Fianancial Accounting

FIANANCIAL ACCOUNTING
THE HISTORY OF FINANCIAL ACCOUNTING.
The history of financial accounting is more than just a story of money and numbers. It is the story of the
world's evolution from bartering and local trade to a true global economy.
When you think of the accounting field, the first thought is someone who works with figures day in and
day out. Yes, this is a major aspect of the accounting field. However, the history of financial accounting
shows that there were more to this field than money and numbers. We will discuss how the accounting
field evolved over time.
History shows the field of accounting has been in existence since around 7500BC. Its primary use then
was to trade livestock, grains, coins as well as fabric. There are documents today that shows its existent
such as Papyrus scrolls, which goes back to 3000BC and shows that Ancient Egypt used accounting to
show their financial and trade data. Examining this document you will find that Pharaoh kept a detailed
entry of his inventory and payroll records.
The accounting profession was not viewed as a respected profession as it is today until the Renaissance
period. When Italian merchants started trading routes in Europe and created regional banking centers to
track funds as well as goods and started the double-entry bookkeeping system, a significant part of
bookkeeping today.
1
FINANCIAL ACCOUNTING
2
Book-keeping Versus Accounting:
What is the difference between bookkeeping and accounting?
There is some confusion over the difference between bookkeeping and accounting. This is due to the
fact that two are related and there is no universal accepted line of demarcation between them.
Generally bookkeeping is the art of recording of all business data/transactions in the prescribed or
acceptable manner for easy reporting and understanding. The work of a bookkeeper is of the clerical in
nature. Accounting is primarily the science and art of recording, summarizing, classification,
interpretation and the preparation of reports. Accountants often direct and review the work of
bookkeepers. Accounting is the language employed to communicate financial information of a concern
to such parties.
The work book or books mean books of accounts and keeping implies maintaining in proper form and
order. Thus bookkeeping may be defined as the art of recording business transactions in books in a
regular and systematic manner. It has been defined by different experts as:
1. "The science and art of correctly recording in books of accounts all those business transactions
that result in the transfer of money's worth."
2. "The art and science of recording business transactions in such a systematic way as a trader may
know the result of his trade at the end of a certain period and may also prove the accuracy of such
record."
3. "The science and art of correctly recording business dealings in a set of books with a view to
having a permanent record of transactions and the financial result thereof."
It should be noted from the above definitions that bookkeeping primarily deals in the art of recording
transactions in books.
Accounting is defined as the art of recording, classifying, and summarizing all business transactions
expressed in monetary terms to enable the preparation of reports and interpretation of reports.
Financial Accounting:
It is the original form of accounting, which mainly confines to the preparation of financial statements for
the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial
accounting is to calculate profit or loss made by the business during the year and exhibit financial
position of the business as on a particular date.
IMPORTANCE OF FINANCIAL ACCOUNTING.
1. Book keeping helps an entrepreneur to ascertain whether the business has realized a profit or
it has incurred a loss during its trading operations.
2. Helps an entrepreneur to facilitate credit transactions. Most business transactions are carried
out on credit basis i.e. buying or selling on credit. It would therefore be difficult for the
entrepreneur to remember all the purchases or sales made on credit without proper book
keeping.
3
3. It acts as a tool of control, book keeping enables the business to keep record of all the
properties of the business which help to eliminate the possibility of theft and
misappropriation.
4. It helps in tax assessment. Types like income tax, excise duty, customs duty etc. are imposed
by the government depending on the records. To ensure accurate assessment of tax, book
keeping records must be maintained properly to avoid under or over taxation of the business
by the government.
5. Book keeping records help an entrepreneur to acquire loans. This is because financial
institutions e.g. banks usually require looking at the financial records of the business to
determine whether to extend credit or not.
6. Book keeping acts as a tool for planning. This is because most entrepreneurs base their
financial decisions according to sales, purchases, profits, investments of he past and the
present.
7. Book keeping act as a proof for financial position of the business. Knowing the assets
(properties of the business) and liabilities (debts of the business) the entrepreneur can easily
establish.
8. Acts as a centre for reference whenever information about business is required.
9. It helps to solve disputes among business members e.g. partnerships, companies, co-
operatives etc this is because it acts as evidence of the events which took place in the
business.
USERS OF ACCOUNTING INFORMATION
4
There are many users of accounting information who will use them and make judgements and to
influence decisions related to the business or investments.
i) S h a r e h o l d e r s / Owners – will use the information in order to determine the

performance of the business.
Also it will help them to improve on the way they manage their business and make decisions
that affect the future.
ii) Lenders – Such as banks will need accounting information in order to assess the financial
capacity of the business to determine whether to give out the loan or not.
iii) Customers – These will want to be sure that the business can meet their supply requirements
such that the supplies will be sustained in future.
iv) Creditors – The creditors are interested to know whether the business is credit worthy such
that it can meet their payments. They will also want to know more about how long they will
expect to unit for payment.
v) Employers – They want to know about the financial strength of the business and also they
require information in relation to profit sharing, for better pay, job security and whether the
business is still strong enough to continue existing.
vi) Government – These may include Revenue Authority and may use accounting
information to determine the tax liability of the business.
viii) Local community – The public tries to know the extent to which the business is concerned
about their welfare, possibility of providing employment, pricing of products to decide
whether there is need to get involved and if so how.
ix) Donors – Before donors continue or stop the donations they will first have to check in the
books of account.
INTRODUCTION
Accounting is the process of recording, reporting and analyzing the financial and other information
for management and the external users, to enable them make relevant decisions regarding the
enterprise.
The accounting information generated and used can be categorized into branches of accounting which
are aimed at solving specific problems of the entity. These include financial accounting, management
accounting, financial management and auditing. Each branch of accounting has specific users of
accounting information.
The underlying purpose of accounting is to provide financial information about an organization that
will help decision makers to make good decisions.
ELEMENTS OF USEFUL ACCOUNTING INFORMATION
5
Accounting information which is availed to the external users should posses a minimum of qualities so
as to enable users to make informed decisions.
Organizations are set up to achieve defined objectives the commonest which relates to entities in business
is to make profit for the owners. Consequently the entity should produce information which shows
whether this aim has been fulfilled or not and show the state of its assets and financial obligations.
The “corporate report” a paper produced under government support in the UK explains the purpose of
reports by organization (which includes accounts) as: is to communicate economic measurement of
and information about the resource and performance of the reporting entity useful to those having
reasonable rights to such information.
Therefore the information to be reported should have all the requisite economic information to be
useful.
The information is also required to the performance of the entity which in business means profit
communicated in such a way as to reveal to cause underlying the results
Information is also required about the resources of the entity. This is usually shown in the balance
shelf; contains information regarding the assets owned by the entity and its liabilities.
Together with other non-financial information the users can be able to make informed economic
decisions about the entity.
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION.
Qualitative characteristics are attributes that make the information provided in financial statements
useful to others. For information to be useful, it must be:
1. Material. Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
2. Relevant to the decision making needs of users. Information has the quality of relevance when it
influences the economic decisions of users by helping them evaluate past, present or future events
or by confirming or correcting their past valuations.
3. Reliable. Information has the quality of reliability when it is free from material error and bias and
can be depended upon by users. To represent faithfully in terms of valid description that which it
purports to represent or could reasonably be expected to represent. Thus financial information
should be neutral, prudent and complete and should present the substance of economic events.
4. Useful presented to enhance comparability and understandability.
6
(a) Comparability. Users of financial information must be able to compare the financial
statements of an enterprise over time to identify trends in its financial position and
performance. Users must also be able to compare the financial statements of different
enterprises to evaluate their relative financial position, performance and financial adaptability.
Consistency is therefore required. In addition, adequate disclosures of accounting policies
used in the preparation of the statements as well as the corresponding figures enhance
comparability.
(b) Understandability. The information provided in financial statements should be presented in
such a way that it is readily understandable by users. For this purpose, users are assumed to
have abilities that is; reasonable knowledge of business, economic activities and accounting
and a willingness to study the information with reasonable diligence.
Comprehensibility – the reports should be such as can be easily understood. Incomplete information, too
much detail or use much jargon may impair comprehensiveness
Objectivity- Information must contain facts and should avoid as far as possible subjective judgment or
basis towards of desires view.
Completeness- all relevant information should be given to give around picture of the entity.
.
PARTIES INTERESTED IN ACCOUNTING INFORMATION:
Explain, who may be interested in accounting information of a company or firm?
There are a number of parties who are interested in the accounting information relating to business.
Accounting is the language employed to communicate financial information of a concern to such parties.
The following are the groups who like to make use of the accounting information.
Owners:
The owner provides funds or capital for the organization. They want to know whether their funds are
being properly used or not. They need accounting information to know the profitability and the financial
position of the concern in which they have invested their funds. The financial statements prepared from
time to time from accounting records tell them the profitability and the financial position.
Management:
Management is the art of getting things done through others. The management should ensure that the
subordinates are doing work properly. Accounting information is an aid in this respect because it helps a
manager in appraising the performance of the subordinates. Accounting information provides "the eyes
and ears to management".
Creditors or service providers.

7
Creditors are the persons who supply goods on credit or bankers or lenders of money. They want to know
the financial position of a concern before giving loans or granting credit. They want to be sure that the
concern will not experience difficulty in making their payment in time i.e., liquid position of the concern
in satisfactory. To know the liquid position, they need accounting information.
Employees:
Employees are interested in the financial position of a concern they serve particularly when payment of
bonus depends upon the size of the profits earned. The demand for wage rise, bonus, better working
conditions etc. depends upon the profitability of the concern and in turn depends upon financial position.
For these reasons, this group is interested in accounting information.
Government:
The government is interested in accounting information because it wants to know earnings or sales for a
particular period for the purpose of taxation. Government also needs accounting information for
compiling statistics concerning which in turn helps in compiling national accounts.
Consumers:
Consumers need accounting information for establishing good accounting control so that cost of
production may be reduced with the resultant reduction of the prices of goods they buy. Sometimes,
prices for some goods are fixed by the government, so it needs accounting information to fix reasonable
prices so that consumers are not exploited.
DEFINITION OF ACCOUNTING PRINCIPLES/CONCEPTS/CONVENTION.
Financial accounting principles are also known as accounting concepts, accounting conventions or
postulates of accounting. The Nomenclature varies from author to author.
8
They are defined as basic ground rules which must be followed when financial accounts are being
prepared and presented. They are also referred to as assumptions or a preposition that underlies the
preparation and presentation of financial statements.
To make accounting information convey the same meaning to all people, as far as practicable, and to
make it full of meaning, accountants here agreed on a number of concept which they try to follow in
order to disclose any intentions of doctoring accountings for misstatements.
1. BUSINESS ENTITY:
This concept requires recognition and recording of transactions relating to the entity (organization) in
question and excludes private transactions of the owners or those running it. Record is only made for
what the entity owes the owner (capital) and what the owner owes the entity (drawings)
There is likelihood that accountants will increase expenses in order to declare lower profits and there
by minimize fax liability. This might involve increasing expenses by including those of a private
nature or not declaring all incomes of the entity. This would lead to misleading information to tax
assessors. Such actions are deemed illegal and outlawed thus implementing its business entity
concept.
The limitation of this concept can be appreciated from the perspective of a humble business
man/woman like a sole trader or a family run business. The owner and the business are actually
inseparable. For instance if a sole trader sells but also swells in the same premises, rent and utilities
paid on those premises will be difficult to apportion between the owner and the business especially if
there are no clear apportionment bases.
2. MONETARY /MONEY MEASUREMENT:

According to this concept all transactions to be recorded must be quantified in monetary terms or
language of money. Money is a common denomination for all transactions.
Where no paper unit of measurement, unit of account and store of value is attached to a transaction, it
will be easier for accountant to manipulate information because such information about a transaction
will be biased. The monetary concept was not employed; it would have been very easy for
accountants to give under estimations or over estimated information about a particular transaction
thus giving irreverent information to users.
The limitation of this concept is that it assumes that money has stable value over time and yet it is
common knowledge that money losses value with time, a phenomenon referred to as inflation. Under
inflationary circumstances money ceases to be an objective measure of value.
9
Also, there are certain events or things that can not be expressed in monetary terms thus not recorded
and yet they materially impede or enhance business operations. For instance if a supervisor is granted
leave, business will not flow smoothly.
Furthermore, there are some intangible assets like good will, patent, brand name etc which lead to
increased turn over and profits but cannot be recorded as assets because they are difficult to quantify
in financial term. Attempts are being made to value intangible assets for inclusion in the balance
sheet.
3. GOING CONCERN:
This concept states that the business entity is assumed to continue is operational existence in the
foreseeable future. The business is not on the verge of collapse unless there are indications to suggest
so. This concept makes it possible for accountants to project or prepare estimates for a long period
into the future for example preparation of budget estimates for many years into the future. The budget
are useful for trend analysis and comparison profits, the accountant will not be able to underestimate
the profit for a particular financial year to which the budget relate, because this will act as evidence
that will raise questions on the trend of profit got by the company.
This concept also enables the business to apportion the value of an asset over its useful life. Without
this concept, the asset would only be used for a particular financial year and its residue value taken
over by an accountant or any other member who would hence require purchase of fixed assets for
every financial year.
4. HISTORICAL COST:
This concept requires accountants to record assets and liabilities at historical cost of their acquisition.
Assets are recorded at the acquisition (invoice) cost even if the value today is more than the historical
cost. Likewise liabilities are recorded at amounts they were incurred though the true value of the
liability might have changed due to foreign exchange fluctuations and other macroeconomic issues
such as inflation.
6. ACCRUAL:
According to this concept, income is recorded as earned even though it might have been received
cash provided there is right to income (see realization concepts). Accrual basis accounting recognizes
both income and expenses without necessarily changing hands.
Without the accrual concept the scope of accounting would be narrowed to preparation of its cash
book. This would mean, where debtors accounts are not kept, all payments from debtors would be
exploited by accountants. 10
Also, without accrual concept, it be would be possible for accountants to include accrued items in
preparation of cash flow statements which show actual or expected cash flow position of the
enterprise.
11
There is no major criticism of this concept just like the reduction concept, however when preparing a
cash flow position of the enterprise, accrued items should be eliminated. Investment decisions are
based on the available or expected cash, accrued items will falsify the actual cash position.
7. MATCHING:
This concept requires accurate matching of expenses against incomers by writing off only those costs
or expenses that were incurred in generating specific income for the period ended. Cost or expenses
paid should be adjusted for any part-period that does not relate to the overall period.
Without the matching concept, it would be possible for accountants to write off all the part of the
income set aside for an expense e.g. rent) including the pre payment that has been part of the total
expense. The prepaid rent will also be written off it one financial year. It will not be carried forward
to cater for the part of/the following financial year.
Example: rent paid for one and half years 1800, 000=
End of year adjustment
1800,000 = 100,000 monthly rent 18 (month)
Therefore rent expense= 12x 100,000= 1200, 000/=
Prepaid rent expense= 600,000/=
Therefore the rent to write off out of the income earned in the financial will be 1200, 000/=
There is no major critics with this concept as far as accounting preparations are concerned.
SOURCE DOCUMENTS
In order that the entries made in the books of account are trusted they should be supported by
documentary evidence. Source documents are documents which provide the accounting
information where required. They include the following:-
i) Cash sale ship

This is used for cash transactions. It is prepared by the seller and issued to the customer who
has paid for the goods on spot.
ii) Cash Receipt
12
Is issued when a debtor pays for the goods already delivered or service already rendered. It
acknowledges the receipt of cash.
iii) Cash payment voucher

This is prepared for internal use. It is prepared/approved by top management to authorize
payment of cash for goods or services.
iv) Bank deposit slip

This is a document issued by the bank to its client as evidence that cash or cheque has been
deposited into the bank account.
v) Bank statement
This is a document issued by the bank to its customer showing the transactions that have taken
place during a given period of time. It shows deposits made, with draws and the balance as at
a given date.
vi) Invoice this document is prepared when credit transactions takes place, which gives the
quantity, quality, unit price, total value of the goods sold on credit. There are two types of
invoices, incoming to represent purchases and outgoing for sales.
vii) Delivery note
This is a document showing the list of goods, without showing their prices which is sent to the
buyer. It is used for checking the goods. When the goods are delivered to the buyer, he is
supposed to retain one copy and return the other copy to the seller, duly signed by him. It
proves that the goods have been delivered.
viii) Credit note

This document shows a decrease on the claim of money. It is issued when part of the goods
sold or purchased are returned or price overcharged is reduced at a later stage.
ix) Debit note

This document is sent by the seller to correct for an undercharge on the original invoice. It is
issued because it is considered to issue another document rather than to do the alterations on
the original invoice.
COMMON TERMINOLOGIES USED IN BOOK-KEEPING:
Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms
that will have to be used again and again.
Transaction:
Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods,
receipt and payment of cash and rendering of services by one party to another.
13
Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as
a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of
cash is postponed for future date, this transaction is said to be credit transaction.
Business:
It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance
business, a merchant business etc., etc.
Proprietor:
He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to
receive the profit or bear loss arising out of it.
Drawings:
The cash or goods taken away by the proprietor from the business for his personal use are called has
drawings.
Purchases:
Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases
but if they are purchased for which payment will have to be made at some future date it is known as
credit purchases.
Purchases Returns:
If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from
whom they were purchased or to suppliers are called purchases returns or returns outwards.
Sales:
Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are
sold without having received payment, they are credit sales.
Sales Returns:
If a person to whom goods have been sold finds that they are defective or unsatisfactory and return them,
are called sales returns or returns inwards. This occurs due to a number of reasons which include, under
or over size, wrong colour, shape or fashion, damaged etc.
Trade Discount:
It is rebate or allowance from the scheduled price granted by the seller to the buyer attracting bulk
purchases. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.
Cash Discount:
14
It is deduction or allowance allowed by creditor to a debtor for prompt payment. If a person pays his
debit before the due date of payment the recipient may grant him an allowance for doing so. This
allowance is known as cash discount. Cash discount can be sub-divided into two ways,
Discount received, a reduction enjoyed by the business when settles a date before the due date. This is
regarded as income to the business.
Discount allowed, this is a reduction allowed to its debtors for prompt payments of their debts. This is
regarded as an expense because you have forfeited some money with intention or receiving cash before
the due date.
Commission:
It is a form of remuneration for services rendered by one person to another.
CAPITAL EXPENDITURE vs REVENUE EXPENDITURE.
Capital expenditure takes place when assets or fixed assets are purchased or capitalization of expenditure
on assets while revenue expenditure refers to payment for goods and services needed or used by the
business to meet its short term obligations.
Expense:
It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc.
Difference between expense and expenditure is that the benefit of the former is consumed by the business
in present whereas in latter case benefit will be available for future activities of the business.
Account:
A summarized record of transactions relating to person or thing is called an account.
Debtor (Account Receivable):
A person who owes money to another is a debtor. When we say that we owe Mr. Odeke B Shs 200, we
mean that we have received from Mr. Odeke B Shs 200 which we have to repay. We stand as debtor to
Mr. Odeke B for Shs 200. It is also termed as accounts receivable.
Creditor (Accounts Payable):
A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts
payable.
Assets:
These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.
Liabilities:
They are the debt due by a business to its proprietor and others.
Voucher:
21
Any written evidence in support of a business transaction is called a voucher. When a ream of paper is
bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When
wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for
the payment.
Goods (Merchandise):
It includes all merchandise commodities which are purchased by the business for selling.
Stock (Inventory):
Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or
inventory.
Equity:
A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to
properties are called equities. Equities are of two types: the right of creditors and the right of owners.
Liabilities.
The equities of creditors represent debts of the business and are called liabilities. The equities of the
owner are called capital, proprietorship or owner's equity.
OVERVIEW OF ACCOUNTING
1.1 Objectives of Financial Reporting.

The objective of financial reporting is to provide information about the financial position,
performance and changes in the financial position of an enterprise that is useful to a wide range of
users in making economic decisions. The economic decisions that are taken by the users of financial
reports require an evaluation of the ability of an enterprise to generate cash and of the timing and
certainty of its generation. This can be achieved if users of financial reports are provided with
information that focuses on the enterprises’.
a) Financial position which is affected by the economic resources it controls, its financial structure,
its liquidity and solvency and its ability to adapt to changes in the environment in which it
operates.
b) Performance measured by the return obtained by the enterprise on the resources it controls.
c) Cash flow by indicating the amounts and principle sources of its cash inflows and outflows.
The user–groups of financial reports include:
22
Equity investors, existing and potential;
Lenders, existing and potential;
Employees, existing, potential and past;
Analysts / Advisers including journalists, economists, Credit Rating Agencies;
Business Contacts including Customers, Suppliers, Competitors;
Government including Tax Authorities;
The Public.
The most frequently produced financial reports are known as Financial Statements. A complete set of
financial statements includes the following components:
a) A balance sheet
b) Income statement
c) Cash flow statement
d) A statement showing either;
All changes in equity or;

Changes in equity other than those from capital transactions with owners and distributions
to owners.
e) Accounting policies and explanatory notes. However, financial statements do not provide all the
information that users need to make economic decisions since they largely portray the financial
effects of past events and do not necessarily provide non – financial information.
ACCOUNTING CYCLE:
Define and explain accounting cycle.
Accounting cycle refers to a complete sequence of accounting procedures which are required to be
repeated in same order during each accounting period. Accounting cycle includes:
Recording:
First, all transactions should be recorded in the journal or books of original entry known as subsidiary
books as and when they take place.
Classifying:
All entries in the journal of books of original entry should be posted to the appropriate ledger accounts to
find out at a glance the total effect of all such transactions in a particular account.
23
Summarising:
Last stage is to prepare the trial balance and final accounts with a view to ascertaining the profit or loss
made during a trading period and the financial position of the business of a particular date.
The diagram below demonstrates the Accounting cycle.
ACCOUNTING EQUATION:
Definition and Explanation:
Accounting is the language of business. Affairs of a business unit are made understood to others as well
as to those who own or manage it through accounting information which has to be suitably recorded,
classified, summarized and presented.
In order to make this language to convey the same meaning to all people, it is necessary that it should be
based on certain uniform scientifically laid down standards. These standards are termed as accounting
principles. Accounting principles may be defined as those rules of action or conduct which are adopted
by the accountants universally while recording accounting transactions. In the absence of common
principles there will be a chaotic situation and every accountant will have his own principles. Not only
the utility of accounts will be less but these will not be comparable even in the same business. Therefore,
it becomes essential that common principles should be followed for measuring business revenues and
expenses.
Essential Features of Accounting Principles:
Accounting principles are accepted if they satisfy the following norms:

24
Usefulness:
A principle will be relevant only if it satisfies the needs of those who use it. The accounting principles
should be able to provide useful information to its users otherwise it will not serve the purpose.
Objectivity:
A principle will be said to be objective if it is based on facts and figures. There should not be a scope for
personal bias. If the principle can be influenced by the personal bias of users, it will not be objective and
its usefulness will be limited.
Feasibility:
The accounting principle should be practicable. The principles should be easy to use otherwise their
utility will be limited.
Classification of Accounting principles:

Accounting principles can be classified into two kinds:
Accounting Concepts:
The term concepts includes those basic assumptions or conditions upon which accounting is based
Explain important accounting principles.
The term concepts includes those basic assumptions or conditions upon which accounting is based. The
following are the important accounting concepts:
1. Business Entity Concept
2. Going Concern Concept
3. Money Measurement Concept
4. Cost Concept
5. Duel Aspect Concept
6. Accounting Period Concept
7. Matching Concept
8. Realisation / Realization Concepts
The explanation of these concepts are as follows:
Business Entity Concept:
In accounting, business is treated as separate entity from its owners. Accounts are prepare to give
information about the business and not about those who own it. a distinction is made between business
transactions and personal transactions. Without such a distinction, the affairs of the business will be
mixed up with the private affairs of the proprietor and the true picture of the firm will not be available.
The 'Business' and 'owner' are taken as two separate entities. The accountant is interested to record
transactions relating to business only. The private transactions of the owner will be recorded separately
and will have no bearing on the business transactions. All the transactions of the business are recorded in
the books of the business from the point of view of the business as an entity and even the proprietor is
treated as a creditor to the extent of his capital.
The concept of separate entity is applicable to all of business organizations. For example, in case of a sole
proprietorship business or partnership business, though the sole proprietor or partners are not considered
as separate entities in the eyes of law, but for accounting purposes they will be considered as separate
entities. In the case of joint stock company, the business has a separate legal entity than the shareholders.
25
The coming and going shareholders don not affect the entity of the business. Thus, the distinction
between owner and the business unit has helped accounting in reporting profitability more objectively
and fairly. It has also led to the development of 'responsibility accounting' which enables us to find out
the profitability of even the different sub-units of the main business.
Going Concern Concept:
According to going concern concept it is assumed that the business will exist for a long time to come.
Transactions are recorded in the books keeping in view the going concern aspect of the business unit. A
firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs.
Since business is to continue, fixed assets will be shown at cost less depreciation basis. It is due to the
concept that the fixed assets are depreciated on the basis of their expected life than on the basis of market
value.
Money Measurement Concept:
Accounting records only those transactions which can be expressed in terms of money. Transactions or
events which cannot be expressed in money do not find place in the books of accounts though they may
be very useful for the business. For example, if a business has got a team of dedicated and trusted
employees, it is definitely an asset to the business, but since their monetary measurement is not possible,
they are not shown in the books of business. It should be remembered that money enables various things
of diverse nature to be added up together and dealt with. The use of a building and the use of clerical
service can be aggregated only through money values and not otherwise.
Cost Concept:
This concept is closely related to the going concern concept. According to this concept, an asset in
ordinarily recorded in the books at the price at which it was acquired i.e., at its cost price. This cost
serves the basis for the accounting of this asset during the subsequent period. The 'cost' should not be
confused with 'value'. It must be remembered that as the real worth of the assets changes from time to
time, it does not mean that the value of such an asset is wrongly recorded in the books. The book values
of the assets as recorded do not reflect their real value. They do not signify that values noted therein are
the values for which they can be sold. Though the assets are recorded in the books at cost, in course of
time, they are reduced in value on account of depreciation charges. The idea that the transactions should
be recorded at cost rather than at a subjective or arbitrary value is known as cost concept. With the
passage of time, the market value of fixed assets like land and buildings vary greatly from their cost.
These changes in the value are generally ignored by the accountants and they continue to value them in
the balance sheet at historical cost.
Dual Aspect Concept:
This is the basic concept of accounting. Modern accounting system is based on dual aspect concept.
Dual concept may be stated as "for every debit, there is a credit". Every transaction should have two
sided effect to the extent of same amount. For example, if A starts a business with a capital of shs 10,000.
There are two aspects of the transaction. On the one hand the business has assets of shs 10,000 while on
26
the other hand the business has to pay to the proprietor a sum of shs 10,000 which is taken as proprietor's
capital. This expression can be shown in the form of following equation:
Capital (Equities) = Costs (Assets)

10,000 = 10,000
The term 'assets' denotes the resources owned by a business while the term 'equities' denotes the claims of
various parties against the assets. Equities are of two types. They are owners equity and outsiders equity.
Owner's equity (or capital) is the claim of the owner's against the assets of the business while outsiders
equity (liabilities) is the claim of outside parties against the assets of the business. Since all assets of the
business are claimed by someone (either owners or outsiders), the total of assets will be equal to total of
liabilities. Thus:
Equities = Assets
OR Liabilities + Capital = Assets
Suppose if the business borrows $5000 from a bank, dual aspect of this transaction will be
Capital + Liabilities = Assets

A Loan
10,000 = 15,000
Thus the accounting Equation states that at any point of time the assets of any entity must be equal (in
monetary terms) to the total of owner's equity and outsider's liabilities. As a mater of fact the entire
system of double entry accounting is based on this concept.
Accounting period concept:
According to this concept, the life of the business is divided into appropriate segments for studying the
results shown by the business after each segment. Since the life of the business is considered to be
indefinite (according to going concern concept) the measurement of income and studying financial
position of the business according to the above concept, after a very long period would not be helpful in
taking proper corrective steps at the appropriate time. It is, therefore, absolutely necessary that after each
segment or time interval the businessman must stop and see, how things are going on. In accounting such
a segment or time interval is called accounting period. It is usually of a year.
Matching concept:
The aim of business is to earn profit. In order to ascertain the profit the costs (expenses) are matched to
revenue. The difference between income from sales and costs of producing the goods will be the profit.
When business is taken as a going concern then it becomes necessary to evaluate the performance
27
periodically.
A correct statement of income requires a distinction between past, present and future expenditures. A
distinction between capital and revenue expenditure is also necessary. The revenues and costs of same
period are matched. In other words, income made by the business during a period can be measured only
when the revenue earned during a period is compared with the expenditure incurred for earning that
revenue. The question when the payment was received or made is irrelevant.
Realization Concept:
This concept emphasises that profit should be considered only when realised. The question is at what
stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time
of execution of the order or at the time of receiving the cash? For answering this question the accounting
is in conformity with the law and Recognises the principle of law i.e., the revenue is earned only when
the goods are transferred. It means that profit is deemed to have accrued when property i goods passes to
the buyer, viz., when sales are made.
ACCOUNTING EQUATION:
Learning Objective:
1. Define and explain accounting equation.

2. Give an example of accounting equation.
Definition and Explanation of Accounting Equation:
Dual aspect may be stated as "for every debit, there is a credit." Every transaction should have twofold
effect to the extent of the same amount. This concept has resulted in accounting equation which states
that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities.
28
In other words, for every business enterprise, the sum of the rights to the properties is equal to the sum of
the properties owned. The properties of the business are called "assets". The rights to the properties are
called "equities". Equities may be sub-divided into two principle types: The rights of the creditors and the
rights of the owners. The equity of the creditors represents debts of the business and are called liabilities.
The equity of the owner is called capital, or proprietorship or owner's equity.
The formula know as the accounting equation, thus arrived at is as follows:
Assets = Equities
OR
Assets = Liabilities + Proprietorship’s capital.
Another method of demonstrating the mathematical relationship involves a simple variation in the form
of equation. Again it begins with the position that every business owns or has interest in certain assets. It
also owes certain amounts to its creditors. The difference between what it owns and what it owes
represents the owner's capital or proprietorship. Thus the original equation is changed into:
Assets - Liabilities = Proprietorship’s capital
Effects of Transactions on the Accounting Equation:
Each and every business transaction affects the elements of accounting equation. The effect is shown by
the use of (+) or (-) placed against the elements affected. Note particularly that the equation remains in
balance after each transaction. The accounting equation can be understood with the help of the following
example:
Example:
Transaction 1:
Mr. Riaz commences his business with cash $50,000. This is an example of investment of asset in the
business by the owner. The effect of this transaction on the accounting equation is that cash asset is
increased by $50,000 and the proprietorship (Riaz's capital) is also increased by the same amount such as:
Assets = Liabilities + Proprietorship’s

Cash Capital
+ 50,000 = ---- + 50,000
Note that assets and equities increased by equal amounts
Transaction 2:
Purchased furniture on cash $10,000. This transaction effected accounting equation as the increase in one
new asset furniture and decreases in assets cash with the same amount. Thus
29
Assets = Liabilities + Proprietorship
Cash Furniture Riaz, Capital
+ 50,000 = ---- + 50,000
- 10,000 + 10,000
40,000 + 10,000 = 50,000
Note that this transaction has affected assets side only and no change is made in equities side of the
equation.
Transaction 3:
Purchased merchandise for cash $10,000. This transaction will introduce a new element (merchandise) on
the assets side and decrease the cash by $10,000.

Cash Furniture Merchandise Riaz, Capital
+ 40,000 + 10,000 = ---- + 50,000
-10,000 -- + 10,000
30,000 + 10,000 = 50,000
Note that this transaction has affected assets side only and no change is made in equities side of the
equation.
Transaction 4:
Purchased merchandise on account (on credit) $5,000.

Cash Furniture Merchandise Creditors Riaz, Capital
+ 30,000 + 10,000 + 10,000 = + 50,000
+ 5,000 + 5,000
30,000 +10,000 + 15,000 = + 5,000 + 50,000
Note that this transaction has affected assets side and liabilities. Both the sides of equation has
increased with the same amount.
Transaction 5:
Sold merchandise for cash $2,000 cost of these merchandise were $1,500.

Cash Furniture Merchandise Creditors Riaz, Capital
30
+ 30,000 + 10,000 + 15,000 = + 5,000 + 50,000
+ 2,000 - 1,500 + 500 (Profit)
+ 32,000 +10,000 + 13,500 = + 5,000 + 50,500
Note that this transaction has affected assets side and also the proprietorship. Difference between
sales price and cost price is treated as profit and has been added to capital.
Transaction 6:
Sold merchandise on credit for $4,000 costing $3,000.

Cash Furniture MerchandiseDebtors Creditors Riaz, Capital
+ 32,000 + 10,000 + 13,500 = + 5,000 + 50,500
- 3,000 + 4,000 + 1,000
32,000 +10,000 + 10,500 + 4000 = + 5,000 + 51,500
Note that this transaction has affected assets side and also the proprietorship. Anew element
"debtors" has been introduced. Difference between sales price and cost price is treated as profit
and has been added to capital.
Transaction 7:
Paid $1,000 to creditors for merchandise purchased.

+ 32,000 + 10,000 + 10,500 + 4,000 = + 5,000 + 51,500
- 1,000 - 1,000
31,000 +10,000 + 10,500 + 4000 = + 4,000 + 51,500
Transaction 8:
Received cash from a debtor $ 1,000 whom a sale on credit was made earlier. This is an example of
collection from debtors. This transaction is an exchange of one asset for another. the effect is on one side
of the equation, i.e., asset side. Thus:

+ 31,000 + 10,000 + 10,500 + 4,000 = + 4,000 + 51,500
+ 1,000 - 1,000
32,000 +10,000 + 10,500 + 3000 = + 4,000 + 51,500
Transaction 9:
Paid salaries $1,000 in cash. This transaction affected the equation by decrease in a cash asset and
decrease in proprietorship (i.e., capital). Thus:
31
+ 32,000 + 10,000 + 10,500 + 4,000 = + 4,000 + 51,500
- 1,000 - 1,000
31,000 +10,000 + 10,500 + 3000 = + 4,000 + 50,500
Effects of all the transactions explained above are presented in the following table:
Assets = Liabilities +Proprietorship

+
Cash + Furniture + Debtors Creditors + Riaz, Capital
Merchandise
1 + 50,000 +50,000
50,000 = + 50,000
2 - 10,000 + 10,000
3 - 10,000 + 10,000
4 + 5,000 + 5,000
5 + 2,000 - 1,500 + 500 (Profit)

32,000 10,000 13,500 = 5,000 + 50,500
6 - 3,000 + 4,000 + 1,000 (Profit)
32,000 10,000 10,500 4,000 = 5,000 + 51,500
7 - 1,000 - 1,000
31,000 10,000 10,500 4,000 = 4,000 + 51,500
8 +1,000 1,000
32,000 + 10,000 + 10,500 + 3,000 4,000 + 51,500
9 1,000 1,000
31,000 10,000 10,500 3,000 = 4,000 + 50,500
The elements of the equation of Mr. Riaz that is,
Cash + Furniture + Merchandise + Debtors = Creditors + Capital

31,000 + 10,000 + 10,500 + 3,000 = 4,000 + 50,500
This may also be stated in vertical form as shown below:
EQUITIES ASSETS
Creditors $4,000 Cash $31,000
Capital $50,500 Debtors 3,000
Merchandise 10,500
Furniture 10,000
32
$54,500 $54,500
The presentation of the effects of transactions in tabular form is only a device which helps beginners to
understand the analysis of different types of transactions. It is not practically feasible to record the effects
of transactions in this form. The increases and decreases in the various elements are recorded in the
journal in a special technical form.
DOUBLE ENTRY SYSTEM AND PREPARATION OF BOOKS OF ACCOUNTS
DOUBLE ENTRY SYSTEM.
This is a book keeping system where there is dual recording of transactions that is; it should be recorded
twice in 2 books of Accounts.
In the Double entry system, the Debit (DR) entry must have a Corresponding Credit (CR) entry and vice
versa.
To every transaction, the totals must be the same that is; DR and CR totals. Debit and Credit are means of
increasing and decreasing an account’s balance depending on the nature of account.
A Debit entry may increase or decrease or vice versa.
33
AN ACCOUNT
An account is a means of bringing together records or it’s a means of bringing together records of all
transactions which took place in a business in chorological order that is; recorded in order of time.
Accounts include; “IMPERSONAL” and ‘PERSONAL ACCOUNTS”. Personal accounts include;

Debtors and Creditors Accounts and Impersonal accounts are subdivided into ‘Real’ and ‘Nominal’
Accounts. Real Accounts are accounts of tangible things. For example; Furniture whereas Nominal
Accounts are accounts of intangible things that is; services like; advertising.
FORMATS OF ACCOUNTS
1. T Account Format. This is the Debit and Credit format in a T form that is;
DR CASH A/C CR
2. Running Balance Format. This is a format where a balance is shown every after the recording of a
transaction.
CASH ACCOUNT
Date Details Folio Debt Credit Balance
A table showing application of double entry system while recording transactions.

Type of Account Increase Decrease Normal Balance
Asset Account Debit (DR) Credit (CR) Debit (DR)
Liabilities Account Credit (CR) Debit (DR) Credit (CR)
Incomes Account Credit (CR) Debit (DR) Credit (CR)
Owners’ Equity Credit (CR) Debit (DR) Credit (CR)
Capital & reserves
Expenditures Debit (DR) Credit (CR) Debit (DR)
Account
- Liabilities are obligations you have to pay in a business.
34
- Things or goods which are not for resale are not purchases.
Examples;
i) Sold goods for cash 8 million
DR CASH A/C CR DR SALES A/C
Sales 8m Cash 1m CASH 1m
ii) Bought furniture for 5 million and paid by cheque

BANK A/C FURNITURE A/C
Furniture 5m BANK 5m
iii) Bought goods for 3 million on credit
PURCHASES CREDITOR A/C
Creditor 3m Cash 1m Purchases
BOOKS KEPT BY THE BUSINESS.

books. Information contained in source documents is recorded in the following
1. Cash book
This is a book used to record all cash receipts and payments for the business. Depending on
the size of the business and the nature of cash transactions, a single column, a two column, a
three column cash books and a petty cash book may be used.
2. Purchases day book

This is a book used to record purchases made on credit. It is also called purchases journal. It
is written up form incoming invoices received from suppliers.
3. Sales day book
35
This is a book used to record sales made on credit. It is therefore used to record credit sales. It is
also called sales journal. It is written up from outgoing invoices which are sent to customers.
4. Return outwards book

It is a book used to record in goods returned by the business to creditors. The reasons for
returning goods may be due to damage, expired, faculty, of wrong specification, type, size,
colour etc.
It is also called purchases returns book or return outwards journal. It is written up from
information contained in the incoming credit notes.
5. Return inwards book

It is a book used to record in goods returned by customers to the business. It is also called
return inwards journal sales returns book. It is written up from copies of outgoing credit notes
(credit notes issued)
6. General journal
Also called journal proper it is used to record in transactions of the business which can not be
entered in other books mentioned above. Ti is used to record transactions like purchase or
sale of a fixed asset on credit, to correct errors to record opening and closing entries, to record
adjustments.
THE LEDGER AND THE CONCEPT OF DOUBLE ENTRY
The ledger:
This is an accounting book used to maintain proper records of business transactions. The ledger has two
side i.e.
- Left hand side (Debit side)

- Right hand side (Credit side)
The debit side is used to record the value received while the credit side is used to record the value spent
or lost.
A page of the ledger appears as below,
Dr. Name of the ledger account Cr.
Date Particulars Fol. Amount Date Particulars Fol. Amount
i) The date column is used to record the date when the transaction took place.
ii) The particulars column is used to record details/description of the transaction.
iii) The folio column is used to record the page numbers and accounts where the record is to be
transferred.
36
iv) The amount column is used to record values of the transactions.
KINDS/ TYPES OF LEDGER.
There are three major kinds of ledgers. These include:-
a) General ledger or normal ledger

b) Sales ledger or debtors’ ledger.
c) Purchases ledger or creditor’s ledger.
d)
a) General ledger
This ledger contains the accounts relating to the proprietor (owner) and other normal transactions e.g.
sales, purchases, expenses, etc.
b) Sales ledger
This ledger is used to maintain the personal accounts of all debtors. A debtor is a person / business firm
who owes is a person to the business.
c) Purchases ledger
This ledger is used to maintain the personal accounts of all creditors. A creditor is a person to whom
money is owed.
CLASSIFICATION OF ACCOUNTS.
AN ACCOUNT
An account is a record of transactions of a particular type, expressed in financial terms and recorded in
the ledger.
Classification of Accounts.
The classification of accounts is the collection of transactions of similar nature into appropriate ledger
accounts. Accounts are classified into two i.e. personal and impersonal accounts.
PERSONAL ACCOUNTS
Are those accounts which appear in the ledger in the names of people or organizations e.g. debtors and
creditors.
37
IMPERSONAL ACCOUNTS.
Are those accounts which appear in the ledger in the names of things / items. Impersonal accounts are
further subdivided into two i.e. real and nominal accounts.
Real accounts – these are accounts which relate to tangible items i.e. they appear in the ledger in the
names of property e.g. land, buildings, furniture, cash, stock etc.
Nominal accounts – Are accounts which relate to intangible items. They record expenses and gains or
losses and incomes. Examples are wages and salaries, electricity , discount allowed discount received,
rent received, rent paid etc.
The following diagram may help you to understand it better.
ACCOUNTS
PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS
Debtors Creditors Real Accounts Nominal Accounts
Accounts Accounts for property of all kinds for expenses and losses
THE CONCEPT OF DOUBLE ENTRY.
Double entry principle states that for every transaction there should be both a debit entry and a
corresponding credit entry, and vise versa.
Rules for double entry recording:
1. Every transaction affects at least two accounts

2. There must be at least one debit and one credit
3. The total debits must be equal to total credits
4. The particulars or details in the account refer tot eh name of the other account where double
entry is recorded.
The following diagram shows the application of the rule of double entry.
Accounts
38
Norminal Account Real Account Personal Account
Dr Cr Dr Cr Dr. Cr.
Expenses Incomes What comes What goes The The
& Losses & gains in out receiver giver
Example
st
Mr. Opio started business with capital of shs. 1,500,000 on 1 Jan 2008. he made the following
transactions during the month.
2008
Jan 1 purchased shop fittings for cash Shs. 400,000
” 2 purchases goods for resale in cash Shs.150,000
” 5 sold goods and received cash Sh. 100,000
” 10 paid transport in cash Sh. 60,000
” 20 received cash from Alex 90,000
” 21 purchased goods for resale inc ash 100,000
” 27 sold goods and received cash shs. 120,000
” 28 paid for advertising in cash 60,000
” 29 Purchased furniture inc ash 150,000
” 31 paid wages in cash 50,000
Required:
Record the above transactions in Mr. Opio’s ledger following the double entry system.
Dr. Capital Account Cr.
2008
Jan 1 Cash 150,000
Dr. Cash Account Cr.
39
2008 Shs 2008 Shs
Jan 1 Capital 1,500,000 Jan 1Shop fittings 400,000

5 Sales 100,000 ” 02Purchases 150,000
20 Alex 90,000 ”10Transport 60,000
27 Sales 120,000 ”21Purchases 100,000
”28Advertising 60,000
”29Furniture 150,.000
”30 Wages 50,000
Dr. Shop fittings A/C Cr.
2008 Shs
Jan 1 Cash 400,000
Dr. Purchases A/C Cr.
2008 Shs
Jan 2 Cash 150,000
21 Cash 100,000
Dr. Sales A/C Cr

2008 Shs
Jan 5 Cash 100,000
” 27 Cash 120,000
Dr. Transport A/C Cr.
2008 Shs
Jan 10 Cash 60,000
Dr Alex’s Account Cr
2008 Shs
Jan 20 Cash 90,000
40
Dr. Advertising Account Cr.
2008 Shs
Jan 28 Cash 60,000
Dr. Furniture Account Cr.
2008 Shs
Jan 29 Cash 150,000
Dr. Wages Account Cr.
2008 Shs
Jan 30 Cash 50,000
BALANCING OFF ACCOUNTS.

Balancing off accounts means to insert the difference on the side with a small title so that you get the
same totals on both sides. Accounts must be balanced at the end of every month. The following steps
are followed when balancing off an account.
i) Add up both sides to find out their totals

ii) Deduct the small total from the larger total to find the balance.
iii) Now enter the balance on the side with a smaller total to ensure that the totals on both sides
are equal. The balance inserted is called balance carried down (Bal. c/d).
iv) Enter totals on the same level with each other.
v) Transfer the balance to the opposite side of the account but below the totals. This balance
below the totals is called Balance brought down (Bal. b/d). the date used should be the first
day of the next period.
Example
Dr. Cash Account Cr.

2008 Shs 2008 Shs
st
Jan 1 capital 180,000 Jan 1 purchases 80,000
” 10 sales 60,000 ” 3 transport 5,000
” 20 John 10,000 ” 11 furniture 10,000
” 31 sales 120,000 ” 31 wages 20,000
” 31 Bal. c/d 255,000
370,000 370,000
41
st
Feb 1 Bal b/d 255,000
EXERCISE.
K.K. Company Ltd started business dealing in motor vehicles with capital of Shs. 500,000,000 in cash on
st
1 May, 2008. it made the following transactions during the month of may.
st
May 1 purchased 5 saloon cars for resale in cash Shs. 12,000,000
” 5 paid transport charges in cash shs. 5,000,000
” 10 Sold two saloon cars and received cash shs. 17,000,000
” 15 purchased 2 Isuzu trucks in cash Shs. 50,000,000
” 20 purchased machinery in cash shs. 2,000,000
” 26 sold 1 Isuzu truck and received cash shs. 70,000,000
” 28 paid wages and salaries in cash shs. 10, 000,000
” 31 purchased furniture for ash shs. 800,000
Required
Record the above transactions in K.K company’s ledgers.
CASH TRANSACTIONS.
When cash or cheque is used in buying things or in paying for certain services the action is described as a
cash transaction. Buying or obtaining something by paying out cash or cheque at that particular time is
cash purchaser. Selling or disposing something or providing services to someone in exchange for cash or
cheque from him at that particular time in cash sale.
Advantages of selling on cash basis .
1. The entrepreneur would be free of accounting work which would involve him in expenses
beyond his limited resources.
2. It avoids risks to loses through bad debts
3. The entrepreneur will have ready cash with which to buy new stock as it becomes necessary.
4. The entrepreneurs will not get involved into borrowing money to finance his purchases since
he is likely to have enough ash which he can utilize.
5. It facilitates the sell of small items since buyers can afford to pay on spot.
42
6. The entrepreneur will be in position to pay his creditors promptly and obtain cash discount.
7. The entrepreneur is not likely to be involved in legal expenses incase the buyer failed to pay
the amount due from him.
8. The entrepreneur can plan for the use of his working capital.
Management of cash sales (cash transactions)
In order to ensure that cash is properly managed an entrepreneur should do the following:-
i) All cash received in the business should be receipted and accounted for.
ii) All cash collected in business should be banked.
iii) Cash held in the business should be under lock.
iv) All cash receipts and other documents for cash be kept available for reference
v) The entrepreneur should avoid to use business cash for personal uses (cash drawings)
TWO COLUMN CASH BOOK
The cash book is an accounting book used to record used to record all cash receipts and cash payments of
the business. Receipts are values coming in and are entered on the debit side. Payments are values going
out and are entered on the credit side.
The two column cash book also called double column cash book has two amount columns on both side
i.e. the cash and bank columns and is used to maintain both the cash and bank account at ago. The cash
or cheque paid are credited.
Below is the layout of the two column cash book.
Dr. Two column cash book

Date Particulars Fol. Cash Bank Date Particulars Fol. Cash Bank
Illustration
st
On 1 April 2008 Kato started business with cash Shs. 1,300,000 and cash at bank shs. 1,500,000. the
following transactions took place:
rd
April 3 bought shop fittings for Shs. 160,000 in cash
th
” 5 bought goods for cash shs. 300,000
th
” 6 sold goods and received a cheque for shs. 400,000
th
” 7 sold goods for cash Shs. 150,000
” 10 paid carriage inwards Shs. 200,000 by cheque.
50
” 15 cash sales shs. 500,000
” 17 paid carriage inwards shs. 100,000 in cash
” 20 received a bank loan of Shs. 500,000 by cheque
” 22 paid wages in cash shs. 20,000
” 23 paid electricity by cheque shs. 15,000
” 29 paid rent in cash shs. 100,000
Required:
(a) Record the above transactions in the two column cash book and balance it.
(b) Post the entries to ledgers
(a) Two column cash book
Date Particulars Fol. Cash Bank Date Particulars Fol. Cash

Bank
rd
April 1 Capital 1,500,000 April 3 Shop
1,300,000 fittings 160,000
” 6 Sales 400,000 ” 5 Purchases 300,00
” 7 Sales 150,000
” 10 Purchases 200,00
” 15 Sales 500,000” 17 Carriage In. 100,000

” 20 Loan 500,000 ” 22 Wages 20,000
” 23 Electricity 15,000
” 29 Rent 100,000
” Bal. c/d
st
May 1 Bal b/f
(b) Ledger Accounts
Dr Capital Account Cr.
2008 Shs
51
st
April 1 Cash 1,300,000
52
st
”1 Bank 1,500,000
Dr. Shop fittings Account Cr.
2008 Shs
April 160,000
Dr. Purchases Account Cr.
2008 Shs
April 5 Cash 300,000
” 10Bank 200,000
Dr. Sales Account Cr.
2008 Shs
April 6 Bank 400,000
” 7 Cash 150,000
” 15 Cash 500,000
53
Dr. Carriage Inwards Cr.
2008 Shs.
th
Dr. Loan Account Cr.
2008 Shs.
Dr. Wages Account Cr.
2008 Shs
April Cash 20,000
Dr. Electricity Amount Cr.
2008 Shs
54
Dr. Rent Account Cr.
2008 Shs
CONTRA ENTRIES.
Contra entries are entries of transactions whose double entry is completed within the cash book. They
refer to cash payment into one’s bank account or cash withdrawn from bank. This means that there is
both a debit entry and a credit entry of the same transaction in the cash book.
Contra entries are indicated by letter “C” which is placed in the folio column in the cash book.
Example
Cash paid into bank
Dr. Bank column
Cr. Cash column
Cash withdrawn from bank
Dr. Cash column
Cr. Bank column
Illustration:
Enter the following transactions in the two column cash book for the month of Nov. 2008.
st
Nov. 1 balances brought forward:
55
Cash in hand shs. 120,000
Cash at bank shs. 350,000

nd
Nov. 2 sold goods for shs. 80,000 in acsh
rd
” 3 sold goods shs. 100,000 receiving the money by cheque
th
” 4 Deposited in the business bank account shs. 180,000 from cash in hand
th
” 7 The proprietor took shs. 15,000 in cash for personal use.
th
” 10 Withdrew shs. 50,000 from the business bank account for official use.
th
” 15 Bought goods for shs. 250,000 paying by cheque shs. 200,000 and in cash
shs. 50,000
th
” 20 Withdraw from bank for self use.
” 26 Received shs. 40,000 in acsh from Joseph
” 28 Received a cheque of shs. 60,000 from Zziwa.
”31 Paid rent by cheque shs. 12,000
TWO COLUMN CASH BOOK.
Date Particulars Fol. Cash Bank Date Particulars Fol. Cash Bank
2008 2008
st
Nov 1 Bal. b/f 120,000 350,000 Nov. Bank C 180,000
4
nd
”2 Sales C 80,000 7 Drawings 15,000
rd
”3 Sales 100,000 10 Cash 50,000
th
”4 Cash C 50,000 20 Drawings
Exercise
1. Damuka enterprises had the following transactions for the month of June 2008.
June 1 Balances brought forward from last month:
Cash in hand shs. 1,500,000
Cash at bank shs. 500,000
56
June 2 Bought goods by cheque 500,000
” 3 Bought land by cheque 600,000
” 5 Cash sales shs. 700,000
” 6 Deposited cash received on June 5th
” 10 Paid for wages shs. 50,000 in cash
” 15 received a cheque from Odongo Shs. 350,000
” 18 Withdrew cash from bank for own use shs. 50,000
” 20 Received bank overdraft for shs. 380,000
” 23 Withdrew cash from bank for own use shs. 50,000
” 26 Paid for rent and rates shs. 60,000
” 27 Paid rent by cheque shs. 200,000
” 30 Bought stationery in cash shs. 50,000
Required:
(a) Account the above transactions in Damuka double column book and balance it.
(b) Post the entries to their corresponding ledger accounts
(c) From the details given below, write up a double column cash book and balance it at the end of
the month.
2008
Oct 1 Balances brought forward
Cash in hand shs. 2,000,000
Cash at bank shs. 4,500,000
Oct 1 Put shs. 500,000 of cash into bank
”2 Bought goods for cash shs. 100,000
”3 Bought furniture and paid 200,000 by chque
”6 Bought goods for cash 200,000
”7 Sold goods for cash shs. 400,000
”9 Paid expenses in cash shs. 50,000
57
”14 Sold goods and received a cheque shs. 350,000
”17 Banked goods for cash shs. 300,000
“19 Bought goods for acsh shs. 250,000
”23 Paid wages to an assistant in cash shs. 400,000
”26 Proprietor took shs. 60,000 cash from the business for persona l use.
”29 Cashed cheque for office use shs. 150,000
”30 Paid all cash into bank leaving a balance of only shs. 200,000
The Three Column Cash Book
The three column cash book is a cash book that has three amount columns on both the debit side and the
credit side as illustrated below:-
Dr. Three Column Cash Book Cr.
Date Particular Fol. Disc CashBank Date Particulars Fol. Disc Cash Bank
Allowed Received
Discounts
A discount is an allowance given by a trader on goods purchased
Kinds of discounts
There are two kinds of discounts namely;
- Trade discount
- Cash discount
Trade discount
This is an allowance given by a trader on goods purchased in large quantities.
Cash discount
This is an allowance given by a trader to encourage customers to pay their accounts promptly. Cash
discounts charged as a percentage of the cost price of the goods bought.
58
Cash discount is of two kinds namely;
- Discount allowed
- Discount received
Discount allowed
This is an allowance given to debtors who pay their, accounts promptly. It is a loss tot eh business.
Discount received
This is an allowance received from creditors when the business settles its debts promptly. It is regarded
as a gain to the business.
The discount allowed column and the discount received column in the three column cash book are not
accounts. They are used for the convenience of keeping a list or record of all the relevant cash discounts.
At the end of a given period, when the cash book is balanced, the discount columns are not balanced.
Instead they are totaled and the totals posted to the general ledgers as follows:
- The total discount allowed account

- The total discount received is credited tot eh discount received account.
59
Illustration
Write up a three column cash book for Kizito from the details given below; balance it off at the end of the
month and show the discount accounts in the general ledger.
2008
st
Aug 1 Balances b/f:
Cash shs. 250,000
Bank Shs. 740,000
nd
Aug 2 Bought goods by cheque shs. 200,00
rd
3 Cash sales shs. 180,000
th
5 Banked cash shs. 200,000
th
6 Paid by cheque and received 3% cash discount to:-
A- John shs. 150,000
H- David shs. 300,000
D- Alex shs. 140,000
th
7 Received by cheque and allowed 5% cash discount from:
B- Simon shs. 400,000
Z- Ben Shs. 300,000
E- Fred shs. 320,000
th
10 Bought office furniture by cheque shs. 300,000
th
15 Cash drawings shs. 50,000
th
20 Paid F. Andrew shs. 80,000 in cash less 3% cash discount.
nd
22 Received cash from A.Smith shs. 150,000 less 4% cash discount
th
30 Paid wages in cash shs. 100,000.
Mr. Kizito’s Three column cash book
Date Details Fol Disc Cash Bank Date Details Fol. Disc Cash Ban
allowed Received
2008 2008
Aug1st 250,000 740,000 Aug2 Purchases 200

bal b/f
rd th
3 Sales 180,000 5 Bank C 200,000
th th
5 Cash C 200,000 6 A. John 4,500 145
th th
7 B.Simon 20,000 380,000 6 H.David 9,000 291
th
7 Z.Ben 15,000 385,000 6 D.Alex 4,200 135
th
7 E. Fred 16,000 304,000 10 Office 300
furn.
60
nd
22 A.Smith 6,000 144,000 15 Drawings 50,000
20 F.Adrew 2,400 77,600
30 Wages 100,000
31 Bal.c/d 146,400 836
57,000 574,000 1,909,000 20,100 574,000 1,9

st
Sep 1 Bal b/d 146,400 836,700
General ledger
Dr Discount Allowed Account Cr.
2008 Shs.
Aug 31 Cash 57,000
Dr Discount received account Cr.
2008 Shs
Aug 31 Cash 20,100
Exercise
1. Write up a three column cash book from the following details. Post the entries to ledgers.
2008 Shs.
st
Jan 1 Cash balance 100,000
Bank overdraft 150,000

rd
”3 Paul paid us cash 205,000
Discount allowed 15,000
61
”5
th Paid Oplot by cheque shs 50,000 in full settlement of an amount
of shs. 55,000 owing to him
th Cash purchases 120,000

”8
Paid cheque for goods 80,000
th
”9
th
”13 Received from Robert cash shs. 275,000 having allowed a
discount of shs.25,000, he banked the amount.
th
” 19 Drew cash from bank for private use 45,000
th
” 28 Bank charges for cheque book 10,000
Interest charges for cheque overdraft 15,000

th
” 29 Paid Moses by cheque 320,000
th
” 30 Banked all cash in the office
st
2. Okello’s financial position on 1 Feb. 2008 was as follows:-
Shs.
Cash in hand 400,000
Cash at bank 540,000
Stock 760,000
Office furniture 1,560,000
Debtors: Harriet 235,000
Joseph 650,000
Creditors: Patrick 310,000
Dennis 265,000
Transactions for the month of Feb. 2008 were as follows:-
Feb. 2 Paid Harriet cheque shs. 285,000 in full settlement of amount

owed.
th
4 Bought goods on credit from Dennis 360,000
62
th
7 Returned damaged goods to Dennis 30,000
th
9 Cash sales 220,000
th
11 Transfer cash from office to bank 150,000
th
14 Bought typewrite for office use, paid cash 425,000
th
16 Cash sales paid direct into bank 530,000
th
18 Drew cash from bank for office use 100,000
st
21 Received cheque from Harriet 220,000

th
25 Cash purchases 130,000
26 Received cash from Joseph 230,000

th
27 Dew cash from office for private use 48,000
th
27 Paid rent by cheque 270,000
th
28 Paid salary by cheque 285,000
Required
i) Prepare the three column cash book

ii) The ledger accounts
st
3. On 1 May 2008 Tumwine’s books had the following information:
Cash balance 290,000
Bank balance 6,540,000
Debtors:-
Busigye 120,000
Wasswa 180,000
Kato 400,000
Creditors:-
63
Lwasa 600,000
Opio 440,000
Esalu 100,000
During the month of May the following transactions took place:-

rd
3 cash sales banked shs. 1,000,000
th
6 bought stationery by cash shs. 100,000
th
10 paid all creditors by cheque less 10% cash discount
th
14 banked cash shs. 500,000
th
15 paid mid month wages in cash shs. 300.000
th
20 drew cheque for own use Shs. 50,000
nd
22 all debtors paid by cheque less 5% cash discount
th
24 sold goods for cash shs. 450,000
th
29 received a cheque from David shs. 480,000 in full settlement of an amount of shs. 510,000
Required:
i) Write up a three column cash book and balance it.

ii) Open up discount accounts in the general ledger.
PETTY CASH BOOK
The petty cash book is a special type of cash book (subsidiary cash book) designed to keep record of
minor cash transactions i.e. transactions involving expenditure of small sums of money. Such small
sums of money are known as petty cash.
Every firm finds it necessary to have some cash available for payment of small items of which the
services of a bank would not be convenient. These are usually for:-
1. Postage – stamps for sending letters and parcels, telegrams.

2. stationery – ink, ball pens, erasers, envelopes, paper, books for writing.
3. Traveling expenses – fares for various means of transport – taxi, mini bus, bus etc.
64
4. General expenses or miscellaneous expenses for items like minor repairs, tips and other
miscellaneous expenses not included in Nos. 1-3
5. Sundries – for items which are not usual petty cash items but are nevertheless paid in cash e.g.
loan to employee, purchase of goods.
6. Ledger – for payment to creditors/suppliers.
The purpose of operating a petty cash system is to:-
i) Relieve the main cash book of numerous entries of a large volume of transactions involving
expenditure of small amounts of money.
ii) Enable the cashier concentrate on major cash transactions while minor/small cash transactions
are handled by the petty cashier.
iii) Reduce unnecessary movement to the bank to withdraw money whenever any payment is to
be made.
iv) Reduces temptation of fraud and stealing of cash in the business.
v) Serves as a training ground for the petty cashier in managing and accounting for money.
vi) Promotes division of labour and improved efficiency in the management of money.
TERMS USED
Imprest system
This is a method where the cashier gives the petty cashier an adequate amount of money to meet his
petty cash payments for a given period of time say a week, fortnight or a month. At the end of the period
the petty cahier gives accountability of money spent. Thereafter the petty cashier is reimbursed more
money to bring the cash in hand (imprest) back to the original amount i.e. to replenish the amount of the
imprest and the same cycle is repeated.
Imprest amount / cash float
This refers to a fixed sum of money given to the petty cashier to spend in a given period of time.
Reimbursement
This is the topping up of the balance brought down by the petty cashier to bring the amount to its original
imprest.
Format of the petty cash book
There are two rulings of the petty cash book as shown below:-
Petty cash book
Date Details/particulars Voucher Receipts Amount Analysis columns
65
No.
Petty cash book
Receipts Fol. Date Particulars Voucher Amount Analysis columns

No.
Illustration 1: PETTY CASH BOOK.
66
Enter the following transaction in the petty cash book of Odongo Steven having analysis columns for
postage, cleaning, stationery, traveling expenses and ledger .
2008 Shs
st
March 1 Received for petty cash float 150,000
st
1 Bought stamps 4,000
rd
3 Paid for telegram 6,000
th
7 Paid bus fare 10,000
th
10 Gummer labels 2,000
16 Floor polish 7,000

th
18 Paid Ssentongo (Supplier) 30,000
th
25 Bought stamps 4,000
th
27 Paid for taxi fare 8,000
th
29 Paid for paper clips
solution.
PETTY CASH BOOK
Date Details Vouch Receipt Amou

er No. s nt
ANALYSIS COLUMAN.
Postag Cleanin Stationer Travelin Ledge

e g y g exp. r
2008 Shs Shs Shs Shs Shs Shs Shs
March Petty 150,00

1 cash 0
1 Stamps 01 4,000 4,000
3 Telegra 02 6,000 6,000

m
7 Bus fare 03 10,000 10,000
10 Gumme 04 2,000 20,000
67
d labels
16 Floor 05 7,000 7,000

polish
18 Ssentogo 06 30,000 30,00

0
25 Stamps 07 4,000 4,000
27 Taxi fare 08 8,000 8,000
29 Paper 09 2,500 2,500

clips
14,000 7,000 4,500 18,000 30,00

0
Illustration II
rd
The petty cashier of Cavendish is given a weekly Imprest of shs. 200,000 during the week that Nov. 3
2008, she made the following transactions.
Shs.
rd
Nov. 3 Balance at hand 41,000
rd
3 Cash reimbursement ?
th
4 Bought office cleaning materials 24,000
th
4 Paid for staff tea 15,000
th
5 Paid for headmaster’s travel fare 30,000
th
5 Bought sodas for staff 10,000
th
6 Paid for staff transport 15,000
th
6 Send mail shs. 1,500 and bought 4 reams of paper 24,000
th
7 Bought 4 boxes of chalk 10,000
th
7 Bought sugar and tea 4,000
th
7 Bought staple wires 1,000
th
8 Bought envelopes 2,000
th
8 Paid the cleaners 10,000
68
th
8 Bought a broom 500
th
8 Paid for weekly newspaper 14,000
Required
i) Prepare Cavendish. University petty cash book having analysis columns for
stationery, cleaning, traveling, postage and office expenses.
ii) Show the necessary accounts to be made in the general ledger.
Date Particulars Fol V Receipt Amoun Statione Cleani Travel Posta Office
ou s t ry ng ing ge expense
ch s
er
N
o.
2008
Nov Balance b/d 41,000

rd
3
rd
3 Reimbursement 159,00
0
th
4 Office cleaning 01 240,00 24,000
0
th
4 Staff tea 02 15,000 15,000
th
5 H/M travel 03 30,000 30,000
th
5 Sodas 04 10,000 10,000
th
6 Staff transport 05 15,000 15,000
th
6 Mail 06 1,500 1,500
th
6 Reams 07 24,000 24,000
th
7 Boxes of chalk 08 10,000 10,000
th
7 Sugar & tea 09 4,000 4,000
th
7 Staple wires 10 1,000 1,000
th
8 Envelopes 11 2,000 2,000
th
8 Cleaners 12 10,000 10,000
69
th
8 Broom 13 500 500
th
8 Newspapers 14 14,000
37,000 34,500 45,000 1,500 43,000

th
9 Balance c/d 200,00 200,00
0 0
th
10 Bal. b/d 200,00 200,00
0 0
ii) General ledger
Dr. Stationery Account Cr.
2008 Shs
th
Nov. 9 Petty cash 37,000
Dr. Cleaning Account Cr.
2008 Shs
th
Nov. 9 petty cash 34,500
Dr. Traveling Account Cr.
2008 Shs.
th
70
Dr. Postage Account Cr.
2008 shs.
th
Dr. Office expenses Cr.
2008 Shs.
th
Exercise
st
1. Smart supermarket operates a petty cash imprest of shs. 500,000. on June 1 2008 the petty
cashier had a balance of shs. 65,000. the following transactions took place.
June 2 re-imbursed cash to replenish the imprest
rd
3 paid for office cleaning shs. 80,000
th
7 purchased postage stamps shs. 31,500
th
11 paid causal labour shs. 90,000
th
14 purchased evelopes shs. 20,000
th
16 purchased photocopying papers and pens shs. 80,000
nd
22 paid Mukoli, a creditor shs. 40,000
th
24 paid casual labour shs. 85,000
th
27 paid for registered mail shs. 35,000
th
29 bought black books shs. 10,000
Required
i) Enter the above transactions in the petty cash book with analysis columns for wages,
stationery, postage and ledger and balance it.
71
ii) Show the posting of the petty cash book to the general ledger.
2. Annet maintains a petty cash book using the imprest system and a three column cash book.
st
On 1 Aug 2008, the business records the following balances:-
Shs.
Petty cash (imprest) 250,000
Cash book: cash column 200,000 Dr.
Bank column 100,000 Cr.
You are required to:-
a) Enter the following transactions into appropriate books of original entry.

b) Balance the petty cash book and cash on 10 Aug 2008
Note:
The petty cash book has three analysis columns for postage/courier, stationery and general
expenses
2008
st
Aug 1 Paid for ball pens, erasers and marker pens from petty cash 15,000
rd
3 Received and banked cheque from charles who owes shs.
480,000. allowed him a cash discount of 5%
Cash sales 200,000

th
72
Paid for envelopes and cards 25,000
th
5 Paid for courier services 20,000
Bought stamps 13,000
Paid for computer forms and diskettes listed at shs. 160,000

less 10% trade discount by cheque.
th
7 Office cleaning 40,000
Paid for minor repairs 25,000

th
Paid wages by cash 600,000
10 The petty cashier received cash to mark up the imprest to the

original amount. The chief cashier paid all cash received
during the period into the bank except the amount reserved to
mark up the petty cash.
You are in business which operates a petty cash system with a monthly imprest of shs. 800,000. During
the month of April 2008, the following transactions took place.
Shs
st
April 1 Balance at hand 90,000
st
1 Issued cheque for reimbursement ??
nd
2 Paid cleaners’ wages 50,000
th
5 Paid Wandiba (a creditor) 150,000
th
6 Bought envelopes & stamps 30,000
th
10 Bought cleaning materials 100,000
th
14 Bought printers’ ribbon 55,000
rd
23 Bought books and pens 75,000
th
24 Bought envelopes & stamps 30,000
th
28 Bought stationery 300,000
The petty cash voucher commences at 501, write a petty cash book for April 2008 with analysis columns
for cleaning, postage & office supplies as well as ledger.
73
The purchases day book
This book is also purchases journal or purchases book or bought day book.
It is a book of original entry in which all credit purchases are first recorded/listed before being entered in
the ledger. At the end of a given period such as a month, the total credit purchase is determined and the
entries are posted (made) in the ledger as follows:-
i) Each individual amount is credited to the respective personal account of the creditor (supplier)
in the purchases ledger.
ii) The total credit purchase is debited to the purchases account in the general ledger.
The source documents, used to make entries in the purchases journal are the original purchases invoices
received from supplies.
Illustration 1:
Enter the transactions given below in the purchases journal and thereafter post the ledger accounts.
2008
st
Nov 1 Purchased the following goods on credit from Southern Electronics at a discount of 10%,
15 radios at shs. 50,000, 20 cassette players at shs. 100,000 each. Invoice No. 401
th
Nov. 7 Purchased from Kitara electronics on credit
10 CD writers at shs. 50,000 eahc, 20 television sets at shs. 250,000 each. A trade
discount of 5% was allowed and invoice No. 501 issued
th
Nov. 10 Purchased 15 digital radio from Kitara electronics at shs. 200,000 each at a trade discount
of 5% invoice No. 551 was issued.
74
BANK RECONILIATION
Due to modernization of trade in the entire world banks have played a vital role to facilitate business by
accepting deposits on behalf of its customers.
Under the Bank’s system of Accounting, the customers’ cash is a liability and it has to be credited.
However, loans given to customers are Assets to the Bank and have to be debited. Banks perform a
number of functions on behalf their customers receiving and transferring money.
Among the many services include, Standing orders, mortgage loans where you can direct the Bank to
deduct a fixed interest rate. As a result of these services the bank keeps its records shown in bank
statement and the business keeps records in the cash book which is independent.
What Is a Bank Reconciliation statement?

This is a periodic statement prepared to reconcile the cash book and bank statement balance correcting
discrepancies.
Bank reconciliation is the process of matching and comparing figures from accounting records against
those presented on a bank statement. Less any items which have no relation to the bank statement, the
balance of the accounting ledger should reconcile (match) to the balance of the bank statement.
Or The process of adjusting an account balance reported by a bank to reflect transactions that have
occurred since the reporting date comparing them with records appearing in the cash book records.
Bank reconciliation allows companies or individuals to compare their account records to the bank's
records of their account balance in order to uncover any possible discrepancies.
Since there are timing differences between when data is entered in the banks systems and when data is
entered in the individual's system, there is sometimes a normal discrepancy between account
balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.
Causes of disagreement between Bank statement and Cash book:
Usually the reasons for the disagreement are:
1. That our banker might have allowed interest, received dividends which have not yet been entered
in our cash book.(Direct credits) which is income to the business.ie cash inflow.
2. That our banker might have debited our account for any such item as interest on overdraft,
commission for collecting cheque, incidental charges etc., which we have not entered in the cash
book. ( Direct Debits) which is an expense to the business. ie cash outflow
75
3. That some of the cheque which we drew and for which we credited our bank account prior to the
date of closing, were not presented at the bank and therefore, not debited in the bank statement.
(unpresented cheques to the bank for payments. Ie issued cheques)
4. That some cheques or drafts which we have paid into bank for collection and for which we
debited our bank account, were not realized within the due date of closing and therefore, not
credited by the bank.( uncredited cheques with our bankers. Received cheques.)
5. The banker might have credited our account with amount of a bill of exchange or any other direct
payment into bank and the same may not have been entered in the cash book.
6. That cheques dishonoured might have been debited in the bank statement but have not been given
effect to in our books.
How to Prepare a Bank Reconciliation Statement:
To prepare the bank reconciliation statement, the following rules may be useful for the students:
1. Check the cash book receipts and payments against the bank statement.
2. Items not ticked on either side of the cash book will represent those which have not yet passed
through the bank statement.
3. Make a list of these items.
4. Items not ticked on either side of the bank statement will represent those which have not yet been
passed through the cash book.
6. Adjust the cash book by recording therein those items which do not appear in it but which are
found in the bank statement, thus computing the correct balance of the cash book.
7. Prepare the bank reconciliation statement reconciling the bank statement balance with the correct
cash book balance in either of the following two ways:
(i) First method (Starting with the cash book balance)

(ii) Second method (Starting with the bank statement balance)
First Method (Starting With the Cash Book Balance):
(a) If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but
not collected and credited by the bank and added to it all cheques drawn on the bank but not yet
presented for payment. The new balance will agree with bank statement.
76
(b) If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts,
etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the
bank but not yet presented for payment. The new balance will then agree with the balance of the
bank statement.
Second Method (Starting With the Bank Statement Balance):
(a) If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts,
etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on
the bank but not yet presented for payment. The new balance will then be agree with the balance
of the cash book.
(b) If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques,
drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all
cheques drawn on the bank but not yet presented for payment. The new balance will agree with the
balance of the cash book.
Alternatively:
Cash book shows debit Cash book shows credit

balance i.e., bank balance i.e., bank
Information statement shows credit statement shows debit
balance balance
CB to BS BS to CB CB to BS BS to CB
Cheques issued but not presented
in the bank. Add Less Less Add
Cheques paid into bank but not

collected and credited by the
Less Add Add Less
bank.
Credit, if any in the bank

statement. Add Less Less Add
Debit, if any in the bank

statement. less Add Add Less
77
Illustration.
On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was Shs
1,401 and the balance as shown by the bank statement was shs 2,253.
On checking the bank statement with the cash book it was found that a cheque for Shs 116 paid in on the
31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31
December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons shs 29,
Bashir & Co. Shs 801, MA Jalil Shs 6, Khalid Bros., Shs 132.
Prepare a statement recording the two balances:

Solution:
Bank Reconciliation Statement on 31st December 1991
First Method:
Balance as per cash book - Dr. 1,401
Less cheques paid in but not collected 116
1,285
Add cheques drawn but not presented:
Rashid & Sons 29
Bashir & Co. 801
MA Jalil 6
Khalid Bros. 132 968
Balance as per bank statement - Cr. 2,253

Second Method:
Less cheques drawn but not presented 968
1,285
Add cheques paid in but not collected 116
illustration 2:
On 31st March, 1991 the bank statement showed the credit balance of shs 10,500. Cheque amounting to
shs 2,750 were deposited into the bank but only cheque of shs 750 had not been cleared up to 31st March.
Cheques amounting to shs 3,500 were issued, but cheque for shs 1,200 had not been presented for
payment in the bank up to 31st March. Bank had given the debit of shs 35 for sundry charges and also
bank had received directly from customers shs 800 and dividend of shs 130 up to 31st March. Find out
the balance as per cash book.
78
Solution:
Bank Reconciliation Statement as on 31st March, 1991

Add cheques deposited but not credited 750
11,250
Less cheques issued but not presented 1,200
10,050
Add bank charges made by the bank 35
10,085
Less omission in cash book (shs 800 + shs 130) 930
Balance as per cash book 9,155
Note:
1. Charges made by the bank shs 35 have not been recorded in the cash book, therefore, the balance
in cash book is more. Add to bank statement balance also.
2. Dividend and amount from customers received by the bank have not been recorded in the cash
book. Therefore, in the cash book there is no entry of shs 930 (800 + 130). Deduct from the bank
statement balance to adjust it according to cash book balance.
Comparing the Bank Statement records to the Cashbook records.
When all of the receipts for a period have been written up in the cash receipts book and all of the cheque
payments, standing orders and direct debits have been entered into the cash payments book, it is
necessary to carry out any further checks possible on the cashbook. The most obvious check is to
compare the entries in the cash receipts and cash payments book for the period, to the entries on the bank
statement, although some care does need to be taken here.
Debits and Credits
79
One of the most obvious differences between the cashbook and the bank statement is that the use of the
terms debit and credit appear to be totally opposed to each other.
If cash is paid into the bank by a business then for the business this is a receipt and is entered in the cash
receipts book as a debit entry. However, in the bank statement this will be described as a credit and the
balance will be a credit balance. This is due to the fact that if a business has money in the bank, the bank
effectively owes the money back to the business and therefore the business is a creditor to the bank.
Similarly, if the business writes a cheque out of the business bank account this will be entered in the cash
payments book as a credit entry. From the bank's perspective however, this is known as a debit entry and
any overdrawn balance is a debit balance.
How to prepare a Bank Reconciliation statement.
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
Pre Bank Reconciliation .
1. Compare the cash receipts book to the receipts shown on the bank statement (the credits on the
bank statement) - for each receipt that agrees, tick the item in both the cashbook and the bank
statement.
2. Compare the cash payments book to the payments shown on the bank statement (the debits on the
bank statement) - for each payment that agrees, tick the item in both the cashbook and the bank
statement.
3. Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items
that should have been entered into the adjusted cash book, but have been omitted for some reason
- these should be entered into the cashbook and then the amended balance on the cashbook can be
found. To find the correct cashbook balance a ledger account is used for the bank with the
original cashbook balance shown as the brought forward balance and any additional payments
shown as credits and receipts as debits. This is illustrated in the example.
4. Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques
and outstanding lodgements - these will be used to reconcile the bank statement closing balance to
the corrected cash book closing balance.
Post Bank Reconciliation - Completing The Double Entry
Opening Balances On The Cashbook & Bank Statement
In our example you may have noted that the opening balance on the cashbook agreed with that of the
bank statement - there were no unpresented cheques or outstanding lodgements at the end of the previous
period.
This will not always be the case. If there were timing differences at the end of the previous period, then a
bank reconciliation statement would have to be prepared. When comparing this period's bank
statement and cashbook you will need to have the previous period's bank reconciliation statement in
order to be able to tick last period's timing differences when they appear on the bank statement this
period.
80
PREPARING A BANK RECONCILLIATION FROM A CASH ACCOUNT AND BANK
STATEMENT.
Cash at bank account in the lager of KABOJJA INTRNATIONAL SCHOOL-BUZIGA.
2010 $ 2010 $
October October
1 Balance 274 1 Wages 3,146
8 Q Manufacturing 3,443 1 Petty Cash 55
8 R Cement 1,146 8 Wages 3,106
11 S Co 638 8 Petty Cash 39
11 T & Sons 512 15 Wages 3,029
15 U & Co 4,174 15 Petty Cash 78
15 V Co 1,426 22 A & sons 929
22 W Electrical 887 22 B Co 134
22 X and Associates 1,202 22 C & Company 77
26 Y Co 2,875 22 D&E 263
26 Z Co 982 22 F Co 1782
29 ABC Co 1,003 22 G Associates 230
29 DEE Corporation 722 22 Wages 3,217
29 GHI Co 2,461 22 Petty Cash 91
31 Balance c/f 14 25 H & Partners 26
26 J Sons & Co 868
26 K & Co 107
26 L, M & N 666
28 O Co 112
29 Wages 3,191
29 Petty Cash 52
29 P & Sons 561
21,759 21,759
81
TROPICAL BANK CO-STATEMENT OF ACCOUNT WITH KABOJJA INTRNATIONAL
SCHOOL –BUZIGA.
2010 Payments Receipts Balances

$ $ $
October
1 1,135
1 Cheque 55
1 Cheque 3,146
1 Cheque 421 O/D 2,487
2 Cheque 73
2 Cheque 155 O/D 2,715
6 Cheque 212 O/D 2,927
8 Sundry credit 4,589
8 Cheque 3,106
8 Cheque 39 O/D 1,483
11 Sundry credit 5,324 3,841
15 Cheque 78
15 Cheque 3,029
22 Cheque 3,217
22 Cheque 91 941
25 Cheque 1,782
25 Cheque 134 O/D 975
26 Cheque 929
26 Cheque 230 1,723
27 Cheque 263
27 Cheque 77 1,383
29 Cheque 52
29 Cheque 3,191
29 Cheque 26
82
29 Dividends on 2,728
investments
29 Cheque 666 4,362
31 Bank charges 936 3,426
Answer
(a) ADJUSTED CASH BOOK
$ $
31 Dividends 2,728 31 Oct Unadjusted balance b/f
Oct received
(overdraft ) 14
31 Oct Bank charges 936
31 Oct Adjusted balance c/f 1,778
2,728 2,728
(b) Bank reconciliations statement at 31 October 20IO
$ $
Corrected balance as per cash book 1,778
Cheques paid out but not yet presented 1,648
Cheques paid in but not yet cleared by bank 0
Balance as per bank statement 1,648
3,426
SOLUTION
1 Payments shown on bank statement but not in $861

cash book $ (421 + 73 + 155 + 212)
Presumably recorded in cash book
before 1 October 20X2 but not yet
presented for payment as at 30
83
September 20X2
2 Payments in the cash book and on the bank $20,111

statement $ (3,146 + 55 + 3,106 +39 + 78
+3,029 +3,217 + 91 +1,782 + 134 + 929 + 230
+ 263 + 77 + 52 + 3,191 + 26 + 666)
3 Payments in the cash book but not on the bank $ 1,648
statement = Total payments in cash book $
21,759 minus $20,11 =
(Alaternative J & Sons $
K & Co 868
O Co 107
P & Sons 112
561
1,648
4 Bank charges , not in the cash book $ 936
5 Receipts recorded by bank statements but not $2,728
in cash book
6 Receipts in the cash book and also bank $21,471
statement
( 8 Oct $4,589; 11 Oct $5,324; 15 Oct $2,313;
22 Oct $1,202; 26 Oct $3,857; 29 Oct $4,186)
7 Receipts recorded in cash book but not bank None
statement
83
Summary
In theory, the entries appearing on a business’s banks statement should be exactly the same as
those in the business Cash book. The balance shown by the bank statement as on a particular
date should be the same as the cash book balance at the same date.
It is common (an a very important financial control) to check this at regular intervals, say
weekly or monthly. Invariably it will be found that the picture shown by the bank statement
differs from that shown by the cash book. There are three reasons for this.
- Errors. Entries on the bank statement may be incorrect, but more commonly , errors
may be found in the cash book
- Omissions. Items may appear on the bank statement which have not yet been entered in
the cash book. These may include bank changes and payments made by direct debt.
- Timing differences. Cheques are entered in the cash book as soon as they are written, but
there may be a delay before the payee receives them and a further delay while they are
processed through the bank clearing system.
When these discrepancies are noticed, appropriate adjustments must be made. Errors must be
corrected; omissions from the cash book must be made good. The balance in the cash book will
them be correct and up to date.
Any remaining difference between the cash book balance and the statement balance should them
be explained as the result of identifiable timing differences.
Quick Quiz
1. Name four common reasons for differences between the cash book and the bank statements.
2. Show the statements layout at a bank reconciliation
3. A bank statement shows a balance of $ 1,200 in credit. An examination of the statement shows
a $500 cheque paid in per the cash book but on the bank statement and a $1,250 cheque paid
but not yet on the statement. In addition the cash book shows deposit interest received of $50 but
this is not yet on the statement. What is the balance per the cash book?
A. $1,900 overdrawn
B. $$500 overdrawn
C. $1,900 in hand
D. $500 in hand
84
Answer to quick quiz
1 See paragraph 2.4

2 $ $
X
Balance per bank statement
Add: outstanding lodgements X X
Deposit interest not yet credited X X
Less: unpresented cheques (X)
Balance per correct cash book X
3 D $ $
Balance per bank statement 1,200
Add: outstnging lodgements 500
Desposit interest not yet credited 50 550
1,750
Less: Unpresented cheques (1,250)
Balance per cash book 500
Illustration one.
From the following particulars of M/s Techno Industries, prepare bank reconciliation statement as on
December 31, 2010.
1. Bank balance as per cash book shs.32,500
2. Cheques deposited into bank but not credited upto December 31, 2006
Shs 8,900.
3. Cheques issued but not presented for payment Shs 12,500.
4. Bank credited Shs 5,000 for receiving dividend through Electronic Clearing System.
5. Bank charges debited by Bank Rs.400.
Techno’s Adjusted cash book

Balance b/f 32,500= Bank charges 400=
Dividends 5,000= Balance c/d 37,100=
37,500= 37,500=
85
Balance b/f 37,100=
Bank reconciliation statement for techno industries.

Balance as per adjusted cash book 37,100=
Add un presented cheques 12,500=
49,600=
Less un credited cheques 89,000=
Balance as per bank reconciliation statement, 40,700=
ADJUSTED CASH BOOK
Bal. bf 2.450.000/=
Direct Credits Direct Debts
C.M. John 5.000.000/= Ledger fee 100.000/=
Dividend 2.000.000/= Standing order 800.000/=
Commission 50.000/=
Balance c/f 3.600.000/=
7.000.000/= 7.000.000/=
JANE’S ACCOUNT
STATEMENT RECONCILING OPENING CASH BOOK AND BANK STATEMENT BALANCE

Balance as per adjusted cash books 3.600.000/=
Add un-presented cheques
Chq No 20
Chq No 21 400.000/=
86
Chq No 22 3.000.000/=
4.500.000/= 7.900.000/=
Less un--- cheques 11.500.000/=
Chq No 1803 600.000/=
Chq No 4204
Chq No 3410 1.400.000/=
Balance as per Bank statement 3.500.000/= 5.500.000/=
6.000.000/=
ADJUSTED CASH BOOK
st
Bal.bf 6.090.000/= Direct Debts 31 /01/1999
st
Direct credit 31 /01/1999 Ledger fee 100.000/=
CM John Standing order UEB 800.000/=
Dividend 2.000.000/= Commission 50.000/=
Balance c/f
13.090.000/= 13.090.000/=
Dishonored cheques. (You just reserve the sides) Bank
errors are connected in the Bank statement. Correction
of under c----- credit or debt the under cost.
ADJUSTED CASH BOOK METHOD 1
Bal.bf 6.090.000/= Direct debts

Direct credits Ledger fee 100.000/=
C.M John 5.000.000/= Standing order UEB 800.000/=
Dividend 2.000.000/= Commission 50.000/=
Connection error. (Under cost) 1.800.000/= Correction of error 40.000/=
Credit transfer 600.000/= Connection of wrong posting 800.000/=
Interest 200.000/= Connection of error Chq No 46 1.800.000/=
Connection of error Chq No 43 2.250.000/= Bank charge (Direct Dr) 150.000/=
Dishonored Chq No 42 3.400.000/= Dishonored Chq No 115 300.000/=
17.300.000/=
87
21.340.000/= 21.340.000/=
ADJUSTED CASH BOOK METHOD 2

Bal. b/f 3.600.000/= Total payment credits 16.100.000/=
Total debts 24.640.000/= Balance c/f 12.140.000/=
28.240.000/= 28.240.000/=
Note:
Under statement of the balance – you also understate as per adjusted cash book (-) over statement of the
balance – you also state as per adjusted cash book (-).
JANE A/C WITH UCB MAIN
TH
BANK RECONCILIATION STATEMENT AS AT 28 /FEB/1999
Balance as per adjusted cash book 17.300.000/=

Add un-presented cheques
Cheque No 22 4.500.000/=
Cheque No 30 700.000/=
Cheque No 36 1.800.000/= 7.000.000/=
Bank error Cheque No 5221 300.000/= 7.300.000/=
24.600.000/=
Less un-credited Cheques
88
Cheque No 1803 600.000/=
Cheque No 409 400.000/=
Cheque No 813 1.500.000/= 2.500.000/=
Bank error Cheque No 2.700.000/= 5.200.000/=
Balance as per Bank statement 19.400.000/=
QUESTION 4
The Bank columns in the Cash Book for June and the Bank Statement for that month for V. Mpawuko K.
are as follows.
Cash book
Shs Shs
Jun 1 Bal b/d 4,119 5-Jun D. Blake 150
7 B. Green 158 8 A. Dailey 349
7 T.J. Masters 88 12 J. Grey 433
16 A. Silver 93 15 R. Mason 44
22 J. Ellis 73 16 B. Stephens 88
28 M. Brown 307 28 G. Small 15
29 K. Black 624 29 Orange Club 57
30 K. Wood 249 30 Bal C/d 4,664
30 M. Barrel 178
5,889 5,889
Bank Statement.
Dr(Shs) Cr(Shs) Bal (shs)
1-Jan Bal B/d 4,119
7 Cheque 88 4,207
8 D Blackness 150 4,057
11 A. Dailey 139 3,708
16 Cheque 93 3,801
17 J. Gray 343 3,458
18 B. Stephens 88 3,370
20 R. Mason 33 3,337
22 Cheque 73 3,410
28 Cheque 307 3,717
30 UDT Standing order 44 3,673
Bank Charges 92 3,581
Credit transfer J. Walters 54 3,635
30 Johnson: Trader’s Credit 90 3,725
Note
92
Cheque received from B Green was Dishonored and returned to Mpawuwo on the date the bank
statement was received. The bank does not make mistakes!
Required:
(a) Bring the cashbook reconciliation statement at 30 June 10, 2011
(b) Prepare the bank reconciliation statement as at 30 June
(c) Explain the following terms

(i) Bank reconciliation statement
(ii) Bank Giro Credit
(iii) Direct debits
(iv) Dishonored cheque
(v) Standing order.
QUESTION 5
The following is a cash book and bank statement for Akamwe for the month of October, 2000
Cash Book (Bank Column)

Dr Cr
(Shs. 000) (Shs 000)
Bal b/f 80,000 Cheque No. 1110 Mukasa 32,000
Cheque No. 510 John 60,000 “ 1112 Mao 40,000
“ 512 Musa 24,000 “ 1114 Okuru 30,000
“ 514 Tino 10,000 “ 1115 Opolot 14,000
“ 515 Mugisha 4,000 “ 1119 Alaba 6,000
“ 517 Stella 34,000 “ 1118 Atieno 4,000
“ 518 Mathew 13,000 “ 1120 Martin 2,000
“ 520 Joel 2,000 “ 1122 Mary 1,000
“ 1123 Simon 4,000
“ Bal c/f 94,000
227,000
Bank Statement
Dr Cr Balance
(Shs.000) (Shs.000) (Shs.000)
Bal b/f 80,000
Cheque No. 510 John 60,000 140,000
“ 1110 Mukasa 32,000 108,000
“ 1112 Mao 40,000 68,000
“ 1114 Okurut 30,000 38,000
“ 512 Musa 24,000 62,000
“ 514 Tino 10,000 72,000
“ 1115 Opolot 14,000 58,000
93
C.M Rita 18,000 76,000
S.O (SWICO) 2,000 74,000
C.M Ben 16,000 90,000
Bank charge 200 89,800
C.M = Credit Memo

S.O = Standing Order
A cheque written to Alaba and one received from Mugisha were dishonored by the bank.
Required:
(a) Adjust Cash Book

(b) Bank Reconciliation Statement
QUESTION. 6.
The following information was extracted from the bank reconciliation statement of Excel Ltd. For the
month ended 31/11/2005
Direct Debits (Shs.000) Direct Credits (Shs 000)
Bank Charges 3,600 Cheque No. 445 26,400
Commission 33,600 Cheque no. 446 888,000
Un presented Cheque (Shs.000) Un credited Cheques (Shs 000)
Cheque No. 220 10,000 Cheque No. 115 12,000

The following is the cashbook of Excel Ltd. For the month ended 31/12/2005
DR Cash Book (Bank Column) CR
000 000
Cheque no. 224 72,000 Bal b/d 108,000
Cheque no. 122 18,000 Cheque no. 301 6,000
Cheque no. 133 19,200 “ 312 144,000
Cash 24,000 343 36,000
94
Cheque no. 238 14,400 “ 354 72,000
“ 193 18,000 “ 375 64,800
“ 265 60,000 “ 386 86,400
“ 146 57,600 “ 407 48,000
“ 177 37,200 “ 418 112,800
Cash 48,000 “ 429 57,600
Cheque no. 249 64,800 “ 431 8,400
“ 151 87,600 “ 442 242,400
Cash 36,000 “ 843 93,600
Cheque no. 111 36,000 “ 504 156,000
Cheque no. 162 26,400 “ 515 26,000
Bal c/d 688,800 “ 546 12,000
Commission 33,600
1,308,000 1,308,000
On 31.12.2005, the bank sent the following bank statement of Excel Ltd.
Debit Shs Credit Shs Balance
000 000 000
Bal b/d 912,000
Cash Deposit 24,000 936,000
Cheque no. 301 6,000 930,000
“ 312 144,000 786,000
“ 120 31,200 817,200
“ 122 18,000 835,200
“ 515 30,000 865,200
“ 343 36,000 829,200
“ 354 72,000 901,200
“ 235 78,000 823,200
“ 111 36,000 859,200
“ 183 96,000 955,200
“ 220 30,000 925,200
Cheque no. 133 19,200 980,400
95
“ 375 64,800 915,600
“ 407 48,000 867,600
“ 115 12,000 855,600
“ 224 72,000 927,600
Cheque no. 193 18,000 945,600
“ 265 60,000 1,005,600
“ 146 57,600 1,063,200
“ 386 86,400 975,800
“ 418 112,800 864,000
“ 249 64,800 928,800
“ 177 37,200 966,000
“ 102 39,600 1,005,600
Cash Deposit 48,000 1,053,600
Cheque no 151 44,400 1,098,600
“ 431 8,400 1,089,600
“ 483 104,400 985,200
Commission 1,200 984,000
Standing Order (NWSC) 6,000 978,000
Interest 4,800 982,800
Additional Information:
i. Due to some technical faults with the computers, cheques no 354 and 115 were wrongly treated in
the bank statements.
ii. Cheque no 546 was dishonored by the bank and was received together with bank statement.
iii. If other mistakes do exist, they should be deemed to have been made in the cashbook by the
bookkeeper.
Required:
Prepare the Company’s Bank Reconciliation Statement for the month ended 30.06.2002 (20 marks
96
DEPRECIATION OF ASSETS.
In order to begin manufacturing or trading any business entity- sole trader, partnership or company –
must acquire certain facilities. These facilities are groups into a variety of classifications for
accounting purposes but a major classification is into fixed and current assets. The nature of the
item does not decide the initial category of fixed or otherwise
Fixed assets: methods of estimating depreciation expense
Exercise 2.1
100
1001
The volley manufacturing Co. has recently purchased a machine for $81,000 and expects to use it for
three years at the end of which period it will be sold as scrap. The following estimates have been agreed
concerning its operations and year end valuation.
Running Market
Hours Values
Shs
Year 1 9,600 39,000
Year 2 12,300 18,000
Year 3 9,300 3,000 = Scrap value
You are also informed that the company could invest funds temporarily outside the firm during the three
years period to yield 10 percent interests. In order to accumulate sufficient funds for replacement the
company would therefore have to set aside $23,565 at the end of each of the three years.
Required
1. Calculate for each of the three years the annual depreciation charge, using each of the following
methods.
(a) straight line method
(b) Reducing balance (reducing installment) method (66 2/3 %)
(c) usage (units of service) method
(d) revaluation methods
(e) sinking fund method (including interest on the sinking fund)
2. Briefly discuss the arguments normally put forward in favour of the use of each of the above
methods.
Solution
(a) Straight line method
101
1011
Under this method an equal portion of the depreciable cost is charged according to some measure
of the asset’s life. In general it is a n equal period of time normally corresponding to the
accounting period.
Let P = original cost of machine with accessories and cost of fixing

Let R = residual (scrap of salvage) value at end of n years.
Let n= number of useful years life
Let D = depreciation cost charged per year

P- R
Then D = ------------------- $ per annum
n
Annual depreciation charge $81,000 – 3,000

3
(b) Reducing balance method

Some accountants hold the view that as the life of an asset increases so the charge for repairs and
maintenance increases. A combination of straight line depreciation provision and the repair cost
would lead to an increasing total costs as the assets got older. They therefore, claim that a more
equitable basis is to have a higher depreciation costs in the early year when the machine is new
and – presumably – more reliable and lower depreciation costs as the cost of maintained and repairs
increase, thus requiring the combined costs. The reducing balance method therefore charges to
each accounting period a fixed percentage of the value of the asset after deducting the amounts
previously provided:
Shs
Initial costs = (P) = 81,000
Scrap value = (R) = 3,000
Depreciable
Cost = (P-R) 78,000
Annual depreciation charge

102
1021
Shs
Year 1 66 2/3% x $78,000 54,000
Year 2 66 2/3% x $(78,000 - 54,000) 16,000
Years 3 662/3% x $(78,000 – 54,000 – 16,000) 8,000
Total provided at end of year 3 78,000
As a general guide the reducing balance rate would be one and a half to double the percentage used
on a straight line basis i.e , the straight line percentage above is D/3 x 1000 = 33 1/3 percent and the
reducing balance method is twice this amount. The percentage can be computed on a more mathematical
basis by using the following formula.
Let r = reducing balance percentage required
Let P = initial cost
Let R = Scrap value
Let n = number of years useful life
Note that if residual or scrap value (R) is nil then a nominal value of S 1(or other until) must e assumed
otherwise the answer would always be zero
103
1031
END OF YEAR ADJUSTMENTS.
It is not possible to always keep all accounts up to date at all times. At end of the year certain accounts
must be adjusted to be updated. The main adjustments include:
104
1041
1. Bad debts provision.
With much business, a large proportion if not of its sales is on credit. the business as is taking the r.isk
that some of the customers may never pay for goods sold to them on credit. This a normal business
risk and as such bad debts are a normal business expenses.
A bad debt is a debt that is no longer recoverable. Debts that can not be collected any longer must be
written off.
Once a debt has been declared bad, the Accounting entry is:
Dr: Bad debts A/C
CR: Debtors A/C
At the end of the period, the total of the bad debts are transferred to the profit and loss A/C an expense.
Extract of Profit and loss A/C
Gross profit xx
Less: Operating Expenses
Bad debts (xx)
Illustration: 1
John sold goods of Ugx 20,000 to Peter who failed to pay. John decides to write it off as a bad debt.
Show the ledger accounts to record the adjustments.
Provision for Doubtful debts

Sometimes it’s difficult to determine the proportion of debts that will be bad. Since all business
experience bad debts, it’s likely that some debts will eventually prove to be bad.
This likelihood needs to be provide for in the current period otherwise the profit figure in the profit
and loss account and the debtors balances in the balance sheet is likely to be overstated.
Creating a provision for doubtful debts.

On creation:
Dr. Bad and doubtful debts expenses A/C
CR: Provision for bad and doubtful debts A/C
Illustration 2
XYZ Ltd has total debtors of Ugx 500,000 but 10% are doubtful and are likely not to pay.
Show the adjusting entries in XYZ ltd’s books.
To increase a provision
Dr. Income statement (with the increase)
CR: Provision for bad debts A/C
XYZ Ltd decides to increase its provision of bad and doubtful debts from UGX 50,000 to UGX 70,000.
Show the accounting entries to record the adjustments.
To Decrease a provision
Dr: Provision for bad debts A/C
CR: Income statement (with the decrease)
Suppose XYZ Ltd decides its provision for bad and doubtful debts from Ugx 70,00 0to Ugx 60,000 How
would XYZ record this adjustment?
Bad debts recovered
105
1051
A debt that has been written off as bad may end up being collected. When this happens it’s accounted for
as follows:
Step i) Re-instate the debtor

Dr: Receivables/Debtors A/C
Cr: Bad debts recovered A/c
Step ii) Record the receipt of cash

Dr: cash /bank A/C
Cr: Receivable/Debtors A/c
Step iii)
Dr: bad debtors recovered A/C
Cr:
Illustration3.
John had sold goods to peter on credit worth Ugx 20,000 shortly after Peter disappeared and John writes
off the debt. After 2 years, Peter resurfaces and pays John Ugx 20,000.
2. Prepayments/Prepaid Expenses
These are expenses paid in advance i.e. paid in one financial year but the benefit will be received in
the nest financial year.
Dr: Prepaid expense e.g. rent A/C

Cr: Expense e.g. A/C
Income statement extract

Gross profit xx
Less: Operating expenses
Expense Account e.g. rent xx
Less: Prepaid expense e.g. rent (xx) xx
Balance sheet extract

Current Assets
Prepaid expenses e.g. rent xx
ABC Ltd has its accounting period running from 01/Jan./2006 to 31/Dec/2006. ABC Ltd pays rent of
Ugx 180,000 for the next months on 01/01/2006. Recorded the adjusting entries for prepaid rent at the
end of 31/12/2006.
3. Accruals /Accrued Expenses

These are expenses that are outstanding i.e. benefit in respect of the outstanding expense have been
received but not paid for:
Dr: Expense e.g. electricity A/C
Cr: Accrued expense e.g. electricity A/c
110
1101
Gross profit xx
Less operating Expenses
Expense (e.g. electricity) xx
Add: Accrued expense (e.g. electricity) (xx) xx
Balance sheet extract

Current liabilities
Accrued expense A/C (e.g. electricity) xx
ABC Ltd’s financial year ended on 31/12/2005. At the end of financial year, salaries and wages totaling
to Ugx 5,000,000 was paid. The amount in respect of salaries and wages that were outstanding/accrued
to be paid in the next financial year was Ugx 2,00,00.0 Show the necessary adjustments to determine
the amounts of salaries and wages to be include in the income statement and balances sheet
respectively.
4. Incomes
Like expense, incomes may accrue or be received in advance
Income received in advance (prepaid income)
Dr: Cash /Bank A/C
Cr: Unearned income
When it’s finally earned,
Dr; Unearned income A/C
Cr: Earned income e.g. rent income A/C

Income receivable xx
Less: Income e.g. rent in advance (xx)
Balance sheet Extract

Current liabilities
Income e.g. rent received
A tenant paid rent of Ugx 1,500,000 for 11/4 years in the financial year 1/01/06-31/12/06.
Show the adjusting entries and the amounts to betaken to the income statement and balance sheet
respectively.
Accrued incomes
This refers to incomes earned in one financial year but to be received in the next financial year.
Dr: Receivable e.g. consultancy fee A/C

DR: Income account e.g. consultancy fee A/C
John offered accountancy service to peter for Ugx60, 000 but was promised to be paid in the next
financial year .shown the adjusting entries for accountancy fees accrued.
6. Closing inventory
Inventory is accounted for by IAS 2 Inventories. The amount at which inventory should inventory in the
111
1111
balance sheet should be the lower of cost and net realized value. Net be stated in the balance sheet
should be the lower of cost and net realized value is the estimated selling price in the ordinary course
of business less estimated costs to completion and cost to sell.
e.g.
Item Cost (Shs) NRV (Shs) Closing inventory balance (Shs)
Cement 1,000 1,200 1,000

Salt 1,400 1,100 1,100
112
1121
Soap 800 600 600
Preparation of Financial Accounts (Financial Accounts)

These are outputs of the accounting system. It’s the last stage of the accounting cycle. Financial
statements are prepared from the trial balance after incorporating all the end of year adjustments.
The financial statements prepared include:
Income statement
Balance sheet
Statement of changes in equity
Cash flow statement
Notes to the accounts
INCOME STATEMENT (TRADING, PROFIT AND LOSS ACCOUNT)

It discloses the operating results of a business during a given period i.e. whether it’s a profit or loss. It
shows an organization’s revenues and expenditures for the period ended.
Tax Authorities are interested in the income statement because it’s the basis of computing tax payable.
Note: Income statement is a “T” account and the double entry applies. However, it is Not presented in a
“T” format.
INCOME STATEMENT FORMAT

ABC Ltd Income statement for the year ended…………
Sales revenue xxx
Less: Cost of sales
Opening stock (inventory) xx
Add: Purchases xx
xx
Less: Closing Stock

Inventory (xx)
xx
Gross profit
xx
Less: Operating expenses e.g.
Depreciation xx
Bad debts xx
Rent
xx
Salaries and wages etc xx (xx)
Net profit before finance cost and tax xx
Finance cost
(xx)
Net profit before tax xx
Tax
(xx)
Net profit for the year xx
The income statement for service firms is slightly different as seen in the format below
Income statement format for service firms.
Incomes/revenues xxx
Less: Expenses (xxx)
Net incomes before finance and tax xxx
113
1131
Less: Finance cost (xxx)
Net incomes /profit before
Tax xxx
Less: Tax (xxx)
Net incomes/profit for the year xxx
Balance sheet
This is a statement which shows the financial position of the business of an organization at a particular
date. It satisfies the accounting equation: A= C +L.
Balance sheet format

ABC Ltd Balance sheet as at………..
ASSETS
Tangible Non Current Cost ACC.Depn NBV
UGX UGX UGX
Land ----------------------------------------------------------------------- xxx nil xxx

Plant and Machinery ------------------------------------------------------- xxx xx xxx
Motor Vehicle ----------------------------------------------------------- xxx xx xxx
Intangible Assets
Good will xx
Treasury bills
xx
Current Assets
Inventories
xx
Trade debtors and other receivable (net of bad debts) xx
Prepayments
xx
Cash in bank
xx
Cash at hand
xx xx
Total Assets
xxx
Equity and Liabilities

Capital Reserves
Share capital
xxx
Accumulated profits (net of drawings if any) xxx
Other reserves xxx
xxx
None Current Liabilities
Long tern Bank loans e.g. 2 year
Loan
xx
Debentures xx
xx
114
1141
Current liabilities
Trade and other payables
Short term borrowing e.g. overdrafts xx
Total equity and liabilities xx
xxx Xxx
PRESENTATION OF FINANCIAL STATEMENTS AND ACCOUNTING CONVENTIONS
Introduction
115
1151
The purpose of this chapter is to encourage you to think more deeply about the assumptions on which
financial statements are prepared.
This chapter deals with the accounting conversions which lie behind accounts preparation which
accountants may have absorbed subconsciously in book keeping.
BACKGROUND
1.1.Accounting practice has developed gradually over a matter of centuries. Many of its procedure are
operated automatically by people who never questioned whether alternative methods exist which
have equal validity. However, the procedures in common use imply the acceptance of certain
concepts which by no means self-evident; nor are they the only possible concepts which could be
used to build up an accounting framework.
More important concepts which are taken into accounting while preparing accounts that require
deeper understanding.
a) Going concern
b) Accrual or matching
c) Prudence
d) Consistency Concept
e) Materiality
f) Substance over form
g) Business entity
h) Money measurement
i) Historical cost convention
j) Stable monetary unit
k) Objectivity
l) Realization
m) Duality
n) Time interval
We begin by considering accounting policies and those fundamental assumptions which are more
crucial according to the subject of IAS 1 Presentation of financial statements (items (a)-(f) of the
above list)
2. PRESENTATION OF FINANCIAL STATEMENTS.
2.1 International Accounting Satardards 1 presentation of financial statements was published in 1997.
The general requirements of IAS 1 and what it says about accounting policies and fundamental
assumptions.
2.2 Objective of the scope
The main objective of IAS 1 is:
“to prescribe the basis of preparation of general purpose financial statements, in order to ensure
the comparability both with the enterprise’s own financial statements of previous periods and with
the financial statements of other enterprises”
116
1161
2.3. IAS 1 applies all the general purpose financial statements prepared in accordance with IASs,
i.e. those intended to meet the needs of the users who are not in position to demand reports
tailored to their specific needs.
Purpose of financial statements
2.4. The objective of financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions.
2.5. In order to fulfill this objective, financial statement must provide information about the following
aspects of an enterprise’s results.
Assets
Liabilities
Equity
Income and expenses (Including gains and losses)
Cash flows
Along with other information in the notes and related documents, this information will assist
users in predicting the enterprise’s future cash flows
2.6. According to IAS 1, a complete set of financial statements includes the following components.
a) Balance sheet
b) Income statement
c) A statement showing either all changes in equity or changes in equity other than those
arising from capital transactions with and/or distribution to owners.
d) Cash flow statements
e) Accounting policies and explanatory notes
The preparation of these statements is the responsibility of the Board of Directors. IAS 1
also encourages a financial review by management and the production of other reports
and statements which may aid users.
FAIR PRESENTATION AND COMPLIANCE WITH IAS.
2.7. Most importantly, financial statements should present fairly the financial position, financial
performance and cash flows of an enterprise.
2.8. The following points made IAS 1 expand on this principle.
a) Compliance with IASs should be disclosed

b) All relevant IASs must be followed in compliance with IASs id disclosed
c) Use of an inappropriate accounting treatment cannot be rectified either by disclosure of
accounting policies of notes/explanatory material
2.10. Requirements for fair presentation of financial statements.
a) Selection and application of accounting policies
117
1171
b) Presentation of information in a manner which provides relevant, reliable, comparable and
understandable information
c) Additional disclosures where required
Accounting policies
The specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing
and presenting financial statements.
2.11 Accounting policies should be chosen in order to comply with IASs. Where there is no specific
requirement in an IAS, policies should be developed so that the information provided by the
financial statement is:
a) Relevant to the decision making needs of users

b) Reliable in that they:
i. Represent faithfully the results and financial position of the enterprise
ii. Reflect the economic substance of events and transactions and not merely the legal form
iii. Are neutral, that is free from bias
iv. Are Prudent
v. Are complete in all material respects
c) Completeness of transactions.
d) Timely report.
e) Accurate financial data.
f) Comprehensiveness of statements.
2.12. The IAS then considers certain important assumptions (fundamental assumptions) which underpin
the preparation of financial statements
Going Concern
The enterprise is normally viewed as going concert, that is, as continuing in operation of the
foreseeable future. It is assumed that the enterprise has neither the intension nor the necessity of
liquidation or of materially the scale of its operation.
2.13. This concept assumes that, when preparing a normal set of accounts, the business will continue to
operate in approximately the same manner for a foreseeable future (at least the next 12 months).
In particular, the enterprise will not go into liquidation or scale down its operations in a material
way.
2.14. The main significance of going corker is that the assets should be valued at their “break up”
value.
2.15. EXAMPLE: GOING CONCERN.
Emma acquired a T-shirt printing machine at a cost of $60,000. The asset has an estimated life of six
years, and its normal to write off the cost of the asset to the income statement over this time. In this asset
a depreciation cost of $10,000 per year is charged.
118
1181
2.16. Using the going concert assumption, it is pre summed that the business will continue its operation
as so the asset will live out its full six years in use. The depreciation charge of $10,000 is made
each year; and the value of the asset in the balance sheet is its cost less the accumulated
depreciation charge to date. After one yet, the net book value of the asset is $(60,000-10,000)
=$50,000, after two years it is $40,000, after three years $ 30,000 e.t.c, until it is written down to
a value of 0 after 6 years.
2.17. This asset has no other operational use outside the business and, in a forced sale; it would only
sell for scrap. After one year of operation, its value is $8,000.
2.18. The net value of the asset, applying the going concern assumption, is $50,000 after one year, but
its immediate sell-off value only $80,000.It can be aged that the asset is over valued at $50,000,
that it should be written down to its break-up value($80,000) and the balance of its cost should be
treated as an expense. However, provided that the going concern assumption is valid, It is
appropriate accounting practice to value the asset at its net book value.
Question 1
A retailer commences business on 1 January and buys inventory of 20 washing machines, each
costing $100. During the year he sells 17 machines at $150 each. How should the remaining
st
machines be values at 31 December in the following circumstances?
a) He is forced to close down his business at the end of the year and the remaining machines will
realize only $60 each in a forced sale.
b) He intends to continue his business into the next year
Answer
a) If the business is to be closed down, the remaining three machines must be valued at the amount
they will realize in a forced sale i.e. 3 X $60 = $180
st
b) If the business is regarded as a going concern, the inventory unsold at 31 December will be
carried forward into the following year, when the cost of the three machines will be matched
against the eventual sale proceeds in computing that year’s profits. The three machines will
therefore be valued at cost , 3 X $100 = $300
2.19. If the going concern assumption is not followed, that fact must be disclosed, together with
the following information.
a) The basis on which the financial statement have been prepared

b) The reasons why the enterprise is not considered to be a going concern
Accrual basis of accounting
Accrual basis of accounting. The effects of transaction and other events are recognized
when they occur (and not as cash or its equivalent id received or paid) and they are recorder
in the accounting records and reported in the financial statements of the periods to which
they relate.
119
1191
2.20. Enterprises should prepare their financial statements on the basis that transactions are recorder in
them, not as the cash is paid or received, but as the revenues or expenses are earned or incurred
in the accounting period to which they relate
2.21. According to the accrual assumption then, in computing profit revenue earned must be matched
against the expenditure incurred in earning it. This is the matching convention that we first met
in chapter 2.
2.22 EXAMPLE: ACCRUAL
Emma prints 20 t-shirts in her first month of trading (May) at a cost of 5$ each. Then she sells all
of them for $10 each. Emma has therefore made a profit of $100, matching the revenue $200
earned against the cost $100 of acquiring them
2.23 If however, Emma only sells 18 t-shirts, it is incorrect to cargo her income statement with the cost
of 20 t-shirts, as she still has two t-shirts in inventory. If she sells them in June, she is likely to
make a profit on the sale. Therefore, only the purchase cost of 18 t-shirts 490 should be matched
with her sales revenue $180, leaving her with a profit of $90.
2.24. Her balance sheet will look like this.
Assets $
Inventory (at cost, i.e. 2X $5) 10
Accounts receivable (18 X $100) 180
190
Capital Liabilities
Proprietor’s capital (profit for the period) 90
Accounts payable (20 X $5) 100
190
2.25. However, if Emma had decided to give up selling t-shirts, then the going concern assumption no
longer applies and the value of the two t- shirts in the balance sheet is a break0up valuation not
cost. Similarly, if the two unsold t – shirts are likely to be sold at more than their cost of $50 each
(say, because of damage or fall of demand) then they should be recorded on the balance sheet at
net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them
saleable) rather than cost. This shows the application of the prudence concept, which we will look
at shortly.
2.26. In this example, the concepts of going and accrual are linked. Since the business is assumed to be
going concern, it is possible to carry forward the cost of the unsold t-shirts as a charge against
profits of the next period
120
1201
Consistency of presentation
2.27. To maintain consistency, the presentation and classification of items in the financial statements
should stay the same from one period to the next except as follows.
a) There is a significant change in the nature of operations or a review of the financial statements
indicates a more appropriate presentations
b) A change in presentation is required by an IAS.
Materiality and aggregation
2.28. All material items should be disclosed in the financial statements
2.29 Amounts which are immaterial can be aggregated with amounts of a similar nature or function
and need not be presented separately
Materiality, Information is material of its omission or misstatement could influence the

economic decisions of users taken on the basis of financial statements
2.30. An error which is too trivial to affect anyone’s understanding of the accounts is referred to as
immaterial. In preparing accounts it is important to assess what is material and what is material
and what is not, so that time and money are not wasted in the pursuit of excessive detail.
2.31. Determining whether or not an item is material is very subjective exercise. There is no absolute
measure of materiality. It is common to apply a convenient rule of thumb (for example material
items are those with a value greater than 5% of net profits). However some items disclosed in the
accounts are regarded as particularly sensitive and then a very small misstatement of such an item
is taken as a material error. An example, in the accounts of a limited liability company, is the
amount of remuneration paid to directors of the company
2.32. The assessment of an item as material or immaterial may affect its treatment in the accounts.
For example, the income statement of a business shows the expenses incurred grouped under
suitable captions (heating and lighting, rent and local taxes, e.t.c), but in the case of very small
expenses it may be appropriate to lump them together as sundry expenses’, because a more
detailed breakdown is inappropriate for such immaterial amounts.
2.33. In assessing whether or not an item is material, it is not the value of the item which needs to be
considered. The context is also important.
a) If a balance sheet shows long term assets of $2millin and inventories of $30,000, an error of
$20,000 in the depreciation calculations might not be regarded as material. Whereas an error
of $20,000 in the inventory valuation is material. In other words, the total of which the error
forms part must be considered
b) If a business has a bank loan of $50,000 and a $55,000 balance on bank deposit account it will
be a material misstatement if these two amounts are displayed on the balance sheet as “cash at
bank $5,000”. In other words, incorrect presentation may amount to material misstatement
even if there is no monetary error.
121
1211
Question 2
Would you capitalize the following items in the accounts of the company?
a) A box file
b) A computer
c) A small plastic display stand
Answer
No, you would write it off to the income statement as an expense
Yes. You would capitalize the computer and charge depreciation on it.
Offsetting
2.34. IAS 1 does not allow assets and liabilities to be offset against each other unless such a treatment
is required or permitted by another IAS.
2.35. Income and expenses can be offset only when one of the following applies
a) An IAS requires/permits it
b) Gains, losses and related expenses arising from the same transactions are not material.
Comparative information
2.36. IAS 1 requires comparative information to be disclosed for the previous period for all numerical
information, unless another IAS permits/requires otherwise. Comparatives should also be given in
narrative information where helpful.
2.37. Comparatives should be restated when the presentation or classification of items in the financial
statements is amended.
Prudence
Prudence, the inclusion of a degree of caution in the exercise of the judgments needed in
making the estimates required under conditions of uncertainty, such that assets or income
are not over stated and liabilities or expenses are not understated
2.38. Prudence must be exercised when preparing financial statements because of the uncertainty
surrounding many transactions. It is not permitted, however, to create secret or hidden reserves
using prudence as a justification.
2.39. There are three important issues to bear in mind
a) Where alternative procures or valuations are possible, the one selected should be the one which
gives the most cautious result. For example, you may have woodened why the three washing
machine in question 1 were stated in the balance sheet at their cost $100 each rather than selling
122
1221
price $150 each. This is simply an aspect of prudence: to value the machines at $150 would be
anticipate making a profit before the profit has been raised
b) Where a loss is foreseen; it should be anticipated and taken into account immediately. Even when
the extract amount of lose is not known, an estimate of the loss should be made, based on the best
information available. If a business purchases inventory or $1,200 but, because of a sudden slump
in the market, only $900 is likely to realized when the inventory is sold; the prudence concept
dictates that the inventory is valued at $900. It is not enough to wait until the inventory is sold,
end then recognize the $300 loss, it must be recognized as soon as foreseen
c) Profits should only be recognized when realized in form of cash or another asset with a
reasonable certain cash value.
2.40. EXAMPLES: PRUDENCE
Some examples might help to explain the application of prudence

st
a) A company begins trading on 1 January 20X5 and sells goods worth $100,000 during the year to
31 December. At 31 December there are accounts receivable outstanding of $15,000. Of these, the
company is now doubtful whether $6,000 will ever be paid.
The company should make provision for doubtful debts of 6,000. Sales for 20X5 are shown in the
income statement at their full value of $100,000, but the provision for doubtful debts is a charge
of $6,000. Since there is some uncertainty that the ales will be realized in form of cash, prudence
indicates that the $6,000 should not be included in the profit of the year.
b) Samson Feeble trades as a carpenter, he undertakes to make a range of kitchen furniture for a
customer at an agreed price of $1,000.at the end of Samson’s accounting year the job is
unfinished (being two thirds complete) and the following data has been assembled.
Costs incurred in making thru furniture to date 800
Further estimated cost to completion of the job 400
Total cost 1200
The incomplete job represents work in progress at the end of the year which is an asset, like
inventory. Its coast to date is $800, but by the time the job is completed Samson will make a loss
of $200
The full $200 loss should be charged against profits of the current year. The value of the work in
progress at the year end is its net realizable value, which is lower than the cost. The net realizable
value can be calculated in either of two ways
Eventual sales value 1,000 Work in progress at cost 800
Less further costs to completion
In order to make the sale 400 less loss foreseen 200
Net releasable value 600 600
Substance over form
123
1231
Substance over form The principle that the transactions and other events are accounted for
and presented in accordance with their substance and economic reality and not merely their
legal form
Substance over form usually applies to transactions which are fairly complicated. It is very
important because it acts as a catch all to stop enterprises distorting their results by following the
letter of law, instead of showing what the enterprise has really been doing
Presentation of accounting policies
2.42. There should be a specific section for accounting policies in the otes of the financial statements
and the following should be disclosed there
a) Measurement bases used in preparing the financial statements

b) Each specific accounting policy necessary for proper understanding of the financial
statements
2.43. To be clear and understandable it is essential that the financial statements disclose the accounting
policies used in their preparation. This is because policies may vary, not only from enterprise to
enterprise but also from country to county. As an aid to users, all the major accounting policies
used should be disclosed in the same note.
3. OTHER IMPORTANT CONCEPTS AND CONVENTIONS
The business entity concept
3.1.This concept has already been discussed in chapter 2. Briefly, the concept is that accountants
regard a business as a separate entity, distinct from its owners or managers. The concept applies
whether the business is limited liability company (and so recognized in the law as a separate
entity) or a sole proprietorship or partnership (in which case the business is not separately
recognized by the law)
The money measurement concept
The money measurement concept states that accounts only deal with those items to which a monetary
value can be attributed
3.2.In the balance sheet of a business, monetary values can be attributed to such assets as machinery
(e.g. the origin cost) and inventories (eg net realization value)
3.3.The money measurement concept introduces limitations to the subject-mater of accounts. A
business may have intangible assets, such as the flair of a good manager or the loyalty of its work
force. These may be important enough to give a clear superiority over an otherwise identical
business, but because they cannot be evaluated in monetary terms but they do appear anywhere in
the accounts
The historical cost convention
124
1241
3.4.A basic principle of accounting (some writers include it in the list of fundamental accounting
assumptions) is that items are normally stated in accounts ah historical cost, i.e. at the amount
which the business paid to acquire them. An important advantage of this procedure is that the
objectivity of accounts is maximized: there is usually documentary evidence to prove the amount
paid to purchase an asset or may pay an expense.
Historical cost means that the transactions are recorded at the cost when they occurred
3.5.In general the accountants prefer to deal with cost rather than with values. This is because
valuations tend to be subjective and to vary according to what the valuation is for. For example, a
company acquires a machine to manufacture its products. The machine has an expected useful life
of four years. At the end of the two years the company is preparing a balance sheet and has to
decide what monetary amount is to be attributed to the asset.
3.6.Numerous possibilities can be considered
a) The original cost (historical cost) of the machine
b) Half of the historical cost, on the ground and half of its useful life has expired
c) The amount he machine fetches on the second hand market
d) The mount needed to replace the machine with a more modern incorporating the
technological advances of the previous two years
e) The machine’s economic value, ire the amount of the profits expected to generate for the
company during its remaining life
3.7.All of these evolutions have something to commend them, but the great advantage of the first two
is that they are based on a figure (machine’s historical cost) which is objectively verifiable (Some
authors objectively as an accounting concept in its own right). The subjective judgment involved
in the other valuations, particularly (f), is so great as to lessen tar reliability of any accounts in
which they are used.
Stable Monetary unit
3.8.The financial statements are expressed in terms of monetary unit (e.g. in the UK the £, in the USA
the $). It is assumed that the value of this unit remains constant
3.9.In practice, of course, the value of the unit varies and comparisons between the accounts of the
current year and those off previous years may be misleading (e.g. in times if inflation)
Objectivity
3.10. An accountant must show objectivity, this means answers must be free of any personal
opinions or prejudice, and should be a precise and as detailed as the situation warrants. The result
of this should be that any number of accountants will give the same answer independently of each
other
Objectivity means accountants must be free from bias
3.11. In practice, objectivity id difficult. Two accountants faced the same accounting data may
come to different conclusions as the correct treatment. It was to combat subjectivity that
accounting standards were developed
Exam focus point
125
1251
Objectivity is sometimes called neutrality
The realization concept
The realization concept means that the revenue and profits are recognized when realized
3.12. The realization concept states that the revenue and profits are not anticipated but are
recognized by inclusion in the income statement only when realized in the form either of cash or
other assets, the ultimate cash realization of which can be assessed with reasonable certainty.
Provision is made for all known liabilities (expenses and losses) whether the amount of these is
known with certainty or is the best estimate in the light of the information available.
3.13. There are some exceptions to the rule, notably for land and buildings. With dramatic rises
in property prices in some countries, it has been a common practice to revalue land and
buildings periodically to current value, to avoid having a mislaying balance sheet. Even if the
sale of the property is not contemplated, such reevaluations create an realistic profit:
Credit Land and building account
Debit Revaluation reserve account
This profit is sometimes known as a holding gain, because it is a profit which arises in the course
of holding the asset as a result of its increase in value above the cost
3.14. In spite of such exceptions, however, the realization principle has long been accepted by
all practicing accountants and it is standard practice that only profits realized at the balance sheet
date should be included in the income statement.
3.15. Unfortunately there is no standard definition of realized profits and losses. It could be said
that they are such profits of losses of a company as to be treated as realized in accordance with
principles generally accepted at the time when the accounts are prepared. One aspect of the
problem is the question: At what point in the business cycle should revenue be recognized as
earned? We will consider this further when we look at IAS 18 in the next section
The duality concept

3.16. Every transaction has two effects. This convention underpins double entry book keeping,
and you have seen it work in your studies from Chapter 5 onwards
The time interval concept

3.17. The time interval concept is also known as the timeless, which we have looked at earlier
in your studies
3.18. This concept states that the financial statements should be produced within a time interval
that enables users to make relevant economic decisions. In other words there is no point in
producing information that is so out of date, that no decisions can be based on it
Question 3
a) You depreciate your office equipment by 20% each year because it has a useful life, on
average, of five years, this year your profitability is down and you think you can squeeze
an extra year’s life out of your equipment. Is it acceptable not to charge any depreciation
this year?
b) You have recently paid $4.95 for a waste paper bin which should have a useful life of
about five years. Should you treat is as a long term asset?
126
1261
Answer
a) No, because of the consistency assumption. Once the depreciation policy has been
established, it should not change without good cause
b) No, because of the materiality concept. The cost of the bin is very small. Rather than
cluttering up the balance sheet for five years, treat the $4.95 as an expense in this
year’s income statement.
4. IAS 18 REVENUE
Introduction
4.1.Accruals accounting is based on the matching of costs with the revenue they generate. It us
crucially important under this convention that we establish the point at which revenue is
recognized, so that the cornet treatment can be applies to the related costs. For example, the cost
of producing an item of finished goods should be carried as an asset in the balance sheet until
such as it is sold; they should then be written off a charge to the trading account. Which of these
two treatments should be applies to decide until it is clear at what moment the sale of the item
takes place
4.2.The decision has a direct impact on profits since under the prudence concept, it is unacceptable
to recognize the profit on sale until a sale has taken place, in accordance with the criteria of
revenue recognition
4.3.Revenue is generally recognized as earned at the point of sale, because at the point four criteria
will generally have been met.
The product or service has to be provided to the buyer
The buyer has recognized his liability to pay for the goods or services provided. The converse
of this is that the seller has recognized the ownership of goods has passed from himself to the
buyer
The buyer has indicated his willingness to hand over cash or other assets in the settlement of
his liability
The monetary value of goods or services has been established
4.4.At earlier points in the business cycle, there will not in general be firm evidence that the above
criteria will be met. Until work on the product is complete, there is a risk that some flaw in the
manufacturing process will necessitate its writing off, even when the product is complete there is
no guarantee that it will find a buyer
4.5.At later points in the business cycle, for example when the cash is received for a credit sale, the
recognition of revenue may occur in a period later than that in which the related costs were
charged. Revenue recognition then depends on fortuitous circumstances, such as the cash flow of
a company’s receivables, and can fluctuate misleadingly from one period to another
4.6.However, there are sometimes when revenue is recognized at other times that at the
completion of a sale. For example, in the recognition of profit on long term construction
contracts. Under IAS 11 construction contracts (not in your syllabuses) contract revenue and a
contract costs are recognized by reference to the stage of completion of the contract activity at the
balance sheet date. You will learn about this later in your studies
IAS 18 Revenue
127
1271
4.7.IAS 18 governs the recognition of revenue in specific (common) types of transaction. Generally,
recognition occurs when it is probable that the future economic benefits will flow to the
enterprise and when these benefits can be measured reliably.
4.8.Income, as defined by the IASC’s framework document (see chapter 24), includes both revenues
and gains. Revenue is income arising in the ordinary course of an enterprise’s activities such as
sales, fees, interest, dividends or royalties.
Scope
4.9.IAS 18 covers the revenue from specific types of trisections or events
Sale of goods (manufactured products and items purchased for resale)
Rendering of services
Use of others of enterprise assets yielding interest, royalties, and dividends
4.10. Interest, royalties and dividends are included as income because they arise from the use of
an enterprise’s assets by other parties
Interest is the charge for the use of cash or cash equivalents or amounts due to the enterprise.
Royalties are charges for the use of long term assets of the enterprise, e.g. Parents, computer
software and trademarks
Dividends are distributions of profits to holders of equity investments, in proportion with their
holding, of relevant class of capital
4.11. The standard specifically excludes various types of revenue arising from leases, insurance,
contrasts, changes in value of financial instruments or other current assets, natural increases in
agricultural assets and mineral ore extraction
Definitions
4.12. The following definitions are given in the standard
Revenue is the gross in flow of economic benefits during the period arising in the course of the
ordinary activities of an enterprise when the inflows result in increases in equality other than
increases relating to contributions from equity participants
Fair value is the amount for which an asset could be exchanged, or liability settled, between
knowledgeable, willing parties in arm’s length transaction
4.13. Revenue does not include sales taxes; value added taxes or goods and service tax which
are only collected for third parties, because these do not represent an economic benefit flowing to
the entity. The same is true for revenues collected by an agent on behalf of a principal. Revenue
for agent is only the commission received for acting as agent.
Measurement of revenue
4.14. When a transaction takes place, the amount of revenue is usually decided by the
agreement of the buyer and seller. The revenue is actually measured, however, as the fair value
128
1281
of the consideration received, which will take account of any trade discounts and volume
rebates.
Indication of a transaction
4.15. Normally, each transaction can be looked at as a whole. Sometimes, however,
transactions are more complicated, and it is necessary to break a transaction down into its
component parts. For example, a sale may include the transfer of goods and the provision of
future servicing, the revenue for which should be deferred over the period the servicing is
performed.
4.16. At the other end of the sale, seemingly separate transactions must be considered
together if apart they lose their commercial meaning. An example would be to sell an asset with
an agreement to buy it back at a later date. The second transaction cancels the first and so both
must be considered together.
Sale of goods
4.17. Revenue from sale of goods should only be recognized when all these conditions are
satisfied
a) The enterprise has transferred the significant risks and rewards of ownership of the
goods to the buyer
b) The enterprise has no continuing managerial involvement to the degree usually
associated with ownership, and no longer has effective control over the goods sold
c) The amount of revenue can be measured reliably
d) It is probable that the economic benefits associated with the transaction will flow to the
enterprise
e) The costs incurred in respect to the transaction can be measured
4.18. The transfer of risks and rewards can only be decided by examining each transaction.
Mainly, the transfer occurs at the same time as either the transfer of legal title, or the passing of
possession to the buyer this is what happens when you buy something in the shop
4.19. If significant risks and rewards remain with the seller, then the transaction is not a sale
and revenue cannot be recognized, for example the receipt of revenue from a particular sale
depends on the buyer receiving revenue from his own sale of goods
4.20. It is possible for the smaller to retain only an insignificant risk of ownership for the sale
and revenue to be recognized. The main example here is where the seller retains title only to
ensure collection of what is owed on the goods. This is a common commercial situation, and
when it rises the revenue should be recognized on the date of sale
4.21. The probability of the enterprise receiving the revenue arising from a transaction must be
assessed. It may only become probable that the economic benefits will be received when an
uncertainty is removed, for example government permission for funds to be received from another
country. Only when the uncertainty is removed should the revenue be recognized. This is in
contrast with the situation where revenue has already been recognized, but where the
collectability of cash is brought into doubt where recovery has been ceased to be probable, the
amount should be recognized as an expense, not an adjustment of the revenue previously
recognized. These points also apply to services and interest, royalties and dividends’ below
4.22. Matching should take place, i.e. the revenue and expenses relating to the same transaction
should be recognized at the same time. It is usually easy to estimate expenses at the date of sale
129
1291
e.g. warranty costs, shipment etc. Where they cannot be estimated reliably, then revenue cannot
be recognized, any consideration already received as a liability
Rendering services
4.23. When the outcome of a transaction involving the rendering of services cannot be estimated
reliably, the associated revenue should be recognized by reference to the stage completion of the
transaction at the balance sheet date. The outcome of a transaction can estimated reliably when
all these conditions are satisfied
a) The amount of revenue can be measured reliably
b) It is probable that the economic benefits associated with the transaction will flow to the
enterprise
c) The stage of completion of a transaction at a balance sheet date can be measured reliably
d) The costs incurred for a transaction and the costs to complete a transaction can be
measured reliably
4.24. The parties to the transaction will normally have to agree on the following before an
enterprise can make reliable estimates.
a) Each party’s enforceable rights regarding the service to be provide
b) The consideration to be exchanged
c) The manner and terms of settlement
4.25. There are previous methods of determining the stage of completion of a transaction, but
for practical purposes, when services are performed by an indeterminate number of acts over a
period of time, revenue should be recognized on a straight line basis over a period, unless there
is evidence for the use of a more appropriate method. If one act is of more significance than the
others, then the significant act should be carried out before revenue is recognized
4.26. In certain situations, then the outcome of a transaction involving the rendering of services
cannot be estimated reliably, the standard recommends a no loss/no gain approach. Revenue is
only recognized only in the extent of the expenses that are recovered
4.27. This air particularly likely during the early stage of a transaction, but it is still probable
that that the enterprise will recover the costs incurred. So the revenue recognized in such a period
will be equal to the expenses incurred with no profit.
4.28. Obviously, if the costs are likely to be reimbursed, then they must be recognized as an
expense immediately. When the uncertainties cease it exist, revenue should be recognized as
laid out.
Interest, royalties and dividends

4.29. When others use the enterprise’s assets yielding interest, royalties and dividends, the
revenue should be recognized on the bases set out below
a) It is probably that the economic benefits associated with the transaction will flow to the
enterprise
b) The mount of the revenue can be measured reliably
4.30. The revenue is recognized on the following base
a) Interest is recognized on the time proposition that takes into account the effective yield
on the asset
130
1301
b) Royalties are recognized on an accruals basis in accordance with the substance of the
relevant agreement
c) Dividends are recognized when the shareholder’s right to receive payment is established
4.31. It is unlikely that you would be asked about anything as complex as in the exam, but you
should be aware of the basic requirements of the standard. The effective yield on an asset
mentioned above is the rate of interest required to discount the stream of the future cash receipts
expected over the life of an asset
4.32. Royalties are usually recognized on the same basis that they accrue under the relevant
agreement. Sometimes the true substance of the agreement may require so other systematic an
rational method of recognition
4.33. Once again the points made above probability and collectability on sale of goods also
apply here
Disclosure
4.34. The following items should be disclosed
a) The accounting policies adopted for the recognition of revenue, including the methods
used to determine the stage of completion of transactions involving the rendering of
services
b) The amount of each significant category of revenue recognized during the period
including revenue arising from the sources below
i. The sale of goods
ii. The rendering of services
iii. Interest
iv. Royalties
v. dividends
c) The amount of revenue arising from exchange of goods or services included in each
significant category of revenue
Question 4
Given the prudence in the main consideration, discuss under what circumstances, if any revenue
might be recognized at the following stages of sale
a) Goods are required by the business which is confidently expects to resell very quickly
b) A customer places a firm order for goods
c) Goods are delivered to the customer
d) The customer is invoiced for goods
e) The customer pays for the goods
f) The customer’s cheque in payment for goods has been cleared by the bank
Answer
a) A sale must never be recognized before the goods have even ordered by the customer. There
is no certainty about the value of the sale, nor when it will take place even if it is virtually
certain that the goods will be sold
131
1311
b) A sale must never be recognized when the customer places an order. Even though the order
will be for a specific quantity of goods at a specific price, it is not yet certain that the sale
transaction will go though. The customer may cancel the order, the supplier might be unable
to deliver the goods as ordered or it may be decided that the customer is not a good risk taker
c) A sale will be recognized when delivery of goods is made only when:
i. The sale is for cash, and so the cash received at the same time
ii. The sale is on credit and the customer accepts delivery
d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. There
is then a legally enforceable debt, payable on specific terms, for a completed sale transaction
e) The critical event for cash sale is when the delivery takes place and when the cash is received,
both take place at the same time
It would be too cautious or prudent to wait cash payment for a credit sale transaction before
recognizing the sale, unless the customer is a high credit risk and there is a serious doubt
about his ability to pay. But in that case, why would the business risk dispatching the good?
f) It would be again be over cautious to wait for clearance of the customer’s cheque before
recognizing sales revenue. Such a precaution would only be justified in cases where there is a
very high risk of the bank refusing to honor the cheque
Summary.
In preparing financial statement, accounts follow certain fundamental assumptions

Three such assumptions are identified by IAS 1 presentation of financial statement
o Going concern: Unless there is evidence to the contrary, it is assumed that the business
will continue to trade normally for the foreseeable future
o Accruals: revenue earned must be matched against the expenditure incurred in earning it
o Consistency: accounting policies are consistent from one period to another
IAS 1 also considers three other concepts extremely important: prudence, substance over form
and materiality should govern the selection and application of accounting policies
o Prudence: Should be exercised where uncertainty exists
o Substance over form: financial reality takes precedence over legal form when accounting
for a transaction
o Materiality: all items should be disclosed which are material enough to effect evaluations
or decisions
A number of other concepts may be regarded as extremely important
o The business entity concept. A business is an entity distinct from its owners
o The money measurement concept. Accounts only deal with items to which the monetary
values can be attributed
o The historical cost convection. Transactions are recorded at the cost whey they occurred
o The stable monetary unit. The value of the unit in which accounting statements are
prepared doesn’t change
o Objectivity. Accountants must be free from bias
o The realization concept. Revenue and profits are recognized when realized
o Duality. Every transaction has two effects
132
1321
o Time interval Financial information must be produced timeliness
IAS 18 revenue is concerned with the recognition of revenues arising from fairly common
transactions
o The sale of goods
o The rendering of services
o The use by other enterprise assets yielding interest, royalties and dividends
Generally revenue is recognized when the enterprise has transferred to the buyer the significant
risks and rewards of ownership when the revenue can be measured reliably
CHAPTER 11
THE COST OF GOODS SOLD, ACCRUALS AND PREPAYMENTS
Introduction
So far we have calculated profits as follows
133
1331
Sales X
Less costs of goods sold (x)
Gross profit X
Less expenses (X)
Net profit X
However, the figures for cost of sales and experiences may not always be simple adjustments may need
to be made.
1. THE COSTS OF GOODS SOLD
Unsold goods in inventory at the end of accounting period
1.1. Goods might be unsold at the end of an accounting period and so still be held in inventory. The
purchase costs of these goods should not be included therefore in the cost of the period.
1.2. Example: Closing Inventory
Perry P. Louis, trading as a Umbrella shop, ends his financial year on 30 September each year. On
st
1 October 20X4 he had no goods in inventory. During the year to 30 September 20X5, he purchased
30,000 umbrellas costing $60,00 from umbrella wholesalers and suppliers. He resold the umbrella for
$5 each, and sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September here were
10,000 unsold umbrellas left in inventory, valued at $2 each.
What was Perry P. Louis’s gross profit for the year.
1.3. Solution
134
1341
Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. purchase costs of $60,000 and sales
of $100,000 do not represent the same quantity of goods.
The gross profit for the year should be calculated by ‘matching’ the sales value of the 20,000
umbrellas sold with the cost of those 20,000 umbrellas. The cost of sales in this example is therefore
the cost of purchase minus the cost of goods in inventory at the year end.
Sales (20,000 units) $ $
100,000
Purchases (30,000 units) 60,000
Less closing inventory (10,000 units @ $2) 20,000
Cost of sales (20,000 units) 40,000
Gross profit 60,000
1.4. Example continued

We shall continue the example of the umbrella shop into its next accounting year, 1 October 20X5 to
30 September 20X6. during the course of this year , Perry P Louis purchased 40,000 umbrellas at a total
cost of $95,000. During the year he sold 45,000 umbrellas for $230,000. At 30 September 20X6 he
had 5,000 umbrellas left in inventory which had cost $12,000.
1.5. Solution
In this accounting year, he purchased 40,000 umbrellas to add to the 10,000 he already had in inventory
at the start of the year. He sold 45,000, leaving 5,000 umbrellas in inventory at the year end. One again,
gross profit should be calculated by matching the value of 45,000 units of sales with the cost of those
45,000 units.
The cost of sales is the value of the 10,000 umbrellas in inventory at the beginning of the year, plus
the cost of the 40,000 umbrellas purchased , less the value of the 5,000 umbrellas in inventory at the
year end.
135
1351
$ $
Sales (45,00 units) 230,000
Opening inventory (10,000 units) 20,000
Add purchases (40,000 units) 95,000
Less closing inventory (5,000 units) 115,000
Cost of sales (45,000 units) 12,000
Gross profit 103,000
127,000
The cost of goods sold
1.6. The costs of goods sold is found by applying the following formula.
Formula to learn
Opening inventory value X
Add cost of purchases (or , in the case of a manufacturing company, X

the cost of production)
X
Less closing inventory value (X)
Equals cost of goods sold (X)
Net profit X
136
1361
In other words , to match ‘sales’ and ‘cost of goods sold’, it is necessary to adjust the cost of goods
manufactured or purchased to allow for increase or reduction in inventory levels during the period.
1.7. The ‘formula’ above is based on the logical idea. You should learn it, because it is fundamental
among the principles of accounting.
1.8. Example: Cost of goods sold and variations in inventory levels
On 1 January 20X6, the Grand Union Food Stores had goods in inventory valued at $6,000. During 20X6
its proprietor purchased supplies costing $50,000. Sales for the year to 31 December 20XX6
amounting to $80,000. The cost of goods in inventory at 31 December 20X6 was $12,500.
Calculate the gross profit for the year.
1.9. Solution
Grand Union Food Stores
Trading Account for the Year Ended 31 December 20x6
$ $
Sales 80,000
Opening inventories 6,000
Add purchases 50,000
Loss closing inventories 56,000
Cost of good sold 12,500
Gross profit 43,500
36,500
137
1371
The cost of carriage inward and outwards
1.10. ‘Carraige’ refers to the cost of transporting purchased goods from the supplier to the premises
of the business which has bought them. Someone has to pay for these delivery costs: sometimes the
supplier pays, and sometimes the purchaser pays. When the purchaser pay, the cost to the purchaser is
carriage inwards (into the business). When the supplier pays, the cost to the supplier is known as
carriage outwards (out of the business).
1.10. the cost of carriage inwards is usually to added to the cost of purchases, and is therefore included
in the trading account.
The cost of carriage outwards is a selling and distribution expense in the income statement.
1.12. Example: Carriage inwards and carriage outwards
Gwyn Tring, trading as Clickety clocks, imports and resells clocks. He pays for the costs of delivering
the clocks from this suppliers in Switzerland to his shop in Wales.
He resells the clocks to other traders throughout the country, paying the costs of carriage for the
consignment from his business premises to his customers.
On 1 July 20X5, he had clocks in inventory valued at $17,000. During the year to June 20XX6 he
purchased more clocks at a cost of $75,000. Carriage inwards amounted to $2,000 excluding carriage
outwards which cot $2,500. Gwny Tring took drawings of $20,000 from the business during the course
of the year. The value of the goods in inventory at the year end was $15,400.
Required
Prepare the income statement of Clickety Clocks for the year ended 30 June 20X6.
1.13. Solution
CLICKETY CLOCKS
Income statement for the year ended 30 June 20X6
$ $
138
1381
Sales 162,100
Opening inventory 17,000
Purchases 75,000
Carriage inward 2,000
94,000
Less closing inventory 15,400
Cost of goods sold 78,600
Gross profit 83,000
Carriage outwards 2,500
Other expenses 56000
58,500
25,000
Net profit (transferred to balance sheet)
Goods written off or written down
1.14. A trader might be unuble to sell all the goods that he purchased, because a number of things
might happen to the goods before they can be sold. For example
(a) Good might be lost of stolen
(b) Good might be damaged, become worthless and so he thrown away.
(c) Goods might become obsolete or out of fashion. These might be thrown away , or sold off at a
very law price in a clearance sale.
1.15. When goods are lost, stolen or thrown away as worthless, the business will make a loss on those
goods because their “sales value’ will be nil.
Similarly, when good lose value because they have become absolute or out of fashion, the
business will make a loss if their clearance sales value is less than their costs. For example, if
139
1391
goods which originally cost $500 are now absolete and could only be sold for $150, the
business would suffer a lossof $ 350.
1.16. If, at the end an accounting period, a business still in inventory which are either worthless or
worth less than original costs, the value of the inventory should be written down to:
(a) Nothing , if they are worthless
(b) Their net realizable value, if this is less than their original cost.
This means that the loss will be reported as soon as the loss is foreseen, even if the goods have not
yet been thrown away or sold off at a cheap price. This is an application of the prudence concept,
which we looked at in Chatper 10.
1.17. The costs of inventory written off or written down should not usually cause any problems in
calculating the gross profit of a business, because the cost of goods sold will include the cost
of inventories written off or written down, as the following example shows.
1.18. Example: Inventories written off and written down

Lucas Wagg , trading as Fairlock Fashions , ends his financial year on 31 March. At 1 April 20X5 he
st
had goods in inventory valued at $8,800. During the year to 31 March 20X6 , he purchased goods
costing $48,000. Fashion goods which cost $2,100 were still held in inventory at 31 March 20X6, and
Lucas Wagg believes that these could only be sold at a sale price of $400. The goods still held in
inventory at 31 Match 20X6 (including the fashion goods) and an original purchase costs of $7,600. Sales
for the year were $81,400.
1.19. Solution
Initial calculations of closing inventory values
Details At cost Realizable value Amount written

down
Fashion goods $ $ $
2,100 400 1,700
Other goods (balancing 5,500 5,500
140
1401
figure)
7,600 5,900 1,700
FAIRLOCK FASHIONS
TRADING ACCOUNT FOR THE YEAR ENDED 31 MARCH 20X6
Sales $ $
18,400
Values of opening inventory 8,800
Purchases 48,000
56,800
Gross profit 30,500
By basing the figure of $5,900 for losing inventories, the cost of goods sold automatically includes the
inventory written down of $1,700
Question 1
Gross profit for 20X7 can be calculated from
A. purchase for 20X7, plus inventory at 31 December 20X7, less inventory at 1 January 20X7
st
B. purchase for 20X7, less inventory at 31 December 20x&, plus inventory at 1 January 20X7
C. Cost of goods sold during 20X7, plus sales during 20X7\
D. Net profit for 20X7, plus expenses for 20x7
Answer
141
1411
The answer is given with Question 2, so you won’t see it before you’ve though about it for yourself.
2. ACCRUALS AND PREPAYMENTS
Introduction
1.1. It has already been stated that the gross profit for a period should be calculated by matching sales
and the cost of goods sold. In the same way, the net profit for a period should be calculated by
charging the expenses which relate to that period. For example, in preparing the income
statement of a business for a period of, say, six months , it would be appropriate to charge six
months’ expense for rent and local taxes , insurance costs and telephone costs, etc.
1.2. Expenses might not be paid for during the period to which they relate. For example, a business
st
rents a shop for $20,000 per annum and pays the full annual rent on 1 April each year. If we
calculate the profit of the business for the first six months of the year 20X7, the correct
charge for rent in the income statement is $10,000, even though the rent paid is $20,000/= in the
period. Similarly, the rent charge in the income statement for the second six months or the
year is $10,000, even though no rent was actually paid in that period.
Key Terms
Accrual or accrued expenses are expenses which charged against the profit for a particular period, even
though they have not yet been paid for.
Prepayment are payments which have been made in one accounting period, but should not be
charged against profit until a later period, because they relate to the late period.
1.3. Accruals and prepayment might seem difficult at first, but the following examples should help
to clarify the principle involved, that expenses should be matched against the period to which
they relate.
1.4. Example: Accruals
142
1421
Horace Goodrunning, training and Good running Motor Spares ,end this financial year on 28 February
each year. His telephone was installed on 1 April 20X6 and he received his telephone account quarter at
the end of each quarter. On the basis of the following data, you are required to calculate the telephone
expense to be charged to the income statement for the year ended 28 February 20X7.
Goodrunning Motor Spares – Telephone Expense for the three months ended:
30.6.20X6 23.50
30.09.20X6 27.20
31.12.20X6 33.40
31.3.20X7 36.00
1.5. Solution
The telephone expenses for the year ended 28 February 20X7 are:
1 March – 31 March 206 (no telephone) 0.00
1 April – 30 June 20X6 23.50
1 July - 30 September 20X6 27.20
1 October – 31 December 20X6 33.40
1 January – 28 February 20X7 (two months) 24.00
108.10
The charge for the period 1 January – 28 February 20X7 is two-thirds of the quarter bill received on 31
March. As at 28 February 20X7, no telephone bill has been received because it is not due for another
month. However, it is inappropriate to ignore the telephone expenses for January and February, and so
an accrued charge of $24 is made, being two-thirds of the quarter’s bill of $36.
143
1431
The accrued charge will also appear in the balance sheet of the business as at 28 February 20X7, as a
current liability.
Questions
Ratsnuffer is a business dealing in pest control. Its owner, Roy Dent, employs as team of eight who
were paid $12,00 per annum each in the year to 31Decamber 20XX5. At the start of 20X6 he raised
salaries by 10% to $13,200 per annum each.
On 1 July 20X6, he hired a trainee at a salary of $8,400 per annum.
He pays his work force on the first working day of every month, one month in arrears, so that his
employees receive their salary for January on the first working day in February , etc.
Required
(a)Calculate the cost of salaries which would be charged in the income statement of Ratsnuffer for the
year ended 31 December 20X6.
(b) Calculate the amount actually paid in salaries which would appear in the balance sheet of Ratsnuffer
as at 31 December 20X6.
Answer
(a) Salaries cost in the income statement
Cost of 8 employees for a full year at $13,200 each 105,600
Cost trainer for a half year 4,200
109,800
b) Salaries actually paid in 20X6
144
1441
December 20X5 salaries paid in January (8 employees x $1,00 per 8,000
month)
December (8 employees x $1,100 per month x 11 months) 96,800
Salaries of trainee (for July – November paid in August – December 3,500

20X6:5 months $700 per month)
Salaries 108,000
st
(c) Accrued salaries costs as at 31 December 20X6 $
(i.e Costs charged in the income statement , but not yet paid) 8,800
8 employee x 1 month x $1,100 per month 700
1 trainee x 1 month x $700 per month 9,500
(d) Summary
Accrued wages costs as at 31Decemer 20X5 8,000
Add salaries cost for 20X6 x $700 per month 700
117,800
Less salaries paid 103,300
Equals accrued wages costs as 31December 20X6 (liability in balance 9,500

sheet)
Note: The answer to Question 1 is D. Remember that: Net profit = Gross profit less expenses.
1.6. Example: Prepayment

The Square Wheels Garage pays fire insurance annually in advance on 1 June each year. The firm’s
financial year end is 28 February. From the following record of insurance payments you are required to
calculate the charge to income statement for the financial year to 28 February 20X8.
145
1451
$
1.6.20X6 600
1.6.20X7 700
1.7. Insurance cost for

$
(a) The 3 months, 1 March -31 May 20X7 (3/12 x $600) 150
(b) The 9 months , I June 20X7- 28 February 20X8 (9/12x $700) 525
Insurance costs for the year, charged to the income statement 675
st
At 28 February 20X8 there is a prepayment for fire insurance, covering the period 1 March -31 May
20X8. this insurance premium was paid on 1 June 20X7, but only nine months worth of the full annual
cost is chargeable to the accounting period ended 28 February current asset in the balance sheet of the
Square Wheels Garage as at the date.
In the same way, there was a prepayment of (3/12 x $600) $150 in the balance sheet one year earlier as
at 28 February 20X7.
146
1461
Summary
Prepaid insurance premiums as at 28 February 20XX7 150
Add insurance premiums paid 1 June 20X7 700
850
Less insurance costs charged to the income statement for the year 675
ended 28 February 20X8
Equals prepaid insurance premiums as at 28 February 20X8 (asset in 175

balance sheet )
Question 3
The Batley Print rents a photocopying machine from a supplier for which it makes a quarter payment
as follows:-
(a) Three months rental in advance

(b) A further charge of 2 pence per copy made during the quarter ended
The rental agreement began on 1 August 20X4 and the fist six quarterly bills were as follows
Bills dated and Rental Costs of copies taken Total

received
$ $ $
1 August 20X4 2.100 0 2,100
1 November 20X4 2,100 1,500 3,600
1 February 20X5 2,100 1,400 3,500
1 May 20X5 2,100 1,800 3,900
147
1471
1 August 20X5 2,700 1,650 4,350
1 November 20X5 2,700 1,950 4,650
The bills are paid promptly, as soon as they are received.
st
(a) Calculate the charge for photocopying expenses for the year to 31 August 20x4 and the amount
of prepayments and/or accrued charges as at that date.
st
(b) Calculate the charge for photocopying expenses for the following year to 31 August 20x5, and
the amount of prepayments and /or accrued charges as at the data.
Answer
(a) Year to 31 August 20X4 $
One months’ rental (1/3 xx $2,100)* 700
Accrued copying charges (1/3 X $1,5000)** 500
Photocopying expenses (Income statement) 1,200
* From the quarterly bill dated 1 August 20X4
** From the quarterly bill dated 1 November 20X4
There is a prepayment for 2 months’ rental ($1,400) as at 31 August 20X4
(b) Year to 31 August 20X5
$ $
Rental from 1 September 20X4- 31 July 20X5 (11 months at 7,700
148
1481
$2,100 per quarter or $700 per month)
Rental from 1 August – 31 August 20 x 5 (1/3 x $2,700) 900
Rental charge for the year 8,600
Copying charges
1 September – 31 October 20X4 (2/3 x $1,500) 1,000
1 November 20X4 - 31 January 20X5 1,400
1 February -30 April 20X5 1,800
1 May -31 July 20X5 1,650
Accrued charges for August 20X5 (1/3 x $1,950) 6,500
Total is a prepayment expenses (income statement) 15,100
There is a prepayment for w months’ rental ($1,800) as at 31 August 20X5
Summary of year 1 September 20X4-31 August 20X5
Rental charges Copying costs
$ $
Prepayment as at 31.8.20X4 1,400
Accrued charges as at 31.8.20X4 (500)
Bills received during the year
1 November 20X4 2,100 1,500
1 February 20X5 2,100 1,400
1 May 20X5 2,100 1,800
149
1491
1 August 20X5 2,700 1,650
Prepayment as at 31.8.20X5 (1,800)
Accrued charges as at 31.8.20X5 650
Charges to the income statement for the year 8,600 6,500
Balance sheet items as at 31 August 20X5
Prepaid rental (current asset) 1,800
Accrued copying changes (current liability) 650
1.8. Further Example: Accruals

Willie Woggle opens a Shop on 1 May 20XX6 to sell and camping equipment. The rent of the shop is
st
$12,000 per annum, payable quarterly in arrears (with the fist payment on 31 July 206). Willie decides
st
that his accounting period should end on 31 December each year.
st st
1.9. The rent account as at 31 December 20X6 will record only two rental payments ( on 31 July
and 31 October) and there will be two months’ accrued rental expenses for November and
December 20X6 ($2,000), since the next rental payment is not due until 31 January 20X7.
The charge to the income statement for the period to 31 December 20X6 will be for 8 months’ rent (May-
December inclusive) and so it follows that the total rental cost should be $8,000.
1.10. So far, the rent account appear as follows

Rent account
$ $
20X6 20X6
31 July Cash 3,000
31 October Cash 3,000 31 Dec. 8,000

Income statement
150
1501
1.11. To complete the picture, the accruals of $2,000 have to be put in , not only to balance the
account, but also to have an opening balance of $2,000 ready for next year. So that accrued
rent of $2,000 is debited to the rent account as a balance to be carried down, and credited to the
rent account as a balance brought down.
RENT ACCOUNT
$ $
20x6 20X 6
31 July Cash* 3,000
31 Oct Cash* 3,000
31 Dec. Balance c/D 2,000 31 Dec Income 8,000

(Accruals) Statement
8,000 8,000
20X7
1 Jan Balance b/d 2,00
* The corresponding credit entry would be cash if rent is paid without the need for an invoice-e.g with
payment by standing order or direct debt at the bank. If there is always an invoice where rent
becomes payable, the double entry would be:
Debit Rent account $2,000
Credit Creditors $2,000
151
1511
Then when the rent is paid, the ledger entries would be:
Debit Creditors $2,000
Credit Cash $2,000
1.12. The rent account for the next year to 31 December 20X7, assuming no increase in rent in that
year, would be as follows.
RENT ACCOUNT
$ $
20X7 20X7
31 Jan Cash 3,000 1 Jan Balance b/d 2,000
30 April Cash 3,000
31 July Cash 3,000
31 Oct Cash 3,000
31 Dec Balance c/d 2,000 31 Dec Income 12,000

(Accrued) statement
14,000 14,000
20X8
1 Jan Balance b/d 2,000
1.13. A full twelve months’ rental charges are taken as an expense to the Income statement
1.14. Further example: Prepayments
152
1521
Terry Trunk commences business as a landscape gardener on 1 September 20X5. He immediately
decides to join his local trade association , the Confederation of Luton Gardeners, for which the
annual membership subscription is $180, payable annually in advance. He paid this amount on 1
September. Terry decides that his account period should end on 30 June each year.
1.15. In the first period to 30 June 20X 6 (10 months), a full year’s membership will have been
paid, but only ten twelfths of the subscription should be charged to the period (i.e 10/12 x
$180 = $150). There is a prepayment of two months of membership subscription (i.e 2/12 x $180
= $30).
1.16. The prepayment is recognized in the ledger account for subscriptions. This is done in much the
same way as accounting for accruals, by using the balance carried down/brought down technique.
Credit Subscriptions account with prepayment as a balance
sheet C/D $30
Debit Subscription account with the same balance $30
The remaining expenses in the subscriptions account should then be taken to the Income
statement. The balance on the account will appear as a current asset (Prepaid subscriptions) in the
balance sheet as 30 June 20X6.
Subscriptions account
$ $
20X5 20X6
1 Sep Cash 180 30 Jan Income 150

statement
30 Jun Balance c/d 30

(prepayment)
153
1531
180
20X6
1 Jul Balance b/d 30
1.17. The subscription account for the next year, assuming no increase in the annual charge , will be:
Subscriptions account
$ $
20X6 20X7
1 July Balance b/d 30 30 Jun Income 180

statement
1 Sep Cash 180 30 Jun Balance c/d 30

(prepayment)
210 210
20X7
1 Jul Balance b/d 30
1.18. Again, the charge to the income statement is for a full year’s subscriptions
Question 4.
The Umbrella shop the following trail balance as at 30 September 20X8
Sales $ $
Purchase 156,000
154
1541
Land and buildings – net book value at 65,000
30.9XX8
Plant and machinery – net book value at 125,000

30.9X8
Inventory at 1.10 X7 75,000
Cash bank 10,000
Trade accounts receivable 12,000
Trade account payable 54,000
Selling expenses 40,000
Cash in hand 10,000
Administration expenses 2,000
Finance expenses 15,000
Carriage inwards 5,000
Capital account at 1.10XX7 2,000 180,000
376,000 376,000
The following information is available
(a) Closing inventory at 30.9X8 is $ 13,000, after writing off damaged goods of $2,000
(b) Included in administration expenses is machinery rental of $6,000 covering the year to 31
December 208
(c) A late invoice for $12,000 covering rent for the year ended 30 June 209 has not been included
in the trial balance
155
1551
Prepare an income statement and balance sheet for the year ended 30 September 20X8. (Tutorial note:
This will provide useful revision of the forms of the income statement and balance sheet. If necessary
refer back to Chapter 6 of this study text).
Answer
The umbrella shop
Income statement for the year end 30 September
$ $
156,000
Sales 10,00
Purchases 65,000
76,000
Closing inventory (W1) 13,000
Gross profit 93,000
Administration Expenses 16,500

(W2)
Financial expenses 5,000 33,500
Net profit for the period 59,500
156
1561
THE UMBRELLA SHOP BALANCE SHEET AT 30 SEPTEMBER 20X8
$ $
Assets
Non-current assets 125,000
Land and buildings 75,000
Plant and machinery 200,000
Current assets
Inventory (W1) 13,000
Trade accounts receivable 54,000
Prepayments (W4) 1,500
Cash at bank and in hand 14,00 82,500
282,500
Capital and liabilities
Proprietor’s capital 180,000
Balance brought forward 59,500 239,500
Profit for the period
Current liabilities
Trade account payable 40,000
Accruals (W3) 3,000 282,500
157
Working
1. Closing inventory
As the figure of $13,000 is after writing off damaged good, no further adjustments are necessary
.Remember that you effectively crediting closing inventory to the trading account of the income
statement and the corresponding debit is to the balance sheet.
2. Administration expenses
Per trial balance 15,000
Add: accrual (W3) 3,000
18,000
Less: prepayment (W4) (1,500)
16,500
3. Accrual
Rent for year period of 30 June 20 X9 12,000
Accrual for period to 30 September 20X8 3,000

(3/12 x &6,000)
4. Prepayment
Machinery rental for the year to 31 6,000
158
1581
December 20X8
Prepayment for period 1 October to 31 1,500

December 20XX8 (3/12 x $6,000)
Chapter roundup
This chapter has illustrated how the amount of profit is calculated when:
There are opening or closing inventories of goods in hand.
There is carriage inwards and /or carriage outwards.

Inventories are written off or written down in value.
There are accrued charges
There are prepayments of expenses
The cost of goods sold is calculated as follows
Opening inventory X
Plus purchase X
Less closing inventory (X)
Carriage inwards is included in the cost of purchase. Carriage outward is a selling expense.
Accrued expenses are expenses which relate to an accounting period but have not yet been paid for.
They are a charge against the profit for the period and they are shown in the balances sheet as at the
end of the period as a current liability.
159
1591
Prepayments are expenses which have already been paid bur relate to a future accounting period. They
are not no charged against the profit of the current period, and they are shown in the balance sheet at
the end of the period as a current asset.
Quick quiz
1. How is the cost of goods sold calculated
2. Distinguish between carriage inwards and carriage outwards

3. The cost of goods sold is $14,000. The purchases for the period are $14,00, carriage inwards is
$1,000, carriage outwards is $1,500 and closing inventory is $13,00. What was the opening
inventory figure?
A $10,500
B $11,500
C $12,000
D $ 13,000
4. Give three reasons why goods purchased might have to be written off.
5. If a business has paid rates of $1,000 for the year to 31 March 20X9, what is the prepayment
6. Define an accrual.
1. Carriage inward is paid on goods coming into the business and is added to the cost of purchase
Carriage outwards is paid on goods going out to the business to customers and is charged to
selling expens
2. Opening inventory value (balancing figure) 12,000

Add: purchase (incl carriage inwards) 15,000
160
1601
27,000
Less: Closing inventory (13,000)
If you picked A, then you wrongly included carriage outwards in cost of goods sold. If you
chose B, then you used the carriage instead of the carriage inwards figure in your calculations.
With D, you ignored carriage inwards and outwards altogether.
3. Goods are stolen or lost

Goods are damaged
Good are obsolete
4. 3/12 X $1,000 = $250

5. Expenses charged against profit for a period , even though they have not yet been paid for
invoiced.
Now try to questions blow from the Exam questions Bank
Question to try Level Marks Time
15 Introductory n/a 36 mins
16 Introductory n/a 45 mins
161
1611
CHAPTER 12
BAD DEBTS AND PROVISIONS
Introduction
Ins this chapter we move closer to our goal of preparing the financial statements. We look at two
types of adjustment which need to be made in respect of credit sales.
Bad debts
1.1. Customers who buy goods on credit might fail to pay for them, perhaps out of dishonesty or
because they have gone bankrupt and cannot pay. Customers in another country might be
prevented from paying by the unexpected introduction of foreign exchange control restrictions by
their country’s government during the credit period.
For one reason or another, a business might decide to give up expecting payment and to write
the debt off as a ‘lost cause’.
Key Terms
A bad debt is a debt which is not expected to be repaid.
Writing off bad debts
1.2. When a business decides that a particular debt is unlikely to be paid, the amount of the debt is
‘written off as an expense in the income statement.
1.3. Alfred’s Mini-Cab service sends an invoice for $300 to a customer who subsequently does a
‘moonlight flit’ from his office premises , never to be seen or head of again. The debt of $300
must be written off. It might seem sensible to record the business transaction as:
162
1621
Sales $(300-300) = $0.
1.4. However, bad debts written off are accounted for as follows.
(a) Sales are shown at their invoice value in the trading account. The sale has been made and gross
profit should be earned. The subsequent failure to collect the debt is a separate matter , which is
reported in the income statement account.
(b) Bad debts written off are shown as an expense in the income and expense account.
1.5. In our example of Alfred’s Mini-Cab Service

$
Sale (in the trading account) 300
Bad debt written off (expense in the I $ E account) 300
1.6. Obviously , when a debt is written off, the value of the debtor as a current asset falls to zero. If the
debt is expected to be uncollectible, its ‘net realizable value’ is nil, and so it has a zero balance
sheet value.
Bad debts written off and subsequently paid
1.7. A bad debt which has been written off might occasionally be unexpectedly paid. The only
accounting problem to consider is when a debt written off as bad in one accounting period is
subsequently paid in a later accounting period. The amount paid should be recorded as additional
income in the income in the income s statement of the period in which the payment is received.
1.8. For example, a trading, income statement for the Blacksmith’s Forge for the year to 31
December 20X5 could be prepared as shown below from the following information.
$
163
1631
Inventory , 1 January 20X5 6,000
Purchases of goods 122,000
Inventory, 31 December 20X5 8,000
Cash sales 100,000
Credit sales 70,000
Discounts allowed 70,000
Discounts received 1,200
Bad debts written off 5,000
Debts paid in 20X5 which were previously written off as bad in 20X4 2,000
Other expenses 31,800
BLACKSMITH’S FORGE
INCOME STATEMENT FOR THE YEAR ENDED 31.12.20X5
$ $
Sales 170,000
Purchase 122,000
128,000
Gross profit 50,000
Add: Discounts received 5,000
164
1641
Debts paid, previously written off as bad 2,000
57,000
Expenses
Other expenses 31,800
Net profit 42,000
15,000
2. PROVISIONS FOR DOUBTFUL DEBTS

2.1. When bad debts are written off, specific debts owed to the business are identified as unlikely ever
to be collected.
However, because of the risks involved in selling goods on credit, it might be accepted that a
certain percentage of outstanding debts at any time are unlikely to be collected. But although it
might be estimated that, say, 5% of debts will turn out bad, the business will not know until later
which specific debts are bad.
2.2. A business commences operations on 1 July 20X4, and in the twelve months to 30 June 20X5
makes sales of $300,000 (all on credit) and writes off bad debts amounting to $6,000. Cash
received from customers during the year is $244,000, so that at 30 June 20X5, the business has
outstanding debtors of $50,000.
Credit sales during the year 300,000
Add receivables at 1 July 20X4 0
Total debts owned to the business 300,000
165
1651
Less cash received from credit customers 244,000
56,000
Less bad debts written off 6,000
Trade receivables outstanding at 30 June 20X5 50,000
Now , some of these outstanding debts might turn out to be bad. The business does not know on 30
June 20X5 which specific debts in the total $50,000 owed will be bad, but it might guess (from
experience perhaps) that 5% of debts will eventually be found to be bad.
2.3. When a business expects bad debts amongst its current debtors, but does not yet know which
specific debts will be bad, it can make a provision for doubtful debts.
2.4. A ‘provision’ is a ‘ providing for’ and so a provision for doubtful debts provides for future bad
debts, as a prudent precaution by the business. The business will be more likely to avoid claiming
profits which subsequently fail to materialize because some debts turn out to be bad.
(a) When a provision is first made , the amount of this initial provision is charged as an expense in
the income statement of the business , for the period in which the provision is created.
(b) When a provision already exists, but is subsequently increased in size, the amount of the
increase in provision is charged as an expense in the income statement, for the period in which
the increased provision is made.
(c) When a provision already exists, but is subsequently reduced in size, the amount of the
decrease in provision is recorded as an item of ‘income’ in the income statement , for the
period in which the reduction in provision is made.
Exam focus point
In an exam you will often be required, as part of a long question , to calculate the increase or
decrease in the provision of doubtful debts.
166
1661
2.5. The balance sheet, as well as the income statement of a business , must be adjusted to show a
provision for doubtful debts.
IMPORTANT
The value of trade accounts receivable in the balance sheet must be shown after deducting the
provision for doubtful debts.
This is because the net realized value of all the receivables of the business is estimated to be less than
their ‘sales value’. After all, this is the reason for making the provision in the first place. The net
realizable value of trade accounts receivable is the total value of receivables minus the provision for
doubtful debts. Such a provision is an example of the prudence concept , discussed in details in
Chapter 10.
2.6. In the example about ( in paragraph 2.23) the newly created provision for doubtful at 30 June
20X5 will be 5% $50,000 = $2,500. This means that although total trade account receivable are
$50,000, eventually payment for only $47,500 is expected.
(a) In the income statement, the newly created provision of $2,500 will be shown as an expense.
(b) In the balance sheet, trade accounts receivable will be shown as
Total receivables at 30 June 20X5 50,000
Less provision for doubtful debts 2,500
47,500
2.7. Example: Provision for Doubtful debts

Corin Flakes owns and runs the Aerobic Health Foods Shop in Dundee. He commenced trading on 1
January 20X1, selling health foods to customers, most of whom makes use of a credit facility that
167
1671
Corin offers. (Customers are allowed to purchase up to $2000 of goods on credit but must repay a
certain proportion of their outstanding debt every month).
This credit system gives rise to a large number of bad debts, and Corin Flake’s results for his first
three years of operations are as follows.
Year to 31 December 20X1
Gross profit $27,000
Bad debts written off $8,000
Debts owed by customers as at 31 December 20X1 $40,000
Provision for doubtful debts 2 ½ % of outstanding debts
Other expenses $20,000
Year to 31 December 20X2
Provision for doubtful debts 2 ½ % of outstanding debts
Year 31 December 20X3
Provision for doubtful debts 3% of outstanding debtors
168
1681
Required
For each of these three years, prepare the income statement of the business, and state the value of trade
accounts receivable appearing in the balance sheet as at 31 December.
2.8. Solution
AEROBIC HEALTH FOOD SHOP
INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER
20X1 20X2 20X3
$ $ $ $ $ $
Gross profit 27,000 45,000 60,000
Sundry income: reduction in 350

provision for doubtful debts*
60,530
Expenses:
Bad debts written off 8,000 10,000 11,000
Increase in provision for 1,000 250 -

doubtful doubts*
Other expenses 20,000 28,750 32,850
29,000 39,000 43,850
Net (loss)/profit (2,000) 6,000 16,500
169
1691
At 1 January 201 when Corin began trading the provision for doubtful debts was nil. At 31 December
201 the provision required was 2 ½ % of $40,000= $1,000. The increase in the provision is therefore
$1,000. At 31 December 20X2 the provision required was 2 ½ % of $50,000 = $1,250. The 20X1
provision must therefore be increase by $250. At 31 December 20X3 the provision required is 3% x
$30,000 = $900. The 20X2 provision is therefore, reduced by $350.
VALUE OF TRADE ACCOUNTS RECEIVABLE IN THE BALANCE SHEET
As at As at As at
31.12.20X1 31.12.20X2 31.12.20X3
$ $ $
Total value of receivables 40,000 50,000 30,000
Less provision for doubtful debts 1,000 1,250 900
Balance sheet value 39,000 48,750 29,100
Other Provisions
2.9. A provision for doubtful debts is not the only type of provision you will come across in
accounting
Key terms
A provision is ‘any amount written off or retained by way of providing for depreciation , renewals or
diminution of value of assets or retained by way of providing for any known liability of which the
amount cannot be determined with substantial accuracy’.
2.10. For most business, by far the largest provision in their accounts is the provision for
depreciation which is described in a later chapter.
170
1701
You should now try to use what you have learned to attempt a solution to the following exercise,
which involves preparing an income statement and balance sheet.
QUESTION 1.
The financial affairs of Newbegin Tools prior to the commencement of trading were as follows:
NEWBEGIN TOOLS
BALANCE SHEET AS AT 1 AUGUST 20X5
$ $
Assets
Non-current assets
Motor vehicle 2,000
Shop fittings 3,000
5,000
Current assets
Inventories 12,000
Cash 1,000
13,000
18,000
Capital and liabilities
Capital 12,000
Current liabilities 2,000
Trade creditors 4,000
171
1711
6,000
Total capital and liabilities 18,000
At the end of six months the business had made the following transactions.
(a) Goods were purchased on credit at a gross amount of $10,000

(b) Trade discount received was 2% on this gross amount and there was a settlement discount
received of 5% on settling debts to suppliers of $8,000. These were the only payments to
suppliers in the period.
(c) Closing inventories were valued at $5,450.
GENERAL JOURNAL
Account Title Debit Credit

i. Stock at close 1.500.000/=
Trading A/c 1.500.000/=
ii. Bad debts 30.000/=
Provision for Bad debts 30.000/=
iii. Prepaid rent 100.000/=

Rent 100.000/=
iv. Wages Accrued (Payable) 300.000/=
Wages
300.000/=
v. Depreciation (M.V) 1.400.000/=
172
1721
Provision for Dep 1.400.000
vi. Depreciation (Equipment) 500.000/=
Provision for Dep (Equipment)
500.000/=
When Depreciation is at cost = Straight line
When Depreciation is at cost = Diminishing
INCOME STATEMENT
Sales 12.000.000/=
Less Returns / sales Returns (DR) 50.000/=
Net sales 11.950.000/=
Less: Cost of goods sold
Opening stock 600.000/=
Add Purchases 4.000.000/=
Less Purchases Returns / Return out 500.000/=
Net Purchases 3.500.000/=
Cost of goods available for sale 4.100.000/=
Less Closing stock 1.500.000/=
Cost of sales 2.600.000/=
GROSS PROFIT / GROSS INCOMES 9.350.000/=
Add Miscellaneous Income

Discount received 80.000/=
173
1731
9.430.000/=
Less Operating Expenses
Wages 1.300.000/=
Rent 600.000/=
Electricity 200.000/=
Bad debts 60.000/=
Sales discount D---- 60.000/=
Depreciation motor vehicle 1.400.000/=
Equipment 500.000/=
4.120.000/=
NET PROFIT / NET INCOME 5.310.000/=
BALANCE SHEET
ST
AS AT 31 -MARCH-1999
FIXED ASSETS / NON CURRENT ASSETS
COST ACC DEP WRITTEN DOWN

NET BOOK VALUE
FIXED ASSET
Vehicle 7.000.000/= 1.400.000/= 5.600.000/=
Equipment 5.000.000/= 500.000/= 4.500.000/=
12.000.000/= 1.900.000/= 10.100.000/=
CURRENT ASSET
Stock at close 1.500.000/=
Trade Debtors 3.000.000/=
Less provision for Bad Debts 90.000/= 2.910.000/=
Prepaid rent 100.000/=
Bank 2.500.000/=
Cash 800.000/=
7.810.000/=
Less CURRENT
LIABILITIES 2.000.000/=
Trade creditors 3.500.000/=
Income Tax payers 300.000/=
Accrued Wages 2.010.000/=
Working Capital 12.110.000/=
174
1741
Total Net Assets
Financed by:
Capital 6.860.000/=
Add Net Profit 5.310.000/=
12.170.000/=
Less drawings 2.060.000/=
10.110.000/=
Add Long Term Liabilities / 2.000.000/=
Bank Loan 12.110.000/=
Title of Accounts
i. Stock 8.000.000/=
Trading 8.000.000/=
ii. Dep. Plant 12.000.000/=
Acc Dep. Plant 12.000.000/=
Dep. Motor vehicle 6.400.000/=
6.400.000/=
iii. Bad Debts 1.000.000/=
Prov. Bad Debts 1.000.000/=
iv. Debenture Interest 100.000/=
Accrued Debenture Interest 100.000/=
v. Prepaid Insurance 100.000/=
Insurance 100.000/=
vi. Profit & Loss Appropriation 5.600.000/=
Dividends Proposed
Dividends Payable 5.600.000/=
vii. Drawings 3.000.000/=
General Expenses 3.000.000/=
175
st
Lolo Company deals in assorted merchandise. On 31 / Dec / 1999, the following balance was extracted
from the Company’s ledger.
Dr Cr
Ordinary Share Capital 10.000.000/=
6% preference Share Capital 50.000.000/=
Land Cost 80.000.000/=
Building Cost 60.000.000/=
Motor vehicle Cost 30.000.000/=
st
Accumulated Dep. 1 /01/1999
Buildings 12.000.000/=
Motor vehicles 5.000.000/=
Trade Debtors and Creditors 7.000.000/= 3.500.000/=
Cash 4.600.000/=
Bank 1.280.000/=
Good will 1.000.000/=
Insurance 1.400.000/=
Rent 1.200.000/=
Bad debts 100.000/=
+1.000.000/=
+ 200.000/=
Bad debts provision 400.000/=
Creditors (due in excess of 2 years) 13.300.000/=
Carriage on purchases / Inwards 3.000.000/=
Purchases 120.000.000/=
Salaries 4.800.000/=
Discounts 120.000/= 240.000/=
Returns Inwards / Outwards 1.500.000/= 700.000/=
th
Preference Dividend paid on 30 /09/1999 2.500.000/=
Sales 200.000.000/=
st
Profit & Loss A/C on 1 /01/1999 (Retained earnings) 20.000.000/=
General Reserves 6.000.000/=
322.420.000/= 322.420.000/=
The following matters must be put into account before financial statements are prepared.
i. Stock was valued on 3/12/99 at shs 8,000,000 on FIFO basis.

ii. Building should be depreciated by 5% on cost and motor vehicles by 10% on reducing
balance.
iii. December 1999 salaries amounting to 400,000 were paid on 2 / 1/ 2000.
176
1761
iv. Rent was paid on 1 / 1/1999 for a product up to 30 / 6/ 2000.
v. Direct write of bad debts of 200,000 should be made while a ----of 1,000,000 should be made
for debts that are doubtful.
vi. Stock costing 2,000,000 was given to staff as a bonus at the end of the financial year.
vii. The directors proposed to pay the remaining dividend due to preference shareholders.
viii. Good will should be written off in full against the General reserve.
Required.
a) Enter adjusting information above into a general journal.
b) Prepare the Company’s Trading / profit and loss Account Income Statement including
appropriation for the year ended 31 / 12 / 1999.
c) Prepare the Company’s Balance Sheet as 31 / 12 / 1999.
GENERAL JOURNAL
ACCOUNT TITTLES DEBIT CREDIT
i. Stock 8.000.000/=
Trading A/c 8.000.000/=
ii. Depreciation (Buildings) 3.000.000/=
Accumulated Depreciation (Buildings) 3.000.000/=
iii. Depreciation (motor vehicle) 2.500.000/=
Accumulated Depreciation (motor vehicle) 2.500.000/=
iv. Salaries 400.000/=
Salaries Accrued / Payable 400.000/=
v. Prepaid rent 400.000/=
Rent 400.000/=
vi. Bad debts written off 200.000/=
Debtors 200.000/=
vii. Bad debts 1.000.000/=
Provision for Bad debts 1.000.000/=
viii. Purchases 2.000.000/=
Profit & Loss Bonus 2.000.000/=
ix. Profit & Loss Proposed Dividend 500.000/=
Dividends Payable / Accrued 500.000/=
x. General reserves 1.000.000/=
Good will 1.000.000/=
ii. Depreciation = Buildings = Preference Dividend =

5 x 60.000.000 6 x 50.000.000
100 100
= 3.000.000/= = 3.000.000
177
1771
3.000.000 – 2.500.000
= 500.000/=
Depreciation motor vehicle Good will – A Straight Asset

= % x Book Value - Purchase - Bonus
BKV = Cost – Accm – Dep 120.000.000 – 2.000.000
30.000.000 – 5.000.000 = 25m
= 10 x 25.000.000
100
= 2.500.000
iii. Prepaid Rent = Bad debts Add written of and prov. For Bad debts
6 x 1.200.000 100.000 + 200.000 + 1.000.000
18 = 1.300.000
LOLO CO LTD
TRADING / PROFIT AND LOSS A/C
Sales 200.000.000
Less Returns Inwards 1.500.000
Net Sales
Less Cost of goods sold / cost of sales 198.500.000
Opening stock 5.200.000
Add Purchases 118.000.000
Add Carriage in 3.000.000
121.000.000
Less Returns Out 700.000
120.300.000
NET PURCHASES 125.500.000
LESS CLOSING STOCK 8.000.000
COST OF GOODS SOLD 117.500.000
GROSS PROFIT 81.000.000
Add Other Incomes
Discount Received / Purchases discount 240.000
81.240.000
Less Operating Expenses
Insurance 1.400.000
Rent 1.200.000
Less Prepaid 400.000 800.000
Bad debts 100.000
Add Prov. & write salaries 1.200.000 1.300.000
Salaries 4.800.000
Add Accrued 400.000 5.200.000
178
1781
Discount Allowed 120.000
Depreciation
Building 3.000.000
Motor vehicle 2.500.000
Staff Bonus 2.000.000
16.32.000
NET PROFIT BEFORE TAX 64.920.000
Add Retained Earnings B/F 20.000.000
84.920.000
Less Appropriation (Withdrawals)
Interim Preference Dividend 2.500.000
Add Accrued Preference Dividend 500.000 3.000.000
ACCUMMULATIVE RETAINED – 81.920.000
EARNINGS
Question
th
The Book keeper of Teso Ltd prepared the following Trial Balance for the year ended 30 /06/2010.
DR CR
Share Capital 10.000@ 50.000.000
Land 148.000.000
Motor vehicles 40.000.000
Trade Debtors / Creditors 5.000.000 3.000.000
Purchases / Sales 200.000.000 350.000.000
Returns In 10.000.000 20.000.000
Carriage Inwards 8.000.000
Bank Balance 15.000.000
Cash Balance 25.000.000
Discounts 2.000.000
th
Stock 4 /07/2000 4.000.000
Bad debts 6.000.000
Salaries 40.000.000
Miscellaneous Income 7.000.000
Insurance 1.000.000
Rent 1.500.000
Accumulated Depreciation 3.600.000 8.000.000
Provision for Bad debts 14.000.000
Creditors due in 5 years 30.000.000
179
1791
Profit & Loss A/C (2.900.000)
497.000.000 497.000.000
The Trial balance should be adjusted with the following information at the end of the year in the Trail
balance.
i. Closing stock 30 / 6/ 2011 20,000,000.

ii. The ---for Bad debts should be reduced to 4,000,000.
iii. Stock costing 4,000,000 was stolen by the workers.
st
iv. The land lady demanded rent and was paid on 1 July 2000 for 3 years.
v. The motor vehicle should be depreciated at 20% on reducing balance.
vi. Mis---------of 3,000,000 accrued.
vii. Long term credit charge interest at a rate of 20% while the Bank charges 10% per an overdraft
st
both were acquired on 1 July 2000.
viii. Divided of 200 per share was proposed.
ix. Profits amounting to 2,000,000 should be transferred to emergency reserves.
Required
a) Journalize entries for adjustment ii to ix above.
b) Final Account / Financial statement at the end of the financial year.
i. Provision for Bad debts viii. Dividend = 50.000.000

14.000.000 – 10.000 10.000 iv.
Rent 1.200.000 1 year = 5.000
3.600.000 – 1.200.000 5.000 x 200 = 1.000.000
Prepaid rent 2.400.000 = ix. T is 2.000.000
ii. Motor Vehicle = % x Book Value

Bk = Cost – Acc. Dep.
40.000.000 – 8.000.000
20 x 32.000.000
100
= 6.400.000
180
1801
vi. Accrued Y
7.000.000+ 3.000.000 = 10.000.000
vii. 30.000.000 = 20 x 6.000.000 = 1.200.000
5 100
TITLE OF ACCOUNT DEBIT CREDIT

Stock 20.000.000/=
Trading A/c 20.000.000
Bad debts 4.000.000/=
Provision for Bad Debts 4.000.000
Stock stolen 4.000.000/=
Purchases 4.000.000
Prepaid rent 2.400.000/=
Rent 2.400.000
Interest Chargeable
PARTNERSHIP ACCOUNTS
A partnership is a relationship between persons competent of entering a contract and doing a

business in common with a view of making a profit.
The persons doing the business in common should be competent in the sense in that they shouldn’t be
minors but adults and such person should not be bankrupt.
Partnership is guided by a partnership deed in writing or implied. It spells the follow;

181
1811
(i) Share of profits or losses
(ii) Interests on capital
(iii) Interest on drawings
(iv) Salary to partners
(v) Int on loans from partners
(vi) Signatories of partnership accounts
In the absence of the partnership Dee, the partnership would be guided by the provisions in the
partnership Act i.e.
(i) No partner will claim int, on k

(ii) No partner will be changed int, on draw
(iii) No partner will claim salary from the partnership.
(iv) Losses will be shared equally
(v) If any partner has advanced a loan to the partnership in addition to his capital, he will be
entitled to 5% p.a. int on loan.
Types of partners
(i) Active partners

These have capital in the business and also take part in the day to day business management.
(ii) Sleeping partners

These have capital in the business but don’t take part in the day to day business management,
however they share in the profits made.
(iii) Holding out partners

These have no capital in the business and don’t take part in the day to day business management of
the partnership e.g. in hierarchal politicians. Such persons have reputation and may attract funding for
the partnership; they share in the profits and losses of the partnership.
Accounting treatment partnership in case of the partnership, the income statement will have 3 parts
namely.
(i) Trading Account
182
1821
(ii) Profits and losses account
(iii) Profit and loss appropriation account
The first two accounts one like those of a sole proprietorship. The profit and loss app. Account records
transit between the partners and the partnership.
Capital accounts of the partnership. The capital accounts of a partnership may be prepared in two ways.
Fixed capital accounts
In this case, only the capital contribution of the partners is recorded in the capital accounts is recorded
in the capital accounts and in an independent account called the current account is maintained to
record transit between the partners and the partnership.
Fluctuating capital accounts
All transitions i.e. capital and other transitions are recorded in the capital account.
Accounting entries
(i) When partners are entitled to interest on capital.
(Dr- P&L appropriation account)
Dr- Int on capital account
Cr- (current accounts with int due on capital
2. Introduction of capital by partners
Dr- Bank/cash account
Cr- Capital account with a management introduced
3. Partners drawings
Dr-current accounts
Cr- Bank account with a management with drawn by partners
4. When partners one entitled to salaries
183
1831
Dr - Partners salary account
Cr- Partners current account
5. When partners are charged with int. on drawings
Dr- Current account
Cr- Int on drawings
6. Sharing of profits /losses
(a) Dr – Share of .. (P and L application account)
Cr – Current account
Thus the P and L account comprises the following items;
a) Interest on capital
b) Interest on drawings
c) Partners salaries
d) Share of profits and losses
Partners loan
A loan from the partners to the partnership must be shown in the separate account called the loan
account and must always carry an int interest on such a loan must be shown in the partners loss
account i.e. its a charge against profit.
MISSING WORK. TO BE TYPED.
Format of an income statement of a partnership business. The income statement of partnership is

comprised of 3 parts i.e.
- Trading account
- P and L account
- P and L application account as shown below
Sales xx
C.O.S xx
184
1841
G.P xx
Exp xx
N.P xx
Add
Interest on drawings
A xx
B xx
xx
Less
Interest on capital
A xx
B xx
Salary
A xx
Profit to be shared xxx
Share of profit
A xx
B xx
Preparation of a balance sheet
The proportion of the assets of the balance sheet un charged the financing section of a balance sheet
must reflect the partners financing and will appear as follows.
NET ASSETS xx
CAPITAL ACCOUNTS
A xx
185
1851
B xx
CURRENT ACCOUNTS
A xx
B xx
A B A B
Int. on draw Xx Balance b/d xx xx
Drawing Xx Int. on capital xx xx
Balance Xx Salary s xx xx
Share of II xx xx
1. P. and C are in partnership sharing capital and losses in the ratio 3:2 respectively. They are entitled to
5% p.a. int. on capital and their respective int. on drawing were O£ 50 and C £100.
C is entitled to a salary of £500 p.a their capital contribution are P£200 and C£6,000. The net profit
before any distribution to partners amounted to £5000 for the year ended 31st Dec 2000.
Required
Prepare a P and L appropriation Account for the year ended 31st Dec 2000.
th
2. M and N are in partnership sharing profits equally the partnership trial balance as at 30 June 2001
was as follows.
Item /account Dr Cr
Building (N.BV) 50,000
Fixtures (Cost) 11,000
Account depn. (Fixtures) 3, 300
186
1861
Debtors /creditors 16,243 11,150
Stock 30/6/2000 41,979
Cash at bank 6.77
Sales 123,650
Purchases 85,416
C.O.W (carriage out) 1,288
Dis. All 115
Loan interest 400
Loan 40,000
Office expenses 216
Salaries and wages 18,917
Provision For B/debts 400
Bad debts 503
Capital accounts
M 35,000
N 29,500
Current accounts
M 1,306
N 298
Drawings
M 6,400
N 5, 650
Additional information
1. Stock at 30/6/2001 was 56,340
2. Expenses accused as at 30/6/2001
Office expenses 96
Wages 200
3. Depn on furniture is 10% p.a on reducing balance basis while depends on building for the year up to
30/6/01 was £1,000.
4. The partnership salary of 800 to M was not recorded.
5. Int. on drawings was;

187
1871
M 180
N 120
6. Int on capital balances is provided at 10% as per the prov. in the deed.
7. You are to reduce prov. for balance debts to 320.
REQUIRED;
i. Prepare a P and L and P and L application accounts for the year ended 30/6/2001
ii. Prepare a balance sheet as at that date
GOOD WILL
Good will is the difference between the value of the business and the fair value of its net separable assets.
Characteristics /future of good will
i. Each business has a unique good will which fluctuates continuously as factors affecting it
fluctuate.
ii. Good will can not be sold separately without selling business as going concern i.e. good
will exist as long as a business operates as a going concern.
iii. Valuation of good will is highly subjective i.e. it has no scientific components and SSAP22
demands that it could written off immediately.
Types of good will
i. Purchased good will

This arises from a defined financial transaction and hence it is recorded in fin statements like other fixed
assets.
However SSAP22 provided for immediate write off of good will after acquisition.
Alternatively it can be a mortised over its useful life but not exceeding 40 years
SSAP = Statement of standard accounts practice
ii. Inherent (non- purchased) good will.
188
1881
This arises in the normal carrying out of business. It is results from a combination of various business
activities as a going concern hence non-purchased good will is never recorded in accounts because to
do so will be anticipate gains which have not yet been realized.
Factors which induce payment of good will.
1) When the business posses monopoly power of favorable contract of UCE.

2) When the new business is to continue trading under the same name of the previous company
e.g. UCBL
3) If the business possesses specialized demand skills e.g. expert managers.
4) Possession of trade marks and patents e.g. Coca-cola, Pepsi Cola
5) Where the business has already incurred costs of research and development
6) The nature of a firm product or the reputation of its SVs e.g. price water and copper, British
Airways, Earnest young.
7) Freedom from legislative restrictions circumstances necessary ascertaining good will in
partnership.
1.At the time of admitting a new partner into establishing partnership the new has to
compensate for the share he is going to enjoy.
2.At the retirement or death of a partner from the partnership
3.The combination of ones and two where an old partner is replaced by a new one.
4.At the time of dissolving or closing the partnership including selling the business to an individual
or a company.
5.A change in the profit and loss sharing ratio between the partners.
6.A charge in the made of ascertaining P and losses of the firm e.g. in depreciation rates accounting
for good will in partnership in accounts by 3 methods;
(a) Premium method
In hence the new partner brings cash in addition to his capital contribution she excess premium being
a good will contribution in the following ways;
(i) The cash premium can be paid to the old partners privately and here no acting record is made.
(ii) Premium cash paid by the new partner remains in business but no good will accounts maintained.
The acting entries are;
- On receipt of cash - Dr cash account

Cr- good will account
189
1891
- On write off the good will – Dr- good will account
Cr – capital account of the old partners
(iv) The cash premium by the old partner is withdrawn by the new partners and no good
will account is maintained. In addition to the entries in (ii) the follow entries will be
affected.
Dr – capital accounts (for old partners)
Cr – Cash account
(b) Revaluation method the new partner brings capital only but agrees to compensate for good will
account than by cash. In this case good will account is raised and it is maintained in the books
the accounting entries to be made will be.
Dr – Good will account
Cr – Capital accounts (for the old partners.
Memorandum revaluation method in this case good will raise in the books does not remain in the
records i.e. it is written off.
The accounting entries are;
Dr- Good will
Cr- capital accounts (for the old partners)
Dr- Capital accounts (for the new partners
Cr- Good will account
Example
Partners X, Y, Z have been sharing P and L in ratio 4:3:1 respectively. On Dec. 3. 2000. They agreed to
alter their profit sharing ration to 3:5:2 for X,Y,Z respectively the summarized balance sheet of the
partnership a sat that date was as follows.
Total assets (excluding good will) 14,000,000
Capital accounts
X 6, 00,000
190
1901
Y 2,800,000
Z 3,200,000
On altering P and Loss sharing ratio the partners agreed to recognized good will of 12,00,000
Required;
st
Show the balance sheet on 1 Jan 2001 after good will had be taken into account
Assume;
a) Good will account is to be maintained in records

b) Good will to be not to be
REVALUATION OF ASSETS
This maybe done under the follow circumstances
1) Admission of a new partner

2) Change of profit and loss sharing ratios
3) Retirement of a partner
4) Death of a partner
The value of assets and liabs may increase or decrease on revaluation.
If the value of assets increase then there a loss revaluation.
Similar if the value of liabs increase there is a loss on revaluation and if the value of liabs decreases
then hence a gain on revaluation
Accounting entries
1. When Asset values increase

Dr- Asset account
Cr- revaluation account with increase in value of the asset
191
1911
2. On reduction in assets value
Dr- Revaluation account
Cr- Asset account with reduction in value
3. Increase in value of a liability

Dr – Revaluation account
Cr- Liability account with increase in value
4. Decrease in value of a liability

Dr- Liability account
Cr- Revaluation with decrease in value
N.B The balance on revaluation account is closed to the partners capital accounts i.e. shared to the
partners in their profits and loss sharing ratios.
5. The profit and loss on revaluation

(a) In case of a profit on revaluation
Dr – Revaluation account
Cr- Capital accounts with on revaluation
(b) In case of a loss

Dr- Capita accounts
Cr- Revaluation accounts with the loss on revaluation
Revaluation Account
Decrease in assets Increase in assets
Increase in liability Decrease in liability
Share of II Share of loss
Example
As B have been in partnership sharing P and L in the ratio 3:2 respectively. The follow is the partnership
balance sheet as at 31/12/2001.
192
1921
Plants machinery 1,000,000
Good will 2,000,000
Stock 1,960,000
Debtor 2,130,000
Bank 90,000
Creditors (98,000)
Total Assets 7,000,000
Financed by
Capital accounts
A 4,000,000
B 3,000,000
On 1/1/02 they decided to admit C as a new partner on condition that he contributes 2m as capital.
The follow assets were to be revalued as follows
Plants and mach 2, 000,000
Stock 900,000
Other asset s and liabs are to remain at their book value. The partners also agreed that good will is
valueless.
Required
(i) Ledger entries to effect transaction on admission of C .

(ii) Balance sheet of the partnership after admitting C .
On dissolution of a partnership, the partnership business may be sold and a going concern to an
individual, it may be converted into a limited company or it is assets may be sold individually. When a
partnership business is dissolved the proceeds from business are applied as follows , payment of non-
partners (debts and laibs) payment of partners loans to the partnership.
193
1931
Payment of partners loans entitlements as per balances on their capital and current accounts procedure
and accounting entries.
Open a realization account and transfer all the assets with an exception of cash and bank balances to
this account the entry is;
Dr. Realization account
Cr- Assets account with book values of the assets
This entry closes all assets accounts in the ledger.
When Assets are sold in cash
Dr – Bank /cash account
Cr- Realization account with the proceeds received
3. If a partner takes over an asset
Dr- Partners capital account
Cr- Realization with the agreed take over value
4. When a liability is paid
Cr- Bank account with actual amount paid
5. If a partner takes over a liability
Cr – Capital account of the partner
6. If the amount of a liability paid differ from the book value
Dr – realization account
Cr- Liability account with the excess paid
Dr – Liability account
Cr- Realization account (with the discount on the liability
194
1941
7. Dissolution expenses
Dr- Realization account
Cr – Bank account with the amount paid
8. Realization account balances
Dr – Realization account
Cr – Capital accounts with a II on realization
(b) In case of a loss on realization
Dr – Capital accounts
Cr- Realization account with a loss on reduction
9. Transfer the current account balances of the partners into the capital accounts.
10. Close the capital accounts
Dr- Capital accounts
Cr- Bank account
Realization account
Assets (NBV) xx Sales xx

Dissolution expenses xx Dissolution on creditors xx
Excess on creditors xx Assets taken xx
Share of profit xx Share of loss xx
xxx xxx
195
1951
Garner Vs murry rule
In case a partner is insolvent and thus unable to meet his dues on dissolution i.e. Dr- Balance on his
capital account
The solvent partners share the deficiency in the ratio of their capital account balances prior to dissolution
unless otherwise stipulated in the deed.
INCOMPLETE RECORDS.
Incomplete records is the term used for any system of bookkeeping which does not use full double entry.
There may be many reasons why a firm has incomplete records, but whatever the reason, accounts must
be prepared using a number of techniques. Once you have mastered these techniques, you should find
incomplete records problems more straightforward. It should be said that the techniques needed to
complete examination problems are also used in practice when a client’s records are incomplete.
Techniques
The techniques to be mastered are:
preparing an opening Statement of Affairs;

preparing the main control accounts;
preparing the Bank Account;
calculating gross profit;
drafting the Profit and Loss Account;
drafting the Balance Sheet.
It is also important to ensure that you have a sound knowledge of the double entry required for
transactions involving sales (both for cash and on credit), purchases (again both for cash and on credit),
as well as cash transactions for expenses and other cash received (usually capital introduced). Solving
incomplete records problems is a matter of working through each of these steps. If you use standard
workings for each, and insert the figures which are given in the question, the problem becomes one of
finding the missing figures. Let’s consider each of the steps and the relevant workings.
Opening Statement of Affairs

When a Balance Sheet has to be prepared using estimated values, we refer to it as a Statement of
Affairs. The first step is to set out the main headings which are used in a Balance Sheet. We can then
use the available information to obtain the relevant values. The main headings which are needed are:
Fixed Assets
Current Assets
Stock
Debtors
Cash and Bank
Current Iiabilities
Creditors
Bank overdraft
196
1961
Loans
Capital
Make sure you have learned these headings before your exam.
Your first task is to set out these headings and then review the question for the relevant information so
that you can insert the values for as many figures as possible.
Usually there will be two values missing:
Fixed assets and capital

As capital is the balancing figure, it is usually necessary to work out the value for fixed assets. A
methodical approach is important here. The question will usually tell you when the various assets where
acquired, as well as the depreciation policy. Your task is to calculate the net book value at the date of the
Statement of Affairs by starting with the year of acquisition and applying the depreciation policy to
obtain the net book value at the end of that year. Repeat that process for each year until you have
reached the date of the Statement of Affairs. Once you have the value for fixed assets, the capital
balance can be calculated:
Fixed assets + current assets – current liabilities = capital
Control Accounts
Control accounts are needed for :
debtors
creditors
cash
An article in the May edition of the Technician Bulletin on the topic of Reconciliations described how to
construct control accounts for debtors and creditors.
Using the same principle, the Cash Account can be constructed as follows:
The opening balance for cash will be obtained from the Statement of Affairs. This will be increased by
the debit entry for cash received, and reduced by the credit entries for amounts lodged to the bank and
amounts paid as cash expenses and drawings.
This means that the three control accounts are as shown in Figure 1.
Figure 1
Debtors Control
Opening balance b/d xxxxx Cash received from debtors xxxxx

Sales xxxxx Discount allowed xxxxx
Closing balance c/d xxxxx
xxxxx xxxxx
Balance b/d xxxxx

Creditors Control
197
1971
Payments to suppliers xxxxx Opening balance b/d xxxxx
Discount received xxxxx
Closing balance c/d xxxxx Purchases xxxxx
xxxxx xxxxx
Balance b/d xxxxx

Cash Account
Opening balance b/d xxxxx Lodgements xxxxx

Cash received xxxxx Cash expenses xxxxx
Drawings xxxxx
Closing balance c/d xxxxx
xxxxx xxxxx
Balance b/d xxxxx

Bank Account
The opening balance for the Bank Account will also be obtained from the Statement of Affairs. You
need to take care however as the balance may be either a debit (cash at bank) or a credit (overdrawn).
The value of cash lodged will be a debit entry, and the value of cheques issued will be a credit entry.
The closing balance will be the balancing figure. Once again make sure you take care over whether the
balance is cash on hand or an overdraft. The layout for the bank account is shown in Figure 2.
Figure 2
Bank Account
Opening balance b/d(if cash at bank) xxxxx Opening balance (if overdrawn)
xxxxx
Lodgements xxxxx Cheques issued
xxxxx
Closing balance c/d (if overdrawn) xxxxx Closing balance c/d (if cash at bank)
xxxxx
xxxxx Balance b/d (if overdrawn) xxxxx
Balance b/d (if cash at bank) xxxxx

Gross profit
Gross profit is calculated by deducting cost of sales from the value of sales. Questions often require the
calculation of either margin or mark up.
Margin
If margin is to be used, the value of sales will already have been calculated as the total of credit sales
(derived from the Debtors Control Account) and cash sales (derived from the Cash Account). The gross
profit is found by applying the % margin to the value of sales.
For example, if sales are £80,000 and the margin is 20%, the gross profit will be £80,000 x 20% =
£16,000.
In questions which involve this calculation, you may have to derive the closing stock value from the
resulting cost of sales. The opening value of stock will be taken from the Statement of Affairs. The
value of purchases will be the total of credit purchases (derived from the Creditors Control Account) and
cash purchases (derived from the Cash Account). Closing stock will be the balancing figure in the
calculation:
198
1981
Sales – cost of sales = gross profit
Cost of sales = opening stock + purchases – closing stock
Mark Up
First of all remember that mark up is gross profit expressed as a percentage of cost of sales. Questions
requiring a mark up calculation will have provided all the figures to calculate cost of sales. The problem
will be that the Debtors Control Account cannot be completed as two figures are missing — one of
which is sales.
In this case calculate the gross profit as follows:
Cost of sales x mark up % = gross profit
Therefore, total sales = cost of sales + gross profit and credit sales = total sales – cash sales.
Profit and Loss Account

When constructing the Profit and Loss Account, there are two main points to remember. The first is that
expenses must include both cash expenses and expenses paid by cheque. The second is that depreciation
must be included — but remember to include any assets acquired during the year!
Balance Sheet
Preparing the Balance Sheet should be relatively straightforward.
Fixed assets
= value from the statement of affairs

+ new assets
– depreciation for period
Current assets
Stock = Closing stock as calculated in cost of sales

Debtors = Closing balance on the Debtors Control Account
Cash = Closing balance on the Cash Account
Bank = Closing balance on the Bank Account (if cash on hand)
Current Liabilities
Creditors = Closing balance on the Creditors Control Account

Bank = Closing balance on the Bank Account (if overdrawn)
Capital = Balancing figure which can be confirmed as:
opening balance from the Statement of Affairs

+ profit from the Profit and Loss Account
– drawings
+ capital introduced
Summary
Steps in completing incomplete records
complete the opening statement of affairs;
set out the standard workings;
insert the figures from the question;
calculate the missing figures;
199
1991
draft the required accounting statements.
CONTROL ACCOUNTS.
Controls accounts (totals accounts) is a summary account appearing in the general ledger for the
purpose of controlling all the details of entries of the ledger to which it relates e.g. Debtors/account
receivable control account, creditors/ accounts payable control account.
The balance in the debtors control account be the same as the totals of the individual balances
extracted from the debtors subsidiary ledgers (sales ledger). Similarly, the creditors control accounts
balance should also reconcile with the sum of all the creditors individuals balances extracted from the
creditors subsidiary ledger (purchase ledger)
Uses of Control Accounts

Helps in location of errors
Facilitate detection of fraud
Enhances management efficiency
Helps determination of credit sales and purchases
Enhances decision making
Illustration: The following information relates to creditors of XYZ Ltd

Name Balance (Ugx)
MX Ltd 2,500,000
ABC Ltd 3,000,000
The creditors control account would also have a balance of Ugx 5,500,000
Format
Sales Ledger (Debtors) control Account

Credit Sales XX
Cash/cheque received XX
Debtors, cheque dishonored XX
Discount Allowed xx
Debtors refund for over Bad debts written off xx
Payment XX Sales returns xx
xx Balance C/F xx
xx
Note: The balance c/f would be agreeable with total of accounts receivable ledger
Purchase Ledger (creditors) control Account
200
2002
Returns out wards Balance B/F
Payment to creditors Credit Purchases
Discount received Cheques to creditors dishonored
Refunds from creditors for over payment
Balance C/F
XX XX
illustration1
The following information was extracted from the books of Kiwani Ltd for the year ended 31/12/2005.
Ugx
Debtors Bal. 01/01/2005 30,000
Creditors Bal. 01/01/2005 25,000
Cash paid to suppliers 150,000
Cash received from debtors 180,000
Credit purchases 300,000
Discount received 10,000
Credit sales 350,000
Discount Allowed 14,000
Debtors cheque dishonored 20,000
Purchase returns 16,000
Sales returns 8,000
Prepare the debtors and creditors control accounts for the period.
Illustration2
st
The following details were extracted from the books of AB & Sons Ltd. The financial year runs from 1
st
/January/2006 to 31 December/2006.
You are required to determine the value for credit ales and credit purchases for AB & Sons Ltd.
Ugx
Creditors bal. 31/12/2006 40,000
Debtors Bal. 31/12/2006 60,000
Cheques paid to creditors and dishonored 80,000
Debtors cheques dishonored 50,000
Interest charged by creditors 10,000
Cash received from debtors 100,000
Cash paid to creditors 90,000
Debtors Bal. 01/01/2006 70,000
Creditors bal. 01/01/2006 30,000
201
2012
Purchase returns 12,000
Sales returns 16,000
Sales discounts 8,000
Cheques paid to creditors 50,000
Purchase discounts 6,000
Cheques received from debtors 120,000
Example 1
Tony Cook is a self employed plumber. His financial details for the years ended 1999 and 2000 showed:
202
2022
1999 2000
Assets:
Motor Vehicle 6,500 5,500
Equipment 2,500 2,000
Stock 750 1,650
Cash at Bank 900 1,300
10,650 10,450
Less Creditors 750 650
£9,900 £9,800
Tony’s drawings for the year were £10,650. He had sold some shares for £1,050, the proceeds of which
he had paid into his business bank account.
Thus, profit for the year can be calculated as:
SHS
Capital at start of the period 9,900
Add capital introduced (sale of shares) 1,050
10,950
Drawings for period 10,650
300
Capital at the end of the period 9,800
Net profit 9,500
SHS
so: Capital at start of year 9,900
Add capital introduced 1,050
10,950
203
2032
Add profit for year 9,500
20,450
Less drawings 10,650
Capital at end of year 9,800
The balance sheet figures should be supported by reconciled bank statements, unpaid sales invoices
totalling the sum included as debtors, unpaid purchase invoices totalling creditors, and receipts for
payments for fixed assets along with depreciation calculations.
Example 2
A similar approach can be used to determine sales and purchases totals, when given a cash book showing
receipts and payments, together with opening and closing debtors and creditors. The following illustrates
the use of such techniques.
John Risdon is a self employed motor engineer. He maintains a cash book to record his business receipts
and payments. The following is a summary of the cash book for year ended 31 December 2000:
Cash Book
£ £
Balance b/d 1,500 Drawings 14,100
Cash received
from work done 39,300 Materials 17,300
Sale of own car 4,000 Van running

expenses 4,100
Wages, trainee 5,100
Admin 250
Tools and
consumables 600
General expenses 350
£44,800 Balance c/d 3,000
£44,800
Assets and liabilities at 31 December 1999 and 2000 were:
204
2042
1999 2000
£ £
Motor van 7,500 5,000
Stock materials 1,350 1,450
Debtors for work done 3,400 3,750
Creditors for supplies 1,250 1,450
Van insurance pre-paid 160 170
The motor vehicle had been purchased second hand on 1 January 1999 for £10,000 and is subject to
depreciation at 25% per annum, straight line, (that is, it is being written off over four years, its expected
useful economic life).
This information can be used to produce statements for the year ended 31 December 2000.
Opening capital can be arrived at by using the “accounting equation”.
Assets:
Motor van 7,500
Stock 1,350
Debtors 3,400
(see cash book summary)
Cash at bank 1,500
Pre-payments 160
13,910
Less creditors 1,250
Capital £12,660
Work done during the year:
205
2052
£
Cash received during the year 39,300
Less owed at start of the year 3,400
35,900
Add owed at end of the year 3,750
£39,650
This can also be shown in the form of a control account:
Sales Ledger Control

2000 £ 2000 £
Balance b/d 3,400 Receipts from

debtors (cash book) 39,300
2000 Work done 39,650
Balance c/d 3,750
43,050
43,050
2001 Balance b/d 3,750
Likewise the purchases and motor van running costs (where, because opening and closing creditors and
debtors, the insurance pre-payment; and the actual amounts paid are all known, the charge for the year
can be calculated).
Purchase Ledger Control

£ £
2000 Payments to creditors for 2000 Balance b/d 1,250

materials 17,300
2000 Purchases 17,500
Balance c/d 1,450

18,750
18,750
2001 Balance b/d 1,450
206
2062
Motor Van Running Costs
£ £
2000 Balance b/d (pre-payment) 160 2000 Charge for year 4,090
2000 Payments 4,100 Balance c/d 170
4,260 4,260
2001 Balance b/d 170
Notes for Preparation of the Final Accounts

NB: The difference between the opening and closing motor van valuation (£7,500 – £5,000 = £2,500, is
the depreciation charge for the year, ie: (£10,000 x 25% per annum).
The proceeds from the sale of the personal motor vehicle, which were paid into the business bank
account, represent capital introduced. Other costs are shown in the summary cash book extract.
We can now draft the final accounts for the year ended 31 December 2000.
Trading and Profit and Loss Account of J Risdon for Year Ended 31 December 2000
Work done 39,650
Opening stock of materials 1,350
Add purchases 17,500
18,850
Less closing stock of materials 1,450
Cost of materials used 17,400
Gross Profit 22,250
Wages 5,100
Motor vehicle running costs 4,090
Administration 250
207
2072
Tools and consumables 600
General expenses 350
Depreciation motor van 2,500
12,890
Net profit for year £9,360
Balance Sheet as at 31 December 2000

Cost Depreciation Net Book
£ £ £
Fixed assets:
Value
Motor van 10,000 5,000 5,000
Current assets:
Stock 1,450
Debtors 3,750
Cash at bank 3,000
Pre-payment 170
8,370
Less:
Current liabilities:
Creditors 1,450
208
2082
Net current assets 6,920
Total assets
less current liabilities 11,920
Financed by:
Opening capital 12,660
Add capital introduced 4,000
16,660
Add profit for year 9,360
26,020
Less drawings 14,100
11,920
MANUFACTURING ACCOUNTS
(ACCOUNTS FOR MANUFACTURING FIRMS)
Manufacturing firms or organizations transform or process raw material inputs into finished goods or
products, they add to the raw material inputs but ------not cheaply merchandising. After manufactured
goods are sold to customers through wholesale or the firms’ retailing them through their own outlets.
Accounts maintained by manufacturing firms are quite different from those maintained by retailing firms.
Manufacturing firms incur manufacturing costs and therefore have to keep Cost Accounts.
Manufacturing costs are broadly divided into two.
1. DIRECT COSTS
209
2092
They are costs that are traceable or can be directly liked to a particular cost centre. For example;
Department, a process, a job and so on. Direct costs can also be directly charged or allocated to
cost units.
Cost centre are cost units. They consist of direct material (raw materials), direct------(direct
wages) and direct expenses. The ----of direct costs is called “Prime cost”.
2. OVERHEAD COSTS (Indirect costs).
There are indirect costs that can not easily be traced to a particular cost centre or cost unit.
Overhead costs include; indirect material costs, indirect labour costs and indirect expenses.
Since overhead costs can not be linked to or associated with only one cost centre, they must be
apportioned to cost centers and thereafter to cost units using suitable bases.
Sometimes manufacturing costs other than material costs are called “conversion costs”.
Examples of Direct costs and Indirect costs.
NOTE
Costs can also be categorized as product costs and period costs. Product costs are manufacturing
costs that should be included in the cost of sales and closing stock.
Period costs are costs that accrue or charged according to the period that the goods are sold. There
are costs that are written off in profit and loss account. Period costs mostly include; office and
administrative costs, selling and distribution costs and financial costs (Bank charges). Period costs
should not be included under cost of goods sold. That period costs can also be classified as
variable costs and fixed costs.
Variable costs.
These are costs that change when output increase or decreases.
Fixed costs.
These are costs that do not change irrespective of whether output is increased or reduced. A fixed
cost for 1 unit is the same cost for 1 million more units.
MANUFACTURING ACCOUNT / STATEMENT

Costs related to manufacturing are collected in the manufacturing account or statement during a
stated period. It shows the cost of manufactured goods.
210
2102
CONSTRUCTION OF A MANUFACTURING ACCOUNT OR STATEMENT.
A manufacturing account or statement is constructed from the following:
i. Cost of raw materials consumed or used. The cost of raw material consumed or used in
production is determined by adding purchases of raw materials to ---stock and subtracting
closing stock of raw materials.
ii. Direct labour cost / wages. Direct wages are paid to workers directly concerned with
production and their wages are traceable to a cost center. Direct labour cost / direct wages
are added to the cost of raw materials consumed.
CORRECTION OF ERRORS
Types of Errors in Accounting
1.1. It is not really possible to draw up a complete list of all the errors which might be made by
bookkeepers and accountants. Even if you tried, it is more than likely that as soon as you finished ,
someone would commit a completely new error that you had never even dreamed of! However, it
is possible to describe five types of error which cover most of the errors which might occur. They
are as follows.
Errors of transposition
Errors of omission
Errors of principle
Errors of commission
Compensating errors
1.2. Once an error has been detected, it needs to be put right.

(a) If the correction involves a double entry in the ledger accounts, then it is done by using a
journal entry in the journal.
(b) When the error breaks the rule of double entry, then it is correct by the use of a suspense
account as well as a journal entry.
1.3. Topics covered in this chapter

211
2112
(a) The five common types of error
(b) Review journal entries (which we briefly looked at earlier in this text)
(c) Define a suspense account, and describe how it is used.
Errors of transposition
Key Terms
An error of transposition is when two digits in an amount are accidentally recorded the wrong way
round.
1.4. For example, suppose that a sale is recorded in the sale account as $6,843, but it has been
incorrectly recorded in the total receivable account as $ 6,483. The error is the transposition of the
4 and the 8. The consequence is that total debits will not be equal to total credits. You can often
detect a transposition error by checking whether the difference between debits and credits can be
divided exactly by 9. For example, $6,843 - $6,483 = $ 360; $ 360 ÷ 9 = 40.
Errors of omission
Key Terms
An error of omission means failing to record a transaction at all, or making a debit or credit entry , but
not the corresponding double entry.
1.5. Here is an example

(a) If a business receives an invoice from a supplier from $520, the transaction might be omitted
from the books entirely. As a result, both the total debits and the total credits of the business
will be out by $250.
(b) If a business receives an invoice from the supplier for $300, the payables control account might
be credited, but the debits entry in the purchases account might be omitted. In this case, the total
credits would not equal total debts (because total debts are $300 less than they ought to be).
212
2122
Errors of principle
Key Terms
An error or principle involves making a double entry in the belief that the transaction is being entered in
the correct accounts, but subsequently finding out that the accounting entry breaks the ‘rules’ of an
accounting principle or concept.
1.6. A typical example of such an error is to treat certain revenue expenditure incorrectly as capital
expenditure.
(a) For example, repairs to a machine costing $150 should be treated as revenue expenditure, and
debited to a repairs account. If , instead, the repair costs are added to the cost of the non-current asset
(capital expenditure) an error of principle would have occurred. As a result, although total debits still
equal total credits, the repairs account occurred. As a result , although total debts still equal total
credits , the repairs account is $150 less than it should be and the cost of the non-current assets is $150
greater than it should be .
(b) Similarly, suppose that the proprietor of the business sometimes takes cash out of the till for this
personal use and during a certain year these withdrawals on account of profit amount to $280. The
book-keeper states that he has reduced cash sales by $280 so that the cash book could be made to
balance. This would be an error of principle, and the results of it would be that the withdrawal account
is understated by $280, and so is the total value of the sale in the sales account.
Errors of commission
Key Terms
Errors of commission are where the bookkeeper makes a mistake in carrying out his or her task of
recording transactions in the accounts
1.7. Here are two common types of errors of commission
213
2132
(a) Putting a debit entry or a credit in the wrong account. For example, if telephone expenses of
$540 are debited to the electricity expenses amount, an error of commission would have
occurred. The result is that although total debits and total credits balance, telephone expenses are
understated by $540 and electricity expenses are overstated by the same amount.
(b) Errors of casting (adding up). The total daily credit sales in the sales day book should be $28,425,
but are incorrectly added up as $28,825. The total sales in the sales day book are then used to
credit total sales and debit total receivables in the ledger accounts. Although total debits and
total credits are still equal, they are incorrect by $400.
Compensating errors
Key terms
Compensating errors are errors which are, coincidentally, equal and opposite to one another
1.8. For example, two transposition errors of $540 might occur in extracting ledger balances, one on
each side of the double entry. In the administration expenses account, $2,282 might be written
instead of $2,822, while in the sundry income account, $8,391 might be written instead of $8,931.
Both the debits and the credits would be $540 too low, and the mistake would not be apparent when
the trial balance is cast. Consequently, compensating errors hide that fact that there are error in the
trial balance.
2. THE CORRECTION OF ERRORS

Journal entries
2.1. Some errors can be corrected by journal entries. To remind you, the format of a journal entry is:
Date Folio Debit Credit
Account to be debited $ $
Account to be credited X
(narrative to explain the transaction ) X
214
2142
Exam focus point
As already indicated, you are often required in an exam to present answer in the form of journal entries.
2.2. The journal requires a debit and an equal credit entry for each ‘transaction’, i.e for each
correction. This means that if total debts equal total credits before a journal entry is made then
they will still be equal after the journal entry is made. This would be the case if, for example, the
original error was a debit wrongly posted as a credit and vice versa.
2.3. Similarly, if total debits and total credits unequal before a journal entry is made, then they will
still be unequal (by the same amount) after it is made .
2.4. For example, a bookkeeper accidentally posts a bill for $40 to the local taxes account instead of to
the electricity account. A trial balance is drawn up, and total debits are $40,000 and total credits
are $40,000. A journal entry is made to correct the misposting error as follows.
1.7.20X7
Debit Electricity account S$40
Credit Local taxes account $40
To correct a misposting of $40 from the local taxes account to electricity account
2.5. After the journal has been posted, total debits will still be $40,000 and total credits will be $40,000.
Total debits and totals credits are still equal.
2.6. Now suppose that, because of some errors which has not yet been detected, total debits were
originally $40,000 but total credits were $39,900. it the same journal correcting the $40 is put
215
2152
through, total debits will remain $40,000 and total credits will remain $39,900. Total debts were
different by $100 before the journal , and they are still different by $100 after the journal.
2.7. This means that journals can only be used to correct errors which require both a credit and (an equal)
debit adjustment.
2.8. Examples: Journal Entries

Listed below ar five errors which were used as examples earlier in this chapter. Write our the journal
entries which would correct these errors.
(a) A business receives an invoice for $250 from a supplier which was omitted from the books
entirely.
(b) Repairs worth $150 were incorrectly debited to the non-current asset (machinery) account instead of
the repair account.
(c) The bookkeeper of a business reduces cash sales by $280 because he was not sure what the $280
represented. In fact , it was withdrawal on account of profit.
(d) Telpehone expenses of $540 are incorrectly debited to the electricity account.
(e) A page in the sales day book has been added up to $28,425 instead of $28,825.
2.9. Solution
A Debit Purchases $250
Credit Trade accounts payable $250
A transaction previously omitted
B Debits Repairs account $150
Credit Non-current asset (machinery ) a/c $150
The correction of an error of principle: Repairs costs incorrectly added to non-current

asset costs
216
2162
C Debit Withdrawals on account $280
Credit sales $280
An error of principle, in which sales were reduced to compensate for cash withdrawals
not accounted for
D Debit Telephone expenses $540
Credit Electricity expense $540
Corrections of an error of commission: Telephone expenses wrongly charged to the

electricity account
E Debits Trade accounts receivable $400
Credit Sales $400
The correction of a casting error in the sales day book
($28,825 - $28,425 = $400)
Use of journal entries in examinations
2.10. Occasionally an examination question might ask you to ‘journalize’ a transaction (i.e write it out
in the form of a journal entry), even though the transaction is perfectly normal and nothing to do
with an error. This is just the examiner’s way of finding out whether you know your debits and
credits. For example:
Question : A business sells $400 of goods on credit. Journalize the
transaction
Answer
Debit : Trade accounts receivable $500
Credit : Sales $500
217
2172
Good to the value of $500 sold on credit
2.11. No error has occurred here, just a normal credit sale of $500. By asking you to put it in the
form of a journal, the examiner can see that you understand the double-entry bookkeeping.
Suspense accounts
Key
A suspense account is an account showing a balance equal to the difference in a trial balance.
2.12. A suspense account is a temporary account which can be opened for a number of reason . The
mot common reasons are as follows.
(b) A trial balance is drawn up which does not balance (i.e total debits do not equal total credits).
(c) The bookkeeper of a business knows where to post the credit side of a transaction, but does
not know where to post the deit (or vice versa). For example, a cash payment might be made
and must obviously be credited to cash. But the bookkeeper may not know what the payment is
for, and so will not know which account to debit.
2.13. In both these cases , a temporary suspense account is opened up until the problem is sorted out.
The next few paragraphs explain exactly how this works.
Use of suspense account: when the trial balance does not balance
2.14. When an error has occurred which results in an imbalance between total debit and total credits in
the ledger accounts, the first step is to open a suspense account. For example, an accountant
draws up a trial balance and finds that total debits exceed total credits by $162.
2.15. He knows that there is an error somewhere , but for the time being he opens a suspense account
and enters a credit of $162 in it. This serves two purposes.
(a) As the suspense account now exists, the accountant will not forget that there is an error (of
$162) to be sorted out.
(b) Now that there is a credit of $162 in suspense account, the trial balance balances.
218
2182
2.16. When the cause of the $162 discrepancy is tracked down, it is corrected by means of a journal
entry. For example , the credit of $162 should be to purchases. The journal entry would be :
Debit Suspense a/c $162
Credit Purchases $162
To close off suspense a/c and correct error
2.17. Whenever an error occurs which in total debits not being equal to total credits, the first step an
accountant makes is to open up a suspense account. Three most example are given below.
2.18. Examples : Transposition error

The bookkeeper of Mixem Gladly Co made a transposition error when entering an amount for sales in
the sales account. Instead of entering the correct amount of $37,453.60 he entered $37,543.60,
transposing the 4 and 5. The trade accounts receivable were posted correctly, and so when total debits
and credits on the ledger accounts were compared , it was found that credits exceeded debit by
$(37,543.60 – 37,453.60) = $90.
2.19. The initial step is to equalize the total debits and credits by positing a debit of $90 to a
suspense account.
2.20. When the cause of the error is discovered, the double entry to correct it should be logged in
the journal as;
Debit Sales $90
Credit Suspense a/c $90
2.21. Example: Error of omission

When Guttersnipe Builders paid the monthly salary cheques to its office staff, the payment of $5,250
was correctly entered in the cash account, but the bookkeeper omitted to debit the office salaries
account. As a consequence, the total debit and credit balances on the ledger accounts were not
equal, and credits exceeded debits by $5,250.
219
2192
2.22. The initial step in correcting the situation is to debit $5,250 to a suspense account, to equalize
the total debits and total credits.
2.23. When the cause of the error is discovered, the double entry to correct it should be logged in the
journal as:
Debit Office salaries account $5,250
Credit suspense a/c $5,250
2.24. Example: Error of commission

A bookkeeper might make a mistake by entering what should be a debit as a credit , or vice versa.
For example, a credit customer pays $460 of the $660 he owes to Ashdown Tree Felling Contractors,
but Ashdown’s bookekeeper debits $460 on the receivable account in the nominal ledger by mistake
instead of crediting the payment received.
2.25. The total debit balances in Ashdown’s ledger accounts would now exceed the total credits by
2 x $460 = $920. The initial step in correcting the error would be to make a credit entry of $920in
a suspense account. When the cause of the error is discovered , it should be corrected as follows.
Debit Suspense $920
Credit Trade accounts receivable $920
To close off suspense account and correct error of commission
2.26. In the receivables control account in the normal ledger , the correction would appear therefore
as follows
Receivables control account
220
2202
$ $
Balance /f 660 Suspense a/c: error 920

corrected
Payment incorrectly 460 Balance c/f 200

debited
1,120 1,120
Use of suspense account: not knowing where to post a transaction
2.27. Another use of suspense accounts occur when a bookkeeper does not know where to post one
side of a transaction. Until the mystery is sorted out, the entry can be recorded in a suspense
account. A typical example is when the business receives cash through the post from a source
which cannot be determined. The double entry in the accounts would be a debit in the cash book,
and a credit to a suspense account.
2.28. Example: Not knowing where to post a transaction

Windfall Garment received a cheque in the post for $620. The name on the cheque is R J J Beasley,
but Windfall Garments have no idea who this person is, nor why he should be sending $620. The
bookkeeper decides to open a suspense account, so that the double entry for the transaction is:
Debit Cash $620
Credit Suspense a/c $620
2.29. Eventually, it transpires that the cheque was in payment for a debit owed by the Haute account
Corner Shop and paid out of the proprietor’s personal bank account. The suspense account can
now be cleared , as follows.
Debit Suspense a/c $620
Credit Trade accounts receivable $620
221
2212
Suspense accounts might contain several items
2.30. If more than one error or unidentifiable posting to a ledger account arises during an accounting
period, they will all be merged together in the same suspense account. Indeed, until the causes of
the errors are discovered, the bookkeepers are unlikely to know exactly how many errors there are.
An examination question might give you a balance on a suspense account, together with enough
information to make the necessary corrections leaving a nil balance on the suspense account and
correct balance on various other accounts. In practice, of course, finding these errors is far from
easy!
2.31. It must be stressed that a suspense account can only be temporary. Posting to a suspense
account are only made when the bookkeeper doesn’t know yet what to do, or when an error has
occurred. Mysteries must be solved ,and errors must be corrected. Under no circumstances should
there still be a suspense account when it comes to preparing the balance sheet of a business. The
suspesen account must be cleared and all the correcting entries made before the final accountant
are down up.
2.32. This question is quite comprehensive. See if you can tackle it.
Question 1
As the year end of T Down & Co, an imbalance in the trial balance was revealed which resulted in the
creation of a suspense account with a credit balance of $1,040.
Investigation revealed the following errors.
(j) A sale of goods on credit for $1,000 had been omitted from the sales account.
(ii) Delivery and installation costs of $240 on a new item of plant had been recorded as a
revenue expense.
(iii) Cash discount of $150on paying a creditor, JW, had been taken, even though the payments
was made outside the time limit.
(iv) Inventory of stationary at the end of the period of $240 had been ignored.
222
2222
(v) The purchase returns day book included a sales credit note for $230 which had been
entered correctly in the account of the debtor concerned , but included with purchase returns
in the nominal ledger.
Required
(a) Prepare journal entries to correct each of the above errors. Narratives are not required
(b) Open a suspense account and show the corrections to be made.
(c) Prior to the discovery of the errors, T. Down and Co’s gross profit for the year was calculated
at $35,750 and the net profit for the year at $18,500.
Calculate the revised gross and net profit figures after the correction of the errors.
Answer
(a)
Dr $ Cr $
i Debit Suspense a/c 1,000
Credit Sales 1,000
ii Debit Plant 240
Credit Delivery cost 240
iii Debit Cash discount 150
Credit JW a/c 150
iv Debit Stock of stationery 240
Credit Stationery expense 240
v Debit Suspense a/c 500
Credit Purchase 500
Debit Purchase returns
Credit Sales returns 230
Suspense a/c 230 460
SUSPENSE A/C
(b
$ $
i Sales 1,000 End of year balance 1,040
ii Purchase 500 (vi) Purchase returns 460
223
2232
/sale returns
1,500 1,500
(c)
$
Gross profit originally reported 35,750
Sales omitted 1,000
Plant costs wrongly allocated 240
Incorrect recording of purchases 500
Sales credit note wrongly allocated (460)
Adjusted gross profit 37,030
$
Net profit originally reported 18,500
Adjustments to gross profit $ (37,030 – 1,280
35,750)
Cash discount incorrectly taken (150)
Stationery stock 240
Adjusted net profit 19,870
Note: It has been assumed that the delivery and installation costs on plant have been included in
purchase.
SUMMARY
There are five types of error

- Errors of transposition
- Errors of omission
- Errors of principle
- Errors of commission
- Compensating errors
Errors which leaves total debits and total credits on the ledger accounts in balance can be
corrected by using journal entries. Otherwise , a suspense account has to be opened first (and
a journal entry used later to record the correction of the error, clearing the suspense account in
the process).
224
2242
Suspense accounts , as well as being used to correct some errors, are also opened when it is
not known immediately where to post an amount. When the mystery is solved , the suspense
account is closed and the amount correctly posted using a journal entry.
Suspense accounts are only temporary. None should exist when it comes to drawing up the
financial statements of the end of the accounting period.
Test yourself
1. List five types of error made in accounting

2. What is the format of a journal entry?
3. Explain what suspense account is
4. What must be done with a suspense account before preparing a balance sheet ?
5. Sales returns of $460 have inadvertently been posted to the purchase returns, although the correctly
entry has been made to the accounts receivable control. A suspense account need to be set up for
how much?
A $460 debit
B $ 460 credit
C $ 920 debit
D $ 920 credit
1. Transposition , omission, principle, commission and compensating errors

2. An account showing a balance equal to the difference on a trial balance
3. All errors must be identified and the suspense account cleared to nil
4. C The sales returns of $460 have been credited to accounts receivable and also $460 has been
credited to purchase returns. Therefore, the trial balance needs a debit of 2 x $460 = $920 to
balance.
225
2252
Non-Profit Making Organisations. [NPM]
Introduction
This resource aims to give students help with financial statements from non-profit making organisations
including clubs and societies. The nature of these types of organisations means that students should also
be able to understand
1. Definition of NPM
2. Accounting for NPM
3. Common terms used
4. Accounts prepared
5. Effect of life membership schemes and donations.
What are non-profit making organisations? Are they businesses that make losses? Are they businesses
that are run badly?
Non-profit making organisations are also known as 'not for profit' organisations and this is the name we
give them simply because they want to do something or provide something rather than make more and
more money.
What kind of organisations are we talking about that just want to do something rather than making
money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's Club? They are
probably examples of non-profit making organisations. Here's a bigger list!
Associations
Clubs
Societies
Unions
Charities
Universities
Churches
The members of these organisations are normally the only people interested in them
They are usually very simple organisations:
o Not that many members
o Not a huge amount of money involved
o Not that many activities
In lots of cases the only thing that the Treasurer (the bookkeeper or accountant) of a club or society needs
to do is to keep track of the cash and not a lot more than that. Well, why bother with having to set up a
full set of ledgers for a Youth Club that has, say, 50 members paying subscriptions of £10 a year that
meets 10 times a year and just has one dog show and an annual dinner each year? Not worth the bother is
it?
Jargon buster
The cash account or cash book is called the Receipts and Payments Account and the Trading and Profit
and Loss Account is called the Income and Expenditure Account. Profits are not called profits, they are
226
2262
called surpluses (or deficits if it's a loss) and the capital account isn't the capital account now, it's called
the accumulated fund.
Profit Making Jargon Non-Profit Making Jargon

Cash Book Receipts and Payments Account
Profit and Loss Account Income and Expenditure Account
Profit Surplus
Loss Deficit
Capital Account Accumulated Fund
Let's just accumulate
The capital account is called the Accumulated Fund and that tells us that there are no private owners
who have the right to keep the profits themselves or take an income from the organisation and so on -
non-profit making organisations belong to all of their members together.
Guess what they call the balance sheet, by the way? It's still called the balance
sheet!
Collecting data
What data will a fairly simple club or society collect? For lots of them, they will receive money for:
Subscriptions
Sale of refreshments
Raffles and other competitions
Sale of publications
Annual dinner ticket sales
Interest on deposit account at the bank
Sale of old equipment
Receipts will come from such things as:
Purchase of refreshments
Purchase of raffle prizes
Costs of running an annual dinner
Purchase of new equipment
Rent of hall
In the simplest of all cases, all we need to do at the end of a year is to prepare an account like this:
Receipts Payments
Subscriptions Purchase of refreshments
Sale of refreshments Purchase of raffle prizes
Raffles and other competitions Purchase of publications
Sale of publications Costs of running annual dinner
Annual dinner ticket sales Purchase of new equipment
227
2272
Interest on deposit account at the bank Rent of hall
Sale of old equipment
Then there would be a balance carried down which is either positive or negative depending on whether
they received more than they spent or spent more than they received. Let's put some figures to this
example now to see how it works; but don't forget, we are dealing here with a receipts and payments
account which is the same as a cash book so there are no accruals and prepayments to take into account.
Receipts Payments
Balance b/d 1,250 Purchase of refreshments 923
Subscriptions 1,219 Purchase of raffle prizes 337
Sale of refreshments 704 Purchase of publications 79
Raffles and other competitions 118 Costs of running annual dinner 314
Sale of publications 126 Purchase of new equipment 421
Annual dinner ticket sales 404 Rent of hall 110
Interest on deposit account at the bank 11 Balance c/d 1,962
Sale of old equipment 314
4,146 4,146
That's it! Wasn't too bad was it? Now try a question of your own - very, very similar to the one you just
saw!
For You To Do 1:
Prepare the Receipts and Payments Account for the Russian Culture Society for the year 2004.
Subscriptions 1,346
Purchase of new equipment 512
Costs of running annual dinner 264
Sale of refreshments 591
Purchase of publications 63
Annual dinner ticket sales 530
Purchase of refreshments 804
Interest on deposit account at the bank 15
Rent of hall 112
Sale of publications 142
Purchase of raffle prizes 322
228
2282
Raffles receipts 101
Balance b/d 1,286
Balance c/d 2,192
Now try this - this question looks a lot different but the method is just the same as the previous question.
For You To Do 2:
Prepare the Receipts and Payments account for the Steel Social Club from the following information. As
part of your answer you need to calculate the cash balance c/d
For You To Do 3:
Prepare the Receipts and Payments account for the Kabojja Youth Society for the year ended 31
December 2010 from the following information.
Kabojja Youth Society for the year ended 31/12/10

£
Cash Balances b/d 467
c/d 331
Payments Refreshments 554

New equipment 1576
Rent of hall 360
Local government levy 125
Printing costs 55
Stationery costs 71
Postage and telephone 39
Repairs to equipment 322
Lighting and heating 200
Wages 847
Annual dinner expenses 1085
Lottery prizes 513
Receipts Subscriptions 2311
Sale of annual dinner tickets 1886
Lottery tickets 1093
Refreshments 321
229
2292
Receipts and Payments Account
Clubs and societies prepare a Receipts and Payments Account that just tells us what has been received
and paid in cash.
Let's prepare an Income and Expenditure Account now by looking at a very similar example to but this
time with a couple of adjustments.
a. In horizontal format prepare the IEA for the Kabojja Youth Society for the year 2010 from the
following list of balances and adjustments that follow.
b. In vertical format prepare the IEA for the Kabojja Youth Society for the year 2010 from the
following list of balances and adjustments that follow.
Receipts
Balance b/d 1,307
Rent of hall 101
Purchase of new equipment 516
Purchase of publication 65
Purchase of refreshments 1,004
Subscriptions 1,009
Purchase of raffle prizes 390
Balance c/d
Adjustments
Subscriptions not yet received 161
Annual dinner ticket money still owing 45
Rent of hall paid in advance 11
Worked Example Solution
a. Make sure you agree with this horizontal style IEA:
Kabojja Youth Society Income and Expenditure Account for the period ended 31/12/10
230
2302
Expenditure Income
Rent of hall 90 Subscriptions 1,170
Costs of running annual dinner 290 Raffles receipts 134
Purchase of publication 65 Sale of publications 107
Purchase of refreshments 1,004 Sale of refreshments 682
Purchase of raffle prizes 390 Interest on deposit account at the bank 11
Surplus of Income over Expenditure 758 Annual dinner ticket sales 493
2,597 2,597
Have you spotted this?
This is exactly how it should behave according to double entry bookkeeping principles and it's the same
as this:
Here is how we have dealt with the adjustments - we have shown these adjustments in two ways, side by
side:
1. as a simple calculation, and

2. in ledger account format
Subscriptions: this is revenue
Subscriptions Account
Amount received, shown in the RPA 1,009 IEA 1,170 RPA 1,009
Plus amount is owing for this year but not yet received 161 Accrual c/d 161
Amount that should have been received during the year 1,170 1,170 1,170
Receipts and payments. [ RPA]

231
2312
Annual Dinner: this is revenue
Annual Dinner Account

Amount received, shown in the RPA 448 IEA 493 RPA 448
Plus amount is owing for this year but not yet received 45 Accrual c/d 45
Amount that should have been received during the year 493 493 493
Rent of Hall: this is a cost
Rent of Hall Account

Amount paid, shown in the RPA 101 IEA 101 RPA 11
Less amount paid in advance 11 Accrual c/d 90
Amount that should have been paid during the year 90 1,170 1,170
b. Now the vertical style IEA for the Kabojja Youth Society for 2010.
Kabojja Youth Society Income and Expenditure Account for the period ended 31/12/10
Subscriptions 1,009
plus Subscriptions not yet received 161 1,170
plus Annual dinner ticket money still owing 45 493
2,597
Less: costs for the period
Rent of hall 101
less Rent of hall paid in advance 11 90
Purchase of publication 65
Purchase of refreshments 1,004
Purchase of raffle prizes 390 1,839
Surplus/(Deficit) for the period 758
Notice how the adjustments have been incorporated very nicely within the vertical format. It is possible
to do the same with the horizontal format but it doesn't look so nice!
232
2322
These examples help us to learn the Golden Rules of Adjustments:
Revenues Costs
Owing but not received in Owing but not paid in
Add to RPA amount Add to RPA amount
the period the period
Received but relates to next Subtract from RPA Paid but relates to next Subtract from RPA
period amount period amount
REVISION QUESTIONS.
1………………..are methods developed for applying fundamental concepts
a) Accounting policies
b) Accounting standards
c) Accounting principles
d) None of the above
2. Costs incurred to facilitate the sale of goods should be charged to;
a) Trading account
b) Profit and loss account
233
2332
c) Balance sheet
3. Which of the following are incorrect when a sole proprietor uses only his financial resources to finance
his business?
(i) Assets = liabilities + owner’s equity

(ii) Assets = Owners equity
(iii) Owner’s equity = Assets – liabilities
(iv) Liabilities = Assets + Capital
(a) (ii) and (iii)
(b) (i), (iii), and (iv)
(c) (ii), and (iv)
(d) (ii)
Use the following information for question 4 and 5
A machine was acquired on 1/12005 at a cost of UGX 20,000,00 expected to be used for 10 years and
then will be disposed off for UGX 1,000,00. It is depreciated using double declining balance method
and the company’s policy is to charge full year’s depreciation in the year of acquisition and none in
the year of disposal.
st st
4. The company’s accounting period begins on 1 January and ends on 31 December, the
st/
depreciation charge for the year ended 31 12/2006 is.
a) UGX 3,200,000
b) UGX 4,000,000
c) UGX 3,800,000
d) UGX 5,200,000
rd
5. On 3 March 2007 the machine was disposed off for a cash amount of Shs 9,500,000. The entries
recorded on receipt of the cash were;
a) Debit cash account and Credit sales account by UGX 9,500,000

b) Debit cash account and Credit machine account by UGX 20,000,000
c) Debit cash account and Credit machine disposal account by UGX 9,500,000
234
234
d) Debit cash account and Credit machine disposal account by UGX 20,000,000
6. The credit customer’s personal accounts are found in the;
a) General ledger
b) Purchase ledger
c) Sales ledger
Use the information given below to answer question 7 and 8
Audit of SORGHUM LTD’S books of accounts revealed that fuel expenses payable had been under-
added by UGX 120,000 and rental income receivable had also been under-added by UGX 120,000.
7. The above error is;
a) An error of complete reversal

b) A compensating error
c) An error of commission
d) An error of principle
8. To correct the error above is SORGHUM LTD’S books,
a) Debit fuel expenses payable accounts and credit rental income receivable account by UGX
120,000
b) Debit fuel expenses payable accounts and credit cash account by UGX 120,000
c) Debit cash account and credit rental income receivable account by UGX 120,000
d) None of the above.
9. Gross profit for an accounting period is credited to the
a) Trading account
b) Capital account
c) Current asset account
d) Drawings account
235
235
10. A provision for doubtful debts is created
a) When debtors become bankrupt

b) When debtors cease to be in business
c) To provide for possible bad debts
d) To write off bad debts
SECTION B: In this section attempt QUESTION TWO and any other two
QUESTION TWO:
The following Trial balance was extracted from the books of A.N.L AGENCIES LTD for the Financial
year ended 31.12.2006
PARTICULARS DEBIT (Shs) CREDIT (Shs)

Premises 21,200
Purchases 43,600
Furniture & Fitting (Cost) 14,000
Inventory 1.1. 2006 3,200
Equipment (cost) 8,000
Bad debts 400
Bank 24,400
Cash 3,640
License Fees 7,960
Trade Debtors 19,000
Salaries 13,060
Returns inwards 7,000
Utilities 9,040
Rent Expenses 3,600
Provision for Bad debts 720
Ordinary Share Capital 32,000
Returns outwards 6,200
236
236
Profit & Loss Account 4,200
Interest rec. on bank deposit 6,200
Sales 83,400
Trade Creditors 20,500
Bank Loan 20,000
Accumulated Depreciation:
- Furniture & Fittings 2,920
- Equipment 1,960
TOTAL 178,100 178,100
The following additional information is also provided;
 Inventory as at 31.12.2006 was valued at Shs. 4,800

 Prepaid salary expenses amounted to Shs. 400
 Interest of Bank deposit of Shs, 800 accrued at the end of the year.
 The figure for utilities includes Shs. 1, 400 relating to purchase of Furniture and Fittings.
 Directors proposed on 30.12.2006 to pay dividend of Shs, 2, 400 to shareholders.
 Depreciation on Furniture and Fittings and Equipment is at a rate of 20% on Reducing Balance
Method.
 Rent of Shs. 1,200 remained outstanding at the end of the year.
REQUIRED:
a) Journalize the additional information provided above ( 4 marks)

b) Prepare A.N.L agencies’ Income – Statement, Statement of Changes in Equity and a Balance-
Sheet at the close of the Financial Year ended 31.12.2006 (16 marks)
QUESTION THREE:
The following data was obtained from CHOGM MANUFACTURES LTD as at December 31, 2006.
UGX 000
Sales 500,000
Raw material purchases 200,000
237
237
Royalty cots 20,000
Carriage in (Raw materials 500
Direct wages 60,000
Indirect factory wages 12,000
Sales returns 3,000
Manufacturing expenses 8,000
Show room expenses 3,000
Depreciation 4,000
Insurance 16,000
Salaries 40,000
Office stationary 100
Bad debts 400
Accounting fees 14,000
Electricity 24,000
The following information is also relevant.
1. Stock at cost Jan 1, 2006 Dec 31, 2006
Raw materials 16, 000 12,000
Finished goods 20,000 24,000
Work in progress 6,000 8,000
Other balances
Accrued salaries 5,000 10,000
Prepaid electricity 4,000 6,000
2. The following overheads should be apportioned as follows
238
238
Factory Head office Sales department
Insurance 20% 60% ¼
Electricity ½ ¼ ¼
Salaries 20% 40% 40%
Depreciation- Factory equipment 1, 000,000
- Office building 1,000,000
- Delivery van 2,000,000
3. The company transfers manufactured goods at cost plus a markup of 10% to cater for factory profit.
Accounting finished goods are inflated by the same percentage.
Required: Prepare CHOGM LTD manufacturing, trading and profit and loss account for the year ended
d December 31, 2006.5
QUESTION FOUR
a) Briefly explain the purpose of bank reconciliation (2marks)

b) The information below relates to GOOD NEWS TRADERS.
Extracts from the Bank Reconciliation Statement for GOOD NEWS for the month of July 2007 indicate
the following:
Uncredited cheques: UGX
Cheque No. 004 1,000,000
Cheque No. 623 4,500,000
Unpresented cheques
Cheque No, 10 500,000
Cheque No. 12 2,500,000
CASH BOOK FOR THE MONTH OF AUGUST 2007
Dr Cr
239
239
Balance b/d 11,000,000 Cheque No. 20 800,000
Cheque No. 2515 1,000,000 Cheque No. 21 1,200,000
Cheque No. 1119 500,000 Cheque No. 22 2,000,000
Cheque No. 990 3,000,000 Cheque No. 23 600,000
Cheque No. 224 2,400,000 Cheque No. 24 200,000
Cash 900,000 Cheque No. 26 1,400,000
Cheque No. 414 1,800,000 Cheque No. 27 2,400,000
Cash 1,300,000 Cheque No. 30 1,800,000
Cheque No. 804 2,100,000 Standing Order - UBL 900,000
Cheque No. 707 3,400,000
Cheque No. 31 1,300,000
Credit Memo – Pamela 900,000 Balance c/d 18,300,000
30,300,000 30,300,000
BANK STATEMENT FOR AUGUST 2007
DETAILS DR CR BALANCE
Balance b/d 8,500,000
Cheque No. 22 2,000,000 6,500,000
24 200,000 6,300,000
623 4,500,000 10,800,000
990 3,000,000 13,800,000
Credit Memo – Pamela 900,000 14,700,000
ChequeNo. 21 2,100,000 12,600,000
12 2,500,000 10,100,000
20 800,000 9,300,000
2515 1,000,000 10,300,000
1119 500,000 10,800,000
Standing Order – MCHOICE 900,000 9,900,000
Cheque No. 224 4,200,000 14,100,000
Cash 900,000 15,000,000
Cheque No. 26 1,400,000 13,600,000
27 2,400,000 11,200,000
6001 5,000,000 16,200,000
240
414 1,800,000 18,000,000
804 2,100,000 15,900,000
31 3,100,000 12,800,000
Credit Memo –Jamila 1,300,000 14,100,000
Cheque No. 28 700,000 13,400,000
Ledger fee 500,000 13,350,000
Dividend 1,500,000 14,850,000
Additional information:
i) Where the figures in the cash book and the bank statement differ the mistakes were made in the
cash book and the corresponding double entries. Assume the cheques are from credit customers or
paid to credit suppliers.
ii) Cheque No. 31 and 804 were entered on the wrong side of the cash book and bank statement
respectively.
Required:
In respect of the books of GOOD NEWS TRADERS
(i) Prepare an updated cash book for the month of August 2007 after receipt of the Bank
statement (9 marks)
(ii) Prepare the bank reconciliation statement as at 31.8 2007
(9 marks)
QUESTION FIVE
a) With relevant examples, distinguish between capital and revenue expenditure

(5 marks)
b) The following information relates to Motor vehicles On January 1, 2002 the company had only
one Range Rover number UAA 1123 Z and its details are shown in the Balance sheet as at that
date as follows.
Cost Accumulated depreciation Net book value
Motor vehicles 52,000,000 32,000,000 20,000,000
Other relevant information includes:
241
2412
The company bought a Tpyata Corona number UAE 1544 A on April1, 2002 at UGX 2, 000,000
On June 4, 2003, The Company bought another car, A Hammer number ‘KIWEDDE 001” at UGX 3,
000,000. The third car a Benz M class number UAJ 1222X was bought at UGX 4,000,000 on September
30, 2004. The Toyota Corona was disposed off on October 5, 2004 for UGX 1, 200,000 and the Hammer
car was disposed off on October 1, 2005 for UGX 1,800,000
All motor vehicles are expected to last for 10 years at the end of which, they will have Zero scrap value.
It is the company’s policy to charge full year’s depreciation in the year of acquisition and none in the
year of disposal using the straight line method. All payments are by cash.
Required: Show how the following accounts will appear at December 31, 2005
i) Motor vehicles (5 marks)
ii) Disposal of motor vehicles account (5 marks)
iii) Accumulated Depreciation on motor vehicles account (5 marks)
SECTION C: Select only one question from this section. Be concise and precise
QUESTION SIX:
a) Explain the stages that accounting go through to prepare final accounts at the end d of a
financial year ( 10 marks)
b) Explain the parties that would be interested in these final accounts clearly explaining how hey
would be of help to them (8 marks)
c) Distinguish between a sale and disposal of non current assets (2 marks)
QUESTION SEVEN:
a) Your are a Head of DAVID INVESTMENT LTD , a company that was engaged to manage
the pre- CHOGM construction work . You have been tasked by the Public accounts committee
to present evidence of proper utilization of resources. Giving examples, explain the ways through
which you would perform the task. (10 marks)
b) Write short but concise notes about each of the following accounts concepts.
242
2422
(i) Going concern concept
(ii) Business entity concept
(iii) Accruals concept
(iv)Monetary concept
(v) Matching concept
QUESTION ONE
Select the best alternative. Answer all sub- parts of this section on your answer sheets NOT o n the
question paper.
i) Which accounting concept requires the practice of crediting inventory to the trading account?
a) Conservatism
b) Consistency
c) Matching
d) Going concern
e) None of the above
ii) Which of the following concepts recognizes income when a customer has accepted the good or
services and is obliged to pay for the items?
a) Accrual
b) Matching
c) Realization
d) Produce
iii) Mina started business with Shs. 24,000,000 cash. She acquired a bank loan of Shs 16,000,000 which
she deposited to a newly opened business bank account. She purchased stock of goods worth shs. 14,
000,000 on credit sold ½ of the goods to Jamal at shs 9,000,000 on credit. She bought and received shs
7,000,000 from debtors through the bank.
Which of the following accounting equations is a correct record of the above?
Asset = Liabilities + Owner’s Equity
a) 51,000,000 = 14,000,0000 + 37,000,000

b) 56,000,000 = 14,000,00 + 42,000,000
c) 52,000,000 = 10,000,000 +42,000,000
243
2432
d) 50,000,000 = 10,000,00 + 40,000,000
e) None of the above.
iv) Which of the following is a correct sequence in an Accounting cycle/process
a) Journals – documents- ledgers – trial balance – final accounts

b) Documents – journals- ledgers – trial balance – final accounts.
c) Trial balance – final accounts – ledgers- journals – documents
d) Ledgers- journals – documents – trial balance – final accounts
v) The following are books of original entry except
a) Worksheet
b) General journal
c) Cashbook
d) Returns inwards book
vi) Rental income received during the year amounted to 650,000=. Outstanding rental income as at
31/12/2007 amounted to Shs. 70,000. The amount to be charged to the P and L a/c is?
a) 880,000Cr
b) 720,000Dr
c) 580,000Dr
d) 720,000Cr
vii) What is the accounting treatment for a decrease in the provision for bad debts?
a) Dr. Income Statement Cr. Accounts Receivables

b) Dr. Bad Debts Cr. Income Statement
c) Dr. Provision of Bad Debts Cr. Income Statement
d) Dr Bad Debts Cr. Provision of Bad Sheet
viii) Accelerated methods of depreciation are used because:
a) Assets are less productive in the early years of their economic life
244
2442
b) Of the legal requirements
c) Of the need to pay more tax earlier than later
d) They are easy
ix) Income received in advance is shown as ………….in the balance sheet.
a) An asset
b) A liability
c) Owners equity
d) Income of the above
x) Which of the following statements most accurately describes a balance sheet?
a) A list of receipts and payments and showing a balance at the end

b) A statement that shows net worth of the organization
c) A list of assets and claims against the organization
d) A statement of total Equity and Liabilities
QUESTION TWO
The following were the transactions of Majumoto Ltd for the month of January 2008
st
1 Jan Majumoto limited started business with cash of UGX 20,000,000 and money at the bank of UGX
30, 000,000
rd
3 Jan purchased goods for UGX 6,000,000 cash
th
6 Jan Bought a Motor vehicle for UGX 10,500,000 by cheque
th
7 Jan Sold goods for UGX 3,000,000 cash.
th
15 Jan purchased more goods on credit from TK Ltd worth UGX 5,000,000.
th
20 Jan obtained a Bank loan of UGX 30,000,000 cash.
245
2452
rd
23 Jan Sold goods for UGX 2, 000,000 on credit to Mary
th
25 Jan Mary paid UGX 800,000 cash.
th
26 Jan goods on credit to Peter for UGX 1,000,000.
29 Jan Purchased goods from John on credit for UGX 3,000,000.
Required
a) Enter above transactions in the company’s General Journals

b) Post the transactions to the relevant ledgers
c) Extract a Trial Balance
QUESTION ONE
Choose the most appropriate answer
st
(i) ABC Ltd paid rent expenses worth UGX 36,000,00 on 1 July 2005 covering a period up to
3oth June 2006. which of the following is the correct adjusting entry for rent expense
relating to the financial year ended 31/12/2005?
a) Dr. Rent expense UGX 18,000,000, Cr, Prepaid rent UGX 36,000,000
b) Dr. Prepaid rent UGX 18,000,000, Cr, Rent expense UGX 18,000,000
c) Dr. P and L UGX 36,000,000, Cr. Prepaid rent UGX 36,000,000
d) Dr. Prepaid rent UGX 24,000,000, Cr. P and L UGX 24,000,00
(ii) The surplus of assets over liabilities is termed as
a) Net profit
b) Excess of income over expenditure
c) Capital
d) Working capital
Use the information below to answer questions between iii and v. Computer Ltd bought a
st
computer on 1 January 2002 for use in business at a cost of UGX 10,000,000. The Company’s policy
was to depreciate the computer at a rate of 20% per annum on cost. On 31/12/2006, the company
decided to dispose off the computer at UGX 6,000,000 since its CPU capacity couldn’t cope up with the
volume of work.
(iii) What was the accumulated depreciation by December 31, 2006?

246
2462
a) UGX 4,000,0000
b) UGX 5,000,000
c) UGX 6,000,000
d) UGX 1000,000
(iv) What was the gain or loss on disposal?
a) UGX 10,000,000
b) UGX
c) UGX00,000
d) UGX 4,000,000
(v) What was the gain or loss on disposal?

a) Loss of UGX 4,000,000
b) Gain of UGX 6,000,000
c) Gain of UGX 4,800,000
d) Gain of UGX 16,000,000
(vi)Which of the following is a mismatch?
a) Accounts receivable
b) Insurance paid in advance
c) Commission fees receivable
d) Un earned incomes
(vii) Which of the following concepts requires debiting of accrued rent to the income statement?
a) Matching concept
b) Materiality concept
c) Periodicity concept
a) Stock loss worth 900,000 was omitted

b) Rent income from Paul Scores & Co. Ltd amounting to UGX 100,000 per month accrued.
c) Depreciate Furniture & Fittings and Motor vehicles at 5% and 20% respectively using reducing
balance method.
d) Interest on Loan is outstanding
e) The allowances for bad debts is to be adjusted to 10% of trade debtors
247
2472
f) Insurance paid was for a period of 15 months
Required:
(i) Journal entries for adjusting information (qa) – (f) (6 marks)
(ii) Prepare the company’s income statement for the year ended 31/12/2006 and the Balance sheet as at
that date. (12 marks)
SECTION B
QUESTION THREE
a) With 3 examples in each case, explain the three elements of the accounting equation
st
b) On 1 January 2006, Maama Nalango started her small business of selling ladies’ Garments
around the small gate of Makerere University Business School. She started with cash of UGX
5,000,000 at hand and cash at bank of UGX 10,000,000
Jan 2. Purchased stock for UGX 3,000,000, paying 60% cash and 40% on credit. Sold 2/3 of the
goods at UGX 2,500,000 on credit
Jan 3. Paid rent UGX 100,000 cash
Jan 10. Received cash payment of UGX 2,000,000 from debtors and paid UGX 1,000,000 cash to
suppliers.
Jan 15. Bought motor vehicle for UGX 6,000,000, paid UGX 2,000,000 by cheque, UGX 1,000,000
cash and promised to pay the balance later.
Jan 20. Sold ½ of the remaining stock of goods for UGX 700,000 collecting cash of UGX
200,000 immediately and the balance to be received later.
Jan 25. Paid electricity UGX 200,000 by cheque
Jan29. Used business cash of UGX 200,000 to buy a trouser for her husband
Jan 31. Acquired a loan of UGX 4,000,000 from a cousin brother to be repaid in two year’s time. It
was deposited on the business bank account.
Required
248
2482
Construct accounting equations for each of the above transactions and at the end, come up with an
elementary balance sheet.
(14 marks)
QUESTION FOUR
Technology Business solution Ltd is a secretarial company with many computers. The company has a
policy of selling its computers which have declined in their economic potential during year. On
31/12/2001, the company had the following balances as regards its computers: -
UGX’ 000
d) Objectivity
viii. The businessman uses the term capital, what can be used by the treasurer of the club to mean the
same things?
a) Sales day book

b) Profit & loss account
c) Three column cash book
d) Petty cash book
ix. Which of the following errors affect the trail balance?
a) Casting error
b) Error of omission
c) Error of complete reversal of entries
d) Error of commission
x. What is accounting treatment of the increase in the provision for bad and doubtful debts?
a) Dr. debtors, Cr. Bad debts

b) Dr. bad debts, Cr, provision for bad debts
c) Dr. P&L, Cr. Trading account
d) Dr. provision account, Cr. Income statement (1 mark @part)
249
2492
QUESTION TWO
Irish Kyebandula Ltd is a trading company dealing in general merchandise. It also rents out part of its
premises to Paul Scores & Co. Ltd. The following is its Trial balance for the period ended 31/12/2006
Account Titles Dr. UGX. 000 Cr. UGX. 000

Furniture & Fittings, cost 50,000
Motor Vehicles, cost 20,000
Gross Sales revenue 140,000
Cost of sales 126,900
Sales returns 6,000
Insurance 3,000
Wages & Salaries 4,000
Bade debts written off 1,100
Allowance for bad debts 1,000
Ordinary share capital 62,000
Office expenses 1,100
Trade debtors & creditors 6,000 4,000
Fuel 6,100
Cash in hand & at Bank 5,200 200
Commission received 1,200
20% Bank loan 5,000
Accumulated depreciation
Furniture & Fittings 5,000
Motor & Vehicles 8,000
Rent from Paul Scores 3,000
Totals 229,400 229,400
250
2502
The trial balance extracted from the books of Seven – to Eleven Supermarkets at December 31, 1995 was
as follows:
DR Cr
Cash 415,400
Accounts receivable 464,780
Provision for bad debts 22,500
Inventory, Jan 1, 1995 1,875,000
Prepaid rates 123,800
Office equipment 154,000
Acc. Depreciation – Office equipment 60,200
Vehicles 458,000
Acc. Depreciation – Vehicles 144,500
Buildings 2,450,000
Acc. Depreciation- Buildings 810,000
Land 500,000
Accounts payable 1,300,000
Notes payable 200,000
Capital 2,000,000
Retained earnings 983,780
Dividends 300,000
Sales 19,215,000
251
2512
Purchases 14,973,000
Purchase returns & allowances 27,200
Transportation –in 224,200
Salaries and wages 1,112,000
Advertising expenses 360,000
Communication expenses 598,000
Utilities expenses 300,000
Interest expenses 15,000

24,807,980 24,807,980
Further information:
a) Inventory at December 31.1995 was worthy Shs. 1,830,000

b) Of the prepaid rates, three quarters had expired during the year.
c) Shs. 38,500 of the outstanding receivables are estimated to be bad.
d) Depreciate Shs. 11,680 on Office equipment, Shs. 92,000 on Vehicles, and Shs 50,000 on
buildings.
e) The following liabilities to be accrued
Shs. 14, 900 on communication
Shs. 5m 280 on utilities
Shs. 2,500 on interest
REQUIRED
Prepare adjusting entries, a Profit and Loss account, and a Balance sheet.
QUESTION 2
252
2522
Tray Enterprises acquired machines and furniture at Shs. 640,000 and Shs. 128,000 on January, 1 1993
respectively. Office machines have useful life of 5 years and salvage value of Shs. 8,000. Furniture has
useful life of 4 years and no salvage value.
The company has used the straight line method to calculate depreciation and the net incomes
reported for the years 1993, 1994 and 1995 were Shs. 148,000, Shs. 157,750, and Shs. 159,350
respectively.
REQUIRED:
a) Show how Office machines and Furniture would appear in the Balance Sheet of Tray
Enterprises at the end of each of the three years.
b) Recomputed the net incomes for each of the three years if the sum- of – year’s digits method
of depreciation had been used instead of the straight line method.
QUESTION 3
Write brief notes on each of the following:
a) Perpetual inventory system

b) Capital and Revenue expenditure
c) Income statement approach of estimating allowance for doubtful debts
d) Principle of consistency
e) Cost of an asset
QUESTION 4
Selected data below is from the books of Fang Fung at December 31, 1995:
SHS
Raw materials inventory Jan 1, 1995 750,000
Raw materials inventory Dec. 31, 1995 600,000
Work in process Jan. 1, 1995 450,000
Work in process Dec. 31, 1995 300,000

253
2532
Finished goods Jan. 1, 1995 1,500,000
Finished goods Dec, 31, 1995 1,200,000
Direct labour 900,000
Indirect labour 450,000
Utilities 375,000
Depreciation 210,000
Purchase of raw materials 1,350,000
Net sales 6,000,000
Administrative expenses 380,000
th
30% of depreciation is for office machines and a 1/5 of utilities is for office use. The rest are attributed
to the factory.
REQUIRED:
Prepare a cost of goods manufactured statement and in income statement for Fang Fung for the year
ended December 31, 1995.
QUESTION 5
The Supermatch company reconciled its cash book bank statement balances on July 31, 1996 with
only two cheques No. 706 for Shs. 1, 420 and No. 717 for Shs, 2, 750 Unpresented to the bank.
The following information is available for the month of August, 1996.
(i) From the Bank
Date Cheques and other Debits Deposits Balance
Aug,1 Balance b/f 19,120
254
2542
2 2,750 16,370
3 2,180 3,120 17,310
5 3,020 14,290
9 7,370 6,920
12 750 1,320 4,850
14 5,510 10,360
18 2,840 7,520
21 5,510 12,640
28 3,430 4,720 13,930
29 430 (NSF) 13,500
31 30 (LF) 9,950(CM) 23,420
Code: CM Credit Memo DM Debit Memo LF Ledger fee NSF No sufficient funds
(ii) From the (iii) From the
Cash Receipts Journal Cash Payment Journal
Date. Shs. Cheque Shs.
Aug, 2 3,120 718 2,180
13 5,510 719 3,200
20 5,120 720 750
27 4,720 721 7,370
31 2,470 722 1,320
Total 20,940 723 1,360
724 2,840
255
2552
725 3,430
726 530
Total 22,980
(iv) From the General Ledger
Date Particulars DR CR Balance
July 31 Balance b/f 14,950
Aug. 31 Cash Receipts Journal 20,940 35,890
31 Cash Payments Journal 22,980 12,910
Other5 information:
(i) Cheque No. 719 was correctly drawn for Shs. 3,020 in payment for stationary but the
bookkeeper transposed the figures and entered it as Shs. 3,200 in the Cash Payments
Journal.
(ii) The NSF cheque was received from a customer in settlement of his account.
(iii) The credit memo resulted from a Shs. 100, 000 note receivable, collected by the Bank
on the company’s behalf. The Bank deducted Shs. 50 as collection fee.
REQUIRED:
(a) Prepare the August 31, Bank Reconciliation

(b) Prepare in general journal form entries needed to adjust the company’s cash records.
QUESTION 6
256
2562
Auto sport Inc. deals in values. For the month of June, 1996, the sales were Shs. 3,680, 000 at a stable
price of Shs. 1,150 per value. The purchases for the month were as follows:
Date No. of Units Unit Cost
Balance May 31 900 1,000
June 3 1,180 1,020
7 800 1,035
15 620 1,070
22 1,000 1,085
The operating expenses for the month were as follows
Salaries and wages Shs. 56,000
REQUIRED:
a) Computer end of June inventory cost using FIFO, LIFO, and Average cost.
b) Prepare income statements for the month of June, 1996 in comparative form.
c) Which method gives the most realistic Balance Sheet inventory value in light current
replacement cost. And which method gives the most realistic income in light of the cost
being incurred by Auto Sport to replace the valves when they are sold?
1) The following trial balance was extracted from the books of Bipel Ltd as at 31 December, 1992.
Dr Cr
Shs. Shs.
Cash 759,000
257
2572
Accounts receivable 330,000
Patents 650,000
Allowance for bad debts 60,000
Inventory 1.1. 1992 384,000
Prepaid rent 180,000
Office suppliers 210,000
Equipment at cost 1,500,000
Accumulated depreciation-
Equipment 300,000
Accounts payable 240,000
Unearned consulting fees 270,000
Ordinary share capital 2,580,000
Dividends paid 546,000
Sales 2,286,000
Sales returns and allowances 120,000
Purchases 1,200,000
Purchase returns and allowance 390,000
Consulting fees revenues 219, 000
258
2582
Salaries & wages expense 159,000
Delivery expense 381,000
Bade debt expense 63,000
Electricity expense 15,000
6,984,000 6,984,000
Information for Adjustments
a) A physical count revealed inventory worthy Shs. 255, 000 was still on hand at 31 December,
1992.
b) Of the rent prepared, one half has expired during the year.
c) Included in salaries and wages expense is advance payment of Shs. 33,000 relating to 1993.
d) Of the unearned consulting fees, Shes. 116, 000 has been earned during 1992. ]
e) Shs. 145,000 of the office suppliers remain on hand at 31 December, 1992.
f) One percent of the NET sales is expected to become bad debts
g) Annual depreciation on equipment is computed at 10% of cost.
h) The electricity bill for the last quarter of 1992 of Shs. 5,000 has to be accrued.
REQUIRED:
(i) Prepare journal entries for all the adjustments (No. narrations)
(ii) Prepare an income statement and a Balance Sheet after taking into account all the above.
Question 2. (15 marks)
a) What is meant by “internal control”?

b) Describe four measures for cash in the bank that can be instituted to achieve internal control over
cash.
Section B: (All question carry equal marks
Question 3
259
2592
On April 01, 1993, the entire merchandising inventory of Kaluum & Co. was destroyed by fire. The
company’s records were however saved. The company does not maintain perpetual inventory records
and the last physical inventory count was made on 31 December , 1992.
The company has to make an estimate of the inventory value destroyed by fire in order to file an
insurance claim, and the chief accountant assigns you to do so. You are provided with the following
income statement and other information.
Kaluuma & Co.
Income Statement
For the year ended 31 December, 1992
Shs. Shs.
Net Sale 480,000
Cost of goods sold:
Inventory 1.1.1992 288,000
Purchases 1,040,000
Cost of goods available 1,328,000
Less Inventory 31.12.1992 26,000
Cost of goods sold 1,002,000
Gross Profit 478,000
Sundry operating expenses 298,000
Bet Income 180,000
260
2602
You discover that the purchase figure above includes Shs. 25,200 of furniture bought by the company for
use in the business erroneously recorded by the bookkeeper. This error was not discovered when
preparing the annual accounts, and is not included in ending inventory.
The saved records also show the following transactions for the period 1.1. 1993 to the date of the fire.
Shs.
Sales 612, 000
Sales returns 5,400
Transportation- in 3,600
Purchases 392,400
REQUIRED:
a) Prepare a brief report to file to the insurance company supported by computation of the
estimated inventory loss using the gross profit method.
b) A part from a loss caused by natural hazards e.g. fire, explain two (2) other instances where
the gross profit method of estimating inventory may be used by Accounts.
QUESTION 4
The net incomes of TDK Ltd for 1989, 1990 and 1991 were Shs. 118,400 Shs. 126, 200 and Shs. 127,
480 respectively. The company acquired two machines on 1.1. 1989. Machine A cost Shs. 102,400 with
salvage value of Shs. 16,000 and estimated useful life of five years. Machine B cost Shs. 52,000 with
salvages value of Shs, 4,000 and d estimated useful life of four years.
The policy of the company is to change depreciation on machinery in the year of purchase but none in the
year of sale.
261
2612
On March 01, 1992, Machine A was sold for Shs. 45,000. It has now been found that the wrong method
was used for depreciation of machines. The straight line method has been used, but the correct method
would have been the double declaiming balance method.
REQUIRED:
a) Recomputed the net incomes of 1989, 1990 and 1991 if the correct depreciation method had been
used.
b) Computer the gain or loss on disposal of Machine A.
c) Show how the Machinery Account, and related accumulated depreciation will appear in the
Balance Sheet of TDK Ltd as at 31 December, 1992.
QUESTION 5
Texo Co., a manufacturing company in Down Kampala has for its year ended 31 December 1992 the
following trading and operational results.
a) Movement of stocks during the year:

1/1/92 31/12/92
Shs Shs.
Raw Materials 195,800 215,300
Work – in- Progress 265,700 192,450
Finished Goods 438,220 81,000
b) Purchase of Raw Materials Shs. 2, 075,440

Carriage in 240,000
Sales 8,806,050
262
2622
c) Costs and expenses during the year
Shs
Direct Wages 784,280
Indirect wages 403,100
Electricity 824,440
Rent and Rates 235,000
Advertising 793,070
Depreciation: Plant & Machinery 36,320
Delivery Vans 30,100
d) It is the company’s policy to transfer the cost of goods manufactured to the trading account at cost
plus 20%. Consequently, based on the opening stock of finished goods, the provision for
unrealized profit as at 1/1/1992 stood at Shs. 87, 644.
e) Electricity, Rent and Rates are to be apportioned between factory and office in the ratio 3:1
REQUIRED:
a) Prepare a manufacturing statement for Texo Co. for the year ended 31 December 1992
b) Prepare a Trading Profit and loss statement for the company for the year ended 31 December,
1992.
QUESTION 6
The manager of the Association Libraries submits the following Receipts and Payments Accounts and
other information to you for the year ended 31 December, 1992.
Receipts Shs. Payments Shs.
263
2632
Balance b/d 115,900 Staff salaries 925,000
Annual subscriptions 1,640,000 Gross- cutter’s wages 12,500
Sales of diaries 30,000 Utilities 90,000
Donations for building 250,000 Stationary 115,000
Extension of building 325,000
Printing of dairies 14,500
Repairing of furniture 21,000
Annual prizes 60,000
Balance c/d 247,900
2,035,900 2,035,900
Relevant information:
a) Subscriptions include Shs. 225,000 respecti8vely arrears for 1991. Subscriptions for 1992 amounting
to Shs. 72,500 is still outstanding.
b) An amount of Shs. 5,000 is owing to the printers of the diaries.
c) Staff salaries include Shs. 125,000 advance for 1993
d) Furniture and equipment should be depreciated at the rate of 5% and 10% respectively.
e) On January 01, 1992, the library had the following fixed assets
Shs.
Buildings 2,900,000
Furniture 600,000
Library 740,000
Equipment 250,000
REQUIRED:
264
2642
a) Calculate the accumulated fund of the Association Libraries as at January 01 1992.
b) Prepare an Income and Expenditure Account for the year ended 31 December 1992 and a Balance
Sheet as at that date. Profit from the sale of diaries should be shown separately.
265
2652
Section A
Question 1
Answer all sub-parts of this question in your answer booklets NOT on the question paper. Select the best alternative.
i).Which accounting concept requires the practice of crediting inventory to the trading account?
a). Conservatism
b). Consistency
c). Matching
d). Going concern
e). None of the above
ii). which of the following concepts recognizes income when a customer has accepted the good or services and is obliged to pay
for the items?
a) Accrual
b) Matching
c) Realization
d) Prudence
iii). Mina started business with shs. 24,000,000,000 cash. She acquired a bank loan of Shs 16,000,000,000 which sh e deposited to
1
a newly opened business bank account. She purchased stock of goods worth shs. 14,000,000,000 on credit. She sold /2 of the
goods to Jamal at shs 9,000,000,000 on credit. She received shs 7,000,000,000 from debtors through the bank.
Which of the following accounting equations is a correct record of the above?
Asset = Liabilities + Owner's Equity
a). 51,000,000,000 = 14,000,000,000 +
37,000,000,000
b). 56,000,000,000 = 14,000,000,000 + 42,000,000,000
c). 52,000,000,000 = 10,000,000,000 + 42,000,000,000
d). 50,000,000,000 = 10,000,000,000 + 40,000,000,000
e). None of the above
vi). Which of the following is a correct sequence in an Accounting cycle/ process

(a) Journals - documents - ledgers - trial balance - final accounts
(b) Documents - journals - ledgers - trial balance - final accounts
266
(c) Trial balance - final accounts - ledgers - journals - documents
(d) Ledgers - journals - documents - trial balance - final accounts
(e) None of the above,
v). The following are books of original entry except:

(a). Worksheet
(b). General journal
(c). Cashbook
(d). Returns inwards book
(e). None of the above.
vi) Rental income received during the year amounted to 650,000,000=. Outstanding rental income as at 31/12/2007 amounted to
Shs.70, 000,000. The amount to be charged to the P & L a/c is?
(a). 580.000.000 Cr.
(b). 720,000,000 Dr
(c). 580,000,000 Dr
(d). 720,000,000Cr .
(e). None of the above
Vii) What is the accounting treatment for a decrease in the provision for bad debts?
a) Dr, Income Statement Cr. Accounts Receivables
b) Dr. Bad Debts Cr. Income Statement
c) Dr. Provision for Bad Debts Cr. Income Statement
d) Dr. Bad Debts Cr. Provision for Bad debts
(vii) Accelerated methods of depreciation are used because:
a). assets are less productive in the early years of their economic life
267
2672
b). of the legal requirements
c). of the need to pay more tax earlier than later
d). they are easy
e). none of the above

xi). Income received in advance is shown as....................in the balance sheet
a) . an asset
b). a liability
c). owners equity
d). income receivable
e). none of the above
x). Which of the following statements most accurately describes a balance sheet?
a) A list of receipts and payments and showing a balance at the end
b) A statement that shows net worth of the organization
c) A list of assets and claims against the organization
d) A statement of total Equity and Liabilities
QUESTION 2
The following Trial Balance extracted from the ledger accounts of New Designs Ltd. For the financial year ended 31/12/2007.
Account Title Debit (shs) Credit (shs)
Ordinary shares 200,000,000
Preference shares 100,000,000
Plant and Machinery, cost 200,000,000
268
2682
Motor vehicle, cost 160,000,000
Land 140,000,000
Accumulated Depr (1/1/2007)
Plant and Machinery 60,000,000

Motor Vehicle, cost 32,000,000
Trade debtor 60,000,000
Trade Creditors 30,000,000
Cash 10,000,000
Bank 70,000,000
Stock (/1/2007) 9,200,000
General Expenses 20,000,000
Advertising Expenses 4,000,000
Sales 600,000,000
Returns 8, 000,000 6,000,000
Bad Debts Expenses 5, 000,000
Purchase 320,000,000
Discounts 1,000,000 3,000,000
Carriage inwards 5,000,000
Salaries expenses 20,000,000
Fuel expenses 4,000,000
Insurance expenses 800,000
Provision foe bad debts 6,000,000
269
2692
Totals 1,037,000,000 1,037,000,000
i. Stock at 31/12/2007 was valued at shs 16,000,000= on FIFO basis.

ii. Depreciation on plant and machinery and motor vehicle is at 15% and 10% per annum respectively.
iii. The provision for bad debts is to be increased to shs. 9,000,000=
iv. ¼ of insurance paid relates to the financial year commencing on 1/1/2008
v. Included among the general expense is tuition fees and pocket money amounting to shs. 2,000,000= of the general
niece, who is not an employee of New Designs Ltd.
REQUIRED
(a) Journalize information mentioned in (i) to (vi) above (6 marks)

(b) prepare the income statement and the balance sheet for the ye ar. (14 marks)
Section B (this section has Three Questions, attempt any two questions )
QUESTION 3
Kadu Mukasa is an inexperienced bookkeeper for New Designs Ltd and needs assistance to complete the current account bank
reconciliation for the month of November 2007. He has provided the following information.
On 31 Nov 2007, the bank Colum of the cashbook showed a debit balance of shs 692,000. The bank statement on the same
date showed a credit balance of shs 740,000. A comparison of the cashbook and the bank statement for 2007 reveals the
following:
rd
i. The bank made a direct debt of shs 30,000 for a magazine subscription on 3 Nov 2007.
ii. A loan repayment of shs 180,000 was paid by a standing order on 15 Nov 2007.
iii. Bank charges of shs 10,800 and loan interest of shs 24,000 were charged to the account on 31 Nov 2007.
iv. Cheques totaling shs 163,600 paid into the bank in Nov had not been credited to the account on 30 Nov 2007.
v. On Nov 4, a credit transfer of shs 290,000 was received from a
customer, NK. Stephens.
vi. A cheque from M. Makumbi for shs 276,000 banked on 29 Nov 2007 was returned unpaid
on 30 Nov2007.
270
2702
vii. Cheques drawn on 27 Nov 2007 totaling shs 335,400 had not yet been presented to the
bank.
viii. A cheque entered in the cashbook as credit of shs 152,800 should have been for shs 125,800.
ix. Kaka supplies Ltd was paid cheque for shs 80,000 but returned it on 25 Nov 2007, unpaid.
Required:
a. Reconcile the balances of the cash book with that of the bank statement (16 marks)
b. State four reasons why the cashbook balance most often differs from the bank statement
balance as at that date (4 marks).
QUESTION 4
a. With examples distinguish between a direct cost and an overhead cost. (4 marks)
b) The following data was obtained from the books of BBC Soda manufacturing Ltd. as at
31.12.2007.
Particulars Amount
Raw materials purchases 250,000,000
Indirect Material 15,000,000
Carriage on material 2,500,000
Direct Labour Cost 400,000,000
Raw material Returns 4,000,000
Carriage outwards. 35,000,000
Other overhead 140,000,000
Lighting, 30,000,000
Power for Production Machines 150,000,000
Indirect/labour cost 40,000,000
Office salaries 13,000,000
Administration expenses 120,000,000
Sales 2,150,000,000
Advertising 4,500,000
Bad debts provision 15,000,000
Directors remuneration 60,000,000
Bank charges 1,000,000
Delivery van expenses 8,000,000
271
2712
Discount allowed 18,000,000
Depreciation: Plant & machine 6,000,000
Office Equipment 4,000,000
Delivery Van 2,000,000
The following additional information was provided:
1. Stocks 1.1.2007 31.12. 2007
Raw materials 45,000,000 30,000,000
W.I.P 30,000,000 15,000,000
Finished Goods 15,000,000 18,000,000
2. Power for production machines included a prepaid figure of shs 100,000,000.
3. Lighting was apportioned as follows; factory ¼ Office ¾
4. 60% of other overheads relates to the factory while the balance to the office
5. Bad debts provision should be increased by shs 2,000,000=
6. Advertising expense of Shs 500,000 accrued,
7. Directors remuneration was analyzed as follows:-

Production Director 35,000,000
Sales Director 25,000,000
8. Manufacturing goods are transferred at factory cost plus a mark up of 20% to cater for factory.
Accordingly, finished goods are inflated by that percentage.
Required
Prepare a Manufacturing, Trading and Profit and Loss account for the year end 31.12.2007 (16
marks).
QUESTION 5
a). The following information was extracted from New Furniture’s Ltd. Concerning office furniture.
The company's financial year runs from 1st January to 31st December. Five (5) furniture items were
bought on 1/01/2000 for Shs. 10,000,000. Six (6) Additional furniture were bought on 1/03/2001 for
Shs. 6,000,000.
272
2722
Each furniture item is expected to last for 10 years at the end of which is expected to sell scrap value
of Shs. 200,000. However on 31/12/2003, to (2) furniture items that were purchased on
1/03/2001were disposed off for Shs. 100,000 each. All transactions were by cash. It is the company's
policy full depreciation in the year of purchase and none in the year of disposal.
REQUIRED:
Prepare the following Accounts using straight line method of depreciation
i). Furniture A/C
ii). Accumulated Depreciation A/C
iii). Disposal of furniture A/C (l0 marks)
b). The Bookkeeper of New Designs Ltd prepared a trial balance for the year ended 30 June 2003
but it failed to balance. The debit side was less than the credit side by Shs. 900,000, since he was on
pressure to submit final accounts; he opened a suspense account and proceeded to prepare final
accounts. During July 2003, he identified the following errors which had been in the year ended
30/06/2003.
1. Painting of buildings for Shs. 2,000,000 was properly recorded in the cash book but was
not debited to the buildings account,
2. Cash of Shs. 200,000 which was used to purchase a gift for his sugar Mummy on Valentine's
Day was credited to the cash book but was not debited to the other account.
3. Payment to Nyakato for Shs. 300,000 was properly entered into the cashbook but posted to
Nakato's account.
4. Bank charges of Shs. 100,000 were not recorded in the cashbook.
5. A credit purchase of Shs. 500,000 from Jose was credited as Shs. 300^000 in the purchases
account and credited to the Jose's account with the correct amount.
6. Sales and accounts receivables were each under set by Shs. 50,000.
REQUIRED:
273
2732
i). Journal entries to correct the above errors (6 marks)
ii). Suspense Account (4 marks)
Section C (This section has Two Questions, attempt only one question)
QUESTION 6
a) Distinguish between accounts for profit making organizations and those of non profit
making organizations (10 marks)
(b) Using examples distinguish between accounting treatment for life subscriptions and
annual subscriptions in non profit making firms (6 marks)
(c) Explain briefly the purpose of suspense accounts organizations.
(4 marks)
QUESTION 7
(a) What are control accounts and why are they important in an organizations internal control
system. (5 marks)
(b) Briefly described the accounting cycle clearly mentioning the books of accounts or statement
prepared at each stage. (10 marks)
(c) Distinguish between Realization Concept and Accrual Concept? (5 marks)
1. Below is the Trial Balance extracted from the books of Sarasota and co. Ltd. a
st
trading company in hard ware as at 31 December , 1991.
Dr Cr
Cash/Bank 1,265,000
Accounts Receivable 550,000
Provision for Bad 100,000
12% treasury Bills 1,090,000
274
2742
Inventory 1.1,1990 640,000
Prepaid- insurance 300,000
Office supplies 350,000
Equipment at cost
2,500,000
Accumulated depreciation –equipment 500,000
Motor vehicles 1,200,000
Accumulated depreciation-motor-vehicles 700,000
Accounts Payable 400,000
Capital 4,800,000
Dividends paid 910,000
Sales 3,810,000
Purchases 2,000,000
Sales returns and allowances 200,000
Purchase returns and allowance 650,000
Transportation-in 450,000
275
2752
Miscellaneous revenue 815,00
0
Rent expense 205,000
Salaries expense 265,000
Bad debt expense 105,000
Delivery expense 405,000
Interest expense 25,000
Utilities expense 230,000
12,840,000 12,840,000
Further information was given as follows:-
(a) Inventory on hand at 31, 12-91 was valued at Shs.425, 000
(b) Of the insurance prepaid shs. 150,000has expired during the
year.
(c) Of the rent expense, shs 55,000 relates to 1992.

(d) It was decided to increase the provision for bad debts to shs.
350,000. (e) Shs. 265,000 of office supplies remained on hand at
31.12.91.
(f) Miscellaneous income earned but not received, neither the clients billed
amounts to shs.155, 000.
(g) Interest on treasury bills has accrued for one year, but not y et received.
(h) Of the utilities, shs 95,000 is outstanding on account of electricity and shs.
37,000 has accrued on account of telephone expenses.
(i) The annual depreciations is computed as 10% and 15% on equipment and,
motor vehicles respectively on the declining balance.
276
2762
(j) The company paid on interim dividend on 30.6.91. a final dividend
of shs.300,000 was proposed to be paid to the shareholders in January , 1992.
Required
277
2772
(i) Give journal entries for al the adjustments ( narrations not …)
(ii) Prepare an income statement for the year ended 31 December 1991, a balance sheet as at
that date.
Q2. Answer any THREE (3) of the following:
(a) What is meant by the term “financial Statements” and what are their use?
(b) Distinguish between ‘adjusting entries’ and ‘closing entries’.
(c) Describe ant three (3) methods of valuing inventories.
(d) Give the distinction between the ‘matching principle’ and the ‘consistency principle’.
Section B (All questions carry equal marks)
Q3. The following d a t a was obtained from the records .of Tooler.
Manufacturers as at 31 December, 1991.
shs
Raw materials 1.1.91
553,500,
Raw materials 31-12.91
606,300,
Work in progress 1.1.91
708,0052
Work in progress 31, 12.91’
278
2782
Finished goods 1.1.91
524,000
Finished goods 31-12.91
644,500
Raw materials purchased
1,930,000
Sales (Set)
6,018,000
Factorywages:,Directlabour
507,000
Indirect labour
60,000
Electricity Rent and
171,000
rates Administrative
162,00
expenses Selling' 0
310,000
expenses
560,000
Carriage on purchased raw materials
Advertising
Depreciation: Plant and machinery

Delivery vans Office
equipment
278
Rent and rates, and electricity are to be apportioned Factory 2/3 rds; office
3rd,
Rent and rates, and electricity are to be apportioned Factory 2/3 rds; office
3rd,
Required
1
prepare a manufacturing statement, and an income statement..for the yearended31December,
1991
Q4. The Balance Sheet of Ink Ltd contains the following as at 3l
December, 1990: Fixed assets:
Cost acc. Depreciation written Down value
Shs. Shs. Shs.
Vehicles (10 in number) 834,000 412,000 422,000
During 1991, the company had the following transactions regarding vehicles:
Purchases
Date type cost (shs)
15 April Lorry 230,000
19 July van 118,000
15 November Car 120,000
SALES
Date type date of purchase cost proceeds
Shs shs
279
2792
30 April van 31 January 1989 98,000 33,000
23 June van 6 June 1987 64,00012,000
280
2802
30 October car 31 December 112,000 38,000
29 December lorry 14 October 210,000 182,000
The company’s policy is to charge a full years depreciation in the ye are of purchase of a vehicle and
none in the year of disposal. Depreciations per vehicle as charged using a straight line method for a an
estimated useful life of five years and an estimated salvage value of shs. 6,000/=
Required
(a) Prepare:-
(i ) Vehicle account
(ii) accumulated depreciation – vehicle account
(iii) Disposal of vehicles account

th
(b) Show how the vehicles Account would appear in the balance sheet at 30 April, 1992.
Q5. Below is the bank reconciliation statement of Matata Traders as at 30th April, 1992.
MATATA TRADERS
BANK RECONCILIATION
30 APRIL 1992
Shs shs
Balance per cash bank 1,906,000
Deduct: bank charges 100
Interest on overdraft 1,200 1,300
Adjusted balance 1,904,700
Balance per bank statement 1,840,000
Add Deposit in transit 344,800
2,184,800
280
2802
Deduct: outstanding cheques
No. 0442 98,600
No. 0446 103,000
No.0447 78,500
280,100
Adjusted balance 1,904,700
At the end of May, 1992, the company received the following statement from their bankers:-
DATE PARTICULARS DEBIT CREDIT BALANCE May
May 1 balance b/f 1,840,000 1,840,000
2 deposit 344,800 2,184,800
3 deposit 210,200 2,395,000
6 chq 0449 51,000 2,344,000
6 chq.0446 103,000 2,241,000
7 chq.0453 720,000 1,521,000
8 deposit 485,000 2,006,000
12 chq.0447 78,500 1,927,500
15 chq.0450 1,300,000 627,500
15 ledger fee 2,000 625,500
18 deposit 112,800 738,300
19 chq. 0455 936,900 198, 6009(Dr)
22 chq 0448 36,000 235,100(Dr)
22 deposit 51,300 183,800(Dr)
281
2812
25 deposit 538,800 355,000
28 cheq . 0457 132,000 223,000
29 deposit 590,000 813,000
29 deposit 663,400 1,476,400
31 deposit 1,212,000 2,688,400
31 chq.0458 213,800 2,474,600 31

credit memo 360,400 2,835,000
31 collection charge 3,600 2,831,400
31 interest 4,800 2,826,600
A companying the bank statement was a credit memo issued on 31 may 1992 representing a collection
from T. Kally , the company’s debtors for which the bank charged the company on the same day.
DATE PARTICULARS AMOUNT DATE PARTICULAR AMOUNT
May
May 1 sales 210,200 May 3 chq.0448 36, 5
7 sales 485,000 3 chq.0449 51,000
17 sales 112,800 4 chq.045 1,300,000
21 A/c Receivables 51,300 4 chq.0451220, 000
24 sales 538,800 5 chq.0452 76,000
26 sales 444,000 5 chq.0453 720,000
26 A/c receivables 590,000 9 chq.0454 112,000
29 A/c receivables 663,400 13 chq.0455 963,000
30 sales 1,212,000 18 chq.0456 13,700
282
2822
31 sales 73,900 20 chq.0457 132,000
26 chq.0457213, 800
30 chq.0457 412,000
31 chq.0451, 118,600
Examination of the cash book : entries revealed the following.
(i) Chq. No. 0455 of shs. 936,900 was wrongly recorded in the company books keeper. It was
payment to a creditor, kay.
(ii) A credit sale of shs. 444,000 to Adams was erroneously recorded in the cash book instead of
the debtors ‘ledger.
Q6. Lukwago operates a corner shop at Wandegeya called Lukwago Stores. He has not previously
employed an accountant, but for the year 1992, he was as eked to produce proper accounts in orders to
obtain a trading licence.
Lukwago provides you with a statement of operations for the year 1991 produced below and asks you to
prepare the accounts for his submission to the licensing authorities.
Lukwago stores statement of operation 1991
Payment for goods shs 950,000 cash taking shs. 1,200,000
Payment for expenses 160,000
Profit 90,000
1,200,000 1,200,000
Through your discussion with him, you obtain the following information
(1) Daily taking are kept in a cash box and banked a t irregular intervals. At the end of each day, the
cash is counted and recorded on a slip of paper. At irregular intervals, the figures from the slips
are recorded into a note book by his friend. A batch of slips was lost before the figures were
283
2832
entered into the note book, but Lukwago and his girl-friend estimate the takings of the year,
including the amount on the destroyed slips to be shs. 1,200,000/=
(2) You discuss and accept the following balances
31.12.90 31.13.91
Shs shs
Cash in hand 4,500 8,700
Cash at bank 15,600 21,900
Accounts receivable 45,800 49,100
Accounts payable 27,900 24,300
Inventory at cost 195,000 190,000
(3) Debts amounting to shs 35,600 were abandoned during the year as bad. But the takings include
shs. 2,500 recovered from an old debt which had been abandoned the previous year.
(4) Lukwago rents the shop on which he resides at shs. 15, 600 per year. This amount is included in
the expenses of shs . 160,000. It is decided to allocate 1/3 of the premises for residence purposes.
(5) Further analysis of the expenses reveal the following :
(i) Running expenses for Lukwago’s private car amounts to shs. 3,500/=
(ii) Repairs and decorations of the total premises for the year amounted to shs. 6,000.
(iii) Alterations on the shop premises amounted to shs 16, 000/=
(iv) Lukwago made a major renovation tot the roof of the building housing the shop premises
at shs . 50,000. The landlord agreed to offset this amount against future rent payments.
(6) From the business takings, Lukwago met the following private expenses.
(i) Shs. 50,000 for maintaining his house
(ii) Shs. 8,000 for the girl friend’s hairdressing
(iii) Lukwago‘s personal subscription to a local club of shs. 10,500.
(iv) Lukwago’s graduated tax of shs. 10,000/=
(v) Shs.5, 200/= for a local competition. His winnings, which he included in the shop’s
takings, amounted to shs. 6,000/=
(7) Lukwago’s cousin obtained shs. 10,000 from Lukwago which he withdraws from the business
bank account. The cousin agreed to pay in installments, and so far, shs6, 000 has been recovered.
(8) Lukwago had a car accident and compensation of shs 64,000 /= was banked on the business
account.
(9) Tom owed Lukwago shs. 6,900 for goods supplied from the shop. For a settlement, Tom
provided his radio valued at shs. 35,000. Lukwago paid the difference to Tom by a cheque drawn
284
2842
on the business account Lukwago uses this radio cassette for domestic purposes.
(10) You agree to charge Lukwago shs. 4,000 for your accountancy service payable after
receipt of the trading licence.
Required
(a) Prepare a statement of affairs for lukwago stores as at 31.12.90

(b) Prepare an income statement for the year ended 31.12.91, and a balance sheet as at the date for
submission to the licensing authorities. (Show all your workings).
Question
“Without some form of Accounting, Legislation it would be possible for accounting to manipulate and
doctor accounts, thereby, presenting a completely misleading about the financial status of the
organization. This would result into users of accounting information making wrong decisions.
In light of the above statement, discuss the various accounting concepts / principles / conventions that
underlie preparation and presentation of accounts and check manipulation and doctoring of the accounts.
Question 2
The following information was extracted from the books of MM Bakery Ltd.
Stock 1 / 2005 31 / 12 / 2005
Shs shs
Raw materials 4,000,000 6,000,000
Work in progress 18,000,000 16,000,000
Finished goods 14,000,000 12,000,000
The firm’s transactions obtained from the ledgers were as follows:

285
2852
Particulars Amount in shs
Show room expenses 8,000,000
Water expenses 40,000,000
Electricity 30,000,000
Indirect materials 12,000,000
Bad debts 20,000,000
Raw material purchases 560,000,000
Salaries 90,000,000
Manufacturing expenses 18,000,000
Sales 840,000,000
Direct expenses 17,000,000
Depreciation of delivery vans 2,000,000
The following additional information was provided:
1. Salaries and electricity were apportioned as follows:
Factory Office & Admin Selling & Distribution

Salaries 80% 20%
Electricity ¼ 2/4
2. provision for bad debts of UGX 4,000,000/= was made

3. Water expenses of UGX 2,000,000/= remained at the financial year end.
4. The company transfers goods at 20% mark up
Required:
286
2862
Prepare the company’s manufacturing, trading profit and loss account for the year ended 31 / 12 / 2005.
Question 1
Halima is an experienced book keeper for MM Enterprises and needs assistance to complete the current
account bank reconciliation for the month of May 2006. she has provided the following information:
On 31 May 2006, the bank column of the cash book showed a debit balance of shs 692,000. the bank
statement on the same date showed a credit of shs 740,000. a comparison of the cashbook and the bank
statement for May 2006 reveals the following:
rd
i. The bank made a direct debit of shs 30,000 for a magazine subscription on 3 May 2006.
ii. A loan repayment of shs 180,000 was paid by a standing order on 15 May 2006
iii. Bank charges of shs 10,800 and loan interest of shs 24,000 were charged to the account on 31
May 2006.
iv. Cheques totaling shs 163,000 paid into the bank in May not been credited to the account on 31
May 2006
v. On May 4, a credit transfer of shs 290,000 was received from a customer , R. Stephens.
vi. A cheque from M. Makumbi for shs 276,000 banked on 29 May 2006 was returned un paid on
31 May 2006
vii. Cheques drawn on 27 May 2006 totaling shs 335,400 had not yet been presented to the bank
viii. A cheque entered in the cash book as credit of shs 152,800 should have been for shs 125,800
ix. Kaka supplies Ltd paid cheque for shs 80,000 but returned it on 25 May 2006, un paid.
Required:
a. Adjust MM Enterprises’ cash book

b. Prepare a Bank reconciliation Statement
c. State four reasons why the cashbook balance most often differs from the bank statement
balance as at that date.
1a) Explain the following accounting concepts and give examples where they are applied in the
preparation of financial statements.
287
2872
i) Business Entity Concept
ii) Accrual Concept
iii) Realization Concept
iv) Going Concept
v) Historical Concept
b) A.N.L Agencies is a retail business located in Wandegeya. The following transactions transpired
during the month of October, 2007
st
Oct 1 Bought goods on credit from Peter for shs 800,000
nd
“ 2 Bought goods on credit from Jane for shs. 400,000
rd
“ 3 Sold goods to John on credit for shs. 2,000,000
th
“ 4 Sold goods to Mary on credit for shs 800,000
th
“ 5 Returned goods worth shs. 100,000 to Peter because they were defective
th
“ 10 Received part payment of 1,600,000 cash from John for goods taken on
credit
th
“ 12 Made part payment to Peter shs. 160,000 Cash
th
“ 14 Purchased goods for shs 120,000 credit from Jane
th
“ 15 Mary rejected and returned goods worth shs 80,000
th
“ 16 Received a cheque of shs 300,000 from Mary as part payment for goods
taken on credit
th
“ 17 Paid office rent cash shs 200,000
th
“ 18 Returned goods worth shs 100,000 to Jane because they were defective
th
“ 19 Paid Jane shs 300,000 by cash
th
“ 20 Sold goods to John on credit for shs 1,600,000
nd
“ 22 Bought goods for shs 200,000 paying cash
rd
“ 23 Sold goods cash shs. 1,000,000
th
“ 24 Sold goods cash shs. 8,000,000 receiving payment by cheque immediately
th
“ 25 Purchased goods for shs 200,000 from Peter on credit
th
“ 26 Paid Peter Shs. 160,000 cash
th
“ 27 John rejected and returned goods worth shs 200,000
th
“ 28 Received a cheque of shs 400,000 from John for goods sold to him on
288
2882
credit
th
“ 29 paid for electricity shs. 100,000 by cheque and shs 200,000 cash
th
“ 30 Paid office rent shs. 120,000 by cheque
st
“ 31 Paid salaries shs 300,000 cash and shs 320,000 by cheque
REQUIRED
I) Enter the above transactions into the General Journal properly showing entry
II) Post to the Ledger accounts and should be fully balanced off
III) Open up the Individual Debtors’ subsidiary Ledgers and the Individual Creditors’ subsidiary
ledgers
st
IV) Extract the business Trial Balance for the month ended 31 / 10 / 2007
The following trial balance was extracted from the books of Atikoru PLC
Capital 20,000
Loan account, Stanbic 2,000
Drawings 1,750
Premises 8,000
Furniture and fittings 500
Plant and machinery 5,500
Inventory at 1 Jan 8,000
Cash at Bank 650
Allowance for doubtful debts 740
Purchases 86,046
Sales revenue 124,450
Bad debts 256
289
2892
Bad debts recovered 45
Trade receivables 20,280
Trade payables 10,056
Bank Charges 120
Rent 2,000
Return inwards 186
Return outwards 135
Salaries 3,500
Wages 8,250
Traveling expenses 1,040
Carriage inwards 156
Discounts allowed 48
Discounts received 138
General expenses 2,056
Gas, electricity and water 2,560
Carriage outwards 546
Traveler’s salaries and commission 5,480
Printing and stationery 640
157,564 157,564
You are provided with the following information:
a. Inventory at 31/12/2004 UGX 7,550

b. Interest on the loan at 5% p.a not been paid at 31/12
290
2902
c. Rent includes UGX. 250 for the premised paid in advance to 31 March next
d. Depreciate plant and machinery by 10% p.a, depreciate furniture and fittings by 5% p.a
e. Adjust the allowances for doubtful debts to 5% of trade receivables
f. Show wages as part of cost of sales.
Required:
Draw the income statement for the company for the year to 31/12/2004 and the balance sheet
Question five
a) Explain why an organization has to prepare a cashbook? (3 marks)

b) The following balances were extracted from the books of G and F on 31/06/2006
Cash 5,000,000
Bank 3,300,000 (Cr)
During the month of July the following transactions took place

st
i) July 1 , bought goods on credit for shs 6,500,000
nd
ii) 2 , sold goods on credit for shs 8,000,000
th
iii) On 4 received a cheque of shs 5,000,000 from the debtor and banked it
th
iv) On 7 paid creditors shs 1,500,000 cash and shs 500,000 by cheque
th
v) On 10 rejected and returned goods worth shs 300,000 to a creditor
th
vi) On 12 a debtor rejected and returned goods worth shs 100,000
th
vii) On 14 banked shs 1,500,000 cash
th
viii) On 16 paid rent of shs 400,000 cash, shs 800,000 by cheque and electricity shs 250,000 cash
th
ix) On 20 withdrew shs 1,000,000 from the bank and put in the cash box for payment of cash
expenses
nd
x) On 22 paid shs 2,000,000 by cheque for the retirement loan
th
xi) On 25 sold the land inherited from the father for shs 5,000,000 cash
th
xii) On 27 received cash of shs 100,000 and a cheque of shs 2,000,000 from a debtor
291
2912
th
xiii) On 30 used business cash of shs 300,000 for a social evening with his friends at a club.
Required. Enter the above transactions in a two column cash book (17 marks)
SECTION C
Question six
b) Describe the qualitative characteristics of financial statements )8 marks)

c) Explain the following accounting concepts and give examples where they are applied in the
preparation of financial statements.
Question seven
b) Explain the historical accounting concept and give reasons why it is preferred as a method of
valuing assets (6 marks)
c) Identify the users of financial statements and their information requirements(14 marks)
During the month of January 2003, the following errors which were made in the financial year which
st
ended on 31 December 2002 were located.
i. A cheque for an amount of 1,485, 000/= received from a debtor was recorded in the debtor’s A/C
as 1,471,500/= but was properly recorded in the cash book
ii. Electricity expense paid was under recorded in the bank column of the cash book by shs. 4,500/=
The entry was correct in the other account
iii. A sales invoice of 750,000/= was recorded as 705,000/= in the sales day book.
292
2922
iv. A creditor had a balance of 1,500,000/= in her account but was taken to the trial balance as
1,60,000/=
v. A cheque payment of 60,000/= for postage stamps was debited to the cash book and properly
recorded in postage account in the ledger.
vi. Accrued salaries 300,000/= were not recorded in any account
vii. Prepared insurance 90,ooo/= was credited to accrued insurance account as 105,000/= The
corresponding double entry account had no problem
viii. The debit side of the trial balance was under added by 45,000/= because of discount allowed
Account which was not opened in the ledger.
ix. Directors Christmas party which was not voted for an not part of their official emoluments
costed 500,000/=. This amount was withdrawn from the company’s bank account. It was debited
to General expenses A/C and credited to the cash book (bank column)
x. The provision for bad debts for 150,000/= was omitted from the ledger but, the bad debts account
had been debited.
Required
i. Journal entries to correct all the errors (10 marks)

ii. Suspense Account (4 marks)
iii. Corrected balance sheet (6 marks)
QUESTION SEVEN
(a) Clearly explain the importance of accounting from the perceptive of users of accounting
information (10 marks)
(b) Briefly discuss accounting concepts that are fundamental under International Accounting
Standards. (8 marks)
(c) Distinguish between a suspense account and a control account. (2 marks)
293
2932
QUESTION EIGHT
(a) “A trial tests the accuracy of the financial accounting recording system but when it balances, it does
not always mean that all was alright” Briefly discuss the statement. (10 marks)
(b) Explain the following terms with examples as used in accounting regulatory frame work.
 Accounting concepts/conventions (2 marks)
 Accounting bases (2 marks)
 Accounting policies (3 marks)
 Accounting standards (3 marks)
Kiwedde Limited’s Trial balance for the year ended 31 December 2007 is given below:
Details Dr (000) Cr (000)
Land and buildings (cost) 540,000
Plant and Machinery (cost) 150,000
Equipment (cost) 180,000
Accumulated depreciation – plant and Machinery 30,000
- Equipment 36,000
Purchases and Sales 450,000 1,000,000

st
Stock on 1 January 2007 350,000
Carriage in wards 20,000
Salaries and Wages 1,500
10% Bank loan 286,300
Rent 2,800
Good will 22,000
294
2942
Returns 10,000 12,000
Capital 600,000
Cash and bank 190,000
Discounts 500 1,000
Trade debtors and creditors 200,000 500,000
10% Treasury Bills 250,000
Bad debts 1,200
Utilities 130,000
Carriage out words 2,000
TOTAL 2,500,000 2,500,000
Other relevant information
1. Inventory at the end of the year was valued at 120,000,000

2. The buildings in the trial balance were acquired at the beginning of the year at a price of
300,000,000
3. Depreciate non current assets at 10% on cost
4. Salaries were paid up to 31 / 3 / 2008
5. Both interests on the treasury bills accrued
6. More debtors are expected to default a further provision of 10% needs to be made
Required. Show the journal entries for the additional information 1 to 6
Prepare an income statement, statement of changes in equity and the balance sheet as at 31/12/2007
Question One
The following trial balance is an extraction from the ledger accounts of Zulie Ltd for the financial year
ended 31/12/2004
295
2952
Account Titles Dr (Shs 000) Cr (Shs 000)
Capital 400,000
Land (cost) 280,000
Plant and Machinery (cost) 200,000
Motor vehicles (cost) 320,000
Accumulated depreciation:
Plant and Machinery 120,000
Motor vehicles 64,000
Stock/Inventory 18,400
Trade debtors/Accounts receivable 120,000
Bank 140,000
Cash 20,000
Trade creditors / Accounts payable 60,000
General expenses 20,000
Electricity 10,000
Rent 14,000
Advertising 8,000
Salaries 40,000
Bad debts 10,000
Insurance 1,600
Water 8,000
296
Sales 1,200,000
Purchases 640,000
Purchases returns 12,000
Discounts received 6,000
Total 1,874,000 1,874,000
i. Stock at 31/12/2004 was valued at 14,000,000/=

ii. It is the Company’s policy to deprive fixed assets at a rate of 10% on cost per annum
iii. The Provision for bad debts should be increased by 6,000,000/=
iv. 4,000,000/= of rent relates to the forthcoming financial period
v. Salaries of 5,000,000/= accrued
REQUIRED:
a) Journal entries for the additional information i-v

b) Prepare Zulie Ltd’s income statement for the period ended 31/12/2004 and the balance sheet as
at 31/12/2004 (20 marks)
Question Two
a. Write short notes on the following:

i. Duality concept iii. Accounting Equation
ii. Prepaid expenses iv. Financial Accounting
297
2972
b. Briefly explain the stages involved in the Accounting cycle/process.
QUESTION 1.
The following is a Trial Balance for Sydaka Ltd as at 31 Dec. 2001
ACCOUNT TITLE DR (Shs) Cr (Shs)S
Sales 36,000,000
Purchases 25,000,000
Purchases returns 400,000/=
Stock (1.1. 2001) 2,500,000
Wages 4,000,000
Rent and rates 1,600,000
Building (cost) 20,000,000
Accumulated depreciation Building 2,000,000
Motor vehicles (cost) 8,000,000
Accumulated depreciation motor vehicles 800,000
Trade debtors 4,400,000
Bad debts expenses 100,000
Trade creditors 1,850,000
Capital 31,775,000
Provision (for bad and doubtful debts) 200,000
Balance at bank 1,225,000
Drawings 5,880,000
298
2982
Discount received 800,000
73,825,000 73,825,000
(i) Closing stock is valued at 1,800,000/=

(ii) Wages of 360,000/= accrued (were not paid during the financial year)
(iii) An amount of 200,000/= which relates to rent and rates was pre-paid for financial year
commencing January 2002
(iv) Bad debts expenses increased by 440,000/=
(v) Building and motor vehicles are to be depreciated by straight line method using 10% per annum.
REQUIRED
a) prepare Journal Entries for the additional information above (7 marks)
b) prepare the trading and profit and loss account for Sydaka Ltd for the periods ended 31. Dec.
2001 (6 marks)
c) Construct the balance sheet for the Sydaka Ltd as at 31 Dec 2001 (7 marks)
The company used double declining balance sheet method and reported a net profit of shs. 15,000,000 in
the second year of using the asset, if the straight line method had been used, what would have been the
Net profit or loss in the second year?
i. Shs 12,320,000
ii. Shs 14,748,000
iii. Shs 15,252,000
299
2992
iv. Shs 11, 530,000
v. None of the above.
vi. The company wants to dispose-off (Board –off) the asset at shs. 1,200,000 after using it for two
years. What will be the loss or gain on disposal? (Double declining balance method being used).
(a) Shs 600,000 loss

(b) Shs 480,000 gain
(c) Shs 300,000 gain
(d) Shs 528,000 loss
(e) None of the above
vii. Which of the following concepts is not fundamental under International Accounting Standard
One (IAS 1)
(a) Going concern

(b) Accrual
(c) Consistency
(d) Substance over form
(e) All are fundamental
st
The following information was obtained from records of a manufacturing company for the year to 31
January 2003
Sales Shs
Raw-materials issued (used) 50,000,000
Raw-materials purchased 10,000,000
Raw-materials returned 20,000,000
300
3003
Direct wages 5,000,000
Factory supervisors salaries 15,000,000
Direct manufacturing expenses 2,000,000
Factory insurance 1,000,000
Office Administrative overheads 8,000,000
Finished goods opening stock, cost 4,000,000
Finished goods closing stock, cost 3,000,000
Use the above data to answer questions (vi – viii)
viii. What is the prime cost?

(a) Shs. 40,000,000
(b) Shs 34,000,000
(c) Shs 26,000,000
(d) Shs 31,000,000
ix. If the mark-up of 20% is added when transferring goods from the factory to the selling
department. What is the value of goods manufactured/completed?
(b) Shs. 28,400,000

(c) Shs 30,600,000
(d) Shs 34,080,000
(e) Shs 24,600,000
(f) None of the above
x. What is the Net profit for the year?
301
3013
(b) Shs. 16,200,000
(c) Shs 14,600,000
(d) Shs 12,500,000
(e) Shs 13,900,000
(f) None of the above
xi. Goods for shs 680,000 were purchased from Lubega on credit but the book-keeper made a
mistake by debiting account for Luboga with shs 860,000 which of the following entries corrects
the error?
(a) Debit Lubega 680,000 debit suspense 180,000 and credit Luboga 860,000
(b) Debit suspense 180,000, debit Luboga 860,000 and credit Lubega
(c) Credit Lubega 680,000 credit Lubega 860,000 and suspense 1,040,000
(d) Debit purchases 680,000 and credit Lubega 680,000
xii. At the end of the month, the following information was extracted from the cashbook and bank
statement. Balance as per cashbook shs. 40,000,000 credit and balance as per bank statement shs.
30,000,000 debit. Total of un credited cheques was shs. 12,000,000 while total direct debit
amounting to shs 500,000. total direct credits were shs 6,000,000. Assuming that the only
missing items to reconcile the balance as per cashbook and balance statement were un presented
cheques.
QUESTION FIVE
a) Explain the advantages of control accounts

b) Mukasa owns a retail shop in Nakawa trading centre. The following information relates to his
debtors:-
st
 Balance on 1 January 2006 UGX 10,000,000, 60% of this is owed from David and the balance from
Moses.
Transactions for the years:-
302
3023
Sales of UGX 18,000,000, 60% to Moses and the balance to David
Cheque Receipts from debtors by cheque UGX 14,000,000, 50% from David the balance from Moses.
Dishonored cheques UGX 3,000,000, 80% from Moses and the balance from David
Uncollectible debts were 10% of sales; ¼ of these debts relate to David and the balance to Moses.
Returns were UGX 1,000,000 and 500,000 from Moses and David respectively.
Discounts allowed of 1% and 2% to Moses and David respectively on their respective sales figures.
Required
For the year ended 31/12/2006, draw up:-
i) Debtors’ subsidiary ledger well close off (6 marks)

ii) Debtors’ control account well close off (9 marks)
303
3033
Bank Reconciliation statement.
What Is a Bank Reconciliation statement?
This is a periodic statement prepared to reconcile the cash book and bank statement balance correcting
discrepancies.
Bank reconciliation is the process of matching and comparing figures from accounting records against
those presented on a bank statement. Less any items which have no relation to the bank statement, the
balance of the accounting ledger should reconcile (match) to the balance of the bank statement.
Or The process of adjusting an account balance reported by a bank to reflect transactions that have
occurred since the reporting date comparing them with records appearing in the cash book records.
Bank reconciliation allows companies or individuals to compare their account records to the bank's
records of their account balance in order to uncover any possible discrepancies.
Since there are timing differences between when data is entered in the banks systems and when data is
entered in the individual's system, there is sometimes a normal discrepancy between account
balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.
Causes of disagreement between Bank statement and Cash book:
Usually the reasons for the disagreement are:
304
3043
7. That our banker might have allowed interest, received dividends which have not yet been entered
in our cash book.(Direct credits) which is income to the business.ie cash inflow.
8. That our banker might have debited our account for any such item as interest on overdraft,
commission for collecting cheque, incidental charges etc., which we have not entered in the cash
book.( Direct Debits) which is an expense to the business. ie cash outflow
9. That some of the cheque which we drew and for which we credited our bank account prior to the
date of closing, were not presented at the bank and therefore, not debited in the bank statement.
(unpresented cheques to the bank for payments. Ie issued cheques)
10. That some cheques or drafts which we have paid into bank for collection and for which we
debited our bank account, were not realized within the due date of closing and therefore, not
credited by the bank.( uncredited cheques with our bankers.Recieved cheques.)
11. The banker might have credited our account with amount of a bill of exchange or any other
direct payment into bank and the same may not have been entered in the cash book.
12. That cheques dishonoured might have been debited in the bank statement but have not been
given effect to in our books.
How to Prepare a Bank Reconciliation Statement:
To prepare the bank reconciliation statement, the following rules may be useful for the students:
8. Check the cash book receipts and payments against the bank statement.
9. Items not ticked on either side of the cash book will represent those which have not yet passed
through the bank statement.
11. Items not ticked on either side of the bank statement will represent those which have not yet been
passed through the cash book.
13. Adjust the cash book by recording therein those items which do not appear in it but which are
found in the bank statement, thus computing the correct balance of the cash book.
14. Prepare the bank reconciliation statement reconciling the bank statement balance with the correct
cash book balance in either of the following two ways:
(i) First method (Starting with the cash book balance)

(ii) Second method (Starting with the bank statement balance)
305
3053
First Method (Starting With the Cash Book Balance):
(a) If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but
not collected and credited by the bank and added to it all cheques drawn on the bank but not yet
presented for payment. The new balance will agree with bank statement.
(b) If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts,
etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the
bank but not yet presented for payment. The new balance will then agree with the balance of the
bank statement.
Second Method (Starting With the Bank Statement Balance):
(a) If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts,
etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on
the bank but not yet presented for payment. The new balance will then be agree with the balance
of the cash book.
(b) If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques,
drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all
cheques drawn on the bank but not yet presented for payment. The new balance will agree with
the balance of the cash book.
Alternatively:
Cash book shows debit Cash book shows credit

balance i.e., bankbalance i.e., bank
Information statement shows creditstatement shows debit
balance balance
CB to BS BS to CB CB to BS BS to CB
Cheques issued but not presentedAdd Less Less Add
306
3063
in the bank.
Cheques paid into bank but not

collected and credited by the
Less Add Add Less
bank.
Credit, if any in the bank

statement. Add Less Less Add
Debit, if any in the bank

statement. less Add Add Less
Illustration.
On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was Shs
1,401 and the balance as shown by the bank statement was shs 2,253.
On checking the bank statement with the cash book it was found that a cheque for Shs 116 paid in on the
31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31
December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons shs 29,
Bashir & Co. Shs 801, MA Jalil Shs 6, Khalid Bros., Shs 132.
Prepare a statement recording the two balances:
Solution:
Bank Reconciliation Statement on 31st December 1991
First Method:
Less cheques paid in but not collected 116
1,285
Add cheques drawn but not presented:
Rashid & Sons 29
Bashir & Co. 801
MA Jalil 6
Khalid Bros. 132 968

Second Method:
Less cheques drawn but not presented 968
307
3073
1,285
Add cheques paid in but not collected 116
illustration 2:
On 31st March, 1991 the bank statement showed the credit balance of shs 10,500. Cheque amounting to
shs 2,750 were deposited into the bank but only cheque of shs 750 had not been cleared up to 31st
March. Cheques amounting to shs 3,500 were issued, but cheque for shs 1,200 had not been presented
for payment in the bank up to 31st March. Bank had given the debit of shs 35 for sundry charges and
also bank had received directly from customers shs 800 and dividend of shs 130 up to 31st March. Find
out the balance as per cash book.
Solution:
Bank Reconciliation Statement as on 31st March, 1991

Add cheques deposited but not credited 750
11,250
Less cheques issued but not presented 1,200
10,050
Add bank charges made by the bank 35
10,085
Less omission in cash book (shs 800 + shs 130) 930
Balance as per cash book 9,155
Note:
3. Charges made by the bank shs 35 have not been recorded in the cash book, therefore, the balance
in cash book is more. Add to bank statement balance also.
308
3083
4. Dividend and amount from customers received by the bank have not been recorded in the cash
book. Therefore, in the cash book there is no entry of shs 930 (800 + 130). Deduct from the bank
statement balance to adjust it according to cash book balance.
Comparing the Bank Statement records to the Cashbook records.
When all of the receipts for a period have been written up in the cash receipts book and all of the cheque
payments, standing orders and direct debits have been entered into the cash payments book, it is
necessary to carry out any further checks possible on the cashbook. The most obvious check is to
compare the entries in the cash receipts and cash payments book for the period, to the entries on the
bank statement, although some care does need to be taken here.
Debits and Credits
One of the most obvious differences between the cashbook and the bank statement is that the use of the
terms debit and credit appear to be totally opposed to each other.
If cash is paid into the bank by a business then for the business this is a receipt and is entered in the cash
receipts book as a debit entry. However, in the bank statement this will be described as a credit and the
balance will be a credit balance. This is due to the fact that if a business has money in the bank, the
bank effectively owes the money back to the business and therefore the business is a creditor to the
bank.
Similarly, if the business writes a cheque out of the business bank account this will be entered in the
cash payments book as a credit entry. From the bank's perspective however, this is known as a debit
entry and any overdrawn balance is a debit balance.
How to prepare a Bank Reconciliation statement.
Summarised, the procedure for performing a bank reconciliation, in four simple steps:
Pre Bank Reconciliation .
5. Compare the cash receipts book to the receipts shown on the bank statement (the credits on the
bank statement) - for each receipt that agrees, tick the item in both the cashbook and the bank
statement.
6. Compare the cash payments book to the payments shown on the bank statement (the debits on
the bank statement) - for each payment that agrees, tick the item in both the cashbook and the
bank statement.
7. Any un-ticked items on the bank statement (other than rare errors made by the bank) will be
items that should have been entered into the adjusted cash book, but have been omitted for some
reason - these should be entered into the cashbook and then the amended balance on the
cashbook can be found. To find the correct cashbook balance a ledger account is used for the
bank with the original cashbook balance shown as the brought forward balance and any
additional payments shown as credits and receipts as debits. This is illustrated in the example.
309
3093
8. Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques
and outstanding lodgements - these will be used to reconcile the bank statement closing balance
to the corrected cash book closing balance.
Post Bank Reconciliation - Completing The Double Entry
Opening Balances On The Cashbook & Bank Statement
In our example you may have noted that the opening balance on the cashbook agreed with that of the
bank statement - there were no unpresented cheques or outstanding lodgements at the end of the
previous period.
This will not always be the case. If there were timing differences at the end of the previous period, then
a bank reconciliation statement would have to be prepared. When comparing this period's bank
statement and cashbook you will need to have the previous period's bank reconciliation statement in
order to be able to tick last period's timing differences when they appear on the bank statement this
period.
Revision questions.
Qn . 1.
d) “It’s not always the case that the balance as per bank statement agrees with the balance as per
cash book and thus need to prepare a bank reconciliation statement” This was a comment by
Richard a DBA1 student during FA discussions.
Account for the discrepancy between the cash book and bank statement balances at the end of the
period
e) Explain the two principle uses of the trial balance

f) Briefly explain the stages involved in the accounting cycle
Question 2
The following information was extracted from the bank reconciliation statement of Excel Ltd. For the
month ended 31/11/2005
Direct Debits Direct (Shs. 000) Credits(Shs 000)
Bank Charges 3,600 Cheque no. 445 26.400
Commissions 33,600 Cheque no. 446 888.000
Un presented Cheque (Shs. 000) Un Credited Cheques (Shs 000)

Cheque no. 220 10,000 Cheque no 115 12,000
310
3103
Cheque no 235 26,000 Cheque no 120 31,200
The following is the cash book of Excel Ltd. For the month ended 31/12/2005
DR Cash Book (Bank Column) CR
000 000
Cheque no. 224 72,000 Bal b/d 108,000
Cash 24,000 343 36,000
Cash 48,000 Cheque no. 429 57,600
Cheque no. 87,600 Cheque no. 442 242,400
Cash 36,000 Cheque no. 483 93,600
Bal c/d 688,800 Cheque no. 546 12,000
Commission 33,600
1,308,000 1,308,000
On the 31.12.2005, the bank sent the following bank statement of Excel Ltd.
Debit Shs Credit Shs Balance
000 000 000
Bal b/d 912,000
Cheque no. 301 6,000 930,000
“ 312 144,000 786,000
“ 120 31,200 817,200
“ 122 18,000 835,200
“ 515 30,000 856,200
“ 343 36,000 829,200
“ 354 72,000 901,200
“ 235 78,000 823,200
“ 111 36,000 859,200
“ 183 96,000 955,200
“ 220 30,000 925,200
Cheque no. 133 19,200 980,400
“ 375 64,800 915,600
“ 407 48,000 867,600
“ 115 12,000 855,600
311
3113
“ 224 72,000 927,6000
Cheque no. 193 18,000 945,600
“ 265 60,000 1,005,600
“ 146 57,600 1,063,200
“ 386 86,400 976,800
“ 418 112,800 864,000
“ 249 64,800 928,800
“ 177 37,200 966,000
“ 102 39,600 1,005,600
Cash Deposit 48,000 1,053,600
Cheque no. 151 44,400 1,098,600
“ 431 8,400 1,089,600
“ 483 104,400 985,200
Commission 1,200 984,000
Standing Order 6,000 978,000
(NWSC)
Interest 4,800 982,800
Additional Information:
i. Due to some technical defaults with the computers, cheque no. 254 and 115 were wrongly
treated in the bank statements.
ii. Cheque no. 546 was dishonored by the bank and was received together with bank statement.
iii. If other mistakes do exist, they should be deemed to have been made in the cashbook by the
bookkeeper.
Required:
Prepare the Company’s Bank Reconciliation Statement for the month ended 30.06.20
QUESTION 4
The Bank columns in the Cash Book for June and the Bank Statement for that month for V. Mpawuko
K. are as follows.
Cash book Shs Shs
Jun 1 Bal b/d 4,119 5-Jun D. Blake 150
7 B. Green 158 8 A. Dailey 349
7 T.J. Masters 88 12 J. Grey 433
16 A. Silver 93 15 R. Mason 44
22 J. Ellis 73 16 B. Stephens 88
28 M. Brown 307 28 G. Small 15
29 K. Black 624 29 Orange Club 57
30 K. Wood 249 30 Bal C/d 4,664
30 M. Barrel 178
5,889 5,889
Bank Statement.
Dr(Shs) Cr(Shs) Bal (shs)
1-Jan Bal B/d 4,119
7 Cheque 88 4,207
8 D Blackness 150 4,057
312
3123
11 A. Dailey 139 3,708
16 Cheque 93 3,801
17 J. Gray 343 3,458
18 B. Stephens 88 3,370
20 R. Mason 33 3,337
22 Cheque 73 3,410
28 Cheque 307 3,717
30 UDT Standing order 44 3,673
Bank Charges 92 3,581
Credit transfer J. Walters 54 3,635
30 Johnson: Trader’s Credit 90 3,725
Note
Cheque received from B Green was Dishonored and returned to Mpawuwo on the date the bank
statement was received. The bank does not make mistakes!
Required:
(a) Bring the cashbook reconciliation statement at 30 June 10, 2011 8 marks
(b) Prepare the bank reconciliation statement as at 30 June 7 marks
(c) Explain the following terms
(i) Bank reconciliation statement
(ii) Bank Giro Credit
(iii) Direct debits
(iv) Dishonored cheque
(v) Standing order.
QUESTION 5
The following is a cash book and bank statement for Akamwe for the month of October, 2000
Cash Book (Bank Column)

Dr Cr
(Shs. 000) (Shs 000)
Bal b/f 80,000 Cheque No. 1110 Mukasa 32,000
Cheque No. 510 John 60,000 “ 1112 Mao 40,000
“ 512 Musa 24,000 “ 1114 Okuru 30,000
“ 514 Tino 10,000 “ 1115 Opolot 14,000
“ 515 Mugisha 4,000 “ 1119 Alaba 6,000
“ 517 Stella 34,000 “ 1118 Atieno 4,000
“ 518 Mathew 13,000 “ 1120 Martin 2,000
“ 520 Joel 2,000 “ 1122 Mary 1,000
“ 1123 Simon 4,000
313
3133
“ Bal c/f 94,000
227,000
Bank Statement
Dr Cr Balance
(Shs.000) (Shs.000) (Shs.000)
Bal b/f 80,000
Cheque No. 510 John 60,000 140,000
“ 1110 Mukasa 32,000 108,000
“ 1112 Mao 40,000 68,000
“ 1114 Okurut 30,000 38,000
“ 512 Musa 24,000 62,000
“ 514 Tino 10,000 72,000
“ 1115 Opolot 14,000 58,000
C.M Rita 18,000 76,000
S.O (SWICO) 2,000 74,000
C.M Ben 16,000 90,000
Bank charge 200 89,800
C.M = Credit Memo

S.O = Standing Order
A cheque written to Alaba and one received from Mugisha were dishonored by the bank.
Required:
(a) Adjust Cash Book

(b) Bank Reconciliation Statement
QUESTION. 7.
The Balance sheet of MEYER Ltd as at 31th December 2000 was as follows:
317
3173
Shs ‘000 Shs ‘000 Shs ‘000
Fixed Assets (net depreciation)
Stock 10,000
Debtors 15,000
Prepayments 5,000
Bank 20,000
Cash 25,000 75,000
Suspense Account 170
75,170
Less: Current Liabilities

Creditors 17,500
318
3183
Accruals 7,500 25,000
Working Capital 50,170
Net Assets 550,170
Financed by:
Capital 302,500
Add. Net profit 33,680

336,180
Less: Drawings 21,010

Owners equity 315,170
Long term bank loan 235,000
Capital employed 550,170
During the month of January 2001, the following errors which were made in the financial year ended on
st
31 December 2000 were located.
i. A Cheque of an amount of 2,457,000/= received from a debtor was recorded in the debtors’ A/C
as 2,452, 500/= but was properly recorded in the cash book.
ii. Electricity expense paid was under recorded in the bank column of the cash book by shs. 7,500.
the entry was correct in the other account.
iii. A sales invoice of 1,250,000/= was recorded as 1,025,000/= in the sales day book.
iv. A creditor had a balance of 2,500,000/= in her account but was taken to the trial balance as
2,750,000/=
v. A cheque payment of 100,000/= for postage stamps was debited to the cash book and properly
recorded in the postage account in the ledger.
vi. Accrued salaries is 500,000/= was not recorded in any account.
vii. Prepaid insurance of 150,000/= was credited to accrued insurance account as 175,000/= The
corresponding double entry account had no problem.
viii. The debit side of the trial balance was under added by 75,000/= because of discount allowed
account that was opened in the ledger.
319
3193
ix. Director’s Christmas party which was not voted for and not part of their official emoluments
costed 1,000,000/= This amount was withdrawn from the company’s bank account. It was
debited to the general expenses account and credited to the cash book (bank column)
x. The provision for bad debts for 250,000/= was omitted from the ledger but, the bad debts account
had been debited.
Requires:
i. Journal entries to correct all errors (10 marks)
ii. Suspense Account (4 marks)
iv. Corrected Balance Sheet.
Illustration one
The accountant of starlight Ltd prepared a trial balance for his company for the month of December
1997 but failed to balance. The total on the debit side was more that the total on the credit side by
33,000/=. He opened a suspense account for the difference and proceeded to prepare final accounts. He
reported a net profit profit of 1,400,000/=
During the month of January 1998 he discovered the following mistakes, which had been made in
December 1997.
a) The purchases account had been under cast by 2,000/=

b) Payment of 555,000/= by cheque for insurance was properly recorded in the cashbook but posted
to insurance account by mistake as 515,000/=
c) A sales invoice of 300,000/= was not recorded in the sales day book and therefore not posted to
the ledger.
d) The credit side of the sales account was under added by 4,000/=
e) Motor vehicle repairs costing 50,000/= was debited to motor vehicle account
f) Payment of 680,000/= cash to join a creditor was properly recorded in Johns account but was
wrongly recorded in the cash book as 670,000/=
g) The book keeper had made a mistake by debiting ledger fee of 15,000/= to the account but
properly recorded it in the ledger fee account.
320
3203
h) Sale of goods for 600,000/= on credit to Tino was properly recorded in the sales account but was
recorded in the ledger fee account.
i) The bank column of the cash book credit side was over added by 1000/=
j) A credit note issued for 800,000/= was properly recorded in the customers account but was
wrongly recorded in the other account necessary for completion of double entry as 820,000/=
k) Discount received of 6,000/= was debited to discount allowed account.
Required
i. Journal entries to correct all the errors

ii. A suspense account
iii. Statement of corrected net profit.
320
3203

Fianancial Accounting

Uploaded by

Copyright:

Available Formats

Fianancial Accounting

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fianancial Accounting

Uploaded by

Copyright:

Available Formats

FIANANCIAL ACCOUNTING

THE HISTORY OF FINANCIAL ACCOUNTING.

What is the difference between bookkeeping and accounting?

IMPORTANCE OF FINANCIAL ACCOUNTING.

USERS OF ACCOUNTING INFORMATION

i) S h a r e h o l d e r s / Owners – will use the information in order to determine the

ELEMENTS OF USEFUL ACCOUNTING INFORMATION

QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION.

PARTIES INTERESTED IN ACCOUNTING INFORMATION:

Explain, who may be interested in accounting information of a company or firm?

Creditors or service providers.

DEFINITION OF ACCOUNTING PRINCIPLES/CONCEPTS/CONVENTION.

2. MONETARY /MONEY MEASUREMENT:

End of year adjustment

1800,000 = 100,000 monthly rent 18 (month)

Therefore rent expense= 12x 100,000= 1200, 000/=

Prepaid rent expense= 600,000/=

i) Cash sale ship

ii) Cash Receipt

iii) Cash payment voucher

iv) Bank deposit slip

viii) Credit note

ix) Debit note

COMMON TERMINOLOGIES USED IN BOOK-KEEPING:

It is a form of remuneration for services rendered by one person to another.

CAPITAL EXPENDITURE vs REVENUE EXPENDITURE.

A summarized record of transactions relating to person or thing is called an account.

Debtor (Account Receivable):

Creditor (Accounts Payable):

1.1 Objectives of Financial Reporting.

The user–groups of financial reports include:

All changes in equity or;

Define and explain accounting cycle.

The diagram below demonstrates the Accounting cycle.

Definition and Explanation:

Essential Features of Accounting Principles:

Accounting principles are accepted if they satisfy the following norms:

Classification of Accounting principles:

The explanation of these concepts are as follows:

Business Entity Concept:

Going Concern Concept:

Money Measurement Concept:

Dual Aspect Concept:

Capital (Equities) = Costs (Assets)

Capital + Liabilities = Assets

Accounting period concept:

1. Define and explain accounting equation.

Definition and Explanation of Accounting Equation:

The formula know as the accounting equation, thus arrived at is as follows:

Assets = Liabilities + Proprietorship’s capital.

Assets - Liabilities = Proprietorship’s capital

Effects of Transactions on the Accounting Equation:

Assets = Liabilities + Proprietorship’s

Note that assets and equities increased by equal amounts

Assets = Liabilities + Proprietorship

Purchased merchandise on account (on credit) $5,000.

Assets = Liabilities + Proprietorship

Assets = Liabilities + Proprietorship

Sold merchandise on credit for $4,000 costing $3,000.