PRINCIPLES OF

ACCOUNTS
THE MASTER KEY
Grade 10 – 12 examination concise .

2018 REVISED AND STANDARDIZED ACCORDING TO THE EXAMINATION SPECIFICATIONS.

2018 VERSION
NDOL A DISTRICT PRODUCTION
RESOURCE TEAM
N.M Kachamba
1. Kachamba Norman Team Coordinator, Kanini Secondary School

2. Mwanakasale Prudence – Lubuto Secondary School

3. Clande Bwalya - Kansenshi Secondary School

 4. Kasonde Veronica – Kayele Secondary School

5. Fungai Koneki Mpofu – Kaniki Secondary School

6. Kayumba. V.K – Ndeke caritas secondary school

Table of Contents
1 Introduction to accounting ............................................................................................................. 35
1.1 What is the meaning of Principles of Accounts? ......................................................................................... 35
1.2 Explain the importance of Principles of Accounts ....................................................................................... 36
1.3 Identify career prospects in the Accounting Profession .............................................................................. 36
1.4 Identify the Accounting Concepts................................................................................................................. 36
1.5 Explain the accounting concepts .................................................................................................................. 36
2 Business environment and transactions ..................................................................................... 38

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1.6 2.1 What is a business .................................................................................................................................. 38
2.2 Components of a business ........................................................................................................................... 38
1.7 Assets ............................................................................................................................................................ 38
1.8 Liabilities ........................................................................................................................................................ 38
2 Transactions and their effects on the balance sheet. ................................................................ 39
1.9 3.1 define a business transaction:- .............................................................................................................. 39
1.10 Identify different types of transactions ......................................................................................................... 39
1.11 Effects of transaction on the accounting equation ...................................................................................... 40
1.12 Recording business transactions: ................................................................................................................ 41
1.13 CLASSIFICATION OF ACCOUNTS: ........................................................................................................... 41
1.14 Procedure for recording business transactions. .......................................................................................... 42
1.15 Recording transactions in their appropriate ledger accounts. .................................................................... 43
2 4 books of prime entry .................................................................................................................... 44
2.1 4.1 Cash Book ............................................................................................................................................... 45
2.2 4.2 The petty cash book ............................................................................................................................... 48
2.3 4.3 PURCHASES DAY BOOK ..................................................................................................................... 50
2.4 4.4 PURCHASES RETURNS DAY BOOK .................................................................................................. 51
3 5.THE TRIAL BALANCE - INTRODUCTION .................................................................................. 55
3.1 OBJECTIVES QUESTIONS ......................................................................................................................... 55
3.2 5.1 PREPARE A TRIAL BALANCE ............................................................................................................. 55
4 ................................................................................................................................................................... 59
5 FINAL ACCOUNTS OF SOLE TRADERS ....................................................................................... 59
5.1 Objective questions ....................................................................................................................................... 59
5.2 FINAL ACCOUNTS ....................................................................................................................................... 60
5.3 PROFIT AND LOSS ACCOUNT .................................................................................................................. 63
5.4 Points to remember about the balance sheet.............................................................................................. 66
6 Capital expenditure and revenue Expenditure. ........................................................................... 68
1.1 Rationale ........................................................................................................................................................ 68
6.1 1.2 objectives ............................................................................................................................................. 69
6.2 1.3 Points to note .......................................................................................................................................... 69
6.2.1 Definition ................................................................................................................................................... 69
6.2.2 Classification ............................................................................................................................................ 69
6.2.3 ......................................................................................................................................................................... 72
6.2.4 Capital and revenue income .................................................................................................................... 72
6.2.5 Treatment of loan interest ........................................................................................................................ 73
7 Depreciation of fixed assets........................................................................................................... 74
7.1 Objectives ...................................................................................................................................................... 74
7.2 Points to note:................................................................................................................................................ 74
7.3 Definition ........................................................................................................................................................ 74
7.4 Causes of depreciation ................................................................................................................................. 74
7.4.1 Physical deterioration ............................................................................................................................... 74
7.4.2 Economic factors ...................................................................................................................................... 74
7.5 Methods of calculating depreciation charges. ............................................................................................. 75
7.5.1 Straight Line Method ................................................................................................................................ 75
7.5.2 The Reducing Balance Method ............................................................................................................... 75
7.6 Depreciation provisions and assets bought or sold .................................................................................... 75
7.6.1 Double entry records for depreciation ..................................................................................................... 75
7.7 The disposal of an asset ............................................................................................................................... 78
8 Bad debts, provisions for doubtful Debts .................................................................................... 82
8.1 Objectives ...................................................................................................................................................... 82
8.2 Definition ........................................................................................................................................................ 82

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 8.2.1 Bad debts.................................................................................................................................................. 82
8.2.2 Accounting entries .................................................................................................................................... 83
8.2.3 Provisions for doubtful debts ................................................................................................................... 83
8.2.4 points to note: ........................................................................................................................................... 84
8.3 Prepayments and accruals ........................................................................................................................... 85
8.4 Objectives. ..................................................................................................................................................... 85
8.5 ACCRUALS ................................................................................................................................................... 85
8.5.1 Amounts accrued to the business ........................................................................................................... 87
9 Objectives ......................................................................................................................................... 88
10 Definition ...................................................................................................................................... 88
10.1 Summary of ledger account classes and nature of balances: .................................................................... 88
11 Trial balance construction. ...................................................................................................... 90
12 errors not disclosed by the trial balance. ................................................................................ 91
13 Correction of errors – suspense account ................................................................................ 92
13.1.1 Rationale .............................................................................................................................................. 92
13.1.2 Objectives ............................................................................................................................................ 92
13.1.3 Suspense account............................................................................................................................... 93
13.2 Steps in correcting errors.............................................................................................................................. 93
14 Practice ......................................................................................................................................... 95
14.1 Objectives ...................................................................................................................................................... 96
Definitions and Explanations ....................................................................................................................................... 96
14.2 Purpose of control accounts ......................................................................................................................... 96
14.3 Sources of information for control accounts–Sales ledger control account............................................... 97
15 Format for sales/debtors ledger control accounts ................................................................. 97
15.1 Sources of information: Sales ledger control accounts............................................................................... 97
16 Sources of information: purchases ledger control account ..................................................... 97
16.1 Set offs/transfers/contras .............................................................................................................................. 98
17 ............................................................................................................................................................... 101
18 The bank reconciliation statements. ...................................................................................... 101
18.1 Objectives: ................................................................................................................................................... 101
18.2 Definitions .................................................................................................................................................... 101
18.3 The purpose of the bank reconciliation statement .................................................................................... 101
18.4 Interpretation of the cash book bank account. .......................................................................................... 101
18.5 Interpretation of the bank statement. ......................................................................................................... 102
18.6 Reasons for differences between the cash book balance and the bank statement balance ................. 102
18.6.1 Uncredited items ............................................................................................................................... 102
18.6.2 Unpresented Cheques ...................................................................................................................... 102
18.6.3 Standing orders ................................................................................................................................. 102
18.6.4 Direct debits ....................................................................................................................................... 103
18.6.5 Bank charges..................................................................................................................................... 103
18.6.6 Dishonored Cheques ........................................................................................................................ 103
18.6.7 Credit transfers / direct credits ......................................................................................................... 103
18.6.8 Interest allowed by the bank ............................................................................................................. 103
18.7 Drawing up a bank reconciliation statement .............................................................................................. 103
18.8 Post-dated cheque ...................................................................................................................................... 105
18.8.1 Accounting treatment ........................................................................................................................ 106
18.9 Bank overdrafts ........................................................................................................................................... 106
19 accounting for Clubs and societies ........................................................................................ 107
19.1 Objectives. ................................................................................................................................................... 107
19.2 Not-For-Profit Organizations....................................................................................................................... 107

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20 INCOMPLETE RECORDS – SINGLE ENTRY .......................................................................... 120
20.1 Objective ...................................................................................................................................................... 120
20.2 Definitions .................................................................................................................................................... 120
20.3 Reasons for not keeping double entry system .......................................................................................... 120
20.4 Difference between double entry system & incomplete Records. ............................................................ 120
20.5 Sources of Information ................................................................................................................................ 120
20.6 ASCERTAINMENT OF PROFIT OR LOSS FROM INCOMPLETE RECORDS ..................................... 121
20.7 Statement of affairs method: ...................................................................................................................... 121
20.7.1 Computation of Profit ........................................................................................................................ 121
20.8 ............................................................................................................................................................................. 122
20.9 Procedure in coming up with full sets of accounts. ................................................................................... 122
20.10 Tasks involved in coming up with financial statements ....................................................................... 122
20.11 CREDITORS LEDGER CONTROL ACCOUNT ................................................................................... 122
Computation of Purchases using the Cost of goods sold ............................................................... 122
Computation of Sales ............................................................................................................................. 122
21 Profit as an increase in capital ................................................................................................ 125
21.1.1 ..................................................................................................................................................................... 125
21.1.2 ..................................................................................................................................................................... 125
21.1.3 Calculation of purchases and sales using the statement format. ................................................... 125
22 GROSS MARGINS AND MARK UPS........................................................................................ 126
22.1 Gross Profit Percentages............................................................................................................................ 126
22.1.1 Relationship between margin and mark up ..................................................................................... 126
23 ACCOUNTING FOR PARTNERSHIP BUSINESS .................................................................... 127
23.1 Rationale ...................................................................................................................................................... 127
23.2 Objectives .................................................................................................................................................... 128
23.3 Purpose for individuals entering into partnership ...................................................................................... 128
23.4 Partnership Agreement: .............................................................................................................................. 128
23.5 Where no Partnership agreement Exists: .................................................................................................. 128
In partnership business where no partnership agreement exists the following occurs ............. 128
23.6 Final accounts for partnership business .................................................................................................... 129
23.7 New Items .................................................................................................................................................... 129
23.7.1 Profit and Loss appropriation Account. ............................................................................................ 129
23.8 Contents of profit and loss appropriate Account ....................................................................................... 129
23.8.1 Drawings: ........................................................................................................................................... 129
23.8.2 Interest on Drawings ......................................................................................................................... 129
23.8.3 Interest on Capitals: .......................................................................................................................... 130
23.8.4 Salaries to partners: .......................................................................................................................... 130
23.8.5 Share of residues: ............................................................................................................................. 130
24 Format for partnership appropriation account. .................................................................... 130
Practice Question one ............................................................................................................................ 130
25 ............................................................................................................................................................... 133
26 Practice Question 2 ................................................................................................................. 133
27 MANUFACTURING ACCOUNTS .............................................................................................. 136
27.1 Rationale ...................................................................................................................................................... 136
27.2 Objectives: ................................................................................................................................................... 136
27.3 Definition of terms associated with manufacturing .................................................................................... 136
27.4 ............................................................................................................................................................................. 136
27.5 The types of costs ....................................................................................................................................... 136
28 Format for manufacturing account:........................................................................................ 137

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29 ............................................................................................................................................................... 143
30 ACCOUNTING ETHICS.............................................................................................................. 144
30.1 IDENTIFY EFFECTS OF NON ADHERENCE TO ETHICS ..................................................................... 144
30.2 Corruption .................................................................................................................................................... 144
30.3 Fraud............................................................................................................................................................ 145
30.4 Money laundering........................................................................................................................................ 145
30.5 Embezzlement ............................................................................................................................................. 145
30.6 Breach of confidentiality .............................................................................................................................. 145
31 Explain the benefits to the company of adhering to ethics in accountancy [5] ......... 145
31.1.1 Better Professional Environment ...................................................................................................... 145
31.1.2 Increased Reputation ........................................................................................................................ 145
31.1.3 Standards for Employee Discipline .................................................................................................. 146
31.1.4 Decreased Legal Liability.................................................................................................................. 146
32 INTERPRETATION TO FINAL ACCOUNTS............................................................................. 146
32.1 OBJECTIVES .............................................................................................................................................. 146
32.2 Importance of Accounting Ratios /Percentages ........................................................................................ 146
32.3 Various Accounting Ratios ......................................................................................................................... 147
32.3.1 Return On Capital Invested (ROCE) ................................................................................................ 147
32.3.2 Return on Capital Employed............................................................................................................. 147
32.3.3 Acid Test Ratio .................................................................................................................................. 147
32.3.4 Liquidity Ration .................................................................................................................................. 147
32.3.5 Capital Employed .............................................................................................................................. 147
32.3.6 Working Capital ................................................................................................................................. 147
32.3.7 Creditors/ Purchases Ratio ............................................................................................................... 147
32.3.8 Debtors/ Sales Ratio ......................................................................................................................... 147
32.3.9 Rate of Stock Turn or Turnover ........................................................................................................ 147
32.3.10 Turnover............................................................................................................................................. 147

3. BOOKS OF PRIME ENTRY AND SOURCE DOCUMENTS

32. Subsidiary books are also known as
……………………………………………………………………..
A. Books of prime entry B. Books of first entry C. Book of Original Entry D. All of the
above
33. Which is both a book of prime entry and a ledger?

A Cash Book B General Journal

C Purchases Journal D Sales Journal
34. Every double entry in the journal proper should have summary and this is called a
A. Balance B. detail C. foil D. narration

38. Which of the following documents is used to write up the Petty Cash Book?
A. Receipt B. Invoice C. Petty Cash Voucher D. Cheque

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 39. Trade discount is recorded in the …………………..
A Cash Book B Cash Account
C Purchases and Sales Account D Purchases and Sales Journal
40. An original invoice is used for recording in the
A. Purchases Returns Day Book B. Sales Returns Day Book
C. Purchases Day Book D. Sales Journal
41. The explanation of the double entries marked in the Journal is called
A. A Balance B. details c. folios D. a narration

42. The Double entry is completed in the Cash Book for one of the following entries
A. Drawings B. contra entry C. Sales entry D. Purchases entry
43. A purchases invoice shows 15 Hems costing K60, 000 each, less 20% trade discount and cash
discount of 5% if paid within the credit period, the amount of the cheque will be
A. K180 B. 684 C. K36 K720
44. Which of the following should be entered in the journal?
(i) Payment for cash purchases
(ii) Fixtures bought on credit
(iii) Credit sale of goods
(iv) Sale of surplus machinery
A. (i) and (iv) B. (ii) and (iii) C. (iii) and (iv) D. (ii) and (iv)

45. Credit Notes issued by us will be entered in our

A. Sales Account B. Returns Inwards Account C. Returns outwards D. Returns Inwards
Journals
46. Which of the following is the book of original entry?
A. The Sales (debtors) ledgers B. The purchases Journal
C…..The general Journal D. The purchases (creditors) ledger
47. Which document does the firm use to record the goods sold on credit?
A. Debit Notes B. Purchases Invoice C. Sales invoice D. Customers
Statement
48. Given a desired cash float of K200. If 146 is spent in the period. How much will be reimbursed
at the end of the period?
A. 200 B. 540 C. K254 D. K 146
49. Invoices received are
A. First entered In the cash journal
B. First entered in the purchases journal
C. First entered in the sales journal
D. First entered in the general journal
50. The General Journal differs from all the other Subsidiary books. This is because it
A. Records only assets bought in the business with narrations included
B. Records transactions of a usual nature chronologically
C. Records transactions of un usual nature chronologically
51. Record transactions alphabetically an organization’s chief cashier gives the petty cashier K50
each week for small expenditures. In turn, the petty cashier asks for re-imbursement of
whatever she has spent from the chief cashier. This is a system called
A. Standing order B. Double entry system C. Floating system D. Imprest system.

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52. Cheque book counter foils are used for recording
A. Cash paid into Bank
B. Bank credit transfer
C. Payments received from customers through the bank
D. Payments made to suppliers through the bank
53. The word Subsidiary means
A. “ giving help to the owner of the business”
B. “giving help to the capital of the business”
C. “giving additional help to the manager”
D. “giving the ledger a proper system of accounting”
54. What document summarizes the day to day transactions between the buyer and the seller at
the end of the month?
A. Control Account B. Statement of account C. Bank statement f Account D. Bank

55. A debtor owes his supplier K500 000. What percent of cash discount is he allowed if he sends
a cheque for K475, 000 after 14 days?
A. 95% B. 5% C. 5.2% D. 9.5%

56. Which of the following documents is used to write up the petty cash Book?
A. Receipt B. Invoice C. Petty cash voucher D. Cheque.

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57. We originally sold 25 items at K12000 each, less 333 percent trade discount. Our customer
now returns 4 items to use. What is the amount of Credit Note to be issued?
A. K48 000 B. K36 000 C. K32 000 D. K16 000.
58. The purpose of sending a Credit Note is to
A. Inform the buyer about goods payable
B. Increase the amount owed by the buyer
C. To inform the buyer the amount he owes the seller
D. To reduce the amount the buyer owes the seller

59. A Debtor pays K260 000 receiving 5% cash discount. How much did he pay?
A. K247 000 B. K13 000 C. K273 000 D. K507 000

60. The total of sales Returns journal is posted to the

A. Credit side of sales Returns Account
B. Credit side of Side of sales ledger
C. Purchases ledger
D. Debit side of purchases returns account

61. A Debit Note received from a supplier for an undercharge

A. Increases the value of goods sold
B. Increases the value of the goods
C. Is credited to the bank Account
D. Is debited to the bank Account

62. The number which indicates where the corresponding entry is found is known as
A. Column number B. folio number C. batch number D. patent number

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63. A computer costs K500 excluding V.A.T. if VAT is at the rate of 10% percent, the price
including V.A.T will be
A. K530 B. K670 C. K450 D. K550

64. Cash discount is an allowance for

A. Prompt payment for goods bought
B. Enabling a trader make profit
C. Goods bought
D. Goods bought on credit
4 DOUBLE ENTRY AND THE LEDGER

65. Mr Banda brings his private motor car into business, the entry would be :
A. Dr, capital Cr cash B. Dr capital, Cr Motor car C. Dr motor car Cr, capital
D. Dr Motor Car Cr cash.
66. Which of the following are personal accounts? (i) Building (ii) Wages (iii) Debtors (iv) creditors
A. (i) and (iv) only
B. (ii) and (iii) only
C. (iii) and (iv) only
D. (ii) and (iv) only
67. “Posting” the transactions in bookkeeping means
A. Making the first entry of double entry
B. Entering items in a cash book
C. Making the second entry of a double entry transaction
D. Something other than the above
68. Discount received are
A. Deducted when we receive cash
B. Given by us when we sell goods on credit
C. Deduced by us when we pay our accounts
D. None of the above
69. The proprietor paid a creditor Kalaba from his money outside the firm. The entry to record this
would be
A. Dr Creditors Cr Cash
B. Dr Capital Cr Kalaba
C. Dr Kalaba Cr Capital
D. Dr Capital Cr Bank
70. The ledger is the book ……………………..
A. from which the trial balance is extracted
B. in which transactions are first recorded
C. of original entry
D. here errors are first recorded
71. Personal accounts are related to :
A. Assets and liabilities
B. Expenses, losses and incomes
C. Debtors and creditors
D. Capital and creditors

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72. When goods are taken for use by the proprietor, the posting to the ledger is
A. Dr stock, Cr purchases
B. Dr proprietor, Cr sales
C. Dr Drawings, Cr stock
D. Dr Drawings, Cr purchases

73. Which one of the following is a nominal account?

A. Rent paid B. Creditors C. Debtors D. Assets
74. Which of the following items would not appear in a purchases ledger Account?
A. Sales Returns
B. Purchases
C. Cash payments made to suppliers
D. purchases returns

75. Which account usually has a debit balance?

A. Sales account
B. Purchase account
C. Purchase Returns account
D. Capital account

76. The total of the “ Discount allowed ‘’ column cash book is posted to
A. The debit of the discounts allowed account
B. The debit of the discounts Received account
C. The credit of the discounts allowed Account
D. The credit of the discounts Received account
77. An example of Real Account is ……………….
A Drawings Account B Makaya Account
C Cash Account D Electricity Account
78. The customer’s personal accounts are found are found in ………….
A Nominal Ledger B General Ledger
C Sales Ledger D Purchases Ledger
79. The recording of two aspects of a transaction involves ……………
A Double entry B. Accounting equation
C. Debit entry D. Credit entry
80. M Mwata was a sales agent for Standard Sales Co. Ltd and was receiving 15%
commission on
Monthly sales. In one month he sold goods by cheque worth K15 500. Which entry below was
Correct to record commission in M. Mwata’s books?
Account Debited Account Credited
A Bank account K2 325 Sales Account K235
B Sales Account K2 325 Bank Account K2 325
C Bank Account K2 325 Commission Received K2 325
D Commission Received K2 325 Bank Account K2 325
81. The double entry is completed in the ………..
A Sales book B Ledger book
C Purchases book D General Book
82. In the “date” column of a ledger account you enter the date when the …………
A Transaction is recorded in the ledger account

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 B Business started operating
C Transaction took place
D Accounting year started
83. The owner withdraws goods with a selling price of K20 000 from the business for his own
use.
The goods cost him K15 000. This should be recorded by:
DEBIT CREDIT
A Purchases Account K20 000. Drawings Account K20 000
B Drawings Account K15 000 Purchases Account K15 000
C Drawings Account K20 000 Purchases Account K20 000
D Purchases Account K15 000 Drawings Account K15 000
84. The debtors ledger is the book in which ………………. are kept
A. Suppliers accounts B. Customers’ accounts
C……Capital account D. Drawings account
85. The total of the returns inwards journal is posted to the
A. Debit side of the sales account
B. Credit side of the purchases returns account
C. Debit side of the sales returns account
D. Credit side of the side account

86. The of Accounts is called the

A. The ledger B. subsidiary C. Book of original entry D. Accounting Book
87 . What is the balance on the following account on 31 st may 2008?
T. Bwalya’s Account.
Dr Cr
1.05.08 Balance 205 17.05.08 Cash 300
14.05.08 Sales 360 28.05.08 Sales Returns 50
30.05.08 Sales 180

A. A credit balance of 395

B. A debit balance of 360
C. A debit balance of 395
D. There is a nil balance on the account

88. Which of the following are correct?

A/C to debit A/C to credit
(i) Bought office furniture for cash office furniture Cash
(ii) A debtor C. Tembo pay us by cheque Bank C. Tembo
(iii) Introduced capital by K. Mule Capital Bank
(iv) Paid a creditor C.Phiri by cash C. Phiri cash

A. (i), (ii) and (iii) only B. (ii), (iii) and (iv) only C. (i) (ii) and (iv) only D. (i) and (iv) only

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89. Which is the correct entry to record Commission received by cheque?
A/C to Dr A/C to Cr
A. Bank Sales
B. Sales Bank
C. Bank Commission Received
D. None of the above.
90. A credit balance is an account which occurs when
A. The two sides of an account are equal
B. The credit side of an account is greater than the debit side
C. The debit side of an account is greater than the credit side.
D. One side of an account has nothing recorded on it.
91. Repairs to the proprietors private house should be
A. Dr to the drawings account B. Cr to the drawings account C. Dr to the repairs account
D. Cr to the repairs account
92. Which of the following are examples of nominal account?
(i) Star Motors (ii) cash account (iii) postage account (iv)furniture and fittings (v)
wages account
A (ii) and (v) B. (i) (ii) and (v) C. (iii) (vi) D. (ii) (iv) and (v)
93. Show the effect of transaction in which the owner puts an extra K4,000 cash into the business
A. Debit cash credit owner
B. Debit business and credit cash
C. Debit bank and credit capital
D. Debit cash and credit capital
94. Mande owns a toyshop. He sells a toy to chipo who pays cash. How will mande record this
transaction?
A. Debit cash and credit sale
B. Debit cash and credit chipo
C. Debit sale and credit cash
D. Debit chipo and credit sales
95. Which of the following best describe the accounting equation
A. Asset +capital=liabilities
B. Capital –Asset = liabilities
C. Capital - liabilities =Assets
D. Assets – liabilities = capital

96. The recording of two aspects of transaction involves..

A. double entry
B. accounting equation
C. debit entry
D. credit entry

5 THE TRIAL BALANCE

97. Which of the following is the heading for the Trial Balance?
A. Trial Balance for the year ending 31st December 2001
B. Trial Balance as at 31st December 2001
C. Trial Balance for the month ending 31st December 2001

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 D. Trial Balance as at year ending 31stDecember 2001
98. The following balances are available in the books of D. Mwanza a trader as at 31 st December,
2016
Sales 8000
Drawings 2200
Sales Returns 800
Purchases 5000
Opening stock 1000
Purchases Returns 1500
Insurance 500
Using the information above prepare the Trial Balance to find the totals
A. Dr 7300, Cr 7300 B. Dr 9500, Cr 9500 C. Dr 13800, Cr 13800 D. Dr 3000, Cr
3000

99. A business prepares a Trial Balance so as to

A. Calculate the profit and Loss account
B. Show the financial position
C. Check on the arithmetical accuracy of double entry
D. Check the cash and bank balances

100. In the trial balance the balance on the provision for Depreciation Account is
A. Shown as a credit item
B. Not shown, as it is part of depreciation
C. Shown as a debit item
D. Sometimes as a credit, sometimes as a debit.
6 FINAL ACCOUNTS

101. Carriage outwards is charged to the profit and loss account since it is an expense that
is concerned with
A. buying of goods B. Selling of goods
C. purchase of fixed assets D. delivery of goods being returns to customers
101. Net profit is calculated in
the………………………………………………………………………………..
A. Trading Account B. Profit and Loss Account C. Trial Balance D. balance sheet
102. Freight charges should be charged to
A. The trading account
B. The profit and loss account
C. The balance sheet
D. The profit and loss appropriation account
103. Import Duty and Freight Charges are expenses to the business. In which section of the
final Accounts should they appear? In the …………..
A Profit and Loss Account B Trading Account
C Profit and Loss Appropriation Account D Balance sheet
104 . In which statement is gross profit calculated?
A Balance Sheet B Trial Balance
C Profit and Loss Account D Trading Account

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 105. A sole proprietorship business is best described as …………….
A A manufacturing company
B A business that buys and sells goods at a profit
C A one man business
D A non-profit making organization
105. Which of the following should not be called sales?
A. Office fixtures sold B. Cash Sales
B. Goods Sold on credit D. Sale of an item previously included in purchases
106. Which of the following best describes the meaning of “ purchases”
A. Item bought B. Bought goods on credit C. Goods bought for sale D. Goods paid for
107. When preparing final accounts, Revenues should be
A. Debited to the profit and loss account
B. Credited to the Trading Account
C. Debited to the Trading Account
D. Credited to the Trading Account
108. In the absence of drawings and additional capital, capital at the end less capital at start is equal to
A. Net profit B. Gross profit C. Net worth D. Drawings
109. Cost of goods sold is equal to
A. Sales minus purchases
B. Purchases minus closing stock, minus purchases Returns
C. Purchases minus Returns outwards
D. Opening stock, plus purchases minus Returns outwards minus closing stock.
110. The Trading Account of a firm for the year ended 30 th June, 2001 shows the following details;
Stock 01.0.2000 K59, 360
Sales K838, 400
Purchases K614, 880
What is the gross profit?
A. K833,840 B. K824, 480 C. K268, 960 D. K209, 600
111. Carriage inwards
A. Increases the cost of sales
B. Increases the cost of purchases
C. Increases the expense of the business
D. Increases the gains of the business
112. Cost of goods sold is equal to
A. Sales minus purchases
B. Purchases minus closing stock, minus purchases Returns
C. Purchases minus Returns outwards
D. Opening stock, plus purchases minus Returns outwards minus closing stock.
113. You are given the following:
Cash k80 000, machinery 45 000, Debtors 50 000, creditors k26,000, stock k30,000; Mortgage
k42,000, Bank overdraft k18 000, find working capital.
A. K116 000 B. K214 000 C. K133 000 D. K127 000

7 ADJUSTMENT TO FINAL ACCOUNTS

114. When a fixed asset can no longer be used or depreciated in the business due to its obsolete state,
it is generally referred to as having a
A. Nominal value B. scrap value C. Book value D. Market value

14
115. The Omission of a rent receivable owing figure from the profit and Account will
A. Increase the net profit for the business
B. Reduce the net profit for the business
C. Increase the gross for the business
D. Reduce the gross for the business
116. For which category of fixed assets is the revaluation method of depreciation most appropriate?
A. Loose tools B. Motor vehicles C. Office equipment D. Plant and Machinery
117. If an accumulated depreciation account is in use then the entries for the year’s depreciation
would be
A. Credit, provision for depreciation, Debit profit and loss account
B. Debit asset Account, Credit profit and loss account
C. Credit Asset Account, debit provision for Depreciation Account
D. Credit profit and Loss account, debit provision for Depreciation Account
118. The books of a trader are closed on 31 st for December. In the rates Account which shows a
total of K220 000 , is included a payment of K96 000 representing rates for the half year 1 st
October 2002 to 31st March 2003. The amount charged to the profit and loss account will be
A. K124 000 B. K127 000 C. K316 000 D. K172 000
119. The central sand supply corporation depreciates. Its vehicles using the straight line method
and all the trucks are estimated to last 5 years. A truck was bought for K25 000 000 and sold
at the end of the third year for
K13 000 000. We can then say the truck was sold at
A. A profit of K3 000 000 B. A loss of K3 000 000
C. A profit of K2 000 00D. A loss of K2 000 000
120. At the beginning of the year provision for bad debts account had balance of K65 500. During
the year K35 500 was written off as bad debts. At the end of the year the debtors balance was
K 800 000 and a provision for bad debts of 5% was to be maintained. How much was taken to
the profit and loss account?
A. K40 000 Dr B. K40 000 Dr C. K10 000 Cr D. K10 000 Dr
121. The books of trader are closed on 31 December. In the rates account, which shows a total of
st

K220, is included, a payment of K96 representing rates for the half year 1 st October 2002 to
31st March 2003. The amount charged to the profit and loss account will be
A. K124 B. K127 C. K316 D. K172
122. At the beginning of the month the Debtors figure was K360 500, k60 500 was written off as
bad debt.
K200 00 was received from the debtors at the end of the month, and K450 000 was owing
from the debtor at the end of the month. How much were credit sales?
A. K710 500 B. K1070 000 C. K810 000 D. K350 000
123. The creditors balances at the beginning of the month was K328 000, during the month goods
worth K735 000 were purchased and cheques amounting to K800 500 were paid. What was
the creditors closing balance?
A. K1063 000 Cr B. K262 500 C. K1128 500 Dr D. K262 500 C of Cr
124. On 1st January 2010, insurance was K48. During the year K72 was paid. On 31 st December
2010, insurance paid in advance was K24. Calculate the amount charged to the profit and loss
account.
A. K72 B. K24 C. K96 D. 120

15
125. A company makes a provision for doubtful debts of 5% on debtors. On 1 st January the balance
standing on the provision for Doubtful debtors amount to k300, 000. The provision for doubtful
debts per 31st December is?
A. Decrease by K5000 B. Increase by K5000
C……Increase by K15 000 D. Decrease by K15 000
126. At the beginning of the year the provision for bad debts account had a balance of k65 500.
During the year k35 500 was written off as bad debts. At the end of the year the Debtor
balance was k800 000 and a provision for bad debts of 5% was to be maintained. How much
was taken to profit and loss Account?
A. K40 000 , debit side
B. K40 000 , credit side
C. K10 000 , credit side
D. K10 000 , debit side
127. If a provision for depreciation account is in use, then the entries for the year’s depreciation
would be
A. Cr profit and loss account, Dr Provision for depreciation account
B. Dr Asset account, Cr profit and loss account
C. Cr Asset account, Dr provision for depreciation account
D. Cr provision for depreciation, Dr profit and loss account
128. A Trial Balance shows provision for bad debts of K 190 and debtors K 800. It is required
maintained the provision at 2.5 percent of Debtors. To do this profit and Loss Accounts should
show:
A. A credit of K 20 B. A credit of K 28 C. A credit of K 490 D. A credit of K
394
A decrease in the provision for bad debts will
A. Increase cash/ Bank balance
B. increase net profit for the year
C. decrease net profit for the year
D. decrease the cash/ Bank balance
129. A Motor Van costing K100, 000 is expected to have a working life of five years and a scrap
value of K10, 000 at that time. Using the straight line method of depreciation, the annual
charge of depreciation will be
A. K20, 000 B. K10, 000 C. K18, 000 D. K2 2000
130. A trader took out an insurance policy 1 st March 2007, the annual premium being K724, 000. He
closes his books on 31st December of the same year. How much of the amount was paid in
advance?
A. K60, 000 B. K540, 000 C. K180, 000 D. K120, 000
131. A Debtor who owes your company K200 is declared bankrupt. He is able to pay only K4 in
every K10 he owes. How much will be written off as a bad debt?
A. K120 B. K100 C. K180 D. K80

132. A firm bought a machine for K320, 000. It is to be depreciation at a rate of 25 percent using the
reducing balance method. What would be the remaining book value after two years?
A. K160, 000
B. Value of partly finished goods
C. Value of goods purchased

16
 D. Value of finished goods on hand
133. An increase in provision for Bad debts will
A. Increase the bank balance
B. Increase net profit for the year
C. Decrease net profit for the year
D. Decrease the cash balance
134. The depreciation which allows same amount to be deducted annually from an asset is called……
A Straight line method
B Diminishing balance method
C Revaluation method
D Reducing balance method
135. Prepaid rent and salaries at a close of a trading period are listed under ………………..
A Long term liabilities B Fixed assets
C Current asset D Current liabilities
136. The cost of a machine is K250 000, provision for depreciation is K60 000, depreciation charges
For the year are K19 000. In the Balance Sheet, the machine will be shown at a net value of
……..
A K190 000 B K231 000 C K250 000 D K171 000
137. A machine which originally cost K5 000 is sold for K750. The provision for Depreciation
Account relevant to this machine shows a credit balance of K4 350. This means that there is
A. A loss on sale of K100
B. A profit on sale of K100
C. A profit on sale of K750
D. A profit on sale K4 350

8 LIMITATIONS TO THE TRIAL BALANCE AND SUSPENSE ACCOUNT

138. When a transaction is completely omitted from the books, it is called ………………….
A. Error of commission
B. Error of omission
C. Error of principle
D. Transposition error
139. If the trial balance do not agree, the difference must be entered in
……………………………………
A. The profit and loss account
B. A suspense account
C. A nominal account
D. The capital account
140. Which of the following error would be detected by the Trial Balance?
A. Error of original entry
B. Error of principle
C. Error of complete reversal
D. A single entry transaction
141. The purchase of a motor vehicle has been debited to the motor vehicle expenses account.
What type of error has been made?
A. Commission
B. Ommission

17
 C. Original entry
D. Principle
142. Which of the following affects the Trial Balance agreement?
A. Wages account added up incorrectly, being totalled K10,000 more.
B. Purchases K4,400 from James Manda entered in both accounts as k4,040.
C. Sales K105 to James entered in Johns account
D. Cheque payment of K2,130 for motor expenses entered as K2,310 in both accounts.
143. On 20 September 2010, the accounts clerk discovered that sales of K250 had been posted to
Mwape’s account in error. The goods had been sold to Mwaba on credit. Upon discovering of
this error the journal entry was made as shown below:
Journal entry
Dr Mwaba K250
Cr Mwape K250
(-----------------------------------------------------)
Which one is the correct narration for this record?
A. Being sales overcast
B. Being error of commission now corrected
C. Being suspense accounts now corrected
D. Being error of omission now corrected
144. Errors are corrected through the General Journal. This is because it…….
A. provides a record to explain the double entries
B. definitely saves the book-keeper’s time and effort
C. saves the trouble of entering them in the ledger
D. is much easier to make entries in the general ledger
145. Which of the following errors would not affect the balancing of a Trial Balance?
A. An amount not posted to E. Banda
B. An amount omitted entirely from the books
C. An amount posted to the wrong side of the account
D. An amount overcast in one account
146. Discount received K2,000 has been posted on the debit side of discount allowed account. The
entry to correct the error is …………………………………………………
A. Suspense Dr K2,000 Discount received Cr K2,000
B. Discount allowed Dr K2,000 Discount received Cr K2,000
C. Suspense Dr K4,000 Discount allowed Cr K2,000
Discount received Cr K2,000
D. Discount allowed Dr k4,000 Discount received Cr K4,000

147. Which of the following do not affect the Trial Balance agreement?
(i) Sales K 150 to A. Mwape entered in P. Mwaba’s account
(ii) Cheque payment of K 431 for motor expenses entered only in cash Book
(iii) Purchases K 404 from C. Chali entered in both accounts as K 440
(iv) Wages account added up incorrectly being totalled K 100 less
A. (i) and (iv)
B. (i) and(iii)
C. (ii) and(iii)
D. (iii) and(iv)
148. Compensating errors are………………………………………..
A. Errors where an entry has been omitted

18
 B. Errors which compensate or cancel each other
C. Errors made in the ledger
D. Errors made in the subsidiary books

149. If the purchase of stationery was debited twice in the account, we reserve by
A. Debiting stationery account
B. Crediting stationery account
C. Crediting suspense account
D. Debiting suspense account
150. Which subsidiary book records the correction of errors?
A. Petty cash book
B. Sales journal
C. Cash book
D. General journal
151. The sales figure from the journal was posted as K56 500 to the sales account instead of
K65 500. To correct this error.
A. Dr Suspense and Cr Sales with K9 000
B. Dr Sales and Cr Suspense with K9 000
C. Dr Suspense and Cr Sales with K65 500
D. Dr Suspense and Cr Sales with K56 500
152. Errors corrected using the suspense account are the ones that …………
A. prevent the trial balance from balancing
B. are not exposed by the trial balance
C. affect the balance sheet
D. are omitted in the ledger
153. Which of these errors below cannot be revealed by a Trial Balance?
A. Compensating Errors
B. Errors of original Entry
C. Errors of principle
D. All of the above
9 BANK RECONCILIATION STATEMENTS
154. A Bank Reconciliation statement is a statement…………………..
A. Sent by the bank when the account is overdrawn
B. Drawn up by us to verify our cash Book balance
C. Drawn up by the bank to verify the cash book balance
D. Sent by the bank when we have made an error
155. The bank statement may be used in business as……………….
A. A Source document for the subsidiary books
B. A source of information for reconciling the cash and bank records
C. Part of the double entry for deposited money
D. A bank credit records for loans
156. Mr C. Ngoma has a bank overdraft of K250 with Stanchart Bank (Zambia)Ltd. 1 st September,
he issued cheques to Mr. Mwanza K180 and Ms. Mulomba for K360. He further receives three
cheques from the following debtors; MrSoko K150, MrChilekati K70 and MrBwalya K230 within
one week. How much overdraft does Mr C Ngoma have at the end of the week
A. K490
B. K250

19
 C. K340
D. K790
157. If you want to make sure that your money will be safe, if cheques sent are lost in the Post, you
should
A. Not use the postal service
B. Always pay by cash
C. Always take the money in person
D. Cross your cheques “Account Payee only, not negotiable
158. The bank statement balance may differ from the cash book (bank column) balance because:
(i) One party may have made a mistake
(ii) One party may lack immediate knowledge of action taken by another
(iii) Both have different transactions
(iv) The accountants of the business are very fast in recording
Which of the above statements are true?
A. (i) (ii) and (iii)
B. (i) (iii) and (iv)
C. (ii) (iii) and (iv)
D. (i) and (ii)

159. A Bank reconciliation statement prepared starting with balance as per bank will show
A. Unpresentedcheques added, and uncredited deposits subtracted.
B. Uncredited deposits added, and unpresentedcheques subtracted
C. Bank charges added, and uncreditedcheques subtracted
D. Credit transfers added, and bank charges subtracted.

160. The following information is available for Mwendo enterprises:

Bank balances shown in cash book K650(Dr)
Amounts paid is not yet credited K150
Bank charges not yet entered in cash Book K50
Credit transfer received by the bank not yet entered in cash K300
Unpresented cheques K100
The bank statement balance should be…………….
A. K750 B. K450 C. K850 D. K550

161. When Lee makes out a cheque for K50 and sends it to Young then Lee is known as
A. Payee B. Banker C. Drawer D.
Creditor

162. Junior Bookkeeper was updating the cash book (Bank Column). On the bank statement he
found M. Mahongo (credit transfer) with K1200 entered in the credit column. This had not yet
been entered in the cash book. On which side of the cash book (bank column) should it be
entered?
A. Credit cash book with K1200
B. Debit cash book with K1200
C. Credit cash book with K2400
D. Debit cash book with K2400

163. A cheque paid by you, but not yet passed through the banking system, is

20
 A. Standing orders
B. A dishonoured Cheque
C. A credit transfer
D. An unpresented cheque

164. A request to the bank to make payments a regular intervals is known as

A. Standing order B. Giro credit C. Bill of exchange D. Paying – in – slip

165. The document for withdrawing money from current Account is the
A. Cheque B. Invoice C. Receipt D. Withdrawal slip
166. Which statement is sent by the bank to its customers to verify the balance at bank at the end of
the month?
A. Bank Reconciliation Statement
B. Bank Statement
C. Cash Statement
D. Statement of Account

10 CONTROL ACCOUNTS

167. What is the purpose of the control accounts?

A. To calculate total receipts
B. T o calculate year end debtors and creditors balance
C. To calculate total cash discount
D. To calculate total returns
168. Given opening debtors balance of K11 500, sales K4 800 and receipts from debtors K4 500, the
closing debtors’ balance total should be
A. K 8 500
B. K14 500
C. K11 500
D. K18500
169. In the sales ledger control account. The bad debts written off should be shown in the
account…………
A. as a debit
B. as a credit
C. both credit and debit
D. as a balance carried down
170. A trader took out an insurance policy on 1st May 2007, the annual premium being K720. He
does his books on 31st December. Calculate the amount paid in advance?
A. K60
B. K240
C. K180
D. K120
171. In which ledger would the debtors control account be kept?
A. Sales ledger
B. General ledger
C. Nominal ledger
D. Purchases ledger

21
 172. Which item would not appear in a Sales Ledger Control Account?
A. Sales Returns
B. Interest charged on overdue accounts
C. Provision for bad debts
D. Discount Allowed
173. At the beginning of month the total creditors balance was K2700 and the balance at the end
was k3560. During the month payments to creditors were K5760. What were the purchases for
the month?
A. K9320
B. K12020
C. K6620
D. K8460

174. In sales ledger control account ,provision for bad debts should be shown in the account
A. As a debit
B. As a credit
C. Balance brought down
D. Should not be shown
175. Which item appears on the credit side of a purchases ledger control account?
A. Cheques paid
B. Discount received
C. Refund from suppliers
D. Purchases return
176. The balance brought down in the debtors account was K 9000. At the end of the same
accounting period, the firm’s debtors were K1500.During the period, a bad debt of K100 was
written off and K5000 was received from credit customers. The total of the firms credit sales for
the period was:
A. K3700
B. K4200
C. K5400
D. K5900
177. Entries in control accounts are made from?
A. Bank statement
B. Books of original entry
C. Ledger accounts
D. Sales invoices
178. At the beginning of the period, a business owed its creditors K15000.During the period, the
credit purchases amounted to K87000, and paid K94000 to the creditors. At the end of the
period, the firm owed the creditors:
A. K7000
B. K8000
C. K14000
D. K22000

22
179. A cheque received by Mulenga from a debtor is later dishonored, how is this taken in Mulenga
’s control account?
A. Credit in purchases ledger control account
B. Credit in sales ledger control account
C. Debit in purchase ledger control account
D. Debit in sales ledger control account
180. The total of the purchases control account had been under casted by K100. How could this
error be rectified in the concerned firm’s journal?
A. Dr suspense A/c K100 Cr purchase A/c K100
B. Dr purchase A/c K200 Cr suspense A/c K200
C. Dr purchase A/c K100 Cr suspense A/c K100
D. Dr creditors A/c K100 Cr purchases A/c K100

181. Calculate the ending debtors from the following balances of sales ledger control account?

Opening balance K17,100

Sales(Cash) K7,100
Credit sales K10,100
Refund to credit customer K210
Bad debts written K250
Return inwards K350
Set off K2,700

A. K27,200
B. K27,410
C. K23,900
D. K24,110

11 ACCOUNTS OF NON PROFIT MAKING ORGANISATIONS

182. Clubs and societies are registered as non-profit making organizations because
A. The motive of formation is not for profit
B. They only receive income through subscriptions and donations
C. They do not make profit at all
D. They are not involved in selling of anything at all
183. The Kitwe cricket club had equipment worth K1 000, subscriptions in arrears K160, Stock of
refreshments K1600; sundry creditors for refreshments K1000. What was the accumulated fund
for the club?
A. K1760 B. 170 C. K1750 K17600
184. A social club’s receipts and payments account for the year 2010 showed rent paid as K4,000.
On 1st January 2010 rent owed by the club was K800. On December 31 st 2010 rent owed by
the club was K1000. What is the amount charged for rent on the income and Expenditure
Account for the year 2010?
A. K4 000 B. K4 200 C. K4 800 D. K 5 000
185. The consolidated fund balance of a club at a specific date can be found by.
A. Balancing off a receipts and payments account.

23
 B. Preparing a statement of affairs
C. Preparing an income and expenditure account
D. Subtracting the surplus for the year from total assets

186. The following balances were taken from the book of Lusaka Golf Club
Subscriptions prepaid for last year K 100
Subscriptions received for next this year K 5 000
Subscriptions prepaid for current year K 150
Subscriptions owed for current year K 200

Find the amount of subscriptions transferred to the income and expenditure account
A. K5 250 B. K5 150 C. K7 150 D. K5 300

187. In a club Balance sheet subscriptions paid in advance are recorded as

A. A current assets B. A current liability C. A fixed assets D. Added to the
accumulated fund.
188. A club’s income and expenditure statement is similar to
A. Profit and loss B. Appropriation C. cash book D. Balance sheet
189. ……………………… is the summary of the cash book for the period
A. Income and expenditure B. Profit and Loss C. Balance sheet
D. Receipt and payments

190. A club had credit balance of K146 as its subscription account on 1 st January 2002. During the
year subscriptions of K1300 were received, but K74 of this was in advance for the following
year. What is the amount transferred to the income and Expenditure Account?
A. K1 372 B. K1 446 C. K1 154 D. K1 080
191. At the end of the year K6 000 has not yet been paid for the subscriptions by some member of
the Recreation Club. This should be ………..
A Shown as a credit balance in Subscription Account
B Shown as an expense in the income and Expenditure
C Added to the accumulated fund
D Shown as a debit balance in the Subscription Account
192. In a club, the profit and loss account is replaced by ……..
A Receipt and payments account
B Subscription account.
C Trading, profit and loss account
D Income and expenditure account
193. Subscriptions prepaid in the previous year will in the Income and Expenditure Account be.........
A Added to new subscriptions
B Subtracted from the new subscriptions
C Included in the expenditure
D let out.
194. Accumulated fund is the term used to mean
A Capital of non- profit making organization
B. Capital of a profit making business
C. Capital for companies
D. Cash in hand

12 CAPITAL AND REVENUE EXPENDITURE AND RECEIPTS

24
195. Extension to the clubhouse is an example of
A. Revenue expenditure
B. Capital expenditure
C. Current expenditure
D. Nominal expenditure

196. Capital Expenditure is

A. The extra capital paid in by the proprietor
B. Costs of running the business on day to day basis
C. Money spent on buying fixed assets or adding value to them
D. Money spent on selling fixed assets
197. Revenue Expenditure is …………….
A Money spent on selling fixed assets
B Money spent on buying fixed assets or adding value to them
C The cost of running the business on a day to day
D The extra capital paid in by the proprietor

198. A motor vehicle purchased for use in the business is…………………………

a. Revenue expenditure in the profit and loss account
b. Capital expenditure appearing in the balance sheet
c. Revenue expenditure added to the purchases in the trading account
d. Capital receipts added to the capital in the balance sheet

199. Expenditure on assets which last for more than one year and permanently increase profit
making capacity of the business is called…………..
a. Capital receipts
b. Revenue expenditure
c. Revenue receipts
d. Capital expenditure

200. …………………………..appear in the profit and loss account under expenses subtracted
from gross profit
a. Revenue receipts
b. Revenue expenditure
c. Capital expenditure
d. Capital receipts

201. Which receipts/incomes are recorded in the trading, profits and loss account as sales or
additional incomes added to the gross profit to get gross income?
a. Capital receipts/incomes
b. Capital expenditure
c. Revenue expenditure
d. Revenue receipts

202. Which one is capital receipt?

25
 a. Purchase of machinery by cheque
b. Sale of machinery for cash
c. Rent received in cash
d. Stationary bought by cheque

203. Which of the following revenue expenditures is for a Motor vehicle dealer?
(i) Advertising
(ii) Extension of premises
(iii) Purchase of cars for resale
(iv) Purchase of house
a. (i) and (ii)
b. (i )and (iii)
c. (ii) and (iv)
d. (iii) and (iv)

204. What is the effect of treating Capital expenditure as revenue expenditure?

a. To reduce the gross profit
b. To increase the net profit
c. To reduce the fixed assets
d. To increase the fixed assets

SINGLE ENTRY

205. Incomplete records are best described as records which

A. Are kept in single entry bookkeeping system
B. Have been partly destroyed
C. Show only the cash book
D. Are maintained on the double entry system

206. The best method of calculating profit if double entry is not maintained is
A. Decrease in net worth method
B. Increase in net worth method
C. Balance sheet method
D. Profit and loss account method
207. Incomplete Records are best described as records which …………………
A are destroyed by fire
B are not kept on single entry
C are not kept on double entry system
D show only debit entry.

208. A trader had an opening capital of K85 000 and closing capital of K107 000. She had drawings
of?

K13 000 during the year. What was her net profit?
A K9 000 B K13 000

26
 C K22 000 D 35 000
209. The following are the assets and liabilities of a business:- Cash K850 000, Mortgage
loan, K680 000, Creditors K320 000, Motor Vehicle K550 000. What is the amount of
capital?
A K850 000 B K400 000
C K680 000 D K320 000
210. A firm’s capital at the end of a trading period amounted to K2 100. The net trading profit was
K 450. While drawings amount to K 255.What was capital owed at the beginning of the trading
period?
A. K1 800 B. K1 875 C. K1 905 D. K1 650

14 PARTNERSHIP ACCOUNTS

211. Assets can be revalued in a partnership change because

A. The law insist upon it
B. It helps prevent injustice to some partners
C. Inflation affects all values
D. The depreciation charged on them needs to be reversed
212. You are to buy an existing business which has assets valued at buildings 50 000, motor
vehicles K15 000, fixtures K5 000, and stock K40 000. You are to pay K140 000 for the
business. This means that
A. You are paying K40 000 for goodwill
B. Building are costing k30 00 more than their value
C. You are paying k30 00 for goodwill
D. You have made an arithmetic mistake
213. Mulenga and Jelita are in partnership sharing profits and losses in the ratio 3:2 Net profit for
year was k52,000. Mulenga receives a salary of K12 000 . What are the amount to be credited
to the Partners current accounts?
A. Mulenga K26 000, Jelita 26 000
B. Mulenga K31 200, Jelita 20 800
C. Mulenga K36 000, Jelita 16 000
D. Mulenga K24 000, Jelita 16 000

214. Interest on capital is recorded on the …………

A. Debit side of the partners current A/C
B. Credit side of the partners current A/C
C. In the balance sheet under current Assets
D. On the credit side of the appropriation A/C
215. Goodwill may be define as
A. The difference between the purchase price of a business and the of assets taken over
B. The value given to the seller of the business
C. The value given to the purchases of the business
D. An agreement between the purchaser and the seller of the business
216. Where there is no partnership agreement profit and losses
A. Must be shared in same proportion as capital
B. Must be shared equally after adjusting for interest on capital
C. Must be shared equally
D. Must be shared after deducting drawings

27
 217. The minimum number of partners in a partnership is
A. 7 B. 2 C. 20 D. 5
218. A double entry for the interest on drawings in the partnership accounts is
A. Credit the interest on Drawings and debit the Current Accounts of partners
B. Credit the Current Accounts of partners and debit the interest on Drawings Account
C. Debit the profit and loss Appropriation and credit the partners’ Current account
D. Debit the partners’ current Accounts and credit the Profit and Loss Appropriation
Account.
219. Profit of partnership amount to K3 280 before the following is taken into account.
(i) Interest on partner’s capital K180
(ii) Interest on drawings K20
(iii) Salary of one partner K1 000
(iv) Sharing ratio is 1:1
How much profit remains for division between the partners?
A. K2 080 B. K2 100 C. 2 120 D. 2 440
220. What does a Credit Balance on a partner’s current account represent to a business?
A. Current Assets B. Current Liability C. Long term Liability D.
Part of the capital
221. The agreement between partners is recorded in a document known as
A. Partnership deed
B. Memorandum of association
C. Table of content
D. Prospectus
222. When a partnership agreement states that the capital Accounts should remain fixed. It is best to
deal with the share of profits by
A. Dr the Partners current A/C
B. Cr the Partners capital A/C
C. Cr the Partners current A/C
D. Dr the Partners capital A/C

223. What does the word “Residue” mean in relation to profit in a partnership business?
A. The profit that remains after all expenses have been paid in the Profit and Loss
Appropriation Account and is available for sharing
B. The profit that remains after all expenses have been paid in the profit and loss
Appropriation and is kept aside as a reserve
C. The profit before any expenses have been in the profit and loss Appropriation Account.
D. The profit before any expenses have been paid in the profit and loss Account

224. A partner’s salary of K210 000 would be posted to the ……………..

A debit side of profit and loss account
B credit side of the profit and loss
C debit side of his current account
D credit of his current account
225. In order to keep the partner’s Capital Accounts fixed, changes on variations to the Capital are
recorded in the
A. Profit and Loss Appropriation Account

28
 B. Partners, Current Accounts
C. Partners Drawings Accounts
D. Partnership Trading Account
226. When a partnership agreement states that the capital Accounts should remain fixed. It is best to
deal with the share of profits by
A. Dr the Partners current A/C
B. Cr the Partners capital A/C
C. Cr the Partners current A/C
D. Dr the Partners capital A/C
227. Where the partnership deed does not exist, the partners are expected to use the……………
A. name of the company
B. title names
C. partnership act 1890
D. company certificate

15 MANUFACTURING ACCOUNTS

228. What do you understand b the term “work in progress”

A. Sales less cost of goods sold
B. Value of partly finished
C. Value of goods purchased.
D. Value of finished goods on hand
229. A manufacturing business extracts the following information from its books
Direct materials K28
Direct Labour K22
Indirect Expenses K 8
What is the prime cost of production?

A. K36
B. K42
C. K50
D. K58
230. The cost of manufacturing goods is transferred to…….
A. the profit and loss account
B. the trading account
C. the balance sheet
D. no where
231. Which of the following items would be charged to the profit and loss in a manufacturing
concern?
A. Factory Labour
B. Factory overheads
C. warehouse wages
D. Office Rent
232. In the manufacturing business, royalties paid on every item manufactured are regarded
as………….
A. Direct expense

29
 B. An indirect expense
C. Part of raw material used
D. Factory overhead expense
233. Factor overhead costs are expenses…………
A. directly traced to items being manufacturing
B. which cannot be traced to the items being manufactured
C. incurred to sell manufactured goods
D. found in the Trading Account
234. In a manufacturing account the excess of the market value of the goods over the cost of
production results in…………..
A. an undervalued prime cost
B. a manufacturing profit
C. an overvalued total overhead expenditure
D. a manufacturing loss.
235. For a manufacturing company, depreciation of machinery in the plant should be included in
the…………
A. prime cost section
B. trading account
C. factory overheads
D. profit and loss account
236. The sum of prime cost plus the indirect manufacturing costs is the …………….
A. direct cost
B. production cost
C. overhead expenses
D. direct materials
237. How is the factory cost of production calculated?
A. Direct labour+direct material
B. Direct material+factory overheads
C. Direct material+direct labour+factory overheads
D. Direct material+direct labour+total overheads

238. A manufacturing firms cost were as follows

Raw materials 55,000
Direct labour 86,400
Factory overheads 122,000
Depreciation on plant 6,400
Administration cost 8,800 Selling and
distributor 12,000 There was
closing work in progress of K12,400. What was the factory cost of production?
A. K257,400
B. K263,400
C. K269,800
D. K278,200
239. A manufacturer has the following costs
240. Raw materials K8,000
Wages: factory workers K4,000 factory supervisor K1,000
office workers K2,000

30
 Fixed overheads: factoryK4,500 office K4,500

What is the factory cost of production?

A. K12000
B. K16,500
C. K17,500
D. K21,00
241. What item is the factory overhead?
A. carriage on raw materials
B. Cost of raw materials
C. Secretary’s salary
D. Wages on machine operators

Priskay manufactures school uniforms. She provided the following information

K

Material cost 5000

Labour cost 4000
Factory overheads 2000
What is the cost of production?
A. K5000
B. K9000
C. K7000
D. K11,000

242. Which is an Indirect cost

A. Carriage inwards
B. Factory rent
C. Production materials
D. Production wages
243. What will be included in a manufacturing account?
A. Bank charges and commission on sales
B. Depreciation on plant and sales men salaries
C. Direct labour and factory overheads
D. Direct labour and office expenses

16 ACCOUNTING ETHICS

244. When accountant In the firm adhere to professional code of ethics, this would result in clients
developing………………………. The firm as decisions would be made in their best interest.
A. Trust B. Reliability C. Loyalty D. Dependence.

245. Which one of the following is not a danger of non- adherence to Ethics in accounting?
A. Competition B. Fraud C. Integrity B. Embezzlement
246. Which of the following words best describes ethics in accountancy

31
 (i) Fraud
(ii) Integrity
(iii) Corruption
(iv) Discipline
(v) Embezzlement
(vi) Honest

(A) (i) (iii) and (v)

(B) (ii) (iii) and (iv)
(C) (ii) (iv) and (vi)
(D) (I) (V) and (vi)

17 INTERPRETATION OF FINAL ACCOUNTS

247. Given cost of goods sold K16 000 and margin of 20% this sales figure is
A. 20 150 B. K13 600 C. K21 000 D. 20, 000.
248. If the opening stock is K 3 000, closing stock K5 000, Sales K4 000 and Margin 20% their
stock turnover is
1
A. 8 times B. 5 times C. 6 times D. 7 2 times

249. If K500 was shown added to purchases instead of being added to a fixed asset.
A. Net profit only would be understated
B. Net profit only would be overstated
C. It would not affect net profit
D. 30th gross profit and loss would be understated

250. If the cost price of goods is k900, 000 and the margin is 25 per cent. Find the selling price
A. K925, 000 B. k1120, 000 C. k300, 000 D. k1200, 000
251. The Mark-Up is the gross profit’s relationship with the ………………
A Capital B Turnover C Cost of goods D Average stock
252. Total sales of K2800 have been debited to the Sales account. What is the effect of this on the
sales account balance?
A. Over stated by K2800
B. Overstated by K5600
C. Understated by K2800
D. Understated by K5600

253. A debit balance in capital account indicates that the firm is

A. Overtrading B. Depreciation C. Insolvent D. Investing
254. Identify the correct statement
A. Profit does not alter capital
B. Profit reduces capital
C. Capital can only come from profit
D. Profit increases capital
255. A business that is short of working capital is said to be
A. Solvent B. Bankrupt C. Insolvent D. overtrading

32
256. The amount a trader adds to his/her cost price of goods is known as
A. Mark up B. Prime cost C. Cost of goods sold D. Net profit
257. A business maintains a gross profit mark – up of 25% and achieved total sales of K60,
000 for the year. What is the cost of goods sold?
A. K12, 000 B. 15 000 C. K45, 000 D. K48 000
258. C. Phiri’s current Assets and Liabilities were as follows:
Stock 62 000
Creditors 35 000
Debtors 43 000
Bank overdraft 25 000
Prepared Expenses 15 000
What is C. Phiri’s working capital ratio
A. 2:1 B. 1:2 C. 4:1 D. 0.7: 1

259. Table gives information for a company’s financial year

Gross profit K23 680
Wages K15 600
Insurance K1 300
Insurance is prepaid by K60, 000 and wages outstanding are K1500 000. What is the net
profit for the year?
A. K5 220 000 B. K53 400 C. K8 220 000 D. K8 340 000

1
260. A business achieves a gross margin 333%. The following information available
Opening stock K5 000
Purchases K25 000
Closing stock K6 000
The value of sales for the year is
A. K32 000 B. K36 000 K24 000 D. K30 000

261. The books of a business has the following :

Sales K90 000
Cost of sales K50 000
Expenses K10 000
What is the net profit as a percentage of sales?
A. 20% B. 33.3% C. 44.4% D. 66.6%

262. A trading account showed the following figures, sales K15 000, purchases K10
000, opening stock K4 000, closing stock K6 000. The rate of turnover was
A. 2.4 B. 1.6 C. 3 D. 5
263. A business maintains a gross profit Mark – up of 25% and achieved total sales of K60.000
000 for the year. What is the cost of goods sold?
(A) K12 000,000
(B) K15 000,000
(C) K45,000,000
(D) K48,000,000

264. Trading account of a firm for the year ended 30 June 1999 shows the following details:

33
 Stock (1.7.98) K 5,936
Stock (30.6.99) K 4,544
Sales K83,840
Purchases K61.488
(A) K8 8384
(B) K82 448
(C) K26 896
(D) K 20 960
265. Using the details in question above and you gross profit figure, calculate the rate of stock
turn
(A) 6 times
(B) 10 times
(C) 15 times
(D) 12 times

34
 PRINCIPLES OF ACCOUNTS

MASTER KEYS

PAPER TWO PART ONE

1 Introduction to accounting
1.1 What is the meaning of Principles of Accounts?

It is process of identifying/recognizing, recording, classifying, summarizing and reporting of

business/economic information to stakeholders.

35
The process of identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of that information.
Is the reporting, analyzing and interpretation of recorded information on business transactions?

1.2 Explain the importance of Principles of Accounts

 It is for checks and balances

 To provide information for decision making
 Develop skills in preparing and interpreting economic/business information
 Develop an understanding of accounting concepts, principles, procedures and terminology
Develop skill of numeracy, literacy, communication and enquiry
Encourage attitude of accuracy, orderliness, logical thought and an appreciation of professional ethics
Develop an understanding of the role of accounting in providing an information system for monitoring
progress and assessing performance of business.

1.3 Identify career prospects in the Accounting Profession

 Accountant
 Bookkeeper
 Cashier
 Bursar
 Financial Controller
 Assistant Accountant
 Financial Manager
 Finance Minister

1.4 Identify the Accounting Concepts.

 Historical Cost
 Prudence
 Going Concern
 Business entity
 Realization
 Objectivity
 Dual aspect
 Consistency
 Accrual
 Materiality
 Periodical
 Money measurement

1.5 Explain the accounting concepts

1) Historical Cost –
It states that assets must be recorded and shown in the books of accounts at the cost price at which
they were acquired and not at selling or market value, and that this is the basis for revaluation of the
asset.

36
 2) Prudence
Requires that a degree of caution/judgement must be exercised in making the estimates required under
conditions of uncertainty (e.g. decisions relating to bad debts and allowances for doubtful debts), such
that assets and income are not overstated and liabilities and expenses are not understated. To take
into account unrealized losses.

3) Going Concern
Under this concept it is assumed that the business will continue to operate for a foreseeable future after
the end of the reporting period. Business will continue for a long time

4) Business entity –
Implies that the affairs of a business are to be treated as being quite separate from the
private/personal activities of its owner(s). Assumptions that only transactions that affect the firm and not
the owner’s private transactions will be recorded.

5) Objectivity
the use of a method which arrives at a value that everyone can agree with because it is based upon a
factual occurrence.

6) Dual aspect –
this states that there are two effects to every economic activity, one represented by the assets of the
business and the other by the claims against them. The concept states that these two aspects are
always equal to each other. Double entry system means every transaction will be posted on the Dr and
Cr side with the same amount
Assets = Capital + Liabilities

7) Consistency
Transaction of a similar nature should be recorded in the same way in the same accounting period and
in all future accounting periods.
Accrual – Net Profit is the difference between revenues and the expense incurred in generating those
revenues i.e. Revenues – Expenses = Net Profit
The effects of transactions and other events are recognized when they occur and they are recorded in
the books and reported in the financial statements of the period to which they relate.
Materiality –means an item purchased will be treated as an expense or fixed asset according to the size
of the organization and accountants’ judgment.
Items of material value are recorded as assets and

37
 2 Business environment and transactions
1.6 2.1 What is a business
is any activity undertaken for the purpose of making a commercial/economic gain or benefit .
2.2 Components of a business
These are features and activities that characterize the operations of business. The following are the
main features of a business:
a) Capital/equity/investment
b) Assets
c) Liabilities
d) Expenses
e) Income
f) Transactions.

1.6.1.1 Capital/equity/investment
Capital is often called the owner’s equity or net worth. It comprises the funds invested in the business
by the owner plus any profits retained for use in the business less any share of profits paid out of the
business to the owner.
These are resources/ funds/money that are used to start a business. They are transferred from the
owner to the business. the transfer of money from the owner to the business means that the owner has
lent money to the business.
Thus capital represents what the business owes the owner/investor.

1.7 Assets

These are resources that are owned by the business and are used to generate revenue or income.
They are acquired using the capital invested in the business. They are property or possessions of the
business used for production of goods and services. Thus: capital = assets
There are various ways of identifying and classifying assets. The common way is to classify them
according to time. Thus we have fixed or non-current and current or circulating assets
Fixed assets are assets which have a long life bought with the intention to use them in the business
and not with the intention to simply resell them, e.g. buildings, machinery, fixtures,motor vehicles.
Current assets are assets consisting of cash, goods for resale or items having a short life. For example,
the value of stock in hand goes up and down as it is bought and sold.

1.8 Liabilities
Liabilities are resources owed by the business to other people or organizations. Liabilities represent the
business obligation to pay somebody for services, goods or cash received from that individual.
Liabilities are settled using assets.
Liabilities are classified into two main classes. Current and long term liabilities.

38
1.8.1.1.1 Current liabilities
Current liabilities are those liabilities which are expected to be paid within a year. They are settled using
current assets.
Examples of current liabilities include: trade creditors, bank overdraft, tax dues, accrued expenses,
Long term liabilities
Long term liabilities are those labilities which repaid over long period or period exceeding one financial
year.
Examples of long term liabilities include: capital, bank loan, mortgage, debentures, bonds and
securities etc.
Thus the equation:
Assets = Capital + Liabilities
Expressed in terms of capital the equation is:
Capital = Assets - Liabilities.
A statement which a list of assets set against the liabilities is called a balance sheet. sometime referred
to as the position statement.
Exercise
Classify the following items into liabilities and assets:
(a) Motor vehicles (f ) Owing to bank
(b) Premises (g) Cash in hand
(c) Creditors for goods (h) Loan from D Jones
(d) Stock of goods (i ) Machinery
(e) Debtors.

2 Transactions and their effects on the balance sheet.

1.9 3.1 define a business transaction:-
A transaction is defined as an exchange of goods or services for money or money equivalent.
1.10 Identify different types of transactions
Cash transaction – A cash transaction is one which there is immediate transfer/payment of cash or
cash equivalent for goods or services .
Bank transaction – A transaction in which the exchange of cash for goods or services is done through
the bank or using a banking facility such as a cheque or deposit slip.
Credit transaction – A credit transaction is one in which goods supplied or services rendered against a
promise given by the receiver of goods or services, to pay at a future date. In this case the supplier of
the goods or service is known as a creditor while the receiver is known as a debtor. The promise to pay
at a later date is a debt due and payable to the supplier.
Contra Transaction – contra transactions are movement of funds within the enterprise that do not
involve inflow or outflow of funds as far as the enterprise is concerned. An example is the banking of
cash takings from the office to the bank account of the enterprise or withdrawal of money from the bank
account of the enterprise to meet office expenses.

39
Barter transaction – involves the exchange of goods for goods

1.11 Effects of transaction on the accounting equation

Every transaction affects two items in the accounting equation. Sometimes that may involve the same
item being affected twice, once positively (going up/increase) and once negatively (going
down/decrease).
Every transaction affects two items in the balance sheet.
TRANSACTION EFFECT ON ASSET EFFECT ON LIABILITIES
(1) Owner pays capital into the bank Increase asset cash Increase liability – capital or
at bank owners equity
(2) Buy goods by cheque Increase asset stock
Decrease asset cash
at bank
(3) Buy goods on credit Increase asset stock Increase liability creditor
(4) Sale of goods on credit Decrease asset stock No effect on liability
Increase asset debtor
(5) Sale of goods for cash (cheque) Increase asset cash No effect on liability
Decrease asset stock
(6) Pay creditor Decrease asset Decrease liability
(7) Debtor pays money owing by cheque Increase asset cash No effect on liability
Decrease asset
debtors
Owner takes money out of the business bank Decrease asset Decrease capital
account for own use
Owner pays creditor from private money Decrease liability Increase capital
outside the firm

Exercise
(i) After the preparation of the firm’s balance sheet, it was discovered that the following errors had
been committed in the books of accounts.
(ii) Furniture bought on credit for k450,000 had been entered in the purchases day book.
(iii) Machinery disposed of for k600,000 had been included in the sales day book
(iv) A cheque for k990,000 from a debtor for goods sold to him at k1000,000 on credit had not been
recorded in the books
(v) Goods worthk250,000sold to a customer but not yet delivered had been included in the closing
stock
(vi) Motor vans standing at k10,000,000 should have been depreciated at 20%
(vii) The firm should have provided for discount on debtors total of k550,000 at 10%.
(viii) Goods amounting to k150,000 taken by the owner of the business had been included
in the sales figure.
Required :
In order to adjust the for each of the errors above , state which items in the balance sheet should be
increased or decreased.
Complete the table below:

40
 error Item to be increased Items to be decreased
i
ii
iii
iv
v
vi
vii

Q3.Fill in the missing amounts in the following table.

Assets Liabilities Capital Answers
A 128,600 84,000 ? Cap=asset – Liab=446000
B ? 56,400 28,400 Asset=cap+Liab=84,800
C 250,400 ? 114,800 Liab=Assets – cap=135,600
D ? 111,500 88,500 Assets=capital=200,000
E 216,500 104,300 ? Cap=Asset – Liab=112,200
F 314,100 ? 146,300 Liab=Asset – cap=167,800

Q2. F. Mwale had the following assets and Liabilities as @ 1st June, 2006
Premises 20,000
Planted and machinery 14,000
Motor vehicle 10,000
Stock of goods 1,456
Debtors 2,484
Creditors 6,434
Cash in hand 1,200
Bank overdraft 4,608
Required
Calculate his capital as at1st June, 2006.
Workings.
Capital= Assets-Liabilities
=49,140,000 - 11,042,000 = 38,098,00

1.12 Recording business transactions:

A record of business transactions is called an account. A collection of accounts is called a ledger.

1.13 CLASSIFICATION OF ACCOUNTS:
All accounts that form up the ledger can be grouped into three classes;
 Real
 Nominal and
 Personal

41
 1.1.1. Personal accounts:
These are account of individual persons and organizations with whom the business deals. These are
credit customers (debtors) and suppliers of goods on credit (creditors) .eg. Mwansa, Zambia sugar,
ShopRite, chalikosa
1.1.2. Nominal accounts;
These are accounts that exist in name only i.e. they identify the activities or services performed by or to
the business. all expenses such as rent, salaries, carriage, freight charges, purchases, bills including
loses such as bad debts, depreciation, and drawings and gains/ income accounts such as sales, rent
received, commission received, including capital are nominal accounts.

1.1.3. Real accounts;

These are accounts that keep records of the assets of the business i.e. accounts of all the possessions
of the business. They are sometimes called asset accounts. examples include land and buildings
account, motor vehicle account etc.
PRACTICE QUESTION
Classify the following accounts as either real, nominal or personal accounts;
i. Premises
ii. Major ltd account
iii. Insurance account
iv. Muyunda’s account
v. Bank account
vi. Rent received account
vii. Cash account
viii. Sub divisions of the ledger

1.14 Procedure for recording business transactions.

Processing a business begins with recording the information on a source document. The following table
summarizes the common and usual business transactions and the source document prepared in each
case.
Transaction Source Account. Debited Account Credited Subsidiary Ledger
document book class
Cash sales Duplicate Cash account Sales account Cash book General
receipt
Credit sales Duplicate Debtors/ customer Sales account Sales Debtors
invoice journal ledger
Cash Orig.receipt purchases Cash account Cash book General
purchases ledger
Credit Original invoice Purchases Creditors/supplier Purchases Creditors
purchases journal ledger
Returns in Credit note Sales returns Customers/debtors Returns Debtors
in.journal ledger
Returns out Debit note Suppliers/creditors Purchases returns Returns out Creditors
journal ledger
Purchase of receipt f/Asset account Cash account General General
fixed asset journal ledger
on cash
Purchase of Invoice/Journal f/asset account Suppliers account
fixed asset voucher

42
 on credit
sale of fixed Copy Cash/bank Asset disposal General General
asset receipt/JV journal ledger
cash/cheque
Small daily Petty cash Expense account Petty cash Petty cash General
expenses voucher book ledger

1.15 Recording transactions in their appropriate ledger accounts.

According to the dual aspect concept, every transaction has twofold effect on the position of the
business. It is therefore important that the two accounts are identified, classified and recorded
appropriately. The double entry rule applies. The rule states that
For every debit entry there must be a corresponding credit entry.
Note also that this rule applies differently on the three classes of ledger accounts.
1.15.1.1 For all real accounts:
Dr. what comes in or the increase in value and;
Cr. what goes out or the decrease in value.
1.15.1.2 For all person accounts:
Dr. the person who receives the value or simply the receiver and
Cr. the person who gives out value or simply the giver.
1.15.1.2.1 For all nominal accounts;
Dr. all expenses and loses
Cr. all incomes, gains and liabilities.
Example
Cash Transaction
1/06/17 - Sold goods K2,300 cash

Cash Account
Date Particulars F DR (K) CR (K)
1/06/17 Sales 2,300

Sales Account
Date Particulars F DR (K) CR (K)
1/06/17 Cash 2,300

Bank Transaction

43
 2/06/17 – Bought goods for re-sale at K4,000 by cheque
Bank Account
Date Particulars F DR (K) CR (K)
2/06/17 Purchases 4,000

Purchases Account
Date Particulars F DR (K) CR (K)
2/06/17 Bank 4,000

Credit Transaction
3/06/17 - Bought goods on credit from H. Banda K3,000
Purchases Account
Date Particulars F DR (K) CR (K)
3/06/17 H. Banda 3,000

H. Banda
Date Particulars F DR (K) CR (K)
3/06/17 Purchases 3,000

Contra Transaction
4/06/17 – Withdrew cash from bank, K1,000
Cash Account
Date Particulars F DR (K) CR (K)
4/06/17 Bank 3,000

Bank Account
Date Particulars F DR (K) CR (K)
4/06/17 Cash 3,000

REVISION EXERCISE
I /06/ 2017 Bwalya started business with K20000 cash
3/06/2017 bought goods by cash K5000
4/06/2017 paid rent by cash K1000
10/06/2017 deposited K8000 of the cash into the bank.
12/06/2017 Bought building by cheque K120
20/06/2017 sold goods by cheque K600

2 4 books of prime entry

 What are books of prime entry?
 Identify the types of books of prime entry
 Explain what each book of prime entry is used for
 Identify and explain the source document(s) used to prepare each book

44
  Enter transactions in each book of prime entry
 Distinguish between a trade discount and a cash discount
 Post each book to the ledger
 Extract a trial balance
Books of prime entry are books where transactions are first recorded. They are sometimes referred
to as subsidiary books.
Outline the books of prime entry
i. Examples of these books are:
ii. Cash Book
iii. Petty Cash Book
iv. Purchases Day Book
v. Sales Day Book
vi. Purchases Returns Day Book
vii. Sales Returns Day Book
viii. General Journal or Journal Proper

2.1 4.1 Cash Book

State the subsidiary book and explain the type of transactions which are recorded in each of them.
The cash book is a book of prime entry in which cash transactions are recorded.
Cash transactions are those in which goods are exchanged for cash in the form of notes and coins, or
are paid for using the cheque system and the debit cards (ATM Cards). Cash transactions involving the
exchange of notes and coins with goods are used to compile the cash account.
Transactions involving Cheques are used to compile the bank account.
2.1.1.1 PREPARING A CASH BOOK
The cashbook is the only book of prime entry that is also part of the ledger.
The cash book is a real account and the application of the double entry is:
 Dr what comes in/inflow/increase and
 Cr what goes out/outflow/decrease

The cash book with only cash and bank accounts is called the two column cash book.
When the discount column is included the cash book is called the three-column cash book.
The discount column has two sections- The discount allowed and received columns.
Cash discount is an allowance given whenever a debt is settled with in a given time.
The allowance given by the business to its customers/debtors to encourage prompt settlement
of amounts owed is called allowed.
Discount allowed is a loss to the business as it reduces the value of the asset debtors.
The allowance given to the business by the creditors/suppliers when it pays its debts is called
discount received.
Discount received is a gain to the business as reduces the value of the liability creditors.
The debit side of the cash book (bank/cash account) records cash inflows from:

45
Sales, rent received, commission received, receipts from debtors.
Transfers of cash from the bank to the office- contra entries
Cash withdraws for personal use - drawings
The credit side of the cash book (bank and cash) records
Payments to suppliers, cash purchases, rent and rates, salaries and wages, bills.
Transfers of cash to bank account- contra entries
Cash account of the cash begin with a debit balance and may end with either debit or nil balance.
The debit balance on either cash or bank account of the cash represents cash available in hand. A
special case sometimes occurs where the bank account of the cash book shows a credit balance.
This means that the account has been overdrawn. This state is called a bank overdraft. The business
has borrowed from the bank.
CONTRA ENTRIES
Where a transaction’s double entry is completed within the cash book, it is known as a contra entry.
Examples are:
 Cash paid into the bank from cash till
 Cash withdrawn from the bank for business use.
The letter ‘c’ is inserted in the folio column to denote that an item is a contra.
Example 1
Record transactions in D. Nyirenda’s Cash Book for January, 2004.
01. Bank K6 000 000
16. Sales by cheque K5 500 000
20. Bought goods paying by cheque K1 500 000
22. Bought a motor vehicle paying by cheque K10 000 000
24. Paid for traveling expenses by cash K400 000
27. Withdrew cash from the bank for business use K4 500 000
28. Bought a machine paying by cash K4 000 000
30. Received a cheque for K2 500 000 as a loan from P Lubasi
31. Paid salaries by cheque K2 000 000

D. Nyirenda’s Cash Book for January, 2004

DATE CASH ACCOUNT BANK ACCOUNT DISCOUNTS

2004 DETAILS FOL DR CR DR CR ALL REC’D

JAN- balances 6,000,000
1 sales 5,500,000

46
 purchases 1,500,000
16 motor vehicle 10,000,000
Traveling 400,000
20 expenses 4,500,000
Cash/ bank 400,000
22 Machinery 2,500,000
p. lubasi 2,000,000
24 salaries c/d 500,000
balances
27

28

30

31
4,500,000 4,500,000 14,000,000 14,000,000
Balances b/d 500,000

QUESTION 2
Enter the following transactions in the three-column cash book of J Pokololo, a general dealer. Balance
off the cash book at the end of the month and post the cash book to the ledger.
20x5
May 1 Balances brought down from April:
Cash balance K926 000
Bank balance K 6 450 000
Debtors accounts:
A Maambo K240 000
B Kolwe K460 000
Creditors accounts:
V Mbao K300 000
C Mwewa K160 000
3 Cash sales K144 000.
4 Purchased goods by cheque K860 000.
5 A Maambo paid us by cheque K220 000, having deducted K20 000 cash discount.
8 Paid V Mbao’s account by cash, deducting 5% cash discount.
10 Paid wages by cash K250 000.
14 Received K430 000 cash from B Kolwe, cash discount K30 000.
16 Deposited cash into the bank K600 000.
20 We paid C Mwewa by cheque, deducting 10% cash discount.
24 Sales by cheque K420 000.
Three-column cash book of J Pokololo

47
DATE CASH BANK ACCOUNT DISCOUNTS
ACCOUNT
2004 DETAILS FOL DR CR DR CR ALL REC’D
MAY- b/f
1

16

20

22

24 c/d

27

28

30

31

Balances b/d
NOTE:
1. The opening balances for debtors and creditors should not be entered in the cash book but entered
in the respective debtors and creditors accounts in the sales ledger and purchases ledger.
2. The corresponding double entries for the total discounts are entered in the personal accounts of
debtors and creditors.
3. All. Stands for discount allowed while Rec. stands for discount received

4.2 The petty cash book

o Petty cash is used to make small payments.
o Petty cash must be kept safely in a lockable cash box.
o Because of its nature, for security reasons petty cash should be in the hands of a responsible
officer and that not everybody in an organization is eligible for petty cash.
o Petty cash is operated on an imprest system. This is where the petty cashier is reimbursed what
has been spent in order to restore the imprest amount.

Thus: FLOAT xx
Less expenditure xx
Balance xx
Reimbursement xx
FLOAT xx
All payments out of petty cash must be fully authorized by signing on the voucher.
o If there’s no receipt (document) to support the claim, the petty cashier must consult the supervisor.
o Entries made (recorded) in petty cash book originate from a document called petty cash voucher.

48
o The petty cash book is used as an accumulative book for small expenses of which the totals for the
period are transferred to respective expense account in general ledger.
Petty cash expenditure involving Value Added Tax, should be recorded separately in petty cash book
with separate amounts in the Value Added Tax column

Analysis Columns
The petty cash book has analysis columns such as:-
Postage - eg. Parcels, letters, stamps.
Stationery - eg. Pens, envelopes, books, pencils.
Office expenses- eg. Coffee, tea, sugar, milk.
Motor Expenses- repairs, fuel.
Travelling- travel, transport expenses, logistics.
Sundry Expenses- beverages, milk, etc.
Cleaning- detergents, disinfectants.

RECORD TRANSACTIONS IN THE PETTY CASH BOOK

QUESTION:

The following is a summary of the petty cash transactions of JK Ltd for May 20x5:
May 1. Received from cashier K300 000 as petty cash float
Payments for the month were as follows:
2. Postage K18 000
3. Travelling K12 000
4. Cleaning K15 000
7. Petrol for delivery van K22 000
8. Travelling K25 000
9. Stationery K17 000
11. Cleaning K18 000
14. Postage K5 000
15. Travelling K8 000
18. Stationery K9 000
18. Cleaning K23 000
20. Postage K13 000
24. Service of delivery van K43 000
26. Petrol K18 000
27. Cleaning K21 000
29. Postage K5 000
30. Petrol K14 000
You are required to:
Rule up a suitable petty cash book with analysis columns for expenditure on: cleaning, motor expenses,
postage, stationery, and traveling.
Enter the month’s transactions
Enter the receipt of the amount necessary to restore the imprest and carry down the balance for the
commencement of the following month.
Show how the double entry for the expenditure is completed.

49
4.3 PURCHASES DAY BOOK
Explain the purchases day book
‘Purchases’ refers to items bought for resale, whether by cash or on credit.
The purchases day book is a book where we record items bought on credit for resale.

The source document for the purchases day book (also known as purchases journal) is the purchase
invoice (or original invoice).
Record transactions in the purchases day book
QUESTION:
From the following transactions, you are to prepare the purchases day book, post the book to the
ledger and extract a trial balance as at 31 January 20x5:
20x5
Jan. 3 Credit purchases from: B Zimba K580 000; J Phiri K360 000.
18 Bought goods on credit from: C Banda K900 000 less 10% trade discount.
26 Bought goods on credit from: D Soko K600 000 and B Zimba K800 000 less 10% trade
discount
Solution
Purchases Day Book
_____________________________________________________________
Date Details Invoice no Amount
20x5 K’000
Jan 3 B Zimba 004 580
3 J Phiri 098 860
18 C Banda 014 810
26 D Soko 066 600
26 B Zimba 042 720

31 Transfer to purchases account 3 57

4.4 THE SALES DAY BOOK

‘Sales’ in accounting refers to the sale of items previously bought.

The source document for the sales day book (also known as sales journal) is the sales invoice (or
duplicate invoice).
Record transactions in the sales day book
QUESTION
B kayumba had the following credit purchase and sales for the month of May 2015:
You are to prepare kayumba’s purchases and sales day book only.
May 1 bought good from A.Banda:
5kg of sugar at k20 per kg
3kg of salt at k5 per kg
May 5 sold goods to Hatwaambo:
5kg of rice at k30 per kg
10 bags of potatoes at k20 each

50
May 10 bought goods on credit from K Mwandu at k20 on credit
May 16 bought goods on credit from p Mwale:
2kgs of rice at k7 per kg
1 bag of potatoes at k25
May 31 Sold goods on credit to B N’gandu
20 kg of caster sugar at a total of k100

B.KAYUMBA’S PURCHASES DAY BOOK FOR THE MONTH OF MAY

DATES SUPPLIERS NAME Inv.NO. Add Totals
01.05.16 A. Banda
5kg sugar @ k20 each 100
3Kg salt @k5 each 15
115
10.05.16 K. Mwandu
1kg sugar @ k20 20 20
16.05.16 P. Mwale
2kg rice@k7 each 14
1 bag of potatoes @ k25 25
39
debit purchases account in the GL 174

B. KAYUMBA’S SALES DAY BOOK FOR THE MONTH OF MAY 2016

DATES CUSTOMERS NAME INV.NO Add total
05.05.16 Hatwaambo
5kg of rice @ k30 per kg 150
10 bags of potatoes @ k20 each 200
31.05.16 B.N’gandu 350
20 kg of caster sugar @ k100 100
credit sales account in the GL 450

C Simwanza, a sole trader specializing in material for Nigerian clothing , has the following purchases
and sales for March 20x5:
March 1 Bought from Mulila stores: silk K360 000, cotton K720 000. All less 25% trade discount
8 Sold to A Gondwe: linen items K252 000, woolen items K396 000. no trade discount.
15 Sold to B Hanzala: silk K324 000, linen K1 296 000, cotton items K1 080 000. All less
20% trade discount.
23 Bought from C Kwabe: cotton K792 000, linen K468 000. All less 25% trade discount.
24 Sold to D Shawa: linen items K378 000, cotton K432 000. All less 10% trade discount.
31 Bought from J Mudenda: linen items K2 478 000. Less 33⅓% trade discount.
Required:
a) prepare the purchases and sales journals for C Simwanza from the above
b) post the items to the personal accounts
c) post the totals of the journals to the sales and purchases accounts.
4.5 PURCHASES RETURNS DAY BOOK

Explain the purchases returns day book

A Purchases Returns Day Book is a book in which goods bought for resale but are returned by the
buyer to the supplier and are recorded in the purchases day book.

51
  Reasons for returns
 Customers are oversupplied
 Goods sent are of a wrong color, type or make.
 Goods are damaged in transit to the customer.

Whenever goods are returned to a supplier, the customer sends a debit note to the supplier.
RECORD TRANSACTIONS IN THE PURCHASES RETURNS DAY BOOK
Solution
Purchases returns day book
Date Details B/N no Amount
20x5 K’000
Jan 5 J Phiri 0010 160
20 C Banda 0011 180
28 B Zimba 0012 162
Transfer to purchases returns account 502
4.6 SALES RETURNS DAY BOOK
Explain the sales returns day book
The sales returns day book is a book where we record goods returned to us by our customers.
Whenever goods are returned by a customer, a credit note is sent to the customer.
RECORD TRANSACTIONS IN THE SALES RETURNS DAY BOOK
QUESTION:
B Musonda experienced the following returns inwards during the month of February 20x5:
Feb 6 Returns from C Mate K84 000
18 Returns from Z Buumba K42 000
27 Returns from M Chalwe K60 000
Enter the above transactions in the sales returns day book and post the book to the ledger.
Solution
Sales returns day book
Date Details C/N NO. Amount
20x5 K’000
Feb 6 C Mate 0126 84
18 Z Buumba 0127 42
27 B Zimba 0128 60
28 Transfer to sales returns account 186
You are to enter up the sales, purchases and the returns inwards and returns outwards journals from
the following details, then to post the items to the relevant accounts in the sales and purchases ledgers.
The total of the journals are then to be transferred to the accounts in the general ledger.
20x5
May 1 Credit sales: T Tamba K504 000; L Dimba K1 332 000; K Banda K1 305 000.
3 Credit purchases: P Phiri K1 296 000; H Hantobolo K225 000; B Sinda K684 000.
7 Credit sales: K Kwabe K801 000; N Malama K702 000; N Lombe K2 313 000.
9 Credit purchases: B Mpafya K216 000; H Hantobolo K522 000;
H Muleta K1 107 000.

52
 11 Goods returned by us to: P Phiri K108 000; B Sinda K198 000.
14 Goods returned to us by: T Tamba K45 000; K Banda K99 000; K Kwabe K126 000.
17 Credit purchases: H Hantobolo K486 000; B Mpafya K585 000; L Ntembe K675 000.
20 Goods returned by us to: B Sinda K126 000.
24 Credit sales: K Mutinta K513 000; K Kwabe K585 000; O Gondwe K1 008 000.
28 Goods returned to us by: N Malama K216 000.
31 Credit sales: N lombe K495 000.
7. JOURNAL PROPER (GENERAL JOURNAL)
The word journal means ‘a book containing the record of events as they occur day by day’.
Examples of entries made in the journal proper are:
 Purchase and sale of fixed assets on credit
 Opening entries Correction of errors
 Transfer of items between accounts
 Creation, increase or decrease of provisions and reserves

The journal shows:

 The name(s) of the account(s) to be debited and the amount(s)
 The name(s) of the account(s) to be credited and the amount(s)
 A brief explanation of the transaction called a narrative (narration)

RECORD TRANSACTIONS IN THE JOURNAL PROPER

The layout for the journal is as follows:

Journal proper_
Date Details F Dr Cr
20x5 K’000 K’000
Jan 1 Name of account to be debited xxx
Name of account to be credited xxx
Narrative

QUESTION:
To illustrate the recording of entries in the journal proper, we shall only look at three groups of entries:
Purchase and sale of fixed assets on credit
Transfers between ledger accounts
Opening entries
a) Purchase and sale of fixed assets on credit
i) On 4th May 20x5, a company bought a machine on credit from Major Ltd for K10 million.
Record the transaction in the journal and post it to the ledger.
Solution.

53
 JOURNAL PROPER
Date Details F Dr Cr
20x5 K’000 K’000
May 4 Machinery 10 000
Major Ltd 10 000
c) Opening entries
These are the entries required to open up a new set of books e.g. when a trader decides to keep his
books on a double entry principle. Opening entries are simply entries showing the financial position of
a business as at the time a new set of books is to be opened. The excess of assets over
liabilities at that date is the capital of the business.
In practice, opening entries may be made only once in the lifetime of the business. However, many
book keeping exercises commence by requiring you to do the opening entries.
When opening a new set of books, all assets should have debit opening balances while liabilities and
capital should have credit opening balances.
QUESTION:
B Maala has been in business for sometime without keeping proper accounting records. He has now
decided to have a full double entry set of books.His assets and liabilities on 1st May 20x5 are as
follows:
Assets: Buildings K7 000 000; Motor van K4 500 000; Stock K1 200 000; Debtors: - C Bwalya K6 000
000, O Moono K400 000; Cash at bank K850 000 and Cash in hand K300 000.
Liabilities: Creditors:- W Chansa K750 000, E Kasonde K600 000.
Step 2 Having identified the books, you should now record the transactions in the respective
books. For our question, the entries in the books will be as follows:
JOURNAL PROPER
Date Details F Dr Cr
20x5 K’000 K’000
Jan 1 Buildings 24 000
Motor vehicle 16 000
Stock 3 000
Debtors: - V Lubinda 5 500
- M Tembo 3 000
Cash at bank 4 200
Cash in hand 1 800
Creditors: - D Banda 6 000
- E Kasonde 1 000
Capital (bal. Fig.) 50 500
57 500 57 500
Being assets, liabilities and capital entered to open a new book
Jan 13 Motor vehicle 14 000

54
 Toyota (Z) Ltd 14 000
Purchase of a motor vehicle from Toyota (Z) Ltd on credit

32 5.THE TRIAL BALANCE - INTRODUCTION

32.1 OBJECTIVES QUESTIONS

 Define a trial balance

 Explain the purpose of a trial balance
 Extract a trial balance from ledger.

32.1.1.1 What is a trial balance?

A trial balance is defined as a list of debit and credit balances extracted from the ledger which when
added the totals must be equal.
32.1.1.2 Explain the purpose of the trial balance.
The purpose of a trial balance is:
To check the arithmetic accuracy or errors from the ledger.
To check whether the double entry has been completed.
To check fraud.
By virtue of the principle of double entry book-keeping, the totals of debit and credit balances must
agree. Should this not be the case, then there must be an error in the books of account.

32.2 5.1 PREPARE A TRIAL BALANCE

The first task in preparing a trial balance is to balance all the ledger accounts, and then the balances
must be extracted and entered in the trial balance. When extracting the trial balance, the following
points should be taken note of:
Accounts with debit balances include the following classes of accounts:
Dr. Assets, Expenses & Losses. Hence the acronym DR.A.E.

Accounts with credit balances include the following classes of accounts.

Cr. Incomes, Liabilities & Gains. Hence the acronym = CR.I.L.G
Therefore, trial balance construction is guided by the following model

ASSETS
LIABILITIES
DEBIT ALL

CREDIT ALL

DOUBLE
EXPENSE
ENTRY INCOMES
S
COMPLETE

LOSSES GAINS

55
QUESTION 1
You are required to prepare a Trial Balance and balance it as at 31/03/09
K
Purchases 61, 420
Sales 127, 245
Stock (inventory) 7, 940
Capital 25, 200
Bank overdraft 2, 490
Cash 140
Discount received 62
Discount allowed 2, 480
Returns inwards 3, 486
Returns outwards 1, 356
Carriage outwards 3, 210
Rent & insurance 8, 870
Allowance for doubtful debts 630
Fixtures and fittings 1, 900
Van 5, 600
Debtors 12, 418
Creditors 11, 400
Drawings 21, 400
Wages & salaries 39, 200
General office expenses 319

Solution
TRAIL BALANCE (as at 31st march, 2009)
Details DR CR
K K
Purchases 61, 420

Sales 127, 245

Stock (inventory) 7,940

Capital 25, 200

Bank overdraft 2, 490

Cash
140
Discount received 62

Discount allowed

56
 2, 480
Returns inwards
3, 486
Returns outwards 1, 356

Carriage outwards
3, 210
Rent & insurance
8, 870
Allowance for doubtful debts 630

Fixtures & fittings

1,900
Van
5, 600
Debtors
12, 418
Creditors 11, 400

Drawings 21, 400

Wages & salaries 39, 200

General office expenses 319

168, 383 168, 383

QUESTION 2
The following trial balance was drawn by an inexperienced book-keeper on 30 June 2009.
J. MULEYA TRIAL BALANCE For the month ended 30 June 2009
ACCOUNT TITLE DR CR
Sales 19 740
Purchases 11 280
Cash at bank 1140
Cash in hand 210
Capital (1 July 2008) 9 900
Drawings 2 850
Office furniture 1 440
Rent 1 020
Wages and salaries 2 580
Discount allowed 640
Discount received 360
Debtors 4 970
Creditors 2 490
Stock (1 July 2008) 2 970
Provision for bad debts (1 July 2008) 270

57
 Delivery vans 2 400
Vans running expenses 450
Bad debts written off 810
Suspense account 300
32 910 32 910

The following transactions had been omitted from the records while others had been wrongly recorded:

P. Njakule, a debtor owing K200, had been declared bankrupt but no record had been made in the
books.

Vans running expenses, K100, had been recorded in the delivery vans account.

The proprietor, J. Muleya, had taken goods worth K80 for his personal use. No record was made in the
books.

An invoice for K300 received from W. Shitisha had been misplaced.

Required:
Draft the correct Trial Balance with correct heading. Show how it would appear after posting the
transactions (i) to (i) to the appropriate accounts.

J. MULEYA
REDRAFTED TRIAL BALANCE AS AT 30 JUNE 2009
DR CR.
Purchases/sales 11, 500, 000 19, 740, 000
Bank 1,140, 000
Cash 210, 000
Capital (01/07/08) 9, 900, 000
Drawings 2, 930, 000
Office furniture 1, 440, 000
Rent 1, 020, 000
Wages and salaries 2, 580, 000
Discounts 640, 000 360, 000
Debtors /creditors 4, 770, 000 2, 790, 000
Stock (01/07/08) 2, 970, 000
Provision for bad debts 270, 000
Delivery vans 2, 300, 000

58
 Vans running expenses 550, 000
Bad debt written off 1,010, 000
33, 060,000 33, 060, 000
NOTES:
 Debtors – reduced or credited k200
 Bad debt increased by k200
 Motor Van expenses increased by k100 and delivery van reduced by a
k100
 Drawings increased by k80 then purchases reduced by k80.
 (11280- 80)= k11200
 Purchases increased by k300 and creditors increased by k30
Activity:
The Trial Balance below related to the business of Kandolo as at 31st March, 2015, the end of
the month.
Dr Cr
K K
Sales 70 000
Purchases 30 000
Debtors 45 000
Creditors 20 000
Cash at bank 15 000
Petty cash 5 000
Sales returns 1 000
Purchases returns 1 500
Equipment 18 000
Machinery 28 000
Capital 52 000
Carriage inwards 1 500
98 000 189 000
The above Trial Balance was prepared by an incompetent Book- keeper. You are required to
re-draft it correctly with a correct heading.

33 FINAL ACCOUNTS OF SOLE TRADERS

33.1 Objective questions

a)What is meant by the term final accounts

b)Explain the purpose of the trading account
c)Explain the difference between gross profit and net profit
d)Prepare a trading account from the given information
e)Define and Explain how to deal with the following items when preparing a trading
account:
 Opening and closing stocks
 Returns inwards and outwards
 Trading expenses
a) Explain the purpose of the profit and loss account.

59
 b) Prepare the profit and loss account from the given information
c) Define a balance sheet
d) Explain the order of permanence and liquidity for showing fixed and current assets in the
balance sheet.
e) Prepare the trading, and profit and loss account from information given in a trial balance.
f) Draw up a balance sheet from the information given.

33.2 FINAL ACCOUNTS

Also known as Financial Statements

33.2.1.1 WHAT ARE FINAL ACCOUNTS?
The term final account is used to refer to the stage in the accounting process at which
business activities are summarized and reported. Three statements are presented to
communicate the performance, profitability and position of the business
 Performance - Trading account,
 Profitability - Profit and loss account
 Financial position - Balance sheet (although a balance sheet is not an account).

NOTE
Trading Account and profit and loss account are also known as INCOME
STATEMENTS. It is made up of nominal accounts.
-They are incomes and expenses.
Balance sheet is also known as position statement.
-It is made up of assets and liabilities.
TRADING ACCOUNT
33.2.1.2 Explain trading account
 To trade is the buying or selling of goods with the intention of making profit
 A trading account is prepared to calculate the gross profit /loss of the
business in a given trading period.
33.2.1.3 Explain the terms used in the trading account
1.1.4. TURNOVER
 Turnover means Net Sales
 It is arrived at by deducting Sales Returns from Sales
 It is the actual value of goods we Sold to our customers
TURNOVER = SALES – SALES RETURNS
1.1.5. OPENING STOCK
 This refers to the value of goods the business has unsold or not yet sold at
the beginning of the period.

1.1.6. CLOSING STOCK

 This refers to the value of goods unsold or not yet sold at the end of the
trading period.
 To find the closing stock, the business will have to do a Stock Tacking.
 Stock Taking is the physical counting of the goods.

1.1.7. PURCHASES
Purchases are goods bought for resale.

60
 1.1.8. PURCHASES RETURNS
 These are goods bought but have taken them to the seller due to the reasons
such as:-
 Damaged in transit, wrong color, wrong size, over supply by the seller.

1.1.9. NET PURCHASES

This is the difference between purchases and purchases returns.
1.1.10. COST OF SALES
 This is the actual cost of goods sold.
 It is the cost of putting goods into a saleable condition.
 The other name is cost of goods sold.
 It is made up of Purchases and other direct expenses like carriage inwards.

33.2.1.4 COST OF SALES = OPENING STOCK – CLOSING STOCK

CARRIAGE
 Carriage refers to the cost of transporting goods from one place to another.
It is divided into two:-
33.2.1.5 CARRIAGE INWARDS
 This is the cost of transporting goods bought into the business.
CARRIAGE OUTWARDS
 This is the cost of transporting goods outside the business to the customers for the
sales made.
GROSS PROFIT
 This is profit before deductions of expenses
 Gross profit is the excess of sale over the cost of sales, whereas gross loss is the
excess of cost of sales over sales.
QUESTION:
From the following balances, prepare the trading account for W. Koswe for the year ended 30th
June 2004:
Sales K600 000
Sales returns K50 000
Stock 1st July 2003 K60 000
Purchases K400 000
Purchases returns K20 000
Stock 30th June 2004 K70 000.
SOLUTION
W. Koswe
Trading account for the year ended 30th June 2004
K’000 K’000 K’000
Sales 600
Less: sales returns 50
Net sales (or turnover) 550
Less: cost of sales:
Opening stock 60
Add: purchases 400
Less: purchases returns 20
380
Total stock available 440

61
 Less: closing stock ( 70)
Cost of goods sold 370
Gross profit 180

EXPENSES IN THE TRADING ACCOUNT

DEFINE EXPENSES
Expenses incurred in bringing the goods into the firm/business and those incurred in putting
goods into the saleable condition should be charged to the trading account.
Examples of these are:
a) Expenses in buying goods:
 Carriage inward
 Customs duty added to purchases.
 Freight charges

b) Expenses in putting goods into saleable condition:

 Warehouse wages
 Warehouse rent added to cost of goods sold.
 Warehouse light and heat

QUESTION 2
On 31st December 2004, John Banda had the following balances:
Sales K5 000 000
Opening stock K950 000
Purchases K3 000 000
Sales returns K500 000
Purchases returns K450 000
Carriage inwards K250 000
Warehouse wages K300 000
Closing stock K440 000.
You are required to prepare John Banda’s Trading Account for the year ended 31st December 2004.

SOLUTION
John Banda
Trading account for the year ended 31st December 2004
K’000 K’000 K’000
Sales 5 000
Less: sales returns 500
Net sales 4 500
Opening stock 950
Add: Purchases 3 000
Less: purchases returns 450
2 550
Add: carriage inwards 250

62
 2 800
Total stock available 3 750
Less: closing stock (440)
Cost of goods sold 3 310
Add: warehouse wages 300
Cost of sales 3 610
Gross profit 890

33.3 PROFIT AND LOSS ACCOUNT

The profit and loss account is prepared to calculate the net profit/loss in a given trading period.
It comprises the gross profit /loss plus any other income other than that from sales, less all
other expenses other than the buying expenses incurred by the business. At the end of the
accounting period, the net profit or loss is transferred to the capital section in the balance
sheet.
Question
Fungai Nkomeki’s is an importer of second hand clothes whose trial balance as at
31st,December 2015 is as follows:
Account title Dr Cr
Sales 191,600
Purchases 96,680
Returns outwards 1,920
Stock 1/1/2015 21,560
Wages 23,000
Motor vehicles expenses 13,000
Premises at cost 120,000
Motor vehicles at cost 40,000
Provision for depreciation on motor vehicle 30,000
Provision for depreciation on premises 24,000
Rent and rates 15,400
Light and heat 9,900
General expenses 12,400
Discount received 10,600
Provision for bad debts 1,120
Returns inwards 11,600
Discount allowed 5,400
8% bank loan repayable 30th,June 2019 60,000
Cash 540
Bank 3,360
Debtors 37,000
Creditors 19,500
Drawings 22,620
Commission received 22,900
Capital 70,000
Insurance 5,900 ________
435,000 435,000

63
 Additional information:
1. Stock at 31 December 2015 Was valued at k25,200.
2. 20% of the wages was carriage inwards and 80% selling expenses.
3. depreciation is to be charged on the premises after the sale of one % per annum on cost
using the straight line method and 25% per annum on Motor vehicles using reducing balances
method.
Depreciation of delivery motor vehicles to be shared 4:1 between selling expenses and
carriage inwards.
4. Interest on loan is due on 31 December 2015.
5. Insurance in advance amounted to K900 and electricity due amounted to k260 on 31 December
2015.
6. Provision for doubtful debts is to be maintained at 3% of debtors.
Required:
(a) Prepare trading profit and loss account [ income statement] for Fungai Nkomeki for the
year 31 December 2015.
(b) Balance sheet as at 31 December 2015.

Solution
Fungai Nkomeki’s
Trading Profit and Loss Account for The Year Ended 31 December 2015
PARTICULARS K K K

64
Sales 191,000
Less returns inwards
Net sales or turnover 11,600 180,000
COST OF GOODS SOLD:
Opening stock
purchases 96,680 21,560
Add: wages [20% x 23,000] 4,600
Depreciation [ 25% x 10,000 = X 5]
1 / 500
101,780
Less: returns out wards 1,920)
Net purchases
Total stock available for sale 99,860
Less: closing stock 121,420
Cost of goods sold (25,200)
Gross profit (96,220)
Add : Other Incomes/ Gains 83,780
Discount received
Commission received 10,600
Decrease in provision for bad debts [1120-1110] 22,900
Total additional income 10
Total profit 33,510
Less: Expenses/ Loses 117,290
Wages [80%X 23,000]
Motor expenses 18,400
Rent and rates 13,000
Light and heat 9,900 15,400
Add: amount owing 260
General expenses 10,160
Depreciation: 12,400
Premises
Motor vehicles 1,200
Interest on loan 2,000
Discount allowed 4,800
Total expenses 5,400
Net profit (87,760)
29,530

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 FUNGAI NKOMEKI’S BALANCE SHEET AS AT 31ST, DECEMBER 2015
FIXED ASSETS COST DEP NBV
Premises 120,000 25,200 94,800
Motor vehicles 40,000 32,500 7,500
Total fixed assets 160,000 57,700 102,300
CURRENT ASSETS
Stock 25,200
Debtors 37,000
Less: provision for bad debts 1,110
Net debtors 35,890
Insurance prepaid 900
Cash 540
Total current assets 62,530
LESS CURRENT LIABILITIES
Creditors 19,500
Bank overdraft 3,360
Loan interest due 4,800
Electricity due 260
Total current liabilities (27,920)
Net assets/working capital 34,610
Total Net asset 136,910
FINANCED BY:
Capital 70,000
Add: net profit 29,530
99,530
Less: drawings (22,620)
Capital owned 76,910
Add: long term liabilities.
Bank loan 60,000
136,910

33.4 Points to remember about the balance sheet.

 A balance sheet is a statement showing the financial position of the business at a given date.
 A balance sheet is also known as a position Statement.
 It consists of the remaining balances for assets, liabilities, capital, drawings and the net profit or
loss.
 It shows what a business owns and owes at a particular given date.
 A balance sheet is not part of double entry.

ASSETS
These are resources or things owned by the business.
In the balance sheet, assets are shown under two headings namely:-
NON- CURRENT ASSETS OR FIXED ASSETS
These are resources that:
-Are expected to be used in the business for a long time ie. More than 12 months.

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-Were not bought for resale
-Examples include: land and buildings, fixtures and fittings, premises, etc.
CURRENT ASSETS
These are assets that:
 Are likely to change form within 12 months.
 They include goods for resale at a profit.
 Assets in the Balance Sheet are listed starting with the assets that are least likely to turn into
cash.
 Prepayments or payments in advance are treated as current assets in the Balance Sheet, ie.
Order of permanence.
Balance sheet layout:
There are two methods of laying out assets in the balance sheet; order of permanence and order of
liquidity:
(a) Order of permanence: This is when assets are arranged starting with the most difficult item to turn
into cash
or the most permanent item (i.e. the item that will be kept the longest), e.g.
Fixed Assets:
Land and building,Fixtures and fittings, Machinery, Motor vehicles
Current Assets:
Stock,Debtors,Bank ,Cash
(b) Order of liquidity: This is where you start with the least permanent item or the easiest
items to turn into cash. It is the opposite of the order of permanence, eg.
CURRENT ASSETS:
Cash,Bank,Debtors,Stock
LIABILITIES
These are amounts a Company owes or borrowed from other Organizations or Individuals.
There are two types:
CURRENT LIABILITIES
These are liabilities due for payment in the shortest time, usually within 12 months.
Examples include: Creditors, Bank-overdraft.
Adjustments called Accruals are recorded under current liabilities.

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 MASTER KEYS PART TWO
GRADE 11 WORK

Adjustments in the Final Accounts

34 Capital expenditure and revenue Expenditure.

1.1 Rationale
Expenditure is the disbursement of funds for acquisition of assets or for services rendered to the
business. This topic is designed to help learners appreciate the importance of appropriate classification
of business items as a basis of reliability of accounting information. The deductive reasoning approach

68
is a more suitable method of lesson delivery.

34.1 1.2 objectives

 Define capital and revenue expenditure giving examples

 Show how they are treated in financial statements
 Describe revenue and capital income and their treatment in financial statements.
 Describe why failure to distinguish the above may lead to distortion of financial statements
 explain the effect on the financial statements, and the profits shown there, if revenue
 expenditure is wrongly treated as being capital expenditure, and vice versa.

34.2 1.3 Points to note

34.2.1 Definition
Expenditure is the disbursement of funds from the business for acquisition of assets or for services
rendered to the business; or
It is the amount of economic resources given up in obtaining goods and services.

34.2.2 Classification
Expenditure is classified as either capital or revenue expenditure depending on the item for which funds
have been disbursed.
 Capital expenditure
Capital expenditure is incurred when a business spends money either to buy fixed assets, or add to the
value of an existing fixed asset.
 It is an expenditure to:
 Get a long-term benefit,
 Buy fixed assets, or
 Add to the value of an existing fixed asset
Included in such amounts should be spending on
 acquiring fixed assets
 bringing them into the business
 legal costs of buying buildings
 carriage inwards on machinery bought
 any other cost needed to get a fixed asset ready for use.
Adding Value
Adding value means spending money on an existing asset in order to improve its performance or
increase production capacity. E.g. carrying out renovations on machinery in order to increase
production capacity.

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  Revenue expenditure
 This is expenditure incurred on the running of the business on a day to day basis as the
business is carrying on its trading activities. It is an expenditure for:
 The acquisition of assets for resale, or For the purpose of earning revenue income
It is also incurred in maintaining the fixed assets.. Examples may include:
 Repairing machinery
 Replacing broken window panes to a building
 Electricity expenses in running machinery
 Petrol costs in running the vehicle
 Purchase of goods for resale
Note
Revenue expenditure is chargeable to the Trading and Profit and Loss Account, while capital
expenditure will result in increased figures for fixed assets in the Balance Sheet.
getting the classification wrong affects, the profits reported, the capital account and asset values in the
financial statements. It is, therefore, important that this classification is correctly done.
Accounting Treatment
 Capital Expenditure
 On acquiring assets,
Dr. Asset accounts
Cr. Bank / Cash / Creditors
 At the year end, the balances go to the Balance Sheet
 Revenue Expenditure
 When there are expenses,
Dr. Expenses accounts
Cr. Bank / Cash / Creditors
 At the year end, the balances will be debited to the Profit and Loss Account, or Trading
Account.

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71
34.2.3

34.2.4 Capital and revenue income

Income is proceeds coming into the business. Where income is coming from is what would be
identified as capital or revenue income.
(a) Capital income
Capital income are proceeds arising from the sale of Fixed assets and long term investments. The
profits or losses from the sale of Fixed assets are included in the income statement for the year in
which the sale took place.
Example: suppose a machinery is bought for K10,000, and four years later sold for K8,000. The
K10,000 would be treated as capital expenditure and K8,000 capital income. The loss K2,000 (10,000
– 8,000) would be shown in income statement.
(b) Revenue income
This is income generated in the normal cause of running the business. Included are:
revenue from ordinary trading (sales)
 interest received
 dividends received
 discount received
 commission received etc.

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34.2.5 Treatment of loan interest
If money is borrowed to finance the purchase of a fixed asset, interest will have to be paid on the loan.
Loan repayment is capital expenditure while loan interest which is not a cost of acquiring the asset, but
is simply a cost of financing its acquisition is revenue expenditure.
. PRACTICE questions
a) Explain the difference between capital and revenue expenditure [4marks]
Capital expenditure is incurred on acquisition of new fixed asset or improving
the value of an existing fixed asset; while revenue expenditure is incurred on
day to day operations of the business which involve mainly current assets.
b) State which of the following are capital and which are revenue expenditure. Give reasons for
the classification in each case.
i. Purchase of packing materials from the cartons ltd for the dispatch of goods.
Revenue expenditure; purchase of parking materials is part of the cost of
goods sold –Daily operational expense
ii. Payment by cheque for freight costs of goods exported
Revenue expenditure; this forms part of the selling expenses which
are daily operating expenses.
iii. Purchase of laser jet printer for use in the office from alpha business equipment.
Capital expenditure – acquisition of new fixed asset
iv. A.Orzel, a partner in the firm, paid for motor vehicle parts for the firm out of her private
bank account.
payment by partner is capital expenditure as it represents capital
injection into the business where as the expense on motor vehicle parts
constitutes revenue expenditure as it does not improve the value the
fixed asset[8marks]
Question two.
(a) What is meant by ‘capital expenditure’, and ‘revenue expenditure’?
(b) Some of the following items should be treated as capital and some as revenue. For each of
them state which classification applies:
(i) The purchase of machinery for use in the business.
(ii) Carriage paid to bring the machinery in (i) above to the works.
(iii) Complete redecoration of the premises at a cost of £1,500.
(iv) A quarterly account for heating.
(v) The purchase of a soft drinks vending machine for the canteen with a stock of soft drinks.
(vi) Wages paid by a building contractor to his own workmen for the erection of an office in
the builder’s stockyard.

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35 Depreciation of fixed assets.
35.1 Objectives

 Define depreciation and explain why it is provided for

 Identify causes of depreciation
 Calculate and account for depreciation using different methods
 Identify the steps in disposal of fixed asset

35.2 Points to note:

Fixed assets are those assets of material value which are:
 of long life, and
 to be used in the business, and
 not bought with the main purpose of resale.

35.3 Definition
Depreciation is that part of the original cost of a fixed asset that is consumed during its period of use by
the business.
 It needs to be charged to profit and loss every year.
 The amount charged in a year to profit and loss for depreciation is based upon an estimate of
how much of the overall economic usefulness of a fixed asset has been used up in that
accounting period.
 It is an expense for services consumed in the same way as expenses are incurred for items
such as wages, rent or electricity.
 Because it is charged as an expense to the profit and loss account, depreciation reduces net
profit.

35.4 Causes of depreciation

Physical deterioration, economic factors, time,
35.4.1 Physical deterioration
 Wear and tear.
 Erosion, rust, rot and decay.
35.4.2 Economic factors
Obsolescence. This is the process of becoming out-of-date. For instance, over the years there
has been great progress in the development of synthesizers and electronic devices used by leading
commercial musicians.
The old equipment will therefore have become obsolete, and much of it will have been taken out of use
by such musicians.

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Inadequacy. This arises when an asset is no longer used because of the growth and changes
in the size of the business.

35.5 Methods of calculating depreciation charges.

The two main methods in use are the straight line method and the reducing balance method.

35.5.1 Straight Line Method

Under this method ,Depreciation is calculated by dividing the depreciable amount of the asset by the
expected number of accounting periods of its useful life.
Annual depreciation = Cost of an asset – residual value
Expected useful life of the asset
Cost (£22,000) - Estimated disposal/residual value (£2,000)
Number of expected years of use (4)
Example
A vehicle cost K500 000 will be in use in the business for 4 years after which it will have residual value
of K20 000. Annual depreciation over 4 years will be:
(K500 000 – K20 000) = K480 000
4 4
= K120 000 P.A.

35.5.2 The Reducing Balance Method

In this method depreciation is calculated as a fixed percentage of the net book value of the asset, as at
the end of previous accounting period.
This method assumes that the business will benefit more from the use of the asset in earlier years than
later years.
Example: Reducing Balance Method
Machine was bought at a cost of K150 000. Depreciation is to be charged at the rate of 20% per
annum. Calculate depreciation for the first 3 years.

Year 1 20% x 150 000

(30 000) Depreciation
Year 2 20% x 120 000 N.B.V
(24 000) Depreciation
Year 3 20% x 96 000 N.B.V
(19 200) Depreciation
76 800
35.6 Depreciation provisions and assets bought or sold
35.6.1 Double entry records for depreciation
The method now used involves maintaining each fixed asset at its cost in the ledger account while

75
operating another ledger account where the depreciation to date is recorded. This account is known as
the ‘accumulated provision for depreciation account.
The depreciation is posted directly into the cumulative provision for depreciation account.
The double entry is:
 Debit the profit and loss account
 Credit the accumulated provision for depreciation account
Example.
Brian Blackpool, a trader with a year-end of 31 December, had the following transactions in his
accounts:
He purchased a motor vehicle for £25,000 on 1 January 2004.
Brian purchased a second motor vehicle on 1 January 2005 for £30,000.
He calculates depreciation using the reducing balance method at 20% per annum.
Required:
a) The motor vehicle account.
b) The provision for depreciation account.
c) The profit and loss account extracts and balance sheet extracts for the years 2004, 2005
and 2006.
Solution.
Computation of annual depreciation
MV 1 MV 2 TOTAL
25,000x 20% = 5,000 - 5,000
20,000x 20% = 4,000 30,000 x 20% = 6,000 10,000
16,000 x 20% = 3,200 24,000 x 20% = 4,800 8,000

a) Motor vehicles accounts

Dates Details Folio Debit Credit
01/01/2004 bank 25,000
31/12/2004 Balance c/d 25,000
25,000 25,000
01/01/2005 Balance b/d 25,000
bank 30,000
31/01/2005 Balance c/d 55,000
55,000 55,000
01/01/2006 Balance b/d 55,000
Balance c/d 55,000
55,000 55,000
Balance b/d 55,000

Provision for depreciation

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Dates Details Folio Debit Credit
31/12/04 Profit/loss acct 5,000
balance c/d 5,000
5,000 5,000
01/01/05 balance b/d 5,000
31/12/05 Profit/loss account 10,000
balance c/d 15,000
15,000 15,000
01/01/06 Balance b/d 15,000
31/12/06 Profit and loss 8,000
31/12/06 Balance c/d 23,000
23,000 23,000
01/01/07 23,000

PRACTICE QUESTION TWO

B. Fungai bought four (4) machines on credit from Kayumba equipment limited on 1 January 2010 for
k20,000 each. She charged 20% depreciation per year by reducing balance method. The policy is to
charge full year’s depreciation in the year of purchase but not charge any depreciation in the year of
sale. Two of the machines were sold for k13,000 each by cash on 1 October 2012. On the same date
two replacement machines costing k24,000 each were bought for cash. Fungi’s financial year ends on
December 31st,2012.
Required:

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Prepare the provision for depreciation account for the years 2010,2011 and 2012.[7]
Solution
DATES details folio Dr. Cr.
2010 Profit and loss account 16,000
Dec.31. Balance c/d 16,000
16,000 16,000
2011
Jan. 1 Balance b/d 16,000
Dec.31 Profit and loss account 12,800
Dec.31 Balance c/d 28,800
28,800 28,800
2012
Jan.1 Balance b/d 28,800
Oct.1 Machinery disposal 14,400
Dec.31 Profit and loss account 14,720
Dec.31 balance c/d 29,120
43,520 43,520
2013
Jan. 1 Balance b/d 29,120
Calculations for depreciation
2010 4 x 20,000 = 80,000 x 20% = 16,000
2011 80,000 – 16,000 = 64,000 X 20% = 12,800
2012 2 new machinery 24,000 x 2 = 48,000 x 20% = 9,600
2 old machinery 12,800 x 2 = 25,6000 x 20% = 5,120
Total provision for depreciation to profit and loss account. 14,720.

35.7 The disposal of an asset

When a fixed asset is sold or disposed, it is necessary to bring together:

 The original cost of the asset.
 Depreciation provided over the life of the asset.
 Sale proceeds.
This can be achieved using the following accounts:
 Fixed asset account
 Provision for depreciation account
 Disposals account
On 1 January 2007, Brian Blackpool sold the motor vehicle he purchased on 1 January 2004 for
£11,000.

Required

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Show the accounting entries for the disposal of the asset, together with the extracts for the profit and
loss account and balance sheet extracts for the year ending 31 December 2007.
If we start with the balance b/d in the previous double entry accounts for:
 motor vehicles
 provision for depreciation
we can now show the accounting entries for the disposal of the asset.
Motor vehicle account
Date Details Folio Dr. Cr.
Balance b/d 55,000
Provision for depreciation account
Date Details Folio Dr. Cr.
Balance b/d 23,000

Double entry transactions for disposal of an asset

1) Transfer the cost price of the asset sold to the disposal account
 Debit disposals account
 Credit fixed asset account
2) Transfer the depreciation already charged to the disposal account
 Debit provisions for depreciation account
 Credit disposals account
3) For sale proceeds
 Debit cash book
 Credit disposals account
4) Transfer balance on disposals account to the profit and loss account
If the difference is on the debit side of the disposal account, it is a profit on sale
 Credit profit and loss account
 Debit disposals account
If the difference is on the credit side of the disposal account, it is a loss on sale
 Debit profit and loss account
 Credit disposals account
Profit and loss account (extract
Less expenses
Loss on disposal 1,800

Problems involved in accounting for depreciation.

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  Selection of appropriate method
 Estimating the useful life of the asset
 Determination of the cost of a fixed asset (correctly dealing with delivery installation and legal
fees etc.)
Concepts
Accruals – matching what has been used of an asset to that period of time.
Prudence – not overstating the profit in the profit and loss account or the value of assets in the balance
sheet.
Consistency – Using the same method and percentage year on year.
Summary of accounting treatment for disposal of fixed assets.

Dr. Disposal
Cost price of the asset sold
Cr. Fixed Asset
Dr. Provision for Depreciation Depreciation already charged on the assets
Cr. Disposal concerned

Dr. Cash / Vendee

Proceeds received / receivable on the disposal
Cr. Disposal
In case of loss on the disposal (Debit side greater than credit side)
Dr. Profit and Loss
With any loss on the disposal
Cr. Disposal
In case of profit on the disposal (Credit side greater than debit side)
Dr. Disposal
Cr. Profit and Loss With any profit on the disposal

More Practice Questions

A company purchased machine for $2,500 each on 1 Jan. Year 1.
It is the company’s policy to provide for depreciation on its machinery at a rate of 20%, with a full
year’s depreciation made in the year in which a machine is purchased, but none in the year of sale.
One machine was traded in and a new machine for $4,000 was purchased on 1 Feb. Year 2. The
trade-in value of the old machine was $1,000.

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Practice Question.
Mulenga maintained his motor vehicle account at cost price and a provision for depreciation of motor
vehicle account.
On January 2014, the motor vehicle account had a cost value of k120,000 while the provision for
depreciation account had a balance of k24,000.
His policy was to depreciate the motor vehicle at 20% of cost per annum, charge full years’ depreciation
in the year of purchase and no charge of depreciation in the year of disposal.

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On 31 march 2015 Mulenga acquired another vehicle from TATA motors ltd at K40,000. ON 30
September 2016, Mulenga sold one vehicle which had cost him K35,000 in 2014, at K19,000, to zionele
traders on credit.
Required;
Open the provision for depreciation of motor vehicles account for three years -2014 -2016.

Solution.
Provision for Depreciation of Motor Vehicle Account
Date Details folio Dr Cr
2014
January 1 Balance 24,000
December. 31 Profit and loss account 24,000
December. 31 balance 48,000 _____
48,000 48,000
2015
January 1 Balance 48,000
December. 31 Profit and loss account 32,000
December. 31 balance 80,000 ______
80,000 80,000
2016
January 1 Balance b/f 80,000
September 31 Disposal account 14,000
December. 31 Profit and loss account 25,000
December. 31 Balance 91,000 _______
105,000 105,000
Jan 2017 balance 91,000

36 Bad debts, provisions for doubtful Debts

36.1 Objectives
 explain and show how bad debts are written off
 explain why provisions for doubtful debts are made
 make the necessary entries to record a provision for doubtful debts in the books
 calculate and make provisions for discounts on debtors

36.2 Definition
36.2.1 Bad debts

 When a business sells to a customer on credit it takes a business risk that the customer might
not pay the amount owed.
 What the customer fails to pay is what is known as a bad debt.
 A business might have to write off the debt as a bad debt.
 Bad debts are an expense and will reduce the profit of the business.
 A business may decide that the debtor cannot pay or the cost of chasing the debt is not cost
effective. The debt will then be written out of the ledger.

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36.2.2 Accounting entries
Debit - bad debts account
Credit - personal account of the debtor
John Green
Bal b\d 6,000 Bad debts 6,000
Bad debts account
Dr. Cr.
John Green 6,000 Profit and loss a\c 6,000
BAD DEBTS RECOVERED
A debt previously written off may be recovered in full or partially.
Steps in recovery:

(a) The debt must first be reinstated to facilitate the recording of cash coming in.

DR. – the receivable (Debtor) account

CR. – Bad debts recovered account.
(b) When payment is received:

DR. – Cash or Bank account

CR. – Receivables (Debtors) account with amount received
36.2.3 Provisions for doubtful debts
When creating a provision, the concept of prudence is applied. The profit of the business will not be
overstated. Debtors will be shown at a true and fair value in the balance sheet.
When drawing up the financial statements, the following are the objectives:
 to charge as an expense in the profit and loss account for that year an amount representing debts
that will never be paid;
 to show in the balance sheet a debtors figure as close as possible to the true value of debtors at
the balance sheet date.
The accounting entries needed for the provision for doubtful debts are:
Year in which provision is first made:
 Debit the profit and loss account with the amount of the provision (i.e. deduct it from gross profit as
an expense).
 Credit the Provision for Doubtful Debts Account.With the full amount of the provision
Total debtors £500,000 ,5% provision
Provision for doubtful debts account
Bal c\d 25,000 Profit and loss 25,000
25,000 25,000
Bal b\d 25,000

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Debtors must be shown in the balance sheet at the net figure.
Balance sheet extract
Current assets
Debtors 500,000
Less provision for doubtful debts 25,000 475,000
The prudence concept has been applied and the debtors’ figure is not overstated.
The accounting entries to increase the provision
The accountant may decide that the provision is not enough and must be increased:
Debit - profit and loss account
Credit - provision for doubtful debts account
only with the amount of the increase
If the total debtors have increased to £800,000 and the business maintains a 5% provision on debtors:
Provision for doubtful debts account
Bal c\d 40,000 Bal b/d 25,000
Profit and Loss 15,000
40,000 40,000
Bal b/d 40,000
Current assets
Debtors 800,000
Less Provision for doubtful debts 40,000
760,000

36.2.4 points to note:

 That debts the business is unable to collect are called bad debts.
 That bad debts are credited to the customer’s account (to cancel them) and debited to a bad
debts account.
 That provisions for doubtful debts are needed, otherwise the value of the debtors on the
balance sheet will be showing too high a value, and could mislead anyone looking at the
balance sheet. Also, this allows for more accurate calculation of profits or losses.
 That the provision for doubtful debts is calculated after bad debts have been deducted from the
debtor balances.
 That the amount of the provision for doubtful debts is based on the best estimate that can be
made taking all the facts into account.
 That an increase in the provision for doubtful debts will create a debit entry in the profit and
loss account.
 That a reduction in the provision for doubtful debts will create a credit entry in the profit and
loss account.
 That the provision for doubtful debts is shown as a deduction from the debtors in the balance

84
 sheet.
 That provisions for cash discount are made in the same way as provisions for doubtful debts.
Practice question
On 1 January 2008. There was a balance of k500 in allowance for doubtful debts accounts,
and it was decided to maintain the provision at 5% of the debtors each year end.
The debtors on 31 December each year were:
2008 K 12000
2009 K8000
2010 K 9000
REQUIRED:
Show the necessary entries for the three years ended 31 December 2008 to 31 December 210
inclusive of the allowance for doubtful allowance for doubtful account. [8]
Solution
Date. Details folio Dr Dr
2008
Jan. Balance b/f 500
Dec Profit and loss 100
Dec balance 600
600 600
2009
Jan. Balance b/f 600
Dec Profit and loss 200
Dec balance 400
600 600
2010
Jan. Balance 400
Dec Profit and loss 50
Dec balance 450
450 450
Balance b/d 450

36.3 Prepayments and accruals

36.4 Objectives.

 To prepare expense account and interpret balance brought down as an accrual or prepayment.
 To adjust expenses for accruals and prepayments in income statement
 To prepare income account with adjustment for amounts owing and prepaid
 To show accruals and prepayments appropriately in balance sheet.

36.5 ACCRUALS

The accruals concept states that income and expenses should be included in the income statement of
the period in which they are earned or incurred and not paid or received.

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A business rents a shop for K1,200 per annum (K100 per month). If at year end, the business has only
paid K1000, a full year’s charge of K1,200 will be expensed in income statement. The K200 though not
paid will be included because it relates to the same period.
Accruals or accrued expenses are expenses which are charged against the profits of a particular
period, even though they have not been paid, because they were incurred in that period.
N.B. Accruals can be owing by the business or to the business.
Example 1
Dates Details. folio Dr. Cr.
Bank 1000
Profit and loss account 1200
Balance c/d 200
1200 1200
Balance b/d 200
the rent expense account with balance brought down on credit is a liability (amount owing).
But the amount to charge in income statement will be K1200 including K200 not paid because it relates
to the same period.
In balance the sheet K200, will be shown under current liabilities as accrued expenses.
Example 2: Owing by the business
Genuine Motor Spares, is a dealer in motor spares. The financial year for the business ends on 28
February each year. His telephone was installed on 1 April 20x6 and receives his telephone account
quarterly at the end of each quarter. He pays it promptly as soon as it is received. On the basis of the
following data, calculate the telephone expense to be charged to the income statement for the year
ended 28 February 20x7.
The following payments were made.
Dates. K
30.6.20x6 23.50
30.9.20x6 27.20
31.12.20x6 33.40
31.3.20x7 36.00
solution
Telephone account
Dates Details. folio Dr. Cr.
30.6.2006 bank 2,350
30.9.2006 bank 2,720
31.12.2006 bank 3,340
Profit and loss 10,810
Balance c/d 2,400
10,810 10,810
Balance b/d 2,400

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36.5.1 Amounts accrued to the business
While the business may owe others for expenses, the business may also be owed for other amounts
apart from trade among others:
 Rent receivables
 Commission receivable
 Unsettled claims for insurance etc.
Using the matching or accruals concepts, all income whether received or not as long as it relates to the
accounting period under review, should be included as income in income statement for that period.
Since amounts are not yet received, they should be shown in balance sheet under current assets as
other receivables.
Example 1.
T.K. Furnishers Ltd sublets part of the buildings at an annual rent of K1200 000 (K100 000 per month).
During the year ended 31 December 20X8, T.K. discovers that the tenant had only paid K1 000 000.
Show rent receivable account and statement to be shown in income statement and interpret the
balance brought down.
Solution:
Rent receivable account
Date Details folio Dr Cr
Dec.31 bank 1000,000
Income statement 1,200,000
Balance c/d 200,000
1,200,000 1,200,000
Balance b/d 200,000

A business maintains one account for rent and rates.

During the year ended 31 December 20X5, the following information was made available for rent and
rates.
At 1 January 20X5, there was K250 000 rates which had been paid in advance in 20X4, and K500 000
rent was owing on the same date.
The following payments were made during 20X5, rent K4 000 000 and rates K3 6000 000.
On 31 December 20X5, rent of K200 000 is owing and rates of K150 000 are paid in advance.
Required:
Prepare the rent and rates account (combined and appropriately bring down the balance).

Rent and rates account

Details folio Dr Cr
Balances b/f 250,000 500,000
Bank (rent) 4,000,000
Bank (rates) 3,600,000
Balances c/d 200,000 150,000
Profit and loss 7,400,000
8,050,000 8,050,000
Balances b/d 150,000 200,000

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 Note:
In balance sheet: Rent is current liability (K200 000) Rates is current asset (150 000).

The trial balance and limitation.

37 Objectives
 Identify different types of errors and how to correct them
 Distinguish between errors affecting trial balance and those not
 Adjust profit figure after correcting errors
 Show correctly suspense account in balance sheet before errors are corrected
 correct all errors which do not affect trial balance totals being equal

38 Definition
A trial balance is a list of debit and credit balances taken from the ledger.
the trial balance is constructed on the principle of double entry which states that:
 every debit entry needs a corresponding credit entry
 every credit entry needs a corresponding debit entry
When this principle is correctly applied, the debit and credit totals of the trial balance are equal.

38.1 Summary of ledger account classes and nature of balances:

The acronyms
 DR. EA L
 CR.ILG
DR.EAL

assets
Debit

expenses
losses
CR.ILG

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 INCOME

CREDIT
LIABILITIES
GAINS

trial balance blue print

Account titles CLASSIFICATION Nature of balance
Land and buildings Asset Dr
Premises Asset Dr
Equipment Asset Dr
Fixtures and fittings Asset Dr
Capital liability Cr
Drawings loss Dr
Bank loan liability Cr
Bank overdraft liability Cr
Debtors Asset Dr
Stock Asset Dr
Cash at bank asset Dr
Discount received Gain Cr
Provision for bad debts gain Cr
Rent Expense Dr
Salaries Expense Dr
Purchases Expense Dr
Carriage in Expense Dr
Returns in Loss Dr
Total

Practice question two

Thomas Smith, a retail trader, has very limited accounting knowledge. In the absence of
his accounting technician, he extracted the following trial balance as at 31 March 20X8 from his
business’s accounting records:
£ £
Stock in trade at 1 April 20X7 10,700

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 Stock in trade at 31 March 20X8 7,800
Discounts allowed 310
Discounts received 450
Provision for doubtful debts 960
Purchases 94,000
Purchases returns 1,400
Sales 132,100
Sales returns 1,100
Freehold property: at cost 70,000
Provision for depreciation 3,500
Motor vehicles: at cost 15,000
Provision for depreciation 4,500
Capital – Thomas Smith 84,600
Balance at bank 7,100
Trade debtors 11,300
Trade creditors 7,600
Establishment and administrative expenditure 16,600
Drawings 9,000
£239,010 £239,010
Required:
(a) Prepare a corrected trial balance as at 31 March 20X8.
After the preparation of the above trial balance, but before the completion of the final
accounts for the year ended 31 March 20X8,

39 Trial balance construction.

The following information is extracted from the books of B Stepson, a sole trader, whose
financial year ends on 31 October 2015.
K
Capital 1 January 20X5 204,235
Opening inventory 46,000
Purchases 234,000
Sales 288,000
Light & heat 2,000
Advertising 3,000
Insurance 5,000
Bad debts 150
Rent 13,000
General 13,850
Drawings 8,000
Receivables 48,000
Payables 35,000
Bank overdraft 50,000
Returns inwards 1,000
Returns outwards 350
Carriage inwards 780
Carriage outwards 475
Machinery 132,000
Discounts allowed 880
Discount received 550

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 Required:
Construct Stephen’s trial balance as at 31 October 2015

solution
B. Stephson
Corrected Trial balance as at 31 December,2015
Dr. Cr.
K K
Capital 1 January 20X5 204,235
Opening inventory 46,000
Purchases 234,000
Sales 288,000
Light & heat 2,000
Advertising 3,000
Insurance 5,000
Bad debts 150
Rent 13,000
General 13,850
Drawings 8,000
Receivables 48,000
Payables 35,000
Bank overdraft 50,000
Returns inwards 1,000
Returns outwards 350
Carriage inwards 780
Carriage outwards 475
Machinery 132,000
Discounts allowed 880
Discount received 550
543,135 543,135

40 errors not disclosed by the trial balance.

1. Errors of omission – where a transaction is completely omitted from the books. If we sold £90
goods to J Brewer, but did not enter it in either the sales or Brewer’s personal account, the trial
balance would still ‘balance’.
2. Errors of commission – this type of error occurs when the correct amount is entered but in the
wrong person’s account, e.g. where a sale of £11 to C Green is entered in the account of K
Green. It will be noted that the correct class of account was used, both the accounts concerned
being personal accounts.
3. Errors of principle – where an item is entered in the wrong class of account, e.g. if purchase of
a fixed asset, such as a van, is debited to an expenses account, such as motor expenses
account.

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 4. Compensating errors – where errors cancel each other out. If the sales account was added up
to be £10 too much and the purchases account was also added up to be £10 too much, then
these two errors would cancel out in the trial balance. This is because the totals of both the
debit side and the credit side of the trial balance will be £10 too much.
5. Errors of original entry – where the original figure is incorrect, yet double entry is still observed
using this incorrect figure. An instance of this could be where there were sales of £150 goods
but an error is made in calculating the sales invoice. If it were calculated as £130, and £130
were credited as sales and £130 were debited to the personal account of the customer, the trial
balance would still balance.
6. Complete reversal of entries – where the correct accounts are used but each item is shown on
the wrong side of the account. Suppose we had paid a cheque to D Williams for £200, the
double entry of which is Cr Bank £200, Dr D Williams £200. In error it is entered as Cr D
Williams £200, Dr Bank £200. The trial balance totals will still agree.
7. Transposition errors – where the wrong sequence of the individual characters within a number
was entered. For example, £142 entered instead of £124. This is quite a common error and is
very difficult to spot when the error has occurred in both the debit and the credit entries, as the
trial balance would still balance. (It is more common for this error to occur on one side of the
double entry only.)

41 Correction of errors – suspense account

41.1.1 Rationale
The suspense account is taught and examined for two main reasons:
 To test the candidates’ knowledge and understanding of how suspense accounts can be used
to correct errors found in the trial balance
 To test the students’ appreciation of the reason why a trial balance is extracted for the
compilation of the final accounts of a business.
This topic calls for hands-on activity, thus the demonstration coupled with practice method is
recommended method of lesson delivery.

41.1.2 Objectives
 Explain why a suspense account may be used
 Create a suspense account in order to balance the trial balance
 Correct errors using a suspense account
 Recalculate profits after errors have been corrected
 Explain why using a suspense account is generally inappropriate

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When totals in trial balance are not equal, a temporal account called the suspense account is opened.

41.1.3 Suspense account

The suspense account is opened for the difference in the trial balance when the cause for the
difference is not clear. However, it is not encouraged to all the time open suspense account
when trial balance totals disagree, except under certain circumstances e.g. where it is
suspected that the difference may be as a result of many errors which might take some time to
discover.
Also where the bookkeeper does not know where to post one side of a transaction e.g. a cash
payment is credited to cash, but the bookkeeper does not know what the payment was for and
so will not know which account to debit.

41.2 Steps in correcting errors

1. Identify the accounts affected

2. Identify the account class of the affected accounts
3. Identify the nature of balance the account ends with.
4. Perform the journal correcting entry to rectify the error.
5. The following table may be of help in carrying out this process.

Error types Action on accounts ending Action on accounts with

with Dr.balances asset, Cr.balances(income, liabilities
expenses/loss and gains)

a) overcast Cr.the account to remove Dr.the account to remove the

the excess excess

b) Under cast Dr the account to increase Cr.the account to increase the

the balance balance.

c) Omissions from Dr the account with the Credit the account with the
entry amount omitted amounts omitted

d) Transpositions Dr the account affected Cr the account affected with the

resulting in with the difference difference
understatement

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e) Transpositions Cr the account affected Dr the account affected with the
resulting in with the difference difference
overstatement

practice questions to do
December each year. At 31 December 20X5 a trial balance was extracted which revealed a deficit of
K1421 on the debit side. This was resolved by opening a suspense account, and financial statements
where prepared and showed a profit of K12,600.
In January 20X6 investigation revealed that:
(i) A page of sales day book totaling K576 had not been posted to sales account.
(ii) An accrual of rates K371 had not been taken into account
(iii) A repayment part of the loan from the bank K300 had been entered on the loan interest
account
(iv) The petty cash balance had been included as K57 instead of K75.
(v) A bad debt of K120 had been entered in the customer’s account but not in the expense
account.
(vi) Drawings K200 had been entered in the sundry expenses account
(vii) An invoice for car repairs K380 had been entered in the wages account.
(viii) The rent received account balance of K600 had been entered on the wrong side of the trial
balance and income statement.
(ix) Advertising account with a balance of K2,759 had been omitted altogether.
(x) Closing inventory had omitted some items valued at cost K2,000.
(xi) Discount allowed of K150 had been credited to discounts received.
Required:
(a) Show by means of journal to correct the above errors (narratives are not
required).
(b) Clear suspense account balance after the correction of errors and
(c) Prepare a statement showing the corrected amount of the profit.
Solution:

(a) The Journal entries

Dr Cr
(i) Suspense account 576
Sales account 576
Profit and loss account 371
(ii) Rates account 371

(iii) Bank loan account 300

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 Interest account 300

(iv) Petty cash account 18

Suspense account 18

(v) Bad debts account 120

Suspense account 120

(vi) Drawings account 200

Sundry expenses account 200

(vii) Car repairs account 380

Wages account 380
(viii) Suspense account (rent) 1,200
Rent 1,200
Advertising 2759
(ix) Suspense account (advertising) 2,759

(x) Closing Inventory/stock account 2,000

Income Statement 2,000

(xi) Discount allowed account 150

Discount received account 150
Suspense account 300

42 Practice
Account title Dr Cr
Capital 45,000
Debtors and creditors 32,900 5,000
Returns in and out 2,500 2,710
Purchases and sales 25,000 30,485
Discounts 6,800 5,630
Drawings 8,220
Wages and salaries 7,000
Equipment 8,000 _____
Total 90,420 88,825

The following errors were discovered by Sandy, the internal auditor, on 31 December 2014:
i) The Purchases account had been under cast by £4,500.
ii) Cash sales of £24,205 had not been entered into the Sales account.
iii) A credit note of £3,450 was entered in P White’s customer account but no entry was made
in the relevant returns account.
iv) The Sales account was overcast by £3,900.
v) £4,590 of goods was taken out of the business for I Johnson’s personal use. This was
recorded in the Drawings account but there were no other entries.
vi) An invoice for J Sullivan was discovered behind the computer. No accounting entries had

95
 been made for the £1,650.
vii) £2,700 in respect of debtor J Smith was debited in error to the account of J Smyth Ltd.
viii) A discount allowed of £4,275 was credited in error to the Discount Received account.
ix) A bad debt of £6,800 had been entered into the customer’s account only.
TASK
a) What is the purpose of a trial balance? (2 marks)
b) Correct the above errors and prepare the resulting suspense account. (18 marks)
Note: journal entries are not required.

Control accounts
42.1 Objectives

 explain that control accounts are an independent check on the sales and purchases ledgers
 explain that control accounts may be used to provide totals of debtors and creditors, locate
errors and act as a deterrent against fraud
 identify and use the books of prime entry as sources of information for the control account
entries
 enter the following items into the relevant control account: credit sales and purchases, receipts
and payments, discounts, returns, bad debts, dishonoured cheques, interest on overdue
accounts, contra
 entries, refunds, opening and closing balances (debit and credit within each account)
Definitions and Explanations.
Control accounts are so called because they control a section of the ledger which they represent.
By control it means that the balance on a control account should equal the total of balances of the
ledger it is controlling.
Thus a sales ledger control account controls the sales ledger
A purchases ledger controls the purchases ledger

42.2 Purpose of control accounts

The control accounts help us to locate errors.
The control accounts provide a summary. The total balances of the debtors and creditors can be
derived quickly and easily.
• If there is a difference on a trial balance, the control account will show whether or not any of the
difference is in the sales or purchases ledger accounts.

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 • If the control accounts agree with the balances on the sales and purchases ledgers, then the
difference must lie in the nominal general ledger.

42.3 Sources of information for control accounts–Sales ledger control account

• Opening receivables or debtors balance – List of receivables balances drawn up at end of

previous period
• Credit sales got from sales day book
• Returns inwards obtained from returns inwards book
• Cheques/cash received. Total of receipts from cashbook
• Discounts on receivables. This is the total of discounts from discounts allowed column in the
cashbook
• Closing receivables. This a total of receivables balances drawn at the end of the period.

43 Format for sales/debtors ledger control accounts

DR. Cr
DEC 1. Balances b/f Balance b/f
31. sales Returns inwards
31. bank Cash/bank
31. bills receivable Bills receivable
31. interest received Set – offs/transfers
31. bad debts recovered Refunds and rebates
31 .balance c/f Discount allowed
Bad debts
Balance c/f
43.1 Sources of information: Sales ledger control accounts
 Opening receivables or debtors balance – List of receivables balances drawn up at end of
previous period
 Credit sales got from sales day book
 Returns inwards obtained from returns inwards book
 Cheques/cash received. Total of receipts from cashbook
 Discounts on receivables. This is the total of discounts from discounts allowed column in the
cashbook
 Closing receivables. This a total of receivables balances drawn at the end of the period.
44 Sources of information: purchases ledger control account
 Opening creditors – List of creditors’ balances drawn up at the end of the previous
period.
 Credit purchases – Total from purchases journal
 Purchases returns – Total from purchases returns journal

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  Cheques/cash paid to creditors – Cash book
 Discounts received – Cash book
 Closing creditors – List of creditors’ balances drawn up at the end of the period

Format for Purchases ledger control account

44.1 Set offs/transfers/contras

These arise from contra entry transactions. This is where a firm is both a customer and supplier to the
same person. Eg X Ltd sold goods to Engine Zimba, K20,000. Engine also supplied the firm with goods
worth K28,000. The K20,000 owed by Zimba to X Ltd will set off against the K28,000 owed to him.
This makes the two transactions cancel out, with the net effect of K8,000 remaining as the amount
owing to Zimba.
Contra items(set-off) are shown on the credit side of the sales ledger control account and will appear on
the debit side of the purchases ledger control account
Practical examination question
The following information was extracted from the books of Lewell Ltd. On 1 March 1996:
Purchases ledger control account 28,500
Sales ledger control account 67,300
During the month:
Cash sales 12,000
Credit sales 20,000
Cash purchases 8,800
Credit purchases 14,000
Discounts received from suppliers 5,400
Discounts allowed to customers 4,200
Returns Inwards 900
Cash received from customers 25,000

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Cash payment to suppliers 30,000
Returns Outwards 700
Bad debts written off 100
Bills receivable from customers 11,000
Dishonored Cheques returned to customers 500
Balances in sales ledger set off against credit Balances in purchases ledger 2,600

Solution
Sales/Debtors Ledger Control Account
Details Dr Cr
Balance b/f 67,300
Sales 20,000
Bank 500
Discount allowed 4,200
Returns in wards 900
Bad debts 100
Cash 25,000
Bills receivable 11,000
Set-off 2,600
Balance c/d __________ 44,000___
87,800_____ 87,800___
44,000

Purchases/creditors ledger control account

Details
Balance b/f 28,500
Purchases 14,000
Discount received 5,400
Returns out wards 700

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Set-off 2,600
Cash 30,000
Balance c/f 3,800 ______
42,500 42,500
Balance c/d 3.800

Practice question 2
KAMWI had the following balances on his trade receivables and trade payables on 1 December 2006.
Customers owed K40 250 and he owed suppliers 26 423. Credit balances in the trade receivables
ledger amounted to K3 845 and debit balances in the trade payables ledger amounted to K1 985.
During the month his daybooks showed the following totals:
Purchases 408 563
Sales 854 239
Returns inwards 44 271
Returns outwards 32 662
Payments to suppliers 300 912
Receipts from customers 675 843
Discounts received 9 027
Discounts allowed 20 275
Amounts written off to bad debts 13 173
Transfers between the receivables ledger and the payables
Ledgers 7 457
Rebates on customer invoices 3 244
Refunds of cash from suppliers 5 877
On 31 December 2006 amounts owed to customers were K2 119. Suppliers who owed him
amounts at start of the year had paid K1 525.
REQUIRED
Prepare a trade receivables/debtors/sales ledger control account and a trade payables control
account, showing the balances to carry forward to the following month.

KAMWI’S TRADE DEBTORS’ LEDGER

CONTROL ACCOUNT
Details folio Dr. Cr.
Balances b/d 40 250 3845
Sales 854,239
Returns in wards 44,271
Bank 675,843
Discounts all. 20,275
Bad debts written off 13,173

100
 Trade creditors transferred 7,457
Rebates on customer invoices 3,244
balances b/f 2,119 128,400
896,508 896508
Balances b/d 128,400 2,119
KAMWI’S TRADE CREDITORS LEDGER
CONTROL ACCOUNT
Details folio Dr. Cr.
Balances b/f 1985 26,423
Purchases 408,563
Purchases returns 32,662
Bank 300,912
Trade debtors 7,457
Discounts rec. 9,027
Balances c/d 83,403 460
435,446 435,446
. . 460 83,403

45

46 The bank reconciliation statements.

46.1 Objectives:

 Interpret the cash book entries and bank statement entries.

 state the meaning and need of Bank Reconciliation Statement;
 explain the reasons for difference between the balances of Cash Book
 and bank statement;
 update the cash book
 prepare the Bank Reconciliation Statement.
46.2 Definitions
The bank Account (or The Analysed Cash Book) is the account holders own record of money received
and spent.
The Bank Statement is the banks record of money received and spent by the account holder. This is
viewed from the banks perspective.
The Bank Reconciliation Statement is then prepared to reconcile (or fix) the two records and check for
any errors that have occurred.
46.3 The purpose of the bank reconciliation statement

It should be prepared regularly as part of the internal control system of the business to check:
a) the accuracy of the cash book
b) the accuracy of the bank statement
c) that undue delay is not occurring between payments, receipts and their clearance by the
bank
d) to discover payments made and items received by the bank not entered in the cash book
46.4 Interpretation of the cash book bank account.
 It keeps records of the business’ cash transactions.
 It is a real account which operates on the principle of:

101
 Dr. what comes in/increase and Cr. what goes out/decrease.
 A debit balance shows/indicates the cash available in the account;
 while a credit balance indicates an overdrawn account or bank overdraft.
 An overdraft is short term financial assistance that is given to current account holders.
 It is shown as a current liability in the business’ balance sheet.

46.5 Interpretation of the bank statement.

 It keeps the records of the cash deposited and withdrawn by the business from the banks point
of view.
 It is the business’ personal account in the banks ledger which operates on the principle of :
Dr =the receiver and Cr = the giver.
 Hence all cash withdrawn by the business is debited to show that the business received; and
all cash deposited into the account is credited to show what the business gives to the bank.
 All deposits represent what the bank owes the business.
 Thus a credit balance shows the cash available in the bank while a debit balance shows that
the account has been overdrawn (bank overdraft).

46.6 Reasons for differences between the cash book balance and the bank
statement balance
46.6.1 Uncredited items
These are deposits paid into the bank but do not appear on the statement as these items occurred too
close to the cut-off date of the bank statement. They will appear on the next statement.
Banking made shown in the cash book but not on the bank statement
46.6.2 Unpresented Cheques
These are Cheques issued by the firm that have not yet been presented to its bank for payment.
46.6.3 Standing orders
These are instructions from the firm to the bank to make regular payments of a fixed amounts on
predetermined dates to a specified person.

102
46.6.4 Direct debits
These are payments made directly through the firm’s bank.
46.6.5 Bank charges
These are charges made by the bank to the company for banking services used.
46.6.6 Dishonored Cheques
Cheques deposited but subsequently returned by the bank due to the failure of the drawer to pay.
46.6.7 Credit transfers / direct credits
This is money received from the business’ customers directly through the banking system.
46.6.8 Interest allowed by the bank
This is interest earned /received on deposits or fixed deposit account.
46.7 Drawing up a bank reconciliation statement

Three steps:
1. Check the bank statement and the cash book to identify the items which have been omitted.
2. Update the cash book with any omissions and errors made by the firm itself.
 Credit transfers (debit cash book)
 Bank interest (debit cash book)
 Standing orders / direct debits (credit cash book)
 Bank charges (credit cash book)
 Dishonored Cheques (credit cash book)
3. Prepare the bank reconciliation statement

103
To reconcile the bank statement with the Unadjusted cash book
Two steps:
 Check the bank statement and the cash book to identify the items which have been
omitted.
 Prepare the bank reconciliation statement.

104
46.8 Post-dated cheque
It is a cheque which has not yet matured within the current accounting period.

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 46.8.1 Accounting treatment
The cheque should be held by the cashier and no entry should be made until the cheque becomes
mature. If a post-dated cheque has been entered in the cash book, make correcting entries.

46.9 Bank overdrafts

The adjustment needed to reconcile a bank overdraft according to the firm’s books (shown by a
credit balance in the Cash Book) with that shown in the bank’s records are the same as those
needed when the account is not overdrawn.
Bank Reconciliation Statement as at 31 December 20X8
£
Overdraft as per cash book (380)
Add Unpresented cheque 63
(317)
Less Bank lodgment not on bank statement (106)
Overdraft per bank statement (423)

Practice question
On 31 December 2017 the bank column of Norman’s cash book showed a debit balance of K1,500.
The monthly bank statement written up to 31 December 2017 showed a credit balance of
K2,950.
On checking the cash book with the bank statement it was discovered that the following transactions
had not been entered in the cash book:
Dividends of K240 had been paid directly to the bank.
A credit transfer – Customs and Excise VAT refund of K260 – had been collected by the bank.
Bank charges K30.
A direct debit of K70 for the ACCA subscription had been paid by the bank.
A standing order of K200 for Norman’s loan repayment had been paid by the bank.
Norman’s deposit account balance of K1,400 was transferred into his bank current account.
A further check revealed the following items:
Two Cheques drawn in favor of T Chola K250 and F Hamududu K290 had been entered in the cash
book but had not been presented for payment.
Cash and Cheques amounting to K690 had been paid into the bank on 31 December 2017 but were
not credited by the bank until 2 January 2018.
REQUIRED:
a) Starting with the debit balance of K1,500, bring the cash book (bank columns) up to date and
then balance the bank account.
b) Prepare a bank reconciliation statement as at 31 December 2017.

SOLUTION
Norman’s Updated cash book.
DATES DETAILS DR CR
Dec.31 Balance b/f 1,500
Dividends 240
HM Revenue and customs 260
Bank charges 30
ACCA subscription 70
Loan repayment 200
Deposit account balance transfer 1,400

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 Balance c/d 3,100
3,400 3,400
Up dated balance 3,100

Norman’s bank reconciliation statement

as at 31st, December 2017
Balance as per bank statement 2,950
updated cash book balance 3,100
Add: unpresented Cheques:
T. Chola 250
F. Hamududu 290
540
3,640
less : unrecorded/uncredited deposits (690)
reconciled cash book balance 2,590

47 accounting for Clubs and societies

47.1 Objectives.
 Describe non-profit organizations and explain their main object
 Distinguish between receipts and payments accounts and income and expenditure accounts
 Prepare accounts for the following – receipts and payments, revenue generating activities, e.g.
Refreshments, and subscriptions
 Define and calculate the accumulated fund
 Prepare income and expenditure accounts and statements of financial position
 Make the other adjustments as detailed as appropriate.

47.2 Not-For-Profit Organizations

The main purpose of such organizations is to provide social amenities to its members such as games of
tennis, soccer, etc.
They can also be charities to help people. They exist not to make profits, thus the name not for profit
making organizations.
They may be engaged in profit making activities, but profits arising from such is not shared by members
but ploughed back in the organization to improve on services to members.
TERMS USED IN COMPARISON WITH TRADING ORGANISATIONS

107
 Terms associate commercial business
with npo
Accumulated fund Capital
Receipts and payments account Cash book

Income and expenditure account Profit and loss account

Surplus of income over expenditure Net profit

Deficit of expenditure over income Net loss

RECEIPTS AND PAYMENTS ACCOUNT

 A summary of all cash and bank transactions throughout the year.

 The receipts and payments account is in essence the cash book.
 It is a summary of cash receipts and cash payments.
 Smaller clubs and charities with no other assets (apart from cash) and no liabilities will use the
receipts and payments account as a financial statement.
 No balance sheet is produced.
Procedure:
 Start with the opening cash balance.
 Add all cash received during the year regardless of whether it is capital, revenue or period for
which it is received (i.e. whether it is received in advance or areas).
 Subtract cash payments during the year regardless of whether it is capital, revenue or period
for which it is paid (i.e. whether it is paid in advance or accrued)
Example: receipts and payments account

ARMSTRONG Body Building Club

Receipts and payments account for the year ended

31 December 20X4

Receipts Payments
K K

Balance b/f 200 Bar purchases 160

Subscriptions 6,450 Rental 720
Bar Sales 240 Care takers wages 1,800
Donations 150 Printing & postage 22
Heat & light 60
Repairs 15
Balance c/d 4,263
_____ _____
7,040 7,040

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 Balance b/d 4,263

N.B. The receipts side is same as debit and payments side credit of the cash
book.
Advantages and disadvantages of receipts and payments account:
Advantages
(a) Very easy to prepare
(b) Very easy to understand especially cash position
(c) It is used as a basis for the preparation of the income and expenditure account
Disadvantages
(a) Only accounts for cash. There could be other assets in use.
(b) Does not account for any amounts paid in advance or owing.
(c) Does not distinguish between capital and revenue expenditure
(d) Does not account for depreciation of non-current assets.
Income and Expenditure Account
 Income and expenditure account is the same as income statement for trading organizations.
 The principals of matching or accruals concepts are applied to income and expenditure
accounts in the same way as for income statement in trading organizations.
 List and total up all revenue income applying to the year in question only.
 This means adjustments must be made for accruals and prepayments
 When total income exceeds expenditure the club makes a Surplus
 When total expenditure exceeds income the club makes a Deficit

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TRADING ACTIVITIES WITHIN THE NOT-FOR- PROFIT ORGANISATION
The main source of income for non-trading organizations is subscriptions from members. However,
they may engage in profit ventures like owning a bar.
In such a case a separate bar income statement will be prepared to determine profit or loss arising from
it, and transferred to income and expenditure account.
For other profit ventures such as dinner dance or fete income and expenses are netted and the
resultant profit or loss also transferred to income and expenditure account.
Accumulated fund
In a trading organization it is known as capital. In most cases it may not be given. It should be
calculated by identifying assets and liabilities given at a particular time . Thus.
Accumulated fund = Assets – Liabilities
Example: accumulated fund
The North East Rotary Club had the following assets and liabilities as at 1 January 20X1, the beginning
of the year.

110
Cash and Bank balances K210, Equipment at valuation K975, Subscriptions in arrears K65,
Subscriptions in advance K10, Owing to suppliers of competition prizes K58 and Inventory of
competition prizes K38.
Required:
Calculate the accumulated fund as at 1 January 20X1, to be included in balance sheet.
Solution:

Assets: K K
Cash and bank balance 210
Subscriptions in arrears 65
Equipment 975
Inventory of competition prizes 38
Total assets 1288
Liabilities:
Subscriptions in advance 10
Owing to suppliers 58
Total liabilities 68
Accumulated fund at 1 January 20X1 1220
Subscriptions
This may be the main source of income for not profit making organizations.
Subscription is an agreed amount each member must pay at regular intervals e.g. monthly or annually.
Members will enjoy facilities of the organization at no cost, while nonmembers will have to pay high
fees to use same facilities and sometimes may be denied access even if they have money.
Subscriptions account
A subscription account is always maintained to show the amount collected, amount not collected and
amounts paid in advance.
N.B. Members who have not paid the subscriptions and their membership has not lapsed are
considered as receivables because they have not paid the institution and yet they have been enjoying
the services. This is called subscriptions in arrears.
Subscriptions in arrears should be included as part of income (subscriptions) in the year they are not
paid and shown as current asset in the balance sheet.
Remember the matching or accruals concept. When they are paid the following year, they should not
be included into subscriptions for that year and are no longer assets.

Practice question
at the beginning of the year ,1 January 2016, Matero social club had the following assets and liabilities:
ITEM K
equipment at cost 1,000,000
furniture at cost 1,500,000
cash at hand 200,000
cash at bank 450,000

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stock of refreshments 250,000
subscriptions in advance 50,000
subscriptions in areas 60,000
credit suppliers of refreshments 120,000
sundry expenses owing 50,000
As at 31 December, the end of the year, the club presented the receipts and payments as follows:
RECEIPTS K PAYMENTS K
Opening balances: New equipment 400,000
Cash at hand 200,000 Rent and rates 500,000
Cash at bank 450,000 Stationery 200,000
Subscriptions 1,200,000 Wages –office assistant 450,000
Sale of raffle tickets 580,000 Creditors for refreshments 650,000
Sale refreshments 900,000 Sundry expenses 120,000
Raffle tickets and expenses 200,000
Balances:
Cash at hand 210,000
__________ Cash at bank 600,000
3,330,000 3,330,000
The treasurer had the following additional information at the end of the year 31 December 2016:
1. Stock of unsold refreshments was k390,000
2. Subscriptions in advance k100,000
3. Rent paid in advance k120,000
4. The club policy was to depreciate:
a. Equipment at 20% on cost
b. Furniture at 10% on cost.
You are required to:
a) Calculate the club’s accumulated fund at 1 January 2016.
b) Prepare the club refreshment trading account
c) Prepare the income and expenditure account for the year ending 31 December 2016.
d) The balance sheet as at 31 December 2016.

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Solution.
Matero social club
Accumulated fund = assets – liabilities
assets
Equipment 1,000,000
Furniture 1,500,000
Cash 200,000
Bank 450,000
Stock of refreshments 250,000
Subscriptions in areas 60,000
Total assets 3,460,000
Less liabilities:
Subscriptions in advance 50,000
Credit supplies refreshments 120,000
Sundry expenses owing 50,000
Total liabilities ( 220,000)
Accumulated fund 3,240,000

Matero social club

Refreshment Trading account
for the year ended 31December 2016
Details k K k
Sales of refreshments 900,000
Opening stock 250,000
Purchases of refreshments 650,000
Total stock available for sale 900,000
Less:
Creditors at start 120,000
Unsold stock of refreshments 390,000
(510,000)
Cost of goods sold (390,000)
Profit on refreshments 510,000

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 Matero social club income and expenditure account
for the year ended 31 December 2016
Details K K K
INCOME
Subscriptions
Add: subscriptions in advance at start 1,200,000
50,000
Less: subscriptions in areas at start 60,000 1,250,000
Subscriptions in advance 100,000

(160,000)
Subscriptions for the year 1,090,000
Profit on refreshments 510,000
Sales of raffle tickets 580,000
Total income 2,180,000
Less: expenditure
Rent and rates 500,000
Less: prepaid amounts 120,000
380,000
Stationery and postage 200,000
Wages of office assistant 450,000
Sundry expenses 120,000
Less amounts owing at start (50,000)
70,000
Raffle tickets and expenses 200,000
Dep: equipment 280,000
Furniture 150,000
Total expenditure
surplus (1,730,000)
450,000

Example: Subscriptions
The North East Rotary Club had the following details relating to subscriptions for the year 1 January
20X1 to 31 December 20X1.
Cash received from members during the year to 31 December 20X1 K1987.
On 1 January 20X1, some members still owed the club K65 for 20X0, and some members had also not
paid K85 for 20X1.
On 1 January 20X1, some members had paid in advance K10 in 20X0 for 20X1, and also at 31
December 20X1, some members had paid K37 in advance for 20X2.
Required:
Show how the entries will be made in subscription account and then show amount to be shown in
income and expenditure account as subscriptions for 2017.

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Solution:
Step 1: Open subscription account and show the opening balances

Dr. Subscription account Cr.

K K
1 January 2017 Bal. b/f 65 1 January 2017 Balance b/f 10

subscription account
Date details folio Dr Cr
January 1 Opening Balances b/f 65 10
2017

The amount of K65 appearing on the debit side is an asset. Money is for the club though not yet paid.
K10 is liability. Money is not yet for club though the club has it.
Step 2: Upon receiving cash as subscriptions from members.
Dr. Cash account
Cr. Subscription account

Dr. Subscription account Cr.

K K
1 January 20X1 Bal. b/f 65 1 January 20X1 Balance b/f 10
Cash 1987
Dr. Cash account Cr.

K K
Subscriptions 1987

Step 3: Put in the closing balances for accruals and prepayments. The
balancing figure is subscription for 20X1.
Subscription account
Dates Details folio Dr Cr
1 Jan. 20X1 Balances b/f 65 10
Cash 1987
Income and expenditure account 1980
31.Dec. Balances c/d 37 85
2082 2082
balances 85 37

K1980 will be credited to income and expenditure account.

The amount to be shown as income from subscriptions for 20X1 is K1980.
K85 will be shown in balance sheet under current assets as subscriptions in arrears.
K37 will be shown in balance sheet under current liabilities as subscriptions in advance.

In statement form it will be shown as:

K K
Subscriptions received (cash) 1987
Add: Subscription paid in advance 2010 10

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 Subscription in arrears 2011 85
95
2082
Less: Subscriptions paid in advance 2012 37
Subscriptions in arrears 2010 65
(102)
1980

Income and expenditure

The following is a summary of the receipts and payments of North East Rotary Club during the
year ended 31 December 20X1.
North East Rotary Club
Receipts and payments accounts for the year ended
31 December 20X1
Dr K K Cr.

Cash and bank balance 210 Secretarial expenses 163

Sales of competition tickets 437 Rent 1402
Members subscriptions 1987 Visiting speakers expenses 1275
Donations 177 Donations to charities 35
Refund of rent 500 Prizes for competitions 270
Balance c/d 13 Stationery & printing 179
____ ____
3,324 3,324
Balance b/d 13
The following valuations are also available:
As at 31 December 2010 2011
K K
Equipment (original cost K1,420) 975 780
Subscriptions in arrears 65 85
Subscriptions in advance 10 37
Owing to suppliers of competition prizes 58 68
Inventory of competition prizes 38 46

Required:
(a) Calculate the value of the accumulated fund of the club as at 1 January 20X1.
(b) Reconstruct the following accounts for the year ended 31 December 20X1.
(i) the subscription account
(ii) the competition prizes account
(c) Prepare an income and expenditure account for the club for the year ended 31
December 20X1 and a balance sheet as at that date.

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 Solution:

(a) Accumulated fund

Assets: K K
Cash and bank balance 210
Subscriptions in arrears 65
Equipment 975
Inventory of competition prizes 38
1288
Liabilities:
Subscriptions in advance 10
Owing to suppliers 58
68
Accumulated fund at 1 January 2011 1220

Competition prizes account

Details folio Dr Cr
Balances b/f 38 58
Bank 270
Cost of prizes given to income and expenditure 272
account (Bal. Fig)
balances c/d 68 46
376 376
balances b/d 46 68

North East Rotary Club

Income and Expenditure account for the year
ended 31 December 2011
Income K K
Subscriptions 1980
Ticket sales 437
Less cost of prizes (272)
Profit on competition 165
Donations 177
2,322
Expenditure
Secretarial expenses 163
Rent (1402 – 500) 902
Speakers expenses 1,275
Donations to charities 35
Stationery and printing 179

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 Depreciation 195
(2749)
Deficit (427)

North East Rotary Club

Balance sheet as at 31 December 20X1

Fixed Assets Cost Dep. N.B.V.

Equipment 1420 640 780
Current assets
Inventory of prizes 46
Subscriptions in arrears 85
Total current assets 131
less current liabilities
Current liabilities
Payables for prizes 68
Subscriptions paid in advance 37
Bank overdraft 13
Total current liabilities (118)
Net assets/working capital 13
Total assets 793
Financed by:
Accumulated fund at 1 January 20X1 1,220
Less deficit (427)
793

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 MASTER KEYS

PART THREE – GRADE 12 WORK

119
48 INCOMPLETE RECORDS – SINGLE ENTRY
48.1 Objective
 Define single entry system of accounting.
 Distinguish between double and single entry
 Explain increase and decrease in net worth and Statement of affairs
 Prepare final accounts and balance sheet from incomplete records
48.2 Definitions
 Incomplete records problems occur when a business does not have a full set of accounting
records. (ZICA)
 Single entry is an accounting system that does not follow double entry system.
 Single entry is a system of accounting in which only one aspect of a transaction is recorded.
Some of the information is missing.
48.3 Reasons for not keeping double entry system
 Lack of accounting knowledge
 Main concentration is on primary activity
 Lack of knowledge on legislative requirements for accounting record
 Hiding cash transactions for tax avoidance
 Confusing business and personal banking transactions
 Lost accounting records e.g. via theft or fire
 It is convenient for the business owner (cheaper, less time consuming)
48.4 Difference between double entry system & incomplete Records.

 Basis of difference
Recording of both aspects (Double entry records every transaction and incomplete records few
transactions)
 Type of accounts
(All accounts are considered in double entry only personal account are considered in
incomplete records)
 Trial balance
(Trial balance is prepared in double entry system, Trial balance is not prepared in incomplete
records)
 Net profit/ loss
(Profit/Loss is calculated by preparing trading and profit &loss a/c in double entry system, while
a Statement of profit is prepared in incomplete records to find the same.
 Financial position
(Balance sheet is prepared in double entry whereas a statement of affairs is prepared in
incomplete records)
 Adjustments
Adjustment are considered in double entry, while adjustments are not considered in incomplete
records.
48.5 Sources of Information
 Cash book/daily sales book

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  Debtors book
 Creditors book
 Stock book
 Bank records
 Accounts receivable
 Accounts payable
 Business Activity Statements
 Instalment Activity Statements
 Insurance companies
 Finance or banking organizations
 The previous accountant

48.6 ASCERTAINMENT OF PROFIT OR LOSS FROM INCOMPLETE RECORDS

 Statements of affairs method
 Profit as an increase in capital
 Ascertaining profits given opening and closing balances of assets and liabilities
 Ascertaining profits using a full set of financial statements
 Conversion into double entry method

48.7 Statement of affairs method:

Under this method Opening and Closing capital is calculated.

Then statement of profit is prepared to find profit/loss during the year.
48.7.1 Computation of Profit
Capital at end
Less capital at start
= change in capital
Less additional capital
Add drawings
= profit
ILLUSTRATION
Calculate the profit or loss from the following data:
Withdrawals by the proprietor during the year K30,000.Capital at the beginning of
the year i.e., 1 Jan. 2015 K120,000. Capital at the end of the year i.e., 31 Dec 2015
K200,000. Capital brought in by the proprietor during the year K50,000.

WORKINGS

Capital at the end 200,000

Less capital at start (120,000)
Change in capital 80,000
Less additional capital (50,000)
30,000
Add: drawings 30,000
net profit 60,000

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48.8
48.9 Procedure in coming up with full sets of accounts.
 Draw up the opening statement of affairs if it’s not given in order to calculate the capital.
 Draw up a cashbook summary to discover the cash and bank balance.
 Draw up total debtors and total creditors accounts to calculate the sales and purchases for the
year.
 Find the amount of an expense that must be shown in the profit and loss account especially
where there are accruals or prepayments at the beginning and end of the year.
 Draw up the trading and profit and loss account and the balance sheet.

48.10Tasks involved in coming up with financial statements

 Computation of cost of purchases and other expenses
 Computation of total amount of sales
 Establishing the amount of accounts payable and accruals
 Establishment of accounts receivable and prepayments

48.11CREDITORS LEDGER CONTROL ACCOUNT

Dates Details Folio DR. CR.
Jan 1 Opening Balance of creditors b/f xxxx
Cash payments to suppliers/creditors xxx
Cheques issued to suppliers/creditors xxx
Purchases returns xxx
Purchases (balancing figure) ___ xxxx
xxx xxx

Computation of Purchases using the Cost of goods sold

Since: Opening inventory xxx
plus Purchases xxx
Less Closing inventory (xxx)
Equals Cost of goods sold xxx
Then: Cost of goods sold xxx
Plus Closing inventory xxx
Less Opening inventory (xxx)
Purchases xxx

Computation of Sales
DATES DETAILS folio Dr Dr
Jan 1 Opening balances of debtors XXXX
Cash receipts from debtors XXX
Cheques received from debtors Xxxx
Sales returns XXX
Sales(balancing figure) XXXX ______
XXXX XXX

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USING THE EQUATION
Opening balance + sales – receipts from debtors + returns= closing balance.
We can then use the missing information as the subject of the formula.
Thus; sales = opening balance – Receipts + returns + closing balance
Exam. Questions.
1) Single entry system has effect
A. None
B. One side effect
C. Two sided effect
D. Three sided effect
Correct Answer: One side effect
Q.2) In single entry system, it is not possible to prepare:
A. Receipts and payments A/c
B. Trial balance
C. Balance sheet
D. Account sales
Correct Answer: Trial balance
Q.3) Mr.Vinod a small shop-keeper is using single entry system because____
A. None of these
B. Credit transactions are many
C. It is not costly
D. Cash transactions and credit transactions are more
Correct Answer: It is not costly
Q.4) Credit sale can be obtained by preparing
A. Cash book
B. Debtors
C. Creditors
D. Statement of affairs
Correct Answer: Debtors
Q.5) Cash in hand can be obtained by preparing
A. Debtors
B. Creditors
C. Statement of affairs
D. Cash book
Correct Answer: Cash book
Q.6) Profit is calculated by the formula
A. None of these
B. Capital at the end + Drawing – Fresh capital- Opening capita
C. Opening Capital + Drawing + Fresh Capital- Ending capital
D. Capital at the end - Drawing – Fresh capital – opening capital
Correct Answer: Capital at the end + Drawing – Fresh capital- Opening capita
Q.7) A statement of assets and liabilities prepared under the single entry system is called
A. Statement of affairs
B. Financial statement
C. Balance sheet
D. Cash book
Correct Answer: Statement of affairs
Annie is a sole trader who does not keep full accounting records. The following details relate to her
transactions with credit customers and suppliers for the year ended 30 June 20X6.
Trade receivables, 1 July 20X5
Trade payables, 1 July 20X5 - 60,000
Cash received from customers-686,400
Cash paid to suppliers - 302,800
Discounts allowed- 1,400
Discounts received - 2,960

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 Contra between payables and
receivables ledger - 2,000
Trade receivables, 30 June 20X6 -
181,000
Trade payables, 30 June 20X6 - 84,000
What figure should appear in Annie's statement of profit or loss for the year ended 30 June 20X6 for
purchases?
SOLUTION

Practice questions.
(1) The position of Mrs. Kaminda as at 31st December 2016 was as follows
Premises 5 000
Plant and Machinery 3 000
Stock 6 500
Debtors 8 750
Cash at bank 1 500
Creditors 9 375
On 1 January 2016, his capital was 27 000 and during the year his drawings amounted to 2 500. He
st

paid into his business 1 000 which was the sale proceeds of his private car.
Required:
Prepare the statement of affairs and ascertain his profit or loss for the year.
Solution

Mrs. Kaminda

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 Statement of affairs as at 31st December, 2016 (Balance Sheet)
FIXED ASSETS COST DEP NBV
Premises 5 000 00 5 000
Plant and machinery 3 000 00 3 000
8 000 00 8 000

CURRENT ASSETS
Stock
Debtors 6 500
Cash at bank 8 750
1 500
16 750
CURRENT LIABILITIES
Creditors (9 375)

Working Capital 7 375

15 375

FINANCED BY
Opening capital 27 500
Add additional capital 1 000
28 500
Less Net Loss 10 625
17 875
Less Drawings 2 500 _____
15 375

49 Profit as an increase in capital

This year’s capital minus last year’s capital = Net profit
= K3,000 - K2,000
Therefore, the profit will be K1,000
If drawings hand been for instance K700
The profit must have bee K1700
Last year capital + profits – drawings = this year capital
K2,000 + X – 700 = K3,000
K2,000 = X – 700 = K3,700 :.
= 2,000 + X = 3,700
= X = 3,700 – 2,000
X = 1,700
The statement of affairs is a balance sheet at the beginning of a Trading period. Prepared using the
word equation;
Opening Capital + Profit – Drawings = Closing Capital

49.1.1 Calculation of purchases and sales using the statement format.

J. Kawaya lost the whole of his stock in fire on 17 th March 2017.

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 The last time that a stock taking had been done was on 31 st December 2016. The last balance sheet
date, when stock was valued at cost @1950, purchases from then until 17 th March 2017 was 6,870 and
sales in that period were K9,600. All sales were made at a uniform gross profit margin of 20 per cent.
The Trading account can be drawn from known
K K K
Sales 9,600
Less: Cost of Sales
Opening stock 1,950
Purchases 6,870
Less: Closing stock 8,820
Cost of sales C ( )
Gross profit B( )
A__?

___________________________ ___________

Workings
(a) Gross profit = 20⁄100 x
9,600
= 1,920
(b) 9,600 – 1,920 = 3,680 1,140
(c) Closing stock = 8,820 –
7680 =
Cost of goods avails able –
cost of sales

50 GROSS MARGINS AND MARK UPS

Some incomplete records questions involve the relationship between sales, cost of sales and gross
profit. Using this relationship and provided the gross profit percentage is given any of the three items
can be computed.

50.1 Gross Profit Percentages

Gross profit can be written or expressed either as percentage of sales or as a percentage of cost of
sales.
When gross profit is expressed as a percentage of sales, it is known as the Margin. Whereas when
gross profit is expressed as a percentage of cost of sales, it is known as the Mark Up.
- Margin is gross profit percentage on sales
- Mark up is gross profit percentage on cost price i.e cost of sales
50.1.1 Relationship between margin and mark up
Both mark up and margin are profit percentages of difference amount. Therefore if one is known then
the other can be calculated or found. e.g Mark up then margin
1⁄ 1⁄
4 5

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Where 1⁄4 + 1 = 1⁄5 or 1⁄ = 1⁄
4 5−1

Converting from margin to mark up and vice versa

Example
Moonga a sole Trader has provided you with the following information relating to the year ended 31-12-
2014.
He has not made a note of cash drawings or cash receipt/received. The following items were paid from
taking profit prior to banking.
Purchases 760
Sundry expenses 400
Moonga as estimated that his gross profit percentage is 25% on cost. Calculate Moonga’s profit for
fee year.
Calculate Moonga’s net profit for the year.
Moonga’s Income statement for the year ended
K K K
Sales 950
Less: Cost of sales
Purchases 760
Gross profit 190

Less: Expenses
Sundry expenses 400
Net loss (210)

51 ACCOUNTING FOR PARTNERSHIP BUSINESS

51.1 Rationale

A partnership business is a business run by two or more like minded individuals with a view of making
profit.
The people (individuals) who own the partnership are called partners. The purpose of partnership
accounting therefore, is to develop in the learner collaborative skills necessary for them to solve
problems at home and in the society.

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51.2 Objectives
 Define partnership and list its essential features
 Explain the meaning and list the contents of partnership deed
 Prepare partners’ capital accounts under fixed capital methods.
 Explain the distribution profit or loss among the partners and prepare the Profit and Loss
Appropriation Account.
 Calculate interest on capital and drawing under various situations.
 Explain how guarantee for a minimum amount of profit affects the distribution of profits among
the partners.

51.3 Purpose for individuals entering into partnership

(i) Increased capital

(ii) Sharing of business ideas
(iii) Divisions of labour/sharing of responsibilities.
(iv) Pooling of skills
(v) Sharing costs

51.4 Partnership Agreement:

When a partnership business is to be formed the parties involved should draw up an agreement which
should stipulate the concerns on how the partnership should be formed and run. The concerns that
need to be addressed in this agreement may include
 Partners capital contributions
 Interest on capital to be earned by the partners if any
 Interest on drawing if any
 Salaries if any to partners
 Ratio of sharing profits/loses
 Procedures to follow when
(i) Admitting a new partner
(ii) When a partner dies
(iii) When a partner retires
Thus a partnership agreement or partnership deed is an agreement made by the partners stipulating
the conditions regarding the running of the business

51.5 Where no Partnership agreement Exists:

In partnership business where no partnership agreement exists the following occurs

(i) Profit and loss are to be shared equally
(ii) There is to be no interest on capitals

128
 (iii) No interest is to be charged on drawings
(iv) Salaries are not allowed.

51.6 Final accounts for partnership business

 Income statement (Trading and profit and loss Account)

 Profit and loss appropriate Account
 Balance sheet

 The income statement for the partnership is exactly the same as the one you already know for
the sole trader.
 The balance sheet for the partnership business is also same as for the sole trader with a small
difference only on the capital structure which includes the individual partner’s capital and
current account balances (if credit balance i.e)
51.7 New Items

The only new items on partnership is the preparation of the partnership profit and loss appropriation
Account and the partners current accounts.
51.7.1 Profit and Loss appropriation Account.
This is an account in which the profit or loss made in the partnership business are distributed/shared
amongst the partners.

51.8 Contents of profit and loss appropriate Account

(i) Profit for the year
(ii) Interest on drawings
(iii) Interest on capitals
(iv) Salaries to partners
(v) Share of residues
51.8.1 Drawings:
These are advances taken against anticipated profits. Thus the Drawing taken should not exceed the
expected share of profit. Drawings reduce the capital of the business. If partners are making
unnecessary drawings the partnership business may eventually collapse as all the capital may be
finished. Thus to prevent unnecessary drawings, interest on drawings are charged.

51.8.2 Interest on Drawings

This is a charge to partners on the drawings made which is usually done to restrict partners to a given
percentage (%) of the drawings made or a fixed figure. The purpose of the interest on drawings is to
deter/prevent unnecessary drawings. All the partners that have made drawings should be charged with
interest on drawings if it is the firms policy to charge.

129
 51.8.3 Interest on Capitals:
This is a reward that partners earn for the capital contribution they made in firm. The interest on capital
is usually a percentage (%) of the capitals each partner contributed. Interest on capitals is earned by
all the partners.

51.8.4 Salaries to partners:

There are basically two types of partners, an active partner and sleeping partner/dormant partner. An
active partner is one who is actively involved in the running of the business and for his/her active
involvement in the running of the business gets a salary, while a sleeping partner is not actively
involved in the running of the business and should not get any salary. Only active partners get a salary.

51.8.5 Share of residues:

This is the remainder of the profits after all the rewards/earnings have been appropriated. It is
distributed according to the profit sharing ratios provided in the partnership agreement.
In an event where profit and loss sharing ratios are not given the partners should share the residues
according to the capital contributed by each partners. All the partners get a share of residues.

52 Format for partnership appropriation account.

A and B Partnership
Profit and Loss Appropriation Account
For the year ended 31 Dec 2016
Details
Net profit brought down XXX
Add: Interest on drawings a=K100000
A x
B x
Less: Interest on capital
b=K70 000
A x
B x
Salary B x
Share of residues A
B ______
______ 100 000
70 000
The partners A and B shares profit and loss in the ratio 3:2 and assuming the total
Cr side (a) = K100 000 and the total Dr side (b) = 70 000.
Complete the tables by calculating what each person will get as a share of residue.
Calculations
Residues = 100 000 – 70 000 = K30 000
A’s share of residue = 3/5 x 30 000 = K18 000 while B’s share of residue = 2/5 x 30 000
= K12 000

Practice Question one

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Niza and Taonga were in partnership sharing profits and losses equally. The following Trial Balance
was extracted from their books on 31 December 2008.

Dr Cr
K K
Capitals: Niza 28 000
Taonga 14 000

Drawings: Niza 6 800

Taonga 4 400
Rent received 156
Furniture and Fittings (cost K1 759 ) 1 360
Opening Stock 21 000
Trade debtors/Trade creditors 16 328 14 380
Purchases/Sales 152 000 206 000
Wages and Salaries 25 454
Freehold property 18 500
General expenses 9 832
Discounts 4 154
Cash at Bank 2 408
Rates 300
___________ _____________
262 536 262 536
___________ _____________

The following information was also available on 31 December 2008:

Closing stock was valued at K23 500;
Interest on capital was to be credited to the partner’s Current Accounts at 5% per annum.
Interest on drawings was to be charged as follows:
Niza K170
Taonga K110
Wages and salaries due amounted to K304;
Rent received included K26 for the following year
Furniture and fittings were to be depreciated at 10% per annum on cost.
Niza is entitled to a salary of K2000 per annum
Provision for bad debts is to be 10% of debtors.
Required: The partnership Trading and Profit and Loss Accounts.The partnership Appropriation
Account for the year ended 31 December 2008, and the Current Accounts.The Balance Sheet as at 31
December 2008.

Profit and loss account

For the year ended 31 Dec 2008

Details K K K

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 Sales 206 000
Less: Cost of Sales
Opening Stock 21 000
Add: purchases 152 000
Total cost of goods available for sale 173 000
Less: closing stock (23 500)
App Cost of sales 149 500
ropri Gross profit 56 500
atio Add: other gains
n Rent received 156
acc Less: rent received in advance ( 26)
ount Total Income 130
s Less : Expenses 56,630
Wages and Salaries 25 454
Add: wages and salaries due 304 25 758
General expenses 9 832
Discount allowed 4 154
Rates 300
Furniture and fittings [10/100 x 1759] 175.9
Provision for Bad debts 1 632.8
Total expenses 41 852.7
Net profit 14 777.3

Net profit b/d 14 777.3

Interest on drawings:
Niza 170
Taonga 110
Interest on capitals:
Niza (5/100 x 28000) 1 400
Taonga (5/100 x 14000 ) 700
Salary
Niza 2 000
Sharing residues 15 057.3
Niza 28 000 x 10 957.3 = 7,305 7,305
42 000
Taonga 14000 x 10 957.3 = K3 652.43 3 652.43
42000
15 057.3

Current Accounts

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 Niza Taonga
Details Dr Cr Dr Cr
Drawings 6 800 4 400
Interest on drawings 170 110
Interest on capitals 1 400 700
Salary 2 000
Share of residues 7 304.87 3 652.43
Balances c/d 3 734.87 157.57
10 704.87 10 704.87 4 510 4 510
Balance b/f 3 734.87 157.57

Workings
Share of residues
Niza 28 000 x 10 957.3 = K3 734.87
42 000
Taonga 14 000 x 10 957.3 = K3 652.43
42 000

Niza and Taonga Partnership Balance Sheet as at 31st December, 2008

Fixed Assets Cost Dep NBV
Fee lad Premises 18 500 18,500
Furniture and fittings 1 759 574.9 1,184.1
20 759 574.9 19,684.10
Current Assets:
Stock 23,500
Debtors 16,328
Less: provision for Bad debts (1,632.8)
14,695.2
Bank 2,408
Total current Assets 40,603.2
Less: Current Liabilities
Creditors 14,380
Wages and Salaries due 304
Rent received due 26
Total current liabilities (14,710)
Working capital 25,893.2
Net assets 45,577.3
Financed by NIZA TAONGA
Fixed Capitals 28,000 14 000
Current accounts 3,734.87 (157.57)
31,734.87 13,842.43
Capital employed
45,577.3

53 Practice Question 2
Mvula and Mubanga are in partnership.
The following is extracted from their books at 31/12/09.

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 K
Premises 6 000 000
Fixtures and fittings 4 500 000
Capital accounts: Mvula 6 000 000
Mubanga 6 000 000
Current Accounts: Mvula (DR) 100 000
Mubanga (CR) 150 000
Drawings: Mvula 800 000
Mubanga 900 000

Creditors 5 000 000

Provision for bad debts 250 000
Debtors 8 000 000
Net Profit 5 000 000
Cash in hand 700 000
The following additional information is made available at 31/12/09:
1) Stock at 31/12/09 was K2 800 000.
2) Depreciate fixtures and fittings at 10 percent per annum.
3) Interest on partners’ capitals to be at 5 percent.
4) Mvula is entitled to a salary of K500 000.
5) Wages accrued K400 000.
6) Partners to share profits equally.
7) Provision for bad and debts to be equal to 10 per cent of debtors

Required:
(a) Prepare the profit and loss appropriation account for the year ended 31/12/09
(b) Show the current accounts for the partners as they would appear at that date.
These accounts may be shown separately in table form.
(c) Prepare the partnership balance sheet as at 31/12/09
Solution
Mvula and Mubanga Partnership
Profit and loss appropriation account
For the year ended 31 December 2009
Details
Net profit 5 000 000
Less: Interest on capitals :
Mvula (5/100 x 6 000 000) 300,000
Mubanga (5/100 x 6 000 000) 300,000
600,000
Salary: Mvula 500 000
Share of residues:
Mvula 3,900 000 1 950 000
2
Mubanga 3,900 000 1 950 000
2 _________ _________
5 000 000 5 000 000
__________ __________

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 Current Accounts
Details Mvula Mubanga
Dr Cr DR. CR.
Balances b/f 100 000 150,000
Drawings 800 000 900,000
Interest on capitals 300 000 300,000
Salary c/f 500 000 xxx
Share of residues 1 950 000 1,950,000
Balances 1850 000 ________ 1,500,000 _________
2 ,750,000 2, 750,000 2,400,000 2,400,000
Balances b/d 1, 850 000 1,500,000

Mvula and Mubanga Partnership

Balance sheet As at 31 Dec 2009
Details COST DEP NBV
Fixed Assets
Premises 6 000 000 6 000 000
Fixtures and Fittings 4 500 000 450 000 4 050 000
__________ _________ 10 050 000
1 050 000 450 000
Current Assets
Stock 28 000 000
Debtors 8 000 000
Loss: Provision for Bad debts (10/100 x 8000 000) 800 000 7 200 000
Cash 2 100 000
Total Current Assets 10 700 000

Less Current Liabilities

Creditors 5 000 000
Wages and Salary accrued 400 000
Total Current Liabilities 5 400 000 5 300,000
Working capital 15 350,000
Net assets.

Financed by: Mvula Mubanga

Fixed Capital 6 000 000 6 000 000
Current accounts 1 850 00 1 500 000
Capital employed 7 850 000 7 500 000 15 350,000

NOTE:
Salary to partners need not be shown in the profit and loss and Balance but only shown in the profit and
loss appropriation account.

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54 MANUFACTURING ACCOUNTS
54.1 Rationale
A manufacturing organization is one that manufactures (produces) goods for sale. This could either be
a sole trader, a partnership or a company. The purpose of this topic is to help learners gain knowledge,
skills, and experience to manage the costs associated with the production of a particular commodity for
individuals, and local small entities, including community organizations, while acting with integrity.
54.2 Objectives:
 Define the manufacturing process.
 Describe the costing stages
 Classify the expenses according to their relationship with the production process.
 Explain the purpose of a Manufacturing Account
 Explain the treatment of opening and closing Work in Progress in Manufacturing Accounts
 Calculate the profit or loss on manufacturing
 Prepare Manufacturing Account, trading profit/loss account(Income Statement) and Balance
Sheet for sole traders, partnerships and companies.

54.3 Definition of terms associated with manufacturing

Manufacturing - Manufacturing is the process of converting raw materials into finished products.
Manufacturing accounts - is an account that collects together all cost involved in production to
determine the production costs of goods completed.
Stocks /inventory for the manufacturing accounts – there are three types of stock in the manufacturing
business :
 stock of raw materials -
 stock of work in progress
 stock of finished goods
Raw materials consumed – this the value of raw materials used up in the production process
54.4
54.5 The types of costs

Summarily, there are two types of costs in the manufacturing accounts namely,
Direct costs and indirect costs
 Direct Costs – these are costs that can be directly identified with each unit of production
 Direct materials ( raw materials),
 Direct labour ( e.g. wages paid to those working on machinery or assembly of products) and
 Direct expenses ( direct expenses like carriage inwards on raw materials), implying ( all those
costs involved in production that are traceable to units of goods produced)
 The total direct costs incurred in a year is called Prime Cost
 Indirect cost – these are other costs that cannot be identified with each unit of production.
Production overheads are all cost incurred in the factory but can’t be easily traced to the units
of goods produced.
 Prime costs are added to production overheads to give us the Production Cost.
 Raw materials (e.g. opening stock, purchases)
 Finished goods (refer to goods produced)

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  Work-In-Progress (goods partly completed at the start of the of the accounting period is called
opening work-in-progress and the one at the end of the accounting period is called closing
work -in- progress)

Preparation of the manufacturing accounts Involves six key stages:

1) Computation of raw materials consumed
2) Ascertainment of prime cost
3) Allocation of overheads
4) Adjustment for work-in-progress
5) Calculation of total cost of production
6) Establishing the manufacturing profit/loss by comparing the cost of production with the market
price.

55 Format for manufacturing account:

Manufacturing account for the year ended …
RAW MATERIALS CONSUMED: KKK KKK KKK
Openings stock of raw materials XXX
Add: Purchases of raw materials XXX
Carriage on raw materials XXX
XXX
Total stock of raw materials available XXX
Less closing stock of raw materials (XXX)
Raw materials consumed XXX
ADD: DIRECT EXPENSES
Direct labor XXX
Direct wages XXX
Royalties XXX
Lubricants for production equipment XXX
Total direct expenses XXX
PRIME COST XXX
ADD FACTORY OVERHEADS XXX
Factory rent XX
Factory lighting and heating XXX
Factory power XXX
Depreciation of factory equipment XXX
Factory manager’s salary XX
Insurance of factory building XXX
XXX
WORK-IN-PROGRESS
Opening stock of WIP XX
Less closing stock of WIP (XX)
XXX
TOTAL COST OF PRODUCTION XXX

MARKET VALUE OF GOODS (XXX)

MANUFACTURING PROFIT/LOSS -/+XXX

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Question 1
Trial balance as at 31 December 2014
Dr Cr
K K
Stock of raw materials 01/01/2014 2,100
Stock of finished goods 01/01/2014 3,890
Work in progress 1,350
Wages (direct K18,000;factory/indirect K14,500) 32,500
Royalties 700
Carriage inwards 350
Purchases of raw materials 37,000
Productive machinery (cost K28000) 23,000
Office equipment (cost K2000) 1,200
General factory expenses 3,100
Lighting 750
Factory Power 1,370
Administrative salaries 4,400
Salesman salaries 3,000
Commission on sales 1,150
Rent 1,200
Insurance 420
General administrative expenses 1,340
Bank charges 230
Discount allowed 480
Carriage outwards 590
Sales 100,000
Debtors and creditors 14,230 12,500
Bank 5,680
Cash 150
Drawings 2,000
Capital 01/01/2014 29680
142,180 142,180
Notes at 31st December 2014
a) Stock of raw materials K 2,400, stock of finished goods K4,000, work in progress K 1,500
b) Lighting, rent and insurance are to be apportioned: factory5/6, administration 1/6
c) Depreciation on productive and office equipment at 10% per annum on cost.

Required:
1) Prepare the manufacturing account
2) Trading profit and loss account for the year ended December 2014
3) The balance sheet as at 31st December 2014

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 Manufacturing, trading, profit and loss account
for the year ended 31st December 2014
Raw materials consumed K K K
Opening stock of raw materials 2,100
Purchases of raw materials 37,000
Add: carriage inwards 350
Net purchases of raw materials 37,350
Raw materials available for the period 39,450
Less: closing stock of raw materials (2,400)
Cost of raw materials consumed 37,050
Direct labour 18,000
Royalties 700
Prime cost 55,750
Factory Overheads Expenses
General factory expenses 3,100
Lighting 5/6 625
Power 1,370
Rent 5/6 1,000
Insurance 5/6 350
Depreciation of plant 2,800
Indirect labour 14,500
Total overheads 23,745
Factory cost of resources consumed 79,495
Add opening work in progress 1,350
80,845
Less closing work in progress (1,500)
Production cost of goods completed 79,345

sales 100,000
Opening stock of finished goods 3,890
Add production cost of goods completed 79,345
Total stock of goods available 83,235
Less closing stock of finished goods 4,000
Cost of goods sold (79,235)
Gross profit 20,765
Less expenses
Administration expenses
Administrative salaries 4,400
Rent 1/6 200
Insurance 1/6 70
General expenses 1,340
Lighting 1/6 125
Depreciation of accounting machine 200
6,335
Selling and distribution expenses
Salesmen salaries 3,000
Commission on sales 1,150
Carriage outwards 590

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 4,740
Financial charges
Bank charges 230
Discount allowed 480
710
11,785
Net profit 8,980

Balance sheet as at 31 December 2010

K K K
Fixed assets Cost Dep. N.B.V
Production machinery at coast 28,000 7,800 20,200
Accounting machinery at cost 2,000 1,000 1,000
30,000 8,800 21,200
Current assets
Stock-raw materials 2,400
Stock- finished goods 4,000
Work in progress 1,500
Debtors 14,230
Bank 5,680
Cash 150
27,960
Less current liabilities
Creditors (12,500)
Working capital 15,460
Net assets 36,660
Financed by:
Capital 29,680
Add: net profit 8,980
38,660
Less: drawings 2,000 _______
36,660

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Practice Question 2
The following information has been extracted from the books of major manufacturing company for the
year to 30th September 2015:
Stock at 1st January 2015:
Raw materials 7,000
Work in progress 5,000
Finished goods 6,900
Purchases of raw materials 38,000
Direct labour 28,000
Factory overheads:
Variable 1,600
Fixed 9,000
Administrative expenses:
Rent and rates 1,900
Heat and light 6,000
Stationary 2,000
Staff salaries 19,380
Sales 192,000
Plant and machinery:
At cost 30,000
Provision for depreciation 12,000
Motor vehicles (for sales delivery)
At cost 16,000
Provision for depreciation 4,000
Creditors 5,500
Debtors 28,000
Drawings 11,500
Balance at bank (Dr) 16,600
Capital at 1st January 2015 48,000
Provision for unrealised profit at 1st January 2015 1,380
Motor vehicle running costs 4,500
Additional information:
1) Stock at 31st December 2004, were as following:
Raw materials........................ K 9,000
Work in progress....................K 8,000
Finished goods ......................K 10,350
The finished goods are transferred to the trading account at the factory cost plus 25% for factory profit.
The finished goods stock is valued on the basis of amount transferred to the debit of the trading
account.
2) Depreciation is provided annually at the following percentages of the original cost of fixed
assets held at the end of each financial year.
Plant and machinery....................... 10%
Motor vehicles............................... 25%
3) Amount accrued due on 31st December 2004 for direct labour amounted to K3,000 and rent
rates prepaid at 31st 2004 amounted to K 2,000

Required
Prepare the manufacturing, trading, profit and loss account for the year ended 31st December 2004,
and the balance sheet as at that date.

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Note: the prime cost and factory cost should be clearly shown.
solution
Manufacturing, trading profit and loss account
for the year ended 31st December 2004

Raw materials consumed:

Opening stock 7,000
Purchases 38,000
Total stock available 45,000
Less: closing stock (9,000)
Cost of raw materials consumed 36,000
Direct labour:
Wages 28,000
Add: wages accrued 3,000
31,000
Prime cost 67,000
Add: factory overheads:
Variable 16,000
Fixed 9,000
Depreciation- plant and machinery 3,000
28,000
95,000
Add: opening work in progress 5,000
100,000
Less: closing work in progress 8,000
Factory cost of production 92,000

Market value 115,000

Less: factory cost 92,000
Manufacturing profit 23,000

Sales 192,000
Opening stock 6,900
Market value 115,000
Total stock available for sale 121,900
Less: closing stock (10,350)
Cost of goods sold (111,550)
Gross profit on trading 80,450
Add: profit on manufacturing 23,000
103,450
Less: expenses:
Rent and rates 19,000
Less: prepayments (2,000)
17,000
Provision for unrealized profit (w1) 690
Heat and light 6,000
Stationery and postage 2,000
Staff salaries 19,380
Depreciation – motor vehicles 4,000
Motor vehicle running costs 4,500
Total expenses (53,570)

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Net profit 49,880

BALANCE SHEET AS AT 31ST DECEMBER 2004

COST DEP. N.B.V
Fixed assets
Plant and machinery 30,000 15,000 15,000
Motor vehicles 16,000 8,000 8,000
46,000 23,000 23,000
Current assets
Stock- raw materials 9,000
Work in progress 8,000
Finished goods 10,350
Less: provision for unrealised profit 2,070
8,280
Debtors 28,000
Cash at bank 16,600
Rent and rates prepaid 2,000
71,880
Less: current liabilities
Creditors 5,500
Direct labour accrued 3,000
(8,500)
Working capital 63,380
Net assets 86,380
Financed by:
capital 48,000
Add net profit 49,880
97,880
Less drawings (11,500)
86,380
Working s 1
Provision for unrealized profit account
Balance c/d K 2,070 Balance b/d K 1,380
_______ Profit and loss account K 690
K 2,070 K 2,070

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56 ACCOUNTING ETHICS
Explain the ethics in accountancy?
Ethics – Ethics are the set of moral principles that guide a person behavior. The word ethics is
commonly used interchangeably with morality and sometimes it is used to mean the moral principles
of a particular tradition, group or individual.
Ethics in accountancy refers to a set of beliefs about what is right and wrong in the accountancy
professional. There are a number of them to which professional accountants should comply with
such as:
Integrity This is an important fundamental element of the accountancy profession. It imposes an
obligation on all professional accountants to be straight forward and honest in professional and
business relationship. Integrity also implies fair dealing and truthfulness. Accountants should avoid
or restrict themselves from personal gain and intentional opportunity to deceive and manipulate
financial information.
Trustworthy: trust is a fundamental relationship between client and the professional
accountant. A trustworthy person is someone in whom you can place your trust and rest assured
trust shall not be betrayed.
Discipline
These are impositions of obligations on an accountant to comply with relevant laws and regulations
Honest: Allows investors and other stakeholders to trust the information received.
Accountability – being answerable or taking responsibility for one’s actions
Confidentiality - the accountant should not disclose any important information to third parties.

56.1 IDENTIFY EFFECTS OF NON ADHERENCE TO ETHICS

The following are the effects

 Corruption
 Fraud
 Money laundering
 Embezzlement
 Breach of confidentiality
 Betrayal of trust

56.2 Corruption

This is the abuse of entrusted power for private gain

144
 56.3 Fraud
This is intentional manipulation of financial statement to create a positive picture to deceive people.
56.4 Money laundering

Process of making illegally earned money appear clean by carrying out certain cleansing activities
56.5 Embezzlement
Misappropriation of company funds by a person entrusted to be the custodian of funds.
56.6 Breach of confidentiality

The accountant gives confidential information to competitors.

Questions
Which of the following is one of the ethics in accounting?
a) Trustworthy
b) Double entry
c) Consistency
d) Realization

Which of the following is one of the effects of non-compliance to accountancy ethics

a) Embezzlement
b) Contra entry
c) Objectivity
d) Dual aspect

57 Explain the benefits to the company of adhering to ethics in

accountancy [5]
57.1.1 Better Professional Environment

An accounting code of ethics that is enforced at public accounting firms or company accounting
departments can ensure that individuals working with financial information act in the highest ethical
manner possible. Accounting firms may review their code of ethics with potential employees to
ensure that no misrepresentations are given regarding the expected ethical manner of employees
during daily accounting functions. The code of ethics ensures that current employees understand
the importance of acting ethically and that they respond to business scenarios with the proper
mindset for maintaining high ethical standards.

57.1.2 Increased Reputation

Public accounting firms or companies using a standard accounting code of ethics may discover that
they have a more positive reputation in the business environment than companies without a code of
ethical conduct. Clients, consumers and other businesses tend to have a positive opinion of
companies who act ethically and maintain a high level of professionalism when conducting

145
 operations. Favorable reputations may allow companies to increase their market share and earn
higher profits founded on positive consumer good will.

57.1.3 Standards for Employee Discipline

A code of ethics can allow companies to develop disciplinary practices for employees who violate
the ethical standards when conducting daily accounting functions. Accounting managers and
controllers may be able to address difficult employee situations by reviewing the accounting code of
conduct and instructing the employee on how to correct his behavior. Managers may reiterate the
specific expectations the employee must adhere to when working for the public accounting firm or
company.

57.1.4 Decreased Legal Liability

Public accounting firms and private accountants often face increased legal liabilities when acting
unethically. As seen in the accounting scandals of 2001, individual accountants were convicted of
attempting to destroy unfavorable or inappropriate reports and communications with clients
regarding accounting situations. These employees increased the legal liability of their company; the
actions of a few employees severely impacted the lives and reputations of thousands of other
accountants. Creating and following an accounting code of ethics can ensure companies and their
employees decrease legal liability from inappropriate action.

58 INTERPRETATION TO FINAL ACCOUNTS

58.1 OBJECTIVES

a) Explain the importance of accounting ratios and percentages

b) Explain the various accounting ratios and percentages
c) Calculate various ratios/ percentages

58.2 Importance of Accounting Ratios /Percentages

 Both ratios and percentages are critical to help understand financial statements,
 Determining whether the business is moving in right direction and ascertain the business profitability
 For identifying trends overtime
 For measuring the overtime
 For measuring the overall financial state of the business.
 In addition, lenders and potential investors often rely on ratio analysis when lending and investing
decisions.

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 58.3 Various Accounting Ratios
58.3.1 Return On Capital Invested (ROCE)

This is the percentage amount that a company is making for every percentage point over the cost of
capital or is the percentage that a business makes over its investments capital.
58.3.2 Return on Capital Employed

This is the profitability ratio that measures how efficiently a company can generate profits from its
company employed by comparing net operating profit to capital employed.
58.3.3 Acid Test Ratio

This is a measure of how well a business can meet its short term financial liabilities.
58.3.4 Liquidity Ration

This is an indicator of whether a company’s current assets will be sufficient to meet the company’s
obligations when they become due.
58.3.5 Capital Employed

The total capital collected in a firm’s fixed and current assets viewed from the funding side, it equals
stock holders’ funds (equity capital) plus long term liabilities (loan capital), viewed from the assets
side, it equals fixed assets plus working assets.
58.3.6 Working Capital

This is the cash available for day to day operations of an organizations. It is also called current
capital.
58.3.7 Creditors/ Purchases Ratio

Determines the rate at which a business pays off its creditors. It is sometimes called creditors
turnover ratio
58.3.8 Debtors/ Sales Ratio

It is s the relationship between net sales and average debts. It is also called debtors turnover ratio.
58.3.9 Rate of Stock Turn or Turnover

Is stock metric that measures the rate at which the stock is used
58.3.10 Turnover

Is the number of times an asset (such as cash, stock, raw materials) is replaced or revolved during an
accounting periods.
Calculate The Following Ratios
Gross profit percentage of sales 315,000 100
= 555,000 x 1 = 56.8%

Net profit as a percentage of sales 100,000

= 555,000 x
100
= 18%
1
Expenses as a percentage of sales 215,000
= 555,000 x
100
= 38.7%
1
Rate of stock return 240,000
= (100,000+60,000)/2 = 4.4 Times

147
 Average stock = (closing stock + opening) (
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
)
2 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘

Example
KIMS Trading Profit and Loss Account for The Year Ended 31,12,2012
Sales 555,000
Opening stock 100,000
Add: purchase 200,000
Total goods available 300,000
Less: closing stock 60,000
Cost of sales 240,000
Gross profit 315,000
Less: expenses
Depreciation 5,000
Wages, salaries & commissions 105,000
Other expenses 45,000
215,000
Net profit 100,000

KIMS balance sheet at that date

Fixed Assets Cost Dep NBV
Equipment 50,000 40,000 10,000
Current assets
Closing stock 60,000
debtors 125,000
Bank 25,000
210,000
Less: Current Liabilities
Creditor (104,000)
Working capital 106,000
Net assets 116,000
Financed By:
Capital 76,000
Net profit 100,000
176,000
Less: Drawings 80,000
Capital owned 9,600
Add: Long Term Liabilities
Loan 20,000
Capital employed 116,000

Rate of Return On Capital Employed 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝒙 𝟏𝟎𝟎

= (𝟕𝟔,𝟎𝟎𝟎+𝟗𝟔,𝟎𝟎𝟎) ÷ 2 = 104.2 %
𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝟏𝟎𝟎
I.E. 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅 ÷ 𝟏
Current Ratio =
210,000
= 2.02
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 104,000
I.E. 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

148
Acid Test Ratio =
210,000−60,000
= 1.4
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔−𝒄𝒍𝒐𝒔𝒊𝒏𝒈 𝒔𝒕𝒐𝒄𝒌 104,000
=. 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

Debtor / Sales Ratio 125,000

= 555,000 = 2.7 months
𝒅𝒆𝒃𝒕𝒐𝒓𝒔 𝒙 𝟏𝟐 𝒎𝒐𝒕𝒉𝒔
=. 𝒔𝒂𝒍𝒆𝒔

Creditors / Purchases Ratio =

104,000 𝑥 12 𝑚𝑜𝑛𝑡ℎ𝑠
= 6.24
= 200,000
𝒄𝒓𝒆𝒅𝒊𝒕𝒐𝒓𝒔 𝒙 𝟏𝟐 𝒎𝒐𝒏𝒕𝒉𝒔 months
. 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔

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