 -
-
Cash - - 500
Bal c/d 2,066 1,386 880 Inventory - - 400
2,210 1,530 900 2,210 1,530 900

ii) Retirement/Death of a partner
 Retirement or death is the opposite of admission. If the partnership continues
without the retiring or dead partner, all amounts of profit/loss up to the date of
retirement or death is distributed to the partners.
 Amounts from the current account are transferred to the capital account. Any
balance in the capital account of the retiring/dead partner is paid to the
retiring partner or the estate of the dead partner.
 Such balance may also remain in the partnership if there is no enough cash or
assets to pay out. Such amounts are taken, as loan and will earn interest.
 Retirement/death involves making entries to the reverse of those required for

admission, as follows:
 Dr Capital accounts
 Cr Asset account (with asset given or paid to the retiring partner or
beneficiaries of the demised partner).
 Example
 Jana, Kariz and Limo are in partnership sharing profit and losses in the ratio of 2:2:1
respectively. Partner Jana decides to retire on 31 December 2014 when the partnership
Statement of financial position is as follows:
Jana, Kariz and Limo

FRw FRw
NET ASSETS
100,000
Capital accounts: Jana 35,000

Kariz 45,000
Limo 20,000 100,000
Goodwill is agreed at a valuation of FRw.30,000. Kariz and Limo are to continue in partnership
and will share profits and losses in the ratio of 2:1 respectively. Jana agrees to leave FRw.20,000
of the amount due to him as a loan to the new partnership.
Required:
(a) Show necessary journal entries
(b)Capital accounts
(c) Statement of financial position after the retirement of Jana
Solution
The journal entries on retirement of Jana from the partnership are as follows:
Dr FRw Cr FRw
Dr Goodwill account 30,000
Cr Capital account- Jana 2/5 X 30,000 12,000
Capital account- Kariz 2/5 X 30,000 12,000
Capital account- Limo 1/5 X 30,000 6,000
To introduce goodwill (old profit share ratio)
Dr Capital account- Kariz 2/3 X 30,000 20,000

Capital account- Limo 1/3 X 30,000 10,000
Cr Goodwill account 30,000
To write off goodwill (new profit share ratio)
The capital accounts will then look as follows
_____Capital account____________________
Jana Kariz Limo Jana Kariz Lim
FRw FRw FRw FRw FRw FRw

‘000’ '000’ ‘000’ ‘000' ‘000' ‘000'
Goodwill - 20 10 Bal b/f 35 45 20
Loan-Jana 20 Goodwill 12 12 6
Bank 27
Bal c/d - 37 16
47 57 26 47 57 26
Note;
After recording goodwill, the balance of Jana’s capital account is FRw 47,000 (that is FRw 35,000 +
FRw.12,000, being her share of goodwill). Of this, FRw 20,000 will be retained in the business as a
loan, and FRw.27,000 will be paid to her from the partnership bank account.
The Statement of financial position, after the retirement of Jana, appears as
follows
Kariz and Limo

Statement of financial position As at 31st December January 2014
ASSETS (100,000- 27,000) 73,000
Capital accounts: Kariz 37,000

Limo 16,000 53,000
Loan- Jana 20,000
73,000
The effect of this is that the remaining partners have bought out Jana’s FRw.12,000 share of
goodwill of the business (costing FRw.8,000 to Kariz and FRw.4,000 to Limo)
If the business was to be sold later, Kariz and Limo would share the goodwill obtained from the sale
in their new profit sharing ratio.
Example 2
Ali, Kimani and Wambua had been in partnership, sharing profits and losses
equally after allowing interest on capital at 10% per annum. Wambua retired from
the partnership on 31December 2011 and Ali and Kimani agreed to continue
with the business sharing profits and losses in the ratios 3/5 and 2/5
respectively after allowing interest on capital as before.
Wambua agreed that repayment of his capital be delayed for three years and the
outstanding amount be subject of interest at the rate of 15% per annum.
Any balance on Wambua’s current account is to be held in a separate account and
be payable on demand.
On 31 December 2011, a valuation of goodwill was carried out and agreed at
FRw.1,440,000 but this was not to be reflected in the books. The land and
buildings were revalued at the same date at FRw.2,760,000 and were to be
adjusted in the books to this figure.
The firm prepared its accounts annually to 31 March, and at the time the following
trial balance was extracted, the above adjustments relating to the change in
partnership had not been made
Trial balance as at 31 March 2012
FRw FRw
Capital accounts: Ali 720,000
Kimani 960,000
Wambua 720,000
Current accounts: Ali 180,000
Kimani 240,000
Wambua 120,000
Drawings : Ali 660,000
Kimani 780,000
Wambua 480,000
Land and buildings (cost) 2,040,000
Plant and machinery (net as at March 2012) 720,000
Inventories 540,000
Receivables and Payables 360,000 660,000
Bank balance 180,000
Net profit for the year (after depreciation) ???????
5,760,000 5,760,000
Required:
(a) Profit and loss and appropriation account for the year ended 31 March 2012
(b) Statement of financial position as at 31 March 2012(Assume profit accrued evenly over the year)
Solution
Ali & Kimani
Profit and Loss appropriation a/c for the year ended 31 Marc 2012
9 months 31 Dec2011 3 months 31 Mar2012
Year
FRw FRw FRw FRw FRw
Net profit
‘000’ ‘000’ ‘000’ ‘000’ ‘000’
1,620 540 2,160
Loan interest (W1) - (45) (45)
1,620 495 2115
Interest on capital: (W1)
Ali 54 8.4 62.4
Kimani 72 21.6 93.6
Wambua 54 - 54
(180) (30) (210)
1,440 465 1,905
Profit share: (W1)
Ali 480 279 759
Kimani 480 186 666
Wambua 480 - 480
1,440 465 1,905
Ali and Kimani Statement of financial position As at 31st March 2002
NON-CURRENT ASSETS
Land and buildings 2,760

Plant and machinery 720
3,480
CURRENT ASSETS
Inventory 540
Receivables 360
Cash 180 1,080
4,560
Capital accounts: Ali 336

Kimani 864 1,200
Current accounts:
Ali 581.4
Kimani 459.6 1,041
NON-CURRENT LIABILITIES
Long term loan: (Wambua) 1,200
CURRENT LIABILITIES
Payables 660
Accrued loan interest(Wambua) 45
Short term loan (Wambua) 414 1,119
4,560
Workings
Profit for 9 months (9/12 x 2,160,000 = 1,620,000) 1,620
Interest on capital: Ali (10% x 720,000 x 9/12) 54

Kimani (10% x 960,000 x 9/12) 72
Wambua (10% x 720,000 x 9/12) 54_____

180
Share of Profit: Ali (1/3 x 1,440,000) 480
Kimani (1/3 x 1,440,000) 480
Wambua (1/3 x 1,440,000) 480 1,440
Profit for 3 months (3/12 x 2,160,000 = 540,000) 540
Loan interest: (15% x 1,200,000 x 3/12) 45
Interest on capital: Ali (10% x 336,000 x 3/12) 8.4

Kimani (10% x 864,000 x 3/12) 21.6
30
Share of profit: Ali (3/5 x 465,000) 279

Kimani (2/5 x 465,000) 186
465
Capital accounts
A K W A K W
FRw FRw FRw ‘000’ FRw FRw FRw
‘000’ 000’ ‘000’ ‘000’ ‘000’
Goodwill 864 576 - Balance 720 960 720
b/f
Loan a/c - - 1,200 Goodwill 480 480 480
Balance 336 864 -
c/f
1,200 1,440 1,200 1,200 1,440 1,200

iii) Dissolution
A partnership is terminated and is dissolved in the following circumstances:
1. When the fixed time in the partnership agreement expires
2. On the death of a partner
3. On the bankruptcy of a partner
4. If it becomes illegal in its operations
5. By the order of a court
6. On expulsion of partner
When a partnership is terminated the business can be run by other partners

(already considered earlier), sold as a going concern to other owners like
conversion to a company or even the assets sold to clear the business
completely.
Accounting procedures in dissolution of a partnership
1. Close all the accounts of assets and liabilities sold or taken over by
partners or other owners to realization account (this will assist
determine the profit or loss from dissolution).
2. Credit the realization account with any cash received for the assets and
liabilities (consideration for them)
3. Any expenses of realization should be debited the realization account
4. Liabilities should be paid for. If a partner has loan with the partnership
then it is paid.
5. Any balance in the realization account is transferred to capital accounts

in profit sharing ratios.
6. The balance in the capital accounts is then paid or a partner is asked to

pay the partnership
To open a realization account : The journal entries to be followed are: -
Dr Realization account X
Cr Assets accounts X
Book value of the assets
Cr Realization account X
Book values of those liabilities taken over
Dr. Realization X
Cr Cash/bank X
With expenses of realization
Sales proceeds from the sale of the assets and liabilities

Dr Cash X
Amount received for the sale of the assets and liabilities
The liabilities of the partnership if not taken over by the buyer

Cr cash account. X
Payment of liabilities
Assets taken over by any partner

Dr Partner's capital account X
With the agreed value
Balance in the realization account (if credit is a profit on realization)
Dr Realization account X
Cr Partner capital accounts X
Share of profit from realization in profit sharing ratios
Balance in the realization account (if debit is a loss on realization)

Dr Partner capital accounts X
Share of loss from realization in profit sharing ratios
If any partner had advanced a loan to the partnership

Dr Loan account X
Cr Cash/bank account X
Payment of loan to a partner
Note. The net balance in the capital account will always be equal to the balance in the
cashbook. Partners are paid for any credit balance in their capital accounts; partners with
debit balances will be required to pay to the firm a sum of money equal to the debit balance.
If a partner is unable to clear the deficiency in his capital account, the solvent partners will
bear the deficiency among themselves in the proportion of their last agreed capital (Garner V.
Murray). That is the balance in their capital accounts before the dissolution of the partnership.
Example
The following is the Statement of financial position of Jabari and Sagini on 31st December 2016,
on which date the partners decide to dissolve the partnership. They share profits and losses in the
proportion of two thirds Jabari and one thirds Sagini.
NON-CURRENT ASSETS
Fixtures and fittings 2,760
CURRENT ASSETS
Inventory 7,410
Receivables 3,480
Cash 990 11,180
14,640
Capital accounts: Jabari 5,600
Sagini 3,060 8,660
CURRENT LIABILITIES
5,980
Payables
14,640
The fixtures and fittings realize FRw.2,400,000, Inventory FRw.5,960,000 and Receivables
FRw.3,220,000. The expenses of realization are FRw.120,000
Required
Prepare the necessary accounts to show the dissolution of the partnership
Solution
1. The asset accounts other than the cash are transferred to the
realization account
2. The amounts realized from them is credited to the realization account
and debited to the cash book
3. The realization expense is then debited to the realization account.
4. The Payables are then paid
5. The balance in the realization account is then transferred to the capital
accounts.
6. The balance in the capital is then settled by cash
The accounts are as follows
Realization account
FRw‘000’ FRw‘000’
Fixtures and fittings 2,760 Cash (Fixtures and fittings) 2,400
Inventory 7,410 Cash (Inventory) 5,960
Receivables 3,480 Cash (Receivables) 3,220
Cash (Realisation expense) 120 Loss:
Capital: Jabari 2/3 X 2,190,000 1,460
Capital: Sagini 1/3 X 2,190,000 730
13,770 13,770
Cash account
Balance b/f 990 Realization (Realization expense) 120
Realisation (Fixtures & fittings) 2,400 Payables 5,980
Realisation (Inventory) 5,960 Capital: Jabari 4,140
Realisation (Receivables) 3,220 Capital: Sagini 2,330
12,570 12,570
Capital accounts
Jabari Sagini Jabari Sagini
FRw.‘000’ FRw.‘000’ FRw.‘000’ FRw.‘000
’
Realization 1,460 730 Balance 5,600 3,060
b/f
Cash 4,140 2,330
5,600 3,060 5,600 3,060
CHAPTER FIVE: REGULATORY FRAMEWORK FOR COMPANIES
DEFINITION
A company is a legal entity which is made up with at least one physical person or
corporate person for commercial purposes and after filling in a form thereto related and basing up
on the provisions of this Law. (Law relating to companies - N°07/2009 of 27/04/2009)
TYPES OF COMPANIES
There are two types of companies:
i. Private companies
These have the words limited (Ltd) at the end of the name. Being private, they cannot invite the
members of the public to invest in their ownership.
ii. Public companies

There much larger in size as compared to private companies. They have the word public limited
company(plc) at the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be
quoted on the stock exchange.
A company can also be categorized as follows:
i. Limited by Shares - is a company formed on the principle of having the

following liability of its members limited to the amount paid by shareholders or
the amount agreed to pay on the shares respectively held by them, if any.
ii. Limited by Guarantee - is a company formed on the principle of having the

following liability of its members limited to the security issued by shareholders
equivalent to the amount agreed as surety in case of liquidation
iii. Limited by Both shares and guarantee
iv. A company can also be unlimited company - a company formed on the

principle of having no limit placed on the liability of its shareholder
A public company can either be limited by shares or both by shares and guarantee
A private company can be in any of the categories

FORMATION OF COMPANY
A company is formed by incorporation.

Incorporation is done by :
-Filling appropriate forms for Memorandum of association and may have also
- articles of association given to registrar of companies with appropriate fees.
a certificate of incorporation is issued.
Memorandum of association is a document that shows the relationship between the

company and the outsiders.
It contains the name and address of the company, the objectives of the company, showing
whether it is limited or unlimited, showing whether it is private or public and the
authorized share capital
Articles of association shows the rules and regulations for the company internal structure.
It contain items like the number of directors, when the annual general meetings are to be
held. The voting rights of the shareholders, dividends policy, and other rule.
SHARE CAPITAL OF A COMPANY
The owner’s interest in a limited company consists of share capital. The share capital is
divided into shares. The investor will then pay for and be issued with the shares and
therefore, they become owners. Each share has a flat value called Par value/face
value/nominal value. (e.g.) If a company decides to set up a share capital of FRw.
200,000, it may decide to issue:
200,000 shares of FRw. 1 each per value.

There are 2 main types of share capital
Preference share capital - This is made up of preference shares and a preference share
carries the right to a fixed dividend, which is expressed as a percentage of their par value.
E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital - These are the most common shares. They carry no right to a
fixed dividend but are entitled to residual value of the business during winding up, and
all profits after the claim on the entire preference dividend have been paid. The more the
number of ordinary shares held, the higher the control.
Other terms in share capital
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the
company is allowed to issue to shareholders. A company cannot issue more shares than
the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital
required is less than the issued share capital.
(e.g.) If a firm issues ordinary shares of FRw10 each and request the shareholders to pay
6FRw. Assuming that the issued 100,000 shares, then the called up share capital will be:
6FRw x 100,000 shares = FRw600,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for
payment and therefore these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 4FRw, therefore the uncalled
capital is 4Frw x 100,000 shares = FRw400,000.
Paid-up share capital

This is the total of the share capital, which has been paid for by the shareholders.
Example
A limited has an authorized share capital of 200,000 shares of FRw10 each out of
which only 150,000 shares have been issued, Although the firm requested the
shareholders to pay FRw8 per share, the shareholders were able to pay FRw5
per share.
Required: Authorized share capital;
Issued share capital;
Called up share capital;
Uncalled up share capital ;
Paid up share capital.
Solution
Authorized share capital : 200,000 x FRw10 = FRw2,000,000
Issued share capital : 150,000 x FRw10 = FRw1,500,000
Called up share capital : 150,000 x FRw 8 = FRw 1,200,000
Uncalled up share capital : 150,000 x FRw 2 = FRw300,000
Paid up share capital : 150,000 x FRw 5 = FRw750,000
Eample2
 ‘ABC’ limited has an authorized share capital of 100,000
shares of FRw100 each out of which only 75,000 share
have been issued, Although the firm requested the
shareholders to pay FRw80 per share, the shareholders
were able to pay FRw50 per share.
You are required to determine:
1) Authorized share capital
2) Issued share capital
3) Called up share capital
4) Uncalled up share capital
5) Paid up share capital
THE PRINCIPAL DISTINCTIONS BETWEEN UNLIMITED PARTENRSHIP AND LIMITED COMPANIES
Unlimited Partnerships Limited Companies
No separate Legal Entity apart from its Separate legal entity, which is not affected by changes
Members in its membership. A company may contract, sue or be
sued in its own name.
Liability of each member for debts of If the company is limited by share, each shareholder
the firm is unlimited. is limited to the amount he has agreed to pay the
company for share allotted.
Number of partners limited to 20 except A limited company must have at least 2 members. The
for professional firms. maximum number of shareholders is restricted to the
company’s authorized share capital.
Every partner can normally take part in Rights to management are delegated to directors who alone
the management of the business. He can can act on behalf of and bind the company.
legally bind the firm by his action.
Copy of accounts do not need to be filed Copies of accounts must be registered with the Registrar of
with the Registrar of Companies Companies
Although a written Partnership deed is A company is required to have a memorandum and articles
desirable it is not mandatory. of association which defines powers and duties of directors.
A partnership is subject to the A company is subject to the Companies Act the provisions
partnership Act which can be varied by of which cannot be varied.
mutual agreement.
The partners contribute the capital by The authorized share capital is fixed by the
agreement. The amount need not be memorandum of association. It can be altered by passing
ordinary resolution or by the court.
fixed.
A share in a partnership cannot be In public companies shares are freely transferable.
transferable except by the consent of all In private companies share transfer are subject to any
restrictions imposed by the articles of association.
partners.
A partnership is not obliged to keep A company is required to keep specialized
statutory books of account and an audit is accounting records and is subject to compulsory audit.
not compulsory.
FORMAT OF FINANCIAL STATEMENTS
Internal purpose
The Income statement of a company is the same as that of a sole trader, but there are additional
expenses that are unique to the company and therefore, they should be included in the Income
statement. These are : Director’s fees, salaries and other expenses; Audit fees; Debenture interest
Director’s salaries
Salaries, fees and other expenses in relation to the directors are expenses as far as company
accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations –
expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees
paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as
an expenses and unpaid amount are shown as current liabilities in the business. The debenture is
classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profits they earn. This is shown in the accounts because a
company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as
drawings.
Kroito Ltd, Income statement and appropriation For the year ended Date FRw FRw
Sales XXX
Less Returns in (XXX)
XXX
Opening inventory XXX
Purchases XXX
Less Returns out (XXX)
Carriage in XXX
Less Closing inventory (XXX)
Cost of sales (XXX)
Gross profit XXX
Other income:
Commission income XXX
Discount received XXX
Allowance for doubtful debt XXX
Total other income XXX
Total income XXX
Expenses:
Director’s fees salaries and other expenses XXX
Audit fees
Bad debts XXX
Salaries and wages XXX
Discount allowed XXX
Carriage out XXX
Rent expense XXX
Electricity and water XXX
Depreciation and amortisation:
Buildings XXX
Plant and Machinery XXX
Furniture and equipment XXX
Patents and copyright XXX
Debenture interest XXX
Total expenses (XXX)
Profit/(loss) before tax XXX
Taxation (XXX)
Profit/(loss) for the year XXX
Transfer to general reserve XXX
Dividends
Preference Interim XXX
Preference Final proposed XXX
Ordinary Interim XXX
Ordinary Final proposed XXX
(XXX)
Retained profit for th year XXX
Retained earning b/f XXX
Retained earnings c/f XXX
Kroito Ltd, Statement of financial position As at date
FRw FRw FRw
ASSETS
Non-current assets:
XXX (XXX) XXX
Land and buildings
XXX (XXX) XXX
Plant and machinery
XXX (XXX) XXX
Furniture & Equipment
XXX (XXX) XXX
Patents and copyrights
XXX XXX
Financial assets (Investment)
XXX
Total non-current assets
Current assets:
XXX
Inventory
XXX
Accounts receivable
XXX
Accrued income
XXX
Prepaid expense
XXX
Bank
XXX
Cash
XXX
Total current assets
XXX
Total assets
EQUITY AND LIABILITIES
Capital and reserves:
(Authorised, issued and paid) Ordinary shares of FRw100 each XXX
XXX
Share premium
XXX
General reserve
XXX
Retained earnings
XXX
5% Preference shares of FRw100 each
XXX
Total equity
Non-Current liabilities:
XXX
8% Debentures
Current liabilities:
XXX
Accounts payable
XXX
Accrued expense
XXX
Unpaid interest
XXX
Unpaid tax
XXX
Total current liabilities
Total liabilities XXX
Total equity and liabilities XXX

Dividends
Shareholders are also entitled to a share of profits made by the company and this is because
the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the course of the financial period:
Interim dividends
Is paid part way in the financial period. (e.g.) after the 6 months
Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the income statement and
appropriation should disclose interim paid and final proposed.
h) Reserves
Capital reserves
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three
types of capital reserves are:
Share Premium:
A share premium arises when accompany issues shares at a price that is more than the par value.
The share Premium may be applied in: Paying un-issued shares.
Writing off preliminary expenses. Write off discounts on shares.
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at FRw10 each (per value) and the issue
price (selling price) is FRw15 each. The following are the entries to be made in the A/C.
Dr Cashbook (100,000 x FRw15) 1,500,000
Cr Ordinary shares capital (100,000 FRw10) 1,000,000
Cr Share Premium A/C (100,000 FRw 5) 500,000
Issue of shares at a premium of FRw5
Revaluation Reserve:
Any gain made on revaluation of non current Assets especially for Land and buildings. When
company sells it’s property to realize the gain, the amount is transferred to the Income statement.
Capital Redemption Reserve:
A reserve created after redemption or purchase of Preference shares without issuing new shares. The
transfer is made from either the share premium or the Income statement.
(b)Revenue reserves
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves.
Transfers are made from the Profits to the General reserves to provide for expansion or purchase of
non current assets. The General Reserves can also be used to issue bonus Shares.
(c)Debenture loans
The term debenture is used when a limited company receives money on loan, and certificates called
debenture certificates are issued to the lender.
They are also called loan Inventory or loan capital. Debenture interest has to be paid whether profits
are made or not. A debenture may either be redeemable or irredeemable. Redeemable is repayable
at or by a particular date and irredeemable is payable when the company is officially terminated.
(d)Bonus and Rights issue
Bonus shares
Shares issued to existing shareholders free of charge. They are paid out from either the share
premium, balance of retained profits of the General Reserves.
A scrip issue
Is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or
Stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at FRw1 each to form an ordinary share capital of FRw100,000
and a balance on the share premium A/C of FRw50,000. It issues some bonus shares to
existing shareholders at a rate of 1 share for every 5 shares held. This amount is to be
financed by the share premium. The entries will be as follows:
Shares to be issued:
100,000 x 1 =20,000
5
A bonus issue of 20,000 shares
Dr share premium A/C [20,000 FRw1 ]

20,000
Cr ordinary share capital
20,000
Statement of financial position (extract)
Ordinary shares of FRw1 120,000

Capital Reserves
Share premium 30,000
Rights Issue
 A right issue is an option on the part of the shareholder given by the
company to existing shareholders at a price lower than the market price.
 It involves selling ordinary shares to existing shareholders of the

company on a prorata basis. When the rights are issued the shareholders
have 2 options available.
 Buy the new shares and exercise their rights

 Sell the rights in the market, Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an
obligation) to buy the new shares issued by the company.
Example:
A Ltd has a share capital of FRw200,000 trade up of 100,000shares of
FRw2 each. The balance on the share premium is FRw60,000. Additional
capital is raised by way of a right issue. The terms are:
For every 5 shares held in the company, a shareholder can buy 2 shares at
a price of FRw2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the
shareholders exercise their rights and the relevant Statement of financial
position extract. Shares to be issued : 100,000 x 2 =40,000 shares
5
Dr cash book [40,000 @ FRw2.5 ] = FRw100,000
Cr Ordinary share capital [40,000 @ FRw2 ] = FRw80,000
Cr Share Premium [40,000 @ FRw0.5 ] = FRw20,000
Statement of financial position (extract)
140,000 Ordinary shares @ FRw 280,000
Capital Reserves
Share premium 80,000
External purpose
 Financial statements for external purpose are more
summarized and prepared according to IFRS’s.
 IFRS’s are the financial authoritative statements used in
accounting and preparation of financial statements.
 Income statement can be prepared classifying the
expenses according to functions of the entity or by their
nature as follows:
 By function – the expenses are classified as cost of sales,
administration expense and distribution cost
Expenses classified by functions
Kroito Ltd, Income statement
For the year ended Date
FRw
Sales Revenue XXX
Less Cost of sales (XXX)
Gross profit XXX
Other income: (XXX)
Administration expenses (XXX)
Distribution cost (XXX)
Finance cost (XXX)
Taxation (XXX)
Expenses classified by nature
Kroito Ltd, Income statement
For the year ended Date
FRw
Sales Revenue XXX
Other income: XXX
Change in inventory of raw materials and work in progress XXX/(XXX)
Purchases (XXX)
Depreciation (XXX)
Staff cost (XXX)
Other expenses (XXX)
Finance cost (XXX)
Taxation (XXX)
Statement of Change in Equity
Kroito Ltd, Statement of changes in equity
For year ended Date
Ord Pref Share General Retained Total

shares shares premium reserve earnings
FRw FRw FRw FRw FRw FRw
Balance b/f XXX XXX XXX XXX XXX XXX
Profit for the year XXX XXX
Dividends : Preference (XXX) XXX
Dividends : Ordinary (XXX) XXX
Transfer to general reserves XXX (XXX) XXX
Issue of shares XXX XXX XXX
XXX XXX XXX XXX XXX XXX

Example1
 The following is the trial balance of Transit Ltd at 31 March 2018.
Issued share capital (ordinary shares of FRw1 each) 42,000
Leasehold properties, at cost 75000
Motor vans, at cost (used for distribution) 2500
Provision for depreciation on motor vans to 31/3/2017 1000
Administration expenses 7650
Distribution expenses 10000
Inventory, 31 March 2017 12000
Purchases/sales 138750 206500
Directors’ remuneration (administrative) 25000
Rents receivable 3600
Investments at cost 6750
Investment income 340
7% Debentures 15000
Debenture interest 1050

Example1(cont…)
Bank interest 162
Bank overdraft 730
Receivables and Payables 31000 24100
Interim Dividend paid 1260
Income statement 31/3/2017 17852
Total 311122 311122
Additional information:
(i)All the motor vans were purchased on 1 April 2015.
Depreciation has been, and is to be, provided at the rate of
20% per annum on cost from the date of purchase to the date
of sale. On 31 March2018 one van, which had cost FRw900, was
sold for FRw550, as part settlement of the price of FRw800 of a
new van, but no entries with regard to these transactions were
made in the books
Example1 (cont…)
(ii)The estimated corporation tax liability for the year to
31 March 2018 is FRw12,700.
(iii) It is proposed to pay a final dividend of 10% for the
year to 31 March 2018.
(iv) Inventory at the lower of cost or net realizable value
on 31 March 2018 is FRw16,700
Required:
 Prepare, without taking into account the relevant
statutory provisions:
1. An income statement for the year ended 31 March
2018:
2. Statement of financial position at that date.
Ex2. The trial balance of Soko, a limited liability company, at 31 May 2011
was as follows:
Dr Cr
FRw000 FRw000
Revenue 5,500
Discounts received 80
Discounts allowed 70
Bank balance 147
Buildings at cost 2,040
Buildings, accumulated depreciation, 1 June 2010 160
Plant at cost 2,200
Plant, accumulated depreciation, 1 June 2010 400
Land at cost 345
Purchases 2,170
Returns inwards 15
Returns outwards 17
Heating and lighting 270
Other expenses 60
Ex2 (cont…)
Trade payables 1,030
Trade receivables 700
Carriage inwards 105
Wages and salaries 250
10% Loan notes 580
General reserve 35
Allowance for doubtful debts, at 1 June 2010 30
Director’s remuneration 60
Retained earnings at 1 June 2010 115
FRw10 Ordinary shares 800

Inventory at 1 June 2010 515
Share premium account 200

Total 8,947 8,947
Additional information as at 31 May 2011
(i) Closing inventory has been counted and is valued at FRw960,000.
(ii) There are wages and salaries to be paid of FRw30,000.
(iii) Loan note interest has not been paid during the year.
(iv) The allowance for doubtful debts is to be increased to FRw40,000.
(v) Plant is depreciated at 25% per annum using the reducing balance
method.
(vi) Buildings are depreciated at 5% per annum on their original cost.
(vii) Dividends of FRw.0.8 per share was declared and proposed at the end
of the year.
(viii)The directors have agreed a transfer of FRw45,000 to the general
reserve from profits for the period.
(ix) Tax has been calculated as FRw700,000 for the year.
Required: Prepare, for internal purpose, the following financial
statements for Soko Ltd
a) The income statement and appropriation for the year ended 31 May
2011;
b) The Statement of financial position as at 31 May 2011
Practical questions
 Questions 22-26 (internal and external purpose)
ISSUE OF SHARE CAPITAL FOR COMPANIES
No trading can run without capital. The ownership of a

company is through shares which have been issued by the
company.
Equity shares will get dividend and repayment of capital after
meeting the claims of preference shareholders. There will
be no fixed rate of dividend to be paid to the equity
shareholders and this rate may vary from year to year.
This rate of dividend is determined by the directors and in

case of larger profits, it may even be more than the rate
attached to preference shares. Such shareholders may go
without any dividend if no profit is made.
ISSUE OF SHARES AT PAR, PREMIUM AND DISCOUNT
At par
 Shares are said to be issued at par when a shareholder is required to pay
the face value of the share to the company. For example, when share of
FRw.10 are issued at FRw.10, they are said to be issued at face value.
ii) At premium
 Shares are said to be issued at premium when a shareholder is required
to pay more than the face value to the company. For example, if shares
of FRw.100 are issued for FRw 110, FRw 10 is the premium. The premium
received on the issue of shares must not be mixed up with the share
capital.
 The amount earned by a company on issue of its shares at premium
cannot be said to be profits earned in the normal course of business
and as such must be treated as capital profits and not transferred to the
Income statement.
At premium(con’t)
Accounting Entries
If a company issues shares of FRw 100 at FRw 110 the premium being
payable on application with application money FRw 15 the entry will be.
Dr Cr
i) Bank 25
Share application 25
To record receipt of application
ii) Share application 25

Share capital 15
Share premium 10
To transfer share application to share capital and share premium account
 Issue of shares at a discount
 A company may only issue at a discount, shares of a class already issued

with the authority of the General meeting and sanction of the court.
The rate of discount at which shares are to be issued must not exceed
 10% in any case and at least one year must have elapsed since the
company was entitled to commence business. It follows that a new
company cannot issue shares at a discount.
 When shares are issued at a discount the company will receive less than
the nominal value of the shares. The amount payable by shareholders is
debited to application and allotment account, discount on issue of
shares debited with the discount amount and the nominal value of the
shares credited to share capital account.
If a company issued shares of FRw.100 at FRw.90 the discount being
adjusted on application with application money of FRw.25, the entries
would be.
Dr Cr
Bank 25
Discount on issue of shares 10
To record receipt of application money and adjust for discount on issue
Share capital 35
To transfer share application to share capital
OVER AND UNDER SUBSCRIPTION OF SHARES

 In case of companies of good reputation there is possibility of
oversubscription. Some applications are rejected and others are
allotted on pro-rata basis.
 ALLOTEMENT AND CALL ON SHARES
 Allotment of shares means acceptance of the offer of the applicant

for the purchase of shares. After receiving the application, the directors
take steps to allot the shares.
 Directors have discretionary power either to reject or to accept partially

the applications. There are no restrictions on the rights of a private
company to allot its shares.
The applicants to whom shares are allotted, will be sent allotment letters.
After allotment, they become the shareholders of the company. Those to

whom shares could not be allotted will be sent a letter of regret along
with refund of their application money.
The shareholders will be required to pay allotment money on allotment of
shares which will also be recorded in the Application and Allotment
book.
 Calls on shares
Out of the face value of the shares, at least 25% is payable with
application, some money will be paid as and when calls are made by
the company.
Generally, the prospectus gives the dates of different calls along with the
amount of the calls to shares. In case it is not given in the prospectus,
the directors have discretion to call it in one call or more than one call.
For this, a resolution of the Board of Directors must be passed and a

notice is sent to the shareholders with a request to pay the amount of
the call. As soon as a call notice is sent, its particulars are entered in a
separate book known as shares call book.
 Steps and Journal entries for issue of shares
Application
i) On receipt of application money
Bank a/c Dr
Share application account Cr
Being the application money on ….. Shares @ FRw….per share.
It should be noted that this entry is to be passed for the full amount of application
money. This amount cannot be credited to share capital account as some
application money is to be refunded to the applicants who will not be allotted
shares.
ii) On allotment of shares
a) application money on allotted shares is transferred to share capital account as
follows:
Share application a/c Dr
Share capital a/c Cr
Being the application money transferred to share capital account.
b) Those applicants who could not be allotted any share, their application money will
be returned. For this, the following entry will be passed.
Share Application a/c Dr
Bank a/c Cr
iii) On allotment of shares; the allotment money becomes due to the
company. For this the company will pass the following entry;
Share allotment a/c Dr
Share capital a/c Cr
Being the share allotment money due on ….. shares @ .FRw….. per share, per
resolution dated…..
iv) On receipt of allotment money, the entry is:
Bank a/c Dr
Share allotment a/c Cr
Being receipt of allotment money
v) On making the first call due from shareholders, the entry is:
Share First Call A/c Dr
Share Capital A/c Cr
Being the first call money due on shares @ FRw….. per share as per resolution of
the directors dated……
vi) On receipt of first call money, the entry is;
Bank a/c Dr
Share first call a/c Cr
Being share first call money ……shares @ FRw…..per share received.
Any money received or paid to any shareholder is not to be credited or debited to
shareholder account but collectively it will be either debited or credited to
share application account, share allotment account or share call a/c.
Example- Question.27
Jambi clothing Ltd. issued 10,000 ordinary shares of
FRw10 at par. They were fully subscribed and paid for
on application by cash. Show the necessary journal
entries
Question 28
 Assume that Jambi clothing Ltd. had issued the 10,000
ordinary shares of FRw10 at FRw14 instead. All the
shares were applied for and paid for in cash. Show the
journal entries
Question 29
 Assume that after one year Jambi clothing Ltd. issued
4,000 ordinary shares of FRw10 at FRw8 after following
all the sanctions of the Companies Act. All the shares
were applied for and cash received by the company.
(Recall that the company will still be having
FRw40,000 in the share premium account.)
Question 30
XYZ Ltd. issued 80,000 ordinary shares of FRw25 each to
the public at par. Applications were received for
110,000 shares and cash received. The directors
rejected applications for 30,000 shares and thus
refunded the excess amount.
Required
i)Show the journal entries concerned.
ii) Necessary Accounts
Question31
 Kanombe Ltd. has authorized share capital of 500,000 ordinary
shares of FRw10 each. The directors decided to issue 300,000
ordinary shares at FRw13. The amounts were to be received in
installments as follows: FRw
 Application 3
 Allotment (including premium) 5
 First call 3
 Second call 2
 Applications were received for 374,000 shares. The directors decided
to refund money in respect of 14,000 share applicants and the rest
were given 5 shares for every 6 subscribed for. The excess amount
was used to reduce application monies. All the monies were
received in respect of allotment. Calls were made at different times
and all the monies received as required.
 Show the journal entries, accounts required and the Statement of
financial position after all these transactions.
When both preference and equity shares are issued
 When a company issues both preference and equity shares, then it

is desirable that the entries for
 application money, allotment money and calls money should be

separately passed for each type of share capital.
 If any amount is not received from the shareholders for any call, this
amount is known as calls in arrears and is deducted from the call up
capital in order to calculate the paid up capital
Illustration
 A company was floated with an authorized capital consisting of
20,000 9% preference shares of FRw25 per share on application,
FRw25 per share on allotment and FRw50 per share on first and
final calls. And;
 300,000 equity shares of FRw10 each payable FRw2.50 on

application, FRw2.50 per share on allotment and FRw5 per share on
the first and final call.
 Applications were received for the whole of the preference and

equity shares. All the money due on the shares was paid with the
exception of the amount due on the first and final call on 4,000
equity shares.
 Required: Make the necessary entries and the Statement of
financial position of the company.
Solution
Dr FRw Cr FRw
Bank a/c 1,250,000
Preference share application a/c (20,000x25) 500,000
Equity share application a/c (300,000x2.5) 750,000
Being pref. share application money received on 20,000 preference shares @ FRw25/ share and
300,000 equity shares @ FRw.2.50 /share received.
Preference share application a/c 500,000
Equity share application a/c 750,000
Preference share capital a/c 500,000
Equity share capital a/c 750,000
Being the application money on preference and equity shares to the respective share capital a/c
Preference share allotment a/c (20,000x25) 500,000
Equity share allotment a/c (300,000x2.5) 750,000
Preference share capital a/c 500,000
Equity share capital a/c 750,000
Being allotment money due on 20,000 preference shares @ FRw25 per share and 300,000 equity
shares @ FRw2.50 per share a per resolution of the Board of Directors.
Bank a/c 1,250,000
Preference share allotment a/c 500,000
Equity share allotment a/c 750,000
Being receipt of allotment money on preference and equity shares
Solution(con’t)
Preference share first and Final call a/c 1,000,000

Equity share first and final call a/c 1,500,000
Preference share capital a/c 1,000,000
Equity share capital a/c 1,500,000
Being the first and final call due on 20,000 preference shares @ FRw50
per share and 300,000 equity shares @ FRw 5 per shares.
Bank a/c 2,480,000

Preference share 1st and final call a/c 1,000,000
Equity share first and final call a/c 1,480,000
Being the receipt of the first and final call money due on preference and
equity shares except on 4,000 equity shares.
Forfeiture of shares
 If a particular shareholder fails to pay the calls made, the directors
may have the power of forfeiting the shares held by him or them i.e.
directors may choose to remove the name from the register of
members and treat the account already paid as forfeited to the
company.
 But it should be borne in mind that the shares can only be forfeited
if the articles authorize the directors to do so. They have to follow
certain procedures such as:
 giving notice to the defaulting shareholders to pay within certain time
the overdue amount together with interest.
 If the amount is still not forthcoming, the directors may proceed to
forfeit the shares. The result of the forfeiture is that the share capital is
reduced to the same extent.
 The entries are : Share capital account DR (Number of shares forfeited
and the total amount called on each) Various calls account CR (Amount
that remains unpaid); Forfeited Share A/C (amount already received).
Share forfeiture defined
 Share forfeiture is the process by which the directors
of a company cancel the power of a shareholder if he
does not pay his call money when the company
demands for it. The company will give 14 days' notice;
after 14 days if the shareholder does not pay then
company will forfeit his shares and strike his name
from the register of shareholders. The company will
not repay the funds received from the shareholder. In
order to do a share forfeiture the Articles of
Association of the company should contain a provision
for that.
Re-issue of forfeited shares
 Forfeited shares may be reissued by the company
directors for any amount but if such shares are issued at a
discount then the amount of discount should not exceed
the actual amount received on forfeited shares.
 The purchaser of forfeited reissued shares is liable for
payment of future calls duly made by the company.
 The following journal entry on such reissue is passed:
 Bank a/c DR (amount received on such reissue)
 Discount on issue of shares a/c DR (If shares were originally
issued at a discount)
 Share forfeited a/c DR (Discount on reissue of shares)
 Share capital a/c CR (With face value of shares)
 Share premium a/c (If shares are reissued at premium)
Example32
 Assume that for Kanombe Ltd. for the shares issued,
one shareholder with 3,600 shares allotted did not pay
for the second call. The directors decided to forfeit the
shares and thereafter issued the shares to another
shareholder Mr Karongi for FRw8 each. Mr Karongi
paid the required cash. Show the accounting journal
entries and accounts assuming the other facts are the
same.
Question33(b) Homework
 Gisovu Tea Company Limited has an authorized share capital of
FRw 1,000,000 ordinary shares of FRw10 each. The shares were
issued at par as follows:
 Payable on application FRw1.00
 Payable on allotment FRw3.00
 Payable on first call FRw4.00
 Payable on second call FRw2.00
 Applications were received for 1,630,000 shares.
a) It was decided to refund applicants monies on 130,000 shares and
to allot all the shares on the basis of two for every three applied
for.
b) The excess application monies received from the successful
applicants is not to be refunded but is to be applied to reduce the
amount payable on allotment.
Question 33(b) cont…
c) The calls were made and paid in full with the
exception of one member holding 5,000 shares
who paid neither the first nor the second call and
another member who did not pay the second call
on 1,000 shares. After requisite action by the
directors the shares were forfeited. They were later
reissued at a price of FRw8 per share.
Required:
 The necessary journal entries and ledger accounts
to record these transactions
RATIOS ANALYSIS
Introduction
 Financial statements include :
(1)Statement of comprehensive that tells us the financial
performance of a company throughout the financial
period.
(2)Statement of financial position(balance sheet) that
shows the financial position or status of a company
(3)Statement cash flows which shows changes in cash
position of the entity,
 We analyze financial statements by the use of accounting
ratios. Classified under 5 categories: Liquidity;
Leverage/Gearing ratios; Activity Ratios; Profitability;
Equity / Investors/valuation ratios.
1. Liquidity/Solvency ratios
 These measure the ability of the enterprise to meet its
short term maturing obligations. Therefore, they assess
the level of current assets and current liabilities. These
ratios include:
a) Current Ratio: Current Assets/Current liabilities
 A high ratio means Receivables, Inventory and cash are
high. This shows an inefficient firm since funds is not
used. A low figure means the business is not able to pay
the current liabilities and vice-versa. Usually the ratio
should be around 2:1
(b) Acid test ratio: (Current Assets –Inventory )/ Current
Liabilties
 Usually the ratio should be around 1:1
Liquidity/Solvency ratios (…..)
(c) Cash ratio: Cash and cash equivalents/Current
liabilities
 Indicates the cash available to pay the liabilities. It is
more refined since it assumes that Receivables may not
pay their accounts on time and Inventory will take
time to convert into cash.
Working capital Efficiency ratios/Activity
ratios
 These ratios show how management has used assets to
generate sales/turnover and so profit.
 They include the following:
(a) Inventory turnover ratio
Cost of goods sold/Average inventory
 This ratio indicates number of times inventory is turned over.
 The higher the Inventory turnover, the higher the cash flows
from sales, meaning more cash to settle liabilities. In holding
Inventory for long (lower Inventory turnover) then the
business is not able to get cash from Inventory.
 This ratio also shows management performance since low
turnover means higher Inventory, which further means
capital is tied up, Inventory may deteriorate and costs of
storage will increase, although this ensures no Inventory
shortages.
Working capital Efficiency ratios/Activity ratios
(….)
(b) Receivable’s collection period:
(Debtors * 365)/ Credit sales
 This indicates number of days on average that Receivables
take to pay their debts.
 Comparison is made with credit period given. If the period is
lower than credit period then Receivables management is okay,
otherwise it will be showing that Receivables hold on cash for
long (meaning liquidity problems) and vice-versa.
(c) Payables payment period:
(Creditors *365)/Credit Purchases
This ratio indicates number of days on average that business
pays its debts.
d) Total assets turnover: Turnover/Total Assets
3. Profitability ratios
 These ratios measure the efficiency with which the firm is
using its various assets/resources to generate return/profit .
They include the following:
(a) Gross profit –mark up : Gross profit*100/cost of sales
(b) Gross profit- margin : Gross profit*100/Sales
(c) Net Profit Margin: Net Profit *100/Sales
 Gross profit mark up, margin and net profit margin show how
well a business is doing in terms of profit earned from trading
and the whole business activity.
(d) Return on capital employed (ROCE):
Operating profit (before interest and taxes)*100/(Total Asset –
Current Liabilities)
ROCE = (Sales/Capital employed ) * (Operating profit/sales) *100
This ratio shows how efficient a business has used funds
available to earn a profit.
3. Profitability ratios (…..)
(e) Return on investment (ROI):
ROI : Operating Profit/Operating Assets
 This ratio shows how efficient management used total
assets to earn profit.
(f) Return on equity (ROE):
Return on Shareholders Equity: Profit (after taxes, interest
and preference Dividend )*100/ shareholders equity
 This shows the return accruing to shareholders after
interest payments to long-term Payables and taxes have
been deducted.
4. Gearing/leverage/Capital structure/Financial
risk ratios
 These ratios measure the extent to which the firm is financed by
liabilities.
 They measure the financial risk of the company. Financial risk is
the probability that the firm may not be able to pay its debts as
and when they fall due. they include the following:
(a) Gearing ratio:
Non current liabilities*100/Total Capital
 This ratio expresses the relationship between the proportion of
fixed interest capital to share capital.
 A high proportion means a highly geared business (company).
This will mean that shareholders can get more income if the
additional loan capital brings more profit than the interest.
 This on the other hand means that the dividends of ordinary
shareholders will be fluctuating a lot. It also means that the
company highly depends on non-owners to supply capital.
4. Gearing/leverage/Capital structure/Financial
risk ratios (…)
b) Debt ratio : Total Liabilities *100/Total Assets
 This ratio Measures the proportion of the total assets
financed by liabilities. The higher the ratio, the higher the
financial risk.
c) Debt/equity ratio: Total liabilities *100/Shareholders
fund
 This ratio Compares the amount invested by owners to
that invested by other lenders. The higher the ratio the
higher the financial risk.
5. Investor ratios
 These ratios measure the relative value of the firm and returns
expected by the owners of the firm.
 They also measure the overall performance of the enterprise
and whether it is a going concern. They include the following:
(a). Dividend cover :
(Profit after tax –Preference Dividend )/Ordinary dividend
 Dividend cover ratio measures the number of times dividend
can be paid from the profits available. The higher the number
of times the better for the enterprise.
(b). b) Earnings per share (EPS)
EPS: (Profit after tax – Preference Dividend )/ Number of ordinary
shares
It measures the profit available to each ordinary
shareholder. The higher the EPS, the more profitable the
enterprise.
5. Investor ratios
c) Dividend per share (DPS):
 DPS= Ordinary dividend/ No. of ordinary shares
d) Dividend yield
Dividend yield = DPS/ Market price per share
 It shows how a business is marketable and having
prospects about the future returns in terms of dividend.
e) Price /earnings ratio (P/E ratio)
P/E ratio = Market price per share/ EPS
 This ratio assesses the ongoing financial performance of

company from year to year. It shows the profit earning
capacity of a business.
Limitations
1. Financial statements where ratios are calculated from are
historical while liquidity is concerned with the future.
2. Financial statements are static while liquidity is concerned
with flows of money.
3. Financial statements do not present accurate information for
liquidity assessment
4. Window dressing involves covering up bad situations like
writing cheques at year-end to reduce Payables, and giving the
Payables the cheques after year end
5. Inherent limitations of ratios: Like Receivables payment period
uses average Receivables, or figures may have other kinds of
Receivables. Also the Receivables figure usually has VAT
amounts while sales do not.
 Something like bank overdraft may be used to finance capital
expenditure, while this overdraft is a current liability.
Example:

Interm - Financ.acc-Acc1232 - Updated On 27may 2019

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Interm - Financ.acc-Acc1232 - Updated On 27may 2019

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Lecturer :Mr.

MBA IN FINANCE & Msc International Trade Policy

3. Accounting for Incomplete records and non

5. Regulatory framework for companies

6. Issue of share capital for companies

7. Introduction to analysis of financial statements

 Control accounts are so called because they control a section

 Balances c/d = 1,250,000+780,000+1,240,000= 3,270,000

 Provide for arithmetical check on the postings

 To provide for a quick total of the balances to be

 To detect and prevent errors and frauds in the

Purchases ledger control account

 Bills of exchange: it represents means of clearing account, in a

 Contras: This represents a situation where a supplier is also a

(i)The business has sold to Hoang Rwf 600,000

(ii) Hoang has supplied the business with Rwf

(iii)The Rwf 600,000 owing by Hoang is set off

(iv) This leaves Rwf 280,000 owing to Hoang on

The set off now takes place

Purchases ledger control account

Purchases ledger control account

 A Company can decide to manufacture instead of

 Such company will need to collect costs of

 A manufacturing account will therefore need to be

 These will be overheads that cannot be allocated

 This may arise if at the end of a given period there

 Some costs would have already been incurred. For

 Some part of direct labour would have been incurred.

 It is possible to carry the amounts from manufacturing

 In such a situation the finished good, opening stock

 This provision for unrealized profit on unsold stock should be

 Any increase from previous allowance is treated as

Closing stock (9,000) 36,000

Rent and rates 9,000

Motor vehicles expense 4,500 (52,880)

 The inventory of finished goods is at cost.

 The aspects of accruals and prepayments are still

 This will bring about unrealized profit (UP), thus

Allowance for UP account

Manufacturing profit 25%X92,000 23,000

Transfer price 115,000

At cost = transfer price =. 5,000,000

So the UP is 4,800,000-4,000,000=FRw. 800,000

The Allowance for UP account will look as follows :

Allowance for UP account

a. Calculate unrealized profit in the opening stock and

There may be no records at all that are kept

Reasons for incomplete records may be due to:

Single entry alone

 To know the financial performance and position, the opening and

 The accounting equation in extended format is as follows

Trade receivables control account

Relationship between the two ratios

Given the following Information:

2) Mark up = Gross profit margin

= 0.25/1-0.25 = 0.25/0.75 = 25/75 = 1/3(1Marks)

After getting the markup; Gross profit is = cost of sales x markup

463,333 + 1,390,000 = 1,853,333(2Marks)

Rwf 5,000 = Gross Profit

* Sales – (Opening Inventory + Purchases – Closing Inventory)= Gross Profit

20,000 – ( 4,500 + Purchases – 4,800) = 5000

20,000 + 300 – Purchases = 5000

20,300 – 5,000 = Purchases