1.INTRODUCTION
TO PRINCIPLES
OF ACCOUNTS
Principles of Accounts
7110 A Supplementary
Study
Text
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MINISTRY OF EDUCATION
LUSAKA PROVINCE
PRINCIPLES
OF
ACCOUNTS7110
SUPPLEMENTARY STUDY TEXT
FOR GCE/ ‘O’ LEVEL
Grade 10 – 12
NOT FOR SALE
BUSINESS STUDIES TEACHERS ASSOCIATION OF ZAMBIA
Business Studies Teachers Association of Zambia – Lusaka Province
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1.INTRODUCTION
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Principles of Accounts
7110 A Supplementary
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PRINCIPLES OF ACCOUNTS7110
SUPPLEMENTARY STUDY TEXT FOR GCE/’O’LEVEL
2nd Edition
Authors
RICHARD FISONGA MBA Fin, ZiCATech, BBA Ed, Dip. Ed.
Head of Business Studies Department – Highland Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
JAMES GWENANI MBA Fin, ZiCATech, BBA Ed, Dip. Ed.
Deputy Headteacher - Arakan Boys Secondary School,
Formerly Head of Business Studies Department - Nelson Mandela Secondary School,
Past Chairperson of the Business Studies Teachers Association of Zambia, Lusaka Province
Past National Treasurer General for the Business Studies Teachers Association of Zambia.
EDGAR SHILUWE BBA Ed, Group Dip. Marketing, Dip. Ed.
Deputy Headteacher, Roma Girls Secondary School,
Formerly Head of Business Studies Department - Roma Girls Secondary School,
Winner of the 2018 Outstanding Educator Initiative National Award in Financial Literacy,
JOHN KAPUTULA MBA Fin, ZiCALic, BBA Ed, Dip. Ed.
Head Teacher, Mahatma Gandhi Combined School,
Formerly Head of Business Studies Department - Chilenje South Secondary School,
Past Vice Secretary General for the Business Studies Teachers Association of Zambia,
Lusaka Province.
Business Studies Teacher’s Association of Zambia
Lusaka Province
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7110 A Supplementary
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©2022 BUSTAZ Lusaka Province
Principles of Accounts - Supplementary Study Text for GCE/’O’ Level
The right of Richard Fisonga, James Gwenani, Edgar Shiluwe and John Kaputula as authors
of this work under the umbrella of the Business Studies Teachers Association of Zambia has
been asserted by them. This supplementary book is not for sale, however express permission
for free distribution and education purposes has been granted.
Disclaimer
Although the authors have made every reasonable effort to ensure that the information in this
book was correct at press time, they make no express or implied representation, with regard
to the accuracy of the content herein and hereby disclaim any legal responsibility or liability to
any party caused by errors or omissions. Note that some pictures of products and services
that are referred to may be either trademarks and/or registered trademarks of their respective
owners. The authors make no claim to these trademarks.
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7110 A Supplementary
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PROVINCIAL EDUCATION OFFICER’S STATEMENT
The Ministry of Education envisions to achieve access to high quality education across the
nation and Lusaka province is no exception. One of the main indicators of quality education is
Examination results to which the availability of quality books is irrefutably one of the main
contributing factors. There is therefore a need at all times to have material written with the
teacher and learner in mind and which adheres to the official syllabus and the associated
learner outcomes.
The production of this supplementary book by the BUSTAZ is one of the provincial initiatives
to improve teacher and learner performance in class assessments and National
Examinations. The book has been written in such a way as to meet these needs and ensure
that teachers and learners have access to up to date subject content. The association and
authors deserve commendation for the job well done.
This initiative started in 2018 when the first edition of this book was produced. The province
would therefore like to express sincere thanks to the then, Provincial Education Officer, Mr.
Paul Ngoma, the Principal Education Standards Officer Mrs. Grace Sinkolongo and the Senior
Education Standards Officer – Business Studies, Dr. John S. Chola, for the administrative
support given to the association.
I sincerely believe that this supplementary material will go a long way in achieving the goals of
the Ministry of Education and improve learner performance in Lusaka Province and beyond.
School administrators are therefore encouraged to distribute the material to teachers and
learners in hard and soft copy at no cost to the recipients.
Allan Lingambe PhD
Provincial Education Officer
LUSAKA PROVINCE
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7110 A Supplementary
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FOREWORD
The compilation of this supplementary book was necessitated by the need to provide
comprehensive material in the subject area to cover all aspects of the syllabus in order to
improve examination results. The authors ensured that the contents of the book conformed
to the requirements of the official Curriculum Development Centre (CDC) Syllabus as well as
the Examination Syllabus for the Examinations Council of Zambia.
The information contained in this supplementary book is professionally written by qualified and
experienced teachers of the subject. Teachers and learners are therefore assured that the
information is well researched and relevant to the current curriculum and lesson outcomes as
contained in the syllabus.
The book has been developed with the teacher and learner in mind. The teacher will be
equipped with a well summarised all-in-one resource that will enhance their preparedness for
effective delivery of lessons in class, thus improving teacher performance. The learner, on the
other hand will find this book easy to use with its well summarised notes and easy to
understand illustrations which will aid their understanding of concepts. This will equip them
with knowledge, values and skills necessary for the business environment and in turn help to
improve learner performance in the final examinations.
This book will prove to be a helpful resource for both teachers and learners in their quest to
achieve the intended syllabus outcomes and improve results in Principles of Accounts.
Mrs. Lenny N. Longwe
Senior Education Standards Officer – Business Studies
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7110 A Supplementary
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ACKNOWLEDGEMENTS
The authors would like to acknowledge the help and support received from the Provincial
Education Officer, Dr. Allan Linganbe for the encouragement to have this material edited and
the permission to have it distributed in soft copy to teachers and learners. We also
acknolwedge the professional help and advise received from the Senior Education Standards
officer, Mrs. Lenny Longwe in the preparation of the Second edition of this book.
We appreciate the efforts of many teachers who provided reviews and advice on a number of
topics.
Special thanks to key stakeholders in Business and Financial Education such as the
Curriculum Development Centre (CDC), Examinations Council of Zambia (ECZ), Securities
and Exchange Commission (SEC), Pensions and Insurance Authority (PIA), Competition and
Consumer Protection Commission (CCPC), the Zambia Institute of Chartered Accountants
(ZICA) and the Bankers Association of Zambia (BAZ). These organisations availed valuable
information through seminars, workshops and electronic means without which some topics in
this book could not have been updated.
This book is a result of many years of the authors’ practical teaching experiences in the
classroom. The bigger part of the book is a compilation of the authors’ self-generated notes.
Other resources used are here acknowledged which have been used particularly for
education purposes as provided for under Fair Use. They include:
David Cox, (2005) ‘Success in Book-keeping and Accounts’ John Murray Publishers
Favell A. J. (1965) ‘Practical Bookkeeping and Accounts’ University Tutorial Press
Gwenani J. (2022) ‘Principles of Accounts A Complete Course’ James Gwenani, Lusaka
Hamakoko R, (2015) ‘Senior Secondary Principles of Accounts’ MK Publishers
Wood F. and Sangster A. (2012) ‘Business Accounting 1, 12th Edition’ Pearson
Education Limited
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7110 A Supplementary
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TABLE OF CONTENTS
1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS ........................................... 10
Importance of accounting/financial information................................................................. 10
Users of Accounting Information ......................................................................................... 10
Job Prospects/Career Prospects........................................................................................... 10
2.ACCOUNTING CONCEPTS AND ASSUMPTIONS ............................................. 11
Accounting Concepts............................................................................................................ 11
3.BUSINESS TRANSACTIONS .............................................................................. 14
Types of transactions ........................................................................................................... 14
Cash Transaction............................................................................................................... 14
Bank Transactions ............................................................................................................. 14
Credit Transactions ........................................................................................................... 14
Barter transactions ........................................................................................................... 14
4.THE ACCOUNTING CYCLE ................................................................................. 15
Source Documents ............................................................................................................... 15
Books of Accounts ................................................................................................................ 16
Subsidiary books ............................................................................................................... 16
Ledger ............................................................................................................................... 16
The Trial Balance .................................................................................................................. 16
Final Accounts ...................................................................................................................... 16
5.THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE ..................................... 17
Double Entry Bookkeeping ................................................................................................... 17
Role of Double Entry ............................................................................................................ 17
Ledger Accounts and their Classification ............................................................................. 17
6.SUBSIDIARY BOOKS .......................................................................................... 19
Advantages of keeping books of original entry.................................................................... 19
Books of Prime Entry, Transaction Type and Source Documents ........................................ 19
The Cash Book ...................................................................................................................... 20
Single Column Cash Book (Cash Account) ........................................................................ 20
Single Column Cash Book (The Bank Account) ................................................................. 21
Two Column Cash Book .................................................................................................... 22
Three Column Cash Book.................................................................................................. 23
Petty Cash Book and the Imprest System ........................................................................ 25
Purchases Day Book/Purchases Journal ........................................................................... 26
Sales Day Book .................................................................................................................. 28
Purchases Returns Day Book ............................................................................................ 29
Sales Returns Day Book .................................................................................................... 31
General Journal................................................................................................................. 32
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7.THE TRIAL BALANCE ......................................................................................... 34
Purpose of the trial balance ................................................................................................. 34
Preparation of the Trial Balance .......................................................................................... 34
8.FINAL ACCOUNTS .............................................................................................. 36
The Trading Account ............................................................................................................ 36
The Profit and Loss Account ................................................................................................. 37
Balance Sheet/Statement of Financial Position ................................................................... 38
The Accounting Equation.................................................................................................. 38
Order of the Balance Sheet .............................................................................................. 39
9.ADJUSTMENTS TO FINAL ACCOUNTS ............................................................. 42
Accrued Expenses................................................................................................................. 42
Accrued Incomes .................................................................................................................. 43
Prepaid Expenses ................................................................................................................. 43
Prepaid Incomes ................................................................................................................... 44
Bad Debts ............................................................................................................................. 45
Provision for Doubtful Debts................................................................................................ 46
Bad Debts with Provision for Bad/Doubtful Debts .............................................................. 49
Depreciation ......................................................................................................................... 51
Disposal of Fixed Assets ....................................................................................................... 55
Full question on Final Accounts with Adjustments .............................................................. 59
10.LIMITATION OF THE TRIAL BALANCE ............................................................ 62
Errors not disclosed by the Trial Balance ............................................................................. 62
Errors disclosed by the Trial Balance ................................................................................... 63
11.BANK RECONCILIATION .................................................................................. 66
Definition and Explanation ................................................................................................... 66
Discrepancies between Bank statement and Cash book ..................................................... 66
Preparation of Bank Reconciliation Statements .................................................................. 66
Method 1: Starting with the Cash Book Balance .............................................................. 67
Method Two: Starting with the Bank Statement Balance ................................................ 67
12.CONTROL ACCOUNTS ..................................................................................... 70
Reasons for Preparing Control Accounts ............................................................................. 70
Debtors Ledger Control Account .......................................................................................... 71
Creditors Ledger Control Account ........................................................................................ 71
13.FINAL ACCOUNTS OF NON PROFIT MAKING ORGANISATIONS ................. 74
Sources of Income for Non Profit Concerns ......................................................................... 74
Expenditure streams for Non Profit Concerns ..................................................................... 74
Financial Statements of Non Profit Concerns ...................................................................... 74
Receipts and Payments Account ...................................................................................... 74
Income and Expenditure Account .................................................................................... 75
Treatment of special items in Non Profit Concerns ......................................................... 76
Trading activies in Non Profit Concerns ........................................................................... 79
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The Accumulated Fund ..................................................................................................... 80
Capital and Revenue Expenditure and Receipts............................................................... 80
14.INCOMPLETE RECORDS/SINGLE ENTRY ...................................................... 90
Meaning of Incomplete records ........................................................................................... 90
Difference Between Single Entry and Double Entry ............................................................ 90
Important Formulae ............................................................................................................. 91
Calculation of Profit.............................................................................................................. 91
Net Profit as Increase in Net Worth ................................................................................. 91
Net Profit as an increase in capital ................................................................................... 93
Calculation of Missing Figures .......................................................................................... 94
Margin and Mark Up......................................................................................................... 96
15.PARTNERSHIP ACCOUNTS ............................................................................. 99
Formation of Partnerships ................................................................................................... 99
Partnership Deed .............................................................................................................. 99
Partnership Act, 1890 ....................................................................................................... 99
Accounts in Partnerships .................................................................................................... 100
Profit and Loss Appropriation Account .......................................................................... 100
Capital and Current Accounts ......................................................................................... 100
16.MANUFACTURING ACCOUNTS ..................................................................... 109
Classification of a Manufacturer’s Costs ............................................................................ 109
Direct Manufacturing Costs ............................................................................................ 109
Indirect Manufacturing Costs - (Factory Overhead Expenses) ....................................... 109
Administration, Finance, Selling And Distribution Expenses.......................................... 110
Preparation of a manufacturing firm’s Final Accounts ...................................................... 111
17.ETHICS IN ACCOUNTANCY ........................................................................... 115
Importance of Ethics .......................................................................................................... 115
Elements of Good Accountany Ethics ................................................................................ 115
Unethical Accountancy Behavoiur ..................................................................................... 115
Effects of Non – Adherence to Ethics................................................................................. 115
18.ANALYSIS AND INTERPRETATION OF FINAL ACCOUNTS ........................ 116
Importance of Financial Ratios ........................................................................................... 116
Profitability Ratios .............................................................................................................. 116
Capital Efficiency Ratios ..................................................................................................... 118
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1.INTRODUCTION TO PRINCIPLES OF ACCOUNTS
Principles of Accounts is a subject concerned with the systematic recording, analysing,
reporting and interpreting of financial transactions using a set of rules and regulations.
Bookkeeping is the recording of business transactions from source documents into the
books of accounts in a systematic and chronological order.
Importance of accounting/financial information
Accounting/Financial information is important for the following reasons:
 Calculating profit
 Following up credit transactions
 Used for checks and balances
 Helps business managers to plan
 Provides proof of financial position
 Helps to calculate the tax to be paid to the tax authorities.
Users of Accounting Information
Users of accounting information include the following:
 Managers of businesses
 Prospective investors
 The lenders (banks)
 The government
 Tax authorities
 Suppliers
 Customers
 Employees
Job Prospects/Career Prospects
The following are the job prospects available to students of accounting:
 Entrepreneur
 Chief Finance Officer
 Financial Accountant
 Cost and Management Accountant
 Accounting teacher/lecturer
 Credit controller
 Tax advisor
 Auditor
 Banker
 Cashier
 Consultant etc.
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2. ACCOUNTING
CONCEPTS AND
ASSUMPTIONS
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2. ACCOUNTING CONCEPTS AND ASSUMPTIONS
Accounting concepts and conversions are standard rules that must be followed in the
preparation of accounting records and financial statements.
This helps to make sure that financial statements provide true information about the financial
position, performance and changes in the financial position of an entity that is useful to a
wide range of users in making business decisions.
Accounting concepts help to maintain uniformity in the recording, reporting and interpretation
of financial information.
Accounting Concepts
The following are some of the Accounting concepts and conversions:

The Money Measurement Concept
This concept says that only those transactions which can be expressed in monetary
value should be recorded in the books of accounts. For example, if the bookkeeper is
told that during the day, 80 people entered the shop and bought goods for K30 000, the
bookkeeper should only record the value of the goods sold in the books of accounts and
not the number of people who bought.

Business entity concept
This is also known as the Separate Entity Concept. This principle states that the
business and the owner are two different entities existing as two separate persons. This
means that the private affairs of the proprietor should be separated from the affairs of the
business. Therefore, the assets of the business are not the assets of the owner, and the
liabilities of the business are not the liabilities of the owner and vice versa.

Going Concern Concept
This concept says that the financial reports of a business should be prepared with the
assumption that the business will continue operating for a foreseeable future, i.e. a fairly
long period of time. This concept is only rejected when the business is going to close
down in the near future.

Realisation Concept
This is also referred to as Revenue Recognition Concept. This principle states that
revenue is recognised to have been earned by the seller when goods or services have
been sold and accepted by the buyer irrespective of whether cash has been received or
not.

Historical Cost Concept
This concept tells us that assets bought by a business should be recorded in the books
of accounts at their cost price (i.e. the price at which they were bought).

Objectivity Concept
The objectivity concept states that accounting information and financial reporting should
be independent and supported by unbiased evidence. This means that accounting
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information must be based on research and facts and not merely on the preparer’s
opinion. This concept is aimed at making financial statements more relevant and reliable.

Periodic Concept
All the transactions are recorded in the books of accounts on the assumption that profits
on these transactions are to be ascertained for a specified period.
This is known as accounting period concept. Thus, this concept requires that a balance
sheet and profit and loss account should be prepared at regular intervals. This is
necessary for different purposes like, calculation of profit, ascertaining financial position,
tax computation etc.
Further, this concept assumes that, indefinite life of business is divided into parts. These
parts are known as Accounting Period. It may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period which may be a
calendar year or a financial year.

Dual aspect Concept
Dual aspect is the foundation or basic principle of accounting. It provides the very basis
of recording business transactions in the books of accounts.
This concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects of the transaction must be recorded
in the books of accounts. For example, goods purchased for cash has two aspects which
are:
(i) Giving of cash
(ii) (ii) Receiving of goods. These two aspects are to be recorded.
Thus, the duality concept is commonly expressed in terms of fundamental accounting
equation:
Assets = Liabilities + Capital
The above accounting equation entails that the assets of a business are always equal to
the claims of owner/owners and the outsiders. This claim is also termed as capital or
owner’s equity and that of outsiders, as liabilities or creditors’ equity.

Accrual Concept
The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that
revenues are recognised when they become receivable.
Though cash is received or not received and the expenses are recognised when they
become payable though cash is paid or not paid. Both transactions will be recorded in
the accounting period to which they relate. Therefore, the accrual concept makes a
distinction between the accrual receipt of cash and the right to receive cash as regards
revenue and actual payment of cash and obligation to pay cash as regards expenses.

Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised,
the next step is to allocate it to the relevant accounting period.
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Principles of Accounts
7110 A Supplementary
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
Prudence Concept
Prudence requires that accountants should exercise a degree of caution in the adoption
of policies and significant estimates such that the assets and income of the entity are not
overstated whereas liability and expenses are not under stated. The rationale behind
prudence is that a company should not recognize an asset at a value that is higher than
the amount which is expected to be recovered from its sale or use. Conversely, liabilities
of an entity should not be presented below the amount that is likely to be paid in its
respect in the future.

Materiality Concept
This principle demands that accountants would only recognise and include material
items and leave out immaterial or minor items when preparing accounting records of a
business organisation.
Information is considered to be material if its removal influences the economic decisions
of users taken on the basis of the financial statements or records prepared. Materiality is
therefore about how significant the transaction or item is in the financial statements or
records to users of that information.
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3. BUSINESSStudy
TRANSACTIONS
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3. BUSINESS TRANSACTIONS
A transaction is an exchange of values. It can also be defined as the exchange of goods,
money and services between persons. In other words, a business transaction is a form of
interaction between a business and its customers, suppliers and others with whom it does
business.
Types of transactions
There are generally four types of transactions:
Cash Transaction
A cash transaction is a transaction that involves the exchange of goods or services for an
immediate payment of cash
e.g. Bought goods by cash K10 000
Bank Transactions
A bank transaction is a transaction that involves the exchange of goods or services for an
immediate payment by cheque.
e.g. Bought goods by cheque K1 000
Credit Transactions
A credit transaction is a transaction that involves the exchange of goods or services for a
deferred payment i.e. postponed payment,
e.g. Bought goods on credit, payment is to be made the following week.
Barter transactions
A barter transaction is a transaction that involves the exchange of goods for goods, services
for services or goods for services.
e.g. Sold furniture to Bwalya in exchange for maize.
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4. THE ACCOUNTING CYCLE
The accounting cycle is a description of how financial information flows in an organisation.
It starts with the source documents which provide the details of transactions. These details
are entered in the Subsidiary books. The details in the subsidiary books are posted to the
ledger using the double entry system.
To prove the accuracy of the double entry in the ledger, a Trial Balance is extracted from
which the Final Accounts are prepared.
Below is the flow of financial information presented in diagrammatic form.
Documents providing proof of
transactions are collected
Receipts, cheques, Credit notes, Debit Notes, Invoices,
Details of transactions are
entered in the books of prime
entry
SUBSIDIARY BOOKS
Cash Books, Purchases Journal, Purchases
Returns Journal, Sales Journal, Sales Returns
Journal, General Journal
Information is then posted to the
ledger accounts
A trial balance is extracted from
the ledger accounts
Finally, Final Accounts are
prepared
SOURCE DOCUMENTS
LEDGER
Sales Ledger (Debtors Ledger)
Purchases Ledger (Creditors ledger)
General Ledger (Nominal Ledger)
TRIAL BALANCE
FINAL ACCOUNTS
Trading Account, Profit and Loss Account, Balance
Sheet
Source Documents
Source documents are accounting records that are used to record business transactions in
the books of accounts. They provide proof of a transaction. They include: invoice,
(Purchases and sales), credit note (Purchases Returns and Sales Returns), Receipts,
Cheques, cheque stabs, Bank Statements (Cashbook), Petty Cash Voucher (Petty
Cashbook)
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Books of Accounts
These are books in which business transactions are entered. There are two types of books
of accounts namely:
Subsidiary books
These are books in which transactions are first entered before (prior to) posting to the
ledger. These are also called books of prime entry, books of original entry, books of first
entry, daybooks or journals. They include:
- Sales Daybook,
- Purchases Daybook,
- Purchases Returns Daybook,
- Sales Returns Daybook,
- Cashbook (i.e. Single Column, Two Column, Three Column, and Petty Cashbooks),
and
- The General Journal.
Ledger
This is the main (principal) book of accounts where the double entry is completed. It is
divided into four (4) sub – ledgers namely:
- Sales Ledger,
- Purchases Ledger,
- General Ledger and
- Cash Ledger (Cash book),
The Trial Balance
A trial balance is a list of debit and credit balances extracted from ledger as at a particular
date.
Since transactions in the ledger are entered on the basis of double entry, it follows that for
every transaction, there must be two entries: a debit entry; and a credit entry. This means
that if all entries are done correctly, the total of the debit entries should be equal to the total
of the credit entries.
The test/trial of the accuracy can then be determined by picking balances from the ledger
accounts. Balances are picked because they represent a summary of the entries made in
each account.
Final Accounts
Final Accounts are financial statements prepared at the end of a trading period (usually,
twelve months) to calculate the profit or loss made and to ascertain the financial position of
the business. They include the Trading Account, Profit and Loss Account and the Balance
sheet
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5.THE LEDGER
THE DOUBLE ENTRY
PRINCIPLE
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5.THE LEDGER AND THE DOUBLE ENTRY PRINCIPLE
The double entry principle states that for every debit entry, there is a corresponding credit
entry of the same amount arising from the same transaction.
It is derived from the Dual Aspect Concept
The double entry concept assumes that every transaction has a dual effect.
For example, goods purchased for cash has two aspects which are:
(i) Giving of cash
(ii) Receiving of goods
These two aspects are to be recorded.
Double Entry Bookkeeping
Double Entry Bookkeeping is a system of maintaining books of accounts on the basis of the
double entry principle.
There are three Golden rules of bookkeeping which are:
Personal accounts
Debit the
Credit the
receiver
giver
Real accounts
Debit what
Credit what
comes in
goes out
Nominal accounts
Debit
Credit
expenses
incomes
The other type of bookkeeping is Single entry bookkeeping which does not recognise the
Double Entry Principle.
Role of Double Entry
The role/importance of double entry can be summarised as follows:
1. provides a method for quick checking the accuracy of the ledger
2. Confirms the dual aspect of every transaction
3. helps to track the movement of value from one account to another
4. Double entry keeps the accounting equation in balance
Ledger Accounts and their Classification
An Account is a page or series of pages in the ledger where business transactions of a
particular aspect of the business are recorded. E.g a record of rental payment
An account may also be defined as a summarized record of business transactions that have
taken place with a particular person or organisation.
Format of an account
An account can either be presented in columnar/vertical form or in T-account form.
Date
Details
The columnar format
F
DR
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The T-format
Dr
Date
Cr
Details
K
Date
Details
K
Accounts can be classified according to what they contain, thus:
Personal Accounts
These are accounts of people or businesses. They are usually accounts of debtors and
creditors. Examples of personal accounts include: Shoprite Account, Mulimbika Account,
Trade Kings Account etc.
Real Accounts
Real accounts are accounts for assets of a business. Examples of real accounts include:
furniture account, stock account, cash account, machinery account, buildings account etc.
Nominal Accounts
Nominal accounts are accounts of expenses and incomes (revenues) of the business.
Examples of nominal accounts include fuel expenses account, advertising account, rent
account, stationery account, drawings account, capital account, etc.
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Books of original entry are books in which transactions are recorded as they are posted to
the relevant ledger accounts.
Advantages of keeping books of original entry
-
Accounts can be found more easily by the use of the cross referencing nature of the
books of original entry being kept.
If records are lost, then the ledgers and the books of original entry acts as a backup
for each other.
Acts as a 'listing device' for posting totals to various accounts, thereby saving labour.
The commonly used books of original entry together with source document used to
record transactions are:
Books of Prime Entry, Transaction Type and Source Documents
BOOK
Sales daybook (or Sales
journal) for
Purchases daybook (or
Purchases journal)
Sales returns day
book/Returns inwards
daybook (or
Purchases returns
daybook/Returns outwards
daybook
Cashbook
TRANSACTION TYPE
For credit sales
SOURCE DOCUMEN
Duplicate Invoice
For credit purchases
Original Invoice
Returns inwards
journal)
Original Credit notes
Returns outwards
journal
Duplicate Credit notes
for receipts and
payments of cash and
cheques
Petty cashbook
General journal
For small expenses
All transactions where
Everything else not
covered
are
first
entered before posting
them to the ledger
Cheque counterfoils (From
The cheque book to show cheques
paid out),
paying in slips (Evidence of money
paid into bank accounts),
Till rolls (Evidence of cash being
received)
Petty cash vouchers
All of the above
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The Cash Book
This is a book used for recording all cash transactions. (i.e. all cash receipts to the business
and all cash payments by the business). The cash book is a book of prime entry and is also
part of the double entry system. For this reason, the cash book is also called the cash
ledger.
Types of Cash books
There are four types of cash books. These are:
- Single Column cash book
- Two column cash book
- Three column cash book
- Petty Cash Book
Single Column Cash Book (Cash Account)
This is a book with the Cash Account only. The cash account is an account used for all cash
receipts and payments. All cash received is recorded on the debit side and all cash paid out
is recorded on the credit side of the cash account.
The source documents for the cash account are:
- For cash receipts (money received) - Duplicate receipt/Duplicate cash invoice
- For cash payments (money paid out) - Original Receipt/Original cash invoice
Source document
Subsidiary book Account to Dr
Account to Cr.
Original Receipts, original Cash Book
Corresponding
Cash A/C
Cash Sale
A/C
Duplicate receipt/Cash
Cash book
Cash A/C
Corresponding A/C
Sale
Double Entry for Cash Transactions
Cash Account
Money received by cash/cash withdrawn from the bank for business use –
Dr. Cash Account
Cr. Corresponding account
Money paid by cash/Cash deposited in the bank
Dr. Corresponding account
Cr. Cash Account
Example
From the following information pertaining to the business of Willie Simwinga, prepare a
Single Column Cash Book and balance the account at the end of the month.
2017
1 Jan
Willie Simwinga started in business with K20 000 cash.
2 Jan
Deposited K3 000 in the bank
3 Jan
Bought land and buildings by cash K4 500
4 Jan
Bought fixtures and fittings by cash K1 700
5 Jan
Bought furniture by cash K2 500
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10 Jan
12 Jan
14 Jan
14 Jan
14 Jan
15 Jan
15 Jan
15 Jan
18 Jan
21 Jan
24 Jan
29 Jan
30 Jan
Paid for electricity by cash K250
Bought goods by cash K6 000
Sold goods by cash K2 000
Bought stationery by cash K30
Bought goods by cash K3 400
Sold goods by cash K3 600
Withdrew cash from the till for personal use K250
Withdrew K300 from the bank for business use.
Sold goods by cash K4 100
Bought a motor van by cash K11 000
Cash sales K500
Cash purchases K1 400
Bought a Cash Register (till) by cash K1 300
Paid wages and salaries by cash K2 400.
Willie Simwinga’s
One Column Cash Book (Cash Account)
Date
Details
2017
Jan 1 Capital
2 Bank
3 Land and Buildings
4 Fixtures and Fittings
5 Furniture
7 Electricity
10 Purchases
12 Sales
14 Stationery
14 Purchases
14 Sales
15 Drawings
15 Bank
15 Sales
18 Motor Van
21 Sales
24 Purchases
29 Cash Register
30 Wages and Salaries
31 Balance
Feb 1
21
Balance
F
Dr (K)
Cr (K)
30,000
3,000
4,500
1,700
2,500
250
6,000
2,000
30
3,400
3,600
250
300
4,100
11,000
500
c/d
b/d
40,500
2,770
1,400
1,300
2,400
2,770
40,500
Single Column Cash Book (The Bank Account)
The bank account is an account used for all cash receipts and payments involving the
money kept in the bank account.
The source documents used in the two column cash book include the following
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For money received
For money paid
Source document
Cheque
Cheque counterfoil/Stabs
- Duplicate receipt, The cheque
- Original Receipt, cheque counterfoil
Subsidiary book Account to Dr
Cash Book
Bank A/C
Cash book
Corresponding A/C
22
Account to Cr.
Corresponding A/C
Bank A/C
Double entry for Bank transactions
Money received by cheque/cash deposited in the bank account
Dr. Bank Account
Cr. Corresponding Account
-
Money paid by cheque/cash withdrawn from the Bank Account
Dr. corresponding Account
Cr. Bank Account
Two Column Cash Book
This is a cash book that has both the Cash Account and Bank account side by side.
Example
M Kachesa started business on 1st March, 2016 with K30 000 cash and K25 000 at bank.
The following transactions took place during the month. You are required to enter them in
her Cash book and balance it at the end of the month.
2016
March 02
Bought Land and buildings by cash K5 600.
March 03
Bought Furniture and Fittings by cheque K3 000.
March 05
Purchased Furniture and Fittings by cheque K1 500.
March 07
Paid by cash for advertising K250.
March 09
Bought goods for K5 000 by cash.
March 12
Sold goods by cheque K3 000.
March 15
withdrew K550 from the cash till for personal use.
March 19
Sold goods by cash K1 200.
March 20
Bought goods by cheque K3 400.
March 20
Sold goods for K3 500 cash
March 22
Withdrew cash K400 from the bank for business use.
March 23
Bought a Motor car for K10 000 by cheque.
March 26
Received a bank loan for K7 000 by cheque.
March 28
Received K2 000 cash from Deli Tembo.
March 30
Sold goods by cash and immediately deposited into the bank K2 100.
March 30
Paid cash into bank K500
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Two Column Cash Book
Date
Details
2016
March
April
1
2
3
5
7
9
12
15
19
20
20
22
23
26
28
30
30
31
Capital
Land and buildings
Furniture and fittings
Furniture and fittings
Advertising
Purchases
Sales
Drawings
Sales
Purchases
Sales
Cash/Bank
Motor Car
Loan
Deli Tembo
Sales
Bank/Cash
Balance
1 Balance
F
Cash Account
Dr (K)
Cr (K)
20,000
Bank Account
Dr (K)
Cr (K)
15,000
5,600
3,000
1,500
250
5,000
3,000
550
1,200
3,400
C
3,500
400
400
10,000
7,000
2,000
C
c/d
b/d
37,100
15,200
500
15,200
37,100
2,100
500
24,600
3,300
3,300
24,600
Three Column Cash Book
This is a cash book with the cash account, bank account and discount columns. The
discount column is divided into two columns namely; discount allowed and discount
received.
Discount received
When a business is making payment by either cash or cheque, the creditor might decide to
reduce the price by a percentage, fraction or just a block sum. This is called discount
received. The cash discount received is an income to the business.
Discount allowed
When a business is receiving payment by either cash or cheque, a decision may be made to
reduce the amount to be paid by a percentage, fraction or a block sum. This is called cash
discount allowed. Cash discount allowed is an expense to the business.
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Reason for granting cash discounts
The main reason for granting cash discounts to a customer is to appreciate them for paying
promptly (in time). The other reason is to encourage the customer to continue buying from a
particular trader.
Example
From the following details, prepare Victoria Phiri’s three column cash book.
2016
July 01
Cash in K12 000 and Cash at Bank K24 000.
July 02
Bought land by cheque K10 000.
July 03
Bought equipment by cheque K6 000.
July 04
Bought goods by cash K4 000.
July 05
Sold goods by cheque K5 000.
July 06
Received K4 000 cash from Norah Choono, less 10% cash discount.
July 07
Paid K2 000 by cheque to Miriam Makayi, less cash discount of 5%.
July 12
Paid for land Rates by cheque K1 000.
July 14
Withdrew K1 300 from the bank for business use.
July 16
Withdrew K670 from the till for own use.
July 18
Paid K1 800 to Chiputa by cheque, less cash discount of 5%
July 28
Habeenzu paid us K2 600 by cash; cash discount of K500.00
Victoria Phiri’s
Three Column Cash Book
Date
Details
F
2016
July 1
2
3
4
5
6
7
12
14
16
18
28
31
Balance
Land
Equipment
Purchases
Sales
Norah Choono
Miriam Makayi
Rates
Cash/Bank
Drawings
Chiputa
Habeenzu
Balance
B/F
Aug 1
Balance
B/D
Cash Account
Dr (K)
Cr (K)
12,000
Bank Account
Dr (K) Cr (K)
Discounts
Allow
Receive
ed (K) d (K)
24,000
10,000
6,000
4,000
5,000
3,600
C
400
1,900
1,000
1,300
1,300
100
670
1,710
2,600
C/D
19,500
14,830
90
500
14,830
19,500
29,000
7,090
7,090
29,000
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Petty Cash Book and the Imprest System
A petty cash book is a book for recording small payments made by the business. Petty
means small. The petty cash book is maintained on the Imprest system. The Imprest system
is a system where the cashier gives the petty cashier enough cash to meet the petty cash
expenses for a particular period of time. The petty cashier will be disbursing the cash during
that period as per requests presented to him/her. The requests are presented using Petty
Cash Vouchers which act as a source document for the petty cash book. At the end of the
period, the total used up is calculated to know the amount that has remained unspent. The
cashier then gives an amount equal to what was spent in the period so as to start the next
period with the same amount as in the previous period. This amount given to the petty
cashier to top up (replace) what was spent is called the Petty Cash Float and this system of
maintaining the petty cash is called the Imprest system.
How the Imprest system works
March –
K
The petty cashier receives from the cashier
10 000
The petty cashier pays out during the period
- 7 500
Petty cash remaining at the end of the period (K10 000 – K7 500) 2 500
The cashier now gives the petty cashier the amount spent
+7 500
Petty cash which the petty cashier will start with in April
10 000
Example
The following is a summary of the petty cash transactions of Machima Investments Ltd for
April 2017.
K
April 1
Received from Cashier K10 000.00 as petty cash float
10 000
April 2
Postage
800
3
Travelling
200
4
Cleaning
150
7
Petrol for van
220
8
Travelling
170
9
Stationery
180
11
Cleaning
50
14
Postage
400
15
Travelling
900
18
Stationery
250
18
Payment to Busaka cleaning services for Cleaning
230
20
Postage
100
24
Payment to A.M Motors for Van servicing
800
26
Petrol
180
27
Cleaning
210
29
Postage
50
30
Petrol
400
You are required to:
1. Rule up a suitable petty cash book with analysis columns for expenditure on cleaning,
motor expense, postage, stationery, travelling.
2. Enter the month’s transactions.
3. Enter the receipt of the amount necessary to restore the Imprest and carry down the
balance for the commencement of the following month.
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Machima Investment Ltd’s
Petty Cash Book
Date
Details
Pcv
No.
Amt
Rec(K)
Amt
Spent
(K)
Cleani
ng(K)
Analysis Columns
Motor
Postag Station
Expen
e(K)
ery(K)
ses (K)
Travell
ing(K)
2017
April 1
Cash
7,000
2
Postage
800
3
Travelling
200
4
Cleaning
150
7
Petrol
220
8
Travelling
170
9
Stationery
180
11
Cleaning
50
14
Postage
400
15
Travelling
900
18
Stationery
250
18
Cleaning
230
20
Postage
100
24
Van Servicing
800
800
26
Petrol
180
180
27
Cleaning
210
29
Postage
50
30
Petrol
400
30
Balance
C/D
Balance
B/D
200
150
220
170
180
50
400
900
250
230
100
210
50
400
1,710
7,000
May 1
800
7,000
640
1,600
1,350
430
1,270
1,710
1
Imprest Restored
5,290
1
Cash
7,000
Purchases Day Book/Purchases Journal
This is a book used for recording trading goods bought on credit from suppliers.
Trading goods are those bought with the intention of reselling. Therefore, we can define
purchases as goods bought either on credit or by cash or cheque and are meant for re-sale.
When goods are bought on credit form suppliers, the buyer is given a Purchases Invoice
(Original Invoice or Top Invoice) to be used as a source document for information which
should be entered in the purchases Day book.
The following table describes the flow of information and how it is posted to the ledger.
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Source document
Subsidiary book
Original Invoice
Purchases
Book
Account to Dr
27
Account to Cr.
Day Purchases
Creditor’s
Account (in the Account (in the
General Ledger)
Purchases
Ledger)
Question
The following transactions for the month of February 2022 were extracted from the books of
Mweempe Rodwell. Prepare his Purchases Day book and Post to the ledger
February 2
February 9
February 19
February 25
February 26
Goods bought on credit worth K30,000, invoice No 0283 from E. Njobvu.
Credit purchases amounting to K42,000, invoice No 20122 from J. Sinyangwe
Credit purchases worth K54,000, invoice No 715 from m. Daka wholesalers.
Purchased goods on credit amounting to K 210,000, invoice No 012 from
Lukwesa traders
Bought goods on credit from Vivante traders worth K34,000, invoice No 416.
Solution
Rodwell Mweempe’s
Purchases Day Book
Date
Details
2022
Feb. 2
E. Njobvu.
Feb.9
J. Sinyangwe
Feb.19
M.Daka wholesalers.
Feb.25
Lukwesa traders
Feb. 28
To. Purchases Account - GL
Date
Details
Invoice No.
Amount
K
30,000
42,000
54,000
210,000
336 000
0283
20122
715
012
Rodwell Mweempe’s Creditors Ledger
F.
DR.
K
CR.
K
2 Feb 2022
E. Njobvu. Account
Purchases
30,000
9 Feb.2022
J. Sinyangwe Account
Purchases
42,000
M.Daka wholesalers Account
19 Feb.2022 Purchases
54,000
Lukwesa traders Account
25 Feb.2022 Purchases
210,000
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Rodwell Mweempe’s General Ledger
F.
DR.
Date
Details
02 Feb 2022
09 Feb.2022
19 Feb.2022
25 Feb.2022
E. Njobvu.
J. Sinyangwe
M.Daka wholesalers.
Lukwesa traders
28 Feb. 2022
Balance
CR.
K
01 Mar. 2022
Balance
28
K
30,000
42,000
54,000
210,000
c/d
b/d
336 000
336 000
336 000
336 000
Sales Day Book
This is a book used for recording trading goods sold on credit to customers.
When goods are sold on credit to customers, the customer (buyer) is given the Original
Invoice and the seller (supplier) remains with the duplicate Invoice (Sales Invoice). The seller
uses the duplicate Invoice as a source document for the Sales Day book.
Source document
Duplicate Invoice
Subsidiary book
Sales Day Book
Account to Dr
Account to Cr.
Customer’s
(Debtor’s) Sales Account (in
A/C (in the debtors the general ledger)
Ledger)
Question
Chakulya General Dealers made the following credit sales to the following customers in the
month of February 2022:
Feb 4
Ndavwa; K25,000 invoice No. 0345
Feb 6
Malumbe K60,000, invoice No. 0346
Feb 10
Munkanta K85,000, Invoice No. 0347; Whiteson K28,000 Invoice No. 0348
Feb 15
Juventio K17,000, Invoice No. 0349
Enter the above information in the sales day book and post to the ledger.
Solution
Chakulya General Dealers’
Sales Day Book
Date
Details
2022
Feb. 4
Ndavwa
Feb.6
Malumbe
Feb.10
Munkanta
Feb.10
Whiteson
Feb.15
Juventio
Feb. 28
To Sales A/C
Invoice No.
0345
0346
0347
0348
0349
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K
25,000
60,000
85,000
28,000
17,000
215 000
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CHAKULYA GENERAL DEALERS’ SALES LEDGER
Date
Details
F.
DR.
CR.
K
K
04 Feb 2022
Ndavwa Account
Sales
25,000
06 Feb.2022
Malumbe Account
Sales
60,000
10 Feb.2022
Munkanta Account
Sales
85,000
10 Feb.2022
Whiteson Account
Sales
28,000
15 Feb. 2022
Juventio Account
Sales
17,000
Date
CHAKULYA GENERAL DEALERS’ GENERAL LEDGER
Details
F.
DR.
CR.
04 Feb 2022
06 Feb.2022
10 Feb.2022
10 Feb.2022
15 Feb. 2022
28 Feb. 2022
Sales Account
Ndavwa
Malumbe
Munkanta
Whiteson
Juventio
Balance
K
01 Mar. 2022
Balance
29
K
25,000
60,000
85,000
28,000
17,000
c/d
215,000
215,000
b/d
215,000
215,000
Purchases Returns Day Book
This is a book used for recording trading goods previously bought but which the business
has returned to its suppliers.
Goods may be returned to the supplier for any of the following reasons:
- If goods are expired
- If goods are damaged
- If goods are of the wrong colour, type, size, make etc.
- If the buyer has been oversupplied.
When the buyer returns goods to the seller for one of the above reasons, and the seller
agrees to take back the goods and refund part or all of the amount paid by the buyer, the
seller sends a document called a credit note (original Credit note) to the customer to show
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the amount by which the total bill has been reduced. The credit note is called so because the
customer’s account in the debtors’ ledger is credited with the value of goods returned to
show the reduction in the amount owed. Credit notes are always printed in red to avoid
mistaking them for invoices.
Source
document
Original Credit
note
Subsidiary book
Account to Dr
Account to Cr.
Purchases Returns
Day Book
Creditor’s (Supplier) A/C
(in the creditors ledger)
Purchases Returns A/C
(in the general ledger)
Question
The following transactions took place during the month of September 2022 in the business of
Taonga Chilongo.
Sept 5
Returned goods to Kampango Dealers amounting to K45,000 and were issued with
a credit Note No. 131
Sept 15 Returned goods to Oxilia Enterprises amounting to K76,000 and were issued with
a credit Note No. 305
Sept 20 Returned goods to Mwape Investments amounting to K12,000 and were issued
With a credit note No. 541
Enter this information in the Purchases Returns day book and post to the ledger
Solution
Taonga Chilongo’s
Purchases Returns Day Book
Date
Details
2022
Sept 5
Kampango
Sept 15
Oxilia Enterprises
Sept 20
Mwape
Sept 30
To Purchases Returns A/C
CN. No.
Amount
K
45,000
76,000
12,000
133,000
131
305
541
Date
TAONGA CHILONGO’S CREDITORS LEDGER
Details
F.
DR.
05 Sept 2022
Kampango Account
Purchases Returns
45,000
15 Sept 2022
Oxilia Enterprises Account
Purchases Returns
76,000
20 Sept 2022
Mwape Account
Purchases Returns
12,000
K
CR.
K
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TAONGA CHILONGO’S GENERAL LEDGER
Details
F.
DR.
05 Sept 2022
15 Sept 2022
20 Sept 2022
30 Sept 2022
Purchases Returns Account
Kampango
Oxilia Enterprises
Mwape
Balance
c/d
01 Mar. 2022
Balance
b/d
31
CR.
K
K
45,000
76,000
12,000
133,000
133,000
133,000
133,000
Sales Returns Day Book
This is a book used for recording trading goods previously sold but which the customers
have returned back to the business.
When goods have been returned by the customer, the customer sends an Original Debit
Note to the seller (supplier) giving details of goods returned and the reasons for their return.
The supplier (seller) will then send the original credit note to the customer whose main
purpose is to show proof that he (seller) has agreed to get back the goods and to reduce the
amount the customer is owing. The seller remains with the duplicate Credit Note from which
information is derived for the Sales Returns Day Book.
Question
The following transactions took place during the month of July 2022 in the businesses of
Melody Musonda.
July 5 Sikaala Merchants returned goods amounting to K40, 000.They were issued with a
credit note No 101
July 15 Sinyangwe returned part of the goods sold to him amounting to K20,000. He was
issued with a credit note No 102
July 20 Hakasenke returned goods which had been sold to her earlier on, worth K90,000.
She was issued with credit note No. 103.
Enter this information in the sales returns day book and post to the ledger.
Solution
Melody Musonda’s
Sales Returns Day Book
Date
Details
2022
July 5
Sikaala Merchants
July 15
Sinyangwe
July 20
Hakasenke
July 31
To Sales Returns A/C
CN. No.
101
102
103.
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Amount
K
40,000
20,000
90,000
150,000
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Date
MELODY MUSONDA’S CREDITORS LEDGER
Details
F.
DR.
05 July 2022
Sikaala Merchants Account
Sales Returns
40,000
05 July 2022
Sinyangwe Enterprises Account
Sales Returns
20,000
20 July 2022
Hakasenke Account
Sales Returns
90,000
Date
MELODY MUSONDA’S GENERAL LEDGER
Details
F.
DR.
05 Sept 2022
15 Sept 2022
20 Sept 2022
30 Sept 2022
Sales Returns Account
Kampango
Oxilia Enterprises
Mwape
Balance
CR.
K
K
CR.
K
01 Mar. 2022
Balance
32
K
45,000
76,000
12,000
c/d
b/d
150,000
150,000
150,000
150,000
General Journal
Journal is a book of prime entry which records transactions which are not routine (and not
recorded in any other book of prime entry), for example:
- year-end adjustments
- Depreciation charge for the year
- Irrecoverable debt write-off
- Record the movement in the provision for doubtful debts.
- Accruals and prepayments
- Closing inventory
- Acquisitions and disposals of non-current assets
- Opening balances for statement of financial position items
- Correction of errors
The journal is a clear and comprehensible way of setting out a bookkeeping double entry
that is to be made. It shows if transactions are to be posted to the debt or credit side of the
relevant ledger account.
Question
From the following information, you are required to prepare Humphrey’s General Journal
2017
Jan
1
Machinery K13,200; Bank K 17, 690; Creditors: Hilda K 5,000, Ngungu
K 4,000, Cecilia K 3,000; Debtors: Ngululu K 8,000, Rodgers K 2,500,
Mulilo K 6,000; Stock K2,900, Cash K 860; Furniture K 9,700.
Jan
14
Sold Furniture on credit to Rodgers at K 4,000.
Jan
27
Bought a Motor Vehicle on credit from Hilda at K 25,000.
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Solution
Humphrey’s
General Journal
DATE
DETAILS
2017
Jan 1
Machinery
Bank
Debtors: Ngululu
Rodgers
Mulilo
Stock
Cash
Furniture
Creditors: Hilda
Ngungu
Cecilia
Capital
F
Dr (K)
33
Cr (K)
13,200
17,690
8,000
2,500
6,000
2,900
860
9,700
60,850
5,000
4,000
3,000
48,850
60,850
(Being opening balances)
Jan 14
Jan 27
Rodgers
Furniture
(Being Furniture sold on credit)
4,000
Motor Vehicle
Hilda
(Being a Motor Vehicle bought on credit)
25,000
4,000
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TRIALText
BALANCE
Principles of Accounts 7110 A Supplementary
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34
7.THE TRIAL BALANCE
A trial balance is a list of debit and credit balances extracted from ledger accounts as at a
particular date.
Since transactions in the ledger are entered on the basis of double entry, it follows that for
every transaction, there must be two entries: a debit entry; and a credit entry. This means
that if all entries are done correctly, the total of the debit entries should be equal to the total
of the credit entries.
The test/trial of the accuracy can then be determined by picking balances from the ledger
accounts. Balances are picked because they represent a summary of the entries made in
each account.
Purpose of the trial balance
1.
2.
3.
4.
5.
To prove the arithmetic accuracy of the double entry in the ledger accounts.
To see if the double entry rule has been followed.
To show all ledger balances.
To prevent fraud.
To be used as a source of information for preparing the final accounts.
Preparation of the Trial Balance
The Trial balance is prepared as at a particular date (end of the accounting period) when the
accounts in the ledger are balanced. When preparing the trial balance, Debit balances are
listed on the Debit side of the trial balance; and Credit balances are listed on the Credit side
of the trail balance. The total of balances on the Debit side is calculated as well as the total
on the Credit side. If the balances tally (i.e. if they are the same), it is proof that the double
entry in the ledger was done correctly.
The position of Assets, Liabilities, Expenses and Incomes in the trial balance
The usual positions of the balances are as follows:
Assets and expense accounts normally have Debit balances; hence, their balances appear
on the Debit side of the trial balance.
Liabilities and Income accounts normally have credit balances; hence, their balances appear
on the Credit side of the trial balance.
A
Dr
L
Cr
E
Dr
G
Cr
Question
From the details below, prepare Gwenani J’s trial balance as at 31 March 2023.
K
Capital
40 000
Bank
5 000
Cash
8 000
Purchases
80 000
Purchases Returns
1 200
Sales
120 000
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Principles of Accounts 7110 A Supplementary
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Sales Returns
Discount allowed
Discount received
Commission
Commission received
Advertising
Transport costs
Rent
Rent received
Debtors
Creditors
Equipment
Machinery
Motor vehicles
Furniture
Loan
Bank overdraft
35
1 500
2 100
3 400
5 000
4 300
3 400
2 000
1 300
5 300
3 000
2 400
20 000
18 000
12 500
27 700
10 000
2 900
Solution
Gwenani J’s
Trial Balance
as at 31st March 2016
Dr
K
Capital
Bank
Cash
Purchases
Purchases Returns
Sales
Sales Returns
Discount allowed
Discount received
Commission
Commission received
Advertising
Transport costs
Rent
Rent received
Debtors
Creditors
Equipment
Machinery
Motor vehicles
Furniture
Loan
Bank overdraft
Cr
K
40 000
5 000
8 000
80 000
1 200
120 000
1 500
2 100
3 400
5 000
4 300
3 400
2 000
1 300
5 300
3 000
2 400
20 000
18 000
12 500
27 700
189 500
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8.FINAL ACCOUNTS
Final Accounts are financial statements prepared at the end of a trading period (period of
twelve months) to calculate the profit or loss made and to ascertain the financial position of
the business. They include the Trading Account, Profit and Loss Account and the Balance
sheet.
The Trading Account
This account is used for calculating the Gross Profit or Gross Loss for the business. The
Gross Profit/loss of a business is the unrefined result of business activities. This means that
there are other items to consider but which have not yet been taken into account.
To calculate the Gross Profit or Loss we use the formula:
Gross profit = Turn Over – Cost of sales
Where:
Turnover = Sales–Sales returns
Cost of Sales = Opening Stock+ (Purchases + Carriage inwards–Purchases returns)–
Closing stock + Wages.
Presentation of the Trading account
Question
From the details below, prepare F. Malunga’s Profit and Loss account for the year ended 30
September 2022.
K
Sales
130 000
Returns outwards
4 000
Sales returns
6 000
Wages
8 000
Opening stock
8 000
Purchases
55 000
Carriage inwards
3 000
Closing stock (30 Sept. 2022)
6 000
F. Malunga’s
Trading Account
for the year ended 30 September 2022
K
Sales
Less: Sales returns
Turnover/Net Sales
Less Cost of sales
Opening stock
Purchases
Add: carriage inwards
K
K
130 000
(6 000)
124 000
8 000
55 000
3 000
58 000
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Less: Returns outwards
Net Purchases
Total stock available for sale
Less: Closing stock
Cost of goods sold
Add Wages
Cost of Sales
Gross Profit
37
4 000
54 000
62 000
6 000
56 000
8 000
64 000
60 000
Note:
Please add carriage inwards to purchases before subtracting purchases returns.
The Profit and Loss Account
The Profit and Loss Account is used for calculating the Net Profit or Net loss of the business.
This is important because even after arriving at the gross profit/loss, there may still be some
expenses and incomes which took place but cannot be absorbed in the trading account.
To calculate the Net Profit or Net Loss, we use the following formula:
Net Profit/Loss = Gross Profit/Loss + Other Incomes – Other expenses
Preparation of the Profit and Loss Account
Question
Use the following list of balances to prepare the profit and Loss account for H. Jolezya for
the year ended 30 September 2022
K
Gross Profit
68 000
Rent and Rates paid
1 400
Insurance
3 000
Discount received
400
Repairs
800
Commission received
600
Interest received
500
General expenses
5 000
Rent received
900
Advertising expenses
3 000
Fuel costs
1 200
Stationery
500
Salaries and wages
25 400
Electricity
380
Commission paid
750
Motor vehicle expenses
900
Lighting and heating expenses
2 000
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Solution
H. Jolezya’s
Profit and Loss Account
for the year ended 30 September 2022
K
Gross Profit
Add: Other Income
Discount received
Commission received
Interest received
Rent received
Total Income
Net Income
Less: Expenses
Advertising expenses
Fuel costs
Stationery
Salaries and wages
Rent and Rates paid
Electricity
Commission paid
Repairs
Motor vehicle expenses
Insurance
Lighting and heating expenses
General expenses
K
K
68 000
400
600
500
900
2 400
70 400
3 000
1 200
500
25 400
1 400
380
750
800
900
3 000
2 000
5 000
44 330
26 070
NET PROFIT
Balance Sheet/Statement of Financial Position
A balance sheet is a statement showing the financial position of a business as at a particular
date. It is also defined as a statement of assets and liabilities as at a particular date or a
statement of affairs which show the financial position of the business through assets owned
and liabilities owed at a particular date.
The Accounting Equation
The Accounting equation states that at any point in time, the assets of the business will be
equal to its capital and liabilities.
If the proprietor is the only supplier of the resources to the business, the equation is
recorded as: Assets = Capital.
If the resources are supplied by the proprietor and others, the equation is recorded as:
Capital
Assets
Liabilities
=
=
=
Assets – Liabilities
Capital + Liabilities
Assets – Capital
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The balance sheet follows the Accounting equation where: Assets = Capital + Liabilities
Since, the accounting equation depicts the fundamental relationship among the components
of the balance sheet; it is also called the Balance Sheet Equation. As the name suggests,
the balance sheet is a statement of assets, liabilities and capital.
Capital
Capital is money or money’s worth invested in the business by the owner/proprietor or
Capital are resources used to start up a business, e.g. money, machinery, motor vehicles,
etc.
Liabilities
Liabilities are money which the business owes other persons or businesses or Liabilities are
resources used in the business but do not belong to the business. Liabilities can be divided
into two types namely, short term liabilities and long term/Non-current liabilities.
Long term liabilities/Non-current liabilities are liabilities that will come due for payment
beyond one year or beyond a period of twelve months, e.g. loan, bonds, mortgages, etc.)
Short term liabilities/Current liabilities are liabilities that are due to be paid within one
year or within a period of twelve months, e.g. Creditors/payables, overdrafts etc.)
Assets
Assets are things/resources that belong to the business and are used in the business. They
are legal possessions of a business. They are acquired using the resources provided by
capital and liabilities. There are two types of assets namely, fixed assets and current assets.
Fixed assets are assets bought for use in the business to generate profit and not for resale
e.g. land and buildings, motor vehicles, equipment, machinery etc.)
Current assets are cash and other assets which can easily be converted to cash within one
year, e.g. stock/inventory, debtors/receivables, cash at bank, cash in hand etc.)
Order of the Balance Sheet
Fixed assets and current assets in the balance sheet are usually listed beginning with the
asset that is most difficult to turn into cash moving down to the asset which is easiest to turn
into cash. This method of listing is called Increasing order of liquidity or Decreasing order of
permanence. Liquidity means the ease with which an asset can be turned into cash.
The balance sheet below is arranged in the increasing order of liquidity.
NOTE: Most businesses use the Decreasing order of permanence when preparing
their balance sheets.
Types of Capital
a) Owners capital/capital employed
This is the total amount in the business that belongs to the owner
Owners capital = starting capital – Drawings + Net Profit
b) Circulating capital/net Current assets
This is the excess of current assets over current liabilities. It is the capital that is
available in the business for the day today expenses. It is also called Circulating capital,
capital in circulation or capital at work.
Working capital = Current assets – current liabilities
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c) Fixed capital
This is the total value of all fixed assets in the business.
d) Loan capital
This is the total value of all long term liabilities
Preparation of a balance sheet
Question
The following balances remained in the books of Fisonga R. after the preparation of his profit
and loss account for the year ended 30 September 2022. You are required to prepare his
balance sheet as at that date.
K
Net Profit
47 670
Land and buildings
25 000
Premises
23 000
Fixtures and fittings
12 000
Machinery
18 000
Motor vehicles
23 000
Equipment
6 000
Office furniture
6 000
Closing stock
6 000
Debtors
14 000
Cash at bank
31 000
Cash at hand
5 670
Creditors
3 400
Bank overdraft
5 600
Capital
60 000
Drawings
4 000
Mortgage
25 000
Loan
32 000
R. Fisonga’s
Balance Sheet
as at 30 September 2022
K
K
Fixed Assets
Land and buildings
Premises
Fixtures and fittings
Machinery
Motor vehicles
Equipment
Office furniture
Total Fixed Assets
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K
25 000
23 000
12 000
18 000
23 000
6 000
6 000
113 000
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Current Assets
Closing stock
Debtors
Cash at bank
Cash at hand
Less: Current Liabilities
Creditors
Bank overdraft
Total Current Liabilities
Working Capital
Net Assets
41
6 000
14 000
31 000
5 670
56 670
3 400
5 600
FINANCED BY:
Capital
Add/Less: Net Profit/loss
Less: Drawings
Owners capital
Add: Long term Liabilities
Mortgage
Loan
Total Long term liabilities
Capital employed
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47 670
160 670
60 000
47 670
107 670
4 000
103 670
25 000
32 000
57 000
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9.ADJUSTMENTS TO FINAL ACCOUNTS
Accrued Expenses
An accrued expense is an item of expense that has been incurred during the accounting
period but has not yet been paid for.
When preparing final accounts, an accrued expense for the year should be included as an
expense in the profit and loss account and also shown in the balance sheet under
current liabilities.
Question:
Funduluka’s business has an accounting year-end of 31st December. He rents a factory at a
rental cost of K6 000 per quarter payable in arrears. During the year 31st December 2022
his cash payment for rent has been as follows:
March 31
June 29
October 28
K6 000
K6 000
K6 000
The final payment due on 31st December 2004 for the quarter to that date was not paid until
4th January 2023.
You are required to prepare the following:
(a) The Rent account
(b) A profit and loss account and the Balance Sheet extracts as at 31st December 2004.
Rent Account
Date
2022
Mar
31
June 29
Oct. 28
Dec 31
Dec 31
2023
Jan
01
Details
Bank
Bank
Bank
Profit and loss
Balance (Accrued Rent)
Balance
F
Dr
K
6 000
6 000
6 000
Cr
K
24 000
c/d
6 000
24 000
24 000
b/d
6 000
Profit and Loss account extract for the year ended 31 December 2022
Less: Expenses:
Rent (amount paid)
18 000
Add: Rent Accrued
6 000
24 000
Balance sheet extract as at 31st December 2022
Current liabilities:
Rent accrued
6 000
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Accrued Incomes
An accrued income is income receivable during the accounting period but has not yet been
received. When preparing final accounts, the accrued amount should be included as an
income in profit and loss account since it relates to the current accounting period. In the
balance sheet, the accrued income should be shown under current assets.
Question:
In the books of L. Sombaile, rent is receivable annually at K8 400. During the year 31st
December 2022, the following receipts were made:
31 May
K3 600
31 Dec.
K4 400
You are required to prepare the following:
(a) The Rent Receivable Account
(b) The profit and loss account and the Balance Sheet extracts as at 31 December 2022.
Date
2022
May 31
Dec 31
Dec 31
Dec 31
Details
Rent Receivable Account
F
Bank
Bank
Profit and Loss
Balance (Rent Receivable Accrued)
Dr
K
Cr
K
3 600
4 400
8 400
c/d
8 400
2018
Jan
01
Balance
b/d
400
8 400
400
Profit and loss account (extract) for the year ended 31 December 2022
Add: Gains:
Rent receivable
8 000
Add: accrued rent
400
8 400
Balance sheet extract as at 31 December 2017
Current assets:
Rent receivable accrued
400
Prepaid Expenses
A prepaid expense is an expense that has been paid for during the accounting period but
relates to the future accounting period(s).
When preparing the final accounts, a prepaid expense should be excluded/Subtracted
from the current profit and loss account, but should be shown in the balance sheet
under current assets.
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Example
V. Mwanza pays insurance on his motor vehicles at an annual cost of K6 000.
During the year to 31st December 2017, he paid a total of K4,000 on 1 June 2022 and
K3,500 on 3rd September, 2022 for insurance costs.
Show the following:
(a) The insurance Account
(b) The profit and Loss account and balance sheet extract as at 31st December 2017.
Insurance Account
Date
2022
June 01
Sept 03
Dec 31
Dec 31
Details
F
Bank
Bank
Profit and loss
Balance
c/d
Dr
K
4 000
3 500
7 500
2023
Jan
01
Balance
b/d
Cr
K
6 000
1 500
7 500
1 500
Profit and loss account extract for the year ended 31 December 2022
Less: Expenses:
Insurance
7 500
Less: Prepaid Insurance
1 500
6 000
Balance sheet extract as at 31st December 2022
Current assets:
Insurance prepaid
1 500
Prepaid Incomes
This is income received during the current accounting period but which relates to the future
Accounting period(s). Since the income relates to the next accounting period(s), it should be
subtracted from the total income received in the profit and loss account for the current
accounting period. In the balance sheet, prepaid income should appear under current
liabilities.
Question:
A Mugala receives an annual commission of K7 200. During the year to 31st December
2022, he received the following commission:
2nd Feb 2022
received by cash K3 200
1st April 2022
received by cheque K2 200
rd
3 Sept 2022
received by cheque K4 400
You are required to:
(a) Show the Commission Receivable Account
(b) The Profit and Loss account and the balance sheet extract as at 31 December 2022.
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Date
2022
Feb 02
Apr 01
Sept 03
Dec 31
Dec 31
2023
Jan 01
Details
Commission Receivable Account
F.
Cash
Bank
Bank
Profit and loss
Balance (Commission receivable prepared)
Balance
Dr
K
7 200
2 600
9 800
c/d
b/d
45
Cr
K
3 200
2 200
4 400
9 800
2 600
Profit and Loss account extract for the year ended 31st December 2022
Add: Gains:
Commission received
Less: prepaid commission
9 800
2 600
7 200
Balance sheet extract as at 31st December 2022
Current liabilities:
Commission receivable prepaid
2 600
Summary on Accruals and Prepayments
An Expense Accrued is added in the Profit and Loss Account
and is treated as a Current Liability in the balance sheet.
An Income Accrued is added in the Profit and Loss Account
and is treated as a Current Asset in the Balance sheet.
An Expense Prepaid is subtracted in the Profit and Loss Account
and is treated as a Current Asset in the Balance Sheet.
An Income Prepaid is subtracted in the Profit and Loss Account
and is treated as a Current Liability in the Balance Sheet.
Bad Debts
Some debtors may fail to pay for their debts and so it is prudent accounting to write off such
debts as bad. A bad debt is a debt that is considered to be uncollectable. A bad debtor is a
debtor who fails to pay parts or the whole debt for a number of reasons such as: Running
away without trace, Bankruptcy, Insanity, Death etc
Question
On 30th September 2022, we are told that our debtor, Justine Chibwe, who owes us K7 000
has become legally bankrupt. It is decided to write off the debt as bad.
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You are required to show:
(a) Justine Chibwe Account
(b) The Bad Debts Account
(c) Profit and loss account extract for the year ended 31 December 2017
Justine Chibwe Account
Date
2022
Jan 01
Sept 30
Details
F
Balance
Bad debts
Dr
K
7 000
Cr
K
7 000
7 000
7 000
Bad Debts Account
Date
2022
Sept 30
Dec 31
Details
F
Justine Chibwe
Profit and Loss
Dr
K
7 000
Cr
K
7 000
7 000
7 000
Profit and Loss Account extract for the year ended 31 December 2017
Less: Expenses
Bad debts
7 000
Provision for Doubtful Debts
A provision for doubtful debts is an estimated expense of debtors that are likely to become
bad. A provision for doubtful debts is set aside when there is some doubt as to whether all
the debts of the business will be recovered in full. The provisin for doubtful debts figure is
calculated on the outstanding debtors figure (i.e. debtors figure after subtracting bad debts
for the year)
Question:
A business started trading on 1 January, 2014. During the first four years ended 31
December 2014, 2015, 2016 and 2017, the outstanding debtors’ figures were as follows:
2014
K60 000
2015
K50 000
2016
K50 000
2017
K70 000
It was decided to estimate the provision for doubtful debts as 5% of the outstanding debtors
figure at each year end.
Required:
(a) A provision for doubtful debts account for 2014, 2015, 2016 and 2017 showing
transfers to the profit and loss account.
(b) The Profit and Loss account and balance sheet extracts for the years 2014, 2015,
2016 and 2017.
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Solution
Provision for doubtful Debts Account
Date
2014
Dec 31
Dec 31
2015
Jan 01
Dec 31
Dec 31
2016
Jan 01
Dec 31
2017
Jan 01
Dec 31
Dec 31
2018
Jan 01
Details
F
Dr
K
Profit and Loss Account
Balance
c/d
3 000
3 000
Balance
Profit and Loss (Reduction in Provision)
Balance
Balance
Balance
Balance
Profit and Loss account (Increase in Provision)
Balance
Balance
b/d
c/d
b/d
c/d
3 000
3 000
500
2 500
3 000
3 000
2 500
2 500
2 500
b/d
c/d
Cr
K
3 000
2 500
2 500
1 000
3 500
3 500
b/f
3 500
3 500
Profit and Loss Account (extract) for the year ended 31 December, 2014
K
K
K
Less: Expenses
Provision for bad debts
3 000
Note:
When a provision for bad/doubtful debts is created for the first time, the full amount of
provision is entered in the Profit and Loss account as an expense and in the balance
sheet as a reduction on the outstanding debtors figure.
Profit and Loss Account (extract) for the year ended 31 December, 2015
K
K
K
Add: Other Income
Reduction in Provision for bad debts
500
(Old Provision - New Provision = 3 000 –
2,500)
Note:
When the current year’s provision is lower than the provision for the previous year, it
is referred to as a reduction in provision for bad debts. In such a case, what is
transferred to the Profit and Loss account is the amount by which the provision has
decreased which is treated as an income under Gains. This is because the only
effect on the profit and loss of the business is the reversal of part of the estimated
cost of bad debts to the profit of the business in the current accounting year. In the
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balance sheet, the full amount of provision for that year is subtracted from the
outstanding debtors figure.
Note: 2016
For the year ended 31 December, 2016, there shall be no entry in the Profit and Loss
account for Provision for bad/doubtful debts as there is neither an increase nor a
reduction in provision. Hence, the profit figure is neither affected negatively nor
positively. In the balance sheet, the full amount of provision for that year is subtracted
from the outstanding debtors figure.
Profit and Loss Account (extract) for the year ended 31 December, 2017
K
K
K
Less: Expenses
Increase in Provision for bad debts
1 000
(New Provision – Old Provision
= 3,500 – 2,500
Balance sheet (extract) as at 31st December 2014
K
K
Current Assets
Debtors
60 000
Less: Provision for bad debts
3 000
57 000
Balance sheet (extract) as at 31st December 2015
K
K
Current Assets
Debtors
Less: Provision for bad debts
K
K
50 000
2 500
47 500
Balance sheet (extract) as at 31st December 2016
K
K
Current Assets
Debtors
50 000
Less: Provision for bad debts
2 500
47 500
Balance sheet (extract) as at 31st December 2017
K
K
Current Assets
Debtors
70 000
Less: Provision for bad debts
3 500
66 500
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Bad Debts with Provision for Bad/Doubtful Debts
Question
A business started trading on 1 January, 2015. During the first three years ended 31
December 2015, 2016 and 2017, the following debts were written off to the bad debts
account on the following dates:
31 March 2015
30 September 2015
28 February 2016
30 June 2017
Joyce Choono
Prisca Chilumba
Kraus Bbabbi
Lucy Tapi
K6 000
K2 000
K3 000
K7 000
Debtors outstanding for the same period were as follows:
31 December 2015
K70 000
31 December 2016
K50 000
31 December 2017
K90 000
It is the policy of the firm to make a provision for bad debts of 5% of the total debtors at each
year end.
You are required to show the following:
(a) The Bad Debts Account for 2015, 2016 and 2017
(b) The Provision for Doubtful Debts Account 2015, 2016 and 2017
(c) The Profit and Loss Account extracts for 2015, 2016 and 2017
(d) The Balance sheet extracts for 2015, 2016 and 2017.
Solution
Bad Debts Account (2015)
Date
2015
Sept 30
Mar 31
Dec 31
Details
F
Joyce Choono
Prisca Chilumba
Profit and Loss
Dr
K
6 000
2 000
8 000
Cr
K
8 000
8 000
Bad Debts Account (2016)
Date
2016
Feb 28
Dec 31
Details
F
Kraus Bbabbi
Profit and Loss
Dr
K
3 000
3 000
Cr
K
3 000
3 000
Bad Debts Account (2017)
Date
2017
June 30
Dec 31
Details
F
Lucy Tapi
Profit and Loss
Dr
K
7 000
8 000
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K
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Date
2015
Dec 31
Dec 31
2016
Jan 01
Dec 31
Dec 31
2017
Jan 01
Dec 31
Dec 31
2018
Jan 01
Details
Provision for doubtful Debts Account
F
Profit and Loss Account
Balance
Balance
Profit and Loss (Reduction in Provision)
Balance
Balance
Profit and Loss (Increase in Provision)
Balance
Balance
c/d
Dr
K
Cr
K
3 500
3 500
3 500
3 500
b/d
c/d
3 500
1 000
2 500
3 500
3 500
b/d
c/d
2 500
2 000
4 500
4 500
4 500
b/d
4 500
Profit and Loss Account (extract) for the year ended 31 December, 2015
K
K
Less: Expenses
Bad debts
8 000
Provision for bad debts
3 500
Profit and Loss Account (extract) for the year ended 31 December, 2016
K
K
Add: Other Income
Reduction in Provision for bad debts
1 000
(Old Provision - New Provision = 3 500 – 2
500
Less: Expenses
Bad debts
K
K
3 000
Profit and Loss Account (extract) for the year ended 31 December, 2017
K
K
Less: Expenses
Bad debts
7 000
Increase in Provision for bad debts
2 000
(New Provision – Old Provision = 4 500 – 2
500
Balance sheet (extract) as at 31 December 2015
K
Current Assets
Debtors
70 000
Less: Provision for bad debts
3 500
50
K
K
K
66 500
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Balance sheet (extract) as at 31 December 2016
K
K
Current Assets
Debtors
Less: Provision for bad debts
51
K
50 000
2 500
47 500
Balance sheet (extract) as at 31 December 2017
K
Current Assets
Debtors
90 000
Less: Provision for bad debts
4 500
K
K
85 500
Depreciation
Depreciation is the measure of the wearing out, consumption or other reductions in the
useful economic life of a fixed asset. It is loss of value of a fixed asset.
Causes of depreciation
Depreciation may be cause by:
- use of the asset e.g., Plant and machinery, motor vehicles etc.
- passing of time e.g., a term, year lease of property.
- Obsolescence through technology and market changes e.g., machinery of a
specialised nature.
- Depletion e.g., extraction of minerals from a mine.
Purpose of accounting for depreciation
The purpose of depreciation is to allocate the cost of the fixed asset over the expected life of
that asset. It is not a method for providing for, or saving up for, replacement of fixed assets.
Methods of Calculating Depreciation
There are several methods of calculating depreciation, but the following are the three most
common ones:
1 Straight line method or Equal/fixed instalment method
2 Reducing balance method or diminishing balance method
3 Revaluation Method
Straight Line Method
Under this method, an equal amount is charged as depreciation for each year of the
expected life of the asset. To calculate the depreciation charge, the following information is
necessary:
 the original or historical cost of the asset
 an estimate of its useful life to the business
 an estimate of its residual value at the end of its useful life
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The depreciation charge is calculated as follows:
-
By formula:
Annual depreciation = Original cost - estimated residual value
Estimated useful life
-
Or as a percentage of the original cost:
Annual Depreciation = %Rate X Original cost
100
Note: When Depreciation is expressed as a percentage of the original cost e.g., 20%
on cost, the residual value is not specified, and in such cases, the residual value
should be taken to be zero.
Question
A motor vehicle was purchased on 1st January 2015 at a cost of K25 000. It is estimated
that its useful life is eight years, after which it will have a scrap value of
K5 000. Calculate the annual depreciation charge.
Solution:
Annual depreciation = cost of asset - estimated residual value
Estimated useful life
= 25 000 - 5 000
8
= K2 500
Question:
A Firm purchased a machine on 1st January 2015 at a cost of K25 000. It was decided to
depreciate it at an annual rate of 15% on cost. Calculate the annual depreciation charge.
Solution:
Annual Depreciation = 15 X K25 000
100
= K3 750
Reducing Balance Method
Under this method the annual depreciation charge is higher in the earlier years of the life of
the asset and lower in the later years. It is calculated using a fixed percentage on the net
book value. Net book value (NBV) of a fixed asset is its cost less the accumulated
depreciation on the asset to date.
Question:
A trader bought a machine at K10 000. Depreciation is charged at a rate of 20% per annum
on net book value. Calculate the depreciation charges for the first 3 years of its life.
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Solution
Year
1
2
3
NBV
10 000 x 20%
8 000 x 20%
6 400 x 20%
53
Depreciation charge Accumulated depreciation
K
K
2 000
2 000
1 600
3 600
1 280
4 880
Revaluation Method
This is the method used for fixed assets which are difficult to value as single items but which
are grouped in order to arrive at their value. Such fixed assets include loose tools and
equipment such as:
- Tools in a garage like spanners, screwdrivers, etc.
- Kitchen utensils in a restaurant like spoons, folks, plates, serving dishes etc.
For these items, the depreciation figure can be arrived at by compairing their value at the
beginning of the year and at the end of the year.
Question
Ifintu Kulya Restaurant valued its kitchen equipment at K20 000 on 1 Jnanuary, 2017. On 31
December, the estimated value of the same equipment was K17 500 after a revaluation of
the same equipment.
Calculate the depreciation charge for kitchen equipment for the year.
Solution
Depreciation = Opening value – Closing value
= K20 000 – K17 500
= K2 500
Double Entry for Depreciation
Recording depreciation involves maintaining the asset account at cost while charging
depreciation to a separate ledger account where depreciation to date is recorded. This
account is known as the Accumulated Provision for Depreciation Account or simply Provision
for Depreciation Account.
The double entry for Depreciation is:
Dr. Profit and Loss Account
Cr. Accumulated Provision for Depreciation account
In the balance sheet, the Accumulated Provision for depreciation to date is deducted from
the Original cost of the fixed asset.
Question
A trader bought a machine at K10 000 on 1 January 2015 the financial year end being 31
December. Depreciation is charged at a rate of 20% per annum on net book value.
You are required to show:
(a) The depreciation charges for the first 3 years of its life.
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(b) The machine Account.
(c) The Provision for Depreciation account.
(d) The Profit and Loss Account and Balance sheet extracts for the years 2015, 2016
and 2017.
Solution
Depreciation Charges for the first three years
Year
NBV
Dec 2015
Dec 2016
Dec 2017
10 000 x 20%
8 000 x 20%
6 400 x 20%
Depreciation charge Accumulated depreciation
K
K
2 000
2 000
1 600
3 600
1 280
4 880
Machine Account
Date
2015
Jan 1
Dec 31
Details
F
Bank
Balance
c/d
Dr
K
10 000
10 000
2016
Jan 1
Dec 31
Balance
Balance
b/d
c/d
Balance
Balance
b/d
c/d
Date
2015
Dec 31
Dec 31
2016
Jan 01
Dec 31
Dec 31
2017
Jan 01
Dec 31
Dec 31
2018
Jan 01
Balance
b/d
Machine Provision for Depreciation Account
F
Dr
K
Profit and Loss Account
Balance
c/d
2 000
2 000
Balance
Profit and Loss
Balance
Balance
b/d
c/d
b/d
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Cr
K
2 000
2 000
2 000
1 600
3 600
3 600
b/d
c/d
10 000
10 000
10 000
Details
Balance
Profit and Loss
Balance
10 000
10 000
10 000
10 000
2018
Jan 1
10 000
10 000
10 000
10 000
2017
Jan 1
Dec 31
Cr
K
3 600
3 600
1 280
4 880
4 880
4 880
4 880
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Profit and Loss Account (extract) for the year ended 31 December, 2015
K
K
Less: Expenses
Provision for depreciation: Machine
2 000
Profit and Loss Account (extract) for the year ended 31 December, 2016
K
K
Add: Other Income
Provision for depreciation: Machine
1 600
55
K
K
Profit and Loss Account (extract) for the year ended 31 December, 2017
K
K
K
Less: Expenses
Provision for depreciation: Machine
1 280
Balance sheet (extract) as at 31 December 2015
K
K
Fixed Assets
Cost
Dep.
Machine
10 000
2 000
K
N.B.V
8 000
Balance sheet (extract) as at 31 December 2016
K
K
Fixed Assets
Cost
Dep.
Machine
10 000
3 600
K
N.B.V
6 400
Balance sheet (extract) as at 31 December 2017
K
K
Fixed Assets
Cost
Dep.
Machine
10 000
4 880
K
N.B.V
5 120
Disposal of Fixed Assets
Disposal involves the selling of fixed assets that are no longer useful. The accounting
process for the disposal of fixed assets is as follows:
i)
When the asset is sold, the first step is to remove the original cost of that asset from
our accounting records. The double entry being:
Dr - Disposal of fixed assets account
Cr - Fixed asset account
ii)
The next step is to remove all the depreciation that has been charged on that asset
from our accounting records. The double entry being:
Dr - Provision for depreciation account
Cr - Disposal of fixed asset account
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iii)
When the proceeds from the disposal are received, the double entry is:
Dr - Cash book
Cr - Disposal of fixed asset account
If the asset is sold on credit, then the double entry is:
Dr - Debtor account
Cr - Disposal of fixed asset account
iv)
The balance in the disposal account, which represents a profit or loss on disposal,
will be transferred to the profit and loss account at the end of the year as follows:
- If there is a profit:
Dr - Disposal of fixed asset account
Cr - Profit and loss account
- If there is a loss:
Dr - Profit and loss account
Cr - Disposal of fixed asset account
56
Question
Hakasenke, a trader, makes up her accounts to 31st December. On 1st April 2014, she
bought a Lorry at a cost of K50 000. The Lorry had an estimated useful life of five years,
with a residual value of K6 000.
On 1st February 2015, she bought another Lorry for K42 000. This lorry was estimated to
have a useful life of ten years after which its residual value was estimated at K8 000.
Hakasenke sold the first lorry on 30th September, 2016 for K30 000, receiving the amount by
cash. The company provides a full year’s depreciation on all its fixed assets using the
straight line method but no depreciation is charged in the year of sale.
You are required to show:
a) The lorry account for the years ended 31st December 2014, 2015 and 2016.
b) The Lorry provision for depreciation account for the years ended 31st December 2014,
2015 and 2016.
c) The Motor Van Disposal account.
d) Extracts from the profit and loss account for the year ended 31st December 2014,
2015 and 2016.
e) Extracts from the balance sheet for the years ended 31st December 2014, 2015 and
2016.
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Solution:
Lorry Account
Date
2014
April 1
Dec 31
Details
F
Bank
Balance
c/d
Dr
K
50 000
50 000
2015
Jan 1
Feb 1
Dec 31
Balance
Bank
Balance
b/d
c/d
Balance
Lorry disposal
Balance
b/d
Date
2014
Dec 31
Dec 31
2015
Jan 01
Dec 31
Dec 31
2016
Jan 01
Mar 31
Dec 31
Dec 31
2017
Jan 01
Balance
c/d
b/d
Balance
Lorry Disposal
Profit and Loss
Balance
Balance
b/d
c/d
50 000
42 000
92 000
42 000
Lorry Provision for Depreciation Account
Details
F
Dr
K
Profit and Loss Account
Balance
c/d
8 800
8 800
Balance
Profit and Loss
Balance
92 000
92 000
92 000
92 000
2017
Jan 1
50 000
50 000
50 000
42 000
92 000
2016
Jan 1
Sept 30
Dec 31
Cr
K
Cr
K
8 800
8 800
8 800
12 200
21 000
21 000
b/d
21 000
21 000
17 600
3 400
c/d
6 800
24 400
b/d
24 400
6 800
Lorry Disposal Account
Date
2014
Mar 31
Mar 31
Mar 31
Dec 31
Details
F
Lorry
Lorry provision for depreciation
Bank
Profit and loss
Dr
K
50 000
50 000
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K
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30 000
3 000
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Profit and Loss Account (extract) for the year ended 31 December, 2014
K
K
Less: Expenses
Provision for depreciation: Lorry
8 800
58
K
Profit and Loss Account (extract) for the year ended 31 December, 2015
K
K
Less: Expenses
Provision for depreciation: Lorry
12 200
K
Profit and Loss Account (extract) for the year ended 31 December, 2016
K
K
K
Less: Expenses
Loss on disposal of old Lorry
3 000
Provision for depreciation: Lorry
3 400
Balance sheet (extract) as at 31 December 2014
K
K
Fixed Assets
Cost
Dep.
Lorry
50 000
8 800
K
N.B.V
41 200
Balance sheet (extract) as at 31 December 2015
K
K
Cost
Dep.
92 000
21 000
K
N.B.V
71 000
Balance sheet (extract) as at 31 December 2016
K
K
Fixed Assets
Cost
Dep.
Lorry
42 000
6 800
K
N.B.V
35 200
Fixed Assets
Lorry
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Full question on Final Accounts with Adjustments
Bright Tembo has a retail business. The following balances were extracted from his
books at the end of his financial year on 31 March 2016.
K
Leasehold property – 25 years (cost)
50 000
Equipment (cost)
54 000
Provisions for depreciation:
Leasehold property
10 000
Equipment
17 000
6% Bank loan
25 000
Bank Dr
5 150
Trade receivables
6 750
Trade payables
4 010
Provision for doubtful debts
700
Revenue
78 580
Purchases
18 240
Purchase returns
1 600
Stock at 1 April 2015
4 690
Equipment repairs
850
Equipment running expenses
2 650
General expenses
8 400
Wages
15 300
Insurance
3 640
Power and water
2 300
Advertising
5 100
Discount allowed
1 650
Discount received
330
Capital at 1 April 2015
50 000
Drawings
8 500
Additional information at 31 March 2016
1) Stock was valued at K3 870.
2) Bright Tembo took stock valued at K450 for his own use.
3) Equipment running expenses, K750, were accrued and insurance, K1350, was
prepaid.
4) The 6% bank loan was received on 1 December 2015.
5) An appropriate amount is to be written off the lease.
6) The purchase of additional equipment, K10 000, had been omitted from the books.
7) Payment was K5 000 by cheque with the remainder on credit.
8) Equipment is to be depreciated at the rate of 20% per annum using the diminishing
(reducing) balance method.
9) Provision for doubtful debts is to be maintained at 8% of trade receivables.
Required
(a) Prepare the Trading and Profit and Loss Account for the year ended 31 March 2016.
(b) Prepare the balance sheet as at 31 March 2016.
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Solution
Bright Tembo’s
Trading and Profit and Loss Account for the year ended 31 March 2016
K
K
Revenue
Less: Cost of Sales
Opening stock
4 690
Purchases
18 240
Less: Drawings
(450)
Returns
(1 600)
16 190
20 880
Less: Closing stock
(3 870)
Cost of sales
Gross profit
Add: Gains
Discount received
Decrease in Provision for doubtful debts
60
K
78 580
(17 010)
61 570)
330
160
490
62 060
Less: Expenses
Loan interest
Equipment repairs
Equipment running expenses (2650 + 750)
General running expenses
Wages
Insurance (3640 – 1350)
Power and water
Advertising costs
Discount allowed
Depreciation:
Lease
Equipment
500
850
3 400
8 400
15 300
2 290
2 300
5 100
1 650
2 000
9 400
Net Profit
(51190)
10,870
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Bright Tembo’s
Balance sheet as at 31 March 2016
Fixed Assets
Leasehold
Equipment
Current assets
Closing stock
Trade debtors
Less: Provision for doubtful debts
K
Cost
K
Accum. Dep.
K
N.B.V
50 000
64 000
114 000
12 000
26 400
46 000
38 000
37 600
75 600
3870
6 750
540
6 210
1 350
150
11 580
Insurance prepaid
Bank (5150 – 5000)
Less: Current liabilities
Trade creditors (4010 + 5000)
Equipment running expenses
Loan interest outstanding
9 010
750
500
(10 260)
Working Capital
Net assets
Financed by:
Capital
Net profit
Less: Drawings (8500 + 450)
Add: Long Term Liabilities
6% Bank loan
Capital employed
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76 920
50 000
10 870
60870
(8950)
51 920
(25 000)
76 920
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10.LIMITATION OF THE TRIAL BALANCE
When the trial balance agrees, it is prima facie true that the ledger accounts have been done
correctly. This is because a deeper look into the ledger may reveal errors which could not
be noted at first look. These errors affect the calculation of profit and the ascertainment of
the financial position of a business for a particular period. For this reason it is important that
the errors are located and corrected in order to have as accurate the profit figure and the
financial position of a business as possible.
Errors contained in the trial balance are of two classes:
(a) Errors disclosed by the trial balance
(b) Errors not disclosed by the trial balance
Errors not disclosed by the Trial Balance
It is a well appreciated rule that every debit entry in ledger accounts must have a
corresponding credit entry arising from the same transaction; and every credit entry must
have a corresponding debit entry. Therefore, if the entries in the ledger accounts are
correctly done, then when the trial balance is extracted the total of its debit and credit side
must agree i.e. must be equal. However, there are certain kinds of error which would not
affect the agreement of the trial balance totals. The following are the errors not disclosed by
the trial balance:
(a) Errors of omission
This is an error committed by completely leaving out (omitting) a transaction from the
books. For example, if we sold goods to C. Chansa for K1 000 but did not enter it in
either the dales or C. Chansa account, the trial balance would still agree.
(b) Errors of commission
This is where the correct amount is entered but in the wrong person’s account.
For example, a sale of goods for K2 000 to A. Banda is entered in the account of C.
Banda. In this case, the class of account is correct but the name of the account is
wrong.
(c) Errors of principle
This is where an item is entered in the wrong class of accounts, e.g. if the purchase
of a fixed asset such as a motor van is debited to an expenses account such as
motor expenses account. In this case, the purchase of motor van is capital
expenditure but it has been treated as revenue expenditure.
(d) Compensating errors
This is a type of error where errors cancel out each other. If the sales account was
added up to be K100 too much and the purchases account was also added up to be
K100 too much, then these errors would cancel out in the trial balance. This is
because the totals of both the debit side of the trial balance and of the credit side will
be K100 too much.
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(e) Errors of original entry
This is where the original figure is incorrect, yet double entry is still observed using
the incorrect figure, e.g. where sales of K1 500 were made but an error was made in
calculating the sales invoice. If the sales invoice was calculated as K 1 600, and K1
600 was credited to the sales account and debited to the personal account of the
customer, the trail balance would still agree.
(f) Complete reversal of entries
This is where the correct accounts are used but each item is shown on the wrong
side of the account.
For example, if we had paid a cheque to D. Kangwa for K2 000, the double entry is
supposed to be;
Debit D. Kangwa account K2 000 and;
Credit Bank account K2 000.
If, in error it is entered as
Credit D. Kangwa K2 000 and;
Debit Bank Account K2000
The trial balance totals will still agree.
(g) Errors of transposition
This happens where the wrong sequence of the individual characters within a
number was entered, e.g. K597 entered as K579. Although this error occurs more
commonly on one side of the double entry only, it may also occur on both sides.
Correction of errors disclosed by the trial balance
Errors not disclosed by the trial balance can be corrected in two steps:
(1) Show the entries needed for correction in the journal.
(2) Post the journal entries to the ledger accounts.
Errors disclosed by the Trial Balance
Errors disclosed by the trial balance are those that cause the trial balance totals to disagree.
They include the following:
(a) Wrong additions
This is due to adding or subtracting figures wrongly.
(b) Single entries
This is caused by failure to observe the double entry system, i.e. by making an entry
on only one side of the accounts, e.g. a debit but no credit: a credit but no debit.
(c) Entry of different amounts
This is where the amount entered on the debit side differs from the one entered on
the credit side arising from the same transaction, e.g. entering K300 on the debit of
cash account and K330 on the credit of the sales account.
When the trial balance totals disagree, effort must be made to locate the errors that have
caused the disagreement. If all efforts cannot locate the errors, the trial balance totals can
be made to agree with each other by inserting the amount of the difference between the two
sides in a suspense account.
For example
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A trial balance is presented as follows:
Trial balance as at 31 December 2012
Totals after all balances from ledger accounts have been listed
Suspense ( to make trial balance to agree)
A suspense account is therefore opened and will look like this:
Suspense account
Date
Details
F
31 Dec
2012
Trial balance
balance)
(difference
as
per
DR
K
100 000
CR
K
95 000
5 000
DR
K
CR
K
5 000
trial
The above action is taken to temporarily hold the difference between the trial balance totals
until the errors are found and corrected.
Example
Rupiah Banda prepared a trial balance on 31st January 2011, which showed that the total of
the credit balance was K110 more than the total of the debit balances. A Suspense Account
was opened with this figure to make the books balance. Later investigations revealed the
following errors in her books.
(i) A Purchase of K300 was entered wrongly as K200 in the account of the supplier, J.
Zimba.
(ii) The purchase by cheque of a piece of office equipment for use in the office, at the cost
of K600 had been posted to the Purchases Account
(iii) The total of the Sales Returns Book, amounting to K120, had not been posted to the
ledger.
(iv) A debit balance on P. Bwalya’s Account of K540 was brought down as K450 and this
later was included in the Debtors’ total entered in the trial balance.
Required:
a) Make necessary journal entries to correct the errors.
(a) Write up a Suspense Account duly balanced.
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OF THE
TRIALText
BALANCE
Principles of Accounts 711010.LIMITATION
A Supplementary
Study
Journal
Date
2011
31 Jan
31 Jan
31 Jan
31 Jan
Details
Folio
Dr (K)
Suspense
J. Zimba
Being correction error where a purchase figure was
wrongly entered in the account of the supplier.
Office Equipment
Purchases
Being correction of an error of principle.
Sales Returns
Suspense
Being correction of error of single entry.
P. Bwalya
Suspense
Being correction of error of transposition in one
account.
Suspense Account
Date
Details
2011
Difference in books
J. Zimba
Sales Returns
P. Bwalya
Folio
100
100
600
600
120
120
90
90
Dr. (K)
Cr. (K)
110
100
210
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Cr (K)
120
90
210
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11.BANK Study
RECONCILIATION
Principles of Accounts 7110 A Supplementary
Text
66
11.BANK RECONCILIATION
Definition and Explanation
From time to time the balance shown by the bank and cash column of the cash book
required to be checked. The balance shown by the cash column of the cash book must
agree with the amount of cash in hand on that date. Thus reconciliation of the cash column
is a simple matter. If it does not agree it means that either some cash transactions have
been omitted from the cash book or an amount of cash has been stolen or lost. The reason
for the difference is ascertained and cash book can be corrected. So far as the bank balance
is concerned, its reconciliation is not so simple. The balance shown by the bank column of
the cash book should always agree with the balance shown by the bank statement, because
the bank statement is a copy of the customer's account in the banks ledger. But the bank
balance as shown by the cash book and bank balance as shown by the bank statement
seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation
statement to find out the reasons for disagreement between the bank statement balance
and the cash book balance of the bank, and to test whether the apparently conflicting
balance do really agree.
Discrepancies between Bank statement and Cash book
Usually the reasons for the disagreement in the bank statement and Cash book balances
are:
1. That our banker might have allowed interest which have not yet been entered in our
cash book.
2. That our banker might have debited our account for any such item as interest on
overdraft, commission for collecting cheque, incidental charges etc., which we have
not entered in the cash book.
3. That some of the cheques which we drew and for which we credited our bank
account prior to the date of closing, were not presented at the bank and therefore,
not debited in the bank statement.
4. That some cheques or drafts which we have paid into bank for collection and for
which we debited our bank account, were not realised within the due date of closing
and therefore, not credited by the bank.
5. The banker might have credited our account with amount of a bill of exchange or any
other direct payment into bank and the same may not have been entered in the cash
book.
6. That cheques dishonoured might have been debited in the bank statement but have
not been given effect to in our books.
Preparation of Bank Reconciliation Statements
To prepare the bank reconciliation statement, the following rules may be useful:
1) Check the cash book receipts and payments against the bank statement.
2) Tick the items that appear in both the cashbook and the bank statement
3) Items not ticked on either side of the cash book will represent those which have not
yet passed through the bank statement.
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RECONCILIATION
Principles of Accounts 7110 A Supplementary
Text
67
4) Items not ticked on either side of the bank statement will represent those which have
not yet been passed through the cash book. Circle these items.
5) Adjust the cash book by recording therein those items which do not appear in it but
which are found in the bank statement, thus computing the correct balance of the
cash book.
6) Prepare the bank reconciliation statement reconciling the bank statement balance
with the correct cash book balance in either of the following two ways:
- First method (Starting with the cash book balance)
- Second method (Starting with the bank statement balance)
Method 1: Starting with the Cash Book Balance
Deduct from the balance as per cash book, all cheques, drafts etc., paid into the bank
but not collected and credited by the bank and;
add to it all cheques drawn on the bank but not yet presented for payment.
The new balance will agree with the balance as per bank statement.
Revised Cash Book
Date
Details
Jan
‘’
‘’
‘’
‘’
Feb
1
20
26
31
31
1
Balance
Credit transfer: Sam
Direct debit: Zesco
Bank charges
Balance
Balance
F.
Dr (K)
b/d
Bank Reconciliation statement as at 31 January 2017
Balance as per cash book
Add: Unpresented cheques:
Phillip
Less: Uncredited cheques:
David
Balance as per bank statement
(K)
22 000
3 000
c/d
b/d
Cr
25 000
20 000
4 500
500
20 000
25 000
20 000
3 500
23 500
4 000
19 500
Method Two: Starting with the Bank Statement Balance
Add to the bank statement balance all cheques, drafts, etc., paid into bank but not
collected and credited by the bank and;
Subtract all cheques drawn on the bank but not yet presented for payment.
The new balance will then agree with the balance as per revised cash book.
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11.BANK Study
RECONCILIATION
Principles of Accounts 7110 A Supplementary
Text
Revised Cash Book
Date
Details
Jan
‘’
‘’
‘’
‘’
Feb
1
20
26
31
31
1
Balance
Credit transfer: Sam
Direct debit: Zesco
Bank charges
Balance
Balance
Dr (K)
b/d
Cr (K)
22 000
3 000
c/d
b/d
68
25 000
20 000
4 500
500
20 000
25 000
Bank Reconciliation statement as at 31 January 2017
K
19,500
4,000
23 500
3,500
20,000
Balance as per bank statement
Add: Uncredited cheques: David
Less: Unpresented cheque: Phillip
Balance as per revised cashbook
Example 1
On December 31 2017 the balance of the cash at bank as shown by the cash book of a
trader was K1,401 and the balance as shown by the bank statement was K2,253.
On checking the bank statement with the cash book it was found that a cheque for K116
paid in on the 31st December was not credited until the 1st January, 2018 and the following
cheques drawn prior to 31 December were not presented at the bank for payment until the
5th January 2018. Susan K29, Grace K801, Maureen K6, Ruth K132.
Prepare a statement recording the two balances:
Solution:
Bank Reconciliation Statement as at 31 December 2017
First Method:
Balance as per cash book - Dr.
Less cheques paid in but not collected
Add cheques drawn but not presented:
Susan
Grace
Maureen
Ruth
Balance as per bank statement - Cr.
1,401
116
1,285
29
801
6
132
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2,253
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11.BANK Study
RECONCILIATION
Principles of Accounts 7110 A Supplementary
Text
Second Method:
Balance as per bank statement - Cr.
Susan
Grace
Maureen
Ruth
69
2,253
29
801
6
132
Add cheques paid in but not collected
Balance as per cash book - Dr.
968
1,285
116
1,401
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12.CONTROL
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
70
12.CONTROL ACCOUNTS
Control accounts are accounts that are used to check on the arithmetic accuracy of ledgers.
Types of Control Accounts
1) Debtors Ledger Control Account or Sales Ledger Control Account or Total Debtors
Control Account.
2) Creditors Ledger Control Account or Purchases Ledger Control Account or Total
Creditors Control Account.
Reasons for Preparing Control Accounts
(1) To confirm accuracy of postings
If the total of the individual balances in the subsidiary ledger agrees with the balance
on the control account, we can conclude that postings have been made accurately.
(2) To assist in finding errors quickly
If the total of the individual balances in the subsidiary ledger is compared with the
balance on the control account regularly (say weekly), errors can be identified
quickly, and the volume of entries to be checked to find the nature of the errors will
be manageable.
(3) To extract figures more quickly
When preparing draft final accounts, it is necessary to extract the balance on the
control account for inclusion in the accounts, rather than totalling the balances on the
individual accounts.
(4) To provide an internal check
The use of control accounts means that individual staff can be given specific
responsibility for maintaining a part of the book-keeping system. The accuracy of the
postings made by each individual can therefore be checked
The Principle
The principle on which the control accounts are based is as follows:
If the Opening balance of an account is known together with information of the Additions and
Subtractions during the period, the Closing balance can be known.
The balances in the control accounts are transferred to the balance sheet as the final figures
for debtors and creditors as at the end of the financial year.
NOTE THAT Contra’s (Latin = against) occur when a credit customer also sells on credit to a
business. Instead of exchanging cheques the two indebtednesses are set against each other
and one cheque only is sent. If A owes B K600, and B owes A K200, it is convenient for A to
pay B K400.
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Principles of Accounts 7110 A Supplementary
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Text
71
Debtors Ledger Control Account
Sources of information for the Debtors Ledger Control A/C
1
2
3
4
Item
Opening debtors
balances
Credit sales
Returns Inwards
Cheques
received
5
Cash received
6
7
Discount allowed
Closing debtors
balances
Source
List of debtors’ balances drawn up at the end of the previous period.
Total from the Sales Day Book
Total of the Returns Inwards Day Book
Cash Book: Bank column on received side. List extracted or the total
of a special column for cheques which has been included in the Cash
Book.
Cash book: Cash column on received side. List extracted or the total
of a special column for cash which has been included in the Cash
Book.
Total of discounts allowed column in the Cash Book
List of debtors’ balances drawn up at the end of the period.
Debtors Ledger Control Account
Date
2020
Jan 1
Jan 31
Details
Fo.
Balance
Credit Sales
Sales Returns
Cash received from debtors
Cheques received from debtors
Bad debts
Discounts allowed
Interest charged to debtors
Dishonoured cheques
Set offs
Cash refunds to customers
Balance
B/F
Dr
Cr
K
K
XXXXX
XXXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
B/F
XXXXXXX
XXXXXX
XXXX
XXXX
XXXXXXX
XXXXXXX
Creditors Ledger Control Account
Sources of information for the Creditors Ledger Control A/C
2
3
4
Item
Opening creditors
balances
Credit purchases
Returns Outwards
Cheques paid
Source
List of creditors’ balances drawn up at the end of the previous
period.
Total from Purchases Day Book
Total of the Returns Outwards Day Book
Cash Book: Bank column on payments side. List extracted or the
total of a special column for cheques which has been included in the
Cash Book.
5
Cash paid
Cash book: Cash column on payments side. List extracted or the
total of a special column for cash which has been included in the
Cash Book.
1
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Text
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7
Discount received
Closing creditors
balances
72
Total of discounts received column in the Cash Book
List of creditors’ balances drawn up at the end of the period.
Creditors Ledger Control Account
Date
2020
Jan 1
Jan 31
Details
Fo.
Balance
Credit Purchases
Purchases Returns
Cash paid to creditors
Cheques paid to creditors
Discounts received
Interest charged by suppliers
Dishonoured cheques
Set offs
Cash refunded by creditors
Balance
B/F
Dr
K
Cr
K
XXXXX
XXXX
XXXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
B/F
XXXXX
XXXXXX
XXXX
XXXXX
XXXXXXX
Example
On 31 December 2022 Mumbi prepared control accounts to check the accuracy of this sales
and purchases ledgers. He provided the following information.
K
Control account balances, 1 December 2022
Sales ledger control account debit balance
Sales ledger control account credit balance
Purchases ledger control account credit balance
Purchases ledger control account debit balance
6 520
290
8 480
310
Cash book totals
Receipts from trade receivables
Payments to trade payables
Discounts allowed
Discount received
Dishonoured cheques (from trade receivables)
Cash purchases
Cash sales
5 990
8 630
240
450
180
3 920
15 870
Day book totals
Sales book
Purchases book
Returns inwards book
Returns outwards book
7 440
9 300
510
450
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Principles of Accounts 7110 A Supplementary
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Text
General Journal totals
Bad debts written off
Contra entry between sales ledger and purchases ledger
73
270
880
Balances shown in the sales ledger at 31 December 2022
Total of debit balances
Total of credit balances
6 350
390
Balances shown in the purchases ledger at 31 December 2022
Total of debit balances
Total of credit balances
520
7 270
(a) Prepare the sales ledger control account and the purchases ledger control account
for December 2022.
Sales Ledger Control Account
Date
2022
Dec 1
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Details
F
Balance
Credit sales
Dishonoured cheque
Returns inwards
Bank receipts
Discount allowed
Bad debts written off
Contra entry with purchases ledger
Balance
b/d
Jan 01
Balance
b/d
c/d
Dr. (K)
Cr. (K)
6 520
7 440
180
390
14 530
6 350
290
510
5 990
240
270
880
6 350
14 530
390
Purchases Ledger Control Account
Date
2022
Dec 1
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Details
F
Balance
Credit purchases
Returns outwards
Bank payments
Discounts received
Contra entry with sales ledger
Balance
b/d
Jan 01
Balance
b/d
c/d
Dr. (K)
Cr. (K)
310
450
8 630
450
880
7 580
18 300
520
Business Studies Teachers Association of Zambia – Lusaka Province
8 480
9 300
520
18 300
7 580
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13.FINAL
ACCOUNTS7110
OF NON
PROFIT MAKING Study
ORGANISATIONS
Principles
of Accounts
A Supplementary
Text
74
13.FINAL ACCOUNTS OF NON PROFIT MAKING
ORGANISATIONS
Non Profit Making Organisations are Organisations that do not aim at making profit but at
proving a service to there members and the community. They are however required to
prepare final accounts mainly for accountability and efficient utilisation of resources.
Examples of such Organisations include:
 Social Clubs
 Societies
 Associations
 Religious Bodies
 Educational Institutions
 Hospitals
Sources of Income for Non Profit Concerns
Although Non Profit Making Organisations are not involved in trade, they still need funds to
curry out their activities. Sources of income include:
 Membership fees
 Subscriptions
 Grants from government
 Donations
 Fundraising ventures (fundraising ventures include: Dinner dances, Raffle draws,
walks, car wash, Tea parties, etc.
Expenditure streams for Non Profit Concerns
These are similar to those made by profit making organisations. The only difference is that
those made by non profit making organisations are not for profit purposes. They are aiming
at maintaining or improving the organization and the services offered. These may include:
 Salaries and wages
 Stationery
 Advertising,
 Payments for affiliations
 Refreshments
 Transport
 Events expenses etc.
Financial Statements of Non Profit Concerns
The common financial records prepared for non profit making organisations include the
following:
Receipts and Payments Account
The receipt and payment is the summary of the transactions recorded in the cash book, it
starts with balance brought down from the previous trading period and ends with the closing
balance for the current period. It shows the classified actual in flow and out flow of cash in
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A Supplementary
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and from the organization. The Receipts and Payment Account does not show whether the
amounts are current, a prepayment, or accrued. It does not differentiate or classify the
capital and revenue income or the expenditure. The Receipt and Payment Account is similar
to the Cash Book for trading businesses (profit making organisation).
Below is the format for the receipts and payment:
Format 1
Kaleya’s Football Club’s
Receipts and Payment Account for the year ended ………
Date
Details
F
Dr (K)
Cr (K)
20…..
Jan 1
Balance
b/f
XXXX
Donations
XX
Subscriptions
XXX
Membership fees
XX
Ground man’s Wages
XX
Stationery
XX
Rent of Ground
XX
Dec 31
Balance
c/d
XX
XXXX
XXXX
20…….
Jan 1
Balance
b/d
XX
Format 2
Kaleya’s Football Club’s
Receipts and Payment Account for the year ended ………
Date
20….
Jan 1
20…..
Jan 1
Details
Dr(K)
Balance b/f
Donations
Subscriptions
Membership fees
XXXX
XX
XXX
XX
XXXX
XX
Balance b/d
Date
2017
Jan 1
Dec 31
Details
Cr(K)
Ground man’s wages
Stationery
Rent of Ground
Balance c/d
XX
XX
XX
XX
XXXX
Income and Expenditure Account
An Income and Expenditure Account is prepared to show the results of the financial activities
that took place during the year.
The Income and Expenditure Account is similar to the trading and profit and loss account for
trading businesses (profit making organisations). The two are prepared following the same
principle of deducting expenses from the incomes in order to determine whether there was a
profit/loss, or Surplus/Deficit resulting from their operations.
The Income and Expenditure Account is prepared using information contained on the
receipts and payments Account plus the possible adjustments.
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When preparing the Income and Expenditure Account we only use revenue income and
revenue expenditure. Capital income and capital expenditures are reserved for the balance
sheet. Since the income and expenditure account requires income earned not income
received, expenses incurred and not expenses paid, some adjustments have to be made.
When subtracting expenditure from incomes and answer is positive, it is said to be a Surplus
of income over expenditure. A trading business would call it net profit. If the answer is
negative, it is said to be Surplus of expenditure over income. It shows that the organization
received less income compared to its expenditure. A trading business would refer to this as
net profit. For the purpose of differentiation, we shall refer to Surplus of income over
expenditure as “Surplus”, and surplus of expenditure over income as “deficit”.
Differences between receipts and payment account and income and expenditure
account are
Receipt and Payment Account
Income and Expenditure Account
1
It shows the actual cash received 1 It shows the income earned and
and paid out
expenses incurred after adjustments
have been made to receipts and
expenses whether paid or not.
2
It shows all the receipts and 2 It only deals with revenue incomes
payments, without grouping them
and revenue expenditure.
into capital and revenue items.
3
It does not show clearly whether the 3 It shows whether the incomes were
income received was sufficient to
more than the expenses (surplus), or
meet expenses.
the expenses were more than the
incomes (deficit).
Treatment of special items in Non Profit Concerns
Special Funds
This is a donation or funds raised by non-profit making organisations to finance special
expenses or for the purchase of a particular asset.
The money received for purchase of a particular asset is treated as a capital income
(additional capital) and is recorded separately on the balance sheet just below the
accumulated fund.
Life Membership Fees
This is money paid at once by a member in order to use the facilities of the organisations
for the rest of their life. Life Membership fees is not recurring in nature and received once
for a whole life from a member. Thus, as Life Membership Fees are capital receipts,
these are added to the Capital Fund on the Liabilities side of the Balance Sheet.
Subscription Adjustment
Subscription is the most common income received by non-profit making organisations. It
may be paid for the current year, by members, others pay in advance and others are in
arrears. In order to sort out the different categories of subscription, we need to prepare
the subscription account. Out of these categories it is only the current year’s
subscription (income earned) that goes to the income and expenditure account.
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Below is an illustration of the subscription account:
Subscription Account
Date
Details
20…..
Jan 1
Balance (Subs. In advance)
Jan 1
Balance (Subs. Owing)
Refund of overpayment
Receipts
Income & Expenditure
Dec 31
Balance (Subs. In advance)
Dec 31
Balance (Subs. Owing)
20…..
Jan 1
Balance (Subs. In advance)
Jan 1
Balance (Subs. Owing)
F
b/f
b/f
Dr(K)
Cr(K)
XX
XX
XX
XXX
c/d
c/d
XX
XX
XXXX
b/d
b/d
XX
XXXX
XX
XX
The following format can also be used for the computation of subscription for the
current year:
Receipts………………………………………………………………………
Add: Subscriptions in advance at start……………………….
XX
Subscriptions owing at end………………………………
XX
XXX
XX
Less: Subscriptions in advance at end……………………….
XX
Subscriptions owing at start…………………………… XX
Refund of overpayments………………………………….XX
XX
XXX
Subscriptions for the year (To: Income & Expenditure a/c)
Expenses Adjustments
Only expenses incurred in the current year are to be included in the income and
expenditure account, therefore it is necessary for adjustments to be made.
Below is an illustration of the expenses account:
Expenses Account
Date
Details
20…..
Jan 1
Balance (Expenses In advance)
Jan 1
Balance (Expenses Owing)
Bank/cash (amount paid)
Income & Expenditure
Dec 31
Balance (Expenses In advance)
Dec 31
Balance (Expenses Owing)
20…..
Jan 1
Balance (Expenses In advance)
Jan 1
Balance (Expenses Owing)
F
Dr(K)
b/f
b/f
XX
Cr(K)
XX
XX
c/d
c/d
b/d
b/d
Business Studies Teachers Association of Zambia – Lusaka Province
XX
XX
XX
XXXX
XX
XXXX
XX
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The following format can be used to compute the expense for the year:
Bank/cash (Amount paid)…………………………………………………… .
Add: Expenses in advance at start……………………….
XX
Expenses owing at end………………………………..
Less: Expenses in advance at end……………………….
Expenses owing at start………………………………..
78
XXX
XX
XX
XX
XX
XX
XX
XX
Expenses for the year (To: Income & Expenditure a/c)
Depreciation
Non profit making organisations do own assets in form of equipment, motor vehicles,
premises, etc. they do lose value through use, passage of time, etc. depreciation is treated
as one of the expenses and is recorded in the income and expenditure account.
For examination purposes the figure for depreciation may not be provided, hence the need
for computation of the depreciation figure.
Below is an illustration on how to compute the figure for depreciation:
Asset Account
Date
Details
20…..
Jan 1
Balance
Bank/cash (Purchase)
Depreciation (To: Income & expenditure)
Dec 31
Balance
20…..
Jan 1
Balance
F
Dr(K)
b/f
XX
XX
c/d
b/d
XXXX
XX
Cr(K)
XX
XX
XXXX
The following format can be used to compute the figure for depreciation:
Opening balance……………………………………………………………………XXX
Add: Purchase of new asset…………………………………………………….. XX
XX
Less: Closing balance……………………………………………………………….XX
Depreciation figure………………………………………………………………….. XX
Disposal of Assets
Non profit making organisations may decide to dispose (sale) of assets that may no longer
be required. There is a need to ascertain whether there was a profit or loss on the sale of an
asset. Whatever the case be it, be it a profit or loss it will be recorded in the income and
expenditure account. If it is a profit it will be recorded under income and if it is a loss it will
be recorded under expenditure.
The illustration is shown below:
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Asset Disposal Account
Date
Details
20…..
Jan 31 Cost of asset
Jan 31 Bank/cash (Proceeds)
Jan 31 Provision for depreciation (Acc. Dep)
Jan 31 Income and Expenditure
F
Dr(K)
79
Cr(K)
XXX
XXXX
XX
XX
XX
XXXX
The following format can be used to calculate profit earned or loss sustained on the sale of
an asset:
Cost of asset…………………………………………………………………………XXX
Less: Bank/cash (proceeds)…………………………………………….
XX
Accumulated Depreciation………………………………………..
XX
XX
Profit/Loss on sale of an asset………………………………………………….. XX
Trading activies in Non Profit Concerns
Profit made from trading activities and functions must be recorded in the income and
expenditure under income and if there is a loss as an expense.
When the trading account is to be prepared for examination purposes in most cases
purchases figure will have to be calculated and in rare cases sales will also have to be
calculated using control accounts.
Below is the sample of the Purchases Control Account:
Purchases Control Account
Date
Details
20…..
Jan 1
Balance
Bank/cash (Payment to suppliers)
Purchases (To:Trading Account)
Dec 31
Balance
20…..
Jan 1
Balance
F
Dr(K)
b/f
Cr(K)
XX
XX
XX
c/d
XX
XXXX
b/d
XXXX
XX
The following format may also be used to calculate the purchases figure:
Bank/cash (payment to suppliers)……………………………………………. XXX
Add: Balance at end (creditors figure) ………………………………………
XX
XX
Less: Balance at start (creditors figure) …………………………………….
XX
Purchases figure (To: Trading Account) ……………………………………
XX
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Below is an illustration for the Sales Control Account:
Sales Control Account
Date
Details
20…..
Jan 1
Balance
Bank/cash (Receipts from customers)
Sales (To: Trading Account)
Dec 31
Balance
20…..
Jan 1
Balance
F
Dr(K)
b/f
Cr(K)
XX
XX
XX
c/d
b/d
XXXX
XX
XX
XXXX
The following format may also be used to calculate the sales figure:
Bank/cash (receipts from customers)………………………………………. XXX
Add: Balance at end (debtors figure)……………………………………….. XX
XX
Less: Balance at start (debtors figure)……………………………………... XX
Sales figure (To: Trading Account)…………………………………………… XX
The Accumulated Fund
In non profit making organisations instead of capital, the money contributed by members and
well wishers is known as accumulated fund. In the beginning the amount is normally small
and grows as more contributions are made from subscriptions. Treatment of accumulated
fund is same as capital for trading businesses. They are both recorded in the same position
as capital. Accumulated fund is calculated using the opening balances of assets and
liabilities at the beginning of the year. The following formula is used to calculate
accumulated fund:
Accumulated Fund = Assets(at start) – Liabilities (at start)
Capital and Revenue Expenditure and Receipts
Be aware that ‘capital expenditure’ has nothing to do with the owner’s Capital Account. The
two terms happen to start with the same first word and they are both things that are likely to
be around the business for quite a long time. While both are, in a sense, long-term
investments, one made by the business, and the other made by the owner, they are, by
definition, two very different things.
Capital expenditure
Is incurred when a business spends money either to
 buy fixed assets,
 add to the value of an existing fixed asset.
Included in such amounts should be spending on
 acquiring fixed assets
 bringing them into the business
 legal costs of buying buildings
 carriage inwards on machinery bought
 Any other cost needed to get a fixed asset ready for use.
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Revenue expenditure
Expenditure which is not spent on increasing the value of fixed assets, but on running the
business on a day-to-day basis, is known as revenue expenditure.
The difference between revenue expenditure and capital expenditure can be seen clearly
with the:  Total cost of using a van for a business.
Buying a van is capital expenditure. The van will be in use for several years and is,
therefore, a fixed asset.
 Paying for petrol to use in the van is revenue expenditure. This is because the
expenditure is used up in a short time and does not add to the value of fixed assets.
Revenue receipts are sales and other revenue items that are added to gross profit, such as
rent receivable and commissions receivable.
The rules are:
1. If expenditure is directly incurred in bringing a fixed asset into use for the first time, it
is capital expenditure.
2. If expenditure improves a fixed asset (by making it superior to what it was when it
was first owned by the organization, e.g. building an extension to a warehouse), it is
capital expenditure.
3. All other expenditures are revenue expenditure.
Capital and Revenue Receipts:
When the business receives money it is again of two sorts. It may be a long-term receipt, a
contribution by the owner, either to start the business off or to increase the funds available to
it. It might be a mortgage or a loan which brings money into the business for a long-term, but
in this case it is not the owner of the business but some other investor who is supplying the
money.
On the other hand, the receipt may be a short-term receipt, one which is truly a profit of the
business. It may be rent received, commission received or cash for sale of goods made that
day, or at some previous time.
Capital Receipt:
Receipts which are non-recurring (not received again and again) by nature and whose
benefit is enjoyed over a long period are called "Capital Receipts", e.g. money brought into
the business by the owner (capital invested), loan from bank, sale proceeds of fixed assets
etc. Capital receipt is shown on the liabilities side of the Balance Sheet.
Revenue Receipt:
Receipts which are recurring (received again and again) by nature and which are available
for meeting all day to day expenses (revenue expenditure) of a business concern are known
as "Revenue receipts", e.g. sale proceeds of goods, interest received, commission received,
rent received, dividend received etc.
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Distinction between Capital Receipt and Revenue Receipt:
Revenue Receipt
Capital Receipt
1.
It has short-term effect. The benefit 1.
is enjoyed within one accounting
period.
It has long-term effect. The benefit is
enjoyed for many years in future.
2.
It occurs repeatedly. It is recurring 2.
and regular.
It does not occur again and again. It is
nonrecurring and irregular.
3.
It is shown in profit and loss account 3.
on the credit side.
It is shown in the Balance Sheet on
the liability side.
4.
It does not produce capital receipt.
4.
Capital receipt, when invested,
produces revenue receipt e.g. when
capital is invested by the owner,
business gets revenue receipt (i.e.
sale proceeds of goods etc.).
5.
This does not increase or decrease 5.
the value of asset or liability.
The capital receipt decreases the
value of asset or increases the value
of liability e.g. sale of a fixed asset,
loan from bank etc.
6.
Sometimes, expenses of capital 6.
nature are to be incurred for revenue
receipt, e.g. purchase of shares of a
company is capital expenditure but
dividend received on shares is a
revenue receipt.
Sometimes expenses of revenue
nature are to be incurred for such
receipt e.g. on obtaining loan (a
capital receipt) interest is paid until its
repayment
Worked example 1.
The Treasurer of the Chisamba Farmers Football Club had the following details from the
summary Cash Book at 30 November 2007.
K
Bank balance at 1 December 2006
Cash balance at 1 December 2006
630, 000
100, 000
Cash receipts during the year 2007:
Supporters subscriptions:
for 2006
for 2007
for 2008
140, 000
1, 360, 000
200, 000
Games gate takings
Annual social party collections
1, 700, 000
1, 340, 000
The following expenses were made during the year 2007
Rent
Printing and stationery
Affiliation fees
2, 340, 000
180, 000
120, 000
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Secretarial expenses
Visitors refreshments during games
Annual social party expenses
Equipment purchased
The treasurer also had the following details:
Amounts due to the club
83
370, 000
610, 000
1, 020, 000
260, 000
Supporters’ subscriptions
Games gate takings
Annual social party collections
1 Dec
2006
140, 000
780, 000
160, 000
30 Nov
2007
120, 000
530, 000
-
Amounts owed by the club
Rent
Printing
Secretarial expenses
Visitors refreshments expenses
720, 000
40, 000
130, 000
540, 000
30, 000
80, 000
120, 000
On 1 December 2006 the club’s equipment had book value of K1, 500, 000. It was decided
that 10% of total book value of the equipment be written off at 30 November 2007.
You are required to:
(a)
(b)
Show the summary receipts and payments account for the year and calculate the
cash balance at bank.
Prepare the income and expenditure account for the year ended 30 November
2007 and the balance sheet as at that date.
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Chisamba Farmers Football Club’s
Receipts and payments Account
For the year ended 30 November 2007
K
Receipts
Opening Bank balance
Opening Cash balance
Supporters subscription – 2006
Supporters subscription – 2007
Supporters subscription – 2008
Games gate takings
Annual social party collections
K
630 000
100 000
140 000
1 360 000
200 000
1 700 000
1 340 000
5 470 000
Less: Payments
Rent
Printing and stationery
Affiliation fees
Secretarial expenses
Visitors refreshments during the year
Annual social party expenses
Equipment purchased
2 340 000
180 000
120 000
370 000
610 000
1 020 000
260 000
(4 900 000)
Closing cash/bank balance
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Chisamba Famers football Club’s
Income and Expenditure Account
for the year ended 30 November 2007
K
Income
Supporters subscription
Games gate takings
Less: 2006 Games gate takings
1 700 000
780 000
Add: Games Gate takings accrued
920 000
530 000
K
K
1 480 000
1 450 000
Annual social party collections
Less: 2006 Annual social party collections owing
1 340 000
160 000
1 180 000
Total Income
Less: Expenditure
Rent
Less: 2006 rent owing
Add: 2007 Rent owing
Printing and stationery
Add: 2007 Printing owing
4 110 000
2 340 000
720 000
1 620 000
540 000
2 160 000
180 000
30 000
210 000
Affiliation fees
Secretarial expenses
Less: 2006 secretarial expenses owing
Add: 2007 Secretarial expenses owing
Visitors refreshments during the year
Less: 2006 visitors refreshments owing
Add: 2007 visitors refreshments owing
370 000
40 000
120 000
330 000
80 000
410 000
610 000
130 000
480 000
120 000
Annual social party expenses
Equipment written off(Depreciation)
Total expenditure
Deficit
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1 020 000
176 000
4 696 000
586 000
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Chisamba Farmers’ Football Club’s
Balance Sheet as at 30 November 2007
K
Cost
Fixed assets
Equipment
K
Acc. Dep.
1 760 000
Current Liabilities
Closing Cash /bank balance
2007 Supporters subscription owing
2007 Games Gate takings owing
Less: Current Liabilities
Rent owing
Printing owing
Visitors Refreshments owing
Secretarial expenses owing
2008 Subscriptions prepaid
176 000
K
N.B.V
1 584 00
570 000
120 000
530 000
1 220 000
540 000
30 000
120 000
80 000
200 000
Working Capital
970 000
250 000
1 834 000
Net Assets
FINANCED BY:
Accumulated fund at start
Less: Deficit
2 420 000
(586 000)
Accumulated fund at close
1 834 000
Subscription Account
Date
1 Dec 06
F
b/d
30 Nov 07
30 Nov 07
Details
Balance (subscription owing)
Bank ( 2006)
Bank (2007)
Bank (2008)
Income and Expenditure
Balance(subscription prepaid/owing)
01 Dec 07
Balance(Subscription Owing/Prepaid)
b/d
Dr (K)
140 000
Cr (K)
140 000
1 360 000
200 000
c/d
1 480 000
200 000
1 820 000
120 000
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1 820 000
200 000
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Worked example 2
The receipts and payment account of the Lusaka Badminton club for the year ended
31st December 1999 was as follows:
RECEIPTS
Balance 1st January 1999
Subscriptions
Donations
Gifts (for purchase of equipment)
Sales of refreshments
PAYMENT
K
580, 000
2, 470, 000
130, 000
400, 000
1, 240, 000
Rent and Rates
Postage and Stationery
Cost of refreshments
New equipment
Sundry expenses
Wages (for refreshments
Preparation)
Balance c/f
4, 820, 000
K
1, 640, 000
470, 000
860, 000
700, 000
510, 000
200, 000
?
4, 820, 000
The following additional information is available.
1st January 1999
K
Stock of refreshments
70, 000
Owing to suppliers for refreshments
50, 000
Subscriptions in arrears
Subscriptions in advance
80, 000
Equipment at valuation
680, 000
31st December1999
K
60, 000
50, 000
1, 180, 000
Required:
(a)
The Refreshment Trading Account for the year ended 31st December 1999.
(b)
The Income and Expenditure Account for the year ended 31st December 1999.
(c)
The balance sheet as at 31st December 1999.
Lusaka Badminton Club’s
Refreshment trading account
for the year ended 31 December 1999
K
Sales of refreshments
Less: Cost of Sales
Opening stock of refreshments
Cost of refreshments purchased
(K860 000 –K 50 000)
K
1 240 000
70 000
810 000
Less: closing stock of refreshments
880 000
60 000
Wages for refreshments
820 000
200 000
Cost of sales of Refreshments
Profit on refreshments
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Lusaka Badminton’s
Income and Expenditure account
for the year ended 31 December 1999
K
K
Income
Profit on refreshments
Subscriptions
Donations
K
220 000
2 600 000
130 000
2 950 000
Less: Expenditure
Rent and rates
Postage and stationery
Sundry expenses
Depreciation of equipment
1 640 000
470 000
510 000
200 000
2 820 000
130 000
Surplus
Lusaka Badminton’s
Balance Sheet as at 31 December 199930 November 2007
Fixed assets
K
Cost
K
Accu. Dep.
K
N.B.V
1 380 000
200 000
1 180 00
Equipment (680 000 + 700 000)
Current Assets
Closing Cash balance
Subscription owing
Stock of refreshments
440 000
50 000
60 000
550 000
Less: current Liabilities
Working capital
Net Assets
-
FINANCED BY:
Accumulated fund at start
Add: Surplus
Add: Gift for purchase of equipment
550 000
1 730 000
1 200 000
130 000
1 340 000
400 000
Accumulated Fund At Close
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Workings
1.
Subscription Account
Date
1 Jan 99
F
b/d
31 Dec 99
31 Dec 99
Details
Balance (subscription prepaid)
Bank
Income and Expenditure
Balance(subscription in arrears)
01 Jan 2000
Balance
b/d
Dr (K)
Cr (K)
80 000
2 470 000
2 600 000
c/d
50 000
2 600 000 2 600 000
50 000
2.
Gifts for purchase of equipment
Purchase of equipment is capital expenditure; hence, gifts received for this purpose are a
capital receipt and should be added to the accumulated fund.
3.
Accumulated fund
= total assets at start – total liabilities at start
= opening bank balance + opening stock of refreshments
+ Equipment – (owing to suppliers for refreshments
+ subscription in advance)
= (580 000 + 70 000 + 680 000) – (50 000 + 80 000)
= K1 200 000
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14.INCOMPLETE RECORDS/SINGLE ENTRY
Meaning of Incomplete records
is a situation where we do not have full set of double entry accounts maintained but we are
able to prepare the final accounts
Single entry refers to any type of book keeping which is not double entry. This is common
with small traders (e.g, small shopkeepers, market stalls, internet café) who deal with only
cash, they do not offer credit, and they don’t receive credit
Single entry is a system of accounting in which only one aspect of a transaction is recorded.
Some of the information is missing.
Difference Between Single Entry and Double Entry
Double Entry System
Both the aspects of a transaction are
recorded in it. So complete analysis
of a transaction is possible.
All the difference classes of accounts
- assets a/c, liability a/c, capital a/c,
expense a/c and revenue a/c - are
maintained.
It is possible to verify the arithmetical
accuracy of books through trial
balance.
In this system profit and loss account
can be prepared and the result of the
business can be determined thereby
The financial position of the business
can be compared through balance
sheet.
Single Entry System
1. For some transactions both the aspects are
recorded, while for some other transactions only
one aspect is considered. Again, some
transactions are not recorded at all. Thus,
complete analysis of a transaction is not always
possible.
2. Only cash accounts and personal accounts are
maintained.
3. As under this system both the aspects of all
transactions are not recorded, it is not possible
to prepare trial balance and thereby verify
arithmetical accuracy of books of account.
4. Under this system no account is maintained in
respect of income or expenditure. So it is not
possible to prepare profit and loss account.
However, profit and loss is determined through a
statement by comparing closing capital with the
opening capital, but is not so reliable.
5. No account is maintained in respect of assets
and liabilities. So, balance sheet cannot be
prepared. However, a statement of affairs is
prepared on the lines of balance sheet. But it is
not regarded as a reliable document, since the
values of assets and liabilities are not obtained
from the regular books of accounts.
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Important Formulae
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Net profit = Capital at end – Capital at start.
Net profit = Capital at end + Drawings – Capital at start – Additional Capital.
Capital = Assets – Liabilities.
Turnover = Gross Sales – Sales Returns.
Cost of Sales = Opening Stock + Net Purchases – Closing Stock.
Gross Profit = Net Sales – Cost of Sales
Net Sales = Gross Profit + Cost of Sales.
Net Profit = Gross Profit – Expenses.
Net Assets = Fixed Asset + Net Current Assets
Capital Employed = Owner’s Capital + Borrowed Capital/Long Term Liabilities.
Mark Up = Selling Price – Cost Price.
Gross Profit Margin = Gross Profit X 100%
Sales
Net Profit Margin = Net Profit X 100%
Sales
Rate of stock Turnover = Cost of Sales
Average Stock
Average Stock = Opening Stock + Closing Stock
2
Net Current Assets/Working Capital = Current Assets – Current Liabilities.
Owner’s Equity = Opening Capital + Net Profit – Drawings.
Calculation of Profit
Net Profit as Increase in Net Worth
Net worth is the value of a business at a particular moment in time and is based on the
value of assets that belong to the business. Assets which don’t belong to the business are
those that are not yet paid for. Net worth is equivalent to capital and is derived by
deducting liabilities from assets. By increased net worth we mean that the difference
between the capital at the start of the period and capital at the end of the period should be
net profit.
Example
Mutaba did not keep proper books of account for his business, but was able to supply the
following information:
30 Sept 2016
30 Sept 2017
Stock
Debtors
Bank
Bank overdraft
Creditors
Premises
Equipment
Motor vehicles
K
47,000
19,000
8,500
25,500
200,000
43,000
K
64,000
20,000
24,500
17,500
210,000
39,000
52,000
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He took cash drawings of K3,500 per month for his private uses.
Mutaba also paid his private motoring expenses of K7,000 from the business bank account.
In August 2017, he sold some of his private Airtel shares for K30,000 and put this sum in the
business bank account.
- Prepare a statement showing profit or loss for the year ended 30 September 2017.
- Prepare a Balance Sheet as at 30 September 2017.
Solution
Assets = Capital + Liabilities
Net profit = Capital at end + Drawings – Capital at start – Additional Capital
Mutaba’s
Statement of Profit/Loss
For The Year Ended 30 September 2017
K
Fixed Assets
Premises
Equipment
Motor vehicles
Total Fixed Assets
Current assets
Stock
Debtors
Total Current Assets
Total Assets as at 30 September 2017
Creditors
Bank overdraft
Total Current Liabilities
Capital as at 30 September 2017
Add: Drawings
K
K
210,000
39,000
52,000
301,000
64,000
20,000
84,000
385,000
17,500
24,500
42,000
343,000
49,000
392,000
Less: Capital at 30 September 2016:
Fixed Assets
Premises
Equipment
Total Fixed Assets
Current assets
Stock
Debtors
Bank
Total Current Assets
Total Assets as at 30 September 2017
Less: Current Liabilities
Creditors
Capital as at 30 September 2017
200,000
43,000
243,000
47,000
19,000
8,500
74,500
317,500
25,500
Less: Additional Capital
Net Profit
292,000
100,000
30,000
70,000
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Net Profit as an increase in capital
This year’s capital
K3,000
Therefore, the profit will be
last year’s capital
K2,000
K1,000
If drawings had been for instance K700
The profit must have been K1,700
Last year capital + profits – drawings = this years capital
K2,000 + X – 700 = K3,000
K2,000 = X – 700 = K3,700
2,000 + X = 3,700
X = 3,700 – 2,000
X = 1,700
==========
The statement of affairs is a balance sheet at the beginning of a Trading period. Prepared
using the word equation;
Opening Capital + Profit – Drawings = Closing Capital
Question
The position of Mr Hakasenke as at 31st December 2016 was as follows
Premises
5 000
Plant and Machinery
3 000
Stock
6 500
Debtors
8 750
Cash at bank
1 500
Creditors
9 375
On 1st January 2016, his capital was K27 000 and during the year his drawings
amounted to 2 500. He paid into his business K1 000 which was the sale proceeds of
his private car.
Prepare the statement of affairs and ascertain his profit or loss for the year.
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Solution
Mr Hakasenke
Statement of affairs as at 31st December, 2016 (Balance Sheet)
FIXED ASSETS
COST
DEP
NBV
Premises
5 000
5 000
Plant and machinery
3 000
3 000
8 000
8 000
CURRENT ASSETS
Stock
Debtors
Cash at bank
6 500
8 750
1 500
16 750
CURRENT LIABILITIES
Creditors
9 375
7 375
15 375
Working Capital
FINANCED BY
Opening capital
Add additional capital
Less Net Loss
Less Drawings
27 500
1 000
28 500
10 625
17 875
2 500
15 375
Calculation of Missing Figures
In finding the missing information, the following techniques can be used:
 The accounting equation (statement of affairs or balance sheet)
 Debtors and creditors control accounts
 The cash book
 The gross profit percentages.
Single entry records of accounts are records that have not observed the double entry
system of book-keeping. Recorded only one side of account without observing the rule of
double entry e.g. sales of goods to Kalu recorded in Kalu’s account.
Double entry is where records of accounts observes the rule of “debit the receiver and
credit the giver”. These are records that go through the prime entry books, the ledger
and then extraction of Trial balance.
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Calculation of Purchases Figure
Closing Balance ………………………… XXX
Add:
Payment to Suppliers ………………… XXX
Purchases Returns …………………… XX
Discount received ……………………… XX
XXX
Less:
Opening Balance……………………… XXX
Purchases ……………………………
XXX
Creditors Ledger Control Account
Date
Details
01/01/….
Balance
Purchases (balancing figure)
Discount Received
Cash/cheques paid(Payments)
Returns Outwards
Contra – Sales
31/12/….
Balance
01/01/…..
Balance
F
b/f
Dr(K)
c/d
b/d
Cr(K)
XX
XX
XX
XX
XX
XX
XX
XXX
XXX
XX
Calculation of Sales Figure
Closing Balance ………………………………………XXX
Add:
Receipts from Customers ………… XXX
Sales Returns ………………………
XX
Bad debts ……………………………
XX
Discount allowed …………………… XX
XXX
XXX
Less:
Opening Balance………………………..XXX
Dishonoured Cheques………………. XX
XXX
Sales ……………………………………………
XXX
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14.INCOMPLETE
RECORDS/SINGLE
Principles of Accounts 7110
A Supplementary
Study TextENTRY
Debtors Ledger Control Account
Date
Details
01/01/…… Balance
Sales
Cash/cheque received(Receipts)
Dishonoured cheques
Interest on overdue Accounts
Discount Allowed
Returns Inwards
Bad Debts
Cash refunds
Contra – Purchases
31/12/……. Balance
01/01/……
F
b/f
Dr(K)
Cr(K)
XX
XX
XX
XX
XX
XX
XX
XX
XX
c/d
b/d
Balance
96
XXX
XX
XX
XX
XXX
Margin and Mark Up
Some incomplete records questions involve the relationship between sales, cost of sales
and gross profit. Using this relationship and provided the gross profit percentage is given any
of the three items can be computed.
Gross Profit Percentages
Gross profit can be written or expressed either as percentage of sales or as a percentage of
cost of sales. When gross profit is expressed as a percentage of sales, it is known as the
Margin. Whereas when gross profit is expressed as a percentage of cost of sales, it is
known as the Mark Up.
Margin is gross profit percentage on sales
Mark up is gross profit percentage on cost price i.e. cost of sales
Relationship between margin and mark up
Both mark up and margin are profit percentages of difference amount. Therefore, if one is
known then the other can be calculated or found. e.g.
Mark up
then
margin
Where
+1=
or
=
Convention to margin from mark up and the vice versa
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14.INCOMPLETE
RECORDS/SINGLE
Principles of Accounts 7110
A Supplementary
Study TextENTRY
97
Question
J. Kawaya lost the whole of his stock in fire on 17th March 2017.
The last time that a stock taking had been done was on 31st December 2016. The last
balance sheet date, when stock was valued at cost @1950, purchases from then until 17th
March 2017 was 6,870 and sales in that period were K9,600. All sales were made at a
uniform gross profit margin of 20 per cent.
The Trading account can be drawn from the known
K
Sales
Less: Cost of Sales
Opening stock
Purchases
Less: Closing stock
Cost of sales
Gross profit
Workings
(a) Gross profit =
K
K
9,600
C (
1,950
6,870
8,820
)
B(
)
A________?
x 9,600
= 1,920
(b) 9,600 – 1,920 = 3,680
(c) Closing stock = 8,820 – 7680 =
Cost of goods avails able – cost of
sales
1,140
Example
Moonga a sole Trader has provided you with the following information relating to the year
ended 31-12-2014.
(a) He has not made a note of cash drawings or cash receipt/received. The following
items were paid from taking profit prior to banking.
Purchases
760
Sundry expenses
400
(a) Moonga has estimated that his gross profit percentage is 25% on cost. Calculate
Moonga’s profit for fee year.
Calculate Moonga’s net profit for the year.
Business Studies Teachers Association of Zambia – Lusaka Province
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14.INCOMPLETE
RECORDS/SINGLE
Principles of Accounts 7110
A Supplementary
Study TextENTRY
98
Moonga’s Income statement for the year ended
K
Sales
Less: Cost of sales
Purchases
Gross profit
Less: Expenses
Sundry expenses
Net loss
Business Studies Teachers Association of Zambia – Lusaka Province
K
K
950
760
190
400
(210)
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
99
15.PARTNERSHIP ACCOUNTS
A Partnership is defined by the Partnership Act of 1890 as a relationship which subsists
between persons carrying on a business in common with a view of profit.
Each person contributes money, property, labor or skill, and expertise to share in the profits
and losses of the business. The people who own the partnership business are known as
Partners.
Formation of Partnerships
Partnership Deed
Before starting a partnership business, the partners need to come to a common
understanding and prepare a written agreement called a Partnership Deed or Agreement.
Matters that partners have to agree upon include:
1. Capital contributions –the amount of capital to be contributed by each partner,
which will include both money and equipment and other capital goods.
2. Interest on capital- the rate of interest, if any, to be paid on capital before the
profits are shared.
3. Responsibilities of each Partner. The role and responsibilities of each partner.
The Partner/s involved in active running of the affairs of the business are known as
Ordinary/Active or General Partners and are entitled to a Salary.
4. Profit/loss sharing ratios- Partners have to agree how they are going to share
profits and losses made by the business.
5. Drawings-They have to agree on the amount of drawings allowed to each partner.
6. Interest on drawings- the rate of interest if any to be charged on the partner’s
drawings.
7. The salary-the amount to be paid as salary to the partner/s involved in running of
the business.
8. Admission of new partners and dissolution of the Partnership-Procedure for
admitting new partners and for dissolving the partnership, including the retirement,
death or long-term illness of a partner.
9. Management of the finances-bank account, signing of cheques and orders
10. Hours of work and holidays allocated.
11. Dispute resolution- how disagreements or disputes will be resolved e.g. through
Arbitration.
Partnership Act, 1890
Should the partners fail to come up with a Partnership Agreement/ Deed the Partnership Act
1890 states that the following will apply on a piecemeal basis:
1. Equal Capital Contributions
2. No interest shall be paid on capital
3. Partners will receive interest at 5% on excess capital (i.e. over and above that which
they have agreed to contribute)
4. No interest on drawings
5. No partner will be entitled to a salary
6. Profits / losses are to be shared equally among partners
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
100
Accounts in Partnerships
Profit and Loss Appropriation Account
The books of a Partnership business are kept in the same manner as those of a Sole trader.
From the double entry system, the balancing of ledgers accounts and extraction of the trial
balance to the Profit and loss account where the Net Profit is calculated, there is no
difference between the Sole trader and the Partnership accounts.
Once the Net Profit/loss has been calculated in the Profit and loss account, a special
account which shows how the Profits/losses are distributed among the partners is prepared.
This account is known as the Profit and Loss Appropriation Account.
Preparation of the Profit and Loss Appropriation Account
a) Bring down the net profit from the profit and loss account (on the credit side of the
Appropriation account)
b) In the credit column, record interest on drawings for each partner, marking it
accordingly.
c) In the debit column enter interest on capitals for each partner marking each entry
accordingly.
d) In the debit column record the value of individual partners’ salaries marking each one
accordingly.
e) Again in the debit column record the individual profit shares of each partner, marking
each one accordingly. Show the proportion e.g. ⅟₂ or 50%.
f) Total up and balance this account- the two sides will equal hence no balance C/D.
Annie and Dorcas Partnership Business
Profit and Loss Appropriation Account
DATE
DETAILS
F
DR
CR
K
Net profit Balance
Interest on drawings
Interest on capital: Partner A
Partner D
Salary:
Partner A
Share of profit:
Partner A
Partner D
b/f
XXX
XXX
XXX
XXX
XXX
XXX
K
XXX
XXX
XXX
Capital and Current Accounts
There are two ways of maintaining the partners’ Capital accounts
(i) Fluctuating Capital accounts
(ii) Fixed Capital accounts
Fluctuating Capital Accounts
Under this approach to maintaining the Capital account, all transactions that are likely to
increase or decrease the Partners’ Capital figures are entered directly into the partners’
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Principles of Accounts 7110 A Supplementary
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Capital accounts such that the balance in the capital accounts keeps changing or fluctuating
year after year.
The share of residual profit for the partner every year would be credited to his/her capital
account while the drawings and interest on drawings would be debited.
Fixed Capital Accounts plus Current Accounts
Under this approach, the Capital for each partner remains the same as at the formation of
the partnership. All items that have an effect of either increasing or decreasing the capital
figure are instead recorded in a separate Current Account for the partner. This means that
the Profits, interest on capital, and the Salaries would be credited in the Partners, Current
account while the drawings and the interest on drawings are debited in the same account.
NB: The Fixed Capital accounts are usually more preferred and examination questions
usually require candidates to prepare Capital accounts and Current accounts for the
partners.
Loans from Partners
When a partner makes a cash loan separate from the capital, it is credited to the partner’s
Capital Account. A separate Loan Account is created and credited with the loan amount. The
amount received by the firm is debited to the Cash account.
Interest is payable to the partner who makes the loan. The interest amount is
- Credited to the partner’s Current Account.
- Loan Interest Account is debited as it is an expense for the firm.
Partners’ Salaries
Salaries paid to the partners is Credited to their respective Current Account
If Salary is paid in Cash, then Cash Book is credited instead of Partner’s Current Account,
Debited to Partnership Salaries Account which is later on transferred to the Profit and Loss
Appropriation Account.
Worked example 1
Kabwe and Kamba are in partnership, sharing profits and losses in the ratio 4:3 respectively. Below
is the trial balance of Kabwe and Kamba partnership as at 31 March 2021:
K
K
Opening inventory
43,000
Buildings at cost
384,000
Machinery at cost
192,000
Accumulated depreciation:
Buildings
168,000
Machinery
76,800
Purchases
503,000
Sales
995,000
Returns inwards
5,248
Carriage inwards
7,840
Returns outwards
20,500
Rent
76,000
Bank
137,500
Bank charges
12,005
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
Selling expenses
General expenses
Trade receivables and trade payables
Wages and salaries
Current accounts at 1 April 2020:
Kabwe
Kamba
Drawings:
Kabwe
Kamba
Capital accounts: 1 April 2020:
Kabwe
Kamba
Allowance for receivables
10% loan note
5,461
9,449
211,600
321,000
102
325,505
31,913
31,070
64,000
175,070
________
2,178,243
85,000
67,050
8,475
400,000
2,178,243
The following additional information is available as at 31 March 2021:
(i)
Inventory was valued at K41.2 million.
(ii)
Interest on drawings for the year was:
Kabwe K2.145 million
Kamba K1.424 million
(iii)
The 10% loan was given to the partnership by Kamba on 1 April 2020. The accrued interest
on the loan has not yet been accounted for.
(iv)
Kamba is entitled to a salary of K14.5 million per annum commencing 1 January 2021.
(v)
Rent amounting to K5 million was paid in advance.
(vi)
Irrecoverable debts of K2.2 million are to be written off and an allowance for receivables is to
be adjusted to 4% of receivables remaining balance.
(vii)
Depreciation is to be provided for as follows:
Buildings 25% reducing balance method
Machinery 10% straight line method
(viii) Partners receive 5% interest per annum on their capital contribution.
Required:
Prepare the following statements for Kabwe and Kamba partnership:
a) The statement of profit or loss and appropriation account for the year ended 31 March 2021.
b) The partners’ current accounts.
Note: the statement of financial position as at 31 March 2021 is not required.
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
103
Solution
Kabwe and Kamba’s
Partnership Statement of Profit or Loss and Appropriation Account
for the year ended 31 March 2021.
K
K
Revenue
Less Returns in
Net sales
Less cost of sales:
Opening inventory
Purchases
503,000
Carriage inwards
7,840
510,840
Returns outwards
(20,500)
Net purchases
Less closing inventory
K
995,000
(5,248)
989,752
43,000
490,340
533,340
(41,200)
Gross profit
Less expenses:
Rent (28,000-5,000)
Bank charges
Selling expenses
General expenses
Wages and salaries
Loan interest
Receivables expense(2,200-99)
Depreciation expense:
Buildings (25% x (384-168)
Plant (10% x 192,000)
(492,140)
497,612
23,000
12,005
5,461
9,449
321,000
40,000
2,101
54,000
19,200
(486,216)
11,396
Net profit before appropriation
Less appropriation:
Add interest on drawings:
Kabwe
Kamba
Total for distribution to partners
Less: interest on capital:
Kabwe (5% x 85,000)
Kamba (5% x 67,050)
Salary – Kamba (14,500 x 3/12)
Residual profit
Share of residual profit
Kabwe (4/7 x 3,737)
Kamba (3/7 x 3,737)
Business Studies Teachers Association of Zambia – Lusaka Province
2,145
1,424
14,965
4,250
3,353
3,625
(11,228)
3,737
(2,135)
(1,602)
0
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
Partners Current Accounts
Details
F
Dr
Balance
Interest on drawings
Drawings
Interest on capital
Salary
Share of residue profit
Loan interest
Balance
Balance
b/f
Kabwe
Cr
31,913
2,145
64,000
Kamba
Dr
Cr
31,070
1,424
175,070
4 250
c/f
b/f
66,145
27,847
2,135
27,847
66,145
104
207,564
158,984
3,353
3,625
1,602
40,000
158,984
207,564
Question:
Reid and Benson are in partnership as lecturers and tutors. Interest is to be allowed on capital and
on the opening balances on the current accounts at a rate of 5% per annum and Reid is to be given
a salary of K18,000 per annum. Interest is to be charged on drawings at 5% per annum (see notes
below) and the profits and losses are to be shared Reid 60% and Benson 40%.
The following trial balance was extracted from the books of the partnership at 31 December 2022.
K
K
Capital account – Benson
50,000
Capital account – Reid
75,000
Current account – Benson
4,000
Current account – Reid
5,000
Drawings – Reid
17,000
Drawings – Benson
20,000
Sales – goods and services
541,750
Purchases of textbooks for distribution
291,830
Returns inwards and outwards
800
330
Carriage inwards
3,150
Staff salaries
141,150
Rent
2,500
Insurance – general
1,000
Insurance – public indemnity
1,500
Compensation paid due to Benson error
10,000
General expenses
9,500
Bad debts written off
1,150
Fixtures and fittings – cost
74,000
Fixtures and fittings – depreciation
12,000
Debtors and creditors
137,500
23,400
Cash
400
Total
711,480
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711,480
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105
15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
a) A provision for doubtful debts is to be carried forward of K1,500.
b) Insurances paid in advance at 31 December 2021 were General K50; Professional Indemnity
K100.
c) Fixtures and fittings are to be depreciated at 10% on cost.
d) Interest on drawings are: Benson K550, Reid K1,050.
e) Stock of books at 31 December 2021 was K1,500.
Required:
Prepare a profit and loss account together with an appropriation account at 31 December 2022 and
a balance sheet as at that date.
Solution
Reid and Benson’s
Trading and Profit and Loss Account
For the year ended 31 December 2022
K
Sales
Less: Returns inwards
Turnover
Less: Cost of Sales
Purchases of text books for distribution
Add: Carriage inwards
Less Returns outwards
Cost of Purchases
Less Closing stock
Cost of sales
Gross Profit
Less: Expenses
Staff Salaries
Rent
Insurance – General
Less General insurance prepaid
K
541 750
800
K
540 950
291 830
3 150
294 980
330
294 650
1 500
293 150
247 800
141 150
2 500
1 000
50
950
Insurance – Public indemnity
Less Public indemnity insurance prepaid
1 500
100
Compensation paid due to Benson error
General expenses
Bad debts written off
Depreciation on fixtures and fittings (10/100 x 74 000)
Provision for doubtful debts
NET PROFIT
Business Studies Teachers Association of Zambia – Lusaka Province
1 400
10 000
9 500
1 150
7 400
1 500
175 550
72 250
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
REID AND BENSON’S
PROFIT AND LOSS APPROPRIATION ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2022
Details
F.
Net Profit
Add: Interest on drawings:
Reid
Benson
Less: Interest on capital
Reid (5/100 x 75 000)
Benson (5/100 x 50 000)
Interest on current Accounts with Cr. Balance:
Reid (5/100 x 5 000)
Benson (5/100 x 4 000)
Salaries to partners
Salary – Reid
Share of residue profit
Reid (60/100 x 49 150)
Benson (40/100 x 49 150)
CURRENT ACCOUNTS
Details
Cr.
K
72 250
b/f
1 050
550
3 750
2500
250
200
18 000
29 490
19 660
73 850
F.
Reid
Dr.
K
Balance
Drawings
Interest on drawings:
Interest on capital
Interest on current Accounts with Cr.
Balance
Salaries to partners
Shae of residue profit
Balance
Dr.
K
106
b/f
3 750
250
Benson
Dr.
Cr.
K
K
4 000
20 000
550
2 500
200
18 000
29 490
19 660
Cr.
K
5 000
17 000
1 050
38 440
56 490
73 850
56 490
38 440
Business Studies Teachers Association of Zambia – Lusaka Province
5 810
26 360
26 360
5 810
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15.PARTNERSHIP
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
107
REID AND BENSON’S
BALANCE SHEET AS AT 31 DECEMBER 2022 (1)
Fixed Assets
Fixtures and Fittings
Current Assets
Closing stock
Debtors
Less: Provision for Bad Debts
K
Cost
74 000
K
Acc.
Dep.
19 400
K
N.B.V.
54 600
1 500
137 500
1 500
136 000
50
100
400
138 050
General insurance prepaid
Public indemnity insurance prepaid
Cash
Less: Current Liabilities
Creditors
Working Capital
Net Assets/Net Worth
23 400
114 650
169 250
FINANCED BY:
Capital Reid
- Benson
75 000
50 000
125 000
Current Accounts
Opening Balances
Drawings
Interest on drawings
Interest on capital
Interest on current Accounts with Cr. Balance
Salaries to partners
Shae of residue profit
Closing balances
Capital Employed
5 000
(17 000)
(1 050)
3 750
250
18 000
29 490
38 440
Business Studies Teachers Association of Zambia – Lusaka Province
4 000
(20 000)
(550)
2 500
200
19 660
5 810
44 250
169 250
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Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
108
BALANCE SHEET AS AT 31 DECEMBER 2022 (2)
Fixed Assets
Fixtures and Fittings
Current Assets
Closing stock
Debtors
Less: Provision for Bad Debts
K
Cost
74 000
K
Acc.
Dep.
19 400
K
N.B.V.
54 600
1 500
137 500
1 500
General insurance prepaid
Public indemnity insurance prepaid
Cash
Less: Current Liabilities
Creditors
Working Capital
Net Assets/Net Worth
FINANCED BY:
Capital Reid
- Benson
136 000
50
100
400
138 050
23 400
114 650
169 250
75 000
50 000
125 000
Current Accounts
- Reid
- Benson
Closing balances
Capital Employed
Business Studies Teachers Association of Zambia – Lusaka Province
38 440
5 810
44 250
169 250
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16.MANUFACTURING
Principles of Accounts 7110 A Supplementary
StudyACCOUNTS
Text
109
16.MANUFACTURING ACCOUNTS
Manufacturing firms are firms that:
a) Buy raw materials;
b) Process raw materials into finished goods and;
c) Sell the finished goods at a profit to either wholesalers, retailersor final consumers.
For such firms the following accounts are prepared at the end of the financial year:
a) Manufacturing account for internal use;
b) Trading and Profit and Loss account and;
c) Balance sheet.
Manufacturing businesses can be carried on by sole traders, partnerships, limited
companies or with other modes of ownership.
Classification of a Manufacturer’s Costs
Direct Manufacturing Costs
These are costs that can be traced directly to the product being manufactured. They are
entered in the manufacturing Account.
Direct Material Cost
These are raw materials which eventually become part of the manufactured product e.g.
cost of maize in mealie meal production, sunflower in cooking oil production.
Direct Labour Cost
(Direct wages, manufacturing wages, production wages, factory wages)
These are wages or allowances paid to employees who actually work on the goods
produced.
Direct Expenses
These are expenses other than direct materials and direct labour which relate directly to
the goods manufactured e.g. Royalties paid for goods manufactured.
Indirect Manufacturing Costs - (Factory Overhead Expenses)
These are costs which occur in the factory or other place where production is being done,
but which cannot easily be traced to the items being manufactured. These are also entered
in the manufacturing account.
Examples include:
Wages of cleaners
Wages of crane drivers
Rent and rates of factory
Depreciation of plant and machinery
Factory fuel and power
Factory heating and lighting
Plant insurance
General factory expenses
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Principles of Accounts 7110 A Supplementary
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Text
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Administration, Finance, Selling And Distribution Expenses
These are entered in the Trading and Profit and Loss account of the firm.
Administration expenses consist of such items as:
Managers’ salaries,
Legal and accountancy charges,
Depreciation of accounting machinery and
Secretarial salaries.
Financial expenses are expense items such as
Bank charges and
Discounts allowed.
Selling and distribution expenses are items such as:
Sales staff’s salaries and commission,
Carriage outwards,
Depreciation of delivery vans,
Advertising and display expenses.
NOTE: Administration, Finance, Selling and Distribution Expenses are entered in the
Profit and Loss account and not in the manufacturing acccount.
WORK IN PROGRESS
Work in progress is the value of materials which are still in the manufacturing process i.e.
they are partly finished goods.
These cannot appear in the Trading account because they cannot be sold but have to
appear in the manufacturing account.
PURCHASE OF FINISHED GOODS
Sometimes, if a business has produced less than the customers have demanded, then
already finished goods may be bought to offset the defincit in demand. In this case, the
trading account will have both a figure for Cost of finished Goods and Purchases of Finished
goods.
Market value of goods Vs manufactured and profit on manufacturing
Market value of finished goods symbolises what cost the manufacturing firm could have
incurred if the goods had been bought in their finished state instead of being manufactured
by the business. This figure is credited to the manufacturing account and debited to the
trading account. This results in two gross profits in the trading account instead of one. The
second gross profit is called Gross profit on manufacture which is obtained by finding the
difference between the actual cost of finished goods and the market value of finished goods.
It is also possible to have net loss on manufacture where the market value of finished goods
is lower than the actual cost of finished goods. It must be noted that the net profit remains
unaltered even with this treatment in place.
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Principles of Accounts 7110 A Supplementary
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Text
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Preparation of a manufacturing firm’s Final Accounts
Manufacturing Account For The Year Ended 31 December 2010
K
K
K
Raw Materials(Direct Materials)
Opening stock
20,000
Purchases of raw materials
6,500
Add: Carriage inwards on Raw Mat
500
7,000
Less: Purchases returns on raw materials
2 000
5 000
Cost of raw materials available
25,000
Less: Closing stock of raw materials
3 000
Cost of Raw materials consumed
22,000
Add: Direct Expenses
Direct wages
Royalties
Prime Cost
2,000
1,500
25,500
Add: Factory Overheads
Factory rates
Wages for supervisors
Factory power and fuel
Factory heating and lighting
Depreciation of machinery,
Factory rent and rates
Repairs to plant
Factory insurance
Other factory expenses
200
500
400
300
200
400
600
900
50
3,550
29,050
750
29,800
500
Add: opening work in progress
Less: closing work in progress
Cost
Of
Finished
Goods/Cost
Production
Of
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29,300
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Principles of Accounts 7110 A Supplementary
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Question:
The following balances were extracted from the books of Chungu Mwamba Manufacturing
on 30 April 2017.
K
Inventory at 1 May 2016
Raw materials
Work in progress
Finished goods
Purchases of raw materials
Purchases of finished goods
Manufacturing wages
Direct factory expenses
Factory management salaries
Buildings maintenance
Administration salaries
Revenue
Rent
Rent receivable
Insurance
Selling expenses
Other operating expenses
Factory machinery (cost)
Office fixtures and fittings (cost)
Provisions for depreciation
Factory machinery
Office fixtures and fittings
Provision for doubtful debts
Capital
Drawings
Trade receivables
Trade payables
Bank (Debit)
18 200
23 000
37 000
210 000
135 000
102 000
8 800
36 500
31 000
71 400
755 000
24 000
3 300
9 800
18 500
32 300
120 000
18 000
30 000
12 500
3 500
150 000
45 000
63 100
59 000
9 700
Additional information at 30 April 2017
1 Closing stock
Raw materials
16 500
Work in progress
18 100
Finished goods
41 500
2 Manufacturing wages of K2500 are owing.
3 Rent and insurance are to be apportioned 50% to the factory and 50% to
administration.
4 K25 000 of the buildings maintenance relates to the factory.
5 Selling expenses of K1400 were prepaid.
6 Office fixtures and fittings costing K5000 had been purchased by cheque. No entries
had been made in the books
7 Depreciation is to be charged as follows:
(i) Factory machinery at 25% per annum using the diminishing (reducing)
balance method
(ii) Office fixtures and fittings at 10% using the straight-line method
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A debt of K3100 was considered irrecoverable. The provision for doubtful debts is to
be maintained at 5%.
Required
a) Prepare the manufacturing account of Chungu Mwamba Manufacturing for the year
ended 30 April 2017. Show clearly the prime cost and the cost of production.
b) Prepare Chungu Mwamba’s Balance Sheet as at 30 April 2017.
Solution
Chungu Mwamba’s
Manufacturing Account for the year ended 30 April 2017
K
Opening stock of Raw materials
Purchases of Raw material
Less Closing stock of Raw materials
Cost of raw materials consumed
add: Manufacturing wages (102 000 +2 500)
add: Direct factory expenses
Prime cost
Add: Factory overheads:
Factory management salaries
Buildings maintenance
Rent
Insurance
Depreciation -machinery
K
K
18 200
210 000
228 200
(16 500)
211 700
104 500
8 800
325 000
36 500
25 000
12 000
4 900
22 500
Less: Closing Work in Progress
Cost of production
100 900
425 900
23 000
448 900
(18 100)
430 800
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Chungu Mwamba Manufacturing’s
Trading and Profit and Loss Account for the year ended 30 April 2017
K
755 000
Revenue
Less: Cost of Sales
Opening stock of finished goods
Cost of production
Purchases of finished goods
37 000
430 800
135 000
602 800
(41 500)
Less: Closing stock of finished goods
Cost of sales
Gross profit
(561 300)
193 700
Add: Gains
Decrease in provision for doubtful debts
Rent receivable
500
3 300
3 800
197 500
Less expenses:
Buildings maintenance
Administration salaries
Rent
Insurance
Selling expenses (18 500 – 1 400)
Other operating expenses
Depreciation – fixtures and fittings
Bad debts
6 000
71 400
12 000
4 900
17 100
32 300
2 300
3 100
(149 100)
48 400
Net Profit
Fixed assets
Factory machinery
Fixtures and fittings
Balance Sheet as at 30 April 2017
K
K
Cost
Accu. Dep.
120 000
52 500
23 000
14 800
143 000
67 300
Current assets
Closing Stock
Raw materials
Work in progress
Finished goods
Trade debtors (63 100 – 3100)
Less Provision for doubtful debts
16 500
18 100
41 500
60 000
(3 000)
57 000
1 400
4 700
139 200
Selling expenses prepaid
Bank (9 700 – 5 000)
Less: Current liabilities
Trade creditors
Manufacturing wages accrued
K
N.B.V.
67 500
8 200
75 700
59 000
2 500
61 500
Working Capital
Net Assets
Financed by:
Capital
Net Profit
Less: Drawings
Owners Capital at close/Capital employed
77 700
153 400
150 000
48 400
198 400
(45 000)
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ACCOUNTANCY
Principles of Accounts 7110 A Supplementary
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17.ETHICS IN ACCOUNTANCY
Ethics in Accountancy refers to the standards of right and wrong conduct that apply to the
Accounting profession.
It is also the study of moral values and judgements as they apply to accountancy.
Importance of Ethics



It’s a legal requirement
It’s a moral requirement
In order to present a true and fair view of the company, i.e. Final Books of Accounts.
Elements of Good Accountany Ethics






Integrity
Professional competence and due care
Trustworthy
Discipline
Objectivity
Confidentiality
Unethical Accountancy Behavoiur




Corruption
Fraud
Money laundering
Embezzlement of funds.
Effects of Non – Adherence to Ethics





Losing one’s job
Losing reputation as an Accountant
Being deregistered and out of practice
Imprisonment
Payment of fines as a business
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18.ANALYSIS AND INTERPRETATION OF FINAL ACCOUNTS
Importance of Financial Ratios



Ratios show important relationships between financial figures.
Compare the business’ performance over several financial periods.
Compare the business’ performance with that of other business within the same industry.
1) Profitability of the business
Gives an indication of the level of returns that the owner is getting:
Gross profit margin
Mark-up on cost
Net profit margin
Rate of return on capital
2) Level of efficiency of business activity
- Indicates the way the business uses its assets:
- Rate of stock turn or Rate of stock turnover
3) Liquidity of the business
Indicates the business’ ability to pay its debt and manage its working capital:
Working capital
Current ratio
Quick ratio
4) Capital structure of the business
Show the composition of and relationship between equity capital and other longterm sources of finance e.g. long-term loan:
Owner’s equity
Capital employed
Profitability Ratios
Profit is the reward for doing business. The business person takes the risk of manufacturing
something or providing some service so as to get profit. The profitability of a business can be looked
at from the point of view of gross profit or net profit.
Gross profits
Gross profit is the difference between the cost of goods sold and the proceeds from their sale. Put
simply, gross profit is selling price minus cost price. Gross profit is not the true profit since the
expenses incurred in selling the goods have not been taken into account. It is calculated as:
Gross Profit = Turnover minus Cost of goods sold.
Net Profit
Calculated as:
Net Profit = Gross Profit (plus other incomes) minus Expenses.
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Profit Mark-Up
Profit mark-up is when gross profit is expressed as a percentage of cost price.
i.e. Mark-up =
Gross profit
X 100
Cost price (cost of sales)
Gross Profit Margin
Profit margin is when gross profit is expressed as a percentage of selling price.
Gross profit margin =
Gross profit
X 100
Selling price
Turnover
The turnover or net sales is the net value of goods sold during an accounting period calculated as
follows:
Turnover = Sales minus Returns inwards
Or
Turnover = Sales minus Cost of goods sold plus gross profit.
Cost of goods sold
This is the cost price of the goods that have been sold. It is calculated as:
Cost of goods sold = Opening Stock plus Net Purchase minus Closing Stock
Or
Cost of goods sold = Turnover minus Gross profit.
Rate of turnover or rate of stock turn
It is the number of times the average stock can be sold in an accounting period. (It is actually the
number of times a firm orders and sells out its stock each year). It is calculated as follows:
Rate of stock turn = Turnover
or
Rate of stock turn
= Cost of goods sold
Average Stock
Average stock
Average stock
This is the average number of stock held in the business for the accounting period. It is actually the
average of the opening and closing stock. It is calculated as:
Average Stock = Opening Stock + Closing Stock
2
Gross profit percentage
This shows the average profit made from trading. It is sometimes called the gross profit percentage
of turnover. It is calculated as follows:
Gross Profit Percentage
=
Gross Profit x 100
Turnover
Net profit percentage
The Net Profit percentage shows actual average profit made after taking into account all costs and
expenses incurred. It is also known as the net profit percentage of turnover. It is calculated as
follows:
Net Profit Percentage
=
Net Profit x 100
Turnover
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Capital Efficiency Ratios
Rate of Return on Capital Invested
The rate of return on capital invested is extremely important to a businessman or woman for it tells
him/her exactly how much he/she is getting from the investment. It is calculated as:
Rate of Return on Capital Invested =
Net Profit x 100
Capital at start of the year
This ratio helps the businessperson to determine the profitability of his/her business. He/she is thus
able to decide whether it is worthwhile or not to keep his/her money in that investment.
Earnings per Share
EPS =
Net Profit
Number of ordinary shares issued
Current Ratio (Working Capital Ratio)
This is the measure of the business’s ability to pay its current debts. A ratio of 2:1 is considered
favourable.
Current ratio =
Current assets
Current liabilities
Acid Test Ratio (Quick Ratio)
This is the measure of the ability of the business to pay off maturing short term financial obligations
without relying on the sales of stock. A ratio of 1:1 is considered satisfactory.
Acid test ratio =
Current assets – Closing stock
Current liabilities
Debtor/Sales Ratio (Or Debtor Ratio)
This ratio measures money tied up in debts
Debtors/sales ratio = Debtors
Sales
or
Debtors X 365 days
Sales
Creditors/Purchases Ratio
This ratio measures money owed by the business to the suppliers of goods.
Creditors/Purchases ratio =
Creditors
or Creditors
X 365days
Purchases
Purchases
Gearing Ratio
Gearing ratio =
Long term liabilities + Preference shares
Ordinary share capital + Preference shares + reserves + Long term liabilities
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Worked examples
T. Mashamba, a businessman, prepares his Final Accounts annually and the following
information relates to the year ended 31 March, 2002.
K
Capital
468, 000
Sales
460, 000
Stock on 1st April, 2001
50, 000
Stock on 31 March
70, 000
Returns inwards
40, 000
Gross profit
180, 000
Expenses are 15% of Turnover
Required:
Calculate for the year
(a)
Turnover
(b)
Cost of sales
(c)
Cost of purchases
(d)
Rate of stock turn
(e)
Gross profit as a percentage of turnover
(f)
Expenses
(g)
Net profit
(h)
Net profit as a percentage of capital
(i)
Gross profit as a percentage of cost price
Solution
(a) Turnover
(b) Cost of Sales
=
Sales – Sales Returns
=
K460 000 – K40 000
=
K420 000
=
Turnover - Gross Profit
=
K420 000 – K180 000
=
K240 000
(c) Cost of Purchases=
(Closing Stock + Cost of Sales) - Closing Stock
=
(70 000 +240 000) – 50 000
=
310 000 – 50 000
=
K260 000
(d) Rate of stock turn=
Cost of Stock
Average Stock
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Average stock=
120
Opening stock +closing Stock
2
=
K50 000 + K240 000
2
=
K60 000
Therefore:
Rate of Stock Turn =
K240 000
K60 000
=
4 times
(e) Gross Profit as a percentage of Turnover
= Gross profit
X100
Turnover
= K180 000
X100
K420 000
= 42.85%
(f) Expenses
=
15
X
Turnover
X
K420 000
100
=
15
100
(g) Net Profit
=
K63 000
=
Gross profit – Expenses
=
K180 000 – K63 000
=
K117 000
(h) Net Profit as a percentage of capital
= Net profit X 100
Capital
=K117 000 X 100
K468 000
=25%
(i) Gross Profit as a percentage of Cost price = Gross profit X 100
Cost price
= K180 000 X 100
K240 000
= 75%
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Worked example 2
F. Chisaka, a business man, prepares his final accounts annually and the following
information relates to the year ended 31 March, 2008.
K
50, 000, 000
60, 000, 000
10, 000, 000
12, 000, 000
4, 000, 000
20, 000, 000
Capital
Sales
Stock on 1 April
Stocks on 31 March 2008
Returns inwards
Gross profit
Expenses are 15% of turnover
Required:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Calculate for the year
Turnover
Cost of sales
Cost of purchases
Rate of stockturn
Expenses
Net profit
Solution
(a) Turnover
(b) Cost of Sales
=
Sales – Returns inwards
=
K60 000 000 – K4 000 000
=
K56 000 000
=
Turnover - Gross Profit
=
K K56 000 000 – K20 000 000
=
K36 000 000
(c) Cost of Purchases =
(Cost of Sales + Closing stock) – Opening Stock
=
(K36 000 000 +K12 000 000) – K10 000 000
=
K48 000 000 – K10 000 000
=
K38 000 000
(d) Rate of stock turn=
Cost of Sales
Average Stock
Average stock
=
Opening stock +closing Stock
2
=
K12 000 000 + K10 000 000
2
=
K11 000 000
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Therefore:
Rate of Stock Turn =
K36 000 000
K11 000 000
(e) Expenses
=
=
3.27 times
15
X
Turnover
X
K56 000 000
100
=
15
100
(f) Net profit
=
K8 400 000
=
Gross profit – Expenses
=
K20 000 000 – K8 400 000
=
K11 600 000
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