FINANCIAL ACCOUNTING 1
Financial Accounting 1
Subject No. 1
Study Pack
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Strathmore University
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Distance Learning Centre
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P.O. Box 59857,
00200, Nairobi,
Kenya.
Tel: +254 (02) 606155
Fax: +254 (02) 607498
Email: dlc@strathmore.edu
Copyright
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent of the copyright owner.
© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992
ACKNOWLEDGMENT
We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and Secretaries National Examination Board (IASNEB); Chartered Institute of Management Accountants (CIMA); Chartered Association of Certified Accountants (ACCA).
INSTRUCTIONS FOR STUDENTS
This study guide is intended to assist distance-learning students in their independent studies. In addition, it is only for the personal use of the purchaser, see copyright clause. The course has been broken down into eight lessons each of which should be considered as approximately one week of study for a full time student. Solve the reinforcement problems verifying your answer with the suggested solution contained at the back of the distance learning pack. When the lesson is completed, repeat the same procedure for each of the following lessons.
At the end of lessons 2, 4, 6 and 8 there is a comprehensive assignment that you should complete and submit for marking to the distance learning administrator.
Submission Procedure
1. After you have completed a comprehensive assignment clearly identify each question and number your pages.
2. If you do not understand a portion of the course content or an assignment question indicate this in your answer so that your marker can respond to your problem areas. Be as specific as possible.
3. Arrange the order of your pages by question number and fix them securely to the data sheet provided. Adequate postage must be affixed to the envelope.
4. While waiting for your assignment to be marked and returned to you, continue to work through the next two lessons and the corresponding reinforcement problems and comprehensive assignment.
On the completion of the last comprehensive assignment a two-week period of revision should be carried out of the whole course using the material in the revision section of the study pack. At the completion of this period the final Mock Examination paper should be completed under examination conditions. This should be sent to the distance-learning administrator to arrive in Nairobi at least five weeks before the date of your sitting the IASNEB Examinations. This paper will be marked and posted back to you within two weeks of receipt by the Distance Learning Administrator.
CONTENTS
ACKNOWLEDGMENT ii
INSTRUCTIONS FOR STUDENTS iii
FINANCIAL ACCOUNTING I COURSE DESCRIPTION vi
LESSON ONE 1
INTRODUTION TO ACCOUNTING 1
LESSON TWO 32
FINAL ACCOUNTS 32
LESSON THREE 68
ACCOUNTING THEORY 68
LESSON FOUR 81
ADJUSTMENTS TO FINAL ACCOUNTS 81
LESSON FIVE 136
FURTHER ADJUSTMNETS TO ACCOUNTS 136
LESSON SIX 176
OTHER ASPECTS OF FINAL ACCOUNTS 176
LESSON SEVEN 231
PARTNERSHIPS 231
LESSON EIGHT 287
COMPANY ACCOUNTS 287
LESSON NINE 334
REVISION AID 334
FINANCIAL ACCOUNTING I COURSE DESCRIPTION
The subject gives a thorough and comprehensive introduction to double bookkeeping. It develops the students understanding of the final; accounts of business and that of clubs and societies, and the treatment of capital expenditure and the purchasing of stock.
Following this it deals with the cashbook and bank reconciliation preparation of accounts from incomplete records. Its prime purpose is to pre[pare candidates for the Section One examination of the CPA Kenya accountancy paper and is based on the materials used to prepare students at Strathmore School of Accountancy.
Text Book: Business Accounting Volume 1 by Frank Wood
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the users of this information to permit informed judgment
Many businesses carry out transactions. Some of these transactions have a financial implication i.e. either cash is received or paid out. Examples of these transactions include selling goods, buying goods, paying employees and so many others.
Accounting is involved with identifying these transactions measuring (attaching a value) and reporting on these transactions. If a firm employs a new staff member then this may not be an accounting transaction. However when the firm pays the employee salary, then this is related to accounting as cash involved. This has an economic impact on the organization and will be recorded for accounting purposes. A process is put in place to collect and record this information; it is then classified and summarized so that it can be reported to the interested parties.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These financial statements provide information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners and others.
The financial performance reflects how the business has performed, whether it has made profits or losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the information contained in the financial statements will affect the decision making process.
The following are the users of accounting information:
i. Owners:
They have invested in the business and examples of such owners include sole traders, partners (partnerships) and shareholders (company). They would like to have information on the financial performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing whether the business is profitable or not and whether to make drawings or put in additional capital.
ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like to have information on the financial performance and position so as to assess whether the business would be able to pay up for the goods and services provided as and when the payments falls due.
iii. Managers
The managers are involved in the day-to-day activities of the business. They would like to have information on the financial position, performance and changes in financial position so as to determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks and other financial institutions. They would like to have information on the financial performance and position of the business to assess whether the business is profitable enough to pay the interest on loans and whether it has enough resources to pay back the principal amount when it is due.
v. The Government and its agencies
The Government is interested in the financial performance of the business to be able to assess the tax to be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the business to be able to come with National Statistics. This statistics measure the average performance of the economy.
vi. The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples include stockbrokers who advise investors on shares to buy in the stock market and other professional consultants like accountants. They are interested with the financial position and performance of the firm so that they can advise their clients on how much is the value their investment i.e. whether it is profitable or not and what is the value.
Others advisors would include the press who will then pass the information to other relevant users.
vii. The Employees
They work for the business/entity. They would like to have information on the financial position and performance so as to make decisions on their terms of employment. This information would be important as they can use it to negotiate for better terms including salaries, training and other benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are secure.
viii. The Public
Institutions and other welfare associations and groups represent the public. They are interested with the financial performance of the firm. This information will be important for them to assess how socially responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and the effect of firm’s activities on the environment.
c) THE ACCOUNTING EQUATION
A business owns properties. These properties are called assets. The assets are the business resources that enable it to trade and carry out trading. They are financed or funded by the owners of the business who put in funds.
These funds, including assets that the owner may put is called capital. Other persons who are not owners of the firm may also finance assets. Funds from these sources are called liabilities.
The total assets must be equal to the total funding i.e. both from owners and non-owners. This is expressed inform of accounting equation which is stated as follows:
ASSETS = LIABILITIES + CAPITAL
Each item in this equation is briefly explained below.
Assets:
An asset is a resource controlled by a business entity/firm as a result of past events for which economic benefits are expected to flow to the firm.
An example is if a business sells goods on credit then it has an asset called a debtor. The past event is the sale on credit and the resource is a debtor. This debtor is expected to pay so that economic benefits will flow towards the firm i.e. in form of cash once the customers pays.
Assets are classified into two main types:
i) Non current assets (formerly called fixed assets).
ii) Current assets.
Non current assets are acquired by the business to assist in earning revenues and not for resale. They are normally expected to be in business for a period of more than one year.
Major examples include:
▪ Land and buildings
▪ Plant and machinery
▪ Fixtures, furniture, fittings and equipment
▪ Motor vehicles
Current assets are not expected to last for more than one year. They are in most cases directly related to the trading activities of the firm. Examples include:
▪ Stock of goods – for purpose of selling.
▪ Trade debtors/accounts receivables – owe the business amounts as a resort of trading.
▪ Other debtors – owe the firm amounts other than for trading.
▪ Cash at bank.
▪ Cash in hand.
Liabilities:
These are obligations of a business as a result of past events settlement of which is expected to result to an economic outflow of amounts from the firm. An example is when a business buys goods on credit, then the firm has a liability called creditor. The past event is the credit purchase and the liability being the creditor the firm will pay cash to the creditor and therefore there is an out flow of cash from the business.
Liabilities are also classified into two main classes.
i) Non-current liabilities (or long term liabilities)
ii) Current liabilities.
Non-current liabilities are expected to last or be paid after one year. This includes long-term loans from banks or other financial institutions. Current liabilities last for a period of less than one year and therefore will be paid within one year. Major examples:
▪ Trade creditors/
or accounts payable – owed amounts as a result of
business buying goods on credit.
▪ Other creditors - owed amounts for services supplied to the firm
other than goods.
▪ Bank overdraft - amounts advanced by the bank for a short-term
period.
Capital:
This is the residual amount on the owner’s interest in the firm after deducting liabilities from the assets.
The Accounting equation can be expressed in a simple report called the Balance Sheet. The basic format is as follows:
Name
Balance sheet as at 31.12.
Sh Sh Sh Sh
Capital xx Non Current Assets
Land & Buildings xx
Non Current Liabilities Plant & Machinery xx
Loan xx Fixtures, furniture & fittings xx
Motor vehicles xx
Current liabilities xx
Overdraft xx Current Assets
Creditors xx xx Stocks xx
Debtor’s xx
Capital and Liabilities Cash at bank xx
Cash in hand xx xx
xx Total assets xx
The above format of the balance sheet is the horizontal format however currently the practice is to present the Balance Sheet using the vertical format which is shown below.
Name
Balance sheet as at 31.12.
Non Current Assets Sh Sh Sh
Land & Buildings xx
Plant & Machinery xx
Fixtures, furniture & fittings xx
Motors vehicles xx
xx
Current Assets
Stocks/inventories xx
Debtors/ trade receivables xx
Cash at bank xx
Cash in hand xx
Current Liabilities
Bank Overdraft xx
Creditors/trade payables xx (xx)
Net Current Assets xx
Net assets xx
Capital xx
Non Current Liabilities
Loan (from bank or other sources) xx
xx
Please pay attention to the format. The Non Current assets are listed in order of permanence as shown i.e. from Land and Buildings to motor vehicles. The Current Assets are listed in order of liquidity i.e. which asset is far from being converted into cash. Example ,stock is not yet sold, (i.e. not yet realised yet) then when it is sold we either get cash or a debtor (if sold on credit). When the debtor pays then the debtor may pay by cheque (cash has to be banked) or cash.
The Current Liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is payable on demand by the bank, then followed by creditors.
Note that in the vertical format, current liabilities are deducted from current assets to give net current assets. This is added to Non Current assets, which give us net assets.
Net assets should be the same as the total of Capital and Non Current Liabilities.
Example 1.1
B Kelly has a business that has been trading for some time. You are given the following information as at 31.12.2002
£
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
Stocks 8,500
Debtor 5,600
Cash a bank 1,500
Cash in hand 400
Creditors 2,500
Capital 30,800
Loan 5,000
You are required to prepare a Balance Sheet as at 31 December 2001
B Kelly
Balance Sheet as at 31 December 2001
Non Current Assets £ £ £
Buildings 11,000
Furniture & Fittings 5,500
Motor Vehicles 5,800
22,300
Current Liabilities
Stock 8,500
Debtors 5,600
Cash at bank 1,500
Cash in hand 400
16,000
Creditors (2,500)
Net Current Assets 13,500
Net Assets 35,800
Capital 30,800
Non-Current Liabilities
Loan 5,000
35,800
Example 1.2
L Stokes sets up a new business. Before he actually sells anything he has bought motor vehicles of ₤3,000, premises of ₤7,000, stock of goods ₤2,000. He still owes ₤800 in respect of them. He had borrowed ₤4,000 from D Evans. After the events just described and before trading starts, he had ₤300 cash in hand and ₤600 cash at bank.
You are required to calculate the amount of his capital.
Solution:
Assets: ₤ ₤
Motor Vehicle 3,000
Premises 7,000
Stock 2,000
Cash at bank 600
Cash in hand 300
12,900
Liabilities:
Creditors 800
Loan - D Evans 4,000 (4,800)
8,100
Capital 8,100
Remember the Accounting equation:
Assets = Liabilities + Capital.
To get capital we rearrange the equation as follows:
Capital = Assets - Liabilities
Total Assets = ₤12,900
Total Liabilities = ₤4,800
Capital = ₤ 12,900 - 4,800
= ₤ 8,100
Example 1.3
C Kings has the following items in his balance sheet as on 30 June 2002.
Capital £41,800, Creditors £3,200, Fixtures £7,000, Motor Vehicles £8,400, Stock of goods £9,900, Debtors £6,500, Cash at bank £12,900 and Cash in hand £240.
During the first week of July 2002:
a. He bought extra stock of goods £1,540 on credit.
b. One of the debtors paid him £560 in cash.
c. He bought extra fixture by cheque £2,000.
You are to draw up a balance sheet as on 7 July 2002 after the above transactions have been completed.
First we need to look at the effect of the above transactions on the assets and liabilities of C Kings.
For
(a) Buying extra stock increases the level of stock by £1,540 and because this is bought on credit the creditors increase by £1,540 also.
b) Amount received from the debtor means that the level of debtors reduces and cash increases by £560.
c) Extra fixtures bought by cheque, will increase the fixtures and reduce the cash at bank by £2,000.
This can be summarized as follows:
Opening Increase/(Decrease) Closing
Balances Balances
£ £
Capital 41,800 - 41,800
Creditors 3,200 1,540 4,740
Fixtures 7,000 2,000 9,000
Motor Vehicles 8,400 - 8,400
Stock 9,900 1,540 11,440
Debtors 6,560 (560) 6,000
Cash at bank 12,900 (2000) 10,900
Cash in hand 240 560 800
Given these closing balances then the balance sheet can be drawn as follows:
C Kings
Balance sheet as at 7 July 2002.
Non Current Assets £ £
Fixtures 9,000
Motor Vehicles 8,400
17,400
Current Assets
Stock 11,440
Debtors 6,000
Cash at bank 10,900
Cash at hand 800
29,140
Current Liabilities
Creditors (4,740)
Net Current Assets 24,400
Net Assets 41,800
Capital 41,800
From the illustration remember that any change in the items of the balance sheet will have a double effect on the accounting equation has a double effect and therefore the equation will always balance.
Example 1.4
D Moody has the following assets and liabilities as on 31 April 2002:
£
Creditors 15,800
Equipment 46,000
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
During the first week of May 2002 Moody:
a. Bought extra equipment on credit for £5,520.
b. Bought extra stock by cheque £2,280.
c. Paid creditors by cheque £3,160.
d. Debtors paid £3,360 by cheque and £240 by cash.
e. Moody put in extra £1,000 cash as capital.
Required:
a. Determine the capital as at 1st May 2002.
b. Draw up a balance sheet after the above transactions have been completed.
Solution:
(i) Using the accounting equation of Assets = Liabilities + Capital, then assets and liabilities can be listed as follows.
Assets £ Liabilities £
Equipment 46,000 Creditors 15,800
Motor Vehicle 25,160
Stock 24,600
Debtors 23,080
Cash at bank 29,120
Cash in hand 160
148,120
Capital = Assets – Liabilities
= £148,120 - £15,800 = £132,320
(ii) To draw up the balance sheet, we consider the effect of the above transactions on the relevant balances:
a. Buying extra equipment means that the equipment balance will increase by £5,520 and the creditors will also increase by the same amount.
b. Buying extra stock by cheque means that the level of stock goes up by £2,280 and the balance at bank reduces by the same.
c. Paying creditors by cheque reduces the balance on the creditors account and also reduce the amount at the bank.
d. Debtor paying the firm reduces the debtors balance by £3,600 and increases the cash at bank and cash in hand by £3,360 and £240 respectively.
e. Additional cash of £1,000 increases the cash in hand balance by £1,000 and the capital balances.
This is also summarized as follows:
Opening Adjustment Closing
Balance Increase/Decrease Balance
Assets/Liabilities £ £ £
Equipment 46,000 +5,520 51,520
Motor Vehicle 25,160 25,160
Stock 24,600 +2,280 26,880
Debtors 23,080 -3,600 19,480
Cash at bank 29,120 (-2,280 – 3,160 + 3,360) 27,040
Cash in hand 160 (+240 + 1000) 1,400
Creditors 15,800 (+5,520 – 3,160) 18,160
Capital 132,320 +1,000 133,320
The balance sheet will therefore be prepared as follows:
D Moody
Balance sheet as at 7 May 2002
Non Current Assets £ £
Equipment 51,520
Motor vehicle 25,160
76,680
Current Assets
Stock 26,880
Debtors 19,480
Cash at bank 27,040
Cash in hand 1,400
74,800
Current Liabilities
Creditors (18,160)
Net Current Assets 56,640
Net Assets 133,320
Capital 133,320
Double Entry Aspects
The Accounting equation forms the basis of double entry and therefore it should always be maintained. Any change in assets, liabilities or capital will have a double effect such that assets will always be equal to liabilities plus capital. If the owners put in additional capital then this will increase the cash at bank and the capital amount therefore the equation is still maintained.
Name Debit Credit
|Date |Detail |Folio |Amount |Date | | Detail |Folio |Amount |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
In this account the date will show the opening period of the asset ,liability or capital i.e. the balance brought forward. It will also show the date when a transaction took place (i.e. either an asset was bought or liability incurred).
The detail column (also called the particulars column) shows the nature of the transaction and reference to the corresponding account. The Folio Column for purposes of detailed recording shows the reference number of the corresponding account. The amount column shows the amount of the asset, liability or capital.
The left side of the account is called the debit side and the right side is called the credit side. All assets are shown or recorded on the debit side while all the liabilities and capital are recorded on the credit side. Each type of asset or liability must have its own account whereby all transactions affecting them are recorded in this account. Therefore there should be an account for Premises, Plant and Machinery, Stock, Debtors, Creditors etc.
Under the accounting equation if all assets are represented by liabilities and capital therefore all debits should be the same as credits.
For the double entry to be reflected in the accounts, every debit entry must have a corresponding credit entry. The transactions affecting these accounts are posted in the account as debit entry and credit entry to complete the double entry.
When we make a debit entry we are either:
i. Increasing the value of an asset.
ii. Reducing the value of a liability.
iii. Reducing the value of capital.
When we make a credit entry we are either:
i. Reducing the value of an asset.
ii. Increasing the value of a liability.
iii. Increasing the value of capital.
Example 1.5
H Jumps has the following assets and liabilities as on 30 November 2002:
Creditors £39,500; Equipment £115,000; Motor vehicle £62,900; Stock £61,500; Debtors £57,700;Cash at bank £72,800 and Cash in hand £400.
Compute the balance on the capital account as at 30 November 2002.
During the first week of December 2002, Jump:
a. Bought extra equipment on credit for £13,800.
b. Bought extra stock by cheque £5,700.
c. Paid creditors by cheque £7,900.
d. Received from debtors £8,400 by cheque and £600 by cash.
e. Put in an extra £2,500 cash as capital.
You are to draw up a balance sheet as on 7 December 2002 after the above transactions have been completed.
Answer:
Capital = Assets – Liabilities
|Assets |£ |Liabilities |£ |
|Equipment |115,000 |Creditors |39,500 |
|Motor vehicle |62,900 | | |
|Stock |61,500 | | |
|Debtors |57,700 | | |
|Cash at bank |72,800 | | |
|Cash in hand | 400 | | |
| |371,300 | | |
Capital = £371,300 - £39,500 = £330,800
Creditors A/C Motor Vehicles a/c
2002 £ B 2002 £ 2002 £ 2002 £
Bank 7900 1.12 Bal b/d 39,500 1.12 Bal b/d 62,900 1.12 Bal c/d 62,900
1.12 Bal c/d 31,600
62,900 62,900
39,500 39,500
Equipment a/c
|2002 |2002 £ |
|£ | |
|1.12 Bal b\d 115,000 | |
|Creditors 13,800 |7.12 Bal c\d 128,800 |
|128,800 |128,800 |
Stock a/c
|2002 |2002 £ |
|£ | |
|1.12 Bal b\d 61,500 | |
|Bank 5700 |7.12 Bal c\d 67,200 |
|67,200 |67,200 |
| | |
Debtors a/c
|2002 |2002 £ |
|£ | |
|1.12 Bal b\d 57,700 |Bank 8,400 |
| |Cash 600 |
|Bank 570 |7.12 Bal c\d 48,700 |
|57,700 |57,700 |
Cash at Bank a/c
|2002 |2002 |
|£ |£ |
|1.12 Bal b\d 72,800 |Stock 5,700 |
| |Creditors 7,900 |
|Debtors 8,400 |7.12 Bal c\d 67,600 |
|81,200 |81,200 |
Cash in hand a/c
|2002 |2002 |
|£ |£ |
|1.12 Bal b\d | |
|400 | |
|Debtors 600 | |
|Capital 2500 |7.12 Bal c\d 3500 |
|3500 |3500 |
Capital
|2002 |2002 £ |
|£ | |
| |1.12 Bal b\d 330800 |
|7.12 Bal b\d 333300 |Cash 2500 |
|128,800 |128,800 |
Creditors Of Equipment
|2002 |2002 £ |
|£ | |
| | |
|7.12 Bal b\d 13800 |Equipment 13800 |
|13,800 |13,800 |
H Jump
Balance sheet as at 7 December 2002
Non Current Assets £ £ £
Equipment 128,800
Motor vehicles 62,900
191,700
Current Assets
Stock 61,200
Debtors 48,700
Cash at Bank 67,600
Cash in Hand 3,500
187,000
Current Liabilities
Creditors of equipment 13,800
Creditors 31,000 (45,400)
Net Current Assets 141,000
Net Assets 333,300
Capital 333,300
Example 1.6
Write up the asset, capital and liability accounts in the books of M Crash to record the following transactions:
2002
June 1 Started business with £50,000 in the bank.
“ 2 Bought motor van paying by cheque £12,000.
“ 5 Bought Fixtures £4,000 on credit from Office Masters Ltd.
“ 8 Bought a van on credit from Motor Cars Ltd £8,000.
“ 12 Took £1,000 out of the bank and put it into the cash till.
“ 15 Bought Fixtures paying by cash £600.
“ 19 Paid Motor Cars Ltd by cheque £8000.
“ 21 A loan of £10,000 cash is received from J Marcus.
“ 25 Paid £8,000 of the cash in hand into the bank account.
“ 30 Bought more Fixtures paying by cheque £3,000.
Capital a/c Cash at bank a/c
2002 £ 2002 £ 2002 £ 2002 £
30/6 Bal c/f 50,000 1/6 Bank 50,000 1/6 Capital 50,000 2/6 Van 12,000
12/6 Cash 8,000 12/6Cash 1,000
19/6Motor ltd 8,000
50,000 50,000 30/6 Fixtures 3,000
30/6 Bal c/f 34,000
58,000 58,000
Motor Van
|2002 £ | £ |
|2/6 Bank 12,000 | |
|8/6 Super M 8,000 |30/6 Bal c/f 20,000 |
|20000 |20000 |
Fixtures
|2002 £ |2002 £ |
|5/6 young 4,000| |
|15/6 Cash 600| |
|30/6 Bank 3000 |Bal c/f 7,600 |
|7,600 |7,600 |
Motor Car Ltd – Creditors
|2002 £ |2002 £ |
|19/6 Bank 8000 |8/6 Van 8000 |
|8000 |8000 |
Office Masters Ltd - Creditor
|2002 £ |2002 £ |
|30/6 B\f 4000 |8/6 Fixtures 4000 |
|4000 |4000 |
Cash in hand
|2002 £ |2002 £ |
|12/6 Cash 1,000|15/6 Cash 600|
| |25/6 Bank 800 |
|21/6 J. Marcus 10000 |30/6 Bal c/f 2400 |
|11000 |11000 |
J. Marcus - Loaner
|2002 £ |2002 £ |
|30/6 c\f 10000 |21/6 Cash 10000 |
Note that the difference between the debit side and the credit side is the balancing figure. Most assets will have a balance on the credit side and most liabilities and capital accounts will have a balance on the debit side.
A simple balance sheet from these balances will be as follows:
M Crash
Balance Sheet as at 30th June 2002
£ £
Non Current Assets
Fixtures 7,600
Motor vehicles 20,000
27,600
Current Assets
Cash at bank 34,000
Cash in hand 2,400
36,400
Current Liabilities
Creditors – others (4,000)
Net Current Assets 32,400
Net Assets 60,000
Capital 50,000
Non Current Liabilities
Loan – J Jarvis 10,000
60,000
Let us now consider other transactions that take place in a business and the accounting entries to be made.
Accounting for sales, purchases, incomes and expenses.
Sales:
This is the sell of goods that were bought by a firm (the goods must have been bought with the purpose of resale). Sales are divided into cash sales and credit sales. When a cash sale is made, the following entries are to be made.
i. Debit cash either at bank or in hand.
ii. Credit sales account.
For a credit sale:
i. Debit debtors/ Accounts receivable account.
ii. Credit sales account.
A new account for sales is opened and credited with cash or credit sales.
Purchases:
Buying of goods meant for resale. Purchases can also be for cash or on credit. For cash purchases:
i. Debit purchases.
ii. Credit cash at bank/cash in hand
For credit purchases, we:
i. Debit purchases.
ii. Credit creditors for goods.
A new account is also opened for purchases where both cash and credit purchases are posted. NOTE: NO ENTRY IS MADE INTO THE STOCKS ACCOUNT.
Incomes:
A firm may have other incomes apart from that generated from trading (sales). Such incomes include:
▪ Rent
▪ Bank interest
▪ Discounts received.
When the firm receives cash, from these incomes, the following entries are made:
▪ Debit cash in hand/at bank.
▪ Credit income account.
Each type of income should have its own account e.g. rent income, interest income.
Incomes increase the value of capital and that is the reason why they are posted on the credit side of their respective accounts.
Expenses:
These are amounts paid out for services rendered other than those paid for purchases. Examples include:
• Postage and stationery
• Salaries and wages
• Telephone bills
• Motor vehicle running expenses.
• Bank charges.
When a firm pays for an expense, we:
i. Debit the expense account.
ii. Credit cash at bank/in hand.
Each expense should also have its own account where the corresponding entry will be posted. Expenses decrease the value of capital and thus the posting is made on the debit side of their accounts.
The following diagram is a simple summary of the entries made for incomes and expenses.
Debit cash book/bank/in hand
INCOMES/EXPENSES Debit Expense A/C
Credit cash book /bank/in hand
Returns Inwards and Returns Outwards.
Returns Inwards: These are goods that have been returned by customers due to various reasons e.g.
i. They may be defective/damaged,
ii. Being of the wrong type .
iii. Excess goods being delivered.
Goods returned may relate to cash sales or credit sales. For the goods returned in relation to cash sales and cash is refunded to the customer the following entries are made:
i. Debit returns – inwards
ii. Credit cashbook.
For goods returned that relate to credit sales; no cash has been given to customer, the following entry is to be made.
i. Debit returns inwards.
ii. Credit debtors.
Returns Outwards: These are goods returned to suppliers/creditors. They may be for cash purchases or for credit purchases. For cash purchases a cash refund given to the firm by the supplier,
i. Debit the cashbook (cash at bank/hand).
ii. Credit returns outwards.
For credit purchases and no refund has been made:
i. Debit creditors.
ii. Credit returns outwards.
Diagrammatically shown as follows:
Debit returns inwards.
Cash
Credit cashbook.
Inwards Debit returns inwards
Credit
Credit debtors
Debit cash
Returns Cash
Outwards Credit returns outwards
Debit creditors
Credit
Credit returns outwards
Now lets us take one example that includes most of the above transactions.
Example 1.8
You are to enter the following transactions, completing the double entry in the books for the month of May 2002.
2002
May 1 Started business with £2,000 in the bank.
“ 2 Purchased goods £175 on credit from M Rooks.
“ 3 Bought furniture and fittings £150 paying by cheque.
“ 5 Sold goods for cash £275.
“ 6 Bought goods on credit £114 from P Scot.
“ 10 Paid rent by cash £15.
“ 12 Bought stationery £27, paying in cash.
“ 18 Goods returned to M Rooks £23.
“ 21 Let off part of the premises receiving rent by cheque £5.
“ 23 Sold goods on credit to U Foot for £77.
“ 24 Bought a motor van paying by cheque £300.
“ 30 Paid the month’s wages by cash £117.
“ 31 The proprietor took cash for himself £44.
Example
Bank a/c
|2002 £ |2002 £ |
|1/5 Capital |3/5Furn& fitting 150 |
|2,000 | |
| |24/5 Motor vehicle 300 |
|21/5 Rent |31/5 Bal c/f 1,555|
|5 | |
|2,005 |2,005 |
Capital a/c
|31/5 Bal c/f 2,000|1/5 Bank 2,000 |
| | |
Purchases a/c
|2002 £ |2002 £ |
|2/5M Rooks 175 | |
|6/5 P Scot |31/5 Bal c/f |
|114 |289 |
|289 |289 |
| | |
| | |
Creditor – M Rooks a/c
|2002 £ |2002 £ |
|18/5 Returns in 23 |2/5 Purchases 175 |
|31/5 Bal c/f 152| |
|175 |175 |
| | |
Furniture & Fittings a/c
2002 £ 2002 £ Sales a/c
3/5 Bank 150 31/5 Bal c/f 150
2002 £ 2002 £
31/5 Bal c/f 352 5/5 Cash 275
150 150 23/5 U. Foot 77
352 352
Cash in hand a/c
2002 £ 2002 £ P Scot a/c
5/5 Sales 275 10/5 Rent 15 2002 £ 2002 £
12/5 Stationery 27 31/5 Bal c/f 114 6/5Purchases 114
30/5 Wages 117
31/5 Bal c/f 116
275 275 114 114
Expenses – Rent a/c Expenses – Stationery a/c
2002 £ 2002 £ 2002 £ 2002 £
11/5 Bal c/f 15 10/5 Cash 15 12/5 Cash 27 31/5Bal c/f 27
27 27
Returns – Out a/c Income – Rent a/c
2002 £ 2002 £ 2002 £ 2002 £
31/5 Bal c/f 23 18/5 M Rooks 23 21/5 Bal c/f 5 31/5 Bank 5
Debtors – U Foot a/c Motor vehicle a/c
2002 £ 2002 £ 2002 £ 2002 £
23/5 Sales 77 31/5 Bal c/f 77 24/5 Bank 300 31/5 Bal c/f 300
Expenses – Wages a/c Drawings a/c
2002 £ 2002 £ 2002 £ 200 £
30/5 Cash 117 31/5 Bal c/f 117 31/5 Cash 44 31/5 Bal c/f 44
Accounting for drawings, discounts allowed and discounts received.
Drawings
The owner makes drawings from the firm in various ways:
i) Cash or bank withdrawals
When the owner withdraws money from the business we debit drawings and credit cashbook (cash in hand or cash at bank).
ii) Taking goods for own use and
When the owner takes out some of the goods for his own use, we debit drawings and credit purchases.
iii) Personal expenses, paid by the business
Here we debit the drawings and credit expense account
Taking some of the other assets from the business e.g. motor vehicles or using part of the premises.
Sometimes the owner may take over some of the assets of the business e.g. vehicle or converting business premises into living quarters or not paying into the business cash collected personally from the customers. When this happens we debit drawings and credit the relevant asset e.g. motor vehicles, premises or some building or even debtors.
Discounts
Discounts received.
A discount received is an allowance by the creditors to the firm to encourage the firm to pay the amount dues within the agreed time. It is an amount deducted from the invoice price.
When a discount is given by the supplier then we debit creditor’s account and credit discounts received e.g. A. Ltd sells some goods on credit to B Ltd. ₤1,000 under the terms of sale, B Ltd, will receive a discount of 5% if they pay the amount due within one month. B decides to take up the offer and pays the amount within the given time. B will record the transaction as follows.
Debit: Creditor – A Ltd
Credit: Discounts Received
Creditor A. Ltd a/c Purchases a/c
2002 £ 2002 £ 2002 £ 2002 £
Bank 950 Purchases 1,000 A Ltd 1,000
Discount received 50
1000 1000
Discounts Received a/c Bank a/c
200 £ 2002 £ 2002 £ 2002 £
Bal c/f 50 A Ltd 50 A Ltd 950
Discounts Allowed
These are the allowances made by a firm on the amounts receivable from the customers to encourage prompt payment. The amounts deducted from the sales invoice. In the previous example when A Ltd issued the discount and was taken up by B the entries will be:
i. Debit - discount allowed
ii. Credit - debtors - B Ltd.
Debtors B Ltd a/c Sales a/c
2002 £ 2002 £ 2002 £ 2002 £
Sales 1,000 Bank 950
Discount 50 Debtor 1,000
1,000 1,000
Discount allowed a/c Bank a/c
2002 £ 2002 £ 2002 £ Debtor 50 Bal c/f 50 Debtor 950
TRIAL BALANCE
The trial balance is a simple report that shows the list of account balances classified as per the debits and credits. The purpose of the trial balance is to show the accuracy of the double entries made and to facilitate the preparation of final accounts i.e. the trading, profit & loss account and a balance sheet.
The debits of the trial balance should be the same as the credits, if not then there is an error in one or more of the accounts.
The trial balance in example 1.8 would be extracted as follows:
Name
|Trial balance as at 31 May 2002 |
| |Debit |Credit |
| |£ |£ |
|Rent – income | |5 |
|Debtor – U Foot |7 | |
|Motor vehicle |300 | |
|Bank |1555 | |
|Purchases |289 | |
|Wages |117 | |
|Capital | |2000 |
|Creditor – M Rooks | |152 |
|Furniture & Fittings |150 | |
|Sales | |352 |
|Cash in hand |72 | |
|Creditor – P Scot | |114 |
|Expenses – Rent |15 | |
|Expenses – Stationery |27 | |
|Returns Outwards | |23 |
|Drawings | 44 | . |
| |2464 |2464 |
From the trial balance please note that assets and expenses are on the debit side. Capital, liabilities and incomes are normally listed on the credit side.
The next example is a detailed one that shows extracting of trial balance once all the postings have been made in the relevant accounts.
Example 1.9
Write up the following transactions in the books of S Pink:
2003
March 1 Started business with cash £1,000.
“ 2 Bought goods on credit from A Cliks £296.
“ 3 Paid rent by cash £28.
“ 4 Paid £1,000 of the cash of the firm into a bank account.
“ 5 Sold goods on credit to J Simpson £54.
“ 7 Bought stationery £15 paying by cheque.
“ 11 Cash sales £49.
“ 14 Goods returned by us to A Cliks £17.
“ 17 Sold goods on credit to P Lutz £29.
“ 20 Paid for repairs to the building by cash £18.
“ 22 J Simpson returned goods to us £14.
“ 27 Paid A Cliks by cheque £279.
“ 28 Cash purchases £125.
“ 29 Bought a motor vehicle paying by cheque £395.
“ 30 Paid motor expenses in cash £15.
“ 31 Bought fixtures £120 on credit from R west.
Solutions
Capital a/c Cash in hand a/c
2003 £ 2003 £ 2003 £ 2003 £
31/3 Bal c/d 1,500 1/3 Cash 1,500 1/3 Capital 1,500 3/3 Rent 28
11/3 Sales 49 4/3 Bank 1,000
20/3 Repairs 18
28/3 Purchases 125
30/3 Motor exp. 15
31/3 Bal c/d 363
1,549 1,549
Purchases a/c
2003 £ 2003 £
2/3 A Hanson 296 31/3 Bal c/d 421 Creditors – A Cliks ac
28/3 Cash 125
2003 £ 2003 £
421 421 14/3 Returns out 17 2/3 Purchases 296
27/3 Bank 279
296 296
Rent –Expenses a/c Bank a/c
2003 £ 2003 £ 2003 £ 2003 £
3/3 Cash 28 31/3 Bal c/d 28 4/3 Cash 1,000 5/3 Stationery 15
27/3 A. Hanson 279
29/3 Motor van 395
31/3 Bal c/d 311
1,000 1,000
Debtor – J Simpson a/c Sales a/c
2003 £ 2003 £ 2003 ` £ 2002 £
3/3 Sales 54 22/3 Returns in 14 31/3 Bal c/d 132 5/3 JSimpson 54
31/3 Bal c/d 40 11/3 Sales 49
17/3 P Lutz 29
54 54
132 132
Stationery a/c
2003 £ 2003 £ Returns outwards a/c
7/3 Bank 15 31/3 Bal c/d 15
2003 £ 2003 £
31/3 Bal c/d 17 14/3 A Cliks 17
P Lutz – Debtor a Building repairs - expenses
2003 £ 2003 £ 2003 £ 2003 £
17/3 Sales 29 21/3 Bal c/d 29 20/3 Cash 18 31/3 Bal c/d 18
Returns - Inwards
Motor vehicle
2003 £ 2003 £ 2003 £ 2003 £
22/3 J Simpson 14 31/3 Bal c/d 14 29/3 Bank 395 31/3 Bal c/d 395
R West – Creditor (others) Motor expenses
2003 £ 2003 £ 2003 £ 2003 £
31/3 Bal c/d 120 31/3 Fixtures 120 30/3 Cash 15 31/3 Bal c/d 15
Fixtures
2003 £ 2003 £
31/3 A. Webster 120 31/3 Bal c/d 120
S PINKS
TRIAL BALANCE AS AT 31 MARCH 2003
| |Debit (£) |Credit (£) |
|Capital | |1500 |
|Purchases |421 | |
|Cash in hand |363 | |
|Bank |311 | |
|Rent expense |28 | |
|Sales | |132 |
|Fixtures |120 | |
|Debtor – J Simpson |40 | |
|Debtor – P Lutz |29 | |
|Motor vehicle |395 | |
|Creditors |- |- |
|Motor expenses |15 | |
|Returns inwards |14 | |
|Creditors others – R West | |120 |
|Stationery |15 | |
|Returns outwards | |17 |
|Building repairs | 18 | - |
| |1769 |1769 |
Example 1.10
The following transactions took place during the month of May:
2003
May 1 Started firm with capital in cash of £250.
“ 2 Bought goods on credit from the following persons: R Kelly £54; Pcombs £87;
J Role £25; D Mobile £76; I. Sims £64.
“ 4 Sold goods on credit to: C Blanes £43; B Long £62; F Skin £176.
“ 6 Paid rent by cash £12.
“ 9 C Blanes paid us his account by cheque £43.
“ 10 F Skin paid us £150 by cheque.
“ 12 We paid the following by cheque: J Role £25; R Kelley £54.
“ 15 Paid carriage by cash £23.
“ 18 Bought goods on credit from P Combs £43; Mobile £110.
“ 21 Sold goods on credit to B Long £67.
“ 31 Paid rent by cheque £18.
Answer
|Capital | |Cash in Hand |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |2003 | |£ | |2003 |
|19x6 | |£ |
|Capital account | |1,808 |
|Motor van | |1,200 |
|Fixtures and fittings | |806 |
|Provision for depreciation on motor van (credit) | |720 |
|Provisions for depreciation on fixtures& fittings (credit) | |250 |
|Inventory at cost | |366 |
|Receivables for credit sales: | | |
|Brown |160 | |
|Blue |40 | |
|Stripe |20 | |
| | |220 |
|Cash at bank | |672 |
|Cash in hand | |5 |
|Payables for supplies: | | |
|Live |143 | |
|Negative |80 | |
|Earth |73 | |
| | |296 |
|Amount owing for electricity | |45 |
|Local taxes paid in advance | |100 |
Although Sparks has three credit customers the majority of his sales and services are for cash, out of which he pays various expenses before banking the balance.
The following transactions took place during the first four months of 19X1
| |January |February |March |April |
| |$ |$ |$ |$ |
|Suppliers’ invoices: | | | | |
|Live |468 |570 |390 |602 |
|Negative |- |87 |103 |64 |
|Earth |692 |- |187 |- |
|Capital introduced | |500 | | |
|Bankings of cash (from cash sales) |908 |940 |766 |1,031 |
|Expenditure out of cash sales before banking: | | | | |
|Withdrawals on account |130 |120 |160 |150 |
|Stationery |12 |14 |26 |21 |
|Travelling |6 |10 |11 |13 |
|Petrol and van repairs |19 |22 |37 |26 |
|Sundry expenses |5 |4 |7 |3 |
|Postage |12 |10 |15 |19 |
|Cleaner’s wages |60 |60 |65 |75 |
|Goods invoiced to credit customers: | | | | |
|Brown |66 |22 |10 |12 |
| |120 |140 |130 |180 |
|Blue | | | | |
|Stripe |44 |38 |20 |48 |
|Cheque payments (other than those to suppliers): | | | | |
|Telephone |40 |49 |59 |66 |
|Electricity |62 |47 |20 |106 |
|Local taxes |- |- |220 |- |
|Motor van (1 February 19X1) |- |800 |- |- |
|Unbanked at the end of April |- |- |- |12 |
Spark pays for goods by cheque one month after receipt of invoice, and receives a settlement discount of 15% from each supplier.
Credit customers also pay by cheque one month after receipt of invoice, and are given a settlement discount of 10% of the invoice price.
Required:
Write up the ledger accounts of Spark for the four months to 30 April 19X1, and extract a list of account balances after balancing off the accounts.
Question Two
Mary
Balance Sheet as at 31 December 2000
|Non Current Assets |£ |£ |
|Premises | |25,000.00 |
|Plant | |12,000.00 |
| | |37,000.00 |
|Current Assets: | | |
|Stock |11,000.00 | |
|Debtors |10,000.00 | |
|Cash at bank |5,000.00 | |
|Cash in hand |3,000.00 | |
| |29,000.00 | |
|Current liabilities: | | |
|Creditors |(12,000.00) |17,000.00 |
| | |54,000.00 |
|Capital | |34,000.00 |
|Non Current Liabilities: | | |
|Loan from bank | |20,000.00 |
54,000.00
During the year to 31 December 2001 the following total transactions occurred:
a) Mary withdrew a total of £10,000.00 in cash
b) Stock in trade was bought, all on credit, for £34,000.00
c) Sales were made totaling 60,000.00 of stock in trade which had cost £37,000.00. Of these sales £51,000.00 were on credit and £9,000.00 for cash.
d) A total of £16,000.00 was drawn from the bank in cash to the cash till.
e) Electricity for the year paid by cheque totaled £2,000.00
f) Rates for the year paid by cheque totaled £1,000.00
g) Wages for the year all paid cash totaled £10,000.00
h) Sundry expenses all paid in cash totaled £2,000.00
i) Creditors were paid a total of £36,000.00 all by cheque
j) Debtors paid a total of £54,000.00 all in cheques.
k) The bank charged interest on the loan deducting £3,000.00.
Required:
Prepare a revised balance sheet. (20 marks)
Question Three
a) Explain the nature of accounting and the accounting equation (8 marks)
b) Calculate the profit for the year ended 31 December 2001 from the following information
(12 marks)
|Non Current Assets |01.01.2001 |31.12.2001 |
| |£ |£ |
|Property |20,000.00 |20,000.00 |
|Machinery |6,000.00 |9,000.00 |
| |26,000.00 |29,000.00 |
|Current Assets: | | |
|Debtors | 4,000.00 |8,000.00 |
|Cash |1,000.00 |1,500.00 |
| |5,000.00 |9,500.00 |
|Current Liabilities: | | |
|Creditors |5,000.00 |3,000.00 |
|Overdraft |6,000.00 |9,000.00 |
| |11,000.00 |12,000.00 |
|Net Current Liabilities |(6,000.00) |(2,500.00) |
|Net Assets |20,000.00 |26,500.00 |
Drawings during the year amounted to £4,500.00
Additional capital introduced by the owner £5,000.00
Question Four
Brian Barmouth is a sole trader. At 30 June 2000 the following balances have been
extracted from his books:
| |£ |
|Sales |47,600.00 |
|Purchases |22,850.00 |
|Office expenses |1,900.00 |
|Insurance |700.00 |
|Wages |7,900.00 |
|Rates |2,800.00 |
|Heating and Lighting |1,200.00 |
|Telephone |650.00 |
|Discounts allowed |1,150.00 |
|Opening stock |500.00 |
|Returns inwards |200.00 |
|Returns outwards |150.00 |
|Premises |40,000.00 |
|Plant and Machinery |5,000.00 |
|Motor Vehicles |12,000.00 |
|Debtors |12,500.00 |
|Bank balance |7,800.00 |
|Creditors |3,400.00 |
|Loan-long term loan |10,000.00 |
|Capital |60,000.00 |
|Drawings for the year |4,000.00 |
|Closing stock |550.00 |
Required:
Construct a trial balance, from the above list of balances.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON TWO
FINAL ACCOUNTS
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of goods/stocks) of the business and tries to determine the gross profit for the relevant financial period. The gross profit is then taken up in the profit and loss account as part of the income.
Format for the trading account:
Name
Trading Account for the year ended 31 Dec.
₤ ₤ ₤
Sales x
Less: Returns Inwards (x)
x
Less: Cost of Sales
Opening stock x
Purchases x
Add: Carriage Inwards x
x
Less: Returns Outwards x x
Cost of stock available for sale x
Less: Closing stock x (x)
Gross Profit x
Example: 2.1
From the following details draw up the trading account of Springs for the year ended 31 December 2002, which was his first year in business.
₤
Carriage inwards 6,700
Returns outwards 4,950
Returns inwards 8,900
Sales 387,420
Purchases 333,330
Stock of goods: 31 December 19x7 74,890
Springs
Trading Account for the year ended 31 Dec 2002
£ £
Sales 387,420
Less: Returns Inwards 8,900
378,520
Less cost of sales
Purchases 333,330
Add: Carriage Inwards 6,700
340,030
Less: Returns outwards 4,950
335,080
Less: Closing stock 74,890 260,190
Gross Profit 118,330
Example 2.2
The following details for the year ended 31 March 2003 are available. Draw up the trading account of R Sings for that year.
£
Stocks: 1 April 2002 16,523
Returns inwards 1,372
Returns outwards 2,896
Purchases 53,397
Carriage inwards 1,122
Sales 94,600
Stocks: 31 March 2003 14323
Answer
R Sings
Trading Account for the year ended 31 Mar 19x8
₤ ₤ ₤
Sales 94,600
Less: Returns Inwards (1,372)
93,228
Less: Cost of sales
Opening Stock 16,523
Purchases 53,397
Add: Carriage Inwards 1,122
54,519
Less: Returns Outwards 2,896 51,623
Cost of goods available for sale 68,146
Less: Closing stock 18,504 (49,642)
Gross Profit 43,586
(b) PROFIT AND LOSS ACCOUNT
It shows the net profit or net loss that the business has made from all the activities during a financial period.
The net profit (or loss) is determined by deducting all the expenses from all the incomes of the same financial period.
In practice, the trading account is combined together with the net profit and loss account into one report so that the format is as shown below:
Name
Trading, Profit and Loss Account for the year ended 31/12/19xx
£ £ £
Sales x
Less: Returns Inwards x
x
Less: Cost of sales
Opening stock x
Purchases x
Add: Carriage Inwards x
x
Less: Returns Outwards x x
Cost of goods available for sale x
Less: Closing stock x (x)
Gross Profit x
Discount received x
Rent received x
Interest received x
Other incomes x
x
Less: Expenses
Carriage Outwards x
Discounts allowed x
Postage & stationary x
Salaries & wages x
Rent paid x
Insurance & rates x
Bank charges x
Other expenses x (x)
Net profit/ (loss) x/(x)
Example 2.3
From the following trial balance of P Boones draw up a trading and profit and loss account for the year ended 30 September 2002, and a balance sheet as at that date.
Dr Cr
£ £
Stock 1 October 19x8 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns inwards 2,050
Returns outwards 3,220
Purchases 118,740
Sales 186,000
Salaries and wages 38,620
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting and heating expenses 1,660
General expenses 3,140
Premises 50,000
Motor vehicles 18,000
Fixtures and fittings 3,500
Debtors 38,960
Creditors 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360
332,890 332,890
Answer
P Boones
Trading, Profit and Loss Account as at 30 September 2003
£ £ £
Sales 186,000
Less: Returns Inwards (2,050)
183,950
Less: Cost of sales
Opening stock 23,680
Purchases 118,740
Add: Carriage inwards 3,100
12,1840
Less: Returns Outwards 3,220 118,620
Cost of goods available for sale 142,300
Less: Closing stock 29,460 (11,2840)
Gross Profit 71,110
Less Expenses
Salaries & wages 38,620
Carriage outwards 2,000
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting & heating 1,660
General expenses 3,140 (58,040)
Net Profit 13,070
(c) BALANCE SHEET
This is a simple report that shows the assets and liabilities of the business and the capital of the owner as at a certain point in time. The format is at shown below:
Name
Balance sheet as at 31/Dec/19xx
£ £ £
Non Current Assets
Land & Buildings x
Plant & Machinery x
Fixtures, Furniture & Fittings x
Motor vehicles x
x
Current Assets
Stock/inventories x
Debtors – trade x
Debtors – others x
Cash at bank x
Cash at hand x
x
Current Liabilities
Bank overdraft x
Creditors – trade x
Creditors – others x (x)
Net current assets x
Net Assets x
Capital x
Add: Net profit x
x
Less: Drawings (x)
x
Non Current Liabilities
Loan (s) x
x
The balance Sheet of P Boones in example 2.3 will be produced as follows:
P Boones
Balance Sheet as at 30 Sept 2002
£ £
Non Current Assets
Premises 50,000
Fixtures & fittings 3,500
Motor vehicles 18,000
71,500
Current Assets
Stock 29,460
Debtors 38,960
Cash at bank 4,820
73,240
Current Liabilities
Creditors (17,310)
Net Current Assets 55,930
Net Assets 127,430
Capital 126,360
Add: Net Profit 13,070
139,430
Less: Drawings (12,000)
127,430
`
D) BOOKS OF PRIME ENTRY
The diagram below shows the components of an accounting system for a firm that carries out trading activities from the source documents that record the evidence of transactions, where the documents are recorded and the postings to made.
Source Books of The List of the
Final
Documents Prime entry Ledger Balances Accounts
Recorded
Sales The
Ledger Trading
Account
Recorded
Recorded
Purchases The
Ledger Profit
& Loss
Loss
Recorded Account
Recorded General
Ledger
Recorded Balance
Balance Sheet
A brief description of each component is explained below.
SOURCE DOCUMENTS
This shows the evidence transactions. They are collected, filed and posted in the books of prime entry. Example, if a firm sells goods on credit, then an invoice is raised. The source documents as shown in the above include:
▪ Sales invoice
▪ Purchases invoice
▪ Credit note
▪ Debit note
▪ Receipts, cheques and petty cash vouchers
▪ Other correspondences.
(i) Sales Invoice
The sales invoice is raised by the firm and sent to the debtor/customer when the firm makes a credit sale.
The sales invoice contains the following:
i. Name and address of the firm
ii. Name and address of the buying firm
iii. Date of making the sale – invoice date.
iv. Invoice number
v. Amount due (net of trade discount)
vi. Description of goods sold
vii. Terms of sale
(ii) Purchases Invoice
A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It shows the following:
i. Name and the address of the creditor/seller
ii. Name and address of the firm
iii. Date of the purchase (invoice date)
iv. Invoice number
v. Amount due
vi. Description of goods sold
vii. Terms of sale
(iii) Credit note
A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to the firm. It’s contents include:
i. Name and address of the firm
ii. Name and address of the debtor
iii. Amount of credit
iv. Credit note number
v. Reason for credit e.g. if goods sent but of the wrong type.
The purpose of the credit note is to inform the debtor or customer that the debtor’s account with the firm has been credited i.e. the amount due to the firm has been reduced or cancelled.
The credit note may also be issued when the firm gives an allowance of the amounts due from the debtors. From the context we can assume that all credit notes are issued when goods are returned.
(iv) Debit note
This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It includes the following items:
i. Name and address of the firm
ii. Name and address of the creditor
iii. Amount of debit
iv. Debit Note number
v. Reason for the debit
The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or cancelled.
Credit sales (sales invoice)
Returns inwards (credit note)
Credit purchase (purchase invoice)
Returns outwards (debit note)
(vi) Receipts
A receipt is raised by the firm and issued to customers or debtors when they make payments in the form of cash or cheques. It shows:
i. The name and address of the firm
ii. The date of the receipt
iii. Amount received (cash or cheque or other means of payment)
iv. Receipt number.
Cheques
When a firm opens a current account with the bank, a chequebook containing cheques issued. The cheques allow the firm to make payments against the account with the bank. When a firm issues a cheque to its creditors for payments, it authorizes the bank to honour payments against the firm’s account with the bank. The cheque contains the following information:
i. Name and account number of the firm (account holder)
ii. The date of the cheque
iii. Name of the payee (creditor)
iv. Name of the firm’s bank
v. Amount payable in words and figures
vi. The cheque number
vii. The authorized signature(s)
Petty cash vouchers
A petty cash voucher is raised by a cashier to seek authority for payments (payments of small value in the firm which require cash payments e.g. fuel, bus-fare, office snacks), which is approved by a senior manager and filed for record purpose. It shows:
i. Date of payment
ii. Amount paid
iii. Reason for payment
iv. Authorized signature(s):
v. Person approving
vi. Person receiving
The person receiving the money must then return a document supporting how the money was utilized e.g. fuel receipt, bus ticket e.t.c.
(vii) Other correspondence
These include information received within or outside the firm that has a financial implication in the accounts.
Examples are:
i. Letters from the firm’s lawyers about a debtors balance.
ii. Hire-purchase/credit sale or credit purchase agreements that relate to non-current assets.
iii. Memorandum from a senior manager requiring changes to be made in the accounts.
iv. Bank statement from the bank, e.g. bank charges.
BOOKS OF PRIME ENTRY
They record the source documents.
Sales Journal
It is also called a Sales Day Book. It records all the sales invoices issued by the firm during a particular financial period. The format is as follows (with simple records of invoice).
SALES JOURNAL Page 5
Date 19x8 Detail Folio Amount £
1st March S. Spikes SL.10 200.00
3rd March T. Binns SL.19 350.00
5th March L.Thompson SL,8 150.00
Total 700.00
The individual entries in the sales journal are posted to the debit side of the debtor’s accounts in the sales ledger and the total is posted on the credit side of the sales account in the general ledger.
This is shown below:
|Sales Ledger | |General Ledger |
| | | | |
|19x8 | |£ |
| | | | | | | | |
|19x8 | |£ |19x8 | | | | |
|19x8 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|2003 | |£ |
|19x6 | |£ |19x6 | |£ | |19x6 |
|19x6 | |£ |
| | |£ |
| | |£ |
|19x5 | |£ |
|19x5 | |£ |
|19x5 | |£ |
|19x5 | |
|12/7 Returns out 16 |1/7 Purchases 22 |
M. Norman
|1995 |1995 |
|£ |£ |
|30/7 Returns out 30 |1/7 Purchases 500 |
J. Cook
|1995 |1995 |
|£ |£ |
|31/7 Returns out 13 |5/7 Purchases 180 |
C. Davies
|1995 |1995 |
|£ |£ |
|31/7 Returns out 11 |5/7 Purchases 60 |
K. Hill
|1995 |1995 |
|£ |£ |
| |1/7 Purchases 380 |
R. Morton
|1995 |1995 |
|£ |£ |
| |5/7 Purchases 200 |
D. Edwards
|1995 |1995 |
|£ |£ |
| |5/7 Purchases 410 |
C. Ferguson
|1995 |1995 |
|£ |£ |
| |27/7 Purchases 550 |
K. Ennevor
|1995 |1995 |
|£ |£ |
| |24/7 Purchases 900 |
|RETURNS INWARDS JOURNAL |
| | | |
|DATE |DETAILS |AMOUNT |
|14 July |E. Phillips |18 |
|14 July |F. Thompson |22 |
|31 July |E. Phillips |27 |
|31 July |E. Rigby |30 |
| | |97 |
| | | |
| | | |
|RETURNS OUTWARDS JOURNAL |
| | | |
|12 July |M. Norman |30 |
|12 July |N. Senior |16 |
|31 July |J. Cook |13 |
|31 July |C. Davies |11 |
| | |70 |
General Ledger
Sales a/c
|1995 |1995 |
|£ |£ |
| |31/7 Sundry debtors 2772 |
Purchases a/c
|1995 |1995 |
|£ |£ |
|31/7 Sundry creditors 3292 | |
Returns Inwards a/c
|1995 |1995 |
|£ |£ |
|31/7 Sundry debtors 97 | |
Returns Outwards a/c
|1995 |1995 |
|£ |£ |
| |31/7 Sundry creditors 70 |
CASH BOOKS
A cashbook records all the receipts (cash and cheques from customers and debtors or other sources of income) and all the payments (to creditors or suppliers and other expenses) for a particular financial period. The cashbook will also show us the cash at bank and cash in hand position of the firm.
There are two types of cashbooks:
i. Cash in hand cashbook, which records the cash transactions in the firm or business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.
The cashbook is the most important book of prime entry because it forms part of the general ledger and records the source documents (receipts and cheques). The cash at bank cashbook and cash in hand cashbook are combined together to get a two-column cashbook. The format is as follows:
Two-column cashbook.
CASH BOOK
Date Details Cash Bank Date Details Cash Bank
(£) (£) (£) (£)
Additional columns for discounts allowed and discounts received can be included with the cash at bank columns to get a 3 – column cashbook. The format is as follows:
Date Details Discount Cash Bank Date Details Discounts Bank Cash
Allowed (£) (£) Received £) (£)
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger balances and the discounts allowed and discounts received columns will be added and the totals posted to the respective discount accounts. The discount allowed total will be posted to the debit side of the discount allowed account in the general ledger and the total of the discount received will be posted to the credit side of the discount-received account of the general ledger.
Cash at bank can have either a credit or debit balance. A debit balance means the firm has some cash at the bank and a credit balance means that the account at the bank is overdrawn. (the firm owes the bank some money).
Example 2.7
Write up a two-column cashbook from the following details, and balance off as at the end of the month:
2003
May 1 Started business with capital in cash £1,000.
“ 2 Paid rent by cash £100.
“ 3 F Lake lent us £5,000, paid by cheque.
“ 4 We paid B McKenzie by cheque £650.
“ 5 Cash sales £980.
“ 7 N Miller paid us by cheque £620.
“ 9 We paid B Burton in cash £220.
“ 11 Cash sales paid direct into the bank £530.
“ 15 G Moores paid us in cash £650.
“ 16 We took £500 out of the cash till and paid it into the bank account.
“ 19 We repaid F Lake £1,000 by cheque.
“ 22 Cash sales paid direct into the bank £660.
“ 26 Paid motor expenses by cheque £120.
“ 30 Withdrew £1,000 cash from the bank for business use.
“ 31 Paid wages in cash £970.
|Cash Book |
| |Cash |Bank | |Cash |Bank |
|Capital |1000 | | | | |
|F Lake (loan) | |5000 | | | |
|Sales |980 | | | | |
|N Miller | |620 | | | |
|Sales | |530 | | | |
|G Moores |650 | | | | |
|Cash C | | | | | |
|Sales | | | | | |
|Bank C | | | | | |
| | | | | | |
|Cash Book |
| |Cash |Bank | |Cash |Bank |
|Capital |1000 | |Rent |100 | |
|F. Lake (Loan) | |5000 |B McKenzie | |650 |
|Sales | |980 |B Burton |220 | |
|N Miller | |620 |Bank C |500 | |
|Sales | |530 |F Lake (loan) | |1000 |
|G Moores |650 | |Motor Expenses |120 |100 |
|Cash C | |500 |Cash C | | |
|Sales | |660 |Wages |970 | |
|Bank C | |1000 |Balances c/d |1840 |4540 |
| | 3630 |7310 | |3630 |7310 |
Example 2.7(Frankwood adapted)
A three-column cashbook is to be written up from the following details, balanced off, and the relevant discount accounts in the general ledger shown.
19x8
Mar 1 Balances brought forward: Cash £230; Bank £4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton £140; E Taylor £220; R Harris £800.
“ 4 Paid rent by cheque £120.
“ 6 J Cotton lent us £1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per cent cash discount: N Black £360; P Towers £480; C Rowse £300.
“ 10 Paid motor expenses in cash £44.
“ 12 H Hankins pays his account of £77, by cheque £74, deducting £3 cash discount.
“ 15 Paid wages in cash £160.
“ 18 The following paid their accounts by cheque, in each case deducting 5 per cent cash discount: C Winston £260; R Wilson & Son £340; H Winter £460.
“ 21 Cash withdrawn from the bank £350 for business use.
“ 24 Cash Drawings £120.
“ 25 Paid T Briers his account of £140, by cash £133, having deducted £7 cash discount.
“ 29 Bought fixtures paying by cheque £650.
“ 31 Received commission by cheque £88.
Answer
|Cash Book |
| |Disct |Cash |Bank | |Disct |Cash |Bank |
|Bank | | | | | | | |
|Bal b/d | |230 |4756 |Rent | | |120 |
|R Burton |7 | |133 |N Black |9 | |351 |
|E Taylor |11 | |209 |P Towers |12 | |468 |
|R Harris |15 | |285 |C Rowse |20 | |780 |
|J Cotton: loan | | |1000 |Motor expenses | |44 | |
|H Hankins |3 | |74 |Wages |160 | | |
|C Winston |13 | |247 |Cash | | |350 |
|R Wison & Son |17 | |323 |Drawings | |120 | |
|H Winter |23 | |437 |T Briers |7 |133 | |
|Bank | |350 | |Fixtures | | |650 |
|Commission | | |88 |Balances c/d | |123 |4833 |
| |89 |580 |7552 | |48 |580 |7552 |
|Discounts Received |
| | | |3/1 |Sundry Creditors |48 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|Discounts Allowed |
|3/1 |Sundry Debtors |89 | | | |
| | | | | | |
| | | | | | |
Petty Cash Book and the imprest system of Accounting.
Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. The petty cash vouchers will show summary expenses paid by the cashier and this information is listed and classified in the petty cash book under the headings of the relevant expenses such as:
▪ Postage and stationery
▪ Traveling
▪ Cleaning expenses.
The format is as shown:
Petty Cash Book
Receipts Date Detail Payments Expenses The
Amount Postage Stationery Traveling Ledger
The balance c/d of the petty cash book will signify the balance of cash in hand or form part of cash in hand. The totals of the expenses are posted to the debit side of the expense accounts. If a firm operates another cashbook in addition to the petty cash book, then the totals of the expenses will also be posted on the credit side of the cash in hand cashbook.
The Imprest system
This system of accounting operates on a simple principle that the cashier is refunded the exact amount spent on the expenses during a particular financial period. At the beginning of each period, a cash float is agreed upon and the cashier is given this amount to start with. Once the cashier makes payments for the period he will get a total of all the payments made against which he will claim a reimbursement of the same amount that will bring back the amount to the cash float at the beginning of the period.
This is demonstrated as follows:
£
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000
Example 2.8
A cashier in a firm starts with £2,000 in the month of March (that is the cash float). I n the following week, the following payments are made:
£
1st March – bought stamps for 80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
3rd March – bought fuel 150
3rd March – cleaning wages 300
4th March – bought stamps 200
4th March – paid L. Thompson (creditor) 400
5th March – fuel costs 150
On the 5th of March the cashier requested for a refund of the cash spent and this amount was reimbursed back.
Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period and the relevant expense accounts, as they would appear on the General Ledger.
Answer
|Receipts |Date |Detail |Payments |Expenses |The Ledger |
| | | |Amount |Postage (£) |Cleaning (£) |Travel | |
|(£) | | |(£) | | |(£) |(£) |
|2000 |1/3 |Bal b/d | | | | | |
| |1/3 |Stamps |80 |80 | | | |
| |2/3 |Bus Fare |120 | | |120 | |
| |2/3 |Cleaning Materials |240 | |240 | | |
| |3/3 |Fuel |150 | | |150 | |
| |3/3 |Cleaning wages |300 | |300 | | |
| |4/3 |Stamps |200 |200 | | | |
| |4/3 |L Thompson |400 | | | |400 |
| |5/3 |Fuel | 150 | . | . | 150 | . |
| | | | 1640 | 280 | 540 | 420 | 400 |
|1640 |5/3 | | | | | | |
| |5/3 |Bal c/d |2000 | | | | |
|3640 | | |3640 | | | | |
|2000 |6/3 |Bal b/d | | | | | |
The General Journal
It records information from other correspondence (information that is not recorded in the above books of prime entry). It explains the type of entries that will be made in the ledger accounts giving a reason for these entries.
The type of transactions recorded here are:
i. Writing off of assets from the accounts e.g. bad-debts.
ii. Drawings for goods or other assets from the business by the owner, not cash drawings.
iii. Purchase or sale of non-current assets on credit.
The format is as shown:
The General Journal
GENERAL JOURNAL
Date Detail Debit Credit
1/3 Account to be debited x
Account to be credited x
(Narrative)
Example 2.9
You are to show the journal entries necessary to record the following items:
• 2003 May 1 Bought a motor vehicle on credit from Motors Ltd for £6,790.
• 2003 May 3 A debt of £34 owing from N Smart was written off as a bad debt.
• 2003 May 8 Furniture bought by us for £490 was returned to the supplier Wood
• Offices, as it was unsuitable. Full allowance will be given us.
• 2003 May 12 we are owed £150 by W Hayes. He is declared bankrupt and we received
• £39 in full settlement of the debt.
• 2003 May 14 we take £45 goods out of the business stock without paying for them.
• 2003 May 28 Some time ago we paid an insurance bill thinking that it was all in respect
• of the business. We now discover that £76 of the amount paid was in fact insurance of our private house.
• 2003 May 28 Bought Machinery £980 on credit from Xerox Machines Ltd.
a. Answer
GENERAL JOURNAL
Date (19x5) Detail Debit (£) Credit (£)
1/5 Motor Vehicle 6,790
Motors Ltd 6,790
Motor vehicle bought on credit
from Motors Ltd
_________________________________________________________________________ 3/5 Bad debts 34
N Smart - Debtors 34
Amount due from N Smart
written off as bad
_________________________________________________________________________
8/5 Wood offices 490
Furniture 490
Office Furniture returned to
Wood offices
_________________________________________________________________________
12/5 Bad debts 111
W. Hayes 111
Amount owed now written off
as bad debt.
________________________________________________________________________ 14/5 Drawing for goods 45
Purchases 45
Goods taken from the
business for personal use.
_________________________________________________________________________ 8/5 Drawings 76
Insurance Expenses 76
Insurance relating to private house
now transferred to drawings
_________________________________________________________________________ 28/5 Machinery 980
Xerox Machines 980
Machinery bought from
Xerox Machines
THE LEDGER
The ledger is simply the accounts. The Ledger is classified into 3 main classes.
1. Sales Ledger, which has the accounts of all the debtors.
2. Purchases Ledger, which has the accounts of all the creditors.
3. The General Ledger. Has all the other accounts i.e. other assets, liability, incomes and expenses and capital.
The ledger accounts can also be classified as follows:
Other
Non-current Liabilities
assets
Other
Inventories/ Assets
Stocks
Income
Expenses
Capital
REINFORCING QUESTIONS
QUESTION ONE
Mr J Ockey commenced trading as a wholesaler stationer on 1 May 2000 with a capital of £5,000.00 with which he opened a bank account for his business.
During May the following transactions took place.
May 1 Bought shop fittings and fixtures from store fitments Ltd for £2,000.00
May 2 Purchased goods on credit from Abel £650.00
May 4 Sold goods on credit to Bruce £700.00
May 9 Purchased goods on credit from Green £300.00
May 11 Sold goods on credit to Hill £580.00
May 13 Cash sales paid into bank account £200.00
May 16 Received cheque from Bruce in settlement of his account
May 17 Purchased goods on credit from Kay £800.00
May 18 Sold goods on credit to Nailor £360.00
May 19 Sent Cheque to Abel in settlement of his account
May 20 Paid rent by cheque £200.00
May 21 Paid delivery expenses by cheque £50.00
May 24 Received from Hill £200.00 on account
May 30 Drew cheque for personal expenses £200.00 and assistant wages £320.00
May 31 Settled the account of Green.
Required
a) Record the transactions in the books of prime entry.
b) Post the entries in the ledger accounts
c) Balance the ledger accounts where necessary
d) Extract a trial balance as at 31 May 2000.
QUESTION TWO
The following trial balance has been drawn up from the accounts of Endpages bookshop.
Endpages Bookshop
Trial balance as at 31 December 2002
| |Dr |Cr |
| | £ | £ |
| | | |
|Sales | |151,500.00 |
|Purchases |103,500.00 | |
|Salaries and wages |18,700.00 | |
|Office expenses |2,500.00 | |
|Insurance |1,100.00 | |
|Electricity |600.00 | |
|Stationery |2,400.00 | |
|Advertising |3,500.00 | |
| | | |
|Telephone |800.00 | |
|Rates |3,000.00 | |
|Discount allowed |100.00 | |
|Discount received | |200.00 |
|Rent received | |2,000.00 |
|Returns inwards |1,500.00 | |
|Returns outwards | |3,500.00 |
|Stock at 01 Jan 2001 |46,000.00 | |
|Premises |80,000.00 | |
|Stock as at 31 Dec 2001 |41,000.00 | |
|Fixtures and fittings |5,000.00 | |
|Debtors and Creditors |4,800.00 |7,500.00 |
|Cash in Hand |200.00 | |
|Cash in bank | |12,000.00 |
|Capital | |11,000.00 |
|Drawings |14,000.00 | |
|Stock as at 31 Dec 2001 |________ |41,000.00 |
| |328,700.00 |328,700.00 |
| | | |
Required
Prepare a Trading and profit and loss account for the year ended 31 December 2002 and a balance sheet as at that date.
(20 marks)
QUESTION THREE
The following is the trial balance of KSmooth as at 31 March 2002. Draw up a set of final accounts for the year ended 31 March 2002.
| |Dr |Cr |
| |£ | £ |
|Stock 1 April 2001 |1,816,000 | |
|Sales | |9,234,000 |
|Purchases |6,918,500 | |
|Carriage inwards |42,000 | |
|Carriage outwards |157,000 | |
|Returns outwards | |64,000 |
|Wages and salaries |1,024,000 | |
|Rent and rates |301,500 | |
|Communication expenses |62,400 | |
|Commissions payable |21,600 | |
|Insurance |40,500 | |
|Sundry expenses |31,800 | |
|Buildings |2,000,000 | |
|Debtors |1,432,000 | |
|Creditors | |816,000 |
|Fixtures |285,000 | |
|Cash at bank |297,000 | |
|Cash in hand |11,500 | |
|Drawings |762,000 | |
|Capital |152,028 |5,088,800 |
| | |152,028 |
QUESTION FOUR
Skates drew up the following trial balance as at 30 September 2002. You are to draft the trading and profit and loss account for the year to end 30 September 2002 and a balance sheet as at that date.
| |Dr |Cr |
| |£ |£ |
|Capital | |3,095,500 |
|Drawings |842,000 | |
|Cash at bank |311,500 | |
|Cash in hand |29,500 | |
|Debtors |1,230,000 | |
|Creditors | |937,000 |
|Stock 30 September 2001 |2,391,000 | |
|Motor van |410,000 | |
|Office equipment |625,000 | |
|Sales | |1,309,000 |
|Purchases |9,210,000 | |
|Returns inwards |55,000 | |
|Carriage inwards |21,500 | |
|Returns outwards | |30,700 |
|Carriage outwards |30,900 | |
|Motor expenses |163,000 | |
|Rent |297,000 | |
|Telephone charges |40,500 | |
|Wages and salaries |1,281,000 | |
|Insurance |49,200 | |
|Office expenses |137,700 | |
|Sundry expenses |28,400 | |
| | | |
| |17,153,200 | |
| | |17,153,200 |
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
COMPREHENSIVE ASSIGNMENT No.1
TO BE SUBMITTED AFTER LESSON 2
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS
QUESTION ONE
The books of Mr T, a trader in tea showed the following balances as at 31 March 1998:
| | Shs. |
|Opening stock of tea |100,000 |
|Purchases – Tea |400,000 |
|Salaries paid |80,000 |
|Buildings |95,000 |
|Cash in hand |2,000 |
|Cash at bank |135,000 |
|Rent, rates and council taxes |15,000 |
|Insurance premium paid |3,000 |
|Miscellaneous receipts |10,000 |
|Sales |720,000 |
|Discounts allowed |4,750 |
|Bad debts |3,250 |
|Building repairs |2,900 |
|Miscellaneous expenses |8,700 |
|Advertisement |20,000 |
|Commission to sales manager |32,400 |
|Furniture and fittings |35,000 |
|Air conditioners |30,000 |
|Sundry debtors |100,000 |
|Sundry creditors |80,000 |
|Loan on mortgage |70,000 |
|Interest paid on the above |3,000 |
|Prepaid expenses |4,000 |
|Drawings |18,000 |
|Bills payable (Current liability) |30,000 |
|Bank charges |2,000 |
|Legal charges |6,000 |
|Motor vehicles |80,000 |
|Travelling and conveyance |10,000 |
|Capital |280,000 |
The following further information was obtained :
1. Closing stock was Shs.55,000.
2. Legal charges include Shs.5,000 for the cost of stamps and registration of a new building acquired during the year.
3. Purchases include 4000 kg tea valued at Shs.20,000, which was found totally spoilt. An insurance claim of Shs.15,000 has been accepted by the insurance company.
4. Travelling and conveyancing include proprietor’s personal travelling for which he is charged Shs.4, 800.
5. The sales manager is entitled to commission of 7.5% of the total sales. However any bad debts incurred during the year are deductible from such commission entitlements.
6. Debtors include:
7. Shs.10, 000 due from M & C0 (Creditors include Shs.18, 000 due to the same party).
8. Shs.5, 000 due from the sale of furniture.
9. Further bad debts of Shs.2, 000
10. Provision for bad debts is to be created at 2% of net amount outstanding from trade debtors.
11. Depreciation is chargeable as follows:
Buildings 2.5%
Furniture and Fittings 10%
Air conditioners 15%
Motor vehicles 20%
12. Miscellaneous receipts represent sales proceeds of furniture, whose written down value was Shs.12, 000.
13. Prepaid expenses include insurance premiums for the next year.
Required:
Prepare a trading, profit and loss account for the year ended 31st March 1998 and a Balance Sheet as at that date.
QUESTION TWO
Hall Ltd., which makes up its accounts to 30th June each year, has a fleet of motor lorries. Annual depreciation on motor lorries is calculated at a rate of 25% on the reducing balances, with a full year’s depreciation being made in the year of purchase, but no charge in the year of sale. An extract from the company’s balance sheet as on 30th June 1997 showed the following:
Shs
Motor Lorries at cost: 164,900
Less provision for depreciation: 93,382
Net book Value: 71,518
During the year ended 30th June 1998 purchases and sales of lorries were as follows:
Purchases: Reg.No Cost (Shs)
1997
July 30th H11 8,500
Oct 1st H12 7,000
1998
Feb 25th H13 9,000
June 24th H14 5,900
Sales: Reg.No Purchased on: Cost (Shs) Proceeds (Shs)
1997
July 30th H1 14th May 1993 1,592 300
Oct 1st H4 10th July 1994 2,560 850
1998
Mar 1st H6 9th March 1996 8,000 4,600
June 25th H7 21st Sept 1996 3,648 2,700
Required:
Write up the following accounts in the books of the company for the year ended 30th June 1998:
a) The Motor lories account
b) Motor lorries provision for depreciation account
c) Motor lorries disposal account.
QUESTION THREE
The following trial balance was extracted form the books of Rodney, a sole trader, at 31st December 1997:
| |Shs |Shs. |
|Drawings/Capital |2,148 |20,271 |
|Debtors/Creditors |7,689 |5,462 |
|Purchases/Sales |62,101 |81,742 |
|Rent and Rates |880 | |
|Light and heat |246 | |
|Salaries and wages |8,268 | |
|Bad debts |247 | |
|Provision for bad debts | |326 |
|Stock in trade 31st Dec 1996 |9,274 | |
|Insurance |172 | |
|General Expenses |933 | |
|Bank balances |1,582 | |
|Motor van at cost/Provision for depreciation |8,000 |3,6000 |
|Proceeds on sale of van | |250 |
|Motor expenses |861 | |
|Freehold premises at cost |15,000 | |
|Rent received | |750 |
|Provision for depreciation on buildings | |5,000 |
| |117,401 |117,401 |
The following matters are to be taken in to account:
1. Stock in trade at 31st December 1997 was Shs.9,884
2. Rates paid in advance at 31st December 1997, Shs.40
3. Rent receivable due at 31st December 1997, Shs.250
4. Lighting and heating due at 31st December 1997, sh.85
5. Provision for doubtful debts to be increased to Shs.388
6. Included in the amount for insurance Shs.172, is an item for Shs82 for motor insurance and this amount should be transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.
8. Depreciate buildings Shs.500
9. On 1st January 1997 a van which had been purchased for Shs.1,000 on 1st January 1994 was sold for Shs250. The only record of matter is the credit of Shs.250 to “Proceeds of sale on van” account.
Required:
A Trading Profit and Loss account for the year ended 31st December 1997 and a Balance Sheet as at date using vertical format.
QUESTION FOUR
The Batley Print Shop rents a photocopying machine from a suppler for which it makes quarterly payments as follows:
Three moths rental in advance;
A further charge of 2 pence per copy made during the quarter just ended.
The rental agreement began on 1st August 19X4, and the first six quarterly bills were as follows
Bills and dates received Rental (Shs) Cost of copies (shs) Total cost (Shs)
1 August 19X4 2,100 0 2,100
1 November 19X4 2,100 1,500 3,600
1 February 19X5 2,100 1,400 3,500
1 May 19X5 2,100 1,800 3,900
1 August 19X5 2,700 1,650 4,350
1 November 19X5 2,700 1,950 4,650
Required:
Given that Batley Printing shop ends its accounting year on 31 August,
Calculate the charge for photocopying expenses for the year to 31 August, 19X5 and the amount of prepayments and / or accrued charges as at that date.
Show the entries in the ledger of the Batley Printing Shop.
QUESTION FIVE
“The historical cost convention looks backwards but the going concern convention looks forwards.”
Required:
a) Explain clearly what is meant by:
• The historical cost convention
• The going concern convention.
b) Does traditional financial accounting, using the historical cost convention, make the going concern convention unnecessary? Explain your answer fully.
c) Which do you think a shareholder is likely to find more useful – a report on the past or an estimate of the future? Why?
END OF COMPREHENSIVE ASSIGNMENT No.1
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
LESSON THREE
ACCOUNTING THEORY
a) International Accounting Standards and International Financial Reporting Standards.
The foreword to accounting standards defines Accounting Standards as Authoritative statements of how particular types of transaction and other events should be reflected in financial statements. Accounting Standards are developed to achieve comparability of financial information between and among different organizations. International Accounting Standards (IAS’s) and International Financial Reporting Standards (IFRS) are meant to apply to most organizations in the world. IAS’s and IFRS’s are produced by the International Accounting Standards Board (IASB) whose objectives are:
a) To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance; and
b) To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.
The IASB is an affiliate of the International Federation of Accountants (IFAC) established in 1977 which co-ordinates the Accounting profession worldwide. Most accounting bodies of countries are members of IFAC.
The IASC develops IAS’s through an international process that involves the worldwide accountancy profession, the preparers, users of financial statements and national standard setting bodies and other interested parties.
The IASB sets up a steering committee to develop a statement of principles, an Exposure Draft and ultimately an Accounting Standards once a new topic is suggested. The process includes:
– Identifying and reviewing of all the issues associated with the topic,
– Studying national and regional accounting requirements and practice, consultation with the member bodies’ standard setting bodies and other interested groups,
– Public Exposure of the draft Accounting Standard,
– Evaluation by the steering committee and the board of the comments received on exposure drafts.
Currently the IASB has developed about 40 IASs. Examples include:
– IAS 1 Presentation of Financial Statements
– IAS 2 Inventories
– IAS 16 Property plant and equipment.
Previously new standards were called International Accounting Standards but from 2003 any new standards will be called International financial Reporting Standards. However in the current practice is to refer to all standards as International Financial Reporting Standard.
In Kenya, Accountants used to prepare the financial statements in accordance with Kenya Accounting Standards (IASs), which were developed and published by ICPAK (Institute of Certified Public Accountants of Kenya). This were later dropped and International Accounting Standards adopted.
Reasons why Accountants should observe International Accounting Standards:
a) Use of IASs adds credibility to the financial statements as they can be compared with others globally.
b) Facilitates communication within an enterprise that has foreign branches or subsidiaries due to harmonized reporting by the separate entities in the group.
c) Adds value to the financial statements incase an entity is sourcing for foreign capital.
d) Incase an entity wishes to be quoted on the Stock Exchange Market more so for companies.
c) Accounting Concepts Bases and Policies
I) Concepts/conventions/principles
Accounting Concepts are broad basic assumptions that underlie the periodic financial accounts of business enterprises. Examples of concepts include:
i) The going concern concept: implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or to make drastic cutbacks to the scale of operations.
Financial statements should be prepared under the going concern basis unless the entity is being (or is going to be) liquidated or if it has ceased (or is about to cease) trading. The directors of a company must also disclose any significant doubts about the company’s future if and when they arise.
The main significance of the going concern concept is that the assets of the business should not be valued at their ‘break-up’ value, which is the amount that they would sell for it they were sold off piecemeal and the business were thus broken up.
ii) The accruals concept (or matching concept): states that revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate.
Assume that a firm makes a profit of £100 by matching the revenue (£200) earned from the sale of 20 units against the cost (£100) of acquiring them.
If, however, the firm had only sold eighteen units, it would have been incorrect to charge profit and loss account with the cost of twenty units; there is still two units in stock. If the firm intends to sell them later, it is likely to make a profit on the sale. Therefore, only the purchase cost of eighteen units (£90) should be matched with the sales revenue, leaving a profit of £90.
The balance sheet would therefore look like this:
| |£ |
|Assets | |
|Stock (at cost, i.e. 2 x £5) |10 |
|Debtors (18 x £10) |180 |
| |190 |
|Liabilities | |
|Creditors |100 |
| |90 |
|Capital (profit for the period) |90 |
If, however the firm had decided to give up selling units, then the going concern concept would no longer apply and the value of the two units in the balance sheet would be a break-up valuation rather than cost. Similarly, if the two unsold units were now unlikely to be sold at more than their cost of £5 each (say, because of damage or a fall in demand) then they should be recorded on the balance sheet at their net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them saleable, e.g. paint) rather than cost. This shows the application of the prudence concept. (See below).
In this example, the concepts of going concern and matching are linked. Because the business is assumed to be a going concern it is possible to carry forward the cost of the unsold units as a charge against profits of the next period.
Essentially, the accruals concept states that, in computing profit, revenue earned must be matched against the expenditure incurred in earning it.
iii) The Prudence Concept: The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one that gives the most cautious presentation of the business’s financial position or results.
Therefore, revenue and profits are not anticipated but are recognized by inclusion in the profit and loss account only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty: provision is made for all liabilities (expenses and losses) whether the amount of these is known with certainty or is best estimate in the light of the information available.
Assets and profits should not be overstated, but a balance must be achieved to prevent the material overstatement of liabilities or losses.
The other aspect of the prudence concept is that where a loss is foreseen, it should be anticipated and taken into account immediately. If a business purchases stock for £1,200 but because of a sudden slump in the market only £900 is likely to be realized when the stock is sold the prudence concept dictates that the stock should be valued at £900. It is not enough to wait until the stock is sold, and then recognize the £300 loss; it must be recognized as soon as it is foreseen.
A profit can be considered to be a realized profit when it is in the form of:
• Cash
• Another asset that has a reasonably certain cash value. This includes amounts owing from debtors, provided that there is a reasonable certainty that the debtors will eventually pay up what they owe.
A company begins trading on 1 January 20X2 and sells goods worth £100,000 during the year to 31 December. At 31 December there are debts outstanding of £15,000. Of these, the company is now doubtful whether £6,000 will ever be paid.
The company should make a provision for doubtful debts of £6,000. Sales for 20x5 will be shown in the profit and loss account at their full value of £100,000, but the provision for doubtful debts would be a charge of £6,000. Because there is some uncertainty that the sales will be realized in the form of cash, the prudence concept dictates that the £6,000 should not be included in the profit for the year.
iv) The consistency concept: The consistency concept states that in preparing accounts consistency should be observed in two respects.
a) Similar items within a single set of accounts should be given similar accounting treatment.
b) The same treatment should be applied from one period to another in accounting for similar items. This enables valid comparisons to be made from one period to the next.
v) The entity concept: The concept is that accountants regard a business as a separate entity, distinct from its owners or managers. The concept applies whether the business is a limited company (and so recognized in law as a separate entity) or a sole proprietorship or partnership (in which case the business is not separately recognized by the law.
vi) The money measurement concept: The money measurement concept states that accounts will only deal with those items to which a monetary value can be attributed.
For example, in the balance sheet of a business, monetary values can be attributed to such assets as machinery (e.g. the original cost of the machinery; or the amount it would cost to replace the machinery) and stocks of goods (e.g. the original cost of goods, or, theoretically, the price at which the goods are likely to be sold).
The monetary measurement concept introduces limitations to the subject matter of accounts. A business may have intangible assets such as the flair of a good manager or the loyalty of its workforce. These may be important enough to give it a clear superiority over an otherwise identical business, but because they cannot be evaluated in monetary terms they do not appear anywhere in the accounts.
vii) The separate valuation principle: The separate valuation principle states that, in determining the amount to be attributed to an asset or liability in the balance sheet, each component item of the asset or liability must be determined separately.
These separate valuations must then be aggregated to arrive at the balance sheet figure. For example, if a company’s stock comprises 50 separate items, a valuation must (in theory) be arrived at for each item separately; the 50 figures must then be aggregated and the total is the stock figure which should appear in the balance sheet.
viii) The materiality concept: An item is considered material if it’s omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.
Determining whether or not an item is material is a very subjective exercise. There is no absolute measure of materiality. It is common to apply a convenient rule of thumb (for example to define material items as those with a value greater than 5% of the net profit disclosed by the accounts). But some items disclosed in accounts are regarded as particularly sensitive and even a very small misstatement of such an item would be regarded as a material error. An example in the accounts of a limited company might be the amount of remuneration paid to directors of the company.
The assessment of an item as material or immaterial may affect its treatment in the accounts. For example, the profit and loss account of a business will show the expenses incurred by he business grouped under suitable captions (heating and lighting expenses, rent and rates expenses etc); but in the case of very small expenses it may be appropriate to lump them together under a caption such as ‘sundry expenses’, because a more detailed breakdown would be inappropriate for such immaterial amounts.
Example:
a) If a balance sheet shows fixed assets of £2 million and stocks of £30,000 an error of £20,000 in the depreciation calculations might not be regarded as material, whereas an error of £20,000 in the stock valuation probably would be. In other words, the total of which the erroneous item forms part must be considered.
b) If a business has a bank loan of £50,000 balance and a £55,000 balance on bank deposit account, it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5,000’. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error.
ix) The historical cost convention: A basic principle of accounting (some writers include it in the list of fundamental accounting concepts) is that resources are normally stated in accounts at historical cost, i.e. at the amount that the business paid to acquire them. An important advantage of this procedure is that the objectivity of accounts is maximized: there is usually objective, documentary evidence to prove the amount paid to purchase an asset or pay an expense. Historical cost means transactions are recorded at the cost when they occurred.
In general, accountants prefer to deal with costs, rather than with ‘values’. This is because valuations tend to be subjective and to vary according to what the valuation is for. For example, suppose that a company acquires a machine to manufacture its products. The machine has an expected useful life of four years. At the end of two years the company is preparing a balance sheet and has decided what monetary amount to attribute to the asset.
x) Objectivity (neutrality):An accountant must show objectivity in his work. This means he should try to strip his answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this should be that any number of accountants will give the same answer independently of each other. Objectivity means that accountants must be free from bias. They must adopt a neutral stance when analysing accounting data. In practice objectivity is difficult. Two accountants faced with the same accounting data may come to different conclusions as to the correct treatment. It was to combat subjectivity that accounting standards were developed.
xi) The realization concept: Realization: Revenue and profits are recognized when realized. The concept states that revenue and profits are not anticipated but are recognized by inclusion in the income statement only when realized in the form of either cash or of other assets the ultimate cash realization of which can be assessed with reasonable certainty.
xii) Duality: Every transaction has two-fold effect in the accounts and is the basis of double entry bookkeeping.
xiii) Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form e.g. a non current asset on Hire purchase although is not legally owned by the enterprise until it is fully paid for, it is reflected in the accounts as an asset and depreciation provided for in the normal accounting way.
Example 3.1
It is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit and loss account when:
a) The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain.
b) The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the job is well under way but not yet completed by the end of an accounting period).
c) The critical event in the sale transaction has occurred. The critical event is the event after which:
i) It becomes virtually certain that cash will eventually be received from the customer.
ii) Cash is actually received.
Usually, revenue is ‘recognized’
a) When a cash sale is made.
b) The customer promises to pay on or before a specified future date, and the debt is legally enforceable.
The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the trading, profit and loss account, before it is reasonably certain to ‘happen’.
Required
Given that prudence is the main consideration, discuss under what circumstances, if any, revenue might be recognized at the following stages of a sale.
(a) Goods have been acquired by the business, which it confidently expects to resell very quickly.
(b) A customer places a firm order for goods.
(c) Goods are delivered to the customer.
(d) The customer is invoiced for goods.
(e) The customer pays for the goods.
(f) The customer’s cheque in payment for the goods has been cleared by the bank.
Answer
a) A sale must never be recognized before a customer has even ordered the goods. There is no certainty about the value of the sale, nor when it will take place, even if it is virtually certain that goods will be sold.
b) A sale must never be recognized when the customer places an order. Even though the order will be for a specific quantity of goods at a specific price, it is not yet certain that the sale transaction will go through. The customer may cancel an order, the supplier might be unable to deliver the goods as ordered or it may be decided that the customer is not a good credit risk.
c) A sale will be recognized when delivery of the goods is made only when:
i) The sale is for cash, and so the cash is received at the same time.
ii) The sale is on credit and the customer accepts delivery (e.g. by signing a delivery note).
d) The critical event for a credit sale is usually the dispatch of an invoice to the customer. There is then a legally enforceable debt payable on specified terms, for a completed sale transaction.
e) The critical event for a cash sale is when delivery takes place and when cash is received, both take place at the same time. It would be too cautious or ‘prudent’ to await cash payment for a credit sale transaction before recognizing the sale, unless the customer is a high credit risk and there is a serious doubt about his ability or intention to pay.
f) It would again be over-cautious to wait for clearance of the customer’s cheques before recognizing sales revenue. Such a precaution would only be justified in cases where there is a very high risk of the bank refusing to honour the cheque.
II) Bases
Bases are the methods that have been developed for expressing or applying fundamental accounting concepts to financial transactions and items. Examples include:
– Depreciation of Non current Assets (e.g. by straight line or reducing balance method)
– Treatment and amortization of intangible assets (patents and trade marks)
– Stocks and work in progress (FIFO, LIFO and AVCO)
III) Policies
Accounting policies are the specific accounting bases judged by business enterprises to be the most appropriate to their circumstances and adopted by them for the purpose of preparing their financial accounts.
Qualities of Useful Financial Information
The four principal qualities of useful financial information are understandability, relevance, reliability and comparability.
Understandability: an essential quality of the information provided in the financial statements is that it is readily understandable by users. For these reason users are assumed to have a reasonable knowledge of business and economic activities and accounting.
Relevance: information has the quality of being relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations. The relevance of information is affected by its nature and materiality.
Reliability: information is useful when it is free from material error and bias and can be depended upon by users to represent faithfully that which it purports to represent or could reasonably be expected to represent. To be reliable then the information should:
a) Be represented faithfully,
b) Be accounted for and presented in accordance with their substance and economic reality and not merely their legal form,
c) Be neutral i.e. free from bias,
d) Include some degree of caution especially where uncertainties surround some events and transactions (prudence),
e) Be complete i.e. must be within the bounds of materiality and cost. An omission can cause information to be false.
Comparability: users must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different accounting policies, changes in the various policies and the effect of these changes in the accounts. Compliance with accounting standards also helps achieve this comparability.
The Accounting Profession in Kenya
The Accountants Act Cap 531 (1977) establishes the Institute of Certified Public Accountants of Kenya (ICPAK) and two boards, to be known as the Registration of Kenya Accountants Board (RAB) and Kenya Accountants and Secretaries National Examinations Board (IASNEB)
The following are the functions of ICPAK as outlined by the Act;
a) To promote standards of professional competence and practice amongst members of the institute.
b) To promote research into the subjects of accountancy and finance, and related matters, and the publication of books, periodicals, journals and articles in connexion therewith;
c) To promote the international recognition of the institute;
d) To advise the Examinations board on matters relating to examination standards and policies;
e) To carry out any other functions prescribed for it under any of the provisions of the Act or under any other written law; and
f) To do anything incidental or conducive to the performance of any of the preceding functions.
A council known as the Council of the institute governs the Institute, which consists of the Chairman, nine members from the institute and one member appointed by the Minister of finance.
The Registration of Accountants Board (RAB) functions include issuing out practicing certificates and registration of qualified persons as members of the institute.
The Act also outlines the following as the functions of IASNEB:
a) To prepare syllabuses for accountants’ and secretaries’ examinations, to make rules with respect to examinations, to arrange and conduct examinations and issue certificates to candidates who have satisfied examination requirements;
b) To promote recognition of its examinations in foreign countries; and
c) To do anything incidental or conducive to the performance of any preceding functions.
Example 3.2 PILOT PAPER OCTOBER 1991
Briefly explain the meaning and the significance of the following:
i) Accounting concepts.
ii) Accounting bases.
iii) Accounting policies.
iv) Accounting standards.
(Total: 20 Marks)
(Covered adequately in the text).
Example 3.3 PILOT PAPER JULY 2000
a) Define the following accounting concepts and for each explain their implication in the preparation of financial statements.
i) The Going concern concept 4 marks
ii) Business entity concept 4 marks
iii) Materiality 4 marks
iv) Realization 4 marks
b) Two accounting concepts or conventions could clash or there could be inconsistency between them.
Give two examples of such situations and explain how the inconsistency should be resolved.
4 marks
Solution:
i) The Going Concern Concept
The concept of going concern is that an entity will continue trading into the foreseeable future at a similar level as it does when the accounts are prepared. Going concern has implications for the value of the entities assets and the way the user may read the financial statements. If a business is to cease trading after the period of account the financial statements should be prepared on a break up basis as all liabilities will be due and assets will be valued at net realizable value.
ii) The Entity Concept
The organization preparing accounts is a distinct and separate entity. Financial statements are prepared to reflect the activities of the entity. This concept prevents any confusion between the owner’s private finances and those of the entity, hence the option of drawings when a proprietor effectively reduces the capital of the entity.
iii) Materiality
Materiality relates to significant amounts and items in the financial statements. A rough guide to what material amount is 5% of pre tax profits. However, this is only a guide. If say, cash in hand is offset against the overdraft balance this is a material misstatement.
Materiality prevents time being wasted on items which do not impact on the results of the entity; it provides a focus on the significant items.
iv) Realization
The realization concept involves recognizing amounts in the financial statements at the point at which they crystallize. Profit should not be reflected in the profit and loss account until it has been earned.
The realization concept means that the profit in the financial statements should be reasonably stated.
c) Clashes between accounting concepts
Accruals and prudence
The accruals concept requires future income (e.g. in relation to credit sales) to be accrued. The prudence concept dictates that caution should be exercised, so that if there is doubt about the subsequent receipt, no accrual should be made.
Consistency and prudence
If circumstances change, prudence may conflict with the consistency concept, which requires the same treatment year after year.
In both situations, prudence must prevail.
Example 3.5 DECEMBER 1994 QUESTION FIVE
a) Explain the nature of the Accounting Equation. (5 marks)
b) What are accounting standards and why are they important? (5 marks)
c) Describe the role of the Institute of Certified Public Accountants of Kenya. (5 marks)
d) In addition to the Kenya Accounting Standards, why is it important for an
Accountant to make use of International Accounting Standards? (4 marks)
(Total: 19 marks)
(Covered adequately in the text)
REINFORCEMENT QUESTIONS
Question One
Explain, with examples, each of the following terms:
▪ Fundamental accounting concepts
▪ Accounting bases
▪ Accounting policies
Question Two
Accounting practice depends upon the guidance provided by a number of accounting concepts, some of which are to be found in IAS 1 and/or in the conceptional framework of the International Accounting Standards Committee.
Required:
(a) Define and explain the relevance of the following accounting concepts.
▪ Neutrality
▪ Money measurement
▪ Accruals
▪ Substance over form
▪ Consistency (15 marks)
(b) Give two examples of situations in which there is a clash or inconsistency between two accounting concepts or conventions, and explain how the inconsistency should be resolved. (In answering this part of the question, you need not confine yourself to considering the concepts listed in part (a)) (5 marks)
(20 marks)
Question Three
If the information in financial statements is to be useful, regard must be had to the following:
▪ Materiality
▪ Comparability
▪ Prudence
▪ Objectivity
▪ Relevance
Required
Explain the meaning of each of these factors as they apply to financial accounting including in your explanations one example of the application of each of them. (Four marks for each of (a) to (e).)
(20 marks)
Question Four
a) Explain what is meant by materiality in relation to financial statements and state two factors affecting the assessment of materiality. (4 marks)
b) Explain what makes information in financial statements relevant to users. (5 marks)
c)
1. Two characteristics contributing to reliability are ‘neutrality’ and ‘prudence’. Explain the meaning of these two terms.
2. Explain how a possible conflict between them could arise and how that conflict should be resolved. (5 marks)
d) One of the requirements of financial statements is that they should be free from material error. Suggest three safeguards, which may exist, inside or outside a company to ensure that the financial statements are free from material error. (6 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON FOUR
ADJUSTMENTS TO FINAL ACCOUNTS
a) ACCRUALS AND PREPAYMENTS
Revenue and costs must be recognized as they are earned or incurred, not as money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate. Therefore all incomes and expenses that relate to a particular financial period will be matched together to determine the profit for the year.
ACCRUALS
Income:
Accrued Income
This is income that relates to the current year but cash has not yet been received. An accrued income should be reported in the profit & loss account and the same income will be shown in the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month, assuming that this is the first year of renting and rent is received in arrears (rent 4 January is received early Feb).
The ledger accounts of the firm will be as follows:
Cashbook
Year 1 £
Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
April (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 Jun) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000
22,000
Rent – Income
Year 1 £ Year 1 £
Jan C/B 2,000
Feb C/B 2,000
Mar C/B 2,000
April C/B 2,000
May C/B 2,000
Jun C/B 2,000
July C/B 2,000
Aug C/B 2,000
Sept C/B 2,000
Oct C/B 2,000
31/12 P&L 24,000 Nov C/B 2,000
Dec Accrued c/f 2,000
24,000 24,000
Although the cashbook is showing that rent received amounts £22,000, the full rental income of £24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of £2,000 will be reported in the balance sheet as a current asset.
Expenses: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid during that period.
An accrued expense should be charged in the P&L account and shown in the balance sheet as a current liability.
Assume in the above example that the firm is meant to pay the rent, thus it becomes an expense with the facts still the same i.e. £2,000 payable in arrears. The ledger account will be as follows.
Cashbook
Year 1 £ Year 1 £
Feb (rent 4 Jan) 2,000
Mar (rent 4 Feb) 2,000
Apr (rent 4 Mar) 2,000
May (rent 4 Apr) 2,000
June (rent 4 May) 2,000
July (rent 4 June) 2,000
Aug (rent 4 July) 2,000
Sept (rent 4 Aug) 2,000
Oct (rent 4 Sept) 2,000
Nov (rent 4 Oct) 2,000
Dec (rent 4 Nov) 2,000
Rent – Expenses
Year 1 £ Year 1 £
C/B Rent for Jan 2,000
Rent for Feb 2,000
Rent for Mar 2,000
Rent for Apr 2,000
Rent for May 2,000
Rent for June 2,000
Rent for July 2,000
Rent for Aug 2,000
Rent for Sept 2,000
Rent for Oct. 2,000
Rent for Nov 2,000
31/12 Bal c/d 2,000 31/12 P&L 24,000
24,000 24,000
The cashbook shows that the rent for the 11 months was paid for. However in the P&L a/c we should report rent for the full year of £24,000 and the £2,000, rent for Dec being the accrued expense will be shown in the balance sheet as a current liability.
PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an income is payable in advance e.g. Rent payable 3 months in advance.
A prepaid income should not be reported in the current financial period but should be carried forward and reported in the period it relates to.
The accounting treatment will be to show it as a current liability.
Example 4.2
A firm receives rent income of £5,000 per month payable quarterly in advance. Assuming that the firm’s rental income began in 1st March and the financial year, end is on 31st Dec. The ledger accounts will be:
15,000 15,000 15,000 15,000 15,000
1.3 1.6 1.9 1.12 1.3
Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Income
Year 1 £ Year 1 £
1/3 Cashbook 15,000
1/6 Cashbook 15,000
P&L (10 x 5,000) 50,000 1/9 Cashbook 15,000
31/12 Bal c/d 10,000 1/12 Cashbook 15,000
60,000 60,000
Rent for the 4 quarters of 12 months has been received as per the cashbook but because the end of the financial year is at 31 Dec, rent for 2 months is pre-paid. This £10,000 is not charged in the P&L but is carried forward as current liability in the balance sheet.
Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid expense should not be charged in the P&L a/c but should be carried forward to the next financial period and should be shown in the balance sheet as a current asset.
Example
Assume as in the previous illustration, that all the facts are as stated except that rent is an expense. The ledger accounts is as follows:
Cashbook
Year 1 £ Year 1 £
1/3 Rent 15,000
1/6 Rent 15,000
1/9 Rent 15,000
1/12 Rent 15,000
Rent – Expenses
Year 1 £ Year 1 £
1/3 C/B (Mar, April, May) 15,000
1/6 C/B (June, July, Aug) 15,000
1/9 C/B (Sept, Oct, Nov) 15,000 P&L (10 x 5,000) 50,000
1/12 C/B (Dec, Jan, Feb) 15,000 31/12 Bal c/d (2 x 5,000) 10,000
60,000 60,000
Rent of £10,000 for 2 months is carried forward to the next financial period and shown in the balance sheet as a current asset.
The following is the summary of treatment for Accruals and Prepayments:
P&L B/Sheet
Accrued - Report as Current
Income Assets
Income
Prepaid -Not
reported Current
Liability
Accruals/
Prepayments
Accrued - Charge as Current
an expense Liability
Expense
Prepaid - Not charged Current
In P& L Assets
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance Sheet as follows:
Balance Sheet Extracts
£ £
Current Assets
Stock x
Debtors x
Accrued Incomes/Prepaid Expenses x
Cash at bank x
Cash in hand x
x
Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x
X
The accruals and expenses items may also be adjusted in the relevant income and expense accounts so that the correct amount of expense or income is reported in the profit and loss account for the year.
Example 4.4
The financial year of H Seamers ended on 31 December 2002. Show the ledger accounts for the following items including the balance transferred to the necessary part of the final accounts, also the balances carried down to 2003:
a) Motor expenses: Paid in 2002 £7,440; Owing at 31 December 2002 £2,800.
b) Insurance: Paid in 2002 £42,000; Prepaid as at 31 December 2002 £3,500.
c) Stationery: Paid during 2002 £18,000; Owing as at 31 December 2001 £25,000; Owing as at 31 December 2002 £49,000.
d) Rates: Paid during 2002 £95,000; Prepaid as at 31 December 2001 £2,200; Prepaid as at 31December 2002 £2,900.
e) Seamers sub-lets part of the premises. Receives £5,500 during the year ended 31 December 2002. Tenant owed Seamers £1,800 on 31 December 2001 and £2,100 on 31 December 2002
a) Motor Expenses
19X6 £ 19X6 £
Cashbook 7,440
31/12 Bal c/d 280 P/L a\c 7220
7200 7200
19x7
1/1 Bal b/d 280
b) Insurance
19x6 £ 19x6 £
Cashbook 4,200 31/12 P&L a/c 3850
31/12 Bal c/d 350
4,200 4200
19x7
1/1 Bal b/d 350
===
c) Stationery
19x6 £ 19x6 £
Cashbook 18,000 1/1 Bal b/d 2,500
31/12 Bal c/d 4,900 P&L a/c 20,400
22,900 22,900
==== ====
19x7
1/1Bal b/d 4,900
d) Rates
19x6 £ 19x6 £
1/1 Bal b/d 2200 P&L 8800
Cashbook 9500 31/12 Bal c/d 2900
11,700 11,700
19x7
1/1 Bal b/d 2900
e) Rent – Income
19x6 £ 19x6 £
1/1 Bal b/d 1800 Cashbook 5500
P&L 5800 31/12 Bal c/d 2100
7600 7600
19x7
1/1 Bal b/d 2100
b) BAD AND DOUBTFUL DEBTS
Some debtors may not pay up their accounts for various reasons e.g. a debtor may go out of business. When a debtor is not able to pay up his/her account this becomes a bad debt. Therefore the business/firm should write it off from the accounts and thus it becomes an expense that should be charged in the profit & loss account.
In practice a firm may also be unable to collect all the amounts due from debtors. This is because a section of the debtors will not honor their obligations. The problem posed by this situation is that it is difficult to identify the debtors who are unlikely to pay their accounts. Furthermore the amount that will not be collected may also be difficult to ascertain. These debts that the firm may not collect are called doubtful debts. A firm should therefore provide for such debts by charging the provision in the profit and loss account. Provision for doubtful debts maybe specific or general. Specific relate to a debtor whom we can identify and we are doubtful that he may pay the debt (if one of our debtor goes out of business).
Accounting For Bad & Doubtful Debts.
Bad debts
When a debt becomes bad the following entries will be made:
i. Debit bad debts account
Credit debtors account with the amount owing.
ii. Debit Profit and Loss Account.
Credit bad – debts account to transfer the balance on the bad – debts account to the Profit and Loss Account.
Doubtful Debts
A provision for doubtful debts can either be for a specific or a general provision. A specific provision is where a debtor is known and chances of recovering the debt are low.
The general provision is where a provision is made on the balance of the total debtors i.e. Debtors less Bad debts and specific provision.
The accounting treatment of provision for doubtful debts depends on the year of trading and the entries will be as follows. If it is the 1st year of trading (1st year of making provision):
i. Debit P&L a/c.
ii. Credit provision for doubtful debts (with total amount of the provision).
In the subsequent periods, it will depend on whether if it is an increase or decrease required on the provision.
If it is an increase:
i. Debit P&L a/c.
ii. Credit provision for doubtful debts (with increase only).
If it is a decrease:
i. Debit provision for doubtful debts.
ii. Credit P&L a/c (with the decrease in provision only).
Example
Debtors x
Bad debts (x)
x
Specific Provision (x)
x
General Provision (x)
x
A firm started trading in the year 1999, the balance on the debtor’s account was £400,000. Bad debts amounting to £40,000 were written off from this balance, there was a specific provision of £5,000 to be made to one of the debtors and a general provision of £5% was to be made on the balance of the debtors. The ledger accounts of 1999 were as follows:
Debtors Provision for doubtful debts
1999 £ 1999 £ 1999 £ 1999 £
Bal B/d 400,000 Bad debts 40,000 31/12 Bal c/d 22,750 31/12 P&L 22,750
Bal c/d 360,000
400,000 400,000
Bad debts
1999 £ 1999 £
Debtors 40,000 31/12 P&L 40,000
£
Debtors 400,000
Bad debts (40,000)
360,000
Specific Provision (5,000)
355,000
General Provision (5%) (17,750)
337,250
Profit & Loss A/C (Extract) for the year ended 31/12/99
£ £
Expenses:
Bad debts 40,000
Increase in provision for D/debts 22,750
Balance Sheet (Extract) as at 31/12/99
£ £
Current Assets
Stocks x
Debtors 360,000
Provision for D/debts (22,750) 337,250
337,250 337,250
In the year 2,000, the debtors balance goes up to £500,000 from which bad debts of £50,000 needs to be written off there is no specific provision but the general provision is to be maintained at 5%. The ledger accounts will be as follows:
Debtors 500,000
Bad debts (50,000)
450,000
General Provision (5%) 22,500
427,500
Debtors
|2000 £ |2000 £ |
|Bal b\d 500,000 |Bad Debts 50,000 |
|______ |Bal c\d 450,000 |
|500,000 |500,000 |
Provision for Doubtful Debts
|2000 £ |2000 £ |
|P\L 250 |1\1 Bal b\d 22,750 |
|Bal c\d 22,500 | |
|22,750 |22,750 |
Bad Debts
|2000 £ |2000 £ |
|Debtors 50,000 |31\12 P& L 50,000 |
Profit And Loss Account (Extract) for year ended 31/12/2002.
£ £
Incomes
Decrease in provision for D/debts 250
Expenses
Bad debts 50,000
Balance Sheet (Extract) as at 31/12/2002
£ £
Current Assets
Debtors 450,000
Provision for bad debts (22,500) 427,500
In the year 2001 the debtors balance goes up to £600,000 from which bad debts of £50,000 need to be written off, there is no specific provision but the general provision is to be maintained at 5% the ledger accounts is as shown:
£
Debtors 600,000
Bad debts (50,000)
550,000
General provision % (27,500)
522,500
Debtors
|2001 £ |2001 £ |
|Bal b\ |Bad Debts 50,000 |
|600,000 | |
|______ |Bal c\d 550,000 |
|600,000 |600,000 |
Provision for Doubtful Debts
|2001 £ |2001 £ |
| |1\1 Bal b\d 22,500 |
|Bal c\d 27,500 |P& L 5,000 |
|22,500 |27,500 |
Bad Debts
|2001 £ |2001 £ |
|Debtors 50,000 |31\12 P& L 50,000 |
Profit And Loss Account (Extract) for the year ended 31/12/2001
£ £
Expenses
Bad debts 50,000
Increase in provision 5,000
Balance Sheet (Extract) as at 31/12/2001
£ £
Current Assets
Debtors 550,000
Less: Provision for Doubtful Debts (27,500) 522,500
Example 4.6
In a new business during the year ended 31 December 2002 the following debts are found to be bad, and are written off on the dates shown:
30 April H Gordon £1,100
31 August D Bellamy Ltd £640
31 October J Alderton £120
On 31 December 2002 the schedule of remaining debtors, amounting in total to £68,500, is examined, and it is decided to make a provision for doubtful debts of £2,200.
You are required to show:
a. The Bad Debts Account, and the Provision for Doubtful Debts Account.
b. The charge to the Profit and Loss Account.
c. The relevant extracts from the Balance Sheet as at 31 December 2002.
£ Bad Debts
Debtors 70,036 2002 £ 2002 £
Bad debts (1,860) Bad debts 1860 31/12 P\L 1860
68,500 Provision for D/Debt (2,200)
66,300
Provision for doubtful debts
2002 £ 2002 £
31/12 Bal c/d 2,200 31/12 P&L 2,200
Profit & Loss Account (Extract)
£ £
Expenses
Bad debts 1,860
Increase in provision for Doubtful debts 2,200
Balance Sheet (Extract)
£ £
Current Assets
Debtor 8,500
Less: Provision for D/Debts (2,200) 6,300
Example 4.2
A business started trading on 1 January 2001. During the two years ended 31 December 2001 and 2002 the following debts were written off to the Bad Debts Account on the dates stated:
31 August 2001 W Best £850
30 September 2001 S Avon £1,400
28 February 2002 L J Friend £1,800
31 August 2002 N Kelly £600
30 November 2002 A Oliver £2,500
On 31 December 2001 there had been a total of debtors remaining of £405,000. It was decided to make a provision for doubtful debts of £5,500.
On 31 December 2002 there had been a total of debtors remaining of £473,000. It was decided to make a provision for doubtful debts of £6,000.
You are required to show:
i. The Bad Debts Account and the Provision for Doubtful Debts Account for each of the two years.
ii. The relevant extracts from the Balance Sheet as at 31 December 2001 and 2002.
Solutions
Bad debts = 2,250
405,000
Provision (5,500)
399,500
Bad Debts
|2001 £ |2001 £ |
|31\8 W.Best 850 | |
|30\9 S.Aron 1400 |31\12 P&L 2250 |
|2250 |2250 |
| | |
| | |
Provision for D/Debts
|2001 £ |2001 £ |
|31\12 Bal c\d 550 |31\12 P&L 550 |
| | |
|2001 £ |2001 £ |
| |1\1 Bal b\d 550 |
|1\1 Bal c\d 600 |31\12 P&L 50 |
|600 | |
| |600 |
Bad Debts
2001 £ 2001 £
28/2 J. Friend 1,800
31/8 N. Kelly 600
30/11 A. Oliver 2,500 31/13 P&L 4,900
4,900 4,900
Profit & Loss Account (Extract)
19x6 £ £
Expenses
Bad debts 2,250
Provision for Doubtful Debts 5,000
19x7
Bad debts 4,900
Increase in provision for D/Debts 500
Balance Sheet as at 19x6
£ £
Current Assets
Debtors 405,000
Less provision (5,500) 399,500
19x7
Debtors 473,000
Less: provision (6,000) 467,000
Provision for discounts allowable.
In some cases a firm may create a provision for discounts allowable in addition to provision for doubtful debts. This happens where a firm anticipates that some of the debtors may take up cash discounts offered by the firm. The accounting treatment is similar to accounting for provision for doubtful debts. The provision should be made after creating a provision for doubtful debts (debtors figure less either general/specific provision for doubtful debts).
Debtors x
Bad debts (x)
x
Specific provision (x)
x
(x)
x
Provision for discount allowed (on balance) (x)
x
Profit & Loss Account (Extract)
£ £
Incomes
Decrease in provision for D/Debts x
Decrease in provision for discounts allowed x
Expenses
Bad debts x
Increase in provision for D/Debts x
Increase in provision for discounts allowed x
Balance Sheet (Extract)
Current Assets £ £
Debtors x
Less: provision for Doubtful Debts (x)
Less: provision for discounts allowed (x) x
Bad Debts Recovered
A firm may be able to recover a debt that was previously written off. The following entries will be made if this happens:
i. Debit – Debtors
Credit – credit bad debts recovered account – to restore the bad debt recoverable.
N/B: This should be the amount to be recovered.
ii. Debit – Cashbook
Credit – Debtors with the cash received.
iii. Debit – bad debts recovered account.
Credit – P & L account with the same balance as bad debts account.
Example:
A firm recovers debts amounting to £10,000 that had been written off in the previous periods. In the same financial period the firm writes off bad debts amounting £30,000. The ledger accounts will be as follows:
Bad debts
| £ | £ |
|Debtors 30,000 |Bad Debt Recovered 10,000 |
| |P\L 20,000 |
|30,000 |30,000 |
| | |
Bad debts recovered
| £ | £ |
|Bad Debt 10,000 |Debtors 10,000 |
c) BANK RECONCILIATION STATMENTS
The cashbook for cash at bank records all the transactions taking place at the bank i.e. the movements of the account held with the bank. The bank will send information relating to this account using a bank statement for the firm to compare.
Ideally, the records as per the bank and the cashbook should be the same and therefore the balance carried down in the cashbook should be the same as the balance carried down by the bank in the bank statement.
In practice however, this is not the case and the two (balance as per the bank and firm) are different. A bank reconciliation statement explains the difference between the balance at the bank as per the cashbook and balance at bank as per the bank statement.
Causes of the differences:
Items Appearing In The Cashbook And Not Reflected In The Bank Statement.
Unpresented Cheques: Cheques issued by the firm for payment to the creditors or to other supplies but have not been presented to the firm’s bank for payment.
Uncredited deposits/cheques: These are cheques received from customers and other sources for which the firm has banked but the bank has not yet availed the funds by crediting the firm’s account.
Errors made in the cashbook
These include:
• Payments over/understated
• Deposits over/understated
• Deposits and payments misposted
• Overcastting and undercasting the Bal c/d in the cashbook.
ii) Items appearing in the bank statement and not reflected in the cashbook:
Bank charges: These charges include service, commission or cheques.
Interest charges on overdrafts.
Direct Debits (standing orders) e.g. to pay Alico insurance.
Dishonored cheques
A cheque would be dishonored because:
• Stale cheques
• Post – dated cheques
• Insufficient funds
• Differences in amounts in words and figures.
Direct credits
Interest Income/Dividend incomes
Errors of The Bank Statement (Made By The Bank).
Such errors include:
• Overstating/understating.
• Deposits
• Withdrawals
The Purposes of a bank reconciliation statement.
1. To update the cashbook with some of the items appearing in the bank statement e.g. bank charges, interest charges and dishonoured cheques and make adjustments for any errors reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.
Steps in preparing a bank reconciliation statement.
1. To update the cashbook with the items appearing in the bank statement and not appearing in the cashbook except for errors in the bank statement. Adjustments should also be made for errors in the cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to determine the uncredited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to determine the unpresented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per cashbook (updated) x
Add: Un presented cheques x
Errors on Bank Statement (see note 1) x x
x
Less: Uncredited deposits x
Errors on Bank Statement (see note 2) x (x)
Balance at bank as per Balance Sheet x
Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an understated deposit or an overstated payment by the bank, or making an unknown payment.
Format 2
Name:
Bank Reconciliation Statement as at 31/12
£ £
Balance at bank as per bank statement x
Add: Uncredited deposits x
Add errors on bank statement (note 2) x x
x
Less: Unpresented cheques x
Errors on bank statement (note 1) x (x)
Balance at bank as per cashbook (updated) x
===
Example 4.8
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the balance on the bank statement, from the following as on 31 March 2003:
£
Cash at bank as per bank column of the cashbook (Dr) 38,960
Bankings made but not yet entered on bank statement 6,060
Bank charges on bank statement but not yet in cashbook 280
Un presented cheques C Clarke 1170 Standing order to ABC Ltd entered on bank statement, but not in cash book 550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook 1,890
Solution
Cashbook – Bank
|19X9 £ |19X9 £ |
|31/3 Bal b/d 38960 |Bank charges 280|
| |ABC (standing order) 550 |
|A Wood (credit transfer) 1890 |31/3 Bal C/D 40,020 |
|40,850 |40,850 |
Bank Reconciliation as at 31/03/2003
£ £
Balance at bank as per cashbook 40,020
Add: Unpresented cheques 1,170
41,190
Less: Uncredited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
Example 4.9
The following are extracts from the cashbook and the bank statement of J Richards. You are required to:
a) Write the cashbook up to date, and state the new balance as on 31 December 2002, and
b) Draw up a bank reconciliation statement as on 31 December 2002.
Cashbook
2002 Dr £ 2002 Cr £
Dec 1 Balance b/d 1,740 Dec 8 A Dailey 349
Dec 7 J Map 88 Dec 15 R Mason 33
Dec 22 J Cream 73 Dec 28 G Small 115
Dec 31 K Wood 249 Dec 31 Balance c/d 1,831
Dec 31 M Barrett 178
2,328 2,328
Bank Statement
2002 Dr Cr Balance
£ £ £
Dec 1 Balance b/d 1,740
Dec 7 Cheque 88 1,828
Dec 11 A Dailey 349 1,479
Dec 20 R Mason 33 1,446
Dec 22 Cheque 73 1,519
Dec 31 Credit transfer: J Walters 54 1,573
Dec 31 Bank charges 22 1,551
Cashbook –Bank
2002 £ 2002 £
31/12 Bal b/d 1,831 31/1 Bank charges 22
31/12 J. Walters (C/T) 54 31/12 Bal C/D 1,863
1,885 1,885
J. Richards
Bank Reconciliation Statement as at 31/12/2002
£ £
Balance at bank as per cashbook – bank 1,863
Add: Unpresented cheques – (G Small) 115
1,978
Less: Uncredited deposits
K Wood 249
M. Barret 178 (427)
Balance at bank as per balance sheet 1,551
OR:
Balance at bank as per balance sheet 1,551
Add: Uncredited deposits:
K. Wood 249
M. Barret 178
1,978
Less: Unpresented cheques (115)
Balance at bank as per cashbook – bank 1,863
Exam Type Question: Nov 2001 Q4
QUESTION FOUR
(a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that
date the bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500.
His accountant investigated the matter and discovered the following discrepancies:
1. Bank charges of Sh.3, 000 had not been entered in the cashbook.
2. Cheques drawn by Ssemakula totaling Sh.22, 500 had not yet been presented to the bank.
3. He had not entered receipts of Sh.26, 500 in his cashbook.
4. The bank had not credited Mr Ssemakula with receipts of Sh.98, 500 paid into the bank on 30 June 2001.
5. Standing order payments amounting to Sh.62, 000 had not been entered into the cashbook.
6. In the cashbook Ssemakula had entered a payment of Sh.74, 900 as Sh.79, 400.
7. A cheque for Sh.15, 000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cashbook.
8. Ssemakula had brought forward the opening cash balance of Sh.329, 250 as a debit balance instead of a credit balance.
9. An old cheque payment amounting to Sh.44, 000 had been written back in the cashbook but the bank had already honored it.
10. Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had credited some deposits amounting to Sh.832, 500 to another customer’s account. However acting on information from his customers Ssemakula had actually entered the expected receipts from the debtors in is cashbook.
Required:
i. A statement showing Ssemakula’s adjusted cashbook balance as at 30 June 2001. (9 marks)
ii. A bank reconciliation statement as at 30 June 2001. (5marks)
(Total: 20 marks)
Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.
b) ADJUSTED CASHBOOK
2001 Sh. 2001 Sh.
Bal b/d 2,366,500 Bank charges 3,000
Receipts omitted 26,500 Standing orders 62,000
Payment overstated 4,500 Debtors (dishonored cheques) 15,000
Error on opening balance 329,250
Balance C/F 329,250
Cheque payment 44,000
Balance C/D 1,615,000
2,397,500 2,397,500
SSEMAKULA
Bank Reconciliation Statement as at 30 June 2001.
Sh. Sh.
Cash at bank as per the updated cashbook 1,615,000
Add: Unpresented cheques 22,500
1,637,500
Less: Uncredited cheques 98,500
Error on bank statement 832,500 (931,000)
Balance as per the bank statement 706,500
Exam type Question: Nov 96 Q4
QUESTION FOUR
(a) What is the purpose of preparing a bank reconciliation statement? (4marks)
(b) The following is the bank statement of Kakamega Retail Traders for the month of October
1996:
Date Particulars Debit Credit Balance
1996 Sh. Sh. Sh.
October 1 Balance b/d 365,875
2 Cheque no. 63 31,000 334,875
2 Cheque no. 67 3,548 331,327
2 Cheque no. 65 13,000 318,327
2 Deposit 82,000 400,327
4 Cheque no. 69 6,000 394,327
4 Cheque no. 68 3,115 391,212
4 Cheque no. 64 51,000 340,212
4 Deposit 7,280 347,492
7 Cheque no. 70 7,000 340,492
7 Cheque no. 71 51,500 288,992
7 Deposit 36,100 325,092
8 Cheque no. 66 9,000 316,092
8 Deposit 28,000 344,092
October 9 Cheque no. 72 1,330 342,762
9 Cheque no. 73 6,250 336,512
9 Deposit 51,000 387,512
15 Cheque no. 74 2,800 384,712
15 Deposit 20,560 405,272
16 Cheque no. 75 65,000 340,272
16 Deposit 18,014 358,286
17 Deposit 34,500 392,786
19 Cheque no. 76 8,500 384,286
19 Deposit 42,750 427,036
21 Cheque no. 79 2,410 424,626
21 Cheque no. 77 12,506 412,120
21 Cheque no. 78 4,000 408,120
21 Cheque no. 81 6,500 401,620
21 Deposit 9,000 410,620
23 Cheque no. 82 16,240 394,380
23 Deposit 63,000 457,380
26 Cheque no. 84 1,500 455,880
26 Dividends 8,750 464,630
26 Deposit 62,500 527,130
28 Cheque no. 88 35,500 491,630
28 Standing order 10,400 481,230
(Insurance)
28 Cheque no. 85 27,000 454,230
28 Cheque no. 87 22,500 431,730
28 Deposit 13,025 444,755
31 Service charge 750 444,005
31 Deposit 28,050 472,055
The following is the bank column of the cashbook:
Date Particulars Debit Date Particulars Credit
1996 Sh. 1996 Sh.
October 1 Balance b/d 365,875 October 1 Cheque no. 65 13,000
1 Deposited at bank 7,280 1 Cheque no. 66 9,000
3 Deposited at bank 36,100 1 Cheque no. 67 3,548
5 Deposited at bank 28,000 2 Cheque no. 68 3,115
8 Deposited at bank 51,000 4 Cheque no. 69 6,000
10 Deposited at bank 20,560 5 Cheque no. 70 7,000
15 Deposited at bank 18,014 5 Cheque no. 71 51,500
15 Deposited at bank 34,500 7 Cheque no. 72 1,330
17 Deposited at bank 42,750 8 Cheque no. 73 6,250
19 Deposited at bank 15,700 10 Cheque no. 74 2,800
19 Deposited at bank 9,000 11 Cheque no. 75 65,000
22 Deposited at bank 36,000 15 Cheque no. 76 5,800
24 Deposited at bank 26,500 18 Cheque no. 77 12,506
27 Deposited at bank 13,025 19 Cheque no. 78 4,000
28 Deposited at bank 28,050 19 Cheque no. 79 2,410
29 Deposited at bank 171,010 19 Cheque no. 80 3,860
31 Deposited at bank 31,525 19 Cheque no. 81 6,500
22 Cheque no. 82 16,240
23 Cheque no. 815,000
26 Cheque no. 84 1,500
28 Cheque no. 85 27,000
28 Cheque no. 86 10,520
28 Cheque no. 87 22,500
28 Cheque no. 88 53,500
30 Cheque no. 89 2,500
31 Cheque no. 90 64,529
31 Cheque no. 91 15,500
31 Balance c/d 502,481
934,889 934,889
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was in transit and two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cashbook as Sh.26, 500 and Sh.36, 000 and in the bank statement as Sh.62, 500 and Sh.63, 000, respectively.
3. A cheque from Mkulima for Sh.15, 700 was deposited on 18 October 1996 but was dishonored and the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for Sh.5, 800 and Sh.33, 500 respectively.
Required:
a) A correct cashbook balance. (8 marks)
b) A bank reconciliation statement on 31 October 1996. (8 marks)
(Total: 20 marks)
No 96 Q4
CASHBOOK (ADJUSTED)
1996 Sh. 1996 Sh.
31.10 Bal b/d 502,481 Standing order (insurance) 10,400
Dividends 8,750 Service charge 750
Error on deposit 36,000 Dishonored cheques (debtor) 15,700
Error on cheque 88 18,000 Bal c/d 538,381 565,231 565,231
Bank Reconciliation Statement as at 1 October 1996. (Previous period)
Sh. Sh.
Balance as per the cashbook 365,875
Add: Unpresented cheques 63 31,000
64 51,000 82,000
447,875
Less: Uncredited cheques
Deposits (82,000)
Balance as per the bank statement 365,875
Bank Reconciliation Statement as at 31 October 1996
Sh. Sh.
Balance as per the correct cashbook 538,381
Add: Unpresented cheques
Cheque no. 80 3,860
Cheque no. 83 15,000
Cheque no. 86 10,520
Cheque no. 89 2,500
Cheque no. 90 64,529
Cheque no. 91 15,500
Error on bank statement 27,000 138,909
677,290
Less: Uncredited Cheques
Deposits 171,010
“ 31,525
Error in bank statement 2,700 (205,235)
Balance as per the bank statement 472,055
d) CAPITAL AND REVENUE EXPENDITURE
Capital Expenditure: This is the amount spent on the acquisition of a non-current asset or adding value to a non-current asset.
Examples of expenses incurred in acquisition:
i. Purchase price/cost of the asset.
ii. Delivery/carriage inwards costs (e.g. shipping charges or import taxes).
iii. Costs incurred to get the asset in use (e.g. assembly, testing)
iv. Installation
v. Demolition costs in order to construct a new building.
vi. Architect fees for construction and supervision
vii. Legal fees incurred in acquisition of a new asset (e.g. lease agreement)
Examples of expenses incurred in adding value to an asset:
i. Modify plant to increase its useful life.
ii. Upgrading plant to improve quality of output.
iii. Adopting or upgrading the production process to improve or reduce costs.
Revenue Expenditure: There’s an amount spent by the firm in the normal trading process or to assist in earning revenues or income. Examples:
i. Postage and stationery.
ii. Carriage outwards (sales).
iii. Repairs and maintenance.
Example 4.10
For the business of K Spinns,a wholesaler, classify the following between ‘capital’ and ‘revenue’ expenditure:
a) Purchase of an extra motor van.
b) Cost of rebuilding warehouse wall, which had fallen down.
c) Building extension to the warehouse.
d) Painting extension to warehouse when it is first built.
e) Repainting extension to warehouse three years later than that done in (d).
f) Carriage costs on bricks for new warehouse extension.
g) Carriage costs on purchases.
h) Carriage costs on sales.
i) Legal costs of collecting debts.
j) Legal charges on acquiring new premises for office.
k) Fire insurance premium.
l) Costs of erecting new machine.
Solution.
a) Capital expenditure
b) Revenue expenditure
c) Capital expenditure
d) Capital expenditure
e) Revenue expenditure
f) Capital expenditure
g) Revenue expenditure
h) Revenue expenditure
i) Revenue expenditure
j) Capital expenditure
k) Revenue expenditure
l) Capital expenditure.
e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the firm. IAS 16 on property, plant and equipment defines depreciation as the allocation of a depreciable amount of a non-current asset over its estimated useful life.
Under the matching concept, all incomes or revenues and expenses for a particular period should be reported in the financial statements and because depreciation is an expense of the business therefore, it will be charged in the P&L A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a
business grows or expands then some buildings may become inadequate due to space. Also some machines that are unable to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil. Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of depreciation to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting practice, accounting standards and suit the firm’s non-current assets. There are 2 main methods of estimating depreciation and 5 others that will apply in a firm’s situation.
The main methods are: Straight-line method and Reducing Balance method. The other 5 methods include:
i. Sum of the digits methods – uses a formular.
ii. Revaluation method – applies to a non-current asset of low value.
iii. Machine-Hour method – depreciation is based on number of hours a machine is expected to operate (manufacturing process).
iv. Unit of output method – depreciation is based on the number of units a machine is expected to produce.
v. Depletion of units – depreciation is based on number of units extracted from the asset.
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c for a particular asset and is based on the following formular:
Depreciation for year = Cost of asset – Residual Value = £100,000 - £20,000
Estimated useful life 8
= £10,000 per year.
Cost of Asset – Residual Value
Estimated useful life of asset.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value / Scrap Value.
Estimated Useful Life
The period the asset is expected to be used in the firm.
Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight years. After the eight years the machine will be sold for £20,000. Under the straight-line method, the depreciation amount will be computed as follows:
This means for this asset £10,000 will be charged in the P&L account as depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly over the life of the asset e.g. buildings use straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of use. The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value of the asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier periods of use and lower amounts in the latter periods of use as shown in the following example:
Example 4.12
Assume a firm buys machinery for £100,000 and provides depreciation on machines at 20% p.a. on reducing balance method. The depreciation charged to the P&L will be as follows for the next 3 years.
Year 1
£
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1
Balance to YR 2 80,000
Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2
Balance to YR 3 64,000
Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3
Balance to YR 4 51,200
Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of an asset are higher in the first periods of use and lower in the latter periods e.g.
▪ Fixtures, furniture and fitting.
▪ Plant and machinery.
▪ Motor vehicles.
ACCOUNTING TREATMENT ON DEPRECIATION
When non-current assets are depreciated, a new account for each type of asset is opened; this account is called a provision for depreciation whereby the following entries will be made:
Debit – P&L a/c
Credit – Provision for depreciation a/c
With the amount of depreciation charged for the period.
Example on straight-line method
The entries will be as follows:
Debit – P&L a/c with £10,000
Credit – Provision for depreciation. Machines a/c with £10,000 being depreciation provided for the machine.
The ledger accounts will be as follows:
Machinery Provision for Depreciation Machinery
£ £ £ £
Cashbook 100,000 31/12 Bal c/d 100,000 31/12 Bal c/d 10,000 P&L 10,000
The final accounts extracts will be shown as follows:
(a) Profit And Loss Account (Extract) for the year ended
Expenses £ £
Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x
(b) Balance sheet (Extract) as at________
Non Current Assets Cost Total NBV (Net Book Value)
£ Depreciation (£) £
Land x - x
Buildings x (x) x
Plant and Machinery x (x) x
Furniture, Fixtures & fittings x (x) x
Motor vehicles x (x) x
x x x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars account and the provision for depreciation account for the year ended 31 December 2002 from the information given below. Depreciation is at the rate of 20 per cent per annum. Using the basis of one month’s ownership needs one month’s depreciation.
2002 Bought two motor vans for £12,000 each on 1 January
Bought one motor van for £14,000 on 1 July.
Motorcars a/c
2002 £ 2002 £
1/1 Cashbook 24,000
1/7 Cashbook 14,000 31/12 Bal c/d 38,000
38,000 38,000
Calculation for depreciation
1/1 24,000 x 20 x 12 = £4,800 + 1/7( 14,000 x 20 x 6 = 1,400 )
100 12 100 12
= £4,800 + 1,400 = £6,200
Provision- Depreciation for Motor cars A/c
2002 £ 2002 £
31/12 Bal c/d 6,200 31/12 P&L 6,200
Profit And Loss Account (Extract) for the period.
Expenses £ £
Depreciation:
Motor vans 6200
Balance Sheet (Extract) as at 31/12/2002
Non-current Assets Cost Total NBV
Depreciation
Motor vans 38,000 (6200) 31,800
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31 December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999 1 January 1 plant costing £8,000
2000 1 July 2 plant costing £5,000 each
1 October 1 plant costing £6,000
2002 1 April 1 plant costing £2,000
Depreciation is at the rate of 10 per cent per annum, using the straight-line method, plant being depreciated for each proportion of a year.
Plant a/c
1999 £ 199 £
1/1 Cashbook 8000 31/12 Bal c/d 8000
2000 2000
1/1 Bal b/d 8000
1/7 Cashbook 10,000
1/10 Cashbook 6,000 31/12 Bal c/d 24,000
24,000 24,000
2001 2001
1/1 Bal b/d 24,000 31/12 Bal c/d 24,000
2002 2002
1/1 Bal b/d 24,000
1/4 Cashbook 2,000 31/12 Bal c/d 26,000
26,000 26,000
Calculation for Depreciation
1999 £ Accumulated Depreciation
£8,000 x 10/100 x 12/12 = 800 800
2000
£10,000 x 10/100 x 6/12 = 500
£6,000 x 10/100 x 3/12 = 150
£8,000 x 10/100 x 12/12 = 800
1,450 2,250
2001
£24,000 x 10/100 x 12/12 = 2400 4,650
2002
£24,000 x 10/100 x 12/12 = 2400
£2,000 x 10/100 x 9/12 = 150
2,250 7,200
Provision – Depreciation Machines
1999 £ 1999 £
31/12 Bal c/d 800 31/12 P&L 800
2000 £ 2000 £
1/1 Bal b/d 800
31/12 Bal c/d 2,250 P&L 1,450
2,250 2,250
2001 £ 2001 £
1/1 Bal b/d 2,250
31/12 Bal c/d 4,650 P&L 2,400
4650 4650
2002 £ 2002 £
1/1 Bal b/d 4,650
31/12 Bal c/d 7,200 P&L 2,550
7,200 7,200
Balance Sheet (Extract) as at 31/12/99 – 31/12/02
Non Current Assets Cost Total NBV
Depreciation
1999
Motor vans 8,000 (800) 7,200
1999
Motor vans 24,000 (2,250) 21,750
1999
Motor vans 24,000 (4,650) 19,350
1999
Motor vans 26,000 (7,200) 18,800
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
When an asset is disposed and is no longer used by the firm, the appropriate entries should be made in the asset account and the total depreciation provided to date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset being disposed.
(b) Debit – provision for depreciation of asset a/c.
Credit – asset disposal a/c
With the total depreciation provided to date on the asset.
(c) Debit – cashbook.
Credit – asset disposal a/c
With the cash received on disposal.
When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance company accept liability but by the end of the period the insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.
(b) Debit – provision for depreciation of asset a/c
Credit – asset disposal a/c
(c) Debit – insurance receivable a/c
Credit – asset disposal a/c
With the amount expected from the insurance.
If the insurance pays before the end of the financial period, it will not be necessary to create an insurance debtor so the following entries will be made:
Debit – cashbook.
Credit – asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries will be made in the asset account and provision for depreciation a/c only.
Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset no longer in use.
Debit – provision for depreciation for asset
Credit – asset disposal a/c
With the total depreciation provided to date.
The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with other incomes. The entry will be:
Debit – asset disposal a/c
Credit – P&L a/c
With the balance in the account.
A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is £800. The firm decides to trade in the motor vehicle with a new one the value of the new one being £500. The supplier of the new vehicle agree with the firm that the old motor vehicle is worth £300, therefore the difference will be paid by cash.
Motor vehicle a/c
£ £
Bal b/d 1,000 Motor vehicle disposal 1,000
Disposals 300
Cashbook 200 Bal c/d 500
1,500 1,500
===== ====
Motor Vehicle Disposal a/c
£ £
Motor vehicle a/c 1,000 Provision for depreciation 800
P&L 100 Motor vehicle 300
1,100 1,100
JOURNAL ENTRIES £ £
Debit – motor vehicles disposal 1,000
Credit – motor vehicles a/c 1,000
(Motor vehicle being traded in now transferred to disposal a/c)
Debit – Provision for depreciation – motor vehicles 800
Credit – Motor vehicle disposal a/c 800
(Total depreciation provided for motor vehicle)
Debit – Motor vehicle a/c 500
Credit – Asset disposal a/c 300
- Cashbook 200
(New motor vehicle acquired by trade-in value
of £300 and cheque payment of £200)
Debit – Asset disposal a/c 100
Credit – P&L 100
(Profit made on disposal)
In case of a loss,
Debit – P&L a/c
Credit – asset disposal a/c
If the firm trades in an old asset for a new one, the following entries will be made in addition to the movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old asset)
Asset disposal a/c (with trade-in value of old asset)
Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for each month of ownership. From the following details draw up the plant account and the provision for depreciation account for each of the years 1999, 2000, 2001 and 2002.
1999 Bought plant costing £900 on 1 January.
Bought plant costing £600 on 1 October.
2001 Bought plant costing £550 on 1 July.
2002 Sold plant which had been bought for £900 on 1 January 1999 for the sum of £275 on 30 September 2002.
You are also required to draw up the plant disposal account and the extracts from the balance sheet as at the end of each year.
Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500
2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d 1,500
2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d 2,050
2,050 2,050
2002 2002
1/1 Bal b/d 2,050 30/9 Disposal 900
31/12 Bal c/d 1,150
2,050 2,050
Plant Provision for Depreciation a/c
1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210
2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510
2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865
2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230
Calculation for Depreciation
Date Cost Months Depreciation charge £
1999
1/1 900 12 20/100 x 900 x 12/12 = 180
1/10 600 3 20/100 x 600 x 3/12 = 30
210
2000
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
2001
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
1/2 550 6 20/100 x 550 x 6/12 = 55
355
2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365
Plant Disposal a/c
2002 £ 2002 £
Plant a/c 900 30/9 Provision for depreciation 675
P&L 50 30/9 Cashbook 275
950 950
Balance Sheet (Extract)
Total
Non Current Assets Cost Depreciation NBV
1999 Plant 1,500 (210) 1,290
2000 Plant 1,500 (510) 990
2001 Plant 2,050 (865) 1,695
2002 Plant 1,150 (555) 595
CHANGE OF DEPRECIATION POLICY
A firm may change its depreciation policy in several ways e.g. from straight line to reducing balance or vice versa, or it may increase/decrease the number of estimated useful years of an asset. A firm should always follow the depreciation policy adopted consistently and incase there is need to change the policy may be due to a new accounting standard or change in circumstances. This change should be disclosed in the financial statements.
When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation to be charged in the Profit and loss account .IAS 16 requires that depreciation should be based on the remaining net book value at the start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10 years. The firm depreciates the machines on a straight-line basis on the years of the number of estimated useful years. In the 4th year, the estimated useful life of the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried down for year 4. Change for 10yr – 8 yr is same as change from 10% to 12.5%
Provision for Depreciation
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
1/1 Bal b/d 20,000
31/12 Bal c/d 30,000 31/12 P&L 10,000
30,000 30,000
Year 4 Year 4
1/1 Bal b/d 30,000
31/12 P&L 14,000
31/12 Bal c/d 44,000
44,000 44,000
Workings:
The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease but increases from 10 years to 13 years.
Required: Show the provision of depreciation account in year 4
Provision for Depreciation
Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000
Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
31/12 Bal c/d 30,000 1/1 Bal b/d 20,000
_____ P&L 10,000
30,000 30,000
Year 4 Year 4
1/1 Bal b/d 30,000
31/12 Bal c/d 37,000 31/12 P&L 7,000
37,000 37,000
REVALUATION OF NON CURRENT ASSETS
Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.g. land and buildings. IAS 16 on property, plant and equipment requires that such assets may be carried in the accounts at the revalued amounts (may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but for buildings, changes should be made at the cost and depreciation reserve account is usually opened for the purpose of these adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset Cost Depreciation
(a) Land £1,000,000 -
(b) Buildings £800,000 40,000
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices and these are revalued at:
Land -£ 1,200,00 Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land [pic]1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings [pic]900,000 – 800,000)
(c) Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
| |£ | |£ |
|Bal B/D |1,000,000 | | |
|Revaluation reserve |__200,000 |Bal C/D |1,200,000 |
| |1,2000,000 | |1,200,000 |
Buildings a/c
| |£ | |£ |
|Bal B/D |800,000 | | |
|Revaluation reserve |100,000 |Bal C/D |900,000 |
| |900,000 | |900,000 |
Revaluation Reserve a/c
| |£ | |£ |
| | |Land |200,000 |
| | |Buildings |100,000 |
|Bal C/D |340,000 |Provision for depr. |40,000 |
| |340,000 | |340,000 |
| | | | |
Provision for depreciation (Buildings)
| |£ | |£ |
|Revaluation |40,000 |Bal B/D |40,000 |
| Bal c/d |45,000 |P & L |45,000 |
| |85,000 | |85,000 |
The balances in the Land and Building a/c will be shown as cost in the Balance Sheet and the revaluation reserve a/c appears together with the capital as a revaluation reserve (especially used in company accounts.
Land 1,200,000 – 1,000,000 = 200,000
Buildings 900,000 – 760,000 = 140,000 340,000
Any depreciation to be charged for the buildings should be based on the revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged in the P & L and will also be the Bal c/d in the provision for depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land and buildings downwards in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.
The Ledger accounts will be as follows:
Land
|Year 3 |£ |Year 3 |£ |
|1/1 Bal B/D |1,200,000 |31/12 Revaluation |200,000 |
| | |P & L |100,000 |
| |________ |Bal C/D |__900,000 |
| | | | |
| |1,200,000 | |1,200,000 |
Buildings
|Year 3 |£ |Year 3 |£ |
|1/1 Bal B/D |900,000 |31/12 Revaluation |100,000 |
| | |P & L |100,000 |
| |_______ |Bal C/D |700,000 |
| |900,000 | |900,000 |
Revaluation Reserve
|Year 3 |£ |Year 3 |£ |
|31/12 Land |200,000 |1/1/ Bal B/D |340,000 |
|31/12 Building |100,000 | | |
|31/12 Prov. For depr. |_40,000 | |_______ |
| |340,000 | |340,000 |
Exam Type Question 4.19 (December 1995 ) Question 4
James Mbuvi started a taxi business in Nairobi March 1990 under the firm name Mbuvi Taxis. The firm had two vehicles KA and KB, which had been purchased forSh.560, 000, and Sh.720, 000 respectively earlier in the year.
In February 1992 vehicle KB was involved in an accident and was written off. The insurance company paid the firm Sh.160, 000 for the vehicle. In the same year the firm purchased two vehicles, KC and KD for Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle KE was purchased for Shs.840,000. In March 1994 another vehicle KF was purchased for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of the year irrespective of the date of purchase. Depreciation is not provided for vehicle disposed of during the year. The firm’s year ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss account for each of the five years. (7 marks)
b) Prepare the motor vehicle account (at cost). (8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles disposed of by the company. (5 marks)
(Total: 20 marks)
a
|Vehicle |1990 |1991 |1992 |1993 |1994 |
|KA |560,000 |560,000 |560,000 |560,000 | |
|KB |720000 |720,000 |- |- |- |
|KC |- |- |800,000 |- |- |
|KD |- |- |800,000 |800,000 |800,000 |
|KE |- |- |- |- |840,000 |
|KF |- |- |- |- |960,000 |
|Total cost |1,280,000 |1,280,000 |2,160,000 |1,360,000 |2,600,000 |
|Depreciation at 25% | 320,000 | 320,000 | 540,000 | 340,000 | 650,000 |
Motor Vehicle
|1990 | | Sh |1990 | | Sh |
|1/3 |Cashbook |1,280,000 |31/12 |Bal c/d |1,280,000 |
|1991 | | |1991 | | |
|1/1 |Bal b/d |1,280,000 |31/12 |Bal c/d |1,280,000 |
|1992 | | |1992 | | |
|1/1 |bal b/d |1,280,000 |1/2 |Disposal |720,000 |
| |Cashbook |1,600,000 |31/12 |Bal c/d |2,160,000 |
| | |2,880,000 | | |2,880,000 |
|1993 | | |1993 | | |
|1/1 |Bal b/d |2,160,000 |1/11 |Disposal |800,000 |
| | |________ |31/12 |Bal c/d |1,360,000 |
| | |2,160,000 | | |2,160,000 |
|1994 | | |1994 | | |
|1/1 |Bal b/d |1,360,000 | | | |
|1/1 |Cashbook |840,000 | | | |
|1/3 |Cashbook |960,000 |31/12 |Bal c/d |3,160,000 |
| | |3,160,00 | | |3,160,000 |
Provision For Depreciation – M/V
|1990 | |Sh |1990 | |Sh |
|31/12 |Balc/d |320,000 |31/12 |P & L |320,000 |
|1991 | | |1991 | | |
| | | |1/1 |Bal b/d |320,000 |
|1992 | | | | | |
|31/12 |Bal c/d |640,000 |31/12 |P& L |320,000 |
| | |640,000 | | |640,000 |
|1992 | | |1992 | | |
|1/2 |Disposal |360,000 |1/1 |Bal b/d |640,000 |
| | | | | | |
| | | | | | |
|31/12 |Bal c/d |820,000 |3/12 |P & L |540,000 |
| | |1,180,000 | | |1,180,000 |
|1993 | | |1993 | | |
|1/11 |Disposal |200,000 |1/1 |Bal b/d |820,000 |
|31/12 |Bal c/ |960,000 |31/12 | P & L |340,000 |
| | |1,160,000 | | |1,1 |
| | | | | |60,000 |
|1994 | | |1994 | | |
| | | |31/1 |Bal b/d |960,000 |
|31/12 |Bal c/d |1,610,000 | |P & L |650,000 |
| | |1,610,000 | | |1,610,000 |
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
l
| | |Accumulated |Net book |
| |Cost |Depreciation |Value |
| |£000 |£000 |£000 |
|Land |4,000 |Nil |4,000 |
|Buildings |2,200 |800 |1,400 |
|Plant and machinery |1,600 |600 |1,000 |
|Motor vehicles | 600 |200 | 400 |
Depreciation is charged at the following annual rates (all straight line):
Land Nil
Buildings 2%
Plant and machinery 15%
Motor vehicles 20%
Appropriate depreciation charge is made in the year of purchase, sale or revaluation of an asset
During the year ended 30 June 2000 the following transactions took place:
1. I January 2000 The company decided to adopt a policy of revaluing its buildings; and they were revalued to £3.4m.
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000. Accumulated depreciation on this plant at 30 June 1999 amounted to £230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the purchase price was settled by part exchanging another motor vehicle, which had cost £20,000, at an agreed value of £12,000. the balance of £18,000 was paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999 of £10,000
Required:
Prepare ledger accounts to record these transactions in the records of Pentland Limited.
(16 marks)
Land
|1999 |£ |1999 |£ |
|1/7 Bal b/d |4,000 | | |
| | | | |
|2000 | |2000 | |
|1/1 Revaluation |1,200 |30/6 Bal c/d |5,200 |
| |5,200 | |5,200 |
Buildings
|1999 |£ |1999 |£ |
|1/7 Bal b/d |2,200 | | |
| | | | |
|2000 | |2000 | |
|1/1 Revaluation |1,200 |30/6 Bal c/d |3,400 |
| |3,400 | |3,400 |
Revaluation Reserve
|2000 |£ |2000 |£ |
| | |1/1 Buildings |1,200 |
|30/6 Bal C/D |2,022 |1/1 Provision for depr. |822 |
| |2,022 | |2,022 |
Provision for Depreciation - Building
|1999 |£ |1999 |£ |
| | |1/7 Bal b/d |800 |
| | | | |
|2000 | |2000 | |
|1/1 Revaluation |822 |30/6 P & L | |
| | |2,200 x ½ x 15 | |
|30/6 Bal c/d |34_ |3,400 x ½ x 15 |56_ |
| |856 | |856 |
Plant
|1999 |£ |1999 |£ |
|1/7 Bal B/D |1,600 | | |
| | | | |
|2000 | |2000 | |
|1/1 Cashbook |400 |1/1 Disposal |300 |
| |_____ |30/6 Bal c/d |1,700 |
| |2,000 | |2,000 |
Provision for Depreciation - Plant
|1999 |£ |1999 |£ |
| | |1/7 Bal b/d |600 |
| | | | |
|2000 | |2000 | |
|1/1 Disposal |252.50 |30/6 P & L |247.50 |
| Bal c/d |595.00 | | |
| |847.50 | |847.50 |
Motor Vehicles
|1999 |£ |1999 |£ |
|1/7 Bal b/d |600 | | |
| | | | |
|2000 | |2000 | |
|1/4 Disposal |12 |1/4 Disposal |20 |
|1/4 Cash book |18 |30/6 Bal C/D |610 |
| |630 | |630 |
Motor Vehicle Disposal
|2000 |£ |2000 |£ |
|1/4 Motor Vehicle |20 |1/4 Provision for depr. |13 |
| P & L |5 |1/4 Motor Vehicle |12 |
| |25 | |25 |
Provision for depreciation - Vehicle
|1999 |£ |1999 |£ |
| | |1/7 Bal b/d |200 |
| | | | |
|2000 | |2000 | |
|1/4 Disposal |13 |1/4 P & L |120.5 |
|30/6 Bal c/d |307.5 |30/6 Bal C/D |______ |
| |320.50 | |320.50 |
Plant - Disposal
|2000 |£ |2000 |£ |
|1/1 Plant |300 |1/1 Provision for depr. |252.50 |
|P & L |2.50 |Cash book |50___ |
| |25 | |302.50 |
Property, Plant and Equipment Schedule (Formerly fixed asset movement schedule)
The property, plant and equipment schedule is a summary report on the balances and transactions of the asset and provision for depreciation account as per the requirements of IAS 16 to be reported in the published accounts of companies. The format is as follows:
Property, Plant and Equipment Schedule:
|Cost/ Valuation |Freehold property |Leasehold Property |Plant and |Fixture, Furniture |Total |
| |(£) |Long leases |Short lease |Machinery (£) |And fittings (£) |(£) |
| | |(£) |(£) | | | |
|Bal as at 1/1/01 |x |x |x |x |x |x |
|Additions |xx |xx |xx |xx |xx |xx |
|Revaluations (gains) |xx |- |- |- |- |xx |
|Reclassifications |- |(xx) |xx |- |- |- |
|Disposals |(xx) |(xx) |(xx) |(xx) |(xx) |(xx) |
|Bal as at 31/12/01 | | | | | | |
| |xx |xx |xx |xx |xx |xx |
| | | | | | | |
|Depreciation/ | | | | | | |
|Amortization | | | | | | |
|Bal as at 1/1/10 |xx |- |xx |xx |xx |xx |
|Change for year |xx |- |xx |xx |xx |xx |
|Revaluation |(xx) |- |(xx) |(xx) |(xx) |(xx) |
|Eliminated on Disposal | | | | | | |
| |(xx) |- |(xx) |(xx) |(xx) |(xx) |
|Bal as at 31/12/01 | |- | | | | |
| |(xx) | |(xx) |(xx) |(xx) |(xx) |
|N.B. V as at 31/12/01 |xx |xx |xx |xx |xx |xx |
|NBV as at 31/12/01 |xx |xx |xx |xx |xx |xx |
| | | | | | | |
Additional information is in this schedule called reclassifications where some of the non-current assets are transferred into a different class. (e.g.) some of the properties hold under long leases (over 50 years) will be transferred to the short leases classes when their term becomes less than 50 years. This is a reclassification from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the long lease class and on addition in the short lease class
Exam Type Questions
May 2000 Question Three
a) Briefly explain the nature and purpose of accounting for depreciation.
b) The chief accountant of Jitegemea Ltd has encountered difficulties while accounting for fixed assets and the related depreciation in the company’s draft accounts for the year ended 30 April 2000. He has decided to seek your professional advice and presented the following balances of fixed assets as at 1 May 1999:
| |Acquisition |Accumulated |Depreciation |
| |Cost |Depreciation |Rates |
| |Sh. |Sh. |% |
|Furniture | 900,000 | 300,000 |12.5 |
|Trucks |3,525,000 |1,470,000 | 25 |
|Plant and machinery |7,387,500 |4,462,500 | 10 |
|Land |2,775,000 |- | Nil |
|Buildings |2,925,000 | 292,500 | 2.5 |
The following additional information was also available:
1. It is the company’s policy to write off cost of the assets using above percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in during the year at a value of sh.157,500 in part exchange of the new delivery truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company that went out of business. At the time of acquisition sh.90,000 was paid to have the assets revalued by a professionally qualified valuer. The revaluation indicated the following market values.
Sh.
Land 900,000
Buildings 600,000
Machinery 300,000
Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company’s accounts for the year ended 30 April 2000. (10 marks)
(Total: 15 marks)
SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm. IAS 16 on property plant and equipment defines depreciation as allocation of a depreciable amount of a non-current asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses that relate to a particular financial period and therefore because the firm to earn revenue or income uses the assets, then the loss of value should be marched with these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.
Property, Plant & Equipment Schedule:
|Cost/Valuation |Land, Buildings |Furniture |Motor |Total |
| |And Machinery | | | |
| |Sh. |Sh. |Sh. |Sh. |
|Bal as at 1/5/99 | 13,087,500 |900,000 |3,225,000 |17,512,500 |
|Additions |1,350,000 |- |450,000 |1,800,000 |
|Revaluation |450,000 |- |- |450,000 |
|Disposals | (187500) | _____- |(248,250) |(435,750) |
|Bal as at 30/4/2000 |14,700,000 |900,000 |3,726,750 |19,326,750 |
| | | | | |
|Depreciation | | | | |
|Bal as at 1/5/99 |4,755,000 |300,000 |1,470,000 |6,525,000 |
|Charge for the year |1,066,500 |112,500 |931,687.5 |2,110,687.5 |
|Eliminated on disposal |(37,500) |-______ |(124,125) |(161,625) |
|Bal as at 30/4/2000 |5,784,000 |412,500 |2,277,562.5 |8,474,062.5 |
|NBV 1/5/99 |8,332,500 |600,000 |2,055,000 |10,987,500 |
|NBV 30/4/2000 |8,916,000 |487,500 |1,449,187.5 |10852,687.8 |
| | | | | |
| | | | | |
Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle = cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5
Buildings = (292,500 + 600,000) x 4%
= 141,000
At 2.5% = 2,925,000 x 2.5% x 4 = 292,500
4% = 292,500 x 4% x 4 = 468,000
175,500
Machinery: cost c/f + Additions – Disposals = Bal x 10%
73,787,500 + 300,000 – (187,500) = 7,500,000 x 10%
= 750,000
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and purchases ledgers. The control accounts for the month of September 1999 are in balance and incorporate the following totals:
| |£ |
|Sales ledger: | |
|Balances at 1 September 1999: Debit |386,430 |
| |190 |
|Credit | |
|Sales |163,194 |
|Cash received |158,288 |
|Discounts allowed |2,160 |
|Sales returns inwards |590 |
|Credit balances at 30 September 1999 |370 |
|Purchases ledger: | |
|Balances at 1 September 1999: Credit |184,740 |
| |520 |
|Debit | |
|Purchases |98,192 |
|Cash payments |103,040 |
|Discounts received |990 |
|Purchases returns outwards |1,370 |
|Debit balances at 30 September 1999 |520 |
Although the control accounts agree with the underlying ledgers, a number of errors have been found, and there are also several adjustments to be made. These errors and adjustments are detailed below:
1. Four sales invoices totaling £1,386 have been omitted from the records.
2. A cash refund of £350 paid to a customer, A Smith, was mistakenly treated as a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of £870 due to a supplier against the sales ledger account for the same company is to be made.
4. Bad debts totaling £1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed account. As a result, the supplier issued a credit note for £2,000 on 26 September. No entry has yet been made for this.
6. A purchases invoice for £1,395 was keyed in as £1,359.
7. A payment of £2,130 to a supplier, B Jones, was mistakenly entered to the account of R Jones.
8. A debit balance of £420 existed in the purchases ledger at the end of August 1999. The supplier concerned cannot now be traced and it has been decided to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should appear after allowing, where necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its debtor collection system, the company maintains a sales ledger control account. In preparing the accounts for the year to 31 October 20X3 the accountant discovers that the total of all the personal accounts in the sales ledger amounts to £12,802, whereas the balance on the sales ledger control account is £12,550.
Upon investigating the matter, the following errors were discovered:
1. Sales for the week ending 27 March 20X3 amounting to £850 had been omitted from the control account.
2. A debtor’s account balance of £300 had not been included in the list of balances.
3. Cash received of £750 had been entered in a personal account as £570.
4. Discounts allowed totaling £100 had not been entered in the control account.
5. A personal account balance had been undercast by £200.
6. A contra item of £400 with the purchase ledger had not been entered in the control account.
7. A bad debt of £500 had not been entered in the control account.
8. Cash received of £250 had been debited to a personal account.
9. Discounts received of £50 had been debited to Bell’s sales ledger account.
10. Returns inwards valued at £200 had not been included in the control account.
11. Cash received of £80 had been credited to a personal account as £8.
12. A cheque for £300 received from a customer had been dishonored by the bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended sales ledger control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999, which showed a profit of £81,208, when he realized that no bank reconciliation statement had been prepared at that date.
When checking the cashbook against the bank statement and carrying out other checks, he found the following:
1. A cheque for £1,000 had been entered in the cashbook but had not yet been presented.
2. Cheques from customers totaling £2,890 entered in the cashbook on 31 March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of £320 appear in the bank statement on 30 March 1999 but have not been recoded by George.
4. A cheque for £12,900 drawn by George to pay for a new item of plant had been mistakenly entered in the cash book and the plant account as £2,900. Depreciation of £290 had been charged in the profit and loss account for this plant.
5. A cheque for £980 from a credit customer paid in on 26 March was dishonoured after 31 March and George decided that the debt would have to be written off as the customer was now untraceable.
6. A cheque for £2,400 in payment for some motor repairs had mistakenly been entered in the cash book as a debit and posted to the credit of motor vehicles account. Depreciation at 25% per annum (straight line) is charged on motor vehicles, with a full year’s charge calculated on the balance at the end of each year.
7. The total of the payments side of the cash book had been understated by £1,000. On further investigation it was found that the debit side of the purchases account had also been understated by £1,000.
George had instructed his bank to credit the interest of £160 on the deposit account maintained for surplus business funds to the current account. This the bank had done on 28 March. George had made an entry on the payments side of the cashbook for this £160 and had posted it to the debit of interest payable account.
George had mistakenly paid an account for £870 for repairs to his house with a cheque drawn on the business account. The entry in the cashbook had been debited to repairs to premises account.
George had also mistakenly paid £540 to Paul, a trade supplier, to clear his account in the purchases ledger, using a cheque drawn on George’s personal bank account. No entries have yet been made for this transaction.
The cashbook showed a debit balance of £4,890 before any correcting entries had been made. The balance in the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should appear in George’s balance sheet at 31 March 1999. (6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999. (2 marks)
3. Draw up a statement for George showing the effect on his profit of the adjustments necessary to correct the errors found. (8 marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995. The difference was put in the suspense account. The final accounts which were then prepared showed a net profit of Sh. 64,000. During audit, the following errors were noted:
• A loan from ABD Bank of Sh 10,000 was entered correctly in cash book but was not posted to the ledger.
• A cheque of Sh. 4,000 for rent was not entered in the books.
• Closing stock was overvalued by Sh 1,500.
• Discount allowed of Sh 500 was entered in the discount-received account.
• The opening stock was understated by Sh 3,200.
• Prepaid insurance of Sh 220 had been included in the profit and loss account.
• Goods destroyed by fire amounting to Sh 12,000 were written off in the profit and loss account. However, the insurance company has agreed to compensate the full amount.
Required:
1. Journal entries to correct the errors. (8 marks)
2. Statement of corrected profit. (2 marks)
3. Suspense account. (2 marks)
(Total: 20 marks)
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on 31st December 2002:
| |£ |£ |
|Capital | |40,000 |
|Purchases |26,154 | |
|Sales | |36,246 |
|Salaries |4,814 | |
|Opening stock |4,307 | |
|Insurance |820 | |
|Rent | |965 |
|Buildings |25,000 | |
|Furniture |14,500 | |
|Debtors |6,140 | |
|Other expenses |1,060 | |
|Creditors | |4,638 |
|Commission |_____ |__946 |
| |82,795 |82,795 |
Adjustments:
1. Salaries due, £350
2. Insurance was paid for one year up to 31st March 19-2.
3. Rent received for January 19-2, £165.
4. Commission accrued but not yet received, £120.
5. Furniture to be depreciated by 10%.
6. 5% of debtors are doubtful.
7. Stock on 31st December 19-1 was valued at £5,008.
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1. Explain the purposes for which control accounts are prepared in a business organization. (3 marks)
XML Ltd maintains control accounts in its business records. The balances and transactions relating to the company’s control accounts for the month of December 1994 are listed below:
| | | |
|Balance at 1 December 1994: | | |
| Sales ledger |6,185,000 |(debit) |
| |52,500 |(credit) |
|Purchases ledger |16,500 |(debit) |
| |4,285,000 |(credit) |
|Transactions during December 1994: | | |
|Sales on credit |8,452,000 | |
|Purchases on credit |5,687,500 | |
|Returns inwards |203,500 | |
|Returns outwards |284,000 | |
|Bills of exchange payable |930,000 | |
|Bills of exchange receivable |615,000 | |
|Cheques received from customers |7,985,000 | |
|Cheques paid to suppliers |4,732,000 | |
|Cash paid to suppliers |88,500 | |
|Bill payable dishonoured |400,000 | |
|Charges on bill payable dishounered |10,000 | |
|Cash received from credit customers |153,000 | |
|Bad debts written off |64,500 | |
|Cash discounts allowed |302,000 | |
|Bill receivable dishonoured |88,500 | |
| | | |
|Balances at 31 December 1994: | | |
|Sales ledger |44,000 |(credit) |
|Purchases ledger |23,500 |(debit) |
Required:
Post the sales ledger and the purchases ledger control accounts for the month of December 1994 and derive the respective debit and credit closing balances on 31 December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON FIVE
FURTHER ADJUSTMNETS TO ACCOUNTS
(a) CONTROL ACCOUNTS
Control accounts are so called because they control a section of the ledgers. By control we mean that the total on the control accounts should be the same as the totals on the ledger accounts. There are two main types of control accounts:
i) Sales ledger control Account – also called total debtors. The balance on the sales ledger control account should be the same as the total of the balances in the sale ledger.
ii) Purchases Ledger Control Account – also called total creditors .The balance carried down (Bal c/d) on the purchases Ledger Control Account should be the same as the total of the balances in the purchases ledger.
Example (Sales Ledger Control a/c)
Sales Ledger Control A/c
| | | | |
|Sales |1400 |CashBook |700 |
| | |Bal C/D |700 |
| |1400 | |1400 |
SALES LEDGER
Debtor A a/c
| | | | |
|Sales |200 |C/B |50 |
| | |Bal c/d |150 |
| |200 | |200 |
Debtor B a/c
| | | | |
|Sales |400 |C/B |250 |
| | |Bal c/d |150 |
| |400 | |400 |
Debtor C a/c
| | | | |
|Sales |300 |C/B |100 |
| | |Bal c/d |200 |
| |300 | |300 |
Debtor D a/c
| | | | |
|Sales |500 |C/B |300 |
| | |Bal c/d |200 |
| |500 | |500 |
Example: Purchases Ledger Control a/c
Purchases Ledger Control a/c
| | | | |
|C/B |1900 |Purchases |2600 |
|Bal c/d |700 | | |
| |2600 | |2600 |
PURCHASES LEDGER
Creditor A
| | | | |
|C/B |400 |Purchases |600 |
|Bal c/d |200 | | |
| |600 | |600 |
Creditor B
| | | | |
|C/B |450 |Purchases |700 |
|Bal c/d |250 | | |
| |700 | |700 |
Creditor C
| | | | |
|C/B |350 |Purchases |500 |
|Bal c/d |150 | | |
| |500 | |500 |
Creditor D
| | | | |
|C/B |700 |Purchases |800 |
|Bal c/d |100 | | |
| |800 | |800 |
Purpose of Control Accounts
1. Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
3. To detect and prevent errors and frauds in the customers and suppliers account.
4. To facilitate delegation of duties among the debtors and creditors clerks.
FORMAT OF A SALES LEDGER CONTROL
Sales Ledger Control a/c
| | |
|Balance b/d of the total debit balances from previous period |Total credit balances of the sales ledger brought forward |
|Total credit sales for the period (from the sales journal) |Total cash received from credit customers/debtors (from cash |
| |book) |
|Refunds to customers (from cashbook) |Total cheques received from credit customers/debtors (from cash|
| |book) |
|Dishonored cheques (from cashbook) |Total returns-inwards (returns-inwards journal) |
|Bad debts recovered (from general journal) |Total cash discount allowed to customers (from cash book) |
| |Bad debtors written-off (from general journal) |
| |Cash received from bad debtors recovered (cash book) |
| |Purchases Ledger contra |
| |Allowances to customers (price reduction in excess to discounts|
| |allowed) |
|Total credit balances of the sales Ledger carried forward |Total debit balance carried down to the next period – to be |
| |derived after posting all those transactions |
Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes place when there is a credit balance on the debtor’s a/c and the customer is not a creditor too.
The entry will be:
Dr. Debtor’s a/c
Cr. Cashbook
Example:
Debtor A
| |£ | |£ |
|Sales |1000 |Cashbook |950 |
|(Refunds) C/B |100 |Discounts |50 |
| | |Returns |100 |
| |1100 | |1100 |
If the firm has not paid this amount owed to the customer, then it’s carried forward to the next period then is a credit balance in the customer’s a/c. Therefore, if a firm has several customer, this information will be shown in the control a/cs as total balance c/f
(debit side).
Contra against the purchases ledger balances:
Some debtors may also be creditors in the same firm and therefore, if the amount due to them as creditors is less than what they owe as debtors, then the credit balance is transferred from their creditors a/c to their debtors a/c as a contra entry.
Example:
Debtor (A)
| | | | |
|Sales |2000 |Contra- purchases |1000 |
| | |Bal c/d |1000 |
| |2000 | |1100 |
Creditor (A)
| | | | |
|Contra - Debtor |1000 |Purchases |1000 |
FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT
Purchases Ledger Control A/C
|Total debit balances from purchases ledger brought forward from |Total credit balance brought forward (of purchases ledger from |
|previous period |the previous period) |
|Total cash paid to creditors |Total credit purchases for the period (from purchases journal) |
|(from cash book) | |
|Total cheques paid to creditors |Refunds from suppliers |
|(from cash book) |(from cash book) |
|Total cash discounts received | |
|(from cash book) | |
|Allowances by suppliers | |
|Sales ledger contra | |
|Total returns outwards | |
|(from returns-outwards journal) | |
|Total credit balance |Total debit balances (of the purchases ledger carried forward) |
|(to be derived after posting entries) | |
NOTES:
The following notes should be taken into consideration:
1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts should NOT be included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase or decrease in provisions for doubtful debts will not affect this account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some cases it can be included especially where there are incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be shown on the debit side of the sales ledger control. However when trying to determine the turnover under incomplete records then it is wise to omit it.
Example 5.1
You are required to prepare a purchases ledger control account from the following for the month of June. The balance of the account is to be taken as the amount of creditors as on 30 June.
|2003 | |£ |
|June 1 |Purchases ledger balances |36,760 |
| |Totals for June: | |
| | Purchases journal |422,570 |
| | Returns outwards journal |10,980 |
| | Cheques paid to suppliers |387,650 |
| | Discounts received from suppliers |8,870 |
|June 30 |Purchases ledger balances |? |
Solution
Purchases Ledger Control A/C
|2003 |£ |2003 |£ |
|Returns out |10,980 |Bal b/d (1/6) |36,760 |
|Bank |387,950 | | |
|Discounts received |8,870 | | |
|Bal c/d (30/6) |51,830 |Purchases |422,570 |
| |459,330 | |459,330 |
Example 5.2
Prepare a sales ledger control account from the following:
| | |£ |
|2003 | | |
|May 1 |Debit balances |64,200 |
| |Totals for May: | |
| |Sales journal |128,000 |
| |Cash and cheques received from debtors |103,700 |
| |Discounts allowed |3,950 |
| |Debit balances in the sales ledger set off against credit balances in the | |
| |purchases ledger |1,450 |
|May 31 |Debit balances |? |
| |Credit balances |500 |
Solution
Sales Ledger Control A/C
|2003 | |£ |2003 | |£ |
|1/5 |Bal b/d |64,200 | |Cash book |103,700 |
| |Sales |128,000 | |Discounts allowed |3,950 |
| | | | |Purchases contra |1,450 |
|31/5 |Bal c/d |500 |31/5 |Bal c/d |83,600 |
| | |192,700 | | |192,700 |
Example 5.3 (Exam type question – November 1997 Question 2)
a) Explain the purposes for which control accounts are prepared. (3 marks)
b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of November 1997 are listed below:-
| |Sh. | |
|Balances on 1 November 1997: | | |
|Sales ledger |9,123,000 |(debit) |
| |211,000 |(credit) |
|Purchases ledger |4,490,000 |(credit) |
| |88,000 |(debit) |
|Transactions during November 1997: | | |
| Purchases on credit |18,135,000 | |
| Allowances from suppliers |629,000 | |
| Receipts from customers by cheques |27,370,000 | |
| Sale on credit |36,755,000 | |
| Discount received |1,105,000 | |
| Payments to creditors by cheques |15,413,000 | |
| Contra settlements |3,046,000 | |
| Bills of exchange receivable |6,506,000 | |
| Allowances to customers |1,720,000 | |
| Customers cheques dishonored |489,000 | |
| Cash received from credit customers |4,201,000 | |
| Refunds to customers for overpayments |53,000 | |
| Discounts allowed |732,000 | |
|Balances on 30 November 1997 | | |
| Sales ledger |136,000 |(credit) |
| Purchases ledger |67,000 |(debit) |
Required:
The sales ledger and purchases ledger control accounts for the month of November 1997 and show the respective debit and credit closing balances on 30 November 1997.
(17 marks)
(Total: 20 marks)
(a)
i) Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)
ii) To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
iii) To detect and prevent errors and frauds in the customers and suppliers account.
iv) To facilitate delegation of duties among the debtors and creditors clerks.
Kopesha Ltd
Sales Ledger Control A/C
|1997 | |Sh |1997 | |Sh |
|1/11 |Bal b/d |9,123,000 |1/11 |Bal b/d |211,000 |
| |Sales |36,755,000 | |Bank |27,370,000 |
| |Dishonored cheques | | | | |
| | |489,000 | |Contra |3,046,000 |
| |Refunds to customers | | |Bills of exchange receivable | |
| | |53,000 | | |6,506,000 |
| | | | |Allowances |720,000 |
| | | | |Cash |4,201,000 |
| | | | |Discounts allowed |732,000 |
|30/11 |Bal c/d |136,000 |30/11 |Bal c/d |2,770,000 |
| | |46,556,000 | | |46,556,000 |
Purchases Ledger Control A/C
|1997 | |Sh |1997 | |Sh |
|1/11 |Bal b/d |88,000 |1/11 |Bal b/d |4,490,000 |
| |Allowances from suppliers | | |Purchases |18,135,000 |
| | |629,000 | | | |
| |Discounts received |1,105,000 | | | |
| |Bank |15,413,000 | | | |
| |Contra settlement |3,046,000 | | | |
|30/11 |Bal c/d |2,411,000 |30/11 |Bal c/d |67,000 |
| | |22,692,000 | | |22,692,000 |
Example 5.4 (Exam Question – May 2000 Question 4)
Poesha Limited keeps sales and purchases control accounts in the General Ledger. The transactions for the month ended 30 April 2000 were as follows:
| | |Sh |
|Credit balances on 1 April 2000 |-Sales ledger |154,000 |
| |-Purchases ledger |569,000 |
|Debit balances on 1 April 2000 |-Sales ledger |956,000 |
| |-Purchases ledger |196,000 |
|Credit balances on 30 April 2000 |-Sales ledger |178,000 |
|Debit balances on 30 April 2000 |Purchases ledger |189,000 |
|Credit purchases | |2,450,000 |
|Credit sales | |4,563,000 |
|Cheques received from debtors | |3,140,000 |
|Cash received from debtors | |1,367,000 |
|Cheque payments to creditors | |1,994,000 |
|Cash payments to creditors | |352,000 |
|Bad debts written off | |68,000 |
|Discounts received | |104,000 |
|Discounts allowed | |169,000 |
|Contra entry to sales ledger from purchases ledger | |234,000 |
|Refunds to debtors | |62,000 |
|Returns outwards | |138,000 |
|Returns inwards | |231,000 |
Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April 2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
• Errors that don’t affect the trial balance
• Errors that affect the trial balance
Errors that don’t affect the trial balance
The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the same as the credits. However, on taking a close check on the balances and transactions posted, errors may have been made and therefore the balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are explained as follows:
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not made e.g. a sales invoice of £400 is not posted in the sales journal therefore no entry is made in the debtor’s account and the sales account i.e. both debit of £400 in debtor’s account and credit of £ 400 in the sales account.
The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:
Debiting debtors £400
Crediting sales £400
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same class. Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount of £ 200. Instead of a debit to T Thompson’s account it is made to L Thompson’s account and the corresponding credit in the sales account is correct.
Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson by:
£
i) Debit T Thompson a/c 200
ii) Credit L Thompson a/c 200
c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different class e.g. Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c. (Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is correct)
The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account. Therefore a capital expenditure has been posted as revenue expenditure.
To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
£
i) Debit Motor vehicles a/c 400
ii) Credit Motor expenses a/c 400
d) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit is posted as a credit and a credit is posted as a debit. Example: cash drawn from the bank of £150 for business use is posted as a debit in the bank account and credit in cash in hand.
To correct this error, two entries are made in the relevant accounts:
i) Correct the error
ii) Post the transaction correctly
The entries will therefore be as follows:
i) Debit Cash in hand by £150
Credit bank by £150
To correct the error of £ 150 posted in the wrong sides of these account
ii) Debit cash by £150
Credit bank by £150
To post the entries correctly
e) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is either under/over stated. In some cases, this is known as a transposition error e.g. cash received from a debtor of £980 is credited/posted to the customer’s account as £890.
To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct balance. In this case, we will:
£
Debit cash book 90
Credit debtors 90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or credits then another error may take place to overstate the debits or credits by the same amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but shown in the trial balance as £3,890 and another error carried to the trial balance of fixture amounting to £4,540 instead of £4,450:
£
Purchases 3,980
3,890
(90)
£
Fixtures 4,450
(4,540)
90
This type of error is corrected by use of a suspense account.
Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are required.
a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
Solution
THE JOURNAL
| |Debit |Credit |
| Sales |10,000 | |
| Capital | |10,000 |
|Additional capital passed into sales a/c now transferred to | | |
|capital a/c | | |
| Drawings |700 | |
| General expenses | |700 |
|Drawings debited in general expense now transferred to | | |
|drawing a/c | | |
| Drawings |89 | |
| Insurance | |89 |
|Private insurance transferred from insurance a/c to drawings| | |
|a/c | | |
| Purchases |270 | |
| C Kelly | |270 |
|Purchases and creditors amount to 857 initially entered as | | |
|£587 | | |
| Bank |390 | |
| Cash | |390 |
|Correct error in posting | | |
| Bank |390 | |
| Cash | |390 |
|To post the cash banked correctly | | |
| Bank |400 | |
| Cash | |400 |
|Cash drawings correctly started from bank to cash | | |
| J Charlton |168 | |
| M McCarthy | | |
|Returns in from McCarthy entered in error in J Carlton now | | |
|transferred to his a/c | |168 |
|Motor expenses |1000 | |
|Motor disposal a/c | |1000 |
|To correct error in recording sales proceeds In expense | | |
|account | | |
Example 5.6 (Exam type question – May 200 Question 2)
The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
| |Sh’000 |Sh’000 | |Sh’000 |Sh’000 |
|Capital 1 April 1999 | |1,890 |Land and buildings (at valuation)| | |
| | | | | |1,650 |
|Profit for the year ended 31 March | | |Machinery (at cost) |1,200 | |
|2000 |450 | | | | |
|Deduct: drawings |150 |300 |Deduct: depreciation |750 |450 |
|Creditors | |630 |Stock at cost |570 | |
|Bank overdraft | |270 |Debtors |420 |990 |
| | |3,090 | | |3,090 |
Further investigation reveals the following information:
1. The closing stock includes damaged goods which, although they had cost Sh. 10,000 have an estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt. A provision for doubtful debts of 2 ½% is also required on the balance of the debtors.
3. The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-line basis over eight years. A more realistic estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been reflected in the accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr. Patel had been deducted as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party had not been received and no entry had been made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions. (10 marks)
b) A statement of revised profit for the year ended 31 March 2000. (8 marks)
c) A revised balance sheet as at 31 March 2000. (7 marks)
(Total: 25 marks)
Solution
a) THE JOURNAL
| |Debit |Credit |
| Trading account |2,500 | |
| Stock | |2,500 |
|Being a reduction in stock for damaged goods | | |
| Profit and loss(Bad debts) |20,000 | |
| Debtors | |20,000 |
|Debtors gone bankrupt written off | | |
| Profit and loss) |10,000 | |
| Provision for doubtful debts | |10,000 |
|Being a provision for doubtful debts created at 20%. | | |
| Provision for depreciation |150,000 | |
| Profit and loss | |150,000 |
|A change in estimated lifespan for machinery | | |
| Profit and loss( wages ) |9,500 | |
| Accrued expenses | |9,500 |
|Wages owing omitted in the accounts | | |
| Profit and loss (Bank overdraft charges) |8,000 | |
| Bank overdraft | |8,000 |
|Changes for overdraft not reflected in the accounts. | | |
| Drawings |100,000 | |
| Profit and loss | |100,000 |
|Drawing to Mr. Patel deducted as an expense. | | |
| Accrued income |20,000 | |
| Profit and loss (rent income) | |20,000 |
|Rent receivable owing not reflected in the accounts. | | |
b) STATEMENT OF ADJUSTED NET PROFIT
| |Sh |Sh |
|Net profit as per the account | |450,000 |
|Add: Provision for depreciation |50,000 | |
| Drawings |100,000 | |
| Accrued income (rent) |20,000 |170,000 |
| | |620,000 |
|Less: Stock reduction |2,500 | |
| Bad debts |20,000 | |
| Provision for doubtful debts |10,000 | |
| Accrued expenses |9,500 | |
| Bank charges |8,000 |(50,000) |
|Net profit (revised) | |570,000 |
REVISED BALANCE SHEET AS AT 31 MARCH 2000
| |Sh |Sh |Sh |
|Land and buildings |1,650,000 |- |1,650,000 |
|Machinery |1,200,000 |(700,000) |500,000 |
| |2,850,000 |700,000 |2,150,000 |
|Add: Current Assets | | | |
| Stock | |567,500 | |
| Debtors |400,00 | | |
|Less: Provision for doubtful debts |(10,000) |390,000 | |
| Accrued rent income | |20,000 | |
| | |977,500 | |
|Less Current liabilities | | | |
| Creditors |630,000 | | |
| Accrued wage expense |9,500 | | |
| Bank overdraft |278,000 |(917,500) |60,000 |
| | | |2,210,000 |
|Capital | | |1,890,000 |
|Add Net Profit | | |570,000 |
| | | |2,460,000 |
|Less drawings | | |(250,000) |
| | | |2,210,000 |
Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the credits. The debits may be more than the credits and vice versa.
Examples include:
1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash received from a debtor is debited to the cashbook and no other entry is made in the account, i.e. no credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit. Example – cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £ 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts or when taken up to the trial balance. Example Bal c/d in the cash book for cash at bank of £ 2000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The balance may also be brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made through an account called a suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are posted here. The balance to be shown on the suspense accounts depends on which side the error is shown on the trial balance.
If the debits ( credits, then an amount is included on the credit side of the trial balance so that the debits = credits. This is a credit balance and will be taken to the suspense account on the credit side.
Example:
DR CR
Total 240 200
Suspense - 40
240 240
Suspense a/c
| |£ | |£ |
| | |Difference as per T/B |40 |
| | | | |
If the credits are more than the debits this is a debit balance and therefore we require an amount to be added to the total of the debits for the two side to be same. This debit balance is posted to the debit side of the suspense a/c.
DR CR
Total 260 300
Suspense 40 -
300 300
Suspense a/c
| |£ | |£ |
|Difference as per T/B |40 | | |
| | | | |
Posting the correct entries should eliminate the balance on the suspense account.
In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance. This balance depends on whether it is a credit or debit and whether it is material or not for purposes of proper accounting treatment. The following is the recommended approach:
|Balance |Material |Not Material |
|Debit |Show as an asset (eg) other debtors |Charge in P& L as an expense |
|Credit |Show as a liability (eg) other creditors |Report as income in P&L |
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a shortage on the credit side of the trial balance. A suspense account was opened for the difference.
In January 2003 the following errors made in 2003 were found:
i) Sales daybook had been undercast by £1,000.
ii) Sales of £2,500 to J Church had been debited in error to J Chane account.
iii) Rent account had been undercast by £700.
iv) Discounts received account had been under cast by £3,000.
v) The sale of a motor vehicle at book value had been credited in error to Sales account £3,600.
You are required to:
a) Show the journal entries necessary to correct the errors.
b) Draw up the suspense account after the errors described have been corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended 31 December 2002, show the calculations of the corrected net profit
Solution
THE JOURNAL
| |£ |£ |
|Suspense |1,000 | |
|Sales | |,1000 |
|Sales under cast of £100 now corrected | | |
| J Church |2,500 | |
| J Chane | |2,500 |
|Sale to J Church posted to J Chane corrected | | |
| Rent |700 | |
| Suspense | |700 |
|Under cast in rent balance now corrected | | |
| Suspense |3,000 | |
| Discount received | |3,000 |
|Under cast in discount received balance now corrected | | |
| Sales a/c |3,600 | |
| Disposal | |,3600 |
|Sale of motor vehicle entered in sales a/c now corrected | | |
Suspense a/c
| |£ | |£ |
|Sales |1,000 |Bal b/d |3,300 |
|Discount received |3,000 |Rent |700 |
| |4,000 | |4,000 |
STATEMENT OF CORRECTED NET PROFIT
| |£ |£ |
|Net profit as per account | |79,000 |
|Add: | | |
| Sales |1,000 | |
| Discount received |3,000 |4,000 |
|Less: | | |
| Rent |700 | |
| Sales |3,600 |(4,300) |
|Corrected net profit | |78,700 |
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is extracted at the end of each month, and a profit and loss account and balance sheet are computed. This month, however, the trial balance did not balance, the credits exceeding debits by £1,536.
Your are asked to help and after inspection of the ledgers discover the following errors:
i) A balance of £87 on a debtor’s account has been omitted from the schedule of debtors, the total of which was entered as debtors in the trial balance.
ii) A small piece of machinery purchased for £1,200 had been written off to repairs.
iii) The recipiets’ side of the cashbook had been under cast by £720.
iv) The total of one page of the sales daybook had been carried forward as £8,154, whereas the correct amount was £8,514.
v) A credit note for £179 received from a supplier had been posted to the wrong side of his account.
vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
vii) Mr. Smith, whose past debts to the company had been the subject of a provision, at last paid £731 to clear his account. His personal account has been credited but the cheque has not yet passed through the cashbook.
Solution
Suspense a/c
| |£ | |£ |
|Opening balance |1,536.00 |Debtors |87.00 |
|Sales - under record |360.00 |Cashbook under cast |720.00 |
| | |Creditors error |179.00 |
| | |Creditors (correct) |179.00 |
| | |Cashbook: smiths debt paid |731.00 |
| |1,896.00 | |1,896.00 |
i. Increase total for debtors by 87.
ii. Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an increase in profits.
iii. Increase sales by 360.
iv. Reduce the creditors by 358.
v. accruals by 152 and reduce profits by the same.
vi. Increase the cash balance by 731.
Example 5.9 (Exam type question – May 2002 question 1).
On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial balance. Due to errors committed by the bookkeeper, the trial balance failed to balance by Sh 369,400. He placed the difference in a suspense account as shown below:
Wanji trial balance as at 31 December 2001
| |Sh |Sh |
|Fixed assets – cost |832,000 | |
|Stocks: | | |
| 1 January 2001 |148,000 | |
| 31 December 2001 | |98,800 |
|Trade debtors | |76,000 |
|Prepayments | |10,000 |
|Trade creditors |34,600 | |
|Bank overdraft | |15,200 |
|Accruals | |16,000 |
|Drawings |359,600 | |
|Capital | |1,054,000 |
|Sales |1,043,200 | |
|Provision for depreciation | |166,400 |
|Purchases | |733,000 |
|Operating expenses |126,000 | |
|Provision for doubtful debts | |3,800 |
|Discounts received |5,000 | |
|Discounts allowed | |5,800 |
|Suspense account |________ |369,400 |
| |2,548,400 |2,548,400 |
Investigations carried out after preparing the above trial balance detected the following errors:
1. The total of the sales daybook for December 2001 was overcast by Sh 25,700.
2. On July 2001, the business purchased office equipment for Sh 40,000. These were debited to purchases account. Depreciation on the equipment is at the rate of 10% per annum on cost and based on the period (months) of usage in the year.
3. A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor’s account.
4. A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.
5. An amount of Sh 15,000 received from a debtor was not posted to the debtor’s account from the cashbook.
6. Purchases daybook for October 2001 was under cast by Sh 28,000.
Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.
Required:
a) The adjusted trial balance and the correct balance of the suspense account. (6 marks)
b) Journal entries to correct the errors (Narrations not required) (6 marks)
c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above. (4 marks)
d) The adjusted net profit for the year. (4 marks)
Solution:
Adjusted Trial Balance
| |Sh |Sh |
|Fixed assets – cost |832,000 | |
|Stock - 1 January 2001 |148,000 | |
|Trade debtors |76,000 | |
|Prepayments |10,000 | |
|Trade creditors | |34,600 |
|Bank overdraft | |15,200 |
|Accruals | |16,000 |
|Drawings |359,600 | |
|Capital | |1,054,000 |
|Sales | |1,043,200 |
|Provision for depreciation | |166,400 |
|Purchases |733,000 | |
|Operating expenses |126,000 | |
|Provision for doubtful debts | |3,800 |
|Discounts received | |5,000 |
|Discounts allowed |5,800 | |
|Suspense account |47,800 |_______ |
| |2,338,200 |2,338,200 |
THE JOURNAL
Dr Cr
Sales 25,700
Suspense 25,700
Office equipment 40,000
Purchases 40,000
Provision for depreciation 2,000
Profit and loss 2,000
Creditors 8,500
Suspense 8,500
Creditors 8,500
Suspense 8,500
Suspense 900
Telephone 900
Suspense 15,000
Debtor 15,000
Suspense 2,500
Discounts allowed 2,500
Suspense 2,500
Discounts received 2,500
Purchases 28,000
Suspense 28,000
SUSPENSE ACCOUNT
|2001 | |Sh |2001 | |Sh |
|1 Jan |Bal b/d |47,800 |1 Jan |Sales |25,700 |
| |Telephone |900 | |Creditors |8,500 |
| |Debtors |15,000 | |Creditors |8,500 |
| |Discount allowed |2,500 | |Purchases |28,000 |
| |Discount received |2,500 | | | |
| |Bal c/d |2,000 | | |______ |
| | |70,700 | | |70,700 |
STATEMENT OF ADJUSTED NET PROFIT
Sh Sh
Net profit as per the accounts 85,800
Add
Purchases 40,000
Telephone expenses 900
Discount allowed + received 5,000 45,900
131,700
Less
Sales 25,700
Depreciation 2,000
Purchases 28,000 (55,700)
Corrected Net Profit 76,000
c) STOCK VALUATION (IAS 2 INVENTORIES)
inventories in a firm includes:
a) Finished goods (assets held for sale)
b) Work in progress (assets still in production for purposes of sale)
c) Raw materials (to be used in production process).
The cost of inventories should include all costs of purchase. (Purchase price and other taxes like import duties), costs of conversion (e.g. direct labour) and other costs incurred in bringing the inventories into their present location and condition (carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry. In most cases either carrying out stocktaking or checking the stock records that the firm is kept determines the value of stock at the end of the financial period. Stocktaking involves counting the number of units of finished goods, work in progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of units available.
Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400 each respectively. At the end of year 2002, stocktaking was carried out and the following units were available:
Product A 200,000 units
Product B 20,000 units
Product C 30,000 units
Required:
Compute the cost of stock to be included in the final accounts.
Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000
Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each unit as far as the business can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number of transactions and changes in the cost price, IAS 2 on inventories recommends the use of the following estimates:
i) First In First Out (FIFO)
The business assumes that items of stocks that were purchased first are sold first and therefore, items left as part of closing stock were purchased recently.
ii) Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased during the period.
iii) Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first and therefore, the closing stock shows items that were bought first.
Net Realizable Value (SP- Expenses)
This is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either actual or estimated under the different methods) and if the firm was to sell the stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net realizable value.
Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000 is damaged. This stock can fetch the firm Sh 22,000 after repairs and packaging that will cost Sh 4,000.
Required:
What value will be attached on this damaged units and the total closing stock for the final accounts purposes.
| |Sh | | |
|Cost |20,000 | | |
|Selling price |22,000 | | |
|Repairs |4,000 | | |
|NRV (22-4) |18,000 | | |
| | | | |
| | | | |
The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this damaged unit will be shown as Sh 18,000. The balance of the stock of Sh 280,000 + 18,000 of the damaged stock will be included in the final accounts and shown together as Sh 298,000.
d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form. A work sheet has 8-10 columns and the simple headings are as follows:
|TRIAL BALANCE |ADJUSTMENT |TRADING ACCOUNT |PROFIT & LOSS ACCOUNT |BALANCE SHEET |
| Dr Cr |Dr Cr |Dr Cr |Dr Cr |Assets Liabilities + Capital |
|£ £ |£ £ |£ £ |£ £ |£ £ |
| | | | | |
| | | | | |
| | | | | |
Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of balances has been extracted from his ledger as at 30 April 19X7, the end of his most recent financial year.
| |£ |
|Capital |83,887 |
|Sales |259,870 |
|Trade creditors |19,840 |
|Returns out |13,407 |
|Provision for bad debts |512 |
|Discounts allowed |2,306 |
|Discounts received |1,750 |
|Purchases |135,680 |
|Returns inwards |5,624 |
|Carriage outwards |4,562 |
|Drawings |18,440 |
|Carriage inwards |11,830 |
|Rent, rates and insurance |25,973 |
|Heating and lighting |11,010 |
|Postage, stationery and telephone |2,410 |
|Advertising |5,980 |
|Salaries and wages |38,521 |
|Bad debts |2,008 |
|Cash in hand |534 |
|Cash at bank |4,440 |
|Stock as at 1 May 19x6 |15,654 |
|Trade debtors |24,500 |
|Fixtures and fittings – at cost |120,740 |
|Provision for depreciation on fixtures and fittings – as at 30 | |
|April 19X7 |63,020 |
|Depreciation |12,074 |
The following additional information as at 30 April 19X7 is available:
a) Stock at the close of business was valued at £17,750.
b) Insurances have been prepaid by £1,120.
c) Heating and lighting is accrued by £1,360.
d) Rates have been prepaid by £5,435.
e) The provision for bad debts is to be adjusted so that it is 3% of trade debtors.
Required:
|MR CHAI |Trial Balance |Adjustments |Trading account |Profit & loss a/c |Balance sheet |
|WORKSHEET |£ |£ |£ |
|Sales | | |XX |
|Less Returns | | |(XX) |
|inwards | | | |
| | | |XX |
|Less cost of sales | | | |
|Opening stock | |XX | |
|Purchases |XX | | |
|Add carriage in | XX | | |
| |XX | | |
|Less Returns out |(XX) | XX | |
| | |XX | |
|Less closing stock | |(XX) |(XX) |
|Gross profit | | |XX |
|Discount received | | |XX |
|Other incomes | | |XX |
|(rent, interests, | | | |
|dividends) | | | |
|Profit on disposal | | |XX |
|of non-current | | | |
|assets | | | |
|Reduction in | | |XX |
|provision for | | | |
|doubtful debts | | | |
|Reduction in | | |XX |
|provision for | | | |
|discount allowable | | | |
|Interest on overdue| | |XX |
|debtors balances | | | |
| | | |XX |
|Less Expenses | | | |
|Bad debts | |XX | |
|Depreciation: (eg) | |XX | |
|Plant | | | |
| | |XX | |
|Motor vehicle | | | |
|Increase in | |XX | |
|provision for | | | |
|doubtful debts | | | |
|Increase in | |XX | |
|provision for | | | |
|discount allowable | | | |
|Loss on disposal of| |XX | |
|non current assets | | | |
|Loss of other | |XX | |
|assets (eg) stock | | | |
|Interest charged by| |XX | |
|creditors | | | |
|Other expenses: | |XX | |
|Rent | | | |
|Insurance | |XX | |
|Postage | |XX | |
|Interest on loan | | XX |(XX) |
|etc | | | |
|NET PROFIT | | |XX |
| | | | |
BALANCE SHEET AS AT 31 DEC…….
| | | | |
| | | | |
|Non current assets |£ |£ |£ |
|Land |XX |- |XX |
|Buildings |XX |(XX) |XX |
|Plant and machinery |XX |(XX) |XX |
|Fixtures, furniture and fittings |XX |(XX) |XX |
|Motor vehicle |XX |(XX) | XX |
| |XX |XX |XX |
|Current assets | | | |
|Stock | |XX | |
|Debtors |XX | | |
|Less provision for doubtful debts|(XX) |XX | |
|Accrued income | |XX | |
|Prepaid expenses | |XX | |
|Cash at bank | |XX | |
|Cash in hand | | XX | |
| | | | |
|Current liabilities | | | |
|Bank overdraft |XX | | |
|Trade creditors |XX | | |
|Prepaid income |XX |(XX) | |
|Net current assets | | |XX |
|Net assets | | |XX |
|Capital | | |XX |
|Add net profit | | |XX |
| | | |XX |
|Less drawings | | |(XX) |
| | | |XX |
|Non current liabilities | | | |
|Loan | | |XX |
| | | |XX |
|Non current liabilities | | | |
|Loan | | |XX |
| | | |XX |
|Non current liabilities | | | |
|Loan | | |XX |
| | | |XX |
|Non current liabilities | | | |
|Loan | | |XX |
| | | |XX |
Non current liabilities XX
Loan
Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
| |£ | |£ |
| | |£ | |
|Sales | | |259,870 |
|Less Returns | | |(5,624) |
|inwards | | | |
| | | |254,246 |
|Less cost of | | | |
|sales | | | |
|Opening stock | |15,654 | |
|Purchases |135,680 | | |
|Add carriage in |11,830 | | |
| |147,510 | | |
|Less Returns out|(13,407) |134,103 | |
|Cost of goods | |149,757 | |
|available for | | | |
|sale | | | |
|Less closing | |(17,750) |(132,007) |
|stock | | | |
|Gross profit | | |122,239 |
|Add: Discount | | |1,750 |
|received | | | |
| | | |123,989 |
|Less Expenses | | | |
|Discount allowed| |2,306 | |
|Carriage | |4,562 | |
|outwards | | | |
|Rent, rates and | |19,418 | |
|insurance | | | |
|Heating and | |12,370 | |
|lighting | | | |
| | | | |
| | | | |
|Postage, | |2,410 | |
|stationery and | | | |
|telephone | | | |
|Advertising | |5,980 | |
|Salaries and | |38,521 | |
|Wages | | | |
|Bad debts | |2,008 | |
|Provision for | |223 | |
|bad debts | | | |
|Provision for | | | |
|depreciation – | | | |
|fixtures and | | | |
|fitting | | | |
| | |12,074 |99,872 |
|Net profit | | |24,117 |
Mr Chai
Balance Sheet as at 30 April 19X7
|Non current asset |£ |£ |£ |
|Fixtures and |120,740 |(63,020) |57,720 |
|fittings | | | |
|Current assets | | | |
|Stock | |17,750 | |
|Debtors |24,500 | | |
|Less provision for |(735) |23,765 | |
|doubtful debts | | | |
|Prepayments | |6,555 | |
|Cash at bank | |4,440 | |
|Cash in hand | |534 | |
| | |53,044 | |
|Current liabilities| | | |
|Creditors |19,840 | | |
|Accruals |1,360 |(21,200) |31,844 |
| | | |89,564 |
|Capital | | |83,887 |
|Add net profit | | |24,117 |
| | | |108,004 |
|Less drawings | | |(18,440) |
| | | |89,564 |
Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
| | | |
| |£ |£ |
|Sales | |138,078 |
|Purchases |82,350 | |
|Carriage |5,144 | |
|Drawings |7,800 | |
|Rent, rates and insurance |6,622 | |
|Postage and stationery |3,001 | |
|Advertising |1,330 | |
|Salaries and wages |26,420 | |
|Bad debts |877 | |
|Provision for bad debts | |130 |
|Debtors |12,120 | |
|Creditors | |6,471 |
|Cash in hand |177 | |
|Cash at bank |1,002 | |
|Stock at at 1 June 19X5 |11,927 | |
|Equipment | | |
|At cost |58,000 | |
|Accumulated depreciation | |19,000 |
|Capital |______ |53,091 |
| |216,770 |216,770 |
The following additional information as at 31 May 19X6 is available:
a) Rent is accrued by £210.
b) Rates have been prepaid by £880.
c) £2,211 of carriage represents carriage inwards on purchases.
d) Equipment is to be depreciated at 15% per annum using the straight line method.
e) The provision for bad debts to be increased by£40.
f) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a balance sheet as at that date.
Solution:
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
| |£ |£ |£ |
|Sales | | |138,078 |
|Less cost of sales | | | |
|Opening stock | |11,927 | |
|Purchases |82,350 | | |
|Carriage inwards |2,211 |84,561 | |
| | |96,488 | |
|Less closing stock | |(13,551) |(82,937 |
|Gross profit | | |55,141 |
|Less expenses | | | |
|Carriage outwards | |2,933 | |
|Rent, rates and insurance | |5,952 | |
|Postage and stationery | |3,001 | |
|Advertising | |1,330 | |
|Salaries and wages | |26,420 | |
|Bad debts | |877 | |
|Increase in provision for bad debts | |40 | |
|Depreciation – equipment | |8,700 |(49,253 |
|Net profit | | |5,888 |
Mr. Yousef
Balance Sheet as at 31 May 19X6.
| |£ |£ |£ |
|Non Current assets | | | |
|Equipment |58,000 |(27,700) |30,300 |
|Current Assets | | | |
|Stocks | |13,551 | |
|Debtors |12,120 | | |
|Less provision for doubtful debts |(170) |11,950 | |
|Prepayments | |880 | |
|Cash in hand | |177 | |
|Cash at bank | |1,002 | |
|Current Liabilities | |27,560 | |
|Creditors |6,471 | | |
|Accruals |210 |6,681 |20,879 |
| | | |51,179 |
| | | | |
|Capital | | |53,091 |
|Add: Net Profit | | |5,888 |
| | | |58,979 |
|Less Drawings | | |(7,800) |
| | | |51,179 |
Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a sole trader, as at 31 May 20X9, the end of his most recent financial year.
Herbert Howell
Trial Balance As At 31 May 20x9
| |Dr |Cr |
| |£ |£ |
|Property at cost |90,000 | |
|Equipment at cost |57,500 | |
|Provision for depreciation (as at 1 June 20X8) | | |
|Property | |12,500 |
|Equipment | |32,500 |
|Stock as at 1 June 20X8 |27,400 | |
|Purchases |259,600 | |
|Sales | |405,000 |
|Discounts allowed |3,370 | |
|Discounts received | |4,420 |
|Wages and salaries |52,360 | |
|Bad debts |1,720 | |
|Loan interest |1,560 | |
|Carriage out |5,310 | |
|Other operating expenses |38,800 | |
|Trade debtors |46,200 | |
|Trade creditors | |33,600 |
|Provision for bad debts | |280 |
|Cash on hand |151 | |
|Bank overdraft | |14,500 |
|Drawings |28,930 | |
|13% loan | |12,000 |
|Capital, as at 1 June 20X8 |______ |98,101 |
| |612,901 |612,901 |
The following additional information as at 31 May 20X9 is available:
a) Stock as at the close of business was valued at £25,900.
b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:
Property - 1% using the straight-line method
Equipment - 15% using the straight-line method
c) Wages and salaries are accrued by £140.
d) Other operating expenses include certain expenses prepaid by £500. Other expenses included under this heading are accrued by £200.
e) The provision for bad debts is to be adjusted so that it is 0.5% of trade debtors as at 31 May 20X9.
f) Purchases include goods valued at £1,040, which were withdrawn by Mr Howell for his own personal use.
Required:
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May 20X9 and his balance sheet as at 31 May 20X9. (20 marks)
Solution:
| |£ |£ |
|Sales | |405,000 |
|Less cost of sales | | |
|Opening stock |27,400 | |
|Purchases |258,560 | |
| |285,960 | |
|Less closing stock |(25,900) |(260,060) |
|Gross profit | |144,940 |
|Discounts received | |4,420 |
|Decrease in provision for bad debts | |____49 |
| | |149,409 |
|Less expenses | | |
|Depreciation: Property |900 | |
| Equipment |8,625 | |
| Discounts allowed |3,370 | |
| Wages and salaries |52,500 | |
| Bad debts |1,720 | |
| Loan interest |1,560 | |
| Carriage out |5,310 | |
| Other operating expenses |38,500 |(112,485) |
|NET PROFIT | |86,924 |
Herbert Howell
Balance Sheet as at 31 May 2000
| |£ |£ |£ |
|Non current Assets | | | |
|Property |90,000 |(13,400) |76,600 |
|Equipment |57,500 |(41,125) |16,375 |
| |147,500 |54,525 |92,975 |
|Current Assets | | | |
|Stock | |25,900 | |
|Debtor |46,200 | | |
|Less provision |(231) |45,969 | |
|Prepayments | |500 | |
|Cash in hand | |151 | |
| | |72,520 | |
|Current liabilities | | | |
|Bank overdraft |14,500 | | |
|Creditors |33,600 | | |
|Accruals |__340 |(48,440) | |
| | | |24,080 |
| | | |117,055 |
|Capital | | |98,101 |
|Add net profit | | |36,924 |
| | | |135,025 |
|Less drawings | | |(29,975) |
| | | |105,055 |
|Non current liabilities | | | |
|Loan (13%) | | |12,000 |
| | | |117,055 |
Workings:
1) Depreciation for:
Property 1% X 90,000 = 900
Equipment 15% X 57,500 = 8,625
2) Provision for bad debts
0.5% X (46,200) =231
Decrease in provision for bad debts
280 – 231= 49
3) Wages and salaries
Paid 52,360
Accruals 140
52,500
4) Other operating expenses
Paid 8,800
Pre-paid (500)
8,300
Accruals 200
8,500
5) Purchases: 259,600 – 1,040 = 258,560
Drawings: 28,930 + 1,040 = 29,990
REINFORCEMENT QUESTIONS
QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March 2001
| |£ |
| | |
|Sales |378,500.00 |
|Discount Received |2,400.00 |
|Rent Received |7,500.00 |
|Returns outwards |7,700.00 |
|Creditors |18,700.00 |
|Bank Overdraft |30,000.00 |
|Capital |287,500.00 |
|Purchases |261,700.00 |
|Salaries and Wages |45,700.00 |
|Office expenses |8,400.00 |
|Insurance premiums |3,100.00 |
|Electricity |1,600.00 |
|Stationery |6,200.00 |
|Advertising |8,400.00 |
|Telephone |2,100.00 |
|Business Rates |7,500.00 |
|Discounts allowed |600.00 |
|Returns Inwards |4,100.00 |
|Stocks as at 1 April 2000 |120,600.00 |
|Warehouse, shop and office |210,000.00 |
|Fixtures and fittings |12,800.00 |
|Debtors |13,000.00 |
|Cash in till |500.00 |
|Drawings |26,000.00 |
The following further information was obtained:
• Closing stock was £ 102,500.00
• Electricity charges accrued £ 700.00
• Advertising expenses accrued £ 500.00
• Insurance premiums paid in advance £ 900.00
• Business rates prepaid £ 1,500.00
Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March 2001 and balance sheet as at that date.
QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.
TRIAL BALANCE AS AT 31 DECEMBER 20X0
| |Debit |Credit |
| |£ |£ |
|Capital at 1 January 20X0 | |26,094 |
|Debtors |42,737 | |
|Cash In Hand |1,411 | |
|Creditors | |35,404 |
|Fixtures and fittings at cost |42,200 | |
|Discounts allowed |1,304 | |
|Discounts received | |1,175 |
|Stock at 1 January 20X0 |18,460 | |
|Sales | |491,620 |
|Purchases |387,936 | |
|Motor Vehicles at cost |45,730 | |
|Lightning and heating |6,184 | |
|Motor expenses |2,862 | |
|Rent |8,841 | |
|General expenses |7,413 | |
|Balance at bank | |19,861 |
|Provision for depreciation | | |
|Fixtures and fitting | |2,200 |
|Motor vehicles | |15,292 |
|Drawings |_26,568 |_______ |
| |591,646 |591,646 |
The following information as at 31 December is also available:
a) £218 is owing for motor expenses.
b) £680 has been prepaid for rent.
c) Depreciation is to be provided of the year as follows:
Motor vehicles: 20% on cost
Fixtures and fittings: 10% reducing balance method
d) Stock at the close of business was valued at £19,926.
Required
Prepare Donald Brown’s trading and profit and loss account for the year ended 31 December 20X0 and his balance sheet at that date.
QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a sole trader.
Brenda Bailey
Trial Balance As At 30 June 20x9
| |Dr |Cr |
| |£ |£ |
|Sales | |427,726 |
|Purchases |302,419 | |
|Carriage inwards |476 | |
|Carriage outwards |829 | |
|Wages and salaries |64,210 | |
|Rent and rates |12,466 | |
|Heat and light |4,757 | |
|Stock at 1 July 20X8 |15,310 | |
|Drawings |21,600 | |
|Equipment at cost |102,000 | |
|Motor vehicles at cost |43,270 | |
|Provision for depreciation: | | |
|Equipment | |22,250 |
|Motor vehicles | |8,920 |
|Debtors |50,633 | |
|Creditors | |41,792 |
|Bank | |3,295 |
|Sundry expenses |8,426 | |
|Cash |477 | |
|Capital |______ |122,890 |
| |626,873 |626,873 |
The following information as at 30 June 20X9 is also available.
a) £350 is owing for heat and light.
b) £620 has been prepaid for rent and rates.
c) Depreciation is to be provided for the year as follows:
Equipment - 10% on cost
Motor vehicles - 20% on cost
d) Stock at the close of business was valued at £16,480
Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended 30June 20X9 and her balance sheet at that date.
QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for December 19X9. The statement showed the following.
|MIDWEST BANK |
| |
|F Mercer: Statement of Account |
|Date |Particulars |Debits |Credits |Balance |
|19X8 | |$ |$ |$ |
|Dec 1 |Balance | | |1,862 |
|Dec 5 |417864 |243 | |1,619 |
|Dec 5 |Dividend | |26 |1,645 |
|Dec 5 |Bank Giro Credit | |212 |1,857 |
|Dec 8 |417866 |174 | |1,683 |
|Dec 10 |417867 |17 | |1,666 |
|Dec 11 |Sundry Credit | | |1,851 |
|Dec 14 |Standing Order |32 |185 |1,819 |
|Dec 20 |417865 |307 | |1,512 |
|Dec 20 |Bank Giro Credit | | |1,630 |
|Dec 21 |417868 |95 |118 |1,535 |
|Dec 21 |416870 |161 | |1,374 |
|Dec 24 |Bank charges |18 | |1,356 |
|Dec 27 |Bank Giro Credit | | |1,403 |
|Dec 28 |Direct Debit |88 |47 |1,315 |
|Dec 29 |417873 |12 | |1,303 |
|Dec 29 |Bank Giro Credit | | |1,582 |
|Dec 31 |417871 |25 |279 |1,557 |
| | | | | |
His cashbook for the corresponding period was as follows.
|CASH BOOK |
|19x8 | |$ |19x8 | |Cheque No |$ |
| | | | | | | |
|Dec 1 |Balance b/d |1,862 |Dec 1 |Electricity |864 |243 |
|Dec 4 |J Shannon |212 |Dec 2 |P Simpson |865 |307 |
|Dec 9 |M Lipton |185 |Dec 5 |D Underhill |866 |174 |
|Dec 19 |G Hurst |118 |Dec 6 |A Young |867 |17 |
|Dec 26 |M Evans |47 |Dec 10 |T Unwin |868 |95 |
|Dec 27 |J Smith |279 |Dec 14 |B Oliver |869 |71 |
|Dec 29 |V Owen |98 |Dec 16 |Rent |870 |161 |
|Dec 30 |K Walters |134 |Dec 20 |M Peters |871 |25 |
| | | |Dec 21 |L Philips |872 |37 |
| | | |Dec 22 |W Hamilton |873 |12 |
| | | _____ |Dec 31 |Balance c/d | |1,793 |
| | |2,935 | | | |2,935 |
Required
a) Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
b) Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
LESSON SIX
OTHER ASPECTS OF FINAL ACCOUNTS
a) INCOMPLETE RECORDS
An incomplete record situation is whereby, the accounting system falls short of the double entry. This may be due to:
– Lack of records at all; or
– Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and maintaining an accounting system (records and procedures).
b) It may not be economical for the business to maintain accounting records due to the volume or/and nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.
There are 4 main approaches in preparing final accounts where there are insufficient records.
a) Estimating income from the net assets.
b) Estimating income from the use of ratios.
c) Use of a simple cashbook and bank statement.
d) Use of control accounts.
N/B: approach number c and d are normally used together.
a) Estimating Income from the Net Assets
Where the available records are so deficient (i.e. it is impossible to compile a reasonable complete cash summary, the only method of estimating the profits or loss for the period, is to prepare statement of affairs showing the net worth of the business at the beginning and at the end of the period.
The profit/loss is estimated by use of the following formulas:
Profit or loss = Closing – Opening + Drawings – Additional
Capital Capital Capital
Or where there are no non current liabilities then this optional formula can be used
Profit or loss = Closing - Opening + Drawings - Additional
Net Asset Net Asset Capital
Example: 6.1
A sole trader’s capital position is as follows:
| |31 December |
| |19X2 |19X3 |
| |£ |£ |
|Motor vehicle: | | |
| Cost |7,500 |7,500 |
| Depreciation |3,000 |4,500 |
| |4,500 |3,000 |
|Stock |2,960 |3,450 |
|Debtors |1,150 |2,060 |
|Bank |925 |2,125 |
|Cash |__263 |___54 |
| |9,798 |10,689 |
|Creditors |2,860 |3,340 |
|Net assets |6,938 |7,349 |
He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the year.
Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets
= 7,349 – 6,938 + 12,500
= £12,911
b) Use of Ratios
There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information available on sales or purchases can be used to derive the total Gross Profit for the period and incase there is sufficient information on expenses, then the Net Profit can also be derived.
The above ratios are computed as follows:
1) Gross Profit Margin = Gross Profit x 100
Sales (selling price)
E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the Gross Profit Margin will be:
= 25 x 100
100
= 25%
If a firm sells 1,000 units in a financial period, then the Gross Profit will be:
= 25% (£100,000)
= £25,000
2) Mark up
= Gross Profit x 100
Cost of Sales (cost price per unit)
In the above example, the mark up will be:
= 25 x 100
75
= 33.33%
N/B: 75 = 100 – 25
Cost = selling price – gross profit
3) Stock Turnover
Measures the rate at which a firm uses its stocks to make sales or turnover.
The formula is: = Cost of Sales
Average Stocks expressed as number of times
Average stock = Opening Stock + Closing Stock
2
Example: A firm has the following data for the period:
Opening stock £ 20,000
Purchases £300,000
Closing stock £ 30,000
Required: The Stock Turnover Ratio.
Average Stock = 30,000 + 20,000
2
= 25,000
Cost of sales = (20,000 + 300,000) – 30,000
= 290,000
Stock Turnover = 300,000
25,000
= 11.6 times
Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001 6,000
Purchases 54,000
Jones’s mark-up is 50% on cost of goods sold. His average stock during the year was £12,000. Draw up a trading and profit and loss account for the year ended 30 June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a net profit on sales of 10%.
Solution
a) Average Stock = Opening Stock + closing stock
2
12,000 = 6,000 + C
2
C = 24,000 – 6,000
= 18,000
Gross profit = 50%
Cost of Sales = 42,000
Gross Profit = 50%
42,000
Gross Profit = 21,000.
MEMORANDUM TRADING ACCOUNT
| |£ |
|Sales |63,000 |
|Less cost of sales |(42,000) |
|Gross profit |21,000 |
|Expenses |(14,700) |
|Net profit |6,300 |
Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600. Trade discount (i.e. margin allowed) is 33¼% off all selling prices. Expenses are 66 ¾% of gross profit.
You are to calculate:
a) Cost of goods sold.
b) Gross profit margin.
c) Turnover.
d) Total expenses.
e) Net profit.
Solution:
Profit schedule
| |£ |
|Turnover |132,300 |
|Cost of goods sold |88,200 |
|Gross profit |44,100 |
|Expenses |(29,400) |
|Net profit |14,700 |
Turnover = Cost of Sales
Average stock
Margin = Gross Profit
Sales
7 = Cost of Sales
12,600
Cost of Sales = 88,200
c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook for both cash in hand and cash at bank can be prepared in confirmation of deposits and payments made from the bank statement.
The information can then be posted to the relevant accounts e.g. any income received to the relevant income accounts, expenses to relevant expense accounts and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit sales and cash purchases or credit purchases.
Steps in Preparing the Final Accounts
1) Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e. the cashbook (for both cash in hand and bank), sales ledger control account and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
5) Prepare the final accounts.
Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank payments and receipts during the year to 31 December 19X8 were as follows:
Reciepts Payments
| |£ | |£ |
|Balance 1 Jan 19X8 |572 |Purchases |10,007 |
|Cheques for sales |13,179 |Expenses |2,950 |
|Cash banked |14,005 |Drawings |11,250 |
|Balance 31 Dec 19X8 |3,751 |Delivery van |7,300 |
| |31,507 | |31,507 |
From a cash notebook you ascertain:
| |£ |
|Cash in hand 1 January 19X8 |62 |
|Cash takings |16,300 |
|Purchases paid in cash |1,850 |
|Expenses paid in cash |375 |
|Cash in hand 31 December 19X8 |65 |
|Drawings by proprietor in cash |Unknown |
You discover that assets and liabilities were as follows:
| |1 Jan 19X8 |31 Dec 19X8 |
| |£ |£ |
|Debtors |1,850 |2,070 |
|Trade creditors |1,250 |1,420 |
|Stock on hand |2,650 |2,990 |
Depreciation on the van is to be provided at the rate of 20% per annum.
Statement of Affairs as at 1 January 19x8
| |£ |
|Current Assets | |
|Cash at bank |572 |
|Cash in hand |62 |
|Debtors |1,850 |
|Stock |2,650 |
| |5,134 |
|Current Liabilities | |
|Creditors |(1,250) |
|Net Assets |3,884 |
| | |
|Capital |3,884 |
Sales Ledger Control Account
| |£ | |£ |
|Balance b/d |1,850 |Cash Takings |16,300 |
|Sales |29,699 |Bank |13,179 |
| |______ |Bal c/d |2,070 |
| |31,549 | |31,549 |
Purchases Ledger Control Account
| |£ | |£ |
|Cash purchases |1,850 |Bal b/d |1,250 |
|Bank |10,007 |Purchases |12,027 |
| |13,277 | |13,277 |
Cash in Hand Account
| |£ | |£ |
|Balance b/d |62 |Creditors |1,850 |
|Debtors/sales |16,300 |Expenses |375 |
| | |Bank |14,005 |
| | |Bal c/d |65 |
| |_____ |Drawings |___67 |
| |16,362 | |16,362 |
• The capital invested at any point of time in a business by the owner is represented by the difference between the assets and liabilities at that time.
• The difference between the capital at the end and the capital at the beginning of the trading period represents the trading profit made during that period, unless there were withdrawals or investments of additional capital.
Hobbs
Trading and Profit and Loss Account for the year ending 31 December 19X8
| |£ |£ |
|Sales | |29,699 |
|Less cost of goods sold: | | |
|Opening stock |2,650 | |
|Add purchases |12,027 | |
| |14,677 | |
|Less closing stock |(2,990) |11,687 |
|GROSS PROFIT | |18,012 |
|Less Expenses: | | |
|Expenses (375 + 2,950) |3,325 | |
|Depreciation |1,460 |(4,785) |
|NET PROFIT | |13,227 |
Hobbs
Balance Sheet as at 31 December 19X8
| |£ |£ |£ |
|Fixed Assets |Cost |Depreciation |NBV |
|Delivery van |7,300 |1,460 |5,840 |
| | | | |
|Current Assets | | | |
|Stock | |2,990 | |
|Debtors | |2,070 | |
|Cash | |___65 | |
| | |5,125 | |
|Less current liabilities | | | |
|Creditors |1,420 | | |
|Bank overdraft |3,751 |5,171 |__46 |
| | | |5,794 |
|Financed by: | | | |
|Capital | |3,884 | 3,884 |
|Add net profit | | |13,227 |
| | | |17,111 |
|Less drawings (11,250 + 67) | | |11,317 |
| | | |5,794 |
| | | | |
Example 6.5 (Exam Type Questions May 2001 Question 3)
Kimeu commenced his business of making furniture on 1 April 2000. Due to his limited accounting knowledge he has not maintained proper books of account. You have been engaged to examine his records and prepare appropriate accounts there from. You perform an examination of the records and from interviews with Kimeu you ascertain the following information.
1. At the commencement of business on 1 April 2000, he deposited Sh 1,200,000 into business bank account. On the same day he brought into the firm his pickup and estimated that it was worth Sh 660,000 and then that from 1 April 2000 it will have useful life of three years.
2. To increase his working capital he borrowed Sh 400,000 at 15% interest per annum on 1 July 2000 from his sister but no interest has yet been paid.
3. On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per annum.
4. He had drawn Sh 18,000 per week from the business account for private use during the year.
5. He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of stock was retained in the workshop on 31 March 2001. He also spent Sh 960,000 on the purchase of some equipment at the commencement of the business which he estimates will last him five years.
6. Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the remaining two months were estimated to be Sh 48,000. Motor vehicle expenses were Sh 182,000 while general expenses amounted to Sh 270,000 for the year. Insurance premium for the year to 30 June 2001 was Sh 160,000. All these expenses have been paid by cheque.
7. Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
8. Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had been received by 31 March 2001. Debt totaling to Sh 17,000 were abandoned during the year as bad. Other customers for jobs too small to invoice have paid Sh 726,000 in cash for work done of which Sh 560,000 was banked. Kimeu used Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya Charity Sweepstake tickets worth 24,000 and Sally used the rest on general expenses except for Sh 30,100 which was left in the office on 31 March 2001.
9. You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.
Required:
(a) Profit and loss account for the year ended 31 March 2001. (10 marks)
(b) Balance sheet as at 31 March 2001. (10 marks)
(Total: 20 marks)
Solution:
Cash book – Bank
| |Sh | |Sh |
|Capital |1,200,000 |Salary |120,000 |
|Loan |400,000 |Drawings |936,000 |
|Debtors |5,080,000 |Timber |1,960,000 |
|Cash |560,000 |Equipment |960,000 |
| | |Electricity |240,000 |
| | |Motor vehicle expenses |182,000 |
| | |General expenses |270,000 |
| | |Insurance |160,000 |
| |________ |Bal c/d |1,812,000 |
| |7,240,000 | |7,240,000 |
Capital
| |Sh | |Sh |
| | |Bank |1,200,000 |
|Bal c/d |1,860,000 |Pick up |660,000 |
| |1,860,000 | |1,860,000 |
Debtors
| |Sh | |Sh |
|Sales |6,178,000 |Bank |5,080,000 |
| | |Bad debts |17,000 |
| |________ |Bal c/d |1,081,000 |
| |6,178,000 | |6,178,000 |
Cash book - cash in hand
| |Sh | |Sh |
|Sales |726,000 |Bank |5,080,000 |
| | |Drawings |17,000 |
| | |Drawings |1,081,000 |
| | |General Expenses |36,900 |
| |______ |Bal c/d |30,100 |
| |726,000 | |726,000 |
Loan interest = 400,000 x 15% x 9/12
Rates = 36,000 x 9/12 = 27,000
Accruals = Electricity bills = 48,000
Rates = 27,000
Agency fees = 55,000
Loan interest = 45,000
175,000
Kimeu
Profit and Loss Account For the year ended 31 March 2001
| |Sh |Sh |
|Sales (cash + credit) | |6,904,000 |
|Less expenses | | |
|Timber used (1,960,000 – 158,000) |1,802,000 | |
|Depreciation – motor vehicle |220,000 | |
| - Equipment |192,000 | |
|Loan interest |45,000 | |
|Salary |720,000 | |
|Electricity bills |288,000 | |
|Motor vehicle expenses |182,000 | |
|General expenses |306,900 | |
|Insurance premium |120,000 | |
|Rates |27,000 | |
|Bad debts |17,000 | |
|Accountancy fees |55,000 |(3,974,900) |
|Net profit | |2,929,100 |
Kimeu
Balance Sheet as at 31 March 2001
|Non current Asset |Sh |Sh |Sh |
|Equipment |960,000 |192,000 |768,000 |
|Motor vehicle |660,000 |220,000 |440,000 |
| |1,620,000 |412,000 |1,208,000 |
| | | | |
|Current Assets | | | |
|Stock | |158,000 | |
|Debtors | |108,000 | |
|Insurance – prepayments | |40,000 | |
|Cash at bank | |181,200 | |
|Cash in hand | |30,000 | |
| | |3,121,100 | |
|Less current liabilities | | | |
|Accruals | |175,000 |2,946,100 |
| | | |4,154,100 |
| | | | |
|Capital | | |1,860,000 |
|Add net profit | | |2,929,100 |
| | | |4,789,100 |
|Less drawings | | |1,035,000 |
| | | |3,754,100 |
|Non current liability | | | |
|Loan 15% | | |400,000 |
| | | |4,154,100 |
Example 6.6 (Exam Type) June 1995 Question 2
Abi, a proprietor of a grocery and general store has not previously engaged an accountant. He informs you that this year his bankers have insisted on a proper set of accounts. Abi supplies you with his trading results for the year ended 30 June 1994 which are as follows:
| |Sh | |Sh |
|Payments for goods |4,747,500 |Takings |5,465,000 |
|Payments for expenses |565,000 | | |
|Profits |152,500 | |________ |
| |5,465,000 | |5,465,000 |
Abi instructs you to examine his records and prepare accounts. From your examination of the records and interview with your client, you ascertain the following information:
1. The takings are kept in a drawer under the counter; at the end of each day the cash is counted and recorded on a scrap of paper; at irregular intervals Mrs. Abi transcribes the figures into a notebook; a batch of slips of paper was inadvertently destroyed before the figures had been written into the notebook, but Mr. And Mrs. Abi carefully estimated their takings for that period, and the estimated figure is included in the total of Sh. 5,465,000.
2. Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500 per week with cash taken from the drawer. His winnings totaled Sh. 29,500.
3. The following balances are ascertained as correct:
| |30 June |
| |1994 |1993 |
| |Sh |Sh |
|Cash in hand |43,500 |22,500 |
|Balance at bank |109,500 |78,000 |
|Sales debtors |245,500 |229,000 |
|Creditors for purchases of stock |121,500 |139,500 |
|Stock at cost |950,000 |975,000 |
4. Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings included Sh 12,500 recovered in respect of an old debt abandoned in the previous year.
5. Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52 weeks in a year; the rent is included in expenses of Sh 565,000. The living accommodation comprises one-third of the building.
6. The total expenses also include:
• Sh. 17,500 running expenses of Abi’s private car;
• Sh. 30,000 for exterior decoration of the whole premises;
• Sh. 80,000 for alterations to the premises to enlarge the storage accommodation.
7. Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal expenses. This excludes the amount indicated in note 8.
8. Mr. Abi draws Sh. 750 per week for cigarettes and beer.
9. During the year, Mr. Abi bought a secondhand car (not for use in the business) from a friend; the price agreed was Sh. 175,000, but as the friend owed Mr. Abi Sh. 33,500 for goods supplied from the business, the difference was settled by cheque.
10. An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
11. Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored and the friend is repaying the Sh. 50,000 by installments. He had paid Sh. 20,000 by 30 June 1994.
12. Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh. 55,000 for income tax.
13. You are to provide Sh. 21,000 for accountancy fees.
N.B. All receipts and payments of Mr. Abi are made through his business account.
Required:
a) Mr. Abi’s balance sheet for the business at 30 June 1993. (4 marks)
b) Mr. Abi’s profit and loss account for the year ended 30 June 1994. (12 marks)
c) Mr. Abi’s balance sheet for the business at 30 June 1994. (6 marks)
(Total: 20 marks)
Solution:
Abi
Balance Sheet as at 30 June 1993
|Current Assets |Sh |Sh |
|Stock |97,500 | |
|Debtors |229,000 | |
|Cash at bank |78,000 | |
|Cash in hand |22,500 | |
| |1,304,500 | |
|Current liabilities | | |
|Creditors |(139,500) |1,165,000 |
| | |1,165,000 |
| | | |
|Capital | |1,165,000 |
Cash at Bank
| |Sh | |Sh |
|Balance b/d |78,000 |Drawings – personal expense for wife |260,000 |
|Sales ledger control a/c |12,500 |Drawings – cigarettes and beer |39,000 |
|Insurance (drawings) |320,500 |Expenses |565,000 |
|Drawings |50,000 |Drawings – second hand car |141,500 |
|Drawings |20,000 |Cash in hand |6,500 |
|Debtors |5,591,000 |Drawings – friend |50,000 |
| | |Creditors |4,747,500 |
| | |Dishonored cheque – drawings |50,000 |
| | |Drawings |48,000 |
| | |Income tax |55,000 |
| |________ |Balance c/d |109,500 |
| |6,072,000 | |6,072,000 |
Cash in Hand
| |Sh | |Sh |
|Balance b/d |22,500 |Drawings |15,000 |
|Drawings – betting |12,500 | | |
|Bank |6,500 |Balance c/d |43,500 |
| |58,500 | |58,500 |
Sales Ledger Control A/c
| |Sh | |Sh |
|Balance b/d |229,000 |Bad debts |178,000 |
|Bad debts recovered |12,500 |Bank |12,500 |
|Credit sales |5,819,000 |Drawings |33,500 |
| | |Bank |5,591,000 |
| |________ |Balance c/d |245,500 |
| |6,060,500 | |6,060,500 |
Purchases Ledger Control A/c
| |Sh | |Sh |
|Bank |4,747,500 |Balance c/d |139,500 |
|Balance c/d |121,500 |Credit purchases |4,729,500 |
| |4,869,000 | |4,869,000 |
Expenses
| |Total |Business |Private |
|Rent |78,000 |52,000 |26,000 |
|Motor running expenses |17,500 |- |17,500 |
|Decoration |30,000 |20,000 |10,000 |
|Alterations |80,000 |80,000 | |
|Other expenses |359,500 |359,500 |_____ |
| |565,000 |532,500 |53,500 |
Abi
Trading Profit and Loss Account for the year ended 30 June 1994
| | |£ |£ |
|Sales | | |5,819,000 |
|Less cost of sales | | | |
|Opening stock | |975,000 | |
|Purchases | |4,729,500 | |
| | |57,040,500 | |
|Less closing stock | |950,000 |4,754,500 |
|Gross profit | | |1,064,500 |
|Less expenses | | | |
|Rent | |52,000 | |
|Decoration | |20,000 | |
|Alterations | |80,000 | |
|Other expenses | |359,500 | |
|Bad debts | |165,500 | |
|Accountancy fees | |21,000 |(698,000) |
|Net profit | | |366,500 |
Abi
Balance Sheet as at 30 June 1994
| |Cost |Depreciation |Book Value |
|Current Assets: |£ |£ |£ |
|Stock | |950,000 | |
|Debtors | |245,500 | |
|Cash at bank | |109,500 | |
|Cash in hand | |43,500 | |
| | |1,348,500 | |
|Current Liabilities | | | |
|Creditors |121,500 | | |
|Accruals |21,000 |(142,500) |1,206,000 |
|Capital | | |1,165,000 |
|Add net profit | | |366,500 |
| | | |1,531,500 |
|Less drawings | | |(325,500) |
| | | |1,206,000 |
NON PROFIT MAKING ORGANIZATIONS (Club, Associations and Others)
These are some form of organizations that are set up to promote or to cater for the welfare of the members involved and not to make a profit. These include clubs, (e.g. football clubs, sports clubs), welfare associations and any other societies (charitable institutions).
Because these organizations are not trading, the types of accounts to prepare are different from the ones of trading organizations.
Example:
1. Instead of a cashbook, the clubs will maintain a receipts and payments which has similar entries to those of a cashbook.
2. Instead of profit and loss account, we have an income and expenditure account.
3. Because the club is not formed by any one owner (has no owner), it is funded by members’ contributions, donations, income from investments to get an accumulated fund instead of capital.
From the income and expenditure account, if the incomes are more than the expenditures for the period, then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of the clubs activities and incase a firm has a trading activity, then in addition to the income and expenditure account and the balance sheet, prepare a Bar Trading Account.
Format of the Final Accounts
Name
Income and Expenditure Account for the year ended 31 December ……
|Incomes |£ |£ |
|Profit from trading activities | |XX |
|Subscriptions | |XX |
|Income from investments | |XX |
|Donations | |XX |
|Income from other activities | | |
|[dinner dance, raffles, festivals] | |XX |
| | |XX |
|Expenditure | | |
|Depreciation |XX | |
|Salaries and wages |XX | |
|Expenses on other activities [prizes] |XX | |
|Loss from trading activities |XX | |
|All other expenses |XX |(XX) |
|SURPLUS/( DEFICIT ) | |XX/(XX) |
NAME
BALANCE SHEET AS AT 31 DECEMBER ……
|Non current Assets |£ |£ |£ |
|Buildings |XX |(XX) |XX |
|Fixtures, fittings and equipment |XX |(XX) |XX |
|Motor vehicle |XX |(XX) |XX |
| |XX |(XX) |XX |
|Investments | | |XX |
|Current Assets | | | |
|Stocks | |XX | |
|Debtors | |XX | |
|Prepayments and accrued income | |XX | |
|Cash at bank/hand (receipts + payments) | |XX | |
| | |XX | |
|Current liabilities | | | |
|Creditors |XX | | |
|Accrued expenses and prepaid income |XX | | |
|Bank overdraft |XX |(XX) |XX |
| | | |XX |
|Accumulated fund balance b/f | | |XX |
|Add/less surplus / deficit | | |XX/(XX) |
| | | | |
|Other funds | | | |
|Life membership fund | |XX | |
|Building fund | |XX | |
|Education fund | |XX |XX |
| | | |XX |
Notes To The Above Format:
1. Subscriptions:
These are the amounts received by the club from the members to renew their membership. It is often paid on an annual basis.
• It is income for the club and therefore reported in the income and expenditure account.
• Depending on the policy of a club, any subscriptions due but not received are shown as accrued income (debtors for subscriptions) in the balance sheet.
• Any amounts prepaid are shown as prepaid (creditors for subscriptions).
• Some clubs will not report subscriptions as income until it is received in form of cash.
2. Income from Investments:
Some clubs invest excess cash in the bank (fixed deposit account), shares of limited companies, treasury bills and any other investment that may be available.
• If the club is investing with no specific intention (i.e a general investment) then income from this investment should be reported in the income and expenditure account.
• If the investment is for a specific purpose and relates to a specific fund (e.g building fund) it will not be reported in the income and expenditure account but credited directly to the fund.
3. Other funds
• These are funds set up for a specific purpose and not general. They will be shown together with the accumulated fund.
• Any incomes relating to these funds, will be credited directly to the funds and any expenses will be taken off from these funds e.g. building fund, education fund.
Life Membership Fund
Some members may pay some amount to become life members of the club and if this happens, there may be a need to spread out this income over the expected life of the members in the club.
Depending on the policy of a club, the following accounting treatment may be allowed:
i. The full amount is reported in the Income and Expenditure account in the year it is received and therefore no balance is retained in the life membership account.
ii. The amount is shown separately in the life membership fund with no transfer in the Income and Expenditure account and hence no balance in the life membership account.
iii. To transfer some amounts from the life membership funds to the income and expenditure account over the expected life of membership to the club.
Example 6.7
The following is the receipts and payments account of the Friendship Club for the year ended 31 December 19X1:
| |£ | |£ |
|Balance at bank | | | |
|31 December 19X0 |102 |Bar purchases |4,434 |
|Entrance fees |42 |Wages |416 |
|Subscriptions: 19X0 |25 |Rent |186 |
| 19X1 |305 |Heating and lighting |128 |
| 19X2 |35 |Postage and stationery |33 |
|Bar Sales |5,227 |Insurance |18 |
|Sale of investments |750 |General expenses |46 |
| | |Payments on account of new | |
| | |furniture |450 |
| | |Balance at bank, | |
| |_____ |31 December 19X1 |775 |
| |6,486 | |6,486 |
| | | | |
The following information is also supplied:
|(1) |31 December 19X0 |31 December 19X1 |
|Bar stock, at cost |272 |315 |
|Creditors for bar purchases |306 |358 |
|Rent due |18 |36 |
|Heating and lighting expenses due |16 |19 |
|Subscriptions due |25 |40 |
|Insurance paid in advance |5 |7 |
| | | |
| | | |
| | | |
| | | |
2) On 31 December 19X0, the club held investments which cost £500. During the year ended 31 December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club purchased additional furniture at a cost of £520. Depreciation of all furniture is to be provided for at the rate of 10% per annum.
Required:
a) Prepare an income and expenditure account for the year ended 31 December 19X1.
b) Prepare a balance sheet at that date.
Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1
|Assets |£ |£ |
|Stock | |272 |
|Subscriptions due | |25 |
|Insurance prepaid | |5 |
|Investments | |500 |
|Furniture | |300 |
|Balance at bank | |102 |
| | |1,204 |
|Liabilities | | |
|Creditors |306 | |
|Rent due |18 | |
|Heating and lighting expenses |16 |(340) |
|Accumulated fund | |864 |
Creditors
| |£ | |£ |
|Receipts and payments |4,434 |Balance b/f |306 |
|Balance c/d |358 |Purchases |4,486 |
| |4,792 | |4,792 |
Subscriptions
| |£ | |£ |
|Balance b/d |25 |Receipts & payments |365 |
|Income & expenditure |345 | | |
|Balance c/d |35 |Balance c/d |40 |
| |405 | |405 |
Friendship Club
Bar, Trading Account for the year ended 31 December 19X1
| |£ |£ |
|Sales | |5,227 |
|Less: Cost of Sales | | |
|Opening stock |272 | |
|Purchases |4,486 | |
| |4,758 | |
|Less closing stock |(315) |(4,443) |
|Gross profit to income & expenditure a/c | |784 |
Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
| |£ |£ |
|Profit from bar trading | |784 |
|Entrance fees | |42 |
|Subscriptions | |345 |
|Profit from sale of investments | |250 |
| | |1,421 |
|Expenditure | | |
|Wages |416 | |
|Rent |204 | |
|Heating and lighting |131 | |
|Postage and stationery |33 | |
|Insurance |16 | |
|General expenses |46 | |
|Depreciation – furniture |56 |(902) |
|Surplus | |519 |
Friendship Club
Balance Sheet as at 31 December 19X1
|Non current Assets |£ |£ |£ |
|Furniture |820 |(56) |764 |
| | | | |
|Current Assets | | | |
|Stock |315 | | |
|Subscriptions due |40 | | |
|Prepaid expense |7 | | |
|Cash at bank |775 | | |
| |1,137 | | |
|Current liabilities | | | |
|Creditors |398 | | |
|Prepaid subscriptions |35 | | |
|Accrued expenses |55 | | |
|Creditors fixtures |70 |(518) |619 |
| | | |1,383 |
|Accumulated fund b/f | | |864 |
|Add surplus | | |519 |
| | | |1,383 |
Example 6.8 (Exam Type) November 2001
a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account. (6 marks)
b) The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2001.
|Receipts |Payments |
| |Sh | |Sh |
|Balance brought forward |288,000 |Salaries and wages |254,000 |
|Subscriptions | |New equipment |565,000 |
|Year: 1999/2000 |249,000 |Repairs and maintenance |124,000 |
| 2000/2001 |2,050,000 |Office expenses |415,000 |
| 2001/2002 |194,000 |Printing and stationery |168,000 |
|Dinner dance |723,000 |Purchase of beverages |497,000 |
|Beverage sales |657,000 |Dinner dance expenses |315,000 |
|Investments income |400,000 |Refund of subscriptions |45,000 |
| | |Sports prizes |25,000 |
| | |Transport |248,000 |
| | |Investments |1,500,000 |
| |_______ |Balance carried forward |_405,000 |
| |4,561,000 | |4,561,000 |
| | | | |
|Balances as at |31 March 2000 | |31 March 2001 |
|Furniture and fittings (net) |240,000 | |- |
|Equipment (net) |690,000 | |- |
|Investment at cost |3,500,000 | |- |
|Subscriptions in arrears |300,000 | |375,000 |
|Salaries accrued |68,000 | |72,000 |
|Stock of beverages |162,000 | |184,000 |
|Subscriptions in advance |85,000 | |- |
Additional information:
1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively.
3. Investments, which had cost Sh. 500,000, were sold on 30 March 2001 for Sh. 625,000. No entries have been made in the books in this respect.
Required:
a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
Solution:
Mamba Sports Club
Statement of Affairs
|Assets |Sh |Sh |
|Furniture and fittings | |240,000 |
|Equipment | |690,000 |
|Receipts and payments | |288,000 |
|Investment at cost | |3,500,000 |
|Subscriptions in arrears | |300,000 |
|Stock of beverages | |162,000 |
| | |5,180,000 |
|Liabilities | | |
|Subscriptions accrued |85,000 | |
|Accrued salaries |68,000 |(153,000) |
| | |5,027,000 |
Mamba Sports Club
Trading Account for the year ended 31.3.2001
| |Sh |Sh |
|Sales | |657,000 |
|Less cost of sales | | |
|Opening stock |162,000 | |
|Purchases |497,000 | |
| |659,000 | |
|Less closing stock |(184,000) |(475,000) |
|Profit to income and expenditure | |182,000 |
Subscriptions
|2001 |Sh |2001 |£ |
|Balance b/d |300,000 |Balance b/f |85,000 |
|Receipts and payments |45,000 |Receipt and payment |2,493,000 |
|Income & expenditure |2,465,000 |Income & expenditure |51,000 |
|Balance c/f |194,000 |Balance c/f |375,000 |
| |3,004,000 | |3,004,000 |
Mamba Sports Club
Income and Expenditure Account for the year ended 31 March 2001
|Incomes |Sh |
|Profit from trading account |182,000 |
|Subscriptions |2,465,000 |
|Dinner dance |723,000 |
|Investment income |400,000 |
|Profit on sale of investments |125,000 |
| |3,895,000 |
| | |
| | |
| | |
Example 6.9 (Exam Type) DECEMBER 2000 QUESTION 3
The following trial balance was extracted from the books of Literary and Philosophical Society as at 30 September 2000:
| |Sh |Sh |
|Balance at bank: current account |724,800 | |
|Accumulated fund 1 October 1999 | |5,771,200 |
|Land and buildings, at cost |3,700,000 | |
|Debtors for subscription |62,000 | |
|Furniture and fittings |1,874,000 | |
|Provision for depreciation of furniture & fittings | |284,000 |
|Subscriptions | |1,450,800 |
|Lecturer’s fees |920,000 | |
|Lecturer’s travel and accommodation expenses |358,000 | |
|Donations | |108,000 |
|Camera and projector repairs |17,000 | |
|Projectors, cameras and audio equipment |190,400 | |
|Depreciation of equipment | |54,400 |
|Rates and water |277,000 | |
|Lighting and heating |367,200 | |
|Rental of rooms | |495,000 |
|Wages – Caretaker |880,000 | |
| - Restaurant |1,600,000 | |
| - Bar staff |800,000 | |
|Purchase of food |1,565,800 | |
|Stock – bar 1 October 1999 |473,600 | |
|Bar receipts | |4,032,000 |
|Bar purchases |2,842,000 | |
|Restaurant receipts | |3,642,000 |
|Loan | |1,600,000 |
|Deposit account – bank |1,000,000 | |
|Interest payable and receivable | |36,000 |
|Creditors for bar and food |________ |178,400 |
| |17,651,800 |17,651,800 |
Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10% has been earned on the deposit account. No changes have taken place all year in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the close of the year although the wine had been included in the bar stock valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
Required:
a) Bar and restaurant trading account for the year ended 30 September 2000 (6 marks)
b) An income and expenditure account for the year ended 30 September 2000 (8 marks)
c) A balance sheet as at 30 September 2000 (6 marks)
(Total: 20 marks)
Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September 2000
| |Sh |Sh |
|Sales | |7,674,000 |
|Less cost of sales | | |
|Opening stock |473,600 | |
|Add purchases |4,450,800 | |
| |4,924,400 | |
|Less closing stock | | |
|Profit to the income and expenditure |(642,800) |(4,281,600) |
| | |3,392,400 |
| | | |
Literary and Philosophical Society
Income and Expenditure Account for the year ended 30 September 2000
|Income |Sh |Sh |
|Profit on trading account | |992,400 |
|Interest on bank deposit account | |100,000 |
|Subscriptions | |1,450,000 |
|Donations | |108,000 |
|Rental of rooms | |495,000 |
| | |3,146,200 |
|Expenditure | | |
|Lecturer’s fees |920,000 | |
|Depreciation on furniture and fitting |194,000 | |
|Equipment |19,000 | |
|Lecturer’s travel and accommodation exp. |358,000 | |
|Camera repairs |17,000 | |
|Rates and water |277,000 | |
|Lighting and heating |867,200 | |
|Caretakers wages |880,000 | |
|Interest on loan |64,000 | |
|Provision for subscription |43,600 |(3,139,800) |
|Surplus | |6,400 |
Literary and Philosophical Society
Balance Sheet as at 30 September 2000
|Non current Assets |Sh |Sh |Sh |
|Land and buildings |3,700,000 |- |3,700,000 |
|Fixtures and fittings |1,874,000 |(478,000) |1,396,000 |
|Equipment |190,400 |(73,400) |117,000 |
| |5,764,400 |551,400 |5,213,000 |
|Current assets | | | |
|Stock | |642,800 | |
|Debtors of subscription | |18,400 | |
|Balance at bank – deposit a/c | |1,000,000 | |
| - Current a/c | |724,800 | |
| | |2,386,000 | |
|Current liabilities | | | |
|Creditors | |(221,400) |2,164,600 |
| | | |7,377,600 |
|Accumulated fund b/f | | |5,771,200 |
|Add surplus | | |___6,400 |
| | | |5,777,600 |
|Non current liabilities | | | |
|4% loan | | |1,600,000 |
| | | |7,377,600 |
(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it is cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is reported in the final accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)
Direct Costs/Prime Costs
This is a cost that can be traced directly to a unit that has been produced. This include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but cannot be traced directly to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production
The manufacturing account will show the factory cost of goods produced that will be shown in the trading account in place of purchases.
FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December
| |£ |£ | |
|Raw Materials | | | |
|Opening stock of raw materials | |XX | |
|Purchases of raw materials |XX | | |
|Add carriage inwards |XX | | |
| |XX | | |
|Less returns outwards |(XX) |XX | |
|Cost of raw materials available for use | |XX | |
|Less closing stock of raw materials | |(XX) | |
|Raw materials consumed | |XX | |
|Direct labour (factory wages) | |XX | |
|Direct expenses | |XX | |
|Prime cost | |XX | |
|Factory overheads | | | |
|Salary to factory manager |XX | | |
|Depreciation on – Plant and machinery |XX | | |
| - Factory buildings |XX | | |
|Other expenses – Factory power |XX | | |
| Lighting and heating |XX | | |
| Water |XX | | |
| Cleaners wages |XX |XX | |
|Total cost of production | |XX | |
|Add: opening Work In Progress |XX | | |
|Less: closing Work In Progress |(XX) |XX | |
|Factory cost of production (cost of finished goods) | |XX |Note 1 |
|FACTORY PROFIT | |XX | |
|Finished goods at a transfer price | |XX |Note 2 |
| | | | |
|Sales | |XX | |
|Less returns inwards | |(XX) | |
| | |XX | |
|Less cost of sales | | | |
|Opening stock – finished goods |XX | | |
|Factory cost of production/transfer price |XX | | |
| |XX | | |
|Less closing stock of finished goods |(XX) |(XX) | |
|Gross profit | |XX | |
|Add factory profit | |XX | |
|Other incomes – discount received | |XX | |
| - Profit on disposal | |XX | |
| | |XX | |
|Less expenses | | | |
|Salaries and wages – administration & non production |XX | | |
|Rent for administration building |XX | | |
|Depreciation - Delivery vans |XX | | |
| - Fixtures and distribution |XX | | |
|Other selling and distribution costs |XX |(XX) | |
|Net profit/(net loss) | |XX/(XX) | |
For the balance sheet, the format is the same for all the assets and liabilities except for the current assets section whereby the stock at the end of the period should be shown for each type of stock as per this format:
|Current Assets |£ |£ |
|Stock: raw materials |XX | |
|Work in progress |XX | |
|Finished goods |XX |XX |
Note 1: This represents the total costs of all the units produced during the period and therefore will be taken to the trading account as the goods are transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of production, then this generates a factory profit. The goods will be shown in the trading account at the transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries (not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment not used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.
• Salaries and commission to the sales manager and staff
• Carriage outwards (i.e. to deliver goods to the customers
• Depreciation on motor vehicles (used for the delivery purpose)
• Advertising
• Bad debts
Example 6.10
B spikes
Trial Balance as on 31 December 2002
| |Dr |Cr |
|Stock of raw materials 1.1.2002 |21,000 | |
|Stock of finished goods 1.1.2002 |38,900 | |
|Work in progress 1.1.2002 |13,500 | |
|Wages(direct £180,000: factory indirect£145,000) |325,000 | |
|Royalties |7,000 | |
|Carriage inwards (on raw materials) |3,500 | |
|Purchases of raw materials |370,000 | |
|Productive machinery (cost £280,000) |230,000 | |
|Accounting machinery (cost £20,000) |12,000 | |
|General factory expenses |31,000 | |
|Lighting |7,500 | |
|Factory power |13,700 | |
|Administrative salaries |44,000 | |
|Sales representatives’ salaries |30,000 | |
|Commission on sales |11,500 | |
|Rent |12,000 | |
|Insurance |4,200 | |
|General administration expenses |13,400 | |
|Bank charges |2,300 | |
|Discounts allowed |4,800 | |
|Carriage outwards |5,900 | |
|Sales | |1000,000 |
|Debtors and creditors |142,300 |125,000 |
|Bank |56,800 | |
|Cash |1,500 | |
|Drawings |20,000 | |
|Capital as at 1.1.2002 |______ |29,680 |
| |1,421,800 |1,421,800 |
Notes at 31.12.2002
1. Stock of raw materials £24,000, stock of finished goods £40,000, work in progress £15,000.
2. Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th.
3. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.
Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.
Solution:
B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002
|Raw Materials |£ |£ |
|Opening Stock of raw materials | |21,000 |
|Purchases |370,000 | |
|Carriage inwards on raw materials |3,500 |373,500 |
| | |394,500 |
|Less: closing stock of raw materials | |(24,000) |
|Raw materials consumed | |370,500 |
|Direct wages | |180,000 |
|PRIME COST | |550,500 |
|Factory Overheads | | |
|Wages |145,000 | |
|Royalties |7,000 | |
|Depreciation: productive machinery |28,000 | |
|General factory expenses |31,000 | |
|Lighting( 5/6 x 7,500) |6,250 | |
|Factory power |13,700 | |
|Rent(5/6 x 12,000) |10,000 | |
|Insurance( 5/6 x 4,200 ) |3,500 |24,4,450 |
|Total cost of production | |794,950 |
|Add: opening work in progress | |13,500 |
| | |808,450 |
|Less: closing work in progress | |(15,000) |
|Factory cost production per finished goods | |793,450 |
|Sales | |1,000,000 |
|Less cost of sales | | |
|Opening stock of finished goods |38,900 | |
|Factory cost of production |793,450 | |
| |832,350 | |
|Less closing stock of finished goods |(40,000) |792,350 |
|Gross profit | |207,650 |
|Expenses | | |
|Accounting machinery – depreciation |2,000 | |
|Lighting (1/6 x 7,500) |1,250 | |
|Administrative salaries |44,000 | |
|Sales representatives salaries |30,000 | |
|Commission on sales |11,500 | |
|Rent ( 1/6 x 12,000) |2,000 | |
|Insurance (1/6 x 4200) |700 | |
|General administrative expenses |13,400 | |
|Bank charges |2,300 | |
|Discounts allowed |4,800 | |
|Carriage outwards |5,900 |(117,850) |
|Net profit | |89,800 |
B Spikes
Balance Sheet as at 31 December 2002
| |COST |DEPRECIATION |NET BOOK VALUE |
|Non current Assets |£ |£ |£ |
|Productive machinery |280,000 |(78,000) |202,000 |
|Accounting machinery |20,000 |(10,000) |10,000 |
| |300,000 |88,000 |212,000 |
|Current Assets | | | |
|Stock: raw materials |24,000 | | |
|Finished goods |40,000 | | |
|Work in progress |15,000 |79,000 | |
|Debtors | |142,300 | |
|Cash at bank | |56,800 | |
|Cash in hand | |1,500 | |
| | |279,600 | |
|Current liabilities | | | |
|Creditors | |(125,000) |154,600 |
| | | |366,600 |
|Capital | | |296,800 |
|Add net profit | | |89,800 |
| | | |386,600 |
|Less drawings | | |(20,000) |
| | | |366,600 |
Example 6.11 (Exam Type – June 1986 Question Two)
Bibi Maridadi owns and manages a small manufacturing business. The following balances have been extracted from her books of account at 31 January 1986:
| |Dr |Cr |
| |Sh |Sh |
|Capital at 1 February 1985 | |171,120 |
|Accounts payable | |86,000 |
|Bank and cash balance |5,400 | |
|Accounts receivable |92,000 | |
|Drawings |60,000 | |
|Administration expenses |150,360 | |
|Advertising expenses |12,000 | |
|Factory direct wages |60,000 | |
|Factory indirect wages |24,000 | |
|Factory power |36,000 | |
|Furniture and fittings (all offices) |18,400 | |
|Heat and light |16,000 | |
|Plant and equipment |276,800 | |
|Motor vehicle (used by salesmen) |144,000 | |
|Plant hire |4,000 | |
|Provision for bad debts | |3,200 |
|Provision for depreciation 1 February 1985: | | |
|Furniture and fittings | |9,200 |
|Plant and equipment | |138,400 |
|Motor vehicle | |24,000 |
|Raw material purchases |228,000 | |
|Rent rates |20,000 | |
|Sales | |829,440 |
|Selling and distribution expenses |66,400 | |
|Inventories at cost, 1 February 1985: | | |
|Raw materials |8,000 | |
|Work in progress |16,000 | |
|Finished goods |24,000 |_______ |
| |1,261,360 |1,261,360 |
The following additional information is provided:
i) Accruals at 31 January 1986 were:
Factory power - Sh.1,600
Rent and rates - Sh. 4,000
There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
ii) Inventories at 31 January 1986, were valued at cost as follows:
Raw materials - Sh. 15,200
Work in progress - Sh. 30,400
Finished goods - Sh. 45,600
iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates of 20%, 25% and 10% per annum respectively on cost.
iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in the ratio of 9 to 1 and 3 to 2 respectively.
v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit and loss account for the year ended 31 January 1986 and a balance sheet as at that date. (22 marks)
Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986
|Direct materials |Sh |Sh |
|Opening stock of raw materials | |8,000 |
|Add: purchases of raw materials | |228,000 |
| | |236,000 |
|Less: closing stock of raw materials | |(15,200) |
|Raw materials consumed | |220,800 |
|Factory direct wages | |60,000 |
|PRIME COST | |280,800 |
|Factory overheads | | |
|Factory indirect wages |24,000 | |
|Factory power |37,600 | |
|Plant hire |4,000 | |
|Heat and light |14,400 | |
|Rent and rates |14,400 | |
|Depreciation on plant |55,360 |149,760 |
| | |430,560 |
|Add opening work in progress | |16,000 |
| | |446,560 |
|Less closing work in progress | |(30,400) |
|Factory cost of production | |416,160 |
|Sales | |829,440 |
|Less cost of sales | | |
|Opening stock of finished goods |24,000 | |
|Add factory cost of production |416,160 | |
| |440,160 | |
|Less closing stock of finished goods |(45,600) |394,560 |
|Gross profit | |434,880 |
|Less expenses | | |
|Increase in provision for doubtful debts |1,400 | |
|Rent and rates |9,600 | |
|Heat and light |1,600 | |
|Depreciation: motor vehicle |36,000 | |
|Furniture and fittings |1,840 | |
|Selling and distribution expenses |65,600 | |
|Administration expenses |150,360 | |
|Advertising expenses |12,000 |278,400 |
|Net profit | |156,480 |
Bibi Maridadi
Balance Sheet as at 31 January 1986
| |COST |DEPRECIATION |NET BOOK VALUE |
|Non current Assets |£ |£ |£ |
|Plant and equipment |276,800 |(193,760) |83,040 |
|Furniture and fittings |18,400 |(11,040) |7,360 |
|Motor vehicle |144,000 |(60,000) |84,000 |
| |439,200 |(264,800) |174,400 |
|Current Assets | | | |
|Stock: Raw materials |15,200 | | |
| Work in progress |30,400 | | |
| Finished goods |45,600 |91,200 | |
|Debtors |92,000 | | |
|Less: provision for doubtful debts |(4,600) |87,400 | |
|Prepayments | |800 | |
|Cash in hand and bank | |5,400 | |
| | |184,800 | |
|Current liabilities | | | |
|Creditors |86,000 | | |
|Accruals |5,600 |(91,600) |93,200 |
| | | |267,600 |
|Capital | | |171,120 |
|Add net profit | | |156,480 |
| | | |327,600 |
|Less drawings | | |(60,000) |
| | | |267,600 |
UNREALISED PROFITS ON CLOSING STOCK
In most cases where business transfers finished goods at a profit to the selling department and the goods are reflected in the balance sheet at the transfer price, then the closing stock includes a profit that has not been earned or realised. If the mark up profit (the profit based on cost of production is always uniform, then any changes in the value of closing stock will result in a reduction or an increase in the unrealised profits.
If there is an increase on unrealised profit on the closing stock, then this increase will be reduced from the gross profit from our profit and loss account and if there is a reduction in unrealised profits, then this reduction will be added to the gross profit in our profit and loss account.
Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet.
The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows
Increase in unrealised profit in closing stock (UPCS)
Profit and loss (extract) Account for year ended………..
| |£ |£ |
|Gross profit | |X |
|Add: factory profit | |X |
|Add: other expenses | |X |
| | |X |
|Less expenses | | |
|Other expenses |X | |
|Increase in unrealised profit on closing stock |X |(X) |
|Net profit | |X |
Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
| |£ |£ |
|Gross profit | |X |
|Add: factory profit | |X |
|Add: other incomes | |X |
|Add: decrease in UPCS | |X |
| | |X |
|Less expenses | | |
|Other expenses | |(X) |
|Net profit | |X |
Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening stock of finished goods for the period was valued at Sh. 100,000. (The marked up cost) The closing stock at the end of the financial period was Sh.160,000.
Opening Stock: 100,000 (marked up) = 120%
(16,667) = (20%)
83,333 = 100%
Closing Stock 160,000 (marked up) = 120%
(26,667) = (20%)
133,333 = 100%
UPCS
| | |Balance b/f |16,667 |
|Balance c/d |26,667 |Profit and loss a/c |10,000 |
| |26,667 | |26,667 |
Profit and Loss (Extract)
Less: Expenses: Sh Sh
Increase in unrealized profits on closing stock 10,000
Balance Sheet (Extract)
Current Assets Sh Sh
Stock:
Raw materials X
Work in progress X
Finished goods 160,000
Less: UPCS (26,667) 133,333
d) DEPARTMENTAL ACCOUNTS
Some organizations have various departments carrying out trade and therefore the profitability of each department needs to be established. For each department, trading, profit and loss account should be prepared. The final accounts will be very important for the management to assess the performance of each department.
The expenses in relation to a specific department should be charged in the Profit and Loss account for that department. The accounts will be represented in columnar form and the format will be as follows: (Assume a firm has departments A and B).
Name
Trading Profit and Loss account for the year ended 31 December
| |Department A |Department B |Department C |
| |£ |£ |£ |£ |£ |£ |
|Sales | |XX | |XX | |XX |
|Less cost of sales | | | | | | |
|Opening stock |XX | |XX | |XX | |
|Purchases |XX | |XX | |XX | |
| |XX | |XX | |XX | |
|Less closing stock |(XX) |(XX) |(XX) |(XX) |(XX) |(XX) |
|Gross profit | |XX | |XX |XX |XX |
|Other incomes | |XX | |XX | |XX |
| | |XX | |XX | |XX |
|Less expenses | | | | | | |
|Salaries and wages |XX | |XX | |XX | |
|Depreciation |XX | |XX | |XX | |
|Other expenses |XX | |XX | |XX | |
|Managers commission |XX |(XX) |XX |(XX) |XX |(XX) |
|NET PROFIT | |XX | |XX | |XX |
The balance sheet will reflect the position of the whole organization and therefore a departmental balance sheet is not required.
When departments in a firm are sharing resources, then the various expenses need to be apportioned between or among the different departments e.g. if the departments are sharing a building, then rent expense should be apportioned among the departments.
The following guidelines can be followed in apportioning the expenses among the departments.
|Type of Expense |Basis of apportionment |
|Rent, rates, heat, light, repairs to buildings, |Floor area occupied by each department. |
|depreciation of buildings and insurance. | |
| | |
|Depreciation, insurance and maintenance of equipment |Cost or net book value of the equipment in each department. |
| | |
|Salaries, canteen expenses, welfare and other expenses |Number of employees in each department |
|relating to employees. | |
| | |
|Carriage inwards. |Purchases in each department. |
| | |
|Advertising, depreciation and maintenance of delivery van. |Value of sales in each department. |
| | |
|Increase in provision for doubtful debts, bad debts and |Sales or debtors in each department. |
|discounts allowed. | |
Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and children’s games and toys. For the purposes of his accounts, he wishes the business to be divided into two departments:
Department A Books, periodicals and newspapers
Department B Games, toys and fancy goods.
The following balances have been extracted from his nominal ledger at 31 March 19X9:
| |Dr |Cr |
|Sales Department A | |15,000 |
|Sales Department B | |10,000 |
|Stocks Department A, 1 April 19X8 |250 | |
|Stocks Department B, 1 April 19x8 |200 | |
|Purchases Department A |11,800 | |
|Purchases Department B |8,200 | |
|Wages of sales assistants Department A |1,000 | |
|Wages of sales assistants Department B |750 | |
|Newspaper delivery wages |150 | |
|General office salaries |750 | |
|Rates |130 | |
|Fire insurance – buildings |50 | |
|Lighting and air conditioning |120 | |
|Repairs to premises |25 | |
|Internal telephone |25 | |
| | | |
|Cleaning |30 | |
|Accountancy and audit charges |120 | |
|General office expenses |60 | |
| |25,000 |25,000 |
| | | |
| | | |
|Stocks at 31 March 19X9 were valued at: | | |
| | | |
|Department A £300 | | |
|Department B £150 | | |
| | | |
|The proportion of the total floor area occupied by each department was: |
| | | |
|Department A one fifth | | |
|Department B four-fifths | | |
Prepare J Spratt’s trading and profit and loss account for the year ended 31 March 19X9, apportioning the overhead expenses, where necessary, to show the Department profit or loss.
The apportionment should be made by using the methods as shown:
Area - Rates, Fire insurance, Lighting and air conditioning, Repairs, Telephone, Cleaning:
Turnover -General office salaries, Accountancy, General office expenses.
Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9
| |Department A |Department B |Department C |
| |£ |£ |£ |£ |£ |£ |
|Sales | |15,000 | |10,000 | |25,000 |
|Less cost of sales | | | | | | |
|Opening stock |250 | |200 | |450 | |
|Purchases |11,800 | |8,200 | |20,000 | |
| |12,500 | |8,400 | |20,450 | |
|Less closing stock |(300) |(11,750) |(150) |(8,250) |(450) |(20,000) |
|Gross profit | |3,250 | |1,750 | |5,000 |
| | | | | | | |
|Less expenses | | | | | | |
|Wages |1,000 | |750 | |1,750 | |
|Newspaper delivery wages |150 | |- | |150 | |
|General office salaries |450 | |300 | |750 | |
|Rates |26 | |104 | |130 | |
|Fire insurance – buildings |10 | |40 | |50 | |
|Lighting and air-conditioning |24 | |96 | |120 | |
|Repairs to premises |5 | |20 | |25 | |
|Internal telephone |5 | |20 | |25 | |
|Cleaning |6 | |24 | |30 | |
|Accountancy or audit charges |72 | |48 | |120 | |
|General office expenses |36 |(1,784) |24 |(1,426) |60 |(3,210) |
|NET PROFIT | |1,466 | |324 | |1,790 |
Workings:
1) General Office Salaries: A = 15,000 X 750 = 450
25,000
B = 10,000 X 750 = 300
25,000
2) Rates: A = 1/5 X 130 = 26
B = 4/5 X 130 = 104
3) Fire Insurance: A = 1/5 X 50 = 10
B = 4/5 X 50 = 40
4) Lighting: A = 1/5 X 120 = 24
B = 4/5 x 120 = 96
5) Repairs: A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
Interdepartmental Trading
A department may buy goods from another department in the same firm and therefore the departments trade with one another. Example, in 4.16 above, department A sells goods to Department B. (Department B is buying from department A). Interdepartmental sales and purchases should be excluded from the total sales and total purchases of the whole firm. If we assume that A sold goods to B amounting to £1,000 and this figure is included in sales of A and purchases of B, the trading account for the whole firm will be as follows (other items will remain the same):
| |£ |£ |
|Sales | |24,000 |
|Less cost of sales | | |
|Opening stock |450 | |
|Purchases |19,000 | |
| |19,450 | |
|Less closing stock |(450) |(19,000) |
|Gross profit | |5,000 |
Managers Commission
A commission based on the net profit made in each department may reward managers of each department.
The commission is normally a percentage of the net profit but it may be a percentage on the net profit before or after charging the commission.
1) Percentage Before Charging Commission
If we assume in example 4.16 that the managers in each department is paid a commission of 5%, before charging such commission, the commission will be as follows:
| |Department A |Department B |Total |
|Net profit before commission |1,466 |324 |1,790 |
|Managers commission @ 5% |(73.3) |(16.2) |(89.5) |
|Net profit after commission |1,392.7 |307.8 |1,700.5 |
2) Percentage After Charging Commission
Assume the commission is 5% of the net profit after charging such commission:
| |Department A |Department B |Total |
|Net profit before commission |1,466 |324 |1,790 |
|Managers commission @ 5% |(69.8) |(15.4) |(85.2) |
|Net profit after commission |1,392.2 |308.6 |1,704.5 |
Note:
If we use percentage for each commission assuming a 5% rate, the commission will be computed as follows:
| |Before charging commission |After charging commission |
|Net profit before commission |100 |105 |
|Commission of 5% |__5 |__5 |
|Net profit after commission |95 |100 |
REINFORCEMENT QUESTIONS
QUESTION ONE
Dare is a grocer who had not kept a full set of books.
The following was a summary of his bank statement for the year ended 31 December 19X6:
| |£ | |£ |
|Amounts credited by bank |32,050 |Balance at 1 January 19X6 |892 |
| | |Payments to trade creditors |27,380 |
| | |Rent and rates |475 |
| | |Fixtures |100 |
| | |Lighting and heating |210 |
| | |General expenses |800 |
| | |Loan interest |120 |
| | |Drawings |900 |
| | |Customers’ cheques dishonoured |180 |
| |_____ |Balance at 31 December 19X6 |993 |
| |32,050 | |32,050 |
You are given the following information:
1. Trading receipts consisted partly of cash and partly of cheques. During the year, Dare had paid, out of his takings, wages for part-time staff amounting to £2,914 and sundry expenditure of £140. He retained between £2 and £5 per week pocket money and maintained a balance of £20 in the till for change. The balance of his takings, together with cheques amounting to £250, which he had cashed out of his takings for the convenience of certain friends, was paid into the bank.
2. Cheques drawn payable to trade creditors, but not presented at 1 January 19X6, amounted to £280 and at 31December 19X6 to £320.
3. All dishonoured cheques were re-presented and honoured during the year.
4. The loan interest was paid to a close friend, Bryant, who had lent Dare £4,000 some years ago at a nominal rate of interest of 3% per annum. The interest was duly paid half-yearly on 31st March and 30 September, and the loan was still outstanding at the end of the year.
5. Discounts allowed by trade creditors amounted to £480 and those allowed to debtors were £520.
6. Other balances at 1 January and 31 December 19X6 are given below:
| |1 January |31 December | |
| |£ |£ | |
|Stocks |4,500 |5,800 | |
|Trade debtors |2,800 |3,200 |(including a bad debt of £200 to be written |
| | | |off) |
|Accrued general expenses |240 |190 | |
|Rates paid in advance |40 |50 | |
|Fixtures valued at |2,800 |2,550 |(including those purchased during the year) |
|Trade creditors |1,800 |2,200 | |
|Creditors for heating and lighting | | | |
| |80 |70 | |
7. There is a standard gross profit margin of 25% on sales.
You are required to prepare:
a) a statement of Dare’s capital on 1 January 19X6;
b) a profit and loss account for the year ended 31 December 19X6;
c) a balance sheet as on that date.
QUESTION TWO
You have agreed to take over the role of bookkeeper for the AB Sports and Social Club.
The summarized balance sheet on 31.12.94 as prepared by the previous bookkeeper contained the following items. All figures are in £s.
|Assets | | |
|Heating oil for clubhouse | |1,000 |
|Bar and café stocks | |7,000 |
|New sports ware, for sale, at cost | |3,000 |
|Used sports ware, for hire, at valuation | |750 |
|Equipment for grounds person – cost |5,000 | |
| - |3,500 |1,500 |
|depreciation | | |
|Subscriptions due | |200 |
|Bank – current account | |1,000 |
| - deposit account | |10,000 |
|Claims | | |
|Accumulated fund | |23,150 |
|Creditors – bar and café stocks | |1,000 |
| - Sports ware | |300 |
| | | |
|The bank account summary for the year to 31.12.95 contained the following items: |
| | | |
|Receipts: | | |
|Subscriptions | |11,000 |
|Bankings – bar and sale | |20,000 |
|Sale of sports ware | |5,000 |
|Hire of sports ware | |3,000 |
|Interest on deposit account | |800 |
|Payments | | |
|Rent and repairs of clubhouse | |6,000 |
|Heating oil | |4,000 |
|Sports ware | |4,500 |
|Grounds person | |10,000 |
|Bar and café purchases | |9,000 |
|Transfer to deposit account | |6,000 |
| | | |
|You discover that the subscriptions due figure as at 31.12.94 was arrived at as follows: |
| | | |
|Subscriptions unpaid for 1993 | |10 |
|Subscriptions unpaid for 1994 | |230 |
|Subscriptions paid for 1995 | |40 |
| | | |
|Corresponding figures at 31.12.95 are: | | |
| | | |
|Subscriptions unpaid for 1993 | |10 |
|Subscriptions unpaid for 1994 | |20 |
|Subscriptions unpaid for 1995 | |90 |
|Subscriptions paid for 1996 | |200 |
| | | |
|Subscriptions due for more than 12 months should be written off with effect from 1.1.95 |
| | | |
|Asset balances at 31.12.95 include: | | |
|Heating oil for club house | |700 |
|Bar and café stocks | |5,000 |
|New sports ware, for sale, at cost | |4,000 |
|Used sports ware, for hire, at valuation | |1,000 |
| | | |
|Closing creditors at 31.12.95 are: | | |
| | | |
|For bar and café stocks | |800 |
|For sports ware | |450 |
|For heating oil for clubhouse | |200 |
| | | |
2/3 rds of the sportswear purchases made in 1995 had been added to stock of new sportswear in the figures given in the list of assets above, and 1/3 had been added directly to the stock of used sportswear for hire.
Half of the resulting ‘new sportswear for sale at cost’ at 31.12.95, to transfer these older items into the stock of used sportswear, at a valuation of 25% of their original cost.
No cash balances are held at 31.12.95. The equipment for the grounds person is to be depreciated at 10% per annum, on cost.
Required:
Prepare income and expenditure account and balance sheet for the AB Sports club for 1995, in a form suitable for circulation to members. The information given should be as complete and informative as possible within the limits of the information given to you. All workings must be submitted. (23 marks)
QUESTION THREE
Mr Cherono trades as a retailer of electric lamps and related products under the name of Chero Hardware. Most goods in which he trades are purchased from various suppliers in a finished form. In addition, a separate department of the firm manufactures various types of lampshades from purchased raw materials. When finished, the lampshades are transferred to the shop at an agreed transfer price for sale. No lampshades are sold other than through the shop.
The firm’s Accounts Assistant presents you with the following trial balance at 30 June 1988:
| |Sh |Sh |
|Capital account – Cherono | |740,000 |
|Drawings – Cherono |95,000 | |
|Long term loan (interest at 15% p.a) | |240,000 |
|Fixtures and fittings at cost |900,000 | |
|Accumulated depreciation at 1 July 1987 | |350,000 |
|Motor vehicle at cost |208,000 | |
|Accumulated depreciation at 1 July 1987 | |60,000 |
|Stock at 1 July 1987 (at cost): | | |
| Raw materials for lampshades |40,000 | |
| Completed lampshades |20,000 | |
| Other goods |328,000 | |
|Trade debtors and creditors |122,000 | |
|Bank balance |98,000 | |
|Sales | |4,100,000 |
|Purchases – raw materials for lampshades |855,000 | |
| - other goods |2,400,000 | |
|Wages |254,000 | |
|Rent and rates |96,000 | |
|Water and electricity |47,000 | |
|Motor expenses |60,800 | |
|Repairs |12,000 | |
|Interest on loan |18,000 | |
|Bank charges |4,000 | |
|Insurance |18,000 | |
|Sundry expenses |21,200 |_______ |
| |5,597,000 |5,597,000 |
Additional Information:
i) Rent and rates include a prepayment of rates of Sh. 6,000.
ii) The insurance includes a premium for the period ending 31 October 1988.
iii) A trade debt of Sh. 14,000 is not expected to be realized.
iv) During the year a pick-up van, which was bought for Sh. 86,000, was sold for Sh. 30,000, and replaced with another pick-up van costing Sh. 152,000. Both transactions have been posted to the motor vehicle account. No disposal account has been opened. The straight-line rates of depreciation based on cost are 25% p.a. for motor vehicle and 10% p.a. for fixtures and fittings. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
v) Accruals at 30 June 1988 were:
Water and electricity Sh. 5,000
Sundry expenses Sh. 4,000
vi) Stocks at 30 June 1988 were:
Sh.
Lampshades raw materials 80,000
Lampshades (at transfer price) 30,000
Other goods at cost 252,000
(vii)
a) The agreed transfer price for lampshades produced was Sh. 1,000,000. The workshop produced 50,000 lampshades during the year.
b) Wages include those of the lampshades making employee who has been paid Sh. 50,000 for the year. In addition, she is entitled to a commission on the annual profit of her department of 10% p.a. after charging such commission. Shop assistants’ wages were Sh. 108,000.
c) The apportionment of rent and rates; and water and electricity to the lampshades is 25% of the total.
Required:
a) Prepare a manufacturing, trading and profit and loss accounts for the year ended 30 June 1988, disclosing clearly (i) the profit earned by the lampshades-making department and (ii) the gross profit earned by the shop.
b) Prepare a balance sheet as at 30 June 1988.
QUESTION FOUR
On 2 November 1983, the Treasurer of the Olympiad Athletics Club died. The financial year of the club, which had been formed to provide training facilities for both field and track event athletes, had ended two days previously on 31 October 1983. An extraordinary general meeting was convened for the purpose of appointing a new treasurer whose task it would be to prepare the annual accounts for that financial year.
An enthusiastic club member, Guy Rowppe, was duly appointed but, having only an elementary knowledge of bookkeeping, soon found himself in difficulty.
He sought your assistance, which you agreed to give. During your conversation he said, ‘The previous treasurer maintained a Cash and Bank account. I have summarized the detailed entries into what I think you call a Receipts and Payments Account, and have rounded the figures to the nearest £1’.
At this point he supplied you with a copy of the following document:
Olympiad Athletics Club
Receipts and Payments Account for 12 months ended 31 October 1983
|Note |Receipts | | |Note |Payments | | |
|No. | | | |No. | | | |
| | |Cash |Bank | | |Cash |Bank |
| | |£ |£ | | |£ |£ |
| |Balance c/d |73 |- | |Balance b/d |- |105 |
| |Membership fees: | | |(4) |Insurance premiums paid to brokers| | |
| | | | | | | |580 |
|(1) |Entrance |80 |170 |(7) |Payments to suppliers of sporting | | |
| | | | | |requisites | |5,270 |
|(1) |Annual subscriptions |215 |4,465 |(5) |Wages of grounds man | |3,600 |
|(2) |Life membership | |530 |(8) |Postages and telephones | |692 |
|(3) |Training ground fees |454 |7,206 |(9) |Stationery | |629 |
| |Insurance: | | | |World-wide Athletics Club | | |
| | | | | |affiliation fee | |50 |
|(4) |Premiums | |638 |(10) |Rates of training ground | |846 |
|(4) |Commissions | |53 | |Upkeep of training ground | | |
| | | | | | | |1,200 |
|(11) |Interest received from investments | | | |Transfers to bank |700 | |
| | | |626 | | | | |
|(12) |Sale of office furniture | |370 |(11) |Purchase of investments | |5,600 |
|(6) |Sale of sporting requisites | |8,774 |(11) |Short term deposits | |3,000 |
| |Advertising revenue | |603 | | | | |
| |Transfers from cash |____ |__700 | |Balances c/d |122 |2,563 |
| | |£822 |£24,135 | | |£822 |£24,135 |
| |Balances b/d |122 |2,563 | | | | |
After you had perused the above account, Guy Rowppe explained the numbered items, as follows:
1) On admittance to membership of the club, new members pay an initial entrance fee together with their annual subscription. At 31 October 1982, annual subscriptions of £70 had been paid in advance and £180 was owing but unpaid; of this latter amount, £40 related to members who left during the current year and is now no longer recoverable. The figures at 31 October 1983 are £100 subscriptions in advance and £230 subscriptions in arrear. The policy of the club is to take credit for subscriptions when due and to write off irrecoverable amounts as they arise.
2) As an alternative to paying annual subscriptions, members can at any time opt to pay a lump sum, which gives them membership for life without further payment.
Amounts so received are held in suspense in a Life Membership Fund account and then credited to Income and Expenditure Account in equal instalments over 10 years; the first such transfer takes place in the year in which the lump sum is received. On 31 October 1982 the credit balance on the Life Membership Fund Account was £4,720, of which £850 credited was as income for year ended 31 October 1983.
3) The club has a permanent training ground. Non-members can use the facilities on payment of a fee. In order to guarantee a particular facility, advance booking is allowed. Advance booking fees received before 31 October 1983 in respect of 1984 total £470. The corresponding amount paid up to 31 October 1982 in advance of 1983 was £325. Members can use the facilities free of charge.
4) Club members can take out insurances through the club at advantageous rates. Initially, premiums are paid by members to the club. Subsequently, the club pays the premiums to an insurance broker and receives commission. At 31 October 1982, premiums received but not yet paid over to the broker amounted to £102 and commissions due but not yet received were £11. The corresponding amounts at 31 October 1983 are £160 and £13 respectively.
5) The grounds man is employed for the six months April to September only. He is then paid a retaining fee to secure his services for the following year. At 31 October 1982 the grounds man had been paid a retainer (£250) for 1983. Included in the Wages figure (£3,600) is the retainer (£300) for 1984.
6) Sporting requisites are sold only on cash terms. There are therefore no debtors for these items.
7) On 31 October 1982 sums owed to suppliers of sporting requisites totaled £163; the corresponding figure on 31 October 1983 was £202.
8) Stock of unsold sporting requisites on 31 October 1982 was £811 and on 31 October 1983, was £927. In arriving at this latter figure, the sum of £137, representing damaged and unsaleable stock at cost price, had been excluded.
9) Postage stamps unused at 31 October 1983 totalled £4.
10) Stock of stationery on 31 October 1982 and 1983 was £55 and £36 respectively.
11) Rates are payable to the District Council in two installments (in advance) each year. £360 had been paid on 1 October 1982, £390 on 1 April 1983 and £456 on 1 October 1983.
12) The club receives interest on investments bought a number of years ago at a cost of £7,400 (current valuation £7,550). At the end of October 1983, the club had acquired further investments which cost £5,600 (current valuation £5,600) and at the same time placed £3,000 in a short-term deposit account.
13) The written down value of the furniture which had been sold during the year was £350; it had originally cost £800.
Other Matters:
Initially, the training ground had been acquired freehold* from a farmer at an inclusive cost of £4,000. Subsequently, the club had some timber buildings erected to provide various facilities for members. The total cost of these buildings was £35,000; depreciation is calculated at the rate of 10% per annum on a straight-line basis. At 31 October 1982, the provision for depreciation account had a balance of £9,400.
At 31 October 1982, the furniture and equipment etc. was recorded in the club’s books as £7,900 (cost) against which there was a provision for depreciation of £4,150 (calculated on the same basis as for buildings). Apart from the disposal referred to in note (12) above there had been no other disposals or acquisitions during the year.
Required:
Prepare the club’s Income and Expenditure Account for year ended 31 October 1983 and the Balance sheet at that date.
All workings must be shown.
*Freehold land is land held in perpetuity.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
COMPREHENSIVE ASSIGNMENT No.2
TO BE SUBMITTED AFTER LESSON 6
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS
QUESTION ONE
The bank account of Fuller Ltd, prepared by the company’s book-keeper, was as shown below for the month of October 19-6:
Bank Account
|19-6 | | |19-6 | | | |
|Oct | | |Oct | | | |
|1 |Balance c/d |91.40 |2 |Petty Cash |062313 |36.15 |
|3 |McIntosh and Co |260.11 |3 |Freda’s Fashions |062314 |141.17 |
|3 |Malcolm Brothers |112.83 |6 |Basford Ltd |062315 |38.04 |
|3 |Cash sales |407.54 |8 |Hansler Agencies |062316 |59.32 |
|14 |Rodney Photographic |361.02 |9 |Duncan’s storage |062317 |106.75 |
|17 |Puccini’s Cold Store Ltd |72.54 |9 |Aubrey plc |062318 |18.10 |
|20 |Eastern Divisional Gas Board – | |10 |Secretarial services Ltd |062319 |28.42 |
| |rebate (August direct credit) | | | | | |
| | |63.40 | | | | |
|22 |Grainger’s Garage |93.62 |14 |Trevor’s Auto repairs |062320 |11.75 |
|29 |Cash sales |235.39 |15 |Wages cash |062321 |115.52 |
|31 |Balance c/d |221.52 |16 |Towers Hotel |062322 |44.09 |
| | | |17 |Bank charges (September) |- |12.36 |
| | | |20 |Broxcliffe borough Council | | |
| | | | | |SO |504.22 |
| | | |21 |Eastern Area Electricity Board | | |
| | | | | |DD |108.64 |
| | | |24 |Eastern Divisional Gas Board | | |
| | | | | |DD |41.20 |
| | | |28 |Petty Cash |062323 |119.07 |
| | | |30 |Wages cash |062324 |337.74 |
| | |______ |31 |Salaries transfer |- |______ |
| | |1,919.37 | | | |1,919.37 |
| | | |Nov 1 | | | |
| | | | |Balance c/d | |221.52 |
In early November, the company’s bank sent a statement of account which is reproduced below:
Statement of Account with Lowland Bank plc
Account: Fuller Ltd Current Account No 10501191
Date of issue: 1 November 19-6
|19-6 Oct |Description |Debit |Credit |Balance |
| | |£ |£ |£ |
|1 |BCE | | |90.45 |
|2 |CR | |175.02 |265.47 |
| 2 |062310 |111.34 | |154.13 |
|3 |062312 |9.18 | |144.95 |
|3 |062309 |15.41 | |129.54 |
|3 |CR | |780.48 |910.02 |
|7 |062313 |36.15 | |873.87 |
|10 |ADJ | |12.90 |886.77 |
|15 |062315 |38.04 | |848.73 |
|16 |062314 |141.17 | |707.56 |
|17 |CR | |443.56 |1,151.12 |
|20 |SO |504.22 | |646.90 |
|21 |062317 |106.75 | |540.15 |
|21 |DD |196.83 | |343.32 |
|21 |062320 |11.75 | |331.57 |
|22 |141981 |212.81 | |118.76 |
|22 |ADJ |10.00 | |108.76 |
|22 |062319 |28.42 | |80.34 |
|22 |062320 |11.75 | |68.59 |
|22 |CR | |93.62 |162.21 |
|24 |ADJ | |212.81 |375.02 |
|27 |INT (loan a/c) |26.35 | |348.67 |
|27 |062321 |115.52 | |233.15 |
|28 |062322 |44.09 | |189.06 |
|28 |DD |108.64 | |80.42 |
|30 |CGS |9.14 | |71.28 |
|31 |ADJ | |11.75 |83.03 |
Abbreviations:
BCE = Balance SO = Standing Order CR = Credit ADJ = Adjustment
INT = Interest DD = Direct Debit CGS = Charges
Required:
Prepare the company’s bank reconciliation statement as at 31 October 19-6.
(Chartered Association of Certified Accountants)
QUESTION TWO
PAUL RUDYERD
The following balances have been extracted from the accounting records of Paul Rudyerd, a wholesale fruiter, at the end of his financial year ended on 31 May 19X1.
| |£ |£ |
|Purchases and sales |104,310 |146,200 |
|Stocks |3,010 | |
|Motor vehicles at cost |26,360 | |
|Provision for depreciation on motor vehicles as at 1 June 19X0 | |12,960 |
|Warehouse equipment at cost |20,000 | |
|Debtors and creditors |25,250 |21,200 |
|Bank | |3,200 |
|Motor vehicle expenses |11,960 | |
|Rent and rates |11,220 | |
|Advertising |2,500 | |
|Sundry expenses (including insurance and electricity) |3,470 | |
|Drawings |6,600 | |
|Capital as at 1 June 19X0 |______ |31,120 |
| |214,680 |214,680 |
Additional information and opinions are given as follows:
a) Stocks at 31 May 19X1 were valued at £2,600. This amount includes a consignment of rare fruit from abroad which cost £300, which would normally sell for approximately £660, but which is badly bruised and could be sold as juice pulp for £100.
b) Depreciation on motor vehicles is normally charged at an annual rate of 20%, using the reducing balance method. The motor vehicles at cost figure includes a new car purchased during the year for £9,600 for Rudyerd’s personal use which it is estimated will last four years with an estimated residual value of £4,000.
c) Expenses prepaid and accrued at 31 May 19X1 were estimated as follows:
| |Prepayments |Accruals |
| |£ |£ |
|Rates |230 | |
|Rent | |160 |
|Insurance |180 | |
|Electricity | |200 |
d) A bad debt of £250 is to be written off. A provision for doubtful debts of 1% of outstanding debtors should be created.
e) A recording error has resulted in a second-hand delivery van, purchased on 2 June 19X0 for £9,000, being treated as a motor vehicle expense.
f) No record has been made of fruit, estimated to have cost £520, withdrawn from the business by Rudyerd for his personal use.
g) No adjustment should be made, in preparing the answer to part (a) for the new warehouse equipment purchased during the year.
Required:
a) Prepare a draft trading, profit and loss account for Paul Rudyerd’s wholesale fruit business for the year ended 31 May 19X1 and a draft balance sheet as at 31 May 19X1. (15 marks)
b) Briefly explain what accounting concepts and conventions would be important in considering the treatment of the new warehouse equipment. (4 marks)
c) Itemize the additional information that you would wish to know before you could make the appropriate adjustments to the above financial statements in respect of the new warehouse equipment. (3 marks)
QUESTION THREE
ABC LTD
You have just been appointed as an accounting assistant to ABC Ltd. A week after your arrival the finance director is rushed into hospital; the auditors are about to arrive to prepare the accounts for the recently-ended financial year; you cannot find any working papers for the previous year’s accounts; and the other accounts staff are too busy to assist you in preparing for the auditor’s visit.
The eight situations described below are detailed on a notepad left by the finance director and their treatment in the accounts needs to be considered by you.
a) A supply of office stationery was purchased five months before the year-end at a cost of £1,000. At the year-end it is estimated there is about £250 worth left in stock.
b) An electronic typewriter was purchased during the year at a cost of £270. It is estimated to have a useful life of five years.
c) A batch of goods was produced to a customer’s special order. The goods cost £5,800 but have not been delivered as it transpires the customer is now bankrupt. A buyer for the goods has been found, who will pay £4,500 but modifications costing £1,200 will have to be made to the goods.
d) Three technical staff have spent the last six months exclusively on a new product design project; their salaries for this period amount to £22,000. At the year-end it is known that the design stage will take another month, to be followed by market research; after this the directors will decide whether the project should proceed to production and marketing. The company’s chief engineer is confident that sales of the new product will start in the next financial year and will last for at least four years.
e) A freehold property was purchased on the first day of the financial year at a cost of £650,000. The building is estimated to have a useful life of ten years when it is expected it will have to be demolished for redevelopment. It is estimated that the freehold land, at the time of purchase, was worth £500,000.
f) A specialist machine was purchased seven years ago for £200,000. It has been depreciated, using the straight-line method, at 10% per annum since then. To the beginning of the year under review £120,000 depreciation has been provided. The chief engineer has advised that the machine is worn out and would need to be rebuilt to last more than another two years. The directors have already decided the machine should not be rebuilt but scrapped one year after the end of the year under review.
g) The debtors’ ledger shows balances totalling £52,000 at the year-end. Two debts, totalling £2,000, are known to be bad. Another customer has gone into liquidation owing £3,000; it is expected he will be able to pay 60p of every £ owed to his creditors. The sales director recommends a general bad debt provision of 2% in respect of the remaining debtor balances.
h) The company has undertaken a heavy advertising campaign throughout the year under review to promote its corporate image and product range. The sales and managing directors feel that this campaign will benefit the company for at least a further six months after the year end. You determine that the campaign cost £150,000 and has been fully paid for before the year-end.
Required:
For each of the eight situations described above:
a) Describe what action should be taken in respect of:
i) The amount to be charged or credited to the year’s profit and loss account (if any);
ii) The value to be placed on the asset in the balance sheet at the year end (if any);
(8 marks)
b) State what accounting assumptions, conventions or concepts could be involved and give reasons, where there is a conflict between two or more of them, why you have chosen the action you propose. (9 marks)
QUESTION FOUR
The following final balance was extracted from the books of J Yeats, a trader, at 31 December 19X9:
| |Ksh |Ksh |
|Carriage inwards | |6,310 |
|Capital account at 1 January 19X9 | |500,000 |
|Motor vans |200,000 | |
|Stock at 1 January 19X9 |164,000 | |
|Balance at bank |116,860 | |
|Purchases |1,593,690 | |
|Sales |2,224,000 | |
|Trade debtors |290,000 | |
|Trade creditors | |157,600 |
|Rent and rates |56,080 | |
|Salaries |350,400 | |
|General expenses | |44,720 |
|Motor expenses |25,600 | |
|Discounts allowed |40,400 | |
|Discounts received | |37,600 |
|Insurance |17,600 | |
|Bad debts |30,400 | |
|Provision for doubtful debts 1 Jan 19X9 | |8,000 |
|Provision for depreciation on vans | |60,000 |
|Drawings |50,000 | |
|Disposal | |6,000 |
|Returns inwards |7,140 |_______ |
| |2,993,200 |2,993,200 |
The following matters should be taken into account:
a) After examination of the debtors account, it was decided to:
Write off a bad debt of Ksh 12,000
Make a specific provision in the accounts for the following doubtful debts,
Ksh 5,000 from Wordsworth
Ksh 3,000 from Coleridge
Make a general provision of 5% on the debtors.
b) Goods unsold at 31 December 19X9 had cost Ksh 201,600 but Yeats expected to sell them at Ksh 232,470.
c) Salaries accrued at 31 December 19X9 amounted to Ksh 32,000.
d) The rent of the premises is Ksh 40,000 a year, payable quarterly in arrears, but the instalment due on 31 December 19X9 was not paid until 15 January in the next year.
e) Insurance paid in advance at 31 December 19X9 amounted to Ksh 2,000.
f) Depreciation is to be provided for on the motor truck at the rate of 20% per annum straight line on cost.
g) General expenses include Ksh 3,060 relating to the telephone account which is made up of:
- Rent – three months in advance from 30 November 19X9 at Ksh. 420.
- Calls – three months ended 30 November 19X9 at Ksh 2,640.
h) It has been agreed with Inland Revenue (Taxation Office) that 12.5% of the rent sand rates relate to private use.
Prepare a trading and profit account for the year to 31st December 19X9, and a balance sheet as at 31 December 19X9.
QUESTION FIVE
The balance sheet of Johnson’s shop at 1 October 19X7 was as follows:
|Non current assets |Ksh |Ksh | |Ksh |Ksh |
|Shop premises |45,000 | |Capital as at 1 Oct | |51,000 |
|Shop fittings |12,000 | | | | |
|Delivery van |4,000 |61,000 | | | |
| | | | | | |
|Current assets | | |Current liabilities | | |
|Stock in trade |14,000 | |Trade creditors |12,000 | |
|Cash in hand |2,000 |16,000 |Bank overdraft |14,000 |26,000 |
| | |77,000 | | |77,000 |
The following is a summary of the transactions which took place during the year to 30 September 19X8:
1. Sales were made, all for cash, of Ksh 145,000. The stock in trade sold cost Ksh 83,000.
2. Stock in trade bought, all on credit for Ksh 78,000.
3. Cash of Ksh 113,000 was taken from the till (cash register) and paid into the bank.
4. The trade creditors were paid Ksh 73,000 by cheque.
5. Johnson borrowed Ksh 30,000 from Black, which was paid into the bank. The loan is for 5 years.
6. Wages of Kshs 17,000 were paid in cash.
7. Rates of Ksh 2,900 were paid by cheque.
8. Sundry expenses of Ksh 6,000 were paid in cash.
9. Electricity bills of Ksh. 1,600 were paid by cheque.
10. The owners of the business withdrew Ksh 9,000 in cash.
At 30 September 19X8 you discover the following:
1. Interest Ksh 2,500 due to Black for the year was unpaid.
2. Shop fittings are to be depreciated at 10% per annum on the total at the year-end; the delivery van is to be depreciated at 20% per annum of the total at the year-end.
3. The rates payment during the year included Ksh 1,000 in respect of the period 1/10/19X8 to 31/3/19X9.
4. The electricity bill for the quarter to 30/09/19X8 for Ksh 500 was unpaid.
Prepare a balance sheet as at 30 September 19X8 and a profit and loss account for the year to that date.
END OF COMPREHENSIVE ASSIGNMENT No.2
NOW SEND TO THE DISTANCE LEARNING CENTRE FOR MARKING
LESSON SEVEN
PARTNERSHIPS
A partnership is a relationship that subsists between two or more persons carrying on a business common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e.g.) lawyers, doctors, accountants etc. whose maximum membership is twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree on the terms upon which the partnership will be run and the relationship between each other. This is done in writing and signed off as agreed by all the partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
Accounting for partnerships.
The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to remain fixed. It will only change when the partners agree or incase of any changes in the partnership like admission of or retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities of the partnership (i.e.) the profits or losses and any drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital account becomes a fixed capital account. When there is no distinction between a capital account and a current account then any short- term changes are passed through the capital account therefore the capital account becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are shown in the following formats.
(Assume a firm of 3 partners A, B and C)
CAPITAL ACCOUNT
| |A |B |C | |A |B |C |
| |£ |£ |£ | |£ |£ |£ |
|Loss or revaluation |xx |xx |xx |Bal b/d |xx |xx |xx |
|Goodwill written off |xx |xx |xx |Additional capital |xx |xx |xx |
| | | | |(c/book or asset) | | | |
| | | | |Gains on revaluation |xx |xx |xx |
|Bal c/d |xx |xx |xx |Goodwill |xx |xx |xx |
| |xx |xx |xx | |xx |xx |xx |
| | | | |Bal b/d |xx |xx |xx |
| | | | | | | | |
CURRENT ACCOUNT
| |A |B |C | |A |B |C |
| |£ |£ |£ | |£ |£ |£ |
|Bal b/d | |xx | |Bal b/d |xx | |xx |
|Interest on drawings |xx |xx |xx |Interest on capital |xx |xx |xx |
|Drawings |xx |xx |xx |Salaries |xx |xx |xx |
| | | | |Share of profits |xx |xx |xx |
|Bal c/d |xx |xx |- |Loan interest |- |xx |- |
| | | | |Bal c/d | | |xx |
| |xx |xx |xx | |xx |xx |xx |
| | | |xx |Bal b/d |xx |xx |xx |
| | | | | | | | |
Format For Final Accounts:
Profit and Loss Account
The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss account, a new section called the Appropriation account is included and this account shows how the partners share the Net Profit for the period. (In addition to other expenses in the profit and loss, an expense for interest on loan given by one of the partners is included and the credit entry is made on the partner’s current account.)
The format for the Appropriation account is as follows:
£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)
£ £
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)
Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the business should be shown separately and any loan given by a partner to the firm is also shown separately in the non-correct liability section therefore, the format will be as follows.
£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx
Example 7.1
Read the following and answer the questions below.
A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:
Capital: A- £60,000; B - £48,000.
Partnership salaries: A - £9,000; B - £6,000.
Drawings: A - £12,000; B - £13,400.
The firm’s net profit for the year was £32,840.
Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.
(a) From the information above prepared the firm’s appropriation account and the partners’ current accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840
Less: Interest on capital
A 6000
B 4800 (10,800)
22,040
Less: Salaries
A 9000
B 6000 (15,000)
Balance of profit to be shared in Profit Share Ratio 7,040
A ½ 3520
B ½ 3520 (7,040)
CURRENT ACCOUNT
| |A |B | |A |B |
| |£ |£ | |£ |£ |
|Drawings |12,860 |13,400 |Interest on capital | 6,000 | 4,800 |
| | | |Salaries | 9,000 | 6,000 |
|Bal c/d | 5,660 | 920 |Profit shared. | 3,520 | 3,520 |
| |18,520 |14,320 | |18,520 |14,320 |
| | | |Bal b/d | 5,660 | 920 |
EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet extracts at the date, from the following:
i. Net profits £30,350
ii. Interest to be charged on capitals: W £2,000; P £1,500; H £900
iii. Interest to be charged on drawings; W £240; P £180; H £130
iv. Salaries to be credited: P £2,000; H £3,500.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/f W £1,860; P £946; H £717
vii. Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
viii. Drawings: W £9,200; P £7,100; H £6,900.
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)
Current Account
| |W |P |H | |W |P |H |
| |£ |£ |£ | |£ |£ |£ |
|Interest on draw | 240 | 180 | 130 |Bal b/d | 1,860 | 946 | 717 |
|Drawings | 9,200 | 7,100 |6,900 |Interest on capital | 2,000 | 1,500 | 900 |
|Bal c/d | | | |Salaries | | 2,000 | 3,500 |
| | | | |Share of profits |10,000 | 6,300 | 4,200 |
|Bal c/d | 4,920 | 3,466 |2,287 | | | | |
| |14,360 |10,746 |9,317 | |14,360 |10,746 | 9,317 |
Balance sheet (extract) as at 31 Dec 2002
£ £ £
Net Assets xx
Capital W 40,000
P 30,000
H 18,000
88,000
Current Accounts
W 4,920
Pl 3,466
H 2,287 10,673
98,673
Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and Stone, trading partnership, sharing the balance of profits and losses in the proportions 3:2 respectively.
£
Printing, stationery and postage 3,500
Sales 322,100
Stock in hand at 1 October 19X8 23,000
Purchases 208,200
Rent and rates 10,300
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running costs 5,620
Discounts allowable 950
Discount receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings: at cost 26,000
Provision for depreciation 11,200
Motor vehicles: at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current account balances
At 1 October 19X8:
Brick 3,600 credit
Stone 2,400 credit
Capital account balances
At 1 October 19X8:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1 July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%
Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include summaries of the partners’ capital and current accounts for the year ended on that date.
Note: In both (a) and (b) vertical forms of presentation should be used.
SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
Discounts allowable 950
Discounts receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings at cost 26,000
Provision for depreciation 11,200
Motor vehicles at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470
TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9
£ £ £
Sales 322,100
Less: Sales returns 2,100
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
Interest on loan (adjustment) 250 (82,320)
Net profit 44,250
Less: Salaries Stone (adjustment) (6,000)
Balance of profit to be shared 38,250
Brick [pic] 22,950
Stone [pic] 15,300 (38,250
Balance sheet as at 30 September 19X9
Non current Asset £ £ £
Fixtures and fittings 26,000 (13,800) 12,200
Motor vehicles 46,000 (34,200) 11,800
72,000 48,000 24,000
Current Asset
Stock 32,000
Debtors 9,300
Less: Provision (300) 9,000
Payments 600
Cash at bank 7,700
49,300
Current Liabilities
Creditors 8,400
Accruals 400 (8,800) 40,500
64,500
Capital
Brick (adjustment) 23,000
Stone 17,000
Current:
Brick adjustment 2,800
Stone 11,700 14,500
54,500
Non-Current Liabilities
10% loan – Brick 10,000
64,500
Current Account
| |Brick |Stone | |Brick |Stone |
| |£ |£ | |£ |£ |
|Drawings |24,000 |12,000 |Bal b/d | 3,600 | 2,400 |
| | |(adj) | | | |
| | | |Interest on loan | 250 | |
|Bal c/d | 2,800 |11,700 |Salaries. | | 6,000 |
| | | |Share profits |22,950 |15,300 |
| |26,800 |26,800 | |26,800 |23,700 |
EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance as at 30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 19X8 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,000
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040
Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance sheet as at that date.
a) Stock, 30 June 2003, £563,400
b) Expenses to be accrued: Office Expenses £960; Wages £2,000
c) Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
d) Reduce provision for bad debts to £3,200.
e) Partnership salary: £8,000 to Mack. Not yet entered
f) Interest on drawings: Mack£1,800; Spencer £1,200.
g) Interest on capital account balances at 10 per cent.
Mack and Spencer
Q 5.2 Trading and Profit Loss Account for the year ended 30 June 2003
£ £ £
Sales 1,236,500
Less cost of sales
Opening Stock 419,790
Add: Purchases 854,160
1273,950
Less: Closing Stock (563,400) 710,550
Gross Profit [pic] 525,950
Reduction in provision for bad debts (400-300) 800
526,750
Less Expenses
Depreciation: Fixtures & Fittings (110,000-33,000 x [pic])7,700
Buildings 10,000
Carriage outwards 12,880
Discount allowed 1,150
Office expenses (24160 + 960) 25,120
Loan interest 40,000
Salaries and wages (18,9170 + 2000) 191,170
Bad debts 5,030 (293050)
Net Profit for the period 233,700
Add: Interest on drawings:
Mack 1,800
Spencer 1,200 3,000
236,700
Less: Salaries – Mack (8,000)
228,700
Less: interest on capital
Mack 35,000
Spencer 29,500 (64,500)
164,200
Balance of profits
Mack ½ 82,100
Spencer ½ 82,100 164,200
Mack – Current Account
£ £
Drawings 64,000 balance b/d 13,060
Interest on drawings 1,800 salary 8,000
Interest on capital 35,000
Profit 82,100
bal c/d 72,360
138,160 138,160
Spencer – Current Account
£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580
Balance Sheet as at 30 June 19X9
£ £ £
Non Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300
Current Assets
Stock 56,3400
Debtors (16,243 – 320) 15,9230
Cash at bank 6770
72,9400
Current Liabilities
Creditors 111,500
Accruals (200 + 96) 2,960 (114,460) 61,4940
1,174,240
Capital Accounts: Mack 35,000
Spencer 29,500 64,500
Current Accounts: Mack 72,360
Spencer 56,880 129,240
Loan from J. King 400,000
1,174,240
Example 7.5
JUNE 1998 QUESTION 4
The balance sheet of the partnership of Kombo and Nzuki as at 31 March 1997 was as follows:
Capital accounts: Shs. Sh. Fixed asset sh. sh
Kombo 1,400,000 (at cost less depreciation
Nzuki 1,400,000 2,800,000 Premises 1,200,000
Equipment 520,000
Vehicles 418,000 2,138,000
Current Accounts:
Kombo 136,000
Nzuki (81,200) 54,800
Current Liabilities: Current Assets:
Creditors 501,600 Stock 894,200
Accruals 25,600 527,200 debtors 475,900
Provision (46,400) 429,500
Prepayments 28,600
Suspense account 326,300 Bank and cash 281,000 1,570,300 3,708,300 3,708,300
After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated at 20% by straight line method on an assumed residual value of Sh.20,000 had been sold at Sh.60,000 but no entries, other than in the bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad debts should have been maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary of Sh.60,000 which should have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200. No entries had been made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%
Required:
a) A statement of adjustments to show the correct net profit for the y (12 marks)
b) A suspense account showing how the balance is eliminated from the books.
(2 marks)
c) A corrected balance sheet as at 31 March 1997. (8 marks)
SOLUTION
The following journal can be included although not required in the question.
DR CR
i) DR: Suspense Account 26,400
CR: Discount Allowed Account 26,400
DR: Suspense Account 26,400
CR: Discount receive 26,400
Making the correct in the accounts
ii) DR: Suspense Account 200,000
CR: Sales Account 200,000
Sales undercast now corrected
iii) DR: Suspense Account 13,500
CR: Debtors Account 13,500
Being an overstatement of debtors
account now corrected
iv) DR: Asset Disposals Account 140,000
CR: Asset Account 140,000
DR: Provision for depreciation Account
CR: Asset Disposal Account
DR: Suspense Account 60,000
CR: Asset Disposal Account 60,000
DR: Asset Disposal Account 16,000
CR: Profit and Loss Account 16,000
v) DR: Profit and Loss Account 11,200
CR: Accrue expenses Account 11,200
vi) DR: Profit and Loss Account 31,200
CR: Debtors Account 31,200
DR: Provision for doubtful debts Account 3,280
CR: Profit and Loss Account 3,280
DR: Kombo’s Current Account 60,000
CR: Nzuki’s Current Account 60,000
DR: Kombo’s Current Account 39,200
CR: Profit and Loss Account (Purchases) 39,200
(a) Kombo and Nzuki Partnership
Statement of Corrected Net Profit for the year
Sh. Sh.
Adjustments
Discount allowed 26,400
Discount received 26,400
Sales undercasted 200,000
Profit on disposal of asset 16,000
Accrued electricity charges (11,200)
Bad debts (31,200)
Decrease in provision for bad debts 3,280
Drawings (goods) 39,200
Net adjustments to Net Profit 268,880
Partners Current Account
| |Kombo |Nzuki | |Kombo |Nzuki |
| |Shs |Shs. | |Shs. |Shs. |
|Bal b/d |- | 81,200 |Bal b/d |136,000 |- |
|Nzuki | 60,000 |- |Kombo |- | 60,000 |
|Drawings | 39,200 |- |Net profit adjustments |161,328 |107,552 |
|Bal c/d |198,128 | 86,352 | | | |
| | | | | | |
| |297,328 |167,552 | |297,328 |167,552 |
(b) Suspense Account
Shs. Shs.
Discount allowed 26,400 bal b/d 326,300
Discount received 26,400
Sales 200,000
Debtors 13,500
Motor vehicle disposal 60,000
326,300 326,300
(c) Kombo and Nzuki
Balance Sheet as at 31 March 1997
Fixed Assets Shs. Shs. Shs.
Premises 1,200,000
Equipment 520,000
Vehicles 374,000
2,094,000
Current Assets
Stocks 894,200
Debtors (431,200 – 43,120) 388,080
Prepayments 28,600
Bank and Cash 218,000
1,528,880
Current Liabilities
Creditors 501,600
Accruals (25,600 + 11,200) 36,800 (538,400) 990,480
3,084,480
Capital Accounts
Kombo 1,400,000
Nzuki 1,400,000 2,800,000
Current Accounts
Kombo 198,128
Nzuki 86,352 284,480
3,084,480
NB
This is a very good question on partnership as it combines both errors on the accounts and Partnerships. Please study it carefully and follow up the entries and adjustments.
The next example is still on past paper and combines both incomplete records and partnerships.
EXAMPLE 7.6 JUNE 1997
Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not maintain proper books of accounts. The following information has been obtained from the available records on 31 March:
1996. 1997
Sh. Sh.
Balance at bank 94,800 169,680
Stock in trade 541,200 488,640
Trade debtors 612,000 ?
Trade creditors ? 305,760
Furniture 360,000
Motor vehicles (book value) 1,920,000
Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while purchases, all on credit for the same period were Sh.2,952,480. On 31 March 1996 Kefa’s capital was Sh.200,000 less than that of Mark. The analysis of the cash book for the year ended 31 March 1997 shows the following:
Receipts:
Cash from credit sales 3,491,520
Additional capital by Kefa 240,000
Cash sales 586,800
Payments:
For purchases 3,070,080
Salaries paid 420,000
Rent paid (for 6 months to 30.9.96) 144,000
Rates paid (for 6 months to 30.6.97) 120,000
Electricity charges 60,000
Advertising 41,760
Motor vehicle expenses 119,520
Sundry expenses 33,600
Drawings - Kefa 132,480
Mark 102,000
On 31 March 1997 liabilities were as follows:
Sh.
Electricity charges 12,480
Advertisement 6,240
Sundry expenses 3,600
On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One vehicle was sold on credit for Sh.640, 000 while the other was taken over by Kefa at a valuation of sh.250, 000. the combined book value of the two vehicles was Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March 1997. No depreciation is to be provided for the vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997. (10 marks)
b) Balance sheet as at 31 March 1997. (8 marks)
c) Partner’s capital accounts (4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1
KEFA and MARK
STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets Sh. Sh.
Bank 94,800
Stock 541,200
Debtors 612,000
Furniture 360,000
Motor vehicle 1,920,000
3,528,000
Liabilities
Creditors (423,360)
Net Assets 3,104,640
Capital Kefa 1,452,320
Mark 1,652,320 3,104,640
Trading, Profit and loss account for the year ended 31 March 1997
Sh Sh.
Sales 3,849,120
Less cost of sales
Opening stock 541,200
Purchases 2,952,480
Less: Closing stock 488,640) (3,005,040)
Gross profit 844,080
Profit on disposal adjustment 230,000
1,074,080
Less Expenses
Salaries 420,000
Rent adjustment 288,000
Rates 60,000
Electricity 72,480
Advertising 48,000
Motor vehicle 119,520
Sundry expense 37,200
Depreciation – Furniture 36,000
- Motor vehicle 126,000 (1,207,200)
(133,120)
Net Loss should in PSR
Kefa (66,560)
Mark (66,560) 133,120
Balance sheet as at 31 March 1997
Non-current Assets Sh. Sh. Sh.
Furniture 360,000 (36,000) 324,000
Motor vehicle 1,260,000 (126,000) 1,134,000
1,620,000 (162,000) 1,458,000
Current Assets
Stock 488,640
Debtors – Trade Adjustment 382,800
- others vehicle 640,000
Prepayments 60,000
Bank 169,680
1,741,120
Current Liabilities
Creditors 305,760
Accruals 166,320 (472,080) 1,269,040
2,727,040
Capital - Kefa 1,243,280
Mark 1,483,760
2,727,040
Capital Account
| |Kefa |Mark | |Kefa |mark |
| |Shs. |Shs. | |Shs. |Shs. |
|Drawings | 132,480 | 102,000 |Bal b/d |1,452,320 |1,652,320 |
|Disposal | 250,000 | |Cash | 240,000 | |
|Loss shared | 66,560 | 66,560 | | | |
|Bal c/d |1,243,280 |1,483,760 | | | |
| |1,692,320 |1,652,320 | |1,692,320 |1,652,320 |
(c) GOODWILL AND REVALUATION OF ASSETS
This is defined as the advantage, whatever it may be, a person gets by continuing to be entitled to represent to the outside would that he is carrying on a business which has been carried on for sometime previously. “Judge Warey in Hull V Frases”
Goodwill is the element that arises from a business due to its reputation and therefore, enjoys benefits that a new business may not get.
(e.g.) A new business may not make profits easily during the first year of trading.
Factors that contribute to goodwill
1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the share of a partner’s effort to improve the business. The problem is normally to ascertain the value or cost of goodwill.
There are two types of goodwill:
1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates. There are various approaches to these. Goodwill maybe arrived at by taking the average profits for lets say three previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or shown in the accounts.
2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business above its net assets.
This is less subjective because it is the excess amounts paid for a business above its net assets.
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these case the net assets will be total assets less total liabilities) of another business that is still trading on and the value of the net asset is 3 M, therefore the purchased goodwill may be shown in the accounts as an intangible asset. Purchased goodwill can be treated in the following three main ways:
1) Goodwill is written off from the accounts
2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.
The practice is normally to carry it in the accounts together with the other assets (as an intangible asset) and amortize it over estimated period of time.
In a partnership, there are normally three situations where goodwill is accounted for in the accounts:
a) If there is a change in the profit sharing ratio.
b) On admission of a new partner.
c) On retirement of an old partner.
d)
Example (when there is a change in profit sharing ratio)
When there is a change in the profit sharing ratio, then goodwill is introduced in the accounts by
Dr. Goodwill account
Cr. Partner’s capital account ( the credit is based on the old
profit sharing ratio.)
The goodwill may remain in the accounts and therefore no partner entries will be made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account
Example:
A and B have been trading as partners sharing profits and losses equally. They decided to change profit sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.
Required: The partner’s capital balances assuming that:
1) Goodwill is to be retained in the accounts
2) Goodwill is to be written off form the accounts.
Solution:
1) CAPITAL ACCOUNT
| |A |B | |A |B |
| | | |Bal b/d |1,000,000 |1,500,000 |
| | | |Goodwill(OPSR) | 250,000 | 250,000 |
|Bal c/d |12,500,000 |1,750,000 | | | |
| |12,500,000 |1,750,000 | | | |
2) CAPITAL ACCOUNT
| |A |B | |A |B |
|Goodwill (NPRS) |300,000 | 200,000 |Bal b/d |1,000,000 |1,500,000 |
|Bal c/d (NPSR) |950,000 |1,550,000 |Goodwill | 250,000 | 250,000 |
| | | |(OPSR) | | |
| |12,500,000 |1,750,000 | |12,500,000 |1,750,000 |
REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based on market price.
The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.
Any revaluation gains or losses are passed through a new account (i.e) a Revaluation account and the balance on this account profit or low on revaluation is transferred to the partner’s capital accounts in the existing profit sharing ratio.
Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1. They have the following assets and liabilities at the book values and they wish to restate these values at market values and agreed values.
Assets/Liabilities Book value Market price/Agreed value Gain)
£ £ Loss
Buildings 2,000,000 2,500,000 100,000
Fixtures, Fittings & furniture 900,000 800,000 (100,000)
Motor vehicle 1,200,000 1,150,000 (50,000)
Stock 700,000 650,000 (50,000)
Debtors 450,000 400,000 (50,000)
Creditors 800,000 700,000 100,000
Required:
Prepare Revaluation account and the partner’s capital account given the partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000
REVALUATION ACCOUNT
£ £
Fixtures 100,000 buildings 500,000
Motor vehicles 50,000 Creditors 100,000
Stock 50,000
Debtors 50,000
Capital A/C A [pic] 140,000
B [pic] 140,000
C [pic] 70,000
600,000 600,000
CAPITAL ACCOUNT
| |A |B |C | |A |B |C |
|Goodwill |£ 000 |£ 000 |£ 000 | |£ 000 |£ 000 |£ 000 |
| | | | |Bal b/d |3,000 |2,500 |1,500 |
|Bal c/d |3,140 |2,640 |1,510 |Revaluation | 140 | 140 | 70 |
| |3,140 |2,640 |1,570 | |3,140 |2,640 |1,570 |
| | | | | | | | |
If there is a profit on revaluation, then the profit will be transferred to the partner’s capital account by:
Dr. Revaluation
Cr. Partner’s capital account in the profit share ratio
If there is loss then
Dr. Partner’s capital account
Cr. Revaluation in the profit share ratio
EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively.
The balance sheet for the partnership as at 30 June 19X6 is as follows;
|Fixed Assets |£ |£ |
|Premises | |90,000 |
|Plant | |37,000 |
|Vehicles | |15,000 |
|Fixtures | |2,000 |
| | |144,000 |
|Current Assets | | |
|Stock |62,379 | |
|Debtors |34,980 | |
|Cash |___760 |98,119 |
| | |£242,119 |
|Capital | | |
|Alan | |85,000 |
|Bob | |65,000 |
|Charles | |35,000 |
| | |185,000 |
|Current account | | |
|Alan |3,714 | |
|Bob |(2,509) | |
|Charles |4,678 |5,883 |
| | | |
|Loan – Charles | |28,000 |
| | | |
|Current liabilities | | |
|Creditors | |19,036 |
|Bank overdraft | |4,200 |
| | |£242,119 |
Charles decides to retire from the business on 30 June 19X6, and Don is admitted as a partner on that date. The following matters are agreed:
a) Certain assets were revalued;
Premises £120,000
Plant £35,000
Stock £54,179
b) Provision is to be made for doubtful debts in the sum of £3,000.
c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners in the new firm do not wish to maintain a goodwill account so that amount is to be written back against the new partners’ capital accounts.
d) Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of profits as Bob.
e) Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by the firm in cash except £20,000 which he is willing to leave as a loan account.
f) The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.
The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.
Required;
a) Account for the above transactions, including goodwill and retiring partners’ accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 19X6.
Solution:
Capital Accounts
| |Don |Alan |Bob |
|Plant |2,000 |Premises |30,000 |
|Stock |8,200 | | |
|Debtors |3,000 | | |
|Profits shared: | | | |
| Alan |8,400 | | |
| Bob |5,600 | | |
| Charles |2,800 | |_____ |
| |30,000 | |30,000 |
Cash book
| |£ | |£ |
|Bal b/d |760 |Charles – capital account |38,100 |
|Don - capital account |79,000 | Loan |8,000 |
|Current account |3,091 | Current account |7,478 |
| | |Alan – capital account |21,000 |
| | |Current account |9,023 |
| | |Bal c/d |****** |
Cash book
| |£ | |£ |
| | |Bal b/d |4,200 |
|Don - capital account |79,000 |Charles – capital account |38,100 |
|Current account |3,091 | Loan account |8,000 |
| | | Current account |7,478 |
| | |Alan – capital account |21,000 |
| | |Current account |9,023 |
Alan, Bob and Don Partnership
Balance Sheet as at 30 June 19X6
|Fixed Assets |Cost |Depreciation |NBV |
|Premises | | |120,000 |
|Plant | | |35,000 |
|Vehicles | | |1,100 |
|Fixtures | | |2,000 |
| | | |168,100 |
|Current Assets | | | |
|Stock | |54,179 | |
|Debtors | |31,980 | |
|Cash | |__760 | |
| | |86,919 | |
|Less Current Liabilities | | | |
|Creditors |19,036 | | |
|Bank overdraft |5,710 |(24,746) |62,173 |
| | | |230,273 |
|Capital accounts | | | |
|Alan |67,000 | | |
|Bob |67,000 | | |
|Don |67,000 | |201,000 |
| | | | |
|Current Accounts | | | |
|Alan |3,091 | | |
|Bob |3,091 | | |
|Don |3,091 | |9,273 |
| | | |210,273 |
|Non current liabilities | | | |
|Loan – Charles | | |20,000 |
| | | |230,273 |
NOTE:
i. Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios.
ii. Same case applies for any gain or loss in the revaluation of assets.
iii. Goodwill written off in the new profit sharing ratios against the capital accounts only for the new partners.
iv. When there is no enough cash to be paid to the retiring partners, his balance remains in the business as a loan.
d) Admission of a new partner.
When a new partner is admitted into the firm, this marks the end of the old partnership and the beginning of a new one.
The new partner will have to bring in the capital that is due from him as per the agreement and also pay for a share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by debiting the partner’s account(inclusive of the new one in the new Profit Sharing Ratio).
If the admission is taking place part way through the financial period, then the new partner will be entitled to the profits or losses for the remaining part of the financial period. (i.e from the point of joining the partnership).
Care should be taken when apportioning interest on capital, salaries and profits because of the changes
Example:
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,070,000
13,420,000 13,420,000
Additional information:
1. On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be shared on the ratio 2:2:1. For the purposes of this admission, the value of goodwill was agreed at Sh.3, 000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 more into the firm of which Sh.375,000 comprised his fixed capital and the balance was credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated were to be apportioned on a time basis.
4. A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April, the stock was valued at Sh.1,275,000.
6. Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500
7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expenses, which was later found to be due to the following clerical errors:
• Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account of the customer concerned;
• The purchases journal had been undercast by Sh.80,000
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners’ current accounts for the year ended 30 April 2001 (4 marks)
c) Balance sheet as at 30 April 2001 (7 marks)
(Total: 20 marks)
Solution
a) ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2001
Sh. Sh.
Sales 8,750,000
Less: cost of sales
Opening stock 1,200,000
Purchases 4,180,000
5,380,000
Less: Closing stock (1,275,000) 4,105,000 Gross Profit 4,645,000
| |1.3.2000-3.10.2000 |1.11.2000-30.4.2001 | | |
| |Sh |Sh |Sh |Sh |Sh |Sh |
|Gross profit[pic] | |1,858,000 | |2,787,000 | |4,645,000 |
|Expenses | | | | | | |
|Dep. Motor Vehicle |160,000 | |160,000 | |320,000 | |
| Furniture | 15,000 | | 15,000 | | 30,000 | |
|Salaries |483,750 | |483,750 | |967,500 | |
|Accountancy fees | 52,500 | | 52500 | |105,000 | |
|Wages |275,000 | |275,000 | |550,000 | |
|Rent, rates, electricity |137,500 | |137,500 | |275,000 | |
|General expenses |362,400 | |359,600 | |612,000 | |
|Prov. For depreciation | 30,000 |(1,506,150) | 10,000 |(1,393,350) | 40,000 |2,899,500 |
|Net Profit | | 351,850 | | 1,393,650 | |1,745,500 |
|Less: Interest on capital | | | | | | |
| Rotich | 37,500 | | 37,500 | | 75,000 | |
| Sinei | 25,000 | | 25,000 | | 50,000 | |
| Tonui | - | (62,500) | 18,750 | (81,250) | 18,750 | (143,750) |
|Balance of profit shared | | 289,350 | | 1,312,400 | |1,601,750 |
|Rotich [pic] [pic] |192,900 | | 524,960 | | 717,860 | |
|Sinei [pic] [pic] | 96,450 | | 524,960 | | 621,410 | |
|Tonui - [pic] | - | (289,350) | 262,480 |(1,312,400) | 262,480 |(1,601,750 |
| | | | | | | |
b)
Current Account
| |R |S |T | |R |S |C |
| |Sh. |Sh. |Sh. |Bal b/d |Sh. |Sh. |Sh. |
|Goodwill w/o |1,200,000 |1,200,000 | 600,000 | | 400,000 |300,000 |- |
|Capital A/C |- |- | 375,000 |Cash book | | | 1,250,000 |
|Drawings | 150,000 | 120,000 | 62,500 |Goodwill (2:1) |2,000,000 |1,000,000 | |
| | | | |Interest on | 75,000 | 50,000 | 18,750 |
| | | | |capital | | | |
| | | | |Profit share | 717,860 | 621,410 | 262,480 |
|Bal c/d |1,842,860 | 651,410 | 493,730 | | | | |
| |3,192,860 |1,971,410 |1,531,230 | |3,192,860 |1,971,410 |1,531,230 |
| | | | | | | | |
c) Rotich, Sinei and Tonui
Balance Sheet as at 30 April 2001
Non-Current Assets Sh Sh. Sh.
Leasehold premises 2,250,000 - 2,250,000
Furniture and Fittings 300,000 (130,000) 170,000
Motor vehicle 1,600,000 (620,000 980,000 4,150,000 (750,000) 3,400,000
Current Assets
Stock 1,275,000
Debtors 193,000
Less Provision (40,000) 153,000
Prepayments 50,000
Balance at bank 820,000
2,298,000
Current Liability
Creditors 1,070,000
Accruals 15,000 (1,085,000) 1,213,000
4,613,000
Capital: Rotich 750,000
Sinei 500,000
Tonui 375,000
1,625,000
Current Account: Rotich 1,842,860
Sinei 651,410
Tonui 493,730 2,988,000
4,613,000
(d) The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any introduction of goodwill and revaluation of assets
Some of the adjustments may also be made in the current accounts if adjustments are made in the capital account and the admission is partway through the financial period, then any interest to be charged on capital will be based on the adjusted capital balance.
If the adjustments are made in the current account then there will be no change on the capital balance and therefore no change on the interest charged on the capital balances.
(e) Retirement of a partner
When a partner retires (i.e.) leaves the firm and the others partners are left to continue with the business then the retirement marks the end of one partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This include:
1) Capital balance
This will be all the amounts the partner has invested in the firm. Some firms may not be able to refund the amount in full and therefore it may be transferred t o a loan account whereby interest will be paid on the balance.
2) Goodwill
Because this partner contributed to the improvement (existence) of the partnership therefore it will be fair to pay him his share of the goodwill. Goodwill is introduced to the accounts in the old profit sharing ratio ((i.e.) credited to all the partner’s capital accounts in the old profit sharing ratio), then written off from the accounts by debiting the capital accounts of the remaining partners in the new profit share ratio.
2) Credit balance on the current account
This amount due to the partner is paid directly from the cashbook or transferred to the
capital account whereby the total cash payable is to be determined.
The transfer is made by:
Dr. Current account
Cr. Capital account
4) Share of profits
If the retirement takes place during the financial period, then the retiring partner is entitled to take profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared in profit share ratio will be credited to the partner’s current account.
Therefore the profit and loss account will be split between the two periods and appointment of profits done and this will be based on the terms of the partnership in each period.
EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits and losses in the ratio 2:2:1 respectively
Given below is the balance sheet of the partnership as at 31 March 2001.
Balance sheet as at 31 March 2001
Assets Sh. Sh.
Non-current assets:
Fixed assets 465,000
Current assets:
Stock 294,000
Debtors 209,000 503,000
968,000
Capital and liabilities:
Capital accounts:
Kyamba 160,000
Onyango 140,000
Wakil 200,000
500,000
Current accounts:
Kyamba 65,300
Onyango 49,000
Wakil 53,000
167,300
667,300
Current Liabilities:
Bank overdraft 48,000
Trade creditors 252,000
300,700
968,000
Additional information:
1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value Transfer value
Sh Sh.
Fixed assets 260,000 306,000
Stocks 166,000 157,000
Debtors 172,000 165,000
Creditors 156,000 156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the net amount due for him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000 but was not to be maintained in the books of the partnership of Kyamba and Onyango.
4. After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and details of the new partnership.
• Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively.
• Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001 and the balance of the profits be shared equally after allowing for annual salaries of Sh.72, 000 to Kyamba and Sh.60, 000 to Onyango.
5. The profit of the new partnership before interest on capitals and partners’ salaries was Sh.240,000 for the year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000, debtors by Sh.90,000 and bank balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango Sh.70,000.
Required:
a) Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)
b) Capital accounts for the year ended 31 March 2002 (4 marks)
c) Current accounts for the year ended 31 March 2002. (4 marks)
d) Balance sheet of the new partnership as at 31 March 2002. (8 marks) (Total: 20 marks)
SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002
Sh Sh.
Net profit for the year 240,000
Less: Interest on capital
Kyamba 20,000
Onyango 20,000 (40,000)
200,000
Less: Salaries
Kyamba 72,000
Onyango 60,000 (132,000)
Balance of profits shared in PSR 68,000
Kyamba ½ 34,000
Onyango ½ 34,000 (68,000)
b) CAPITAL ACCOUNT
| |K |O |W | |K |O |W |
|(2) Goodwill in New PSR|100,000 |100,000 | - |Bal b/d |160,000 |140,000 |200,000 |
|(4) Fixed Assets | | |306,000 |(1)Goodwill in old PSR | 80,000 | 80,000 | 40,000 |
|Stocks | | |157,000 |Cashbook | 48,000 | 68,000 |- |
|Debtors | | |165,000 |Profit on transfer in old | 12,000 | 12,000 | 6,000 |
| | | | |PSR | | | |
| | | | |Creditors | | |156,000 |
|Bal c/d |200,000 |200,000 | |Current account (3) | | | 53,000 |
| | | | |Cash book (**) | | |173,000 |
| |300,000 |3000,000 |628,000 | |300,000 |300,000 |628,000 |
| | | | | | | | |
c) CURRENT ACCOUNT
| |K |O |W | |K |O |W |
| |Sh |Sh |Sh | |Sh |Sh |sh |
|Capital |- |- |53,000 |Bal b/d | 65,300 | 49,000 |53,000 |
|Drawings | 85,000 | 70,000 |- |Interest on capital | 20,000 | 20,000 |- |
| | | | |Salaries | 72,000 | 60,000 |- |
|Bal c/d |106,300 | 93,000 |- |Share of profits | 34,000 | 34,000 |- |
| | | | | | | | |
| |191,300 |163,000 |53,000 | |191,300 |163,000 |53,000 |
| | | | | | | | |
KYAMBA AND ONYANGO
Balance Sheet as at 31 March 2002.
Non-Current Assets Sh. Sh.
Current Assets 205,000
Stock 228,000
Debtors 127,000
Bank 135,300
490,300
Liabilities
Creditors (96,000) 394,300
599,300
Capital:
Kyamba 200,000
Onyango 200,000
400,000
Current:
Kyamba 106,300
Onyango 93,000 199,300
599,300
b) Bank
Working capital 173,000 Bal b/d 48,700
Kyamba- capital 48,000 Drawings
Onyango – capital 68,000 Kyamba 85,000
Increase 50,000 Onyango 10,000
_______ Bal c/d 135,300
339,000 339,000
Workings:
Non Current Assets:
|Bal b/f |465,000 |
|Transfer |260,000 |
|Balance |205,000 |
Stock:
|Bal b/f |294,000 |
|Transfer |(166,000) |
|Increase |100,000 |
| |228,000 |
Debtors:
|Bal b/f |209,000 |
|Transfer |(172,000) |
|Increase |90,000 |
| |127,000 |
Creditors:
|Bal b/f |252,000 |
|Transfer |156,000 |
| |96,000 |
EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been extracted from their books of account as at 31 March 19 –2 after their trading and profit and loss account has been prepared, but before any consequent adjustments have been made to the partners’ respective capital accounts.
Dr. Cr.
Capital accounts (as at 1 April 19 – 1): £ £
Upp 60,000
Downe 40,000
Cash 6,600
Creditors 29,250
Debtors 201,000
Downe: goods withdrawn 400
Drawings:
Upp (all at 31 December 19 – 1) 20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost 200,000
Accumulated depreciation 90,000
Accrued interest on Upp’s Loan account 10,000
Loan account: Upp 50,000
Net profit for the year to 31 March 19 – 2) 179,750
Salary: Downe 12,000
Stocks 3,500
Upp: private expenses paid (on 31 March 19 – 2) 500
£459,000 459,000
Additional information
1. The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the year at a rate of interest of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be revalued at their market value as at the date of retirement of the partner.
2. Upp decided to retire at 31 March 19 – 2. In accordance with the partnership agreement, the assets and liabilities were revalued as follows:
£
Car (to be retained by UPP) 10,000
Remaining fixed assets taken over by the new partnership 50,000
Stocks 5,000
Debtors 180,000
Creditors 35,000
Goodwill 40,000
Legal and other expenses connected with the partnership change 4,750
3. Following Upp’s decision to retire, Downe invited Side to join him in partnership as fro 1 April 19 – 2. Side agreed to pay £75,000 into the new partnership as at that date as his capital contribution. Profits and losses are to be shared in the proportion Downe 75% and side 25%. Goodwill is not to be retained in the books of the partnership.
4. Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan in the new partnership, the other half being paid to him in cash.
5. It may be assumed that all of the transactions relating to the changes in the respective partnerships take place on 1 April 19 – 2. The legal and other expenses connected with the partnership changes were due for payment on 30 April 19 – 2.
Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31 March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of the above transactions. and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions have
been settled.
(Detailed working should be submitted with your answer).
SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2
| |£ |£ |£ |
|Net profit b/d | | |179,750 |
| Add interest on drawings | | | |
| Upp [3/12 x (10% x 20,000)] | |500 | |
| Downe [16/12 x (10% x 15,000)] | |750 |1,250 |
| | | |181,000 |
|Less: | | | |
| Interest on capital |9,000 | | |
| Upp [15% x 60,000] |6,000 | |(15,000) |
| Downe [15% x 40,000 | | |166,000 |
|Less: Salary – Downe | | |(16,000) |
|Balance of profits shared in PSR | | |150,000 |
|Capital – Upp (1/2) | |75,000 | |
| - Downe (1/2) | |75,000 |150,000 |
| | | |_____- |
(b)
Capital Accounts
| |Upp |Downe | |Upp |Downe |
| |£ |£ | |£ |£ |
|Appropriation | | |Balances b/d |60,000 |40,000 |
|- interest on drawings |500 |750 |Loan interest |10,000 | |
|Salary | |12,000 |Appropriation | | |
|Drawings |20,000 |15,000 |-salary | |16,000 |
|Private expenses/goods |500 |400 |-interest on capital |9,000 |6,000 |
|Car |10,000 | |-residual profit |75,000 |75,000 |
|Revaluation (deficit) (W1) |20,000 |20,000 | | | |
|[see workings after (c)] | | | | | |
|Loan (balancing figure) |103,000 | | | | |
|Balance c/d |_____- |88,850 | |______ |______ |
| |154,000 |137,000 | |154,000 |137,000 |
| | | | | | |
| |Side |Downe | |Side |Downe |
| |£ |£ | |£ |£ |
|Goodwill written back (W2) |10,000 |30,000 |Balance b/d |- |88,850 |
|Balances c/d |65,000 |58,850 |Cash |75,000 |____- |
| |75,000 |88,850 | |75,000 |88,850 |
(c)
Balance Sheet as at 1 April 19-2
| |£ |£ |
|Non current assets | |50,000 |
|Current assets | | |
| Stocks |5,000 | |
| Debtors |180,000 | |
| Cash (W3) |__5,100 | |
| |190,100 | |
|Current liabilities | | |
| Creditors [35,000 + 4,750] |39,750 | |
|Working capital | |150,350 |
|Net assets employed | |200,350 |
|Financed by | | |
|Capital | | |
| Downe |58,850 | |
| Side |65,000 | |
| | |123,850 |
|Loan | | |
| Upp (W4) | |_76,500 |
| | |200,350 |
Workings
W1
Revaluation
| |£ | |£ |
|Debtors |201,000 |Creditors |29,250 |
|Fixed assets (cost) |200,000 |Provision for depreciation |90,000 |
|Stocks |3,500 |Capital – Upp (car) |10,000 |
|Legal etc expenses |4,750 |Fixed assets |50,000 |
|Creditors |35,000 |Stocks |5,000 |
| | |Debtors |180,000 |
| | |Goodwill |40,000 |
| |______ |Balance c/d (deficit) |40,000 |
| |444,250 | |444,250 |
| | | | |
|Balance b/d |40,000 |Capital | |
| | |-Downe (1/2) |20,000 |
| |_____ |-Upp (1/2) |20,000 |
| |40,000 | |40,000 |
W2
Goodwill
| |£ | |£ |
|Revaluation |40,000 |Capital | |
| | |-Downe (75%) |30,000 |
| |_____ |-Side (25%) |10,000 |
| |40,000 | |40,000 |
W3
Cash
| |£ | |£ |
|Balance b/d |6,600 |Loan | |
|Capital | |-Upp [1/2 x 153,000] |76,500 |
|-Side |75,000 |Balance c/d |5,100 |
| |81,600 | |81,600 |
|Bal b/d |5,100 | | |
W4
Loan - Upp
| |£ | |£ |
|Cash |76,500 |Balance b/d |50,000 |
|Balance c/d |76,500 |Capital | |
| | |-Upp |103,000 |
| |153,000 | |153,000 |
| | |Balance b/d |76,500 |
REINFORCEMENT QUESTIONS
QUESTION ONE
1. K. Kimeu and M. Maingi are in partnership as manufactures of Tick Toys, Kimeu being responsible for the factory and Maingi for the sales. All completed toys are transferred from the factory to sales department at agreed price. Profits are shared on the following basis:
Factory Sales Department
Kimeu 80% 40%
Maingi 20% 60%
The following trial balance has been extracted from the books at 31 March 1992:
Sh. Sh.
Freehold factory at cost 1,053,750
Factory plant, at cost 843,750
Provision for depreciation 1 April 1991 151,250
Delivery van, at cost 401,250
Provision for depreciation 1 April 1991 86,250
Stocks at 1 April 1991
Raw materials 100,700
Work-in-progress 85,000
Toys completed (30,000 at Sh.40) 1,200,000
Sales (45,500 toys) 2,775,500
Purchases of raw materials 716,250
Factory wages 375,500
Sales department wages 150,750
Expenses:
Factory 301,750
Sales Department 250,500
Provision for doubtful debts 1 April 1991 40,000
Trade debtors and creditors 450,000 150,000
Bank overdraft 176,200
Capital accounts:
Kimeu 1,400,000
Maingi 1,425,000
Drawings:
Kimeu 150,000
Maingi 125,000
6,204,200 6,204,200
Additional information:
i. 38,000 toys at Sh.45 each were manufactured and transferred to Sales Department during the year. Tys in stock at the end of the year were to be valued at Sh. 45 each. Stock of raw materials was Sh.79.50 and work-in-progress was valued at prime cost of Sh.126, 250 at 31 March 1992.
ii. Accrued expenses outstanding at 31 March 1992:
Factory Sales Department
Sh. Sh.
Expenses 52,250 27,000
Factory wages 7,000 -
iii. Provision for depreciation is to be made as follows:
- Factory plant 10% p.a. on cost
- Delivery van 20% p.a. on cost
iv. The general provision for bad debts is to be maintained at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and loss accounts for the year ended 31 March 1992 and a balance sheet as at that date. (20 marks)
QUESTION TWO
Amis, Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2. The following trial balance has been extracted from their books of accounts as at 31 March 19-8:
£ £
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis 80,000
Lodge 15,000
Pym 5,000
Carriage inwards 4,000
Carriage outwards 12,000
Cash at bank 4,900
Current accounts:
Amis 1,000
Lodge 500
Pym 400
Discount allowed 10,000
Discount received 4,530
Drawings:
Amis 25,000
Lodge 22,000
Pym 15,000
Motor vehicles: 80,000
Accumulated depreciation (at 1 April 19-7) 20,000
Office expenses 30,400
Plant and machinery:
At cost 100,000
Accumulated depreciation (at 1 April 19-7) 36,000
Provision for bad and doubtful debts
(at 1 April 19-7) 420
Purchases 225,000
Rent, rates, heat and light 8,800
Sales 404,500
Stock (at 1 April 19-7) 30,000
Trade creditors 16,500
Trade debtors 14,300
£583,300 £583,300 Additional information:
1. Stock at 31 arch 19-8 was valued at £35,000.
2. Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March 19-8.
3. The provision for bad and doubtful debts is to be maintained at a level equivalent to 5% of the total trade debtors as at 31 March 19-8.
4. An office expense of £405 was owing at 31 March 19-8, and some rent amounting to £1,5000 had been paid in advance as at that date. These items had not been included in the list of balances shown in the trial balance.
5. Interest on drawings and on the debit balance on each partner’s current account is to be charged as follows:
£
Amis 1,000
Lodge 900
Pym 720
6. According to the partnership agreement, Pym is allowed a salary of £13,000 per annum. This amount was owing to Pym for the year to 31 March 19-8, and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital account at a rate of 10% per annum. There were no movements on the respective partners’ capital accounts during the year to 31 March 19-8, and the interest had not been credited to them as at that date.
Required:
a) Prepare the Partners trading, profit and loss account for the year ended 31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8
QUESTION THREE
Amber and Beryl are in partnership sharing profits in the ratio 60:40 after charging annual salaries of £20,000 each. The regularly make up their accounts to 31 December each year.
On July 1996 they admitted Coral as a partner and agreed profits shares from that date of 40% Amber, 40% Beryl and 20% Coral. The salaries credited to Amber and Beryl ceased from 1 July 1996.
The partnership trial balance at 31 December 1996 was as follows:
| |£ |£ |
|Capital accounts as at 1.1.96: | | |
| Amber | |280,000 |
| Beryl | |210,000 |
|Capital account Coral (see note (d) below) | |140,000 |
|Current accounts as at 1.1.96 | | |
| Amber | |7,000 |
| Beryl | |6,000 |
|Drawing accounts | | |
| Amber |28,000 | |
| Beryl |24,000 | |
| Coral |15,000 | |
|Loan account Amber | |50,000 |
|Sales | |2,000,000 |
|Purchases |1,400,000 | |
|Stock 1.1.96 |180,000 | |
|Wages and salaries of staff |228,000 | |
|Sundry expenses |120,000 | |
|Provision for doubtful debts at 1.1.96 | |20,000 |
|Freehold land at cost (see not (e) below) |200,000 | |
|Buildings: cost |250,000 | |
| Aggregate depreciation 1.1.96 | |30,000 |
|Plant, equipment and vehicles: cost |240,000 | |
| Aggregate depreciation 1.1.96 | |50,000 |
|Trade debtors and creditors |420,000 |350,000 |
|Cash at bank |38,000 | |
| |3,143,000 |3,143,000 |
In preparing the partnership accounts the following further information is to be taken into account:
a) Closing stock at 31 December 1996 was £200,000
b) Debts totaling £16,000 are to be written off and the provision for doubtful debts increased by £10,000.
c) Provision is to be made for staff bonuses totaling £12,000.
d) The balance of £140,000 on coral’s capital account consists of £100,000 introduced as capital and a further sum of £40,000 paid for a 20% share of the goodwill of the partnership. The appropriate adjustments to deal with the goodwill payment are to be made in the capital accounts of the partners concerned, and no goodwill account is to remain in the records.
e) It was agreed that the freehold land should be revalued upwards on 30 June prior to the admission of Coral from £200,000 to £280,000. The revised value is to appear in the balance sheet at 31 December 1996.
f) Amber’s loan carries interest at 10% per annum and was advanced dot the partnership some years ago.
g) Provide depreciation on the straight-line basis on cost as follows:
Buildings 2%
Plant, equipment and vehicles 10%
h) Profits accrued evenly during the year.
Require:
a) Prepare a trading account, profit and loss account and appropriation account for the year ended 31 December 1996 and a balance sheet as at that date. (17 marks)
b) Prepare the partners’ capital accounts and current accounts for the year in columnar form.
(7 marks)
(Total: 24 marks)
QUESTION FOUR
Duke and Earl are in partnership operating a garage business named Aristocratic Autos.
In addition to selling petrol and oil, the garage has a workshop where car repairs and maintenance are carried out and also a small showroom form which new and second hand cars are sold.
For accounting purposes, each of these three activities is treated as a separate department.
At 30th September 1986 balances extracted from the ledgers of Aristocratic Autos comprised:
| |£ |
|Cash sales: | |
| Workshop (repair charges) |32,125 |
| Petrol and oil |32,964 |
| Showroom (car sales) |8,500 |
|Credit sales: | |
| Workshop (repair charges) |65,892 |
| Petrol and oil |41,252 |
| Showroom (car sales) |81,914 |
|Stocks (at 1 October 1985): | |
| Workshop (repair materials) |1,932 |
| Petrol and oil |3,018 |
| Showroom (cars) |20,720 |
|Credit purchases: | |
| Workshop (repair materials) |23,860 |
| Petrol and oil |41,805 |
| Showroom (cars) |52,100 |
|Fixed assets (at 1 October 1985): | |
| *Freehold buildings: | |
| Workshop |12,600 |
| Petrol and oil |14,200 |
| Showroom |38,000 |
|Plant, equipment and vehicles: | |
| Workshop |65,180 |
| Petrol and oil |22,900 |
| Showroom |17,450 |
|Provisions for depreciation (at 1 October 1985): | |
| Freehold buildings: | |
| Workshop |5,060 |
| Petrol and oil |7,100 |
| Showroom |19,390 |
|*Note ‘Freehold’ – held in perpetuity | |
|Plant, equipment and vehicles: | |
| Workshop |48,254 |
| Petrol and oil |17,077 |
| Showroom |9,451 |
|Fixed asset acquisitions during year (at cost): | |
| Plant and equipment: | |
| Workshop |26,210 |
| Petrol and oil |4,250 |
| Showroom |1,060 |
|Fixed asset disposal proceeds during the year (see note (3)): | |
| Plant and equipment: | |
| Workshop |5,200 |
|Salaries: | |
| Showroom |10,200 |
|Rates |26,738 |
|Electricity |9,453 |
|General expenses |10,692 |
|Wages: | |
| Direct: | |
| Workshop |34,050 |
| Petrol and oil |5,602 |
|Indirect: | |
| Workshop |6,810 |
| Showroom |4,160 |
|Creditors: | |
| Workshop |4,225 |
| Petrol and oil |5,602 |
| Showroom |15,250 |
|Bank/Cash: | |
| Workshop |316 |
| Petrol and oil |1,605 |
| Showroom |30,470 |
|Debtors: | |
| Workshop |1,365 |
| Petrol and oil |537 |
|Drawings: | |
| Duke |12,190 |
| Earl |9,740 |
|Current accounts (at 1 October 1985) (credit balances): | |
| Duke |9,750 |
| Earl |10,477 |
|Capital accounts: | |
| Duke |50,000 |
| Earl |40,000 |
Notes at 30 September 1986
1) Stocks at 30 September 1986:
Workshop 2,752
Petrol and oil 2,976
Showroom 25,310
2) Depreciation is calculated using the straight-line method (assuming no residual value) and is applied to the original cost of the asset at eh end of the financial year, using the following rates:
%
Freehold buildings 20
Plant, equipment and vehicles 20
The depreciation charges for the current year have not yet been posted to the accounts.
The freehold buildings are temporary structures with a five year life.
3) No entries have yet been made to transfer the cost (£19,500) and accumulated depreciation (£15,633) of the workshop plant sold during the year.
4) Accruals at 30 September 19861 £
Wages:
Direct:
Workshop 113
Petrol and oil 83
Indirect:
Workshop 214
Showroom 231
Electricity 517
General expenses 1,304
5) Prepayments at 30 September 1986
£
Rates 13,300
6) Rates and electricity are apportioned over departments on the basis of the original cost of freehold buildings at the end of the current financial year.
7) General expenses are apportioned over departments on the basis of turn over for the current year.
8) Duke and Earl are credited with interest on their respective capital account balances at the rate of 5% per annum.
Required:
Prepare, using separate columns for each department and the business as a whole;
a) A departmental trading and profit and loss account for Aristocratic Autos for the year ended 30 September 1986. (20 marks)
b) A departmental balance sheet for Aristocratic Autos as at 30 September 1986. (14 marks)
(Total: 34 marks)
QUESTION FIVE
Reg, Sam and Ted are in partnership, sharing profits and losses equally. Interest on capital and partnership salaries is not provided. The position of the business at th end of its financial year is:
Balance Sheet 30 June 19-6
| |£ |£ | |£ |£ |
|Capital accounts: | | |Buildings | |17,000 |
| Reg |9,000 | |Equipment | |3,300 |
| Sam |8,000 | |Stock | |900 |
| Ted |8,000 | |Debtors | |2,020 |
| | |25,000 |Bank | |2,840 |
|Current Accounts: | | | | | |
| Reg |140 | | | | |
| Sam |200 | | | | |
| |340 | | | | |
| Ted (debit) |100 | | | | |
| | |240 | | | |
|Creditors | |___820 | | |_____ |
| | |26,060 | | |26,060 |
Reg died suddenly on 31 October 19-6.
The partnership agreement provides that in the event of the death of a partner the sum to be paid to his estate will be the amount of his capital and current account balances at the last financial year-end adjusted by his share of profit or loss since that date together with his share of goodwill. A formula for calculation of goodwill is given, and its application produced a figure of £7,500. no goodwill account is to remain in the books after any change of the partnership constitution.
The stock value at 31 October has been calculated and all other accounts balanced off, including provisions for depreciation, accrued expenses and prepaid expenses.
This results in the following position at 31 October.
£
buildings 17,000
Equipment (including additions of £400) 3,480
Stock 1,100
Debtors 2,230
Bank balance 3,370
Creditors 980
There were no additions to, or reductions of, the capital accounts during the four months, but the following drawings have been made:
Reg £2,000
Sam £1,600
Ted £1,800
• It has also been agreed that the share of a deceased partner should be repaid in three equal installments, the first payment being made as on the day after the day of death.
• The surviving partners agree that Abe (son of Reg) should be admitted as a new partner with effect from 1 November, and it is agreed that he will bring into the business £4,000 as his capital together with a premium for his share of the goodwill (using the existing valuation). The new profit-sharing agreement is: Sam, two-fifths; Ted, tow-fifths; and Abe one-fifth.
• Show the partnership Balance Sheet as at 1 November 19-6, on the assumption that the above transactions have been completed by that date.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
COMPREHENSIVE ASSIGNMENT No.3
TO BE SUBMITTED AFTER LESSON 7
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the College.
EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS
QUESTION ONE
The Dohray Amateur Musical Society has a treasurer who is responsible for receipts and payments, which he records in cash and bankbooks. Periodically, these books are handed over to the firm of certified accountants that employs you.
One of your tasks is to prepare the final accounts of the Society. As a preliminary step, you have prepared the receipts and payments account (rounded to the nearest £1) for the year ended 31 May 1985. This is shown below, together with the explanatory notes which the treasurer has supplied to enable you to understand the nature o f some of the items.
Dohray amateur Musical Society
Receipts and Payments Account
For the year ended 31 May 1985
|Receipts |Payments |
| |Cash |Bank | |Cash |Bank |
| |£ |£ | |£ |£ £ £ £ |
| | | | | |£ |
|Opening balances b/d |31 |309 |Creditors: trade | | |
|Debtors: members | | | Fixed assets (note 4) | | |
| Joining fees (note 1) |190 |160 | Musical instruments | |522 |
| Annual subscriptions | | | Trophies | |83 |
| (Note 2) |285 |70 |Creditors: trade | | |
|Annual concert (note 3) | | | Purchase for resale | | |
| Takings |1,791 | | (Note 4) | | |
|Sales of goods (note 4) | | | Sheet music | |118 |
| Musical instruments |287 | |Annual concert (note 3) | | |
|Prize moneys (note 7) |190 | | Hall booking fees | |490 |
|Sponsorship grant | | | Printing of publicity | | |
| (Note 5) | |300 | Posters | |112 |
|Refreshment sales |113 | | Hire professional | | |
|Raffle profits |64 | | Soloists | |236 |
|PAC grants (note 6) | | | Musicians | |174 |
| Revenue | |100 | Adjudication fees | | |
| Capital | |400 |Musical Festivals (note 7) | | |
|Transfers from cash a/c | |2,910 | Entrance fees | |250 |
| | | | Hire of buses | |281 |
| | | |Honoraria (note 8) | | |
| | | | Secretary | |150 |
| | | | Treasurer | |100 |
| | | |R.M.F.C affiliation fee | | |
| | | | (Note 9) | |72 |
| | | |Rent of society’s premises | | |
| | | | (Note 10) | |510 |
| | | |Refreshment purchases |72 | |
| | | |Bank charges | |42 |
| | | |Sundry expenses |60 | |
| | | |Transfers to bank a/c |2,910 | |
| | | | | | |
| | | |Closing balances c/d |49 |723 |
| |3,091 |4,249 | |3,091 |4,249 |
Explanatory notes supplied by the treasurer
1) On joining the Society, members pay a non-returnable fee of £10 (before 1 June 1982, the fee had been £). It has been found from experience that, on average, members remain in the Society for five years. On this basis, one fifth of each joining fee is credited to Income and Expenditure account each year.
New members’ statistics are
|During the year |Number of |Joining fees in |
|Ended 31 May |new members |Suspense at 31 May 1984 |
| |No. |£ |
|1981 |20 |20 |
|1982 |24 |48 |
|1983 |32 |192 |
|1984 |27 |216 |
|1985 |35 |Nil |
| | |£476 |
2) Annual subscriptions are due on 1 June each year. It is Society’s policy to credit these to income and expenditure account on an actual receipts basis, not an accruals basis. However, if subscriptions are received in advance, the amounts are credited to income and expenditure account for the year, which they are paid.
3) The Society’s major money raising event is its annual public concert. This is given in a large hall, which the Society hires. The society also hires professional musicians and soloists and has to pay the fees of the adjudicators (judges).
4) The society buys trophies (silver bowls and shield) to present to the winners of individual musical items at the annual concert. It also buys musical instruments some of which are for use by the members and others for resale to the members. Musical scores and sheets are also bought for resale to the members.
5) A local building company has given a grant to the Society for a period of three years in return for publicity. This sponsorship grant was received in full on 1 June 1984 and is being credited to income and expenditure account in equal installments in each o the three years to 31 May 1987.
6) The performing Arts Council (PAC) has awarded the Society an annual grant towards the running costs. In addition the PAC makes capital grants. The society’s policy is to hold capital grants in suspense and to release each year’s grant to income and expenditure account over a period of five years, from the year of grants onwards. At 31 May 1984 capital grants held in suspense were analyzed as follows:
|In respect of year |Capital grants |
|Ended 31 May |Suspense |
| |£ |
|1981 |30 |
|1982 |70 |
|1983 |120 |
|1984 |120 |
| |£340 |
7) Throughout the year, the Society competes at various musical festivals. Cash prizes won by individual members are retained by the Society and credited to income and expenditure account in order to reduce the cost of attending the festivals.
8) The offices of secretary and treasurer are unpaid but the society gives each of them an ex-gratia (honorary) cash award, termed an honorarium.
9) In order to participate in the musical festivals, the Society has to be affiliated to the Regional Musical Festival Community (RMFC). The annual fee, which has remained the same for a number of years, is paid on 1 March in each year.
10) The Society pays rent for its premises. The rental, which is inclusive of rates, heating, lighting, cleaning etc. is reviewed annually on 31 March. The payment shown in the receipts and payments account represents quarterly payments in advance, as follows:
|1984 |Payment |
| |£ |
|30 June |120 |
|30 September |120 |
|31 December |120 |
| |120 |
|1985 | |
|31 March |150 |
| | £510 |
The treasurer supplied further information as follows:
1) Creditors at 31 May 1984 1985
£ £
Fixed assets
Musical instruments 79 119
Trophies 23 13
Purchases for resale
Sheet music 14 20
Musical instruments 45 39
2) Subscriptions
Payments in advance included in the
actual receipts for the year 30 40
3) Stocks at 31 May
Goods for resale
Sheet music 31 52
Musical instruments 70 94
Refreshments not brought into account on the grounds that
It is not material in amount
4) Fixed assets (at cost) at 31 May
musical instrument 1,378
Trophies 247
There were no fixed asset disposals during the year
5) Provision for depreciation at 31 May
Musical instruments 704
Trophies 96
Depreciation is calculated on the cost of these assets at the end of the financial year. The straight-line method is employed using the following assumed asset lives.
Musical instruments 5 years
Trophies 10 years
Required:
Prepare for the Dohray Amateur Musical Society
a) The Income and Expenditure account for year ended 31 May 1985, showing the surplus or deficit on each of the activities:
and
b) The Balance Sheet at that date.
Note:
WORKINGS are an integral part of the answer and must be shown.
(34 marks)
QUESTION TWO
A client of the firm of accountants by which you are employed is interested in buying a road transport business from the widow of its deceased owner.
The senior partner of the practice is investigating various aspects of the business and has delegated to you the task of discovering the amount of investment in vehicles at the end of each of the financial years ended 30 September 1980 to 1983 inclusive. The business had commenced operations on 1 October 1979.
The only information available to you is the fact that the owner calculated depreciation at a rate of 20% per annum, using the Reduction Balance method, based on the balance at 30 September each year, and copies of certain ledger accounts which are reproduced below:
Provision for depreciation of vehicles
| | |£ |1980 | |£ |
| | | |1 Oct. |Balance b/ |32,000 |
|1981 | | |1981 | | |
|30 Sept. |Balance c/d |57,600 |30 Sept. |Profit and loss |25,600 |
| | |57,600 | | |£57,600 |
| | | | | | |
| | |£ | | |£ |
|1982 | | |1 Oct. |Balance b/d |57,600 |
|30 Sept. |Disposals |10,800 |1982 | | |
| |Balance c/d |73,440 |30 Sept. |Profit and loss |26,640 |
| | | | |includes £10,000 | |
| | | | |(depreciation on 1982 | |
| | | | |acquisitions) | _____ |
| | |_____ | | | |
| | |£84,240 | | |£84,240 |
| | | | | | |
| | | | | | |
| | |£ | | |£ |
|1983 | | | | | |
|30 Sept. |Disposals |29,280 |1 Oct. |Balance b/d |73,440 |
| |Balance |79,328 |1983 | | |
| | | |30 Sept. |Profit and loss |35,168 |
| | | | |(includes £20,000 | |
| | | | |Depreciation on | |
| | | _______ | |1983 acquisitions) | ______ |
| | |£108,608 | | |£108608 |
| | | |1 Oct. |Balance b/d |79,328 |
| | | | | | |
|Disposals |
| | |£ | | |£ |
|1982 | | |1982 | | |
|30 Sept. |Vehicles (vehicles | |30 Sept. |Provision for | |
| |Originally acquired | | |Depreciation |10,800 |
| |On 1 October 1979) |30,000 | |Bank |16,000 |
| | | | |Profit and loss |3,200 |
| | | ______ | | | ______ |
| | |£30,000 | | |£30,000 |
| | | | | | |
| | | | | | |
| | |£ | | |£ |
|1983 | | |1983 | | |
|30 Sept. |Vehicles (vehicles | |300 Sept. |Provision for | |
| |Originally acquired | | |Depreciation |29,280 |
| |On 1 October 1979) |60,000 | |Bank |42,000 |
| |Profit and loss |11,280 | | | |
| | | ______ | | | ______ |
| | |£71,280 | | |£71,280 |
Required:
a) Calculate the cost of asset, vehicles, held by the business at 30 September in each of the years 1980 to 1983 inclusive (4 marks)
b) Show the detailed composition of the charge for depreciation of the vehicles to profit and loss account at 30 September 1981, 1982 and 1983. (9 marks)
All workings must be shown. (13 marks)
QUESTION THREE
The trial balance of Happy Bookkeeper Ltd, as produced by its bookkeeper includes the following items:
Sales ledger control account £110,172
Purchase ledger control account £78,266
Suspense account (debit balance) £2,315
You have been given the following information:
i. The sales ledger debit balances total £111,111 and the credit balances total £1,234.
ii. The purchase ledger credit balances total £77,777 and the debit balances total £1,111.
iii. The sales ledger includes a debit balance of £700 for business X, and the purchase ledger includes a credit balance of £800 relating to the same business X. Only the net amount will eventually be paid.
iv. Included in the credit balance on the sales ledger is a balance of £600 in the name of H. Smith. This arose because a sales invoice for £600 had earlier been posted in error from the sales daybook to the debit of the account of M. Smith in the purchase ledger.
v. An allowance of £300 against some damaged goods had been omitted from the appropriate account in the sales ledger. This allowance had been included in the control account.
vi. An invoice for £456 had been entered in the purchase daybook as £654.
vii. A cash receipt from a credit customer for £345 had been entered in the cashbook as £245.
viii. The purchase daybook had been overcast by £1,000.
ix. The bank balance of £1,200 had been included in the trial balance, in error, as an overdraft.
x. The bookkeeper had been instructed to write off £500 from customer Y’s account as a bad debt, and to reduce the provision for doubtful debts by £700. By mistake, however, he had written off £700 from customer Y’s account and increased the provision for doubtful debts by £500.
xi. The debit balance on the insurance account in the nominal ledger of £3,456 had been included in the trial balance as £3,546.
Required:
Record corrections in the control and suspense accounts. Attempt to reconcile the sales ledger control account with the sales ledger balances, and the purchase ledger control account with the purchase ledger balances. What further action do you recommend? (25 marks)
QUESTISON FOUR
Ray Dyo, Harry UII and Val Vez are in partnership, trading under the name of Radtel Services, as radio and television suppliers and repairers, sharing profits and losses in the ratio one half, one third and one sixth, respectively. Val Vez works full-time in the business with responsibility for general administration for which she receives a partnership salary of £4,000 per annum.
All partners receive interest on capital at 5% per annum and interest on any loans made to the firm, also at 5% per annum.
It also had been agreed that Val Vez should receive not less than £4,000 per annum in addition to her salary. Any deficiency between this guaranteed figurer and her actual aggregate of interest on capital, plus residual profit (or less residual loss) less interest on drawings, is to be borne by Dyo and UII in the ratio in which they share profits and losses; such deficiency can be recouped by Dyo and UII at the earliest opportunity during the next two consecutive years provided that Val Vez does not receive less than the guaranteed minimum described above. During the year ended 30 September 1983, Dyo and UII had jointly contributed a deficiency of £1,500.
Radtel Services rents two sets of premises - one, a workshop where repairs are carried out, the other, a shop from which radio and television sets are sold. The offices are situated above the shop and are accounted for as part of the shop.
The workshop and shop are regarded as separate departments and managed, respectively, by Phughes and Sokkitt who are each remunerated by a basic salary plus a commission of one ninth of their departments’ profits after charging their commission.
On 30 September 1984, the trial balance of the firm was:
| |£ |£ |
|Stocks at 1 October 1993: | | |
| Shop (radio and television sets) |19,750 | |
| Workshop (spares, components etc.) |8,470 | |
|Purchases: | | |
| Radio and television sets |155,430 | |
| Spares, components etc. |72,100 | |
|Turnover: | | |
| Sales of radio and television sets | |232,600 |
| Repair charges | |127,000 |
|Wages and salaries (employees): | | |
| Shop and offices |54,640 | |
| Workshop |18,210 | |
|Prepaid expenses (at 30 September 1984) |640 | |
|Accrued expenses (at 30 September 1984) | |3,160 |
|Provision for doubtful debts at 1 October 1983 | |920 |
|Rent and rates: | | |
| Shop and offices |7,710 | |
| Workshop |8,450 | |
|Stationery, telephones, insurance: | | |
| Shop and offices |2,980 | |
| Workshop |1,020 | |
|Heating and lighting: | | |
| Shop and offices |4,640 | |
| Workshop |3,950 | |
|Debtors |4,460 | |
|Creditors | |15,260 |
|Bank |48,540 | |
|Cash |960 | |
|Other general expenses: | | |
| Shop and offices |3,030 | |
| Workshop |2,830 | |
|Depreciation: | | |
| Shop and offices (including vehicles) |2,400 | |
| Workshop |2,580 | |
|Shop fittings (cost) |17,060 | |
|Workshop tools and equipment (cost) |55,340 | |
|Vehicles (cost) |27,210 | |
|Discount received: | | |
| Shop | |420 |
| Workshop | |390 |
|Bank loan (repayable in 1988) | |15,000 |
|Loan from Harry UII | |10,000 |
|Capital Accounts: | | |
| R. Dyo | |40,000 |
| H. UII | |40,000 |
| V. Vez | |20,000 |
|Current Accounts (after drawings have been debited): | | |
| R. Dyo |290 | |
| H. UII | |1,040 |
| V. Vez | |920 |
|Loan interest: | | |
| Bank loan |2,400 | |
| Loan from H. UII |500 | |
|Provision for depreciation: | | |
|Shop fittings | |3,190 |
|Workshop tools and equipment | |10,020 |
|Vehicles | |5,670 |
| | | |
| |£525,590 |£525,590 |
The following matters are to be taken into account:
1) Manager’s commissions.
2) Partnership salary (Vez).
3) Interest on partners’ capital accounts (these have not altered during the year).
4) Interest on partners’ drawings; Dyo £70; UII £30; Vez £20.
5) Closing stocks: shop £31,080; workshop £10,220.
6) Provision for doubtful debts at 30 September 1984, £540.
7) Residual profits/Losses.
N.B. Loan interest and the movement in the provision for bad debts are regarded as ‘shop’ items.
Required:
a) Prepared columnar departmental trading and profit and loss accounts and a partnership appropriation account for he year ended 30 September 1984 and the partnership balance sheet at that date. (21 marks)
b) Complete the posting of the partners’ current accounts for the year. (4 marks)
(25 marks)
QUESTSION FIVE
Ernie is a building contractor, doing repair work for local householders. His wife keeps some accounting records but not on a double-entry basis.
The assets and liabilities of the business at 30 June 1997 were as follows:
| |£ |
|Assets | |
| Plant and equipment: cost |12,600 |
| Depreciation to date |5,800 |
| Motor Van: cost |9,000 |
| Depreciation to date |6,500 |
| Stock of materials |14,160 |
| Debtors |9,490 |
| Rent of premises paid in advance to 30 September 1997 |750 |
| Insurance paid in advance to 31 December 1997 |700 |
| Bank balance |1,860 |
| Cash in hand |230 |
| | |
|Liabilities | |
| Creditors for supplies |3,460 |
| Telephone bill owing |210 |
| Electricity owing |180 |
His cash and bank transactions for the year from 1 July 1997 to 30 June 1998 are as follows:
Cash and Bank summary
|Receipts |Cash |Bank |Payments |Cash |Bank |
| |£ |£ | |£ |£ |
|Opening balances |230 |1,860 |Suppliers | |83,990 |
|Receipts from customers |52,640 |150,880 |Rent of premises | |3,600 |
|Loan received | |10,000 |Insurance (to 31.12.98) | |1,600 |
|Proceeds of sale of vehicles | | |Purchase of plant and equipment | |8,400 |
|Held at the beginning of year | |3,000 |Purchase of new vehicle | |12,800 |
|Cash paid into the bank | |24,040 |Telephone | |860 |
|Cash withdrawn from bank |48,260 | |Electricity | |890 |
|Closing balance | |2,100 |Wages of repair staff |68,200 | |
| | | |Miscellaneous expenses | |1,280 |
| | | |Drawings by Ernie |8,000 | |
| | | | | | |
| | | |Refund to customer | |400 |
| | | |Cash paid into bank |24,040 | |
| | | |Cash withdrawn from bank | |48,260 |
| | | |Closing balance |890 |29,800 |
| |101,130 |191,880 | |101,130 |191,880 |
The following further information is available
1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance with a full year’s charge in the year of purchase.
2) The new motor vehicle was purchased on 1 January 1998. Ernie’s depreciation policy is to charge depreciation at 25% per annum on the straight-line basis with a proportionate charge in the year of purchase but not in the year of sale.
3) The rent of the premises was increased by 20 % from 1 October 1997.
4) The loan of £10,000 was obtained from Ernie’s brother on 1 April 1998. It carries interest at 10% per annum, payable on 30 September and 31 March.
5) At 30 June 1998, Ernie owed the following amounts:
£
Suppliers 4,090
Telephone 240
Electricity 220
Miscellaneous expenses 490
6) At 30 June 1998, amounts due from customers totaled £10,860. Of this amount, Ernie considered that debts totaling £1,280 were bad and should be written off.
7) Stock of materials at 30 June was £12,170
8) Ernie agreed to pay his wife £5000 for her assistance with his office work during the year. This amount was actually paid in August 1998.
Required:
Prepare Ernie’s trading profit and loss account for the year ended 30 June 1998 and a balance sheet as at that date.
END OF COMPREHENSIVE ASSIGNMENT No.3
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
LESSON EIGHT
COMPANY ACCOUNTS
Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share capital is divided into shares. The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.
There are 2 main types of share capital
Preference share capital
This is made up of preference shares and a preference share carries the right to a final dividend, which is expressed as a percentage of their par value. E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value of the business during winding up, and all profits after the claim on all of the preference dividend have been paid. The more the no. of ordinary share held, the higher the control.
Share capital may also have the following meaning:
Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the company is allowed to issue to shareholders. A company cannot issue more shares than the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital required is less than the issued share capital.
(e.g.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p. Assuming that the issued 100,000 shares, then the called up share capital will be:
60p ( 100,000 = £60,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for payment and therefore these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 40p, therefore the uncalled capital is 40p ( 100,000 = £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.
Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have been issued, Although the firm requested the shareholders to pay 80p per share, the shareholders were able to pay 50p per share.
Required:
Determine the:
• Authorized share capital
• Issued share capital
• Called up share capital
• Uncalled up share capital
• Paid up share capital
Authorized share capital
200,000 ( £ = £200,000
Issued share capital
150,000 ( £1 = £150,000
Called up share capital
150,000 ( 80p = 120,000
Uncalled up share capital
150,000 (20 p = £30,000
Paid up share capital
150,000 ( 50p = £75,000
The principal distinctions between unlimited partnerships and limited companies are:
|Unlimited Partnerships |Limited Companies |
|No separate Legal Entity apart from its |Separate legal entity, which is not affect by |
|members |changes in its membership. A company may |
| |contract, sue or be sued in it’s own name. |
|Liability of each member for debts of the |If the company is limited by share, each |
|firm is unlimited. |shareholder is limited to the amount he has |
| |agreed to pay the company for share allotted. |
|Number of partners limited to 20 except for |A limited company must have at least 2 members.|
|professional firms. |The maximum number of shares is restricted to |
| |the company’s authorized share capital. |
|Every partner can normally take part in the |Rights to management are delegated to directors|
|management of the business. He can legally |who alone can act on behalf of and bind the |
|bind the firm by his action. |company. |
|Copy of accounts need not be filed with the |Copies of accounts must be registered with the |
|Registrar of Companies |Registrar of Companies |
|Although a written Partnership deed is |A company is required to have a memorandum and |
|desirable it is not mandatory. |articles of association which defines powers |
| |and duties of directors. |
|A partnership is subject to the partnership |A company is subject to the Companies Act the |
|Act which can be varied by mutual agreement. |provisions of which cannot be varied. |
|The partners contribute the capital by |The authorized share capital is fixed by the |
|agreement. The amount need not be fixed. |memorandum of association. It can be altered by|
| |passing ordinary resolution or by the court. |
|A share in a partnership cannot be |In public companies shares are freely |
|transferable except by the consent of all |transferable. In private companies share |
|partners. |transfer are subject to any restrictions |
| |imposed by the articles of association. |
|A partnership is not obliged to keep |A company is required to keep specialized |
|statutory books of account and an audit is |accounting records and is subject to compulsory|
|not compulsory. |audit. |
Format Of Final Account
The P & L of a company, is the same as that of a sole trader, but there are additional expenses that are unique to the company and therefore, they should be included in the P & L A/C.
(e.g.)
• Director’s fees salaries and other expenses
• Audit fees
• Amortization e.g. goodwill
• Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/C which shows the allocation of the net profit for the period. Therefore, the format will be as shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended 31.12
| |£ |£ |£ |
|Sales | | |x |
|Less Returns inwards | | |(x) |
| | | |x |
|Less Cost of Sales | | | |
|Opening Stock | |x | |
|Purchases |x | | |
|Add Carriage in |x | | |
| |x | | |
|Less purchase returns |(x) |x | |
| | |x | |
|Less Closing stock | |(x) |(x) |
|Gross Profit | | |x |
|Add incomes | | |x |
|Discount received | | |x |
|Profit on disposal (sale of Assets) | | |x |
|Income from investment (can also be shown below) | | |x |
|Other incomes e.g. interest received from bank | | |x |
| | | |x |
|Less Expenses | |x | |
|Other expenses | |x | |
|Directors salaries/fees/---- | |x | |
|Audit fees | |x | |
|Debenture Interest | |x | |
|Amortization of good will | | |(x) |
|Operating profit for the period | | |x |
|Add investment income | | |x |
|Profit before tax | | |x |
|Taxation: Corporation tax | |x | |
|Transfer to deferred tax | |x | |
|Under or over provision | |x |(x) |
|Profit after tax | | |x |
|Less: transfer to the general reserve | | |(x) |
| | | |x |
|Less: Dividends | | | |
|Preference dividend: Interim paid | |x | |
|Final proposed | |x | |
| | |x | |
|Ordinary dividend: Interim paid | |x | |
|Final proposed | |x |(x) |
|Retained profit for the year | | |x |
|Retained profit b/f | | |x |
|Retained profit c/d | | |x |
| | | | |
B Limited
Balance sheet as at 31.12………
| |£ |£ |£ |
|Non current Assets | | | |
|Land & Building |x |(x) |x |
|Plant and Machinery |x |(x) |x |
|Fixtures, Furniture & Fittings |x |(x) |x |
|Motor vehicle |x |(x) |x |
| |x |x |x |
|Intangible Assets | | | |
|Goodwill |x |(x) |x |
|Copyrights, patents |x |(x) |x |
| |x |x | |
|(Longterm) Investments (mkt value sh x) | | |x |
| | | |x |
|Current Assets | | | |
|Stock | |x | |
|Debtors |x | | |
|Less provision for bad debts |(x) |x | |
|Prepayments | |x | |
|(Short term) Investments | |x | |
|Cash at bank | |x | |
|Cash in hand | |x | |
| | |x | |
|Current liabilities | | | |
|Bank overdraft |x | | |
|Creditors |x | | |
|Accruals |x | | |
|Interest payable(debenture interest) |x | | |
|Tax payable |x | | |
|Dividends payable |x |(x) |x |
| | | |x |
|Financed by | | | |
|Authorized share capital | | |x |
|100,000 ordinary shares of £1 each | | |x |
|100,000 preference shares of £1 each | | |x |
| | | |(x) |
|Issued and Fully paid | | |x |
|80,000 ordinary shares of £1 each | | | |
|50,000 10% preference shares of £1 each | | |x |
| | | |x |
|Capital Reserves | | | |
|Share premium | |x | |
|Revaluation Reserve | |x | |
|Capital Redemption Reserve | |x |x |
|Revenue Reserves | | | |
|General Reserve | |x | |
|Profit and loss A/C | |x |x |
| | | |x |
|Deffered tax A/C | | |x |
|Non Current Liabilities | | | |
|10% debenture | |x | |
|Other Long term Loans | |x |x |
| | | |x |
Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an expenses and unpaid amount are shown as current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.
Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000, the liability is now agreed at £160,000, which the company pays and at the end of the year 2000, the company estimates that the tax liability is £140,000.
Prepare a tax A/C and show the amount to be deducted as tax for the year (ignore deferred tax).
(e.g.) Taxation Account
Cashbook 160,000 Bal b/d 150,000
Bal c/d 140,000 Appropriation 150,000
300,000 300,000
Under provision 10,000 (160 -150)
Corporation tax 140,000
DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----
Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose interim paid and final proposed.
CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of capital reserves are:
Share Premium: A share premium arises when accompany issues shares at a price that is more than the par value. The share Premium may be applied in:
• Paying un issued shares.
• Writing off preliminary expenses.
• Write off discounts on shares.
Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price (selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000 ( £1.5) 150,000
Cr Ordinary shares capital (100,000 ( £1) 100,000
Cr Sahre Premium A/C (100,000 (£0.5) 50,000
Issue of shares at a premium of £0.5
Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and buildings. When company sills it’s property to realize the gain, the amount is transferred to the Profit and Loss Account.
Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without issuing new shares. The transfer is made from either the share premium or the profit and loss account.
REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves. Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or not. A debenture may either be redeemable of irredeemable. Redeemable is repayable at or by a particular date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium, balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share premium A/C of £50,000. It issues some bonus shares to existing shareholders at a rate of 1 share for every 5shares held. This amount is to be financed by the share premium. The entries will be as follows:
Shares to be issued:
100,000 ( 1 =20,000
5
Dr share premium A/C [20,000 ( £1 ] 20,000
Cr ordinary share capital 20,000
A bonus issue of 20,000 shares
Balance sheet (extract)
Ordinary shares of £1 120,000
Capital Reserves
Share premium 30,000
Rights Issue
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights are issued the shareholders have 2 options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by the company.
Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The balance on the share premium is £60,000. Additional capital is raised by way of a right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and the relevant balance sheet extract.
Shares to be issued
100,000 ( 2 =40,000 shares
5
Dr cash book [40,000 ( £2.5 ] £100,000
Cr Ordinary share capital [40,000 ( £2 ] £80,000
Cr Share Premium [40,000 ( £0.5 ] £20,000
Balance sheet (extract)
140,000 Ordinary shares @ £2 280,000
Capital Reserves
Share premium 80,000
The following examples will illustrate the preparation of final Account for companies.
Example 8.1
Just before you launch yourself into the question that follows remember that everything you have learnt about double entry bookkeeping and the presentation of year end accounts is valid in the context of companies, subject only to the points we have added in this session.
The following is the trial balance of Transit Ltd at 31 March 19X8.
| |£ |£ |
|Issued share capital (ordinary shares of £1 each) | |42,000 |
|Leasehold properties, at cost |75,000 | |
|Motor vans, at cost (used for distribution) |2,500 | |
|Provision for depreciation on motor vans to 31 March 19X7 | |1,000 |
|Administration expenses |7,650 | |
|Distribution expenses |10,000 | |
|Stock, 31 March 19X7 |12,000 | |
|Purchases |138,750 | |
|Sales | |206,500 |
|Directors’ remuneration (administrative) |25,000 | |
|Rents receivable | |3,600 |
|Investments at cost |6,750 | |
|Investment income | |340 |
|7% Debentures | |15,000 |
|Debenture interest |1,050 | |
|Bank interest |162 | |
|Bank overdraft | |730 |
|Debtors and creditors |31,000 |24,100 |
|Interim dividend paid |1,260 | |
|Profit and loss account, 31 March 19X7 | |17,852 |
| |311,122 |311,122 |
You ascertain the following:
All the motor vans were purchased on 1 April 19X5. Depreciation has been, and is to be, provided at the rate of 20% per annum on cost from the date of purchase to the date of sale. On 31 March 19X8 one van, which had cost £900, was sold for £550, as part settlement of the price of £800 of a new van, but no entries with regard to these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.
Required:
Prepare, without taking into account the relevant statutory provisions:
• A profit and loss account for the year ended 31 March 19X8:
• A balance sheet at that date. (22 marks)
Solution:
Transit Ltd
Profit and Loss A/C for the year ended 31.3.19X8
| |£ |£ |
|Gross profit | |72,450 |
|Profit on disposal of van | |190 |
|Rent Receivable | |3,600 |
| | |76,240 |
|Less: Expenses | | |
|Depreciation on motor vans |500 | |
|Administration expenses |32,650 | |
|Distribution expenses |10,000 | |
|Debenture interest |1,050 | |
|Bank interest |162 |(44,362) |
|Trading profit for the year | |31,878 |
|Add investment income | |340 |
|Profit before tax | |32,218 |
|Taxation | |(12,700) |
|Profit after tax | |19,518 |
|Less: Dividends | | |
|Interim paid |1,260 | |
|Final proposed |4,200 |(5,460) |
|Retained profit for the year | |14,058 |
|Retained profit b/f | |17,852 |
|Retained profit c/d | |31,910 |
Transit Ltd
Balance sheet as at 31.3.19X8
| |£ |£ |£ |
|Non-Current Assets | | | |
|Leasehold properties |75,000 |- |75,000 |
|Motor vans |2,400 |(960) |1,440 |
| |77,400 |960 |76,440 |
|Investments | | |6,750 |
| | | |83,190 |
|Current Assets | | | |
|Stock | |16,700 | |
|Debtors | |31,000 | |
| | |47,700 | |
|Current liabilities | | | |
|Bank overdraft |980 | | |
|Creditors |24,100 | | |
|Tax payable |12,700 | | |
|Proposed dividends |4,200 |(41,980) |5,720 |
| | | |88,910 |
|Financed by: | | | |
|Authorized issued and fully paid | | | |
|42000 ordinary share of £1 | | |42,000 |
|Revenue Reserves | | | |
|Profit and Loss A/C c/f | | |31,910 |
| | | |73,910 |
|Non-Current liabilities | | | |
|7% Debentures | | |15,000 |
| | | |88,910 |
Workings
Sales 206,500
Less: Cost of sales
Opening stock 12,000
Purchases 138,750
150,750
Less Closing stock (16,700) (134,050)
Gross profit 72,450
Motor Vehicle – Depreciation
Disposal 540 Bal b/d 1,000
Bal c/d 960 P & L 500
1,500 1,500
Motor vehicle
Bal b/f 2,500 Disposal 900
Disposal 550
Cashbook 250 Bal c/d 2,400
3,300 3,300
Motor vehicle Disposal
Disposal 900 Motor Vehicle 550
P & L 190 Depreciation 540
1090 1090
Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5
| |£ |£ |
|Share capital authorized and issued: | | |
| | | |
|80,000 ordinary shares of £1 each | |80,000 |
|Freehold premises at cost |59,000 | |
|Motor vans | | |
|Balance 1 January 19X5 at cost |15,000 | |
|Additions less sale proceeds |650 | |
|Provisions for depreciation of motor vans to 31 December 19X4 | | |
|Stock in trade 31 December 19X4 | |6,750 |
|Balance at bank |13,930 | |
|Provision for doubtful debts 31 December 19X4 |6,615 | |
|Trade debtors and creditors | |275 |
|Directors’ remuneration |12,395 |11,380 |
|Wages and salaries |4,000 | |
|Motor and delivery expenses |13,127 | |
|Rates |3,258 | |
|Purchases |700 | |
|Sales |108,440 | |
|Legal expenses | |142,770 |
|General expenses |644 | |
|Profit and loss account: balance at 31 December 19X4 |5,846 | |
| | |2,430 |
| |243,605 |243,605 |
You are given the following information.:
i. Stock in trade, 31 December 19X5, £14,600.
ii. Rates paid in advance, 31 December 19X5, £140.
iii. Debts of £1,075 to be written off and the provision to be increased to £350.
iv. On 1 January 19X5, a motor van which had cost £680, was sold for £125.
v. Depreciation provided for this van up to 31 December 19X4 was £475.
vi. Provide for depreciation of motor vans (including additions) at 20% of cost.
vii. The balance on legal expenses account included £380 in connection with the purchase of one of the freehold properties.
viii. The directors have decided to recommend a dividend of 5%.
Required:
With particular emphasis on presentation, prepare a trading and profit and loss account for the year 19X5, and a balance sheet at 31 December 19X5, ignoring taxation. (24 marks)
Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
| |£ |£ |
|Sales | |142,770 |
|Opening stock |13,930 | |
|Purchases |108,440 | |
| |122,370 | |
|Less: Closing stock |14,600 | |
|Cost of goods sold | |107,770 |
| | |35,000 |
|Directors’ remuneration |4,000 | |
|Wages and salaries |13,127 | |
|Motor and delivery expenses |3,258 | |
|Rates (700 - 140) |560 | |
|Legal expenses (644 - 380) |264 | |
|General expenses |5,846 | |
|Bad debts |1,150 | |
|Loss on disposal |80 | |
|Depreciation |3,019 | |
|Net profit | |31,304 |
| | |3,696 |
|Proposed dividend | |4,000 |
| | |(304) |
|Retained profit brought forward | |2,430 |
|Retained profit carried forward | |2,126 |
Balance sheet at 31 December 19X5
| |£ |£ |£ |
|Non-Current Assets | | | |
|Freehold properties |59,380 |---- |59,380 |
|Motor vans |15,095 |(9,294) |5,801 |
| |74,475 |(9,294) |65,181 |
|Current Assets | | | |
|Stock | |14,600 | |
|Debtors and prepayments, less provision for doubtful debts | | | |
|Cash at bank | |11,110 | |
| | |6,615 | |
|Current liabilities | |32,325 | |
|Creditors | | | |
|Proposed dividends |11,380 | | |
| |4,000 | | |
| | |15,380 | |
| | | |16,945 |
| | | |82,126 |
|Share capital | | | |
|Ordinary shares of £1 each | | | |
|Profit and loss account | | |80,000 |
| | | |2,126 |
| | | |82,126 |
Workings
Bad debts
| £ | £ |
|Debtors 1,075 |Balance b/f 275 |
|Balance c/f 350 |Profit and loss account 1,150 |
|1,425 |1,425 |
Motor vans
| £ | £ |
|Balance b/f 15,000 |Disposals 680 |
|Additions 775 |Balance c/f 15,095 |
|15,775 |15,775 |
Provision for depreciation
| £ | £ |
|Disposals 475 |Balance b/f 6,750 |
|Balance c/f 9,294 |Profit and loss account 3,019 |
|9,769 |9,769 |
Disposals
| £ | £ |
|Motor vans 680 |Provision for depreciation 475 |
| |Proceeds 125 |
| |Loss on capital 80 |
|680 |680 |
Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local farmers.
Services offered include the collection of produce, the use of rapid freezing equipment, storage of the frozen produce and transport from frozen storage in refrigerated vehicles to any point within the country. Orders for these services are secured by the company’s sales staff.
The company’s revenue consists of charges for transport and freezing, and of storage rentals. Customers may hire storage space either on a long-term contract basis at advantageous charges (payable in advance) or on a casual basis (invoiced monthly).
A considerable amount of electricity from the public supply is used by the company in the freezing and storage operations. In the event of a sudden failure in this supply, the company is able to generate its own emergency supplies from standby generators kept for this purpose. An insurance policy has been taken out to protect the company against the claims which would arise should any of the frozen produce deteriorate as the result of power or equipment failure.
At the end of the company’s financial year ended 30 September 1982, the assistant accountant extracted the following balances from the ledgers.
|Assets Account |£ |
|Land and buildings (at cost) |390,000 |
|Plant (at cost) |271,900 |
|Vehicle (at cost) |82,600 |
|Provision for depreciation (at 1 October 1981): | |
|Land and buildings |39,600 |
|Plant |144,800 |
|Vehicles |27,050 |
|Stock of consumable stores (at 30 September 1982) |23,449 |
|Debtor – for rentals |18,204 |
|for charges |2,332 |
|Bank |30,710 |
|Cash |1,103 |
| | |
|Liability Accounts | |
|Trade Creditors |7,390 |
|7% Debentures 2004/2012 |80,000 |
|Ordinary Share Capital (see note 7) |200,000 |
|General reserve |25,000 |
|Unappropriated profit (at 1 October 1981) |108,284 |
|Share Premium |15,000 |
| | |
|Revenue Accounts | |
|Storage rentals – long term contracts |302,090 |
|Casual |85,063 |
|Freezing charges |112,810 |
|Transport charges |90,107 |
| | |
|Expense Accounts | |
|Wages, salaries and related expenses |128,004 |
|Rates |79,112 |
|Electricity |76,860 |
|Transport costs |43,271 |
|Repairs |30,319 |
|Consumable stores |29,800 |
|Postages, stationery, telephones |15,604 |
|Insurance premium |7,800 |
|Debenture interest |5,600 |
|Sundries |9,176 |
| | |
|Other Accounts | |
|Suspense (credit balance) |8,650 |
Notes at 30 September 1982:
At the beginning of the 1981-82 financial year, the company had sold refrigeration plant (which had originally cost £26,000 and on which £20,800 had been provided as depreciation to date of disposal) for £4,000. The only accounting entries relative to this disposal which have been made so far, are a debit to Bank and a credit to Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence the contents deteriorated to such an extent that they had to be disposed of by incineration. Compensation of £1,350 was paid to the farmer by Owik – Freez by cheque and debited to Suspense.
The insurance company has admitted liability under the policy but no further ledger entries have as yet been made.
During the 1981-82 financial year, the company replaced one of its refrigerated vehicles, which has originally cost £16,400 and on which £13,120 had been provided as depreciation to date of disposal. A trade-in (part exchange) allowance of £6,000 was granted in respect to this vehicle. A replacement vehicle was acquired at a list price of £27,000. The entries relating to the disposal of the old vehicle have not yet been made, except that the trade-in allowance has been debited to Vehicles and credited to Suspense. The balance of the price of the new vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis calculated on the cost of fixed assets held at the end of each financial year and assuming no residual value. Annual depreciation rates are:
%
Building 2
Plant 10
Vehicles 25
The ‘Buildings’ content of the item Land and Buildings included in asset account balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following items:
£
Storage rentals received in advance 25,631
Insurance premium prepaid 600
Wages and Salaried accrued 1,920
Rates prepaid 28,820
Electricity accrued 5,757
Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share. The directors have recommended a dividend for the year of £0.12 per share.
Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez p.l.c.for the year ended 30 September 1982 and a Balance Sheet at that date. All workings must be shown. (31 marks)
Open the Suspense account and post the entries needed to eliminate the opening credit balance.
(2 marks)
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
| |£ |£ |
|Revenue | | |
|Storage rentals – long term (302,090 – 25631) | |276,459 |
|casual | |85,063 |
|Freezing charges | |112,810 |
|Transport charges | |90,107 |
| | |564,439 |
|Less: | | |
|Expenses | | |
|Wages, Salaries etc. (128,004 + 1,920) |129,924 | |
|Rates (79,112 – 28,820) |50,292 | |
|Electricity (76,860 – 5,757) |82,617 | |
|Transport costs (43,271 + 4,131 + 9,972) |57,374 | |
|Repairs (30,319 – 9,972) |20,347 | |
|Consumable stores (29,800 – 4,131) |25,669 | |
|Postages, stationery, telephones |15,604 | |
|Insurance premiums (7,800 - 600) |7,200 | |
|1,2 *Depreciation |43,540 | |
|Debenture Interest |5,600 | |
|Sundries |9,176 | |
| | |447,343 |
| | |117,096 |
|5 Profit (less loss) on disposal of fixed assets | |1,520 |
|Net Profit For The Year | |118,616 |
|Retained profit brought forward | |108,284 |
|Distributed profit | |226,900 |
|Less: | | |
|Ordinary dividends proposed | |48,000 |
|Retained profit carried forward | |178,900 |
Workings:
| |Land |Buildings |Plant |Vehicle |Total |
|Fixed Assets: |£ |£ |£ |£ |£ |
|Balance 1 October 1981 |270,000 |120,000 |271,900 |55,600 |717,500 |
|(veh 82,600 – (6,000 + 21,000)) | | | | | |
|Acquisitions (21,000 – 6,000) | | | |27000 |27,000 |
|Disposals | | |(26,000) |(16,400) |(42,400) |
|Balance 30 September 1982 | | | | | |
| |270,000 |120,000 |245,900 |66,200 |702,100 |
|Depreciation | | | | | |
|-rate |- |2% |10 |25 | |
| |£ |£ |£ |£ |£ |
|-current year charge |- |2,400 |24,590 |16,550 |43,540 |
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a transport cost, thereby increasing that figure to £73,924.
|Provision for Depreciation: | | | | | |
|Balance 1 October 1981 |- |39,600 |144,800 |27,050 |211,450 |
|Disposals | | |(20,800) |(13,120) |(33,920) |
|Current year charge |- |2,400 |24,590 |16,550 |43,540 |
| | | | | | |
|Balance 30 September 1982 | | | | | |
| |- |42,000 |148,590 |30,480 |221,070 |
| |£ |£ |£ |£ |£ |
|Written down values at 30 September 1982 | | | | | |
| |270,000 |78,000 |97,310 |35,720 |481,030 |
|Proceeds from disposals | | |4,000 |6,000 |10,000 |
|Less: | | | | | |
|Written down values of disposals | | |5,200 |3,280 |8,480 |
|(26,000 – 20,800) | | | | | |
|(16,400 – 13,120) | | | | | |
|Profit/(Loss) on disposals | | | | | |
| | | |£(1,200) |2,720 |1,520 |
Qwik-Freez (East Anglisa) p.l.c
Balance Sheet as at 30 September 1982
Workings:
| |
|Fixed Assets |
|Land and Buildings |
|Plant |
|Vehicles |
|1,3,4 |
|Current Assets |
|Stocks |
|Debtors |
|- for rentals |
|- for charges |
|- for insured losses |
|Prepaid expenses (600 + 28,820) |
|Bank |
|Cash |
|Less: |
|Current Liabilities |
|Creditors |
|Accrued expenses (1920 + 5757) |
|Advance receipts |
|Proposed dividends |
|Working Capital |
|Net Assets employed |
|Financed by: |
|Share Capital, authorized, issued and fully paid, |
|400000 Ordinary shares of £0.50 per share |
|16 |
|Reserves |
|Share Premium |
|General Reserve |
|Profit and Loss account |
|Shareholders’ funds |
|Long-term loan |
|7% Debentures 2004/2012 |
|Cost |
|£ |
|390,000 |
|245,900 |
|66,200 |
|Depreciation |
|£ |
|42,000 |
|148,590 |
|30,480 |
|Net |
|£ |
|348,000 |
|97,310 |
|35,720 |
|702,100 |
|221,070 |
|481,030 |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|17,870 |
|498,900 |
| |
| |
| |
| |
|200,000 |
| |
| |
| |
| |
| |
| |
|218,900 |
|418,900 |
| |
| |
|80,000 |
|498,900 |
| |
| |
| |
| |
|18,204 |
|2,332 |
|1,350 |
| |
| |
| |
| |
| |
| |
| |
|7,390 |
|7,677 |
|25,631 |
|48,000 |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|23,449 |
| |
| |
| |
| |
|21,886 |
|29,420 |
|30,710 |
|1,103 |
|106,568 |
| |
| |
| |
| |
| |
| |
|88,698 |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|15,000 |
|25,000 |
|178,900 |
| |
| |
Suspense
£ £
Fixed Asset Disposals:
` Plant 4000 Balance b/d 8650
Vehicle 6000 Debtors (insured loss) 1350
10000 10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family. The following trial balance was extracted from the books of the company as at 31 March 1993:
| |Sh. |Sh. |
|Freehold property, at cost (land Sh. 75,000) |125,000 | |
|Plant, at cost |130,000 | |
|Depreciation | |62,000 |
|Motor vehicle, at cost |53,000 | |
|Depreciation – motor vehicle | |30,500 |
|Fittings and fixtures, at cost |38,600 | |
|Depreciation – fittings and fixtures | |11,790 |
|20,000 Ordinary shares of Sh. 10 each authorized, issued and fully paid | | |
|Share premium | |200,000 |
|General reserve | |50,000 |
|Interim dividend paid | |120,000 |
|Cash at bank and in hand |16,000 | |
|Accounts receivable and payable |33,570 | |
|15% Debentures |130,540 |57,430 |
|Discount received | |100,000 |
|Profit and loss account 1 April 1992 | |3,640 |
|Purchases of raw materials | |103,870 |
|Sales of finished goods |942,380 | |
|Inventories 1 April 1992: | |1,254,760 |
|Raw materials | | |
|Work in progress |33,060 | |
|Finished goods |57,660 | |
|Provision for doubtful debts |107,860 | |
|Bad debts | |6,400 |
|Rates and insurance |4,890 | |
|Wages |9,430 | |
|Factory power |108,370 | |
|Light and water |22,560 | |
|Plant maintenance |16,280 | |
|Salaries |10,970 | |
|Returns of raw material |90,000 | |
|Sales returns | |3,240 |
|Advertising |1,360 | |
|Transport expenses (Sales department) |8,580 | |
|Bank charges |24,320 | |
|General expenses |3,040 | |
| |36,160 | |
| |2,003,630 |2,003,630 |
Additional information:
• Depreciation is to be provided for the year using the reducing balance method and applying rates of 15% on plant, 25% on motor vehicle and 10% on fittings and fixtures.
• Building is to be depreciated at the rate of 4% using the straight-line method. (Assume the whole building is used for manufacturing purposes).
• Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.
• Light and water, insurance and general expenses are to be apportioned in the ratio 4:1 between factory and administrative overheads.
| |Sh. |
|Electricity and wateer accrued was |860 |
|Insurance prepaid was |270 |
|Rates prepaid were |780 |
| | |
|Inventories were valued at: | |
| | |
|Raw materials |139,630 |
|Work in progress |82,450 |
|Finished goods |124,320 |
• Debenture interest has not yet been paid.
• The directors require provision for a final dividend which will bring the dividend for the year up to Sh. 2 per share.
Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March 1983 and a Balance Sheet as at that date. (25 marks)
MWANGA AND SONS LTD
Manufacturing Account for the year ended 31 March 1993
|Raw materials: | | |
|Opening stocks | |33,060 |
|Purchases |942,380 | |
|Less Returns In. |(3,240) |939,140 |
| | |972,140 |
|Less Closing stocks | |(139,630) |
|Prime Costs | |832,570 |
|Factory Overheads: | | |
|Plant depreciation |10,200 | |
|Rates and insurance |2,000 | |
|Factory power |6,704 | |
|Light and water |22,560 | |
|Plant maintenance |13,712 | |
|General expenses |10,970 | |
| |28,928 |95,074 |
|Opening W.I.P. | |927,644 |
|Less: Closing W.I.P. |57,660 | |
|Goods manufactured |(82,450) |(24,790) |
| | |902,854 |
Trading, Profit And Loss Account For The Year Ended 31 March 1993
| |Shs |Shs |
|Sales | |1,254,760 |
|Less: Closing stocks | |(1,360) |
| | |1,253,400 |
|Opening stock |107,860 | |
|Goods manufactured |902,854 | |
| |1,010,714 | |
|Less: Closing stocks |(124,320) |886,394 |
| | |367,006 |
|Discount received | |3,640 |
| | |370,646 |
|Debenture interest |15,000 | |
|Provision for bad debts |6,654 | |
|Depreciation | | |
|- Motor vehicle |5,625 | |
|- Fittings and fixtures |2,681 | |
|Dividend | | |
|- Interim |16,000 | |
|- Fianl |24,000 |40,000 |
|Retained Profit for the year | |49,150 |
|Retained Profit brought forward | |103,870 |
|Retained Profit carried forward | |153,870 |
Balance Sheet As At 31 March 1993
| |Cost |Depreciation |Net |
|Fixed Assets |£ |£ |£ |
|Freehold property |125,000 |2,000 |123,000 |
|Plant |130,000 |72,200 |57,800 |
|Motor vehicle |53,000 |36,125 |16,875 |
|Fittings and fixtures |38,600 |14,471 |24,129 |
| |346,600 |124,796 |221,804 |
| | | | |
|Current Assets | | | |
|Stocks | | | |
|- Raw materials |139,630 | | |
|- work in progress |82,450 | | |
|- finished goods |124,320 |346,400 | |
|Debtors, less provisions | |117,486 | |
|Cash at bank and in hand | |33,570 | |
|Prepaid expenses | |1,050 | |
| | |498,506 | |
|Current Liabilities | | | |
|Creditors | |57,430 | |
|Accruals | |15,860 | |
|Dividend proposed | |24,000 | |
| | |97,290 | |
|Net current assets | | |401,216 |
| | | |623,020 |
| | | | |
|Financed by: | | | |
|Authorized, and issued share capital: | | | |
|20,000 Ordinary shares each Sh. 10 | | |200,000 |
|Reserves: | | | |
|Share Premium | |50,000 | |
|General Reserve | |120,000 | |
|Profit and Loss account | |153,000 |323,020 |
| | | |523,020 |
| | | | |
|15% debentures | | |100,000 |
| | | |623,020 |
| | | | |
Workings:
Rate And Insurance
B/d 9,430 Prepaid 270
Prepaid 780
Profit and Loss Account 1,676
Factory 6,704
9,430 9,430
Issuance Of Shares
Issue and Forfeiture of shares:
The sale of shares by 2 PLC to members of the public can be categorized as follows:
When shares are sold in exchange for lump sum cash payment and this is at per value, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
When shares are sold in exchange for lump sum cash payment and this is at a premium, the entries to be made are:
DEBIT: Cashbook
CREDIT: Share Capital
CREDIT: Share Premium
Sale of shares which are to be paid for in installments are normally dealt with as follows:
The number of installments may vary from 2 – 4. Each installment is collected through a comprehensive set of processed(called a stage). The 4 possible stages are:
Application stage
Allotment stage
1st Call stage
2nd Call stage
Application Stage
In this stage, the company invites members of the public to send in applications for share they (the public) are interested in purchasing.
The application firms must be accompanied by the 1st installment money when the public respond to the company’s offer.
When the company requests members of the public to send in application forms & application money it will make the following entries in its books:
DEBIT: Application A/C
CREDIT: Share Capital
When the public responds by sending funds, the company will then
DEBIT: Cashbook
CREDIT: Application A/C
There may be an over or under subscription. If there is an under subscription,
DEBIT: Cashbook
CREDIT: Application
If there is an over-subscription, then the excess applications may either be rejected outright and the applicants’ money refunded, or applications awarded on a pro-rata basis. (i.e. a lower number of shares allotted compared to the number applied for)
If outright rejection, the company will:
DEBIT: Application
CREDIT: Cashbook
If pro-rata issue, the company will:
DEBIT: Application
CREDIT: Allotment
This marks the end of the application stage.
Allotment Stage
In this stage, the company selects the applicants and informs them of their allotment. It also requests them to bring in a second installment. As it requests for the second installment the entries to be made are:
DEBIT: Allotment A/C.
CREDIT: Share Capital.
When the public respond by sending in the second installment money, the company, will in its books: -
DEBIT: Cashbook.
CREDIT: Allotment.
Generally only the correct amount of money is collected at this stage. Since the account has closed by this stage, the stage is deemed to be over.
1st Call Stage
Here the company requests for the third installment from the public. As the company does this, it will:
DEBIT: 1st Call A/C .
CREDIT: Share Capital.
When the public respond by bringing in the installment money, the company, will in its books:
DEBIT: Cashbook
CREDIT: 1st Call A/C.
It is possible that some of the allotees do not pay their 1st installment money on time. When this is so,
DEBIT: Cashbook – with money received
DEBIT: Calls in Arrears – with money not received
CREDIT: 1st Call A/C – with total.
This marks the end of the Call stage.
2nd Call Stage
this is very similar to the 1st Call whereby the company requests for the second (and last) call money; as it does so, it will:
DEBIT: 2nd Call A/C
CREDIT: Share Capital
When the public respond by sending in the second call money, then the company will:
DEBIT: Cashbook
CREDIT: 2nd Call A/C
It is possible that some of the allotees do not pay up their 2nd Call money. When this is so:
DEBIT: Cashbook – with money collected.
DEBIT: Calls in arrears with money not received
CREDIT: 2nd Call A/C.
THIS MARKS THE END OF THE NORMAL ISSUE OF SHARES PROCEDURES.
When a debtor for share money (calls – in –arrears) does not pay up his dues, his shares will be cancelled and any money he previously gave the company forfeited (i.e. not refunded to him). This is known as Share Forfeiture. The entries to be made when shares are forfeited are:
DEBIT: Share Capital
CREDIT: Calls in Arrears
CREDIT: Share forfeiture.
Forfeited shares may be resold as follows:
At per value
At a premium
At a discount
If resold at per:
DEBIT: Cashbook.
CREDIT: Share Capital.
If resold at a premium:
DEBIT: Cashbook
CREDIT: Share Capital.
CREDIT: Share premium
When shares are sold at a discount, a condition will have to apply. The share sale will be expressly illegal unless:
Amounts collected from previous allotee plus an amount collected from current allotee equals or is greater than the par value.
If the condition is fulfilled and shares are sold at a discount, then
DEBIT: Cashbook – with money received.
DEBIT: Share forfeited – with deficit.
CREDIT: Share Capital with par value.
Last entry in this exercise is to transfer any balance on the share forfeiture A/C to Share Premium A/C as follows:
DEBIT: Share forfeiture .
CREDIT: Share Premium.
Example 8.5 MAY 1999
QUESTION FOUR
Give a brief definition of memorandum of association and certificate of incorporation.
(5 marks)
Radhi Tea Company Limited has an authorized share capital of Sh. 10,000,000 ordinary shares of Sh.10 each. The shares were issued at par as follows:
Payable on application Sh.1.00
Payable on allotment Sh.3.00
Payable on first call Sh.4.00
Payable on second call Sh.2.00
Applications were received for 1,630,000 shares.
It was decide to refund applicants monies on 130,000 shares and to allot all the shares on the basis of two for every three applied for.
The excess application monies received from the successful applicants is not to be refunded but is to be applied to reduce the amount payable on allotment.
The calls were made and paid in full with the exception of one member of one member holding 5,000 shares who paid neither the first nor the second call and another member who did not pay the second call on 1,000 shares. After requisite action by the directors the shares were forfeited. They were later reissued at a price of Sh.8 per share.
Required:
The necessary ledger accounts to record these transactions (15 marks)
(Total: 20 marks)
Solution:
Memorandum of association explains the relationship between the company and the outside world. It shows the object of the company, the name, address, the authorized share capital, its location (its registered office) and the date of incorporation.
Articles of association state the rules under which the company will operate e.g. the number of directors, the structure, and meetings. It explains the relationship between the different directors and shareholders.
Certificate of incorporation is a document issued to the company when it is registered by the registrar of companies.
Radhi Tea Co.
Application A/C
Sh. Sh.
Cashbook 130,000 Cashbook 1,630,000
OSC 1,000,000
Allotment 500,000
1,630,000 1,630,000
Allotment A/C
Sh. Sh.
OSC 3,000,000 Application 500,000
Allotment Cashbook 2,500,000
3,000,000 3,000,000
1st Call
Sh. Sh.
OSC 4,000,000 Calls in arrears 20,000
Cashbook 3,980,000
4,000,000 4,000,000
2nd Call
Sh. Sh.
OSC 1,990,00 Calls in arrears 2,000
Cashbook 1,988,000
1,990,000 1,990,000
Share Premium
Sh. Sh.
Bal c/d 1,630,000 Share forfeiture 1,630,000
Ordinary Share Capital
Sh. Sh.
Share forfeiture A/C 50,000 Application 1,000,000
Allotment 3,000,000
1st Call 4,000,000
2nd Call 1,990,000
Bal c/d 10,000,000 Share forfeiture 60,000
10,050,000 10,050,000
Share Forfeiture A/C
Sh. Sh.
Calls in arrears 22,000 OSC 50,000
OSC 60,000 Cashbook 48,000
Share Premium 16,000
98,000 98,000
Calls in Arrears
Sh. ` Sh.
1st Call 20,000
2nd Call 2,000 Share forfeiture 22,000
22,000 22,000
FINANCIAL STATEMENT ANALYSIS
(RATIO ANALYSIS)
Financial statements include a profit and loss A/C (income statement) that tells us the performance of a company throughout the financial period. It also includes a balance sheet that shows the financial position or status of a company and lastly a cash flow statement which shows changes in cash position of the entity,
We analyse financial statements by the use of accounting ratios. There are 5 classes of ratios:
• Liquidity
• Leverage/Gearing ratios
• Activity Ratios
• Profitability
• Equity / Investor ratios.
LIQUIDITY RATIOS.
These measure the firm’s ability to meet its short term maturing obligations.
Leverage/Gearing Ratios – These measure the extent to which a firm has been financed by non-owner supplied funds.
Activity Ratios – These measure the efficiency with which the firm is using various assets to generate sales revenue or how active has the firm been.
Profitability Ratios – These measure the efficiency with which the firm uses various funds to generate profits or returns. They also measure the management’s ability to control the various expenses in the firm.
Equity Ratios/Investor Ratios – They measure the relative value of the firm and returns expected by the owners of the firm. They also try to look at the overall performance of the firm and going concern of the firm.
The following question will be used to illustrate the above classes of ratios
ABC ltd
Profit and Loss A/C for the year ended 31.12.1992
| |Sh |Sh |
|Sales | |850,000 |
|Less: Cost of Sales | | |
|Opening stock |99,500 | |
|Purchases |559,500 | |
| |659,000 | |
|Less: Closing stocks |(149,000) |(510,000) |
|Gross profit | |340,000 |
|Less expenses | | |
|Selling and distribution |30,000 | |
|Depreciation |10,000 | |
|Administration expenses |135,000 |(175,000) |
|Earnings before interest & taxes | |165,000 |
|Interest | |(15,000) |
|Earnings before tax | |150,000 |
|Tax @ 50% | |75,000 |
|Less ordinary dividend | |75,000 |
|(0.75 per share) | | |
|Retained profit for the year | |(15,000) |
| | |60,000 |
ABC
Balance Sheet as at 31 December 1992
|Non Current Assets | |Sh. |Issued share capital |Sh. |
|Land and Buildings | |250,000 |(20000 share of Sh, 10) |200000 |
|Plant & Machinery | |80,000 |Reserve |90000 |
| | |330,000 |Retained profit |60000 |
|Current Assets | | |Long term |100000 |
|Inventory | |149,000 |Current liabilities. |130000 |
|Debtors |75,000 | | | |
|Less provision |(4,000) |71,000 | | |
|Cash | |30,000 | | |
| | |580,000 | |580,000 |
Additional Note
Cash purchases amount to 14,250.
Required:
Compute the relevant ratios.
LIQUDITY RATIOS
Current Ratio = Current Assets
Current Liabilities
Current Ratio = 250,000 = 1.92 : 1
130,000
The higher the ratio then the more liquid the firm is.
Quick Ratio/Acid Test Ratio
= Current Assets - Inventories
Current Liabilities
= 250,000 – 149,000 = 101,000
130,000 130,000
= 0.78 : 1
this is a more refined ration that tries to recognize the fact that stakes may not be easily converted into cash. The higher the ratio, the better for the firm as it means an improved liquidity position.
Cash Ratio
= Cash + Marketable Securities
Current Liabilities
= 30,000 = 0.23 : 1
130,000
= 0.23 : 1
This ratio assumes that stakes may not be converted into cash easily and the debtors may not pay up their accounts on time. The higher the ratio, the better for the firm as the Liquidity position is improved.
Net Working Capital Ratio.
= Net Working Capital
Net Assets
Net Working Capital =CA –CL = 250,000-130,000=120,000
Net Working Capital = 120,000 = 0.27 : 1
450,000
= 0.27 : 1
The higher the ratio the better for the firm and therefore the improved Liquidity position.
GEARING RATIOS
These measure the financial risk of a firm (the probability that a firm will not be able to pay up its debts). The more debts a business has (non owner supplied funds) the higher the financial risk.
Debt Ratio
= Total Liabilities
Total Assets
This ratio measures the proportion of total assets financed by non owner supplied funds. The higher the ratio, the higher the financial risk .
= 230,000 = 0.4
580,000
40% is supplied by non owners
Debt Equity Ratio
= Total Liabilities
Networth (share holders funds)
= 230,000 = 0.66
350,000
40% is supplied by non-owners
This ratio measures how much has been financed by the non-owner supplied funds in relation to the amount financed by the owners i.e. for every shilling invested in the business by the owners how much has been financed by the non-owner supplied funds.
For ABC Ltd, for every 1 shilling contributed in the business by the owner, the creditor have put in 67 cents.
The higher the financial risk.
Long Term Debt Ratio
= Non Current Liabilities
Net Assets
= 100,000 = 0.2
450,000
This measures the proportion of the total net assets financed by the non-owner supplied funds.
The higher the ratio, then the higher the financial risk.
ACTIVITY RATIO
Stock Turnover
= Cost of Sales
Average Stocks
where
Average Stocks = Opening Stock + Closing Stock
2
= 510,000 = 4.1
124,250
= 4.1 times
This is the number of times stock has been converted to sales in a financial year. The higher the ratio the more active the firm is.
An alternative formula is
= Sales
Closing Stock
Debtors Turnover
= Credit Sales
Average Debtors
Where
Average Debtors = Opening debtors + Closing debtors
2
Assume the opening debtors was 89,000 and all sales are on credit
Debtor Turnover = 850,000 = 10.625
80,000
The higher the ratio, the more active the firm has been (we had debtors over 10 times to generate the sales)
Note
Average Collection Period = 360
Debtors Turnover
= 360 = 34 days
10.625
This measure the number of days it takes for debtors to pay up. The lesser the period, the better for the firm as it improves the liquidity position.
Creditors Turnover
= Credit Purchases
Average Creditors
= 545,250
130,000
= 42 times
The ratio tries to measure how many times we have creditors during a financial period. The lesser the ratio the better.
Non Current Assets Turnover (Fixed Assets Turnover)
= Sales
Average Fixed Assets
A.F.A = 340,000 + 330,000 = 670,000 = 335,000
2 2
= 850,000 = 2.54 times
335,000
The ratio measures the efficiency with which the firm is using its fixed/ Non Current Assets to generate sales.
The higher the ratio the more active the firm.
Total Assets Turnover
= Sales
Total Assets
= 850,000
580,000
= 1,046 times
Measures the efficiency with which the firm is using its total assets to generate sales.
PROFITABILITY RATIOS
Profitability in Relation to Sales
Gross Profit Margin
= Gross Profit = 165,000 = 19%
Sales 850,000
The higher the margin, the more profitable the firm is.
Net Profit Margin
= Net Profit after tax = 75,000 = 9%
Sales 850,000
The higher the margin, the more profitable the firm is.
Margin affected by:
Operating expenses for the period.
Profitability in Relation to investment
Return On Investment
= Net Profit after tax
Total Assets
= 75,000 = 13%
580,000
Shows how efficient the firm has been in using the total assets to generate returns in the business.
Return On Capital Employed
= Net Profit after tax
Net Assets
= 750,000 = 17%
450,000
How efficient the firm has been in using the net assets to generate returns in the business.
Return On Equity
= Earnings after tax
Networth
= 75,000
850,000
= 21%
Efficiency of the firm in using the owner’s capital to generate returns.
NOTE
The higher the ratio the more efficient is the firm.
EQUITY RATIOS
Earnings Per Share (Eps)
EPS = Earnings attributable to ordinary shareholders
No. of ordinary shares outstanding.
= 75,000
20,000
= 3.75
This is the return expected by an investor for every share held in the firm.
Earnings Yield
= Earnings Per Share
Market price per share
Assume that the market price for the ABC’S shares is Sh20/Share.
= 3.75 ( 100%
20
= 19%
This is the return amount expected by a shareholder for every shilling invested in the business.
Dividend Per Share
= Total Dividend (ordinary shareholders)
Ordinary shares outstanding.
= 15,000
20,000
= 0.75 cts per share
This is the amount expected by an investor for every share held in the firm.
NOTE
The higher the amounts, the better for the firm.
LIMITATIONS ON USE OF RATIOS
• It is difficult to categorise firms in the various industries due to diversification. This makes inter-company comparison difficult.
• It is difficult to compare one company with others in case of monopolist firms.
• Different, firms use different accounting policies and methods e.g. on depreciation, provisions and other estimates so this makes comparison of companies difficult.
• Ratios are compiled at a point in time and may be affected by short term changes. Therefore ratios are used for short term planning.
• Ratios are computed from historical data and therefore are not good indicators of the future.
DEFINITIONS
TREND ANALYSIS – Comparing or assessing a company’s performance over time.
CROSS SECTIONAL ANALYSIS – Comparing two or more companies in the same industry.
Example 8.6 (ACCA DEC 98)
Beta Ltd is reviewing the financial statements of two companies, Zeta Ltd and Omega Ltd. The companies trade as wholesalers, selling electrical goods to retailers on credit. Their most recent financial statements appear below.
PROFIT AND LOSS ACCOUNTS FOR THE YEAR ENDED 31 MARCH 20X8
| |Zeta Limited |Omega Limited |
| | | |
|Sales | | |
|Cost of sales | | |
|Opening stock | | |
|Purchases | | |
| | | |
|Less: closing stock | | |
| | | |
|Gross profit | | |
| | | |
|Expenses | | |
|Distribution costs | | |
|Administrative expenses | | |
|Interest paid | | |
| | | |
|Profit before tax | | |
|Taxation | | |
|Net profit for the period | | |
| |£’000 |£’000 |£’000 |£’000 |
| | |4,000 | |6,000 |
| | | | | |
| |200 | |800 | |
| |3,200 | |4,800 | |
| |3,400 | |5,600 | |
| |400 | |800 | |
| | |3,000 | |4,800 |
| | |1,000 | |1,200 |
| | | | | |
| | | | | |
| |200 | |150 | |
| |290 | |250 | |
| |10 | |400 | |
| | |500 | |800 |
| | |500 | |400 |
| | |120 | |90 |
| | |380 | |310 |
Balance Sheets As At 31 March 20x8
| |Zeta Limited |Omega Limited |
| | | |
|Fixed assets | | |
|Tangible assets | | |
|Warehouse and office buildings | | |
|Equipment and vehicles | | |
| | | |
|Current assets | | |
|Stock | | |
|Debtor – trade | | |
|- sundry | | |
|Cash at bank | | |
| | | |
|Current liabilities | | |
|Creditors – trade | | |
|- sundry | | |
|Overdraft | | |
|Taxation | | |
| | | |
| | | |
|Long-term loan (interest 10% pa) | | |
| | | |
|Share capital | | |
|Revaluation reserve | | |
|Profit and loss account | | |
| | | |
| |£’000 |£’000 |£’000 |£’000 |
| | | | | |
| | | | | |
| |1,200 | |5,000 | |
| |600 | |1,000 | |
| | |1,800 | |6,000 |
| | | | | |
| |400 | |800 | |
| |800 | |900 | |
| |150 | |80 | |
| |- | |100 | |
| |1,350 | |1,180 | |
| | | | | |
| |(800) | |(800) | |
| |(80) | |(100) | |
| |(200) | |- | |
| |(120) | |(90) | |
| | |150 | |890 |
| | |1,950 | |6,890 |
| | |- | |(4,000) |
| | |1,950 | |2,890 |
| | |1,000 | |1,600 |
| | |- | |500 |
| | |950 | |790 |
| | |1,950 | |2,890 |
Required:
a) Calculate for each company a total of eight ratios which will assist in measuring the three aspects of profitability, liquidity and management of the elements of working capital. Show all workings. (8 marks)
b) Based on the ratios you have calculated in (a), compare the two companies as regards their profitability, liquidity and working capital management. (8 marks)
c) Omega Ltd is much more highly geared than Zera Ltd. What are the implications of this for the two companies? (4 marks)
(20 marks)
Solution:
|PROFITABILITY | | |
| | | |
|Gross profit margin | | |
|Gross profit ( 100% |1000 ( 100% = 25% |1200 ( 100% = 20% |
|Sales |4000 |6000 |
| | | |
|Net profit margin | | |
|Net profit ( 100% |500 ( 100% = 12.5% |400 ( 100% = 6.7% |
|Sales |4000 |6000 |
| | | |
|Return on capital employed | | |
|Profit before interest and tax |510 = 26.2% |800 = 11.6% |
|Capital employed |1950 |6890 |
| | | |
|Return on shareholders’ capital | | |
|Profit before tax |500 = 25.6% |400 = 13.8% |
|Share capital and reserves |1950 |2890 |
| | | |
|Asset turnover | | |
|Sales |4000 = 2.1 times |6000 = 0.9 times |
|Capital employed |1950 |6890 |
| | | |
|LIQUIDITY | | |
|Current ratio | | |
|Current assets |1350 = 1.1:1 |1880 = 1.9:1 |
|Current liabilities |1200 |990 |
| | | |
|Quick ratio | | |
|Current assets – stock |950 = 0.8:1 |1080 = 1.1:1 |
|Current liabilities |1200 |990 |
| | | |
|Gearing | | |
|Long – term loans |nil = nil |4000 = 58% |
|Capital |1950 |6890 |
| | | |
|Interest cover | | |
|Profit before interest and tax |510 = 51 times |800 = 2 times |
|Interest charges |10 |400 |
| | | |
| | | |
| | | |
|WORKING CAPITAL MANAGEMENT | | |
|Debtors days |800 ( 365 = 73 days |900 ( 365 = 55 days |
|Trade debtors ( 365 days |4000 |6000 |
|Sales | | |
| | | |
|Creditor days | | |
|Trade creditors ( 365 days |800 ( 365 = 91 days |800 ( 365 = 61 days |
|Purchases |3200 |4800 |
| | | |
|Stock days | | |
|Average stock ( 365 days |300 ( 365 = 37 days |800 ( 365 = 61 days |
|Cost of sales |3000 |4800 |
| | | |
| | | |
Note. We have used average stock here. When you have the information use it.
Profitability
Zeta has a higher gross margin than Omega. This may indicate a differing pricing policy. Omega’s net margin is lower than Zeta’s. Omega’s expenses are therefore proportionally higher. It should be noted that Omega’s bottom line profit is reduced significantly by the interest charge.
Return on Omega’s capital is around half of Zeta’s. Omega has a higher fixed asset base due in part to a revaluation. It may be that a revaluation of Zeta’s assets will partially close the gap.
Liquidity
Omega has nearly twice as many current assets as current liabilities. Although both companies’ quick ratios are much closer, Zeta’s liquidity does appear to be an issue especially as there is no cash at hand. It would be wise to examine projected cashflows to see how readily Zeta’s profits will improve this situation. As Zeta has no long-term loans they may be able to borrow in order to improve liquidity.
Working capital management
Zeta is turning stock over more quickly than Omega. This is beneficial in a market which can be subject to obsolescence.
Zeta’s creditor and debtor days are a cause for concern. Debtors should be collected within 60 days if not sooner. 60 day collection would improve cash flow by over £140,000 reducing the debtors balance to £658,000(60/73 ( £800,000).
Creditors should be paid at least as quickly as Omega pays theirs. Zeta risks damaging the goodwill it has with its suppliers. Paying creditors within 60 days would have an adverse effect on cash flow of over £270,000. The creditors balance would be £527,000 (60/91 ( £800,000).
Omega is highly geared whereas Zeta has no long-term loans. Omega’s gearing means that should profits fall they may not be in a position to pay the loan interest. Zeta’s capital is entirely share capital and so a fixed return is not required.
Omega’s loan appears to be fixed rate. This means that in times of falling interest rates Omega will have higher interest costs than say, Zeta, if Zeta borrowed the same amount. The converse is true in times of rising interest rates.
REINFORCEMENT QUESTIONS
QUESTION ONE
The chief accountant of AZ Limited has extracted the following trial balance as at 31 October 1999.
| |Sh. |Sh. |
|Authorized and issued capital | |40000000 |
|Share premium | |500000 |
|8% debenture stock | |10000000 |
|Profit and loss stock | |5500000 |
|Motor vehicles at cost |16500000 | |
|Provision for depreciation on motor vehicle | |3400000 |
|Plant and machinery at cost |25800000 | |
|Provision for depreciation on plant and machinery | |6300000 |
|Land buildings at cost |30000000 | |
|Stock in hand 1 November 1998 – Finished goods |420000 | |
|– Raw materials |380000 | |
|– Work-in-progress |560000 | |
| | | |
| |Sh. |Sh. |
|Trade debtors |7360000 | |
|Office furniture and equipment at cost |890000 | |
|Provision for depreciation on office furniture and equipment | |185000 |
|Trade creditors | |1000000 |
|Purchase of raw materials |9500000 | |
|Sales of finished goods | |28550000 |
|Direct wages |1350000 | |
|Direct expenses |395000 | |
|Factory expenses |290000 | |
|Indirect materials |350000 | |
|Factory insurance |150000 | |
|Sales room expenses |485000 | |
|Administration expenses |620000 | |
|Office salaries and wages |840000 | |
|Vehicles running expenses |656000 | |
|Bad debts written-off |640000 | |
|Balance at bank – overdrawn | |1175000 |
| |96610000 |96610000 |
Notes:
Closing stock includes
– Finished goods
– Raw materials
– Work-in-progress
Accrued salaries
The directors recommended a dividend of 10% on the issued share capital and a transfer of Sh. 2000000 to a general reserve.
Debenture interest has not been paid
Depreciation is provided on straight-line method at 10% and 25% per annum on furniture and equipment, plant and machinery and motor vehicles respectively.
The overdraft interest of Sh. 725000 was communicated to the company by the bank on 5 November 1999 and therefore it has not been posted in the cash book.
Required:
Manufacturing, trading, profit and loss account for the year ended 31 October 1999.
(12 marks)
Balance sheet as at 31 October 1999. (8 marks)
(Total: 20 marks)
QUESTION TWO
The Chief Accountant of KK Ltd has extracted the following trial balance as at 31 October 1998.
| |Sh,’000’ |Sh,’000’ |
|Authorized and issued capital (shares of Sh. 20 each fully paid) | |30,000 |
|Share premium | |350 |
|10% premium | |3,500 |
|General reserve | |2,000 |
|Profit and loss account 1 November 1997 | |2,850 |
|Motor vehicles at cost |3,500 | |
|Provision for depreciation | |265 |
|Freehold property |44,500 | |
|Trade debtors |1,375 | |
|Trade creditor | |460 |
|Purchases and sales |95,650 |127,450 |
|Stock in hand 1 November 1997 |3,478 | |
|Furniture and fittings at cost |1,540 | |
|Provision for depreciation | |138 |
|Goodwill |500 | |
|Rent receivable | |385 |
|Salaries and wages |2,285 | |
|General expenses |358 | |
|Vehicles running expenses |2,470 | |
|Bad debts |124 | |
|Telephone and postage |568 | |
|Water and electricity |269 | |
|Rates and insurance |289 | |
|Cash at bank |10,492 | |
| |167,398 |167,398 |
Notes:
1. Credit sales amounting to Sh.165,000 were made on 31 October 1998 but no entries were made in the books.
2. Returns outwards amounting to Sh.128,000 were dispatched on 31 October 1998 but no entries were made in the books.
3. Closing stock was valued at Sh.4,398,000.
4. Accrued salaries and telephone bills amounted to Sh.134,000 and Sh.55,000 respectively.
5. Rent for the month of October 1998 amounting to Sh.35,000 had not been received from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and 20% on cost respectively.
7. Provision for bad and doubtful debts of 5% on trade debtors should be made.
8. Corporation tax should be provided at 35% of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a transfer of Sh.2,500,000 to the general reserve.
10. The debenture interest has not yet been paid.
Required:
1. Trading, profit and loss account for the year ended 31 October 1998. (13 marks)
2. Balance sheet as at 31 October 1998. (7 marks)
(Total: 20 marks)
QUESTION THREE ACCA PILOT PAPER
The balance sheet of Grand Limited, a wholesaler, at 31 December 1995 and 1996 were as follows:
| |31 December |
| | |
| | |
|Tangible fixed assets | |
|Cost of valuation | |
|Aggregate depreciation | |
| | |
|Current assets | |
|Stock | |
|Debtors | |
|Cash | |
| | |
|Current liabilities | |
|Trade creditors | |
|Corporation tax | |
|Proposed dividend | |
| | |
| | |
|Net current assets | |
| | |
| | |
|Loans (due for repayment 1999) | |
| | |
|Called up share capital | |
|Share premium | |
|Revaluation reserve | |
|Profit and loss account | |
| |1995 |1996 |
| |£000 |£000 |£000 |£000 |
| | | | | |
| |126,300 | |162,400 | |
| |(50,000) |76,300 |(64,000) |98,400 |
| | | | | |
| | | | | |
| |12,000 | |15,000 | |
| |10,500 | |14,000 | |
| |1,400 | |2,000 | |
| |23,900 | |31,000 | |
| | | | | |
| |6,800 | |9,400 | |
| |3,400 | |5,000 | |
| |4,000 | |6,000 | |
| |14,200 | |20,400 | |
| | | | | |
| | |9,700 | |10,600 |
| | |86,000 | |109,000 |
| | | | | |
| | |(60,000) | |(60,000) |
| | |26,000 | |49,000 |
| | | | | |
| | |6,000 | |10,000 |
| | |1,000 | |3,000 |
| | |- | |8,000 |
| | |19,000 | |28,000 |
| | |26,000 | |49,000 |
The stock at 31 December 1994 was £10,000,000.
The summarized profit and loss accounts for the company for the years ended 31 December 1995 and 1996 were:
| |Year ended 31 December |
| | |
| | |
|Sales | |
|Cost of sales | |
|Gross profit | |
|Expenses | |
|Net profit before tax | |
| |1995 |1996 |
| |£000 |£000 |
| |64,000 |108,000 |
| |40,000 |75,600 |
| |24,000 |32,400 |
| |10,000 |12,400 |
| |14,000 |20,000 |
Required:
a) Calculate the following accounting ratios for both years:
• The gross profit percentage
• The current ratio and the quick ratio (or acid test)
• Debtors’ collection period in days
• Trade creditors’ payment period in days (based on purchases figures which are to be calculated)
• Gearing ratio.
b) Show you full workings. (10 marks)
c) Explain what you can deduce from the ratios as at 31 December 1996 and from comparing them with those for 1995. (5 marks)
d) State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about. (2 marks)
e) State the extent to which you agree or disagree with the following and give brief reasons for your answers.
f) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.
g) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed. (3 marks)
(20 marks)
QUESTION FOUR
On 1 February 19X1 the directors of Alpha Ltd issued 50,000 ordinary shares of £1 each at 120p per share, payable as to 50p on application (including the premium), 40p on allotment and the balance on 1 May 19X1.
The lists were closed on 10 February 19X1, by which date applications for 70,000 shares had been received. Of the cash received, £4,000 was returned and £6,000 was applied to the amount due on allotment, the balance of which was paid on 16 February 19X1. All shareholders paid the call due on 1 May 19X1, with the exception of one allotee of 500 shares. These shares were forfeited on 29 September 19X1 and reissued as fully paid at 80p per share on November 19X1.
You are required to write up the necessary accounts, excluding those relating to cash, to record these transactions.
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
COMPREHENSIVE ASSIGNMENT No.4
TO BE SUBMITTED AFTER LESSON 8
To be carried out under examination conditions and sent to the Distance Learning Administrator for marking by the University.
EXAMINATION PAPER. TIME ALLOWED: THREE HOURS.
ANSWER ALL QUESTIONS
QUESTION ONE
Pesa Nyingi had a retail business and employed an assistant at a weekly wage of Shs.5,000.00. On 2 January 2002, this assistant did not report for work and it was found that he had left, taking with him the balance in the till. It had been Pesa Nyingi’s practise to bank each Monday morning the balance in the till resulting from the previous week’s transactions. No float was maintained. The only records kept, apart from the bank statement, were details of sales on credit and unpaid invoices for goods.
You ascertain the following balances on 1 January 2001.
Stock 688,000.00
Creditors 988,000.00
Bank 276,000.00
Debtors 344,000.00
Cash 228,000.00
Accrued expenses 100,000.00
Fixtures and Fittings 1,000,000.00
You also ascertain the following:
An analysis of the bank statement for the year ended 31 December 2001 showed the following
Receipts 180,000.00
Banking from debtors cheques 4,116,000.00
Cash 4,296,000.00
Payments 3,748,000.00
Creditors for goods 232,000.00
Rent and expenses 3,980,000.00
Before banking the amounts, Pesa Nyingi paid the assistant and took Shs. 4,000.00 for himself every week.
Expenses Paid out of the till could be assumed to average Shs. 8,000.00 per week excluding wages.
Stock at the end of the period was valued at Shs.360,000.00.
The debtors summary showed that credit sales for the period amounted to Shs. 13,960,000. An amount of Shs. 336,000.00 was still outstanding.
Creditors for goods have always been paid by cheque. Unpaid invoices on 31 December 2001 amounted to Shs. 1,120,000.00. Creditors for expenses were Shs. 800,000.00.
Although creditors were agreed at Shs. 1,120,000.00, goods had been returned against a cash receipt of Shs. 48,000.00. The receipt has not been recorded
There was a fixed margin of gross profit of 20% on selling price.
The insurance company has agreed to admit a claim for the amount of the theft.
A depreciation charge of 20% is to be charged on the value outstanding on the fixtures and fittings at the end of the year.
A cheque from one of the debtors of Shs. 10,000.00 was dishonored but this fact has not yet been reflected in the bank statement.
Assume a 50 week year
Required:
a) Prepare workings showing your calculation of the amount of the theft. (8 marks)
b) Prepare a trading, profit and loss account for the year ended 31 December 2001 and a balance sheet as at that date. 17 marks)
QUESTION TWO
Jambo Dealers Ltd maintains a Sales Ledger and a Purchases Ledger.
The monthly accounts of the company for May 2002 are being prepared and the following information is available.
| |Debit |Credit |
|Sales Ledger balances as at 1 May 2002 |1,672,000.00 |114,600.00 |
|Purchases Ledger balances as at 1 May 2002 |28,000.00 |747,000.00 |
|Sales Ledger balances as at 31 May 2002 |? |67,000.00 |
|Purchases Ledger balances as at 31 May 2002 |36,500.00 |? |
| | | |
|Credit Sales | |18,938,000.00 |
|Credit Purchases | |670,000.00 |
|Cash and cheques received Sales Ledger | |1,549,700.00 |
|Purchases Ledger | |13,000.00 |
|Cash and cheques received Sales Ledger | |47,000.00 |
|Purchases Ledger | |632,000.00 |
|Credit notes issued (for returns inwards) | |119,800.00 |
|Debit notes received (returns outwards) | |24,000.00 |
|Dishonoured cheques | |32,000.00 |
|Discounts allowed | |43,000.00 |
|Discounts received | |33,800.00 |
|Bad debts written off in December 2001 but now recovered | |14,200.00 |
It has been decided to set off a debt due from a customer, A Mutiso, of Shs. 30,000.00 against a debt due to him of Shs. 120,000 in the creditors ledger.
The company has decided to create a provision for doubtful debts of 2.5% of the total debtors on 31 May.
Required:
a) Prepare the sales ledger control account and the purchases ledger control account for May 2002 in the books of Jambo Dealers Ltd. (14 marks)
b) Produce an extract of the balance sheet as at 31 May 2002 of Jambo Dealers Ltd relating to the company’s trade debtors and trade creditors. (3 marks)
c) Briefly explain the purpose of control accounts. (3 marks)
QUESTION THREE
The following are the summarized trading, profit and loss accounts for the year ended 30 April 2000, 2001, 2002 and balance sheet as at 30 April 1999, 2000, 2001 2002 for James Mwendapole, a sole trader.
Trading, Profit and Loss Accounts for the year ended 31 May
| |2000 |2001 |2002 |
| |Sh’000’ |Sh’000’ |Sh’000’ |
|Sales |1,000.00 |1,200.00 |1,400.00 |
|Cost of sales |(600.00) |(720.00) |(980.00) |
|Gross Profit | | | |
|Expenses (including loan interest) | | | |
|Net Profit | | | |
| |400.00 |480.00 |420.00 |
| |(200.00) |(300.00) |(280.00) |
| |200.00 |180.00 |140.00 |
Balance Sheets as at 31 May
| |1999 |2000 |2001 |2002 |
| |Sh’000’ |Sh’000’ |Sh’000’ |Sh’000’ |
|Non Current Assets |380.00 |480.00 |680.00 |900.00 |
| | | | | |
|Current Assets | | | | |
|Stocks |140.00 |160.00 |200.00 |290.00 |
|Debtors |100.00 |180.00 |400.00 |520.00 |
|Balance at bank |900.00 |130.00 |390.00 |160.00 |
|Total Current Assets | | | | |
| | | | | |
|Current Liabilities | | | | |
|Creditors | | | | |
|Loan (received on 31 May 2001) | | | | |
|Total Current Liabilities | | | | |
| | | | | |
|Net Current Assets | | | | |
|Net Assets | | | | |
| | | | | |
|Capital | | | | |
|Opening Capital | | | | |
|Add Net Profit | | | | |
| |330.00 |470.00 |990.00 |970.00 |
| | | | | |
| | | | | |
| |(40.00) |(80.00) |(120.00) |(180.00) |
| |- |- |(500.00) |(500.00) |
| |(40.00) |(80.00) |(620.00) |(680.00) |
| | | | | |
| |290.00 |390.00 |370.00 |290.00 |
| |670.00 |870.00 |1,050.00 |1,190.00 |
| | | | | |
| | | | | |
| |510.00 |670.00 |870.00 |1,050.00 |
| |160.00 |200.00 |180.00 |140.00 |
| |670.00 |870.00 |1,050.00 |1,190.00 |
Additional information:
James MwendaPole, a man of modest tastes, is the beneficiary of a small income from his grandfather and therefore has taken no drawings from his retail business.
Interest of 10% per annum has been paid on the loan from 1 June 2001.
It is estimated that Shs. 120,000.00 would have been paid per year for the services rendered to the business by James MwendaPole.
All sales are on 30 days credit basis.
James MwendaPole is able to invest in a bank deposit account giving interest at the rate of 8% per year.
Required:
1. Calculate for each of the years ended 31 May 2000, 2001, 2001, the following financial ratios.
• Return on capital employed
• Quick ratio
• Stock turnover
• Net Profit Margin (8 marks)
2. Use two financial ratios (not referred in (a) above) to draw attention to two aspects to the business which would appear to give cause for concern. (6 marks)
3. Advise James MwendaPole whether, on financial grounds, he should continue trading and whether it was a sound decision to borrow the loan. (6 marks)
QUESTION FOUR
Bingwa and Shabiki are in partnership as manufacturers of high quality wheelbarrows, Bingwa being responsible for the factory and Shabiki being responsible for sales. Completed wheelbarrows are transferred from the factory to the warehouse at agreed prises. Bingwa and Shabiki are credited with one third of the manufacturing profit and 10% of the trading gross profit respectively and the balance of the firm’s profit being shared equally. All wheelbarrows are sold at Sh. 680.00 each. No interest is credited or charged on capital accounts or drawings.
The following trial balance was extracted on 31 March 2002.
| |Sh. |Sh. |
|Capital Accounts | | |
|Bingwa | |482,000.00 |
|Shabiki | |507,000.00 |
|Drawings | | |
|Bingwa |96,000.00 | |
|Shabiki |87,400.00 | |
|Freehold factory (including land Sh. 300,000.00) |708,800.00 | |
|Factory Plant at cost |326,400.00 | |
|Delivery Van at cost |82,000.00 | |
|Provision for depreciation | | |
|Freehold Factory | |307,040.00 |
|Factory Plant | |110,160.00 |
|Delivery Van | |38,400.00 |
|Stocks on 1 February 2001 | | |
|Raw materials |42,000.00 | |
|Work in progress |40,200.00 | |
|Wheelbarrows (1220 at Shs. 440) |536,800.00 | |
|Sales | |1,237,600.00 |
|Return inwards |13,600.00 | |
|Purchases of raw materials |291,600.00 | |
|PAYE | |8,800.00 |
|Factory wages |165,400.00 | |
|Office wages |48,000.00 | |
|Expenses Factory |126,800.00 | |
|Office |143,400.00 | |
|Provision for unrealized stock (in warehouse) | |48,800.00 |
|Provision for doubtful debts | |19,200.00 |
|Debtors and creditors |217,600.00 |109,200.00 |
|Bank | |57,200.00 |
| | | |
| |2,926,000.00 |2,926,000.00 |
| | | |
Additional information:
a) 1540 wheelbarrows at Sh. 480 each were transferred to the warehouse during the year.
b) Wheelbarrows in stock being balance of the current year’s production, were valued at agreed price of Sh. 480 each.
c) The stock of raw materials was Sh. 34,000.00 and work in progress is valued at Sh. 53,600.00
d) Accrued expenses on 31 March 2002 amounted to 62,400 (including office(Sh. 32,800.00) and prepaid rates Sh,3,200.00 (including office Shs. 1,200.00 )).
e) Provision for depreciation is to be made as follows:
Factory buildings 2% p.a.
Factory Plant 10% p.a.
Motor vehicles 25% p.a.
The general provision for doubtful debts is to maintain at 10% of the trade debtors.
Required:
Manufacturing, trading and profit and Loss Accounts for the year ended 31 March 2002 and a balance sheet as at that date. (20 marks)
QUESTION FIVE
State and explain the qualities of useful financial information. (10 marks)
To what extent do International Accounting Standards help achieve these qualities. (5 marks)
(25 marks)
END OF COMPREHENSIVE ASSIGNMENT No.4
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
LESSON NINE
REVISION AID
INDEX
KASNEB SYLLABUS
MODEL ANSWERS TO REINFORCING QUESTIONS
LESSON 1
LESSON 2
LESSON 3
LESSON 4
LESSON 5
LESSON 6
LESSON 7
LESSON 8
MOCK EXAMINATION
SOLUTIONS TO REINFORCEMENT QUESTIONS
Question 1
Check the balances on your ledger accounts with the trial balance as shown below:
| |DR |CR |
| |£ |£ |
|Cash at bank | 1,703 | |
|Cash in hand | 12 | |
|Drawings | 560 | |
|Postage and stationery | 129 | |
|Traveling expenses | 104 | |
|Cleaning expenses | 260 | |
|Sundry expenses | 19 | |
|Telephone | 214 | |
|Electricity | 190 | |
|Motor vas | 2,000 | |
|Rates | 320 | |
|Fixtures ad fittings | 806 | |
|Capital | | 2,308 |
|Purchases |3,163 | |
|Discounts received | | 419 |
|Credit sales | | 830 |
|Cash sales | | 4,764 |
|Discount allowed | 81 | |
|Provision for depreciation: | | |
|Motor van | |700 |
|Fixtures ad fittings | |250 |
|Stock at 1 January 20X1 | 366 | |
|Loan - Frey | | 250 |
|Debtors – Brown | 12 | |
| Blue | 150 | |
| Stripe | 48 | |
|Creditors – Live | | 602 |
| Negative |_____ | 64 |
| |10,207 |10,207 |
Workings
|Cash at bank |£ |
|Opening balances |672 |
|Bankings of cash (908 + 940 + 766 + 1,031) |3,643 |
|Capital introduced |500 |
|Received from customers | |
|(160 + 66 + 22 + 10 + 40 + 120 + 140 + 150 + 20 + 44 + 38 + 20) x 90% |729 |
| |5,546 |
|Less cheque payments (telephone, electricity, rates and van) | |
|Payments to suppliers | |
|(143 + 468 + 570 + 390 + 80 + 87 + 103 + 73 + 692 + 187) |(2,374) |
| |1,703 |
Cash at Bank
| | £ | |£ |
|Bal b/d |5 |Bank |3,645 |
|Sales (bal) |4,764 |Drawings |560 |
| | |Stationery |73 |
| | |Travel |40 |
| | |Petrol ad van |104 |
| | |Sundry |19 |
| | |Postage |56 |
| | |Cleaner |260 |
| | |Bal c/d |_12 |
| |4,769 | |4,769 |
Question 2
Mary Carter
Balance Sheet as at 31.12.2001
|Non current assets |£ |£ |£ |
|Freehold premises | | |25,000 |
|Plant | | |12,000 |
| | | |37,000 |
|Current assets | | | |
|Stock | |8,000 | |
|Debtors | |7,000 | |
|Cash at Bank | |1,000 | |
|Cash in hand | |6,000 | |
| | |22,000 | |
|Current liabilities | | | |
|Creditors | |(10,000) |12,000 |
| | | |49,000 |
| | | | |
|Capital [34,000 + 5,000 – 10,000] | | |29,000 |
| | | | |
|Non current liabilities | | | |
|Loan from bank | | |20,000 |
| | | |49,000 |
Workings
Stock: 11,000 + 34,000 – 37,000 = 8,000
Debtors: 10,000 + 51,000 – 54,000 = 7,000
Cash at bank: 5,000 – 16,000 – 2,000 – 1,000 – 36,000 + 54,000 – 3,000 = 1,000
Cash hand: 3,000 – 10,000 + 9,000 + 16,000 – 10,000 – 2,000 = 6,000
Capital
|Bal b/f |34,000 |
|Add profit |_5,000 |
| |39,000 |
|Less drawings |(10,000) |
| |29,000 |
| | |
|Profit: | |
|Sales |60,000 |
|Cost of sales |(37,000) |
|Electricity |(2,000) |
|Rates |(1,000) |
|Wages |(10,000) |
|Sundry expenses |(2,000) |
|Bank interest |(3,000) |
|Net profit |5,000 |
Creditors
= 12,000 + 34,000 – 36,000 = 10,000
Question 3
Apparent from the text
Profit is determined by redrafting the second section of the balance sheet.
Remember that net assets will be the same as capital.
|Capital b/f + additional |25,000 |
|Add net profit |6,000 |
|(missing figure) |31,000 |
|Less drawings |(4,500) |
|Capital c/f |26,500 |
Profit may be also computed as follows:
Net profit = closing capital (net assets) – opening capital + drawings – additional capital
= 26,500 – 20,000 + 4,500 – 5,000
= £6,000
Question 4
Brian Barmouth
Trial balance as at 30 June 2000
| |£ |£ |
|Sales | |47,600 |
|Purchases |22,850 | |
|Office expenses |1,900 | |
|Insurance |700 | |
|Wages |7,900 | |
|Rates |2,800 | |
|Heating and lighting |1,200 | |
|Telephone |650 | |
|Discounts allowed |1,150 | |
|Opening stock |500 | |
|Return inwards |200 | |
|Returns outwards | |150 |
|Premiums |40,000 | |
|Plant and machinery |50,000 | |
|Motor vehicle |12,000 | |
|Debtors |12,500 | |
|Bank balance |7,800 | |
|Creditors | |3,400 |
|Loan – long term loan | |10,000 |
|Capital | |60,000 |
|Drawings for the year |__4,000 |______ |
| |121,150 |121,150 |
NB: The closing stock does not appear in the trial balance.
LESSON 2
Question 1
(a)
| | |£ | | |£ |
|1-May |Capital |5,000 |1-May |Store fitments |2,000 |
|13-May |Sales |200 |19-May |Abel |650 |
|16-May |Bruce |700 |20-May |Rent |200 |
|24-May |hill |200 |21-May |Delivery exp |50 |
| | | |30-May |Drawings |200 |
| | | |30-May |Wages |320 |
| | | |31-May |Green |300 |
| | |_____ |31-May |Balance c/d |2,380 |
| | |6,100 | | |6,100 |
(b) SALES DAYBOOK
| | |£ |
|4 – May |Bruce |700 |
|11 – May |Hill |580 |
|18 - May |Nailor |360 |
| | |1,640 |
(c) PURCHASES DAYBOOK
| | |£ |
|2 – May |Abel |650 |
|9 – May |Green |300 |
|17 - May |Kaye |800 |
| | |1,750 |
Check the account balances with the balances shown on the trial balance.
(d)
| |Dr |Cr |
| |£ |£ |
|Cash |2,380 | |
|Sales | |1,840 |
|Purchases |1,750 | |
|Debtors |740 | |
|Creditors | |800 |
|Capital | |5,000 |
|Fixtures and fittings |2,000 | |
|Rent |200 | |
|Delivery expenses |50 | |
|Drawings |200 | |
|Wages |_320 |____ |
| |7,640 |7,640 |
Question 2
End Papers
Trading, Profit & Loss Account for the year ended 31.12.02
| |£ |£ |£ |
|Sales | | |15,500 |
|Less returns inwards | | |(1,500) |
| | | |150,000 |
|Cost of sales | | | |
|Opening stock | |46,000 | |
|Purchases |103,500 | | |
|Less returns outwards |(3,500) |100,000 | |
| | |146,000 | |
|Less closing stock | |(41,000) |(105,000) |
|Gross profit | | |45,000 |
|Discount received | | |200 |
|Rent received | | |2,000 |
| | | |47,200 |
|Expenses | | | |
|Salaries and wages | |18,700 | |
|Office expenses | |2,500 | |
|Insurance | |1,100 | |
|Electricity | |600 | |
|Stationery | |2,400 | |
|Advertising | |3,500 | |
|Telephone | |800 | |
|Rates | |3,000 | |
|Discount allowed | |__100 |(32,700) |
|Net profit | | |14,500 |
End Papers
Balance Sheet as at 31 December 2002
|Non current assets |£ |£ |£ |
|Premises | | |80,000 |
|Fixtures and fittings | | |5,000 |
| | | |85,000 |
|Current assets | | | |
|Stocks | |41,000 | |
|Debtors | |4,800 | |
|Cash in hand | |200 | |
| | |46,000 | |
|Current liabilities | | | |
|Bank overdraft |12,000 | | |
|Creditors |7,500 |(19,500) | |
| | | |26,500 |
| | | |111,500 |
|Capital | | |111,000 |
|Add net profit | | |14,500 |
| | | |125,500 |
|Less drawings | | |(14,000) |
| | | |111,500 |
Question 3
K Smooth
Trading, Profit and Loss Account for the year ended 31.3.2002
| |£ |£ |£ |
|Sales | | |9,234,000 |
|Less: Cost of sales | | | |
|Opening stock | |1,816,000 | |
|Purchases |6,918,500 | | |
|Add carriage inwards |42,000 | | |
| |6,960,500 | | |
|Less returns outwards |(64,000) |6,896,500 | |
| | |8,712,500 | |
|Less closing stock | |(2,239,000) |(6,473,500) |
| | | |2,760,500 |
|Less expenses | | | |
|Wages and salaries | |1,024,000 | |
|Carriage outwards | |157,000 | |
|Rent and rates | |301,500 | |
|Communication expenses | |62,400 | |
|Commission payable | |21,600 | |
|Insurance | |40,500 | |
|Sundry expenses | |31,800 |(1,638,800) |
|Net profit | | |1,121,700 |
K Smooth
Balance Sheet as at 31 December 2002
|Non current assets |£ |£ |£ |
|Buildings | | |2,000,000 |
|Fixtures | | |285,000 |
| | | |2,285,000 |
|Current assets | | | |
|Stocks | |2,239,000 | |
|Debtors | |1,432,000 | |
|Bank | |297,000 | |
|Cash | |11,500 | |
| | |3,979,500 | |
|Current liabilities | | | |
|Creditors | |(816,000) |3,163,500 |
| | | |5,448,500 |
| | | | |
|Capital | | |5,088,800 |
|Add net profit | | |1,121,700 |
| | | |6,210,500 |
|Less drawings | | |762,000 |
| | | |5,448,500 |
Question 4
Skates
Trading, Profit and Loss Account for the year ended 31 September 2002
| |£ |£ |£ |
|Sales | | |13,090,000 |
|Less: returns outwards | | |__(55,000) |
| | | |13,035,000 |
|Cost of sales: | | | |
|Opening stock | |2,391,000 | |
|Purchases |9,210,000 | | |
|Add carriage inwards |___21,500 | | |
| |9,231,500 | | |
|Less returns outwards |__(30,700) |9,200,800 | |
| | |11,591,800 | |
|Less closing stock | |(2,747,500) |(8,844,300) |
| | | |4,190,700 |
|Less expenses | | | |
|Wages and salaries | |1,282,000 | |
|Carriage outwards | |30,900 | |
|Motor expenses | |163,000 | |
|Rent and rates | |297,000 | |
|Telephone | |40,500 | |
|Insurance | |49,200 | |
|Office expenses | |137,700 | |
|Sundries | |28,400 |(2,027,700) |
|Net profit | | |_2,163,000 |
Skates
Balance Sheet as at 30September 2002
|Non current assets |£ |£ |£ |
|Office equipment | | |625,000 |
|Motor van | | |410,000 |
| | | |1,035,000 |
|Current assets | | | |
|Stocks | |2,747,500 | |
|Debtors | |1,239,000 | |
|Bank | |311,500 | |
|Cash | |__29,500 | |
| | |4,318,500 | |
|Current liabilities | | | |
|Creditors | |(937,000) |3,381,500 |
| | | |4,416,500 |
| | | | |
|Capital | | |3,095,500 |
|Add net profit | | |2,163,000 |
| | | |5,258,500 |
|Less drawings | | |(842,000) |
| | | |4,416,500 |
LESSON 3
Question 1-
Adequately covered in the text.
Question 2
Also covered adequately in the text.
Question 3
Materiality
Information is material if its omission or misstatement could influence users’ decisions taken on the basis of the financial statements. The materiality of the omission or misstatement depends on the size and nature of the item in question judged in the particular circumstances of the case. Only items material in amount or in nature will affect the true and fair view given by a set of accounts.
Example:
If a business has a bank loan of £50,000 and a £55,000 balance on bank deposit account, it might well be regarded as a material misstatement if these two amounts were displayed on the balance sheet as ‘cash at bank £5,000’. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error.
Comparability
Users must be able to compare the financial statements of an enterprise over time to identify trends and with other enterprise’s statements to evaluate their relative financial position, performance and changes in financial position. It is therefore necessary for similar events and states of affairs to be represented in a similar manner.
Compliance with accounting standards helps to achieve comparability by ensuring that different entities account for similar transactions and events in a similar way.
Example:
Depreciation policy must be consistent from one period to the next, unless it becomes inappropriate.
Prudence
The prudence concept states that where alternative procedures, or alternative valuations, are possible, the one selected should be the one which gives the most cautious presentation of the business’s financial position or results.
IAS 1 describes the prudence concept as being that ‘revenue and profits are not anticipated, but are recognized by inclusion in the profit and loss account only when realized in the form either of cash or of other assets, the ultimate cash realization of which can be assessed with reasonable certainty; provision is made for all known…….expenses and losses whether the amount of these is known with certainty or is a best estimate in the light of the information available.’
Example:
If there is any doubt as to the recoverability of debts outstanding at the year-end, a provision should be made so that the amount in question is not included in the profit for the year.
Objectivity:
This means that accountants must be free from bias. They must adopt a neutral stance when analyzing accounting data. This means that they should try to strip their answers of any personal opinion or prejudice and should be as precise and as detailed as the situation warrants. The result of this should be that any number of accountants will give the same answer independently of each other.
Example:
Internally generated good will should not be capitalized in the balance sheet, as its value cannot be determined objectively.
Relevance
The Statement of Principles for Financial Reporting states that to be useful, information must be relevant to the decision-making needs of users. Information is relevant when it has the ability to influence the decisions of users by helping them to evaluate past, present or future events or to confirm or correct their past evaluations.
Example:
Suppliers and other creditors would like to have information that enables them to determine if to lend to the firm or supply on credit.
Question 4
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.
Factors affecting materiality are:
• The size of the item;
• The nature of the item.
To be useful, information must be relevant to the decision-making needs of users. Information is relevant when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations.
Neutrality means that the information in financial statements should be free from deliberate
or systematic bias.
Prudence means that a degree of caution is needed in making estimates about certain items.
The potential conflict between the two is that neutrality requires freedom from bias while the exercise of prudence is a potentially biased concept since judgment is required.
In resolving the conflict, a balance should be found that neither overstates nor understates assets, gains, liabilities and losses.
Safeguards to ensure that a company’s financial statements are free from material error:
The fact that the financial statements have been audited by an independent professional;
The existence of sound internal controls within the company;
The existence of an internal audit function within the company.
LESSON FOUR
Question 1
David Douglleu
Trading and Profit and Loss Account for the year ended 31 March 2001
| |£ |£ |£ |
|Sales | | |378,500 |
|Less returns inwards | | |(4,100) |
| | | |374,400 |
|Less cost of sales | | | |
|Opening stock | |120,600 | |
|Purchases |261,700 | | |
|Less returns out |(7,700) |254,000 | |
| | |374,600 | |
|Less closing stock | |102,500 |272,100 |
|Gross profit | | |102,300 |
|Add | | | |
|Discount received | | |2,400 |
|Rent received | | |7,500 |
| | | |112,200 |
|Less expenses | | | |
|Salaries and wages | |45,700 | |
|Office expenses | |8,400 | |
|Insurance premiums | |2,200 | |
|Electricity | |2,300 | |
|Stationery | |6,200 | |
|Advertising | |8,900 | |
|Telephone | |2,100 | |
|Business rates | |6,000 | |
|Discounts allowed | |600 |(82,400) |
|Net profit | | |29,800 |
Balance Sheet as at 31 March 2001
|Non current assets |£ |£ |£ |
|Warehouse shop and office | | |210,000 |
|Fixtures and fittings | | |12,800 |
| | | |222,800 |
|Current assets | | | |
|Stocks | |102,500 | |
|Debtors | |13,000 | |
|Prepayments | |2,400 | |
|Cash in hand | |500 | |
| | |118,400 | |
|Current liabilities | | | |
|Creditors |18,700 | | |
|Accrued expenses |1,200 | | |
|Bank overdraft |30,000 |(49,900) |68,500 |
| | | |291,300 |
| | | | |
|Capital | | |287,500 |
|Add Net Profit | | |29,800 |
| | | |317,300 |
|Less drawings | | |(26,000) |
| | | |291,300 |
Question 2
Donald Brown
Trading and Profit and Loss Account fro the year ended 31 December 20X0
| |£ |£ |
|Sales | |491,620 |
|Less cost of sales | | |
|Opening stock |18,460 | |
|Purchases |387,936 | |
| |406,396 | |
|Closing stock |19,926 | |
| | |386,470 |
|Gross profit | |105,150 |
|Discounts received | |1,175 |
| | |106,325 |
|Less expenses: | | |
|Discounts allowed |1,304 | |
|Lighting and heating |6,184 | |
|Motor expenses |3,080 | |
|Rent |8,161 | |
|General expenses |7,413 | |
|Depreciation (w) |13,146 | |
| | |39,288 |
|Net profit | |67,037 |
Working:
Depreciation charge:
Motor vehicles: £45,730 x 20% = £9,146
Fixtures and fittings: 10% x £(42,200 – 2,200) = £4,000
Total: £4,000 + £9,146 = £13,146
Donald Brown
Balance Sheet as at 31 December 20X0
| |Cost |Depreciation |Net |
|Non current assets |£ |£ |£ |
|Fixtures and fittings |42,200 |6,200 |36,000 |
|Motor vehicles |45,730 |24,438 |21,292 |
| |87,930 |30,638 |57,292 |
|Current assets | | | |
|Stock | |19,926 | |
|Debtors | |42,737 | |
|Prepayments | |680 | |
|Cash in hand | |1,411 | |
| | |64,754 | |
|Current liabilities | | | |
|Creditors |35,404 | | |
|Accruals |218 | | |
|Bank overdraft |19,861 | | |
| | |55,483 | |
|Net current assets | | |9,271 |
|Net assets | | |66,563 |
|Financed by | | | |
|Capital | | |26,094 |
|Net Profit for year | | |67,037 |
|Less drawings | | |93,131 |
| | | |26,568 |
| | | |66,563 |
Question 3
Brenda Bailey
Trading and Profit and Loss Account for the year ended 30 June 20X9
| |£ |£ |
|Sales | |427,726 |
|Opening stock |15,310 | |
|Purchases |302,419 | |
|Carriage inwards |476 | |
| |318,205 | |
|Less closing stock |16,480 | |
|Cost of sales | |301,725 |
|Gross profit | |126,001 |
|Carriage outwards |829 | |
|Wages and salaries |64,210 | |
|Rent and rates (12,466 – 620) |11846 | |
|Heat and light (4,757 + 350) |5,107 | |
|Depreciation – equipment |10,200 | |
| Motor vehicles |8,654 | |
|Sundry expenses |8,426 | |
| | |109,272 |
|Net profit for the year | |16,729 |
Brenda Bailey
Balance Sheet as at 30 June 20X9
| |Cost |Depreciation |Net book value |
|Non current assets |£ |£ |£ |
|Equipment |102,000 |32,450 |69,550 |
|Motor vehicles |43,270 |17,574 |25,696 |
| |145,270 |50,024 |95,246 |
|Current assets | | | |
|Stock | |16,480 | |
|Debtors | |50,633 | |
|Prepayments | |620 | |
|Cash | |__477 | |
| | |68,210 | |
|Current liabilities | | | |
|Bank overdraft | |3,295 | |
|Creditors | |41,792 | |
|Accruals | |350 | |
| | |45,437 | |
|Net current assets | | |22,773 |
| | | |118,019 |
|Capital | | | |
|Balance at 1 July 20X8 | | |122,890 |
|Add Profit for year | | |16,729 |
| | | |139,619 |
|Less drawings | | |21,600 |
|Balance at 30 June 20X9 | | |118,019 |
Question 4
Frank Mercer
Cash book
|20X8 | |£ |20X8 | |£ |
|Dec 31 |Balance b/f |1,793 |Dec 31 |Bank charges |18 |
|Dec 31 |Dividend |26 |Dec 31 |Standing order |32 |
| | | |Dec 31 |Direct debit |88 |
| | |____ | |Balance c/d |1,681 |
| | |1,819 | | |1,819 |
Bank reconciliation as at 31 December 20X8
| |£ |£ |
|Balance per bank statement | |1,557 |
|Add unrecorded lodgments: | | |
| V Owen |98 | |
| K Walters |134 | |
| | |232 |
|Less unpresented cheques: | | |
|B Oliver (869) |71 | |
|L Philips (872) |37 | |
| | |(108) |
|Balance per cash book (corrected) | |1,681 |
LESSON FIVE
Question 1
Sales Ledger Control A/C
| |£ | |£ |
|Bal b/d |386,430 |Bal b/d |190 |
|Sales (163,194 + 1,386) |164,580 |Cash received |158,288 |
|Cash refund |350 |Discounts allowed |2,160 |
| | |Returns inwards |590 |
| | |Contra |870 |
| | |Bad debts written off |1,360 |
| |______ |Balance c/d |388,272 |
| |551,730 | |551,730 |
Sales Ledger Control A/C
| |£ | |£ |
|Bal b/d |520 |Bal b/d |184,740 |
|Cash paid (103,040 – 350) |102,690 |Purchases (98,192 + 36) |98,228 |
|Discounts received |990 |Bad debts |2,160 |
|Returns outwards (1,370 + 2,000) |3,370 | | |
|Contra |870 | | |
|Balance c/d |175,048 |Balance c/d |___100 |
| |283,488 | |283,488 |
Question 2
(a) Sales Ledger Control A/C
| |£ | |£ |
|Uncorrected balance b/f |12,550 |Discounts omitted (d) |100 |
|Sales omitted (a) |850 |Contra entry omitted (f) |400 |
|Bank – cheque dishonored (1) |300 |Bad debt omitted (g) |500 |
| | |Returns inwards omitted (j) |200 |
| |_____ |Amended balance c/d |12,500 |
| |13,700 | |13,700 |
|Balance b/d |12,500 | | |
Note: Items (b), (c), (e), (h), (i) and (k) are matters affecting the personal accounts of customers. They have no effect on the control account.
(b)
Statement Of Adjustments To List Of Personal Account Balances
| |£ |£ |
|Original total of list of balances | |12,802 |
|Add: debit balance omitted (b) |300 | |
| debit balance understated (e) |200 | |
| | |500 |
| | |13,302 |
|Less: transposition error (c ): understatement of cash received |180 | |
| cash debited instead of credited (2 x £250) (h) |500 | |
| discounts received wrongly debited to Bell (i) |50 | |
| Understatement of cash received (i) |_72 | |
| | |__802 |
| | |12,500 |
Question 3
(a)
George – Cash book
| | |£ |£ |
|Balance |4,890 |Bank charges (3) |320 |
|Correction of error - interest |320 |Plant (4) |10,000 |
|Balance |11,890 | | |
| | |Cheque dishonored |980 |
| | |Correction of error in entering| |
| | |cheque (6) |4,800 |
| |_____ |Error in addition (7) |1,000 |
| |17,100 | |17,100 |
(b)
Bank reconciliation
| |£ |
|Balance per bank statement |12,800 |
|Less lodgments not credited (2) |2,890 |
| |9,910 |
|Add: dishonored cheque |980 |
|Add: outstanding cheque (1) |1,000 |
|Balance per cash book - overdrawn |11,890 |
Statement of effect on profit
| |£ |£ |
|Profit per draft accounts |81,208 | |
|Bank charges (3) | |320 |
|Depreciation (4) | |1,000 |
|Bad debt (5) | |980 |
|Motor expenses (6) | |2,100 |
|Additional depreciation (6) | |600 |
|Purchases understated (7) | |1,000 |
|Interest adjustment (8) |320 | |
|Repairs to premises (9) |__870 |____ |
| |82,398 |6,300 |
| |_6,300 | |
| |76,098 | |
(d)
Journal
| |£ |£ |
|George – drawings |870 | |
| Repairs to premises | |870 |
|Repairs to George’s house mistakenly charged as a business | | |
|expense | | |
| | | |
|*Paul – accounts payable ledger account |540 | |
|George – drawings | |540 |
| | | |
|Business account paid by personal cheque | | |
| | | |
*Note: a debit to accounts payable ledger control account is also acceptable for this entry.
Question 4
Four errors not disclosed by the Trial Balance:
Error of Omission: This is where a transaction is completely omitted from the records i.e. not posted at all.
Error of Commission: A transaction is posted in the wrong account but of the same class e.g. a credit sale posted in a wrong debtors account (e.g. to debtor 1 instead of debtor 2)
Error of Principle: A transaction is not only posted to the wrong account but also the class e.g. an expense of plant repair posted to the plant account (an asset).
Error of Original Entry: A transaction is posted to the correct accounts but the amount is incorrect e.g. a credit sale of £250 is posted to the debtor and sales account as £520.
(Refer to the text for further details)
(b)
(i)
| |DR (Sh) |CR (Sh) |
|Suspense |10,000 | |
| ABD Bank – loan | |10,000 |
| | | |
|Cashbook |4,000 | |
| P& L – Rent received | |4,000 |
| | | |
|P& L –Trading account |1,500 | |
| Closing stock | |1,500 |
| | | |
|P& L – discount allowed |500 | |
| P&L – discount received | |500 |
| | | |
|P& L – Trading a/c opening stock |3,200 | |
| Suspense | |3,200 |
| | | |
|Prepayments (prepaid insurance)) |220 | |
| P& L | |220 |
| | | |
|Insurance receivable |12,000 | |
| P& L - income | |12,000 |
| | | |
(ii)
Statement of Corrected net profit
| |(Sh) |(Sh) |
|Net profit | |64,000 |
|Add: Rent received |4,000 | |
|Discount received |500 | |
|Prepaid insurance |220 | |
|Insurance receivable |12,000 |16,720 |
| | |80,720 |
|Less: closing stock overvalued |1,500 | |
|Discount allowed |500 | |
|Opening stock |3,200 |(5,200) |
|Adjusted net profit | |75,520 |
(iii) Suspense A/c
| |Sh | |Sh |
|ABD Loan |10,000 |Balance b/d |6,800 |
| |_____ |Opening stock |3,200 |
| |10,000 | |10,000 |
Question 5
WORKSHEET
|ACCOUNTS |Pre-Adjusted Trial Balance|Adjustments |Adjusted |T & P & L |Balance sheet |
| | | |Trial Balance |Account | |
| |Dr |Cr |Dr |
|Bal b/d |6,185,000 |Bal b/d |52,500 |
|Sales |8,452,000 |Returns inwards |203,500 |
|Bills received dishonored |88,500 |Bank |7,985,000 |
|Charges payable |10,000 |Cash |153,000 |
| | |Bad debt |64,500 |
| | |Discounts allowed |302,000 |
|Bal c/d |44,000 |Bal c/d |5,404,000 |
| |14,779,000 | |14,779,000 |
Purchases ledger control a/c
| |Sh | |Sh |
|Bal b/d |16,500 |Bal b/d |4,285,000 |
|Returns outwards |284,000 |Purchases |5,687,500 |
|Bills payable |930,000 |Bills payable dishonored |400,000 |
|Bank |473,200 | | |
|Cash |88,500 | | |
|Balance c/d |_4,196,500 |Balance c/d |___23,500 |
| |10,396,000 | |10,396,000 |
LESSON SIX
Question 1
(a)
Dare
Statement of Capital as at 1 January 1996
|Assets |£ |£ |
|Stocks | |4,500 |
|Debtors | |2,800 |
|Rates prepaid | |40 |
|Fixtures | |2,500 |
| | |10,140 |
|Liabilities | | |
|Bank overdraft (add unpresented cheques) |1,172 | |
|Accrued expenses |240 | |
|Creditors |1,800 | |
|Loan |4,000 | |
|Accrued interest [4,000 x 3% x 3/12] |30 | |
|Heating and lighting |80 |(7,322) |
| | |2,818 |
(b)
Dare
Profit and loss account for the year ended 31 December 1996
| |£ |£ |
|Gross profit | |9,000 |
|Discounts received | |480 |
| | |9,480 |
|Less expenses | | |
|Rent and rates |465 | |
|Fixtures and fittings (depreciation) |350 | |
|Lighting and heating |200 | |
|General expenses |450 | |
|Loan interest |120 | |
|Wages |2,914 | |
|Sundry expenses |140 | |
|Discounts allowed |520 | |
|Bad debt |200 |(5,659) |
|Net profit | |3,821 |
(c)
Dare
Balance Sheet as at 31 December 19X6
|Non current assets |£ |£ |£ |
|Fixtures and fittings | | |2,550 |
|Current assets | | | |
|Stocks | |5,800 | |
|Debtors | |3,000 | |
|Prepayments | |50 | |
|Bank (less unpresented cheques) | |673 | |
|Cash | |__20 | |
| | |9,543 | |
|Current liabilities | | | |
|Creditors |2,200 | | |
|Accruals |_290 |(2,490) | |
| | | |7,053 |
| | | |9,603 |
|Capital | | |2,818 |
|Net profit | | |3,821 |
| | | |6,639 |
|Less drawings | | |(1,036) |
| | | |5,603 |
|Non current liabilities | | | |
|Loan – 3% | | |4,000 |
| | | |9,603 |
Question 2
AB Sport and Social Club
Income and Expenditure Account for the year ended 31 December 20X5
| |£ |£ |
|Income | | |
|Subscriptions (W1) | |10,690 |
|Bar and café profit (W2) | |9,200 |
|Sale of sportswear (W3) | |1,400 |
|Hire of sportswear (W5) | |1,700 |
|Deposit account interest | |800 |
| | |23,790 |
|Expenditure | | |
|Rent of clubhouse |6,000 | |
|Groundsperson |10,000 | |
|Heating oil (W6) |4,500 | |
|Depreciation 5,000 x 10% |500 | |
| | |(21,000) |
|Surplus of income over expenditure for the year | |2,790 |
AB Sport and Social Club
Balance Sheet as at 31 December 20X5
| |£ |£ |
|Non current assets | | |
|Equipment for grounds person: cost | |5,000 |
| Depreciation (3,500 + 500) | |(4,000) |
| | |1,000 |
|Current assets | | |
|Heating oil |700 | |
|Bar and café stocks |5,000 | |
|Sports equipment for sale (4,000 – 2,000) |2,000 | |
|Sports equipment for hire (1,000 + 500) |1,500 | |
|Subscriptions in arrears |90 | |
|Bank deposit account |16,000 | |
|Bank current account |1,300 | |
| |26,590 | |
|Current liabilities | | |
|Creditors for bar and café purchases |800 | |
|Creditors for sportswear |450 | |
|Creditors for heating oil |200 | |
|Subscriptions in advance |_200 | |
| |1,650 | |
|Net current assets | |24,940 |
|Net assets | |25,940 |
|Accumulated fund b/f | |23,150 |
|Surplus for the year | |2,790 |
|Accumulated fund c/f | |25,940 |
Workings:
Subscriptions
| |SUBSCRIPTIONS |
| |£ | |£ |
|Arrears b/f 1.1.X5 (10 + 230) |240 |Advance b/f 1.1.X5 |40 |
|Subscription income for year (bal fig) |10,690 |Cash received |11,000 |
|Advance c/f 31.12X5 |__200 |Arrears c/f 31.12.X5 |___90 |
| |11,130 | |11,130 |
Note: The write off of the 20X3 arrears (£10) is dealt with in the above working.
Bar and café profit
| |£ |£ |
|Sales | |20,000 |
|Cost of sales |7,000 | |
|Opening stock |8,800 | |
|Purchases* |15,800 | |
| |(5,000) | |
|Closing stock | |10,800 |
|Profit | |9,200 |
*Note: Purchases are 9,000 + 800 – 1,000 = £8,800
Sale of sportswear
| |£ |£ |
|Sales | |5,000 |
|Opening stock |3,000 | |
|Purchases (W4) |3,100 | |
| |6,100 | |
|Closing stock |(4,000) | |
|Closing stock | |(2,100) |
|Gross Profit | |2,900 |
|Sportswear written down | |(1,500) |
|Net profit | |1,400 |
Purchases of sportswear
| |£ |
|Bank |4,500 |
|Add closing creditors |450 |
|Less opening creditors |(300) |
| |4,650 |
|For sale 2/3: £3,100 |For hire 1/3: £1,550 |
Hire of sportswear
| |£ |£ |
|Receipts | |3,000 |
|Costs* | | |
|Opening stock |750 | |
|Purchases (W4) |1,550 | |
| |2,300 | |
|Closing stock |(1,000) | |
| | |(1,300) |
|Profit | |1,700 |
*Note: While there is a case for treating the sportswear for hire as non current assets, in club accounts it is more usual to treat such items as stock in trade.
Heating Oil
| |£ |
|Opening stock |1,000 |
|Purchases (4,000 + 200) |4,200 |
| |5,200 |
|Less closing stock |(700) |
|Expense for year |4,500 |
Question 3
Mr Cherono
Manufacturing Profit and loss Account for the year ended 30 June 1988
|Raw materials | | | |
|Opening stock | | |40,0000 |
|Purchases | | |855,000 |
| | | |895,000 |
|Less closing stock | | |(80,000) |
|Raw materials consumed | | |815,000 |
|Wages | | |_50,000 |
| | | |865,000 |
|Factory overheads | | | |
|Wages | |96,000 | |
|Rent and rates | |22,500 | |
|Water and electricity | |13,000 |131,500 |
|Cost of goods completed | | |996,500 |
|Factory profit | | |___3,500 |
|Transfer price | | |1,000,000 |
| | | | |
|Sales | | |4,100,000 |
| | | | |
|Less cost of sales | | | |
|Opening stock | |348,000 | |
|Purchases and cost of goods produced | |3,400,000 | |
| | |3,748,000 | |
|Less closing stock | |(282,000) |(3,466,000) |
|Gross profit | | |634,000 |
|Profit on disposal of motor vehicle | | |4,000 |
|Factory profit | | |3,500 |
| | | |641,500 |
|Less expenses | | | |
|Interest on loan | |36,000 | |
|Depreciation – fixtures and fittings | |90,000 | |
| Motor vehicles | |38,000 | |
|Wages | |108,000 | |
|Rent and rates | |67,500 | |
|Water and electricity | |39,000 | |
|Motor expenses | |60,800 | |
|Bad debt | |14,000 | |
|Repairs | |12,000 | |
|Bank charges | |4,000 | |
|Insurance | |13,500 | |
|Sundry expenses | |25,200 | |
|Commission to lampshade employee | |318 | |
|Less UPCS | |__120 |(508,438) |
|Net profit | | |133,062 |
Cherono
Balance Sheet as at 30 June 1998
|Non current assets |Cost |Depreciation |NBV |
|Fixtures and fittings |900,000 |(440,000) |460,000 |
|Motor vehicles |152,000 |(38,000) |114,000 |
| |1,052,000 |(478,000) |574,000 |
|Current assets | | | |
|Stock: Raw materials |80,000 | | |
| Lampshades |30,000 | | |
| Less UPCS |(120) | | |
| Other goods |252,000 |361,880 | |
|Debtors | |108,000 | |
|Prepayments | |10,500 | |
|Bank balance | |_98,000 | |
| | |578,380 | |
|Current liabilities | | | |
|Creditors |107,000 | | |
|Accruals |27,318 |(134,318) |444,062 |
| | | |1,018,062 |
| | | | |
|Capital | | |740,000 |
|Add net profit | | |133,062 |
| | | |873,062 |
|Less drawings | | |(95,000) |
| | | |778,062 |
|Add loan | | |_240,000 |
| | | |1,018,062 |
Question 4
Olympiad Athletics Club
Income and Expenditure Account for year ended 31 October 1983
| |£ |£ |
|Income | | |
|Annual subscriptions (4,680 + 70 + 230 – (140 + 100)) |4,740 | |
|Entrance fees |250 | |
|Life membership fees credited (850 + 53) |903 | |
| | |5,893 |
|Training ground fees (7,660 – 470 + 325) | |7,515 |
|Sales of sporting requisites | |8,774 |
|Investment interest received | |626 |
|Insurance commissions received (53 – 11 + 13) | |55 |
|Advertising revenue | |603 |
|Profit on sale of furniture (370 – 350) | |20 |
|Total income | |23,486 |
|Expenditure: | | |
|Cost of sporting requisites sold | | |
|(5,270 + 202 – 163 = 5,309 (purchases) | | |
|5,309 + 811 – 1,064 = 5,056) |5,056 | |
|Damaged stock etc |137 | |
|Wages of grounds man (250 + 3,600 – 300) |3,550 | |
|Postages (692 – 4) |688 | |
|Stationery (55 + 629 – 36) |648 | |
|Rates (300 + 846 – 380) |766 | |
|Subscriptions in arrear written off |40 | |
|World-wide Athletics Club affiliation fee |50 | |
|Training ground upkeep |1,200 | |
|Depreciation: buildings |3,500 | |
| Furniture, equipment etc | | |
|(10% x (7,900 – 800) |__710 | |
|Total expenditure | |16,345 |
|Surplus of income over expenditure | |£7,141 |
Olympiad Athletics Club
Balance Sheet as at 31 October 1983
| |£ |£ |£ |
|Non current assets |Cost |Depreciation |Net |
|Land |4,000 |- |4,000 |
|Buildings |35,000 |12,900 |22,100 |
|Furniture, equipment, etc |7,100 |4,410 |2,690 |
| |46,100 |17,310 |28,790 |
|Investments | | | |
|Investments at cost (7,400 + 5,600) | | | |
|(current valuation £13,150) | | |13,000 |
|Current assets | | | |
|Stocks – sporting requisites | |927 | |
| - stationery | |36 | |
| - stamps | |4 | |
|Debtors – subscriptions | |230 | |
| - insurance commissions | |13 | |
|Prepayments (300 + 380) | |680 | |
|Bank – deposit account | |3,000 | |
| - current account | |2,563 | |
|Cash | |122 | |
| | |7,575 | |
|Current Liabilities | | | |
|Creditors – prepaid subscriptions |100 | | |
|- Prepaid training | | | |
|- Ground fees |470 | | |
|- Premiums |160 | | |
|- Sporting requisites |202 | | |
| | |932 | |
|Working capital | | |6,643 |
|Net assets employed | | |48,433 |
|Financed by: | | | |
|Accumulated fund: as at 31 October 1982 | | |36,945 |
|Add: | | | |
|Surplus of income over expenditure for the year | | |7,141 |
|As at 31 October 1983 | | |44,086 |
|Life membership fund (4,720 + 530 – (850 + 53) | | |4,347 |
| | | |£48,433 |
| | | | |
| | | | |
|Accumulated fund b/f | | | |
|Assets: Land | | | 4,000 |
|Buildings | | |25,600 |
|Furniture | | | 3,750 |
|Investment | | | 7,400 |
|Stocks | | | 866 |
|Debtors | | | 191 |
|Prepayments | | | 550 |
|cash | | |___73 |
| | | |42,430 |
|Liabilities | | | |
|Creditors: Subscriptions | |70 | |
|Training | |325 | |
|Premiums | |102 | |
|Sporting requisites | |163 | |
|Bank overdraft | |105 | |
|Membership fund | |4,720 |(5,485) |
| | | |36,945 |
LESSON 7
Question 1
Kimeu & Mwangi
Manufacturing,Trading Profit and Loss account for the year to 31.3.x 2
| |Shs |Shs |
|Raw materials | | |
|Opening stock | |100,700 |
|Purchases | |716,250 |
| | |816,950 |
|Less stock of raw materials | |(79,500) |
|Raw materials consumed | |737,450 |
|Factory wages | |382,500 |
|Prime cost | |1,119,950 |
|Add opening w/p |85,000 | |
|Less closing w/p |(126,250) |(41,250) |
| | |1,078,700 |
|Factory overheads | | |
|Depreciation on plant |84,375 | |
|Factory expenses |354,000 |438,375 |
|Factory cost of completed goods | |1,517,075 |
|Add factory profit ( missing figure) | |192,925 |
|Transfer price given in the question (par) (38,000 x 45) | |1,710,000 |
| | | |
|Sales | |2,775,500 |
|Cost of sales | | |
|Opening stock of finished goods |1,200,000 | |
|Transfer price |1,710,000 | |
| |2,910,000 | |
|Less closing stock of finished goods |(10,125,000) |(1,897,500) |
| | |878,000 |
|Add factory profit | |192,925 |
| | |1,070,925 |
|Expenses | | |
|Depreciation on delivery van |80,250 | |
|Sales department wages |150,750 | |
|Selling department expenses |277,500 | |
|Increase for provision for bad debts |5,000 | |
|Provision for unrealized profits |112,500 |(626,000) |
|Net profit | |444,925 |
|Share of factory profits | | |
| K |154,340 | |
| M |38,585 |(192,925) |
|Share of remaining profit | |252,000 |
| K |100,800 | |
| M |151,200 |252,000 |
Workings for closing stock of completed units
|Completed units b/f | 30,000 |
|Units manufactured | 38,000 |
|Less units sold |(45,500) |
|Closing stock |22,500 x 45 = 10,125,000 |
| |K |M | |K |M |
|Drawings |15,000 |125,000 |Share of factory profit |154,340 |38,585 |
|Bal c/d |105,140 |54,785 |Balance of profit |100,800 |51,200 |
| |255,140 |189,785 | |255,140 |189,785 |
Kimeu & Maingi
Balance Sheet as at 31 March 1992
|Non current assets |Shs |Shs |
|Property, plant and equipment | | |
|Freehold factory | |1,053,750 |
|Factory plant ( 843,750 – 151,250 – 84,375 = 608,125) | |608,125 |
|Delivery van ( 401,250 – 80,250 – 86,250 = 234,750) | |234,750 |
| | |1,896,625 |
|Current Assets: | | |
|Stock: Raw materials |79,500 | |
| W.I.P |126,250 | |
| Finished goods |900,000 | |
| Debtors |405,000 | |
| |1,510,750 | |
|Current Liabilities | | |
|Bank overdraft |(176,200) | |
|Trade creditors |(150,000) | |
|Accrued expenses and deferred income |(86,250) | |
| |(412,450) | |
|Net current assets | |1,098,300 |
| | |2,994,925 |
|Capitals: K | |1,400,000 |
| M | |1,425,000 |
| | |2,825,000 |
|Current A/c: K |105,140 | |
| M |64,785 |169,925 |
| | |2,994,925 |
The finished good is net of the unrealized profit on closing stock.
Question 2
Amis Lodge and Pym
Trading, Profit and loss appropriation account for year ended 31 March 19-8
| |£ |£ |£ |
|Sales | | |404,500 |
|Less | | | |
|Opening stock | |30,000 | |
|Purchases |225,000 | | |
|Carriage inwards |4,000 |229,000 | |
|Plant depreciation | |259,000 | |
|Closing stock | |(35,000) | |
|Cost of sales | | |(224,000) |
|Gross profit | | |180,500 |
|Discount received | | |4,530 |
|Interest received | | |____750 |
| | | |185,780 |
|Expenses | | | |
|Carriage outwards | |12,000 | |
|Vehicle depreciation | |15,000 | |
|[25% x (80,000 – 20,000)] | | | |
|Depreciation of plant | |20,000 | |
|[20% x 100,000] | | | |
|Discounts allowed | |10,000 | |
|Office expenses [30,000 + 405] | |30,805 | |
|Rent, rates , heat and light [8,800 – 1,500] | |7,300 | |
|Provision for bad debts increase | | | |
|[(5% x 14,300) – 420] | |295 | |
| | | |(95,400) |
|Net profit for year | | |90,380 |
|Interest charged on drawings etc | | | |
| Amis | |1,000 | |
| Lodge | |900 | |
| Pym | |720 | |
| | | |2,620 |
| | | |93,000 |
|Less | | | |
|Salary – Pym | |13,000 | |
|Interest on capital accounts | | | |
| Amis | |8,000 | |
| Lodge | |1,500 | |
| Pym | |500 | |
| | | |23,000 |
|Residual profit | | |70,000 |
|Less | | | |
|Share of residual profit | | | |
| Amis ( 5/10) | |35,000 | |
| Lodge (3/10) | |21,000 | |
| Pym (2/10) | |14,000 | |
| | | |70,000 |
| | | | |
(b)
Current Accounts
| |A |L |P | |A |L |P |
| |£ |£ |£ | |£ |£ |£ |
|Balances |1,000 |500 |400 |Appropn – salary | | |13,000 |
|Drawings |25,000 |22,000 |15,000 | - Interest |8,000 |1,500 |500 |
|Appropn – interest |1,000 |900 |720 | - Residue |35,000 |21,000 |14,000 |
|Bal c/d |16,000 |_____ - |11,380 |Bal c/d |_____- |900 |____- |
| |43,000 |23,400 |27,500 | |43,000 |23,400 |27,500 |
Question 3
Amber, Beryl and Coral
Trading, Profit and Loss Account for the year to 31 December 1996
| |£’000 |£’000 |
|Sales | |2,000 |
|Cost of sales | | |
|Opening stock |180 | |
|Purchases |1,400 | |
| |1,580 | |
|Closing stock |(200) | |
| | |1,380 |
|Gross profit | |620 |
|Expenses | | |
|Wages and salaries (228 + 12) |240 | |
|Sundry expenses |120 | |
|Bad and doubtful debts |26 | |
|Depreciation: | | |
| Building |5 | |
| Plant and equipment |24 | |
|Interest on loan – Amber |__5 | |
| | |420 |
|Net profit | |200 |
Assume profit is earned proportionately throughout the year
Profit and Loss Appropriation Account
| |Amber |Beryl |Coral |Total |
| |£’000 |£’000 |£’000 |£’000 |
|1/1X6 to 30.6.X6 | | | | |
|Salaries |10 |10 | |20 |
|Share of profit: | | | | |
| £80,000 (60:40) |48 |32 | |80 |
|1.7.X6 to 31.12.X6 | | | | |
| £100,000 (40:40:20) |40 |40 |20 |100 |
| |98 |82 |20 |200 |
Amber, Beryl and Coral
Balance Sheet as at 31 December 1996
| |Cost or valuation |Aggregate depreciation|Net book value |
|Non current assets | | | |
|Land at valuation |280 |Nil |280 |
|Buildings |250 |35 |215 |
|Plant, equipment and vehicles |240 |74 |166 |
| |770 |109 |661 |
|Current assets | | | |
|Stock | |200 | |
|Debtors (420 – 16) |404 | | |
|Less: provision for doubtful debts |30 | | |
| | |374 | |
|Cash at bank | |38 | |
| | |612 | |
|Current liabilities | | | |
|Trade creditor |350 | | |
|Bonus |12 | | |
| | |362 |250 |
|Net current assets | | |911 |
|Long term loan – Amber | | |50 |
| | | |861 |
|Represented by: | | | |
| | | | |
|Capital accounts: Amber | |368 | |
| Beryl | |242 | |
| Coral | |100 | |
| | | |710 |
|Current accounts: Amber | |82 | |
| Beryl | |64 | |
| Coral | |_5 | |
| | | |151 |
|Proprietor funds | | |861 |
| | | | |
CAPITAL ACCOUNTS
| |A |B |C | |A |B |C |
| |£’000 |£’000 |£’000 | |£’000 |£’000 |£’000 |
| | | | |Balances b/f |280 |210 | |
|Goodwill |80 |80 |40 |Cash | | |140 |
|Balances c/f |368 |242 |100 |Goodwill (W1) |120 |80 | |
| | | | |Revaluation |48 |32 | |
| |448 |322 |140 | |448 |322 |140 |
| | | | |Balances b/f |368 |242 |100 |
CURRENT ACCOUNTS
| |A |B |C | |A |B |C |
| |£’000 |£’000 |£’000 | |£’000 |£’000 |£’000 |
|Drawings |28 |24 |15 |Balances b/f |7 |6 | |
|Balances c/f |82 |64 |5 |Profit for year |98 |82 |20 |
| |__ |__ |__ |Loan interest |_5 |__ |__ |
| |110 |88 |20 | |110 |88 |20 |
Question 4
The solution provided has the workings shown beside the accounts to make the comparison easier. Remember to adhere to previous partnerships and departmental formats.
(a) Aristocratic Autos
Trading and Profit and Loss Account for year ended 30 September 1986
|Workings |Workshop |Petrol/oil |Showroom | |Total |
| |£ |£ |£ | |£ |
| | | | |Sales and charges: | |
| |32,125 |32,964 |8,500 |Cash |73,589 |
| |65,892 |41,252 |81,914 |Credit |189,058 |
| |98,017 |74,216 |90,414 |Total turnover |262,647 |
| | | | | | |
| | | | |Less materials: | |
| |1,932 |3,018 |20,720 |Opening stock |25,670 |
| |23,860 |41,805 |52,100 |Purchases |117,765 |
| |25,792 |44,823 |72,820 | |143,435 |
| |(2,752) |(2,976) |(25,310) |Closing stock |(31,038) |
| |23,040 |41,847 |47,510 |Usage |112,397 |
|(2) |34,163 |5,685 |____- |Direct wages |39,848 |
| |57,203 |47,532 |47,510 |Cost of sales |152,245 |
| |40,814 |26,684 |42,904 |Gross profit |110,402 |
|(1) |1,333 |- |- |Profit on sale of plant |1,333 |
| |42,147 |26,684 |42,904 | |111,735 |
| | | | |Less | |
|(3) |7,024 |- |4,391 |Indirect wages |11,415 |
| |- |- |10,200 |Salaries |10,200 |
|(4) |2,613 |2,945 |7,880 |Rates |13,438 |
|(5) |1,939 |2,185 |5,846 |Electricity |9,970 |
|(6) |4,477 |3,389 |4,130 |General expenses |11,996 |
|(7) |16,898 |8,324 |11,302 |Depreciation |36,524 |
| |32,951 |16,843 |43,749 |Total |93,543 |
| |9,196 |9,841 |(845) |Net profit/loss for year |18,192 |
| | | | | | |
| | | | |Less appropriations | |
| | | | |Interest on capitals | |
| | | | |Duke (5% x £50,0000 |(2,500) |
| | | | |Earl (5% x £40,000) |(2,000) |
| | | | |Residual profit* |13,692 |
| | | | |Duke |(6,846) |
| | | | |Earl |(6,846) |
| | | | | |- |
*The equal division stipulated by the Partnership Act applies in the absence of agreement to the contrary.
Aristocratic Autos
Balance Sheet as at 30 September 1986
|Workings |Workshop |Petrol/oil |Showroom | |Total |
| |£ |£ |£ | |£ |
| | | | |Non current assets at written down value: | |
|(8) |5,020 |4,260 |11,010 |Freehold buildings |20,290 |
|(8) |24,891 |4,859 |5,357 |Plant, equipment and vehicles |35,107 |
| |29,911 |9,119 |16,367 | |55,397 |
| | | | |Current assets: | |
| |2,752 |2,976 |25,310 |Stocks |31,038 |
| |1,365 |537 |- |Debtors |1,902 |
|(4) |2,586 |2,915 |7,799 |Prepayments |13,300 |
| |316 |1,605 |30,470 |Bank and cash |32,391 |
| |7,019 |8,033 |63,579 | |78,631 |
| | | | |Current liabilities: | |
| |4,225 |5,602 |15,250 |Creditors |25,077 |
|(9) |915 |564 |983 |Accruals |2,462 |
| |5,140 |6,166 |16,233 | |27,539 |
| |1,879 |1,867 |47,346 |Working capital |51,092 |
| |31,790 |10,986 |63,713 |Net assets employed |106,489 |
| | | | |Financed by | |
| | | | |Capital accounts | |
| | | | |Duke 50,000 | |
| | | | |Earl 40,000 | |
| | | | | |90,000 |
| | | | |Current accounts: | |
|(10) | | | |Duke 6,906 | |
|(10) | | | |Earl 9,853 | |
| | | | | |16,489 |
| | | | | |106,489 |
| | | | | | |
| | | | | | |
|Workings | | | | | |
|(1) |Plant disposal: | |Cost |19,500 |
| | | |Accumulated depreciation |(15,633) |
| | | | |Written down value |3,867 |
| | | | |Proceeds |5,200 |
| | | | |Profit on sale |1,333 |
| | | | | | |
|Workshop |Petrol/oil |showroom | | |Total |
|£ |£ |£ | | |£ |
| | | |(2) |Direct wages: | |
|34,050 |5,602 |___- | |Per list |39,652 |
|113 |83 |___- | |Accrual |___196 |
|34,163 |5,685 |- | |Total |39,848 |
| | | |(3) |Indirect wages: | |
|6,810 |- |4,160 | |Per list |10,970 |
|214 |- |231 | |Accrual |445 |
|7,024 |- |4,391 | | |11,415 |
| | | |(4) |Rates (apportioned on basis of freehold buildings | |
| | | | |at (8) below: | |
|5,199 |5,860 |15,679 | |Per list |26,738 |
|(2,586) |(2,915) |(7,799) | |Prepayment |(13,300) |
|2,613 |2,945 |7,880 | |Total |13,438 |
| | | |(5) |Electricity apportioned on same basis as (4) | |
| | | | |above: | |
|1,838 |2,072 |5,543 | |Per list |9,453 |
|101 |113 |303 | |Accruals |517 |
|1,939 |2,185 |5,846 | |Total |9,970 |
| | | |(6) |General expenses (apportioned on basis of | |
| | | | |turnover: | |
|3,990 |3,021 |3,681 | |Per list |10,692 |
|487 |368 |449 | |Accruals |1,304 |
|4,477 |3,389 |4,130 | |Total |11,996 |
| | | |(7) |Depreciation: | |
| | | | |Charge for year per (8) below: | |
|2,520 |2,840 |7,600 | |Freehold buildings |12,960 |
|14,378 |5,484 |3,702 | |Plant, equipment etc |23,564 |
|16,898 |8,324 |11,302 | |Total |36,524 |
| | | | | | |
|Workshop |Petrol/oil |Showroom | | | |
|£ |£ |£ | | | |
| | | |(8) |Freehold buildings (cost): | |
|12,600 |14,200 |38,000 | |At 1 October 1985 |64,800 |
|- |- |- | |Additions during year |- |
|_____- |_____- |_____- | |Disposals during year |_____- |
|12,600 |14,200 |38,000 | |At 30 September 1986 |64,800 |
| | | | | | |
| | | | |Provision for depreciation on freehold buildings: | |
|5,060 |7,100 |19,390 | |At 1 October 1985 |31,550 |
|- |- |- | |Disposals during year |- |
|2,520 |2,840 |7,600 | |Charge for year |12,960 |
|7,580 |9,940 |26,990 | |At 30 September 1986 |44,510 |
| | | | | | |
| | | | |Written down value at 30 September 1986 | |
|5,020 |4,260 |11,010 | | |20,290 |
| | | | |Plant, equipment etc. (cost): | |
|65,180 |22,900 |17,450 | |At 1 October 1985 |105,530 |
|26,210 |4,520 |1,060 | |Additions during year |31,790 |
|(19,500) |_____- |____- | |Disposals during year |(19,500) |
|71,890 |27,420 |18,510 | |At 30 September 1986 |117,820 |
| | | | | | |
| | | | |Provision for depreciation on plant, equipment etc| |
|48,254 |17,077 |9,451 | |At 1 October 1985 |74,782 |
|(15,633) |- |- | |Disposals during year |(15,633) |
|14,378 |5,484 |3,702 | |Charge for year |23,564 |
|46,999 |22,561 |13,153 | |At 30 September 1986 |82,713 |
| | | | | | |
| | | | |Written down value | |
|24,891 |4,859 |5,357 | |At 30 September 1986 |35,107 |
| | | |(9) |Accruals (per workings above): | |
|113 |83 |- | |(2) |196 |
|214 |- |231 | |(3) |445 |
|101 |113 |303 | |(5) |517 |
|487 |368 |449 | |(6) |1,304 |
|915 |564 |983 | | |2,462 |
| | | |(10) |Current accounts: | |
| | | | | Duke |Earl |
| | | | |Opening balance 9,750 |10,477 |
| | | | |Interest on capital 2,500 |2,000 |
| | | | |Residual profit 6,846 |6,846 |
| | | | |Drawings (12,190) |(9,740) |
| | | | |Closing balance 6,906 |9,583 |
Question 5
WORKINGS
The first step is to derive the profit for the period:-
| | |£ |
|Closing |Assets minus external liabilities | |
| |(17,000 + 3,480 + 1,100 + 2,230 + 3,370 – 980) |26,200 |
| |Add back drawings (2,000 + 1,600 + 1,800) |5,400 |
| | |31,600 |
|Opening |Less assets minus external liabilities (26,060 – 820) |25,240 |
| |Profit for period (1st July to 31st October) |6,360 |
CAPITAL ACCOUNTS
| |R |S |
|Opening stock – Raw material | |380 |
|Purchases – Raw material | |9,500 |
| | |9,880 |
|Less closing stock – Raw material | |(465) |
|Cost of raw materials consumed | |9,415 |
|Add: direct wages |1,350 | |
| direct expenses |_395 |1,745 |
|Prime Cost | |11,160 |
|Factory overheads | | |
|Factory expenses |290 | |
|Indirect materials |350 | |
|Factory insurance |150 | |
|Depreciation – plant and machinery |5,160 |5,950 |
|Total cost of production | |17,110 |
|Add opening W.I.P | |560 |
| | |17,670 |
|Less closing W.I.P – Finished goods | |(695) |
|Factory cost of production – finished goods | |16,975 |
|Sales | |28,550 |
|Less cost of sales | | |
|Opening stock – finished goods |420 | |
|Factory cost of production – finished goods |16,975 | |
| |17,395 | |
|Less closing stock – finished goods |(610) |(16,785) |
|Gross profit | |11,765 |
|Less expenses | | |
|Sales room expenses |485 | |
|Administration expenses |620 | |
|Office salaries and wages |898 | |
|Vehicle running expenses |656 | |
|Bad debts w/o |64 | |
|Overdraft interest |725 | |
|Debenture interest |800 | |
|Depreciation: furniture and equipment |89 | |
|Motor vehicles |4,125 |(8,462) |
| | |3,303 |
|Less dividend | |(4,000) |
|Net profit for the year | |(697) |
|Add retained profit b/d | |5,500 |
| | |4,803 |
|Less transfer to general reserve | |(2,000) |
|Retained profit c/d | |2,803 |
AZ Ltd
Balance Sheet as at 31 October 1999
|Non current assets |Sh’000 |Sh’000 |Sh’000 |
|Land & Buildings |30,000 |- |30,000 |
|Plant and machinery |25,800 |(11,460) |14,340 |
|Furniture and equipment |890 |(274) |616 |
|Motor vehicles |16,500 |(7,525) |8,975 |
| |73,190 |19,259 |53,931 |
|Current Assets | | | |
|Stock – Finished goods | |610 | |
| Raw materials | |465 | |
| WIP | |695 | |
| | |7,360 | |
| | |9,130 | |
|Current Liabilities | | | |
|Bank overdraft |1,175 | | |
|Creditors |1,000 | | |
|Accruals |783 | | |
|Debenture interest |800 | | |
|Dividends accrued |4,000 |(7,758) |1,372 |
| | | |55,303 |
|Financed by: | | | |
|Authorized and issued capital | | |40,000 |
|Capital reserve | | | |
|Share premium | | |500 |
|Revenue reserve | | | |
|General reserve | | |2,000 |
|Retained profit | | |2,803 |
| | | |45,303 |
|Non current liability | | | |
|8% debenture | | |10,000 |
| | | |55,303 |
STA
Balance Sheet as at 1 November 19-6
| |£ |£ |
|Buildings | |17,000 |
|Equipment | |3,480 |
| | |20,480 |
|Current assets | | |
|Stock |1,100 | |
|Debtors |2,230 | |
|Bank |4,950 | |
| |8,280 | |
|Current liabilities | | |
|Creditors |(980) |7,300 |
| | |27,780 |
|Capital: Sam | |7,500 |
| Ted | |7,500 |
| Abe | |4,000 |
| | |19,000 |
|Current accounts: Sam |720 | |
| Ted |220 | |
| Abe |__- |940 |
| | |19,940 |
|Estate of Reg. | |7,840 |
| | |27,780 |
KK Ltd
Balance Sheet as at 31 October 1998
| |Shs ‘000’ |Shs ‘000’ |Shs ‘000’ |
|Non Current Assets | | | |
|Freehold property |44,500 |- |44,500 |
|Furniture and fittings |1,540 |(292) |1,248 |
|Motor vehicles |3,500 |(965) |2,535 |
| |49,540 |(1,257) |48,283 |
| | | | |
|Goodwill | | |500 |
| | | | |
|Current Assets | | | |
|Stock | |4,398 | |
|Debtors |1,540 | | |
|Less provision for doubtful debts |(77) |1,463 | |
|Rent receivable | |35 | |
|Cash at bank | |10,492 | |
| | |16,388 | |
|Current Liabilities | | | |
|Creditors |332 | | |
|Accrued expenses |189 | | |
|Debenture interest |350 | | |
|Tax payable |8,960 | | |
|Proposed dividends |4,500 |(14,331) |2,057 |
| | | |50,840 |
|Authorized and issued share capital 1,500,000 ordinary shares of | | | |
|Sh. 20 each fully paid | | | |
| | | |30,000 |
| | | | |
|Capital reserves | | | |
|Share premium | | |350 |
| | | | |
|Revenue reserves | | | |
|General reserve | |4,500 | |
|Profit and loss account | |12,490 |16,990 |
| | | |47,340 |
|10% debenture | | |3,500 |
| | | |50,840 |
Question 3
(a)
| |1995 |1996 |
|Gross profit percentage | | |
| Gross profit |24,000 = 37.5% | 32,400 = 30% |
|Sales |64,000 |108,000 |
| | | |
|Current ratio | | |
| Current assets |23,900 = 1.68:1 |31,000 = 1.52:1 |
|Current liabilities |14,200 |20,400 |
| | | |
|Quick ratio | | |
| Current assets less stock |23,900 – 12,000 = 0.84:1 |31,000 – 15,000 = 0.78:1 |
|Current liabilities |14,200 |20,400 |
| | | |
|Debtors collection period | | |
| Debtors x 365 |10,500 x 365 = 60 days |14,000 x 365 = 47 days |
|Sales |64,000 |108,000 |
| | | |
|Creditors payment period | | |
| Trade creditors x 365 |6,800 x 365 = 59 days |9,400 x 365 = 44 days |
|Purchases (W) |42,000 |78,600 |
| | | |
|Gearing ratio | | |
| Loan capital | 60,000____ = 70% | 60,000____ = 55% |
|Total capital |60,000 + 26,000 |60,000 + 49,000 |
| |1995 |1996 |
| |£’000 |£’000 |
|Cost of sales |40,000 |75,600 |
|Add: closing stock |12,000 |15,000 |
| |52,000 |90,600 |
|Deduct: opening stock |10,000 |12,000 |
|Purchases |42,000 |78,600 |
(b)
• The gross profit margin has fallen when compared with last year, although in absolute terms, both profit and sales are higher. Possibly the firm has lowered the price of goods to increase sales, although there may be other explanations (see part (c) below).
• There has been a reduction in liquidity as evidenced by a fall in both the current and the quick ratios. However, this is no immediate cause for concern as the company appears to be paying its creditors more promptly than last year.
• The debtors’ collection period, already satisfactory, has decreased still further from 60 to 47 days. There is not enough information to say whether this is all due to good credit control, or whether some sales are being made on shorter credit terms or for cash.
• The creditors payment period has shortened. Possibly the company has become more efficient at paying creditors, or perhaps it is purchasing goods on shorter credit terms.
• The gearing ratio has reduced but it is still too high. The reduction is mainly due to an increase in retained profits and in the revaluation reserve. High gearing involves greater risk for the shareholders.
Any two of the following:
• An error in counting closing stock
• An increase in prices from suppliers not passed on to customers
• Deliberate reduction in margin in an attempt to increase sales volume
(d)
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company ought to be able to pay its debts as they fall due. However, an excessively high current ratio means that resources are tied up in stock, debtors and cash instead of producing profits. Current assets should generally be kept as low as is compatible with efficient production and paying creditors as they fall due.
There is some truth in this statement. High gearing means greater risk, but also, in good times, greater returns. It is important that the percentage return to shareholders is greater than the percentage rate of interest being paid on the borrowings.
Question 4
Application and allotment account
|19X1 | |£ |19X1 | |£ |
|11 Feb |Cash |4,000 |10 Feb |Cash | |
|11 Feb |Share capital | | | | |
| |(50,000 @ 70p) |35,000 |16 Feb |Cash | |
| |Share premium | | | | |
| |(50,000 @ 20p) |10,000 | | |______ |
| | |£49,000 | | |£49,000 |
| | | | | | |
Ordinary Share capital account
|19X1 | |£ |19X1 | |£ |
|29 Sep |Forfeited shares | 500 |11 Feb |Application and allotment | |
| | | | |account | |
| | | | |(50,000 @ 70p) |35,000 |
|1 Nov |Balance carried down | |1 May |Call account | |
| | |50,000 | |(50,000 @ 30p) |15,000 |
| | | |1 Nov |Forfeited shares reissued | |
| | |______ | | |___500 |
| | |£50,500 | | |£50,500 |
Ordinary Share Premium Account
| | | |19X1 | |£ |
| | | |11 Feb |Application and allotment | |
| | | | |account | |
| | | | |(50,000 @ 20p) |10,000 |
| | | |1 Nov |Forfeited shares reissued | |
| |Bal c/d |10,250 | |account |___250 |
| | |£10,250 | | |£10,250 |
Call account
|19X1 | | |19X1 | |£ |
|1 May |Share capital |15,000 |1 May |Cash | 14,850 |
| | |_____ |29 Sep |Forfeited shares |___150 |
| | |£15,000 | | |£15,000 |
Forfeited Shares
|19X1 | | |19X1 | |£ |
|29 Sep |Call account |150 |29 Sep |Share capital (500 @ £1) |500 |
|1 Nov |Forfeited shares | | | | |
| |reissued |350 | | |____ |
| | |£500 | | |£500 |
Forfeited Shares
|19X1 | |£ |19X1 | |£ |
|1 Nov |Share capital | 500 |1 Nov |Cash | 400 |
|1 Nov |Share premium | 250 |1 Nov |Forfeited shares | 350 |
| | |£750 | | |£750 |
STRATHMORE UNIVERSITY
MOCK EXAMINATION
CPA PART I\ CPS PART I
FINANCIAL ACCOUNTING I
The following should be done under examination condition.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
QUESTION ONE
Nafuu Foods Ltd. is a company in the hospitality industry. The following trial balance has been extracted from its books on 31 October 2001.
Sh‘000’ Sh.‘000’
Revenue 816,160
Cost of sales 401,000
Wages and salaries 186,440
Operating expenses 95,860
Insurance 1,180
Directors’ fees 960
Ordinary share capital; 5,200,000 shares of Sh.20
each fully paid 104,000
Profit and loss account, 1 November 2000 77,600
9% debenture stock – secured 160,000
Share premium 18,000
Capital redemption reserve 56,400
Trade debtors and creditors 63,860 61,520
Bad debts written off 240
Audit fees 400
Interest on loan and overdraft 13,900
Depreciation expense 17,300
Accruals 900
Interim dividends paid 26,000
Freehold land and buildings 164,600
Leasehold land and buildings (over 50 years) 125,600
Leasehold land and buildings (over 50 years) 51,900
Furniture and equipment 85,600
Stock 46,400
Prepayments 720
Bank balance 2,820
Investments 9,800
1,294,580 1,294,580
You are provided with the following additional information:
1. The balances of fixed asset accounts as at the beginning of the year and additions during the year were as follows:
Cost or valuation Accumulated depreciation Additions
1 November 2000 during the year
Sh. ‘000’ Sh.‘000’ Sh.‘000’
Freehold land and buildings 157,000 7,600
Leasehold land and buildings
(over 50 years) 121,800 3,800
Leasehold land and buildings
(under 50 years) 60,200 5,800
Furniture and equipment 150,800 52,200 1,800
The company does not provide for depreciation on freehold properties or properties held on lease with 50 years or more to run at the balance sheet date. Properties held on lease with less than 50 years to run are depreciated over the un-expired term. Items of equipment are depreciated over their estimated useful life.
2. Some of the leasehold property in the books costing Sh.7,500,000 had just 50 years remaining on the lease in October 2000 and has not yet been transferred to the under 50 years category.
3. Disposals during the year included the following:
Cost Accumulated depreciation Sale proceeds
Sh. ‘000’ Sh.‘000’ Sh ‘000’
Freehold land and buildings 3,600 4,800
Leasehold under 50 years 2,300 1,700 960
All the sale proceeds have been included in the revenue: no other adjustment has been made.
The determination of depreciation expense for the year included in the trial balance above has correctly been done for those properties not disposed and include in the under 50 years category at the beginning of the year.
1) Freehold land was revalued on an existing basis by a professional valuer but the surplus of Sh.6,000,000 has not yet been brought into account.
2) The investments in the trial balance are temporary quoted securities. As at 31 October 2001 their market value was Sh.10,500,000. Income from the investments of Sh.450,000 is included in revenue.
3) Additional audit fees of Sh.600,000 need to be provided for.
4) The total balance of cash at bank includes Sh.1,500,000 overdraft on one of the accounts.
5) The corporation tax on the year’s profit has been estimated at Sh.27,000,000. Corporation tax on the previous years profit was finally agreed with the tax authorities to be Sh.310,000 more than had been provided for in the profit and loss account of the year.
6) The directors have decided to recommend a final dividend of Sh.5 per ordinary share
Required:
a) A schedule showing fixed assets movements for the year ended 31 October 2001. (10 marks)
b) Profit and loss account for the year ended 31 October 2001. (10 marks)
c) Balance sheet at 31 October 2001. (5 marks)
QUESTION TWO
Rotich and Sinei have been in partnership for several years, sharing profits and losses in the ratio 2:1. Interest on fixed capitals was allowed at the rate of 10% per annum, but no interest was charged or allowed on current accounts.
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
To 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,970,000
13,420,000 13,420,000
Additional information:
1. On 1 November 2000, Tonui was admitted as a partner and from that date, profits and losses were to be dated in the ratio 2:2:1. For the purpose of this admission, the value of goodwill was agreed at Sh.3,000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions between the partners being made in their current accounts. On that date, Tonui introduced Sh.1,250,000 into the firm of which Sh.375,000 comprised his fixed capital and the balance was credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission. In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise indicated, were to be apportioned on a time basis.
4. A charge was to be made for depreciation on motor vehicle and furniture and fittings at 20% and 10% per annum respectively, calculated on cost.
5. On 30 April 2001, the stock was valued at Sh.1,275,000.
6. Salaries included the following partners’ drawings:
Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh.62,500.
7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expense, which was later found to be due to the following clerical errors:
Sales returns of Sh.32,000 had been debited to sales returns but had not been posted to the account of the customer concerned :
The purchases journal had been undercast by S.80,000.
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31 October 2000 and 30 April 2001 respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000 for electricity consumed was required.
Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners’ current accounts for the year ended 30April 2001. (4 marks)
c) Balance sheet as at 30 April 2001. (7 marks)
(Total: 20marks)
QUESTION THREE
a) State and briefly explain any three distinguishing features between (i) a receipts and payments account and (ii) an income and expenditure account. (6 marks)
b) The accountant of Mamba Sports Club has extracted the following information from the books of account for the year ended 31 March 2001:
Receipts Payments
Sh. Sh.
Balance brought forward 288,000 Salaries and wages 254,000
Subscriptions: New equipment 565,000
Year 1999 2000 249,000 Repairs and
Maintenance 124,000
2000 2001 2,050,000 Office expenses 415,000
2001 2002 194,000 Printing and stationery 168,000
Dinner dance 723,000 Purchase ofBeverages 197,000
Beverage sales 657,000 Dinner dance expenses 315,000
Investments income 400,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 218,000
Investments 1,500,000
Balance carried forward 405,000
4,561,000 4,561,000
Balances as at 31 March 2000 31 March 2001
Sh. Sh.
Furniture and fittings (net) 240,000 -
Equipment (net) 690,000 -
Investments at cost 3,500,000 -
Subscriptions in arrears 300,000 375,000
Salaries accrued 68,000 72,000
Stock of beverages 162,000 184,000
Subscriptions in advance 85,000 -
Additional information:
1. Subscriptions in arrears are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and fittings and equipment respectively.
3. Investments which had cost Sh.500,000 were sold on 30 March 2001 for Sh.625,000. No entries have been made in the books in this respect.
Required:
a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)
QUESTION FOUR
a) Explain the term “bank reconciliation” and state the reasons for its preparation. (6 marks)
b) Ssemakula, a sole trader received his bank statement for the month of June 2001. At that date the bank balance was Sh.706,500 whereas his cash book balance was Sh.2,366,500. His accountant investigated the matter and discovered the following discrepancies:
1) Bank charges of Sh.3,000 had not been entered in the cash book.
2) Cheques drawn by Ssemakula totalling Sh.22,500 had not yet been presented to the bank.
3) He had not entered receipts of Sh.26,500 in his cash book.
4) The bank had not credited Mr Ssemakula with receipts of Sh.98,500 paid into the bank on 30mJune 2001.
5) Standing order payments amounting to Sh.62.000 had not been entered into the cash book.
6) In the cash book Ssemakula had entered a payment of Sh.74,900 as Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank marked “refer to drawer” but had not been written back into the cash book.
8) Ssemakula had brought forward the opening cash balance of Sh.329,250 as a debit balance instead of a credit balance.
9) An old cheque payment amounting to Sh.44,000 had been written back in the cash book but the bank had already honoured it.
10) Some of Ssemakula’s customers had agreed to settle their debts by paying directly into his bank account. Unfortunately, the bank had credited some deposits amounting to Sh.832,500 to another customer’s account. However, acting on information from his customers, Ssemakula had actually entered the expected receipts from the debtors in his cash book.
Required:
i) A statement showing Ssemakula’s adjusted cash book balance as at 30 June 2001. (9 marks)
ii) A bank reconciliation statement as at 30 June 2001. (5 marks)
(Total: 20 marks)
QUESTION FIVE
The accounting profession has for a long time relied on certain accounting conventions to guide accounting practice. Yet the application of the same conventions has been the source of criticism of the quality and relevance of information contained in financial reports.
Some of these conventions include:
a) The business entity principle.
b) The historical cost principle.
c) The monetary principle.
d) The matching principle.
e) The conservatism principle.
Required:
For each of the principles listed above:
a) Explain its meaning (5 marks)
b) Justify its use. (5 marks)
c) Explain any weaknesses associated with its use. (5 marks)
END OF MOCK EXAMINATION
NOW SEND YOUR ANSWERS TO THE DISTANCE LEARNING CENTRE FOR MARKING
-----------------------
INCOME
EXPENCESGFSS
Credit Income income
THE
TRIAL
BALANCE
Sales
Invoice
Sales
Journal
Purchases
Journal
Purchase
Invoice
Return
Inwards
Journal
Credit
note
Return
Outwards
journal
Debit
Note
Receipts
Cheques
Petty cash
Vouchers
The cashbook
&
Petty cashbook
Other
Correspondence
General
Journal
The
Firm
The
Debtor
The
Creditor
The
Firm
LEDGER
ACCOUNTS
IMPERSONAL
ACCOUNTS
PERSONAL
ACCOUNS
REAL
ACCOUNTS
NORMAL
a/cs
CREDITORS
(For goods)
DEBTORS
(for goods)
Sales = 200 + 300 + 400 + 500
Cashbook = 50 + 100 + 250 + 300
Balance c/d = 150 + 150 + 200 + 200
Sale of Shares
Sale at a premium
Sale at per value
Lump sum
Sale
1.
Lump sum
Sale
4.
Lump sum
Sale
3.
Lump sum
Sale
2.
For each stage, an account is opened. This account must close at the end of the stage. (The application stage & allotment stage may be dealt with in a single account called the application/ allotment A/C)
With deficit
With refunded money
With amount required to close the application A/C.
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