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TOPIC ONE: INTRODUCTION TO ACCOUNTING

Learning Objectives
Upon completion of this topic you should be able to:
• Define the nature and purpose of accounting
• Explain the users of financial information and their needs
• Explain accounting concepts and conventions
• Explain qualities of useful accounting information
1
...
Some of these transactions have a financial implication i
...
either
cash is received or paid out
...

Accounting is involved with identifying these transactions measuring (attaching a value) and reporting
on these transactions
...
However when the firm pays the employeesalary, then this is related to accounting as cash
involved
...

A process isput in place to collect and record this information; it is then classified and summarized so
that it can be reported to the interested parties
...
It provides
a means where the steward reports to the owner how the funds entrusted to him are used to enhance the
wealth of the business
...
The following summarises the business transaction that a firm might have:
 Acquisition of assets from owners and other creditors
 Investing resources in assets to produce goods or services
 Using resources to produce goods and services
 Selling goods or services of the firm
 Paying those to whom money is owned
 Returning assets to owners

Difference between Book-Keeping and Accounting
Book-keeping means the recording of transactions of a business in methodical manner so that
information relating to them may be quickly obtained
...

Accounting includes the design of accounting system, preparation of financial statements, and
development of budgets, cost studies, audits, income tax work, and computer applications to accounting
processes and the analysis and interpretation of accounting information as an aid to making business
decision
...
)
1
...
These financial statements provide
information about an entity financial position, performance and changes in financial position
...

The financial performance reflects how the business has performed, whether it has made profits or losses
...

The users of accounting information have an interest in the existence of the firm
...

The following are the users of accounting information:
i
...
They would like to
have information on the financial performance, financial position and changes in
financial position
...

ii
...
They would like
to know how the business is performing and its financial position
...


iii
...
They
would like to have information on the financial position, performance andchanges in
financial position so as to determine whether the business is operating as per the plans
...


iv
...
They have provided
loans and others sources of capital to the business
...
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
...


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
...
This statistics measure the average performance of the economy
...


Financial Analyst and Advisors: Financial analyst and advisors interpret the financial
information
...
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
...
whether it is
profitable or not and what is the value
...


vii
...
They would like to have information on
the financial position and performance so as to make decisions on their terms of
employment
...

They can also use it to assess whether the firm is financially sound and therefore their jobs are secure
...


ix
...
They are interested with the financial performance of 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
...
The supplies are either for cash or
credit
...


1
...
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
...
The directors of a company must
also disclose any significant doubts about the company’s future if and when they arise
...

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
...

Assume that a firm makes a profit of Sh
...
200) earned from the sale of
20 units against the cost (Sh
...

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
...
Therefore, only the purchase cost of eighteen units (Sh
...
90
...
Similarly, if the two unsold units were now unlikely to be sold at more than their cost
of Sh
...
e
...
g
...
This shows the application of the prudence
concept
...
Because thebusiness 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
...


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 orresults
...

Assets and profits should not be overstated, but a balance must be achieved toprevent the material
overstatement of liabilities or losses
...
If a business purchases stock for Sh
...
900 is likely to be realized when the stock is sold the prudence concept
dictates that the stock should be valued at Sh
...
It is not enough to wait until the stock is sold, and
then recognize the Sh
...

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
...


A company begins trading on 1 January 20X2 and sells goods worth Sh
...
At 31 December there are debts outstanding of Sh
...
Of these, the company is now
doubtful whether Sh
...

The company should make a provision for doubtful debts of Sh
...
Sales for 20x5will be shown in
the profit and loss account at their full value of Sh
...
6,000
...
6, 000 should not be included in the profit for the year
...

a)

Similar items within a single set of accounts should be given similar
accounting treatment
...
This enables valid comparisons to be made from one period
to the next
...
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 separatelyrecognized
by the law
...

For example, in the statement of financial position of a business, monetary values can be attributed to
such assets as machinery (e
...
the original cost of the machinery; or the amount it would cost to replace
the machinery) and stocks of goods (e
...
the original cost of goods, or, theoretically, the price at which
the goods are likely to be sold)
...
A business
may have intangible assets such as the flair of a good manager or the loyalty of its workforce
...

vii) Separate valuation principle: The separate valuation principle states that, in
determining the amount to be attributed to an asset or liability in the statement of
financial position, each component item of the asset or liability must be determined
separately
...

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 statement of financial position
...
Materiality depends on the
nature and size of the item
...

An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial
...

Determining whether or not an item is material is a very subjective exercise
...
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)
...
An example in the accounts of a limitedcompany might be
the amount of remuneration paid to directors of the company
...
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
...
2 million and stocks of
Sh
...
20, 000 in the depreciation calculations might not be
regarded as material, whereas an error of Sh
...
In other words, the total of which the erroneous item forms part must be
considered
...
50,000 balance and a Sh
...
5,000’
...

ix) Historical cost convention: It’s 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
...
at the amount that the business paid to acquire them
...
Historical cost means transactions are recorded
at the cost when they occurred
...
This is because valuations
tend to be subjective and to vary according to what the valuation isfor
...
The machine has an expected useful life of
four years
...

x) Objectivity (neutrality): An accountant must show objectivity in his work
...
The result of this should be that
any number of accountants will give the same answer independentlyof each other
...
They mustadopt a neutral
stance when analysing accounting data
...
Two
accountants faced with the same accounting data may come to different conclusions
as to the correct treatment
...

xi) Realization concept: Revenue and profits are recognized when realized
...


xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double
entry bookkeeping
...
g
...

Example
It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’in the trading,
profit and loss account when:
a)

The sale transaction is for a specific quantity of goods at a known price, so
that the sales value of the transaction is known for certain
...
g
...

c) The critical event in the sale transaction has occurred
...

ii)
Cash is actually
received
...

(b) The customer promises to pay on or before a specified future date, and the debt
is legally enforceable
...

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
...

(b)
A
customer
places a
firm order for
goods
...

(d)
The
customer
is
invoiced
for
goods
...

(f) The customer’s cheque in payment for the goods has been cleared by the bank
...

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
...
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
...

(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
...
g
...

(d) The critical event for a credit sale is usually the dispatch of an invoice to the
customer
...

(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
...

(f) It would again be over-cautious to wait for clearance of the customer’s cheques before
recognizing sales revenue
...

Accounting Bases
Bases are the methods that have been developed for expressing or applying fundamentalaccounting
concepts to financial transactions and items
...
g
...

1
...

Understandability: an essential quality of the information provided in the financialstatements is that it is
readily understandable by users
...

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 confirmingor correcting their past
evaluations
...

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
...
e
...
e
...
An omission can
cause information to be false
...
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
...

1
...

Required:

(a)

(b)

Define and explain the relevance of the following accounting concepts
...
(In answering this part of the question, you need not confine yourself to
considering the concepts listed in part (a))
(5 marks)

Question Three
If the information in financial statements is to be useful, regard must be had to thefollowing:
▪
Materiality
▪
Comparability
▪
Prudence
▪
Objectivity
▪
Relevance
Required
Explain the meaning of each of these factors as they apply to financial accountingincluding in your
explanations one example of the application of each of them
...
(4 marks)
Explain what makes information in financial statements relevant to use (5 marks)c)
i)
Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’
...

ii)
Explain how a possible conflict between them could arise and how that
conflict should be resolved
...
Suggest
three safeguards, which may exist, inside or outside a company to ensure that the financial statements
are free from material error
...
6 References
• Wood, Frank, Business Accounting (17th Edition), International Thompson
...


•

Honrgren and Sundem, G
...
pages 6-12

TOPIC TWO: RECORDING BUSINESS TRANSACTIONS

Learning Objectives
Upon Completion of this topic you should be able to:
• Define the meaning of double entry book-keeping system
• Define assets, capital and liabilities
• Prepare simple balance sheet
• Explain what is meant by` double entry`
• Explain the debit and credit principles
• Record assets capital and liabilities in accounts
• Extract the ledger balances into trail balances
• Identify the purpose of trail balances
2
...

The two cases bring out the accounting equation also called book- keeping equation
Case one: owner supplying all the resources
In this case we say thatResources in the business = Resources supplied by the owner……………

(i)

Resources in business are called assets and resources supplied by the owner are called
capital
Therefore equation (i) can be re -written as-ASSETS
=

CAPITAL

Case two: resources supplied by owner and outside parties
In this case we say thatResources in business = Resources supplied by the owner + Resources supplied by
out- side parties…
(ii)
The new term in the equation is resources supplied by out side parties, in accounting,we call them
liabilities
...
2 Components of accounting equations

Assets: An asset is a resource controlled by a business entity/firm as a result of pastevents for
which economic benefits are expected to flow to the firm
...
The past event is the
sale on credit and the resource is a debtor
...
e
...

Assets are classified into two main types:
i) Non current assets (formerly called fixed assets)
...

Non current assets are acquired by the business to assist in earning revenues and not for resale
...
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
...
Examples include:
▪ Stock of goods – for purpose of selling
...

▪ Other debtors – owe the firm amounts other than for trading
...

▪ Cash in hand
...
Anexample is when a business buys goods
on credit, then the firm has a liability called creditor
...

Liabilities are also classified into two main classes
...


Non-current liabilities are expected to last or be paid after one year
...
Current liabilities last for a period of less than one year and therefore
will be paid within one year
...

▪ Other creditors
- owed amounts for services supplied to the firm
other than goods
...

Capital: This is the residual amount on the owner’s interest in the firm after deductingliabilities from
the assets
...
The basic format is as follows:

Name

Statement of financial
position as at 31
...


Sh
Sh
Capital xx
Non Current Assets
Sh
Sh
Non Current Liabilities
Loanxx
Current liabilities
Overdraft
xx
Creditors

xx

xx

Capital and Liabilities
xx
Land & Buildings
xx
Plant & Machinery xx

Fixtures, furniture & fittings
Motor vehicles
xx
Current Assets
Stocks xx
Debtor’s
xx
Cash at bank xx
Cash in hand xx
Total assets xx

xx

xx

The above format of the statement of financial position is the horizontal formathowever currently the
practice is to present the Statement of financial position using the vertical format which is shown below
...
12
...

Non Current Assets
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
Capital
Non current liabilities
Loan (from bank or other sources)
Total Capital & liabilities

Shs
...


xx

xx
xx
xx
xx
xx
xx
xx
xx

xx
xx
xxx
xxx
xx
xxx

Pay attention to the format
...
e
...
The current assets are listed in order of liquidity i
...
which asset
is far from being converted into cash
...
e
...
When the debtor pays then the debtor may pay
by cheque (cash has to be banked) or cash
...
e
...
Bank
overdraft is payable on demand by the bank, then followed by creditors
...
This is added to Non Current assets, which give us net assets
...


Example 1
...
Murungi sets up a new business
...
3, 000, premises of Sh
...
2,000
...
800 in respect of them
...
4,000 from D Evans
...
300
cash in hand andSh
...

You are required to calculate the amount of his capital
...

To get capital we rearrange the equation as follows:Capital = Assets
- Liabilities
Total Assets =Sh
...
4,800 Capital =Sh
...
8,100
Example 2
...

Creditors
15,800
Equipment
46,000
Motor Vehicle
25,160
Stock
24,600
Debtors
23,080

Sh
3,000
7,000
2,000
600
300
12,900

(4,800)
8,100
8,100

Cash at bank 29,120
Cash in hand 160
During the first week of May 2002 Moody:
a
...
5,520
...
Bought extra stock by cheque Sh
...

c
...
3,160
...
Debtors paid Sh
...
240 by cash
...
Moody put in extra Sh
...

Required:
a
...

b
...

Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets and
liabilities can be listed as follows
...

Liabilities
Sh
...
148,120 - Sh
...
132,320

(ii) To draw up the statement of financial position, we consider the effect of the above
transactions on the relevant balances:
a
...
5,520 and the creditors will also increase by the same amount
...
Buying extra stock by cheque means that the level of stock goes up by Sh
...


c
...

d
...
3,600 and increases the
cash at bank and cash in hand by Sh
...
240 respectively
...
Additional cash of Sh
...
1,000 and
the capital balances
...

Equipment
46,000
Motor Vehicle 25,160
Stock 24,600
Debtors
23,080
Cash at bank 29,120
Cash in hand 160
Creditors
15,800
Capital 132,320

Adjustment
Increase/Decrease
Sh
...

51,520
25,160
26,880
19,480
27,040
1,400
18,160
133,320

The statement of financial position will therefore be prepared as follows:
D Moody
Statement of financial position as at 7 May 2002
Non Current Assets
Equipment
Motor Vehicle

Current Assets
Stock
Debtors
Cash at Bank

Current Liabilities
Creditors
NetCurrent Assets
Net Assets
Capital

Sh

Sh
51,520
25,160
76,680

26,880
19,480
1,400
74,800

(18,160)
56,640
133,320
133,320

2
...

1) Additional investments (I)-occurs when the owner of the business brings in his personal
cash or assets into the business for business use
...


2) Profits (P) -defined as the excess revenue obtained after paying costs of a business
increase the level of capital and assets of the business
...
Drawings reduce the of business capital
...
losses reduce the level of business capital
...
4 Initial Capital and Final Capital of a Business
Initial capital refers to any funds and other assets invested into the business by the owner at the beginning
of the trading period
...
Thus, final capital is initial
capital when it has been influenced by factors such as additional investment, profits, drawings and losses
...
e :

I
...
C

-

I-

P+D

Example 3
...


Required Solution
a) Closing capital as at 31st /12/2009 -: sh 4000,000
...
200,000
...


invested into the business from herpersonal use -: sh
...

Using initial capital formula, find the intial capital
I
...
C – I – P + D
I,C =sh 4000,000 – sh 250,000 –sh 200,000 +sh 60,000
I
...


2
...

Any change in assets, liabilities or capital will have a double effect such that assets will always be equal
to liabilities plus capital
...

Name
Debit Credit
Date
Detail
Folio
Amount Date
Detail
Folio
Amount

In this account the date will show the opening period of the asset, liability or capital i
...
the balance
brought forward
...
e
...

The detail column (also called the particulars column) shows the nature of the transaction and reference
to the corresponding account
...
The amount column shows the amount of the asset, liability or
capital
...
All assets
are shown or recorded on the debit side while all the liabilities and capitalare recorded on the credit side
...
Therefore there should be an account for Premises, Plant and Machinery, Stock,
Debtors, Creditors etc
...

For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit
entry
...

When we make a debit entry we are either:
i
...

ii
...

iii
...
When we make a credit entry we
are either:
i
...

ii
...

iii
...


Example 4
...
39,500; Equipment Sh
...
62,900; Stock Sh
...
57,700;Cash at bank Sh
...
400
...
During the
first week of December 2002, Jump:
a
...

c
...

e
...
13,800
...
5,700
...
7,900
...
8,400 by cheque and Sh
...

Put in an extra Sh
...


You are to record the above transactions in respective accounts
...

115,000

Motor vehicle
Stock
Debtors
Cash at bank
Cash in hand

62,900
61,500
57,700
72,800
400
371,300

Liabilities Sh
...
371, 300 - Sh
...
330, 800

Motor
Vehicles

39,500 39,500

Equipment a/c
2002
Sh
...
12 Bal b\d
Creditors
128,800

2002
Sh
...
12 Bal b\d
Bank
67,200

2002

Sh
...
12 Bal c\d
128,800
128,800
Stock a/c
2002

Sh
...
12 Bal c\d
67,200

67,200

Debtors a/c
2002
Sh
...
12 Bal b\d 57,700

2002

Bank 8,400
Cash 600
7
...

1
...

1
...


Cash at Bank a/c
2002
Sh
...
12 Bal c\d
81,200

5,700
7,900
67,600

2002
Sh
...
12 Bal c\d
3500

3500

Capital
2002

2002
Sh
...
12 Bal b\d
128,800

333300

7
...


Example 5
...
12 Bal b\d
Cash
128,800

Sh
...

13800

capital and liability accounts in the books of M Crash to record thefollowing
1
2
5
8
12
15
19
21
25
30

Started business with Sh
...

Bought motor van paying by cheque Sh
...

Bought Fixtures Sh
...

Bought a van on credit from Motor Cars Ltd Sh
...

Took Sh
...

Bought Fixtures paying by cash Sh
...

Paid Motor Cars Ltd by cheque Sh
...

A loan of Sh
...

Paid Sh
...

Bought more Fixtures paying by cheque Sh
...


Cash at bank

a/c

Motor Van
Sh
...

Bank

2002
2/6
12,000
8/6
8,000
20000

Super

Sh
...

8/6 Van
8000
8000

4000

2002
12/6
1,000
21/6 J
...
Marcus - Loaner
2002 Sh
...

Bank

2002 Sh
...
2002

2002
5/6young
4,000
15/6
600
30/6
3000
7,600

2002
19/6
8000
8000

M 30/6
20,000
20000

10000

Office Masters Ltd - Creditor
2002 Sh
...
2002
Cash 15/6
600
25/6 Bank
10000 30/6 Bal c/f
11000

2002 Sh
...

Cash
800
2400

Note that the difference between the debit side and the credit side is the balancing figure
...

2
...

Sales: This is the sell of goods that were bought by a firm (the goods must have been bought with the
purpose of resale)
...
When a cash sale is made, the
following entries are to be made
...

Debit cash either at bank or in hand
...
Credit sales account
...

Debit debtors/ Accounts receivable account
...
Credit sales account
...


Buying (Purchases:) of goods meant for resale
...
For
cash purchases:
i
...

ii
...

Debit purchases
...
Credit creditors for goods
...
Note:
no entry is made into the stocks account
...
Suchincomes
include:
▪ Rent
▪ Bank interest
▪ Discounts received
...

▪ Credit income account
...
g
...

Incomes increase the value of capital and that is the reason why they are posted on thecredit side of
their respective accounts
...

Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills

• Motor vehicle running expenses
...

When a firm pays for an expense, we:
i
...

ii
...

Each expense should also have its own account where the corresponding entry will be posted
...

The following diagram is a simple summary of the entries made for incomes and expenses
...
7 Returns Inwards and Returns Outwards
...
g
...

They may be defective/damaged,
ii
...

iii
...

Goods returned may relate to cash sales or credit sales
...

Debit returns – inwards
ii
...

For goods returned that relate to credit sales; no cash has been given to customer, thefollowing
entry is to be made
...

Debit returns inwards
...


Credit debtors
...
They may be for cash purchases or
for credit purchases
...

Debit the cashbook (cash at bank/hand)
...
Credit returns outwards
...

Debit creditors
...
Credit returns outwards
...


Credit cashbook
...

Example 6
...

2002
May 1
Started business with Sh
...

“
2
Purchased goods Sh
...

“
3
Bought furniture and fittings Sh
...

“
5
Sold goods for cash Sh
...


“
“
“
“
“
“
“

6
10
12
18
21
23
24

Bought goods on credit Sh
...

Paid rent by cash Sh
...

Bought stationery Sh
...

Goods returned to M Rooks Sh
...

Let off part of the premises receiving rent by cheque Sh
...

Sold goods on credit to U Foot for Sh
...

Bought a motor van paying by cheque Sh
...


“
“

30
31

Paid the month’s wages by cash Sh
...

The proprietor took cash for himself Sh
...


Solution
Bank a/c
2002
Sh
...

Capital 3/5Furn&
150
24/5
300
Rent 31/5
1,555
2,005

21/5
5
2,005

fitting
Motor

vehicle

Bal

c/f

Capital a/c
31/5 Bal
2,000

c/f

1/5

Bank 2,000

Purchases a/c
2002
Sh
...

18/5
23
31/5
152
175

2002
Sh
...

Returns
in 2/5
175
Bal
c/f
175

Bal

Purchases

c/f

Sales a/c

352

352

P Scot a/c
2002

Sh
...
2002
Sh
...


2002

15

12/5 Cash

27
27

Sh
...
2002
Sh
...


Sh
...

23/5 Sales

31/5

Bal c/f 77

Income – Rent a/c
2002

21/5 Bal c/f 5

31/5 Bank5

Sh
...

2002

Sh
...
2002
Sh
...

31/5 Bal c/f 117

2
...

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 creditcashbook (cash in
hand or cash at bank)
...

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
...
motor vehicles or using part of the premises
...
g
...

When this happens we debit drawings and credit the relevant asset e
...
motor vehicles, premises or some
building or even debtors
...

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
...

When a discount is given by the supplier then we debit creditor’s account and credit discounts received
e
...
A
...
Sh
...
B decides to take up the offer and pays the
amount within the given time
...

Debit: Creditor – A Ltd Credit:
Discounts Received

Creditor A
...

Sh
...


Purchases 1,000
1000

Discounts Received
a/c

Bank a/c

Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customersto encourage
prompt payment
...
In the previous example when A Ltd
issued the discount and was taken up by B the entries will be:
i
...
Credit - debtors - B Ltd
...


2002

Sh
...


Sales 1,000 Bank 950
Discount
50
1,000 1,000

2002
Debtor 50 Bal c/f

sh
...


2
...
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
...
the trading, profit & loss account and a statement of
financial position
...

The trial balance in example 1
...

Rent – income
Debtor – U Foot
7
Motor vehicle
300
Bank
1555
Purchases
289
Wages
117
Capital
Creditor – M Rooks
Furniture & Fittings 150
Sales
Cash in hand
72
Creditor – P Scot
Expenses – Rent
15
27
Expenses
–
Stationery
Returns Outwards
Drawings
44
2464

Credit
Sh
...

2464

From the trial balance please note that assets and expenses are on the debit side
...

The next example is a detailed one that shows extracting of trial balance once all thepostings have
been made in the relevant accounts
...
2
Write up the following transactions in the books of S Pink:2003
March
1
Started business with cash Sh
...

“
2
Bought goods on credit from A Cliks Sh
...

“
3
Paid rent by cash Sh
...

“
4
Paid Sh
...

“
5
Sold goods on credit to J Simpson Sh
...

“
7
Bought stationery Sh
...

“
11
Cash sales Sh
...

“
14
Goods returned by us to A Cliks Sh
...

“
17
Sold goods on credit to P Lutz Sh
...

“
20
Paid for repairs to the building by cash Sh
...


“
22
J Simpson returned goods to us Sh
...

“
27
Paid A Cliks by cheque Sh
...

“
28
Cash purchases Sh
...

“
29
Bought a motor vehicle paying by cheque Sh
...
“ 30
expenses in cash Sh
...

“
31
Bought fixtures Sh
...


Paid motor

Solutions
Capital a/c
2003

Sh
...

Bal c/d

18
125
15
363

Sh
...
2003
Sh
...
2002
31/3 Bal c/d 132 5/3
JSimpson
11/3 Sales

Sh
...
2003
Sh
...


Sh
...


22/3 J Simpson

14

31/3 Bal c/d 14395

R West – Creditor (others)

Motor expenses

Fixtures
2003
31/3 A
...
2003
120 31/3 Bal c/d

Sh
...
)
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 (Sh
...
2
The following transactions took place during the month of May:
2003
May1 Started firm with capital in cash of Sh
...

“
2
Bought goods on credit from the following persons: R Kelly Sh
...
87;
J Role Sh
...
76; I
...
64
...
43; B Long Sh
...
176
...
12
...
43
...
150 by cheque
...
25; R Kelley Sh
...
“ 15
Paid carriage by cash Sh
...


“ 18
“ 21
“ 31

Solution

Bought goods on credit from P Combs Sh
...
110
...
67
...
18
...
Blares
Sh
...

Purchas
es

64

200
3
4/5

Sh
...

Bank

43

Debtor B Long
200
3
4/5
21/5

Debtor F Smith
Sh
...

Bal c/d

200
3
4/5

129

Sh
...



...

Bank
Bal c/d

15
0
26

5
129

Purchases
2003

Sh
...

Mobile

Sales
200
3
31/5

20 Sh
...


Sh
...

34
8

100
459

348

200
3
4/5

C
Blanes
F Long

64
43

Bal
c/f

17
6


...

3

200

Sh
...

Bal c/d 30

...
Simms

-

64

Purchase

459

sales

-

348

Debtor- B
...
10 Review Questions
Questions One
C Kings has the following items in his statement of financial position as on 30 June 2002
...
41,800, Creditors Sh
...
7,000, Motor Vehicles Sh
...
9,900, Debtors Sh
...
12,900 and Cash in hand Sh
...

During the first week of July 2002:

a
...
1,540 on credit
...
One of the debtors paid him Sh
...


c
...
2,000
...
(10 marks)
Question two
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)

Drawings durin
Non Current Assets 01
...
2001
31
...
2001
Sh
...

Property
20,000
...
00
Machinery
6,000
...
00
26,000
...
00
Current Assets:
Debtors
8,000
...
00
Cash
1,000
...
00
5,000
...
00
Current Liabilities:
Creditors
5,000
...
00
Overdraft
6,000
...
00
11,000
...
00
Net Current Liabili
ties (2,500
...
00
)
Net Assets
20,000
...
00

g the year amounted to Sh
...
00

Question Two
Mary- shop centre, is small business owned by Mary
...
10,000
...
34,000
...
00 of stock in trade which had cost Sh
...
00
...
51,000
...
9,000
...

d) A total of Sh
...
00 was drawn from the bank in cash to the cash till
...
2,000
...
1,000
...
10,000
...
2,000
...
36,000
...
54,000
...

The bank charged interest on the loan deducting Sh
...
00
...


(20 marks)

Question Three
Brian Barmouth is a sole trader
...

47,600
...
00

Required: Prepare

2
...
Pages
5-14,15-52
...
L, Introduction to Financial Accounting, (6th Edition),
New York; Prentice Hall
...
pages 6-12
...
1 Definition and Purpose
A book of original entry is a book of record in which transactions are recorded as they occur on a daily
basis and in a chronological order, before they are posted to the relevant accounts in the ledger
...

Information from source documents is first recorded in such books before being posted to the ledger
...
They are minor or subsidiary to the ledger which remains the main book of account
...
2 Source Documents
This shows the evidence transactions
...

Example, if a firm sells goods on credit, then an invoice is raised
...


(i) Sales Invoice
The sales invoice is raised by the firm and sent to the debtor/customer when the firmmakes a credit
sale
...
Name and address of the firm
ii
...
Date of making the sale – invoice date
...
Invoice number
v
...
Description of goods sold

vii
...

It shows the following:
i
...
Name and address of the firm
iii
...
Invoice number
v
...
Description of goods sold
vii
...
It’s contents include:
i
...
Name and address of the debtor
iii
...
Credit note number
v
...
g
...

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
...
the amount due to the firm has been reduced or cancelled
...

From the context we can assume that all credit notes are issued when goods are returned
...
It
includes the following items:
i
...
Name and address of the creditor
iii
...
Debit Note number
v
...


Credit sales (sales invoice)

Returns inwards (credit note)

Credit purchase (purchase invoice)
Returns outwards (debit note)

(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they makepayments in the
form of cash or cheques
...

ii
...

iv
...


Cheques
When a firm opens a current account with the bank, a chequebook containing cheques issued
...
When a firm issues a
cheque to its creditors for payments, it authorizes the bank tohonour payments against the firm’s
account with the bank
...
Name and account number of the firm (account holder)
ii
...
Name of the payee (creditor)
iv
...
Amount payable in words and figures
vi
...
The authorized signature(s)

Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments (paymentsof small value in
the firm which require cash payments e
...
fuel, bus-fare, office snacks), which is approved by a senior
manager and filed for record purpose
...
Date of payment
ii
...
Reason for payment
iv
...
Person approving
vi
...
g
...
t
...


(vii) Other correspondence
These include information received within or outside the firm that has a financialimplication in
the accounts
...
Letters from the firm’s lawyers about a debtors balance
...
Hire-purchase/credit sale or credit purchase agreements that relate to noncurrent assets
...
Memorandum from a senior manager requiring changes to be made in the
accounts
...
Bank statement from the bank, e
...
bank charges
...
3 Books of Prime Entry
They record the source documents
...
It records all the sales invoices issued by the firm during a particular
financial period
...

Sales Journal Page 5
Date 19x 8

Detail

Folio

Amount Sh
...
Spikes

SL
...
Binns

SL
...
00

5th March

L
...
8

150
...
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 accountin the general ledger
...
19x8
200

Sh
...

19x8
5/3Credit

sales

Sh
...

19x8
Sales 350

19x8
3/3

LThompson
Sh
...

Sales 150

Example 1
...
Post the items to the relevant accounts in
the sales ledger and then show the transfer to the sales account in the general ledger
...
1,870
Sh
...
120
Sh
...
2,890
Sh
...
280
Sh
...
Gordon
3rd March
G
...
White
10th March
J
...
Williams
19 March
U
...
Wood
st
31 March
L
...
00
1,6660
...
00
550
...
00
660
...
00
780
...
00

Sales Ledger
J Gordon
2003
1/3
10/3

U Richards
Sh
...

19/3 Sales 660

2003

Sh
...

2003
3/3
Sales 1,660

V Wood
Sh
...

Sales 280

2003

Sh
...

2003
31/3

Sh
...


Sales a/c
Sh
...


2003
Credit
Sales

Sh
...

2003
1570
550

Sh
...

2003
2890

Purchases Journal
Purchases journal is also called a purchases day-book
...
It has the following format (including records of invoices)
...
Kelly
L
...
10
PL
...

This is shown below:
C Kelly
19x6

L Smailes
19x6

Sh
...

1/5
Purchases 400

Purchases a/c
19x6
Sh
...


Sh
...

2/5
Purchases 250

Returns Inwards Journal
It is also called the returns inwards day-book
...

Returns Inwards Journal
Page 10
Date
Detail
1st March
S
...
Kelly
5th March
T
...
22
SL
...
9

Amount Sh
...
Spikes a/c
Sh
...


Sh
...

53

Sh
...

5/3

Sh
...
Bills a/c
Sh
...
It records all the debit notes received by the firm from the
creditors during a particular financial period
...

Returns
journal
Date
2nd May
3rd May
4th May
Total

outwards
Detail
L
...
Hyatt
T
...
15
PL
...
7

Ampunt(Sh)
14
12
19
35

Individual entries are posted on the debit side of the creditors account in the purchases ledger and on
the total to credit side of the returns outwards account in the general ledger
...
Thompson a/c
`
Sh
...


Returns Outwards a/c
Sh
...

31/5 sundry

creditors

35

T
...
5 shows how the four journals are used
...
3
You are to enter the following items in the books, post to personal accounts, and showtransfers to
the general ledger
...
3800; M Norman Sh
...
106
...
510; E Phillips Sh
...
356
...
200; J Cook Sh
...
410; C
Davies Sh
...

“ 8
Credit sales to: A Green Sh
...
250; J Ferguson Sh
...

“ 12
Returns outwards to: M Norman Sh
...
16
...
18; F Thompson Sh
...

“ 20
Credit sales to: E Phillips Sh
...
310; E Lee Sh
...

“ 24
Credit purchases from: Ferguson Sh
...
900
...
27; E
...
30
...
13; C Davies Sh
...


Study the solution provided:

Date
3rd July
3rd July
3rd July
8th July

Sales Journal
Detail
E
...
Phillips
F
...
Green

Amount(Sh)
510
246
356
307

8th July
8 July
20th July
20th July
20th July
Total

H
...
Ferguson
E
...
Powell
E
...
Thompson

Purchase Journal

250
185
188
310
420
2,772

Date

Detail

Amount(Sh)

1st July

K
...
Normarn

500

1st July

N
...
Mortan

200

5th July

J
...
Edwards

410

5th July

C
...
Ferguson

550

24th July

K
...
Senior
1995

1995
12/7

Sh
...

Purchases
22

M
...

Returns
30

31/7

Sh
...

Returns
11

Sh
...
Cook
1995

1995
out

5/7

Sh
...

Purchases
60

1/7

Sh
...

Purchases
200

C
...
Hill
1995

1995
Sh
...
Morton
1995

1995
Sh
...
Edwards
1995

1995

C
...

27/7

Sh
...

Purchases
900

K
...


Returns Inwards Journal
Date
14 July
14 July
31 July
31 July

Details
E
...
Thompson
E
...
Rigby

Amount
18
22
27
30
97

M
...
Senior
J
...
Davies

30
16
13
11
70

Returns Outwards Journal
12 July
12 July
31 July
31 July

General Ledger
Sales a/c
1995

1995
Sh
...

Sundry debtors

Purchases a/c
1995
31/7
3292

1995
Sh
...


1995
Sh
...


1995
Sh
...

Sundry creditors

3
...
The cashbook will also show us the cash at bank and cash in hand position of the firm
...

ii
...

Cash at bank cashbook, which records the transactions at/with, the bank
...
The cash at bank cashbook and cash in hand
cashbook are combined together to get a two-column cashbook
...


Date

Details

Cash
(Sh)

CASH BOOK
Date
Bank
(Sh)

Details

Cash
(Sh)

Bank
(Sh)

Additional columns for discounts allowed and discounts received can be included withthe cash at bank
columns to get a 3 – column cashbook
...
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
...
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)
...
3
Write up a two-column cashbook from the following details, and balance off as at the endof the month:
2003
May 1
Started business with capital in cash Sh
...

“
2
Paid rent by cash Sh
...

“
3
F Lake lent us Sh
...

“
4
We paid B McKenzie by cheque Sh
...

“
5
Cash sales Sh
...

“
7
N Miller paid us by cheque Sh
...

“
9
We paid B Burton in cash Sh
...

“
11
Cash sales paid direct into the bank Sh
...

“
15
G Moores paid us in cash Sh
...


“
“
“
“
“
“

16
19
22
26
30
31

We took Sh
...

We repaid F Lake Sh
...

Cash sales paid direct into the bank Sh
...

Paid motor expenses by cheque Sh
...

Withdrew Sh
...

Paid wages in cash Sh
...


Cash Book
Capital
F
...
3
A three-column cashbook is to be written up from the following details, balanced off, andthe relevant
discount accounts in the general ledger shown
...
230; Bank Sh
...

“
2
The following paid their accounts by cheque, in each case deducting 5percent
discounts: R Burton Sh
...
220; R Harris Sh
...
“
4 Paid rent by
cheque Sh
...

“
6
J Cotton lent us Sh
...

“
8
We paid the following accounts by cheque in each case deducting a 2 ½per cent cash
discount: N Black Sh
...
480; C Rowse Sh
...

“
10
Paid motor expenses in cash Sh
...

“
12
H Hankins pays his account of Sh
...
74, deducting Sh
...

“
15
Paid wages in cash Sh
...

“
18
The following paid their accounts by cheque, in each case deducting 5 per
cent cash discount: C Winston Sh
...
340; H
Winter Sh
...

“
21
Cash withdrawn from the bank Sh
...

“
24
Cash Drawings Sh
...


“
25
Paid T Briers his account of Sh
...
133, having deducted Sh
...

“
29
Bought fixtures paying by cheque Sh
...
“ 31
Received commission by cheque Sh
...
solution
Cash Book
Disct
Bank
Bal b/d
R Burton
E Taylor
R Harris
J Cotton: loan

Cash

Bank

230

4756
133
209
285
1000

7
11
15

H Hankins
3
C Winston
13
R
Wison & 17
Son
H Winter
23
Bank
Commission
89

74
247
323
437
350
580

88
7552

Disct
Rent
N Black
P Towers
C Rowse
Motor
expenses
Wages
Cash
Drawings

Cash

Bank
120
351
468
780

9
12
20
44
160

350
120

T Briers
Fixtures
Balances c/d

7

133

48

123
580

650
4833
7552

Discounts Received
3/1 Sundry Creditors

48

Discounts Allowed
3/1 Sundry
89
Debtors

Petty Cash Book and Imprest System of Accounting
...
The petty cash
vouchers will show summary expenses paid by the cashier and thisinformation 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 totals of the expenses are posted to the debit side of the expense accounts
...

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
...
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
...

Start with (float)
1,000
Expenses paid
(720)
Balance
280
Reimbursement
720
Cash float
1,000
Example 5
...
2,000 in the month of March (that is the cash float)
...


On the 5th of March the cashier requested for a refund of the cash spent and thisamount was
reimbursed back
...

Solution
Receipts

(Sh
...
)

Postage
(Sh
...
)
(Sh
...
)

120
240
150
300
200
400

...

540

150
420


...
6 The General Journal
It records information from other correspondence (information that is not recorded in the above books of
prime entry)
...

The type of transactions recorded here are:
i
...
g
...

ii
...

iii
...

The format is as shown:

The General Journal

General Journal
Date
1st March

Detail
Account to be debit
Account
to
becredited
(Narrative)

Debit
X

Credit
X

Example 6
...
6,790
...
34 owing from N Smart was written off as a bad debt
...
490 was returned to the supplier Wood
Offices, as it was unsuitable
...

2003 May 12 we are owed Sh
...
He is declared bankrupt and we
received
Sh
...

2003 May 14 we take Sh
...

2003 May 28 Some time ago we paid an insurance bill thinking that it was all in
respect
of the business
...
76 of the amount paid was in
factinsurance of
our private house
...
980 on credit from Xerox Machines Ltd
...
Answer

General Journal
Date
1st May

3rd May

8th May

Detail
Motor Vehicle
Motor Ltd
...

Bad debts
N Smart-Debtors
Amount due from N
Smart
Written off as bad
Wood offices

Debit (Sh
...
Hayes
amount owed now
written off as bad
debt
...

Drawings
Insurance Expe
Insurance relating to
private house now
transferred
to
drawings
...
7 The Ledger
The ledger is simply the accounts
...

1
...

2
...

3
...
Have all the other accounts i
...
other assets, liability,
incomes and expenses and capital
...
8 Review Questions
Question One
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital ofSh
...
00
with which he opened a bank account for his business
...

May 1 Bought shop fittings and fixtures from store fitments Ltd for Sh
...
00May 2
Purchased goods on credit from Abel Sh
...
00
May 4 Sold goods on credit to Bruce Sh
...
00
May 9 Purchased goods on credit from Green Sh
...
00May 11
Sold goods on credit to Hill Sh
...
00
May 13
Cash sales paid into bank account Sh
...
00
May 16
Received cheque from Bruce in settlement of his accountMay 17
Purchased goods on credit from Kay Sh
...
00

May 18
Sold goods on credit to Nailor Sh
...
00
May 19
Sent Cheque to Abel in settlement of his accountMay 20
Paid rent by cheque Sh
...
00
May 21
Paid delivery expenses by cheque Sh
...
00May 24
Received from Hill Sh
...
00 on account
May 30
Drew cheque for personal expenses Sh
...
00 and assistant wagesSh
...
00
May 31
Settled the account of Green
...

Post the entries in the ledger accounts
Balance the ledger accounts where necessary
Extract a trial balance as at 31 May 2000
...
9 References
• Wood, Frank, Business Accounting (17th Edition), International Thompson
...
L, Introduction to Financial Accounting, (6th Edition),
New York; Prentice Hall
...
pages 47-52
...
1 Introduction
Control accounts are so called because they control a section of the ledgers
...
There are two main
types of control accounts:
(i)

Sales ledger control Account – also called total debtors
...


(ii)

Purchases Ledger Control Account – also called total creditors
...


Example (Sales Ledger Control a/c)
Sales Ledger Control A/c

Sales Ledger
Debtor A a/c
Sales

200

C/B
Bal c/d

50
150
200

C/B
Bal c/d

250
150
400

200
Debtor B a/c
Sales

400
400

Debtor C a/c
Sales

300

C/B
Bal c/d

300

100
200
300

Debtor D a/c
Sales

500

C/B
Bal c/d

500

300
200
500

Example 4
...
Provide for arithmetical check on the postings made in the individual accounts
(either in the sales ledger or purchases ledger
...
To provide for a quick total of the balances to be shown in the trial balance as
debtors and creditors
...
To detect and prevent errors and frauds in the customers and suppliers account
...
To facilitate delegation of duties among the debtors and creditors clerks
...
2 Format of a Sales Ledger Control
Sales Ledger Control a/c
1
...
Total credit sales for the period(from
the sales journal)
3
...
Dishonored
cashbook)
5
...
Total credit balances of the sales
ledger brought forward
2
...
Total cheques received from credit
customers/debtors (fromcash book)

(from

6
...
Total
returns-inwards (returnsinwards journal)
(from 5
...
Bad
debtors written-off
(from
general journal)
7
...
Purchases Ledger contra
9
...
Total debit balance carried downto
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
...

The entry will be:
Dr
...
Cashbook
Example 4
...

Sales
1000
(Refunds) C/B
100

Sh
...
Therefore, if a firm has several customer, this information
will be shown in the control a/cs as total balance c/f
(Debit side)
...

Example:
Debtor (A)
Sales

2000

Contra- purchases
Bal c/d

2000

1000
1000
1100
Creditor (A)

Contra - Debtor

1000

Purchases

1000

4
...
Total debit balances from purchases
1
...
Total cash paid to creditors
2
...
Total cheques paid to creditors
3
...
Total cash discounts received
(from cash book)
5
...
Sales ledger contra
7
...
Total credit balance
(to be derived after posting entries)

4
...

2) Only cash discounts (allowable & receivables) should be included
...

3) Provision for doubtful debts is NOT included in the sales ledger control a/c
...
e
...

4) Cash purchases are NOT posted to the Purchases Ledger Control A/C
...

5) Interest due that is charged on over due customers’ account may also be shown on
the debit side of the sales ledger control
...

Example 4
...
for themonth of
November 1997 are listed below:Sh
...


Kopesha Ltd
Sales Ledger Control A/C
1997
1/11 Bal b/d
Sales
Dishonored cheques
Refunds
customers

30/11 Bal c/d

Sh
9,123,000
36,755,000

1997
1/11

489,000

Contra
Bills of
exchange
receivable
Allowances
Cash
Discounts allowed
30/11 Bal c/d

to
53,000

136,000
46,556,000

Sh
211,000
27,370,000

Bal b/d
Bank

Purchases Ledger Control A/C
1997
Sh
1997
1/11 Bal b/d
88,000
1/11 Bal b/d
Allowances from
Purchases
suppliers
629,000
Discounts received
1,105,000

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

Bank
Contra settlement
30/11 Bal c/d

15,413,000
3,046,000
2,411,000
30/11 Bal c/d 67,000
22,692,000
22,692,000

4
...

The balance of the account is to be taken as the amount of creditors as on 30 June
...

36,760
422,570
10,980
387,650
8,870
?

Question two
Prepare a sales ledger control account from the following:
Sh
...
5 References
•

Wood, Frank, Business Accounting (17th Edition), International Thompson
...
1 Errors that do not affect the ‘balancing’ of Trial Balance
The trial balance produced from the accounts appears to be okay/correct, i
...
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
...
under/over stated
...
g
...
400 is not posted in the sales journal therefore no entry is made in the
debtor’s account and the sales account i
...
both debit of Sh
...
400
in the sales account
...
To correct
this error, the transaction is posted in the books by:
Debiting debtors
Sh
...
400Crediting sales

b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is ofthe same class
...
200
...

Although the debit entry is made into the wrong account, the two accounts are of thesame class i
...

debtors
...

(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 adifferent
class e
...
Motor vehicle purchased for Sh
...
(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
...


To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
Sh
...
e
...
Example: cash drawn from thebank of Sh
...

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
Sh
...
150

To correct the error of Sh
...
150
Credit bank by Sh
...
e
...
In some cases, this is known as a transposition error e
...
cash received
from a debtor of Sh
...
890
...
In this case, we will:
Sh
...
e
...
E
...
if the balance c/d of the purchases a/c is Sh
...
3,890 and another error carried to the trial balance of fixture amounting to Sh
...
4,450:
Sh
...

Example 5
...
Narratives are required
...
10, 000 paid into the bank had been credited to Sales account
...
700 had been debited to General Expenses
...
89 had been debited to Insurance account
...
857 had been entered in the books as Sh
...

Cash banked Sh
...

f) Cash drawings of Sh
...

g) Returns inwards Sh
...

h) A sale of a motor van Sh
...

Solution
The Journal
Sales
Capital
Additional capital passed into sales a/c
now transferred to capital a/c

Debit
10,000

Drawings
700
General expenses
Drawings debited in general expensenow
transferred to drawing a/c

Credit
10,000

700

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 Sh
...
2 Errors that affect the ‘balancing’ of Trial Balance and Suspense Account These
types of errors are reflected on the trial balance because the debits will not be sameas the
credits
...

Examples include:
1
...
e
...

Example cash received from a debtor is debited to the cashbook and no other entry is
made in the account, i
...
no credit entry on the debtor’s a/c
...
A transaction is posted on one side of both the accounts i
...
two debits or two credits
...
300 is credited in the cashbook and also credited
in the creditor’s accounts
...
A transaction is posted correctly but different amounts i
...
debit is not the same as the
credit
...
450 is debited in the cashbook as
Sh
...
540 in the debtor’s a/c
...
Error on balances of accounts – i
...
understatement or overstatement of an account
balance due to mathematical errors
...
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
...
2000 is shown as a credit i
...
an overdraft, instead of a debit in
the trial balance
...

6
...

To correct the above errors, the appropriate or the adjusting entries are made through an account called a
suspense account
...
The balance to be shown on the suspense accounts depends on which side the error is shown on the
trial balance
...
This is a credit balance and will be taken to the suspense account on the credit side
...
2
Total
Suspense

DR
240
240

CR
200
40
240

Suspense a/c
Sh
...

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
...

Total
Suspense

Difference as per T/B

DR
260
40
300

CR
300
300

Suspense a/c
Sh
...


Sh
...

This balance depends on whether it is a credit or debit and whether it is material or not for purposes of
proper accounting treatment
...
3
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by Sh
...
A suspense account was opened forthe difference
...
1, 000
...
2, 500 to J Church had been debited in error to J Chane account
...
700
...
3, 000
...
3, 600
...

b) Draw up the suspense account after the errors described have been corrected
...
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
Suspense a/c
Sh
...

1,000

Sh
...


Sales
Discount received

1,000

Bal b/d
3,000 Rent
4,000

3,300
700
4,000

5
...
The closing stock includes damaged goods which, although they had cost Sh
...
7, 500
...
Debtors include Sh
...
A
provision for doubtful debts of 2 ½% is also required on the balance of the
debtors
...
The machinery was acquired five years ago and is being depreciated to its scrap
value on a straight-line basis over eight years
...

4
...
9,500 but this has not been
reflected in the accounts
...
Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the
accounts
...
In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr
...

7
...
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
...

(10 marks)
b) A statement of revised profit for the year ended 31 March 2000
...

(7 marks)

Question two
On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial
balance
...

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

Sh

148,000
98,800
76,000
10,000
34,600
15,200
16,000
359,600
1,054,000
1,043,200
166,400
733,000
126,000
3,800
5,000

2,548,400

5,800
369,400
2,548,400

Investigations carried out after preparing the above trial balance detected the following errors:
1
...


The total of the sales daybook for December 2001 was overcast by Sh 25,700
...
These were
debited to purchases account
...

3
...
8,500 was erroneously credited to the
creditor’s account
...
A payment of Sh
...

5
...

6
...

Assume the business had reported a net profit of Sh 85,800 before adjusting for the aboveerrors
...
(6 marks)

(b)

Journal entries to correct the errors (Narrations not required)
(6 marks)
Suspense account starting with the balance determined in the adjusted trial
balance in (a) above
...
4 References
Wood, Frank, Business Accounting (17th Edition), International Thompson Pages 346-350

TOPIC 6: BANK RECONCIALIATION STATEMENT
Learning Objectives
Upon completion of this topic you should be able to:
• Explain why the bank column of the cashbook may not balance with bank
statement
• Explain the importance of bank reconciliation statement
• Prepare a bank reconciliation statement
6
...
e
...
The bank will send information relating to this account using a bank
statement for the firm to compare
...

In practice however, this is not the case and the two (balance as per the bank and firm)are different
...

Causes of the differences:
Items appearing on Cashbook and not reflected on bank statement
...

Uncredited deposits/cheques: These are cheques received from customers and othersources for which the
firm has banked but the bank has not yet availed the funds by crediting the firm’s account
...

ii) Items appearing in the bank statement and not reflected in the cashbook:
Bank charges: These charges include service, commission or cheques, interest charges onoverdrafts
...
g
...
Dishonored
cheques
A cheque would be dishonored because:
• Stale cheques
• Post – dated cheques
• Insufficient funds

•

Differences in amounts in words and figures
...
Such errors
include:
• Overstating/understating
...
2 Purposes of Bank Reconciliation Statement
...
To update the cashbook with some of the items appearing in the bank statement
e
...
bank charges, interest charges and dishonored cheques and make adjustmentsfor any errors
reflected in the cashbook
...
To detect and prevent errors or frauds relating to the cashbook
...
To detect and prevent errors or frauds relating to the bank
...
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
...

2
...

3
...

4
...

The format is as follows:
Format 1
Name:
Bank Reconciliation Statement as at 31/12
Sh
...


Balance at bank as per cashbook (updated)
xAdd: Un presented cheques x
Errors on Bank Statement (see note 1)
x
xx
Less: Uncredited deposits
x
Errors on Bank Statement (see note 2)
x
(x)
Balance at bank as per Statement of financial position
x

Note 1: These types of errors will have an effect of increasing the balance at bank e
...
an overstated
deposit or an understated payment by the bank
...
g
...

Format 2
Name:
Bank Reconciliation Statement as at 31/12
Sh
...

Balance at bank as per bank statement
Add errors on bank statement (note 2)
Less: Unpresented cheques x
Errors on bank statement (note 1)
x
x
===
Example 6
...
2
The following are extracts from the cashbook and the bank statement of J Richards
...


Cashbook

Cashbook –Bank
2002
31/12 Bal b/d
31/12 J
...
Richards
Bank Reconciliation Statement as at 31/12/2002
£

£
1,863
115
1,978

Balance at bank as per cashbook – bank
Add: Unpresented cheques – (G Small)
Less: Uncredited deposits
K Wood
249
M
...
Wood
M
...
3 Review Questions
Question one
...

(b)

Ssemakula, a sole trader received his bank statement for the month of June 2001
...
706,500 whereas his cash book balance was Sh
...


His accountant investigated the matter and discovered the following discrepancies:
1
...
3, 000 had not been entered in the cashbook
...
Cheques drawn by Ssemakula totaling Sh
...

3
...
26, 500 in his cashbook
...
The bank had not credited Mr Ssemakula with receipts of Sh
...

5
...
62, 000 had not been entered into
the cashbook
...
In the cashbook Ssemakula had entered a payment of Sh
...
79,
400
...
A cheque for Sh
...

8
...
329, 250 as a
debit balance instead of a credit balance
...
An old cheque payment amounting to Sh
...


10
...
Unfortunately, the bank had credited some
deposits amounting to Sh
...
However
acting on information from his customers Ssemakula had actually entered the
expected receipts from the debtors in is cashbook
...


A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001
...


Question Two
The cash book of Ramogi stores had adebt balance of sh 24000 on 30th June 2006
...
The two documents were compared and the
following differences were realized
...
2500

ii)

Cheque no
...

The bank charges for the month amounted to sh 1600
Acheque issued to a creditor of sh 11,200 was paid bank as sh 12000
Acheque drawn against Runninga stores for sh 6800 was charged in erroragainst Ramogi
strores account
vii)
A standing order of sh5500 had been paid by the bank
viii) A dividend cheque for sh 9000 had been collected and credited by thebank
...

Required
...
4
References
Wood, Frank, Business Accounting (17th Edition), International Thompson Pages 308-318

TOPIC 7: FINAL ACCOUNTS
Learning Objectives
Upon completion of this topic you should be able to:
• Explain the importance of income statement and balance sheet
• Prepare an income statement and balance sheet
• Distinguish between capital and revenue expenditure
7
...
The gross profit is then taken up
in the profit and loss account as part of the income
...

Sh
...


Sh
...
1
From the following details draw up the trading account of Springs for the year ended 31December
2002, which was his first year in business
...

6,700
4,950
8,900
387,420
333,330

Stock of goods: 31 December 19x7 74,890
Springs
Trading Account for the year ended 31 Dec 2002
Sh
...

Sales 387,420
Less: Returns Inwards 8,900
378,520

Less cost of sales
Purchases
333,330
Add: Carriage Inwards

6,700
Less: Returns outwards

340,030
4,950
335,080

Less: Closing stock 74,890 260,190
Gross Profit 118,330
Example 7
...
Draw up thetrading 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

Solution
R Sings
Trading Account for the year ended 31 Mar 19x8
Sh
...


Sh
...

The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same
financial period
...
Format is as
shown below:
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
Sh
...


Sh
...
3
From the following trial balance of P Boones draw up statement of comprehensiveincome for the
year ended 30 September 2002, and a statement of financial position as at that date
...

Sh
...


Sh
...

Sales 186,000
Less: Returns Inwards (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

(58,040)
13,070

7
...
The format is at shown below:
Name
Statement of financial position as at 31/Dec/19xx
Sh
...

Sh
...
3 will be produced asfollows:
P Boones
Statement of financial position as at 30 Sept 2002
Sh
...


Non Current Assets
Premises
Fixtures & fittings
Motor vehicles

50,000
3,500
18,000
71,500

Current Assets
Stock
Debtors
Cash at bank

29,460
38,960
4,820
73,240

Current Liabilities
Creditors
Net Current Assets
Net Assets

(17,310)
55,930
127,430

Capital
126,360
Add: Net Profit
13,070
Less: Drawings

139,430
(12,000)
127,430

7
...

Examples of expenses incurred in acquisition:
i
...

ii
...
g
...

iii
...
g
...

Installation
v
...

vi
...

Legal fees incurred in acquisition of a new asset (e
...
lease agreement)
Examples of expenses incurred in adding value to an asset:
i
...

ii
...

iii
...

Revenue Expenditure: There’s an amount spent by the firm in the normal trading processor to assist in
earning revenues or income
...

Postage and stationery
...
Carriage outwards (sales)
...
Repairs and maintenance
...
4 Review Questions
Question one
The following trial balance has been drawn up from the accounts of Endpages bookshop
...

Sales
Purchases
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising

Cr
Sh
...
00

103,500
...
00
2,500
...
00
600
...
00
3,500
...
00
3,000
...
00
200
...
00
1,500
...
00
46,000
...
00
41,000
...
00
4,800
...
00

7,500
...
00
11,000
...
00

328,700
...
00
328,700
...

(20 marks)
Question two
The following is the trial balance of KSmooth as at 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

Dr
Sh
...

9,234,000

6,918,500
42,000
157,000
64,000
1,024,000
301,500
62,400
21,600
40,500
31,800
2,000,000
1,432,000

Creditors
Fixtures Cash
at bankCash in
handDrawings
Capital

816,000
285,000
297,000
11,500
762,000
152,028

5,088,800
152,028

7
...
1 Depreciation
It is the loss of value of a non-current asset throughout its period of use by the firm
...
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 profit and loss account
...
Physical Factors
i)
Wear and tear: Some non-current assets depreciate or lose value due to use
overtime e
...
machinery and motor vehicles
...
g
...

2
...
g
...
Also
some machines are unable to manufacture alarge number of goods
...
g
...

3
...
g
...

4
...
Such assets include mines, oil wells, and quarries
...
2 Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of depreciation to be charged in the
profit and loss account as an expense
...
There are two
main methods of estimating depreciationand five others that will apply in a firm’s situation
...
The other 5methods
include:
i
...

ii
...

iii
...

iv
...

v
...

The Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c fora particular
asset and is based on the following formular:

Residual Value

=

Sh
...
20,000

=

Cost of asset –

Estimated useful life 8
= Sh
...

Cost of Asset – Residual Value
Estimated useful life of asset
...

Estimated Useful Life
The period the asset is expected to be used in the firm
...
1
A firm buys a machine for Sh
...
After the eight
years the machine will be sold for Sh
...
Under the straight-line method, the depreciation amount
will be computed as follows:

This means for this asset Sh
...

The straight line method assumes that benefits accruing on use of a non-current asset arespread out
evenly over the life of the asset e
...
buildings use straight-line method
...


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
...
(Cost of asset – total depreciation provided to date)
...
2
Assume a firm buys machinery for Sh
...
a
...
The depreciation charged to the P&L will be as follows for the next 3 years
...

Cost

100,000

Depreciation 20% of 100,000
Balance to YR 2

(20,000)

P&L YR 1

80,000

Year 2
Depreciation 20% of 80,000 80,000

(16,000)

P&L YR 2

Balance to YR 3

64,000

Year 3
Depreciation 20 % of 64,000 64,000
(12,800)
P&L YR 3
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 thelatter period’s e
...

▪ Fixtures, furniture and fitting
...

▪ Motor vehicles
...
3 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
...
10, 000
Credit – Provision for depreciation
...
10, 000 being depreciationprovided for
the machine
...
Sh
...

Cashbook 100,000
31/12 Bal c/d 100,000 31/12 Bal c/d 10,000

P&L

Sh
...

Sh
...
Depreciation (Sh
...


Land
Buildings
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles

x
x
x
x

(x)
(x)
(x)
x

x

xxxx
x
x
(x)

x

Example 8
...
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
...
Using the basis of one month’s ownership
needs one month’s depreciation
...
12, 000 each on 1 JanuaryBought one motor
van for Sh
...


Motorcars a/c
Calculation for depreciation
1/1
24,000 x 20 x 12
100 12
100 12

= Sh
...
4, 800 + 1,400 = Sh
...

Expenses
Depreciation:
Motor vans

Sh
...


6200

Statement of financial position (Extract) as at 31/12/2002
Non-current Assets

Cost

Motor vans

38,000

Total
Depreciation
(6200)

NBV
31,800

Example 8
...

You are to show:
a
...

b
...

c
...

The machinery bought was:
1999
2000

1 January
1 plant costing Sh
...
5, 000 each
1 October
1 plant costing Sh
...
2, 000

Depreciation is at the rate of 10 per cent per annum, using the straight-line method, plantbeing
depreciated for each proportion of a year
...

Cashbook

8000

a/c
Sh
...
8,000 x 10/100 x 12/12
2000

Sh
...
10,000 x 10/100 x 6/12 =

500

Sh
...
8,000 x 10/100 x 12/12 =

800
1,450 2,250

2001
Sh
...
24,000 x 10/100 x 12/12

=

2400

Sh
...
1999
31/12 Bal c/d
800 31/12 P&L
2000
31/12 Bal c/d

2001
31/12 Bal c/d

2002
31/12 Bal c/d

4,650

=

Sh
...
2000
1/1
Bal b/d
2,250
P&L
2,250

Sh
...
2001
1/1
Bal b/d
4,650
P&L
4650

Sh
...
2002
1/1
Bal b/d
7,200
P&L
7,200

Sh
...
Selling the asset
...
Asset being written-off from damage/accident/theft
...
Asset is scrapped/not used anymore
...

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
...
Credit – asset disposal a/c
With the total depreciation provided to date on the asset
...

Credit – asset disposal a/c
With the cash received on disposal
...
If it was insured and theinsurance
company accept liability but by the end of the period the insurance companyhas not yet paid
...

(b)

Debit – provision for depreciation of
asset a/cCredit – asset disposal a/c

(c) Debit – insurance receivable a/c
Credit – asset disposal a/c

With the amount expected from the insurance
...

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 – provision for depreciation for assetCredit – asset disposal
a/c
With the total depreciation provided to date
...
A
credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with
other incomes
...

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
...
5
A firm has a motor vehicle costing Sh
...
800
...
500
...
300; therefore the
difference will be paid by cash
...

Bal b/d
Disposals
Cashbook

1,000
300
200
1,500

Motor vehicle disposal
Bal c/d
=====

Sh
...

Motor vehicle a/c
P&L

Journal Entries Sh

1,000
100
1,100

Sh
...
300 and cheque payment of Sh
...

Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i
...
trade in value of old asset)Asset disposal
a/c (with trade-in value of old asset)
Example 8
...
From the following details draw up the plant account and the provision for
depreciation account for each of the years 1999, 2000, 2001and 2002
...
900 on 1 January
...
600 on 1 October
...
550 on 1 July
...
900 on 1 January 1999 for the
sum of Sh
...


You are also required to draw up the plant disposal account and the extracts from thestatement of
financial position as at the end of each year
...

1/1
1/10

2000
Sh
...

1/1
1/7

2002
1/1

Plant a/c
Sh
...


2000

1,500

31/12 Bal c/d

Sh
...

210

2000
31/12

2000
1/1
Bal c/d

510
510

2001
31/12

2002

1999
31/12

2001
1/1
Bal c/d

865
865
2002

P&L

Sh
...


900
600

12
3

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

2002
30/9
31/12
31/12

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

Plant Disposal a/c
2002
Plant a/c
P&L

Sh
...

675
275
950

Statement of financial position (Extract)
Non Current Assets
1999 Plant

Cost
1,500

Total
Depreciation
(210)

2000 Plant

1,500

(510)

990

2001 Plant

2,050

(865)

1,695

2002 Plant

1,150

(555)

595

NBV
1,290

8
...

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
...

Accruals
Income: Accrued Income
This is income that relates to the current year but cash has not yet been received
...

Example 8
...
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)
...

2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
2,000
22,000

24,000 24,000

Although the cashbook is showing that rent received amounts Sh
...
24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of Sh
...

Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet beenpaid during that
period
...


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
...
Sh
...
The ledger account will be as follows
...
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)

Sh
...
2,000
2,000
2,000
2,000
2,000

Year 1

Sh
...

Rent for Nov
31/12 Bal c/d

2,000
2,000
2,000
2,000
2,000
2,000
2,000 31/12
24,000

P&L

24,000
24,000

The cashbook shows that the rent for the 11 months was paid for
...
24, 000 and the Sh
...

8
...
This happens wherean income is
payable in advance e
...
Rent payable 3 months in advance
...


The accounting treatment will be to show it as a current liability
...
2
A firm receives rent income of Sh
...
Assuming that the
firm’s rental income began in 1st March and the financial year, end is on 31st Dec
...
3

1
...
9

1
...
3

Cashbook
Year 1
1/3
Rent
1/6
Rent
1/9
Rent
1/12 Rent

Sh
...


Rent – Income
Year 1

Sh
...

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
...
10,000 isnot charged in the P&L but is
carried forward as current liability in the statement of financial position
...
A prepaid expense
should not be charged in the P&L a/c but should be carried forward tothe next financial period and
should be shown in the statement of financial position as a current asset
...
8
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense
...


Cashbook
Year 1
1/3
1/6
1/9
1/12

Rent
Rent
Rent
Rent

Sh
...

Year 1
Sh
...
10, 000 for 2 months is carried forward to the next financial period and shownin the statement
of financial position as a current asset
...

Sh
...

8
...
g
...

When a debtor is not able to pay up his/her account this becomes a bad debt
...

In practice a firm may also be unable to collect all the amounts due from debtors
...
The problem posed by this situation is that it is difficult to
identify the debtors who are unlikely to pay their accounts
...
These debts that the firm may not collect are called doubtful
debts
...
Provision for doubtful debts maybe specific or general
...

Accounting for bad & doubtful debts
...
Debit bad debts account
Credit debtors account with the amount owing
...
Debit Profit and Loss Account
...

Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision
...
The general provision is where a
provision is made on the balance of the total debtors i
...
Debtors less Bad debts and specific provision
...
If it is the 1st year of trading (1st year of making provision):
i
...


Debit P&L a/c
...


In the subsequent periods, it will depend on whether if it is an increase or decreaserequired on
the provision
...

ii
...

ii
...

Credit provision for doubtful debts (with increase only)
...

Credit P&L a/c (with the decrease in provision only)
...
9
Debtors
x
Bad debts
(x)x
Specific Provision
x General Provision
x

(x)
(x)

A firm started trading in the year 1999, the balance on the debtor’s account was Sh
...
Bad debts amounting to Sh
...
5, 000 to be made to one of the debtors and a general provisionof Sh
...
The ledger accounts of 1999 were as follows:

Debtors Provision for doubtful debts

1999 Sh
...


1999

Sh
...

1999
Bal B/d 400,000
22,750
Bad debts
40,000
Bal c/d 360,000
31/12 Bal c/d 22,750 31/12 P&L
400,000

Bad debts

400,000

1999
Debtors

Sh
...

40,000

Debtors
Bad debts
Specific Provision
General Provision (5%)

Sh
...

Expenses:
Bad debts
40,000
Increase in provision for D/debts

Sh
...


Sh
...
500,000 from which bad debts ofSh
...
The ledger accounts will be as follows:
Debtors
Bad debts
General Provision (5%)

Debtors
2000 Sh
...

Bad Debts
50,000
Bal c\d 450,000
500,000

Sh
...

22,750

Bad Debts
Debtors

2000 Sh
...

31\12 P& L 50,000

Profit And Loss Account (Extract) for year ended 31/12/2002
...

Sh
...

Sh
...
600,000 from which bad debts of Sh
...

Debtors
600,000
Bad debts
(50,000)
550,000
General provision % (27,500)
522,500
Debtors
2001 Sh
...

Bad Debts

50,000

Bal c\d 550,000
600,000

Sh
...

22,500
5,000

Bad Debts
Debtors

2001 Sh
...

31\12 P& L 50,000

Profit And Loss Account (Extract) for the year ended 31/12/2001
Sh
...


Expenses
Bad debts
50,000
Increase in provision 5,000

Statement of financial position (Extract) as at 31/12/2001
Sh
...

Current Assets
Debtors
550,000
Less: Provision for Doubtful Debts

(27,500)

522,500

Example 4
...
1,100
Sh
...
120

On 31 December 2002 the schedule of remaining debtors, amounting in total to Sh
...
2,200
...
The Bad Debts Account, and the Provision for Doubtful Debts Account
...
The charge to the Profit and Loss Account
...
The relevant extracts from the Statement of financial position as at 31 December
2002
...

Debtors

2002 Sh
...
2002
2,200 31/12 P&L

Sh
...


Sh
...


Sh
...
10

6,300
A business started trading on 1 January 2001
...
850
Sh
...
1,800

N Kelly
A Oliver

Sh
...
2,500

On 31 December 2001 there had been a total of debtors remaining of Sh
...
It was decided to make
a provision for doubtful debts of Sh
...

On 31 December 2002 there had been a total of debtors remaining of Sh
...
It was decided to make
a provision for doubtful debts of Sh
...


You are required to show:
i
...

ii
...

Solutions
Bad debts = 2,250
405,000
Provision
(5,500)
399,500

2001
31\8 W
...
Aron
2250

Bad Debts
Sh
...
2001
550 31\12 P&L

Sh
...
2001
1\1
Bal b\d
600 31\12 P&L

Sh
...

2250

600

Bad Debts
2001
28/2 J
...
Kelly
30/11 A
...

1,800
600
2,500

2001

31/13

Sh
...


Statement of financial position as at 19x6
Sh
...


Current Assets
Debtors
Less provision

405,000
(5,500)

399,500

19x7
Debtors
Less: provision

473,000
(6,000)

467,000

8
...

In some cases a firm may create a provision for discounts allowable in addition to provision for doubtful
debts
...
The accounting treatment is similar to accounting for provision for doubtful debts
...

Debtors
x
Bad debts
(x)
x
Specific provision

(x)

x (x)x
Provision for discount allowed (on balance) (x)
x

Profit & Loss Account (Extract)
Sh
...


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

xx

x
xx

Statement of financial position (Extract)
Current Assets
Debtors
Less: provision for Doubtful Debts
Less: provision for discounts allowed

Sh
...

x

Bad Debts Recovered
A firm may be able to recover a debt that was previously written off
...

Debit – Debtors
Credit – credit bad debts recovered account – to restore the bad debt recoverable
...

ii
...

iii
...

Credit – P & L account with the same balance as bad debts account
...
11
A firm recovers debts amounting to Sh
...
In the
same financial period the firm writes off bad debts amounting Sh
...
The ledger accounts will be as
follows:
Bad debts
Sh
...

Debtors
30,000
Bad Debt Recovered
10,000
P\L
20,000
30,000
30,000

Bad debts recovered
Bad Debt

Sh
...

10,000

8
...
The firm
had two vehicles KA and KB, which had been purchased forSh
...
720, 000 respectively
earlier in the year
...
The insurance company
paid the firm Sh
...
In the same year the firm purchased two vehicles, KC and KD
for Sh
...

In November 1993 vehicle KC was sold for Sh
...
In January 1994 vehicle KE was purchased
for Shs
...
In March 1994 another vehicle KF was purchased for Sh
...

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
...
The firm’s year ends on 31 December
...

b) Prepare the motor vehicle account (at cost)
...

Question two
The financial year of H Seamers ended on 31 December 2002
...
7,440; Owing at 31 December 2002
Sh
...

b) Insurance: Paid in 2002 Sh
...
3,500
...
18,000; Owing as at 31 December 2001
Sh
...
49,000
...
95,000; Prepaid as at 31 December 2001
Sh
...
2,900
...
Receives Sh
...
Tenant owed Seamers Sh
...
2,100 on 31 December 2002
Question two
The financial year of H Seamers ended on 31 December 2002
...
7,440; Owing at 31 December 2002 Sh
...

b) Insurance: Paid in 2002 Sh
...
3,500
...
18,000; Owing as at 31
December 2001 Sh
...
49,000
...
95,000; Prepaid as at 31 December
2001 Sh
...
2,900
...
Receives Sh
...
Tenant owed
Seamers Sh
...
2,100 on 31
December 2002
8
...
Pages171-189
...
L, Introduction to Financial
Accounting, (6th Edition), New York; Prentice Hall

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