Financial Accounting 1
SUBJECT NO. 1
Study Pack
STRATHMORE
UNIVERSITY
DISTANCE LEARNING CENTRE
P.O. Box 59857,
00200, Nairobi,
KENYA.
Tel:
Fax:
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© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992
Acknowledgement
ii
ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the following
bodies: Kenya Accountants and Secretaries National Examination Board (IASNEB);
Chartered Institute of Management Accountants (CIMA); Chartered Association of Certified
Accountants (ACCA).
iii
Instructions for Students
INSTRUCTIONS FOR STUDENTS
This study guide is intended to assist distance-learning students in their independent studies. In addition, it is only
for the personal use of the purchaser, see copyright clause. The course has been broken down into eight lessons
each of which should be considered as approximately one week of study for a full time student. Solve the
reinforcement problems verifying your answer with the suggested solution contained at the back of the distance
learning pack. When the lesson is completed, repeat the same procedure for each of the following lessons.
At the end of lessons 2, 4, 6 and 8 there is a comprehensive assignment that you should complete and submit for
marking to the distance learning administrator.
SUBMISSION PROCEDURE
1.
2.
3.
4.
After you have completed a comprehensive assignment clearly identify each question and number your
pages.
If you do not understand a portion of the course content or an assignment question indicate this in your
answer so that your marker can respond to your problem areas. Be as specific as possible.
Arrange the order of your pages by question number and fix them securely to the data sheet provided.
Adequate postage must be affixed to the envelope.
While waiting for your assignment to be marked and returned to you, continue to work through the next
two lessons and the corresponding reinforcement problems and comprehensive assignment.
On the completion of the last comprehensive assignment a two-week period of revision should be carried out of
the whole course using the material in the revision section of the study pack. At the completion of this period the
final Mock Examination paper should be completed under examination conditions. This should be sent to the
distance-learning administrator to arrive in Nairobi at least five weeks before the date of your sitting the IASNEB
Examinations. This paper will be marked and posted back to you within two weeks of receipt by the Distance
Learning Administrator.
FINANCIAL ACCOUNTING 1
iv
STRATHMORE UNIVERSITY ● STUDY PACK
v
Course Description
CONTENTS
ACKNOWLEDGMENT ...................................................................................................................... ii
INSTRUCTIONS FOR STUDENTS ................................................................................................. iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION .............................................................. vi
LESSON ONE....................................................................................................................................... 1
INTRODUTION TO ACCOUNTING ................................................................................................................... 1
LESSON TWO .................................................................................................................................... 32
FINAL ACCOUNTS ...................................................................................................................................................32
LESSON THREE................................................................................................................................ 68
ACCOUNTING THEORY .......................................................................................................................................68
LESSON FOUR................................................................................................................................... 81
ADJUSTMENTS TO FINAL ACCOUNTS ..........................................................................................................81
LESSON FIVE .................................................................................................................................. 136
FURTHER ADJUSTMNETS TO ACCOUNTS ................................................................................................ 136
LESSON SIX ..................................................................................................................................... 176
OTHER ASPECTS OF FINAL ACCOUNTS.................................................................................................... 176
LESSON SEVEN .............................................................................................................................. 231
PARTNERSHIPS ...................................................................................................................................................... 231
LESSON EIGHT............................................................................................................................... 287
COMPANY ACCOUNTS ....................................................................................................................................... 287
LESSON NINE ................................................................................................................................. 334
REVISION AID ........................................................................................................................................................ 334
FINANCIAL ACCOUNTING 1
Course Description
vi
FINANCIAL ACCOUNTING I COURSE DESCRIPTION
The subject gives a thorough and comprehensive introduction to double bookkeeping. It develops
the students understanding of the final; accounts of business and that of clubs and societies, and
the treatment of capital expenditure and the purchasing of stock.
Following this it deals with the cashbook and bank reconciliation preparation of accounts from
incomplete records. Its prime purpose is to pre[pare candidates for the Section One examination
of the CPA Kenya accountancy paper and is based on the materials used to prepare students at
Strathmore School of Accountancy.
Text Book:
Business Accounting Volume 1 by Frank Wood
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
1
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the
users of this information to permit informed judgment
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either
cash is received or paid out. Examples of these transactions include selling goods, buying goods, paying
employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on
these transactions. If a firm employs a new staff member then this may not be an accounting transaction.
However when the firm pays the employee salary, then this is related to accounting as cash involved. This
has an economic impact on the organization and will be recorded for accounting purposes. A process is
put in place to collect and record this information; it is then classified and summarized so that it can be
reported to the interested parties.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These financial statements provide
information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners
and others.
The financial performance reflects how the business has performed, whether it has made profits or
losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the
information contained in the financial statements will affect the decision making process.
i.
The following are the users of accounting information:
Owners:
They have invested in the business and examples of such owners include sole traders, partners
(partnerships) and shareholders (company). They would like to have information on the financial
performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing
whether the business is profitable or not and whether to make drawings or put in additional capital.
ii.
Customers
Customers rely on the business for goods and services. They would like to know how the business is
performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
FINANCIAL ACCOUNTING 1
2
Introduction to Accounting
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like
to have information on the financial performance and position so as to assess whether the business would be
able to pay up for the goods and services provided as and when the payments falls due.
iii.
iv.
Managers
The managers are involved in the day-to-day activities of the business. They would like to have
information on the financial position, performance and changes in financial position so as to
determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to
ensure that the set plans are met.
The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks
and other financial institutions. They would like to have information on the financial performance
and position of the business to assess whether the business is profitable enough to pay the interest
on loans and whether it has enough resources to pay back the principal amount when it is due.
v.
The Government and its agencies
The Government is interested in the financial performance of the business to be able to assess the
tax to be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the
business to be able to come with National Statistics. This statistics measure the average performance
of the economy.
vi.
The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples include stockbrokers
who advise investors on shares to buy in the stock market and other professional consultants like
accountants. They are interested with the financial position and performance of the firm so that they
can advise their clients on how much is the value their investment i.e. whether it is profitable or not
and what is the value.
Others advisors would include the press who will then pass the information to other relevant users.
vii.
The Employees
They work for the business/entity. They would like to have information on the financial position
and performance so as to make decisions on their terms of employment. This information would be
important as they can use it to negotiate for better terms including salaries, training and other
benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are
secure.
viii.
The Public
Institutions and other welfare associations and groups represent the public. They are interested with
the financial performance of the firm. This information will be important for them to assess how
socially responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and
the effect of firm’s activities on the environment.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
3
c) THE ACCOUNTING EQUATION
A business owns properties. These properties are called assets. The assets are the business resources that
enable it to trade and carry out trading. They are financed or funded by the owners of the business who
put in funds.
These funds, including assets that the owner may put is called capital. Other persons who are not owners
of the firm may also finance assets. Funds from these sources are called liabilities.
The total assets must be equal to the total funding i.e. both from owners and non-owners. This is
expressed inform of accounting equation which is stated as follows:
ASSETS = LIABILITIES + CAPITAL
Each item in this equation is briefly explained below.
Assets:
An asset is a resource controlled by a business entity/firm as a result of past events for which economic
benefits are expected to flow to the firm.
An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the
sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will
flow towards the firm i.e. in form of cash once the customers pays.
Assets are classified into two main types:
i) Non current assets (formerly called fixed assets).
ii) Current assets.
Non current assets are acquired by the business to assist in earning revenues and not for resale. They are
normally expected to be in business for a period of more than one year.
Major examples include:
 Land and buildings
 Plant and machinery
 Fixtures, furniture, fittings and equipment
 Motor vehicles
Current assets are not expected to last for more than one year. They are in most cases directly related to
the trading activities of the firm. Examples include:
 Stock of goods – for purpose of selling.
 Trade debtors/accounts receivables – owe the business amounts as a resort of trading.
 Other debtors – owe the firm amounts other than for trading.
 Cash at bank.
 Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which is expected to result to an
economic outflow of amounts from the firm. An example is when a business buys goods on credit, then
the firm has a liability called creditor. The past event is the credit purchase and the liability being the
creditor the firm will pay cash to the creditor and therefore there is an out flow of cash from the business.
Liabilities are also classified into two main classes.
i)
ii)
Non-current liabilities (or long term liabilities)
Current liabilities.
Non-current liabilities are expected to last or be paid after one year. This includes long-term loans from
banks or other financial institutions. Current liabilities last for a period of less than one year and therefore
will be paid within one year. Major examples:
FINANCIAL ACCOUNTING 1
4
Introduction to Accounting



Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
Other creditors
- owed amounts for services supplied to the firm
other than goods.
Bank overdraft
- amounts advanced by the bank for a short-term
period.
Capital:
This is the residual amount on the owner’s interest in the firm after deducting liabilities from the assets.
The Accounting equation can be expressed in a simple report called the Balance Sheet. The basic
format is as follows:
Name
Balance sheet as at 31.12.
Capital
Sh
Non Current Liabilities
Loan
Current liabilities
Overdraft
xx
Creditors
xx
Sh
xx
xx
xx
Capital and Liabilities
xx
Sh
Non Current Assets
Land & Buildings
Plant & Machinery
Fixtures, furniture & fittings
Motor vehicles
Current Assets
Stocks
Debtor’s
Cash at bank
Cash in hand
Total assets
xx
xx
xx
xx
STRATHMORE UNIVERSITY ● STUDY PACK
Sh
xx
xx
xx
xx
xx
xx
xx
Lesson One
5
The above format of the balance sheet is the horizontal format however currently the practice is to
present the Balance Sheet using the vertical format which is shown below.
Name
Balance sheet as at 31.12.
Non Current Assets
Sh
Land & Buildings
Plant & Machinery
Fixtures, furniture & fittings
Motors vehicles
Current Assets
Stocks/inventories
Debtors/ trade receivables
Cash at bank
Cash in hand
Current Liabilities
Bank Overdraft
Creditors/trade payables
Net Current Assets
Net assets
Sh
Sh
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Capital
Non Current Liabilities
Loan (from bank or other sources)
(xx)
xx
xx
xx
xx
xx
Please pay attention to the format. The Non Current assets are listed in order of permanence as shown i.e.
from Land and Buildings to motor vehicles. The Current Assets are listed in order of liquidity i.e. which
asset is far from being converted into cash. Example ,stock is not yet sold, (i.e. not yet realised yet) then
when it is sold we either get cash or a debtor (if sold on credit). When the debtor pays then the debtor
may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is
payable on demand by the bank, then followed by creditors.
Note that in the vertical format, current liabilities are deducted from current assets to give net current
assets. This is added to Non Current assets, which give us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
FINANCIAL ACCOUNTING 1
6
Introduction to Accounting
Example 1.1
B Kelly has a business that has been trading for some time. You are given the following information as at
31.12.2002
£
Buildings
11,000
Furniture & Fittings
5,500
Motor Vehicles
5,800
Stocks
8,500
Debtor
5,600
Cash a bank
1,500
Cash in hand
400
Creditors
2,500
Capital
30,800
Loan
5,000
You are required to prepare a Balance Sheet as at 31 December 2001
B Kelly
Balance Sheet as at 31 December 2001
Non Current Assets
Buildings
Furniture & Fittings
Motor Vehicles
Current Liabilities
Stock
Debtors
Cash at bank
Cash in hand
Creditors
Net Current Assets
Net Assets
Capital
Non-Current Liabilities
Loan
£
£
8,500
5,600
1,500
400
16,000
(2,500)
£
11,000
5,500
5,800
22,300
13,500
35,800
30,800
5,000
35,800
Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought motor vehicles of ₤3,000,
premises of ₤7,000, stock of goods ₤2,000. He still owes ₤800 in respect of them. He had borrowed
₤4,000 from D Evans. After the events just described and before trading starts, he had ₤300 cash in hand
and ₤600 cash at bank.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
7
You are required to calculate the amount of his capital.
Solution:
Assets:
₤
₤
Motor Vehicle
Premises
Stock
Cash at bank
Cash in hand
Liabilities:
Creditors
Loan - D Evans
3,000
7,000
2,000
600
300
12,900
800
4,000
(4,800)
8,100
Capital
8,100
Remember the Accounting equation:
Assets = Liabilities + Capital.
To get capital we rearrange the equation as follows:
Capital = Assets - Liabilities
Total Assets = ₤12,900
Total Liabilities = ₤4,800
Capital = ₤ 12,900 - 4,800
= ₤ 8,100
Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock of goods £9,900,
Debtors £6,500, Cash at bank £12,900 and Cash in hand £240.
During the first week of July 2002:
a. He bought extra stock of goods £1,540 on credit.
b. One of the debtors paid him £560 in cash.
c. He bought extra fixture by cheque £2,000.
You are to draw up a balance sheet as on 7 July 2002 after the above transactions have been completed.
FINANCIAL ACCOUNTING 1
8
Introduction to Accounting
First we need to look at the effect of the above transactions on the assets and liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because this is bought on credit
the creditors increase by £1,540 also.
(b) Amount received from the debtor means that the level of debtors reduces and cash increases by
£560.
(c) Extra fixtures bought by cheque, will increase the fixtures and reduce the cash at bank by
£2,000.
This can be summarized as follows:
Capital
Creditors
Fixtures
Motor Vehicles
Stock
Debtors
Cash at bank
Cash in hand
Opening
Balances
£
41,800
3,200
7,000
8,400
9,900
6,560
12,900
240
Increase/(Decrease)
1,540
2,000
1,540
(560)
(2000)
560
Closing
Balances
£
41,800
4,740
9,000
8,400
11,440
6,000
10,900
800
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Non Current Assets
Fixtures
Motor Vehicles
Current Assets
Stock
Debtors
Cash at bank
Cash at hand
Current Liabilities
Creditors
Net Current Assets
Net Assets
Capital
£
£
9,000
8,400
17,400
11,440
6,000
10,900
800
29,140
(4,740)
24,400
41,800
41,800
From the illustration remember that any change in the items of the balance sheet will have a double effect
on the accounting equation has a double effect and therefore the equation will always balance.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
9
Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors
15,800
Equipment
46,000
Motor Vehicle
25,160
Stock
24,600
Debtors
23,080
Cash at bank
29,120
Cash in hand
160
During the first week of May 2002 Moody:
a. Bought extra equipment on credit for £5,520.
b. Bought extra stock by cheque £2,280.
c. Paid creditors by cheque £3,160.
d. Debtors paid £3,360 by cheque and £240 by cash.
e. Moody put in extra £1,000 cash as capital.
Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been completed.
Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets and liabilities can be listed
as follows.
Assets
£
Liabilities
£
Equipment
46,000
Creditors
15,800
Motor Vehicle
25,160
Stock
24,600
Debtors
23,080
Cash at bank
29,120
Cash in hand
160
148,120
Capital = Assets – Liabilities
= £148,120 - £15,800 = £132,320
(ii) To draw up the balance sheet, we consider the effect of the above transactions on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by £5,520 and the creditors
will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by £2,280 and the balance at
bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and also reduce the amount
at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases the cash at bank and
cash in hand by £3,360 and £240 respectively.
e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and the capital balances.
FINANCIAL ACCOUNTING 1
10
Introduction to Accounting
This is also summarized as follows:
Opening
Adjustment
Balance
Increase/Decrease
Assets/Liabilities
£
£
Equipment
46,000
+5,520
Motor Vehicle
25,160
Stock
24,600
+2,280
Debtors
23,080
-3,600
Cash at bank
29,120
(-2,280 – 3,160 + 3,360)
Cash in hand
160
(+240 + 1000)
Creditors
15,800
(+5,520 – 3,160)
Capital
132,320
+1,000
Closing
Balance
£
51,520
25,160
26,880
19,480
27,040
1,400
18,160
133,320
The balance sheet will therefore be prepared as follows:
D Moody
Balance sheet as at 7 May 2002
Non Current Assets
Equipment
Motor vehicle
£
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
£
51,520
25,160
76,680
26,880
19,480
27,040
1,400
74,800
Current Liabilities
Creditors
Net Current Assets
Net Assets
(18,160)
Capital
56,640
133,320
133,320
Double Entry Aspects
The Accounting equation forms the basis of double entry and therefore it should always be maintained. Any
change in assets, liabilities or capital will have a double effect such that assets will always be equal to liabilities
plus capital. If the owners put in additional capital then this will increase the cash at bank and the capital
amount therefore the equation is still maintained.
Debit
Date
Name
Detail
Folio
Amount
Credit
Date
Detail
STRATHMORE UNIVERSITY ● STUDY PACK
Folio
Amount
Lesson One
11
In this account the date will show the opening period of the asset ,liability or capital i.e. the balance brought
forward. It will also show the date when a transaction took place (i.e. either an asset was bought or liability
incurred).
The detail column (also called the particulars column) shows the nature of the transaction and reference to
the corresponding account. The Folio Column for purposes of detailed recording shows the reference
number of the corresponding account. The amount column shows the amount of the asset, liability or
capital.
The left side of the account is called the debit side and the right side is called the credit side. All assets are
shown or recorded on the debit side while all the liabilities and capital are recorded on the credit side. Each
type of asset or liability must have its own account whereby all transactions affecting them are recorded in
this account. Therefore there should be an account for Premises, Plant and Machinery, Stock, Debtors,
Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should
be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit entry.
The transactions affecting these accounts are posted in the account as debit entry and credit entry to
complete the double entry.
When we make a debit entry we are either:
i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.
When we make a credit entry we are either:
i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.
Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500; Debtors £57,700;Cash at
bank £72,800 and Cash in hand £400.
Compute the balance on the capital account as at 30 November 2002.
During the first week of December 2002, Jump:
a.
b.
c.
d.
e.
Bought extra equipment on credit for £13,800.
Bought extra stock by cheque £5,700.
Paid creditors by cheque £7,900.
Received from debtors £8,400 by cheque and £600 by cash.
Put in an extra £2,500 cash as capital.
You are to draw up a balance sheet as on 7 December 2002 after the above transactions have been
completed.
FINANCIAL ACCOUNTING 1
12
Introduction to Accounting
Answer:
Capital = Assets – Liabilities
Assets
Equipment
Motor vehicle
Stock
Debtors
Cash at bank
Cash in hand
£
Liabilities
115,000 Creditors
62,900
61,500
57,700
72,800
400
371,300
£
39,500
Capital = £371,300 - £39,500 = £330,800
2002
Bank
1.12 Bal c/d
Creditors A/C
£B
2002
7900 1.12 Bal b/d
31,600
£
39,500
Motor Vehicles a/c
2002
£
2002
£
1.12 Bal b/d 62,900 1.12 Bal c/d 62,900
62,900
39,500
62,900
39,500
2002
1.12 Bal b\d
Creditors
Equipment a/c
£
2002
115,000
13,800 7.12 Bal c\d
128,800
2002
1.12 Bal b\d
Bank
Stock a/c
£
2002
61,500
5700 7.12 Bal c\d
67,200
67,200
67,200
Debtors a/c
£
2002
57,700 Bank
Cash
570 7.12 Bal c\d
57,700
£
8,400
600
48,700
57,700
2002
1.12 Bal b\d
Bank
STRATHMORE UNIVERSITY ● STUDY PACK
£
128,800
128,800
£
Lesson One
13
Cash at Bank a/c
£ 2002
72,800 Stock
Creditors
8,400 7.12 Bal c\d
81,200
2002
1.12 Bal b\d
Debtors
2002
1.12 Bal b\d
Debtors
Capital
2002
£
5,700
7,900
67,600
81,200
Cash in hand a/c
£ 2002
400
600
2500 7.12 Bal c\d
3500
3500
3500
Capital
2002
1.12 Bal b\d
333300 Cash
128,800
£
330800
2500
128,800
£
£
7.12 Bal b\d
Creditors Of Equipment
£
2002
2002
7.12 Bal b\d
£
13800 Equipment
13,800
13800
13,800
H Jump
Balance sheet as at 7 December 2002
Non Current Assets
Equipment
Motor vehicles
£
Current Assets
Stock
Debtors
Cash at Bank
Cash in Hand
Current Liabilities
Creditors of equipment 13,800
Creditors
31,000
Net Current Assets
Net Assets
Capital
£
£
128,800
62,900
191,700
61,200
48,700
67,600
3,500
187,000
(45,400)
141,000
333,300
333,300
FINANCIAL ACCOUNTING 1
14
Introduction to Accounting
Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record the following transactions:
2002
June
1
Started business with £50,000 in the bank.
“
2
Bought motor van paying by cheque £12,000.
“
5
Bought Fixtures £4,000 on credit from Office Masters Ltd.
“
8
Bought a van on credit from Motor Cars Ltd £8,000.
“
12
Took £1,000 out of the bank and put it into the cash till.
“
15
Bought Fixtures paying by cash £600.
“
19
Paid Motor Cars Ltd by cheque £8000.
“
21
A loan of £10,000 cash is received from J Marcus.
“
25
Paid £8,000 of the cash in hand into the bank account.
“
30
Bought more Fixtures paying by cheque £3,000.
Capital a/c
2002
30/6
Bal c/f
Cash at bank a/c
£ 2002
50,000 1/6
Bank
£
50,000
50,000
50,000
2002
1/6 Capital
12/6 Cash
£
2002 £
50,000 2/6 Van
12,000
8,000 12/6Cash
1,000
19/6Motor ltd 8,000
30/6 Fixtures 3,000
30/6 Bal c/f 34,000
58,000
58,000
Motor Van
2002
2/6 Bank
8/6 Super M
£
12,000
8,000 30/6 Bal c/f
20000
£
20,000
20000
2002
5/6 young
15/6 Cash
30/6 Bank
Fixtures
£ 2002
4,000
600
3000 Bal c/f
7,600
7,600
7,600
2002
19/6 Bank
Motor Car Ltd – Creditors
£ 2002
8000 8/6 Van
8000
£
8000
8000
2002
30/6 B\f
Office Masters Ltd - Creditor
£ 2002
4000 8/6 Fixtures
4000
£
4000
4000
STRATHMORE UNIVERSITY ● STUDY PACK
£
Lesson One
15
2002
12/6 Cash
21/6 J. Marcus
2002
30/6 c\f
Cash in hand
£ 2002
1,000 15/6 Cash
25/6 Bank
10000 30/6 Bal c/f
11000
£
600
800
2400
11000
J. Marcus - Loaner
£ 2002
10000 21/6 Cash
£
10000
Note that the difference between the debit side and the credit side is the balancing figure. Most assets will
have a balance on the credit side and most liabilities and capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:
M Crash
Balance Sheet as at 30th June 2002
£
Non Current Assets
Fixtures
Motor vehicles
Current Assets
Cash at bank
Cash in hand
Current Liabilities
Creditors – others
Net Current Assets
Net Assets
£
7,600
20,000
27,600
34,000
2,400
36,400
(4,000)
Capital
Non Current Liabilities
Loan – J Jarvis
32,400
60,000
50,000
10,000
60,000
Let us now consider other transactions that take place in a business and the accounting entries to be made.
Accounting for sales, purchases, incomes and expenses.
Sales:
This is the sell of goods that were bought by a firm (the goods must have been bought with the purpose of
resale). Sales are divided into cash sales and credit sales. When a cash sale is made, the following entries are
to be made.
i.
Debit cash either at bank or in hand.
ii.
Credit sales account.
For a credit sale:
i.
Debit debtors/ Accounts receivable account.
ii.
Credit sales account.
FINANCIAL ACCOUNTING 1
16
Introduction to Accounting
A new account for sales is opened and credited with cash or credit sales.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For cash purchases:
i.
Debit purchases.
ii.
Credit cash at bank/cash in hand
For credit purchases, we:
i.
Debit purchases.
ii.
Credit creditors for goods.
A new account is also opened for purchases where both cash and credit purchases are posted. NOTE: NO
ENTRY IS MADE INTO THE STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales). Such incomes include:
 Rent
 Bank interest
 Discounts received.
When the firm receives cash, from these incomes, the following entries are made:
 Debit cash in hand/at bank.
 Credit income account.
Each type of income should have its own account e.g. rent income, interest income.
Incomes increase the value of capital and that is the reason why they are posted on the credit side of their
respective accounts.
Expenses:
These are amounts paid out for services rendered other than those paid for purchases. Examples include:
 Postage and stationery
 Salaries and wages
 Telephone bills
 Motor vehicle running expenses.
 Bank charges.
When a firm pays for an expense, we:
i.
Debit the expense account.
ii.
Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will be posted. Expenses
decrease the value of capital and thus the posting is made on the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and expenses.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
17
Debit cash book/bank/in hand
INCOME
INCOMES/EXPENSES
EXPENCES
GFSS
Credit Income
income
Debit Expense A/C
Credit cash book /bank/in hand
Returns Inwards and Returns Outwards.
Returns Inwards: These are goods that have been returned by customers due to various reasons e.g.
i.
They may be defective/damaged,
ii.
Being of the wrong type .
iii.
Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in relation to cash sales and
cash is refunded to the customer the following entries are made:
i.
Debit returns – inwards
ii.
Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer, the following entry is to be
made.
i.
Debit returns inwards.
ii.
Credit debtors.
Returns Outwards: These are goods returned to suppliers/creditors. They may be for cash purchases or for
credit purchases. For cash purchases a cash refund given to the firm by the supplier,
i.
Debit the cashbook (cash at bank/hand).
ii.
Credit returns outwards.
For credit purchases and no refund has been made:
i.
Debit creditors.
ii.
Credit returns outwards.
FINANCIAL ACCOUNTING 1
18
Introduction to Accounting
Diagrammatically shown as follows:
Debit returns inwards.
Cash
Credit cashbook.
Debit returns inwards
Inwards
Credit
Returns
Credit debtors
Debit cash
Cash
Outwards
Credit returns outwards
Debit creditors
Credit
Credit returns outwards
Now lets us take one example that includes most of the above transactions.
Example 1.8
You are to enter the following transactions, completing the double entry in the books for the month of May
2002.
2002
May
1
Started business with £2,000 in the bank.
“
2
Purchased goods £175 on credit from M Rooks.
“
3
Bought furniture and fittings £150 paying by cheque.
“
5
Sold goods for cash £275.
“
6
Bought goods on credit £114 from P Scot.
“
10
Paid rent by cash £15.
“
12
Bought stationery £27, paying in cash.
“
18
Goods returned to M Rooks £23.
“
21
Let off part of the premises receiving rent by cheque £5.
“
23
Sold goods on credit to U Foot for £77.
“
24
Bought a motor van paying by cheque £300.
“
30
Paid the month’s wages by cash £117.
“
31
The proprietor took cash for himself £44.
Example
2002
1/5 Capital
£
2,000
21/5 Rent
5
2,005
31/5 Bal c/f
2,000
Bank a/c
2002
3/5Furn& fitting
24/5 Motor vehicle
31/5 Bal c/f
Capital a/c
1/5 Bank
STRATHMORE UNIVERSITY ● STUDY PACK
£
150
300
1,555
2,005
2,000
Lesson One
19
2002
2/5M Rooks
6/5 P Scot
Purchases a/c
£ 2002
175
114 31/5 Bal c/f
289
2002
18/5 Returns in
31/5 Bal c/f
Creditor – M Rooks a/c
£ 2002
23 2/5 Purchases
152
175
Furniture & Fittings a/c
2002
£ 2002
£
3/5 Bank
150 31/5 Bal c/f 150
150
150
£
289
289
£
175
175
Sales a/c
2002
31/5 Bal c/f
£ 2002
£
352 5/5 Cash 275
23/5 U. Foot 77
352
Cash in hand a/c
2002
£ 2002
5/5 Sales
275 10/5
12/5
30/5
31/5
£
Rent
15
Stationery 27
Wages 117
Bal c/f 116
275
P Scot a/c
2002
£
2002
£
31/5 Bal c/f 114 6/5Purchases 114
275
114
Expenses – Rent a/c
2002
£ 2002
11/5 Bal c/f 15 10/5 Cash
352
114
Expenses – Stationery a/c
£
15
2002
12/5 Cash
27
27
FINANCIAL ACCOUNTING 1
£
2002
31/5Bal c/f
27
27
£
20
Introduction to Accounting
Returns – Out a/c
2002
£ 2002
31/5 Bal c/f 23 18/5 M Rooks
£
23
Debtors – U Foot a/c
2002
£ 2002
23/5 Sales
77 31/5 Bal c/f
£
77
Expenses – Wages a/c
2002
£ 2002
30/5 Cash
117 31/5 Bal c/f
£
117
Income – Rent a/c
2002
£ 2002
21/5 Bal c/f 5 31/5 Bank
Motor vehicle a/c
2002
£
2002
24/5 Bank 300 31/5 Bal c/f
2002
31/5 Cash
Drawings a/c
£
200
44 31/5 Bal c/f
£
5
£
300
£
44
Accounting for drawings, discounts allowed and discounts received.
Drawings
The owner makes drawings from the firm in various ways:
i) Cash or bank withdrawals
When the owner withdraws money from the business we debit drawings and credit cashbook (cash in hand or
cash at bank).
ii) Taking goods for own use and
When the owner takes out some of the goods for his own use, we debit drawings and credit purchases.
iii) Personal expenses, paid by the business
Here we debit the drawings and credit expense account
Taking some of the other assets from the business e.g. motor vehicles or using part of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle or converting business
premises into living quarters or not paying into the business cash collected personally from the customers.
When this happens we debit drawings and credit the relevant asset e.g. motor vehicles, premises or some
building or even debtors.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
21
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the firm to pay the amount dues
within the agreed time. It is an amount deducted from the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit discounts received e.g. A.
Ltd sells some goods on credit to B Ltd. ₤1,000 under the terms of sale, B Ltd, will receive a discount of 5%
if they pay the amount due within one month. B decides to take up the offer and pays the amount within the
given time. B will record the transaction as follows.
Debit: Creditor – A Ltd
Credit: Discounts Received
Creditor A. Ltd a/c
2002
£
Bank
950
Discount received 50
1000
200
Bal c/f
Purchases a/c
2002
Purchases
£
1,000
2002
A Ltd
£ 2002
1,000
2002
Bank a/c
£ 2002
A Ltd
£
1000
Discounts Received a/c
£
2002
50
A Ltd
£
50
£
950
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customers to encourage prompt
payment. The amounts deducted from the sales invoice. In the previous example when A Ltd issued the
discount and was taken up by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.
2002
Sales
Debtors B Ltd a/c
£
2002
1,000 Bank
Discount
1,000
2002
50 Bal c/f
Discount allowed a/c
£ 2002
50
£
2002
950
50
Sales a/c
£
2002
£
Debtor 1,000
1,000
£
Debtor
2002
Bank a/c
£
Debtor
950
TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified as per the debits and
credits. The purpose of the trial balance is to show the accuracy of the double entries made and to facilitate the
preparation of final accounts i.e. the trading, profit & loss account and a balance sheet.
FINANCIAL ACCOUNTING 1
22
Introduction to Accounting
The debits of the trial balance should be the same as the credits, if not then there is an error in one or more
of the accounts.
The trial balance in example 1.8 would be extracted as follows:
Name
Trial balance as at 31 May 2002
Debit
Credit
£
£
Rent – income
5
Debtor – U Foot
7
Motor vehicle
300
Bank
1555
Purchases
289
Wages
117
Capital
2000
Creditor – M Rooks
152
Furniture & Fittings
150
Sales
352
Cash in hand
72
Creditor – P Scot
114
Expenses – Rent
15
Expenses – Stationery
27
Returns Outwards
23
Drawings
44
.
2464
2464
From the trial balance please note that assets and expenses are on the debit side. Capital, liabilities and
incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all the postings have been made
in the relevant accounts.
Example 1.9
Write up the following transactions in the books of S Pink:
2003
March
1
Started business with cash £1,000.
“
2
Bought goods on credit from A Cliks £296.
“
3
Paid rent by cash £28.
“
4
Paid £1,000 of the cash of the firm into a bank account.
“
5
Sold goods on credit to J Simpson £54.
“
7
Bought stationery £15 paying by cheque.
“
11
Cash sales £49.
“
14
Goods returned by us to A Cliks £17.
“
17
Sold goods on credit to P Lutz £29.
“
20
Paid for repairs to the building by cash £18.
“
22
J Simpson returned goods to us £14.
“
27
Paid A Cliks by cheque £279.
“
28
Cash purchases £125.
“
29
Bought a motor vehicle paying by cheque £395.
“
30
Paid motor expenses in cash £15.
“
31
Bought fixtures £120 on credit from R west.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
23
Solutions
Capital a/c
Cash in hand a/c
2003
£ 2003
£
31/3 Bal c/d 1,500 1/3 Cash 1,500
2003 £
2003
£
1/3 Capital 1,500 3/3 Rent
28
11/3 Sales
49 4/3 Bank
1,000
20/3 Repairs
18
28/3 Purchases
125
30/3 Motor exp.
15
31/3 Bal c/d
363
1,549
1,549
Purchases a/c
2003
£ 2003
£
2/3 A Hanson 296 31/3 Bal c/d 421
28/3 Cash
125
421
Creditors – A Cliks ac
2003
£ 2003
14/3 Returns out 17 2/3 Purchases
27/3 Bank
279
421
£
296
296
Rent –Expenses a/c
2003
3/3
Cash
£ 2003
28 31/3 Bal c/d
296
Bank a/c
£
28
2003
£
2003
4/3 Cash 1,000 5/3 Stationery
27/3 A. Hanson
29/3 Motor van
31/3 Bal c/d
1,000
1,000
Debtor – J Simpson a/c
2003
3/3 Sales
£
15
279
395
311
Sales a/c
£ 2003
54 22/3 Returns in
31/3 Bal c/d
£
14
40
54
54
2003
` £ 2002
31/3 Bal c/d 132 5/3 JSimpson
11/3 Sales
17/3 P Lutz
132
FINANCIAL ACCOUNTING 1
£
54
49
29
132
24
Introduction to Accounting
2003
7/3 Bank
Stationery a/c
£ 2003
15 31/3 Bal c/d
£
15
Returns outwards a/c
2003
31/3 Bal c/d
P Lutz – Debtor a
2003
£ 2003
17/3 Sales 29 21/3 Bal c/d
£
29
2003
20/3 Cash
£ 2003
14 31/3 Bal c/d
£
14
2003
29/3 Bank
R West – Creditor (others)
2003
31/3 Bal c/d
2003
31/3 A. Webster
£
17
Building repairs - expenses
Returns - Inwards
2003
22/3 J Simpson
£ 2003
17 14/3 A Cliks
2003
£
31/3 Bal c/d 18
Motor vehicle
£
2003
£
395 31/3 Bal c/d
395
Motor expenses
£ 2003
£
120 31/3 Fixtures 120
Fixtures
£ 2003
120 31/3 Bal c/d
£
18
2003
30/3 Cash
£ 2003
£
15 31/3 Bal c/d 15
£
120
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
25
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
Debit (£)
Capital
Purchases
Cash in hand
Bank
Rent expense
Sales
Fixtures
Debtor – J Simpson
Debtor – P Lutz
Motor vehicle
Creditors
Motor expenses
Returns inwards
Creditors others – R West
Stationery
Returns outwards
Building repairs
Credit (£)
1500
421
363
311
28
132
120
40
29
395
15
14
120
15
18
1769
17
1769
Example 1.10
The following transactions took place during the month of May:
2003
May 1
“
2
“
“
“
“
“
“
“
“
“
4
6
9
10
12
15
18
21
31
Started firm with capital in cash of £250.
Bought goods on credit from the following persons: R Kelly £54; Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
Paid rent by cash £12.
C Blanes paid us his account by cheque £43.
F Skin paid us £150 by cheque.
We paid the following by cheque: J Role £25; R Kelley £54.
Paid carriage by cash £23.
Bought goods on credit from P Combs £43; Mobile £110.
Sold goods on credit to B Long £67.
Paid rent by cheque £18.
FINANCIAL ACCOUNTING 1
26
Introduction to Accounting
Answer
2003
31/5
Bal
c/d
£
250
Capital
2003
1/5
£
250
Cash
2003
1/5
Capital
Cash in Hand
£
2003
250
6/5 Rent
.
250
2003
12/5
2003
12/5
Bank
Creditor R Kelly
£ 2003
54 2/5 Purchases
£
54
2003
31/5
Bank
Creditor – J Role
£
25 2/5 Purchases
£
25
2003
31/5
2003
31/5 Bal c/d
2003
4/5
21/5
2003
2/5
2/5
2/5
2/5
2/5
18/5
18/5
2003
9/5
10/5
Sales
Sales
Creditor I Sims
£ 2003
64 2/5 Purchases
Debtor B Long
£ 2003
62 31/5 Bal c/d
67
129
Purchases
£
2003
R Kelly
54 31/5 Bal c/d
P Combs
87
J Role
25
D Mobile
76
L Sims
64
P Combs
43
D. Mobile
100
459
C Blanes
H F Skin
Bank
£ 2003
43 12/5
150 12/5
31/5
. 31/5
193
J Role
R Kelly
Rent
Bal c/d
£
64
2003
4/5
£
129
.
129
2003
4/5
£
459
2003
31/5
15/5
31/5
Carriage
Bal c/d
2003
15/5
23
215
250
Creditor P Combs
£ 2003
Bal c/d
130 2/5
Purchases
. 18/5 Purchases
130
£
87
43
130
Creditor – D Mobile
£
2003
£
Bal c/d
186 2/5 Purchases
76
. 18/5 Purchases 110
186
186
Sales
Sales
Bal c/f
Debtor C. Blares
£
2003
43
4/5 Bank
£
43
Debtor F Smith
£ 2003
176 10/5 Bank
. 31/5 Bal c/d
176
£
150
26
176
£
348
Sales
2003
4/5
4/5
4/5
4/5
£
C Blanes
F Long
F Skin
B Long
.
459
£
25
54
18
96
193
£
12
Carriage Expenses
£ 2003
Cash
23 31/5 Bal c/d
STRATHMORE UNIVERSITY ● STUDY PACK
43
62
176
67
.
348
£
23
Lesson One
19x6
6/5
31/5
Cash
Bank
27
Rent
£ 19x6
12 31/5 Bal c/d
18
30
£
30
.
30
Trial Balance as at 31/5/2003
Capital
Cash
Creditor – R Kelly
Creditor – P Combs
Creditor – J Role
Creditor – D Mobile
Creditor – L. Simms
Debtor – C. Blanes
Purchases
Sales
Debtor- B. Long
Debtor- F Skin
Bank
Carriage
Rent
Debit
215
459
129
26
96
30
978
Credit
250
130
186
64
348
978
FINANCIAL ACCOUNTING 1
28
Introduction to Accounting
REINFORCEMENT QUESTIONS
Question One
Spark has been trading for a number of years as an electrical appliance retailer and repairer in premises which
he rents at an annual rate of $1,500 payable in arrears. Balances appearing in his books at 1 January 19X1
were as follows:
Capital account
Motor van
Fixtures and fittings
Provision for depreciation on motor van (credit)
Provisions for depreciation on fixtures& fittings (credit)
Inventory at cost
Receivables for credit sales:
Brown
Blue
Stripe
Cash at bank
Cash in hand
Payables for supplies:
Live
Negative
Earth
$
$
1,808
1,200
806
720
250
366
160
40
20
220
672
5
143
80
73
296
45
100
Amount owing for electricity
Local taxes paid in advance
Although Sparks has three credit customers the majority of his sales and services are for cash, out of which
he pays various expenses before banking the balance.
The following transactions took place during the first four months of 19X1
January February
$
$
Suppliers’ invoices:
Live
468
570
Negative
87
Earth
692
Capital introduced
500
Bankings of cash (from cash sales)
908
940
Expenditure out of cash sales before banking:
Withdrawals on account
130
120
Stationery
12
14
Travelling
6
10
Petrol and van repairs
19
22
Sundry expenses
5
4
Postage
12
10
Cleaner’s wages
60
60
Goods invoiced to credit customers:
Brown
66
22
STRATHMORE UNIVERSITY ● STUDY PACK
March
$
April
$
390
103
187
602
64
-
766
1,031
160
26
11
37
7
15
65
150
21
13
26
3
19
75
10
12
Lesson One
29
Blue
Stripe
Cheque payments (other than those to suppliers):
Telephone
Electricity
Local taxes
Motor van (1 February 19X1)
Unbanked at the end of April
120
140
130
180
44
38
20
48
40
62
-
49
47
800
-
59
20
220
-
66
106
12
Spark pays for goods by cheque one month after receipt of invoice, and receives a settlement discount of
15% from each supplier.
Credit customers also pay by cheque one month after receipt of invoice, and are given a settlement discount
of 10% of the invoice price.
Required:
Write up the ledger accounts of Spark for the four months to 30 April 19X1, and extract a list of account
balances after balancing off the accounts.
Question Two
Mary
Balance Sheet as at 31 December 2000
Non Current Assets
Premises
Plant
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities:
Creditors
Capital
Non Current Liabilities:
Loan from bank
£
£
25,000.00
12,000.00
37,000.00
11,000.00
10,000.00
5,000.00
3,000.00
29,000.00
(12,000.00)
17,000.00
54,000.00
34,000.00
20,000.00
54,000.00
During the year to 31 December 2001 the following total transactions occurred:
FINANCIAL ACCOUNTING 1
30
Introduction to Accounting
a) Mary withdrew a total of £10,000.00 in cash
b) Stock in trade was bought, all on credit, for £34,000.00
c) Sales were made totaling 60,000.00 of stock in trade which had cost £37,000.00. Of these sales
£51,000.00 were on credit and £9,000.00 for cash.
d) A total of £16,000.00 was drawn from the bank in cash to the cash till.
e) Electricity for the year paid by cheque totaled £2,000.00
f) Rates for the year paid by cheque totaled £1,000.00
g) Wages for the year all paid cash totaled £10,000.00
h) Sundry expenses all paid in cash totaled £2,000.00
i) Creditors were paid a total of £36,000.00 all by cheque
j) Debtors paid a total of £54,000.00 all in cheques.
k) The bank charged interest on the loan deducting £3,000.00.
Required:
Prepare a revised balance sheet.
(20 marks)
Question Three
a) Explain the nature of accounting and the accounting equation
(8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following information
(12 marks)
Non Current Assets
Property
Machinery
Current Assets:
Debtors
Cash
Current Liabilities:
Creditors
Overdraft
Net Current Liabilities
Net Assets
01.01.2001
£
20,000.00
6,000.00
26,000.00
4,000.00
1,000.00
5,000.00
31.12.2001
£
20,000.00
9,000.00
29,000.00
8,000.00
1,500.00
9,500.00
5,000.00
6,000.00
3,000.00
9,000.00
11,000.00
(6,000.00)
20,000.00
12,000.00
(2,500.00)
26,500.00
Drawings during the year amounted to £4,500.00
Additional capital introduced by the owner £5,000.00
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson One
31
Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:
Sales
Purchases
Office expenses
Insurance
Wages
Rates
Heating and Lighting
Telephone
Discounts allowed
Opening stock
Returns inwards
Returns outwards
Premises
Plant and Machinery
Motor Vehicles
Debtors
Bank balance
Creditors
Loan-long term loan
Capital
Drawings for the year
Closing stock
£
47,600.00
22,850.00
1,900.00
700.00
7,900.00
2,800.00
1,200.00
650.00
1,150.00
500.00
200.00
150.00
40,000.00
5,000.00
12,000.00
12,500.00
7,800.00
3,400.00
10,000.00
60,000.00
4,000.00
550.00
Required:
Construct a trial balance, from the above list of balances.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
32
Final Accounts
LESSON TWO
FINAL ACCOUNTS
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of goods/stocks) of the business
and tries to determine the gross profit for the relevant financial period.
The gross profit is then taken up
in the profit and loss account as part of the income.
Format for the trading account:
Name
Trading Account for the year ended 31 Dec.
₤
₤
Sales
Less: Returns Inwards
₤
x
(x)
x
Less: Cost of Sales
Opening stock
Purchases
Add: Carriage Inwards
x
x
x
x
x
Less: Returns Outwards
Cost of stock available for sale
Less: Closing stock
Gross Profit
x
x
x
(x)
x
Example: 2.1
From the following details draw up the trading account of Springs for the year ended 31 December 2002,
which was his first year in business.
Carriage inwards
Returns outwards
Returns inwards
Sales
Purchases
Stock of goods: 31 December 19x7
₤
6,700
4,950
8,900
387,420
333,330
74,890
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
33
Springs
Trading Account for the year ended 31 Dec 2002
£
Sales
Less: Returns Inwards
£
387,420
8,900
378,520
Less cost of sales
Purchases
Add: Carriage Inwards
333,330
6,700
340,030
4,950
335,080
74,890
Less: Returns outwards
Less: Closing stock
Gross Profit
260,190
118,330
Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the trading account of R
Sings for that year.
Stocks: 1 April 2002
Returns inwards
Returns outwards
Purchases
Carriage inwards
Sales
Stocks: 31 March 2003
£
16,523
1,372
2,896
53,397
1,122
94,600
14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
Sales
Less: Returns Inwards
₤
₤
₤
94,600
(1,372)
93,228
Less: Cost of sales
Opening Stock
Purchases
Add: Carriage Inwards
Less: Returns Outwards
Cost of goods available for sale
Less: Closing stock
Gross Profit
53,397
1,122
54,519
2,896
16,523
51,623
68,146
18,504
FINANCIAL ACCOUNTING 1
(49,642)
43,586
34
Final Accounts
(b) PROFIT AND LOSS ACCOUNT
It shows the net profit or net loss that the business has made from all the activities during a financial period.
The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same financial
period.
In practice, the trading account is combined together with the net profit and loss account into one report so
that the format is as shown below:
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
£
£
Sales
Less: Returns Inwards
£
x
x
x
Less: Cost of sales
Opening stock
Purchases
Add: Carriage Inwards
Less: Returns Outwards
Cost of goods available for sale
Less: Closing stock
Gross Profit
Discount received
Rent received
Interest received
Other incomes
x
x
x
x
x
x
x
x
(x)
x
x
x
x
x
x
Less: Expenses
Carriage Outwards
Discounts allowed
Postage & stationary
Salaries & wages
Rent paid
Insurance & rates
Bank charges
Other expenses
Net profit/ (loss)
x
x
x
x
x
x
x
x
STRATHMORE UNIVERSITY ● STUDY PACK
(x)
x/(x)
Lesson Two
35
Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss account for the year
ended 30 September 2002, and a balance sheet as at that date.
Dr
Cr
£
£
Stock 1 October 19x8
23,680
Carriage outwards
2,000
Carriage inwards
3,100
Returns inwards
2,050
Returns outwards
3,220
Purchases
118,740
Sales
186,000
Salaries and wages
38,620
Rent
3,040
Insurance
780
Motor expenses
6,640
Office expenses
2,160
Lighting and heating expenses
1,660
General expenses
3,140
Premises
50,000
Motor vehicles
18,000
Fixtures and fittings
3,500
Debtors
38,960
Creditors
17,310
Cash at bank
4,820
Drawings
12,000
Capital
126,360
332,890
FINANCIAL ACCOUNTING 1
332,890
36
Final Accounts
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
Sales
Less: Returns Inwards
£
£
£
186,000
(2,050)
183,950
Less: Cost of sales
Opening stock
Purchases
Add: Carriage inwards
Less: Returns Outwards
Cost of goods available for sale
Less: Closing stock
Gross Profit
23,680
118,740
3,100
12,1840
3,220
118,620
142,300
29,460
(11,2840)
71,110
Less Expenses
Salaries & wages
Carriage outwards
Rent
Insurance
Motor expenses
Office expenses
Lighting & heating
General expenses
Net Profit
38,620
2,000
3,040
780
6,640
2,160
1,660
3,140
STRATHMORE UNIVERSITY ● STUDY PACK
(58,040)
13,070
Lesson Two
37
(c) BALANCE SHEET
This is a simple report that shows the assets and liabilities of the business and the capital of the owner as at a
certain point in time. The format is at shown below:
Name
Balance sheet as at 31/Dec/19xx
Non Current Assets
£
£
£
Land & Buildings
Plant & Machinery
Fixtures, Furniture & Fittings
Motor vehicles
x
x
x
x
x
Current Assets
Stock/inventories
Debtors – trade
Debtors – others
Cash at bank
Cash at hand
Current Liabilities
Bank overdraft
Creditors – trade
Creditors – others
Net current assets
Net Assets
x
x
x
x
x
x
x
x
x
(x)
Capital
Add: Net profit
x
x
x
x
x
(x)
x
Less: Drawings
Non Current Liabilities
Loan (s)
x
x
The balance Sheet of P Boones in example 2.3 will be produced as follows:
FINANCIAL ACCOUNTING 1
38
Final Accounts
P Boones
Balance Sheet as at 30 Sept 2002
£
£
Non Current Assets
Premises
Fixtures & fittings
Motor vehicles
50,000
3,500
18,000
71,500
Current Assets
Stock
Debtors
Cash at bank
Current Liabilities
Creditors
Net Current Assets
Net Assets
29,460
38,960
4,820
73,240
(17,310)
Capital
Add: Net Profit
55,930
127,430
126,360
13,070
139,430
(12,000)
127,430
Less: Drawings
`
D) BOOKS OF PRIME ENTRY
The diagram below shows the components of an accounting system for a firm that carries out trading
activities from the source documents that record the evidence of transactions, where the documents are
recorded and the postings to made.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
39
Source
Books of
The
Documents
Prime entry
Ledger Balances
Sales
Invoice
Account
Recorded
Sales
Ledger
Recorded
Loss
Recorded
Return
Inwards
Journal
Purchases
Ledger
Other
Balance
Correspon
dence
TRIAL
The
&
Return
Outwards
journal
Loss
BALANCE
Receipts
Cheques
Petty cash
Vouchers
The
Purchases
Journal
Profit
Debit
Note
Account
THE
Trading
Recorded
Purchase
Invoice
Credit
note
Sales
Journal
List of the
Final
Accounts
The cashbook
&
Recorded
Recorded
Petty
cashbook
General
Ledger
General
Journal
Sheet
Balance
A brief description of each component is explained below.
SOURCE DOCUMENTS
This shows the evidence transactions. They are collected, filed and posted in the books of prime entry.
Example, if a firm sells goods on credit, then an invoice is raised. The source documents as shown in the
above include:
FINANCIAL ACCOUNTING 1
40
Final Accounts






Sales invoice
Purchases invoice
Credit note
Debit note
Receipts, cheques and petty cash vouchers
Other correspondences.
(i) Sales Invoice
The sales invoice is raised by the firm and sent to the debtor/customer when the firm makes a credit sale.
The sales invoice contains the following:
i. Name and address of the firm
ii. Name and address of the buying firm
iii. Date of making the sale – invoice date.
iv. Invoice number
v. Amount due (net of trade discount)
vi. Description of goods sold
vii. Terms of sale
(ii) Purchases Invoice
A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It
shows the following:
i. Name and the address of the creditor/seller
ii. Name and address of the firm
iii. Date of the purchase (invoice date)
iv. Invoice number
v. Amount due
vi. Description of goods sold
vii. Terms of sale
(iii) Credit note
A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to
the firm. It’s contents include:
i. Name and address of the firm
ii. Name and address of the debtor
iii. Amount of credit
iv. Credit note number
v. Reason for credit e.g. if goods sent but of the wrong type.
The purpose of the credit note is to inform the debtor or customer that the debtor’s account with the firm
has been credited i.e. the amount due to the firm has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors.
From the context we can assume that all credit notes are issued when goods are returned.
(iv) Debit note
This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It
includes the following items:
i. Name and address of the firm
ii. Name and address of the creditor
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced
or cancelled.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
The
Firm
41
Credit sales (sales invoice)
The
Debtor
Returns inwards (credit note)
Credit purchase (purchase invoice)
The
Firm
Returns outwards (debit note)
The
Creditor
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they make payments in the form
of cash or cheques. It shows:
i.
ii.
iii.
iv.
The name and address of the firm
The date of the receipt
Amount received (cash or cheque or other means of payment)
Receipt number.
Cheques
When a firm opens a current account with the bank, a chequebook containing cheques issued. The cheques
allow the firm to make payments against the account with the bank. When a firm issues a cheque to its
creditors for payments, it authorizes the bank to honour payments against the firm’s account with the bank.
The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments (payments of small value in the
firm which require cash payments e.g. fuel, bus-fare, office snacks), which is approved by a senior manager
and filed for record purpose. It shows:
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how the money was utilized e.g.
fuel receipt, bus ticket e.t.c.
FINANCIAL ACCOUNTING 1
42
Final Accounts
(vii) Other correspondence
These include information received within or outside the firm that has a financial implication in the
accounts.
Examples are:
i.
ii.
iii.
iv.
Letters from the firm’s lawyers about a debtors balance.
Hire-purchase/credit sale or credit purchase agreements that relate to non-current assets.
Memorandum from a senior manager requiring changes to be made in the accounts.
Bank statement from the bank, e.g. bank charges.
BOOKS OF PRIME ENTRY
They record the source documents.
Sales Journal
It is also called a Sales Day Book. It records all the sales invoices issued by the firm during a particular
financial period. The format is as follows (with simple records of invoice).
SALES JOURNAL
Date 19x8
1st March
3rd March
5th March
Page 5
Detail
Folio
S. Spikes
T. Binns
L.Thompson
Amount £
SL.10
SL.19
SL,8
Total
200.00
350.00
150.00
700.00
The individual entries in the sales journal are posted to the debit side of the debtor’s accounts in the sales
ledger and the total is posted on the credit side of the sales account in the general ledger.
This is shown below:
Sales Ledger
19x8
1/3
S Spikes
£
19x8
Sales 200
£
Sales Ledger
19x8
3/3
Sales
General Ledger
19x8
£
General Account
19x8
5/3
Credit sales for
period
General Ledger
T Binus
£
19x8
350
STRATHMORE UNIVERSITY ● STUDY PACK
£
700
Lesson Two
19x8
3/3
43
L Thompson
£
19x8
Sales 150
£
Example 2.4
You are to enter up the sales journal from the following details. Post the items to the relevant accounts in the
sales ledger and then show the transfer to the sales account in the general ledger.
2003
Mar
“
“
“
“
“
“
“
1
3
6
10
17
19
27
31
Credit sales to J Gordon
Credit sales to G Abrahams
Credit sales to V White
Credit sales to J Gordon
Credit sales to F Williams
Credit sales to U Richards
Credit sales to V Wood
Credit sales to L Simes
£1,870
£1,660
£120
£550
£2,890
£660
£280
£780
FINANCIAL ACCOUNTING 1
44
Final Accounts
Answer
SALES JOURNAL
Date (2003)
1/3
3/3
6/3
10/3
17/3
19/3
27/3
31/3
Detail
Page 10
Folio
Amount
J. Gordon
G. Abrahams
V. White
J. Gordon
F. Williams
U. Richards
V. Wood
L. Simes
1,870.00
1,660.00
120.00
550.00
2,890.00
660.00
280.00
780.00
8,810.00
Sales Ledger
2003
1/3
10/3
J Gordon
£ 2003
1570
550
2003
3/3
G Abrahams
£ 2003
Sales 1,660
£
2003
27/3
2003
6/3
Sales
U White
£ 2003
120
£
2003
31/3
Sales
F Williams
£ 2003
2890
2003
17/3
£
£
2003
19/3
2003
Sales
U Richards
£ 2003
660
£
Sales
V Wood
£ 2003
280
£
Sales
L Simes
£ 2003
750
£
£
Sales a/c
2003
Credit
Sales
£
Purchases Journal
Purchases journal is also called a purchases day-book. It records all the purchase invoices received by the firm
during a particular financial period. It has the following format (including records of invoices).
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
Date 19x6
1/5
2/5
45
PURCHASES JOURNAL
Description/Detail
C. Kelly
L. Smailes
Folio
Page 15
Amount
PL. 10
PL. 20
400
350
TOTAL
750
The individual entries in the purchases journal are posted to the credit side of the creditor’s accounts in the
purchases ledger and the total is posted to the debit side of purchases account of the general ledger. This is
shown below:
19x6
C Kelly
£ 19x6
1/5 Purchases
£
400
19x6
L Smailes
£ 19x6
2/5 Purchases
£
250
19x6
31/5
Purchases a/c
£ 19x6
Sundry
750
Creditors
£
Returns Inwards Journal
It is also called the returns inwards day-book. It records all the credit notes raised by the firm and sent to
customers during a particular financial period, it has the following format.
RETURNS INWARDS JOURNAL
Date
1 March
2 March
5 March
TOTAL
Detail
S. Spikes
C. Kelly
T. Bills
Pg 10
Folio
Amount
SL. 22
SL. 18
SL. 9
£20
£18
£15
£53
Individual entries in a return inwards journal are posted to the credit of the debtors accounts in the sales
ledger and the total is posted to the debit side of the return-inwards account of the general ledger.
FINANCIAL ACCOUNTING 1
46
Final Accounts
Sales Ledger
General Ledger
S. Spikes a/c
£
1/3
Returns In
£
20
C Kelly a/c
£
2/3
Returns In
£
18
31/3
Returns Inwards a/c
£
Sundry
53
Debtors
T. Bills a/c
£
5/3
STRATHMORE UNIVERSITY ● STUDY PACK
Returns
In
£
£
15
Lesson Two
47
Returns Outwards Journal
It is also called the returns outwards daybook. It records all the debit notes received by the firm from the
creditors during a particular financial period. It has the following format.
RETURNS OUTWARDS JOURNAL
DATE
DETAILS
FOLIO
2 May
3 May
4 May
L. Thompson
M. Hyatt
T. Bills
PL. 15
PL. 10
PL. 7
AMOUNT (£)
14
12
19
TOTAL
35
Individual entries are posted on the debit side of the creditors account in the purchases ledger and on the
total to credit side of the returns outwards account in the general ledger.
Purchases Ledger
L. Thompson a/c
`
£
2/5 Returns out 14
General Ledger
£
M. Hyatt a/c
£
3/5 Returns out 12
£
£
T. Bills a/c
£
4/5 Returns Out 19
£
The following example 2.5 shows how the four journals are used.
FINANCIAL ACCOUNTING 1
Returns Outwards a/c
£
31/5 sundry
creditors 35
48
Final Accounts
Example 2. (Frankwood adapted)
You are to enter the following items in the books, post to personal accounts, and show transfers to the
general ledger.
19x5
July
“
1
3
5
8
12
14
20
24
31
31
“
“
“
“
“
“
“
Credit purchases from: K Hill £3800; M Norman £500; N Senior £106.
Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356.
Credit purchases from: R Morton £200; J Cook £180; D Edwards £410; C
Credit sales to: A Green £307; H George £250; J Ferguson £185.
Returns outwards to: M Norman £30; N Senior £16.
Returns inwards from: E Phillips £18; F Thompson £22.
Credit sales to: E Phillips £188; F Powell £310; E Lee £420.
Credit purchases from: Ferguson £550; K Ennevor £900.
Returns inwards from: E Phillips £27; E. Rigby £30.
Returns outwards to: J Cook £13; C Davies £11.
Davies £66.
Study the solution provided:
SALES JOURNAL
DATE
DETAIL
AMOUNT (£)
3 July
3 July
3 July
8 July
8 July
8 July
20 July
20 July
20 July
E. Rigby
E. Phillips
F. Thompson
A. Green
H. George
J. Ferguson
E. Phillips
F. Powell
E. Lee
510
246
356
307
250
185
188
310
420
TOTAL
2,772
Sales Ledger
19x5
3/7
Sales
E Rigby
£ 19x5
510 3/7
Returns
Inwards
£
30
19x5
3/7
Sales
E Phillips
£ 19x5
246 14/7
20/7
Sales
188 31/7
Sales
J. Ferguson
£ 19x5
185
F. Thompson
19x5
3/7
Sales
£ 19x5
356 14/7 Returns
in
£
22
19x5
8/7
STRATHMORE UNIVERSITY ● STUDY PACK
Returns
£
18
Retuns in
27
£
Lesson Two
19x5
8/7
19x5
8/7
49
Sales
Green
£ 19x5
307
Sales
H George
19x5
250
£
19x5
20/7
£
19x5
20/7
F. Powell
£ 19x5
310
Sales
Sales
£
420
£
E Lee
19x5
£
PURCHASES JOURNAL
DATE
DETAIL
1 July
1 July
1 July
5 July
5 July
5 July
5 July
24 July
24 July
AMOUNT (£)
K. Hill
M. Norman
N. Senior
R. Mortan
J. Cook
D. Edwards
C. Davies
C. Ferguson
K. Ennevor
380
500
106
200
180
410
66
550
900
Total
3,292
Purchases Ledger
1995
12/7
1995
30/7
1995
31/7
1995
31/7
Returns out
£
16
N. Senior
1995
1/7 Purchases
£
22
Returns out
£
30
M. Norman
1995
1/7 Purchases
£
500
Returns out
£
13
J. Cook
1995
5/7 Purchases
£
180
Returns out
£
11
C. Davies
1995
5/7 Purchases
£
60
FINANCIAL ACCOUNTING 1
50
Final Accounts
£
K. Hill
1995
1/7 Purchases
£
380
1995
£
R. Morton
1995
5/7 Purchases
£
200
1995
£
D. Edwards
1995
5/7 Purchases
£
410
1995
C. Ferguson
£ 1995
27/7 Purchases
£
550
1995
£
K. Ennevor
1995
24/7 Purchases
£
900
1995
RETURNS INWARDS JOURNAL
DATE
14 July
14 July
31 July
31 July
DETAILS
E. Phillips
F. Thompson
E. Phillips
E. Rigby
AMOUNT
18
22
27
30
97
RETURNS OUTWARDS JOURNAL
12 July
12 July
31 July
31 July
M. Norman
N. Senior
J. Cook
C. Davies
30
16
13
11
70
General Ledger
Sales a/c
1995
1995
31/7 Sundry creditors
£
£
3292
1995
31/7 Sundry debtors
Purchases a/c
1995
STRATHMORE UNIVERSITY ● STUDY PACK
£
2772
£
Lesson Two
51
Returns Inwards a/c
£
1995
97
1995
31/7 Sundry debtors
£
Returns Outwards a/c
£ 1995
31/7 Sundry creditors
1995
£
70
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of
income) and all the payments (to creditors or suppliers and other expenses) for a particular financial period.
The cashbook will also show us the cash at bank and cash in hand position of the firm.
There are two types of cashbooks:
i.
ii.
Cash in hand cashbook, which records the cash transactions in the firm or business.
Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of the general ledger and
records the source documents (receipts and cheques). The cash at bank cashbook and cash in hand cashbook
are combined together to get a two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
Date
Details
Cash
(£)
Bank
(£)
Date
Details
Cash
(£)
Bank
(£)
Additional columns for discounts allowed and discounts received can be included with the cash at bank
columns to get a 3 – column cashbook. The format is as follows:
Date
Details
Discount Cash
Allowed (£)
Bank
(£)
Date Details
Discounts Bank
Received
£)
FINANCIAL ACCOUNTING 1
Cash
(£)
52
Final Accounts
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger balances
and the discounts allowed and discounts received columns will be added and the totals posted to the
respective discount accounts. The discount allowed total will be posted to the debit side of the discount
allowed account in the general ledger and the total of the discount received will be posted to the credit side of
the discount-received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the firm has some cash at the
bank and a credit balance means that the account at the bank is overdrawn. (the firm owes the bank some
money).
Example 2.7
Write up a two-column cashbook from the following details, and balance off as at the end of the month:
2003
May
“
“
“
“
“
“
“
“
“
“
“
“
“
“
1
2
3
4
5
7
9
11
15
16
19
22
26
30
31
Started business with capital in cash £1,000.
Paid rent by cash £100.
F Lake lent us £5,000, paid by cheque.
We paid B McKenzie by cheque £650.
Cash sales £980.
N Miller paid us by cheque £620.
We paid B Burton in cash £220.
Cash sales paid direct into the bank £530.
G Moores paid us in cash £650.
We took £500 out of the cash till and paid it into the bank account.
We repaid F Lake £1,000 by cheque.
Cash sales paid direct into the bank £660.
Paid motor expenses by cheque £120.
Withdrew £1,000 cash from the bank for business use.
Paid wages in cash £970.
Cash Book
Capital
F Lake (loan)
Sales
N Miller
Sales
G Moores
Cash C
Sales
Bank C
Cash
1000
Bank
Cash
Bank
5000
980
620
530
650
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
Capital
F. Lake (Loan)
Sales
N Miller
Sales
G Moores
Cash C
Sales
Bank C
53
Cash
1000
650
3630
Cash Book
Bank
Rent
5000 B McKenzie
980 B Burton
620 Bank C
530 F Lake (loan)
Motor Expenses
500 Cash C
660 Wages
1000 Balances c/d
7310
Cash
100
220
500
Bank
650
120
1000
100
970
1840
3630
4540
7310
Example 2.7(Frankwood adapted)
A three-column cashbook is to be written up from the following details, balanced off, and the relevant
discount accounts in the general ledger shown.
19x8
Mar
“
1
2
“
“
“
4
6
8
“
“
“
“
10
12
15
18
“
“
“
“
“
21
24
25
29
31
Balances brought forward: Cash £230; Bank £4,756.
The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton £140; E Taylor £220; R Harris £800.
Paid rent by cheque £120.
J Cotton lent us £1,000 paying by cheque.
We paid the following accounts by cheque in each case deducting a 2 ½ per
cent cash
discount: N Black £360; P Towers £480; C Rowse £300.
Paid motor expenses in cash £44.
H Hankins pays his account of £77, by cheque £74, deducting £3 cash discount.
Paid wages in cash £160.
The following paid their accounts by cheque, in each case deducting 5 per cent
cash
discount: C Winston £260; R Wilson & Son £340; H Winter £460.
Cash withdrawn from the bank £350 for business use.
Cash Drawings £120.
Paid T Briers his account of £140, by cash £133, having deducted £7 cash discount.
Bought fixtures paying by cheque £650.
Received commission by cheque £88.
FINANCIAL ACCOUNTING 1
54
Final Accounts
Answer
Disct
Bank
Bal b/d
R Burton
E Taylor
R Harris
J Cotton: loan
H Hankins
C Winston
R Wison & Son
H Winter
Bank
Commission
7
11
15
3
13
17
23
89
Cash
230
350
580
Cash Book
Bank
4756
133
209
285
1000
74
247
323
437
Rent
N Black
P Towers
C Rowse
Motor expenses
Wages
Cash
Drawings
T Briers
Fixtures
88 Balances c/d
7552
Discounts Received
3/1
Sundry Creditors
3/1
Sundry Debtors
Disct
9
12
20
Cash
44
160
7
120
133
48
123
580
Bank
120
351
468
780
350
650
4833
7552
48
Discounts Allowed
89
Petty Cash Book and the imprest system of Accounting.
Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. The petty cash
vouchers will show summary expenses paid by the cashier and this information is listed and classified in the
petty cash book under the headings of the relevant expenses such as:



Postage and stationery
Traveling
Cleaning expenses.
The format is as shown:
Receipts
Date
Petty Cash Book
Detail
Payments
Amount
Expenses
Postage Stationery
Traveling
STRATHMORE UNIVERSITY ● STUDY PACK
The
Ledger
Lesson Two
55
The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand.
The totals of the expenses are posted to the debit side of the expense accounts. If a firm operates another
cashbook in addition to the petty cash book, then the totals of the expenses will also be posted on the credit
side of the cash in hand cashbook.
The Imprest system
This system of accounting operates on a simple principle that the cashier is refunded the exact amount spent
on the expenses during a particular financial period. At the beginning of each period, a cash float is agreed
upon and the cashier is given this amount to start with. Once the cashier makes payments for the period he
will get a total of all the payments made against which he will claim a reimbursement of the same amount that
will bring back the amount to the cash float at the beginning of the period.
This is demonstrated as follows:
Start with (float)
Expenses paid
Balance
Reimbursement
Cash float
£
1,000
(720)
280
720
1,000
Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float). I n the following week,
the following payments are made:
£
1st March – bought stamps for
80
nd
2 March – paid bus fare for
120
2nd March – cleaning materials
240
3rd March – bought fuel
150
3rd March – cleaning wages
300
4th March – bought stamps
200
4th March – paid L. Thompson (creditor)
400
5th March – fuel costs
150
On the 5th of March the cashier requested for a refund of the cash spent and this amount was reimbursed
back.
Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the
relevant expense accounts, as they would appear on the General Ledger.
FINANCIAL ACCOUNTING 1
56
Final Accounts
Answer
Receipts
Date
(£)
2000 1/3
1/3
2/3
2/3
3/3
3/3
4/3
4/3
5/3
1640 5/3
5/3
3640
2000 6/3
Detail
Payments
Amount
(£)
Bal b/d
Stamps
Bus Fare
Cleaning Materials
Fuel
Cleaning wages
Stamps
L Thompson
Fuel
Expenses
Postage
(£)
80
120
240
150
300
200
400
150
1640
Bal c/d
Cleaning
(£)
THE
LEDGER
Travel
(£)
(£)
80
240
200
.
280
300
.
540
120
150
150
420
400
.
400
2000
3640
Bal b/d
The General Journal
It records information from other correspondence (information that is not recorded in the above books of
prime entry). It explains the type of entries that will be made in the ledger accounts giving a reason for these
entries.
The type of transactions recorded here are:
i. Writing off of assets from the accounts e.g. bad-debts.
ii. Drawings for goods or other assets from the business by the owner, not cash drawings.
iii. Purchase or sale of non-current assets on credit.
The format is as shown:
The General Journal
GENERAL JOURNAL
Date
1/3
Detail
Debit
Account to be debited
Account to be credited
(Narrative)
x
Credit
x
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
57
Example 2.9
You are to show the journal entries necessary to record the following items:










2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
2003 May 8 Furniture bought by us for £490 was returned to the supplier Wood
Offices, as it was unsuitable. Full allowance will be given us.
2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and we received
£39 in full settlement of the debt.
2003 May 14 we take £45 goods out of the business stock without paying for them.
2003 May 28 Some time ago we paid an insurance bill thinking that it was all in respect
of the business. We now discover that £76 of the amount paid was in fact insurance of
our private house.
2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.
FINANCIAL ACCOUNTING 1
58
Final Accounts
a.
Answer
GENERAL JOURNAL
Date (19x5)
1/5
Detail
Debit (£)
Credit (£)
Motor Vehicle
6,790
Motors Ltd
6,790
Motor vehicle bought on credit
from Motors Ltd
_________________________________________________________________________
Bad debts
34
N Smart - Debtors
34
Amount due from N Smart
written off as bad
_________________________________________________________________________
8/5
3/5
Wood offices
490
Furniture
490
Office Furniture returned to
Wood offices
_________________________________________________________________________
12/5
Bad debts
111
W. Hayes
111
Amount owed now written off
as bad debt.
________________________________________________________________________
14/5
Drawing for goods
45
Purchases
45
Goods taken from the
business for personal use.
_________________________________________________________________________
8/5
Drawings
76
Insurance Expenses
76
Insurance relating to private house
now transferred to drawings
_________________________________________________________________________ 28/5
Machinery
980
Xerox Machines
980
Machinery bought from
Xerox Machines
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
59
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability, incomes and expenses and
capital.
The ledger accounts can also be classified as follows:
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
REAL
ACCOUNTS
DEBTORS
(for goods)
CREDITORS
(For goods)
Non-current
assets
Inventories/
Stocks
NORMAL
a/cs
Other
Liabilities
Other
Assets
Income
Expenses
Capital
FINANCIAL ACCOUNTING 1
60
Final Accounts
REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital of £5,000.00 with
which he opened a bank account for his business.
During May the following transactions took place.
May 1
May 2
May 4
May 9
May 11
May 13
May 16
May 17
May 18
May 19
May 20
May 21
May 24
May 30
May 31
Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
Purchased goods on credit from Abel £650.00
Sold goods on credit to Bruce £700.00
Purchased goods on credit from Green £300.00
Sold goods on credit to Hill £580.00
Cash sales paid into bank account £200.00
Received cheque from Bruce in settlement of his account
Purchased goods on credit from Kay £800.00
Sold goods on credit to Nailor £360.00
Sent Cheque to Abel in settlement of his account
Paid rent by cheque £200.00
Paid delivery expenses by cheque £50.00
Received from Hill £200.00 on account
Drew cheque for personal expenses £200.00 and assistant wages £320.00
Settled the account of Green.
Required
a)
b)
c)
d)
Record the transactions in the books of prime entry.
Post the entries in the ledger accounts
Balance the ledger accounts where necessary
Extract a trial balance as at 31 May 2000.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
61
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages bookshop.
Endpages Bookshop
Trial balance as at 31 December 2002
Dr
£
Sales
Purchases
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising
Telephone
Rates
Discount allowed
Discount received
Rent received
Returns inwards
Returns outwards
Stock at 01 Jan 2001
Premises
Stock as at 31 Dec 2001
Fixtures and fittings
Debtors and Creditors
Cash in Hand
Cash in bank
Capital
Drawings
Stock as at 31 Dec 2001
103,500.00
18,700.00
2,500.00
1,100.00
600.00
2,400.00
3,500.00
Cr
£
151,500.00
800.00
3,000.00
100.00
200.00
2,000.00
1,500.00
3,500.00
46,000.00
80,000.00
41,000.00
5,000.00
4,800.00
200.00
14,000.00
________
328,700.00
7,500.00
12,000.00
11,000.00
41,000.00
328,700.00
FINANCIAL ACCOUNTING 1
Require
d
Prepare
a
Trading
and
profit
and loss
account
for the
year
ended 31
Decemb
er 2002
and a
balance
sheet as
at that
date.
(
20
marks)
62
Final Accounts
QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of final accounts for the
year ended 31 March 2002.
Stock 1 April 2001
Sales
Purchases
Carriage inwards
Carriage outwards
Returns outwards
Wages and salaries
Rent and rates
Communication expenses
Commissions payable
Insurance
Sundry expenses
Buildings
Debtors
Creditors
Fixtures
Cash at bank
Cash in hand
Drawings
Capital
Dr
£
1,816,000
6,918,500
42,000
157,000
1,024,000
301,500
62,400
21,600
40,500
31,800
2,000,000
1,432,000
285,000
297,000
11,500
762,000
152,028
Cr
£
9,234,000
64,000
816,000
5,088,800
152,028
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
63
QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to draft the trading and profit
and loss account for the year to end 30 September 2002 and a balance sheet as at that date.
Dr
Cr
£
£
Capital
3,095,500
Drawings
842,000
Cash at bank
311,500
Cash in hand
29,500
Debtors
1,230,000
Creditors
937,000
Stock 30 September 2001
2,391,000
Motor van
410,000
Office equipment
625,000
Sales
1,309,000
Purchases
9,210,000
Returns inwards
55,000
Carriage inwards
21,500
Returns outwards
30,700
Carriage outwards
30,900
Motor expenses
163,000
Rent
297,000
Telephone charges
40,500
Wages and salaries
1,281,000
Insurance
49,200
Office expenses
137,700
Sundry expenses
28,400
17,153,200
17,153,200
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
64
Final Accounts
COMPREHENSIVE ASSIGNMENT No.1
TO BE SUBMITTED AFTER LESSON 2
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking
by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
The books of Mr T, a trader in tea showed the following balances as at 31 March 1998:
Shs.
100,000
400,000
80,000
95,000
2,000
135,000
15,000
3,000
10,000
720,000
4,750
3,250
2,900
8,700
20,000
32,400
35,000
30,000
100,000
80,000
70,000
3,000
4,000
18,000
30,000
2,000
6,000
80,000
10,000
280,000
Opening stock of tea
Purchases – Tea
Salaries paid
Buildings
Cash in hand
Cash at bank
Rent, rates and council taxes
Insurance premium paid
Miscellaneous receipts
Sales
Discounts allowed
Bad debts
Building repairs
Miscellaneous expenses
Advertisement
Commission to sales manager
Furniture and fittings
Air conditioners
Sundry debtors
Sundry creditors
Loan on mortgage
Interest paid on the above
Prepaid expenses
Drawings
Bills payable (Current liability)
Bank charges
Legal charges
Motor vehicles
Travelling and conveyance
Capital
The following further information was obtained :
1. Closing stock was Shs.55,000.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
65
2. Legal charges include Shs.5,000 for the cost of stamps and registration of a new building acquired
during the year.
3. Purchases include 4000 kg tea valued at Shs.20,000, which was found totally spoilt. An insurance
claim of Shs.15,000 has been accepted by the insurance company.
4. Travelling and conveyancing include proprietor’s personal travelling for which he is charged Shs.4,
800.
5. The sales manager is entitled to commission of 7.5% of the total sales. However any bad debts
incurred during the year are deductible from such commission entitlements.
6. Debtors include:
7. Shs.10, 000 due from M & C0 (Creditors include Shs.18, 000 due to the same party).
8. Shs.5, 000 due from the sale of furniture.
9. Further bad debts of Shs.2, 000
10. Provision for bad debts is to be created at 2% of net amount outstanding from trade debtors.
11. Depreciation is chargeable as follows:
Buildings
2.5%
Furniture and Fittings
10%
Air conditioners
15%
Motor vehicles
20%
12. Miscellaneous receipts represent sales proceeds of furniture, whose written down value was Shs.12,
000.
13. Prepaid expenses include insurance premiums for the next year.
Required:
Prepare a trading, profit and loss account for the year ended 31st March 1998 and a Balance Sheet as at that
date.
QUESTION TWO
Hall Ltd., which makes up its accounts to 30th June each year, has a fleet of motor lorries. Annual
depreciation on motor lorries is calculated at a rate of 25% on the reducing balances, with a full year’s
depreciation being made in the year of purchase, but no charge in the year of sale. An extract from the
company’s balance sheet as on 30th June 1997 showed the following:
Shs
164,900
93,382
71,518
Motor Lorries at cost:
Less provision for depreciation:
Net book Value:
During the year ended 30th June 1998 purchases and sales of lorries were as follows:
Purchases:
1997
July 30th
Oct 1st
1998
Feb 25th
June 24th
Sales:
1997
July 30th
Oct 1st
Reg.No
H1
H4
Reg.No
Cost (Shs)
H11
H12
8,500
7,000
H13
H14
9,000
5,900
Purchased on:
14th May 1993
10th July 1994
Cost (Shs)
1,592
2,560
FINANCIAL ACCOUNTING 1
Proceeds (Shs)
300
850
66
Final Accounts
1998
Mar 1st
June 25th
H6
H7
9th March 1996
21st Sept 1996
8,000
3,648
4,600
2,700
Required:
Write up the following accounts in the books of the company for the year ended 30th June 1998:
a) The Motor lories account
b) Motor lorries provision for depreciation account
c) Motor lorries disposal account.
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader, at 31st December 1997:
Drawings/Capital
Debtors/Creditors
Purchases/Sales
Rent and Rates
Light and heat
Salaries and wages
Bad debts
Provision for bad debts
Stock in trade 31st Dec 1996
Insurance
General Expenses
Bank balances
Motor van at cost/Provision for depreciation
Proceeds on sale of van
Motor expenses
Freehold premises at cost
Rent received
Provision for depreciation on buildings
Shs
2,148
7,689
62,101
880
246
8,268
247
9,274
172
933
1,582
8,000
861
15,000
117,401
Shs.
20,271
5,462
81,742
326
3,6000
250
750
5,000
117,401
The following matters are to be taken in to account:
1.
2.
3.
4.
5.
6.
Stock in trade at 31st December 1997 was Shs.9,884
Rates paid in advance at 31st December 1997, Shs.40
Rent receivable due at 31st December 1997, Shs.250
Lighting and heating due at 31st December 1997, sh.85
Provision for doubtful debts to be increased to Shs.388
Included in the amount for insurance Shs.172, is an item for Shs82 for motor insurance and this
amount should be transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.
8. Depreciate buildings Shs.500
9. On 1st January 1997 a van which had been purchased for Shs.1,000 on 1st January 1994 was sold for
Shs250. The only record of matter is the credit of Shs.250 to “Proceeds of sale on van” account.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Two
67
Required:
A Trading Profit and Loss account for the year ended 31st December 1997 and a Balance Sheet as at date
using vertical format.
QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it makes quarterly payments
as follows:
Three moths rental in advance;
A further charge of 2 pence per copy made during the quarter just ended.
The rental agreement began on 1st August 19X4, and the first six quarterly bills were as follows
Bills and dates received
1 August 19X4
1 November 19X4
1 February 19X5
1 May 19X5
1 August 19X5
1 November 19X5
Rental (Shs)
2,100
2,100
2,100
2,100
2,700
2,700
Cost of copies (shs)
0
1,500
1,400
1,800
1,650
1,950
Total cost (Shs)
2,100
3,600
3,500
3,900
4,350
4,650
Required:
Given that Batley Printing shop ends its accounting year on 31 August,
Calculate the charge for photocopying expenses for the year to 31 August, 19X5 and the amount of
prepayments and / or accrued charges as at that date.
Show the entries in the ledger of the Batley Printing Shop.
QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention looks forwards.”
Required:
a) Explain clearly what is meant by:


The historical cost convention
The going concern convention.
b) Does traditional financial accounting, using the historical cost convention, make the going concern
convention unnecessary? Explain your answer fully.
c) Which do you think a shareholder is likely to find more useful – a report on the past or an estimate
of the future? Why?
END OF COMPREHENSIVE ASSIGNMENT No.1
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
FINANCIAL ACCOUNTING 1
68
Accounting Theory
LESSON THREE
ACCOUNTING THEORY
(a) International Accounting Standards and International Financial Reporting Standards.
The foreword to accounting standards defines Accounting Standards as Authoritative statements of how
particular types of transaction and other events should be reflected in financial statements. Accounting
Standards are developed to achieve comparability of financial information between and among different
organizations. International Accounting Standards (IAS’s) and International Financial Reporting Standards
(IFRS) are meant to apply to most organizations in the world. IAS’s and IFRS’s are produced by the
International Accounting Standards Board (IASB) whose objectives are:
(a) To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance; and
(b) To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.
The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which coordinates the Accounting profession worldwide. Most accounting bodies of countries are members of IFAC.
The IASC develops IAS’s through an international process that involves the worldwide accountancy
profession, the preparers, users of financial statements and national standard setting bodies and other
interested parties.
The IASB sets up a steering committee to develop a statement of principles, an Exposure Draft and
ultimately an Accounting Standards once a new topic is suggested. The process includes:
 Identifying and reviewing of all the issues associated with the topic,
 Studying national and regional accounting requirements and practice, consultation with the member
bodies’ standard setting bodies and other interested groups,
 Public Exposure of the draft Accounting Standard,
 Evaluation by the steering committee and the board of the comments received on exposure drafts.
Currently the IASB has developed about 40 IASs. Examples include:
 IAS 1 Presentation of Financial Statements
 IAS 2 Inventories
 IAS 16 Property plant and equipment.
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Previously new standards were called International Accounting Standards but from 2003 any new standards
will be called International financial Reporting Standards. However in the current practice is to refer to all
standards as International Financial Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with Kenya Accounting
Standards (IASs), which were developed and published by ICPAK (Institute of Certified Public Accountants
of Kenya). This were later dropped and International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:
a)
b)
c)
d)
Use of IASs adds credibility to the financial statements as they can be compared with others
globally.
Facilitates communication within an enterprise that has foreign branches or subsidiaries due to
harmonized reporting by the separate entities in the group.
Adds value to the financial statements incase an entity is sourcing for foreign capital.
Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.
(c) Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business
enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in operational existence for the
foreseeable future, and that there is no intention to put the company into liquidation or to make drastic
cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is
going to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must
also disclose any significant doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the business should not be
valued at their ‘break-up’ value, which is the amount that they would sell for it they were sold off
piecemeal and the business were thus broken up.
ii) The accruals concept (or matching concept): states that revenue and costs must be recognized as
they are earned or incurred, not as money is received or paid. They must be matched with one another
so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss
account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200) earned from the sale of 20
units against the cost (£100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect to charge profit and loss
account with the cost of twenty units; there is still two units in stock. If the firm intends to sell them
later, it is likely to make a profit on the sale. Therefore, only the purchase cost of eighteen units (£90)
should be matched with the sales revenue, leaving a profit of £90.
FINANCIAL ACCOUNTING 1
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Accounting Theory
The balance sheet would therefore look like this:
£
Assets
Stock (at cost, i.e. 2 x £5)
10
Debtors (18 x £10)
180
190
Liabilities
Creditors
100
90
Capital (profit for the period)
90
If, however the firm had decided to give up selling units, then the going concern concept would no
longer apply and the value of the two units in the balance sheet would be a break-up valuation rather than
cost. Similarly, if the two unsold units were now unlikely to be sold at more than their cost of £5 each
(say, because of damage or a fall in demand) then they should be recorded on the balance sheet at their
net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them saleable,
e.g. paint) rather than cost. This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked. Because the business is
assumed to be a going concern it is possible to carry forward the cost of the unsold units as a charge
against profits of the next period.
Essentially, the accruals concept states that, in computing profit, revenue earned must be matched
against the expenditure incurred in earning it.
iii) The Prudence Concept: The prudence concept states that where alternative procedures, or alternative
valuations, are possible, the one selected should be the one that gives the most cautious presentation of
the business’s financial position or results.
Therefore, revenue and profits are not anticipated but are recognized by inclusion in the
profit and
loss account only when realized in the form of either cash or of other assets the ultimate cash realization
of which can be assessed with reasonable certainty: provision is made for all liabilities (expenses and
losses) whether the amount of these is known with certainty or is best estimate in the light of the
information available.
Assets and profits should not be overstated, but a balance must be achieved to prevent the material
overstatement of liabilities or losses.
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The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated and
taken into account immediately. If a business purchases stock for £1,200 but because of a sudden slump
in the market only £900 is likely to be realized when the stock is sold the prudence concept dictates that
the stock should be valued at £900. It is not enough to wait until the stock is sold, and then recognize
the £300 loss; it must be recognized as soon as it is foreseen.
A profit can be considered to be a realized profit when it is in the form of:


Cash
Another asset that has a reasonably certain cash value. This includes amounts owing from debtors,
provided that there is a reasonable certainty that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth £100,000 during the year to 31
December. At 31 December there are debts outstanding of £15,000. Of these, the company is now
doubtful whether £6,000 will ever be paid.
The company should make a provision for doubtful debts of £6,000. Sales for 20x5 will be shown in the
profit and loss account at their full value of £100,000, but the provision for doubtful debts would be a
charge of £6,000. Because there is some uncertainty that the sales will be realized in the form of cash,
the prudence concept dictates that the £6,000 should not be included in the profit for the year.
iv) The consistency concept: The consistency concept states that in preparing accounts consistency
should be observed in two respects.
a)
b)
Similar items within a single set of accounts should be given similar accounting treatment.
The same treatment should be applied from one period to another in accounting for similar
items. This enables valid comparisons to be made from one period to the next.
v) The entity concept: The concept is that accountants regard a business as a separate entity, distinct from
its owners or managers. The concept applies whether the business is a limited company (and so
recognized in law as a separate entity) or a sole proprietorship or partnership (in which case the business
is not separately recognized by the law.
vi) The money measurement concept: The money measurement concept states that accounts will only
deal with those items to which a monetary value can be attributed.
For example, in the balance sheet of a business, monetary values can be attributed to such assets as
machinery (e.g. the original cost of the machinery; or the amount it would cost to replace the machinery)
and stocks of goods (e.g. the original cost of goods, or, theoretically, the price at which the goods are
likely to be sold).
The monetary measurement concept introduces limitations to the subject matter of accounts. A business
may have intangible assets such as the flair of a good manager or the loyalty of its workforce. These may
be important enough to give it a clear superiority over an otherwise identical business, but because they
cannot be evaluated in monetary terms they do not appear anywhere in the accounts.
FINANCIAL ACCOUNTING 1
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Accounting Theory
vii) The separate valuation principle: The separate valuation principle states that, in determining the
amount to be attributed to an asset or liability in the balance sheet, each component item of the asset or
liability must be determined separately.
These separate valuations must then be aggregated to arrive at the balance sheet figure. For example, if
a company’s stock comprises 50 separate items, a valuation must (in theory) be arrived at for each item
separately; the 50 figures must then be aggregated and the total is the stock figure which should appear
in the balance sheet.
viii) The materiality concept: An item is considered material if it’s omission or misstatement will affect the
decision making process of the users. Materiality depends on the nature and size of the item. Only items
material in amount or in their nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial.
In preparing accounts it is important to assess what is material and what is not, so that time and money
are not wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute
measure of materiality. It is common to apply a convenient rule of thumb (for example to define
material items as those with a value greater than 5% of the net profit disclosed by the accounts). But
some items disclosed in accounts are regarded as particularly sensitive and even a very small
misstatement of such an item would be regarded as a material error. An example in the accounts of a
limited company might be the amount of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment in the accounts. For
example, the profit and loss account of a business will show the expenses incurred by he business
grouped under suitable captions (heating and lighting expenses, rent and rates expenses etc); but in the
case of very small expenses it may be appropriate to lump them together under a caption such as
‘sundry expenses’, because a more detailed breakdown would be inappropriate for such immaterial
amounts.
Example:
a)
If a balance sheet shows fixed assets of £2 million and stocks of £30,000 an error of £20,000 in the
depreciation calculations might not be regarded as material, whereas an error of £20,000 in the stock
valuation probably would be. In other words, the total of which the erroneous item forms part must be
considered.
b) If a business has a bank loan of £50,000 balance and a £55,000 balance on bank deposit account, it
might well be regarded as a material misstatement if these two amounts were displayed on the balance
sheet as ‘cash at bank £5,000’. In other words, incorrect presentation may amount to material
misstatement even if there is no monetary error.
ix) The historical cost convention: A basic principle of accounting (some writers include it in the list of
fundamental accounting concepts) is that resources are normally stated in accounts at historical cost, i.e.
at the amount that the business paid to acquire them. An important advantage of this procedure is that
the objectivity of accounts is maximized: there is usually objective, documentary evidence to prove the
amount paid to purchase an asset or pay an expense. Historical cost means transactions are recorded at
the cost when they occurred.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is because valuations tend to
be subjective and to vary according to what the valuation is for. For example, suppose that a company
acquires a machine to manufacture its products. The machine has an expected useful life of four years. At
the end of two years the company is preparing a balance sheet and has decided what monetary amount to
attribute to the asset.
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x) Objectivity (neutrality):An accountant must show objectivity in his work. This means he should try to
strip his answers of any personal opinion or prejudice and should be as precise and as detailed as the
situation warrants. The result of this should be that any number of accountants will give the same
answer independently of each other. Objectivity means that accountants must be free from bias. They
must adopt a neutral stance when analysing accounting data. In practice objectivity is difficult. Two
accountants faced with the same accounting data may come to different conclusions as to the correct
treatment. It was to combat subjectivity that accounting standards were developed.
xi) The realization concept: Realization: Revenue and profits are recognized when realized. The concept
states that revenue and profits are not anticipated but are recognized by inclusion in the income
statement only when realized in the form of either cash or of other assets the ultimate cash realization of
which can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double entry
bookkeeping.
xiii) Substance over form: The principle that transactions and other events are accounted for and presented
in accordance with their substance and economic reality and not merely their legal form e.g. a non
current asset on Hire purchase although is not legally owned by the enterprise until it is fully paid for, it
is reflected in the accounts as an asset and depreciation provided for in the normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit
and loss account when:
a)
b)
c)
The sale transaction is for a specific quantity of goods at a known price, so that the sales value of
the transaction is known for certain.
The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the
case of long-term contract work, when the job is well under way but not yet completed by the
end of an accounting period).
The critical event in the sale transaction has occurred. The critical event is the event after which:
i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.
FINANCIAL ACCOUNTING 1
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Accounting Theory
Usually, revenue is ‘recognized’
(a) When a cash sale is made.
(b) The customer promises to pay on or before a specified future date, and the debt is legally
enforceable.
The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the
trading, profit and loss account, before it is reasonably certain to ‘happen’.
Required
Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be
recognized at the following stages of a sale.
(a) Goods have been acquired by the business, which it confidently expects to resell very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer’s cheque in payment for the goods has been cleared by the bank.
Answer
(a) A sale must never be recognized before a customer has even ordered the goods. There is no certainty
about the value of the sale, nor when it will take place, even if it is virtually certain that goods will be
sold.
(b) A sale must never be recognized when the customer places an order. Even though the order will be for
a specific quantity of goods at a specific price, it is not yet certain that the sale transaction will go
through. The customer may cancel an order, the supplier might be unable to deliver the goods as
ordered or it may be decided that the customer is not a good credit risk.
(c) A sale will be recognized when delivery of the goods is made only when:
i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a delivery note).
(d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. There is then a
legally enforceable debt payable on specified terms, for a completed sale transaction.
(e) The critical event for a cash sale is when delivery takes place and when cash is received, both take place
at the same time. It would be too cautious or ‘prudent’ to await cash payment for a credit sale
transaction before recognizing the sale, unless the customer is a high credit risk and there is a serious
doubt about his ability or intention to pay.
(f) It would again be over-cautious to wait for clearance of the customer’s cheques before recognizing sales
revenue. Such a precaution would only be justified in cases where there is a very high risk of the bank
refusing to honour the cheque.
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Lesson Three
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II) Bases
Bases are the methods that have been developed for expressing or applying fundamental accounting concepts
to financial transactions and items. Examples include:



Depreciation of Non current Assets (e.g. by straight line or reducing balance method)
Treatment and amortization of intangible assets (patents and trade marks)
Stocks and work in progress (FIFO, LIFO and AVCO)
III) Policies
Accounting policies are the specific accounting bases judged by business enterprises to be the most
appropriate to their circumstances and adopted by them for the purpose of preparing their financial accounts.
Qualities of Useful Financial Information
The four principal qualities of useful financial information are understandability, relevance, reliability and
comparability.
Understandability: an essential quality of the information provided in the financial statements is that it is
readily understandable by users. For these reason users are assumed to have a reasonable knowledge of
business and economic activities and accounting.
Relevance: information has the quality of being relevant when it influences the economic decisions of users
by helping them evaluate past, present or future events or confirming or correcting their past evaluations.
The relevance of information is affected by its nature and materiality.
Reliability: information is useful when it is free from material error and bias and can be depended upon by
users to represent faithfully that which it purports to represent or could reasonably be expected to represent.
To be reliable then the information should:
a)
b)
Be represented faithfully,
Be accounted for and presented in accordance with their substance and economic reality and not merely
their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some events and transactions
(prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information
to be false.
Comparability: users must be able to compare the financial statements of an enterprise through time in
order to identify trends in its financial position and performance. Users must also be able to compare the
financial statements of different accounting policies, changes in the various policies and the effect of these
changes in the accounts. Compliance with accounting standards also helps achieve this comparability.
The Accounting Profession in Kenya
The Accountants Act Cap 531 (1977) establishes the Institute of Certified Public Accountants of Kenya
(ICPAK) and two boards, to be known as the Registration of Kenya Accountants Board (RAB) and Kenya
Accountants and Secretaries National Examinations Board (IASNEB)
FINANCIAL ACCOUNTING 1
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Accounting Theory
The following are the functions of ICPAK as outlined by the Act;
a) To promote standards of professional competence and practice amongst members of the institute.
b) To promote research into the subjects of accountancy and finance, and related matters, and the
publication of books, periodicals, journals and articles in connexion therewith;
c) To promote the international recognition of the institute;
d) To advise the Examinations board on matters relating to examination standards and policies;
e) To carry out any other functions prescribed for it under any of the provisions of the Act or under
any other written law; and
f) To do anything incidental or conducive to the performance of any of the preceding functions.
A council known as the Council of the institute governs the Institute, which consists of the Chairman, nine
members from the institute and one member appointed by the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out practicing certificates and
registration of qualified persons as members of the institute.
The Act also outlines the following as the functions of IASNEB:
a) To prepare syllabuses for accountants’ and secretaries’ examinations, to make rules with respect to
examinations, to arrange and conduct examinations and issue certificates to candidates who have
satisfied examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding functions.
Example 3.2 PILOT PAPER OCTOBER 1991
Briefly explain the meaning and the significance of the following:
(i) Accounting concepts.
(ii) Accounting bases.
(iii) Accounting policies.
(iv) Accounting standards.
(Covered adequately in the text).
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(Total: 20 Marks)
Lesson Three
77
Example 3.3 PILOT PAPER JULY 2000
(a) Define the following accounting concepts and for each explain their implication in the preparation of
financial statements.
(i)
(ii)
(iii)
(iv)
The Going concern concept
Business entity concept
Materiality
Realization
4 marks
4 marks
4 marks
4 marks
(b) Two accounting concepts or conventions could clash or there could be inconsistency between them.
Give two examples of such situations and explain how the inconsistency should be resolved.
4 marks
Solution:
(i) The Going Concern Concept
The concept of going concern is that an entity will continue trading into the foreseeable future at a similar
level as it does when the accounts are prepared. Going concern has implications for the value of the entities
assets and the way the user may read the financial statements. If a business is to cease trading after the period
of account the financial statements should be prepared on a break up basis as all liabilities will be due and
assets will be valued at net realizable value.
(ii) The Entity Concept
The organization preparing accounts is a distinct and separate entity. Financial statements are prepared to
reflect the activities of the entity. This concept prevents any confusion between the owner’s private finances
and those of the entity, hence the option of drawings when a proprietor effectively reduces the capital of the
entity.
(iii) Materiality
Materiality relates to significant amounts and items in the financial statements. A rough guide to what
material amount is 5% of pre tax profits. However, this is only a guide. If say, cash in hand is offset against
the overdraft balance this is a material misstatement.
Materiality prevents time being wasted on items which do not impact on the results of the entity; it provides a
focus on the significant items.
(iv) Realization
The realization concept involves recognizing amounts in the financial statements at the point at which they
crystallize. Profit should not be reflected in the profit and loss account until it has been earned.
The realization concept means that the profit in the financial statements should be reasonably stated.
(c) Clashes between accounting concepts
Accruals and prudence
The accruals concept requires future income (e.g. in relation to credit sales) to be accrued. The prudence
concept dictates that caution should be exercised, so that if there is doubt about the subsequent receipt, no
accrual should be made.
FINANCIAL ACCOUNTING 1
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Accounting Theory
Consistency and prudence
If circumstances change, prudence may conflict with the consistency concept, which requires the same
treatment year after year.
In both situations, prudence must prevail.
Example 3.5 DECEMBER 1994 QUESTION FIVE
(a)
(b)
(c)
(d)
Explain the nature of the Accounting Equation.
What are accounting standards and why are they important?
Describe the role of the Institute of Certified Public Accountants of Kenya.
In addition to the Kenya Accounting Standards, why is it important for an
Accountant to make use of International Accounting Standards?
(Covered adequately in the text)
STRATHMORE UNIVERSITY ● STUDY PACK
(5 marks)
(5 marks)
(5 marks)
(4 marks)
(Total: 19 marks)
Lesson Three
79
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:



Fundamental accounting concepts
Accounting bases
Accounting policies
Question Two
Accounting practice depends upon the guidance provided by a number of accounting concepts, some of
which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting
Standards Committee.
Required:
(a)
Define and explain the relevance of the following accounting concepts.





(b)
Neutrality
Money measurement
Accruals
Substance over form
Consistency
(15 marks)
Give two examples of situations in which there is a clash or inconsistency between two accounting
concepts or conventions, and explain how the inconsistency should be resolved. (In answering this
part of the question, you need not confine yourself to considering the concepts listed in part (a))
(5 marks)
(20 marks)
Question Three
If the information in financial statements is to be useful, regard must be had to the following:





Materiality
Comparability
Prudence
Objectivity
Relevance
Required
Explain the meaning of each of these factors as they apply to financial accounting including in your
explanations one example of the application of each of them. (Four marks for each of (a) to (e).)
(20 marks)
FINANCIAL ACCOUNTING 1
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Accounting Theory
Question Four
a)
b)
c)
d)
Explain what is meant by materiality in relation to financial statements and state two factors affecting
the assessment of materiality.
(4 marks)
Explain what makes information in financial statements relevant to users.
(5 marks)
1. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’. Explain the meaning of
these two terms.
2. Explain how a possible conflict between them could arise and how that conflict should be resolved.
(5 marks)
One of the requirements of financial statements is that they should be free from material error.
Suggest three safeguards, which may exist, inside or outside a company to ensure that the financial
statements are free from material error.
(6 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
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Lesson Four
81
LESSON FOUR
ADJUSTMENTS TO FINAL ACCOUNTS
a) ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as money is received or paid.
They must be matched with one another so far as their relationship can be established or justifiably
assumed, and dealt with in the profit and loss account of the period to which they relate. Therefore all
incomes and expenses that relate to a particular financial period will be matched together to determine
the profit for the year.
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should
be reported in the profit & loss account and the same income will be shown in the balance sheet as a
current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month, assuming that this is the first year
of renting and rent is received in arrears (rent 4 January is received early Feb).
The ledger accounts of the firm will be as follows:
Year 1
Feb (rent 4 Jan)
Mar (rent 4 Feb)
April (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 Jun)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
Cashbook
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
22,000
FINANCIAL ACCOUNTING 1
82
Adjustment to Final Accounts
Year 1
31/12 P&L 24,000
Rent – Income
£ Year 1
Jan
C/B
Feb
C/B
Mar
C/B
April C/B
May
C/B
Jun
C/B
July
C/B
Aug
C/B
Sept
C/B
Oct
C/B
Nov
C/B
Dec Accrued c/f
24,000
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
24,000
Although the cashbook is showing that rent received amounts £22,000, the full rental income of £24,000
will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of £2,000 will be
reported in the balance sheet as a current asset.
Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid during that
period.
An accrued expense should be charged in the P&L account and shown in the balance sheet as a current
liability.
Assume in the above example that the firm is meant to pay the rent, thus it becomes an expense with the facts
still the same i.e. £2,000 payable in arrears. The ledger account will be as follows.
Year 1
Cashbook
£ Year 1
Feb (rent 4 Jan)
Mar (rent 4 Feb)
Apr (rent 4 Mar)
May (rent 4 Apr)
June (rent 4 May)
July (rent 4 June)
Aug (rent 4 July)
Sept (rent 4 Aug)
Oct (rent 4 Sept)
Nov (rent 4 Oct)
Dec (rent 4 Nov)
STRATHMORE UNIVERSITY ● STUDY PACK
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
Lesson Four
83
Rent – Expenses
Year 1
C/B
Rent for Jan
Rent for Feb
Rent for Mar
Rent for Apr
Rent for May
Rent for June
Rent for July
Rent for Aug
Rent for Sept
Rent for Oct.
Rent for Nov
31/12 Bal c/d
£
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
Year 1
£
31/12
P&L
24,000
24,000
24,000
The cashbook shows that the rent for the 11 months was paid for. However in the P&L a/c we should
report rent for the full year of £24,000 and the £2,000, rent for Dec being the accrued expense will be shown
in the balance sheet as a current liability.
PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an income is payable
in advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should be carried forward and
reported in the period it relates to.
The accounting treatment will be to show it as a current liability.
Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance. Assuming that the firm’s
rental income began in 1st March and the financial year, end is on 31st Dec. The ledger accounts will be:
15,000
15,000
1.3
15,000
1.6
15,000
1.9
1.12
Cashbook
Year 1
1/3
1/6
1/9
1/12
Rent
Rent
Rent
Rent
15,000
15,000
15,000
15,000
£ Year 1
FINANCIAL ACCOUNTING 1
£
15,000
1.3
84
Adjustment to Final Accounts
Rent – Income
Year 1
P&L (10 x 5,000)
31/12 Bal c/d
£ Year 1
1/3
1/6
50,000
1/9
10,000
1/12
60,000
Cashbook
Cashbook
Cashbook
Cashbook
15,000
15,000
15,000
15,000
60,000
£
Rent for the 4 quarters of 12 months has been received as per the cashbook but because the end of the
financial year is at 31 Dec, rent for 2 months is pre-paid. This £10,000 is not charged in the P&L but is
carried forward as current liability in the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid expense
should not be charged in the P&L a/c but should be carried forward to the next financial period and should
be shown in the balance sheet as a current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense. The
ledger accounts is as follows:
Year 1
£
Cashbook
Year 1
1/3
1/6
1/9
1/12
Rent
Rent
Rent
Rent
£
15,000
15,000
15,000
15,000
Rent – Expenses
Year 1
1/3
1/6
1/9
1/12
£
C/B (Mar, April, May) 15,000
C/B (June, July, Aug) 15,000
C/B (Sept, Oct, Nov) 15,000
C/B (Dec, Jan, Feb)
15,000
60,000
Year 1
P&L
(10 x 5,000)
31/12 Bal c/d (2 x 5,000)
£
50,000
10,000
60,000
Rent of £10,000 for 2 months is carried forward to the next financial period and shown in the balance sheet
as a current asset.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
85
The following is the summary of treatment for Accruals and Prepayments:
P&L
Accrued - Report as
Income
B/Sheet
Current
Assets
Income
Prepaid -Not
reported
Current
Liability
Accruals/
Prepayments
Expense
Accrued - Charge as
an expense
Liability
Current
Prepaid - Not charged
Current
In P& L
Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance Sheet as
follows:
Balance Sheet Extracts
Current Assets
£
Stock
Debtors
Accrued Incomes/Prepaid Expenses
Cash at bank
Cash in hand
Bank overdraft
Creditors
Prepaid Incomes/Accrued Expenses
£
x
x
x
x
x
x
Current Liabilities
x
x
x
X
The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that
the correct amount of expense or income is reported in the profit and loss account for the year.
FINANCIAL ACCOUNTING 1
86
Adjustment to Final Accounts
Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger accounts for the following
items including the balance transferred to the necessary part of the final accounts, also the balances carried
down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December 2002 £2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December 2002 £3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December 2001 £25,000; Owing as at
31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December 2001 £2,200; Prepaid as at
31December 2002 £2,900.
e) Seamers sub-lets part of the premises. Receives £5,500 during the year ended 31 December
2002. Tenant owed Seamers £1,800 on 31 December 2001 and £2,100 on 31 December
2002
a)
Motor Expenses
£ 19X6
Cashbook
7,440
Bal c/d
280 P/L a\c
7200
19x7
1/1
Bal b/d
19X6
31/12
b)
£
7220
7200
280
Insurance
19x6
£ 19x6
4,200 31/12 P&L a/c
31/12 Bal c/d
4,200
Cashbook
19x7
1/1
c)
19x6
Cashbook
31/12 Bal c/d
Bal b/d
£
3850
350
4200
350
===
Stationery
£
18,000
4,900
22,900
====
19x6
1/1
Bal b/d
P&L a/c
19x7
1/1Bal b/d
STRATHMORE UNIVERSITY ● STUDY PACK
£
2,500
20,400
22,900
====
4,900
Lesson Four
87
d)
Rates
19x6
1/1
19x7
1/1
Bal b/d
Cashbook
Bal b/d
£ 19x6
2200
P&L
9500 31/12 Bal c/d
11,700
£
8800
2900
11,700
2900
e)
Rent – Income
19x6
1/1
19x7
1/1
Bal b/d
P&L
£
19x6
1800
5800 31/12
7600
Bal b/d
2100
Cashbook
Bal c/d
£
5500
2100
7600
b) BAD AND DOUBTFUL DEBTS
Some debtors may not pay up their accounts for various reasons e.g. a debtor may go out of business. When
a debtor is not able to pay up his/her account this becomes a bad debt. Therefore the business/firm should
write it off from the accounts and thus it becomes an expense that should be charged in the profit & loss
account.
In practice a firm may also be unable to collect all the amounts due from debtors. This is because a section of
the debtors will not honor their obligations. The problem posed by this situation is that it is difficult to
identify the debtors who are unlikely to pay their accounts. Furthermore the amount that will not be collected
may also be difficult to ascertain. These debts that the firm may not collect are called doubtful debts. A firm
should therefore provide for such debts by charging the provision in the profit and loss account. Provision
for doubtful debts maybe specific or general. Specific relate to a debtor whom we can identify and we are
doubtful that he may pay the debt (if one of our debtor goes out of business).
Accounting For Bad & Doubtful Debts.
Bad debts
When a debt becomes bad the following entries will be made:
i. Debit bad debts account
Credit debtors account with the amount owing.
ii. Debit Profit and Loss Account.
Credit bad – debts account to transfer the balance on the bad – debts account to the Profit and Loss
Account.
FINANCIAL ACCOUNTING 1
88
Adjustment to Final Accounts
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A specific provision is
where a debtor is known and chances of recovering the debt are low.
The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad
debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will
be as follows. If it is the 1st year of trading (1st year of making provision):
i.
ii.
Debit P&L a/c.
Credit provision for doubtful debts (with total amount of the provision).
In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision.
If it is an increase:
i.
ii.
Debit P&L a/c.
Credit provision for doubtful debts (with increase only).
If it is a decrease:
i.
Debit provision for doubtful debts.
ii.
Credit P&L a/c (with the decrease in provision only).
Example
Debtors
Bad debts
x
(x)
x
(x)
x
(x)
x
Specific Provision
General Provision
A firm started trading in the year 1999, the balance on the debtor’s account was £400,000. Bad debts
amounting to £40,000 were written off from this balance, there was a specific provision of £5,000 to be made
to one of the debtors and a general provision of £5% was to be made on the balance of the debtors. The
ledger accounts of 1999 were as follows:
Debtors
1999
£
Bal B/d 400,000
400,000
Provision for doubtful debts
1999
£
Bad debts 40,000
Bal c/d 360,000
1999
31/12 Bal c/d
£
1999
22,750 31/12 P&L
400,000
STRATHMORE UNIVERSITY ● STUDY PACK
£
22,750
Lesson Four
1999
Debtors
89
Bad debts
£ 1999
40,000 31/12
Debtors
Bad debts
Specific Provision
General Provision (5%)
£
40,000
P&L
£
400,000
(40,000)
360,000
(5,000)
355,000
(17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
£
Expenses:
Bad debts
Increase in provision for D/debts
£
40,000
22,750
Balance Sheet (Extract) as at 31/12/99
£
Current Assets
Stocks
Debtors
Provision for D/debts
360,000
(22,750)
337,250
£
x
337,250
337,250
In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of £50,000 needs to be
written off there is no specific provision but the general provision is to be maintained at 5%. The ledger
accounts will be as follows:
Debtors
Bad debts
General Provision (5%)
500,000
(50,000)
450,000
22,500
427,500
FINANCIAL ACCOUNTING 1
90
Adjustment to Final Accounts
Debtors
£ 2000
500,000 Bad Debts
______ Bal c\d
500,000
2000
Bal b\d
£
50,000
450,000
500,000
Provision for Doubtful Debts
£ 2000
250 1\1 Bal b\d
22,500
22,750
2000
P\L
Bal c\d
Bad Debts
£ 2000
50,000 31\12 P& L
2000
Debtors
£
22,750
22,750
£
50,000
Profit And Loss Account (Extract) for year ended 31/12/2002.
£
£
Incomes
Decrease in provision for D/debts
250
Expenses
Bad debts
50,000
Balance Sheet (Extract) as at 31/12/2002
£
£
Current Assets
Debtors
Provision for bad debts
450,000
(22,500)
427,500
In the year 2001 the debtors balance goes up to £600,000 from which bad debts of £50,000 need to be
written off, there is no specific provision but the general provision is to be maintained at 5% the ledger
accounts is as shown:
Debtors
Bad debts
General provision %
£
600,000
(50,000)
550,000
(27,500)
522,500
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
91
Debtors
£ 2001
600,000 Bad Debts
______ Bal c\d
600,000
2001
Bal b\
2001
Bal c\d
£
50,000
550,000
600,000
Provision for Doubtful Debts
£ 2001
1\1 Bal b\d
27,500 P& L
22,500
£
22,500
5,000
27,500
Bad Debts
£ 2001
50,000 31\12 P& L
£
50,000
2001
Debtors
Profit And Loss Account (Extract) for the year ended 31/12/2001
£
Expenses
Bad debts
Increase in provision
£
50,000
5,000
Balance Sheet (Extract) as at 31/12/2001
£
Current Assets
Debtors
Less: Provision for Doubtful Debts
£
550,000
(27,500)
522,500
Example 4.6
In a new business during the year ended 31 December 2002 the following debts are found to be bad, and are
written off on the dates shown:
30 April
31 August
31 October
H Gordon
D Bellamy Ltd
J Alderton
£1,100
£640
£120
On 31 December 2002 the schedule of remaining debtors, amounting in total to £68,500, is examined, and it
is decided to make a provision for doubtful debts of £2,200.
You are required to show:
a. The Bad Debts Account, and the Provision for Doubtful Debts Account.
b. The charge to the Profit and Loss Account.
c. The relevant extracts from the Balance Sheet as at 31 December 2002.
FINANCIAL ACCOUNTING 1
92
Adjustment to Final Accounts
£
70,036
(1,860)
68,500
66,300
Debtors
Bad debts
2002
31/12 Bal c/d
2002
Bad debts
Provision for doubtful debts
£ 2002
2,200 31/12 P&L
Profit & Loss Account (Extract)
Expenses
Bad debts
Increase in provision for Doubtful debts
Balance Sheet (Extract)
Bad Debts
£ 2002
£
1860 31/12 P\L
1860
Provision for D/Debt (2,200)
£
2,200
£
£
1,860
2,200
£
Current Assets
Debtor
Less: Provision for D/Debts
£
8,500
(2,200)
6,300
Example 4.2
A business started trading on 1 January 2001. During the two years ended 31 December 2001 and 2002 the
following debts were written off to the Bad Debts Account on the dates stated:
31 August 2001
30 September 2001
28 February 2002
31 August 2002
30 November 2002
W Best
S Avon
L J Friend
N Kelly
A Oliver
£850
£1,400
£1,800
£600
£2,500
On 31 December 2001 there had been a total of debtors remaining of £405,000. It was decided to make a
provision for doubtful debts of £5,500.
On 31 December 2002 there had been a total of debtors remaining of £473,000. It was decided to make a
provision for doubtful debts of £6,000.
You are required to show:
i.
The Bad Debts Account and the Provision for Doubtful Debts Account for each of the two years.
ii.
The relevant extracts from the Balance Sheet as at 31 December 2001 and 2002.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
93
Solutions
Bad debts =
Provision
2,250
405,000
(5,500)
399,500
Bad Debts
£ 2001
850
1400 31\12 P&L
2250
2001
31\8 W.Best
30\9 S.Aron
2001
31\12 Bal c\d
2001
1\1
Bal c\d
2001
28/2 J. Friend
31/8 N. Kelly
30/11 A. Oliver
Bad Debts
£ 2001
1,800
600
2,500 31/13
4,900
£
2250
2250
Provision for D/Debts
£ 2001
550 31\12 P&L
£
550
£ 2001
1\1 Bal b\d
600 31\12 P&L
600
£
550
50
600
£
P&L
4,900
4,900
FINANCIAL ACCOUNTING 1
94
Adjustment to Final Accounts
Profit & Loss Account (Extract)
19x6
£
£
Expenses
Bad debts
Provision for Doubtful Debts
2,250
5,000
19x7
Bad debts
Increase in provision for D/Debts
4,900
500
Balance Sheet as at 19x6
£
£
Debtors
Less provision
405,000
(5,500)
399,500
19x7
Debtors
Less: provision
473,000
(6,000)
467,000
Current Assets
Provision for discounts allowable.
In some cases a firm may create a provision for discounts allowable in addition to provision for doubtful
debts. This happens where a firm anticipates that some of the debtors may take up cash discounts offered by
the firm. The accounting treatment is similar to accounting for provision for doubtful debts. The provision
should be made after creating a provision for doubtful debts (debtors figure less either general/specific
provision for doubtful debts).
Debtors
Bad debts
Specific provision
Provision for discount allowed (on balance)
x
(x)
x
(x)
x
(x)
x
(x)
x
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
95
Profit & Loss Account (Extract)
£
Incomes
Decrease in provision for D/Debts
Decrease in provision for discounts allowed
Expenses
Bad debts
Increase in provision for D/Debts
Increase in provision for discounts allowed
£
x
x
x
x
x
Balance Sheet (Extract)
Current Assets
Debtors
Less: provision for Doubtful Debts
Less: provision for discounts allowed
£
x
(x)
(x)
£
x
Bad Debts Recovered
A firm may be able to recover a debt that was previously written off. The following entries will be made if
this happens:
i.
Debit – Debtors
Credit – credit bad debts recovered account – to restore the bad debt recoverable.
N/B: This should be the amount to be recovered.
ii.
Debit – Cashbook
Credit – Debtors with the cash received.
iii.
Debit – bad debts recovered account.
Credit – P & L account with the same balance as bad debts account.
Example:
A firm recovers debts amounting to £10,000 that had been written off in the previous periods. In the same
financial period the firm writes off bad debts amounting £30,000. The ledger accounts will be as follows:
Bad debts
£
£
Debtors
30,000 Bad Debt Recovered
10,000
P\L
20,000
30,000
30,000
Bad Debt
Bad debts recovered
£
10,000 Debtors
FINANCIAL ACCOUNTING 1
£
10,000
96
Adjustment to Final Accounts
c) BANK RECONCILIATION STATMENTS
The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements of the
account held with the bank. The bank will send information relating to this account using a bank statement
for the firm to compare.
Ideally, the records as per the bank and the cashbook should be the same and therefore the balance carried
down in the cashbook should be the same as the balance carried down by the bank in the bank statement.
In practice however, this is not the case and the two (balance as per the bank and firm) are different. A bank
reconciliation statement explains the difference between the balance at the bank as per the cashbook and
balance at bank as per the bank statement.
Causes of the differences:
Items Appearing In The Cashbook And Not Reflected In The Bank Statement.
Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but
have not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and other sources for which
the firm has banked but the bank has not yet availed the funds by crediting the firm’s account.
Errors made in the cashbook
These include:
 Payments over/understated
 Deposits over/understated
 Deposits and payments misposted
 Overcastting and undercasting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the cashbook:
Bank charges: These charges include service, commission or cheques.
Interest charges on overdrafts.
Direct Debits (standing orders) e.g. to pay Alico insurance.
Dishonored cheques
A cheque would be dishonored because:

Stale cheques

Post – dated cheques

Insufficient funds

Differences in amounts in words and figures.
Direct credits
Interest Income/Dividend incomes
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
97
Errors of The Bank Statement (Made By The Bank).
Such errors include:
 Overstating/understating.
 Deposits
 Withdrawals
The Purposes of a bank reconciliation statement.
1. To update the cashbook with some of the items appearing in the bank statement e.g. bank charges,
interest charges and dishonoured cheques and make adjustments for any errors reflected in the
cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.
Steps in preparing a bank reconciliation statement.
1. To update the cashbook with the items appearing in the bank statement and not appearing in the
cashbook except for errors in the bank statement. Adjustments should also be made for errors in the
cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to determine the
uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to determine the
unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)
Name:
Bank Reconciliation Statement as at 31/12
£
Balance at bank as per cashbook (updated)
Add: Un presented cheques
Errors on Bank Statement (see note 1)
Less: Uncredited deposits
Errors on Bank Statement (see note 2)
Balance at bank as per Balance Sheet
x
x
x
x
£
x
x
x
(x)
x
Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit
or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit
or an overstated payment by the bank, or making an unknown payment.
FINANCIAL ACCOUNTING 1
98
Adjustment to Final Accounts
Format 2
Name:
Bank Reconciliation Statement as at 31/12
Balance at bank as per bank statement
Add: Uncredited deposits
Add errors on bank statement (note 2)
Less: Unpresented cheques
Errors on bank statement (note 1)
Balance at bank as per cashbook (updated)
£
£
x
x
x
x
x
x
x
(x)
x
===
Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on
the bank statement, from the following as on 31 March 2003:
Cash at bank as per bank column of the cashbook (Dr)
Bankings made but not yet entered on bank statement
Bank charges on bank statement but not yet in cashbook
Un presented cheques C Clarke
order to ABC Ltd entered on bank statement, but not in cash book
550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook
£
38,960
6,060
280
1170 Standing
1,890
Solution
Cashbook – Bank
£ 19X9
38960 Bank charges
ABC (standing order)
1890 31/3 Bal C/D
40,850
19X9
31/3 Bal b/d
A Wood (credit transfer)
£
280
550
40,020
40,850
Bank Reconciliation as at 31/03/2003
£
Balance at bank as per cashbook
Add: Unpresented cheques
40,020
Less: Uncredited deposits
Balance at bank as per Balance Sheet
Example 4.9
£
1,170
41,190
(6,060)
35,130
=====
The following are extracts from the cashbook and the bank statement of J Richards. You are required to:
a) Write the cashbook up to date, and state the new balance as on 31 December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
2002
Dec 1
Dec 7
Dec 22
Dec 31
Dec 31
99
Cashbook
£ 2002
1,740 Dec 8
88 Dec 15
73 Dec 28
249 Dec 31
178
2,328
Dr
Balance b/d
J Map
J Cream
K Wood
M Barrett
Cr
A Dailey
R Mason
G Small
Balance c/d
£
349
33
115
1,831
2,328
Bank Statement
2002
Dec
Dec
Dec
Dec
Dec
Dec
Dec
1
7
11
20
22
31
31
Balance b/d
Cheque
A Dailey
R Mason
Cheque
Credit transfer: J Walters
Bank charges
Dr
£
88
349
33
22
Cr
£
1,828
73
54
Balance
£
1,740
1,479
1,446
1,519
1,573
1,551
Cashbook –Bank
2002
31/12 Bal b/d
31/12 J. Walters (C/T)
1,831
£ 2002
31/1 Bank charges
54
31/12 Bal C/D
1,885
FINANCIAL ACCOUNTING 1
22
£
1,863
1,885
100
Adjustment to Final Accounts
J. Richards
Bank Reconciliation Statement as at 31/12/2002
Balance at bank as per cashbook – bank
Add: Unpresented cheques – (G Small)
Less: Uncredited deposits
K Wood
M. Barret
Balance at bank as per balance sheet
OR:
Balance at bank as per balance sheet
Add: Uncredited deposits:
K. Wood
M. Barret
£
249
178
Less: Unpresented cheques
Balance at bank as per cashbook – bank
£
1,863
115
1,978
(427)
1,551
1,551
249
178
1,978
(115)
1,863
Exam Type Question: Nov 2001 Q4
QUESTION FOUR
(a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that
date the bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500.
His accountant investigated the matter and discovered the following discrepancies:
1. Bank charges of Sh.3, 000 had not been entered in the cashbook.
2. Cheques drawn by Ssemakula totaling Sh.22, 500 had not yet been presented to the bank.
3. He had not entered receipts of Sh.26, 500 in his cashbook.
4. The bank had not credited Mr Ssemakula with receipts of Sh.98, 500 paid into the bank on 30
June 2001.
5. Standing order payments amounting to Sh.62, 000 had not been entered into the cashbook.
6. In the cashbook Ssemakula had entered a payment of Sh.74, 900 as Sh.79, 400.
7. A cheque for Sh.15, 000 from a debtor had been returned by the bank marked “refer to drawer”
but had not been written back into the cashbook.
8. Ssemakula had brought forward the opening cash balance of Sh.329, 250 as a debit balance
instead of a credit balance.
9. An old cheque payment amounting to Sh.44, 000 had been written back in the cashbook but the
bank had already honored it.
10. Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank
account. Unfortunately, the bank had credited some deposits amounting to Sh.832, 500 to
another customer’s account. However acting on information from his customers Ssemakula
had actually entered the expected receipts from the debtors in is cashbook.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
101
Required:
i.
A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001. (9 marks)
ii.
A bank reconciliation statement as at 30 June 2001.
(5marks)
(Total: 20 marks)
Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.
b)
ADJUSTED CASHBOOK
2001
Bal b/d
Receipts omitted
Payment overstated
Sh.
2,366,500
26,500
4,500
2001
Sh.
Bank charges
3,000
Standing orders
62,000
Debtors (dishonored cheques) 15,000
Error on opening balance
329,250
Balance C/F
329,250
Cheque payment
44,000
Balance C/D
1,615,000
2,397,500
2,397,500
SSEMAKULA
Bank Reconciliation Statement as at 30 June 2001.
Cash at bank as per the updated cashbook
Add: Unpresented cheques
Less: Uncredited cheques
Error on bank statement
Balance as per the bank statement
Sh.
98,500
832,500
Sh.
1,615,000
22,500
1,637,500
(931,000)
706,500
FINANCIAL ACCOUNTING 1
102
Adjustment to Final Accounts
Exam type Question: Nov 96 Q4
QUESTION FOUR
(a) What is the purpose of preparing a bank reconciliation statement?
(4marks)
(b) The following is the bank statement of Kakamega Retail Traders for the month of October
1996:
Date
1996
Particulars
October 1
2
2
2
2
4
4
4
4
7
7
7
8
8
October 9
9
9
15
15
16
16
17
19
19
21
21
21
21
21
23
23
26
26
26
28
28
Balance b/d
Cheque no. 63
31,000
Cheque no. 67
3,548
Cheque no. 65
13,000
Deposit
82,000
Cheque no. 69
Cheque no. 68
Cheque no. 64
Deposit
7,280
Cheque no. 70
Cheque no. 71
Deposit
36,100
Cheque no. 66
Deposit
28,000
Cheque no. 72
Cheque no. 73
Deposit
51,000
Cheque no. 74
Deposit
20,560
Cheque no. 75
Deposit
18,014
Deposit
34,500
Cheque no. 76
8,500
Deposit
42,750
Cheque no. 79
Cheque no. 77
Cheque no. 78
Cheque no. 81
6,500
Deposit
9,000
Cheque no. 82
16,240
Deposit
63,000
Cheque no. 84
Dividends
Deposit
62,500
Cheque no. 88
Standing order 10,400
(Insurance)
Cheque no. 85
27,000
Cheque no. 87
22,500
Deposit
13,025
Service charge
750
Deposit
28,050
28
28
28
31
31
Debit
Sh.
Credit
Sh.
6,000
3,115
51,000
7,000
51,500
9,000
1,330
6,250
2,800
65,000
2,410
12,506
4,000
1,500
8,750
35,500
STRATHMORE UNIVERSITY ● STUDY PACK
Balance
Sh.
365,875
334,875
331,327
318,327
400,327
394,327
391,212
340,212
347,492
340,492
288,992
325,092
316,092
344,092
342,762
336,512
387,512
384,712
405,272
340,272
358,286
392,786
384,286
427,036
424,626
412,120
408,120
401,620
410,620
394,380
457,380
455,880
464,630
527,130
491,630
481,230
454,230
431,730
444,755
444,005
472,055
Lesson Four
103
The following is the bank column of the cashbook:
Date
Particulars
Debit
1996
Sh.
October 1
1
3
5
8
10
15
15
17
19
19
22
24
27
28
29
31
Balance b/d
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Deposited at bank
Date
1996
365,875 October 1
7,280
1
36,100
1
28,000
2
51,000
4
20,560
5
18,014
5
34,500
7
42,750
8
15,700
10
9,000
11
36,000
15
26,500
18
13,025
19
28,050
19
171,010
19
31,525
19
22
23
26
28
28
28
28
30
31
31
31
934,889
Particulars
Credit
Sh.
Cheque no. 65 13,000
Cheque no. 66 9,000
Cheque no. 67 3,548
Cheque no. 68 3,115
Cheque no. 69 6,000
Cheque no. 70 7,000
Cheque no. 71 51,500
Cheque no. 72 1,330
Cheque no. 73 6,250
Cheque no. 74 2,800
Cheque no. 75 65,000
Cheque no. 76 5,800
Cheque no. 77 12,506
Cheque no. 78 4,000
Cheque no. 79 2,410
Cheque no. 80 3,860
Cheque no. 81 6,500
Cheque no. 82 16,240
Cheque no. 815,000
Cheque no. 84 1,500
Cheque no. 85 27,000
Cheque no. 86 10,520
Cheque no. 87 22,500
Cheque no. 88 53,500
Cheque no. 89 2,500
Cheque no. 90 64,529
Cheque no. 91 15,500
Balance c/d 502,481
934,889
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was in transit and two
cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as Sh.26, 500 and Sh.36,
000 and in the bank statement as Sh.62, 500 and Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but was dishonored and
the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for Sh.5, 800 and Sh.33,
500 respectively.
Required:
a) A correct cashbook balance.
b) A bank reconciliation statement on 31 October 1996.
FINANCIAL ACCOUNTING 1
(8 marks)
(8 marks)
(Total: 20 marks)
104
Adjustment to Final Accounts
No 96 Q4
CASHBOOK (ADJUSTED)
1996
31.10
Sh.
502,481
8,750
36,000
18,000
Bal b/d
Dividends
Error on deposit
Error on cheque 88
565,231
1996
Sh.
Standing order (insurance)
10,400
Service charge
750
Dishonored cheques (debtor) 15,700
Bal c/d
538,381
565,231
Bank Reconciliation Statement as at 1 October 1996. (Previous period)
Sh.
Balance as per the cashbook
Add: Unpresented cheques 63
31,000
51,000
64
Sh.
365,875
82,000
447,875
Less: Uncredited cheques
Deposits
Balance as per the bank statement
(82,000)
365,875
Bank Reconciliation Statement as at 31 October 1996
Balance as per the correct cashbook
Add: Unpresented cheques
Cheque no. 80
Cheque no. 83
Cheque no. 86
Cheque no. 89
Cheque no. 90
Cheque no. 91
Error on bank statement
Less: Uncredited Cheques
Deposits
“
Error in bank statement
Balance as per the bank statement
Sh.
3,860
15,000
10,520
2,500
64,529
15,500
27,000
171,010
31,525
2,700
STRATHMORE UNIVERSITY ● STUDY PACK
Sh.
538,381
138,909
677,290
(205,235)
472,055
Lesson Four
105
d) CAPITAL AND REVENUE EXPENDITURE
Capital Expenditure: This is the amount spent on the acquisition of a non-current asset or adding value to a
non-current asset.
Examples of expenses incurred in acquisition:
i.
Purchase price/cost of the asset.
ii.
Delivery/carriage inwards costs (e.g. shipping charges or import taxes).
iii.
Costs incurred to get the asset in use (e.g. assembly, testing)
iv.
Installation
v.
Demolition costs in order to construct a new building.
vi.
Architect fees for construction and supervision
vii.
Legal fees incurred in acquisition of a new asset (e.g. lease agreement)
Examples of expenses incurred in adding value to an asset:
i.
Modify plant to increase its useful life.
ii.
Upgrading plant to improve quality of output.
iii.
Adopting or upgrading the production process to improve or reduce costs.
Revenue Expenditure: There’s an amount spent by the firm in the normal trading process or to assist in
earning revenues or income. Examples:
i.
Postage and stationery.
ii.
Carriage outwards (sales).
iii.
Repairs and maintenance.
Example 4.10
For the business of K Spinns,a wholesaler, classify the following between ‘capital’ and ‘revenue’ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
k) Revenue expenditure
l) Capital expenditure.
FINANCIAL ACCOUNTING 1
106
Adjustment to Final Accounts
e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the firm. IAS 16 on property,
plant and equipment defines depreciation as the allocation of a depreciable amount of a non-current asset
over its estimated useful life.
Under the matching concept, all incomes or revenues and expenses for a particular period should be
reported in the financial statements and because depreciation is an expense of the business therefore, it will
be charged in the P&L A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a
business grows or expands then some buildings may become inadequate due to
space. Also some machines that are unable to manufacture a large number of
goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil.
Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of depreciation to be charged in the P&L
a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting practice, accounting
standards and suit the firm’s non-current assets. There are 2 main methods of estimating depreciation and 5
others that will apply in a firm’s situation.
The main methods are: Straight-line method and Reducing Balance method. The other 5 methods include:
i.
ii.
iii.
iv.
v.
Sum of the digits methods – uses a formular.
Revaluation method – applies to a non-current asset of low value.
Machine-Hour method – depreciation is based on number of hours a machine is expected to operate
(manufacturing process).
Unit of output method – depreciation is based on the number of units a machine is expected to
produce.
Depletion of units – depreciation is based on number of units extracted from the asset.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
107
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c for a particular asset
and is based on the following formular:
Depreciation for year
=
Cost of asset – Residual Value
=
Estimated useful life
£100,000 - £20,000
8
= £10,000 per year.
Cost of Asset – Residual Value
Estimated useful life of asset.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value /
Scrap Value.
Estimated Useful Life
The period the asset is expected to be used in the firm.
Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight years. After the eight years
the machine will be sold for £20,000. Under the straight-line method, the depreciation amount will be
computed as follows:
This means for this asset £10,000 will be charged in the P&L account as depreciation expense on the
machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly
over the life of the asset e.g. buildings use straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of
use. The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value
of the asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier
periods of use and lower amounts in the latter periods of use as shown in the following example:
Example 4.12
Assume a firm buys machinery for £100,000 and provides depreciation on machines at 20% p.a. on reducing
balance method. The depreciation charged to the P&L will be as follows for the next 3 years.
FINANCIAL ACCOUNTING 1
108
Adjustment to Final Accounts
Year 1
£
Cost
Depreciation 20% of 100,000
100,000
(20,000)
P&L YR 1
80,000
(16,000)
P&L YR 2
64,000
(12,800)
P&L YR 3
Balance to YR 2 80,000
Year 2
Depreciation 20% of 80,000
Balance to YR 3 64,000
Year 3
Depreciation 20 % of 64,000
Balance to YR 4 51,200
Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of
an asset are higher in the first periods of use and lower in the latter periods e.g.
 Fixtures, furniture and fitting.
 Plant and machinery.
 Motor vehicles.
ACCOUNTING TREATMENT ON DEPRECIATION
When non-current assets are depreciated, a new account for each type of asset is opened; this account is
called a provision for depreciation whereby the following entries will be made:
Debit – P&L a/c
Credit – Provision for depreciation a/c
With the amount of depreciation charged for the period.
Example on straight-line method
The entries will be as follows:
Debit – P&L a/c with £10,000
Credit – Provision for depreciation. Machines a/c with £10,000 being depreciation provided for the
machine.
The ledger accounts will be as follows:
Machinery
£
£
Cashbook
100,000 31/12 Bal c/d 100,000
Provision for Depreciation Machinery
£
£
31/12 Bal c/d 10,000
P&L 10,000
The final accounts extracts will be shown as follows:
(a) Profit And Loss Account (Extract) for the year ended
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
Expenses
Depreciation:
109
£
Buildings
Plant and machinery
Furniture, Fixtures and Fittings
Motor vehicles
£
x
10,000
x
x
(b) Balance sheet (Extract) as at________
Non Current Assets
Cost
£
Total
Depreciation (£)
Land
Buildings
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles
x
x
x
x
x
x
(x)
(x)
(x)
(x)
x
NBV (Net Book Value)
£
x
x
x
x
x
x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars account and the
provision for depreciation account for the year ended 31 December 2002 from the information given below.
Depreciation is at the rate of 20 per cent per annum. Using the basis of one month’s ownership needs one
month’s depreciation.
2002
Bought two motor vans for £12,000 each on 1 January
Bought one motor van for £14,000 on 1 July.
Motorcars a/c
2002
1/1
1/7
£
24,000
14,000
38,000
Cashbook
Cashbook
2002
31/12
£
Bal c/d
Calculation for depreciation
1/1
24,000 x 20 x 12
100 12
= £4,800 + 1/7( 14,000 x 20 x 6 = 1,400 )
100 12
=
£4,800 + 1,400 = £6,200
FINANCIAL ACCOUNTING 1
38,000
38,000
110
Adjustment to Final Accounts
Provision- Depreciation for Motor cars A/c
£ 2002
2002
31/12 Bal c/d
6,200 31/12
P&L
£
6,200
Profit And Loss Account (Extract) for the period.
Expenses
Depreciation:
Motor vans
£
£
6200
Balance Sheet (Extract) as at 31/12/2002
Non-current Assets
Cost
Motor vans
38,000
Total
Depreciation
(6200)
NBV
31,800
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31 December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999
2000
2002
1 January
1 July
1 October
1 April
1 plant costing £8,000
2 plant costing £5,000 each
1 plant costing £6,000
1 plant costing £2,000
Depreciation is at the rate of 10 per cent per annum, using the straight-line method, plant being depreciated
for each proportion of a year.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
1999
1/1
Cashbook
2000
1/1
1/7
1/10
Bal b/d
Cashbook
Cashbook
2001
1/1
Bal b/d
2002
1/1
1/4
Bal b/d
Cashbook
111
Plant a/c
£ 199
8000 31/12 Bal c/d
8000
2000
8000
10,000
6,000 31/12 Bal c/d
24,000
24,000
24,000
2001
24,000 31/12 Bal c/d
24,000
2002
24,000
2,000 31/12 Bal c/d
26,000
26,000
26,000
Calculation for Depreciation
1999
£8,000 x 10/100 x 12/12
=
£
800
2000
£10,000 x 10/100 x 6/12
=
500
£6,000 x 10/100 x 3/12
=
150
£8,000 x 10/100 x 12/12
=
800
1,450
2001
£24,000 x 10/100 x 12/12
=
2400
2002
£24,000 x 10/100 x 12/12
=
2400
£2,000 x 10/100 x 9/12
=
150
2,250
Accumulated Depreciation
800
2,250
4,650
7,200
FINANCIAL ACCOUNTING 1
£
112
1999
31/12 Bal c/d
Adjustment to Final Accounts
Provision – Depreciation Machines
£ 1999
800
31/12 P&L
2000
£
31/12 Bal c/d
2,250
2,250
2001
£
31/12 Bal c/d
2000
1/1
2001
1/1
4,650
4650
2002
£
31/12 Bal c/d
7,200
7,200
2002
1/1
£
800
Bal b/d
P&L
£
800
1,450
2,250
Bal b/d
P&L
£
2,250
2,400
4650
Bal b/d
P&L
£
4,650
2,550
7,200
Balance Sheet (Extract) as at 31/12/99 – 31/12/02
Non Current Assets
Cost
NBV
1999
Motor vans
Total
Depreciation
8,000
(800)
7,200
1999
Motor vans
24,000
(2,250)
21,750
1999
Motor vans
24,000
(4,650)
19,350
1999
Motor vans
26,000
(7,200)
18,800
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
When an asset is disposed and is no longer used by the firm, the appropriate entries should be made in the
asset account and the total depreciation provided to date on the asset and the entries required will depend on
the type of disposal.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
113
When the asset is sold, the following entries will be made:
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset being disposed.
(b) Debit – provision for depreciation of asset a/c.
Credit – asset disposal a/c
With the total depreciation provided to date on the asset.
(c) Debit – cashbook.
Credit – asset disposal a/c
With the cash received on disposal.
When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance
company accept liability but by the end of the period the insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.
(b) Debit – provision for depreciation of asset a/c
Credit – asset disposal a/c
(c) Debit – insurance receivable a/c
Credit – asset disposal a/c
With the amount expected from the insurance.
If the insurance pays before the end of the financial period, it will not be necessary to create an insurance
debtor so the following entries will be made:
Debit – cashbook.
Credit – asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries will be made in the asset
account and provision for depreciation a/c only.
Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset no longer in use.
Debit – provision for depreciation for asset
Credit – asset disposal a/c
With the total depreciation provided to date.
The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A
credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with other
incomes. The entry will be:
Debit – asset disposal a/c
Credit – P&L a/c
With the balance in the account.
FINANCIAL ACCOUNTING 1
114
Adjustment to Final Accounts
A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense
and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is £800. The firm decides to
trade in the motor vehicle with a new one the value of the new one being £500. The supplier of the new
vehicle agree with the firm that the old motor vehicle is worth £300, therefore the difference will be paid by
cash.
Bal b/d
Disposals
Cashbook
Motor vehicle a/c
£
1,000
Motor vehicle disposal
300
200
Bal c/d
1,500
=====
£
1,000
500
1,500
====
Motor Vehicle Disposal a/c
Motor vehicle
P&L
a/c
1,000
100
1,100
£
£
800
300
1,100
Provision for depreciation
Motor vehicle
JOURNAL ENTRIES
£
£
Debit – motor vehicles disposal
Credit – motor vehicles a/c
(Motor vehicle being traded in now transferred to disposal a/c)
1,000
Debit – Provision for depreciation – motor vehicles
Credit – Motor vehicle disposal a/c
(Total depreciation provided for motor vehicle)
800
Debit – Motor vehicle a/c
Credit – Asset disposal a/c
- Cashbook
(New motor vehicle acquired by trade-in value
of £300 and cheque payment of £200)
500
Debit – Asset disposal a/c
Credit – P&L
(Profit made on disposal)
100
In case of a loss,
Debit – P&L a/c
Credit – asset disposal a/c
STRATHMORE UNIVERSITY ● STUDY PACK
1,000
800
300
200
100
Lesson Four
115
If the firm trades in an old asset for a new one, the following entries will be made in addition to the
movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for each month of
ownership. From the following details draw up the plant account and the provision for depreciation account
for each of the years 1999, 2000, 2001 and 2002.
1999
2001
2002
Bought plant costing £900 on 1 January.
Bought plant costing £600 on 1 October.
Bought plant costing £550 on 1 July.
Sold plant which had been bought for £900 on 1 January 1999 for the sum of
30 September 2002.
£275 on
You are also required to draw up the plant disposal account and the extracts from the balance sheet as at the
end of each year.
Example
Plant a/c
£
1999
900
600
31/12 Bal c/d
1,500
1,500
1,500
£
1,500
£
1,500
1999
1/1
1/10
Cashbook
Cashbook
2000
1/1
Bal b/d
2001
1/1
1/7
Bal b/d
Cashbook
£
2001
1,500
550 31/12 Bal c/d
2,050
2002
1/1
Bal b/d
2,050
2,050
2000
31/12 Bal c/d
2002
30/9 Disposal
31/12
Bal c/d
FINANCIAL ACCOUNTING 1
£
£
2,050
2,050
900
1,150
2,050
116
Adjustment to Final Accounts
Plant Provision for Depreciation a/c
1999
31/12
£
210
Bal c/d
2000
31/12
Bal c/d
510
510
2001
31/12
2002
31/12
Bal c/d
865
865
Disposals
Bal c/d
675
555
1,230
1999
31/12
2000
1/1
2001
1/1
2002
1/1
£
210
P&L
Bal b/d
P&L
210
300
510
Bal b/d
P&L
510
355
865
Bal b/d
P&L
865
365
1,230
Calculation for Depreciation
Date
1999
1/1
1/10
Cost
Months Depreciation charge
£
900
600
12
3
20/100 x 900 x 12/12
20/100 x 600 x 3/12
2000
1/1
1,500
12
20/100 x 1,500 x 12/12
=
300
2001
1/1
1/2
1,500
550
12
6
20/100 x 1,500 x 12/12
20/100 x 550 x 6/12
=
=
300
55
355
900
550
600
9
12
12
20/100 x 900 x 9/12
20/100 x 550 x 12/12
20/100 x 600 x 12/12
2002
30/9
31/12
31/12
2002
Plant a/c
P&L
Plant Disposal a/c
£
2002
900
30/9 Provision for depreciation
50
30/9 Cashbook
950
STRATHMORE UNIVERSITY ● STUDY PACK
=
=
=
=
=
£
675
275
950
180
30
210
135
110
120
365
Lesson Four
117
Balance Sheet (Extract)
1999
Non Current Assets
Plant
Cost
1,500
Total
Depreciation
(210)
2000
Plant
1,500
(510)
990
2001
Plant
2,050
(865)
1,695
2002
Plant
1,150
(555)
595
NBV
1,290
CHANGE OF DEPRECIATION POLICY
A firm may change its depreciation policy in several ways e.g. from straight line to reducing balance or vice
versa, or it may increase/decrease the number of estimated useful years of an asset. A firm should always
follow the depreciation policy adopted consistently and incase there is need to change the policy may be due
to a new accounting standard or change in circumstances. This change should be disclosed in the financial
statements.
When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation
to be charged in the Profit and loss account .IAS 16 requires that depreciation should be based on the
remaining net book value at the start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10 years. The firm depreciates
the machines on a straight-line basis on the years of the number of estimated useful years. In the 4th year, the
estimated useful life of the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried down for year 4. Change
for 10yr – 8 yr is same as change from 10% to 12.5%
FINANCIAL ACCOUNTING 1
118
Adjustment to Final Accounts
Provision for Depreciation
Year 1
31/12
£
Bal c/d
10,000
Year 2
31/12
Bal c/d
Year 3
31/12
Bal c/d
20,000
20,000
30,000
30,000
Year 4
31/12
Bal c/d
44,000
Year 1
31/12
Year 2
1/1
P&L
£
10,000
Bal b/d
P&L
Year 3
1/1
31/12
10,000
10,000
20,000
Bal b/d
P&L
20,000
10,000
30,000
Year 4
1/1
31/12
Bal b/d
P&L
30,000
14,000
44,000
44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease but increases from 10 years
to 13 years.
Required: Show the provision of depreciation account in year 4
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
119
Provision for Depreciation
Year 1
31/12
£
10,000
Bal c/d
Year 1
31/12
Year 2
31/12
Bal c/d
Year 2
1/1
20,000
20,000
Year 3
31/12
P&L
£
10,000
Bal b/d
P&L
10,000
10,000
20,000
Bal b/d
20,000
P&L
10,000
Year 3
Bal c/d
30,000
1/1
_____
30,000
Year 4
31/12
Bal c/d
37,000
30,000
Year 4
1/1
Bal b/d
31/12 P&L
37,000
30,000
7,000
37,000
REVALUATION OF NON CURRENT ASSETS
Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.g. land and
buildings. IAS 16 on property, plant and equipment requires that such assets may be carried in the accounts
at the revalued amounts (may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but for buildings, changes
should be made at the cost and depreciation reserve account is usually opened for the purpose of these
adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset
Cost
(a)
Land
£1,000,000
(b)
Buildings
£800,000
FINANCIAL ACCOUNTING 1
Depreciation
40,000
120
Adjustment to Final Accounts
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices and these are revalued at:
Land
-£ 1,200,00
Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land  1,200,000 – 1,000,000)
(b)
Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings  900,000 – 800,000)
(c)
Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£
Bal B/D
£
1,000,000
Revaluation reserve
__200,000
Bal C/D
1,2000,000
1,200,000
1,200,000
Buildings a/c
£
Bal B/D
800,000
Revaluation reserve
100,000
£
Bal C/D
900,000
900,000
900,000
Revaluation Reserve a/c
£
Bal C/D
340,000
£
Land
200,000
Buildings
100,000
Provision for depr.
340,000
STRATHMORE UNIVERSITY ● STUDY PACK
40,000
340,000
Lesson Four
121
Provision for depreciation (Buildings)
£
£
Revaluation
40,000
Bal B/D
40,000
Bal c/d
45,000
P&L
45,000
85,000
85,000
The balances in the Land and Building a/c will be shown as cost in the Balance Sheet and the
revaluation reserve a/c appears together with the capital as a revaluation reserve (especially used in
company accounts.
Land
1,200,000 – 1,000,000 = 200,000
Buildings
900,000 – 760,000 = 140,000
340,000
Any depreciation to be charged for the buildings should be based on the revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged in the P & L and will
also be the Bal c/d in the provision for depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land and buildings downwards
in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Year 3
1/1 Bal B/D
Land
£
1,200,000
Year 3
£
31/12 Revaluation
200,000
P&L
100,000
________
1,200,000
FINANCIAL ACCOUNTING 1
Bal C/D
__900,000
1,200,000
122
Adjustment to Final Accounts
Buildings
Year 3
£
1/1 Bal B/D
900,000
_______
Year 3
£
31/12 Revaluation
100,000
P&L
100,000
Bal C/D
700,000
900,000
900,000
Revaluation Reserve
Year 3
£
Year 3
£
31/12 Land
200,000
1/1/ Bal B/D
340,000
31/12 Building
100,000
31/12 Prov. For depr.
_40,000
_______
340,000
340,000
Exam Type Question 4.19 (December 1995 ) Question 4
James Mbuvi started a taxi business in Nairobi March 1990 under the firm name Mbuvi Taxis. The firm had
two vehicles KA and KB, which had been purchased forSh.560, 000, and Sh.720, 000 respectively earlier in
the year.
In February 1992 vehicle KB was involved in an accident and was written off. The insurance company paid
the firm Sh.160, 000 for the vehicle. In the same year the firm purchased two vehicles, KC and KD for
Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle KE was purchased for
Shs.840,000. In March 1994 another vehicle KF was purchased for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of
the year irrespective of the date of purchase. Depreciation is not provided for vehicle disposed of during the
year. The firm’s year ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss account for each of the five
years.
(7 marks)
b)
Prepare the motor vehicle account (at cost).
(8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles disposed of by the company.
(5 marks)
(Total: 20 marks)
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
123
a
Vehicle
1990
1991
1992
1993
KA
560,000
560,000
560,000
560,000
KB
720000
720,000
-
-
-
KC
-
-
800,000
-
-
KD
-
-
800,000
800,000
800,000
KE
-
-
-
-
840,000
KF
-
-
-
-
960,000
Total cost
1,280,000
1,280,000
2,160,000
1,360,000
2,600,000
320,000
320,000
540,000
340,000
650,000
Depreciation at 25%
Motor Vehicle
1990
1/3
Cashbook
Sh
1990
1,280,000
31/12
1991
1/1
Bal c/d
1,280,000
Bal c/d
1,280,000
1991
Bal b/d
1,280,000
1992
1/1
Sh
31/12
1992
bal b/d
1,280,000
1/2
Disposal
720,000
Cashbook
1,600,000
31/12
Bal c/d
2,160,000
2,880,000
1993
1/1
2,880,000
1993
Bal b/d
2,160,000
1/11
Disposal
800,000
________
31/12
Bal c/d
1,360,000
2,160,000
1994
2,160,000
1994
1/1
Bal b/d
1,360,000
1/1
Cashbook
840,000
1/3
Cashbook
960,000
31/12
3,160,00
FINANCIAL ACCOUNTING 1
Bal c/d
3,160,000
3,160,000
1994
124
Adjustment to Final Accounts
Provision For Depreciation – M/V
1990
31/12
Balc/d
Sh
1990
320,000
31/12
1991
Sh
P&L
320,000
1/1
Bal b/d
320,000
31/12
P& L
320,000
1991
1992
31/12
Bal c/d
640,000
640,000
1992
640,000
1992
1/2
Disposal
360,000
1/1
Bal b/d
640,000
31/12
Bal c/d
820,000
3/12
P&L
540,000
1,180,000
1993
1,180,000
1993
1/11
Disposal
200,000
1/1
Bal b/d
820,000
31/12
Bal c/
960,000
31/12
P&L
340,000
1,160,000
1,1
60,000
1994
1994
31/1
31/12
Bal c/d
1,610,000
Bal b/d
960,000
P&L
650,000
1,610,000
1,610,000
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost still remains until the asset is
disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
l
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
125
Accumulated
Net book
Cost
Depreciation
Value
£000
£000
£000
Land
4,000
Nil
4,000
Buildings
2,200
800
1,400
Plant and machinery
1,600
600
1,000
600
200
400
Motor vehicles
Depreciation is charged at the following annual rates (all straight line):
Land
Nil
Buildings
2%
Plant and machinery 15%
Motor vehicles
20%
Appropriate depreciation charge is made in the year of purchase, sale or revaluation of an asset
During the year ended 30 June 2000 the following transactions took place:
1. I January 2000 The company decided to adopt a policy of revaluing its buildings; and they were
revalued to £3.4m.
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000. Accumulated depreciation on this
plant at 30 June 1999 amounted to £230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the purchase price was settled by
part exchanging another motor vehicle, which had cost £20,000, at an agreed value of £12,000. the
balance of £18,000 was paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999
of £10,000
Required:
Prepare ledger accounts to record these transactions in the records of Pentland Limited.
(16 marks)
Land
1999
1/7
£ 1999
Bal b/d
4,000
2000
1/1
£
2000
Revaluation
1,200 30/6
Bal c/d
5,200
FINANCIAL ACCOUNTING 1
5,200
5,200
126
Adjustment to Final Accounts
1999
1/7
2000
1/1
Bal b/d
Revaluation
2000
30/6 Bal C/D
2000
1,200 30/6
3,400
£
Bal c/d
2000
1/1
Revaluation
30/6
Bal c/d
1999
1/7
Bal B/D
2000
1/1
Cashbook
2000
822 30/6
34_
856
P&L
2,200 x ½ x 15
3,400 x ½ x 15
Plant
£ 1999
1,600
2000
400 1/1
_____ 30/6
2,000
Disposal
Bal c/d
2000
252.50 30/6
595.00
847.50
£
1,200
822
2,022
£
800
56_
856
£
Disposal
Bal c/d
Provision for Depreciation - Plant
£ 1999
1/7
Bal b/d
1999
3,400
3,400
Revaluation Reserve
£ 2000
1/1
Buildings
2,022 1/1
Provision for depr.
2,022
Provision for Depreciation - Building
£ 1999
1/7
Bal b/d
1999
2000
1/1
Buildings
£ 1999
2,200
P&L
STRATHMORE UNIVERSITY ● STUDY PACK
300
1,700
2,000
£
600
247.50
847.50
Lesson Four
127
1999
1/7
Bal b/d
1/4
1/4
2000
1/4
2000
Disposal
Cash book
Motor Vehicle
P&L
12
18
630
1/4
30/6
2000
Disposal
Bal C/D
Motor Vehicle Disposal
£ 2000
20 1/4 Provision for depr.
5 1/4 Motor Vehicle
25
Provision for depreciation - Vehicle
£ 1999
1/7
Bal b/d
1999
2000
1/4
30/6
Motor Vehicles
£
1999
600
Disposal
Bal c/d
2000
1/1
Plant
P&L
2000
13 1/4
307.5 30/6
320.50
P&L
Bal C/D
Plant - Disposal
£ 2000
300 1/1 Provision for depr.
2.50 Cash book
25
£
20
610
630
£
13
12
25
£
200
120.5
______
320.50
£
252.50
50___
302.50
Property, Plant and Equipment Schedule (Formerly fixed asset movement schedule)
The property, plant and equipment schedule is a summary report on the balances and transactions of the
asset and provision for depreciation account as per the requirements of IAS 16 to be reported in the
published accounts of companies. The format is as follows:
FINANCIAL ACCOUNTING 1
128
Cost/ Valuation
Adjustment to Final Accounts
Freehold
property
(£)
Bal as at 1/1/01
Additions
Revaluations
(gains)
Reclassifications
Disposals
Bal as at
31/12/01
Depreciation/
Amortization
Bal as at 1/1/10
Change for year
Revaluation
Eliminated on
Disposal
Bal as at
31/12/01
N.B. V as at
31/12/01
NBV as at
31/12/01
Property, Plant and Equipment Schedule:
Leasehold Property
Plant and
Fixture, Furniture
Total
Short lease
(£)
x
xx
-
Machinery
(£)
x
xx
-
And fittings (£)
(£)
x
xx
xx
Long leases
(£)
x
xx
-
x
xx
-
x
xx
xx
(xx)
(xx)
(xx)
xx
(xx)
(xx)
(xx)
(xx)
xx
xx
xx
xx
xx
xx
xx
xx
(xx)
-
xx
xx
(xx)
xx
xx
(xx)
xx
xx
(xx)
xx
xx
(xx)
(xx)
-
(xx)
(xx)
(xx)
(xx)
(xx)
xx
(xx)
xx
(xx)
xx
xx
xx
xx
(xx)
xx
xx
(xx)
xx
xx
xx
xx
Additional information is in this schedule called reclassifications where some of the non-current assets are
transferred into a different class. (e.g.) some of the properties hold under long leases (over 50 years) will be
transferred to the short leases classes when their term becomes less than 50 years. This is a reclassification
from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the
long lease class and on addition in the short lease class
Exam Type Questions
May 2000 Question Three
a) Briefly explain the nature and purpose of accounting for depreciation.
b) The chief accountant of Jitegemea Ltd has encountered difficulties while accounting for fixed assets and
the related depreciation in the company’s draft accounts for the year ended 30 April 2000. He has
decided to seek your professional advice and presented the following balances of fixed assets as at 1 May
1999:
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
Furniture
Trucks
Plant and machinery
Land
Buildings
129
Acquisition
Cost
Sh.
900,000
3,525,000
7,387,500
2,775,000
2,925,000
Accumulated
Depreciation
Sh.
300,000
1,470,000
4,462,500
292,500
Depreciation
Rates
%
12.5
25
10
Nil
2.5
The following additional information was also available:
1.
2.
3.
4.
5.
It is the company’s policy to write off cost of the assets using above percentages on cost.
Depreciation is fully charged in the year of acquisition and none in the year of disposal.
A three year old machine acquired for sh.187,500 was sold for sh.15,750.
It has been decided to adjust and charge depreciation on buildings at 4%.
A used delivery truck purchased three years ago for sh.248,250 was traded in during the year at a value of
sh.157,500 in part exchange of the new delivery truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company that went out of
business. At the time of acquisition sh.90,000 was paid to have the assets revalued by a professionally
qualified valuer. The revaluation indicated the following market values.
Sh.
Land
900,000
Buildings
600,000
Machinery
300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company’s
accounts for the year ended 30 April 2000.
(10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm. IAS 16
on property plant and equipment defines depreciation as allocation of a depreciable amount of a non-current
asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses that relate to a particular
financial period and therefore because the firm to earn revenue or income uses the assets, then the loss of
value should be marched with these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.
FINANCIAL ACCOUNTING 1
130
Adjustment to Final Accounts
Property, Plant & Equipment Schedule:
Cost/Valuation
Land, Buildings
And Machinery
Sh.
Bal as at 1/5/99
13,087,500
Additions
1,350,000
Revaluation
450,000
Disposals
(187500)
Bal as at 30/4/2000
14,700,000
Depreciation
Bal as at 1/5/99
Charge for the year
Eliminated on disposal
Bal as at 30/4/2000
NBV 1/5/99
NBV 30/4/2000
4,755,000
1,066,500
(37,500)
5,784,000
8,332,500
8,916,000
Furniture
Motor
Sh.
900,000
_____900,000
Sh.
3,225,000
450,000
(248,250)
3,726,750
Sh.
17,512,500
1,800,000
450,000
(435,750)
19,326,750
300,000
112,500
-______
412,500
600,000
487,500
1,470,000
931,687.5
(124,125)
2,277,562.5
2,055,000
1,449,187.5
6,525,000
2,110,687.5
(161,625)
8,474,062.5
10,987,500
10852,687.8
Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle = cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5
Buildings
= (292,500 + 600,000) x 4%
At 2.5%
4%
= 141,000
= 2,925,000 x 2.5% x 4 = 292,500
= 292,500 x 4% x 4
= 468,000
175,500
Machinery: cost
Total
c/f + Additions – Disposals = Bal x 10%
73,787,500 + 300,000 – (187,500) = 7,500,000 x 10%
= 750,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Four
131
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and purchases ledgers. The control
accounts for the month of September 1999 are in balance and incorporate the following totals:
Sales ledger:
Balances at 1 September 1999: Debit
Credit
Sales
Cash received
Discounts allowed
Sales returns inwards
Credit balances at 30 September 1999
Purchases ledger:
Balances at 1 September 1999: Credit
Debit
Purchases
Cash payments
Discounts received
Purchases returns outwards
Debit balances at 30 September 1999
£
386,430
190
163,194
158,288
2,160
590
370
184,740
520
98,192
103,040
990
1,370
520
Although the control accounts agree with the underlying ledgers, a number of errors have been found, and
there are also several adjustments to be made. These errors and adjustments are detailed below:
1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as a payment to a
supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the sales ledger account for
the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed account. As a result, the
supplier issued a credit note for £2,000 on 26 September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the account of R Jones.
8. A debit balance of £420 existed in the purchases ledger at the end of August 1999. The supplier
concerned cannot now be traced and it has been decided to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should appear after allowing, where
necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its debtor collection system,
the company maintains a sales ledger control account. In preparing the accounts for the year to 31 October
FINANCIAL ACCOUNTING 1
132
Adjustment to Final Accounts
20X3 the accountant discovers that the total of all the personal accounts in the sales ledger amounts to
£12,802, whereas the balance on the sales ledger control account is £12,550.
Upon investigating the matter, the following errors were discovered:
1. Sales for the week ending 27 March 20X3 amounting to £850 had been omitted from the control
account.
2. A debtor’s account balance of £300 had not been included in the list of balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell’s sales ledger account.
10. Returns inwards valued at £200 had not been included in the control account.
11. Cash received of £80 had been credited to a personal account as £8.
12. A cheque for £300 received from a customer had been dishonored by the bank, but no adjustment
had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended balance as at 1 November
20X3.
Prepare a statement showing the adjustments that are necessary to the list of personal account balances so
that it reconciles with the amended sales ledger control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999, which showed a profit of
£81,208, when he realized that no bank reconciliation statement had been prepared at that date.
When checking the cashbook against the bank statement and carrying out other checks, he found the
following:
1. A cheque for £1,000 had been entered in the cashbook but had not yet been presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31 March 1999 were credited
by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but have not been recoded by
George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had been mistakenly entered
in the cash book and the plant account as £2,900. Depreciation of £290 had been charged in the
profit and loss account for this plant.
5. A cheque for £980 from a credit customer paid in on 26 March was dishonoured after 31 March and
George decided that the debt would have to be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been entered in the cash
book as a debit and posted to the credit of motor vehicles account. Depreciation at 25% per annum
(straight line) is charged on motor vehicles, with a full year’s charge calculated on the balance at the
end of each year.
7. The total of the payments side of the cash book had been understated by £1,000. On further
investigation it was found that the debit side of the purchases account had also been understated by
£1,000.
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Lesson Four
133
George had instructed his bank to credit the interest of £160 on the deposit account maintained for surplus
business funds to the current account. This the bank had done on 28 March. George had made an entry on
the payments side of the cashbook for this £160 and had posted it to the debit of interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a cheque drawn on the
business account. The entry in the cashbook had been debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account in the purchases ledger,
using a cheque drawn on George’s personal bank account. No entries have yet been made for this
transaction.
The cashbook showed a debit balance of £4,890 before any correcting entries had been made. The balance in
the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should appear in George’s balance
sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999.
(2 marks)
3. Draw up a statement for George showing the effect on his profit of the adjustments necessary to
correct the errors found.
(8 marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995. The difference was put
in the suspense account. The final accounts which were then prepared showed a net profit of Sh.
64,000. During audit, the following errors were noted:







A loan from ABD Bank of Sh 10,000 was entered correctly in cash book but was not posted
to the ledger.
A cheque of Sh. 4,000 for rent was not entered in the books.
Closing stock was overvalued by Sh 1,500.
Discount allowed of Sh 500 was entered in the discount-received account.
The opening stock was understated by Sh 3,200.
Prepaid insurance of Sh 220 had been included in the profit and loss account.
Goods destroyed by fire amounting to Sh 12,000 were written off in the profit and loss
account. However, the insurance company has agreed to compensate the full amount.
Required:
1. Journal entries to correct the errors.
2. Statement of corrected profit.
3. Suspense account.
FINANCIAL ACCOUNTING 1
(8 marks)
(2 marks)
(2 marks)
(Total: 20 marks)
134
Adjustment to Final Accounts
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on 31st December 2002:
£
Capital
Purchases
Sales
Salaries
Opening stock
Insurance
Rent
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission
£
40,000
26,154
36,246
4,814
4,307
820
965
25,000
14,500
6,140
1,060
4,638
__946
82,795
_____
82,795
Adjustments:
1.
2.
3.
4.
5.
6.
7.
Salaries due, £350
Insurance was paid for one year up to 31st March 19-2.
Rent received for January 19-2, £165.
Commission accrued but not yet received, £120.
Furniture to be depreciated by 10%.
5% of debtors are doubtful.
Stock on 31st December 19-1 was valued at £5,008.
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and transactions relating to the
company’s control accounts for the month of December 1994 are listed below:
Balance at 1 December 1994:
Sales ledger
Purchases ledger
Transactions during December 1994:
Sales on credit
Purchases on credit
6,185,000
52,500
16,500
4,285,000
(debit)
(credit)
(debit)
(credit)
8,452,000
5,687,500
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Lesson Four
135
Returns inwards
Returns outwards
Bills of exchange payable
Bills of exchange receivable
Cheques received from customers
Cheques paid to suppliers
Cash paid to suppliers
Bill payable dishonoured
Charges on bill payable dishounered
Cash received from credit customers
Bad debts written off
Cash discounts allowed
Bill receivable dishonoured
Balances at 31 December 1994:
Sales ledger
Purchases ledger
203,500
284,000
930,000
615,000
7,985,000
4,732,000
88,500
400,000
10,000
153,000
64,500
302,000
88,500
44,000 (credit)
23,500 (debit)
Required:
Post the sales ledger and the purchases ledger control accounts for the month of December 1994 and derive
the respective debit and credit closing balances on 31 December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
136
Further Adjustments to Accounts
LESSON FIVE
FURTHER ADJUSTMNETS TO ACCOUNTS
(a) CONTROL ACCOUNTS
Control accounts are so called because they control a section of the ledgers. By control we mean that the
total on the control accounts should be the same as the totals on the ledger accounts. There are two main
types of control accounts:
(i)
Sales ledger control Account – also called total debtors. The balance on the sales ledger control
account should be the same as the total of the balances in the sale ledger.
(ii)
Purchases Ledger Control Account – also called total creditors .The balance carried down (Bal
c/d) on the purchases Ledger Control Account should be the same as the total of the balances in the
purchases ledger.
Example (Sales Ledger Control a/c)
Sales Ledger Control A/c
Sales
1400 CashBook
Bal C/D
1400
700
700
1400
Sales = 200 + 300 + 400 + 500
Cashbook = 50 + 100 + 250 + 300
Balance c/d = 150 + 150 + 200 + 200
SALES LEDGER
Debtor A a/c
Sales
200 C/B
Bal c/d
200
50
150
200
Debtor B a/c
Sales
400 C/B
Bal c/d
400
250
150
400
Debtor C a/c
Sales
300 C/B
Bal c/d
300
100
200
300
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Lesson Five
137
Debtor D a/c
Sales
500 C/B
Bal c/d
500
300
200
500
Example: Purchases Ledger Control a/c
Purchases Ledger Control a/c
C/B
Bal c/d
1900 Purchases
700
2600
2600
2600
PURCHASES LEDGER
Creditor A
C/B
Bal c/d
400 Purchases
200
600
600
600
Creditor B
C/B
Bal c/d
450 Purchases
250
700
700
700
Creditor C
C/B
Bal c/d
350 Purchases
150
500
500
500
Creditor D
C/B
Bal c/d
700 Purchases
100
800
800
800
Purpose of Control Accounts
1. Provide for arithmetical check on the postings made in the individual accounts (either in the sales
ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
3. To detect and prevent errors and frauds in the customers and suppliers account.
4. To facilitate delegation of duties among the debtors and creditors clerks.
FINANCIAL ACCOUNTING 1
138
Further Adjustments to Accounts
FORMAT OF A SALES LEDGER CONTROL
Sales Ledger Control a/c
1. Balance b/d of the total debit
balances from previous period
2. Total credit sales for the period (from
the sales journal)
3. Refunds to customers (from
cashbook)
4. Dishonored cheques (from cashbook)
5. Bad debts recovered (from general
journal)
6. Total credit balances of the sales
Ledger carried forward
1. Total credit balances of the sales
ledger brought forward
2. Total cash received from credit
customers/debtors (from cash book)
3. Total cheques received from credit
customers/debtors (from cash book)
4. Total returns-inwards (returns-inwards
journal)
5. Total cash discount allowed to
customers (from cash book)
6. Bad debtors written-off (from general
journal)
7. Cash received from bad debtors
recovered (cash book)
8. Purchases Ledger contra
9. Allowances to customers (price
reduction in excess to discounts
allowed)
10. Total debit balance carried down to
the next period – to be derived after
posting all those transactions
Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes place when there is a credit
balance on the debtor’s a/c and the customer is not a creditor too.
The entry will be:
Dr. Debtor’s a/c
Cr. Cashbook
Example:
Debtor A
£
£
1000 Cashbook
950
100 Discounts
50
Returns
100
1100
1100
If the firm has not paid this amount owed to the customer, then it’s carried forward to the next period then is
a credit balance in the customer’s a/c. Therefore, if a firm has several customer, this information will be
shown in the control a/cs as total balance c/f
(debit side).
Sales
(Refunds) C/B
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Lesson Five
139
Contra against the purchases ledger balances:
Some debtors may also be creditors in the same firm and therefore, if the amount due to them as creditors is
less than what they owe as debtors, then the credit balance is transferred from their creditors a/c to their
debtors a/c as a contra entry.
Example:
Sales
Debtor (A)
2000 Contra- purchases
Bal c/d
2000
1000
1000
1100
Creditor (A)
Contra - Debtor
1000 Purchases
1000
FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT
1.
2.
3.
4.
5.
Purchases Ledger Control A/C
Total debit balances from purchases
1. Total credit balance brought forward (of
ledger brought forward from previous
purchases ledger from the previous
period
period)
Total cash paid to creditors
2. Total credit purchases for the period
(from cash book)
(from purchases journal)
Total cheques paid to creditors
3. Refunds from suppliers
(from cash book)
(from cash book)
Total cash discounts received
(from cash book)
Allowances by suppliers
6. Sales ledger contra
7. Total returns outwards
(from returns-outwards journal)
8. Total credit balance
(to be derived after posting entries)
4. Total debit balances (of the purchases
ledger carried forward)
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts should NOT be
included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase or
decrease in provisions for doubtful debts will not affect this account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some cases it
can be included especially where there are incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be shown on the debit side of
the sales ledger control. However when trying to determine the turnover under incomplete records
then it is wise to omit it.
FINANCIAL ACCOUNTING 1
140
Further Adjustments to Accounts
Example 5.1
You are required to prepare a purchases ledger control account from the following for the month of June.
The balance of the account is to be taken as the amount of creditors as on 30 June.
2003
June 1
£
36,760
Purchases ledger balances
Totals for June:
Purchases journal
Returns outwards journal
Cheques paid to suppliers
Discounts received from suppliers
Purchases ledger balances
June 30
Solution
2003
Returns out
Bank
Discounts received
Bal c/d (30/6)
Purchases Ledger Control A/C
£ 2003
10,980 Bal b/d (1/6)
387,950
8,870
51,830 Purchases
459,330
422,570
10,980
387,650
8,870
?
£
36,760
422,570
459,330
Example 5.2
Prepare a sales ledger control account from the following:
2003
May 1
£
Debit balances
Totals for May:
Sales journal
Cash and cheques received from debtors
Discounts allowed
Debit balances in the sales ledger set off against credit
balances in the purchases ledger
Debit balances
Credit balances
May 31
64,200
128,000
103,700
3,950
1,450
?
500
Solution
2003
1/5
31/5
Bal b/d
Sales
Bal c/d
Sales Ledger Control A/C
£ 2003
64,200
Cash book
128,000
Discounts allowed
Purchases contra
500 31/5
Bal c/d
192,700
STRATHMORE UNIVERSITY ● STUDY PACK
£
103,700
3,950
1,450
83,600
192,700
Lesson Five
141
Example 5.3 (Exam type question – November 1997 Question 2)
(a) Explain the purposes for which control accounts are prepared.
(3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of
November 1997 are listed below:Balances on 1 November 1997:
Sales ledger
Purchases ledger
Transactions during November 1997:
Purchases on credit
Allowances from suppliers
Receipts from customers by cheques
Sale on credit
Discount received
Payments to creditors by cheques
Contra settlements
Bills of exchange receivable
Allowances to customers
Customers cheques dishonored
Cash received from credit customers
Refunds to customers for overpayments
Discounts allowed
Balances on 30 November 1997
Sales ledger
Purchases ledger
Sh.
9,123,000
211,000
4,490,000
88,000
(debit)
(credit)
(credit)
(debit)
18,135,000
629,000
27,370,000
36,755,000
1,105,000
15,413,000
3,046,000
6,506,000
1,720,000
489,000
4,201,000
53,000
732,000
136,000 (credit)
67,000 (debit)
Required:
The sales ledger and purchases ledger control accounts for the month of November 1997 and show the
respective debit and credit closing balances on 30 November 1997.
(17 marks)
(Total: 20 marks)
(a)
i)
Provide for arithmetical check on the postings made in the individual accounts (either in
the sales ledger or purchases ledger.)
ii)
To provide for a quick total of the balances to be shown in the trial balance as debtors
and creditors.
iii)
To detect and prevent errors and frauds in the customers and suppliers account.
iv)
To facilitate delegation of duties among the debtors and creditors clerks.
FINANCIAL ACCOUNTING 1
142
Further Adjustments to Accounts
Kopesha Ltd
1997
1/11
Bal b/d
Sales
Dishonored cheques
Refunds to customers
30/11
1997
1/11
30/11
Bal c/d
Bal b/d
Allowances from
suppliers
Discounts received
Bank
Contra settlement
Bal c/d
Sales Ledger Control A/C
Sh 1997
9,123,000 1/11 Bal b/d
36,755,000
Bank
489,000
Contra
Bills of exchange
53,000
receivable
Allowances
Cash
Discounts allowed
136,000 30/11 Bal c/d
46,556,000
Purchases Ledger Control A/C
Sh 1997
88,000 1/11
Bal b/d
Purchases
629,000
1,105,000
15,413,000
3,046,000
2,411,000 30/11 Bal c/d
22,692,000
Sh
211,000
27,370,000
3,046,000
6,506,000
720,000
4,201,000
732,000
2,770,000
46,556,000
Sh
4,490,000
18,135,000
67,000
22,692,000
Example 5.4 (Exam Question – May 2000
Question 4)
Poesha Limited keeps sales and purchases control accounts in the General Ledger. The transactions for the
month ended 30 April 2000 were as follows:
Sh
Credit balances on 1 April 2000
-Sales ledger
154,000
-Purchases ledger
569,000
Debit balances on 1 April 2000
-Sales ledger
956,000
-Purchases ledger
196,000
Credit balances on 30 April 2000
-Sales ledger
178,000
Debit balances on 30 April 2000
Purchases ledger
189,000
Credit purchases
2,450,000
Credit sales
4,563,000
Cheques received from debtors
3,140,000
Cash received from debtors
1,367,000
Cheque payments to creditors
1,994,000
Cash payments to creditors
352,000
Bad debts written off
68,000
Discounts received
104,000
Discounts allowed
169,000
Contra entry to sales ledger from purchases ledger
234,000
Refunds to debtors
62,000
Returns outwards
138,000
Returns inwards
231,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
143
Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April 2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
 Errors that don’t affect the trial balance
 Errors that affect the trial balance
Errors that don’t affect the trial balance
The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the same as the
credits. However, on taking a close check on the balances and transactions posted, errors may have been
made and therefore the balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are explained as follows:
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not made e.g. a
sales invoice of £400 is not posted in the sales journal therefore no entry is made in the debtor’s account and
the sales account i.e. both debit of £400 in debtor’s account and credit of £ 400 in the sales account.
The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
Debiting debtors
Crediting sales
£400
£400
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same class.
Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount of £ 200. Instead
of a debit to T Thompson’s account it is made to L Thompson’s account and the corresponding credit in the
sales account is correct.
Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson by:
£
(i)
(ii)
Debit T Thompson a/c
Credit L Thompson a/c
200
200
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different class e.g.
Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c. (Instead of debiting motor
vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is correct)
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account.
Therefore a capital expenditure has been posted as revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
£
(i)
Debit Motor vehicles a/c
400
(ii)
Credit Motor expenses a/c
400
FINANCIAL ACCOUNTING 1
144
Further Adjustments to Accounts
d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit is posted as
a credit and a credit is posted as a debit. Example: cash drawn from the bank of £150 for business use is
posted as a debit in the bank account and credit in cash in hand.
To correct this error, two entries are made in the relevant accounts:
(i)
Correct the error
(ii)
Post the transaction correctly
The entries will therefore be as follows:
(i)
Debit Cash in hand by
Credit bank by
£150
£150
To correct the error of £ 150 posted in the wrong sides of these account
(ii)
Debit cash by
Credit bank by
To post the entries correctly
£150
£150
e) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is either
under/over stated. In some cases, this is known as a transposition error e.g. cash received from a debtor of
£980 is credited/posted to the customer’s account as £890.
To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct
balance. In this case, we will:
Debit cash book
Credit debtors
£
90
90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or
credits then another error may take place to overstate the debits or credits by the same amount, hence
canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but shown in the trial balance
as £3,890 and another error carried to the trial balance of fixture amounting to £4,540 instead of £4,450:
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
Purchases
Fixtures
145
£
3,980
3,890
(90)
£
4,450
(4,540)
90
This type of error is corrected by use of a suspense account.
Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are required.
a)
b)
c)
d)
e)
Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
Goods taken for own use £ 700 had been debited to General Expenses.
Private insurance £ 89 had been debited to Insurance account.
A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
Cash banked £ 390 had been credited to the bank column and debited to the cash column in the
cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
FINANCIAL ACCOUNTING 1
146
Solution
Further Adjustments to Accounts
THE JOURNAL
Debit
10,000
Sales
Capital
Additional capital passed into sales a/c now
transferred to capital a/c
Drawings
General expenses
Drawings debited in general expense now
transferred to drawing a/c
Drawings
Insurance
Private insurance transferred from insurance
a/c to drawings a/c
Purchases
C Kelly
Purchases and creditors amount to 857
initially entered as £587
Bank
Cash
Correct error in posting
Bank
Cash
To post the cash banked correctly
Bank
Cash
Cash drawings correctly started from bank to
cash
J Charlton
M McCarthy
Returns in from McCarthy entered in error
in J Carlton now transferred to his a/c
Motor expenses
Motor disposal a/c
To correct error in recording sales proceeds
In expense account
Credit
10,000
700
700
89
89
270
270
390
390
400
390
390
400
168
1000
168
1000
Example 5.6 (Exam type question – May 200 Question 2)
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
Capital 1 April 1999
Profit for the year ended 31
March 2000
Deduct: drawings
Creditors
Bank overdraft
147
Sh’000
450
150
Sh’000
1,890 Land and buildings (at
valuation)
Machinery (at cost)
300 Deduct: depreciation
630 Stock at cost
270 Debtors
3,090
Sh’000
Sh’000
1,650
1,200
750
570
420
450
990
3,090
Further investigation reveals the following information:
1. The closing stock includes damaged goods which, although they had cost Sh. 10,000 have an
estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt. A provision for
doubtful debts of 2 ½% is also required on the balance of the debtors.
3. The machinery was acquired five years ago and is being depreciated to its scrap value on a straightline basis over eight years. A more realistic estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been reflected in the
accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr. Patel had been deducted
as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party
had not been received and no entry had been made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions.
(10 marks)
b) A statement of revised profit for the year ended 31 March 2000.
(8 marks)
c) A revised balance sheet as at 31 March 2000.
(7 marks)
(Total: 25 marks)
Solution
FINANCIAL ACCOUNTING 1
148
Further Adjustments to Accounts
a)
THE JOURNAL
Debit
2,500
Trading account
Stock
Being a reduction in stock for damaged goods
Profit and loss(Bad debts)
Debtors
Debtors gone bankrupt written off
Profit and loss)
Provision for doubtful debts
Being a provision for doubtful debts created at 20%.
Provision for depreciation
Profit and loss
A change in estimated lifespan for machinery
Profit and loss( wages )
Accrued expenses
Wages owing omitted in the accounts
Profit and loss (Bank overdraft charges)
Bank overdraft
Changes for overdraft not reflected in the accounts.
Drawings
Profit and loss
Drawing to Mr. Patel deducted as an expense.
Accrued income
Profit and loss (rent income)
Rent receivable owing not reflected in the accounts.
2,500
20,000
20,000
10,000
10,000
150,000
150,000
9,500
9,500
8,000
8,000
100,000
100,000
20,000
20,000
b) STATEMENT OF ADJUSTED NET PROFIT
Sh
Net profit as per the account
Add: Provision for depreciation
50,000
Drawings
100,000
Accrued income (rent)
20,000
Less: Stock reduction
Bad debts
Provision for doubtful debts
Accrued expenses
Bank charges
Net profit (revised)
Credit
2,500
20,000
10,000
9,500
8,000
Sh
450,000
170,000
620,000
(50,000)
570,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
149
REVISED BALANCE SHEET AS AT 31 MARCH 2000
Sh
Land and buildings
1,650,000
Machinery
1,200,000
2,850,000
Add: Current Assets
Stock
Debtors
400,00
Less: Provision for doubtful debts
(10,000)
Accrued rent income
Less Current liabilities
Creditors
Accrued wage expense
Bank overdraft
630,000
9,500
278,000
Capital
Add Net Profit
Less drawings
Sh
(700,000)
700,000
Sh
1,650,000
500,000
2,150,000
567,500
390,000
20,000
977,500
(917,500)
60,000
2,210,000
1,890,000
570,000
2,460,000
(250,000)
2,210,000
Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the credits. The
debits may be more than the credits and vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash
received from a debtor is debited to the cashbook and no other entry is made in the account, i.e. no
credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a
payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit. Example –
cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £ 540 in the
debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to
mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts or
when taken up to the trial balance. Example Bal c/d in the cash book for cash at bank of £ 2000 is
shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The balance may also be
brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made through an account called a
suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are posted
here. The balance to be shown on the suspense accounts depends on which side the error is shown on the
trial balance.
FINANCIAL ACCOUNTING 1
150
Further Adjustments to Accounts
If the debits  credits, then an amount is included on the credit side of the trial balance so that the debits =
credits. This is a credit balance and will be taken to the suspense account on the credit side.
Example:
DR
240
240
Total
Suspense
CR
200
40
240
Suspense a/c
£
Difference as per T/B
£
40
If the credits are more than the debits this is a debit balance and therefore we require an amount to be added
to the total of the debits for the two side to be same. This debit balance is posted to the debit side of the
suspense a/c.
Total
Suspense
Difference as per T/B
DR
260
40
300
CR
300
300
Suspense a/c
£
40
£
Posting the correct entries should eliminate the balance on the suspense account.
In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance.
This balance depends on whether it is a credit or debit and whether it is material or not for purposes of
proper accounting treatment. The following is the recommended approach:
Balance
Debit
Credit
Material
Show as an asset (eg) other
debtors
Show as a liability (eg) other
creditors
Not Material
Charge in P& L as an expense
Report as income in P&L
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a shortage on the
credit side of the trial balance. A suspense account was opened for the difference.
In January 2003 the following errors made in 2003 were found:
(i)
(ii)
(iii)
(iv)
(v)
Sales daybook had been undercast by £1,000.
Sales of £2,500 to J Church had been debited in error to J Chane account.
Rent account had been undercast by £700.
Discounts received account had been under cast by £3,000.
The sale of a motor vehicle at book value had been credited in error to Sales account £3,600.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
151
You are required to:
a) Show the journal entries necessary to correct the errors.
b) Draw up the suspense account after the errors described have been corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended 31 December 2002,
show the calculations of the corrected net profit
Solution
THE JOURNAL
Suspense
Sales
Sales under cast of £100 now corrected
J Church
J Chane
Sale to J Church posted to J Chane corrected
Rent
Suspense
Under cast in rent balance now corrected
Suspense
Discount received
Under cast in discount received balance now corrected
Sales a/c
Disposal
Sale of motor vehicle entered in sales a/c now corrected
Sales
Discount received
Suspense a/c
£
1,000 Bal b/d
3,000 Rent
4,000
£
1,000
£
,1000
2,500
2,500
700
700
3,000
3,000
3,600
,3600
£
3,300
700
4,000
STATEMENT OF CORRECTED NET PROFIT
£
£
Net profit as per account
79,000
Add:
Sales
1,000
Discount received
3,000
4,000
Less:
Rent
700
Sales
3,600
(4,300)
Corrected net profit
78,700
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is extracted at the
end of each month, and a profit and loss account and balance sheet are computed. This month, however, the
trial balance did not balance, the credits exceeding debits by £1,536.
FINANCIAL ACCOUNTING 1
152
Further Adjustments to Accounts
Your are asked to help and after inspection of the ledgers discover the following errors:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
A balance of £87 on a debtor’s account has been omitted from the schedule of debtors, the total of
which was entered as debtors in the trial balance.
A small piece of machinery purchased for £1,200 had been written off to repairs.
The recipiets’ side of the cashbook had been under cast by £720.
The total of one page of the sales daybook had been carried forward as £8,154, whereas the correct
amount was £8,514.
A credit note for £179 received from a supplier had been posted to the wrong side of his account.
An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
Mr. Smith, whose past debts to the company had been the subject of a provision, at last paid £731 to
clear his account. His personal account has been credited but the cheque has not yet passed through
the cashbook.
Solution
Opening balance
Sales - under record
i.
ii.
iii.
iv.
v.
vi.
Suspense a/c
£
1,536.00 Debtors
360.00 Cashbook under cast
Creditors error
Creditors (correct)
Cashbook: smiths debt paid
1,896.00
£
87.00
720.00
179.00
179.00
731.00
1,896.00
Increase total for debtors by 87.
Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an increase in
Increase sales by 360.
Reduce the creditors by 358.
accruals by 152 and reduce profits by the same.
Increase the cash balance by 731.
STRATHMORE UNIVERSITY ● STUDY PACK
profits.
Lesson Five
153
Example 5.9 (Exam type question – May 2002 question 1).
On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial
balance. Due to errors committed by the bookkeeper, the trial balance failed to balance by Sh 369,400. He
placed the difference in a suspense account as shown below:
Wanji trial balance as at 31 December 2001
Fixed assets – cost
Stocks:
1 January 2001
31 December 2001
Trade debtors
Prepayments
Trade creditors
Bank overdraft
Accruals
Drawings
Capital
Sales
Provision for depreciation
Purchases
Operating expenses
Provision for doubtful debts
Discounts received
Discounts allowed
Suspense account
Sh
832,000
148,000
34,600
359,600
1,043,200
126,000
5,000
________
2,548,400
Sh
98,800
76,000
10,000
15,200
16,000
1,054,000
166,400
733,000
3,800
5,800
369,400
2,548,400
Investigations carried out after preparing the above trial balance detected the following errors:
1.
2.
3.
4.
5.
6.
The total of the sales daybook for December 2001 was overcast by Sh 25,700.
On July 2001, the business purchased office equipment for Sh 40,000. These were debited to purchases
account. Depreciation on the equipment is at the rate of 10% per annum on cost and based on the
period (months) of usage in the year.
A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor’s account.
A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.
An amount of Sh 15,000 received from a debtor was not posted to the debtor’s account from the
cashbook.
Purchases daybook for October 2001 was under cast by Sh 28,000.
Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account.
(6 marks)
(b) Journal entries to correct the errors (Narrations not required)
(6 marks)
(c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above.
(4 marks)
(d) The adjusted net profit for the year.
(4 marks)
FINANCIAL ACCOUNTING 1
154
Solution:
Adjusted Trial Balance
Fixed assets – cost
Stock - 1 January 2001
Trade debtors
Prepayments
Trade creditors
Bank overdraft
Accruals
Drawings
Capital
Sales
Provision for depreciation
Purchases
Operating expenses
Provision for doubtful debts
Discounts received
Discounts allowed
Suspense account
Sales
Suspense
Office equipment
Purchases
Further Adjustments to Accounts
Sh
832,000
148,000
76,000
10,000
359,600
733,000
126,000
5,800
47,800
2,338,200
3,800
5,000
_______
2,338,200
Cr
25,700
40,000
Creditors
Suspense
Creditors
Suspense
8,500
8,500
2,000
8,500
8,500
900
15,000
Suspense
Discounts allowed
2,500
Suspense
Discounts received
2,500
Purchases
Suspense
1,054,000
1,043,200
166,400
40,000
2,000
Suspense
Debtor
34,600
15,200
16,000
THE JOURNAL
Dr
25,700
Provision for depreciation
Profit and loss
Suspense
Telephone
Sh
28,000
STRATHMORE UNIVERSITY ● STUDY PACK
900
15,000
2,500
2,500
28,000
Lesson Five
2001
1 Jan
Bal b/d
Telephone
Debtors
Discount allowed
Discount received
Bal c/d
155
SUSPENSE ACCOUNT
Sh 2001
47,800 1 Jan
Sales
900
Creditors
15,000
Creditors
2,500
Purchases
2,500
2,000
70,700
Sh
25,700
8,500
8,500
28,000
______
70,700
STATEMENT OF ADJUSTED NET PROFIT
Net profit as per the accounts
Add
Purchases
Telephone expenses
Discount allowed + received
Less
Sales
Depreciation
Purchases
Corrected Net Profit
Sh
40,000
900
5,000
Sh
85,800
45,900
131,700
25,700
2,000
28,000
(55,700)
76,000
c) STOCK VALUATION (IAS 2 INVENTORIES)
inventories in a firm includes:
(a) Finished goods (assets held for sale)
(b) Work in progress (assets still in production for purposes of sale)
(c) Raw materials (to be used in production process).
The cost of inventories should include all costs of purchase. (Purchase price and other taxes like import
duties), costs of conversion (e.g. direct labour) and other costs incurred in bringing the inventories into their
present location and condition (carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry. In most cases either
carrying out stocktaking or checking the stock records that the firm is kept determines the value of stock at
the end of the financial period. Stocktaking involves counting the number of units of finished goods, work in
progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of
units available.
Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400 each respectively. At the
end of year 2002, stocktaking was carried out and the following units were available:
Product A 200,000 units
Product B 20,000 units
Product C 30,000 units
FINANCIAL ACCOUNTING 1
156
Further Adjustments to Accounts
Required:
Compute the cost of stock to be included in the final accounts.
Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000
Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each unit as far as the business
can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number of transactions and
changes in the cost price, IAS 2 on inventories recommends the use of the following estimates:
(i)
First In First Out (FIFO)
The business assumes that items of stocks that were purchased first are sold first and therefore, items left as
part of closing stock were purchased recently.
(ii)
Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average of the cost of similar items
at the beginning of the period and the cost of similar items purchased during the period.
(iii)
Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first and therefore, the closing
stock shows items that were bought first.
Net Realizable Value (SP- Expenses)
This is the estimated selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either actual or estimated under the
different methods) and if the firm was to sell the stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net realizable value.
Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000 is damaged. This stock
can fetch the firm Sh 22,000 after repairs and packaging that will cost Sh 4,000.
Required:
What value will be attached on this damaged units and the total closing stock for the final accounts purposes.
Sh
Cost
20,000
Selling price
22,000
Repairs
4,000
NRV (22-4)
18,000
The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this damaged unit will be
shown as Sh 18,000. The balance of the stock of Sh 280,000 + 18,000 of the damaged stock will be included
in the final accounts and shown together as Sh 298,000.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
157
d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form. A
work sheet has 8-10 columns and the simple headings are as follows:
TRIAL
ADJUSTMENT TRADING
BALANCE
ACCOUNT
Dr
£
Cr
£
Dr
£
Cr
£
Dr
£
Cr
£
PROFIT &
LOSS
ACCOUNT
Dr
Cr
£
£
BALANCE SHEET
Assets Liabilities + Capital
£
£
Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of balances has been
extracted from his ledger as at 30 April 19X7, the end of his most recent financial year.
£
Capital
83,887
Sales
259,870
Trade creditors
19,840
Returns out
13,407
Provision for bad debts
512
Discounts allowed
2,306
Discounts received
1,750
Purchases
135,680
Returns inwards
5,624
Carriage outwards
4,562
Drawings
18,440
Carriage inwards
11,830
Rent, rates and insurance
25,973
Heating and lighting
11,010
Postage, stationery and telephone
2,410
Advertising
5,980
Salaries and wages
38,521
Bad debts
2,008
Cash in hand
534
Cash at bank
4,440
Stock as at 1 May 19x6
15,654
Trade debtors
24,500
Fixtures and fittings – at cost
120,740
Provision for depreciation on fixtures and
fittings – as at 30 April 19X7
63,020
Depreciation
12,074
The following additional information as at 30 April 19X7 is available:
(a) Stock at the close of business was valued at £17,750.
(b) Insurances have been prepaid by £1,120.
(c) Heating and lighting is accrued by £1,360.
(d) Rates have been prepaid by £5,435.
(e) The provision for bad debts is to be adjusted so that it is 3% of trade debtors.
FINANCIAL ACCOUNTING 1
158
Further Adjustments to Accounts
Required:
MR CHAI
Trial Balance
Adjustments
WORKSHEET
£
£
£
Dr
Cr
Dr
Capital
83,887
Sales
Trade creditors
259,870
19,840
Returns
outwards
Provision for B
debts
Discounts
allowed
Discounts
received
Purchases
Returns Inwards
Carriage
outwards
Drawings
Carriage inwards
Rent, rates &
insurance
Heating &
lighting
Postage,
stationery and
telephone
Advertising
Salaries and
wages
Bad debts
Cash in hand
Cash at bank
Stock at 1 May
19X6
Trade debtors
Fixtures &
fittings at cost
Provision for
depreciation
Depreciation
13,407
Stocks
30.04.19X7 –
asset
Stocks
30.04.19X7 –
Cost of Sales
512
2,
306
£
Cr
Trading account
Profit & loss a/c
Balance sheet
£
£
£
£
£
£
Dr
Cr
Dr
Cr
Dr
Cr
83,88
7
259,870
19,84
0
13,407
223
735
2,306
1,750
1,750
135,680
5,624
4,562
135,680
5,624
18,440
11,830
25,973
4,562
18,440
6,555
11,010
11,830
19,418
1,360
12,370
2,410
2,410
5,980
38,521
5,980
38,521
2,008
534
4,440
15,654
2,008
15,654
24,500
120,740
534
4,440
24,500
120,740
63,020
12,074
442,286
63,02
0
12,074
442,286
17,750
17,750
17,750
17,750
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
Insurance
prepaid
Heating and
lighting accrued
Rates prepaid
Provision for bad
debts
159
1,120
1,120
1,360
1,360
5,435
223
25,888
5,435
223
25,888
Gross profit
(Balancing
figure)
122,239
122,239
291,027
291,027
Net profit
(Balancing
figure)
24,117
123,989
123,989
24,11
7
192,959 192,9
59
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In the next session we shall
prepare the final accounts incorporating these adjustments. Some adjustments will affect the format of final
accounts and therefore they will look as follows:
FORMAT OF FINAL ACCOUNTS WITH ADJUSTMENTS
NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£
£
£
Sales
XX
Less Returns
(XX)
inwards
XX
Less cost of
sales
Opening
XX
stock
Purchases
XX
Add carriage
XX
in
XX
Less Returns (XX)
XX
out
XX
Less closing
(XX)
(XX)
stock
Gross profit
XX
Discount
XX
received
FINANCIAL ACCOUNTING 1
160
Further Adjustments to Accounts
Other
incomes
(rent,
interests,
dividends)
Profit on
disposal of
non-current
assets
Reduction in
provision for
doubtful
debts
Reduction in
provision for
discount
allowable
Interest on
overdue
debtors
balances
Less
Expenses
Bad debts
Depreciation:
(eg) Plant
Motor
vehicle
Increase in
provision for
doubtful
debts
Increase in
provision for
discount
allowable
Loss on
disposal of
non current
assets
Loss of other
assets (eg)
stock
Interest
charged by
creditors
Other
expenses:
Rent
Insurance
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
161
Postage
Interest on
loan etc
NET
PROFIT
XX
XX
(XX)
XX
BALANCE SHEET AS AT 31 DEC…….
Non current assets
£
£
£
Land
Buildings
Plant and machinery
XX
XX
XX
(XX)
(XX)
XX
XX
XX
Fixtures, furniture and
fittings
XX
(XX)
XX
Motor vehicle
XX
(XX)
XX
XX
XX
XX
Current assets
Stock
Debtors
Less provision for
doubtful debts
XX
(XX)
XX
XX
Accrued income
XX
Prepaid expenses
XX
Cash at bank
XX
Cash in hand
XX
FINANCIAL ACCOUNTING 1
162
Further Adjustments to Accounts
Current liabilities
Bank overdraft
XX
Trade creditors
XX
Prepaid income
XX
(XX)
Net current assets
X
Net assets
X
XX
Capital
Add net profit
XX
XX
(XX)
Less drawings
X
X
XX
Non current liabilities
Loan
XX
X
X
Non current liabilities
Loan
XX
Non current liabilities
Loan
XX
Non current liabilities
Loan
XX
STRATHMORE UNIVERSITY ● STUDY PACK
X
X
X
X
X
X
Lesson Five
163
Non current liabilities
XX
Loan
Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
£
£
£
Sales
259,870
Less
(5,624)
Returns
inwards
254,246
Less cost
of sales
Opening
15,654
stock
Purchases
135,680
Add
1
carriage in
1
,
8
3
0
147,510
Less
(13,407)
134,103
Returns
out
Cost of
149,757
goods
available
for sale
Less
(17,750) (132,00
closing
7)
stock
Gross
122,239
profit
Add:
1,750
Discount
received
123,989
Less
Expenses
Discount
2,306
allowed
Carriage
4,562
outwards
Rent, rates
19,418
and
insurance
FINANCIAL ACCOUNTING 1
164
Further Adjustments to Accounts
Heating
and
lighting
12,370
Postage,
stationery
and
telephone
Advertisin
g
Salaries
and Wages
2,410
5,980
38,521
Bad debts
2,008
Provision
for bad
debts
223
Provision
for
depreciati
on –
fixtures
and fitting
12,074
Net profit
99,872
24,117
Mr Chai
Balance Sheet as at 30 April 19X7
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
165
Non
£
current
asset
Fixtures and 120,740
fittings
Current
assets
Stock
Debtors
24,500
Less
(735)
provision
for doubtful
debts
Prepayments
Cash at
bank
Cash in
hand
Current
liabilities
Creditors
Accruals
19,840
1,360
£
£
(63,020)
57,720
17,750
23,765
6,555
4,440
5
34
53,044
(21,200)
31,844
89,564
83,887
24,117
Capital
Add net
profit
108,004
(18,440)
Less
drawings
89,564
Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
Sales
Purchases
Carriage
Drawings
Rent, rates and insurance
Postage and stationery
Advertising
Salaries and wages
Bad debts
Provision for bad debts
Debtors
Creditors
Cash in hand
Cash at bank
£
82,350
5,144
7,800
6,622
3,001
1,330
26,420
877
12,120
177
1,002
FINANCIAL ACCOUNTING 1
£
138,078
130
6,471
166
Further Adjustments to Accounts
Stock at at 1 June 19X5
Equipment
At cost
Accumulated depreciation
Capital
11,927
58,000
______
216,770
19,000
53,091
216,770
The following additional information as at 31 May 19X6 is available:
(a) Rent is accrued by £210.
(b) Rates have been prepaid by £880.
(c) £2,211 of carriage represents carriage inwards on purchases.
(d) Equipment is to be depreciated at 15% per annum using the straight line method.
(e) The provision for bad debts to be increased by£40.
(f) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a balance sheet as at that
date.
Solution:
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Lesson Five
167
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£
£
Sales
Less cost of sales
Opening stock
11,927
Purchases
82,350
Carriage inwards
2,211
84,561
96,488
Less closing stock
(13,551)
Gross profit
Less expenses
Carriage outwards
2,933
Rent, rates and insurance
5,952
Postage and stationery
3,001
Advertising
1,330
Salaries and wages
26,420
Bad debts
877
Increase in provision for bad debts
40
Depreciation – equipment
8,700
Net profit
£
138,078
(82,937
55,141
(49,253
5,888
Mr. Yousef
Balance Sheet as at 31 May 19X6.
Non Current assets
Equipment
Current Assets
Stocks
Debtors
Less provision for doubtful debts
Prepayments
Cash in hand
Cash at bank
Current Liabilities
Creditors
Accruals
£
£
£
58,000
(27,700)
30,300
12,120
(170)
6,471
210
Capital
Add: Net Profit
13,551
11,950
880
177
1,002
27,560
6,681
20,879
51,179
53,091
5,888
58,979
(7,800)
51,179
Less Drawings
FINANCIAL ACCOUNTING 1
168
Further Adjustments to Accounts
Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a sole trader, as at 31 May
20X9, the end of his most recent financial year.
Herbert Howell
Trial Balance As At 31 May 20x9
Property at cost
Equipment at cost
Provision for depreciation (as at 1 June 20X8)
Property
Equipment
Stock as at 1 June 20X8
Purchases
Sales
Discounts allowed
Discounts received
Wages and salaries
Bad debts
Loan interest
Carriage out
Other operating expenses
Trade debtors
Trade creditors
Provision for bad debts
Cash on hand
Bank overdraft
Drawings
13% loan
Capital, as at 1 June 20X8
Dr
£
90,000
57,500
27,400
259,600
3,370
52,360
1,720
1,560
5,310
38,800
46,200
151
28,930
______
612,901
Cr
£
12,500
32,500
405,000
4,420
33,600
280
14,500
12,000
98,101
612,901
The following additional information as at 31 May 20X9 is available:
(a) Stock as at the close of business was valued at £25,900.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:
Property
Equipment -
1% using the straight-line method
15% using the straight-line method
(c) Wages and salaries are accrued by £140.
(d) Other operating expenses include certain expenses prepaid by £500. Other expenses included under this
heading are accrued by £200.
(e) The provision for bad debts is to be adjusted so that it is 0.5% of trade debtors as at 31 May 20X9.
(f) Purchases include goods valued at £1,040, which were withdrawn by Mr Howell for his own personal
use.
Required:
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May 20X9 and his balance
sheet as at 31 May 20X9.
(20 marks)
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
169
Solution:
£
Sales
Less cost of sales
Opening stock
Purchases
27,400
258,560
285,960
(25,900)
Less closing stock
Gross profit
Discounts received
Decrease in provision for bad debts
Less expenses
Depreciation: Property
Equipment
Discounts allowed
Wages and salaries
Bad debts
Loan interest
Carriage out
Other operating expenses
NET PROFIT
900
8,625
3,370
52,500
1,720
1,560
5,310
38,500
£
405,000
(260,060)
144,940
4,420
____49
149,409
(112,485)
86,924
Herbert Howell
Balance Sheet as at 31 May 2000
£
£
£
(13,400)
(41,125)
54,525
76,600
16,375
92,975
Non current Assets
Property
Equipment
Current Assets
Stock
Debtor
Less provision
Prepayments
Cash in hand
Current liabilities
Bank overdraft
Creditors
Accruals
90,000
57,500
147,500
46,200
(231)
14,500
33,600
__340
Capital
Add net profit
Less drawings
Non current liabilities
Loan (13%)
25,900
45,969
500
151
72,520
(48,440)
24,080
117,055
98,101
36,924
135,025
(29,975)
105,055
12,000
117,055
FINANCIAL ACCOUNTING 1
170
Further Adjustments to Accounts
Workings:
1) Depreciation for:
Property
Equipment
1% X 90,000 =
15% X 57,500 =
2)
Provision for bad debts
0.5% X (46,200) =231
Decrease in provision for bad debts
280 – 231= 49
3)
Wages and salaries
Paid
52,360
Accruals
140
52,500
Other operating expenses
Paid
8,800
Pre-paid
(500)
8,300
Accruals
200
8,500
4)
5)
Purchases: 259,600 – 1,040 =
Drawings: 28,930 + 1,040 =
900
8,625
258,560
29,990
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Lesson Five
171
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March 2001
£
Sales
Discount Received
Rent Received
Returns outwards
Creditors
Bank Overdraft
Capital
Purchases
Salaries and Wages
Office expenses
Insurance premiums
Electricity
Stationery
Advertising
Telephone
Business Rates
Discounts allowed
Returns Inwards
Stocks as at 1 April 2000
Warehouse, shop and office
Fixtures and fittings
Debtors
Cash in till
Drawings
378,500.00
2,400.00
7,500.00
7,700.00
18,700.00
30,000.00
287,500.00
261,700.00
45,700.00
8,400.00
3,100.00
1,600.00
6,200.00
8,400.00
2,100.00
7,500.00
600.00
4,100.00
120,600.00
210,000.00
12,800.00
13,000.00
500.00
26,000.00
The following further information was obtained:





Closing stock was £ 102,500.00
Electricity charges accrued £ 700.00
Advertising expenses accrued £ 500.00
Insurance premiums paid in advance £ 900.00
Business rates prepaid £ 1,500.00
Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March 2001 and balance sheet as
at that date.
FINANCIAL ACCOUNTING 1
172
Further Adjustments to Accounts
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
Capital at 1 January 20X0
Debtors
Cash In Hand
Creditors
Fixtures and fittings at cost
Discounts allowed
Discounts received
Stock at 1 January 20X0
Sales
Purchases
Motor Vehicles at cost
Lightning and heating
Motor expenses
Rent
General expenses
Balance at bank
Provision for depreciation
Fixtures and fitting
Motor vehicles
Drawings
Debit
£
42,737
1,411
42,200
1,304
18,460
387,936
45,730
6,184
2,862
8,841
7,413
_26,568
591,646
Credit
£
26,094
35,404
1,175
491,620
19,861
2,200
15,292
_______
591,646
The following information as at 31 December is also available:
a) £218 is owing for motor expenses.
b) £680 has been prepaid for rent.
c) Depreciation is to be provided of the year as follows:
Motor vehicles: 20% on cost
Fixtures and fittings: 10% reducing balance method
d) Stock at the close of business was valued at £19,926.
Required
Prepare Donald Brown’s trading and profit and loss account for the year ended 31 December 20X0 and his
balance sheet at that date.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Five
173
QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a sole trader.
Brenda Bailey
Trial Balance As At 30 June 20x9
Sales
Purchases
Carriage inwards
Carriage outwards
Wages and salaries
Rent and rates
Heat and light
Stock at 1 July 20X8
Drawings
Equipment at cost
Motor vehicles at cost
Provision for depreciation:
Equipment
Motor vehicles
Debtors
Creditors
Bank
Sundry expenses
Cash
Capital
Dr
£
302,419
476
829
64,210
12,466
4,757
15,310
21,600
102,000
43,270
50,633
8,426
477
______
626,873
Cr
£
427,726
22,250
8,920
41,792
3,295
122,890
626,873
The following information as at 30 June 20X9 is also available.
a)
b)
c)
d)
£350 is owing for heat and light.
£620 has been prepaid for rent and rates.
Depreciation is to be provided for the year as follows:
Equipment - 10% on cost
Motor vehicles - 20% on cost
Stock at the close of business was valued at £16,480
Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended 30June 20X9 and her balance
sheet at that date.
FINANCIAL ACCOUNTING 1
174
Further Adjustments to Accounts
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for December 19X9. The statement
showed the following.
MIDWEST BANK
F Mercer: Statement of Account
Date
Particulars
19X8
Dec 1
Balance
Dec 5
417864
Dec 5
Dividend
Dec 5
Bank Giro Credit
Dec 8
417866
Dec 10
417867
Dec 11
Sundry Credit
Dec 14
Standing Order
Dec 20
417865
Dec 20
Bank Giro Credit
Dec 21
417868
Dec 21
416870
Dec 24
Bank charges
Dec 27
Bank Giro Credit
Dec 28
Direct Debit
Dec 29
417873
Dec 29
Bank Giro Credit
Dec 31
417871
Debits
$
243
174
17
Credits
$
26
212
32
307
185
95
161
18
118
88
12
47
25
279
STRATHMORE UNIVERSITY ● STUDY PACK
Balance
$
1,862
1,619
1,645
1,857
1,683
1,666
1,851
1,819
1,512
1,630
1,535
1,374
1,356
1,403
1,315
1,303
1,582
1,557
Lesson Five
175
His cashbook for the corresponding period was as follows.
CASH BOOK
19x8
Dec 1
Balance b/d
Dec 4
Dec 9
Dec 19
Dec 26
Dec 27
Dec 29
Dec 30
J Shannon
M Lipton
G Hurst
M Evans
J Smith
V Owen
K Walters
$ 19x8
1,862 Dec 1
212
185
118
47
279
98
134
_____
Dec 2
Dec 5
Dec 6
Dec 10
Dec 14
Dec 16
Dec 20
Dec 21
Dec 22
Dec 31
Electricity
P Simpson
D Underhill
A Young
T Unwin
B Oliver
Rent
M Peters
L Philips
W Hamilton
Balance c/d
Cheque
No
864
865
866
867
868
869
870
871
872
873
$
243
307
174
17
95
71
161
25
37
12
1,793
2,935
2,935
Required
a)
Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
b)
Draw up a bank reconciliation statement as at 31 December 19X8
(10 marks)
(5 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
176
Other Aspects of Final Accounts
LESSON SIX
OTHER ASPECTS OF FINAL ACCOUNTS
(a) INCOMPLETE RECORDS
An incomplete record situation is whereby, the accounting system falls short of the double entry. This may
be due to:
 Lack of records at all; or
 Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and maintaining an accounting
system (records and procedures).
b) It may not be economical for the business to maintain accounting records due to the volume or/and
nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.
There are 4 main approaches in preparing final accounts where there are insufficient records.
a)
b)
c)
d)
Estimating income from the net assets.
Estimating income from the use of ratios.
Use of a simple cashbook and bank statement.
Use of control accounts.
N/B: approach number c and d are normally used together.
(a)
Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a reasonable complete cash
summary, the only method of estimating the profits or loss for the period, is to prepare statement of affairs
showing the net worth of the business at the beginning and at the end of the period.
The profit/loss is estimated by use of the following formulas:
Profit or loss = Closing
Capital
–
Opening
Capital
+
Drawings
–
Additional
Capital
Or where there are no non current liabilities then this optional formula can be used
Profit or loss = Closing
Net Asset
-
Opening
Net Asset
+
Drawings
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-
Additional
Capital
Lesson Six
177
Example: 6.1
A sole trader’s capital position is as follows:
31 December
Motor vehicle:
Cost
Depreciation
Stock
Debtors
Bank
Cash
Creditors
Net assets
19X2
£
19X3
£
7,500
3,000
4,500
2,960
1,150
925
__263
9,798
2,860
6,938
7,500
4,500
3,000
3,450
2,060
2,125
___54
10,689
3,340
7,349
He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the year.
Solution:
Net profit =
Closing
Net Asset
- Opening
Net Asset
+ Drawings -
Additional
Net assets
= 7,349 – 6,938 + 12,500
= £12,911
(b)
Use of Ratios
There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information available on sales or
purchases can be used to derive the total Gross Profit for the period and incase there is sufficient information
on expenses, then the Net Profit can also be derived.
The above ratios are computed as follows:
1)
Gross Profit Margin = Gross Profit x 100
Sales (selling price)
E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the Gross Profit Margin will
be:
= 25 x 100
100
= 25%
FINANCIAL ACCOUNTING 1
178
Other Aspects of Final Accounts
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (£100,000)
= £25,000
2)
Mark up
= Gross Profit x 100
Cost of Sales (cost price per unit)
In the above example, the mark up will be:
= 25 x 100
75
= 33.33%
N/B: 75 = 100 – 25
Cost = selling price – gross profit
3)
Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
The formula is: =
Cost of Sales
Average Stocks
Average stock
Opening Stock + Closing Stock
2
=
expressed as number of times
Example: A firm has the following data for the period:
Opening stock
Purchases
Closing stock
£ 20,000
£300,000
£ 30,000
Required: The Stock Turnover Ratio.
Average Stock = 30,000 + 20,000
2
= 25,000
Cost of sales
= (20,000 + 300,000) – 30,000
= 290,000
Stock Turnover = 300,000
25,000
= 11.6 times
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
179
Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001
6,000
Purchases
54,000
Jones’s mark-up is 50% on cost of goods sold. His average stock during the year was £12,000. Draw up a
trading and profit and loss account for the year ended 30 June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a
net profit on sales of 10%.
Solution
a)
Average Stock = Opening Stock + closing stock
2
12,000 = 6,000 + C
2
C
= 24,000 – 6,000
= 18,000
Gross profit
= 50%
Cost of Sales = 42,000
Gross Profit = 50%
42,000
Gross Profit = 21,000.
MEMORANDUM TRADING ACCOUNT
Sales
Less cost of sales
Gross profit
Expenses
Net profit
£
63,000
(42,000)
21,000
(14,700)
6,300
Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600. Trade discount (i.e. margin
allowed) is 33¼% off all selling prices. Expenses are 66 ¾% of gross profit.
You are to calculate:
(a) Cost of goods sold.
(b) Gross profit margin.
(c) Turnover.
(d) Total expenses.
(e) Net profit.
FINANCIAL ACCOUNTING 1
180
Other Aspects of Final Accounts
Solution:
Profit schedule
£
132,300
88,200
44,100
(29,400)
14,700
Turnover
Cost of goods sold
Gross profit
Expenses
Net profit
Turnover = Cost of Sales
Average stock
Margin = Gross Profit
Sales
7
= Cost of Sales
12,600
Cost of Sales = 88,200
(c)
Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook for both cash
in hand and cash at bank can be prepared in confirmation of deposits and payments made from the bank
statement.
The information can then be posted to the relevant accounts e.g. any income received to the relevant income
accounts, expenses to relevant expense accounts and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in
summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit
sales and cash purchases or credit purchases.
Steps in Preparing the Final Accounts
1)
2)
3)
4)
5)
Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to
determine the beginning capital.
Open and post the balances and transactions to these 3 relevant accounts (i.e. the cashbook (for both
cash in hand and bank), sales ledger control account and purchases ledger control account.
Any other account can be opened where necessary.
Make adjustments for any accruals or prepayments.
Extract a list of the balances. (Trial balance).
Prepare the final accounts.
Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank payments and receipts during the
year to 31 December 19X8 were as follows:
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
181
Reciepts
Payments
Balance 1 Jan 19X8
Cheques for sales
Cash banked
Balance 31 Dec 19X8
£
572
13,179
14,005
3,751
31,507
From a cash notebook you ascertain:
Purchases
Expenses
Drawings
Delivery van
£
62
16,300
1,850
375
65
Unknown
Cash in hand 1 January 19X8
Cash takings
Purchases paid in cash
Expenses paid in cash
Cash in hand 31 December 19X8
Drawings by proprietor in cash
You discover that assets and liabilities were as follows:
1 Jan 19X8
£
1,850
1,250
2,650
Debtors
Trade creditors
Stock on hand
31 Dec 19X8
£
2,070
1,420
2,990
Depreciation on the van is to be provided at the rate of 20% per annum.
Statement of Affairs as at 1 January 19x8
£
CURRENT ASSETS
Cash at bank
Cash in hand
Debtors
Stock
572
62
1,850
2,650
5,134
CURRENT LIABILITIES
Creditors
Net Assets
(1,250)
3,884
Capital
3,884
Balance b/d
Sales
Sales Ledger Control Account
£
£
1,850
Cash Takings
16,300
29,699
Bank
13,179
______
Bal c/d
2,070
31,549
31,549
FINANCIAL ACCOUNTING 1
£
10,007
2,950
11,250
7,300
31,507
182
Other Aspects of Final Accounts
Purchases Ledger Control Account
£
Cash purchases
1,850 Bal b/d
Bank
10,007 Purchases
13,277
Balance b/d
Debtors/sales


Cash in Hand Account
£
62 Creditors
16,300 Expenses
Bank
Bal c/d
_____ Drawings
16,362
£
1,250
12,027
13,277
£
1,850
375
14,005
65
___67
16,362
The capital invested at any point of time in a business by the owner is represented by the difference
between the assets and liabilities at that time.
The difference between the capital at the end and the capital at the beginning of the trading period
represents the trading profit made during that period, unless there were withdrawals or investments
of additional capital.
Hobbs
Trading and Profit and Loss Account for the year ending 31 December 19X8
£
£
Sales
29,699
Less cost of goods sold:
Opening stock
2,650
Add purchases
12,027
14,677
Less closing stock
(2,990)
11,687
GROSS PROFIT
18,012
Less Expenses:
Expenses (375 + 2,950)
3,325
Depreciation
1,460
(4,785)
NET PROFIT
13,227
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
Fixed Assets
Delivery van
183
Hobbs
Balance Sheet as at 31 December 19X8
£
£
Cost
Depreciation
7,300
1,460
Current Assets
Stock
Debtors
Cash
Less current liabilities
Creditors
Bank overdraft
£
NBV
5,840
2,990
2,070
___65
5,125
1,420
3,751
Financed by:
Capital
Add net profit
5,171
5,794
__46
3,884
3,884
13,22
7
17,111
11,317
5,794
Less drawings (11,250 + 67)
Example 6.5 (Exam Type Questions May 2001 Question 3)
Kimeu commenced his business of making furniture on 1 April 2000. Due to his limited accounting
knowledge he has not maintained proper books of account. You have been engaged to examine his records
and prepare appropriate accounts there from. You perform an examination of the records and from
interviews with Kimeu you ascertain the following information.
1.
2.
3.
4.
5.
6.
7.
8.
At the commencement of business on 1 April 2000, he deposited Sh 1,200,000 into business bank
account. On the same day he brought into the firm his pickup and estimated that it was worth Sh
660,000 and then that from 1 April 2000 it will have useful life of three years.
To increase his working capital he borrowed Sh 400,000 at 15% interest per annum on 1 July 2000 from
his sister but no interest has yet been paid.
On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per annum.
He had drawn Sh 18,000 per week from the business account for private use during the year.
He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of stock was retained in the
workshop on 31 March 2001. He also spent Sh 960,000 on the purchase of some equipment at the
commencement of the business which he estimates will last him five years.
Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the remaining two months
were estimated to be Sh 48,000. Motor vehicle expenses were Sh 182,000 while general expenses
amounted to Sh 270,000 for the year. Insurance premium for the year to 30 June 2001 was Sh 160,000.
All these expenses have been paid by cheque.
Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had been received by 31
March 2001. Debt totaling to Sh 17,000 were abandoned during the year as bad. Other customers for
jobs too small to invoice have paid Sh 726,000 in cash for work done of which Sh 560,000 was banked.
Kimeu used Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya Charity
Sweepstake tickets worth 24,000 and Sally used the rest on general expenses except for Sh 30,100 which
was left in the office on 31 March 2001.
FINANCIAL ACCOUNTING 1
184
9.
Other Aspects of Final Accounts
You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.
Required:
(a) Profit and loss account for the year ended 31 March 2001.
(b) Balance sheet as at 31 March 2001.
(10 marks)
(10 marks)
(Total: 20 marks)
Solution:
Capital
Loan
Debtors
Cash
Cash book – Bank
Sh
1,200,000 Salary
400,000 Drawings
5,080,000 Timber
560,000 Equipment
Electricity
Motor vehicle expenses
General expenses
Insurance
________ Bal c/d
7,240,000
Capital
Sh
Bal c/d
Sales
Sales
Sh
120,000
936,000
1,960,000
960,000
240,000
182,000
270,000
160,000
1,812,000
7,240,000
Bank
1,860,000 Pick up
1,860,000
Sh
1,200,000
660,000
1,860,000
Debtors
Sh
6,178,000 Bank
Bad debts
________ Bal c/d
6,178,000
Sh
5,080,000
17,000
1,081,000
6,178,000
Cash book - cash in hand
Sh
726,000 Bank
Drawings
Drawings
General Expenses
______ Bal c/d
726,000
STRATHMORE UNIVERSITY ● STUDY PACK
Sh
5,080,000
17,000
1,081,000
36,900
30,100
726,000
Lesson Six
185
Loan interest
=
400,000 x 15% x 9/12
Rates
=
36,000 x 9/12
=
27,000
Accruals
=
Electricity bills
Rates
Agency fees
Loan interest
=
=
=
=
48,000
27,000
55,000
45,000
175,000
Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh
Sh
Sales (cash + credit)
6,904,000
Less expenses
Timber used (1,960,000 – 158,000)
1,802,000
Depreciation – motor vehicle
220,000
- Equipment
192,000
Loan interest
45,000
Salary
720,000
Electricity bills
288,000
Motor vehicle expenses
182,000
General expenses
306,900
Insurance premium
120,000
Rates
27,000
Bad debts
17,000
Accountancy fees
55,000
(3,974,900)
Net profit
2,929,100
FINANCIAL ACCOUNTING 1
186
Other Aspects of Final Accounts
Non current Asset
Equipment
Motor vehicle
Kimeu
Balance Sheet as at 31 March 2001
Sh
Sh
960,000
192,000
660,000
220,000
1,620,000
412,000
Current Assets
Stock
Debtors
Insurance – prepayments
Cash at bank
Cash in hand
Sh
768,000
440,000
1,208,000
158,000
108,000
40,000
181,200
30,000
3,121,100
Less current liabilities
Accruals
175,000
2,946,100
4,154,100
Capital
Add net profit
1,860,000
2,929,100
4,789,100
1,035,000
3,754,100
Less drawings
Non current liability
Loan 15%
400,000
4,154,100
Example 6.6 (Exam Type) June 1995 Question 2
Abi, a proprietor of a grocery and general store has not previously engaged an accountant. He informs you
that this year his bankers have insisted on a proper set of accounts. Abi supplies you with his trading results
for the year ended 30 June 1994 which are as follows:
Payments for goods
Payments for expenses
Profits
Sh
4,747,500 Takings
565,000
152,500
5,465,000
Sh
5,465,000
________
5,465,000
Abi instructs you to examine his records and prepare accounts. From your examination of the records and
interview with your client, you ascertain the following information:
1.
2.
The takings are kept in a drawer under the counter; at the end of each day the cash is counted and
recorded on a scrap of paper; at irregular intervals Mrs. Abi transcribes the figures into a notebook; a
batch of slips of paper was inadvertently destroyed before the figures had been written into the
notebook, but Mr. And Mrs. Abi carefully estimated their takings for that period, and the estimated
figure is included in the total of Sh. 5,465,000.
Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500 per week with cash taken
from the drawer. His winnings totaled Sh. 29,500.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
3.
187
The following balances are ascertained as correct:
Cash in hand
Balance at bank
Sales debtors
Creditors for purchases of stock
Stock at cost
4.
5.
6.
8.
9.
10.
11.
12.
13.
1993
Sh
22,500
78,000
229,000
139,500
975,000
Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings included Sh 12,500
recovered in respect of an old debt abandoned in the previous year.
Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52 weeks in a year; the rent is
included in expenses of Sh 565,000. The living accommodation comprises one-third of the building.
The total expenses also include:



7.
30 June
1994
Sh
43,500
109,500
245,500
121,500
950,000
Sh. 17,500 running expenses of Abi’s private car;
Sh. 30,000 for exterior decoration of the whole premises;
Sh. 80,000 for alterations to the premises to enlarge the storage accommodation.
Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal expenses. This excludes the
amount indicated in note 8.
Mr. Abi draws Sh. 750 per week for cigarettes and beer.
During the year, Mr. Abi bought a secondhand car (not for use in the business) from a friend; the price
agreed was Sh. 175,000, but as the friend owed Mr. Abi Sh. 33,500 for goods supplied from the business,
the difference was settled by cheque.
An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored and the friend is
repaying the Sh. 50,000 by installments. He had paid Sh. 20,000 by 30 June 1994.
Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh. 55,000 for income tax.
You are to provide Sh. 21,000 for accountancy fees.
N.B. All receipts and payments of Mr. Abi are made through his business account.
Required:
(a) Mr. Abi’s balance sheet for the business at 30 June 1993.
(b) Mr. Abi’s profit and loss account for the year ended 30 June 1994.
(c) Mr. Abi’s balance sheet for the business at 30 June 1994.
FINANCIAL ACCOUNTING 1
(4 marks)
(12 marks)
(6 marks)
(Total: 20 marks)
188
Other Aspects of Final Accounts
Solution:
Abi
Balance Sheet as at 30 June 1993
Current Assets
Stock
Debtors
Cash at bank
Cash in hand
Current liabilities
Creditors
Sh
97,500
229,000
78,000
22,500
1,304,500
Sh
(139,500)
1,165,000
1,165,000
Capital
Balance b/d
Sales ledger control a/c
Insurance (drawings)
Drawings
Drawings
Debtors
1,165,000
Cash at Bank
Sh
78,000 Drawings – personal expense for wife
12,500 Drawings – cigarettes and beer
320,500 Expenses
50,000 Drawings – second hand car
20,000 Cash in hand
5,591,000 Drawings – friend
Creditors
Dishonored cheque – drawings
Drawings
Income tax
________ Balance c/d
6,072,000
Cash in Hand
Balance b/d
Drawings – betting
Bank
Balance b/d
Bad debts recovered
Credit sales
Sh
22,500
12,500
6,500
58,500
Drawings
Balance c/d
Sales Ledger Control A/c
Sh
229,000
Bad debts
12,500
Bank
5,819,000
Drawings
Bank
________
Balance c/d
6,060,500
Sh
15,000
43,500
58,500
Sh
178,000
12,500
33,500
5,591,000
245,500
6,060,500
STRATHMORE UNIVERSITY ● STUDY PACK
Sh
260,000
39,000
565,000
141,500
6,500
50,000
4,747,500
50,000
48,000
55,000
109,500
6,072,000
Lesson Six
Bank
Balance c/d
Rent
Motor running expenses
Decoration
Alterations
Other expenses
189
Purchases Ledger Control A/c
Sh
4,747,500 Balance c/d
121,500 Credit purchases
4,869,000
Expenses
Total
78,000
17,500
30,000
80,000
359,500
565,000
Business
52,000
20,000
80,000
359,500
532,500
Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£
Sales
Less cost of sales
Opening stock
975,000
Purchases
4,729,500
57,040,500
Less closing stock
950,000
Gross profit
Less expenses
Rent
52,000
Decoration
20,000
Alterations
80,000
Other expenses
359,500
Bad debts
165,500
Accountancy fees
21,000
Net profit
Current Assets:
Stock
Debtors
Cash at bank
Cash in hand
Current Liabilities
Creditors
Accruals
Capital
Add net profit
Sh
139,500
4,729,500
4,869,000
Private
26,000
17,500
10,000
_____
53,500
£
5,819,000
4,754,500
1,064,500
(698,000)
366,500
Abi
Balance Sheet as at 30 June 1994
Cost
Depreciation
Book Value
£
£
£
950,000
245,500
109,500
43,500
1,348,500
121,500
21,000
(142,500)
Less drawings
FINANCIAL ACCOUNTING 1
1,206,000
1,165,000
366,500
1,531,500
(325,500)
1,206,000
190
Other Aspects of Final Accounts
NON PROFIT MAKING ORGANIZATIONS (Club, Associations and Others)
These are some form of organizations that are set up to promote or to cater for the welfare of the members
involved and not to make a profit. These include clubs, (e.g. football clubs, sports clubs), welfare associations
and any other societies (charitable institutions).
Because these organizations are not trading, the types of accounts to prepare are different from the ones of
trading organizations.
Example:
1.
2.
3.
Instead of a cashbook, the clubs will maintain a receipts and payments which has similar entries to those
of a cashbook.
Instead of profit and loss account, we have an income and expenditure account.
Because the club is not formed by any one owner (has no owner), it is funded by members’
contributions, donations, income from investments to get an accumulated fund instead of capital.
From the income and expenditure account, if the incomes are more than the expenditures for the period,
then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of the clubs activities and
incase a firm has a trading activity, then in addition to the income and expenditure account and the balance
sheet, prepare a Bar Trading Account.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
191
Format of the Final Accounts
Name
Income and Expenditure Account for the year ended 31 December ……
Incomes
£
£
Profit from trading activities
XX
Subscriptions
XX
Income from investments
XX
Donations
XX
Income from other activities
[dinner dance, raffles, festivals]
XX
XX
Expenditure
Depreciation
XX
Salaries and wages
XX
Expenses on other activities [prizes]
XX
Loss from trading activities
XX
All other expenses
XX
SURPLUS/( DEFICIT )
(XX)
XX/(XX)
FINANCIAL ACCOUNTING 1
192
Other Aspects of Final Accounts
NAME
BALANCE SHEET AS AT 31 DECEMBER ……
Non current Assets
£
£
Buildings
XX
(XX)
Fixtures, fittings and equipment
XX
(XX)
Motor vehicle
XX
(XX)
XX
(XX)
Investments
Current Assets
Stocks
XX
Debtors
XX
Prepayments and accrued income
XX
Cash at bank/hand (receipts +
XX
payments)
XX
Current liabilities
Creditors
XX
Accrued expenses and prepaid income
XX
Bank overdraft
XX
(XX)
Accumulated fund balance b/f
Add/less surplus / deficit
Other funds
Life membership fund
Building fund
Education fund
XX
XX
XX
£
XX
XX
XX
XX
XX
XX
XX
XX
XX/(XX)
XX
XX
Notes To The Above Format:
1. Subscriptions:
These are the amounts received by the club from the members to renew their membership. It is often paid
on an annual basis.




It is income for the club and therefore reported in the income and expenditure account.
Depending on the policy of a club, any subscriptions due but not received are shown as accrued income
(debtors for subscriptions) in the balance sheet.
Any amounts prepaid are shown as prepaid (creditors for subscriptions).
Some clubs will not report subscriptions as income until it is received in form of cash.
2. Income from Investments:
Some clubs invest excess cash in the bank (fixed deposit account), shares of limited companies, treasury bills
and any other investment that may be available.


If the club is investing with no specific intention (i.e a general investment) then income from this
investment should be reported in the income and expenditure account.
If the investment is for a specific purpose and relates to a specific fund (e.g building fund) it will not be
reported in the income and expenditure account but credited directly to the fund.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
193
3. Other funds
 These are funds set up for a specific purpose and not general. They will be shown together with the
accumulated fund.
 Any incomes relating to these funds, will be credited directly to the funds and any expenses will be taken
off from these funds e.g. building fund, education fund.
Life Membership Fund
Some members may pay some amount to become life members of the club and if this happens, there may be
a need to spread out this income over the expected life of the members in the club.
Depending on the policy of a club, the following accounting treatment may be allowed:
i. The full amount is reported in the Income and Expenditure account in the year it is received and
therefore no balance is retained in the life membership account.
ii. The amount is shown separately in the life membership fund with no transfer in the Income and
Expenditure account and hence no balance in the life membership account.
iii. To transfer some amounts from the life membership funds to the income and expenditure account
over the expected life of membership to the club.
Example 6.7
The following is the receipts and payments account of the Friendship Club for the year ended 31 December
19X1:
£
£
Balance at bank
31 December 19X0
Entrance fees
Subscriptions: 19X0
19X1
19X2
Bar Sales
Sale of investments
102
42
25
305
35
5,227
750
Bar purchases
Wages
Rent
Heating and lighting
Postage and stationery
Insurance
General expenses
Payments on account
of new furniture
Balance at bank,
_____ 31 December 19X1
6,486
4,434
416
186
128
33
18
46
450
775
6,486
The following information is also supplied:
(1)
31 December 19X0
Bar stock, at cost
Creditors for bar purchases
Rent due
Heating and lighting expenses due
Subscriptions due
Insurance paid in advance
31 December 19X1
272
306
18
16
25
5
FINANCIAL ACCOUNTING 1
315
358
36
19
40
7
194
2)
3)
Other Aspects of Final Accounts
On 31 December 19X0, the club held investments which cost £500. During the year ended 31
December 19X1, these were sold for £750.
Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club purchased additional
furniture at a cost of £520. Depreciation of all furniture is to be provided for at the rate of 10% per
annum.
Required:
(a) Prepare an income and expenditure account for the year ended 31 December 19X1.
(b) Prepare a balance sheet at that date.
Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1
Assets
£
£
Stock
Subscriptions due
Insurance prepaid
Investments
Furniture
Balance at bank
Liabilities
Creditors
Rent due
Heating and lighting expenses
Accumulated fund
Receipts and payments
Balance c/d
Balance b/d
Income & expenditure
Balance c/d
272
25
5
500
300
102
1,204
306
18
16
Creditors
£
4,434 Balance b/f
358 Purchases
4,792
Subscriptions
£
25 Receipts & payments
345
35 Balance c/d
405
STRATHMORE UNIVERSITY ● STUDY PACK
(340)
864
£
306
4,486
4,792
£
365
40
405
Lesson Six
195
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
£
Sales
£
5,227
Less: Cost of Sales
Opening stock
272
Purchases
4,486
4,758
Less closing stock
(315)
Gross profit to income & expenditure a/c
(4,443)
784
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£
£
Profit from bar trading
784
Entrance fees
42
Subscriptions
345
Profit from sale of investments
250
1,421
Expenditure
Wages
416
Rent
204
Heating and lighting
131
Postage and stationery
33
Insurance
16
General expenses
46
Depreciation – furniture
56
(902)
Surplus
519
FINANCIAL ACCOUNTING 1
196
Other Aspects of Final Accounts
Non current Assets
Furniture
Friendship Club
Balance Sheet as at 31 December 19X1
£
820
Current Assets
Stock
Subscriptions due
Prepaid expense
Cash at bank
£
(56)
£
764
(518)
619
1,383
864
519
1,383
315
40
7
775
1,137
Current liabilities
Creditors
Prepaid subscriptions
Accrued expenses
Creditors fixtures
398
35
55
70
Accumulated fund b/f
Add surplus
Example 6.8 (Exam Type) November 2001
(a) State and briefly explain any three distinguishing features between (i) a receipts and payments account
and (ii) an income and expenditure account.
(6 marks)
(b) The accountant of Mamba Sports Club has extracted the following information from the books of
account for the year ended 31 March 2001.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
197
Receipts
Payments
Sh
Balance brought forward
288,000 Salaries and wages
Subscriptions
Year: 1999/2000
2000/2001
2001/2002
Sh
254,000
New equipment
565,000
249,000 Repairs and maintenance
124,000
2,050,000 Office expenses
415,000
194,000 Printing and stationery
168,000
Dinner dance
723,000 Purchase of beverages
497,000
Beverage sales
657,000 Dinner dance expenses
315,000
Investments income
400,000 Refund of subscriptions
45,000
Sports prizes
25,000
Transport
248,000
Investments
1,500,000
_______ Balance carried forward
_405,000
4,561,000
4,561,000
31 March 2000
31 March 2001
Furniture and fittings (net)
240,000
-
Equipment (net)
690,000
-
3,500,000
-
300,000
375,000
68,000
72,000
162,000
184,000
85,000
-
Balances as at
Investment at cost
Subscriptions in arrears
Salaries accrued
Stock of beverages
Subscriptions in advance
FINANCIAL ACCOUNTING 1
198
Other Aspects of Final Accounts
Additional information:
1.
2.
3.
Subscriptions in arrears are written-off after twelve months.
Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and
fittings and equipment respectively.
Investments, which had cost Sh. 500,000, were sold on 30 March 2001 for Sh. 625,000. No entries have
been made in the books in this respect.
Required:
(a) Income and expenditure account for the year ended 31 March 2001.
(b) Balance sheet as at 31 March 2001.
(8 marks)
(6 marks)
(Total: 20 marks)
Solution:
Mamba Sports Club
Statement of Affairs
Assets
Sh
Sh
Furniture and fittings
240,000
Equipment
690,000
Receipts and payments
288,000
Investment at cost
3,500,000
Subscriptions in arrears
300,000
Stock of beverages
162,000
5,180,000
Liabilities
Subscriptions accrued
85,000
Accrued salaries
68,000
(153,000)
5,027,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
199
Mamba Sports Club
Trading Account for the year ended 31.3.2001
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Profit to income and expenditure
2001
Balance b/d
Receipts and payments
Income & expenditure
Balance c/f
Sh
162,000
497,000
659,000
(184,000)
Subscriptions
Sh 2001
300,000 Balance b/f
45,000 Receipt and payment
2,465,000 Income & expenditure
194,000 Balance c/f
3,004,000
Sh
657,000
(475,000)
182,000
£
85,000
2,493,000
51,000
375,000
3,004,000
Mamba Sports Club
Income and Expenditure Account for the year ended 31 March 2001
Incomes
Profit from trading account
Subscriptions
Dinner dance
Investment income
Profit on sale of investments
Sh
182,000
2,465,000
723,000
400,000
125,000
3,895,000
FINANCIAL ACCOUNTING 1
200
Other Aspects of Final Accounts
Example 6.9 (Exam Type) DECEMBER 2000 QUESTION 3
The following trial balance was extracted from the books of Literary and Philosophical Society as at 30
September 2000:
Sh
Sh
Balance at bank: current account
724,800
Accumulated fund 1 October 1999
5,771,200
Land and buildings, at cost
3,700,000
Debtors for subscription
62,000
Furniture and fittings
1,874,000
Provision for depreciation of furniture & fittings
284,000
Subscriptions
1,450,800
Lecturer’s fees
920,000
Lecturer’s travel and accommodation expenses
358,000
Donations
108,000
Camera and projector repairs
17,000
Projectors, cameras and audio equipment
190,400
Depreciation of equipment
54,400
Rates and water
277,000
Lighting and heating
367,200
Rental of rooms
495,000
Wages – Caretaker
880,000
- Restaurant
1,600,000
- Bar staff
800,000
Purchase of food
1,565,800
Stock – bar 1 October 1999
473,600
Bar receipts
4,032,000
Bar purchases
2,842,000
Restaurant receipts
3,642,000
Loan
1,600,000
Deposit account – bank
1,000,000
Interest payable and receivable
36,000
Creditors for bar and food
________
178,400
17,651,800
17,651,800
Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10% has been earned on the
deposit account. No changes have taken place all year in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the close of the year although
the wine had been included in the bar stock valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000
(6 marks)
(b) An income and expenditure account for the year ended 30 September 2000
(8 marks)
(c) A balance sheet as at 30 September 2000
(6 marks)
(Total: 20 marks)
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
201
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September 2000
Sh
Sales
Less cost of sales
Opening stock
Add purchases
Sh
7,674,000
473,600
4,450,800
4,924,400
Less closing stock
Profit to the income and expenditure
(642,800)
(4,281,600)
3,392,400
Literary and Philosophical Society
Income and Expenditure Account for the year ended 30 September 2000
Income
Profit on trading account
Interest on bank deposit account
Subscriptions
Donations
Rental of rooms
Sh
Expenditure
Lecturer’s fees
Depreciation on furniture and fitting
Equipment
Lecturer’s travel and accommodation exp.
Camera repairs
Rates and water
Lighting and heating
Caretakers wages
Interest on loan
Provision for subscription
Surplus
920,000
194,000
19,000
358,000
17,000
277,000
867,200
880,000
64,000
43,600
FINANCIAL ACCOUNTING 1
Sh
992,400
100,000
1,450,000
108,000
495,000
3,146,200
(3,139,800)
6,400
202
Other Aspects of Final Accounts
Literary and Philosophical Society
Balance Sheet as at 30 September 2000
Non current Assets
Land and buildings
Fixtures and fittings
Equipment
Current assets
Stock
Debtors of subscription
Balance at bank – deposit a/c
- Current a/c
Current liabilities
Creditors
Sh
3,700,000
1,874,000
190,400
5,764,400
Sh
(478,000)
(73,400)
551,400
Sh
3,700,000
1,396,000
117,000
5,213,000
642,800
18,400
1,000,000
724,800
2,386,000
(221,400)
Accumulated fund b/f
Add surplus
Non current liabilities
4% loan
2,164,600
7,377,600
5,771,200
___6,400
5,777,600
1,600,000
7,377,600
(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it is
cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is reported in the final
accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is
shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These
costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)
Direct Costs/Prime Costs
This is a cost that can be traced directly to a unit that has been produced. This include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but cannot be traced directly
to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production
The manufacturing account will show the factory cost of goods produced that will be shown in the trading
account in place of purchases.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
203
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December
£
£
Raw Materials
Opening stock of raw materials
XX
Purchases of raw materials
XX
Add carriage inwards
XX
XX
Less returns outwards
(XX)
XX
Cost of raw materials available for use
XX
Less closing stock of raw materials
(XX)
Raw materials consumed
XX
Direct labour (factory wages)
XX
Direct expenses
XX
Prime cost
XX
Factory overheads
Salary to factory manager
XX
Depreciation on – Plant and machinery
XX
- Factory buildings
XX
Other expenses – Factory power
XX
Lighting and heating
XX
Water
XX
Cleaners wages
XX
XX
Total cost of production
XX
Add: opening Work In Progress
XX
Less: closing Work In Progress
(XX)
XX
Factory cost of production (cost of finished goods)
XX
FACTORY PROFIT
XX
Finished goods at a transfer price
XX
Sales
Less returns inwards
XX
(XX)
XX
Less cost of sales
Opening stock – finished goods
Factory cost of production/transfer price
XX
XX
XX
(XX)
Less closing stock of finished goods
Gross profit
Add factory profit
Other incomes – discount received
- Profit on disposal
Less expenses
Salaries and wages – administration & non production
Rent for administration building
Depreciation - Delivery vans
- Fixtures and distribution
Other selling and distribution costs
Net profit/(net loss)
XX
XX
XX
XX
XX
FINANCIAL ACCOUNTING 1
(XX)
XX
XX
XX
XX
XX
(XX)
XX/(XX)
Note 1
Note 2
204
Other Aspects of Final Accounts
For the balance sheet, the format is the same for all the assets and liabilities except for the current assets
section whereby the stock at the end of the period should be shown for each type of stock as per this format:
Current Assets
Stock: raw materials
Work in progress
Finished goods
£
XX
XX
XX
£
XX
Note 1: This represents the total costs of all the units produced during the period and therefore will be taken
to the trading account as the goods are transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of
production, then this generates a factory profit. The goods will be shown in the trading account at the
transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries
(not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment not
used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.





Salaries and commission to the sales manager and staff
Carriage outwards (i.e. to deliver goods to the customers
Depreciation on motor vehicles (used for the delivery purpose)
Advertising
Bad debts
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
205
Example 6.10
B spikes
Trial Balance as on 31 December 2002
Stock of raw materials 1.1.2002
Stock of finished goods 1.1.2002
Work in progress 1.1.2002
Wages(direct £180,000: factory indirect£145,000)
Royalties
Carriage inwards (on raw materials)
Purchases of raw materials
Productive machinery (cost £280,000)
Accounting machinery (cost £20,000)
General factory expenses
Lighting
Factory power
Administrative salaries
Sales representatives’ salaries
Commission on sales
Rent
Insurance
General administration expenses
Bank charges
Discounts allowed
Carriage outwards
Sales
Debtors and creditors
Bank
Cash
Drawings
Capital as at 1.1.2002
Dr
21,000
38,900
13,500
325,000
7,000
3,500
370,000
230,000
12,000
31,000
7,500
13,700
44,000
30,000
11,500
12,000
4,200
13,400
2,300
4,800
5,900
142,300
56,800
1,500
20,000
______
1,421,800
Cr
1000,000
125,000
29,680
1,421,800
Notes at 31.12.2002
1.
2.
3.
Stock of raw materials £24,000, stock of finished goods £40,000, work in progress £15,000.
Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th.
Depreciation on productive and accounting machinery at 10 per cent per annum on cost.
Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.
FINANCIAL ACCOUNTING 1
206
Other Aspects of Final Accounts
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002
Raw Materials
£
£
Opening Stock of raw materials
21,000
Purchases
370,000
Carriage inwards on raw materials
3,500
373,500
394,500
Less: closing stock of raw materials
(24,000)
Raw materials consumed
370,500
Direct wages
180,000
PRIME COST
550,500
Factory Overheads
Wages
145,000
Royalties
7,000
Depreciation: productive machinery
28,000
General factory expenses
31,000
Lighting( 5/6 x 7,500)
6,250
Factory power
13,700
Rent(5/6 x 12,000)
10,000
Insurance( 5/6 x 4,200 )
3,500
24,4,450
Total cost of production
794,950
Add: opening work in progress
13,500
808,450
Less: closing work in progress
(15,000)
Factory cost production per finished goods
793,450
Sales
1,000,000
Less cost of sales
Opening stock of finished goods
38,900
Factory cost of production
793,450
832,350
Less closing stock of finished goods
(40,000)
792,350
Gross profit
207,650
Expenses
Accounting machinery – depreciation
2,000
Lighting (1/6 x 7,500)
1,250
Administrative salaries
44,000
Sales representatives salaries
30,000
Commission on sales
11,500
Rent ( 1/6 x 12,000)
2,000
Insurance (1/6 x 4200)
700
General administrative expenses
13,400
Bank charges
2,300
Discounts allowed
4,800
Carriage outwards
5,900
(117,850)
Net profit
89,800
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
207
B Spikes
Balance Sheet as at 31 December 2002
COST DEPRECIATION
Non current Assets
Productive machinery
Accounting machinery
Current Assets
Stock: raw materials
Finished goods
Work in progress
Debtors
Cash at bank
Cash in hand
£
280,000
20,000
300,000
24,000
40,000
15,000
Current liabilities
Creditors
£
(78,000)
(10,000)
88,000
79,000
142,300
56,800
1,500
279,600
(125,000)
Capital
Add net profit
Less drawings
FINANCIAL ACCOUNTING 1
NET BOOK
VALUE
£
202,000
10,000
212,000
154,600
366,600
296,800
89,800
386,600
(20,000)
366,600
208
Other Aspects of Final Accounts
Example 6.11 (Exam Type – June 1986 Question Two)
Bibi Maridadi owns and manages a small manufacturing business. The following balances have been
extracted from her books of account at 31 January 1986:
Dr
Sh
Capital at 1 February 1985
Accounts payable
Bank and cash balance
Accounts receivable
Drawings
Administration expenses
Advertising expenses
Factory direct wages
Factory indirect wages
Factory power
Furniture and fittings (all offices)
Heat and light
Plant and equipment
Motor vehicle (used by salesmen)
Plant hire
Provision for bad debts
Provision for depreciation 1 February 1985:
 Furniture and fittings
 Plant and equipment
 Motor vehicle
Raw material purchases
Rent rates
Sales
Selling and distribution expenses
Inventories at cost, 1 February 1985:
 Raw materials
 Work in progress
 Finished goods
5,400
92,000
60,000
150,360
12,000
60,000
24,000
36,000
18,400
16,000
276,800
144,000
4,000
228,000
20,000
66,400
8,000
16,000
24,000
1,261,360
There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:
-
3,200
9,200
138,400
24,000
The following additional information is provided:
(i) Accruals at 31 January 1986 were:
Factory power
Sh.1,600
Rent and rates
Sh. 4,000
Raw materials
Work in progress
Finished goods
Cr
Sh
171,120
86,000
Sh. 15,200
Sh. 30,400
Sh. 45,600
STRATHMORE UNIVERSITY ● STUDY PACK
829,440
_______
1,261,360
Lesson Six
209
(iii)
Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates
of 20%, 25% and 10% per annum respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in
the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit and loss account for the
year ended 31 January 1986 and a balance sheet as at that date.
(22 marks)
Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986
Direct materials
Sh
Sh
Opening stock of raw materials
8,000
Add: purchases of raw materials
228,000
236,000
Less: closing stock of raw materials
(15,200)
Raw materials consumed
220,800
Factory direct wages
60,000
PRIME COST
280,800
Factory overheads
Factory indirect wages
24,000
Factory power
37,600
Plant hire
4,000
Heat and light
14,400
Rent and rates
14,400
Depreciation on plant
55,360
149,760
430,560
Add opening work in progress
16,000
446,560
Less closing work in progress
(30,400)
Factory cost of production
416,160
Sales
829,440
Less cost of sales
Opening stock of finished goods
24,000
Add factory cost of production
416,160
440,160
Less closing stock of finished goods
(45,600)
394,560
Gross profit
434,880
Less expenses
Increase in provision for doubtful debts
1,400
Rent and rates
9,600
Heat and light
1,600
Depreciation: motor vehicle
36,000
Furniture and fittings
1,840
Selling and distribution expenses
65,600
Administration expenses
150,360
Advertising expenses
12,000
278,400
Net profit
156,480
Bibi Maridadi
FINANCIAL ACCOUNTING 1
210
Other Aspects of Final Accounts
Balance Sheet as at 31 January 1986
Non current Assets
Plant and equipment
Furniture and fittings
Motor vehicle
Current Assets
Stock: Raw materials
Work in progress
Finished goods
Debtors
Less: provision for doubtful debts
Prepayments
Cash in hand and bank
Current liabilities
Creditors
Accruals
COST DEPRECIATION
£
276,800
18,400
144,000
439,200
£
(193,760)
(11,040)
(60,000)
(264,800)
15,200
30,400
45,600
92,000
(4,600)
91,200
86,000
5,600
NET BOOK
VALUE
£
83,040
7,360
84,000
174,400
87,400
800
5,400
184,800
(91,600)
Capital
Add net profit
Less drawings
93,200
267,600
171,120
156,480
327,600
(60,000)
267,600
UNREALISED PROFITS ON CLOSING STOCK
In most cases where business transfers finished goods at a profit to the selling department and the goods are
reflected in the balance sheet at the transfer price, then the closing stock includes a profit that has not been
earned or realised. If the mark up profit (the profit based on cost of production is always uniform, then any
changes in the value of closing stock will result in a reduction or an increase in the unrealised profits.
If there is an increase on unrealised profit on the closing stock, then this increase will be reduced from the
gross profit from our profit and loss account and if there is a reduction in unrealised profits, then this
reduction will be added to the gross profit in our profit and loss account.
Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet.
The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
211
Increase in unrealised profit in closing stock (UPCS)
Profit and loss (extract) Account for year ended………..
£
Gross profit
Add: factory profit
Add: other expenses
Less expenses
Other expenses
Increase in unrealised profit on closing stock
Net profit
X
X
Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
Gross profit
Add: factory profit
Add: other incomes
Add: decrease in UPCS
Less expenses
Other expenses
Net profit
£
£
X
X
X
X
(X)
X
£
X
X
X
X
X
(X)
X
Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening
stock of finished goods for the period was valued at Sh. 100,000. (The marked up cost) The closing stock at
the end of the financial period was Sh.160,000.
Opening Stock: 100,000 (marked up)
(16,667)
83,333
=
=
=
120%
(20%)
100%
Closing Stock
=
=
=
120%
(20%)
100%
Balance c/d
160,000 (marked up)
(26,667)
133,333
UPCS
Balance b/f
26,667 Profit and loss a/c
26,667
16,667
10,000
26,667
FINANCIAL ACCOUNTING 1
212
Other Aspects of Final Accounts
Profit and Loss (Extract)
Less: Expenses:
Increase in unrealized profits on closing stock
Sh
10,000
Sh
Balance Sheet (Extract)
Current Assets
Stock:
Raw materials
Work in progress
Finished goods
Less: UPCS
Sh
Sh
X
X
160,000
(26,667)
133,333
(d) DEPARTMENTAL ACCOUNTS
Some organizations have various departments carrying out trade and therefore the profitability of each
department needs to be established. For each department, trading, profit and loss account should be
prepared. The final accounts will be very important for the management to assess the performance of each
department.
The expenses in relation to a specific department should be charged in the Profit and Loss account for that
department. The accounts will be represented in columnar form and the format will be as follows: (Assume a
firm has departments A and B).
Name
Trading Profit and Loss account for the year ended 31 December
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Other incomes
Less expenses
Salaries and wages
Depreciation
Other expenses
Managers commission
NET PROFIT
Department A
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department B
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
Department C
£
£
XX
XX
XX
XX
(XX)
XX
XX
XX
XX
XX
(XX)
XX
XX
XX
(XX)
XX
The balance sheet will reflect the position of the whole organization and therefore a departmental balance
sheet is not required.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
213
When departments in a firm are sharing resources, then the various expenses need to be apportioned between
or among the different departments e.g. if the departments are sharing a building, then rent expense should
be apportioned among the departments.
The following guidelines can be followed in apportioning the expenses among the departments.
Type of Expense
Rent, rates, heat, light, repairs to
buildings,
depreciation of buildings and insurance.
Basis of apportionment
Floor area occupied by each department.
2)
Depreciation, insurance and maintenance
of equipment
Cost or net book value of the equipment in
each department.
3)
Salaries, canteen expenses, welfare and
other expenses relating to employees.
Number of employees in each department
4)
Carriage inwards.
Purchases in each department.
5)
Advertising, depreciation and
maintenance of delivery van.
Value of sales in each department.
6)
Increase in provision for doubtful debts,
bad debts and discounts allowed.
Sales or debtors in each department.
1)
Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and children’s games and toys. For
the purposes of his accounts, he wishes the business to be divided into two departments:
Department A Books, periodicals and newspapers
Department B Games, toys and fancy goods.
The following balances have been extracted from his nominal ledger at 31 March 19X9:
Dr
Sales Department A
Sales Department B
Stocks Department A, 1 April 19X8
Stocks Department B, 1 April 19x8
Purchases Department A
Purchases Department B
Wages of sales assistants Department A
Wages of sales assistants Department B
Newspaper delivery wages
General office salaries
Rates
Fire insurance – buildings
Lighting and air conditioning
Repairs to premises
Internal telephone
250
200
11,800
8,200
1,000
750
150
750
130
50
120
25
25
FINANCIAL ACCOUNTING 1
Cr
15,000
10,000
214
Other Aspects of Final Accounts
Cleaning
Accountancy and audit charges
General office expenses
30
120
60
25,000
25,000
Stocks at 31 March 19X9 were valued at:
Department A £300
Department B £150
The proportion of the total floor area occupied by each department was:
Department A one fifth
Department B four-fifths
Prepare J Spratt’s trading and profit and loss account for the year ended 31 March 19X9, apportioning the
overhead expenses, where necessary, to show the Department profit or loss.
The apportionment should be made by using the methods as shown:
Area - Rates, Fire insurance, Lighting and air conditioning, Repairs, Telephone, Cleaning:
Turnover -General office salaries, Accountancy, General office expenses.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
Solution:
215
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
Sales
Less cost of sales
Opening stock
Purchases
Less closing stock
Gross profit
Less expenses
Wages
Newspaper delivery wages
General office salaries
Rates
Fire insurance – buildings
Lighting and air-conditioning
Repairs to premises
Internal telephone
Cleaning
Accountancy or audit charges
General office expenses
NET PROFIT
Department A
£
£
15,000
Department B
£
£
10,000
Department C
£
£
25,000
250
11,800
12,500
(300)
200
8,200
8,400
(150)
450
20,000
20,450
(450)
1,000
150
450
26
10
24
5
5
6
72
36
(11,750)
3,250
(1,784)
1,466
750
300
104
40
96
20
20
24
48
24
Workings:
1)
General Office Salaries:
A = 15,000 X 750 = 450
25,000
B = 10,000 X 750 = 300
25,000
2)
Rates:
A = 1/5 X 130 = 26
B = 4/5 X 130 = 104
3)
Fire Insurance:
A = 1/5 X 50 = 10
B = 4/5 X 50 = 40
4)
Lighting:
A = 1/5 X 120 = 24
B = 4/5 x 120 = 96
5)
Repairs:
A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
FINANCIAL ACCOUNTING 1
(8,250)
1,750
(1,426)
324
1,750
150
750
130
50
120
25
25
30
120
60
(20,000)
5,000
(3,210)
1,790
216
Other Aspects of Final Accounts
Interdepartmental Trading
A department may buy goods from another department in the same firm and therefore the departments trade
with one another. Example, in 4.16 above, department A sells goods to Department B. (Department B is
buying from department A). Interdepartmental sales and purchases should be excluded from the total sales
and total purchases of the whole firm. If we assume that A sold goods to B amounting to £1,000 and this
figure is included in sales of A and purchases of B, the trading account for the whole firm will be as follows
(other items will remain the same):
£
£
Sales
24,000
Less cost of sales
Opening stock
450
Purchases
19,000
19,450
Less closing stock
(450)
(19,000)
Gross profit
5,000
Managers Commission
A commission based on the net profit made in each department may reward managers of each department.
The commission is normally a percentage of the net profit but it may be a percentage on the net profit before
or after charging the commission.
1) Percentage Before Charging Commission
If we assume in example 4.16 that the managers in each department is paid a commission of 5%, before
charging such commission, the commission will be as follows:
Net profit before commission
Managers commission @ 5%
Net profit after commission
Department A
1,466
(73.3)
1,392.7
Department B
324
(16.2)
307.8
Total
1,790
(89.5)
1,700.5
2) Percentage After Charging Commission
Assume the commission is 5% of the net profit after charging such commission:
Net profit before commission
Managers commission @ 5%
Net profit after commission
Department A
1,466
(69.8)
1,392.2
Department B
324
(15.4)
308.6
Total
1,790
(85.2)
1,704.5
Note:
If we use percentage for each commission assuming a 5% rate, the commission will be computed as follows:
Net profit before commission
Commission of 5%
Net profit after commission
Before charging
commission
100
__5
95
After charging
commission
105
__5
100
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
217
REINFORCEMENT QUESTIONS
QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31 December 19X6:
Amounts credited by bank
£
32,050 Balance at 1 January 19X6
Payments to trade creditors
Rent and rates
Fixtures
Lighting and heating
General expenses
Loan interest
Drawings
Customers’ cheques dishonoured
_____ Balance at 31 December 19X6
32,050
£
892
27,380
475
100
210
800
120
900
180
993
32,050
You are given the following information:
1.
5.
Trading receipts consisted partly of cash and partly of cheques. During the year, Dare had paid, out of
his takings, wages for part-time staff amounting to £2,914 and sundry expenditure of £140. He retained
between £2 and £5 per week pocket money and maintained a balance of £20 in the till for change. The
balance of his takings, together with cheques amounting to £250, which he had cashed out of his takings
for the convenience of certain friends, was paid into the bank.
Cheques drawn payable to trade creditors, but not presented at 1 January 19X6, amounted to £280 and
at 31December 19X6 to £320.
All dishonoured cheques were re-presented and honoured during the year.
The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000 some years ago at a
nominal rate of interest of 3% per annum. The interest was duly paid half-yearly on 31st March and 30
September, and the loan was still outstanding at the end of the year.
Discounts allowed by trade creditors amounted to £480 and those allowed to debtors were £520.
6.
Other balances at 1 January and 31 December 19X6 are given below:
2.
3.
4.
Stocks
Trade debtors
1 January
£
4,500
2,800
Accrued general expenses
Rates paid in advance
Fixtures valued at
240
40
2,800
Trade creditors
Creditors for heating and
lighting
1,800
7.
31 December
£
5,800
3,200 (including a bad debt of £200 to
be written off)
190
50
2,550 (including those purchased during
the year)
2,200
80
There is a standard gross profit margin of 25% on sales.
FINANCIAL ACCOUNTING 1
70
218
Other Aspects of Final Accounts
You are required to prepare:
(a) a statement of Dare’s capital on 1 January 19X6;
(b) a profit and loss account for the year ended 31 December 19X6;
(c) a balance sheet as on that date.
QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social Club.
The summarized balance sheet on 31.12.94 as prepared by the previous bookkeeper contained the following
items. All figures are in £s.
Assets
Heating oil for clubhouse
Bar and café stocks
New sports ware, for sale, at cost
Used sports ware, for hire, at valuation
Equipment for grounds person – cost
- depreciation
Subscriptions due
Bank – current account
- deposit account
Claims
Accumulated fund
Creditors – bar and café stocks
- Sports ware
5,000
3,500
STRATHMORE UNIVERSITY ● STUDY PACK
1,000
7,000
3,000
750
1,500
200
1,000
10,000
23,150
1,000
300
Lesson Six
219
The bank account summary for the year to 31.12.95 contained the following items:
Receipts:
Subscriptions
Bankings – bar and sale
Sale of sports ware
Hire of sports ware
Interest on deposit account
Payments
Rent and repairs of clubhouse
Heating oil
Sports ware
Grounds person
Bar and café purchases
Transfer to deposit account
11,000
20,000
5,000
3,000
800
6,000
4,000
4,500
10,000
9,000
6,000
You discover that the subscriptions due figure as at 31.12.94 was arrived at as follows:
Subscriptions unpaid for 1993
Subscriptions unpaid for 1994
Subscriptions paid for 1995
10
230
40
Corresponding figures at 31.12.95 are:
Subscriptions unpaid for 1993
Subscriptions unpaid for 1994
Subscriptions unpaid for 1995
Subscriptions paid for 1996
10
20
90
200
Subscriptions due for more than 12 months should be written off with effect from 1.1.95
Asset balances at 31.12.95 include:
Heating oil for club house
Bar and café stocks
New sports ware, for sale, at cost
Used sports ware, for hire, at valuation
700
5,000
4,000
1,000
Closing creditors at 31.12.95 are:
For bar and café stocks
For sports ware
For heating oil for clubhouse
800
450
200
2/3 rds
of the sportswear purchases made in 1995 had been added to stock of new sportswear in the figures
given in the list of assets above, and 1/3 had been added directly to the stock of used sportswear for hire.
Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these older items into the stock
of used sportswear, at a valuation of 25% of their original cost.
FINANCIAL ACCOUNTING 1
220
Other Aspects of Final Accounts
No cash balances are held at 31.12.95. The equipment for the grounds person is to be depreciated at 10%
per annum, on cost.
Required:
Prepare income and expenditure account and balance sheet for the AB Sports club for 1995, in a form
suitable for circulation to members. The information given should be as complete and informative as
possible within the limits of the information given to you. All workings must be submitted.
(23 marks)
QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the name of Chero Hardware.
Most goods in which he trades are purchased from various suppliers in a finished form. In addition, a
separate department of the firm manufactures various types of lampshades from purchased raw materials.
When finished, the lampshades are transferred to the shop at an agreed transfer price for sale. No
lampshades are sold other than through the shop.
The firm’s Accounts Assistant presents you with the following trial balance at 30 June 1988:
Sh
Sh
Capital account – Cherono
740,000
Drawings – Cherono
95,000
Long term loan (interest at 15% p.a)
240,000
Fixtures and fittings at cost
900,000
Accumulated depreciation at 1 July 1987
350,000
Motor vehicle at cost
208,000
Accumulated depreciation at 1 July 1987
60,000
Stock at 1 July 1987 (at cost):
Raw materials for lampshades
40,000
Completed lampshades
20,000
Other goods
328,000
Trade debtors and creditors
122,000
Bank balance
98,000
Sales
4,100,000
Purchases – raw materials for lampshades
855,000
- other goods
2,400,000
Wages
254,000
Rent and rates
96,000
Water and electricity
47,000
Motor expenses
60,800
Repairs
12,000
Interest on loan
18,000
Bank charges
4,000
Insurance
18,000
Sundry expenses
21,200
_______
5,597,000
5,597,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
221
Additional Information:
(i)
(ii)
(iii)
(iv)
Rent and rates include a prepayment of rates of Sh. 6,000.
The insurance includes a premium for the period ending 31 October 1988.
A trade debt of Sh. 14,000 is not expected to be realized.
During the year a pick-up van, which was bought for Sh. 86,000, was sold for Sh. 30,000, and
replaced with another pick-up van costing Sh. 152,000. Both transactions have been posted to the
motor vehicle account. No disposal account has been opened. The straight-line rates of
depreciation based on cost are 25% p.a. for motor vehicle and 10% p.a. for fixtures and fittings. A
full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
(v) Accruals at 30 June 1988 were:
Water and electricity
Sh. 5,000
Sundry expenses
Sh. 4,000
(vi) Stocks at 30 June 1988 were:
(vii)
Lampshades raw materials
Lampshades (at transfer price)
Other goods at cost
Sh.
80,000
30,000
252,000
(a) The agreed transfer price for lampshades produced was Sh. 1,000,000. The workshop produced
50,000 lampshades during the year.
(b) Wages include those of the lampshades making employee who has been paid Sh. 50,000 for the year.
In addition, she is entitled to a commission on the annual profit of her department of 10% p.a. after
charging such commission. Shop assistants’ wages were Sh. 108,000.
(c) The apportionment of rent and rates; and water and electricity to the lampshades is 25% of the total.
Required:
(a) Prepare a manufacturing, trading and profit and loss accounts for the year ended 30 June 1988,
disclosing clearly (i) the profit earned by the lampshades-making department and (ii) the gross profit
earned by the shop.
(b) Prepare a balance sheet as at 30 June 1988.
QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The financial year of the club,
which had been formed to provide training facilities for both field and track event athletes, had ended two
days previously on 31 October 1983. An extraordinary general meeting was convened for the purpose of
appointing a new treasurer whose task it would be to prepare the annual accounts for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an elementary knowledge of
bookkeeping, soon found himself in difficulty.
He sought your assistance, which you agreed to give. During your conversation he said, ‘The previous
treasurer maintained a Cash and Bank account. I have summarized the detailed entries into what I think you
call a Receipts and Payments Account, and have rounded the figures to the nearest £1’.
At this point he supplied you with a copy of the following document:
FINANCIAL ACCOUNTING 1
222
Other Aspects of Final Accounts
Olympiad Athletics Club
Receipts and Payments Account for 12 months ended 31 October 1983
Note
Receipts
Note
Payments
No.
No.
Cash
Bank
£
£
Balance c/d
73
Balance b/d
Membership fees:
(4)
Insurance premiums
paid to brokers
(1) Entrance
80
170
(7)
Payments to suppliers of
sporting requisites
(1) Annual subscriptions
215
4,465
(5)
Wages of grounds man
(2) Life membership
530
(8)
Postages and telephones
(3) Training ground fees
454
7,206
(9)
Stationery
Insurance:
World-wide Athletics
Club affiliation fee
(4) Premiums
638 (10) Rates of training ground
(4) Commissions
53
Upkeep of training
ground
(11) Interest received from
Transfers to bank
investments
626
(12) Sale of office furniture
370 (11) Purchase of investments
(6) Sale of sporting requisites
8,774 (11) Short term deposits
Advertising revenue
603
Transfers from cash
____
__700
Balances c/d
£822 £24,135
Balances b/d
122
2,563
Cash
£
-
Bank
£
105
580
5,270
3,600
692
629
50
846
700
1,200
5,600
3,000
122
2,563
£822 £24,135
After you had perused the above account, Guy Rowppe explained the numbered items, as follows:
(1) On admittance to membership of the club, new members pay an initial entrance fee together with their
annual subscription. At 31 October 1982, annual subscriptions of £70 had been paid in advance and
£180 was owing but unpaid; of this latter amount, £40 related to members who left during the current
year and is now no longer recoverable. The figures at 31 October 1983 are £100 subscriptions in
advance and £230 subscriptions in arrear. The policy of the club is to take credit for subscriptions when
due and to write off irrecoverable amounts as they arise.
(2) As an alternative to paying annual subscriptions, members can at any time opt to pay a lump sum, which
gives them membership for life without further payment.
Amounts so received are held in suspense in a Life Membership Fund account and then credited to
Income and Expenditure Account in equal instalments over 10 years; the first such transfer takes place
in the year in which the lump sum is received. On 31 October 1982 the credit balance on the Life
Membership Fund Account was £4,720, of which £850 credited was as income for year ended 31
October 1983.
(3) The club has a permanent training ground. Non-members can use the facilities on payment of a fee. In
order to guarantee a particular facility, advance booking is allowed. Advance booking fees received
before 31 October 1983 in respect of 1984 total £470. The corresponding amount paid up to 31
October 1982 in advance of 1983 was £325. Members can use the facilities free of charge.
(4) Club members can take out insurances through the club at advantageous rates. Initially, premiums are
paid by members to the club. Subsequently, the club pays the premiums to an insurance broker and
receives commission. At 31 October 1982, premiums received but not yet paid over to the broker
amounted to £102 and commissions due but not yet received were £11. The corresponding amounts at
31 October 1983 are £160 and £13 respectively.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
223
The grounds man is employed for the six months April to September only. He is then paid a
retaining fee to secure his services for the following year. At 31 October 1982 the grounds man had
been paid a retainer (£250) for 1983. Included in the Wages figure (£3,600) is the retainer (£300) for
1984.
Sporting requisites are sold only on cash terms. There are therefore no debtors for these items.
On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163; the corresponding
figure on 31 October 1983 was £202.
Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31 October 1983, was
£927. In arriving at this latter figure, the sum of £137, representing damaged and unsaleable stock at
cost price, had been excluded.
Postage stamps unused at 31 October 1983 totalled £4.
Stock of stationery on 31 October 1982 and 1983 was £55 and £36 respectively.
Rates are payable to the District Council in two installments (in advance) each year. £360 had been
paid on 1 October 1982, £390 on 1 April 1983 and £456 on 1 October 1983.
The club receives interest on investments bought a number of years ago at a cost of £7,400 (current
valuation £7,550). At the end of October 1983, the club had acquired further investments which
cost £5,600 (current valuation £5,600) and at the same time placed £3,000 in a short-term deposit
account.
The written down value of the furniture which had been sold during the year was £350; it had
originally cost £800.
Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an inclusive cost of £4,000.
Subsequently, the club had some timber buildings erected to provide various facilities for members. The total
cost of these buildings was £35,000; depreciation is calculated at the rate of 10% per annum on a straight-line
basis. At 31 October 1982, the provision for depreciation account had a balance of £9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club’s books as £7,900 (cost)
against which there was a provision for depreciation of £4,150 (calculated on the same basis as for buildings).
Apart from the disposal referred to in note (12) above there had been no other disposals or acquisitions
during the year.
Required:
Prepare the club’s Income and Expenditure Account for year ended 31 October 1983 and the Balance sheet
at that date.
All workings must be shown.
*Freehold land is land held in perpetuity.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
FINANCIAL ACCOUNTING 1
224
Other Aspects of Final Accounts
COMPREHENSIVE ASSIGNMENT No.2
TO BE SUBMITTED AFTER LESSON 6
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking
by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as shown below for the month
of October 19-6:
Bank Account
19-6
19-6
Oct
Oct
1
Balance c/d
91.40
2
Petty Cash
062313
36.15
3
McIntosh and Co
260.11
3
Freda’s Fashions
062314
141.17
3
Malcolm Brothers
112.83
6
Basford Ltd
062315
38.04
3
Cash sales
407.54
8
Hansler Agencies
062316
59.32
14 Rodney Photographic
361.02
9
Duncan’s storage
062317
106.75
17 Puccini’s Cold Store Ltd
72.54
9
Aubrey plc
062318
18.10
20 Eastern Divisional Gas
10
Secretarial services Ltd
062319
28.42
Board – rebate (August
direct credit)
63.40
22 Grainger’s Garage
93.62
14
Trevor’s Auto repairs
062320
11.75
29 Cash sales
235.39
15
Wages cash
062321
115.52
31 Balance c/d
221.52
16
Towers Hotel
062322
44.09
17
Bank charges (September)
12.36
20
Broxcliffe borough
Council
SO
504.22
21
Eastern Area Electricity
Board
DD
108.64
24
Eastern Divisional Gas
Board
DD
41.20
28
Petty Cash
062323
119.07
30
Wages cash
062324
337.74
______
31
Salaries transfer
- ______
1,919.37
1,919.37
Nov
1
Balance c/d
221.52
In early November, the company’s bank sent a statement of account which is reproduced below:
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
225
Statement of Account with Lowland Bank plc
Account: Fuller Ltd Current Account No 10501191
Date of issue: 1 November 19-6
19-6 Oct
Description
Debit
Credit
Balance
£
£
£
1
BCE
90.45
2
CR
2
062310
111.34
154.13
3
062312
9.18
144.95
3
062309
15.41
129.54
3
CR
7
062313
10
ADJ
15
062315
38.04
848.73
16
062314
141.17
707.56
17
CR
20
SO
504.22
646.90
21
062317
106.75
540.15
21
DD
196.83
343.32
21
062320
11.75
331.57
22
141981
212.81
118.76
22
ADJ
10.00
108.76
22
062319
28.42
80.34
22
062320
11.75
68.59
22
CR
175.02
780.48
36.15
265.47
910.02
873.87
12.90
443.56
93.62
FINANCIAL ACCOUNTING 1
886.77
1,151.12
162.21
226
Other Aspects of Final Accounts
24
ADJ
212.81
27
INT (loan a/c)
27
375.02
26.35
348.67
062321
115.52
233.15
28
062322
44.09
189.06
28
DD
108.64
80.42
30
CGS
9.14
71.28
31
ADJ
Abbreviations:
BCE = Balance
INT = Interest
11.75
SO = Standing Order
DD = Direct Debit
CR = Credit
CGS = Charges
83.03
ADJ = Adjustment
Required:
Prepare the company’s bank reconciliation statement as at 31 October 19-6.
(Chartered Association of Certified Accountants)
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul Rudyerd, a wholesale fruiter,
at the end of his financial year ended on 31 May 19X1.
£
£
Purchases and sales
104,310
146,200
Stocks
3,010
Motor vehicles at cost
26,360
Provision for depreciation on motor vehicles as at 1 June 19X0
12,960
Warehouse equipment at cost
20,000
Debtors and creditors
25,250
21,200
Bank
3,200
Motor vehicle expenses
11,960
Rent and rates
11,220
Advertising
2,500
Sundry expenses (including insurance and electricity)
3,470
Drawings
6,600
Capital as at 1 June 19X0
______
31,120
214,680
214,680
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
227
Additional information and opinions are given as follows:
(a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a consignment of rare fruit from
abroad which cost £300, which would normally sell for approximately £660, but which is badly bruised
and could be sold as juice pulp for £100.
(b) Depreciation on motor vehicles is normally charged at an annual rate of 20%, using the reducing balance
method. The motor vehicles at cost figure includes a new car purchased during the year for £9,600 for
Rudyerd’s personal use which it is estimated will last four years with an estimated residual value of
£4,000.
(c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
Prepayments
Accruals
£
£
Rates
230
Rent
160
Insurance
180
Electricity
200
(d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of outstanding debtors
should be created.
(e) A recording error has resulted in a second-hand delivery van, purchased on 2 June 19X0 for £9,000,
being treated as a motor vehicle expense.
(f) No record has been made of fruit, estimated to have cost £520, withdrawn from the business by
Rudyerd for his personal use.
(g) No adjustment should be made, in preparing the answer to part (a) for the new warehouse equipment
purchased during the year.
Required:
(a) Prepare a draft trading, profit and loss account for Paul Rudyerd’s wholesale fruit business for the year
ended 31 May 19X1 and a draft balance sheet as at 31 May 19X1.
(15 marks)
(b) Briefly explain what accounting concepts and conventions would be important in considering the
treatment of the new warehouse equipment.
(4 marks)
(c) Itemize the additional information that you would wish to know before you could make the appropriate
adjustments to the above financial statements in respect of the new warehouse equipment.
(3 marks)
QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after your arrival the finance
director is rushed into hospital; the auditors are about to arrive to prepare the accounts for the recently-ended
financial year; you cannot find any working papers for the previous year’s accounts; and the other accounts
staff are too busy to assist you in preparing for the auditor’s visit.
The eight situations described below are detailed on a notepad left by the finance director and their treatment
in the accounts needs to be considered by you.
FINANCIAL ACCOUNTING 1
228
Other Aspects of Final Accounts
(a) A supply of office stationery was purchased five months before the year-end at a cost of £1,000. At the
year-end it is estimated there is about £250 worth left in stock.
(b) An electronic typewriter was purchased during the year at a cost of £270. It is estimated to have a useful
life of five years.
(c) A batch of goods was produced to a customer’s special order. The goods cost £5,800 but have not been
delivered as it transpires the customer is now bankrupt. A buyer for the goods has been found, who will
pay £4,500 but modifications costing £1,200 will have to be made to the goods.
(d) Three technical staff have spent the last six months exclusively on a new product design project; their
salaries for this period amount to £22,000. At the year-end it is known that the design stage will take
another month, to be followed by market research; after this the directors will decide whether the
project should proceed to production and marketing. The company’s chief engineer is confident that
sales of the new product will start in the next financial year and will last for at least four years.
(e) A freehold property was purchased on the first day of the financial year at a cost of £650,000. The
building is estimated to have a useful life of ten years when it is expected it will have to be demolished
for redevelopment. It is estimated that the freehold land, at the time of purchase, was worth £500,000.
(f) A specialist machine was purchased seven years ago for £200,000. It has been depreciated, using the
straight-line method, at 10% per annum since then. To the beginning of the year under review £120,000
depreciation has been provided. The chief engineer has advised that the machine is worn out and would
need to be rebuilt to last more than another two years. The directors have already decided the machine
should not be rebuilt but scrapped one year after the end of the year under review.
(g) The debtors’ ledger shows balances totalling £52,000 at the year-end. Two debts, totalling £2,000, are
known to be bad. Another customer has gone into liquidation owing £3,000; it is expected he will be
able to pay 60p of every £ owed to his creditors. The sales director recommends a general bad debt
provision of 2% in respect of the remaining debtor balances.
(h) The company has undertaken a heavy advertising campaign throughout the year under review to
promote its corporate image and product range. The sales and managing directors feel that this
campaign will benefit the company for at least a further six months after the year end. You determine
that the campaign cost £150,000 and has been fully paid for before the year-end.
Required:
For each of the eight situations described above:
(a) Describe what action should be taken in respect of:
(i) The amount to be charged or credited to the year’s profit and loss account (if any);
(ii) The value to be placed on the asset in the balance sheet at the year end (if any);
(8 marks)
(b) State what accounting assumptions, conventions or concepts could be involved and give reasons, where
there is a conflict between two or more of them, why you have chosen the action you propose.
(9 marks)
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Six
229
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31 December 19X9:
Ksh
Carriage inwards
Capital account at 1 January 19X9
Motor vans
Stock at 1 January 19X9
Balance at bank
Purchases
Sales
Trade debtors
Trade creditors
Rent and rates
Salaries
General expenses
Motor expenses
Discounts allowed
Discounts received
Insurance
Bad debts
Provision for doubtful debts 1 Jan 19X9
Provision for depreciation on vans
Drawings
Disposal
Returns inwards
Ksh
6,310
500,000
200,000
164,000
116,860
1,593,690
2,224,000
290,000
157,600
56,080
350,400
44,720
25,600
40,400
37,600
17,600
30,400
50,000
7,140
2,993,200
8,000
60,000
6,000
_______
2,993,200
The following matters should be taken into account:
(a) After examination of the debtors account, it was decided to:
Write off a bad debt of Ksh 12,000
Make a specific provision in the accounts for the following doubtful debts,
Ksh 5,000 from Wordsworth
Ksh 3,000 from Coleridge
Make a general provision of 5% on the debtors.
(b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected to sell them at Ksh
232,470.
(c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
(d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but the instalment due on 31
December 19X9 was not paid until 15 January in the next year.
(e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
(f) Depreciation is to be provided for on the motor truck at the rate of 20% per annum straight line on
cost.
(g) General expenses include Ksh 3,060 relating to the telephone account which is made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
FINANCIAL ACCOUNTING 1
230
Other Aspects of Final Accounts
(h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent sand rates relate to
private use.
Prepare a trading and profit account for the year to 31st December 19X9, and a balance sheet as at 31
December 19X9.
QUESTION FIVE
The balance sheet of Johnson’s shop at 1 October 19X7 was as follows:
Non current assets
Shop premises
Shop fittings
Delivery van
Ksh
45,000
12,000
4,000
Current assets
Stock in trade
Cash in hand
14,000
2,000
Ksh
Capital as at 1 Oct
Ksh
Ksh
51,000
61,000
Current liabilities
Trade creditors
16,000 Bank overdraft
77,000
12,000
14,000
26,000
77,000
The following is a summary of the transactions which took place during the year to 30 September 19X8:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh 83,000.
Stock in trade bought, all on credit for Ksh 78,000.
Cash of Ksh 113,000 was taken from the till (cash register) and paid into the bank.
The trade creditors were paid Ksh 73,000 by cheque.
Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The loan is for 5 years.
Wages of Kshs 17,000 were paid in cash.
Rates of Ksh 2,900 were paid by cheque.
Sundry expenses of Ksh 6,000 were paid in cash.
Electricity bills of Ksh. 1,600 were paid by cheque.
The owners of the business withdrew Ksh 9,000 in cash.
At 30 September 19X8 you discover the following:
1.
2.
3.
4.
Interest Ksh 2,500 due to Black for the year was unpaid.
Shop fittings are to be depreciated at 10% per annum on the total at the year-end; the delivery van is to
be depreciated at 20% per annum of the total at the year-end.
The rates payment during the year included Ksh 1,000 in respect of the period 1/10/19X8 to
31/3/19X9.
The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.
Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for the year to that date.
END OF COMPREHENSIVE ASSIGNMENT No.2
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
STRATHMORE UNIVERSITY ● STUDY PACK
231
Partnerships
LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying on a business common
with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e.g.)
lawyers, doctors, accountants etc. whose maximum membership is twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree on the terms
upon which the partnership will be run and the relationship between each other. This is done in writing and
signed off as agreed by all the partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
Accounting for partnerships.
The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to remain fixed.
It will only change when the partners agree or incase of any changes in the partnership like admission of or
retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities of
the partnership (i.e.) the profits or losses and any drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital account
becomes a fixed capital account. When there is no distinction between a capital account and a current
account then any short- term changes are passed through the capital account therefore the capital account
becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are shown in the
following formats.
(Assume a firm of 3 partners A, B and C)
CAPITAL ACCOUNT
FINANCIAL ACCOUNTING 1
Lesson Seven
Loss or revaluation
Goodwill written off
Bal c/d
232
A
£
xx
xx
B
£
xx
xx
C
£
xx
xx
xx
xx
xx
xx
xx
xx
Bal b/d
Additional capital
(c/book or asset)
Gains on revaluation
Goodwill
Bal b/d
Bal b/d
Interest on drawings
Drawings
Bal c/d
CURRENT ACCOUNT
B
C
£
£
xx
Bal b/d
xx
xx
xx
Interest on capital
xx
xx
xx
Salaries
Share of profits
xx
xx
Loan interest
Bal c/d
xx
xx
xx
xx
Bal b/d
A
£
A
£
xx
xx
B
£
xx
xx
C
£
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
A
£
xx
xx
xx
xx
-
B
£
xx
xx
xx
xx
xx
xx
xx
xx
C
£
xx
xx
xx
xx
xx
xx
xx
Format For Final Accounts:
Profit and Loss Account
The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss
account, a new section called the Appropriation account is included and this account shows how the partners
share the Net Profit for the period. (In addition to other expenses in the profit and loss, an expense for
interest on loan given by one of the partners is included and the credit entry is made on the partner’s current
account.)
The format for the Appropriation account is as follows:
STRATHMORE UNIVERSITY ● STUDY PACK
233
Add:
Partnerships
Net Profit for the year
Interest on drawings.
Less: Interest on capital.
£
A
B
C
xx
xx
xx
A
B
C
xx
xx
xx
£
Less: Salaries
A
B
C
xx
xx
xx
Balance of profit to be shared in percentage ratio
A (ratio)
xx
B (ratio)
xx
C (ratio)
xx
£
xx
xx
xx
(xx)
£
xx
(xx)
xx
(xx)
Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the business
should be shown separately and any loan given by a partner to the firm is also shown separately in the noncorrect liability section therefore, the format will be as follows.
£
Net assets.
Capital: A
B
C
Current account A
B
C (debit balance).
Non-current liabilities
10% loan – B
10% loan – bank
£
xx
xx
(xx)
xx
xx
FINANCIAL ACCOUNTING 1
£
xx
xx
xx
xx
xx
xx
xx
xx
xx
Lesson Seven
234
Example 7.1
Read the following and answer the questions below.
A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:
Capital:
Partnership salaries:
Drawings:
A- £60,000;
A - £9,000;
A - £12,000;
B - £48,000.
B - £6,000.
B - £13,400.
The firm’s net profit for the year was £32,840.
Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.
(a) From the information above prepared the firm’s appropriation account and the partners’ current
accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£
£
Net Profit for the year
32,840
Less:
Interest on capital
A
B
6000
4800
Less:
Salaries
A
9000
B
6000
Balance of profit to be shared in Profit Share Ratio
A
½
3520
B
½
3520
Drawings
Bal c/d
A
£
12,860
5,660
18,520
(10,800)
22,040
(15,000)
7,040
(7,040)
CURRENT ACCOUNT
B
£
13,400
Interest on capital
Salaries
920
Profit shared.
14,320
Bal b/d
STRATHMORE UNIVERSITY ● STUDY PACK
A
£
6,000
9,000
3,520
18,520
5,660
B
£
4,800
6,000
3,520
14,320
920
235
Partnerships
EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet
extracts at the date, from the following:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Net profits £30,350
Interest to be charged on capitals: W £2,000; P £1,500; H £900
Interest to be charged on drawings; W £240; P £180; H £130
Salaries to be credited: P £2,000; H £3,500.
Profits to be shared: W 50%; P 30%; H20%.
Current accounts: balances b/f W £1,860; P £946; H £717
Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
Drawings: W £9,200; P £7,100; H £6,900.
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2002
Add:
Less:
£
Net profit for the year
Interest on drawings
W
P
H
240
180
130
Interest on capital
W
P
H
Salaries
P
H
Balance of profit to be shared
W 50%
Pl 30%
H 20%
Interest on draw
Drawings
Bal c/d
Bal c/d
550
30,900
2,000
1,500
900
Less:
W
£
30,350
(4,400)
26,500
2,000
3,500
10,500
6,300
4,200
P
£
240
9,200
£
180
7,100
4,920
14,360
3,466
10,746
(5,500)
21,000
(21,000)
Current Account
H
£
130
Bal b/d
6,900
Interest on capital
Salaries
Share of profits
2,287
9,317
FINANCIAL ACCOUNTING 1
W
£
1,860
2,000
P
10,000
£
946
1,500
2,000
6,300
14,360
10,746
H
£
717
900
3,500
4,200
9,317
Lesson Seven
236
Balance sheet (extract) as at 31 Dec 2002
Net Assets
Capital
W
P
H
Current Accounts
W
Pl
H
£
£
4,920
3,466
2,287
£
xx
40,000
30,000
18,000
88,000
10,673
98,673
Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and
Stone, trading partnership, sharing the balance of profits and losses in the proportions 3:2 respectively.
£
Printing, stationery and postage
3,500
Sales
322,100
Stock in hand at 1 October 19X8
23,000
Purchases
208,200
Rent and rates
10,300
Staff salaries
36,100
Telephone charges
2,900
Motor vehicle running costs
5,620
Discounts allowable
950
Discount receivable
370
Sales returns
2,100
Purchases returns
6,100
Carriage inwards 1,700
Carriage outwards
2,400
Fixtures and fittings: at cost
26,000
Provision for depreciation
11,200
Motor vehicles: at cost
46,000
Provision for depreciation
25,000
Provision for doubtful debts
300
Drawings:
Brick
24,000
Stone
11,000
Current account balances
At 1 October 19X8:
Brick
3,600
credit
Stone
2,400
credit
Capital account balances
At 1 October 19X8:
Brick
33,000
Stone
17,000
Debtors
9,300
Creditors
8,400
Balance at bank
7,700
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1
July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at
that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings
10%
Motor vehicles
20%
Required:
(a)
Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b)
Prepare a balance sheet as at 30 September 19X9 which should include summaries of the partners’
capital and current accounts for the year ended on that date.
Note: In both (a) and (b) vertical forms of presentation should be used.
SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Printing and stationery and postage
Sales
Stock (1 October 19X8)
Purchases
Rent and rates
Heat and light
Staff salaries
Telephone charges
Motor vehicle running expenses
Discounts allowable
Discounts receivable
Sales returns
Purchases returns
Carriage inwards 1,700
Carriage outwards
Fixtures and fittings at cost
Provision for depreciation
Motor vehicles at cost
Provision for depreciation
Provision for doubtful debts
Drawings:
Brick
Stone
Debit
£
3,500
Credit
£
322,100
23,000
208,200
10,300
8,700
36,100
2,900
5,620
950
2,100
2,400
26,000
46,000
24,000
11,000
FINANCIAL ACCOUNTING 1
370
6,100
11,200
25,000
300
Lesson Seven
Current accounts:
Brick
Stone
Capital accounts:
Brick
Stone
Debtors
Creditors
Balance at bank
238
3,600
2,400
9,300
7,700
429,470
33,000
17,000
8,400
429,470
TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9
£
£
£
Sales
322,100
Less: Sales returns
2,100
320,000
less cost of sales
Opening Stock
23,000
Purchases (adjustment)
207,200
Add: Carriage inwards
1,700
208,900
Less: Purchases returns
(6,100)
202,800
225,800
Less: Closing Stock
(32,000)
(193,800)
Gross profit
126,200
Discount receivable
370
Less Expenses
Telephone charges (adjustment))
3,300
Printing and stationery and postage
3,500
Rent and rages (adjustment)
9,700
Heat and light
8,700
Staff salaries
36,100
Motor vehicle running expense
5,620
Discount allowable
950
Carriage outwards
2,400
Depreciation on fixtures and fittings
2,600
Depreciation on motor vehicles
9,200
Interest on loan (adjustment)
250
(82,320)
Net profit
44,250
Less: Salaries Stone (adjustment)
(6,000)
Balance of profit to be shared
38,250
Brick 3 5
22,950
2
Stone 5
15,300
(38,250
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Balance sheet as at 30 September 19X9
Non current Asset
Fixtures and fittings
Motor vehicles
Current Asset
Stock
Debtors
Less: Provision
Payments
Cash at bank
Current:
£
(13,800)
(34,200)
48,000
9,300
(300)
Current Liabilities
Creditors
Accruals
Capital
£
26,000
46,000
72,000
8,400
400
£
12,200
11,800
24,000
32,000
9,000
600
7,700
49,300
(8,800)
40,500
64,500
Brick (adjustment)
Stone
23,000
17,000
Brick adjustment
Stone
2,800
11,700
14,500
54,500
Non-Current Liabilities
10% loan – Brick
Drawings
Bal c/d
10,000
64,500
Brick
£
24,000
2,800
26,800
Current Account
Stone
£
12,000
Bal b/d
(adj)
Interest on loan
11,700
Salaries.
Share profits
26,800
FINANCIAL ACCOUNTING 1
Brick
£
3,600
Stone
£
2,400
250
22,950
26,800
6,000
15,300
23,700
Lesson Seven
240
EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance as at
30 June 2003.
Dr.
Cr.
£
£
Buildings (cost £750,000)
500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures
33,000
Debtors
162,430
Creditors
111,500
Cash at bank
6,770
Stock at 30 June 19X8
419,790
Sales
1,236,500
Purchases
854,160
Carriage outwards
12,880
Discount allowed
1,150
Loan interest: King
40,000
Office expenses 24,160
Salaries and wages
189,170
Bad debts
5,030
Provision for bad debts
4,000
Loan from J King
400,000
Capitals: Mack
350,000
Spencer
290,000
Current accounts: Mack
13,060
Spencer
2,890
Drawings: Mack 64,000
Spencer
56,500
2,446,040
2,446,040
Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance
sheet as at that date.
a)
b)
c)
d)
e)
f)
g)
Stock, 30 June 2003, £563,400
Expenses to be accrued: Office Expenses £960; Wages £2,000
Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
Reduce provision for bad debts to £3,200.
Partnership salary: £8,000 to Mack. Not yet entered
Interest on drawings: Mack£1,800; Spencer £1,200.
Interest on capital account balances at 10 per cent.
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Q 5.2
Partnerships
Mack and Spencer
Trading and Profit Loss Account for the year ended 30 June 2003
£
£
Sales
Less cost of sales
Opening Stock
419,790
Add: Purchases
854,160
1273,950
Less: Closing Stock
(563,400)
Gross Profit
Reduction in provision for bad debts (400-300)
Less Expenses
Depreciation: Fixtures & Fittings (110,000-33,000 x
Buildings
Carriage outwards
Discount allowed
Office expenses (24160 + 960)
Loan interest
Salaries and wages (18,9170 + 2000)
Bad debts
Net Profit for the period
Add: Interest on drawings:
Mack
Spencer
10
100
)7,700
10,000
12,880
1,150
25,120
40,000
191,170
5,030
1,800
1,200
Less: Salaries – Mack
Less:
interest on capital
Mack
Spencer
35,000
29,500
Balance of profits
Mack ½
Spencer ½
82,100
82,100
Mack – Current Account
Drawings
Interest on drawings
bal c/d
£
64,000
1,800
72,360
138,160
balance b/d
salary
Interest on capital
Profit
£
13,060
8,000
35,000
82,100
138,160
FINANCIAL ACCOUNTING 1
£
1,236,500
710,550
525,950
800
526,750
(293050)
233,700
3,000
236,700
(8,000)
228,700
(64,500)
164,200
164,200
Lesson Seven
242
Spencer – Current Account
Drawings
Interest on drawings
Bal c/d
£
56,500
1200
£
bal b/d
Interest on capital
Profit
56,880
114,580
2980
29,500
82,100
114,580
Balance Sheet as at 30 June 19X9
Non Current Assets
Buildings
Fixtures
£
Cost
750,000
110,000
860,000
Current Assets
Stock
Debtors (16,243 – 320)
Cash at bank
Current Liabilities
Creditors
Accruals (200 + 96)
Capital Accounts: Mack
Spencer
Current Accounts: Mack
Spencer
Loan from J. King
£
Depreciation
(260,000)
(40,700)
(300,700)
£
NBV
490,000
69,300
559,300
56,3400
15,9230
6770
72,9400
111,500
2,960
(114,460)
35,000
29,500
72,360
56,880
61,4940
1,174,240
64,500
129,240
400,000
1,174,240
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Example 7.5
JUNE 1998 QUESTION 4
The balance sheet of the partnership of Kombo and Nzuki as at 31 March 1997 was as follows:
Capital accounts:
Shs.
Kombo
1,400,000
Nzuki
1,400,000
Current Accounts:
Kombo
136,000
Nzuki
(81,200)
Current Liabilities:
Creditors
501,600
Accruals
25,600
Suspense account
3,708,300
Sh.
2,800,000
Fixed asset
sh.
(at cost less depreciation
Premises
1,200,000
Equipment
520,000
Vehicles
418,000
sh
2,138,000
54,800
527,200
326,300
Current Assets:
Stock
894,200
debtors
475,900
Provision (46,400)
429,500
Prepayments
28,600
Bank and cash 281,000 1,570,300
3,708,300
After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated at 20% by straight line
method on an assumed residual value of Sh.20,000 had been sold at Sh.60,000 but no entries,
other than in the bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad debts should have been
maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary of Sh.60,000 which should
have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200. No entries had been
made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%
Required:
a)
A statement of adjustments to show the correct net profit for the y
(12 marks)
b)
A suspense account showing how the balance is eliminated from the books.
(2 marks)
c)
A corrected balance sheet as at 31 March 1997.
(8 marks)
FINANCIAL ACCOUNTING 1
Lesson Seven
244
SOLUTION
The following journal can be included although not required in the question.
i)
DR: Suspense Account
CR: Discount Allowed Account
DR: Suspense Account
CR: Discount receive
Making the correct in the accounts
ii)
DR
26,400
26,400
DR: Suspense Account
CR: Sales Account
Sales undercast now corrected
200,000
iii)
DR: Suspense Account
CR: Debtors Account
Being an overstatement of debtors
account now corrected
13,500
iv)
DR:
CR:
DR:
CR:
DR:
CR:
DR:
CR:
140,000
Asset Disposals Account
Asset Account
Provision for depreciation Account
Asset Disposal Account
Suspense Account
Asset Disposal Account
Asset Disposal Account
Profit and Loss Account
CR
26,400
26,400
200,000
60,000
16,000
v)
DR: Profit and Loss Account
CR: Accrue expenses Account
11,200
vi)
DR:
CR:
DR:
CR:
Profit and Loss Account
Debtors Account
Provision for doubtful debts Account
Profit and Loss Account
31,200
DR:
CR:
DR:
CR:
Kombo’s Current Account
Nzuki’s Current Account
Kombo’s Current Account
Profit and Loss Account (Purchases)
3,280
13,500
140,000
60,000
16,000
11,200
31,200
3,280
60,000
39,200
STRATHMORE UNIVERSITY ● STUDY PACK
60,000
39,200
245
(a)
Partnerships
Kombo and Nzuki Partnership
Statement of Corrected Net Profit for the year
Sh.
Adjustments
Discount allowed
Discount received
Sales undercasted
Profit on disposal of asset
Accrued electricity charges
Bad debts
Decrease in provision for bad debts
Drawings (goods)
Net adjustments to Net Profit
Bal b/d
Nzuki
Drawings
Bal c/d
Sh.
26,400
26,400
200,000
16,000
(11,200)
(31,200)
3,280
39,200
268,880
Kombo
Shs
60,000
39,200
198,128
Partners Current Account
Nzuki
Shs.
81,200
Bal b/d
Kombo
Net profit adjustments
86,352
Kombo
Shs.
136,000
161,328
Nzuki
Shs.
60,000
107,552
297,328
167,552
297,328
167,552
(b)
Discount allowed
Discount received
Sales
Debtors 13,500
Motor vehicle disposal
Suspense Account
Shs.
26,400
bal b/d
26,400
200,000
60,000
326,300
FINANCIAL ACCOUNTING 1
Shs.
326,300
326,300
Lesson Seven
(c)
246
Kombo and Nzuki
Balance Sheet as at 31 March 1997
Fixed Assets
Shs.
Premises
Equipment
Vehicles
Current Assets
Stocks
Debtors (431,200 – 43,120)
Prepayments
Bank and Cash
Current Liabilities
Creditors
Accruals (25,600 + 11,200)
Shs.
374,000
Shs.
1,200,000
520,000
2,094,000
894,200
388,080
28,600
218,000
1,528,880
501,600
36,800
Capital Accounts
Kombo
Nzuki
1,400,000
Current Accounts
Kombo
Nzuki
198,128
(538,400)
990,480
3,084,480
1,400,000
2,800,000
86,352
284,480
3,084,480
NB
This is a very good question on partnership as it combines both errors on the accounts and Partnerships.
Please study it carefully and follow up the entries and adjustments.
The next example is still on past paper and combines both incomplete records and partnerships.
EXAMPLE 7.6 JUNE 1997
Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not maintain proper books of
accounts. The following information has been obtained from the available records on 31 March:
1996
1997
Sh.
Sh.
Balance at bank
94,800
169,680
Stock in trade
541,200
488,640
Trade debtors
612,000
?
Trade creditors
?
305,760
Furniture
360,000
Motor vehicles (book value)
1,920,000
Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while purchases, all on credit for
the same period were Sh.2,952,480. On 31 March 1996 Kefa’s capital was Sh.200,000 less than that of Mark.
The analysis of the cash book for the year ended 31 March 1997 shows the following:
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Receipts:
Cash from credit sales
Additional capital by Kefa
Cash sales
Payments:
For purchases
Salaries paid
Rent paid (for 6 months to 30.9.96)
Rates paid (for 6 months to 30.6.97)
Electricity charges
Advertising
Motor vehicle expenses
Sundry expenses
Drawings - Kefa
Mark
3,491,520
240,000
586,800
3,070,080
420,000
144,000
120,000
60,000
41,760
119,520
33,600
132,480
102,000
On 31 March 1997 liabilities were as follows:
Sh.
Electricity charges
12,480
Advertisement
6,240
Sundry expenses
3,600
On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One vehicle was sold on credit
for Sh.640, 000 while the other was taken over by Kefa at a valuation of sh.250, 000. the combined book
value of the two vehicles was Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March
1997. No depreciation is to be provided for the vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997.
(10 marks)
b) Balance sheet as at 31 March 1997.
(8 marks)
c) Partner’s capital accounts
(4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
KEFA and MARK
STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets
Sh.
Sh.
Bank
94,800
Stock
541,200
Debtors
612,000
Furniture
360,000
Motor vehicle
1,920,000
3,528,000
Liabilities
Creditors
(423,360)
Net Assets
3,104,640
Capital
Kefa
1,452,320
Mark
1,652,320
3,104,640
FINANCIAL ACCOUNTING 1
Lesson Seven
248
Trading, Profit and loss account for the year ended 31 March 1997
Sh
Sales
Less cost of sales
Less:
Opening stock
Purchases
Closing stock
Gross profit
Profit on disposal adjustment
Sh.
3,849,120
541,200
2,952,480
488,640)
Less Expenses
Salaries 420,000
Rent adjustment
Rates
Electricity
Advertising
Motor vehicle
Sundry expense
Depreciation – Furniture
- Motor vehicle
288,000
60,000
72,480
48,000
119,520
37,200
36,000
126,000
Net Loss should in PSR
Kefa
Mark
(66,560)
(66,560)
(3,005,040)
844,080
230,000
1,074,080
(1,207,200)
(133,120)
133,120
Balance sheet as at 31 March 1997
Non-current Assets
Furniture
Motor vehicle
Sh.
360,000
1,260,000
1,620,000
Current Assets
Stock
Debtors – Trade Adjustment
- others vehicle
Prepayments
Bank
Current Liabilities
Creditors
Accruals
Capital -
Sh.
(36,000)
(126,000)
(162,000)
Sh.
324,000
1,134,000
1,458,000
488,640
382,800
640,000
60,000
169,680
1,741,120
305,760
166,320
(472,080)
Kefa
Mark
STRATHMORE UNIVERSITY ● STUDY PACK
1,269,040
2,727,040
1,243,280
1,483,760
2,727,040
249
Partnerships
Drawings
Disposal
Loss shared
Bal c/d
(c)
Kefa
Shs.
132,480
250,000
66,560
1,243,280
1,692,320
Capital Account
Mark
Shs.
102,000
Bal b/d
Cash
66,560
1,483,760
1,652,320
Kefa
Shs.
1,452,320
240,000
mark
Shs.
1,652,320
1,692,320
1,652,320
GOODWILL AND REVALUATION OF ASSETS
This is defined as the advantage, whatever it may be, a person gets by continuing to be entitled to
represent to the outside would that he is carrying on a business which has been carried on for
sometime previously. “Judge Warey in Hull V Frases”
Goodwill is the element that arises from a business due to its reputation and therefore, enjoys
benefits that a new business may not get.
(e.g.) A new business may not make profits easily during the first year of trading.
Factors that contribute to goodwill
1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the share of a partner’s
effort to improve the business. The problem is normally to ascertain the value or cost of goodwill.
There are two types of goodwill:
1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates. There are various
approaches to these. Goodwill maybe arrived at by taking the average profits for lets say three
previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or shown in the accounts.
2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business above its net assets.
This is less subjective because it is the excess amounts paid for a business above its net assets.
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these case the net assets will be
total assets less total liabilities) of another business that is still trading on and the value of the net
asset is 3 M, therefore the purchased goodwill may be shown in the accounts as an intangible
asset. Purchased goodwill can be treated in the following three main ways:
1) Goodwill is written off from the accounts
2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.
The practice is normally to carry it in the accounts together with the other assets (as an intangible
asset) and amortize it over estimated period of time.
FINANCIAL ACCOUNTING 1
Lesson Seven
250
In a partnership, there are normally three situations where goodwill is accounted for in the accounts:
a) If there is a change in the profit sharing ratio.
b) On admission of a new partner.
c) On retirement of an old partner.
d)
Example (when there is a change in profit sharing ratio)
When there is a change in the profit sharing ratio, then goodwill is introduced in the accounts by
Dr. Goodwill account
Cr. Partner’s capital account ( the credit is based on the old
profit sharing ratio.)
The goodwill may remain in the accounts and therefore no partner entries will be made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account
Example:
A and B have been trading as partners sharing profits and losses equally. They decided to change profit
sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.
Required: The partner’s capital balances assuming that:
1) Goodwill is to be retained in the accounts
2) Goodwill is to be written off form the accounts.
Solution:
1)
CAPITAL ACCOUNT
A
B
Bal c/d
12,500,000
12,500,000
2)
Goodwill (NPRS)
Bal c/d (NPSR)
1,750,000
1,750,000
Bal b/d
Goodwill(OPSR)
CAPITAL ACCOUNT
A
B
300,000
200,000
950,000
1,550,000
12,500,000
Bal b/d
Goodwill
(OPSR)
1,750,000
A
1,000,000
250,000
B
1,500,000
250,000
A
1,000,000
250,000
B
1,500,000
250,000
12,500,000
1,750,000
REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based on market price.
The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.
STRATHMORE UNIVERSITY ● STUDY PACK
251
Partnerships
Any revaluation gains or losses are passed through a new account (i.e) a Revaluation account and the balance
on this account profit or low on revaluation is transferred to the partner’s capital accounts in the existing
profit sharing ratio.
Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1. They have the following
assets and liabilities at the book values and they wish to restate these values at market values and agreed
values.
Assets/Liabilities
Book value
£
2,000,000
900,000
1,200,000
700,000
450,000
800,000
Buildings
Fixtures, Fittings & furniture
Motor vehicle
Stock
Debtors
Creditors
Market price/Agreed value Gain)
£
Loss
2,500,000
100,000
800,000
(100,000)
1,150,000
(50,000)
650,000
(50,000)
400,000
(50,000)
700,000
100,000
Required:
Prepare Revaluation account and the partner’s capital account given the partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000
REVALUATION ACCOUNT
Fixtures
Motor vehicles
Stock
Debtors
Capital A/C A
B
C
Goodwill
Bal c/d
2
2
1
5
5
5
£
100,000
50,000
50,000
50,000
140,000
140,000
70,000
600,000
A
£ 000
B
£ 000
3,140
3,140
2,640
2,640
buildings
Creditors
£
500,000
100,000
600,000
CAPITAL ACCOUNT
C
£ 000
Bal b/d
1,510
Revaluation
1,570
A
£ 000
3,000
140
3,140
B
£ 000
2,500
140
2,640
C
£ 000
1,500
70
1,570
If there is a profit on revaluation, then the profit will be transferred to the partner’s capital account by:
Dr. Revaluation
Cr. Partner’s capital account in the profit share ratio
FINANCIAL ACCOUNTING 1
Lesson Seven
252
If there is loss then
Dr. Partner’s capital account
Cr. Revaluation in the profit share ratio
EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively.
The balance sheet for the partnership as at 30 June 19X6 is as follows;
Fixed Assets
Premises
Plant
Vehicles
Fixtures
Current Assets
Stock
Debtors
Cash
£
62,379
34,980
___760
Capital
Alan
Bob
Charles
Loan – Charles
Current liabilities
Creditors
Bank overdraft
98,119
£242,119
85,000
65,000
35,000
185,000
Current account
Alan
Bob
Charles
£
90,000
37,000
15,000
2,000
144,000
3,714
(2,509)
4,678
5,883
28,000
19,036
4,200
£242,119
Charles decides to retire from the business on 30 June 19X6, and Don is admitted as a partner on that date.
The following matters are agreed:
STRATHMORE UNIVERSITY ● STUDY PACK
253
a)
b)
c)
d)
e)
f)
Partnerships
Certain assets were revalued;
- Premises £120,000
- Plant £35,000
- Stock £54,179
Provision is to be made for doubtful debts in the sum of £3,000.
Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners
in the new firm do not wish to maintain a goodwill account so that amount is to be written back against
the new partners’ capital accounts.
Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of
profits as Bob.
Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by
the firm in cash except £20,000 which he is willing to leave as a loan account.
The partners in the new firm are to start on an equal footing so far as capital and current accounts are
concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as
the original partner from the old firm who has the lower investment in the business.
The original partner in the old firm who has the higher investment will draw out cash so that his capital and
current account balances equal those of his new partners.
Required;
a) Account for the above transactions, including goodwill and retiring partners’ accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 19X6.
Solution:
Don
£
Goodwill
written off
Motor
vehicle
Cashbook
Bal c/d
Bal b/d
Cash book
Bal c/d
12,000
-
Alan
£
Capital Accounts
Bob Charles
£
£
18,000 12,000
-
- 21,000
67,000 67,000 67,000
79,000 106,000 79,000
Don
£
9,023
Alan
£
-
3,091
3,091
3,091
12,114
- Bal b/d
3,900 Goodwill
Don
£
Bob Charles
£
£
85,000 65,000
21,000 14,000
35,000
7,000
38,100 Cash book 79,000
42,000
79,000 106,000 79,000
-
Current Accounts
Bob Charles
£
£
2,509
- Bal b/d
7,478 Revaluation a/c
Cash book
3,091
5,600
7,478
FINANCIAL ACCOUNTING 1
-
Alan
£
Don
£
3,091
Alan
£
3,714
8,400
-
3,091
12,114
42,000
Bob Charles
£
£
4,678
5,600
2,800
5,600
7,478
Lesson Seven
Plant
Stock
Debtors
Profits shared:
Alan
Bob
Charles
Bal b/d
Don - capital account
Current account
Don - capital account
Current account
254
Revaluation Account
£
2,000 Premises
8,200
3,000
8,400
5,600
2,800
30,000
£
30,000
_____
30,000
Cash book
£
760 Charles – capital account
79,000
Loan
3,091
Current account
Alan – capital account
Current account
Bal c/d
£
38,100
8,000
7,478
21,000
9,023
******
Cash book
£
Bal b/d
79,000 Charles – capital account
3,091
Loan account
Current account
Alan – capital account
Current account
£
4,200
38,100
8,000
7,478
21,000
9,023
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Alan, Bob and Don Partnership
Balance Sheet as at 30 June 19X6
Fixed Assets
Premises
Plant
Vehicles
Fixtures
Cost
Current Assets
Stock
Debtors
Cash
NBV
120,000
35,000
1,100
2,000
168,100
54,179
31,980
__760
86,919
Less Current Liabilities
Creditors
Bank overdraft
19,036
5,710
Capital accounts
Alan
Bob
Don
67,000
67,000
67,000
Current Accounts
Alan
Bob
Don
3,091
3,091
3,091
Non current liabilities
Loan – Charles
Depreciation
(24,746)
62,173
230,273
201,000
9,273
210,273
20,000
230,273
NOTE:
i.
ii.
iii.
iv.
Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios.
Same case applies for any gain or loss in the revaluation of assets.
Goodwill written off in the new profit sharing ratios against the capital accounts only for the new
partners.
When there is no enough cash to be paid to the retiring partners, his balance remains in the business as a
loan.
(d) Admission of a new partner.
When a new partner is admitted into the firm, this marks the end of the old partnership and the beginning of
a new one.
The new partner will have to bring in the capital that is due from him as per the agreement and also pay for a
share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by debiting the partner’s
account(inclusive of the new one in the new Profit Sharing Ratio).
FINANCIAL ACCOUNTING 1
Lesson Seven
256
If the admission is taking place part way through the financial period, then the new partner will be entitled
to the profits or losses for the remaining part of the financial period. (i.e from the point of joining the
partnership).
Care should be taken when apportioning interest on capital, salaries and profits because of the changes
Example:
The following was the partnership trial balance as at 30 April 2001:
Sh.
Sh.
Fixed capital accounts
Rotich
750,000
Sinei
500,000
Current accounts
Rotich
400,000
Sinei
300,000
Leasehold premises (purchased 1 May 2000)
2,250,000
Purchases
4,100,000
Motor vehicle (cost)
1,600,000
Balance at bank
820,000
Salaries (including partners’ drawings)
1,300,000
Stocks: 30 April 2000
1,200,000
Furniture and fittings (cost)
300,000
Debtors
225,000
Accountancy and audit fees
105,000
Wages
550,000
Rent, rates and electricity
310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000)
660,000
Cash introduced – Tonui
1,250,000
Sh.
Sh.
Sales (Sh.3,500,000 to 31 October 2000)
8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle
300,000
Furniture and fittings
100,000
Creditors
1,070,000
13,420,000
13,420,000
Additional information:
1.
On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be
shared on the ratio 2:2:1. For the purposes of this admission, the value of goodwill was agreed at Sh.3,
000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions
between the partners being made in their current accounts. On that date, Tonui introduced
Sh.1,250,000 more into the firm of which Sh.375,000 comprised his fixed capital and the balance was
credited to his current account.
2.
Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission.
In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
3.
Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise
indicated were to be apportioned on a time basis.
4.
A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10%
per annum respectively, calculated on cost.
5.
On 30 April, the stock was valued at Sh.1,275,000.
6.
Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500
STRATHMORE UNIVERSITY ● STUDY PACK
257
7.
8.
9.
Partnerships
A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expenses,
which was later found to be due to the following clerical errors:
 Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account
of the customer concerned;
 The purchases journal had been undercast by Sh.80,000
Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31
October 2000 and 30 April 2001 respectively.
On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000
for electricity consumed was required.
Required:
a)
Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b)
Partners’ current accounts for the year ended 30 April 2001
(4 marks)
c)
Balance sheet as at 30 April 2001
(7 marks)
(Total: 20 marks)
Solution
a)
ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2001
Sh.
Sh.
Sales
8,750,000
Less: cost of sales
Opening stock
1,200,000
Purchases
4,180,000
5,380,000
Less: Closing stock
(1,275,000)
4,105,000
Gross Profit
4,645,000
FINANCIAL ACCOUNTING 1
Lesson Seven
Gross profit
258
S
TS
 GP
Expenses
Dep. Motor Vehicle
Furniture
Salaries
Accountancy fees
Wages
Rent, rates, electricity
General expenses
Prov. For depreciation
Net Profit
Less: Interest on
capital
Rotich
Sinei
Tonui
Balance of profit
shared
Rotich 2 3 2 5
Sinei 1 3 2 5
Tonui - 1 5
1.3.2000-3.10.2000
Sh
Sh
1,858,000
1.11.2000-30.4.2001
Sh
Sh
2,787,000
Sh
160,000
15,000
483,750
52,500
275,000
137,500
362,400
30,000
160,000
15,000
483,750
52500
275,000
137,500
359,600
10,000
320,000
30,000
967,500
105,000
550,000
275,000
612,000
40,000
37,500
25,000
192,900
96,450
-
(1,506,150)
351,850
(62,500)
289,350
(289,350)
37,500
25,000
18,750
524,960
524,960
262,480
(1,393,350)
1,393,650
(81,250)
1,312,400
(1,312,400)
Sh
4,645,000
75,000
50,000
18,750
717,860
621,410
262,480
2,899,500
1,745,500
(143,750)
1,601,750
(1,601,750
b)
Goodwill
w/o
Capital A/C
Drawings
Bal c/d
R
Sh.
1,200,000
Current Account
S
T
Sh.
Sh.
Bal b/d
1,200,000
600,000
-
-
150,000
1,842,860
3,192,860
120,000
651,410
1,971,410
375,000
62,500
493,730
1,531,230
Cash book
Goodwill
(2:1)
Interest on
capital
Profit share
R
Sh.
400,000
S
Sh.
300,000
2,000,000
1,000,000
75,000
50,000
18,750
717,860
621,410
262,480
3,192,860
1,971,410
STRATHMORE UNIVERSITY ● STUDY PACK
C
Sh.
1,250,000
1,531,230
259
c)
Partnerships
Rotich, Sinei and Tonui
Balance Sheet as at 30 April 2001
Non-Current Assets
Leasehold premises
Furniture and Fittings
Motor vehicle
Current Assets
Stock
Debtors
Less Provision
Prepayments
Balance at bank
Current Liability
Creditors
Accruals
4,150,000
Sh
2,250,000
300,000
1,600,000
(750,000)
1,275,000
193,000
(40,000)
1,070,000
15,000
Sh.
(130,000)
(620,000
3,400,000
153,000
50,000
820,000
2,298,000
(1,085,000) 1,213,000
4,613,000
Capital: Rotich
Sinei
Tonui
Current Account: Rotich
Sinei
Tonui
(d)
Sh.
2,250,000
170,000
980,000
1,842,860
651,410
493,730
750,000
500,000
375,000
1,625,000
2,988,000
4,613,000
The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any
introduction of goodwill and revaluation of assets
Some of the adjustments may also be made in the current accounts if adjustments are made in the
capital account and the admission is partway through the financial period, then any interest to be
charged on capital will be based on the adjusted capital balance.
If the adjustments are made in the current account then there will be no change on the capital balance
and therefore no change on the interest charged on the capital balances.
(e)
Retirement of a partner
When a partner retires (i.e.) leaves the firm and the others partners are left to continue with the
business then the retirement marks the end of one partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This include:
1) Capital balance
This will be all the amounts the partner has invested in the firm. Some firms may not be able to refund
the amount in full and therefore it may be transferred t o a loan account whereby interest will be paid
on the balance.
2) Goodwill
FINANCIAL ACCOUNTING 1
Lesson Seven
260
Because this partner contributed to the improvement (existence) of the partnership therefore it will be fair
to pay him his share of the goodwill. Goodwill is introduced to the accounts in the old profit sharing
ratio ((i.e.) credited to all the partner’s capital accounts in the old profit sharing ratio), then written off
from the accounts by debiting the capital accounts of the remaining partners in the new profit share
ratio.
2) Credit balance on the current account
This amount due to the partner is paid directly from the cashbook or transferred to the
capital account whereby the total cash payable is to be determined.
The transfer is made by:
Dr. Current account
Cr. Capital account
4) Share of profits
If the retirement takes place during the financial period, then the retiring partner is entitled to take
profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared
in profit share ratio will be credited to the partner’s current account.
Therefore the profit and loss account will be split between the two periods and appointment of profits
done and this will be based on the terms of the partnership in each period.
EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits
and losses in the ratio 2:2:1 respectively
Given below is the balance sheet of the partnership as at 31 March 2001.
Balance sheet as at 31 March 2001
Assets
Sh.
Sh.
Non-current assets:
Fixed assets
465,000
Current assets:
Stock 294,000
Debtors
209,000
503,000
968,000
Capital and liabilities:
Capital accounts:
Kyamba
160,000
Onyango
140,000
Wakil
200,000
500,000
Current accounts:
Kyamba
65,300
Onyango
49,000
Wakil
53,000
167,300
667,300
Current Liabilities:
Bank overdraft
48,000
Trade creditors
252,000
300,700
968,000
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Additional information:
1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while
Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango
continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value
Transfer value
Sh
Sh.
Fixed assets
260,000
306,000
Stocks
166,000
157,000
Debtors
172,000
165,000
Creditors
156,000
156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the net amount
due for
him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000 but was not to be
maintained in the books of the partnership of Kyamba and Onyango.
4.
After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and
details of the new partnership.


Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively.
Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001
and the balance of the profits be shared equally after allowing for annual salaries of Sh.72, 000 to
Kyamba and Sh.60, 000 to Onyango.
5. The profit of the new partnership before interest on capitals and partners’ salaries was Sh.240,000 for the
year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000, debtors by Sh.90,000 and bank
balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango Sh.70,000.
Required:
a)
Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)
b)
Capital accounts for the year ended 31 March 2002
(4 marks)
c)
Current accounts for the year ended 31 March 2002.
(4 marks)
d)
Balance sheet of the new partnership as at 31 March 2002.
(8 marks)
(Total: 20 marks)
FINANCIAL ACCOUNTING 1
Lesson Seven
262
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh
Net profit for the year
Less: Interest on capital
Kyamba
Onyango
20,000
20,000
Less: Salaries
Kyamba
Onyango
Balance of profits shared in PSR
Kyamba ½
Onyango ½
b)
(2) Goodwill in
New PSR
(4) Fixed Assets
K
100,000
O
100,000
72,000
60,000
34,000
34,000
157,000
165,000
200,000
200,000
300,000
3000,000
c)
Capital
Drawings
K
Sh
85,000
O
Sh
70,000
Bal c/d
106,300
93,000
191,300
163,000
(40,000)
200,000
(132,000)
68,000
(68,000)
CAPITAL ACCOUNT
W
Bal b/d
306,000
Stocks
Debtors
Bal c/d
Sh.
240,000
O
140,000
W
200,000
80,000
80,000
40,000
48,000
12,000
68,000
12,000
(1)Goodwill in
old PSR
Cashbook
Profit on transfer
in old PSR
Creditors
Current account
(3)
Cash book (**)
628,000
CURRENT ACCOUNT
W
Sh
53,000
Bal b/d
Interest on
capital
Salaries
Share of profits
53,000
K
160,000
6,000
156,000
53,000
300,000
300,000
173,000
628,000
K
Sh
65,300
20,000
O
Sh
49,000
20,000
W
sh
53,000
-
72,000
34,000
60,000
34,000
-
191,300
163,000
53,000
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
KYAMBA AND ONYANGO
Balance Sheet as at 31 March 2002.
Non-Current Assets
Current Assets
Stock
Debtors
Bank
Sh.
228,000
127,000
135,300
490,300
Liabilities
Creditors
(96,000)
Capital:
Kyamba
Onyango
394,300
599,300
200,000
200,000
400,000
Current:
Kyamba
Onyango
b)
Sh.
205,000
106,300
93,000
199,300
599,300
Bank
Working capital 173,000
Kyamba- capital
48,000
Onyango – capital 68,000
Increase
50,000
_______
339,000
Bal b/d
Drawings
Kyamba
Onyango
Bal c/d
48,700
85,000
10,000
135,300
339,000
Workings:
Non Current Assets:
Bal b/f
Transfer
Balance
Stock:
Debtors:
Creditors:
465,000
260,000
205,000
Bal b/f
Transfer
Increase
294,000
(166,000)
100,000
228,000
Bal b/f
Transfer
Increase
209,000
(172,000)
90,000
127,000
Bal b/f
Transfer
252,000
156,000
96,000
FINANCIAL ACCOUNTING 1
Lesson Seven
264
EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been extracted from their books of
account as at 31 March 19 –2 after their trading and profit and loss account has been prepared, but
before any consequent adjustments have been made to the partners’ respective capital accounts.
Dr.
Cr.
Capital accounts (as at 1 April 19 – 1):
£
£
Upp
60,000
Downe
40,000
Cash
6,600
Creditors
29,250
Debtors
201,000
Downe: goods withdrawn
400
Drawings:
Upp (all at 31 December 19 – 1)
20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost
200,000
Accumulated depreciation
90,000
Accrued interest on Upp’s Loan account
10,000
Loan account: Upp
50,000
Net profit for the year to 31 March 19 – 2)
179,750
Salary: Downe
12,000
Stocks
3,500
Upp: private expenses paid (on 31 March 19 – 2)
500
£459,000
459,000
Additional information
1.
The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a
rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the year at a rate of interest
of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be revalued at their
market value as at the date of retirement of the partner.
2.
3.
Upp decided to retire at 31 March 19 – 2. In accordance with the partnership agreement, the assets
and liabilities were revalued as follows:
£
Car (to be retained by UPP)
10,000
Remaining fixed assets taken over by the new partnership
50,000
Stocks
5,000
Debtors
180,000
Creditors
35,000
Goodwill
40,000
Legal and other expenses connected with the partnership change
4,750
Following Upp’s decision to retire, Downe invited Side to join him in partnership as fro 1 April 19 – 2.
Side agreed to pay £75,000 into the new partnership as at that date as his capital contribution. Profits
STRATHMORE UNIVERSITY ● STUDY PACK
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4.
5.
Partnerships
and losses are to be shared in the proportion Downe 75% and side 25%. Goodwill is not to be
retained in the books of the partnership.
Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan
in the new partnership, the other half being paid to him in cash.
It may be assumed that all of the transactions relating to the changes in the respective partnerships take
place on 1 April 19 – 2. The legal and other expenses connected with the partnership changes were
due for payment on 30 April 19 – 2.
Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31 March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of the above transactions.
and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions
have
been settled.
(Detailed working should be submitted with your answer).
SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2
Net profit b/d
Add interest on drawings
Upp [3/12 x (10% x 20,000)]
Downe [16/12 x (10% x 15,000)]
Less:
Interest on capital
Upp [15% x 60,000]
Downe [15% x 40,000
Less: Salary – Downe
Balance of profits shared in PSR
Capital – Upp (1/2)
- Downe (1/2)
£
£
500
750
9,000
6,000
75,000
75,000
FINANCIAL ACCOUNTING 1
£
179,750
1,250
181,000
(15,000)
166,000
(16,000)
150,000
150,000
_____-
Lesson Seven
266
(b)
Appropriation
- interest on drawings
Salary
Drawings
Private expenses/goods
Car
Revaluation (deficit) (W1)
[see workings after (c)]
Loan (balancing figure)
Balance c/d
Goodwill written back (W2)
Balances c/d
20,000
500
10,000
20,000
Capital Accounts
Downe
£
Balances b/d
750
Loan interest
12,000
Appropriation
15,000
-salary
400
-interest on capital
-residual profit
20,000
103,000
_____154,000
Side
£
10,000
65,000
75,000
Upp
£
500
(c)
Balance Sheet as at 1 April 19-2
Non current assets
Current assets
Stocks
Debtors
Cash (W3)
Current liabilities
Creditors [35,000 + 4,750]
Working capital
Net assets employed
Financed by
Capital
Downe
Side
Loan
Upp (W4)
Upp
£
60,000
10,000
Downe
£
40,000
9,000
75,000
16,000
6,000
75,000
88,850
137,000
______
154,000
______
137,000
Downe
£
30,000
58,850
88,850
Side
£
75,000
75,000
Downe
£
88,850
____88,850
£
Balance b/d
Cash
£
50,000
5,000
180,000
__5,100
190,100
39,750
58,850
65,000
150,350
200,350
123,850
_76,500
200,350
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Partnerships
Workings
W1
Debtors
Fixed assets (cost)
Stocks
Legal etc expenses
Creditors
Balance b/d
Revaluation
£
201,000
Creditors
200,000
Provision for depreciation
3,500
Capital – Upp (car)
4,750
Fixed assets
35,000
Stocks
Debtors
Goodwill
______
Balance c/d (deficit)
444,250
40,000
Capital
-Downe (1/2)
-Upp (1/2)
_____
40,000
W2
Revaluation
Goodwill
£
40,000
Capital
-Downe (75%)
_____
-Side (25%)
40,000
W3
Balance b/d
Capital
-Side
Bal b/d
20,000
20,000
40,000
£
30,000
10,000
40,000
Cash
£
6,600
Loan
-Upp [1/2 x 153,000]
Balance c/d
75,000
81,600
5,100
W4
Cash
Balance c/d
£
29,250
90,000
10,000
50,000
5,000
180,000
40,000
40,000
444,250
£
76,500
5,100
81,600
Loan - Upp
£
76,500
76,500
153,000
Balance b/d
Capital
-Upp
Balance b/d
FINANCIAL ACCOUNTING 1
£
50,000
103,000
153,000
76,500
Lesson Seven
268
REINFORCEMENT QUESTIONS
QUESTION ONE
1.
K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys, Kimeu being responsible
for the factory and Maingi for the sales. All completed toys are transferred from the factory to sales
department at agreed price. Profits are shared on the following basis:
Factory
Sales Department
Kimeu
80%
40%
Maingi
20%
60%
The following trial balance has been extracted from the books at 31 March 1992:
Sh.
Sh.
Freehold factory at cost
1,053,750
Factory plant, at cost
843,750
Provision for depreciation 1 April 1991
151,250
Delivery van, at cost
401,250
Provision for depreciation 1 April 1991
86,250
Stocks at 1 April 1991
Raw materials
100,700
Work-in-progress
85,000
Toys completed (30,000 at Sh.40)
1,200,000
Sales (45,500 toys)
2,775,500
Purchases of raw materials
716,250
Factory wages
375,500
Sales department wages
150,750
Expenses:
Factory
301,750
Sales Department
250,500
Provision for doubtful debts 1 April 1991
40,000
Trade debtors and creditors
450,000
150,000
Bank overdraft
176,200
Capital accounts:
Kimeu
1,400,000
Maingi
1,425,000
Drawings:
Kimeu
150,000
Maingi
125,000
6,204,200
6,204,200
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Additional information:
i
38,000 toys at Sh.45 each were manufactured and transferred to Sales Department during the year.
Tys in stock at the end of the year were to be valued at Sh. 45 each. Stock of raw materials was
Sh.79.50 and work-in-progress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii
Accrued expenses outstanding at 31 March 1992:
Factory
Sales Department
Sh.
Sh.
Expenses
52,250
27,000
Factory wages
7,000
iii
Provision for depreciation is to be made as follows:
- Factory plant
10% p.a. on cost
- Delivery van
20% p.a. on cost
iv
The general provision for bad debts is to be maintained at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March 1992 and a balance sheet as
at that date.
(20 marks)
QUESTION TWO
Amis, Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2. The following
trial balance has been extracted from their books of accounts as at 31 March 19-8:
£
£
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis
80,000
Lodge
15,000
Pym
5,000
Carriage inwards
4,000
Carriage outwards
12,000
Cash at bank
4,900
Current accounts:
Amis
1,000
Lodge
500
Pym
400
Discount allowed
10,000
Discount received
4,530
Drawings:
Amis
25,000
Lodge
22,000
Pym
15,000
Motor vehicles:
80,000
Accumulated depreciation (at 1 April 19-7)
20,000
Office expenses
30,400
Plant and machinery:
At cost
100,000
Accumulated depreciation (at 1 April 19-7)
36,000
Provision for bad and doubtful debts
(at 1 April 19-7)
420
FINANCIAL ACCOUNTING 1
Lesson Seven
270
Purchases
Rent, rates, heat and light
Sales
Stock (at 1 April 19-7)
Trade creditors
Trade debtors
1.
2.
3.
4.
5.
225,000
8,800
30,000
14,300
404,500
16,500
£583,300
£583,300
Additional information:
Stock at 31 arch 19-8 was valued at £35,000.
Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March 19-8.
The provision for bad and doubtful debts is to be maintained at a level equivalent to 5% of the total
trade debtors as at 31 March 19-8.
An office expense of £405 was owing at 31 March 19-8, and some rent amounting to £1,5000 had
been paid in advance as at that date. These items had not been included in the list of balances shown
in the trial balance.
Interest on drawings and on the debit balance on each partner’s current account is to be charged as
follows:
£
Amis
1,000
Lodge
900
Pym
720
6. According to the partnership agreement, Pym is allowed a salary of £13,000 per annum. This
amount was owing to Pym for the year to 31 March 19-8, and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital account at a rate of 10%
per annum. There were no movements on the respective partners’ capital accounts during the year
to 31 March 19-8, and the interest had not been credited to them as at that date.
Required:
a) Prepare the Partners trading, profit and loss account for the year ended 31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8
QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after charging annual salaries of
£20,000 each. The regularly make up their accounts to 31 December each year.
On July 1996 they admitted Coral as a partner and agreed profits shares from that date of 40%
Amber, 40% Beryl and 20% Coral. The salaries credited to Amber and Beryl ceased from 1 July
1996.
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Partnerships
The partnership trial balance at 31 December 1996 was as follows:
£
Capital accounts as at 1.1.96:
Amber
Beryl
Capital account Coral (see note (d) below)
Current accounts as at 1.1.96
Amber
Beryl
Drawing accounts
Amber
Beryl
Coral
Loan account Amber
Sales
Purchases
Stock 1.1.96
Wages and salaries of staff
Sundry expenses
Provision for doubtful debts at 1.1.96
Freehold land at cost (see not (e) below)
Buildings: cost
Aggregate depreciation 1.1.96
Plant, equipment and vehicles: cost
Aggregate depreciation 1.1.96
Trade debtors and creditors
Cash at bank
£
280,000
210,000
140,000
7,000
6,000
28,000
24,000
15,000
1,400,000
180,000
228,000
120,000
200,000
250,000
240,000
420,000
38,000
3,143,000
50,000
2,000,000
20,000
30,000
50,000
350,000
3,143,000
In preparing the partnership accounts the following further information is to be taken into account:
a) Closing stock at 31 December 1996 was £200,000
b) Debts totaling £16,000 are to be written off and the provision for doubtful debts increased by
£10,000.
c) Provision is to be made for staff bonuses totaling £12,000.
d) The balance of £140,000 on coral’s capital account consists of £100,000 introduced as capital
and a further sum of £40,000 paid for a 20% share of the goodwill of the partnership. The
appropriate adjustments to deal with the goodwill payment are to be made in the capital accounts
of the partners concerned, and no goodwill account is to remain in the records.
e) It was agreed that the freehold land should be revalued upwards on 30 June prior to the
admission of Coral from £200,000 to £280,000. The revised value is to appear in the balance
sheet at 31 December 1996.
f) Amber’s loan carries interest at 10% per annum and was advanced dot the partnership some
years ago.
g) Provide depreciation on the straight-line basis on cost as follows:
Buildings
2%
Plant, equipment and vehicles
10%
h) Profits accrued evenly during the year.
FINANCIAL ACCOUNTING 1
Lesson Seven
272
Require:
a) Prepare a trading account, profit and loss account and appropriation account for the year ended
31 December 1996 and a balance sheet as at that date.
(17 marks)
b) Prepare the partners’ capital accounts and current accounts for the year in columnar form.
(7 marks)
(Total: 24 marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs and maintenance are carried
out and also a small showroom form which new and second hand cars are sold.
For accounting purposes, each of these three activities is treated as a separate department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos comprised:
Cash sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Credit sales:
Workshop (repair charges)
Petrol and oil
Showroom (car sales)
Stocks (at 1 October 1985):
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Credit purchases:
Workshop (repair materials)
Petrol and oil
Showroom (cars)
Fixed assets (at 1 October 1985):
*Freehold buildings:
Workshop
Petrol and oil
Showroom
Plant, equipment and vehicles:
Workshop
Petrol and oil
Showroom
Provisions for depreciation (at 1 October 1985):
Freehold buildings:
Workshop
Petrol and oil
Showroom
*Note ‘Freehold’ – held in perpetuity
Plant, equipment and vehicles:
Workshop
Petrol and oil
Showroom
Fixed asset acquisitions during year (at cost):
£
32,125
32,964
8,500
65,892
41,252
81,914
1,932
3,018
20,720
23,860
41,805
52,100
12,600
14,200
38,000
65,180
22,900
17,450
5,060
7,100
19,390
48,254
17,077
9,451
STRATHMORE UNIVERSITY ● STUDY PACK
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Partnerships
Plant and equipment:
Workshop
Petrol and oil
Showroom
Fixed asset disposal proceeds during the year (see note
(3)):
Plant and equipment:
Workshop
Salaries:
Showroom
Rates
Electricity
General expenses
Wages:
Direct:
Workshop
Petrol and oil
Indirect:
Workshop
Showroom
Creditors:
Workshop
Petrol and oil
Showroom
Bank/Cash:
Workshop
Petrol and oil
Showroom
Debtors:
Workshop
Petrol and oil
Drawings:
Duke
Earl
Current accounts (at 1 October 1985) (credit balances):
Duke
Earl
Capital accounts:
Duke
Earl
FINANCIAL ACCOUNTING 1
26,210
4,250
1,060
5,200
10,200
26,738
9,453
10,692
34,050
5,602
6,810
4,160
4,225
5,602
15,250
316
1,605
30,470
1,365
537
12,190
9,740
9,750
10,477
50,000
40,000
Lesson Seven
274
Notes at 30 September 1986
1) Stocks at 30 September 1986:
Workshop
2,752
Petrol and oil
2,976
Showroom
25,310
2) Depreciation is calculated using the straight-line method (assuming no residual value) and is applied
to the original cost of the asset at eh end of the financial year, using the following rates:
%
Freehold buildings
20
Plant, equipment and vehicles
20
The depreciation charges for the current year have not yet been posted to the accounts.
The freehold buildings are temporary structures with a five year life.
3) No entries have yet been made to transfer the cost (£19,500) and accumulated depreciation
(£15,633) of the workshop plant sold during the year.
4) Accruals at 30 September 19861
£
Wages:
Direct:
Workshop
113
Petrol and oil
83
Indirect:
Workshop
214
Showroom
231
Electricity
517
General expenses
1,304
5) Prepayments at 30 September 1986
£
Rates
13,300
6) Rates and electricity are apportioned over departments on the basis of the original cost of freehold
buildings at the end of the current financial year.
7) General expenses are apportioned over departments on the basis of turn over for the current year.
8) Duke and Earl are credited with interest on their respective capital account balances at the rate of 5%
per annum.
Required:
Prepare, using separate columns for each department and the business as a whole;
a) A departmental trading and profit and loss account for Aristocratic Autos for the year ended 30
September 1986.
(20 marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September 1986.
(14 marks)
(Total: 34 marks)
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Partnerships
QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on capital and partnership
salaries is not provided. The position of the business at th end of its financial year is:
Capital accounts:
Reg
Sam
Ted
Current
Accounts:
Reg
Sam
Ted (debit)
£
Balance Sheet 30 June 19-6
£
Buildings
9,000
Equipment
8,000
Stock
8,000
Debtors
25,000 Bank
140
200
340
100
Creditors
£
240
___820
26,060
£
17,000
3,300
900
2,020
2,840
_____
26,060
Reg died suddenly on 31 October 19-6.
The partnership agreement provides that in the event of the death of a partner the sum to be paid to his
estate will be the amount of his capital and current account balances at the last financial year-end adjusted by
his share of profit or loss since that date together with his share of goodwill. A formula for calculation of
goodwill is given, and its application produced a figure of £7,500. no goodwill account is to remain in the
books after any change of the partnership constitution.
The stock value at 31 October has been calculated and all other accounts balanced off, including provisions
for depreciation, accrued expenses and prepaid expenses.
This results in the following position at 31 October.
buildings
Equipment (including additions of £400)
Stock
Debtors
Bank balance
Creditors
£
17,000
3,480
1,100
2,230
3,370
980
There were no additions to, or reductions of, the capital accounts during the four months, but the following
drawings have been made:
Reg
Sam
Ted
£2,000
£1,600
£1,800
FINANCIAL ACCOUNTING 1
Lesson Seven



276
It has also been agreed that the share of a deceased partner should be repaid in three equal
installments, the first payment being made as on the day after the day of death.
The surviving partners agree that Abe (son of Reg) should be admitted as a new partner with effect
from 1 November, and it is agreed that he will bring into the business £4,000 as his capital together
with a premium for his share of the goodwill (using the existing valuation). The new profit-sharing
agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
Show the partnership Balance Sheet as at 1 November 19-6, on the assumption that the above
transactions have been completed by that date.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
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Partnerships
COMPREHENSIVE ASSIGNMENT No.3
TO BE SUBMITTED AFTER LESSON 7
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking
by the College.
EXAMINATION PAPER.
TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS
QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts and payments, which he
records in cash and bankbooks. Periodically, these books are handed over to the firm of certified accountants
that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary step, you have prepared
the receipts and payments account (rounded to the nearest £1) for the year ended 31 May 1985. This is
shown below, together with the explanatory notes which the treasurer has supplied to enable you to
understand the nature o f some of the items.
Dohray amateur Musical Society
Receipts and Payments Account
For the year ended 31 May 1985
Receipts
Opening balances b/d
Debtors: members
Joining fees (note 1)
Annual subscriptions
(Note 2)
Annual concert (note 3)
Takings
Sales of goods (note 4)
Musical instruments
Prize moneys (note 7)
Sponsorship grant
(Note 5)
Refreshment sales
Raffle profits
PAC grants (note 6)
Revenue
Capital
Transfers from cash a/c
Payments
Bank
£
31
309 Creditors: trade
Fixed assets (note 4)
190
160
Musical instruments
Trophies
285
70 Creditors: trade
Purchase for resale
1,791
(Note 4)
Sheet music
287
Annual concert (note 3)
190
Hall booking fees
Printing of publicity
300
Posters
113
Hire professional
64
Soloists
Musicians
100 Adjudication fees
400 Musical Festivals (note 7)
2,910 Entrance fees
Hire of buses
Honoraria (note 8)
Cash
£
FINANCIAL ACCOUNTING 1
Cash
£
Bank
£
522
83
118
490
112
236
174
250
281
Lesson Seven
278
Secretary
Treasurer
R.M.F.C affiliation fee
(Note 9)
Rent of society’s premises
(Note 10)
Refreshment purchases
Bank charges
Sundry expenses
Transfers to bank a/c
Closing balances c/d
3,091
4,249
150
100
72
72
60
2,910
510
42
49
723
3,091
4,249
Explanatory notes supplied by the treasurer
1) On joining the Society, members pay a non-returnable fee of £10 (before 1 June 1982, the fee had
been £). It has been found from experience that, on average, members remain in the Society for five
years. On this basis, one fifth of each joining fee is credited to Income and Expenditure account
each year.
New members’ statistics are
During the
year
Ended 31
May
1981
1982
1983
1984
1985
Number of
new
members
Joining fees in
Suspense at 31 May
1984
No.
20
24
32
27
35
£
20
48
192
216
Nil
£476
2) Annual subscriptions are due on 1 June each year. It is Society’s policy to credit these to income and
expenditure account on an actual receipts basis, not an accruals basis. However, if subscriptions are
received in advance, the amounts are credited to income and expenditure account for the year, which
they are paid.
3) The Society’s major money raising event is its annual public concert. This is given in a large hall,
which the Society hires. The society also hires professional musicians and soloists and has to pay the
fees of the adjudicators (judges).
4) The society buys trophies (silver bowls and shield) to present to the winners of individual musical
items at the annual concert. It also buys musical instruments some of which are for use by the
members and others for resale to the members. Musical scores and sheets are also bought for resale
to the members.
5) A local building company has given a grant to the Society for a period of three years in return for
publicity. This sponsorship grant was received in full on 1 June 1984 and is being credited to income
and expenditure account in equal installments in each o the three years to 31 May 1987.
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Partnerships
6) The performing Arts Council (PAC) has awarded the Society an annual grant towards the running
costs. In addition the PAC makes capital grants. The society’s policy is to hold capital grants in
suspense and to release each year’s grant to income and expenditure account over a period of five
years, from the year of grants onwards. At 31 May 1984 capital grants held in suspense were
analyzed as follows:
In respect of year
Ended 31 May
1981
1982
1983
1984
Capital grants
Suspense
£
30
70
120
120
£340
7) Throughout the year, the Society competes at various musical festivals. Cash prizes won by
individual members are retained by the Society and credited to income and expenditure account in
order to reduce the cost of attending the festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each of them an ex-gratia
(honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated to the Regional Musical
Festival Community (RMFC). The annual fee, which has remained the same for a number of years,
is paid on 1 March in each year.
10) The Society pays rent for its premises. The rental, which is inclusive of rates, heating, lighting,
cleaning etc. is reviewed annually on 31 March. The payment shown in the receipts and payments
account represents quarterly payments in advance, as follows:
1984
30 June
30 September
31 December
1985
31 March
Payment
£
120
120
120
120
150
£510
The treasurer supplied further information as follows:
1) Creditors at 31 May
Fixed assets
Musical instruments
Trophies
Purchases for resale
Sheet music
Musical instruments
2) Subscriptions
Payments in advance included in the
actual receipts for the year
1984
£
1985
£
79
23
119
13
14
45
20
39
30
40
FINANCIAL ACCOUNTING 1
Lesson Seven
280
3) Stocks at 31 May
Goods for resale
Sheet music
31
Musical instruments
70
Refreshments not brought into account on the grounds that
It is not material in amount
4) Fixed assets (at cost) at 31 May
musical instrument
Trophies
52
94
1,378
247
There were no fixed asset disposals during the year
5) Provision for depreciation at 31 May
Musical instruments
704
Trophies
96
Depreciation is calculated on the cost of these assets at the end of the financial year. The straightline method is employed using the following assumed asset lives.
Musical instruments
Trophies
5 years
10 years
Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May 1985, showing the surplus or
deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)
QUESTION TWO
A client of the firm of accountants by which you are employed is interested in buying a road transport
business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business and has delegated to you the
task of discovering the amount of investment in vehicles at the end of each of the financial years ended 30
September 1980 to 1983 inclusive. The business had commenced operations on 1 October 1979.
The only information available to you is the fact that the owner calculated depreciation at a rate of 20% per
annum, using the Reduction Balance method, based on the balance at 30 September each year, and copies of
certain ledger accounts which are reproduced below:
1981
30
Sept.
Balance c/d
Provision for depreciation of vehicles
£
1980
1 Oct.
Balance b/
1981
57,600 30
Profit and loss
Sept.
57,600
STRATHMORE UNIVERSITY ● STUDY PACK
£
32,000
25,600
£57,600
281
Partnerships
1982
30
Sept.
1983
30
Sept.
£
Disposals
Balance c/d
1 Oct.
10,800 1982
Balance b/d
£
57,600
73,440 30
Sept.
Profit and loss
26,640
_____
£84,240
_____
£84,240
£
£
Disposals
29,280 1 Oct.
Balance b/d
73,440
Balance
79,328 1983
30
Sept.
Profit and loss
35,168
_______
£108,608
1982
30
Sept.
1983
30
Sept.
includes £10,000
(depreciation on
1982
acquisitions)
Vehicles
(vehicles
Originally
acquired
On 1 October
1979)
Vehicles
(vehicles
Originally
acquired
On 1 October
1 Oct.
Disposals
£
1982
30
Sept.
30,000
(includes £20,000
Depreciation on
1983 acquisitions)
Balance b/d
______
£108608
79,328
£
Provision for
Depreciation
10,800
Bank
16,000
Profit and loss
3,200
______
£30,000
______
£30,000
£
£
60,000
1983
300
Sept.
Provision for
Depreciation
29,280
Bank
42,000
FINANCIAL ACCOUNTING 1
Lesson Seven
282
1979)
Profit and loss
11,280
______
£71,280
______
£71,280
Required:
a) Calculate the cost of asset, vehicles, held by the business at 30 September in each of the years
1980 to 1983 inclusive
(4 marks)
b) Show the detailed composition of the charge for depreciation of the vehicles to profit and loss
account at 30 September 1981, 1982 and 1983.
(9 marks)
All workings must be shown.
(13 marks)
QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes the following items:
Sales ledger control account
Purchase ledger control account
Suspense account (debit balance)
£110,172
£78,266
£2,315
You have been given the following information:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
The sales ledger debit balances total £111,111 and the credit balances total £1,234.
The purchase ledger credit balances total £77,777 and the debit balances total £1,111.
The sales ledger includes a debit balance of £700 for business X, and the purchase ledger includes a
credit balance of £800 relating to the same business X. Only the net amount will eventually be paid.
Included in the credit balance on the sales ledger is a balance of £600 in the name of H. Smith. This
arose because a sales invoice for £600 had earlier been posted in error from the sales daybook to the
debit of the account of M. Smith in the purchase ledger.
An allowance of £300 against some damaged goods had been omitted from the appropriate account in
the sales ledger. This allowance had been included in the control account.
An invoice for £456 had been entered in the purchase daybook as £654.
A cash receipt from a credit customer for £345 had been entered in the cashbook as £245.
The purchase daybook had been overcast by £1,000.
The bank balance of £1,200 had been included in the trial balance, in error, as an overdraft.
The bookkeeper had been instructed to write off £500 from customer Y’s account as a bad debt, and
to reduce the provision for doubtful debts by £700. By mistake, however, he had written off £700
from customer Y’s account and increased the provision for doubtful debts by £500.
The debit balance on the insurance account in the nominal ledger of £3,456 had been included in the
trial balance as £3,546.
Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the sales ledger control
account with the sales ledger balances, and the purchase ledger control account with the purchase ledger
balances. What further action do you recommend?
(25 marks)
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Partnerships
QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel Services, as radio and
television suppliers and repairers, sharing profits and losses in the ratio one half, one third and one sixth,
respectively. Val Vez works full-time in the business with responsibility for general administration for which
she receives a partnership salary of £4,000 per annum.
All partners receive interest on capital at 5% per annum and interest on any loans made to the firm, also at
5% per annum.
It also had been agreed that Val Vez should receive not less than £4,000 per annum in addition to her salary.
Any deficiency between this guaranteed figurer and her actual aggregate of interest on capital, plus residual
profit (or less residual loss) less interest on drawings, is to be borne by Dyo and UII in the ratio in which they
share profits and losses; such deficiency can be recouped by Dyo and UII at the earliest opportunity during
the next two consecutive years provided that Val Vez does not receive less than the guaranteed minimum
described above. During the year ended 30 September 1983, Dyo and UII had jointly contributed a
deficiency of £1,500.
Radtel Services rents two sets of premises - one, a workshop where repairs are carried out, the other, a shop
from which radio and television sets are sold. The offices are situated above the shop and are accounted for
as part of the shop.
The workshop and shop are regarded as separate departments and managed, respectively, by Phughes and
Sokkitt who are each remunerated by a basic salary plus a commission of one ninth of their departments’
profits after charging their commission.
On 30 September 1984, the trial balance of the firm was:
£
Stocks at 1 October 1993:
Shop (radio and television sets)
Workshop (spares, components etc.)
Purchases:
Radio and television sets
Spares, components etc.
Turnover:
Sales of radio and television sets
Repair charges
Wages and salaries (employees):
Shop and offices
Workshop
Prepaid expenses (at 30 September 1984)
Accrued expenses (at 30 September 1984)
Provision for doubtful debts at 1 October 1983
Rent and rates:
Shop and offices
Workshop
Stationery, telephones, insurance:
Shop and offices
Workshop
Heating and lighting:
Shop and offices
FINANCIAL ACCOUNTING 1
£
19,750
8,470
155,430
72,100
232,600
127,000
54,640
18,210
640
7,710
8,450
2,980
1,020
4,640
3,160
920
Lesson Seven
284
Workshop
Debtors
Creditors
Bank
Cash
Other general expenses:
Shop and offices
Workshop
Depreciation:
Shop and offices (including vehicles)
Workshop
Shop fittings (cost)
Workshop tools and equipment (cost)
Vehicles (cost)
Discount received:
Shop
Workshop
Bank loan (repayable in 1988)
Loan from Harry UII
Capital Accounts:
R. Dyo
H. UII
V. Vez
Current Accounts (after drawings have been debited):
R. Dyo
H. UII
V. Vez
Loan interest:
Bank loan
Loan from H. UII
Provision for depreciation:
Shop fittings
Workshop tools and equipment
Vehicles
3,950
4,460
48,540
960
15,260
3,030
2,830
2,400
2,580
17,060
55,340
27,210
420
390
15,000
10,000
40,000
40,000
20,000
290
1,040
920
2,400
500
3,190
10,020
5,670
£525,590
£525,590
The following matters are to be taken into account:
1)
2)
3)
4)
5)
6)
7)
Manager’s commissions.
Partnership salary (Vez).
Interest on partners’ capital accounts (these have not altered during the year).
Interest on partners’ drawings; Dyo £70; UII £30; Vez £20.
Closing stocks: shop £31,080; workshop £10,220.
Provision for doubtful debts at 30 September 1984, £540.
Residual profits/Losses.
N.B. Loan interest and the movement in the provision for bad debts are regarded as ‘shop’ items.
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Partnerships
Required:
a) Prepared columnar departmental trading and profit and loss accounts and a partnership
appropriation account for he year ended 30 September 1984 and the partnership balance sheet at
that date.
(21 marks)
b) Complete the posting of the partners’ current accounts for the year.
(4 marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife keeps some accounting
records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:
£
Assets
Plant and equipment: cost
Depreciation to date
Motor Van: cost
Depreciation to date
Stock of materials
Debtors
Rent of premises paid in advance to 30 September 1997
Insurance paid in advance to 31 December 1997
Bank balance
Cash in hand
Liabilities
Creditors for supplies
Telephone bill owing
Electricity owing
12,600
5,800
9,000
6,500
14,160
9,490
750
700
1,860
230
3,460
210
180
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998 are as
Cash and Bank summary
Receipts
Cash
Bank
Payments
£
£
Opening balances
230
1,860 Suppliers
Receipts from customers
52,640 150,880 Rent of premises
Loan received
10,000 Insurance (to 31.12.98)
Proceeds of sale of vehicles
Purchase of plant and equipment
Held at the beginning of year
3,000 Purchase of new vehicle
Cash paid into the bank
24,040 Telephone
Cash withdrawn from bank
48,260
Electricity
Closing balance
2,100 Wages of repair staff
Miscellaneous expenses
Drawings by Ernie
Refund to customer
Cash paid into bank
Cash withdrawn from bank
Closing balance
101,130
191,880
FINANCIAL ACCOUNTING 1
follows:
Cash
£
68,200
8,000
24,040
890
101,130
Bank
£
83,990
3,600
1,600
8,400
12,800
860
890
1,280
400
48,260
29,800
191,880
Lesson Seven
286
The following further information is available
1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance with a full year’s
charge in the year of purchase.
2) The new motor vehicle was purchased on 1 January 1998. Ernie’s depreciation policy is to charge
depreciation at 25% per annum on the straight-line basis with a proportionate charge in the year of
purchase but not in the year of sale.
3) The rent of the premises was increased by 20 % from 1 October 1997.
4) The loan of £10,000 was obtained from Ernie’s brother on 1 April 1998. It carries interest at 10%
per annum, payable on 30 September and 31 March.
5) At 30 June 1998, Ernie owed the following amounts:
£
Suppliers
4,090
Telephone
240
Electricity
220
Miscellaneous expenses 490
6) At 30 June 1998, amounts due from customers totaled £10,860. Of this amount, Ernie considered
that debts totaling £1,280 were bad and should be written off.
7) Stock of materials at 30 June was £12,170
8) Ernie agreed to pay his wife £5000 for her assistance with his office work during the year. This
amount was actually paid in August 1998.
Required:
Prepare Ernie’s trading profit and loss account for the year ended 30 June 1998 and a balance sheet
as at that date.
END OF COMPREHENSIVE ASSIGNMENT No.3
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
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Company Accounts
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many
investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the
public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at
the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on
the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share capital is divided into shares.
The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a
share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
There are 2 main types of share capital
Preference share capital
This is made up of preference shares and a preference share carries the right to a final dividend, which is
expressed as a percentage of their par value. E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value
of the business during winding up, and all profits after the claim on all of the preference dividend have been
paid. The more the no. of ordinary share held, the higher the control.
FINANCIAL ACCOUNTING 1
Lesson Eight
288
Share capital may also have the following meaning:
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the company is allowed to
issue to shareholders. A company cannot issue more shares than the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital required is less than
the issued share capital.
(e.g.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p. Assuming that the
issued 100,000 shares, then the called up share capital will be:
60p  100,000 = £60,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for payment and therefore
these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 40p, therefore the uncalled capital is 40p  100,000
= £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have
been issued, Although the firm requested the shareholders to pay 80p per share, the shareholders were able to
pay 50p per share.
Required:
Determine the:
 Authorized share capital
 Issued share capital
 Called up share capital
 Uncalled up share capital
 Paid up share capital
Authorized share capital
200,000  £ = £200,000
Issued share capital
150,000  £1 = £150,000
Called up share capital
150,000  80p = 120,000
Uncalled up share capital
150,000 20 p = £30,000
Paid up share capital
150,000  50p = £75,000
The principal distinctions between unlimited partnerships and limited companies are:
STRATHMORE UNIVERSITY ● STUDY PACK
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Company Accounts
Unlimited Partnerships
Limited Companies
No separate Legal Entity apart
from its members
Separate legal entity, which is not
affect by changes in its
membership. A company may
contract, sue or be sued in it’s own
name.
If the company is limited by share,
each shareholder is limited to the
amount he has agreed to pay the
company for share allotted.
A limited company must have at
least 2 members. The maximum
number of shares is restricted to
the company’s authorized share
capital.
Rights to management are
delegated to directors who alone
can act on behalf of and bind the
company.
Copies of accounts must be
registered with the Registrar of
Companies
A company is required to have a
memorandum and articles of
association which defines powers
and duties of directors.
A company is subject to the
Companies Act the provisions of
which cannot be varied.
The authorized share capital is
fixed by the memorandum of
association. It can be altered by
passing ordinary resolution or by
the court.
In public companies shares are
freely transferable. In private
companies share transfer are
subject to any restrictions imposed
by the articles of association.
A company is required to keep
specialized accounting records and
is subject to compulsory audit.
Liability of each member for
debts of the firm is unlimited.
Number of partners limited to 20
except for professional firms.
Every partner can normally take
part in the management of the
business. He can legally bind the
firm by his action.
Copy of accounts need not be
filed with the Registrar of
Companies
Although a written Partnership
deed is desirable it is not
mandatory.
A partnership is subject to the
partnership Act which can be
varied by mutual agreement.
The partners contribute the
capital by agreement. The
amount need not be fixed.
A share in a partnership cannot
be transferable except by the
consent of all partners.
A partnership is not obliged to
keep statutory books of account
and an audit is not compulsory.
Format Of Final Account
The P & L of a company, is the same as that of a sole trader, but there are additional expenses that are unique
to the company and therefore, they should be included in the P & L A/C.
(e.g.)
 Director’s fees salaries and other expenses
 Audit fees
 Amortization e.g. goodwill
FINANCIAL ACCOUNTING 1
Lesson Eight
290
 Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/C which shows the allocation of
the net profit for the period. Therefore, the format will be as shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended 31.12
£
£
£
Sales
x
Less Returns inwards
(x)
x
Less Cost of Sales
Opening Stock
x
Purchases
x
Add Carriage in
x
x
Less purchase returns
(x)
x
x
Less Closing stock
(x)
(x)
Gross Profit
x
Add incomes
x
Discount received
x
Profit on disposal (sale of Assets)
x
Income from investment (can also be shown below)
x
Other incomes e.g. interest received from bank
x
x
Less Expenses
x
Other expenses
x
Directors salaries/fees/---x
Audit fees
x
Debenture Interest
x
Amortization of good will
(x)
Operating profit for the period
x
Add investment income
x
Profit before tax
x
Taxation: Corporation tax
x
Transfer to deferred tax
x
Under or over provision
x
(x)
Profit after tax
x
Less: transfer to the general reserve
(x)
x
Less: Dividends
Preference dividend:
Interim paid
x
Final proposed
x
x
Ordinary dividend:
Interim paid
x
Final proposed
x
(x)
Retained profit for the year
x
Retained profit b/f
x
Retained profit c/d
x
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Company Accounts
B Limited
Balance sheet as at 31.12………
Non current Assets
Land & Building
Plant and Machinery
Fixtures, Furniture & Fittings
Motor vehicle
Intangible Assets
Goodwill
Copyrights, patents
(Longterm) Investments (mkt value sh x)
Current Assets
Stock
Debtors
Less provision for bad debts
Prepayments
(Short term) Investments
Cash at bank
Cash in hand
£
£
£
x
x
x
x
x
(x)
(x)
(x)
(x)
x
x
x
x
x
x
x
x
x
(x)
(x)
x
x
x
x
(x)
Current liabilities
Bank overdraft
Creditors
Accruals
Interest payable(debenture interest)
Tax payable
Dividends payable
x
x
x
x
x
x
x
x
x
x
x
x
x
(x)
Financed by
Authorized share capital
100,000 ordinary shares of £1 each
100,000 preference shares of £1 each
Deffered tax A/C
Non Current Liabilities
10% debenture
x
x
x
x
x
(x)
x
Issued and Fully paid
80,000 ordinary shares of £1 each
50,000 10% preference shares of £1 each
Capital Reserves
Share premium
Revaluation Reserve
Capital Redemption Reserve
Revenue Reserves
General Reserve
Profit and loss A/C
x
x
x
x
x
x
x
x
x
x
x
x
x
x
FINANCIAL ACCOUNTING 1
Lesson Eight
292
Other Long term Loans
x
x
x
Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are
concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in
relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an
expenses and unpaid amount are shown as current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is
a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous
period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a
deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000,
the liability is now agreed at £160,000, which the company pays and at the end of the year 2000, the company
estimates that the tax liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax).
(e.g.)
Taxation Account
Cashbook
Bal c/d
Under provision
Corporation tax
160,000
140,000
300,000
Bal b/d
Appropriation
150,000
150,000
300,000
10,000 (160 -150)
140,000
DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders
do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 ----Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose
interim paid and final proposed.
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Company Accounts
CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of
capital reserves are:
Share Premium: A share premium arises when accompany issues shares at a price that is more than the par
value. The share Premium may be applied in:



Paying un issued shares.
Writing off preliminary expenses.
Write off discounts on shares.
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price
(selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000  £1.5) 150,000
Cr Ordinary shares capital
(100,000  £1) 100,000
Cr Sahre Premium A/C (100,000 £0.5) 50,000
Issue of shares at a premium of £0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and
buildings. When company sills it’s property to realize the gain, the amount is transferred to the Profit and
Loss Account.
Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without
issuing new shares. The transfer is made from either the share premium or the profit and loss account.
REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves.
Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non
current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture
certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or
not. A debenture may either be redeemable of irredeemable. Redeemable is repayable at or by a particular
date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium,
balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving
cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share
premium A/C of £50,000. It issues some bonus shares to existing shareholders at a rate of 1 share for every
5shares held. This amount is to be financed by the share premium. The entries will be as follows:
FINANCIAL ACCOUNTING 1
Lesson Eight
294
Shares to be issued:
100,000  1 =20,000
5
Dr share premium A/C [20,000  £1 ]
20,000
Cr ordinary share capital
20,000
A bonus issue of 20,000 shares
Balance sheet (extract)
Ordinary shares of £1
Capital Reserves
Share premium
120,000
30,000
Rights Issue
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a
price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights
are issued the shareholders have 2 options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by
the company.
Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The balance on the share
premium is £60,000. Additional capital is raised by way of a right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and
the relevant balance sheet extract.
Shares to be issued
100,000  2 =40,000 shares
5
Dr cash book [40,000  £2.5 ] £100,000
Cr Ordinary share capital [40,000  £2 ] £80,000
Cr Share Premium
[40,000  £0.5 ] £20,000
Balance sheet (extract)
140,000
Ordinary shares @ £2
Capital Reserves
Share premium 80,000
280,000
The following examples will illustrate the preparation of final Account for companies.
Example 8.1
Just before you launch yourself into the question that follows remember that everything you have learnt
about double entry bookkeeping and the presentation of year end accounts is valid in the context of
companies, subject only to the points we have added in this session.
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Company Accounts
The following is the trial balance of Transit Ltd at 31 March 19X8.
Issued share capital (ordinary shares of £1 each)
Leasehold properties, at cost
Motor vans, at cost (used for distribution)
Provision for depreciation on motor vans to 31 March 19X7
Administration expenses
Distribution expenses
Stock, 31 March 19X7
Purchases
Sales
Directors’ remuneration (administrative)
Rents receivable
Investments at cost
Investment income
7% Debentures
Debenture interest
Bank interest
Bank overdraft
Debtors and creditors
Interim dividend paid
Profit and loss account, 31 March 19X7
£
75,000
2,500
7,650
10,000
12,000
138,750
25,000
6,750
1,050
162
31,000
1,260
£
42,000
1,000
206,500
3,600
340
15,000
730
24,100
17,852
311,122 311,122
You ascertain the following:
All the motor vans were purchased on 1 April 19X5. Depreciation has been, and is to be, provided at the rate
of 20% per annum on cost from the date of purchase to the date of sale. On 31 March 19X8 one van, which
had cost £900, was sold for £550, as part settlement of the price of £800 of a new van, but no entries with
regard to these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.
Required:
Prepare, without taking into account the relevant statutory provisions:


A profit and loss account for the year ended 31 March 19X8:
A balance sheet at that date. (22 marks)
FINANCIAL ACCOUNTING 1
Lesson Eight
Solution:
296
Transit Ltd
Profit and Loss A/C for the year ended 31.3.19X8
Gross profit
Profit on disposal of van
Rent Receivable
Less: Expenses
Depreciation on motor vans
Administration expenses
Distribution expenses
Debenture interest
Bank interest
Trading profit for the year
Add investment income
Profit before tax
Taxation
Profit after tax
Less: Dividends
Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
STRATHMORE UNIVERSITY ● STUDY PACK
£
£
72,450
190
3,600
76,240
500
32,650
10,000
1,050
162 (44,362)
31,878
340
32,218
(12,700)
19,518
1,260
4,200
(5,460)
14,058
17,852
31,910
297
Company Accounts
Transit Ltd
Balance sheet as at 31.3.19X8
Non-Current Assets
Leasehold properties
Motor vans
Investments
£
£
£
75,000
2,400
77,400
(960)
960
75,000
1,440
76,440
6,750
83,190
Current Assets
Stock
Debtors
16,700
31,000
47,700
Current liabilities
Bank overdraft
Creditors
Tax payable
Proposed dividends
980
24,100
12,700
4,200
Financed by:
Authorized issued and fully paid
42000 ordinary share of £1
Revenue Reserves
Profit and Loss A/C c/f
Less Closing stock
Gross profit
31,910
73,910
15,000
88,910
206,500
12,000
138,750
150,750
(16,700) (134,050)
72,450
Motor Vehicle – Depreciation
Disposal
540
Bal b/d
Bal c/d
960
P&L
1,500
Motor vehicle
Bal b/f
Disposal
Cashbook
2,500
550
250
3,300
5,720
88,910
42,000
Non-Current liabilities
7% Debentures
Workings
Sales
Less: Cost of sales
Opening stock
Purchases
(41,980)
1,000
500
1,500
Disposal
900
Bal c/d
2,400
3,300
FINANCIAL ACCOUNTING 1
Lesson Eight
Disposal
P&L
298
Motor vehicle Disposal
900
Motor Vehicle 550
190
Depreciation 540
1090
1090
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5
£
£
Share capital authorized and issued:
80,000 ordinary shares of £1 each
Freehold premises at cost
Motor vans
Balance 1 January 19X5 at cost
Additions less sale proceeds
Provisions for depreciation of motor vans to 31 December
19X4
Stock in trade 31 December 19X4
Balance at bank
Provision for doubtful debts 31 December 19X4
Trade debtors and creditors
Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates
Purchases
Sales
Legal expenses
General expenses
Profit and loss account: balance at 31 December 19X4
59,000
80,000
15,000
650
13,930
6,615
12,395
4,000
13,127
3,258
700
108,440
644
5,846
6,750
275
11,380
142,770
2,430
243,605 243,605
You are given the following information.:
i.
ii.
iii.
iv.
v.
vi.
vii.
Stock in trade, 31 December 19X5, £14,600.
Rates paid in advance, 31 December 19X5, £140.
Debts of £1,075 to be written off and the provision to be increased to £350.
On 1 January 19X5, a motor van which had cost £680, was sold for £125.
Depreciation provided for this van up to 31 December 19X4 was £475.
Provide for depreciation of motor vans (including additions) at 20% of cost.
The balance on legal expenses account included £380 in connection with the purchase of one of
the freehold properties.
viii. The directors have decided to recommend a dividend of 5%.
Required:
With particular emphasis on presentation, prepare a trading and profit and loss account for the year 19X5,
and a balance sheet at 31 December 19X5, ignoring taxation.
(24 marks)
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Company Accounts
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
£
Sales
Opening stock
Purchases
£
142,770
13,930
108,440
122,370
14,600
Less: Closing stock
Cost of goods sold
Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates (700 - 140)
Legal expenses (644 - 380)
General expenses
Bad debts
Loss on disposal
Depreciation
Net profit
107,770
35,000
4,000
13,127
3,258
560
264
5,846
1,150
80
3,019
31,304
3,696
4,000
(304)
2,430
2,126
Proposed dividend
Retained profit brought forward
Retained profit carried forward
Balance sheet at 31 December 19X5
Non-Current Assets
Freehold properties
Motor vans
Current Assets
Stock
Debtors and prepayments, less provision for
doubtful debts
Cash at bank
Current liabilities
Creditors
Proposed dividends
£
£
£
59,380
15,095
74,475
---(9,294)
(9,294)
59,380
5,801
65,181
14,600
11,110
6,615
32,325
11,380
4,000
15,380
16,945
82,126
Share capital
Ordinary shares of £1 each
Profit and loss account
80,000
2,126
82,126
FINANCIAL ACCOUNTING 1
Lesson Eight
Workings
Debtors
Balance c/f
300
Bad debts
£
1,075 Balance b/f
350 Profit and loss account
1,425
£
275
1,150
1,425
Motor vans
Balance b/f
Additions
£
15,000
775
15,775
Disposals
Balance c/f
£
680
15,095
15,775
Provision for depreciation
Disposals
Balance c/f
£
475
9,294
9,769
Balance b/f
Profit and loss account
£
6,750
3,019
9,769
Disposals
Motor vans
£
680
680
Provision for depreciation
Proceeds
Loss on capital
£
475
125
80
680
Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local farmers.
Services offered include the collection of produce, the use of rapid freezing equipment, storage of the frozen
produce and transport from frozen storage in refrigerated vehicles to any point within the country. Orders for
these services are secured by the company’s sales staff.
The company’s revenue consists of charges for transport and freezing, and of storage rentals. Customers may
hire storage space either on a long-term contract basis at advantageous charges (payable in advance) or on a
casual basis (invoiced monthly).
A considerable amount of electricity from the public supply is used by the company in the freezing and
storage operations. In the event of a sudden failure in this supply, the company is able to generate its own
emergency supplies from standby generators kept for this purpose. An insurance policy has been taken out to
protect the company against the claims which would arise should any of the frozen produce deteriorate as the
result of power or equipment failure.
At the end of the company’s financial year ended 30 September 1982, the assistant accountant extracted the
following balances from the ledgers.
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Company Accounts
Assets Account
Land and buildings (at cost)
Plant (at cost)
Vehicle (at cost)
Provision for depreciation (at 1 October 1981):
Land and buildings
Plant
Vehicles
Stock of consumable stores (at 30 September 1982)
Debtor – for rentals
for charges
Bank
Cash
£
390,000
271,900
82,600
39,600
144,800
27,050
23,449
18,204
2,332
30,710
1,103
Liability Accounts
Trade Creditors
7% Debentures 2004/2012
Ordinary Share Capital (see note 7)
General reserve
Unappropriated profit (at 1 October 1981)
Share Premium
7,390
80,000
200,000
25,000
108,284
15,000
Revenue Accounts
Storage rentals – long term contracts
Casual
Freezing charges
Transport charges
302,090
85,063
112,810
90,107
Expense Accounts
Wages, salaries and related expenses
Rates
Electricity
Transport costs
Repairs
Consumable stores
Postages, stationery, telephones
Insurance premium
Debenture interest
Sundries
128,004
79,112
76,860
43,271
30,319
29,800
15,604
7,800
5,600
9,176
Other Accounts
Suspense (credit balance)
8,650
Notes at 30 September 1982:
At the beginning of the 1981-82 financial year, the company had sold refrigeration plant (which had originally
cost £26,000 and on which £20,800 had been provided as depreciation to date of disposal) for £4,000. The
only accounting entries relative to this disposal which have been made so far, are a debit to Bank and a credit
to Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence the contents deteriorated
to such an extent that they had to be disposed of by incineration. Compensation of £1,350 was paid to the
farmer by Owik – Freez by cheque and debited to Suspense.
FINANCIAL ACCOUNTING 1
Lesson Eight
302
The insurance company has admitted liability under the policy but no further ledger entries have as yet been
made.
During the 1981-82 financial year, the company replaced one of its refrigerated vehicles, which has originally
cost £16,400 and on which £13,120 had been provided as depreciation to date of disposal. A trade-in (part
exchange) allowance of £6,000 was granted in respect to this vehicle. A replacement vehicle was acquired at a
list price of £27,000. The entries relating to the disposal of the old vehicle have not yet been made, except
that the trade-in allowance has been debited to Vehicles and credited to Suspense. The balance of the price of
the new vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis calculated on the cost of fixed
assets held at the end of each financial year and assuming no residual value. Annual depreciation rates are:
%
Building
2
Plant
10
Vehicles
25
The ‘Buildings’ content of the item Land and Buildings included in asset account balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following items:
£
Storage rentals received in advance
25,631
Insurance premium prepaid
600
Wages and Salaried accrued
1,920
Rates prepaid
28,820
Electricity accrued
5,757
Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share.
The directors have recommended a dividend for the year of £0.12 per share.
Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez p.l.c.for the year ended
30 September 1982 and a Balance Sheet at that date. All workings must be shown.
(31 marks)
Open the Suspense account and post the entries needed to eliminate the opening credit balance.
(2 marks)
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
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Company Accounts
£
Revenue
Storage rentals – long term (302,090 – 25631)
casual
Freezing charges
Transport charges
Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920)
Rates (79,112 – 28,820)
Electricity (76,860 – 5,757)
Transport costs (43,271 + 4,131 + 9,972)
Repairs (30,319 – 9,972)
Consumable stores (29,800 – 4,131)
Postages, stationery, telephones
Insurance premiums (7,800 - 600)
1,2
*Depreciation
Debenture Interest
Sundries
276,459
85,063
112,810
90,107
564,439
129,924
50,292
82,617
57,374
20,347
25,669
15,604
7,200
43,540
5,600
9,176
447,343
117,096
1,520
118,616
108,284
226,900
5
Profit (less loss) on disposal of fixed assets
Net Profit For The Year
Retained profit brought forward
Distributed profit
Less:
Ordinary dividends proposed
Retained profit carried forward
Workings:
Land
£
270,000
Fixed Assets:
Balance 1 October 1981
(veh 82,600 – (6,000 + 21,000))
Acquisitions (21,000 – 6,000)
Disposals
Balance 30 September 1982
Depreciation
-rate
-current year charge
270,000
£
-
£
2%
£
2,400
48,000
178,900
Buildings
£
120,000
120,000
Plant
£
271,900
Vehicle
£
55,600
Total
£
717,500
(26,000)
245,900
27000
(16,400)
66,200
27,000
(42,400)
702,100
10
£
24,590
25
£
£
16,550 43,540
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a transport cost, thereby
increasing that figure to £73,924.
FINANCIAL ACCOUNTING 1
Lesson Eight
304
Provision for Depreciation:
Balance 1 October 1981
Disposals
Current year charge
Balance 30 September 1982
Written down values at 30
September 1982
-
39,600
-
2,400
144,800 27,050
211,450
(20,800) (13,120) (33,920)
24,590
16,550
43,540
-
42,000
148,590
£
£
270,000 78,000
Proceeds from disposals
Less:
Written down values of disposals
(26,000 – 20,800)
(16,400 – 13,120)
Profit/(Loss) on disposals
30,480
221,070
£
£
£
97,310
35,720
481,030
4,000
6,000
10,000
5,200
3,280
8,480
£(1,200) 2,720
1,520
Qwik-Freez (East Anglisa) p.l.c
Balance Sheet as at 30 September 1982
Workings:
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Company Accounts
Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£
42,000
148,590
30,480
Net
£
348,000
97,310
35,720
702,100
221,070
481,030
FINANCIAL ACCOUNTING 1
Lesson Eight
Fixed Asset Disposals:
`
306
Suspense
£
£
Plant 4000
Balance b/d
8650
Vehicle 6000
Debtors (insured loss) 1350
10000
10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family. The following trial
balance was extracted from the books of the company as at 31 March 1993:
Freehold property, at cost (land Sh. 75,000)
Plant, at cost
Depreciation
Motor vehicle, at cost
Depreciation – motor vehicle
Fittings and fixtures, at cost
Depreciation – fittings and fixtures
20,000 Ordinary shares of Sh. 10 each authorized, issued and
fully paid
Share premium
General reserve
Interim dividend paid
Cash at bank and in hand
Accounts receivable and payable
15% Debentures
Discount received
Profit and loss account 1 April 1992
Purchases of raw materials
Sales of finished goods
Inventories 1 April 1992:
Raw materials
Work in progress
Finished goods
Provision for doubtful debts
Bad debts
Rates and insurance
Wages
Factory power
Light and water
Plant maintenance
Salaries
Returns of raw material
Sales returns
Advertising
Transport expenses (Sales department)
Bank charges
General expenses
Sh.
125,000
130,000
53,000
38,600
16,000
33,570
130,540
942,380
33,060
57,660
107,860
4,890
9,430
108,370
22,560
16,280
10,970
90,000
Sh.
62,000
30,500
11,790
200,000
50,000
120,000
57,430
100,000
3,640
103,870
1,254,760
6,400
3,240
1,360
8,580
24,320
3,040
36,160
2,003,630 2,003,630
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Company Accounts
Additional information:




Depreciation is to be provided for the year using the reducing balance method and applying rates of
15% on plant, 25% on motor vehicle and 10% on fittings and fixtures.
Building is to be depreciated at the rate of 4% using the straight-line method. (Assume the whole
building is used for manufacturing purposes).
Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.
Light and water, insurance and general expenses are to be apportioned in the ratio 4:1 between
factory and administrative overheads.
Electricity and wateer accrued was
Insurance prepaid was
Rates prepaid were
Sh.
860
270
780
Inventories were valued at:
Raw materials
Work in progress
Finished goods


139,630
82,450
124,320
Debenture interest has not yet been paid.
The directors require provision for a final dividend which will bring the dividend for the year up to
Sh. 2 per share.
Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March
1983 and a Balance Sheet as at that date. (25 marks)
MWANGA AND SONS LTD
Manufacturing Account for the year ended 31 March 1993
Raw materials:
Opening stocks
33,060
Purchases
942,380
Less Returns In.
(3,240)
939,140
972,140
Less Closing stocks
(139,630)
Prime Costs
832,570
Factory Overheads:
Plant depreciation
10,200
Rates and insurance
2,000
Factory power
6,704
Light and water
22,560
Plant maintenance
13,712
General expenses
10,970
28,928
95,074
Opening W.I.P.
927,644
Less: Closing W.I.P.
57,660
Goods manufactured
(82,450)
(24,790)
902,854
FINANCIAL ACCOUNTING 1
Lesson Eight
308
Trading, Profit And Loss Account For The Year Ended 31 March 1993
Shs
Sales
Less: Closing stocks
Opening stock
Goods manufactured
107,860
902,854
1,010,714
(124,320)
Less: Closing stocks
Discount received
Debenture interest
Provision for bad debts
Depreciation
- Motor vehicle
- Fittings and fixtures
Dividend
- Interim
- Fianl
Retained Profit for the year
Retained Profit brought forward
Retained Profit carried forward
15,000
6,654
Shs
1,254,760
(1,360)
1,253,400
886,394
367,006
3,640
370,646
5,625
2,681
16,000
24,000
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40,000
49,150
103,870
153,870
309
Company Accounts
Balance Sheet As At 31 March 1993
Fixed Assets
Freehold property
Plant
Motor vehicle
Fittings and fixtures
Current Assets
Stocks
- Raw materials
- work in progress
- finished goods
Debtors, less provisions
Cash at bank and in hand
Prepaid expenses
Cost Depreciation
£
£
125,000
2,000
130,000
72,200
53,000
36,125
38,600
14,471
346,600
124,796
139,630
82,450
124,320
Current Liabilities
Creditors
Accruals
Dividend proposed
346,400
117,486
33,570
1,050
498,506
57,430
15,860
24,000
97,290
Net current assets
Financed by:
Authorized, and issued share capital:
20,000 Ordinary shares each Sh. 10
Reserves:
Share Premium
General Reserve
Profit and Loss account
401,216
623,020
200,000
50,000
120,000
153,000
15% debentures
323,020
523,020
100,000
623,020
Workings:
B/d
Net
£
123,000
57,800
16,875
24,129
221,804
Rate And Insurance
9,430 Prepaid
Prepaid
Profit and Loss Account
Factory
9,430
FINANCIAL ACCOUNTING 1
270
780
1,676
6,704
9,430
Lesson Eight
310
Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:
Sale of Shares
Sale at a premium
Sale at per value
Lump sum
Sale
2.
Lump sum
Sale
3.
Lump sum
Sale
4.
Lump sum
Sale
1.
When shares are sold in exchange for lump sum cash payment and this is at per value, the entries to be made
are:
DEBIT: Cashbook
CREDIT: Share Capital
When shares are sold in exchange for lump sum cash payment and this is at a premium, the entries to be
made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium
Sale of shares which are to be paid for in installments are normally dealt with as follows:
The number of installments may vary from 2 – 4. Each installment is collected through a comprehensive set
of processed(called a stage). The 4 possible stages are:
Application stage
For each stage, an account is opened. This account
Allotment stage
must close at the end of the stage. (The application
1st Call stage
stage & allotment stage may be dealt with in a single
2nd Call stage
account called the application/ allotment A/C)
Application Stage
In this stage, the company invites members of the public to send in applications for share they (the public)
are interested in purchasing.
The application firms must be accompanied by the 1st installment money when the public respond to the
company’s offer.
When the company requests members of the public to send in application forms & application money it will
make the following entries in its books:
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
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Company Accounts
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application
With deficit
If there is an over-subscription, then the excess applications may either be rejected outright and the
applicants’ money refunded, or applications awarded on a pro-rata basis. (i.e. a lower number of shares
allotted compared to the number applied for)
If outright rejection, the company will:
DEBIT: Application
With refunded money
CREDIT: Cashbook
If pro-rata issue, the company will:
DEBIT: Application
With amount required to close the
CREDIT: Allotment
application A/C.
This marks the end of the application stage.
Allotment Stage
In this stage, the company selects the applicants and informs them of their allotment. It also requests them to
bring in a second installment. As it requests for the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the company, will in its books: DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the account has closed by this
stage, the stage is deemed to be over.
1st Call Stage
Here the company requests for the third installment from the public. As the company does this, it will:
DEBIT: 1st Call A/C .
CREDIT: Share Capital.
When the public respond by bringing in the installment money, the company, will in its books:
DEBIT: Cashbook
CREDIT: 1st Call A/C.
It is possible that some of the allotees do not pay their 1st installment money on time. When this is so,
DEBIT: Cashbook – with money received
DEBIT: Calls in Arrears – with money not received
CREDIT: 1st Call A/C – with total.
This marks the end of the Call stage.
2nd Call Stage
this is very similar to the 1st Call whereby the company requests for the second (and last) call money; as it
does so, it will:
DEBIT: 2nd Call A/C
CREDIT: Share Capital
When the public respond by sending in the second call money, then the company will:
DEBIT: Cashbook
CREDIT: 2nd Call A/C
It is possible that some of the allotees do not pay up their 2nd Call money. When this is so:
DEBIT: Cashbook – with money collected.
DEBIT: Calls in arrears with money not received
CREDIT: 2nd Call A/C.
FINANCIAL ACCOUNTING 1
Lesson Eight
312
THIS MARKS THE END OF THE NORMAL ISSUE OF SHARES PROCEDURES.
When a debtor for share money (calls – in –arrears) does not pay up his dues, his shares will be cancelled and
any money he previously gave the company forfeited (i.e. not refunded to him). This is known as Share
Forfeiture. The entries to be made when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.
Forfeited shares may be resold as follows:
At per value
At a premium
At a discount
If resold at per:
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale will be expressly illegal
unless:
Amounts collected from previous allotee plus an amount collected from current allotee equals or is greater
than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.
Last entry in this exercise is to transfer any balance on the share forfeiture A/C to Share Premium A/C as
follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.
Example 8.5 MAY 1999
QUESTION FOUR
Give a brief definition of memorandum of association and certificate of incorporation.
(5 marks)
Radhi Tea Company Limited has an authorized share capital of Sh. 10,000,000 ordinary shares of Sh.10 each.
The shares were issued at par as follows:
Payable on application
Payable on allotment
Payable on first call
Payable on second call
Sh.1.00
Sh.3.00
Sh.4.00
Sh.2.00
Applications were received for 1,630,000 shares.
It was decide to refund applicants monies on 130,000 shares and to allot all the shares on the basis of two for
every three applied for.
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Company Accounts
The excess application monies received from the successful applicants is not to be refunded but is to be
applied to reduce the amount payable on allotment.
The calls were made and paid in full with the exception of one member of one member holding 5,000 shares
who paid neither the first nor the second call and another member who did not pay the second call on 1,000
shares. After requisite action by the directors the shares were forfeited. They were later reissued at a price of
Sh.8 per share.
Required:
The necessary ledger accounts to record these transactions
(15 marks)
(Total: 20 marks)
Solution:
Memorandum of association explains the relationship between the company and the outside world. It shows
the object of the company, the name, address, the authorized share capital, its location (its registered office)
and the date of incorporation.
Articles of association state the rules under which the company will operate e.g. the number of directors, the
structure, and meetings. It explains the relationship between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is registered by the registrar of
companies.
Radhi Tea Co.
Cashbook
OSC
Allotment
Sh.
OSC
Allotment
Application A/C
Sh.
130,000 Cashbook
1,000,000
500,000
1,630,000
1,630,000
Allotment A/C
Sh.
3,000,000 Application
Cashbook
3,000,000
1st Call
OSC
Sh.
1,630,000
500,000
2,500,000
3,000,000
Sh.
4,000,000 Calls in arrears
Cashbook
4,000,000
Sh.
20,000
3,980,000
4,000,000
FINANCIAL ACCOUNTING 1
Lesson Eight
OSC
Bal c/d
314
2nd Call
Sh.
1,990,00 Calls in arrears
Cashbook
1,990,000
Sh.
2,000
1,988,000
1,990,000
Share Premium
Sh.
1,630,000 Share forfeiture
Sh.
1,630,000
Ordinary Share Capital
Sh.
Sh.
Share forfeiture A/C
50,000 Application
1,000,000
Allotment
3,000,000
1st Call
4,000,000
nd
2 Call
1,990,000
Bal c/d
10,000,000 Share forfeiture 60,000
10,050,000
10,050,000
Share Forfeiture A/C
Sh.
Calls in arrears 22,000 OSC
OSC
60,000 Cashbook
Share Premium 16,000
98,000
1st Call
2nd Call
Sh.
50,000
48,000
98,000
Calls in Arrears
Sh.
`
20,000
2,000 Share forfeiture
22,000
Sh.
22,000
22,000
FINANCIAL STATEMENT ANALYSIS
(RATIO ANALYSIS)
Financial statements include a profit and loss A/C (income statement) that tells us the performance of a
company throughout the financial period. It also includes a balance sheet that shows the financial position or
status of a company and lastly a cash flow statement which shows changes in cash position of the entity,
We analyse financial statements by the use of accounting ratios. There are 5 classes of ratios:
 Liquidity
 Leverage/Gearing ratios
 Activity Ratios
 Profitability
 Equity / Investor ratios.
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Company Accounts
LIQUIDITY RATIOS.
These measure the firm’s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been financed by non-owner
supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various assets to generate sales
revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses various funds to generate
profits or returns. They also measure the management’s ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and returns expected by the
owners of the firm. They also try to look at the overall performance of the firm and going concern of the
firm.
The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992
Sales
Less: Cost of Sales
Opening stock
Purchases
99,500
559,500
659,000
(149,000)
Less: Closing stocks
Gross profit
Less expenses
Selling and distribution
Depreciation
Administration expenses
Earnings before interest & taxes
Interest
Earnings before tax
Tax @ 50%
Less ordinary dividend
(0.75 per share)
Retained profit for the year
ABC
Balance Sheet as at 31 December 1992
Non Current Assets
Land and Buildings
Plant & Machinery
Current Assets
Inventory
Debtors
Less provision
Cash
75,000
(4,000)
Sh
30,000
10,000
135,000
Sh
850,000
(510,000)
340,000
(175,000)
165,000
(15,000)
150,000
75,000
75,000
(15,000)
60,000
Sh.
250,000
80,000
330,000
Issued share capital
(20000 share of Sh, 10)
Reserve
Retained profit
Long term
149,000 Current liabilities.
Sh.
200000
90000
60000
100000
130000
71,000
30,000
580,000
580,000
Additional Note
FINANCIAL ACCOUNTING 1
Lesson Eight
316
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
Current Ratio = 250,000 = 1.92 : 1
130,000
The higher the ratio then the more liquid the firm is.
Quick Ratio/Acid Test Ratio
= Current Assets - Inventories
Current Liabilities
= 250,000 – 149,000 = 101,000
130,000
130,000
= 0.78 : 1
this is a more refined ration that tries to recognize the fact that stakes may not be easily converted into cash.
The higher the ratio, the better for the firm as it means an improved liquidity position.
Cash Ratio
= Cash + Marketable Securities
Current Liabilities
= 30,000 = 0.23 : 1
130,000
= 0.23 : 1
This ratio assumes that stakes may not be converted into cash easily and the debtors may not pay up their
accounts on time. The higher the ratio, the better for the firm as the Liquidity position is improved.
Net Working Capital Ratio.
= Net Working Capital
Net Assets
Net Working Capital =CA –CL = 250,000-130,000=120,000
Net Working Capital = 120,000 = 0.27 : 1
450,000
= 0.27 : 1
The higher the ratio the better for the firm and therefore the improved Liquidity position.
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Company Accounts
GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able to pay up its debts). The
more debts a business has (non owner supplied funds) the higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets
This ratio measures the proportion of total assets financed by non owner supplied funds. The higher the
ratio, the higher the financial risk .
= 230,000 = 0.4
580,000
40% is supplied by non owners
Debt Equity Ratio
= Total Liabilities
Networth (share holders funds)
= 230,000 = 0.66
350,000
40% is supplied by non-owners
This ratio measures how much has been financed by the non-owner supplied funds in relation to the amount
financed by the owners i.e. for every shilling invested in the business by the owners how much has been
financed by the non-owner supplied funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the creditor have put in 67 cents.
The higher the financial risk.
Long Term Debt Ratio
= Non Current Liabilities
Net Assets
= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner supplied funds.
The higher the ratio, then the higher the financial risk.
ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250
= 4.1 times
This is the number of times stock has been converted to sales in a financial year. The higher the ratio the
more active the firm is.
FINANCIAL ACCOUNTING 1
Lesson Eight
318
An alternative formula is
=
Sales
Closing Stock
Debtors Turnover
= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit
Debtor Turnover =
850,000 = 10.625
80,000
The higher the ratio, the more active the firm has been (we had debtors over 10 times to generate the sales)
Note
Average Collection Period
=
=
360
Debtors Turnover
360 = 34 days
10.625
This measure the number of days it takes for debtors to pay up. The lesser the period, the better for the firm
as it improves the liquidity position.
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
130,000
= 42 times
The ratio tries to measure how many times we have creditors during a financial period. The lesser the ratio
the better.
Non Current Assets Turnover (Fixed Assets Turnover)
= Sales
Average Fixed Assets
A.F.A = 340,000 + 330,000 = 670,000 = 335,000
2
2
= 850,000 = 2.54 times
335,000
The ratio measures the efficiency with which the firm is using its fixed/ Non Current Assets to generate sales.
The higher the ratio the more active the firm.
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Company Accounts
Total Assets Turnover
= Sales
Total Assets
= 850,000
580,000
= 1,046 times
Measures the efficiency with which the firm is using its total assets to generate sales.
PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales
850,000
The higher the margin, the more profitable the firm is.
Net Profit Margin
= Net Profit after tax = 75,000 = 9%
Sales
850,000
The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.
Profitability in Relation to investment
Return On Investment
= Net Profit after tax
Total Assets
= 75,000 = 13%
580,000
Shows how efficient the firm has been in using the total assets to generate returns in the business.
Return On Capital Employed
= Net Profit after tax
Net Assets
= 750,000 = 17%
450,000
How efficient the firm has been in using the net assets to generate returns in the business.
Return On Equity
= Earnings after tax
Networth
= 75,000
FINANCIAL ACCOUNTING 1
Lesson Eight
320
850,000
= 21%
Efficiency of the firm in using the owner’s capital to generate returns.
NOTE
The higher the ratio the more efficient is the firm.
EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.
= 75,000
20,000
= 3.75
This is the return expected by an investor for every share held in the firm.
Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC’S shares is Sh20/Share.
= 3.75  100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in the business.
Dividend Per Share
= Total Dividend (ordinary shareholders)
Ordinary shares outstanding.
= 15,000
20,000
= 0.75 cts per share
This is the amount expected by an investor for every share held in the firm.
NOTE
The higher the amounts, the better for the firm.
LIMITATIONS ON USE OF RATIOS
 It is difficult to categorise firms in the various industries due to diversification. This makes intercompany comparison difficult.
 It is difficult to compare one company with others in case of monopolist firms.
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Company Accounts



Different, firms use different accounting policies and methods e.g. on depreciation, provisions and
other estimates so this makes comparison of companies difficult.
Ratios are compiled at a point in time and may be affected by short term changes. Therefore ratios
are used for short term planning.
Ratios are computed from historical data and therefore are not good indicators of the future.
DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company’s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same industry.
Example 8.6 (ACCA DEC 98)
Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and Omega Ltd. The companies
trade as wholesalers, selling electrical goods to retailers on credit. Their most recent financial statements
appear below.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
Sales
Cost of sales
Opening stock
Purchases
Less: closing stock
Zeta Limited
£’000
200
3,200
3,400
400
Profit before tax
Taxation
Net profit for the period
Omega Limited
£’000
200
290
10
£’000
6,000
800
4,800
5,600
800
3,000
1,000
Gross profit
Expenses
Distribution costs
Administrative expenses
Interest paid
£’000
4,000
500
500
120
380
FINANCIAL ACCOUNTING 1
4,800
1,200
150
250
400
800
400
90
310
Lesson Eight
322
Balance Sheets As At 31 March 20x8
Fixed assets
Tangible assets
Warehouse and office buildings
Equipment and vehicles
1,200
600
Current assets
Stock
Debtor – trade
- sundry
Cash at bank
Current liabilities
Creditors – trade
- sundry
Overdraft
Taxation
Long-term loan (interest 10% pa)
Share capital
Revaluation reserve
Profit and loss account
Zeta Limited
£’000
£’000
Omega Limited
£’000
1,800
5,000
1,000
400
800
150
1,350
800
900
80
100
1,180
(800)
(80)
(200)
(120)
(800)
(100)
(90)
150
1,950
1,950
1,000
950
1,950
£’000
6,000
890
6,890
(4,000)
2,890
1,600
500
790
2,890
Required:
a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of
profitability, liquidity and management of the elements of working capital. Show all workings.
(8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies as regards their
profitability, liquidity and working capital management.
(8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the implications of this for the two
companies?
(4 marks)
(20 marks)
Solution:
STRATHMORE UNIVERSITY ● STUDY PACK
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Company Accounts
PROFITABILITY
Gross profit margin
Gross profit  100%
Sales
1000  100% = 25%
4000
1200  100% = 20%
6000
Net profit margin
Net profit  100%
Sales
500  100% = 12.5%
4000
400  100% = 6.7%
6000
Return on capital employed
Profit before interest and tax
Capital employed
510 = 26.2%
1950
800 = 11.6%
6890
Return on shareholders’ capital
Profit before tax
Share capital and reserves
500 = 25.6%
1950
400 = 13.8%
2890
Asset turnover
Sales
Capital employed
4000 = 2.1 times
1950
6000 = 0.9 times
6890
LIQUIDITY
Current ratio
Current assets
Current liabilities
1350 = 1.1:1
1200
1880 = 1.9:1
990
Quick ratio
Current assets – stock
Current liabilities
950 = 0.8:1
1200
1080 = 1.1:1
990
Gearing
Long – term loans
Capital
nil = nil
1950
4000 = 58%
6890
Interest cover
Profit before interest and tax
Interest charges
510 = 51 times
10
800 = 2 times
400
800  365 = 73 days
4000
900  365 = 55 days
6000
800  365 = 91 days
3200
800  365 = 61 days
4800
WORKING CAPITAL
MANAGEMENT
Debtors days
Trade debtors  365 days
Sales
Creditor days
Trade creditors  365 days
Purchases
FINANCIAL ACCOUNTING 1
Lesson Eight
Stock days
Average stock  365 days
Cost of sales
324
300  365 = 37 days
3000
800  365 = 61 days
4800
Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing policy. Omega’s net margin
is lower than Zeta’s. Omega’s expenses are therefore proportionally higher. It should be noted that Omega’s
bottom line profit is reduced significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset base due in part to a
revaluation. It may be that a revaluation of Zeta’s assets will partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both companies’ quick ratios
are much closer, Zeta’s liquidity does appear to be an issue especially as there is no cash at hand. It would be
wise to examine projected cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has
no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market which can be subject to
obsolescence.
Zeta’s creditor and debtor days are a cause for concern. Debtors should be collected within 60 days if not
sooner. 60 day collection would improve cash flow by over £140,000 reducing the debtors balance to
£658,000(60/73  £800,000).
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks damaging the goodwill it has with
its suppliers. Paying creditors within 60 days would have an adverse effect on cash flow of over £270,000.
The creditors balance would be £527,000 (60/91  £800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing means that should profits fall
they may not be in a position to pay the loan interest. Zeta’s capital is entirely share capital and so a fixed
return is not required.
Omega’s loan appears to be fixed rate. This means that in times of falling interest rates Omega will have
higher interest costs than say, Zeta, if Zeta borrowed the same amount. The converse is true in times of rising
interest rates.
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325
Company Accounts
REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31 October 1999.
Sh.
Sh.
Authorized and issued capital
40000000
Share premium
500000
8% debenture stock
10000000
Profit and loss stock
5500000
Motor vehicles at cost
16500000
Provision for depreciation on motor vehicle
3400000
Plant and machinery at cost
25800000
Provision for depreciation on plant and machinery
6300000
Land buildings at cost
30000000
Stock in hand 1 November 1998 – Finished goods
420000
– Raw materials
380000
– Work-in-progress
560000
Trade debtors
Office furniture and equipment at cost
Provision for depreciation on office furniture and equipment
Trade creditors
Purchase of raw materials
Sales of finished goods
Direct wages
Direct expenses
Factory expenses
Indirect materials
Factory insurance
Sales room expenses
Administration expenses
Office salaries and wages
Vehicles running expenses
Bad debts written-off
Balance at bank – overdrawn
Sh.
7360000
890000
9500000
1350000
395000
290000
350000
150000
485000
620000
840000
656000
640000
96610000
Sh.
185000
1000000
28550000
1175000
96610000
Notes:
Closing stock includes
– Finished goods
– Raw materials
– Work-in-progress
Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a transfer of Sh. 2000000 to a
general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on furniture and equipment,
plant and machinery and motor vehicles respectively.
FINANCIAL ACCOUNTING 1
Lesson Eight
326
The overdraft interest of Sh. 725000 was communicated to the company by the bank on 5 November 1999
and therefore it has not been posted in the cash book.
Required:
Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
Balance sheet as at 31 October 1999.
(12 marks)
(8 marks)
(Total: 20 marks)
QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31 October 1998.
Sh,’000’
Sh,’000’
Authorized and issued capital (shares of Sh. 20 each fully paid)
30,000
Share premium
350
10% premium
3,500
General reserve
2,000
Profit and loss account 1 November 1997
2,850
Motor vehicles at cost
3,500
Provision for depreciation
265
Freehold property
44,500
Trade debtors
1,375
Trade creditor
460
Purchases and sales
95,650
127,450
Stock in hand 1 November 1997
3,478
Furniture and fittings at cost
1,540
Provision for depreciation
138
Goodwill
500
Rent receivable
385
Salaries and wages
2,285
General expenses
358
Vehicles running expenses
2,470
Bad debts
124
Telephone and postage
568
Water and electricity
269
Rates and insurance
289
Cash at bank
10,492
167,398
167,398
Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no entries were made in
the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October 1998 but no entries were
made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000 respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and 20% on cost
respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
STRATHMORE UNIVERSITY ● STUDY PACK
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Company Accounts
9. The directors propose a dividend of 15% on issued share capital and a transfer of Sh.2,500,000 to the
general reserve.
10. The debenture interest has not yet been paid.
Required:
1. Trading, profit and loss account for the year ended 31 October 1998.
(13 marks)
2. Balance sheet as at 31 October 1998.
(7 marks)
(Total: 20 marks)
QUESTION THREE ACCA PILOT PAPER
The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996 were as follows:
31 December
1995 1996
£000
£000
£000
£000
Tangible fixed assets
Cost of valuation
126,300
162,400
Aggregate depreciation
(50,000)
76,300 (64,000)
98,400
Current assets
Stock
Debtors
Cash
Current liabilities
Trade creditors
Corporation tax
Proposed dividend
12,000
10,500
1,400
23,900
15,000
14,000
2,000
31,000
6,800
3,400
4,000
14,200
9,400
5,000
6,000
20,400
Net current assets
Loans (due for repayment
1999)
Called up share capital
Share premium
Revaluation reserve
Profit and loss account
9,700
86,000
10,600
109,000
(60,000)
26,000
(60,000)
49,000
6,000
1,000
19,000
26,000
10,000
3,000
8,000
28,000
49,000
The stock at 31 December 1994 was £10,000,000.
FINANCIAL ACCOUNTING 1
Lesson Eight
328
The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996
were:
Sales
Cost of sales
Gross profit
Expenses
Net profit before tax
Year ended 31 December
1995
1996
£000
£000
64,000
108,000
40,000
75,600
24,000
32,400
10,000
12,400
14,000
20,000
Required:
a) Calculate the following accounting ratios for both years:
 The gross profit percentage
 The current ratio and the quick ratio (or acid test)
 Debtors’ collection period in days
 Trade creditors’ payment period in days (based on purchases figures which are to be
calculated)
 Gearing ratio.
b) Show you full workings.
(10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them
with those for 1995.
(5 marks)
d) State two points which could cause the movement in the gross profit percentages between the two
years and explain how they could bring the change about.
(2 marks)
e) State the extent to which you agree or disagree with the following and give brief reasons for your
answers.
f) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as
they fall due. Therefore the higher these ratios are the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced
by investing the money borrowed.
(3 marks)
(20 marks)
QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1 each at 120p per share,
payable as to 50p on application (including the premium), 40p on allotment and the balance on 1 May 19X1.
The lists were closed on 10 February 19X1, by which date applications for 70,000 shares had been received.
Of the cash received, £4,000 was returned and £6,000 was applied to the amount due on allotment, the
balance of which was paid on 16 February 19X1. All shareholders paid the call due on 1 May 19X1, with the
exception of one allotee of 500 shares. These shares were forfeited on 29 September 19X1 and reissued as
fully paid at 80p per share on November 19X1.
You are required to write up the necessary accounts, excluding those relating to cash, to record these
transactions.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
STRATHMORE UNIVERSITY ● STUDY PACK
329
Company Accounts
COMPREHENSIVE ASSIGNMENT No.4
TO BE SUBMITTED AFTER LESSON 8
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking
by the University.
EXAMINATION PAPER.
ANSWER ALL QUESTIONS
TIME ALLOWED: THREE HOURS.
QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of Shs.5,000.00. On 2 January
2002, this assistant did not report for work and it was found that he had left, taking with him the balance in
the till. It had been Pesa Nyingi’s practise to bank each Monday morning the balance in the till resulting from
the previous week’s transactions. No float was maintained. The only records kept, apart from the bank
statement, were details of sales on credit and unpaid invoices for goods.
You ascertain the following balances on 1 January 2001.
Stock
Creditors
Bank
Debtors
Cash
Accrued expenses
Fixtures and Fittings
688,000.00
988,000.00
276,000.00
344,000.00
228,000.00
100,000.00
1,000,000.00
You also ascertain the following:
An analysis of the bank statement for the year ended 31 December 2001 showed the following
Receipts
Banking from debtors cheques
Cash
180,000.00
4,116,000.00
4,296,000.00
Payments
Creditors for goods
Rent and expenses
3,748,000.00
232,000.00
3,980,000.00
Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00 for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs. 13,960,000. An amount of
Shs. 336,000.00 was still outstanding.
Creditors for goods have always been paid by cheque. Unpaid invoices on 31 December 2001 amounted to
Shs. 1,120,000.00. Creditors for expenses were Shs. 800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned against a cash receipt of Shs.
48,000.00. The receipt has not been recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
FINANCIAL ACCOUNTING 1
Lesson Eight
330
A depreciation charge of 20% is to be charged on the value outstanding on the fixtures and fittings at the
end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact has not yet been reflected in
the bank statement.
Assume a 50 week year
Required:
a) Prepare workings showing your calculation of the amount of the theft.
(8 marks)
b) Prepare a trading, profit and loss account for the year ended 31 December 2001 and a balance sheet
as at that date.
17 marks)
QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the following information is
available.
Sales Ledger balances as at 1 May 2002
Purchases Ledger balances as at 1 May 2002
Sales Ledger balances as at 31 May 2002
Purchases Ledger balances as at 31 May 2002
Debit
1,672,000.00
28,000.00
?
36,500.00
Credit Sales
Credit Purchases
Cash and cheques received
Sales Ledger
Purchases Ledger
Cash and cheques received
Sales Ledger
Purchases Ledger
Credit notes issued (for returns inwards)
Debit notes received (returns outwards)
Dishonoured cheques
Discounts allowed
Discounts received
Bad debts written off in December 2001 but now recovered
Credit
114,600.00
747,000.00
67,000.00
?
18,938,000.00
670,000.00
1,549,700.00
13,000.00
47,000.00
632,000.00
119,800.00
24,000.00
32,000.00
43,000.00
33,800.00
14,200.00
It has been decided to set off a debt due from a customer, A Mutiso, of Shs. 30,000.00 against a debt due to
him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the total debtors on 31 May.
Required:
a) Prepare the sales ledger control account and the purchases ledger control account for May 2002 in
the books of Jambo Dealers Ltd.
(14 marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers Ltd relating to the
company’s trade debtors and trade creditors.
(3 marks)
c) Briefly explain the purpose of control accounts.
(3 marks)
QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year ended 30 April 2000, 2001,
2002 and balance sheet as at 30 April 1999, 2000, 2001 2002 for James Mwendapole, a sole trader.
STRATHMORE UNIVERSITY ● STUDY PACK
331
Company Accounts
Trading, Profit and Loss Accounts for the year ended 31 May
2000
Sh’000’
1,000.00
(600.00)
400.00
(200.00)
200.00
Sales
Cost of sales
Gross Profit
Expenses (including loan interest)
Net Profit
Balance Sheets as at 31 May
2001
Sh’000’
1,200.00
(720.00)
480.00
(300.00)
180.00
2002
Sh’000’
1,400.00
(980.00)
420.00
(280.00)
140.00
Non Current Assets
1999
Sh’000’
380.00
2000
Sh’000’
480.00
2001
Sh’000’
680.00
2002
Sh’000’
900.00
Current Assets
Stocks
Debtors
Balance at bank
Total Current Assets
140.00
100.00
900.00
330.00
160.00
180.00
130.00
470.00
200.00
400.00
390.00
990.00
290.00
520.00
160.00
970.00
Current Liabilities
Creditors
Loan (received on 31 May 2001)
Total Current Liabilities
(40.00)
(40.00)
(80.00)
(80.00)
(120.00)
(500.00)
(620.00)
(180.00)
(500.00)
(680.00)
Net Current Assets
Net Assets
290.00
670.00
390.00
870.00
370.00
1,050.00
290.00
1,190.00
510.00
160.00
670.00
670.00
200.00
870.00
870.00
180.00
1,050.00
1,050.00
140.00
1,190.00
Capital
Opening Capital
Add Net Profit
Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income from his grandfather and
therefore has taken no drawings from his retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services rendered to the business by
James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the rate of 8% per year.
Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following financial ratios.
 Return on capital employed
 Quick ratio
 Stock turnover
 Net Profit Margin
(8 marks)
FINANCIAL ACCOUNTING 1
Lesson Eight
332
2. Use two financial ratios (not referred in (a) above) to draw attention to two aspects to the business
which would appear to give cause for concern.
(6 marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue trading and whether it
was a sound decision to borrow the loan.
(6 marks)
QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality wheelbarrows, Bingwa being
responsible for the factory and Shabiki being responsible for sales. Completed wheelbarrows are transferred
from the factory to the warehouse at agreed prises. Bingwa and Shabiki are credited with one third of the
manufacturing profit and 10% of the trading gross profit respectively and the balance of the firm’s profit
being shared equally. All wheelbarrows are sold at Sh. 680.00 each. No interest is credited or charged on
capital accounts or drawings.
The following trial balance was extracted on 31 March 2002.
Capital Accounts
Bingwa
Shabiki
Drawings
Bingwa
Shabiki
Freehold factory (including land Sh. 300,000.00)
Factory Plant at cost
Delivery Van at cost
Provision for depreciation
Freehold Factory
Factory Plant
Delivery Van
Stocks on 1 February 2001
Raw materials
Work in progress
Wheelbarrows (1220 at Shs. 440)
Sales
Return inwards
Purchases of raw materials
PAYE
Factory wages
Office wages
Expenses Factory
Office
Provision for unrealized stock (in warehouse)
Provision for doubtful debts
Debtors and creditors
Bank
Sh.
Sh.
482,000.00
507,000.00
96,000.00
87,400.00
708,800.00
326,400.00
82,000.00
307,040.00
110,160.00
38,400.00
42,000.00
40,200.00
536,800.00
13,600.00
291,600.00
165,400.00
48,000.00
126,800.00
143,400.00
1,237,600.00
8,800.00
48,800.00
19,200.00
217,600.00
109,200.00
57,200.00
2,926,000.00 2,926,000.00
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Company Accounts
Additional information:
a) 1540 wheelbarrows at Sh. 480 each were transferred to the warehouse during the year.
b) Wheelbarrows in stock being balance of the current year’s production, were valued at agreed price of
Sh. 480 each.
c) The stock of raw materials was Sh. 34,000.00 and work in progress is valued at Sh. 53,600.00
d) Accrued expenses on 31 March 2002 amounted to 62,400 (including office(Sh. 32,800.00) and
prepaid rates Sh,3,200.00 (including office Shs. 1,200.00 )).
e) Provision for depreciation is to be made as follows:
Factory buildings 2% p.a.
Factory Plant
10% p.a.
Motor vehicles 25% p.a.
The general provision for doubtful debts is to maintain at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March 2002 and a balance sheet
as at that date.
(20 marks)
QUESTION FIVE
State and explain the qualities of useful financial information.
(10 marks)
To what extent do International Accounting Standards help achieve these qualities. (5 marks)
(25 marks)
END OF COMPREHENSIVE ASSIGNMENT No.4
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
FINANCIAL ACCOUNTING 1
334
Revision Aid
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
MODEL ANSWERS TO REINFORCING QUESTIONS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
335
SOLUTIONS TO REINFORCEMENT QUESTIONS
Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
DR
CR
£
£
Cash at bank
1,703
Cash in hand
12
Drawings
560
Postage and stationery
129
Traveling expenses
104
Cleaning expenses
260
Sundry expenses
19
Telephone
214
Electricity
190
Motor vas
2,000
Rates
320
Fixtures ad fittings
806
Capital
2,308
Purchases
3,163
Discounts received
419
Credit sales
830
Cash sales
4,764
Discount allowed
81
Provision for depreciation:
Motor van
700
Fixtures ad fittings
250
Stock at 1 January 20X1
366
Loan - Frey
250
Debtors – Brown
12
Blue
150
Stripe
48
Creditors – Live
602
Negative
_____
64
10,207
10,207
Workings
Cash at bank
Opening balances
Bankings of cash (908 + 940 + 766 + 1,031)
FINANCIAL ACCOUNTING 1
£
672
3,643
336
Revision Aid
Capital introduced
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 + 38 + 20) x 90%
500
729
5,546
Less cheque payments (telephone, electricity, rates and van)
Payments to suppliers
(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + 187)
Cash at Bank
£
5 Bank
4,764 Drawings
Stationery
Travel
Petrol ad van
Sundry
Postage
Cleaner
Bal c/d
4,769
Bal b/d
Sales (bal)
(2,374)
1,703
£
3,645
560
73
40
104
19
56
260
_12
4,769
Question 2
Mary Carter
Balance Sheet as at 31.12.2001
Non current assets
Freehold premises
Plant
Current assets
Stock
Debtors
Cash at Bank
Cash in hand
Current liabilities
Creditors
£
£
£
25,000
12,000
37,000
8,000
7,000
1,000
6,000
22,000
(10,000)
Capital [34,000 + 5,000 – 10,000]
12,000
49,000
29,000
Non current liabilities
Loan from bank
20,000
49,000
Workings
Stock:
Debtors:
Cash at bank:
Cash hand:
11,000 + 34,000 – 37,000
= 8,000
10,000 + 51,000 – 54,000
= 7,000
5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 = 1,000
3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
Capital
Bal b/f
Add profit
Less drawings
Profit:
Sales
Cost of sales
Electricity
Rates
Wages
Sundry expenses
Bank interest
Net profit
337
34,000
_5,000
39,000
(10,000)
29,000
60,000
(37,000)
(2,000)
(1,000)
(10,000)
(2,000)
(3,000)
5,000
Creditors
= 12,000 + 34,000 – 36,000 = 10,000
Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.
Capital b/f + additional
Add net profit
(missing figure)
Less drawings
Capital c/f
25,000
6,000
31,000
(4,500)
26,500
Profit may be also computed as follows:
Net profit
= closing capital (net assets) – opening capital + drawings – additional capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000
FINANCIAL ACCOUNTING 1
338
Revision Aid
Question 4
Brian Barmouth
Trial balance as at 30 June 2000
Sales
Purchases
Office expenses
Insurance
Wages
Rates
Heating and lighting
Telephone
Discounts allowed
Opening stock
Return inwards
Returns outwards
Premiums
Plant and machinery
Motor vehicle
Debtors
Bank balance
Creditors
Loan – long term loan
Capital
Drawings for the year
£
22,850
1,900
700
7,900
2,800
1,200
650
1,150
500
200
40,000
50,000
12,000
12,500
7,800
__4,000
121,150
£
47,600
150
3,400
10,000
60,000
______
121,150
NB: The closing stock does not appear in the trial balance.
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Lesson Nine
339
LESSON 2
Question 1
(a)
1-May
13-May
16-May
24-May
(b)
4 – May
11 – May
18 - May
(c)
2 – May
9 – May
17 - May
Capital
Sales
Bruce
hill
£
5,000
200
700
200
1-May
19-May
20-May
21-May
30-May
30-May
31-May
_____ 31-May
6,100
SALES DAYBOOK
Bruce
Hill
Nailor
PURCHASES DAYBOOK
Abel
Green
Kaye
£
2,000
650
200
50
200
320
300
2,380
6,100
Store fitments
Abel
Rent
Delivery exp
Drawings
Wages
Green
Balance c/d
£
700
580
360
1,640
£
650
300
800
1,750
Check the account balances with the balances shown on the trial balance.
(d)
Cash
Sales
Purchases
Debtors
Creditors
Capital
Fixtures and fittings
Rent
Delivery expenses
Drawings
Wages
Dr
£
2,380
1,750
740
2,000
200
50
200
_320
7,640
Cr
£
1,840
800
5,000
____
7,640
FINANCIAL ACCOUNTING 1
340
Revision Aid
Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
£
Sales
Less returns inwards
Cost of sales
Opening stock
Purchases
Less returns outwards
103,500
(3,500)
Less closing stock
Gross profit
Discount received
Rent received
Expenses
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising
Telephone
Rates
Discount allowed
Net profit
Current assets
Stocks
Debtors
Cash in hand
£
15,500
(1,500)
150,000
46,000
100,000
146,000
(41,000)
18,700
2,500
1,100
600
2,400
3,500
800
3,000
__100
End Papers
Balance Sheet as at 31 December 2002
Non current assets
£
Premises
Fixtures and fittings
Current liabilities
Bank overdraft
Creditors
£
£
(105,000)
45,000
200
2,000
47,200
(32,700)
14,500
£
80,000
5,000
85,000
41,000
4,800
200
46,000
12,000
7,500
(19,500)
26,500
111,500
111,000
14,500
125,500
(14,000)
111,500
Capital
Add net profit
Less drawings
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Lesson Nine
341
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
Sales
Less: Cost of sales
Opening stock
Purchases
Add carriage inwards
Less returns outwards
£
£
1,816,000
6,918,500
42,000
6,960,500
(64,000)
6,896,500
8,712,500
(2,239,000)
Less closing stock
Less expenses
Wages and salaries
Carriage outwards
Rent and rates
Communication expenses
Commission payable
Insurance
Sundry expenses
Net profit
K Smooth
Balance Sheet as at 31 December 2002
Non current assets
£
Buildings
Fixtures
Current assets
Stocks
Debtors
Bank
Cash
Current liabilities
Creditors
£
9,234,000
1,024,000
157,000
301,500
62,400
21,600
40,500
31,800
£
(6,473,500)
2,760,500
(1,638,800)
1,121,700
£
2,000,000
285,000
2,285,000
2,239,000
1,432,000
297,000
11,500
3,979,500
(816,000)
Capital
Add net profit
3,163,500
5,448,500
5,088,800
1,121,700
6,210,500
762,000
5,448,500
Less drawings
FINANCIAL ACCOUNTING 1
342
Revision Aid
Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
£
£
Sales
Less: returns outwards
Cost of sales:
Opening stock
Purchases
Add carriage inwards
Less returns outwards
2,391,000
9,210,000
___21,500
9,231,500
__(30,700)
9,200,800
11,591,800
(2,747,500)
Less closing stock
Less expenses
Wages and salaries
Carriage outwards
Motor expenses
Rent and rates
Telephone
Insurance
Office expenses
Sundries
Net profit
Current assets
Stocks
Debtors
Bank
Cash
Current liabilities
Creditors
Capital
Add net profit
Less drawings
(8,844,300)
4,190,700
1,282,000
30,900
163,000
297,000
40,500
49,200
137,700
28,400
Skates
Balance Sheet as at 30September 2002
Non current assets
£
Office equipment
Motor van
£
13,090,000
__(55,000)
13,035,000
£
(2,027,700)
_2,163,000
£
625,000
410,000
1,035,000
2,747,500
1,239,000
311,500
__29,500
4,318,500
(937,000)
3,381,500
4,416,500
3,095,500
2,163,000
5,258,500
(842,000)
4,416,500
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Lesson Nine
343
LESSON 3
Question 1Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users’ decisions taken on the basis of
the financial statements. The materiality of the omission or misstatement depends on the size and nature of
the item in question judged in the particular circumstances of the case. Only items material in amount or in
nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit account, it might well be
regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank
£5,000’. In other words, incorrect presentation may amount to material misstatement even if there is no
monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time to identify trends and with
other enterprise’s statements to evaluate their relative financial position, performance and changes in financial
position. It is therefore necessary for similar events and states of affairs to be represented in a similar
manner.
Compliance with accounting standards helps to achieve comparability by ensuring that different entities
account for similar transactions and events in a similar way.
Example:
Depreciation policy must be consistent from one period to the next, unless it becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one
selected should be the one which gives the most cautious presentation of the business’s financial position or
results.
IAS 1 describes the prudence concept as being that ‘revenue and profits are not anticipated, but are
recognized by inclusion in the profit and loss account only when realized in the form either of cash or of
other assets, the ultimate cash realization of which can be assessed with reasonable certainty; provision is
made for all known…….expenses and losses whether the amount of these is known with certainty or is a best
estimate in the light of the information available.’
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a provision should be made
so that the amount in question is not included in the profit for the year.
Objectivity:
This means that accountants must be free from bias. They must adopt a neutral stance when analyzing
accounting data. This means that they should try to strip their answers of any personal opinion or prejudice
and should be as precise and as detailed as the situation warrants. The result of this should be that any
number of accountants will give the same answer independently of each other.
FINANCIAL ACCOUNTING 1
344
Revision Aid
Example:
Internally generated good will should not be capitalized in the balance sheet, as its value cannot be
determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful, information must be relevant to
the decision-making needs of users. Information is relevant when it has the ability to influence the decisions
of users by helping them to evaluate past, present or future events or to confirm or correct their past
evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to determine if to lend to the
firm or supply on credit.
Question 4
Information is material if its omission or misstatement could influence the economic decisions of users taken
on the basis of the financial statements.
Factors affecting materiality are:
 The size of the item;
 The nature of the item.
To be useful, information must be relevant to the decision-making needs of users. Information is relevant
when it influences the economic decisions of users by helping them evaluate past, present or future events or
confirming, or correcting their past evaluations.
Neutrality means that the information in financial statements should be free from deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about certain items.
The potential conflict between the two is that neutrality requires freedom from bias while the exercise of
prudence is a potentially biased concept since judgment is required.
In resolving the conflict, a balance should be found that neither overstates nor understates assets, gains,
liabilities and losses.
Safeguards to ensure that a company’s financial statements are free from material error:
The fact that the financial statements have been audited by an independent professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.
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Lesson Nine
Question 1
345
LESSON FOUR
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
£
£
£
Sales
378,500
Less returns inwards
(4,100)
374,400
Less cost of sales
Opening stock
120,600
Purchases
261,700
Less returns out
(7,700)
254,000
374,600
Less closing stock
102,500
272,100
Gross profit
102,300
Add
Discount received
2,400
Rent received
7,500
112,200
Less expenses
Salaries and wages
45,700
Office expenses
8,400
Insurance premiums
2,200
Electricity
2,300
Stationery
6,200
Advertising
8,900
Telephone
2,100
Business rates
6,000
Discounts allowed
600
(82,400)
Net profit
29,800
FINANCIAL ACCOUNTING 1
346
Revision Aid
Balance Sheet as at 31 March 2001
Non current assets
Warehouse shop and office
Fixtures and fittings
£
Current assets
Stocks
Debtors
Prepayments
Cash in hand
Current liabilities
Creditors
Accrued expenses
Bank overdraft
£
£
210,000
12,800
222,800
102,500
13,000
2,400
500
118,400
18,700
1,200
30,000
(49,900)
Capital
Add Net Profit
68,500
291,300
287,500
29,800
317,300
(26,000)
291,300
Less drawings
Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
£
£
Sales
491,620
Less cost of sales
Opening stock
18,460
Purchases
387,936
406,396
Closing stock
19,926
386,470
Gross profit
105,150
Discounts received
1,175
106,325
Less expenses:
Discounts allowed
1,304
Lighting and heating
6,184
Motor expenses
3,080
Rent
8,161
General expenses
7,413
Depreciation (w)
13,146
39,288
Net profit
67,037
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Lesson Nine
347
Working:
Depreciation charge:
Motor vehicles: £45,730 x 20% = £9,146
Fixtures and fittings: 10% x £(42,200 – 2,200) = £4,000
Total: £4,000 + £9,146 = £13,146
Donald Brown
Balance Sheet as at 31 December 20X0
Cost
Non current assets £
Fixtures and fittings
42,200
Motor vehicles
45,730
87,930
Current assets
Stock
Debtors
Prepayments
Cash in hand
Current liabilities
Creditors
Accruals
Bank overdraft
Net current assets
Net assets
Financed by
Capital
Net Profit for year
Less drawings
35,404
218
19,861
Depreciation
£
6,200
24,438
30,638
Net
£
36,000
21,292
57,292
19,926
42,737
680
1,411
64,754
55,483
9,271
66,563
26,094
67,037
93,131
26,568
66,563
FINANCIAL ACCOUNTING 1
348
Revision Aid
Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
£
£
Sales
427,726
Opening stock
15,310
Purchases
302,419
Carriage inwards
476
318,205
Less closing stock
16,480
Cost of sales
301,725
Gross profit
126,001
Carriage outwards
829
Wages and salaries
64,210
Rent and rates (12,466 – 620)
11846
Heat and light (4,757 + 350)
5,107
Depreciation – equipment
10,200
Motor vehicles 8,654
Sundry expenses
8,426
109,272
Net profit for the year
16,729
Brenda Bailey
Balance Sheet as at 30 June 20X9
Cost
Non current assets
£
Equipment
102,000
Motor vehicles
43,270
145,270
Current assets
Stock
Debtors
Prepayments
Cash
Current liabilities
Bank overdraft
Creditors
Accruals
Net current assets
Depreciation
£
32,450
17,574
50,024
Net book value
£
69,550
25,696
95,246
16,480
50,633
620
__477
68,210
3,295
41,792
350
45,437
Capital
Balance at 1 July 20X8
Add Profit for year
22,773
118,019
122,890
16,729
139,619
21,600
118,019
Less drawings
Balance at 30 June 20X9
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Lesson Nine
349
Question 4
Frank Mercer
20X8
Dec 31
Dec 31
Balance b/f
Dividend
Cash book
£ 20X8
1,793 Dec 31
26 Dec 31
Dec 31
____
1,819
Bank charges
Standing order
Direct debit
Balance c/d
Bank reconciliation as at 31 December 20X8
£
Balance per bank statement
Add unrecorded lodgments:
V Owen
K Walters
98
134
Less unpresented cheques:
B Oliver (869)
L Philips (872)
71
37
Balance per cash book (corrected)
£
1,557
232
(108)
1,681
FINANCIAL ACCOUNTING 1
£
18
32
88
1,681
1,819
350
Revision Aid
LESSON FIVE
Question 1
Bal b/d
Sales (163,194 + 1,386)
Cash refund
Sales Ledger Control A/C
£
386,430 Bal b/d
164,580 Cash received
350 Discounts allowed
Returns inwards
Contra
Bad debts written off
______ Balance c/d
551,730
£
190
158,288
2,160
590
870
1,360
388,272
551,730
Sales Ledger Control A/C
£
Bal b/d
520 Bal b/d
Cash paid (103,040 – 350)
102,690 Purchases (98,192 + 36)
Discounts received
990 Bad debts
Returns outwards (1,370 + 2,000)
3,370
Contra
870
Balance c/d
175,048 Balance c/d
283,488
£
184,740
98,228
2,160
___100
283,488
Question 2
(a)
Uncorrected balance b/f
Sales omitted (a)
Bank – cheque dishonored (1)
Balance b/d
Sales Ledger Control A/C
£
12,550 Discounts omitted (d)
850 Contra entry omitted (f)
300 Bad debt omitted (g)
Returns inwards omitted (j)
_____ Amended balance c/d
13,700
12,500
£
100
400
500
200
12,500
13,700
Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have
no effect on the control account.
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Lesson Nine
351
(b)
Statement Of Adjustments To List Of Personal Account Balances
£
Original total of list of balances
Add: debit balance omitted (b)
debit balance understated (e)
300
200
Less: transposition error (c ): understatement of cash received
cash debited instead of credited (2 x £250) (h)
discounts received wrongly debited to Bell (i)
Understatement of cash received (i)
180
500
50
_72
£
12,802
500
13,302
__802
12,500
Question 3
(a)
Balance
Correction of error - interest
Balance
(b)
Bank reconciliation
Balance per bank statement
Less lodgments not credited (2)
Add: dishonored cheque
Add: outstanding cheque (1)
Balance per cash book - overdrawn
George – Cash book
£
4,890 Bank charges (3)
320 Plant (4)
11,890
Cheque dishonored
Correction of error in
entering cheque (6)
_____ Error in addition (7)
17,100
£
12,800
2,890
9,910
980
1,000
11,890
FINANCIAL ACCOUNTING 1
£
320
10,000
980
4,800
1,000
17,100
352
Revision Aid
Statement of effect on profit
£
81,208
Profit per draft accounts
Bank charges (3)
Depreciation (4)
Bad debt (5)
Motor expenses (6)
Additional depreciation (6)
Purchases understated (7)
Interest adjustment (8)
Repairs to premises (9)
320
__870
82,398
_6,300
76,098
£
320
1,000
980
2,100
600
1,000
____
6,300
(d)
Journal
George – drawings
Repairs to premises
Repairs to George’s house mistakenly charged
as a business expense
*Paul – accounts payable ledger account
George – drawings
£
870
£
870
540
540
Business account paid by personal cheque
*Note: a debit to accounts payable ledger control account is also acceptable for this entry.
Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale
posted in a wrong debtors account (e.g. to debtor 1 instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense
of plant repair posted to the plant account (an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a
credit sale of £250 is posted to the debtor and sales account as £520.
(Refer to the text for further details)
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
353
(b)
(i)
DR (Sh)
10,000
Suspense
ABD Bank – loan
Cashbook
P& L – Rent received
4,000
P& L –Trading account
Closing stock
1,500
P& L – discount allowed
P&L – discount received
4,000
1,500
500
3,200
Prepayments (prepaid insurance))
P& L
3,200
220
220
Insurance receivable
P& L - income
12,000
(ii)
Statement of Corrected net profit
12,000
(Sh)
Net profit
Add: Rent received
Discount received
Prepaid insurance
Insurance receivable
(Sh)
64,000
4,000
500
220
12,000
Less: closing stock overvalued
Discount allowed
Opening stock
Adjusted net profit
ABD Loan
10,000
500
P& L – Trading a/c opening stock
Suspense
(iii)
CR (Sh)
1,500
500
3,200
Suspense A/c
Sh
10,000 Balance b/d
_____ Opening stock
10,000
FINANCIAL ACCOUNTING 1
16,720
80,720
(5,200)
75,520
Sh
6,800
3,200
10,000
354
Revision Aid
Question 5
ACCOUNTS
Capital
Purchases
Sales
Salaries
Opening stock
Insurance
Rent income
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission
Salaries due
Prepaid
insurance
Rent rec’d in adv.
Accrued
commission
Depreciation
Bad debts
Closing stock
Net profit
WORKSHEET
Pre-Adjusted Trial
Adjustments
Balance
Dr
Cr
Dr
Cr
£
£
£
£
40,000
26,154
36,246
4,814
350
4,307
820
205
965
165
25,000
14,500
1,450
6,140
307
1,060
4,638
946
120
82,795
82,795
350
205
Column numbers
120
165
1,450
307
1
2
2,597
3
2,597
4
Adjusted
Trial Balance
Dr
Cr
£
£
40,000
26,154
36,246
5,164
4,307
615
800
25,000
13,050
5,833
1,060
4,638
1,066
205
120
T&P&L
Account
Dr
Cr
£
£
26,154
5,164
4,307
615
Assets
£
Liab.
£
40,000
36,246
800
1,060
25,000
13,050
5,833
4,638
1,066
350
350
205
165
165
120
1,450
307
1,450
307
83,265
5
4,063
43,120
7
83,265
6
Balance sheet
5,008
5,008
43,120
8
49,216
9
49,216
10
Question 6
Purpose of Control Accounts
i. To provide for arithmetic check on the postings made in the individual account i.e. either the sales
ledger or the purchases ledger.
ii. To provide a quick total of the debtors and creditors balances to be shown in the trial balance.
iii. To detect and prevent errors and frauds on the debtor and creditors account.
iv. To facilitate delegation of duties especially where the debtors and creditors are many.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
Bal b/d
Sales
Bills received dishonored
Charges payable
Bal c/d
Bal b/d
Returns outwards
Bills payable
Bank
Cash
Balance c/d
355
Sales Ledger Control A/C
Sh
6,185,000 Bal b/d
8,452,000 Returns inwards
88,500 Bank
10,000 Cash
Bad debt
Discounts allowed
44,000 Bal c/d
14,779,000
Purchases ledger control a/c
Sh
16,500 Bal b/d
284,000 Purchases
930,000 Bills payable dishonored
473,200
88,500
_4,196,500 Balance c/d
10,396,000
FINANCIAL ACCOUNTING 1
Sh
52,500
203,500
7,985,000
153,000
64,500
302,000
5,404,000
14,779,000
Sh
4,285,000
5,687,500
400,000
___23,500
10,396,000
356
Revision Aid
LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets
Stocks
Debtors
Rates prepaid
Fixtures
Liabilities
Bank overdraft (add unpresented cheques)
Accrued expenses
Creditors
Loan
Accrued interest [4,000 x 3% x 3/12]
Heating and lighting
£
1,172
240
1,800
4,000
30
80
£
4,500
2,800
40
2,500
10,140
(7,322)
2,818
(b)
Dare
Profit and loss account for the year ended 31 December 1996
£
Gross profit
Discounts received
Less expenses
Rent and rates
Fixtures and fittings (depreciation)
Lighting and heating
General expenses
Loan interest
Wages
Sundry expenses
Discounts allowed
Bad debt
Net profit
465
350
200
450
120
2,914
140
520
200
£
9,000
480
9,480
(5,659)
3,821
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
357
(c)
Dare
Balance Sheet as at 31 December 19X6
Non current assets
Fixtures and fittings
Current assets
Stocks
Debtors
Prepayments
Bank (less unpresented cheques)
Cash
Current liabilities
Creditors
Accruals
£
£
£
2,550
5,800
3,000
50
673
__20
9,543
2,200
_290
(2,490)
Capital
Net profit
Less drawings
Non current liabilities
Loan – 3%
7,053
9,603
2,818
3,821
6,639
(1,036)
5,603
4,000
9,603
Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
£
Income
Subscriptions (W1)
Bar and café profit (W2)
Sale of sportswear (W3)
Hire of sportswear (W5)
Deposit account interest
Expenditure
Rent of clubhouse
Groundsperson
Heating oil (W6)
Depreciation 5,000 x 10%
£
10,690
9,200
1,400
1,700
800
23,790
6,000
10,000
4,500
500
Surplus of income over expenditure for the year
FINANCIAL ACCOUNTING 1
(21,000)
2,790
358
Revision Aid
AB Sport and Social Club
Balance Sheet as at 31 December 20X5
£
Non current assets
Equipment for grounds person: cost
Depreciation (3,500 + 500)
£
5,000
(4,000)
1,000
Current assets
Heating oil
Bar and café stocks
Sports equipment for sale (4,000 – 2,000)
Sports equipment for hire (1,000 + 500)
Subscriptions in arrears
Bank deposit account
Bank current account
700
5,000
2,000
1,500
90
16,000
1,300
26,590
Current liabilities
Creditors for bar and café purchases
Creditors for sportswear
Creditors for heating oil
Subscriptions in advance
800
450
200
_200
1,650
Net current assets
Net assets
Accumulated fund b/f
Surplus for the year
Accumulated fund c/f
24,940
25,940
23,150
2,790
25,940
Workings:
Subscriptions
SUBSCRIPTIONS
£
£
Arrears b/f 1.1.X5 (10 + 230)
240 Advance b/f 1.1.X5
40
Subscription income for year (bal fig)
10,690 Cash received
11,000
Advance c/f 31.12X5
__200 Arrears c/f 31.12.X5
___90
11,130
11,130
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.
Bar and café profit
Sales
Cost of sales
Opening stock
Purchases*
£
7,000
8,800
15,800
(5,000)
Closing stock
Profit
*Note: Purchases are 9,000 + 800 – 1,000 = £8,800
£
20,000
10,800
9,200
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
359
Sale of sportswear
£
Sales
Opening stock
Purchases (W4)
3,000
3,100
6,100
(4,000)
Closing stock
Closing stock
Gross Profit
Sportswear written down
Net profit
Purchases of sportswear
£
5,000
(2,100)
2,900
(1,500)
1,400
£
4,500
450
(300)
4,650
For hire 1/3: £1,550
Bank
Add closing creditors
Less opening creditors
For sale 2/3: £3,100
Hire of sportswear
£
Receipts
Costs*
Opening stock
Purchases (W4)
750
1,550
2,300
(1,000)
Closing stock
Profit
£
3,000
(1,300)
1,700
*Note: While there is a case for treating the sportswear for hire as non current assets, in club accounts it is
more usual to treat such items as stock in trade.
Heating Oil
Opening stock
Purchases (4,000 + 200)
Less closing stock
Expense for year
£
1,000
4,200
5,200
(700)
4,500
FINANCIAL ACCOUNTING 1
360
Revision Aid
Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
Raw materials
Opening stock
Purchases
Less closing stock
Raw materials consumed
Wages
Factory overheads
Wages
Rent and rates
Water and electricity
Cost of goods completed
Factory profit
Transfer price
96,000
22,500
13,000
Sales
40,0000
855,000
895,000
(80,000)
815,000
_50,000
865,000
131,500
996,500
___3,500
1,000,000
4,100,000
Less cost of sales
Opening stock
Purchases and cost of goods produced
Less closing stock
Gross profit
Profit on disposal of motor vehicle
Factory profit
Less expenses
Interest on loan
Depreciation – fixtures and fittings
Motor vehicles
Wages
Rent and rates
Water and electricity
Motor expenses
Bad debt
Repairs
Bank charges
Insurance
Sundry expenses
Commission to lampshade employee
Less UPCS
Net profit
348,000
3,400,000
3,748,000
(282,000)
36,000
90,000
38,000
108,000
67,500
39,000
60,800
14,000
12,000
4,000
13,500
25,200
318
__120
STRATHMORE UNIVERSITY ● STUDY PACK
(3,466,000)
634,000
4,000
3,500
641,500
(508,438)
133,062
Lesson Nine
Cherono
Balance Sheet as at 30 June 1998
Non current assets
Fixtures and fittings
Motor vehicles
Current assets
Stock: Raw materials
Lampshades
Less UPCS
Other goods
Debtors
Prepayments
Bank balance
Current liabilities
Creditors
Accruals
361
Cost
900,000
152,000
1,052,000
Depreciation
(440,000)
(38,000)
(478,000)
80,000
30,000
(120)
252,000
107,000
27,318
Capital
Add net profit
NBV
460,000
114,000
574,000
361,880
108,000
10,500
_98,000
578,380
(134,318)
444,062
1,018,062
740,000
133,062
873,062
(95,000)
778,062
_240,000
1,018,062
Less drawings
Add loan
FINANCIAL ACCOUNTING 1
362
Revision Aid
Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
Income
Annual subscriptions (4,680 + 70 + 230 – (140 + 100))
Entrance fees
Life membership fees credited (850 + 53)
Training ground fees (7,660 – 470 + 325)
Sales of sporting requisites
Investment interest received
Insurance commissions received (53 – 11 + 13)
Advertising revenue
Profit on sale of furniture (370 – 350)
Total income
Expenditure:
Cost of sporting requisites sold
(5,270 + 202 – 163 = 5,309 (purchases)
5,309 + 811 – 1,064 = 5,056)
Damaged stock etc
Wages of grounds man (250 + 3,600 – 300)
Postages (692 – 4)
Stationery (55 + 629 – 36)
Rates (300 + 846 – 380)
Subscriptions in arrear written off
World-wide Athletics Club affiliation fee
Training ground upkeep
Depreciation: buildings
Furniture, equipment etc
(10% x (7,900 – 800)
Total expenditure
Surplus of income over expenditure
£
4,740
250
903
£
5,893
7,515
8,774
626
55
603
20
23,486
5,056
137
3,550
688
648
766
40
50
1,200
3,500
__710
STRATHMORE UNIVERSITY ● STUDY PACK
16,345
£7,141
Lesson Nine
363
Olympiad Athletics Club
Balance Sheet as at 31 October 1983
£
Cost
4,000
35,000
7,100
46,100
Non current assets
Land
Buildings
Furniture, equipment, etc
Investments
Investments at cost (7,400 + 5,600)
(current valuation £13,150)
Current assets
Stocks – sporting requisites
- stationery
- stamps
Debtors – subscriptions
- insurance commissions
Prepayments (300 + 380)
Bank – deposit account
- current account
Cash
£
Depreciation
12,900
4,410
17,310
£
Net
4,000
22,100
2,690
28,790
13,000
927
36
4
230
13
680
3,000
2,563
122
7,575
Current Liabilities
Creditors – prepaid subscriptions
- Prepaid training
- Ground fees
- Premiums
- Sporting requisites
100
470
160
202
Working capital
Net assets employed
Financed by:
Accumulated fund: as at 31 October 1982
Add:
Surplus of income over expenditure for the year
As at 31 October 1983
Life membership fund (4,720 + 530 – (850 + 53)
FINANCIAL ACCOUNTING 1
932
6,643
48,433
36,945
7,141
44,086
4,347
£48,433
364
Revision Aid
Accumulated fund b/f
Assets: Land
Buildings
Furniture
Investment
Stocks
Debtors
Prepayments
cash
4,000
25,600
3,750
7,400
866
191
550
___73
42,430
Liabilities
Creditors: Subscriptions
Training
Premiums
Sporting requisites
Bank overdraft
Membership fund
70
325
102
163
105
4,720
STRATHMORE UNIVERSITY ● STUDY PACK
(5,485)
36,945
Lesson Nine
365
LESSON 7
Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
Shs
Raw materials
Opening stock
Purchases
Less stock of raw materials
Raw materials consumed
Factory wages
Prime cost
Add opening w/p
Less closing w/p
85,000
(126,250)
Factory overheads
Depreciation on plant
Factory expenses
Factory cost of completed goods
Add factory profit ( missing figure)
Transfer price given in the question (par) (38,000 x 45)
Sales
Cost of sales
Opening stock of finished goods
Transfer price
84,375
354,000
Shs
100,700
716,250
816,950
(79,500)
737,450
382,500
1,119,950
(41,250)
1,078,700
438,375
1,517,075
192,925
1,710,000
2,775,500
1,200,000
1,710,000
2,910,000
(10,125,000)
Less closing stock of finished goods
Add factory profit
Expenses
Depreciation on delivery van
Sales department wages
Selling department expenses
Increase for provision for bad debts
Provision for unrealized profits
Net profit
Share of factory profits
K
M
Share of remaining profit
K
M
80,250
150,750
277,500
5,000
112,500
154,340
38,585
100,800
151,200
FINANCIAL ACCOUNTING 1
(1,897,500)
878,000
192,925
1,070,925
(626,000)
444,925
(192,925)
252,000
252,000
366
Revision Aid
Workings for closing stock of completed units
Completed units b/f
Units manufactured
Less units sold
Closing stock
Drawings
Bal c/d
K
15,000
105,140
255,140
30,000
38,000
(45,500)
22,500 x 45 = 10,125,000
M
125,000
54,785
189,785
Share of factory profit
Balance of profit
Kimeu & Maingi
Balance Sheet as at 31 March 1992
Non current assets
Property, plant and equipment
Freehold factory
Factory plant ( 843,750 – 151,250 – 84,375 = 608,125)
Delivery van ( 401,250 – 80,250 – 86,250 = 234,750)
Current Assets:
Stock: Raw materials
W.I.P
Finished goods
Debtors
Current Liabilities
Bank overdraft
Trade creditors
Accrued expenses and deferred income
Net current assets
K
154,340
100,800
255,140
Shs
Shs
1,053,750
608,125
234,750
1,896,625
79,500
126,250
900,000
405,000
1,510,750
(176,200)
(150,000)
(86,250)
(412,450)
Capitals: K
M
Current A/c: K
M
M
38,585
51,200
189,785
105,140
64,785
The finished good is net of the unrealized profit on closing stock.
STRATHMORE UNIVERSITY ● STUDY PACK
1,098,300
2,994,925
1,400,000
1,425,000
2,825,000
169,925
2,994,925
Lesson Nine
367
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-8
£
£
£
Sales
404,500
Less
Opening stock
30,000
Purchases
225,000
Carriage inwards
4,000
229,000
Plant depreciation
259,000
Closing stock
(35,000)
Cost of sales
(224,000)
Gross profit
180,500
Discount received
4,530
Interest received
____750
185,780
Expenses
Carriage outwards
12,000
Vehicle depreciation
15,000
[25% x (80,000 – 20,000)]
Depreciation of plant
20,000
[20% x 100,000]
Discounts allowed
10,000
Office expenses [30,000 + 405]
30,805
Rent, rates , heat and light [8,800 – 1,500]
7,300
Provision for bad debts increase
[(5% x 14,300) – 420]
295
(95,400)
Net profit for year
90,380
Interest charged on drawings etc
Amis
1,000
Lodge
900
Pym
720
2,620
93,000
Less
Salary – Pym
13,000
Interest on capital accounts
Amis
8,000
Lodge
1,500
Pym
500
23,000
Residual profit
70,000
Less
Share of residual profit
Amis ( 5/10)
35,000
Lodge (3/10)
21,000
Pym (2/10)
14,000
70,000
FINANCIAL ACCOUNTING 1
368
Revision Aid
(b)
Balances
Drawings
Appropn – interest
Bal c/d
A
£
1,000
25,000
1,000
16,000
43,000
Current Accounts
L
P
£
£
500
400 Appropn – salary
22,000 15,000
- Interest
900
720
- Residue
_____ - 11,380 Bal c/d
23,400 27,500
A
£
L
£
8,000
35,000
_____43,000
1,500
21,000
900
23,400
Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
£’000
£’000
Sales
2,000
Cost of sales
Opening stock
180
Purchases
1,400
1,580
Closing stock
(200)
1,380
Gross profit
620
Expenses
Wages and salaries (228 + 12)
240
Sundry expenses
120
Bad and doubtful debts
26
Depreciation:
Building
5
Plant and equipment
24
Interest on loan – Amber
__5
420
Net profit
200
Assume profit is earned proportionately throughout the year
Profit and Loss Appropriation Account
1/1X6 to 30.6.X6
Salaries
Share of profit:
£80,000 (60:40)
1.7.X6 to 31.12.X6
£100,000 (40:40:20)
Amber
£’000
Beryl
£’000
Coral
£’000
10
10
20
48
32
80
40
98
40
82
20
20
STRATHMORE UNIVERSITY ● STUDY PACK
Total
£’000
100
200
P
£
13,000
500
14,000
____27,500
Lesson Nine
369
Amber, Beryl and Coral
Balance Sheet as at 31 December 1996
Non current assets
Land at valuation
Buildings
Plant, equipment and vehicles
Current assets
Stock
Debtors (420 – 16)
Less: provision for doubtful debts
Cost or
valuation
Aggregate
depreciation
Net book
value
280
250
240
770
Nil
35
74
109
280
215
166
661
404
30
Cash at bank
Current liabilities
Trade creditor
Bonus
350
12
200
374
38
612
362
250
911
50
861
Net current assets
Long term loan – Amber
Represented by:
Capital accounts: Amber
Beryl
Coral
368
242
100
Current accounts: Amber
Beryl
Coral
82
64
_5
710
151
861
Proprietor funds
A
£’000
Goodwill
Balances c/f
80
368
448
CAPITAL ACCOUNTS
B
C
£’000 £’000
Balances b/f
80
40 Cash
242
100 Goodwill (W1)
Revaluation
322
140
Balances b/f
FINANCIAL ACCOUNTING 1
A
£’000
280
B
£’000
210
120
48
448
368
80
32
322
242
C
£’000
140
140
100
370
Drawings
Balances c/f
Revision Aid
A
£’000
28
82
__
110
CURRENT ACCOUNTS
B
C
£’000 £’000
24
15 Balances b/f
64
5 Profit for year
__
__ Loan interest
88
20
A
£’000
7
98
_5
110
B
£’000
6
82
__
88
C
£’000
20
__
20
Question 4
The solution provided has the workings shown beside the accounts to make the comparison easier.
Remember to adhere to previous partnerships and departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
Workings
Workshop
Petrol/oil Showroom
Total
£
£
£
£
Sales and charges:
32,125
32,964
8,500 Cash
73,589
65,892
41,252
81,914 Credit
189,058
98,017
74,216
90,414 Total turnover
262,647
(2)
(1)
(3)
(4)
(5)
(6)
(7)
1,932
23,860
25,792
(2,752)
23,040
34,163
57,203
40,814
1,333
42,147
3,018
41,805
44,823
(2,976)
41,847
5,685
47,532
26,684
26,684
20,720
52,100
72,820
(25,310)
47,510
____47,510
42,904
42,904
7,024
2,613
1,939
4,477
16,898
32,951
9,196
2,945
2,185
3,389
8,324
16,843
9,841
4,391
10,200
7,880
5,846
4,130
11,302
43,749
(845)
Less materials:
Opening stock
Purchases
Closing stock
Usage
Direct wages
Cost of sales
Gross profit
Profit on sale of plant
Less
Indirect wages
Salaries
Rates
Electricity
General expenses
Depreciation
Total
Net profit/loss for year
Less appropriations
Interest on capitals
Duke (5% x £50,0000
Earl (5% x £40,000)
Residual profit*
Duke
Earl
25,670
117,765
143,435
(31,038)
112,397
39,848
152,245
110,402
1,333
111,735
11,415
10,200
13,438
9,970
11,996
36,524
93,543
18,192
(2,500)
(2,000)
13,692
(6,846)
(6,846)
*The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.
STRATHMORE UNIVERSITY ● STUDY PACK
Lesson Nine
371
Aristocratic Autos
Balance Sheet as at 30 September 1986
Workings
Workshop
Petrol/oil
£
£
(8)
(8)
(4)
(9)
5,020
24,891
29,911
4,260
4,859
9,119
2,752
1,365
2,586
316
7,019
2,976
537
2,915
1,605
8,033
4,225
915
5,140
1,879
31,790
5,602
564
6,166
1,867
10,986
Workings
(1)
34,050
113
34,163
6,810
214
7,024
Total
£
Non current assets at written down
value:
11,010 Freehold buildings
5,357 Plant, equipment and vehicles
16,367
Current assets:
25,310 Stocks
- Debtors
7,799 Prepayments
30,470 Bank and cash
63,579
Current liabilities:
15,250 Creditors
983 Accruals
16,233
47,346 Working capital
63,713 Net assets employed
Financed by
Capital accounts
Duke
50,000
Earl
40,000
Current accounts:
Duke
Earl
(10)
(10)
Workshop
£
Showroom
£
Plant disposal:
Petrol/oil
£
showroom
£
5,602
83
5,685
______-
-
4,160
231
4,391
6,906
9,853
Cost
Accumulated depreciation
Written down value
Proceeds
Profit on sale
(2) Direct wages:
Per list
Accrual
Total
(3) Indirect wages:
Per list
Accrual
(4) Rates (apportioned on basis of
FINANCIAL ACCOUNTING 1
20,290
35,107
55,397
31,038
1,902
13,300
32,391
78,631
25,077
2,462
27,539
51,092
106,489
90,000
16,489
106,489
19,500
(15,633)
3,867
5,200
1,333
Total
£
39,652
___196
39,848
10,970
445
11,415
372
Revision Aid
5,199
(2,586)
2,613
5,860
(2,915)
2,945
15,679
(7,799)
7,880
1,838
101
1,939
2,072
113
2,185
5,543
303
5,846
3,990
487
4,477
3,021
368
3,389
3,681
449
4,130
2,520
14,378
16,898
2,840
5,484
8,324
7,600
3,702
11,302
Petrol/oil
£
Showroom
£
14,200
_____14,200
38,000
_____38,000
Workshop
£
12,600
_____12,600
5,060
2,520
7,580
7,100
2,840
9,940
19,390
7,600
26,990
5,020
4,260
11,010
22,900
4,520
_____27,420
65,180
26,210
(19,500)
71,890
48,254
(15,633)
14,378
46,999
17,077
5,484
22,561
freehold buildings at (8) below:
Per list
Prepayment
Total
(5) Electricity apportioned on same
basis as (4) above:
Per list
Accruals
Total
(6) General expenses (apportioned on
basis of turnover:
Per list
Accruals
Total
(7) Depreciation:
Charge for year per (8) below:
Freehold buildings
Plant, equipment etc
Total
(8) Freehold buildings (cost):
At 1 October 1985
Additions during year
Disposals during year
At 30 September 1986
Provision for depreciation on
freehold buildings:
At 1 October 1985
Disposals during year
Charge for year
At 30 September 1986
26,738
(13,300)
13,438
9,453
517
9,970
10,692
1,304
11,996
12,960
23,564
36,524
64,800
_____64,800
31,550
12,960
44,510
17,450
1,060
____18,510
Written down value at 30 September
1986
Plant, equipment etc. (cost):
At 1 October 1985
Additions during year
Disposals during year
At 30 September 1986
105,530
31,790
(19,500)
117,820
9,451
3,702
13,153
Provision for depreciation on plant,
equipment etc
At 1 October 1985
Disposals during year
Charge for year
At 30 September 1986
74,782
(15,633)
23,564
82,713
Written down value
STRATHMORE UNIVERSITY ● STUDY PACK
20,290
Lesson Nine
373
24,891
113
214
101
487
915
4,859
5,357
83
113
368
564
231
303
449
983
At 30 September 1986
(9) Accruals (per workings above):
(2)
(3)
(5)
(6)
(10) Current accounts:
Opening balance
Interest on capital
Residual profit
Drawings
Closing balance
35,107
196
445
517
1,304
2,462
Duke
9,750
2,500
6,846
(12,190)
6,906
Earl
10,477
2,000
6,846
(9,740)
9,583
Question 5
WORKINGS
The first step is to derive the profit for the period:Closing
Assets minus external liabilities
(17,000 + 3,480 + 1,100 + 2,230 + 3,370 – 980)
Add back drawings (2,000 + 1,600 + 1,800)
Opening
Less assets minus external liabilities (26,060 – 820)
Profit for period (1st July to 31st October)
R
£
-
Goodwill w/o
Closing balances
Exors of
R decd
11,500
11,500
Balance b/d
Drawings
Closing balance
Exors of R (decd)
CAPITAL ACCOUNTS
T
A
£
£
3,000 1,500 Opening balances
Goodwill raised
7,500 7,500 4,000 Bank
Capital
- Premium (1/5 x
7,500)
10,500 10,500 5,500
S
£
3,000
R
£
2,000
260
2,260
S
£
1,600
720
2,320
£
26,200
5,400
31,600
25,240
6,360
R
£
9,000
2,500
S
£
8,000
2,500
T
£
8,000
2,500
4,000
1,500
A
£
4,000
1,500
11,500 10,500
10,500
5,500
CURRENT ACCOUNTS
T
A
£
£
100
- Balances b/d
1,800
- Appropriation a/c
720
- (profit)
2,120
-
R
£
140
2,120
S
£
200
2,120
T A
£ £
- 2,120 -
2,260
2,320
2,120
The Capital and Current Accounts are given as workings for the Balance sheet figures.
FINANCIAL ACCOUNTING 1
-
374
Revision Aid
LESSON 8
Question 1 (a)
AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31 October 1999
Raw Materials
Sh’000
Sh’000
Opening stock – Raw material
380
Purchases – Raw material
9,500
9,880
Less closing stock – Raw material
(465)
Cost of raw materials consumed
9,415
Add: direct wages
1,350
direct expenses
_395
1,745
Prime Cost
11,160
Factory overheads
Factory expenses
290
Indirect materials
350
Factory insurance
150
Depreciation – plant and machinery
5,160
5,950
Total cost of production
17,110
Add opening W.I.P
560
17,670
Less closing W.I.P – Finished goods
(695)
Factory cost of production – finished goods
16,975
Sales
28,550
Less cost of sales
Opening stock – finished goods
420
Factory cost of production – finished goods
16,975
17,395
Less closing stock – finished goods
(610)
(16,785)
Gross profit
11,765
Less expenses
Sales room expenses
485
Administration expenses
620
Office salaries and wages
898
Vehicle running expenses
656
Bad debts w/o
64
Overdraft interest
725
Debenture interest
800
Depreciation: furniture and equipment
89
Motor vehicles
4,125
(8,462)
3,303
Less dividend
(4,000)
Net profit for the year
(697)
Add retained profit b/d
5,500
4,803
Less transfer to general reserve
(2,000)
Retained profit c/d
2,803
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Lesson Nine
375
AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets
Land & Buildings
Plant and machinery
Furniture and equipment
Motor vehicles
Current Assets
Stock – Finished goods
Raw materials
WIP
Current Liabilities
Bank overdraft
Creditors
Accruals
Debenture interest
Dividends accrued
Sh’000
30,000
25,800
890
16,500
73,190
Sh’000
(11,460)
(274)
(7,525)
19,259
Sh’000
30,000
14,340
616
8,975
53,931
610
465
695
7,360
9,130
1,175
1,000
783
800
4,000
(7,758)
Financed by:
Authorized and issued capital
Capital reserve
Share premium
Revenue reserve
General reserve
Retained profit
1,372
55,303
40,000
500
2,000
2,803
45,303
Non current liability
8% debenture
10,000
55,303
FINANCIAL ACCOUNTING 1
376
Revision Aid
Buildings
Equipment
STA
Balance Sheet as at 1 November 19-6
£
Current assets
Stock
Debtors
Bank
Current liabilities
Creditors
1,100
2,230
4,950
8,280
(980)
Capital: Sam
Ted
Abe
Current accounts: Sam
Ted
Abe
£
17,000
3,480
20,480
720
220
__-
Estate of Reg.
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7,300
27,780
7,500
7,500
4,000
19,000
940
19,940
7,840
27,780
Lesson Nine
377
KK Ltd
Balance Sheet as at 31 October 1998
Shs ‘000’
Shs ‘000’
Non Current Assets
Freehold property
Furniture and fittings
Motor vehicles
44,500
1,540
3,500
49,540
(292)
(965)
(1,257)
Goodwill
Shs ‘000’
44,500
1,248
2,535
48,283
500
Current Assets
Stock
Debtors
Less provision for doubtful debts
Rent receivable
Cash at bank
1,540
(77)
Current Liabilities
Creditors
Accrued expenses
Debenture interest
Tax payable
Proposed dividends
332
189
350
8,960
4,500
4,398
1,463
35
10,492
16,388
(14,331)
Authorized and issued share capital 1,500,000
ordinary shares of Sh. 20 each fully paid
2,057
50,840
30,000
Capital reserves
Share premium
350
Revenue reserves
General reserve
Profit and loss account
4,500
12,490
10% debenture
FINANCIAL ACCOUNTING 1
16,990
47,340
3,500
50,840
378
Revision Aid
Question 3
(a)
1995
1996
24,000 = 37.5%
64,000
32,400 = 30%
108,000
Current ratio
Current assets
Current liabilities
23,900 = 1.68:1
14,200
31,000 = 1.52:1
20,400
Quick ratio
Current assets less stock
Current liabilities
23,900 – 12,000 = 0.84:1
14,200
31,000 – 15,000 = 0.78:1
20,400
Debtors collection period
Debtors x 365
Sales
10,500 x 365 = 60 days
64,000
14,000 x 365 = 47 days
108,000
Creditors payment period
Trade creditors x 365
Purchases (W)
6,800 x 365 = 59 days
42,000
9,400 x 365 = 44 days
78,600
Gearing ratio
Loan capital
Total capital
60,000____ = 70%
60,000 + 26,000
60,000____ = 55%
60,000 + 49,000
Gross profit percentage
Gross profit
Sales
Cost of sales
Add: closing stock
Deduct: opening stock
Purchases
(b)





1995
£’000
40,000
12,000
52,000
10,000
42,000
1996
£’000
75,600
15,000
90,600
12,000
78,600
The gross profit margin has fallen when compared with last year, although in absolute terms, both
profit and sales are higher. Possibly the firm has lowered the price of goods to increase sales,
although there may be other explanations (see part (c) below).
There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios.
However, this is no immediate cause for concern as the company appears to be paying its creditors
more promptly than last year.
The debtors’ collection period, already satisfactory, has decreased still further from 60 to 47 days.
There is not enough information to say whether this is all due to good credit control, or whether
some sales are being made on shorter credit terms or for cash.
The creditors payment period has shortened. Possibly the company has become more efficient at
paying creditors, or perhaps it is purchasing goods on shorter credit terms.
The gearing ratio has reduced but it is still too high. The reduction is mainly due to an increase in
retained profits and in the revaluation reserve. High gearing involves greater risk for the
shareholders.
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Lesson Nine
379
Any two of the following:



An error in counting closing stock
An increase in prices from suppliers not passed on to customers
Deliberate reduction in margin in an attempt to increase sales volume
(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company
ought to be able to pay its debts as they fall due. However, an excessively high current ratio means that
resources are tied up in stock, debtors and cash instead of producing profits. Current assets should generally
be kept as low as is compatible with efficient production and paying creditors as they fall due.
There is some truth in this statement. High gearing means greater risk, but also, in good times, greater
returns. It is important that the percentage return to shareholders is greater than the percentage rate of
interest being paid on the borrowings.
Question 4
19X1
11 Feb
11 Feb
19X1
29 Sep
1 Nov
Cash
Share capital
(50,000 @ 70p)
Share premium
(50,000 @ 20p)
Application and allotment account
£
19X1
4,000
10 Feb
Cash
35,000
16 Feb
Cash
10,000
£49,000
______
£49,000
Ordinary Share capital account
£
19X1
Forfeited shares
500
11 Feb
Application and
allotment account
(50,000 @ 70p)
Balance carried
1 May
Call account
down
50,000
(50,000 @ 30p)
1 Nov
Forfeited shares
______
reissued
£50,500
Bal c/d
£
Ordinary Share Premium Account
19X1
11 Feb
Application and
allotment account
(50,000 @ 20p)
1 Nov
Forfeited shares
10,250
reissued account
£10,250
Call account
FINANCIAL ACCOUNTING 1
£
35,000
15,000
___500
£50,500
£
10,000
___250
£10,250
380
19X1
1 May
19X1
29 Sep
1 Nov
19X1
1 Nov
1 Nov
Revision Aid
Share capital
Call account
Forfeited shares
reissued
Share capital
Share premium
15,000
_____
£15,000
19X1
1 May
29 Sep
Forfeited Shares
19X1
150
29 Sep
Cash
Forfeited shares
Share capital (500 @ £1)
350
£500
Forfeited Shares
£
19X1
500
1 Nov
250
1 Nov
£750
£
14,850
___150
£15,000
£
500
____
£500
Cash
Forfeited shares
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£
400
350
£750
Lesson Nine
381
STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I
The following should be done under examination condition.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL
your workings.
QUESTION ONE
Nafuu Foods Ltd. is a company in the hospitality industry. The following trial balance has been extracted
from its books on 31 October 2001.
Revenue
Cost of sales
Wages and salaries
Operating expenses
Insurance
Directors’ fees
Ordinary share capital; 5,200,000 shares of Sh.20
each fully paid
Profit and loss account, 1 November 2000
9% debenture stock – secured
Share premium
Capital redemption reserve
Trade debtors and creditors
Bad debts written off
Audit fees
Interest on loan and overdraft
Depreciation expense
Accruals
Interim dividends paid
Freehold land and buildings
Leasehold land and buildings (over 50 years)
Leasehold land and buildings (over 50 years)
Furniture and equipment
Stock
Prepayments
Bank balance
Investments
Sh‘000’
Sh.‘000’
816,160
401,000
186,440
95,860
1,180
960
63,860
240
400
13,900
17,300
164,600
125,600
51,900
85,600
46,400
720
2,820
9,800
1,294,580
FINANCIAL ACCOUNTING 1
104,000
77,600
160,000
18,000
56,400
61,520
900
26,000
1,294,580
382
Revision Aid
You are provided with the following additional information:
1. The balances of fixed asset accounts as at the beginning of the year and additions during the year were as
follows:
Cost or valuation
Accumulated depreciation
Additions
1 November 2000
during the year
Freehold land and buildings
Leasehold land and buildings
(over 50 years)
Leasehold land and buildings
(under 50 years)
Furniture and equipment
Sh. ‘000’
157,000
Sh.‘000’
Sh.‘000’
7,600
121,800
60,200
150,800
3,800
5,800
52,200
1,800
The company does not provide for depreciation on freehold properties or properties held on lease with
50 years or more to run at the balance sheet date. Properties held on lease with less than 50 years to run
are depreciated over the un-expired term. Items of equipment are depreciated over their estimated
useful life.
2. Some of the leasehold property in the books costing Sh.7,500,000 had just 50 years remaining on the
lease in October 2000 and has not yet been transferred to the under 50 years category.
3. Disposals during the year included the following:
Cost
Sh. ‘000’
Freehold land and buildings
Leasehold under 50 years
3,600
2,300
Accumulated depreciation
Sh.‘000’
Sale proceeds
Sh ‘000’
1,700
4,800
960
All the sale proceeds have been included in the revenue: no other adjustment has been made.
The determination of depreciation expense for the year included in the trial balance above has correctly
been done for those properties not disposed and include in the under 50 years category at the beginning
of the year.
1)
2)
3)
4)
5)
6)
Freehold land was revalued on an existing basis by a professional valuer but the surplus of Sh.6,000,000
has not yet been brought into account.
The investments in the trial balance are temporary quoted securities. As at 31 October 2001 their
market value was Sh.10,500,000. Income from the investments of Sh.450,000 is included in revenue.
Additional audit fees of Sh.600,000 need to be provided for.
The total balance of cash at bank includes Sh.1,500,000 overdraft on one of the accounts.
The corporation tax on the year’s profit has been estimated at Sh.27,000,000. Corporation tax on the
previous years profit was finally agreed with the tax authorities to be Sh.310,000 more than had been
provided for in the profit and loss account of the year.
The directors have decided to recommend a final dividend of Sh.5 per ordinary share
Required:
a)
b)
c)
A schedule showing fixed assets movements for the year ended 31 October 2001.
Profit and loss account for the year ended 31 October 2001.
Balance sheet at 31 October 2001.
STRATHMORE UNIVERSITY ● STUDY PACK
(10 marks)
(10 marks)
(5 marks)
Lesson Nine
383
QUESTION TWO
Rotich and Sinei have been in partnership for several years, sharing profits and losses in the ratio 2:1. Interest
on fixed capitals was allowed at the rate of 10% per annum, but no interest was charged or allowed on
current accounts.
The following was the partnership trial balance as at 30 April 2001:
Sh.
Fixed capital accounts
Rotich
Sinei
Sh.
750,000
500,000
Current accounts
Rotich
Sinei
400,000
300,000
Leasehold premises (purchased 1 May 2000)
Purchases
Motor vehicle (cost)
Balance at bank
Salaries (including partners’ drawings)
Stocks: 30 April 2000
Furniture and fittings (cost)
Debtors
Accountancy and audit fees
Wages
Rent, rates and electricity
General expenses (Sh.352,400 for the six months
To 31 October 2000)
Cash introduced – Tonui
Sales (Sh.3,500,000 to 31 October 2000)
Accumulated depreciation: 1 May 2000
Motor vehicle
Furniture and fittings
Creditors
2,250,000
4,100,000
1,600,000
820,000
1,300,000
1,200,000
300,000
225,000
105,000
550,000
310,000
660,000
1,250,000
Sh.
13,420,000
Sh.
8,750,000
300,000
100,000
1,970,000
13,420,000
Additional information:
1.
On 1 November 2000, Tonui was admitted as a partner and from that date, profits and losses were to
be dated in the ratio 2:2:1. For the purpose of this admission, the value of goodwill was agreed at
Sh.3,000,000. No account for goodwill was to be maintained in the books, adjusting entries for
transactions between the partners being made in their current accounts. On that date, Tonui
introduced Sh.1,250,000 into the firm of which Sh.375,000 comprised his fixed capital and the balance
was credited to his current account.
2.
Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission.
In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
FINANCIAL ACCOUNTING 1
384
Revision Aid
3.
Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise
indicated, were to be apportioned on a time basis.
A charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10%
per annum respectively, calculated on cost.
On 30 April 2001, the stock was valued at Sh.1,275,000.
Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh.62,500.
A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expense, which
was later found to be due to the following clerical errors:
Sales returns of Sh.32,000 had been debited to sales returns but had not been posted to the account of
the customer concerned :
The purchases journal had been undercast by S.80,000.
Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31
October 2000 and 30 April 2001 respectively.
On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000
for electricity consumed was required.
4.
5.
6.
7.
8.
9.
Required:
a)
b)
c)
Trading and profit and loss account for the year ended 30 April 2001.
Partners’ current accounts for the year ended 30April 2001.
Balance sheet as at 30 April 2001.
(9 marks)
(4 marks)
(7 marks)
(Total: 20marks)
QUESTION THREE
a) State and briefly explain any three distinguishing features between (i) a receipts and payments account
and (ii) an income and expenditure account. (6 marks)
b) The accountant of Mamba Sports Club has extracted the following information from the books of
account for the year ended 31 March 2001:
Receipts
Balance brought forward
Subscriptions:
Year 1999 2000
Maintenance
2000 2001
2001 2002
Dinner dance
Beverage sales
Investments income
Sh.
288,000
249,000
124,000
2,050,000
194,000
723,000
657,000
400,000
Payments
Salaries and wages
New equipment
Repairs and
Office expenses
Printing and stationery
Purchase ofBeverages
Dinner dance expenses
Refund of subscriptions
Sports prizes
Transport
Investments
Balance carried forward
4,561,000
STRATHMORE UNIVERSITY ● STUDY PACK
Sh.
254,000
565,000
415,000
168,000
197,000
315,000
45,000
25,000
218,000
1,500,000
405,000
4,561,000
Lesson Nine
Balances as at
Furniture and fittings (net)
Equipment (net)
Investments at cost
Subscriptions in arrears
Salaries accrued
Stock of beverages
Subscriptions in advance
385
31 March 2000
Sh.
240,000
690,000
3,500,000
300,000
68,000
162,000
85,000
31 March 2001
Sh.
375,000
72,000
184,000
-
Additional information:
1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and
fittings and equipment respectively.
3. Investments which had cost Sh.500,000 were sold on 30 March 2001 for Sh.625,000. No entries have
been made in the books in this respect.
Required:
a) Income and expenditure account for the year ended 31 March 2001.
b) Balance sheet as at 31 March 2001.
(8 marks)
(6 marks)
(Total: 20 marks)
QUESTION FOUR
a)
b)
Explain the term “bank reconciliation” and state the reasons for its preparation.
(6 marks)
Ssemakula, a sole trader received his bank statement for the month of June 2001. At that date the bank
balance was Sh.706,500 whereas his cash book balance was Sh.2,366,500. His accountant investigated
the matter and discovered the following discrepancies:
1)
2)
3)
4)
Bank charges of Sh.3,000 had not been entered in the cash book.
Cheques drawn by Ssemakula totalling Sh.22,500 had not yet been presented to the bank.
He had not entered receipts of Sh.26,500 in his cash book.
The bank had not credited Mr Ssemakula with receipts of Sh.98,500 paid into the bank on 30mJune
2001.
5) Standing order payments amounting to Sh.62.000 had not been entered into the cash book.
6) In the cash book Ssemakula had entered a payment of Sh.74,900 as Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank marked “refer to drawer” but
had not been written back into the cash book.
8) Ssemakula had brought forward the opening cash balance of Sh.329,250 as a debit balance instead
of a credit balance.
9) An old cheque payment amounting to Sh.44,000 had been written back in the cash book but the
bank had already honoured it.
10) Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank
account. Unfortunately, the bank had credited some deposits amounting to Sh.832,500 to another
customer’s account. However, acting on information from his customers, Ssemakula had actually
entered the expected receipts from the debtors in his cash book.
FINANCIAL ACCOUNTING 1
386
Revision Aid
Required:
i)
ii)
A statement showing Ssemakula’s adjusted cash book balance as at 30 June 2001.
A bank reconciliation statement as at 30 June 2001.
(9 marks)
(5 marks)
(Total: 20 marks)
QUESTION FIVE
The accounting profession has for a long time relied on certain accounting conventions to guide accounting
practice. Yet the application of the same conventions has been the source of criticism of the quality and
relevance of information contained in financial reports.
Some of these conventions include:
a)
b)
c)
d)
e)
The business entity principle.
The historical cost principle.
The monetary principle.
The matching principle.
The conservatism principle.
Required:
For each of the principles listed above:
a) Explain its meaning
b) Justify its use.
c) Explain any weaknesses associated with its use.
(5 marks)
(5 marks)
(5 marks)
END OF MOCK EXAMINATION
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