Financial Accounting Module 2

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Financial Accounting - module 2
Financial accounting (University of Zambia)
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UNIT SIX: FINAL ACCOUNTS
After you have studied this unit, you should be able to:
 Explain the term final accounts
 Explain the purpose of the trading account
 Explain the difference between gross profit and net profit
 Prepare a trading account from the given information
 Explain how to deal with the following items when preparing a trading account:
o Opening and closing stocks
o Returns inwards and outwards
o Trading expenses
 Close down expense and revenue accounts and transfer the balances to the trading account.
 Explain the purpose of the profit and loss account.
 Prepare the profit and loss account from the given information
 Define a balance sheet
 Explain the order of permanence and liquidity for showing fixed and current assets in the
balance sheet.
 Draw up a balance from the information given.
 Prepare the trading, and profit and loss account and the balance sheet from information given
in a trial balance.
INTRODUCTION
The unit looks at the financial statements of a business organisation (commonly referred to as
final accounts). In this unit, we shall only look at the final accounts of a sole trader. The final
accounts for the other forms business organisations will be looked at in the later units.
WHAT ARE FINAL ACCOUNTS?

The term final accounts, is used collectively to mean the trading account, profit and loss account
and the balance sheet (although a balance sheet is not an account).
1. TRADING ACCOUNT
Most people set up businesses in order to make profit. Therefore, a trading account is prepared
to calculate the gross profit /loss of the business in a given trading period.
Gross profit is the excess of sale over the cost of sales, where as gross loss is the excess of cost
of sales over sales.
Cost of sales:
Cost of sales is made up of the cost of goods sold and other expenses involved in buying the
goods.
Example:
From the following balances, prepare the trading account for W. Koswe for the year ended
30th June 2004:
Sales K600 000, sales returns K50 000, stock 1st July 2003 K60 000, Purchases K400 000,
Purchases returns K20 000, stock 30th June 2004 K70 000.
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SOLUTION
W. Koswe
Trading account for the year ended 30th June 2004
K’000 K’000 K’000
Sales 600
Less: sales returns 50
Net sales (or turnover) 550
Less: cost of sales:
Opening stock 60
Add: purchases 400
Less: purchases returns 20
380
Total stock available 440
Less: closing stock 70
370
Gross profit 180
EXPENSES IN THE TRADING ACCOUNT

Expenses incurred in bringing the goods into the firm/business and those incurred in putting
goods into the saleable condition should be charged to the trading account. Examples of these
are:
a) Expenses in buying goods:
- Carriage inward
- Customs duty added to purchases.
- Freight charges
b) Expenses in putting goods into saleable condition:
- Warehouse wages
- Warehouse rent added to cost of goods sold.
- Warehouse light and heat
Example:
On 31st December 2004, John Banda had the following balances:
Sales K5 000 000, opening stock K950 000, Purchases K3 000 000, Sales returns K500 000,
purchases returns K450 000, Carriage inwards K250 000, Warehouse wages K300 000, closing
stock K440 000.
You are required to prepare John Banda’s trading account for the year ended 31st December
2004.
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SOLUTION
John Banda
Trading account for the year ended 31st December 2004
K’000 K’000 K’000
Sales 5 000
Less: sales returns 500
Net sales 4 500
Opening stock 950
Add: Purchases 3 000
Less: purchases returns 450
2 550
Add: carriage inwards 250
2 800
Total stock available 3 750
Less: closing stock 440
Cost of goods sold 3 310
Add: warehouse wages 300
Cost of sales 3 610
Gross profit 890
2. PROFIT AND LOSS ACCOUNT
The second part of profit computation is done in the profit and loss account. The profit and loss
account is prepared to calculate the net profit/loss in a given trading period. It comprises the
gross profit /loss plus any other income or revenue other than that from sales, less all other
expenses other than the buying expenses incurred by the business.
At the end of the accounting period, the net profit or loss is transferred to the capital section in
the balance sheet.
Example:
From the following trial balance of Goodson Kaswilo extracted after one year’s trading, prepare
his trading and profit and loss account for the year ended 31st October 2004.
Dr Cr
K’000 K’000
Sales 18 462
Purchases 14 629
Capital 5 424
Drawings 895
Salaries 2 150
Motor expenses 520
Rent 670
Insurance 111
General expenses 105
Interest received 2 000
Premises 1 500
Motor vehicles 1 200
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Debtors 1 950
Creditors 1 538
Cash at bank 3 654
Cash in hand 40 _____
27 424 27 424
Stock at 31st October 2004 was valued at K2 548 000.
SOLUTION
Goodson Kaswilo
Trading and profit and loss account for the year ended 31st October 2004
K’000 K’000
Sales 18 462
Purchases 14 629
Less: closing stock 2 548
Cost of sales 12 081
Gross profit 6 381
Add: other incomes:
Interest received 2 000
Total income 8 381
Less: expenses:
Salaries 2 150
Motor expenses 520
Rent 670
Insurance 111
Total expenses 3 556
Net profit 4 825
3. BALANCE SHEET
A balance sheet is a statement showing the financial position of the business at a given date. It
consists of all balances remaining in our books after the trading and profit and loss account for
the period has been prepared. The remaining balances will therefore be for assets, liabilities,
capital, drawings and the net profit or loss.
Balance sheet layout:

There are two methods of laying out assets in the balance sheet; order of permanence and order
of liquidity
(a) Order of permanence: This is where you start with the most difficult item to turn into cash
or the most permanent item (i.e. the item that will be kept the longest), e.g.
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Fixed Assets: Land and building

Fixtures and fittings
Machinery
Motor vehicles
Current Assets: Stock

Debtors
Bank
Cash
(b) Order of liquidity: This is where you start with the least permanent item or the easiest
items to turn into cash. It is the opposite of the order of permanence.
Example:
Using the previous question on Goodson Kaswilo, prepare his balance sheet as at 31st October
2004.
SOLUTION
Goodson Kaswilo
Balance sheet as at 31st October 2004
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Premises 1 500 - 1 500
Motor vehicles 1 200 - 1 200
2 700 - 2 700
Current assets:
Stock 2 548
Debtors 1 950
Cash at bank 3 654
Cash in hand 40
8 192
Less: current liabilities:
Creditors 1 538
Working capital 6 654
Net assets 9 354
Financed by:
Capital 5 424
Add: net profit 4 825
10 249
Less: drawings 895
9 354
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_____________________________________________________________________________
ACTIVITY 1
From the following trail balance of R. Graham; draw up the trading, profit and loss account for
the year ended 30th September 2004 and a balance sheet as at that date.
K’000 K’000
Opening stock 1 October 2003 2 368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11 874
Sales 18 600
Salaries and wages 3 862
Rent 304
Insurance 78
Motor expenses 664
Office expenses 216
Lighting and heating expenses 166
Premises 5 000
Motor Vehicles 1 800
Fixtures and fittings 350
Debtors 3 896
Creditors 1 649
Discount received 22
Cash at bank 422
Drawings 1 200
Capital 12 636
33 229 33 229
Stock at 30th September 2004 was K2 946 000.

______________________________________________________________________________
Feedback to this activity is at end of module
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______________________________________________________________________________
ACTIVITY 2
Record the following transactions in the necessary ledger accounts and two column cash book.
Take out a trial balance as at 30th April 2004.
April 1 M Chanda started business with cash at bank K64 000 000 and cash in hand
K7 350 000
2 Bought goods on credit from T. Banda K12 480 000
3 Bought goods on credit from P. Gondwe K4 200 000
6 Sold goods on credit to D. Mwewa and sons K18 725 000
8 Bought an office desk for cash K1 050 000
12 Paid cash for stationery K260 000
14 Paid P. Gondwe his account by cheque K4 200 000
16 Sold good for cash K2 800 000
17 Drew cheque for himself K1 000 000
20 D. Mwewa & sons paid their account as to K18 000 000 by cheque and the
remainder in cash
28 Paid one month’s rent by cheque K1 200 000
29 Cash sales K1 705 000
30 Paid cash into bank K8 000 000
Prepare final accounts as at 30th April 2004. Stock on hand at 30th April 2004 was K3 300 000.
______________________________________________________________________________
______________________________________________________________________________
ACTIVITY 3
Enter the following transactions in F. Nguni’s ledger and cash book
July 1 F. Nguni commenced business with cash at bank K94 000 000 and cash in hand
K6 650 000.
2. Bought from J. Thomas, goods on credit K21 000 000
3 Placed on deposit account at bank K50 000 000
5 Bought goods for cash K 2 050 000
8 Sold to R. Mac Donald goods on credit K17 000 000
12 Cash purchases K3 000 000
15 Drew from the bank for office cash K5 000 000
17 Paid J. Thomas by cheque 21 000 000
18 Paid travellers expenses in cash K2 750 000
21 Cash sales K6 000 000
25 Bought and paid by cheque goods K15 000 000
27 Withdraw from deposit account to current account K30 000 000
Take out a trial balance as at 31st July 2004, and prepare final accounts as at that date. Stock on
hand at 31st July 2004 was K25 500 000.
_____________________________________________________________________________
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UNIT 7: ACCOUNTING CONCEPTS AND CONVENTIONS
 Define accounting concepts and conventions
 Explain the accounting concepts and conventions, giving an example for each
 Distinguish between capital and revenue expenditure
INTRODUCTION
In this unit we shall look at the rules and principles or practices that govern the way assets,
liabilities, income and expenses are recorded and valued in the financial statements. We shall
also look at the difference between capital and revenue expenditure.
1. ACCOUNTING CONCEPTS AND CONVENTIONS
Accounting concepts and conventions are rules that govern the way in which transactions of the
business are recorded. They are also said to be principles or accepted practice, which apply
generally to transactions.
Some of the concepts and conventions are of more relevance to some transactions than to others
but all have an influence in determining:
(a) Which assets and liabilities are recorded on the balance sheet and how the assets and
liabilities are valued.
(b) What income and expenditure is recorded in the profit and loss account and at what
amount the income and expenditure is recorded.
According to SSAP 2 ‘Disclosure of accounting policies’, there are four fundamental accounting
concepts [(a) to (d) below]. In addition to the four major concepts there are a number of other
concepts and conventions that have influence on the way transactions are recorded.
(a) Going Concern Concept
The going concern concept assumes that the business will continue in operational
existence for the foreseeable future. This means that the financial statements are drawn
up on the assumption that there is no intention or necessity to liquidate or curtail
significantly the scale of operation.
An example on how the going concern concept is applied is that of assets being valued at
their cost price rather than their saleable value (Market value).
(b) Matching or Accruals Concept
The concept states that costs and revenues should be matched one with the other, and
dealt with in the accounting period to which they relate. Using the accruals concept,
revenue and cost, are recognised as they are earned or incurred and not as money is
received or paid.
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Example: an expense due but not paid is recognised as an expense of the period to which
it relates and set against revenue for that same period, while an Expense paid in advance
is excluded and treated as a prepayment.
(c) Prudence Concept
Prudence concept states that revenues and profit are not reported and recognised in the
financial statements unless realised. In contrast, immediate provision is made for
anticipated loses even if such losses are not yet realised. Therefore, where an item in the
financial statement is uncertain, the figure taken for that item will be that which will
understate rather than the one overstating profits.
An example of the prudence concept is that a provision for doubtful debts should be
created out of profits whenever the realisation of trade debts in full is uncertain.
(d) Consistency Concept
Consistency concept states that a business should be consistent in its accounting

treatment of similar items, both within a particular accounting period and between one
accounting period and the next. Consistence makes it possible for the users of financial
statements to compare the organisation’s results from period to period in a meaningful
manner. If an organisation was to change its accounting treatment of an item, the
financial effects of such a change should be quantified and, if material should be reported
to the users.
An example of the consistency concept is the depreciation of fixed assets. There is more
than one accepted method of depreciating fixed assets such as the straight line, reducing
balance and so on. In order for the accounts to be validly compared from period to period
the depreciation method chosen should be consistently used from period to period.
(e) Duality Concept
The concept states that every transaction has two effects. These effects are always equal
to each other.
An example of the duality concept is the double entry concept of recording transactions.
(f) Substance over form Convention
The convention states that where there is a difference between the real effect of a
transaction (substance) and its legal form (form), the real effect should be recognised in
the financial statements rather than the legal form provided this is legally possible.
An example of this concept is that an asset acquired on hire purchase terms will be
recognised as an asset with an associated liability despite the fact that the legal ownership
of the asset does not pass until the last instalment has been paid.
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(g) Accounting Period Convention
The convention states that for accounting purposes, the lifetime of the business is divided
into arbitrary periods of a fixed length, usually one year. The arbitrary periods are known
as accounting periods.
An example of the application of this convention is the periodic preparation of the profit
and loss account and balance sheet at the end of a trading period.
(h) Historical Cost Convention
The convention states that all values in accounting are based on the historical costs
incurred.
An example of this concept is the recording of the assets at their cost price.
(i) Realisation Concept
The concept states that a transaction should be recognised when the event from which the
transaction stems has taken place and the receipt of cash from the transaction is
reasonably certain. In other words, realisation takes place when goods or services are put
to the customer and he or she incurred liability for them.
Example: A sale on credit is recognised when sale is made and the invoice sent out rather
than waiting until the cash from the sale is received.
(J) Money Measurements Concept
It states that financial accounting only records items capable of being expressed in
monetary terms and most people will agree to the money values of the items.
For example financial accounting can record a piece of equipment but cannot record
(recognise) the worthiness of the employees of the business. This is because it is
practically difficult to give value to the worthness of the employees.
(k) Materiality Convention
This states that financial statements should separately disclose items which are significant
enough to affect evaluation or decisions. The significance of an item stems from its
importance in the overall contexts of the financial statements. The application of
materiality (i.e. what is and is not significant) will differ from organisation to
organisation.
For example, the cost of a box of staples that remain unused at the end of the accounting
period is not shown among stocks in the balance sheet but is charged to the profit and
loss account in the year in which it is incurred.
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(L) Stable Monetary Unit
This states that different transactions undertaken by the business are expressed in terms
of a common unit measurement, namely the monetary unit. The financial statements
prepared on a historical cost basis make the assumption that the currency is a stable
monetary unit.
For example, kwacha values of different years can be added together and a meaningful
result obtain.
(M) Business entity concept
The concept states that financial accounting information relates only to the activities of
the business entity and not the activities of its owner(s). The business entity is seen as
being separate from its owner(s) regardless of its legal status.
An example of this concept is that financial accounts are drawn up for the business
separately from the owner(s) personal financial dealings
(N) Objectivity Convention
It states that financial statements should be as objective as possible i.e. free from bias.
Transactions are to be recorded objectively as historical events. Objectivity is the basis
of historical cost accounting. The convention reduces the extent to which financial
statements may be influenced by subjective opinion
(O) The separate valuation principle
It states that in determining the amount to be attributed to an asset or liability in the

balance sheet, each component item of the asset or liability must be determined
separately. These separate valuations must then be aggregated to arrive at the balance
sheet figure.
Example, if the company’s stock comprises 50 separate items a valuation must be arrived
at for each item separately.
2. CAPITAL AND REVENUE EXPENDITURE
Business expenditure falls into two categories: capital and revenue expenditure.
a) Capital expenditure: Capital expenditure involves buying of fixed assets and also money
spent on adding value to an existing fixed asset. It also includes costs needed to get the fixed
asset in operation. In short, capital expenditure involves:
i) Costs of acquiring fixed assets eg. Purchase cost, carriage inwards of fixed assets.
ii) Costs of making a fixed asset start operating e.g. installation costs.
iii) Expenditure on existing fixed assets aimed at increasing their earning capacity e.g. legal
costs, costs of registration on motor vehicle at first time.
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b) Revenue expenditure: It is the cost involved in running a business on a day to day basis.
Examples of revenue expenditure are:
i) expenditure on current assets (stock)

ii) expenditure relating to running as business (administration and selling expenses)
iii) expenditure on maintaining the earning capacity of fixed assets (e.g. repairs and
renewals)
When preparing final accounts, the revenue expenditure should be passed through the profit and
loss account, whereas capital expenditure goes to the balance sheet. This distinction is so
important so as not to overstate or understate profits and assets.
An overstatement of revenue expenditure results in an understatement of profits and fixed assets,

whereas an overstatement of capital expenditure results in overstatement of profits and fixed
assets.
______________________________________________________________________________
ACTIVITY 1
For the business of J. Hara, a wholesaler, classify the following between capital and revenue
expenditure:
a) Purchase of an extra motor van.

b) Purchase of a new tyre for van.
c) Cost of rebuilding warehouse wall, which had fallen down.
d) Building extension to the warehouse.
e) Painting extension to the warehouse when it is first built.
f) Repainting extension to warehouse three years later.
g) Carriage costs on bricks for new warehouse extension.
h) Roof repairs.
i) Installing thief detection equipment.
j) Legal charges on acquiring new premises for office.
k) Carriage cost on purchases.
l) Carriage cost on sales.
m) Wages of shop assistant.
n) Cost of motor taxation licence for new van.
______________________________________________________________________________
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UNIT EIGHT: ERRORS AND THE TRIAL BALANCE
 Explain why even when a trial balance has balance, it does not mean that everything in the
books is well.
 Describe the errors not disclosed by a trial balance.
 Journalise the correction of errors not disclosed by a trial balance.
 Describe the errors disclosed by a trial balance.
 Explain the steps to follow when a trial balance does not agree.
 Open up the suspense account.
 Journalise the correction of the errors disclosed by a trial balance.
 Clear the suspense account.
 Correct the net profit after errors have been corrected.
INTRODUCTION
In this unit we shall look at the two kinds of errors that are committed in the books of account
and how to correct the errors once they have been discovered. There are those errors that do not
contravene the double entry principle (i.e. they can not be disclosed by a trial balance) and those
that contravene the double entry principle (i.e. they cause the trial balance not to balance).
Lastly, we shall look at how to correct the profits after errors have been discovered.
1. ERRORS NOT DISCLOSED BY A TRIAL BALANCE
When a trial balance balances, it does not entail that everything is alright because certain errors,
even if committed in the books of account, they would not affect the trial balance agreement.
These errors are:
i) Error of omission: an error where a transaction is completely omitted from the books of
account.
ii) Error of commission: this is where the correct amount of the transaction is entered in the
wrong account but in the correct class of accounts.
iii) Error of principle: this is where a transaction is entered in the wrong class of account
(i.e. the error contravenes the rule of capital and revenue expenditure)
iv) Error of original entry: this is where the original amount (figure) is incorrect but double
entry is completed using the incorrect figure.
v) Compensating errors: these are errors that cancel out each other.
vi) Error of complete reversal of entries: this is where the amount is entered on the wrong
side of both accounts (i.e. the account to be credited is debited and vice versa).
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CORRECTION OF ERRORS
Once errors are discovered they must be corrected. Each correction should be done on the
double entry principle. This is done by the use of the journal proper so that for each correction
an explanation is given.
EXAMPLES:
1. Error of omission
A purchase of goods for K600 000 on credit from B. Kumwenda was completely omitted
from the books of account.
Do the journal entry to correct the error.
Journal entry
________________________________________________________________________
Date Details F Dr Cr
K’000 K’000
Purchases 600
B. Kumwenda 600
Being a purchase invoice completely omitted from
the books of account.
________________________________________________________________________
2. Error of commission
A sale of goods to J. Hara on credit for K300 000 was entered in H. Jere’s account.
Journal entry
________________________________________________________________________
K’000 K’000
J. Hara 300
H. Jere 300
Being correction of a sales invoice to J. Hara posted
in error to H. Jere’s account.
________________________________________________________________________
3. Error of Principle
The purchase of a motor vehicle for use in business for K16 000 000 was entered in
purchases account.
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Journal entry
________________________________________________________________________
K’000 K’000
Motor vehicle 16 000
Purchases 16 000
Being correction of a purchase invoice for a Motor
vehicle posted in error to purchases account.
________________________________________________________________________
4. Error of original entry

A payment for salaries by cheque for K1 210 000 was entered in both accounts as
K1 270 000.
Journal entry
________________________________________________________________________
K’000 K’000
Bank 60
Salaries 60
Being correction of cheque number ……. for
K1 210 000 posted to both accounts as K1 270 000.
________________________________________________________________________
5. Error of complete reversal of entries

A sale of goods for cash for K1 600 000 was debited in the sales account and credited in
the cash book.
Journal entry
________________________________________________________________________
K’000 K’000
Cash 3 200
Sales 3 200
Being correction of a cash sale for K1 600 000
debited to sales and credited to cash.
________________________________________________________________________
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6. Compensating errors
The total of the purchases journal was overcast by K1 000 000 and at the same time the
total of the sales journal was overcast by K1 000 000.
Journal entry
________________________________________________________________________
K’000 K’000
Sales 1 000
Purchases 1 000
Being correction of a compensating overcast in the
purchases and sales accounts.
________________________________________________________________________
______________________________________________________________________________
ACTIVITY 1
Show the journal entries required to correct the following errors:
(a) A sale of goods for K1 356 000 to J. Green had been entered in A. Green’s Account.
(b) A purchase of the Machine on credit from A. Machines Ltd for K8 780 000 had been
completely omitted from our books.
(c) The purchase of a Motor van for K7 600 000 had been entered in motor expenses account
in error.
(d) A sale of goods for K442 000 to A. Zulu had been entered in both accounts as K424 000.
(e) Commission received of K514 000 had been entered in rent received account.
(f) A receipt of cash from Sondashi for K154 000 had been entered on the credit side of the
cash account and debited in Sondashi’s account.
(g) A purchase of goods K378 000 had been entered in error on the debit side of drawings
account.
(h) A discount allowed of K732 000 had been entered in error on the debit side of the
discount received account.
______________________________________________________________________________
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2. ERRORS DISCLOSED BY THE TRIAL BALANCE
These errors contravene the rule of double entry and so will affect the trial balance agreement
because the debits will not equal the credits. These errors are:
1. Arithmetical errors
- These are single sided errors that are as a result of incorrect additions or subtraction i.e.
the totals are either overcast or undercast.
2. Errors of single entry

- This is where a transaction was only entered on one side of the books e.g. a debit entry is
made but with no corresponding credit entry or vice versa.
- Additionally, errors in double entry bookkeeping may occur where a transaction is posted
twice to the same side of both accounts.
3. Errors of transposition
- This is an error where you enter the right amount on one side but the numbers are
transposed when entering on the other side e.g. a payment for salaries for K38 600 000
entered in the cash book correctly but in salaries account as K36 800 000.
4. Errors in the trial balance

- These are errors made when extracting a trial balance e.g. a debit balance entered as a
credit balance in the trial balance or a balance omitted from the trial balance.
STEPS TO FOLLOW WHEN THE TRIAL BALANCE FAILS TO BALANCE
Whenever a trial balance fails to agree, every effort should be made to locate the error(s). The
following steps should be followed:
i) Determine the difference between the two sides.

ii) Check for the difference in the booking accounts
iii) If the difference is 1, 10, 100, 10 000, etc the error might be due to additions and
subtractions.
iv) Divide the difference by two in case a figure was posted twice to one side.
v) Check if the difference is divisible by nine in case one figure was transposed.
vi) In situations where the errors cannot be found, then a suspense account is opened.
SUSPENSE ACCOUNT
This is an account where the difference in books is held temporally until errors are discovered.
A suspense account is also used to record an amount for which the bookkeeper does not know
where to record it e.g. a cheque received by post from K. Chanda, for which the bookkeeper does
not know what K. Chanda is paying for. The amount would be debited in the cash book but the
corresponding credit would be made in the suspense account until the reason for the payment is
known.
CLEARING A SUSPENSE ACCOUNT

When the errors have been discovered, the suspense account has to be cleared. Like the other
errors, these errors have to be corrected by the use of the journal proper.
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Example:
A book keeper extracted a trial balance on 31st December 2004 which failed to balance by
K660 000, a shortage on the credit side of the trial balance. A suspense account was opened for
the difference.
In January 2005, the following errors committed in 2004 were found:
(a) The sales day book had been undercast by K200 000.
(b) A sale of goods K600 000 to Mama Betty were entered in Mama Florence’s account.
(c) Rent account had been undercast by K140 000.
(d) Discount received account had been undercast by K600 000.
(e) A sale of a motor vehicle at book value K720 000 had been credited to sales account in error
You are required to:
(i) Show the journal entries to correct the errors.

(ii) Draw up the suspense account after the errors described have been corrected.
Solution:
i) Journal entries
________________________________________________________________________
K’000 K’000
a) Suspense 200
Sales 200
Being correction of an undercast in sales account.
b) Mama Betty 600

Mama Florence 600
Being correction of a sales invoice to Mama Betty
posted in error to Mama Florence’s account.
c) Rent 140
Suspense 140
Being correction of an undercast in rent account.
d) Suspense 600
Discount Received 600
Being correction of an undercast in discount
received account.
e) Sales 720
Motor vehicle 720
Being correction of the disposal of a motor vehicle
credited to sales account.
________________________________________________________________________
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ii) Suspense account

________________________________________________________________________
K’000 K’000
Balance c/d 660
Sales 200
Rent 140
Discount received 600 ___
800 800
CORRECTION OF PROFITS
Where the profit and loss account was prepared before errors were corrected, there will be need
to adjust (correct) the net profit after the errors have been corrected. In correcting or adjusting
the net profit, only those errors that affect the income and expenses need to be included.
Example:
On 31st October 2004 a bookkeeper prepared a trial balance, which failed to balance with a
shortage on the credit side. A suspense account was opened for the difference.
Upon investigations, the following errors were discovered:
(i) The sales returns journal was overcast by K2 500 000.

(ii) A cheque received from Elephant Ndhlovu for K6 500 000 was entered in the cash
book only.
(iii) A payment for insurance K2 000 000 was not posted to the nominal ledger.
(iv) Goods sold on credit to Sibweni for K2 600 000 were entered as K6 200 000 in Sibweni’s
account.
(v) The purchases day book was undercast by K1 600 000.
(vi) A balance of K4 800 000, owing by a debtor, had been omitted from the trial balance.
Required:
(a) Journalise the correction of the above errors

(b) Draw up the suspense account to ascertain the difference in books.
(c) The net profit originally calculated for the year to 31st October 2004 was K14 600 000.
Show your calculation of the corrected net profit figure.
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Solution:
a) Journal entries
________________________________________________________________________
K’000 K’000
i) Suspense 2 500
Sales returns 2 500
Being correction of an overcast in sales returns
account.
ii) Suspense 6 500

Elephant Ndhlovu 6 500
Being correction of a cheque from E Ndhlovu
entered in the cash book only.
iii) Insurance 2 000

Suspense 2 000
Being correction of a payment for insurance not
posted to the nominal ledger.
iv) Suspense 3 600

Sibweni 3 600
Being correction of a sales invoice to Sibweni for
K2 600 000 entered as K6 200 000 in his account.
v) Purchases 1 600
Suspense 1 600
Being correction of an undercast in purchases
account.
vi) Debtors in trial balance 4 800

Suspense 4 800
Being correction of a debtor’s balance omitted
from the trial balance.
________________________________________________________________________
b) Suspense account
________________________________________________________________________
K’000 K’000
Balance c/d 4 200
Sales returns 2 500
E Ndhlovu 6 500
Insurance 2 000
Sibweni 3 600
Purchases 1 600
Debtor 4 800
12 600 12 600_
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c) Calculation of corrected net profit for the year ended 31st October 2004.
K’000 K’000
Net profit as accounts 14 600
Add: sales returns overcast 2 500
17 100
Less: Insurance undercast 2 000
Purchases undercast 1 600
3 600
Corrected net profit 13 500
______________________________________________________________________________
ACTIVITY 2
On 30th September 2004, Stella the bookkeeper for Egoli prepared a trial balance that failed to
balance. The difference was entered in the suspense account.
You were asked to assist in the investigations and after going through the books you discovered
the following errors:
(a) A sale of goods to Deon for K2 500 000 was debited in the sales account and credited in
Deon’s account.
(b) The discount received column of the cash book for K3 000 000 was not posted to the
general ledger.
(c) The purchases account was overcast by K200 000 and at the same time commission
received was overcast by K200 000.
(d) Goods sold to Marvis on credit for K4 000 000 were not entered in Marvi’s account.
(e) A payment for security to Lex by cheque for K4 300 000 was entered in the cash book as
K3 400 000.
(f) The account of a customer, Dona was undercast by K5 100 000.
(g) A balance of K8 360 000 in a creditor’s account was entered in the trial balance a
K8 630 000.
(h) A credit balance of K1 200 000 in Bank loan account had been debited in the trail
balance.
Required:
(i) Do the journal entries to correct the above errors.

(ii) Draw up the suspense account to ascertain the difference in books.
(iii) Given that the net profit had been previously calculated at K10 450 000, calculate the
adjusted net profit for the year ended 30th September 2004.
______________________________________________________________________________
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SUSPENSE AND BALANCE SHEET
If the errors are not discovered by the time final accounts are prepaid, then the balance in the
suspense will be shown in the balance sheet provided authority has been granted to do so. If the
balance in the suspense account is a debit it is shown under current assets and if it is a credit it is
shown under current liabilities.
Example:
The balance sheet of Malama Stores as at 31st December 2004 showed a suspense balance of
K584 000 among its current liabilities. The profit figure reported for the year was K8 486 000.
The following errors were later discovered:
1. K110 000 received from sales of old office equipment had been entered in sales account.
2. Purchases day book had been overcast by K120 000.
3. A private purchase of K230 000 had been included in the purchases day book.
4. Bank charges of K76 000 entered in the cash book have not been posted to the bank
charges account.
5. A sale of goods to S Nyirenda K1 280 000 was correctly entered in the sales day book but
entered as K1 820 000 in the personal account.
Required:
(a) Show the journal entries required to correct the errors.

(b) Write up the suspense account to clear the balance.
(c) Prepare a computation of the corrected profit for the year.
Solution:
a) Journal entries
________________________________________________________________________
K’000 K’000
1) Sales 110
Office Equipment 110
Being correction of the disposal of an office
Equipment credited to sales account.
2) Suspense 120
Purchases 120
Being correction of an overcast in the purchases
account.
3) Drawings 230
Purchases 230
Being correction of a private purchase included in
business purchases account.
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4) Bank charges 76
Suspense 76
Being correction of bank charges not entered in bank
charges account.
5) Suspense 540
S Nyirenda 540
Being correction of a sales invoice to S Nyirenda for
K1 280 000 entered as K1 820 000 in his account.
________________________________________________________________________
b) Suspense account
________________________________________________________________________
K’000 K’000
Balance b/d 584
Purchases 120
Bank charges 76
S Nyirenda 540 ___
660 660_
c) Calculation of corrected net profit for the year ended 31st December 2004.
K’000 K’000
Net profit as accounts 8 486
Add: purchases overcast (120 + 230) 350
8 836
Less: Sales overcast 110
Bank charges 76
186
Corrected net profit 8 650
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______________________________________________________________________________
ACTIVITY 3
Sunday having been unable to balance his trial balance at 31st December 2004, opened up a
suspense account and entered in it the amount he was out of balance. The debits had exceeded
the credits by K736 000.
The following errors were subsequently discovered:
(i) An allowance to a debtor Saturday, of K265 000 was entered in his account as K256 000.
(ii) The total of the discount received column in the cash book for the month of December
K237 000 had not been posted.
(iii) K500 000 representing the sale proceeds of a machine scraped had been passed through
the sales account.
(iv) A balance of K268 000 owing by a debtor, Monday, had been omitted from the trial
balance at 31st December 2004.
(v) A bank overdraft of K313 000 had been entered in the trial balance as K331 000.
(vi) Sale of goods for K1 000 000 to Tuesday on credit had been completely missed from the
books.
(vii) Discounts received balance of K379 000 had been entered in the trial balance as
K397 000 (debit balance)
You are required to show the suspense account after the rectification of all errors and to show the
entries to be made to correct the errors which do not pass through the suspense account.
______________________________________________________________________________
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UNIT NINE: BANK RECONCILIATION STATEMENT
 Explain the difference in recording transactions in the cash book and the bank statement.
 Define a bank reconciliation statement.
 List the reasons for preparing a bank reconciliation statement at regular intervals.
 Identify and explain the items that cause the difference in balances between the cash book
and the bank statement.
 Explain the reconciliation procedure.
 Prepare the bank reconciliation statement starting with either the balance as per bank
statement or as per cash book.
 Adjust or revise the cash book before preparing a reconciliation statement.
 Prepare the bank reconciliation statement where both the cash book and the bank statement
balances are overdrawn.
 Prepare the bank reconciliation statement where both opening and closing balances differ.
Bank statement and cash book

The cash book records all transactions with the bank whereas the bank statement records all the
bank’s transactions with the business. The contents of the cash book are exactly the same as the
records in the bank statement, except that the transactions in the bank statement are shown on
the opposite sides as to those in the cash book.
Therefore, the balances though in opposite sides are supposed to be the same, except where there
are timing differences and errors in the bank statement and/or the cash book. The timing
differences and the errors make it essential to reconcile the balances in the bank account with
that on the bank statement.
Bank reconciliation statement

A bank reconciliation statement is a statement that reconciles the bank cash book balance with
the bank statement balance. The bank reconciliation statement should be prepared at intervals
(e.g. monthly) for the following reasons:
1. It assists the verification of the cash book balances.

2. It acts as an internal check and so it aids/assists the detection of fraud.
3. It establishes the correctness of cash book entries.
4. It identifies amounts received or charges without notification, and so it ensures that those
items are included in the cash book or excluded if they are incorrect.
5. It identifies the possible errors made by the bank.
Items causing the difference in balances

The difference in balances is caused the following items:
(a) those which have been entered in the cash book but which have not yet appeared on the
bank statement.
(b) those which appear in the bank statement but which have not yet been entered in the cash
book.
(c) Errors
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a) Items not yet on the bank Statement
(i) Unpresented Cheques: Cheques drawn and entered in the cash book but have not yet
been presented at the bank or pass through the bank clearing system.
(ii) Uncredited Cheques: Cheques that have been received but are not yet credited into the
account of the customer.
b) Items not yet entered in the cash book
(i) Credit transfers/bank Giro: When a receipt has been received directly through the
firm’s bank account
(ii) Bank charges: Amount charged by banks for the service given in keeping the customer’s
bank account.
(iii) Standing Orders: Instructions to the bank by the firm to make regular payments of fixed
amounts at stated dates to certain persons or organisation.
(iv) Direct debits: Payments where the authority to get the money is given to the firm to
whom money is to be paid.
(v) Bank interest: Interest on savings or on bank overdrafts.
(vi) Dishonoured cheques: Cheques which the bank has not paid or honoured for a number
of reasons.
c) Errors: These could be either in the cash book or bank statement.
Reconciliation procedure
When you want to reconcile, the first step is to identify the items that causes the two balances to
differ. Once these items are identified, draw up the reconciliation statement starting with either
the bank statement balance or the cash book balance, incorporating the identified items.
Example:
Japhet received his bank statement on 30th April 2004 that showed a balance different from his
cash book on the same date. Details of these are shown below:
Cash book (bank column only)
2004 K’000 2004 K’000

April 1 Balance b/d 36 000 April 10 C. Howard 9 000
7 K. Joseph 14 000 14 V. Patrick 6 000
15 Sales 12 000 28 Salaries 12 000
28 D. John 8 000 29 B. Philips 7 000
30 Balance 36 000
70 000 70 000
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Bank Statement
Date Dr Cr Balance
2004 K’000 K’000 K’000
April 1 Balance b/f (Cr) 36 000
8 Cheque deposit 14 000 50 000
11 C. Howard 9 000 41 000
15 V. Patrick 6 000 35 000
17 Cash deposit 12 000 47 000
20 Credit Transfer-James Plc 6 000 53 000
28 Cheque No. 10 (salaries) 12 000 41 000
30 Standing order – Zamtel 3 000 38 000
30 Bank Charges 250 37 750
Required:
Draw up a bank reconciliation statement as on 30th April 2004.
Solution
Bank reconciliation statement as on 30th April 2004

K’000 K’000
Balance as per cash book 36 000
Add: unpresented cheque – B Philips 7 000
Credit transfer – James Plc 6 000
13 000
49 000
Less: uncredited cheque – D John 8 000
Standing order 3 000
Bank charges 250
11 250
Balance as per bank statement 37 750
The above reconciliation statement could also have been done starting with the balance as per
bank statement as follows (it is actually recommended to use this approach unless mentioned
otherwise):
Bank reconciliation statement as on 30th April 2004

K’000 K’000
Add: uncredited cheque – D John 8 000
Standing order 3 000
Bank charges 250
11 250
49 000
Less: unpresented cheque – B Philips 7 000
Credit transfer – James Plc 6 000
13 000
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Updating the cash book before drawing up the reconciliation statement

Practically, the cash book should be updated before a reconciliation statement is prepared. This
is done by identifying the business items that are on the bank statement but not in the cash book
and then making entries for the items in the cash book. In addition, any errors made in the cash
book should be corrected when updating the cash book.
Example:
On 31st March 2005, Danny’s cash book showed a debit balance of K39 340 000. The bank
statement on the same date showed a credit balance of K68 955 000.
On comparing the cash book with the bank statement the following differences were found.
(i) Cheques of K7 645 000 had been paid into the bank on 31st March 2005 but were not
credited by the bank until the following day.
(ii) Bank charges of K550 000 appeared on the bank statement but not on the cash book.
(iii) Cheques of K28 435 000 had been drawn but not yet presented for payment.
(iv) A standing order of K500 000 to Trade Kings, payable on 24th of every month have been
paid by the bank but not entered on the cash book.
(v) Dividends of K9 875 000 collected and credited by the bank did not appear in the cash
book.
Required:
a) Update the cash book

b) Draw up the bank reconciliation statement as on 31st March 2005.
Solution:
a) Updated cash book

________________________________________________________________________
2004 K’000 2004 K’000
31.3. Balance b/d 39 340 31.3. Bank charges 500
31.3. Dividends 9 875 31.3. Standing order 500
31.3. Balance c/d 48 165
49 215 49 215
b) Bank reconciliation statement as on 31st March 2005

K’000
Add: uncredited cheques 7 645
76 600
Less: unpresented cheques 28 435
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Reconciling unfavourable balances

To reconcile unfavourable balances (i.e. where both the cash book and bank statement balances
are overdrawn), the reconciliation procedure is the opposite as to when the balances are
favourable. However, when updating the cash book with an overdraft, the normal rules of
preparing a cash book should be followed.
Example:
The following is a cash book (bank column only) of B Eslewhere for December 2004:
Cash book
________________________________________________________________________
2004 K’000 2004 K’000
Dec. 6 J. Hall 310 Dec. 1 Balance b/d 7 744
20 C Walters 378 10 P Wood 412
31 P Miller 422 19 M Roberts 630
31 Balance c/d 7 844 29 P Philips 168
8 954 8 954
The bank statement for the month is:
Bank Statement
Date Dr Cr Balance
2004 K’000 K’000 K’000
Dec. 1 Balance b/f 7 744 O/D
6 Cheque deposit 310 7 434 O/D
13 P Wood 412 7 846 O/D
20 Cheque deposit 378 7 468 O/D
22 M Roberts 630 8 098 O/D
30 Standing order – L B Brothers 400 8 498 O/D
31 K Sandala – Trader’s credit 360 8 138 O/D
30 Bank Charges 130 8 268 O/D

a) Write the cash book up to date to take the necessary items into account.
b) Draw up a bank reconciliation statement as on 31st December 2004.
Solution:
a) Updated cash book

________________________________________________________________________
2004 K’000 2004 K’000
31.12. Trader’s credit 360 31.12. Balance b/d 7 844
31.12. Balance c/d 8 014 31.12. Bank charges 130
31.12. Standing order 400
8 374 8 374
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b) Bank reconciliation statement as on 31st December 2005

K’000
Balance as per bank statement (overdraft) 8 268
Add: unpresented cheque – P Philips 168
8 436
Less: uncredited cheque – P Miller 422
Balance as per cash book (overdraft) 8 014
Reconciling when both the opening and closing balances differ

When ticking corresponding items in the cash book and on the bank statement, one should ensure
that the unpresented and uncredited cheques for the last reconciliation period are also ticked if
they appear in the current bank statement.
If any of the previous unpresented or uncredited cheques have not been presented or credited
respectively in the current period, they should be included in the current reconciliation statement
and treated in the usual manner.
Example:
The bank column of the cash book for James Kaluwe for the month of January 2005 and the
bank statement for the month are as follows:
Cash book
________________________________________________________________________
2005 K’000 2005 K’000
Jan . 1 Balance b/d 734 Jan. 4 B Kabwe 452
6 A Banda 246 14 P Kaswilo 124
10 Sales 150 28 G Bwalya 202
12 B Sililo 120 31 Bank charges 50
24 D Mambwe 600 31 Balance c/d 1 290
30 C Chirwa 368 ____
2 218 2 218
The bank statement for the month is:

Bank Statement
Date Dr Cr Balance
2005 K’000 K’000 K’000
Jan. 1 Balance b/f 975
2 H Zulu (cheque deposit) 115 1 090
3 C Tomaida 256 834
4 B Kabwe 452 382
6 Cheque deposit 246 628
11 Cash deposit 150 778
12 B Sililo 120 658
14 P Kaswilo 124 534
20 Credit transfer – P Mweene 409 943
24 Cheque deposit 600 1 543
25 Direct debit - Zampost 123 1 420
30 Standing order – Mopani 341 1 079
31 Bank Charges 50 1 029
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Additional information provided:

1. A cheque paid to B Sililo for K120 000 was debited in the cash book in error.
2. The cash book balance was understated by K100 000.
3. The difference between the cash book balance and the bank statement balance on
1st January 2005 was due to two unpresented cheques: P Malilwe K100 000 and C Tomaida
K256 000; and one uncredited cheque from H Zulu for K115 000.

a) Write up a revised cash book.
b) Draw up a bank reconciliation statement as on 31st January 2005.
Solution:
a) Revised cash book

________________________________________________________________________
2005 K’000 2005 K’000
Jan.31 Balance b/d 1 290 Jan. 31 B Sililo (120 x 2) 240
31 Credit transfer 409 31 Direct debit 123
31 Balance understated 100 31 Standing order 341
31 Balance c/d 1 095
1 799 1 799
b) Bank reconciliation statement as on 31st January 2005

K’000 K’000
Add: uncredited cheque – C Chirwa 368
1 397
Less: unpresented cheques – P Malilwe 100
- G Bwalya 202
302
______________________________________________________________________________
ACTIVITY 1
The summary of the bank column in the cash book of Minor Ltd for the year ending
30th September 2004 is as follows:
K’000
Opening balance 1 654
Receipts 332 478
334 132
Payments 316 735
Closing balance 17 397
The bank statement showed a favourable balance as at 30th September 2004 of K15 465 000.
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Your investigations of the accounting records for the period reviews the following information:
1. Cheques paid to suppliers of K1 435 000 have not yet been presented at the bank, and
cheques paid into the bank of K1 620 000 on 30th September 2004 have not yet been credited
to the company’s account.
2. Standing orders entered in the bank statement have been omitted from the cash book in
respect of lease payments on company car, 12 months at K96 000 per month and annual
insurance of K150 000.
3. Bank charges of K452 000 shown in the bank statement have not been entered in the cash
book.
4. A cheque drawn fro K127 000 had been entered in the cash book as K172 000, and a cash
book page on the reciptes side has been underadded by K200 000.
5. A cheque for K238 000 had been debited to the company’s account in error by the bank.

a) Write up a revised cash book
b) Draw up a bank reconciliation statement as on 30th September 2004.
______________________________________________________________________________
______________________________________________________________________________
ACTIVITY 2
On 31st December 2004, J Buumba’s cash book showed a credit balance of K3 922 000 while his
bank statement on the same date showed a debit balance of K4 134 000.
Subsequent investigations revealed the following:
1. A cheque drawn on 29th December 2004 for K84 000 in favour of B Chola was not debited by
the bank until 8th January 2005.
2. A cheque received from B Kabwe on 31st December 2004 for K211 000 and recorded in the
cash book had not yet been credited by the bank.
3. Bank charges of K65 000 appearing on the bank statement had not yet been entered in the
cash book.
4. A standing order for K200 000 was paid by the bank on the due date (30th December) but was
not included in the cash book.
5. Trader’s credit totaling K180 000 have been credited in the bank statement but not yet in the
cash book.

a) Write the cash book up to date
b) Draw up a bank reconciliation statement as on 31st December 2004.
______________________________________________________________________________
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UNIT TEN: CONTROL ACCOUNTS
 Define a control account.
 Explain the purpose of control accounts.
 Give the advantages of control accounts.
 Identify the sources of information for control accounts.
 Explain the principle used in preparing control accounts.
 Draw up control accounts for debtors and creditors
 Explain the accounting of a contra settlement between the sales ledger and purchases ledger.
 Reconcile the control accounts balances with the total of balances on the individual accounts.
Control accounts
A control account is a total account that checks the arithmetic accruing of a ledger. Control
accounts are like a trial balance for each particular ledger. The use of control accounts is
technique used to quickly identify the section of the accounting records that has errors.
Therefore, only the ledger whose control account fails to agree the individual balances will need
to be checked to locate the errors.
Two control accounts are normally prepared:

(a) A control account for the sales ledger, known as the sales ledger control account or the
total debtors account.
(b) A control account for the purchases ledger, known as the purchases ledger control
account or the total creditors account.
Advantages of control accounts

In addition to the advantage of locating errors quickly, control accounts also have the following
advantages:
(i) Control accounts are normally under the charge of the responsible official and so fraud is
made more difficult because transfers made (in an effort) to disguise fraud will have to
pass the scrutiny of this official .
(ii) For management control purpose, the balances on the control accounts can always be
taken to equal the debtors and creditors at any point. Therefore, management control is
aided by the quick information provided from the control accounts.
Treatment of control accounts in the books of account.

Control accounts can be treated either as part of the double entry system or for memorandum
purposes only – merely proving the arithmetical accuracy of the ledger accounts. Where control
accounts are part of the double entry system, then the ledgers are for memorandum purposes.
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SOURCE OF INFORMATION FOR CONTROL ACCOUNTS
The source of information for preparing control accounts is from the journals and the cash book
is shown by the list below:
(a) Sales ledger control account
Item Source of the total
1. Opening balances List of the last period’s balances

2. Credit sales Total of Sales Journal/day book
3. sales Returns Total of sales returns Journal
4. Cash from customers Cash book: Bank column on the debit side
5. Cheques from customers Cash book: Bank column on the debit side
6. Discount allowed Total of discounts allowed column in cash
Book
7. Cash refunds to customers Cash book: cash column on the payment
side.
8. Dishonoured cheque Cash book: bank column or journal proper.
9. Bad debts Journal proper
10. Other transfers Journal proper
11. Closing balances Lists of debtors drawn at the end of the
period.
(b) Purchases ledger control account
Item Source of total
1. Opening balances List of last period’s balances

2. Credit purchases Total of purchases journal/Day book
3. Purchases Returns Total of purchases returns Journal
4. Cash paid to supplies Cash book: cash column of the credit side
5. Cheques paid to supplies Cash book: bank column of the credit side
6. Discount received Total of discount received column in the
cash book
7. Cash refund from suppliers Cash book: Cash column on the receipt side
8. Transfers Journal proper
9. Closing balances List of creditors at the end of the period.
PREPARING CONTROL ACCOUNTS

Control accounts are prepared based on the principle that if the opening balance is known
together with additions and deduction then the closing balance can be computed.
The sales ledger control account is prepared using the same principles as that of preparing a
debtors account, whereas the purchases ledger control account was the principle of preparing the
creditors account.
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Examples:
1. You are required to prepare the sales ledger control from the following for the month of
March 2005:
2005 K’000
March 1 Sales ledger balances 4 936
Totals for the month:
Sales journal 49 916
Returns inwards journal 1 139
Cheques and cash received from customers 46 490
Discount allowed 1 455
March 31 Sales ledger balances 5 768
Solution:
Sales ledger control account

________________________________________________________________________
2005 K’000 K’000
March 1 Balance b/d 4 936
31 Sales 49 916
31 Sales returns 1 139
31 Cheques and cash from customers 46 490
31 Discounts allowed 1 455
31 Balance c/d 5 768
54 852 54 852
April 1 Balance b/d 5 768
2. You are required to prepare a purchases ledger control account from the following for the
month of January 2005. The balance of the account is to be taken as the amount of the
creditors as on 31st January 2005.
2005 K’000
January 1 Purchases ledger balances 3 676
Totals for the month:
Purchases journal 42 257
Returns outwards journal 1 098
Cheques paid suppliers 38 765
Discount received from suppliers 887
January 31 Purchases ledger balances ?
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Solution:
Purchases ledger control account
________________________________________________________________________
2005 K’000 K’000
Jan. 1 Balance b/d 3 676
31 Purchases 42 257
31 Purchases returns 1 139
31 Cheques paid to suppliers 38 765
31 Discounts received 887
31 Balance c/d 5 183 _____
45 933 45 933
Feb 1 Balance b/d 5 183
CONTRA SETTLEMENTS
A contra is a transfer between the ledger accounts for the same person. It may happen that a
customer in the sales ledger is also a supplier in the purchases ledger. Normally the parties
involved settle their accounts in full, but it is also possible to set off the balances, and for the
party with a greater balance to pay the difference.
Example:
The account of Zulu appeared both in the purchases ledger and sales ledger with balances of
K2 000 000 and K1 400 000 respectively. Show the accounts of Zulu as they would appear in
the ledgers if the two balances are set off.
Solution:
Sales Ledger
Zulu account
________________________________________________________________________
2005 K’000 K’000
Balance b/d 1 400
Purchases ledger contra 1 400
1 400 1 400
Purchases ledger
Zulu account
________________________________________________________________________
2005 K’000 K’000
Balance b/d 2 000
Sales ledger contra 1 400
Balance c/d 600 ____
2 000 1 400
Balance b/d 600
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Note: Contra settlements appear in both the sales ledger control account and the purchases
ledger control account. They are debited in the purchases ledger control account and
credited in the sales ledger control A/c.
Credit balances in the sales ledger

Credit balances in the sales ledger can arise where a customer has over paid us or made a
payment in advance for goods for which an invoice has not yet been issued.
Debit balances in the purchases ledger

Debit balances in the purchases ledger can arise where we have over paid a supplier or made an
advance payment for goods for which our supplier has not yet invoiced us.
Example:
From the following details prepare the sales ledger and purchases ledger control account as they
would appear in the general ledger of Minor Ltd for the month of April 2005.
Sales Ledger: K’000

Debit balances on 1st April 2005 50 432
Credit balances on 1st April 2005 260
Credit balances on 30th April 2005 425
Purchases ledger:
Credit balances on 1st April 2005 48 652
Debit balances on 1st April 2005 185
Debit balances on 30th April 2005 225
Transactions for the month:

Credit sales 88 360
Credit purchases 40 030
Discounts allowed 4 855
Purchases returns 1 645
Allowances to customers 464
Discounts received 2 809
Sales returns 1 817
Bad debts written off 109
Contra settlements 7 891
Payments to suppliers 38 123
Customers’ cheques dishonoured 607
Receipts from customers 76 945
Allowances from suppliers 464
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Solution:
Sales ledger control account
________________________________________________________________________
2005 K’000 K’000
April 1 Balances b/d 50 432 260
30 Sales 88 360
30 Sales returns 1 817
30 Bad debts 109
30 Receipts from customers 76 945
30 Discounts allowed 4 855
30 Allowances to customers 464
30 Contra settlements 7 891
30 Dishonoured cheques 607
30 Balances c/d 425 47 483
139 824 139 824
May 1 Balances b/d 47 483 425

________________________________________________________________________
2005 K’000 K’000
April 1 Balances b/d 185 48 652
30 Purchases 40 030
30 Purchases returns 1 645
30 Payments to suppliers 38 123
30 Discounts received 2 809
30 Allowances from suppliers 464
30 Balances c/d 37 790 __225
88 907 88 907
May 1 Balances b/d 225 37 790
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______________________________________________________________________________
ACTIVITY 1
From the following information that was extracted from the books of Chicken limited as at 30th
September 2004, you are required to prepare the sales and purchases ledger control accounts for
the year.
K’000
Sales ledger balances: 1st October, 2003 32 854 (Dr)
st
Purchases ledger balances: 1 October, 2003 22 383 (Cr)
Totals for the year ended 30th September 2004:
Sales journal 306 475
Purchases journal 220 389
Returns outwards journal 5 138
Returns inwards journal 4 586
Payments to suppliers 211 260
Receipts from Customers 266 669
Discount received 11 235
Discount allowed 4 074
Bad debts written off 1 755
Dishonoured cheques from customers 560
Refunds from suppliers in respect of overpayment 780
Interest charged on customers overdue accounts 312
Sales ledger balances set off against balances in the purchases ledger 663
th
Credit balances in the sales ledger on 30 September 2004 229
Debt balances in the purchases ledger on 30th September 2004 195
______________________________________________________________________________
RECONCILITAION OF CONTROL ACCOUNT BALANCE WITH THE TOTAL OF

INDIVIDUAL BALANCES
In practice the balance on the control account may not agree with the total of the ledger accounts
balances. In such circumstances, the causes of the difference must be identified and adjustments
made where necessary.
Such difference may be cause by:
1. Errors in the sales or purchases ledger control accounts

2. Errors in the debtors or creditors ledger.
3. Errors in both the control accounts and the ledger accounts
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Example:
Josephine’s purchases ledger control account is an integral part of the double entry system.
Individual ledger account balances are listed and totalled on a monthly basis and reconciled to
the control account balance. Information for the month of April 2005 is as follows:
(a) Individual ledger account balances at 30th April 2005 have been listed out and totalled as
follows:
K’000
Total of debit balances 1 012
Total of Credit balances 20 778
(b) The purchases ledger control balance at 30th April 2005 was K21 832 000
(c) On further examination, the following errors were discovered:
i) The total of discount received for the month amounting to K1 715 000 has not been
entered in the control account.
ii) On listing out, an individual credit balance of K205 000 has been incorrectly treated as
debit.
iii) A petty cash payment to a supplier amounting to K63 000 has been correctly treated in
the control account but no entry has been made in the suppliers individual ledger
account.
iv) The purchases day book total for the month of April has been undercast by K2 000 000
v) Contra settlements with the sales ledger, amounting in total to K2 004 000 have been
correctly treated in the individual ledger accounts but no entry has been made in the
control account.
You are required :
(a) To prepare the part of the purchases ledger control account reflecting the above
information
(b) To prepare a statement reconciling the original total of the individuals balances with the
corrected balances on the control account.
Solution:
________________________________________________________________________
2005 K’000 K’000
April 1 Balance b/d 21 832
30 Purchases undercast 2 000
30 Discounts received 1 715
30 Balances c/d 20 113 _____
23 832 23 832
May 1 Balance b/d 20 113
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Reconciliation of individual balances with control account balance

K’000
Net balance as per individual accounts (20 778 000 – 1 012 000) 19 766
Add: credit balance wrongly debited (205 000 x 2) 410
Less: Petty cash payment 63
Net balance as per control account 20 113
______________________________________________________________________________
ACTIVITY 2
The following figures relating for the year 2004 were extracted from the books of a trader.
K’000
st
Debit balance on the sales ledger control account (1 January) 10 164
Sales, per sales journal 122 636
Discount allowed, per cash book 2 874
Receipts on account of credit sales 117 892
The book keeper prepared a list of balances in the sales ledger as on 31st December 2004
amounting to a total of K11 004 000. There were no credit balances. After the extraction of the
figures and preparation of the list mentioned above, the following errors were discovered:
i) The sales journal had been overcast by K180 000.

ii) The debit side of the personal account of the customer had been undercast by K418 000.
iii) Discount allowed amounting to K96 000 had been credited to the personal accounts but
were not entered elsewhere in the books.
iv) Goods invoice to a customer at K32 000 had been returned by him. The return of these
goods had not been recorded anywhere in the books.
v) A sales invoice of K264 000 entered in the sales journal had not been posted to the
customers’ personal account.
vi) A debit balance of K72 000 on a personal account of a customer had been omitted in the
list of the debit balances in the sales ledger.
After the discovery of the above errors the book keeper prepared the sales ledger control account
and a revised list of sales ledger balances as on 31st December 2004.
You are required:
(a) To show the sales ledger control account for the year.
(b) To show your calculation of the total of the revised list of sales ledger balances as on
31st December 2004.
______________________________________________________________________________
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______________________________________________________________________________
REVIEW QUESTIONS
Question 1
A sales control account and a purchases ledger control account are maintained as integral parts of
the accounting records of James Brown Limited
Information relevant t to the business of James Brown Limited for the year ended 2004 is as
follows:
i) Balances at 1st January 2004:

K
Sales ledger 106 870 (Dr)
4 520 (Cr)
Purchases ledger 16 300 (Dr)

95 360 (Cr)
ii) Sales totalled K1 303 820 whilst sales returned amounted to K18 100
(ii) K1 279 000 was received from debtors in settlement of their accounts totalling
K1 306 500. In addition K12 000 was received for a bad debt which had been written off
as irrecoverable for the year ended 31st December 2003.
(iv) A debt of K3 500 due from Amos was transferred to the purchases ledger and set off
against a debt of K11 000 due to Amos.
(v) An amount of K5 600 due to James Brown Limited for good supplied to Thomas was
written off as bad in December 2004.
(vi) Purchases amounted to K990 000 at list prices and purchases returns totalled K6 000 at
list prices. All purchases and returns were subject to trade discount of 10%.
(vii) K835 000 was paid to suppliers in settlement of debts due of K850 000.
(viii) Balances at 31st December 2004, include:

K
Sales ledger 10 080 (Cr)
Purchases ledger 7 600 (Dr)
Required:
Prepare in James Brown’s books for the year ended 31st December 2004:
(a) The sales ledger control accounts

(b) The purchases ledger control account
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Question 2
The financial year of Elsewhere Trading Company ended on 30 November 2004. You have been
asked to prepare a Total Debtors account and a Total Creditors Account in order to produce end-
of-year figures for Debtors and Creditors for the draft final accounts.
You are able to obtain the following information for the financial year from the books of original
entry:
K’000
Sales – cash 344 890
- credit 268 187
Purchases – cash 14 440
- credit 496 600
Total receipts from customers 600 570
Total payments to suppliers 503 970
Discounts allowed (all to credit customers) 5 520
Discounts received (all from credit suppliers) 3 510
Refunds given to cash customers 5 070
Balance in sales ledger set off against balance in purchases ledger 70
Bad debts written off 780
Increase in the provision for bad debts 90
Credit notes issued to credit customers 4 140
Debit notes issued to credit suppliers 1 480
According to the audited financial statements for the previous year debtors and creditors as at
1st December 2003 were K26 555 000 and K43 450 000 respectively.
Required:
Draw up the relevant Total accounts entering end-of-year totals for debtors and creditors.
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Question 3
The book keeper of Majoza Ltd prepared a schedule of balances of individual supplier’s accounts
from the creditors ledger on 30th June 2004 and a arrived at a total of K8 653 828.
He passed the schedule over to the accountant who compared this total with the closing balance
On the purchases ledger control account reproduced below:

________________________________________________________________________
2004 K’000 2004 K’000
June 30 Purchases returns 56 018 June 30 Balance b/d 8 927 113
30 Bank 9 631 270 30 Purchases 10 048 349
30 Balance c/d 8 468 831 30 Discount received 265 682
30 Debtors ledger contra 304 975
19 526 119 19 526 119
July 1 Balance b/d 8 468 831
During his investigation into the discrepancy between the two figures, the accountant discovered
a number of errors in the control account and the individual ledger accounts and schedule .You
may assume that the total of each item posted to the control account is correct except to the
extent that they are dealt with in the list below:
i) One supplier had been paid K1 022 out of petty cash. This had been correctly posted to
his personal account but has been omitted from the control account.
ii) The credit side of one supplier’s personal account had been underadded by K3 000.
iii) A credit balance on a suppliers account had been transposed from K54 814 to K58 441
when extracted on the schedule.
iv) The balance on one supplier’s account of K67 432 had been completely omitted from the
schedule.
v) Discounts received of K1 256 and K813 had been posted to the wrong side of two
individual creditors’ accounts.
vi) Goods costing K3 960 hand been returned to the suppliers but this transaction had been
completely omitted from the returns day book.
You are required:
a) To prepare a statement starting with the original closing balance in the purchases ledger
control account then identify and correct the errors in that account and concluding with an
amended closing balance, and
b) To prepare a statement starting with the original total of the schedule of individual creditors
then identify and correcting errors in that schedule and concluding with an amended total.
______________________________________________________________________________
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UNIT ELEVEN: ADJUSTMENTS TO FINAL ACCOUNTS
 Explain the purpose of adjustments to final accounts.

 Identify adjustments to final accounts.
 Describe accruals and prepayments.
 Record accruals and prepayments in ledger accounts.
 Show profit and loss account and balance sheet extracts for accruals and prepayments.
 Define a bad debt.
 Identify causes of bad debts.
 Record bad debts in the journal and ledger accounts.
 Show profit and loss account extracts for recording bad debts.
 Define a bad debt recovered.
 Record bad debts in the journal proper and ledger accounts.
 Show profit and loss account extracts for recording bad debts recovered.
 Explain the provision for doubtful debts.
 Explain the need for making a provision for doubtful debts.
 Identify the types of provisions for doubtful for doubtful debts.
 Record the provisions for doubtful debts in the journal proper and ledger accounts.
 Show profit and loss account and balance sheet extracts for recording provisions for doubtful
debts.
 Explain the provision for discounts allowed.
 Explain the need for making a provision for discounts allowed.
 Record provisions for discounts allowed in the journal proper and ledger accounts.
 Show profit and loss account and balance sheet extracts for recording provisions for
discounts allowed.
 Define and explain the purpose of depreciation.
 Identify the causes of depreciation.
 Explain the methods of calculating depreciation.
 Calculate depreciation using the different methods.
 Identify the ways of charging depreciation on assets bought and sold.
 Explain the method of accounting for depreciation.
 Account for depreciation charged in the period and accumulated depreciation in the ledger
accounts, profit and loss account and balance sheet extracts.
 Define disposal of fixed assets.
 Explain the accounting process on disposal of fixed assets.
 Record the disposal in ledger accounts, profit and loss account and balance sheet extracts.
 Record the trading in of fixed assets in ledger accounts, profit and loss account.
 Account for unrecorded drawings in kind in the trading account and the balance sheet.
 Account for unused stocks of consumable items in the profit and loss account and balance
sheet.
 Prepare final accounts with adjustments.
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Purpose of Adjustments to final accounts

The purpose of adjustments to find accounts is to ensure that the final accounts reflect a true and
fair set of records.
Examples of these adjustments are:

 Accruals and payments
o Expenses
o Incomes
 Bad debts, bad debts recovered, and provision doubtful debts.
 Provision for discounts allowed
 Depreciation/provision for depreciation
 Disposal of fixed assets
 Unrecorded drawing in kind
 Unused stocks of consumable items
1. ACCRUALS AND PREPAYMENTS
a) ACCRUED EXPENSES
An accrued expenses is an item of expense that has been incurred during the accounting
period but has not get been paid for.
When preparing final accounts, an accrued expense for the year should be included as an
expense in the profit and loss account and also shown in the balance sheet under current
liabilities.
Example 1:
Manyando’s business has an accounting year-end of 31st December. He rents a factory at a
rental cost of K 6 000 00 per quarter payable in arrears. During the year 31st December 2004
his cash payment for rent has been as follows:
March 31 K6 000 000

June 29 K6 000 000
October 28 K6 000 000
The final payment due on 31st December 2004 for the quarter to that date was not paid until
4th January 2004.
You are required to prepared the factory rent account showing, the transfer to the profit and
loss account, and the balance sheet extract as at 31st December 2004.
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Solution:
Factory Rent account
________________________________________________________________________
2004 K’000 K’000
March 31 Bank 6 000
June 29 Bank 6 000
Oct. 28 Bank 6 000
Dec. 31 Profit and loss account (bal. fig.) 24 000
Dec. 31 Balances c/d 6 000 _____
24 000 24 000
Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current liabilities:
Rent accrued 6 000
Note:
Where the adjustment is being made from a given trial balance, the common way of adjusting
the figure that goes to the profit and loss account is as follows:
Profit and loss account extract

K’000 K’000 K’000
Less: Expenses:
Rent (amount paid) 18 000
Add: accrued rent 6 000
24 000
Example 2:
F Banda’s financial year ends on 31st December. During the year ended 31st December 2004,
his payment for rates totalled K10 000 000. He had K3 000 000 owing at the start of the year
and K2 00 000 accrued at the end of the year.
Show the Rates account for the year and the balance sheet extract as at 31st December 2004.
Solution:
Rates account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 10 000
Dec. 31 Balances c/d 2 000 _____
12 000 12 000
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K’000 K’000 K’000
Rent accrued 2 000
Note:
Had the adjustment been made from a given trial balance without using the account method,
the adjustment for the figure that goes to the profit and loss account would have been:

K’000 K’000 K’000
Less: Expenses:
Rates (amount paid) 10 000
Add: accrued rates at end of year 2 000
12 000
Less: accrued rates at start of year 3 000
9 000
b) PREPAID EXPENSES:
A prepaid expense is an expense that has been paid for during the accounting period but
relates to the next accounting period(s).
When preparing the final accounts, a prepaid expense should be excluded from the current
profit and loss account, but should be shown in the balance sheet under current assets.
Example 1:
John Bwalya pays insurance on his motor vehicles at an annual cost of K12 000 000. During
the year to 31st December 2004, he paid a total of K 14 000 000 on insurance costs.
Show the insurance account and the balance sheet extract as at 31st December 2004.
Solution:
Insurance account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 14 000
Dec. 31 Balances c/d 2 000
14 000 14 000
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K’000 K’000 K’000
Current assets:
Insurance prepaid 2 000
Note:

K’000 K’000 K’000
Less: Expenses:
Insurance 14 000
Less: prepaid insurance 2 000
12 000
Example 2:
The following relate to Motor expenses for the year ended 31st December 2004:
Paid K23 000 000.
Paid in advance at 1st January 2004 K4 000 000.
Paid in advance at 31st December 2004 K 7 000 000.
Show the motor expenses account and the balance sheet extract as at 31st December 2004.
Solution:
Motor expenses account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 23 000
Dec. 31 Balances c/d 7 000
27 000 27 000

K’000 K’000 K’000
Current assets:
Motor expenses prepaid 7 000
Note:
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K’000 K’000 K’000
Less: Expenses:
Motor expenses 23 000
Add: prepaid motor expenses at start of year 4 000
27 000
Less: prepaid motor expenses at end of year 7 000
20 000
c) INCOME ACCRUED
An accrued income is income receivable during the accounting period but has not yet been
received.
When preparing final accounts the accrued amount should be included as an income in the
profit and loss account since it relates to the current accounting period. In the balance sheet,
the accrued income should be shown under current assets.
Example 1:
In the books of J. Kafupi, rent is receivable annually at K8 400 000. During the year
31st December 2004, the following receipts were made:
31 May 2004 K3 600 000
31 Dec. 2004 K4 400 000
Prepare the rent receivable account for the year showing the transfer to the profit and loss
account and show the balance sheet extracted as at 31st December 2004.
Solution:
Rent receivable account
________________________________________________________________________
2004 K’000 K’000
May 31 Bank 3 600
Dec. 31 Bank 4 400
Dec. 31 Balance c/d 400
8 400 8 400
Jan. 1 Balance b/d 400

K’000 K’000 K’000
Current assets:
Rent receivable accrued 400
Note:
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K’000 K’000 K’000
Add: Gains:
Rent receivable 8 000
Add: accrued rent 400
8 400
Example 2:
At the start of the year, on 1st January 2004, rent receivable account had accrued amount of
K5 000 000. During the year rent received amounted to K18 000 000. At the end of the year
rent receivable owing totalled K2 000 000.
Prepare the rent receivable account for the year showing the transfer to the profit and loss
account and show the balance sheet extracted as at 31st December 2004.
Solution:
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 18 000
Dec. 31 Balance c/d 2 000
20 000 20 000

K’000 K’000 K’000
Current assets:
Rent receivable accrued 2 000
Note:

K’000 K’000 K’000
Add: Gains:
Rent receivable 18 000
Add: accrued rent at end of year 2 000
20 000
Less: accrued rent at start of year 5 000
15 000
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d) INCOME PREPAID
This is income received during the current accounting period but relates to the next
accounting period(s).
Since the income relates to the next accounting period(s), it should not be included as income
in the current accounting period. In the balance sheet, prepaid income should appear under
current liabilities.
Example 1:
C. Phiri receives an annual commission of K3 600 000. During the year to 31st December
2004, he received a total commission of K4 000 000.
Prepare a commission receivable account showing the transfer to the profit and loss account
and show the balance sheet extract as at 31st December 2004.
Solution:
Commission receivable account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 4 000
Dec. 31 Balance c/d 400 _____
4 000 4 000

K’000 K’000 K’000
Commission receivable prepaid 400
Note:

K’000 K’000 K’000
Add: Gains:
Commission received 4 000
Less: prepaid commission 400
3 600
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Example 2:
On 1st January 2004, rent receivable prepaid in th books of C Kalunga amounted to
K3 500 000. During the year Kalunga received rentals totalling K9 500 000. On
31st December 2004, rent receivable prepaid was K6 000 000.
Prepare the rent receivable account showing the transfer to the profit and loss account and
show the balance sheet extract as at 31st December 2004.
Solution:
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Bank 9 500
Dec. 31 Balance c/d 6 000 _____
13 000 13 000

K’000 K’000 K’000
Rent receivable prepaid 6 000
Note:

K’000 K’000 K’000
Add: Gains:
Rent received 9 500
Add: prepaid rent at start of year 3 500
13 000
Less: prepaid rent at end of year 6 000
7 000
Summary
1. An expense accrued is an liability to the business whereas on income accrued is an asset

to the business.
2. An expense prepaid is an asset to the business whereas an income prepaid is a liability to
the business.
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______________________________________________________________________________
ACTIVITY 1
The financial year of H.Chamusana ended on 31st December 2004. Show the ledger accounts for
the following items including the balance transferred to the necessary parts of the final accounts
and also the balances carried down to the year 2005.
(a) Motor expenses: Paid in 2004 K744 000, owing at 31st December 2004 K28 000.
(b) Insurance: Paid in 2004 K420 000, prepaid at 31st December 2004 K35 000
(c) Stationery: Paid during 2004, K1 800 000, owing as at 31 December 2003 K250 000,
owing as 31st December 2004 K490 000.
(d) Rent: Paid during 2004 K950 000, Prepaid as at 31st December 2004 K220 000, prepaid
as at 31st December 2004 K290 000.
(e) Chamusana sublets part of the premises. Received K550 000 during the year ended
31st December 2004. The tenant owed Chamusana K180 000 on 31st December 2003 and
K210 000 on 31st December 2004.
______________________________________________________________________________
______________________________________________________________________________
ACTIVITY 2
Gilbert Properties has purchased a number of different properties over the years that it has been
in business by way of a variety of loans. Some of the interest on loan has been paid in arrears
and in advance. A number of properties are rented out to tenants, some of whom pay their rent
in advance and in arrears.
Interest payable and prepaid, and rent due and receivable in advance at the beginning and end of
Gilbert Properties’ accounting year are as follows:
31st May 2004 31st May 2005
K’000 K’000
Interest payable 12 000 14 500
Interest prepaid 8 000 6 400
Rental due from tenants 15 000 19 000
Rental received in advance 3 000 2 500
During the year to 31st May 2005, the amount of interest payable charged to the profit and loss
account was K56 000 000 and cash collected from rental tenants was K116 000 000.
You are required to write up the interest payable account and the rental income account for the
year ended 31st May 2005.
______________________________________________________________________________
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2. BAD DEBTS/BAD DEBTS RECOVERED AND PROVISIONS FOR DOUBTFUL

DEBTS
a) BAD DEBTS
Some debtors may fail pay for their debts and so it is prudent accounting to write off such
debts as bad debts. A bad debt is a debt that is, or is considered to be uncollectable. A bad
debtor is a debtor who fails to pay parts or the whole debt for a number of reasons such as:
 Running away without trace
 Bankruptcy
 Insanity
 Death etc.
ACCOUNTING ENTRIES FOR BAD DEBTS

i) The uncollectable debts must be removed from the books of account by:
Dr - Bad debts account
Cr - Debtors account
ii) At the end of the financial period, transfer the bad debts to the profit & and loss account.
Dr - Profit and loss account
Cr - Debtors account
Example:
On 1st May 2004, we are told that our debtor, Matumbo Walikolwa who owes us K300 000
has disappeared without trace. The balance is to be written off as a bad debt. Show the
journal entries for clearing the debt and transferring the debt to the profit & loss account, and
the ledger accounts to record the above matters.
Solution:
Journal entries
________________________________________________________________________
K’000 K’000
Bad debts 300
Matumbo Walikolwa 300
Being a bad debt written off
Profit and loss 300

Bad debts 300
Being transfer of the bad debt to profit and loss.
_______________________________________________________________________
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Ledger accounts
Matumbo Walikolwa account
________________________________________________________________________
2004 K’000 K’000
May 1 Balance b/d 300
May 1 Bad debt 300
300 300
________________________________________________________________________
Bad debts account

________________________________________________________________________
2004 K’000 K’000
May 1 Matumbo Walikolwa 300
Dec 31 Profit and loss account 300
300 300
________________________________________________________________________
b) BAD DEBTS RECOVERED

A bad debt recovered is a debt previously written off and is now recovered. The accounting
entries for a bad debt recovered are as follows:
1) If the bad debt is recovered in the same accounting period as to when it was written off,
the entries for the recovered amount will be the reversal of the write off entries as follows:
Dr – Debtors account
Cr – Bad debts account
2) If the bad debt is recovered in the later accounting periods:
i) Re – instatement of the debt
Dr – Debtors account with the amount recovered
Cr - Bad debt recovered account
ii) When cheques or cash is received

Dr – Bank/Cash
Cr – Debtors account
iii) At the end of the financial year the bad debt recovered is transferred to the profit & loss
account.
Dr. Bad debt recovered account
Cr. Profit & Loss account
Example:
On 12th April 2005, Kasonde who was previously written off as a bad debtor happens to be no
longer bankrupt and so send us a cheque of K4 000 000 in full settlement of his account.
Show the journal entries to record the above information, the ledger accounts showing the
transfers to the profit & loss account.
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Solution:
Journal entries
________________________________________________________________________
K’000 K’000
Kasonde 4 000
Bad debts recovered 4 000
Being re-instatement of the bad debt recovered
Bad debts recovered 4 000

Profit and loss account 4 000
Being transfer of the bad debt recovered to profit
and loss.
_______________________________________________________________________
Ledger accounts
Kasonde account
________________________________________________________________________
2005 K’000 K’000
April 12 Bad debt recovered 4 000
April 12 Bank 4 000
4 000 4 000
________________________________________________________________________
Bad debts recovered account

________________________________________________________________________
2005 K’000 K’000
April 12 Kasonde 4 000
Dec 31 Profit and loss account 4 000 ____
4 000 4 000
________________________________________________________________________
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c) PROVISION FOR DOUBTFUL DEBTS

A provision for doubtful debts is an estimated expense of debtors that are likely to become
bad. A provision for doubtful debts is set aside when there is some doubt as to whether all the
debts of the business will be recovered in full.
There are two types of provisions for doubtful debts:

i) Specific provision for doubtful debts: - this is a provision set for specific debts that are
known to be in doubt.
ii) General provision for doubtful debts: - this is the provision made for debts that are not
known precisely to be in doubt.
ACCOUNTING FOR PROVISION FOR DOUBTFUL DEBTS

There are two methods used to account for provision for doubtful debts i.e.
1) Both the bad debts written off and the provision for doubtful debts are charged to the
profit and loss account.
2) The bad debts written off are passed through the provision for doubtful debts.
The double entries for provision for doubtful debts are as follows:
Method (1):
i) In the year in which the provision is first made:
Dr – Profit and loss account
Cr – Provision for doubtful debts account
ii) In the subsequent years, two things may happen:
a) the provision may be increased:
Dr – Profit and loss account
Cr – Provision for doubtful debts account, with the amount of the increase
b) the provision may be reduced:
Dr – Provision for doubtful debts account
Cr – Profit and loss account, with the amount of the decrease
Method (2):
i) In the year in which the provision is first made:
Dr – Bad debts account
Cr – Provision for doubtful debts account
ii) In the subsequent years, two things may happen:
a) the provision may be increased:
Dr – Bad debts account
Cr – Provision for doubtful debts account, with the amount of the increase
b) the provision may be reduced:
Dr – Provision for doubtful debts account
Cr – Bad debts account, with the amount of the decrease
Example:
During the first year of trading, Kalilo wrote off bad debts amounting to K330 000. In view
of this, Kalilo decided to create a 5% provision for doubtful debts on the total debtors of
K30 000 000 as at 31st December 2003.
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Show the ledger accounts for the above transactions, the profit and loss account extract for the
year and the balance sheet extract as at 31st December 2003, using both methods of accounting
for provision for doubtful debts.
Solution:
Method (1)
Bad debts account
________________________________________________________________________
2003 K’000 K’000
Dec. 31 Debtors 330
Dec. 31 Profit and loss account 330
330 330
________________________________________________________________________
Provision for doubtful debts account

________________________________________________________________________
2003 K’000 K’000
Dec 31 Profit and loss account 1 500
Dec 31 Balance c/d 1 500 ____
1 500 1 500
________________________________________________________________________

K’000 K’000
Less: Expenses:
Bad debts 330
Provision for doubtful debts 1 500

K’000 K’000 K’000
Current assets:
Debtors 30 000
Less: provision for doubtful debts 1 500
28 500
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Method (2)
Bad debts account
________________________________________________________________________
2003 K’000 K’000
Dec. 31 Debtors 330
Dec. 31 Provision for doubtful debts 1 500
Dec. 31 Profit and loss account 1 830
1 830 1 830
________________________________________________________________________

________________________________________________________________________
2003 K’000 K’000
Dec 31 Bad debts 1 500
1 500 1 500
________________________________________________________________________

K’000 K’000
Less: Expenses:
Bad debts 1 830

K’000 K’000 K’000
Current assets:
Debtors 30 000
28 500
Example 2:
During the year ended 31st December 2004, Kalilo wrote off bad debts amounting to K1 000 000.
On 31st December, debtors outstanding totalled K32 000 000 and a 5% provision for doubtful
debts is to be maintained.
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Solution:
Method (1)
Bad debts account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Debtors 1 000
1 000 1 000
________________________________________________________________________

________________________________________________________________________
2004 K’000 K’000
1 600 1 600
________________________________________________________________________

K’000 K’000
Less: Expenses:
Bad debts 1 000
Provision for doubtful debts 100

K’000 K’000 K’000
Current assets:
Debtors 32 000
30 400
Method (2)
Bad debts account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Debtors 1 000
Dec. 31 Provision for doubtful debts 100
1 100 1 100
________________________________________________________________________
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________________________________________________________________________
2004 K’000 K’000
Dec 31 Bad debts 100
1 600 1 600
________________________________________________________________________

K’000 K’000
Less: Expenses:
Bad debts 1 100

K’000 K’000 K’000
Current assets:
Debtors 32 000
30 400
Example 3:
During the year ended 31st December 2005, Kalilo wrote off bad debts amounting to K680 000.
On 31st December, debtors outstanding totalled K24 000 000 and the 5% provision for doubtful
debts is to be maintained.
Solution:
Method (1)
Bad debts account
________________________________________________________________________
2005 K’000 K’000
Dec. 31 Debtors 680
680 680
________________________________________________________________________
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________________________________________________________________________
2005 K’000 K’000
1 200 1 200
________________________________________________________________________

K’000 K’000
Add: Gains:
Decrease in provision for doubtful debts 400
Less: Expenses:
Bad debts 680

K’000 K’000 K’000
Current assets:
Debtors 24 000
22 800
Method (2)
Bad debts account
________________________________________________________________________
2005 K’000 K’000
Dec. 31 Debtors 680
Dec. 31 Provision for doubtful debts 400
680 680
________________________________________________________________________

________________________________________________________________________
2005 K’000 K’000
Dec 31 Bad debts 400
1 200 1 200
________________________________________________________________________
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K’000 K’000
Less: Expenses:
Bad debts 280

K’000 K’000 K’000
Current assets:
Debtors 24 000
22 800
_____________________________________________________________________________
ACTIVITY 3
A business started trading on 1st January 2003. During the two years ended 31st December 2003
and 2004 the following debts were written off to bad debts account on the dates stated:
30 June 2003 B Chola K170 000

30 November 2003 M Kahalu K280 000
31 March 2004 C Kabaso K360 000
31 July 2004 M Zuma K120 000
31 October 2004 G Nkonde K500 000
On 31st December 2003 there had been a total of debtors remaining of K81 000 000. It was
decided to make a provision for doubtful debts of K1 100 000.
On 31st December 2004 there had been a total of debtors remaining of K94 600 000. It was
decided to make a provision for doubtful debts of K1 200 000.
You are required to show:

a) The bad debts account and the provision for Bad debts account for each of the two years.
b) The extracts from the profit and loss account for each of the two years.
c) The relevant extracts from the Balance sheet as at 31st December 2003 and 2004.
______________________________________________________________________________
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_____________________________________________________________________________
ACTIVITY 4
Nokia Daka set up in business on 1st July 2000 as a shoemaker. At the end of his first year of
trading, 31st December 2000 the amount owing to him from customers totalled to K13 140 000.
After some consideration Nokia decided that of these debts the total of K740 000 was unlikely
ever to be received and should be written off as bad debts. Of the remaining debtors he decided
to be prudent and provide against 4%.
By 31st December 2001, Nokia's debtors had increased to K16 800 000 and of these K3 000 000
were considered to be bad. Nokia decided that his provision for doubtful debts could be reduced
to 2% of the remaining debtors.
By 31st December 2002, Nokia's debtors totalled K12 500 000. There were no debts that were
considered bad but a specific provision was tobe made against one debt of K700 000 and against
a general provision of 2% was to be continued on the remaining debtors.
Required:
To write up the bad debts expenses account and the provision for bad debts account for the year
ended 31st December 2000, 2001, and 2002.
______________________________________________________________________________
3. PROVISION FOR DISCOUNTS ALLOWED

A provision for discounts allowed is an estimated expense of the discounts to be allowed on
debtors who pay promptly. The provision for doubtful debts should first be deducted from
debtors before the provision for discounts allowed is estimated.
A provision for discounts allowed is accounted for in the same manner as that provision for
doubtful debts. Thus, an increase in the provisions is an expense while a decrease is a gain
to the business.
Example:
During the year to 31st December 2004, Mubita wrote off bad debts amounting to K400 000
and allowed discounts totalling K100 000.
At the end of the year, debtors outstanding amounted to K5 000 000. A 10% provision for
doubtful debts was set aside, with a further 10% provision for discounts allowed on the
remaining debtors.

i) The bad debts account and the discount allowed account for the year.
ii) The provision for Bad debts account and the provision for discount allowed account for
the year.
iii) The extracts from the profit and loss account for the year.
iv) The relevant extracts from the Balance sheet as at 31st December 2004.
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Solution:
i)
Bad debts account
________________________________________________________________________
2004 K’000 K’000
Dec. 31 Debtors 400
400 400
________________________________________________________________________
Discount allowed account

________________________________________________________________________
2004 K’000 K’000
Dec. 31 Debtors 100
100 100
________________________________________________________________________
ii)
________________________________________________________________________
2004 K’000 K’000
Dec 31 Balance c/d 500 ___
500 500
________________________________________________________________________
Provision for discounts allowed account

________________________________________________________________________
2004 K’000 K’000
Dec 31 Balance c/d 450 ___
450 450
________________________________________________________________________
iii)
K’000 K’000
Less: Expenses:
Bad debts 400
Discount allowed 100
Provision for doubtful debts 500
Provision for discounts allowed 450
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iv)

K’000 K’000 K’000
Current assets:
Debtors 5 000
Less: provision for doubtful debts 500
provision for discounts allowed 450
4 050
4. DEPRECIAITON OF FIXED ASSETS

Depreciation is the measure of the wearing out, consumption or other reductions in the useful
economic life of a fixed asset.
This may arise from:

i) use of the asset eg, Plant and machinery, motor vehicles etc.
ii) passing of time eg, a tem year lease of property.
iii) Obsolescence through technology and market changes eg, machinery of a specialised
nature.
iv) Depletion eg, extraction of minerals from a mine.
Purpose of depreciation
The purpose of depreciation is to allocate the cost of the fixed asset over the expected life of
that asset. Therefore, depreciation is a method of applying the matching or accruals concept
to the cost of fixed assets. It is not a method for providing for, or saving up for, replacement
of fixed assets.
METHODS OF CALCULATING DEPRECIATION

There are several methods of calculating depreciation, but the following are the two most
common ones:
1) Straight line method or Equal/fixed instalment method
2) Reducing balance method or diminishing balance method
Examiners will specify which method is to be used in an examination. If they do not, the
straight line method should generally be adopted as it is the easiest to use.
a) Straight line method

This is the simplest and most popular method of calculating depreciation. Under this
method, an equal amount is charged as depreciation for each year of the expected life of
the asset. To calculate the depreciation charge, the following information is necessary:
i) the original or historical cost of the asset

ii) an estimate of its useful life to the business
iii) an estimate of its residual value at the end of its useful life
The depreciation charge is calculated as follows:
Annual depreciation = Original cost less estimated residual value

Estimated useful life
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Example:
A motor vehicle was purchased on 1st January 2005 at a cost of K25 000 000. It is
estimated that its useful life is eight years, after which it will have a scrap value of
K5 000 000. Calculate the annual depreciation charge.
Solution
Annual depreciation = cost of asset less estimated residual value
Estimated useful life
= 25 000 000 - 5 000 000

8
= K2 500 0000
Notes:
i) Depreciation is often expressed as percentage of the original cost eg, 20% on cost
p.a.
ii) In most cases the residual value is not specified, and in such cases, it should be
taken to be zero.
b) Reducing balance method

Under this method the depreciation charge is higher in the earlier years of the life of the
asset. It is calculated using a fixed percentage on the net book value. Net book value
(NBV) or written down value (WDV) of a fixed asset is its cost less the accumulated
depreciation on the asset to date.
Example:
A trader bought a machine at K10 000 000. Depreciation is charged at a rate of 20% pa on
net book value. Calculate the depreciation charges for the first 4 years of its life.
Solution
Year NBV Depreciaiton charge Accumulated depreciaiton
K K
1 10 000 000 x 20% 2 000 000 2 000 000
2 8 000 000 x 20% 1 600 000 3 600 000
3 6 400 000 x 20% 1 280 000 4 880 000
4 5 120 000 x 20% 1 024 000 5 904 000
METHODS OF CHARGING DEPRECIATION

There are two ways of charging depreciation on assets bought or sold during the year. These
are:
i) Charging a full year's depreciation on assets bought regardless of the date of purchase
and no depreciation charge on assets sold.
ii) Depreciation is charged prorata to the period of ownership i.e. one month's ownership
requires one month's depreciation.
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Note: where the question does not specify the way depreciation is to charged, charge
depreciation proportionately if the date of purchase of the asset is given and a full year's
charge if the date of purchase of the asset is not given.
ACCOUNTING FOR DEPRECIATION

Whichever method is used, the bookkeeping entries for depreciation are the same.
Depreciation is not recorded by an entry in the fixed asset account but is shown accumulating
in a separate account known as provision for depreciation account.
The fixed asset account is retained at cost. The bookkeeping entries for fixed assets are as
follows:
a) On acquisition of fixed assets:
Dr - fixed asset account
Cr - cash book/creditor
b) Depreciation charge at the end of the year:
Cr - fixed asset provision for depreciation account
Example:
During the year ending 31st December 2003, Elsewhere Ltd acquired two motor vehicles
paying by cheques. Details are as follows:
January 15 AAL 3456 K28 000 000

October 1 AAN 9876 K20 000 000
Depreciation is charged annually on cost at 10%.
Show:
i) The motor vehicles account for the years ended 31st December 2003 and 2004,
ii) The motor vehicles provision for depreciation account for the years ended
31st December 2003 and 2004,
iii) Extracts from the profit and loss account for the years ended 31st December 2003 and
2004,
iv) Extracts from the balance sheet for the years ended 31st December 2003 and 2004,
given that:
a) Depreciation is charged prorata to the period of ownership.

b) A full year's depreciation is made in the year of purchase.
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Solution:
a) Depreciation charged prorata
i)
Motor vehicles account
________________________________________________________________________
2003 K’000 K’000
Jan. 15 Bank 28 000
Oct. 1 Bank 20 000
48 000 48 000
2004
________________________________________________________________________
ii)
Motor vehicle provision for depreciation account
________________________________________________________________________
2003 K’000 K’000
Dec 31 Balance c/d 3 300 ___
3 300 3 300
2004
8 100 8 100
2005
_______________________________________________________________________
iii)
Profit and loss account extract for the year ended 31st December 2003
K’000 K’000
Less: Expenses:
Depreciation: - motor vehicles 3 300
K’000 K’000
Less: Expenses:
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iv)
Cost Dep. Value
Motor vehicles 48 000 3 300 44 700

Cost Dep. Value
Motor vehicles 48 000 8 100 39 900
b) Full year's depreciaiton charge
i)
Motor vehicles account
________________________________________________________________________
2003 K’000 K’000
Jan. 15 Bank 28 000
Oct. 1 Bank 20 000
48 000 48 000
2004
________________________________________________________________________
ii)
Motor vehicle provision for depreciation account
________________________________________________________________________
2003 K’000 K’000
4 800 4 800
2004
9 600 9 600
2005
_______________________________________________________________________
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iii)
K’000 K’000
Less: Expenses:
K’000 K’000
Less: Expenses:
iv)
Cost Dep. Value
Motor vehicles 48 000 4 800 43 200

Cost Dep. Value
Motor vehicles 48 000 9 600 38 400
______________________________________________________________________________
ACTIVITY 5
A company's financial year end is 31st December. Details regarding the acquisition of machines
are shown below:
Date Machine no. Cost

10th January 2001 S4321 K32 000 000
1st July 2002 G9008 & G9009 K12 000 000 each
15th October 2002 X1100 K16 000 000
1st April 2004 X2340 K18 000 000
The company charges depreciaiton at 10% per annum on the net book value.
Show:
a) The machinery account for the years ended 31st December 2001, 2002, 2003 and 2004.
b) The machinery provision for depreciation account for the years ended 31st December
2001, 2002, 2003 and 2004.
c) Extracts from the profit and loss account for the years ended 31st December 2001, 2002,
2003 and 2004.
d) Extracts from the balance sheet for the years ended 31st December 2001, 2002, 2003 and
2004.
______________________________________________________________________________
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5. DISPOSAL OF FIXED ASSETS

Disposal involves the selling of fixed assets that are no longer useful. The accounting process
for the disposal of fixed assets is as follows:
i) When the asset is sold, the first step is to remove the original cost of that asset from our
accounting records. The double entry being:
Dr - Disposal of fixed assets account
Cr - Fixed asset account
ii) The next step is to remove all the depreciation that has been charged on that asset from our
accounting records. The double entry being:
Dr - Provision for depreciation account
Cr - Disposal of fixed asset account
iii) When the proceeds from the disposal are received, the double entry is:
Dr - Cash book
If the asset is sold on credit, then the double entry is:
Dr - Debtor account
iv) The balance in the disposal account, which represents a profit or loss on disposal will be
transferred to the profit and loss account at the end of the year as follows:
a) If there is a profit, the double entry is:
Dr - Disposal of fixed asset account
Cr - Profit and loss account
b) If there is a loss, the double entry is:
Example:
Zulu and co. Ltd has been trading for many years, making up accounts to 31st December. On
1st July 2002, the company bought a motor van at a cost of K24 000 000. The van has an
estimated useful life of five years, with a residual value of K3 000 000.
On 1st April 2003, the company bought another van for K36 000 000. This van is also
estimated to have a useful life of five years after which its residual value is estimated at
K4 000 000.
Zulu and co. Ltd sold the first van on 31st March 2004 for K18 000 000, the amount being
paid into the bank account.
The company provides for depreciation on all its fixed assets using the straight line method.

a) The motor van account for the years ended 31st December 2002, 2003 and 2004.
b) The motor van provision for depreciation account for the years ended 31st December
2002, 2003 and 2004.
c) Extracts from the profit and loss account for the year ended 31st December 2004.
d) Extracts from the balance sheet for the years ended 31st December 2002, 2003 and 2004.
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Solution:
a)
Motor van account
________________________________________________________________________
2002 K’000 K’000
July 1 Bank 24 000
24 000 24 000
2003
April 1 Bank 36 000
60 000 60 000
2004
March 31 Disposal 24 000
60 000 60 000
2005
________________________________________________________________________
b)
Motor van provision for depreciation account
________________________________________________________________________
2002 K’000 K’000
2 100 2 100
2003
11 100 11 100
2005
March 31 Disposal 7 350
18 550 18 550
2005
_______________________________________________________________________
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c)
Motor van disposal account
________________________________________________________________________
2004 K’000 K’000
March 31 Motor van 24 000
March 31 Provision for depreciation 7 350
March 31 Bank 18 000
Dec. 31 Profit and loss 1 350
25 350 25 350
_______________________________________________________________________
d)
K’000 K’000
Add: Gains:
Profit on disposal of van 1 350
Less: Expenses:
Depreciation: - motor van 7 450
e)
Cost Dep. Value
Motor van 24 000 2 100 21 900

Cost Dep. Value
Motor van 60 000 11 100 48 900

Cost Dep. Value
Motor van 36 000 11 200 24 800
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6. TRADING IN OF FIXED ASSETS

Trading in of fixed assets is a process where by the old fixed asset is disposed off by
exchanging it with another fixed asset. The agreed exchange value is known as the trade in
allowance.
The accounting process for such disposals are the same as for normal disposals except for a
few adjustments as illustrated below:
Example:
A Company acquired two machines in the year 2003. Details of these are as follows:
1st February Machine 5489 K24 000 000

20th October Machine 9211 K28 000 000
On 10th May 2004, machine 5489 was trade in and replaced by machine 3400. The cost of
machine 3400 was K20 000 000. The trade in allowance for the machines was K16 000 000.
The difference between the trade in allowance and the cost was paid by cheque.
Depreciation is charged at 20% per annum on cost and a full year's charged is made in year of
acquisition and none in the year of disposal.
You are required to show for the year 2004:

a) Machinery account
b) Machinery provision for depreciation account
c) Machinery disposal account
Solution:
a)
Machinery account
________________________________________________________________________
2004 K’000 K’000
May 10 Disposal 24 000
May 10 Bank 4 000
May 10 Trade in allowance (disposal) 16 000
72 000 72 000
2005
________________________________________________________________________
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b)
Machinery provision for depreciation account
________________________________________________________________________
2004 K’000 K’000
May 10 Disposal 4 800
20 000 20 000
2005
_______________________________________________________________________
c)
Machinery disposal account
________________________________________________________________________
2004 K’000 K’000
May 10 Machinery 24 000
May 10 Provision for depreciation 4 800
May 10 Trade in allowance 16 000
Dec. 31 Profit and loss 3 200
24 000 24 000
_______________________________________________________________________
______________________________________________________________________________
ACTIVITY 6
A business' financial year end is 30th June. On 1st July 2000, the business acquired two motor
vehicles: AAX 1534 at K24 000 000 and AAP 4250 at K20 000 000. On 1st November 2001
another motor vehicle registration number AAT 9415 was bought for K16 000 000.
During the year to 30th June 2003, the following transactions took place:
i) On 20th September 2002, motor vehicle AAT 1044 was acquired at a cost of K28 000 000.
ii) On 1st October 2002, motor vehicle AAX 1534 was sold for K19 000 000.
During the year ending 30th June 2004, on 1st November 2003, motor vehicle AAP 4250 was
disposed off for K15 000 000.
The business' policy in depreciation is to charge a full year's charge in the year of purchase and
none in the year of disposal at 10% per annum on net book value.
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You are to show:

a) The motor vehicles account for the years ending 30th June 2001, 2002, 2003 and 2004.
b) The provision for depreciation on motor vehicles account for the years ended 30th June 2001,
2002, 2003 and 2004.
c) The motor vehicles disposal account for the year ended 30th June 2003 and 2004.
______________________________________________________________________________
____________________________________________________________________________
ACTIVITY 7
Mighty Plc owned the following motor vehicles at 1st April 2003:
Motor vehicle Date acquired Cost Estimated residual value Estimated life
AAT 101 1st October 2000 K17 000 000 K5 000 000 5
DGH 202 1st April 2001 K24 000 000 K4 000 000 8
Mighty Plc's policy is to provide at the end of each financial year depreciation using the straight
line method applied on a month by month basis on all motor vehicles used during the year.
During the financial year ended 31st March 2004, the following occurred:
i) 30th June 2003, AAT 101 was traded in and replaced by KGC 303. The trade in allowance
was K10 000 000. KGC 303 cost K30 000 000 and the balance due (after deducting the trade
in allowance) was paid partly in cash and partly by a loan of K12 000 000 from Pickson
finance. KGC 303 is expected to have a residual value of K8 000 000 after an estimated life
of 5 years.
ii) The estimated economic life of DJH was reduced from 6 years to 4 years with no change in
the estimated residual value.
You are required to reconstruct for the year ended 31st March 2004:
a) the motor vehicle account
b) the provision for depreciation account
c) the disposal account.
______________________________________________________________________________
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7. GOODS TAKEN FOR OWN USE

In a situation where the proprietor of a business takes goods for his own consumption or use
from the business, the double entry required to record this is:
Dr – Drawings account
Cr – Purchases account
Where no accounting entries had been made during the trading period, the adjustments
required to the final accounts are as follows:
a) Decrease the purchases figure in the trading account.
b) Increase the drawings figure in the balance sheet by the value of the goods taken.
8. UNUSED STOCKS OF CONSUMABLE ITEMS

Where large quantities of stocks of consumable items such as stationery, fuels etc remain
unused at the end of the financial year, an adjustment will be required to reduce the cost of the
consumable items that is charged in the profit and loss account and for these stocks remaining
to be included in the balance sheet.
Example:
X Ltd spent K10 000 000 on stationery during the year to 31st December 2004. At the end of
the year, stocks of stationery worth K4 000 000 were in stock
Show how the adjustments will be made to final accounts of X Ltd.
Solution:
K’000 K’000 K’000
Less: Expenses:
Stationery 10 000
Less: unused stocks 4 000
6 000

Current assets: K’000 K’000 K’000
Stocks of stationery 4 000
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9. FINAL ACCOUNTS WITH ADJUSTMENTS

Having looked at the individual adjustments, we now look at final accounts with these
adjustments.
Example:
The following trial balance was extracted from the books of B Zulu, a trader, at 31st March
2004.
Dr Cr
K’000 K’000
Sales 81 742
Opening stock 1st April 2003 9 274
Purchases 62 101
Rent and rates 880
Light and heating 246
Bad debts 247
Provision for bad debts (at 31st March 2003) 326
Insurance 172
Motor expenses 861
Rent received 750
Cash at bank 1 582
Freehold premises 15 000
Provision for depreciation - buildings (at 31st March 2003) 5 000
Motor Van at cost 8 000
Provision for depreciation - motor van (at 31st March 2003) 3 600
Proceeds on sale of motor van 250
Debtors 7 689
Creditors 5 462
Drawings 2 148
Capital 20 271
117 401 117 401
The following matters have to be taken into account:

1. Stock at 31st March 2004 was valued as follows: Cost K9 884 000; NRV K9 988 000.
2. Rates paid in advance on 31st March 2004 amounted to K40 000.
3. Rent receivable due at 31st March 2004, K250 000.
4. Lighting and heating due on 31st March 2004, K85 000.
5. Provisions for doubtful debts to be increased to K388 000.
6. Included in the amount for insurance, K172 000, is an item for K82 000 for motor
insurance and the amount should bee transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.
8. Depreciation - buildings K500 000.
9. On 1st April 2003, a van which had been purchased for K1 000 000 on 1st April 200
was sold for K250 000. The only record of the matter is the credit of K250 000 to
proceeds of sales of van account.
10. During the year, Zulu got goods worth K601 000 from his business purchases. No
record of this has been made in the books of account.
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Required:
Prepare the trading and profit and loss account for the year ended 31st March 2004 and the
balance sheet as at that date.
Solution:
Zulu
Trading and profit and loss account for the year ended 31st March 2004
K’000 K’000 K’000
Sales 81 742
Opening stock 9 274
Purchases 62 101
Less: drawings in kind 601
61 500
70 774
Less: closing stock 9 884
Cost of sales 60 890
Gross profit 20 852
Add Gains:
Rent received 750
Add: rent accrued 250
1 000
Total income 21 852
Less expenses:
Rent and rates 880
Less: rates prepaid 40
840
Lighting and heating 246
Add: accrual 85
331

Bad debts 247
Insurance 172
Less: motor insurance transfer 82
90
Motor expenses 861
Add: motor insurance transfer 82
943
Provision for bad debts (388 - 326) 62
Loss on disposal of van (w ) 150
Depreciation: - motor van 1 400
- buildings 500
Total expenses 13 764
Net profit 8 088
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Zulu
Balance sheet as at 31st March 2004
Cost Dep. Value
Freehold premises 15 000 5 500 15 000
Motor van 7 000 4 400 2 600
22 000 9 900 12 100
Current assets:
Stock 9 884
Debtors 7 689
Less: provision for bad debts 388
7 301
Cash at bank 1 582
Rent receivable accrued 250
Rent and rates prepaid 40
19 057
Less: current liabilities:
Creditors 5 462
Lighting and heating accrued 85
5 547
Working capital 13 510
Net assets 25 610
Financed by:
Capital 20 271
Add: net profit 8 088
28 359
Less: drawings (2 148 + 601) 2 749
25 610
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______________________________________________________________________________
REVIEW QUESTION
The trial balance of Mubiyana at 31st May 2005 is as follows:

Dr Cr
K’000 K’000
Capital 15 258
Drawings 5 970
Purchases 73 010
Returns inwards 1 076
Returns outwards 3 720
Credit sales 96 520
Cash sales 30 296
Discounts 1 870 965
Stock 7 650
Customs duty 11 760
Carriage inwards 2 930
Carriage outwards 1 762
Sales man's commission 711
Sales man's salary 3 970
Office salaries 7 207
Bank charges 980
Loan interest 450
Light and heat 2 653
Sundry expenses 2 100
Rent and rates 7 315
Printing and postage 2 103
Advertising 1 044
Bad debts 1 791
Doubtful debts provision (at 31st May 2004) 437
Debtors 10 760
Creditors 7 411
Cash at bank 2 634
Cash in hand 75
Motor expenses 986
New delivery van (less trade-in) 2 200
Furniture and equipment:
Cost 8 000
Depreciation at 1st June 2004 2 400
Old delivery van:
Cost 2 000
Depreciation at 1st June 2004 1 000
Loan account at 9% (repayable in five years) 5 000
163 007 163 007
You ascertain the following information:
1. Closing stock has been valued for accounts purposes at K8 490 000.
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2. The motor van was sold on 31st August 2004 and traded in against the cost of a new
van. The trade-in price was K1 million and the cost of the new van was K3 200 000.
3. Depreciation on the straight-line basis is to be provide at the following annual rates:
Motor vans 25%

Furniture and equipment 10%
4. 5% of the closing debtors' total is estimated to be doubtful.
5. An accrual of K372 000 is required in respect of light and heat.
6. A quarter's rent to 30th June 2005 amounting to K900 000 was paid on 2nd April 2005.
Rates for the year to 31st March 2006 amounting to K1 680 000 were paid on 16th April
2005.

Prepare the trading and profit and loss account for the year ended 31st May 2005 and the
balance sheet as at that date.
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175

Financial Accounting Module 2

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lOMoARcPSD|5050031

Financial Accounting - module 2

Financial accounting (University of Zambia)

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UNIT SIX: FINAL ACCOUNTS

WHAT ARE FINAL ACCOUNTS?

EXPENSES IN THE TRADING ACCOUNT

a) Expenses in buying goods:

b) Expenses in putting goods into saleable condition:

2. PROFIT AND LOSS ACCOUNT

Stock at 31st October 2004 was valued at K2 548 000.

Balance sheet layout:

Fixed Assets: Land and building

Current Assets: Stock

Stock at 30th September 2004 was K2 946 000.

Enter the following transactions in F. Nguni’s ledger and cash book

UNIT 7: ACCOUNTING CONCEPTS AND CONVENTIONS

1. ACCOUNTING CONCEPTS AND CONVENTIONS

(a) Going Concern Concept

(b) Matching or Accruals Concept

(c) Prudence Concept

(d) Consistency Concept

Consistency concept states that a business should be consistent in its accounting

(e) Duality Concept

(f) Substance over form Convention

(g) Accounting Period Convention

(h) Historical Cost Convention

(i) Realisation Concept

(J) Money Measurements Concept

(k) Materiality Convention

(L) Stable Monetary Unit

(M) Business entity concept

(N) Objectivity Convention

(O) The separate valuation principle

It states that in determining the amount to be attributed to an asset or liability in the

2. CAPITAL AND REVENUE EXPENDITURE

i) expenditure on current assets (stock)

An overstatement of revenue expenditure results in an understatement of profits and fixed assets,

a) Purchase of an extra motor van.

UNIT EIGHT: ERRORS AND THE TRIAL BALANCE

1. ERRORS NOT DISCLOSED BY A TRIAL BALANCE

Do the journal entry to correct the error.

Do the journal entry to correct the error.

Do the journal entry to correct the error.

4. Error of original entry

Do the journal entry to correct the error.

5. Error of complete reversal of entries

Do the journal entry to correct the error.

Do the journal entry to correct the error.

Show the journal entries required to correct the following errors:

2. ERRORS DISCLOSED BY THE TRIAL BALANCE

2. Errors of single entry

4. Errors in the trial balance

STEPS TO FOLLOW WHEN THE TRIAL BALANCE FAILS TO BALANCE

i) Determine the difference between the two sides.

CLEARING A SUSPENSE ACCOUNT

In January 2005, the following errors committed in 2004 were found:

You are required to:

(i) Show the journal entries to correct the errors.

b) Mama Betty 600

ii) Suspense account

Upon investigations, the following errors were discovered:

(i) The sales returns journal was overcast by K2 500 000.

(a) Journalise the correction of the above errors