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NEWTRENDS
in
Principles of Accounting
Form 3
LEARNER’S BOOK
Updated Curriculum
i
G. Chigiji B. Mugoni
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ISBN
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recording or otherwise without the prior permission of the publishers
ii
AIMS OF THE BOOK
The aims of the New Trends in Principles of Accounting Book 3 are:
(i)
(ii)
(iii)
(iv)
Expose learners to new trends of processing accounting data.
Develop the nature, concepts and principles of accounting.
Develop enterprise skills that will assist learners to be self-reliant.
Apply practical modern skills, techniques and procedures in carrying out
bookkeeping and accounting activities.
(v) Instil accounting control procedures in learners.
(vi) Appreciate the use of computers in accounting.
v
CONTENTS
CHAPTER 1: DATA PROCESSING ........................................................1
Processing the data.........................................................................................2
Manual method ..............................................................................................5
Electronic method ..........................................................................................6
Glossary .........................................................................................................9
END OF CHAPTER QUESTIONS ...............................................................9
CHAPTER 2: ACCOUNTING CONCEPTS.......................................... 10
Accounting concept...................................................................................... 11
Going Concern Concept ............................................................................... 12
Historical cost concept ................................................................................. 12
Business entity concept ................................................................................ 13
Money measurement concept....................................................................... 13
Accounting period concept .......................................................................... 14
Accruals (or matching concept) ................................................................... 14
Prudence Concept also known as Conservatism ......................................... 15
Materiality concept ...................................................................................... 16
Dual aspect concept ..................................................................................... 17
Glossary ....................................................................................................... 18
END OF CHAPTER QUESTIONS ............................................................. 19
CHAPTER 3: SUBSIDIARY BOOKS ..................................................... 21
Use of the general journal/journal proper ....................................................22
Purpose of the Journal .................................................................................22
Glossary .......................................................................................................28
END OF CHAPTER QUESTIONS ............................................................. 29
CHAPTER 4: CLASSIFYING THE LEDGER....................................34
Classification, posting and balancing ledger accounts. ................................ 36
Types of the ledger ....................................................................................... 36
Trade receivables ledger ............................................................................... 36
vi
Trade payables ledger ................................................................................... 43
General ledger ..............................................................................................48
Use of folio columns .................................................................................... 49
Interpretation of ledger accounts ................................................................. 52
Glossary ....................................................................................................... 55
END OF CHAPTER QUESTIONS ............................................................. 55
CHAPTER 5: THE TRIAL BALANCE AND ERRORS ...................... 62
Correction of errors ......................................................................................64
Effect of errors on trial balance .................................................................... 65
Glossary ....................................................................................................... 74
END OF CHAPTER QUESTIONS ............................................................. 75
CHAPTER 6: FINANCIAL STATEMENTS ..........................................80
Income statement ......................................................................................... 81
Statement of financial position ..................................................................... 85
Glossary .......................................................................................................90
END OF CHAPTER QUESTIONS ............................................................. 91
CHAPTER 7 : ADJUSTMENT TO FINAL ACCOUNTS ...................95
Accruals .......................................................................................................96
Prepayments .................................................................................................99
Bad debts and provision for bad debts ....................................................... 106
Provision for bad debts ............................................................................... 108
Provision for depreciation .......................................................................... 120
Glossary ..................................................................................................... 139
END OF CHAPTER QUESTIONS ........................................................... 140
CHAPTER 8: CLASSIFICATION OF EXPENDITURE.................... 160
Accounting for capital and revenue expenditure in financial statements ... 162
Effects of incorrect classification ............................................................... 162
Glossary ..................................................................................................... 164
PRACTICE QUESTIONS.......................................................................... 165
vii
CHAPTER 9: CONTROL ACCOUNTS ............................................... 168
Control accounts ........................................................................................ 168
Sources of information ............................................................................... 168
Glossary ..................................................................................................... 177
END OF CHAPTER QUESTIONS ........................................................... 177
CHAPTER 10: BANK RECONCILIATION ........................................ 185
The Bank Statement ................................................................................... 187
Differences between Cash book and Bank statement balances.................. 189
Bank Reconciliation ................................................................................... 190
Bank reconciliation statements and errors ................................................. 192
Comprehensive example ............................................................................ 195
Glossary ..................................................................................................... 205
END OF CHAPTER QUESTIONS ...........................................................206
CHAPTER 11: DEPARTMENTAL ACCOUNTS ............................... 217
Departmental trading accounts .................................................................. 218
Combined profit and loss account .............................................................. 224
Glossary ..................................................................................................... 229
END OF CHAPTER QUESTIONS ........................................................... 229
viii
CHAPTER
DATA PROCESSING
1
Objectives
By the end of the chapter, learners should be able to:
•
•
apply manual methods of processing data
demonstrate the use of electronic methods
INTRODUCTION
Data processing is the manipulation of raw items of collected facts and convert
them into something that has a meaning to users. In its raw or unprocessed state,
data will not be meaningful to the intended user. For example, individual O level
results may not give a clear picture about the performance of the 2020 O level
class of a school. If these results are processed into a percentage of those who
scored Grade C or better against the total number of candidates, the percentage
pass rate will be known. This pass rate will clearly show whether the school
performed better or worse than the previous year. This knowledge will be very
useful to the school management as they can use it to make informed decisions.
In this chapter we will consider the definitions of some key words and how they
are applied in processing accounting data into usable accounting information.
KEY WORDS

Manual method

Electronic method
Data is a collection of raw facts that have not been processed or arranged in any
meaningful order. Examples of data may include the number of cars passing
through a road junction or the colour of cars in a car park over a given time
period. The raw facts will still be in their natural state of collection.
Information on the other hand, refers to data that has been processed into
something meaningful. This includes summarised data or data which has been
1
Electronic method
The electronic method is found in an electronic environment where computers
are used to process the data. Human labour is mostly needed to input data into
the system. This is done by keying in data using the keyboard and other means
of inputting data. The processing of this data into information is done by the
computer. The data can be sorted into the desired format by the computer.
The computer can also carryout various calculations. There are a number of
computer packages that are being used to manipulate accounting data. Such
computer software include excel, and packages such as Pastel and QuickBooks.
These packages are capable of producing reports that summarise the results
of accounting transactions into usable information. Analyses and performance
measurement can also be done using computers in a matter of seconds.
The electronic method uses computers of different sizes and arrangements to
process data. Since more than one computer may be used, networks will have to
be established for easy accessibility of data and information. This may call for the
establishment of Local Area Networks (LAN) and Wide Area Networks (WAN).
WAN is a local network where only localised computers for an organisation
can share the information internally while WAN is where local computers are
connected to outside computers in a different location. Intranets are internet
technologies where data and information are made available to employees on one
organisation only and none is available to the outsiders. Extranets, on the other
hand, are computers connected such that data and information of an organisation
is available to both internal and external users.
THE COMPONENTS OF A COMPUTER
A computer is made up of two essential parts; the hardware and the software.
Hardware Components
Hardware refers to the physical components of a computer and any accessories.
Such components include the monitor, central processing unit (CPU), mouse,
keyboard, and other components that may be attached to a computer. The
accessories are basically used as input devices, external backing devices and
output devices.
Task
(i) Name any three data input devices.
(ii) List any four external data back-up devices.
(iii) Name any three output devices of a computer.
6
Glossary
Data is a collection of raw facts that have not been processed or arranged
in any meaningful order.
Hardware refers to the physical components of a computer and any
accessories.
Information is data that has been processed into something meaningful.
Software refers to programs or packages which instructs the computer
to carryout desired functions such as processing the ledger or posting the
journals.
END OF CHAPTER QUESTIONS
1. Define the terms
(a) data
(b) information
2. Draw and label the data processing system.
3. Distinguish between the manual and the electronic methods of processing
data.
4. List 6 advantages of using computers for data processing.
5. List 6 disadvantages of using computers to process data.
9
CHAPTER
ACCOUNTING CONCEPTS
2
Objectives
By the end of the chapter, you should be able to:
•
•
•
define accounting concepts
discuss the application of accounting concepts in the compilation
of financial statements
apply accounting concepts in the compilation of financial statements
INTRODUCTION
Accounting is described as the blood circulatory system of any business, without
it, the business collapses. To save in the central role, accounting statements
should be prepared in a closely controlled environment that will ensure the
survival of the business. There are many stakeholders who are affected by the
accounting information that comes out of the data processing systems of every
business. Due to the varied nature of the users and their locations, there were
commonly accepted approaches and assumptions that were agreed and now
applied during the preparation of financial statements. This common ground
ensures comparability of businesses performance over time. The ground rules
or common approaches used to ensure this is achieved are called accounting
concepts.
KEY WORDS






Matching/ accrual
Prudence
Going concern
Consistency
Historical cost
Double entry
10
Implication
The same depreciation method is applied for similar items in the same period
and from one period to another.
Dual aspect concept
This concept takes into account the two aspects of accounting represented on one
side by the assets of the business and on the other by the claims against those assets.
This duality is also explained by the accounting equation as follows:
Assets = Capital + Liabilities
Implication
Transactions are recorded using the double entry system whereby each transaction
has a debit entry and a corresponding credit entry.
Task
Garikayi has an accounting year ending on 31 December each year.
The following amounts have been paid during the year ended 31 December
20X7:
$
(i)
(ii)
(iii)
(iv)
Wages
35 000
Rent
6 600
Rates
1 400
Insurance
2 200
Motor expenses
14 300
Wages due to workers for the work completed during the last week of the
year but unpaid amount to $900.
Rent for December 20X7 $500 was paid on 11 January 20X8.
Rates have been paid $400 relating to the period 01 January – 31 March
20X8.
Insurance includes a premium $250 for the period 01 January – 28
February 20X8.
17
CHAPTER
SUBSIDIARY BOOKS
3
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
state the uses of the general journal
prepare journal entries
explain the entries in the general journal
post journal entries
INTRODUCTION
In Book 1 of this series, we discussed the concept of accounting cycle. The
second stage of the accounting cycle was given as subsidiary books. In this
chapter we will discuss the last part of this stage as the first part was discussed
in Book 1 and Book 2. These earlier discussions centred on the cash book, petty
cash book, sales journal, purchases journal, sales returns journal, and purchases
returns journal. The general journal was not discussed in detail in the previous
studies. It is the objective of this chapter to explore this very important subsidiary
book.
KEY WORDS
 General journal/journal proper
 Interpretation of entries
Do you still remember the uses of the above subsidiary books? Do you remember
the source documents used to write the subsidiary books?
Task
1.
2.
Give the use of each of the named subsidiary books above.
Name the source document from which the subsidiary book is prepared.
21
$
80 000
30 000
12 000
4 500
3 000
1 900
800
240
Shop buildings
Fixtures and fittings
Motor vehicles
Inventory
Receivables
Payables
Cash at bank
Cash in hand
The assets and liabilities will be used to calculate the capital as the balancing
figure when the total of liabilities is deducted from the total assets as shown in
the opening statement below.
Opening statement of assets and liabilities: James Lizard
2015
Debit
October
1
Shop buildings
Fixtures and fittings
Motor vehicles
Inventory
Receivables
Cash at bank
Cash in hand
Payables
Capital (balancing fig)
$
80 000
30 000
12 000
4500
3 000
800
240
130540
Credit
$
1 900
128 640
130540
Closing entries
Expenses and income accounts are closed off to the income statement to ascertain
gross and net profit figures. Expenses are matched to the revenue generated in
the years and accounts are closed at the end of the year as in the example below.
23
END OF CHAPTER QUESTIONS
Select the correct option from the questions below.
1.
Which one of the following is not a subsidiary book?
A. Cash book
B. Sales returns journal
C. Purchases ledger
D. Petty cash book
2.
Only one of the following is a purpose of the Journal.
A. Recording goods returned by a customer
B. Recording credit purchases
C. Recording cash sales
D. Writing off a dab debt
3.
A narration in the journal helps to
A. explain what triggered the entries just made
B. show who borrowed from us
C. which account was not recorded
D. show the owner of the books
4.
The general journal is another name for
A. the journal
B. sales day book
C. purchases returns journal
D. cash book
5.
Journalising in the accounting system means
A. training journalists
B. recording transactions in journals
C. posting transactions to the ledger
D. preparing source documents
29
CHAPTER
CLASSIFYING THE LEDGER
4
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
•
•
define the term account.
classify ledger accounts
post entries from subsidiary books to appropriate divisions of the
ledger.
explain the entries in the ledger accounts.
use reference numbers in the folio columns
interpret the final balances in the accounts.
INTRODUCTION
The third and fourth stages of the accounting cycle involve the use of a ledger.
After recording transactions in the appropriate books of original entry, the
subsidiary books will have to be posted to an appropriate ledger. It is very
important for this posting to be made in the correct ledger otherwise if a posting
is made to the wrong ledger, this will cause wrong reports made in the final
accounts prepared on the bases of these wrong postings. In this chapter we will
analyse the different sections of the ledger and discuss the different postings that
are made to each type of ledger.
KEY WORDS








Classification
Posting
Balancing ledger accounts
Trade receivables ledger
Trade payables ledger
General ledger
Use of folio columns
Interpretation of ledger accounts
34
Sales invoice
Financial
statements
Sales journal
Trial balance
Sales ledger
General
ledger
Fig 5.2 Credit sales cycle
A sales invoice is the source document used to write up the sales journal. The
sales journal is the subsidiary book from which the sales ledger will be recorded.
Let us look at an example of credit sales, from the transaction right down to the
sales ledger.
20 x 9
November
1
3
8
15
20
22
29
Credit sales to M. Chaundura $2 500
Credit sales to T. Dura $5 300
Credit sales to M. Laura $4 200
Credit sales to Q. Moses $6 000
Credit sales to M. Laura $5 300
Credit sales to Q. Moses $3 100
Credit sales to T. Dura $7 900
37
Debit side
side
Date
Details
2017
May 1
Balance
Sales
June 1
Balance
Chelsea Account
Folio
b/d
GL
Amnt
$
X
X
b/d
X
X
Credit
Date
Details
2017
May 1
Sales returns
14 Sales returns
31 Cash
31 Balance
Folio
GL
GL
CB
c/d
Amnt
$
120
300
X
X
X
Posting the sales returns to the General ledger
Debit side
Date
Details
2017
May 31
Sundry receivable
Chelsea Account
Folio Amount Date
$
2017
SL
1 530
Details
Credit side
Folio Amount
$
Trade payables ledger
These are accounts of all credit suppliers. Credit purchases are evidenced by a
purchases invoice which is received from the supplier when goods are purchased
on credit. Thus a purchases invoice is the source document of credit purchases.
Trade payables are also called trade creditors. These are amounts which we owe
to outside organisations and individuals. Whenever we buy goods on credit, the
supplier will raise (prepare) a document that will record this transaction. This
document is issued to us together with the goods bought. We will call this source
document a purchases invoice since we will have received it after purchasing
goods.
We will use this purchases invoice to start recording the credit purchases. The
purchases invoice is the source document for credit purchases. It will be
recorded in the purchases journal (also called purchases day book). The rest
of the cycle is shown in the diagram below. It is important that you acquaint
yourself with the credit purchases cycle diagram.
43
Notes:
-
In the folio column we show the ledger where the account appearing in the
details section is kept.
CB stands for Cash Book, GL stands for General ledger, SL stands for Sales
Ledger and PL stands for Purchases Ledger.
Interpretation of ledger accounts
When a ledger account is prepared, it should send some clear information to
the users of accounts. Let us interpret two of the ledger accounts above. The
cash account and the Muchadei Furnitures accounts are reproduced here for easy
analysis.
Cash Account
20X4
Oct
Details
3 Bank
Microfinance:
9 loan
12 Sales
Folio
CB
$
20X4
640 Oct
GL
7 000
GL
2 300
Details
Folio
6 Purchases GL
31 Balance
c/d
9 940
Nov
1 Balance
b/d
$
400
9540
9940
9 540
Interpretation:
-
The entry on Nov 1 20X4 shows that there is $9 540 cash on the premises.
A debit balance is an asset, remember!
Muchadei Furnitures Account
20X4
Oct
Details
26 Bank
Folio
CB
$
20X4
2 000 Oct
5
31 Balance
c/d
2 500
Details
Furniture
Folio
GL
4 500
4 500
Nov
52
$
4 500
1
Balance
b/d
2 500
CHAPTER
THE TRIAL BALANCE AND ERRORS
5
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
recognise the errors that do not affect trial balance agreement
state the errors that affect trial balance agreement
correct the errors by means of journal entries
prepare the suspense account correct the trial balance
INTRODUCTION
Preparation of the trial balance is stage five on the accounting cycle. A trial
balance helps in the preparation of other summary statements and needs to be well
prepared with little or no errors. The accounting process is prone to unintentional
mistakes. Whether the accounting process is operating on a manual or electronic
system, errors cannot be ruled out. Man is prone to conditions such as stress,
fatigue, ignorance and other conditions that facilitate the commission of errors
in the recording of accounts and preparation of financial statements. Some errors
will cause the trial balance not to balance while others do not manifest themselves
in the trial balance. If not corrected, the errors cause the final accounts to be
misleading as they will not show a true and fair view of the business finances. To
avoid this, every error should be investigated and corrected so that adjustments
are done to the wrongly reported statements.
KEY WORDS



Correction of errors
Suspense account
Correction of the trial balance
62
END OF CHAPTER QUESTIONS
Multiple Choice Questions
1.
Which two of the following do not affect the trial balance?
(i) Sales $105 to A Hondo were entered in A Hombe’s account
(ii) A cheque payment of $44 for Motor expenses entered only in Cash
Book
(iii) Purchases $440 from C Moyo entered in both accounts as $404
(iv) Wages account added up incorrectly, being totalled $120 too much.
A. (i) and (iv)
B. (i) and (iii)
C. (ii) and (iii)
D. (iii) and (iv).
2.
Which two of the following are not errors of principle?
(i) Motor expenses entered in Motor Vehicles account
(ii) Purchases of machinery entered in Purchases account
(iii) Sale of $50 to C Philemon completely omitted from books
(iv) Purchases from A Smiles entered in A Semili’s account.
A. (ii) and (iii)
B. (i) and (ii)
C. (iii) and (iv)
D. (i) and (iv).
3.
We correct errors through the Journal so that
A. we save the bookkeeper’s time
B. we do not clutter the ledger
C. we create work for the unemployed
D. we provide a good record explaining the double entry records.
4.
Cash discount allowed to customers totalling $100 was completely omitted
from the books. If the reported net profit before this error was discovered
was $10 400, the correct profit is
A. $10 400
B. $10 300
C. $10 500
D. $10 200
75
CHAPTER
FINANCIAL STATEMENTS
6
Objectives
By the end of the chapter, you should be able to:
•
•
prepare income statements
draw up statements of financial position
INTRODUCTION
Preparation of financial statements is stage six on the accounting cycle. This
stage is critical because most users of accounting information will only be able to
interface with the output of the business activities through financial statements.
In this chapter we will discuss the preparation of the income statement and the
statement of financial position. The preparation of financial statements follows
specific formats as dictated by international accounting standards. You are
encouraged to learn and follow these formats whenever you are asked to prepare
financial statements.
KEY WORDS


Income statements
Statements of financial position
Now that most of the bookkeeping tasks have been learnt, we now move on to
the Reporting Part of the course. The accountant needs to report to the owners of
the business periodically and one way of reporting is the preparation of financial
statements. Financial statements are made up of the Income statement, Statement
of Changes in Equity, the Statement of financial position, Statement of Cash
flows, Notes to the statements. However at this level you will only learn about
the income statement, statement of changes in equity and statement of financial
position.
80
Role Play
Get into groups of five learners per group.
a)
b)
Prepare an income statement for the year ended 31 December 20X5
Prepare a statement of financial position as at 31 December 20X5
Trial balance as at 31 December 20X5
$
$
Capital
30000
Furniture
10000
Inventory
1500
Buildings
14000
Inventory on 1 January 20X5
1000
Sales
24000
Freight carges
2100
Customs duty
1200
Packaging cost
3000
Purchases
18000
Returns outwards
1100
Returns inwards
700
Discounts
250
Stationery
170
Accounts payable
140
4450
Rent
370
Wages and salaries
5800
Insurance
1500
Bank overdraft
4300
Accounts receivable
3000
Drawings
1400
63990
63990
Additional information
i)
Inventory on 31 December 20X5 was $1 200
Task
Use your answer to practice question above to prepare the statement of
financial position for Munashe.
89
CHAPTER
ADJUSTMENT TO FINAL ACCOUNTS
7
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
•
•
•
•
•
explain the effect of closing entries
record closing entries in the journal and ledger
define depreciation
compute depreciation
prepare ledger accounts for depreciation, non-current assets and
non-current assets disposal
draw up ledger accounts for prepaid and accrued income and
expenses
construct ledger accounts for provisions for doubtful debts and
discounts allowable
compile income statements and statement of financial position
showing effects of the adjustments
interpret balances in the ledger accounts
INTRODUCTION
When the trial balance is extracted at the end of a financial period, there may
be some information which may not be known about the current year. This
information may come to management’s knowledge some days after the last
day of the financial period. Since this information relates to the current year’s
accounts, it will be used to make adjustments to the balances in the trial balance
so that financial statements are prepared to reflect a true and fair view of the
financial position of the business. This information is called post balance sheet
information. An example of such information is the closing inventory which
may only be known after the stock take has been done possibly some weeks
after the financial period has ended. This chapter will explore the treatment of
a number of post balance sheet items and the adjustments required to make the
accounts correct.
95
BAD DEBTS AND PROVISION FOR BAD DEBTS
BAD DEBTS
In some cases, businesses sell their products on credit. A customer who takes the
goods and promises to pay later is called a debtor. Some of such debtors may fail
to pay at all. A customer who fails to pay is called a bad debtor.
The amount which the firm fails to collect from a customer is known as a bad
debt. Such an amount is cancelled from the total amount owed by debtors and
becomes an expense to the firm, that is, it is debited in the income statement.
Customers may be taken as bad debtors when:
i. They Run away and change address without the knowledge of the firm.
ii. They become insane (crazy) that they are no longer able to cooperate.
iii. They become insolvent or bankrupt (when liabilities are more than one’s
assets.)
iv. They die before payment is done.
v. The company dissolves away such that it is unable to pay.
When a customer is declared bankrupt by the firm, the bookkeeping entries will
be:
Debit Bad debts account
Credit Customer/debtor’s account
At the end of the year the bad debts account is closed off by transferring the
amount to the profit or loss account, thus:
Debit the bad debts account
Credit the profit or loss account.
Note:
i)
If the bad debt awareness is given as a note to the trial balance, it means no
record has been made in the books (unless it is stated that it was recorded).
This means the amount of bad debts must be deducted from the debtor’s
amount supplied in the trial balance and debited to the profit or loss account.
106
The provision for bad debts account will be as follows.
Provision for Bad Debts Account
20X8
$
20X8
Dec 31 Income statement
300 Jan 1
Balance b/d
Dec 31 Balance c/d
950
1 250
20X8
Balance b/d
Jan 1
$
1 250
1 250
950
Example
S. Sithole, a sole trader maintains a provision for doubtful debts of 2½% every
year on its total receivables. The following are the receivables for the three years
to 31 December 20X5.
31 December 20X3
31 December 20X4
31 December 20X5
$2 500
$3 400
$2 900
It has been found that one of the receivables for the year 20X5 owing $200 has
become insolvent. Prepare the provision for bad debts accounts for the three
years indicating the amounts transferred to the income statements.
Answer
Provision for bad debts account-20X3
20X3
Dec 31
Balance c/d
$
20X3
62.50
Dec 31
$
Income statement
62.50
62.50
62.50
20X4
1 Jan
Bal b/d
62.50
Provision for bad debts account-20X4
20X4
Dec 31
$
Balance c/d
20X4
85.00 Jan 1
Dec 31
$
Balance b/d
62.50
Income statement
22.50
85.00
85.00
20X5 Jan
113
Balance b/d
85.00
ii)
Loan interest has not been listed in the trial balance that means no payment
was made for interest during the year. This means the entire figure is owinghence it is a current liability in the statement of financial position.
iii) Purchases were subtracted by $4 000 with respect to the goods taken by the
owner for personal use at cost. The same amount was added to drawings.
If they were taken at selling price, we could have added (credited) it to sales
account. Students normally wrongly deduct drawings of inventory from the
closing stock amount.
iv) In the income statement, provision for bad debts is a change between two
years while the current year’s provision is deduction from the debtors in the
statement of financial position.
DISPOSAL OF NON-CURRENT ASSETS
The contact of business normally calls for the need to buy non-current assets.
Business organisations buy different types of non-current assets depending on
type and size of business, type of products dealt with, capital investments and
technology used. These assets include motor vehicles, computers, buildings,
equipment, fridges, stoves and various other types of equipment.
At the end of predetermined period of use or when the asset is no longer useful
to the organisation, firms may decide to dispose of such assets. Disposing of an
asset refers to the selling of a non-current asset. If an asset is sold, it has to be
cancelled from the firm’s asset register.
When an asset is disposed of, profit or loss arises. This affects calculation of
profit for the period. Profit on disposal is income added to profit in the profit or
loss account (credited) while loss is in expense (debited).
With profit on disposal:
Debit the Asset Disposal account
Credit the Income Statement
With loss on disposal:
Debit the Income Statement
Credit the Asset Disposal account
Profit or loss on disposal is calculated in the asset disposal account. Profit on
disposal is the difference between selling price and the net book value of a noncurrent asset. Net book value is cost of an asset less accumulated depreciation on
the date the asset is being sold, i.e.
133
CHAPTER
CLASSIFICATION OF EXPENDITURE
8
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
define revenue and capital expenditure
classify expenditure into revenue or capital expenditure
show revenue and capital expenditure appropriately in the financial
statements
state the effects of incorrect classification of expenditure on profit,
non-current assets and working capital
INTRODUCTION
Businesses incur expenditures of different types in their day to day operations.
These expenditures need to be properly classified so that financial statements
will be correctly prepared. If this classification is not properly done, profits will
be wrongly reported and the value of assets and liabilities will be inaccurate.
The expenditure is classified into revenue expenditure and capital expenditure.
This chapter will define the terms capital expenditure and revenue expenditure.
The learner is encouraged to learn these definitions and try to classify various
expenditures into their appropriate categories.
KEY WORDS


Capital expenditure
Revenue expenditure
CAPITAL EXPENDITURE
Capital expenditure is where money is incurred in acquiring or improving
the value of non-current assets. This expenditure includes the following costs
incurred in:
160
PRACTICE QUESTIONS
Multiple choice questions
1.
Capital expenditure refers to
A. money used to acquire non-current assets
B. money used or spent on inventory
C. annual charges on depreciation
D. all costs of starting a business
2.
Revenue expenditure is
A. money used to acquire non-current assets
B. money used or spent the maintenance of non-current assets
C. money used on increasing the operational capacity of non-current
assets
D. money used to pay workers installing non-current assets
3.
Only one of the following is not an example of revenue expenditure
A. cost of installing a new machine
B. repainting a classroom block
C. purchasing a new engine for the school bus
D. repairing the air conditioning system
4.
If furniture repairs of $1 200 were debited to the Furniture account in error,
the impact is
A. There is not impact on net profit since a debit entry was made
B. Net profit is overstated by $1 200 while non-current assets understated
by $1 200
C. Net profit is overstated by $1 200 while non-current assets are overstated
by $1 200
D. Net profit is understated by $1 200 while non-current assets are
understated by $1 200
The salaries for workers constructing the new office block were recorded in
the salaries account. The impact was to
A. Understate net profit and overstate non-current assets
B. Understate net profit and understate non-current assets
C. Overstate net profit and overstate non-current assets
D. Overstate net profit and understate non-current assets
5.
165
CHAPTER
CONTROL ACCOUNTS
9
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
•
define control accounts
state the purposes of control accounts
name the types of control accounts
identify sources of information for control accounts
prepare control accounts
INTRODUCTION
A control account is an account in the general ledger which summarise the
transactions passing through the accounts it controls. Control accounts are also
called Totals accounts. There are basically two accounts we will cover, the
Creditors Ledger Control account and the Debtors Ledger Control account.
CONTROL ACCOUNTS
A control account is an account in the general ledger which summarises the
transactions passing through the accounts it controls. Control accounts are also
called Total accounts. A control account acts as a summary of the ledger it
controls. There are basically two types of control accounts namely:
i)
ii)
the Creditor Ledger Control account /Trade Payables account/Purchases
Control account
the Debtors Ledger Control account/Sales Ledger Control account/Trade
Receivables account
Sources of information for constructing control accounts
The information used to construct control accounts is extracted from personal
accounts of credit customers (receivables) and suppliers (payables) as well as
information from subsidiary books.
168
Credit balances in Sales Ledger Control accounts
Since debtors are technically assets of an organisation, according to the accounting
equation they must have a debit balance. However, there are instances where
debtors can also have credit balances. This arises due to the following reasons:
i) An overpayment to a creditor
ii) Returning goods to the creditor after paying the full amount
iii) Paying the creditor in advance for goods
iv) Cash discount not being deducted before payment was made
Thus for the above reasons the control account may have two opening balances,
a debit and a credit balance.
ICT ASSIGNMENT
Using the search engine www.google.com or any search engine of your
choice, list the source documents used to provide the information for:
payments to creditors
discount received from creditors
goods returned to suppliers
set-offs
purchases
bank refunds
Reasons for preparing control accounts
•
•
•
•
•
•
They assist in locating errors when trial balance fails to balance,
They are proof of the arithmetical accuracy of the ledgers they control,
They provide the amounts for receivables and payables immediately,
They help in the preparation of draft financial statements,
They reduce fraud as they are prepared by a person not involved in the
preparation of the controlled ledger,
They provide a summary of transactions affecting debtors and creditors
for each financial period.
171
CHAPTER
BANK RECONCILIATION
10
Objectives
By the end of the chapter, you should be able to:
•
•
•
•
identify causes of differences between cash book and bank balances
identify errors in the cash book and bank statement
draw up an updated cash book
prepare bank reconciliation statement
INTRODUCTION
In normal business circumstances, any firm should have a business bank account
in which it keeps its large amount of cash. This is because of the need for money
to circulate in the economy than it being held in the cash tills by firms. This
chapter looks into the differences that normally occur between the records
that are kept by the firm and the firm’s bank regarding the periodic banking
transactions of the firm. The business will keep a cash book where it records it
banking transactions while the bank will also keep a record of its transactions
with its client business. At the end of the month when the two parties balance
off their respective records, they should ideally come up with the same balance.
However, this may not be the so. This chapter will explore the reasons for these
differences and how businesses prepare documents to reconcile these differences.
KEY WORDS




Bank reconciliation statements
Errors
Updated cash book
Bank overdraft
If a business opens a bank account with any bank, say, ZB Bank limited, the bank
shall keep a record of all payments into or out of the account. Every time the firm
deposits or withdraws money from its account, the bank records. This means at
185
CHAPTER
DEPARTMENTAL ACCOUNTING
11
Objectives
By the end of the chapter, learners should be able to:
•
•
•
•
•
state the purpose of departmental trading accounts
prepare departmental trading accounts in columnar form
apportion expenses appropriately among departments
draw up a combined profit and loss account
prepare statements of financial position
INTRODUCTION
Departmental accounts are prepared by organisations with more than one
trading unit. An organisation may have the hardware department and clothing
department under the supervision (or management) of different people. To
see how the two managers are performing, departmental accounts should be
prepared. The departmental accounts will ensure that the profitability of each
department will be calculated and each manager will be appropriately appraised.
Corrective measures may be taken for the poorly performing department so that
profitability may be increased. At times, drastic measures such as closing the
loss making departments may be recommended although more facts need to be
considered before this decision is taken. This chapter will explore the preparation
of departmental accounts.
KEY WORDS



Departmental trading accounts
Combined profit and loss account.
Apportionment of expenses
217
Glossary
Apportioned costs – are jointly incurred costs that have to be shared by
benefiting departments.
Direct costs – are costs that can be traced directly to a particular department.
Indirect costs – are costs that cannot be directly traced to a particular
department.
END OF CHAPTER QUESTIONS
Multiple Choice Questions
1.
The most appropriate purpose of preparing departmental accounts is to
A. provide information used to evaluate the profitability and cost
effectiveness of each department,
B. show how much each department contributes to the overall profits of
the country
C. identify departments that that must be closed by management
D. help in management expressing their skills
2.
Simba Stores has two departments, Toys Department and Clothing
Department. Toys Department occupies 200m2 and the Clothing Department
occupies 500m2. Simba Stores pays combined rentals of $4 500 for the
premises housing the two departments. The portion of rental apportioned to
the Toys Department to the nearest $1 is
A. $1 285
B. $1 286
C. $6 425
D. $2 570
3.
Apportioned costs are
A. Shared between departments
B. That are not shared by departments
229
Structured Questions
1.
Chindove Supermarket has two departments, the Groceries and Butchery
departments. The following list of balances was extracted from their books
on 31 December 20X1.
$
Capital
Fixtures and fittings at cost
Provision for depreciation: 1 Jan 20X1
Motor vehicles
Furniture
Returns outwards
Drawings
Purchases
Butchery
Groceries
Sales
Butchery
Groceries
Rent
Land and buildings
Furniture, at cost
Motor vehicles, at cost
Carriage inwards: Butchery
Salaries
Advertising
Trade receivables
Provision for doubtful debts: 1 Jan 20X1
Trade payables
Rates
Discounts
Bank
Inventory: 1 Jan 20X1
Butchery
Groceries
231
$
834 800
275 000
10 000
5 000
30 000
60 000
187 000
240 000
290 000
570 000
18 000
470 000
105 000
160 000
7 000
25 000
4 000
25 000
3 000
65 000
58 000
1 300
85 000
35 000
90 000
1 827
300
1 500
1 827 300