CONTENTS
INTRODUTION TO ACCOUNTING............................................................................................. i
LESSON TWO.................................................................................................... 44
FINAL ACCOUNTS................................................................................................................ 44
LESSON THREE................................................................................................. 86
ACCOUNTING THEORY........................................................................................................ 86
LESSON FOUR................................................................................................. 104
ADJUSTMENTS TO FINAL ACCOUNTS.................................................................................104
LESSON FIVE.................................................................................................. 175
FURTHER ADJUSTMNETS TO ACCOUNTS...........................................................................175
LESSON SIX.................................................................................................... 224
OTHER ASPECTS OF FINAL ACCOUNTS..............................................................................224
LESSON SEVEN............................................................................................... 297
PARTNERSHIPS.................................................................................................................. 297
LESSON EIGHT................................................................................................ 370
COMPANY ACCOUNTS....................................................................................................... 370
LESSON NINE.................................................................................................. 504
REVISION AID.................................................................................................................... 504
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting
economic information to the users of this information to permit informed
judgment
Many businesses carry out transactions. Some of these transactions have a
financial implication i.e. either cash is received or paid out. Examples of these
transactions include selling goods, buying goods, paying employees and so many
others.
Accounting is involved with identifying these transactions measuring (attaching a
value) and reporting on these transactions. If a firm employs a new staff member
then this may not be an accounting transaction. However when the firm pays the
employee salary, then this is related to accounting as cash involved. This has an
economic impact on the organization and will be recorded for accounting
purposes. A process is put in place to collect and record this information; it is
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then classified and summarized so that it can be reported to the interested
parties.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These
financial statements provide information about an entity financial position,
performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much
belongs to the owners and others.
The financial performance reflects how the business has performed, whether it
has made profits or losses. Changes in financial positions determine whether the
resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm.
Therefore the information contained in the financial statements will affect the
decision making process.
i.
ii.
The following are the users of accounting information:
Owners:
They have invested in the business and examples of such owners include sole
traders, partners (partnerships) and shareholders (company). They would like
to have information on the financial performance, financial position and
changes in financial position.
This information will enable them to assess how the managers of the business
are performing whether the business is profitable or not and whether to make
drawings or put in additional capital.
Customers
Customers rely on the business for goods and services. They would like to
know how the business is performing and its financial position.
This information would enable them to assess whether they can rely on the
firm for future supplies.
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Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit.
The suppliers would like to have information on the financial performance and
position so as to assess whether the business would be able to pay up for the goods
and services provided as and when the payments falls due.
iii.
iv.
Managers
The managers are involved in the day-to-day activities of the business. They
would like to have information on the financial position, performance and
changes in financial position so as to determine whether the business is
operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate
measures (controls) to ensure that the set plans are met.
The Lenders
They have provided loans and others sources of capital to the business. Such
lenders include banks and other financial institutions. They would like to have
information on the financial performance and position of the business to
assess whether the business is profitable enough to pay the interest on loans
and whether it has enough resources to pay back the principal amount when
it is due.
v.
The Government and its agencies
The Government is interested in the financial performance of the business to
be able to assess the tax to be collected in the case there are any profits
made by the business.
The other government agencies are interested with the financial position and
performance of the business to be able to come with National Statistics. This
statistics measure the average performance of the economy.
vi.
The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples
include stockbrokers who advise investors on shares to buy in the stock
market and other professional consultants like accountants. They are
interested with the financial position and performance of the firm so that they
can advise their clients on how much is the value their investment i.e.
whether it is profitable or not and what is the value.
Others advisors would include the press who will then pass the information to
other relevant users.
vii.
The Employees
They work for the business/entity. They would like to have information on
the financial position and performance so as to make decisions on their
terms of employment. This information would be important as they can use
it to negotiate for better terms including salaries, training and other benefits.
They can also use it to assess whether the firm is financially sound and
therefore their jobs are secure.
viii.
The Public
Institutions and other welfare associations and groups represent the public.
They are interested with the financial performance of the firm. This
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information will be important for them to assess how socially responsible is
the firm.
This responsibility is in form the employment opportunities the firm offers,
charitable activities and the effect of firm’s activities on the environment.
c) THE ACCOUNTING EQUATION
A business owns properties. These properties are called assets. The assets are
the business resources that enable it to trade and carry out trading. They are
financed or funded by the owners of the business who put in funds.
These funds, including assets that the owner may put is called capital. Other
persons who are not owners of the firm may also finance assets. Funds from
these sources are called liabilities.
The total assets must be equal to the total funding i.e. both from owners and nonowners. This is expressed inform of accounting equation which is stated as
follows:
ASSETS = LIABILITIES + CAPITAL
Each item in this equation is briefly explained below.
Assets:
An asset is a resource controlled by a business entity/firm as a result of past
events for which economic benefits are expected to flow to the firm.
An example is if a business sells goods on credit then it has an asset called a
debtor. The past event is the sale on credit and the resource is a debtor. This
debtor is expected to pay so that economic benefits will flow towards the firm
i.e. in form of cash once the customers pays.
Assets are classified into two main types:
i) Non current assets (formerly called fixed assets).
ii) Current assets.
Non current assets are acquired by the business to assist in earning revenues and
not for resale. They are normally expected to be in business for a period of more
than one year.
Major examples include:
 Land and buildings
 Plant and machinery
 Fixtures, furniture, fittings and equipment
 Motor vehicles
Current assets are not expected to last for more than one year. They are in most
cases directly related to the trading activities of the firm. Examples include:
 Stock of goods – for purpose of selling.
 Trade debtors/accounts receivables – owe the business amounts as a
resort of trading.
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


Other debtors – owe the firm amounts other than for trading.
Cash at bank.
Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which
is expected to result to an economic outflow of amounts from the firm. An
example is when a business buys goods on credit, then the firm has a liability
called creditor. The past event is the credit purchase and the liability being the
creditor the firm will pay cash to the creditor and therefore there is an out flow of
cash from the business.
Liabilities are also classified into two main classes.
i)
ii)
Non-current liabilities (or long term liabilities)
Current liabilities.
Non-current liabilities are expected to last or be paid after one year. This
includes long-term loans from banks or other financial institutions. Current
liabilities last for a period of less than one year and therefore will be paid within
one year. Major examples:



Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
Other creditors - owed amounts for services supplied to the firm
other than goods.
Bank overdraft - amounts advanced by the bank for a short-term
period.
Capital:
This is the residual amount on the owner’s interest in the firm after deducting
liabilities from the assets.
The Accounting equation can be expressed in a simple report called the
Balance Sheet. The basic format is as follows:
Name
Balance sheet as at 31.12.
Sh
Capital
Non Current Liabilities
Loan
Current liabilities
Overdraft
xx
Creditors
xx
Capital and Liabilities
Sh
Sh
Non Current Assets
Land & Buildings
Plant & Machinery
xx
Fixtures, furniture & fittings
Motor vehicles
Sh
xx
xx
xx
xx
xx
xx
xx
Current Assets
Stocks
Debtor’s
Cash at bank
xx
xx
xx
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Cash in hand
xx
xx
xx
Total assets
xx
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The above format of the balance sheet is the horizontal format however currently
the practice is to present the Balance Sheet using the vertical format which is
shown below.
Name
Balance sheet as at 31.12.
Non Current Assets
Land & Buildings
Plant & Machinery
Fixtures, furniture & fittings
Motors vehicles
Sh
Sh
xx
xx
xx
xx
xx
Current Assets
Stocks/inventories
Debtors/ trade receivables
Cash at bank
Cash in hand
Current Liabilities
Bank Overdraft
xx
Creditors/trade payables
Net Current Assets
Net assets
Sh
xx
xx
xx
xx
xx
Capital
Non Current Liabilities
Loan (from bank or other sources)
(xx)
xx
xx
xx
xx
xx
Please pay attention to the format. The Non Current assets are listed in order of
permanence as shown i.e. from Land and Buildings to motor vehicles. The
Current Assets are listed in order of liquidity i.e. which asset is far from being
converted into cash. Example ,stock is not yet sold, (i.e. not yet realised yet) then
when it is sold we either get cash or a debtor (if sold on credit). When the debtor
pays then the debtor may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment
first. Bank overdraft is payable on demand by the bank, then followed by
creditors.
Note that in the vertical format, current liabilities are deducted from current
assets to give net current assets. This is added to Non Current assets, which give
us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
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Example 1.1
B Kelly has a business that has been trading for some time. You are given the
following information as at 31.12.2002
£
Buildings
11,000
Furniture & Fittings 5,500
Motor Vehicles
5,800
Stocks
8,500
Debtor
5,600
Cash a bank
1,500
Cash in hand
400
Creditors
2,500
Capital
30,800
Loan
5,000
You are required to prepare a Balance Sheet as at 31 December 2001
B Kelly
Balance Sheet as at 31 December 2001
Non Current Assets
Buildings
Furniture & Fittings
Motor Vehicles
Current Liabilities
Stock
Debtors
Cash at bank
Cash in hand
Creditors
Net Current Assets
Net Assets
Capital
Non-Current Liabilities
Loan
£
£
£
11,000
5,500
5,800
22,300
8,500
5,600
1,500
400
16,000
(2,500)
13,500
35,800
30,800
5,000
35,800
Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought
motor vehicles of ₤3,000, premises of ₤7,000, stock of goods ₤2,000. He still
owes ₤800 in respect of them. He had borrowed ₤4,000 from D Evans. After the
events just described and before trading starts, he had ₤300 cash in hand and
₤600 cash at bank.
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You are required to calculate the amount of his capital.
Solution:
Assets:
₤
Motor Vehicle
Premises
Stock
Cash at bank
Cash in hand
Liabilities:
Creditors
Loan - D Evans
₤
3,000
7,000
2,000
600
300
12,900
800
4,000
Capital
(4,800)
8,100
8,100
Remember the Accounting equation:
Assets = Liabilities + Capital.
To get capital we rearrange the equation as follows:
Capital = Assets - Liabilities
Total Assets = ₤12,900
Total Liabilities = ₤4,800
Capital = ₤ 12,900 - 4,800
= ₤ 8,100
Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock
of goods £9,900, Debtors £6,500, Cash at bank £12,900 and Cash in hand £240.
During
a.
b.
c.
the first week of July 2002:
He bought extra stock of goods £1,540 on credit.
One of the debtors paid him £560 in cash.
He bought extra fixture by cheque £2,000.
You are to draw up a balance sheet as on 7 July 2002 after the above transactions
have been completed.
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First we need to look at the effect of the above transactions on the assets and
liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because
this is bought on credit the creditors increase by £1,540 also.
(b) Amount received from the debtor means that the level of debtors reduces
and cash increases by £560.
(c) Extra fixtures bought by cheque, will increase the fixtures and reduce the
cash at bank by £2,000.
This can be summarized as follows:
Capital
Creditors
Fixtures
Motor Vehicles
Stock
Debtors
Cash at bank
Cash in hand
Opening
Balances
£
41,800
3,200
7,000
8,400
9,900
6,560
12,900
240
Increase/(Decrease)
1,540
2,000
1,540
(560)
(2000)
560
Closing
Balances
£
41,800
4,740
9,000
8,400
11,440
6,000
10,900
800
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Non Current Assets
Fixtures
Motor Vehicles
Current Assets
Stock
Debtors
Cash at bank
Cash at hand
Current Liabilities
Creditors
Net Current Assets
Net Assets
Capital
£
£
9,000
8,400
17,400
11,440
6,000
10,900
800
29,140
(4,740)
24,400
41,800
41,800
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From the illustration remember that any change in the items of the balance sheet
will have a double effect on the accounting equation has a double effect and
therefore the equation will always balance.
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Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors
15,800
Equipment
46,000
Motor Vehicle
25,160
Stock
24,600
Debtors
23,080
Cash at bank
29,120
Cash in hand
160
During the first week of May 2002 Moody:
a. Bought extra equipment on credit for £5,520.
b. Bought extra stock by cheque £2,280.
c. Paid creditors by cheque £3,160.
d. Debtors paid £3,360 by cheque and £240 by cash.
e. Moody put in extra £1,000 cash as capital.
Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been
completed.
Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets
and liabilities can be listed as follows.
Assets
£
Liabilities
£
Equipment
46,000
Creditors
15,800
Motor Vehicle
25,160
Stock
24,600
Debtors
23,080
Cash at bank
29,120
Cash in hand
160
148,120
Capital = Assets – Liabilities
= £148,120 - £15,800 = £132,320
(ii) To draw up the balance sheet, we consider the effect of the above transactions
on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by
£5,520 and the creditors will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by
£2,280 and the balance at bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and
also reduce the amount at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases
the cash at bank and cash in hand by £3,360 and £240 respectively.
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e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and
the capital balances.
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This is also summarized as follows:
Opening
Adjustment
Closing
Balance
Increase/Decrease
Balance
Assets/Liabilities
£
£
£
Equipment
46,000
+5,520
51,520
Motor Vehicle
25,160
25,160
Stock
24,600
+2,280
26,880
Debtors
23,080
-3,600
19,480
Cash at bank
29,120
(-2,280 – 3,160 + 3,360)
27,040
Cash in hand
160
(+240 + 1000)
1,400
Creditors
15,800
(+5,520 – 3,160)
18,160
Capital
132,320
+1,000
133,320
The balance sheet will therefore be prepared as follows:
D Moody
Balance sheet as at 7 May 2002
Non Current Assets
Equipment
Motor vehicle
£
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
£
51,520
25,160
76,680
26,880
19,480
27,040
1,400
74,800
Current Liabilities
Creditors
Net Current Assets
Net Assets
(18,160)
56,640
133,320
Capital
133,320
Double Entry Aspects
The Accounting equation forms the basis of double entry and therefore it should
always be maintained. Any change in assets, liabilities or capital will have a double
effect such that assets will always be equal to liabilities plus capital. If the owners
put in additional capital then this will increase the cash at bank and the capital
amount therefore the equation is still maintained.
Name
Debit
Date
Detail
Folio
Amount
Credit
Date
Detail
Folio
Amount
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In this account the date will show the opening period of the asset ,liability or capital
i.e. the balance brought forward. It will also show the date when a transaction took
place (i.e. either an asset was bought or liability incurred).
The detail column (also called the particulars column) shows the nature of the
transaction and reference to the corresponding account. The Folio Column for
purposes of detailed recording shows the reference number of the corresponding
account. The amount column shows the amount of the asset, liability or capital.
The left side of the account is called the debit side and the right side is called the
credit side. All assets are shown or recorded on the debit side while all the liabilities
and capital are recorded on the credit side. Each type of asset or liability must have
its own account whereby all transactions affecting them are recorded in this
account. Therefore there should be an account for Premises, Plant and Machinery,
Stock, Debtors, Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital
therefore all debits should be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a
corresponding credit entry. The transactions affecting these accounts are posted in
the account as debit entry and credit entry to complete the double entry.
When we make a debit entry we are either:
i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.
When we make a credit entry we are either:
i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.
Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500;
Debtors £57,700;Cash at bank £72,800 and Cash in hand £400.
Compute the balance on the capital account as at 30 November 2002.
During the first week of December 2002, Jump:
a. Bought extra equipment on credit for £13,800.
b. Bought extra stock by cheque £5,700.
c. Paid creditors by cheque £7,900.
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d. Received from debtors £8,400 by cheque and £600 by cash.
e. Put in an extra £2,500 cash as capital.
You are to draw up a balance sheet as on 7 December 2002 after the above
transactions have been completed.
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Answer:
Capital = Assets – Liabilities
Assets
£
Liabilitie
s
115,000 Creditor
s
62,900
61,500
57,700
72,800
400
371,300
Equipment
Motor vehicle
Stock
Debtors
Cash at bank
Cash in hand
£
39,50
0
Capital = £371,300 - £39,500 = £330,800
Creditors A/C
a/c
2002
£B
Motor Vehicles
2002
£
2002
£
2002
£
Bank
7900
c/d 62,900
1.12 Bal c/d
31,600
1.12 Bal b/d
39,500
1.12
Bal b/d 62,900 1.12 Bal
62,900
62,900
39,500
2002
£
1.12 Bal b\d
Creditors
2002
£
1.12 Bal b\d
Bank
39,500
Equipment a/c
2002
115,000
13,800 7.12 Bal c\d
128,800
128,800
Stock a/c
2002
61,500
5700 7.12 Bal c\d
67,200
£
128,800
£
67,200
67,200
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Debtors a/c
2002
2002
£
1.12 Bal b\d
57,700 Bank
Cash
570 7.12 Bal c\d
57,700
Bank
Debtors
Bal
2002
£
7.12 Bal b\d
5,700
7,900
67,600
81,200
Cash in hand a/c
2002
£
b\d
600
2500 7.12 Bal c\d
3500
3500
3500
Capital
2002
2002
£
7.12 Bal b\d
8,400
600
48,700
57,700
Cash at Bank a/c
2002
£
72,800 Stock
Creditors
8,400 7.12 Bal c\d
81,200
2002
£
1.12 Bal b\d
2002
£
1.12
400
Debtors
Capital
£
£
1.12 Bal b\d
333300 Cash
128,800
330800
2500
128,800
Creditors Of Equipment
2002
£
13800 Equipment
13,800
13800
13,800
H Jump
Balance sheet as at 7 December 2002
Non Current Assets
£
£
£
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Equipment
Motor vehicles
128,800
62,900
191,700
Current Assets
Stock
Debtors
Cash at Bank
Cash in Hand
Current Liabilities
Creditors of equipment
Creditors
Net Current Assets
Net Assets
Capital
61,200
48,700
67,600
3,500
187,000
13,800
31,000
(45,400)
141,000
333,300
333,300
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Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record
the following transactions:
2002
June 1
Started business with £50,000 in the bank.
“
2
Bought motor van paying by cheque £12,000.
“
5
Bought Fixtures £4,000 on credit from Office Masters Ltd.
“
8
Bought a van on credit from Motor Cars Ltd £8,000.
“
12
Took £1,000 out of the bank and put it into the cash till.
“
15
Bought Fixtures paying by cash £600.
“
19
Paid Motor Cars Ltd by cheque £8000.
“
21
A loan of £10,000 cash is received from J Marcus.
“
25
Paid £8,000 of the cash in hand into the bank account.
“
30
Bought more Fixtures paying by cheque £3,000.
Capital a/c
Cash at
bank a/c
2002
£ 2002
30/6 Bal c/f 50,000 1/6
Van
12,000
£
Bank
50,000
2002
1/6
12/6
£
Capital
Cash
2002 £
50,000 2/6
8,000 12/6Cash
1,000
19/6Motor ltd
8,000
50,000
50,000
30/6 Fixtures
3,000
30/6 Bal c/f 34,000
58,000
58,000
2002
2/6
12,000
8/6
8,000
Motor Van
£
Bank
Super
M
30/6
20,000
20000
2002
5/6
4,000
15/6
600
30/6
3000
£
Bal
c/f
20000
Fixtures
£ 2002
young
£
Cash
Bank
Bal c/f
7,600
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7,600
2002
19/6
8000
7,600
Motor Car Ltd – Creditors
£ 2002
Bank 8/6 Van
8000
2002
30/6
2002
12/6
1,000
21/6 J. Marcus
2002
30/6
£
8000
8000
Office Masters Ltd - Creditor
£ 2002
B\f 8/6 Fixtures
4000
4000
Cash in hand
£ 2002
Cash 15/6
600
25/6 Bank
10000 30/6 Bal c/f
11000
J. Marcus - Loaner
£ 2002
c\f 21/6 Cash
10000
£
4000
4000
£
Cash
800
2400
11000
£
10000
Note that the difference between the debit side and the credit side is the balancing
figure. Most assets will have a balance on the credit side and most liabilities and
capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:
M Crash
Balance Sheet as at 30th June 2002
£
Non Current Assets
Fixtures
Motor vehicles
Current Assets
Cash at bank
Cash in hand
Current Liabilities
Creditors – others
Net Current Assets
£
7,600
20,000
27,600
34,000
2,400
36,400
(4,000)
32,400
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Net Assets
Capital
Non Current Liabilities
Loan – J Jarvis
xxii
60,000
50,000
10,000
60,000
Let us now consider other transactions that take place in a business and the
accounting entries to be made.
Accounting for sales, purchases, incomes and expenses.
Sales:
This is the sell of goods that were bought by a firm (the goods must have been
bought with the purpose of resale). Sales are divided into cash sales and credit
sales. When a cash sale is made, the following entries are to be made.
i.
Debit cash either at bank or in hand.
ii.
Credit sales account.
For a credit sale:
i.
Debit debtors/ Accounts receivable account.
ii.
Credit sales account.
A new account for sales is opened and credited with cash or credit sales.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For
cash purchases:
i.
Debit purchases.
ii.
Credit cash at bank/cash in hand
For credit purchases, we:
i.
Debit purchases.
ii.
Credit creditors for goods.
A new account is also opened for purchases where both cash and credit purchases
are posted. NOTE: NO ENTRY IS MADE INTO THE STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales).
Such incomes include:
 Rent
 Bank interest
 Discounts received.
When the firm receives cash, from these incomes, the following entries are
made:
 Debit cash in hand/at bank.
 Credit income account.
Each type of income should have its own account e.g. rent income, interest
income.
xxiii
Course Description
Incomes increase the value of capital and that is the reason
posted on the credit side of their respective accounts.
why they are
Expenses:
These are amounts paid out for services rendered other than those paid for
purchases. Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills
• Motor vehicle running expenses.
• Bank charges.
When a firm pays for an expense, we:
i.
Debit the expense account.
ii.
Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will
be posted. Expenses decrease the value of capital and thus the posting is made on
the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and
expenses.
Course Description
xxiv
Debit cash book/bank/in hand
INCOME
Credit
INCOMES/EXPENSES
Debit Expense A/C
EXPENCE
Credit cash book
/bank/in hand
Returns Inwards and Returns Outwards.
Returns Inwards: These are goods that have been returned by customers due to
various reasons e.g.
i.
They may be defective/damaged,
ii.
Being of the wrong type .
iii.
Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in
relation to cash sales and cash is refunded to the customer the following entries are
made:
i.
Debit returns – inwards
ii.
Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer,
the following entry is to be made.
i.
Debit returns inwards.
ii.
Credit debtors.
Returns Outwards: These are goods returned to suppliers/creditors. They may be
for cash purchases or for credit purchases. For cash purchases a cash refund given
to the firm by the supplier,
i.
Debit the cashbook (cash at bank/hand).
ii.
Credit returns outwards.
For credit purchases and no refund has been made:
i.
Debit creditors.
ii.
Credit returns outwards.
xxv
Course Description
Diagrammatically shown as follows:
Debit returns inwards.
Cash
Credit cashbook.
Debit returns inwards
Inwards
Credit
Credit debtors
Debit cash
Returns
Cash
Outwards
Credit returns outwards
Debit creditors
Credit
Credit returns
outwards
Now lets us take one example that includes most of the above transactions.
Example 1.8
You are to enter the following transactions, completing the double entry in the
books for the month of May 2002.
2002
May 1
Started business with £2,000 in the bank.
“
2
Purchased goods £175 on credit from M Rooks.
“
3
Bought furniture and fittings £150 paying by cheque.
“
5
Sold goods for cash £275.
“
6
Bought goods on credit £114 from P Scot.
“
10
Paid rent by cash £15.
“
12
Bought stationery £27, paying in cash.
“
18
Goods returned to M Rooks £23.
“
21
Let off part of the premises receiving rent by cheque £5.
“
23
Sold goods on credit to U Foot for £77.
“
24
Bought a motor van paying by cheque £300.
“
30
Paid the month’s wages by cash £117.
“
31
The proprietor took cash for himself £44.
Example
2002
£
1/5
2,000
21/5
Bank a/c
2002
£
Capital 3/5Furn&
150
24/5
300
Rent 31/5
fitting
Motor
Bal
vehicle
c/f
Course Description
xxvi
5
1,555
2,005
31/5
2,000
Bal
c/f
2,005
Capital a/c
1/5 Bank
2,000
Purchases a/c
2002
£
Rooks
2002
£
2/5M
175
6/5
114
P
2002
£
18/5
23
31/5
152
Scot 31/5
289
289
Returns
Bal
Bal
c/f
289
Creditor – M Rooks a/c
2002
£
in 2/5
175
c/f
Purchases
175
175
Furniture & Fittings a/c
2002
£ 2002
£
3/5 Bank
150
31/5 Bal c/f 150
Sales a/c
2002
£
2002
£
31/5 Bal c/f
Cash
352 5/5
275
150
150
23/5
U. Foot 77
352
352
Cash in hand a/c
2002
£ 2002
£
5/5 Sales
275
10/5 Rent
£
15
2002
P Scot a/c
£
2002
xxvii
Course Description
12/5 Stationery 27
6/5Purchases
31/5
Bal c/f
114
114
30/5 Wages
31/5 Bal c/f
117
116
275
275
114
114
Expenses – Rent a/c
2002
11/5 Bal c/f
27
£ 2002
15 10/5 Cash
Expenses – Stationery a/c
£
2002
15
£
12/5 Cash
27
2002
£
31/5Bal c/f
27
27
Course Description
Returns – Out a/c
2002
£ 2002
£
£
31/5 Bal c/f 23 18/5 M Rooks
Bank
5
Debtors – U Foot a/c
2002
£ 2002
£
23/5 Sales
77
31/5 Bal c/f
300
Expenses – Wages a/c
a/c
2002
£ 2002
£
£
30/5 Cash
117
31/5 Bal c/f
c/f 44
xxviii
Income – Rent a/c
£
2002
2002
23
77
21/5
Bal c/f
5
31/5
Motor vehicle a/c
2002
£
2002
£
24/5 Bank 300 31/5 Bal c/f
Drawings
2002
117
£
31/5 Cash
44
200
31/5
Bal
Accounting for drawings, discounts allowed and discounts received.
Drawings
The owner makes drawings from the firm in various ways:
i) Cash or bank withdrawals
When the owner withdraws money from the business we debit drawings and credit
cashbook (cash in hand or cash at bank).
ii) Taking goods for own use and
When the owner takes out some of the goods for his own use, we debit drawings
and credit purchases.
iii) Personal expenses, paid by the business
Here we debit the drawings and credit expense account
Taking some of the other assets from the business e.g. motor vehicles or using part
of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle
or converting business premises into living quarters or not paying into the business
xxix
Course Description
cash collected personally from the customers. When this happens we debit
drawings and credit the relevant asset e.g. motor vehicles, premises or some
building or even debtors.
Course Description
xxx
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the
firm to pay the amount dues within the agreed time. It is an amount deducted from
the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit
discounts received e.g. A. Ltd sells some goods on credit to B Ltd. ₤1,000 under the
terms of sale, B Ltd, will receive a discount of 5% if they pay the amount due within
one month. B decides to take up the offer and pays the amount within the given
time. B will record the transaction as follows.
Debit: Creditor – A Ltd
Credit: Discounts Received
Creditor
A.
Ltd
a/c
Purchases a/c
2002
£
2002
2002
£
Bank
950
1,000
Discount received 50
1000
£
Purchases
Discounts Received a/c
200
£
2002
£
Bal c/f
50
A Ltd
Ltd
950
2002
1,000
£
A Ltd
1000
£
2002
Bank a/c
£ 2002
50
A
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the
customers to encourage prompt payment. The amounts deducted from the sales
invoice. In the previous example when A Ltd issued the discount and was taken up
by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.
2002
Sales
Debtors B Ltd a/c
£
2002
1,000 Bank
£
950
2002
£
Discount
Debtor 1,000
1,000
1,000
Sales a/c
2002
£
50
xxxi
2002
Debtor
Course Description
Discount allowed a/c
£ 2002
50 Bal c/f
£
50
2002
Debtor
Bank a/c
£
950
TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified
as per the debits and credits. The purpose of the trial balance is to show the
accuracy of the double entries made and to facilitate the preparation of final
accounts i.e. the trading, profit & loss account and a balance sheet.
The debits of the trial balance should be the same as the credits, if not then there is
an error in one or more of the accounts.
The trial balance in example 1.8 would be extracted as follows:
Name
Trial balance as at 31 May
2002
Debit Credit
£
£
Rent – income
5
Debtor – U Foot
7
Motor vehicle
300
Bank
1555
Purchases
289
Wages
117
Capital
2000
Creditor
–
M
152
Rooks
Furniture
&
150
Fittings
Sales
352
Cash in hand
72
Creditor – P Scot
114
Expenses – Rent
15
Expenses
–
27
Stationery
Returns Outwards
23
Drawings
44
.
2464
2464
From the trial balance please note that assets and expenses are on the debit side.
Capital, liabilities and incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all
the postings have been made in the relevant accounts.
Example 1.9
Write up the following transactions in the books of S Pink:
Course Description
2003
March
“
“
“
“
“
“
“
“
“
“
“
“
“
“
“
1
2
3
4
5
7
11
14
17
20
22
27
28
29
30
31
xxxii
Started business with cash £1,000.
Bought goods on credit from A Cliks £296.
Paid rent by cash £28.
Paid £1,000 of the cash of the firm into a bank account.
Sold goods on credit to J Simpson £54.
Bought stationery £15 paying by cheque.
Cash sales £49.
Goods returned by us to A Cliks £17.
Sold goods on credit to P Lutz £29.
Paid for repairs to the building by cash £18.
J Simpson returned goods to us £14.
Paid A Cliks by cheque £279.
Cash purchases £125.
Bought a motor vehicle paying by cheque £395.
Paid motor expenses in cash £15.
Bought fixtures £120 on credit from R west.
Solutions
Capital a/c
Cash in hand
a/c
2003
£
2003
£
2003
£
£
31/3 Bal c/d 1,500 1/3 Cash 1,500
1/3 Capital
28
11/3 Sales
1,000
2003
1,500
49
3/3 Rent
4/3
20/3
Bank
Repairs
18
28/3
Purchases
125
30/3
exp.
Motor
15
31/3
Bal c/d
363
1,549
1,549
Purchases a/c
2003
£ 2003
£
2/3 A Hanson 296 31/3 Bal c/d 421
28/3 Cash
125
Creditors – A Cliks ac
2003
£
2003
£
421
Purchases
296
421
14/3 Returns out
17 2/3
xxxiii
Course Description
27/3 Bank
279
296
296
Rent –Expenses a/c
2003
£
3/3
15
£ 2003
Cash
28
£
31/3
Bank a/c
2003
Bal c/d
£
28
2003
4/3 Cash
1,000
5/3 Stationery
27/3 A. Hanson
279
29/3 Motor van
395
31/3
Bal c/d
311
1,000
1,000
Debtor – J Simpson a/c
Sales
a/c
2003
£
3/3
Sales
JSimpson
54
£ 2003
54
£
2003
22/3 Returns in
31/3
Bal c/d
14
` £ 2002
31/3
40
Bal c/d
132
5/3
11/3 Sales
49
17/3 P Lutz
29
54
54
132
132
Course Description
xxxiv
Stationery a/c
£ 2003
£
15
31/3 Bal c/d
2003
7/3
Bank
Returns outwards a/c
15
2003
£
2003
£
31/3
Cliks
Bal c/d
17 14/3
A
17
P Lutz – Debtor a
2003
£
2003
£
17/3 Sales 29 21/3 Bal c/d
c/d 18
Building repairs - expenses
£
2003
29
20/3
£
Cash
2003
18
31/3 Bal
Returns - Inwards
2003
£ 2003
£
22/3 J Simpson 14 31/3 Bal c/d
395
2003
14
£
29/3 Bank
R West – Creditor (others)
2003
31/3 Bal c/d
15
2003
31/3 A. Webster
£ 2003
£
120 31/3 Fixtures 120
Fixtures
£
2003
£
120 31/3 Bal c/d
Motor vehicle
2003
£
395 31/3 Bal c/d
Motor expenses
2003
120
£
2003
30/3 Cash
15
£
31/3 Bal c/d
xxxv
Course Description
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
Debit
(£)
Capital
Purchases
Cash in hand
Bank
Rent expense
Sales
Fixtures
Debtor – J Simpson
Debtor – P Lutz
Motor vehicle
Creditors
Motor expenses
Returns inwards
Creditors others – R
West
Stationery
Returns outwards
Building repairs
Credit
(£)
1500
421
363
311
28
132
120
40
29
395
15
14
120
15
18
1769
17
1769
Example 1.10
The following transactions took place during the month of May:
2003
May
1
Started firm with capital in cash of £250.
“
2
Bought goods on credit from the following persons: R Kelly £54;
Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
“
4
Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
“
6
Paid rent by cash £12.
“
9
C Blanes paid us his account by cheque £43.
“
10
F Skin paid us £150 by cheque.
“
12
We paid the following by cheque: J Role £25; R Kelley £54.
“
15
Paid carriage by cash £23.
“
18
Bought goods on credit from P Combs £43; Mobile £110.
“
21
Sold goods on credit to B Long £67.
“
31
Paid rent by cheque £18.
Course Description
xxxvi
Answer
200
3
31/
5
200
3
12/
5
200
3
12/
5
Bal
c/d
Creditor R Kelly
£ 200
3
Bank
54 2/5 Purcha
ses
Creditor – J Role
£
Bank
200
3
31/5 Bal
c/d
200
3
4/5
21/
5
Capital
£
200
3
250
1/5 Cash
25 2/5
Purcha
ses
Creditor I Sims
£ 200
3
64 2/5 Purcha
ses
Debtor B Long
£ 200
3
Sale
62 31/ Bal c/d
s
5
Sale
67
s
129
£
250
£
54
£
25
£
64
£
129
.
129
200
3
1/5
200
3
31/
5
200
3
31/
5
200
3
4/5
200
3
4/5
Cash in Hand
£
200
3
Capit 250 6/5 Rent
al
15/ Carriag
5
e
. 31/ Bal c/d
5
250
£
12
23
21
5
25
0
Creditor P Combs
£ 200
3
Bal c/d 130 2/5
Purcha
ses
. 18/5 Purcha
ses
130
Creditor – D Mobile
£
200
3
Bal
186 2/5 Purcha
c/d
ses
. 18/ Purcha
5
ses
186
Debtor C. Blares
£
200
3
Sales 43
4/5 Bank
Debtor F Smith
£ 200
3
Sales
176 10/ Bank
5
. 31/ Bal c/d
5
176
£
87
4
3
13
0
£
76
11
0
18
6
£
43
£
15
0
2
6
17
6
xxxvii
Course Description
2/5
2/5
Purchases
£
200
3
R Kelly
54 31/ Bal
5
c/d
P Combs
87
J Role
25
2/5
2/5
D Mobile
L Sims
76
64
18/5
P Combs
43
18/5
D. Mobile
10
0
45
9
200
3
2/5
200
3
9/5
C
Blanes
H
F
Skin
10/5
19x
6
6/5
31/
5
Cash
Bank
Bank
£ 200
3
43 12/5
15 12/5
0
31/5
31/5
.
19
3
Rent
£ 19x
6
12 31/
5
1
8
3
0
£
200
3
31/
5
45
9
Bal
c/f
£
4/5
4/5
C
Blanes
F Long
F Skin
4/5
B Long
43
62
17
6
67
.
34
8
.
459
£
2003
J Role
25
15/5
R
Kelly
Rent
Bal
c/d
54
Carriage Expenses
£ 200
3
Cash
23 31/ Bal c/d
5
18
9
6
19
3
£
Bal
c/d
30
.
30
Trial Balance as at 31/5/2003
Capital
Sales
£
200
3
348 4/5
Debit
-
Credit
250
£
23
Course Description
Cash
Creditor – R Kelly
Creditor – P Combs
Creditor – J Role
Creditor – D Mobile
Creditor – L. Simms
Debtor – C. Blanes
Purchases
Sales
Debtor- B. Long
Debtor- F Skin
Bank
Carriage
Rent
xxxviii
215
-
130
-
-
186
64
-
459
-
348
129
26
96
-
30
-
978
978
xxxix
Course Description
REINFORCEMENT QUESTIONS
Question One
Spark has been trading for a number of years as an electrical appliance retailer and
repairer in premises which he rents at an annual rate of $1,500 payable in arrears.
Balances appearing in his books at 1 January 19X1 were as follows:
$
Capital account
Motor van
Fixtures and fittings
Provision for depreciation on motor van (credit)
Provisions for depreciation on fixtures& fittings
(credit)
Inventory at cost
Receivables for credit sales:
Brown
Blue
Stripe
Cash at bank
Cash in hand
Payables for supplies:
Live
Negative
Earth
$
1,808
1,200
806
720
250
366
160
40
20
220
672
5
143
80
73
296
45
100
Amount owing for electricity
Local taxes paid in advance
Although Sparks has three credit customers the majority of his sales and services
are for cash, out of which he pays various expenses before banking the balance.
The following transactions took place during the first
Januar
y
$
Suppliers’ invoices:
Live
468
Negative
Earth
692
Capital introduced
Bankings of cash (from cash sales)
908
Expenditure out of cash sales before
banking:
Withdrawals on account
130
Stationery
12
Travelling
6
Petrol and van repairs
19
four months of 19X1
Februar Marc April
y
h
$
$
$
570
87
500
940
390
103
187
602
64
-
766
1,031
120
14
10
22
160
26
11
37
150
21
13
26
Course Description
xl
Sundry expenses
Postage
Cleaner’s wages
Goods invoiced to credit customers:
Brown
Blue
Stripe
Cheque payments (other than those to
suppliers):
Telephone
Electricity
Local taxes
Motor van (1 February 19X1)
Unbanked at the end of April
5
12
60
4
10
60
7
15
65
3
19
75
66
120
22
140
10
130
12
180
44
38
20
48
40
62
-
49
47
800
-
59
20
220
-
66
106
12
Spark pays for goods by cheque one month after receipt of invoice, and receives a
settlement discount of 15% from each supplier.
Credit customers also pay by cheque one month after receipt of invoice, and are
given a settlement discount of 10% of the invoice price.
Required:
Write up the ledger accounts of Spark for the four months to 30 April 19X1, and
extract a list of account balances after balancing off the accounts.
Question Two
Mary
Balance Sheet as at 31 December 2000
Non Current Assets
Premises
£
Plant
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities:
Creditors
£
25,000.0
0
12,000.0
0
37,000.0
0
11,000.0
0
10,000.0
0
5,000.00
3,000.00
29,000.0
0
(12,000.0
17,000.0
xli
Course Description
0)
Capital
Non Current Liabilities:
Loan from bank
0
54,000.0
0
34,000.0
0
20,000.0
0
54,000.00
During the year to 31 December 2001 the following total transactions occurred:
a) Mary withdrew a total of £10,000.00 in cash
b) Stock in trade was bought, all on credit, for £34,000.00
c) Sales were made totaling 60,000.00 of stock in trade which had cost £37,000.00.
Of these sales £51,000.00 were on credit and £9,000.00 for cash.
d) A total of £16,000.00 was drawn from the bank in cash to the cash till.
e) Electricity for the year paid by cheque totaled £2,000.00
f) Rates for the year paid by cheque totaled £1,000.00
g) Wages for the year all paid cash totaled £10,000.00
h) Sundry expenses all paid in cash totaled £2,000.00
i) Creditors were paid a total of £36,000.00 all by cheque
j) Debtors paid a total of £54,000.00 all in cheques.
k) The bank charged interest on the loan deducting £3,000.00.
Required:
Prepare a revised balance sheet.
(20 marks)
Question Three
a) Explain the nature of accounting and the accounting equation
(8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following
information
(12 marks)
Non Current
Assets
Property
Machinery
01.01.200
1
£
20,000.00
6,000.00
31.12.200
1
£
20,000.00
9,000.00
Course Description
xlii
26,000.00
Current Assets:
Debtors
Cash
Current
Liabilities:
Creditors
Overdraft
Net Current
Liabilities
Net Assets
29,000.00
8,000.00
4,000.00
1,000.00
5,000.00
1,500.00
9,500.00
5,000.00
6,000.00
3,000.00
9,000.00
11,000.00
(6,000.00)
12,000.00
(2,500.00)
20,000.00
26,500.00
Drawings during the year amounted to £4,500.00
Additional capital introduced by the owner £5,000.00
Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:
Sales
Purchases
Office expenses
Insurance
Wages
Rates
Heating and
Lighting
Telephone
Discounts allowed
Opening stock
Returns inwards
Returns outwards
£
47,600.
00
22,850.
00
1,900.0
0
700.00
7,900.0
0
2,800.0
0
1,200.0
0
650.00
1,150.0
0
500.00
200.00
150.00
xliii
Course Description
Premises
Plant and
Machinery
Motor Vehicles
Debtors
Bank balance
Creditors
Loan-long term loan
Capital
Drawings for the
year
Closing stock
40,000.
00
5,000.0
0
12,000.
00
12,500.
00
7,800.0
0
3,400.0
0
10,000.
00
60,000.
00
4,000.0
0
550.00
Required:
Construct a trial balance, from the above list of balances.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Acknowledgement
44
LESSON TWO
FINAL ACCOUNTS
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of
goods/stocks) of the
business and tries to determine the gross profit for the
relevant financial period.
The gross profit is then taken up in the profit and
loss account as part of the income.
Format for the trading account:
Name
Trading Account for the year ended 31 Dec.
₤
₤
₤
Sales
Less: Returns Inwards
x
(x)
x
Less: Cost of Sales
Opening stock
Purchases
Add: Carriage Inwards
x
x
x
x
Less: Returns Outwards
Cost of stock available for sale
Less: Closing stock
Gross Profit
x
x
x
x
(x)
x
Example: 2.1
From the following details draw up the trading account of Springs for the year
ended 31 December 2002, which was his first year in business.
₤
Carriage inwards
Returns outwards
Returns inwards
Sales
Purchases
Stock of goods: 31 December 19x7
6,700
4,950
8,900
387,420
333,330
74,890
Lesson One
45
Springs
Trading Account for the year ended 31 Dec 2002
£
£
Sales
Less: Returns Inwards
387,420
8,900
378,520
Less cost of sales
Purchases
Add: Carriage Inwards
333,330
6,700
340,030
4,950
335,080
74,890
260,190
Less: Returns outwards
Less: Closing stock
Gross Profit
118,330
Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the
trading account of R Sings for that year.
£
Stocks: 1 April 2002
Returns inwards
Returns outwards
Purchases
Carriage inwards
Sales
Stocks: 31 March 2003
16,523
1,372
2,896
53,397
1,122
94,600
14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
₤
₤
₤
94,600
(1,372)
93,228
Sales
Less: Returns Inwards
Less: Cost of sales
Opening Stock
Purchases
Add: Carriage Inwards
53,397
1,122
54,519
Less: Returns Outwards
2,896
Cost of goods available for sale
16,523
51,623
68,146
46
Introduction to Accounting
Less: Closing stock
(49,642)
Gross Profit
18,504
43,586
(b) PROFIT AND LOSS ACCOUNT
It shows the net profit or net loss that the business has made from all the activities
during a financial period.
The net profit (or loss) is determined by deducting all the expenses from all the
incomes of the same financial period.
In practice, the trading account is combined together with the net profit and loss
account into one report so that the format is as shown below:
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
£
£
£
x
Sales
Less: Returns Inwards
x
x
Less: Cost of sales
Opening stock
Purchases
Add: Carriage Inwards
x
x
x
x
Less: Returns Outwards
Cost of goods available for sale
Less: Closing stock
Gross Profit
Discount received
Rent received
Interest received
Other incomes
x
x
x
x
(x)
x
x
x
x
x
x
Less: Expenses
Carriage Outwards
Discounts allowed
Postage & stationary
Salaries & wages
Rent paid
Insurance & rates
Bank charges
Other expenses
Net profit/ (loss)
x
x
x
x
x
x
x
x
(x)
x/(x)
Lesson One
47
Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss
account for the year ended 30 September 2002, and a balance sheet as at that
date.
Dr
Cr
£
£
Stock 1 October 19x8
23,680
Carriage outwards
2,000
Carriage inwards
3,100
Returns inwards
2,050
Returns outwards
3,220
Purchases
118,740
Sales
186,000
Salaries and wages
38,620
Rent
3,040
Insurance
780
Motor expenses
6,640
Office expenses
2,160
Lighting and heating expenses
1,660
General expenses
3,140
Premises
50,000
Motor vehicles
18,000
Fixtures and fittings
3,500
Debtors
38,960
Creditors
17,310
Cash at bank
4,820
Drawings
12,000
Capital
126,360
332,890
332,890
48
Introduction to Accounting
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
£
£
£
186,000
(2,050)
183,950
Sales
Less: Returns Inwards
Less: Cost of sales
Opening stock
Purchases
Add: Carriage inwards
23,680
118,740
3,100
12,1840
Less: Returns Outwards
Cost of goods available for sale
Less: Closing stock
Gross Profit
3,220
118,620
142,300
29,460
(11,2840)
71,110
Less Expenses
Salaries & wages
Carriage outwards
Rent
Insurance
Motor expenses
Office expenses
Lighting & heating
General expenses
Net Profit
38,620
2,000
3,040
780
6,640
2,160
1,660
3,140
(58,040)
13,070
Lesson One
49
(c) BALANCE SHEET
This is a simple report that shows the assets and liabilities of the business and the
capital of the owner as at a certain point in time. The format is at shown below:
Name
Balance sheet as at 31/Dec/19xx
£
£
£
Non Current Assets
Land & Buildings
Plant & Machinery
Fixtures, Furniture & Fittings
Motor vehicles
x
x
x
x
x
Current Assets
Stock/inventories
Debtors – trade
Debtors – others
Cash at bank
Cash at hand
x
x
x
x
x
x
Current Liabilities
Bank overdraft
Creditors – trade
Creditors – others
Net current assets
Net Assets
x
x
x
(x)
x
x
Capital
Add: Net profit
x
x
x
Less: Drawings
(x)
x
Non Current Liabilities
Loan (s)
x
x
The balance Sheet of P Boones in example 2.3 will be produced as follows:
50
Introduction to Accounting
P Boones
Balance Sheet as at 30 Sept 2002
£
£
Non Current Assets
Premises
Fixtures & fittings
Motor vehicles
18,000
50,000
3,500
71,500
Current Assets
Stock
Debtors
Cash at bank
29,460
38,960
4,820
73,240
Current Liabilities
Creditors
Net Current Assets
Net Assets
Capital
Add: Net Profit
Less: Drawings
(17,310)
55,930
127,430
126,360
13,070
139,430
(12,000)
127,430
`
D) BOOKS OF PRIME ENTRY
The diagram below shows the components of an accounting system for a firm that
carries out trading activities from the source documents that record the evidence of
transactions, where the documents are recorded and the postings to made.
Lesson One
51
Source
Final
Documents
Accounts
Sales
Invoice
The
Books of
The
Prime entry
Ledger Balances
Recorded Sales
Journal
List of the
Sales
Ledger
THE
Trading
Account
Purchas
e
Invoice
Recorded
Purchases
Journal
TRIAL
Credit
note
Recorded
The
Return
Inwards
Journal
Purchases
Ledger
Profit
Loss
Debit
Loss
Note
Account
Other
Correspo
Balance
ndence
BALANCE
Recorded
Receipt
s
Cheque
s
Petty
&
Return
Outwards
journal
The
cashbook
&
Recorded
Petty
cashbook
General
Ledger
Recorded General
Journal
Balance Sheet
A brief description of each component is explained below.
SOURCE DOCUMENTS
52
Introduction to Accounting
This shows the evidence transactions. They are collected, filed and posted in the
books of prime entry. Example, if a firm sells goods on credit, then an invoice is
raised. The source documents as shown in the above include:
Lesson One






53
Sales invoice
Purchases invoice
Credit note
Debit note
Receipts, cheques and petty cash vouchers
Other correspondences.
(i) Sales Invoice
The sales invoice is raised by the firm and sent to the debtor/customer when the
firm makes a credit sale.
The sales invoice contains the following:
i. Name and address of the firm
ii. Name and address of the buying firm
iii. Date of making the sale – invoice date.
iv. Invoice number
v. Amount due (net of trade discount)
vi. Description of goods sold
vii. Terms of sale
(ii) Purchases Invoice
A purchase invoice is raised by the creditor and sent to the firm when the firm
makes a credit purchase. It shows the following:
i. Name and the address of the creditor/seller
ii. Name and address of the firm
iii. Date of the purchase (invoice date)
iv. Invoice number
v. Amount due
vi. Description of goods sold
vii. Terms of sale
(iii) Credit note
A credit note is raised by the firm and issued to the debtor when the debtor
returns some goods back to the firm. It’s contents include:
i. Name and address of the firm
ii. Name and address of the debtor
iii. Amount of credit
iv. Credit note number
v. Reason for credit e.g. if goods sent but of the wrong type.
The purpose of the credit note is to inform the debtor or customer that the
debtor’s account with the firm has been credited i.e. the amount due to the firm
has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the
amounts due from the debtors. From the context we can assume that all credit
notes are issued when goods are returned.
(iv) Debit note
This is raised by the creditor and issued to the firm when the firm returns some
goods to the creditor. It includes the following items:
i. Name and address of the firm
ii. Name and address of the creditor
54
Introduction to Accounting
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the
creditor has been reduced or cancelled.
The
Firm
Credit sales (sales invoice)
The
Debtor
Returns inwards (credit note)
Credit purchase (purchase invoice)
The
Firm
Returns outwards (debit note)
The
Creditor
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they
make payments in the form of cash or cheques. It shows:
i.
ii.
iii.
iv.
The name and address of the firm
The date of the receipt
Amount received (cash or cheque or other means of payment)
Receipt number.
Cheques
When a firm opens a current account with the bank, a chequebook containing
cheques issued. The cheques allow the firm to make payments against the account
with the bank. When a firm issues a cheque to its creditors for payments, it
authorizes the bank to honour payments against the firm’s account with the bank.
The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments
(payments of small value in the firm which require cash payments e.g. fuel, busfare, office snacks), which is approved by a senior manager and filed for record
purpose. It shows:
Lesson One
55
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how
the money was utilized e.g. fuel receipt, bus ticket e.t.c.
(vii) Other correspondence
These include information received within or outside the firm that has a financial
implication in the accounts.
Examples are:
i. Letters from the firm’s lawyers about a debtors balance.
ii. Hire-purchase/credit sale or credit purchase agreements that relate to
non-current assets.
iii. Memorandum from a senior manager requiring changes to be made in
the accounts.
iv. Bank statement from the bank, e.g. bank charges.
BOOKS OF PRIME ENTRY
They record the source documents.
Sales Journal
It is also called a Sales Day Book. It records all the sales invoices issued by the firm
during a particular financial period. The format is as follows (with simple records of
invoice).
SALES JOURNAL
Date 19x8
1st March
3rd March
5th March
Total
Detail
S. Spikes
T. Binns
L.Thompson
Page 5
Folio
Amount £
SL.10
SL.19
SL,8
200.00
350.00
150.00
700.00
The individual entries in the sales journal are posted to the debit side of the
debtor’s accounts in the sales ledger and the total is posted on the credit side of
the sales account in the general ledger.
56
Introduction to Accounting
This is shown below:
Sales Ledger
19x
8
1/3
S Spikes
£
19x
8
Sale 200
s
General Ledger
£
19x
8
Sales Ledger
19x
8
3/3
19x
8
3/3
Sal
es
£
General Account
19x
8
5/3
Credit sales
for period
£
700
General Ledger
T Binus
£
19x
8
350
L Thompson
£
19x
8
Sal 150
es
£
Example 2.4
You are to enter up the sales journal from the following details. Post the items to
the relevant accounts in the sales ledger and then show the transfer to the sales
account in the general ledger.
2003
Mar
“
“
“
“
“
“
“
1
3
6
10
17
19
27
31
Credit
Credit
Credit
Credit
Credit
Credit
Credit
Credit
sales
sales
sales
sales
sales
sales
sales
sales
to
to
to
to
to
to
to
to
J Gordon
G Abrahams
V White
J Gordon
F Williams
U Richards
V Wood
L Simes
£1,870
£1,660
£120
£550
£2,890
£660
£280
£780
Lesson One
57
Answer
SALES JOURNAL
Date (2003)
1/3
3/3
6/3
10/3
17/3
19/3
27/3
31/3
Page 10
Detail
Folio
J. Gordon
G. Abrahams
V. White
J. Gordon
F. Williams
U. Richards
V. Wood
L. Simes
Amount
1,870.00
1,660.00
120.00
550.00
2,890.00
660.00
280.00
780.00
8,810.00
Sales Ledger
J Gordon
£ 20
03
157
0
550
20
03
1/3
10/
3
200
3
3/3
200
3
6/3
200
£
G Abrahams
£ 200
3
Sal
1,6
es
60
Sal
es
£
U White
£ 200
3
120
F Williams
£ 200
20
03
19/
3
£
£
200
3
27/
3
200
3
31/
3
200
Sal
es
Sal
es
Sal
es
U Richards
£ 20
03
660
£
V Wood
£ 200
3
280
£
L Simes
£ 200
3
750
Sales a/c
£
200
£
£
58
Introduction to Accounting
3
17/
3
3
Sal
es
3
3
289
0
Cred
it
Sale
s
Purchases Journal
Purchases journal is also called a purchases day-book. It records all the purchase
invoices received by the firm during a particular financial period. It has the
following format (including records of invoices).
Date 19x6
1/5
2/5
PURCHASES JOURNAL
Description/Detail
C. Kelly
L. Smailes
Page 15
Amount
Folio
PL. 10
400
PL. 20
TOTAL
350
750
The individual entries in the purchases journal are posted to the credit side of the
creditor’s accounts in the purchases ledger and the total is posted to the debit side
of purchases account of the general ledger. This is shown below:
19x
6
19x
6
C Kelly
£ 19x
6
1/5 Purchas
es
L Smailes
£ 19x
6
2/5 Purchas
es
£
40
0
19x
6
31/
5
Purchases a/c
£ 19x
6
Sundry
75
Credito
0
rs
£
£
25
0
Returns Inwards Journal
It is also called the returns inwards day-book. It records all the credit notes raised
by the firm and sent to customers during a particular financial period, it has the
following format.
Lesson One
59
RETURNS INWARDS JOURNAL
Date
1 March
2 March
5 March
Detail
Folio
S. Spikes
C. Kelly
T. Bills
SL. 22
TOTAL
Pg 10
Amount
£20
SL. 18
SL. 9
£18
£15
£53
Individual entries in a return inwards journal are posted to the credit of the debtors
accounts in the sales ledger and the total is posted to the debit side of the returninwards account of the general ledger.
Sales Ledger
General Ledger
S. Spikes a/c
£
1/
3
Returns
In
£
20
C Kelly a/c
£
2/
3
Returns
In
£
18
31/
3
Returns Inwards a/c
£
Sundry
53
Debtors
T. Bills a/c
£
5/
3
Retur
ns In
£
£
15
60
Introduction to Accounting
Returns Outwards Journal
It is also called the returns outwards daybook. It records all the debit notes
received by the firm from the creditors during a particular financial period. It has
the following format.
RETURNS OUTWARDS JOURNAL
DATE
DETAILS
FOLIO
2 May
3 May
4 May
L. Thompson
M. Hyatt
T. Bills
PL. 10
AMOUNT (£)
PL. 15
14
12
PL. 7
TOTAL
19
35
Individual entries are posted on the debit side of the creditors account in the
purchases ledger and on the total to credit side of the returns outwards account in
the general ledger.
Purchases Ledger
Ledger
L. Thompson a/c
Outwards a/c
`
£
2/5 Returns out
14
sundry
creditors
General
Returns
£
£
31/5
35
M. Hyatt a/c
£
3/5 Returns out 12
£
T. Bills a/c
£
4/5 Returns Out
£
19
£
Lesson One
The following example 2.5 shows how the four journals are used.
61
62
Introduction to Accounting
Example 2. (Frankwood adapted)
You are to enter the following items in the books, post to personal accounts, and
show transfers to the general ledger.
19x5
July 1
“
3
5
“
“
“
“
“
“
“
8
12
14
20
24
31
31
Credit purchases from: K Hill £3800; M Norman £500; N Senior £106.
Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356.
Credit purchases from: R Morton £200; J Cook £180; D Edwards £410;
C
Davies £66.
Credit sales to: A Green £307; H George £250; J Ferguson £185.
Returns outwards to: M Norman £30; N Senior £16.
Returns inwards from: E Phillips £18; F Thompson £22.
Credit sales to: E Phillips £188; F Powell £310; E Lee £420.
Credit purchases from: Ferguson £550; K Ennevor £900.
Returns inwards from: E Phillips £27; E. Rigby £30.
Returns outwards to: J Cook £13; C Davies £11.
Study the solution provided:
SALES JOURNAL
DATE
DETAIL
AMOUNT (£)
3 July
3 July
3 July
8 July
8 July
8 July
20 July
20 July
20 July
E. Rigby
E. Phillips
F. Thompson
A. Green
H. George
J. Ferguson
E. Phillips
F. Powell
E. Lee
510
246
356
307
250
185
188
310
420
TOTAL
2,772
Sales Ledger
19x
5
3/7
Sal
es
E Rigby
£ 19x
5
51 3/7
0
£
Retur
ns
Inwar
ds
30
19x
5
3/7
20/
7
E Phillips
£ 19x5
£
Sal
es
246 14/7
Returns
18
Sal
es
188 31/7
Retuns
in
27
Lesson One
63
F. Thompson
19x
5
3/7
19x
5
8/7
19x
5
8/7
Sal
es
£ 19x
5
35 14/
6 7
Sal
es
Green
£ 19x
5
30
7
Sal
es
H George
19x
5
25
0
£
Retur
ns in
19x
5
8/7
22
£
19x
5
20/
7
£
19x
5
20/
7
J. Ferguson
£ 19x5
Sal
es
£
185
F. Powell
£ 19x5
Sal
es
310
£
Sal
es
£
E Lee
19x5
£
420
PURCHASES JOURNAL
DATE
1 July
1 July
1 July
5 July
5 July
5 July
5 July
24 July
24 July
DETAIL
AMOUNT (£)
K. Hill
M. Norman
N. Senior
R. Mortan
J. Cook
D. Edwards
C. Davies
C. Ferguson
K. Ennevor
Total
380
500
106
200
180
410
66
550
900
3,292
Purchases Ledger
N. Senior
64
Introduction to Accounting
1995
12/7
1995
£
Returns out
16
£
Returns out
30
£
Returns out
13
22
£
1/7
500
Purchases
£
5/7
Purchases
180
C. Davies
1995
1995
31/7
Purchases
J. Cook
1995
1995
31/7
1/7
M. Norman
1995
1995
30/7
£
£
Returns out
11
£
5/7
Purchases
60
K. Hill
1995
1995
£
£
1/7
Purchases
380
R. Morton
1995
1995
£
£
5/7
Purchases
200
D. Edwards
1995
1995
£
£
5/7
Purchases
410
C. Ferguson
1995
1995
£
£
27/7
Purchases
550
1995
K. Ennevor
1995
Lesson One
65
£
£
24/7
Purchases
900
RETURNS INWARDS JOURNAL
DATE
14 July
14 July
31 July
31 July
DETAILS
E. Phillips
F. Thompson
E. Phillips
E. Rigby
AMOUNT
18
22
27
30
97
RETURNS OUTWARDS JOURNAL
12
12
31
31
July
July
July
July
M. Norman
N. Senior
J. Cook
C. Davies
30
16
13
11
70
General Ledger
Sales a/c
1995
1995
£
£
31/7 Sundry debtors
2772
Purchases a/c
66
Introduction to Accounting
1995
1995
£
31/7 Sundry creditors
3292
£
Returns Inwards a/c
1995
1995
£
£
31/7 Sundry debtors
97
Returns Outwards a/c
1995
1995
£
£
31/7 Sundry creditors
70
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors
or other sources of income) and all the payments (to creditors or suppliers and
other expenses) for a particular financial period. The cashbook will also show us
the cash at bank and cash in hand position of the firm.
There are two types of cashbooks:
i.
ii.
Cash in hand cashbook, which records the cash transactions in the firm or
business.
Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of
the general ledger and records the source documents (receipts and cheques). The
cash at bank cashbook and cash in hand cashbook are combined together to get a
two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
Date Details
Bank
Cash
(£)
Bank
(£)
Date
Details
(£)
Cash
(£)
Lesson One
67
Additional columns for discounts allowed and discounts received can be included
with the cash at bank columns to get a 3 – column cashbook. The format is as
follows:
Date Details
Bank
Cash
Discount Cash
Allowed
(£)
Bank
(£)
Date Details
Discounts
Received
£)
(£)
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part
of the ledger balances and the discounts allowed and discounts received columns
will be added and the totals posted to the respective discount accounts. The
discount allowed total will be posted to the debit side of the discount allowed
account in the general ledger and the total of the discount received will be posted
to the credit side of the discount-received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the
firm has some cash at the bank and a credit balance means that the account at the
bank is overdrawn. (the firm owes the bank some money).
Example 2.7
Write up a two-column cashbook from the following details, and balance off as at
the end of the month:
2003
May
“
“
“
“
“
“
“
“
“
“
“
“
“
1
2
3
4
5
7
9
11
15
16
19
22
26
30
Started business with capital in cash £1,000.
Paid rent by cash £100.
F Lake lent us £5,000, paid by cheque.
We paid B McKenzie by cheque £650.
Cash sales £980.
N Miller paid us by cheque £620.
We paid B Burton in cash £220.
Cash sales paid direct into the bank £530.
G Moores paid us in cash £650.
We took £500 out of the cash till and paid it into the bank account.
We repaid F Lake £1,000 by cheque.
Cash sales paid direct into the bank £660.
Paid motor expenses by cheque £120.
Withdrew £1,000 cash from the bank for business use.
68
Introduction to Accounting
“
31
Paid wages in cash £970.
Cash Book
Capital
F Lake
(loan)
Sales
N Miller
Sales
G Moores
Cash C
Sales
Bank C
Capital
F. Lake
(Loan)
Sales
N Miller
Sales
G Moores
Cash
1000
Bank
Cash
Bank
5000
980
620
530
650
Cash
1000
650
Cash C
Sales
Bank C
363
0
Cash Book
Bank
Rent
5000 B McKenzie
980 B Burton
620 Bank C
530 F Lake (loan)
Motor
Expenses
500 Cash C
660 Wages
1000 Balances c/d
7310
Cash
100
Bank
650
220
500
120
1000
100
970
1840
3630
4540
7310
Example 2.7(Frankwood adapted)
A three-column cashbook is to be written up from the following details, balanced
off, and the relevant discount accounts in the general ledger shown.
19x8
Mar 1
Balances brought forward: Cash £230; Bank £4,756.
“
2
The following paid their accounts by cheque, in each case deducting 5
percent
Lesson One
“
“
“
4
6
“
“
10
12
“
“
15
18
“
“
“
21
24
25
“
“
29
31
8
69
discounts: R Burton £140; E Taylor £220; R Harris £800.
Paid rent by cheque £120.
J Cotton lent us £1,000 paying by cheque.
We paid the following accounts by cheque in each case deducting a 2
½ per
cent cash discount: N Black £360; P Towers £480; C Rowse
£300.
Paid motor expenses in cash £44.
H Hankins pays his account of £77, by cheque £74, deducting £3 cash
discount.
Paid wages in cash £160.
The following paid their accounts by cheque, in each case deducting 5
per cent
cash discount: C Winston £260; R Wilson & Son £340; H
Winter £460.
Cash withdrawn from the bank £350 for business use.
Cash Drawings £120.
Paid T Briers his account of £140, by cash £133, having deducted £7
cash discount.
Bought fixtures paying by cheque £650.
Received commission by cheque £88.
70
Introduction to Accounting
Answer
Disct
Bank
Bal b/d
R Burton
E Taylor
R Harris
J Cotton: loan
H Hankins
C Winston
R Wison &
Son
H Winter
Bank
Commission
Cash
230
7
11
15
3
13
17
23
350
89
580
Cash Book
Bank
Disct
4756
133
209
285
1000
Rent
N Black
P Towers
C Rowse
Motor
expenses
74 Wages
247 Cash
323 Drawings
3/1
Sundry
Debtors
Bank
120
351
468
780
9
12
20
44
160
350
120
437 T Briers
Fixtures
88 Balances c/d
7552
Discounts Received
3/1 Sundry
Creditors
Cash
7
133
48
123
580
650
4833
7552
48
Discounts Allowed
89
Petty Cash Book and the imprest system of Accounting.
Petty Cash Book is a record of all the petty cash vouchers raised and kept by the
cashier. The petty cash vouchers will show summary expenses paid by the cashier
and this information is listed and classified in the petty cash book under the
headings of the relevant expenses such as:



Postage and stationery
Traveling
Cleaning expenses.
The format is as shown:
Petty Cash Book
Receipts
Date Detail Payments
Expenses
The
Lesson One
71
Amount
Postage Stationery
Traveling
Ledger
The balance c/d of the petty cash book will signify the balance of cash in hand or
form part of cash in hand. The totals of the expenses are posted to the debit side
of the expense accounts. If a firm operates another cashbook in addition to the
petty cash book, then the totals of the expenses will also be posted on the credit
side of the cash in hand cashbook.
The Imprest system
This system of accounting operates on a simple principle that the cashier is
refunded the exact amount spent on the expenses during a particular financial
period. At the beginning of each period, a cash float is agreed upon and the cashier
is given this amount to start with. Once the cashier makes payments for the period
he will get a total of all the payments made against which he will claim a
reimbursement of the same amount that will bring back the amount to the cash
float at the beginning of the period.
This is demonstrated as follows:
£
Start with (float)
Expenses paid
Balance
Reimbursement
Cash float
1,000
(720)
280
720
1,000
Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float).
I n the following week, the following payments are made:
£
1st March – bought stamps for
2nd March – paid bus fare for
2nd March – cleaning materials
3rd March – bought fuel
3rd March – cleaning wages
4th March – bought stamps
4th March – paid L. Thompson (creditor)
5th March – fuel costs
On the 5th of March the cashier requested
amount was reimbursed back.
80
120
240
150
300
200
400
150
for a refund of the cash spent and this
72
Introduction to Accounting
Required:
Prepare a detailed petty cash book showing the balance to be carried forward to
the next period and the relevant expense accounts, as they would appear on the
General Ledger.
Lesson One
73
Answer
Receipt
s
Date
(£)
2000 1/3
1/3
2/3
2/3
3/3
3/3
4/3
4/3
5/3
1640 5/3
5/3
3640
2000 6/3
Detail
Payment
s
Amount
(£)
Bal b/d
Stamps
Bus Fare
Cleaning
Materials
Fuel
Cleaning
wages
Stamps
L Thompson
Fuel
Bal c/d
Expenses
Postag
e (£)
80
120
240
Cleanin
g (£)
THE
LEDGER
Travel
(£)
(£)
80
120
240
150
300
150
300
200
400
150
1640
200
.
280
.
540
150
420
400
.
400
2000
3640
Bal b/d
The General Journal
It records information from other correspondence (information that is not recorded
in the above books of prime entry). It explains the type of entries that will be made
in the ledger accounts giving a reason for these entries.
The type of transactions recorded here are:
i. Writing off of assets from the accounts e.g. bad-debts.
ii. Drawings for goods or other assets from the business by the owner, not
cash drawings.
iii. Purchase or sale of non-current assets on credit.
The format is as shown:
The General Journal
GENERAL JOURNAL
Date
1/3
Detail
Account to be debited
Account to be credited
(Narrative)
Debit
Credit
x
x
74
Introduction to Accounting
Example 2.9
You are to show the journal entries necessary to record the following items:
•
•
•
•
•
•
•
•
•
•
2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
2003 May 8 Furniture bought by us for £490 was returned to the supplier
Wood
Offices, as it was unsuitable. Full allowance will be given us.
2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and
we received
£39 in full settlement of the debt.
2003 May 14 we take £45 goods out of the business stock without paying for
them.
2003 May 28 Some time ago we paid an insurance bill thinking that it was all
in respect
of the business. We now discover that £76 of the amount paid was in fact
insurance of
our private house.
2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.
Lesson One
75
a. Answer
GENERAL JOURNAL
Date (19x5)
1/5
Detail
Debit (£)
Credit (£)
Motor Vehicle
6,790
Motors Ltd
6,790
Motor vehicle bought on credit
from Motors Ltd
_________________________________________________________________________
3/5
Bad debts
34
N Smart - Debtors
34
Amount due from N Smart
written off as bad
_________________________________________________________________________
8/5
Wood offices
490
Furniture
490
Office Furniture returned to
Wood offices
_________________________________________________________________________
12/5
Bad debts
111
W. Hayes
111
Amount owed now written off
as bad debt.
________________________________________________________________________
14/5
Drawing for goods
45
Purchases
45
Goods taken from the
business for personal use.
_________________________________________________________________________
8/5
Drawings
76
Insurance Expenses
76
Insurance relating to private house
now transferred to drawings
_________________________________________________________________________
28/5
Machinery
980
Xerox Machines
980
Machinery bought from
Xerox Machines
76
Introduction to Accounting
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability,
incomes and expenses and capital.
The ledger accounts can also be classified as follows:
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
REAL
ACCOUNTS
DEBTORS
(for
goods)
NORMAL
a/cs
CREDITORS
(For goods)
Other
Non-current
Liabilities
assets
Other
Inventories/
Assets
Stocks
Income
Expenses
Capital
Lesson One
77
REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a
capital of £5,000.00 with which he opened a bank account for his business.
During May the following transactions took place.
May 1 Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
May 2 Purchased goods on credit from Abel £650.00
May 4 Sold goods on credit to Bruce £700.00
May 9 Purchased goods on credit from Green £300.00
May 11
Sold goods on credit to Hill £580.00
May 13
Cash sales paid into bank account £200.00
May 16
Received cheque from Bruce in settlement of his account
May 17
Purchased goods on credit from Kay £800.00
May 18
Sold goods on credit to Nailor £360.00
May 19
Sent Cheque to Abel in settlement of his account
May 20
Paid rent by cheque £200.00
May 21
Paid delivery expenses by cheque £50.00
May 24
Received from Hill £200.00 on account
May 30
Drew cheque for personal expenses £200.00 and assistant wages
£320.00
May 31
Settled the account of Green.
Required
a)
b)
c)
d)
Record the transactions in the books of prime entry.
Post the entries in the ledger accounts
Balance the ledger accounts where necessary
Extract a trial balance as at 31 May 2000.
78
Introduction to Accounting
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages
bookshop.
Endpages Bookshop
Trial balance as at 31 December 2002
Dr
£
Sales
Purchases
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising
Telephone
Rates
Discount allowed
Discount received
Rent received
Returns inwards
Returns outwards
Stock at 01 Jan 2001
Premises
Stock as at 31 Dec
2001
Fixtures and fittings
Debtors and Creditors
Cash in Hand
Cash in bank
Capital
Drawings
Stock as at 31 Dec
2001
Cr
£
151,500.00
103,500.00
18,700.00
2,500.00
1,100.00
600.00
2,400.00
3,500.00
800.00
3,000.00
100.00
200.00
2,000.00
1,500.00
3,500.00
46,000.00
80,000.00
41,000.00
5,000.00
4,800.00
200.00
7,500.00
12,000.00
11,000.00
14,000.00
________
328,700.00
41,000.00
328,700.00
Required
Prepare a Trading and profit and loss account for the year ended 31 December
2002 and a balance sheet as at that date.
(20 marks)
Lesson One
79
QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of
final accounts for the year ended 31 March 2002.
Stock 1 April 2001
Sales
Purchases
Carriage inwards
Carriage outwards
Returns outwards
Wages and salaries
Rent and rates
Communication
expenses
Commissions payable
Insurance
Sundry expenses
Buildings
Debtors
Creditors
Fixtures
Cash at bank
Cash in hand
Drawings
Capital
Dr
£
1,816,000
Cr
£
9,234,000
6,918,500
42,000
157,000
64,000
1,024,000
301,500
62,400
21,600
40,500
31,800
2,000,000
1,432,000
816,000
285,000
297,000
11,500
762,000
5,088,800
152,028
152,028
80
Introduction to Accounting
QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to
draft the trading and profit and loss account for the year to end 30 September 2002
and a balance sheet as at that date.
Dr
Cr
£
£
Capital
3,095,500
Drawings
842,000
Cash at bank
311,500
Cash in hand
29,500
Debtors
1,230,000
Creditors
937,000
Stock 30 September
2,391,000
2001
410,000
Motor van
625,000
Office equipment
1,309,000
Sales
9,210,000
Purchases
55,000
Returns inwards
21,500
Carriage inwards
30,700
Returns outwards
30,900
Carriage outwards
163,000
Motor expenses
297,000
Rent
40,500
Telephone charges
1,281,000
Wages and salaries
49,200
Insurance
137,700
Office expenses
Sundry expenses
28,400
17,153,200
17,153,200
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Lesson One
81
COMPREHENSIVE ASSIGNMENT No.1
TO BE SUBMITTED AFTER LESSON 2
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
The books of Mr T, a trader in tea showed the following balances as at 31 March
1998:
Opening stock of tea
Purchases – Tea
Salaries paid
Buildings
Cash in hand
Cash at bank
Rent, rates and council taxes
Insurance premium paid
Miscellaneous receipts
Sales
Discounts allowed
Bad debts
Building repairs
Miscellaneous expenses
Advertisement
Commission to sales manager
Furniture and fittings
Air conditioners
Sundry debtors
Sundry creditors
Loan on mortgage
Interest paid on the above
Prepaid expenses
Drawings
Bills payable (Current liability)
Bank charges
Legal charges
Motor vehicles
Travelling and conveyance
Capital
Shs.
100,000
400,000
80,000
95,000
2,000
135,000
15,000
3,000
10,000
720,000
4,750
3,250
2,900
8,700
20,000
32,400
35,000
30,000
100,000
80,000
70,000
3,000
4,000
18,000
30,000
2,000
6,000
80,000
10,000
280,000
The following further information was obtained :
82
Introduction to Accounting
1. Closing stock was Shs.55,000.
2. Legal charges include Shs.5,000 for the cost of stamps and registration of a
new building acquired during the year.
3. Purchases include 4000 kg tea valued at Shs.20,000, which was found
totally spoilt. An insurance claim of Shs.15,000 has been accepted by the
insurance company.
4. Travelling and conveyancing include proprietor’s personal travelling for
which he is charged Shs.4, 800.
5. The sales manager is entitled to commission of 7.5% of the total sales.
However any bad debts incurred during the year are deductible from such
commission entitlements.
6. Debtors include:
7. Shs.10, 000 due from M & C0 (Creditors include Shs.18, 000 due to the same
party).
8. Shs.5, 000 due from the sale of furniture.
9. Further bad debts of Shs.2, 000
10.Provision for bad debts is to be created at 2% of net amount outstanding
from trade debtors.
11.Depreciation is chargeable as follows:
Buildings
2.5%
Furniture and Fittings 10%
Air conditioners
15%
Motor vehicles
20%
12.Miscellaneous receipts represent sales proceeds of furniture, whose written
down value was Shs.12, 000.
13.Prepaid expenses include insurance premiums for the next year.
Required:
Prepare a trading, profit and loss account for the year ended 31 st March 1998 and a
Balance Sheet as at that date.
QUESTION TWO
Hall Ltd., which makes up its accounts to 30 th June each year, has a fleet of motor
lorries. Annual depreciation on motor lorries is calculated at a rate of 25% on the
reducing balances, with a full year’s depreciation being made in the year of
purchase, but no charge in the year of sale. An extract from the company’s
balance sheet as on 30th June 1997 showed the following:
Shs
Motor Lorries at cost:
Less provision for depreciation:
Net book Value:
164,900
93,382
71,518
During the year ended 30th June 1998 purchases and sales of lorries were as
follows:
Purchases:
1997
July 30th
Reg.No
H11
Cost (Shs)
8,500
Lesson One
83
Oct 1st
1998
Sales:
H12
Feb 25th
June 24th
H13
5,900
Purchased on:
1,592
10th July 1994
H4
Cost (Shs)
14th May 1993
H1
2,560
9th March 1996
H6
H7
9,000
H14
Reg.No
Proceeds (Shs)
1997
July 30th
300
Oct 1st
1998
Mar 1st
4,600
June 25th
7,000
850
8,000
21st Sept 1996
3,648
2,700
Required:
Write up the following accounts in the books of the company for the year ended
30th June 1998:
a) The Motor lories account
b) Motor lorries provision for depreciation account
c) Motor lorries disposal account.
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader,
at 31st December 1997:
Drawings/Capital
Debtors/Creditors
Purchases/Sales
Rent and Rates
Light and heat
Salaries and wages
Bad debts
Provision for bad debts
Stock in trade 31st Dec 1996
Insurance
General Expenses
Bank balances
Motor van at cost/Provision for
depreciation
Proceeds on sale of van
Motor expenses
Freehold premises at cost
Shs
2,148
7,689
62,10
1
880
246
8,268
247
Shs.
20,27
1
5,462
81,74
2
326
9,274
172
933
1,582
8,000
861
15,00
3,600
0
250
84
Introduction to Accounting
0
Rent received
Provision for depreciation on
buildings
750
5,000
117,4
01
117,4
01
The following matters are to be taken in to account:
Stock in trade at 31st December 1997 was Shs.9,884
Rates paid in advance at 31st December 1997, Shs.40
Rent receivable due at 31st December 1997, Shs.250
Lighting and heating due at 31st December 1997, sh.85
Provision for doubtful debts to be increased to Shs.388
Included in the amount for insurance Shs.172, is an item for Shs82 for motor
insurance and this amount should be transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20%
on cost.
8. Depreciate buildings Shs.500
9. On 1st January 1997 a van which had been purchased for Shs.1,000 on 1 st
January 1994 was sold for Shs250. The only record of matter is the credit of
Shs.250 to “Proceeds of sale on van” account.
1.
2.
3.
4.
5.
6.
Required:
A Trading Profit and Loss account for the year ended 31 st December 1997 and a
Balance Sheet as at date using vertical format.
QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it
makes quarterly payments as follows:
Three moths rental in advance;
A further charge of 2 pence per copy made during the quarter just ended.
The rental agreement began on 1st August 19X4, and the first six quarterly bills
were as follows
Bills and dates received
1 August 19X4
1 November 19X4
1 February 19X5
1 May 19X5
1 August 19X5
1 November 19X5
Required:
Rental (Shs)
2,100
2,100
2,100
2,100
2,700
2,700
Cost of copies (shs)Total cost (Shs)
0
2,100
1,500
3,600
1,400
3,500
1,800
3,900
1,650
4,350
1,950
4,650
Lesson One
85
Given that Batley Printing shop ends its accounting year on 31 August,
Calculate the charge for photocopying expenses for the year to 31 August, 19X5
and the amount of prepayments and / or accrued charges as at that date.
Show the entries in the ledger of the Batley Printing Shop.
QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention
looks forwards.”
Required:
a) Explain clearly what is meant by:
•
•
The historical cost convention
The going concern convention.
b) Does traditional financial accounting, using the historical cost convention,
make the going concern convention unnecessary? Explain your answer fully.
c) Which do you think a shareholder is likely to find more useful – a report on
the past or an estimate of the future? Why?
END OF COMPREHENSIVE ASSIGNMENT No.1
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
Acknowledgement
86
LESSON THREE
ACCOUNTING THEORY
(a) International Accounting Standards and International Financial
Reporting Standards.
The foreword to accounting standards defines Accounting Standards as
Authoritative statements of how particular types of transaction and other events
should be reflected in financial statements. Accounting Standards are developed to
achieve comparability of financial information between and among different
organizations. International Accounting Standards (IAS’s) and International
Financial Reporting Standards (IFRS) are meant to apply to most organizations in
the world. IAS’s and IFRS’s are produced by the International Accounting Standards
Board (IASB) whose objectives are:
(a) To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements and to promote their
worldwide acceptance; and
(b) To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of
financial statements.
The IASB is an affiliate of the International Federation of Accountants (IFAC)
established in 1977 which co-ordinates the Accounting profession worldwide. Most
accounting bodies of countries are members of IFAC.
The IASC develops IAS’s through an international process that involves the
worldwide accountancy profession, the preparers, users of financial statements and
national standard setting bodies and other interested parties.
The IASB sets up a steering committee to develop a statement of principles, an
Exposure Draft and ultimately an Accounting Standards once a new topic is
suggested. The process includes:
− Identifying and reviewing of all the issues associated with the topic,
− Studying national and regional accounting requirements and practice,
consultation with the member bodies’ standard setting bodies and other
interested groups,
− Public Exposure of the draft Accounting Standard,
− Evaluation by the steering committee and the board of the comments
received on exposure drafts.
Currently the IASB has developed about 40 IASs. Examples include:
Lesson Two
87
− IAS 1 Presentation of Financial Statements
− IAS 2 Inventories
− IAS 16 Property plant and equipment.
Previously new standards were called International Accounting Standards but from
2003 any new standards will be called International financial Reporting Standards.
However in the current practice is to refer to all standards as International Financial
Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with
Kenya Accounting Standards (IASs), which were developed and published by ICPAK
(Institute of Certified Public Accountants of Kenya). This were later dropped and
International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:
a) Use of IASs adds credibility to the financial statements as they can be
compared with others globally.
b) Facilitates communication within an enterprise that has foreign branches or
subsidiaries due to harmonized reporting by the separate entities in the
group.
c) Adds value to the financial statements incase an entity is sourcing for
foreign capital.
d) Incase an entity wishes to be quoted on the Stock Exchange Market more so
for companies.
(c) Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic
financial accounts of business enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in
operational existence for the foreseeable future, and that there is no intention
to put the company into liquidation or to make drastic cutbacks to the scale of
operations.
Financial statements should be prepared under the going concern basis unless
the entity is being (or is going to be) liquidated or if it has ceased (or is about to
cease) trading. The directors of a company must also disclose any significant
doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the
business should not be valued at their ‘break-up’ value, which is the amount
that they would sell for it they were sold off piecemeal and the business were
thus broken up.
ii) The accruals concept (or matching concept): states that revenue and costs
must be recognized as they are earned or incurred, not as money is received or
88
Final Accounts
paid. They must be matched with one another so far as their relationship can
be established or justifiably assumed, and dealt with in the profit and loss
account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200)
earned from the sale of 20 units against the cost (£100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect
to charge profit and loss account with the cost of twenty units; there is still two
units in stock. If the firm intends to sell them later, it is likely to make a profit
on the sale. Therefore, only the purchase cost of eighteen units (£90) should be
matched with the sales revenue, leaving a profit of £90.
Lesson Two
89
The balance sheet would therefore look like this:
£
Assets
Stock (at cost, i.e. 2 x £5)
Debtors (18 x £10)
10
180
190
Liabilities
Creditors
100
90
Capital (profit for the period)
90
If, however the firm had decided to give up selling units, then the going concern
concept would no longer apply and the value of the two units in the balance
sheet would be a break-up valuation rather than cost. Similarly, if the two
unsold units were now unlikely to be sold at more than their cost of £5 each
(say, because of damage or a fall in demand) then they should be recorded on
the balance sheet at their net realizable value (i.e. the likely eventual sales price
less any expenses incurred to make them saleable, e.g. paint) rather than cost.
This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked.
Because the business is assumed to be a going concern it is possible to carry
forward the cost of the unsold units as a charge against profits of the next
period.
Essentially, the accruals concept states that, in computing profit, revenue
earned must be matched against the expenditure incurred in earning it.
iii) The Prudence Concept: The prudence concept states that where alternative
procedures, or alternative valuations, are possible, the one selected should be
the one that gives the most cautious presentation of the business’s financial
position or results.
Therefore, revenue and profits are not anticipated but are recognized by
inclusion in the
profit and loss account only when realized in the form of
either cash or of other assets the ultimate cash realization of which can be
assessed with reasonable certainty: provision is made for all liabilities
90
Final Accounts
(expenses and losses) whether the amount of these is known with certainty or is
best estimate in the light of the information available.
Assets and profits should not be overstated, but a balance must be achieved to
prevent the material overstatement of liabilities or losses.
The other aspect of the prudence concept is that where a loss is foreseen, it
should be anticipated and taken into account immediately. If a business
purchases stock for £1,200 but because of a sudden slump in the market only
£900 is likely to be realized when the stock is sold the prudence concept dictates
that the stock should be valued at £900. It is not enough to wait until the stock
is sold, and then recognize the £300 loss; it must be recognized as soon as it is
foreseen.
A profit can be considered to be a realized profit when it is in the form of:
•
•
Cash
Another asset that has a reasonably certain cash value. This includes
amounts owing from debtors, provided that there is a reasonable certainty
that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth £100,000
during the year to 31 December. At 31 December there are debts outstanding
of £15,000. Of these, the company is now doubtful whether £6,000 will ever be
paid.
The company should make a provision for doubtful debts of £6,000. Sales for
20x5 will be shown in the profit and loss account at their full value of £100,000,
but the provision for doubtful debts would be a charge of £6,000. Because there
is some uncertainty that the sales will be realized in the form of cash, the
prudence concept dictates that the £6,000 should not be included in the profit
for the year.
iv) The consistency concept: The consistency concept states that in preparing
accounts consistency should be observed in two respects.
a) Similar items within a single set of accounts should be given similar
accounting treatment.
b) The same treatment should be applied from one period to another in
accounting for similar items. This enables valid comparisons to be made
from one period to the next.
v) The entity concept: The concept is that accountants regard a business as a
separate entity, distinct from its owners or managers. The concept applies
whether the business is a limited company (and so recognized in law as a
separate entity) or a sole proprietorship or partnership (in which case the
business is not separately recognized by the law.
vi) The money measurement concept: The money measurement concept states
that accounts will only deal with those items to which a monetary value can be
attributed.
For example, in the balance sheet of a business, monetary values can be
attributed to such assets as machinery (e.g. the original cost of the machinery;
Lesson Two
91
or the amount it would cost to replace the machinery) and stocks of goods (e.g.
the original cost of goods, or, theoretically, the price at which the goods are
likely to be sold).
The monetary measurement concept introduces limitations to the subject matter
of accounts. A business may have intangible assets such as the flair of a good
manager or the loyalty of its workforce. These may be important enough to give
it a clear superiority over an otherwise identical business, but because they
cannot be evaluated in monetary terms they do not appear anywhere in the
accounts.
92
Final Accounts
vii) The separate valuation principle: The separate valuation principle states
that, in determining the amount to be attributed to an asset or liability in the
balance sheet, each component item of the asset or liability must be
determined separately.
These separate valuations must then be aggregated to arrive at the balance
sheet figure. For example, if a company’s stock comprises 50 separate items, a
valuation must (in theory) be arrived at for each item separately; the 50 figures
must then be aggregated and the total is the stock figure which should appear
in the balance sheet.
viii) The materiality concept: An item is considered material if it’s omission or
misstatement will affect the decision making process of the users. Materiality
depends on the nature and size of the item. Only items material in amount or in
their nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is
referred to as immaterial. In preparing accounts it is important to assess what
is material and what is not, so that time and money are not wasted in the
pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise.
There is no absolute measure of materiality. It is common to apply a
convenient rule of thumb (for example to define material items as those with a
value greater than 5% of the net profit disclosed by the accounts). But some
items disclosed in accounts are regarded as particularly sensitive and even a
very small misstatement of such an item would be regarded as a material
error. An example in the accounts of a limited company might be the amount
of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment
in the accounts. For example, the profit and loss account of a business will
show the expenses incurred by he business grouped under suitable captions
(heating and lighting expenses, rent and rates expenses etc); but in the case of
very small expenses it may be appropriate to lump them together under a
caption such as ‘sundry expenses’, because a more detailed breakdown would
be inappropriate for such immaterial amounts.
Example:
a) If a balance sheet shows fixed assets of £2 million and stocks of £30,000 an
error of £20,000 in the depreciation calculations might not be regarded as
material, whereas an error of £20,000 in the stock valuation probably would be.
In other words, the total of which the erroneous item forms part must be
considered.
b) If a business has a bank loan of £50,000 balance and a £55,000 balance on
bank deposit account, it might well be regarded as a material misstatement if
these two amounts were displayed on the balance sheet as ‘cash at bank
£5,000’. In other words, incorrect presentation may amount to material
misstatement even if there is no monetary error.
ix) The historical cost convention: A basic principle of accounting (some writers
include it in the list of fundamental accounting concepts) is that resources are
normally stated in accounts at historical cost, i.e. at the amount that the
Lesson Two
93
business paid to acquire them. An important advantage of this procedure is
that the objectivity of accounts is maximized: there is usually objective,
documentary evidence to prove the amount paid to purchase an asset or pay an
expense. Historical cost means transactions are recorded at the cost when they
occurred.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is
because valuations tend to be subjective and to vary according to what the
valuation is for. For example, suppose that a company acquires a machine to
manufacture its products. The machine has an expected useful life of four years.
At the end of two years the company is preparing a balance sheet and has decided
what monetary amount to attribute to the asset.
x) Objectivity (neutrality):An accountant must show objectivity in his work.
This means he should try to strip his answers of any personal opinion or
prejudice and should be as precise and as detailed as the situation warrants.
The result of this should be that any number of accountants will give the same
answer independently of each other. Objectivity means that accountants must
be free from bias. They must adopt a neutral stance when analysing accounting
data. In practice objectivity is difficult. Two accountants faced with the same
accounting data may come to different conclusions as to the correct treatment.
It was to combat subjectivity that accounting standards were developed.
xi) The realization concept: Realization: Revenue and profits are recognized
when realized. The concept states that revenue and profits are not anticipated
but are recognized by inclusion in the income statement only when realized in
the form of either cash or of other assets the ultimate cash realization of which
can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis
of double entry bookkeeping.
xiii) Substance over form: The principle that transactions and other events are
accounted for and presented in accordance with their substance and economic
reality and not merely their legal form e.g. a non current asset on Hire purchase
although is not legally owned by the enterprise until it is fully paid for, it is
reflected in the accounts as an asset and depreciation provided for in the
normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be ‘realized’ and so
‘recognized’ in the trading, profit and loss account when:
a) The sale transaction is for a specific quantity of goods at a known price, so
that the sales value of the transaction is known for certain.
b) The sale transaction has been completed, or else it is certain that it will be
completed (e.g. in the case of long-term contract work, when the job is
well under way but not yet completed by the end of an accounting
period).
94
Final Accounts
c)
The critical event in the sale transaction has occurred. The critical event
is the event after which:
i) It becomes virtually certain that cash will eventually be received
from the customer.
ii) Cash is actually received.
Lesson Two
95
Usually, revenue is ‘recognized’
(a) When a cash sale is made.
(b) The customer promises to pay on or before a specified future date, and the
debt is legally enforceable.
The prudence concept is applied here in the sense that revenue should not be
anticipated, and included in the trading, profit and loss account, before it is
reasonably certain to ‘happen’.
Required
Given that prudence is the main consideration, discuss under what circumstances, if
any, revenue might be recognized at the following stages of a sale.
(a) Goods have been acquired by the business, which it confidently expects to resell
very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer’s cheque in payment for the goods has been cleared by the bank.
Answer
(a) A sale must never be recognized before a customer has even ordered the
goods. There is no certainty about the value of the sale, nor when it will take
place, even if it is virtually certain that goods will be sold.
(b) A sale must never be recognized when the customer places an order. Even
though the order will be for a specific quantity of goods at a specific price, it is
not yet certain that the sale transaction will go through. The customer may
cancel an order, the supplier might be unable to deliver the goods as ordered or
it may be decided that the customer is not a good credit risk.
(c) A sale will be recognized when delivery of the goods is made only when:
i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a
delivery note).
(d) The critical event for a credit sale is usually the dispatch of an invoice to the
customer. There is then a legally enforceable debt payable on specified terms,
for a completed sale transaction.
(e) The critical event for a cash sale is when delivery takes place and when cash is
received, both take place at the same time. It would be too cautious or ‘prudent’
to await cash payment for a credit sale transaction before recognizing the sale,
unless the customer is a high credit risk and there is a serious doubt about his
ability or intention to pay.
(f) It would again be over-cautious to wait for clearance of the customer’s cheques
before recognizing sales revenue. Such a precaution would only be justified in
cases where there is a very high risk of the bank refusing to honour the cheque.
96
Final Accounts
II) Bases
Bases are the methods that have been developed for expressing or applying
fundamental accounting concepts to financial transactions and items. Examples
include:
−
Depreciation of Non current Assets (e.g. by straight line or reducing balance
method)
− Treatment and amortization of intangible assets (patents and trade marks)
− Stocks and work in progress (FIFO, LIFO and AVCO)
III)Policies
Accounting policies are the specific accounting bases judged by business
enterprises to be the most appropriate to their circumstances and adopted by them
for the purpose of preparing their financial accounts.
Qualities of Useful Financial Information
The four principal qualities of useful financial information are understandability,
relevance, reliability and comparability.
Understandability: an essential quality of the information provided in the
financial statements is that it is readily understandable by users. For these reason
users are assumed to have a reasonable knowledge of business and economic
activities and accounting.
Relevance: information has the quality of being relevant when it influences the
economic decisions of users by helping them evaluate past, present or future
events or confirming or correcting their past evaluations. The relevance of
information is affected by its nature and materiality.
Reliability: information is useful when it is free from material error and bias and
can be depended upon by users to represent faithfully that which it purports to
represent or could reasonably be expected to represent. To be reliable then the
information should:
a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and
economic reality and not merely their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some
events and transactions (prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission
can cause information to be false.
Comparability: users must be able to compare the financial statements of an
enterprise through time in order to identify trends in its financial position and
performance. Users must also be able to compare the financial statements of
different accounting policies, changes in the various policies and the effect of these
changes in the accounts. Compliance with accounting standards also helps achieve
this comparability.
The Accounting Profession in Kenya
Lesson Two
97
The Accountants Act Cap 531 (1977) establishes the Institute of Certified Public
Accountants of Kenya (ICPAK) and two boards, to be known as the Registration of
Kenya Accountants Board (RAB) and Kenya Accountants and Secretaries National
Examinations Board (IASNEB)
98
Final Accounts
The following are the functions of ICPAK as outlined by the Act;
a) To promote standards of professional competence and practice amongst
members of the institute.
b) To promote research into the subjects of accountancy and finance, and
related matters, and the publication of books, periodicals, journals and
articles in connexion therewith;
c)
To promote the international recognition of the institute;
d) To advise the Examinations board on matters relating to examination
standards and policies;
e) To carry out any other functions prescribed for it under any of the provisions
of the Act or under any other written law; and
f)
To do anything incidental or conducive to the performance of any of the
preceding functions.
A council known as the Council of the institute governs the Institute, which consists
of the Chairman, nine members from the institute and one member appointed by
the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out
practicing certificates and registration of qualified persons as members of the
institute.
The Act also outlines the following as the functions of IASNEB:
a) To prepare syllabuses for accountants’ and secretaries’ examinations, to
make rules with respect to examinations, to arrange and conduct
examinations and issue certificates to candidates who have satisfied
examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding
functions.
Example 3.2 PILOT PAPER OCTOBER 1991
Briefly explain the meaning and the significance of the following:
(i) Accounting concepts.
(ii) Accounting bases.
(iii)Accounting policies.
(iv)
Accounting standards.
(Total: 20 Marks)
(Covered adequately in the text).
Lesson Two
99
Example 3.3 PILOT PAPER JULY 2000
(a) Define the following accounting concepts and for each explain their implication
in the preparation of financial statements.
(i)
(ii)
(iii)
(iv)
The Going concern concept
Business entity concept
Materiality
Realization
4
4
4
4
marks
marks
marks
marks
(b) Two accounting concepts or conventions could clash or there could be
inconsistency between them.
Give two examples of such situations and explain how the inconsistency should
be resolved.
4 marks
Solution:
(i) The Going Concern Concept
The concept of going concern is that an entity will continue trading into the
foreseeable future at a similar level as it does when the accounts are prepared.
Going concern has implications for the value of the entities assets and the way the
user may read the financial statements. If a business is to cease trading after the
period of account the financial statements should be prepared on a break up basis
as all liabilities will be due and assets will be valued at net realizable value.
(ii)The Entity Concept
The organization preparing accounts is a distinct and separate entity. Financial
statements are prepared to reflect the activities of the entity. This concept
prevents any confusion between the owner’s private finances and those of the
entity, hence the option of drawings when a proprietor effectively reduces the
capital of the entity.
(iii)
Materiality
Materiality relates to significant amounts and items in the financial statements. A
rough guide to what material amount is 5% of pre tax profits. However, this is only
a guide. If say, cash in hand is offset against the overdraft balance this is a material
misstatement.
Materiality prevents time being wasted on items which do not impact on the results
of the entity; it provides a focus on the significant items.
(iv)
Realization
The realization concept involves recognizing amounts in the financial statements at
the point at which they crystallize. Profit should not be reflected in the profit and
loss account until it has been earned.
The realization concept means that the profit in the financial statements should be
reasonably stated.
100
Final Accounts
(c) Clashes between accounting concepts
Accruals and prudence
The accruals concept requires future income (e.g. in relation to credit sales) to be
accrued. The prudence concept dictates that caution should be exercised, so that if
there is doubt about the subsequent receipt, no accrual should be made.
Consistency and prudence
If circumstances change, prudence may conflict with the consistency concept, which
requires the same treatment year after year.
In both situations, prudence must prevail.
Example 3.5 DECEMBER 1994 QUESTION FIVE
(a) Explain the nature of the Accounting Equation.
(5 marks)
(b) What are accounting standards and why are they important?
(5
marks)
(c) Describe the role of the Institute of Certified Public Accountants of Kenya. (5
marks)
(d) In addition to the Kenya Accounting Standards, why is it important for an
Accountant to make use of International Accounting Standards?
(4
marks)
(Total: 19 marks)
(Covered adequately in the text)
Lesson Two
101
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:
Fundamental accounting concepts
Accounting bases
Accounting policies



Question Two
Accounting practice depends upon the guidance provided by a number of
accounting concepts, some of which are to be found in IAS 1 and/or in the
conceptional framework of the International Accounting Standards Committee.
Required:
(a)
Define and explain the relevance of the following accounting concepts.





(b)
Neutrality
Money measurement
Accruals
Substance over form
Consistency
(15 marks)
Give two examples of situations in which there is a clash or inconsistency
between two accounting concepts or conventions, and explain how the
inconsistency should be resolved. (In answering this part of the question, you
need not confine yourself to considering the concepts listed in part (a))
(5 marks)
(20
marks)
Question Three
If the information in financial statements is to be useful, regard must be had to the
following:





Materiality
Comparability
Prudence
Objectivity
Relevance
102
Final Accounts
Required
Explain the meaning of each of these factors as they apply to financial accounting
including in your explanations one example of the application of each of them.
(Four marks for each of (a) to (e).)
(20 marks)
Lesson Two
103
Question Four
a)
b)
Explain what is meant by materiality in relation to financial statements and
state two factors affecting the assessment of materiality.
(4 marks)
Explain what makes information in financial statements relevant to users.
(5 marks)
c)
1. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’.
Explain the meaning of these two terms.
2. Explain how a possible conflict between them could arise and how that
conflict should be resolved.
(5 marks)
d)
One of the requirements of financial statements is that they should be free
from material error. Suggest three safeguards, which may exist, inside or
outside a company to ensure that the financial statements are free from
material error.
(6 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Acknowledgement
104
LESSON FOUR
ADJUSTMENTS TO FINAL ACCOUNTS
a) ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as
money is received or paid. They must be matched with one another so far as
their relationship can be established or justifiably assumed, and dealt with in the
profit and loss account of the period to which they relate. Therefore all incomes
and expenses that relate to a particular financial period will be matched together
to determine the profit for the year.
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received.
An accrued income should be reported in the profit & loss account and the same
income will
be shown in the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month,
assuming that this is the first year of renting and rent is received in arrears (rent 4
January is received early Feb).
The ledger accounts of the firm will be as follows:
Cashbook
Year 1
Feb (rent 4 Jan)
Mar (rent 4 Feb)
April (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 Jun)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
22,000
Lesson Three
Year 1
31/12 P&L 24,000
105
Rent – Income
£ Year 1
Jan
C/B
Feb C/B
Mar C/B
April C/B
May C/B
Jun
C/B
July C/B
Aug C/B
Sept C/B
Oct
C/B
Nov C/B
Dec Accrued c/f
24,000
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
24,000
Although the cashbook is showing that rent received amounts £22,000, the full
rental income of £24,000 will be reported in the Profit & Loss a/c as rent income and
the accrued rent for Dec of £2,000 will be reported in the balance sheet as a current
asset.
Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not
yet been paid during that period.
An accrued expense should be charged in the P&L account and shown in the
balance sheet as a current liability.
Assume in the above example that the firm is meant to pay the rent, thus it
becomes an expense with the facts still the same i.e. £2,000 payable in arrears.
The ledger account will be as follows.
Year 1
Cashbook
£ Year 1
Feb (rent 4 Jan)
Mar (rent 4 Feb)
Apr (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 June)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
106
Accounting Theory
Rent – Expenses
Year 1
C/B
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
Rent for
31/12 Bal c/d
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct.
Nov
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
Year 1
£
2,000
2,000
2,000
2,000
31/12
P&L
24,000
24,000
24,000
The cashbook shows that the rent for the 11 months was paid for. However in
the P&L a/c we should report rent for the full year of £24,000 and the £2,000, rent
for Dec being the accrued expense will be shown in the balance sheet as a current
liability.
PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens
where an income is payable in advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should
be carried forward and reported in the period it relates to.
The accounting treatment will be to show it as a current liability.
Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance.
Assuming that the firm’s rental income began in 1 st March and the financial year,
end is on 31st Dec. The ledger accounts will be:
15,000
15,000
15,000
15,000
15,000
1.3
1.3
Cashbook
1.6
1.9
1.12
Lesson Three
Year 1
1/3
Rent
1/6
Rent
1/9
Rent
1/12 Rent
107
£
Year 1
£
15,000
15,000
15,000
15,000
Rent – Income
Year 1
£ Year 1
£
1/3
Cashbook
15,000
1/6
Cashbook
15,000
P&L (10 x 5,000) 50,000
1/9
Cashbook
15,000
31/12
Bal c/d
10,000
1/12
Cashbook
60,000
60,000
15,000
Rent for the 4 quarters of 12 months has been received as per the cashbook but
because the end of the financial year is at 31 Dec, rent for 2 months is pre-paid.
This £10,000 is not charged in the P&L but is carried forward as current liability in
the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been
paid. A prepaid expense should not be charged in the P&L a/c but should be carried
forward to the next financial period and should be shown in the balance sheet as a
current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that
rent is an expense. The ledger accounts is as follows:
Year 1
£
Cashbook
Year 1
1/3
Rent
1/6
Rent
1/9
Rent
1/12
Rent
£
15,000
15,000
15,000
15,000
Rent – Expenses
Year 1
£ Year 1
£
1/3
C/B (Mar, April, May) 15,000
1/6
C/B (June, July, Aug)
15,000
1/9
C/B (Sept, Oct, Nov)
15,000
P&L
(10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb)
15,000
31/12 Bal c/d (2 x 5,000)
10,000
60,000
60,000
108
Accounting Theory
Rent of £10,000 for 2 months is carried forward to the next financial period and
shown in the balance sheet as a current asset.
Lesson Three
109
The following is the summary of treatment for Accruals and Prepayments:
P&L
B/Sheet
Accrued - Report as
Current
Income
Assets
Income
Prepaid -Not
reported
Current
Liability
Accruals/
Prepayments
Accrued
- Charge as
Current
an expense
Liability
Expense
Prepaid - Not charged
Current
In P& L
Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in
the Balance Sheet as follows:
Balance Sheet Extracts
£
£
Current Assets
Stock
Debtors
Accrued Incomes/Prepaid Expenses
Cash at bank
Cash in hand
Current Liabilities
Bank overdraft
x
Creditors
x
Prepaid Incomes/Accrued Expenses
x
X
x
x
x
x
x
x
110
Accounting Theory
The accruals and expenses items may also be adjusted in the relevant income and
expense accounts so that the correct amount of expense or income is reported in
the profit and loss account for the year.
Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger
accounts for the following items including the balance transferred to the necessary
part of the final accounts, also the balances carried down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December 2002
£2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December 2002
£3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December 2001
£25,000; Owing as at 31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December 2001
£2,200; Prepaid as at 31December 2002 £2,900.
e) Seamers sub-lets part of the premises. Receives £5,500 during the
year ended 31 December 2002. Tenant owed Seamers £1,800 on 31
December 2001 and £2,100 on 31 December 2002
a)
Motor Expenses
£ 19X6
7,440
280 P/L a\c
7200
19x7
1/1 Bal b/d
19X6
Cashbook
Bal c/d
31/12
b)
£
7220
7200
280
Insurance
19x6
£
Cashbook
19x7
1/1
c)
19x6
Cashbook
£
19x6
4,200
31/12
31/12
4,200
Bal b/d
P&L a/c
Bal c/d
3850
350
4200
350
===
Stationery
£
19x6
18,000 1/1
Bal b/d
£
2,500
Lesson Three
111
31/12 Bal c/d
20,400
4,900
22,900
====
P&L a/c
22,900
====
19x7
1/1Bal b/d
4,900
112
Accounting Theory
d)
Rates
19x6
1/1
Bal b/d
Cashbook
£
19x6
2200
P&L
9500 31/12 Bal c/d
11,700
£
8800
2900
11,700
19x7
1/1
Bal b/d
e)
2900
Rent – Income
19x6
1/1
Bal b/d
P&L
£
19x6
1800
Cashbook
5800
31/12 Bal c/d
7600
19x7
1/1
Bal b/d
£
5500
2100
7600
2100
b) BAD AND DOUBTFUL DEBTS
Some debtors may not pay up their accounts for various reasons e.g. a debtor may
go out of business. When a debtor is not able to pay up his/her account this
becomes a bad debt. Therefore the business/firm should write it off from the
accounts and thus it becomes an expense that should be charged in the profit &
loss account.
In practice a firm may also be unable to collect all the amounts due from debtors.
This is because a section of the debtors will not honor their obligations. The problem
posed by this situation is that it is difficult to identify the debtors who are unlikely to
pay their accounts. Furthermore the amount that will not be collected may also be
difficult to ascertain. These debts that the firm may not collect are called doubtful
debts. A firm should therefore provide for such debts by charging the provision in
the profit and loss account. Provision for doubtful debts maybe specific or general.
Specific relate to a debtor whom we can identify and we are doubtful that he may
pay the debt (if one of our debtor goes out of business).
Accounting For Bad & Doubtful Debts.
Bad debts
When a debt becomes bad the following entries will be made:
i. Debit bad debts account
Credit debtors account with the amount owing.
ii. Debit Profit and Loss Account.
Lesson Three
Credit bad – debts account to transfer the balance on the bad – debts
account to the Profit and Loss Account.
113
114
Accounting Theory
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A
specific provision is where a debtor is known and chances of recovering the debt
are low.
The general provision is where a provision is made on the balance of the total
debtors i.e. Debtors less Bad debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of
trading and the entries will be as follows. If it is the 1 st year of trading (1st year of
making provision):
i.
ii.
Debit P&L a/c.
Credit provision for doubtful debts (with total amount of the provision).
In the subsequent periods, it will depend on whether if it is an increase or decrease
required on the provision.
If it is an increase:
i.
ii.
Debit P&L a/c.
Credit provision for doubtful debts (with increase only).
If it is a decrease:
i.
Debit provision for doubtful debts.
ii.
Credit P&L a/c (with the decrease in provision only).
Example
Debtors
Bad debts
x
Specific Provision
General Provision
(x)
x
(x)
x
(x)
x
A firm started trading in the year 1999, the balance on the debtor’s account was
£400,000. Bad debts amounting to £40,000 were written off from this balance,
there was a specific provision of £5,000 to be made to one of the debtors and a
general provision of £5% was to be made on the balance of the debtors. The ledger
accounts of 1999 were as follows:
Debtors
1999
£
1999 £
Bal B/d 400,000
Bad debts 40,000
22,750
Bal c/d
360,000
Provision for doubtful debts
1999
£
31/12 Bal c/d
1999
£
22,750 31/12 P&L
Lesson Three
400,000
115
400,000
116
1999
Debtors
Accounting Theory
Bad debts
£ 1999
40,000 31/12
£
P&L
40,000
£
Debtors
Bad debts
Specific Provision
General Provision (5%)
400,000
(40,000)
360,000
(5,000)
355,000
(17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
£
Expenses:
Bad debts
40,000
Increase in provision for D/debts22,750
£
Balance Sheet (Extract) as at 31/12/99
£
£
Current Assets
Stocks
Debtors
Provision for D/debts
x
360,000
(22,750)
337,250
337,250
337,250
In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of
£50,000 needs to be written off there is no specific provision but the general
provision is to be maintained at 5%. The ledger accounts will be as follows:
Debtors
Bad debts
General Provision (5%)
500,000
(50,000)
450,000
22,500
427,500
Lesson Three
117
Debtors
£ 2000
500,000 Bad Debts
______ Bal c\d
500,000
2000
Bal b\d
£
50,000
450,000
500,000
Provision for Doubtful Debts
£ 2000
250 1\1 Bal b\d
22,500
22,750
2000
P\L
Bal c\d
£
22,750
22,750
Bad Debts
£ 2000
50,000 31\12 P& L
2000
Debtors
£
50,000
Profit And Loss Account (Extract) for year ended 31/12/2002.
£
£
Incomes
Decrease in provision for D/debts
250
Expenses
Bad debts
50,000
Balance Sheet (Extract) as at 31/12/2002
£
£
Current Assets
Debtors
Provision for bad debts
450,000
(22,500)
427,500
In the year 2001 the debtors balance goes up to £600,000 from which bad debts of
£50,000 need to be written off, there is no specific provision but the general
provision is to be maintained at 5% the ledger accounts is as shown:
£
Debtors
Bad debts
600,000
(50,000)
550,000
General provision %
(27,500)
522,500
118
Accounting Theory
2001
Bal b\
600,000
£
Debtors
2001
Bad Debts
£
50,000
______ Bal c\d
600,000
550,000
600,000
Provision for Doubtful Debts
£ 2001
1\1 Bal b\d
27,500 P& L
22,500
2001
Bal c\d
Bad Debts
£ 2001
50,000 31\12 P& L
2001
Debtors
£
22,500
5,000
27,500
£
50,000
Profit And Loss Account (Extract) for the year ended 31/12/2001
£
£
Expenses
Bad debts
Increase in provision
50,000
5,000
Balance Sheet (Extract) as at 31/12/2001
£
£
Current Assets
Debtors
Less: Provision for Doubtful Debts
550,000
(27,500)
522,500
Example 4.6
In a new business during the year ended 31 December 2002 the following debts are
found to be bad, and are written off on the dates shown:
30 April
31 August
31 October
H Gordon
D Bellamy Ltd
J Alderton
£1,100
£640
£120
On 31 December 2002 the schedule of remaining debtors, amounting in total to
£68,500, is examined, and it is decided to make a provision for doubtful debts of
£2,200.
Lesson Three
You are required to show:
a. The Bad Debts Account, and the Provision for Doubtful Debts Account.
b. The charge to the Profit and Loss Account.
c. The relevant extracts from the Balance Sheet as at 31 December 2002.
119
120
Accounting Theory
£
Bad Debts
Debtors
70,036
2002
£ 2002
£
Bad debts
1860
(1,860)
Bad debts
68,500
1860 31/12 P\L
Provision for
D/Debt (2,200)
66,300
Provision for doubtful debts
2002
£ 2002
31/12 Bal c/d
2,200 31/12
£
P&L
2,200
Profit & Loss Account (Extract)
£
£
Expenses
Bad debts
Increase in provision for Doubtful debts
1,860
2,200
Balance Sheet (Extract)
£
£
Current Assets
Debtor
Less: Provision for D/Debts
8,500
(2,200)
6,300
Example 4.2
A business started trading on 1 January 2001. During the two years ended 31
December 2001 and 2002 the following debts were written off to the Bad Debts
Account on the dates stated:
31
30
28
31
30
August 2001
September 2001
February 2002
August 2002
November 2002
W Best
S Avon
L J Friend
N Kelly
A Oliver
£850
£1,400
£1,800
£600
£2,500
On 31 December 2001 there had been a total of debtors remaining of £405,000. It
was decided to make a provision for doubtful debts of £5,500.
On 31 December 2002 there had been a total of debtors remaining of £473,000. It
was decided to make a provision for doubtful debts of £6,000.
You are required to show:
Lesson Three
i.
ii.
121
The Bad Debts Account and the Provision for Doubtful Debts Account for each
of the two years.
The relevant extracts from the Balance Sheet as at 31 December 2001 and
2002.
Solutions
Bad debts =
Provision
2,250
405,000
(5,500)
399,500
Bad Debts
£ 2001
850
1400 31\12 P&L
2250
2001
31\8 W.Best
30\9 S.Aron
2250
2250
Provision for D/Debts
£ 2001
550 31\12 P&L
2001
31\12 Bal c\d
2001
1\1
£
£
550
£
2001
1\1 Bal b\d
600 31\12 P&L
600
Bal c\d
£
550
50
600
2001
28/2 J. Friend
31/8 N. Kelly
30/11 A. Oliver
Bad Debts
£ 2001
1,800
600
2,500
31/13 P&L
4,900
£
4,900
4,900
122
Accounting Theory
Profit & Loss Account (Extract)
19x6
£
£
Expenses
Bad debts
Provision for Doubtful Debts
2,250
5,000
19x7
Bad debts
4,900
Increase in provision for D/Debts
500
Balance Sheet as at 19x6
£
£
Current Assets
Debtors
Less provision
405,000
(5,500)
399,500
19x7
Debtors
Less: provision
473,000
(6,000)
467,000
Provision for discounts allowable.
In some cases a firm may create a provision for discounts allowable in addition to
provision for doubtful debts. This happens where a firm anticipates that some of
the debtors may take up cash discounts offered by the firm. The accounting
treatment is similar to accounting for provision for doubtful debts. The provision
should be made after creating a provision for doubtful debts (debtors figure less
either general/specific provision for doubtful debts).
Debtors
Bad debts
Specific provision
x
(x)
x
(x)
x
(x)
x
Provision for discount allowed (on balance)
(x)
x
Lesson Three
123
Profit & Loss Account (Extract)
£
£
Incomes
Decrease in provision for D/Debts
Decrease in provision for discounts allowed
Expenses
Bad debts
Increase in provision for D/Debts
Increase in provision for discounts allowed
x
x
x
x
x
Balance Sheet (Extract)
Current Assets
Debtors
Less: provision for Doubtful Debts
Less: provision for discounts allowed
£
x
(x)
(x)
£
x
Bad Debts Recovered
A firm may be able to recover a debt that was previously written off. The following
entries will be made if this happens:
i.
Debit – Debtors
Credit – credit bad debts recovered account – to restore the bad debt
recoverable.
N/B: This should be the amount to be recovered.
ii.
Debit – Cashbook
Credit – Debtors with the cash received.
iii.
Debit – bad debts recovered account.
Credit – P & L account with the same balance as bad debts account.
Example:
A firm recovers debts amounting to £10,000 that had been written off in the
previous periods. In the same financial period the firm writes off bad debts
amounting £30,000. The ledger accounts will be as follows:
Bad debts
£
£
Debtors
30,000 Bad Debt Recovered
10,000
P\L
20,000
30,000
30,000
Bad Debt
Bad debts recovered
£
10,000 Debtors
£
10,000
124
Accounting Theory
c) BANK RECONCILIATION STATMENTS
The cashbook for cash at bank records all the transactions taking place at the bank
i.e. the movements of the account held with the bank. The bank will send
information relating to this account using a bank statement for the firm to compare.
Ideally, the records as per the bank and the cashbook should be the same and
therefore the balance carried down in the cashbook should be the same as the
balance carried down by the bank in the bank statement.
In practice however, this is not the case and the two (balance as per the bank and
firm) are different. A bank reconciliation statement explains the difference between
the balance at the bank as per the cashbook and balance at bank as per the bank
statement.
Causes of the differences:
Items Appearing In The Cashbook And Not Reflected In The Bank
Statement.
Unpresented Cheques: Cheques issued by the firm for payment to the creditors
or to other supplies but have not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and
other sources for which the firm has banked but the bank has not yet availed the
funds by crediting the firm’s account.
Errors made in the cashbook
These include:
• Payments over/understated
• Deposits over/understated
• Deposits and payments misposted
• Overcastting and undercasting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the
cashbook:
Bank charges: These charges include service, commission or cheques.
Interest charges on overdrafts.
Direct Debits (standing orders) e.g. to pay Alico insurance.
Dishonored cheques
A cheque would be dishonored because:
•
Stale cheques
•
Post – dated cheques
•
Insufficient funds
•
Differences in amounts in words and figures.
Direct credits
Interest Income/Dividend incomes
Lesson Three
125
Errors of The Bank Statement (Made By The Bank).
Such errors include:
• Overstating/understating.
• Deposits
• Withdrawals
The Purposes of a bank reconciliation statement.
1. To update the cashbook with some of the items appearing in the bank
statement e.g. bank charges, interest charges and dishonoured cheques and
make adjustments for any errors reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.
Steps in preparing a bank reconciliation statement.
1. To update the cashbook with the items appearing in the bank statement and
not appearing in the cashbook except for errors in the bank statement.
Adjustments should also be made for errors in the cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank
statement to determine the uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank
statement to determine the unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)
Name:
Bank Reconciliation Statement as at 31/12
£
Balance at bank as per cashbook (updated)
Add: Un presented cheques
Errors on Bank Statement (see note 1)
£
x
x
x
x
x
Less: Uncredited deposits
x
Errors on Bank Statement (see note 2)
Balance at bank as per Balance Sheet
x
(x)
x
Note 1: These types of errors will have an effect of increasing the balance at bank
e.g. an overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank
e.g. an understated deposit or an overstated payment by the bank, or making an
unknown payment.
126
Accounting Theory
Format 2
Name:
Bank Reconciliation Statement as at 31/12
£
Balance at bank as per bank statement
Add: Uncredited deposits
x
Add errors on bank statement (note 2)
£
x
x
x
x
Less: Unpresented cheques
Errors on bank statement (note 1)
Balance at bank as per cashbook (updated)
x
x
(x)
x
===
Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date,
ascertaining the balance on the bank statement, from the following as on 31 March
2003:
£
Cash at bank as per bank column of the cashbook (Dr)
38,960
Bankings made but not yet entered on bank statement
6,060
Bank charges on bank statement but not yet in cashbook
280
Un presented cheques C Clarke
1170
Standing order to ABC Ltd entered on bank statement, but not in cash book
550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook
1,890
Solution
19X9
31/3 Bal b/d
38960
A Wood (credit transfer)
Cashbook – Bank
£ 19X9
Bank charges
280
ABC (standing order)
1890 31/3 Bal C/D
40,850
Bank Reconciliation as at 31/03/2003
£
550
40,020
40,850
Lesson Three
127
£
£
Balance at bank as per cashbook
Add: Unpresented cheques
40,020
1,170
41,190
(6,060)
35,130
=====
Less: Uncredited deposits
Balance at bank as per Balance Sheet
Example 4.9
The following are extracts from the cashbook and the bank statement of J Richards.
You are required to:
a) Write the cashbook up to date, and state the new balance as on 31
December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.
2002
Dec 1
Dec 7
Dec 22
Dec 31
Dec 31
Dr
Balance b/d
J Map
J Cream
115
K Wood
M Barrett
Cashbook
£ 2002
Cr
1,740 Dec 8
A Dailey
88
Dec 15
R Mason
73
Dec 28
249
Dec 31
£
349
33
G Small
Balance c/d
178
1,831
2,328
2,328
Bank Statement
2002
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dr
£
1
7
11
20
22
31
31
Balance b/d
Cheque
A Dailey
349
R Mason
33
Cheque
Credit transfer: J Walters
Bank charges
Cr
£
88
Balance
£
1,740
1,828
1,479
1,446
73
54
22
1,519
1,573
1,551
Cashbook –Bank
2002
31/12 Bal b/d
31/12 J. Walters (C/T)
1,863
£ 2002
1,831
31/1 Bank charges
54
31/12 Bal C/D
1,885
1,885
£
22
128
Accounting Theory
Lesson Three
129
J. Richards
Bank Reconciliation Statement as at 31/12/2002
£
£
Balance at bank as per cashbook – bank
Add: Unpresented cheques – (G Small)
1,863
115
1,978
Less: Uncredited deposits
K Wood
M. Barret
Balance at bank as per balance sheet
OR:
Balance at bank as per balance sheet
Add: Uncredited deposits:
K. Wood
M. Barret
Less: Unpresented cheques
Balance at bank as per cashbook – bank
249
178
(427)
1,551
1,551
249
178
1,978
(115)
1,863
Exam Type Question: Nov 2001 Q4
QUESTION FOUR
(a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(b) Ssemakula, a sole trader received his bank statement for the month of June
2001. At that
date the bank balance was Sh. 706,500 whereas his cash book balance was
Sh.2,366,500.
His accountant investigated the matter and discovered the following
discrepancies:
1. Bank charges of Sh.3, 000 had not been entered in the cashbook.
2. Cheques drawn by Ssemakula totaling Sh.22, 500 had not yet been
presented to the bank.
3. He had not entered receipts of Sh.26, 500 in his cashbook.
4. The bank had not credited Mr Ssemakula with receipts of Sh.98, 500 paid
into the bank on 30 June 2001.
5. Standing order payments amounting to Sh.62, 000 had not been entered
into the cashbook.
6. In the cashbook Ssemakula had entered a payment of Sh.74, 900 as
Sh.79, 400.
7. A cheque for Sh.15, 000 from a debtor had been returned by the bank
marked “refer to drawer” but had not been written back into the
cashbook.
8. Ssemakula had brought forward the opening cash balance of Sh.329, 250
as a debit balance instead of a credit balance.
9. An old cheque payment amounting to Sh.44, 000 had been written back in
the cashbook but the bank had already honored it.
10.Some of Ssemakula’s customers had agreed to settle their debts by
paying directly into his bank account. Unfortunately, the bank had
130
Accounting Theory
credited some deposits amounting to Sh.832, 500 to another customer’s
account. However acting on information from his customers Ssemakula
had actually entered the expected receipts from the debtors in is
cashbook.
Required:
i.
A statement showing Ssemakula’s adjusted cashbook balance as at 30 June
2001. (9 marks)
ii.
A bank reconciliation statement as at 30 June 2001.
(5marks)
(Total: 20 marks)
Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at
bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank
statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.
b)
ADJUSTED CASHBOOK
2001
Sh.
2001
Bal b/d
3,000
Receipts omitted
2,366,500
Bank charges
26,500
Standing orders
Sh.
62,000
cheques)
Payment overstated
15,000
4,500
Debtors (dishonored
Error on opening balance
Balance C/F
Cheque payment
Balance C/D
2,397,500
2,397,500
SSEMAKULA
Bank Reconciliation Statement as at 30 June 2001.
Sh.
Sh.
329,250
329,250
44,000
1,615,000
Lesson Three
131
Cash at bank as per the updated cashbook
Add: Unpresented cheques
Less: Uncredited cheques
Error on bank statement
Balance as per the bank statement
98,500
832,500
1,615,000
22,500
1,637,500
(931,000)
706,500
132
Accounting Theory
Exam type Question: Nov 96 Q4
QUESTION FOUR
(a) What is the purpose of preparing a bank reconciliation statement?
(4marks)
(b) The following is the bank statement of Kakamega Retail Traders for the month of
October
1996:
Date
1996
Particulars
Debit
Sh.
Credit
Sh.
October 1
2
334,875
2
331,327
2
318,327
2
400,327
4
4
4
340,212
4
347,492
7
7
288,992
7
325,092
8
8
344,092
October 9
9
9
387,512
15
15
405,272
16
340,272
16
358,286
17
392,786
19
384,286
Balance b/d
Cheque no. 63
31,000
Cheque no. 67
3,548
Cheque no. 65
13,000
Deposit
82,000
365,875
Cheque no. 69
Cheque no. 68
Cheque no. 64
Deposit
6,000
3,115
51,000
394,327
391,212
7,000
51,500
340,492
9,000
316,092
7,280
Cheque no. 70
Cheque no. 71
Deposit
36,100
Cheque no. 66
Deposit
28,000
Cheque no. 72
Cheque no. 73
Deposit
51,000
Cheque no. 74
Deposit
20,560
1,330
6,250
2,800
Cheque no. 75
65,000
Deposit
18,014
Deposit
34,500
Cheque no. 76
Balance
Sh.
8,500
342,762
336,512
384,712
Lesson Three
19
427,036
21
21
412,120
21
21
401,620
21
410,620
23
394,380
23
457,380
26
455,880
26
26
527,130
28
491,630
28
481,230
28
454,230
28
431,730
28
444,755
31
31
472,055
133
Deposit
42,750
Cheque no. 79
Cheque no. 77
Cheque no. 78
Cheque no. 81
6,500
Deposit
9,000
2,410
12,506
424,626
4,000
408,120
Cheque no. 82
16,240
Deposit
63,000
Cheque no. 84
1,500
Dividends
Deposit
8,750
62,500
Cheque no. 88
Standing order
464,630
35,500
10,400
(Insurance)
Cheque no. 85
27,000
Cheque no. 87
22,500
Deposit
13,025
Service charge
Deposit
750
28,050
444,005
The following is the bank column of the cashbook:
Date
Particulars
Debit
Date Particulars
1996
Sh.
1996
October 1
1
3
5
8
10
15
15
17
19
19
22
Balance b/d
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
Deposited at
bank
bank
bank
bank
bank
bank
bank
bank
bank
bank
bank
365,875
7,280
36,100
28,000
51,000
20,560
18,014
34,500
42,750
15,700
9,000
36,000
October 1
1
1
2
4
5
5
7
8
10
11
15
Credit
Sh.
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
Cheque
no.
no.
no.
no.
no.
no.
no.
no.
no.
no.
no.
no.
65 13,000
66
9,000
67
3,548
68
3,115
69
6,000
70
7,000
71 51,500
72
1,330
73
6,250
74
2,800
75 65,000
76
5,800
134
Accounting Theory
24
27
28
29
31
Deposited
Deposited
Deposited
Deposited
Deposited
at
at
at
at
at
bank
bank
bank
bank
bank
26,500
13,025
28,050
171,010
31,525
22
23
26
28
28
28
28
30
31
31
31
934,889
18 Cheque no. 77 12,506
19 Cheque no. 78
4,000
19 Cheque no. 79
2,410
19 Cheque no. 80 3,860
19 Cheque no. 81
6,500
Cheque no. 82 16,240
Cheque no. 815,000
Cheque no. 84
1,500
Cheque no. 85 27,000
Cheque no. 86 10,520
Cheque no. 87 22,500
Cheque no. 88 53,500
Cheque no. 89 2,500
Cheque no. 90 64,529
Cheque no. 91 15,500
Balance c/d 502,481
934,889
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was
in transit and two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as
Sh.26, 500 and Sh.36, 000 and in the bank statement as Sh.62, 500 and
Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but
was dishonored and the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for
Sh.5, 800 and Sh.33, 500 respectively.
Required:
a) A correct cashbook balance.
(8 marks)
b) A bank reconciliation statement on 31 October 1996.
(8
marks)
(Total: 20 marks)
Lesson Three
135
No 96 Q4
CASHBOOK (ADJUSTED)
1996
31.10 Bal b/d
10,400
Dividends
Error on deposit
15,700
Error on cheque 88
Sh.
1996
502,481
8,750
36,000
18,000
565,231
Sh.
Standing order (insurance)
Service charge
750
Dishonored cheques (debtor)
Bal c/d
538,381
565,231
Bank Reconciliation Statement as at 1 October 1996. (Previous period)
Sh.
Balance as per the cashbook
Add: Unpresented cheques 63
64
Sh.
365,875
31,000
51,000
82,000
447,875
Less: Uncredited cheques
Deposits
Balance as per the bank statement
(82,000)
365,875
Bank Reconciliation Statement as at 31 October 1996
Sh.
Balance as per the correct cashbook
Add: Unpresented cheques
Cheque no. 80
Cheque no. 83
Cheque no. 86
Cheque no. 89
Cheque no. 90
Cheque no. 91
Error on bank statement
Sh.
538,381
3,860
15,000
10,520
2,500
64,529
15,500
27,000
138,909
677,290
Less: Uncredited Cheques
Deposits
“
Error in bank statement
Balance as per the bank statement
171,010
31,525
2,700
(205,235)
472,055
136
Accounting Theory
d) CAPITAL AND REVENUE EXPENDITURE
Capital Expenditure: This is the amount spent on the acquisition of a non-current
asset or adding value to a non-current asset.
Examples of expenses incurred in acquisition:
i.
Purchase price/cost of the asset.
ii.
Delivery/carriage inwards costs (e.g. shipping charges or import taxes).
iii.
Costs incurred to get the asset in use (e.g. assembly, testing)
iv.
Installation
v.
Demolition costs in order to construct a new building.
vi.
Architect fees for construction and supervision
vii.
Legal fees incurred in acquisition of a new asset (e.g. lease agreement)
Examples of expenses incurred in adding value to an asset:
i.
Modify plant to increase its useful life.
ii.
Upgrading plant to improve quality of output.
iii.
Adopting or upgrading the production process to improve or reduce costs.
Revenue Expenditure: There’s an amount spent by the firm in the normal trading
process or to assist in earning revenues or income. Examples:
i.
Postage and stationery.
ii.
Carriage outwards (sales).
iii.
Repairs and maintenance.
Example 4.10
For the business of K Spinns,a wholesaler, classify the following between ‘capital’
and ‘revenue’ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
Lesson Three
137
k) Revenue expenditure
l) Capital expenditure.
e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the
firm. IAS 16 on property, plant and equipment defines depreciation as the
allocation of a depreciable amount of a non-current asset over its estimated useful
life.
Under the matching concept, all incomes or revenues and expenses for a
particular period should be reported in the financial statements and because
depreciation is an expense of the business therefore, it will be charged in the P&L
A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to
use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by
the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy:
Some assets lose value due to them becoming
inadequate e.g. when a
business grows or expands then some buildings may become
inadequate due to space. Also some machines that are unable
to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology
or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw
materials, minerals or oil. Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of depreciation
to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting
practice, accounting standards and suit the firm’s non-current assets. There are 2
main methods of estimating depreciation and 5 others that will apply in a firm’s
situation.
The main methods are: Straight-line method and Reducing Balance method. The
other 5 methods include:
i.
ii.
Sum of the digits methods – uses a formular.
Revaluation method – applies to a non-current asset of low value.
138
iii.
iv.
v.
Accounting Theory
Machine-Hour method – depreciation is based on number of hours a machine
is expected to operate (manufacturing process).
Unit of output method – depreciation is based on the number of units a
machine is expected to produce.
Depletion of units – depreciation is based on number of units extracted from
the asset.
Lesson Three
139
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L
a/c for a particular asset and is based on the following formular:
Depreciation for year
£20,000
=
Cost of asset – Residual Value =
Estimated useful life
£100,000 8
= £10,000 per
year.
Cost of Asset – Residual Value
Estimated useful life of asset.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm,
also called Sales Value / Scrap Value.
Estimated Useful Life
The period the asset is expected to be used in the firm.
Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight
years. After the eight years the machine will be sold for £20,000. Under the
straight-line method, the depreciation amount will be computed as follows:
This means for this asset £10,000 will be charged in the P&L account as
depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current
asset are spread out evenly over the life of the asset e.g. buildings use straight-line
method.
Percentage rate based on cost as opposed to number of years can also be used to
calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset
during the first period of use. The same rate is applied in the subsequent financial
periods but the rate is applied on the reduced value of the asset. (Cost of asset –
total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L
account in the earlier periods of use and lower amounts in the latter periods of use
as shown in the following example:
Example 4.12
140
Accounting Theory
Assume a firm buys machinery for £100,000 and provides depreciation on machines
at 20% p.a. on reducing balance method. The depreciation charged to the P&L will
be as follows for the next 3 years.
Lesson Three
141
Year 1
£
Cost
Depreciation 20% of 100,000
Balance to YR 2
80,000
(16,000)
P&L YR 2
64,000
Year 3
Depreciation 20 % of 64,000
Balance to YR 4
P&L YR 1
80,000
Year 2
Depreciation 20% of 80,000
Balance to YR 3
100,000
(20,000)
64,000
(12,800)
P&L YR 3
51,200
Reducing balance method (diminishing balance method) assumes that benefits
accruing from the use of an asset are higher in the first periods of use and lower
in the latter periods e.g.
 Fixtures, furniture and fitting.
 Plant and machinery.
 Motor vehicles.
ACCOUNTING TREATMENT ON DEPRECIATION
When non-current assets are depreciated, a new account for each type of asset is
opened; this account is called a provision for depreciation whereby the following
entries will be made:
Debit – P&L a/c
Credit – Provision for depreciation a/c
With the amount of depreciation charged for the period.
Example on straight-line method
The entries will be as follows:
Debit – P&L a/c with £10,000
Credit – Provision for depreciation. Machines a/c with £10,000 being depreciation
provided for the machine.
The ledger accounts will be as follows:
Machinery
£
£
Cashbook 100,000
31/12 Bal c/d
P&L
10,000
Provision for Depreciation Machinery
£
£
100,000
31/12 Bal c/d 10,000
142
Accounting Theory
The final accounts extracts will be shown as follows:
(a) Profit And Loss Account (Extract) for the year ended
Expenses
£
Depreciation:
Buildings
x
Plant and machinery
Furniture, Fixtures and Fittings
Motor vehicles
£
10,000
x
x
(b) Balance sheet (Extract) as at________
Non Current Assets
Cost
£
Land
x
Buildings
x
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles
x
Total
NBV (Net Book Value)
Depreciation (£)
£
(x)
x
x
x
x
x
(x)
(x)
(x)
x
x
x
x
x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars
account and the provision for depreciation account for the year ended 31 December
2002 from the information given below. Depreciation is at the rate of 20 per cent
per annum. Using the basis of one month’s ownership needs one month’s
depreciation.
2002
Bought two motor vans for £12,000 each on 1 January
Bought one motor van for £14,000 on 1 July.
Motorcars a/c
2002
1/1
Cashbook
1/7
Cashbook
38,000
£ 2002
24,000
14,000
31/12
38,000
£
Bal c/d
38,000
Calculation for depreciation
1/1
24,000 x 20 x 12
100 12
= £4,800 + 1/7( 14,000 x 20 x 6
100 12
= 1,400 )
Lesson Three
143
= £4,800 + 1,400 = £6,200
144
2002
Accounting Theory
Provision- Depreciation for Motor cars A/c
£ 2002
£
31/12 Bal c/d
6,200
31/12
P&L
6,200
Profit And Loss Account (Extract) for the period.
Expenses
£
Depreciation:
Motor vans 6200
£
Balance Sheet (Extract) as at 31/12/2002
Non-current Assets
Motor vans
Cost
38,000
Total
Depreciation
(6200)
NBV
31,800
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31
December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999 1 January
2000 1 July
1 October
2002 1 April
1
2
1
1
plant
plant
plant
plant
costing
costing
costing
costing
£8,000
£5,000 each
£6,000
£2,000
Depreciation is at the rate of 10 per cent per annum, using the straight-line method,
plant being depreciated for each proportion of a year.
Lesson Three
145
Plant a/c
£ 199
8000
31/12
1999
1/1
Cashbook
2000
1/1
Bal b/d
1/7
Cashbook
1/10 Cashbook
Bal c/d
2000
8000
10,000
6,000
24,000
2001
1/1
Bal b/d
24,000
2002
1/1
Bal b/d
1/4
Cashbook
£
8000
31/12
2001
24,000
Bal c/d
31/12
2002
24,000
2,000 31/12
26,000
24,000
24,000
Bal c/d
Bal c/d
26,000
26,000
Calculation for Depreciation
1999
£8,000 x 10/100 x 12/12
£
=
800
2000
£10,000 x 10/100 x 6/12
=
500
£6,000 x 10/100 x 3/12 =
150
£8,000 x 10/100 x 12/12
=
800
1,450
2001
£24,000 x 10/100 x 12/12
=
2400
2002
£24,000 x 10/100 x 12/12
=
2400
£2,000 x 10/100 x 9/12 =
150
2,250
Accumulated Depreciation
800
2,250
4,650
7,200
146
1999
31/12 Bal c/d
Accounting Theory
Provision – Depreciation Machines
£ 1999
£
800 31/12 P&L
2000
£
31/12 Bal c/d
2000
1/1
Bal b/d
2,250
P&L
2,250
2001
£
31/12 Bal c/d
£
31/12 Bal c/d
£
800
1,450
2,250
2001
1/1
Bal b/d
4,650
P&L
4650
2002
800
£
2,250
2,400
4650
2002
1/1
Bal b/d
7,200
P&L
7,200
£
4,650
2,550
7,200
Balance Sheet (Extract) as at 31/12/99 – 31/12/02
Non Current Assets
Cost
Total
Depreciation
NBV
1999
Motor vans
8,000
(800)
7,200
1999
Motor vans
24,000
(2,250)
21,750
1999
Motor vans
24,000
(4,650)
19,350
1999
Motor vans
26,000
(7,200)
18,800
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
Lesson Three
147
When an asset is disposed and is no longer used by the firm, the appropriate entries
should be made in the asset account and the total depreciation provided to date on
the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset being disposed.
(b) Debit – provision for depreciation of asset a/c.
Credit – asset disposal a/c
With the total depreciation provided to date on the asset.
(c) Debit – cashbook.
Credit – asset disposal a/c
With the cash received on disposal.
When an asset is written off as a result of damage/accident/theft. If it was insured
and the insurance company accept liability but by the end of the period the
insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.
(b) Debit – provision for depreciation of asset a/c
Credit – asset disposal a/c
(c) Debit – insurance receivable a/c
Credit – asset disposal a/c
With the amount expected from the insurance.
If the insurance pays before the end of the financial period, it will not be necessary
to create an insurance debtor so the following entries will be made:
Debit – cashbook.
Credit – asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries will
be made in the asset account and provision for depreciation a/c only.
Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset no longer in use.
Debit – provision for depreciation for asset
Credit – asset disposal a/c
With the total depreciation provided to date.
148
Accounting Theory
The balance in the disposal a/c after the above entries will either be a debit balance
or a credit balance. A credit balance represents a profit on disposal, which is
reported in the profit and loss a/c together with other incomes. The entry will be:
Debit – asset disposal a/c
Credit – P&L a/c
With the balance in the account.
A debit balance in the asset disposal a/c is loss on disposal which is reported in the
P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is
£800. The firm decides to trade in the motor vehicle with a new one the value of
the new one being £500. The supplier of the new vehicle agree with the firm that
the old motor vehicle is worth £300, therefore the difference will be paid by cash.
Bal b/d
Disposals
Cashbook
Motor vehicle a/c
£
£
1,000 Motor vehicle disposal
300
200 Bal c/d
500
1,500
1,500
=====
====
1,000
Motor Vehicle Disposal a/c
£
Motor vehicle
P&L
a/c
£
1,000
Provision for depreciation
100
Motor vehicle
1,100
1,100
JOURNAL ENTRIES
800
300
£
£
Debit – motor vehicles disposal
1,000
Credit – motor vehicles a/c
(Motor vehicle being traded in now transferred to disposal a/c)
Debit – Provision for depreciation – motor vehicles
Credit – Motor vehicle disposal a/c
(Total depreciation provided for motor vehicle)
1,000
800
800
Debit – Motor vehicle a/c
Credit – Asset disposal a/c
- Cashbook
(New motor vehicle acquired by trade-in value
of £300 and cheque payment of £200)
500
Debit – Asset disposal a/c
100
300
200
Lesson Three
149
Credit – P&L
(Profit made on disposal)
100
In case of a loss,
Debit – P&L a/c
Credit – asset disposal a/c
If the firm trades in an old asset for a new one, the following entries will be made in
addition to the movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old
asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line
method, for each month of ownership. From the following details draw up the plant
account and the provision for depreciation account for each of the years 1999,
2000, 2001 and 2002.
1999 Bought plant costing £900 on 1 January.
Bought plant costing £600 on 1 October.
2001 Bought plant costing £550 on 1 July.
2002 Sold plant which had been bought for £900 on 1 January 1999 for the
sum of
£275 on 30 September 2002.
You are also required to draw up the plant disposal account and the extracts from
the balance sheet as at the end of each year.
Example
1999
1/1
Cashbook
1/10 Cashbook
£
900
600
1,500
2000
1/1
Bal b/d
1,500
£
2001
1/1
Bal b/d
1/7
Cashbook
2,050
£
Plant a/c
1999
31/12 Bal c/d
2000
1,500
2001
1,500
550 31/12
2,050
2002
£
1,500
1,500
£
31/12
Bal c/d
£
Bal c/d
2,050
2002
150
1/1
900
Accounting Theory
Bal b/d
2,050
31/12
30/9
Disposal
Bal c/d
1,150
2,050
2,050
Plant Provision for Depreciation a/c
1999
31/12
Bal c/d
£
1999
210
31/12
Bal c/d
2000
1/1
510
2000
31/12
P&L
£
210
Bal b/d
P&L
210
300
510
2001
31/12
510
2001
1/1
865
Bal c/d
Bal b/d
P&L
865
2002
31/12
Disposals
Bal c/d
675
1,230
510
355
865
2002
1/1
555
Bal b/d
P&L
365
1,230
865
Calculation for Depreciation
Date
1999
1/1
1/10
2000
1/1
300
2001
Cost
Months Depreciation charge
£
900
600
12
3
20/100 x 900 x 12/12
20/100 x 600 x 3/12
=
=
210
1,500
12
20/100 x 1,500 x 12/12
=
180
30
Lesson Three
1/1
300
1/2
151
1,500
12
550
6
20/100 x 1,500 x 12/12
20/100 x 550 x 6/12
=
=
55
355
2002
30/9
31/12
31/12
900
550
600
2002
Plant a/c
P&L
9
12
12
£
900
50
950
20/100 x 900 x 9/12
20/100 x 550 x 12/12
20/100 x 600 x 12/12
=
=
=
365
135
110
120
Plant Disposal a/c
2002
£
30/9
Provision for depreciation 675
30/9
Cashbook
275
950
Balance Sheet (Extract)
Non Current Assets
1999 Plant
Cost
1,500
Total
Depreciation
(210)
2000 Plant
1,500
(510)
990
2001 Plant
2,050
(865)
1,695
2002 Plant
1,150
(555)
595
NBV
1,290
CHANGE OF DEPRECIATION POLICY
A firm may change its depreciation policy in several ways e.g. from straight line to
reducing balance or vice versa, or it may increase/decrease the number of
estimated useful years of an asset. A firm should always follow the depreciation
policy adopted consistently and incase there is need to change the policy may be
due to a new accounting standard or change in circumstances. This change should
be disclosed in the financial statements.
When there is change in the depreciation policy this may result in an increase or a
decrease in the depreciation to be charged in the Profit and loss account .IAS 16
requires that depreciation should be based on the remaining net book value at the
start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10
years. The firm depreciates the machines on a straight-line basis on the years of
the number of estimated useful years. In the 4 th year, the estimated useful life of
the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried
down for year 4. Change for 10yr – 8 yr is same as change from 10% to 12.5%
152
Accounting Theory
Lesson Three
153
Provision for Depreciation
Year 1
31/12
Bal c/d
10,000
£ Year 1
10,000
Year 2
31/12
Year 2
1/1
20,000
Bal c/d
10,000
20,000
Year 3
1/1
30,000
Year 3
31/12
Bal c/d
10,000
£
31/12
Bal b/d
31/12
Bal c/d
Year 4
1/1
31/12
44,000
10,000
P&L
20,000
Bal b/d
31/12
30,000
Year 4
P&L
20,000
P&L
30,000
Bal b/d
P&L
44,000
30,000
14,000
44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And
the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease
but increases from 10 years to 13 years.
Required: Show the provision of depreciation account in year 4
154
Accounting Theory
Provision for Depreciation
Year 1
31/12
£
Year 1
10,000
Bal c/d
10,000
Year 2
31/12
£
31/12
Year 2
1/1
20,000
Bal c/d
10,000
P&L
Bal b/d
10,000
P&L
20,000
Year 3
31/12
20,000
Year 3
Bal c/d
30,000
1/1
Bal b/d
20,000
_____
P&L
10,000
30,000
30,000
Year 4
Year 4
1/1 Bal b/d
30,000
31/12
7,000
Bal c/d
37,000
31/12
P&L
37,000
37,000
REVALUATION OF NON CURRENT ASSETS
Some of the non-current assets in a firm tend to appreciate in value rather than
depreciate e.g. land and buildings. IAS 16 on property, plant and equipment
requires that such assets may be carried in the accounts at the revalued amounts
(may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but
for buildings, changes should be made at the cost and depreciation reserve account
is usually opened for the purpose of these adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset
(a)
(b)
Land
Buildings
Cost
Depreciation
£1,000,000
£800,000
40,000
Lesson Three
155
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices
and these are revalued at:
Land
-£ 1,200,00
Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land
⇒ 1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings ⇒ 900,000 – 800,000)
(c)
Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to
revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£
Bal B/D
Revaluation
reserve
£
1,000,000
__200,000
Bal C/D
1,2000,000
1,200,000
1,200,000
Buildings a/c
£
Bal B/D
800,000
Revaluation
reserve
100,000
£
Bal C/D
900,000
900,000
900,000
Revaluation Reserve a/c
£
£
156
Accounting Theory
Bal C/D
340,000
Land
200,000
Buildings
100,000
Provision for depr.
340,000
40,000
340,000
Provision for depreciation (Buildings)
£
£
Revaluation
40,000
Bal B/D
40,000
Bal c/d
45,000
P&L
45,000
85,000
85,000
The balances in the Land and Building a/c will be shown as cost in the
Balance Sheet and the revaluation reserve a/c appears together with the
capital as a revaluation reserve (especially used in company accounts.
Land
1,200,000 – 1,000,000 = 200,000
Buildings
900,000 – 760,000 = 140,000
340,000
Any depreciation to be charged for the buildings should be based on the
revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged
in the P & L and will also be the Bal c/d in the provision for depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land
and buildings downwards in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Land
Year 3
£
1/1 Bal B/D
1,200,000
Year 3
31/12 Revaluation
£
200,000
Lesson Three
157
P&L
________
100,000
Bal C/D
__900,000
1,200,000
1,200,000
Buildings
Year 3
1/1 Bal B/D
£
900,000
_______
Year 3
£
31/12
Revaluation
100,000
P&L
100,000
Bal C/D
700,000
900,000
900,000
Revaluation Reserve
Year 3
£
Year 3
1/1/ Bal B/D
£
31/12 Land
200,000
340,000
31/12 Building
100,000
31/12 Prov. For depr.
_40,000
_______
340,000
340,000
Exam Type Question 4.19 (December 1995 ) Question 4
James Mbuvi started a taxi business in Nairobi March 1990 under the firm name
Mbuvi Taxis. The firm had two vehicles KA and KB, which had been purchased
forSh.560, 000, and Sh.720, 000 respectively earlier in the year.
In February 1992 vehicle KB was involved in an accident and was written off. The
insurance company paid the firm Sh.160, 000 for the vehicle. In the same year the
firm purchased two vehicles, KC and KD for Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle KE
was purchased for Shs.840,000. In March 1994 another vehicle KF was purchased
for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on
vehicles on hand at the end of the year irrespective of the date of purchase.
158
Accounting Theory
Depreciation is not provided for vehicle disposed of during the year. The firm’s year
ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss
account for each of the five years.
(7 marks)
b)
Prepare the motor vehicle account (at cost).
(8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles disposed
of by the company.
(5 marks)
(Total: 20 marks)
a
Vehicle
1990
1991
1992
1993
KA
560,000
560,000
560,000
560,000
KB
720000
720,000
-
-
-
KC
-
-
800,000
-
-
KD
-
-
800,000
800,000
800,000
KE
-
-
-
-
840,000
KF
-
-
-
-
960,000
Total cost
1,280,00
0
1,280,00
0
2,160,00
0
1,360,00
0
2,600,00
0
320,00
0
320,00
0
540,00
0
340,00
0
650,00
0
Depreciation at
25%
Motor Vehicle
1990
1/3
Sh
Cashbook
1,280,00
0
1991
1/1
1990
31/12
Sh
Bal c/d
1,280,000
Bal c/d
1,280,000
1991
Bal b/d
1,280,00
0
31/12
1994
Lesson Three
159
1992
1/1
1992
bal b/d
1,280,00
0
1/2
Disposal
Cashbook
1,600,00
0
31/12
Bal c/d
2,880,00
0
1993
1/1
720,000
2,160,000
2,880,000
1993
Bal b/d
2,160,00
0
1/11
Disposal
________
31/12
Bal c/d
2,160,00
0
1994
800,000
1,360,000
2,160,000
1994
1/1
Bal b/d
1,360,00
0
1/1
Cashbook
840,000
1/3
Cashbook
960,000
3,160,00
31/12
Bal c/d
3,160,000
3,160,000
160
Accounting Theory
Provision For Depreciation – M/V
1990
31/12
Sh
Balc/d
320,000
1991
1990
31/12
Sh
P&L
320,000
1/1
Bal b/d
320,000
31/12
P& L
320,000
1991
1992
31/12
Bal c/d
640,000
640,000
1992
640,000
1992
1/2
Disposal
360,000
1/1
Bal b/d
640,000
31/12
Bal c/d
820,000
3/12
P&L
540,000
1,180,00
0
1993
1,180,000
1993
1/11
Disposal
200,000
1/1
Bal b/d
820,000
31/12
Bal c/
960,000
31/12
P&L
340,000
1,160,00
0
1994
1,1
60,000
1994
31/1
31/12
Bal c/d
1,610,00
0
1,610,00
0
Bal b/d
960,000
P&L
650,000
1,610,000
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost
still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
Lesson Three
161
l
Accumulate
d
Net book
Depreciatio
n
Value
£000
£000
£000
Land
4,000
Nil
4,000
Buildings
2,200
800
1,400
Plant and
machinery
1,600
600
1,000
600
200
400
Cost
Motor vehicles
Depreciation is charged at the following annual rates (all straight line):
Land
Nil
Buildings
2%
Plant and machinery
Motor vehicles
15%
20%
Appropriate depreciation charge is made in the year of purchase, sale or revaluation
of an asset
During the year ended 30 June 2000 the following transactions took place:
1. I January 2000
The company decided to adopt a policy of revaluing its
buildings; and they were revalued to £3.4m.
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000.
Accumulated depreciation on this plant at 30 June 1999 amounted to
£230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the
purchase price was settled by part exchanging another motor vehicle, which
had cost £20,000, at an agreed value of £12,000. the balance of £18,000 was
paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less
depreciation) at 30 June 1999 of £10,000
Required:
Prepare ledger accounts to record these transactions in the records of Pentland
Limited.
(16 marks)
162
Accounting Theory
Land
1999
1/7
£ 1999
Bal b/d
4,000
2000
1/1
£
2000
Revaluation
1,200 30/6
Bal c/d
5,200
5,200
1999
1/7
Bal b/d
2000
1/1
Revaluation
2000
30/6
Bal C/D
30/6
1999
Buildings
£ 1999
2,200
2000
1,200 30/6
3,400
£
Bal c/d
3,400
3,400
Revaluation Reserve
£ 2000
1/1
Buildings
2,022 1/1
Provision for
depr.
2,022
£
1,200
822
2,022
Provision for Depreciation - Building
£ 1999
£
1/7
Bal b/d
800
1999
2000
1/1
5,200
Revaluation
Bal c/d
2000
82 30/6
2
34
_
85
6
Plant
£ 1999
P&L
2,200 x ½ x
15
3,400 x ½ x
15
56_
856
£
Lesson Three
1/7
163
Bal B/D
2000
1/1
1/7
1/4
1/4
2000
1/4
Disposal
Bal c/d
1999
Bal b/d
2000
Disposal
Cash book
Motor Vehicle
300
1,700
2,000
2000
252.50 30/6
595.00
847.50
P&L
Motor Vehicles
£
1999
600
12
18
630
1/4
30/6
Disposal
Bal c/d
2000
Disposal
Bal C/D
Motor Vehicle Disposal
£ 2000
20 1/4 Provision for
depr.
5 1/4 Motor Vehicle
25
Plant
2000
13 1/4
307.5 30/6
320.50
£
600
247.50
847.50
Provision for depreciation - Vehicle
£ 1999
1/7
Bal b/d
1999
2000
1/1
Disposal
Bal c/d
Provision for Depreciation - Plant
£ 1999
1/7
Bal b/d
P&L
2000
1/4
30/6
2000
400 1/1
_____ 30/6
2,000
Cashbook
1999
2000
1/1
1,600
P&L
Bal C/D
Plant - Disposal
£ 2000
300 1/1 Provision for
£
20
610
630
£
13
12
25
£
200
120.5
______
320.50
£
252.50
164
Accounting Theory
P&L
depr.
2.50 Cash book
25
50___
302.50
Property, Plant and Equipment Schedule (Formerly fixed asset movement
schedule)
The property, plant and equipment schedule is a summary report on the balances
and transactions of the asset and provision for depreciation account as per the
requirements of IAS 16 to be reported in the published accounts of companies. The
format is as follows:
Lesson Three
Cost/
Valuation
165
Property, Plant and Equipment Schedule:
Freehold
Leasehold Property
Plant and
property
(£)
Bal as at
1/1/01
Additions
Revaluations
(gains)
Reclassificati
ons
Disposals
Bal as at
31/12/01
Depreciation/
Amortization
Bal as at
1/1/10
Change for
year
Revaluation
Eliminated
on Disposal
Bal as at
31/12/01
N.B. V as at
31/12/01
NBV as at
31/12/01
Fixture,
Furniture
Total
Short
lease
(£)
x
Machiner
y (£)
And fittings
(£)
(£)
x
Long
leases
(£)
x
x
x
x
xx
xx
xx
-
xx
-
xx
-
xx
-
xx
xx
-
(xx)
xx
-
-
-
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
xx
xx
xx
xx
xx
-
xx
xx
xx
xx
xx
-
xx
xx
xx
xx
(xx)
-
(xx)
(xx)
(xx)
(xx)
(xx)
-
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
(xx)
xx
(xx)
xx
(xx)
xx
(xx)
xx
xx
xx
xx
xx
xx
xx
Additional information is in this schedule called reclassifications where some of the
non-current assets are transferred into a different class. (e.g.) some of the
properties hold under long leases (over 50 years) will be transferred to the short
leases classes when their term becomes less than 50 years. This is a
reclassification from long lease to short lease and so is shown in the schedule at the
value of transfer as a deduction in the long lease class and on addition in the short
lease class
Exam Type Questions
May 2000 Question Three
a) Briefly explain the nature and purpose of accounting for depreciation.
166
Accounting Theory
b) The chief accountant of Jitegemea Ltd has encountered difficulties while
accounting for fixed assets and the related depreciation in the company’s draft
accounts for the year ended 30 April 2000. He has decided to seek your
professional advice and presented the following balances of fixed assets as at 1
May 1999:
Lesson Three
Furniture
Trucks
Plant and machinery
Land
Buildings
167
Acquisition
Accumulated
Cost
Sh.
900,000
3,525,000
7,387,500
2,775,000
2,925,000
Depreciation
Sh.
300,000
1,470,000
4,462,500
292,500
Depreciatio
n
Rates
%
12.5
25
10
Nil
2.5
The following additional information was also available:
1. It is the company’s policy to write off cost of the assets using above percentages
on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year of
disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in
during the year at a value of sh.157,500 in part exchange of the new delivery
truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company
that went out of business. At the time of acquisition sh.90,000 was paid to have
the assets revalued by a professionally qualified valuer. The revaluation
indicated the following market values.
Sh.
Land
900,000
Buildings
600,000
Machinery
300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for
inclusion in the company’s accounts for the year ended 30 April 2000.
(10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of
use by the firm. IAS 16 on property plant and equipment defines depreciation as
allocation of a depreciable amount of a non-current asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses
that relate to a particular financial period and therefore because the firm to earn
revenue or income uses the assets, then the loss of value should be marched with
these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the
non-current asset.
168
Accounting Theory
Property, Plant & Equipment Schedule:
Cost/Valuation
Land,
Furniture
Buildings
And
Machinery
Sh.
Sh.
Bal as at 1/5/99
13,087,5
900,000
00
Additions
1,350,000
Revaluation
450,000
Disposals
(187500)
_____Bal as at 30/4/2000
14,700,000
900,000
Depreciation
Bal as at 1/5/99
Charge for the year
Eliminated on
disposal
Bal as at 30/4/2000
Motor
Total
Sh.
3,225,000
Sh.
17,512,500
450,000
(248,250)
3,726,750
1,800,000
450,000
(435,750)
19,326,750
4,755,000
1,066,500
(37,500)
300,000
112,500
-______
1,470,000
931,687.5
(124,125)
6,525,000
2,110,687.5
(161,625)
5,784,000
412,500
8,474,062.5
8,332,500
8,916,000
600,000
487,500
2,277,562.
5
2,055,000
1,449,187.
5
NBV 1/5/99
NBV 30/4/2000
10,987,500
10852,687.
8
Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle
Buildings
= cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5
= (292,500 + 600,000) x 4%
= 141,000
= 2,925,000 x 2.5% x 4 = 292,500
= 292,500 x 4% x 4
= 468,000
175,500
At 2.5%
4%
Machinery: cost
c/f + Additions – Disposals = Bal x 10%
73,787,500 + 300,000 – (187,500) = 7,500,000 x 10%
= 750,000
Lesson Three
169
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and
purchases ledgers. The control accounts for the month of September 1999 are in
balance and incorporate the following totals:
£
Sales ledger:
Balances at 1 September
1999: Debit
386,430
190
Credit
Sales
Cash received
Discounts allowed
Sales returns inwards
Credit balances at 30
September 1999
Purchases ledger:
Balances at 1 September
1999: Credit
163,194
158,288
2,160
590
370
184,740
520
Debit
Purchases
Cash payments
Discounts received
Purchases returns outwards
Debit balances at 30
September 1999
98,192
103,040
990
1,370
520
Although the control accounts agree with the underlying ledgers, a number of errors
have been found, and there are also several adjustments to be made. These errors
and adjustments are detailed below:
1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as
a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the
sales ledger account for the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed
account. As a result, the supplier issued a credit note for £2,000 on 26
September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the
account of R Jones.
170
Accounting Theory
8. A debit balance of £420 existed in the purchases ledger at the end of August
1999. The supplier concerned cannot now be traced and it has been decided
to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should
appear after allowing, where necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its
debtor collection system, the company maintains a sales ledger control account. In
preparing the accounts for the year to 31 October 20X3 the accountant discovers
that the total of all the personal accounts in the sales ledger amounts to £12,802,
whereas the balance on the sales ledger control account is £12,550.
Upon investigating the matter, the following errors were discovered:
1. Sales for the week ending 27 March 20X3 amounting to £850 had been
omitted from the control account.
2. A debtor’s account balance of £300 had not been included in the list of
balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the
control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell’s sales ledger account.
10.Returns inwards valued at £200 had not been included in the control account.
11.Cash received of £80 had been credited to a personal account as £8.
12.A cheque for £300 received from a customer had been dishonored by the
bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended
balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of
personal account balances so that it reconciles with the amended sales ledger
control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999,
which showed a profit of £81,208, when he realized that no bank reconciliation
statement had been prepared at that date.
Lesson Three
171
When checking the cashbook against the bank statement and carrying out other
checks, he found the following:
1. A cheque for £1,000 had been entered in the cashbook but had not yet been
presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31
March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but
have not been recoded by George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had
been mistakenly entered in the cash book and the plant account as £2,900.
Depreciation of £290 had been charged in the profit and loss account for this
plant.
5. A cheque for £980 from a credit customer paid in on 26 March was
dishonoured after 31 March and George decided that the debt would have to
be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been
entered in the cash book as a debit and posted to the credit of motor vehicles
account. Depreciation at 25% per annum (straight line) is charged on motor
vehicles, with a full year’s charge calculated on the balance at the end of
each year.
7. The total of the payments side of the cash book had been understated by
£1,000. On further investigation it was found that the debit side of the
purchases account had also been understated by £1,000.
George had instructed his bank to credit the interest of £160 on the deposit account
maintained for surplus business funds to the current account. This the bank had
done on 28 March. George had made an entry on the payments side of the
cashbook for this £160 and had posted it to the debit of interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a
cheque drawn on the business account. The entry in the cashbook had been
debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account
in the purchases ledger, using a cheque drawn on George’s personal bank account.
No entries have yet been made for this transaction.
The cashbook showed a debit balance of £4,890 before any correcting entries had
been made. The balance in the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should
appear in George’s balance sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999.
(2
marks)
3. Draw up a statement for George showing the effect on his profit of the
adjustments necessary to correct the errors found.
(8
marks)
172
Accounting Theory
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial
balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995.
The difference was put in the suspense account. The final accounts which
were then prepared showed a net profit of Sh. 64,000. During audit, the
following errors were noted:
•
•
•
•
•
•
•
A loan from ABD Bank of Sh 10,000 was entered correctly in cash book
but was not posted to the ledger.
A cheque of Sh. 4,000 for rent was not entered in the books.
Closing stock was overvalued by Sh 1,500.
Discount allowed of Sh 500 was entered in the discount-received
account.
The opening stock was understated by Sh 3,200.
Prepaid insurance of Sh 220 had been included in the profit and loss
account.
Goods destroyed by fire amounting to Sh 12,000 were written off in the
profit and loss account. However, the insurance company has agreed
to compensate the full amount.
Required:
1. Journal entries to correct the errors.
2. Statement of corrected profit.
3. Suspense account.
(8 marks)
(2 marks)
(2 marks)
(Total: 20 marks)
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on
31st December 2002:
£
Capital
Purchases
Sales
Salaries
Opening stock
Insurance
Rent
£
40,000
26,154
36,246
4,814
4,307
820
965
Lesson Three
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission
173
25,000
14,500
6,140
1,060
_____
82,795
4,638
__946
82,795
Adjustments:
1.
2.
3.
4.
5.
6.
7.
Salaries due, £350
Insurance was paid for one year up to 31st March 19-2.
Rent received for January 19-2, £165.
Commission accrued but not yet received, £120.
Furniture to be depreciated by 10%.
5% of debtors are doubtful.
Stock on 31st December 19-1 was valued at £5,008.
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business
organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and
transactions relating to the company’s control accounts for the month of December
1994 are listed below:
Balance at 1 December 1994:
Sales ledger
Purchases ledger
Transactions during December
1994:
Sales on credit
Purchases on credit
Returns inwards
Returns outwards
6,185,0
00
52,500
16,500
4,285,0
00
8,452,0
00
5,687,5
00
203,50
0
284,00
(debit)
(credit)
(debit)
(credit)
174
Accounting Theory
Bills of exchange payable
Bills of exchange receivable
Cheques received from customers
Cheques paid to suppliers
Cash paid to suppliers
Bill payable dishonoured
Charges on bill payable
dishounered
Cash received from credit
customers
Bad debts written off
Cash discounts allowed
0
930,00
0
615,00
0
7,985,0
00
4,732,0
00
88,500
400,00
0
10,000
Bill receivable dishonoured
153,00
0
64,500
302,00
0
88,500
Balances at 31 December 1994:
Sales ledger
Purchases ledger
44,000 (credit)
23,500 (debit)
Required:
Post the sales ledger and the purchases ledger control accounts for the month of
December 1994 and derive the respective debit and credit closing balances on 31
December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Acknowledgement
175
LESSON FIVE
FURTHER ADJUSTMNETS TO ACCOUNTS
(a) CONTROL ACCOUNTS
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:
(i)
Sales ledger control Account – also called total debtors. The balance on
the sales ledger control account should be the same as the total of the
balances in the sale ledger.
(ii)
Purchases Ledger Control Account – also called total creditors .The
balance carried down (Bal c/d) on the purchases Ledger Control Account
should be the same as the total of the balances in the purchases ledger.
Example (Sales Ledger Control a/c)
Sales Ledger Control A/c
Sales
1400 CashBook
Bal C/D
1400
700
700
1400
Sales = 200 + 300 + 400 + 500
Cashbook = 50 + 100 + 250 +
300
Balance c/d = 150 + 150 + 200
SALES LEDGER
Debtor A a/c
Sales
200 C/B
Bal c/d
200
50
150
200
Debtor B a/c
Sales
400 C/B
Bal c/d
400
250
150
400
Debtor C a/c
Sales
300 C/B
Bal c/d
100
200
176
Adjustment to Final Accounts
300
300
Lesson Four
177
Debtor D a/c
Sales
500 C/B
Bal c/d
500
300
200
500
Example: Purchases Ledger Control a/c
Purchases Ledger Control a/c
C/B
Bal c/d
1900 Purcha
ses
700
2600
2600
2600
PURCHASES LEDGER
Creditor A
C/B
Bal c/d
400 Purcha
ses
200
600
600
600
Creditor B
C/B
Bal c/d
450 Purchas
es
250
700
700
700
Creditor C
C/B
Bal c/d
350 Purchas
es
150
500
500
500
Creditor D
C/B
Bal c/d
700 Purchas
es
100
800
800
800
178
Adjustment to Final Accounts
Purpose of Control Accounts
1. Provide for arithmetical check on the postings made in the individual
accounts (either in the sales ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as
debtors and creditors.
3. To detect and prevent errors and frauds in the customers and suppliers
account.
4. To facilitate delegation of duties among the debtors and creditors clerks.
FORMAT OF A SALES LEDGER CONTROL
Sales Ledger Control a/c
1. Balance b/d of the total debit
balances from previous
period
2. Total credit sales for the
period (from the sales
journal)
3. Refunds to customers (from
cashbook)
4. Dishonored cheques (from
cashbook)
5. Bad debts recovered (from
general journal)
6. Total credit balances of the
sales Ledger carried forward
1. Total credit balances of the
sales ledger brought forward
2. Total cash received from
credit customers/debtors
(from cash book)
3. Total cheques received from
credit customers/debtors
(from cash book)
4. Total returns-inwards
(returns-inwards journal)
5. Total cash discount allowed
to customers (from cash
book)
6. Bad debtors written-off (from
general journal)
7. Cash received from bad
debtors recovered (cash
book)
8. Purchases Ledger contra
9. Allowances to customers
(price reduction in excess to
discounts allowed)
10.Total debit balance carried
down to the next period – to
be derived after posting all
those transactions
Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes
place when there is a credit balance on the debtor’s a/c and the customer is not a
creditor too.
The entry will be:
Dr. Debtor’s a/c
Lesson Four
179
Cr. Cashbook
Example:
Debtor A
£
£
1000 Cashbook
950
100 Discounts
50
Returns
100
1100
1100
If the firm has not paid this amount owed to the customer, then it’s carried forward
to the next period then is a credit balance in the customer’s a/c. Therefore, if a firm
has several customer, this information will be shown in the control a/cs as total
balance c/f
(debit side).
Sales
(Refunds) C/B
Contra against the purchases ledger balances:
Some debtors may also be creditors in the same firm and therefore, if the amount
due to them as creditors is less than what they owe as debtors, then the credit
balance is transferred from their creditors a/c to their debtors a/c as a contra entry.
Example:
Debtor (A)
Sales
2000 Contrapurchases
Bal c/d
2000
1000
1000
1100
Creditor (A)
Contra Debtor
1000 Purchases
1000
FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT
Purchases Ledger Control A/C
1. Total debit balances from
1. Total credit balance brought
purchases ledger brought
forward (of purchases ledger
forward from previous period
from the previous period)
2. Total cash paid to creditors
2. Total credit purchases for the
(from cash book)
period (from purchases journal)
3. Total cheques paid to creditors
3. Refunds from suppliers
(from cash book)
(from cash book)
180
Adjustment to Final Accounts
4. Total cash discounts received
(from cash book)
5. Allowances by suppliers
6. Sales ledger contra
7. Total returns outwards
(from returns-outwards
journal)
8. Total credit balance
(to be derived after posting
entries)
4. Total debit balances (of the
purchases ledger carried
forward)
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger
control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade
discounts should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c.
i.e. increase or decrease in provisions for doubtful debts will not affect this
account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C.
However in some cases it can be included especially where there are
incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be
shown on the debit side of the sales ledger control. However when trying to
determine the turnover under incomplete records then it is wise to omit it.
Example 5.1
You are required to prepare a purchases ledger control account from the following
for the month of June. The balance of the account is to be taken as the amount of
creditors as on 30 June.
2003
June 1
June 30
Purchases ledger balances
Totals for June:
Purchases journal
Returns outwards journal
Cheques paid to suppliers
Discounts received from
suppliers
Purchases ledger balances
£
36,760
422,570
10,980
387,650
8,870
Solution
2003
Returns out
Purchases Ledger Control A/C
£ 2003
£
10,980 Bal b/d (1/6)
36,760
?
Lesson Four
181
Bank
Discounts received
Bal c/d (30/6)
387,95
0
8,870
51,830 Purchases
459,33
0
422,570
459,330
Example 5.2
Prepare a sales ledger control account from the following:
£
2003
May 1
Debit balances
Totals for May:
Sales journal
Cash and cheques received from debtors
Discounts allowed
Debit balances in the sales ledger set off
against credit balances in the purchases
ledger
Debit balances
Credit balances
May 31
Solution
2003
1/5
Bal b/d
Sales
31/5
Bal c/d
Sales Ledger Control A/C
£ 2003
£
64,20
Cash book
103,70
0
0
128,0
Discounts
3,950
00
allowed
Purchases
1,450
contra
500 31/5
Bal c/d
83,600
192,7
192,70
00
0
64,200
128,000
103,700
3,950
1,450
?
500
182
Adjustment to Final Accounts
Example 5.3 (Exam type question – November 1997 Question 2)
(a) Explain the purposes for which control accounts are prepared.
(3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd.
for the month of November 1997 are listed below:Sh.
Balances on 1 November 1997:
Sales ledger
Purchases ledger
Transactions during November 1997:
Purchases on credit
Allowances from suppliers
Receipts from customers by
cheques
Sale on credit
Discount received
Payments to creditors by cheques
Contra settlements
Bills of exchange receivable
Allowances to customers
Customers cheques dishonored
Cash received from credit
customers
Refunds to customers for
overpayments
Discounts allowed
Balances on 30 November 1997
Sales ledger
Purchases ledger
9,123,00
0
211,000
4,490,00
0
88,000
(debit)
(credit)
(credit)
(debit)
18,135,0
00
629,000
27,370,0
00
36,755,0
00
1,105,00
0
15,413,0
00
3,046,00
0
6,506,00
0
1,720,00
0
489,000
4,201,00
0
53,000
732,000
136,000 (credit)
67,000 (debit)
Required:
The sales ledger and purchases ledger control accounts for the month of November
1997 and show the respective debit and credit closing balances on 30 November
1997.
(17 marks)
(Total: 20 marks)
Lesson Four
183
(a)
i)
Provide for arithmetical check on the postings made in the
individual accounts (either in the sales ledger or purchases ledger.)
ii)
To provide for a quick total of the balances to be shown in the trial
balance as debtors and creditors.
iii)
To detect and prevent errors and frauds in the customers and
suppliers account.
iv)
To facilitate delegation of duties among the debtors and creditors
clerks.
184
Adjustment to Final Accounts
Kopesha Ltd
199
7
1/11
Bal b/d
Sales
Dishonored
cheques
Refunds to
customers
30/1
1
199
7
1/11
Bal c/d
Bal b/d
Allowances from
suppliers
Discounts
received
Bank
Contra settlement
30/1
1
Bal c/d
Sales Ledger Control A/C
Sh 199
7
9,123,00 1/11 Bal b/d
0
36,755,0
Bank
00
489,000
53,000
136,000 30/1
1
46,556,0
00
Contra
Bills of exchange
receivable
Allowances
Cash
Discounts allowed
Bal c/d
Purchases Ledger Control A/C
Sh 199
7
88,000 1/11 Bal b/d
Purchases
629,000
1,105,00
0
15,413,0
00
3,046,00
0
2,411,00 30/1 Bal c/d
0 1
22,692,0
00
Sh
211,000
27,370,00
0
3,046,000
6,506,000
720,000
4,201,000
732,000
2,770,000
46,556,00
0
Sh
4,490,000
18,135,000
67,000
22,692,000
Example 5.4 (Exam Question – May 2000
Question 4)
Poesha Limited keeps sales and purchases control accounts in the General Ledger.
The transactions for the month ended 30 April 2000 were as follows:
Sh
Credit balances on 1 April 2000
-Sales ledger
154,000
-Purchases
569,000
ledger
Debit balances on 1 April 2000
-Sales ledger
956,000
-Purchases
196,000
ledger
Lesson Four
185
Credit balances on 30 April 2000
Debit balances on 30 April 2000
-Sales ledger
Purchases
ledger
Credit purchases
Credit sales
Cheques received from debtors
Cash received from debtors
Cheque payments to creditors
Cash payments to creditors
Bad debts written off
Discounts received
Discounts allowed
Contra entry to sales ledger from purchases
ledger
Refunds to debtors
Returns outwards
Returns inwards
178,000
189,000
2,450,000
4,563,000
3,140,000
1,367,000
1,994,000
352,000
68,000
104,000
169,000
234,000
62,000
138,000
231,000
Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April
2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
• Errors that don’t affect the trial balance
• Errors that affect the trial balance
Errors that don’t affect the trial balance
The trial balance produced from the accounts appears to be okay/correct, i.e the
debits are the same as the credits. However, on taking a close check on the
balances and transactions posted, errors may have been made and therefore the
balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are
explained as follows:
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the
double entry is not made e.g. a sales invoice of £400 is not posted in the sales
journal therefore no entry is made in the debtor’s account and the sales account i.e.
both debit of £400 in debtor’s account and credit of £ 400 in the sales account.
The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
Debiting debtors
Crediting sales
£400
£400
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is
of the same class. Example: a credit sale to T Thompson is posted to L Thompson’s
186
Adjustment to Final Accounts
account for an amount of £ 200. Instead of a debit to T Thompson’s account it is
made to L Thompson’s account and the corresponding credit in the sales account is
correct.
Although the debit entry is made into the wrong account, the two accounts are of
the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson
by:
£
(i)
(ii)
Debit T Thompson a/c
Credit L Thompson a/c
200
200
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of
a different class e.g. Motor vehicle purchased for £ 400 is posted to the motor
vehicle expenses a/c. (Instead of debiting motor vehicles, we debited motor vehicle
expenses a/c and the credit entry in the cashbook is correct)
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c
is an expense account. Therefore a capital expenditure has been posted as
revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the
motor vehicles a/c by:
£
(i)
Debit Motor vehicles a/c 400
(ii)
Credit Motor expenses a/c
400
d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the
accounts i.e. a debit is posted as a credit and a credit is posted as a debit.
Example: cash drawn from the bank of £150 for business use is posted as a debit in
the bank account and credit in cash in hand.
To correct this error, two entries are made in the relevant accounts:
(i)
Correct the error
(ii)
Post the transaction correctly
The entries will therefore be as follows:
(i)
Debit Cash in hand by £150
Credit bank by
£150
To correct the error of £ 150 posted in the wrong sides of these account
(ii)
Debit cash by
Credit bank by
£150
£150
Lesson Four
187
To post the entries correctly
e) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not
correct i.e. it is either under/over stated. In some cases, this is known as a
transposition error e.g. cash received from a debtor of £980 is credited/posted to
the customer’s account as £890.
To correct this error, the amount understated or overstated is posted to these
accounts to reflect the correct balance. In this case, we will:
£
Debit cash book
Credit debtors
90
90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to
understate the debits or credits then another error may take place to overstate the
debits or credits by the same amount, hence canceling out each other. E.g. if the
balance c/d of the purchases a/c is £3,980 but shown in the trial balance as £3,890
and another error carried to the trial balance of fixture amounting to £4,540 instead
of £4,450:
188
Purchases
Adjustment to Final Accounts
£
3,980
3,890
(90)
£
Fixtures
4,450
(4,540)
90
This type of error is corrected by use of a suspense account.
Example 5.5
Give the journal entries needed to record the corrections of the following.
Narratives are required.
a)
b)
c)
d)
e)
Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
Goods taken for own use £ 700 had been debited to General Expenses.
Private insurance £ 89 had been debited to Insurance account.
A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
Cash banked £ 390 had been credited to the bank column and debited to the
cash column in the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s
account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
Lesson Four
189
Solution
THE JOURNAL
Debit
10,000
Sales
Capital
Additional capital passed into
sales a/c now transferred to
capital a/c
Drawings
General expenses
Drawings debited in general
expense now transferred to
drawing a/c
Drawings
Insurance
Private insurance transferred from
insurance a/c to drawings a/c
Purchases
C Kelly
Purchases and creditors amount
to 857 initially entered as £587
Bank
Cash
Correct error in posting
Bank
Cash
To post the cash banked correctly
Bank
Cash
Cash drawings correctly started
from bank to cash
J Charlton
M McCarthy
Returns in from McCarthy entered
in error in J Carlton now
transferred to his a/c
Motor expenses
Motor disposal a/c
To correct error in recording sales
proceeds In expense account
Credit
10,000
700
700
89
89
270
270
390
390
390
390
400
400
168
168
1000
1000
Example 5.6 (Exam type question – May 200 Question 2)
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
190
Adjustment to Final Accounts
Sh’000
Capital 1 April 1999
Profit for the year
ended 31 March
2000
Deduct: drawings
Creditors
Bank overdraft
450
150
Sh’000
1,890 Land and
buildings (at
valuation)
Machinery (at
cost)
300 Deduct:
depreciation
630 Stock at cost
270 Debtors
3,090
Sh’000
Sh’00
0
1,650
1,200
750
570
420
450
990
3,090
Further investigation reveals the following information:
1. The closing stock includes damaged goods which, although they had cost Sh.
10,000 have an estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt.
A provision for doubtful debts of 2 ½% is also required on the balance of the
debtors.
3. The machinery was acquired five years ago and is being depreciated to its
scrap value on a straight-line basis over eight years. A more realistic
estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been
reflected in the accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected
in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr.
Patel had been deducted as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business
premises to external party had not been received and no entry had been
made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions.
(10
marks)
b) A statement of revised profit for the year ended 31 March 2000.
(8
marks)
c) A revised balance sheet as at 31 March 2000.
(7
marks)
(Total: 25 marks)
Solution
Lesson Four
a)
191
THE JOURNAL
Trading account
Stock
Being a reduction in stock for damaged goods
Profit and loss(Bad debts)
Debtors
Debtors gone bankrupt written off
Profit and loss)
Provision for doubtful debts
Being a provision for doubtful debts created
at 20%.
Provision for depreciation
Profit and loss
A change in estimated lifespan for machinery
Profit and loss( wages )
Accrued expenses
Wages owing omitted in the accounts
Profit and loss (Bank overdraft
charges)
Bank overdraft
Changes for overdraft not reflected in the
accounts.
Drawings
Profit and loss
Drawing to Mr. Patel deducted as an expense.
Accrued income
Profit and loss (rent income)
Rent receivable owing not reflected in the
accounts.
Debit
2,500
Credit
2,500
20,000
20,000
10,000
10,000
150,000
150,000
9,500
9,500
8,000
8,000
100,000
100,000
20,000
20,000
192
Adjustment to Final Accounts
b) STATEMENT OF ADJUSTED NET PROFIT
Sh
Net profit as per the account
Add: Provision for depreciation
50,000
Drawings
100,000
Accrued income (rent)
20,000
Less: Stock reduction
Bad debts
Provision for doubtful
debts
Accrued expenses
Bank charges
Net profit (revised)
Sh
450,000
170,000
620,000
2,500
20,000
10,000
9,500
8,000
(50,000)
570,000
REVISED BALANCE SHEET AS AT 31 MARCH 2000
Sh
Sh
Land and buildings
1,650,000
Machinery
1,200,000
(700,000)
2,850,000
700,000
Add: Current Assets
Stock
567,500
Debtors
400,00
Less: Provision for doubtful
(10,000)
390,000
debts
Accrued rent income
20,000
977,500
Less Current liabilities
Creditors
630,000
Accrued wage expense
9,500
Bank overdraft
278,000
(917,500)
Capital
Add Net Profit
Less drawings
Sh
1,650,000
500,000
2,150,000
60,000
2,210,000
1,890,000
570,000
2,460,000
(250,000)
2,210,000
Lesson Four
193
Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not
be same as the credits. The debits may be more than the credits and vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a
credit entry. Example cash received from a debtor is debited to the cashbook
and no other entry is made in the account, i.e. no credit entry on the debtor’s
a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two
credits. Example a payment to a creditor of £ 300 is credited in the cashbook
and also credited in the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same
as the credit. Example – cash received from a debtor of £ 450 is debited in the
cashbook as £ 450 and credited as £ 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an
account balance due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening
the ledger accounts or when taken up to the trial balance. Example Bal c/d in
the cash book for cash at bank of £ 2000 is shown as a credit i.e. an overdraft,
instead of a debit in the trial balance. The balance may also be brought down as
an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made
through an account called a suspense account.
The difference in the accounts is posted to this account and the entries to correct
the accounts are posted here. The balance to be shown on the suspense accounts
depends on which side the error is shown on the trial balance.
If the debits > credits, then an amount is included on the credit side of the trial
balance so that the debits = credits. This is a credit balance and will be taken to
the suspense account on the credit side.
Example:
DR
240
240
Total
Suspense
CR
200
40
240
Suspense a/c
£
Difference as per T/B
£
40
194
Adjustment to Final Accounts
If the credits are more than the debits this is a debit balance and therefore we
require an amount to be added to the total of the debits for the two side to be
same. This debit balance is posted to the debit side of the suspense a/c.
Total
Suspense
Difference as per
T/B
DR
260
40
300
CR
300
300
Suspense a/c
£
40
£
Posting the correct entries should eliminate the balance on the suspense account.
In some cases, after checking for all errors that can affect the trial balance, the
suspense a/c has a balance. This balance depends on whether it is a credit or debit
and whether it is material or not for purposes of proper accounting treatment. The
following is the recommended approach:
Balance
Debit
Credit
Material
Show as an asset (eg)
other debtors
Show as a liability (eg)
other creditors
Not Material
Charge in P& L as an
expense
Report as income in P&L
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree
by £3,300, a shortage on the credit side of the trial balance. A suspense account
was opened for the difference.
In January 2003 the following errors made in 2003 were found:
(i)
(ii)
(iii)
(iv)
(v)
Sales daybook had been undercast by £1,000.
Sales of £2,500 to J Church had been debited in error to J Chane account.
Rent account had been undercast by £700.
Discounts received account had been under cast by £3,000.
The sale of a motor vehicle at book value had been credited in error to Sales
account £3,600.
You are required to:
a) Show the journal entries necessary to correct the errors.
b) Draw up the suspense account after the errors described have been
corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended
31 December 2002, show the calculations of the corrected net profit
Solution
THE JOURNAL
Lesson Four
195
Suspense
Sales
Sales under cast of £100 now corrected
J Church
J Chane
Sale to J Church posted to J Chane corrected
Rent
Suspense
Under cast in rent balance now corrected
Suspense
Discount received
Under cast in discount received balance now
corrected
Sales a/c
Disposal
Sale of motor vehicle entered in sales a/c now
corrected
Sales
Discount received
Suspense a/c
£
1,000 Bal b/d
3,000 Rent
4,000
£
1,000
£
,1000
2,500
2,500
700
700
3,000
3,000
3,600
,3600
£
3,300
700
4,000
STATEMENT OF CORRECTED NET PROFIT
£
£
Net profit as per
79,000
account
Add:
Sales
1,000
Discount received
3,000
4,000
Less:
Rent
700
Sales
3,600
(4,300)
Corrected net profit
78,700
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial
balance is extracted at the end of each month, and a profit and loss account and
balance sheet are computed. This month, however, the trial balance did not
balance, the credits exceeding debits by £1,536.
196
Adjustment to Final Accounts
Your are asked to help and after inspection of the ledgers discover the following
errors:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
A balance of £87 on a debtor’s account has been omitted from the schedule
of debtors, the total of which was entered as debtors in the trial balance.
A small piece of machinery purchased for £1,200 had been written off to
repairs.
The recipiets’ side of the cashbook had been under cast by £720.
The total of one page of the sales daybook had been carried forward as
£8,154, whereas the correct amount was £8,514.
A credit note for £179 received from a supplier had been posted to the wrong
side of his account.
An electricity bill in the sum of £152, not yet accrued for, is discovered in a
filing tray.
Mr. Smith, whose past debts to the company had been the subject of a
provision, at last paid £731 to clear his account. His personal account has
been credited but the cheque has not yet passed through the cashbook.
Solution
Opening balance
Sales - under record
Suspense a/c
£
1,536. Debtors
00
360.00 Cashbook under cast
Creditors error
Creditors (correct)
Cashbook: smiths debt
paid
1,896.0
0
£
87.00
720.00
179.00
179.00
731.00
1,896.00
i.
Increase total for debtors by 87.
ii.
Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an
increase in
profits.
iii. Increase sales by 360.
iv. Reduce the creditors by 358.
v.
accruals by 152 and reduce profits by the same.
vi. Increase the cash balance by 731.
Lesson Four
197
Example 5.9 (Exam type question – May 2002 question 1).
On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole
trader extracted a trial balance. Due to errors committed by the bookkeeper, the
trial balance failed to balance by Sh 369,400. He placed the difference in a
suspense account as shown below:
Wanji trial balance as at 31 December 2001
Sh
Sh
Fixed assets – cost
832,000
Stocks:
1 January 2001
148,000
31 December
98,800
2001
Trade debtors
76,000
Prepayments
10,000
Trade creditors
34,600
Bank overdraft
15,200
Accruals
16,000
Drawings
359,600
Capital
1,054,000
Sales
1,043,200
Provision for
166,400
depreciation
Purchases
733,000
Operating expenses
126,000
Provision for doubtful
3,800
debts
Discounts received
5,000
Discounts allowed
5,800
Suspense account
________
369,400
2,548,400
2,548,400
Investigations carried out after preparing the above trial balance detected the
following errors:
1.
2.
3.
4.
5.
6.
The total of the sales daybook for December 2001 was overcast by Sh 25,700.
On July 2001, the business purchased office equipment for Sh 40,000. These
were debited to purchases account. Depreciation on the equipment is at the
rate of 10% per annum on cost and based on the period (months) of usage in
the year.
A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the
creditor’s account.
A payment of Sh. 4,500 for telephone expenses was debited to telephone
account as Sh 5,400.
An amount of Sh 15,000 received from a debtor was not posted to the debtor’s
account from the cashbook.
Purchases daybook for October 2001 was under cast by Sh 28,000.
198
Adjustment to Final Accounts
Assume the business had reported a net profit of Sh 85,800 before adjusting for the
above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account.
(6 marks)
(b) Journal entries to correct the errors (Narrations not required)
(6
marks)
(c) Suspense account starting with the balance determined in the adjusted trial
balance in (a) above.
(4 marks)
(d) The adjusted net profit for the year.
(4
marks)
Solution:
Adjusted Trial Balance
Fixed assets – cost
Stock - 1 January 2001
Trade debtors
Prepayments
Trade creditors
Bank overdraft
Accruals
Drawings
Capital
Sales
Provision for
depreciation
Purchases
Operating expenses
Provision for doubtful
debts
Discounts received
Discounts allowed
Suspense account
Sales
Suspense
Office equipment
Purchases
Provision for depreciation
Profit and loss
Sh
832,000
148,000
76,000
10,000
Sh
34,600
15,200
16,000
359,600
1,054,000
1,043,200
166,400
733,000
126,000
3,800
5,000
5,800
47,800
2,338,200
_______
2,338,200
THE JOURNAL
Dr
25,700
Cr
25,700
40,000
40,000
2,000
2,000
Lesson Four
199
Creditors
Suspense
Creditors
Suspense
8,500
8,500
8,500
8,500
Suspense
Telephone
900
900
Suspense
Debtor
15,000
15,000
Suspense
Discounts allowed
2,500
Suspense
Discounts received
2,500
2,500
2,500
Purchases
Suspense
2001
1 Jan
Bal b/d
Telephone
Debtors
Discount
allowed
Discount
received
Bal c/d
28,000
28,000
SUSPENSE ACCOUNT
Sh 2001
47,800 1 Jan
Sales
900
Creditors
15,000
Creditors
2,500
Purchases
Sh
25,700
8,500
8,500
28,000
2,500
2,000
70,700
______
70,700
STATEMENT OF ADJUSTED NET PROFIT
Sh
Net profit as per the accounts
Add
Purchases
Telephone expenses
Discount allowed + received
40,000
Less
Sales
Depreciation
Purchases
Corrected Net Profit
25,700
2,000
28,000
Sh
85,800
900
5,000
c) STOCK VALUATION (IAS 2 INVENTORIES)
45,900
131,700
(55,700)
76,000
200
Adjustment to Final Accounts
inventories in a firm includes:
(a) Finished goods (assets held for sale)
(b) Work in progress (assets still in production for purposes of sale)
(c) Raw materials (to be used in production process).
The cost of inventories should include all costs of purchase. (Purchase price and
other taxes like import duties), costs of conversion (e.g. direct labour) and other
costs incurred in bringing the inventories into their present location and condition
(carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry.
In most cases either carrying out stocktaking or checking the stock records that the
firm is kept determines the value of stock at the end of the financial period.
Stocktaking involves counting the number of units of finished goods, work in
progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per
unit to the total number of units available.
Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400
each respectively. At the end of year 2002, stocktaking was carried out and the
following units were available:
Product A 200,000 units
Product B 20,000 units
Product C 30,000 units
Lesson Four
201
Required:
Compute the cost of stock to be included in the final accounts.
Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000
Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each
unit as far as the business can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number
of transactions and changes in the cost price, IAS 2 on inventories recommends the
use of the following estimates:
(i)
First In First Out (FIFO)
The business assumes that items of stocks that were purchased first are sold first
and therefore, items left as part of closing stock were purchased recently.
(ii)
Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average
of the cost of similar items at the beginning of the period and the cost of similar
items purchased during the period.
(iii)
Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first
and therefore, the closing stock shows items that were bought first.
Net Realizable Value (SP- Expenses)
This is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either
actual or estimated under the different methods) and if the firm was to sell the
stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net
realizable value.
Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000
is damaged. This stock can fetch the firm Sh 22,000 after repairs and packaging
that will cost Sh 4,000.
Required:
What value will be attached on this damaged units and the total closing stock for
the final accounts purposes.
Sh
Cost
20,000
Selling price
22,000
Repairs
4,000
NRV (22-4)
18,000
202
Adjustment to Final Accounts
The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this
damaged unit will be shown as Sh 18,000. The balance of the stock of Sh 280,000
+ 18,000 of the damaged stock will be included in the final accounts and shown
together as Sh 298,000.
Lesson Four
203
d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial
balance in column form. A work sheet has 8-10 columns and the simple headings
are as follows:
TRIAL
BALANC
E
Dr
Cr
£
£
ADJUSTMEN
T
TRADING
ACCOUNT
Dr
Cr
£
£
Dr
Cr
£
£
PROFIT &
LOSS
ACCOUNT
Dr
Cr
£
£
BALANCE SHEET
Assets Liabilities +
Capital
£
£
Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of
balances has been extracted from his ledger as at 30 April 19X7, the end of his
most recent financial year.
£
Capital
83,887
Sales
259,870
Trade creditors
19,840
Returns out
13,407
Provision for bad debts
512
Discounts allowed
2,306
Discounts received
1,750
Purchases
135,680
Returns inwards
5,624
Carriage outwards
4,562
Drawings
18,440
Carriage inwards
11,830
Rent, rates and insurance
25,973
Heating and lighting
11,010
Postage, stationery and telephone
2,410
Advertising
5,980
Salaries and wages
38,521
Bad debts
2,008
Cash in hand
534
Cash at bank
4,440
Stock as at 1 May 19x6
15,654
Trade debtors
24,500
Fixtures and fittings – at cost
120,740
Provision for depreciation on fixtures
and fittings – as at 30 April 19X7
63,020
Depreciation
12,074
The following additional information as at 30 April 19X7 is available:
204
Adjustment to Final Accounts
(a)
(b)
(c)
(d)
(e)
Stock at the close of business was valued at £17,750.
Insurances have been prepaid by £1,120.
Heating and lighting is accrued by £1,360.
Rates have been prepaid by £5,435.
The provision for bad debts is to be adjusted so that it is 3% of trade
debtors.
Required:
MR CHAI
Trial Balance
WORKSHEET
£
Dr
Capital
Sales
Trade
creditors
Returns
outwards
Provision for
B debts
Discounts
allowed
Discounts
received
Purchases
Returns
Inwards
Carriage
outwards
Drawings
Carriage
inwards
Rent, rates &
insurance
Heating &
lighting
Postage,
stationery
and
telephone
Advertising
Salaries and
wages
Bad debts
Cash in hand
Cash at bank
Adjustments
£
Cr
83,887
£
Dr
Trading
account
£
£
Cr
Dr
Profit & loss
Balance
a/c
sheet
£
£
£
£
Cr
Dr
Cr
Dr
259,87
0
19,840
259,8
70
13,407
13,40
7
19,8
40
512
223
735
2,
306
2,306
1,750
1,750
135,68
0
5,624
135,6
80
5,624
4,562
4,562
18,440
18,44
0
11,830
11,83
0
25,973
11,010
2,410
5,980
38,521
2,008
534
4,440
£
Cr
83,8
87
6,55
5
1,360
19,41
8
12,37
0
2,410
5,980
38,52
1
2,008
534
4,440
Lesson Four
Stock at 1
May 19X6
Trade
debtors
Fixtures &
fittings at
cost
Provision for
depreciation
Depreciation
15,654
15,65
4
24,500
24,50
0
120,7
40
120,74
0
63,020
63,0
20
12,074
442,28
6
Stocks
30.04.19X7 –
asset
Stocks
30.04.19X7 –
Cost of Sales
Insurance
prepaid
Heating and
lighting
accrued
Rates
prepaid
Provision for
bad debts
205
12,07
4
442,28
6
17,75
0
17,7
50
17,75
0
1,120
1,120
1,36
0
1,36
0
5,435
5,435
223
25,88
8
Gross profit
(Balancing
figure)
17,75
0
223
25,8
88
122,2
39
291,0
27
122,2
39
291,0
27
Net profit
(Balancing
figure)
24,11
7
123,9
89
123,9
89
24,1
17
192,9 192,
59 959
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In
the next session we shall prepare the final accounts incorporating these
adjustments. Some adjustments will affect the format of final accounts and
therefore they will look as follows:
206
Adjustment to Final Accounts
FORMAT OF FINAL ACCOUNTS WITH ADJUSTMENTS
NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£
£
£
Sales
XX
Less
(XX)
Returns
inwards
XX
Less cost
of sales
Opening
XX
stock
Purchases XX
Add
XX
carriage
in
XX
Less
(XX
XX
Returns
)
out
XX
Less
(XX)
(XX)
closing
stock
Gross
XX
profit
Discount
XX
received
Other
XX
incomes
(rent,
interests,
dividends)
Profit on
XX
disposal
of noncurrent
assets
Reduction
XX
in
provision
for
doubtful
debts
Reduction
XX
in
Lesson Four
207
provision
for
discount
allowable
Interest
on
overdue
debtors
balances
XX
XX
Less
Expenses
Bad debts
Depreciati
on: (eg)
Plant
XX
XX
XX
Motor
vehicle
Increase
in
provision
for
doubtful
debts
Increase
in
provision
for
discount
allowable
Loss on
disposal
of non
current
assets
Loss of
other
assets
(eg) stock
Interest
charged
by
creditors
Other
expenses:
Rent
Insurance
Postage
Interest
XX
XX
XX
XX
XX
XX
XX
XX
XX
(XX)
208
Adjustment to Final Accounts
on loan
etc
NET
PROFIT
XX
BALANCE SHEET AS AT 31 DEC…….
Non current
assets
£
£
£
Land
Buildings
Plant and
machinery
Fixtures, furniture
and fittings
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
(XX)
XX
Motor vehicle
XX
(XX)
XX
XX
Current assets
Stock
Debtors
Less provision for
doubtful debts
XX
XX
(XX)
XX
Accrued income
XX
Prepaid expenses
XX
Cash at bank
XX
Cash in hand
XX
XX
XX
Lesson Four
209
Current
liabilities
Bank overdraft
XX
Trade creditors
XX
Prepaid income
XX
(XX)
Net current
assets
Net assets
X
X
XX
Capital
Add net profit
XX
X
X
XX
(XX)
Less drawings
XX
Non current
liabilities
Loan
X
X
XX
Non current
liabilities
Loan
X
X
XX
Non current
liabilities
Loan
X
X
XX
Non current
liabilities
Loan
X
X
XX
210
Non current liabilities
Adjustment to Final Accounts
XX
Loan
Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be
as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
£
£
£
Sales
259,8
70
Less
(5,62
Returns
4)
inwards
254,2
46
Less
cost of
sales
Opening
15,654
stock
Purchas
135,680
es
Add
carriage
in
147,510
Less
(13,407)
134,103
Returns
out
Cost of
149,757
goods
availabl
e for
sale
Less
(17,750)
(132,
closing
007)
stock
Gross
122,2
profit
39
Add:
1,750
Discoun
t
receive
d
123,9
Lesson Four
211
89
Less
Expens
es
Discoun
t
allowed
Carriag
e
outward
s
Rent,
rates
and
insuran
ce
Heating
and
lighting
Postage
,
statione
ry and
telepho
ne
Advertis
ing
Salaries
and
Wages
Bad
debts
Provisio
n for
bad
debts
Provisio
n for
depreci
ation –
fixtures
and
fitting
Net
profit
Mr Chai
Balance Sheet as at 30 April 19X7
2,306
4,562
19,418
12,370
2,410
5,980
38,521
2,008
223
12,074
99,87
2
24,11
7
212
Adjustment to Final Accounts
Non
current
asset
Fixtures
and
fittings
Current
assets
Stock
Debtors
Less
provision
for
doubtful
debts
Prepaym
ents
Cash at
bank
Cash in
hand
Current
liabilitie
s
Creditors
Accruals
£
£
£
120,7
40
(63,020)
57,720
17,750
24,50
0
(735)
23,765
6,555
4,440
5
34
53,044
19,84
0
1,360
(21,200)
31,844
89,564
83,887
24,117
Capital
Add net
profit
108,004
(18,440)
Less
drawings
89,564
Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a
sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£
Sales
Purchases
Carriage
Drawings
82,350
5,144
7,800
£
138,078
Lesson Four
Rent, rates and insurance
Postage and stationery
Advertising
Salaries and wages
Bad debts
Provision for bad debts
Debtors
Creditors
Cash in hand
Cash at bank
Stock at at 1 June 19X5
Equipment
At cost
Accumulated depreciation
Capital
213
6,622
3,001
1,330
26,420
877
130
12,120
6,471
177
1,002
11,927
58,000
______
216,770
19,000
53,091
216,770
The following additional information as at 31 May 19X6 is available:
(a) Rent is accrued by £210.
(b) Rates have been prepaid by £880.
(c) £2,211 of carriage represents carriage inwards on purchases.
(d) Equipment is to be depreciated at 15% per annum using the straight line
method.
(e) The provision for bad debts to be increased by£40.
(f) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a
balance sheet as at that date.
Solution:
214
Adjustment to Final Accounts
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£
£
£
Sales
138,078
Less cost of sales
Opening stock
11,927
Purchases
82,350
Carriage inwards
2,211 84,561
96,488
Less closing stock
(13,551
(82,937
)
Gross profit
55,141
Less expenses
Carriage outwards
2,933
Rent, rates and insurance
5,952
Postage and stationery
3,001
Advertising
1,330
Salaries and wages
26,420
Bad debts
877
Increase in provision for bad
40
debts
Depreciation – equipment
8,700
(49,253
Net profit
5,888
Mr. Yousef
Balance Sheet as at 31 May 19X6.
Non Current assets
Equipment
Current Assets
Stocks
Debtors
Less provision for doubtful
debts
Prepayments
Cash in hand
Cash at bank
Current Liabilities
Creditors
Accruals
Capital
Add: Net Profit
Less Drawings
£
£
£
58,000
(27,700)
30,300
13,551
12,120
(170)
11,950
880
177
1,002
27,560
6,471
210
6,681
20,879
51,179
53,091
5,888
58,979
(7,800)
Lesson Four
215
51,179
216
Adjustment to Final Accounts
Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a
sole trader, as at 31 May 20X9, the end of his most recent financial year.
Herbert Howell
Trial Balance As At 31 May 20x9
Property at cost
Equipment at cost
Provision for depreciation (as at 1
June 20X8)
Property
Equipment
Stock as at 1 June 20X8
Purchases
Sales
Discounts allowed
Discounts received
Wages and salaries
Bad debts
Loan interest
Carriage out
Other operating expenses
Trade debtors
Trade creditors
Provision for bad debts
Cash on hand
Bank overdraft
Drawings
13% loan
Capital, as at 1 June 20X8
Dr
£
90,000
57,500
Cr
£
12,500
32,500
27,400
259,600
405,000
3,370
4,420
52,360
1,720
1,560
5,310
38,800
46,200
33,600
280
151
14,500
28,930
______
612,901
12,000
98,101
612,901
The following additional information as at 31 May 20X9 is available:
(a) Stock as at the close of business was valued at £25,900.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:
Property
1% using the straight-line method
Equipment - 15% using the straight-line method
(c) Wages and salaries are accrued by £140.
(d) Other operating expenses include certain expenses prepaid by £500. Other
expenses included under this heading are accrued by £200.
(e) The provision for bad debts is to be adjusted so that it is 0.5% of trade debtors
as at 31 May 20X9.
(f) Purchases include goods valued at £1,040, which were withdrawn by Mr Howell
for his own personal use.
Required:
Lesson Four
217
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May
20X9 and his balance sheet as at 31 May 20X9.
(20 marks)
Solution:
£
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Discounts received
Decrease in provision for bad
debts
27,400
258,560
285,960
(25,900)
£
405,000
(260,060)
144,940
4,420
____49
149,409
Less expenses
Depreciation: Property
Equipment
Discounts
allowed
Wages and
salaries
Bad debts
Loan interest
Carriage out
Other operating
expenses
NET PROFIT
900
8,625
3,370
52,500
1,720
1,560
5,310
38,500
(112,485)
86,924
Herbert Howell
Balance Sheet as at 31 May 2000
£
£
£
Non current Assets
Property
Equipment
90,000
57,500
147,50
0
(13,400)
(41,125)
54,525
Current Assets
Stock
Debtor
Less provision
Prepayments
Cash in hand
Current liabilities
Bank overdraft
25,900
46,200
(231)
14,500
45,969
500
151
72,520
76,600
16,375
92,975
218
Adjustment to Final Accounts
Creditors
Accruals
33,600
__340
(48,440)
24,080
117,055
98,101
36,924
135,025
(29,975)
105,055
Capital
Add net profit
Less drawings
Non current liabilities
Loan (13%)
Workings:
1) Depreciation for:
Property
Equipment
12,000
117,055
1% X 90,000
15% X 57,500
=
=
900
8,625
2) Provision for bad debts
0.5% X (46,200)
=231
Decrease in provision for bad debts
280 – 231= 49
3) Wages and salaries
Paid
52,360
Accruals
140
52,500
4) Other operating expenses
Paid
8,800
Pre-paid
(500)
8,300
Accruals
200
8,500
5) Purchases:
Drawings:
259,600 – 1,040
28,930 + 1,040
=
=
258,560
29,990
Lesson Four
219
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March
2001
£
Sales
Discount Received
Rent Received
Returns outwards
Creditors
Bank Overdraft
Capital
Purchases
Salaries and Wages
Office expenses
Insurance premiums
Electricity
Stationery
Advertising
Telephone
Business Rates
Discounts allowed
Returns Inwards
Stocks as at 1 April 2000
Warehouse, shop and office
Fixtures and fittings
Debtors
Cash in till
Drawings
378,500.00
2,400.00
7,500.00
7,700.00
18,700.00
30,000.00
287,500.00
261,700.00
45,700.00
8,400.00
3,100.00
1,600.00
6,200.00
8,400.00
2,100.00
7,500.00
600.00
4,100.00
120,600.00
210,000.00
12,800.00
13,000.00
500.00
26,000.00
The following further information was obtained:
•
•
•
•
•
Closing stock was £ 102,500.00
Electricity charges accrued £ 700.00
Advertising expenses accrued £ 500.00
Insurance premiums paid in advance £ 900.00
Business rates prepaid £ 1,500.00
Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March
2001 and balance sheet as at that date.
220
Adjustment to Final Accounts
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December
20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
Debit
£
Capital at 1 January 20X0
Debtors
Cash In Hand
Creditors
Fixtures and fittings at
cost
Discounts allowed
Discounts received
Stock at 1 January 20X0
Sales
Purchases
Motor Vehicles at cost
Lightning and heating
Motor expenses
Rent
General expenses
Balance at bank
Provision for depreciation
Fixtures and fitting
Motor vehicles
Drawings
Credit
£
26,094
42,737
1,411
35,404
42,200
1,304
1,175
18,460
491,620
387,936
45,730
6,184
2,862
8,841
7,413
19,861
_26,568
591,646
2,200
15,292
_______
591,646
The following information as at 31 December is also available:
a) £218 is owing for motor expenses.
b) £680 has been prepaid for rent.
c) Depreciation is to be provided of the year as follows:
Motor vehicles: 20% on cost
Fixtures and fittings: 10% reducing balance method
d) Stock at the close of business was valued at £19,926.
Required
Prepare Donald Brown’s trading and profit and loss account for the year ended 31
December 20X0 and his balance sheet at that date.
Lesson Four
221
QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a
sole trader.
Brenda Bailey
Trial Balance As At 30 June 20x9
Dr
£
Sales
Purchases
Carriage inwards
Carriage outwards
Wages and salaries
Rent and rates
Heat and light
Stock at 1 July 20X8
Drawings
Equipment at cost
Motor vehicles at cost
Provision for
depreciation:
Equipment
Motor vehicles
Debtors
Creditors
Bank
Sundry expenses
Cash
Capital
Cr
£
427,726
302,419
476
829
64,210
12,466
4,757
15,310
21,600
102,000
43,270
22,250
8,920
50,633
41,792
3,295
8,426
477
______
626,873
122,890
626,873
The following information as at 30 June 20X9 is also available.
a)
b)
c)
d)
£350 is owing for heat and light.
£620 has been prepaid for rent and rates.
Depreciation is to be provided for the year as follows:
Equipment - 10% on cost
Motor vehicles - 20% on cost
Stock at the close of business was valued at £16,480
Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended
30June 20X9 and her balance sheet at that date.
222
Adjustment to Final Accounts
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for
December 19X9. The statement showed the following.
MIDWEST BANK
F Mercer: Statement of Account
Date
Particulars
19X8
Dec 1
Balance
Dec 5
417864
Dec 5
Dividend
Dec 5
Bank Giro Credit
Dec 8
417866
Dec 10
417867
Dec 11
Sundry Credit
Dec 14
Standing Order
Dec 20
417865
Dec 20
Bank Giro Credit
Dec 21
417868
Dec 21
416870
Dec 24
Bank charges
Dec 27
Bank Giro Credit
Dec 28
Direct Debit
Dec 29
417873
Dec 29
Bank Giro Credit
Dec 31
417871
Debits
$
Credits
$
243
26
212
174
17
32
307
185
95
161
18
118
88
12
47
25
279
Balance
$
1,862
1,619
1,645
1,857
1,683
1,666
1,851
1,819
1,512
1,630
1,535
1,374
1,356
1,403
1,315
1,303
1,582
1,557
Lesson Four
223
His cashbook for the corresponding period was as follows.
CASH BOOK
19x8
Dec 1
Dec 9
Balance
b/d
J
Shannon
M Lipton
Dec
Dec
Dec
Dec
Dec
G Hurst
M Evans
J Smith
V Owen
K Walters
Dec 4
19
26
27
29
30
$ 19x8
1,862 Dec 1
212 Dec 2
185 Dec 5
118
47
279
98
134
Dec
Dec
Dec
Dec
Dec
Dec
Dec
6
10
14
16
20
21
22
Dec 31
_____
Cheque
No
Electricity
P
Simpson
D
Underhill
A Young
T Unwin
B Oliver
Rent
M Peters
L Philips
W
Hamilton
Balance
c/d
$
243
864
865
307
866
174
867
868
869
870
871
872
873
17
95
71
161
25
37
12
1,793
2,935
2,935
Required
a)
b)
Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Acknowledgement
224
LESSON SIX
OTHER ASPECTS OF FINAL ACCOUNTS
(a)INCOMPLETE RECORDS
An incomplete record situation is whereby, the accounting system falls short of the
double entry. This may be due to:
− Lack of records at all; or
− Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and
maintaining an accounting system (records and procedures).
b) It may not be economical for the business to maintain accounting records
due to the volume or/and nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.
There are 4 main approaches in preparing final accounts where there are
insufficient records.
a) Estimating income from the net assets.
b) Estimating income from the use of ratios.
c) Use of a simple cashbook and bank statement.
d) Use of control accounts.
N/B: approach number c and d are normally used together.
(a) Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a
reasonable complete cash summary, the only method of estimating the profits or
loss for the period, is to prepare statement of affairs showing the net worth of the
business at the beginning and at the end of the period.
The profit/loss is estimated by use of the following formulas:
Profit or loss = Closing
Capital
–
Opening
Capital
+
Drawings
–
Additional
Capital
Or where there are no non current liabilities then this optional formula can be used
Profit or loss = Closing
Additional
Net Asset
-
Opening
Net Asset
+
Drawings
Capital
Lesson Five
225
Example: 6.1
A sole trader’s capital position is as follows:
31 December
Motor vehicle:
Cost
Depreciation
Stock
Debtors
Bank
Cash
Creditors
Net assets
19X2
£
19X3
£
7,500
3,000
4,500
2,960
1,150
925
__263
9,798
2,860
6,938
7,500
4,500
3,000
3,450
2,060
2,125
___54
10,689
3,340
7,349
He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the
year.
Solution:
Net profit =
Closing
Net Asset
Net Asset
- Opening
+ Drawings
Net assets
-
Additional
= 7,349 – 6,938 + 12,500
= £12,911
(b) Use of Ratios
There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information
available on sales or purchases can be used to derive the total Gross Profit for the
period and incase there is sufficient information on expenses, then the Net Profit
can also be derived.
The above ratios are computed as follows:
1) Gross Profit Margin = Gross Profit x 100
Sales (selling price)
E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the
Gross Profit Margin will be:
= 25 x 100
100
226
Further Adjustments to Accounts
= 25%
Lesson Five
227
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (£100,000)
= £25,000
2) Mark up
= Gross Profit x 100
Cost of Sales (cost price per unit)
In the above example, the mark up will be:
= 25 x 100
75
= 33.33%
N/B: 75 = 100 – 25
Cost = selling price – gross profit
3) Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
The formula is:
Average stock
=
Cost of Sales
Average Stocks
expressed as number of times
=
Opening Stock + Closing Stock
2
Example: A firm has the following data for the period:
Opening stock
Purchases
Closing stock
£ 20,000
£300,000
£ 30,000
Required: The Stock Turnover Ratio.
Average Stock = 30,000 + 20,000
2
= 25,000
Cost of sales = (20,000 + 300,000) – 30,000
= 290,000
Stock Turnover
= 300,000
25,000
228
Further Adjustments to Accounts
= 11.6 times
Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001
6,000
Purchases
54,000
Jones’s mark-up is 50% on cost of goods sold. His average stock during the year
was £12,000. Draw up a trading and profit and loss account for the year ended 30
June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed
if he is to maintain a net profit on sales of 10%.
Solution
a) Average Stock = Opening Stock + closing stock
2
12,000
= 6,000 + C
2
C
= 24,000 – 6,000
= 18,000
Gross profit = 50%
Cost of Sales = 42,000
Gross Profit = 50%
42,000
Gross Profit = 21,000.
MEMORANDUM TRADING ACCOUNT
Sales
Less cost of sales
Gross profit
Expenses
Net profit
£
63,000
(42,000)
21,000
(14,700)
6,300
Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600.
Trade discount (i.e. margin allowed) is 33¼% off all selling prices. Expenses are 66
¾% of gross profit.
You are to calculate:
(a) Cost of goods sold.
Lesson Five
(b)
(c)
(d)
(e)
Gross profit margin.
Turnover.
Total expenses.
Net profit.
229
230
Further Adjustments to Accounts
Solution:
Profit schedule
Turnover
Cost of goods sold
Gross profit
Expenses
Net profit
£
132,300
88,200
44,100
(29,400)
14,700
Turnover = Cost of Sales
Average stock
Margin = Gross Profit
Sales
7
= Cost of Sales
12,600
Cost of Sales = 88,200
(c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a
simple cashbook for both cash in hand and cash at bank can be prepared in
confirmation of deposits and payments made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income
received to the relevant income accounts, expenses to relevant expense accounts
and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from
debtors can be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate
any cash sales or credit sales and cash purchases or credit purchases.
Steps in Preparing the Final Accounts
1)
Prepare a statement of affairs at the beginning of the period (a list of all assets
and liabilities) to determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e.
the cashbook (for both cash in hand and bank), sales ledger control account
and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
5) Prepare the final accounts.
Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank
payments and receipts during the year to 31 December 19X8 were as follows:
Lesson Five
231
Reciepts
Balance 1 Jan
19X8
Cheques for sales
Cash banked
Balance 31 Dec
19X8
Payments
£
£
572 Purchases
10,007
13,17 Expenses
9
14,00 Drawings
5
3,751 Delivery van
31,50
7
2,950
11,250
7,300
31,507
From a cash notebook you ascertain:
£
62
Cash in hand 1 January
19X8
Cash takings
Purchases paid in cash
Expenses paid in cash
Cash in hand 31
December 19X8
Drawings by proprietor in
cash
16,300
1,850
375
65
Unknown
You discover that assets and liabilities were as follows:
1 Jan 19X8
Debtors
Trade creditors
Stock on hand
£
1,850
1,250
2,650
31 Dec
19X8
£
2,070
1,420
2,990
Depreciation on the van is to be provided at the rate of 20% per annum.
Statement of Affairs as at 1 January 19x8
£
CURRENT ASSETS
Cash at bank
Cash in hand
Debtors
Stock
572
62
1,850
2,650
5,134
CURRENT LIABILITIES
Creditors
Net Assets
(1,250)
3,884
232
Further Adjustments to Accounts
Capital
3,884
Balance b/d
Sales
Sales Ledger Control Account
£
£
1,850
Cash
16,300
Takings
29,69
Bank
13,179
9
______
Bal c/d
2,070
31,54
31,549
9
Lesson Five
233
Purchases Ledger Control Account
£
£
Cash purchases
1,850 Bal b/d
1,250
Bank
10,00 Purchases
12,027
7
13,27
13,277
7
Cash in Hand Account
£
Balance b/d
62 Creditors
Debtors/sales
16,30 Expenses
0
Bank
Bal c/d
_____ Drawings
16,36
2
•
•
£
1,850
375
14,005
65
___67
16,362
The capital invested at any point of time in a business by the owner is
represented by the difference between the assets and liabilities at that time.
The difference between the capital at the end and the capital at the
beginning of the trading period represents the trading profit made during that
period, unless there were withdrawals or investments of additional capital.
Hobbs
Trading and Profit and Loss Account for the year ending 31 December
19X8
£
£
Sales
29,699
Less cost of goods sold:
Opening stock
2,650
Add purchases
12,027
14,677
Less closing stock
(2,990)
11,687
GROSS PROFIT
18,012
Less Expenses:
Expenses (375 + 2,950)
3,325
Depreciation
1,460
(4,785)
NET PROFIT
13,227
234
Further Adjustments to Accounts
Fixed Assets
Delivery van
Hobbs
Balance Sheet as at 31 December 19X8
£
£
£
Cost Depreciation
NBV
7,300
1,460
5,840
Current Assets
Stock
Debtors
Cash
Less current liabilities
Creditors
Bank overdraft
2,990
2,070
___65
5,125
1,420
3,751
5,171
5,794
Financed by:
Capital
Add net profit
Less drawings (11,250 + 67)
3,884
13,2
27
17,111
11,317
5,794
Example 6.5 (Exam Type Questions May 2001 Question 3)
Kimeu commenced his business of making furniture on 1 April 2000. Due to his
limited accounting knowledge he has not maintained proper books of account. You
have been engaged to examine his records and prepare appropriate accounts there
from. You perform an examination of the records and from interviews with Kimeu
you ascertain the following information.
1.
2.
3.
4.
5.
6.
At the commencement of business on 1 April 2000, he deposited Sh 1,200,000
into business bank account. On the same day he brought into the firm his
pickup and estimated that it was worth Sh 660,000 and then that from 1 April
2000 it will have useful life of three years.
To increase his working capital he borrowed Sh 400,000 at 15% interest per
annum on 1 July 2000 from his sister but no interest has yet been paid.
On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per
annum.
He had drawn Sh 18,000 per week from the business account for private use
during the year.
He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of
stock was retained in the workshop on 31 March 2001. He also spent Sh
960,000 on the purchase of some equipment at the commencement of the
business which he estimates will last him five years.
Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the
remaining two months were estimated to be Sh 48,000. Motor vehicle expenses
were Sh 182,000 while general expenses amounted to Sh 270,000 for the year.
Lesson Five
7.
8.
9.
235
Insurance premium for the year to 30 June 2001 was Sh 160,000. All these
expenses have been paid by cheque.
Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had
been received by 31 March 2001. Debt totaling to Sh 17,000 were abandoned
during the year as bad. Other customers for jobs too small to invoice have paid
Sh 726,000 in cash for work done of which Sh 560,000 was banked. Kimeu used
Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya
Charity Sweepstake tickets worth 24,000 and Sally used the rest on general
expenses except for Sh 30,100 which was left in the office on 31 March 2001.
You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.
Required:
(a) Profit and loss account for the year ended 31 March 2001.
marks)
(b) Balance sheet as at 31 March 2001.
marks)
(10
(10
(Total: 20 marks)
Solution:
Capital
Loan
Debtors
Cash
Bal c/d
Cash
Sh
1,200,00
0
400,000
5,080,00
0
560,000
book – Bank
Salary
Drawings
Timber
Equipment
Electricity
Motor vehicle
expenses
General expenses
Insurance
________ Bal c/d
7,240,00
0
Capital
Sh
Bank
1,860,00 Pick up
0
1,860,00
0
Debtors
Sh
Sh
120,000
936,000
1,960,000
960,000
240,000
182,000
270,000
160,000
1,812,000
7,240,000
Sh
1,200,000
660,000
1,860,000
Sh
236
Further Adjustments to Accounts
Sales
Sales
6,178,00 Bank
0
Bad debts
________ Bal c/d
6,178,00
0
Cash book - cash in hand
Sh
726,000 Bank
Drawings
Drawings
General Expenses
______ Bal c/d
726,000
5,080,000
17,000
1,081,000
6,178,000
Sh
5,080,000
17,000
1,081,000
36,900
30,100
726,000
Lesson Five
237
Loan interest
=
400,000 x 15% x 9/12
Rates
=
36,000 x 9/12
=
Accruals
=
Electricity bills
Rates
=
Agency fees =
Loan interest
=
48,000
27,000
55,000
=
45,000
175,000
27,000
Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh
Sh
Sales (cash + credit)
6,904,000
Less expenses
Timber used (1,960,000 –
1,802,000
158,000)
Depreciation – motor vehicle
220,000
- Equipment
192,000
Loan interest
45,000
Salary
720,000
Electricity bills
288,000
Motor vehicle expenses
182,000
General expenses
306,900
Insurance premium
120,000
Rates
27,000
Bad debts
17,000
Accountancy fees
55,000
(3,974,900)
Net profit
2,929,100
238
Further Adjustments to Accounts
Non current Asset
Equipment
Motor vehicle
Kimeu
Balance Sheet as at 31 March 2001
Sh
Sh
960,000
192,000
660,000
220,000
1,620,000
412,000
Current Assets
Stock
Debtors
Insurance – prepayments
Cash at bank
Cash in hand
Sh
768,000
440,000
1,208,000
158,000
108,000
40,000
181,200
30,000
3,121,100
Less current liabilities
Accruals
175,000
Capital
Add net profit
2,946,100
4,154,100
1,860,000
2,929,100
4,789,100
1,035,000
3,754,100
Less drawings
Non current liability
Loan 15%
400,000
4,154,100
Example 6.6 (Exam Type) June 1995 Question 2
Abi, a proprietor of a grocery and general store has not previously engaged an
accountant. He informs you that this year his bankers have insisted on a proper set
of accounts. Abi supplies you with his trading results for the year ended 30 June
1994 which are as follows:
Payments for goods
Payments for expenses
Profits
Sh
4,747,50 Takings
0
565,000
152,500
5,465,00
0
Sh
5,465,000
________
5,465,000
Abi instructs you to examine his records and prepare accounts. From your
examination of the records and interview with your client, you ascertain the
following information:
1.
The takings are kept in a drawer under the counter; at the end of each day the
cash is counted and recorded on a scrap of paper; at irregular intervals Mrs. Abi
transcribes the figures into a notebook; a batch of slips of paper was
inadvertently destroyed before the figures had been written into the notebook,
Lesson Five
2.
239
but Mr. And Mrs. Abi carefully estimated their takings for that period, and the
estimated figure is included in the total of Sh. 5,465,000.
Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500
per week with cash taken from the drawer. His winnings totaled Sh. 29,500.
3.
The following balances are ascertained as correct:
30 June
1994
1993
Sh
Sh
Cash in hand
43,500
22,500
Balance at bank
109,500
78,000
Sales debtors
245,500
229,000
Creditors for purchases of
121,500
139,500
stock
Stock at cost
950,000
975,000
4.
Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings
included Sh 12,500 recovered in respect of an old debt abandoned in the
previous year.
Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52
weeks in a year; the rent is included in expenses of Sh 565,000. The living
accommodation comprises one-third of the building.
The total expenses also include:
5.
6.
•
•
•
7.
8.
9.
10.
11.
12.
13.
Sh. 17,500 running expenses of Abi’s private car;
Sh. 30,000 for exterior decoration of the whole premises;
Sh. 80,000 for alterations to the premises to enlarge the storage
accommodation.
Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal
expenses. This excludes the amount indicated in note 8.
Mr. Abi draws Sh. 750 per week for cigarettes and beer.
During the year, Mr. Abi bought a secondhand car (not for use in the business)
from a friend; the price agreed was Sh. 175,000, but as the friend owed Mr. Abi
Sh. 33,500 for goods supplied from the business, the difference was settled by
cheque.
An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored
and the friend is repaying the Sh. 50,000 by installments. He had paid Sh.
20,000 by 30 June 1994.
Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh.
55,000 for income tax.
You are to provide Sh. 21,000 for accountancy fees.
N.B. All receipts and payments of Mr. Abi are made through his business
account.
Required:
240
Further Adjustments to Accounts
(a) Mr. Abi’s balance sheet for the business at 30 June 1993.
(4 marks)
(b) Mr. Abi’s profit and loss account for the year ended 30 June 1994.
(12 marks)
(c) Mr. Abi’s balance sheet for the business at 30 June 1994.
(6 marks)
(Total: 20 marks)
Lesson Five
241
Solution:
Abi
Balance Sheet as at 30 June 1993
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities
Creditors
Sh
97,500
229,00
0
78,000
22,500
1,304,5
00
Sh
(139,50
0)
1,165,0
00
1,165,0
00
Capital
Balance b/d
Sales ledger control
a/c
Insurance (drawings)
Drawings
Drawings
Debtors
1,165,0
00
Cash at Bank
Sh
78,000 Drawings – personal expense
for wife
12,500 Drawings – cigarettes and
beer
320,500 Expenses
50,000 Drawings – second hand car
20,000 Cash in hand
5,591,00 Drawings – friend
0
Creditors
Dishonored cheque –
drawings
Drawings
Income tax
________ Balance c/d
6,072,00
0
Cash in Hand
Balance b/d
Drawings – betting
Bank
Sh
22,500
12,500
6,500
Drawings
Sh
15,000
Balance c/d
43,500
Sh
260,000
39,000
565,000
141,500
6,500
50,000
4,747,500
50,000
48,000
55,000
109,500
6,072,000
242
Further Adjustments to Accounts
58,500
Balance b/d
Bad debts recovered
Credit sales
Bank
Balance c/d
Rent
Motor running
expenses
Decoration
Alterations
Other expenses
58,500
Sales Ledger Control A/c
Sh
Sh
229,000
Bad debts
178,000
12,500
Bank
12,500
5,819,00 Drawings
33,500
0
Bank
5,591,000
________
Balance c/d
245,500
6,060,50
6,060,500
0
Purchases Ledger Control A/c
Sh
Sh
4,747,50 Balance c/d
139,500
0
121,500 Credit
4,729,500
purchases
4,869,00
4,869,000
0
Total
78,000
17,500
Expenses
Business
52,000
-
30,000
80,000
359,500
565,000
20,000
80,000
359,500
532,500
Private
26,000
17,500
10,000
_____
53,500
Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£
£
Sales
5,819,000
Less cost of sales
Opening stock
975,000
Purchases
4,729,500
57,040,500
Less closing stock
950,000
4,754,500
Gross profit
1,064,500
Less expenses
Rent
52,000
Decoration
20,000
Alterations
80,000
Other expenses
359,500
Bad debts
165,500
Lesson Five
243
Accountancy fees
Net profit
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current Liabilities
Creditors
Accruals
Capital
Add net profit
Less drawings
21,000
(698,000)
366,500
Abi
Balance Sheet as at 30 June 1994
Cost
Depreciatio Book Value
n
£
£
£
950,000
245,500
109,500
43,500
1,348,500
121,500
21,000
(142,500)
1,206,000
1,165,000
366,500
1,531,500
(325,500)
1,206,000
NON PROFIT MAKING ORGANIZATIONS (Club, Associations and Others)
These 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,
(e.g. football clubs, sports clubs), welfare associations and any other societies
(charitable institutions).
Because these organizations are not trading, the types of accounts to prepare are
different from the ones of trading organizations.
Example:
1.
2.
3.
Instead of a cashbook, the clubs will maintain a receipts and payments which
has similar entries to those of a cashbook.
Instead of profit and loss account, we have an income and expenditure account.
Because the club is not formed by any one owner (has no owner), it is funded by
members’ contributions, donations, income from investments to get an
accumulated fund instead of capital.
From the income and expenditure account, if the incomes are more than the
expenditures for the period, then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of
the clubs activities and incase a firm has a trading activity, then in addition to the
income and expenditure account and the balance sheet, prepare a Bar Trading
Account.
244
Further Adjustments to Accounts
Format of the Final Accounts
Name
Income and Expenditure Account for the year ended 31 December ……
Incomes
£
£
Profit from trading activities
XX
Subscriptions
XX
Income from investments
XX
Donations
XX
Income from other activities
[dinner dance, raffles,
festivals]
XX
XX
Expenditure
Depreciation
XX
Salaries and wages
XX
Expenses on other activities
[prizes]
XX
Loss from trading activities
XX
All other expenses
XX
SURPLUS/( DEFICIT )
(XX)
XX/(XX)
Lesson Five
BALANCE SHEET
Non current Assets
Buildings
Fixtures, fittings and
equipment
Motor vehicle
245
NAME
AS AT 31 DECEMBER ……
£
£
£
XX
(XX)
XX
XX
(XX)
XX
XX
XX
Investments
Current Assets
Stocks
Debtors
Prepayments and accrued
income
Cash at bank/hand (receipts +
payments)
(XX)
(XX)
XX
XX
XX
XX
XX
XX
XX
XX
Current liabilities
Creditors
Accrued expenses and prepaid
income
Bank overdraft
XX
XX
XX
(XX)
Accumulated fund balance b/f
Add/less surplus / deficit
Other funds
Life membership fund
Building fund
Education fund
XX
XX
XX
XX
XX
XX
XX/(XX)
XX
XX
Notes To The Above Format:
1. 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 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.
2. 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.
246
•
•
Further Adjustments to Accounts
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.
3. 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:
i. 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.
ii. 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.
iii. 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 6.7
The following is the receipts and payments account of the Friendship Club for the
year ended 31 December 19X1:
£
£
Balance at bank
31 December
19X0
Entrance fees
Subscriptions:
19X0
19X1
19X2
Bar Sales
Sale of
investments
102 Bar purchases
42 Wages
25 Rent
305 Heating and
lighting
35 Postage and
stationery
5,227 Insurance
750 General expenses
Payments on
4,434
416
186
128
33
18
46
Lesson Five
247
account of new
furniture
Balance at bank,
_____ 31 December
19X1
6,486
450
775
6,486
The following information is also supplied:
(1)
31 December
19X0
Bar stock, at cost
Creditors for bar purchases
Rent due
Heating and lighting
expenses due
Subscriptions due
Insurance paid in advance
31 December
19X1
272
306
18
16
25
5
315
358
36
19
40
7
2) On 31 December 19X0, the club held investments which cost £500. During the
year ended 31 December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club
purchased additional furniture at a cost of £520. Depreciation of all furniture
is to be provided for at the rate of 10% per annum.
Required:
(a) Prepare an income and expenditure account for the year ended 31 December
19X1.
(b) Prepare a balance sheet at that date.
Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1
Assets
£
Stock
Subscriptions due
Insurance prepaid
Investments
Furniture
Balance at bank
Liabilities
Creditors
£
272
25
5
500
300
102
1,204
306
248
Further Adjustments to Accounts
Rent due
Heating and lighting expenses
Accumulated fund
Receipts and
payments
Balance c/d
Balance b/d
Income &
expenditure
Balance c/d
Creditors
£
4,434 Balance b/f
358 Purchases
4,792
Subscriptions
£
25 Receipts &
payments
345
35 Balance c/d
405
18
16
(340)
864
£
306
4,486
4,792
£
365
40
405
Lesson Five
249
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
£
Sales
£
5,227
Less: Cost of Sales
Opening stock
Purchases
272
4,486
4,758
Less closing stock
Gross profit to income &
expenditure a/c
(315)
(4,443)
784
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£
£
Profit from bar trading
784
Entrance fees
42
Subscriptions
345
Profit from sale of investments
250
1,421
Expenditure
Wages
416
Rent
204
Heating and lighting
131
Postage and stationery
33
Insurance
16
General expenses
46
Depreciation – furniture
56
(902)
Surplus
519
250
Further Adjustments to Accounts
Friendship Club
Balance Sheet as at 31 December 19X1
Non current Assets
£
£
Furniture
820
(56)
Current Assets
Stock
Subscriptions due
Prepaid expense
Cash at bank
Current liabilities
Creditors
Prepaid subscriptions
Accrued expenses
Creditors fixtures
Accumulated fund b/f
Add surplus
£
764
315
40
7
775
1,137
398
35
55
70
(518)
619
1,383
864
519
1,383
Example 6.8 (Exam Type) November 2001
(a) State and briefly explain any three distinguishing features between (i) a receipts
and payments account and (ii) an income and expenditure account.
(6 marks)
(b) The accountant of Mamba Sports Club has extracted the following information
from the books of account for the year ended 31 March 2001.
Lesson Five
251
Receipts
Payments
Sh
Balance brought
forward
288,000 Salaries and wages
Subscriptions
Year: 1999/2000
2000/2001
2001/2002
Sh
New equipment
254,000
565,000
249,000 Repairs and
maintenance
124,000
2,050,000 Office expenses
415,000
194,000 Printing and
stationery
168,000
Dinner dance
723,000 Purchase of
beverages
497,000
Beverage sales
657,000 Dinner dance
expenses
315,000
Investments income
400,000 Refund of
subscriptions
45,000
Sports prizes
25,000
Transport
Investments
_______ Balance carried
forward
248,000
1,500,000
_405,000
4,561,000
4,561,000
31 March
2000
31 March
2001
Furniture and fittings
(net)
240,000
-
Equipment (net)
690,000
-
Balances as at
252
Further Adjustments to Accounts
Investment at cost
3,500,000
-
300,000
375,000
68,000
72,000
162,000
184,000
85,000
-
Subscriptions in arrears
Salaries accrued
Stock of beverages
Subscriptions in
advance
Additional information:
1.
2.
3.
Subscriptions in arrears are written-off after twelve months.
Depreciation is provided for on reducing balance method at 10% and 20% per
annum on furniture and fittings and equipment respectively.
Investments, which had cost Sh. 500,000, were sold on 30 March 2001 for Sh.
625,000. No entries have been made in the books in this respect.
Required:
(a) Income and expenditure account for the year ended 31 March 2001.
(8 marks)
(b) Balance sheet as at 31 March 2001.
(6
marks)
(Total: 20 marks)
Solution:
Mamba Sports Club
Statement of Affairs
Assets
Sh
Sh
Furniture and fittings
240,000
Equipment
690,000
Receipts and payments
288,000
Investment at cost
3,500,000
Subscriptions in arrears
300,000
Stock of beverages
162,000
5,180,000
Liabilities
Subscriptions accrued
85,000
Lesson Five
Accrued salaries
253
68,000
(153,000)
5,027,000
254
Further Adjustments to Accounts
Mamba Sports Club
Trading Account for the year ended 31.3.2001
Sh
Sales
Less cost of sales
Opening stock
162,000
Purchases
497,000
659,000
Less closing stock
(184,000)
Profit to income and
expenditure
2001
Balance b/d
Receipts and
payments
Income &
expenditure
Balance c/f
Sh
300,000
45,000
2,465,000
194,000
3,004,000
Subscriptions
2001
Balance b/f
Receipt and
payment
Income &
expenditure
Balance c/f
Sh
657,000
(475,000)
182,000
£
85,000
2,493,00
0
51,000
375,000
3,004,00
0
Mamba Sports Club
Income and Expenditure Account for the year ended 31 March 2001
Incomes
Profit from trading account
Subscriptions
Dinner dance
Investment income
Profit on sale of investments
Sh
182,000
2,465,000
723,000
400,000
125,000
3,895,000
Lesson Five
255
Example 6.9 (Exam Type) DECEMBER 2000 QUESTION 3
The following trial balance was extracted from the books of Literary and
Philosophical Society as at 30 September 2000:
Sh
Sh
Balance at bank: current account
724,800
Accumulated fund 1 October 1999
5,771,200
Land and buildings, at cost
3,700,000
Debtors for subscription
62,000
Furniture and fittings
1,874,000
Provision for depreciation of furniture
284,000
& fittings
Subscriptions
1,450,800
Lecturer’s fees
920,000
Lecturer’s travel and accommodation
358,000
expenses
Donations
108,000
Camera and projector repairs
17,000
Projectors, cameras and audio
190,400
equipment
Depreciation of equipment
54,400
Rates and water
277,000
Lighting and heating
367,200
Rental of rooms
495,000
Wages – Caretaker
880,000
- Restaurant
1,600,000
- Bar staff
800,000
Purchase of food
1,565,800
Stock – bar 1 October 1999
473,600
Bar receipts
4,032,000
Bar purchases
2,842,000
Restaurant receipts
3,642,000
Loan
1,600,000
Deposit account – bank
1,000,000
Interest payable and receivable
36,000
Creditors for bar and food
________
178,400
17,651,800
17,651,800
Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be
collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10%
has been earned on the deposit account. No changes have taken place all year
in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the
close of the year although the wine had been included in the bar stock
valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
256
Further Adjustments to Accounts
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000
(6 marks)
(b) An income and expenditure account for the year ended 30 September 2000
(8 marks)
(c) A balance sheet as at 30 September 2000
(6
marks)
(Total: 20 marks)
Lesson Five
257
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September
2000
Sh
Sales
Less cost of sales
Opening stock
Add purchases
Less closing stock
Profit to the income and
expenditure
Sh
7,674,000
473,600
4,450,800
4,924,400
(642,800)
(4,281,600)
3,392,400
Literary and Philosophical Society
Income and Expenditure Account for the year ended 30 September 2000
Income
Profit on trading account
Interest on bank deposit account
Subscriptions
Donations
Rental of rooms
Expenditure
Lecturer’s fees
Depreciation on furniture and
fitting
Equipment
Lecturer’s travel and
accommodation exp.
Camera repairs
Rates and water
Lighting and heating
Caretakers wages
Interest on loan
Provision for subscription
Surplus
Sh
Sh
992,400
100,000
1,450,000
108,000
495,000
3,146,200
920,000
194,000
19,000
358,000
17,000
277,000
867,200
880,000
64,000
43,600
(3,139,800)
6,400
258
Further Adjustments to Accounts
Literary and Philosophical Society
Balance Sheet as at 30 September 2000
Non current Assets
Land and buildings
Fixtures and fittings
Equipment
Current assets
Stock
Debtors of subscription
Balance at bank – deposit a/c
- Current a/c
Current liabilities
Creditors
Accumulated fund b/f
Add surplus
Non current liabilities
4% loan
Sh
3,700,000
1,874,000
190,400
5,764,400
Sh
(478,000)
(73,400)
551,400
Sh
3,700,000
1,396,000
117,000
5,213,000
642,800
18,400
1,000,000
724,800
2,386,000
(221,400)
2,164,600
7,377,600
5,771,200
___6,400
5,777,600
1,600,000
7,377,600
(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in
operational costs. (i.e. it is cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is
reported in the final accounts.
Therefore, in addition to a trading, profit and loss account, a new account called
manufacturing account is shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in
producing the goods. These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)
Direct Costs/Prime Costs
This is a cost that can be traced directly to a unit that has been produced. This
include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but
cannot be traced directly to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production
Lesson Five
259
The manufacturing account will show the factory cost of goods produced that will be
shown in the trading account in place of purchases.
260
Further Adjustments to Accounts
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31
December
£
£
Raw Materials
Opening stock of raw materials
XX
Purchases of raw materials
XX
Add carriage inwards
XX
XX
Less returns outwards
(XX)
XX
Cost of raw materials available for use
XX
Less closing stock of raw materials
(XX)
Raw materials consumed
XX
Direct labour (factory wages)
XX
Direct expenses
XX
Prime cost
XX
Factory overheads
Salary to factory manager
XX
Depreciation on – Plant and machinery
XX
- Factory buildings
XX
Other expenses – Factory power
XX
Lighting and heating
XX
Water
XX
Cleaners wages
XX
XX
Total cost of production
XX
Add: opening Work In Progress
XX
Less: closing Work In Progress
(XX)
XX
Factory cost of production (cost of finished
XX
Note 1
goods)
FACTORY PROFIT
XX
Finished goods at a transfer price
XX
Note 2
Sales
Less returns inwards
Less cost of sales
Opening stock – finished goods
Factory cost of production/transfer price
Less closing stock of finished goods
Gross profit
Add factory profit
Other incomes – discount received
- Profit on disposal
Less expenses
Salaries and wages – administration & non
production
XX
(XX)
XX
XX
XX
XX
(XX)
XX
(XX)
XX
XX
XX
XX
XX
Lesson Five
261
Rent for administration building
Depreciation - Delivery vans
- Fixtures and distribution
Other selling and distribution costs
Net profit/(net loss)
XX
XX
XX
XX
(XX)
XX/(XX)
For the balance sheet, the format is the same for all the assets and liabilities except
for the current assets section whereby the stock at the end of the period should be
shown for each type of stock as per this format:
Current Assets
Stock: raw materials
Work in progress
Finished goods
£
XX
XX
XX
£
XX
Note 1: This represents the total costs of all the units produced during the period
and therefore will be taken to the trading account as the goods are transferred to
the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher
than the cost of production, then this generates a factory profit. The goods will be
shown in the trading account at the transfer price and the factory profit is added to
the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and
includes managers salaries (not factory managers), legal and accounting fees,
depreciation of furniture and fixtures and equipment not used in production, finance
cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.
•
•
•
•
•
Salaries and commission to the sales manager and staff
Carriage outwards (i.e. to deliver goods to the customers
Depreciation on motor vehicles (used for the delivery purpose)
Advertising
Bad debts
262
Further Adjustments to Accounts
Example 6.10
B spikes
Trial Balance as on 31 December 2002
Stock of raw materials 1.1.2002
Stock of finished goods 1.1.2002
Work in progress 1.1.2002
Wages(direct £180,000: factory
indirect£145,000)
Royalties
Carriage inwards (on raw materials)
Purchases of raw materials
Productive machinery (cost
£280,000)
Accounting machinery (cost £20,000)
General factory expenses
Lighting
Factory power
Administrative salaries
Sales representatives’ salaries
Commission on sales
Rent
Insurance
General administration expenses
Bank charges
Discounts allowed
Carriage outwards
Sales
Debtors and creditors
Bank
Cash
Drawings
Capital as at 1.1.2002
Dr
21,000
38,900
13,500
325,000
Cr
7,000
3,500
370,000
230,000
12,000
31,000
7,500
13,700
44,000
30,000
11,500
12,000
4,200
13,400
2,300
4,800
5,900
142,300
56,800
1,500
20,000
______
1,421,800
1000,000
125,000
29,680
1,421,800
Notes at 31.12.2002
1.
2.
3.
Stock of raw materials £24,000, stock of finished goods £40,000, work in
progress £15,000.
Lighting, and rent and insurance are to be apportioned: factory 5/6ths,
administration 1/6th.
Depreciation on productive and accounting machinery at 10 per cent per annum
on cost.
Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002.
Lesson Five
263
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31
December 2002
Raw Materials
£
£
Opening Stock of raw materials
21,000
Purchases
370,000
Carriage inwards on raw materials
3,500
373,500
394,500
Less: closing stock of raw materials
(24,000)
Raw materials consumed
370,500
Direct wages
180,000
PRIME COST
550,500
Factory Overheads
Wages
145,000
Royalties
7,000
Depreciation: productive machinery
28,000
General factory expenses
31,000
Lighting( 5/6 x 7,500)
6,250
Factory power
13,700
Rent(5/6 x 12,000)
10,000
Insurance( 5/6 x 4,200 )
3,500
24,4,450
Total cost of production
794,950
Add: opening work in progress
13,500
808,450
Less: closing work in progress
(15,000)
Factory cost production per finished
793,450
goods
Sales
1,000,000
Less cost of sales
Opening stock of finished goods
38,900
Factory cost of production
793,450
832,350
Less closing stock of finished goods
(40,000)
792,350
Gross profit
207,650
Expenses
Accounting machinery – depreciation
2,000
Lighting (1/6 x 7,500)
1,250
Administrative salaries
44,000
Sales representatives salaries
30,000
Commission on sales
11,500
Rent ( 1/6 x 12,000)
2,000
Insurance (1/6 x 4200)
700
General administrative expenses
13,400
Bank charges
2,300
Discounts allowed
4,800
Carriage outwards
5,900
(117,850)
Net profit
89,800
264
Further Adjustments to Accounts
B Spikes
Balance Sheet as at 31 December 2002
COST DEPRECIATION
Non current Assets
Productive machinery
Accounting machinery
Current Assets
Stock: raw materials
Finished goods
Work in progress
Debtors
Cash at bank
Cash in hand
Current liabilities
Creditors
Capital
Add net profit
Less drawings
£
280,000
20,000
300,000
24,000
40,000
15,000
£
(78,000)
(10,000)
88,000
NET BOOK
VALUE
£
202,000
10,000
212,000
79,000
142,300
56,800
1,500
279,600
(125,000)
154,600
366,600
296,800
89,800
386,600
(20,000)
366,600
Lesson Five
265
Example 6.11 (Exam Type – June 1986 Question Two)
Bibi Maridadi owns and manages a small manufacturing business. The following
balances have been extracted from her books of account at 31 January 1986:
Dr
Sh
Capital at 1 February 1985
Accounts payable
Bank and cash balance
Accounts receivable
Drawings
Administration expenses
Advertising expenses
Factory direct wages
Factory indirect wages
Factory power
Furniture and fittings (all offices)
Heat and light
Plant and equipment
Motor vehicle (used by salesmen)
Plant hire
Provision for bad debts
Provision for depreciation 1 February
1985:
− Furniture and fittings
− Plant and equipment
− Motor vehicle
Raw material purchases
Rent rates
Sales
Selling and distribution expenses
Inventories at cost, 1 February 1985:
− Raw materials
− Work in progress
− Finished goods
Cr
Sh
171,120
86,000
5,400
92,000
60,000
150,360
12,000
60,000
24,000
36,000
18,400
16,000
276,800
144,000
4,000
3,200
9,200
138,400
24,000
228,000
20,000
829,440
66,400
8,000
16,000
24,000
1,261,360
_______
1,261,360
The following additional information is provided:
(i) Accruals at 31 January 1986 were:
Factory power
Sh.1,600
Rent and rates
Sh. 4,000
There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:
Raw materials
Work in progress
Finished goods
-
Sh. 15,200
Sh. 30,400
Sh. 45,600
266
Further Adjustments to Accounts
(iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture
and fittings at the rates of 20%, 25% and 10% per annum respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between
the factory and office in the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable
at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit
and loss account for the year ended 31 January 1986 and a balance sheet as at that
date. (22 marks)
Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31
January 1986
Direct materials
Sh
Sh
Opening stock of raw materials
8,000
Add: purchases of raw materials
228,000
236,000
Less: closing stock of raw materials
(15,200)
Raw materials consumed
220,800
Factory direct wages
60,000
PRIME COST
280,800
Factory overheads
Factory indirect wages
24,000
Factory power
37,600
Plant hire
4,000
Heat and light
14,400
Rent and rates
14,400
Depreciation on plant
55,360
149,760
430,560
Add opening work in progress
16,000
446,560
Less closing work in progress
(30,400)
Factory cost of production
416,160
Sales
829,440
Less cost of sales
Opening stock of finished goods
24,000
Add factory cost of production
416,160
440,160
Less closing stock of finished goods
(45,600)
394,560
Gross profit
434,880
Less expenses
Increase in provision for doubtful
1,400
debts
Rent and rates
9,600
Heat and light
1,600
Depreciation: motor vehicle
36,000
Lesson Five
267
Furniture and fittings
Selling and distribution expenses
Administration expenses
Advertising expenses
Net profit
1,840
65,600
150,360
12,000
278,400
156,480
Bibi Maridadi
Balance Sheet as at 31 January 1986
COST DEPRECIATION
Non current Assets
Plant and equipment
Furniture and fittings
Motor vehicle
Current Assets
Stock: Raw materials
Work in progress
Finished goods
Debtors
Less: provision for doubtful
debts
Prepayments
Cash in hand and bank
Current liabilities
Creditors
Accruals
£
276,800
18,400
144,000
439,200
£
(193,760)
(11,040)
(60,000)
(264,800)
15,200
30,400
45,600
92,000
(4,600)
91,200
NET BOOK
VALUE
£
83,040
7,360
84,000
174,400
87,400
800
5,400
184,800
86,000
5,600
Capital
Add net profit
Less drawings
(91,600)
93,200
267,600
171,120
156,480
327,600
(60,000)
267,600
UNREALISED PROFITS ON CLOSING STOCK
In most cases where business transfers finished goods at a profit to the selling
department and the goods are reflected in the balance sheet at the transfer price,
then the closing stock includes a profit that has not been earned or realised. If the
mark up profit (the profit based on cost of production is always uniform, then any
changes in the value of closing stock will result in a reduction or an increase in the
unrealised profits.
If there is an increase on unrealised profit on the closing stock, then this increase
will be reduced from the gross profit from our profit and loss account and if there is
a reduction in unrealised profits, then this reduction will be added to the gross profit
in our profit and loss account.
Any unrealised profit of closing stock should be deducted from the closing stock in
the balance sheet.
268
Further Adjustments to Accounts
The slight change in the format of the Profit and Loss Account and Balance Sheet
will be as follows
Lesson Five
269
Increase in unrealised profit in closing stock (UPCS)
Profit and loss (extract) Account for year ended………..
£
Gross profit
Add: factory profit
Add: other expenses
Less expenses
Other expenses
Increase in unrealised profit on
closing stock
Net profit
X
X
£
X
X
X
X
(X)
X
Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
£
Gross profit
Add: factory profit
Add: other incomes
Add: decrease in UPCS
Less expenses
Other expenses
Net profit
£
X
X
X
X
X
(X)
X
Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of
production. The opening stock of finished goods for the period was valued at Sh.
100,000. (The marked up cost) The closing stock at the end of the financial period
was Sh.160,000.
Opening Stock:
100,000 (marked up)
=
120%
(16,667)
=
(20%)
83,333
=
100%
Closing Stock
160,000 (marked up)
=
120%
(26,667)
=
(20%)
133,333
=
100%
Balance
c/d
UPCS
Balance b/f
26,667 Profit and loss
a/c
26,667
16,667
10,000
26,667
270
Further Adjustments to Accounts
Profit and Loss (Extract)
Less: Expenses:
Sh
Increase in unrealized profits on closing stock
Sh
10,000
Balance Sheet (Extract)
Current Assets
Stock:
Raw materials
Work in progress
Finished goods
Less: UPCS
Sh
Sh
X
X
160,000
(26,667)
133,333
(d) DEPARTMENTAL ACCOUNTS
Some organizations have various departments carrying out trade and therefore the
profitability of each department needs to be established. For each department,
trading, profit and loss account should be prepared. The final accounts will be very
important for the management to assess the performance of each department.
The expenses in relation to a specific department should be charged in the Profit
and Loss account for that department. The accounts will be represented in
columnar form and the format will be as follows: (Assume a firm has departments A
and B).
Name
Trading Profit and Loss account for the year ended 31 December
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Other incomes
Less expenses
Salaries and wages
Depreciation
Other expenses
Managers
commission
NET PROFIT
Department A
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department B
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department C
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
The balance sheet will reflect the position of the whole organization and therefore a
departmental balance sheet is not required.
Lesson Five
271
When departments in a firm are sharing resources, then the various expenses need
to be apportioned between or among the different departments e.g. if the
departments are sharing a building, then rent expense should be apportioned
among the departments.
The following guidelines can be followed in apportioning the expenses among the
departments.
Type of Expense
1) Rent, rates, heat, light, repairs
to buildings,
depreciation of buildings and
insurance.
Basis of apportionment
Floor area occupied by each
department.
2) Depreciation, insurance and
maintenance of equipment
Cost or net book value of the
equipment in each department.
3) Salaries, canteen expenses,
welfare and other expenses
relating to employees.
Number of employees in each
department
4) Carriage inwards.
Purchases in each department.
5) Advertising, depreciation and
maintenance of delivery van.
Value of sales in each department.
6) Increase in provision for
doubtful debts, bad debts and
discounts allowed.
Sales or debtors in each
department.
Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and
children’s games and toys. For the purposes of his accounts, he wishes the
business to be divided into two departments:
Department A
Department B
Books, periodicals and newspapers
Games, toys and fancy goods.
The following balances have been extracted from his nominal ledger at 31 March
19X9:
Dr
Sales Department A
Sales Department B
Stocks Department A, 1 April 19X8
Stocks Department B, 1 April 19x8
Purchases Department A
250
200
11,800
Cr
15,000
10,000
272
Further Adjustments to Accounts
Purchases Department B
Wages of sales assistants
Department A
Wages of sales assistants
Department B
Newspaper delivery wages
General office salaries
Rates
Fire insurance – buildings
Lighting and air conditioning
Repairs to premises
Internal telephone
8,200
1,000
Cleaning
Accountancy and audit charges
General office expenses
30
120
60
25,000
750
150
750
130
50
120
25
25
25,000
Stocks at 31 March 19X9 were
valued at:
Department A £300
Department B £150
The proportion of the total floor area occupied by each
department was:
Department A one fifth
Department B four-fifths
Prepare J Spratt’s trading and profit and loss account for the year ended 31 March
19X9, apportioning the overhead expenses, where necessary, to show the
Department profit or loss.
The apportionment should be made by using the methods as shown:
Area Rates, Fire insurance, Lighting and air conditioning, Repairs,
Telephone, Cleaning:
Turnover -General office salaries, Accountancy, General office expenses.
Lesson Five
273
Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Department A
£
£
15,000
250
11,800
12,500
(300)
Gross profit
Less expenses
Wages
Newspaper delivery
wages
General office salaries
Rates
Fire insurance –
buildings
Lighting and airconditioning
Repairs to premises
Internal telephone
Cleaning
Accountancy or audit
charges
General office
expenses
NET PROFIT
(11,750
)
3,250
Department B
£
£
10,000
200
8,200
8,400
(150)
(8,250)
450
20,000
20,450
(450)
1,750
1,000
150
750
-
1,750
150
450
26
10
300
104
40
750
130
50
24
96
120
5
5
6
72
20
20
24
48
25
25
30
120
36
(1,784)
24
(1,426)
1,466
Workings:
1) General Office Salaries:
Department C
£
£
25,000
A = 15,000 X 750 = 450
25,000
B = 10,000 X 750 = 300
25,000
2) Rates:
A = 1/5 X 130 = 26
B = 4/5 X 130 = 104
3) Fire Insurance:
A = 1/5 X 50 = 10
B = 4/5 X 50 = 40
4) Lighting:
A = 1/5 X 120 = 24
B = 4/5 x 120 = 96
324
60
(20,000
)
5,000
(3,210)
1,790
274
5) Repairs:
Further Adjustments to Accounts
A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
Lesson Five
275
Interdepartmental Trading
A department may buy goods from another department in the same firm and
therefore the departments trade with one another. Example, in 4.16 above,
department A sells goods to Department B. (Department B is buying from
department A). Interdepartmental sales and purchases should be excluded from
the total sales and total purchases of the whole firm. If we assume that A sold
goods to B amounting to £1,000 and this figure is included in sales of A and
purchases of B, the trading account for the whole firm will be as follows (other items
will remain the same):
£
£
Sales
24,000
Less cost of sales
Opening stock
450
Purchases
19,000
19,450
Less closing stock
(450)
(19,000)
Gross profit
5,000
Managers Commission
A commission based on the net profit made in each department may reward
managers of each department.
The commission is normally a percentage of the net profit but it may be a
percentage on the net profit before or after charging the commission.
1)
Percentage Before Charging Commission
If we assume in example 4.16 that the managers in each department is paid a
commission of 5%, before charging such commission, the commission will be as
follows:
Net profit before
commission
Managers commission
@ 5%
Net profit after
commission
Department A
1,466
Department B
324
Total
1,790
(73.3)
(16.2)
(89.5)
1,392.7
307.8
1,700.5
2) Percentage After Charging Commission
Assume the commission is 5% of the net profit after charging such commission:
Net profit before
commission
Managers commission
@ 5%
Net profit after
commission
Department A
1,466
Department B
324
Total
1,790
(69.8)
(15.4)
(85.2)
1,392.2
308.6
1,704.5
276
Further Adjustments to Accounts
Note:
If we use percentage for each commission assuming a 5% rate, the commission will
be computed as follows:
Net profit before
commission
Commission of 5%
Net profit after
commission
Before
charging
commission
100
After charging
commission
__5
95
__5
100
105
REINFORCEMENT QUESTIONS
QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31
December 19X6:
Amounts credited by
bank
£
32,050 Balance at 1 January
19X6
Payments to trade
creditors
Rent and rates
Fixtures
Lighting and heating
General expenses
Loan interest
Drawings
Customers’ cheques
dishonoured
_____ Balance at 31 December
19X6
32,050
£
892
27,380
475
100
210
800
120
900
180
993
32,050
You are given the following information:
1.
Trading receipts consisted partly of cash and partly of cheques. During the
year, Dare had paid, out of his takings, wages for part-time staff amounting to
£2,914 and sundry expenditure of £140. He retained between £2 and £5 per
week pocket money and maintained a balance of £20 in the till for change. The
balance of his takings, together with cheques amounting to £250, which he had
cashed out of his takings for the convenience of certain friends, was paid into
the bank.
Lesson Five
2.
3.
4.
5.
6.
277
Cheques drawn payable to trade creditors, but not presented at 1 January 19X6,
amounted to £280 and at 31December 19X6 to £320.
All dishonoured cheques were re-presented and honoured during the year.
The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000
some years ago at a nominal rate of interest of 3% per annum. The interest
was duly paid half-yearly on 31st March and 30 September, and the loan was still
outstanding at the end of the year.
Discounts allowed by trade creditors amounted to £480 and those allowed to
debtors were £520.
Other balances at 1 January and 31 December 19X6 are given below:
1 January
Stocks
Trade debtors
Accrued general
expenses
Rates paid in advance
Fixtures valued at
Trade creditors
Creditors for heating and
lighting
7.
£
4,500
2,800
240
40
2,800
1,800
80
31
December
£
5,800
3,200 (including a bad debt of
£200 to be written off)
190
50
2,550 (including those
purchased during the
year)
2,200
70
There is a standard gross profit margin of 25% on sales.
You are required to prepare:
(a) a statement of Dare’s capital on 1 January 19X6;
(b) a profit and loss account for the year ended 31 December 19X6;
(c) a balance sheet as on that date.
QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social
Club.
The summarized balance sheet on 31.12.94 as prepared by the previous
bookkeeper contained the following items. All figures are in £s.
Assets
Heating oil for clubhouse
Bar and café stocks
New sports ware, for sale, at cost
Used sports ware, for hire, at
valuation
Equipment for grounds person –
cost
1,000
7,000
3,000
750
5,000
278
Further Adjustments to Accounts
depreciation
Subscriptions due
Bank – current account
- deposit account
Claims
Accumulated fund
Creditors – bar and café stocks
- Sports ware
3,500
1,500
200
1,000
10,000
23,150
1,000
300
Lesson Five
279
The bank account summary for the year to 31.12.95 contained the
following items:
Receipts:
Subscriptions
Bankings – bar and sale
Sale of sports ware
Hire of sports ware
Interest on deposit account
Payments
Rent and repairs of clubhouse
Heating oil
Sports ware
Grounds person
Bar and café purchases
Transfer to deposit account
11,000
20,000
5,000
3,000
800
6,000
4,000
4,500
10,000
9,000
6,000
You discover that the subscriptions due figure as at 31.12.94 was arrived
at as follows:
Subscriptions unpaid for 1993
Subscriptions unpaid for 1994
Subscriptions paid for 1995
10
230
40
Corresponding figures at 31.12.95
are:
Subscriptions
Subscriptions
Subscriptions
Subscriptions
unpaid for 1993
unpaid for 1994
unpaid for 1995
paid for 1996
10
20
90
200
Subscriptions due for more than 12 months should be written off with
effect from 1.1.95
Asset balances at 31.12.95 include:
Heating oil for club house
Bar and café stocks
New sports ware, for sale, at cost
Used sports ware, for hire, at
valuation
700
5,000
4,000
1,000
Closing creditors at 31.12.95 are:
For bar and café stocks
For sports ware
For heating oil for clubhouse
800
450
200
280
Further Adjustments to Accounts
2
/3 rds of the sportswear purchases made in 1995 had been added to stock of new
sportswear in the figures given in the list of assets above, and 1/3 had been added
directly to the stock of used sportswear for hire.
Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these
older items into the stock of used sportswear, at a valuation of 25% of their original
cost.
No cash balances are held at 31.12.95. The equipment for the grounds person is to
be depreciated at 10% per annum, on cost.
Required:
Prepare income and expenditure account and balance sheet for the AB Sports club
for 1995, in a form suitable for circulation to members. The information given
should be as complete and informative as possible within the limits of the
information given to you. All workings must be submitted.
(23 marks)
QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the
name of Chero Hardware. Most goods in which he trades are purchased from
various suppliers in a finished form. In addition, a separate department of the firm
manufactures various types of lampshades from purchased raw materials. When
finished, the lampshades are transferred to the shop at an agreed transfer price for
sale. No lampshades are sold other than through the shop.
The firm’s Accounts Assistant presents you with the following trial balance at 30
June 1988:
Sh
Sh
Capital account – Cherono
740,000
Drawings – Cherono
95,000
Long term loan (interest at 15% p.a)
240,000
Fixtures and fittings at cost
900,000
Accumulated depreciation at 1 July
350,000
1987
Motor vehicle at cost
208,000
Accumulated depreciation at 1 July
60,000
1987
Stock at 1 July 1987 (at cost):
Raw materials for lampshades
40,000
Completed lampshades
20,000
Other goods
328,000
Trade debtors and creditors
122,000
Bank balance
98,000
Sales
4,100,000
Purchases – raw materials for
855,000
lampshades
- other goods
2,400,000
Wages
254,000
Lesson Five
Rent and rates
Water and electricity
Motor expenses
Repairs
Interest on loan
Bank charges
Insurance
Sundry expenses
281
96,000
47,000
60,800
12,000
18,000
4,000
18,000
21,200
5,597,000
_______
5,597,000
282
Further Adjustments to Accounts
Additional Information:
(i) Rent and rates include a prepayment of rates of Sh. 6,000.
(ii) The insurance includes a premium for the period ending 31 October 1988.
(iii)A trade debt of Sh. 14,000 is not expected to be realized.
(iv)
During the year a pick-up van, which was bought for Sh. 86,000, was
sold for Sh. 30,000, and replaced with another pick-up van costing Sh.
152,000. Both transactions have been posted to the motor vehicle account.
No disposal account has been opened. The straight-line rates of depreciation
based on cost are 25% p.a. for motor vehicle and 10% p.a. for fixtures and
fittings. A full year’s depreciation is charged in the year of acquisition and
none in the year of disposal.
(v) Accruals at 30 June 1988 were:
Water and electricity
Sh. 5,000
Sundry expenses
Sh. 4,000
(vi)
Stocks at 30 June 1988 were:
Sh.
Lampshades raw materials
Lampshades (at transfer price)
Other goods at cost
(vii)
80,000
30,000
252,000
(a) The agreed transfer price for lampshades produced was Sh. 1,000,000. The
workshop produced 50,000 lampshades during the year.
(b) Wages include those of the lampshades making employee who has been
paid Sh. 50,000 for the year. In addition, she is entitled to a commission on
the annual profit of her department of 10% p.a. after charging such
commission. Shop assistants’ wages were Sh. 108,000.
(c) The apportionment of rent and rates; and water and electricity to the
lampshades is 25% of the total.
Required:
(a) Prepare a manufacturing, trading and profit and loss accounts for the year
ended 30 June 1988, disclosing clearly (i) the profit earned by the lampshadesmaking department and (ii) the gross profit earned by the shop.
(b) Prepare a balance sheet as at 30 June 1988.
QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The
financial year of the club, which had been formed to provide training facilities for
both field and track event athletes, had ended two days previously on 31 October
1983. An extraordinary general meeting was convened for the purpose of
appointing a new treasurer whose task it would be to prepare the annual accounts
for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an
elementary knowledge of bookkeeping, soon found himself in difficulty.
He sought your assistance, which you agreed to give. During your conversation he
said, ‘The previous treasurer maintained a Cash and Bank account. I have
Lesson Five
283
summarized the detailed entries into what I think you call a Receipts and Payments
Account, and have rounded the figures to the nearest £1’.
At this point he supplied you with a copy of the following document:
284
Further Adjustments to Accounts
Olympiad Athletics Club
Receipts and Payments Account for 12 months ended 31 October 1983
Not
Receipts
Not
Payments
e
e
No.
No.
Cash
Bank
Cash
Bank
£
£
£
£
Balance c/d
73
Balance b/d
105
Membership fees:
(4) Insurance
premiums paid to
580
brokers
(1) Entrance
80
170 (7) Payments to
suppliers of
5,270
sporting requisites
(1) Annual subscriptions
215 4,465 (5) Wages of grounds
3,600
man
(2) Life membership
530 (8) Postages and
692
telephones
(3) Training ground fees
454 7,206 (9) Stationery
629
Insurance:
World-wide
Athletics Club
50
affiliation fee
(4) Premiums
638 (10) Rates of training
846
ground
(4) Commissions
53
Upkeep of training
ground
1,200
(11 Interest received
Transfers to bank
700
)
from investments
626
(12 Sale of office
370 (11) Purchase of
5,600
)
furniture
investments
(6) Sale of sporting
8,774 (11) Short term
3,000
requisites
deposits
Advertising revenue
603
Transfers from cash
____ __700
Balances c/d
122 2,563
£822 £24,1
£822 £24,1
35
35
Balances b/d
122 2,563
After you had perused the above account, Guy Rowppe explained the numbered
items, as follows:
(1) On admittance to membership of the club, new members pay an initial entrance
fee together with their annual subscription. At 31 October 1982, annual
subscriptions of £70 had been paid in advance and £180 was owing but unpaid;
of this latter amount, £40 related to members who left during the current year
and is now no longer recoverable. The figures at 31 October 1983 are £100
subscriptions in advance and £230 subscriptions in arrear. The policy of the
club is to take credit for subscriptions when due and to write off irrecoverable
amounts as they arise.
Lesson Five
285
(2) As an alternative to paying annual subscriptions, members can at any time opt
to pay a lump sum, which gives them membership for life without further
payment.
Amounts so received are held in suspense in a Life Membership Fund account
and then credited to Income and Expenditure Account in equal instalments over
10 years; the first such transfer takes place in the year in which the lump sum is
received. On 31 October 1982 the credit balance on the Life Membership Fund
Account was £4,720, of which £850 credited was as income for year ended 31
October 1983.
(3) The club has a permanent training ground. Non-members can use the facilities
on payment of a fee. In order to guarantee a particular facility, advance
booking is allowed. Advance booking fees received before 31 October 1983 in
respect of 1984 total £470. The corresponding amount paid up to 31 October
1982 in advance of 1983 was £325. Members can use the facilities free of
charge.
(4) Club members can take out insurances through the club at advantageous rates.
Initially, premiums are paid by members to the club. Subsequently, the club
pays the premiums to an insurance broker and receives commission. At 31
October 1982, premiums received but not yet paid over to the broker amounted
to £102 and commissions due but not yet received were £11. The
corresponding amounts at 31 October 1983 are £160 and £13 respectively.
(5) The grounds man is employed for the six months April to September only. He is
then paid a retaining fee to secure his services for the following year. At 31
October 1982 the grounds man had been paid a retainer (£250) for 1983.
Included in the Wages figure (£3,600) is the retainer (£300) for 1984.
(6) Sporting requisites are sold only on cash terms. There are therefore no debtors
for these items.
(7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163;
the corresponding figure on 31 October 1983 was £202.
(8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31
October 1983, was £927. In arriving at this latter figure, the sum of £137,
representing damaged and unsaleable stock at cost price, had been
excluded.
(9) Postage stamps unused at 31 October 1983 totalled £4.
(10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36
respectively.
(11) Rates are payable to the District Council in two installments (in advance)
each year. £360 had been paid on 1 October 1982, £390 on 1 April 1983 and
£456 on 1 October 1983.
(12) The club receives interest on investments bought a number of years ago at a
cost of £7,400 (current valuation £7,550). At the end of October 1983, the
club had acquired further investments which cost £5,600 (current valuation
£5,600) and at the same time placed £3,000 in a short-term deposit account.
(13) The written down value of the furniture which had been sold during the year
was £350; it had originally cost £800.
Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an
inclusive cost of £4,000. Subsequently, the club had some timber buildings erected
286
Further Adjustments to Accounts
to provide various facilities for members. The total cost of these buildings was
£35,000; depreciation is calculated at the rate of 10% per annum on a straight-line
basis. At 31 October 1982, the provision for depreciation account had a balance of
£9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club’s
books as £7,900 (cost) against which there was a provision for depreciation of
£4,150 (calculated on the same basis as for buildings). Apart from the disposal
referred to in note (12) above there had been no other disposals or acquisitions
during the year.
Required:
Prepare the club’s Income and Expenditure Account for year ended 31 October
1983 and the Balance sheet at that date.
All workings must be shown.
*Freehold land is land held in perpetuity.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
Lesson Five
287
COMPREHENSIVE ASSIGNMENT No.2
TO BE SUBMITTED AFTER LESSON 6
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as
shown below for the month of October 19-6:
Bank Account
1919-6
6
Oct
Oct
1
Balance c/d
91.40
2
Petty Cash
0623 36.15
13
3
McIntosh and Co
260.1
3
Freda’s Fashions
0623 141.1
1
14
7
3
Malcolm Brothers
112.8
6
Basford Ltd
0623 38.04
3
15
3
Cash sales
407.5
8
Hansler Agencies
0623 59.32
4
16
14 Rodney
361.0
9
Duncan’s storage
0623 106.7
Photographic
2
17
5
17 Puccini’s Cold Store
72.54
9
Aubrey plc
0623 18.10
Ltd
18
20 Eastern Divisional
10 Secretarial services
0623 28.42
Gas Board – rebate
Ltd
19
(August direct
63.40
credit)
22 Grainger’s Garage
93.62 14 Trevor’s Auto
0623 11.75
repairs
20
29 Cash sales
235.3 15 Wages cash
0623 115.5
9
21
2
31 Balance c/d
221.5 16 Towers Hotel
0623 44.09
2
22
17 Bank charges
- 12.36
(September)
20 Broxcliffe borough
Council
SO 504.2
2
21 Eastern Area
Electricity Board
DD 108.6
4
288
Further Adjustments to Accounts
24
______
1,919.
37
28
Eastern Divisional
Gas Board
Petty Cash
30
Wages cash
31
Salaries transfer
Nov
1
Balance c/d
DD
0623
23
0623
24
-
41.20
119.0
7
337.7
4
______
1,919.
37
221.5
2
In early November, the company’s bank sent a statement of account which is
reproduced below:
Lesson Five
289
Statement of Account with Lowland Bank plc
Account: Fuller Ltd Current Account No 10501191
Date of issue: 1 November 19-6
19-6
Oct
Description
1
BCE
2
CR
2
Debit
Credit
Balance
£
£
£
90.45
175.02
265.47
062310
111.34
154.13
3
062312
9.18
144.95
3
062309
15.41
129.54
3
CR
7
062313
780.48
36.15
910.02
873.87
10
ADJ
12.90
15
062315
38.04
848.73
16
062314
141.17
707.56
17
CR
20
SO
504.22
646.90
21
062317
106.75
540.15
21
DD
196.83
343.32
21
062320
11.75
331.57
22
141981
212.81
118.76
22
ADJ
10.00
108.76
22
062319
28.42
80.34
22
062320
11.75
68.59
443.56
886.77
1,151.12
290
Further Adjustments to Accounts
22
CR
24
ADJ
27
INT (loan a/c)
27
93.62
162.21
212.81
375.02
26.35
348.67
062321
115.52
233.15
28
062322
44.09
189.06
28
DD
108.64
80.42
30
CGS
9.14
71.28
31
ADJ
Abbreviations:
BCE = Balance
Adjustment
INT = Interest
11.75
SO = Standing Order
DD = Direct Debit
83.03
CR = Credit
ADJ =
CGS = Charges
Required:
Prepare the company’s bank reconciliation statement as at 31 October 19-6.
(Chartered Association of Certified Accountants)
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul
Rudyerd, a wholesale fruiter, at the end of his financial year ended on 31 May 19X1.
£
£
Purchases and sales
104,310
146,200
Stocks
3,010
Motor vehicles at cost
26,360
Provision for depreciation on motor vehicles as
12,960
at 1 June 19X0
Warehouse equipment at cost
20,000
Debtors and creditors
25,250
21,200
Bank
3,200
Motor vehicle expenses
11,960
Rent and rates
11,220
Advertising
2,500
Sundry expenses (including insurance and
3,470
electricity)
Drawings
6,600
Capital as at 1 June 19X0
______
31,120
214,680
214,680
Lesson Five
291
Additional information and opinions are given as follows:
(a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a
consignment of rare fruit from abroad which cost £300, which would normally
sell for approximately £660, but which is badly bruised and could be sold as
juice pulp for £100.
(b) Depreciation on motor vehicles is normally charged at an annual rate of 20%,
using the reducing balance method. The motor vehicles at cost figure includes
a new car purchased during the year for £9,600 for Rudyerd’s personal use
which it is estimated will last four years with an estimated residual value of
£4,000.
(c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
Prepayments
Accruals
£
£
Rates
230
Rent
160
Insurance
180
Electricity
200
(d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of
outstanding debtors should be created.
(e) A recording error has resulted in a second-hand delivery van, purchased on 2
June 19X0 for £9,000, being treated as a motor vehicle expense.
(f) No record has been made of fruit, estimated to have cost £520, withdrawn from
the business by Rudyerd for his personal use.
(g) No adjustment should be made, in preparing the answer to part (a) for the new
warehouse equipment purchased during the year.
Required:
(a) Prepare a draft trading, profit and loss account for Paul Rudyerd’s wholesale
fruit business for the year ended 31 May 19X1 and a draft balance sheet as at
31 May 19X1.
(15 marks)
(b) Briefly explain what accounting concepts and conventions would be important in
considering the treatment of the new warehouse equipment.
(4 marks)
(c) Itemize the additional information that you would wish to know before you could
make the appropriate adjustments to the above financial statements in respect
of the new warehouse equipment.
(3 marks)
QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after
your arrival the finance director is rushed into hospital; the auditors are about to
arrive to prepare the accounts for the recently-ended financial year; you cannot find
any working papers for the previous year’s accounts; and the other accounts staff
are too busy to assist you in preparing for the auditor’s visit.
The eight situations described below are detailed on a notepad left by the finance
director and their treatment in the accounts needs to be considered by you.
292
Further Adjustments to Accounts
(a) A supply of office stationery was purchased five months before the year-end at
a cost of £1,000. At the year-end it is estimated there is about £250 worth left
in stock.
(b) An electronic typewriter was purchased during the year at a cost of £270. It is
estimated to have a useful life of five years.
(c) A batch of goods was produced to a customer’s special order. The goods cost
£5,800 but have not been delivered as it transpires the customer is now
bankrupt. A buyer for the goods has been found, who will pay £4,500 but
modifications costing £1,200 will have to be made to the goods.
(d) Three technical staff have spent the last six months exclusively on a new
product design project; their salaries for this period amount to £22,000. At the
year-end it is known that the design stage will take another month, to be
followed by market research; after this the directors will decide whether the
project should proceed to production and marketing. The company’s chief
engineer is confident that sales of the new product will start in the next financial
year and will last for at least four years.
(e) A freehold property was purchased on the first day of the financial year at a cost
of £650,000. The building is estimated to have a useful life of ten years when it
is expected it will have to be demolished for redevelopment. It is estimated
that the freehold land, at the time of purchase, was worth £500,000.
(f) A specialist machine was purchased seven years ago for £200,000. It has been
depreciated, using the straight-line method, at 10% per annum since then. To
the beginning of the year under review £120,000 depreciation has been
provided. The chief engineer has advised that the machine is worn out and
would need to be rebuilt to last more than another two years. The directors
have already decided the machine should not be rebuilt but scrapped one year
after the end of the year under review.
(g) The debtors’ ledger shows balances totalling £52,000 at the year-end. Two
debts, totalling £2,000, are known to be bad. Another customer has gone into
liquidation owing £3,000; it is expected he will be able to pay 60p of every £
owed to his creditors. The sales director recommends a general bad debt
provision of 2% in respect of the remaining debtor balances.
(h) The company has undertaken a heavy advertising campaign throughout the
year under review to promote its corporate image and product range. The sales
and managing directors feel that this campaign will benefit the company for at
least a further six months after the year end. You determine that the campaign
cost £150,000 and has been fully paid for before the year-end.
Required:
For each of the eight situations described above:
(a) Describe what action should be taken in respect of:
(i) The amount to be charged or credited to the year’s profit and loss account
(if any);
(ii) The value to be placed on the asset in the balance sheet at the year end (if
any);
(8 marks)
(b) State what accounting assumptions, conventions or concepts could be involved
and give reasons, where there is a conflict between two or more of them, why
Lesson Five
293
you have chosen the action you propose.
(9 marks)
294
Further Adjustments to Accounts
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31
December 19X9:
Ksh
Carriage inwards
Capital account at 1 January
19X9
Motor vans
Stock at 1 January 19X9
Balance at bank
Purchases
Sales
Trade debtors
Trade creditors
Rent and rates
Salaries
General expenses
Motor expenses
Discounts allowed
Discounts received
Insurance
Bad debts
Provision for doubtful debts 1
Jan 19X9
Provision for depreciation on
vans
Drawings
Disposal
Returns inwards
Ksh
6,310
500,000
200,000
164,000
116,860
1,593,690
2,224,000
290,000
157,600
56,080
350,400
44,720
25,600
40,400
37,600
17,600
30,400
8,000
60,000
50,000
7,140
2,993,200
6,000
_______
2,993,200
The following matters should be taken into account:
(a) After examination of the debtors account, it was decided to:
Write off a bad debt of Ksh 12,000
Make a specific provision in the accounts for the following doubtful debts,
Ksh 5,000 from Wordsworth
Ksh 3,000 from Coleridge
Make a general provision of 5% on the debtors.
(b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected
to sell them at Ksh 232,470.
(c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
(d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but
the instalment due on 31 December 19X9 was not paid until 15 January in the
next year.
(e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
Lesson Five
295
(f) Depreciation is to be provided for on the motor truck at the rate of 20% per
annum straight line on cost.
(g) General expenses include Ksh 3,060 relating to the telephone account which is
made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
(h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent
sand rates relate to private use.
Prepare a trading and profit account for the year to 31 st December 19X9, and a
balance sheet as at 31 December 19X9.
QUESTION FIVE
The balance sheet of Johnson’s shop at 1 October 19X7 was as follows:
Non current
assets
Shop premises
Ksh
45,000
Shop fittings
Delivery van
12,000
4,000
Current assets
Stock in trade
Cash in hand
14,000
2,000
Ksh
Ksh
Capital as at 1
Oct
Ksh
51,000
61,000
Current
liabilities
Trade creditors
16,000 Bank overdraft
77,000
12,000
14,000
26,000
77,000
The following is a summary of the transactions which took place during the year to
30 September 19X8:
1.
Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh
83,000.
2. Stock in trade bought, all on credit for Ksh 78,000.
3. Cash of Ksh 113,000 was taken from the till (cash register) and paid into the
bank.
4. The trade creditors were paid Ksh 73,000 by cheque.
5. Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The
loan is for 5 years.
6. Wages of Kshs 17,000 were paid in cash.
7. Rates of Ksh 2,900 were paid by cheque.
8. Sundry expenses of Ksh 6,000 were paid in cash.
9. Electricity bills of Ksh. 1,600 were paid by cheque.
10. The owners of the business withdrew Ksh 9,000 in cash.
At 30 September 19X8 you discover the following:
1.
Interest Ksh 2,500 due to Black for the year was unpaid.
296
2.
3.
4.
Further Adjustments to Accounts
Shop fittings are to be depreciated at 10% per annum on the total at the yearend; the delivery van is to be depreciated at 20% per annum of the total at the
year-end.
The rates payment during the year included Ksh 1,000 in respect of the period
1/10/19X8 to 31/3/19X9.
The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.
Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for
the year to that date.
END OF COMPREHENSIVE ASSIGNMENT No.2
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
Acknowledgement
297
LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying
on a business common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise
sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for
professional firms (e.g.) lawyers, doctors, accountants etc. whose maximum
membership is twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that
they agree on the terms upon which the partnership will be run and the relationship
between each other. This is done in writing and signed off as agreed by all the
partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a
percentage.
4) Salaries to be paid to any partners who will be involved in the active
management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
Accounting for partnerships.
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 incase of
any changes in the partnership like admission of or retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by
the trading activities of the partnership (i.e.) the profits or losses and any drawings
made by the partners.
In most partnerships, both a capital and a current account are maintained and
therefore the capital account becomes a fixed capital account. When there is no
298
Other Aspects of Final Accounts
distinction between a capital account and a current account then any short- term
changes are passed through the capital account therefore the capital account
becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current
account are shown in the following formats.
(Assume a firm of 3 partners A, B and C)
Loss or
revaluation
Goodwill written
off
Bal c/d
CAPITAL ACCOUNT
A
B
C
£
£
£
xx xx xx Bal b/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
A
£
xx
B
£
xx
C
£
xx
Additional capital
xx
(c/book or asset)
Gains on revaluation xx
Goodwill
xx
xx
Bal b/d
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
CURRENT ACCOUNT
B
C
A
£
£
£
xx
Bal b/d
xx
xx xx xx Interest on capitalxx
A
£
Bal b/d
Interest on
drawings
Drawings
Bal c/d
xx
xx
xx
xx
xx
-
xx
xx
xx
xx
Salaries
Share of profits
Loan interest
Bal c/d
Bal b/d
B
£
xx
xx
xx
-
xx
xx
xx
xx
xx
xx
xx
C
£
xx
xx
xx
xx
xx
xx
xx
Format For Final Accounts:
Profit and Loss Account
The profit and loss account is exactly as the one for the sole trader and in addition
to the profit and loss account, a new section called the Appropriation account is
included and this account shows how the partners share the Net Profit for the
period. (In addition to other expenses in the profit and loss, an expense for interest
on loan given by one of the partners is included and the credit entry is made on the
partner’s current account.)
The format for the Appropriation account is as follows:
Lesson Six
299
£
Net Profit for the year
Add: Interest on drawings.
A
B
C
xx
xx
xx
£
xx
xx
xx
Less: Interest on capital.
A
B
C
xx
xx
xx
£
(xx)
£
xx
Less: Salaries
A
B
C
xx
xx
xx
Balance of profit to be shared in percentage ratio
A (ratio)
xx
B (ratio)
xx
C (ratio)
xx
(xx)
xx
(xx)
Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each
partner in the business should be shown separately and any loan given by a partner
to the firm is also shown separately in the non-correct liability section therefore, the
format will be as follows.
£
£
£
xx
xx
xx
xx
xx
Net assets.
Capital: A
B
C
Current account A
B
C (debit balance).
Non-current liabilities
10% loan – B
10% loan – bank
xx
xx
(xx)
xx
xx
xx
xx
xx
xx
300
Other Aspects of Final Accounts
Example 7.1
Read the following and answer the questions below.
A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:
Capital:
Partnership salaries:
Drawings:
A- £60,000;
A - £9,000;
A - £12,000;
B - £48,000.
B - £6,000.
B - £13,400.
The firm’s net profit for the year was £32,840.
Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.
(a) From the information above prepared the firm’s appropriation account and the
partners’ current accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£
£
Net Profit for the year
32,840
Less: Interest on capital
A
B
6000
4800
(10,800)
22,040
Less: Salaries
A
9000
B
6000
(15,000)
Balance of profit to be shared in Profit Share Ratio
7,040
A
½
3520
B
½
3520
(7,040)
Drawings
A
£
12,86
0
Bal c/d
5,660
18,52
0
CURRENT ACCOUNT
B
£
13,400 Interest on
capital
Salaries
920 Profit shared.
14,320
A
£
6,000
B
£
4,800
9,000
3,520
6,000
3,520
18,520
Bal b/d
14,32
0
5,660
920
Lesson Six
301
EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December
19X7 and balance sheet extracts at the date, from the following:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Net profits £30,350
Interest to be charged on capitals: W £2,000; P £1,500; H £900
Interest to be charged on drawings; W £240; P £180; H £130
Salaries to be credited: P £2,000; H £3,500.
Profits to be shared: W 50%; P 30%; H20%.
Current accounts: balances b/f W £1,860; P £946; H £717
Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
Drawings: W £9,200; P £7,100; H £6,900.
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December
2002
£
Net profit for the year
Add: Interest on drawings
W
P
H
240
180
130
Less: Interest on capital
W
P
H
2,000
1,500
900
Less: Salaries
P
H
Balance of profit to be shared
W
50%
Pl
30%
H
20%
W
Interest on
draw
Drawings
P
£
240
£
10,500
6,300
4,200
550
30,900
(4,400)
26,500
(5,500)
21,000
(21,000)
Current Account
H
£
130 Bal b/d
W
£
1,860
180
9,200
P
£
H
£
717
946
6,900
7,100
Bal c/d
2,000
3,500
£
30,350
Interest on
capital
Salaries
2,000
900
1,500
3,500
2,000
302
Other Aspects of Final Accounts
Share of
profits
Bal c/d
4,920
14,360
4,200
6,300
2,287
3,466
10,74
6
9,317
Balance sheet (extract) as at 31 Dec 2002
£
Net Assets
Capital
W
P
H
Current Accounts
W
Pl
H
10,000
14,360
£
10,74
6
9,317
£
xx
40,000
30,000
18,000
88,000
4,920
3,466
2,287
10,673
98,673
Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the
books of Brick and Stone, trading partnership, sharing the balance of profits and
losses in the proportions 3:2 respectively.
£
Printing, stationery and postage
3,500
Sales
322,100
Stock in hand at 1 October 19X8
23,000
Purchases
208,200
Rent and rates
10,300
Staff salaries
36,100
Telephone charges
2,900
Motor vehicle running costs
5,620
Discounts allowable
950
Discount receivable
370
Sales returns
2,100
Purchases returns
6,100
Carriage inwards
1,700
Carriage outwards
2,400
Fixtures and fittings: at cost
26,000
Provision for depreciation
11,200
Motor vehicles: at cost
46,000
Provision for depreciation
25,000
Provision for doubtful debts
300
Drawings:
Brick
24,000
Stone
11,000
Current account balances
Lesson Six
At 1 October 19X8:
Brick
Stone
Capital account balances
At 1 October 19X8:
Brick
Stone
Debtors
Creditors
Balance at bank
303
3,600
2,400
credit
credit
33,000
17,000
9,300
8,400
7,700
Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick
Loan Account on 1 July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1
April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and
rent of £600 prepaid at that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing
£1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line
basis:
Fixtures and fittings
10%
Motor vehicles
20%
Required:
(a)
Prepare a trading and profit loss account for the year ended 30 September
19X9.
(b)
Prepare a balance sheet as at 30 September 19X9 which should include
summaries of the partners’ capital and current accounts for the year ended
on that date.
Note: In both (a) and (b) vertical forms of presentation should be used.
SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit
£
Printing and stationery and postage
3,500
Sales
Stock (1 October 19X8)
23,000
Purchases
208,200
Rent and rates
Heat and light
Staff salaries
36,100
Telephone charges
2,900
Motor vehicle running expenses
5,620
Credit
£
322,100
10,300
8,700
304
Discounts allowable
Discounts receivable
Sales returns
Purchases returns
Carriage inwards
Carriage outwards
Fixtures and fittings at cost
Provision for depreciation
Motor vehicles at cost
Provision for depreciation
Provision for doubtful debts
Drawings:
Brick
Stone
Other Aspects of Final Accounts
950
370
2,100
6,100
1,700
2,400
26,000
11,200
46,000
25,000
300
24,000
11,000
Lesson Six
305
Current accounts:
Brick
Stone
Capital accounts:
Brick
Stone
Debtors
Creditors
Balance at bank
3,600
2,400
33,000
17,000
9,300
8,400
7,700
429,470
429,470
TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30
SEPTEMBER 19X9
£
£
£
Sales
322,100
Less: Sales returns
2,100
320,000
less cost of sales
Opening Stock
23,000
Purchases (adjustment)
207,200
Add: Carriage inwards
1,700
208,900
Less: Purchases returns
(6,100)
202,800
225,800
Less: Closing Stock
(32,000)
(193,800)
Gross profit
126,200
Discount receivable
370
Less Expenses
Telephone charges (adjustment))
3,300
Printing and stationery and postage
3,500
Rent and rages (adjustment)
9,700
Heat and light
8,700
Staff salaries
36,100
Motor vehicle running expense
5,620
Discount allowable
950
Carriage outwards
2,400
Depreciation on fixtures and fittings
2,600
Depreciation on motor vehicles
9,200
Interest on loan (adjustment)
250
(82,320)
Net profit
44,250
Less: Salaries
Stone (adjustment)
(6,000)
Balance of profit to be shared
38,250
Brick 3 5
22,950
Stone
2
5
15,300
(38,250
306
Other Aspects of Final Accounts
Balance sheet as at 30 September 19X9
Non current Asset
£
£
£
Fixtures and fittings
26,000
(13,800)
12,200
Motor vehicles
46,000
(34,200)
11,800
72,000
48,000
24,000
Current Asset
Stock
32,000
Debtors
9,300
Less: Provision
(300)
9,000
Payments
600
Cash at bank
7,700
49,300
Current Liabilities
Creditors
8,400
Accruals
400
(8,800)
40,500
64,500
Capital
Brick (adjustment)
23,000
Stone
17,000
Current:
Brick adjustment
2,800
Stone
11,700
14,500
54,500
Non-Current Liabilities
10% loan – Brick
10,000
64,500
Current Account
Drawings
Brick
£
24,00
0
Bal c/d
Stone
£
12,000
(adj)
11,700
Bal b/d
Interest on loan
Salaries.
Brick
£
3,600
250
2,800
Share profits
26,80
0
26,800
Stone
£
2,400
22,950
26,800
6,000
15,30
0
23,70
0
Lesson Six
307
EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The
following is the trial balance as at 30 June 2003.
Dr.
Cr.
£
£
Buildings (cost £750,000)
500,000
Fixtures at cost
110,000
Provision for depreciation: Fixtures
33,000
Debtors
162,430
Creditors
111,500
Cash at bank
6,770
Stock at 30 June 19X8
419,790
Sales
1,236,500
Purchases
854,160
Carriage outwards
12,880
Discount allowed
1,150
Loan interest: King
40,000
Office expenses
24,160
Salaries and wages
189,170
Bad debts
5,030
Provision for bad debts
4,000
Loan from J King
400,000
Capitals: Mack
350,000
Spencer
290,000
Current accounts: Mack
13,060
Spencer
2,890
Drawings: Mack
64,000
Spencer
56,500
2,446,040 2,446,040
Required:
Prepare a trading and profit and loss appropriation account for the year ended 30
June 19X9 and a balance sheet as at that date.
a)
b)
c)
d)
e)
f)
g)
Stock, 30 June 2003, £563,400
Expenses to be accrued: Office Expenses £960; Wages £2,000
Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
Reduce provision for bad debts to £3,200.
Partnership salary: £8,000 to Mack. Not yet entered
Interest on drawings: Mack£1,800; Spencer £1,200.
Interest on capital account balances at 10 per cent.
308
Other Aspects of Final Accounts
Mack and Spencer
Q 5.2 Trading and Profit Loss Account for the year ended 30 June 2003
£
£
£
Sales
1,236,500
Less cost of sales
Opening Stock
419,790
Add: Purchases
854,160
1273,950
Less: Closing Stock
(563,400)
710,550
Gross Profit
525,950
Reduction in provision for bad debts (400-300)
800
526,750
Less Expenses
10
Depreciation: Fixtures & Fittings (110,000-33,000 x 100
)7,700
Buildings
10,000
Carriage outwards
12,880
Discount allowed
1,150
Office expenses (24160 + 960)
25,120
Loan interest
40,000
Salaries and wages (18,9170 + 2000)
191,170
Bad debts
5,030 (293050)
Net Profit for the period
233,700
Add: Interest on drawings:
Mack
1,800
Spencer
1,200
3,000
236,700
Less: Salaries – Mack
(8,000)
228,700
Less: interest on capital
Mack
35,000
Spencer
29,500
(64,500)
164,200
Balance of profits
Mack ½
82,100
Spencer ½
82,100
164,200
Mack – Current Account
£
£
Drawings
64,000
balance b/d
13,060
Interest on drawings
1,800
salary
8,000
Interest on capital
35,000
Profit
82,100
bal c/d
72,360
138,160
138,160
Lesson Six
309
Spencer – Current Account
£
Drawings
56,500
Interest on drawings
1200
Bal c/d
£
bal b/d
2980
Interest on capital 29,500
Profit
82,100
56,880
114,580
114,580
Balance Sheet as at 30 June 19X9
Non Current Assets
Buildings
Fixtures
£
Cost
750,000
110,000
860,000
Current Assets
Stock
Debtors (16,243 – 320)
Cash at bank
Current Liabilities
Creditors
Accruals (200 + 96)
56,3400
15,9230
6770
72,9400
111,500
2,960
Capital Accounts: Mack
Spencer
Current Accounts: Mack
Spencer
Loan from J. King
£
£
Depreciation NBV
(260,000)
490,000
(40,700)
69,300
(300,700)
559,300
(114,460)
61,4940
1,174,240
35,000
29,500
64,500
56,880
129,240
72,360
400,000
1,174,240
310
Other Aspects of Final Accounts
Example 7.5
JUNE 1998 QUESTION 4
The balance sheet of the partnership of Kombo and Nzuki as at 31 March
1997 was as follows:
Capital accounts:
sh.
sh
Kombo
1,400,000
Nzuki
1,400,000
2,138,000
Current Accounts:
Kombo
136,000
Nzuki
(81,200)
Current Liabilities:
Creditors
501,600
Accruals
25,600
Suspense account
1,570,300
Shs.
Sh.
Fixed asset
(at cost less depreciation
2,800,000 Premises
1,200,000
Equipment
520,000
Vehicles
418,000
54,800
Current Assets:
Stock
894,200
527,200 debtors
475,900
Provision
(46,400)
429,500
Prepayments
28,600
326,300 Bank and cash
281,000
3,708,300
3,708,300
After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as
Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated
at 20% by straight line method on an assumed residual value of Sh.20,000
had been sold at Sh.60,000 but no entries, other than in the bank account
had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been
omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad
debts should have been maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary of
Sh.60,000 which should have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200.
No entries had been made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%
Required:
a)
A statement of adjustments to show the correct net profit for the y
(12 marks)
Lesson Six
b)
311
A suspense account showing how the balance is eliminated from the
books.
(2 marks)
c)
A corrected balance sheet as at 31 March 1997.
(8 marks)
312
Other Aspects of Final Accounts
SOLUTION
The following journal can be included although not required in the question.
DR
i)
DR: Suspense Account
CR: Discount Allowed Account
DR: Suspense Account
CR: Discount receive
Making the correct in the accounts
ii)
DR: Suspense Account
CR: Sales Account
Sales undercast now corrected
iii)
DR: Suspense Account
CR: Debtors Account
Being an overstatement of debtors
account now corrected
iv)
DR:
CR:
DR:
CR:
DR:
CR:
DR:
CR:
v)
DR: Profit and Loss Account
CR: Accrue expenses Account
vi)
DR:
CR:
DR:
CR:
DR:
CR:
DR:
CR:
39,200
CR
26,400
26,400
26,400
26,400
200,000
200,000
13,500
13,500
Asset Disposals Account
140,000
Asset Account
140,000
Provision for depreciation Account
Asset Disposal Account
Suspense Account
60,000
Asset Disposal Account
60,000
Asset Disposal Account
16,000
Profit and Loss Account
16,000
11,200
Profit and Loss Account
Debtors Account
Provision for doubtful debts Account
Profit and Loss Account
Kombo’s Current Account
Nzuki’s Current Account
Kombo’s Current Account
Profit and Loss Account (Purchases)
11,200
31,200
31,200
3,280
3,280
60,000
60,000
39,200
Lesson Six
(a)
313
Kombo and Nzuki Partnership
Statement of Corrected Net Profit for the year
Sh.
Sh.
Adjustments
Discount allowed
26,400
Discount received
26,400
Sales undercasted
200,000
Profit on disposal of asset
16,000
Accrued electricity charges
(11,200)
Bad debts
(31,200)
Decrease in provision for bad debts
3,280
Drawings (goods)
39,200
Net adjustments to Net Profit
268,880
Bal b/d
Nzuki
Drawings
Bal c/d
Partners Current Account
Kombo Nzuki
Shs
Shs.
Bal b/d
81,200
Kombo
60,000
Net profit
39,200
adjustments
198,12
8
86,352
297,32
8
(b)
Discount allowed
Discount received
Sales
Debtors
Motor vehicle disposal
167,55
2
Suspense Account
Shs.
26,400 bal b/d
26,400
200,000
13,500
60,000
326,300
Kombo
Shs.
136,00
0
-
Nzuki
Shs.
-
161,32
8
60,000
107,55
2
297,32
8
167,55
2
Shs.
326,300
326,300
314
(c)
Other Aspects of Final Accounts
Kombo and Nzuki
Balance Sheet as at 31 March 1997
Fixed Assets
Shs.
Shs.
Premises
Equipment
Vehicles
Current Assets
Stocks
Debtors (431,200 – 43,120)
Prepayments
Bank and Cash
Current Liabilities
Creditors
501,600
Accruals (25,600 + 11,200)
Shs.
1,200,000
520,000
374,000
2,094,000
894,200
388,080
28,600
218,000
1,528,880
36,800
Capital Accounts
Kombo
Nzuki
1,400,000
1,400,000
Current Accounts
Kombo
Nzuki
198,128
86,352
(538,400)
3,084,480
990,480
2,800,000
284,480
3,084,480
NB
This is a very good question on partnership as it combines both errors on the
accounts and Partnerships. Please study it carefully and follow up the entries and
adjustments.
The next example is still on past paper and combines both incomplete records and
partnerships.
EXAMPLE 7.6 JUNE 1997
Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not maintain
proper books of accounts. The following information has been obtained from the
available records on 31 March:
1996
1997
Sh.
Sh.
Balance at bank
94,800
169,680
Stock in trade
541,200
488,640
Trade debtors
612,000
?
Trade creditors
?
305,760
Furniture
360,000
Motor vehicles (book value)
1,920,000
Lesson Six
315
Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while
purchases, all on credit for the same period were Sh.2,952,480. On 31 March 1996
Kefa’s capital was Sh.200,000 less than that of Mark. The analysis of the cash book
for the year ended 31 March 1997 shows the following:
Receipts:
Cash from credit sales
Additional capital by Kefa
Cash sales
Payments:
For purchases
Salaries paid
Rent paid (for 6 months to 30.9.96)
Rates paid (for 6 months to 30.6.97)
Electricity charges
Advertising
Motor vehicle expenses
Sundry expenses
Drawings Kefa
Mark
On 31 March 1997 liabilities were as follows:
Sh.
Electricity charges
12,480
Advertisement
Sundry expenses
3,491,520
240,000
586,800
3,070,080
420,000
144,000
120,000
60,000
41,760
119,520
33,600
132,480
102,000
6,240
3,600
On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One
vehicle was sold on credit for Sh.640, 000 while the other was taken over by Kefa at
a valuation of sh.250, 000. the combined book value of the two vehicles was
Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor
vehicles on hand at 31 March 1997. No depreciation is to be provided for the
vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997.
(10 marks)
b) Balance sheet as at 31 March 1997.
(8 marks)
c) Partner’s capital accounts
(4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
KEFA and MARK
STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets
Sh.
Sh.
Bank
94,800
Stock
541,200
Debtors
612,000
316
Other Aspects of Final Accounts
Furniture
Motor vehicle
Liabilities
Creditors
Net Assets
Capital
360,000
1,920,000
3,528,000
(423,360)
3,104,640
Kefa
Mark
1,452,320
1,652,320
3,104,640
Trading, Profit and loss account for the year ended 31 March 1997
Sh
Sh.
3,849,120
Sales
Less cost of sales
Opening stock
Purchases
Less: Closing stock
Gross profit
Profit on disposal adjustment
541,200
2,952,480
488,640)
(3,005,040)
844,080
230,000
1,074,080
Less Expenses
Salaries
Rent adjustment
Rates
Electricity
Advertising
Motor vehicle
Sundry expense
Depreciation – Furniture
- Motor vehicle
Net Loss should in PSR
Kefa
Mark
420,000
288,000
60,000
72,480
48,000
119,520
37,200
36,000
126,000
(66,560)
(66,560)
(1,207,200)
(133,120)
133,120
Balance sheet as at 31 March 1997
Non-current Assets
Furniture
Motor vehicle
Sh.
360,000
1,620,000
Current Assets
Stock
Debtors – Trade Adjustment
- others vehicle
Prepayments
Bank
Sh.
(36,000)
1,260,000
(162,000)
Sh.
324,000
(126,000)
1,134,000
1,458,000
488,640
382,800
640,000
60,000
169,680
1,741,120
Lesson Six
317
Current Liabilities
Creditors
Accruals
Capital -
Kefa
Mark
305,760
166,320
(472,080)
1,269,040
2,727,040
1,243,280
1,483,760
2,727,040
318
Other Aspects of Final Accounts
Kefa
Shs.
Drawings
132,480
Disposal
Capital Account
Mark
Shs.
Bal b/d
102,000
Cash
250,000
Kefa
Shs.
1,452,3
20
mark
Shs.
1,652,3
20
240,000
Loss shared
Bal c/d
66,560
1,243,28
0
1,692,32
0
66,560
1,483,76
0
1,652,32
0
1,692,3
20
1,652,3
20
(c)
GOODWILL AND REVALUATION OF ASSETS
This is defined as the advantage, whatever it may be, a person gets by
continuing to be entitled to represent to the outside would that he is carrying
on a business which has been carried on for sometime previously. “Judge
Warey in Hull V Frases”
Goodwill is the element that arises from a business due to its reputation and
therefore, enjoys benefits that a new business may not get.
(e.g.) A new business may not make profits easily during the first year of
trading.
Factors that contribute to goodwill
1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the
share of a partner’s effort to improve the business. The problem is normally
to ascertain the value or cost of goodwill.
There are two types of goodwill:
1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates.
There are various approaches to these. Goodwill maybe arrived at by
taking the average profits for lets say three previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or
shown in the accounts.
2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business
above its net assets.
This is less subjective because it is the excess amounts paid for a
business above its net assets.
Lesson Six
319
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these
case the net assets will be total assets less total liabilities) of another
business that is still trading on and the value of the net asset is 3 M,
therefore the purchased goodwill may be shown in the accounts as an
intangible asset. Purchased goodwill can be treated in the following three
main ways:
1) Goodwill is written off from the accounts
2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.
The practice is normally to carry it in the accounts together with the other
assets (as an intangible asset) and amortize it over estimated period of
time.
320
Other Aspects of Final Accounts
In a partnership, there are normally three situations where goodwill is accounted for
in the accounts:
a) If there is a change in the profit sharing ratio.
b) On admission of a new partner.
c) On retirement of an old partner.
d)
Example (when there is a change in profit sharing ratio)
When there is a change in the profit sharing ratio, then goodwill is introduced in the
accounts by
Dr. Goodwill account
Cr. Partner’s capital account ( the credit is based on the
old
profit sharing ratio.)
The goodwill may remain in the accounts and therefore no partner entries will be
made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account
Example:
A and B have been trading as partners sharing profits and losses equally. They
decided to change profit sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.
Required: The partner’s capital balances assuming that:
1) Goodwill is to be retained in the accounts
2) Goodwill is to be written off form the accounts.
Solution:
1)
CAPITAL ACCOUNT
B
Bal b/d
A
A
1,000,0
00
B
1,500,0
00
250,000
250,000
Goodwill(OPSR)
Bal c/d
2)
Goodwill
12,500,0
00
12,500,0
00
1,750,0
00
1,750,0
00
CAPITAL ACCOUNT
A
B
300,000
Bal b/d
A
1,000,000
B
1,500,00
Lesson Six
321
(NPRS)
Bal c/d (NPSR)
950,000
12,500,00
0
200,000
1,550,00
0
1,750,00
0
0
Goodwill
(OPSR)
250,000
12,500,00
0
250,000
1,750,00
0
REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based
on market price.
The revaluation is normally done when a new partner is to be admitted or an old
partner is retiring.
Any revaluation gains or losses are passed through a new account (i.e) a
Revaluation account and the balance on this account profit or low on revaluation is
transferred to the partner’s capital accounts in the existing profit sharing ratio.
Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1.
They have the following assets and liabilities at the book values and they wish to
restate these values at market values and agreed values.
Assets/Liabilities
Buildings
Fixtures, Fittings & furniture
Motor vehicle
Stock
Debtors
(50,000)
Creditors
Book value
£
2,000,000
900,000
1,200,000
700,000
450,000
Market price/Agreed value Gain)
£
Loss
2,500,000
100,000
800,000
(100,000)
1,150,000
(50,000)
650,000
(50,000)
400,000
800,000
700,000
100,000
Required:
Prepare Revaluation account and the partner’s capital account given the
partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000
REVALUATION ACCOUNT
£
100,000
50,000
50,000
50,000
140,000
Fixtures
Motor vehicles
Stock
Debtors
Capital A/C A 2 5
B
2
C
1
5
140,000
5
70,000
£
buildings
Creditors
500,000
100,000
322
Other Aspects of Final Accounts
600,000
600,000
Goodwill
A
£ 000
Bal c/d
3,140
3,140
CAPITAL ACCOUNT
C
£ 000
Bal b/d
2,640 1,510 Revaluatio
n
2,640 1,570
B
£ 000
A
£ 000
3,000
140
B
£ 000
2,500
140
C
£ 000
1,500
70
3,140
2,640
1,570
If there is a profit on revaluation, then the profit will be transferred to the
partner’s capital account by:
Dr. Revaluation
Cr. Partner’s capital account in the profit share ratio
If there is loss then
Dr. Partner’s capital account
Cr. Revaluation in the profit share ratio
EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1
respectively.
The balance sheet for the partnership as at 30 June 19X6 is as follows;
Fixed Assets
Premises
Plant
Vehicles
Fixtures
Current Assets
Stock
Debtors
Cash
£
62,379
34,980
___760
Capital
Alan
Bob
Charles
Current account
Alan
Bob
£
90,000
37,000
15,000
2,000
144,000
98,119
£242,11
9
85,000
65,000
35,000
185,000
3,714
(2,509)
Lesson Six
Charles
Loan – Charles
Current liabilities
Creditors
Bank overdraft
323
4,678
5,883
28,000
19,036
4,200
£242,11
9
Charles decides to retire from the business on 30 June 19X6, and Don is admitted as
a partner on that date. The following matters are agreed:
324
Other Aspects of Final Accounts
a) Certain assets were revalued;
Premises £120,000
Plant £35,000
Stock £54,179
b) Provision is to be made for doubtful debts in the sum of £3,000.
c) Goodwill is to be recorded in the books on the day Charles retires in the sum of
£42,000. The partners in the new firm do not wish to maintain a goodwill
account so that amount is to be written back against the new partners’ capital
accounts.
d) Alan and Bob are to share profits in the same ratio as before, and Don is to have
the same share of profits as Bob.
e) Charles is to take his car at its book value of £3,900 in part payment, and the
balance of all he is owed by the firm in cash except £20,000 which he is willing
to leave as a loan account.
f) The partners in the new firm are to start on an equal footing so far as capital
and current accounts are concerned. Don is to contribute cash to bring his
capital and current accounts to the same amount as the original partner from
the old firm who has the lower investment in the business.
The original partner in the old firm who has the higher investment will draw out
cash so that his capital and current account balances equal those of his new
partners.
Required;
a) Account for the above transactions, including goodwill and retiring partners’
accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June
19X6.
Solution:
Goodwill
written off
Motor
vehicle
Cashbook
Bal c/d
Don
Alan
Bob
£
£
£
12,0
00
-
18,00
0
-
12,0
00
-
-
21,00
0
67,00
0
106,0
00
67,0
00
79,0
00
Don
Alan
67,0
00
79,0
00
Bob
Charl
es
£
Capital Accounts
Don
Alan
- Bal b/d
3,900 Goodwil
l
38,10 Cash
0 book
42,00
0
Charl
Bob
Charl
es
£
£
£
£
-
85,00
0
21,00
0
-
65,0
00
14,0
00
-
35,00
0
7,000
106,0
00
79,0
00
42,00
0
79,0
00
79,0
00
Current Accounts
Don
Alan
Bob
-
Charl
Lesson Six
Bal b/d
Cash
book
Bal c/d
325
£
-
£
-
£
2,50
9
9,02
3
3,09
1
3,09
1
es
£
- Bal b/d
7,478 Revaluation
a/c
Cash book
3,091
12,11
4
3,09
1
5,60
0
es
£
4,678
£
-
£
3,714
£
-
-
8,400
2,800
3,09
1
-
5,60
0
-
3,09
1
12,11
4
5,60
0
7,478
-
7,478
326
Plant
Stock
Debtors
Profits shared:
Alan
Bob
Charles
Other Aspects of Final Accounts
Revaluation Account
£
£
2,000 Premises
30,000
8,200
3,000
8,400
5,600
2,800
30,000
_____
30,000
Cash book
Bal b/d
Don - capital
account
Current account
£
760 Charles – capital
account
79,000
Loan
3,091
Current
account
Alan – capital account
Current account
Bal c/d
£
38,100
8,000
7,478
21,000
9,023
******
Cash book
£
Don - capital
account
Current account
Bal b/d
79,000 Charles – capital
account
3,091
Loan account
Current account
Alan – capital account
Current account
£
4,200
38,100
8,000
7,478
21,000
9,023
Lesson Six
327
Alan, Bob and Don Partnership
Balance Sheet as at 30 June 19X6
Fixed Assets
Cost
Depreciatio
n
Premises
Plant
Vehicles
Fixtures
120,000
35,000
1,100
2,000
168,100
Current Assets
Stock
Debtors
Cash
54,179
31,980
__760
86,919
Less Current
Liabilities
Creditors
Bank overdraft
19,036
5,710
Capital accounts
Alan
Bob
Don
67,000
67,000
67,000
Current Accounts
Alan
Bob
Don
Non current
liabilities
Loan – Charles
NBV
3,091
3,091
3,091
(24,746)
62,173
230,273
201,000
9,273
210,273
20,000
230,273
NOTE:
i.
ii.
iii.
iv.
Goodwill introduced shared among the partners in the old partnership in current
profit sharing ratios.
Same case applies for any gain or loss in the revaluation of assets.
Goodwill written off in the new profit sharing ratios against the capital accounts
only for the new partners.
When there is no enough cash to be paid to the retiring partners, his balance
remains in the business as a loan.
(d)Admission of a new partner.
When a new partner is admitted into the firm, this marks the end of the old
partnership and the beginning of a new one.
328
Other Aspects of Final Accounts
The new partner will have to bring in the capital that is due from him as per the
agreement and also pay for a share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by
debiting the partner’s account(inclusive of the new one in the new Profit Sharing
Ratio).
If the admission is taking place part way through the financial period, then the new
partner will be entitled to the profits or losses for the remaining part of the financial
period. (i.e from the point of joining the partnership).
Care should be taken when apportioning interest on capital, salaries and profits
because of the changes
Example:
The following was the partnership trial balance as at 30 April 2001:
Sh.
Sh.
Fixed capital accounts
Rotich
750,000
Sinei
500,000
Current accounts
Rotich
400,000
Sinei
300,000
Leasehold premises (purchased 1 May 2000)
2,250,000
Purchases
4,100,000
Motor vehicle (cost)
1,600,000
Balance at bank
820,000
Salaries (including partners’ drawings)
1,300,000
Stocks: 30 April 2000
1,200,000
Furniture and fittings (cost)
300,000
Debtors
225,000
Accountancy and audit fees
105,000
Wages
550,000
Rent, rates and electricity
310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000)
660,000
Cash introduced – Tonui
1,250,000
Sh.
Sh.
Sales (Sh.3,500,000 to 31 October 2000)
8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle
300,000
Furniture and fittings
100,000
Creditors
1,070,000
13,420,000
13,420,000
Additional information:
1.
On I November 2000 Tonui was admitted as a partner and from that date
profits and losses were to be shared on the ratio 2:2:1. For the purposes of this
admission, the value of goodwill was agreed at Sh.3, 000,000. No account for
goodwill was to be maintained in the books, adjusting entries for transactions
between the partners being made in their current accounts. On that date,
Tonui introduced Sh.1,250,000 more into the firm of which Sh.375,000
Lesson Six
2.
3.
4.
5.
6.
7.
8.
9.
329
comprised his fixed capital and the balance was credited to his current
account.
Interest on fixed capitals was still to be allowed at the rate of 10% per annum
after Tonui’s admission. In addition, after Tonui’s admission, no interest was to
be charged or allowed on current accounts.
Any apportionment of gross profit was to be made on the basis of sales.
Expenses, unless otherwise indicated were to be apportioned on a time basis.
A charge was to be made fro depreciation on motor vehicle and furniture and
fittings at 20% and 10% per annum respectively, calculated on cost.
On 30 April, the stock was valued at Sh.1,275,000.
Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500
A difference in the books of Sh.48,000 had been written off at 30 April 2001 to
general expenses, which was later found to be due to the following clerical
errors:
• Sales returns of Sh. 32,000 had been debited to sales returns but had not
been posted to the account of the customer concerned;
• The purchases journal had been undercast by Sh.80,000
Doubtful debts (for which full provision was required) amounted to Sh.30,000
and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively.
On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a
provision of Sh.15,000 for electricity consumed was required.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001.
(9
marks)
b) Partners’ current accounts for the year ended 30 April 2001
(4
marks)
c)
Balance sheet as at 30 April 2001
(7 marks)
(Total: 20 marks)
Solution
a) ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30
APRIL 2001
Sh.
Sh.
Sales
8,750,000
Less: cost of sales
Opening stock
1,200,000
Purchases
4,180,000
5,380,000
Less: Closing stock
(1,275,000) 4,105,000
Gross Profit
4,645,000
330
Other Aspects of Final Accounts
Gross profit
S
TS
× GP
Expenses
Dep. Motor
Vehicle
Furniture
Salaries
Accountancy
fees
1.3.20003.10.2000
Sh
Sh
1,858,00
0
1.11.200030.4.2001
Sh
Sh
2,787,00
0
Sh
160,0
00
160,00
0
320,00
0
15,00
0
483,7
50
15,000
30,000
483,75
0
52500
967,50
0
105,00
0
275,00
0
137,50
0
359,60
0
550,00
0
275,00
0
612,00
0
52,50
0
275,0
00
137,5
00
362,4
00
Wages
Rent, rates,
electricity
General
expenses
Prov. For
depreciation
30,00
0
(1,506,1
50)
10,000
(1,393,3
50)
40,000
Net Profit
351,850
Sh
4,645,00
0
2,899,50
0
1,745,50
0
1,393,65
0
Less: Interest on
capital
Rotich
37,50
0
37,500
75,000
25,00
0
-
25,000
50,000
Sinei
Tonui
(62,500)
Balance of profit
shared
Rotich
2
Sinei
1
3
3
2
5
2
5
18,750
289,350
192,9
00
96,45
0
(81,250)
18,750
1,312,40
0
524,96
0
717,86
0
524,96
0
621,41
0
(143,750
)
1,601,75
0
Lesson Six
Tonui -
331
1
-
5
(289,350
)
262,48
0
(1,312,4
00)
262,48
0
(1,601,7
50
b)
Goodwill
w/o
R
Sh.
1,200,0
00
S
Sh.
1,200,0
00
Capital A/C
-
-
Current Account
R
Bal b/d
Sh.
T
Sh.
600,00
0
375,00
0
Drawings
150,00
0
120,00
0
62,500
400,00
0
Cash
book
Goodwill
(2:1)
Interest
on
capital
Profit
share
Bal c/d
1,842,8
60
3,192,8
60
c)
651,41
0
1,971,4
10
S
Sh.
300,00
0
493,73
0
1,531,2
30
C
Sh.
-
1,250,00
0
2,000,0
00
1,000,0
00
75,000
50,000
18,750
717,86
0
621,41
0
262,480
3,192,8
60
1,971,4
10
1,531,23
0
Rotich, Sinei and Tonui
Balance Sheet as at 30 April 2001
Non-Current Assets
Leasehold premises
Furniture and Fittings
170,000
Motor vehicle
Sh
2,250,000
1,600,000
4,150,000
Sh.
300,000
Sh.
2,250,000
(130,000)
(620,000
980,000
(750,000) 3,400,000
332
Other Aspects of Final Accounts
Current Assets
Stock
Debtors
Less Provision
Prepayments
Balance at bank
Current Liability
Creditors
Accruals
1,275,000
193,000
(40,000)
1,070,000
15,000
153,000
50,000
820,000
2,298,000
(1,085,000)
1,213,000
4,613,000
Capital: Rotich
Sinei
Tonui
Current Account: Rotich
Sinei
Tonui
(d)
750,000
500,000
375,000
1,625,000
1,842,860
651,410
493,730
2,988,000
4,613,000
The adjusting entries on admission of a new partner should be made to the
capital account (i.e) for any introduction of goodwill and revaluation of assets
Some of the adjustments may also be made in the current accounts if
adjustments are made in the capital account and the admission is partway
through the financial period, then any interest to be charged on capital will be
based on the adjusted capital balance.
If the adjustments are made in the current account then there will be no
change on the capital balance and therefore no change on the interest charged
on the capital balances.
(e)
Retirement of a partner
When a partner retires (i.e.) leaves the firm and the others partners are left to
continue with the business then the retirement marks the end of one
partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This
include:
1)
Capital balance
This will be all the amounts the partner has invested in the firm. Some firms
may not be able to refund the amount in full and therefore it may be
transferred t o a loan account whereby interest will be paid on the balance.
2) Goodwill
Because this partner contributed to the improvement (existence) of the
partnership therefore it will be fair to pay him his share of the goodwill.
Goodwill is introduced to the accounts in the old profit sharing ratio ((i.e.)
credited to all the partner’s capital accounts in the old profit sharing ratio),
then written off from the accounts by debiting the capital accounts of the
remaining partners in the new profit share ratio.
Lesson Six
333
2) Credit balance on the current account
This amount due to the partner is paid directly from the cashbook or
transferred to the
capital account whereby the total cash payable is to be determined.
The transfer is made by:
Dr. Current account
Cr. Capital account
4) Share of profits
If the retirement takes place during the financial period, then the retiring
partner is entitled to take profits made up to the point of retirement. Any
interest of capital, salaries and balance of profit shared in profit share ratio will
be credited to the partner’s current account.
Therefore the profit and loss account will be split between the two periods and
appointment of profits done and this will be based on the terms of the
partnership in each period.
EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail
business and shared profits and losses in the ratio 2:2:1 respectively
Given below is the balance sheet
Balance sheet as at 31 March
Assets
Non-current assets:
Fixed assets
Current assets:
Stock
Debtors
Capital and liabilities:
Capital accounts:
Kyamba
Onyango
Wakil
of the partnership as at 31 March 2001.
2001
Sh.
Sh.
465,000
294,000
209,000
503,000
968,000
160,000
140,000
200,000
500,000
Current accounts:
Kyamba
Onyango
Wakil
65,300
49,000
53,000
167,300
667,300
Current Liabilities:
Bank overdraft
Trade creditors
48,000
252,000
300,700
968,000
334
Other Aspects of Final Accounts
Additional information:
1. On 1 April 2001, Wakil retired from the partnership and was to start a business
as a sole trader while Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while
Kyamba and Onyango continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value
Transfer value
Sh
Sh.
Fixed assets
260,000
306,000
Stocks
166,000
157,000
Debtors
172,000
165,000
Creditors
156,000
156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the
net amount
due for him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000
but was not to be maintained in the books of the partnership of Kyamba and
Onyango.
4.
After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the
following terms and details of the new partnership.
•
•
Kyamba and Onyango to introduce additional capital of Sh.48, 000 and
Sh.68, 000 respectively.
Each partner was entitled to interest on capital at 10% per annum with
effect from 1 April 2001 and the balance of the profits be shared equally
after allowing for annual salaries of Sh.72, 000 to Kyamba and Sh.60, 000
to Onyango.
5. The profit of the new partnership before interest on capitals and partners’
salaries was Sh.240,000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000,
debtors by Sh.90,000 and bank balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango
Sh.70,000.
Required:
a)
Profit and loss and appropriation account for the year ended 31 March 2002.
(4 marks)
b)
Capital accounts for the year ended 31 March 2002
(4
marks)
c)
Current accounts for the year ended 31 March 2002.
(4 marks)
d)
Balance sheet of the new partnership as at 31 March 2002.
(8 marks)
(Total: 20 marks)
Lesson Six
335
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh
Net profit for the year
Less: Interest on capital
Kyamba
Onyango
Sh.
240,000
20,000
20,000
Less: Salaries
Kyamba
Onyango
Balance of profits shared in PSR
Kyamba ½
Onyango ½
(40,000)
200,000
72,000
60,000
34,000
34,000
b)
(132,000)
68,000
(68,000)
CAPITAL ACCOUNT
(2) Goodwill
in New PSR
(4) Fixed
Assets
K
100,00
0
O
100,00
0
Stocks
Debtors
Bal c/d
200,00
0
W
-
Bal b/d
306,0
00
(1)Goodwill in
old PSR
157,0
00
Cashbook
165,0
00
Profit on
transfer in old
PSR
Creditors
200,00
0
K
160,0
00
O
140,0
00
W
200,0
00
80,00
0
80,00
0
40,00
0
-
48,00
0
68,00
0
12,00
0
12,00
0
156,0
00
Current
account (3)
53,00
0
Cash book
(**)
300,00
0
c)
Capital
3000,0
00
628,0
00
6,000
300,0
00
300,0
00
173,0
00
628,0
00
CURRENT ACCOUNT
K
Sh
-
O
Sh
-
W
Sh
53,000
Bal b/d
K
Sh
65,300
O
Sh
W
sh
53,00
336
Other Aspects of Final Accounts
49,00
0
Drawings
85,00
0
70,000
Interest on
capital
Salaries
20,000
0
-
20,00
0
72,000
60,00
0
Bal c/d
106,3
00
93,000
-
191,3
00
163,00
0
Share of
profits
53,000
34,000
191,300
KYAMBA AND ONYANGO
Balance Sheet as at 31 March 2002.
Non-Current Assets
Current Assets
Stock
Debtors
127,000
Bank
490,300
Liabilities
Creditors
(96,000)
Capital:
Kyamba
Onyango
Sh.
Sh.
205,000
228,000
135,300
394,300
599,300
200,000
200,000
400,000
Current:
Kyamba
Onyango
106,300
93,000
b)
199,300
599,300
Bank
Working capital
Kyamba- capital
Onyango – capital
Increase
173,000
Bal b/d 48,700
48,000
Drawings
68,000 Kyamba
85,000
50,000 Onyango
10,000
_______ Bal c/d
135,300
339,000
339,000
Workings:
Non Current Assets:
34,00
0
163,0
00
53,00
0
Lesson Six
337
Bal b/f
Transfer
Balance
465,000
260,000
205,000
Bal b/f
Transfer
Increase
294,000
(166,000)
100,000
228,000
Bal b/f
Transfer
Increase
209,000
(172,000)
90,000
127,000
Bal b/f
Transfer
252,000
156,000
96,000
Stock:
Debtors:
Creditors:
EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been
extracted from their books of account as at 31 March 19 –2 after their trading
and profit and loss account has been prepared, but before any consequent
adjustments have been made to the partners’ respective capital accounts.
Dr.
Cr.
Capital accounts (as at 1 April 19 – 1):
£
£
Upp
60,000
Downe
40,000
Cash
6,600
Creditors
29,250
Debtors
201,000
Downe: goods withdrawn
400
Drawings:
Upp (all at 31 December 19 – 1)
20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost
200,000
Accumulated depreciation
90,000
Accrued interest on Upp’s Loan account
10,000
Loan account: Upp
50,000
Net profit for the year to 31 March 19 – 2)
179,750
Salary: Downe
12,000
Stocks
3,500
Upp: private expenses paid (on 31 March 19 – 2)
500
£459,000
459,000
Additional information
1.
The partnership agreement contains the following provisions:
338
Other Aspects of Final Accounts
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as
at 1 April in each year at a rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the
year at a rate of interest of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per
annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be
revalued at their market value as at the date of retirement of the partner.
2.
Upp decided to retire at 31 March 19 – 2. In accordance with the partnership
agreement, the assets and liabilities were revalued as follows:
£
Car (to be retained by UPP)
10,000
Remaining fixed assets taken over by the new partnership
50,000
Stocks
5,000
Debtors
180,000
Creditors
35,000
Goodwill
40,000
Legal and other expenses connected with the partnership change
4,750
3.
Following Upp’s decision to retire, Downe invited Side to join him in partnership
as fro 1 April 19 – 2. Side agreed to pay £75,000 into the new partnership as
at that date as his capital contribution. Profits and losses are to be shared in
the proportion Downe 75% and side 25%. Goodwill is not to be retained in the
books of the partnership.
4.
Upp agreed to leave half of the total amount owing to him on his retirement as
a long run term loan in the new partnership, the other half being paid to him in
cash.
5.
It may be assumed that all of the transactions relating to the changes in the
respective partnerships take place on 1 April 19 – 2. The legal and other
expenses connected with the partnership changes were due for payment on 30
April 19 – 2.
Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31
March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of
the above transactions. and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of
the above transactions have
been settled.
(Detailed working should be submitted with your answer).
SOLUTION
(a)
Upp and Downe
Lesson Six
339
Profit and loss appropriation account for the year ended 31 March 19-2
£
Net profit b/d
Add interest on drawings
Upp [3/12 x (10% x
20,000)]
Downe [16/12 x (10% x
15,000)]
£
£
179,750
500
750
1,250
181,000
Less:
Interest on capital
Upp [15% x 60,000]
Downe [15% x 40,000
Less: Salary – Downe
Balance of profits shared
in PSR
Capital – Upp (1/2)
- Downe (1/2)
9,000
6,000
(15,000)
166,000
(16,000)
150,000
75,000
75,000
150,000
_____-
340
Other Aspects of Final Accounts
(b)
Upp
£
Capital Accounts
Downe
£
Balances b/d
500
750
Loan interest
12,000
15,000
Appropriation
-salary
400
-interest on
capital
-residual profit
Appropriation
- interest on
drawings
Salary
Drawings
Private
expenses/goods
Car
Revaluation (deficit)
(W1)
[see workings after
(c)]
Loan (balancing
figure)
Balance c/d
Goodwill written back
(W2)
Balances c/d
20,00
0
500
10,00
0
20,00
0
103,0
00
_____154,0
00
Side
£
10,00
0
65,00
0
75,00
0
Upp
£
60,00
0
10,00
0
Downe
£
40,000
16,000
9,000
6,000
75,00
0
75,000
88,850
137,00
0
______
154,0
00
______
137,00
0
Downe
£
30,000
Balance b/d
Side
£
-
Downe
£
88,850
58,850
Cash
75,00
0
75,00
0
____-
20,000
88,850
(c)
Balance Sheet as at 1 April 19-2
£
Non current assets
Current assets
Stocks
5,000
Debtors
180,000
Cash (W3)
__5,100
190,100
£
50,000
88,850
Lesson Six
341
Current liabilities
Creditors [35,000 + 4,750]
Working capital
Net assets employed
Financed by
Capital
Downe
Side
39,750
150,350
200,350
58,850
65,000
123,850
Loan
Upp (W4)
_76,500
200,350
Workings
W1
Revaluation
Debtors
Fixed assets (cost)
Stocks
Legal etc expenses
Creditors
£
201,00
0
200,00
0
3,500
4,750
35,000
______
444,25
0
Balance b/d
40,000
_____
40,000
Creditors
Provision for
depreciation
Capital – Upp (car)
Fixed assets
Stocks
Debtors
Goodwill
Balance c/d (deficit)
Capital
-Downe (1/2)
-Upp (1/2)
£
29,250
90,000
10,000
50,000
5,000
180,00
0
40,000
40,000
444,25
0
20,000
20,000
40,000
W2
Goodwill
Revaluation
£
40,000
_____
40,000
£
Capital
-Downe (75%)
-Side (25%)
30,000
10,000
40,000
342
Other Aspects of Final Accounts
W3
Cash
Balance b/d
Capital
-Side
Bal b/d
£
6,600
75,000
81,600
5,100
£
Loan
-Upp [1/2 x
153,000]
Balance c/d
76,500
5,100
81,600
W4
Loan - Upp
Cash
Balance c/d
£
76,500
76,500
Balance b/d
Capital
-Upp
153,00
0
Balance b/d
£
50,000
103,00
0
153,00
0
76,500
Lesson Six
343
REINFORCEMENT QUESTIONS
QUESTION ONE
1.
K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys,
Kimeu being responsible for the factory and Maingi for the sales. All
completed toys are transferred from the factory to sales department at
agreed price. Profits are shared on the following basis:
Factory
Sales Department
Kimeu
80%
40%
Maingi
20%
60%
The following trial balance has been extracted from the books at 31 March
1992:
Sh.
Freehold factory at cost
Factory plant, at cost
Provision for depreciation 1 April 1991
Delivery van, at cost
Provision for depreciation 1 April 1991
Stocks at 1 April 1991
Raw materials
Work-in-progress
Toys completed (30,000 at Sh.40)
Sales (45,500 toys)
Purchases of raw materials
Factory wages
Sales department wages
Expenses:
Factory
Sales Department
Provision for doubtful debts 1 April 1991
Trade debtors and creditors
Bank overdraft
Capital accounts:
Kimeu
Maingi
Drawings:
Kimeu
Maingi
Sh.
1,053,750
843,750
151,250
401,250
86,250
100,700
85,000
1,200,000
2,775,500
716,250
375,500
150,750
301,750
250,500
450,000
40,000
150,000
176,200
1,400,000
1,425,000
150,000
125,000
6,204,200
6,204,200
344
Other Aspects of Final Accounts
Additional information:
i
38,000 toys at Sh.45 each were manufactured and transferred to Sales
Department during the year. Tys in stock at the end of the year were to be
valued at Sh. 45 each. Stock of raw materials was Sh.79.50 and work-inprogress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii
Accrued expenses outstanding at 31 March 1992:
Factory
Sales Department
Sh.
Sh.
Expenses
52,250
27,000
Factory wages 7,000
iii
Provision for depreciation is to be made as follows:
- Factory plant
10% p.a. on cost
- Delivery van
20% p.a. on cost
iv
The general provision for bad debts is to be maintained at 10% of the trade
debtors.
Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March
1992 and a balance sheet as at that date.
(20 marks)
QUESTION TWO
Amis, Lodge and Pym were in partnership sharing profits and losses in the
ratio 5:3:2. The following trial balance has been extracted from their books
of accounts as at 31 March 19-8:
£
£
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis
80,000
Lodge
15,000
Pym
5,000
Carriage inwards
4,000
Carriage outwards
12,000
Cash at bank
4,900
Current accounts:
Amis
1,000
Lodge
500
Pym
400
Discount allowed
10,000
Discount received
4,530
Drawings:
Amis
25,000
Lodge
22,000
Pym
15,000
Motor vehicles:
80,000
Accumulated depreciation (at 1 April 19-7)
20,000
Office expenses
30,400
Lesson Six
345
Plant and machinery:
At cost
100,000
Accumulated depreciation (at 1 April 19-7)
36,000
Provision for bad and doubtful debts
(at 1 April 19-7)
420
Purchases
225,000
Rent, rates, heat and light
8,800
Sales
404,500
Stock (at 1 April 19-7)
30,000
Trade creditors
16,500
Trade debtors
14,300
£583,300
£583,300
Additional information:
1. Stock at 31 arch 19-8 was valued at £35,000.
2. Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March
19-8.
3. The provision for bad and doubtful debts is to be maintained at a level
equivalent to 5% of the total trade debtors as at 31 March 19-8.
4. An office expense of £405 was owing at 31 March 19-8, and some rent
amounting to £1,5000 had been paid in advance as at that date. These items
had not been included in the list of balances shown in the trial balance.
5. Interest on drawings and on the debit balance on each partner’s current
account is to be charged as follows:
£
Amis
1,000
Lodge
900
Pym
720
6. According to the partnership agreement, Pym is allowed a salary of £13,000
per annum. This amount was owing to Pym for the year to 31 March 19-8,
and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital
account at a rate of 10% per annum. There were no movements on the
respective partners’ capital accounts during the year to 31 March 19-8, and
the interest had not been credited to them as at that date.
Required:
a) Prepare the Partners trading, profit and loss account for the year ended
31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8
QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after
charging annual salaries of £20,000 each. The regularly make up their
accounts to 31 December each year.
346
Other Aspects of Final Accounts
On July 1996 they admitted Coral as a partner and agreed profits shares from
that date of 40% Amber, 40% Beryl and 20% Coral. The salaries credited to
Amber and Beryl ceased from 1 July 1996.
Lesson Six
347
The partnership trial balance at 31 December 1996 was as follows:
£
Capital accounts as at 1.1.96:
Amber
Beryl
Capital account Coral (see note (d) below)
Current accounts as at 1.1.96
Amber
Beryl
Drawing accounts
Amber
Beryl
Coral
Loan account Amber
Sales
Purchases
Stock 1.1.96
Wages and salaries of staff
Sundry expenses
Provision for doubtful debts at 1.1.96
Freehold land at cost (see not (e) below)
Buildings: cost
Aggregate depreciation 1.1.96
Plant, equipment and vehicles: cost
Aggregate depreciation 1.1.96
Trade debtors and creditors
Cash at bank
£
280,000
210,000
140,000
7,000
6,000
28,000
24,000
15,000
50,000
2,000,000
1,400,000
180,000
228,000
120,000
20,000
200,000
250,000
30,000
240,000
420,000
38,000
3,143,000
50,000
350,000
3,143,000
In preparing the partnership accounts the following further information is to
be taken into account:
a) Closing stock at 31 December 1996 was £200,000
b) Debts totaling £16,000 are to be written off and the provision for doubtful
debts increased by £10,000.
c) Provision is to be made for staff bonuses totaling £12,000.
d) The balance of £140,000 on coral’s capital account consists of £100,000
introduced as capital and a further sum of £40,000 paid for a 20% share
of the goodwill of the partnership. The appropriate adjustments to deal
with the goodwill payment are to be made in the capital accounts of the
partners concerned, and no goodwill account is to remain in the records.
e) It was agreed that the freehold land should be revalued upwards on 30
June prior to the admission of Coral from £200,000 to £280,000. The
revised value is to appear in the balance sheet at 31 December 1996.
f) Amber’s loan carries interest at 10% per annum and was advanced dot
the partnership some years ago.
g) Provide depreciation on the straight-line basis on cost as follows:
Buildings
2%
348
Other Aspects of Final Accounts
Plant, equipment and vehicles
h) Profits accrued evenly during the year.
10%
Require:
a) Prepare a trading account, profit and loss account and appropriation
account for the year ended 31 December 1996 and a balance sheet as at
that date.
(17 marks)
b) Prepare the partners’ capital accounts and current accounts for the year
in columnar form.
(7 marks)
(Total: 24
marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic
Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs
and maintenance are carried out and also a small showroom form which new and
second hand cars are sold.
For accounting purposes, each of these three activities is treated as a separate
department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos
comprised:
£
Cash sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Credit sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Stocks (at 1 October 1985):
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Credit purchases:
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Fixed assets (at 1 October 1985):
*Freehold buildings:
Workshop
Petrol and oil
Showroom
Plant, equipment and vehicles:
Workshop
Petrol and oil
32,125
32,964
8,500
65,892
41,252
81,914
1,932
3,018
20,720
23,860
41,805
52,100
12,600
14,200
38,000
65,180
22,900
Lesson Six
Showroom
Provisions for depreciation (at 1 October
1985):
Freehold buildings:
Workshop
Petrol and oil
Showroom
*Note ‘Freehold’ – held in perpetuity
Plant, equipment and vehicles:
Workshop
Petrol and oil
Showroom
Fixed asset acquisitions during year (at
cost):
Plant and equipment:
Workshop
Petrol and oil
Showroom
Fixed asset disposal proceeds during the
year (see note (3)):
Plant and equipment:
Workshop
Salaries:
Showroom
Rates
Electricity
General expenses
Wages:
Direct:
Workshop
Petrol and oil
Indirect:
Workshop
Showroom
Creditors:
Workshop
Petrol and oil
Showroom
Bank/Cash:
Workshop
Petrol and oil
Showroom
Debtors:
Workshop
Petrol and oil
Drawings:
Duke
Earl
Current accounts (at 1 October 1985)
(credit balances):
349
17,450
5,060
7,100
19,390
48,254
17,077
9,451
26,210
4,250
1,060
5,200
10,200
26,738
9,453
10,692
34,050
5,602
6,810
4,160
4,225
5,602
15,250
316
1,605
30,470
1,365
537
12,190
9,740
350
Other Aspects of Final Accounts
Duke
Earl
Capital accounts:
Duke
Earl
9,750
10,477
50,000
40,000
Lesson Six
351
Notes at 30 September 1986
1) Stocks at 30 September 1986:
Workshop
2,752
Petrol and oil
2,976
Showroom
25,310
2) Depreciation is calculated using the straight-line method (assuming no
residual value) and is applied to the original cost of the asset at eh end of the
financial year, using the following rates:
%
Freehold buildings
20
Plant, equipment and vehicles
20
The depreciation charges for the current year have not yet been posted to
the accounts.
The freehold buildings are temporary structures with a five year life.
3) No entries have yet been made to transfer the cost (£19,500) and
accumulated depreciation (£15,633) of the workshop plant sold during the
year.
4) Accruals at 30 September 19861
£
Wages:
Direct:
Workshop
113
Petrol and oil
83
Indirect:
Workshop
214
Showroom
231
Electricity
517
General expenses
1,304
5) Prepayments at 30 September 1986
£
Rates
13,300
6) Rates and electricity are apportioned over departments on the basis of the
original cost of freehold buildings at the end of the current financial year.
7) General expenses are apportioned over departments on the basis of turn
over for the current year.
8) Duke and Earl are credited with interest on their respective capital account
balances at the rate of 5% per annum.
Required:
Prepare, using separate columns for each department and the business as a whole;
a) A departmental trading and profit and loss account for Aristocratic Autos for
the year ended 30 September 1986.
(20
marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September
1986.
(14 marks)
(Total: 34 marks)
352
Other Aspects of Final Accounts
Lesson Six
353
QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on
capital and partnership salaries is not provided. The position of the business at th
end of its financial year is:
Capital
accounts:
Reg
Sam
Ted
Current
Accounts:
Reg
Sam
Ted
(debit)
Creditors
Balance Sheet 30 June 19-6
£
£
Buildings
9,000
8,000
8,000
Equipment
Stock
Debtors
25,00 Bank
0
£
£
17,000
3,300
900
2,020
2,840
140
200
340
100
240
___82
0
26,06
0
_____
26,060
Reg died suddenly on 31 October 19-6.
The partnership agreement provides that in the event of the death of a partner the
sum to be paid to his estate will be the amount of his capital and current account
balances at the last financial year-end adjusted by his share of profit or loss since
that date together with his share of goodwill. A formula for calculation of goodwill is
given, and its application produced a figure of £7,500. no goodwill account is to
remain in the books after any change of the partnership constitution.
The stock value at 31 October has been calculated and all other accounts balanced
off, including provisions for depreciation, accrued expenses and prepaid expenses.
This results in the following position at 31 October.
£
buildings
17,000
Equipment (including additions of £400)
Stock
1,100
Debtors
2,230
Bank balance
3,370
Creditors
980
3,480
There were no additions to, or reductions of, the capital accounts during the four
months, but the following drawings have been made:
354
Other Aspects of Final Accounts
Reg
Sam
Ted
£2,000
£1,600
£1,800
Lesson Six
•
•
•
355
It has also been agreed that the share of a deceased partner should be repaid
in three equal installments, the first payment being made as on the day after
the day of death.
The surviving partners agree that Abe (son of Reg) should be admitted as a
new partner with effect from 1 November, and it is agreed that he will bring
into the business £4,000 as his capital together with a premium for his share
of the goodwill (using the existing valuation). The new profit-sharing
agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
Show the partnership Balance Sheet as at 1 November 19-6, on the
assumption that the above transactions have been completed by that date.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
356
Other Aspects of Final Accounts
COMPREHENSIVE ASSIGNMENT No.3
TO BE SUBMITTED AFTER LESSON 7
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the College.
EXAMINATION PAPER.
THREE HOURS.
TIME ALLOWED:
ANSWER ALL QUESTIONS
QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts
and payments, which he records in cash and bankbooks. Periodically, these books
are handed over to the firm of certified accountants that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary
step, you have prepared the receipts and payments account (rounded to the
nearest £1) for the year ended 31 May 1985. This is shown below, together with
the explanatory notes which the treasurer has supplied to enable you to understand
the nature o f some of the items.
Dohray amateur Musical Society
Receipts and Payments Account
For the year ended 31 May 1985
Receipts
Cash
£
Payments
Ban
k
£
Cash
Bank
£
£
£
£
£
£
Opening balances
b/d
Debtors:
members
Joining fees
(note 1)
Annual
subscriptions
(Note 2)
31
190
285
309 Creditors: trade
Fixed assets (note
4)
160
Musical
instruments
Trophies
70 Creditors: trade
522
83
Lesson Six
Annual concert
(note 3)
Takings
Sales of goods
(note 4)
Musical
instruments
Prize moneys
(note 7)
Sponsorship grant
(Note 5)
Refreshment sales
Raffle profits
PAC grants (note
6)
Revenue
Capital
357
Purchase for resale
1,791
(Note 4)
Sheet music
287
Annual concert
(note 3)
Hall booking fees
190
113
64
Closing balances c/d
3,091
490
Printing of
publicity
300
Posters
Hire professional
Soloists
Musicians
100
Adjudication fees
400 Musical Festivals
(note 7)
2,91
Entrance fees
0
Hire of buses
Honoraria (note 8)
Secretary
Treasurer
R.M.F.C affiliation
fee
(Note 9)
Rent of society’s
premises
(Note 10)
Refreshment
purchases
Bank charges
Sundry expenses
Transfers to bank
a/c
Transfers from
cash a/c
118
4,24
9
112
236
174
250
281
150
100
72
510
72
42
60
2,910
49
723
3,091
4,249
Explanatory notes supplied by the treasurer
1) On joining the Society, members pay a non-returnable fee of £10 (before 1
June 1982, the fee had been £). It has been found from experience that, on
average, members remain in the Society for five years. On this basis, one
358
Other Aspects of Final Accounts
fifth of each joining fee is credited to Income and Expenditure account each
year.
New members’ statistics are
During the
year
Ended 31
May
1981
1982
1983
1984
1985
Number
of
new
members
No.
20
24
32
27
35
Joining fees in
Suspense at 31
May 1984
£
20
48
192
216
Nil
£476
2) Annual subscriptions are due on 1 June each year. It is Society’s policy to
credit these to income and expenditure account on an actual receipts basis,
not an accruals basis. However, if subscriptions are received in advance, the
amounts are credited to income and expenditure account for the year, which
they are paid.
3) The Society’s major money raising event is its annual public concert. This is
given in a large hall, which the Society hires. The society also hires
professional musicians and soloists and has to pay the fees of the
adjudicators (judges).
4) The society buys trophies (silver bowls and shield) to present to the winners
of individual musical items at the annual concert. It also buys musical
instruments some of which are for use by the members and others for resale
to the members. Musical scores and sheets are also bought for resale to the
members.
5) A local building company has given a grant to the Society for a period of
three years in return for publicity. This sponsorship grant was received in full
on 1 June 1984 and is being credited to income and expenditure account in
equal installments in each o the three years to 31 May 1987.
6) The performing Arts Council (PAC) has awarded the Society an annual grant
towards the running costs. In addition the PAC makes capital grants. The
society’s policy is to hold capital grants in suspense and to release each
year’s grant to income and expenditure account over a period of five years,
from the year of grants onwards. At 31 May 1984 capital grants held in
suspense were analyzed as follows:
In respect of
year
Ended 31 May
1981
1982
1983
Capital
grants
Suspense
£
30
70
120
Lesson Six
359
1984
120
£340
7) Throughout the year, the Society competes at various musical festivals. Cash
prizes won by individual members are retained by the Society and credited to
income and expenditure account in order to reduce the cost of attending the
festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each
of them an ex-gratia (honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated
to the Regional Musical Festival Community (RMFC). The annual fee, which
has remained the same for a number of years, is paid on 1 March in each
year.
10)
The Society pays rent for its premises. The rental, which is inclusive of
rates, heating, lighting, cleaning etc. is reviewed annually on 31 March. The
payment shown in the receipts and payments account represents quarterly
payments in advance, as follows:
1984
30 June
30
September
31
December
Payment
£
120
120
120
120
1985
31 March
150
£510
The treasurer supplied further information as follows:
1) Creditors at 31 May
1984
£
Fixed assets
Musical instruments
Trophies
Purchases for resale
Sheet music
Musical instruments
2) Subscriptions
Payments in advance included in the
actual receipts for the year
3) Stocks at 31 May
Goods for resale
Sheet music
Musical instruments
1985
£
79
119
23
14
45
20
39
30
31
70
13
40
52
94
360
Other Aspects of Final Accounts
Refreshments not brought into account on the grounds that
It is not material in amount
4) Fixed assets (at cost) at 31 May
musical instrument
Trophies
1,378
247
There were no fixed asset disposals during the year
5) Provision for depreciation at 31 May
Musical instruments
704
Trophies
96
Depreciation is calculated on the cost of these assets at the end of the
financial year. The straight-line method is employed using the following
assumed asset lives.
Musical instruments
Trophies
5 years
10 years
Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May 1985,
showing the surplus or deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)
QUESTION TWO
A client of the firm of accountants by which you are employed is interested in
buying a road transport business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business
and has delegated to you the task of discovering the amount of investment in
vehicles at the end of each of the financial years ended 30 September 1980 to 1983
inclusive. The business had commenced operations on 1 October 1979.
The only information available to you is the fact that the owner calculated
depreciation at a rate of 20% per annum, using the Reduction Balance method,
based on the balance at 30 September each year, and copies of certain ledger
accounts which are reproduced below:
1981
30
Sept.
Provision for depreciation of vehicles
£
1980
£
1
Balance b/
32,000
Oct.
1981
Balance c/d
57,600 30
Profit and
25,600
Sept. loss
57,600
£57,60
Lesson Six
361
0
£
1982
30
Sept.
Disposals
Balance c/d
1983
30
Sept.
Disposals
Balance
1
Oct.
10,800 1982
Balance b/d
73,440 30
Sept.
Profit and
loss
includes
£10,000
(depreciation
on 1982
acquisitions)
___
__
£84,24
0
£
£
29,280 1
Oct.
79,328 1983
30
Sept.
1
Oct.
Vehicles
(vehicles
Originally
acquired
On 1
October
1979)
26,640
_____
£84,24
0
_______
£108,6
08
1982
30
Sept.
£
57,600
Disposals
£
1982
30
Sept.
30,000
Balance b/d
73,440
Profit and
loss
(includes
£20,000
Depreciation
on
1983
acquisitions)
35,168
Balance b/d
______
£10860
8
79,328
£
Provision for
Depreciation
10,800
Bank
16,000
Profit and
loss
3,200
362
Other Aspects of Final Accounts
______
£30,00
0
______
£30,00
0
£
1983
30
Sept.
Vehicles
(vehicles
Originally
acquired
On 1
October
1979)
Profit and
loss
£
1983
300
Sept.
60,000
Provision for
Depreciation
29,280
Bank
42,000
11,280
______
£71,28
0
______
£71,28
0
Required:
a) Calculate the cost of asset, vehicles, held by the business at 30
September in each of the years 1980 to 1983 inclusive
(4 marks)
b) Show the detailed composition of the charge for depreciation of the
vehicles to profit and loss account at 30 September 1981, 1982 and 1983.
(9 marks)
All workings must be shown.
(13
marks)
QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes
the following items:
Sales ledger control account £110,172
Purchase ledger control account
Suspense account (debit balance)
£78,266
£2,315
You have been given the following information:
i.
ii.
The sales ledger debit balances total £111,111 and the credit balances total
£1,234.
The purchase ledger credit balances total £77,777 and the debit balances total
£1,111.
Lesson Six
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
363
The sales ledger includes a debit balance of £700 for business X, and the
purchase
ledger includes a credit balance of £800 relating to the same
business X. Only the net amount will eventually be paid.
Included in the credit balance on the sales ledger is a balance of £600 in the
name of H. Smith. This arose because a sales invoice for £600 had earlier
been posted in error from the sales daybook to the debit of the account of M.
Smith in the purchase ledger.
An allowance of £300 against some damaged goods had been omitted from the
appropriate account in the sales ledger. This allowance had been included in
the control account.
An invoice for £456 had been entered in the purchase daybook as £654.
A cash receipt from a credit customer for £345 had been entered in the
cashbook as £245.
The purchase daybook had been overcast by £1,000.
The bank balance of £1,200 had been included in the trial balance, in error, as
an overdraft.
The bookkeeper had been instructed to write off £500 from customer Y’s
account as a bad debt, and to reduce the provision for doubtful debts by £700.
By mistake, however, he had written off £700 from customer Y’s account and
increased the provision for doubtful debts by £500.
The debit balance on the insurance account in the nominal ledger of £3,456
had been included in the trial balance as £3,546.
Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the
sales ledger control account with the sales ledger balances, and the purchase
ledger control account with the purchase ledger balances. What further action do
you recommend?
(25 marks)
364
Other Aspects of Final Accounts
QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel
Services, as radio and television suppliers and repairers, sharing profits and losses
in the ratio one half, one third and one sixth, respectively. Val Vez works full-time
in the business with responsibility for general administration for which she receives
a partnership salary of £4,000 per annum.
All partners receive interest on capital at 5% per annum and interest on any loans
made to the firm, also at 5% per annum.
It also had been agreed that Val Vez should receive not less than £4,000 per annum
in addition to her salary. Any deficiency between this guaranteed figurer and her
actual aggregate of interest on capital, plus residual profit (or less residual loss) less
interest on drawings, is to be borne by Dyo and UII in the ratio in which they share
profits and losses; such deficiency can be recouped by Dyo and UII at the earliest
opportunity during the next two consecutive years provided that Val Vez does not
receive less than the guaranteed minimum described above. During the year ended
30 September 1983, Dyo and UII had jointly contributed a deficiency of £1,500.
Radtel Services rents two sets of premises - one, a workshop where repairs are
carried out, the other, a shop from which radio and television sets are sold. The
offices are situated above the shop and are accounted for as part of the shop.
The workshop and shop are regarded as separate departments and managed,
respectively, by Phughes and Sokkitt who are each remunerated by a basic salary
plus a commission of one ninth of their departments’ profits after charging their
commission.
On 30 September 1984, the trial balance of the firm was:
£
Stocks at 1 October 1993:
Shop (radio and television sets)
Workshop (spares, components etc.)
Purchases:
Radio and television sets
Spares, components etc.
Turnover:
Sales of radio and television sets
19,750
8,470
155,43
0
72,100
232,60
0
127,00
0
Repair charges
Wages and salaries (employees):
Shop and offices
Workshop
Prepaid expenses (at 30 September
1984)
Accrued expenses (at 30 September
1984)
£
54,640
18,210
640
3,160
Lesson Six
Provision for doubtful debts at 1 October
1983
Rent and rates:
Shop and offices
Workshop
Stationery, telephones, insurance:
Shop and offices
Workshop
Heating and lighting:
Shop and offices
Workshop
Debtors
Creditors
Bank
Cash
Other general expenses:
Shop and offices
Workshop
Depreciation:
Shop and offices (including vehicles)
Workshop
Shop fittings (cost)
Workshop tools and equipment (cost)
Vehicles (cost)
Discount received:
Shop
Workshop
Bank loan (repayable in 1988)
Loan from Harry UII
Capital Accounts:
R. Dyo
H. UII
V. Vez
Current Accounts (after drawings have
been debited):
R. Dyo
H. UII
V. Vez
Loan interest:
Bank loan
Loan from H. UII
Provision for depreciation:
Shop fittings
Workshop tools and equipment
Vehicles
365
920
7,710
8,450
2,980
1,020
4,640
3,950
4,460
15,260
48,540
960
3,030
2,830
2,400
2,580
17,060
55,340
27,210
420
390
15,000
10,000
40,000
40,000
20,000
290
1,040
920
2,400
500
3,190
10,020
5,670
£525,5
90
£525,5
90
366
Other Aspects of Final Accounts
The following matters are to be taken into account:
1) Manager’s commissions.
2) Partnership salary (Vez).
3) Interest on partners’ capital accounts (these have not altered during the
year).
4) Interest on partners’ drawings; Dyo £70; UII £30; Vez £20.
5) Closing stocks: shop £31,080; workshop £10,220.
6) Provision for doubtful debts at 30 September 1984, £540.
7) Residual profits/Losses.
N.B. Loan interest and the movement in the provision for bad debts are
regarded as ‘shop’ items.
Lesson Six
367
Required:
a) Prepared columnar departmental trading and profit and loss accounts and
a partnership appropriation account for he year ended 30 September
1984 and the partnership balance sheet at that date.
(21 marks)
b) Complete the posting of the partners’ current accounts for the year. (4
marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife
keeps some accounting records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:
£
Assets
Plant and equipment: cost
Depreciation to date
Motor Van: cost
Depreciation to date
Stock of materials
Debtors
Rent of premises paid in advance to 30
September 1997
Insurance paid in advance to 31 December
1997
Bank balance
Cash in hand
Liabilities
Creditors for supplies
Telephone bill owing
Electricity owing
12,600
5,800
9,000
6,500
14,160
9,490
750
700
1,860
230
3,460
210
180
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998
are as follows:
Receipts
Opening balances
Receipts from
customers
Loan received
Proceeds of sale of
vehicles
Held at the beginning
of year
Cash paid into the
Cash and Bank summary
Cash
Bank
Payments
£
£
230 1,860 Suppliers
52,64
0
150,8 Rent of premises
80
10,00 Insurance (to 31.12.98)
0
Purchase of plant and
equipment
3,000 Purchase of new vehicle
24,04 Telephone
Cash
£
Bank
£
83,99
0
3,600
1,600
8,400
12,80
0
860
368
Other Aspects of Final Accounts
bank
Cash withdrawn from
bank
Closing balance
0
48,26
0
Electricity
2,100 Wages of repair staff
Miscellaneous expenses
Drawings by Ernie
Refund to customer
Cash paid into bank
Cash withdrawn from
bank
Closing balance
101,1
30
191,8
80
890
68,20
0
1,280
8,000
400
24,04
0
890
101,1
30
48,26
0
29,80
0
191,8
80
The following further information is available
1) Plant and equipment is to be depreciated at 25% per annum on the reducing
balance with a full year’s charge in the year of purchase.
2) The new motor vehicle was purchased on 1 January 1998. Ernie’s
depreciation policy is to charge depreciation at 25% per annum on the
straight-line basis with a proportionate charge in the year of purchase but not
in the year of sale.
3) The rent of the premises was increased by 20 % from 1 October 1997.
4) The loan of £10,000 was obtained from Ernie’s brother on 1 April 1998. It
carries interest at 10% per annum, payable on 30 September and 31 March.
5) At 30 June 1998, Ernie owed the following amounts:
£
Suppliers
4,090
Telephone
240
Electricity
220
Miscellaneous expenses
490
6) At 30 June 1998, amounts due from customers totaled £10,860. Of this
amount, Ernie considered that debts totaling £1,280 were bad and should be
written off.
7) Stock of materials at 30 June was £12,170
8) Ernie agreed to pay his wife £5000 for her assistance with his office work
during the year. This amount was actually paid in August 1998.
Required:
Prepare Ernie’s trading profit and loss account for the year ended 30 June
1998 and a balance sheet as at that date.
END OF COMPREHENSIVE ASSIGNMENT No.3
Lesson Six
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR
MARKING
369
Acknowledgement
370
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business
and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is
limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot
invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words
public limited company 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.
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 Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 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
final 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 all of the preference dividend have been paid. The more the no. of ordinary
share held, the higher the control.
371
Partnerships
Share capital may also have the following meaning:
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 £1 each and request the shareholders to
pay 60p. Assuming that the issued 100,000 shares, then the called up share capital
will be:
60p × 100,000 = £60,000
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 40p, therefore the
uncalled capital is 40p × 100,000 = £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which
only 150,000 share have been issued, Although the firm requested the shareholders
to pay 80p per share, the shareholders were able to pay 50p per share.
Required:
Determine the:
• Authorized share capital
• Issued share capital
• Called up share capital
• Uncalled up share capital
• Paid up share capital
Authorized share capital
200,000 × £ = £200,000
Issued share capital
150,000 × £1 = £150,000
Called up share capital
150,000 × 80p = 120,000
Uncalled up share capital
150,000 ×20 p = £30,000
Paid up share capital
150,000 × 50p = £75,000
Lesson Seven
372
The principal distinctions between unlimited partnerships and limited companies
are:
Unlimited Partnerships
Limited Companies
No separate Legal Entity
apart from its members
Separate legal entity,
which is not affect by
changes in its
membership. A company
may contract, sue or be
sued in it’s own name.
If the company is limited
by share, each shareholder
is limited to the amount he
has agreed to pay the
company for share
allotted.
A limited company must
have at least 2 members.
The maximum number of
shares is restricted to the
company’s authorized
share capital.
Rights to management are
delegated to directors who
alone can act on behalf of
and bind the company.
Liability of each member
for debts of the firm is
unlimited.
Number of partners
limited to 20 except for
professional firms.
Every partner can
normally take part in the
management of the
business. He can legally
bind the firm by his
action.
Copy of accounts need
not be filed with the
Registrar of Companies
Although a written
Partnership deed is
desirable it is not
mandatory.
A partnership is subject
to the partnership Act
which can be varied by
mutual agreement.
The partners contribute
the capital by
agreement. The amount
need not be fixed.
Copies of accounts must
be registered with the
Registrar of Companies
A company is required to
have a memorandum and
articles of association
which defines powers and
duties of directors.
A company is subject to
the Companies Act the
provisions of which cannot
be varied.
The authorized share
capital is fixed by the
memorandum of
association. It can be
altered by passing
ordinary resolution or by
the court.
373
A share in a partnership
cannot be transferable
except by the consent of
all partners.
A partnership is not
obliged to keep statutory
books of account and an
audit is not compulsory.
Partnerships
In public companies shares
are freely transferable. In
private companies share
transfer are subject to any
restrictions imposed by the
articles of association.
A company is required to
keep specialized
accounting records and is
subject to compulsory
audit.
Format Of Final Account
The P & L 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 P & L A/C.
(e.g.)
• Director’s fees salaries and other expenses
• Audit fees
• Amortization e.g. goodwill
• Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/C which
shows the allocation of the net profit for the period. Therefore, the format will be as
shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended
31.12
£
£
£
Sales
x
Less Returns inwards
(x)
x
Less Cost of Sales
Opening Stock
x
Purchases
x
Add Carriage in
x
x
Less purchase returns
(x)
x
x
Less Closing stock
(x)
(x)
Gross Profit
x
Add incomes
x
Discount received
x
Profit on disposal (sale of Assets)
x
Income from investment (can also be shown
x
below)
x
Other incomes e.g. interest received from
x
bank
x
x
Less Expenses
x
Lesson Seven
374
Other expenses
Directors salaries/fees/---Audit fees
Debenture Interest
Amortization of good will
Operating profit for the period
Add investment income
Profit before tax
Taxation: Corporation tax
Transfer to deferred tax
Under or over provision
Profit after tax
Less: transfer to the general reserve
Less: Dividends
Preference dividend:
Final proposed
x
x
(x)
x
x
x
x
x
x
x
x
x
x
x
Interim paid
Ordinary dividend: Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
B Limited
Balance sheet as at 31.12………
Non current Assets
Land & Building
Plant and Machinery
Fixtures, Furniture & Fittings
Motor vehicle
Intangible Assets
Goodwill
Copyrights, patents
£
£
£
x
x
x
x
x
(x)
(x)
(x)
(x)
x
x
x
x
x
x
x
x
x
(x)
(x)
x
x
x
(Longterm) Investments (mkt
value sh x)
Current Assets
Stock
Debtors
Less provision for bad debts
Prepayments
(Short term) Investments
Cash at bank
Cash in hand
x
x
x
x
(x)
x
x
x
x
x
x
(x)
x
(x)
x
(x)
x
x
x
375
Current liabilities
Bank overdraft
Creditors
Accruals
Interest payable(debenture
interest)
Tax payable
Dividends payable
Partnerships
x
x
x
x
x
x
(x)
x
x
x
(x)
x
Financed by
Authorized share capital
100,000 ordinary shares of £1
each
100,000 preference shares of £1
each
Issued and Fully paid
80,000 ordinary shares of £1 each
50,000 10% preference shares of
£1 each
Capital Reserves
Share premium
Revaluation Reserve
Capital Redemption Reserve
Revenue Reserves
General Reserve
Profit and loss A/C
Deffered tax A/C
Non Current Liabilities
10% debenture
Other Long term Loans
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
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.
Lesson Seven
376
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.
The tax is listed under those 3 items as shown in the appropriation (under/over
provision for previous period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government
and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended
31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000, which the
company pays and at the end of the year 2000, the company estimates that the tax
liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore
deferred tax).
(e.g.)
Taxation Account
Cashbook
Bal c/d
Under provision
Corporation tax
160,000
140,000
300,000
Bal b/d
150,000
Appropriation
150,000
300,000
10,000 (160 -150)
140,000
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 cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 ----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 P & L
appropriation should disclose interim paid and final proposed.
377
Partnerships
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 £1 each (per
value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook
(100,000 × £1.5) 150,000
Cr Ordinary shares capital
(100,000 × £1)
100,000
Cr Sahre Premium A/C
(100,000 ×£0.5)
50,000
Issue of shares at a premium of £0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets
especially for Land and buildings. When company sills it’s property to realize the
gain, the amount is transferred to the Profit and Loss Account.
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 profit and loss account.
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.
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 stock or loan capital. Debenture interest has to be paid
whether profits are made or not. A debenture may either be redeemable of
irredeemable. Redeemable is repayable at or by a particular date and irredeemable
is payable when the company is officially terminated.
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.
Lesson Seven
378
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000
and a balance on the share premium A/C of £50,000. It issues some bonus shares to
existing shareholders at a rate of 1 share for every 5shares held. This amount is to
be financed by the share premium. The entries will be as follows:
Shares to be issued:
100,000 × 1 =20,000
5
Dr share premium A/C [20,000 × £1 ] 20,000
Cr ordinary share capital
20,000
A bonus issue of 20,000 shares
Balance sheet (extract)
Ordinary shares of £1
Capital Reserves
Share premium
120,000
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 £200,000 trade up of 100,000shares of £2 each. The
balance on the share premium is £60,000. Additional capital is raised by way of a
right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price
of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the
shareholders exercise their rights and the relevant balance sheet extract.
Shares to be issued
100,000 × 2 =40,000 shares
5
Dr cash book
[40,000 × £2.5 ]
£100,000
Cr Ordinary share capital [40,000 × £2 ]
£80,000
379
Cr Share Premium [40,000 × £0.5 ]
Balance sheet (extract)
140,000
Ordinary shares @ £2
Capital Reserves
Share premium
80,000
Partnerships
£20,000
280,000
The following examples will illustrate the preparation of final Account for
companies.
Example 8.1
Just before you launch yourself into the question that follows remember that
everything you have learnt about double entry bookkeeping and the presentation of
year end accounts is valid in the context of companies, subject only to the points we
have added in this session.
The following is the trial balance of Transit Ltd at 31 March
£
Issued share capital (ordinary shares of £1
each)
75,00
Leasehold properties, at cost
0
Motor vans, at cost (used for distribution)
2,500
Provision for depreciation on motor vans to 31
March 19X7
7,650
Administration expenses
10,00
Distribution expenses
0
Stock, 31 March 19X7
12,00
Purchases
0
Sales
138,7
Directors’ remuneration (administrative)
50
Rents receivable
Investments at cost
25,00
Investment income
0
7% Debentures
Debenture interest
6,750
Bank interest
Bank overdraft
Debtors and creditors
1,050
Interim dividend paid
162
Profit and loss account, 31 March 19X7
31,00
0
1,260
311,1
22
19X8.
£
42,00
0
1,000
206,5
00
3,600
340
15,00
0
730
24,10
0
17,85
2
311,1
22
You ascertain the following:
All the motor vans were purchased on 1 April 19X5. Depreciation has been, and is to
be, provided at the rate of 20% per annum on cost from the date of purchase to the
Lesson Seven
380
date of sale. On 31 March 19X8 one van, which had cost £900, was sold for £550, as
part settlement of the price of £800 of a new van, but no entries with regard to
these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.
Required:
Prepare, without taking into account the relevant statutory provisions:
•
•
A profit and loss account for the year ended 31 March 19X8:
A balance sheet at that date.
(22 marks)
381
Partnerships
Solution:
Transit Ltd
Profit and Loss /C for the year ended 31.3.19X8
£
Gross profit
Profit on disposal of van
Rent Receivable
A
Less: Expenses
Depreciation on motor vans
Administration expenses
Distribution expenses
Debenture interest
Bank interest
Trading profit for the year
Add investment income
Profit before tax
Taxation
Profit after tax
Less: Dividends
Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
500
32,65
0
10,00
0
1,050
162
1,260
4,200
£
72,45
0
190
3,600
76,24
0
(44,3
62)
31,87
8
340
32,21
8
(12,7
00)
19,51
8
(5,46
0)
14,05
8
17,85
2
31,91
0
Lesson Seven
382
Transit Ltd
Balance sheet as at 31.3.19X8
Non-Current Assets
Leasehold properties
Motor vans
£
£
£
75,000
2,400
77,400
(960)
960
75,000
1,440
76,440
6,750
83,190
Investments
Current Assets
Stock
Debtors
16,700
31,000
47,700
Current liabilities
Bank overdraft
Creditors
Tax payable
Proposed dividends
980
24,100
12,700
4,200
Financed by:
Authorized issued and fully paid
42000 ordinary share of £1
Revenue Reserves
Profit and Loss A/C c/f
31,910
73,910
15,000
88,910
Workings
Sales
206,500
Less: Cost of sales
Opening stock
12,000
Purchases
138,750
150,750
Less Closing stock (16,700)
(134,050)
Gross profit
72,450
Motor vehicle
Bal b/f
2,500 Disposal
Disposal
550
5,720
88,910
42,000
Non-Current liabilities
7% Debentures
Motor Vehicle – Depreciation
Disposal
540 Bal b/d
Bal c/d
960 P & L
1,500
(41,980
)
1,000
500
1,500
900
383
Partnerships
Cashbook
Disposal
P&L
250 Bal c/d
3,300
2,400
3,300
Motor vehicle Disposal
900 Motor Vehicle
550
190 Depreciation 540
1090
1090
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd
At 31 December 19X5
£
£
Share capital authorized and issued:
80,000 ordinary shares of £1 each
Freehold premises at cost
Motor vans
Balance 1 January 19X5 at cost
Additions less sale proceeds
Provisions for depreciation of motor vans to 31
December 19X4
Stock in trade 31 December 19X4
Balance at bank
Provision for doubtful debts 31 December 19X4
Trade debtors and creditors
Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates
Purchases
Sales
Legal expenses
General expenses
Profit and loss account: balance at 31 December
19X4
59,00
0
80,00
0
15,00
0
650
6,750
13,93
0
6,615
12,39
5
4,000
13,12
7
3,258
700
108,4
40
644
5,846
275
11,38
0
142,7
70
2,430
243,6
05
243,6
05
You are given the following information.:
i. Stock in trade, 31 December 19X5, £14,600.
ii. Rates paid in advance, 31 December 19X5, £140.
iii. Debts of £1,075 to be written off and the provision to be increased to
£350.
iv. On 1 January 19X5, a motor van which had cost £680, was sold for £125.
Lesson Seven
384
v. Depreciation provided for this van up to 31 December 19X4 was £475.
vi. Provide for depreciation of motor vans (including additions) at 20% of
cost.
vii. The balance on legal expenses account included £380 in connection with
the purchase of one of the freehold properties.
viii.
The directors have decided to recommend a dividend of 5%.
Required:
With particular emphasis on presentation, prepare a trading and profit and loss
account for the year 19X5, and a balance sheet at 31 December 19X5, ignoring
taxation.
(24 marks)
385
Partnerships
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
£
Sales
Opening stock
Purchases
Less: Closing stock
Cost of goods sold
Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates (700 - 140)
Legal expenses (644 - 380)
General expenses
Bad debts
Loss on disposal
Depreciation
Net profit
Proposed dividend
Retained profit brought forward
Retained profit carried forward
Balance sheet at 31 December 19X5
13,93
0
108,4
40
122,3
70
14,60
0
4,000
13,12
7
3,258
560
264
5,846
1,150
80
3,019
£
142,7
70
107,7
70
35,00
0
31,30
4
3,696
4,000
(304)
2,430
2,126
Lesson Seven
386
Non-Current Assets
Freehold properties
Motor vans
£
£
£
59,380
15,095
74,475
---(9,294)
(9,294)
59,380
5,801
65,181
Current Assets
Stock
Debtors and prepayments, less
provision for doubtful debts
Cash at bank
14,600
11,110
6,615
32,325
Current liabilities
Creditors
Proposed dividends
11,380
4,000
15,380
16,945
82,126
Share capital
Ordinary shares of £1 each
Profit and loss account
80,000
2,126
82,126
Workings
Bad debts
£
Debtors
1,075
Balance c/f
350
£
Balance b/f
275
Profit and loss account
1,150
1,425
1,425
Motor vans
£
£
Balance b/f
15,000
Additions
775
Disposals
680
Balance c/f
15,095
15,775
15,775
Disposals
475
Balance c/f
9,294
9,769
Provision for depreciation
£
Balance b/f
6,750
Profit and loss account
3,019
9,769
£
387
Partnerships
Disposals
£
Motor vans
680
680
£
Provision for depreciation
475
Proceeds
125
Loss on capital
80
680
Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local
farmers.
Services offered include the collection of produce, the use of rapid freezing
equipment, storage of the frozen produce and transport from frozen storage in
refrigerated vehicles to any point within the country. Orders for these services are
secured by the company’s sales staff.
The company’s revenue consists of charges for transport and freezing, and of
storage rentals. Customers may hire storage space either on a long-term contract
basis at advantageous charges (payable in advance) or on a casual basis (invoiced
monthly).
A considerable amount of electricity from the public supply is used by the company
in the freezing and storage operations. In the event of a sudden failure in this
supply, the company is able to generate its own emergency supplies from standby
generators kept for this purpose. An insurance policy has been taken out to protect
the company against the claims which would arise should any of the frozen produce
deteriorate as the result of power or equipment failure.
At the end of the company’s financial year ended 30 September 1982, the assistant
accountant extracted the following balances from the ledgers.
Lesson Seven
Assets Account
Land and buildings (at cost)
Plant (at cost)
Vehicle (at cost)
Provision for depreciation (at 1 October
1981):
Land and buildings
Plant
Vehicles
Stock of consumable stores (at 30
September 1982)
Debtor – for rentals
for charges
Bank
Cash
Liability Accounts
Trade Creditors
7% Debentures 2004/2012
Ordinary Share Capital (see note 7)
General reserve
Unappropriated profit (at 1 October 1981)
Share Premium
Revenue Accounts
Storage rentals – long term contracts
Casual
Freezing charges
Transport charges
Expense Accounts
Wages, salaries and related expenses
Rates
Electricity
Transport costs
Repairs
Consumable stores
Postages, stationery, telephones
Insurance premium
Debenture interest
Sundries
388
£
390,000
271,900
82,600
39,600
144,800
27,050
23,449
18,204
2,332
30,710
1,103
7,390
80,000
200,000
25,000
108,284
15,000
302,090
85,063
112,810
90,107
128,004
79,112
76,860
43,271
30,319
29,800
15,604
7,800
5,600
9,176
8,650
Other Accounts
Suspense (credit balance)
Notes at 30 September 1982:
At the beginning of the 1981-82 financial year, the company had sold refrigeration
plant (which had originally cost £26,000 and on which £20,800 had been provided
as depreciation to date of disposal) for £4,000. The only accounting entries relative
389
Partnerships
to this disposal which have been made so far, are a debit to Bank and a credit to
Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence
the contents deteriorated to such an extent that they had to be disposed of by
incineration. Compensation of £1,350 was paid to the farmer by Owik – Freez by
cheque and debited to Suspense.
The insurance company has admitted liability under the policy but no further ledger
entries have as yet been made.
During the 1981-82 financial year, the company replaced one of its refrigerated
vehicles, which has originally cost £16,400 and on which £13,120 had been
provided as depreciation to date of disposal. A trade-in (part exchange) allowance
of £6,000 was granted in respect to this vehicle. A replacement vehicle was
acquired at a list price of £27,000. The entries relating to the disposal of the old
vehicle have not yet been made, except that the trade-in allowance has been
debited to Vehicles and credited to Suspense. The balance of the price of the new
vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis
calculated on the cost of fixed assets held at the end of each financial year and
assuming no residual value. Annual depreciation rates are:
%
Building
2
Plant
10
Vehicles
25
The ‘Buildings’ content of the item Land and Buildings included in asset account
balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following
items:
£
Storage rentals received in advance
25,631
Insurance premium prepaid
600
Wages and Salaried accrued
1,920
Rates prepaid
28,820
Electricity accrued
5,757
Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary
Shares of £0.50 per share. The directors have recommended a dividend for the year
of £0.12 per share.
Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez
p.l.c.for the year ended 30 September 1982 and a Balance Sheet at that date. All
workings must be shown.
(31 marks)
Open the Suspense account and post the entries needed to eliminate the opening
credit balance.
(2 marks)
Lesson Seven
390
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
£
Revenue
Storage rentals – long term
(302,090 – 25631)
casual
Freezing charges
Transport charges
Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920)
Rates (79,112 – 28,820)
Electricity (76,860 – 5,757)
Transport costs (43,271 + 4,131 +
9,972)
Repairs (30,319 – 9,972)
Consumable stores (29,800 – 4,131)
Postages, stationery, telephones
Insurance premiums (7,800 - 600)
1,2
*Depreciation
Debenture Interest
Sundries
£
276,459
85,063
112,810
90,107
564,439
129,92
4
50,292
82,617
57,374
20,347
25,669
15,604
7,200
43,540
5,600
9,176
5
Profit (less loss) on disposal of
fixed assets
Net Profit For The Year
Retained profit brought forward
Distributed profit
Less:
Ordinary dividends proposed
Retained profit carried forward
447,343
117,096
1,520
118,616
108,284
226,900
48,000
178,900
Workings:
Fixed Assets:
Balance 1 October 1981
(veh 82,600 – (6,000 +
21,000))
Acquisitions (21,000 –
6,000)
Disposals
Balance 30 September
1982
Land Building
£
s
270,0
£
00
120,00
0
270,0
00
120,00
0
Plant
£
271,90
0
(26,00
0)
245,90
0
Vehicl
e
£
55,600
Total
£
717,50
0
27000
(16,40
0)
66,200
27,000
(42,40
0)
702,10
0
391
Depreciation
-rate
Partnerships
£
-
2%
£
2,400
10
25
£
£
-current year charge
24,59 16,5
0
50
Alternatively the depreciation charge for vehicles (£16,550)
transport cost, thereby increasing that figure to £73,924.
£
43,54
0
can be classified as a
Lesson Seven
Provision for Depreciation:
Balance 1 October 1981
Disposals
Current year charge
392
-
39,600
-
2,400
-
42,000
Balance 30 September
1982
Written down values at 30
September 1982
144,8
00
(20,8
00)
24,59
0
148,5
90
27,05
0
(13,1
20)
16,55
0
30,48
0
211,4
50
(33,9
20)
43,54
0
221,0
70
£
£
£
£
£
270,0
00
78,000
97,31
0
35,72
0
481,0
30
4,000
6,000
10,00
0
5,200
3,280
Proceeds from disposals
Less:
Written down values of
disposals
(26,000 – 20,800)
(16,400 – 13,120)
Profit/(Loss) on disposals
Qwik-Freez (East Anglisa) p.l.c
Balance Sheet as at 30 September 1982
Workings:
8,480
£(1,2
00)
2,720
1,520
393
Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£
42,000
148,590
30,480
Net
£
348,000
97,310
35,720
702,100
221,070
Partnerships
Lesson Seven
394
Suspense
£
£
Fixed Asset Disposals:
`
Plant 4000 Balance b/d
8650
Vehicle
6000 Debtors (insured loss)
1350
10000
10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the
family. The following trial balance was extracted from the books of the company as
at 31 March 1993:
Freehold property, at cost (land Sh. 75,000)
Plant, at cost
Depreciation
Motor vehicle, at cost
Depreciation – motor vehicle
Fittings and fixtures, at cost
Depreciation – fittings and fixtures
20,000 Ordinary shares of Sh. 10 each
authorized, issued and fully paid
Share premium
General reserve
Interim dividend paid
Cash at bank and in hand
Accounts receivable and payable
15% Debentures
Discount received
Profit and loss account 1 April 1992
Purchases of raw materials
Sales of finished goods
Inventories 1 April 1992:
Raw materials
Work in progress
Finished goods
Provision for doubtful debts
Bad debts
Rates and insurance
Wages
Factory power
Light and water
Plant maintenance
Salaries
Returns of raw material
Sales returns
Advertising
Transport expenses (Sales department)
Bank charges
General expenses
Sh.
125,00
0
130,00
0
Sh.
62,000
30,500
53,000
11,790
38,600
200,00
0
50,000
120,00
0
16,000
33,570
130,54
0
942,38
0
57,430
100,00
0
3,640
103,87
0
1,254,
760
33,060
57,660
107,86
0
6,400
4,890
9,430
108,37
0
22,560
16,280
10,970
90,000
3,240
395
Partnerships
1,360
8,580
24,320
3,040
36,1
60
2,003,
630
2,003,
630
Lesson Seven
396
Additional information:
•
•
•
•
Depreciation is to be provided for the year using the reducing balance
method and applying rates of 15% on plant, 25% on motor vehicle and 10%
on fittings and fixtures.
Building is to be depreciated at the rate of 4% using the straight-line method.
(Assume the whole building is used for manufacturing purposes).
Provision for doubtful debts is to be adjusted to a figure equal to 10% of
accounts receivable.
Light and water, insurance and general expenses are to be apportioned in the
ratio 4:1 between factory and administrative overheads.
Electricity and wateer accrued
was
Insurance prepaid was
Rates prepaid were
Sh.
860
270
780
Inventories were valued at:
Raw materials
Work in progress
Finished goods
•
•
139,630
82,450
124,320
Debenture interest has not yet been paid.
The directors require provision for a final dividend which will bring the
dividend for the year up to Sh. 2 per share.
Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for
the year ended 31 March 1983 and a Balance Sheet as at that date. (25 marks)
397
Partnerships
MWANGA AND SONS LTD
Manufacturing Account for the year ended 31 March 1993
Raw materials:
Opening stocks
33,060
Purchases
942,380
Less Returns In.
(3,240)
939,140
972,140
Less Closing stocks
(139,630)
Prime Costs
832,570
Factory Overheads:
Plant depreciation
10,200
Rates and insurance
2,000
Factory power
6,704
Light and water
22,560
Plant maintenance
13,712
General expenses
10,970
28,928
95,074
Opening W.I.P.
927,644
Less: Closing W.I.P.
57,660
Goods manufactured
(82,450)
(24,790)
902,854
Trading, Profit And Loss Account For The Year Ended 31 March 1993
Shs
Shs
Sales
1,254,760
Less: Closing stocks
(1,360)
1,253,400
Opening stock
107,860
Goods manufactured
902,854
1,010,714
Less: Closing stocks
(124,320)
886,394
367,006
Discount received
3,640
370,646
Debenture interest
15,000
Provision for bad debts
6,654
Depreciation
- Motor vehicle
5,625
- Fittings and fixtures
2,681
Dividend
- Interim
16,000
- Fianl
24,000
40,000
Retained Profit for the year
49,150
Retained Profit brought forward
103,870
Retained Profit carried forward
153,870
Lesson Seven
398
Balance Sheet As At 31 March 1993
Fixed Assets
Freehold property
Plant
Motor vehicle
Fittings and fixtures
Current Assets
Stocks
- Raw materials
- work in progress
- finished goods
Debtors, less provisions
Cash at bank and in hand
Prepaid expenses
Current Liabilities
Creditors
Accruals
Dividend proposed
Net current assets
Financed by:
Authorized, and issued share
capital:
20,000 Ordinary shares each
Sh. 10
Reserves:
Share Premium
General Reserve
Profit and Loss account
Cost
£
125,000
130,000
53,000
38,600
346,600
Depreciat
ion
£
2,000
72,200
36,125
14,471
124,796
Net
£
123,000
57,800
16,875
24,129
221,804
139,630
82,450
124,320
346,400
117,486
33,570
1,050
498,506
57,430
15,860
24,000
97,290
401,216
623,020
200,000
50,000
120,000
153,000
323,020
523,020
100,000
623,020
15% debentures
Workings:
B/d
Rate And Insurance
9,430 Prepaid
Prepaid
Profit and Loss Account
Factory
9,430
270
780
1,676
6,704
9,430
399
Partnerships
Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:
Sale of
Sale at a
Sale at per
Lump sum
Sale
2.
Lump sum
Sale
3.
Lump sum
Sale
4.
Lump sum
Sale
1.
When shares are sold in exchange for lump sum cash payment and this is at per
value, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
When shares are sold in exchange for lump sum cash payment and this is at a
premium, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium
Sale of shares which are to be paid for in installments are normally dealt with as
follows:
The number of installments may vary from 2 – 4. Each installment is collected
through a comprehensive set of processed(called a stage). The 4 possible stages
are:
Application stage
For each stage, an account is opened.
Allotment stage
This account must close at the end of
1st Call stage
the stage. (The application stage &
2nd Call stage
allotment stage may be dealt with in a
single account called the application/
Application Stage
In this stage, the company invites members of the public to send in applications for
share they (the public) are interested in purchasing.
The application firms must be accompanied by the 1 st installment money when the
public respond to the company’s offer.
When the company requests members of the public to send in application forms &
application money it will make the following entries in its books:
Lesson Seven
400
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application
With
If there is an over-subscription, then the excess applications may either be rejected
outright and the applicants’ money refunded, or applications awarded on a pro-rata
basis. (i.e. a lower number of shares allotted compared to the number applied for)
If outright rejection, the company will:
DEBIT: Application
With refunded
CREDIT: Cashbook
money
If pro-rata issue, the company will:
DEBIT: Application
With amount required to
CREDIT: Allotment
close the application A/C.
This marks the end of the application stage.
Allotment Stage
In this stage, the company selects the applicants and informs them of their
allotment. It also requests them to bring in a second installment. As it requests for
the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the
company, will in its books: DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the
account has closed by this stage, the stage is deemed to be over.
1st Call Stage
Here the company requests for the third installment from the public. As the
company does this, it will:
DEBIT: 1st Call A/C .
CREDIT: Share Capital.
When the public respond by bringing in the installment money, the company, will in
its books:
DEBIT: Cashbook
CREDIT: 1st Call A/C.
It is possible that some of the allotees do not pay their 1 st installment money on
time. When this is so,
DEBIT: Cashbook – with money received
DEBIT: Calls in Arrears – with money not received
CREDIT: 1st Call A/C – with total.
This marks the end of the Call stage.
2nd Call Stage
401
Partnerships
this is very similar to the 1st Call whereby the company requests for the second (and
last) call money; as it does so, it will:
DEBIT: 2nd Call A/C
CREDIT: Share Capital
When the public respond by sending in the second call money, then the company
will:
DEBIT: Cashbook
CREDIT: 2nd Call A/C
It is possible that some of the allotees do not pay up their 2 nd Call money. When this
is so:
DEBIT: Cashbook – with money collected.
DEBIT: Calls in arrears with money not received
CREDIT: 2nd Call A/C.
THIS MARKS THE END OF THE NORMAL ISSUE OF SHARES PROCEDURES.
When a debtor for share money (calls – in –arrears) does not pay up his dues, his
shares will be cancelled and any money he previously gave the company forfeited
(i.e. not refunded to him). This is known as Share Forfeiture. The entries to be made
when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.
Forfeited shares may be resold as follows:
At per value
At a premium
At a discount
If resold at per:
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale
will be expressly illegal unless:
Amounts collected from previous allotee plus an amount collected from current
allotee equals or is greater than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.
Last entry in this exercise is to transfer any balance on the share forfeiture A/C to
Share Premium A/C as follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.
Lesson Seven
402
Example 8.5 MAY 1999
QUESTION FOUR
Give a brief definition of memorandum of association and certificate of
incorporation.
(5 marks)
Radhi Tea Company Limited has an authorized share capital of Sh. 10,000,000
ordinary shares of Sh.10 each. The shares were issued at par as follows:
Payable
Payable
Payable
Payable
on
on
on
on
application
allotment
first call
second call
Sh.1.00
Sh.3.00
Sh.4.00
Sh.2.00
Applications were received for 1,630,000 shares.
It was decide to refund applicants monies on 130,000 shares and to allot all the
shares on the basis of two for every three applied for.
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.
The calls were made and paid in full with the exception of one member 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 Sh.8 per share.
Required:
The necessary ledger accounts to record these transactions
(15 marks)
(Total: 20 marks)
Solution:
Memorandum of association explains the relationship between the company and
the outside world. It shows the object of the company, the name, address, the
authorized share capital, its location (its registered office) and the date of
incorporation.
Articles of association state the rules under which the company will operate e.g. the
number of directors, the structure, and meetings. It explains the relationship
between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is
registered by the registrar of companies.
Radhi Tea Co.
Application A/C
Cashbook
OSC
Allotment
Sh.
130,000
1,000,000
500,000
1,630,000
Sh.
Cashbook
1,630,000
1,630,000
403
Partnerships
Sh.
OSC
Allotment
Allotment A/C
Sh.
3,000,000 Application
Cashbook
3,000,000
500,000
2,500,000
3,000,000
1st Call
OSC
Sh.
Sh.
4,000,000 Calls in arrears
20,000
Cashbook
3,980,000
4,000,000
4,000,000
Lesson Seven
404
2nd Call
OSC
Bal c/d
Sh.
Sh.
1,990,00 Calls in arrears
2,000
Cashbook
1,988,000
1,990,000
1,990,000
Share Premium
Sh.
Sh.
1,630,000 Share forfeiture
1,630,000
Ordinary Share Capital
Sh.
Sh.
Share forfeiture A/C 50,000
Application 1,000,000
Allotment
3,000,000
1st Call
4,000,000
nd
2 Call
1,990,000
Bal c/d
10,000,000
Share forfeiture
10,050,000
10,050,000
60,000
Share Forfeiture A/C
Sh.
Sh.
Calls in arrears
22,000
OSC
50,000
OSC
60,000
Cashbook 48,000
Share Premium
16,000
98,000
98,000
1st Call
2nd Call
Calls in Arrears
Sh.
`
Sh.
20,000
2,000 Share forfeiture
22,000
22,000
22,000
FINANCIAL STATEMENT ANALYSIS
(RATIO ANALYSIS)
Financial statements include a profit and loss A/C (income statement) that tells us the
performance of a company throughout the financial period. It also includes a
balance sheet that shows the financial position or status of a company and lastly a
cash flow statement which shows changes in cash position of the entity,
We analyse financial statements by the use of accounting ratios. There are 5
classes of ratios:
• Liquidity
• Leverage/Gearing ratios
• Activity Ratios
• Profitability
405
•
Partnerships
Equity / Investor ratios.
Lesson Seven
406
LIQUIDITY RATIOS.
These measure the firm’s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been
financed by non-owner supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various
assets to generate sales revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses
various funds to generate profits or returns. They also measure the management’s
ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and
returns expected by the owners of the firm. They also try to look at the overall
performance of the firm and going concern of the firm.
The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992
Sh
Sh
Sales
850,000
Less: Cost of Sales
Opening stock
99,500
Purchases
559,500
659,000
Less: Closing stocks
(149,000)
(510,000)
Gross profit
340,000
Less expenses
Selling and distribution
30,000
Depreciation
10,000
Administration expenses
135,000
(175,000)
Earnings before interest & taxes
165,000
Interest
(15,000)
Earnings before tax
150,000
Tax @ 50%
75,000
Less ordinary dividend
75,000
(0.75 per share)
Retained profit for the year
(15,000)
60,000
ABC
Balance Sheet as at 31 December 1992
Non Current
Sh.
Assets
250,00
Land and
0
Buildings
80,000
Plant &
330,00
Machinery
0
75,000
Current Assets
(4,000) 149,00
Inventory
0
Debtors
Issued share
capital
(20000 share of
Sh, 10)
Reserve
Retained profit
Long term
Current liabilities.
Sh.
200000
90000
60000
100000
130000
580,000
407
Less provision
Cash
Partnerships
71,000
30,000
580,00
0
Additional Note
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
Current Ratio = 250,000 = 1.92 : 1
130,000
The higher the ratio then the more liquid the firm is.
Quick Ratio/Acid Test Ratio
= Current Assets - Inventories
Current Liabilities
= 250,000 – 149,000 = 101,000
130,000
130,000
= 0.78 : 1
this is a more refined ration that tries to recognize the fact that stakes may not be
easily converted into cash. The higher the ratio, the better for the firm as it means
an improved liquidity position.
Cash Ratio
= Cash + Marketable Securities
Current Liabilities
= 30,000 = 0.23 : 1
130,000
= 0.23 : 1
This ratio assumes that stakes may not be converted into cash easily and the
debtors may not pay up their accounts on time. The higher the ratio, the better for
the firm as the Liquidity position is improved.
Net Working Capital Ratio.
= Net Working Capital
Net Assets
Lesson Seven
408
Net Working Capital =CA –CL = 250,000-130,000=120,000
Net Working Capital = 120,000 = 0.27 : 1
450,000
= 0.27 : 1
The higher the ratio the better for the firm and therefore the improved Liquidity
position.
GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able
to pay up its debts). The more debts a business has (non owner supplied funds) the
higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets
This ratio measures the proportion of total assets financed by non owner supplied
funds. The higher the ratio, the higher the financial risk .
= 230,000 = 0.4
580,000
40% is supplied by non owners
Debt Equity Ratio
= Total Liabilities
Networth (share holders funds)
= 230,000 = 0.66
350,000
40% is supplied by non-owners
This ratio measures how much has been financed by the non-owner supplied funds
in relation to the amount financed by the owners i.e. for every shilling invested in
the business by the owners how much has been financed by the non-owner supplied
funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the
creditor have put in 67 cents.
The higher the financial risk.
Long Term Debt Ratio
= Non Current Liabilities
Net Assets
= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner
supplied funds.
409
Partnerships
The higher the ratio, then the higher the financial risk.
ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250
= 4.1 times
This is the number of times stock has been converted to sales in a financial year.
The higher the ratio the more active the firm is.
An alternative formula is
=
Sales
Closing Stock
Debtors Turnover
= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit
Debtor Turnover = 850,000 = 10.625
80,000
The higher the ratio, the more active the firm has been (we had debtors over 10
times to generate the sales)
Note
Average Collection Period
=
360
Debtors Turnover
=
360 = 34 days
10.625
This measure the number of days it takes for debtors to pay up. The lesser the
period, the better for the firm as it improves the liquidity position.
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
Lesson Seven
410
130,000
= 42 times
The ratio tries to measure how many times we have creditors during a financial
period. The lesser the ratio the better.
Non Current Assets Turnover (Fixed Assets Turnover)
= Sales
Average Fixed Assets
A.F.A = 340,000 + 330,000 = 670,000 = 335,000
2
2
= 850,000 = 2.54 times
335,000
The ratio measures the efficiency with which the firm is using its fixed/ Non Current
Assets to generate sales.
The higher the ratio the more active the firm.
Total Assets Turnover
= Sales
Total Assets
= 850,000
580,000
= 1,046 times
Measures the efficiency with which the firm is using its total assets to generate
sales.
PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales
850,000
The higher the margin, the more profitable the firm is.
Net Profit Margin
= Net Profit after tax = 75,000 = 9%
Sales
850,000
The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.
Profitability in Relation to investment
411
Partnerships
Return On Investment
= Net Profit after tax
Total Assets
= 75,000 = 13%
580,000
Shows how efficient the firm has been in using the total assets to generate returns
in the business.
Return On Capital Employed
= Net Profit after tax
Net Assets
= 750,000 = 17%
450,000
How efficient the firm has been in using the net assets to generate returns in the
business.
Return On Equity
= Earnings after tax
Networth
= 75,000
850,000
= 21%
Efficiency of the firm in using the owner’s capital to generate returns.
NOTE
The higher the ratio the more efficient is the firm.
EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.
= 75,000
20,000
= 3.75
This is the return expected by an investor for every share held in the firm.
Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC’S shares is Sh20/Share.
Lesson Seven
412
= 3.75 × 100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in
the business.
Dividend Per Share
= Total Dividend (ordinary shareholders)
Ordinary shares outstanding.
= 15,000
20,000
= 0.75 cts per share
This is the amount expected by an investor for every share held in the firm.
NOTE
The higher the amounts, the better for the firm.
LIMITATIONS ON USE OF RATIOS
• It is difficult to categorise firms in the various industries due to diversification.
This makes inter-company comparison difficult.
• It is difficult to compare one company with others in case of monopolist firms.
• Different, firms use different accounting policies and methods e.g. on
depreciation, provisions and other estimates so this makes comparison of
companies difficult.
• Ratios are compiled at a point in time and may be affected by short term
changes. Therefore ratios are used for short term planning.
• Ratios are computed from historical data and therefore are not good
indicators of the future.
DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company’s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same
industry.
Example 8.6 (ACCA DEC 98)
Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and
Omega Ltd. The companies trade as wholesalers, selling electrical goods to retailers
on credit. Their most recent financial statements appear below.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
Zeta Limited
Omega Limited
413
Partnerships
£’000
Sales
Cost of sales
Opening stock
Purchases
Less: closing stock
200
3,200
3,400
400
Profit before tax
Taxation
Net profit for the period
£’000
£’000
6,000
800
4,800
5,600
800
3,000
1,000
Gross profit
Expenses
Distribution costs
Administrative expenses
Interest paid
£’000
4,000
200
290
10
4,800
1,200
150
250
400
500
500
120
380
800
400
90
310
Lesson Seven
414
Balance Sheets As At 31 March 20x8
Zeta Limited
£’000
Fixed assets
Tangible assets
Warehouse and office
1,200
buildings
600
Equipment and vehicles
Omega Limited
£’000
£’000
£’000
5,000
1,000
1,800
6,000
Current assets
Stock
Debtor – trade
- sundry
Cash at bank
400
800
150
1,350
800
900
80
100
1,180
Current liabilities
Creditors – trade
- sundry
Overdraft
Taxation
(800)
(80)
(200)
(120)
(800)
(100)
(90)
Long-term loan (interest
10% pa)
Share capital
Revaluation reserve
Profit and loss account
150
1,950
1,950
1,000
950
1,950
890
6,890
(4,000)
2,890
1,600
500
790
2,890
Required:
a) Calculate for each company a total of eight ratios which will assist in
measuring the three aspects of profitability, liquidity and management of the
elements of working capital. Show all workings.
(8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies
as regards their profitability, liquidity and working capital management.
(8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the
implications of this for the two companies?
(4 marks)
(20 marks)
Solution:
415
Partnerships
PROFITABILITY
Gross profit margin
Gross profit × 100%
Sales
Net profit margin
Net profit × 100%
Sales
Return on capital employed
Profit before interest and tax
Capital employed
Return on shareholders’ capital
Profit before tax
Share capital and reserves
Asset turnover
Sales
Capital employed
LIQUIDITY
Current ratio
Current assets
Current liabilities
1000 × 100% =
25%
4000
1200 × 100% =
20%
6000
500 × 100% =
12.5%
4000
400 × 100% = 6.7%
6000
510 = 26.2%
1950
500 = 25.6%
1950
4000 = 2.1
times
1950
800 = 11.6%
6890
400 = 13.8%
2890
6000 = 0.9 times
6890
1880 = 1.9:1
990
Quick ratio
Current assets – stock
Current liabilities
1350 = 1.1:1
1200
Gearing
Long – term loans
Capital
950 = 0.8:1
1200
Interest cover
Profit before interest and tax
Interest charges
nil = nil
1950
1080 = 1.1:1
990
4000 = 58%
6890
800 = 2 times
400
510 = 51 times
10
WORKING CAPITAL
MANAGEMENT
Debtors days
Trade debtors × 365 days
Sales
Creditor days
Trade creditors × 365 days
Purchases
800 × 365 = 73
days
4000
900 × 365 = 55
days
6000
800 × 365 = 61
days
Lesson Seven
416
Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing
policy. Omega’s net margin is lower than Zeta’s. Omega’s expenses are therefore
proportionally higher. It should be noted that Omega’s bottom line profit is reduced
significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset
base due in part to a revaluation. It may be that a revaluation of Zeta’s assets will
partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both
companies’ quick ratios are much closer, Zeta’s liquidity does appear to be an issue
especially as there is no cash at hand. It would be wise to examine projected
cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has
no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market
which can be subject to obsolescence.
Zeta’s creditor and debtor days are a cause for concern. Debtors should be
collected within 60 days if not sooner. 60 day collection would improve cash flow by
over £140,000 reducing the debtors balance to £658,000(60/73 × £800,000).
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks
damaging the goodwill it has with its suppliers. Paying creditors within 60 days
would have an adverse effect on cash flow of over £270,000. The creditors balance
would be £527,000 (60/91 × £800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing
means that should profits fall they may not be in a position to pay the loan interest.
Zeta’s capital is entirely share capital and so a fixed return is not required.
Omega’s loan appears to be fixed rate. This means that in times of falling interest
rates Omega will have higher interest costs than say, Zeta, if Zeta borrowed the
same amount. The converse is true in times of rising interest rates.
417
Partnerships
REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31
October 1999.
Sh.
Sh.
Authorized and issued capital
400000
Share premium
00
8% debenture stock
5000
Profit and loss stock
00
Motor vehicles at cost
165000 100000
Provision for depreciation on motor vehicle
00
00
Plant and machinery at cost
55000
Provision for depreciation on plant and
258000
00
machinery
00
Land buildings at cost
34000
Stock in hand 1 November 1998 – Finished
300000
00
goods
00
– Raw materials
42000
63000
– Work-in-progress
0
00
38000
0
Trade debtors
56000
Office furniture and equipment at cost
0
Provision for depreciation on office furniture
and equipment
Sh.
Sh.
Trade creditors
736000
Purchase of raw materials
0
Sales of finished goods
89000
18500
Direct wages
0
0
Direct expenses
10000
Factory expenses
00
Indirect materials
950000
Factory insurance
0 285500
Sales room expenses
00
Administration expenses
135000
Office salaries and wages
0
Vehicles running expenses
395000
Bad debts written-off
290000
Balance at bank – overdrawn
350000
150000
485000
620000
840000
656000
640000
11750
00
966100 966100
00
00
Lesson Seven
418
Notes:
Closing stock includes
– Finished goods
– Raw materials
– Work-in-progress
Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a
transfer of Sh. 2000000 to a general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on
furniture and equipment, plant and machinery and motor vehicles respectively.
The overdraft interest of Sh. 725000 was communicated to the company by the
bank on 5 November 1999 and therefore it has not been posted in the cash book.
Required:
Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
(12 marks)
Balance sheet as at 31 October 1999.
(8 marks)
(Total: 20 marks)
QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31
October 1998.
Sh,’00 Sh,’00
Authorized and issued capital (shares of Sh. 20
0’
0’
each fully paid)
30,000
Share premium
350
10% premium
3,500
General reserve
2,000
Profit and loss account 1 November 1997
2,850
Motor vehicles at cost
3,500
Provision for depreciation
265
Freehold property
44,50
Trade debtors
0
Trade creditor
1,375
460
Purchases and sales
127,45
Stock in hand 1 November 1997
95,650
0
Furniture and fittings at cost
3,478
Provision for depreciation
1,540
Goodwill
138
Rent receivable
500
Salaries and wages
385
General expenses
2,285
Vehicles running expenses
358
Bad debts
2,470
Telephone and postage
124
Water and electricity
568
419
Rates and insurance
Cash at bank
Partnerships
269
289
10,492
167,39
8
167,39
8
Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no
entries were made in the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October
1998 but no entries were made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000
respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been
received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are
10% and 20% on cost respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a
transfer of Sh.2,500,000 to the general reserve.
10.The debenture interest has not yet been paid.
Required:
1. Trading, profit and loss account for the year ended 31 October 1998. (13
marks)
2. Balance sheet as at 31 October 1998.
(7 marks)
(Total: 20 marks)
QUESTION THREE ACCA PILOT PAPER
The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996
were as follows:
31
December
1995 1996
Lesson Seven
Tangible fixed assets
Cost of valuation
Aggregate
depreciation
Current assets
Stock
Debtors
Cash
Current liabilities
Trade creditors
Corporation tax
Proposed dividend
Net current assets
Loans (due for
repayment 1999)
Called up share capital
Share premium
Revaluation reserve
Profit and loss account
420
£000
126,300
(50,000)
£000
76,300
12,000
10,500
1,400
23,900
£000
£000
162,4
00
(64,0
00)
98,40
0
15,00
0
14,00
0
2,000
31,00
0
6,800
3,400
4,000
14,200
9,700
86,000
(60,00
0)
26,000
6,000
1,000
19,000
26,000
The stock at 31 December 1994 was £10,000,000.
9,400
5,000
6,000
20,40
0
10,60
0
109,0
00
(60,0
00)
49,00
0
10,00
0
3,000
8,000
28,00
0
49,00
0
421
Partnerships
The summarized profit and loss accounts for the company for the years ended 31
December 1995 and 1996 were:
Sales
Cost of sales
Gross profit
Expenses
Net profit before tax
Year ended 31 December
1995
1996
£000
£000
64,000
108,000
40,000
75,600
24,000
32,400
10,000
12,400
14,000
20,000
Required:
a) Calculate the following accounting ratios for both years:
• The gross profit percentage
• The current ratio and the quick ratio (or acid test)
• Debtors’ collection period in days
• Trade creditors’ payment period in days (based on purchases figures
which are to be calculated)
• Gearing ratio.
b) Show you full workings.
(10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and
from comparing them with those for 1995.
(5 marks)
d) State two points which could cause the movement in the gross profit
percentages between the two years and explain how they could bring the
change about.
(2 marks)
e) State the extent to which you agree or disagree with the following and give
brief reasons for your answers.
f) The current ratio and the quick ratio help to assess whether a company is
able to meet its debts as they fall due. Therefore the higher these ratios are
the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit
from the income produced by investing the money borrowed.
(3 marks)
(20 marks)
QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1
each at 120p per share, payable as to 50p on application (including the premium),
40p on allotment and the balance on 1 May 19X1.
The lists were closed on 10 February 19X1, by which date applications for 70,000
shares had been received. Of the cash received, £4,000 was returned and £6,000
was applied to the amount due on allotment, the balance of which was paid on 16
February 19X1. All shareholders paid the call due on 1 May 19X1, with the
exception of one allotee of 500 shares. These shares were forfeited on 29
September 19X1 and reissued as fully paid at 80p per share on November 19X1.
Lesson Seven
You are required to write up the necessary accounts, excluding those relating to
cash, to record these transactions.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY
PACK
422
423
Partnerships
COMPREHENSIVE ASSIGNMENT No.4
TO BE SUBMITTED AFTER LESSON 8
To be carried out under examination conditions and sent to the Distance Learning
Administrator for marking by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of
Shs.5,000.00. On 2 January 2002, this assistant did not report for work and it was
found that he had left, taking with him the balance in the till. It had been Pesa
Nyingi’s practise to bank each Monday morning the balance in the till resulting from
the previous week’s transactions. No float was maintained. The only records kept,
apart from the bank statement, were details of sales on credit and unpaid invoices
for goods.
You ascertain the following balances on 1 January 2001.
Stock
688,000.00
Creditors
988,000.00
Bank
276,000.00
Debtors
344,000.00
Cash
228,000.00
Accrued expenses 100,000.00
Fixtures and Fittings
1,000,000.00
You also ascertain the following:
An analysis of the bank statement for the year ended 31 December 2001 showed
the following
Receipts
180,000.00
Banking from debtors cheques 4,116,000.00
Cash
4,296,000.00
Payments
Creditors for goods
Rent and expenses
3,748,000.00
232,000.00
3,980,000.00
Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00
for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week
excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs.
13,960,000. An amount of Shs. 336,000.00 was still outstanding.
Lesson Seven
424
Creditors for goods have always been paid by cheque. Unpaid invoices on 31
December 2001 amounted to Shs. 1,120,000.00. Creditors for expenses were Shs.
800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned
against a cash receipt of Shs. 48,000.00. The receipt has not been recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
A depreciation charge of 20% is to be charged on the value outstanding on the
fixtures and fittings at the end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact
has not yet been reflected in the bank statement.
Assume a 50 week year
Required:
a) Prepare workings showing your calculation of the amount of the theft. (8
marks)
b) Prepare a trading, profit and loss account for the year ended 31 December
2001 and a balance sheet as at that date.
17 marks)
QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the
following information is available.
Sales Ledger balances as at 1 May 2002
Purchases Ledger balances as at 1 May 2002
Sales Ledger balances as at 31 May 2002
Purchases Ledger balances as at 31 May 2002
Credit Sales
Credit Purchases
Cash and cheques received
Sales Ledger
Purchases Ledger
Cash and cheques received
Sales Ledger
Purchases Ledger
Credit notes issued (for returns inwards)
Debit notes received (returns outwards)
Dishonoured cheques
Discounts allowed
Discounts received
Bad debts written off in December 2001 but now
recovered
Debit
1,672,000.
00
28,000.00
?
36,500.00
Credit
114,600.00
747,000.00
67,000.00
?
18,938,000.
00
670,000.00
1,549,700.0
0
13,000.00
47,000.00
632,000.00
119,800.00
24,000.00
32,000.00
43,000.00
33,800.00
14,200.00
It has been decided to set off a debt due from a customer, A Mutiso, of Shs.
30,000.00 against a debt due to him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the
total debtors on 31 May.
425
Partnerships
Required:
a) Prepare the sales ledger control account and the purchases ledger control
account for May 2002 in the books of Jambo Dealers Ltd.
(14
marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers
Ltd relating to the company’s trade debtors and trade creditors.
(3
marks)
c) Briefly explain the purpose of control accounts.
(3
marks)
QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year
ended 30 April 2000, 2001, 2002 and balance sheet as at 30 April 1999, 2000, 2001
2002 for James Mwendapole, a sole trader.
Trading, Profit and Loss Accounts for the year ended 31 May
Sales
Cost of sales
Gross Profit
Expenses (including loan
interest)
Net Profit
2000
Sh’000’
1,000.00
(600.00)
2001
Sh’000’
1,200.00
(720.00)
400.00
(200.00)
480.00
(300.00)
200.00
180.00
2002
Sh’000’
1,400.0
0
(980.00
)
420.00
(280.00
)
140.00
Balance Sheets as at 31 May
Non Current Assets
1999
Sh’000’
380.00
2000
Sh’000’
480.00
2001
Sh’000’
680.00
2002
Sh’000’
900.00
Current Assets
Stocks
Debtors
Balance at bank
Total Current Assets
140.00
100.00
900.00
330.00
160.00
180.00
130.00
470.00
200.00
400.00
390.00
990.00
290.00
520.00
160.00
970.00
Current Liabilities
Creditors
Loan (received on 31
May 2001)
Total Current Liabilities
(40.00)
(40.00)
(80.00)
(80.00)
(120.00)
(500.00)
(620.00)
(180.00)
(500.00)
(680.00)
Net Current Assets
290.00
670.00
390.00
870.00
370.00
1,050.00
290.00
1,190.00
Lesson Seven
426
Net Assets
Capital
Opening Capital
Add Net Profit
510.00
160.00
670.00
670.00
200.00
870.00
870.00
180.00
1,050.00
1,050.00
140.00
1,190.00
Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income
from his grandfather and therefore has taken no drawings from his retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services
rendered to the business by James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the
rate of 8% per year.
Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following
financial ratios.
• Return on capital employed
• Quick ratio
• Stock turnover
• Net Profit Margin
(8 marks)
2. Use two financial ratios (not referred in (a) above) to draw attention to two
aspects to the business which would appear to give cause for concern.
(6
marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue
trading and whether it was a sound decision to borrow the loan.
(6
marks)
QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality
wheelbarrows, Bingwa being responsible for the factory and Shabiki being
responsible for sales. Completed wheelbarrows are transferred from the factory to
the warehouse at agreed prises. Bingwa and Shabiki are credited with one third of
the manufacturing profit and 10% of the trading gross profit respectively and the
balance of the firm’s profit being shared equally. All wheelbarrows are sold at Sh.
680.00 each. No interest is credited or charged on capital accounts or drawings.
The following trial balance was extracted on 31 March 2002.
427
Partnerships
Sh.
Capital Accounts
Bingwa
Shabiki
Drawings
Bingwa
Shabiki
Freehold factory (including land Sh.
300,000.00)
Factory Plant at cost
Delivery Van at cost
Provision for depreciation
Freehold Factory
Factory Plant
Delivery Van
Stocks on 1 February 2001
Raw materials
Work in progress
Wheelbarrows (1220 at Shs. 440)
Sales
Return inwards
Purchases of raw materials
PAYE
Factory wages
Office wages
Expenses Factory
Office
Provision for unrealized stock (in
warehouse)
Provision for doubtful debts
Debtors and creditors
Bank
96,000.0
0
87,400.0
0
708,800.
00
326,400.
00
82,000.0
0
42,000.0
0
40,200.0
0
536,800.
00
Sh.
482,000.
00
507,000.
00
307,040.
00
110,160.
00
38,400.0
0
1,237,60
0.00
13,600.0
0
291,600.
00
8,800.00
165,400.
00
48,000.0
0
126,800.
00
143,400.
00
48,800.0
0
19,200.0
0
109,200.
00
57,200.0
0
217,600.
00
2,926,00
0.00
Additional information:
2,926,00
0.00
Lesson Seven
428
a) 1540 wheelbarrows at Sh. 480 each were transferred to the warehouse
during the year.
b) Wheelbarrows in stock being balance of the current year’s production, were
valued at agreed price of Sh. 480 each.
c) The stock of raw materials was Sh. 34,000.00 and work in progress is valued
at Sh. 53,600.00
d) Accrued expenses on 31 March 2002 amounted to 62,400 (including
office(Sh. 32,800.00) and prepaid rates Sh,3,200.00 (including office Shs.
1,200.00 )).
e) Provision for depreciation is to be made as follows:
Factory buildings 2% p.a.
Factory Plant
10% p.a.
Motor vehicles
25% p.a.
The general provision for doubtful debts is to maintain at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March
2002 and a balance sheet as at that date.
(20 marks)
QUESTION FIVE
State and explain the qualities of useful financial information.
(10
marks)
To what extent do International Accounting Standards help achieve these qualities.
(5 marks)
(25 marks)
END OF COMPREHENSIVE ASSIGNMENT No.4
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
429
Partnerships
PUBLIC SECTOR ACCOUNTING
OBJECTIVES
At the end of this lesson you should be able to meet these objectives:
• State the accounting concepts, bases and policies of relevance to government accounting.
• Prepare analyse and interpret financial statements of government units.
• Public sector accounting; the development of accounting standards and their applicability to
the public sector.
• Fund accounting and its relationship to entity theory
• Income measurement and valuation in the public sector.
• Prepare the accounts of state corporations and similar organisations.
CONTENTS
• Public Sector Accounting
• Fund Accounting
Acknowledgement
430
PUBLIC SECTOR ACCOUNTING
Public sector accounting is necessary because of the central rule it plays both politically and in economic
terms. The public sector is composed of the following:
•
Central Government
•
Local government
•
Parastatals
•
Charitable organisations
All public sector organisations have one characteristic, namely they derive their specific power from
Parliament, and as a result they are represented in Parliament. The accountability of public sector to
Parliament takes a variety of forms. For example, under central government, the department heads are
directly accountable to Parliament for the activities of their organisation, such as the PS of a given ministry is
accountable to Parliament through what is known as Parliamentary Accounts Committee for the proper
management of his ministry. The Parastatals are accountable through their ministries, while local authorities
are partially accountable to Parliament, and to some extent, to the local electorate. Typically a local authority
can set out policies necessary for the improvement of services to the local population, and will look for funds
either directly or from Parliament.
The accountability to Parliament will then set the basis for objectives for different organisations. For the
central government, the objectives are directly set by Parliament, while the parastatals (e.g. KPLC) will have
general objectives set by Parliament, but specific operational objectives are to be set by the Board of
Directors appointed by the minister to oversee the operations of the Parastatal.
The following are objectives of Public Sector Accounting:
•
To provide financial information useful for the determination and
predicting of the cash inflows, the balances and financial requirements to meet the short term needs of
the organisation, i.e. the accounting information should be able to provide adequate information
regarding the tax base as the main source of income to the organisation.
•
To provide financial information useful for determination and
predicting the economic condition of the organisation.
•
To provide information useful for determining and evaluating the
performance of the organisation in terms of legal, contractual and statutory requirements, i.e. the
financial statements should be able to indicate whether the transactions of the organisation have been
carried out legally and in accordance with statutory requirements and contractual terms.
•
To provide financial information necessary for the preparation of
the budget-planning and to predict the impact of the acquisition and allocation of resources to the
organisation.
•
To provide information necessary for evaluating the managerial
performance of the organisation.
The users of public sector accounts can be summarised as follows:
•
•
Parliament – for control purposes
Government departments – to evaluate performance.
431
•
•
•
Company Accounts
Tax payers – to confirm how tax has been used
Voters – to decide whether to elect a parliament back and
evaluate government performance.
Investors and persons giving grants – such as donors.
FUND ACCOUNTING
A fund is defined as a distinct accounting entity with a self balancing set of accounts which has objectives set
out to be met. In commercial accounting, a fund may be equated to a specific division of the company; that
division being charged with specific responsibilities or given specific objectives, such as would be the case for
a production department.
In government accounting the emphasis is based on the fund as a part of an entity contributing to the overall
objectives of the organisation. For this reason, a fund account will be set to receive cash inflows, record
expenditures, show assets, as well as liabilities. An example would be a library fund A/C.
An organisation may be composed of various fund entities, each fund will have its own books of account as if
it was completely independent from the whole organisation.
ACCOUNTING THEORY
Accounting theory refers to the financial reporting that may be adopted by the organisation. It is necessary to
note that fund accounting is the representation of the entity accounting theory as used in commercial
accounting. This means a fund will be considered a distinctive unit separate from the people related to it.
The financial statements prepared for each fund will be for use of those who are interested in the fund. The
parallel in commercial accounting is that a company is a separate entity from shareholders, directors, debtors
and creditors. The financial statements of the company are prepared to be used by such people.
In public sector accounting, the main accounting concepts used are that of stewardship and accountability.
Under the stewardship accounting concept, the steward is charged with the responsibility of making sure that
the assets of an organisation are not misappropriated. Under accountability, the head of department is
accountable for his actions regarding the management of the organisation as whole.
FINANCIAL ACCOUNTING TECHNIQUES
Public sector organisations may adopt different accounting techniques; the most important listed are below:
1) Budgetary accounting
2) Cash Accounting
3) Accruals Accounting
4) Commitment Accounting (encumbrances)
5) Fund Accounting
1) Budgetary Accounting
Refers to the preparation of operating accounts in form of budgets. A budget is a management plan that
has been transformed into figures necessary to evaluate the achievement of the organisations’ objectives.
Under budgetary accounting, the concept is based on the forecasted cash flows, and operations must be
limited to the budget estimates. The organisation cannot overspend above budget restrictions without
Parliamentary approval.
Budgetary accounting therefore, aims at achieving the following:
Lesson Eight
432
(a) Ensure efficiency of managers.
(b) Communicate the objectives of the organisation to the employees
(c) Provide controls
(d) Provide a yardstick for measuring performance of employees.
2) Cash Accounting
Under this system only cash inflows and outflows are recognised and recorded. The system does not
recognise any revenue or expenditure that has not been received or paid. (i.e. accrued)
3) Accrual Accounting
The accruals concept states that revenues and costs are recognised as they are earned and incurred. Most
of the organisations in the private sector prefer this method. However, under public sector accounting,
both cash and accrual accounting can be used by different entities or kinds of organisations; e.g. if a part
of an organisation is charged with the responsibility of running activities on the same basis as commercial
organisations, such an entity may adopt accrual accounting irrespective of the accounting techniques
adopted by the main organisation.
4) Commitment Accounting
This accounting system recognises transactions when the organisation is committed to them. It means the
transaction is not recognised when cash is paid or received, nor when an invoice is received or issued, but
at an early stage where orders are received and placed. This accounting method is meant to ensure that
government units do not overspend because transactions will only be entered into after checking
committed balances.
5) Special funds
Some specific departments of a governmental organisation may adopt special fund accounting according
to the set objectives they have to meet. The following are some common special funds to governmental
organisations:
(a) Trust funds: These are those funds where the government receives money in the capacity of a
trustee. They are also referred to as Agency funds, or Fiduciary funds. Examples of such funds include
NSSF and NHIF. The governmental organisation does not have absolute title to the assets held; there
are statutory restrictions upon their use.
(b) Sinking funds: These are funds created to account for the accumulation of resources for retiring term
bonds at their maturity. Thus their main purpose is the repayment of public debts. Such funds are set
up through the approval by the Parliament, and some appropriation may be made from these funds.
The amounts appropriated are invested to earn interest; when public debt matures, the sinking fund is
used to redeem this debt.
(c) Working capital funds/Revolving funds: They are also known as internal service funds and
enterprise funds. They are used to account for services provided to other departments (internal
departments – internal service funds, external services = Enterprise funds) for a fee – usually cost-
433
Company Accounts
reimbursement basis. They are set up through the approval of Parliament to have the necessary
resources for achieving their specific objectives.
(d) Capital Project Funds: This provides resources for the completion of some specific capital projects.
The main sources of financing such funds include proceeds from treasury bonds, grants, and transfers
from other ministries and funds. This category excludes any capital projects under trust funds or
revolving funds.
(e) Specific Revenue funds or special funds: Funds of this class are created and operated to account
for revenue designated by law for specific purpose. An example of this would be library services.
(f) General funds: These are funds established to account for resources devoted to financing the general
services which the governmental units perform for its citizens. These include general administration,
protection of life and property etc.
Note: In government accounting, sources of income can be divided into 2, namely
1) Recurrent expenditure income;
2) Development expenditure income.
Recurrent expenditure income can be equated to operating income in financial accounting. Development
expenditure income can be equated to capital income in commercial accounting.
CONSOLIDATED FUND
All Revenues for the government are recorded into a fund known as a consolidated fund. The consolidated
fund account is kept by the treasury under the ministry of finance, and all revenues and grants received by
the Government are paid into this account. No money can be withdrawn from this account without approval
of Parliament, i.e. Parliament is the sole signatory to this account. This is necessary to ensure that all
government incomes are used to carry out activities of public interest; and interests are represented in such
decision making through the MPs. It is also important to note that each governmental unit may be in a
position to raise funds from its local activities (e.g. Ministry of Education – Fees from students, Ministry of
Health – Hospital fees).
Money realised in this manner is called Appropriations-In-Aid (A-I-A). Each governmental unit is expected to
make a budget of its estimated Appropriation-In-Aid and submit the budget to Parliament through the
relevant ministry. Appropriations-In-Aid is supposed to be retained by the government unit that generated it.
It will be added to the appropriation (allocation by Parliament) to cover the expenditure of the governmental
unit.
The following books of accounts are kept by each department (governmental unit) to record the transactions
of the organisation:
1. Cash Book
The cash book is that book in which all receipts and payments are recorded. Each accounting unit will
maintain a cash book. There are different types of receipts and payments in different ministries, and the
general point is that all receipts whether in cash or cheque will be recorded in the cash book.
Illustration
The following cash transactions (cash) took place for a government unit for the month of January 19X8
Sh.
02/01/119X8
Opening balance: Cash
Bank
4,000
25,000
Lesson Eight
434
02/01/19X8
Received cheque in respect of trading license
62,500
03/01/19X8
Paid Peter and Sons (cheque for goods supplied)
05/01/19X8
Cash received in respect of fees
05/01/19X8
Paid telephone charges (cheque)
06/01/19X8
Paid AB Ltd by cheque
06/01/19X8
Paid cash to James Burton
08/01/19X8
Received cheque for Licenses
09/01/19X8
Paid wages in cash
10/01/19X8
Kept a cash balance 10,000 and banked rest together
20,000
2,500
8,700
52,000
2,800
210,000
5,000
with all cheques in hand.
Required: Prepare a cash book for the governmental unit.
Solution
CASHBOOK
Jan
19X8
2 Jan
2 Jan
8 Jan
10 Jan
Balance b/d
Trade
Licenses
Licenses
Cash
CASH
Shs.
4,000
62,500
210,00
0
BANK
Shs.
25,000
261,20
0
10 Jan
Balance c/d
11 Jan
Balance b/d
279,00
0
10,000
4,500
290,70
0
-
Jan
19X8
3 Jan
5 Jan
6 Jan
6 Jan
9 Jan
10 Jan
10 Jan
11Jan
CASH
Shs.
Peter & Sons
Telephone
chg.
AB Ltd
James Burton
Wages
Bank
Balance c/d
Balance b/d
2,800
5,000
261,20
0
10,000
279,00
0
-
BANK
Shs.
20,000
8,700
52,000
-__
290,700
4,500
Note: In the illustration, the government unit has a debit balance in the bank – meaning they have an
overdrawn account with the bank. For control purposes and using the cash accounting technique,
such a situation is not allowed. The accounting officer should only release government cheques when
there is at least an equivalent amount in the bank, otherwise such cheques may be dishonoured.
2. Vote book
In commercial accounting, ledgers are a set of accounts; entries being recorded in such accounts. Under
public sector accounting, ledgers are substituted with an equivalent called the vote book. In this book,
various accounts are opened. These accounts relate to various expenditure heads and sources of revenue.
In the vote book, the vote number of any particular department or ministry is used. This is an equivalent
to a folio number under commercial accounting. The common head numbers include:
110 – Travelling and accommodation
120 – Postal and telegram expenses
435
Company Accounts
121 – Telephone expenses
130 – Official entertainment
174 – Stationery etc.
These vote heads are necessary to speed up the processing and posting of various expenditures.
Note: The vote book accounts are not to be balanced off as would be in the case of commercial accounting
(personal or real accounts) but is a statement to indicate the total amount committed together with the
payments that have been made against a given vote. It is presented generally in the form of a T- Account
with commitments indicated on the left hand side, and actual payments and balances on the right thereof, i.e.
Commitments
Payment
Balance
ILLUSTRATION
Vote head – Ministry of Public Works
A I E (Authority to incur expenditure) No. 225 – 35.
A I E (Authority to incur expenditure) K£5,000 (or Ksh100,000)
Transactions (Dec 19X6)
1 Dec Ordered for iron sheets and cement from Ton & Co. for Sh.25,000;
L.P.O. No. 5213
6 Dec Paid Sh.3,000 for lorry hire to transport cement; PV No. 357
Transactions (Jan 19X7)
10 Jan Paid Ton & Co. Sh.15, 000 being part payment for goods ordered through LPO No. 5213; PV No. 358.
15 Jan Purchased goods from AB & Co. for Sh.5,000 (timber); PV No. 359
20 Jan Issued LPO No. 5214 to Patel & Sons for windows and doors for Sh.20,000.
25 Jan Part payment to Patel & Sons Sh.7,000; PV No. 360.
Lesson Eight
436
Solution
Commitment
Date
19X
6
1
Dec
19X
7
20th
Payment
Ref
Tom & Co.
Patel & Co.
LPO 5213
LPO 5214
Estimated
Cost
Shs.
25,000
20,000
Date
19X6
PV
No.
Amoun
t
Balance
Shs.
6th Dec
19X7
357
3,000
Shs.
100,000
97,000
10th Jan
15th Jan
25th Jan
358
359
360
15,000
5,000
7,000
82,000
77,000
70,000
On 25th January the balance on the vote book will indicate Sh.70,000 with a commitment of Sh.23,000. (Tom
= 10,000; Patel = 13,000) Any other commitment must take into account the only expendable amount
in the vote is Sh.70,000 – 23,000 = Sh47,000.
Annual Accounts
Every governmental unit will prepare financial statements to account for the money allocated to them. The
financial statements differ according to the nature of the activities undertaken by the governmental unit.
However, the following types of accounts are common among government units:
1)
2)
3)
4)
5)
6)
7)
Income and expenditure accounts;
Statement of assets and liabilities,
General Accounts of Vote (GAV)
The exchequer account
Paymaster General Account (PMG)
Appropriation account
Revenue Account
The techniques involved in preparation of the account shall be given by means of the following worked
examples:
1) Income & Expenditure A/C
This is similar to income and expenditure accounts for non-profit making organisations. It is however
prepared by governmental units, which provide commercial services e.g. a staff canteen or students
welfare canteen (at governmental colleges).
Illustration
The following account balances were extracted form the books of a pension fund for the year ended 30 th June
19X7:
Payments to members
Members’ contributions
Payment
for
management
expenses
Interest on investment by fund
Fund Account
Cash balance (PMG)
Investment A/C
Dr (Shs)
500,000
Cr(Shs)
800,000
150,000
400,000
1,800,000
350,000
2,000,000
________
437
Company Accounts
3,000,000
3,000,000
Requitred: Prepare an income and expenditure account for the year ended 30 th June 19X7 and a balance
sheet as at that date.
Note: The fund is the amount set aside to meet the specific objectives of the governmental unit. It is equal to
the capital in a business in commercial accounting.
Solution
Income and Expenditure account for the year ended 30 th June 19X7
Sh.‘000
Sh.‘000
INCOME
800
Members’ contribution
400
Interest income from investments
1,200
Payments to members
500
Expenses of management
150
(650)
Surplus
550
Balance Sheet as at 30 June 19X7
Sh.‘000
ASSETS
Investment A/C
Cash balance
Sh.‘000
2,000
_350
2,350
Fund Account B/F
Add Surplus
1,800
550
2,350
2,350
2) General Account of Vote (GAV)
During a budget speech, the Minister for Finance will give detailed appropriations (allocations) of funds to
different governmental units. Through an appropriation bill, The Parliament will approve different
estimates to individual governmental units. The amount approved to each governmental unit by
Parliament is then recorded into a particular account known as “General Account of Vote” (GAV). This
account therefore records funds allocated to various governmental units.
All incomes of the government are received and recorded into an account called the “Exchequer account”.
The total amount available in the exchequer represents the consolidated fund, i.e. the consolidated fund
operates an account called exchequer.
Illustration
The approved estimates and actual details of the Ministry of Culture and Social Services for the year
19X6/19X7 were as follows:
Gross estimated expenditure
Estimated Appropriation-In-Aid
Drawings from exchequer
Gross Expenditure
Actual appropriations in aid
Required: Prepare
a)
K£640,000
K£ 40,000
K£530,000
K£480,000
K£30,000
i)
The General Account of Vote
Lesson Eight
ii)
iii)
b)
438
The exchequer account
Paymaster General Account
A statement of assets and liabilities as at 30-6-19X7
SOLUTION
Note: (i)
The exchequer account records the amount accrued by the consolidated fund to a
particular government unit
(ii)
The GAV account will record amounts approved by Parliament to a particular governmental unit.
However, the consolidated fund will issue different amounts for a given period of time to a
particular government unit subject to the maximum, which was approved by Parliament. E.g.
Parliament may approve K£600,000 for a particular governmental unit, but due to various reasons,
the consolidated fund may issue a different amount to the unit, but not exceeding K£600,000.
(iii)
The Paymaster General Account (PMG) is the cash account operated by the individual
governmental units. It records amounts so far withdrawn from the exchequer.
All money approved for a governmental unit is intended to meet a specific purpose. This means each
governmental unit will maintain an expenditure account, in which shall be recorded debits for various
expenses incurred. The corresponding credit is in the PMG account (cash account). The expenditure account
will then be closed to GAV. The difference between the amount approved by Parliament and total expenditure
will then represent a fund balance, that should be surrendered back to the treasury at year end if not used.
GENERAL ACCOUNT OF VOTE
30
June
480,000
30 June
190,000
19X7
19X7
1 July 19X7
vote 640,000
_______
K£
K£
Expenditure 1 July 19X6
Exchequer
640,000
Balance c/d 30 June 19X7 Appropriation in Aid
30,000
670,000
670,000
EXCHEQUER ACCOUNT
K£
K£
General Account for 30 June 19X7
PMG A/C
530,000
30 June 19X7
Balance c/f
110,000
640,000
640,000
PAYMASTER GENERAL ACCOUNT
K£
30
June
19X7
Exchequer
530,000
30 June 19X7 Appropriation In Aid
30,000
560,000
30
June
480,000
19X7
PMG
30
June
480,000
30 June
80,000
19X7
19X7
K£
Expenditure
Balance
c/d
560,000
EXPENDITURE ACCOUNT
A/C 30 June 19X7 General Account of Vote
480,000
439
Company Accounts
Notes:
1) Appropriation-In-Aid (AIA) is the amount to be generated by the governmental unit from its internal
activities. It is subtracted from the gross estimate (gross vote) to arrive at net estimate of (net vote)
which is approved by Parliament to be released from the consolidated fund. An A-I-A account may be
maintained,
Where: When A-I-A is received from own operations:
Dr PMG Account
Cr A-I-A Account
At the year end:
Dr A-I-A Account
Cr GAV Account
2) At the beginning of each year, each governmental unit has an estimated Appropriation-In-Aid which will
guide them on the total amount expected to be generated internally. Thus the sum of net estimates
approved and actual appropriation in aid will constitute the total funds allocated to each governmental
unit. This sum constitutes the credit side of the GAV account.
STATEMENT OF ASSETS AND LIABILITIES AS AT 30-6-19X7
K£
K£
ASSETS
110,000
______
Exchequer (Amount not yet
80,000
190,000
drawn)
Paymaster General (PMG)
FUNDED BY
General Account of Vote
190,000
Thus funds allocated have been adequately accounted for and the balance of K£190,000 will be
surrendered back to the Treasury.
In this case, the government unit will surrender the Sh80,000 from the PMG, while the exchequer will
surrender Sh 110,000 on behalf of the ministry.
Illustration:
The following information relates to a governmental unit for the fiscal year 19X6/19X7.
Gross estimates:
K£720,000
Appropriation-In-Aid estimated:
K£90,000
Drawings from the exchequer
K£450,000
Actual gross expenditure
K£520000
Actual appropriation-in-aid
K£120,000
Required:
a) Prepare the following accounts: i)
General Account of vote (GAV)
ii)
Exchequer A/C
iii) PMG A/C
b) Statement of assets and liabilities as at 30 June 19X7.
Solution:
For clear accounting procedure it is necessary to distinguish between the proportion of gross estimate that
will be generated internally and that proportion that is expected from the treasury after Parliamentary
approval.
Lesson Eight
440
GENERAL ACCOUNT OF VOTE
K£
K£
30 June 19X7
Excess in A-I-A 1 July 19X6
Exchequer A/C
30,000
630,000
30
June
19X7
Expenditure 30
June
19X7
A-I-A
52,000
120,000
30 June 19X7
Balance c/d
20,000
______
750,000
750,000
NOTE: TO SIMPLIFY ACCOUNTING ENTRIES, THE A-I-A IS RECORDED IN THE GAV AT THE END OF THE FISCAL YEAR.
THIS WILL ENABLE US TO DETERMINE WHETHER THERE WAS A SHORTFALL (DEFICIENCY) IN A-I-A FROM THE
EXPECTED AMOUNT, OR THERE WAS A SURPLUS.
EXCESS APPROPRIATION-IN-AID
30 June
30,000
19X7
Balance
K£
c/d 30
June
30,000
19X7
GAV
K£
A/C
EXCHEQUER ACCOUNT
1 July 19X6
vote630,000
______
K£
K£
General Account of 30
June
19X7
PMG
450,000
30 June 19X7
Balance c/d
180,000
630,000
630,000
PMG ACCOUNT
K£
K£
30 June 19X7
Exchequer A/C 30 June 19X7
Exchequer A/C
450,000
520,000
30
June
19X7
A-I-A 30
June
19X7
Balance
120,000
50,000
570,000
570,000
APPROPRIATION IN AID ACCOUNT
30
June
120,000
19X7
K£
GAV 30
June
120,000
K£
PMG
19X7
Note: amounts to be surrendered back to the exchequer will be £230,000. The governmental unit is also
expected to remit any A-I-A to the consolidated fund – This is more apparent in a statement of appropriation.
(also known as appropriation A/C).
STATEMENT OF ASSETS AND LIABILITIES AS AT 30th June 19X7
Assets
Exchequer A/C
Paymaster General (PMG)
Funded by
Excess in AIA
K£
180,000
50,000
K£
______
230,000
30,000
______
441
Company Accounts
General Account of Vote
200,000
230,000
APPROPRIATION ACCOUNTS
These may be drawn in two different ways (one being a slight variation from the other).
An example of an appropriation account would be as follows:
APPROPRITATION ACCOUNT FOR THE YEAR ENDED 30TH JUNE 19X4 (K£)
Details
Approved estimate
Personal emoluments:
- original estimate
- supplementary
estimate
House allowance
Passage and Leave
Travelling expenses:
- original estimate
- supplementary
estimate
Electricity & Water
Purchase of plant &
mach.
Gross Appropriation
Appropriation-In-Aid
Net Appropriation
80,000
8,000
22,000
(2,000)
Actual
Expendit
ure
88,000
15,000
5,000
90,000
13,000
4,500
20,000
6,000
50,000
23,000
6,500
40,000
184,000
(15,000)
169,000
177,000
(12,000)
165,000
Amount
underspent
Amount
overspent
2,000
2,000
500
10,000
3,000
500
_____
12,500
5,500
Note:
1) Net estimate exceeds actual expenditure by K£4,000. This indicates that there was no over expenditure
for the governmental unit as a whole. However, there are some over-expenditures on individual items; but
since these are not significant, no explanations are required by the accounting officer.
2) The gross estimates and gross actual expenditures are recorded before taking into account the effect of AI-A. In this case gross expenditure estimate exceeds the gross actual expenditure by K£7,000. But in
order to determine the surplus to be returned to the treasury or over-expenditure, we must take into
account the effects of either surplus AIA or deficiency of AIA. In this case, there is a shortage in AIA of
K£3,000. The deficiency must be netted off from the surplus of “approved estimates and actual
expenditure”:
Surplus of estimates over actual expenditure
K£7,000
Less deficiency in A-I-A
(3,000)
Expendable balance
K£4,000
Therefore there is no net over-expenditure by the ministry.
Illustration
The approved estimates and actual expenditure details of the Ministry of Agriculture for the year 19X7/19X8
were as follows:
CODE
000
050
Details
Personal emoluments
House Allowance
Approved
estimates K£
123280
19,550
Actual
Expenditure K£
97,520
14,260
Lesson Eight
080
100
110
120
190
196
230
620
442
Passage and Leave
Travelling and accommodation
Transport and maintenance
Postal and Telecom expenses
Miscellaneous charges
Training expenses
Purchase of equipment
AIA (Realised income)
41,040
1,334
16,100
4,600
17,480
5,980
21,000
1,000
667
1,656
13,593
3,312
16,882
4,738
39,800
5,560
The ministry made fair equal withdrawals from the exchequer in July 19X7, October 19X7, January 19X8 and
May 19X8. In total, the ministry had drawn K£200,000 by the year-end.
Required:
a) The general account of vote
b) The exchequer account
c) The PMG account
d) Statement of assets and liabilities as at 30th June 19X8.
SOLUTION
It would help if an appropriation account is drawn up. In this illustration it is drawn in a slightly varied version:
CODE
Details
000
050
080
100
110
120
190
196
230
Personal emoluments
House Allowance
Passage and Leave
Travelling and
accommodation
Transport and maintenance
Postal and Telecom
expenses
Miscellaneous charges
Training expenses
Purchase of equipment
Gross Appropriation
A-I-A
Net Appropriation
620
Approved
Estimates K£
123280
19,550
41,040
1,334
16,100
4,600
17,480
5,980
21,000
Actual
Expenditure
K£
97,520
14,260
667
1,656
13,593
3,312
16,882
4,738
39,800
Over/Under
Expenditure
K£
25,760
5,290
40,373
(322)
2,507
1,258
598
1,242
(18,800)
250,364
(1,000)
249,364
192,428
(5,560)
186,868
57,936
4,560
62,496
GAV ACCOUNT
K£
30 June 19X8 Excess A – I – A A/C
4,500
30 June 19X8
Expenditure A/c
192,428
30 June 19X8
Balance c/d
57,936
254,924
30 June
4,560
19X8
Balance
1 July 19X7
249,364
30 June 19X8
5,560
K£
Exchequer A/c
A – I – A A/C
_______
254,924
Excess Appropriation in Aid Account
K£
K£
c/d 30
June
19X8
GAV
A/C
4,560
443
1 July
249,364
Company Accounts
Exchequer Account
K£
K£
GAV A/C 30
June
19X8
Expenditure
200,000
30 June 19X8
Balance c/d
49,364
249,364
249,364
19X7
PMG Account
30 June 19X8
200,000
30 June 19X8
5,560
K£
Exchequer (Total) 30 June
192,428
A – I – A A/C 30 June
13,132
205,560
K£
(Total)
19X8
PMG
19X8
Balance
c/d
205,560
Expenditure
30
June
192,428
19X8
K£
PMG 30
June
192,428
19X8
GAV
K£
A/C
Appropriation-In-aid Account
30
June
5,560
19X8
K£
GAV 30
June
5,560
19X8
K£
PMG
STATEMENT OF ASSETS AND LIABILITIES AS AT 30 JUNE 19X8
K£
K£
ASSETS
49,364
_____
Exchequer A/C
13,132
62,496
Paymaster General A/C
FUNDED BY
General Account of Vote
Excess appropriation-in-aid
57,936
4,560
______
62,496
REVENUE ACCOUNTS
A revenue account records only the estimated revenue and actual revenue from each particular revenue
source for the governmental unit. The difference between the two, if significant must be explained by the
accounting officer. Alternatively the significant difference between the two can be used to correct future
estimations by the governmental unit. It could also represent new factors emerging during the year which
were not taken into account during the previous budget.
ILLUSTRATION
From the following data, prepare a statement of revenue for the year ended 30 th June 19X7.
Renting building and equipment
Estimated RevenueActual Receipts
K£850,000
K£870,000
Lesson Eight
444
Fee for trading licenses
Fees for import/export licenses
Other receipts
K£430,000
K£470,000
K£235,000
K£400,000
K£480,000
K£210,000
The following additional details are available: (i)
Balance on hand on 30th June 19X6
K£247,000
(ii)
Balance on hand on 30th June 19X7
K£160,000
REVENUE A/C FOR THE YEAR ENDED 30TH JUNE 19X7
Details
Estimat
e£
Balance b/d (30-June19X6)
Rent
for
building/machinery
Fees for trading licenses
Fees for import/export
Others
850
430
470
235
Actual
£
247
870
400
480
210
Details
Payment to Treasury
Balance c/f (30.6.19X7)
1,985
1,960
2,207
£
2,047
160
2,207
Note: There are no serious differences between estimate and actual receipts, hence no explanation is
required by the accounting officer.
Illustration:
The following are extracts from the trial balance for revenue head No. 180 – 240, Airport revenue collection
for the year ended 30th June 19X8:
Code
Details
Dr(£)
Cr (£)
630
Renting building and equipment
807,456
631
Rent from land
3,796,205
651
Aviation landing fee
3,542,221
652
Airport passenger tax
3,991,029
670
Other airport receipts
798,144
Payment of revenue to exchequer
13,288,687
The following additional details are made available:
i)
ii)
Balance in hand at 30th June 19X7 £2,568,242.
Estimated receipts for the year:
CODE
AMOUNT
630
£1,000,000
631
£2,500,000
651
£3,000,000
652
£3,600,000
670
£1,100,000
Required:
a) A statement of revenue for the year ended 30 th June 19X6
b) Give appropriate footnotes for material differences between estimates and the actual receipts.
Solution
REVENUE ACCOUNT FOR THE YEAR ENDED 30TH JUNE 19X8
Details
Balance
19X7)
Estimate
£
b/d
(30-June1,000,000
Actual £
Details
2,568,242
807,456
Payment to Treasury
K£
13,288,68
7
445
Renting
building/machinery
Rent for land
Aviation landing fees
Airport passenger tax
Other airport receipts
Company Accounts
2,500,000
3,000,000
3,600,000
1,100,000
3,796,205
3,542,221
3,991,029
798,144
11,200,00
0
12,935,05
5
15,503,29
7
Balance c/f 30.6.19X8
2,214,610
160
_________
15,503,29
7
Note: There may have been a significant increase in the volume of business at the airport. It is possible that
a new airline (previously not operational to Kenya) has decided to make Kenya one of its
destinations/stopovers. It is also possible that some land and buildings have been sold, thus leading to a fall
in rental income.
GENERAL AND SPECIAL FUNDS ACCOUNTS
In carrying out its functions to meet both economic and political needs of the country, the government sets
out various funds that are charged with specific governmental units, ministries or departments that will
oversee the operations of the fund.
Note: A fund is an entity with self-balancing books to meet specified objectives. For proper accounting,
different funds are named in accordance with the activities they are supposed to undertake. For example,
the general fund of a governmental unit is the entity that accounts for all resources and assets used for
financing the general administration of the unit. The general administration of the unit is for traditional
services provided to the people, such as security, health, education and eradication of poverty.
In some cases, the government may set aside funds to meet special duties or activities which are different
from ordinary traditional services being offered to the people. This means whenever a tax or other revenue
source is authorised by Parliament to be used for a specified purpose, then a governmental unit avails itself of
that source, and may create what is known as a Special Revenue Fund.
The purpose of a special revenue fund is to show that the revenue from such sources was used for a specific
purpose only; and the governmental unit will then operate what is known as a special fund account to record
the resources and liabilities for such an entity.
The general fund and special funds are commonly known as revenue funds of a governmental unit. Thus,
where there is no specification, the revenue fund of a governmental unit may refer either to the general fund
or the special fund.
It is important to note that the general fund as well as special revenue fund only record current assets and
current liabilities of the governmental unit. Long term assets as well as long term liabilities for governmental
units are covered under different funds e.g. property funds. The difference between current assets and
current liabilities of a general or special fund constitute what is known as “fund equity”. Fund equity would
thus be an equivalent of net working capital in commercial accounting. However from the governmental
accounting point of view, fund equity represents the fund balance that has not been directly used or
committed. The fund equity can further be divided into two parts:
i)
Fund balance
ii)
Reserves
The reserves part of a fund equity represents funds that have been committed but the liability not yet
incurred. For example, where a contract has been entered into, and the contractor has been issued with an
LPO, but he has not yet supplied or provided the service; the amount committed to the LPO will be
represented in form of a reserve to indicate that it is fund balance which cannot be distributed/utilised. The
other distributable amounts are listed under fund balance.
Lesson Eight
446
BUDGETARY ACCOUNTING
All funds set up by the government to meet different objectives will have a budget as a source of control with
regard to estimated revenue as well as estimated expenditure (appropriations).
In order to record
transactions of a governmental unit, the following general ledger control accounts are recommended:
i)
ii)
iii)
Estimated revenue A/C
Appropriation A/C
Encumbrances A/C
These three accounts are general ledger control accounts which must be supported by the relevant subsidiary
accounts as illustrated below:
Illustration
The expected revenue source of a particular governmental unit were as shown below:
REVENUE LEDGER
Taxes
Licenses and permits
Intergovernmental revenues
Charges for services rendered
Fines and forfeitures
Miscellaneous revenues
Total Expected Revenue
£882,500
£125,500
£200,000
£90,000
£32,500
£19,500
£1,350,000
The Expected revenue would be recorded in the general ledger control accounts as £1,350,000; being the
sum of individual expected revenue. The journal entry to record this transaction is:
Estimated Revenue
Fund balance
To record approved
governmental unit
Dr £
1,350,000
Cr £
1,350,000
revenue
to
a
Subsidiary ledgers will however record details of individual sources of revenue.
Note: Estimated revenues are potential assets for the non-governmental organisation and are comparable to
debtors in commercial accounting; hence the debit entry in the estimated revenue control account. On the
other hand, appropriations are potential liabilities and are recorded through credit entries in the
appropriations control A/C.
Estimated revenues represent what the government unit expects from various sources. At the end of year,
the actual revenue realised may be different from the estimated revenue. The revenue realised is recorded
through the following entries:
Debit Cash
Credit Revenue A/c (This also acts as a control A/C)
The revenue account is then closed to estimated revenue account to indicate whether estimated revenue
exceeds actual revenue or vice versa.
EXPENDITURE ACCOUNT
447
Company Accounts
This account records actual liability incurred as opposed to the appropriation account which records estimated
or potential liability. The corresponding credit is in the individual liability accounts, e.g.
Expenditure Account
£
payable Appropriations
74,000
payable
Wages
60,000
Postage
14,000
74,000
£
A/C
74,000
The total expenditures incurred will then be compared with appropriations (or estimated expenditure). For
this reason, the expenditure account is closed to appropriations A/C.
Wages Payable
£
Cash
60,000
Expenditure
60,000
£
A/C
Postage payable
£
Cash
14,000
Expenditure
14,000
£
A/C
Encumbrances
Encumbrances record the commitments that have been entered into but services are yet to be received. The
purpose of recording the commitments is to ensure that the budgeted appropriations are not exceeded. In
this way, accounting officers may guard against over expenditure.
E.g. assume that approved estimates for a governmental unit was Sh1,000,000, and so far during the year
Sh800,000 had already been incurred. Also assume that LPOs amounting to Sh120,000 have been committed
to vote books. This therefore means that out of the Sh1,000,000, only Sh80,000 is available either to be
retained to the treasury or to be expended by the governmental unit.
The commitments are recorded in:
i)
Encumbrances accounts;
ii)
Fund balance reserved for encumbrances A/C
In the above example, the encumbrances of Sh120,000 will be recorded as follows:
Encumbrance
Fund
120,000
balance
Sh
reserved...
Sh
Fund balance reserved for encumbrance
Sh
Encumbrance
120,000
After the expenditure has been incurred (commitments have been fulfilled). The above entries are reserved.
At the same time, the expenditure is fully recorded. Assume the encumbrance of Sh120,000 was in respect of
pool chlorine for training governmental unit forces; and the supplier has already fulfilled the commitment and
has been paid:
Encumbrance A/C
Lesson Eight
Fund
120,000
balance
Encumbrance
120,000
Pool
120,000
448
Sh
reserved... Fund
120,000
balance
Sh
reserved…
Fund balance reserved for encumbrance
Sh
Sh
Encumbrance
120,000
Expenditure A/C
£
Chlorine Appropriations
120,000
£
Pool Chlorine A/C
Sh
Cash
120,000
Sh
Expenditure
120,000
Sometimes there is an overlap between the end of the accounting period and when the commitments are
fulfilled. Assume that the governmental unit accounting period ends on 30 th June every year, and a
commitment entered into during the month of April for Sh250,000 have been partially services to the tune of
Sh210,000 at the end of the accounting period to 30 th June 19X7. From the point when commitment was
entered into, the following entries shall be made:
449
Company Accounts
Encumbrance A/C
d
,000
balance
__
Sh
reserved... Fund
210,000
Fund
40,000
250,000
balance
Sh
reserved…
balance
250,000
This account is not to be balanced but closed to fund A/C
Encumbrance
210,000
Balance
40,000
Fund balance reserved for encumbrance
Sh
Sh
Encumbrance
250,000
c/d
______
250,000
250,000
Balance
b/d
40,000
The fund balance reserve for encumbrances will then appear in the statement of assets and liabilities at the
end of the period.
COMPREHENSIVE ILLUSTRATION
The city of Westcycle fiscal period ends on 30 th June. The trial balance of the general fund as on 1 July 19X7
was as follows:
Dr £
Cr £
Cash Balance
12,600
Savings A/C
66,800
Property tax receivable
480,000
Accounts payable
7,300
Wages payable
4,450
Fund balance
548,250
560,000
560,000
The operations for the year ended 30th June 19X8 are summarised as follows:
i)
Estimated revenues: £2,400,000; Appropriations: £2,350,000
ii)
Revenues from property taxes levy: £1,925,500
iii)
Cash received from property taxes: £2,005,600; and other revenues: £485,700
iv)
Expenditures encumbered and evidenced by purchase orders: £1,760,000
v)
Liquidation of encumbrances and vouchers prepared for purchase order billings: £1,755,000.
vi)
Expenditure for payroll £602,000
vii)
Cash disbursed for vouchers: £1,740,000
Cash for payment of wages: £598,000
Cash transferred to savings A/C: £150,000.
Required:
a) Open the ordinary ‘T’ accounts for the accounts appearing in the trial balance and enter the balances as at
1 July 19X7.
b) Open ‘T’ accounts for: Fund balance reserves for encumbrances
: Estimated revenues
: Revenues
: Appropriations
Lesson Eight
c)
d)
e)
f)
450
: Expenditure
: Encumbrances
Prepare journal entries to post the foregoing summarised operations.
Post the entries recorded in (c) above into the accounts.
Record appropriate entries to dwell the accounts as at 30 th June 19X8.
Prepare a balance sheet as at 30th June 19X8.
Cash
£
Balance b/d
12,600
Property tax
2,005,600
Other revenue
485,700
_
_______
2,503,900
£
Accounts payable
174,000
Wages
598,000
Savings
150,000
Balance c/d
15,900
2,503,900
Savings
Sh
Balance b/d
66,800
Cash
150,000
216,800
Sh
Balance c/d
216,800
216,800
Fund Balances
Sh
Appropriations
2,350,000
Encumbrance
5,000
Appropriation
7,000
Balance c/d
597,450
2,959,450
Sh
Balance b/d
548,250
Estimated revenue
2,400,000
Estimated revenue
11,200
________
2,959,450
Balance
597,450
b/d
Fund Balance reserved for encumbrances
Sh
Sh
Encumbrances
Encumbrances
1,755,000
1,760,000
Balance c/d
________
5,000
1,760,000
1,760,000
Balance
b/d
451
Company Accounts
5,000
Estimated revenue
Sh
Fund balance
2,400,000
Fund balance
11,200
2,411,200
Sh
Revenue
2,411,200
________
2,411,200
Property taxes
Balance
405,500
Sh
Balance b/d
480,600
Revenue A/C
1,925,500
2,406,100
b/d
Sh
Cash
2,005,600
Balance c/d
400,500
2,406,100
Wages payable
Sh
Cash
598,000
Balance
8,450
Sh
b/d
Balance
4,450
c/d Expenditure
602.000
606,450
Balance
8,450
606,450
b/d
Accounts payable
Sh
Sh
b/d
Balance
7,300
Expenditure
1,755,000
Cash
1,740,000
Balance
22,300
c/d
1,762,300
1,762,300
Balance b/d
22,300
Encumbrances
Fund
reserved
Sh
… Fund
reserved
Sh
…
Lesson Eight
1,760,000
452
1,755,000
Fund
________
5,000
1,760,000
balance
1,760,000
Appropriations
Expenditure
2,357,000
Sh
A/C Fund
2,350,000
________ Fund
7,000
2,357,000
Sh
balance
balance
2,357,000
Revenue A/C
Sh
Estimated
2,411,200
Property
revenue 1,925,500
Other
485,700
2,411,200
Sh
tax
revenue
2,411,200
Expenditure A/C
Wages
602,000
Accounts
1,755,000
Sh
payable
Sh
Appropriations
payable 2,357,000
2,357,000
2,357,000
Other revenue
Revenue
485,700
Sh
account Cash
485,700
Sh
453
Company Accounts
The Journal
Dr (Sh)
Estimated Revenue A/C
Fund Balance A/C
Fund Balance A/c
Appropriations A/C
2,400,000
Property Taxes receivable A/C
Revenue A/C
Cash
Property taxes receivable A/C
1,925,500
2,400,000
2,350,000
2,350,000
1,925,500
2,005,600
2,005,600
Cash
485,700
Other Revenue A/C
Other revenue A/c
Revenue A/C
485,700
Encumbrances
Fund balance reserved for encumbrances
Fund balance reserved for encumbrances
Encumbrances
Fund balance
Encumbrances
Expenditure A/C
Wages Payable
485,700
485,700
1,760,000
1,760,000
1,755,000
1,755,000
5,000
5,000
602,000
602,000
Wages payable
Accounts payable
Savings bank A/C
Cash
598,000
1,740,000
150,000
Expenditure A/C
Accounts payable
Revenue A/C
Estimated Revenue A/C
Estimated Revenue
Fund Balance
1,755,000
Appropriations A/C
Expenditure
Fund Balance
Appropriations
2,357,000
2,488,000
1,755,000
2,411,200
2,411,200
11,200
11,200
2,357,000
7,000
7,000
Balance Sheet as at 30th June 10X8
Assets
Liabilities
Sh
Sh
Cash
Wages payable
15,900
8,450
Savings A/C
Accounts payable
216,800 Property taxes receivable
22,300
400,500
Fund Balance
_______
597,450
Reserve for encumbrances
5,000
633,200
633,200
Illustration
The following data relates to the city of Kababwe:
Cr (Sh)
Lesson Eight
454
Trial Balance As At 1 – 7 – 19x7
Cash
Savings A/C
Property taxes receivable
Investment in government Treasury Bills
Accounts payable
Wages payable
Fund Balances
Dr (Shs)
Cr (Shs)
242,500
250,000
185,000
350,000
162,600
30,000
834,900
1,027,500
________
1,027,500
The transactions completed during the year for the general fund are summarised and recorded as follows for
the year ended 30 – June – 19X8.
JOURNAL
a)
Estimated Revenue A/c
Appropriations
Fund Balance
b)
Property Taxes receivable
Revenue
c)
Cash
Property taxes receivable A/C
Other revenue
d)
Expenditure
Wages payable
Encumbrances
Fund balance reserved for
encumbrances
Fund balance reserved for encumbrances
Encumbrances
Expenditure
Accounts payable
Accounts payable
Wages payable
Cash
Sh
9,100,000
Sh
9,070,000
30,000
9,105,000
6,470,000
2,635,000
3,280,000
3,280,000
5,800,000
5,800,000
5,785,000
5,785,000
5,785,000
5,785,000
5,800,000
3,270,000
9,100,000
38,000
Estimated Revenue
Fund balances
9,070,000
Appropriations
9,065,000
5,000
Expenditure
Fund Balance
15,000
Fund balance
15,000
Encumbrances
Required:
a) Open appropriate accounts, post entries therein, and balance them at the year end
b) Draw a trial balance as at 30.6.19X8
c) Prepare a statement of assets and liabilities.
SOLUTION
Cash A/C
Sh
Balance b/d
242,500
Property taxes
6,470,000
Other revenue
2,635,000
9,347,500
Sh
Accounts payable
5,800,000
Wages payable
3,270,000
Balance c/d
277,500
9,347,500
455
Company Accounts
Property tax receivable
Sh.
Balance b/d
185,000
Revenue
6,500,000
6,685,000
Sh.
Cash
6,470,000
Balance c/d
215,000
6,685,000
Wages payable
Sh.
Cash
3,270,000
Balance
40,000
c/d
Sh.
b/d
Balance
4,450
Expenditure
602.000
3,310,000
3,310,000
Revenue A/C
Sh.
Estimated revenue
9,135,000
________
Sh.
Property tax
6,500,000
Cash other revenue
2,635,000
9,135,000
9,135,000
Encumbrances
Sh.
Sh.
Fund reserved …
5,800,000
________
Fund reserved …
5,785,000
Fund balance
15,000
5,800,000
5,800,000
Fund reserved for encumbrances
Sh.
Encumbrances
5,785,000
Balance c/d
15,000
5,800,000
Sh.
Encumbrances
5,800,000
________
5,800,000
Savings A/C
Sh.
Balance b/d
250,000
Sh.
Balance c/d
250,000
Treasury Bills A/C
Sh.
b/d
Balance
350,000
Balance
350,000
Accounts payable
Sh.
Cash
5,800,000
Balance c/d
Sh.
Balance b/d
162,600
Expenditure
Sh.
c/d
Lesson Eight
456
5,785,000
147,600
5,947,600
5,947,600
Fund Balances
Sh.
Appropriations
9,070,000
Encumbrance
5,000
Appropriation
7,000
Balance c/d
889,450
9,974,900
Sh.
Balance b/d
834,900
Estimated revenue
9,100,000
Estimated revenue
35,000
Appropriations
5,000
9,974,900
Expenditure A/C
Sh.
Wages payable
3,280,000
Accounts payable
5,785,000
9,065,000
Sh.
Appropriations
9,065,000
9,065,000
Appropriations
Sh.
Expenditure A/C
9,065,000
Fund balance
5,000
9,070,000
Sh.
Fund balance
9,070,000
________
9,070,000
Estimated revenue A/C
Sh.
Fund balance
9,100,000
Fund balance
35,000
9,135,000
Sh.
Revenue
9,135,000
________
9,135,000
Trial Balance As At 30 – 6 – 19x8
Dr
Cash
Savings A/C
Treasury Bills
Property taxes receivable
Accounts payable
Wages payable
Fund balance reserved for encumbrances
Fund balance
Cr
277,500
250,000
350,000
215,000
________
1,092,500
147,600
40,000
15,000
889,900
1,092,500
Balance Sheet as at 30 – 6 – 19X8
ASSETS
Cash
Shs.
Shs.
Shs.
277,500
457
Company Accounts
Savings A/C
Treasury Bills
Property taxes receivable
250,000
350,000
215,000
1,092,500
LIABILITIES
Wages payable
Accounts payable
40,000
147,600
(187,600)
904,900
FUND EQUITY
Unreserved fund balance
Fund balance reserved for encumbrances
889,900
15,000
904,900
Illustration:
The city’s general fund trial balance as at 1 June 19X7 is as follows:
Dr £
225,000
80,000
122,500
100,000
Cash
Savings A/C
Property taxes receivable
Investment in treasury bills
Accounts payable
Wages payable
Fund balance
527,500
Cr £
52,700
19,200
455,600
527,500
The following data summarises operations for the current fiscal year that ends operations on 30 – 6 – 19X8:
£
a) Estimated: Revenues
2,180,000
: Appropriations
2,115,000
b) Revenue from property tax levy
1,450,000
Cash received from property taxes
1,460,000
Other revenues received
760,000
c) Expenditure on payroll
1,150,000
Expenditure encumbered and evidenced by LPOs
1,210,000
Liquidation of encumbrance vouchers for order billings
1,050,000
d) Cash disbursed: for vouchers
1,065,000
: for payment of wages
1,155,800
: for savings A/C
40,000
Cash A/C
£
Balance b/d
225,000
Property taxes
1,460,000
Other revenue
760,000
________
2,445,000
£
Accounts payable
1,065,000
Wages payable
1,155,800
Savings A/C
40,000
Balance c/d
184,200
2,445,000
Savings A/C
£
Balance b/d
80,000
Cash
40,000
£
Balance c/d
120,000
Lesson Eight
458
120,000
120,000
Property tax receivable
£
Balance b/d
122,500
Revenue
1,450,000
1,572,500
£
Cash
1,460,000
Balance c/d
112,500
1,572,500
Accounts payable
£
Cash
1,065,000
Balance c/d
37,700
1,102,700
£
Balance b/d
52,700
Expenditure
1,050,000
1,102,700
Wages payable
£
Cash
1,155,800
Balance c/d
13,400
1,169,200
£
Balance b/d
19,200
Expenditure
1,150,000
1,169,200
Estimated revenue A/C
£
Fund balance
2,180,000
Fund balance
30,000
2,210,000
£
Revenue A/C
2,210,000
________
2,210,000
Revenue A/C
£
Estimated revenue
2,210,000
2,210,000
£
Property tax
1,450,000
Cash (other revenue)
760,000
2,210,000
Appropriations
£
Expenditure A/C
2,200,000
________
2,200,000
£
Fund balance
2,115,000
Fund balance
85,000
2,200,000
459
Company Accounts
Encumbrances
£
Fund reserved …
1,210,000
________
£
Fund reserved …
1,050,000
Fund balance
160,000
1,210,000
1,210,000
Fund Balances
£
Appropriations
2,115,000
Appropriations
85,000
Encumbrance
160,000
Balance c/d
305,600
2,665,600
£
Balance b/d
455,600
Estimated revenue
2,180,000
Estimated revenue
30,000
________
2,665,600
Expenditure A/C
£
Wages payable
1,150,000
Accounts payable
1,050,000
2,200,000
£
Appropriations
2,200,000
2,200,000
Fund reserved for encumbrances
£
Encumbrances
1,050,000
Balance c/d
160,000
1,210,000
BALANCE SHEET AS AT 30 – 6 – 19X8
Assets
£
Cash
Savings A/C
Treasury bills
Property Taxes receivable
£
Encumbrances
1,210,000
________
1,210,000
£
184,200
120,000
100,000
112,500
516,700
LIABILITIES
Accounts payable
Wages payable
37,700
13,400
(51,100)
465,600
Financed by
Unreserved fund B/F
Fund balance reserved for encumbrances
SPECIAL FUNDS
305,600
160,000
465,600
Lesson Eight
460
Special fund accounts are created by governmental units to account for the revenues and expenditures of
specialised governmental unit operations, which are outside the traditional services offered by the
government. Once a particular activity is identified, a special fund account is created to ensure that revenues
allocated to this account are properly received and accounted for; and that expenditure from this fund must
be incurred in respect of activities associated with the special fund.
Once identified, the special operation necessitating creation of special fund will be treated exactly in the same
way as general fund accounting, i.e. estimated revenue, revenue, appropriations and expenditure will be
recorded in the same way as was done with the general fund. This also applies to encumbrances.
Common examples of activities that require creation of special funds are:
1) Construction and maintenance of streets, roads and bridges
2) Libraries
3) Grants received either from foreign countries or specific government bodies that are geared towards
specified operations.
Note: Grant accounting requires a slightly different approach in the sense that the grantor would require the
grantee to use the grants for a specified purpose; and in order to attain this objective, grant accounting is on
the basis of reimbursement. This means that grant revenue will only be recognised as having been received
after actual expenditure has been incurred.
It is only then the grantor will release the grant revenue. However, for any given period it is possible for the
grantee to account for any grant receivable by creating an account known as deferred revenue.
The deferred revenue account is a liability account showing that there is a potential revenue which will only
be recognised upon meeting certain conditions. Relevant entries are as follows:
Assume that Town X was given a grant of Sh.50,000,000 for construction of streets in a particular region of
the town. Upon receiving this information, the governmental unit will record the transaction as follows:
Dr Grant receivable
50,000,000
Cr Deferred Revenue A/C
50,000,000
The basis of this entry is that the recognised accounting principles under special funds/general funds in the
“modified accrual basis of accounting”. Under this principle, both revenues and expenditures are only
recognised when the possibility of their realisation is certain.
Grants will normally be released under specified conditions are being met; and under modified accrual basis
of accounting such revenues cannot be recognised until the conditions required have bee fulfilled.
In the above example, assume that 3 months later, Town X has identified the contractor and given out
contracts to construct streets in the required region to the tune of Sh.30,000,000. When this is done, then the
specified conditions have been met and the grant receivable revenue is recognised. The following entries are
then made:
1.
2.
Dr Deferred Revenue
Cr Revenue Account
30,000,000
Dr Expenditure
Cr Accounts payable
30,000,000
30,000,000
30,000,000
The second entry is required to enter the liability incurred when the contract is entered into while the first
entry is now to recognise part of the grant revenue as receivable revenues under the modified accrual basis.
However, where the contract has been entered into but the work is not yet performed, the encumbrance
entries will be recorded instead of (2) above.
The concept of modified acrrual basis of accounting is used in many other governmental units funds that will
require the revenue to be recognised when there is uncertainty regarding their realisation.
461
Company Accounts
One such fund is the capital projects fund. The capital projects fund is a fund created to cater/account for
revenues and resources that are associated with capital projects of a governmental unit. The capital projects
fund is an equivalent to capital budgeting/ financing under commercial accounting.
General funds and special funds are not normally used to finance capital projects. Major sources of financing
capital projects of a governmental unit are as follows:
(1) Long-term debt
(2) Governmental treasury bonds
(3) Grants from other governmental units or foreign governments.
(4) Transfer from other funds within the government.
(5) Gifts (from individuals or organisations) that are specified to be used in particular projects.
Once the sources of funds have been identified and set aside, a special account called the capital project fund
account will be created to ensure proper utilisation of resources. The capital project fund will then operate on
the basis of modified accrual principles of accounting, whereby related revenues and expenditures are
recognised when there is a certainty of their occurrence.
Assume that a governmental unit gets authority to issue long-term bonds to finance a particular capital
project. Once authority is granted, the concerned governmental unit will only record the request’s
acceptance, but the revenue arising thereon will only be recognised when bonds are issued and sold to the
public.
Under capital project funds, contracts will be entered into, and there may be a time lapse from when the
contract is granted and when services are received. Such activities will be recorded as encumbrances in
respect of the particular capital project. Actual expenditure incurred will be recorded against account
payable. At the conclusion of the capital project comparison will have to be carried to between:
1) Sources of funds identified to finance the project;
2) Total expenditure – including the encumbrance incurred.
The difference between (1) and (2) represents the excess/deficit of funds arising from a particular project; and
is transferred to the governmental unit’s fund balance in the year in which the project was completed, e.g.
suppose a particular capital project was to last 5 years, the financial statements for the interim period (1 – 4)
will not include the balance in the capital project fund account. The surplus/deficit will be transferred to fund
account at the end of year 5. Such transfers are known as equity transfers.
FUND ACCOUNTING
The accounts of a government unit are partitioned into segments called funds, and separate financial
statements are prepared for each fund. A fund accounting system is a collection of distinct entities or funds
in which each fund reflects financial aspects of a particular segment of the organisation’s activities. Separate
funds are used to aggregate activities by functions because of the diverse nature of the services offered and
because it is necessary to comply with legal provisions regarding activities of the government unit. Although
funds are separate entities, the structure of funds is such that a single transaction may occasion entries in the
accounts of several funds.
Definition
A fund is defined as a distinct accounting entity with a self-balancing set of accounts recording cash and other
financial resources together with all related liabilities and residual equities or balances and charges therein.
In other words, a fund is a segregated collection of both assets and equity accounts, together with related
revenue and expenditure accounts that describe a particular aspect of the organisation. Each fund is
established to account for specific activities or objectives in accordance with applicable regulations and
Lesson Eight
462
restrictions. Since each fund represents a distinct reporting entity, separate financial statements are
prepared for each fund, in addition combined financial statements may also be prepared.
Types of funds
The types of funds recommended for use by central and local governments are classified in three categories:
(i)
Government funds;
(ii)
Proprietary funds; and
(iii)
Fiduciary funds.
In the first group, governmental funds, are: 1. General Funds
General funds are funds established to account for resources devoted to financing the general services
which the governmental unit performs for its citizens.
These include general administration, protection of life and property, sanitation and similar broad services.
The general fund is sometimes described as the one use to account for all financial transactions not
properly accounted for in another fund. Some activities, such as governmentally supported liberties, are
often of sufficient importance and magnitude to have a special fund; when this is not true they become a
function and responsibility of the general fund.
2. Special Revenue, or Special, Funds
Funds of this class are created and operated to account for revenue designated by law for a particular
purpose. For the specific purpose of function to which it is devoted, a special revenue fund is much in the
nature of a general fund. Some of the governmental services for which special funds are frequently
established are education, libraries, streets and bridges, welfare, etc.
3. Capital Projects Funds
The receipt and disbursements of all financial resources to be used for the acquisition of capital facilities
other than those financed by special assessment funds, proprietary funds and trust funds is accounted for
by capital projects funds.
4. Debt Service Funds (Sinking funds)
A debt service fund is created to account for the resources devoted to the payment of interest and
principal on long-term general obligation debt other than that payable from special assessments and that
serviced by governmental enterprises.
5. Special Assessment Funds
Special assessment funds are designed to account for the construction, or purchase through contract, of
public improvements-streets, sidewalks and sewer systems, for example – which are financed in whole or
in part by special levies against property owners adjudged to receive benefits from the improvements
materially in excess of benefits received by the general body of taxpayers, and for the maintenance and
upkeep of such assets.
The following two fund types are referred to as proprietary funds: 6. Internal Service Funds (Working capital/Revolving funds)
463
Company Accounts
Internal service funds are established by governmental units as a means of providing services to other
funds or departments of the same unit, or to other governmental units, on a cost-reimbursement.
7. Enterprise Funds
Internal service funds are established to provide services for governmental customers, but enterprise
funds are operated to provide electric, water, gas, or other services to the general public. Except for
ownership, they bear a close resemblance to investor-owned utility or other service enterprises. Enterprise
funds are also used to account for activities for which the governmental body desires periodic computation
of revenues earned, costs incurred, or net income. The third category of funds recommended for use by
state and local governmental units is fiduciary funds.
8. Fiduciary Funds (Trust/Agency funds) E.g. NSSF, NHIF
Fiduciary funds are used to account for transactions related to assets held by a governmental unit as a
trustee or agent. In most cases the governmental unit does not have absolute title to the assets held; and
in the remainder, they are owned with specific restrictions upon their use.
In addition to the eight generally recognised types of funds, governmental units employ two self-balancing
groups of accounts which are accounting entities, but which are not fiscal entities and therefore, are not
funds. These groups are called the “general fixed assets group” and the “general long-term debt group”.
General fixed assets are those not used exclusively by any one fund, and general long-term debt is that
long-term debt which is presently a liability of the municipality as a whole and not of individual funds.
Although funds are employed extensively and effectively to promote the use of governmental resources for
their intended purposes, the practice can be carried to extremes. In the opinion of many, accounting and
reporting are facilitated through use of the minimum number of funds consistent with legal and operating
requirements.
Integration of budgetary Accounts
A second distinctive characteristic of governmental accounting resulting from the need to demonstrate
compliance with laws governing the sources of revenues available to governmental units, and laws governing
the utilisation of those revenues, is the formal recording of the legally approved budget in the accounts of
funds operated on annual basis.
Briefly, Budgetary accounts are opened as of the beginning of each fiscal year and closed as of the end of
each fiscal year; therefore they have no balances at year-end. During the year, however the budgetary
accounts of a fund are integrated with its proprietary accounts. Proprietary accounts, in the governmental
sense, include accounts similar to the real and nominal groups found in accounting for profit-seeking entities –
that is, asset, liability, net worth, revenue, and expense (or expenditure) accounts.
The Basis of Accounting
Lesson Eight
464
Use of the accrual basis of accounting is considered appropriate for proprietary funds, non-expendable trust
funds, and pension trust funds of governmental units. Accrual accounting means: -
1. That revenues should be recorded in the period in which the service is given, although payment is
received in a prior or subsequent period, and
2. That expenses should be recorded in the period in which the benefit is received, although payment is
made in a prior or subsequent period.
In business enterprise accounting, the accrual basis is employed to obtain a matching of costs against the
revenue flowing from those costs, thereby producing a more useful income statement. In governmental
entities, however, even for those funds which do attempt to determine net income, only certain trust funds
have major interest in the largest possible amount of gain. Internal service and enterprise funds are
operated primarily for service; they make use of revenue and expense accounts to promote efficiency of
operations and to guard against impairment of ability to render the services desired. For these reasons,
operating statements of proprietary funds, non-expendable trust funds, and pension trust funds are called
statements of revenue and expenses, rather than income statements.
Funds of other types (general funds, special revenue funds, capital projects funds, debt service funds, special
assessments funds, and expendable trust funds) are not concerned with income determination. These funds
are concerned with matching expenditure of legal appropriations, or legal authorisations, with revenues
available to finance expenditures. Accordingly, the “governmental” funds and expendable trust funds should
use the “modified accrual” basis. The modified accrual basis is defined as:
Revenues should be recognised in the accounting period in which they become available and measurable.
Expenditures should be recognised in the accounting period in which the fund liability is incurred, if
measurable, except for unmatured interest on general long-term debt and on special assessment indebtness secured by interest-bearing special assessment levies, which should be recognised when due.
The modified accrual basis is accepted by the American Institute of Certified Public Accountants as being
consistent with generally accepted accounting principles. The AICPA recognises that it is not practicable to
account on an accrual basis for revenues generated on a self assessed basis such as income taxes, gross
receipts taxes, and sales taxes. For such taxes, determination of the amount of revenue collectible is
ordinarily made at the time of the collection, thus placing the fund partially on the cash basis.
Number of Funds
Government units should establish and maintain those funds required by law and sound financial
administration. Only the minimum number of funds consistent with legal and operating requirements should
be established, since unnecessary funds result in inflexibility, undue complexity, and inefficient financial
administration.
Accounting for Fixed Assets and Long-term Liabilities
465
Company Accounts
A clear distinction should be made between;
(A) Fund fixed assets and general fixed assets; and
(B) Fund long-term liabilities and general long-term debt
(i)
Fixed assets related to specific proprietary funds or Trust Funds should be accounted for through
those funds. All other fixed assets of a governmental unit should be accounted for through the
General Fixed Assets Accounts Group.
(ii)
Long-term liabilities of proprietary funds, special assessment funds, and Trust Funds should be
accounted for through those funds.
All other unmatured general long-term liabilities of the governmental unit should be accounted for
through the General long-term debt account group.
Valuation of Fixed Assets
Fixed assets should be accounted for at cost or, if the cost is not practicably determinable, at estimated cost.
Donated fixed assets should be recorded at their estimated fair value at the time received.
Depreciation of Fixed Assets
(a) Depreciation of general fixed assets should be recorded in the accounts of governmental funds.
Depreciation of General Fixed Assets may be recorded in cost accounting systems or calculated for cost
finding analysis; and accumulated depreciation may be recorded in the General Fixed Assets Account
Group.
(b) Depreciation of fixed assets accounted for in a proprietary fund should be recorded in the accounts of that
fund. Depreciation is also recognised in those Trust Funds where expenses, net income and/or capital
maintenance are measured.
Accrual Basis in Governmental Accounting
The modified accrual or accrual basis of accounting as appropriate, should be utilised in measuring financial
position and operating results.
(a) Governmental fund revenues and expenditures should be recognised on the modified accrual basis.
Revenues should be recognised in the accounting period in which they become available and measurable.
Expenditures should be recognised in the accounting period in which the fund liability is incurred, if
measurable, except for unmatured interest on general long-term debt and on special assessment
indebtness secured by interest-bearing special assessment levies, which should be recognised when due.
(b) Proprietary fund revenues and expenses should be recognised on the accrual basis. Revenues should be
recognised in the accounting period in which they are earned and become immeasurable; expenses
should be recognised in the period incurred, if measurable.
Lesson Eight
466
(c) Fiduciary fund revenues and expenses or expenditures (as appropriate) should be recognised on the basis
consistent with funds accounting measurement objective. Non expendable Trust and Pension Trust Funds
should be accounted for on the accrual basis; Expendable Trust Funds should be accounted for on the
modified accrual basis. Agency Fund assets and liabilities should be accounted for on the modified
accrual basis.
(d) Transfer should be recognised in the accounting period in which the interfund receivable and payable
arise.
Budget and Budgetary Controls
Budgets are key elements of legislative control over government units. The executive branch of a
government unit proposes the budget, the legislative branch reviews, modifies and enacts the budgets and
finally the executive branch implements the budget.
The two basic classifications of budgets for
governmental units are the same as for commercial enterprises;
(i)
Annual budgets – which include the estimated revenues and Appropriations for a specific fiscal year
end;
(ii)
Capital budgets – which are used to control the expenditures for construction projects or other planned
asset acquisitions.
The operations of the two proprietary funds (i.e. enterprise and internal service) are similar to those of
business enterprises. Consequently, annual budgets are used by these funds as a managerial planning and
control rather than a legislative control tool. Thus, annual budgets of enterprise funds and internal service
funds are NOT Recorded in ledger accounts by these funds.
PUBLIC SECTOR ACCOUNTING
The Consolidated fund
This is the main fund operated by the government. The Exchequer and Audit Act states that all government
revenue excluding income which a ministry is allowed to keep a cover part of its own expenses (i.e.
Appropriation-In- Aid) must be put into this fund, and no money may be withdrawn form this fund without the
authority of parliament.
Each year, the Parliament votes on the appropriations bill, which sets out:
a) The estimated total revenue of the government for the coming fiscal year (1 st July – 30th June) and;
b) The amount of money which each ministry expects to be allocated for its needs in that fiscal year.
467
Company Accounts
Thus the Appropriation Act for 1986/1987 Parliament authorised a gross sum f K£95,002,150 for the Ministry
of Health in respect of recurrent expenditure. This was described in the 1986/87 estimates of recurrent
expenditure as follows:
K£
Gross vote
95,002,150
Appropriations-In-Aid
Net Vote
(2,280,250)
K£ 92,721,900
The above description means that the Ministry was authorised to spend K£92,721,900 being supplied form
the consolidated fund, and the remainder coming from the ministry’s own Appropriations-In-Aid. Examples of
Appropriations-In-Aid within Ministry of Health would include Hospital Boarding fees, X-ray fees, Lab fees etc.
Consolidated Fund Services
Certain government expenditure does not have to be voted every year by Parliament because Parliament has
already given its approval for the specific items concerned in the past. These items are known as
consolidated fund services, and include salaries and allowances of the Judiciary, subscriptions to international
organisations, such as OAU, UN etc., payment of pension to civil servants, payments of national debt, etc.
Sources of Government Revenue
Government revenue falls into two categories
a) Recurrent
b) Development
The main source of revenue are taxes, government borrowings (both domestic and foreign) and grants.
An example of revenue estimates for the year 1986/87 is:
Recurrent Revenue Estimates
(K£ Millions)
Customs and excise duty
Income tax
Sales tax
298.5
370.0
/Value Added Tax
Export duty and other taxes
437.0
107.4
Lesson Eight
468
Miscellaneous (15 categories)
160.9
1,373.8
The development revenue estimates were
64.5
1,438.3
The annual estimates of expenditure for the fiscal year 1986/1987 were:
Recurrent expenditure
1,420.8
Development expenditure
292.6
1,713.4
There is a shortfall of K£275.1m expected for the 1986/87 fiscal year. The gap is normally closed by
borrowing either from abroad or from the domestic market. Domestic borrowings usually take the form of
Treasury Bills.
Government Expenditure
As with revenue, expenditure falls into two categories
(i)
(ii)
Recurrent expenditure
Development expenditure
Recurrent Expenditure
This is expenditure on the day to day business of the government. In commercial accounting, it could be
called revenue expenditure.
Recurrent expenditure may be referred to as maintenance expenditure as it covers items concerning the
maintenance and operation of existing government services e.g. salaries to government officers, electricity,
water, telephone etc.
Development Expenditure
This is expenditure concerning new projects e.g. construction of hospitals, roads, bridges etc.
Recording Government expenditure and revenues:
(1) Government accounting is “cash-based” i.e. limits itself to transactions which have been entered in the
cash book. Thus government accounting has no personal accounts for debtors/creditors, nor does it have
469
Company Accounts
accruals/prepayments.
The only debtor-creditor relationship arises in transactions between the
government and the ministries, but not third parties.
(2) Government Accounting does not make any distinction between fixed assets and a day-to-day expense.
Both are treated as expenditure in the period in which they are paid (properly classified as either recurrent
or development expenditure) and hence there are no fixed asset accounts.
(3) Since there are no fixed asset accounts, there is no such thing as depreciation in governmental
accounting. The effect of passing fixed
assets through the usual expenditure accounts is to write them
off in the year of purchase.
The reason for this treatment of fixed assets is that the government is not aiming at realising profits or
quantifying losses, and hence does not need to divide the benefits of capital expenditure over the financial
years, nor to assess the loss of value in that asset in a given year.
There is also the difficulty of trying to value assets such as Nairobi-Mombasa Road etc.
Accounting for and individual ministry
In accordance with the normal rules of double entry book-keeping cash received is debited to the cash
account (PMG) and the revenue account is credited. Thus in the books of Ministry X, the receipt of Ksh5,000
will be recorded as:
Pay Master General A/C (Cash)
Revenue
5,000
A/C Exchequer
5,000
Revenue
Pay
5,000
Master
General
The paymaster General is the cash account of all ministries. Since all revenue (apart from Appropriation-InAid) must be transferred immediately to the consolidated fund, funds received will be paid over immediately
Lesson Eight
470
to the Treasury which administers the consolidated fund on behalf of the government. The Account within
which the Treasury administers the consolidated fund is called the Exchequer Account.
Exchequer A/C
Pay
5,000
Master
General
At the end of each financial year, each ministry which has collected funds on behalf of the government makes
out a “statement of revenue”.
Expenditure
A ministry operates within the strict limits of the vote allocated to it by Parliament. The Accounting system is
merely used to reveal whether the ministry is keeping within the limits of voted expenditure or not. The
ministry has no authority to spend over parliamentary allocations, and the authority to spend is only for the
duration of the financial year.
If a ministry underspends in a financial year, or if there are any excess receipts, it may not retain the
available funds, but must surrender them to the exchequer to be reincorporated into the consolidated fund
and eventually re-distributed to the ministries as determined by Parliament.
If the ministry overspends, the only body empowered to ratify this overspending is Parliament. In the
subsequent financial year the matter is presented in Parliament in the form of “excess vote” and Parliament
decides whether to approve the excess vote or to recover it from the officers responsible for exceeding the
vote.
The Pay Master General (PMG)
The PMG is an office rather than an officer, and no person bears the title “Pay-Master General”. The functions
of the PMG are carried out by a section of the treasury.
The PMG is subordinate to the treasury and has the following functions: (which are regulated by the Minister
of Finance)
1) It is the principal paying agent for the government and banker of all government departments as regards
voted expenditures and payments on consolidated fund services.
2) It arranges with the treasury at regular intervals (usually twice a month) for funds to be withdrawn from
the exchequer and put to the credit of the PMG’s account in the Central Bank of Kenya;
3) It allows authorised signatures from these ministries to draw cheques on this account;
4) It keeps a record of the above transaction and sends statements on a monthly basis to the accounting
officers (i.e. the Permanent Secretaries) of each accounting unit together with supporting vouchers;
5) It receiver monthly reconciliations of these statements from accounting officers;
6) It supplies the treasury with the following:
471
Company Accounts
a) A monthly statements and balance sheet
b) Annual statements and balance sheet.
It should be noted that the PMG is just a single account kept at the Central Bank of Kenya and
administered by the PMG’s office in the treasury.
All ministries are authorised to draw on this single PMG account. The PMG’s office is able to analyse the
different payments and receipts to allocate to various ministries, and to send them monthly statements.
Cash book
There are significant differences between commercial accounting and government accounting as regards
operation of the cash book.
These are: (1)
Restricted analysis – The government cash book makes an analysis between “cash” and “bank” only,
i.e. there is no further analysis into categories/classes of expenditure.
(2)
The usage of the cash column – Cheques received are considered cash until they are banked. The
book-keeping entry is: Debit Cash (Cash column of cash book)
Credit Revenue (or Appropriation- In-Aid)
When a cheque is banked,
Debit Bank Column
Credit Cash Column
A dishonoured cheque can be recorded as:
Debit Cash Column
Credit Bank Column
Three cash books are maintained:
(i)
(ii)
(iii)
Current revenue and expenditure cash book.
Development revenue and expenditure cash book
Deposits cash book.
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472
Vote books: The cash book and vote book from the bank-bone of the accounting system. The vote book is essentially a
book of prime entry, and does not form part of the double entry system. The totals of the vote book are
transferred to the ledger:
Debit Expenditure item (as per vote book)
Credit Cash book
Year-end Accounts: By 31 October each year, 4 months after the end of the financial year, each ministry must present its final
accounts to the Auditor General. These consist of
(a) Statements of Revenue
(b) Appropriation Accounts
(c) Final Accounts – These refer to the various funds administered by different ministries and require an
income and expenditure A/C as well as a statement of assets and liabilities for each fund.
Illustration 1:
Prepare a statement of revenue for the year ended 30.6.97 for Ministry of Domestic Affairs:
Exchange Control fees (Code 740) – Estimated receipts
- Actual receipts
Insurance premiums (Code 750)
K£300,000
K£3,460,968
- Estimated receipts
- Actual receipts
K£130,000
K£174,000
Other income (Code 679) - Estimated receipts
K£20,000
- Actual receipts
K£10,334
Extra exchequer income (Code 999) – Estimated receipts
- Actual receipts
Payments to exchequer
K£1,055,000
K£6,843,238
K£8,68,422
473
Balance due to exchequer (1 July 96)
Company Accounts
K£249,529
Public Sector Accounting: Theory
This part of the lesson has been built up using the question and answer approach.
QUESTION ONE
Discuss the role and functions of the Treasury and its relationship with other Government department, in
planning and controlling government expenditure.
Solution
The role and functions of the treasury include:
(1) Advising on the setting of objectives for economic policy.
(2) Coordinating government expenditure towards the achievement of economic policy.
(3) Ensuring the execution of Policies in the most economic fashion by Government Departments.
(4) The overall supervision of national finance.
(5) Involvement in the process of settlement of levels of national expenditure and the raising of revenue.
(6) Controlling Government borrowing.
(7) Management of pensions
(8) Administration of contingency funds e.g. disbursements, distaden funds etc.
(9) Payments forward – chief cashier to the government debts, incomes expenditures etc.
Links with other Government Departments
(1) Involvement in scrutinizing of annual estimates
(2) Consultation on possible revisions of estimates.
(3) Ensuring adequate financial controls exists within departments including adequate staffing and accounting
procedures.
(4) Involvement jointly in preparation of annual budget.
Further points for Discussion
(1) Importance of Treasury control during periods of economic stringency.
(2) Financial specialisation and expertise needed in dealing with estimates and financial control.
(3) Criticism of Treasury
- Too much Treasury Control and interference stifling departmental initiative.
- Staffing by career civil servants and injection of specialists from outside often resented.
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474
Too narrow a view taken by Treasury is often over-cautious.
QUESTION TWO
Discuss the role of the Controller and Auditor General.
Solution
The Controller and Auditor General is an officer of Parliament (not a civil servant) who has two main
functions:(1) As controller, he acts as Paymaster, controlling receipts and payments of public money through various
accounts.
(2) As External Auditor, he audits the various departmental accounts reporting on the Appropriation Account,
etc. to the parliament, which refers them to the Public Accounts Committee. This is a Select
Committee whose duty is to consider the report and issues arising from it.
From Audit point of view, his work covers the following:
Financial and Regularity Audit
(a) Financial: - to ensure that accounting and financial control systems operate correctly so that all financial
transactions are both properly authorised and properly accounted for.
(b) Regularity: - to ensure that expenditure is incurred on approved matters and is legal.
(c) Value for money audit: - an examination based on economy and efficiency to curb extravagance
expenditure and maximise receipts. The Public Accounts Committee also tends to concentrate on this
question.
(d) Effectiveness of audit: - An examination to assess whether programmes undertaken to meet
established policy objectives have achieved those objectives.
QUESTION THREE
Explain the main functions of an annual Budget for a public sector organisation with which you are familiar.
Solution
A budget may be defined as a financial and quantitative statement prepared prior to a definite period of time
of the policy to be perused during that time for the purposes of attaining a given objective.
A statement of the organisation’s intention against which its achievement can be measured.
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Company Accounts
Main function of an annual budget of local authority:
1. To assist in fixing the general rate, local authority is required to levy a rate sufficient to cover the needs of
the year.
2. To assist Policy making - to help members to making decisions on the provision of services.
3. To assist control – or Income and expenditure.
4. To authorise expenditure – authority to incur the expenditure or collect the income.
5. To provide a standard against which to judge performance.
QUESTION FOUR
The independence of Internal Audit in a public sector organisation is considered to be essential to its
effectiveness.
Explain what is meant by independence in this context and give examples of circumstances which might
impair independence.
Solution
As the internal auditor is appointed within the organisation he cannot be completely independent of the
organisation but he must be sufficiently independent to allow him to carry out his duties in a manner which
allows his professional judgement and recommendations to be effective and impartial.
In order to operate effectively, the internal auditor should:
1)
2)
3)
4)
Be independent of all staff whose operations are under review.
Not be involved in routine financial systems.
Have direct access to all department heads, chief executive and the management board.
Have full rights of access to records, assets and personnel and receive such information and explanation
as are necessary for the performance of their duties.
The chief internal auditor should have the right to report under his own name on any aspect of the financial
work including that of finance department.
Impairment of Independence
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476
(a) Having an interest in business which is involved in any way with the audit.
(b) Having been previously involved e.g. as accountant in the operations; or
(c) Personal relationship e.g. a spouse or other relative of persons being audited.
QUESTION FIVE
Discuss the main reasons for the growth in public expenditure.
Solution
1) Increase in range and volume of state activity – inflation.
2) The effect of economic ideas and political theories – use of public expenditure by state as a weapon of
economic control.
3) The effects of wars and social crises.
4) With the development of the state has tended to come an increased expectation by the public of more
state activities: - Roads, transport, energy, water and sewerage services.
5) The introduction and maintenance of the Welfare State.
6) External involvement such as membership of OAU etc.
7) Internal involvement in industry and commerce including nationalisation and control of socially significant
industries and commerce and support for industries incurring heavy research and development costs,
particularly new technology industries.
QUESTION SIX
(a) Explain the role and objectives of internal audit in a public sector organisation.
(b) What factors influence the size and organisation of an internal audit section in a Public Sector organisation.
Solution
The role and objectives of internal audit may vary between different parts of the Public Sector, depending on
attitudes, statutory requirements, size etc. Definition of internal audit – Statement of internal audit practice.
“An independent appraisal function within an organisation for the review of activities as a service to all levels
of management. It is a control which measures, evaluates and reports upon the effectiveness of internal
controls, financial and otherwise as a contribution to the effective use of resources within an organisation.
It is the responsibility of internal audit to review, appraise and report upon the following matters:
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Company Accounts
a) The soundness, adequacy and application of internal controls – internal controls can be said to comprise
the whole system of controls established by management in order to
1)
2)
3)
4)
Safeguard its assets
Ensure reliability of records
Promote operational efficiency and
Monitor adherence to policies and directives.
b) The extent to which the organisation’s assets and interests are accounted for and safeguarded from losses
of all kinds from:
Factors:
1) Fraud and other offences and
2) Waste, extravagance and inefficient administration, poor value for money and other causes. In recent
years, increasing emphasis has been put on audits role in connection with avoidance of waste and
obtain value for money.
3) The suitability and reliability of financial and other management data developed within the
organisation.
Detailed procedures should exist for initiating, authorising, carrying through and recording transactions.
These procedures will allow the principles of internal check and will be kept under review by internal
auditor.
Factors:
1)
2)
3)
4)
5)
Type of organisation
The size
The scope and objectives of internal audit
Managerial attitude to internal audit
The adequacy of internal control system
QUESTION SEVEN
Outline the differences between the financial objectives of:
1) Public Corporation i.e. state owned corporations, nationalised industries, and
2) Limited companies
Solution
Financial objectives of commercial concerns:
-
To maximise the value of the firms to its owners
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478
Determined by management team
More financial than theoretical objective
Management is concerned with firms and share valuation as an indication of the level of reward to
shareholders group.
Management concentrate on the theoretical objectives – reporting on firm and share valuation helps
management in decision making and policy formation process.
Public Corporations
Financial objectives are specified by government rather than determined by management.
Such objectives are difficult to specify in value terms as:
-
There is usually no observable market value of claims on, or right to participate in the entity.
It is difficult to identify the ownership group, whose value should be maximised.
Financial objectives are usually specified in ‘non-value’ financial terms such as target, sometimes better
described as financial constraints.
Main difference in objectives of Commercial/Public Corporations:
1. The freedom of the entity’s management determine the firm objectives.
2. The nature of objectives set – value or accounting measures.
Financial management should be integrated with the firm and designed to assist in meeting the firm’s
objectives.
Difference is due to considerable differences in the operation of firm.
-
Technology
Type of market
QUESTION EIGHT
Outline the role played in Government accounting by:
(a) The Public Accounts Committee
(b) The controller and auditor general
(c) The government Ministries Accounting Officers.
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Company Accounts
Solution
Accounting has been described as a process whereby transactions of an operating entity are documented,
classified and recorded for the purposes of accumulating and providing financial information essential to the
conduct of designated activities.
Government accounting is an essential element of the financial
management function of government. In the main government accounting is directed towards satisfying the
accountability and management requirements of officials responsible for the conduct of government activities
and operations. It is therefore concerned with the proper recording of all receipts of government, with the
maintenance of records that reflect the propriety of transactions and give evidence of accountability for
assets and other resources available for use and with the classification of data in a way that provides useful
information for control and effective and efficient management of government programme operations.
Amongst the features of government accounting, are the specific roles played by the Public Accounts
committee, the Controller and Auditor-General and the Ministries Accounting Officers to which we turn.
a) The Public Accounts Committee
- A standing committee of a few selected members of Parliament.
-
Charged with reviewing financial matters of government.
-
This is in line with the constitutional requirement that all financial matters in government are subject to
consideration, approval and review by the legislature.
-
The deliberations and recommendations of the Public Accounts Committee are based on the report on
funds and accounts by the Auditor-General.
-
The proceedings at the meeting are recorded verbatim, the Auditor-General’s staff and those of
accounting unit responsible for the deliberations reacting to the points raised in the report.
-
Matters deliberated upon include serious ones concerning losses on a large scale, cases of thefts and
Misappropriation, failure to observe regulations and ensure propriety of expenditure, cases of waste
and other administrative inefficiencies which have led to wastage of funds and failure to obtain value
for money.
-
These serious matters require proper explanation on the part of the Accounting Officer and the reaction
of the Public Accounts Committee in recommending surcharge of the principle of personal
accountability of government officers handling public funds.
-
The Public Accounts Committee’s recommendations are then debated in Parliament which often insists
that the government takes necessary corrective action which often is done.
-
The role played by the Public Accounts Committee ensures that the government be made accountable
for financial matters to the legislature. It is a control measure ensuring that public funds are protected
and used only for purposes intended by Parliament. It curbs any tendency by public officers to be lax
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480
and wasteful in their handling and management of public funds. It ensures that proper accounting
methods and procedures and controls are instituted to safeguard public funds.
b) The Controller and Auditor General is appointed by the President and reports to Parliament.
- He functions independently of executive council.
-
He controls issues of funds from exchequer that is funds voted for use by Parliament and intended for
by spending units to be withdrawn from the exchequer, must be sanctioned for by the controller who
satisfies himself that there are adequate funds and that they will be used for the purpose intended by
Parliament.
-
He carries out both statutory and non statutory audit.
The more serious audit queries known reference sheets are compiled in an audit report which is
presented to Parliament for reviewing the government’s financial management.
-
The institution of the office of the Controller and Auditor-General plays a very effective role in the
management of public funds.
-
The Controller and Auditor-General plays the role of a watchdog and the fact that he reports to
Parliament ensures that spending units are not lax in handling public funds.
-
His independence in performance of his duties ensures that he is not subjected to undue influence by
the executive. He carries out his duties without fear or favour, he expresses his opinion, qualifies his
report and on the whole the powers conferred upon him by the exchequer and Audit Act, ensures the
accountability of the executive to the legislature. Without any doubt, the role of the Controller and
Auditor-General is very essential in ensuring proper financial management.
-
Although the role may be that of making of the report to Parliament, his officers carry out continuous
audit inspection on the records of accounting units of the government, this minimises incidents of
fraud, thefts and other misappropriations.
-
The recent creation of the Auditor-General for statutory boards underscores the importance the
government attaches to the auditing function, it is indispensable.
-
The voted funds or the grants given by Parliament for use by the accounting officer should be properly
handled to ensure regularity and propriety of expenditure.
-
The accounting officer is appointed by the Permanent Secretary Treasury personally and under the
principle of personal accountability.
c)
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-
The letter of appointment spells out his duties and functions, emphasising the fact he is answerable to
the Public Accounts Committee on serious matters raised by the controller and Auditor-General.
-
His responsibilities in management of public funds, safeguarding public property and running his
accounting unit must be carried out with diligence, dedication, with due regard for efficiency and
effectiveness.
-
Amongst his duties are to organise his accounting unit to ensure that functions are carried out properly,
to ensure that public property are safeguarded, to ensure that staff under him have the necessary
technical skills for the proper performance of their duties, to plan and budget for the financial
requirements of his unit as directed by Treasury, to instil cost-consciousness in the at all levels of
management, to answer audit queries, to sign the appropriation accounts and so on.
The accounting officer
-
The salient point of the role of the Accounting Officer is that he is personally held responsible for any
undue happenings affecting public funds in his control. For example, should he differ with the Minister,
his political head, on how to spend certain funds he has to obey the Minister’s directives but should
write to Treasury, giving details of the dispute. This will absolve him of blame should a query arise.
-
Public servants handling public funds should be held wholly responsible. As head of his accounting
unit, this requirement ensures that funds are not handled with laxity, that services are provided
efficiently and effectively, that evidence is produced on how the funds were spent and last but not
least, the taxpayers have got value for money with regard to the taxes they pay.
QUESTION NINE
In relation to fund accounting, explain what is meant by the following special funds and explain fully how they
are operated.
a) Revolving funds
b) Trust funds
c) Sinking funds
One basic feature amongst others, of government accounting, is the concept of fund entities, which has its
origin in the fact that financial powers of the executive are subject to the control of the legislature. There is
for example, a constitutional requirement that government receipts from revenue and borrowing should be
accumulated into a general fund (consolidated fund) for use of the government as a whole, and any
withdrawals from fund be subjected to sanction by the legislature.
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482
Provision has also been made for separate treatment of monies received by the government in a trustee
capacity. These are known as trust funds from which withdrawals are made in accordance with specific
statutory provisions. Funds may also be established by law from the proceeds of earmarked taxes, with
provisions for using such receipts to attain specified programme objectives – either with or without prior grant
of authority from the legislature. Additionally, in some cases a contingency fund may be created to enable
advances to be made for meeting necessary and unforeseen expenditures, subject to subsequent
authorisation by the legislature. Funds are also established by legislative action which grants authority to
spend for specified purposes and objectives. Such funds are legal entities. Like the National Social Security
Fund and the National Hospital Insurance Fund, they have their own resources which include property,
receivables, investments and other accountable assets. Any liabilities are set off against the assets to
determine the network of the fund. Such a fund therefore is an independent accounting entity. An example
of a trust fund is the Widows and Children’s Pension Fund to which all married Civil Servants must contribute
a certain amount of their monthly salaries and on retirement or leaving the service, refunds are made.
Revolving Funds are also entities set up by legislative action to provide agencies with resources for the
attainment of specified objectives. Government enterprises are usually set up in this manner. The initial
appropriation is made out of the consolidated fund. The receipts generated in such funds are automatically
used by the agency in accordance with the law that set up the fund. Annual legislative appropriations are not
therefore required for the operation of such funds. However, the original financing required to the financing
of a programme increase or an incurred deficit would be appropriated out of the central funds of the
government. Similarly, any surplus that may result from the operations carried out under such authority
should be deposited in the central fund as receipts of the government.
Sinking Funds are also entities set up by legislative action with the purpose of eventual liquidation or
extinction of public debt. This requires annual appropriations into the fund thus building up the fund as
maturation of the debt approaches, until the principal sum is repaid. There is necessity of investing the
appropriations on a special account as the Sinking Fund is built up. Debt requiring such fund is known as
Funded Debt. There is less use of these Funds these days as they entail tying down funds which would have
been used elsewhere.
QUESTION TEN
One of the principle differences between non-profit and commercial organisations is that they have different
reasons for their existence. Consequently, non-profit making organisations follow some accounting principles
which differ from accounting principles followed by commercial organisations.
You are asked to state which are the principles followed by non-profit making organisations and why you think
they are more appropriate than corresponding principles applicable to commercial organisations.
Solution
483
Company Accounts
Types of non-profit making organisations are the Central Government. Local Authorities, Trade associations,
welfare clubs, religious organisations, and so on, whose motive of existence is not profit but to advance the
welfare of the members or some other.
Take the example of the government accounting system (which includes Local Government accounting). The
accounts are maintained on a receipts and payments basis. Actual receipts of revenues and actual
expenditures incurred are the basis of the financial statements. These statements are produces by each
accounting unit, not by the government as a whole. Each unit is charged with the task of providing a service,
a function during a financial year, of a current or development nature. Since authority to raise revenue and
spend public funds is vested in the legislature, the accounting unit merely has to satisfy accountability
requirements while assuming that services were actually rendered. Any shortfalls in revenue collections or
amounts owed to or by the accounting unit are not debtors or creditors per se but are a mere reflection on
the performance of the unit. Its financial position at the end of the year is known as a statement of assets
and liabilities vis a vis other units or balances held on hand (its assets) and any unused funds (its liabilities).
Revenues to be collected by way of taxes, fees and charges, rates borrowing etc. are estimated for, and also
how those revenues will be expended are also estimated for. It would be difficult to single out individual
taxpayers as debtors or some unpaid bill at the end of the year as a creditor, since the functions of the state
do not stop, but are continuous. The reason for having a financial year is to emphasize the constitutional
requirement that Parliament is supreme in finance matters and the government must receive annual authority
(by way of the Appropriation Act) to raise and expend public funds). In this case, it would appear that the
receipts and payments basis of accounting is appropriate.
The other non-profit accounting system is the income and expenditure system of accounting. Welfare clubs,
Members clubs and religious organisations and trade associations rely mainly on member’s contributions and
necessarily some members will default payment of their dues or the members may sometimes pay in
advance. This is a clear case of creditors and debtors or accruals. A surplus or deficit may be reflect and a
balance sheet drawn.
This income and expenditure accounting system would appear to be appropriate for such organisations in
view of the fact that their area and scope of activities is limited, its assets are identifiable, and liabilities can
be ascertained.
Although we have outlined the differences in approach between accounting in commercial and non
commercial organisations, the dividing line is not straight and clear. It should be remembered that public
sector accounting includes government commercial enterprises with a profit motive. More over, accounting
by non-profit organisations is increasingly adopting practices similar to those employed in private industry.
Such an operation involves setting up a “business type” financial system in which the relationship of receipts
and expenditures and the financial results obtained continuously are highlighted for the attention of agency
management and legislative review.
QUESTION ELEVEN
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484
(a) “Without the profit motive there is an inevitable lack of budget motive”. Do you agree?
(b) Explain the administrative and accounting controls used to achieve the budgeted level of expenditure by
the Government Ministries.
Solution
(a) Planning and control are two important management functions and accounting in the present day
conceptions lays emphasis on these two functions.
In this sense, accounting is described as management accounting, which is any form of accounting which
enables a business to be conducted more efficiently. This emphasis on accounting for efficiency, is in
every area where accounting must be used, whether in an organisation with the profit motive or in nonprofit motive organisations like the government.
Budgetary control refers to the use of budgets to control the activities of an organisation. Take the case of
the government, the idea of budgetary control is in fact extensively used. Finance being such a scarce
resource, no government can afford not to budget. Basically, the annual budget consists estimates of
revenue and expenditure and each accounting unit or cost centre has to show its operational costs being
limits beyond which no expenditure should be incurred without Treasury or Parliamentary approval. The
government budget as whole should not be exceeded without parliamentary approval. All the estimates
are broken up into minor budgets for ministries and/or departments. Vote control is in essence budgetary
control and this is carried on without profit motive.
Therefore, we can emphasize that the profit motive is not necessary for the use of budgetary control.
(b) Budgeted levels of expenditure normally represent ceilings over and above which spending units of
government must not go, without approval either by Parliament or Treasury.
It is both legally and administratively binding for the government to present expenditure estimates to
Parliament.
The expenditure estimates are both of recurrent and development nature and pertain to one financial year.
Sitting as a committee of supply, parliament approves the estimates by way of the appropriation bill which
is signed by the President to become an act.
QUESTIONTWELVE
485
Company Accounts
(a) Compare and contrast the role of an accountant in a governmental accounting with that of an accountant
in commercial accounting.
(b) Explain and illustrate the distinction extraordinary items and exceptional items.
Solution
In order to clearly understand the role an accountant plays in both government and commercial accounting,
we need to make a brief comparison and contrast between the two accounting systems. Unlike private
businesses, government activities are not governed by the profit motive. Private firms essentially are
concerned with profits made, for such purposes as return on investment and expansion in a selected field of
activity. In contrast, functions are undertaken by government in multiple fields of activity, for a variety of
broader purposes such as service to the public, maintaining the financial stability of the nation, promoting
trade and commerce, stimulating private action of national importance and accelerating the development of
the economy and social welfare. Government activities encounter many kinds of problems that are of greater
complexity. Costs of performance are of significant interest to management, but they are of importance
primarily as a measure of operational efficiency and the degree to which planned programme results are
achieved with funds made available. The above description highlights the environment in which an
accountant works, both in private commercial sector and government.
In all government activities, accounting has to place emphasis on three aspects:
a) Control of the acts of public bodies and officers in their raising and expending of public funds.
b) Provide information that will assist in the economic planning of government functions and activities.
c) Provide information to parliament and the public relating to the activities of government operations in
whatever form.
The last aspect is in fact a statutory requirement that the accounting officers should produce financial
statements in the form of revenue accounts, fund accounts, appropriation accounts in order to satisfy the
accountability requirements. However, it has been argued that the role of the accountant in the government
accounting system has been more or less that of a bookkeeper, having no central role of management
decision-making. That view is slowly changing. The accountant is, owing to more sophisticate nature of his
work, now more appreciated, considered as an expert, one of the management team. He is required to
provide information that will assist in the economic planning of government functions and activities.
The role of the accountant in the commercial sector is of no less importance. Apart from the purpose for
which financial statements are usually required, for example, under the Companies Act, or some other
legislations, for assessments of taxation on profits or to support loans from banks or similar financial
institutions, accounting in the present day conception lays particular emphasis on its use of two of the
important management functions of planning and control. In this sense it is described as “Management
Accounting” which may be very briefly referred to as any form of accounting which enables a business to be
conducted more efficiently. These two management functions of planning and control are used in both
government and commercial sector accounting. Accounting therefore serves the same purpose for all
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486
undertakings, both private and public. The accountant in all cases has to classify, record, summarise the
many transactions and events usually in terms of money or money’s worth. The most important difference in
the role of the accountant in government and commercial accounting is that profit is not the end product in
government. But they use the same techniques and overall achievements of efficiency and effectiveness.
Example 1
(a) In accounting for Central Government and Local Government units, a fund called Capital Project Fund is
usually created. What is the purpose of this fund?
(5 marks)
(b) The City Council of Matopeni authorises the construction of a new city hall on 1 January 1991. This hall is
expected to cost sh.100,000,000. Financing for the project is to beSh50,000,000 from 6½ per cent serial
bond issue, Sh.40,000,000 from a Government Grant, and Sh.10,000,000 from the general fund (GF).
Transactions and events during 1991 are as follows:
(i) The city transfers Sh.10,000,000 from the GF to the City Hall Capital Project Fund (a CPF created for
the construction).
(ii) Planning and architect’s fees are paid in the amount of Sh.4,000,000.
(iii) The contract is awarded to the lowest bidder for Sh.95,000,000.
(iv) The bonds are sold for Sh.50,200,000.
(v) The amount of the premium is transferred to the debt service fund.
(vi) The construction is certified to be 50 percent compete and a bill for Sh.47,500,000 is received from
the contractor.
(vii) Contracts payable, less a 10 percent retained percentage, is paid.
(viii) The books are closed and financial statements are prepared.
Required:
(i)
(ii)
Journal entries to record the above transactions.
(10 marks)
Financial statement of the capital project fund for the year 1991.(5 marks)
(20 marks)
Solution
(a) Capital project fund (CPF)
The purpose of capital project fund is to provide resources for the completion of some specific capital
project. The main sources of financing include the proceeds of bond issues, grants and transfers from
other funds. A separate capital project fund is created for each major project.
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(b)
(i) JOURNAL ENTRIES
NO.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
PARTICULARS
Transfers to city call CPF
General Fund
Cash A/C
(Being the transfer to city hall CPF)
Capital project fund (CPF):
Cash account
General Fund (GF) A/C
(Being the receipt of funds from
G.F)
CPF
Planning and architect’s fees A/C
Cash A/C
(Being the payment of planning
and architect’s fees)
CPF
Encumbrances
Reserve for encumbrances
(Being the recording of
encumbrances for the amount of
contract)
CPF
Cash account
Bonds account
Premium on bonds etc.
Being the proceeds from the issue
of bonds)
Premiums on bonds A/C
Cash A/C
(Being the transfer of premium
bonds to City Hall debt service
fund)
F
Dr
(Sh ‘000’)
10,000
10,000
10,000
10,000
4,000
4,000
95,000
95,000
50,200
50,000
200
200
200
Reserve for encumbrances A/C
Encumbrances A/C
(Being the transfer of half of the
amount encumbered)
47,500
Contract expenditures A/C
Contract payable A/C
Contract payable – retention A/C
(Being the expenditure on the City
Hall contraction recorded)
42,500
Contract payable A/C
Cash A/C
(Being the partial payment to the
contractor)
42,750
CPF – Adjusting entry due from
government grant
Revenue A/C
(Being the accrued revenue from
the government grant.)
CPF (Closing Entries)
Revenue A/C
Cr
(Sh ‘000’)
47,500
42,750
4,750
42,750
40,000
40,000
40,000
Lesson Eight
General Fund A/C
Proceeds from issue
Expenditures
Encumbrances
Fund balance
(To close the books at the end of
1994)
488
10,000
50,000
46,750
47,500
5,750
(ii) CITY COUNCIL OF MATOPENI
A statement of Revenue and Expenditure and charges in the Fund Balance for the year
ended 31st December 1991.
(Sh ‘000’)
Project authorisation
100,000
Sources of Financial Funds
Revenue from government grant
40,000
Transfers:
Proceeds from fund issue
50,000
Transfers from general fund
10,000
100,000
Use of Financial Resources
Expenditures
51,500
Excess of Revenue and Transfers over expenditure
48,500
Less: Increase in encumbrances
47,500
Fund Balances as at 31st December 1994
CITY OF MATOPENI
City Hall Capital Project Fund
1,000
489
Company Accounts
Balance Sheet as at December 31, 1991
(Sh ‘000’)
Assets
Cash
13,250
Due from government grant
40,000
53,250
Liabilities:
Contracts payable – retention money
4,750
Fund equity:
Reserve for encumbrance
Fund balance
47,500
1,000
48,500
53,250
Example 2
The Ministry of Trade and Commerce had the following estimated revenues to collect during the financial year
ended 30 June 1993.
Sh.
Hotel and Restaurant licences
Cattle traders licences
900,000
1,000,000
Licences under Trade Licensing Act
765,000
Liquor licenses
500,000
Professional licences
75,000
Licenses for registration of Insurance Companies320,000
During the year and prior to any issue of licences, it was found necessary to suspend the issue of liquor
licences and professional licences.
The Receiver of Revenue further found out that more people were
interested in scrap metal business. The Treasury authorised the Receiver of Revenue to open a new head for
scrap metal licences with an estimated collection of Sh.955,000.
Lesson Eight
490
At the close of the financial year, the Receiver of Revenue had collected the following amounts:
Sh.
Hotel and Restaurant licences
1,131,250
Cattle traders licences
2,261,250
Licences under Trade Licensing Act
Liquor licences
Professional licenses
Registration of insurance companies
Scrap metal licences
705,000
255,000
1,117,500
The Receiver of Revenue had provided the following additional information:
(i)
(ii)
The ministry had a balance of Sh.33,750 at the beginning of the financial year.
An amount of Sh.335,000 in respect of scrap metal licences was still in the hands of agents as at 30 June
1993.
(iii) A sum of Sh.8,750 was due to the Exchequer at the end of the year.
Required
(a)
A Statement of Assets and Liabilities for the year ended 30 June 1993
Ministry Of Trade and Commerce
Statement of Assets and Liabilities as at 30 June 1992
Assets
Cash balance
Receivable from agents
Sh.
5,503,750
335,000
(5 marks)
491
Company Accounts
5,838,750
Fund Balance and Liabilities
Fund balance (brought forward)
Fund balance (current year) (W – 1)
33,750
5,796,250
Payable to the exchequer
8,750
5,838,750
(b) STATEMENT OF REVENUE
For the year ended 30 June 1993
Head
Estimates
Actual
Over (under)
Estimated
Sh.
Sh.
Sh.
011 – Hotel & Restaurants900,000
1,131,250
(231,250)
012 – Cattle traders licences1,000,000
2,261,250
(1,261,250)
765,000
705,500
60,000
500,000
-
500,000
021 – Professional licences 75,000
-
75,000
255,000
65,000
1,117,500
(162,500)
5,470,000
(955,000)
013 – Licences under Trade
Licensing Act
014 – Liquor Licences
022 – Registration of Insurance
Companies
320,000
031 – Scrap metal licences 955,000
4,515,000
Balance b/f from previous year
33,750
Amount payable to the exchequer
5,503,750
Amount transferred to exchequer (Bal. Fig)
5,495,000
Lesson Eight
492
Amount due to exchequer
8,750
(W – 1) Fund Balance Current year:
Amount transferred to exchequer
5,495,000
Add: Amount receivable from agents
335,000
5,830,000
Less: Balance b/f from previous year
33,750
5,796,250
(c) Footnotes:
1.
Introduction of a new source of revenue i.e. scrap metal licences.
2.
Withdrawal of two revenue sources i.e. liquor licences and professional licences.
3.
Reasons for material variations in actual receipts.
4.
Details about revenue with collector’s agents.
Example 3
The following data were taken from the accounting records of the Town of Ole Meka General Fund after the
accounts had been closed for the fiscal year ended 30 September 1991.
Balances
Fiscal Year 1991
Changes
Balances
1 October 1990
Debit
Sh.
Sh.
Sh.
Sh.
180,000
955,000
880,000
225,000
20,000
809,000
781,000
48,000
6,000
9,000
(7,000)
Assets
Cash
Taxes Receivable
Estimated uncollected tax(4,000)
Credit 30 Sept. 1991
196,000
296,000
Liabilities, Reserves & Funds
Balances:
Vouchers payable
44,000
880,000
889,000
53,000
493
Company Accounts
Due to intra governmental
Service fund
2,000
7,000
10,000
5,000
Due to Debt Service Fund10,000
60,000
10,000
50,000
Reserve for encumbrances40,000
40,000
47,000
47,000
Fund balance
100,000
20,000
61,000
141,000
19,000
2,777,000
2,777,000
296,000
The following additional data is available:
(i)
The budget for fiscal year 1991 provided for estimated revenues of Sh.1,000,000 and appropriations of
Sh.965,000.
(ii) Expenditure totalling sh.895,000 in addition to those chargeable against Reserve for Encumbrances,
were made.
(iii) The actual expenditure chargeable against Reserve for Encumbrances was Sh.37,000.
Required:
Show journal entries to record the above transactions in the books of Town of Ole Meka General Fund.
(20 marks)
Lesson Eight
494
Solution
TOWN OF OLE MEKA GENERAL FUND
----Journal Entries
S. No
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
Cash
Revenue
(Being revenue received)
Expenditure
Encumbrances
Bank
(Being the record of payment made)
Tax receivable
Fund Balance
(Being the record of the increase in tax
receivable)
Dr
Sh.
995,000
995,000
858,000
22,000
880,000
28,000
28,000
Fund Balance
Incollectable taxes
3,000
Fund Balance
Vouchers
(Being increase of vouchers payable)
Fund Balance
Intra: government
(Being the record of the net increase)
9,000
3,000
9,000
3,000
3,000
Fund Balance
Debt Servicing Fund
(Being the record of net appropriation to
debt service fund).
40,000
Encumbrances
Fund
Fund
Encumbrances
(Being the record of net changes in
encumbrances)
15,000
Revenue
Expenditure
(Being the record of expenditure incurred
against the revenue).
Revenue
Fund
(Being the transfer of net revenue to the
Fund A/C).
40,000
15,000
44,000
44,000
858,000
858,000
97,000
97,000
FINANCIAL STATEMENT
Town of Ole Meka
Assets
Sh.
Cash
Cr
Sh.
225,000
495
Company Accounts
Tax received
48,000
Estimated uncollected tax
( 7,000)
296,000
Fund Balances
Sh.
Sh.
Uncollected Tax
3,000
Balance b/f
100,000
Voucher
9,000
Tax receivable
28,000
Intra
3,000
Reserve for Encumbrances
15,000
Debt fund
40,000
Reserve
97,000
Encumbrances
44,000
______
Balance c/d
141,000
240,000
240,000
Lesson Eight
496
REINFORCEMENT QUESTIONS
QUESTION ONE
The Approved Estimates and Actual Expenditure details of the Ministry of Uchumi na Ufanisi for the year 197/8 were as follows:
Approved
Actual
Estimates
Expenditure
£
£
123,280
97,520
19,550
14,260
4,140
667
16,100
13,593
110 – Travelling and Accommodation
1,334
1,656
120 – Postal and Telecommunication Expenses
4,600
3,312
17,480
16,882
5,980
4,738
21,000
39,800
1,000
5,560
000 – Personal Emoluments
050 – House Allowances
080 – Passages and Leave
100 – Transport Maintenance
190 – Miscellaneous Charges
196 – Training Expenses
230 – Purchase of Equipment
620 – Appropriations-In-Aid
(Realised)
The Ministry made four (4) equal withdrawals from Exchequer in July 19-7, October 19-7, January 19-8 and
May 19-8. In total the Ministry had withdrawn £200,000 by the end of the year.
Required:
(a)
(i)
(ii)
The General Account of Vote (G.A.V)
The Exchequer Account.
497
Company Accounts
(iii) The Paymaster-General (PMG) Account.
(b) A statement of assets and liabilities as at 30 June, 19-8.
(20 marks)
QUESTION TWO
(a) Distinguish between Commitment Accounting and Fund Accounting in relation to Public Sector
Accounting.
(8 marks)
(b) The Appropriation Account of the Government of the Republic of Kenya for 1992/1993 presented to
Parliament in January 1994 included the following accounts for the Provincial Hospitals managed by the
Ministry of Health.
Estimated 1992/1993
Gross
Current Expenditure/Income
Other direct costs
Capital Expenditure
26,770,000
Net
Expenditure
Income
Expenditure
25,401,000
880,000
24,521,000
357,000
-
357,000
1,012,000
____-
1,012,000
880,000
25,890,000
Lesson Eight
498
Actual 1992/93
Gross
Net
Expenditure
Income
Expenditure
Current Expenditure/Income 26,593,1465
920,951
25,672,194
334,692
-
334,692
1,082,683
______-
1,012,000
920,951
27,089,569
Other direct costs
Capital Expenditure
28,010,520
These accounts were audited by the Controller and Auditor General who issued a clean certificate of
findings.
Required
Discuss the usefulness of these published accounts from the point of view of:
(i)
(ii)
(iii)
(iv)
A
A
A
A
Member of Parliament.
taxpayer.
patient of one of the hospitals.
creditor to one of the hospitals.
(3
(3
(3
(3
marks)
marks)
marks)
marks)
(Total: 20 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
499
Company Accounts
COMPREHENSIVE ASSIGNMENT NO.4
TO BE SUBMITED AFTER LESSON 8
To Be Carried Out Under Examination Condition and Sent to the Distance Learning Administraton
for Marking by the University
TIME ALLOWED: THREE HOURS
ANSWER ALL QUESTION
QUESTION ONE (JUNE 2000 Q2)
You have been provided with the following summarised accounts of Golden Times Ltd. For the year ended 31
March 2000:
Balance sheet as at 31 March 2000
Fixed assets:
Freehold property (Net book value)
Plant and machinery (Net book value)
Motor vehicles (Net book value)
Furniture and fittings (Net book value)
Sh.
Current Assets:
Stocks
Debtors
Investments
Sh.
Sh.
480,000
800,000
200,000
200,000
1,680,000
1,000,000
400,000
120,000
1,500,000
Current liabilities:
Trade creditors
Bank overdraft
Corporation tax
Dividends payable
238,400
878,400
176,000
107,200
(1,400,000
)
Financed by:
Authorised share capital – 800,000
Sh.1 ordinary shares
Issued and fully paid: 400,000 Sh.1 Ordinary
shares
Capital reserve
Revenue reserve
Loan capital: 400,000 10% Sh.1 Debentures
400,000
200,000
800,000
Profit and loss account for the year ended 31 March 2000
Sh.
Sales (credit)
120,000
1,800,000
400,000
1,800,000
4,000,000
Profit after charging all expenses except interest on
debentures
Less: debenture interest
Profit before tax
Corporation tax
Less: ordinary dividend proposed
Retained profit transferred to revenue reserve
440,000
40,000
400,000
176,000
224,000
107,200
116,800
The following additional information was available:
1.
2.
3.
The purchases for the year were Sh.2,160,000 while the cost of sales was Sh.3,000,000.
The market price for Golden Times Ltd. Ordinary shares as at 31 March 2000 was Sh.5
The company estimates the current value of its freehold property at Sh.1,100,000.
Required:
(a)
Compute the following ratios for Golden Times Ltd.:
(i)
Return on capital employees
( 1 mark)
Lesson Eight
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(b)
500
The profit margin
( 2 marks)
The turnover of capital
( 1 mark)
Current ratio;
( 1 mark)
Liquid ratio;
( 2 marks)
Number of days accounts receivable are outstanding;
( 1 mark)
Property ratio;
( 2 marks)
Stock turnover ratio;
( 1 mark)
Dividend yield ratio;
( 1 mark)
Price earnings ratio.
( 2 marks)
Comment on Golden Times Ltd. Liquidity stating the reference points to which relevant ratios can be
compared.
(6 marks)
(Total: 20 marks)
QUESTION TWO (MAY 2002 Q4)
(a)
(b)
Briefly explain the objectives and scope of IAS 7 (Cash Flow Statements).
(6 marks)
The following are extracts from the financial statements of Wewe Ltd. As at 31 March:
2002
Sh.’000’
Fixed assets:
Goodwill
Freehold land and building
Plant and machinery (NBV)
Investment at cost
Current assets:
Stocks
Accounts receivable
Investments
Cash at hand and bank
Current liabilities
Bank overdraft
Accounts payable
Proposed dividends
Taxation
Net current assets
15% debentures
Capital and reserves:
Authorised, issued and paid Sh.10
Ordinary shares
Share premium
Revaluation reserve
Retained profit
Sh.’000
’
2001
Sh.’000’
Sh.’000’
2,800
16,800
5,860
3,600
29,060
2,900
12,000
6,350
3,750
25,000
10,050
6,140
1,710
200
18,100
8,700
7,800
840
430
17,770
(2,390)
(5,850)
(450)
(820)
(9,510)
(6,540)
(5,250)
(380)
(600)
(12,770)
8,590
37,650
(7,500)
30,150
5,000
30,000
(9,000)
21,000
18,000
1,500
4,500
6,150
30,150
15,000
750
5,250
21,000
The profit and loss appropriation account for the year ended 31 March 2002 is given below:
Sh.’000’
Net profit before tax
Less: Corporation tax
Profit after tax
Dividends:
Interim (paid)
Proposed (paid)
150
450
Sh.’000’
2,400
900
1,500
600
900
501
Company Accounts
The following additional information is provided:
1.
Profit for the year is arrived at after charging:
SH.’000’
Depreciation on plant and
machinery
Goodwill amortisation
2.
3.
1,150
420
During the year, plant with a net book value of Sh.750,000 was sold for Sh.1,470,000. The
plant had originally cost Sh.3,000,000.
The investments portfolio was reduced by selling one block of shares at a profit of
sh.160,000.
Required:
Cash flow statement in accordance with IAS 7.
(14 marks)
(Total: 20 marks)
QUESTION THREE (DEC 2002 Q5)
(a)
Explain briefly the meaning of the terms listed below in relation to Government accounting:
(i)
(ii)
(iii)
(iv)
(b)
The Exchequer account
The General account of Vote
The Paymaster General
Appropriations in Aid.
(
(
(
(
3
3
3
3
marks)
marks)
marks)
marks)
The approved estimates and actual expenditure details for the Ministry of Planning and Development
for the year 2001/2002 were as follows:
Personal emoluments
House allowances
Passage and leave
Traveling and accommodation
Transport and maintenance
Postage and telephone expenses
Miscellaneous charges
Training expenses
Purchase of equipment
Appropriations in Aid
Sh.
14,793,600
2,346,000
4,024,800
160,080
1,932,000
552,000
2,097,600
717,600
2,520,000
120,000
Sh.
11,702,400
1,711,200
80,040
198,720
1,631,160
397,440
2,025,840
568,560
4,776,000
667,200
The ministry made four equal withdrawals from the exchequer in July 2001, October 2001, January
2002 and May 2002. In total, the ministry had withdrawn Sh.24,000,000 by the year end.
Required:
(i)
The General Account of Vote.
( 2 marks)
(ii)
The Exchequer Account
( 1 mark)
(iii)
The Paymaster General Account.
( 2 marks)
(iv)
Statement of assets and liabilities as at 30 June 2002.
( 3 marks)
(Total: 20 marks)
Lesson Eight
(a)
Explain briefly the meaning of the terms listed below in relation to Government accounting:
(v)
(vi)
(vii)
(viii)
(b)
502
The Exchequer account
The General account of Vote
The Paymaster General
Appropriations in Aid.
(
(
(
(
3
3
3
3
marks)
marks)
marks)
marks)
The approved estimates and actual expenditure details for the Ministry of Planning and Development
for the year 2001/2002 were as follows:
Personal emoluments
House allowances
Passage and leave
Traveling and accommodation
Transport and maintenance
Postage and telephone expenses
Miscellaneous charges
Training expenses
Purchase of equipment
Appropriations in Aid
Sh.
14,793,600
2,346,000
4,024,800
160,080
1,932,000
552,000
2,097,600
717,600
2,520,000
120,000
Sh.
11,702,400
1,711,200
80,040
198,720
1,631,160
397,440
2,025,840
568,560
4,776,000
667,200
The ministry made four equal withdrawals from the exchequer in July 2001, October 2001, January
2002 and May 2002. In total, the ministry had withdrawn Sh.24,000,000 by the year end.
Required:
(v)
The General Account of Vote.
( 2 marks)
(vi)
The Exchequer Account
( 1 mark)
(vii) The Paymaster General Account.
( 2 marks)
(viii) Statement of assets and liabilities as at 30 June 2002.
( 3 marks)
(Total: 20 marks)
QUESTION FOUR (JUNE 2001 Q5)
Write brief notes on the following:
(a)
(b)
(c)
(d)
Controller and Auditor General
Sinking fund
Trust fund
Revolving fund
(5 marks)
(5 marks)
( 5 marks)
( 5 marks)
(Total: 20 marks)
QUESTION FIVE (DEC 2001 Q5)
(a)
(b)
In the context of accounting and financial reporting for the public sector define the term “fund”
(3 marks)
Write explanatory note son the specific funds falling under each of the categories listed below:
(i)
(ii)
(iii)
(c)
Governmental funds;
Proprietary funds;
Fiduciary funds.
( 2 marks)
( 2 marks)
( 2 marks)
For each of the three categories listed in (b) above, explain how the accounting practice adopted for
each is guide by:
(i)
Accruals basis of accounting;
( 3 marks)
503
(ii)
Company Accounts
Budgets and budgetary control.
( 3 marks)
(Total: 15 marks)
END OF COMPREHENSIVE ASSIGNMENT No.4
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
Lesson Eight
504
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
MODEL ANSWERS TO REINFORCING QUESTIONS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
505
Company Accounts
SOLUTIONS TO REINFORCEMENT QUESTIONS
Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
DR
CR
£
£
Cash at bank
1,703
Cash in hand
12
Drawings
560
Postage and stationery
129
Traveling expenses
104
Cleaning expenses
260
Sundry expenses
19
Telephone
214
Electricity
190
Motor vas
2,000
Rates
320
Fixtures ad fittings
806
Capital
2,308
Purchases
3,163
Discounts received
419
Credit sales
830
Cash sales
4,764
Discount allowed
81
Provision for
depreciation:
700
Motor van
250
Fixtures ad fittings
Stock at 1 January 20X1
366
Loan - Frey
250
Debtors – Brown
12
Blue
150
Stripe
48
Creditors – Live
602
Negative
_____
64
10,207
10,207
Workings
Cash at bank
Opening balances
Bankings of cash (908 + 940 + 766 + 1,031)
Capital introduced
£
672
3,643
500
Lesson Eight
506
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44
+ 38 + 20) x 90%
729
5,546
Less cheque payments (telephone, electricity, rates and
van)
Payments to suppliers
(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 +
187)
(2,374)
1,703
Cash at Bank
£
£
Bal b/d
Sales (bal)
5 Bank
4,764 Drawings
Stationery
Travel
Petrol ad van
Sundry
Postage
Cleaner
Bal c/d
4,769
3,645
560
73
40
104
19
56
260
_12
4,769
Question 2
Mary Carter
Balance Sheet as at 31.12.2001
Non current assets
Freehold premises
Plant
£
Current assets
Stock
Debtors
Cash at Bank
Cash in hand
Current liabilities
Creditors
£
8,000
7,000
1,000
6,000
22,000
(10,000)
Capital [34,000 + 5,000 –
10,000]
20,000
49,000
Workings
11,000 + 34,000 – 37,000
10,000 + 51,000 – 54,000
12,000
49,000
29,000
Non current liabilities
Loan from bank
Stock:
Debtors:
£
25,000
12,000
37,000
= 8,000
= 7,000
507
Company Accounts
Cash at bank:
5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 = 1,000
Cash hand: 3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000
Capital
Bal b/f
Add profit
Less drawings
Profit:
Sales
Cost of sales
Electricity
Rates
Wages
Sundry expenses
Bank interest
Net profit
34,000
_5,000
39,000
(10,000)
29,000
60,000
(37,000)
(2,000)
(1,000)
(10,000)
(2,000)
(3,000)
5,000
Creditors
= 12,000 + 34,000 – 36,000 = 10,000
Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.
Capital b/f +
additional
Add net profit
(missing figure)
Less drawings
Capital c/f
25,000
6,000
31,000
(4,500)
26,500
Profit may be also computed as follows:
Net profit
= closing capital (net assets) – opening capital + drawings – additional capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000
Lesson Eight
508
Question 4
Brian Barmouth
Trial balance as at 30 June 2000
£
Sales
Purchases
Office expenses
Insurance
Wages
Rates
Heating and lighting
Telephone
Discounts allowed
Opening stock
Return inwards
Returns outwards
Premiums
Plant and machinery
Motor vehicle
Debtors
Bank balance
Creditors
Loan – long term loan
Capital
Drawings for the year
£
47,600
22,850
1,900
700
7,900
2,800
1,200
650
1,150
500
200
150
40,000
50,000
12,000
12,500
7,800
__4,000
121,150
3,400
10,000
60,000
______
121,150
NB: The closing stock does not appear in the trial balance.
509
Company Accounts
LESSON 2
Question 1
(a)
1-May
13-May
16-May
24-May
(b)
4 – May
11 – May
18 - May
(c)
2 – May
9 – May
17 - May
Capital
Sales
Bruce
hill
£
5,000
200
700
200
1-May
19-May
20-May
21-May
30-May
30-May
31-May
_____ 31-May
6,100
Store fitments
Abel
Rent
Delivery exp
Drawings
Wages
Green
Balance c/d
£
2,000
650
200
50
200
320
300
2,380
6,100
SALES DAYBOOK
£
700
580
360
1,640
Bruce
Hill
Nailor
PURCHASES DAYBOOK
£
650
300
800
1,750
Abel
Green
Kaye
Check the account balances with the balances shown on the trial balance.
(d)
Cash
Sales
Purchases
Debtors
Creditors
Capital
Fixtures and fittings
Rent
Delivery expenses
Drawings
Wages
Dr
£
2,380
Cr
£
1,840
1,750
740
800
5,000
2,000
200
50
200
_320
7,640
____
7,640
Lesson Eight
510
Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
£
£
£
Sales
15,500
Less returns inwards
(1,500)
150,000
Cost of sales
Opening stock
46,000
Purchases
103,500
Less returns outwards
(3,500)
100,000
146,000
Less closing stock
(41,000)
(105,000)
Gross profit
45,000
Discount received
200
Rent received
2,000
47,200
Expenses
Salaries and wages
18,700
Office expenses
2,500
Insurance
1,100
Electricity
600
Stationery
2,400
Advertising
3,500
Telephone
800
Rates
3,000
Discount allowed
__100
(32,700)
Net profit
14,500
End Papers
Balance Sheet as at 31 December 2002
Non current assets
£
Premises
Fixtures and fittings
Current assets
Stocks
Debtors
Cash in hand
Current liabilities
Bank overdraft
Creditors
Capital
Add net profit
Less drawings
£
£
80,000
5,000
85,000
41,000
4,800
200
46,000
12,000
7,500
(19,500)
26,500
111,500
111,000
14,500
125,500
(14,000)
111,500
511
Company Accounts
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
£
Sales
Less: Cost of sales
Opening stock
Purchases
Add carriage inwards
Less returns outwards
Less closing stock
£
1,816,000
6,918,500
42,000
6,960,500
(64,000)
6,896,500
8,712,500
(2,239,000)
Less expenses
Wages and salaries
Carriage outwards
Rent and rates
Communication
expenses
Commission payable
Insurance
Sundry expenses
Net profit
Current liabilities
Creditors
Capital
Add net profit
Less drawings
(6,473,500)
2,760,500
1,024,000
157,000
301,500
62,400
21,600
40,500
31,800
K Smooth
Balance Sheet as at 31 December 2002
Non current assets
£
£
Buildings
Fixtures
Current assets
Stocks
Debtors
Bank
Cash
£
9,234,000
(1,638,800)
1,121,700
£
2,000,000
285,000
2,285,000
2,239,000
1,432,000
297,000
11,500
3,979,500
(816,000)
3,163,500
5,448,500
5,088,800
1,121,700
6,210,500
762,000
5,448,500
Lesson Eight
512
Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
£
£
£
Sales
13,090,000
Less: returns outwards
__(55,000)
13,035,000
Cost of sales:
Opening stock
2,391,000
Purchases
9,210,000
Add carriage inwards
___21,500
9,231,500
Less returns outwards
__(30,700)
9,200,800
11,591,800
Less closing stock
(2,747,500)
(8,844,300)
4,190,700
Less expenses
Wages and salaries
1,282,000
Carriage outwards
30,900
Motor expenses
163,000
Rent and rates
297,000
Telephone
40,500
Insurance
49,200
Office expenses
137,700
Sundries
28,400
(2,027,700)
Net profit
_2,163,000
Skates
Balance Sheet as at 30September 2002
Non current assets
£
Office equipment
Motor van
Current assets
Stocks
Debtors
Bank
Cash
Current liabilities
Creditors
Capital
Add net profit
Less drawings
£
£
625,000
410,000
1,035,000
2,747,500
1,239,000
311,500
__29,500
4,318,500
(937,000)
3,381,500
4,416,500
3,095,500
2,163,000
5,258,500
(842,000)
4,416,500
LESSON 3
513
Company Accounts
Question 1Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users’ decisions taken on the basis of
the financial statements. The materiality of the omission or misstatement depends on the size and nature of
the item in question judged in the particular circumstances of the case. Only items material in amount or in
nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit account, it might well be
regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at
bank £5,000’. In other words, incorrect presentation may amount to material misstatement even if there is
no monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time to identify trends and with
other enterprise’s statements to evaluate their relative financial position, performance and changes in
financial position. It is therefore necessary for similar events and states of affairs to be represented in a
similar manner.
Compliance with accounting standards helps to achieve comparability by ensuring that different entities
account for similar transactions and events in a similar way.
Example:
Depreciation policy must be consistent from one period to the next, unless it becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the
one selected should be the one which gives the most cautious presentation of the business’s financial position
or results.
IAS 1 describes the prudence concept as being that ‘revenue and profits are not anticipated, but are
recognized by inclusion in the profit and loss account only when realized in the form either of cash or of other
assets, the ultimate cash realization of which can be assessed with reasonable certainty; provision is made for
all known…….expenses and losses whether the amount of these is known with certainty or is a best estimate
in the light of the information available.’
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a provision should be made
so that the amount in question is not included in the profit for the year.
Objectivity:
This means that accountants must be free from bias. They must adopt a neutral stance when analyzing
accounting data. This means that they should try to strip their answers of any personal opinion or prejudice
and should be as precise and as detailed as the situation warrants. The result of this should be that any
number of accountants will give the same answer independently of each other.
Lesson Eight
514
Example:
Internally generated good will should not be capitalized in the balance sheet, as its value cannot be
determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful, information must be relevant to
the decision-making needs of users. Information is relevant when it has the ability to influence the decisions
of users by helping them to evaluate past, present or future events or to confirm or correct their past
evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to determine if to lend to the
firm or supply on credit.
Question 4
Information is material if its omission or misstatement could influence the economic decisions of users taken
on the basis of the financial statements.
Factors affecting materiality are:
• The size of the item;
• The nature of the item.
To be useful, information must be relevant to the decision-making needs of users. Information is relevant
when it influences the economic decisions of users by helping them evaluate past, present or future events or
confirming, or correcting their past evaluations.
Neutrality means that the information in financial statements should be free from deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about certain items.
The potential conflict between the two is that neutrality requires freedom from bias while the exercise of
prudence is a potentially biased concept since judgment is required.
In resolving the conflict, a balance should be found that neither overstates nor understates assets, gains,
liabilities and losses.
Safeguards to ensure that a company’s financial statements are free from material error:
The fact that the financial statements have been audited by an independent professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.
515
Company Accounts
LESSON FOUR
Question 1
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
£
£
£
Sales
378,500
Less returns
(4,100)
inwards
374,400
Less cost of sales
Opening stock
120,600
Purchases
261,700
Less returns out
(7,700)
254,000
374,600
Less closing stock
102,500
272,100
Gross profit
102,300
Add
Discount received
2,400
Rent received
7,500
112,200
Less expenses
Salaries and
45,700
wages
Office expenses
8,400
Insurance
2,200
premiums
Electricity
2,300
Stationery
6,200
Advertising
8,900
Telephone
2,100
Business rates
6,000
Discounts allowed
600
(82,400)
Net profit
29,800
Lesson Eight
516
Balance Sheet as at 31 March 2001
Non current assets
£
Warehouse shop and
office
Fixtures and fittings
Current assets
Stocks
Debtors
Prepayments
Cash in hand
Current liabilities
Creditors
Accrued expenses
Bank overdraft
Capital
Add Net Profit
Less drawings
£
£
210,000
12,800
222,800
102,500
13,000
2,400
500
118,400
18,700
1,200
30,000
(49,900)
68,500
291,300
287,500
29,800
317,300
(26,000)
291,300
Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
£
£
Sales
491,620
Less cost of sales
Opening stock
18,460
Purchases
387,936
406,396
Closing stock
19,926
386,470
Gross profit
105,150
Discounts received
1,175
106,325
Less expenses:
Discounts allowed
1,304
Lighting and heating
6,184
Motor expenses
3,080
Rent
8,161
General expenses
7,413
Depreciation (w)
13,146
39,288
Net profit
67,037
Working:
Depreciation charge:
517
Company Accounts
Motor vehicles: £45,730 x 20% = £9,146
Fixtures and fittings: 10% x £(42,200 – 2,200) = £4,000
Total: £4,000 + £9,146 = £13,146
Donald Brown
Balance Sheet as at 31 December 20X0
Cost
Depreciation
Non current
£
£
asset
s
Fixtures and
42,200
6,200
fittings
Motor vehicles
45,730
24,438
87,930
30,638
Current assets
Stock
19,926
Debtors
42,737
Prepayments
680
Cash in hand
1,411
64,754
Current
liabili
ties
Creditors
35,404
Accruals
218
Bank overdraft
19,861
55,483
Net current
assets
Net assets
Financed by
Capital
Net Profit for
year
Less drawings
Net
£
36,000
21,292
57,292
9,271
66,563
26,094
67,037
93,131
26,568
66,563
Lesson Eight
518
Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
£
£
Sales
427,726
Opening stock
15,310
Purchases
302,419
Carriage inwards
476
318,205
Less closing stock
16,480
Cost of sales
301,725
Gross profit
126,001
Carriage outwards
829
Wages and salaries
64,210
Rent and rates (12,466 – 11846
620)
Heat and light (4,757 +
5,107
350)
Depreciation –
10,200
equipment
Motor
8,654
vehicles
Sundry expenses
8,426
109,272
Net profit for the year
16,729
Brenda Bailey
Balance Sheet as at 30 June 20X9
Cost
Depreciation
Non current
assets
Equipment
Motor vehicles
Current assets
Stock
Debtors
Prepayments
Cash
Current liabilities
Bank overdraft
Creditors
Accruals
Net current assets
Capital
Balance at 1 July
20X8
Add Profit for year
£
102,000
43,270
145,270
£
Net book
value
£
32,450
17,574
50,024
69,550
25,696
95,246
16,480
50,633
620
__477
68,210
3,295
41,792
350
45,437
22,773
118,019
122,890
16,729
519
Company Accounts
139,619
21,600
118,019
Less drawings
Balance at 30 June
20X9
Question 4
Frank Mercer
20X8
Dec 31
Balance b/f
Dec 31
Dividend
Cash book
£ 20X8
1,793 Dec 31 Bank
charges
26 Dec 31 Standing
order
Dec 31 Direct
debit
____
Balance
c/d
1,819
Bank reconciliation as at 31 December 20X8
£
Balance per bank
statement
Add unrecorded
lodgments:
V Owen
K Walters
£
1,557
98
134
232
Less unpresented
cheques:
B Oliver (869)
L Philips (872)
Balance per cash book
(corrected)
71
37
(108)
1,681
£
18
32
88
1,681
1,819
Lesson Eight
520
LESSON FIVE
Question 1
Bal b/d
Sales (163,194 +
1,386)
Cash refund
Sales Ledger Control A/C
£
386,430 Bal b/d
164,580 Cash received
350 Discounts allowed
Returns inwards
Contra
Bad debts written
off
______ Balance c/d
551,730
Bal b/d
Cash paid (103,040 – 350)
Discounts received
Returns outwards (1,370
+ 2,000)
Contra
Balance c/d
£
190
158,288
2,160
590
870
1,360
388,272
551,730
Sales Ledger Control A/C
£
520 Bal b/d
102,690 Purchases (98,192
+ 36)
990 Bad debts
3,370
870
175,048 Balance c/d
283,488
£
184,740
98,228
2,160
___100
283,488
Question 2
(a)
Uncorrected balance b/f
Sales omitted (a)
Bank – cheque dishonored
(1)
Balance b/d
Sales Ledger Control A/C
£
12,550 Discounts omitted (d)
850 Contra entry omitted
(f)
300 Bad debt omitted (g)
Returns inwards
omitted (j)
_____ Amended balance c/d
13,700
12,500
£
100
400
500
200
12,500
13,700
Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have
no effect on the control account.
521
Company Accounts
(b)
Statement Of Adjustments To List Of Personal Account Balances
£
£
Original total of list of balances
12,802
Add: debit balance omitted (b)
300
debit balance understated (e)
200
500
13,302
Less: transposition error (c ): understatement
180
of cash received
cash debited instead of credited (2 x
500
£250) (h)
discounts received wrongly debited to
50
Bell (i)
Understatement of cash received (i)
_72
__802
12,500
Question 3
(a)
Balance
Correction of error interest
Balance
George – Cash book
£
4,890 Bank charges (3)
320 Plant (4)
£
320
10,000
11,890
Cheque
dishonored
Correction of
error in entering
cheque (6)
_____ Error in addition
(7)
17,100
(b)
Bank reconciliation
Balance per bank statement
Less lodgments not credited (2)
Add: dishonored cheque
Add: outstanding cheque (1)
Balance per cash book - overdrawn
£
12,800
2,890
9,910
980
1,000
11,890
980
4,800
1,000
17,100
Lesson Eight
522
Statement of effect on profit
Profit per draft accounts
Bank charges (3)
Depreciation (4)
Bad debt (5)
Motor expenses (6)
Additional depreciation (6)
Purchases understated (7)
Interest adjustment (8)
Repairs to premises (9)
£
81,208
£
320
1,000
980
2,100
600
1,000
320
__870
82,398
_6,300
76,098
____
6,300
(d)
Journal
George – drawings
Repairs to premises
Repairs to George’s house
mistakenly charged as a business
expense
*Paul – accounts payable ledger
account
George – drawings
£
870
£
870
540
540
Business account paid by personal
cheque
*Note: a debit to accounts payable ledger control account is also acceptable for this entry.
Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale
posted in a wrong debtors account (e.g. to debtor 1 instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense
of plant repair posted to the plant account (an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a
credit sale of £250 is posted to the debtor and sales account as £520.
(Refer to the text for further details)
523
Company Accounts
(b)
(i)
Suspense
ABD Bank – loan
DR (Sh)
10,000
CR (Sh)
10,000
Cashbook
P& L – Rent received
4,000
P& L –Trading account
Closing stock
1,500
4,000
1,500
P& L – discount allowed
P&L – discount received
P& L – Trading a/c opening stock
Suspense
Prepayments (prepaid insurance))
P& L
Insurance receivable
P& L - income
500
500
3,200
3,200
220
220
12,000
12,000
(ii)
Statement of Corrected net profit
(Sh)
Net profit
Add: Rent received
Discount received
Prepaid insurance
Insurance receivable
4,000
500
220
12,000
Less: closing stock overvalued
Discount allowed
Opening stock
Adjusted net profit
(iii)
ABD Loan
Suspense A/c
Sh
10,000 Balance b/d
_____ Opening stock
10,000
1,500
500
3,200
(Sh)
64,000
16,720
80,720
(5,200)
75,520
Sh
6,800
3,200
10,000
Lesson Eight
524
Question 5
UNTS
Pre-Adjusted
Trial Balance
Dr
Cr
£
l
ases
£
40,00
0
WORKSHEET
Adjustmen
Adjusted
ts
Trial Balance
Dr
Cr
Dr
Cr
£
£
26,15
4
£
26,15
4
36,24
6
es
ng
nce
ncome
ngs
ure
rs
4,814
4,307
350
25,00
0
14,50
0
6,140
1,060
82,79
5
4,638
946
82,79
5
es due
d
nce
ec’d in
ebts
g stock
ofit
n
ers
1
2
25,00
0
13,05
0
5,833
1,060
4,638
1,066
350
350
205
165
ed
ission
ciation
800
4,638
1,066
350
205
205
165
165
120
120
1,45
0
307
1,450
1,450
307
307
83,26
5
5
4,063
43,12
0
7
2,59
7
3
2,59
7
4
£
40,00
0
615
25,00
0
13,05
0
5,833
1,060
120
Liab.
36,24
6
800
1,45
0
307
Asset
s
£
5,164
4,307
615
165
£
Balance sheet
26,15
4
5,164
4,307
205
965
£
36,24
6
820
ses
ors
ission
£
40,00
0
T&P&L
Account
Dr
Cr
120
83,26
5
6
5,008
5,008
43,12
0
8
49,21
6
9
49,21
6
10
Question 6
Purpose of Control Accounts
i. To provide for arithmetic check on the postings made in the individual account i.e. either the sales
ledger or the purchases ledger.
ii. To provide a quick total of the debtors and creditors balances to be shown in the trial balance.
525
Company Accounts
iii. To detect and prevent errors and frauds on the debtor and creditors account.
iv. To facilitate delegation of duties especially where the debtors and creditors are many.
Lesson Eight
Bal b/d
Sales
Bills received
dishonored
Charges payable
Bal c/d
Bal b/d
Returns outwards
Bills payable
Bank
Cash
Balance c/d
Sales
Sh
6,185,000
8,452,000
88,500
526
Ledger Control A/C
Bal b/d
Returns inwards
Bank
10,000 Cash
Bad debt
Discounts allowed
44,000 Bal c/d
14,779,000
Purchases ledger control a/c
Sh
16,500 Bal b/d
284,000 Purchases
930,000 Bills payable
dishonored
473,200
88,500
_4,196,500 Balance c/d
10,396,000
Sh
52,500
203,500
7,985,000
153,000
64,500
302,000
5,404,000
14,779,00
0
Sh
4,285,000
5,687,500
400,000
___23,500
10,396,00
0
527
Company Accounts
LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets
£
Stocks
Debtors
Rates prepaid
Fixtures
Liabilities
Bank overdraft (add
unpresented cheques)
Accrued expenses
Creditors
Loan
Accrued interest [4,000 x 3% x
3
/12]
Heating and lighting
£
4,500
2,800
40
2,500
10,140
1,172
240
1,800
4,000
30
80
(7,322)
2,818
(b)
Dare
Profit and loss account for the year ended 31 December 1996
£
£
Gross profit
9,000
Discounts received
480
9,480
Less expenses
Rent and rates
465
Fixtures and fittings
350
(depreciation)
Lighting and heating
200
General expenses
450
Loan interest
120
Wages
2,914
Sundry expenses
140
Discounts allowed
520
Bad debt
200
(5,659)
Net profit
3,821
Lesson Eight
528
(c)
Dare
Balance Sheet as at 31 December 19X6
Non current assets
£
Fixtures and fittings
Current assets
Stocks
Debtors
Prepayments
Bank (less unpresented
cheques)
Cash
Current liabilities
Creditors
Accruals
Capital
Net profit
Less drawings
Non current liabilities
Loan – 3%
2,200
_290
£
£
2,550
5,800
3,000
50
673
__20
9,543
(2,490)
7,053
9,603
2,818
3,821
6,639
(1,036)
5,603
4,000
9,603
Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
£
£
Income
Subscriptions (W1)
10,690
Bar and café profit (W2)
9,200
Sale of sportswear (W3)
1,400
Hire of sportswear (W5)
1,700
Deposit account interest
800
23,790
Expenditure
Rent of clubhouse
6,000
Groundsperson
10,000
Heating oil (W6)
4,500
Depreciation 5,000 x 10%
500
(21,000)
Surplus of income over expenditure for
2,790
the year
529
Company Accounts
AB Sport and Social Club
Balance Sheet as at 31 December 20X5
£
Non current assets
Equipment for grounds person: cost
Depreciation
(3,500 + 500)
£
5,000
(4,000)
1,000
Current assets
Heating oil
Bar and café stocks
Sports equipment for sale (4,000 – 2,000)
Sports equipment for hire (1,000 + 500)
Subscriptions in arrears
Bank deposit account
Bank current account
700
5,000
2,000
1,500
90
16,000
1,300
26,590
Current liabilities
Creditors for bar and café purchases
Creditors for sportswear
Creditors for heating oil
Subscriptions in advance
800
450
200
_200
1,650
Net current assets
Net assets
Accumulated fund b/f
Surplus for the year
Accumulated fund c/f
24,940
25,940
23,150
2,790
25,940
Workings:
Subscriptions
Arrears b/f 1.1.X5 (10 + 230)
Subscription income for year
(bal fig)
Advance c/f 31.12X5
SUBSCRIPTIONS
£
£
240 Advance b/f
40
1.1.X5
10,690 Cash received
11,000
__200 Arrears c/f
___90
31.12.X5
11,130
11,130
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.
Bar and café profit
£
Sales
Cost of sales
Opening stock
Purchases*
£
20,000
7,000
8,800
15,800
(5,000)
Closing stock
10,800
Profit
9,200
*Note: Purchases are 9,000 + 800 – 1,000 = £8,800
Lesson Eight
530
Sale of sportswear
£
Sales
Opening stock
Purchases (W4)
£
5,000
3,000
3,100
6,100
(4,000)
Closing stock
Closing stock
Gross Profit
Sportswear written
down
Net profit
(2,100)
2,900
(1,500)
1,400
Purchases of sportswear
£
4,500
450
(300)
4,650
For hire 1/3: £1,550
Bank
Add closing creditors
Less opening creditors
For sale 2/3: £3,100
Hire of sportswear
£
Receipts
Costs*
Opening stock
Purchases (W4)
£
3,000
750
1,550
2,300
(1,000)
Closing stock
(1,300)
1,700
Profit
*Note: While there is a case for treating the sportswear for hire as non current assets, in club accounts it is
more usual to treat such items as stock in trade.
Heating Oil
Opening stock
Purchases (4,000 +
200)
Less closing stock
Expense for year
£
1,00
0
4,20
0
5,20
0
(700
)
4,50
0
531
Company Accounts
Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
Raw materials
Opening stock
40,0000
Purchases
855,000
895,000
Less closing stock
(80,000)
Raw materials consumed
815,000
Wages
_50,000
865,000
Factory overheads
Wages
96,000
Rent and rates
22,500
Water and electricity
13,000
131,500
Cost of goods completed
996,500
Factory profit
___3,500
Transfer price
1,000,000
Sales
Less cost of sales
Opening stock
Purchases and cost of goods
produced
Less closing stock
Gross profit
Profit on disposal of motor
vehicle
Factory profit
Less expenses
Interest on loan
Depreciation – fixtures and
fittings
Motor vehicles
Wages
Rent and rates
Water and electricity
Motor expenses
Bad debt
Repairs
Bank charges
Insurance
Sundry expenses
Commission to lampshade
employee
Less UPCS
Net profit
4,100,000
348,000
3,400,000
3,748,000
(282,000)
(3,466,000)
634,000
4,000
3,500
641,500
36,000
90,000
38,000
108,000
67,500
39,000
60,800
14,000
12,000
4,000
13,500
25,200
318
__120
(508,438)
133,062
Lesson Eight
Cherono
Balance Sheet as at 30 June 1998
Non current assets
Fixtures and fittings
Motor vehicles
Current assets
Stock: Raw materials
Lampshades
Less UPCS
Other goods
Debtors
Prepayments
Bank balance
Current liabilities
Creditors
Accruals
Capital
Add net profit
Less drawings
Add loan
532
Cost
900,000
152,000
1,052,000
80,000
30,000
(120)
252,000
107,000
27,318
Depreciatio
n
(440,000)
(38,000)
(478,000)
NBV
460,000
114,000
574,000
361,880
108,000
10,500
_98,000
578,380
(134,318)
444,062
1,018,062
740,000
133,062
873,062
(95,000)
778,062
_240,000
1,018,062
533
Company Accounts
Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
£
£
Income
Annual subscriptions (4,680 + 70 + 230 –
4,740
(140 + 100))
Entrance fees
250
Life membership fees credited (850 + 53)
903
5,893
Training ground fees (7,660 – 470 + 325)
7,515
Sales of sporting requisites
8,774
Investment interest received
626
Insurance commissions received (53 – 11
55
+ 13)
Advertising revenue
603
Profit on sale of furniture (370 – 350)
20
Total income
23,486
Expenditure:
Cost of sporting requisites sold
(5,270 + 202 – 163 = 5,309 (purchases)
5,309 + 811 – 1,064 = 5,056)
5,056
Damaged stock etc
137
Wages of grounds man (250 + 3,600 –
3,550
300)
Postages (692 – 4)
688
Stationery (55 + 629 – 36)
648
Rates (300 + 846 – 380)
766
Subscriptions in arrear written off
40
World-wide Athletics Club affiliation fee
50
Training ground upkeep
1,200
Depreciation: buildings
3,500
Furniture, equipment etc
(10% x (7,900 – 800)
__710
Total expenditure
16,345
Surplus of income over expenditure
£7,141
Lesson Eight
534
Olympiad Athletics Club
Balance Sheet as at 31 October 1983
Non current assets
Land
Buildings
Furniture, equipment, etc
£
Cost
4,000
35,000
7,100
46,100
Investments
Investments at cost (7,400 + 5,600)
(current valuation £13,150)
Current assets
Stocks – sporting requisites
- stationery
- stamps
Debtors – subscriptions
- insurance commissions
Prepayments (300 + 380)
Bank – deposit account
- current account
Cash
Current Liabilities
Creditors – prepaid subscriptions
- Prepaid training
- Ground fees
- Premiums
- Sporting requisites
£
Depreciati
on
12,900
4,410
17,310
£
Net
4,000
22,100
2,690
28,790
13,000
927
36
4
230
13
680
3,000
2,563
122
7,575
100
470
160
202
932
Working capital
Net assets employed
Financed by:
Accumulated fund: as at 31 October
1982
Add:
Surplus of income over expenditure for
the year
As at 31 October 1983
Life membership fund (4,720 + 530 –
(850 + 53)
6,643
48,433
36,945
7,141
44,086
4,347
£48,433
535
Company Accounts
Accumulated fund b/f
Assets: Land
Buildings
Furniture
Investment
Stocks
Debtors
Prepayments
cash
Liabilities
Creditors: Subscriptions
Training
Premiums
Sporting requisites
Bank overdraft
Membership fund
4,000
25,600
3,750
7,400
866
191
550
___73
42,430
70
325
102
163
105
4,720
(5,485)
36,945
Lesson Eight
536
LESSON 7
Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
Shs
Shs
Raw materials
Opening stock
100,700
Purchases
716,250
816,950
Less stock of raw materials
(79,500)
Raw materials consumed
737,450
Factory wages
382,500
Prime cost
1,119,950
Add opening w/p
85,000
Less closing w/p
(126,250)
(41,250)
1,078,700
Factory overheads
Depreciation on plant
84,375
Factory expenses
354,000
438,375
Factory cost of completed goods
1,517,075
Add factory profit ( missing figure)
192,925
Transfer price given in the question (par)
1,710,000
(38,000 x 45)
Sales
Cost of sales
Opening stock of finished goods
Transfer price
Less closing stock of finished goods
2,775,500
1,200,000
1,710,000
2,910,000
(10,125,000
)
878,000
192,925
1,070,925
Add factory profit
Expenses
Depreciation on delivery van
Sales department wages
Selling department expenses
Increase for provision for bad debts
Provision for unrealized profits
Net profit
Share of factory profits
K
M
Share of remaining profit
K
M
(1,897,500)
80,250
150,750
277,500
5,000
112,500
154,340
38,585
100,800
151,200
(626,000)
444,925
(192,925)
252,000
252,000
537
Company Accounts
Workings for closing stock of completed units
Completed units b/f
Units manufactured
Less units sold
Closing stock
Drawings
Bal c/d
K
15,00
0
105,1
40
255,1
40
30,000
38,000
(45,500)
22,500 x 45 =
10,125,000
M
125,00
0
54,785
Share of factory
profit
Balance of profit
189,78
5
Kimeu & Maingi
Balance Sheet as at 31 March 1992
Non current assets
Property, plant and equipment
Freehold factory
Factory plant ( 843,750 – 151,250 –
84,375 = 608,125)
Delivery van ( 401,250 – 80,250 – 86,250
= 234,750)
K
154,34
0
100,80
0
255,14
0
M
38,585
51,200
189,785
Shs
Shs
1,053,750
608,125
234,750
1,896,625
Current Assets:
Stock: Raw materials
W.I.P
Finished goods
Debtors
Current Liabilities
Bank overdraft
Trade creditors
Accrued expenses and deferred income
79,500
126,250
900,000
405,000
1,510,750
(176,200)
(150,000)
(86,250)
(412,450)
Net current assets
1,098,300
2,994,925
1,400,000
1,425,000
2,825,000
Capitals: K
M
Current A/c: K
M
105,140
64,785
169,925
2,994,925
The finished good is net of the unrealized profit on closing stock.
Lesson Eight
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-8
£
£
£
Sales
404,500
Less
Opening stock
30,000
Purchases
225,000
Carriage inwards
4,000
229,000
Plant depreciation
259,000
Closing stock
(35,000)
Cost of sales
(224,000)
Gross profit
180,500
Discount received
4,530
Interest received
____750
185,780
Expenses
Carriage outwards
12,000
Vehicle depreciation
15,000
[25% x (80,000 – 20,000)]
Depreciation of plant
20,000
[20% x 100,000]
Discounts allowed
10,000
Office expenses [30,000 + 405]
30,805
Rent, rates , heat and light
7,300
[8,800 – 1,500]
Provision for bad debts increase
[(5% x 14,300) – 420]
295
(95,400)
Net profit for year
90,380
Interest charged on drawings etc
Amis
1,000
Lodge
900
Pym
720
2,620
93,000
Less
Salary – Pym
13,000
Interest on capital accounts
Amis
8,000
Lodge
1,500
Pym
500
23,000
Residual profit
70,000
Less
Share of residual profit
Amis ( 5/10)
35,000
Lodge (3/10)
21,000
Pym (2/10)
14,000
70,000
(b)
538
539
Balances
Drawings
Appropn –
interest
Bal c/d
Company Accounts
A
£
1,00
0
25,0
00
1,00
0
16,0
00
43,0
00
L
£
500
22,00
0
900
_____
23,40
0
Current Accounts
P
A
£
£
400 Appropn –
salary
15,0
8,00
00 Interest
0
720
35,0
Residue
00
11,3 Bal c/d
_____
80
27,5
43,0
00
00
L
£
1,500
P
£
13,00
0
500
21,00
0
900
14,00
0
____-
23,40
0
27,50
0
Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
£’000
£’000
Sales
2,000
Cost of sales
Opening stock
180
Purchases
1,400
1,580
Closing stock
(200)
1,380
Gross profit
620
Expenses
Wages and salaries (228
240
+ 12)
Sundry expenses
120
Bad and doubtful debts
26
Depreciation:
Building
5
Plant and
24
equipment
Interest on loan – Amber
__5
420
Net profit
200
Assume profit is earned proportionately throughout the year
Profit and Loss Appropriation Account
1/1X6 to 30.6.X6
Salaries
Share of profit:
£80,000 (60:40)
1.7.X6 to 31.12.X6
£100,000 (40:40:20)
Amber
£’000
Beryl
£’000
Coral
£’000
10
10
20
48
32
80
40
98
40
82
20
20
Total
£’000
100
200
Lesson Eight
540
Amber, Beryl and Coral
Balance Sheet as at 31 December 1996
Cost or
Aggregate
valuation depreciatio
n
Non current assets
Land at valuation
280
Nil
Buildings
250
35
Plant, equipment and
240
74
vehicles
770
109
Current assets
Stock
200
Debtors (420 – 16)
404
Less: provision for doubtful
30
debts
374
Cash at bank
38
612
Current liabilities
Trade creditor
350
Bonus
12
362
Net current assets
Long term loan – Amber
Net book
value
280
215
166
661
250
911
50
861
Represented by:
Capital accounts: Amber
Beryl
Coral
368
242
100
Current accounts: Amber
Beryl
Coral
82
64
_5
710
151
861
Proprietor funds
A
£’00
0
Goodwill
Balances c/f
B
£’00
0
80
368
80
242
448
322
CAPITAL ACCOUNTS
C
A
£’00
£’000
0
Balances b/f
280
40 Cash
100 Goodwill
120
(W1)
Revaluation
48
140
448
Balances b/f
368
B
£’000
C
£’000
210
140
80
32
322
242
140
100
541
Company Accounts
Lesson Eight
Drawings
Balances c/f
A
£’00
0
28
82
B
£’00
0
24
64
__
__
110
88
542
CURRENT ACCOUNTS
C
A
£’00
£’000
0
15 Balances b/f
7
5 Profit for
98
year
__ Loan
_5
interest
20
110
B
£’000
C
£’000
6
82
20
__
__
88
20
Question 4
The solution provided has the workings shown beside the accounts to make the comparison easier.
Remember to adhere to previous partnerships and departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
Working
Worksho Petrol/oil Showroo
Total
s
p
m
£
£
£
£
Sales and charges:
32,125
32,964
8,500 Cash
73,589
65,892
41,252
81,914 Credit
189,05
8
98,017
74,216
90,414 Total turnover
262,64
7
(2)
(1)
(3)
(4)
(5)
(6)
(7)
1,932
23,860
3,018
41,805
Less materials:
20,720 Opening stock
52,100 Purchases
25,792
44,823
72,820
(2,752)
(2,976)
23,040
41,847
47,510 Usage
34,163
57,203
5,685
47,532
____- Direct wages
47,510 Cost of sales
40,814
26,684
42,904 Gross profit
1,333
-
42,147
26,684
- Profit on sale of
plant
42,904
7,024
2,613
1,939
4,477
16,898
32,951
9,196
2,945
2,185
3,389
8,324
16,843
9,841
4,391
10,200
7,880
5,846
4,130
11,302
43,749
(845)
(25,310) Closing stock
Less
Indirect wages
Salaries
Rates
Electricity
General expenses
Depreciation
Total
Net profit/loss for
25,670
117,76
5
143,43
5
(31,038
)
112,39
7
39,848
152,24
5
110,40
2
1,333
111,73
5
11,415
10,200
13,438
9,970
11,996
36,524
93,543
18,192
543
Company Accounts
year
Less appropriations
Interest on capitals
Duke (5% x
£50,0000
Earl (5% x £40,000)
Residual profit*
Duke
Earl
(2,500)
(2,000)
13,692
(6,846)
(6,846)
*The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.
Lesson Eight
544
Aristocratic Autos
Balance Sheet as at 30 September 1986
Working
Worksho Petrol/oil Showroo
s
p
m
£
£
£
(8)
(8)
(4)
(9)
5,020
24,891
4,260
4,859
29,911
9,119
2,752
1,365
2,586
316
7,019
2,976
537
2,915
1,605
8,033
4,225
915
5,140
1,879
31,790
5,602
564
6,166
1,867
10,986
Total
£
Non current assets at
written down value:
11,010 Freehold buildings
5,357 Plant, equipment and
vehicles
16,367
Current assets:
25,310 Stocks
- Debtors
7,799 Prepayments
30,470 Bank and cash
63,579
Current liabilities:
15,250 Creditors
983 Accruals
16,233
47,346 Working capital
63,713 Net assets employed
20,290
35,107
55,397
31,038
1,902
13,300
32,391
78,631
25,077
2,462
27,539
51,092
106,48
9
Financed by
Capital accounts
Duke
50,000
Earl
40,000
90,000
Current accounts:
Duke
6,906
Earl
9,853
(10)
(10)
16,489
106,48
9
Working
s
(1)
Plant disposal:
Cost
Accumulated depreciation
Written down value
Proceeds
Profit on sale
Worksh
op
£
Petrol/oil
£
showroo
m
£
19,500
(15,633
)
3,867
5,200
1,333
Total
£
545
34,050
113
34,163
6,810
214
7,024
5,199
(2,586)
Company Accounts
5,602
83
5,685
______-
-
4,160
231
4,391
5,860
(2,915)
15,679
(7,799)
2,613
2,945
7,880
1,838
101
1,939
2,072
113
2,185
5,543
303
5,846
3,990
487
4,477
3,021
368
3,389
3,681
449
4,130
2,520
14,378
16,898
2,840
5,484
8,324
7,600
3,702
11,302
Worksh
op
£
Petrol/oil
£
Showroo
m
£
12,600
_____12,600
14,200
_____14,200
38,000
_____38,000
5,060
2,520
7,580
5,020
65,180
7,100
2,840
9,940
19,390
7,600
26,990
4,260
11,010
22,900
17,450
(2) Direct wages:
Per list
Accrual
Total
(3) Indirect wages:
Per list
Accrual
(4) Rates (apportioned on basis
of freehold buildings at (8)
below:
Per list
Prepayment
Total
(5) Electricity apportioned on
same basis as (4) above:
Per list
Accruals
Total
(6) General expenses
(apportioned on basis of
turnover:
Per list
Accruals
Total
(7) Depreciation:
Charge for year per (8)
below:
Freehold buildings
Plant, equipment etc
Total
(8) Freehold buildings (cost):
At 1 October 1985
Additions during year
Disposals during year
At 30 September 1986
Provision for depreciation on
freehold buildings:
At 1 October 1985
Disposals during year
Charge for year
At 30 September 1986
Written down value at 30
September 1986
Plant, equipment etc. (cost):
At 1 October 1985
39,652
___196
39,848
10,970
445
11,415
26,738
(13,300
)
13,438
9,453
517
9,970
10,692
1,304
11,996
12,960
23,564
36,524
64,800
_____64,800
31,550
12,960
44,510
20,290
105,53
0
Lesson Eight
26,210
(19,500)
71,890
1,060
Additions during year
31,790
_____-
____-
Disposals during year
27,420
18,510
(19,500
)
117,82
0
48,254
(15,633)
17,077
-
9,451
-
14,378
46,999
5,484
22,561
3,702
13,153
24,891
4,859
5,357
83
113
368
564
231
303
449
983
113
214
101
487
915
546
4,520
At 30 September 1986
Provision for depreciation on
plant, equipment etc
At 1 October 1985
Disposals during year
Charge for year
At 30 September 1986
Written down value
At 30 September 1986
(9) Accruals (per workings
above):
(2)
(3)
(5)
(6)
74,782
(15,633
)
23,564
82,713
35,107
196
445
517
1,304
2,462
(10) Current accounts:
Earl
Duke
Opening balance
9,750
Interest on capital
2,500
Residual profit
6,846
Drawings
(12,190)
Closing balance
6,906
10,477
2,000
6,846
(9,740)
9,583
Question 5
WORKINGS
The first step is to derive the profit for the period:£
Closing
Opening
Assets minus external liabilities
(17,000 + 3,480 + 1,100 + 2,230 +
3,370 – 980)
Add back drawings (2,000 + 1,600 +
1,800)
Less assets minus external liabilities
(26,060 – 820)
Profit for period (1st July to 31st October)
26,200
5,400
31,600
25,240
6,360
547
Company Accounts
R
£
-
dwill w/o
ng
nces
s of
cd
S
£
3,00
0
T
£
3,00
0
-
7,50
0
7,50
0
11,5
00
11,5
00
-
-
10,5
00
10,5
00
Balance b/d
Drawings
Closing
balance
Exors of R
(decd)
CAPITAL ACCOUNTS
A
R
S
£
£
£
1,5 Opening
9,000 8,00
00 balances
0
Goodwill
2,500 2,50
raised
0
4,0 Bank
00
Capital
- Premium (1/5
x 7,500)
5,5
00
11,50
0
10,5
00
CURRENT ACCOUNTS
A
R
£
£
- Balances b/d
140
- Appropriation 2,12
a/c
0
- (profit)
R
£
2,00
0
-
S
£
1,60
0
720
T
£
100
1,80
0
720
260
-
-
-
2,26
0
2,32
0
2,12
0
-
2,26
0
T
£
8,00
0
2,50
0
4,00
0
1,50
0
A
£
-
4,00
0
1,50
0
10,5
00
5,50
0
-
S
£
200
2,12
0
T
£
2,12
0
A
£
-
2,32
0
2,12
0
-
The Capital and Current Accounts are given as workings for the Balance sheet figures.
LESSON 8
Question 1 (a)
AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31 October 1999
Raw Materials
Sh’000
Sh’000
Opening stock – Raw material
380
Purchases – Raw material
9,500
9,880
Less closing stock – Raw material
(465)
Cost of raw materials consumed
9,415
Add: direct wages
1,350
direct expenses
_395
1,745
Prime Cost
11,160
Factory overheads
Factory expenses
290
Indirect materials
350
Factory insurance
150
Depreciation – plant and
5,160
5,950
machinery
Lesson Eight
548
17,110
Total cost of production
Add opening W.I.P
Less closing W.I.P – Finished
goods
Factory cost of production –
finished goods
Sales
Less cost of sales
Opening stock – finished goods
Factory cost of production –
finished goods
Less closing stock – finished goods
Gross profit
Less expenses
Sales room expenses
Administration expenses
Office salaries and wages
Vehicle running expenses
Bad debts w/o
Overdraft interest
Debenture interest
Depreciation: furniture and
equipment
Motor vehicles
Less dividend
Net profit for the year
Add retained profit b/d
Less transfer to general reserve
Retained profit c/d
560
17,670
(695)
16,975
28,550
420
16,975
17,395
(610)
(16,785)
11,765
485
620
898
656
64
725
800
89
4,125
(8,462)
3,303
(4,000)
(697)
5,500
4,803
(2,000)
2,803
549
Company Accounts
AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets
Land & Buildings
Plant and machinery
Furniture and equipment
Motor vehicles
Sh’000
30,000
25,800
890
16,500
73,190
Current Assets
Stock – Finished goods
Raw materials
WIP
Current Liabilities
Bank overdraft
Creditors
Accruals
Debenture interest
Dividends accrued
Financed by:
Authorized and issued capital
Capital reserve
Share premium
Revenue reserve
General reserve
Retained profit
Non current liability
8% debenture
Sh’000
(11,460)
(274)
(7,525)
19,259
Sh’000
30,000
14,340
616
8,975
53,931
610
465
695
7,360
9,130
1,175
1,000
783
800
4,000
(7,758)
1,372
55,303
40,000
500
2,000
2,803
45,303
10,000
55,303
STA
Balance Sheet as at 1 November 19-6
Lesson Eight
550
£
Buildings
Equipment
Current assets
Stock
Debtors
Bank
Current liabilities
Creditors
1,100
2,230
4,950
8,280
(980)
Capital: Sam
Ted
Abe
Current accounts:
Sam
Ted
Abe
Estate of Reg.
£
17,000
3,480
20,480
7,300
27,780
7,500
7,500
4,000
19,000
720
220
__-
940
19,940
7,840
27,780
551
Company Accounts
KK Ltd
Balance Sheet as at 31 October 1998
Shs ‘000’
Shs ‘000’
Shs
‘000’
Non Current Assets
Freehold property
Furniture and fittings
Motor vehicles
44,500
1,540
3,500
49,540
(292)
(965)
(1,257)
Goodwill
Current Assets
Stock
Debtors
Less provision for doubtful debts
Rent receivable
Cash at bank
Current Liabilities
Creditors
Accrued expenses
Debenture interest
Tax payable
Proposed dividends
500
4,398
1,540
(77)
332
189
350
8,960
4,500
1,463
35
10,492
16,388
(14,331)
Authorized and issued share capital
1,500,000 ordinary shares of Sh. 20
each fully paid
10% debenture
2,057
50,840
30,000
Capital reserves
Share premium
Revenue reserves
General reserve
Profit and loss account
44,500
1,248
2,535
48,283
350
4,500
12,490
16,990
47,340
3,500
50,840
Lesson Eight
552
Question 3
(a)
1995
1996
Gross profit
percentage
Gross profit
Sales
24,000
64,000
Current ratio
Current assets
Current liabilities
23,900 = 1.68:1
14,200
31,000 = 1.52:1
20,400
Quick ratio
Current assets less
stock
Current liabilities
23,900 – 12,000 =
0.84:1
14,200
31,000 – 15,000 =
0.78:1
20,400
10,500 x 365 = 60
days
64,000
14,000 x 365 = 47
days
108,000
6,800 x 365 = 59 days
42,000
9,400 x 365 = 44 days
78,600
60,000____ = 70%
60,000 + 26,000
60,000____ = 55%
60,000 + 49,000
Debtors collection
period
Debtors x 365
Sales
Creditors payment
period
Trade creditors x
365
Purchases (W)
Gearing ratio
Loan capital
Total capital
Cost of sales
Add: closing stock
Deduct: opening stock
Purchases
1995
£’000
40,000
12,000
52,000
10,000
42,000
= 37.5%
32,400 = 30%
108,000
1996
£’000
75,600
15,000
90,600
12,000
78,600
(b)
•
•
•
The gross profit margin has fallen when compared with last year, although in absolute terms, both
profit and sales are higher. Possibly the firm has lowered the price of goods to increase sales, although
there may be other explanations (see part (c) below).
There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios.
However, this is no immediate cause for concern as the company appears to be paying its creditors
more promptly than last year.
The debtors’ collection period, already satisfactory, has decreased still further from 60 to 47 days.
There is not enough information to say whether this is all due to good credit control, or whether some
sales are being made on shorter credit terms or for cash.
553
•
•
Company Accounts
The creditors payment period has shortened. Possibly the company has become more efficient at
paying creditors, or perhaps it is purchasing goods on shorter credit terms.
The gearing ratio has reduced but it is still too high. The reduction is mainly due to an increase in
retained profits and in the revaluation reserve. High gearing involves greater risk for the shareholders.
Any two of the following:
•
•
•
An error in counting closing stock
An increase in prices from suppliers not passed on to customers
Deliberate reduction in margin in an attempt to increase sales volume
(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company
ought to be able to pay its debts as they fall due. However, an excessively high current ratio means that
resources are tied up in stock, debtors and cash instead of producing profits. Current assets should generally
be kept as low as is compatible with efficient production and paying creditors as they fall due.
There is some truth in this statement. High gearing means greater risk, but also, in good times, greater
returns. It is important that the percentage return to shareholders is greater than the percentage rate of
interest being paid on the borrowings.
Question 4
19X1
11 Feb
11 Feb
19X1
29 Sep
1 Nov
£
4,000
Cash
Share capital
(50,000 @
70p)
Share
premium
(50,000 @
20p)
Application and allotment account
19X1
£
10 Feb
Cash
35,000
16 Feb
Cash
10,000
______
£49,000
£49,000
Ordinary Share capital account
19X1
500
11 Feb Application and
allotment
account
(50,000 @ 70p)
1 May
Call account
50,000
(50,000 @ 30p)
£
Forfeited
shares
Balance
carried
down
1 Nov
______
£50,50
0
Forfeited
shares reissued
£
35,000
15,000
___500
£50,500
Ordinary Share Premium Account
19X1
£
Lesson Eight
554
11 Feb
1 Nov
Bal c/d
10,250
£10,25
0
19X1
1 May
Share
capital
Application and
allotment
account
(50,000 @ 20p)
Forfeited
shares reissued
account
1 Nov
19X1
1 Nov
1 Nov
___250
£10,250
£
15,000
Call account
19X1
1 May
Cash
_____
29 Sep
___150
14,850
Forfeited
shares
£15,00
0
19X1
29 Sep
10,000
£15,000
Forfeited Shares
19X1
29
Share capital (500
Sep
@ £1)
£
500
Call account
150
Forfeited
shares
reissued
350
____
£500
£500
Share
capital
Share
premium
£
500
Forfeited Shares
19X1
1 Nov
Cash
250
1 Nov
£
400
Forfeited shares
£750
350
£750
LESSON 8(PUBLIC SECTOR)
MINISTRY OF UCHUMI NA UFANISI
General Account of Vote
19-8
£
19-7
£
June 30 Cash (P.M.G.) A/C Expenditure
192,428
June 30 Excess A.I.A A/C
4,560
June 30 Balance c/d
22,036
July 1
Exchequer A/C
213,464
19-8
June 30 Appropriations in Aid A/C
5,560
219,024
219,024
555
Company Accounts
Exchequer Account
19-7
£
19-8
£ June 30 Cash (P.M.G.) A/C
200,000
June 30 Balance c/d
13,464
213,464
July 1 General Account of Vote
213,464
213,464
Paymaster-General (P.M.G.) Account
19-8
£
19-8
£ June 30 General Account of vote
192,428
June 30 Balance c/d
13,132
June 30 Exchequer A/C
200,000
June 30 General Account of vote – A.I.A
5,560
205,560
205,560
Statement of Assets and Liabilities at 30th June 19-8
£
Liabilities
£
Assets
G.A.V
22,036
Excess Appropriation in Aid
4,560
26,596
Exchequer A/C
13,464
Paymaster – General A/C
13,132
26,596
Notes
Total of approved estimates is obtained by adding up the approved estimates in respect of expenditure of
different heads. Appropriation in Aid is not included.
Total expenditure is obtained by adding up the actual expenditure of different heads. Appropriation-in-Aid
(realised) is not included.
ANSWER TWO
Commitment Accounting and Fund Accounting in relation to Public Sector are distinguished as under: Commitment Accounting
This accounting system recognises transactions when the organisation is committed to them. This means
that the transaction is not recognised neither when cash is not paid or received, nor when an invoice is
received or issued but at an earlier stage when orders are issued or received. Under this system, the
organisation is recognising the issue of an order as a commitment to incur expenditure and accounts
continuously record commitments. The main purpose of commitment accounting is the budgetary control
rather than financial reporting.
Fund Accounting
This system refers to the method of accounting which reports in terms of funds rather than in terms of
organisations. This indicates the extent to which different funds are utilized and the form and extent to which
individual fund accounts are consolidated in the final accounts. For example, if ten funds are used but they
are all consolidated into one operating statement and one balance sheet, then the results might be the same
as accounts for a business.
A Member of Parliament
Lesson Eight
556
The interest of a Member of Parliament will be on fiscal compliance. This refers to the extent to which the
organisation has complied with conditions laid down in the authority to spend.
A Tax Payer
The main interest of a taxpayer will be to evaluate the management and performance. This refers to the
need to know whether the money was spent wisely. In other words, this refers to the measurement of
efficiency of the Government as regards the expenditure incurred and resultant increase in level of output.
A Patient of one of the Hospitals
A patient’s interest is on the services provided in the Government Hospitals. He can find out whether the
expenditure incurred on health reflects the improvement in delivery of services.
A Creditor to one of the Hospitals
The interest of a creditor will be on the financial viability. He should find out whether the state has enough
ability to pay against the goods supplied to the hospitals.