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Principles of Accounting

Form 4

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 Published by
Gramsol Books
46 Kwame Nkrumah Avenue,
Harare. 2020
www.gramsol.com
Tel. 0864 420 9124

© Gramsol Books
The moral rights of the authors have been asserted.
Publisher: Sandura Tafadzwa
Managing Editor: Mbono Njabulo
Commissioning Editor: Mabhodyera Armstorng

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Development editors: Nkomazana Priscilla, Midzi Andrew
Typeset by Mhlahlo Artkins
Cover by Chikanga Francis
Printed by Gramsol Books

ISBN:

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Contents
BOOK FEATURES

TOPIC 1: TRIAL BALANCE AND ERRORS.....................................................................1

TOPIC 2: ACCOUNTING RATIOS.................................................................................19
TOPIC 3: SINGLE ENTRY AND INCOMPLETE RECORDS..............................................32
TOPIC 4: NON-PROFIT MAKING ORGANIZATIONS...................................................56
TOPIC 5: MANUFACTURING ACCOUNT.....................................................................75
TOPIC 6: PARTNERSHIP...............................................................................................98
TOPIC 7: COMPANY ACCOUNTS..............................................................................122
TOPIC 8: BUSINESS ETHICS......................................................................................142
Revision Test 1...........................................................................................................146
Revision Test 2...........................................................................................................162

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Revision Test 3...........................................................................................................181
Book Features

Catchy opening images

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Summary at the end
of each topic

Revision exercise at
the end of each topic
 TRIAL BALANCE AND ERRORS
TOPIC
1

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Objectives
By the end of the topic, learners should be able to:
• recognise errors on profit;
• explain the effect of errors on profit;
• adjust gross or net profit after correction of errors; and
• prepare a statement of financial position extracts after
correction of errors.

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Introduction
Financial statements provide many figures that are not necessary for decision making by
key stakeholders. Key stakeholders include shareholders, banks, trade payables, customers,
employees and trade unions, government departments, and other lenders. In decision
making, accounting ratios can be used as a tool for business assessment and performance
measurement. Ratios and percentages are a simple and comprehensive format of presenting
accounting information. They can be used to highlight Key Performance Indicators (KPIs)
in financial statements. They provide a basis for comparison of organizations or financial
periods. Accounting ratios include calculations in the form of ratios, percentages, and time
periods. They are classified into profitability, liquidity, and efficiency ratios.

Profitability ratios
Profitability can be defined as the ability to make a profit. The main objective of a business
in the private sector is to make a profit. Often, success or failure is determined by its ability
to do as such. Profitability ratios are used to measure how successful a business is at selling
and using its assets to generate profit. This implies that profitability ratios are mainly used
to analyse the performance of an entity in respect of its profit levels.

Margin
A margin, also known as the gross profit margin, is a ratio that expresses gross profit as a

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percentage of net sales. Therefore, a margin measures the gross profit earned on every
$100 of net sales. The higher the gross margin, the more profitable the business. Margin
is calculated as follows:
Gross profit
Margin = Turnover # 100

Mark up
This is a ratio that expresses gross profit as a percentage of the cost of sales. Mark up is
calculated on the cost of sales to come up with the selling price. Like the margin ratio, the
mark up is also measured in percentage and is calculated as follows:

Mark up = Gross profit x 100

Cost of sales

The relationship between ‘margin’ and ‘mark up’

Both margin and mark-up are profitability ratios that use the gross profit as a numerator.
When given a mark-up, it is easier to calculate the margin, and if given the margin it is easier
to calculate the mark-up.

Converting a mark up into a margin

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If the mark-up is given as 3 , 1 represents the gross profit and 3 represents the cost of
sales. We convert mark up into margin as follows:
Margin = Gross profit x 100
Cost of sales + gross profit

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Solution
a. Sales for the year = Turnover + returns inwards
= $(195 000 + 5 000)
= $200 000
b. Margin = Gross profit x 100%
Turnover
= $58 500 x 100%
$195 000
= 30%
c. Mark-up = 3 x 100%
10 – 3
= 3 x 100%
7
= 42.9%
d. Cost of goods sold = Turnover – gross profit

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= $(195 000 – 58 500)
= $136 500
e. Rate of inventory turnover = Cost of goods sold
[Opening + Closing inventory]
2
Let x be the closing inventory

4 times = $136 500

$[14 000 +x]
2
` 4[14 000 + x] = 136 500
2
2[14 000 + x] = 136 500
28 000 + 2x = 136 500
2x = 136 500 – 28 000
2x = 108 500
2 2
x = $54 250
Therefore closing inventory = $54 250.

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 f. Purchases = Cost of sales – opening inventory – carriage inwards + closing inventory
= $(136 500 -14 000 – 10 000 + 54 250)
= $166 750

TOPIC SUMMARY
• Accounting ratios helps both users with accounting knowledge and those without
to make their informed decisions.
• Mark up, gross profit margin, net profit margin, and return on capital employed,
are profitability ratios.
• The current or quick ratio is a liquidity ratio that measures the ability of the
business to pay short term liabilities.

REVISION EXERCISE 2
Multiple Choice

SAMPLE
Answer all questions
1. The following information is available in the books of Gilder, a trader.
$
Purchases 145 000
Carriage inwards 3 000
Inventory 1 January 2019 66 000
Inventory 31 December 2019 14 000
What is the rate of inventory turnover?
A. 5⅓ times. B. 5 times. C. 2.5 times. D. 3 times.
2. Which of the following is not included in the ascertainment of acid test ratio?
A. Cash in hand. C. Inventory.
B. Trade receivables. D. Expenses prepaid.
3. 3. If mark up is half, then the gross profit margin is
A. 33⅓%. B. 50%. C. 66⅔%. D. 100%.
4. The following information relates to a trader.

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 Calculation for the purchases for the year
A purchases ledger control account is used to calculate the credit purchases. In this case,
the credit purchases will be the balancing figure in the purchases ledger control account.
Cash purchases are obtained from the payments side of the cash book and then added to
the credit purchases to get total purchases. If there are no cash purchases, credit purchases
will be used as the total purchases.
Opening and closing balances of trade receivables and trade payables are used to prepare
the control accounts.

Example 3.1
Stars Enterprises does not keep proper records. The following information is provided on
31 December 2018:
1 Jan 2018 31 Dec 2018
($) ($)
Trade receivables 15 000 25 000
Trade payables 10 000 18 000
Inventory 16 000 13 500

Cash book
2018 $ 2018 $

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Jan 1 Balance b/d 19 500 Dec 31 Trade payables 43 000
Dec 31 Cash sales 18 500 Purchases 28 000
Trade receivables 99 000 Balance c/d 66 000
137 000 137 000

You are required to prepare:

a. sales ledger control account clearly showing the credit sales;
b. purchases ledger control account clearly showing credit purchases; and
c. trading account for the year ended 31 December 2018.

Solution
Sales ledger control account - 31 December 2018
2018 $ 2018 $
Jan 1 Balance b/d 15 000 Dec 31 Bank 99 000
Dec 31 Credit sales 109 000 Balance c/d 25 000
124 000 124 000

Purchases ledger control account - 31 December 2018

2018 Bank $ 2018 $
Dec 31 Balance c/d 43 000 Jan 1 Balance b/d 10 000
18 000 Dec 31 Credit purchases 51 000
61 000 61 000

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Notes
• Credit sales will be the balancing figure in the sales ledger control account
Total sales = credit sales + Cash sales
Total sales = $(109 000 +18 500)
Total sales = $127 500
• Credit purchases will be the balancing figure in the purchases ledger control account
Total purchases = credit purchases + cash purchases
Total purchases = $(51 000 + 28 000)
Total purchases = $79 000

Trading account for the year ended 31 December 2018

$ $
Sales $(109 000 + 18 500) 127 500
Less cost of sales
Opening inventory 16 000
Add purchases $(28 000 + 51 000) 79 000
Cost of goods consumed 95 000

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Less closing inventory (13 500)
81 500
Gross profit for the year 46 000

Calculation of missing expenses and revenues for the year

Ledger accounts are prepared to calculate the amount to be transferred to the profit and
loss account section of the income statement. In the ledger accounts of expenses and
revenues, the amount transferred to the profit and loss account section of the income
statement is the balancing figure.

Example 3.2
Sean, a sole trader provided the following assets and liabilities:

1 January 31 December
2018 2018
$ $
Trade receivables 14 000 13 776
Trade payables 13 500 15 113
Inventory 11 554 10 678
Insurance owing 2 776 2 450
Electricity prepaid 3 334 2 423
Rent received prepaid 1 209 1 300

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 Purchases ledger control account

$ $
Bank 78 000 Balance b/d 14 900
Discount received 1 500
Balance c/d 15 200 Credit purchases (Bal fig) 79 800
94 700 94 700

Advertising account

$ $
Balance b/d 1 350 Income statement (bal fig) 13 350
Bank 13 950 Balance c/d 1 950
15 300 15 300

Salaries and wages account

$ $
Bank 12 300 Balance b/d 4 600
Balance b/d 3 200 Income statement (Bal fig) 10 900
15 500 15 500

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Income statement for the year ended 31 December 2018
$ $
Sales (See W1) 201 050
Less cost of goods sold
Opening inventory 9 200
Add purchases (see w2) 79 800
89 000
packaging materials $(11 300 – 1 300) 10 900
Less closing inventory (13 500)
(75 500)
125 550
Gross profit
Add other incomes 1 500
Discount received 14 300
Rent received 141 350
Total incomes
Less expenses
Bad debts 550
Discount allowed 1 400
Advertising (See w3) 13 350
Salaries and wages (See w4) 10 000
Stationery $(14 200 – 3 200) 11 000
Interest on loan 1 900
Insurance 19 100
General expenses 10 000
Depreciation : Computers (5% x $14 000) 700
: Motor vehicles (15% x $60 000) 9 000 (87 900)
Net profit 53 450

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 TOPIC SUMMARY
• Incomplete records are a situation whereby there is insufficient accounting
information required for the preparation of the financial statements.
• Control accounts help in the calculation of credit sales and credit purchases if
there is insufficient information.
• The statement of affairs is a financial statement that shows the assets and liabilities
of the business at any particular period. It is also used to calculate capital for the
accounting period.

REVISION EXERCISE 3
Multiple Choice
Answer all questions
1. The following information was provided by a trader:

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$
Cost of sales 120 000
Total expenses 13 500
Net profit 6 500
What is the turnover?
A. $140 000. B. $133 500. C. $126 000. D. $120 000.
2. A trader provided the following information:
$
Capital at 1 January 2020 170 000
Capital at 31 December 2020 200 000
Private motor van brought into business 20 000
Drawings 8 000
What was the net profit/loss for the year?
A. $18 000 loss. B. $18 000 profit. C. $38 000 loss. D. $38 000 profit.
3. The following information relates to the business of a sole trader.

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Trade payables 10 900 11 500
Bank 6 400 Cr 3 200Dr
Loan 25 000 25 000
Advertising prepaid 2 580
Advertising owing 1 565

Additional information available on 31 December 2018.

i) Chuma brought computers worth $3 000 at cost into the business. The
computers were brought on 30 June 2017. The computer is to be depreciated at
12% per annum on cost.
ii) Shonga, a customer, amounted to $4 800 was declared bankrupt and written off
as a bad debtor.
iii) Provision for doubtful debts is to be created on 7% of trade receivables.
iv) Chuma withdrew a $5 000 cheque and goods worth $4 000 at selling price
during the year for personal use. The mark up for goods withdrawn was 25%.
a.

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You are required to prepare:
a) Statement of affairs as at 1 January 2017; and [3]
b) Statement of financial position as at 31 December 2017 showing clearly the net
profit or loss for the year ended 31 December 2017. [9]
3. The statement of financial position of Hove on 31 December 2019 was as follows:
Statement of financial position as at 31 December 2019
Assets $ Liabilities and equity $
Land and buildings 25 000 Capital 30 000
Motor vehicles 18 000
Current assets Current liabilities
Inventory 6 900 Trade payables 5 000
Trade receivables 7 200 Insurance owing 650
Advertising prepaid 895 Non-current liabilities
Cash at bank 1 655 loan 24 000
59 650 59 650

On 1 January 2020, the following transactions took place:

i) Hove took inventory worth $2 900 and a cheque for $1 200 for private use.
ii) Faith a customer paid $1 500 which was immediately deposited into the bank.
iii) Paid one quarter loan by cheque.

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 i) Depreciation is provided on office equipment at 20% per annum on cost.
ii) Provision for doubtful debts is to be created at 5% of the trade receivables.
iii) De-Facto brought his private motor van worth $30 000 into the business. No
records were made in the books of accounts.
iv) Inventory of stationery was valued at $505.
You are required to prepare:
a) income statement for the year ended 31 December 2020; and [9]
b) statement of financial position as at 31 December 2020. [11]
5. Mary, a sole trader, did not keep her proper records on the double entry. However,
she is able to provide the following information about the business on 1 May 2018.
$
Premises at cost 19 200
Fixtures and fittings at cost 11 500
Inventory 8 400
Trade receivables 10 000

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Trade payables 14 000
General expenses owing 1 660
Bank overdraft 6 750

She also provided the following summary for her bank account for the year ended 30
April 2019.

RECEIPTS
$
Cheques received from credit customers 28 450
Cash sales banked 15 100
Rent receivable 3 700
Loan payable 31 December 2025 6 000

PAYMENTS
$
Advertising 16 200
Trade payables 29 000

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v. Insurance outstanding was $1 800.
vi. Depreciation is to be charged as follows:
Clubhouse 10% per annum on cost.
Motor van 15% per annum on cost.
Furniture 12% per annum on cost.
You are required to prepare:
a. refreshments trading account for the year ended 31 December 2017; [4]
b. subscription account, showing an amount to be transferred to the income and
expenditure account; [4]
c. income and expenditure account for the year ended 31 December 2017; and [6]
d. statement of financial position as at 31 December 2017. [8]

Solution
Chitungwiza Social Club’s
Refreshments trading account for the year ended 31 December 2017
$ $

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Sales $(89 800 + 30 000) 119 800
Less cost of sales
Opening inventory 10 000
Add purchases (see working 2) 70 200
80 200
Less closing inventory (9 000
(71 200)
Gross profit 48 600

Subscription account
2017 $ 2017 $
Jan 1 Balance b/d 8 000 Jan 1 Balance b/d 9 300
Dec 31 Income & expenditure 90 300 Dec 31 Bank 92 000
Balance c/d 5 000 Balance c/d 2 000
103 300 103 300
2018 2018
Jan 1 Balance b/d 2 000 Jan 1 Balance b/d 5 000

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 (12 000)
Working capital 145 800
Net assets 314 300

Financed by
Accumulated fund (See w4) 153 700
Add surplus 160 600
Accumulated fund at 31 December 2017 314 300

Workings
1. Sales ledger control account
2015 $ 2015 $
Jan 1 Balance b/d 15 000 Dec 31 Bank 100 000
Dec 31 Cr sales 89 800 Balance c/d 4 800
104 800 104 800

2. Purchases ledger account

2017 $ 2017 $
Dec 31 Bank 78 000 Jan 1 Balance b/d 13 000
Balance c/d 5 200 Dec 31 Cr purchases 70 200
83 200 83 200

3. Statement of affairs as at 1 January 2017

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Assets $ $
Clubhouse 80 000
Motor van 45 000
Accrued subscriptions 8 000
Inventory of refreshments 10 000
Trade receivables 15 000
Cash at bank 18 000
176 000
Less liabilities
Prepaid subscriptions 9 300
Trade payables 13 000
(22 300)
Accumulated fund 153 700

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TOPIC MANUFACTURING ACCOUNT

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Objectives
By the end of the topic, learners should be able to:
• define terms used in manufacturing accounts;
• classify manufacturing costs;
• prepare manufacturing accounts;
• draw up income statements of a manufacturing
business; and
• draft a statement of financial position of a manufacturing
businesses.

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 Trading account for the year ended 31 December 2018
$ $
Sales 230 000
Less sales returns (600)
Turnover 229 400
Less cost of goods sold
Opening inventory of finished goods 4 580
Add total production costs 150 000
Add Purchases of finished goods 21 000
175 580
Add carriage inwards 6 300
Cost of goods available for sale 181 880
Less closing inventory of finished goods (6 000)
(175 880)
Gross profit 53 520

Profit and loss account

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When preparing the profit and loss section of the income statement all expenses that are not
incurred in the production of goods are used. These costs are regarded as non-production
overheads. They include administrative expenses, selling and distribution expenses, and so
on.

Apportionment of expenses
This refers to the sharing of expenses. All factory portions on such expenses are entered into
the manufacturing account. Expenses for the office are entered in the income statement.
When there are prepayments and accruals on such expenses, adjustments should first be
made before apportionment.

Example 5.2.
Ndlovu a manufacturer of nuts and bolts provides the following information on 30 September
2018.
$
Inventory 1 October 2017: Raw materials 10 443
Finished goods 11 394
Purchase of finished goods 13 750
Purchase of raw materials 66 000
Hire of special plant 7 000
Sale of finished goods 191 000
Rent and rates 11 000
Insurance 6 000

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Solution:

Ndlovu’s
Manufacturing account for the year ended 30 September 2018
$
Opening inventory of raw materials 10 443
Add purchases of raw materials 66 000
Add carriage on raw materials 2 200
78 643
Less closing inventory on raw materials (5 442)
Cost of raw materials consumed 73 201
Add direct costs
Manufacturing wages 18 000
Patent fees $(1 670 + 130) 1 800
Hire of special plant 7 000
Prime cost of production 100 001
Add indirect costs
Indirect materials $(1 895 – 800) 1 095

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Factory rent and rates (70% x $8 800) 6 160
Repairs on machinery 4 800
Depreciation on machinery (15% x $23 500) 3 525
Insurance (70% x $6 000) 4 200
Factory power 3 000
Total costs of production before work in progress 122 781
Less closing inventory on work in progress (1 690)
Total cost of production 121 091

Income statement for the year ended 30 September 2018

$ $
Sales 191 000

Less cost of goods sold

Opening inventory of finished goods 11 394
Add total production costs 121 091
Add Purchases of finished goods 13 750
146 235
Add carriage inwards 1 800
Cost of goods available for sale 148 035
Less closing inventory of finished goods (3 250)
(144 785)
Gross profit 46 215
Less expenses 85
 Cost of goods available for sale 148 035
Less closing inventory of finished goods (3 250)
(144 785)
Gross profit 46 215
Less expenses
Selling and distribution expenses 6 950
Office rent and rates 2 640
Insurance 1 800 (11 390)
Net profit for the year 34 825

Statement of financial position

Manufacturing businesses also prepare a statement of financial position to show assets,
liabilities, and the capital of the business. The statement of financial position is prepared
in the same way as of the trading business. The difference is only on the current assets
section where the manufacturing businesses have three inventories: raw materials, work in
progress, and finished goods. All inventories must be disclosed on the face of the statement
of financial position.

Structure of the statement of financial position extracts showing the current

assets section.

SAMPLE
Statement of financial position extracts as at 31 December 2018
Current assets $ $ $
Inventories: Raw materials xx
Work in progress xx
Finished goods xx _____
Total inventories xxx

Example 5.3.
The following balance relates to Susan Manufacturers producing office furniture in Harare.
The trial balance was prepared after the preparation of manufacturing account.

Trial balance as at 31 October 2018

Dr ($) Cr ($)
Inventory, 31 October 2018: Raw materials 16 400
Work In Progress 11 600
Inventory, 1 November 2017: Finished goods 15 000
Total cost of production 88 000
Sales of finished goods 176 000
Office rent 10 500
Office insurance 9 400
Plant and machinery at cost 104 000
Accumulated depreciation on plant and machinery 36 400
Capital, 1 November 2017 72 000
Selling and distribution expenses 13 060
Discounts 9 600 4 000
Returns inwards 5 944
14 400
86Drawings 3 400
Cash at bank
Introduction
A partnership is defined as the business formed between two to twenty people who combine
their resources to operate as one business. Partnership businesses are usually formed to
solve challenges faced by sole traders such as lack of capital. The minimum number of
members who can form a partnership is two and the maximum number is twenty. Members
of the partnership business are known as partners.

Reasons for starting a partnership business

• To raise more capital to stop capital shortages which are usually faced by sole traders.
• To share experience, knowledge, and skills related to the management of the business.
• To share losses, burdens, and risks between partners as a way of reducing problems
faced by sole traders.
• To enjoy economies of scale.
• To share responsibilities and duties among partners.

Disadvantages of partnership business

• There are unlimited liabilities which may cause the partners to lose their private properties
if the business fails to pay its debts.

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• Sharing profits with silent partners may discourage active partners.
• There are conflicts of interest as some partners may be interested in expansion while
others may be interested in the sharing of profits.
• There is no separation of legal entity between the business and its owners.

The partnership agreement

Partners must first agree on the conditions, duties, and responsibilities before the formation
of the partnership. Their agreements are recorded in the partnership deed. The partnership
deed is a document drafted by the partners showing the terms of their agreement in the
formation and operation of the partnership. It is used to avoid misunderstandings and to
settle queries between partners.

A partnership agreement has the following contents:

• The name and address of the business.
• The date of the commencement of the business.
• The addresses and names of the partners.
• Methods of solving disputes among or between partners.
• Commission to be paid to partners.
• The length of the accounting period.
• The capital to be contributed by each partner.
• The duties, responsibilities, and rights of the partners.

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 • The profit-sharing ratio.
• Interest allowed on partners’ capital.
• Interest allowed on partners’ current accounts.
• Interest charged on partners’ drawings.
• Salary to be paid on partners who operate the business.
• Interest in partners’ loans.
• Duration of the partnership business.
• The conditions in which the partnership can be dissolved.
• The objectives of the partnership business.
• Procedures for the admission of a new partner.
• Procedures took on the death or retirement of the one the partners.
• The maximum amount which a partner can withdraw from his/her capital.

The Partnership Act of 1980

In the absence of the partnership agreement, the partnership business is entitled to use the
Partnership Act of 1890. The Partnership Act is used where the formation of partnership was

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made on an oral agreement. The Act is drafted by parliament on behalf of the government.
It governs and states the duties and rights of the partners. So if there are misunderstandings
and other disputes arise in partnership, the court will use the Partnership Act to solve the
disputes between partners.

The provisions of the partnership Act 1890

• No interest is charged on partners drawings.
• No interest is allowed on partners’ capital.
• Profits and losses are to be shared equally.
• All partners contribute equal capital.
• No salaries to be paid to partners.
• Interest on partners’ loan is 5% per annum.
• Equal duties and responsibilities, therefore no active and sleeping partners since all
partners have equal duties and responsibilities.

Financial statements prepared by partnership business

The partnership prepares the following financial statements:
a. Trading account.
b. Profit and loss appropriation account .
c. Statement of financial position.

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 Solution:
John and Simba’s
Profit and loss Appropriation account for the year ended 31 December 2017
$ $
Net profit for the year 83 000
Add interest on drawings: John (8% x $7 000) 560
Simba (8% x $16 000) 1 280
84 840
Less interest on capital: John (10% x $43 000) 4 300
Simba (10% x $40 000) 4 000
Salary: Simba 12 000
Bonus: Simba 8 000 (28 300)
Sharing profits 56 540
John ( ½ x $56 540) 28 270
Simba ( ½ x $56 540) 28 270 (56 540)
----

SAMPLE
Partners’ current account
John Simba John Simba
$ $ $ $
Balance b/d 30 000 40 000
Interest on drawings 560 1 280 Cash 13 000
Drawings 7 000 16 000 Interest on capital 4 300 4 000
Salary 12 000
Bonus 8 000
Balance c/d 68 010 74 990 Sharing profits 28 270 28 270
75 570 92 270 75 570 92 270
Balance b/d 68 010 74 990

Statement of financial position of partnership business

The statement of financial position prepared by partnership businesses is the same as that
prepared by the sole traders. The main difference is on the financed section where capital
and current account are shown separately.

The structure of the statement of financial position

Extracts showing the current account within statement of financial position.

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 Trial balance as at 31 December 2018
Purchases and sales $ $
Capital, 1 January 2018: Lee 100 000 230 000
Vee 120 000
Current accounts: Lee 80 000
Vee 9 000
Drawings account : Lee 9 700
Vee 52 000
Inventory, 1 January 2018 52 000
Insurance 13 000
Carriage inwards 7 000
Rates 8 000
Carriage outwards 10 500
Discounts 7 200
Trade receivables and trade payables 10 000 20 000
Premises at cost 49 000 17 000
Delivery van at cost 125 000
Provision for depreciation, 1 January 2018: Premises 135 000
Delivery van 25 000
Bad debts 52 500
Provision for bad and doubtful debts, 1 January 2018 6 000
Salary : Lee 2 500
: Staff members 14 000
Rent received 32 000

SAMPLE
Loan from Vee 11 000
Cash at bank 50 000
______ 12 000
629 700 629 700

Additional information available on 31 December 2018.

i. Inventory on 31 December 2018 was valued at $16 000.
ii. A purchase invoice amounting to $11 200 was omitted in the books of account.
iii. Insurance for the year amounted to $9 400.
iv. Additional bad debts written off on 31 December 2018 amounted to $4 000.
v. Provision for bad debts is to be increased to 5% on trade receivables. A 2% of provision
for discount allowed was created on 31 December 2018 on net trade receivables.
vi. Cheque paid to a supplier Pee Ltd totalled to $10 000 with a cash discount of 10% was
not included in the books of accounts.
vii. Depreciation is provided as follows:
Premises at 12% per annum on cost.
Delivery van at 15% per annum on written down value.
You are required to prepare:
a. income statement &Appropriation account for the year ended 31 December 2018; and
b. statement of financial position as at 31 December 2018. Show the current account within
the statement of financial position.

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 The partnership deed of the partnership had the following conditions:
• Juliet is to receive a monthly salary of $2 000.
• 12% interest on capital.
• 8% interest on drawings.
• 10% interest on partners’ loan.
The following information was available on 31 December 2019.
i) Inventory on 31 December was valued at $10 600.
ii) Sales invoice to Chinx $5 000 was overlooked in books of account.
iii) Advertising owing on 31 December 2019 was $1 500.
iv) Inventory of stationery unpaid on 31 December 2019 amounted to $1 300.
v) Unused inventory was valued at $730 31 December 2019.
vi) Rent paid covered up-to 31 October 2019.
vii) Loan acquired from Tongai $30 000 was not recorded in the books of account.
viii) Provision for depreciation on office equipment is to be charged on 20% on

SAMPLE
reducing balance method.
ix) Provision for bad debts is to be maintained on 10% on trade receivables and a
provision for discount allowable is to be created on 2% of net trade receivables.

You are required to prepare:

a) income statement for the year ending 31 December 2019; and [10]
b) statement of financial position as at 31 December 2019. Show the current
account on the separate ledger. [10]

5. Junior and Alex extracted the following trial balance after preparation of trading
account on 31 July 2020

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 iii) Carriage outwards accrued on 31 July 2020 was $1 490.
iv) Receivables amounting to $5 000 were declared bankrupt and written off as bad
debts on 31 July 2016.
v) Provision for bad debts is to be adjusted on 8% of trade receivables and
provision for discount allowed is to be created on 5% of net trade receivables.
vi) Interest on loan is to be chargeable at 10% per annum.
vii) Their partnership agreement ha d the following provisions:
• Profits and losses are to be shared at the ratio 4:1.
• Junior is entitled to an annually salary of $3 000.
• Interest on partners’ loan is allowed at 12% per annum.
• Interest on capital is to be allowed at 10% per annum on cost.
• Interest on drawings is to be allowed at 20% per annum.
You are required to prepare:
a) Profit and loss appropriation account for the year ended 31 July 2020; and [10]
b) Statement of financial position as at 31 July 2020. Show the current account

SAMPLE
within the statement of financial position. [10]
6. Sikhumbuzo and Shereni are in partnership operating a departmental firm
selling furniture and groceries

$
Capital, 1 January 2020: Sikhumbuzo 38 000
Shereni 34 000
Current account, 1 January 2020 : Sikhumbuzo 9 400Cr
Shereni 3 450Dr
Drawings : Sikhumbuzo 7 000
Shereni 8 400
Inventory, 1 January 2020: Furniture 10 300
Groceries 11 000
Sales : Furniture 23 000
Groceries 20 174
Purchases : Furniture 16 000
Groceries 18 000
Bank overdraft 3 500
Premises at cost 28 000
Office equipment at cost 15 000
Provision for depreciation, 1 January 2020: Office equipment 4 500
Insurance 1 450
Advertising 1 936
Sundry expenses 2 063
Carriage inwards: Furniture 1 500
Groceries 1 300
Returns inwards : Furniture 1 800
Groceries 2 000
Returns outwards : Furniture 4 925
Groceries 3 250
Provision for bad debts, 1 January 2016 800
120 Trade receivables 18 500
 Ordinary shares
These shares are also known as equity shares. The holders of these shares are known as
ordinary shareholders. They are the true owners of the limited company who have voting
rights at an annual general meeting. They appoint the directors who manage the operations
of the limited company. Ordinary shareholders receive their dividends after the preference
shareholders and their dividends vary with the level of profits earned. Their dividends
also vary with the amount declared by the board of directors. They sometimes receive an
interim dividend during the financial period and a final dividend after the financial period.
All reserves of the limited company belong to the ordinary shareholders. The issued share
capital of the ordinary shares is disclosed in the balance sheet of the limited company at
their par value, quantity, and the total value of the shares. For example, 200 000 ordinary
shares of $1 each fully paid $200 000.

Share capital
Authorised share capital
Authorised share capital is the maximum of share capital that can be issued by a limited
company. It is also known as the nominal capital. The authorised share capital is stated in
the memorandum of association of the business.

Issued share capital

SAMPLE
The issued share capital is the amount of capital that a limited company has issued to
the shareholders. It represents the amount of capital invested by the shareholders of the
company. The issued share capital cannot exceed the authorised share capital. The number
of shares of the issued share capital is used to calculate the dividends.

Called up capital
Called up capital is the money which shareholders are required to pay immediately; for
instance, the company can issue 700 000 shares of $1 each. The company may require the
shareholders to pay $0.70 per share which gives a total of $490 000 upfront. The remaining
$0.30 per share which is $210 000 will be paid in the future as and when requested. The
$0.70 per share requested to be paid immediately is the called up capital.

Un-called up capital
This is an amount of share capital not yet requested to be paid by shareholders. Using the
above example the uncalled up capital is $0.30 per share.

Paid up capital
This is the amount received from the shareholders from the amount of share capital called
up. Paid up capital is the amount that the shareholders have managed to pay on called up
capital. For instance, when called up capital requested the shareholder may pay $400 000
from the $490 000 requested as called up capital.

Unpaid up capital
This is the portion of the money not yet received from shareholders from the called up
capital. Using the above example, unpaid called up is represented by $90 000.

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 Example:
200 000, 10% preference shares of $1 each fully paid
You are required to calculate: the preference dividends

Solution
Preference dividends = 10% x 200 000 x $1
= $20 000

Example:
400 000, 8% preference shares of $2 each fully paid
During year the interim dividends paid to preference shareholders was $36 000.
You are required to calculate:
a. total preference share dividends; and
b. the final preference share dividends.

Solution
a. Total preference dividends = 8% x 400 000 x $2
= $64 000

SAMPLE
b. Final preference share dividends = Total preference share dividends – interim dividends
= $(64 000 – 36 000)
= $28 000
The final preference share dividend is the remaining amount of dividends unpaid at the end
of the accounting period. In this case, the total amount of dividends that the preference
shareholders are supposed to receive is $64 000. During the year they received $36 000
and the amount not yet received is $28 000 and this $28 000 is regarded as the final
dividend. Preference share dividends are treated as expenses under finance cost in the
income statement.

Calculation of the final ordinary share dividends

The ordinary share dividends vary with the level of profits and the amount declared by the
board of directors and therefore not fixed.

Example 7.1.
500 000 ordinary shares of $1 each fully paid

During the year ordinary shareholders were paid 15cents per share. The directors
recommended that ordinary shareholders are to receive10 cents per share as a final dividend.
You are required to calculate:
a. interim dividends;
b. final dividends; and
c. total ordinary dividends.

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 Reserves
General reserves, 1 April 2018 31 000
Retained Profits, 1 April 2018 64 000CR

Net profit for the year before interest on debentures was $106 000. The ordinary
dividends paid were 6 cents per share during the year. Interim preference dividends
amounted to $34 000.
The directors recommended that:
i) General reserves to be increased to $35 000.
ii) A final dividends be paid to the preference shareholders.
iii) A proposed final dividend of 5 cents per share be paid to ordinary shareholders.
You are required to prepare:
a) income statement for the year ended 31 March 2019; [4]
b) statement of changes in equity for the year ending 31 March 2019; and [5]
c) statement of financial position extracts as at 31 March 2019. [8]

SAMPLE
3. Violet and Sons Limited Company had the following information in their books on
31 December 2018.

Authorised share capital

220 000 ordinary shares of $1 each
100 000, 11% preference shares of $1 each

Issued share capital

200 000 Ordinary shares of $1 each fully paid
80 000, 11% preference shares of $1 each fully paid
18 000, 15% debentures of $10 each fully paid

Reserves
$
General reserves – 1 January 2018 16 000
Retained profits – 1 January 2018 40 000Dr
Interim ordinary dividends 10 000
Interim preference shares 6 000

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 REVISION EXERCISE 8
Multiple Choice
Answer all questions
1. Which of the following is unethical behaviour in business
A. Competence.
B. Cheating customers.
C. Integrity.
D. Objectivity.
2. __________________ is a professional ethic in accounting
A. Misuse of business funds
B. Dual aspect
C. Integrity
D. Exaggeration of business revenue

SAMPLE
Structured questions
1. a) Define business ethics . [1]
b) State any three professional ethics in accounting. [3]
c) Explain each professional ethic in accounting stated in 1.(b). [3]
d) State any three reasons why ethics are accounting important. [3]
e) State any three unethical behaviours in
i) Accounting [3]
ii) Business [3]

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