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HATEGEKIMANA Uzziel
Module Code:
ACC1232
CONTENTS
1. Control Accounts
2. Manufacturing accounts
4. Partnerships Accounts
Mary Account
May 1 Bal b/d 1,500,000 May 10 sales returns 200,000
28 sales 400,000 11 bank 900,000
14 discounts allowed 20,000
31 Bal c/d 780,000
1,900,000 1,900,000
June 1 Bal b/d 780,000
White Account
May 1 Bal b/d 750,000 May 20 sales returns 110,000
15 sales 600,000 31 Bal c/d 1,240,000
1,350,000 1,350,000
June 1 Bal b/d 1,240,000
Young Account
May 1 Bal b/d 450,000 May 28 bad debts 450,000
450,000 450,000
Sales Ledger Control account
A control account in this case, a Sales Ledger Control account
would consist only of the totals of each of the items in the sales
ledger:
May 1 balance b/d : 850,000+1,500,000+750,000+450,000=
3,550,000
Sales in May : 900,000+350,000+400,000+600,000= 2,250,000
Cheques received in May : 820,000+900,000 = 1,720,000
Discount allowed in May : 30,000+20,000 = 50,000
Sales returns in May : 200,000+110,000 = 310,000
Bad debts written off in may = 450,000
XX XX
Bad debts: there may also be reason to write off a debt as bad
where a business finds it impossible to collect the debt. The sales
ledger control account would be also credited.
Example 1:
Purchases ledger
Dr Hoang account Cr
Rwf.
15 July purchases (ii) 880,000
Purchases ledger
Dr Hoang account Cr
Rwf. Rwf.
30 July set off : sales ledger (iii) 600,000 15 July 880,000
31 July balance c/d (iv) 280,000
880,000 880,000
1 august balance b/d (iv) 280,000
From the following prepare a sales ledger and purchases ledger control
accounts for the business of genuine spares.
FRw
Opening debtors 44,000
Opening creditors 24,900
Sales 143,766
Purchases 87,982
Sales returns 2,890
Purchases returns 742
Cheques in 140,809
Cheques out 80,234
Bad debts 2,890
Contras 874
Discounts received 540
Discounts allowed 1,034
Customers cheque dishonored 500
Bill of exchange accepted by customer 700
Sales ledger control account
FRw. FRw.
Balance b/f 44,000 Returns inwards 2,890
Credit sales 143,766 Bank (Cheques in) 140,809
Bank (dishonored cheque) 500 Bad debts 2,890
Contras 874
Discounts allowed 1,034
Bill of exchange accepted 700
Balance c/f 39,069
188,266 188,266
Direct costs-
These are easily identified to the product being
manufactured. They include
Direct material- for example raw material
Direct labour- for example wages to technicians,
salaries to technicians
Direct expenses- for example royalty payments, special
hire of equipment
Prime cost –this is a total of all the direct costs. (direct
labour, direct expenses and direct material).
Indirect costs
These are not easily identified to the product being
manufactured. They include:
Indirect material- for example cleaning material
Indirect labour- for example wages and salaries of
supervisors and factory manager
Indirect expenses- for example factory property,
plant and equipment depreciation and there
maintenance, rent for the factory building, heat,
electricity and power for the factory
Factory overheads- these are the indirect costs as listed
above. They cannot be easily traceable to the product
but are part of cost of manufacture.
Overheads may need to be apportioned between the
factory and other function of the enterprise like selling
and administration.
Sales XX
Returns in (XX)
Net Sales XX
Finished goods
Opening stock XX
Production cost/transfer price XX
Closing stock (XX) (XX)
Gross profit XX
Manufacturing profit XX
Other income XX
Decrease in Allowance for UP XX
Expenses
Other expenses XX
Increase in Allowance for UP XX (XX)
Net profit XX
Example 1 : TOM manufacturers had the following balances as at 31st December 2009
Stocks as at 1st Jan 2009 Rwf. Rwf.
Raw materials 7,000
Work in progress 5,000
Finished goods (Cost) 5,520
Purchases of raw materials 38,000
Direct labour 28,000
Factory overheads
Electricity and power 16,000
Rent and rates 9,000
Administrative expenses
Rent and rates 19,000
Lighting 6,000
Stationery and postage 2,000
Staff salaries 19,380
Sales 192,000
Plant and machinery Cost & Acc. deprec. 30,000 12,000
Motor vehicles (for sales deliveries) Cost & Acc. deprec. 16,000 4,000
Debtors & Creditors 28,000 5,500
Drawings 11,500
Bank 16,600
Capital 48,000
Motor vehicles expenses 4,500
Additional information
•Raw materials Rwf.9,000 ; Work in progress Rwf.8,000; Finished goods Rwf.8,280
•Depreciation is provided at 10% and 25% of cost for plant and machinery and motor vehicles respectively.
•accrued direct labour amounted to Rwf.3,000 and administrative rent and rates prepaid amounted to Rwf.2,000
Required: Manufacturing account & income statement and balance sheet on 31st December 2009 .
Solution
TOM manufacturers Manufacturing account for the year ended 31st Dec 2009
Raw materials Rwf. Rwf.
Opening stock 7,000
Purchases 38,000
Opening stock:
At cost= FRw. 4,000,000
At transfer price= 120% x 4,000,000 = 4,800,000 ; (4,000,000 + 20% x4,000,000)
When accounts are kept whereby double entry is not followed or followed
partly then this is single entry. There are different degrees of incompleteness.
Statement of profit or loss for the year ended 31st December 2018
FRw
Closing capital balance (as at 31st December) 14,760
Drawings 4,500
Additional capital (3,000)
Opening capital (as at 1st January) (10,650)
Profit for the year 5,610
Exercise 2
Bill Biruta took out a statement of his financial position on 1 April 2018 which showed
the following: in Frw
Sundry accounts payable 850,500
Sundry accounts receivable 720,000
Inventory in trade 135,000
Cash and bank 45,000
Furniture and fittings 265,500
After one year, during which Bill Biruta introduced additional capital of FRw50,000 and
withdrew FRw22,500 for his own requirements, his position was:
Sundry accounts payable 683,100
Sundry accounts receivable 540,000
Inventory in trade 84,000
Cash and bank 135,000
Furniture and fittings 239,000
Required:
(a) statements of affairs to show Bill Biruta's capital position as at 1 April 2018 and
his new capital position one year later.
(b) a statement showing the profit or loss made by Bill Biruta for the year.
2. Use of control accounts
-The Total Trade receivables account is used to calculate total credit & cash sales and
- The Total Trade payables account is used to calculate total credit & cash purchases.
Example 1
Antoine Traders had the following figures for the Years ended:
31st December 2017 31st December 2018
FRw FRw
Trade receivables 34,500 53,600
For the year ended 31st December 2018:
Cash sales :FRw1,500 ; Cash receipts from debtors: FRw1060
Discounts allowed: FRw45 ; Bad debts: FRw56
1) If the margin is known, the mark – up can be found out: Take the same numerator of
the margin; the denominator is the difference of the denominator and the numerator
of the Margin e.g. If the Margin is 20% (1/5) then the Mark-up is 1/4
M x 100
Mu%= 100 - M
2) If the mark – up is known, the margin can be found out: Take the same numerator to
be the numerator of the margin; the denominator is the total of the mark- up’s
numerator and denominator. e.g. if Mark – up is 25% ( ¼) then the Margin is 1/5
(20%)
Mux100
M% =
100 Mu
Use of ratios
Items Frw
Stock on 1/10/2014 970,000
Stock on 30/09/2015 1,480,000
Purchases 2,750,000
Drawings ( Goods ) 850,000
Drawings ( cash ) 980,000
Gross Profit Margin 25%
Sales = 1,853,333frw
Example
Tom provides the following information for the year ended 31st December 2009:
Rwf
Margin = 25%
Sales 20,000
Inventory at 1st January 2009 4,500
Inventory at 31st December 2009 4,800
Prepare a Trading Account to show the calculation of the purchases for the year.
Solution:
Tom’s Income statement for the year ended 31st Dec., 2009
Rwf Rwf
Sales 20,000
Less Cost of Goods sold:
Inventory at 1st Jan., 2009 4,500
Add Purchases * 15,300
Less Inventory at 31st Dec. 2009 4,800
Cost of sales (15,000)
Gross Profit 5,000
Workings:
Gross profit x 100
** Margin %=
Sales
25 = Gross profit x 100
20,000
25 x 20,000 = Gross Profit
100
All of the business takings have been paid into the bank with the exception of
Rwf 174,000. Out of this, Jane has paid wages of Rwf 112,600, drawings
Rwf 12,000 and purchases of goods Rwf 49,400.
The following additional information is available for Bank Account
Rwf Rwf
Balance 1.1.2010 41,000 Payments to creditors for goods 673,600
Cash banked 911,900 Rent 39,500
Balance 31.12.2010 63,000 Insurance 14,700
Sundry expenses 6,100
Drawings 282,000
1,015,900 1,015,900
Required: Drawing up financial statements for the year ended 31/12/2010.
Show all of your workings
Answer 1
Statement of affairs as at 1/1/2010
Non-current asset
Fixtures 18,000
Current assets
Inventory 108,000
Accounts receivable 212,000
Insurance prepaid 4,200
Bank 41,000 365,200
Total assets 383,200
Current liabilities
Rent owing 3,900
Accounts payable 127,000 (130,900)
Opening Capital 252,300
Cash a/c
Sales – cash 1,085,900 wages 112,600
drawings 12,000
Purchases 49,400
Cash sales banked 911,900
Total 1,085,900 1,085,900
Sales ledger control a/c
1,283,900 1,283,900
Sales 1,071,900
Less Cost of sales
Inventory at 1.1.2010 108,000
Purchases 737,000
Inventory at 31.12.2010 (122,000) 723,000
Gross profit 348,900
Less expenses
Wages 112,600
Rent (39,500-3,900) 35,600
Insurance(14,700 + 4,200 – 4400) 14,500
They are not governed by any statutory regulations governing the keeping
of proper books of account nor the form of financial statements that are to
be prepared.
Most of the time the records kept are of cash basis. So most of the time the
financial statements are prepared in either:
Other incomes: may be through donations from well wishers and even
sometimes from small trading activity or investing activity. Expenses
will be similar to that of trading concerns other than the slight
difference in nature.
VI. Use all the information from previous steps to prepare the financial
statements
•Format of the Financial statements
Name of Organization
Income and Expenditure Account for the year ended date
FRw FRw
Incomes
Subscriptions XX
Profit from trading activities XX
Income from investments XX
Donations XX
Income from other activities like dance or festival XX
XX
Expenditure
Depreciation XX
Salaries and wages XX
Expenses on other activities [prizes] XX
Loss from trading activities XX
All other expenses XX
(XX)
SURPLUS/(DEFICIT) XX
Balance sheet as at date
FRw FRw FRw
Non-current assets Cost Dep’n Net
Land and buildings XX (XX) XX
Furniture and Equipment XX (XX) XX
Motor Vehicles XX (XX) XX
Investments XX - XX
XX
Current Assets
Inventory for the bar XX
Debtors (or accounts receivable) XX
Prepaid expense XX
Accrued subscriptions XX
Bank XX
Cash XX
XX
XX
Accumulated fund XX
Surplus/(deficit) XX XX
XX
Other funds
Life membership XX
Non-current liabilities :
5 Year loan XX
Current liabilities
Creditors (bar supplies) XX
Accrued expense XX
Notes To The Above Format:
(i)Subscriptions:
These are the amounts received by the club from the members to renew their
membership. It is often paid on an annual basis.
It is an income for the club and therefore reported in the income and expenditure
account.
Depending on the policy of a club, any subscriptions due but not received are shown
as accrued income (debtors for subscriptions) in the balance sheet.
Any amounts prepaid are shown as prepaid (creditors for subscriptions).
Some clubs will not report subscriptions as income until it is received in form of cash.
Any incomes relating to these funds will be credited directly to the funds and
any expenses will be taken off from these funds e.g. building fund, education
fund.
You are required to prepare an income and expenditure account for the club for the year ended
30 June 2009 and a balance sheet at that date.
Workings
Subscription account
FRw‘000’ FRw‘000’
Accrued b/f 180 Receipts and payments 22,410
Wages account
FRw‘000’ FRw‘000’
Receipts and payments 15300 Income and expenditure 15408
Accrued c/f 108
15408
15048
Workings
Furniture FRw.‘000’
Acquired during the year 3,240
Balance c/f 3,105
Depreciation 135
Notes:
In this question the accumulated fund was given
Receipts and payments account had already been prepared
Depreciation was calculated assuming there was no other balance at the start of the year because of
lack of that information
Take care of the adjustments of income and expenses as shown in the workings
Solution: Greenlodge Club
Income and Expenditure Account for the year ended 30 June 2009
FRw‘000’ FRw‘000’
Incomes
Subscriptions (w1) 22,383
Games fees (w2) 243
Drink machine receipts 936
23,562
Expenditure
Wages (w3) 15,408
Printing and postage (w4) 1,935
Secretary’s salary 2,700
Rent 900
Loss on dance 198
Depreciation (w5) 135
21,276
Surplus 2,286
Balance sheet as at 30 June 2009
FRw‘000’ FRw‘000’
Non-current assets Net
Furniture (w5) 3,105
Current Assets
Stationery stock (w4) 180
Accrued subscription (1) 225
Cash 5,283
5,688
8,793
Accumulated fund 1,800
Surplus 2,286
4,086
Non-current liabilities
Bank loan 4,500
Current liabilities
Prepaid subscriptions (w1) 72
Prepaid games fees (w2) 27
Accrued wages (w3) 108
207
8,793
Notes:
In this question the accumulated fund was given
Receipts and payments account had already been prepared
Depreciation was calculated assuming there was no other balance at the start of the year becaus
of that information
Take care of the adjustments of income and expenses as shown in the workings
Workings
Furniture FRw.‘000’
Acquired during the year 3,240
Balance c/f 3,105
Depreciation 135
Exercise (Q21)
The assets and liabilities of the Safari Social Club as at 1 November 2015 were:
Cash held at bank Rwf380,000; furniture and equipment Rwf420,000; bar stock Rwf120,000; rent
owing on premises Rwf30,000. The following is a summary of receipts and payments for the club for
the year ended 31 October 2016:
Receipts Rwf Payments Rwf
Balance 1 November 2015 380,000 Bar purchases 1,485,000
Subscriptions 1,420,000 Annual dance expenses 580,000
Annual dance 750,000 Rent of premises 840,000
Bar sales 2,040,000 Secretary's expenses 225,000
Purchase of furniture 200,000
Wages of caretaker 580,000
Balance 31 October 2016 680,000
4,590,000 4,590,000
The following information was also available:
- Bar stock at 31 October 2016 was FRw150,000
- Rent for premises of FRw110,000 was owing at 31 October 2016
- Depreciation on furniture is 10% of value of furniture at the end of the year
You are required to:
(a) Calculate the accumulated fund at 1 November 2015
(b) Prepare an income and expenditure account for the year ended 31 October 2016,
showing clearly the profit/loss on the bar and the dance
(c) Prepare a balance sheet for the club as at 31 October 2016
Q23: CBESA a students welfare organization at CBE provided for you the following balances and ‘receipts
and payments’ for the year ended 31 May 2017. CBESA operates a shop for the students at the campus.
LPs are not liable for the debts. They have the following characteristics:
Their liability for the debts of the partnership is limited to the capital
they have put in. they can lose that capital, but they cannot be asked
for any more money to pay the debts.
They are not allowed to take part in the management of the
partnership business.
All the partners cannot be limited partners so that there must be at
least one partner with unlimited liability.
E. PARTNERSHIP DEED
A partnership deed is an agreement written showing the terms of the
partnership. This is to be point of reference in case there is there is a
dispute between the partners.
Contents of partnership agreement include:
1) Name(s) and address(s) of the partnership and the partners
The long-term interest is the capital contributed by each partner and the
balance is expected to remain fixed. It will only change when the partners
agree or in case of any changes in the partnership like admission or
retirement of a partner.
Each partner’s short term and long-term interest must be shown separately
in his/her account.
CAPITAL ACCOUNT
A B C A B C
FRw. FRw. FRw. FRw. FRw. FRw.
Balance b/d XX XX XX
Balance c/d XX XX XX Cashbook (Add XX XX XX
capital)
XX XX XX XX XX XX
Balance b/d XX XX XX
CURRENT ACCOUNT
A B C A B C
FRw. FRw. FRw. FRw. FRw. FRw.
Balance b/d XX Balance b/d XX XX
Interest on XX XX XX Interest on capital XX XX XX
drawings
Drawings XX XX XX Salaries - XX XX
Share of profits XX XX XX
Loan interest - XX -
Balance c/d XX XX - Balance c/d - - XX
XX XX XX XX XX XX
Balance b/d - - XX Balance b/d XX XX -
F. ACCOUNTING FOR PARTNERSHIPS(Con’t)
Note that the current account is just like the capital account. It is maintained
separately to indicate the short-term interest.
It is possible to have a current account that has a debit balance like for
partner B at the start of period and partner C at the end of the period.
INTEREST ON DRAWINGS
In the best interest of the firm the cash is withdrawn from the firm by the
partners in accordance with the two basic principles:
As little as possible
As late as possible
To discourage the partners from taking out cash unnecessarily the concept
can be used of charging the partners interest on each withdrawal.
The amount charged to them helps to increase the profits divisible
between the partners.
SALARIES TO PARTNERS
One partner may have more responsibility or tasks than others. As a reward
for this, rather than change profit and loss sharing ratio, he may have a
salary which is deducted before sharing the balance of profits.
When the entries in the current account are passed through the capital account
then we have a fluctuating capital account. This is as follows:
The income statement is completely the same as for a sole trader other
than the additional part of appropriation account as shown previously.
The Statement of financial position is also the same, as that for a sole
trader but the interest of each partner in the business should be shown
separately.
That is the capital and current accounts balances for each partner are
shown separately. Any loan given by a partner to the firm is also shown
separately in the non- current liability section therefore, the format will
be as follows.
Statement of financial position as at date
Capital accounts
A XX
B XX
C XX
XX
Current accounts
A XX
B XX
C (XX)
XX
TOTAL EQUITY XX
Non-current liabilities
Loan from B XX
Current liabilities
Payables XX
Accrued expense XX
Prepaid income XX
Bank overdraft XX
TOTAL LIABILITIES XX
TOTAL EQUITY AND LIABILITIES XX
Example
A and B own a grocery shop. Their first financial year ended on 31 December 2017. The
following balances were taken from the books on that date:
Capital:
A- FRw.60,000;
B - FRw.48,000.
Partnership salaries:
A - FRw.9,000;
B - FRw.6,000.
Drawings:
A - FRw.12,000;
B - FRw.13,400.
The firm’s net profit for the year ended 31 December 2017 was FRw.32,840.
Interest on capital is to be allowed at 10% per year. Profits and losses are to be shared
equally.
From the information above prepare the firm’s appropriation account and the partners’
current accounts.
SOLUTION
A& B partnship Appropriation account for the year ended 31 December 2017
FRw. FRw.
Net profit/(loss) 32,840
Less
Interest on capital
A 6,000
B 4,800
(10,800)
Salaries
B 9,000
C 6,000
(15,000)
Residual profit
7,040
A (1/2) x 7,040 3,520
B (1/2) x 7,040 3,520
7,040
CURRENT ACCOUNTS
A B A B
FRw. FRw. FRw. FRw.
Drawings 12,860 13,400Interest on capital 6,000 4,800
Bal c/d 5,660 920Salaries 9,000 6,000
Profit share 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920
Example 2
Draw up an appropriation account for the year ended 31 December 2017 and
Statement of financial position extracts at the date, from the following:
(i) Net profits FRw.30,350
(ii) Interest to be charged on capitals: W FRw.2,000; P FRw.1,500;
H FRw.900
(iii) Interest to be charged on drawings; W FRw.240; P FRw.180;
H FRw.130
(iv) Salaries to be credited: P FRw.2,000; H FRw.3,500.
(v) Profits to be shared: W 50%; P 30%; H20%.
(vi) Current accounts: balances b/f W FRw.1,860; P FRw.946; H FRw.717
(vii) Capital accounts: balances b/f W FRw.40,000; P FRw.30,000;
H FRw.18,000
(viii) Drawings: W FRw.9,200; P FRw.7,100; H FRw.6,900.
Appropriation account for the year ended 31 December 2017
FRw. FRw.
30,350
Net profit/(loss)
Add:
Interest on drawings
W 240
P 180
H 130 550
Less:
Interest on capital
W
2,000
P 1,500
H 900
(4,400)
Salaries
P 2,000
H 3,500
(5,500)
Residual profit 21,000
W (50% x 21,000) 10,500
P (30% x 21,000) 6,300
H (20% x 21,000) 4,200
21,000
Current Account
W P H W P H
FRw. FRw. FRw. FRw. FRw. FRw.
Interest on drawings 240 180 130Balance b/d 1,860 946 717
FRw FRw
Capital accounts
W 40,000
P 30,000
H 18,000 88,000
Current accounts
W 4,920
P 3,466
H 2,287
10,673
98,673
PARTNERSHIP ACCOUNTS
These include:
1. Admission of a partner;
2. Retirement/Death of a partner;
3. Amalgamation of sole traders;
4. Dissolution;
5. Conversion into a limited liability company; and
6. Changes in agreement among existing partners.
Admission of a partner
A new partner(s) can be introduced after all partners are in agreement to this
effect. The old partnership ceases to exist and a new partnership starts.
The accounts of the old partnership can be closed then a new set of accounts
prepared for the new partnership. This is really followed. So admission of a
partner merely entails addition of a capital column for the new partner and the
following entries thereafter:
Dr Asset accounts
Cr Capital account (with assets received from the joining partner which can be
cash) However, both admission and retirement/death bring about the
following additional issues:
1. Goodwill;
2. Revaluations;
3. Changes taking place partway through the year.
Goodwill
Goodwill is the benefit arising from connection and reputation in
respect of continuing business.
It arises due to the good relationship a business has with the customers.
It also arises due to the good staff.
Dr Goodwill account
Cr Capital accounts (in old profit sharing ratio)
Dr Liabilities accounts X
Cr Revaluation account X
Decrease of the liabilities amounts that have been revalued
Dr Assets account X
Cr Revaluation accounts X
Increase in assets amounts that have been revalued
Dr Revaluation accounts X
Cr Liabilities account X
Increase in liabilities amounts that have been revalued
CURRENT LIABILITIES
Payables 590
W2 Inventory account_____________________
W5 Capital accounts
B W G B W G
FRw FRw FRw FRw
FRw FR ‘000’ ‘000’ ‘000’
‘000’ ‘000’ ‘000’
Cash - - 500
Bal c/d 2,066 1,386 880 Inventory - - 400
Amounts from the current account are transferred to the capital account. Any
balance in the capital account of the retiring/dead partner is paid to the
retiring partner or the estate of the dead partner.
Such balance may also remain in the partnership if there is no enough cash or
assets to pay out. Such amounts are taken, as loan and will earn interest.
Goodwill is agreed at a valuation of FRw.30,000. Kariz and Limo are to continue in partnership
and will share profits and losses in the ratio of 2:1 respectively. Jana agrees to leave FRw.20,000
of the amount due to him as a loan to the new partnership.
Required:
(a) Show necessary journal entries
(b)Capital accounts
(c) Statement of financial position after the retirement of Jana
Solution
The journal entries on retirement of Jana from the partnership are as follows:
Dr FRw Cr FRw
Dr Goodwill account 30,000
Cr Capital account- Jana 2/5 X 30,000 12,000
Capital account- Kariz 2/5 X 30,000 12,000
Capital account- Limo 1/5 X 30,000 6,000
To introduce goodwill (old profit share ratio)
Loan-Jana 20 Goodwill 12 12 6
Bank 27
Bal c/d - 37 16
47 57 26 47 57 26
Note;
After recording goodwill, the balance of Jana’s capital account is FRw 47,000 (that is FRw 35,000 +
FRw.12,000, being her share of goodwill). Of this, FRw 20,000 will be retained in the business as a
loan, and FRw.27,000 will be paid to her from the partnership bank account.
The Statement of financial position, after the retirement of Jana, appears as
follows
The effect of this is that the remaining partners have bought out Jana’s FRw.12,000 share of
goodwill of the business (costing FRw.8,000 to Kariz and FRw.4,000 to Limo)
If the business was to be sold later, Kariz and Limo would share the goodwill obtained from the sale
in their new profit sharing ratio.
Example 2
Ali, Kimani and Wambua had been in partnership, sharing profits and losses
equally after allowing interest on capital at 10% per annum. Wambua retired from
the partnership on 31December 2011 and Ali and Kimani agreed to continue
with the business sharing profits and losses in the ratios 3/5 and 2/5
respectively after allowing interest on capital as before.
Wambua agreed that repayment of his capital be delayed for three years and the
outstanding amount be subject of interest at the rate of 15% per annum.
Any balance on Wambua’s current account is to be held in a separate account and
be payable on demand.
On 31 December 2011, a valuation of goodwill was carried out and agreed at
FRw.1,440,000 but this was not to be reflected in the books. The land and
buildings were revalued at the same date at FRw.2,760,000 and were to be
adjusted in the books to this figure.
The firm prepared its accounts annually to 31 March, and at the time the following
trial balance was extracted, the above adjustments relating to the change in
partnership had not been made
Trial balance as at 31 March 2012
FRw FRw
Capital accounts: Ali 720,000
Kimani 960,000
Wambua 720,000
Current accounts: Ali 180,000
Kimani 240,000
Wambua 120,000
Drawings : Ali 660,000
Kimani 780,000
Wambua 480,000
Land and buildings (cost) 2,040,000
Plant and machinery (net as at March 2012) 720,000
Inventories 540,000
Receivables and Payables 360,000 660,000
Bank balance 180,000
Net profit for the year (after depreciation) ???????
5,760,000 5,760,000
Required:
(a) Profit and loss and appropriation account for the year ended 31 March 2012
(b) Statement of financial position as at 31 March 2012(Assume profit accrued evenly over the year)
Solution
Ali & Kimani
Profit and Loss appropriation a/c for the year ended 31 Marc 2012
9 months 31 Dec2011 3 months 31 Mar2012
Year
FRw FRw FRw FRw FRw
Net profit
‘000’ ‘000’ ‘000’ ‘000’ ‘000’
1,620 540 2,160
Loan interest (W1) - (45) (45)
1,620 495 2115
Interest on capital: (W1)
Ali 54 8.4 62.4
Kimani 72 21.6 93.6
Wambua 54 - 54
(180) (30) (210)
1,440 465 1,905
Profit share: (W1)
Ali 480 279 759
Kimani 480 186 666
Wambua 480 - 480
1,440 465 1,905
Ali and Kimani Statement of financial position As at 31st March 2002
NON-CURRENT ASSETS
6. On expulsion of partner
1. Close all the accounts of assets and liabilities sold or taken over by
partners or other owners to realization account (this will assist
determine the profit or loss from dissolution).
2. Credit the realization account with any cash received for the assets and
liabilities (consideration for them)
4. Liabilities should be paid for. If a partner has loan with the partnership
then it is paid.
Note. The net balance in the capital account will always be equal to the balance in the
cashbook. Partners are paid for any credit balance in their capital accounts; partners with
debit balances will be required to pay to the firm a sum of money equal to the debit balance.
If a partner is unable to clear the deficiency in his capital account, the solvent partners will
bear the deficiency among themselves in the proportion of their last agreed capital (Garner V.
Murray). That is the balance in their capital accounts before the dissolution of the partnership.
Example
The following is the Statement of financial position of Jabari and Sagini on 31st December 2016,
on which date the partners decide to dissolve the partnership. They share profits and losses in the
proportion of two thirds Jabari and one thirds Sagini.
NON-CURRENT ASSETS
Fixtures and fittings 2,760
CURRENT ASSETS
Inventory 7,410
Receivables 3,480
Cash 990 11,180
14,640
Capital accounts: Jabari 5,600
Sagini 3,060 8,660
CURRENT LIABILITIES
5,980
Payables
14,640
The fixtures and fittings realize FRw.2,400,000, Inventory FRw.5,960,000 and Receivables
FRw.3,220,000. The expenses of realization are FRw.120,000
Required
Prepare the necessary accounts to show the dissolution of the partnership
Solution
1. The asset accounts other than the cash are transferred to the
realization account
2. The amounts realized from them is credited to the realization account
and debited to the cash book
3. The realization expense is then debited to the realization account.
4. The Payables are then paid
5. The balance in the realization account is then transferred to the capital
accounts.
6. The balance in the capital is then settled by cash
The accounts are as follows
Realization account
FRw‘000’ FRw‘000’
Fixtures and fittings 2,760 Cash (Fixtures and fittings) 2,400
Inventory 7,410 Cash (Inventory) 5,960
Receivables 3,480 Cash (Receivables) 3,220
Cash (Realisation expense) 120 Loss:
Capital: Jabari 2/3 X 2,190,000 1,460
Capital: Sagini 1/3 X 2,190,000 730
13,770 13,770
Cash account
Balance b/f 990 Realization (Realization expense) 120
Realisation (Fixtures & fittings) 2,400 Payables 5,980
Realisation (Inventory) 5,960 Capital: Jabari 4,140
Realisation (Receivables) 3,220 Capital: Sagini 2,330
12,570 12,570
Capital accounts
Jabari Sagini Jabari Sagini
FRw.‘000’ FRw.‘000’ FRw.‘000’ FRw.‘000
’
Realization 1,460 730 Balance 5,600 3,060
b/f
Cash 4,140 2,330
5,600 3,060 5,600 3,060
CHAPTER FIVE: REGULATORY FRAMEWORK FOR COMPANIES
DEFINITION
A company is a legal entity which is made up with at least one physical person or
corporate person for commercial purposes and after filling in a form thereto related and basing up
on the provisions of this Law. (Law relating to companies - N°07/2009 of 27/04/2009)
TYPES OF COMPANIES
i. Private companies
These have the words limited (Ltd) at the end of the name. Being private, they cannot invite the
members of the public to invest in their ownership.
They can invite the members of the public to invest in their ownership and the companies may be
quoted on the stock exchange.
A company can also be categorized as follows:
A public company can either be limited by shares or both by shares and guarantee
It contains the name and address of the company, the objectives of the company, showing
whether it is limited or unlimited, showing whether it is private or public and the
authorized share capital
Articles of association shows the rules and regulations for the company internal structure.
It contain items like the number of directors, when the annual general meetings are to be
held. The voting rights of the shareholders, dividends policy, and other rule.
SHARE CAPITAL OF A COMPANY
The owner’s interest in a limited company consists of share capital. The share capital is
divided into shares. The investor will then pay for and be issued with the shares and
therefore, they become owners. Each share has a flat value called Par value/face
value/nominal value. (e.g.) If a company decides to set up a share capital of FRw.
200,000, it may decide to issue:
Preference share capital - This is made up of preference shares and a preference share
carries the right to a fixed dividend, which is expressed as a percentage of their par value.
E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital - These are the most common shares. They carry no right to a
fixed dividend but are entitled to residual value of the business during winding up, and
all profits after the claim on the entire preference dividend have been paid. The more the
number of ordinary shares held, the higher the control.
Other terms in share capital
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the
company is allowed to issue to shareholders. A company cannot issue more shares than
the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital
required is less than the issued share capital.
(e.g.) If a firm issues ordinary shares of FRw10 each and request the shareholders to pay
6FRw. Assuming that the issued 100,000 shares, then the called up share capital will be:
6FRw x 100,000 shares = FRw600,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for
payment and therefore these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 4FRw, therefore the uncalled
capital is 4Frw x 100,000 shares = FRw400,000.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees
paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as
an expenses and unpaid amount are shown as current liabilities in the business. The debenture is
classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profits they earn. This is shown in the accounts because a
company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as
drawings.
Kroito Ltd, Income statement and appropriation For the year ended Date FRw FRw
Sales XXX
Less Returns in (XXX)
XXX
Opening inventory XXX
Purchases XXX
Less Returns out (XXX)
Carriage in XXX
Less Closing inventory (XXX)
Cost of sales (XXX)
Gross profit XXX
Other income:
Commission income XXX
Discount received XXX
Allowance for doubtful debt XXX
Total other income XXX
Total income XXX
Expenses:
Director’s fees salaries and other expenses XXX
Audit fees
Bad debts XXX
Salaries and wages XXX
Discount allowed XXX
Carriage out XXX
Rent expense XXX
Electricity and water XXX
Depreciation and amortisation:
Buildings XXX
Plant and Machinery XXX
Furniture and equipment XXX
Patents and copyright XXX
Debenture interest XXX
Total expenses (XXX)
Profit/(loss) before tax XXX
Profit/(loss) before tax XXX
Taxation (XXX)
Profit/(loss) for the year XXX
Transfer to general reserve XXX
Dividends
Preference Interim XXX
Preference Final proposed XXX
Ordinary Interim XXX
Ordinary Final proposed XXX
(XXX)
Retained profit for th year XXX
Retained earning b/f XXX
Retained earnings c/f XXX
Kroito Ltd, Statement of financial position As at date
FRw FRw FRw
ASSETS
Non-current assets:
XXX (XXX) XXX
Land and buildings
XXX (XXX) XXX
Plant and machinery
XXX (XXX) XXX
Furniture & Equipment
XXX (XXX) XXX
Patents and copyrights
XXX XXX
Financial assets (Investment)
XXX
Total non-current assets
Current assets:
XXX
Inventory
XXX
Accounts receivable
XXX
Accrued income
XXX
Prepaid expense
XXX
Bank
XXX
Cash
XXX
Total current assets
XXX
Total assets
EQUITY AND LIABILITIES
Capital and reserves:
(Authorised, issued and paid) Ordinary shares of FRw100 each XXX
XXX
Share premium
XXX
General reserve
XXX
Retained earnings
XXX
5% Preference shares of FRw100 each
XXX
Total equity
Non-Current liabilities:
XXX
8% Debentures
Current liabilities:
XXX
Accounts payable
XXX
Accrued expense
XXX
Unpaid interest
XXX
Unpaid tax
XXX
Total current liabilities
Total liabilities XXX
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at FRw10 each (per value) and the issue
price (selling price) is FRw15 each. The following are the entries to be made in the A/C.
Dr Cashbook (100,000 x FRw15) 1,500,000
Cr Ordinary shares capital (100,000 FRw10) 1,000,000
Cr Share Premium A/C (100,000 FRw 5) 500,000
Issue of shares at a premium of FRw5
Revaluation Reserve:
Any gain made on revaluation of non current Assets especially for Land and buildings. When
company sells it’s property to realize the gain, the amount is transferred to the Income statement.
Capital Redemption Reserve:
A reserve created after redemption or purchase of Preference shares without issuing new shares. The
transfer is made from either the share premium or the Income statement.
(b)Revenue reserves
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves.
Transfers are made from the Profits to the General reserves to provide for expansion or purchase of
non current assets. The General Reserves can also be used to issue bonus Shares.
(c)Debenture loans
The term debenture is used when a limited company receives money on loan, and certificates called
debenture certificates are issued to the lender.
They are also called loan Inventory or loan capital. Debenture interest has to be paid whether profits
are made or not. A debenture may either be redeemable or irredeemable. Redeemable is repayable
at or by a particular date and irredeemable is payable when the company is officially terminated.
(d)Bonus and Rights issue
Bonus shares
Shares issued to existing shareholders free of charge. They are paid out from either the share
premium, balance of retained profits of the General Reserves.
A scrip issue
Is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or
Stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at FRw1 each to form an ordinary share capital of FRw100,000
and a balance on the share premium A/C of FRw50,000. It issues some bonus shares to
existing shareholders at a rate of 1 share for every 5 shares held. This amount is to be
financed by the share premium. The entries will be as follows:
Shares to be issued:
100,000 x 1 =20,000
5
A bonus issue of 20,000 shares
A rights issue therefore gives the shareholder the right (but not an
obligation) to buy the new shares issued by the company.
Example:
A Ltd has a share capital of FRw200,000 trade up of 100,000shares of
FRw2 each. The balance on the share premium is FRw60,000. Additional
capital is raised by way of a right issue. The terms are:
For every 5 shares held in the company, a shareholder can buy 2 shares at
a price of FRw2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the
shareholders exercise their rights and the relevant Statement of financial
position extract. Shares to be issued : 100,000 x 2 =40,000 shares
5
Dr cash book [40,000 @ FRw2.5 ] = FRw100,000
Cr Ordinary share capital [40,000 @ FRw2 ] = FRw80,000
Cr Share Premium [40,000 @ FRw0.5 ] = FRw20,000
Statement of financial position (extract)
140,000 Ordinary shares @ FRw 280,000
Capital Reserves
Share premium 80,000
External purpose
Financial statements for external purpose are more
summarized and prepared according to IFRS’s.
IFRS’s are the financial authoritative statements used in
accounting and preparation of financial statements.
Income statement can be prepared classifying the
expenses according to functions of the entity or by their
nature as follows:
By function – the expenses are classified as cost of sales,
administration expense and distribution cost
Expenses classified by functions
Kroito Ltd, Income statement
FRw
Taxation (XXX)
Profit/(loss) for the year XXX
Expenses classified by nature
Kroito Ltd, Income statement
For the year ended Date
FRw
Sales Revenue XXX
Other income: XXX
Purchases (XXX)
Depreciation (XXX)
Staff cost (XXX)
Other expenses (XXX)
Finance cost (XXX)
Profit/(loss) before tax XXX
Taxation (XXX)
Profit/(loss) for the year XXX
Statement of Change in Equity
Kroito Ltd, Statement of changes in equity
Director’s remuneration 60
Retained earnings at 1 June 2010 115
Accounting Entries
If a company issues shares of FRw 100 at FRw 110 the premium being
payable on application with application money FRw 15 the entry will be.
Dr Cr
i) Bank 25
Share application 25
To record receipt of application
10% in any case and at least one year must have elapsed since the
company was entitled to commence business. It follows that a new
company cannot issue shares at a discount.
When shares are issued at a discount the company will receive less than
the nominal value of the shares. The amount payable by shareholders is
debited to application and allotment account, discount on issue of
shares debited with the discount amount and the nominal value of the
shares credited to share capital account.
If a company issued shares of FRw.100 at FRw.90 the discount being
adjusted on application with application money of FRw.25, the entries
would be.
Dr Cr
Bank 25
Discount on issue of shares 10
Share application 35
To record receipt of application money and adjust for discount on issue
Share application 35
Share capital 35
To transfer share application to share capital
The applicants to whom shares are allotted, will be sent allotment letters.
If any amount is not received from the shareholders for any call, this
amount is known as calls in arrears and is deducted from the call up
capital in order to calculate the paid up capital
Illustration
A company was floated with an authorized capital consisting of
20,000 9% preference shares of FRw25 per share on application,
FRw25 per share on allotment and FRw50 per share on first and
final calls. And;