GREAT ZIMBABWE UNIVERSITY

JULIUS NYERERE SCHOOL OF SOCIAL SCIENCES

DEPARTMENT OF HUMAN RESOURCE MANAGEMENT

BSC (HONS) DEGREE IN HRM, LEVEL 2.1

CODE: HRMH215 NARRATION: PRINCIPLES OF ACCOUNTING

LECTURER: R. MANDIZVIDZA

MODULE DESCRIPTION
This module aims to provide basic knowledge of accounting with emphasis on financial records
for sole traders, individuals, small firms, societies and clubs. It is also suitable for beginners to this
subject area and provides an introduction to the major topics covered within an introductory bookkeeping or
financial accounting course. This module introduces the accounting concepts and principles and the
main focus is on developing an understanding of the Conceptual Framework and IAS 1
Presentation of Financial Statements.

MODULE LEARNING OUTCOMES

Upon completion of this course, students will be able to:

❖ Understand how the accounting equation can be used and what it represents
❖ Enter transactions into books of primary entry
❖ Post transactions to the ledger
❖ Extract a trial balance,
❖ Make appropriate adjustments to the financial statements
❖ Prepare a statement of profit or loss and other comprehensive income and statement of
financial position in accordance with the principles and procedures as laid down by the
IASs and IFRSs
❖ Produce a bank reconciliation statement based on the cash book and a bank statement
❖ Construct an income and expenditure account

MODULE CONTENT
1. Understanding terms used in financial accounting and the purpose of financial
statements to various stakeholders.
2. Accounting concepts, principles and assumptions.
3. Qualitative characteristics of financial information.
4. Double entry system & Accounts there-of.
5. Books of original entry – Day books and journals and Maintenance of ledger accounts.
6. Bank reconciliation statements.
7. Depreciation and disposal of a non-current asset.
8. Receivables and Payables, and Control Accounts.
9. Provisions and contingencies– on depreciation, on bad debts, on discounts.
10. Trial balance / correction of errors and suspense a/c.
11. Producing financial statement from incomplete records and single entry system.
12. Treatment of Prepayments and Accruals.
13. Income statement and Statement of financial position.
14. Financial statements of receipts and payments for not for profit organisations.
1.0 UNDERSTANDING TERMS USED IN ACCOUNTING AND THE PURPOSE OF
FINANCIAL STATEMENTS TO VARIOUS STAKEHOLDERS

1.1 Definition of Accounting

Accounting is a system that identifies, records, communicates information that is relevant,
reliable and comparable to help users to make better decisions.

1.2 Objectives of financial statements

• To provide information about the financial position, financial performance and the
changes in the financial position of an entity that is useful to a wide range of users in
making economic decisions.
• Financial statements are prepared on the basis of a number of accounting concepts and
assumptions and must adhere to the rules and procedures set down in accounting
standards.

1.3 Relationship between Accounting and Bookkeeping

• Bookkeeping is the recording of financial transactions and events, either manually or
electronically.
• Accounting includes identifying, measuring, recording, reporting and analyzing business
events and transactions and helps information users to make economic decisions.

1.4 Users of financial statements

i) Investors
Need information about the profitability, dividends yield and price/earnings ratio in order
to assess the quality and price of shares of the company.
ii) Lenders
They need information about the profitability and solvency of the business in order to
determine the risk and interest rate of loans.

iii) Management
Need information for planning the allocation of resources, policy making and evaluation
in order to make economic decisions.

iv) Suppliers and trade creditors

Suppliers need information about the liquidity position of the business in order to assess
the ability to repay the amounts owed to them.

v) Tax inspectors
They need information about the profitability of the business in order to be able to
calculate the taxes payable.

vi) Government
Is interested in information about various businesses for statistics and formulation of
economic plans.

vii) Customers
The customers are interested in the long-term stability of the business and continuance
of the supply of a particular product.

viii) Employees
Are interested in the stability of the business to provide employment, fringe benefits and
promotion opportunities.

ix) Public
Need information about the trends and recent development.
1.5 Terminology

OLD TERM IASB NEW TERM

1 Profit and loss account (or income Statement of comprehensive income

statement)

2 Balance sheet Statement of financial position

3 Fixed assets Non-current assets

4 Long-term liabilities Non-current liabilities

5 Stock Inventory/inventories

6 Debtors (or accounts receivable) Trade receivables

7 Creditors (or accounts payable) Trade payables

8 Sales revenue Turnover

9 Shareholders’ funds Equity

10 Profit and loss account Retained earnings

(appearing as a revenue reserve)

1.6 Generally Accepted Accounting Principles

Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
2.0 ACCOUNTING CONCEPTS, PRINCIPLES AND ASSUMPTIONS

i) The Dual Aspect Concept

• This states that there are two aspects of accounting, one represented by the assets of
the business and the other by the liabilities (claims against them).
• It also states that these two aspects are always equal to each other.
ASSETS = CAPITAL + LIABILITIES
• This is the double entry system of recording transactions under the dual aspect.

ii) The Historical Cost Concept

Assets should be shown in the statement of financial position at the cost of purchase
instead of current value.

iii) Business Entity Concept

• Implies that the affairs of the company are to be treated quite separately from the
no-business activities of its owners.
• The business and its owners are two separate entities therefore any private and
personal incomes and expenses of the owners should not be treated as the incomes
or expenses of the business.

iv) Money measurement Concept

• All transactions of the business are recorded in monetary terms.
• It provides a common unit of measurement.
• Market conditions, technological changes, and the efficiency of management would
not be disclosed in the accounts because it would be impossible to work out a
monetary value for them.

v) Time Interval Concept

• Financial statements are prepared at regular intervals of one year.
• For internal management purposes they may be prepared more frequently e.g.
monthly.

vi) Prudence/Conservatism
• Revenues and profits are not anticipated. Only realized profits with reasonable
certainty are recognized in the profit and loss account.
• However, provision is made for all known expenses and losses whether the amount is
known for certain or just an estimation.
• This treatment minimizes the reported profits and the valuation of assets e.g.
- Inventory valuation sticks to the rule of the lower of cost and net realizable
value.
- Provision for doubtful debts should be made
- Non-current assets must be depreciated over their useful economic lives.
vii) Materiality
• Immaterial amounts may be aggregated within the amounts of a similar nature or
function and need not be presented separately.
• Materiality depends on the size and nature of the item e.g.
- Small items like postage, stationery, and cleaning expenses should be
grouped together as sundry expenses.
- Cost of small valued assets like pencil sharpeners and paper clips should
be written off in the income statement as expenditure although they can
last for more than one accounting period.

viii) Objectivity
Accounting information should be free from bias and should be capable of independent
verification i.e. the information should be based upon verifiable evidence such as
invoices, receipts or contracts e.g.
- Revenue should be recognized on the basis of verifiable evidence such as the
delivery of goods or the issue of an invoice.

ix) Consistency
• Entities are expected to choose the most suitable accounting methods and
treatments, and consistently apply them in every period.
• Changes are permitted only when the new method is considered better and can
reflect the true and fair view of the financial position of the company.
• The change and its effect on profits should be disclosed in the financial statements
e.g. Depreciation and inventory valuation methods.

x) Realization Concept
Revenues should be recognized when the major economic activities have been completed
e.g. Sales are recognized when the goods are sold and delivered to customers or services
are rendered to clients.

Recognition of Revenue
• The realization concept develops rules for the recognition of revenue.
• It provides that revenues are recognized when earned, and not when money is
received e.g.
- A receipt in advance for the supply of goods or services should be treated
as prepaid income under current liabilities.

xi) Disclosure Concept

• Financial statements should be prepared to reflect a true and fair view of the financial
position and performance of the company.
• All material and relevant information must be disclosed in the financial statements.
 Uniformity
• Different companies within the same industry should adopt the same accounting
methods and treatments for like transactions.
• This enables inter-company comparisons of the financial performance and
financial positions.
Relevance
• Financial statements should be prepared to meet objectives of the users.
• Relevant information which can satisfy the needs of most users is selected and
recorded in the financial statements.

2.1 Underlying assumptions

The International Accounting Standards Board Framework provides two assumptions that
must be applied if financial statements are to meet their objectives i.e. the accruals concept
and the going concern concept.

i) Accruals/Matching Concept
• Revenues are recognized when they are earned but not when cash is received.
• Expenses are recognized as they are incurred, but not when cash is paid.
• The net income for the period is determined by subtracting expenses incurred
from revenues earned [Revenues – Expenses = Net Profit/(Loss)].
o Expenses incurred but not yet paid in the reporting period should be
treated as accruals or accrued expenses under current liabilities.
o Expenses that are going to be incurred in the following period but have
been paid for in advance in the reporting period should be treated as
prepayments expenses under current assets.
o Depreciation should be charged as part of cost of a non-current asset
consumed during the period of use.

ii) Going Concern Concept

• The business will continue in operational existence for the foreseeable future
(12 months after the reporting period).
• Financial statements should be prepared on a going concern basis unless
management either intends to liquidate the enterprise or to cease trading, or
has no realistic alternative to do so e.g.
- Prepayments, depreciation provisions may be carried forward in
expectation of proper matching against the revenues of the future
periods.
- Going concern may be rejected:
a) If the business is going to close down in the near future.
b) Where there are cash flow problems and its almost certain that
the business will have to cease trading.
3.0 QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION.

3.1 Fundamental

3.1.1 Relevance

• Relevant information affects the decision of it users

• Information in financial statements must be relevant to the decision making needs of
users.
• It must influence the economic decisions of users by helping them to evaluate past,
present or future events or confirming, or correcting, their past evaluation.
• Therefore a report must give the user what he wants i.e. when preparing the financial
report you should know who the user is, what their purpose is, what information is
required for that purpose.

3.1.2 Materiality
Information is material if its omission or misstatement could influence the economic decisions of
users.

3.1.3 Reliability
• Reliable information is trusted by users.
• Information must be reliable for it to be useful.
• Users should be able to have a high degree of confidence in the information presented.
• To be reliable, it must be free from material errors and bias and must be able to be
depended upon by users to represent faithfully what it claims to represent.
3.1.3.1 Faithful presentation
Financial statements should represent faithfully the transactions and other events that
result in assets and liabilities and equity of the company at the reporting date.
Substance over form

Transactions and other events must be accounted for and presented in accordance with
their substance and economic reality and not merely their legal form.

Completeness

To be reliable information must be complete within the bounds of materiality and cost.
Therefore users should be given a total picture of the reporting entity.

Neutrality

It should meet all proper user needs and be neutral.

Objectivity

Information presented must be objective, free from error, or unbiased.

3.1.4 Understandability
This does not necessarily mean simplicity. It actually means that the financial reports must be
geared to the abilities and knowledge of the users concerned e.g. complex economic activities
which require extremely complicated reports are meant for expert users.

3.1.5 Timeliness
• Information should be provided to the user in time for it to be useful.
• It should be as up to date as possible for appropriate decision making

3.1.6 Comparability
• Comparable information is helpful in contrasting organisations. Financial statements
must include corresponding information for the preceding information.
• Information should be presented so that:
a) It can be compared with information about the same business for a different period.
b) It can be easily compared with information about a different business for the same or
even a different period.
Consistency of treatment of items is very important i.e. the application of GAAP/IASs e.g. on
inventory valuation.

3.1.7 Verifiability

• Information should be as credible, as believable as possible.

• It should be independently verified e.g. by an independent, qualified auditor.
• However unverified or unverifiable information is better than no information at all.

3.2 ELEMENTS OF THE FINANCIAL STATEMENTS

3.2.1 Assets

Are resources controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity e.g. cash, accounts receivable, vehicles, inventory,
equipment, buildings, land etc.

3.2.2 Liabilities

Are present obligations of the entity arising from past events, the settlement of which is expected
to result in an outflow from the entity of resources embodying economic benefits e.g. accounts
payable, taxes payable, wages payable etc.

3.2.3 Equity

Is the residual interest in the assets of the entity after deducting all its liabilities e.g. owner
investments (the assets an owner puts into the company), revenues, withdrawals (the assets
taken away from the company) etc.

3.2.4 Income

These are increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.

3.2.5 Expenses

Are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
4.0 DOUBLE ENTRY SYSTEM & AC COUNTS THERE-OF.
The Accounting Equation

Assets = Equity + Liabilities

The Double Entry System

Every transaction affects two items in the statement of financial position.

EXAMPLE 1

Complete the following table showing the effect of each transaction

EXAMPLE OF TRANSACTION EFFECT

1. Owner pays capital into the bank

2. Buy inventory by cheque

3. Buy inventory on credit

4. Sale of inventory n credit

5. Sale of inventory for cash (cheque)

6. Pay creditor

7. Debtor pays money owing by cheque

8. Owner takes money out of the business

bank account for personal use

9. owner pays creditor from private money

outside the firm
SOLUTION 1

EXAMPLE OF TRANSACTION EFFECT

1. Owner pays capital into the bank Increase asset Increase Capital
(Bank)

2. Buy inventory by cheque Decrease asset Increase asset

(Bank) (Inventory)

3. Buy inventory on credit Increase asset Increase liability

(Inventory) (Accounts payable)

4. Sale of inventory n credit Decrease asset Increase asset

(Inventory) (Accounts receivable)

5. Sale of inventory for cash (cheque) Increase asset Decrease asset

(Bank) (Inventory)

6. Pay creditor Decrease asset Decrease liability

(Bank) (Accounts payable)

7. Debtor pays money owing by cheque Increase asset Decrease asset

(Bank) (Accounts receivable)

8. Owner takes money out of the business Decrease asset Decrease Capital
bank account for personal use (Bank)

9. owner pays creditor from private money Decrease liability Increase Capital
outside the firm (Accounts payable)
 EXAMPLE 2

Complete the following table

Transaction Account to be debited Account to be credited

Bought lorry for cash

Paid creditor T. Lake by cheque

Repaid P. logan’s loan by cash

Sold lorry for cash

Bought office machinery on credit from Ultra Ltd

Debtor A. Hill pays us by cheque

Debtor J. Cross pays us by cash

Owner puts a further amount into the business by cheque

Paid creditor D. Lord by cash

SOLUTION 2

Transaction Account to be debited Account to be credited

Bought lorry for cash Lorry Cash

Paid creditor T. Lake by cheque T. Lake Bank

Repaid P. logan’s loan by cash Loan: P. Logan Cash

Sold lorry for cash Cash Lorry

Bought office machinery on credit from Ultra Ltd Machinery Ultra Ltd

Debtor A. Hill pays us by cheque Bank A. Hill

Debtor J. Cross pays us by cash Cash J. Cross

Owner puts a further amount into the business by Bank Capital

cheques

Paid creditor D. Lord by cash D. Lord Cash

EXERCISE 1

Write up the asset, liability, and capital accounts to record the following transactions in the
books of Shumba Ltd for June 2020.

June 1 Started business with $60 000 in the bank.

2 Bought office furniture by cheque $3 500.

3 Bought computers on credit from $1 000 from Gumbo Ltd.

4 Bought a lorry paying by cheque $9 200.

10 Sold some of the office furniture for $500 on credit to Moyo Ltd.

15 Paid the amount owing to Gumbo Ltd $1 000.

20 Received the amount due from Moyo Ltd 500 by cheque.

30 Bought buildings by cheque $30 000.

EXERCISE 2

Write up the accounts to record the following transactions and prepare a Trial Balance for
March 2020:

March 1 Started business with $750 cash and $9 000 in the bank.

2 Received a loan of $2 000 from B. Blane by cheque.

3 Bought a computer for cash $600.

5 Bought display equipment on credit from Clearcount Ltd $420.

8 Took $200 out of the bank and put it in the cash till.

15 Repaid part of Blane’s loan by cheque $500.

17 Paid amount owing to Clearcount Ltd $420 by cheque.

24 Repaid part of Blane’s loan by cash $250.

31 Bought a printer on credit from F. Jones for $200.

5.0 BOOKS OF ORIGINAL ENTRY – DAY BOOKS AND JOURNALS AND
MAINTENANCE OF LEDGER ACCOUNTS.

• These are the books in which we first record transactions.

• We record the date on which each transaction took place i.e. transactions should be
shown in date order.
• Details relating to the transaction.
• A folio column entry is made cross-referencing back to the original source document e.g.
invoice number.
• The amount is also recorded.

5.1 Types of Ledgers

i) Sales ledger
This is for customers’ personal accounts (the accounts receivable).
ii) Purchases ledger
This is for suppliers’ personal accounts (the accounts payable).

iii) General ledger

This contains the remaining double entry accounts such as those relating to expenses,
non-current assets, and capital.

5.2 Types of Accounts

i) Personal Accounts

These are for debtors and creditors (accounts receivable and accounts payable) i.e.
customers and suppliers

ii) Impersonal Accounts

a) Real Accounts

Accounts in which possessions are recorded e.g. buildings, machinery, fixtures and
inventory.

b) Norminal Accounts
 Accounts in which expenses, income and capital are recorded.

5.3 Types of books of original entry

a) Sales Day Book (Sales Journal) – is for recording credit sales

b) Purchases Day Book (Purchases Journal) – for credit purchases
c) Returns Inwards Day Book (Returns Inwards Journal) – for returns inwards
d) Returns Outwards Day Book (Returns Outwards Journal) – for returns outwards
e) Cash Book – for receipts and payments of cash and cheques.
f) General Journal (or Journal – if the term day book is used for the other books of original
entry) – for other items.

5.3.1 Cash Book

This is the book in which we record receipts and payments of cash and cheques and folio
columns are used for easy reference.

5.3.1.1 Cash Discounts

• Are always shown in double entry accounts and in the profit and loss part of the income
statement.
• It appears in the cash book and is always shown in the financial statements.

5.3.1.2 Trade Discounts

• Are never shown in double entry accounts, nor in the income statement.
• It is not entered anywhere in either the ledger nor financial statements.

5.3.1.3 Discount Allowed

These are Cash discounts allowed by a business to its customers when they pay their accounts
quickly.
5.3.1.4 Discount Received

Are cash discounts received by a business from its suppliers when it pays quickly.

EXAMPLE

a) Enter the following in the three-column cash book of an office supply shop. Balance off the
cash book at the end of the month of June 2020.

b) Show the discount accounts in the general ledger for June 2020.

June 1 Balances brought forward: cash $420; bank $4 940

2 The following paid us by cheque, in each case deducting a 5% cash discount: S.

Braga $820; L. Pine $320; G. Hodd $440; M. Rae $1 040.

3 Cash sales paid direct into the bank $740

5 Paid rent by cash $340

6 We paid the following accounts by cheque in each case deducting 2½% cash
discount: M. Peters $360; G. Graham $960; F. Bell $400.

8 Withdrew cash from the bank for business use $400.

10 Cash sales $1 260

12 B. Age paid us their account of $280 by cheque less $4 cash discount.

14 Paid wages by cash $540.

16 We paid the following accounts by cheque: R. Todd $310/less cash discount $15;
F. Drury $412 less cash discount $12.

20 Bought fixtures by cheque $4 320.

24 Bought lorry paying by cheque $14 300

29 Received $324 cheque from A. Line.

30 Cash sales $980.

30 Bought stationery paying by cash $56.

5.3.1.5 Petty Cash Book

• The petty cash book is both a book of original entry and a ledger account.
• It is used for small items or transactions

5.3.1.5.1 Imprest system

• The petty cashier is given the petty cash float which the cashier spends.
• The cashier is reimbursed for the amount or payments made after the vouchers have
been checked and verified as correct.

EXAMPLE

December 1 Petty cash balance 10

2 Reimbursement 290

5 Bought envelopes 20

7 Paid bus fares 30

10 Bought petrol 100

15 Bought staples 40

20 Bought stamps 50

30 Paid for a telephone call 20

From the above information write up a petty cash book.

5.3.2 Sales Day Book

• This book is merely a list of details relating to each credit sale and the seller records the
following:
- Date
- Name of customer
- Invoice number
- Folio column
 - Final amount of invoice
• The credit sales are posted one by one to the debit side of each customer’s account in the
sales ledger.
• At the end of the period the total of the credit sales is posted to the credit side of the
sales account in the general ledger.

5.3.3 Purchases Day Book

• The purchaser enters the details of invoices for goods bought on credit in the purchases
day book (Purchases Journal).
• The credit purchases are posted one by one to the credit side of each supplier’s account
in the purchases ledger.
• The total amount of credit purchases for the period is posted to the debit side of the
purchases account in the general ledger.

5.3.3 Returns Inwards Day Book

• Credit notes are listed in a returns inwards day book (Returns Inwards Journal)
• Credit the amount of credit notes, on by one, to the accounts of the customers in the
sales ledger.
• At the end of the period the total of the returns inwards day book is posted to the debit
side of the returns inwards account in the general ledger.

5.3.4 Returns Outwards Day Book

• Debit notes are listed in a returns outwards day book (Returns Outwards Journal)
• Debit the amount of debit notes, on by one, to the personal accounts of suppliers in the
purchases ledger.
• The total of the returns outwards day book is posted to the credit side of the returns
outwards account in the general ledger.

EXAMPLE

a) You are to enter up the sales, purchases, returns inwards, and returns outwards day books
from the following details for the month of May 2020.
b) You are also required to post the items to the relevant accounts in the sales and purchases
ledger.
 c) The totals from the day books should then be transferred to the accounts in the General
ledger.

May 1 Credit sales: T. Thompson $560; L. Rod $1480; K. Barton $1 450

3 Credit purchases: P. Porter $1 440; H. Harris $250; B. Spencer $760

7 Credit sales: K. Kelly $890; N. Mendes $780; N. Lee $2 570

9 Credit purchases: B. Perkins $240; H. Harris $580; H. Miles $1 230

11 Goods returned by us to: P. Porter $120; B. Spencer $220

14 Goods returned to us by: T. Thompson $50; K. Barton $110; K. Kelly $140

17 Credit purchases: H. Harris $540; B. Perkins 650; L. Nixon $750

20 Goods returned by us to B. Spencer $140

24 Credit sales: K. Mohammed $570; K. Kelly $650; O. Green $1 120

28 Goods returned to us by N. Mendes $240

31 Credit sales N. Lee $550

5.3.5 The Journal

Is a book of original entry in which we record the date, the name of accounts to be debited and
name of accounts to be credited, the description and explanation of the transaction (narrative)
and a folio reference to the source documents.

5.3.5.1 Uses of the Journal

a) Correction of errors in the ledger accounts

b) Writing-off bad debts
c) Purchase and sale of non-current assets on credit
d) Opening entries
e) Adjustments to any of the entries in the ledgers.

EXAMPLE

Show Journal entries necessary to record the following items which occurred in 2019:
 i) May 1 – Bought a van on credit from Deedon Garage for $6 000.
ii) May 3 – A debt of $100 owing from P. Knight was written-off as a bad debt
iii) May 8 – Office furniture bought by us for $600 was returned to the supplier Timewas Ltd,
as it was unsuitable. Full allowance will be given to us.
iv) May 12 – We are owed $500 by R. Twig. He is declared bankrupt and we received 200 in
full settlement of the debt.
v) May 14 – We took goods costing $20 out of the business inventory without paying for
them.
vi) May 28 – Some time ago we paid an insurance bill thinking that it was all in respect of the
business. We now discover that $80 of the amount paid was in fact insurance of our
private house.
vii) May 28 – Bought machinery for $2 400 on credit from Electrotime Ltd.

6.0 BANK RECONCILIATION STATEMENTS

• These are done to correct errors made in the cash book.

• To correct errors made by the bank e.g. treatment of a deposit as a withdrawal.
• In order to update the cash book e.g. by entering the bank charges which are not known
by the business but are shown on bank statements.
• To identify dishonoured cheques.

Note:

• The balance to be shown in the statement of financial position is the balance as per the
cash book after it has been written up to date.
• A bank reconciliation statement can either start with the cash book balance and then
reconcile it to the bank statement balance or it will start with the bank statement balance
and then reconcile it to the cash book balance.

EXAMPLE

Cash at bank as per bank column of cash book 5 000

Unpresented cheques 500

Cheques deposited but not yet entered on bank statement 1 000

Credit transfers entered as banked on bank statement not on cash book 2 000

Cash at bank as per cash book 6 500

You are required to prepare a bank reconciliation statement from the above information.

QUESTION 1

The Bank Statement for the month of March 2020 is as follows:

Date Details DR CR Balance

Mar 1 Balance 4 200 O/D
Mar 8 T. Macleod 184 4 384 O/D
Mar 16 Cheque 292 4 092 O/D
Mar 20 W. Milne 160 4 252 O/D
Mar 21 Cheque 369 3 883 O/D
Mar 31 G. Frank: Trader's credit 88 3 795 O/D
Mar 31 TYF: Standing order 32 3 827 O/D
Mar 31 Bank charges 19 3 846 O/D

Cash Book for March 2020

Mar 16 G. Phillip 292 Mar 1 Balance b/d 4 200

21 J. Forker 369 6 T. Macleod 184
31 O. Hare 192 30 W. Milne 160
31 Balance c/d 4 195 30 S. Porter 504
5 048 5 048

Required

i) Write the cash book up to date

ii) Draw up a bank reconciliation statement as at 31 March 2020

QUESTION 2
The bank columns in the cash book for June 2020 and the bank statement for that month for D.
Hogan are as follows:

BANK STATEMENT FOR JUNE 2020

Date Details DR CR Balance

June 1 Balance 1 410
June 7 Cheque 62 1 472
June 8 F. Lane 180 1 292
June 16 Cheque 75 1 367
June 17 J. Rebus 519 848
June 18 T. Silver 41 807
June 28 Cheque 224 1 031
June 29 SLM: Standing order 52 979
June 30 Flynn: Trader’s credit 64 1 043
June 30 Bank charges 43 1 000

Cash Book for June 2020

June 1 Balance b/d 1 410 June 5 F. Lane 180

7 J. May 62 12 J. Rebus 519
16 T. Wilson 75 16 T. Silver 41
28 F. Slack 224 29 Blister Disco 22
30 G. Barker 582 30 Balance c/d 1 591
2 353 2 353

Required

i) Write the cash book up to date

ii) Draw up a bank reconciliation statement as at 30 June 2020

QUESTION

Read the following and answer the questions below.

On 31 December 2020 the bank column of R. Gumbo’s cash book showed a debit balance of $4
000. The monthly bank statement written up to 31 December 2020 showed a credit balance $13
960. 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 $2 400 had been paid directly to the bank.

• A credit transfer for VAT refund of $ $2 600 had been collected by the bank.
• A standing order of $2 000 for R. Gumbo’s loan repayment had been paid by the bank.
• Bank charges $300.
• A direct debit of $700 for the Golf club subscription had been paid by the bank
• R. Gumbo’s deposit account balance of $3 460 was transferred into his bank current
account.

A further check revealed the following:

i) Two cheques drawn in favour of T. Shumba $2 500 and M. Samaita $3 000 had been
entered in the cash book but had not been presented for payment.

ii) Cash and cheques amounting to $1 000 had been paid into the bank on 31 December
2020 but were not credited by the bank until 3 January 2021.

Required

a) Starting with the debit balance of $4 000, bring the cash book (bank column) up to date
and then balance the bank account.
b) Prepare a bank reconciliation statement as at 31 December 2020.

7.0 DEPRECIATION AND DISPOSAL OF A NON-CURRENT ASSET.

• Depreciation is the wear and tear of an asset.

• It is that part of the original cost of a non-current asset that is consumed during it period
of use by the business.

7.1 Causes of Depreciation

i) Physical deterioration e.g. wear and tear, erosion, rust, rot and decay.
ii) Economic factors e.g. obsolescence i.e. out of date, inadequacy because of growth of the
business.
iii) Time e.g. assets which have a legal life fixed in terms of years.
 iv) Depletion e.g. assets of wasting character due to the extraction of raw material from
them (mines, quarries, and oil wells).

NB: Non-current assets held for sale must not be depreciated

7.2 Methods of Calculating Depreciation

7.2.1 Straight Line Method

• In this method the number of years of use is estimated.

• The cost is divided by the number of years and this gives the depreciation charge for each
year.

EXAMPLE

Office equipment was bought for $140 000 and it would be disposed after 3 years at $20 000.

The depreciation charge per year would be:

Cost – Estimated disposal value

Number of years

= $140 000 – $20 000

3 years

= $40 000

If the equipment has no disposal value after the 3 years, the depreciation charge per year would
be:

Cost

Number of years

= $140 000

3 years

= $46 667

7.2.2 Reducing Balance Method (Diminishing Balance Method)

 • In this method, a fixed percentage for depreciation is deducted from the cost in the first
year depreciation is deducted from the cost in the first year.
• In the second and later years the same percentage is taken out of the reduced balance
(i.e. cost less depreciation already charged).

EXAMPLE

If office equipment is bought and depreciation is to be charged at 10%. The calculations for the
first 3 years would be as follows:

Cost 140 000

140 000 10
First year: Depreciation ( 𝑥 ) (14 000)
1 100

126 000
126 000 10
Second year: Depreciation ( 𝑥 ) (12 600)
1 100

113 400
113 400 10
Third year: Depreciation ( 𝑥 ) (11 340)
1 100

Cost not yet apportioned, end of 3 years 102 060

The other methods of calculating depreciation are the revaluation method, machine hour
method, the sum of years digits method and the units of output method.

QUESTION 1

A motor vehicle which cost $12 000 was bought on credit from Trucks Ltd on 1 January 2019.
Financial statements are prepared annually to 31 December and depreciation of vehicles is
provided at 25% per annum under the reducing balance method.

Required

Prepare the motor vehicle account and the accumulated provision for depreciation on motor
vehicles account for the first 2 years of the motor vehicle’s working life.
QUESTION 2

A company maintains its non-current assets at cost. Depreciation provision accounts for each
asset are kept. At 31 December 2019 the position was as follows:

Total cost to date Total depreciation to date

Machinery $94 500 $28 350

Office furniture $3 200 $1 280

The following additions were made during the financial year ended 31 December 2020:

• Machinery $16 000; Office furniture $460

• A machine bought in 2016 for $1 600 was sold for $360 during the year
• The rates of depreciation are:
o Machinery 20%, Office furniture 10% using the straight line basis, calculated on
the assets in existence at the end of each financial period irrespective of the date
of acquisition.

You are required to show the asset and depreciation accounts for the year ended 31 December
2020 and the statement of financial position entries at that date.

8.0 RECEIVABLES AND PAYABLES CONTROL ACCOUNTS.

8.1 Control Accounts and Reconciliations

• A control account is an account maintained in the general ledger.

• Only the total value of the different subsidiary ledgers is recorded in this account
• It summarises the entries and balances of all the accounts in the same or another ledger.

8.2 Payables Ledger Control Account

Summarises the entries and balance of all the individual accounts of suppliers in the purchases
ledger.

8.3. Receivables Ledger Control Account

Summarises the entries and balance of all the individual accounts of customers in the sales
ledger.

8.4 Purpose of Control Accounts

• Keeps a record of the total sales and the total receipts from customers i.e. it keeps the
general ledger free of details, yet has the correct balance for the financial statements.
• Details about each customer and each transaction will not be recorded in the receivable
control account, but in the receivables or sales ledger.

8.5 How control exists between receivable control account and individual receivable
(customer) account

• After all the postings to the receivable control account are completed, the total of the
individual customer balances should be equal to the balance in the receivable control
account.
• If the total of the individual balances differs from the balance in the receivable control
account then it means that there is some error in the customers’ accounts in the
receivables ledger. Therefore you will need to do a reconciliation statement.

8.6 Benefits of Preparing Control Accounts

a) They provide a mathematical check on the accuracy on the accuracy of the individual
ledger accounts.
b) Control accounts can be prepared quickly to provide the total outstanding balance in the
customers’ and suppliers’ accounts without having to add up all the individual accounts.
c) If control account reconciliations are prepared on a regular basis they can be used to
locate the errors; i.e. regular reconciliations will reduce the amount of data you need to
check in order to identify the discrepancies.
d) In a large company, one person may not post all the transactions therefore the control
account provides an internal check to ensure that all entries are being correctly posted.

8.7 Transfers (or Contras)

Sometimes a customer is also a supplier i.e. the same person is a debtor for the goods he has
bought and a creditor for the goods he has supplied. His accounts may be settled by a transfer
(or contra).

EXAMPLE

Construct the receivables and payables ledger control accounts from the following data:

Sales ledger balances as at 1 September 2019 10 010

Purchases ledger balances as at 1 September 2019 6 660

Credit sales for September 83 050

Credit purchases for September 38 250

Cash sales 24 340

Cash purchases 45 350

Cash and bank receipts in respect of credit sales 86 400

Dishonoured cheques 2 800

Credit balances in sales ledger as at 1 September 2019 410

Set-offs from sales ledger against purchases ledger balances 660

Returns inwards 1 010

Bad debts 1 050

Payments made for credit purchases 38 880

Discounts allowed 2 650

Discounts received 2 100

Returns outwards 950

Sales ledger balances as at 30 September 2019 3 680

Purchases ledger balances as at 30 September 2019 2 320

8.8 Reconciliation of Control Accounts

The closing total of all individual accounts in the payables account should be equal to the balance
in payables control account.

8.8.1 Approach

Receivables control and Payables control reconciliations involve four main steps:

i) Identify the differences between the two records.

ii) Decide if the difference affects the nominal ledger or the personal ledger.
iii) Update the nominal ledger
iv) Prepare a reconciliation statement.

EXAMPLE: Receivable Control Account

The balance in the receivables control account is $785 470, while the listing of balances from the
receivables ledger is $787 470. The following differences have been identified:

i) Discount allowed to customers totaling $7 650 has been posted only to the customer’s
accounts.
ii) The cash book had been incorrectly added, with the total being overstated by $990.
iii) An invoice for $6 700 had been posted to the customer’s account as $7 600.
iv) A credit balance of $3 880 on a customer’s account had been listed as a debit balance.

EXAMPLE: Payable Control Reconciliation

The balance on the payables control account is $356 840 and the listing of balances from the
payables ledger is $347 040. The following differences have been identified:

i) The purchases day book was added incorrectly, with the total being understated by $10
000.
ii) The total value of cheques paid was entered in the nominal ledger as $224 500. The
correct total was $242 500
iii) A balance of $7 580 on a customer’s account has been included in the list of balances as
$5 780.
9.0 PROVISIONS AND CONTINGENCIES– ON DEPRECIATION, ON BAD DEBTS, ON
DISCOUNTS.
9.1 Introduction
Any business that sales goods on credit terms has the risk of some debtors not settling the
amount owing in full, meaning the business will incur what is known as a bad debt. Bad debts are
a normal and will need to be accounted for if we are not to overstate the value of total assets for
a business. This can be dealt with through the creation of a provision for doubtful debts. Debtors
appear on the statement of financial position trade receivables therefore the figure of the
provision for bad debts should be subtracted from the trade receivables.

9.2 How to minimise the risk of bad debts

Bad debts can be avoided by not allowing sales to be made on credit. Minimising the risk of bad
debts will involve implementing a system of credit control. Steps in a reliable system of credit
control could involve the following:
• Asking for references from a business before allowing credit
• Offering sufficient cash discounts to encourage prompt payment
• Chasing up outstanding debts when credit periods are exceeded
• Using a debt factor (a debt factoring business specialises in collecting debts and will
purchase outstanding debts at a discounted price from some businesses if there is a
chance the debts can be collected)
• Only allowing a certain credit limit
• Only allowing regular customers’ credit.

9.3 Provision for doubtful debts

• Given that bad debts are common the amount for total debtors is likely to overstate the
amount that we will actually receive in settlement (i.e. we are assuming that we will never
collect all that we are owed) which means it would not be prudent to place the debtors
at their full value on the statement of financial position. It is therefore wise to calculate
an estimate for the future size of any bad debts. This is known as the provision for
doubtful debts.
• According to IAS 37 a provision is ‘a liability of uncertain timing or amount’.
• The provision for doubtful debts figure will be deducted from the debtors figure on the
statement of financial position to represent a more realistic figure that will be collected
from debtors. The size of the provision will depend on a number of factors.

9.4 Calculating the size of the provision for doubtful debts

The following factors are likely to influence the size of any provision:
• The length of time debts have been outstanding – this can be achieved through an aged
debtors schedule which ‘ages’ each debt owing to the firm
• Historical trends for bad debts in a particular industry
 • Economic factors – i.e. what are the prevailing macroeconomic conditions – in times of
economic decline we would expect the incidence of bad debts to rise as business failure
is more common.
• Although a realistic estimate for the size of the provision is important, we will mostly use
a simple method for calculating the size of the provision, based on a simple percentage
of the total debtors figure at the end of the trading period.

9.5 Accounting entries for the provision for doubtful debts

All provision accounts show credit balances.
Although provisions can be treated in a similar manner to expenses in the statement of
comprehensive income, unlike expense accounts, the outstanding balance on the provision
account is carried forward to the next period.
The balance on a provision account will remain the same until it is adjusted by either increasing
(the increase is treated as an expense and is included under the expenses) or decreasing the
provision (the decrease is treated as other income and is added to gross profit).
The adjustment for the provision will be entered into the statement of comprehensive income in
the period in which the adjustment is made:

EXAMPLE
Shumba Ltd discovers that bad debts on average are 5% of the value of total debtors and
therefore would like to create a provision for doubtful debts equivalent to 5% of the year-end
debtor balances.
Year Debtors ($) at 31 December Required size of provision (5%)
2016 10 000 (10 000x0.05) 500
2017 12 000 (12 000x0.05) 600
2018 12 000 (12 000x0.05) 600
2019 9 500 (9 000x0.05) 450

The ledger account for provision for doubtful debts would appear as follows:
Provision for doubtful debts A/c
2016 $ 2016 $
Dec 31 Balance c/d 500 Dec 31 Statement of comp. income 500
2017 2017
Dec 31 Balance c/d 600 Jan 1 Balance b/d 500
Dec 31 Statement of comp. income 100
600 600
2018 2018
Dec 31 Balance b/d 600 Jan 1 Balance b/d 600
2019 2019
Dec 31 Statement of comp. income 150 Jan 1 Balance b/d 600
Dec 31 Balance c/d 450
600 600
 2020
Jan 1 Balance b/d 450

• In 2016, the full amount of the provision has to be debited to the statement of
comprehensive income as an expense as no previous provision exists and the balance is
carried forward to the next period.
• In 2017, the provision is increased (due to an increase in the size of the debtors figure),
but it is only the increase in the provision that is debited to the statement of
comprehensive income.
• In 2018, the provision remains unaltered as the size of the debtors figure remains
unchanged. Therefore, no entry is needed for the statement of comprehensive income
– the balance brought forward from the previous year is simply carried forward to
the following year.
• In 2019, a decrease in the overall debtors figure leads to the provision being reduced in
size. Therefore we need to debit the provision account to reduce the overall balance and
we will credit the statement of comprehensive income with the size of the decrease. This
will be treated as revenue income in the 2019 statement of comprehensive income.

9.6 Treatment of the Provision for doubtful debts in the statement of financial position
It is the full amount (i.e. the end-of-year balance) that will appear on the statement of financial
position and this will be deducted from the relevant asset. In the example above, the relevant
section of the statements of financial position would appear as follows:

Statement of financial position extracts at 31 December

$ $
Current assets (for 2016)
Receivables 10 000
Less Provision for doubtful debts (500) 9 500
Current assets (for 2017)
Receivables 12 000
Less Provision for doubtful debts (600) 11 400
Current assets (for 2018)
Receivables 12 000
Less Provision for doubtful debts (600) 11 400
Current assets (for 2019)
Receivables 9 000
Less Provision for doubtful debts (450) 8 500

10.0 TRIAL BALANCE / CORRECTION OF ERRORS AND SUSPENSE A/C.

A trial balance is a list of account balances extracted from the ledger.

EXAMPLE

From the following information, you are required to enter the transactions in the appropriate
accounts, then prepare a trial balance as at 30 April 2020.

April 1 Started business with $16 000 cash

3 Bought goods for cash $2 200

7 Bought goods on credit $6 000 from Fatso Ltd

10 Sold goods for cash $860

14 Returned goods to Fatso Ltd $2 300

18 Bought goods on credit $1 200 from D. Exodus

21 Returned goods to D. Exodus $520

24 Sold goods to B. Shumba $1 460 on credit

25 Paid Fatso Ltd’s account by cash $4 800

30 B. Shumba paid us his account in cash $1 460

SOLUTION

Cash A/c

Apr 1 Capital 16 000 Apr 3 Purchases 2 200

10 Sales 860 25 Fatso Ltd 4 800
25 B. Shumba 1 460 30 Balance c/d 11 320
18 320 18 320

B. Shumba’s A/c

Apr 24 Sales 1 460 Apr 30 Cash 1 460

Purchases A/c
Apr 3 Cash 2 200
7 Fatso Ltd 6 000
18 D. Exodus 1 200 Apr 30 Balance c/d 9 400
9 400 9 400

Sales A/c

Apr 10 Cash 860

Apr 30 Balance c/d 2 320 24 B. Shumba 1 460
2 320 2 320

Returns Outwards A/c

Apr 14 Fatso Ltd 2 300

Apr 30 Balance c/d 2 820 21 D. Exodus 520
2 820 2 820

Fatso Ltd’s A/c

Apr 14 Returns Outwards 2 300 Apr 7 Purchases 6 000

25 Cash 4 800 30 Balance c/d 1 100
7 100 7 100

D. Exodus’s A/c

Apr 21 Returns Outwards 520 Apr 18 Purchases 1 200

Apr 30 Balance c/d 680
1 200 1 200

Capital A/c

Apr 30 Balance c/d 16 000 Apr 1 Cash 16 000

16 000 16 000

TRIAL BALANCE AS AT 30 APRIL 2020

 DR CR

$ $

Cash 11 320

Purchases 9 400

Sales 2 320

Returns outwards 2 820

Fatso Ltd 1 100

D. Exodus 680

Capital 16 000

Total 21 820 21 820

10.1 Errors Not Affecting the Balancing of the Trial Balance

i) Errors of Commission
Occurs when the correct amount is entered but in the wrong account, e.g. a sale of $500
to B. Moyo is entered in the account of P. Moyo.

ii) Errors of Omission

Where a transaction is completely omitted from the books.

iii) Errors of Principle

Occurs where an item is entered in the wrong class of account e.g. an expense is treated
as a non-current asset.

iv) Compensating Errors

Where errors cancel each other out e.g. where the purchases account has been added
up to be $200 less and the sales account was also $200 less.

v) Errors of Original Entry

 Where the original figure is incorrect, yet double entry is correctly done using the
incorrect figure.

vi) Complete Reversal of Entries

Where the correct accounts are used but each item is shown on the wrong side of the
account e.g. a payment to Mr. Shumba, is erroneously as debit bank and credit Mr.
Shumba.

vii) Transposition Errors

Where the wrong sequence of the individual characters within a number was entered
e.g. $173 is entered as $137.

EXAMPLE

Show the journal entries needed to correct the following errors

a) Purchases $14 100 on credit from A. Ray had been entered in B. Roy’s account.
b) A cheques for $940 paid for printing had been entered in the cash book column of the
cash book instead of in the bank column.
c) A sale of goods $7 340 on credit to D. Roll has been entered in error to D. Rollo’s account.
d) Purchase of goods on credit from L. Hand for $8 190 had been entered in error as $8 910.
e) Cash paid to Gumbo Ltd $640 has been entered on the debit side of the cash book and
the credit side of Gumbo Ltd’s account.
f) A sale of fittings $3 200 had been entered in the sales account.

10.2 Suspense Accounts and Errors

10.2.1 Errors Affecting the Trial Balance

• Incorrect additions in any account

• Making an entry on only one side of the accounts e.g. a debit without a corresponding
credit entry.
• Entering a different amount on the debit side from the amount on the credit side.

When such errors cannot be found a Suspense A/c can be used to balance the trial balance.
EXAMPLE

The following is a trial balance which has been incorrectly drawn up.

TRIAL BALANCE AS AT 31 JANUARY 2021

Details DR CR
$ $
Capital 1 February 2020 7 845
Drawings 19 500
Inventory 1 February 2020 8 410
Trade Accounts Receivable 34 517
Furniture and Fittings 2 400
Cash in Hand 836
Trade Accounts Payable 6 890
Sales 127 510
Returns Inwards 2 438
Discount Received 1 419
Business Expenses 3 204
Purchases 72 100
107 304 179 765

In addition to the mistakes evident above, the following errors were also discovered:

a) A payment of $315 made to a creditor had not been posted from the posted from the
cash book into the purchases ledger.
b) A cheques for $188 received from a customer had been correctly entered in the cash book
but posted to the customer’s as $180.
c) A purchase of fittings $407 had been included in the purchases account.
d) The total of the discounts allowed column in the cash book of $42 had not been posted
into the general ledger.
e) A page of the sales day book was correctly totaled as $765 but carried forward as $675.

Required

Show the trial balance as it would appear after all the errors had been corrected. Show all your
workings.

EXAMPLE
The trial balance of Mhofu Enterprises as at 31 December 2020 showed a difference which was
posted to a suspense account. Draft final accounts for the year ended 31 December 2020 were
prepared showing a net profit of $472 400. The following errors were subsequently discovered:

a) Sales of $4 500 to C. Togarepi had been debited to C. Togarasei’s account.

b) A payment of $2 750 for telephone charges had been entered on the debit side of the
telephone account as $3 750.
c) The sales Journal had been undercast by $20 000.
d) Repairs to a machine amounting to $3 900 had been charged to machinery account.
e) A cheque for $15 000 being rent received from Shava Ltd had only been entered in the
cash book.
f) Purchases from Apple Ltd amounting to $7 650 had been received on 31 December 2020
and included in the closing inventory at that date but the invoice had not been entered in
the Purchases Journal.

Required

i) Give the Journal entries without narratives, necessary to correct the above errors.
ii) Show the effect of each of these adjustments on the net profit in the draft financial
statements and the correct profit for the year ended 31 December 2020.

11.0 PRODUCING FINANCIAL STATEMENT FROM INCOMPLETE RECORDS AND

SINGLE ENTRY SYSTEM.
Small businesses like internet café or sole traders would not know how to write up double entry
records.

They would enter transactions once only using a single entry system.

Many of them would fail to record every transaction resulting in incomplete records.

EXAMPLE 1

How to identify profits when opening and closing capital figures are known:

Opening capital $500 000

Closing capital $800 000

Drawings $100 000

Last year’s capital + Profits - Drawings = This year’s capital

$500 000 + ? - $100 000 = $800 000

$500 000 + $400 00 - $100 000 = $800 000

Therefore Profit = $400

EXAMPLE 2

Non-current assets $60 000

Current assets $24 000

Total assets $80 000

Current liabilities $8 000

Non-current liabilities $9 000

Total liabilities $17 000

Net assets $63 000

Capital: Balance as at 1/12/19 $20 000

Add: Net profit (C) ?

(B) ?

Less: Drawings $10 000

(A) ?

Deduction of Net Profit

Opening capital + Profits - Drawings = Closing capital

Finding the missing figures (A), (B) and (C) by deduction

(A) is the same as the total of the top half the statement of financial position $63 000
(B) is therefore $63 000 + $10 000 = $73 000

(C) is therefore $73 000 - $20 000 = $53 000

Therefore: Capital: Balance as at 1/12/19 $20 000

Add: Net profit (C) $53 000

(B) $73 000

Less: Drawings $10 000

(A) $63 000

Note: The calculations above should be done in the sequence shown (A, B then C).

QUESTION

On 1 May 2019 Thomas Shava who is a retailer had the following balances in his books:

Premises $70 000; Equipment $8 200; Vehicles $5 100; inventory $9 500; trade accounts
receivable $150. Thomas does not keep proper books of accounts, but bank statements covering
the 12 months from 1 May 2019 to 30 April 2020 were obtained from the bank and summarized
as follows:

Money paid into the bank:

Extra capital 8 000

Shop takings 96 500

Received from debtors 1 400

Payments made by cheques:

Paid for inventory purchased 70 500

Purchase of delivery van 6 000

Vehicle running expenses 1 020

Lighting and heating 940

Sales assistant’s wages 5 260

Miscellaneous expenses 962

It has been discovered that, in the year ending 30 April 2020, the owner had paid into the bank
all shop takings apart from cash used to pay:

i) $408 miscellaneous expenses and

ii) $500 per month drawings

At 30 April 2020:

• $7 600 was owing to suppliers for inventory bought on credit.

• The amount owed by trade receivables is to be treated as a bad debt. Assume that there
had been no sales on credit during the year.
• Inventory was valued at $13 260.
• Depreciation for the year was calculated at $720 (equipment) and $1 000 (vehicles).

You are asked to:

Prepare and income statement for the year ended 30 April 2020. Show all workings.

12.0 TREATMENT OF PREPAYMENTS AND ACCRUALS.

12.1 Introduction
Most individuals and businesses will not pay expenses at the exact moment they are due (for
example, many bills for services such as electricity will require part payment in advance, while
some payments are made after the electricity has been consumed).

The accruals concept is applied in determining how much should appear in the statement of
comprehensive income as an expense or income for any particular accounting period. All incomes
and expenses that are incurred in a particular period of time should appear in the statement of
comprehensive income of that particular period of time – regardless of whether they have
actually been paid or received by the business. If a bill remains unpaid at the end of the period
the statement of comprehensive income will still show this as a full expense.

12.2 Accruals
 • The term ‘accruals’ refers to expenses that remain unpaid.
• They are, in effect, expenses owing.
• Accruals are also known as accrued expenses, expenses owing and expenses in arrears.

EXAMPLE
A business with a financial year-end of December 31 incurs a regular insurance charge for
business activities totalling $6 000. However, one year, the business failed to pay the full amount
but it only pays $4 500 of the total. Therefore the ledger account would appear as follows:

Insurance A/c

Dec 31 Bank 4 500 Dec 31 Income statement 6 000

Dec 31 Balance c/d 1 500
6 000 6 000
Jan 1 Balance b/d 1 500

Applying the accruals concept means that there is a discrepancy in the above ledger account and
the amount to be transferred to the statement of comprehensive income must be the full
amount that belongs to the year (i.e. the $6 000 due), whereas the amount debited to the ledger
account (representing the amount actually paid) is only $4 500.

The outstanding balance on the account ($1 500) is transferred as an accrual (an amount owing)
which will be carried forward to the next accounting period.

12.3 Prepayments
• It is possible that a business pays some of its expenses before the date required.
• These amounts paid in advance are known as prepayments.
• Prepayments are also known as prepaid expenses and amounts paid in advance.

EXAMPLE
The business also incurs an annual charge for rent of $50 000. However, one year it will pay $10
000 in advance of the following year’s rent (and has kept up to date with the rest of the current
year’s payments) then the ledger account for rent would appear as follows:

Rent A/c

Dec 31 Bank 60 000 Dec 31 Income statement 50 000

Dec 31 Balance c/d 10 000
6 000 6 000
 Jan 1 Balance b/d 1 500

The outstanding balance is the result of overpayment. This is brought down to the next year’s
account as a debit balance. It represents the amount paid this year for the next year’s charge.
Note that the rental charge for the year (as transferred to the statement of comprehensive
income) is unaltered by the prepayment. The closing debit balance represents the prepaid
amount.

12.4 Accruals and prepayments and the statement of financial position

The outstanding balances are included on the statement of financial position as either a current
asset or a current liability.

Type of balance Balance on account Appears on statement of financial position

as
Accrual Credit Current liability
Prepayment Debit Current asset
Accrued revenue Debit Current asset
Prepaid revenue Credit Current liability

12.5 The trial balance and outstanding balances

• In normal circumstances the amounts appearing within the trial balances for incomes and
expenses will represent the amounts actually paid or received.
• Any adjustments needed for outstanding balances will be presented outside the trial
balances (usually underneath as additional information).

EXAMPLE
The following trial balance relates to Banana Ltd as at 31 December 2020:
Dr Cr
$ $
Inventory at 1 Jan 2020 61 050
Sales 561 930
Purchases 300 100
Office expenses 39 800
Rent 17 500
Wages 113 250
Premises 265 000
Equipment 49 900
Trade receivables 26 550
Trade payables 31 560
Bank 10 740
Capital 345 000
Drawings 54 600
938 490 938 490

Additional information:
i) Inventory as at 31 December 2020 was valued at $72 300.
ii) Office expenses still owing as at 31 December 2020 amounted to $5 100.
iii) Rent accrued at 31 December 2020 was $2 300.
iv) Wages paid in advance for 2021 totalled $9 950.

Note: Each of the expenses is adjusted as for the outstanding balance; amounts accrued are
added on to the amount paid to reflect the amount that ‘belongs’ to the time period
shown. Similarly, the amount prepaid ‘belongs’ to the next year and therefore will be
subtracted from the amount paid.

Required
Showing all your workings in brackets by the side of any adjustment prepare a statement of
comprehensive income and an extract of the statement of financial position as at 31 December
2020.

SOLUTION
BANANA LTD
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020
Notes $
Sales 561 930
Less Cost of goods sold: 288 850
Opening inventory 61 050

300 100
Add: Purchases
(72 300)
Less Closing inventory
Gross profit 273 080
Less: Expenses (168 000)
44 900

19 800

103 300
Office expenses ($39 800 + $5 100)

Rent ($17 500 + $2 300)

Wages ($113 250 − $9 950)

Net profit 105 080

The outstanding balances for accruals and prepayments would appear on the statement of
financial position as follows:
$
Current Assets
Prepayments 9 950

Current Liabilities
Accruals ($5 100 + $2 300) 7 400

13.0 THE INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION.

13.1 Introduction
The preparation of financial statements is guided by International Accounting Standards 1 (IAS 1)
Presentation of Financial Statements which sets out the overall requirements for financial
statements, including how they should be structured, the minimum requirements for their
content and overriding concepts such as going concern, the accrual basis of accounting and the
current/non-current distinction. The standard requires a complete set of financial statements to
comprise a statement of financial position, a statement of profit or loss and other comprehensive
income, a statement of changes in equity and a statement of cash flows.

13.2 Components of financial statements

A complete set of financial statements includes:

• A statement of financial position (balance sheet) at the end of the period

• A statement of profit or loss and other comprehensive income for the period (presented
as a single statement, or by presenting the profit or loss section in a separate statement
 of profit or loss, immediately followed by a statement presenting comprehensive income
beginning with profit or loss)
• A statement of changes in equity for the period
• A statement of cash flows for the period
• Notes, comprising a summary of significant accounting policies and other explanatory
notes
• Comparative information prescribed by the standard.

13.3 Structure and content of financial statements in general

IAS 1 requires an entity to clearly identify:

• The financial statements, which must be distinguished from other information in a

published document
• Each financial statement and the notes to the financial statements.

In addition, the following information must be displayed prominently, and repeated as necessary:

• The name of the reporting entity and any change in the name
• Whether the financial statements are a group of entities or an individual entity
• Information about the reporting period
• The presentation currency (as defined by IAS 21 the effects of changes in foreign exchange
rates)
• The level of rounding used (e.g. Thousands, millions).

EXAMPLE
From the following trial balance of Pineapple Investments, you are asked to draw up a statement
of comprehensive income for the year ended 30 June 2020 and a Statement of financial position
as at that date.
Dr Cr
$ $
Sales 520 000
Purchases 230 000
Inventory as at 1 July 2019 85 500
Premises 750 000
Equipment 180 000
Returns inwards 3 400
Bank 12 800
Wages 69 500
Insurance 3 900
Rent 13 500
Advertising 2 600
Capital 946 600
Drawings 104 500
Returns outwards 4 500
Trade receivables 65 000
Trade payables 49 600
1 520 700 1 520 700

Additional information:
a) Inventory as at 30 June 2020 was valued at $106 600.
b) Depreciation is to be provided as follows: Premises 10%, Equipment 20% (both on cost).
c) A provision for doubtful debts is to be created at 5% of trade receivables at the year-end.
d) Accrued rent was $2 110 as at 30 June 2020.
e) Insurance paid in advance was $1 200 as at 30 June 2020.

PINEAPPLE INVESTMENTS
STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED 30 JUNE 2020
Notes $
Net turnover 516 600
520 000
Sales
(3 400)
Less: Returns inwards
Less: Cost of goods sold 204 400
Opening inventory 85 500

Add purchases 230 000

Less: Returns outwards (4 500)

(106 600)
Less Closing inventory
Gross profit 312 200
Less: Expenses (204 660)
Wages 69 500

Insurance ($3 900 - $1 200) 2 700

Advertising 2 600

15 610
Rent ($13 500 + $2 110)
$750 000 10
Depreciation: premises ( 𝑥 100) 75 000
1
$180 000 20
Depreciation: equipment ( 1 𝑥 100) 36 000
$65 000 5
Provision for doubtful debt( 𝑥 ) 3 250
1 100

Net profit 107 540

Workings Cost Accumulated Depreciation carrying amount

1. Property Plant and Equipment
Premises $750 000 ($75 000) $675 000
Equipment $180 000 ($36 000) $144 000
$930 000 ($111 000) $819 000

2. Receivables $65 000

Less: Provision for doubtful debts ($3 250)
$61 750

PINEAPPLE INVESTMENTS
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2020
Notes $
Non-Current Assets 1 819 000
930 000
Property Plant and Equipment
(111 000)
Less: Accumulated depreciation
Current Assets 182 350
Inventory 106 600
Receivables 2 61 750

12 800

1 200
Bank

Prepayments

Total Assets 1 001 350

Equity and Liabilities

Equity 949 640
Capital 946 600

Add: Net profit 107 540

(104 500)
Less: Drawings
Current Liabilities 51 710
Payables 49 600

Accruals 2 110

1 001 350

QUESTION 1

The following trial balance was extracted from the books of Lioness Ltd as at 31 December 2022

Dr Cr

$ $

Purchases and Sales 92 800 157 165

Cash at bank 4 100

Cash in hand 324

Capital account 1 January 2022 11 400

Drawings 17 100

Office furniture 2 900

Rent 3 400

Wages and salaries 31 400

Discounts 820 160

Accounts receivable and accounts payable 12 000 4 929

Returns 2 000 1 000

Provision for depreciation on Van 500

Commission 500

Inventory 1 January 2022 4 120

Allowances for doubtful debts 1 January 2022 405

Delivery van 3 750

Van running costs 615

Bad debts written off 730

176 059 176 059

Notes:

(a) Inventory 31 December 2022 $2 400

(b) Wages and salaries accrued at 31 December 2022 $340
(c) Rent prepaid at 31 December 2022 $230
(d) Van running costs owing at 31 December 2022 $72
(e) The allowance for doubtful debts should be maintained at 5% of trade receivables.
(f) Provide for depreciation as follows: Office furniture $380; Delivery van $1 250.

Required:
(i) Prepare the statement of profit or loss and other comprehensive income for the
year ended 31 December 2022
(ii) Prepare the statement of financial position as at 31 December 2022

14.0 FINANCIAL STATEMENTS OF RECEIPTS AND PAYMENTS FOR NOT FOR

PROFIT ORGANISATIONS.

• Non-profit oriented organisations do not prepare income statements.

• They prepare their receipts and payments accounts or income and expenditure accounts.
• These are a summary of the cash book for the period.
• When a club or organization has assets and/or liabilities it prepares a statement of
financial position.
14.1 Terms used

Profit-oriented organization Non-profit oriented organization

Income statement Income and Expenditure Account

Net profit Surplus of income over expenditure

Net loss Deficit of income over expenditure

14.2 Accumulated Fund

A sole trader has a capital account. A non-profit oriented organization has an accumulated fund.

Accumulated fund = Assets – Liabilities

14.3 Outstanding Subscriptions and the Prudence Concept

Subscriptions owing are treated as an asset. Prepaid subscriptions are treated as a liability.

EXAMPLE

A club charges its members an annual subscription of $400 per member. It adjusts for
subscriptions received in advance and also accrues for subscriptions owing at the end of each
year.

(i) On 1 April 2020, 18 members had not paid their subscriptions for the year 2019.
(ii) In March 2019, 4 members paid $1 600 for the year 2020
(iii) For the year 2020: $148 400

For 2019 $7 200

For 2020 $138 400
For 2021 $2 800

(iv) At 31 March 2020, 11 members had not paid their 2020 subscriptions

You are required to post the above in the subscriptions account.

SOLUTION

Subscriptions A/c

2020 2020
Apr 1 Owing b/d (i) 7 200 Apr 1 Prepaid b/d (ii) 1 600
Mar 31 Income & Expenditure* 144 400 Mar 31 Bank (iii) 148 400
Mar 31 Prepaid c/d (iii) 2 800 Mar 31 Balance c/d (iv) 4 400
154 400 154 400
2021 2021
Apr 1 Balance b/d (iv) 4 400 Apr 1 Balance b/d (iii) 2 800

QUESTION

A summary of Masvingo Golf Club’s cash book is shown below.

CASH BOOK SUMMARY

2020 2020
Jan 1 Balance b/d 2 800 Dec 31 Purchase of equipment 600
Dec 31 Collections at matches 8 600 Rent for the pitch 2 400
Profit on sale of refreshments 11 000 Printing and stationery 100
Secretary’s expenses 160
Repairs to equipment 140
Groundsman’s wages 8 000
Miscellaneous expenses 120
Balance c/d 10 880
22 400 22 400
2021
Jan 1 Balance b/d 10 880

Additional information

i) At 1 January 2020 equipment was valued at $3 000

ii) Depreciate all equipment at 10% for the year 2020
iii) At 31 December 2020 rent paid in advance was $600
iv) At 31 December 2020 there was also $40 owing for printing

You are required to:

a) Construct an income and expenditure account for the year ending 31 December 2020
and,
b) A statement of financial position as at that date.