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INTRODUCTION
The receipts and payments we make in our cash book are also recoded by the bank in
there books. The cash book contains the cash account and the a bank Account. The
balance on the bank account must be exactly equal to the amount the bank will show on
the bank statement sent to us at the end of the month. If the two balances are not the
same then investigations should be instituted to establish the causes of the difference.
The cash book is thereafter updated with entries that are on the bank statement but not
in the cash book, and a bank reconciliation statement is compiled for the entries that are
in the cash book but are not on the bank statement.
To provide a means of internal control which the auditors can rely on.
To reveal the volume of transactions that the bank have not processed in their
accounting system by the end of the period under review, eg a month.
To correct the errors that may have been made in the accounting records.
To provide a verifiable balance at the bank that is to be included in the balance sheet
without any undue delay to the preparation of financial statements at the year-end.
Direct debits:
Amounts debited on the bank statement but are not on the cashbook bank account. Consequently if we
are to update our cashbook the amounts should be recorded on the credit side as they represent payments
made directly by the bank on our behalf.
Direct credits:
Amounts credited on the bank statement but are not on the cashbook bank account. When updating the cashbook the amounts will
have to be recorded on the debit side as they represent receipt of cash directly through the bank.
Standing order:
The name is derived from the activity that creates it. The business issues a standing order to the
bank by letter. The letter contains an instruction to the bank to pay a specified fixed amount on a
stated date at regular interval (eg quarterly). When the time is due for the matter the bank acts
on the standing order and pay the amount. The amount is shown on the debit side of the bank
statement and so it will be recorded on the credit side of the updated cashbook.
Such deposits are usually made on the last day of the month or year. The processing of the deposit slips by
the bank takes place the following day. So the bank statement for the month or year under review does not
show entries for such deposits, even though they have already been recorded in the cash book.
Unpresented cheques:
These are cheques we issued to pay for goods or services but the cheques have not been
taken to the bank for cashing by the suppliers we paid. The cheques are already
recorded in our cash book but have not been reflected on the bank statement.
Dishonoured cheques:
Cheques that once were received, recorded in the cash book but the bank refuses to
honour them for one reason or the other. Such cheques are returned to the customer
(trade receivable) who paid the amount, and the earlier receipt is reversed.
The following exercise will illustrate how to prepare a bank reconciliation statement.
EXERCISE
The bank columns in the cashbook for May 2018 and the bank statement for that month
for G LORD are as follows:
CASH BOOK
Debit side Credit side
$000 $000
May 1 Balance b/d 3 250 May 6 Kundananji 165
May 8 R Mbewe 720 May 13K Mwila 454
May 17B Jere 685 May 17P Muma 38
May 29F Banda 372 May 30Daka Bowling 44
May 31D Phiri 582 May 31Balance c/d 4 908
5 609 5 609
BANK STATEMENT
1. Identify entries appearing on both the cash book and the bank statement. The
matching field is either the date or the description. The amount should be matched
last. These entries represent transactions that have been processed in both sets of
accounts correctly.
2. Starting with the closing balance on the cash book, prepare an updated cashbook by
debiting amounts that appear in the credit column of the bank statement, and vice
versa.
3. Starting with the revised cashbook balance in step 2, prepare a bank reconciliation
statement. The amounts recorded in the cashbook but not processed by the bank are
reversed accordingly.
In practice more rigorous verification is done since a lump sum shown on the bank
statement may have to be broken down into several transactions and matching entries
identified separately. Extensive schedules of unmatched entries are prepared, and totals
used for preparation of bank reconciliation statements.
SOLUTION
UPDATED CASHBOOK
$000 $ 000
May 31Balance b/d 4 908 May 31Suwilanji 220
May 31 Akazipo 85 May 31GYM Club 63
May 31Bank Charges 52
May 31Balance c/d 4 658
5 609 5 609
The rationale of how entries are treated in the bank reconciliation statement is that
cashbook entries not processed by the bank are reversed. Thus payments made are
added to the cashbook-revised balance as if they were not made, and receipts are
deducted accordingly:
The double entry for dishonoured cheques is similar to that done for bank charges when
updating the cashbook with entries that appeared on the bank statement but not in the
cashbook:
DR CR
Bank charges 52
Bank account (in CB) 52
GYN Club 63
Bank account (in CB) 63
EXERCISES
1. Your firm’s cash book shows a credit balance of $12 400 at 30 June 2005. Upon
comparison with the bank statement you determine that there are unpresented
cheques totalling $4 500, and a receipt of $1 400 which has not been passed through
the bank. The bank statement shows bank charges of $740 which have not been
entered in the cash book.
2. Your firm’s cash book at 30 September 2005 shows a balance at the bank of $24 900.
A comparison with the bank statement at the same date reveals the following
differences:
3. Trotters Grotto Ltd prepared the following summary of receipts and payments account
for the month of April 2006:
$000 $000
Receipts 1 478 Balance b/d 770
Balance c/d 662 Payments 1370
2140 2140
Trotters Grotto Ltd make all payments by cheques and all monies received are banked
immediately.
a) The balance brought forward from March 2006 in the cash book should be $750
000 and not $770 000
b) A cheque drawn for 128 000 for advertising had been incorrectly entered in the cash
book as 125 000.
c) Dividends received in the month of April of 89 000 were credited by the bank but no
entries were made in the cash book.
d) Business rates are paid directly by the bank under a standing order arrangement. An
amount of 120 000 was paid on 30 April 2006 and no entries have been made in the
cash book.
e) A cheque received from Kebby for 207 000 had been returned by the bank and
marked ‘insuffficient funds’. No adjustment has been made in the cashbook.
f) A cheque for 35 000 for miscellaneous consumables was entered in the cashbook as a
receipt instead of as a payment.
g) Cheques received totalling 807 000 had been entered in the cashbook and paid into
the bank, but had not been credited by the bank until 3 May.
h) Cheques drawn amounting to 345 000 had not been presented to the bank for
payment.
i) Bank service charges of 67 000 appearing on the bank statement have not been
entered in the cashbook.
REQUIRED:
i) Calculate the closing balance that should appear on the cashbook, taking into account
the appropriate information from the investigation.
BAD DEBTS
As a business grows in size, some of its sales may be made on credit. Customers will be
able to access the goods from the business and arrangement will be made when to settle
the amount.
By doing so the business is taking a risk because some customers may fail to pay for
various reasons which may include:
When a business fails to recover its money from credit customers, after making all
efforts, the amount is written off as a bad debt.
Mr. Fix owes the business K276,000 and therefore, he is an asset to the business by
virtual of the amount owed.
If at year end 31 December 20X6, Mr. Fix is still owing the amount, he will appear
together with others in balance sheet, under current assets as Trade receivables.
20X6 $ $
Nov. 1 Sales 276,000 Balance c/d 276,000
______ _______
276 000 276000
20X7
Jan. 1 Balance b/d 276,000
When the new year begins on 1 January 20X7, Mr. Fix is still a receivable (debtor) with
$276,000.
Assuming Mr. Fix’s credit period expires and the business fails to recover the money,
then the business has incurred bad debts.
Double entry:
20X7
Jan. 1 Balance 276,000 Bad debts
276,000
_______ ______
276,000 276,000
Mr. Fix is no longer a receivable (debtor) to the business, so his account is closed to bad
debts which is a loss. The bad debts account will remain open throughout the
accounting period.
Should some more customers fail to pay, their accounts will be closed off to the same
bad debts account.
At year end when preparing financial statements, the bad debts account is transferred to
income statement as a charge against profits.
Double entry is:
When trial balance is extracted bad debts appear on debit side as an expense.
At the end of the accounting period, before financial statements are prepared, all
accounts in business books are reviewed for adjustment.
It may happen that after reviewing the receivables ledger and preparation of aged
receivables analysis, some receivables may be discovered bad. An adjustment must be
made for both receivables total and bad debts.
When preparing financial statements, bad debts discovered at year should be added to
bad debts in trial balance to show total bad debts in income statement.
In balance sheet, the receivables figure should be adjusted by reducing with the bad
debts just discovered.
Steps in recovery:
(a) The debt must first be reinstated to facilitate the recording of cash coming in.
A debt previously written off Mr. Fix $276,000 has now been fully recovered
with a payment by cheque.
Dr.
The bad debts recovered account is closed off to income statement as income. It will be
added to gross profit.
Sometimes cash may not be received immediately but reasonable assurance is given
that the amount will be paid. The debt should still be reinstated but if at the balance
sheet the amount is not yet received, the debt must be included in total receivables
figure.
Because of past experiences where some debts become bad, some organizations find it
more prudent to provide for future bad debts.
An allowance for doubtful debts is a general estimate of the percentage of debts which
are not expected to be repaid.
An aged schedule of receivables may help in estimating the allowance. It is well known
that the longer a debt is owing, the more likely that it will become bad debt.
Example of aged schedule of receivables
Example:
The financial year of Mafuso ends on 31 December each year. On 31 December 20X7
receivables accounts totaled K50 000. It was decided to write off K5 000 as bad debts. It
is also estimated that 3% of the remaining receivables may eventually prove to be bad
and it is decided to make a provision for doubtful debts.
In income statement
Expenses:
Allowance for doubtful
- The allowance for bad debts account is closed off to balance sheet or
by bringing down the balance into the next account period, awaiting to
be used when bad debts occur.
Income statement
Gross profit XX
Less: Expenses
Bad debts 5,000
Allowance for bad debts 1,350
6,350
In subsequent years, adjustments may be made to the allowance for doubtful debts. The
allowance may increase or decrease due to economic factors which may change from
year to year.
Compare the balance b/d in the allowance for doubtful debts account with the newly
calculated figure, the difference is the increase which should be charged to income
statement and added to allowance b/d from previous year.
Example
In 20X8, receivables in Mafuso amounts to 54,000 after deducting 3,000 bad debts. It is
decided to maintain the 3% allowance for bad debts on receivables.
3% X 54,000 = 1,620
In Income Statement:
Assuming in 20X9, the economic environment is very conducive for business and most of
the receivables are paying, the allowance for doubtful debts may be reduced.
Example:
The allowance for doubtful debts has been in existence for the past two (2) years in the
books of Mafuso. At 31 December 20X9, receivables were 30,000. After reviewing the
receivables ledger it is discovered that 1,500 will not be recovered and 3% allowance for
doubtful be maintained on remaining receivables.
Receivables 30,000
Less: Bad debts (1,500)
28,500
Double entry when the allowance is reduced will now be the opposite.
Dr. – Allowance for doubtful debts account (to reduce)
Cr. – Income statement (add to gross profit)
NOTE:
Where bad debts (expense) exist when the reduction takes place, it is advisable to net
off the two since they are related. Thus in given example, instead of adding decrease to
gross profit it will be:
K
Bad debts (Expense) 1,500
Decrease in allowance for
Doubtful debts (income) 765
735 to be shown as bad debt in income
statement
Gross profit XX
Add: other income
Decrease in provision for doubtful debts 765
XX
Less: Expenses
Bad debts 1,500
When bad debts are incurred where allowance for doubtful debts exists.
Bad debts 18,000 is a charge against the allowance for doubtful debts.
- The net charge is K15,200 (18,000 – 2,800) to income statement.
If the amount of allowance is not enough for bad debts suffered, the
remainder will be charged against profits in that year.
The following information is available in the books of Home Made Furnishers Ltd as at 30
June, end of each financial year.
2016
Balance c/d 570 Income statement 570
570 570
2017
Balance c/d 713 Balance b/d 570
___ Income statement 143
713 713
20x8
Income statement 59 Balance b/d 713
Balance c/d 654 ___
713 713
Balance b/d 654
Income Statement
$ $
Gross profit for (2016, 2017, 2018) XX
Expenses:
2016 Allowance for discounts allowed (570)
2017 Increase in allowance for discounts allowed (143)
(2018) Add decrease in allowanced for discounts 59
In Balance Sheet
Current Assets $
2016 Receivables (20,000 – 1,000 - 570) 18,430
The income statement of a business measures the profit by considering revenues earned
and expenses incurred in an accounting year.
Gross profit less expenses equals net profit. The precise amount of net profit is
calculated on the accruals or matching concept.
ACCRUALS
The accruals concept states that income and expenses should be included in the income
statement of the period in which they are earned or incurred and not paid or received.
Example
A business rents a shop for 1,200 per annum (100 per month). If at year end, the
business has only paid 1000, a full years charge of 1,200 will be expensed in income
statement. The 200 though not paid will be included because it relates to the same
period.
Accruals or accrued expenses are expenses which are charged against the profits of a
particular period, even though they have not been paid, because they were incurred in
that period.
Using the above example the rent expense account would look like:
$ $
Bank 1 000 Income Statement 1 200
Balance c/d 200
_____ ____
1 200 1 200
Balance b/d 200
By now one should know that a balance b/d on credit side of an account could be
interpreted as a liability or income depending on what type of account one is looking at.
Therefore, the rent expense account with balance brought down on credit is a liability
(amount owing).
But the amount to charge in income statement will be 1200 including 200 not paid
because it relates to the same period.
In balance sheet 200, will be shown under current liabilities as accrued expenses.
Assuming in the following year 1 400 is paid for rent, the account will be as follows:
The 1 400 paid is first to pay the previous years balance of 200 and the remainder
1 200 is what should be charged to the second year’s income statement.
The 200 has now been paid and will not appear anywhere in financial statements.
30.6.20x6 23.50
30.9.20x6 27.20
31.12.20x6 33.40
31.3.20x7 36.00
Solution:
$ $
Bank 23.50 Income Statement 108.10
Bank 27.20
Bank 33.40
Balance c/d 24.00
_____ _____
108.10 108.10
Balance b/d 24.00
The 24 would be shown under current liabilities as an accrual. The K24 represents
two months arrears for January and February which were still due by 28 February
20X7.
While the business may owe others for expenses, the business may also be owed for
other amounts apart from trade among others:
Using the matching or accruals concepts, all income whether received or not as long as it
relates to the accounting period under review, should be included as income in income
statement for that period.
Since amounts are not yet received, they should be shown in balance sheet under
current assets as other receivables.
Example 1.
T.K. Furnishers Ltd sublets part of the buildings at an annual rent of 1200 000 (100 000
per month). During the year ended 31 December 20X8, T.K. discovers that the tenant
had only paid 1 000 000.
Show rent receivable account and statement to be shown in income statement and
interpret the balance brought down.
Solution:
The amount to be shown in income statement is not 1 000 000 paid, but will also include
200 000 not paid.
So the total to include in income statement is 1 200 000, to be added to Gross profit.
In balance sheet the 200 000 will be shown under current assets as other receivables.
Example 2:
Using example 1, assuming in the following year 20X9, the tenant pays 1 400 000 for
rentals, the rent receivable account will be:
In 20X9, the opening balance b/f of $200 000 is a debit representing amounts not
yet received (asset).
16.1 PREPAYMENTS
A business has a fixed rate for electricity of K74 000 per month. It is the business
tendancy that when their liquidity position is favourable they pay in advance for
certain services including for electricity.
For the year ended 31.12.20X8 the business had paid for electricity total of K1 036
000 to cover a period of 14 months to 28 February 20X9.
DOUBLE ENTRY
In balance sheet. Dr. Electricity (Balance sheet) with balance b/d (Dr.)
Therefore:
K
-
-
-
-
-
-
-
- Though 1 036 000 was paid during the year, the only expenses is 888 000
(74 000 x 12 months). The other amount 148 000 is for the year to come
(prepayment) and it will be accounted for in that year.
- The balance b/d will be shown in balance sheet under current assets as
prepayments.
Example 2:
Assuming the balance in example 1 of 148 000 is carried forward to the next year
and the business in the new year is only able to pay 740 000.
Solution:
Notes:
- Though only 740 000 has been paid for current year, i.e. for 10 months, the
other amount of 148 000 paid in advance the previous accommodates the
first 2 months of the year making a full payment for the year of 888 000 to
be charged to income statement.
- 148 000 is no longer an advance payment because it has now been used in
the year for which it was paid.
Gas Pipe runs a service station and sales fuel among other services.
Some well established individuals make advanced payments to Gas Pipe for fuel.
During the year ended 31.12.20X7, a payment of 3 000 000 was paid in advance
for fuel by a customer.
It now is discovered that the customer had actually withdrawn fuel amounting to
2 488 000 as at 31.12.20X7.
Show the necessary account to record the above information and state the unused
amount which will be shown in financial statements.
Solution:
Double entry
The business is holding K512 000 cash for which fuel is yet to be withdrawn. The
fact that this amount could be claimed by customer before fuel is withdrawn makes
it become a liability to the business.
Example 1:
From the following record of insurance payments, calculate the charge to income
statement for the financial year to 28 February 20X8.
Notes:
(a) The 3 months, 1 March – 31 May 20X7 (3/12 x 600 000) 150 000
(b) The 9 months, 1 June 20X7 – 20 February (20X8) 9/12 x 700 000 525 000
(c) Insurance cost for year charged to income statement 675 000
INTRODUCTION
This chapter deals with non current assets and depreciation. It looks at what non
currents are, depreciation and how it is provided and eventually leading to disposal. The
non current asset register is also discussed.
Additionally the chapter covers the basics of research and development costs and
goodwill
Non current assets are divided into tangible and intangible assets.
Land
Buildings
Fixtures and fittings
Motor vehicles
Goodwill
Patents
Trade marks
CURRENT ASSETS
These are assets that are temporal in nature. They change in value with time, and
examples includes:-
- Inventory
- Receivables
- Cash in bank and
- Cash in hand
NOTE: What is non current asset will depend on the nature of the business. If a
business is dealing in motor vehicles and it buys motor vehicles for resale, then motor
vehicles will be classified as inventory under current assets. Then motor vehicles bought
to be used in the business will be classified as non – current assets.
DEPRECIATION
Definition: (IAS 16 Property, plant and equipment)
IAS 16 which deals with property, plant and equipment defines depreciation as:“the
allocation of the depreciable amount of an asset over its estimated useful life”.
Depreciation for the accounting period is charged to income statement for the period
either directly or indirectly. Depreciation is an expense. No cash is involve
KEY TERMS (IAS 16)
(c) Depreciable amount of a depreciable asset is the historical cost or other amount
substituted for historical cost in the financial statements, less the estimated
residual value.
Sometimes called scrap value. This is the estimated value of an asset at the end of its
life. Residual value is not depreciable. In most cases residual value is immaterial. It is
usually estimated at the time the asset is being purchased. The estimation may be
based on similar assets in existence in the business.
Example 1: Equipment costing 80,000,000 which has an expected life of five years and
nil residual value will be depreciated as:
Example 2: Equipment costing 80 000 000 which has an expected life of five years with
3 000 000 residual value will be depreciated as:
CAUSES OF DEPRECIATION
Wear and tear - This is when assets deteriorate because of being used.
Natural causes - This is when elements of nature take its effect e.g. erosion of land,
rust on machinery, rot and decay in furniture.
Inadequacy - This arises when an asset is no longer used because of the growth and
changes in the size of the business. For instance a business is operating a bicycle to
deliver oranges to its customers. When demand increases, the business will need a van.
The bicycle can be sold else where.
Depletion - Natural resources such as mines, quarries and oil wells are wasting assets.
As raw materials are extracted they do not regenerate.
METHODS OF DEPRECIATION
There are many different methods of depreciation. The following are selected for your
study.
- Straight line
- Reducing balance method
- Sum of digits
- Revaluation method
In this method the depreciable amount is charged equally from one accounting period to
the other over the expected useful life of the asset. It is assumed that the business will
enjoy equal benefits from the use of the assets throughout its life.
A machine was bought on 1 January 20X4 at a cost of 800 000. The machine is expected
to be used over a period of 5 years with no residual value.
In this method depreciation is calculated as a fixed percentage of the net book value of
the asset, as at the end of previous accounting period.
This method assumes that the business will benefit more from the use of the asset in
earlier years than later years.
This method is very similar to reducing balance method. Depreciation is also charged
more in earlier years than later year. What makes it different from reducing balance
method is the way it is calculated.
What is referred to as sum of digits are the years the asset will be in use i.e.
estimated life.
If the life of an asset is 5 years then the sum of digits will be:
Year 1
+
Year 2
+
Year 3
+
Year 4
+
Year 5
15 is the sum of digits
Since depreciation is more in the first year than later years, each year
depreciation charge will be:
Year 1 5
/15 x depreciable amount
Year 2 4
/15 x depreciable amount
Year 3 3
/15 x depreciable amount
Year 4 2
/15 x depreciable amount
Year 5 1
/15 x depreciable amount
Example: Sum of digits method
Ever green purchased a non current asset for 600 000 on 1 January 20X4. The useful
life of the asset is 5 years after which it will have a residual value of 30,000. The
depreciation charge every year will be:
Year 1 5
/15 x K570 000 = K190 000
Year 2 4
/15 x K570 000 = K152 000
Year 3 3
/15 x K570 000 = K114 000
Year 4 2
/15 x K570 000 = K 76 000
Year 5 1
/15 x K570 000 = K 38 000
K570 000
+
K 30 000 Residual value
K600 000
If the asset had no residual value, then the depreciable amount would be the
whole K600 000 spread over 5 years.
Revaluation method
Fall in value of asset
When the market value of a non current asset falls below its net book value, and the fall
in value is expected to be permanent, the asset should be written down to its new
market value. Revaluation means giving a new value to an asset which could be gains or
losses.
NOTE: Market value is value of asset it can currently fetch on the market which is
different from net book value which is cost minus depreciation.
The charge in the income statement for the reduction in the value of the asset during the
accounting period is:
K
Net book value at start of year XX
A business purchased buildings on 1 January 20X3 at a cost of 300 000. The buildings
are expected to be used over a period of 20 years. After 5 years in use on 1 January
20X8, the land is now worth 200 000 and the reduction is permanent.
Solution:
The buildings will now be stated in the books @ 200 000 to be depreciated over 15 years
remaining.
New annual depreciation from 20X8 on wards will be: 200 000/15 = 13 333
Due to inflation, the market value of certain non current assets go up, especially land
and buildings. A business is not obliged to revalue non current assets in its balance
sheet. However in order to give a ‘true and fair view’ the business may decide to
revalue the asset upwards. Depreciation would then be charged on the new revalued
amount.
Musuku Ltd commenced business on 1 January 20X3, and bought buildings costing 275
000. The buildings are to be depreciated on a straight line basis over a period of 25
years with no residual value.
After 4 years on 1 January 20X7, the buildings are revalued to 260 000 with a life span of
21 years.
Solution:
NOTE: The increase as a result of revaluation of K29 000 will not be shown as income in
income statement because the gain is not realized as the buildings are still being used in
the business. Instead the gain will be reflected in the revaluation reserve account and
added separately to capital in the balance sheet. Remember the prudence concept.
Non current assets are maintained in the books at historical cost i.e. the amount paid to
acquire or produce it. An account for depreciation in the general ledger is opened to
record accumulated depreciation to date. This account is called Allowance for
depreciation account.
The accumulated depreciation amount is shown as deduction from cost of the non
current asset to arrive at net book value.
There is an allowance for depreciation account for each separate category of non current
assets, e.g. for buildings, machinery, furniture, motor vehicles etc. If a business has 20
vehicles there will be only one depreciation account for all the vehicles even if they have
been bought at different times and years.
Example:
Recording allowance for depreciation. Fast track company maintains non current assets
at cost. Separate allowance for depreciation accounts are kept for each category of
assets.
2011 1 January bought machinery for 60 000 and fixtures for K38 000.
NOTES: Machinery is depreciated at the rate of 15% per annum on cost and fixtures at
the rate of 5% using the reducing balance method.
Depreciation is to be charged fully for the whole year disregarding the purchase date.
Required: Show
Dr Cr
Machinery 180 000
Accumulated depreciation 9 000
Fixtures 38 000
Accumulated depreciation 1 900
Any depreciation shown in the trial balance is what has accumulated from previous
years. For the year under review it has to be calculated and shown in the income
statement. The figure shown in income statement will be added to the figure in the trial
balance and the accumulated total shown in the balance sheet.
Any method of depreciation can be used on a non current asset, but the method chosen
must be fair in allocating the charges between different accounting periods.
(a) The method should allocate costs in proportion to the benefits i.e.
(i) Use reducing balancing method if the business will benefit more from the
asset in earlier years than later years
(ii) Use the straight line if benefits will be spread equally over the life of the
asset
(b) Consistency must be observed. Same depreciation method must be used for
similar assets, and from one year to another.
If a non current asset is purchased during an accounting period it might be fair to charge
depreciation according to the period the asset has been used i.e. on monthly basis.
However, this basis may apply when straight line method is in use.
Examples:
(a) Charge a full year’s depreciation in the year of acquisition or nothing in the year of
disposal. In this instruction dates of purchase should be ignored even if the dates
are given.
(b) Charge a full year’s depreciation on the value of asset available at year end.
(explanation same as in a)
(c) Depreciation should be charged on monthly basis.
(d) If instructions are silent and dates of purchase are given, then the monthly basis
should be adopted.
On 1 October 20X5 the business purchased furniture for 500 000 cost. The life span of
the furniture is 10 years with no residual value.
What is the depreciation charge for the year ended 31 December 20X5?
Solution
The asset was acquired on 1 October 20X3 and will be depreciated only for 3
months in 20X5.
= K12 500
A business purchased a motor vehicle at a cost of K400 000 with an estimated life
of 6 years. It is to be depreciated on straight line basis over its life. However, after
2 years in use, it is discovered that the asset life has 2 more years making a total
of 8 years.
Solution:
Net book value to be spread over new life i.e. 6 years. From year 3 onwards
annual depreciation will be:
K266 666
6 years = K44 444
A business bought non current assets at a cost of K100 000. It is estimated that
the assets will be used in the business for a period of 7 years with K10 000 residual
value. After one year in use, it was reviewed that the assets life span be reduced
to 3 years from the remaining 6 years. What will be depreciation from year 2
onwards.
Solution
A business bought furniture on 1 January 20X3 at a cost of K80 000. The asset is
to be depreciated using straight line method over a 5 year period.
At 1 January 20X5, a review was conducted, and it was agreed to change the
method to reducing balance method at the rate of 20% per annum.
Solution:
Using straight line method
K80 000
5 years = K16 000 annual depreciation
Net book value after 2 years K80 000 – K32 000 = K48 000
From year three onwards using reducing balance method, depreciation will be:
When a business buys non current assets, they are meant to be used in generating
income for the business over a period time (more than 1 year). They are not
meant for resale to make a profit.
However, the non current assets might be sold off at some stage before even their
useful life is over. Reasons for selling or disposal may include:
- Inadequacy – where an asset fails to meet increased demand for a product
- Obsolescence etc
When non current assets are disposed of, a disposal account is opened. This account
will reveal whether a profit or loss has been made on the asset sold. The profit or loss on
disposal are reported in the income statement.
Step 1:
Step 2:
Note: The two steps in disposal account reveals the net book value of
the asset.
Step 3:
Step 4
Solution:
= K10 000
Green Grass owned the asset for two years and six months, thus the
total depreciation charged since acquisition is K10 000 x 21/2 years =
K25 000.
This means that the net book value at the date of disposal was K100
000 – K25 000 = K75 000.
Since the sale proceeds amounted to K55 000, a loss on disposal of
K55 000 – K75 000 = K20 000 has been made.
20X5 K K
1 Jan. Bank 100 000 31 Dec. Balance c/d 100 000
_______ ______
100 000 100 000
20X6
1 Jan. Balance b/d100 000 31 Dec. Balance c/d 100 000
______ _______
100 000 100 000
20X7
1 Jan. Balance b/d100 000 June 30 Disposal 100 000
______ ______
100 000 100 000
Dr Disposal account Cr
20X7 K 20X7 K
30 June Van at cost 100 000 30 June Allow. For Dep. 25 000
30 June Bank 55 000
Loss (to inc. state.) 20 000
_______ ______
100 000 100 000
On 1 April 20X8, Quick Fix owned a motor vehicle which was bought on
1 October 20X5 at a cost of K600 000. Its estimated residual value
after five years in use would be K80 000.
During the financial year ended 31 March 20X9, the following occurred:
On 30 June 20X8, the motor vehicle was traded in and replaced with a
new one. The trade in allowance was K255 000. The new vehicle cost
K850 000. The balance after deducting the trade in allowance was
paid by cheque.
Required:
Show the necessary ledger accounts to record the above information.
Solution:
Annual depreciation: K600 000 – K80 000
5 years = K104 000
For old vehicle
Note: Trade in allowance is what should have been realized if the asset
was sold for cash.
Ledger accounting:
20X8 K K
Dr Disposal account Cr
20X8 K 20X8 K
Most organizations will own a number of non current assets and their control is
vital to the efficient running of the organization. A non current asset register
should be maintained for this purpose.
register will contain the following information for each non current asset.
INTRODUCTION
Profit is excess of income over expenditure. The purpose of this chapter is to describe
how inventory valuation affects gross profit and the impact it has on current assets in the
Balance Sheet.
What is inventory
The accruals concept requires that income should be matched with expenses incurred in
earning that income. Goods bought in an accounting period may not all be sold at end of
period. The unsold goods will be held in the business warehouse as inventory. These
goods should not be included in the cost of sales for the period.
Opening inventory xx
Add: purchases xx
xx
Less: closing inventory (xx)
Cost of goods sold xx
Example
A trader is in business buying and selling radios. His financial year ends on 31 March
each year.
During the financial year ending 31 March 20x7, the following is a summary of the
transactions that took place.
During the year to 31 March 20x8 he continued with his business and the following took
place.
Required:
Solution:
Cost of sales
Purchases (30 x K40 000) 1 200 000
Less: closing inventory
(9 x K40 000) (360 000)
(840 000)
NOTE: Though 30 radios were bought only 21 radios were sold. Profit will be
calculated on the 21 radios sold, thus 21 x K40 000 = K840 000 is cost of radios
sold at (21 x K55 000 = K1 155 000). The 9 radios not sold will be considered as
closing inventory.
Cost of sales:
Opening inventory (9 x 40 000) K360 000
Add: Purchases (35 x K40 000) K1 400 000
K1 760 000
NOTE: For the year to 31 March 20x8, the business had a total of 44 radios i.e. 9
from 20x7 plus 35 bought during the year. Out of 44 radios only 38 were sold
leaving 6 unsold (closing inventory). Therefore profit is calculated of the cost of
the 38 radios sold. The concept of going concern is in play for taking closing
inventory to the next accounting period.
Using example 12.4, assuming 2 radios were stolen, the situation will now be as
follows:
Cost of sales:
Opening inventory (9 x 40,000) K360 000
Add purchases (35 x K40,000) K1 400 000
K1 760 000
Less closing inventory
(4 x K40 000) (K160 000)
(K1 600 000)
In the above example, since only 4 radios are remaining, the 2 radios stolen will be
included as part of cost of sales when calculating profit.
An alternative method will be to deduct the stolen radios from the total inventory
and show it as a separate expense as follows:
Cost of sales:
Opening inventory (9 x K40 000) K360 000
Add: Purchases (35 x K40 000) K1 400 000
K1 760 000
Less: Inventory stolen (2 x 40,000) (K80,000)
K1 680 000
Less: Closing inventory (4 x 40 000) (K160,000)
K1 520 000
Gross profit K646 000
Expenses:
Inventory stolen (2 x 40 000) (K80 000)
K566 000
Carriage refers to the cost of transporting purchased goods from the supplier to
the premises of the business which has bought them. This cost is sometimes paid
by customer or supplier.
- When the buyer (customer) pays the cost it is called carriage inwards
- When the seller (supplier) pays the cost, the cost to the supplier is called
carriage outwards
- Carriage inwards is added to cost of purchases. It is a direct expense and
therefore included in cost of sales
- Carriage outwards is a selling and distribution expenses in the income
statement. It is an indirect expense.
The following amounts appear in the books of a trader at the end of the financial
year.
K
Opening inventory 55 000
Closing inventory 85 000
Carriage outwards 62 000
Purchases 75 000
Returns inwards 5 000
Carriage inwards 3 000
Required:
In order to calculate gross profit, it is necessary to work out the cost of goods sold, and in
order to calculate the cost of goods sold, it is necessary to have values for the opening
inventory and closing inventory.
DR – Income Statement
CR – Purchases Account
Closing inventory (stock) at end of one period becomes opening inventory at start of
next period. The inventory account remains the same until the end of the next period,
when the value of opening inventory is taken to the income statement. Any purchase
made in the period will be recorded in the purchases account.
DR – Income Statement
CR – Inventory account (with value of opening inventory)
Inventory accruals
This is where goods have been received before the year end and included in inventory,
but no invoice has yet been received. Without an invoice no record can be made in
accounting books to show the business indebtedness or liability to suppliers.
To determine the price of the uninvoiced goods a goods received note (GRN), delivery
notes or current order forms may be used for this purpose.
DR – Purchases account
CR – Payables (Liability)
Inventory Valuation
IAS 2 provides guidance and rules governing inventory valuation. There are many
methods in theory which may be used to value inventory. The following are some of
them.
IAS 2 (inventories) states that inventory should be valued at the lower of cost and net
realizable value.
(a) because selling price may include profit before goods are sold thus going
against the prudence and realization concepts.
(d) because replacement cost may over state inventory especially where
prices are continuously rising.
An item is purchased for K45 000 (cost). Another K7 000 has to be spent to get it ready
for sale. After which the item will be sold for K60 000.
If a business has many inventory items on hand the comparison of cost and N.R.V. should
be carried out for each item separately. Do not aggregate costs and N.R.V. for all items
and compare the two totals.
At the year end on 31 March 20x6, a business has three (3) items of
inventory remaining in warehouse, for which the cost and N.R.V. is given
below.
K45 000 is the value that should appear in balance sheet as value of
inventory. Comparing K48 500 with K51 100 and valuing inventory at K48
500 would be inappropriate because there would be covering up.
Example 3:
A B C
K K K
Cost 20 000 9 000 12 000
Selling price 30 000 12 000 22 000
Modification costs - 2 000 8 000
Marketing costs 7 000 2 000 2 000
Required:
========
Note:
Net Realisable Value
Item
A: K300 000 – K7 000 = K23 000
B: K12 000 - K4 000 = K8 000
C: K22 000 - K10 000 = K12 000
(i) raw materials i.e. if the business is producing its own goods
(ii) finished goods which could have been produced or bought elsewhere for
resale.
(iii) Work in progress (WIP) i.e. work yet to be completed.
The easiest way of valuation of inventory is to use historical cost i.e. the amount
paid at the time of buying the inventory.
Certain items may not be identifiable separately. As items are bought they may be
stored in bins, shelves or pallets, where they are mixed with other items bought
previously. As these items are issued or sold, they will be removed in their mixed
state regardless of which came in first or last.
When valuing inventory this may create problems especially when items were
bought at different prices.
There are many techniques which are used to value such items of inventory. They
include the following:
FIFO
In this method it is assumed that items are issued or sold in order in which they were
received. The oldest items are issued or sold first.
(b) LIFO
This is the opposite of FIFO. Item of inventory are issued or sold starting with
the most recently received or bought, while the earlier stock will be issued or
sold last.
(c) AVCO
As purchase price change with each new consignment, the average price of
components in stock is constantly changed. Each component of stock at any
moment is assumed to have been purchased at the average price of all
components in stock at that moment.
This method assumes that the cost at which inventory was bought is the
amount it would cost to replace it. This is often (but not necessarily) the unit
cost of inventories bought in the next consignment following the issue of the
component to production. For this reason, a method which produces similar
results to replacement costs is called NIFO (Next in first out).
The following transactions took place during the month of June 20x8
QUANTITY UNIT COST
K’000’
1 June Opening inventory 200 12
6 June Purchases 400 17
9 June Sales 300 30
15 June Sales 250 32
17 June Purchases 100 18
21 June Sales 60 32
Required:
Show how continuous inventory records will be and how closing inventory will be
valued using each of the following:
(a) FIFO
(b) LIFO
(c) AVCO
It is not possible to draw up an exhaustive list of all the errors which might be
made. Below are some of the common ones which might cover most of the errors.
- Errors of transposition
- Errors of Omission
- Errors of Principle
- Errors of Commission
- Compensating errors
- Errors of Original entry
- Complete reversal of entries
When errors are detected they should be corrected immediately. The journal is the
book of prime entry used for the correction of errors.
There is no rule regarding how errors should be corrected. One should just first
understand how the error was made and how it should be corrected.
Example
A business has sent a lot of sales invoices to different customers one of them
being K260 sent to customer. If it is omitted both the Debit and Credit sides
of trial balance will be down by K260. The trial balance totals will be equal
based on the other correctly processed sales invoices.
These errors are a result of one’s failure to correctly apply the principles of
accounting or accounting concepts. The common ones are failure to
appreciate the distinction between capital and revenue expenditure and
capital income and revenue income.
Example 1
DR – Furniture account
CR – Cash account
DR – Purchases account
error of principle
CR – Cash account
Please note that furniture has wrongly been debited in purchases account
instead of Furniture account. The fact that both have debit entries, the trial
balance totals will be equal but with wrong figure of purchases and none in
furniture. Record of furniture will not be there since it is included in
purchases.
Errors of commission are very common for customers or supplier with similar
names. Also common with mixing up expenses, e.g. recording a debit entry
or credit entry in the wrong account.
Example 1:
Example 2:
N.B. Both are expenses and have debit entry for this example.
To compensate means to make up e.g. being paid some cash for injury while
on duty.
Example
Bought postage stamps by cash K5.
Paid for rent in cash K10.
Stamps account
Cash 10
Rent account
Cash 5
Cash account
Stamps 5
Rent 15
Trial Balance
Dr. Cr.
Stamps 10
Rent 5
Cash __ 15
15 15
Please note that figures in stamps and rent are switched. Error made in
stamps has been compensated by another error in rent. Trial balance totals
will be equal but with errors.
Example:
Dr – Stationery account K4
Cr – Cash account K4
Reversed entry
Dr – Cash account K4
Cr – Stationery account K4
Trial balance will agree because correct amount and equal in value is debited
and credited in correct accounts but wrong sides.
Activity 1
In some cases, the trial balance totals may not be the same. This may mean a lot
of things.
When the trial balance fails to agree sometimes it could just be a simple additional
error within the trial balance. It is advisable to sum up the trial balance once or
even twice again. If this produces same results then it could be one of the
following or combination of errors.
(i) Incomplete double entry. Recording only one account a transaction. The
trial balance will not agree.
(ii) Debiting one figure and crediting a different figure for same transaction e.g.
bought stamps for cash K5. Debit stamps with K5 but credit cash with K4.
(iii) Transposition e.g. paid for stationery in cash K15. Debit stationery with K15
but, credit cash with K51.
When totals in trial balance are not equal, a temporal account is opened called the
suspense account.
The suspense account is opened for the difference in the trial balance because it is
not clear what caused the difference. However, it is not encouraged to all the time
open suspense account when trial balance totals disagree, except under certain
circumstances e.g. where it is suspected that the difference may be as a result of
many errors which might take sometime to discover.
Also where the bookkeeper does not know where to post one side of a transaction
e.g. a cash payment is credited to cash, but the bookkeeper does not know what
the payment was for and so will not know which account to debit.
Suspense account is always placed where there’s a deficit in trial balance, which
could be debit side or credit side, thus forcing temporally the trial balances totals
to be equal.
With the suspense in trial balance, the financial statements could now be prepared.
All errors once detected are corrected via the journal. When correcting errors it is
important that some will affect suspense account and others not.
- Errors not causing imbalance in trial balance will not affect suspense
account.
- Errors causing imbalance in trial balance will be corrected via suspense
account.
Both T Flash light and T Flash bulb are our customers. On 1 January 20X5 sold
goods to T Flash light but by mistake it was recorded in T Flash bulb account K150.
Solution:
It is assumed that the sales account was correctly credited with K150 but instead
of debiting T Flash light with K150, T Flash bulb was debited instead. The trial
balance is not affected by this error because double entry in figure terms is correct.
To correct this error it should be:
Solution
The trial balance totals will not be equal. One side (Cr) will be greater than debit
side by K70. This error should be corrected via suspense account.
Dr Suspense account Cr
Balance 70
- error corrected
Dr Rent account Cr
Cash 100
Suspense account 70
Dr Suspense account Cr
Balance 70 Rent 70
70 70
N.B. Suspense account is now closed and rent adjusted by K70 to K170.
The error has been corrected and trial balance will agree with adjusted figure
of rent. Cash was correctly recorded and so is not affected by the error.
(i) A page of sales day book totaling K576 had not been posted to sales
account.
(ii) An accrual of rates K371 had not been taken into account
(iii) A repayment part of the loan from the bank K300 had been entered on
the loan interest account
(iv) The petty cash balance had been included as K57 instead of K75.
(v) A bad debt of K120 had been entered in the customers account but not
in the expense account.
(vi) Drawings K200 had been entered in the sundry expenses account
(vii) An invoice for car repairs K380 had been entered in the wages
account.
(viii) The rent received account balance of K600 had been entered on the
wrong side of the trial balance and income statement.
(ix) Advertising account with a balance of K2,759 had been omitted
altogether.
(x) Closing inventory had omitted some items valued at cost K2,000.
(xi) Discount allowed of K150 had been credited to discounts received.
Required:
(a) Show by means of journal to correct the above errors (narratives are
not required).
(b) Clear suspense account balance after the correction of errors and
(c) Prepare a statement showing the corrected amount of the profit.
Solution:
Dr Cr
(i) Suspense account 576
Sales account 576
Income Statement 371
(ii) Rates account 371
Advertising 2759
(ix) Suspense account (advertising) 2759
Balance 1421
Sales 576 Petty cash 18
Rent 1200 Bad debts 120
Advertising 2759
Discount all. 150
____ Discount rec. 150
3197 3197
Notes
- Error (i) is an error of undercast in sales account. The trial balance will
not balance because the receivables figure will be more by K576 on
credit. The suspense account is involved in correcting this error.
Profits should adjust by adding sales of K576.
- Error (ii) rates accruals comes as a year end adjustment. The trial
balance is not affected by this error but profits will be over stated since
accrued expenses are included as expenses in the year to which they
relate. Profits should reduce by K371
- Error (iii) the trial balance is not affected because the loan repayment
should have been debited to loan account instead of loan interest.
Double entry was achieved but in a wrong account. However, the loan
interest account was overstated by K300. therefore profits should be
increased by K300.
- Error (iv) this error will affect the trial balance and suspense account is
involved in correcting it. Petty cash is an asset and was transposed.
The debit side of trial balance will be less by K18. However, profit is
not affected by this error because cash does not appear in Income
Statement but as a current asset in balance sheet.
- Error (v) this is incomplete double entry and the trial balance will not
balance thus the reason for the suspense account. Since bad debt is
an expense, its omission increases profits. Therefore, after correcting
the error the profits should be reduced by the amount of the bad debts.
- Error (vi) this is an error of principle and the trial balance is not
affected. Drawings should have been debited but instead sundry
expenses were debited. Double entry was correct but debited in wrong
account.
- Error (viii) The rent account in the ledger was correct with a credit
entry. On taking it to trial balance it was recorded on the debit side
instead of credit side. This made the debit side of trial balance to be
twice bigger the amount, and the trial balance would not balance. The
trial balance should be credited with rent receivable by K1200 (600 x
2). The first K600 to cancel the debit and the other K600 to reinstate
the rent receivable. Rent receivable is an income and increases profit
by crediting the income statement. Now that it was debited in income
statement, the profit were understated by twice the amount, so add
back twice the amount.
- Error (ix) advertising account is the ledger but was not transferred to
trial balance. This will cause an imbalance in trial balance. Therefore,
it should just be included by crediting suspense account with
advertising. Its omission from trial balance also means that it was
omitted from income statement thus overstating profits. This profits
should now be reduced by the amount.
- Error (x) closing inventory is a year end adjustment after physical stock
take. It does not appear in trial balance and so the error is outside trial
balance. However, profits were understated because cost of sales
were higher. Profits should now be increased by the same amount.
EXERCISES
4. The trial balance of John Black as at 31 March 20X9 did not agree, there being a
shortage of K 874 on the debit side. A suspense account was opened for the
difference. Subsequent investigation showed:
(i) Discount allowed K480 had been entered on the credit side of discount
allowed account.
(ii) The bank statement balance of K560 overdraft had been included in trial
balance instead of the cashbook balance of K63 debit.
(iii) The provision for bad debts account of K150 had been entered on wrong side
of trial balance
(iv) Rent receivable account was over cast by K20
(v) Drawings of K250 had been included in purchases account
(vi) The sale of furniture (non current asset) had been included in sales account
of K300
(vii) Payment for insurance of K45 was entered in insurance account as K54
(viii) Discounts received was overstated by K100.
(ix) A cheque for K200 for car repairs had been posted to the building repairs
account
(x) Provision for depreciation account K270 was entered on wrong side of trial
balance
(xi) The scrapping of an old lorry with net book value of K375 was omitted from
the books.
Required:
- prepayments
- accruals
- bad debts and provision for depreciation
- opening and closing inventory
Exercise 1
’000 ’000
Distribution expenses 1460
10% Loan 1000
Trade payables 820
Cash at bank 140
Allowance for doubtful debts 18
Trade receivables 810
Motor vehicles at cost 1680
Accumulated depreciation motor vehicles 620
Warehouse at cost 1800
Accumulated depreciation warehouse 290
Buildings at cost 8300
Accumulated depreciation buildings 1020
Land at cost 1510
Interest on loan paid 50
Salaries and wages 1590
Discounts allowed and received 80 100
Returns inwards 400
Returns outwards 150
Carriage inwards 700
Carriage outwards 250
Inventory 1 January 20X7 1530
Purchases 8100
Sales 13600
Capital 1 January 20X7 10782
28400 28400
NOTE: The goods received had been included in the year end inventory figures given at
(a) above, and the goods sold had been excluded from it.
- Land nil
- Buildings 2% on cost per annum
- Warehouse 15% on cost per annum
- Motor vehicles 25% on cost per annum
Required:
(a) Prepare income statement for the year ended 31 December 20X7 and
Exercise 2
Mr. Bird Rock has been in business for some time trading in motor spares. The list below
has been taken from his books for the financial year ended 30 September 20X8.
K
Fixtures and fittings 910,000
Accumulated depreciation 136,500
Discounts received 15,400
Trade receivables 400,000
Carriage inwards 95,000
Postage and stationery 15,210
Telephone expenses 10,625
Bad debts 55,000
Returns inwards 110,300
Carriage outwards 5,266
Drawings 315,000
Rent & rates 88,000
Insurance 11,000
Heating and lighting 50,781
Advertising 16,000
Cash in hand 4,242
Cash at bank 112,000
Inventory 1 October 20X7 156,000
Purchases 1,200,400
Discounts allowed 14,000
Allowance for doubtful debts 40,000
Returns outwards 2,745
Trade payables 271,000
Capital 1 October 20X7 1,103,179
Sales 2,000,000
(ii) Depreciation charge for the year is 10% on reducing balance method.
Required:
Prepare income statement for Mr. Bird Rock for the year ended 30 September 20X8 and a
balance sheet as at that date.
a) Cash basis
This accounting system recognizes only cash inflows and cash outflows. The
resulting final accounts are summarized cash books. There are no balance
sheets under this system because there are no other assets (apart from
cash) and liabilities in the books other than cash balances.
Ledger accounting: Separate ledger cards are kept for all receipts and
payments on a cumulative basis.
i) how much tax to collect through budgets. If the government spends less
than the budget, then it is better off at the year-end and can spend excess
cash on other developmental issues, pay back borrowings or reduce tax.
If it spends more than the budget, then it is worse off meaning money will
have to be borrowed or increase taxes
e) Accruals accounting
Revenue and costs are accrued (i.e recognized as they are earned or
incurred, and not as money is received or paid), matched with one another
so far as their relationship can be established or justifiably assumed, and
dealt with in the income statement of the period to which they relate.
Meaning:
i) The earning of revenue is generally taken to mean that invoices have
been issued.
ii) Costs are incurred when services are received. Therefore recognition
of income and costs is not when cash is received or paid.
There has been critical argument that the accruals accounting is too
subjective and hide crucial information about an organisation’s
performance.
Advantages:
Disadvantages:
PARTNERSHIP ACCOUNTING
- .
In a partnership one may find limited partners and general or unlimited partner.
- Limited Partners
These are partners with limited liability. They are only liable or limited to the
amount of capital they have provided. Such partners usually do not
participate in management of the business.
- General Partners
Before a partnership can be operational, partners must agree on how the business
will be organized and run. The law does not state the contents of the agreement
but may contain the following.
Though not required by law the partnership agreement must be put in writing, so that
partners know their rights and responsibilities. This also helps to reduce disputes.
In the absence of a formal agreement by partners The Partnership Act of 1890 will
guide administration and management of a business owned by partners. This is a UK
Act which is also enforceable in Zambia because this country is a former British colony.
Some of the provisions of the Act are:
Advantages:
- While risks are spread among many persons, some partners may feel
uncomfortable to share profits.
- Disputes may arise on management issues and this may lead to partnership
closure.
- A decision made by a partner in relation to business, is usually binding to
other partners. This means if a partner is being sued in relation to the
business, other partners are equally affected.
The accounting techniques in partnership are very similar to that of a sole trader.
Partnerships also keep books of prime entry and ledgers, but there are certain
important differences as shown in the table.
Income statement of sole trader and partnership are very much the same.
However, a partnership extends the income statement by including the
appropriation account.
The appropriation account of the income statement shows how profits and
entitlements to partnership are distributed.
N.B. Net profit in sole trader is all his and thus the whole amount is added to
capital in balance sheet.
For partnership profits there is need to show how profits are shared between
partners.
Example 1
Banda and Bwalya have been in partnership just for one year.
K K
Net profit 70,000
Add: Interest on drawings
Banda 2,000
Bwalya 1,500
73,500
Less: Appropriations:
Salaries: Banda 3,000
Bwalya 5,000
(8,000)
Interest on capitals:
Banda 10,000
Bwalya 20,000
(30,000)
35,500
Share of profits: ======
Banda ½ 17,750
Bwalya ½ 17,750
35,500
======
(ii) Capital accounts
When a partnership is being set at the beginning, partners have to agree the
amount of capital contribution to introduce. This could be in form of cash or
other assets. Double entry would be:
The capital will usually remain fixed for the duration of the business but
could change under the following circumstances:
Capital accounts
K K K K
Bal. 100,000 200,000
Current accounts are used to deal with regular transactions between the
partners and the firm.
These are matters that may not be dealt with in capital accounts. These
may include:
- Share of profits
- Interest on capital
- Drawings
- Interest on drawings
- Partners salaries
For drawings
Current Accounts
The balance of the current accounts at the end of each financial year will
then represent the amount of undrawn or withdrawn profits.
- A debit balance will represent partners have withdrawn more than their
entitlements, so they are receivables to the firm.
Using example 1
Financed by:
Capitals: Banda 100,000
Bwalya 200,000
300,000
Current accounts: Banda 22,750
Bwalya 36,250
59,000
359,000
If one partner had finished with a debit balance in current account, the
balance will be shown in brackets in balance meaning it should be deducted.
Capital and current accounts should be shown separately. Occasionally you may
be faced with a question specifying only one account for each partner. Such an
account acts as a capital and current account combined thus the term Fluctuating
Capital.
Capital accounts
The balance sheet will then only show capital accounts as follows:
5. A and B are in partnership sharing profits and losses in the ratio 3:2.
Under the terms of the partnership agreement, the partners are entitled to interest
on capital at 5% per annum.
The net profit of the firm, before interests and salary for the year ended 30 June
20X7 was K25,800.
At 1 July 20X6, there was a credit balance of K1,280 on B’s current account while
A’s current account balance was K500 debit.
Drawings for the year to 30 June 20X7 amounted to K12,000 and K15,000 for A and
B respectively.
Required:
6. X, Y and Z are in partnership business sharing profits and losses 4:1:3 respectively.
The firms trial balance as at 31 December 20X1, was as follows:
Dr. Cr.
K K
Sales 334,618
Returns Inwards 10,200
Purchases 196,239
Carriage Inwards 3,100
Inventory 1 Jan. 20X1 68,127
Discounts allowed 190
Salaries and wages 54,117
Bad debts 1,620
Provision for doubtful debts
1 January 20X1 950
General expenses 1,017
Business rates 2,900
Postage 845
Computers at cost 8,400
Office equipment at cost 5,700
Provision for depreciation at
1 January 20X1:
Computers 3,600
Office equipment 2,900
Payables 36,480
Receivables 51,320
Cash at bank 5,214
Drawings: X 39,000
Y 16,000
Z 28,000
Current accounts: X 5,940
Y 2,117
Z 9,618
Capital accounts: X 60,000
Y 10,000
Z 30,000
_______ _______
494,106 494,106
Additional information
(i) Inventory 31 December 20X1 K74,223
(ii) Business rates paid in advance K200
(iii) Stock of postage stamps K68
(iv) Increase provision for doubtful debts to K1,400
(v) Partners salaries: Y K18,000, Z K14,000
(vi) Interest on drawings: X K300, Y K200, Z K240
(vii) Interest on capital is at 8 percent per annum.
(viii) Depreciate computers by K2,800 and office equipment by K1,100.
Required:
Draw up a set of financial statements for the year ended 31 December 20X1.
INTRODUCTION
This chapter is concerned with the preparation of financial statements of not profit
making organisations and whose objectives are to provide services to their members or
the pursuit of one or a number of activities rather than the earning of profit.
Since running organisations involves cash and other assets and liabilities, there’s need to
also keep records of all activities (transactions).
They may be engaged in profit making activities, but profits arising from such is not
shared by members but ploughed back in the organisation to improve on services to
members.
The accounting system can be basic to complex depending on size of the organisation.
The receipts and payments account is effectively the cash book. It is a summary of
cash receipts and cash payments.
Smaller clubs and charities with no other assets (apart from cash) and no liabilities
will use the receipts and payments account as a financial statement. No balance
sheet is produced.
Receipts Payments
K K
N.B. The receipts side is same as debit and payments side credit of the cash
book.
Advantages
(a) Very easy to prepare
(b) Very easy to understand especially cash position
(c) It is used as a basis for the preparation of the income and expenditure
account
Disadvantages
(a) Only accounts for cash. There could be other assets in use.
(b) Does not account for any amounts paid in advance or owing.
(c) Does not distinguish between capital and revenue expenditure
(d) Does not account for depreciation of non current assets.
Organisations apart from cash asset may have other assets and liabilities.
Therefore, the receipts and payments account may be inadequate to be used as a
financial statement, because it does not show the other assets and liabilities.
The receipts and payments account does not also show whether the members
contributions are being used effectively.
(a) To reveal a complete picture of assets and liabilities a Balance Sheet must be
prepared.
(b) To show any increase or decrease in capital the income and expenditure
account is prepared.
Income and expenditure account is the same as income statement for trading
organisations.
The main source of income for non trading organisations is subscriptions from
members. However, they may engage in profit ventures like owning a bar.
K K
Bar Sales 240
Less cost of sales:
Bar opening inventory 30
Bar purchases 160
___
190
Less: Bar closing inventory (80)
(110)
130
Less: Bar man’s wages (70)
___
Net profit (transferred to income and
expenditure account) 60
The North East Rotary Club had the following assets and liabilities as at 1 January
20X1, the beginning of the year.
Required:
Solution:
Assets: K K
Cash and bank balance 210
Subscriptions in arrears 65
Equipment 975
Inventory of competition prizes 38
1288
Liabilities:
Subscriptions in advance 10
Owing to suppliers 58
68
Accumulated fund at 1 January 20X1 1220
22.6 Subscriptions
This may be the main source of income for not profit making organisations.
Subscription is an agreed amount each member must pay at regular intervals e.g.
monthly or annually. Members will enjoy facilities of the organisation at no cost,
while non members will have to pay high fees to use same facilities and sometimes
may be denied access even if they have money.
N.B. Members who have not paid the subscriptions and their membership
has not lapsed are considered as receivables because they have not paid the
institution and yet they have been enjoying the services. This is called
subscriptions in arrears.
Example: Subscriptions
The North East Rotary Club had the following details relating to subscriptions
for the year 1 January 20X1 to 31 December 20X1.
Cash received from members during the year to 31 December 20X1 K1987.
On 1 January 20X1, some members still owed the club K65 for 20X0, and
some members had also not paid K85 for 20X1.
On 1 January 20X1, some members had paid in advance K10 in 20X0 for
20X1, and also at 31 December 20X1, some members had paid K37 in
advance for 20X2.
Required:
Show how the entries will be made in subscription account and then show
amount to be shown in income and expenditure account as subscriptions for
20X1.
Solution:
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
The amount of K65 appearing on the debit side is an asset. Money is for the
club though not yet paid. K10 is liability. Money is not yet for club though
the club has it.
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
Cash 1987
K K
Subscriptions 1987
Step 3: Put in the closing balances for accruals and prepayments. The
balancing figure is subscription for 20X1.
K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
2082 2082
20X1 subscriptions owing to the club at the start of 20X2 was K410
The club takes credit for subscriptions when it becomes due, but takes a prudent
view
on overdue subscriptions. What amount is credited to the income and expenditure
account for the year 20X2.
The balances on life membership will be shown in balance sheet as non current
liability.
Life period could be estimated by the organisations based on may be age. In this
way, life membership will be treated the same way non current assets are treated
with depreciation.
If a member dies before the life period, the remaining amount should be
transferred to accumulated fund (capital).
In this case the investment will remain fixed over a period of years and will be
shown as non current asset in balance sheet.
The old timers Bowling Club has introduced a life membership scheme for its
members. It is decided that life membership will be for five years i.e. any amounts
received for life membership will be spread over a period of five (5) years from
year of payment.
At the start of the year ended 31 December 20X3, the amount on life membership
account stood at K7,480. Of this amount K1,850 should be treated as
subscriptions for the year 20X3.
During the year ended 31 December 20X3, some members had paid another
K3,000 for life membership.
Required:
Show how entries will be made in the subscriptions account and the life
membership account.
K K
Life membership 2450
K K
Subscription 2450 Balance 7480
Balance c/d 8030 Cash 3000
____ _____
10,480 10,480
Balance b/d 8030
Workings: 3,000 ÷ 5
= K600 per annum for new life members
+
1850 per annum for old life members
____
2450 amount deducted from life membership account and
credited to subscriptions account for 20X3.
K2450 will be added together with amounts received from members who pay
on annual basis. The total amount will then be shown in income and
expenditure account for 20X3.
(a) Donations are amounts other well wishers may give an organisation
Donations in cash will be treated as income in the year the donation is made.
Double entry is:
(b) Entrance fees are amounts members may be requested to pay when they
first join the club. This amount is also treated as income in the year it is
collected.
Dr. - Cash account with entrance fees
Cr. - Entrance fees with cash received.
22.9 Accounting for the sale of investments and non current assets.
Just like trading organizations, non profit making organizations also sale non
current assets and investments.
Accounting treatment is basically the same where the disposal account is opened
to determine profit or loss arising from the sale.
If profit or loss is made using (i) above, the profit or loss will be directly added or
subtracted – to or from accumulated fund in balance sheet.
If (ii) is used then profit or loss is shown in income and expenditure account.
The following is a summary of the receipts and payments of North East Rotary Club
during the year ended 31 December 20X1.
Dr K K Cr.
Required:
(a) Calculate the value of the accumulated fund of the club as at 1 January
20X1.
(b) Reconstruct the following accounts for the year ended 31 December 20X1.
(c) Prepare an income and expenditure account for the club for the year ended
31 December 20X1 and a balance sheet as at that date.
EXERCISES
3. A club has 150 members who pay K10 each for membership. The opening
subscription receivable was K70 and 5 members had paid subscriptions in advance
at the year end. How much money was collected from members?
(a) K1,500
(b) K1,740
(c) K1,620
(d) K1,520
4. The assets and liabilities of a social club on 31.12.20X1 were equipment K1,500,
premises K16,000, bar inventory K1,300, bar payables K1,100, wages owing K250,
subscriptions in arrears K500, subscriptions prepaid K350, cash in hand K1,900.
The accumulated fund is:
(a) K21,200
(b) K19,650
(c) K19,500
(d) K200,000
5. The accounting records of Up Hill cricket club are given in the following trial
balance as at 31 December 20X4:
Dr. Cr.
K K
Clubhouse 140,000
Equipment 18,000
Profits from raffles 6,000
Accumulated fund 40,000
Bar inventory 1 January 20X4 9,000
General expenses 31,500
Wages of bar workers 30,000
Subscription received 190,000
Bar purchases 40,000
Caretakers wages 20,400
Bar sales 90,000
Cash in hand 900
Cricket professional’s salary 36,200
326,000 326,000
(i) The inventory in the bar at 31 December 20X4 was valued at K5,600
(ii) Depreciation on equipment should be at 131/3%.
(iii) All sales and purchases for the bar were on cash basis.
(iv) As at 31 December 20X4 some members had paid subscriptions in advance
amounting to K1,800 and some members were owing K700.
Required:
Prepare income and expenditure account for the year ended 31 December 20X4
and a balance sheet as at that date.
INCOMPLETE RECORDS
INTRODUCTION
Sole traders do not often keep an elaborate set of books of accounts. The books they
keep comprise mainly a record of receipts and payments and file of unpaid invoices in
the correspondence file.
Even where an elaborate set of books is kept unexpected disasters such as fires may
occur. As a consequence the available books may contain insufficient information for the
preparation of the Income Statement and balance sheet. The owner of the business will
ask for these statements at the end of the year.
The above sample situations pose a challenge on the accountant to prepare the financial
statements from whatever records that are available.
We will use the following question to illustrate the stages of compiling financial
statements from a set of limited records.
Single entry is a generic term used to refer to a business situation in which only a limited
number of records are kept. Principally there is always a record of receipts and payments
and some documentary evidence of other transactions. Accounts can be compiled from
the information available by completing double entry for all the transactions that took
place. Day books may not have been prepared because the administration of the
business does not yet have a defined complete accounting system as such.
Joel Mutale is a sole trader and provides you with the following summarized data . He
would like you to prepare appropriate statements to show
1. Capital on 1 July 2004
2. Profit for the year ended 30 July 2005
3. A list of assets and liabilities as at 30 June 2005
The following additional notes were extracted from Joel’s correspondence box files:
As at As at
1 July 2004 30 June 2005
K 000 K 000
Equipment 8 200 12 500
Inventory 3 200 4 500
Bank loan 10 000 10 000
Rates due 420 -
Rent prepaid - 380
Electricity owing 300 320
Trade receivables 6 300 8 400
Trade payables 3 800 4 600
As you settle down to do work, Joel tell you that he pays loan interest at 12 % and there
is an amount that is not yet paid. He further say that during the year he received cash
discounts of K 800 000, issued credit notes for K 450 000 and cancelled irrecoverable
debts of K 325 000
SOLUTION
The ledger accounts follow then the Income Statement and Balance Sheet finally. It is
always better to draw up nominal accounts on separate pages from the ones on which
real and control accounts are. Doing so will facilitate thoroughness in ensuring that no
transfer to the Income Statement is missed, and that work is properly organized.
TRADE RECEIVABLES
K 000 K 000
Balance b/d 6 300 Bank 42 870
Sales 59 045 Sales Returns 450
Cash 12 500
Discount All 800
Bad Debts 325
Balance c/d 8 400
65 345 65 345
Balance b/d 8 400
TRADE PAYABLES
K 000 K 000
Balance b/d 3 800
Purchases 34 800
Bank 34 000
Balance c/d 4 600
38 600 38 600
Balance b/d 4 600
EQUIPMENT
K 000 K 000
Balance b/d 8 200 P/L -Deprec 1 220
Bank 5 520
Balance c/d 12 500
13 720 13 720
Balance b/d 12 500
LOAN
K 000 K 000
Balance b/d 10 000
Balance c/d 10 000
10 000 10 000
Balance b/d 10 000
CAPITAL
K 000 K 000
Balance b/d 4 880
Balance c/d 4 880
4 880 4 880
Balance b/d 4 880
INVENTORY
K 000 K 000
Balance b/d 3 200
Trading c/d 3 200
3 200 3 200
PURCHASES
K 000 K 000
Trade Payables 34 800
Trading c/d 34 800
38 400 38 400
SALES RETURNS
K 000 K 000
Trade Receivable 450
Trading c/d 450
450 450
SALES
K 000 K 000
Cash 4 200
Trade Receivables 59 045
Trading c/d 63 245
63 245 63 245
BAD DEBTS
K 000 K 000
Balance b/d 325
P/L c/d 325
325 325
DISCOUNT ALLOWED
K 000 K 000
Trade Receivables 800
P/L c/d 800
800 800
DEPRECIATION
K 000 K 000
Equipment 1 220
P/L c/d 1 220
1 220 1 220
STATIONERY
K 000 K 000
Bank 2 700
P/L c/d 2 700
2 700 2 700
WAGES & SALARIES
K 000 K 000
Bank 8 300
P/L c/d 8 300
8 300 8 300
LOAN INTEREST
K 000 K 000
Bank 700 P/L c/d 1 200
Balance c/d 500
700 700
Balance b/d 500
INSURANCE
K 000 K 000
Bank 909
P/L c/d 909
909 909
K 000 K 000
Balance b/d 420
Bank 3 640 P/L c/d 2 840
Balance c/d 380
3 640 3 640
Balance b/d 380
ELECTRICITY
K 000 K 000
Balance b/d 300
Bank 1 580 P/L c/d 1 600
Balance c/d 320
1 900 1 900
Balance b/d 320
DRAWINGS
K 000 K 000
Bank 1 200
Capital c/d 1 200
1 200 1 200
COMMISSION
K 000 K 000
Bank 3 700
P/L c/d 3 700
3 700 3 700
The alternative to calculating cost of sales on the face of the Income Statement is writing
the following account:
COST OF SALES
K 000 K 000
Inventory b/d 3 200
Purchases 34 800 Trading (I/S) 33 500
Inventory c/d 4 500
38 000 38 000
Inventory b/d 4 500
COMMENTS
The full ledger accounts have been written here to illustrate how they would be drawn up
in practice. A student who has understood the principles of double entry would list the
amounts straight on the Income Statement, depending on whether the amount is
earned/incurred or not. For example, the amounts to charge as expenses in respect of
Electricity and Rent & Rates are shown below:
ELECTRICITY
Amount paid 1 580
Add: Amount owing at end 320 Incurred but not yet paid for
1 900
Less: Amounts owing at start 300 settled now but incurred last year
Profit & Loss charge 1 600 Incurred for this year only
The rationale flows because referring to the accounts, amounts on the same side are
added, whereas amounts on the opposite sides of an account are netted. This logic can
be applied to any account without exception. You only need to understand double entry
and the format of ledger accounts.
JOEL MUTALE
INCOME STATEMENT for the year ended 30 June 2005
K000 K000
Sales (less Sales Returns) 62 795
Less: Cost of Sales 33 500
Gross Profit 29 295
Add: Income
Commission received 3 700
32 995
Less: Expenses
Bad Debts 325
Discount Allowed 800
Depreciation 1 220
Electricity 1 600
Rent & Rates 2 840
Insurance 909
Loan Interest 1 200
Wages & Salaries 8 300
Stationery 2 700
19 894
Net Profit 13 101
Joel Mutale
BALANCE SHEET as at 30 June 2005
Km Km
Non current Assets:
Equipment 12 500
Current Assets:
Inventory 4 500
Trade receivables 8 400
Rent & Rates 380
Cash at bank & in hand 10 980
24 260
Total assets 36 760
Capital
Balance at start 4 880
Add: Net Profit 13 101
Current Liabilities:
Trade Payables 4 600
Loan Interest 500
Electricity 320
Bank Overdraft 4 559
9 979
36 760
Note also that depreciation has been deducted directly from Equipment account because
the closing balance given for this account imply that non current assets are kept at their
net book value (not at cost, in which case there would be a separate account for
Accumulated depreciation).
INCOMPLETE RECORDS
To prepare financial statements from the limited information available you will have to
derive most figures either as balancing figures or as complementary figure after applying
some ratios.
EXERCISE
Mpomwa has been trading for the last five years. He has been using the front half of the
house he has rented as a shop, with the consent of the landlord. Mpomwa maintains no
formal accounting system for the purpose of recording business transactions. He,
however, needs to calculate the profit earned during the year 2006 for tax purposes.
RECEIPTS: K000
Cash from customers 48 120
Sales of private motor car 650
Total 48 770
PAYMENTS:
Cash paid to suppliers 32 890
Rent of entire premises 2 400
Wages of part-time staff 760
New counter and shelving 800
General expenses 3 650
Drawings 5 870
Total 46 370
REQUIRED:
CASHFLOW STATEMENTS
THE CASH FLOW STATEMENT
The cashflow statement provides information about the sources of cash and the uses to
which cash was put for a specified period. Some writers refer to these as sources and
applications of cash. Admittedly the information on cash can be obtained from the cash
and bank accounts in the Cashbook. In practice the cash transactions are so numerous
that it becomes tedious to obtain cashflow information from the Cashbook.
Consequently, the entries for cashflows are obtained from individual ledger accounts
where they are already summarised.
1. To explain the difference between the reported profit or loss in the Income
Statement and the cash and bank balances reported in the balance sheet. The
reported profit is calculated under the accruals basis and so includes non cash
items.
2. To communicate the solvency of the company: whether the entity has sufficient
cash resources to support continuity of business. Solvency is much more critical
than mere liquidity. Liquidity problems can be solved by borrowing whereas an
insolvent company cannot borrow funds from anywhere, having exhausted all
possible means.
3. To serve as a source of information for making cash flow forecasts. Management
can make projections of future cash receipts and payments, having regard to
proper timing of cash.
4. The following are the key definitions:
Cash: Amounts of money received or paid in the form of notes or cheques in each
transaction.
Cashfow: The volume of cash that comes into and goes out of the business for a
given period of time.
Cash equivalents: These are financial instruments (bank drafts, loan notes, etc)
that can be used to pay for goods or settle liabilities.
Cash flows are classified under three major headings in the cashflow statements:
operating activities, investing activities and financing activities. The format below outline
the contents of a cash flow statement as required by IAS 7.
Under the direct method cashflow figures are obtained from the ledger accounts for
trade receivables, trade payables and expenses. Depending on the information provided
there might be need to adjust the cashflow figure with amounts for non cash items such
as depreciation and increases/decreases in allowances for bad debts.
ABC Ltd
CASHFLOW STATEMENT (DIRECT METHOD)
for the year ended 31 December 2005
K000 K 000
Cashflow from Operating Activities:
Interest paid X
Income tax X
Dividends paid X
Net cash from operating activities X
There are two methods of preparing cashflow statements: The direct method and the
indirect method. The difference between the two methods lies in the way cashflow from
operating activities is calculated.
ABC Ltd
CASHFLOW STATEMENT (INDIRECT METHOD)
for the year ended 31 December 2005
K000 K 000
Cashflow from Operating Activities:
Profit before tax X
Adjustments for Non-cash items:
Depreciation X
Loss on sale of non current assets X
Decrease in provisions for bad debts X
X
Changes in working capital:
Decrease in inventory X
Increase in debtors X
Increase in creditors X
X
Net cashflow from operating profit X
Interest paid X
Income tax paid X
Dividends paid X
Net cash from operating activities X
Under the indirect method operating activities is adjusted from the accruals figure to a
pure cashflow amount with non-cash items and movements in working capital. The rest
of the cashflow statement is prepared as is done under the direct method. You should be
able to obtain cashflow figures from the appropriate accounts by applying knowledge
acquired in previous chapters. The cashflow figure is the entry that goes to the account
from either the cash account of bank account.
We now use a question to illustrate how to prepare the cash flow statement.
ILLUSTRATION
The balance sheets of Prenodia Plc as at 30 June 2004 and 2005 and the summary
income Statement for the year ended 30 June 2005 were as follows:
2004 2005
Km Km Km Km
Non current Assets:
Premises 130 130
Less: Accumulated Depreciation 30 32
100 98
Plant & Machinery 70 80
Less: Accumulated Depreciation 17 23
53 57
Current Assets:
Inventory 25 24
Trade receivables 16 26
Short term investments - 12
Cash at bank & in hand - 7
41 69
Total assets 194 224
Current Liabilities:
Trade Payables 19 22
Income Tax 7 8
Proposed dividend 12 14
38 44
194 224
Prenodia
Income Statement for the year ended 30 June 2005
Km Km
Sales 173
Less: Cost of Sales 96
Gross Profit 77
Less: Expenses
Sundry expenses 24
Interest payable 2
Loss on sale of non current assets 1
Depreciation –Premises 2
Depreciation –Plant 16
45
Operating profit 32
Interest receivable 2
Profit before tax 34
Income Tax (16)
Profit after tax 18
Proposed dividend (14)
Retained profit for the year 4
ADDITIONAL INFORMATION
During the year a machine costing K15 was sold for K 4m. Depreciation on the machine
had accumulated to K10m.
REQUIRED
Prepare a cashflow statement for Prenodia Plc for the year ended 30 June 2005
SOLUTION
The following part of the cashflow statement can be done as a working in the notes to
the statement or it can be included on the main Cashflow Statement.
Direct method
Cash flow from Operating Activities:
Km Km
Receipts from customers 163
Payments to suppliers (92)
Payments for expenses (45)
26
Adjustments for Non-cash items:
Depreciation 18
Loss on sale of non current assets 1
Interest payable (Has its own entry ) 2
21
Net cash flow from Operating profit 47
Indirect method Km Km
Cash flow from Operating Activities:
Profit before tax 34
Interest payable (Has its own entry on the statement) 2
Interest receivable (Has its own entry on the statement) (2)
Adjustments for Non-cash items:
Depreciation (2 + 16) 18
Loss on sale of non current assets 1
Decrease in provisions for bad debts -
19
Movements in working capital:
Decrease in inventory 1
Increase in trade receivables (10)
Increase in trade payables 3
(6)
Net cash flow from operating profit 47
Net cash flow from operating profit has been calculated in different ways under the two
methods. Under the direct method the figure of expenses was obtained straight from the
Income Statement and so it is a figure after deducting depreciation and loss on disposal.
Consequently it was necessary to adjust for these non-cash items. Otherwise they would
not have been added back to net profit.
Under the indirect method interest was adjusted for because it is dealt with separately
on the face of the Cash flow Statement. This reversal was not necessary for interest
receivable under the direct method because it was not part of the expenses figure
mentioned above.
The rest of the cashflow statement is completed in the same way under both methods as
follows:
The following are the steps to follow when obtaining cash flow figures from ledger
accounts:
1. Write the account and, using the information in the balance sheet as at the end of
the preceding year, put the opening balance on the side it would appear
depending on whether it is an asset or a liability.
2. Using information from the balance sheet as at the end of the current year, insert
the closing balances on the account on the side they would be above total lines
and below total lines depending on whether they are assets or liabilities.
3. In between the two balances (enough space should have been left for this
depending on the expected number of entries) project ‘back wards’ the figure from
the income statement on the side it would be when the entry for the transfer of
funds to the trading, profit and loss was made.
4. Complete the account, slotting in the missing figure on the side with a smaller
total. This figure is the amount of cash flow, the entry from either the bank account
or cash account.
The accounts are now shown below with the cashflow figure highlighted in bolt type.
TRADE RECEIVABLES
PURCHASES
Inventory 95
Trade Payables 95 Balance c/d 0
95 95
TRADE PAYABLES
Balance B/d 19
Bank 92 Purchases 95
Balance c/d 22
114 114
Balance b/d 22
DIVIDEND
Balance B/d 12
Bank 12 IS 14
Balance c/d 14
26 26
Balance b/d 14
TAXATION
Balance B/d 7
Bank 15 Income statement 16
Balance c/d 8
23 23
Balance b/d 8
ACCUMULATED DEPRECIATION
P & M DISPOSAL
The cash flow from debentures is simply the difference between the closing balance and
the opening balance. There being an increase of K20m then this was a credit entry in the
account implying that the debit was in the bank account. The debit in the bank account
represents a cash inflow.
Similarly, there was no balance at start of the period on the Short-term investments. The
account shows a closing balance of K12m representing new investment. The balance is a
debit on the account implying that the credit was in the bank account. Therefore there
was an outflow in K12m.
CHAPTER SUMMARY
EXERCISES
QUESTION ONE
The balance sheet given below together with comparative figures are a for Tokozile Ltd, a
private company that has been operating for the last three years.
TOKOZILE LTD
BALANCE SHEET AS AT 30 JUNE
2006 2005
K000 K000 K000 K000
Non current assets:
Property, plant & equip 2 800 2 100
Accumulated depreciation (650) (490)
2 150 1 610
Current assets:
Inventory 1 100 850
Trade receivables 540 470
Bank 120 -
1 760 1 320
Total assets 3 910 2 930
Equity and liabilities:
Ordinary share capita l2 200 1 600 Share
premium 260 -
Retained earnings 400 865
2 860 2 465
Non current liabilities:
Loan notes 340 140
Current liabilities:
Trade payables 430 110
Bank overdraft - 45
Taxation 280 170
710 325
3 910 2 930
Additional information:
a) During the year the company sold a piece of equipment with a net book value of
K 135,000 at a profit of K75,000.
b) Depreciation charged for the year ended 30 June 2006 was K220,000.
c) Interest paid during the year ended 30 June 2006 was K37,000.
d) Income tax paid during the year amounted to K 230,000.
e) The company paid no dividend in the year under review.
REQUIRED:
(a) Calculate the operating profit of Tokozile Ltd for the year ended 30 June 2006
(b) Prepare a cashflow statement for Tokozile Ltd for the year ended 30 June 2006
in accordance with IAS 7 (revised).
QUESTION TWO
KONKOLA
INCOME STATEMENT for the year ended 31 March 2007
K000 K000
Revenue 2,150
Cost of sales (1,250)
Gross profit 900
Distribution cost 98
Administration expenses 122
(220)
Operating profit 680
Profit on disposal of non current assets 12
Dividend received 14
Interest paid (36)
(10)
Profit before tax 670
Taxation (132)
Profit after tax 538
STATEMENT OF CHANGES IN EQUITY
SHARE SHARE RETAINED
CAPITAL PREMIUM PROFIT
K000 K000 K000
Balances at start (31/03/06) 1,100 260 80
Issues of shares 300 60
Profit for year 538
Dividend (98)
Balance at end 31 March 2007 1,400 320 520
KONKOLA
BALANCE SHEET AS AT 31 JUNE
2006 2007
K000 K000 K000 K000
Non current assets:
Furniture & Fittings 750 930
Accumulated depreciation (210) (265)
540 665
a) Vehicles which had cost K145 000 were sold during the year when their net
book value was K 55,000.
b) There were no accruals or prepaid expenses at the end of the year.
REQUIRED:
a. Prepare a cashflow statement for Konkola for the year ended 31 March
2007 using the DIRECT method. Show any additional notes and
reconciliation required.
b. Explain briefly the usefulness of cashflow statements to external users
SOLUTION TO EXERCISES
SOLUTION ONE
Workings:
Calculation of operating profit:
Retained profit at end –30 June 2006 400
Retained profit at end –30 June 2005 865
Loss for the year 2006 (465)
Add: Dividend -
Taxation 340
Interest charge 37
Operating loss (88)
ACCUMULATED DEPRECIATION
TAXATION
Note: Cost of plant sold is NBV + Depreciation, and the amount of tax charged
to the income statement of a balancing figure on the Income tax account.
LUTION TWO
Direct method
TRADE RECEIVABLES
TRADE PAYABLES
DIVIDEND
TAXATION
MOTOR VEHICLE
COMPANY ACCOUNTS
INTRODUCTION
A company may issue different classes of shares, the most common are being the
following:
a) Ordinary shares
These are the normal shares issued by the company. The normal rights of
ordinary
shareholders are to vote at company meetings and to receive dividends from the
remainder of profits.
b) Preference shares
These are shares carrying a fixed rate of dividend, the shareholders of which
have a
prior claim to any company profits for distribution. Preference shares do not
carry
a voting right. Preference shares could either be cumulative or non-cumulative.
26.3 Debentures
This is a written acknowledgement of a loan to a company, given under the
company's seal, which carries a fixed rate of interest. The conditions and
regulations
of the debenture are set out in a debenture trust deed.
Debentures are not part of the company's share capital - they are third party
liabilities.
Debenture interest is a charge against profit and must be paid whether or not a
company makes profit.
Each share issued has a stated nominal value (also called a par value), for example
20 000 shares of K1 each, the K1 per share is the nominal value. Shares could be
issued at par value or at a premium. The double entry for recording the issue of
shares is as follows:
Dr - Cash book
Cr - Share capital account
For example, suppose 100 000 ordinary shares of K1 each are issued at nominal
value. The ledger accounts recording this issue will be as shown below:
Bank account
___________________________________________________________________
K'000 K'000
Ordinary share capital 100
Dr - Cash book
Cr - Share capital account, with nominal value
Cr - Share premium account, with excess over the nominal value
For example 100 000 ordinary shares of K1 each are issued at a price of K1.20
each.
The ledger accounts to record the issue will be:
Bank account
___________________________________________________________________
K'000 K'000
Ordinary share capital 120
Dr - Reserves
Cr - Share capital, with the amount of bonus issue
Dr - Cash book
Cr - Share capital, with nominal value
Cr - Share premium, with the premium (if any)
ii) Issued share capital: - is the actual share capital issued to shareholders at any
point in time. It is the issued share capital that appears on the company's
balance sheet.
iii) Called up share capital: - is part of the nominal value payable on each share
that has been called for. However most capital is issued on a fully paid up basis.
iv) Paid-up share capital: - is that part of the nominal value that is paid at current
date.
v) Calls in arrears: - is the amount requested for (called for) but not yet received.
vi) Calls in advance: - is the amount received prior to payment being requested.
ACTIVITY 1
Hightech Ltd was formed with the legal right to be able issue 100 000 shares of K100
each. The company has actually issued 80 000 shares. None of these shares have
been fully paid up. So far the company has made calls of K60 per share. All the calls
have been paid by shareholders except for K200 000 unpaid by one shareholder.
The double entry bookkeeping for both the interim dividend and final dividend is
as
follows:
The total of the interim dividend and the final dividend appear in the income
statement but it is only the final proposed dividend that will appear in the
balance
sheet as a liability.
a) Capital reserve
b) Revenue reserve
Revenue reserves arise when a company makes profits and does not pay out
all the profits to the shareholders. There is no statutory requirement for a
company to have any amount in its revenue reserve. Revenue reserves can be
used for any purpose by the company. However, where profits are transferred to
a named reserve, the directors are indicating that these amounts are not
available to support a dividend payment (although there is nothing in law to
prevent their distribution). Revenue reserves include, fixed assets replacement
reserve, general reserve, profit and loss account (reserve) etc.
Example:
You are provided with the following Trial Balance of Hightech Ltd at 31st December
2006:
Dr Cr
K'000 K'000
Ordinary share capital (K1 000 shares) 400 000
10% preference share capital (K1 000 shares) 120 000
Freehold Premises at cost 920 000
Provision for depreciation - buildings 400 000
Plant and machinery (cost K300 million) 180 000
Sales 364 000
Purchases 196 000
Carriage inwards 4 000
Receivables and Payables 64 000 8 000
Cash at bank 60 000
Inventory at 1st January 2006 40 000
Discounts 1 600 800
Carriage outwards 3 200
10% debentures 2010 200 000
Debenture interest paid 20 000
Administrative expenses 16 000
Staff salaries (excluding directors) 16 000
Preference dividend paid 4 000
Profit and loss account b/d 32 000
1 524 800 1 524 800
You are required to prepare the Income Statement for the year ended 31st December
2006 and a Balance Sheet as at that date.
EXERCISES
QUESTION ONE
You are presented with the following summarised Trial Balance of MK Ltd in respect of
the year ended 31st March 2007:
Dr Cr
K'000 K'000
Ordinary share capital (K500 shares) 200 000
Plant and machinery:
Cost 616 000
Depreciation (1 April 2006)
st
170 000
Receivables 104 000
Payables 76 000
Cash at bank 82 000
Inventory at 1st April 2006 180 000
Sales 2 000 000
Purchases 1 542 000
9% debentures 2010 150 000
Share premium account 40 000
Administrative costs 200 000
Provision for doubtful debts 4 000
Interim dividends paid 6 000
Profit and loss account balance 90 000
2 730 000 2 730 000
You are required to prepare the Income Statement account for the year ended 31st
March 2007 and a Balance Sheet as at that date.
QUESTION TWO
The following Trial Balance was extracted from the books of Hillside Plc at 31st March
2006:
K’000 K’000
K1 000 ordinary shares 200 000
8% K1 000 preference shares 70 000
7% debentures 100 000
Land and buildings: cost 130 000
Accumulated depreciation on buildings on 1st April 2005 30 000
Plant and machinery (K348 million cost) 262 500
Motor vans at cost 140 000
Accumulated depreciation on vans on 1st April 2005 56 800
Profit and loss account b/f 20 000
Share premium account 60 200
Inventory at 1st April 2005 35 000
Sales 344 600
Trade Receivables and Payables 45 000 27 000
Bank 5 800
Purchases 166 100
Distribution costs 18 000
General administration expenses 44 900
Debenture interest 7 000
Interim dividends:
Ordinary 10 000
Preference 2 800
Allowance for doubtful debts 1 500
890 100 890 100
a) A new motor van was purchased on 1st January 2006 on credit for K24 million. The
amount was still due to the supplier on 31st March 2006.
b) A motor van which had cost K16 million four years ago when new was sold for
K6.6 million. The proceeds from the sale had not yet been received on 31st March
2006.
None of the above matters had been recorded in the books of the company.
2. Depreciation on motor vans has been and is to be provided at the rate of 20% per
annum on cost and is charged in full in the year of acquisition and none in the year of
disposal.
5. On 31st March 2006 the company issued bonus shares to the ordinary shareholders on
a one (1) to ten (10) basis. No entry relating to this has yet been made in the books.
7. A bill for administrative expenses for K150 000 was unsettled as at 31st March 2006.
8. Distribution costs include an insurance premium for delivery vans of K200 000 which
relates to the period 1st July 2005 to 30th June 2006.
9. The allowance for doubtful debts is to be 21/2% of receivables outstanding on 31st
March 2006.
Required:
a) Using additional information (1) and (2), prepare the following ledger accounts:
(14 marks)
(NATech: December 2006)
ACCOUNTING CONCEPTS
Accounting concepts are the broad assumptions which underline the periodic
financial accounts of business enterprises. Assumptions mean that:
- These concepts are not necessarily obvious, nor are the only concepts which
could
be used, but they the ones in use currently.
- These concepts look at why certain items are treated in specific ways and
THE CONCEPTS
Going Concern Concept
This states that the business will continue in operational existence for the
foreseeable future, and that there is no intention to put the company into
liquidation, unless otherwise it is known.
Neutrality/Objective Concept
This states that accountants should be free from bias when preparing financial
statements e.g. internally generated goodwill should not be recorded in the
books
because of its uncertainty as to its true value.
The key to obtaining meaningful information from ratio analysis is comparison. This may
involve comparing ratios over time within the same business to establish whether things
are improving or declining; and comparing ratios between similar businesses to see
whether the business you are analysing is better or worse than average within its
specific business sector.
Types of Ratios
Interpretation of accounts makes use of five main categories of ratios, these are:
1. Profitability ratios
2. Liquidity ratios
3. Efficiency ratios
4. Solvency ratios
5. Investors’ ratios
Profitability Ratios
Formula:
The capital employed is taken to be the total assets less current liabilities of the
business or share capital plus reserves plus long term liabilities. This ratio is further
broken down into two ratios:
Formula:
Formula:
Formula:
Gross profit margin = Gross profit x 100
Turnover
These ratios indicate how capable a business is in meeting its short term obligations as
they fall due.
a) Current ratio
The ratio, also referred to as the working capital ratio, measures whether the
business can
pay debts due within one year from assets that it expects to turn into cash within that
year.
A ratio of less than one (1) is often a course of concern, particularly if it persists for
any
length of time.
Formula:
Formula:
Quick ratio = Current assets – Inventory
Current liabilities
Note: Higher current and quick ratios are not always good indicators. Sometimes,
this may
indicate that working capital is inefficiently used. The efficiency ratios below will
highlight this. In other words, such ratios should be within acceptable range, i.e.
not
too high and not too low.
These ratios tell us how efficiently the business is employing the resources invested into
fixed assets and working capital.
a) Inventory turnover ratio
This ratio shows on average how many times in a month the inventory is turned over.
The higher the inventory turnover ratio, the quicker the inventory is being turned
over. It
helps us check whether we have got too much money tied up in inventory. A
decreasing
inventory turnover figure or one which is much lower than the average for the
industry may
indicate poor inventory management. On the other hand, a high turnover ratio
indicates a
good movement in inventory, thus reducing obsolescence.
Formula:
Alternatively the ratio can be expressed in inventory days. A higher inventory days
figure
or one which is much larger than the average for the industry may indicate poor
inventory
management.
Formula:
Note: If the average inventory cannot be calculated then the inventory at the balance
sheet
date should be used.
b) Receivables turnover
This ratio shows the average period taken by receivables to pay. It indicates whether
the
receivables are being allowed excessive credit. A decreasing trade receivables
turnover
figure or one less than the industry average may suggest general problems with debt
collection (such as delays in invoicing or failure to screen the credit worthiness of new
customers) or the financial position of major customers.
Formula:
Formula:
d) Payables turnover
This ratio tells us whether a business is taking full advantage of full trade credit
available to
it. A decreasing trade payables turnover or one lower than the average industry
indicates
that you are taking longer to pay suppliers. This may not give any room to the
business to
be able to negotiate better credit terms from suppliers, cash discounts lost and future
supplies
being at risk.
Formula:
Alternatively the ratio can be expressed in terms of Payables credit period. This
shows the average number of days it takes the organisation to pay its suppliers. An
increasing payables credit period indicates that you are taking longer to pay your
suppliers,
and a decreasing period indicates that you are paying quicker.
Formula:
Payables credit period = Trade payables x 365 days
Credit Purchases
Note: Where the purchases figure can not be calculated then the cost of sales figure
may be used.
Formula:
These ratios concentrate on the long-term health of a business, particularly the effect of
capital/finance structure on the business i.e. it establishes the relationship between the
proportion of Capital Employed that is borrowed and the proportion that is provided by
shareholders’ funds. The higher the level of gearing (borrowing) the higher are the risks
to a business since the payment of interest and repayment of debts are not ‘optional’ in
the same way as dividends. However, gearing can be a financially sound part of a
business capital structure particularly if the business has strong, predictable cash flows.
a) Total gearing
This ratio shows the proportion of the company’s assets which are financial by
borrowing and so gives an indication of the amount of further secured borrowings that
might be undertaken.
Formula:
Formula:
Interest cover
This measures the ability of the business to service its debts. The ratio answers the
question: Are the profits sufficient to be able to pay interest and other finance
obligations?
A high rate indicates that the company is in a strong position (security) as regards
payment
of interest. The measure should indicate the number of times the profits can meet
interest
obligations.
Formula:
These are the ratios used by investors to assess the performance of a business as an
investment. An investor is interested in the income earned by the company for him/her
and the return on his/her investment (i.e. the income earned in relation to the market
price of the investment).
Formula:
b) Dividend Cover
This ratio shows the proportion of profit on ordinary activities that is available for
distribution to shareholders and what proportion will be retained in the business to
finance future growth. A dividend cover of 2 times would indicate that the company had
paid 50% of its distributable profits as dividends, and retained 50% in the business to
help finance future operations. A decreasing dividend cover would indicate a fall in
profits but the dividend level is maintained as in the previous years, so as to keep
shareholder expectations satisfied.
Formula:
Dividend cover = Profit for the financial year or = Earnings per share__
Ordinary dividend Net dividend per share
c) Dividend yield
Dividend yield is the return a shareholder is currently expecting on the shares of a
company. On the stock market the dividend yield is normally stated gross of tax.
This
enables the yield on shares to be compared with yields on interest stocks (company
and
government stocks).
Formula:
Formula:
Formula:
f) Earnings yield
Earnings yield is measured as earnings per share expressed as a percentage of the
current share price. It indicates what the dividend yield would be if the company paid
out all its profits as dividends and retained nothing in the business.
Formula:
A public limited company quoted on the Lusaka Stock Exchange produced the following
results as at 31st December 2006:
Profit and loss account for the year ended 31st December 2006
K’000 K’000
Sales revenue 209 000
Opening inventory 37 000
Purchases 162 000
199 000
Closing inventory 42 000
157 000
Gross profit 52 000
Distribution costs 10 000
Administration expenses 13 000
Interest 2 000
25 000
Net profit 27 000
Taxation 10 000
Net profit after taxation 17 000
Dividends: Ordinary shares 6 000
Preference shares 2 000
8 000
Retained profit for the year 9 000
From the above details, you are required to calculate the following ratios:
Example:
The following information has been extracted from the published accounts of Gideon Plc.
Required:
a) Calculate comparable ratios (to two decimal places where appropriate) for Gideon Plc
for the years 2003 and 2004.
b) Comment on the liquidity and efficiency ratios of Gideon Plc, comparing the results
against the two years and against the industry.
Efficiency ratios:
Payables turnover – the period of credit taken from suppliers has fallen from
37 days’ purchases to 32 days’ and is much lower than the industry average.
Inventory turnover has fallen slightly and is much lower than the industry
average.
EXERCISES
QUESTION ONE
The following are the summarised financial statements for X Ltd for 2005 and 2006:
Required:
b) Comment briefly on the changes in the ratios calculated in (a) above between the two
years.
QUESTION TWO
The following ratios were calculated from the financial statements of H Ltd and G Ltd:
H Ltd G Ltd
Profitability
Return on capital employed 27.5% 15.5%
Gross profit margin 34% 28%
Net profit/sales ratio 19% 15%
Gearing
Total gearing 29.5% 13.5%
Interest cover 6 times 9 times
Liquidity
Current ratio 1.0 1.4
Quick ratio 0.6 1.0
Efficiency
Receivables collection period 63 days 250 days
Inventory turnover 4.5 times 3 times
Required: comment of the financial performance and position of H Ltd and G Ltd.
MANUFACTURING ACCOUNTS
At the end of the year, the cost of goods manufactured is then transferred, as the figure
equivalent to purchases, to the income statement.
QUESTION
Joshua Muleya is a manufacturer. His Trial Balance as at 31st December 2006 is as
follows:
Dr Cr
Additional information:
Required: From the above details, prepare the Manufacturing Account, the Income
Statement for the year ended 31st December 2006 and a Balance Sheet as at that date.
When goods are transferred at market value, there will be a balance in the
manufacturing account representing a profit or a loss arising from manufacturing the
goods instead of buying them as finished products. To close the manufacturing account,
the profit or loss should be transferred to the income statement.
QUESTION
The following information has been extracted from the books of Meleki manufacturing
company for the year to 30th September 2006:
K'000
Deprecation for the year to 30 September 2006:
th
Notes:
2. At 30th September 2006, there was an accrual for advertising of K3 000 000, and it
was estimated that K4 500 000 had been paid in advance for electricity. These items
had not been included in the books of account for the year to 30th September 2006.
3. Goods produced during the year are to be transferred to the Income Statement at a
market value of K978 000 000.
4. For the purpose of inventory valuation, finished goods have been valued at cost.
The following balances as at 31st December 2006 have been extracted from the books of
Simon Choolwe, a manufacturer:
Additional information:
2. The factory output is transferred to the income statement at factory cost plus 25% for
factory profit. The finished goods inventory is valued on the basis of amounts
transferred to the debit of the income statement.
4. Amounts accrued due on 31st December 2006 for direct labour amounted to $3 000
000 and rent and rates prepaid at 31st December 2006 amounted to $2 000 000.
Required:
Prepare the Manufacturing Account, Income Statement for the year ended 31st December
2006, and a Balance Sheet as at that date.
QUESTION ONE
The following is a trial balance for J Mutinta as at 31st December 2006:
Dr Cr
Capital 59 360
Drawings 4 000
Productive machinery (cost K56m) 46 000
Accounting machinery (cost K4m) 2 400
Royalties 1 400
Carriage inwards on raw materials 700
Purchases of raw materials 74 000
Inventory at 1st January 2006:
Raw materials 4 200
Finished goods 7 780
Work in progress 2 700
Wages (direct $36m, factory $29m) 65 000
General factory expenses 6 200
Lighting 1 500
Factory power 2 740
Administrative salaries 8 800
Salesmen's salaries 6 000
Commission on sales 2 300
Rent 2 400
Insurance 840
General administrative expenses 2 680
Bank charges 460
Discount allowed 960
Carriage outwards 1 180
Receivables 28 460
Payables 25 000
Bank 11 360
Cash 300
Sales revenue 200 000
284 360 284 360
1. Inventory of raw materials 4 800 000, Inventory of finished goods 8 000 000, Work In
Progress 3 000 000.
2. Lighting, rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th.
3. Depreciation on productive machinery and accounting machinery at 10% per annum
on cost.
Required:
Prepare the Manufacturing Account, Income Statement for the year ended 31st December
2006 and a Balance sheet as at that date.
QUESTION TWO
The following trial balance was extracted from the books of Panuka Ltd after completion
of the manufacturing account for the year ended 31st March 2003.
Dr Cr
$000 $000
Ordinary share capital 40 000
7% preference share capital 20 000
Sales revenue 200 000
Production cost 106 400
Receivables 21 400
Payables 10 000
Inventory:
Finished goods (1st April 2002) 52 000
Raw materials (31st March 2003) 11 000
WIP (31st March 2003) 6 200
Premises at cost 35 000
Accumulated depreciation on buildings 2 000
Plant and machinery at cost 12 000
Depreciation on plant and machinery:
Accumulated provision 4 800
Charge for the year 1 200
Retained profit (1st April 2002) 27 080
Bank 8 528
Rent 3 500
General expenses 3 060
Distribution costs 21 316
Bad debts 400
Administrative salaries 21 615
Advertising expenses 5 590
Preference divided paid 700
Suspense 3 629
308 709 308 709
Additional information:
1. Closing inventory of finished goods on 31st March 2003 was valued at K46 600 000.
3. Included in rent paid is a 16 months rental of K1 680 000 payable as from 1st July
2002.
4. Provision for Income tax on profits for the year of K15 000 000 is to be made.
5. The directors decided to provide for a 10% dividend on ordinary shares and a final
dividend on preference shares.
6. Investigations on the causes of the difference in books revealed the following errors.
These errors had no effect on the production cost:
i) A debit balance of K4 600 000 owing by a customer was omitted in the trial
balance.
ii) The total of the discounts received column in the cash book, K120 000, had not
been posted to the nominal ledger.
iii) A payment for administrative salaries, K1 323 000, was posted to the general
ledger as K1 332 000.
iv) A sales invoice for K8 000 000 had been omitted from the sales account.
v) A cheque issued for general expenses for K50 000 had been posted to the
debit
of the bank account.
Required:
a) Show the journal entries to correct the errors in six (6) above. Narratives are not
required.
(5 marks)
b) Open up the suspense account to clear the difference in books. (3 marks)
i) Panuka Ltd’s Income Statement for the year ended 31st March 2003.
(12 marks)
ii) Panuka Ltd’s Balance Sheet as at 31st March 2003.
(11 marks)