Sunday, March 6, 2011

financial accounting

Financial Accounting 1

SUBJECT NO. 1

Study Pack





STRATHMORE UNIVERSITY
________________________________________
DISTANCE LEARNING CENTRE
________________________________________

P.O. Box 59857,
00200, Nairobi,
KENYA.

Tel: +254 (02) 606155
Fax: +254 (02) 607498

Email: dlc@strathmore.edu



Copyright
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent of the copyright owner.

© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992


ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and Secretaries National Examination Board (IASNEB); Chartered Institute of Management Accountants (CIMA); Chartered Association of Certified Accountants (ACCA).







INSTRUCTIONS FOR STUDENTS
This study guide is intended to assist distance-learning students in their independent studies. In addition, it is only for the personal use of the purchaser, see copyright clause. The course has been broken down into eight lessons each of which should be considered as approximately one week of study for a full time student. Solve the reinforcement problems verifying your answer with the suggested solution contained at the back of the distance learning pack. When the lesson is completed, repeat the same procedure for each of the following lessons.

At the end of lessons 2, 4, 6 and 8 there is a comprehensive assignment that you should complete and submit for marking to the distance learning administrator.

SUBMISSION PROCEDURE
1. After you have completed a comprehensive assignment clearly identify each question and number your pages.
2. If you do not understand a portion of the course content or an assignment question indicate this in your answer so that your marker can respond to your problem areas. Be as specific as possible.
3. Arrange the order of your pages by question number and fix them securely to the data sheet provided. Adequate postage must be affixed to the envelope.
4. While waiting for your assignment to be marked and returned to you, continue to work through the next two lessons and the corresponding reinforcement problems and comprehensive assignment.

On the completion of the last comprehensive assignment a two-week period of revision should be carried out of the whole course using the material in the revision section of the study pack. At the completion of this period the final Mock Examination paper should be completed under examination conditions. This should be sent to the distance-learning administrator to arrive in Nairobi at least five weeks before the date of your sitting the IASNEB Examinations. This paper will be marked and posted back to you within two weeks of receipt by the Distance Learning Administrator.










CONTENTS

ACKNOWLEDGMENT ii
INSTRUCTIONS FOR STUDENTS iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION vi
LESSON ONE 1
INTRODUTION TO ACCOUNTING 1
LESSON TWO 32
FINAL ACCOUNTS 32
LESSON THREE 68
ACCOUNTING THEORY 68
LESSON FOUR 81
ADJUSTMENTS TO FINAL ACCOUNTS 81
LESSON FIVE 136
FURTHER ADJUSTMNETS TO ACCOUNTS 136
LESSON SIX 176
OTHER ASPECTS OF FINAL ACCOUNTS 176
LESSON SEVEN 231
PARTNERSHIPS 231
LESSON EIGHT 287
COMPANY ACCOUNTS 287
LESSON NINE 334
REVISION AID 334









FINANCIAL ACCOUNTING I COURSE DESCRIPTION
The subject gives a thorough and comprehensive introduction to double bookkeeping. It develops the students understanding of the final; accounts of business and that of clubs and societies, and the treatment of capital expenditure and the purchasing of stock.

Following this it deals with the cashbook and bank reconciliation preparation of accounts from incomplete records. Its prime purpose is to pre[pare candidates for the Section One examination of the CPA Kenya accountancy paper and is based on the materials used to prepare students at Strathmore School of Accountancy.

Text Book: Business Accounting Volume 1 by Frank Wood



LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the users of this information to permit informed judgment
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either cash is received or paid out. Examples of these transactions include selling goods, buying goods, paying employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on these transactions. If a firm employs a new staff member then this may not be an accounting transaction. However when the firm pays the employee salary, then this is related to accounting as cash involved. This has an economic impact on the organization and will be recorded for accounting purposes. A process is put in place to collect and record this information; it is then classified and summarized so that it can be reported to the interested parties.

b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These financial statements provide information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners and others.
The financial performance reflects how the business has performed, whether it has made profits or losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the information contained in the financial statements will affect the decision making process.

The following are the users of accounting information:
i. Owners:
They have invested in the business and examples of such owners include sole traders, partners (partnerships) and shareholders (company). They would like to have information on the financial performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing whether the business is profitable or not and whether to make drawings or put in additional capital.

ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.



Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like to have information on the financial performance and position so as to assess whether the business would be able to pay up for the goods and services provided as and when the payments falls due.

iii. Managers
The managers are involved in the day-to-day activities of the business. They would like to have information on the financial position, performance and changes in financial position so as to determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks and other financial institutions. They would like to have information on the financial performance and position of the business to assess whether the business is profitable enough to pay the interest on loans and whether it has enough resources to pay back the principal amount when it is due.

v. The Government and its agencies
The Government is interested in the financial performance of the business to be able to assess the tax to be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the business to be able to come with National Statistics. This statistics measure the average performance of the economy.

vi. The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples include stockbrokers who advise investors on shares to buy in the stock market and other professional consultants like accountants. They are interested with the financial position and performance of the firm so that they can advise their clients on how much is the value their investment i.e. whether it is profitable or not and what is the value.
Others advisors would include the press who will then pass the information to other relevant users.

vii. The Employees
They work for the business/entity. They would like to have information on the financial position and performance so as to make decisions on their terms of employment. This information would be important as they can use it to negotiate for better terms including salaries, training and other benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are secure.

viii. The Public
Institutions and other welfare associations and groups represent the public. They are interested with the financial performance of the firm. This information will be important for them to assess how socially responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and the effect of firm’s activities on the environment.






c) THE ACCOUNTING EQUATION
A business owns properties. These properties are called assets. The assets are the business resources that enable it to trade and carry out trading. They are financed or funded by the owners of the business who put in funds.
These funds, including assets that the owner may put is called capital. Other persons who are not owners of the firm may also finance assets. Funds from these sources are called liabilities.
The total assets must be equal to the total funding i.e. both from owners and non-owners. This is expressed inform of accounting equation which is stated as follows:

ASSETS = LIABILITIES + CAPITAL

Each item in this equation is briefly explained below.
Assets:
An asset is a resource controlled by a business entity/firm as a result of past events for which economic benefits are expected to flow to the firm.
An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will flow towards the firm i.e. in form of cash once the customers pays.

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

Non current assets are acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in business for a period of more than one year.
Major examples include:
 Land and buildings
 Plant and machinery
 Fixtures, furniture, fittings and equipment
 Motor vehicles
Current assets are not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. Examples include:
 Stock of goods – for purpose of selling.
 Trade debtors/accounts receivables – owe the business amounts as a resort of trading.
 Other debtors – owe the firm amounts other than for trading.
 Cash at bank.
 Cash in hand.

Liabilities:
These are obligations of a business as a result of past events settlement of which is expected to result to an economic outflow of amounts from the firm. An example is when a business buys goods on credit, then the firm has a liability called creditor. The past event is the credit purchase and the liability being the creditor the firm will pay cash to the creditor and therefore there is an out flow of cash from the business.

Liabilities are also classified into two main classes.

i) Non-current liabilities (or long term liabilities)
ii) Current liabilities.

Non-current liabilities are expected to last or be paid after one year. This includes long-term loans from banks or other financial institutions. Current liabilities last for a period of less than one year and therefore will be paid within one year. Major examples:

 Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
 Other creditors - owed amounts for services supplied to the firm
other than goods.
 Bank overdraft - amounts advanced by the bank for a short-term
period.

Capital:
This is the residual amount on the owner’s interest in the firm after deducting liabilities from the assets.
The Accounting equation can be expressed in a simple report called the Balance Sheet. The basic format is as follows:

Name
Balance sheet as at 31.12.
Sh Sh Sh Sh
Capital xx Non Current Assets
Land & Buildings xx
Non Current Liabilities Plant & Machinery xx
Loan xx Fixtures, furniture & fittings xx
Motor vehicles xx
Current liabilities xx
Overdraft xx Current Assets
Creditors xx xx Stocks xx
Debtor’s xx
Capital and Liabilities Cash at bank xx
Cash in hand xx xx
xx Total assets xx


The above format of the balance sheet is the horizontal format however currently the practice is to present the Balance Sheet using the vertical format which is shown below.

Name
Balance sheet as at 31.12.

Non Current Assets Sh Sh Sh
Land & Buildings xx
Plant & Machinery xx
Fixtures, furniture & fittings xx
Motors vehicles xx
xx
Current Assets
Stocks/inventories xx
Debtors/ trade receivables xx
Cash at bank xx
Cash in hand xx

Current Liabilities
Bank Overdraft xx
Creditors/trade payables xx (xx)
Net Current Assets xx
Net assets xx




Capital xx
Non Current Liabilities
Loan (from bank or other sources) xx
xx


Please pay attention to the format. The Non Current assets are listed in order of permanence as shown i.e. from Land and Buildings to motor vehicles. The Current Assets are listed in order of liquidity i.e. which asset is far from being converted into cash. Example ,stock is not yet sold, (i.e. not yet realised yet) then when it is sold we either get cash or a debtor (if sold on credit). When the debtor pays then the debtor may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is payable on demand by the bank, then followed by creditors.
Note that in the vertical format, current liabilities are deducted from current assets to give net current assets. This is added to Non Current assets, which give us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.

Example 1.1
B Kelly has a business that has been trading for some time. You are given the following information as at 31.12.2002
£
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
Stocks 8,500
Debtor 5,600
Cash a bank 1,500
Cash in hand 400
Creditors 2,500
Capital 30,800
Loan 5,000

You are required to prepare a Balance Sheet as at 31 December 2001

B Kelly
Balance Sheet as at 31 December 2001

Non Current Assets £ £ £
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
22,300

Current Liabilities
Stock 8,500
Debtors 5,600
Cash at bank 1,500
Cash in hand 400
16,000
Creditors (2,500)
Net Current Assets 13,500
Net Assets 35,800


Capital 30,800
Non-Current Liabilities
Loan 5,000
35,800


Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought motor vehicles of ₤3,000, premises of ₤7,000, stock of goods ₤2,000. He still owes ₤800 in respect of them. He had borrowed ₤4,000 from D Evans. After the events just described and before trading starts, he had ₤300 cash in hand and ₤600 cash at bank.

You are required to calculate the amount of his capital.

Solution:
Assets: ₤ ₤
Motor Vehicle 3,000
Premises 7,000
Stock 2,000
Cash at bank 600
Cash in hand 300
12,900

Liabilities:
Creditors 800
Loan - D Evans 4,000 (4,800)
8,100

Capital 8,100


Remember the Accounting equation:
Assets = Liabilities + Capital.

To get capital we rearrange the equation as follows:
Capital = Assets - Liabilities

Total Assets = ₤12,900
Total Liabilities = ₤4,800
Capital = ₤ 12,900 - 4,800
= ₤ 8,100


Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock of goods £9,900, Debtors £6,500, Cash at bank £12,900 and Cash in hand £240.

During the first week of July 2002:
a. He bought extra stock of goods £1,540 on credit.
b. One of the debtors paid him £560 in cash.
c. He bought extra fixture by cheque £2,000.

You are to draw up a balance sheet as on 7 July 2002 after the above transactions have been completed.

First we need to look at the effect of the above transactions on the assets and liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because this is bought on credit the creditors increase by £1,540 also.
(b) Amount received from the debtor means that the level of debtors reduces and cash increases by £560.
(c) Extra fixtures bought by cheque, will increase the fixtures and reduce the cash at bank by £2,000.

This can be summarized as follows:

Opening Increase/(Decrease) Closing
Balances Balances
£ £
Capital 41,800 - 41,800
Creditors 3,200 1,540 4,740
Fixtures 7,000 2,000 9,000
Motor Vehicles 8,400 - 8,400
Stock 9,900 1,540 11,440
Debtors 6,560 (560) 6,000
Cash at bank 12,900 (2000) 10,900
Cash in hand 240 560 800

Given these closing balances then the balance sheet can be drawn as follows:

C Kings
Balance sheet as at 7 July 2002.

Non Current Assets £ £
Fixtures 9,000
Motor Vehicles 8,400
17,400

Current Assets
Stock 11,440
Debtors 6,000
Cash at bank 10,900
Cash at hand 800
29,140
Current Liabilities
Creditors (4,740)
Net Current Assets 24,400
Net Assets 41,800


Capital 41,800

From the illustration remember that any change in the items of the balance sheet will have a double effect on the accounting equation has a double effect and therefore the equation will always balance.

Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors 15,800
Equipment 46,000
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160

During the first week of May 2002 Moody:
a. Bought extra equipment on credit for £5,520.
b. Bought extra stock by cheque £2,280.
c. Paid creditors by cheque £3,160.
d. Debtors paid £3,360 by cheque and £240 by cash.
e. Moody put in extra £1,000 cash as capital.

Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been completed.

Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets and liabilities can be listed as follows.
Assets £ Liabilities £
Equipment 46,000 Creditors 15,800
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
148,120

Capital = Assets – Liabilities
= £148,120 - £15,800 = £132,320


(ii) To draw up the balance sheet, we consider the effect of the above transactions on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by £5,520 and the creditors will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by £2,280 and the balance at bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and also reduce the amount at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases the cash at bank and cash in hand by £3,360 and £240 respectively.
e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and the capital balances.

This is also summarized as follows:
Opening Adjustment Closing
Balance Increase/Decrease Balance
Assets/Liabilities £ £ £
Equipment 46,000 +5,520 51,520
Motor Vehicle 25,160 25,160
Stock 24,600 +2,280 26,880
Debtors 23,080 -3,600 19,480
Cash at bank 29,120 (-2,280 – 3,160 + 3,360) 27,040
Cash in hand 160 (+240 + 1000) 1,400
Creditors 15,800 (+5,520 – 3,160) 18,160
Capital 132,320 +1,000 133,320

The balance sheet will therefore be prepared as follows:
D Moody
Balance sheet as at 7 May 2002

Non Current Assets £ £
Equipment 51,520
Motor vehicle 25,160
76,680
Current Assets
Stock 26,880
Debtors 19,480
Cash at bank 27,040
Cash in hand 1,400
74,800
Current Liabilities
Creditors (18,160)
Net Current Assets 56,640
Net Assets 133,320

Capital 133,320

Double Entry Aspects
The Accounting equation forms the basis of double entry and therefore it should always be maintained. Any change in assets, liabilities or capital will have a double effect such that assets will always be equal to liabilities plus capital. If the owners put in additional capital then this will increase the cash at bank and the capital amount therefore the equation is still maintained.

Name Debit Credit
Date Detail Folio Amount Date Detail Folio Amount











In this account the date will show the opening period of the asset ,liability or capital i.e. the balance brought forward. It will also show the date when a transaction took place (i.e. either an asset was bought or liability incurred).
The detail column (also called the particulars column) shows the nature of the transaction and reference to the corresponding account. The Folio Column for purposes of detailed recording shows the reference number of the corresponding account. The amount column shows the amount of the asset, liability or capital.
The left side of the account is called the debit side and the right side is called the credit side. All assets are shown or recorded on the debit side while all the liabilities and capital are recorded on the credit side. Each type of asset or liability must have its own account whereby all transactions affecting them are recorded in this account. Therefore there should be an account for Premises, Plant and Machinery, Stock, Debtors, Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit entry. The transactions affecting these accounts are posted in the account as debit entry and credit entry to complete the double entry.

When we make a debit entry we are either:

i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.

When we make a credit entry we are either:

i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.

Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500; Debtors £57,700;Cash at bank £72,800 and Cash in hand £400.

Compute the balance on the capital account as at 30 November 2002.

During the first week of December 2002, Jump:

a. Bought extra equipment on credit for £13,800.
b. Bought extra stock by cheque £5,700.
c. Paid creditors by cheque £7,900.
d. Received from debtors £8,400 by cheque and £600 by cash.
e. Put in an extra £2,500 cash as capital.

You are to draw up a balance sheet as on 7 December 2002 after the above transactions have been completed.

Answer:
Capital = Assets – Liabilities



Assets £ Liabilities £
Equipment 115,000 Creditors 39,500
Motor vehicle 62,900
Stock 61,500
Debtors 57,700
Cash at bank 72,800
Cash in hand 400
371,300


Capital = £371,300 - £39,500 = £330,800



Creditors A/C Motor Vehicles a/c
2002 £ B 2002 £ 2002 £ 2002 £
Bank 7900 1.12 Bal b/d 39,500 1.12 Bal b/d 62,900 1.12 Bal c/d 62,900
1.12 Bal c/d 31,600

62,900 62,900

39,500 39,500


Equipment a/c
2002 £ 2002 £
1.12 Bal b\d 115,000
Creditors 13,800 7.12 Bal c\d 128,800
128,800 128,800

Stock a/c
2002 £ 2002 £
1.12 Bal b\d 61,500
Bank 5700 7.12 Bal c\d 67,200
67,200 67,200



Debtors a/c
2002 £ 2002 £
1.12 Bal b\d 57,700 Bank 8,400

Bank 570 Cash 600
7.12 Bal c\d 48,700
57,700 57,700




Cash at Bank a/c
2002 £ 2002 £
1.12 Bal b\d 72,800 Stock 5,700
Creditors 7,900
Debtors 8,400 7.12 Bal c\d 67,600
81,200 81,200

Cash in hand a/c
2002 £ 2002 £
1.12 Bal b\d 400
Debtors 600
Capital 2500 7.12 Bal c\d 3500
3500 3500


Capital
2002 £ 2002 £
1.12 Bal b\d 330800
7.12 Bal b\d 333300 Cash 2500
128,800 128,800

Creditors Of Equipment
2002 £ 2002 £

7.12 Bal b\d 13800 Equipment 13800
13,800 13,800

H Jump
Balance sheet as at 7 December 2002

Non Current Assets £ £ £
Equipment 128,800
Motor vehicles 62,900
191,700

Current Assets
Stock 61,200
Debtors 48,700
Cash at Bank 67,600
Cash in Hand 3,500
187,000

Current Liabilities
Creditors of equipment 13,800
Creditors 31,000 (45,400)
Net Current Assets 141,000
Net Assets 333,300

Capital 333,300


Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record the following transactions:
2002
June 1 Started business with £50,000 in the bank.
“ 2 Bought motor van paying by cheque £12,000.
“ 5 Bought Fixtures £4,000 on credit from Office Masters Ltd.
“ 8 Bought a van on credit from Motor Cars Ltd £8,000.
“ 12 Took £1,000 out of the bank and put it into the cash till.
“ 15 Bought Fixtures paying by cash £600.
“ 19 Paid Motor Cars Ltd by cheque £8000.
“ 21 A loan of £10,000 cash is received from J Marcus.
“ 25 Paid £8,000 of the cash in hand into the bank account.
“ 30 Bought more Fixtures paying by cheque £3,000.

Capital a/c Cash at bank a/c

2002 £ 2002 £ 2002 £ 2002 £
30/6 Bal c/f 50,000 1/6 Bank 50,000 1/6 Capital 50,000 2/6 Van 12,000
12/6 Cash 8,000 12/6Cash 1,000
19/6Motor ltd 8,000
50,000 50,000 30/6 Fixtures 3,000
30/6 Bal c/f 34,000

58,000 58,000

Motor Van
2002 £ £
2/6 Bank 12,000
8/6 Super M 8,000 30/6 Bal c/f 20,000
20000 20000


Fixtures
2002 £ 2002 £
5/6 young 4,000
15/6 Cash 600
30/6 Bank 3000 Bal c/f 7,600
7,600 7,600

Motor Car Ltd – Creditors
2002 £ 2002 £
19/6 Bank 8000 8/6 Van 8000
8000 8000

Office Masters Ltd - Creditor
2002 £ 2002 £
30/6 B\f 4000 8/6 Fixtures 4000
4000 4000



Cash in hand
2002 £ 2002 £
12/6 Cash 1,000 15/6 Cash 600
25/6 Bank 800
21/6 J. Marcus 10000 30/6 Bal c/f 2400
11000 11000

J. Marcus - Loaner
2002 £ 2002 £
30/6 c\f 10000 21/6 Cash 10000

Note that the difference between the debit side and the credit side is the balancing figure. Most assets will have a balance on the credit side and most liabilities and capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:

M Crash
Balance Sheet as at 30th June 2002
£ £
Non Current Assets
Fixtures 7,600
Motor vehicles 20,000
27,600

Current Assets
Cash at bank 34,000
Cash in hand 2,400
36,400

Current Liabilities
Creditors – others (4,000)
Net Current Assets 32,400
Net Assets 60,000

Capital 50,000
Non Current Liabilities
Loan – J Jarvis 10,000
60,000

Let us now consider other transactions that take place in a business and the accounting entries to be made.

Accounting for sales, purchases, incomes and expenses.

Sales:
This is the sell of goods that were bought by a firm (the goods must have been bought with the purpose of resale). Sales are divided into cash sales and credit sales. When a cash sale is made, the following entries are to be made.
i. Debit cash either at bank or in hand.
ii. Credit sales account.

For a credit sale:
i. Debit debtors/ Accounts receivable account.
ii. Credit sales account.
A new account for sales is opened and credited with cash or credit sales.

Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For cash purchases:
i. Debit purchases.
ii. Credit cash at bank/cash in hand
For credit purchases, we:
i. Debit purchases.
ii. Credit creditors for goods.


A new account is also opened for purchases where both cash and credit purchases are posted. NOTE: NO ENTRY IS MADE INTO THE STOCKS ACCOUNT.

Incomes:
A firm may have other incomes apart from that generated from trading (sales). Such incomes include:
 Rent
 Bank interest
 Discounts received.
When the firm receives cash, from these incomes, the following entries are made:
 Debit cash in hand/at bank.
 Credit income account.
Each type of income should have its own account e.g. rent income, interest income.
Incomes increase the value of capital and that is the reason why they are posted on the credit side of their respective accounts.

Expenses:
These are amounts paid out for services rendered other than those paid for purchases. Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills
• Motor vehicle running expenses.
• Bank charges.
When a firm pays for an expense, we:
i. Debit the expense account.
ii. Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will be posted. Expenses decrease the value of capital and thus the posting is made on the debit side of their accounts.

The following diagram is a simple summary of the entries made for incomes and expenses.


Debit cash book/bank/in hand





INCOMES/EXPENSES Debit Expense A/C




Credit cash book /bank/in hand

Returns Inwards and Returns Outwards.

Returns Inwards: These are goods that have been returned by customers due to various reasons e.g.
i. They may be defective/damaged,
ii. Being of the wrong type .
iii. Excess goods being delivered.

Goods returned may relate to cash sales or credit sales. For the goods returned in relation to cash sales and cash is refunded to the customer the following entries are made:
i. Debit returns – inwards
ii. Credit cashbook.

For goods returned that relate to credit sales; no cash has been given to customer, the following entry is to be made.
i. Debit returns inwards.
ii. Credit debtors.

Returns Outwards: These are goods returned to suppliers/creditors. They may be for cash purchases or for credit purchases. For cash purchases a cash refund given to the firm by the supplier,
i. Debit the cashbook (cash at bank/hand).
ii. Credit returns outwards.

For credit purchases and no refund has been made:
i. Debit creditors.
ii. Credit returns outwards.


Diagrammatically shown as follows:
Debit returns inwards.


Cash
Credit cashbook.
Inwards Debit returns inwards

Credit
Credit debtors
Debit cash
Returns Cash

Outwards Credit returns outwards
Debit creditors

Credit

Credit returns outwards
Now lets us take one example that includes most of the above transactions.

Example 1.8
You are to enter the following transactions, completing the double entry in the books for the month of May 2002.
2002
May 1 Started business with £2,000 in the bank.
“ 2 Purchased goods £175 on credit from M Rooks.
“ 3 Bought furniture and fittings £150 paying by cheque.
“ 5 Sold goods for cash £275.
“ 6 Bought goods on credit £114 from P Scot.
“ 10 Paid rent by cash £15.
“ 12 Bought stationery £27, paying in cash.
“ 18 Goods returned to M Rooks £23.
“ 21 Let off part of the premises receiving rent by cheque £5.
“ 23 Sold goods on credit to U Foot for £77.
“ 24 Bought a motor van paying by cheque £300.
“ 30 Paid the month’s wages by cash £117.
“ 31 The proprietor took cash for himself £44.

Example
Bank a/c
2002 £ 2002 £
1/5 Capital 2,000 3/5Furn& fitting 150
24/5 Motor vehicle 300
21/5 Rent 5 31/5 Bal c/f 1,555
2,005 2,005

Capital a/c
31/5 Bal c/f 2,000 1/5 Bank 2,000


Purchases a/c
2002 £ 2002 £
2/5M Rooks 175
6/5 P Scot 114 31/5 Bal c/f 289
289 289



Creditor – M Rooks a/c
2002 £ 2002 £
18/5 Returns in 23 2/5 Purchases 175
31/5 Bal c/f 152
175 175




Furniture & Fittings a/c
2002 £ 2002 £ Sales a/c
3/5 Bank 150 31/5 Bal c/f 150
2002 £ 2002 £
31/5 Bal c/f 352 5/5 Cash 275
150 150 23/5 U. Foot 77

352 352



Cash in hand a/c
2002 £ 2002 £ P Scot a/c
5/5 Sales 275 10/5 Rent 15 2002 £ 2002 £
12/5 Stationery 27 31/5 Bal c/f 114 6/5Purchases 114
30/5 Wages 117
31/5 Bal c/f 116

275 275 114 114

Expenses – Rent a/c Expenses – Stationery a/c

2002 £ 2002 £ 2002 £ 2002 £
11/5 Bal c/f 15 10/5 Cash 15 12/5 Cash 27 31/5Bal c/f 27

27 27



Returns – Out a/c Income – Rent a/c
2002 £ 2002 £ 2002 £ 2002 £
31/5 Bal c/f 23 18/5 M Rooks 23 21/5 Bal c/f 5 31/5 Bank 5





Debtors – U Foot a/c Motor vehicle a/c
2002 £ 2002 £ 2002 £ 2002 £
23/5 Sales 77 31/5 Bal c/f 77 24/5 Bank 300 31/5 Bal c/f 300






Expenses – Wages a/c Drawings a/c
2002 £ 2002 £ 2002 £ 200 £
30/5 Cash 117 31/5 Bal c/f 117 31/5 Cash 44 31/5 Bal c/f 44



Accounting for drawings, discounts allowed and discounts received.

Drawings
The owner makes drawings from the firm in various ways:

i) Cash or bank withdrawals
When the owner withdraws money from the business we debit drawings and credit cashbook (cash in hand or cash at bank).

ii) Taking goods for own use and
When the owner takes out some of the goods for his own use, we debit drawings and credit purchases.

iii) Personal expenses, paid by the business
Here we debit the drawings and credit expense account

Taking some of the other assets from the business e.g. motor vehicles or using part of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle or converting business premises into living quarters or not paying into the business cash collected personally from the customers. When this happens we debit drawings and credit the relevant asset e.g. motor vehicles, premises or some building or even debtors.


Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the firm to pay the amount dues within the agreed time. It is an amount deducted from the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit discounts received e.g. A. Ltd sells some goods on credit to B Ltd. ₤1,000 under the terms of sale, B Ltd, will receive a discount of 5% if they pay the amount due within one month. B decides to take up the offer and pays the amount within the given time. B will record the transaction as follows.

Debit: Creditor – A Ltd
Credit: Discounts Received

Creditor A. Ltd a/c Purchases a/c

2002 £ 2002 £ 2002 £ 2002 £
Bank 950 Purchases 1,000 A Ltd 1,000
Discount received 50
1000 1000



Discounts Received a/c Bank a/c
200 £ 2002 £ 2002 £ 2002 £
Bal c/f 50 A Ltd 50 A Ltd 950



Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customers to encourage prompt payment. The amounts deducted from the sales invoice. In the previous example when A Ltd issued the discount and was taken up by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.

Debtors B Ltd a/c Sales a/c
2002 £ 2002 £ 2002 £ 2002 £
Sales 1,000 Bank 950
Discount 50 Debtor 1,000

1,000 1,000


Discount allowed a/c Bank a/c
2002 £ 2002 £ 2002 £ Debtor 50 Bal c/f 50 Debtor 950


TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified as per the debits and credits. The purpose of the trial balance is to show the accuracy of the double entries made and to facilitate the preparation of final accounts i.e. the trading, profit & loss account and a balance sheet.
The debits of the trial balance should be the same as the credits, if not then there is an error in one or more of the accounts.

The trial balance in example 1.8 would be extracted as follows:

Name
Trial balance as at 31 May 2002
Debit Credit
£ £
Rent – income 5
Debtor – U Foot 7
Motor vehicle 300
Bank 1555
Purchases 289
Wages 117
Capital 2000
Creditor – M Rooks 152
Furniture & Fittings 150
Sales 352
Cash in hand 72
Creditor – P Scot 114
Expenses – Rent 15
Expenses – Stationery 27
Returns Outwards 23
Drawings 44 .
2464 2464

From the trial balance please note that assets and expenses are on the debit side. Capital, liabilities and incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all the postings have been made in the relevant accounts.

Example 1.9
Write up the following transactions in the books of S Pink:
2003
March 1 Started business with cash £1,000.
“ 2 Bought goods on credit from A Cliks £296.
“ 3 Paid rent by cash £28.
“ 4 Paid £1,000 of the cash of the firm into a bank account.
“ 5 Sold goods on credit to J Simpson £54.
“ 7 Bought stationery £15 paying by cheque.
“ 11 Cash sales £49.
“ 14 Goods returned by us to A Cliks £17.
“ 17 Sold goods on credit to P Lutz £29.
“ 20 Paid for repairs to the building by cash £18.
“ 22 J Simpson returned goods to us £14.
“ 27 Paid A Cliks by cheque £279.
“ 28 Cash purchases £125.
“ 29 Bought a motor vehicle paying by cheque £395.
“ 30 Paid motor expenses in cash £15.
“ 31 Bought fixtures £120 on credit from R west.


Solutions
Capital a/c Cash in hand a/c

2003 £ 2003 £ 2003 £ 2003 £
31/3 Bal c/d 1,500 1/3 Cash 1,500 1/3 Capital 1,500 3/3 Rent 28
11/3 Sales 49 4/3 Bank 1,000
20/3 Repairs 18
28/3 Purchases 125
30/3 Motor exp. 15
31/3 Bal c/d 363

1,549 1,549

Purchases a/c

2003 £ 2003 £
2/3 A Hanson 296 31/3 Bal c/d 421 Creditors – A Cliks ac
28/3 Cash 125
2003 £ 2003 £
421 421 14/3 Returns out 17 2/3 Purchases 296
27/3 Bank 279

296 296


Rent –Expenses a/c Bank a/c

2003 £ 2003 £ 2003 £ 2003 £
3/3 Cash 28 31/3 Bal c/d 28 4/3 Cash 1,000 5/3 Stationery 15
27/3 A. Hanson 279
29/3 Motor van 395
31/3 Bal c/d 311

1,000 1,000


Debtor – J Simpson a/c Sales a/c

2003 £ 2003 £ 2003 ` £ 2002 £
3/3 Sales 54 22/3 Returns in 14 31/3 Bal c/d 132 5/3 JSimpson 54
31/3 Bal c/d 40 11/3 Sales 49
17/3 P Lutz 29
54 54
132 132

Stationery a/c
2003 £ 2003 £ Returns outwards a/c
7/3 Bank 15 31/3 Bal c/d 15
2003 £ 2003 £
31/3 Bal c/d 17 14/3 A Cliks 17



P Lutz – Debtor a Building repairs - expenses

2003 £ 2003 £ 2003 £ 2003 £
17/3 Sales 29 21/3 Bal c/d 29 20/3 Cash 18 31/3 Bal c/d 18




Returns - Inwards
Motor vehicle
2003 £ 2003 £ 2003 £ 2003 £
22/3 J Simpson 14 31/3 Bal c/d 14 29/3 Bank 395 31/3 Bal c/d 395




R West – Creditor (others) Motor expenses

2003 £ 2003 £ 2003 £ 2003 £
31/3 Bal c/d 120 31/3 Fixtures 120 30/3 Cash 15 31/3 Bal c/d 15





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





S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003


Debit (£) Credit (£)
Capital 1500
Purchases 421
Cash in hand 363
Bank 311
Rent expense 28
Sales 132
Fixtures 120
Debtor – J Simpson 40
Debtor – P Lutz 29
Motor vehicle 395
Creditors - -
Motor expenses 15
Returns inwards 14
Creditors others – R West 120
Stationery 15
Returns outwards 17
Building repairs 18 -
1769 1769


Example 1.10
The following transactions took place during the month of May:

2003
May 1 Started firm with capital in cash of £250.
“ 2 Bought goods on credit from the following persons: R Kelly £54; Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
“ 4 Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
“ 6 Paid rent by cash £12.
“ 9 C Blanes paid us his account by cheque £43.
“ 10 F Skin paid us £150 by cheque.
“ 12 We paid the following by cheque: J Role £25; R Kelley £54.
“ 15 Paid carriage by cash £23.
“ 18 Bought goods on credit from P Combs £43; Mobile £110.
“ 21 Sold goods on credit to B Long £67.
“ 31 Paid rent by cheque £18.


Answer
Capital Cash in Hand
2003 £ 2003 £ 2003 £ 2003 £
31/5 Bal c/d 250 1/5 Cash 250 1/5 Capital 250 6/5 Rent 12
15/5 Carriage 23
. 31/5 Bal c/d 215
250 250

Creditor R Kelly
Creditor P Combs
2003 £ 2003 £ 2003 £ 2003 £
12/5 Bank 54 2/5 Purchases 54 31/5 Bal c/d 130 2/5 Purchases 87
. 18/5 Purchases 43
130 130


Creditor – J Role
Creditor – D Mobile
2003 £ £ 2003 £ 2003 £
12/5 Bank 25 2/5 Purchases 25 31/5 Bal c/d 186 2/5 Purchases 76
. 18/5 Purchases 110
186 186

Creditor I Sims Debtor C. Blares
2003 £ 2003 £ 2003 £ 2003 £
31/5 Bal c/d 64 2/5 Purchases 64 4/5 Sales 43 4/5 Bank 43


Debtor B Long
Debtor F Smith
2003 £ 2003 £ 2003 £ 2003 £
4/5 Sales 62 31/5 Bal c/d 129 4/5 Sales 176 10/5 Bank 150
21/5 Sales 67 . . 31/5 Bal c/d 26
129 129 176 176


Purchases
Sales
2003 £ 2003 £ 2003 £ 2003 £
2/5 R Kelly 54 31/5 Bal c/d 459 31/5 Bal c/f 348 4/5 C Blanes 43
2/5 P Combs 87 4/5 F Long 62
2/5 J Role 25 4/5 F Skin 176
2/5 D Mobile 76 4/5 B Long 67
2/5 L Sims 64 .
18/5 P Combs 43 348
18/5 D. Mobile 100 .
459 459

Bank
Carriage Expenses
2003 £ 2003 £ 2003 £ 2003 £
9/5 C Blanes 43 12/5 J Role 25 15/5 Cash 23 31/5 Bal c/d 23
10/5 H F Skin 150 12/5 R Kelly 54
31/5 Rent 18
. 31/5 Bal c/d 96
193 193


Rent
19x6 £ 19x6 £
6/5 Cash 12 31/5 Bal c/d 30
31/5 Bank 18 .
30 30



Trial Balance as at 31/5/2003

Debit Credit
Capital - 250
Cash 215 -
Creditor – R Kelly - -
Creditor – P Combs - 130
Creditor – J Role - -
Creditor – D Mobile - 186
Creditor – L. Simms - 64
Debtor – C. Blanes - -
Purchases 459 -
Sales - 348
Debtor- B. Long 129 -
Debtor- F Skin 26 -
Bank 96 -
Carriage -
Rent 30 -

978 978


REINFORCEMENT QUESTIONS
Question One
Spark has been trading for a number of years as an electrical appliance retailer and repairer in premises which he rents at an annual rate of $1,500 payable in arrears. Balances appearing in his books at 1 January 19X1 were as follows:

$ $
Capital account 1,808
Motor van 1,200
Fixtures and fittings 806
Provision for depreciation on motor van (credit) 720
Provisions for depreciation on fixtures& fittings (credit) 250
Inventory at cost 366
Receivables for credit sales:
Brown 160
Blue 40
Stripe 20
220
Cash at bank 672
Cash in hand 5
Payables for supplies:
Live 143
Negative 80
Earth 73
296
Amount owing for electricity 45
Local taxes paid in advance 100

Although Sparks has three credit customers the majority of his sales and services are for cash, out of which he pays various expenses before banking the balance.

The following transactions took place during the first four months of 19X1
January February March April
$ $ $ $
Suppliers’ invoices:
Live 468 570 390 602
Negative - 87 103 64
Earth 692 - 187 -
Capital introduced 500
Bankings of cash (from cash sales) 908 940 766 1,031
Expenditure out of cash sales before banking:
Withdrawals on account 130 120 160 150
Stationery 12 14 26 21
Travelling 6 10 11 13
Petrol and van repairs 19 22 37 26
Sundry expenses 5 4 7 3
Postage 12 10 15 19
Cleaner’s wages 60 60 65 75
Goods invoiced to credit customers:
Brown 66 22 10 12

Blue 120 140 130 180
Stripe 44 38 20 48
Cheque payments (other than those to suppliers):
Telephone 40 49 59 66
Electricity 62 47 20 106
Local taxes - - 220 -
Motor van (1 February 19X1) - 800 - -
Unbanked at the end of April - - - 12

Spark pays for goods by cheque one month after receipt of invoice, and receives a settlement discount of 15% from each supplier.

Credit customers also pay by cheque one month after receipt of invoice, and are given a settlement discount of 10% of the invoice price.

Required:

Write up the ledger accounts of Spark for the four months to 30 April 19X1, and extract a list of account balances after balancing off the accounts.


Question Two
Mary
Balance Sheet as at 31 December 2000

Non Current Assets £ £
Premises 25,000.00
Plant 12,000.00
37,000.00
Current Assets:
Stock 11,000.00
Debtors 10,000.00
Cash at bank 5,000.00
Cash in hand 3,000.00
29,000.00
Current liabilities:
Creditors (12,000.00) 17,000.00
54,000.00
Capital 34,000.00
Non Current Liabilities:
Loan from bank 20,000.00
54,000.00


During the year to 31 December 2001 the following total transactions occurred:






a) Mary withdrew a total of £10,000.00 in cash
b) Stock in trade was bought, all on credit, for £34,000.00
c) Sales were made totaling 60,000.00 of stock in trade which had cost £37,000.00. Of these sales £51,000.00 were on credit and £9,000.00 for cash.
d) A total of £16,000.00 was drawn from the bank in cash to the cash till.
e) Electricity for the year paid by cheque totaled £2,000.00
f) Rates for the year paid by cheque totaled £1,000.00
g) Wages for the year all paid cash totaled £10,000.00
h) Sundry expenses all paid in cash totaled £2,000.00
i) Creditors were paid a total of £36,000.00 all by cheque
j) Debtors paid a total of £54,000.00 all in cheques.
k) The bank charged interest on the loan deducting £3,000.00.

Required:

Prepare a revised balance sheet. (20 marks)


Question Three
a) Explain the nature of accounting and the accounting equation (8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following information
(12 marks)

Non Current Assets 01.01.2001 31.12.2001
£ £
Property 20,000.00 20,000.00
Machinery 6,000.00 9,000.00
26,000.00 29,000.00
Current Assets:
Debtors 4,000.00 8,000.00
Cash 1,000.00 1,500.00
5,000.00 9,500.00
Current Liabilities:
Creditors 5,000.00 3,000.00
Overdraft 6,000.00 9,000.00
11,000.00 12,000.00
Net Current Liabilities (6,000.00) (2,500.00)
Net Assets 20,000.00 26,500.00

Drawings during the year amounted to £4,500.00
Additional capital introduced by the owner £5,000.00








Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:

£
Sales 47,600.00
Purchases 22,850.00
Office expenses 1,900.00
Insurance 700.00
Wages 7,900.00
Rates 2,800.00
Heating and Lighting 1,200.00
Telephone 650.00
Discounts allowed 1,150.00
Opening stock 500.00
Returns inwards 200.00
Returns outwards 150.00
Premises 40,000.00
Plant and Machinery 5,000.00
Motor Vehicles 12,000.00
Debtors 12,500.00
Bank balance 7,800.00
Creditors 3,400.00
Loan-long term loan 10,000.00
Capital 60,000.00
Drawings for the year 4,000.00
Closing stock 550.00

Required:
Construct a trial balance, from the above list of balances.


CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK



LESSON TWO
FINAL ACCOUNTS
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of goods/stocks) of the business and tries to determine the gross profit for the relevant financial period. The gross profit is then taken up in the profit and loss account as part of the income.

Format for the trading account:

Name
Trading Account for the year ended 31 Dec.
₤ ₤ ₤

Sales x
Less: Returns Inwards (x)
x

Less: Cost of Sales
Opening stock x
Purchases x
Add: Carriage Inwards x
x
Less: Returns Outwards x x
Cost of stock available for sale x
Less: Closing stock x (x)
Gross Profit x

Example: 2.1
From the following details draw up the trading account of Springs for the year ended 31 December 2002, which was his first year in business.

Carriage inwards 6,700
Returns outwards 4,950
Returns inwards 8,900
Sales 387,420
Purchases 333,330
Stock of goods: 31 December 19x7 74,890

Springs
Trading Account for the year ended 31 Dec 2002

£ £

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

Less cost of sales
Purchases 333,330
Add: Carriage Inwards 6,700
340,030
Less: Returns outwards 4,950
335,080
Less: Closing stock 74,890 260,190
Gross Profit 118,330

Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the trading account of R Sings for that year.
£
Stocks: 1 April 2002 16,523
Returns inwards 1,372
Returns outwards 2,896
Purchases 53,397
Carriage inwards 1,122
Sales 94,600
Stocks: 31 March 2003 14323

Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
₤ ₤ ₤
Sales 94,600
Less: Returns Inwards (1,372)
93,228
Less: Cost of sales
Opening Stock 16,523
Purchases 53,397
Add: Carriage Inwards 1,122
54,519
Less: Returns Outwards 2,896 51,623
Cost of goods available for sale 68,146
Less: Closing stock 18,504 (49,642)
Gross Profit 43,586


(b) PROFIT AND LOSS ACCOUNT
It shows the net profit or net loss that the business has made from all the activities during a financial period.
The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same financial period.
In practice, the trading account is combined together with the net profit and loss account into one report so that the format is as shown below:

Name
Trading, Profit and Loss Account for the year ended 31/12/19xx

£ £ £
Sales x
Less: Returns Inwards x
x

Less: Cost of sales
Opening stock x
Purchases x
Add: Carriage Inwards x
x
Less: Returns Outwards x x
Cost of goods available for sale x
Less: Closing stock x (x)
Gross Profit x
Discount received x
Rent received x
Interest received x
Other incomes x
x

Less: Expenses
Carriage Outwards x
Discounts allowed x
Postage & stationary x
Salaries & wages x
Rent paid x
Insurance & rates x
Bank charges x
Other expenses x (x)
Net profit/ (loss) x/(x)


Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss account for the year ended 30 September 2002, and a balance sheet as at that date.
Dr Cr
£ £
Stock 1 October 19x8 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns inwards 2,050
Returns outwards 3,220
Purchases 118,740
Sales 186,000
Salaries and wages 38,620
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting and heating expenses 1,660
General expenses 3,140
Premises 50,000
Motor vehicles 18,000
Fixtures and fittings 3,500
Debtors 38,960
Creditors 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360

332,890 332,890


Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003

£ £ £
Sales 186,000
Less: Returns Inwards (2,050)
183,950

Less: Cost of sales
Opening stock 23,680
Purchases 118,740
Add: Carriage inwards 3,100
12,1840
Less: Returns Outwards 3,220 118,620
Cost of goods available for sale 142,300
Less: Closing stock 29,460 (11,2840)
Gross Profit 71,110

Less Expenses
Salaries & wages 38,620
Carriage outwards 2,000
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting & heating 1,660
General expenses 3,140 (58,040)
Net Profit 13,070


(c) BALANCE SHEET
This is a simple report that shows the assets and liabilities of the business and the capital of the owner as at a certain point in time. The format is at shown below:
Name
Balance sheet as at 31/Dec/19xx
£ £ £
Non Current Assets
Land & Buildings x
Plant & Machinery x
Fixtures, Furniture & Fittings x
Motor vehicles x
x
Current Assets
Stock/inventories x
Debtors – trade x
Debtors – others x
Cash at bank x
Cash at hand x
x
Current Liabilities
Bank overdraft x
Creditors – trade x
Creditors – others x (x)
Net current assets x
Net Assets x


Capital x
Add: Net profit x
x
Less: Drawings (x)
x

Non Current Liabilities
Loan (s) x
x

The balance Sheet of P Boones in example 2.3 will be produced as follows:

P Boones
Balance Sheet as at 30 Sept 2002
£ £
Non Current Assets
Premises 50,000
Fixtures & fittings 3,500
Motor vehicles 18,000
71,500
Current Assets
Stock 29,460
Debtors 38,960
Cash at bank 4,820
73,240
Current Liabilities
Creditors (17,310)
Net Current Assets 55,930
Net Assets 127,430

Capital 126,360
Add: Net Profit 13,070
139,430
Less: Drawings (12,000)
127,430
`


D) BOOKS OF PRIME ENTRY
The diagram below shows the components of an accounting system for a firm that carries out trading activities from the source documents that record the evidence of transactions, where the documents are recorded and the postings to made.

Source Books of The List of the
Final
Documents Prime entry Ledger Balances Accounts

Recorded
Sales The
Ledger Trading
Account
Recorded





Recorded
Purchases The
Ledger Profit
& Loss
Loss
Recorded Account






Recorded General
Ledger

Recorded Balance
Balance Sheet


A brief description of each component is explained below.
SOURCE DOCUMENTS
This shows the evidence transactions. They are collected, filed and posted in the books of prime entry. Example, if a firm sells goods on credit, then an invoice is raised. The source documents as shown in the above include:

 Sales invoice
 Purchases invoice
 Credit note
 Debit note
 Receipts, cheques and petty cash vouchers
 Other correspondences.

(i) Sales Invoice
The sales invoice is raised by the firm and sent to the debtor/customer when the firm makes a credit sale.
The sales invoice contains the following:
i. Name and address of the firm
ii. Name and address of the buying firm
iii. Date of making the sale – invoice date.
iv. Invoice number
v. Amount due (net of trade discount)
vi. Description of goods sold
vii. Terms of sale

(ii) Purchases Invoice
A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It shows the following:
i. Name and the address of the creditor/seller
ii. Name and address of the firm
iii. Date of the purchase (invoice date)
iv. Invoice number
v. Amount due
vi. Description of goods sold
vii. Terms of sale

(iii) Credit note
A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to the firm. It’s contents include:
i. Name and address of the firm
ii. Name and address of the debtor
iii. Amount of credit
iv. Credit note number
v. Reason for credit e.g. if goods sent but of the wrong type.
The purpose of the credit note is to inform the debtor or customer that the debtor’s account with the firm has been credited i.e. the amount due to the firm has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors. From the context we can assume that all credit notes are issued when goods are returned.
(iv) Debit note
This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It includes the following items:
i. Name and address of the firm
ii. Name and address of the creditor
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or cancelled.


Credit sales (sales invoice)

Returns inwards (credit note)




Credit purchase (purchase invoice)


Returns outwards (debit note)



(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they make payments in the form of cash or cheques. It shows:
i. The name and address of the firm
ii. The date of the receipt
iii. Amount received (cash or cheque or other means of payment)
iv. Receipt number.

Cheques
When a firm opens a current account with the bank, a chequebook containing cheques issued. The cheques allow the firm to make payments against the account with the bank. When a firm issues a cheque to its creditors for payments, it authorizes the bank to honour payments against the firm’s account with the bank. The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)

Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments (payments of small value in the firm which require cash payments e.g. fuel, bus-fare, office snacks), which is approved by a senior manager and filed for record purpose. It shows:
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how the money was utilized e.g. fuel receipt, bus ticket e.t.c.

(vii) Other correspondence
These include information received within or outside the firm that has a financial implication in the accounts.
Examples are:
i. Letters from the firm’s lawyers about a debtors balance.
ii. Hire-purchase/credit sale or credit purchase agreements that relate to non-current assets.
iii. Memorandum from a senior manager requiring changes to be made in the accounts.
iv. Bank statement from the bank, e.g. bank charges.

BOOKS OF PRIME ENTRY
They record the source documents.
Sales Journal
It is also called a Sales Day Book. It records all the sales invoices issued by the firm during a particular financial period. The format is as follows (with simple records of invoice).

SALES JOURNAL Page 5

Date 19x8 Detail Folio Amount £

1st March S. Spikes SL.10 200.00
3rd March T. Binns SL.19 350.00
5th March L.Thompson SL,8 150.00



Total 700.00


The individual entries in the sales journal are posted to the debit side of the debtor’s accounts in the sales ledger and the total is posted on the credit side of the sales account in the general ledger.

This is shown below:

Sales Ledger General Ledger

S Spikes General Account
19x8 £ 19x8 £ 19x8 £ 19x8 £
1/3 Sales 200 5/3 Credit sales for period 700

Sales Ledger General Ledger

T Binus
19x8 £ 19x8
3/3 Sales 350


L Thompson
19x8 £ 19x8 £
3/3 Sales 150



Example 2.4
You are to enter up the sales journal from the following details. Post the items to the relevant accounts in the sales ledger and then show the transfer to the sales account in the general ledger.
2003
Mar 1 Credit sales to J Gordon £1,870
“ 3 Credit sales to G Abrahams £1,660
“ 6 Credit sales to V White £120
“ 10 Credit sales to J Gordon £550
“ 17 Credit sales to F Williams £2,890
“ 19 Credit sales to U Richards £660
“ 27 Credit sales to V Wood £280
“ 31 Credit sales to L Simes £780

Answer



SALES JOURNAL Page 10

Date (2003) Detail Folio Amount

1/3 J. Gordon 1,870.00
3/3 G. Abrahams 1,660.00
6/3 V. White 120.00
10/3 J. Gordon 550.00
17/3 F. Williams 2,890.00
19/3 U. Richards 660.00
27/3 V. Wood 280.00
31/3 L. Simes 780.00

8,810.00


Sales Ledger

J Gordon U Richards
2003 £ 2003 £ 2003 £ 2003 £
1/3 1570 19/3 Sales 660
10/3 550



G Abrahams
V Wood
2003 £ 2003 £ 2003 £ 2003 £
3/3 Sales 1,660 27/3 Sales 280



U White
L Simes
2003 £ 2003 £ 2003 £ 2003 £
6/3 Sales 120 31/3 Sales 750


F Williams Sales a/c
2003 £ 2003 £ 2003 £ 2003 £
17/3 Sales 2890 Credit Sales


Purchases Journal
Purchases journal is also called a purchases day-book. It records all the purchase invoices received by the firm during a particular financial period. It has the following format (including records of invoices).


PURCHASES JOURNAL Page 15
Date 19x6 Description/Detail Folio Amount

1/5 C. Kelly PL. 10 400
2/5 L. Smailes PL. 20 350


TOTAL 750


The individual entries in the purchases journal are posted to the credit side of the creditor’s accounts in the purchases ledger and the total is posted to the debit side of purchases account of the general ledger. This is shown below:

C Kelly Purchases a/c
19x6 £ 19x6 £ 19x6 £ 19x6 £
1/5 Purchases 400 31/5 Sundry Creditors 750


L Smailes
19x6 £ 19x6 £
2/5 Purchases 250



Returns Inwards Journal
It is also called the returns inwards day-book. It records all the credit notes raised by the firm and sent to customers during a particular financial period, it has the following format.


RETURNS INWARDS JOURNAL Pg 10

Date Detail Folio Amount

1 March S. Spikes SL. 22 £20
2 March C. Kelly SL. 18 £18
5 March T. Bills SL. 9 £15


TOTAL £53

Individual entries in a return inwards journal are posted to the credit of the debtors accounts in the sales ledger and the total is posted to the debit side of the return-inwards account of the general ledger.










Sales Ledger General Ledger



S. Spikes a/c Returns Inwards a/c
£ £ £ £
1/3 Returns In 20 31/3 Sundry Debtors 53




C Kelly a/c
T. Bills a/c
£ £ £ £
2/3 Returns In 18 5/3 Returns In 15










Returns Outwards Journal
It is also called the returns outwards daybook. It records all the debit notes received by the firm from the creditors during a particular financial period. It has the following format.

RETURNS OUTWARDS JOURNAL

DATE DETAILS FOLIO AMOUNT (£)

2 May L. Thompson PL. 15 14
3 May M. Hyatt PL. 10 12
4 May T. Bills PL. 7 19



TOTAL 35

Individual entries are posted on the debit side of the creditors account in the purchases ledger and on the total to credit side of the returns outwards account in the general ledger.

Purchases Ledger General Ledger

L. Thompson a/c Returns Outwards a/c
` £ £ £ £
2/5 Returns out 14 31/5 sundry
creditors 35



M. Hyatt a/c
£ £
3/5 Returns out 12





T. Bills a/c

£ £
4/5 Returns Out 19





The following example 2.5 shows how the four journals are used.


Example 2. (Frankwood adapted)
You are to enter the following items in the books, post to personal accounts, and show transfers to the general ledger.

19x5
July 1 Credit purchases from: K Hill £3800; M Norman £500; N Senior £106.
“ 3 Credit sales to: E Rigby £510; E Phillips £246; F Thompson £356.
5 Credit purchases from: R Morton £200; J Cook £180; D Edwards £410; C Davies £66.
“ 8 Credit sales to: A Green £307; H George £250; J Ferguson £185.
“ 12 Returns outwards to: M Norman £30; N Senior £16.
“ 14 Returns inwards from: E Phillips £18; F Thompson £22.
“ 20 Credit sales to: E Phillips £188; F Powell £310; E Lee £420.
“ 24 Credit purchases from: Ferguson £550; K Ennevor £900.
“ 31 Returns inwards from: E Phillips £27; E. Rigby £30.
“ 31 Returns outwards to: J Cook £13; C Davies £11.

Study the solution provided:

SALES JOURNAL

DATE DETAIL AMOUNT (£)

3 July E. Rigby 510
3 July E. Phillips 246
3 July F. Thompson 356
8 July A. Green 307
8 July H. George 250
8 July J. Ferguson 185
20 July E. Phillips 188
20 July F. Powell 310
20 July E. Lee 420

TOTAL 2,772


Sales Ledger

E Rigby E Phillips
19x5 £ 19x5 £ 19x5 £ 19x5 £
3/7 Sales 510 3/7 Returns Inwards 30 3/7 Sales 246 14/7 Returns 18
20/7 Sales 188 31/7 Retuns in 27


F. Thompson

J. Ferguson
19x5 £ 19x5 £ 19x5 £ 19x5 £
3/7 Sales 356 14/7 Returns in 22 8/7 Sales 185




Green F. Powell
19x5 £ 19x5 £ 19x5 £ 19x5 £
8/7 Sales 307 20/7 Sales 310



H George
E Lee
19x5 19x5 £ 19x5 £ 19x5 £
8/7 Sales 250 20/7 Sales 420




PURCHASES JOURNAL

DATE DETAIL AMOUNT (£)

1 July K. Hill 380
1 July M. Norman 500
1 July N. Senior 106
5 July R. Mortan 200
5 July J. Cook 180
5 July D. Edwards 410
5 July C. Davies 66
24 July C. Ferguson 550
24 July K. Ennevor 900

Total 3,292


Purchases Ledger

N. Senior
1995 £ 1995 £
12/7 Returns out 16 1/7 Purchases 22


M. Norman
1995 £ 1995 £
30/7 Returns out 30 1/7 Purchases 500

J. Cook
1995 £ 1995 £
31/7 Returns out 13 5/7 Purchases 180

C. Davies
1995 £ 1995 £
31/7 Returns out 11 5/7 Purchases 60

K. Hill
1995 £ 1995 £
1/7 Purchases 380

R. Morton
1995 £ 1995 £
5/7 Purchases 200

D. Edwards
1995 £ 1995 £
5/7 Purchases 410

C. Ferguson
1995 £ 1995 £
27/7 Purchases 550

K. Ennevor
1995 £ 1995 £
24/7 Purchases 900


RETURNS INWARDS JOURNAL

DATE DETAILS AMOUNT
14 July E. Phillips 18
14 July F. Thompson 22
31 July E. Phillips 27
31 July E. Rigby 30
97


RETURNS OUTWARDS JOURNAL

12 July M. Norman 30
12 July N. Senior 16
31 July J. Cook 13
31 July C. Davies 11
70



















General Ledger
Sales a/c
1995 £ 1995 £
31/7 Sundry debtors 2772


Purchases a/c
1995 £ 1995 £
31/7 Sundry creditors 3292


Returns Inwards a/c
1995 £ 1995 £
31/7 Sundry debtors 97

Returns Outwards a/c
1995 £ 1995 £
31/7 Sundry creditors 70


CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of income) and all the payments (to creditors or suppliers and other expenses) for a particular financial period. The cashbook will also show us the cash at bank and cash in hand position of the firm.
There are two types of cashbooks:

i. Cash in hand cashbook, which records the cash transactions in the firm or business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.

The cashbook is the most important book of prime entry because it forms part of the general ledger and records the source documents (receipts and cheques). The cash at bank cashbook and cash in hand cashbook are combined together to get a two-column cashbook. The format is as follows:


Two-column cashbook.

CASH BOOK

Date Details Cash Bank Date Details Cash Bank
(£) (£) (£) (£)










Additional columns for discounts allowed and discounts received can be included with the cash at bank columns to get a 3 – column cashbook. The format is as follows:



Date Details Discount Cash Bank Date Details Discounts Bank Cash
Allowed (£) (£) Received £) (£)





The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger balances and the discounts allowed and discounts received columns will be added and the totals posted to the respective discount accounts. The discount allowed total will be posted to the debit side of the discount allowed account in the general ledger and the total of the discount received will be posted to the credit side of the discount-received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the firm has some cash at the bank and a credit balance means that the account at the bank is overdrawn. (the firm owes the bank some money).

Example 2.7
Write up a two-column cashbook from the following details, and balance off as at the end of the month:

2003

May 1 Started business with capital in cash £1,000.
“ 2 Paid rent by cash £100.
“ 3 F Lake lent us £5,000, paid by cheque.
“ 4 We paid B McKenzie by cheque £650.
“ 5 Cash sales £980.
“ 7 N Miller paid us by cheque £620.
“ 9 We paid B Burton in cash £220.
“ 11 Cash sales paid direct into the bank £530.
“ 15 G Moores paid us in cash £650.
“ 16 We took £500 out of the cash till and paid it into the bank account.
“ 19 We repaid F Lake £1,000 by cheque.
“ 22 Cash sales paid direct into the bank £660.
“ 26 Paid motor expenses by cheque £120.
“ 30 Withdrew £1,000 cash from the bank for business use.
“ 31 Paid wages in cash £970.



Cash Book
Cash Bank Cash Bank
Capital 1000
F Lake (loan) 5000
Sales 980
N Miller 620
Sales 530
G Moores 650
Cash C
Sales
Bank C








Cash Book
Cash Bank Cash Bank
Capital 1000 Rent 100
F. Lake (Loan) 5000 B McKenzie 650
Sales 980 B Burton 220
N Miller 620 Bank C 500
Sales 530 F Lake (loan) 1000
G Moores 650 Motor Expenses 120 100
Cash C 500 Cash C
Sales 660 Wages 970
Bank C 1000 Balances c/d 1840 4540
3630 7310 3630 7310


Example 2.7(Frankwood adapted)
A three-column cashbook is to be written up from the following details, balanced off, and the relevant discount accounts in the general ledger shown.

19x8
Mar 1 Balances brought forward: Cash £230; Bank £4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton £140; E Taylor £220; R Harris £800.
“ 4 Paid rent by cheque £120.
“ 6 J Cotton lent us £1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per cent cash discount: N Black £360; P Towers £480; C Rowse £300.
“ 10 Paid motor expenses in cash £44.
“ 12 H Hankins pays his account of £77, by cheque £74, deducting £3 cash discount.
“ 15 Paid wages in cash £160.
“ 18 The following paid their accounts by cheque, in each case deducting 5 per cent cash discount: C Winston £260; R Wilson & Son £340; H Winter £460.
“ 21 Cash withdrawn from the bank £350 for business use.
“ 24 Cash Drawings £120.
“ 25 Paid T Briers his account of £140, by cash £133, having deducted £7 cash discount.
“ 29 Bought fixtures paying by cheque £650.
“ 31 Received commission by cheque £88.

Answer

Cash Book
Disct Cash Bank Disct Cash Bank
Bank
Bal b/d 230 4756 Rent 120
R Burton 7 133 N Black 9 351
E Taylor 11 209 P Towers 12 468
R Harris 15 285 C Rowse 20 780
J Cotton: loan 1000 Motor expenses 44
H Hankins 3 74 Wages 160
C Winston 13 247 Cash 350
R Wison & Son 17 323 Drawings 120
H Winter 23 437 T Briers 7 133
Bank 350 Fixtures 650
Commission 88 Balances c/d 123 4833
89 580 7552 48 580 7552


Discounts Received
3/1 Sundry Creditors 48




Discounts Allowed
3/1 Sundry Debtors 89



Petty Cash Book and the imprest system of Accounting.
Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. The petty cash vouchers will show summary expenses paid by the cashier and this information is listed and classified in the petty cash book under the headings of the relevant expenses such as:
 Postage and stationery
 Traveling
 Cleaning expenses.

The format is as shown:
Petty Cash Book

Receipts Date Detail Payments Expenses The
Amount Postage Stationery Traveling Ledger








The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand. The totals of the expenses are posted to the debit side of the expense accounts. If a firm operates another cashbook in addition to the petty cash book, then the totals of the expenses will also be posted on the credit side of the cash in hand cashbook.

The Imprest system
This system of accounting operates on a simple principle that the cashier is refunded the exact amount spent on the expenses during a particular financial period. At the beginning of each period, a cash float is agreed upon and the cashier is given this amount to start with. Once the cashier makes payments for the period he will get a total of all the payments made against which he will claim a reimbursement of the same amount that will bring back the amount to the cash float at the beginning of the period.
This is demonstrated as follows:

£
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000


Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float). I n the following week, the following payments are made:

£
1st March – bought stamps for 80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
3rd March – bought fuel 150
3rd March – cleaning wages 300
4th March – bought stamps 200
4th March – paid L. Thompson (creditor) 400
5th March – fuel costs 150
On the 5th of March the cashier requested for a refund of the cash spent and this amount was reimbursed back.

Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the relevant expense accounts, as they would appear on the General Ledger.


Answer

Receipts Date Detail Payments Expenses THE LEDGER

(£) Amount
(£) Postage (£) Cleaning (£) Travel
(£)
(£)
2000 1/3 Bal b/d
1/3 Stamps 80 80
2/3 Bus Fare 120 120
2/3 Cleaning Materials 240 240
3/3 Fuel 150 150
3/3 Cleaning wages 300 300
4/3 Stamps 200 200
4/3 L Thompson 400 400
5/3 Fuel 150 . . 150 .
1640 280 540 420 400
1640 5/3
5/3 Bal c/d 2000
3640 3640
2000 6/3 Bal b/d


The General Journal
It records information from other correspondence (information that is not recorded in the above books of prime entry). It explains the type of entries that will be made in the ledger accounts giving a reason for these entries.
The type of transactions recorded here are:
i. Writing off of assets from the accounts e.g. bad-debts.
ii. Drawings for goods or other assets from the business by the owner, not cash drawings.
iii. Purchase or sale of non-current assets on credit.

The format is as shown:

The General Journal

GENERAL JOURNAL

Date Detail Debit Credit

1/3 Account to be debited x
Account to be credited x
(Narrative)



Example 2.9
You are to show the journal entries necessary to record the following items:
• 2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
• 2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
• 2003 May 8 Furniture bought by us for £490 was returned to the supplier Wood
• Offices, as it was unsuitable. Full allowance will be given us.
• 2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and we received
• £39 in full settlement of the debt.
• 2003 May 14 we take £45 goods out of the business stock without paying for them.
• 2003 May 28 Some time ago we paid an insurance bill thinking that it was all in respect
• of the business. We now discover that £76 of the amount paid was in fact insurance of our private house.
• 2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.

a. Answer

GENERAL JOURNAL

Date (19x5) Detail Debit (£) Credit (£)
1/5 Motor Vehicle 6,790
Motors Ltd 6,790
Motor vehicle bought on credit
from Motors Ltd
_________________________________________________________________________ 3/5 Bad debts 34
N Smart - Debtors 34
Amount due from N Smart
written off as bad
_________________________________________________________________________

8/5 Wood offices 490
Furniture 490
Office Furniture returned to
Wood offices
_________________________________________________________________________
12/5 Bad debts 111
W. Hayes 111
Amount owed now written off
as bad debt.
________________________________________________________________________ 14/5 Drawing for goods 45
Purchases 45
Goods taken from the
business for personal use.
_________________________________________________________________________ 8/5 Drawings 76
Insurance Expenses 76
Insurance relating to private house
now transferred to drawings
_________________________________________________________________________ 28/5 Machinery 980
Xerox Machines 980
Machinery bought from
Xerox Machines









THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability, incomes and expenses and capital.
The ledger accounts can also be classified as follows:
























Other
Non-current Liabilities
assets
Other
Inventories/ Assets
Stocks
Income

Expenses

Capital

REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital of £5,000.00 with which he opened a bank account for his business.

During May the following transactions took place.

May 1 Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
May 2 Purchased goods on credit from Abel £650.00
May 4 Sold goods on credit to Bruce £700.00
May 9 Purchased goods on credit from Green £300.00
May 11 Sold goods on credit to Hill £580.00
May 13 Cash sales paid into bank account £200.00
May 16 Received cheque from Bruce in settlement of his account
May 17 Purchased goods on credit from Kay £800.00
May 18 Sold goods on credit to Nailor £360.00
May 19 Sent Cheque to Abel in settlement of his account
May 20 Paid rent by cheque £200.00
May 21 Paid delivery expenses by cheque £50.00
May 24 Received from Hill £200.00 on account
May 30 Drew cheque for personal expenses £200.00 and assistant wages £320.00
May 31 Settled the account of Green.

Required
a) Record the transactions in the books of prime entry.
b) Post the entries in the ledger accounts
c) Balance the ledger accounts where necessary
d) Extract a trial balance as at 31 May 2000.

QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages bookshop.

Endpages Bookshop

Trial balance as at 31 December 2002

Dr Cr


Sales
Purchases
Salaries and wages
Office expenses
Insurance
Electricity
Stationery
Advertising

Telephone
Rates
Discount allowed
Discount received
Rent received
Returns inwards
Returns outwards
Stock at 01 Jan 2001
Premises
Stock as at 31 Dec 2001
Fixtures and fittings
Debtors and Creditors
Cash in Hand
Cash in bank
Capital
Drawings
Stock as at 31 Dec 2001 £


103,500.00
18,700.00
2,500.00
1,100.00
600.00
2,400.00
3,500.00

800.00
3,000.00
100.00


1,500.00

46,000.00
80,000.00
41,000.00
5,000.00
4,800.00
200.00


14,000.00
________
328,700.00 £

151,500.00











200.00
2,000.00

3,500.00




7,500.00

12,000.00
11,000.00

41,000.00
328,700.00


Required
Prepare a Trading and profit and loss account for the year ended 31 December 2002 and a balance sheet as at that date.
(20 marks)


QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of final accounts for the year ended 31 March 2002.

Dr Cr

Stock 1 April 2001
Sales
Purchases
Carriage inwards
Carriage outwards
Returns outwards
Wages and salaries
Rent and rates
Communication expenses
Commissions payable
Insurance
Sundry expenses
Buildings
Debtors
Creditors
Fixtures
Cash at bank
Cash in hand
Drawings
Capital £
1,816,000

6,918,500
42,000
157,000

1,024,000
301,500
62,400
21,600
40,500
31,800
2,000,000
1,432,000

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

9,234,000



64,000








816,000




5,088,800
152,028



QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to draft the trading and profit and loss account for the year to end 30 September 2002 and a balance sheet as at that date.
Dr Cr

Capital
Drawings
Cash at bank
Cash in hand
Debtors
Creditors
Stock 30 September 2001
Motor van
Office equipment
Sales
Purchases
Returns inwards
Carriage inwards
Returns outwards
Carriage outwards
Motor expenses
Rent
Telephone charges
Wages and salaries
Insurance
Office expenses
Sundry expenses £

842,000
311,500
29,500
1,230,000

2,391,000
410,000
625,000

9,210,000
55,000
21,500

30,900
163,000
297,000
40,500
1,281,000
49,200
137,700
28,400

17,153,200
£
3,095,500




937,000



1,309,000



30,700










17,153,200


CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK



COMPREHENSIVE ASSIGNMENT No.1


TO BE SUBMITTED AFTER LESSON 2

To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.

EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS

QUESTION ONE

The books of Mr T, a trader in tea showed the following balances as at 31 March 1998:

Shs.
Opening stock of tea 100,000
Purchases – Tea 400,000
Salaries paid 80,000
Buildings 95,000
Cash in hand 2,000
Cash at bank 135,000
Rent, rates and council taxes 15,000
Insurance premium paid 3,000
Miscellaneous receipts 10,000
Sales 720,000
Discounts allowed 4,750
Bad debts 3,250
Building repairs 2,900
Miscellaneous expenses 8,700
Advertisement 20,000
Commission to sales manager 32,400
Furniture and fittings 35,000
Air conditioners 30,000
Sundry debtors 100,000
Sundry creditors 80,000
Loan on mortgage 70,000
Interest paid on the above 3,000
Prepaid expenses 4,000
Drawings 18,000
Bills payable (Current liability) 30,000
Bank charges 2,000
Legal charges 6,000
Motor vehicles 80,000
Travelling and conveyance 10,000
Capital 280,000


The following further information was obtained :

1. Closing stock was Shs.55,000.
2. Legal charges include Shs.5,000 for the cost of stamps and registration of a new building acquired during the year.
3. Purchases include 4000 kg tea valued at Shs.20,000, which was found totally spoilt. An insurance claim of Shs.15,000 has been accepted by the insurance company.
4. Travelling and conveyancing include proprietor’s personal travelling for which he is charged Shs.4, 800.
5. The sales manager is entitled to commission of 7.5% of the total sales. However any bad debts incurred during the year are deductible from such commission entitlements.
6. Debtors include:
7. Shs.10, 000 due from M & C0 (Creditors include Shs.18, 000 due to the same party).
8. Shs.5, 000 due from the sale of furniture.
9. Further bad debts of Shs.2, 000
10. Provision for bad debts is to be created at 2% of net amount outstanding from trade debtors.
11. Depreciation is chargeable as follows:
Buildings 2.5%
Furniture and Fittings 10%
Air conditioners 15%
Motor vehicles 20%
12. Miscellaneous receipts represent sales proceeds of furniture, whose written down value was Shs.12, 000.
13. Prepaid expenses include insurance premiums for the next year.

Required:
Prepare a trading, profit and loss account for the year ended 31st March 1998 and a Balance Sheet as at that date.

QUESTION TWO
Hall Ltd., which makes up its accounts to 30th June each year, has a fleet of motor lorries. Annual depreciation on motor lorries is calculated at a rate of 25% on the reducing balances, with a full year’s depreciation being made in the year of purchase, but no charge in the year of sale. An extract from the company’s balance sheet as on 30th June 1997 showed the following:

Shs
Motor Lorries at cost: 164,900
Less provision for depreciation: 93,382
Net book Value: 71,518

During the year ended 30th June 1998 purchases and sales of lorries were as follows:

Purchases: Reg.No Cost (Shs)
1997
July 30th H11 8,500
Oct 1st H12 7,000
1998
Feb 25th H13 9,000
June 24th H14 5,900

Sales: Reg.No Purchased on: Cost (Shs) Proceeds (Shs)
1997
July 30th H1 14th May 1993 1,592 300
Oct 1st H4 10th July 1994 2,560 850
1998
Mar 1st H6 9th March 1996 8,000 4,600
June 25th H7 21st Sept 1996 3,648 2,700


Required:
Write up the following accounts in the books of the company for the year ended 30th June 1998:

a) The Motor lories account
b) Motor lorries provision for depreciation account
c) Motor lorries disposal account.

QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader, at 31st December 1997:

Shs Shs.
Drawings/Capital 2,148 20,271
Debtors/Creditors 7,689 5,462
Purchases/Sales 62,101 81,742
Rent and Rates 880
Light and heat 246
Salaries and wages 8,268
Bad debts 247
Provision for bad debts 326
Stock in trade 31st Dec 1996 9,274
Insurance 172
General Expenses 933
Bank balances 1,582
Motor van at cost/Provision for depreciation 8,000 3,6000
Proceeds on sale of van 250
Motor expenses 861
Freehold premises at cost 15,000
Rent received 750
Provision for depreciation on buildings 5,000
117,401 117,401

The following matters are to be taken in to account:

1. Stock in trade at 31st December 1997 was Shs.9,884
2. Rates paid in advance at 31st December 1997, Shs.40
3. Rent receivable due at 31st December 1997, Shs.250
4. Lighting and heating due at 31st December 1997, sh.85
5. Provision for doubtful debts to be increased to Shs.388
6. Included in the amount for insurance Shs.172, is an item for Shs82 for motor insurance and this amount should be transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.
8. Depreciate buildings Shs.500
9. On 1st January 1997 a van which had been purchased for Shs.1,000 on 1st January 1994 was sold for Shs250. The only record of matter is the credit of Shs.250 to “Proceeds of sale on van” account.


Required:
A Trading Profit and Loss account for the year ended 31st December 1997 and a Balance Sheet as at date using vertical format.

QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it makes quarterly payments as follows:

Three moths rental in advance;
A further charge of 2 pence per copy made during the quarter just ended.

The rental agreement began on 1st August 19X4, and the first six quarterly bills were as follows


Bills and dates received Rental (Shs) Cost of copies (shs) Total cost (Shs)
1 August 19X4 2,100 0 2,100
1 November 19X4 2,100 1,500 3,600
1 February 19X5 2,100 1,400 3,500
1 May 19X5 2,100 1,800 3,900
1 August 19X5 2,700 1,650 4,350
1 November 19X5 2,700 1,950 4,650

Required:
Given that Batley Printing shop ends its accounting year on 31 August,
Calculate the charge for photocopying expenses for the year to 31 August, 19X5 and the amount of prepayments and / or accrued charges as at that date.

Show the entries in the ledger of the Batley Printing Shop.

QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention looks forwards.”

Required:
a) Explain clearly what is meant by:

• The historical cost convention
• The going concern convention.

b) Does traditional financial accounting, using the historical cost convention, make the going concern convention unnecessary? Explain your answer fully.

c) Which do you think a shareholder is likely to find more useful – a report on the past or an estimate of the future? Why?

END OF COMPREHENSIVE ASSIGNMENT No.1

NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING


LESSON THREE
ACCOUNTING THEORY
(a) International Accounting Standards and International Financial Reporting Standards.
The foreword to accounting standards defines Accounting Standards as Authoritative statements of how particular types of transaction and other events should be reflected in financial statements. Accounting Standards are developed to achieve comparability of financial information between and among different organizations. International Accounting Standards (IAS’s) and International Financial Reporting Standards (IFRS) are meant to apply to most organizations in the world. IAS’s and IFRS’s are produced by the International Accounting Standards Board (IASB) whose objectives are:
(a) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance; and
(b) To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.

The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which co-ordinates the Accounting profession worldwide. Most accounting bodies of countries are members of IFAC.
The IASC develops IAS’s through an international process that involves the worldwide accountancy profession, the preparers, users of financial statements and national standard setting bodies and other interested parties.
The IASB sets up a steering committee to develop a statement of principles, an Exposure Draft and ultimately an Accounting Standards once a new topic is suggested. The process includes:

 Identifying and reviewing of all the issues associated with the topic,
 Studying national and regional accounting requirements and practice, consultation with the member bodies’ standard setting bodies and other interested groups,
 Public Exposure of the draft Accounting Standard,
 Evaluation by the steering committee and the board of the comments received on exposure drafts.

Currently the IASB has developed about 40 IASs. Examples include:
 IAS 1 Presentation of Financial Statements
 IAS 2 Inventories
 IAS 16 Property plant and equipment.

Previously new standards were called International Accounting Standards but from 2003 any new standards will be called International financial Reporting Standards. However in the current practice is to refer to all standards as International Financial Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with Kenya Accounting Standards (IASs), which were developed and published by ICPAK (Institute of Certified Public Accountants of Kenya). This were later dropped and International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:

a) Use of IASs adds credibility to the financial statements as they can be compared with others globally.
b) Facilitates communication within an enterprise that has foreign branches or subsidiaries due to harmonized reporting by the separate entities in the group.
c) Adds value to the financial statements incase an entity is sourcing for foreign capital.
d) Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.

(c) Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the business should not be valued at their ‘break-up’ value, which is the amount that they would sell for it they were sold off piecemeal and the business were thus broken up.

ii) The accruals concept (or matching concept): states that revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200) earned from the sale of 20 units against the cost (£100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect to charge profit and loss account with the cost of twenty units; there is still two units in stock. If the firm intends to sell them later, it is likely to make a profit on the sale. Therefore, only the purchase cost of eighteen units (£90) should be matched with the sales revenue, leaving a profit of £90.

The balance sheet would therefore look like this:
£
Assets
Stock (at cost, i.e. 2 x £5) 10
Debtors (18 x £10) 180
190
Liabilities
Creditors 100
90
Capital (profit for the period) 90

If, however the firm had decided to give up selling units, then the going concern concept would no longer apply and the value of the two units in the balance sheet would be a break-up valuation rather than cost. Similarly, if the two unsold units were now unlikely to be sold at more than their cost of £5 each (say, because of damage or a fall in demand) then they should be recorded on the balance sheet at their net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them saleable, e.g. paint) rather than cost. This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked. Because the business is assumed to be a going concern it is possible to carry forward the cost of the unsold units as a charge against profits of the next period.

Essentially, the accruals concept states that, in computing profit, revenue earned must be matched against the expenditure incurred in earning it.

iii) The Prudence Concept: The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one that gives the most cautious presentation of the business’s financial position or results.
Therefore, revenue and profits are not anticipated but are recognized by inclusion in the profit and loss account only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty: provision is made for all liabilities (expenses and losses) whether the amount of these is known with certainty or is best estimate in the light of the information available.
Assets and profits should not be overstated, but a balance must be achieved to prevent the material overstatement of liabilities or losses.

The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated and taken into account immediately. If a business purchases stock for £1,200 but because of a sudden slump in the market only £900 is likely to be realized when the stock is sold the prudence concept dictates that the stock should be valued at £900. It is not enough to wait until the stock is sold, and then recognize the £300 loss; it must be recognized as soon as it is foreseen.
A profit can be considered to be a realized profit when it is in the form of:
• Cash
• Another asset that has a reasonably certain cash value. This includes amounts owing from debtors, provided that there is a reasonable certainty that the debtors will eventually pay up what they owe.

A company begins trading on 1 January 20X2 and sells goods worth £100,000 during the year to 31 December. At 31 December there are debts outstanding of £15,000. Of these, the company is now doubtful whether £6,000 will ever be paid.
The company should make a provision for doubtful debts of £6,000. Sales for 20x5 will be shown in the profit and loss account at their full value of £100,000, but the provision for doubtful debts would be a charge of £6,000. Because there is some uncertainty that the sales will be realized in the form of cash, the prudence concept dictates that the £6,000 should not be included in the profit for the year.

iv) The consistency concept: The consistency concept states that in preparing accounts consistency should be observed in two respects.

a) Similar items within a single set of accounts should be given similar accounting treatment.
b) The same treatment should be applied from one period to another in accounting for similar items. This enables valid comparisons to be made from one period to the next.

v) The entity concept: The concept is that accountants regard a business as a separate entity, distinct from its owners or managers. The concept applies whether the business is a limited company (and so recognized in law as a separate entity) or a sole proprietorship or partnership (in which case the business is not separately recognized by the law.

vi) The money measurement concept: The money measurement concept states that accounts will only deal with those items to which a monetary value can be attributed.
For example, in the balance sheet of a business, monetary values can be attributed to such assets as machinery (e.g. the original cost of the machinery; or the amount it would cost to replace the machinery) and stocks of goods (e.g. the original cost of goods, or, theoretically, the price at which the goods are likely to be sold).
The monetary measurement concept introduces limitations to the subject matter of accounts. A business may have intangible assets such as the flair of a good manager or the loyalty of its workforce. These may be important enough to give it a clear superiority over an otherwise identical business, but because they cannot be evaluated in monetary terms they do not appear anywhere in the accounts.

vii) The separate valuation principle: The separate valuation principle states that, in determining the amount to be attributed to an asset or liability in the balance sheet, each component item of the asset or liability must be determined separately.
These separate valuations must then be aggregated to arrive at the balance sheet figure. For example, if a company’s stock comprises 50 separate items, a valuation must (in theory) be arrived at for each item separately; the 50 figures must then be aggregated and the total is the stock figure which should appear in the balance sheet.

viii) The materiality concept: An item is considered material if it’s omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute measure of materiality. It is common to apply a convenient rule of thumb (for example to define material items as those with a value greater than 5% of the net profit disclosed by the accounts). But some items disclosed in accounts are regarded as particularly sensitive and even a very small misstatement of such an item would be regarded as a material error. An example in the accounts of a limited company might be the amount of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment in the accounts. For example, the profit and loss account of a business will show the expenses incurred by he business grouped under suitable captions (heating and lighting expenses, rent and rates expenses etc); but in the case of very small expenses it may be appropriate to lump them together under a caption such as ‘sundry expenses’, because a more detailed breakdown would be inappropriate for such immaterial amounts.
Example:
a) If a balance sheet shows fixed assets of £2 million and stocks of £30,000 an error of £20,000 in the depreciation calculations might not be regarded as material, whereas an error of £20,000 in the stock valuation probably would be. In other words, the total of which the erroneous item forms part must be considered.
b) If a business has a bank loan of £50,000 balance and a £55,000 balance on bank deposit account, it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5,000’. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error.
ix) The historical cost convention: A basic principle of accounting (some writers include it in the list of fundamental accounting concepts) is that resources are normally stated in accounts at historical cost, i.e. at the amount that the business paid to acquire them. An important advantage of this procedure is that the objectivity of accounts is maximized: there is usually objective, documentary evidence to prove the amount paid to purchase an asset or pay an expense. Historical cost means transactions are recorded at the cost when they occurred.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is because valuations tend to be subjective and to vary according to what the valuation is for. For example, suppose that a company acquires a machine to manufacture its products. The machine has an expected useful life of four years. At the end of two years the company is preparing a balance sheet and has decided what monetary amount to attribute to the asset.
x) Objectivity (neutrality):An accountant must show objectivity in his work. This means he should try to strip his answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this should be that any number of accountants will give the same answer independently of each other. Objectivity means that accountants must be free from bias. They must adopt a neutral stance when analysing accounting data. In practice objectivity is difficult. Two accountants faced with the same accounting data may come to different conclusions as to the correct treatment. It was to combat subjectivity that accounting standards were developed.
xi) The realization concept: Realization: Revenue and profits are recognized when realized. The concept states that revenue and profits are not anticipated but are recognized by inclusion in the income statement only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double entry bookkeeping.
xiii) Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form e.g. a non current asset on Hire purchase although is not legally owned by the enterprise until it is fully paid for, it is reflected in the accounts as an asset and depreciation provided for in the normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit and loss account when:
a) The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain.
b) The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the job is well under way but not yet completed by the end of an accounting period).
c) The critical event in the sale transaction has occurred. The critical event is the event after which:

i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.

Usually, revenue is ‘recognized’
(a) When a cash sale is made.
(b) The customer promises to pay on or before a specified future date, and the debt is legally enforceable.

The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the trading, profit and loss account, before it is reasonably certain to ‘happen’.
Required
Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be recognized at the following stages of a sale.

(a) Goods have been acquired by the business, which it confidently expects to resell very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer’s cheque in payment for the goods has been cleared by the bank.

Answer
(a) A sale must never be recognized before a customer has even ordered the goods. There is no certainty about the value of the sale, nor when it will take place, even if it is virtually certain that goods will be sold.
(b) A sale must never be recognized when the customer places an order. Even though the order will be for a specific quantity of goods at a specific price, it is not yet certain that the sale transaction will go through. The customer may cancel an order, the supplier might be unable to deliver the goods as ordered or it may be decided that the customer is not a good credit risk.
(c) A sale will be recognized when delivery of the goods is made only when:

i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a delivery note).

(d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. There is then a legally enforceable debt payable on specified terms, for a completed sale transaction.
(e) The critical event for a cash sale is when delivery takes place and when cash is received, both take place at the same time. It would be too cautious or ‘prudent’ to await cash payment for a credit sale transaction before recognizing the sale, unless the customer is a high credit risk and there is a serious doubt about his ability or intention to pay.
(f) It would again be over-cautious to wait for clearance of the customer’s cheques before recognizing sales revenue. Such a precaution would only be justified in cases where there is a very high risk of the bank refusing to honour the cheque.

II) Bases
Bases are the methods that have been developed for expressing or applying fundamental accounting concepts to financial transactions and items. Examples include:
 Depreciation of Non current Assets (e.g. by straight line or reducing balance method)
 Treatment and amortization of intangible assets (patents and trade marks)
 Stocks and work in progress (FIFO, LIFO and AVCO)

III) Policies
Accounting policies are the specific accounting bases judged by business enterprises to be the most appropriate to their circumstances and adopted by them for the purpose of preparing their financial accounts.
Qualities of Useful Financial Information
The four principal qualities of useful financial information are understandability, relevance, reliability and comparability.

Understandability: an essential quality of the information provided in the financial statements is that it is readily understandable by users. For these reason users are assumed to have a reasonable knowledge of business and economic activities and accounting.
Relevance: information has the quality of being relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations. The relevance of information is affected by its nature and materiality.
Reliability: information is useful when it is free from material error and bias and can be depended upon by users to represent faithfully that which it purports to represent or could reasonably be expected to represent. To be reliable then the information should:

a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and economic reality and not merely their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some events and transactions (prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information to be false.
Comparability: users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different accounting policies, changes in the various policies and the effect of these changes in the accounts. Compliance with accounting standards also helps achieve this comparability.

The Accounting Profession in Kenya
The Accountants Act Cap 531 (1977) establishes the Institute of Certified Public Accountants of Kenya (ICPAK) and two boards, to be known as the Registration of Kenya Accountants Board (RAB) and Kenya Accountants and Secretaries National Examinations Board (IASNEB)

The following are the functions of ICPAK as outlined by the Act;

a) To promote standards of professional competence and practice amongst members of the institute.
b) To promote research into the subjects of accountancy and finance, and related matters, and the publication of books, periodicals, journals and articles in connexion therewith;
c) To promote the international recognition of the institute;
d) To advise the Examinations board on matters relating to examination standards and policies;
e) To carry out any other functions prescribed for it under any of the provisions of the Act or under any other written law; and
f) To do anything incidental or conducive to the performance of any of the preceding functions.
A council known as the Council of the institute governs the Institute, which consists of the Chairman, nine members from the institute and one member appointed by the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out practicing certificates and registration of qualified persons as members of the institute.
The Act also outlines the following as the functions of IASNEB:

a) To prepare syllabuses for accountants’ and secretaries’ examinations, to make rules with respect to examinations, to arrange and conduct examinations and issue certificates to candidates who have satisfied examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding functions.

Example 3.2 PILOT PAPER OCTOBER 1991

Briefly explain the meaning and the significance of the following:
(i) Accounting concepts.
(ii) Accounting bases.
(iii) Accounting policies.
(iv) Accounting standards.
(Total: 20 Marks)

(Covered adequately in the text).

Example 3.3 PILOT PAPER JULY 2000
(a) Define the following accounting concepts and for each explain their implication in the preparation of financial statements.
(i) The Going concern concept 4 marks
(ii) Business entity concept 4 marks
(iii) Materiality 4 marks
(iv) Realization 4 marks

(b) Two accounting concepts or conventions could clash or there could be inconsistency between them.
Give two examples of such situations and explain how the inconsistency should be resolved.
4 marks
Solution:

(i) The Going Concern Concept
The concept of going concern is that an entity will continue trading into the foreseeable future at a similar level as it does when the accounts are prepared. Going concern has implications for the value of the entities assets and the way the user may read the financial statements. If a business is to cease trading after the period of account the financial statements should be prepared on a break up basis as all liabilities will be due and assets will be valued at net realizable value.
(ii) The Entity Concept
The organization preparing accounts is a distinct and separate entity. Financial statements are prepared to reflect the activities of the entity. This concept prevents any confusion between the owner’s private finances and those of the entity, hence the option of drawings when a proprietor effectively reduces the capital of the entity.
(iii) Materiality
Materiality relates to significant amounts and items in the financial statements. A rough guide to what material amount is 5% of pre tax profits. However, this is only a guide. If say, cash in hand is offset against the overdraft balance this is a material misstatement.

Materiality prevents time being wasted on items which do not impact on the results of the entity; it provides a focus on the significant items.

(iv) Realization
The realization concept involves recognizing amounts in the financial statements at the point at which they crystallize. Profit should not be reflected in the profit and loss account until it has been earned.
The realization concept means that the profit in the financial statements should be reasonably stated.

(c) Clashes between accounting concepts

Accruals and prudence
The accruals concept requires future income (e.g. in relation to credit sales) to be accrued. The prudence concept dictates that caution should be exercised, so that if there is doubt about the subsequent receipt, no accrual should be made.



Consistency and prudence
If circumstances change, prudence may conflict with the consistency concept, which requires the same treatment year after year.

In both situations, prudence must prevail.

Example 3.5 DECEMBER 1994 QUESTION FIVE

(a) Explain the nature of the Accounting Equation. (5 marks)
(b) What are accounting standards and why are they important? (5 marks)
(c) Describe the role of the Institute of Certified Public Accountants of Kenya. (5 marks)
(d) In addition to the Kenya Accounting Standards, why is it important for an
Accountant to make use of International Accounting Standards? (4 marks)

(Total: 19 marks)
(Covered adequately in the text)









REINFORCEMENT QUESTIONS

Question One
Explain, with examples, each of the following terms:

 Fundamental accounting concepts
 Accounting bases
 Accounting policies

Question Two
Accounting practice depends upon the guidance provided by a number of accounting concepts, some of which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting Standards Committee.

Required:
(a) Define and explain the relevance of the following accounting concepts.

 Neutrality
 Money measurement
 Accruals
 Substance over form
 Consistency (15 marks)

(b) Give two examples of situations in which there is a clash or inconsistency between two accounting concepts or conventions, and explain how the inconsistency should be resolved. (In answering this part of the question, you need not confine yourself to considering the concepts listed in part (a)) (5 marks)

(20 marks)

Question Three
If the information in financial statements is to be useful, regard must be had to the following:

 Materiality
 Comparability
 Prudence
 Objectivity
 Relevance

Required
Explain the meaning of each of these factors as they apply to financial accounting including in your explanations one example of the application of each of them. (Four marks for each of (a) to (e).)
(20 marks)




Question Four
a) Explain what is meant by materiality in relation to financial statements and state two factors affecting the assessment of materiality. (4 marks)
b) Explain what makes information in financial statements relevant to users. (5 marks)

c)
1. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’. Explain the meaning of these two terms.
2. Explain how a possible conflict between them could arise and how that conflict should be resolved. (5 marks)

d) One of the requirements of financial statements is that they should be free from material error. Suggest three safeguards, which may exist, inside or outside a company to ensure that the financial statements are free from material error. (6 marks)



CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK


LESSON FOUR
ADJUSTMENTS TO FINAL ACCOUNTS
a) ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate. Therefore all incomes and expenses that relate to a particular financial period will be matched together to determine the profit for the year.
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should be reported in the profit & loss account and the same income will be shown in the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month, assuming that this is the first year of renting and rent is received in arrears (rent 4 January is received early Feb).
The ledger accounts of the firm will be as follows:

Cashbook
Year 1 £

Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
April (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 Jun) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000

22,000


Rent – Income
Year 1 £ Year 1 £
Jan C/B 2,000
Feb C/B 2,000
Mar C/B 2,000
April C/B 2,000
May C/B 2,000
Jun C/B 2,000
July C/B 2,000
Aug C/B 2,000
Sept C/B 2,000
Oct C/B 2,000
31/12 P&L 24,000 Nov C/B 2,000
Dec Accrued c/f 2,000

24,000 24,000


Although the cashbook is showing that rent received amounts £22,000, the full rental income of £24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of £2,000 will be reported in the balance sheet as a current asset.

Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid during that period.
An accrued expense should be charged in the P&L account and shown in the balance sheet as a current liability.
Assume in the above example that the firm is meant to pay the rent, thus it becomes an expense with the facts still the same i.e. £2,000 payable in arrears. The ledger account will be as follows.

Cashbook
Year 1 £ Year 1 £
Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
Apr (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 June) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000
Rent – Expenses

Year 1 £ Year 1 £
C/B Rent for Jan 2,000
Rent for Feb 2,000
Rent for Mar 2,000
Rent for Apr 2,000
Rent for May 2,000
Rent for June 2,000
Rent for July 2,000
Rent for Aug 2,000
Rent for Sept 2,000
Rent for Oct. 2,000
Rent for Nov 2,000
31/12 Bal c/d 2,000 31/12 P&L 24,000
24,000 24,000



The cashbook shows that the rent for the 11 months was paid for. However in the P&L a/c we should report rent for the full year of £24,000 and the £2,000, rent for Dec being the accrued expense will be shown in the balance sheet as a current liability.

PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an income is payable in advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should be carried forward and reported in the period it relates to.
The accounting treatment will be to show it as a current liability.

Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance. Assuming that the firm’s rental income began in 1st March and the financial year, end is on 31st Dec. The ledger accounts will be:

15,000 15,000 15,000 15,000 15,000



1.3 1.6 1.9 1.12 1.3


Cashbook

Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000

Rent – Income

Year 1 £ Year 1 £
1/3 Cashbook 15,000
1/6 Cashbook 15,000
P&L (10 x 5,000) 50,000 1/9 Cashbook 15,000
31/12 Bal c/d 10,000 1/12 Cashbook 15,000
60,000 60,000





Rent for the 4 quarters of 12 months has been received as per the cashbook but because the end of the financial year is at 31 Dec, rent for 2 months is pre-paid. This £10,000 is not charged in the P&L but is carried forward as current liability in the balance sheet.

Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid expense should not be charged in the P&L a/c but should be carried forward to the next financial period and should be shown in the balance sheet as a current asset.

Example
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense. The ledger accounts is as follows:

Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000

Rent – Expenses

Year 1 £ Year 1 £
1/3 C/B (Mar, April, May) 15,000
1/6 C/B (June, July, Aug) 15,000
1/9 C/B (Sept, Oct, Nov) 15,000 P&L (10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb) 15,000 31/12 Bal c/d (2 x 5,000) 10,000
60,000 60,000



Rent of £10,000 for 2 months is carried forward to the next financial period and shown in the balance sheet as a current asset.

The following is the summary of treatment for Accruals and Prepayments:
P&L B/Sheet
Accrued - Report as Current
Income Assets

Income

Prepaid -Not
reported Current
Liability

Accruals/
Prepayments


Accrued - Charge as Current
an expense Liability
Expense

Prepaid - Not charged Current
In P& L Assets

Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance Sheet as follows:

Balance Sheet Extracts
£ £
Current Assets
Stock x
Debtors x
Accrued Incomes/Prepaid Expenses x
Cash at bank x
Cash in hand x
x

Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x
X

The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that the correct amount of expense or income is reported in the profit and loss account for the year.



Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger accounts for the following items including the balance transferred to the necessary part of the final accounts, also the balances carried down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December 2002 £2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December 2002 £3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December 2001 £25,000; Owing as at 31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December 2001 £2,200; Prepaid as at 31December 2002 £2,900.
e) Seamers sub-lets part of the premises. Receives £5,500 during the year ended 31 December 2002. Tenant owed Seamers £1,800 on 31 December 2001 and £2,100 on 31 December 2002

a) Motor Expenses
19X6 £ 19X6 £
Cashbook 7,440
31/12 Bal c/d 280 P/L a\c 7220
7200 7200
19x7
1/1 Bal b/d 280




b) Insurance

19x6 £ 19x6 £
Cashbook 4,200 31/12 P&L a/c 3850
31/12 Bal c/d 350
4,200 4200
19x7
1/1 Bal b/d 350
===
c) Stationery

19x6 £ 19x6 £
Cashbook 18,000 1/1 Bal b/d 2,500
31/12 Bal c/d 4,900 P&L a/c 20,400
22,900 22,900
==== ====
19x7
1/1Bal b/d 4,900


d) Rates

19x6 £ 19x6 £
1/1 Bal b/d 2200 P&L 8800
Cashbook 9500 31/12 Bal c/d 2900
11,700 11,700

19x7
1/1 Bal b/d 2900


e) Rent – Income

19x6 £ 19x6 £
1/1 Bal b/d 1800 Cashbook 5500
P&L 5800 31/12 Bal c/d 2100
7600 7600

19x7
1/1 Bal b/d 2100






b) BAD AND DOUBTFUL DEBTS
Some debtors may not pay up their accounts for various reasons e.g. a debtor may go out of business. When a debtor is not able to pay up his/her account this becomes a bad debt. Therefore the business/firm should write it off from the accounts and thus it becomes an expense that should be charged in the profit & loss account.
In practice a firm may also be unable to collect all the amounts due from debtors. This is because a section of the debtors will not honor their obligations. The problem posed by this situation is that it is difficult to identify the debtors who are unlikely to pay their accounts. Furthermore the amount that will not be collected may also be difficult to ascertain. These debts that the firm may not collect are called doubtful debts. A firm should therefore provide for such debts by charging the provision in the profit and loss account. Provision for doubtful debts maybe specific or general. Specific relate to a debtor whom we can identify and we are doubtful that he may pay the debt (if one of our debtor goes out of business).

Accounting For Bad & Doubtful Debts.
Bad debts
When a debt becomes bad the following entries will be made:
i. Debit bad debts account
Credit debtors account with the amount owing.
ii. Debit Profit and Loss Account.
Credit bad – debts account to transfer the balance on the bad – debts account to the Profit and Loss Account.

Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A specific provision is where a debtor is known and chances of recovering the debt are low.
The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be as follows. If it is the 1st year of trading (1st year of making provision):

i. Debit P&L a/c.
ii. Credit provision for doubtful debts (with total amount of the provision).

In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision.
If it is an increase:

i. Debit P&L a/c.
ii. Credit provision for doubtful debts (with increase only).

If it is a decrease:
i. Debit provision for doubtful debts.
ii. Credit P&L a/c (with the decrease in provision only).

Example

Debtors x
Bad debts (x)
x
Specific Provision (x)
x
General Provision (x)
x


A firm started trading in the year 1999, the balance on the debtor’s account was £400,000. Bad debts amounting to £40,000 were written off from this balance, there was a specific provision of £5,000 to be made to one of the debtors and a general provision of £5% was to be made on the balance of the debtors. The ledger accounts of 1999 were as follows:

Debtors Provision for doubtful debts

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

400,000 400,000



Bad debts
1999 £ 1999 £
Debtors 40,000 31/12 P&L 40,000





£
Debtors 400,000
Bad debts (40,000)
360,000
Specific Provision (5,000)
355,000
General Provision (5%) (17,750)
337,250

Profit & Loss A/C (Extract) for the year ended 31/12/99

£ £
Expenses:
Bad debts 40,000
Increase in provision for D/debts 22,750



Balance Sheet (Extract) as at 31/12/99
£ £
Current Assets
Stocks x
Debtors 360,000
Provision for D/debts (22,750) 337,250
337,250 337,250

In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of £50,000 needs to be written off there is no specific provision but the general provision is to be maintained at 5%. The ledger accounts will be as follows:

Debtors 500,000
Bad debts (50,000)
450,000
General Provision (5%) 22,500
427,500




Debtors
2000 £ 2000 £
Bal b\d 500,000 Bad Debts 50,000
______ Bal c\d 450,000
500,000 500,000

Provision for Doubtful Debts
2000 £ 2000 £
P\L 250 1\1 Bal b\d 22,750
Bal c\d 22,500
22,750 22,750

Bad Debts
2000 £ 2000 £
Debtors 50,000 31\12 P& L 50,000



Profit And Loss Account (Extract) for year ended 31/12/2002.
£ £
Incomes
Decrease in provision for D/debts 250

Expenses
Bad debts 50,000


Balance Sheet (Extract) as at 31/12/2002

£ £
Current Assets
Debtors 450,000
Provision for bad debts (22,500) 427,500

In the year 2001 the debtors balance goes up to £600,000 from which bad debts of £50,000 need to be written off, there is no specific provision but the general provision is to be maintained at 5% the ledger accounts is as shown:

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




Debtors
2001 £ 2001 £
Bal b\ 600,000 Bad Debts 50,000
______ Bal c\d 550,000
600,000 600,000


Provision for Doubtful Debts
2001 £ 2001 £
1\1 Bal b\d 22,500
Bal c\d 27,500 P& L 5,000
22,500 27,500


Bad Debts
2001 £ 2001 £
Debtors 50,000 31\12 P& L 50,000


Profit And Loss Account (Extract) for the year ended 31/12/2001
£ £
Expenses
Bad debts 50,000
Increase in provision 5,000


Balance Sheet (Extract) as at 31/12/2001
£ £
Current Assets
Debtors 550,000
Less: Provision for Doubtful Debts (27,500) 522,500

Example 4.6
In a new business during the year ended 31 December 2002 the following debts are found to be bad, and are written off on the dates shown:

30 April H Gordon £1,100
31 August D Bellamy Ltd £640
31 October J Alderton £120

On 31 December 2002 the schedule of remaining debtors, amounting in total to £68,500, is examined, and it is decided to make a provision for doubtful debts of £2,200.

You are required to show:
a. The Bad Debts Account, and the Provision for Doubtful Debts Account.
b. The charge to the Profit and Loss Account.
c. The relevant extracts from the Balance Sheet as at 31 December 2002.

£ Bad Debts
Debtors 70,036 2002 £ 2002 £
Bad debts (1,860) Bad debts 1860 31/12 P\L 1860
68,500 Provision for D/Debt (2,200)
66,300



Provision for doubtful debts
2002 £ 2002 £
31/12 Bal c/d 2,200 31/12 P&L 2,200



Profit & Loss Account (Extract)
£ £
Expenses
Bad debts 1,860
Increase in provision for Doubtful debts 2,200


Balance Sheet (Extract)
£ £
Current Assets
Debtor 8,500
Less: Provision for D/Debts (2,200) 6,300
Example 4.2
A business started trading on 1 January 2001. During the two years ended 31 December 2001 and 2002 the following debts were written off to the Bad Debts Account on the dates stated:

31 August 2001 W Best £850
30 September 2001 S Avon £1,400
28 February 2002 L J Friend £1,800
31 August 2002 N Kelly £600
30 November 2002 A Oliver £2,500

On 31 December 2001 there had been a total of debtors remaining of £405,000. It was decided to make a provision for doubtful debts of £5,500.
On 31 December 2002 there had been a total of debtors remaining of £473,000. It was decided to make a provision for doubtful debts of £6,000.

You are required to show:
i. The Bad Debts Account and the Provision for Doubtful Debts Account for each of the two years.
ii. The relevant extracts from the Balance Sheet as at 31 December 2001 and 2002.



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

Bad Debts
2001 £ 2001 £
31\8 W.Best 850
30\9 S.Aron 1400 31\12 P&L 2250
2250 2250



Provision for D/Debts
2001 £ 2001 £
31\12 Bal c\d 550 31\12 P&L 550

2001 £ 2001 £
1\1 Bal b\d 550
1\1 Bal c\d 600 31\12 P&L 50
600 600


Bad Debts
2001 £ 2001 £
28/2 J. Friend 1,800
31/8 N. Kelly 600
30/11 A. Oliver 2,500 31/13 P&L 4,900
4,900 4,900


Profit & Loss Account (Extract)

19x6 £ £

Expenses
Bad debts 2,250
Provision for Doubtful Debts 5,000

19x7
Bad debts 4,900
Increase in provision for D/Debts 500


Balance Sheet as at 19x6
£ £

Current Assets
Debtors 405,000
Less provision (5,500) 399,500

19x7
Debtors 473,000
Less: provision (6,000) 467,000


Provision for discounts allowable.
In some cases a firm may create a provision for discounts allowable in addition to provision for doubtful debts. This happens where a firm anticipates that some of the debtors may take up cash discounts offered by the firm. The accounting treatment is similar to accounting for provision for doubtful debts. The provision should be made after creating a provision for doubtful debts (debtors figure less either general/specific provision for doubtful debts).

Debtors x
Bad debts (x)
x
Specific provision (x)
x
(x)
x
Provision for discount allowed (on balance) (x)
x


Profit & Loss Account (Extract)
£ £
Incomes
Decrease in provision for D/Debts x
Decrease in provision for discounts allowed x

Expenses
Bad debts x
Increase in provision for D/Debts x
Increase in provision for discounts allowed x

Balance Sheet (Extract)

Current Assets £ £
Debtors x
Less: provision for Doubtful Debts (x)
Less: provision for discounts allowed (x) x

Bad Debts Recovered
A firm may be able to recover a debt that was previously written off. The following entries will be made if this happens:
i. Debit – Debtors
Credit – credit bad debts recovered account – to restore the bad debt recoverable.
N/B: This should be the amount to be recovered.
ii. Debit – Cashbook
Credit – Debtors with the cash received.
iii. Debit – bad debts recovered account.
Credit – P & L account with the same balance as bad debts account.

Example:
A firm recovers debts amounting to £10,000 that had been written off in the previous periods. In the same financial period the firm writes off bad debts amounting £30,000. The ledger accounts will be as follows:
Bad debts
£ £
Debtors 30,000 Bad Debt Recovered 10,000
P\L 20,000
30,000 30,000



Bad debts recovered
£ £
Bad Debt 10,000 Debtors 10,000







c) BANK RECONCILIATION STATMENTS
The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements of the account held with the bank. The bank will send information relating to this account using a bank statement for the firm to compare.
Ideally, the records as per the bank and the cashbook should be the same and therefore the balance carried down in the cashbook should be the same as the balance carried down by the bank in the bank statement.
In practice however, this is not the case and the two (balance as per the bank and firm) are different. A bank reconciliation statement explains the difference between the balance at the bank as per the cashbook and balance at bank as per the bank statement.
Causes of the differences:

Items Appearing In The Cashbook And Not Reflected In The Bank Statement.

Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but have not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and other sources for which the firm has banked but the bank has not yet availed the funds by crediting the firm’s account.
Errors made in the cashbook
These include:
• Payments over/understated
• Deposits over/understated
• Deposits and payments misposted
• Overcastting and undercasting the Bal c/d in the cashbook.

ii) Items appearing in the bank statement and not reflected in the cashbook:

Bank charges: These charges include service, commission or cheques.
Interest charges on overdrafts.
Direct Debits (standing orders) e.g. to pay Alico insurance.
Dishonored cheques
A cheque would be dishonored because:
• Stale cheques
• Post – dated cheques
• Insufficient funds
• Differences in amounts in words and figures.
Direct credits
Interest Income/Dividend incomes

Errors of The Bank Statement (Made By The Bank).
Such errors include:
• Overstating/understating.
• Deposits
• Withdrawals

The Purposes of a bank reconciliation statement.
1. To update the cashbook with some of the items appearing in the bank statement e.g. bank charges, interest charges and dishonoured cheques and make adjustments for any errors reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.

Steps in preparing a bank reconciliation statement.
1. To update the cashbook with the items appearing in the bank statement and not appearing in the cashbook except for errors in the bank statement. Adjustments should also be made for errors in the cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to determine the uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to determine the unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)

Name:
Bank Reconciliation Statement as at 31/12

£ £
Balance at bank as per cashbook (updated) x
Add: Un presented cheques x
Errors on Bank Statement (see note 1) x x
x
Less: Uncredited deposits x
Errors on Bank Statement (see note 2) x (x)
Balance at bank as per Balance Sheet x


Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit or an overstated payment by the bank, or making an unknown payment.





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

£ £
Balance at bank as per bank statement x
Add: Uncredited deposits x
Add errors on bank statement (note 2) x x
x
Less: Unpresented cheques x
Errors on bank statement (note 1) x (x)
Balance at bank as per cashbook (updated) x
===

Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on the bank statement, from the following as on 31 March 2003:

£
Cash at bank as per bank column of the cashbook (Dr) 38,960
Bankings made but not yet entered on bank statement 6,060
Bank charges on bank statement but not yet in cashbook 280
Un presented cheques C Clarke 1170 Standing order to ABC Ltd entered on bank statement, but not in cash book 550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook 1,890

Solution
Cashbook – Bank
19X9 £ 19X9 £
31/3 Bal b/d 38960 Bank charges 280
ABC (standing order) 550
A Wood (credit transfer) 1890 31/3 Bal C/D 40,020
40,850 40,850

Bank Reconciliation as at 31/03/2003

£ £
Balance at bank as per cashbook 40,020
Add: Unpresented cheques 1,170
41,190
Less: Uncredited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
Example 4.9
The following are extracts from the cashbook and the bank statement of J Richards. You are required to:

a) Write the cashbook up to date, and state the new balance as on 31 December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.

Cashbook
2002 Dr £ 2002 Cr £
Dec 1 Balance b/d 1,740 Dec 8 A Dailey 349
Dec 7 J Map 88 Dec 15 R Mason 33
Dec 22 J Cream 73 Dec 28 G Small 115
Dec 31 K Wood 249 Dec 31 Balance c/d 1,831
Dec 31 M Barrett 178
2,328 2,328

Bank Statement
2002 Dr Cr Balance
£ £ £
Dec 1 Balance b/d 1,740
Dec 7 Cheque 88 1,828
Dec 11 A Dailey 349 1,479
Dec 20 R Mason 33 1,446
Dec 22 Cheque 73 1,519
Dec 31 Credit transfer: J Walters 54 1,573
Dec 31 Bank charges 22 1,551



Cashbook –Bank

2002 £ 2002 £
31/12 Bal b/d 1,831 31/1 Bank charges 22
31/12 J. Walters (C/T) 54 31/12 Bal C/D 1,863

1,885 1,885




J. Richards
Bank Reconciliation Statement as at 31/12/2002

£ £
Balance at bank as per cashbook – bank 1,863
Add: Unpresented cheques – (G Small) 115
1,978
Less: Uncredited deposits
K Wood 249
M. Barret 178 (427)
Balance at bank as per balance sheet 1,551
OR:
Balance at bank as per balance sheet 1,551
Add: Uncredited deposits:
K. Wood 249
M. Barret 178
1,978
Less: Unpresented cheques (115)
Balance at bank as per cashbook – bank 1,863

Exam Type Question: Nov 2001 Q4
QUESTION FOUR
(a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that
date the bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500.
His accountant investigated the matter and discovered the following discrepancies:
1. Bank charges of Sh.3, 000 had not been entered in the cashbook.
2. Cheques drawn by Ssemakula totaling Sh.22, 500 had not yet been presented to the bank.
3. He had not entered receipts of Sh.26, 500 in his cashbook.
4. The bank had not credited Mr Ssemakula with receipts of Sh.98, 500 paid into the bank on 30 June 2001.
5. Standing order payments amounting to Sh.62, 000 had not been entered into the cashbook.
6. In the cashbook Ssemakula had entered a payment of Sh.74, 900 as Sh.79, 400.
7. A cheque for Sh.15, 000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cashbook.
8. Ssemakula had brought forward the opening cash balance of Sh.329, 250 as a debit balance instead of a credit balance.
9. An old cheque payment amounting to Sh.44, 000 had been written back in the cashbook but the bank had already honored it.
10. Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had credited some deposits amounting to Sh.832, 500 to another customer’s account. However acting on information from his customers Ssemakula had actually entered the expected receipts from the debtors in is cashbook.






Required:
i. A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001. (9 marks)
ii. A bank reconciliation statement as at 30 June 2001. (5marks)
(Total: 20 marks)

Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.

b) ADJUSTED CASHBOOK

2001 Sh. 2001 Sh.
Bal b/d 2,366,500 Bank charges 3,000
Receipts omitted 26,500 Standing orders 62,000
Payment overstated 4,500 Debtors (dishonored cheques) 15,000
Error on opening balance 329,250
Balance C/F 329,250
Cheque payment 44,000
Balance C/D 1,615,000

2,397,500 2,397,500

SSEMAKULA
Bank Reconciliation Statement as at 30 June 2001.

Sh. Sh.
Cash at bank as per the updated cashbook 1,615,000
Add: Unpresented cheques 22,500
1,637,500
Less: Uncredited cheques 98,500
Error on bank statement 832,500 (931,000)
Balance as per the bank statement 706,500




Exam type Question: Nov 96 Q4
QUESTION FOUR
(a) What is the purpose of preparing a bank reconciliation statement? (4marks)
(b) The following is the bank statement of Kakamega Retail Traders for the month of October
1996:

Date Particulars Debit Credit Balance
1996 Sh. Sh. Sh.

October 1 Balance b/d 365,875
2 Cheque no. 63 31,000 334,875
2 Cheque no. 67 3,548 331,327
2 Cheque no. 65 13,000 318,327
2 Deposit 82,000 400,327
4 Cheque no. 69 6,000 394,327
4 Cheque no. 68 3,115 391,212
4 Cheque no. 64 51,000 340,212
4 Deposit 7,280 347,492
7 Cheque no. 70 7,000 340,492
7 Cheque no. 71 51,500 288,992
7 Deposit 36,100 325,092
8 Cheque no. 66 9,000 316,092
8 Deposit 28,000 344,092
October 9 Cheque no. 72 1,330 342,762
9 Cheque no. 73 6,250 336,512
9 Deposit 51,000 387,512
15 Cheque no. 74 2,800 384,712
15 Deposit 20,560 405,272
16 Cheque no. 75 65,000 340,272
16 Deposit 18,014 358,286
17 Deposit 34,500 392,786
19 Cheque no. 76 8,500 384,286
19 Deposit 42,750 427,036
21 Cheque no. 79 2,410 424,626
21 Cheque no. 77 12,506 412,120
21 Cheque no. 78 4,000 408,120
21 Cheque no. 81 6,500 401,620
21 Deposit 9,000 410,620
23 Cheque no. 82 16,240 394,380
23 Deposit 63,000 457,380
26 Cheque no. 84 1,500 455,880
26 Dividends 8,750 464,630
26 Deposit 62,500 527,130
28 Cheque no. 88 35,500 491,630
28 Standing order 10,400 481,230
(Insurance)
28 Cheque no. 85 27,000 454,230
28 Cheque no. 87 22,500 431,730
28 Deposit 13,025 444,755
31 Service charge 750 444,005
31 Deposit 28,050 472,055

The following is the bank column of the cashbook:
Date Particulars Debit Date Particulars Credit
1996 Sh. 1996 Sh.

October 1 Balance b/d 365,875 October 1 Cheque no. 65 13,000
1 Deposited at bank 7,280 1 Cheque no. 66 9,000
3 Deposited at bank 36,100 1 Cheque no. 67 3,548
5 Deposited at bank 28,000 2 Cheque no. 68 3,115
8 Deposited at bank 51,000 4 Cheque no. 69 6,000
10 Deposited at bank 20,560 5 Cheque no. 70 7,000
15 Deposited at bank 18,014 5 Cheque no. 71 51,500
15 Deposited at bank 34,500 7 Cheque no. 72 1,330
17 Deposited at bank 42,750 8 Cheque no. 73 6,250
19 Deposited at bank 15,700 10 Cheque no. 74 2,800
19 Deposited at bank 9,000 11 Cheque no. 75 65,000
22 Deposited at bank 36,000 15 Cheque no. 76 5,800
24 Deposited at bank 26,500 18 Cheque no. 77 12,506
27 Deposited at bank 13,025 19 Cheque no. 78 4,000
28 Deposited at bank 28,050 19 Cheque no. 79 2,410
29 Deposited at bank 171,010 19 Cheque no. 80 3,860
31 Deposited at bank 31,525 19 Cheque no. 81 6,500
22 Cheque no. 82 16,240
23 Cheque no. 815,000
26 Cheque no. 84 1,500
28 Cheque no. 85 27,000
28 Cheque no. 86 10,520
28 Cheque no. 87 22,500
28 Cheque no. 88 53,500
30 Cheque no. 89 2,500
31 Cheque no. 90 64,529
31 Cheque no. 91 15,500
31 Balance c/d 502,481
934,889 934,889

Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was in transit and two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as Sh.26, 500 and Sh.36, 000 and in the bank statement as Sh.62, 500 and Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but was dishonored and the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for Sh.5, 800 and Sh.33, 500 respectively.

Required:
a) A correct cashbook balance. (8 marks)
b) A bank reconciliation statement on 31 October 1996. (8 marks)
(Total: 20 marks)

No 96 Q4

CASHBOOK (ADJUSTED)

1996 Sh. 1996 Sh.
31.10 Bal b/d 502,481 Standing order (insurance) 10,400
Dividends 8,750 Service charge 750
Error on deposit 36,000 Dishonored cheques (debtor) 15,700
Error on cheque 88 18,000 Bal c/d 538,381 565,231 565,231



Bank Reconciliation Statement as at 1 October 1996. (Previous period)

Sh. Sh.
Balance as per the cashbook 365,875
Add: Unpresented cheques 63 31,000
64 51,000 82,000
447,875
Less: Uncredited cheques
Deposits (82,000)
Balance as per the bank statement 365,875


Bank Reconciliation Statement as at 31 October 1996
Sh. Sh.
Balance as per the correct cashbook 538,381
Add: Unpresented cheques
Cheque no. 80 3,860
Cheque no. 83 15,000
Cheque no. 86 10,520
Cheque no. 89 2,500
Cheque no. 90 64,529
Cheque no. 91 15,500
Error on bank statement 27,000 138,909
677,290
Less: Uncredited Cheques
Deposits 171,010
“ 31,525
Error in bank statement 2,700 (205,235)
Balance as per the bank statement 472,055


d) CAPITAL AND REVENUE EXPENDITURE
Capital Expenditure: This is the amount spent on the acquisition of a non-current asset or adding value to a non-current asset.

Examples of expenses incurred in acquisition:
i. Purchase price/cost of the asset.
ii. Delivery/carriage inwards costs (e.g. shipping charges or import taxes).
iii. Costs incurred to get the asset in use (e.g. assembly, testing)
iv. Installation
v. Demolition costs in order to construct a new building.
vi. Architect fees for construction and supervision
vii. Legal fees incurred in acquisition of a new asset (e.g. lease agreement)

Examples of expenses incurred in adding value to an asset:
i. Modify plant to increase its useful life.
ii. Upgrading plant to improve quality of output.
iii. Adopting or upgrading the production process to improve or reduce costs.

Revenue Expenditure: There’s an amount spent by the firm in the normal trading process or to assist in earning revenues or income. Examples:
i. Postage and stationery.
ii. Carriage outwards (sales).
iii. Repairs and maintenance.

Example 4.10
For the business of K Spinns,a wholesaler, classify the following between ‘capital’ and ‘revenue’ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
k) Revenue expenditure
l) Capital expenditure.

e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the firm. IAS 16 on property, plant and equipment defines depreciation as the allocation of a depreciable amount of a non-current asset over its estimated useful life.
Under the matching concept, all incomes or revenues and expenses for a particular period should be reported in the financial statements and because depreciation is an expense of the business therefore, it will be charged in the P&L A/C.

Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a
business grows or expands then some buildings may become inadequate due to space. Also some machines that are unable to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.

3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil. Such assets include mines, oil wells, and quarries.

Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of depreciation to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting practice, accounting standards and suit the firm’s non-current assets. There are 2 main methods of estimating depreciation and 5 others that will apply in a firm’s situation.
The main methods are: Straight-line method and Reducing Balance method. The other 5 methods include:

i. Sum of the digits methods – uses a formular.
ii. Revaluation method – applies to a non-current asset of low value.
iii. Machine-Hour method – depreciation is based on number of hours a machine is expected to operate (manufacturing process).
iv. Unit of output method – depreciation is based on the number of units a machine is expected to produce.
v. Depletion of units – depreciation is based on number of units extracted from the asset.

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

Depreciation for year = Cost of asset – Residual Value = £100,000 - £20,000
Estimated useful life 8

= £10,000 per year.

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

Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value / Scrap Value.

Estimated Useful Life
The period the asset is expected to be used in the firm.

Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight years. After the eight years the machine will be sold for £20,000. Under the straight-line method, the depreciation amount will be computed as follows:


This means for this asset £10,000 will be charged in the P&L account as depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly over the life of the asset e.g. buildings use straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of use. The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value of the asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier periods of use and lower amounts in the latter periods of use as shown in the following example:

Example 4.12
Assume a firm buys machinery for £100,000 and provides depreciation on machines at 20% p.a. on reducing balance method. The depreciation charged to the P&L will be as follows for the next 3 years.

Year 1

£
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1

Balance to YR 2 80,000

Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2

Balance to YR 3 64,000

Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3

Balance to YR 4 51,200

Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of an asset are higher in the first periods of use and lower in the latter periods e.g.
 Fixtures, furniture and fitting.
 Plant and machinery.
 Motor vehicles.

ACCOUNTING TREATMENT ON DEPRECIATION
When non-current assets are depreciated, a new account for each type of asset is opened; this account is called a provision for depreciation whereby the following entries will be made:
Debit – P&L a/c
Credit – Provision for depreciation a/c
With the amount of depreciation charged for the period.

Example on straight-line method
The entries will be as follows:
Debit – P&L a/c with £10,000
Credit – Provision for depreciation. Machines a/c with £10,000 being depreciation provided for the machine.

The ledger accounts will be as follows:
Machinery Provision for Depreciation Machinery
£ £ £ £
Cashbook 100,000 31/12 Bal c/d 100,000 31/12 Bal c/d 10,000 P&L 10,000





The final accounts extracts will be shown as follows:
(a) Profit And Loss Account (Extract) for the year ended

Expenses £ £
Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x

(b) Balance sheet (Extract) as at________

Non Current Assets Cost Total NBV (Net Book Value)
£ Depreciation (£) £

Land x - x
Buildings x (x) x
Plant and Machinery x (x) x
Furniture, Fixtures & fittings x (x) x
Motor vehicles x (x) x
x x x

Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars account and the provision for depreciation account for the year ended 31 December 2002 from the information given below. Depreciation is at the rate of 20 per cent per annum. Using the basis of one month’s ownership needs one month’s depreciation.

2002 Bought two motor vans for £12,000 each on 1 January
Bought one motor van for £14,000 on 1 July.


Motorcars a/c

2002 £ 2002 £
1/1 Cashbook 24,000
1/7 Cashbook 14,000 31/12 Bal c/d 38,000
38,000 38,000

Calculation for depreciation
1/1 24,000 x 20 x 12 = £4,800 + 1/7( 14,000 x 20 x 6 = 1,400 )
100 12 100 12


= £4,800 + 1,400 = £6,200


Provision- Depreciation for Motor cars A/c
2002 £ 2002 £

31/12 Bal c/d 6,200 31/12 P&L 6,200




Profit And Loss Account (Extract) for the period.

Expenses £ £
Depreciation:
Motor vans 6200



Balance Sheet (Extract) as at 31/12/2002

Non-current Assets Cost Total NBV
Depreciation
Motor vans 38,000 (6200) 31,800

Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31 December.
You are to show:

a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.

The machinery bought was:

1999 1 January 1 plant costing £8,000
2000 1 July 2 plant costing £5,000 each
1 October 1 plant costing £6,000
2002 1 April 1 plant costing £2,000

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

Plant a/c
1999 £ 199 £
1/1 Cashbook 8000 31/12 Bal c/d 8000

2000 2000
1/1 Bal b/d 8000
1/7 Cashbook 10,000
1/10 Cashbook 6,000 31/12 Bal c/d 24,000
24,000 24,000

2001 2001
1/1 Bal b/d 24,000 31/12 Bal c/d 24,000

2002 2002
1/1 Bal b/d 24,000
1/4 Cashbook 2,000 31/12 Bal c/d 26,000
26,000 26,000

Calculation for Depreciation

1999 £ Accumulated Depreciation
£8,000 x 10/100 x 12/12 = 800 800

2000
£10,000 x 10/100 x 6/12 = 500

£6,000 x 10/100 x 3/12 = 150

£8,000 x 10/100 x 12/12 = 800
1,450 2,250

2001
£24,000 x 10/100 x 12/12 = 2400 4,650


2002
£24,000 x 10/100 x 12/12 = 2400

£2,000 x 10/100 x 9/12 = 150
2,250 7,200

Provision – Depreciation Machines
1999 £ 1999 £
31/12 Bal c/d 800 31/12 P&L 800


2000 £ 2000 £
1/1 Bal b/d 800
31/12 Bal c/d 2,250 P&L 1,450
2,250 2,250

2001 £ 2001 £
1/1 Bal b/d 2,250
31/12 Bal c/d 4,650 P&L 2,400
4650 4650

2002 £ 2002 £
1/1 Bal b/d 4,650
31/12 Bal c/d 7,200 P&L 2,550
7,200 7,200


Balance Sheet (Extract) as at 31/12/99 – 31/12/02

Non Current Assets Cost Total NBV
Depreciation
1999
Motor vans 8,000 (800) 7,200


1999
Motor vans 24,000 (2,250) 21,750


1999
Motor vans 24,000 (4,650) 19,350


1999
Motor vans 26,000 (7,200) 18,800



DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
When an asset is disposed and is no longer used by the firm, the appropriate entries should be made in the asset account and the total depreciation provided to date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:

(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset being disposed.

(b) Debit – provision for depreciation of asset a/c.
Credit – asset disposal a/c
With the total depreciation provided to date on the asset.

(c) Debit – cashbook.
Credit – asset disposal a/c
With the cash received on disposal.

When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance company accept liability but by the end of the period the insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.

(b) Debit – provision for depreciation of asset a/c
Credit – asset disposal a/c

(c) Debit – insurance receivable a/c
Credit – asset disposal a/c
With the amount expected from the insurance.

If the insurance pays before the end of the financial period, it will not be necessary to create an insurance debtor so the following entries will be made:

Debit – cashbook.
Credit – asset disposal a/c

If the asset is not used anymore or scrapped by the firm, the appropriate entries will be made in the asset account and provision for depreciation a/c only.

Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset no longer in use.

Debit – provision for depreciation for asset
Credit – asset disposal a/c
With the total depreciation provided to date.

The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with other incomes. The entry will be:

Debit – asset disposal a/c
Credit – P&L a/c
With the balance in the account.

A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense and therefore the entry will be.

Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is £800. The firm decides to trade in the motor vehicle with a new one the value of the new one being £500. The supplier of the new vehicle agree with the firm that the old motor vehicle is worth £300, therefore the difference will be paid by cash.

Motor vehicle a/c
£ £
Bal b/d 1,000 Motor vehicle disposal 1,000
Disposals 300
Cashbook 200 Bal c/d 500
1,500 1,500
===== ====


Motor Vehicle Disposal a/c

£ £
Motor vehicle a/c 1,000 Provision for depreciation 800
P&L 100 Motor vehicle 300
1,100 1,100

JOURNAL ENTRIES £ £
Debit – motor vehicles disposal 1,000
Credit – motor vehicles a/c 1,000
(Motor vehicle being traded in now transferred to disposal a/c)

Debit – Provision for depreciation – motor vehicles 800
Credit – Motor vehicle disposal a/c 800
(Total depreciation provided for motor vehicle)

Debit – Motor vehicle a/c 500
Credit – Asset disposal a/c 300
- Cashbook 200
(New motor vehicle acquired by trade-in value
of £300 and cheque payment of £200)

Debit – Asset disposal a/c 100
Credit – P&L 100
(Profit made on disposal)

In case of a loss,

Debit – P&L a/c
Credit – asset disposal a/c

If the firm trades in an old asset for a new one, the following entries will be made in addition to the movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old asset)
Asset disposal a/c (with trade-in value of old asset)

Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for each month of ownership. From the following details draw up the plant account and the provision for depreciation account for each of the years 1999, 2000, 2001 and 2002.

1999 Bought plant costing £900 on 1 January.
Bought plant costing £600 on 1 October.
2001 Bought plant costing £550 on 1 July.
2002 Sold plant which had been bought for £900 on 1 January 1999 for the sum of £275 on 30 September 2002.

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

Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500

2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d 1,500

2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d 2,050
2,050 2,050

2002 2002
1/1 Bal b/d 2,050 30/9 Disposal 900
31/12 Bal c/d 1,150
2,050 2,050












Plant Provision for Depreciation a/c

1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210

2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510

2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865

2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230


Calculation for Depreciation
Date Cost Months Depreciation charge £
1999
1/1 900 12 20/100 x 900 x 12/12 = 180
1/10 600 3 20/100 x 600 x 3/12 = 30
210

2000
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300

2001
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
1/2 550 6 20/100 x 550 x 6/12 = 55
355

2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365


Plant Disposal a/c
2002 £ 2002 £
Plant a/c 900 30/9 Provision for depreciation 675
P&L 50 30/9 Cashbook 275
950 950


Balance Sheet (Extract)
Total
Non Current Assets Cost Depreciation NBV
1999 Plant 1,500 (210) 1,290

2000 Plant 1,500 (510) 990

2001 Plant 2,050 (865) 1,695

2002 Plant 1,150 (555) 595

CHANGE OF DEPRECIATION POLICY
A firm may change its depreciation policy in several ways e.g. from straight line to reducing balance or vice versa, or it may increase/decrease the number of estimated useful years of an asset. A firm should always follow the depreciation policy adopted consistently and incase there is need to change the policy may be due to a new accounting standard or change in circumstances. This change should be disclosed in the financial statements.
When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation to be charged in the Profit and loss account .IAS 16 requires that depreciation should be based on the remaining net book value at the start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10 years. The firm depreciates the machines on a straight-line basis on the years of the number of estimated useful years. In the 4th year, the estimated useful life of the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried down for year 4. Change for 10yr – 8 yr is same as change from 10% to 12.5%


Provision for Depreciation

Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000

Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
1/1 Bal b/d 20,000
31/12 Bal c/d 30,000 31/12 P&L 10,000
30,000 30,000

Year 4 Year 4
1/1 Bal b/d 30,000
31/12 P&L 14,000
31/12 Bal c/d 44,000
44,000 44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be

£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease but increases from 10 years to 13 years.

Required: Show the provision of depreciation account in year 4

Provision for Depreciation

Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000

Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000

Year 3 Year 3
31/12 Bal c/d 30,000 1/1 Bal b/d 20,000
_____ P&L 10,000
30,000 30,000

Year 4 Year 4
1/1 Bal b/d 30,000
31/12 Bal c/d 37,000 31/12 P&L 7,000
37,000 37,000
REVALUATION OF NON CURRENT ASSETS
Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.g. land and buildings. IAS 16 on property, plant and equipment requires that such assets may be carried in the accounts at the revalued amounts (may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but for buildings, changes should be made at the cost and depreciation reserve account is usually opened for the purpose of these adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset Cost Depreciation
(a) Land £1,000,000 -
(b) Buildings £800,000 40,000




Illustration 1
The firm decides to revalue these two assets to reflect their current market prices and these are revalued at:
Land -£ 1,200,00 Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land 1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings 900,000 – 800,000)
(c) Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£ £
Bal B/D 1,000,000
Revaluation reserve __200,000 Bal C/D 1,200,000
1,2000,000 1,200,000

Buildings a/c
£ £
Bal B/D 800,000
Revaluation reserve 100,000 Bal C/D 900,000
900,000 900,000
Revaluation Reserve a/c
£ £
Land 200,000
Buildings 100,000
Bal C/D 340,000 Provision for depr. 40,000
340,000 340,000




Provision for depreciation (Buildings)
£ £
Revaluation 40,000 Bal B/D 40,000
Bal c/d 45,000 P & L 45,000
85,000 85,000
The balances in the Land and Building a/c will be shown as cost in the Balance Sheet and the revaluation reserve a/c appears together with the capital as a revaluation reserve (especially used in company accounts.

Land 1,200,000 – 1,000,000 = 200,000
Buildings 900,000 – 760,000 = 140,000 340,000

Any depreciation to be charged for the buildings should be based on the revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged in the P & L and will also be the Bal c/d in the provision for depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land and buildings downwards in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Land
Year 3 £ Year 3 £
1/1 Bal B/D 1,200,000 31/12 Revaluation 200,000
P & L 100,000
________

Bal C/D __900,000
1,200,000 1,200,000



Buildings
Year 3 £ Year 3 £
1/1 Bal B/D 900,000 31/12 Revaluation 100,000
P & L 100,000
_______ Bal C/D 700,000
900,000 900,000

Revaluation Reserve
Year 3 £ Year 3 £
31/12 Land 200,000 1/1/ Bal B/D 340,000
31/12 Building 100,000
31/12 Prov. For depr. _40,000 _______
340,000 340,000

Exam Type Question 4.19 (December 1995 ) Question 4
James Mbuvi started a taxi business in Nairobi March 1990 under the firm name Mbuvi Taxis. The firm had two vehicles KA and KB, which had been purchased forSh.560, 000, and Sh.720, 000 respectively earlier in the year.
In February 1992 vehicle KB was involved in an accident and was written off. The insurance company paid the firm Sh.160, 000 for the vehicle. In the same year the firm purchased two vehicles, KC and KD for Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle KE was purchased for Shs.840,000. In March 1994 another vehicle KF was purchased for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of the year irrespective of the date of purchase. Depreciation is not provided for vehicle disposed of during the year. The firm’s year ends on 31 December.

Required:
a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years. (7 marks)
b) Prepare the motor vehicle account (at cost). (8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles disposed of by the company. (5 marks)
(Total: 20 marks)


a
Vehicle 1990 1991 1992 1993 1994
KA 560,000 560,000 560,000 560,000
KB 720000 720,000 - - -
KC - - 800,000 - -
KD - - 800,000 800,000 800,000
KE - - - - 840,000
KF - - - - 960,000
Total cost 1,280,000 1,280,000 2,160,000 1,360,000 2,600,000
Depreciation at 25% 320,000 320,000 540,000 340,000 650,000

Motor Vehicle
1990 Sh 1990 Sh
1/3 Cashbook 1,280,000 31/12 Bal c/d 1,280,000
1991 1991
1/1 Bal b/d 1,280,000 31/12 Bal c/d 1,280,000
1992 1992
1/1 bal b/d 1,280,000 1/2 Disposal 720,000
Cashbook 1,600,000 31/12 Bal c/d 2,160,000
2,880,000 2,880,000
1993 1993
1/1 Bal b/d 2,160,000 1/11 Disposal 800,000
________ 31/12 Bal c/d 1,360,000
2,160,000 2,160,000
1994 1994
1/1 Bal b/d 1,360,000
1/1 Cashbook 840,000
1/3 Cashbook 960,000 31/12 Bal c/d 3,160,000
3,160,00 3,160,000


Provision For Depreciation – M/V
1990 Sh 1990 Sh
31/12 Balc/d 320,000 31/12 P & L 320,000
1991 1991
1/1 Bal b/d 320,000
1992
31/12 Bal c/d 640,000 31/12 P& L 320,000
640,000 640,000
1992 1992
1/2 Disposal 360,000 1/1 Bal b/d 640,000


31/12 Bal c/d 820,000 3/12 P & L 540,000
1,180,000 1,180,000
1993 1993
1/11 Disposal 200,000 1/1 Bal b/d 820,000
31/12 Bal c/ 960,000 31/12 P & L 340,000
1,160,000 1,1
60,000
1994 1994
31/1 Bal b/d 960,000
31/12 Bal c/d 1,610,000 P & L 650,000
1,610,000 1,610,000

Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost still remains until the asset is disposed. So depreciation ;

= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
l





Accumulated Net book
Cost Depreciation Value
£000 £000 £000
Land 4,000 Nil 4,000
Buildings 2,200 800 1,400
Plant and machinery 1,600 600 1,000
Motor vehicles 600 200 400

Depreciation is charged at the following annual rates (all straight line):
Land Nil
Buildings 2%
Plant and machinery 15%
Motor vehicles 20%
Appropriate depreciation charge is made in the year of purchase, sale or revaluation of an asset
During the year ended 30 June 2000 the following transactions took place:

1. I January 2000 The company decided to adopt a policy of revaluing its buildings; and they were revalued to £3.4m.
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000. Accumulated depreciation on this plant at 30 June 1999 amounted to £230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the purchase price was settled by part exchanging another motor vehicle, which had cost £20,000, at an agreed value of £12,000. the balance of £18,000 was paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999 of £10,000

Required:
Prepare ledger accounts to record these transactions in the records of Pentland Limited.
(16 marks)

Land
1999 £ 1999 £
1/7 Bal b/d 4,000

2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 5,200
5,200 5,200





Buildings
1999 £ 1999 £
1/7 Bal b/d 2,200

2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 3,400
3,400 3,400



Revaluation Reserve
2000 £ 2000 £
1/1 Buildings 1,200
30/6 Bal C/D 2,022 1/1 Provision for depr. 822
2,022 2,022

Provision for Depreciation - Building
1999 £ 1999 £
1/7 Bal b/d 800

2000 2000
1/1 Revaluation 822 30/6 P & L

2,200 x ½ x 15
30/6 Bal c/d 34_ 3,400 x ½ x 15 56_
856 856


Plant
1999 £ 1999 £
1/7 Bal B/D 1,600

2000 2000
1/1 Cashbook 400 1/1 Disposal 300
_____ 30/6 Bal c/d 1,700
2,000 2,000




Provision for Depreciation - Plant
1999 £ 1999 £
1/7 Bal b/d 600

2000 2000
1/1 Disposal 252.50 30/6 P & L 247.50
Bal c/d 595.00
847.50 847.50


Motor Vehicles
1999 £ 1999 £
1/7 Bal b/d 600

2000 2000
1/4 Disposal 12 1/4 Disposal 20
1/4 Cash book 18 30/6 Bal C/D 610
630 630


Motor Vehicle Disposal
2000 £ 2000 £
1/4 Motor Vehicle 20 1/4 Provision for depr. 13
P & L 5 1/4 Motor Vehicle 12
25 25


Provision for depreciation - Vehicle
1999 £ 1999 £
1/7 Bal b/d 200

2000 2000
1/4 Disposal 13 1/4 P & L 120.5
30/6 Bal c/d 307.5 30/6 Bal C/D ______
320.50 320.50

Plant - Disposal
2000 £ 2000 £
1/1 Plant 300 1/1 Provision for depr. 252.50
P & L 2.50 Cash book 50___
25 302.50


Property, Plant and Equipment Schedule (Formerly fixed asset movement schedule)
The property, plant and equipment schedule is a summary report on the balances and transactions of the asset and provision for depreciation account as per the requirements of IAS 16 to be reported in the published accounts of companies. The format is as follows:

Property, Plant and Equipment Schedule:
Cost/ Valuation Freehold property Leasehold Property Plant and Fixture, Furniture Total
(£) Long leases
(£) Short lease
(£) Machinery (£) And fittings (£) (£)
Bal as at 1/1/01 x x x x x x
Additions xx xx xx xx xx xx
Revaluations (gains) xx - - - - xx
Reclassifications - (xx) xx - - -
Disposals (xx) (xx) (xx) (xx) (xx) (xx)
Bal as at 31/12/01
xx
xx
xx
xx
xx
xx

Depreciation/
Amortization
Bal as at 1/1/10 xx - xx xx xx xx
Change for year xx - xx xx xx xx
Revaluation (xx) - (xx) (xx) (xx) (xx)
Eliminated on Disposal
(xx)
-
(xx)
(xx)
(xx)
(xx)
Bal as at 31/12/01
(xx) -
(xx)
(xx)
(xx)
(xx)
N.B. V as at 31/12/01 xx xx xx xx xx xx
NBV as at 31/12/01 xx xx xx xx xx xx


Additional information is in this schedule called reclassifications where some of the non-current assets are transferred into a different class. (e.g.) some of the properties hold under long leases (over 50 years) will be transferred to the short leases classes when their term becomes less than 50 years. This is a reclassification from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the long lease class and on addition in the short lease class

Exam Type Questions

May 2000 Question Three
a) Briefly explain the nature and purpose of accounting for depreciation.
b) The chief accountant of Jitegemea Ltd has encountered difficulties while accounting for fixed assets and the related depreciation in the company’s draft accounts for the year ended 30 April 2000. He has decided to seek your professional advice and presented the following balances of fixed assets as at 1 May 1999:


Acquisition Accumulated Depreciation
Cost Depreciation Rates
Sh. Sh. %
Furniture 900,000 300,000 12.5
Trucks 3,525,000 1,470,000 25
Plant and machinery 7,387,500 4,462,500 10
Land 2,775,000 - Nil
Buildings 2,925,000 292,500 2.5

The following additional information was also available:

1. It is the company’s policy to write off cost of the assets using above percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in during the year at a value of sh.157,500 in part exchange of the new delivery truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company that went out of business. At the time of acquisition sh.90,000 was paid to have the assets revalued by a professionally qualified valuer. The revaluation indicated the following market values.
Sh.
Land 900,000
Buildings 600,000
Machinery 300,000

Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company’s accounts for the year ended 30 April 2000. (10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm. IAS 16 on property plant and equipment defines depreciation as allocation of a depreciable amount of a non-current asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses that relate to a particular financial period and therefore because the firm to earn revenue or income uses the assets, then the loss of value should be marched with these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.


Property, Plant & Equipment Schedule:
Cost/Valuation Land, Buildings
And Machinery Furniture Motor Total

Sh. Sh. Sh. Sh.
Bal as at 1/5/99 13,087,500 900,000 3,225,000 17,512,500
Additions 1,350,000 - 450,000 1,800,000
Revaluation 450,000 - - 450,000
Disposals (187500) _____- (248,250) (435,750)
Bal as at 30/4/2000 14,700,000 900,000 3,726,750 19,326,750

Depreciation
Bal as at 1/5/99 4,755,000 300,000 1,470,000 6,525,000
Charge for the year 1,066,500 112,500 931,687.5 2,110,687.5
Eliminated on disposal (37,500) -______ (124,125) (161,625)
Bal as at 30/4/2000 5,784,000 412,500 2,277,562.5 8,474,062.5
NBV 1/5/99 8,332,500 600,000 2,055,000 10,987,500
NBV 30/4/2000 8,916,000 487,500 1,449,187.5 10852,687.8


Workings:

Depreciation on Furniture = 900,000 x 12.5% = 112,500

Motor vehicle = cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5

Buildings = (292,500 + 600,000) x 4%
= 141,000
At 2.5% = 2,925,000 x 2.5% x 4 = 292,500
4% = 292,500 x 4% x 4 = 468,000
175,500


Machinery: cost c/f + Additions – Disposals = Bal x 10%
73,787,500 + 300,000 – (187,500) = 7,500,000 x 10%
= 750,000


REINFORCING QUESTIONS

QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and purchases ledgers. The control accounts for the month of September 1999 are in balance and incorporate the following totals:

£
Sales ledger:
Balances at 1 September 1999: Debit 386,430
Credit 190
Sales 163,194
Cash received 158,288
Discounts allowed 2,160
Sales returns inwards 590
Credit balances at 30 September 1999 370
Purchases ledger:
Balances at 1 September 1999: Credit 184,740
Debit 520
Purchases 98,192
Cash payments 103,040
Discounts received 990
Purchases returns outwards 1,370
Debit balances at 30 September 1999 520

Although the control accounts agree with the underlying ledgers, a number of errors have been found, and there are also several adjustments to be made. These errors and adjustments are detailed below:

1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the sales ledger account for the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed account. As a result, the supplier issued a credit note for £2,000 on 26 September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the account of R Jones.
8. A debit balance of £420 existed in the purchases ledger at the end of August 1999. The supplier concerned cannot now be traced and it has been decided to write off this balance.

Required:
Prepare the sales ledger and purchases ledger control accounts as they should appear after allowing, where necessary, for the errors and adjustments listed.


QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its debtor collection system, the company maintains a sales ledger control account. In preparing the accounts for the year to 31 October 20X3 the accountant discovers that the total of all the personal accounts in the sales ledger amounts to £12,802, whereas the balance on the sales ledger control account is £12,550.

Upon investigating the matter, the following errors were discovered:

1. Sales for the week ending 27 March 20X3 amounting to £850 had been omitted from the control account.
2. A debtor’s account balance of £300 had not been included in the list of balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell’s sales ledger account.
10. Returns inwards valued at £200 had not been included in the control account.
11. Cash received of £80 had been credited to a personal account as £8.
12. A cheque for £300 received from a customer had been dishonored by the bank, but no adjustment had been made in the control account.

Required:
Prepare a corrected sales ledger control account, bringing down the amended balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended sales ledger control account balance.

QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999, which showed a profit of £81,208, when he realized that no bank reconciliation statement had been prepared at that date.

When checking the cashbook against the bank statement and carrying out other checks, he found the following:

1. A cheque for £1,000 had been entered in the cashbook but had not yet been presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31 March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but have not been recoded by George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had been mistakenly entered in the cash book and the plant account as £2,900. Depreciation of £290 had been charged in the profit and loss account for this plant.
5. A cheque for £980 from a credit customer paid in on 26 March was dishonoured after 31 March and George decided that the debt would have to be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been entered in the cash book as a debit and posted to the credit of motor vehicles account. Depreciation at 25% per annum (straight line) is charged on motor vehicles, with a full year’s charge calculated on the balance at the end of each year.
7. The total of the payments side of the cash book had been understated by £1,000. On further investigation it was found that the debit side of the purchases account had also been understated by £1,000.

George had instructed his bank to credit the interest of £160 on the deposit account maintained for surplus business funds to the current account. This the bank had done on 28 March. George had made an entry on the payments side of the cashbook for this £160 and had posted it to the debit of interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a cheque drawn on the business account. The entry in the cashbook had been debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account in the purchases ledger, using a cheque drawn on George’s personal bank account. No entries have yet been made for this transaction.

The cashbook showed a debit balance of £4,890 before any correcting entries had been made. The balance in the bank statement is to be derived in your answer.

Required:
1. Prepare an adjusted cash book showing the revised balance which should appear in George’s balance sheet at 31 March 1999. (6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999. (2 marks)
3. Draw up a statement for George showing the effect on his profit of the adjustments necessary to correct the errors found. (8 marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)

QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial balance.
(8 marks)

The trial balance of S Juma, a sole trader, did not balance on 30 April 1995. The difference was put in the suspense account. The final accounts which were then prepared showed a net profit of Sh. 64,000. During audit, the following errors were noted:

• A loan from ABD Bank of Sh 10,000 was entered correctly in cash book but was not posted to the ledger.
• A cheque of Sh. 4,000 for rent was not entered in the books.
• Closing stock was overvalued by Sh 1,500.
• Discount allowed of Sh 500 was entered in the discount-received account.
• The opening stock was understated by Sh 3,200.
• Prepaid insurance of Sh 220 had been included in the profit and loss account.
• Goods destroyed by fire amounting to Sh 12,000 were written off in the profit and loss account. However, the insurance company has agreed to compensate the full amount.

Required:
1. Journal entries to correct the errors. (8 marks)
2. Statement of corrected profit. (2 marks)
3. Suspense account. (2 marks)
(Total: 20 marks)



QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on 31st December 2002:

£ £
Capital 40,000
Purchases 26,154
Sales 36,246
Salaries 4,814
Opening stock 4,307
Insurance 820
Rent 965
Buildings 25,000
Furniture 14,500
Debtors 6,140
Other expenses 1,060
Creditors 4,638
Commission _____ __946
82,795 82,795

Adjustments:

1. Salaries due, £350
2. Insurance was paid for one year up to 31st March 19-2.
3. Rent received for January 19-2, £165.
4. Commission accrued but not yet received, £120.
5. Furniture to be depreciated by 10%.
6. 5% of debtors are doubtful.
7. Stock on 31st December 19-1 was valued at £5,008.

Required:
Prepare a 10 column worksheet.



QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business organization. (3 marks)

XML Ltd maintains control accounts in its business records. The balances and transactions relating to the company’s control accounts for the month of December 1994 are listed below:


Balance at 1 December 1994:
Sales ledger 6,185,000 (debit)
52,500 (credit)
Purchases ledger 16,500 (debit)
4,285,000 (credit)
Transactions during December 1994:
Sales on credit 8,452,000
Purchases on credit 5,687,500
Returns inwards 203,500
Returns outwards 284,000
Bills of exchange payable 930,000
Bills of exchange receivable 615,000
Cheques received from customers 7,985,000
Cheques paid to suppliers 4,732,000
Cash paid to suppliers 88,500
Bill payable dishonoured 400,000
Charges on bill payable dishounered 10,000
Cash received from credit customers 153,000
Bad debts written off 64,500
Cash discounts allowed 302,000
Bill receivable dishonoured 88,500

Balances at 31 December 1994:
Sales ledger 44,000 (credit)
Purchases ledger 23,500 (debit)

Required:
Post the sales ledger and the purchases ledger control accounts for the month of December 1994 and derive the respective debit and credit closing balances on 31 December 1994.
(17 marks)


CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK



LESSON FIVE
FURTHER ADJUSTMNETS TO ACCOUNTS
(a) CONTROL ACCOUNTS
Control accounts are so called because they control a section of the ledgers. By control we mean that the total on the control accounts should be the same as the totals on the ledger accounts. There are two main types of control accounts:
(i) Sales ledger control Account – also called total debtors. The balance on the sales ledger control account should be the same as the total of the balances in the sale ledger.

(ii) Purchases Ledger Control Account – also called total creditors .The balance carried down (Bal c/d) on the purchases Ledger Control Account should be the same as the total of the balances in the purchases ledger.

Example (Sales Ledger Control a/c)

Sales Ledger Control A/c


Sales 1400 CashBook 700
Bal C/D 700
1400 1400


SALES LEDGER
Debtor A a/c

Sales 200 C/B 50
Bal c/d 150
200 200

Debtor B a/c

Sales 400 C/B 250
Bal c/d 150
400 400

Debtor C a/c

Sales 300 C/B 100
Bal c/d 200
300 300


Debtor D a/c

Sales 500 C/B 300
Bal c/d 200
500 500


Example: Purchases Ledger Control a/c

Purchases Ledger Control a/c

C/B 1900 Purchases 2600
Bal c/d 700
2600 2600

PURCHASES LEDGER

Creditor A

C/B 400 Purchases 600
Bal c/d 200
600 600

Creditor B

C/B 450 Purchases 700
Bal c/d 250
700 700

Creditor C

C/B 350 Purchases 500
Bal c/d 150
500 500

Creditor D

C/B 700 Purchases 800
Bal c/d 100
800 800

Purpose of Control Accounts
1. Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
3. To detect and prevent errors and frauds in the customers and suppliers account.
4. To facilitate delegation of duties among the debtors and creditors clerks.


FORMAT OF A SALES LEDGER CONTROL
Sales Ledger Control a/c

1. Balance b/d of the total debit balances from previous period 1. Total credit balances of the sales ledger brought forward
2. Total credit sales for the period (from the sales journal) 2. Total cash received from credit customers/debtors (from cash book)
3. Refunds to customers (from cashbook) 3. Total cheques received from credit customers/debtors (from cash book)
4. Dishonored cheques (from cashbook) 4. Total returns-inwards (returns-inwards journal)
5. Bad debts recovered (from general journal) 5. Total cash discount allowed to customers (from cash book)
6. Bad debtors written-off (from general journal)
7. Cash received from bad debtors recovered (cash book)
8. Purchases Ledger contra
9. Allowances to customers (price reduction in excess to discounts allowed)
6. Total credit balances of the sales Ledger carried forward 10. Total debit balance carried down to the next period – to be derived after posting all those transactions

Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes place when there is a credit balance on the debtor’s a/c and the customer is not a creditor too.
The entry will be:

Dr. Debtor’s a/c
Cr. Cashbook

Example:
Debtor A
£ £
Sales 1000 Cashbook 950
(Refunds) C/B 100 Discounts 50
Returns 100
1100 1100
If the firm has not paid this amount owed to the customer, then it’s carried forward to the next period then is a credit balance in the customer’s a/c. Therefore, if a firm has several customer, this information will be shown in the control a/cs as total balance c/f
(debit side).







Contra against the purchases ledger balances:
Some debtors may also be creditors in the same firm and therefore, if the amount due to them as creditors is less than what they owe as debtors, then the credit balance is transferred from their creditors a/c to their debtors a/c as a contra entry.

Example:
Debtor (A)

Sales 2000 Contra- purchases 1000
Bal c/d 1000
2000 1100

Creditor (A)

Contra - Debtor 1000 Purchases 1000

FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT
Purchases Ledger Control A/C
1. Total debit balances from purchases ledger brought forward from previous period 1. Total credit balance brought forward (of purchases ledger from the previous period)
2. Total cash paid to creditors
(from cash book) 2. Total credit purchases for the period (from purchases journal)
3. Total cheques paid to creditors
(from cash book) 3. Refunds from suppliers
(from cash book)
4. Total cash discounts received
(from cash book)
5. Allowances by suppliers
6. Sales ledger contra
7. Total returns outwards
(from returns-outwards journal)
8. Total credit balance
(to be derived after posting entries) 4. Total debit balances (of the purchases ledger carried forward)

NOTES:
The following notes should be taken into consideration:

1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase or decrease in provisions for doubtful debts will not affect this account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some cases it can be included especially where there are incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be shown on the debit side of the sales ledger control. However when trying to determine the turnover under incomplete records then it is wise to omit it.

Example 5.1
You are required to prepare a purchases ledger control account from the following for the month of June. The balance of the account is to be taken as the amount of creditors as on 30 June.

2003 £
June 1 Purchases ledger balances 36,760
Totals for June:
Purchases journal 422,570
Returns outwards journal 10,980
Cheques paid to suppliers 387,650
Discounts received from suppliers 8,870
June 30 Purchases ledger balances ?


Solution
Purchases Ledger Control A/C
2003 £ 2003 £
Returns out 10,980 Bal b/d (1/6) 36,760
Bank 387,950
Discounts received 8,870
Bal c/d (30/6) 51,830 Purchases 422,570
459,330 459,330

Example 5.2
Prepare a sales ledger control account from the following:

2003 £
May 1 Debit balances 64,200
Totals for May:
Sales journal 128,000
Cash and cheques received from debtors 103,700
Discounts allowed 3,950
Debit balances in the sales ledger set off against credit balances in the purchases ledger
1,450
May 31 Debit balances ?
Credit balances 500

Solution

Sales Ledger Control A/C
2003 £ 2003 £
1/5 Bal b/d 64,200 Cash book 103,700
Sales 128,000 Discounts allowed 3,950
Purchases contra 1,450
31/5 Bal c/d 500 31/5 Bal c/d 83,600
192,700 192,700


Example 5.3 (Exam type question – November 1997 Question 2)

(a) Explain the purposes for which control accounts are prepared. (3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of November 1997 are listed below:-

Sh.
Balances on 1 November 1997:
Sales ledger 9,123,000 (debit)
211,000 (credit)
Purchases ledger 4,490,000 (credit)
88,000 (debit)
Transactions during November 1997:
Purchases on credit 18,135,000
Allowances from suppliers 629,000
Receipts from customers by cheques 27,370,000
Sale on credit 36,755,000
Discount received 1,105,000
Payments to creditors by cheques 15,413,000
Contra settlements 3,046,000
Bills of exchange receivable 6,506,000
Allowances to customers 1,720,000
Customers cheques dishonored 489,000
Cash received from credit customers 4,201,000
Refunds to customers for overpayments 53,000
Discounts allowed 732,000
Balances on 30 November 1997
Sales ledger 136,000 (credit)
Purchases ledger 67,000 (debit)

Required:

The sales ledger and purchases ledger control accounts for the month of November 1997 and show the respective debit and credit closing balances on 30 November 1997.
(17 marks)
(Total: 20 marks)
(a)
i) Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)

ii) To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.

iii) To detect and prevent errors and frauds in the customers and suppliers account.

iv) To facilitate delegation of duties among the debtors and creditors clerks.

Kopesha Ltd

Sales Ledger Control A/C
1997 Sh 1997 Sh
1/11 Bal b/d 9,123,000 1/11 Bal b/d 211,000
Sales 36,755,000 Bank 27,370,000
Dishonored cheques
489,000
Contra
3,046,000
Refunds to customers
53,000 Bills of exchange receivable
6,506,000
Allowances 720,000
Cash 4,201,000
Discounts allowed 732,000
30/11 Bal c/d 136,000 30/11 Bal c/d 2,770,000
46,556,000 46,556,000


Purchases Ledger Control A/C
1997 Sh 1997 Sh
1/11 Bal b/d 88,000 1/11 Bal b/d 4,490,000
Allowances from suppliers
629,000 Purchases 18,135,000
Discounts received 1,105,000
Bank 15,413,000
Contra settlement 3,046,000
30/11 Bal c/d 2,411,000 30/11 Bal c/d 67,000
22,692,000 22,692,000

Example 5.4 (Exam Question – May 2000 Question 4)
Poesha Limited keeps sales and purchases control accounts in the General Ledger. The transactions for the month ended 30 April 2000 were as follows:
Sh
Credit balances on 1 April 2000 -Sales ledger 154,000
-Purchases ledger 569,000
Debit balances on 1 April 2000 -Sales ledger 956,000
-Purchases ledger 196,000
Credit balances on 30 April 2000 -Sales ledger 178,000
Debit balances on 30 April 2000 Purchases ledger 189,000
Credit purchases 2,450,000
Credit sales 4,563,000
Cheques received from debtors 3,140,000
Cash received from debtors 1,367,000
Cheque payments to creditors 1,994,000
Cash payments to creditors 352,000
Bad debts written off 68,000
Discounts received 104,000
Discounts allowed 169,000
Contra entry to sales ledger from purchases ledger 234,000
Refunds to debtors 62,000
Returns outwards 138,000
Returns inwards 231,000

Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April 2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
• Errors that don’t affect the trial balance
• Errors that affect the trial balance

Errors that don’t affect the trial balance
The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the same as the credits. However, on taking a close check on the balances and transactions posted, errors may have been made and therefore the balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are explained as follows:

a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not made e.g. a sales invoice of £400 is not posted in the sales journal therefore no entry is made in the debtor’s account and the sales account i.e. both debit of £400 in debtor’s account and credit of £ 400 in the sales account.

The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:

Debiting debtors £400
Crediting sales £400

b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same class. Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount of £ 200. Instead of a debit to T Thompson’s account it is made to L Thompson’s account and the corresponding credit in the sales account is correct.

Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson by:
£

(i) Debit T Thompson a/c 200
(ii) Credit L Thompson a/c 200

c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different class e.g. Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c. (Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is correct)

The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account. Therefore a capital expenditure has been posted as revenue expenditure.


To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
£
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400


d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit is posted as a credit and a credit is posted as a debit. Example: cash drawn from the bank of £150 for business use is posted as a debit in the bank account and credit in cash in hand.

To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
(ii) Post the transaction correctly

The entries will therefore be as follows:

(i) Debit Cash in hand by £150
Credit bank by £150

To correct the error of £ 150 posted in the wrong sides of these account

(ii) Debit cash by £150
Credit bank by £150
To post the entries correctly

e) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is either under/over stated. In some cases, this is known as a transposition error e.g. cash received from a debtor of £980 is credited/posted to the customer’s account as £890.

To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct balance. In this case, we will:

£
Debit cash book 90
Credit debtors 90

f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or credits then another error may take place to overstate the debits or credits by the same amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but shown in the trial balance as £3,890 and another error carried to the trial balance of fixture amounting to £4,540 instead of £4,450:

£
Purchases 3,980
3,890
(90)

£
Fixtures 4,450
(4,540)
90

This type of error is corrected by use of a suspense account.

Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are required.

a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.

Solution
THE JOURNAL
Debit Credit
Sales 10,000
Capital
Additional capital passed into sales a/c now transferred to capital a/c 10,000



Drawings 700
General expenses
Drawings debited in general expense now transferred to drawing a/c 700
Drawings 89
Insurance 89
Private insurance transferred from insurance a/c to drawings a/c
Purchases 270
C Kelly 270
Purchases and creditors amount to 857 initially entered as £587
Bank 390
Cash 390
Correct error in posting
Bank 390
Cash
To post the cash banked correctly 390
Bank 400
Cash 400
Cash drawings correctly started from bank to cash
J Charlton 168
M McCarthy
Returns in from McCarthy entered in error in J Carlton now transferred to his a/c
Motor expenses
Motor disposal a/c
To correct error in recording sales proceeds In expense account

1000
168

1000


Example 5.6 (Exam type question – May 200 Question 2)

The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:









Sh’000 Sh’000 Sh’000 Sh’000
Capital 1 April 1999 1,890 Land and buildings (at valuation)
1,650
Profit for the year ended 31 March 2000
450 Machinery (at cost) 1,200
Deduct: drawings 150 300 Deduct: depreciation 750 450
Creditors 630 Stock at cost 570
Bank overdraft 270 Debtors 420 990
3,090 3,090


Further investigation reveals the following information:

1. The closing stock includes damaged goods which, although they had cost Sh. 10,000 have an estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt. A provision for doubtful debts of 2 ½% is also required on the balance of the debtors.
3. The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-line basis over eight years. A more realistic estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been reflected in the accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr. Patel had been deducted as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party had not been received and no entry had been made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions. (10 marks)
b) A statement of revised profit for the year ended 31 March 2000. (8 marks)
c) A revised balance sheet as at 31 March 2000. (7 marks)
(Total: 25 marks)
Solution




















a) THE JOURNAL
Debit Credit
Trading account 2,500
Stock
Being a reduction in stock for damaged goods 2,500
Profit and loss(Bad debts) 20,000
Debtors
Debtors gone bankrupt written off 20,000
Profit and loss) 10,000
Provision for doubtful debts
Being a provision for doubtful debts created at 20%. 10,000
Provision for depreciation 150,000
Profit and loss
A change in estimated lifespan for machinery 150,000
Profit and loss( wages ) 9,500
Accrued expenses
Wages owing omitted in the accounts 9,500
Profit and loss (Bank overdraft charges) 8,000
Bank overdraft
Changes for overdraft not reflected in the accounts. 8,000
Drawings 100,000
Profit and loss
Drawing to Mr. Patel deducted as an expense. 100,000
Accrued income 20,000
Profit and loss (rent income)
Rent receivable owing not reflected in the accounts. 20,000



b) STATEMENT OF ADJUSTED NET PROFIT
Sh Sh
Net profit as per the account 450,000
Add: Provision for depreciation 50,000
Drawings 100,000
Accrued income (rent) 20,000 170,000
620,000
Less: Stock reduction 2,500
Bad debts 20,000
Provision for doubtful debts 10,000
Accrued expenses 9,500
Bank charges 8,000 (50,000)
Net profit (revised) 570,000











REVISED BALANCE SHEET AS AT 31 MARCH 2000
Sh Sh Sh
Land and buildings 1,650,000 - 1,650,000
Machinery 1,200,000 (700,000) 500,000
2,850,000 700,000 2,150,000
Add: Current Assets
Stock 567,500
Debtors 400,00
Less: Provision for doubtful debts (10,000) 390,000
Accrued rent income 20,000
977,500
Less Current liabilities
Creditors 630,000
Accrued wage expense 9,500
Bank overdraft 278,000 (917,500) 60,000
2,210,000
Capital 1,890,000
Add Net Profit 570,000
2,460,000
Less drawings (250,000)
2,210,000

Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the credits. The debits may be more than the credits and vice versa.
Examples include:

1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash received from a debtor is debited to the cashbook and no other entry is made in the account, i.e. no credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit. Example – cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £ 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts or when taken up to the trial balance. Example Bal c/d in the cash book for cash at bank of £ 2000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The balance may also be brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.

To correct the above errors, the appropriate or the adjusting entries are made through an account called a suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are posted here. The balance to be shown on the suspense accounts depends on which side the error is shown on the trial balance.

If the debits  credits, then an amount is included on the credit side of the trial balance so that the debits = credits. This is a credit balance and will be taken to the suspense account on the credit side.

Example:
DR CR
Total 240 200
Suspense - 40
240 240


Suspense a/c
£ £
Difference as per T/B 40


If the credits are more than the debits this is a debit balance and therefore we require an amount to be added to the total of the debits for the two side to be same. This debit balance is posted to the debit side of the suspense a/c.

DR CR
Total 260 300
Suspense 40 -
300 300


Suspense a/c
£ £
Difference as per T/B 40

Posting the correct entries should eliminate the balance on the suspense account.

In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance. This balance depends on whether it is a credit or debit and whether it is material or not for purposes of proper accounting treatment. The following is the recommended approach:

Balance Material Not Material
Debit Show as an asset (eg) other debtors Charge in P& L as an expense
Credit Show as a liability (eg) other creditors Report as income in P&L

Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a shortage on the credit side of the trial balance. A suspense account was opened for the difference.
In January 2003 the following errors made in 2003 were found:

(i) Sales daybook had been undercast by £1,000.
(ii) Sales of £2,500 to J Church had been debited in error to J Chane account.
(iii) Rent account had been undercast by £700.
(iv) Discounts received account had been under cast by £3,000.
(v) The sale of a motor vehicle at book value had been credited in error to Sales account £3,600.
You are required to:

a) Show the journal entries necessary to correct the errors.
b) Draw up the suspense account after the errors described have been corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended 31 December 2002, show the calculations of the corrected net profit

Solution
THE JOURNAL
£ £
Suspense 1,000
Sales
Sales under cast of £100 now corrected ,1000
J Church 2,500
J Chane
Sale to J Church posted to J Chane corrected 2,500
Rent 700
Suspense
Under cast in rent balance now corrected 700
Suspense 3,000
Discount received
Under cast in discount received balance now corrected 3,000
Sales a/c 3,600
Disposal ,3600
Sale of motor vehicle entered in sales a/c now corrected

Suspense a/c
£ £
Sales 1,000 Bal b/d 3,300
Discount received 3,000 Rent 700
4,000 4,000

STATEMENT OF CORRECTED NET PROFIT
£ £
Net profit as per account 79,000
Add:
Sales 1,000
Discount received 3,000 4,000
Less:
Rent 700
Sales 3,600 (4,300)
Corrected net profit 78,700

Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is extracted at the end of each month, and a profit and loss account and balance sheet are computed. This month, however, the trial balance did not balance, the credits exceeding debits by £1,536.


Your are asked to help and after inspection of the ledgers discover the following errors:

(i) A balance of £87 on a debtor’s account has been omitted from the schedule of debtors, the total of which was entered as debtors in the trial balance.
(ii) A small piece of machinery purchased for £1,200 had been written off to repairs.
(iii) The recipiets’ side of the cashbook had been under cast by £720.
(iv) The total of one page of the sales daybook had been carried forward as £8,154, whereas the correct amount was £8,514.
(v) A credit note for £179 received from a supplier had been posted to the wrong side of his account.
(vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
(vii) Mr. Smith, whose past debts to the company had been the subject of a provision, at last paid £731 to clear his account. His personal account has been credited but the cheque has not yet passed through the cashbook.

Solution
Suspense a/c
£ £
Opening balance 1,536.00 Debtors 87.00
Sales - under record 360.00 Cashbook under cast 720.00
Creditors error 179.00
Creditors (correct) 179.00
Cashbook: smiths debt paid 731.00
1,896.00 1,896.00

i. Increase total for debtors by 87.
ii. Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an increase in profits.
iii. Increase sales by 360.
iv. Reduce the creditors by 358.
v. accruals by 152 and reduce profits by the same.
vi. Increase the cash balance by 731.

Example 5.9 (Exam type question – May 2002 question 1).
On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial balance. Due to errors committed by the bookkeeper, the trial balance failed to balance by Sh 369,400. He placed the difference in a suspense account as shown below:
Wanji trial balance as at 31 December 2001
Sh Sh
Fixed assets – cost 832,000
Stocks:
1 January 2001 148,000
31 December 2001 98,800
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for depreciation 166,400
Purchases 733,000
Operating expenses 126,000
Provision for doubtful debts 3,800
Discounts received 5,000
Discounts allowed 5,800
Suspense account ________ 369,400
2,548,400 2,548,400

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

1. The total of the sales daybook for December 2001 was overcast by Sh 25,700.
2. On July 2001, the business purchased office equipment for Sh 40,000. These were debited to purchases account. Depreciation on the equipment is at the rate of 10% per annum on cost and based on the period (months) of usage in the year.
3. A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor’s account.
4. A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.
5. An amount of Sh 15,000 received from a debtor was not posted to the debtor’s account from the cashbook.
6. Purchases daybook for October 2001 was under cast by Sh 28,000.

Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account. (6 marks)
(b) Journal entries to correct the errors (Narrations not required) (6 marks)
(c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above. (4 marks)
(d) The adjusted net profit for the year. (4 marks)




Solution:
Adjusted Trial Balance
Sh Sh
Fixed assets – cost 832,000
Stock - 1 January 2001 148,000
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for depreciation 166,400
Purchases 733,000
Operating expenses 126,000
Provision for doubtful debts 3,800
Discounts received 5,000
Discounts allowed 5,800
Suspense account 47,800 _______
2,338,200 2,338,200

THE JOURNAL
Dr Cr
Sales 25,700
Suspense 25,700

Office equipment 40,000
Purchases 40,000

Provision for depreciation 2,000
Profit and loss 2,000

Creditors 8,500
Suspense 8,500
Creditors 8,500
Suspense 8,500

Suspense 900
Telephone 900

Suspense 15,000
Debtor 15,000

Suspense 2,500
Discounts allowed 2,500

Suspense 2,500
Discounts received 2,500

Purchases 28,000
Suspense 28,000

SUSPENSE ACCOUNT
2001 Sh 2001 Sh
1 Jan Bal b/d 47,800 1 Jan Sales 25,700
Telephone 900 Creditors 8,500
Debtors 15,000 Creditors 8,500
Discount allowed 2,500 Purchases 28,000
Discount received 2,500
Bal c/d 2,000 ______
70,700 70,700


STATEMENT OF ADJUSTED NET PROFIT

Sh Sh
Net profit as per the accounts 85,800
Add
Purchases 40,000
Telephone expenses 900
Discount allowed + received 5,000 45,900
131,700
Less
Sales 25,700
Depreciation 2,000
Purchases 28,000 (55,700)
Corrected Net Profit 76,000

c) STOCK VALUATION (IAS 2 INVENTORIES)
inventories in a firm includes:

(a) Finished goods (assets held for sale)
(b) Work in progress (assets still in production for purposes of sale)
(c) Raw materials (to be used in production process).

The cost of inventories should include all costs of purchase. (Purchase price and other taxes like import duties), costs of conversion (e.g. direct labour) and other costs incurred in bringing the inventories into their present location and condition (carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry. In most cases either carrying out stocktaking or checking the stock records that the firm is kept determines the value of stock at the end of the financial period. Stocktaking involves counting the number of units of finished goods, work in progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of units available.

Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400 each respectively. At the end of year 2002, stocktaking was carried out and the following units were available:

Product A 200,000 units
Product B 20,000 units
Product C 30,000 units

Required:
Compute the cost of stock to be included in the final accounts.

Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000

Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each unit as far as the business can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number of transactions and changes in the cost price, IAS 2 on inventories recommends the use of the following estimates:

(i) First In First Out (FIFO)
The business assumes that items of stocks that were purchased first are sold first and therefore, items left as part of closing stock were purchased recently.
(ii) Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased during the period.
(iii) Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first and therefore, the closing stock shows items that were bought first.

Net Realizable Value (SP- Expenses)
This is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either actual or estimated under the different methods) and if the firm was to sell the stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net realizable value.

Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000 is damaged. This stock can fetch the firm Sh 22,000 after repairs and packaging that will cost Sh 4,000.

Required:
What value will be attached on this damaged units and the total closing stock for the final accounts purposes.
Sh
Cost 20,000
Selling price 22,000
Repairs 4,000
NRV (22-4) 18,000



The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this damaged unit will be shown as Sh 18,000. The balance of the stock of Sh 280,000 + 18,000 of the damaged stock will be included in the final accounts and shown together as Sh 298,000.

d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form. A work sheet has 8-10 columns and the simple headings are as follows:

TRIAL BALANCE ADJUSTMENT TRADING ACCOUNT PROFIT & LOSS ACCOUNT BALANCE SHEET
Dr Cr Dr Cr Dr Cr Dr Cr Assets Liabilities + Capital
£ £ £ £ £ £ £ £ £ £




Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of balances has been extracted from his ledger as at 30 April 19X7, the end of his most recent financial year.
£
Capital 83,887
Sales 259,870
Trade creditors 19,840
Returns out 13,407
Provision for bad debts 512
Discounts allowed 2,306
Discounts received 1,750
Purchases 135,680
Returns inwards 5,624
Carriage outwards 4,562
Drawings 18,440
Carriage inwards 11,830
Rent, rates and insurance 25,973
Heating and lighting 11,010
Postage, stationery and telephone 2,410
Advertising 5,980
Salaries and wages 38,521
Bad debts 2,008
Cash in hand 534
Cash at bank 4,440
Stock as at 1 May 19x6 15,654
Trade debtors 24,500
Fixtures and fittings – at cost 120,740
Provision for depreciation on fixtures and fittings – as at 30 April 19X7
63,020
Depreciation 12,074

The following additional information as at 30 April 19X7 is available:
(a) Stock at the close of business was valued at £17,750.
(b) Insurances have been prepaid by £1,120.
(c) Heating and lighting is accrued by £1,360.
(d) Rates have been prepaid by £5,435.
(e) The provision for bad debts is to be adjusted so that it is 3% of trade debtors.

Required:
MR CHAI Trial Balance Adjustments Trading account Profit & loss a/c Balance sheet
WORKSHEET £ £ £ £ £ £ £ £ £ £
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Capital 83,887 83,887
Sales 259,870 259,870
Trade creditors 19,840 19,840
Returns outwards 13,407 13,407
Provision for B debts 512 223 735
Discounts allowed 2,
306 2,306
Discounts received 1,750 1,750
Purchases 135,680 135,680
Returns Inwards 5,624 5,624
Carriage outwards 4,562 4,562
Drawings 18,440 18,440
Carriage inwards 11,830 11,830
Rent, rates & insurance 25,973 6,555 19,418
Heating & lighting 11,010 1,360 12,370
Postage, stationery and telephone 2,410 2,410
Advertising 5,980 5,980
Salaries and wages 38,521 38,521
Bad debts 2,008 2,008
Cash in hand 534 534
Cash at bank 4,440 4,440
Stock at 1 May 19X6 15,654 15,654
Trade debtors 24,500 24,500
Fixtures & fittings at cost 120,740 120,740
Provision for depreciation 63,020 63,020
Depreciation 12,074 12,074
442,286 442,286

Stocks 30.04.19X7 – asset 17,750 17,750
Stocks 30.04.19X7 –
Cost of Sales
17,750
17,750
Insurance prepaid 1,120 1,120
Heating and lighting accrued 1,360 1,360
Rates prepaid 5,435 5,435
Provision for bad debts 223 223
25,888 25,888
Gross profit
(Balancing figure)
122,239 122,239
291,027 291,027

Net profit
(Balancing figure)
24,117
24,117
123,989 123,989 192,959 192,959
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In the next session we shall prepare the final accounts incorporating these adjustments. Some adjustments will affect the format of final accounts and therefore they will look as follows:



FORMAT OF FINAL ACCOUNTS WITH ADJUSTMENTS

NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£ £ £
Sales XX
Less Returns inwards (XX)
XX
Less cost of sales
Opening stock XX
Purchases XX
Add carriage in XX
XX
Less Returns out (XX) XX
XX
Less closing stock (XX) (XX)
Gross profit XX
Discount received XX
Other incomes (rent, interests, dividends) XX
Profit on disposal of non-current assets XX
Reduction in provision for doubtful debts XX
Reduction in provision for discount allowable XX
Interest on overdue debtors balances XX
XX
Less Expenses
Bad debts XX
Depreciation: (eg) Plant XX
Motor vehicle XX
Increase in provision for doubtful debts XX
Increase in provision for discount allowable XX
Loss on disposal of non current assets XX
Loss of other assets (eg) stock XX
Interest charged by creditors XX
Other expenses: Rent XX
Insurance XX
Postage XX
Interest on loan etc XX (XX)
NET PROFIT XX



BALANCE SHEET AS AT 31 DEC…….


Non current assets

£

£

£
Land XX - XX
Buildings XX (XX) XX
Plant and machinery XX (XX) XX
Fixtures, furniture and fittings XX (XX) XX
Motor vehicle XX (XX) XX
XX XX XX
Current assets
Stock XX
Debtors XX
Less provision for doubtful debts (XX) XX
Accrued income XX
Prepaid expenses XX
Cash at bank XX
Cash in hand XX



Current liabilities
Bank overdraft XX
Trade creditors XX
Prepaid income XX (XX)
Net current assets XX
Net assets XX

Capital XX
Add net profit XX
XX
Less drawings (XX)
XX
Non current liabilities
Loan XX
XX
Non current liabilities
Loan XX
XX
Non current liabilities
Loan XX
XX
Non current liabilities
Loan XX
XX






Non current liabilities XX

Loan

Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
£ £ £
Sales 259,870
Less Returns inwards (5,624)
254,246
Less cost of sales
Opening stock 15,654
Purchases 135,680
Add carriage in 11,830
147,510
Less Returns out (13,407) 134,103
Cost of goods available for sale 149,757
Less closing stock (17,750) (132,007)
Gross profit 122,239
Add: Discount received 1,750
123,989
Less Expenses
Discount allowed 2,306
Carriage outwards 4,562
Rent, rates and insurance 19,418
Heating and lighting 12,370


Postage, stationery and telephone

2,410
Advertising 5,980
Salaries and Wages 38,521
Bad debts 2,008
Provision for bad debts 223
Provision for depreciation – fixtures and fitting



12,074



99,872
Net profit 24,117

Mr Chai
Balance Sheet as at 30 April 19X7

Non current asset £ £ £
Fixtures and fittings 120,740 (63,020) 57,720
Current assets
Stock 17,750
Debtors 24,500
Less provision for doubtful debts (735) 23,765
Prepayments 6,555
Cash at bank 4,440
Cash in hand 534
53,044
Current liabilities
Creditors 19,840
Accruals 1,360 (21,200) 31,844
89,564
Capital 83,887
Add net profit 24,117
108,004
Less drawings (18,440)
89,564

Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.

£ £
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Rent, rates and insurance 6,622
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Provision for bad debts 130
Debtors 12,120
Creditors 6,471
Cash in hand 177
Cash at bank 1,002
Stock at at 1 June 19X5 11,927
Equipment
At cost 58,000
Accumulated depreciation 19,000
Capital ______ 53,091
216,770 216,770

The following additional information as at 31 May 19X6 is available:
(a) Rent is accrued by £210.
(b) Rates have been prepaid by £880.
(c) £2,211 of carriage represents carriage inwards on purchases.
(d) Equipment is to be depreciated at 15% per annum using the straight line method.
(e) The provision for bad debts to be increased by£40.
(f) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a balance sheet as at that date.
Solution:


Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£ £ £
Sales 138,078
Less cost of sales
Opening stock 11,927
Purchases 82,350
Carriage inwards 2,211 84,561
96,488
Less closing stock (13,551) (82,937
Gross profit 55,141
Less expenses
Carriage outwards 2,933
Rent, rates and insurance 5,952
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Increase in provision for bad debts 40
Depreciation – equipment 8,700 (49,253
Net profit 5,888




Mr. Yousef
Balance Sheet as at 31 May 19X6.

£ £ £
Non Current assets
Equipment 58,000 (27,700) 30,300
Current Assets
Stocks 13,551
Debtors 12,120
Less provision for doubtful debts (170) 11,950
Prepayments 880
Cash in hand 177
Cash at bank 1,002
Current Liabilities 27,560
Creditors 6,471
Accruals 210 6,681 20,879
51,179

Capital 53,091
Add: Net Profit 5,888
58,979
Less Drawings (7,800)
51,179


Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a sole trader, as at 31 May 20X9, the end of his most recent financial year.

Herbert Howell
Trial Balance As At 31 May 20x9
Dr Cr
£ £
Property at cost 90,000
Equipment at cost 57,500
Provision for depreciation (as at 1 June 20X8)
Property 12,500
Equipment 32,500
Stock as at 1 June 20X8 27,400
Purchases 259,600
Sales 405,000
Discounts allowed 3,370
Discounts received 4,420
Wages and salaries 52,360
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,800
Trade debtors 46,200
Trade creditors 33,600
Provision for bad debts 280
Cash on hand 151
Bank overdraft 14,500
Drawings 28,930
13% loan 12,000
Capital, as at 1 June 20X8 ______ 98,101
612,901 612,901

The following additional information as at 31 May 20X9 is available:
(a) Stock as at the close of business was valued at £25,900.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:

Property - 1% using the straight-line method
Equipment - 15% using the straight-line method

(c) Wages and salaries are accrued by £140.
(d) Other operating expenses include certain expenses prepaid by £500. Other expenses included under this heading are accrued by £200.
(e) The provision for bad debts is to be adjusted so that it is 0.5% of trade debtors as at 31 May 20X9.
(f) Purchases include goods valued at £1,040, which were withdrawn by Mr Howell for his own personal use.

Required:
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May 20X9 and his balance sheet as at 31 May 20X9. (20 marks)


Solution:
£ £
Sales 405,000
Less cost of sales
Opening stock 27,400
Purchases 258,560
285,960
Less closing stock (25,900) (260,060)
Gross profit 144,940
Discounts received 4,420
Decrease in provision for bad debts ____49
149,409
Less expenses
Depreciation: Property 900
Equipment 8,625
Discounts allowed 3,370
Wages and salaries 52,500
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,500 (112,485)
NET PROFIT 86,924

Herbert Howell
Balance Sheet as at 31 May 2000
£ £ £
Non current Assets
Property 90,000 (13,400) 76,600
Equipment 57,500 (41,125) 16,375
147,500 54,525 92,975
Current Assets
Stock 25,900
Debtor 46,200
Less provision (231) 45,969
Prepayments 500
Cash in hand 151
72,520
Current liabilities
Bank overdraft 14,500
Creditors 33,600
Accruals __340 (48,440)
24,080
117,055
Capital 98,101
Add net profit 36,924
135,025
Less drawings (29,975)
105,055
Non current liabilities
Loan (13%) 12,000
117,055

Workings:
1) Depreciation for:
Property 1% X 90,000 = 900
Equipment 15% X 57,500 = 8,625

2) Provision for bad debts
0.5% X (46,200) =231
Decrease in provision for bad debts
280 – 231= 49

3) Wages and salaries
Paid 52,360
Accruals 140
52,500
4) Other operating expenses
Paid 8,800
Pre-paid (500)
8,300
Accruals 200
8,500

5) Purchases: 259,600 – 1,040 = 258,560
Drawings: 28,930 + 1,040 = 29,990


REINFORCEMENT QUESTIONS

QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March 2001

£

Sales
Discount Received
Rent Received
Returns outwards
Creditors
Bank Overdraft
Capital
Purchases
Salaries and Wages
Office expenses
Insurance premiums
Electricity
Stationery
Advertising
Telephone
Business Rates
Discounts allowed
Returns Inwards
Stocks as at 1 April 2000
Warehouse, shop and office
Fixtures and fittings
Debtors
Cash in till
Drawings
378,500.00
2,400.00
7,500.00
7,700.00
18,700.00
30,000.00
287,500.00
261,700.00
45,700.00
8,400.00
3,100.00
1,600.00
6,200.00
8,400.00
2,100.00
7,500.00
600.00
4,100.00
120,600.00
210,000.00
12,800.00
13,000.00
500.00
26,000.00


The following further information was obtained:

• Closing stock was £ 102,500.00
• Electricity charges accrued £ 700.00
• Advertising expenses accrued £ 500.00
• Insurance premiums paid in advance £ 900.00
• Business rates prepaid £ 1,500.00

Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March 2001 and balance sheet as at that date.


QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.

TRIAL BALANCE AS AT 31 DECEMBER 20X0
Debit Credit

Capital at 1 January 20X0
Debtors
Cash In Hand
Creditors
Fixtures and fittings at cost
Discounts allowed
Discounts received
Stock at 1 January 20X0
Sales
Purchases
Motor Vehicles at cost
Lightning and heating
Motor expenses
Rent
General expenses
Balance at bank
Provision for depreciation
Fixtures and fitting
Motor vehicles
Drawings £

42,737
1,411

42,200
1,304

18,460

387,936
45,730
6,184
2,862
8,841
7,413




_26,568
591,646
£
26,094


35,404


1,175

491,620






19,861

2,200
15,292
_______
591,646
The following information as at 31 December is also available:

a) £218 is owing for motor expenses.
b) £680 has been prepaid for rent.
c) Depreciation is to be provided of the year as follows:
Motor vehicles: 20% on cost
Fixtures and fittings: 10% reducing balance method
d) Stock at the close of business was valued at £19,926.

Required

Prepare Donald Brown’s trading and profit and loss account for the year ended 31 December 20X0 and his balance sheet at that date.








QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a sole trader.

Brenda Bailey
Trial Balance As At 30 June 20x9
Dr Cr

Sales
Purchases
Carriage inwards
Carriage outwards
Wages and salaries
Rent and rates
Heat and light
Stock at 1 July 20X8
Drawings
Equipment at cost
Motor vehicles at cost
Provision for depreciation:
Equipment
Motor vehicles
Debtors
Creditors
Bank
Sundry expenses
Cash
Capital £

302,419
476
829
64,210
12,466
4,757
15,310
21,600
102,000
43,270



50,633


8,426
477
______
626,873 £
427,726











22,250
8,920

41,792
3,295


122,890
626,873

The following information as at 30 June 20X9 is also available.

a) £350 is owing for heat and light.
b) £620 has been prepaid for rent and rates.
c) Depreciation is to be provided for the year as follows:
Equipment - 10% on cost
Motor vehicles - 20% on cost
d) Stock at the close of business was valued at £16,480

Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended 30June 20X9 and her balance sheet at that date.







QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for December 19X9. The statement showed the following.

MIDWEST BANK

F Mercer: Statement of Account
Date
19X8
Dec 1
Dec 5
Dec 5
Dec 5
Dec 8
Dec 10
Dec 11
Dec 14
Dec 20
Dec 20
Dec 21
Dec 21
Dec 24
Dec 27
Dec 28
Dec 29
Dec 29
Dec 31 Particulars

Balance
417864
Dividend
Bank Giro Credit
417866
417867
Sundry Credit
Standing Order
417865
Bank Giro Credit
417868
416870
Bank charges
Bank Giro Credit
Direct Debit
417873
Bank Giro Credit
417871

Debits
$

243


174
17

32
307

95
161
18

88
12

25 Credits
$


26
212



185


118



47


279 Balance
$
1,862
1,619
1,645
1,857
1,683
1,666
1,851
1,819
1,512
1,630
1,535
1,374
1,356
1,403
1,315
1,303
1,582
1,557























His cashbook for the corresponding period was as follows.

CASH BOOK
19x8

Dec 1

Balance b/d $

1,862 19x8

Dec 1

Electricity Cheque No

864 $

243
Dec 4 J Shannon 212 Dec 2 P Simpson 865 307
Dec 9 M Lipton 185 Dec 5 D Underhill 866 174
Dec 19 G Hurst 118 Dec 6 A Young 867 17
Dec 26 M Evans 47 Dec 10 T Unwin 868 95
Dec 27 J Smith 279 Dec 14 B Oliver 869 71
Dec 29 V Owen 98 Dec 16 Rent 870 161
Dec 30 K Walters 134 Dec 20 M Peters 871 25
Dec 21 L Philips 872 37
Dec 22 W Hamilton 873 12
_____
2,935 Dec 31 Balance c/d 1,793
2,935



Required
a) Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
b) Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)

CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK



LESSON SIX
OTHER ASPECTS OF FINAL ACCOUNTS

(a) INCOMPLETE RECORDS
An incomplete record situation is whereby, the accounting system falls short of the double entry. This may be due to:
 Lack of records at all; or
 Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and maintaining an accounting system (records and procedures).
b) It may not be economical for the business to maintain accounting records due to the volume or/and nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.

There are 4 main approaches in preparing final accounts where there are insufficient records.

a) Estimating income from the net assets.
b) Estimating income from the use of ratios.
c) Use of a simple cashbook and bank statement.
d) Use of control accounts.

N/B: approach number c and d are normally used together.

(a) Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a reasonable complete cash summary, the only method of estimating the profits or loss for the period, is to prepare statement of affairs showing the net worth of the business at the beginning and at the end of the period.

The profit/loss is estimated by use of the following formulas:

Profit or loss = Closing – Opening + Drawings – Additional
Capital Capital Capital

Or where there are no non current liabilities then this optional formula can be used

Profit or loss = Closing - Opening + Drawings - Additional
Net Asset Net Asset Capital

Example: 6.1
A sole trader’s capital position is as follows:

31 December
19X2 19X3
£ £
Motor vehicle:
Cost 7,500 7,500
Depreciation 3,000 4,500
4,500 3,000
Stock 2,960 3,450
Debtors 1,150 2,060
Bank 925 2,125
Cash __263 ___54
9,798 10,689
Creditors 2,860 3,340
Net assets 6,938 7,349

He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the year.

Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets

= 7,349 – 6,938 + 12,500

= £12,911

(b) Use of Ratios
There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information available on sales or purchases can be used to derive the total Gross Profit for the period and incase there is sufficient information on expenses, then the Net Profit can also be derived.

The above ratios are computed as follows:

1) Gross Profit Margin = Gross Profit x 100
Sales (selling price)

E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the Gross Profit Margin will be:

= 25 x 100
100

= 25%

If a firm sells 1,000 units in a financial period, then the Gross Profit will be:

= 25% (£100,000)

= £25,000

2) Mark up

= Gross Profit x 100
Cost of Sales (cost price per unit)

In the above example, the mark up will be:

= 25 x 100
75

= 33.33%

N/B: 75 = 100 – 25
Cost = selling price – gross profit

3) Stock Turnover

Measures the rate at which a firm uses its stocks to make sales or turnover.

The formula is: = Cost of Sales
Average Stocks expressed as number of times


Average stock = Opening Stock + Closing Stock
2

Example: A firm has the following data for the period:

Opening stock £ 20,000
Purchases £300,000
Closing stock £ 30,000

Required: The Stock Turnover Ratio.

Average Stock = 30,000 + 20,000
2
= 25,000

Cost of sales = (20,000 + 300,000) – 30,000
= 290,000

Stock Turnover = 300,000
25,000

= 11.6 times

Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001 6,000
Purchases 54,000

Jones’s mark-up is 50% on cost of goods sold. His average stock during the year was £12,000. Draw up a trading and profit and loss account for the year ended 30 June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a net profit on sales of 10%.

Solution

a) Average Stock = Opening Stock + closing stock
2
12,000 = 6,000 + C
2
C = 24,000 – 6,000

= 18,000

Gross profit = 50%

Cost of Sales = 42,000

Gross Profit = 50%
42,000

Gross Profit = 21,000.

MEMORANDUM TRADING ACCOUNT
£
Sales 63,000
Less cost of sales (42,000)
Gross profit 21,000
Expenses (14,700)
Net profit 6,300

Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600. Trade discount (i.e. margin allowed) is 33¼% off all selling prices. Expenses are 66 ¾% of gross profit.

You are to calculate:
(a) Cost of goods sold.
(b) Gross profit margin.
(c) Turnover.
(d) Total expenses.
(e) Net profit.

Solution:
Profit schedule
£
Turnover 132,300
Cost of goods sold 88,200
Gross profit 44,100
Expenses (29,400)
Net profit 14,700

Turnover = Cost of Sales
Average stock

Margin = Gross Profit
Sales

7 = Cost of Sales
12,600

Cost of Sales = 88,200

(c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook for both cash in hand and cash at bank can be prepared in confirmation of deposits and payments made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income received to the relevant income accounts, expenses to relevant expense accounts and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit sales and cash purchases or credit purchases.

Steps in Preparing the Final Accounts

1) Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e. the cashbook (for both cash in hand and bank), sales ledger control account and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
5) Prepare the final accounts.

Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank payments and receipts during the year to 31 December 19X8 were as follows:

Reciepts Payments
£ £
Balance 1 Jan 19X8 572 Purchases 10,007
Cheques for sales 13,179 Expenses 2,950
Cash banked 14,005 Drawings 11,250
Balance 31 Dec 19X8 3,751 Delivery van 7,300
31,507 31,507

From a cash notebook you ascertain:
£
Cash in hand 1 January 19X8 62
Cash takings 16,300
Purchases paid in cash 1,850
Expenses paid in cash 375
Cash in hand 31 December 19X8 65
Drawings by proprietor in cash Unknown

You discover that assets and liabilities were as follows:

1 Jan 19X8 31 Dec 19X8
£ £
Debtors 1,850 2,070
Trade creditors 1,250 1,420
Stock on hand 2,650 2,990

Depreciation on the van is to be provided at the rate of 20% per annum.
Statement of Affairs as at 1 January 19x8
£
CURRENT ASSETS
Cash at bank 572
Cash in hand 62
Debtors 1,850
Stock 2,650
5,134
CURRENT LIABILITIES
Creditors (1,250)
Net Assets 3,884

Capital 3,884

Sales Ledger Control Account
£ £
Balance b/d 1,850 Cash Takings 16,300
Sales 29,699 Bank 13,179
______ Bal c/d 2,070
31,549 31,549


Purchases Ledger Control Account
£ £
Cash purchases 1,850 Bal b/d 1,250
Bank 10,007 Purchases 12,027
13,277 13,277



Cash in Hand Account
£ £
Balance b/d 62 Creditors 1,850
Debtors/sales 16,300 Expenses 375
Bank 14,005
Bal c/d 65
_____ Drawings ___67
16,362 16,362


• The capital invested at any point of time in a business by the owner is represented by the difference between the assets and liabilities at that time.
• The difference between the capital at the end and the capital at the beginning of the trading period represents the trading profit made during that period, unless there were withdrawals or investments of additional capital.

Hobbs
Trading and Profit and Loss Account for the year ending 31 December 19X8
£ £
Sales 29,699
Less cost of goods sold:
Opening stock 2,650
Add purchases 12,027
14,677
Less closing stock (2,990) 11,687
GROSS PROFIT 18,012
Less Expenses:
Expenses (375 + 2,950) 3,325
Depreciation 1,460 (4,785)
NET PROFIT 13,227


Hobbs
Balance Sheet as at 31 December 19X8
£ £ £
Fixed Assets Cost Depreciation NBV
Delivery van 7,300 1,460 5,840

Current Assets
Stock 2,990
Debtors 2,070
Cash ___65
5,125
Less current liabilities
Creditors 1,420
Bank overdraft 3,751 5,171 __46
5,794
Financed by:
Capital 3,884 3,884
Add net profit 13,227
17,111
Less drawings (11,250 + 67) 11,317
5,794


Example 6.5 (Exam Type Questions May 2001 Question 3)
Kimeu commenced his business of making furniture on 1 April 2000. Due to his limited accounting knowledge he has not maintained proper books of account. You have been engaged to examine his records and prepare appropriate accounts there from. You perform an examination of the records and from interviews with Kimeu you ascertain the following information.

1. At the commencement of business on 1 April 2000, he deposited Sh 1,200,000 into business bank account. On the same day he brought into the firm his pickup and estimated that it was worth Sh 660,000 and then that from 1 April 2000 it will have useful life of three years.
2. To increase his working capital he borrowed Sh 400,000 at 15% interest per annum on 1 July 2000 from his sister but no interest has yet been paid.
3. On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per annum.
4. He had drawn Sh 18,000 per week from the business account for private use during the year.
5. He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of stock was retained in the workshop on 31 March 2001. He also spent Sh 960,000 on the purchase of some equipment at the commencement of the business which he estimates will last him five years.
6. Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the remaining two months were estimated to be Sh 48,000. Motor vehicle expenses were Sh 182,000 while general expenses amounted to Sh 270,000 for the year. Insurance premium for the year to 30 June 2001 was Sh 160,000. All these expenses have been paid by cheque.
7. Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
8. Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had been received by 31 March 2001. Debt totaling to Sh 17,000 were abandoned during the year as bad. Other customers for jobs too small to invoice have paid Sh 726,000 in cash for work done of which Sh 560,000 was banked. Kimeu used Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya Charity Sweepstake tickets worth 24,000 and Sally used the rest on general expenses except for Sh 30,100 which was left in the office on 31 March 2001.
9. You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.

Required:
(a) Profit and loss account for the year ended 31 March 2001. (10 marks)
(b) Balance sheet as at 31 March 2001. (10 marks)
(Total: 20 marks)

Solution:
Cash book – Bank
Sh Sh
Capital 1,200,000 Salary 120,000
Loan 400,000 Drawings 936,000
Debtors 5,080,000 Timber 1,960,000
Cash 560,000 Equipment 960,000
Electricity 240,000
Motor vehicle expenses 182,000
General expenses 270,000
Insurance 160,000
________ Bal c/d 1,812,000
7,240,000 7,240,000


Capital
Sh Sh
Bank 1,200,000
Bal c/d 1,860,000 Pick up 660,000
1,860,000 1,860,000


Debtors
Sh Sh
Sales 6,178,000 Bank 5,080,000
Bad debts 17,000
________ Bal c/d 1,081,000
6,178,000 6,178,000


Cash book - cash in hand
Sh Sh
Sales 726,000 Bank 5,080,000
Drawings 17,000
Drawings 1,081,000
General Expenses 36,900
______ Bal c/d 30,100
726,000 726,000


Loan interest = 400,000 x 15% x 9/12

Rates = 36,000 x 9/12 = 27,000

Accruals = Electricity bills = 48,000
Rates = 27,000
Agency fees = 55,000
Loan interest = 45,000
175,000


Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh Sh
Sales (cash + credit) 6,904,000
Less expenses
Timber used (1,960,000 – 158,000) 1,802,000
Depreciation – motor vehicle 220,000
- Equipment 192,000
Loan interest 45,000
Salary 720,000
Electricity bills 288,000
Motor vehicle expenses 182,000
General expenses 306,900
Insurance premium 120,000
Rates 27,000
Bad debts 17,000
Accountancy fees 55,000 (3,974,900)
Net profit 2,929,100


Kimeu
Balance Sheet as at 31 March 2001
Non current Asset Sh Sh Sh
Equipment 960,000 192,000 768,000
Motor vehicle 660,000 220,000 440,000
1,620,000 412,000 1,208,000

Current Assets
Stock 158,000
Debtors 108,000
Insurance – prepayments 40,000
Cash at bank 181,200
Cash in hand 30,000
3,121,100
Less current liabilities
Accruals 175,000 2,946,100
4,154,100

Capital 1,860,000
Add net profit 2,929,100
4,789,100
Less drawings 1,035,000
3,754,100
Non current liability
Loan 15% 400,000
4,154,100

Example 6.6 (Exam Type) June 1995 Question 2
Abi, a proprietor of a grocery and general store has not previously engaged an accountant. He informs you that this year his bankers have insisted on a proper set of accounts. Abi supplies you with his trading results for the year ended 30 June 1994 which are as follows:
Sh Sh
Payments for goods 4,747,500 Takings 5,465,000
Payments for expenses 565,000
Profits 152,500 ________
5,465,000 5,465,000

Abi instructs you to examine his records and prepare accounts. From your examination of the records and interview with your client, you ascertain the following information:

1. The takings are kept in a drawer under the counter; at the end of each day the cash is counted and recorded on a scrap of paper; at irregular intervals Mrs. Abi transcribes the figures into a notebook; a batch of slips of paper was inadvertently destroyed before the figures had been written into the notebook, but Mr. And Mrs. Abi carefully estimated their takings for that period, and the estimated figure is included in the total of Sh. 5,465,000.
2. Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500 per week with cash taken from the drawer. His winnings totaled Sh. 29,500.




3. The following balances are ascertained as correct:
30 June
1994 1993
Sh Sh
Cash in hand 43,500 22,500
Balance at bank 109,500 78,000
Sales debtors 245,500 229,000
Creditors for purchases of stock 121,500 139,500
Stock at cost 950,000 975,000

4. Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings included Sh 12,500 recovered in respect of an old debt abandoned in the previous year.
5. Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52 weeks in a year; the rent is included in expenses of Sh 565,000. The living accommodation comprises one-third of the building.
6. The total expenses also include:

• Sh. 17,500 running expenses of Abi’s private car;
• Sh. 30,000 for exterior decoration of the whole premises;
• Sh. 80,000 for alterations to the premises to enlarge the storage accommodation.

7. Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal expenses. This excludes the amount indicated in note 8.
8. Mr. Abi draws Sh. 750 per week for cigarettes and beer.
9. During the year, Mr. Abi bought a secondhand car (not for use in the business) from a friend; the price agreed was Sh. 175,000, but as the friend owed Mr. Abi Sh. 33,500 for goods supplied from the business, the difference was settled by cheque.
10. An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
11. Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored and the friend is repaying the Sh. 50,000 by installments. He had paid Sh. 20,000 by 30 June 1994.
12. Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh. 55,000 for income tax.
13. You are to provide Sh. 21,000 for accountancy fees.

N.B. All receipts and payments of Mr. Abi are made through his business account.
Required:
(a) Mr. Abi’s balance sheet for the business at 30 June 1993. (4 marks)
(b) Mr. Abi’s profit and loss account for the year ended 30 June 1994. (12 marks)
(c) Mr. Abi’s balance sheet for the business at 30 June 1994. (6 marks)
(Total: 20 marks)

Solution:
Abi
Balance Sheet as at 30 June 1993

Current Assets Sh Sh
Stock 97,500
Debtors 229,000
Cash at bank 78,000
Cash in hand 22,500
1,304,500
Current liabilities
Creditors (139,500) 1,165,000
1,165,000

Capital 1,165,000



Cash at Bank
Sh Sh
Balance b/d 78,000 Drawings – personal expense for wife 260,000
Sales ledger control a/c 12,500 Drawings – cigarettes and beer 39,000
Insurance (drawings) 320,500 Expenses 565,000
Drawings 50,000 Drawings – second hand car 141,500
Drawings 20,000 Cash in hand 6,500
Debtors 5,591,000 Drawings – friend 50,000
Creditors 4,747,500
Dishonored cheque – drawings 50,000
Drawings 48,000
Income tax 55,000
________ Balance c/d 109,500
6,072,000 6,072,000


Cash in Hand
Sh Sh
Balance b/d 22,500 Drawings 15,000
Drawings – betting 12,500
Bank 6,500 Balance c/d 43,500
58,500 58,500


Sales Ledger Control A/c
Sh Sh
Balance b/d 229,000 Bad debts 178,000
Bad debts recovered 12,500 Bank 12,500
Credit sales 5,819,000 Drawings 33,500
Bank 5,591,000
________ Balance c/d 245,500
6,060,500 6,060,500


Purchases Ledger Control A/c
Sh Sh
Bank 4,747,500 Balance c/d 139,500
Balance c/d 121,500 Credit purchases 4,729,500
4,869,000 4,869,000

Expenses
Total Business Private
Rent 78,000 52,000 26,000
Motor running expenses 17,500 - 17,500
Decoration 30,000 20,000 10,000
Alterations 80,000 80,000
Other expenses 359,500 359,500 _____
565,000 532,500 53,500

Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£ £
Sales 5,819,000
Less cost of sales
Opening stock 975,000
Purchases 4,729,500
57,040,500
Less closing stock 950,000 4,754,500
Gross profit 1,064,500
Less expenses
Rent 52,000
Decoration 20,000
Alterations 80,000
Other expenses 359,500
Bad debts 165,500
Accountancy fees 21,000 (698,000)
Net profit 366,500

Abi
Balance Sheet as at 30 June 1994
Cost Depreciation Book Value
Current Assets: £ £ £
Stock 950,000
Debtors 245,500
Cash at bank 109,500
Cash in hand 43,500
1,348,500
Current Liabilities
Creditors 121,500
Accruals 21,000 (142,500) 1,206,000
Capital 1,165,000
Add net profit 366,500
1,531,500
Less drawings (325,500)
1,206,000

NON PROFIT MAKING ORGANIZATIONS (Club, Associations and Others)
These are some form of organizations that are set up to promote or to cater for the welfare of the members involved and not to make a profit. These include clubs, (e.g. football clubs, sports clubs), welfare associations and any other societies (charitable institutions).
Because these organizations are not trading, the types of accounts to prepare are different from the ones of trading organizations.
Example:

1. Instead of a cashbook, the clubs will maintain a receipts and payments which has similar entries to those of a cashbook.
2. Instead of profit and loss account, we have an income and expenditure account.
3. Because the club is not formed by any one owner (has no owner), it is funded by members’ contributions, donations, income from investments to get an accumulated fund instead of capital.

From the income and expenditure account, if the incomes are more than the expenditures for the period, then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of the clubs activities and incase a firm has a trading activity, then in addition to the income and expenditure account and the balance sheet, prepare a Bar Trading Account.

Format of the Final Accounts
Name
Income and Expenditure Account for the year ended 31 December ……
Incomes £ £
Profit from trading activities XX
Subscriptions XX
Income from investments XX
Donations XX
Income from other activities
[dinner dance, raffles, festivals]
XX
XX
Expenditure
Depreciation XX
Salaries and wages XX
Expenses on other activities [prizes] XX
Loss from trading activities XX
All other expenses XX (XX)
SURPLUS/( DEFICIT ) XX/(XX)




NAME
BALANCE SHEET AS AT 31 DECEMBER ……
Non current Assets £ £ £
Buildings XX (XX) XX
Fixtures, fittings and equipment XX (XX) XX
Motor vehicle XX (XX) XX
XX (XX) XX
Investments XX
Current Assets
Stocks XX
Debtors XX
Prepayments and accrued income XX
Cash at bank/hand (receipts + payments) XX
XX
Current liabilities
Creditors XX
Accrued expenses and prepaid income XX
Bank overdraft XX (XX) XX
XX
Accumulated fund balance b/f XX
Add/less surplus / deficit XX/(XX)


Other funds
Life membership fund XX
Building fund XX
Education fund XX XX
XX

Notes To The Above Format:

1. Subscriptions:
These are the amounts received by the club from the members to renew their membership. It is often paid on an annual basis.

• It is income for the club and therefore reported in the income and expenditure account.
• Depending on the policy of a club, any subscriptions due but not received are shown as accrued income (debtors for subscriptions) in the balance sheet.
• Any amounts prepaid are shown as prepaid (creditors for subscriptions).
• Some clubs will not report subscriptions as income until it is received in form of cash.

2. Income from Investments:
Some clubs invest excess cash in the bank (fixed deposit account), shares of limited companies, treasury bills and any other investment that may be available.

• If the club is investing with no specific intention (i.e a general investment) then income from this investment should be reported in the income and expenditure account.
• If the investment is for a specific purpose and relates to a specific fund (e.g building fund) it will not be reported in the income and expenditure account but credited directly to the fund.

3. Other funds
• These are funds set up for a specific purpose and not general. They will be shown together with the accumulated fund.
• Any incomes relating to these funds, will be credited directly to the funds and any expenses will be taken off from these funds e.g. building fund, education fund.

Life Membership Fund
Some members may pay some amount to become life members of the club and if this happens, there may be a need to spread out this income over the expected life of the members in the club.
Depending on the policy of a club, the following accounting treatment may be allowed:

i. The full amount is reported in the Income and Expenditure account in the year it is received and therefore no balance is retained in the life membership account.
ii. The amount is shown separately in the life membership fund with no transfer in the Income and Expenditure account and hence no balance in the life membership account.
iii. To transfer some amounts from the life membership funds to the income and expenditure account over the expected life of membership to the club.

Example 6.7
The following is the receipts and payments account of the Friendship Club for the year ended 31 December 19X1:
£ £
Balance at bank
31 December 19X0 102 Bar purchases 4,434
Entrance fees 42 Wages 416
Subscriptions: 19X0 25 Rent 186
19X1 305 Heating and lighting 128
19X2 35 Postage and stationery 33
Bar Sales 5,227 Insurance 18
Sale of investments 750 General expenses 46
Payments on account of new furniture
450

_____ Balance at bank,
31 December 19X1
775
6,486 6,486


The following information is also supplied:

(1) 31 December 19X0 31 December 19X1
Bar stock, at cost 272 315
Creditors for bar purchases 306 358
Rent due 18 36
Heating and lighting expenses due 16 19
Subscriptions due 25 40
Insurance paid in advance 5 7





2) On 31 December 19X0, the club held investments which cost £500. During the year ended 31 December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club purchased additional furniture at a cost of £520. Depreciation of all furniture is to be provided for at the rate of 10% per annum.

Required:
(a) Prepare an income and expenditure account for the year ended 31 December 19X1.
(b) Prepare a balance sheet at that date.

Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1
Assets £ £
Stock 272
Subscriptions due 25
Insurance prepaid 5
Investments 500
Furniture 300
Balance at bank 102
1,204
Liabilities
Creditors 306
Rent due 18
Heating and lighting expenses 16 (340)
Accumulated fund 864

Creditors
£ £
Receipts and payments 4,434 Balance b/f 306
Balance c/d 358 Purchases 4,486
4,792 4,792


Subscriptions
£ £
Balance b/d 25 Receipts & payments 365
Income & expenditure 345
Balance c/d 35 Balance c/d 40
405 405


Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
£ £
Sales 5,227
Less: Cost of Sales
Opening stock 272
Purchases 4,486
4,758
Less closing stock (315) (4,443)
Gross profit to income & expenditure a/c 784

Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£ £
Profit from bar trading 784
Entrance fees 42
Subscriptions 345
Profit from sale of investments 250
1,421
Expenditure
Wages 416
Rent 204
Heating and lighting 131
Postage and stationery 33
Insurance 16
General expenses 46
Depreciation – furniture 56 (902)
Surplus 519


Friendship Club
Balance Sheet as at 31 December 19X1
Non current Assets £ £ £
Furniture 820 (56) 764

Current Assets
Stock 315
Subscriptions due 40
Prepaid expense 7
Cash at bank 775
1,137
Current liabilities
Creditors 398
Prepaid subscriptions 35
Accrued expenses 55
Creditors fixtures 70 (518) 619
1,383
Accumulated fund b/f 864
Add surplus 519
1,383

Example 6.8 (Exam Type) November 2001
(a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account. (6 marks)
(b) The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2001.

Receipts Payments
Sh Sh
Balance brought forward 288,000 Salaries and wages 254,000
Subscriptions New equipment 565,000
Year: 1999/2000 249,000 Repairs and maintenance 124,000
2000/2001 2,050,000 Office expenses 415,000
2001/2002 194,000 Printing and stationery 168,000
Dinner dance 723,000 Purchase of beverages 497,000
Beverage sales 657,000 Dinner dance expenses 315,000
Investments income 400,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 248,000
Investments 1,500,000
_______ Balance carried forward _405,000
4,561,000 4,561,000

Balances as at 31 March 2000 31 March 2001
Furniture and fittings (net) 240,000 -
Equipment (net) 690,000 -
Investment at cost 3,500,000 -
Subscriptions in arrears 300,000 375,000
Salaries accrued 68,000 72,000
Stock of beverages 162,000 184,000
Subscriptions in advance 85,000 -
Additional information:

1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively.
3. Investments, which had cost Sh. 500,000, were sold on 30 March 2001 for Sh. 625,000. No entries have been made in the books in this respect.

Required:
(a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
(b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
Solution:
Mamba Sports Club
Statement of Affairs
Assets Sh Sh
Furniture and fittings 240,000
Equipment 690,000
Receipts and payments 288,000
Investment at cost 3,500,000
Subscriptions in arrears 300,000
Stock of beverages 162,000
5,180,000
Liabilities
Subscriptions accrued 85,000
Accrued salaries 68,000 (153,000)
5,027,000


Mamba Sports Club
Trading Account for the year ended 31.3.2001
Sh Sh
Sales 657,000
Less cost of sales
Opening stock 162,000
Purchases 497,000
659,000
Less closing stock (184,000) (475,000)
Profit to income and expenditure 182,000

Subscriptions
2001 Sh 2001 £
Balance b/d 300,000 Balance b/f 85,000
Receipts and payments 45,000 Receipt and payment 2,493,000
Income & expenditure 2,465,000 Income & expenditure 51,000
Balance c/f 194,000 Balance c/f 375,000
3,004,000 3,004,000

Mamba Sports Club
Income and Expenditure Account for the year ended 31 March 2001

Incomes Sh
Profit from trading account 182,000
Subscriptions 2,465,000
Dinner dance 723,000
Investment income 400,000
Profit on sale of investments 125,000
3,895,000




Example 6.9 (Exam Type) DECEMBER 2000 QUESTION 3
The following trial balance was extracted from the books of Literary and Philosophical Society as at 30 September 2000:
Sh Sh
Balance at bank: current account 724,800
Accumulated fund 1 October 1999 5,771,200
Land and buildings, at cost 3,700,000
Debtors for subscription 62,000
Furniture and fittings 1,874,000
Provision for depreciation of furniture & fittings 284,000
Subscriptions 1,450,800
Lecturer’s fees 920,000
Lecturer’s travel and accommodation expenses 358,000
Donations 108,000
Camera and projector repairs 17,000
Projectors, cameras and audio equipment 190,400
Depreciation of equipment 54,400
Rates and water 277,000
Lighting and heating 367,200
Rental of rooms 495,000
Wages – Caretaker 880,000
- Restaurant 1,600,000
- Bar staff 800,000
Purchase of food 1,565,800
Stock – bar 1 October 1999 473,600
Bar receipts 4,032,000
Bar purchases 2,842,000
Restaurant receipts 3,642,000
Loan 1,600,000
Deposit account – bank 1,000,000
Interest payable and receivable 36,000
Creditors for bar and food ________ 178,400
17,651,800 17,651,800

Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10% has been earned on the deposit account. No changes have taken place all year in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the close of the year although the wine had been included in the bar stock valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000 (6 marks)
(b) An income and expenditure account for the year ended 30 September 2000 (8 marks)
(c) A balance sheet as at 30 September 2000 (6 marks)
(Total: 20 marks)

Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September 2000

Sh Sh
Sales 7,674,000
Less cost of sales
Opening stock 473,600
Add purchases 4,450,800
4,924,400
Less closing stock
Profit to the income and expenditure (642,800) (4,281,600)
3,392,400


Literary and Philosophical Society
Income and Expenditure Account for the year ended 30 September 2000

Income Sh Sh
Profit on trading account 992,400
Interest on bank deposit account 100,000
Subscriptions 1,450,000
Donations 108,000
Rental of rooms 495,000
3,146,200
Expenditure
Lecturer’s fees 920,000
Depreciation on furniture and fitting 194,000
Equipment 19,000
Lecturer’s travel and accommodation exp. 358,000
Camera repairs 17,000
Rates and water 277,000
Lighting and heating 867,200
Caretakers wages 880,000
Interest on loan 64,000
Provision for subscription 43,600 (3,139,800)
Surplus 6,400


Literary and Philosophical Society
Balance Sheet as at 30 September 2000

Non current Assets Sh Sh Sh
Land and buildings 3,700,000 - 3,700,000
Fixtures and fittings 1,874,000 (478,000) 1,396,000
Equipment 190,400 (73,400) 117,000
5,764,400 551,400 5,213,000
Current assets
Stock 642,800
Debtors of subscription 18,400
Balance at bank – deposit a/c 1,000,000
- Current a/c 724,800
2,386,000
Current liabilities
Creditors (221,400) 2,164,600
7,377,600
Accumulated fund b/f 5,771,200
Add surplus ___6,400
5,777,600
Non current liabilities
4% loan 1,600,000
7,377,600

(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it is cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is reported in the final accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)

Direct Costs/Prime Costs
This is a cost that can be traced directly to a unit that has been produced. This include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but cannot be traced directly to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production
The manufacturing account will show the factory cost of goods produced that will be shown in the trading account in place of purchases.

FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December

Raw Materials £ £
Opening stock of raw materials XX
Purchases of raw materials XX
Add carriage inwards XX
XX
Less returns outwards (XX) XX
Cost of raw materials available for use XX
Less closing stock of raw materials (XX)
Raw materials consumed XX
Direct labour (factory wages) XX
Direct expenses XX
Prime cost XX
Factory overheads
Salary to factory manager XX
Depreciation on – Plant and machinery XX
- Factory buildings XX
Other expenses – Factory power XX
Lighting and heating XX
Water XX
Cleaners wages XX XX
Total cost of production XX
Add: opening Work In Progress XX
Less: closing Work In Progress (XX) XX
Factory cost of production (cost of finished goods) XX Note 1
FACTORY PROFIT XX
Finished goods at a transfer price XX Note 2

Sales XX
Less returns inwards (XX)
XX
Less cost of sales
Opening stock – finished goods XX
Factory cost of production/transfer price XX
XX
Less closing stock of finished goods (XX) (XX)
Gross profit XX
Add factory profit XX
Other incomes – discount received XX
- Profit on disposal XX
XX
Less expenses
Salaries and wages – administration & non production XX
Rent for administration building XX
Depreciation - Delivery vans XX
- Fixtures and distribution XX
Other selling and distribution costs XX (XX)
Net profit/(net loss) XX/(XX)

For the balance sheet, the format is the same for all the assets and liabilities except for the current assets section whereby the stock at the end of the period should be shown for each type of stock as per this format:

Current Assets £ £
Stock: raw materials XX
Work in progress XX
Finished goods XX XX

Note 1: This represents the total costs of all the units produced during the period and therefore will be taken to the trading account as the goods are transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of production, then this generates a factory profit. The goods will be shown in the trading account at the transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries (not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment not used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.

• Salaries and commission to the sales manager and staff
• Carriage outwards (i.e. to deliver goods to the customers
• Depreciation on motor vehicles (used for the delivery purpose)
• Advertising
• Bad debts

Example 6.10
B spikes
Trial Balance as on 31 December 2002
Dr Cr
Stock of raw materials 1.1.2002 21,000
Stock of finished goods 1.1.2002 38,900
Work in progress 1.1.2002 13,500
Wages(direct £180,000: factory indirect£145,000) 325,000
Royalties 7,000
Carriage inwards (on raw materials) 3,500
Purchases of raw materials 370,000
Productive machinery (cost £280,000) 230,000
Accounting machinery (cost £20,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Administrative salaries 44,000
Sales representatives’ salaries 30,000
Commission on sales 11,500
Rent 12,000
Insurance 4,200
General administration expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Sales 1000,000
Debtors and creditors 142,300 125,000
Bank 56,800
Cash 1,500
Drawings 20,000
Capital as at 1.1.2002 ______ 29,680
1,421,800 1,421,800

Notes at 31.12.2002

1. Stock of raw materials £24,000, stock of finished goods £40,000, work in progress £15,000.
2. Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th.
3. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.

Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.

Solution:

B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002
Raw Materials £ £
Opening Stock of raw materials 21,000
Purchases 370,000
Carriage inwards on raw materials 3,500 373,500
394,500
Less: closing stock of raw materials (24,000)
Raw materials consumed 370,500
Direct wages 180,000
PRIME COST 550,500
Factory Overheads
Wages 145,000
Royalties 7,000
Depreciation: productive machinery 28,000
General factory expenses 31,000
Lighting( 5/6 x 7,500) 6,250
Factory power 13,700
Rent(5/6 x 12,000) 10,000
Insurance( 5/6 x 4,200 ) 3,500 24,4,450
Total cost of production 794,950
Add: opening work in progress 13,500
808,450
Less: closing work in progress (15,000)
Factory cost production per finished goods 793,450
Sales 1,000,000
Less cost of sales
Opening stock of finished goods 38,900
Factory cost of production 793,450
832,350
Less closing stock of finished goods (40,000) 792,350
Gross profit 207,650
Expenses
Accounting machinery – depreciation 2,000
Lighting (1/6 x 7,500) 1,250
Administrative salaries 44,000
Sales representatives salaries 30,000
Commission on sales 11,500
Rent ( 1/6 x 12,000) 2,000
Insurance (1/6 x 4200) 700
General administrative expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900 (117,850)
Net profit 89,800




B Spikes
Balance Sheet as at 31 December 2002

COST DEPRECIATION NET BOOK VALUE
Non current Assets £ £ £
Productive machinery 280,000 (78,000) 202,000
Accounting machinery 20,000 (10,000) 10,000
300,000 88,000 212,000
Current Assets
Stock: raw materials 24,000
Finished goods 40,000
Work in progress 15,000 79,000
Debtors 142,300
Cash at bank 56,800
Cash in hand 1,500
279,600
Current liabilities
Creditors (125,000) 154,600
366,600
Capital 296,800
Add net profit 89,800
386,600
Less drawings (20,000)
366,600


Example 6.11 (Exam Type – June 1986 Question Two)
Bibi Maridadi owns and manages a small manufacturing business. The following balances have been extracted from her books of account at 31 January 1986:

Dr Cr
Sh Sh
Capital at 1 February 1985 171,120
Accounts payable 86,000
Bank and cash balance 5,400
Accounts receivable 92,000
Drawings 60,000
Administration expenses 150,360
Advertising expenses 12,000
Factory direct wages 60,000
Factory indirect wages 24,000
Factory power 36,000
Furniture and fittings (all offices) 18,400
Heat and light 16,000
Plant and equipment 276,800
Motor vehicle (used by salesmen) 144,000
Plant hire 4,000
Provision for bad debts 3,200
Provision for depreciation 1 February 1985:
 Furniture and fittings 9,200
 Plant and equipment 138,400
 Motor vehicle 24,000
Raw material purchases 228,000
Rent rates 20,000
Sales 829,440
Selling and distribution expenses 66,400
Inventories at cost, 1 February 1985:
 Raw materials 8,000
 Work in progress 16,000
 Finished goods 24,000 _______
1,261,360 1,261,360
The following additional information is provided:
(i) Accruals at 31 January 1986 were:
Factory power - Sh.1,600
Rent and rates - Sh. 4,000

There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:
Raw materials - Sh. 15,200
Work in progress - Sh. 30,400
Finished goods - Sh. 45,600

(iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates of 20%, 25% and 10% per annum respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit and loss account for the year ended 31 January 1986 and a balance sheet as at that date. (22 marks)

Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986
Direct materials Sh Sh
Opening stock of raw materials 8,000
Add: purchases of raw materials 228,000
236,000
Less: closing stock of raw materials (15,200)
Raw materials consumed 220,800
Factory direct wages 60,000
PRIME COST 280,800
Factory overheads
Factory indirect wages 24,000
Factory power 37,600
Plant hire 4,000
Heat and light 14,400
Rent and rates 14,400
Depreciation on plant 55,360 149,760
430,560
Add opening work in progress 16,000
446,560
Less closing work in progress (30,400)
Factory cost of production 416,160
Sales 829,440
Less cost of sales
Opening stock of finished goods 24,000
Add factory cost of production 416,160
440,160
Less closing stock of finished goods (45,600) 394,560
Gross profit 434,880
Less expenses
Increase in provision for doubtful debts 1,400
Rent and rates 9,600
Heat and light 1,600
Depreciation: motor vehicle 36,000
Furniture and fittings 1,840
Selling and distribution expenses 65,600
Administration expenses 150,360
Advertising expenses 12,000 278,400
Net profit 156,480

Bibi Maridadi
Balance Sheet as at 31 January 1986
COST DEPRECIATION NET BOOK VALUE
Non current Assets £ £ £
Plant and equipment 276,800 (193,760) 83,040
Furniture and fittings 18,400 (11,040) 7,360
Motor vehicle 144,000 (60,000) 84,000
439,200 (264,800) 174,400
Current Assets
Stock: Raw materials 15,200
Work in progress 30,400
Finished goods 45,600 91,200
Debtors 92,000
Less: provision for doubtful debts (4,600) 87,400
Prepayments 800
Cash in hand and bank 5,400
184,800
Current liabilities
Creditors 86,000
Accruals 5,600 (91,600) 93,200
267,600
Capital 171,120
Add net profit 156,480
327,600
Less drawings (60,000)
267,600

UNREALISED PROFITS ON CLOSING STOCK
In most cases where business transfers finished goods at a profit to the selling department and the goods are reflected in the balance sheet at the transfer price, then the closing stock includes a profit that has not been earned or realised. If the mark up profit (the profit based on cost of production is always uniform, then any changes in the value of closing stock will result in a reduction or an increase in the unrealised profits.
If there is an increase on unrealised profit on the closing stock, then this increase will be reduced from the gross profit from our profit and loss account and if there is a reduction in unrealised profits, then this reduction will be added to the gross profit in our profit and loss account.
Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet.
The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows

Increase in unrealised profit in closing stock (UPCS)
Profit and loss (extract) Account for year ended………..
£ £
Gross profit X
Add: factory profit X
Add: other expenses X
X
Less expenses
Other expenses X
Increase in unrealised profit on closing stock X (X)
Net profit X

Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
£ £
Gross profit X
Add: factory profit X
Add: other incomes X
Add: decrease in UPCS X
X
Less expenses
Other expenses (X)
Net profit X

Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening stock of finished goods for the period was valued at Sh. 100,000. (The marked up cost) The closing stock at the end of the financial period was Sh.160,000.

Opening Stock: 100,000 (marked up) = 120%
(16,667) = (20%)
83,333 = 100%

Closing Stock 160,000 (marked up) = 120%
(26,667) = (20%)
133,333 = 100%


UPCS
Balance b/f 16,667
Balance c/d 26,667 Profit and loss a/c 10,000
26,667 26,667


Profit and Loss (Extract)
Less: Expenses: Sh Sh
Increase in unrealized profits on closing stock 10,000

Balance Sheet (Extract)

Current Assets Sh Sh
Stock:
Raw materials X
Work in progress X
Finished goods 160,000
Less: UPCS (26,667) 133,333

(d) DEPARTMENTAL ACCOUNTS

Some organizations have various departments carrying out trade and therefore the profitability of each department needs to be established. For each department, trading, profit and loss account should be prepared. The final accounts will be very important for the management to assess the performance of each department.
The expenses in relation to a specific department should be charged in the Profit and Loss account for that department. The accounts will be represented in columnar form and the format will be as follows: (Assume a firm has departments A and B).

Name
Trading Profit and Loss account for the year ended 31 December

Department A Department B Department C
£ £ £ £ £ £
Sales XX XX XX
Less cost of sales
Opening stock XX XX XX
Purchases XX XX XX
XX XX XX
Less closing stock (XX) (XX) (XX) (XX) (XX) (XX)
Gross profit XX XX XX XX
Other incomes XX XX XX
XX XX XX
Less expenses
Salaries and wages XX XX XX
Depreciation XX XX XX
Other expenses XX XX XX
Managers commission XX (XX) XX (XX) XX (XX)
NET PROFIT XX XX XX

The balance sheet will reflect the position of the whole organization and therefore a departmental balance sheet is not required.

When departments in a firm are sharing resources, then the various expenses need to be apportioned between or among the different departments e.g. if the departments are sharing a building, then rent expense should be apportioned among the departments.
The following guidelines can be followed in apportioning the expenses among the departments.

Type of Expense Basis of apportionment
1) Rent, rates, heat, light, repairs to buildings,
depreciation of buildings and insurance. Floor area occupied by each department.

2) Depreciation, insurance and maintenance of equipment Cost or net book value of the equipment in each department.

3) Salaries, canteen expenses, welfare and other expenses relating to employees. Number of employees in each department

4) Carriage inwards. Purchases in each department.

5) Advertising, depreciation and maintenance of delivery van. Value of sales in each department.

6) Increase in provision for doubtful debts, bad debts and discounts allowed. Sales or debtors in each department.


Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and children’s games and toys. For the purposes of his accounts, he wishes the business to be divided into two departments:

Department A Books, periodicals and newspapers
Department B Games, toys and fancy goods.

The following balances have been extracted from his nominal ledger at 31 March 19X9:

Dr Cr
Sales Department A 15,000
Sales Department B 10,000
Stocks Department A, 1 April 19X8 250
Stocks Department B, 1 April 19x8 200
Purchases Department A 11,800
Purchases Department B 8,200
Wages of sales assistants Department A 1,000
Wages of sales assistants Department B 750
Newspaper delivery wages 150
General office salaries 750
Rates 130
Fire insurance – buildings 50
Lighting and air conditioning 120
Repairs to premises 25
Internal telephone 25

Cleaning
30
Accountancy and audit charges 120
General office expenses 60
25,000 25,000


Stocks at 31 March 19X9 were valued at:

Department A £300
Department B £150

The proportion of the total floor area occupied by each department was:

Department A one fifth
Department B four-fifths


Prepare J Spratt’s trading and profit and loss account for the year ended 31 March 19X9, apportioning the overhead expenses, where necessary, to show the Department profit or loss.

The apportionment should be made by using the methods as shown:

Area - Rates, Fire insurance, Lighting and air conditioning, Repairs, Telephone, Cleaning:

Turnover -General office salaries, Accountancy, General office expenses.






Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9

Department A Department B Department C
£ £ £ £ £ £
Sales 15,000 10,000 25,000
Less cost of sales
Opening stock 250 200 450
Purchases 11,800 8,200 20,000
12,500 8,400 20,450
Less closing stock (300) (11,750) (150) (8,250) (450) (20,000)
Gross profit 3,250 1,750 5,000

Less expenses
Wages 1,000 750 1,750
Newspaper delivery wages 150 - 150
General office salaries 450 300 750
Rates 26 104 130
Fire insurance – buildings 10 40 50
Lighting and air-conditioning 24 96 120
Repairs to premises 5 20 25
Internal telephone 5 20 25
Cleaning 6 24 30
Accountancy or audit charges 72 48 120
General office expenses 36 (1,784) 24 (1,426) 60 (3,210)
NET PROFIT 1,466 324 1,790

Workings:

1) General Office Salaries: A = 15,000 X 750 = 450
25,000

B = 10,000 X 750 = 300
25,000

2) Rates: A = 1/5 X 130 = 26
B = 4/5 X 130 = 104

3) Fire Insurance: A = 1/5 X 50 = 10
B = 4/5 X 50 = 40

4) Lighting: A = 1/5 X 120 = 24
B = 4/5 x 120 = 96

5) Repairs: A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.


Interdepartmental Trading
A department may buy goods from another department in the same firm and therefore the departments trade with one another. Example, in 4.16 above, department A sells goods to Department B. (Department B is buying from department A). Interdepartmental sales and purchases should be excluded from the total sales and total purchases of the whole firm. If we assume that A sold goods to B amounting to £1,000 and this figure is included in sales of A and purchases of B, the trading account for the whole firm will be as follows (other items will remain the same):
£ £
Sales 24,000
Less cost of sales
Opening stock 450
Purchases 19,000
19,450
Less closing stock (450) (19,000)
Gross profit 5,000

Managers Commission
A commission based on the net profit made in each department may reward managers of each department.
The commission is normally a percentage of the net profit but it may be a percentage on the net profit before or after charging the commission.

1) Percentage Before Charging Commission

If we assume in example 4.16 that the managers in each department is paid a commission of 5%, before charging such commission, the commission will be as follows:

Department A Department B Total
Net profit before commission 1,466 324 1,790
Managers commission @ 5% (73.3) (16.2) (89.5)
Net profit after commission 1,392.7 307.8 1,700.5

2) Percentage After Charging Commission

Assume the commission is 5% of the net profit after charging such commission:

Department A Department B Total
Net profit before commission 1,466 324 1,790
Managers commission @ 5% (69.8) (15.4) (85.2)
Net profit after commission 1,392.2 308.6 1,704.5

Note:
If we use percentage for each commission assuming a 5% rate, the commission will be computed as follows:



Before charging commission After charging commission
Net profit before commission 100 105
Commission of 5% __5 __5
Net profit after commission 95 100

REINFORCEMENT QUESTIONS

QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31 December 19X6:

£ £
Amounts credited by bank 32,050 Balance at 1 January 19X6 892
Payments to trade creditors 27,380
Rent and rates 475
Fixtures 100
Lighting and heating 210
General expenses 800
Loan interest 120
Drawings 900
Customers’ cheques dishonoured 180
_____ Balance at 31 December 19X6 993
32,050 32,050

You are given the following information:

1. Trading receipts consisted partly of cash and partly of cheques. During the year, Dare had paid, out of his takings, wages for part-time staff amounting to £2,914 and sundry expenditure of £140. He retained between £2 and £5 per week pocket money and maintained a balance of £20 in the till for change. The balance of his takings, together with cheques amounting to £250, which he had cashed out of his takings for the convenience of certain friends, was paid into the bank.
2. Cheques drawn payable to trade creditors, but not presented at 1 January 19X6, amounted to £280 and at 31December 19X6 to £320.
3. All dishonoured cheques were re-presented and honoured during the year.
4. The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000 some years ago at a nominal rate of interest of 3% per annum. The interest was duly paid half-yearly on 31st March and 30 September, and the loan was still outstanding at the end of the year.
5. Discounts allowed by trade creditors amounted to £480 and those allowed to debtors were £520.

6. Other balances at 1 January and 31 December 19X6 are given below:

1 January 31 December
£ £
Stocks 4,500 5,800
Trade debtors 2,800 3,200 (including a bad debt of £200 to be written off)
Accrued general expenses 240 190
Rates paid in advance 40 50
Fixtures valued at 2,800 2,550 (including those purchased during the year)
Trade creditors 1,800 2,200
Creditors for heating and lighting
80
70


7. There is a standard gross profit margin of 25% on sales.

You are required to prepare:
(a) a statement of Dare’s capital on 1 January 19X6;
(b) a profit and loss account for the year ended 31 December 19X6;
(c) a balance sheet as on that date.

QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social Club.
The summarized balance sheet on 31.12.94 as prepared by the previous bookkeeper contained the following items. All figures are in £s.

Assets
Heating oil for clubhouse 1,000
Bar and café stocks 7,000
New sports ware, for sale, at cost 3,000
Used sports ware, for hire, at valuation 750
Equipment for grounds person – cost 5,000
- depreciation 3,500 1,500
Subscriptions due 200
Bank – current account 1,000
- deposit account 10,000
Claims
Accumulated fund 23,150
Creditors – bar and café stocks 1,000
- Sports ware 300


The bank account summary for the year to 31.12.95 contained the following items:

Receipts:
Subscriptions 11,000
Bankings – bar and sale 20,000
Sale of sports ware 5,000
Hire of sports ware 3,000
Interest on deposit account 800
Payments
Rent and repairs of clubhouse 6,000
Heating oil 4,000
Sports ware 4,500
Grounds person 10,000
Bar and café purchases 9,000
Transfer to deposit account 6,000

You discover that the subscriptions due figure as at 31.12.94 was arrived at as follows:

Subscriptions unpaid for 1993 10
Subscriptions unpaid for 1994 230
Subscriptions paid for 1995 40

Corresponding figures at 31.12.95 are:

Subscriptions unpaid for 1993 10
Subscriptions unpaid for 1994 20
Subscriptions unpaid for 1995 90
Subscriptions paid for 1996 200

Subscriptions due for more than 12 months should be written off with effect from 1.1.95

Asset balances at 31.12.95 include:
Heating oil for club house 700
Bar and café stocks 5,000
New sports ware, for sale, at cost 4,000
Used sports ware, for hire, at valuation 1,000

Closing creditors at 31.12.95 are:

For bar and café stocks 800
For sports ware 450
For heating oil for clubhouse 200


2/3 rds of the sportswear purchases made in 1995 had been added to stock of new sportswear in the figures given in the list of assets above, and 1/3 had been added directly to the stock of used sportswear for hire.

Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these older items into the stock of used sportswear, at a valuation of 25% of their original cost.

No cash balances are held at 31.12.95. The equipment for the grounds person is to be depreciated at 10% per annum, on cost.

Required:
Prepare income and expenditure account and balance sheet for the AB Sports club for 1995, in a form suitable for circulation to members. The information given should be as complete and informative as possible within the limits of the information given to you. All workings must be submitted. (23 marks)

QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the name of Chero Hardware. Most goods in which he trades are purchased from various suppliers in a finished form. In addition, a separate department of the firm manufactures various types of lampshades from purchased raw materials. When finished, the lampshades are transferred to the shop at an agreed transfer price for sale. No lampshades are sold other than through the shop.

The firm’s Accounts Assistant presents you with the following trial balance at 30 June 1988:
Sh Sh
Capital account – Cherono 740,000
Drawings – Cherono 95,000
Long term loan (interest at 15% p.a) 240,000
Fixtures and fittings at cost 900,000
Accumulated depreciation at 1 July 1987 350,000
Motor vehicle at cost 208,000
Accumulated depreciation at 1 July 1987 60,000
Stock at 1 July 1987 (at cost):
Raw materials for lampshades 40,000
Completed lampshades 20,000
Other goods 328,000
Trade debtors and creditors 122,000
Bank balance 98,000
Sales 4,100,000
Purchases – raw materials for lampshades 855,000
- other goods 2,400,000
Wages 254,000
Rent and rates 96,000
Water and electricity 47,000
Motor expenses 60,800
Repairs 12,000
Interest on loan 18,000
Bank charges 4,000
Insurance 18,000
Sundry expenses 21,200 _______
5,597,000 5,597,000


Additional Information:
(i) Rent and rates include a prepayment of rates of Sh. 6,000.
(ii) The insurance includes a premium for the period ending 31 October 1988.
(iii) A trade debt of Sh. 14,000 is not expected to be realized.
(iv) During the year a pick-up van, which was bought for Sh. 86,000, was sold for Sh. 30,000, and replaced with another pick-up van costing Sh. 152,000. Both transactions have been posted to the motor vehicle account. No disposal account has been opened. The straight-line rates of depreciation based on cost are 25% p.a. for motor vehicle and 10% p.a. for fixtures and fittings. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
(v) Accruals at 30 June 1988 were:
Water and electricity Sh. 5,000
Sundry expenses Sh. 4,000

(vi) Stocks at 30 June 1988 were:
Sh.
Lampshades raw materials 80,000
Lampshades (at transfer price) 30,000
Other goods at cost 252,000
(vii)

(a) The agreed transfer price for lampshades produced was Sh. 1,000,000. The workshop produced 50,000 lampshades during the year.
(b) Wages include those of the lampshades making employee who has been paid Sh. 50,000 for the year. In addition, she is entitled to a commission on the annual profit of her department of 10% p.a. after charging such commission. Shop assistants’ wages were Sh. 108,000.
(c) The apportionment of rent and rates; and water and electricity to the lampshades is 25% of the total.

Required:
(a) Prepare a manufacturing, trading and profit and loss accounts for the year ended 30 June 1988, disclosing clearly (i) the profit earned by the lampshades-making department and (ii) the gross profit earned by the shop.
(b) Prepare a balance sheet as at 30 June 1988.

QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The financial year of the club, which had been formed to provide training facilities for both field and track event athletes, had ended two days previously on 31 October 1983. An extraordinary general meeting was convened for the purpose of appointing a new treasurer whose task it would be to prepare the annual accounts for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an elementary knowledge of bookkeeping, soon found himself in difficulty.
He sought your assistance, which you agreed to give. During your conversation he said, ‘The previous treasurer maintained a Cash and Bank account. I have summarized the detailed entries into what I think you call a Receipts and Payments Account, and have rounded the figures to the nearest £1’.

At this point he supplied you with a copy of the following document:



Olympiad Athletics Club
Receipts and Payments Account for 12 months ended 31 October 1983
Note Receipts Note Payments
No. No.
Cash Bank Cash Bank
£ £ £ £
Balance c/d 73 - Balance b/d - 105
Membership fees: (4) Insurance premiums paid to brokers
580
(1) Entrance 80 170 (7) Payments to suppliers of sporting requisites
5,270
(1) Annual subscriptions 215 4,465 (5) Wages of grounds man 3,600
(2) Life membership 530 (8) Postages and telephones 692
(3) Training ground fees 454 7,206 (9) Stationery 629
Insurance: World-wide Athletics Club affiliation fee
50
(4) Premiums 638 (10) Rates of training ground 846
(4) Commissions 53 Upkeep of training ground
1,200
(11) Interest received from investments
626 Transfers to bank 700
(12) Sale of office furniture 370 (11) Purchase of investments 5,600
(6) Sale of sporting requisites 8,774 (11) Short term deposits 3,000
Advertising revenue 603
Transfers from cash ____ __700 Balances c/d 122 2,563
£822 £24,135 £822 £24,135
Balances b/d 122 2,563

After you had perused the above account, Guy Rowppe explained the numbered items, as follows:

(1) On admittance to membership of the club, new members pay an initial entrance fee together with their annual subscription. At 31 October 1982, annual subscriptions of £70 had been paid in advance and £180 was owing but unpaid; of this latter amount, £40 related to members who left during the current year and is now no longer recoverable. The figures at 31 October 1983 are £100 subscriptions in advance and £230 subscriptions in arrear. The policy of the club is to take credit for subscriptions when due and to write off irrecoverable amounts as they arise.
(2) As an alternative to paying annual subscriptions, members can at any time opt to pay a lump sum, which gives them membership for life without further payment.
Amounts so received are held in suspense in a Life Membership Fund account and then credited to Income and Expenditure Account in equal instalments over 10 years; the first such transfer takes place in the year in which the lump sum is received. On 31 October 1982 the credit balance on the Life Membership Fund Account was £4,720, of which £850 credited was as income for year ended 31 October 1983.
(3) The club has a permanent training ground. Non-members can use the facilities on payment of a fee. In order to guarantee a particular facility, advance booking is allowed. Advance booking fees received before 31 October 1983 in respect of 1984 total £470. The corresponding amount paid up to 31 October 1982 in advance of 1983 was £325. Members can use the facilities free of charge.
(4) Club members can take out insurances through the club at advantageous rates. Initially, premiums are paid by members to the club. Subsequently, the club pays the premiums to an insurance broker and receives commission. At 31 October 1982, premiums received but not yet paid over to the broker amounted to £102 and commissions due but not yet received were £11. The corresponding amounts at 31 October 1983 are £160 and £13 respectively.

(5) The grounds man is employed for the six months April to September only. He is then paid a retaining fee to secure his services for the following year. At 31 October 1982 the grounds man had been paid a retainer (£250) for 1983. Included in the Wages figure (£3,600) is the retainer (£300) for 1984.
(6) Sporting requisites are sold only on cash terms. There are therefore no debtors for these items.
(7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163; the corresponding figure on 31 October 1983 was £202.
(8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31 October 1983, was £927. In arriving at this latter figure, the sum of £137, representing damaged and unsaleable stock at cost price, had been excluded.
(9) Postage stamps unused at 31 October 1983 totalled £4.
(10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36 respectively.
(11) Rates are payable to the District Council in two installments (in advance) each year. £360 had been paid on 1 October 1982, £390 on 1 April 1983 and £456 on 1 October 1983.
(12) The club receives interest on investments bought a number of years ago at a cost of £7,400 (current valuation £7,550). At the end of October 1983, the club had acquired further investments which cost £5,600 (current valuation £5,600) and at the same time placed £3,000 in a short-term deposit account.
(13) The written down value of the furniture which had been sold during the year was £350; it had originally cost £800.

Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an inclusive cost of £4,000. Subsequently, the club had some timber buildings erected to provide various facilities for members. The total cost of these buildings was £35,000; depreciation is calculated at the rate of 10% per annum on a straight-line basis. At 31 October 1982, the provision for depreciation account had a balance of £9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club’s books as £7,900 (cost) against which there was a provision for depreciation of £4,150 (calculated on the same basis as for buildings). Apart from the disposal referred to in note (12) above there had been no other disposals or acquisitions during the year.

Required:
Prepare the club’s Income and Expenditure Account for year ended 31 October 1983 and the Balance sheet at that date.

All workings must be shown.
*Freehold land is land held in perpetuity.

CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK

COMPREHENSIVE ASSIGNMENT No.2


TO BE SUBMITTED AFTER LESSON 6

To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.

EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS


QUESTION ONE
The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as shown below for the month of October 19-6:
Bank Account
19-6 19-6
Oct Oct
1 Balance c/d 91.40 2 Petty Cash 062313 36.15
3 McIntosh and Co 260.11 3 Freda’s Fashions 062314 141.17
3 Malcolm Brothers 112.83 6 Basford Ltd 062315 38.04
3 Cash sales 407.54 8 Hansler Agencies 062316 59.32
14 Rodney Photographic 361.02 9 Duncan’s storage 062317 106.75
17 Puccini’s Cold Store Ltd 72.54 9 Aubrey plc 062318 18.10
20 Eastern Divisional Gas Board – rebate (August direct credit)

63.40 10 Secretarial services Ltd 062319 28.42
22 Grainger’s Garage 93.62 14 Trevor’s Auto repairs 062320 11.75
29 Cash sales 235.39 15 Wages cash 062321 115.52
31 Balance c/d 221.52 16 Towers Hotel 062322 44.09
17 Bank charges (September) - 12.36
20 Broxcliffe borough Council
SO
504.22
21 Eastern Area Electricity Board
DD
108.64
24 Eastern Divisional Gas Board
DD
41.20
28 Petty Cash 062323 119.07
30 Wages cash 062324 337.74
______ 31 Salaries transfer - ______
1,919.37 1,919.37
Nov 1
Balance c/d

221.52

In early November, the company’s bank sent a statement of account which is reproduced below:

Statement of Account with Lowland Bank plc
Account: Fuller Ltd Current Account No 10501191
Date of issue: 1 November 19-6
19-6 Oct Description Debit Credit Balance
£ £ £
1 BCE 90.45
2 CR 175.02 265.47
2 062310 111.34 154.13
3 062312 9.18 144.95
3 062309 15.41 129.54
3 CR 780.48 910.02
7 062313 36.15 873.87
10 ADJ 12.90 886.77
15 062315 38.04 848.73
16 062314 141.17 707.56
17 CR 443.56 1,151.12
20 SO 504.22 646.90
21 062317 106.75 540.15
21 DD 196.83 343.32
21 062320 11.75 331.57
22 141981 212.81 118.76
22 ADJ 10.00 108.76
22 062319 28.42 80.34
22 062320 11.75 68.59
22 CR 93.62 162.21
24 ADJ 212.81 375.02
27 INT (loan a/c) 26.35 348.67
27 062321 115.52 233.15
28 062322 44.09 189.06
28 DD 108.64 80.42
30 CGS 9.14 71.28
31 ADJ 11.75 83.03

Abbreviations:
BCE = Balance SO = Standing Order CR = Credit ADJ = Adjustment
INT = Interest DD = Direct Debit CGS = Charges

Required:
Prepare the company’s bank reconciliation statement as at 31 October 19-6.
(Chartered Association of Certified Accountants)
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul Rudyerd, a wholesale fruiter, at the end of his financial year ended on 31 May 19X1.
£ £
Purchases and sales 104,310 146,200
Stocks 3,010
Motor vehicles at cost 26,360
Provision for depreciation on motor vehicles as at 1 June 19X0 12,960
Warehouse equipment at cost 20,000
Debtors and creditors 25,250 21,200
Bank 3,200
Motor vehicle expenses 11,960
Rent and rates 11,220
Advertising 2,500
Sundry expenses (including insurance and electricity) 3,470
Drawings 6,600
Capital as at 1 June 19X0 ______ 31,120
214,680 214,680


Additional information and opinions are given as follows:
(a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a consignment of rare fruit from abroad which cost £300, which would normally sell for approximately £660, but which is badly bruised and could be sold as juice pulp for £100.
(b) Depreciation on motor vehicles is normally charged at an annual rate of 20%, using the reducing balance method. The motor vehicles at cost figure includes a new car purchased during the year for £9,600 for Rudyerd’s personal use which it is estimated will last four years with an estimated residual value of £4,000.
(c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
Prepayments Accruals
£ £
Rates 230
Rent 160
Insurance 180
Electricity 200

(d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of outstanding debtors should be created.
(e) A recording error has resulted in a second-hand delivery van, purchased on 2 June 19X0 for £9,000, being treated as a motor vehicle expense.
(f) No record has been made of fruit, estimated to have cost £520, withdrawn from the business by Rudyerd for his personal use.
(g) No adjustment should be made, in preparing the answer to part (a) for the new warehouse equipment purchased during the year.

Required:
(a) Prepare a draft trading, profit and loss account for Paul Rudyerd’s wholesale fruit business for the year ended 31 May 19X1 and a draft balance sheet as at 31 May 19X1. (15 marks)
(b) Briefly explain what accounting concepts and conventions would be important in considering the treatment of the new warehouse equipment. (4 marks)
(c) Itemize the additional information that you would wish to know before you could make the appropriate adjustments to the above financial statements in respect of the new warehouse equipment. (3 marks)

QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after your arrival the finance director is rushed into hospital; the auditors are about to arrive to prepare the accounts for the recently-ended financial year; you cannot find any working papers for the previous year’s accounts; and the other accounts staff are too busy to assist you in preparing for the auditor’s visit.
The eight situations described below are detailed on a notepad left by the finance director and their treatment in the accounts needs to be considered by you.

(a) A supply of office stationery was purchased five months before the year-end at a cost of £1,000. At the year-end it is estimated there is about £250 worth left in stock.
(b) An electronic typewriter was purchased during the year at a cost of £270. It is estimated to have a useful life of five years.
(c) A batch of goods was produced to a customer’s special order. The goods cost £5,800 but have not been delivered as it transpires the customer is now bankrupt. A buyer for the goods has been found, who will pay £4,500 but modifications costing £1,200 will have to be made to the goods.
(d) Three technical staff have spent the last six months exclusively on a new product design project; their salaries for this period amount to £22,000. At the year-end it is known that the design stage will take another month, to be followed by market research; after this the directors will decide whether the project should proceed to production and marketing. The company’s chief engineer is confident that sales of the new product will start in the next financial year and will last for at least four years.
(e) A freehold property was purchased on the first day of the financial year at a cost of £650,000. The building is estimated to have a useful life of ten years when it is expected it will have to be demolished for redevelopment. It is estimated that the freehold land, at the time of purchase, was worth £500,000.
(f) A specialist machine was purchased seven years ago for £200,000. It has been depreciated, using the straight-line method, at 10% per annum since then. To the beginning of the year under review £120,000 depreciation has been provided. The chief engineer has advised that the machine is worn out and would need to be rebuilt to last more than another two years. The directors have already decided the machine should not be rebuilt but scrapped one year after the end of the year under review.
(g) The debtors’ ledger shows balances totalling £52,000 at the year-end. Two debts, totalling £2,000, are known to be bad. Another customer has gone into liquidation owing £3,000; it is expected he will be able to pay 60p of every £ owed to his creditors. The sales director recommends a general bad debt provision of 2% in respect of the remaining debtor balances.
(h) The company has undertaken a heavy advertising campaign throughout the year under review to promote its corporate image and product range. The sales and managing directors feel that this campaign will benefit the company for at least a further six months after the year end. You determine that the campaign cost £150,000 and has been fully paid for before the year-end.

Required:
For each of the eight situations described above:
(a) Describe what action should be taken in respect of:

(i) The amount to be charged or credited to the year’s profit and loss account (if any);
(ii) The value to be placed on the asset in the balance sheet at the year end (if any);
(8 marks)
(b) State what accounting assumptions, conventions or concepts could be involved and give reasons, where there is a conflict between two or more of them, why you have chosen the action you propose. (9 marks)

QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31 December 19X9:

Ksh Ksh
Carriage inwards 6,310
Capital account at 1 January 19X9 500,000
Motor vans 200,000
Stock at 1 January 19X9 164,000
Balance at bank 116,860
Purchases 1,593,690
Sales 2,224,000
Trade debtors 290,000
Trade creditors 157,600
Rent and rates 56,080
Salaries 350,400
General expenses 44,720
Motor expenses 25,600
Discounts allowed 40,400
Discounts received 37,600
Insurance 17,600
Bad debts 30,400
Provision for doubtful debts 1 Jan 19X9 8,000
Provision for depreciation on vans 60,000
Drawings 50,000
Disposal 6,000
Returns inwards 7,140 _______
2,993,200 2,993,200

The following matters should be taken into account:

(a) After examination of the debtors account, it was decided to:
Write off a bad debt of Ksh 12,000
Make a specific provision in the accounts for the following doubtful debts,

Ksh 5,000 from Wordsworth
Ksh 3,000 from Coleridge
Make a general provision of 5% on the debtors.

(b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected to sell them at Ksh 232,470.
(c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
(d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but the instalment due on 31 December 19X9 was not paid until 15 January in the next year.
(e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
(f) Depreciation is to be provided for on the motor truck at the rate of 20% per annum straight line on cost.
(g) General expenses include Ksh 3,060 relating to the telephone account which is made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
(h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent sand rates relate to private use.

Prepare a trading and profit account for the year to 31st December 19X9, and a balance sheet as at 31 December 19X9.

QUESTION FIVE
The balance sheet of Johnson’s shop at 1 October 19X7 was as follows:

Non current assets Ksh Ksh Ksh Ksh
Shop premises 45,000 Capital as at 1 Oct 51,000
Shop fittings 12,000
Delivery van 4,000 61,000

Current assets Current liabilities
Stock in trade 14,000 Trade creditors 12,000
Cash in hand 2,000 16,000 Bank overdraft 14,000 26,000
77,000 77,000

The following is a summary of the transactions which took place during the year to 30 September 19X8:

1. Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh 83,000.
2. Stock in trade bought, all on credit for Ksh 78,000.
3. Cash of Ksh 113,000 was taken from the till (cash register) and paid into the bank.
4. The trade creditors were paid Ksh 73,000 by cheque.
5. Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The loan is for 5 years.
6. Wages of Kshs 17,000 were paid in cash.
7. Rates of Ksh 2,900 were paid by cheque.
8. Sundry expenses of Ksh 6,000 were paid in cash.
9. Electricity bills of Ksh. 1,600 were paid by cheque.
10. The owners of the business withdrew Ksh 9,000 in cash.

At 30 September 19X8 you discover the following:

1. Interest Ksh 2,500 due to Black for the year was unpaid.
2. Shop fittings are to be depreciated at 10% per annum on the total at the year-end; the delivery van is to be depreciated at 20% per annum of the total at the year-end.
3. The rates payment during the year included Ksh 1,000 in respect of the period 1/10/19X8 to 31/3/19X9.
4. The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.

Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for the year to that date.




END OF COMPREHENSIVE ASSIGNMENT No.2

NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING

LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying on a business common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.

Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e.g.) lawyers, doctors, accountants etc. whose maximum membership is twenty (20) persons.

Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree on the terms upon which the partnership will be run and the relationship between each other. This is done in writing and signed off as agreed by all the partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.

Accounting for partnerships.
The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to remain fixed. It will only change when the partners agree or incase of any changes in the partnership like admission of or retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities of the partnership (i.e.) the profits or losses and any drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital account becomes a fixed capital account. When there is no distinction between a capital account and a current account then any short- term changes are passed through the capital account therefore the capital account becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are shown in the following formats.

(Assume a firm of 3 partners A, B and C)

CAPITAL ACCOUNT
A B C A B C
£ £ £ £ £ £
Loss or revaluation xx xx xx Bal b/d xx xx xx
Goodwill written off xx xx xx Additional capital
(c/book or asset) xx xx xx
Gains on revaluation xx xx xx
Bal c/d xx xx xx Goodwill xx xx xx
xx xx xx xx xx xx
Bal b/d xx xx xx



CURRENT ACCOUNT
A B C A B C
£ £ £ £ £ £
Bal b/d xx Bal b/d xx xx
Interest on drawings xx xx xx Interest on capital xx xx xx
Drawings xx xx xx Salaries xx xx xx
Share of profits xx xx xx
Bal c/d xx xx - Loan interest - xx -
Bal c/d xx
xx xx xx xx xx xx
xx Bal b/d xx xx xx



Format For Final Accounts:
Profit and Loss Account
The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss account, a new section called the Appropriation account is included and this account shows how the partners share the Net Profit for the period. (In addition to other expenses in the profit and loss, an expense for interest on loan given by one of the partners is included and the credit entry is made on the partner’s current account.)
The format for the Appropriation account is as follows:


£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)

£ £
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)


Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the business should be shown separately and any loan given by a partner to the firm is also shown separately in the non-correct liability section therefore, the format will be as follows.

£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx

Example 7.1
Read the following and answer the questions below.

A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:

Capital: A- £60,000; B - £48,000.
Partnership salaries: A - £9,000; B - £6,000.
Drawings: A - £12,000; B - £13,400.

The firm’s net profit for the year was £32,840.
Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.

(a) From the information above prepared the firm’s appropriation account and the partners’ current accounts.

SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840

Less: Interest on capital
A 6000
B 4800 (10,800)
22,040
Less: Salaries
A 9000
B 6000 (15,000)
Balance of profit to be shared in Profit Share Ratio 7,040
A ½ 3520
B ½ 3520 (7,040)



CURRENT ACCOUNT
A B A B
£ £ £ £
Drawings 12,860 13,400 Interest on capital 6,000 4,800
Salaries 9,000 6,000
Bal c/d 5,660 920 Profit shared. 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920


EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet extracts at the date, from the following:

i. Net profits £30,350
ii. Interest to be charged on capitals: W £2,000; P £1,500; H £900
iii. Interest to be charged on drawings; W £240; P £180; H £130
iv. Salaries to be credited: P £2,000; H £3,500.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/f W £1,860; P £946; H £717
vii. Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
viii. Drawings: W £9,200; P £7,100; H £6,900.


SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)


Current Account
W P H W P H
£ £ £ £ £ £
Interest on draw 240 180 130 Bal b/d 1,860 946 717
Drawings 9,200 7,100 6,900 Interest on capital 2,000 1,500 900
Bal c/d Salaries 2,000 3,500
Share of profits 10,000 6,300 4,200
Bal c/d 4,920 3,466 2,287
14,360 10,746 9,317 14,360 10,746 9,317




Balance sheet (extract) as at 31 Dec 2002
£ £ £
Net Assets xx
Capital W 40,000
P 30,000
H 18,000
88,000
Current Accounts
W 4,920
Pl 3,466
H 2,287 10,673
98,673

Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and Stone, trading partnership, sharing the balance of profits and losses in the proportions 3:2 respectively.
£
Printing, stationery and postage 3,500
Sales 322,100
Stock in hand at 1 October 19X8 23,000
Purchases 208,200
Rent and rates 10,300
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running costs 5,620
Discounts allowable 950
Discount receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings: at cost 26,000
Provision for depreciation 11,200
Motor vehicles: at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current account balances
At 1 October 19X8:
Brick 3,600 credit
Stone 2,400 credit
Capital account balances
At 1 October 19X8:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700

Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1 July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%

Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include summaries of the partners’ capital and current accounts for the year ended on that date.

Note: In both (a) and (b) vertical forms of presentation should be used.

SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
Discounts allowable 950
Discounts receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings at cost 26,000
Provision for depreciation 11,200
Motor vehicles at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000

Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470

TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9
£ £ £
Sales 322,100
Less: Sales returns 2,100
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
Interest on loan (adjustment) 250 (82,320)
Net profit 44,250
Less: Salaries Stone (adjustment) (6,000)
Balance of profit to be shared 38,250
Brick 22,950
Stone 15,300 (38,250



Balance sheet as at 30 September 19X9
Non current Asset £ £ £
Fixtures and fittings 26,000 (13,800) 12,200
Motor vehicles 46,000 (34,200) 11,800
72,000 48,000 24,000
Current Asset
Stock 32,000
Debtors 9,300
Less: Provision (300) 9,000
Payments 600
Cash at bank 7,700
49,300
Current Liabilities
Creditors 8,400
Accruals 400 (8,800) 40,500
64,500
Capital
Brick (adjustment) 23,000
Stone 17,000
Current:
Brick adjustment 2,800
Stone 11,700 14,500
54,500
Non-Current Liabilities
10% loan – Brick 10,000
64,500

Current Account
Brick Stone Brick Stone
£ £ £ £
Drawings 24,000 12,000
(adj) Bal b/d 3,600 2,400
Interest on loan 250
Bal c/d 2,800 11,700 Salaries. 6,000
Share profits 22,950 15,300
26,800 26,800 26,800 23,700


EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance as at 30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 19X8 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,000
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040

Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance sheet as at that date.

a) Stock, 30 June 2003, £563,400
b) Expenses to be accrued: Office Expenses £960; Wages £2,000
c) Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
d) Reduce provision for bad debts to £3,200.
e) Partnership salary: £8,000 to Mack. Not yet entered
f) Interest on drawings: Mack£1,800; Spencer £1,200.
g) Interest on capital account balances at 10 per cent.



Mack and Spencer
Q 5.2 Trading and Profit Loss Account for the year ended 30 June 2003
£ £ £
Sales 1,236,500
Less cost of sales
Opening Stock 419,790
Add: Purchases 854,160
1273,950
Less: Closing Stock (563,400) 710,550
Gross Profit 525,950
Reduction in provision for bad debts (400-300) 800
526,750
Less Expenses
Depreciation: Fixtures & Fittings (110,000-33,000 x )7,700
Buildings 10,000
Carriage outwards 12,880
Discount allowed 1,150
Office expenses (24160 + 960) 25,120
Loan interest 40,000
Salaries and wages (18,9170 + 2000) 191,170
Bad debts 5,030 (293050)
Net Profit for the period 233,700
Add: Interest on drawings:
Mack 1,800
Spencer 1,200 3,000
236,700
Less: Salaries – Mack (8,000)
228,700
Less: interest on capital
Mack 35,000
Spencer 29,500 (64,500)
164,200
Balance of profits
Mack ½ 82,100
Spencer ½ 82,100 164,200

Mack – Current Account

£ £
Drawings 64,000 balance b/d 13,060
Interest on drawings 1,800 salary 8,000
Interest on capital 35,000
Profit 82,100
bal c/d 72,360
138,160 138,160




Spencer – Current Account

£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580


Balance Sheet as at 30 June 19X9

£ £ £
Non Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300

Current Assets
Stock 56,3400
Debtors (16,243 – 320) 15,9230
Cash at bank 6770
72,9400
Current Liabilities
Creditors 111,500
Accruals (200 + 96) 2,960 (114,460) 61,4940
1,174,240



Capital Accounts: Mack 35,000
Spencer 29,500 64,500
Current Accounts: Mack 72,360
Spencer 56,880 129,240

Loan from J. King 400,000
1,174,240





Example 7.5
JUNE 1998 QUESTION 4

The balance sheet of the partnership of Kombo and Nzuki as at 31 March 1997 was as follows:

Capital accounts: Shs. Sh. Fixed asset sh. sh
Kombo 1,400,000 (at cost less depreciation
Nzuki 1,400,000 2,800,000 Premises 1,200,000
Equipment 520,000
Vehicles 418,000 2,138,000
Current Accounts:
Kombo 136,000
Nzuki (81,200) 54,800

Current Liabilities: Current Assets:
Creditors 501,600 Stock 894,200
Accruals 25,600 527,200 debtors 475,900
Provision (46,400) 429,500
Prepayments 28,600
Suspense account 326,300 Bank and cash 281,000 1,570,300 3,708,300 3,708,300

After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated at 20% by straight line method on an assumed residual value of Sh.20,000 had been sold at Sh.60,000 but no entries, other than in the bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad debts should have been maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary of Sh.60,000 which should have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200. No entries had been made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%


Required:
a) A statement of adjustments to show the correct net profit for the y (12 marks)
b) A suspense account showing how the balance is eliminated from the books.
(2 marks)
c) A corrected balance sheet as at 31 March 1997. (8 marks)




SOLUTION
The following journal can be included although not required in the question.

DR CR
i) DR: Suspense Account 26,400
CR: Discount Allowed Account 26,400

DR: Suspense Account 26,400
CR: Discount receive 26,400
Making the correct in the accounts

ii) DR: Suspense Account 200,000
CR: Sales Account 200,000
Sales undercast now corrected

iii) DR: Suspense Account 13,500
CR: Debtors Account 13,500
Being an overstatement of debtors
account now corrected

iv) DR: Asset Disposals Account 140,000
CR: Asset Account 140,000
DR: Provision for depreciation Account
CR: Asset Disposal Account
DR: Suspense Account 60,000
CR: Asset Disposal Account 60,000
DR: Asset Disposal Account 16,000
CR: Profit and Loss Account 16,000

v) DR: Profit and Loss Account 11,200
CR: Accrue expenses Account 11,200


vi) DR: Profit and Loss Account 31,200
CR: Debtors Account 31,200
DR: Provision for doubtful debts Account 3,280
CR: Profit and Loss Account 3,280

DR: Kombo’s Current Account 60,000
CR: Nzuki’s Current Account 60,000
DR: Kombo’s Current Account 39,200
CR: Profit and Loss Account (Purchases) 39,200



(a) Kombo and Nzuki Partnership
Statement of Corrected Net Profit for the year
Sh. Sh.
Adjustments
Discount allowed 26,400
Discount received 26,400
Sales undercasted 200,000
Profit on disposal of asset 16,000
Accrued electricity charges (11,200)
Bad debts (31,200)
Decrease in provision for bad debts 3,280
Drawings (goods) 39,200
Net adjustments to Net Profit 268,880



Partners Current Account
Kombo Nzuki Kombo Nzuki
Shs Shs. Shs. Shs.
Bal b/d - 81,200 Bal b/d 136,000 -
Nzuki 60,000 - Kombo - 60,000
Drawings 39,200 - Net profit adjustments 161,328 107,552
Bal c/d 198,128 86,352

297,328 167,552 297,328 167,552




(b) Suspense Account
Shs. Shs.
Discount allowed 26,400 bal b/d 326,300
Discount received 26,400
Sales 200,000
Debtors 13,500
Motor vehicle disposal 60,000
326,300 326,300

(c) Kombo and Nzuki
Balance Sheet as at 31 March 1997
Fixed Assets Shs. Shs. Shs.
Premises 1,200,000
Equipment 520,000
Vehicles 374,000
2,094,000
Current Assets
Stocks 894,200
Debtors (431,200 – 43,120) 388,080
Prepayments 28,600
Bank and Cash 218,000
1,528,880
Current Liabilities
Creditors 501,600
Accruals (25,600 + 11,200) 36,800 (538,400) 990,480
3,084,480

Capital Accounts
Kombo 1,400,000
Nzuki 1,400,000 2,800,000

Current Accounts
Kombo 198,128
Nzuki 86,352 284,480
3,084,480

NB
This is a very good question on partnership as it combines both errors on the accounts and Partnerships. Please study it carefully and follow up the entries and adjustments.

The next example is still on past paper and combines both incomplete records and partnerships.

EXAMPLE 7.6 JUNE 1997
Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not maintain proper books of accounts. The following information has been obtained from the available records on 31 March:
1996 1997
Sh. Sh.
Balance at bank 94,800 169,680
Stock in trade 541,200 488,640
Trade debtors 612,000 ?
Trade creditors ? 305,760
Furniture 360,000
Motor vehicles (book value) 1,920,000

Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while purchases, all on credit for the same period were Sh.2,952,480. On 31 March 1996 Kefa’s capital was Sh.200,000 less than that of Mark. The analysis of the cash book for the year ended 31 March 1997 shows the following:


Receipts:
Cash from credit sales 3,491,520
Additional capital by Kefa 240,000
Cash sales 586,800
Payments:
For purchases 3,070,080
Salaries paid 420,000
Rent paid (for 6 months to 30.9.96) 144,000
Rates paid (for 6 months to 30.6.97) 120,000
Electricity charges 60,000
Advertising 41,760
Motor vehicle expenses 119,520
Sundry expenses 33,600
Drawings - Kefa 132,480
Mark 102,000

On 31 March 1997 liabilities were as follows:
Sh.
Electricity charges 12,480
Advertisement 6,240
Sundry expenses 3,600

On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One vehicle was sold on credit for Sh.640, 000 while the other was taken over by Kefa at a valuation of sh.250, 000. the combined book value of the two vehicles was Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March 1997. No depreciation is to be provided for the vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997. (10 marks)
b) Balance sheet as at 31 March 1997. (8 marks)
c) Partner’s capital accounts (4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1

KEFA and MARK
STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets Sh. Sh.
Bank 94,800
Stock 541,200
Debtors 612,000
Furniture 360,000
Motor vehicle 1,920,000
3,528,000
Liabilities
Creditors (423,360)
Net Assets 3,104,640
Capital Kefa 1,452,320
Mark 1,652,320 3,104,640


Trading, Profit and loss account for the year ended 31 March 1997
Sh Sh.
Sales 3,849,120
Less cost of sales
Opening stock 541,200
Purchases 2,952,480
Less: Closing stock 488,640) (3,005,040)
Gross profit 844,080
Profit on disposal adjustment 230,000
1,074,080
Less Expenses
Salaries 420,000
Rent adjustment 288,000
Rates 60,000
Electricity 72,480
Advertising 48,000
Motor vehicle 119,520
Sundry expense 37,200
Depreciation – Furniture 36,000
- Motor vehicle 126,000 (1,207,200)
(133,120)
Net Loss should in PSR
Kefa (66,560)
Mark (66,560) 133,120

Balance sheet as at 31 March 1997
Non-current Assets Sh. Sh. Sh.
Furniture 360,000 (36,000) 324,000
Motor vehicle 1,260,000 (126,000) 1,134,000
1,620,000 (162,000) 1,458,000

Current Assets
Stock 488,640
Debtors – Trade Adjustment 382,800
- others vehicle 640,000
Prepayments 60,000
Bank 169,680
1,741,120
Current Liabilities
Creditors 305,760
Accruals 166,320 (472,080) 1,269,040
2,727,040
Capital - Kefa 1,243,280
Mark 1,483,760
2,727,040

Capital Account
Kefa Mark Kefa mark
Shs. Shs. Shs. Shs.
Drawings 132,480 102,000 Bal b/d 1,452,320 1,652,320
Disposal 250,000 Cash 240,000
Loss shared 66,560 66,560
Bal c/d 1,243,280 1,483,760
1,692,320 1,652,320 1,692,320 1,652,320

(c) GOODWILL AND REVALUATION OF ASSETS
This is defined as the advantage, whatever it may be, a person gets by continuing to be entitled to represent to the outside would that he is carrying on a business which has been carried on for sometime previously. “Judge Warey in Hull V Frases”
Goodwill is the element that arises from a business due to its reputation and therefore, enjoys benefits that a new business may not get.
(e.g.) A new business may not make profits easily during the first year of trading.

Factors that contribute to goodwill

1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the share of a partner’s effort to improve the business. The problem is normally to ascertain the value or cost of goodwill.
There are two types of goodwill:

1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates. There are various approaches to these. Goodwill maybe arrived at by taking the average profits for lets say three previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or shown in the accounts.

2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business above its net assets.
This is less subjective because it is the excess amounts paid for a business above its net assets.
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these case the net assets will be total assets less total liabilities) of another business that is still trading on and the value of the net asset is 3 M, therefore the purchased goodwill may be shown in the accounts as an intangible asset. Purchased goodwill can be treated in the following three main ways:

1) Goodwill is written off from the accounts
2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.

The practice is normally to carry it in the accounts together with the other assets (as an intangible asset) and amortize it over estimated period of time.

In a partnership, there are normally three situations where goodwill is accounted for in the accounts:

a) If there is a change in the profit sharing ratio.
b) On admission of a new partner.
c) On retirement of an old partner.
d)
Example (when there is a change in profit sharing ratio)
When there is a change in the profit sharing ratio, then goodwill is introduced in the accounts by

Dr. Goodwill account
Cr. Partner’s capital account ( the credit is based on the old
profit sharing ratio.)

The goodwill may remain in the accounts and therefore no partner entries will be made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account

Example:
A and B have been trading as partners sharing profits and losses equally. They decided to change profit sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.

Required: The partner’s capital balances assuming that:
1) Goodwill is to be retained in the accounts
2) Goodwill is to be written off form the accounts.

Solution:

1) CAPITAL ACCOUNT
A B A B
Bal b/d 1,000,000 1,500,000
Goodwill(OPSR) 250,000 250,000
Bal c/d 12,500,000 1,750,000
12,500,000 1,750,000

2) CAPITAL ACCOUNT
A B A B
Goodwill (NPRS) 300,000 200,000 Bal b/d 1,000,000 1,500,000
Bal c/d (NPSR) 950,000 1,550,000 Goodwill
(OPSR) 250,000 250,000
12,500,000 1,750,000 12,500,000 1,750,000

REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based on market price.
The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.

Any revaluation gains or losses are passed through a new account (i.e) a Revaluation account and the balance on this account profit or low on revaluation is transferred to the partner’s capital accounts in the existing profit sharing ratio.

Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1. They have the following assets and liabilities at the book values and they wish to restate these values at market values and agreed values.

Assets/Liabilities Book value Market price/Agreed value Gain)
£ £ Loss
Buildings 2,000,000 2,500,000 100,000
Fixtures, Fittings & furniture 900,000 800,000 (100,000)
Motor vehicle 1,200,000 1,150,000 (50,000)
Stock 700,000 650,000 (50,000)
Debtors 450,000 400,000 (50,000)
Creditors 800,000 700,000 100,000

Required:
Prepare Revaluation account and the partner’s capital account given the partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000


REVALUATION ACCOUNT
£ £
Fixtures 100,000 buildings 500,000
Motor vehicles 50,000 Creditors 100,000
Stock 50,000
Debtors 50,000
Capital A/C A 140,000
B 140,000
C 70,000
600,000 600,000



CAPITAL ACCOUNT
A B C A B C
Goodwill £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Bal b/d 3,000 2,500 1,500
Bal c/d 3,140 2,640 1,510 Revaluation 140 140 70
3,140 2,640 1,570 3,140 2,640 1,570



If there is a profit on revaluation, then the profit will be transferred to the partner’s capital account by:
Dr. Revaluation
Cr. Partner’s capital account in the profit share ratio
If there is loss then
Dr. Partner’s capital account
Cr. Revaluation in the profit share ratio


EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively.

The balance sheet for the partnership as at 30 June 19X6 is as follows;

Fixed Assets £ £
Premises 90,000
Plant 37,000
Vehicles 15,000
Fixtures 2,000
144,000
Current Assets
Stock 62,379
Debtors 34,980
Cash ___760 98,119
£242,119
Capital
Alan 85,000
Bob 65,000
Charles 35,000
185,000
Current account
Alan 3,714
Bob (2,509)
Charles 4,678 5,883

Loan – Charles 28,000

Current liabilities
Creditors 19,036
Bank overdraft 4,200
£242,119

Charles decides to retire from the business on 30 June 19X6, and Don is admitted as a partner on that date. The following matters are agreed:

a) Certain assets were revalued;
­ Premises £120,000
­ Plant £35,000
­ Stock £54,179
b) Provision is to be made for doubtful debts in the sum of £3,000.
c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners in the new firm do not wish to maintain a goodwill account so that amount is to be written back against the new partners’ capital accounts.
d) Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of profits as Bob.
e) Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by the firm in cash except £20,000 which he is willing to leave as a loan account.
f) The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.

The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

Required;
a) Account for the above transactions, including goodwill and retiring partners’ accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 19X6.

Solution:
Capital Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
Goodwill written off
12,000
18,000
12,000
-
Bal b/d
-
85,000
65,000
35,000
Motor vehicle - - - 3,900 Goodwill - 21,000 14,000 7,000
Cashbook - 21,000 38,100 Cash book 79,000 - - -
Bal c/d 67,000 67,000 67,000 -
79,000 106,000 79,000 42,000 79,000 106,000 79,000 42,000


Current Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
Bal b/d - - 2,509 - Bal b/d - 3,714 - 4,678
Cash book 9,023 7,478 Revaluation a/c - 8,400 5,600 2,800
Cash book 3,091 - - -
Bal c/d 3,091 3,091 3,091 -
3,091 12,114 5,600 7,478 3,091 12,114 5,600 7,478


Revaluation Account
£ £
Plant 2,000 Premises 30,000
Stock 8,200
Debtors 3,000
Profits shared:
Alan 8,400
Bob 5,600
Charles 2,800 _____
30,000 30,000





Cash book
£ £
Bal b/d 760 Charles – capital account 38,100
Don - capital account 79,000 Loan 8,000
Current account 3,091 Current account 7,478
Alan – capital account 21,000
Current account 9,023
Bal c/d ******

Cash book
£ £
Bal b/d 4,200
Don - capital account 79,000 Charles – capital account 38,100
Current account 3,091 Loan account 8,000
Current account 7,478
Alan – capital account 21,000
Current account 9,023


Alan, Bob and Don Partnership
Balance Sheet as at 30 June 19X6

Fixed Assets Cost Depreciation NBV
Premises 120,000
Plant 35,000
Vehicles 1,100
Fixtures 2,000
168,100
Current Assets
Stock 54,179
Debtors 31,980
Cash __760
86,919
Less Current Liabilities
Creditors 19,036
Bank overdraft 5,710 (24,746) 62,173
230,273
Capital accounts
Alan 67,000
Bob 67,000
Don 67,000 201,000

Current Accounts
Alan 3,091
Bob 3,091
Don 3,091 9,273
210,273
Non current liabilities
Loan – Charles 20,000
230,273


NOTE:

i. Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios.
ii. Same case applies for any gain or loss in the revaluation of assets.
iii. Goodwill written off in the new profit sharing ratios against the capital accounts only for the new partners.
iv. When there is no enough cash to be paid to the retiring partners, his balance remains in the business as a loan.

(d) Admission of a new partner.
When a new partner is admitted into the firm, this marks the end of the old partnership and the beginning of a new one.
The new partner will have to bring in the capital that is due from him as per the agreement and also pay for a share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by debiting the partner’s account(inclusive of the new one in the new Profit Sharing Ratio).

If the admission is taking place part way through the financial period, then the new partner will be entitled to the profits or losses for the remaining part of the financial period. (i.e from the point of joining the partnership).
Care should be taken when apportioning interest on capital, salaries and profits because of the changes

Example:
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,070,000
13,420,000 13,420,000
Additional information:
1. On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be shared on the ratio 2:2:1. For the purposes of this admission, the value of goodwill was agreed at Sh.3, 000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 more into the firm of which Sh.375,000 comprised his fixed capital and the balance was credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated were to be apportioned on a time basis.
4. A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April, the stock was valued at Sh.1,275,000.

6. Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500
7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expenses, which was later found to be due to the following clerical errors:
• Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account of the customer concerned;
• The purchases journal had been undercast by Sh.80,000
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.

Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners’ current accounts for the year ended 30 April 2001 (4 marks)
c) Balance sheet as at 30 April 2001 (7 marks)
(Total: 20 marks)

Solution
a) ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2001
Sh. Sh.
Sales 8,750,000
Less: cost of sales
Opening stock 1,200,000
Purchases 4,180,000
5,380,000
Less: Closing stock (1,275,000) 4,105,000 Gross Profit 4,645,000

1.3.2000-3.10.2000 1.11.2000-30.4.2001
Sh Sh Sh Sh Sh Sh
Gross profit
1,858,000 2,787,000 4,645,000
Expenses
Dep. Motor Vehicle 160,000 160,000 320,000
Furniture 15,000 15,000 30,000
Salaries 483,750 483,750 967,500
Accountancy fees 52,500 52500 105,000
Wages 275,000 275,000 550,000
Rent, rates, electricity 137,500 137,500 275,000
General expenses 362,400 359,600 612,000
Prov. For depreciation 30,000 (1,506,150) 10,000 (1,393,350) 40,000 2,899,500
Net Profit 351,850 1,393,650 1,745,500
Less: Interest on capital
Rotich 37,500 37,500 75,000
Sinei 25,000 25,000 50,000
Tonui - (62,500) 18,750 (81,250) 18,750 (143,750)
Balance of profit shared 289,350 1,312,400 1,601,750
Rotich
192,900 524,960 717,860
Sinei
96,450 524,960 621,410
Tonui -
- (289,350) 262,480 (1,312,400) 262,480 (1,601,750


b)

Current Account
R S T R S C
Sh. Sh. Sh. Bal b/d Sh. Sh. Sh.
Goodwill w/o 1,200,000 1,200,000 600,000 400,000 300,000 -
Capital A/C - - 375,000 Cash book 1,250,000
Drawings 150,000 120,000 62,500 Goodwill (2:1) 2,000,000 1,000,000
Interest on capital 75,000 50,000 18,750
Profit share 717,860 621,410 262,480
Bal c/d 1,842,860 651,410 493,730
3,192,860 1,971,410 1,531,230 3,192,860 1,971,410 1,531,230









c) Rotich, Sinei and Tonui
Balance Sheet as at 30 April 2001


Non-Current Assets Sh Sh. Sh.
Leasehold premises 2,250,000 - 2,250,000
Furniture and Fittings 300,000 (130,000) 170,000
Motor vehicle 1,600,000 (620,000 980,000 4,150,000 (750,000) 3,400,000

Current Assets
Stock 1,275,000
Debtors 193,000
Less Provision (40,000) 153,000
Prepayments 50,000
Balance at bank 820,000
2,298,000
Current Liability
Creditors 1,070,000
Accruals 15,000 (1,085,000) 1,213,000
4,613,000

Capital: Rotich 750,000
Sinei 500,000
Tonui 375,000
1,625,000
Current Account: Rotich 1,842,860
Sinei 651,410
Tonui 493,730 2,988,000
4,613,000

(d) The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any introduction of goodwill and revaluation of assets

Some of the adjustments may also be made in the current accounts if adjustments are made in the capital account and the admission is partway through the financial period, then any interest to be charged on capital will be based on the adjusted capital balance.

If the adjustments are made in the current account then there will be no change on the capital balance and therefore no change on the interest charged on the capital balances.

(e) Retirement of a partner
When a partner retires (i.e.) leaves the firm and the others partners are left to continue with the business then the retirement marks the end of one partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This include:
1) Capital balance
This will be all the amounts the partner has invested in the firm. Some firms may not be able to refund the amount in full and therefore it may be transferred t o a loan account whereby interest will be paid on the balance.
2) Goodwill
Because this partner contributed to the improvement (existence) of the partnership therefore it will be fair to pay him his share of the goodwill. Goodwill is introduced to the accounts in the old profit sharing ratio ((i.e.) credited to all the partner’s capital accounts in the old profit sharing ratio), then written off from the accounts by debiting the capital accounts of the remaining partners in the new profit share ratio.

2) Credit balance on the current account
This amount due to the partner is paid directly from the cashbook or transferred to the
capital account whereby the total cash payable is to be determined.
The transfer is made by:
Dr. Current account
Cr. Capital account
4) Share of profits
If the retirement takes place during the financial period, then the retiring partner is entitled to take profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared in profit share ratio will be credited to the partner’s current account.
Therefore the profit and loss account will be split between the two periods and appointment of profits done and this will be based on the terms of the partnership in each period.

EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively

Given below is the balance sheet of the partnership as at 31 March 2001.
Balance sheet as at 31 March 2001
Assets Sh. Sh.
Non-current assets:
Fixed assets 465,000
Current assets:
Stock 294,000
Debtors 209,000 503,000
968,000
Capital and liabilities:
Capital accounts:
Kyamba 160,000
Onyango 140,000
Wakil 200,000
500,000
Current accounts:
Kyamba 65,300
Onyango 49,000
Wakil 53,000
167,300
667,300
Current Liabilities:
Bank overdraft 48,000
Trade creditors 252,000
300,700
968,000



Additional information:

1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value Transfer value
Sh Sh.
Fixed assets 260,000 306,000
Stocks 166,000 157,000
Debtors 172,000 165,000
Creditors 156,000 156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the net amount due for him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000 but was not to be maintained in the books of the partnership of Kyamba and Onyango.
4. After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and details of the new partnership.

• Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively.
• Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001 and the balance of the profits be shared equally after allowing for annual salaries of Sh.72, 000 to Kyamba and Sh.60, 000 to Onyango.

5. The profit of the new partnership before interest on capitals and partners’ salaries was Sh.240,000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000, debtors by Sh.90,000 and bank balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango Sh.70,000.

Required:
a) Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)
b) Capital accounts for the year ended 31 March 2002 (4 marks)
c) Current accounts for the year ended 31 March 2002. (4 marks)
d) Balance sheet of the new partnership as at 31 March 2002. (8 marks) (Total: 20 marks)

SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002

Sh Sh.
Net profit for the year 240,000
Less: Interest on capital
Kyamba 20,000
Onyango 20,000 (40,000)
200,000
Less: Salaries
Kyamba 72,000
Onyango 60,000 (132,000)
Balance of profits shared in PSR 68,000
Kyamba ½ 34,000
Onyango ½ 34,000 (68,000)


b) CAPITAL ACCOUNT
K O W K O W
(2) Goodwill in New PSR 100,000 100,000 - Bal b/d 160,000 140,000 200,000
(4) Fixed Assets 306,000 (1)Goodwill in old PSR 80,000 80,000 40,000
Stocks 157,000 Cashbook 48,000 68,000 -
Debtors 165,000 Profit on transfer in old PSR 12,000 12,000 6,000
Creditors 156,000
Bal c/d 200,000 200,000 Current account (3) 53,000

Cash book (**) 173,000
300,000 3000,000 628,000 300,000 300,000 628,000




c) CURRENT ACCOUNT
K O W K O W
Sh Sh Sh Sh Sh sh
Capital - - 53,000 Bal b/d 65,300 49,000 53,000
Drawings 85,000 70,000 - Interest on capital 20,000 20,000 -
Salaries 72,000 60,000 -
Bal c/d 106,300 93,000 - Share of profits 34,000 34,000 -

191,300 163,000 53,000 191,300 163,000 53,000





KYAMBA AND ONYANGO
Balance Sheet as at 31 March 2002.
Non-Current Assets Sh. Sh.
Current Assets 205,000
Stock 228,000
Debtors 127,000
Bank 135,300
490,300
Liabilities
Creditors (96,000) 394,300
599,300
Capital:
Kyamba 200,000
Onyango 200,000
400,000
Current:
Kyamba 106,300
Onyango 93,000 199,300
599,300
b) Bank

Working capital 173,000 Bal b/d 48,700
Kyamba- capital 48,000 Drawings
Onyango – capital 68,000 Kyamba 85,000
Increase 50,000 Onyango 10,000
_______ Bal c/d 135,300
339,000 339,000

Workings:

Non Current Assets:
Bal b/f 465,000
Transfer 260,000
Balance 205,000

Stock:
Bal b/f 294,000
Transfer (166,000)
Increase 100,000
228,000

Debtors:
Bal b/f 209,000
Transfer (172,000)
Increase 90,000
127,000
Creditors:
Bal b/f 252,000
Transfer 156,000
96,000


EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been extracted from their books of account as at 31 March 19 –2 after their trading and profit and loss account has been prepared, but before any consequent adjustments have been made to the partners’ respective capital accounts.
Dr. Cr.
Capital accounts (as at 1 April 19 – 1): £ £
Upp 60,000
Downe 40,000
Cash 6,600
Creditors 29,250
Debtors 201,000
Downe: goods withdrawn 400
Drawings:
Upp (all at 31 December 19 – 1) 20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost 200,000
Accumulated depreciation 90,000
Accrued interest on Upp’s Loan account 10,000
Loan account: Upp 50,000
Net profit for the year to 31 March 19 – 2) 179,750
Salary: Downe 12,000
Stocks 3,500
Upp: private expenses paid (on 31 March 19 – 2) 500
£459,000 459,000

Additional information
1. The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the year at a rate of interest of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be revalued at their market value as at the date of retirement of the partner.

2. Upp decided to retire at 31 March 19 – 2. In accordance with the partnership agreement, the assets and liabilities were revalued as follows:
£
Car (to be retained by UPP) 10,000
Remaining fixed assets taken over by the new partnership 50,000
Stocks 5,000
Debtors 180,000
Creditors 35,000
Goodwill 40,000
Legal and other expenses connected with the partnership change 4,750
3. Following Upp’s decision to retire, Downe invited Side to join him in partnership as fro 1 April 19 – 2. Side agreed to pay £75,000 into the new partnership as at that date as his capital contribution. Profits and losses are to be shared in the proportion Downe 75% and side 25%. Goodwill is not to be retained in the books of the partnership.
4. Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan in the new partnership, the other half being paid to him in cash.
5. It may be assumed that all of the transactions relating to the changes in the respective partnerships take place on 1 April 19 – 2. The legal and other expenses connected with the partnership changes were due for payment on 30 April 19 – 2.

Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31 March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of the above transactions. and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions have
been settled.
(Detailed working should be submitted with your answer).

SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2

£ £ £
Net profit b/d 179,750
Add interest on drawings
Upp [3/12 x (10% x 20,000)] 500
Downe [16/12 x (10% x 15,000)] 750 1,250
181,000
Less:
Interest on capital 9,000
Upp [15% x 60,000] 6,000 (15,000)
Downe [15% x 40,000 166,000
Less: Salary – Downe (16,000)
Balance of profits shared in PSR 150,000
Capital – Upp (1/2) 75,000
- Downe (1/2) 75,000 150,000
_____-


(b)

Capital Accounts
Upp Downe Upp Downe
£ £ £ £
Appropriation Balances b/d 60,000 40,000
- interest on drawings 500 750 Loan interest 10,000
Salary 12,000 Appropriation
Drawings 20,000 15,000 -salary 16,000
Private expenses/goods 500 400 -interest on capital 9,000 6,000
Car 10,000 -residual profit 75,000 75,000
Revaluation (deficit) (W1)
[see workings after (c)] 20,000 20,000
Loan (balancing figure) 103,000
Balance c/d _____- 88,850 ______ ______
154,000 137,000 154,000 137,000

Side Downe Side Downe
£ £ £ £
Goodwill written back (W2) 10,000 30,000 Balance b/d - 88,850
Balances c/d 65,000 58,850 Cash 75,000 ____-
75,000 88,850 75,000 88,850






(c)
Balance Sheet as at 1 April 19-2
£ £
Non current assets 50,000
Current assets
Stocks 5,000
Debtors 180,000
Cash (W3) __5,100
190,100
Current liabilities
Creditors [35,000 + 4,750] 39,750
Working capital 150,350
Net assets employed 200,350
Financed by
Capital
Downe 58,850
Side 65,000
123,850
Loan
Upp (W4) _76,500
200,350



Workings

W1
Revaluation
£ £
Debtors 201,000 Creditors 29,250
Fixed assets (cost) 200,000 Provision for depreciation 90,000
Stocks 3,500 Capital – Upp (car) 10,000
Legal etc expenses 4,750 Fixed assets 50,000
Creditors 35,000 Stocks 5,000
Debtors 180,000
Goodwill 40,000
______ Balance c/d (deficit) 40,000
444,250 444,250

Balance b/d 40,000 Capital
-Downe (1/2) 20,000
_____ -Upp (1/2) 20,000
40,000 40,000

W2
Goodwill
£ £
Revaluation 40,000 Capital
-Downe (75%) 30,000
_____ -Side (25%) 10,000
40,000 40,000



W3
Cash
£ £
Balance b/d 6,600 Loan
Capital -Upp [1/2 x 153,000] 76,500
-Side 75,000 Balance c/d 5,100
81,600 81,600
Bal b/d 5,100


W4
Loan - Upp
£ £
Cash 76,500 Balance b/d 50,000
Balance c/d 76,500 Capital
-Upp 103,000
153,000 153,000
Balance b/d 76,500


REINFORCEMENT QUESTIONS

QUESTION ONE
1. K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys, Kimeu being responsible for the factory and Maingi for the sales. All completed toys are transferred from the factory to sales department at agreed price. Profits are shared on the following basis:
Factory Sales Department
Kimeu 80% 40%
Maingi 20% 60%

The following trial balance has been extracted from the books at 31 March 1992:
Sh. Sh.
Freehold factory at cost 1,053,750
Factory plant, at cost 843,750
Provision for depreciation 1 April 1991 151,250
Delivery van, at cost 401,250
Provision for depreciation 1 April 1991 86,250
Stocks at 1 April 1991
Raw materials 100,700
Work-in-progress 85,000
Toys completed (30,000 at Sh.40) 1,200,000
Sales (45,500 toys) 2,775,500
Purchases of raw materials 716,250
Factory wages 375,500
Sales department wages 150,750
Expenses:
Factory 301,750
Sales Department 250,500
Provision for doubtful debts 1 April 1991 40,000
Trade debtors and creditors 450,000 150,000
Bank overdraft 176,200
Capital accounts:
Kimeu 1,400,000
Maingi 1,425,000
Drawings:
Kimeu 150,000
Maingi 125,000
6,204,200 6,204,200



Additional information:
i 38,000 toys at Sh.45 each were manufactured and transferred to Sales Department during the year. Tys in stock at the end of the year were to be valued at Sh. 45 each. Stock of raw materials was Sh.79.50 and work-in-progress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii Accrued expenses outstanding at 31 March 1992:
Factory Sales Department
Sh. Sh.
Expenses 52,250 27,000
Factory wages 7,000 -
iii Provision for depreciation is to be made as follows:
- Factory plant 10% p.a. on cost
- Delivery van 20% p.a. on cost

iv The general provision for bad debts is to be maintained at 10% of the trade debtors.

Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March 1992 and a balance sheet as at that date. (20 marks)
QUESTION TWO

Amis, Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2. The following trial balance has been extracted from their books of accounts as at 31 March 19-8:
£ £
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis 80,000
Lodge 15,000
Pym 5,000
Carriage inwards 4,000
Carriage outwards 12,000
Cash at bank 4,900
Current accounts:
Amis 1,000
Lodge 500
Pym 400
Discount allowed 10,000
Discount received 4,530
Drawings:
Amis 25,000
Lodge 22,000
Pym 15,000
Motor vehicles: 80,000
Accumulated depreciation (at 1 April 19-7) 20,000
Office expenses 30,400
Plant and machinery:
At cost 100,000
Accumulated depreciation (at 1 April 19-7) 36,000
Provision for bad and doubtful debts
(at 1 April 19-7) 420
Purchases 225,000
Rent, rates, heat and light 8,800
Sales 404,500
Stock (at 1 April 19-7) 30,000
Trade creditors 16,500
Trade debtors 14,300

£583,300 £583,300 Additional information:
1. Stock at 31 arch 19-8 was valued at £35,000.
2. Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March 19-8.
3. The provision for bad and doubtful debts is to be maintained at a level equivalent to 5% of the total trade debtors as at 31 March 19-8.
4. An office expense of £405 was owing at 31 March 19-8, and some rent amounting to £1,5000 had been paid in advance as at that date. These items had not been included in the list of balances shown in the trial balance.
5. Interest on drawings and on the debit balance on each partner’s current account is to be charged as follows:
£
Amis 1,000
Lodge 900
Pym 720

6. According to the partnership agreement, Pym is allowed a salary of £13,000 per annum. This amount was owing to Pym for the year to 31 March 19-8, and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital account at a rate of 10% per annum. There were no movements on the respective partners’ capital accounts during the year to 31 March 19-8, and the interest had not been credited to them as at that date.

Required:
a) Prepare the Partners trading, profit and loss account for the year ended 31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8

QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after charging annual salaries of £20,000 each. The regularly make up their accounts to 31 December each year.
On July 1996 they admitted Coral as a partner and agreed profits shares from that date of 40% Amber, 40% Beryl and 20% Coral. The salaries credited to Amber and Beryl ceased from 1 July 1996.

The partnership trial balance at 31 December 1996 was as follows:

£ £
Capital accounts as at 1.1.96:
Amber 280,000
Beryl 210,000
Capital account Coral (see note (d) below) 140,000
Current accounts as at 1.1.96
Amber 7,000
Beryl 6,000
Drawing accounts
Amber 28,000
Beryl 24,000
Coral 15,000
Loan account Amber 50,000
Sales 2,000,000
Purchases 1,400,000
Stock 1.1.96 180,000
Wages and salaries of staff 228,000
Sundry expenses 120,000
Provision for doubtful debts at 1.1.96 20,000
Freehold land at cost (see not (e) below) 200,000
Buildings: cost 250,000
Aggregate depreciation 1.1.96 30,000
Plant, equipment and vehicles: cost 240,000
Aggregate depreciation 1.1.96 50,000
Trade debtors and creditors 420,000 350,000
Cash at bank 38,000
3,143,000
3,143,000



In preparing the partnership accounts the following further information is to be taken into account:
a) Closing stock at 31 December 1996 was £200,000
b) Debts totaling £16,000 are to be written off and the provision for doubtful debts increased by £10,000.
c) Provision is to be made for staff bonuses totaling £12,000.
d) The balance of £140,000 on coral’s capital account consists of £100,000 introduced as capital and a further sum of £40,000 paid for a 20% share of the goodwill of the partnership. The appropriate adjustments to deal with the goodwill payment are to be made in the capital accounts of the partners concerned, and no goodwill account is to remain in the records.
e) It was agreed that the freehold land should be revalued upwards on 30 June prior to the admission of Coral from £200,000 to £280,000. The revised value is to appear in the balance sheet at 31 December 1996.
f) Amber’s loan carries interest at 10% per annum and was advanced dot the partnership some years ago.
g) Provide depreciation on the straight-line basis on cost as follows:
Buildings 2%
Plant, equipment and vehicles 10%
h) Profits accrued evenly during the year.


Require:
a) Prepare a trading account, profit and loss account and appropriation account for the year ended 31 December 1996 and a balance sheet as at that date. (17 marks)
b) Prepare the partners’ capital accounts and current accounts for the year in columnar form.
(7 marks)
(Total: 24 marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs and maintenance are carried out and also a small showroom form which new and second hand cars are sold.

For accounting purposes, each of these three activities is treated as a separate department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos comprised:

£
Cash sales:
Workshop (repair charges) 32,125
Petrol and oil 32,964
Showroom (car sales) 8,500
Credit sales:
Workshop (repair charges) 65,892
Petrol and oil 41,252
Showroom (car sales) 81,914
Stocks (at 1 October 1985):
Workshop (repair materials) 1,932
Petrol and oil 3,018
Showroom (cars) 20,720
Credit purchases:
Workshop (repair materials) 23,860
Petrol and oil 41,805
Showroom (cars) 52,100
Fixed assets (at 1 October 1985):
*Freehold buildings:
Workshop 12,600
Petrol and oil 14,200
Showroom 38,000
Plant, equipment and vehicles:
Workshop 65,180
Petrol and oil 22,900
Showroom 17,450
Provisions for depreciation (at 1 October 1985):
Freehold buildings:
Workshop 5,060
Petrol and oil 7,100
Showroom 19,390
*Note ‘Freehold’ – held in perpetuity
Plant, equipment and vehicles:
Workshop 48,254
Petrol and oil 17,077
Showroom 9,451
Fixed asset acquisitions during year (at cost):
Plant and equipment:
Workshop 26,210
Petrol and oil 4,250
Showroom 1,060
Fixed asset disposal proceeds during the year (see note (3)):
Plant and equipment:
Workshop 5,200
Salaries:
Showroom 10,200
Rates 26,738
Electricity 9,453
General expenses 10,692
Wages:
Direct:
Workshop 34,050
Petrol and oil 5,602
Indirect:
Workshop 6,810
Showroom 4,160
Creditors:
Workshop 4,225
Petrol and oil 5,602
Showroom 15,250
Bank/Cash:
Workshop 316
Petrol and oil 1,605
Showroom 30,470
Debtors:
Workshop 1,365
Petrol and oil 537
Drawings:
Duke 12,190
Earl 9,740
Current accounts (at 1 October 1985) (credit balances):
Duke 9,750
Earl 10,477
Capital accounts:
Duke 50,000
Earl 40,000


Notes at 30 September 1986

1) Stocks at 30 September 1986:
Workshop 2,752
Petrol and oil 2,976
Showroom 25,310
2) Depreciation is calculated using the straight-line method (assuming no residual value) and is applied to the original cost of the asset at eh end of the financial year, using the following rates:
%
Freehold buildings 20
Plant, equipment and vehicles 20
The depreciation charges for the current year have not yet been posted to the accounts.
The freehold buildings are temporary structures with a five year life.
3) No entries have yet been made to transfer the cost (£19,500) and accumulated depreciation (£15,633) of the workshop plant sold during the year.
4) Accruals at 30 September 19861 £
Wages:
Direct:
Workshop 113
Petrol and oil 83
Indirect:
Workshop 214
Showroom 231
Electricity 517
General expenses 1,304
5) Prepayments at 30 September 1986
£
Rates 13,300

6) Rates and electricity are apportioned over departments on the basis of the original cost of freehold buildings at the end of the current financial year.
7) General expenses are apportioned over departments on the basis of turn over for the current year.
8) Duke and Earl are credited with interest on their respective capital account balances at the rate of 5% per annum.

Required:
Prepare, using separate columns for each department and the business as a whole;

a) A departmental trading and profit and loss account for Aristocratic Autos for the year ended 30 September 1986. (20 marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September 1986. (14 marks)
(Total: 34 marks)


QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on capital and partnership salaries is not provided. The position of the business at th end of its financial year is:

Balance Sheet 30 June 19-6
£ £ £ £
Capital accounts: Buildings 17,000
Reg 9,000 Equipment 3,300
Sam 8,000 Stock 900
Ted 8,000 Debtors 2,020
25,000 Bank 2,840
Current Accounts:
Reg 140
Sam 200
340
Ted (debit) 100
240
Creditors ___820 _____
26,060 26,060


Reg died suddenly on 31 October 19-6.
The partnership agreement provides that in the event of the death of a partner the sum to be paid to his estate will be the amount of his capital and current account balances at the last financial year-end adjusted by his share of profit or loss since that date together with his share of goodwill. A formula for calculation of goodwill is given, and its application produced a figure of £7,500. no goodwill account is to remain in the books after any change of the partnership constitution.
The stock value at 31 October has been calculated and all other accounts balanced off, including provisions for depreciation, accrued expenses and prepaid expenses.

This results in the following position at 31 October.
£
buildings 17,000
Equipment (including additions of £400) 3,480
Stock 1,100
Debtors 2,230
Bank balance 3,370
Creditors 980

There were no additions to, or reductions of, the capital accounts during the four months, but the following drawings have been made:

Reg £2,000
Sam £1,600
Ted £1,800

• It has also been agreed that the share of a deceased partner should be repaid in three equal installments, the first payment being made as on the day after the day of death.
• The surviving partners agree that Abe (son of Reg) should be admitted as a new partner with effect from 1 November, and it is agreed that he will bring into the business £4,000 as his capital together with a premium for his share of the goodwill (using the existing valuation). The new profit-sharing agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
• Show the partnership Balance Sheet as at 1 November 19-6, on the assumption that the above transactions have been completed by that date.


CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK




COMPREHENSIVE ASSIGNMENT No.3


TO BE SUBMITTED AFTER LESSON 7


To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the College.

EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS

QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts and payments, which he records in cash and bankbooks. Periodically, these books are handed over to the firm of certified accountants that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary step, you have prepared the receipts and payments account (rounded to the nearest £1) for the year ended 31 May 1985. This is shown below, together with the explanatory notes which the treasurer has supplied to enable you to understand the nature o f some of the items.

Dohray amateur Musical Society
Receipts and Payments Account
For the year ended 31 May 1985

Receipts Payments
Cash Bank Cash Bank
£ £ £ £ £ £ £ £
Opening balances b/d 31 309 Creditors: trade
Debtors: members Fixed assets (note 4)
Joining fees (note 1) 190 160 Musical instruments 522
Annual subscriptions Trophies 83
(Note 2) 285 70 Creditors: trade
Annual concert (note 3) Purchase for resale
Takings 1,791 (Note 4)
Sales of goods (note 4) Sheet music 118
Musical instruments 287 Annual concert (note 3)
Prize moneys (note 7) 190 Hall booking fees 490
Sponsorship grant Printing of publicity
(Note 5) 300 Posters 112
Refreshment sales 113 Hire professional
Raffle profits 64 Soloists 236
PAC grants (note 6) Musicians 174
Revenue 100 Adjudication fees
Capital 400 Musical Festivals (note 7)
Transfers from cash a/c 2,910 Entrance fees 250
Hire of buses 281
Honoraria (note 8)
Secretary 150
Treasurer 100
R.M.F.C affiliation fee
(Note 9) 72
Rent of society’s premises
(Note 10) 510
Refreshment purchases 72
Bank charges 42
Sundry expenses 60
Transfers to bank a/c 2,910

Closing balances c/d 49 723

3,091 4,249 3,091 4,249


Explanatory notes supplied by the treasurer

1) On joining the Society, members pay a non-returnable fee of £10 (before 1 June 1982, the fee had been £). It has been found from experience that, on average, members remain in the Society for five years. On this basis, one fifth of each joining fee is credited to Income and Expenditure account each year.


New members’ statistics are

During the year
Ended 31 May Number of
new members Joining fees in
Suspense at 31 May 1984
No. £
1981 20 20
1982 24 48
1983 32 192
1984 27 216
1985 35 Nil
£476

2) Annual subscriptions are due on 1 June each year. It is Society’s policy to credit these to income and expenditure account on an actual receipts basis, not an accruals basis. However, if subscriptions are received in advance, the amounts are credited to income and expenditure account for the year, which they are paid.
3) The Society’s major money raising event is its annual public concert. This is given in a large hall, which the Society hires. The society also hires professional musicians and soloists and has to pay the fees of the adjudicators (judges).
4) The society buys trophies (silver bowls and shield) to present to the winners of individual musical items at the annual concert. It also buys musical instruments some of which are for use by the members and others for resale to the members. Musical scores and sheets are also bought for resale to the members.
5) A local building company has given a grant to the Society for a period of three years in return for publicity. This sponsorship grant was received in full on 1 June 1984 and is being credited to income and expenditure account in equal installments in each o the three years to 31 May 1987.
6) The performing Arts Council (PAC) has awarded the Society an annual grant towards the running costs. In addition the PAC makes capital grants. The society’s policy is to hold capital grants in suspense and to release each year’s grant to income and expenditure account over a period of five years, from the year of grants onwards. At 31 May 1984 capital grants held in suspense were analyzed as follows:

In respect of year
Ended 31 May Capital grants
Suspense
£
1981 30
1982 70
1983 120
1984 120
£340


7) Throughout the year, the Society competes at various musical festivals. Cash prizes won by individual members are retained by the Society and credited to income and expenditure account in order to reduce the cost of attending the festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each of them an ex-gratia (honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated to the Regional Musical Festival Community (RMFC). The annual fee, which has remained the same for a number of years, is paid on 1 March in each year.
10) The Society pays rent for its premises. The rental, which is inclusive of rates, heating, lighting, cleaning etc. is reviewed annually on 31 March. The payment shown in the receipts and payments account represents quarterly payments in advance, as follows:


1984 Payment
£
30 June 120
30 September 120
31 December 120
120
1985
31 March 150
£510

The treasurer supplied further information as follows:

1) Creditors at 31 May 1984 1985
£ £
Fixed assets
Musical instruments 79 119
Trophies 23 13
Purchases for resale
Sheet music 14 20
Musical instruments 45 39
2) Subscriptions
Payments in advance included in the
actual receipts for the year 30 40

3) Stocks at 31 May
Goods for resale
Sheet music 31 52
Musical instruments 70 94
Refreshments not brought into account on the grounds that
It is not material in amount

4) Fixed assets (at cost) at 31 May
musical instrument 1,378
Trophies 247

There were no fixed asset disposals during the year


5) Provision for depreciation at 31 May
Musical instruments 704
Trophies 96
Depreciation is calculated on the cost of these assets at the end of the financial year. The straight-line method is employed using the following assumed asset lives.

Musical instruments 5 years
Trophies 10 years

Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May 1985, showing the surplus or deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)

QUESTION TWO
A client of the firm of accountants by which you are employed is interested in buying a road transport business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business and has delegated to you the task of discovering the amount of investment in vehicles at the end of each of the financial years ended 30 September 1980 to 1983 inclusive. The business had commenced operations on 1 October 1979.
The only information available to you is the fact that the owner calculated depreciation at a rate of 20% per annum, using the Reduction Balance method, based on the balance at 30 September each year, and copies of certain ledger accounts which are reproduced below:

Provision for depreciation of vehicles
£ 1980 £
1 Oct. Balance b/ 32,000
1981 1981
30 Sept. Balance c/d 57,600 30 Sept. Profit and loss 25,600
57,600 £57,600

£ £
1982 1 Oct. Balance b/d 57,600
30 Sept. Disposals 10,800 1982
Balance c/d 73,440 30 Sept. Profit and loss 26,640
includes £10,000
(depreciation on 1982
_____ acquisitions) _____
£84,240 £84,240



£ £
1983
30 Sept. Disposals 29,280 1 Oct. Balance b/d 73,440
Balance 79,328 1983
30 Sept. Profit and loss 35,168
(includes £20,000
Depreciation on
_______ 1983 acquisitions) ______
£108,608 £108608
1 Oct. Balance b/d 79,328

Disposals
£ £
1982 1982
30 Sept. Vehicles (vehicles 30 Sept. Provision for
Originally acquired Depreciation 10,800
On 1 October 1979) 30,000 Bank 16,000
Profit and loss 3,200
______ ______
£30,000 £30,000


£ £
1983 1983
30 Sept. Vehicles (vehicles 300 Sept. Provision for
Originally acquired Depreciation 29,280
On 1 October 1979) 60,000 Bank 42,000
Profit and loss 11,280
______ ______
£71,280 £71,280

Required:
a) Calculate the cost of asset, vehicles, held by the business at 30 September in each of the years 1980 to 1983 inclusive (4 marks)
b) Show the detailed composition of the charge for depreciation of the vehicles to profit and loss account at 30 September 1981, 1982 and 1983. (9 marks)
All workings must be shown. (13 marks)


QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes the following items:

Sales ledger control account £110,172
Purchase ledger control account £78,266
Suspense account (debit balance) £2,315

You have been given the following information:

i. The sales ledger debit balances total £111,111 and the credit balances total £1,234.
ii. The purchase ledger credit balances total £77,777 and the debit balances total £1,111.
iii. The sales ledger includes a debit balance of £700 for business X, and the purchase ledger includes a credit balance of £800 relating to the same business X. Only the net amount will eventually be paid.
iv. Included in the credit balance on the sales ledger is a balance of £600 in the name of H. Smith. This arose because a sales invoice for £600 had earlier been posted in error from the sales daybook to the debit of the account of M. Smith in the purchase ledger.
v. An allowance of £300 against some damaged goods had been omitted from the appropriate account in the sales ledger. This allowance had been included in the control account.
vi. An invoice for £456 had been entered in the purchase daybook as £654.
vii. A cash receipt from a credit customer for £345 had been entered in the cashbook as £245.
viii. The purchase daybook had been overcast by £1,000.
ix. The bank balance of £1,200 had been included in the trial balance, in error, as an overdraft.
x. The bookkeeper had been instructed to write off £500 from customer Y’s account as a bad debt, and to reduce the provision for doubtful debts by £700. By mistake, however, he had written off £700 from customer Y’s account and increased the provision for doubtful debts by £500.
xi. The debit balance on the insurance account in the nominal ledger of £3,456 had been included in the trial balance as £3,546.

Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the sales ledger control account with the sales ledger balances, and the purchase ledger control account with the purchase ledger balances. What further action do you recommend? (25 marks)

QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel Services, as radio and television suppliers and repairers, sharing profits and losses in the ratio one half, one third and one sixth, respectively. Val Vez works full-time in the business with responsibility for general administration for which she receives a partnership salary of £4,000 per annum.

All partners receive interest on capital at 5% per annum and interest on any loans made to the firm, also at 5% per annum.

It also had been agreed that Val Vez should receive not less than £4,000 per annum in addition to her salary. Any deficiency between this guaranteed figurer and her actual aggregate of interest on capital, plus residual profit (or less residual loss) less interest on drawings, is to be borne by Dyo and UII in the ratio in which they share profits and losses; such deficiency can be recouped by Dyo and UII at the earliest opportunity during the next two consecutive years provided that Val Vez does not receive less than the guaranteed minimum described above. During the year ended 30 September 1983, Dyo and UII had jointly contributed a deficiency of £1,500.

Radtel Services rents two sets of premises - one, a workshop where repairs are carried out, the other, a shop from which radio and television sets are sold. The offices are situated above the shop and are accounted for as part of the shop.
The workshop and shop are regarded as separate departments and managed, respectively, by Phughes and Sokkitt who are each remunerated by a basic salary plus a commission of one ninth of their departments’ profits after charging their commission.

On 30 September 1984, the trial balance of the firm was:

£ £
Stocks at 1 October 1993:
Shop (radio and television sets) 19,750
Workshop (spares, components etc.) 8,470
Purchases:
Radio and television sets 155,430
Spares, components etc. 72,100
Turnover:
Sales of radio and television sets 232,600
Repair charges 127,000
Wages and salaries (employees):
Shop and offices 54,640
Workshop 18,210
Prepaid expenses (at 30 September 1984) 640
Accrued expenses (at 30 September 1984) 3,160
Provision for doubtful debts at 1 October 1983 920
Rent and rates:
Shop and offices 7,710
Workshop 8,450
Stationery, telephones, insurance:
Shop and offices 2,980
Workshop 1,020
Heating and lighting:
Shop and offices 4,640
Workshop 3,950
Debtors 4,460
Creditors 15,260
Bank 48,540
Cash 960
Other general expenses:
Shop and offices 3,030
Workshop 2,830
Depreciation:
Shop and offices (including vehicles) 2,400
Workshop 2,580
Shop fittings (cost) 17,060
Workshop tools and equipment (cost) 55,340
Vehicles (cost) 27,210
Discount received:
Shop 420
Workshop 390
Bank loan (repayable in 1988) 15,000
Loan from Harry UII 10,000
Capital Accounts:
R. Dyo 40,000
H. UII 40,000
V. Vez 20,000
Current Accounts (after drawings have been debited):
R. Dyo 290
H. UII 1,040
V. Vez 920
Loan interest:
Bank loan 2,400
Loan from H. UII 500
Provision for depreciation:
Shop fittings 3,190
Workshop tools and equipment 10,020
Vehicles 5,670

£525,590
£525,590


The following matters are to be taken into account:

1) Manager’s commissions.
2) Partnership salary (Vez).
3) Interest on partners’ capital accounts (these have not altered during the year).
4) Interest on partners’ drawings; Dyo £70; UII £30; Vez £20.
5) Closing stocks: shop £31,080; workshop £10,220.
6) Provision for doubtful debts at 30 September 1984, £540.
7) Residual profits/Losses.

N.B. Loan interest and the movement in the provision for bad debts are regarded as ‘shop’ items.



Required:
a) Prepared columnar departmental trading and profit and loss accounts and a partnership appropriation account for he year ended 30 September 1984 and the partnership balance sheet at that date. (21 marks)
b) Complete the posting of the partners’ current accounts for the year. (4 marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife keeps some accounting records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:

£
Assets
Plant and equipment: cost 12,600
Depreciation to date 5,800
Motor Van: cost 9,000
Depreciation to date 6,500
Stock of materials 14,160
Debtors 9,490
Rent of premises paid in advance to 30 September 1997 750
Insurance paid in advance to 31 December 1997 700
Bank balance 1,860
Cash in hand 230

Liabilities
Creditors for supplies 3,460
Telephone bill owing 210
Electricity owing 180

His cash and bank transactions for the year from 1 July 1997 to 30 June 1998 are as follows:

Cash and Bank summary
Receipts Cash Bank Payments Cash Bank
£ £ £ £
Opening balances 230 1,860 Suppliers 83,990
Receipts from customers 52,640 150,880 Rent of premises 3,600
Loan received 10,000 Insurance (to 31.12.98) 1,600
Proceeds of sale of vehicles Purchase of plant and equipment 8,400
Held at the beginning of year 3,000 Purchase of new vehicle 12,800
Cash paid into the bank 24,040 Telephone 860
Cash withdrawn from bank 48,260 Electricity 890
Closing balance 2,100 Wages of repair staff 68,200
Miscellaneous expenses 1,280
Drawings by Ernie 8,000

Refund to customer 400
Cash paid into bank 24,040
Cash withdrawn from bank 48,260
Closing balance 890 29,800
101,130 191,880 101,130 191,880

The following further information is available

1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance with a full year’s charge in the year of purchase.
2) The new motor vehicle was purchased on 1 January 1998. Ernie’s depreciation policy is to charge depreciation at 25% per annum on the straight-line basis with a proportionate charge in the year of purchase but not in the year of sale.
3) The rent of the premises was increased by 20 % from 1 October 1997.
4) The loan of £10,000 was obtained from Ernie’s brother on 1 April 1998. It carries interest at 10% per annum, payable on 30 September and 31 March.
5) At 30 June 1998, Ernie owed the following amounts:
£
Suppliers 4,090
Telephone 240
Electricity 220
Miscellaneous expenses 490

6) At 30 June 1998, amounts due from customers totaled £10,860. Of this amount, Ernie considered that debts totaling £1,280 were bad and should be written off.
7) Stock of materials at 30 June was £12,170
8) Ernie agreed to pay his wife £5000 for her assistance with his office work during the year. This amount was actually paid in August 1998.

Required:
Prepare Ernie’s trading profit and loss account for the year ended 30 June 1998 and a balance sheet as at that date.




END OF COMPREHENSIVE ASSIGNMENT No.3

NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING  
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share capital is divided into shares. The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.

There are 2 main types of share capital
Preference share capital
This is made up of preference shares and a preference share carries the right to a final dividend, which is expressed as a percentage of their par value. E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value of the business during winding up, and all profits after the claim on all of the preference dividend have been paid. The more the no. of ordinary share held, the higher the control.


Share capital may also have the following meaning:
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the company is allowed to issue to shareholders. A company cannot issue more shares than the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital required is less than the issued share capital.
(e.g.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p. Assuming that the issued 100,000 shares, then the called up share capital will be:
60p  100,000 = £60,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for payment and therefore these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 40p, therefore the uncalled capital is 40p  100,000 = £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.

Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have been issued, Although the firm requested the shareholders to pay 80p per share, the shareholders were able to pay 50p per share.

Required:
Determine the:
• Authorized share capital
• Issued share capital
• Called up share capital
• Uncalled up share capital
• Paid up share capital

Authorized share capital
200,000  £ = £200,000

Issued share capital
150,000  £1 = £150,000

Called up share capital
150,000  80p = 120,000

Uncalled up share capital
150,000 20 p = £30,000

Paid up share capital
150,000  50p = £75,000

The principal distinctions between unlimited partnerships and limited companies are:

Unlimited Partnerships Limited Companies
No separate Legal Entity apart from its members Separate legal entity, which is not affect by changes in its membership. A company may contract, sue or be sued in it’s own name.
Liability of each member for debts of the firm is unlimited. If the company is limited by share, each shareholder is limited to the amount he has agreed to pay the company for share allotted.
Number of partners limited to 20 except for professional firms. A limited company must have at least 2 members. The maximum number of shares is restricted to the company’s authorized share capital.
Every partner can normally take part in the management of the business. He can legally bind the firm by his action. Rights to management are delegated to directors who alone can act on behalf of and bind the company.
Copy of accounts need not be filed with the Registrar of Companies Copies of accounts must be registered with the Registrar of Companies
Although a written Partnership deed is desirable it is not mandatory. A company is required to have a memorandum and articles of association which defines powers and duties of directors.
A partnership is subject to the partnership Act which can be varied by mutual agreement. A company is subject to the Companies Act the provisions of which cannot be varied.
The partners contribute the capital by agreement. The amount need not be fixed. The authorized share capital is fixed by the memorandum of association. It can be altered by passing ordinary resolution or by the court.
A share in a partnership cannot be transferable except by the consent of all partners. In public companies shares are freely transferable. In private companies share transfer are subject to any restrictions imposed by the articles of association.
A partnership is not obliged to keep statutory books of account and an audit is not compulsory. A company is required to keep specialized accounting records and is subject to compulsory audit.

Format Of Final Account
The P & L of a company, is the same as that of a sole trader, but there are additional expenses that are unique to the company and therefore, they should be included in the P & L A/C.
(e.g.)
• Director’s fees salaries and other expenses
• Audit fees
• Amortization e.g. goodwill
• Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/C which shows the allocation of the net profit for the period. Therefore, the format will be as shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended 31.12

Sales
Less Returns inwards

Less Cost of Sales
Opening Stock
Purchases
Add Carriage in

Less purchase returns

Less Closing stock
Gross Profit
Add incomes
Discount received
Profit on disposal (sale of Assets)
Income from investment (can also be shown below)
Other incomes e.g. interest received from bank

Less Expenses
Other expenses
Directors salaries/fees/----
Audit fees
Debenture Interest
Amortization of good will
Operating profit for the period
Add investment income
Profit before tax
Taxation: Corporation tax
Transfer to deferred tax
Under or over provision
Profit after tax
Less: transfer to the general reserve

Less: Dividends
Preference dividend: Interim paid
Final proposed

Ordinary dividend: Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d

£





x
x
x
(x) £




x



x
x
(x)







x
x
x
x
x




x
x
x




x
x
x
x
x £
x
(x)
x







(x)
x
x
x
x
x
x
x





(x)
x
x
x


(x)
x
(x)
x





(x)
x
x
x



B Limited
Balance sheet as at 31.12………

Non current Assets
Land & Building
Plant and Machinery
Fixtures, Furniture & Fittings
Motor vehicle

Intangible Assets
Goodwill
Copyrights, patents

(Longterm) Investments (mkt value sh x)

Current Assets
Stock
Debtors
Less provision for bad debts
Prepayments
(Short term) Investments
Cash at bank
Cash in hand

Current liabilities
Bank overdraft
Creditors
Accruals
Interest payable(debenture interest)
Tax payable
Dividends payable

Financed by
Authorized share capital
100,000 ordinary shares of £1 each
100,000 preference shares of £1 each

Issued and Fully paid
80,000 ordinary shares of £1 each
50,000 10% preference shares of £1 each

Capital Reserves
Share premium
Revaluation Reserve
Capital Redemption Reserve
Revenue Reserves
General Reserve
Profit and loss A/C

Deffered tax A/C
Non Current Liabilities
10% debenture
Other Long term Loans £

x
x
x
x
x

x
x
x




x
(x)






x
x
x
x
x
x
£

(x)
(x)
(x)
(x)
x

(x)
(x)
x



x

x
x
x
x
x
x






(x)











x
x
x

x
x



x
x £

x
x
x
x
x

x
x

x
x















x
x

x
x
x
(x)
x

x
x



x


x
x
x


x
x

Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an expenses and unpaid amount are shown as current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.

Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000, which the company pays and at the end of the year 2000, the company estimates that the tax liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax).

(e.g.) Taxation Account

Cashbook 160,000 Bal b/d 150,000
Bal c/d 140,000 Appropriation 150,000
300,000 300,000

Under provision 10,000 (160 -150)
Corporation tax 140,000

DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----

Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.

CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of capital reserves are:

Share Premium: A share premium arises when accompany issues shares at a price that is more than the par value. The share Premium may be applied in:

• Paying un issued shares.
• Writing off preliminary expenses.
• Write off discounts on shares.

Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000  £1.5) 150,000
Cr Ordinary shares capital (100,000  £1) 100,000
Cr Sahre Premium A/C (100,000 £0.5) 50,000
Issue of shares at a premium of £0.5

Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. When company sills it’s property to realize the gain, the amount is transferred to the Profit and Loss Account.

Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without issuing new shares. The transfer is made from either the share premium or the profit and loss account.

REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or not. A debenture may either be redeemable of irredeemable. Redeemable is repayable at or by a particular date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium, balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share premium A/C of £50,000. It issues some bonus shares to existing shareholders at a rate of 1 share for every 5shares held. This amount is to be financed by the share premium. The entries will be as follows:




Shares to be issued:
100,000  1 =20,000
5

Dr share premium A/C [20,000  £1 ] 20,000
Cr ordinary share capital 20,000
A bonus issue of 20,000 shares

Balance sheet (extract)

Ordinary shares of £1 120,000
Capital Reserves
Share premium 30,000

Rights Issue
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights are issued the shareholders have 2 options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by the company.

Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The balance on the share premium is £60,000. Additional capital is raised by way of a right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and the relevant balance sheet extract.

Shares to be issued
100,000  2 =40,000 shares
5
Dr cash book [40,000  £2.5 ] £100,000
Cr Ordinary share capital [40,000  £2 ] £80,000
Cr Share Premium [40,000  £0.5 ] £20,000

Balance sheet (extract)
140,000 Ordinary shares @ £2 280,000
Capital Reserves
Share premium 80,000

The following examples will illustrate the preparation of final Account for companies.

Example 8.1
Just before you launch yourself into the question that follows remember that everything you have learnt about double entry bookkeeping and the presentation of year end accounts is valid in the context of companies, subject only to the points we have added in this session.

The following is the trial balance of Transit Ltd at 31 March 19X8.

Issued share capital (ordinary shares of £1 each)
Leasehold properties, at cost
Motor vans, at cost (used for distribution)
Provision for depreciation on motor vans to 31 March 19X7
Administration expenses
Distribution expenses
Stock, 31 March 19X7
Purchases
Sales
Directors’ remuneration (administrative)
Rents receivable
Investments at cost
Investment income
7% Debentures
Debenture interest
Bank interest
Bank overdraft
Debtors and creditors
Interim dividend paid
Profit and loss account, 31 March 19X7 £

75,000
2,500

7,650
10,000
12,000
138,750

25,000

6,750


1,050
162

31,000
1,260

311,122 £
42,000


1,000




206,500

3,600

340
15,000


730
24,100

17,852
311,122

You ascertain the following:
All the motor vans were purchased on 1 April 19X5. Depreciation has been, and is to be, provided at the rate of 20% per annum on cost from the date of purchase to the date of sale. On 31 March 19X8 one van, which had cost £900, was sold for £550, as part settlement of the price of £800 of a new van, but no entries with regard to these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.

Required:

Prepare, without taking into account the relevant statutory provisions:

• A profit and loss account for the year ended 31 March 19X8:
• A balance sheet at that date. (22 marks)

Solution:
Transit Ltd
Profit and Loss A/C for the year ended 31.3.19X8

Gross profit
Profit on disposal of van
Rent Receivable

Less: Expenses
Depreciation on motor vans
Administration expenses
Distribution expenses
Debenture interest
Bank interest
Trading profit for the year
Add investment income
Profit before tax
Taxation
Profit after tax
Less: Dividends
Interim paid
Final proposed
Retained profit for the year
Retained profit b/f
Retained profit c/d
£





500
32,650
10,000
1,050
162






1,260
4,200



£
72,450
190
3,600
76,240





(44,362)
31,878
340
32,218
(12,700)
19,518


(5,460)
14,058
17,852
31,910



Transit Ltd
Balance sheet as at 31.3.19X8

Non-Current Assets
Leasehold properties
Motor vans

Investments

Current Assets
Stock
Debtors

Current liabilities
Bank overdraft
Creditors
Tax payable
Proposed dividends

Financed by:
Authorized issued and fully paid
42000 ordinary share of £1
Revenue Reserves
Profit and Loss A/C c/f

Non-Current liabilities
7% Debentures

£

75,000
2,400
77,400







980
24,100
12,700
4,200










£

-
(960)
960



16,700
31,000
47,700




(41,980)










£

75,000
1,440
76,440
6,750
83,190








5,720
88,910


42,000

31,910
73,910

15,000
88,910


Workings
Sales 206,500
Less: Cost of sales
Opening stock 12,000
Purchases 138,750
150,750
Less Closing stock (16,700) (134,050)
Gross profit 72,450


Motor Vehicle – Depreciation
Disposal 540 Bal b/d 1,000
Bal c/d 960 P & L 500
1,500 1,500

Motor vehicle
Bal b/f 2,500 Disposal 900
Disposal 550
Cashbook 250 Bal c/d 2,400
3,300 3,300

Motor vehicle Disposal
Disposal 900 Motor Vehicle 550
P & L 190 Depreciation 540
1090 1090

Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5

Share capital authorized and issued:

80,000 ordinary shares of £1 each
Freehold premises at cost
Motor vans
Balance 1 January 19X5 at cost
Additions less sale proceeds
Provisions for depreciation of motor vans to 31 December 19X4
Stock in trade 31 December 19X4
Balance at bank
Provision for doubtful debts 31 December 19X4
Trade debtors and creditors
Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates
Purchases
Sales
Legal expenses
General expenses
Profit and loss account: balance at 31 December 19X4 £



59,000

15,000
650


13,930
6,615

12,395
4,000
13,127
3,258
700
108,440

644
5,846

243,605 £


80,000





6,750


275
11,380





142,770


2,430
243,605

You are given the following information.:

i. Stock in trade, 31 December 19X5, £14,600.
ii. Rates paid in advance, 31 December 19X5, £140.
iii. Debts of £1,075 to be written off and the provision to be increased to £350.
iv. On 1 January 19X5, a motor van which had cost £680, was sold for £125.
v. Depreciation provided for this van up to 31 December 19X4 was £475.
vi. Provide for depreciation of motor vans (including additions) at 20% of cost.
vii. The balance on legal expenses account included £380 in connection with the purchase of one of the freehold properties.
viii. The directors have decided to recommend a dividend of 5%.

Required:
With particular emphasis on presentation, prepare a trading and profit and loss account for the year 19X5, and a balance sheet at 31 December 19X5, ignoring taxation. (24 marks)

Solution:
Trading and profit and loss account
for the year ended 31 December 19X5

Sales
Opening stock
Purchases

Less: Closing stock
Cost of goods sold

Directors’ remuneration
Wages and salaries
Motor and delivery expenses
Rates (700 - 140)
Legal expenses (644 - 380)
General expenses
Bad debts
Loss on disposal
Depreciation
Net profit

Proposed dividend

Retained profit brought forward
Retained profit carried forward
£

13,930
108,440
122,370
14,600


4,000
13,127
3,258
560
264
5,846
1,150
80
3,019





£
142,770




107,770
35,000









31,304
3,696
4,000
(304)
2,430
2,126
Balance sheet at 31 December 19X5

Non-Current Assets
Freehold properties
Motor vans

Current Assets
Stock
Debtors and prepayments, less provision for doubtful debts
Cash at bank

Current liabilities
Creditors
Proposed dividends




Share capital
Ordinary shares of £1 each
Profit and loss account

£

59,380
15,095
74,475







11,380
4,000





£

----
(9,294)
(9,294)

14,600

11,110
6,615
32,325



15,380





£

59,380
5,801
65,181










16,945
82,126


80,000
2,126
82,126


Workings
Bad debts
£
Debtors 1,075
Balance c/f 350
1,425 £
Balance b/f 275
Profit and loss account 1,150
1,425

Motor vans
£
Balance b/f 15,000
Additions 775
15,775 £
Disposals 680
Balance c/f 15,095
15,775

Provision for depreciation
£
Disposals 475
Balance c/f 9,294
9,769 £
Balance b/f 6,750
Profit and loss account 3,019
9,769

Disposals
£
Motor vans 680


680 £
Provision for depreciation 475
Proceeds 125
Loss on capital 80
680

Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local farmers.
Services offered include the collection of produce, the use of rapid freezing equipment, storage of the frozen produce and transport from frozen storage in refrigerated vehicles to any point within the country. Orders for these services are secured by the company’s sales staff.

The company’s revenue consists of charges for transport and freezing, and of storage rentals. Customers may hire storage space either on a long-term contract basis at advantageous charges (payable in advance) or on a casual basis (invoiced monthly).

A considerable amount of electricity from the public supply is used by the company in the freezing and storage operations. In the event of a sudden failure in this supply, the company is able to generate its own emergency supplies from standby generators kept for this purpose. An insurance policy has been taken out to protect the company against the claims which would arise should any of the frozen produce deteriorate as the result of power or equipment failure.

At the end of the company’s financial year ended 30 September 1982, the assistant accountant extracted the following balances from the ledgers.
Assets Account
Land and buildings (at cost)
Plant (at cost)
Vehicle (at cost)
Provision for depreciation (at 1 October 1981):
Land and buildings
Plant
Vehicles
Stock of consumable stores (at 30 September 1982)
Debtor – for rentals
for charges
Bank
Cash

Liability Accounts
Trade Creditors
7% Debentures 2004/2012
Ordinary Share Capital (see note 7)
General reserve
Unappropriated profit (at 1 October 1981)
Share Premium

Revenue Accounts
Storage rentals – long term contracts
Casual
Freezing charges
Transport charges

Expense Accounts
Wages, salaries and related expenses
Rates
Electricity
Transport costs
Repairs
Consumable stores
Postages, stationery, telephones
Insurance premium
Debenture interest
Sundries

Other Accounts
Suspense (credit balance) £
390,000
271,900
82,600

39,600
144,800
27,050
23,449
18,204
2,332
30,710
1,103


7,390
80,000
200,000
25,000
108,284
15,000


302,090
85,063
112,810
90,107


128,004
79,112
76,860
43,271
30,319
29,800
15,604
7,800
5,600
9,176


8,650

Notes at 30 September 1982:
At the beginning of the 1981-82 financial year, the company had sold refrigeration plant (which had originally cost £26,000 and on which £20,800 had been provided as depreciation to date of disposal) for £4,000. The only accounting entries relative to this disposal which have been made so far, are a debit to Bank and a credit to Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence the contents deteriorated to such an extent that they had to be disposed of by incineration. Compensation of £1,350 was paid to the farmer by Owik – Freez by cheque and debited to Suspense.


The insurance company has admitted liability under the policy but no further ledger entries have as yet been made.
During the 1981-82 financial year, the company replaced one of its refrigerated vehicles, which has originally cost £16,400 and on which £13,120 had been provided as depreciation to date of disposal. A trade-in (part exchange) allowance of £6,000 was granted in respect to this vehicle. A replacement vehicle was acquired at a list price of £27,000. The entries relating to the disposal of the old vehicle have not yet been made, except that the trade-in allowance has been debited to Vehicles and credited to Suspense. The balance of the price of the new vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis calculated on the cost of fixed assets held at the end of each financial year and assuming no residual value. Annual depreciation rates are:
%
Building 2
Plant 10
Vehicles 25

The ‘Buildings’ content of the item Land and Buildings included in asset account balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following items:
£
Storage rentals received in advance 25,631
Insurance premium prepaid 600
Wages and Salaried accrued 1,920
Rates prepaid 28,820
Electricity accrued 5,757

Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share. The directors have recommended a dividend for the year of £0.12 per share.

Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez p.l.c.for the year ended 30 September 1982 and a Balance Sheet at that date. All workings must be shown. (31 marks)
Open the Suspense account and post the entries needed to eliminate the opening credit balance.
(2 marks)
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:

Revenue
Storage rentals – long term (302,090 – 25631)
casual
Freezing charges
Transport charges

Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920)
Rates (79,112 – 28,820)
Electricity (76,860 – 5,757)
Transport costs (43,271 + 4,131 + 9,972)
Repairs (30,319 – 9,972)
Consumable stores (29,800 – 4,131)
Postages, stationery, telephones
Insurance premiums (7,800 - 600)
1,2 *Depreciation
Debenture Interest
Sundries


5 Profit (less loss) on disposal of fixed assets
Net Profit For The Year
Retained profit brought forward
Distributed profit
Less:
Ordinary dividends proposed
Retained profit carried forward £








129,924
50,292
82,617
57,374
20,347
25,669
15,604
7,200
43,540
5,600
9,176 £

276,459
85,063
112,810
90,107
564,439













447,343
117,096
1,520
118,616
108,284
226,900

48,000
178,900

Workings:

Fixed Assets:
Balance 1 October 1981
(veh 82,600 – (6,000 + 21,000))
Acquisitions (21,000 – 6,000)
Disposals
Balance 30 September 1982 Land
£
270,000 Buildings
£
120,000 Plant
£
271,900


(26,000) Vehicle
£
55,600

27000
(16,400) Total
£
717,500

27,000
(42,400)
270,000 120,000 245,900 66,200 702,100

Depreciation
-rate

-current year charge
-
£
-
2%
£
2,400
10
£
24,590
25
£
16,550

£
43,540
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a transport cost, thereby increasing that figure to £73,924.

Provision for Depreciation:
Balance 1 October 1981
Disposals
Current year charge

Balance 30 September 1982
-

-
39,600

2,400
144,800
(20,800)
24,590
27,050
(13,120)
16,550
211,450
(33,920)
43,540
- 42,000 148,590 30,480 221,070


Written down values at 30 September 1982 £

270,000 £

78,000 £

97,310 £

35,720 £

481,030

Proceeds from disposals
Less:
Written down values of disposals
(26,000 – 20,800)
(16,400 – 13,120)
Profit/(Loss) on disposals 4,000

5,200 6,000

3,280 10,000

8,480
£(1,200) 2,720 1,520



Qwik-Freez (East Anglisa) p.l.c
Balance Sheet as at 30 September 1982
Workings:

Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£
42,000
148,590
30,480
Net
£
348,000
97,310
35,720
702,100
221,070
481,030



















17,870
498,900




200,000






218,900
418,900


80,000
498,900




18,204
2,332
1,350







7,390
7,677
25,631
48,000

















23,449




21,886
29,420
30,710
1,103
106,568






88,698










15,000
25,000
178,900




Suspense
£ £
Fixed Asset Disposals:
` Plant 4000 Balance b/d 8650
Vehicle 6000 Debtors (insured loss) 1350
10000 10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family. The following trial balance was extracted from the books of the company as at 31 March 1993:


Freehold property, at cost (land Sh. 75,000)
Plant, at cost
Depreciation
Motor vehicle, at cost
Depreciation – motor vehicle
Fittings and fixtures, at cost
Depreciation – fittings and fixtures
20,000 Ordinary shares of Sh. 10 each authorized, issued and fully paid
Share premium
General reserve
Interim dividend paid
Cash at bank and in hand
Accounts receivable and payable
15% Debentures
Discount received
Profit and loss account 1 April 1992
Purchases of raw materials
Sales of finished goods
Inventories 1 April 1992:
Raw materials
Work in progress
Finished goods
Provision for doubtful debts
Bad debts
Rates and insurance
Wages
Factory power
Light and water
Plant maintenance
Salaries
Returns of raw material
Sales returns
Advertising
Transport expenses (Sales department)
Bank charges
General expenses Sh.
125,000
130,000

53,000

38,600





16,000
33,570
130,540



942,380


33,060
57,660
107,860

4,890
9,430
108,370
22,560
16,280
10,970
90,000

1,360
8,580
24,320
3,040
36,160
2,003,630 Sh.


62,000

30,500

11,790

200,000
50,000
120,000


57,430
100,000
3,640
103,870

1,254,760




6,400







3,240





2,003,630


Additional information:

• Depreciation is to be provided for the year using the reducing balance method and applying rates of 15% on plant, 25% on motor vehicle and 10% on fittings and fixtures.
• Building is to be depreciated at the rate of 4% using the straight-line method. (Assume the whole building is used for manufacturing purposes).
• Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.
• Light and water, insurance and general expenses are to be apportioned in the ratio 4:1 between factory and administrative overheads.


Electricity and wateer accrued was
Insurance prepaid was
Rates prepaid were

Inventories were valued at:

Raw materials
Work in progress
Finished goods Sh.
860
270
780



139,630
82,450
124,320

• Debenture interest has not yet been paid.
• The directors require provision for a final dividend which will bring the dividend for the year up to Sh. 2 per share.

Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March 1983 and a Balance Sheet as at that date. (25 marks)

MWANGA AND SONS LTD
Manufacturing Account for the year ended 31 March 1993
Raw materials:
Opening stocks
Purchases
Less Returns In.

Less Closing stocks
Prime Costs
Factory Overheads:
Plant depreciation
Rates and insurance
Factory power
Light and water
Plant maintenance
General expenses

Opening W.I.P.
Less: Closing W.I.P.
Goods manufactured

942,380
(3,240)




10,200
2,000
6,704
22,560
13,712
10,970
28,928

57,660
(82,450)
33,060

939,140
972,140
(139,630)
832,570







95,074
927,644

(24,790)
902,854


Trading, Profit And Loss Account For The Year Ended 31 March 1993

Sales
Less: Closing stocks

Opening stock
Goods manufactured

Less: Closing stocks

Discount received

Debenture interest
Provision for bad debts
Depreciation
- Motor vehicle
- Fittings and fixtures
Dividend
- Interim
- Fianl
Retained Profit for the year
Retained Profit brought forward
Retained Profit carried forward
Shs



107,860
902,854
1,010,714
(124,320)



15,000
6,654

5,625
2,681

16,000
24,000



Shs
1,254,760
(1,360)
1,253,400



886,394
367,006
3,640
370,646







40,000
49,150
103,870
153,870



Balance Sheet As At 31 March 1993

Fixed Assets
Freehold property
Plant
Motor vehicle
Fittings and fixtures


Current Assets
Stocks
- Raw materials
- work in progress
- finished goods
Debtors, less provisions
Cash at bank and in hand
Prepaid expenses

Current Liabilities
Creditors
Accruals
Dividend proposed

Net current assets


Financed by:
Authorized, and issued share capital:
20,000 Ordinary shares each Sh. 10
Reserves:
Share Premium
General Reserve
Profit and Loss account


15% debentures Cost
£
125,000
130,000
53,000
38,600
346,600



139,630
82,450
124,320 Depreciation
£
2,000
72,200
36,125
14,471
124,796





346,400
117,486
33,570
1,050
498,506

57,430
15,860
24,000
97,290







50,000
120,000
153,000


Net
£
123,000
57,800
16,875
24,129
221,804















401,216
623,020



200,000



323,020
523,020

100,000
623,020



Workings:

Rate And Insurance
B/d 9,430 Prepaid 270
Prepaid 780
Profit and Loss Account 1,676
Factory 6,704
9,430 9,430


Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:


















When shares are sold in exchange for lump sum cash payment and this is at per value, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital

When shares are sold in exchange for lump sum cash payment and this is at a premium, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium

Sale of shares which are to be paid for in installments are normally dealt with as follows:
The number of installments may vary from 2 – 4. Each installment is collected through a comprehensive set of processed(called a stage). The 4 possible stages are:
Application stage
Allotment stage
1st Call stage
2nd Call stage


Application Stage
In this stage, the company invites members of the public to send in applications for share they (the public) are interested in purchasing.
The application firms must be accompanied by the 1st installment money when the public respond to the company’s offer.
When the company requests members of the public to send in application forms & application money it will make the following entries in its books:
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application

If there is an over-subscription, then the excess applications may either be rejected outright and the applicants’ money refunded, or applications awarded on a pro-rata basis. (i.e. a lower number of shares allotted compared to the number applied for)
If outright rejection, the company will:
DEBIT: Application
CREDIT: Cashbook
If pro-rata issue, the company will:
DEBIT: Application
CREDIT: Allotment
This marks the end of the application stage.

Allotment Stage
In this stage, the company selects the applicants and informs them of their allotment. It also requests them to bring in a second installment. As it requests for the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the company, will in its books: -
DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the account has closed by this stage, the stage is deemed to be over.

1st Call Stage
Here the company requests for the third installment from the public. As the company does this, it will:
DEBIT: 1st Call A/C .
CREDIT: Share Capital.
When the public respond by bringing in the installment money, the company, will in its books:
DEBIT: Cashbook
CREDIT: 1st Call A/C.
It is possible that some of the allotees do not pay their 1st installment money on time. When this is so,
DEBIT: Cashbook – with money received
DEBIT: Calls in Arrears – with money not received
CREDIT: 1st Call A/C – with total.
This marks the end of the Call stage.

2nd Call Stage
this is very similar to the 1st Call whereby the company requests for the second (and last) call money; as it does so, it will:
DEBIT: 2nd Call A/C
CREDIT: Share Capital
When the public respond by sending in the second call money, then the company will:
DEBIT: Cashbook
CREDIT: 2nd Call A/C
It is possible that some of the allotees do not pay up their 2nd Call money. When this is so:
DEBIT: Cashbook – with money collected.
DEBIT: Calls in arrears with money not received
CREDIT: 2nd Call A/C.

THIS MARKS THE END OF THE NORMAL ISSUE OF SHARES PROCEDURES.

When a debtor for share money (calls – in –arrears) does not pay up his dues, his shares will be cancelled and any money he previously gave the company forfeited (i.e. not refunded to him). This is known as Share Forfeiture. The entries to be made when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.

Forfeited shares may be resold as follows:
At per value
At a premium
At a discount

If resold at per:
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale will be expressly illegal unless:
Amounts collected from previous allotee plus an amount collected from current allotee equals or is greater than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.

Last entry in this exercise is to transfer any balance on the share forfeiture A/C to Share Premium A/C as follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.

Example 8.5 MAY 1999
QUESTION FOUR
Give a brief definition of memorandum of association and certificate of incorporation.
(5 marks)
Radhi Tea Company Limited has an authorized share capital of Sh. 10,000,000 ordinary shares of Sh.10 each. The shares were issued at par as follows:

Payable on application Sh.1.00
Payable on allotment Sh.3.00
Payable on first call Sh.4.00
Payable on second call Sh.2.00

Applications were received for 1,630,000 shares.
It was decide to refund applicants monies on 130,000 shares and to allot all the shares on the basis of two for every three applied for.

The excess application monies received from the successful applicants is not to be refunded but is to be applied to reduce the amount payable on allotment.

The calls were made and paid in full with the exception of one member of one member holding 5,000 shares who paid neither the first nor the second call and another member who did not pay the second call on 1,000 shares. After requisite action by the directors the shares were forfeited. They were later reissued at a price of Sh.8 per share.

Required:
The necessary ledger accounts to record these transactions (15 marks)
(Total: 20 marks)

Solution:
Memorandum of association explains the relationship between the company and the outside world. It shows the object of the company, the name, address, the authorized share capital, its location (its registered office) and the date of incorporation.
Articles of association state the rules under which the company will operate e.g. the number of directors, the structure, and meetings. It explains the relationship between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is registered by the registrar of companies.

Radhi Tea Co.

Application A/C
Sh. Sh.
Cashbook 130,000 Cashbook 1,630,000
OSC 1,000,000
Allotment 500,000
1,630,000 1,630,000


Allotment A/C
Sh. Sh.
OSC 3,000,000 Application 500,000
Allotment Cashbook 2,500,000
3,000,000 3,000,000


1st Call
Sh. Sh.
OSC 4,000,000 Calls in arrears 20,000
Cashbook 3,980,000
4,000,000 4,000,000


2nd Call
Sh. Sh.
OSC 1,990,00 Calls in arrears 2,000
Cashbook 1,988,000
1,990,000 1,990,000


Share Premium
Sh. Sh.
Bal c/d 1,630,000 Share forfeiture 1,630,000


Ordinary Share Capital
Sh. Sh.
Share forfeiture A/C 50,000 Application 1,000,000
Allotment 3,000,000
1st Call 4,000,000
2nd Call 1,990,000
Bal c/d 10,000,000 Share forfeiture 60,000
10,050,000 10,050,000


Share Forfeiture A/C
Sh. Sh.
Calls in arrears 22,000 OSC 50,000
OSC 60,000 Cashbook 48,000
Share Premium 16,000
98,000 98,000


Calls in Arrears
Sh. ` Sh.
1st Call 20,000
2nd Call 2,000 Share forfeiture 22,000
22,000 22,000


FINANCIAL STATEMENT ANALYSIS
(RATIO ANALYSIS)
Financial statements include a profit and loss A/C (income statement) that tells us the performance of a company throughout the financial period. It also includes a balance sheet that shows the financial position or status of a company and lastly a cash flow statement which shows changes in cash position of the entity,
We analyse financial statements by the use of accounting ratios. There are 5 classes of ratios:
• Liquidity
• Leverage/Gearing ratios
• Activity Ratios
• Profitability
• Equity / Investor ratios.

LIQUIDITY RATIOS.
These measure the firm’s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been financed by non-owner supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various assets to generate sales revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses various funds to generate profits or returns. They also measure the management’s ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and returns expected by the owners of the firm. They also try to look at the overall performance of the firm and going concern of the firm.

The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992

Sales
Less: Cost of Sales
Opening stock
Purchases

Less: Closing stocks
Gross profit
Less expenses
Selling and distribution
Depreciation
Administration expenses
Earnings before interest & taxes
Interest
Earnings before tax
Tax @ 50%
Less ordinary dividend
(0.75 per share)
Retained profit for the year
Sh


99,500
559,500
659,000
(149,000)


30,000
10,000
135,000








Sh
850,000




(510,000)
340,000



(175,000)
165,000
(15,000)
150,000
75,000
75,000

(15,000)
60,000


ABC
Balance Sheet as at 31 December 1992
Non Current Assets
Land and Buildings
Plant & Machinery

Current Assets
Inventory
Debtors
Less provision
Cash





75,000
(4,000)

Sh.
250,000
80,000
330,000

149,000

71,000
30,000
580,000
Issued share capital
(20000 share of Sh, 10)
Reserve
Retained profit
Long term
Current liabilities. Sh.
200000
90000
60000
100000
130000



580,000


Additional Note
Cash purchases amount to 14,250.

Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities

Current Ratio = 250,000 = 1.92 : 1
130,000

The higher the ratio then the more liquid the firm is.

Quick Ratio/Acid Test Ratio
= Current Assets - Inventories
Current Liabilities

= 250,000 – 149,000 = 101,000
130,000 130,000

= 0.78 : 1

this is a more refined ration that tries to recognize the fact that stakes may not be easily converted into cash. The higher the ratio, the better for the firm as it means an improved liquidity position.

Cash Ratio
= Cash + Marketable Securities
Current Liabilities

= 30,000 = 0.23 : 1
130,000

= 0.23 : 1

This ratio assumes that stakes may not be converted into cash easily and the debtors may not pay up their accounts on time. The higher the ratio, the better for the firm as the Liquidity position is improved.

Net Working Capital Ratio.
= Net Working Capital
Net Assets

Net Working Capital =CA –CL = 250,000-130,000=120,000

Net Working Capital = 120,000 = 0.27 : 1
450,000

= 0.27 : 1

The higher the ratio the better for the firm and therefore the improved Liquidity position.

GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able to pay up its debts). The more debts a business has (non owner supplied funds) the higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets

This ratio measures the proportion of total assets financed by non owner supplied funds. The higher the ratio, the higher the financial risk .

= 230,000 = 0.4
580,000
40% is supplied by non owners

Debt Equity Ratio

= Total Liabilities
Networth (share holders funds)

= 230,000 = 0.66
350,000
40% is supplied by non-owners

This ratio measures how much has been financed by the non-owner supplied funds in relation to the amount financed by the owners i.e. for every shilling invested in the business by the owners how much has been financed by the non-owner supplied funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the creditor have put in 67 cents.
The higher the financial risk.

Long Term Debt Ratio
= Non Current Liabilities
Net Assets

= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner supplied funds.
The higher the ratio, then the higher the financial risk.

ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250

= 4.1 times

This is the number of times stock has been converted to sales in a financial year. The higher the ratio the more active the firm is.
An alternative formula is

= Sales
Closing Stock

Debtors Turnover

= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit

Debtor Turnover = 850,000 = 10.625
80,000

The higher the ratio, the more active the firm has been (we had debtors over 10 times to generate the sales)

Note
Average Collection Period = 360
Debtors Turnover

= 360 = 34 days
10.625

This measure the number of days it takes for debtors to pay up. The lesser the period, the better for the firm as it improves the liquidity position.

Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
130,000

= 42 times
The ratio tries to measure how many times we have creditors during a financial period. The lesser the ratio the better.

Non Current Assets Turnover (Fixed Assets Turnover)
= Sales
Average Fixed Assets

A.F.A = 340,000 + 330,000 = 670,000 = 335,000
2 2
= 850,000 = 2.54 times
335,000

The ratio measures the efficiency with which the firm is using its fixed/ Non Current Assets to generate sales.
The higher the ratio the more active the firm.

Total Assets Turnover

= Sales
Total Assets

= 850,000
580,000

= 1,046 times

Measures the efficiency with which the firm is using its total assets to generate sales.

PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales 850,000

The higher the margin, the more profitable the firm is.

Net Profit Margin
= Net Profit after tax = 75,000 = 9%
Sales 850,000

The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.

Profitability in Relation to investment
Return On Investment
= Net Profit after tax
Total Assets

= 75,000 = 13%
580,000

Shows how efficient the firm has been in using the total assets to generate returns in the business.

Return On Capital Employed
= Net Profit after tax
Net Assets

= 750,000 = 17%
450,000

How efficient the firm has been in using the net assets to generate returns in the business.

Return On Equity
= Earnings after tax
Networth

= 75,000
850,000

= 21%

Efficiency of the firm in using the owner’s capital to generate returns.

NOTE
The higher the ratio the more efficient is the firm.

EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.

= 75,000
20,000

= 3.75

This is the return expected by an investor for every share held in the firm.

Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC’S shares is Sh20/Share.

= 3.75  100%
20
= 19%

This is the return amount expected by a shareholder for every shilling invested in the business.

Dividend Per Share
= Total Dividend (ordinary shareholders)
Ordinary shares outstanding.

= 15,000
20,000

= 0.75 cts per share

This is the amount expected by an investor for every share held in the firm.

NOTE
The higher the amounts, the better for the firm.

LIMITATIONS ON USE OF RATIOS
• It is difficult to categorise firms in the various industries due to diversification. This makes inter-company comparison difficult.
• It is difficult to compare one company with others in case of monopolist firms.
• Different, firms use different accounting policies and methods e.g. on depreciation, provisions and other estimates so this makes comparison of companies difficult.
• Ratios are compiled at a point in time and may be affected by short term changes. Therefore ratios are used for short term planning.
• Ratios are computed from historical data and therefore are not good indicators of the future.

DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company’s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same industry.

Example 8.6 (ACCA DEC 98)
Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and Omega Ltd. The companies trade as wholesalers, selling electrical goods to retailers on credit. Their most recent financial statements appear below.

PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8



Sales
Cost of sales
Opening stock
Purchases

Less: closing stock

Gross profit

Expenses
Distribution costs
Administrative expenses
Interest paid

Profit before tax
Taxation
Net profit for the period Zeta Limited Omega Limited
£’000


200
3,200
3,400
400




200
290
10



£’000
4,000





3,000
1,000





500
500
120
380
£’000


800
4,800
5,600
800




150
250
400



£’000
6,000





4,800
1,200





800
400
90
310


Balance Sheets As At 31 March 20x8


Fixed assets
Tangible assets
Warehouse and office buildings
Equipment and vehicles

Current assets
Stock
Debtor – trade
- sundry
Cash at bank

Current liabilities
Creditors – trade
- sundry
Overdraft
Taxation


Long-term loan (interest 10% pa)

Share capital
Revaluation reserve
Profit and loss account

Zeta Limited Omega Limited
£’000


1,200
600


400
800
150
-
1,350

(800)
(80)
(200)
(120)






£’000




1,800











150
1,950
-
1,950
1,000
-
950
1,950
£’000


5,000
1,000


800
900
80
100
1,180

(800)
(100)
-
(90)








£’000




6,000











890
6,890
(4,000)
2,890
1,600
500
790
2,890

Required:
a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability, liquidity and management of the elements of working capital. Show all workings. (8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies as regards their profitability, liquidity and working capital management. (8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the implications of this for the two companies? (4 marks)
(20 marks)

Solution:

PROFITABILITY

Gross profit margin
Gross profit  100%
Sales

Net profit margin
Net profit  100%
Sales

Return on capital employed
Profit before interest and tax
Capital employed

Return on shareholders’ capital
Profit before tax
Share capital and reserves

Asset turnover
Sales
Capital employed

LIQUIDITY
Current ratio
Current assets
Current liabilities

Quick ratio
Current assets – stock
Current liabilities

Gearing
Long – term loans
Capital

Interest cover
Profit before interest and tax
Interest charges



WORKING CAPITAL MANAGEMENT
Debtors days
Trade debtors  365 days
Sales

Creditor days
Trade creditors  365 days
Purchases

Stock days
Average stock  365 days
Cost of sales



1000  100% = 25%
4000


500  100% = 12.5%
4000


510 = 26.2%
1950


500 = 25.6%
1950


4000 = 2.1 times
1950



1350 = 1.1:1
1200


950 = 0.8:1
1200


nil = nil
1950


510 = 51 times
10




800  365 = 73 days
4000



800  365 = 91 days
3200


300  365 = 37 days
3000





1200  100% = 20%
6000


400  100% = 6.7%
6000


800 = 11.6%
6890


400 = 13.8%
2890


6000 = 0.9 times
6890



1880 = 1.9:1
990


1080 = 1.1:1
990


4000 = 58%
6890


800 = 2 times
400




900  365 = 55 days
6000



800  365 = 61 days
4800


800  365 = 61 days
4800




Note. We have used average stock here. When you have the information use it.

Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing policy. Omega’s net margin is lower than Zeta’s. Omega’s expenses are therefore proportionally higher. It should be noted that Omega’s bottom line profit is reduced significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset base due in part to a revaluation. It may be that a revaluation of Zeta’s assets will partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both companies’ quick ratios are much closer, Zeta’s liquidity does appear to be an issue especially as there is no cash at hand. It would be wise to examine projected cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market which can be subject to obsolescence.

Zeta’s creditor and debtor days are a cause for concern. Debtors should be collected within 60 days if not sooner. 60 day collection would improve cash flow by over £140,000 reducing the debtors balance to £658,000(60/73  £800,000).

Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks damaging the goodwill it has with its suppliers. Paying creditors within 60 days would have an adverse effect on cash flow of over £270,000. The creditors balance would be £527,000 (60/91  £800,000).


Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing means that should profits fall they may not be in a position to pay the loan interest. Zeta’s capital is entirely share capital and so a fixed return is not required.

Omega’s loan appears to be fixed rate. This means that in times of falling interest rates Omega will have higher interest costs than say, Zeta, if Zeta borrowed the same amount. The converse is true in times of rising interest rates.


REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31 October 1999.

Authorized and issued capital
Share premium
8% debenture stock
Profit and loss stock
Motor vehicles at cost
Provision for depreciation on motor vehicle
Plant and machinery at cost
Provision for depreciation on plant and machinery
Land buildings at cost
Stock in hand 1 November 1998 – Finished goods
– Raw materials
– Work-in-progress


Trade debtors
Office furniture and equipment at cost
Provision for depreciation on office furniture and equipment
Trade creditors
Purchase of raw materials
Sales of finished goods
Direct wages
Direct expenses
Factory expenses
Indirect materials
Factory insurance
Sales room expenses
Administration expenses
Office salaries and wages
Vehicles running expenses
Bad debts written-off
Balance at bank – overdrawn

Sh.




16500000

25800000

30000000
420000
380000
560000

Sh.
7360000
890000


9500000

1350000
395000
290000
350000
150000
485000
620000
840000
656000
640000

96610000
Sh.
40000000
500000
10000000
5500000

3400000

6300000





Sh.


185000
1000000

28550000










1175000
96610000

Notes:
Closing stock includes

– Finished goods
– Raw materials
– Work-in-progress

Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a transfer of Sh. 2000000 to a general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on furniture and equipment, plant and machinery and motor vehicles respectively.
The overdraft interest of Sh. 725000 was communicated to the company by the bank on 5 November 1999 and therefore it has not been posted in the cash book.

Required:

Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
(12 marks)
Balance sheet as at 31 October 1999. (8 marks)
(Total: 20 marks)

QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31 October 1998.

Authorized and issued capital (shares of Sh. 20 each fully paid)
Share premium
10% premium
General reserve
Profit and loss account 1 November 1997
Motor vehicles at cost
Provision for depreciation
Freehold property
Trade debtors
Trade creditor
Purchases and sales
Stock in hand 1 November 1997
Furniture and fittings at cost
Provision for depreciation
Goodwill
Rent receivable
Salaries and wages
General expenses
Vehicles running expenses
Bad debts
Telephone and postage
Water and electricity
Rates and insurance
Cash at bank
Sh,’000’





3,500

44,500
1,375

95,650
3,478
1,540

500

2,285
358
2,470
124
568
269
289
10,492
167,398 Sh,’000’
30,000
350
3,500
2,000
2,850

265


460
127,450


138

385








167,398

Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no entries were made in the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October 1998 but no entries were made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000 respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and 20% on cost respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a transfer of Sh.2,500,000 to the general reserve.
10. The debenture interest has not yet been paid.

Required:
1. Trading, profit and loss account for the year ended 31 October 1998. (13 marks)
2. Balance sheet as at 31 October 1998. (7 marks)
(Total: 20 marks)

QUESTION THREE ACCA PILOT PAPER
The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996 were as follows:



Tangible fixed assets
Cost of valuation
Aggregate depreciation

Current assets
Stock
Debtors
Cash

Current liabilities
Trade creditors
Corporation tax
Proposed dividend


Net current assets


Loans (due for repayment 1999)

Called up share capital
Share premium
Revaluation reserve
Profit and loss account
31 December
1995 1996
£000

126,300
(50,000)


12,000
10,500
1,400
23,900

6,800
3,400
4,000
14,200












£000


76,300












9,700
86,000

(60,000)
26,000

6,000
1,000
-
19,000
26,000
£000

162,400
(64,000)


15,000
14,000
2,000
31,000

9,400
5,000
6,000
20,400












£000


98,400












10,600
109,000

(60,000)
49,000

10,000
3,000
8,000
28,000
49,000


The stock at 31 December 1994 was £10,000,000.


The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996 were:




Sales
Cost of sales
Gross profit
Expenses
Net profit before tax Year ended 31 December
1995
£000
64,000
40,000
24,000
10,000
14,000
1996
£000
108,000
75,600
32,400
12,400
20,000

Required:
a) Calculate the following accounting ratios for both years:
• The gross profit percentage
• The current ratio and the quick ratio (or acid test)
• Debtors’ collection period in days
• Trade creditors’ payment period in days (based on purchases figures which are to be calculated)
• Gearing ratio.
b) Show you full workings. (10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them with those for 1995. (5 marks)
d) State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about. (2 marks)
e) State the extent to which you agree or disagree with the following and give brief reasons for your answers.
f) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed. (3 marks)
(20 marks)

QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1 each at 120p per share, payable as to 50p on application (including the premium), 40p on allotment and the balance on 1 May 19X1.
The lists were closed on 10 February 19X1, by which date applications for 70,000 shares had been received. Of the cash received, £4,000 was returned and £6,000 was applied to the amount due on allotment, the balance of which was paid on 16 February 19X1. All shareholders paid the call due on 1 May 19X1, with the exception of one allotee of 500 shares. These shares were forfeited on 29 September 19X1 and reissued as fully paid at 80p per share on November 19X1.

You are required to write up the necessary accounts, excluding those relating to cash, to record these transactions.


CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK


COMPREHENSIVE ASSIGNMENT No.4


TO BE SUBMITTED AFTER LESSON 8

To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.

EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS

QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of Shs.5,000.00. On 2 January 2002, this assistant did not report for work and it was found that he had left, taking with him the balance in the till. It had been Pesa Nyingi’s practise to bank each Monday morning the balance in the till resulting from the previous week’s transactions. No float was maintained. The only records kept, apart from the bank statement, were details of sales on credit and unpaid invoices for goods.

You ascertain the following balances on 1 January 2001.

Stock 688,000.00
Creditors 988,000.00
Bank 276,000.00
Debtors 344,000.00
Cash 228,000.00
Accrued expenses 100,000.00
Fixtures and Fittings 1,000,000.00

You also ascertain the following:
An analysis of the bank statement for the year ended 31 December 2001 showed the following

Receipts 180,000.00
Banking from debtors cheques 4,116,000.00
Cash 4,296,000.00

Payments 3,748,000.00
Creditors for goods 232,000.00
Rent and expenses 3,980,000.00

Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00 for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs. 13,960,000. An amount of Shs. 336,000.00 was still outstanding.
Creditors for goods have always been paid by cheque. Unpaid invoices on 31 December 2001 amounted to Shs. 1,120,000.00. Creditors for expenses were Shs. 800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned against a cash receipt of Shs. 48,000.00. The receipt has not been recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
A depreciation charge of 20% is to be charged on the value outstanding on the fixtures and fittings at the end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact has not yet been reflected in the bank statement.
Assume a 50 week year

Required:
a) Prepare workings showing your calculation of the amount of the theft. (8 marks)
b) Prepare a trading, profit and loss account for the year ended 31 December 2001 and a balance sheet as at that date. 17 marks)

QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the following information is available.


Sales Ledger balances as at 1 May 2002
Purchases Ledger balances as at 1 May 2002
Sales Ledger balances as at 31 May 2002
Purchases Ledger balances as at 31 May 2002

Credit Sales
Credit Purchases
Cash and cheques received Sales Ledger
Purchases Ledger
Cash and cheques received Sales Ledger
Purchases Ledger
Credit notes issued (for returns inwards)
Debit notes received (returns outwards)
Dishonoured cheques
Discounts allowed
Discounts received
Bad debts written off in December 2001 but now recovered Debit
1,672,000.00
28,000.00
?
36,500.00











Credit
114,600.00
747,000.00
67,000.00
?

18,938,000.00
670,000.00
1,549,700.00
13,000.00
47,000.00
632,000.00
119,800.00
24,000.00
32,000.00
43,000.00
33,800.00
14,200.00

It has been decided to set off a debt due from a customer, A Mutiso, of Shs. 30,000.00 against a debt due to him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the total debtors on 31 May.

Required:
a) Prepare the sales ledger control account and the purchases ledger control account for May 2002 in the books of Jambo Dealers Ltd. (14 marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers Ltd relating to the company’s trade debtors and trade creditors. (3 marks)
c) Briefly explain the purpose of control accounts. (3 marks)

QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year ended 30 April 2000, 2001, 2002 and balance sheet as at 30 April 1999, 2000, 2001 2002 for James Mwendapole, a sole trader.
Trading, Profit and Loss Accounts for the year ended 31 May



Sales
Cost of sales
Gross Profit
Expenses (including loan interest)
Net Profit 2000
Sh’000’
1,000.00
(600.00) 2001
Sh’000’
1,200.00
(720.00) 2002
Sh’000’
1,400.00
(980.00)
400.00
(200.00) 480.00
(300.00) 420.00
(280.00)
200.00 180.00 140.00


Balance Sheets as at 31 May


Non Current Assets

Current Assets
Stocks
Debtors
Balance at bank
Total Current Assets

Current Liabilities
Creditors
Loan (received on 31 May 2001)
Total Current Liabilities

Net Current Assets
Net Assets

Capital
Opening Capital
Add Net Profit
1999
Sh’000’
380.00


140.00
100.00
900.00 2000
Sh’000’
480.00


160.00
180.00
130.00 2001
Sh’000’
680.00


200.00
400.00
390.00 2002
Sh’000’
900.00


290.00
520.00
160.00
330.00


(40.00)
- 470.00


(80.00)
- 990.00


(120.00)
(500.00) 970.00


(180.00)
(500.00)
(40.00)

290.00 (80.00)

390.00 (620.00)

370.00 (680.00)

290.00
670.00 870.00 1,050.00 1,190.00


510.00
160.00

670.00
200.00

870.00
180.00

1,050.00
140.00
670.00 870.00 1,050.00 1,190.00

Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income from his grandfather and therefore has taken no drawings from his retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services rendered to the business by James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the rate of 8% per year.

Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following financial ratios.
• Return on capital employed
• Quick ratio
• Stock turnover
• Net Profit Margin (8 marks)

2. Use two financial ratios (not referred in (a) above) to draw attention to two aspects to the business which would appear to give cause for concern. (6 marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue trading and whether it was a sound decision to borrow the loan. (6 marks)

QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality wheelbarrows, Bingwa being responsible for the factory and Shabiki being responsible for sales. Completed wheelbarrows are transferred from the factory to the warehouse at agreed prises. Bingwa and Shabiki are credited with one third of the manufacturing profit and 10% of the trading gross profit respectively and the balance of the firm’s profit being shared equally. All wheelbarrows are sold at Sh. 680.00 each. No interest is credited or charged on capital accounts or drawings.

The following trial balance was extracted on 31 March 2002.


Capital Accounts
Bingwa
Shabiki
Drawings
Bingwa
Shabiki
Freehold factory (including land Sh. 300,000.00)
Factory Plant at cost
Delivery Van at cost
Provision for depreciation
Freehold Factory
Factory Plant
Delivery Van
Stocks on 1 February 2001
Raw materials
Work in progress
Wheelbarrows (1220 at Shs. 440)
Sales
Return inwards
Purchases of raw materials
PAYE
Factory wages
Office wages
Expenses Factory
Office
Provision for unrealized stock (in warehouse)
Provision for doubtful debts
Debtors and creditors
Bank

Sh.




96,000.00
87,400.00
708,800.00
326,400.00
82,000.00





42,000.00
40,200.00
536,800.00

13,600.00
291,600.00

165,400.00
48,000.00
126,800.00
143,400.00


217,600.00
Sh.

482,000.00
507,000.00







307,040.00
110,160.00
38,400.00




1,237,600.00


8,800.00




48,800.00
19,200.00
109,200.00
57,200.00
2,926,000.00 2,926,000.00


Additional information:
a) 1540 wheelbarrows at Sh. 480 each were transferred to the warehouse during the year.
b) Wheelbarrows in stock being balance of the current year’s production, were valued at agreed price of Sh. 480 each.
c) The stock of raw materials was Sh. 34,000.00 and work in progress is valued at Sh. 53,600.00
d) Accrued expenses on 31 March 2002 amounted to 62,400 (including office(Sh. 32,800.00) and prepaid rates Sh,3,200.00 (including office Shs. 1,200.00 )).
e) Provision for depreciation is to be made as follows:

Factory buildings 2% p.a.
Factory Plant 10% p.a.
Motor vehicles 25% p.a.
The general provision for doubtful debts is to maintain at 10% of the trade debtors.

Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March 2002 and a balance sheet as at that date. (20 marks)

QUESTION FIVE
State and explain the qualities of useful financial information. (10 marks)
To what extent do International Accounting Standards help achieve these qualities. (5 marks)
(25 marks)


END OF COMPREHENSIVE ASSIGNMENT No.4

NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING






LESSON NINE
REVISION AID

INDEX
KASNEB SYLLABUS
MODEL ANSWERS TO REINFORCING QUESTIONS

LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION


SOLUTIONS TO REINFORCEMENT QUESTIONS

Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
DR CR
£ £
Cash at bank 1,703
Cash in hand 12
Drawings 560
Postage and stationery 129
Traveling expenses 104
Cleaning expenses 260
Sundry expenses 19
Telephone 214
Electricity 190
Motor vas 2,000
Rates 320
Fixtures ad fittings 806
Capital 2,308
Purchases 3,163
Discounts received 419
Credit sales 830
Cash sales 4,764
Discount allowed 81
Provision for depreciation:
Motor van
Fixtures ad fittings
700
250
Stock at 1 January 20X1 366
Loan - Frey 250
Debtors – Brown 12
Blue 150
Stripe 48
Creditors – Live 602
Negative _____ 64
10,207 10,207









Workings

Cash at bank £
Opening balances 672
Bankings of cash (908 + 940 + 766 + 1,031) 3,643
Capital introduced 500
Received from customers
(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 + 38 + 20) x 90%
729
5,546
Less cheque payments (telephone, electricity, rates and van)
Payments to suppliers
(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + 187)
(2,374)
1,703

Cash at Bank
£ £
Bal b/d 5 Bank 3,645
Sales (bal) 4,764 Drawings 560
Stationery 73
Travel 40
Petrol ad van 104
Sundry 19
Postage 56
Cleaner 260

Bal c/d _12
4,769 4,769

Question 2
Mary Carter
Balance Sheet as at 31.12.2001

Non current assets £ £ £
Freehold premises 25,000
Plant 12,000
37,000
Current assets
Stock 8,000
Debtors 7,000
Cash at Bank 1,000
Cash in hand 6,000
22,000
Current liabilities
Creditors (10,000) 12,000
49,000

Capital [34,000 + 5,000 – 10,000] 29,000

Non current liabilities
Loan from bank 20,000
49,000

Workings
Stock: 11,000 + 34,000 – 37,000 = 8,000
Debtors: 10,000 + 51,000 – 54,000 = 7,000
Cash at bank: 5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 = 1,000
Cash hand: 3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000

Capital
Bal b/f 34,000
Add profit _5,000
39,000
Less drawings (10,000)
29,000

Profit:
Sales 60,000
Cost of sales (37,000)
Electricity (2,000)
Rates (1,000)
Wages (10,000)
Sundry expenses (2,000)
Bank interest (3,000)
Net profit 5,000

Creditors
= 12,000 + 34,000 – 36,000 = 10,000

Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.

Capital b/f + additional 25,000
Add net profit 6,000
(missing figure) 31,000
Less drawings (4,500)
Capital c/f 26,500

Profit may be also computed as follows:

Net profit = closing capital (net assets) – opening capital + drawings – additional capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000


Question 4
Brian Barmouth
Trial balance as at 30 June 2000
£ £
Sales 47,600
Purchases 22,850
Office expenses 1,900
Insurance 700
Wages 7,900
Rates 2,800
Heating and lighting 1,200
Telephone 650
Discounts allowed 1,150
Opening stock 500
Return inwards 200
Returns outwards 150
Premiums 40,000
Plant and machinery 50,000
Motor vehicle 12,000
Debtors 12,500
Bank balance 7,800
Creditors 3,400
Loan – long term loan 10,000
Capital 60,000
Drawings for the year __4,000 ______
121,150 121,150


NB: The closing stock does not appear in the trial balance.



LESSON 2

Question 1
(a)
£ £
1-May Capital 5,000 1-May Store fitments 2,000
13-May Sales 200 19-May Abel 650
16-May Bruce 700 20-May Rent 200
24-May hill 200 21-May Delivery exp 50
30-May Drawings 200
30-May Wages 320
31-May Green 300
_____ 31-May Balance c/d 2,380
6,100 6,100


(b) SALES DAYBOOK
£
4 – May Bruce 700
11 – May Hill 580
18 - May Nailor 360
1,640

(c) PURCHASES DAYBOOK
£
2 – May Abel 650
9 – May Green 300
17 - May Kaye 800
1,750

Check the account balances with the balances shown on the trial balance.

(d)
Dr Cr
£ £
Cash 2,380
Sales 1,840
Purchases 1,750
Debtors 740
Creditors 800
Capital 5,000
Fixtures and fittings 2,000
Rent 200
Delivery expenses 50
Drawings 200
Wages _320 ____
7,640 7,640


Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
£ £ £
Sales 15,500
Less returns inwards (1,500)
150,000
Cost of sales
Opening stock 46,000
Purchases 103,500
Less returns outwards (3,500) 100,000
146,000
Less closing stock (41,000) (105,000)
Gross profit 45,000
Discount received 200
Rent received 2,000
47,200
Expenses
Salaries and wages 18,700
Office expenses 2,500
Insurance 1,100
Electricity 600
Stationery 2,400
Advertising 3,500
Telephone 800
Rates 3,000
Discount allowed __100 (32,700)
Net profit 14,500

End Papers
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Premises 80,000
Fixtures and fittings 5,000
85,000
Current assets
Stocks 41,000
Debtors 4,800
Cash in hand 200
46,000
Current liabilities
Bank overdraft 12,000
Creditors 7,500 (19,500)
26,500
111,500
Capital 111,000
Add net profit 14,500
125,500
Less drawings (14,000)
111,500

Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002

£ £ £
Sales 9,234,000
Less: Cost of sales
Opening stock 1,816,000
Purchases 6,918,500
Add carriage inwards 42,000
6,960,500
Less returns outwards (64,000) 6,896,500
8,712,500
Less closing stock (2,239,000) (6,473,500)
2,760,500
Less expenses
Wages and salaries 1,024,000
Carriage outwards 157,000
Rent and rates 301,500
Communication expenses 62,400
Commission payable 21,600
Insurance 40,500
Sundry expenses 31,800 (1,638,800)
Net profit 1,121,700

K Smooth
Balance Sheet as at 31 December 2002
Non current assets £ £ £
Buildings 2,000,000
Fixtures 285,000
2,285,000
Current assets
Stocks 2,239,000
Debtors 1,432,000
Bank 297,000
Cash 11,500
3,979,500
Current liabilities
Creditors (816,000) 3,163,500
5,448,500

Capital 5,088,800
Add net profit 1,121,700
6,210,500
Less drawings 762,000
5,448,500



Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
£ £ £
Sales 13,090,000
Less: returns outwards __(55,000)
13,035,000
Cost of sales:
Opening stock 2,391,000
Purchases 9,210,000
Add carriage inwards ___21,500
9,231,500
Less returns outwards __(30,700) 9,200,800
11,591,800
Less closing stock (2,747,500) (8,844,300)
4,190,700
Less expenses
Wages and salaries 1,282,000
Carriage outwards 30,900
Motor expenses 163,000
Rent and rates 297,000
Telephone 40,500
Insurance 49,200
Office expenses 137,700
Sundries 28,400 (2,027,700)
Net profit _2,163,000

Skates
Balance Sheet as at 30September 2002
Non current assets £ £ £
Office equipment 625,000
Motor van 410,000
1,035,000
Current assets
Stocks 2,747,500
Debtors 1,239,000
Bank 311,500
Cash __29,500
4,318,500
Current liabilities
Creditors (937,000) 3,381,500
4,416,500

Capital 3,095,500
Add net profit 2,163,000
5,258,500
Less drawings (842,000)
4,416,500


LESSON 3

Question 1-
Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users’ decisions taken on the basis of the financial statements. The materiality of the omission or misstatement depends on the size and nature of the item in question judged in the particular circumstances of the case. Only items material in amount or in nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit account, it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5,000’. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time to identify trends and with other enterprise’s statements to evaluate their relative financial position, performance and changes in financial position. It is therefore necessary for similar events and states of affairs to be represented in a similar manner.
Compliance with accounting standards helps to achieve comparability by ensuring that different entities account for similar transactions and events in a similar way.
Example:
Depreciation policy must be consistent from one period to the next, unless it becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives the most cautious presentation of the business’s financial position or results.
IAS 1 describes the prudence concept as being that ‘revenue and profits are not anticipated, but are recognized by inclusion in the profit and loss account only when realized in the form either of cash or of other assets, the ultimate cash realization of which can be assessed with reasonable certainty; provision is made for all known…….expenses and losses whether the amount of these is known with certainty or is a best estimate in the light of the information available.’
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a provision should be made so that the amount in question is not included in the profit for the year.

Objectivity:
This means that accountants must be free from bias. They must adopt a neutral stance when analyzing accounting data. This means that they should try to strip their answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this should be that any number of accountants will give the same answer independently of each other.


Example:
Internally generated good will should not be capitalized in the balance sheet, as its value cannot be determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful, information must be relevant to the decision-making needs of users. Information is relevant when it has the ability to influence the decisions of users by helping them to evaluate past, present or future events or to confirm or correct their past evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to determine if to lend to the firm or supply on credit.

Question 4
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Factors affecting materiality are:
• The size of the item;
• The nature of the item.

To be useful, information must be relevant to the decision-making needs of users. Information is relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations.

Neutrality means that the information in financial statements should be free from deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about certain items.

The potential conflict between the two is that neutrality requires freedom from bias while the exercise of prudence is a potentially biased concept since judgment is required.
In resolving the conflict, a balance should be found that neither overstates nor understates assets, gains, liabilities and losses.
Safeguards to ensure that a company’s financial statements are free from material error:
The fact that the financial statements have been audited by an independent professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.


LESSON FOUR
Question 1
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
£ £ £
Sales 378,500
Less returns inwards (4,100)
374,400
Less cost of sales
Opening stock 120,600
Purchases 261,700
Less returns out (7,700) 254,000
374,600
Less closing stock 102,500 272,100
Gross profit 102,300
Add
Discount received 2,400
Rent received 7,500
112,200
Less expenses
Salaries and wages 45,700
Office expenses 8,400
Insurance premiums 2,200
Electricity 2,300
Stationery 6,200
Advertising 8,900
Telephone 2,100
Business rates 6,000
Discounts allowed 600 (82,400)
Net profit 29,800


Balance Sheet as at 31 March 2001
Non current assets £ £ £
Warehouse shop and office 210,000
Fixtures and fittings 12,800
222,800
Current assets
Stocks 102,500
Debtors 13,000
Prepayments 2,400
Cash in hand 500
118,400
Current liabilities
Creditors 18,700
Accrued expenses 1,200
Bank overdraft 30,000 (49,900) 68,500
291,300

Capital 287,500
Add Net Profit 29,800
317,300
Less drawings (26,000)
291,300


Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
£ £
Sales 491,620
Less cost of sales
Opening stock 18,460
Purchases 387,936
406,396
Closing stock 19,926
386,470
Gross profit 105,150
Discounts received 1,175
106,325
Less expenses:
Discounts allowed 1,304
Lighting and heating 6,184
Motor expenses 3,080
Rent 8,161
General expenses 7,413
Depreciation (w) 13,146
39,288
Net profit 67,037

Working:
Depreciation charge:

Motor vehicles: £45,730 x 20% = £9,146
Fixtures and fittings: 10% x £(42,200 – 2,200) = £4,000
Total: £4,000 + £9,146 = £13,146

Donald Brown
Balance Sheet as at 31 December 20X0
Cost Depreciation Net
Non current assets £ £ £
Fixtures and fittings 42,200 6,200 36,000
Motor vehicles 45,730 24,438 21,292
87,930 30,638 57,292
Current assets
Stock 19,926
Debtors 42,737
Prepayments 680
Cash in hand 1,411
64,754
Current liabilities
Creditors 35,404
Accruals 218
Bank overdraft 19,861
55,483
Net current assets 9,271
Net assets 66,563
Financed by
Capital 26,094
Net Profit for year 67,037
Less drawings 93,131
26,568
66,563


Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
£ £
Sales 427,726
Opening stock 15,310
Purchases 302,419
Carriage inwards 476
318,205
Less closing stock 16,480
Cost of sales 301,725
Gross profit 126,001
Carriage outwards 829
Wages and salaries 64,210
Rent and rates (12,466 – 620) 11846
Heat and light (4,757 + 350) 5,107
Depreciation – equipment 10,200
Motor vehicles 8,654
Sundry expenses 8,426
109,272
Net profit for the year 16,729


Brenda Bailey
Balance Sheet as at 30 June 20X9
Cost Depreciation Net book value
Non current assets £ £ £
Equipment 102,000 32,450 69,550
Motor vehicles 43,270 17,574 25,696
145,270 50,024 95,246
Current assets
Stock 16,480
Debtors 50,633
Prepayments 620
Cash __477
68,210
Current liabilities
Bank overdraft 3,295
Creditors 41,792
Accruals 350
45,437
Net current assets 22,773
118,019
Capital
Balance at 1 July 20X8 122,890
Add Profit for year 16,729
139,619
Less drawings 21,600
Balance at 30 June 20X9 118,019

Question 4
Frank Mercer
Cash book
20X8 £ 20X8 £
Dec 31 Balance b/f 1,793 Dec 31 Bank charges 18
Dec 31 Dividend 26 Dec 31 Standing order 32
Dec 31 Direct debit 88
____ Balance c/d 1,681
1,819 1,819

Bank reconciliation as at 31 December 20X8

£ £
Balance per bank statement 1,557
Add unrecorded lodgments:
V Owen 98
K Walters 134
232
Less unpresented cheques:
B Oliver (869) 71
L Philips (872) 37
(108)
Balance per cash book (corrected) 1,681


LESSON FIVE

Question 1

Sales Ledger Control A/C
£ £
Bal b/d 386,430 Bal b/d 190
Sales (163,194 + 1,386) 164,580 Cash received 158,288
Cash refund 350 Discounts allowed 2,160
Returns inwards 590
Contra 870
Bad debts written off 1,360
______ Balance c/d 388,272
551,730 551,730

Sales Ledger Control A/C
£ £
Bal b/d 520 Bal b/d 184,740
Cash paid (103,040 – 350) 102,690 Purchases (98,192 + 36) 98,228
Discounts received 990 Bad debts 2,160
Returns outwards (1,370 + 2,000) 3,370
Contra 870
Balance c/d 175,048 Balance c/d ___100
283,488 283,488

Question 2


(a) Sales Ledger Control A/C
£ £
Uncorrected balance b/f 12,550 Discounts omitted (d) 100
Sales omitted (a) 850 Contra entry omitted (f) 400
Bank – cheque dishonored (1) 300 Bad debt omitted (g) 500
Returns inwards omitted (j) 200
_____ Amended balance c/d 12,500
13,700 13,700
Balance b/d 12,500

Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have no effect on the control account.











(b)
Statement Of Adjustments To List Of Personal Account Balances
£ £
Original total of list of balances 12,802
Add: debit balance omitted (b) 300
debit balance understated (e) 200
500
13,302
Less: transposition error (c ): understatement of cash received 180
cash debited instead of credited (2 x £250) (h) 500
discounts received wrongly debited to Bell (i) 50
Understatement of cash received (i) _72
__802
12,500

Question 3
(a)
George – Cash book
£ £
Balance 4,890 Bank charges (3) 320
Correction of error - interest 320 Plant (4) 10,000
Balance 11,890
Cheque dishonored 980
Correction of error in entering cheque (6)
4,800
_____ Error in addition (7) 1,000
17,100 17,100

(b)
Bank reconciliation
£
Balance per bank statement 12,800
Less lodgments not credited (2) 2,890
9,910
Add: dishonored cheque 980
Add: outstanding cheque (1) 1,000
Balance per cash book - overdrawn 11,890


Statement of effect on profit
£ £
Profit per draft accounts 81,208
Bank charges (3) 320
Depreciation (4) 1,000
Bad debt (5) 980
Motor expenses (6) 2,100
Additional depreciation (6) 600
Purchases understated (7) 1,000
Interest adjustment (8) 320
Repairs to premises (9) __870 ____
82,398 6,300
_6,300
76,098

(d)
Journal
£ £
George – drawings 870
Repairs to premises 870
Repairs to George’s house mistakenly charged as a business expense

*Paul – accounts payable ledger account 540
George – drawings 540

Business account paid by personal cheque


*Note: a debit to accounts payable ledger control account is also acceptable for this entry.

Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale posted in a wrong debtors account (e.g. to debtor 1 instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense of plant repair posted to the plant account (an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a credit sale of £250 is posted to the debtor and sales account as £520.

(Refer to the text for further details)



(b)

(i)
DR (Sh) CR (Sh)
Suspense 10,000
ABD Bank – loan 10,000

Cashbook 4,000
P& L – Rent received 4,000

P& L –Trading account 1,500
Closing stock 1,500

P& L – discount allowed 500
P&L – discount received 500

P& L – Trading a/c opening stock 3,200
Suspense 3,200

Prepayments (prepaid insurance)) 220
P& L 220

Insurance receivable 12,000
P& L - income 12,000

(ii)
Statement of Corrected net profit
(Sh) (Sh)
Net profit 64,000
Add: Rent received 4,000
Discount received 500
Prepaid insurance 220
Insurance receivable 12,000 16,720
80,720
Less: closing stock overvalued 1,500
Discount allowed 500
Opening stock 3,200 (5,200)
Adjusted net profit 75,520


(iii) Suspense A/c
Sh Sh
ABD Loan 10,000 Balance b/d 6,800
_____ Opening stock 3,200
10,000 10,000


Question 5

WORKSHEET
ACCOUNTS Pre-Adjusted Trial Balance Adjustments Adjusted
Trial Balance T & P & L
Account Balance sheet
Dr Cr Dr Cr Dr Cr Dr Cr Assets Liab.
£ £ £ £ £ £ £ £ £ £
Capital 40,000 40,000 40,000
Purchases 26,154 26,154 26,154
Sales 36,246 36,246 36,246
Salaries 4,814 350 5,164 5,164
Opening stock 4,307 4,307 4,307
Insurance 820 205 615 615
Rent income 965 165 800 800
Buildings 25,000 25,000 25,000
Furniture 14,500 1,450 13,050 13,050
Debtors 6,140 307 5,833 5,833
Other expenses 1,060 1,060 1,060
Creditors 4,638 4,638 4,638
Commission 946 120 1,066 1,066
82,795 82,795
Salaries due 350 350 350
Prepaid insurance 205 205 205
Rent rec’d in adv. 165 165 165
Accrued commission 120 120 120
Depreciation 1,450 1,450 1,450
Bad debts 307 307 307
Closing stock 5,008 5,008
Net profit 4,063
2,597 2,597 83,265 83,265 43,120 43,120 49,216 49,216
Column numbers 1 2 3 4 5 6 7 8 9 10

Question 6
Purpose of Control Accounts
i. To provide for arithmetic check on the postings made in the individual account i.e. either the sales ledger or the purchases ledger.
ii. To provide a quick total of the debtors and creditors balances to be shown in the trial balance.
iii. To detect and prevent errors and frauds on the debtor and creditors account.
iv. To facilitate delegation of duties especially where the debtors and creditors are many.


Sales Ledger Control A/C
Sh Sh
Bal b/d 6,185,000 Bal b/d 52,500
Sales 8,452,000 Returns inwards 203,500
Bills received dishonored 88,500 Bank 7,985,000
Charges payable 10,000 Cash 153,000
Bad debt 64,500
Discounts allowed 302,000
Bal c/d 44,000 Bal c/d 5,404,000
14,779,000 14,779,000


Purchases ledger control a/c
Sh Sh
Bal b/d 16,500 Bal b/d 4,285,000
Returns outwards 284,000 Purchases 5,687,500
Bills payable 930,000 Bills payable dishonored 400,000
Bank 473,200
Cash 88,500
Balance c/d _4,196,500 Balance c/d ___23,500
10,396,000 10,396,000


LESSON SIX

Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
Assets £ £
Stocks 4,500
Debtors 2,800
Rates prepaid 40
Fixtures 2,500
10,140
Liabilities
Bank overdraft (add unpresented cheques) 1,172
Accrued expenses 240
Creditors 1,800
Loan 4,000
Accrued interest [4,000 x 3% x 3/12] 30
Heating and lighting 80 (7,322)
2,818


(b)

Dare
Profit and loss account for the year ended 31 December 1996
£ £
Gross profit 9,000
Discounts received 480
9,480
Less expenses
Rent and rates 465
Fixtures and fittings (depreciation) 350
Lighting and heating 200
General expenses 450
Loan interest 120
Wages 2,914
Sundry expenses 140
Discounts allowed 520
Bad debt 200 (5,659)
Net profit 3,821


(c)

Dare
Balance Sheet as at 31 December 19X6
Non current assets £ £ £
Fixtures and fittings 2,550
Current assets
Stocks 5,800
Debtors 3,000
Prepayments 50
Bank (less unpresented cheques) 673
Cash __20
9,543
Current liabilities
Creditors 2,200
Accruals _290 (2,490)
7,053
9,603
Capital 2,818
Net profit 3,821
6,639
Less drawings (1,036)
5,603
Non current liabilities
Loan – 3% 4,000
9,603

Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
£ £
Income
Subscriptions (W1) 10,690
Bar and café profit (W2) 9,200
Sale of sportswear (W3) 1,400
Hire of sportswear (W5) 1,700
Deposit account interest 800
23,790
Expenditure
Rent of clubhouse 6,000
Groundsperson 10,000
Heating oil (W6) 4,500
Depreciation 5,000 x 10% 500
(21,000)
Surplus of income over expenditure for the year 2,790


AB Sport and Social Club
Balance Sheet as at 31 December 20X5
£ £
Non current assets
Equipment for grounds person: cost 5,000
Depreciation (3,500 + 500) (4,000)
1,000
Current assets
Heating oil 700
Bar and café stocks 5,000
Sports equipment for sale (4,000 – 2,000) 2,000
Sports equipment for hire (1,000 + 500) 1,500
Subscriptions in arrears 90
Bank deposit account 16,000
Bank current account 1,300
26,590
Current liabilities
Creditors for bar and café purchases 800
Creditors for sportswear 450
Creditors for heating oil 200
Subscriptions in advance _200
1,650
Net current assets 24,940
Net assets 25,940
Accumulated fund b/f 23,150
Surplus for the year 2,790
Accumulated fund c/f 25,940

Workings:

Subscriptions
SUBSCRIPTIONS
£ £
Arrears b/f 1.1.X5 (10 + 230) 240 Advance b/f 1.1.X5 40
Subscription income for year (bal fig) 10,690 Cash received 11,000
Advance c/f 31.12X5 __200 Arrears c/f 31.12.X5 ___90
11,130 11,130
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.

Bar and café profit
£ £
Sales 20,000
Cost of sales 7,000
Opening stock 8,800
Purchases* 15,800
(5,000)
Closing stock 10,800
Profit 9,200
*Note: Purchases are 9,000 + 800 – 1,000 = £8,800

Sale of sportswear
£ £
Sales 5,000
Opening stock 3,000
Purchases (W4) 3,100
6,100
Closing stock (4,000)
Closing stock (2,100)
Gross Profit 2,900
Sportswear written down (1,500)
Net profit 1,400

Purchases of sportswear
£
Bank 4,500
Add closing creditors 450
Less opening creditors (300)
4,650
For sale 2/3: £3,100 For hire 1/3: £1,550

Hire of sportswear
£ £
Receipts 3,000
Costs*
Opening stock 750
Purchases (W4) 1,550
2,300
Closing stock (1,000)
(1,300)
Profit 1,700

*Note: While there is a case for treating the sportswear for hire as non current assets, in club accounts it is more usual to treat such items as stock in trade.


Heating Oil
£
Opening stock 1,000
Purchases (4,000 + 200) 4,200
5,200
Less closing stock (700)
Expense for year 4,500


Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
Raw materials
Opening stock 40,0000
Purchases 855,000
895,000
Less closing stock (80,000)
Raw materials consumed 815,000
Wages _50,000
865,000
Factory overheads
Wages 96,000
Rent and rates 22,500
Water and electricity 13,000 131,500
Cost of goods completed 996,500
Factory profit ___3,500
Transfer price 1,000,000

Sales 4,100,000

Less cost of sales
Opening stock 348,000
Purchases and cost of goods produced 3,400,000
3,748,000
Less closing stock (282,000) (3,466,000)
Gross profit 634,000
Profit on disposal of motor vehicle 4,000
Factory profit 3,500
641,500
Less expenses
Interest on loan 36,000
Depreciation – fixtures and fittings 90,000
Motor vehicles 38,000
Wages 108,000
Rent and rates 67,500
Water and electricity 39,000
Motor expenses 60,800
Bad debt 14,000
Repairs 12,000
Bank charges 4,000
Insurance 13,500
Sundry expenses 25,200
Commission to lampshade employee 318
Less UPCS __120 (508,438)
Net profit 133,062


Cherono
Balance Sheet as at 30 June 1998
Non current assets Cost Depreciation NBV
Fixtures and fittings 900,000 (440,000) 460,000
Motor vehicles 152,000 (38,000) 114,000
1,052,000 (478,000) 574,000
Current assets
Stock: Raw materials 80,000
Lampshades 30,000
Less UPCS (120)
Other goods 252,000 361,880
Debtors 108,000
Prepayments 10,500
Bank balance _98,000
578,380
Current liabilities
Creditors 107,000
Accruals 27,318 (134,318) 444,062
1,018,062

Capital 740,000
Add net profit 133,062
873,062
Less drawings (95,000)
778,062
Add loan _240,000
1,018,062


Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
£ £
Income
Annual subscriptions (4,680 + 70 + 230 – (140 + 100)) 4,740
Entrance fees 250
Life membership fees credited (850 + 53) 903
5,893
Training ground fees (7,660 – 470 + 325) 7,515
Sales of sporting requisites 8,774
Investment interest received 626
Insurance commissions received (53 – 11 + 13) 55
Advertising revenue 603
Profit on sale of furniture (370 – 350) 20
Total income 23,486
Expenditure:
Cost of sporting requisites sold
(5,270 + 202 – 163 = 5,309 (purchases)
5,309 + 811 – 1,064 = 5,056)

5,056
Damaged stock etc 137
Wages of grounds man (250 + 3,600 – 300) 3,550
Postages (692 – 4) 688
Stationery (55 + 629 – 36) 648
Rates (300 + 846 – 380) 766
Subscriptions in arrear written off 40
World-wide Athletics Club affiliation fee 50
Training ground upkeep 1,200
Depreciation: buildings 3,500
Furniture, equipment etc
(10% x (7,900 – 800)
__710
Total expenditure 16,345
Surplus of income over expenditure £7,141




Olympiad Athletics Club
Balance Sheet as at 31 October 1983
£ £ £
Non current assets Cost Depreciation Net
Land 4,000 - 4,000
Buildings 35,000 12,900 22,100
Furniture, equipment, etc 7,100 4,410 2,690
46,100 17,310 28,790
Investments
Investments at cost (7,400 + 5,600)
(current valuation £13,150)
13,000
Current assets
Stocks – sporting requisites 927
- stationery 36
- stamps 4
Debtors – subscriptions 230
- insurance commissions 13
Prepayments (300 + 380) 680
Bank – deposit account 3,000
- current account 2,563
Cash 122
7,575
Current Liabilities
Creditors – prepaid subscriptions 100
- Prepaid training
- Ground fees 470
- Premiums 160
- Sporting requisites 202
932
Working capital 6,643
Net assets employed 48,433
Financed by:
Accumulated fund: as at 31 October 1982 36,945
Add:
Surplus of income over expenditure for the year 7,141
As at 31 October 1983 44,086
Life membership fund (4,720 + 530 – (850 + 53) 4,347
£48,433




Accumulated fund b/f
Assets: Land 4,000
Buildings 25,600
Furniture 3,750
Investment 7,400
Stocks 866
Debtors 191
Prepayments 550
cash ___73
42,430
Liabilities
Creditors: Subscriptions 70
Training 325
Premiums 102
Sporting requisites 163
Bank overdraft 105
Membership fund 4,720 (5,485)
36,945


LESSON 7

Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
Shs Shs
Raw materials
Opening stock 100,700
Purchases 716,250
816,950
Less stock of raw materials (79,500)
Raw materials consumed 737,450
Factory wages 382,500
Prime cost 1,119,950
Add opening w/p 85,000
Less closing w/p (126,250) (41,250)
1,078,700
Factory overheads
Depreciation on plant 84,375
Factory expenses 354,000 438,375
Factory cost of completed goods 1,517,075
Add factory profit ( missing figure) 192,925
Transfer price given in the question (par) (38,000 x 45) 1,710,000

Sales 2,775,500
Cost of sales
Opening stock of finished goods 1,200,000
Transfer price 1,710,000
2,910,000
Less closing stock of finished goods (10,125,000) (1,897,500)
878,000
Add factory profit 192,925
1,070,925
Expenses
Depreciation on delivery van 80,250
Sales department wages 150,750
Selling department expenses 277,500
Increase for provision for bad debts 5,000
Provision for unrealized profits 112,500 (626,000)
Net profit 444,925
Share of factory profits
K 154,340
M 38,585 (192,925)
Share of remaining profit 252,000
K 100,800
M 151,200 252,000


Workings for closing stock of completed units

Completed units b/f 30,000
Units manufactured 38,000
Less units sold (45,500)
Closing stock 22,500 x 45 = 10,125,000

K M K M
Drawings 15,000 125,000 Share of factory profit 154,340 38,585
Bal c/d 105,140 54,785 Balance of profit 100,800 51,200
255,140 189,785 255,140 189,785

Kimeu & Maingi
Balance Sheet as at 31 March 1992
Non current assets Shs Shs
Property, plant and equipment
Freehold factory 1,053,750
Factory plant ( 843,750 – 151,250 – 84,375 = 608,125) 608,125
Delivery van ( 401,250 – 80,250 – 86,250 = 234,750) 234,750
1,896,625
Current Assets:
Stock: Raw materials 79,500
W.I.P 126,250
Finished goods 900,000
Debtors 405,000
1,510,750
Current Liabilities
Bank overdraft (176,200)
Trade creditors (150,000)
Accrued expenses and deferred income (86,250)
(412,450)
Net current assets 1,098,300
2,994,925
Capitals: K 1,400,000
M 1,425,000
2,825,000
Current A/c: K 105,140
M 64,785 169,925
2,994,925

The finished good is net of the unrealized profit on closing stock.



Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-8
£ £ £
Sales 404,500
Less
Opening stock 30,000
Purchases 225,000
Carriage inwards 4,000 229,000
Plant depreciation 259,000
Closing stock (35,000)
Cost of sales (224,000)
Gross profit 180,500
Discount received 4,530
Interest received ____750
185,780
Expenses
Carriage outwards 12,000
Vehicle depreciation
[25% x (80,000 – 20,000)] 15,000
Depreciation of plant
[20% x 100,000] 20,000
Discounts allowed 10,000
Office expenses [30,000 + 405] 30,805
Rent, rates , heat and light [8,800 – 1,500] 7,300
Provision for bad debts increase
[(5% x 14,300) – 420]
295
(95,400)
Net profit for year 90,380
Interest charged on drawings etc
Amis 1,000
Lodge 900
Pym 720
2,620
93,000
Less
Salary – Pym 13,000
Interest on capital accounts
Amis 8,000
Lodge 1,500
Pym 500
23,000
Residual profit 70,000
Less
Share of residual profit
Amis ( 5/10) 35,000
Lodge (3/10) 21,000
Pym (2/10) 14,000
70,000

(b)
Current Accounts
A L P A L P
£ £ £ £ £ £
Balances 1,000 500 400 Appropn – salary 13,000
Drawings 25,000 22,000 15,000 - Interest 8,000 1,500 500
Appropn – interest 1,000 900 720 - Residue 35,000 21,000 14,000
Bal c/d 16,000 ¬¬¬¬¬¬¬¬_____ - 11,380 Bal c/d _____- 900 ____-
43,000 23,400 27,500 43,000 23,400 27,500

Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
£’000 £’000
Sales 2,000
Cost of sales
Opening stock 180
Purchases 1,400
1,580
Closing stock (200)
1,380
Gross profit 620
Expenses
Wages and salaries (228 + 12) 240
Sundry expenses 120
Bad and doubtful debts 26
Depreciation:
Building 5
Plant and equipment 24
Interest on loan – Amber __5
420
Net profit 200

Assume profit is earned proportionately throughout the year

Profit and Loss Appropriation Account

Amber Beryl Coral Total
£’000 £’000 £’000 £’000
1/1X6 to 30.6.X6
Salaries 10 10 20
Share of profit:
£80,000 (60:40) 48 32 80
1.7.X6 to 31.12.X6
£100,000 (40:40:20) 40 40 20 100
98 82 20 200






Amber, Beryl and Coral
Balance Sheet as at 31 December 1996
Cost or valuation Aggregate depreciation Net book value
Non current assets
Land at valuation 280 Nil 280
Buildings 250 35 215
Plant, equipment and vehicles 240 74 166
770 109 661
Current assets
Stock 200
Debtors (420 – 16) 404
Less: provision for doubtful debts 30
374
Cash at bank 38
612
Current liabilities
Trade creditor 350
Bonus 12
362 250
Net current assets 911
Long term loan – Amber 50
861
Represented by:

Capital accounts: Amber 368
Beryl 242
Coral 100
710
Current accounts: Amber 82
Beryl 64
Coral _5
151
Proprietor funds 861


CAPITAL ACCOUNTS
A B C A B C
£’000 £’000 £’000 £’000 £’000 £’000
Balances b/f 280 210
Goodwill 80 80 40 Cash 140
Balances c/f 368 242 100 Goodwill (W1) 120 80
Revaluation 48 32
448 322 140 448 322 140
Balances b/f 368 242 100


CURRENT ACCOUNTS
A B C A B C
£’000 £’000 £’000 £’000 £’000 £’000
Drawings 28 24 15 Balances b/f 7 6
Balances c/f 82 64 5 Profit for year 98 82 20
__ __ __ Loan interest ¬¬_5 __ __
110 88 20 110 88 20

Question 4
The solution provided has the workings shown beside the accounts to make the comparison easier. Remember to adhere to previous partnerships and departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
Workings Workshop Petrol/oil Showroom Total
£ £ £ £
Sales and charges:
32,125 32,964 8,500 Cash 73,589
65,892 41,252 81,914 Credit 189,058
98,017 74,216 90,414 Total turnover 262,647

Less materials:
1,932 3,018 20,720 Opening stock 25,670
23,860 41,805 52,100 Purchases 117,765
25,792 44,823 72,820 143,435
(2,752) (2,976) (25,310) Closing stock (31,038)
23,040 41,847 47,510 Usage 112,397
(2) 34,163 5,685 ____- Direct wages 39,848
57,203 47,532 47,510 Cost of sales 152,245
40,814 26,684 42,904 Gross profit 110,402
(1) 1,333 - - Profit on sale of plant 1,333
42,147 26,684 42,904 111,735
Less
(3) 7,024 - 4,391 Indirect wages 11,415
- - 10,200 Salaries 10,200
(4) 2,613 2,945 7,880 Rates 13,438
(5) 1,939 2,185 5,846 Electricity 9,970
(6) 4,477 3,389 4,130 General expenses 11,996
(7) 16,898 8,324 11,302 Depreciation 36,524
32,951 16,843 43,749 Total 93,543
9,196 9,841 (845) Net profit/loss for year 18,192

Less appropriations
Interest on capitals
Duke (5% x £50,0000 (2,500)
Earl (5% x £40,000) (2,000)
Residual profit* 13,692
Duke (6,846)
Earl (6,846)
-
*The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.

Aristocratic Autos
Balance Sheet as at 30 September 1986
Workings Workshop Petrol/oil Showroom Total
£ £ £ £
Non current assets at written down value:
(8) 5,020 4,260 11,010 Freehold buildings 20,290
(8) 24,891 4,859 5,357 Plant, equipment and vehicles 35,107
29,911 9,119 16,367 55,397
Current assets:
2,752 2,976 25,310 Stocks 31,038
1,365 537 - Debtors 1,902
(4) 2,586 2,915 7,799 Prepayments 13,300
316 1,605 30,470 Bank and cash 32,391
7,019 8,033 63,579 78,631
Current liabilities:
4,225 5,602 15,250 Creditors 25,077
(9) 915 564 983 Accruals 2,462
5,140 6,166 16,233 27,539
1,879 1,867 47,346 Working capital 51,092
31,790 10,986 63,713 Net assets employed 106,489
Financed by
Capital accounts
Duke 50,000
Earl 40,000
90,000
Current accounts:
(10) Duke 6,906
(10) Earl 9,853
16,489
106,489



Workings
(1) Plant disposal: Cost
Accumulated depreciation 19,500
(15,633)
Written down value 3,867
Proceeds 5,200
Profit on sale 1,333

Workshop Petrol/oil showroom Total
£ £ £ £
(2) Direct wages:
34,050 5,602 ___- Per list 39,652
113 83 ___- Accrual ___196
34,163 5,685 - Total 39,848
(3) Indirect wages:
6,810 - 4,160 Per list 10,970
214 - 231 Accrual 445
7,024 - 4,391 11,415
(4) Rates (apportioned on basis of freehold buildings at (8) below:
5,199 5,860 15,679 Per list 26,738
(2,586) (2,915) (7,799) Prepayment (13,300)
2,613 2,945 7,880 Total 13,438
(5) Electricity apportioned on same basis as (4) above:
1,838 2,072 5,543 Per list 9,453
101 113 303 Accruals 517
1,939 2,185 5,846 Total 9,970
(6) General expenses (apportioned on basis of turnover:
3,990 3,021 3,681 Per list 10,692
487 368 449 Accruals 1,304
4,477 3,389 4,130 Total 11,996
(7) Depreciation:
Charge for year per (8) below:
2,520 2,840 7,600 Freehold buildings 12,960
14,378 5,484 3,702 Plant, equipment etc 23,564
16,898 8,324 11,302 Total 36,524

Workshop Petrol/oil Showroom
£ £ £
(8) Freehold buildings (cost):
12,600 14,200 38,000 At 1 October 1985 64,800
- - - Additions during year -
_____- _____- _____- Disposals during year _____-
12,600 14,200 38,000 At 30 September 1986 64,800

Provision for depreciation on freehold buildings:
5,060 7,100 19,390 At 1 October 1985 31,550
- - - Disposals during year -
2,520 2,840 7,600 Charge for year 12,960
7,580 9,940 26,990 At 30 September 1986 44,510


5,020
4,260
11,010 Written down value at 30 September 1986
20,290
Plant, equipment etc. (cost):
65,180 22,900 17,450 At 1 October 1985 105,530
26,210 4,520 1,060 Additions during year 31,790
(19,500) _____- ____- Disposals during year (19,500)
71,890 27,420 18,510 At 30 September 1986 117,820

Provision for depreciation on plant, equipment etc
48,254 17,077 9,451 At 1 October 1985 74,782
(15,633) - - Disposals during year (15,633)
14,378 5,484 3,702 Charge for year 23,564
46,999 22,561 13,153 At 30 September 1986 82,713

Written down value
24,891 4,859 5,357 At 30 September 1986 35,107
(9) Accruals (per workings above):
113 83 - (2) 196
214 - 231 (3) 445
101 113 303 (5) 517
487 368 449 (6) 1,304
915 564 983 2,462
(10) Current accounts:
Duke Earl
Opening balance 9,750 10,477
Interest on capital 2,500 2,000
Residual profit 6,846 6,846
Drawings (12,190) (9,740)
Closing balance 6,906 9,583


Question 5
WORKINGS
The first step is to derive the profit for the period:-
£
Closing Assets minus external liabilities
(17,000 + 3,480 + 1,100 + 2,230 + 3,370 – 980)
26,200
Add back drawings (2,000 + 1,600 + 1,800) 5,400
31,600
Opening Less assets minus external liabilities (26,060 – 820) 25,240
Profit for period (1st July to 31st October) 6,360


CAPITAL ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Goodwill w/o - 3,000 3,000 1,500 Opening balances 9,000 8,000 8,000 -
Goodwill raised 2,500 2,500 2,500 -
Closing balances - 7,500 7,500 4,000 Bank 4,000 4,000
Exors of Capital 1,500 1,500
R decd 11,500 - - - Premium (1/5 x 7,500)
11,500 10,500 10,500 5,500 11,500 10,500 10,500 5,500


CURRENT ACCOUNTS
R S T A R S T A
£ £ £ £ £ £ £ £
Balance b/d - - 100 - Balances b/d 140 200 - -
Drawings 2,000 1,600 1,800 - Appropriation a/c 2,120 2,120 2,120 -
Closing balance - 720 720 - (profit)
Exors of R (decd) 260 - - -
2,260 2,320 2,120 - 2,260 2,320 2,120 -

The Capital and Current Accounts are given as workings for the Balance sheet figures.


LESSON 8

Question 1 (a)

AZ Ltd
Manufacturing , Trading Profit and Loss Account for the year ended 31 October 1999
Raw Materials Sh’000 Sh’000
Opening stock – Raw material 380
Purchases – Raw material 9,500
9,880
Less closing stock – Raw material (465)
Cost of raw materials consumed 9,415
Add: direct wages 1,350
direct expenses _395 1,745
Prime Cost 11,160
Factory overheads
Factory expenses 290
Indirect materials 350
Factory insurance 150
Depreciation – plant and machinery 5,160 5,950
Total cost of production 17,110
Add opening W.I.P 560
17,670
Less closing W.I.P – Finished goods (695)
Factory cost of production – finished goods 16,975
Sales 28,550
Less cost of sales
Opening stock – finished goods 420
Factory cost of production – finished goods 16,975
17,395
Less closing stock – finished goods (610) (16,785)
Gross profit 11,765
Less expenses
Sales room expenses 485
Administration expenses 620
Office salaries and wages 898
Vehicle running expenses 656
Bad debts w/o 64
Overdraft interest 725
Debenture interest 800
Depreciation: furniture and equipment 89
Motor vehicles 4,125 (8,462)
3,303
Less dividend (4,000)
Net profit for the year (697)
Add retained profit b/d 5,500
4,803
Less transfer to general reserve (2,000)
Retained profit c/d 2,803


AZ Ltd
Balance Sheet as at 31 October 1999
Non current assets Sh’000 Sh’000 Sh’000
Land & Buildings 30,000 - 30,000
Plant and machinery 25,800 (11,460) 14,340
Furniture and equipment 890 (274) 616
Motor vehicles 16,500 (7,525) 8,975
73,190 19,259 53,931
Current Assets
Stock – Finished goods 610
Raw materials 465
WIP 695
7,360
9,130
Current Liabilities
Bank overdraft 1,175
Creditors 1,000
Accruals 783
Debenture interest 800
Dividends accrued 4,000 (7,758) 1,372
55,303
Financed by:
Authorized and issued capital 40,000
Capital reserve
Share premium 500
Revenue reserve
General reserve 2,000
Retained profit 2,803
45,303
Non current liability
8% debenture 10,000
55,303




















STA
Balance Sheet as at 1 November 19-6
£ £
Buildings 17,000
Equipment 3,480
20,480
Current assets
Stock 1,100
Debtors 2,230
Bank 4,950
8,280
Current liabilities
Creditors (980) 7,300
27,780
Capital: Sam 7,500
Ted 7,500
Abe 4,000
19,000
Current accounts: Sam 720
Ted 220
Abe __- 940
19,940
Estate of Reg. 7,840
27,780
























KK Ltd
Balance Sheet as at 31 October 1998
Shs ‘000’ Shs ‘000’ Shs ‘000’
Non Current Assets
Freehold property 44,500 - 44,500
Furniture and fittings 1,540 (292) 1,248
Motor vehicles 3,500 (965) 2,535
49,540 (1,257) 48,283

Goodwill 500

Current Assets
Stock 4,398
Debtors 1,540
Less provision for doubtful debts (77) 1,463
Rent receivable 35
Cash at bank 10,492
16,388
Current Liabilities
Creditors 332
Accrued expenses 189
Debenture interest 350
Tax payable 8,960
Proposed dividends 4,500 (14,331) 2,057
50,840
Authorized and issued share capital 1,500,000 ordinary shares of Sh. 20 each fully paid

30,000

Capital reserves
Share premium 350

Revenue reserves
General reserve 4,500
Profit and loss account 12,490 16,990
47,340
10% debenture 3,500
50,840










Question 3
(a)
1995 1996
Gross profit percentage
Gross profit
Sales 24,000 = 37.5%
64,000 32,400 = 30%
108,000

Current ratio
Current assets
Current liabilities 23,900 = 1.68:1
14,200 31,000 = 1.52:1
20,400

Quick ratio
Current assets less stock
Current liabilities 23,900 – 12,000 = 0.84:1
14,200 31,000 – 15,000 = 0.78:1
20,400

Debtors collection period
Debtors x 365
Sales 10,500 x 365 = 60 days
64,000 14,000 x 365 = 47 days
108,000

Creditors payment period
Trade creditors x 365
Purchases (W) 6,800 x 365 = 59 days
42,000 9,400 x 365 = 44 days
78,600

Gearing ratio
Loan capital
Total capital 60,000____ = 70%
60,000 + 26,000 60,000____ = 55%
60,000 + 49,000


1995 1996
£’000 £’000
Cost of sales 40,000 75,600
Add: closing stock 12,000 15,000
52,000 90,600
Deduct: opening stock 10,000 12,000
Purchases 42,000 78,600

(b)
• The gross profit margin has fallen when compared with last year, although in absolute terms, both profit and sales are higher. Possibly the firm has lowered the price of goods to increase sales, although there may be other explanations (see part (c) below).
• There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios. However, this is no immediate cause for concern as the company appears to be paying its creditors more promptly than last year.
• The debtors’ collection period, already satisfactory, has decreased still further from 60 to 47 days. There is not enough information to say whether this is all due to good credit control, or whether some sales are being made on shorter credit terms or for cash.
• The creditors payment period has shortened. Possibly the company has become more efficient at paying creditors, or perhaps it is purchasing goods on shorter credit terms.
• The gearing ratio has reduced but it is still too high. The reduction is mainly due to an increase in retained profits and in the revaluation reserve. High gearing involves greater risk for the shareholders.

Any two of the following:

• An error in counting closing stock
• An increase in prices from suppliers not passed on to customers
• Deliberate reduction in margin in an attempt to increase sales volume

(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company ought to be able to pay its debts as they fall due. However, an excessively high current ratio means that resources are tied up in stock, debtors and cash instead of producing profits. Current assets should generally be kept as low as is compatible with efficient production and paying creditors as they fall due.

There is some truth in this statement. High gearing means greater risk, but also, in good times, greater returns. It is important that the percentage return to shareholders is greater than the percentage rate of interest being paid on the borrowings.

Question 4

Application and allotment account
19X1 £ 19X1 £
11 Feb Cash 4,000 10 Feb Cash
11 Feb Share capital
(50,000 @ 70p)
35,000
16 Feb
Cash
Share premium
(50,000 @ 20p)
10,000
______
£49,000 £49,000


Ordinary Share capital account
19X1 £ 19X1 £
29 Sep Forfeited shares 500 11 Feb Application and allotment account
(50,000 @ 70p)

35,000
1 Nov Balance carried down
50,000 1 May Call account
(50,000 @ 30p)
15,000

______ 1 Nov Forfeited shares reissued
___500
£50,500 £50,500

Ordinary Share Premium Account
19X1 £
11 Feb Application and allotment account
(50,000 @ 20p)

10,000

Bal c/d
10,250 1 Nov Forfeited shares reissued account
___250
£10,250 £10,250


Call account
19X1 19X1 £
1 May Share capital 15,000 1 May Cash 14,850
_____ 29 Sep Forfeited shares ___150
£15,000 £15,000


Forfeited Shares
19X1 19X1 £
29 Sep Call account 150 29 Sep Share capital (500 @ £1) 500
1 Nov Forfeited shares reissued
350
____
£500 £500


Forfeited Shares
19X1 £ 19X1 £
1 Nov Share capital 500 1 Nov Cash 400
1 Nov Share premium 250 1 Nov Forfeited shares 350
£750 £750




STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I

The following should be done under examination condition.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
QUESTION ONE
Nafuu Foods Ltd. is a company in the hospitality industry. The following trial balance has been extracted from its books on 31 October 2001.

Sh‘000’ Sh.‘000’
Revenue 816,160
Cost of sales 401,000
Wages and salaries 186,440
Operating expenses 95,860
Insurance 1,180
Directors’ fees 960
Ordinary share capital; 5,200,000 shares of Sh.20
each fully paid 104,000
Profit and loss account, 1 November 2000 77,600
9% debenture stock – secured 160,000
Share premium 18,000
Capital redemption reserve 56,400
Trade debtors and creditors 63,860 61,520
Bad debts written off 240
Audit fees 400
Interest on loan and overdraft 13,900
Depreciation expense 17,300
Accruals 900
Interim dividends paid 26,000
Freehold land and buildings 164,600
Leasehold land and buildings (over 50 years) 125,600
Leasehold land and buildings (over 50 years) 51,900
Furniture and equipment 85,600
Stock 46,400
Prepayments 720
Bank balance 2,820
Investments 9,800
1,294,580 1,294,580


You are provided with the following additional information:

1. The balances of fixed asset accounts as at the beginning of the year and additions during the year were as follows:
Cost or valuation Accumulated depreciation Additions
1 November 2000 during the year
Sh. ‘000’ Sh.‘000’ Sh.‘000’
Freehold land and buildings 157,000 7,600
Leasehold land and buildings
(over 50 years) 121,800 3,800
Leasehold land and buildings
(under 50 years) 60,200 5,800
Furniture and equipment 150,800 52,200 1,800

The company does not provide for depreciation on freehold properties or properties held on lease with 50 years or more to run at the balance sheet date. Properties held on lease with less than 50 years to run are depreciated over the un-expired term. Items of equipment are depreciated over their estimated useful life.

2. Some of the leasehold property in the books costing Sh.7,500,000 had just 50 years remaining on the lease in October 2000 and has not yet been transferred to the under 50 years category.
3. Disposals during the year included the following:

Cost Accumulated depreciation Sale proceeds
Sh. ‘000’ Sh.‘000’ Sh ‘000’

Freehold land and buildings 3,600 4,800
Leasehold under 50 years 2,300 1,700 960

All the sale proceeds have been included in the revenue: no other adjustment has been made.
The determination of depreciation expense for the year included in the trial balance above has correctly been done for those properties not disposed and include in the under 50 years category at the beginning of the year.

1) Freehold land was revalued on an existing basis by a professional valuer but the surplus of Sh.6,000,000 has not yet been brought into account.
2) The investments in the trial balance are temporary quoted securities. As at 31 October 2001 their market value was Sh.10,500,000. Income from the investments of Sh.450,000 is included in revenue.
3) Additional audit fees of Sh.600,000 need to be provided for.
4) The total balance of cash at bank includes Sh.1,500,000 overdraft on one of the accounts.
5) The corporation tax on the year’s profit has been estimated at Sh.27,000,000. Corporation tax on the previous years profit was finally agreed with the tax authorities to be Sh.310,000 more than had been provided for in the profit and loss account of the year.
6) The directors have decided to recommend a final dividend of Sh.5 per ordinary share

Required:
a) A schedule showing fixed assets movements for the year ended 31 October 2001. (10 marks)
b) Profit and loss account for the year ended 31 October 2001. (10 marks)
c) Balance sheet at 31 October 2001. (5 marks)


QUESTION TWO
Rotich and Sinei have been in partnership for several years, sharing profits and losses in the ratio 2:1. Interest on fixed capitals was allowed at the rate of 10% per annum, but no interest was charged or allowed on current accounts.

The following was the partnership trial balance as at 30 April 2001:

Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000

Current accounts
Rotich 400,000
Sinei 300,000

Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
To 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000

Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000

Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,970,000
13,420,000 13,420,000
Additional information:
1. On 1 November 2000, Tonui was admitted as a partner and from that date, profits and losses were to be dated in the ratio 2:2:1. For the purpose of this admission, the value of goodwill was agreed at Sh.3,000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 into the firm of which Sh.375,000 comprised his fixed capital and the balance was credited to his current account.

2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.

3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated, were to be apportioned on a time basis.
4. A charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April 2001, the stock was valued at Sh.1,275,000.
6. Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh.62,500.
7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expense, which was later found to be due to the following clerical errors:
Sales returns of Sh.32,000 had been debited to sales returns but had not been posted to the account of the customer concerned :
The purchases journal had been undercast by S.80,000.
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.

Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners’ current accounts for the year ended 30April 2001. (4 marks)
c) Balance sheet as at 30 April 2001. (7 marks)
(Total: 20marks)

QUESTION THREE
a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account. (6 marks)
b) The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2001:

Receipts Payments
Sh. Sh.
Balance brought forward 288,000 Salaries and wages 254,000
Subscriptions: New equipment 565,000
Year 1999 2000 249,000 Repairs and
Maintenance 124,000
2000 2001 2,050,000 Office expenses 415,000
2001 2002 194,000 Printing and stationery 168,000
Dinner dance 723,000 Purchase ofBeverages 197,000
Beverage sales 657,000 Dinner dance expenses 315,000
Investments income 400,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 218,000
Investments 1,500,000
Balance carried forward 405,000
4,561,000 4,561,000


Balances as at 31 March 2000 31 March 2001
Sh. Sh.

Furniture and fittings (net) 240,000 -
Equipment (net) 690,000 -
Investments at cost 3,500,000 -
Subscriptions in arrears 300,000 375,000
Salaries accrued 68,000 72,000
Stock of beverages 162,000 184,000
Subscriptions in advance 85,000 -

Additional information:

1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively.
3. Investments which had cost Sh.500,000 were sold on 30 March 2001 for Sh.625,000. No entries have been made in the books in this respect.

Required:
a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)

QUESTION FOUR
a) Explain the term “bank reconciliation” and state the reasons for its preparation. (6 marks)
b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that date the bank balance was Sh.706,500 whereas his cash book balance was Sh.2,366,500. His accountant investigated the matter and discovered the following discrepancies:

1) Bank charges of Sh.3,000 had not been entered in the cash book.
2) Cheques drawn by Ssemakula totalling Sh.22,500 had not yet been presented to the bank.
3) He had not entered receipts of Sh.26,500 in his cash book.
4) The bank had not credited Mr Ssemakula with receipts of Sh.98,500 paid into the bank on 30mJune 2001.
5) Standing order payments amounting to Sh.62.000 had not been entered into the cash book.
6) In the cash book Ssemakula had entered a payment of Sh.74,900 as Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cash book.
8) Ssemakula had brought forward the opening cash balance of Sh.329,250 as a debit balance instead of a credit balance.
9) An old cheque payment amounting to Sh.44,000 had been written back in the cash book but the bank had already honoured it.
10) Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had credited some deposits amounting to Sh.832,500 to another customer’s account. However, acting on information from his customers, Ssemakula had actually entered the expected receipts from the debtors in his cash book.


Required:
i) A statement showing Ssemakula’s adjusted cash book balance as at 30 June 2001. (9 marks)
ii) A bank reconciliation statement as at 30 June 2001. (5 marks)
(Total: 20 marks)

QUESTION FIVE
The accounting profession has for a long time relied on certain accounting conventions to guide accounting practice. Yet the application of the same conventions has been the source of criticism of the quality and relevance of information contained in financial reports.
Some of these conventions include:

a) The business entity principle.
b) The historical cost principle.
c) The monetary principle.
d) The matching principle.
e) The conservatism principle.

Required:
For each of the principles listed above:

a) Explain its meaning (5 marks)
b) Justify its use. (5 marks)
c) Explain any weaknesses associated with its use. (5 marks)


END OF MOCK EXAMINATION

NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING

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