Introduction

I am writing this unit to help you understand introduction to financial accounting easily
and to equip you with relevant technical skills required both at practice and for further
studies in accounting. At the end of each topic, there is assignment or self-test and
activities to enable you understand the topic further.

Objectives
By the end of this unit you should be able to:
i.​ Describe the nature and the purpose of financial accounting
ii.​ Explain the purpose of double accounting
iii.​ Post financial transactions to relevant ledger accounts
iv.​ Prepare basic financial statements
v.​ Prepare adjustments to financial statements

TABLE OF CONTENTS

Lecture 1: Title
1.1​Introduction
1.2​Specific Objectives
1.3​Lecture Outline
1.4​Lecture
1.5​End of lecture activities (self –tests)
1.6​Summary
1.7​Suggestion for further reading
 LECTURE ONE: INTRODUCTION TO ACCOUNTING

1.1​Introduction
This lecture is aimed at providing the learner with basic knowledge of financial
accounting one

1.3​Lecture Outline

1.3.1​ Title 1.3.1: Definition of Accounting

1.3.2​ Title 1.3.2: Stakeholders( users) of financial information
1.3.3​ Title 1.3.3: Conceptual Framework

1.4​Lecture
Definition of Accounting
Accounting is defined as a process of identifying, recording, classifying, summarizing,
reporting and keeping of financial information. This process entails the following;

Identifying: This concerns looking or observing transactions which are of financial

nature, so as to record them in the books of account. The information to be identified may
include sales transactions, purchases transactions, expenses transactions e.t.c

Recording:The information identified is recorded in a systematical manner (according to

the time) of occurrence within the organisation. This is with reference to timing of date,
period e.t.c

Classifying:The financial information is then grouped into similar categories. The

categories can include expenses, capital expenditures, assets, liabilities e.t.c

Summarizing: The financial transactions in an organisation are quick enormous. As such

it is necessary that once they are recorded, they should be summarized in order to bring
out meaningful information to the users.
Reporting: The information summarized above is then reported to the stakeholders for
use to make various decisions. Reporting is done when financial statements such as
statement of financial performance, statement of financial position, statement of changes
in equity, statement of cash flows and others are generated and published.

Keeping: The financial information used for recording is then kept safely for future
reference or comparison
Stakeholders of Financial Information
Stakeholders are users of financial information. They are organizations or individuals
who are affected by the information generated by an organisation. The stakeholders are
divided into two categories as follows;
●​ Internal Stakeholders
●​ External stakeholders

Internal Stakeholders
These are the stakeholders who are directly affected by the activities of an organisation.
The stakeholders in this category include;
i.​ The Management: These are the people who are entrusted with stewardship
management of an enterprise. They manage the organisation by putting the
capital of that organisation for the best interest of the capital providers
(Owners).
ii.​ The Owner (s): These are the individuals/organisations who provide equity
for starting up an organisation. They are interested in seeing the organisation
improve in terms of profitability (profit maximisation) and wealth
(shareholders wealth maximisation)
iii.​ The Employees:These are the people who work for an organisation. They
perfume duties assigned to them by the management.

External Stakeholders
These are the stakeholders who do not directly affect the operations of an organisation.
The stakeholders include;
i.​ Investors: These are the individuals or organisations that commit funds for a
return. They are interested in seeing that the organisation give them high
returns for their investments
ii.​ Suppliers: These are the stakeholders who supply to an organisation goods
for sale or use on cash or credit (creditors). They are interested on the liquidity
of an organisation so as to determine whether the organisation can make
prompt payment to them
iii.​ Customers: These are the stakeholders who buy goods or services from an
organisation. They are also known as debtors when they buy the goods on
credit. They are interested on being charged fairly low prices, being given
quality products e.t.c
iv.​ Competitors: These are the firms that deal in similar products or services.
They are interested in strategy bench marking
 v.​ Financial Institutions: Theseare the institutions that are responsible
regulating the industry of operation like the capital markets authority or
banking institutions the provide capital. They are interested in ensuring that
the organisation complies with set rules and regulations for practice.
vi.​ The Government: The government is responsible for providing enabling
environment for business operation. As such, governments will require
corporate tax to assist in its activities among other requirements
vii.​ The Public: This represents the general public that is affected by the
environment around which the organisation operates. The public expects an
organisation to extend its corporate social responsibility to them. This include
areas such as development of infrastructural facilities, providing employment
opportunities, providing education e.t.c

Difference between Financial Accounting and Management Accounting

Financial accounting is closely linked to cost accounting or management accounting.
However, the following are notable key difference:
i.​ Financial accounting is a regulatory/mandatory requirement as oppose to
management accounting which is a management requirement
ii.​ Financial accounting is done periodically i.e after every one year end
(periodicity concept) while management accounting is done regularly i.e
daily/weekly/monthly reportscan be required by management for decision
making purpose
iii.​ In some cases financial accounting is taken to be used by external
stakeholders while management accounting is taken to be used by the internal
stakeholders

Conceptual Framework of Accounting

A conceptual framework of accounting is a coherent system that describes the nature
purpose of accounting and how certain transactions are treated in accounting. It has the
following advantages;
i.​ Assist in development of coherent set of standards built upon same foundation
ii.​ Assist in resolution of new and emerging issues of accounting
iii.​ Assist in quick resolution of practical problems in accounting by reference to
the basic theory
iv.​ It is a guide for the development of future financial accounting standards
v.​ It assists users of financial reports in interpreting information contained in the
financial statements prepared through consistency

Overview of Conceptual Framework

The First Level: The Objectives
This states the main purpose/goal/aim of accounting. This may be to prepare financial
information to be used by the stakeholders
The second Level/ The Bridge
This level is divided into;
A.​ Elements of financial Statements
The elements of financial statement include the assets, liabilities, capital, revenue,
expenses, and net profit/net loss.
Assets
The assets are economic resources owned by an organisation as a result of past
transaction which are to be used to confer future economic benefit (s) to the organisation.

Characteristics of assets
i.​ They are economic resources owned for a long period of time in an
organisation (period more than 12 months)
ii.​ The organisation has a legal right for their usage
iii.​ They are used to generate economic benefits
Classification of assets
Fixed Assets: They are to be used for a long period of time in an organisation. They
include land, buildings, motor vehicles, equipment, plants and machinery, furniture e.t.c
Current Assets: They are to be used for a short period of time (less than one year). They
include stock, debtors, bank balance, and cash in hand e.t.c
Tangible assets: They are assets with physical existence e.g the fixed assets
Intangible assets: They are assets without physical existence e.g good will
Fictitious assets: They are capital expenses converted to assets e.g preliminary expenses

Liabilities
These are economic obligations arising to an entity as a result of past transaction which
will involve future settlement by the resources of an organisation

Characteristics of Liabilities
i.​ Liabilities are legally enforceable
ii.​ They involve future settlement using economic resources
Categories of liabilities
Long term liabilities: They are liabilities which take a long time to settle within an
organisation e.g long term loan
Current liabilities: They are liabilities which take a short period to settle in an
organisation e.g creditors
Contingent liabilities: They are liabilities accrue to an organisation following a
condition e.g court cases
B.​ Qualitative Characteristics of Financial Information
These are the attributes that make financial information useful to its stakeholders. They
include:
i.​ Understandability: Financial information generated should be easily
understood by the users. This is usually facilitated by including foot notes to
the financial statements
ii.​ Reliability: information is said to be reliable when it has predictive value.
The users can use it to predict future performance of an entity
iii.​ Relevance: Information is relevant when users can depend on it to make a
given decision. Relevance is important as much as there is timeliness (time
value)
 iv.​ Materiality: information is material when it error/omission can affect
decision making
v.​ Comparability: Information generated should be easily compared with other
similar entities
The Third Level
This level contains the underlying assumptions used in accounting. The accounting
concepts include;
i.​ Monetary Concept: Accounting uses money as a unit of measurement.
Therefore only transactions to which monetary value can be attributed are
recorded
ii.​ Business Entity Concept:Accountants hold a business as an entity separate
from its owners. This is regardless of whether it is a sole proprietorship or a
limited company
iii.​ Historical Cost Concept:This principle requires that accounting resources are
recorded at their historical cost. This represents the amount that was paid to
acquire them
iv.​ Duality Concept: This requires that every transaction has to be recorded
twice in the accounts. It forms the basis for double entry system
v.​ Accrual/Matching Concept: This requires that revenues and costs must be
recognized as they are earned/incurred. The two must therefore be matched
together in the profit and loss account relating to their period
vi.​ Going Concern Concept: This implies that business will continue to be in
operation into foreseeable future and that there is no intention to end
operations in the near future.
vii.​ .Materiality Concept: This concept states that an item is material if its
omission or misstatement will affect decision making ability by the financial
information users
viii.​ Consistency Concept: this concept requires that similar items should be
accorded similar treatment and treated similarly in the different financial
period
ix.​ Substance over form Concept: This requires that transactions are accounted
for in their substance and economic reality and not legal forms
x.​ Prudence Concept: These requires that assets and liabilities should not be
overstated or understated
N/B: The constraints under guidance and measurement denote the limited resources in an
organisation such as the human capital, money and time.
 LECTURE TWO: ACCOUNTING EQUATION AND DOUBLE ENTRIES

2.1​Introduction
This lecture is aimed at providing the learners with basic knowledge on the balance sheet
equation, double entry rules and ledger accounts

2.3​Lecture Outline

2.3.1​ Title 2.3.1 The Accounting Cycle

2.3.2​ Title 2.3.2The accounting Equation
2.3.3​ Title 2.3.3 Double Entry rules and Trial Balance

2.4 Lecture

The Accounting Cycle

An accounting cycle is a detailed step by step look into the processes that accounting
information goes through from the point of initiation of transactions up to the point that
the financial information is generated. A summary of the process of accounting cycle is
outlined as shown below;

Step 1: Identifying Transactions

This involves identifying transactions which are financial in nature. These are mostly the
transactions that depict monetary value in an entity. The examples of these transactions
include sales transaction, purchases transactions, receipts and payment transactions e.t.c

Step 2: Posting Transactions to the Journals

The transactions identified above are then posted to journals. A journal contains a debit
and credit side which details all the financial transactions of a business. All business
transactions are usually chronologically recorded in a journal using a double/ single entry
system.

Step 3: Posting the Transactions to the Ledger Specific Ledger Accounts

Transactions involving sale of goods and services (sales transactions) and those for
purchases (buying of goods meant for sale) are recorded in specific ledger accounts

Step 4: Posting Transactions to General Ledger Accounts

 General ledgers are used by businesses which employ a double entry system. The
information posted to general ledger account include assets, liabilities, owners’
equity/Capital, revenues and expenses

Step 5: Preparation of an initial Trial Balance

A trial balance is a-T account where balances from the ledger accounts are posted in
order to ensure that the debit and credit entries are equal. The emphasis at this point is
that the debit and credit sides be equal. However, this does not guarantee that no error has
been committed in the accounts. This is because of errors associated with the trial
balance. These errors include;
i.​ Errors not affecting trial balance agreement; these errors whether committed,
the two sides of the trial balance will still be equal. They include error of
omission, error of commission, error of principle, error of original entry, error
of complete reversal of entries, transposition errors and compensating errors
ii.​ Error affecting trial balance; these are errors whose commitment affects the
two sides of the trial balance

Step 6: Identifying and Correcting Errors in the Trial balance

The trial balance generated above is then checked for the errors highlighted above with a
view to correcting them

Step 7: Posting of the corrected errors to the ledge account

This is aimed at correcting the values of the ledge accounts before a new trial balance is
generated.

Step 8: Extract a corrected trial balance

A final trial balance is then extracted using the values in the corrected ledge accounts.
This forms the basis upon which financial statements can now be generated.

Step 9: Preparation of the financial statements

From the corrected trial balance above, basic financial statements are prepared. The
financial statements which can be prepared from the corrected trial balance include
trading profit and loss account and the balance sheet

Step 10: Preparation of closing balances

These are lists of balances for each ledge account at the end of the financial period. The
values are to be used as the opening values

Step 11: Preparation of opening balances

The balances at the end of the financial period in step 10 above form the basis of opening
balances to be used from the beginning of the next financial period.

N/B: This process continues as long as the going concern of an entity is guaranteed. At
the end of step 11, the process begins again from step one but in a different financial
period hence the tem accounting cycle.
Double Entry Rules and Trial Balance
The accounting equation is also known as the balance sheet equation. It forms the basis
upon which the financial position of an entity in known.
At initial stages, the amount invested in an organisation inform of cash/cheque (bank) is
known as the organisations equity. Thus
Equity/Capital=Assets.

When the entity borrows some funds to increase its capital the equation becomes;
Capital+ Liabilities= Assets. This can also be rearranged as:

Capital=Assets-Liabilities……………The balance sheet equation

Double Entry Rules

There are four basic rules which determine the entries made in accounting records. The
entries are as follows;
i.​ For increase in assets​ ​ Debit
ii.​ For decrease in assets​ ​ Credit
iii.​ For increase in liabilities​ Credit
iv.​ For decrease in liabilities​ Debit

Note: Debit (DR) means a transaction is to be entered to the Left Hand Side (LHS) of an
account while Credit (CR) means a transaction is to be posted to the Right Hand Side of
an account. The following information can illustrate this;
i.​ Bought motor vehicle paying by cash
ii.​ Bought Equipment paying by a cheque
iii.​ Received a loan from family bank by a cheque.
iv.​ Paid loan to family bank by cash

The above entries are posted as follows;

i.​ DR: Motor vehicle a/c​ ​ xx​ ​ (Asset Increasing)
CR: Cash a/c​ ​ ​ xx​ (Asset Decreasing)

ii.​ DR: Equipment a/c​ ​ xx​ ​ (Asset Increasing)

CR: Bank a/c​ ​ ​ xx​ (asset Decreasing)

iii.​ DR: Bank a/c​ ​ ​ xx​ ​ (Asset Increasing)

CR: Family bank loan a/c​ xx​ (Liability Increasing)

iv.​ DR: Family bank loan a/c​xx​ ​ (Liability Decreasing)

CR: Cash a/c​ ​ ​ xx​ (Asset Decreasing)

The above entries are called journal entries. They can be represented in a T-account
known as ledger account as follows;
Suppose the equation reads as;
i.​ Bought motor vehicle Sh. 900,000 paying by cash
ii.​ Bought Equipment Sh. 300,000 paying by a cheque
iii.​ Received a loan from family bank Sh. 800,000 by a cheque.
iv.​ Paid loan to family bank by cash

The journal accounts will be adjusted to be as follows;

i.​ DR: Motor vehicle a/c​ ​ 900,000​ ​
CR: Cash a/c​ ​ ​ 900,000​

ii.​ DR: Equipment a/c​ ​ 300,000​ ​

CR: Bank a/c​ ​ ​ 300,000​

iii.​ DR: Bank a/c​ ​ ​ 800,000​ ​

CR: Family bank loan a/c​ 800,000​

iv.​ DR: Family bank loan a/c​800,000​ ​

CR: Cash a/c​ ​ ​ 800,000​

Ledger Accounts and Balancing off of ledger accounts

Ledger accounts are T- accounts where entries from journals are posted. The left hand
side of the T-account is known as debit while the right hand side is known as credit side.
A T-account is as follows;

​ ​

Thus the above information can be posted to ledger accounts as follows;

Dr Motor vehicle a/c Cr Dr Cash a/c Cr

Motor
vehicl
Cash a/c 900,000 e 900,000
Famil
y bank 800,000
Dr Bank a/c Cr
Equipment 300,00
Loan 800,000 a/c 0

Dr Family bank loan a/c Cr

800,00 800,00
Cash a/c 0 Bank a/c 0
 Equipment
Dr a/c Cr
Bank a/c 300,000

However, the T- accounts must be balanced. The debit side should be equal to the credit
side, therefore when one side is more than the other, a balancing figure, known as balance
carried down (Bal c/d) is used. This is the closing figure for that account. In the next
financial period, the figure is used as opening balance commonly known as balance
brought down (Bal b/d). The above accounts are balanced as follows;

Dr Motor vehicle a/c Cr Dr Cash a/c Cr

Cash Motor
a/c 900,000 Bal c/d 900,000 vehicle 900,000
1,700,00
Bal c/d 0 Family bank 800,000
1,700,00 1,700,00
Bal b/d 900,000 0 0

1,700,00
Dr Bank a/c Cr Bal b/d 0
Equipment
Loan 800,000 a/c 300,000
Bal c/d 500,000 Dr Family bank loan a/c Cr
800,000 800,000 Cash a/c 800,000 Bank a/c 800,000

Bal b/d 500,000

Equipment
Dr a/c Cr
Bank
a/c 300,000 Bal c/d 300,000
Bal b/d 300,000

Trial Balance Preparation

A trial balance is a T-account where entries from the ledger account are posted in order to
ensure that the debit side is equal to the credit side. The figures used for making trial
balance are the opening figures (Bal b/d) in the respective ledger account. The balances
brought down at the debit are posted to the debit side of the trial balance and vice versa.
The opening figures of the above ledger accounts can be posted to a trial balance as
follows;

Dr. Trial Balance Cr.

Motor 1,700,00
vehicle 900,000 Cash 0
Bank 500,000
Equipment 300,000
1,700,00 1,700,00
0 0
Note that the emphasis at this level is to make sure that the debit side is equal to the credit
side.
The following information can also be useful at this point.
i.​ To increase purchases (goods bought for sale)
Dr: Purchases account​ ​ ​ xx
​ CR: Cash/Bank/Creditors a/c​​ ​ xx
ii.​ To record expenses (amounts incurred to generate more revenue)
DR: Respective expenses account​ xx
​ CR: Cash/Bank a/c​ ​ ​ ​ xx
iii.​ To increase incomes
Dr: Cash/Bank/Receivables​ ​ xx
​ CR: Respective Income account​ ​ xx

Comprehensive Illustration
Enter the following transactions of a sole trader in the journal accounts, post the transactions to
ledger accounts and extract a trial balance as at 31 March 2009.

March
1​ Started in business with Kshs.800,000 in the bank and Ksh.
500,00 in cash
2​ Bought goods for sale Ksh. 145,000 paying by a cheque.
5​ Cash sales Kshs.500,000
6​ Paid wages in cash Kshs.100,000
7​ Sold goods by cheque Kshs 400,000.
9​ Bought goods for cash Kshs.120, 000
10​ Bought goods on credit Ksh. 200,000 from Victoria Furnitures
12​ Paid wages in cash Kshs.50, 000
13​ Sold goods on credit Kshs.80,000 to Lions investment
15​ Bought shop fixtures on credit from Mbao Ltd Kshs.74,000
17​ Paid Victoria Furnitures by cheque Kshs.150,000
21​ Paid Mbao Ltd Kshs.74, 000 in cash
24​ Lions Investment paid us his account by cheque Kshs.64,500
30​ Pauline lent us Kshs.100,000 by cash
31​ Bought a motor van paying by cheque Kshs.625,000
Solution:
Journal accounts
i.​ DR: Bank a/c​ ​ 800,000
: Cash a/c​ ​ 500,000
CR: Capital a/c​ ​ ​ 1,300,000
ii.​ DR: Purchases a/c​145,000
CR: Bank a/c​ ​ ​ 145,000
iii.​ DR: Cash a/c​ ​ 500,000
CR: Sales a/c​ ​ ​ 500,000
iv.​ DR: Wages a/c​ 100,000
CR: Cash a/c​ ​ ​ 100,000
v.​ DR: Bank a/c​ ​ 400,000
CR: Sales a/c​ ​ ​ 400,000
vi.​ DR: Purchases a/c​120,000
CR: Cash a/c​ ​ ​ 120,000
vii.​ DR: Purchases a/c​200,000
CR: Victoria furniture’s a/c​ 200,000
viii.​ DR: Wages expense a/c​ 50,000
CR: Cash a/c​ ​ ​ ​ 50,000
ix.​ DR: Lions Investment a/c​80,000
CR: Sales a/c​ ​ ​ ​ 80,000
x.​ DR: Fixtures a/c​ ​ 74,000
CR: Mbao Ltd a/c​​ ​ ​ 74,000
xi.​ DR: Victoria Furniture a/c​ 150,000
CR: Bank a/c​ ​ ​ ​ 150,000
xii.​ DR: Mbao Ltd​ ​ 74,000
CR: Cash a/c​ ​ ​ ​ 74,000
xiii.​ DR: Bank a/c​ ​ 64,500
CR: Lions Investment a/c​ ​ 64,500
xiv.​ DR: Cash a/c​ ​ 100,000
CR: Pauline a/c​ ​ ​ 100,000
xv.​ DR: Motor van a/c​ ​ 625,000
CR: Bank a/c​ ​ ​ ​ 625,000

Balanced off ledger accounts will be as follows:

​
Bank a/c Cash a/c
Capital 800,000 Purchases 145,000 Capital 500,000 Wages 100,000
Purchase
Sales 400,000 Victoria 150,000 Sales 500,000 s 120,000
Lions
investmen
t 64,500 M/vehicle 625,000 Pauline 100,000 Wages 50,000
 Mbao
Bal c/d 344,500 Ltd 74,000
1,264,50 1,264,50
0 0 Bal c/d 756,000
1,100,00
Bal b/d 344,500 0 1,100,000
Bal b/d 756,000

Capital a/c Wages a/c

Bank a/c 800,000 Cash 100,000
Bal c/d 1,300,000 Cash a/c 500,000 Cash 50,000 Bal c/d 150,000
1,300,00
1,300,000 0 150,000 150,000
1,300,00
Bal b/d 0 Bal b/d 150,000

Sales
Purchases a/c a/c
Bank 145,000 Cash 500,000
Cash 120,000 Bank 400,000
Victoria Lions
furniture 200,000 Bal c/d 465,000 Bal c/d 980,000 investment 80,000
465,000 465,000 980,000 980,000
Bal b/d 465,000 Bal b/d 980,000

Lions Investment a/c Victoria Furnitures a/c

Sales 80,000 Bank 64,500 Bank 150,000 Purchases 200,000
Bal c/d 15,500 Bal c/d 50,000
80,000 80,000 200,000 200,000
Bal b/d 15,000 Bal b/d 50,000

Furniture a/c Mbao Ltd a/c

Mbao Ltd 74,000 Bal c/d 74,000 Cash 74,000 Furniture 74,000
74,000 74,000
Bal b/d 74,000

Pauline a/c Motor vehicle a/c

Bal c/d 100,000 Bank 100,000 Bank 625,000 Bal c/d 625,000
Bal b/d 100,000 Bal b/d 625,000

Trial balance
1,300,00
Bank balance 344,500 Capital 0
Cash balance 756,000 Sales 980,000
Wages expense 150,000 Pauline 100,000
Purchases 465,000 Victoria furniture 50,000
Lions
Investment 15,500
Furniture 74,000
Motor vehicle 625,000
2,430,00 2,430,00
0 0

Dd
 LECTURE THREE: BOOKS OF ORIGINAL ENTRIES

3.1​Introduction
This lecture is concerned more with the books where initial transactions are posted before
they are transferred to their respective accounts

3.3​Lecture Outline

3.3.1​ Title 3.3.1 Introduction

3.3.2​ Title 3.3.2 Sales Day Book
3.3.3​ Title 3.3.3 Purchases Day Book
3.3.4​ Title 3.3.4 Return Inwards Day book
3.3.5​ Title 3.3.5 Return Outwards Day Book
3.3.6​ Title 3.3.6 Cash Book
3.3.7​ Title 3.3.7 Petty Cash Book

3.4 Lecture
Introduction
The books of original entry (also known as prime entry books) are the books where
entries are first posted from their source documents before they are transferred to their
respective ledger accounts. The books are as discussed below;

Sales Day Book

This book is used for recording sales made on credit. The source document for the
preparation of this book is known as sales invoice. From the sales invoice, the
transactions are transferred systematically (chronologically) to sales day book and
debited to the respective debtors ledger accounts account. At the end of the period, the
totals of this book are transferred to a general ledger account known as sales ledger
account. This is as shown below
 Illustration
Use the following transactions to prepare a sales day book
1st January 2012: We sold goods on credit Sh. 20,000 to Wanyama
2nd March 2012: We sold goods on credit Sh. 30,000 to Kamau
3rd April 2012 : We sold goods on credit Sh. 50,000 to Joan
4th April 2012 : We sold goods on credit Sh. 30,000 to Wanyama
5th May 2012 : We sold goods on credit Sh. 25,000 to Salim

Solution​ Sales Day book

Date Details Foli Amoun
o t
1/1/201 Wanyama SL1 20,000
2
2/3/201 Kamau SL2 30,000
2
3/4/201 Joan SL3 50,000
2
4/4/201 Wanyama SL1 30,000
2
5/5/201 Salim SL4 25,000
2
To general 155,00
ledger 0

Wanyama a/c Salim a/c

20,00
Sales 0 Sales 25,000 Bal c/d 25,000
30,00 50,00
Sales 0 Bal c/d 0 Bal b/d 25,000
50,00 50,00
0 0
50,00
Bal b/d 0 Sales a/c
Debtor
Bal c/d 155,000 s 155,000
Kamau a/c Bal b/d 155,000
30,00 30,00
Sales 0 Bal c/d 0
30,00
Bal c/d 0
 Joan a/c
50,00 50,00
Sales 0 Bal c/d 0
50,00
Bal b/d 0

Purchases Day Book

This book is used to record purchases made on credit. The source document used to
prepare purchases day book is known as purchases invoice. From the purchases invoice,
the transactions are transferred systematically (chronologically) to this book while being
credited to the creditors account. At the end of the financial period the totals of the book
are transferred to a general ledger account known as purchases ledger account. This book
is as shown below;

Illustration
Use the following information to prepare purchases day book
1st January 2012: We made purchases on credit Sh. 10,000 from Thomas
3rd February 2012: We made purchases on credit Sh. 5,000 from Salmon
4th March 2012: We made purchases on credit Sh. 8,000 from Thomas
7th April 2012: We made purchases on credit Sh. 7,000 from Kca centre
9th April 2012: we made purchases on credit Sh. 6,000 from Vincent

Solution​ Purchases Day Book

Date Details Foli Amoun
o t
1/1/201 Thomas PL1 10,000
2
3/2/201 Salmon PL2 5,000
2
4/3/201 Thomas PL1 8,000
2
7/4/201 Kca Centre PL3 7,000
2
9/4/201 Vincent PL4 6,000
2
To general ledger 36,000
account

Thomas a/c Vincent a/c

Purchases 10,000 Bal c/d 6,000 purchases 6,000
18,00
bal c/d 0 Purchases 8,000 Bal b/d 6,000
 18,00
0 18,000
Bal b/d 18,000 Purchases a/c
Creditor 36,00
s 0 Bal c/d 36,000
36,00
Salmon a/c bal b/d 0
Bal c/d 5,000 Purchases 5,000
Bal b/d 5,000

Kca centre
a/c
Bal c/d 7,000 Purchases 7,000
Bal b/d 7,000

Return Inwards Day Book

This book is used to record sales returned by debtors to an organisation. The source
document for preparing this book is known as credit note. From the credit note, the
transactions are transferred systematically to this book while being credited to the
respective debtors account. At the end of the period, the totals of this book are transferred
to a general ledger account known as return inwards account. This is as shown below;

Illustration
3rd January 2012: Wanyama returned goods to us Sh. 8,000
4th May 2012: Kamau returned goods to us Sh. 2,000
5th August 2012: Salim returned goods to us Sh. 1,000
Solution​ Return Inwards Day Book
Date Details Foli Amoun
o t
3/1/201 Wanyama SL1 8,000
2
4/5/201 Kamau SL2 2,000
2
5/8/201 Salim SL4 1,000
2
To general ledger 11,000
account

Salim
Wanyama a/c a/c
Return
Bal b/d 50,000 Return inwards 8,000 Bal b/d 25,000 inwards 1,000
Bal c/d 42,000 Bal c/d 24,000
50,000 50,000 25,000 25,000
Bal b/d 42,000 Bal b/d 24,000

Kamau a/c Return inwards ac/

Bal
Bal b/d 30,000 Return inwards 2,000 Debtors 11,000 c/d 11,000
28,00
Bal c/d 0 Bal b/d 11,000
30,00
30,000 0
Summar
Bal b/d 28,000 y
Sales 155,000
(11,000
Less: Return inwards )
Net Sales 144,000

Return Outwards Day Book

This book is used to record returns made by an organisation to its creditors. The source
document for preparing this book is known as debit note. From the debit note, the
transactions are transferred systematically to this book while being debited to the
creditors account. At the end of the financial period, the totals of this book are transferred
to the general ledger account known as the return outwards account. This is as follows;

Illustration
5th May 2012: We returned goods to Thomas Sh. 3,000
10th June 2012: we returned goods to Vincent Sh. 1,500
21st September 2012: We returned goods to Kca centre Sh. 2,000

Solution
Date Details Foli Amoun
o t
5/5/2012 Thomas PL1 3,000
10/6/201 Vincent PL4 1,500
2
21/9/201 Kca centre PL3 2,000
2
To general ledger 6,500
account

Thomas a/c Return Outwards a/c

Return Creditor
outwards 3,000 Bal b/d 18,000 Bal c/d 6,500 s 6,500
Bal c/d 15,000 Bal b/d 6,500
18,000 18,000
 Summar
Bal b/d 15,000 y
Purchases 36,000
Less: Return (6,500
Vincent a/c outwards )
Return
outwards 1,500 Bal b/d 6,000 Net purchases 29,500
Bal c/d 4,500
6,000 6,000
Bal b/d 4,500

Kca centre a/c

Return
outwards 2,000 Bal b/d 7,000
Bal c/d 5,000
7,000 7,000
Bal b/d 5,000

Cash Book
This book is used to record transactions made on cash. The source document for
preparation of the cash book is known as receipts. There are two types of cash books
which are;
i.​ Two column cash book
ii.​ Three column cash book
Two column cash book has two columns. The first column is for cash account while the
second column is for bank account. Increases to the cash/bank are debited while
decreases to the cash/bank are credited. This is as shown below;

Illustration

Write up a Two Column cash book for a sole trader from the following details; balance it off at
the end of the month.
2013
June​ 1​ Started business with capital cash shs.10, 000
2​ Paid rent by cash shs.2,300
 3​ Boniface lent us shs.20,000 paid by cheque
4​ We paid J. Fin by cheque shs.8,600
5​ Cash sales of shs.90,000
7​ F. Luke paid us by cheque shs.3,400
9 ​ We paid A Moore in cash shs.9, 200
11​ Cash sales paid direct into the bank account shs.51, 000
15​ P. Hood paid us in cash shs.9, 600
16​ We took shs.10, 000 out of the cash till and paid it into the bank account
19​ We paid Owino shs.3, 000 by cheque
22​ Cash sales paid into the bank shs.22, 000
26​ Paid motor expenses by cheque shs.7, 000
30​ Withdrew shs.10, 000 cash from the bank for personal use
31​ Paid wages in cash shs.40, 000

Solution
Cash Bank Cash Bank
Date Details a/c a/c Date Details a/c a/c
1/6/2013 Capital 10,000 2/6/2013 Rent 2,300
3/6/2013 Boniface 20,000 4/6/2013 J Fin 8,600
5/6/2013 Sales 90,000 9/6/2013 A More 9,200
7/6/2011 16/6/201
3 F Luke 3,400 3 Contra 10,000
19/6/201
11/6/201 Sales 51,000 3 Owino 3,000
15/6/201 22/6/201
3 P Hood 9,600 3 Bank 22,000
16/6/201 26/6/201
3 Contra 10,000 3 Motor expense 7,000
22/6/201 30/6/201
3 Sales 22,000 3 Drawing 10,000
22/6/201 31/6/201
3 Cash 22,000 3 Wages 40,000
Bal c/d 48,100 77,800
131,600 106,400 131,600 106,400
Bal b/l 48,100 77,800

Three Column cash book

A three column cash book has three columns. The first two columns for cash and bank
accounts and an additional column for discounts. There are two types of discounts
including discounts allowed and discounts received. The three column cash book is as
follows;

Illustration
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.
2011
January

​ 1​ Balances brought forward: Cash Sh.230; Bank Sh.4,756.

“​ 2​ The following paid their accounts by cheque, in each case deducting 5
percent discounts: R Burton Sh.140; E Taylor Sh.220; R Harris Sh.800.
“​ 4​ Paid rent by cheque Sh.120.
“​ 6​ J Cotton lent us Sh.1, 000 paying by cheque.
“ 8​ We paid the following accounts by cheque in each case deducting a 5 per
cent cash discount: N Black Sh.360; P Towers Sh.480; C Rowse Sh.800.
“​ 10​ Paid motor expenses in cash Sh.44.
“ 12​ H Hankins pays his account of Sh.77, by cheque Sh.74, deducting Sh.3
cash discount.
“​ 15​ Paid wages in cash Sh.160.
“ 18​ The following paid their accounts by cheque, in each case deducting 5 per
cent cash discount: C Winston Sh.260; R Wilson & Son Sh.340; H Winter
Sh.460.
“​ 21​ Cash withdrawn from the bank Sh.350 for business use.
“​ 24​ Cash Drawings Sh.120.
“ 25​ Paid T Briers his account of Sh.140, by cash Sh.133, having deducted Sh.7
cash discount.
“​ 29​ Bought fixtures paying by cheque Sh.650.
“​ 31​ Received commission by cheque Sh.88.

Solution
 Discoun Discount
cash Bank t Cas s
Date Details a/c a/c allowed Date Details h a/c Bank a/c received
1/1/2011 Bal b/f 230 4,756 4/1/2012 Rent 120
R
2/1/2012 Burton 133 7
E Taylor 209 11
R Harris 760 40 8/1/2012 N Black 342 18
6/1/2012 J Cotton 1,000 P Towers 456 24
12/1/2012 H Hankins 77 3 C Rowse 760 40
Motor
18/1/2012 C Winston 247 13 10/1/2012 expenses 44
R Wilson & 16
Son 323 17 15/1/2012 Wages 0
H Winter 437 23 21/1/2012 Contra 350
12
21/1/2012 Contra 350 24/1/2012 Drawings 0
31/1/2012 Commission 88 25/1/2012 T Briers 133 7
29/1/2012 Fixtures 650
25
Bal c/f 6 5,219
58
580 8,030 114 0 8030 89
Bal b/f 256 5,219

Petty Cash Book

This book is used to record minor expenses made by a petty cashier in an organisation. It
operates on an imprest system. At start, a petty cashier is given an amount to start with
(float). From the float, the petty cashier makes payments and at the end of the month, the
petty cashier requests for reimbursement from the head office. The amount reimbursed is
usually equal to the amount paid by the petty cashier. The expenses paid are grouped
according to their similarities. This is as follows;
Illustration
A cashier in a firm starts with Sh.2, 000 in the month of June as a cash float. In the
following week, the following payments are made:
​ ​ ​ ​ ​ ​ Sh.
1st June – bought stamps for​ ​ ​ 80
2nd June – paid bus fare for​ ​ ​ 120
2nd June – cleaning materials​ ​ ​ 240
3rd June – bought fuel​​ ​ ​ 150
rd
3 June – cleaning wages​ ​ ​ 300
4th June – bought stamps​ ​ ​ 200
th
4 June – paid Creditor​ ​ ​ 400
5th June – fuel costs​ ​ ​ ​ 150
On the 5th of June the cashier requested for a refund of the cash spent and this amount
was reimbursed back.
Solution
Expenses
Communicatio Cleanin The
n Transport g Ledger
Amoun
Bal b/d Details t
2,000 Receipts
Stamps 80 80
Bus fare 120 120
Cleaning
Materials 240 240
Fuel 150 150
Cleaning wages 300 300
Stamps 200 200
Creditor 400 400
Fuel 150 150
Bal c/d 1640 280 420 540 400
1,640 Bal b/d
Bal c/d 2,000
3,640 3,640
2,000 Bal b/d
 LECTURE FOUR: BASIC FINANCIAL STATEMENTS

4:1: Introduction
This Lecture introduces you to basic financial statements which are prepared after the
trial balance. It will provide you with a strong foundation to comprehensive financial
statements.

4:3: Lecture Outline

5.3.1​ Title 5.3.1: Basic Trading Profit and Loss account

5.3.2​ Title 5.3.2: Basic Balance sheet

4.4 Lecture
Basic Trading profit and loss account
A trading profit and loss account is a financial statement used to prepare information to
be communicated to the stakeholders of an organisation. In most cases, the trading
account is used to show revenue generated and the expenses incurred in the generation of
that revenue. The following information is relevant when preparation basic trading profit
and loss account;
Sales/Revenue
This represent the amounts received or to be received for transaction of sale of goods and
or services. Sales can occur either on cash or on credit. To record sales made on cash;
DR: Cash/Bank a/c​ xx
​ CR: Sales a/c​ ​ xx
To record sales made on credit
DR: Debtors a/c​ xx
​ CR: Sales a/c​ ​ xx
*Debtors are the individuals whom an organisation sales to on credit. They are current
assets

Cost of Sales
This represents the cost incurrent on goods sold by an organisation (Purchases). Goods to
be sold can be bought either by making immediate payment or on credit. To record
purchases made on cash;
DR: Purchases a/c​ xx
​ CR: Cash/ Bank a/c​ xx
To record purchases made on credit
DR: Purchases a/c​ xx
​ CR: Creditors a/c​ xx
*Creditors are the individuals whom an organisation buys goods for sale from on credit.
They are current liabilities
The cost of sales is determined as follows in a basic trading account
Opening Stock xx
Add: Purchases xx
(xx
Less: Closing Stock ) xx

Expenses
These are the costs incurred by an organisation in order to help generate more revenues.
The expenses are incurred on regular basis. Some of the examples of expenses include;
Rent expense, Salary expense, Water and electricity expense, Insurance expense,
Transport expense e.t.c
To record expenses paid by an organisation:
DR: Respective expenses a/c​ xx
​ CR: Cash/ Bank a/c​ ​ xx
The above items are arranged as show below in the trading account format;
Sales xx

Less: Cost of sales

Opening Stock xx
Add: Purchases xx
(XX
Less: Closing Stock ) (xx)
Gross profit xx
Less: Expenses
Rent expense xx
Electricity expense xx
Insurance expense xx
Advertising expense xx (XX)
Net profit/Loss XX

Basic Balance Sheet

This is another financial statement generated to communicate financial information to the
stakeholders of an organisation. A balance sheet is generated from accounting equation
earlier learned. Remember, the accounting equation/ balance sheet equation is expressed
as; Capital=Assets-Liabilities
These elements are arranged as follows in the balance sheet format;
Fixed Assets
Land xx
Buildings xx
Equipment xx
xx
Current Assets
Closing stock xx
Debtors xx
Bank balance xx
Cash balance xx
xx
Less: Current Liabilities
Creditors xx (xx) xx
Total assets xxx
Add: Net profit 365,000
Less: Drawings (xx)
1,665,000
Add: Long term loan (Pauline) 100,000
1,765,000

Minor Adjustments
a.​ Returns
There are two types of returns which include return inwards and return outwards. Return
inwards represent the sales returned to an organisation by customers. The goods could be
returned on grounds of being faulty, poor quality, not correct goods a customer ordered
for e.t.c. The return inwards reduce sales hence they are accounted for as follows;
DR: Return inwards a/c​ xx
​ CR: Debtors a/c​ ​ xx

In the trading account;

Sales xx
(xx
Less: Return inwards )
Net sales xx

Return outwards represent goods returned by an organisation to the suppliers. The goods
could be returned on grounds of being faulty, poor quality, not correct goods an
organisation ordered for e.t.c. The return outwards reduce purchases hence they are
accounted for as follows;
DR: Creditors a/c​ xx
​ CR: Return outwards a/c​ xx
In the trading account;
Under cost of sales;

Opening stock xx
Add: Purchases xx
(xx
Less: Return outwards )
(xx
: Closing stock ) xx

b.​ Carriages
Carriages represent costs incurred in an organisation relating to the goods that the
organisation is dealing with. There are two types of carriages which include;

Carriage inwards
The cost incurred to transport purchases into an organisation. It increases the cost of sales
hence adjusted for as follows;
Opening stock xx
Add: purchases xx
Add: Carriage inwards xx
(xx
Less: return outwards )
(xx
: Closing stock ) xx

Carriage outwards
This is the cost incurred to transport goods sold to the customer’s premises or to deliver
the goods to the customers. Carriage outwards is treated as an expense.
DR: Carriage outwards​ xx
​ CR: Cash/Bank a/c​ ​ xx

c.​ Discounts
There are two types of discounts as discussed in lesson three above. Discounts allowed
are treated as expenses while discount received are treated as additional income.

Illustration three
From the following trial balance of G Still, draw up a statement of comprehensive
income and a statement of financial position for the year ended 30 September 2011.

Sh. Sh.
Stock 1 October 2010 41,600
Carriage outwards 2,100
Carriage inwards 3,700
Return inwards 1,540
Return outwards 3,410
188,43
Purchases 0
380,40
Sales 0
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating expenses 894
General expenses 245
Premises 92,000
Motor vehicles 13,400
Fixtures and fittings 1,900
Debtors 42,560
Creditors 31,600
Cash at bank 5,106
Drawings 22,000
Capital 68,843
484,25 484,25
3 3
Stock at 30 September 2011 was Sh. 44,780​ ​ ​ ​ ​ (20 Marks)
 Solution
G. Still
Statement of comprehensive income
For the year ended 30 September 2011
Sales 380,400
Less: Return inwards (1,540)
Net sales 378,860
Less: Cost of sales
Opening Stock 41,600
Add: Purchases 188,430
Add: Carriage
inwards 3,700
Less: Return outwards (3,410)
(44,780
Less: Closing stock ) (185,540)
Gross profit 193,320
Less: Expenses
Carriage outwards 2,100
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating 894
General expenses 245 (72,017)
Net profit 121,303
​
 G. Still
Statement of financial position
As at 30 September 2011
Fixed Assets
Premises 92,000
Motor vehicle 13,400
Fixtures and fittings 1,900
107,300
Current assets
Stock 44,780
Debtors 42,560
Cash and bank 5,106
92,446
Less: Current liabilities
Creditors 31,600 (31,600) 60,846
168,146
Financed by
Capital 68,843
Add: Net profit 121,303
(22,000
Less: Drawings )
168,146
4.6 Self – Test Questions
Question One
From the following trial balance of XYZ LTD, 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.
Inventory 1 October 2001 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Return inwards 2,050
Return 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
Trade receivables 38,960
Trade payables 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360
332,890 332890
LECTURE FIVE: ADJUSTMENTS TO THE FINANCIAL STATEMENTS
(A)​ Depreciation and Disposal of Assets

5.1​Introduction
This lecture will prepare you to be in a position to determine depreciation of fixed assets
and to account for their disposal

5.3​Lecture Outline

5.3.1​ Title 5.3.1 Depreciation definition

5.3.2​ Title 5.3.2 Methods of depreciation
5.3.3​ Title 5.3.3 Computation for depreciation values
5.3.4​ Title 5.3.4 Accounting for depreciation
5.3.5​ Title 5.3.5 Accounting for disposal of fixed assets
Lecture
Depreciation and Disposal of Fixed assets
Depreciation
Depreciation is the loss of value of fixed assets due to usage over time. It is carried out
for the following reasons;
a.​ To match cost with revenue. Fixed assets are used for production of revenue and
therefore the cost of the fixed assets must be matched with the generated revenue.
Fixed assets have estimated useful lives therefore the cost must be spread over
their lifespan.
b.​ To recognize the loss part of the asset with the passage of time as with the
prudence concept. Account for wear and tear
c.​ Creates a provision for funds which can be used to replace the fixed

Causes of depreciation
(i)​ Physical deterioration: due to erosion over time primarily due to the cause of rust,
rot and general decay as well as wear and tear.
(ii)​Economic factors: result in an asset being put off use even though it is in good
physical state. This is primarily due to;
 a.​ Obsolescence- Process of an a set being outdated even though it may still have more
years of potential use e.g. propeller driven aircraft become outdated with
introduction of a jet craft.
b.​ Inadequacy- where an asset is not used to growth and changes in size of a firm. Due
to increase in size, it will be efficient (economical) to use the latest technological
advancement.
(iii)​Depletion: refers to extraction of resources from an asset till it is fully consumed.
(iv)​Time factor: Assets that have fixed legal rights in terms of years e.g. patents,
copyrights, leases. These assets are always amortized.

Methods of calculating depreciation

i.​ Straight line method
This method assumes even usage or efficiency of an asset throughout its economic period
and as such allocates equal depreciation charge over the life of an asset. It is determined
as;
Depreciation = Rate X Cost of an asset or

Depreciation = Cost- Scrap (residual) value

​ ​ ​ ​ Useful life
Where; Scrap/ residual value represents the value of asset that remains after the useful
life
Useful life represents the duration an asset is to be used in an organisation.

ii.​ Reducing balance method

This method assumes high usage or efficiency of an asset in the earlier years of its
economic life with this efficiency declining gradually with time. Thus the method
allocates high depreciation charge in the first year of use and the charge keeps on
diminishing with time

Annual depreciation= rate x N.B.V (reduced balance of the asset)

Reduced balance means that portion of the asset that has not yet been depreciated or
simply the Net Book Value

Accounting for depreciation:

Depreciation is used as an expense and therefore the following accounting entries are
posted;
DR: Depreciation a/c​ xx
​ CR: Provision for depreciation​ xx
At the end of financial period, the amount in depreciation account is transferred to the
trading account (p &l a/c) as follows;
DR: p & l a/c​ xx
​ CR: Depreciation a/c​ xx.
Illustration 1
An organisation bought a motor vehicle at Sh. 600,000. The motor vehicle is to be used
in the organisation for a period of 5 years. The policy of the organisation is to depreciate
its assets using straight line method.
Required:
i.​ Determine the value of the vehicle after year 1,2 and 3
ii.​ Determine the motor vehicle account, depreciation account and provision for
depreciation account for year 1,2 and 3

Solution
Depreciation =600,000/5 =Sh. 12,000.
This means that the asset loses a value of Sh. 12,000 every year it is used.
The ledger accounts are posted as follows;
Depreciation
Motor vehicle a/c a/c
1st
Year 1st year
M/vehicl 12,00 p&l
Cash 600,000 Bal c/d 600,000 e 0 a/c 12,000
2nd
year 2nd year
Bal M/vehicl 12,00 p&l
b/d 600,000 Bal c/d 600,000 e 0 a/c 12,000
3rd
year 3rd year
Bal M/vehicl 12,00 p&l
b/d 600,000 Bal c/d 600,000 e 0 a/c 12,000
4th
year
Bal
b/d 600,000

Provision for depreciation a/c

1st year
Bal c/d 12,000 Depreciation 12,000
2nd year
Bal b/d 12,000
Bal c/d 24,000 Depreciation 12,000
24,000 24,000
3rd year
Bal b/d 24,000
Bal
b/d 36,000 Depreciation 12,000
 36,000 36,000
4rth year
Bal b/d 36,000

Illustration two
Suppose in the above illustration, depreciation is 10% per annum based on reducing
balance method, the entries will be as follows;
Depreciation will be determined as;
1st year​​ 10%x 600,000 ​ = Sh. 60,000
nd
2 year​ 10%x (600,000-60,000) = Sh. 54,000
3rd year​10%x (600,000- 114,000) = Sh. 48,600

The ledger accounts will be as follows;

Depreciation
Motor vehicle a/c a/c
1st Year 1st year
Bal p&l 60,00
Cash 600,000 c/d 600,000 M/vehicle 60,000 a/c 0
2nd
year 2nd year
Bal p&l 54,00
Bal b/d 600,000 c/d 600,000 M/vehicle 54,000 a/c 0
3rd
year 3rd year
Bal p&l 48,60
Bal b/d 600,000 c/d 600,000 M/vehicle 48,600 a/c 0
4th
year
Bal b/d 600,000

Provision for depreciation a/c

1st year
Bal c/d 60,000 Depreciation 60,000
2nd year
Bal b/d 60,000
Bal c/d 114,000 Depreciation 54,000
114,00
114,000 0
3rd year
114,00
Bal b/d 0
Bal b/d 162,600 Depreciation 48,600
162,60
162,600 0
 4rth year
162,60
Bal b/d 0

Disposal of assets
When an asset is disposed of its cost and accumulated depreciation should be removed
from the accounts. The gain or loss arising from the transaction should be determined and
recognized in the income statement. A disposal account is opened and the following
entries passed.
i.​ With the cost of the asset
Dr: Disposal account
Cr: Assets Account
ii.​ With Accumulated depreciation on the asset
Dr: Provision for depreciation account
Cr: Disposal Account
iii.​ With the disposal proceeds
Dr: Bank account
Cr: Disposal account
iv.​ The disposal account is the balanced to determine the gain or loss
(a)​ In case of a gain
​ Dr: Disposal Account
​ Cr: Income statement
(b)​In case of a loss
​ Dr: Income statement
​ Cr: Disposal Account

Illustration
China road Ltd acquired a bulldozer at a cost of 25,000,000 5 years ago. Such assets are
depreciated at 12.5 % on reducing balance basis. This bulldozer was disposed off at
7.5m.
Required
Determine the disposal gain/loss
Hint NBV = C(1-r)n

Where C = cost
​ R = rate
​ N – Number of years
Solution
NBV = 25,000,000 (1-12.5%)5 Acc. Depreciation – 25,000,000 – 12,177,257
Dr Bulldozer account Cr Dr Disposal​ ​ ​
Cr​ ​ ​ Sh. “000”​ ​ Sh. “000”
1st Jan “sh.000” Disposal 25,000​ Bulldozer​ 25,000 Provision
for depr12,177
​ Bank ​ ​ 7,500
Bal b/d 25,000​ ​ ​ ​ Inc stmt​ 5322.72
​ ​ ​ ​

Dr. Provision for depreciation Cr

000
Disposa 12,177.2 Bal.c/d 12,177.2
l 9 9
12,177.2 12,177.2
9 9
====== ======
=
 LECTURE SIX: ACCOUNTING FOR ADJUSTMENTS
(B) Accounts Receivable and Bad debts

6.1​Introduction
This lecturer will prepare you to account for adjustments which can be made to debtors’
accounts and the bad debts accounts together with their treatment to the financial
statements

6.3​Lecture Outline

6.3.1​ Title 6.3.1 Accounting for debtors

6.3.2​ Title 6.3.2 Accounting for bad debts
6.3.3​ Title 1.3.3 Adjustments to financial statements

6.4​Lecture
Accounting for debtors
Trade receivables emanate from sale of goods on credit. They are also referred to as
debtors.

When there are sales made on credits;

Dr: Trade receivables a/c​ xx
Cr: Sales a/c​​ ​ ​ xx

It’s generally expected that the debtors will pay the amounts for trade receivables in
future. If the payments are made;

Dr: Cash a/c​ xx

Cr: Trade receivables a/c​ xx

However, the amounts due from the debtors may not be paid due to some reasons. But
since the traders are not aware of amounts which may not be paid, a provision for such
amounts is created. This is known as provision for doubtful debts or provision for bad
debts. When an organization creates provision for doubtful debts for the first time;

Dr: Profit and loss a/c​xx

Cr: Provision for doubtful debts a/c​ xx

For any other provision created in future, an increase or a decrease in provision is

created;
For increase in provision for doubtful debts;

Dr: Profit and loss a/c​xx

Cr: Provision for doubtful debts a/c​ xx
(With the increase in provision for doubtful debts)

For decrease in provision for doubtful debts;

Dr: Provision for doubtful debts​ xx
Cr: Profit and loss account​​ ​ xx
(With decrease in provision for doubtful debt)
N/B. Increase in provision for doubtful debts is an expense while a decrease in provision
for doubtful debts is an income.

Accounting for bad debts

In some cases, an organization can know the amounts of bad debts that will never be
collected. This can be after the organization has exhausted all means to collect the
amounts in futile. In this case the debtors are referred to as bad debts. The bad debts are
treated as an expense;

Dr: Bad debts a/c​ xx

Cr: Trade receivables a/c​ xx

Bad debts therefore reduce the amounts of trade receivables.

However, in the future the bad debts written off can be recovered. If bad debts are
recovered, they are treated as income. The following entries are made for bad debts
recovered;
(i)​ Dr: Trade receivables a/c​ xx

Cr: Bad debts recovered a/c​ ​ xx

(With the amount of bad debts recovered)
(ii)​ Dr: Bank/Cash a/c​xx

Cr: Trade receivables​ xx

(With the amounts received from trade debtors)
(iii)​ Dr: Bad recovered account xx

Cr: Profit and loss a/c​ ​ xx

(To transfer trade receivables recovered to the p & l a/c at the end of the trading period)

Illustration one
A company started trading in the year 1999; the balance on the debtor’s account was Sh.
400,000. Bad debts amounting to Sh. 40,000 were written off from this balance, there
was a specific provision of Sh.5, 000 to be made to one of the debtors and a general
provision of Sh. 5% was to be made on the balance of the debtors. Record the above
entries in the respective ledger accounts and show extract of respective financial
statements

Debtors​ ​ Sh. 500,000

Bad debts​ ​ (Sh. 40,000)
​ ​ ​ Sh. 460,000
General Provision for bad debts 5% x 460,000 = Sh. 23,000
Specific provision​ ​ ​ ​ Sh. 5,000
​ ​ ​ ​ ​ ​ Sh. 28,000
Trade debtors
500,00
Sales 0 Bad debts a/c 40,000
460,00
Bal c/d 0
400,00 400,00
0 0

Bad debts a/c

Debtors 40,000 P & l a/c 40,000

Provision for doubtful debts a/c

1999
Bal c/d 28,000 P & l a/c 28,000

Extract for P & l a/c 1999

Expenses:
Bad debts​ ​ ​ ​ 40,000
Provision for doubtful debts​ ​ 28,000​

Extract for Balance Sheet 1999

Current assets
Trade receivables​ ​ ​ 460,000
Less: Provision for bad debts​​ (28,000)​ 432,000
Illustration two
In the year 2,000, the debtors balance goes up to Sh. 800,000 from which bad debts of Sh.
50,000 needs to be written off. There is no specific provision but the general provision is
to be maintained at 5%. Record the above in the respective ledger accounts and show
extract of respective financial statements
Debtors​ ​ 800,000
Less: Bad debts​ (50,000)
​ ​ ​ 750,000
Provision for doubtful debts 5% x 750,000 = 37,500
Increase in provision for doubtful debts = 37,500 – 28,000 = Sh. 9,500
Trade debtors a/c
Bal b/d 360,000 Bad debts 50,000
750,00
Sales 440,000 Bal c/d 0
800,00
800,000 0

Bad debts a/c

Debtors 50,000 P & l a/c 50,000

Provision for doubtful debts

Bal b/d 28,000
Bal c/d 37,500 P & l a/c 9,500
37,500 37,500

Extract for P & l a/c 2000

Expenses:
Bad debts​ ​ ​ ​ ​ ​ 50,000
Increase in provision for doubtful debts​ ​ 9,500​
Extract for Balance Sheet 2000
Current assets
Trade receivables​ ​ ​ 750,000
Less: Provision for bad debts​​ (37,500)​ 712,500

Illustration three
In the year 2001 the debtors’ balance goes up to Sh. 1,000,000 from which bad debts of
Sh. 200,000 need to be written off, there is no specific provision but the general provision
is Sh. 30,000. Bad debts of Sh. 20,000 initially written off were recovered. Record the
ledger accounts and extract financial statements.

Trade debtors
Bal b/d 750,000 Dab debts 200,000
 Bank/cas
Sales 250,000 h 20,000
Bad debts recovered 20,000 Bal c/d 800,000
1,020,00 1,020,00
0 0

Bad debts
Debtors 200,000 P & l a/c 200,000

Provision for doubtful debts

P & l a/c 7,500 Bal b/d 37,500
Bal c/d 30,000
37,500 37,500

Bad debts recovered a/c

Debtors 20,000 P & l a/c 20,000

Bank a/c
Bad debts recovered a/c 20,000 Bal c/d 20,000

Extract for P & l a/c 2001

Gross profit​ ​ ​ ​ ​ ​ ​ ​ ​ xx
Add: Other incomes:
Decrease in provision for doubtful debts​ ​ ​ ​ ​ 7,500
Bad debts recovered​ ​ ​ ​ ​ ​ ​ ​ 20,000
Expenses:
Bad debts​ ​ ​ ​ ​ ​ 200,000

Extract for Balance Sheet 2001

Current assets
Trade receivables​ ​ ​ 800,000
Less: Provision for bad debts​​ (30,000)​ 770,000
 LECTURE SEVEN: ACCOUNTING FOR ADJUSTMENTS
(C) Accounting for Accruals and Prepayments

7.1​Introduction
This lecturer will introduce you to adjustments for the accruals and prepayments in an
organisation

7.3​Lecture Outline

7.3.1​ Title 7.3.1 Accounting treatment for accruals

7.3.2​ Title 7.3.2 Accounting treatment for prepayments
7.3.3​ Title 7.3.3 adjustment of accruals and prepayment s to the financial statements

7.4​Lecture
Adjustments for Accruals and Prepayments
Accruals
This represents the outstanding/ owing amounts/due amounts of a business enterprise.
They can either be accrued incomes or accrued expenses

Accrued Expenses
These are expenses due for payment but for which cash has not been paid by an
organisation. They are therefore considered as current liabilities. For example
An organisation is expected to pay a rent expense of Sh. 80,000 per year. However the
organisation only managed to pay Sh. 65,000. Record this in a ledger account
Rent expense a/c
Cash 60,000
Accrue
d 20,000 p & l a/c 80,000
80,000 80,000
Accrued Incomes
These are incomes due to be received but of which money has not been received in an
organisation. They are treated as current assets in an organisation. For example
An organisation expects to receive a rent income of Sh. 100,000 in a year. However, it
managed to receive Sh. 95,000 from the tenants. Record this in the ledger account

Rent income a/c

Cash
a/c 95,000
100,00 Accrue
P & l a/c 0 d 5,000
100,00
0 100,000

Prepayments
These are amounts in advance in any business. They can either be prepaid expenses or
prepaid incomes

Prepaid Incomes
These are expenses not due to be received but of which cash has been received. They are
therefore treated as current liabilities. For example
An organisation is supposed to receive a rent income of Sh. 150,000 in a year. However,
at the end of a given year, the organisation received a total of Sh. 200,000 as rent income.
Record this in the ledger account
Rent income a/c
Prepaid 50,000 Cash 200,00
P & l a/c 150,000
200,000 200,000

Prepaid expenses
These are expenses not due to be paid but for which an organisation has already paid.
They are therefore treated as current assets. For example
An organisation is required to pay an insurance expense of Sh. 30,000 in a year.
However, it paid a total of Sh. 36,000 to insurance premium in one financial period.
Record this in the ledger account

Insurance expense a/c

Cash 36,000 Prepaid 6,000
P&l 30,000
36,000 36,000
​
LECTURE EIGHT: ACCOUNTING FOR ADJUSTMENTS
(D) Correction of Errors Associated with Trial Balance

8.1​Introduction
This lecturer will enlighten you to different types of errors associated with the trial
balance and their corrections

8.3​Lecture Outline

8.3.1​ Title 8.3.1 Types of errors not affecting trial balance agreement
8.3.2​ Title 8.3.2 Types of errors affecting trial balance agreement
8.3.3​ Title 8.3.3 Correction for the various types of errors

8.4​Lecture
Correction of errors associated with the trial balance
One of the most important things learned in lecture two is that the balancing of the trial
balance does not guarantee that no error has been incurred. This is because of some errors
associated with the trial balance which need to be identified and corrected. The errors are
divided into two as follows;
i.​ Errors which do not affect the trial balance agreement
ii.​ Errors which affect the trial balance agreement

Errors which do not affect the trial balance agreement

These are errors whether committed; the two sides of the trial balance will still be equal.
They should be identified and corrected in their respective ledger accounts before a final
trial balance without errors is posted. The errors in this category include;

i.​ Error of omission

This is where a transaction is completely omitted from the entries so that either the debit
or credit or both sides of the trial balance are understated. For example; sales made on
credit of sh. 50,000 were not posted to the accounts. This will be corrected as;
DR: Debtors a/c​ 50,000
​ CR: Sales a/c​ ​ 50,000
(To record sales made on credit not earlier recorded)

ii.​ Error of commission

This is where a transaction is recorded but to a wrong persons account. For example;
Purchases on credit Sh. 40,000 from J Maina were recorded in L Maina’s account. This
will be corrected as;
DR: L Maina a/c​ 40,000
​ CR: J Maina a/c​ 40,000
(To correct error of commission)

iii.​ Error of Principle

This is where a transaction is posted but to a wrong class of account. For example;
purchase of Motor vehicle Sh. 800,000 was recorded in the purchases account. This is
corrected as;
DR: Motor vehicles a/c​ 800,000
​ CR: Purchases a/c​ ​ 800,000
(Being correction of error of principle)

iv.​ Error of Transposition

This is where a transaction is posted in correct accounts however the figures of the
transaction are interchanged. For example; rent expense of Sh. 8,960 was recorded as Sh.
9,860 in the cash and rent expense accounts. This is corrected by determining the
difference between the two figures as follows;
Difference: 9,860-8,960 = Sh. 900. The accounts were therefore overstated by Sh. 900.
The correction is done as follows;
DR: Cash a/c​ 900
​ CR: Rent expense a/c​ 900
(Being correction of error of transposition)

v.​ Error of Original Entry

This is where a transaction is recorded in the correct accounts however wrong figures are
used. For example; Electricity expense of Sh. 6,300 was recorded as Sh. 6,800 in the
bank and electricity expense account. This is corrected as;
DR: Bank a/c​ 500
​ CR: Electricity expense a/c​ 500
(Being correction of error of transposition)

vi.​ Error of Complete Reversal of Entries

This is where a transaction is posted to the wrong sides of accounts. For example; A
drawing of Sh. 8,000 was debited to bank account and credited to the drawings account.
This is corrected by double the amount as follows;
DR: Drawings a/c​ 8,000
​ CR: Bank a/c​ ​ 8,000
(Being correction of error of complete reversal of entries)

vii.​ Compensating Errors

This is where errors of the same value are posted to different accounts so that they appear
to cancel out each other. For example a cash account of Sh. 11,000 recorded as Sh.
10,000 while an insurance expense amount of Sh. 5,000 recorded as Sh. 6,000. As noted,
the total amount at the debit side of the trial balance with both wrong and correct figures
is Sh. 16,000! The correction is done as follows;
DR: Cash a/c​ 1,000
​ CR: Insurance expense a/c​ 1,000
(Being correction of error of compensation)

Errors affecting Trial balance agreement

These are errors if committed; the two sides of the trial balance will not be equal. If
identified, they are corrected in a special account known as suspense account. For
example;
i.​ A depreciation expense of Sh. 5,000 posted to depreciation account but not
posted to provision for depreciation account. This is corrected as;
DR: Suspense a/c​ 5,000
​ CR: Provision for depreciation account​ 5,000

ii.​ A cash sale of Sh. 50,000 was recorded to the sales account but not posted to
the Cash account. This is corrected as;
DR: Cash a/c​ 50,000
​ CR: Suspense a/c​ 50,000
LECTURE NINE: ACCOUNTING FOR ADJUSTMENTS
(E) Accounting for Discounts

9.1​Introduction
This lecture will introduce you to the various discounts in an organisation and their
accounting treatment in the financial statements

9.3​Lecture Outline

9.3.1​ Title 9.3.1Types of discounts

9.3.2​ Title 9.3.2 Accounting for discounts
9.3.3​ Title 9.3.3 Posting discounts to the financial statements

9.4​Lecture
There are two types of discounts including;
i.​ Discount allowed and
ii.​ Discount received

Discount allowed represents the amounts that an organisation allows its customers
(debtors) either to encourage cash sales or prompt settlement of accounts once goods are
sold to the customers. The discounts allowed therefore reduce the amounts receivable
from a customer. They are therefore considered as expenses for an organisation. When
discounts are allowed to a debtor;
DR: Discount allowed a/c​ xx
CR: Debtors a/c​ ​ ​ xx
At the end of the year, the value of the discount allowed is transferred to the P&L a/c to
be used as an expense;
DR: P & L a/c​​ xx
CR: Discount allowed a/c​ xx

Example:
Suppose an organisation sells goods worth Sh. 10,000 on cash with a trade discount of
5%, record the above in ledger accounts;

Solution:

Debtors a/c
Discount Discount
Sales 10,000 allowed 500 allowed a/c
Cash/Bank 9,500 Debtors 500 P & l a/c 500
10,000 10,000
Discount received on the other hand represents the amounts that an organisation receives
from the creditors (suppliers) either to encourage cash purchases or prompt settlement of
purchase costs. They therefore reduce the amounts payable by an organisation hence they
are treated as incomes. When discounts are received;

DR: Creditors a/c​ xx

CR: Discount received a/c ​ xx

At the end of the period, the value of the discount received is transferred to P & L a/c to
act as an income. This is done as follows;
DR: Discount received a/c​ xx
CR: P & L a/c​ ​ ​ xx

Example:
An organisation made purchases on credit Sh. 15,000. After 2 months, the organisation
paid Sh. 13,500 to the supplier being full settlement of the purchases made. Record this in
ledger accounts.

Solution:
Creditors a/c
Discount 15,00
received 1,500 Purchases 0 Discount received a/c
13,50 P&l 1,50
Bank 0 a/c 1,500 Creditors 0
15,00 15,00
0 0

In the profit and loss account, the discount allowed and received like in the case above
will be posted as follows;
P & l a/c Extract
Gross profit xx
Add: other incomes:
1,50
Discount received 0
Less: Expenses
50
Discount allowed 0
 LECTURE TEN: CONTROL ACCOUNTS

10.1​Introduction
This lecture will introduce you to controls accounts commonly used by entities.
10.3​Lecture Outline

10.3.1​ Title 10.3.1 Introduction to control accounts

10.3.2​ Title 10.3.2 Debtors control accounts
10.3.3​ Title 10.3.3 Creditors control accounts

10.4​Lecture
Control accounts are total accounts which are debited and credited with transactions
made in an organisation in individual ledger accounts. There are two types of control
accounts mainly used in an organisation which include;
i.​ Sales ledger control account/ Debtors control accounts
ii.​ Purchases ledger control account/ Creditors control accounts
Debtors Control Account
This is a summary of individual debtors’ ledger balances. The general format for the
debtors control account is as follows;

Debtors Control Account

Balance b/d xx Balance b/d xx
Credit sales xx Cash/ Bank xx
Dishonored cheques xx Discount allowed xx
Dishonored bills of
exchange xx Sales returns xx
Sundry journal debits xx Bad debts xx
Bills receivable xx
Sundry journal credits xx
Bal c/d (Credit balance) xx Bal c/d (Debit balance) xx
xx
x xxx
Bal b/d xx Bal b/d xx

Creditors Control Account

This is a summary of individual creditors’ ledger balances. The general format for the
creditors control ledger account is as follows;

Creditors Control Account

Balance b/d xx Balance b/d xx
Cash/ Bank xx Credit purchases xx
Discounts received xx Dishonoured cheques xx
Purchase returns xx Sundry journal credits xx
Bills payable xx
Bal c/d (Credit Balance) xx Bal c/d (Debit balance) xx
 xx
x xxx
Bal b/d xx Bal b/d xx

Example:
Use the information provided below to draw up sales and purchases control accounts and
determine their balances at the end of the period;

Sales ledger control a/c:

Bal b/d Sh. 30,000 - Debit
Bal b/d Sh. 17,000 - Credit
Purchases ledger control a/c :
Bal b/d Sh. 29,600 - Credit
Bal b/d Sh. 11,900 - Debit
The following transactions took place: (Sh)
Discount allowed 17,000
Credit purchases 45,000
Credit sales 80,000
Bad debts w/off 10,000
Provision for bad debt 2,000
trading expenses 16,000
Discount received 4,000
Cash paid 30,000
Discount allowed 9,000
Sales returns 2,000
Return outwards 1,800

Solution:
Debtors Control a/c
Ba b/d 30,000 Bal b/d 17,000
Sales 80,000 Discount allowed 17,000
Bad debts 10,000
Sales returns 2,000
Bal c/d 64,000
110,000 110,000
Ba b/d 64,000
 Creditors Control a/c
Bal b/d 11,900 Bal b/d 29,600
Discount received 4,000 Credit purchases 45,000
Cash paid 30,000
Return outwards 1,800
Bal c/d 26,900
74,600 74,600
Bal b/d 26,900
​

LECTURE ELEVEN: COMPREHENSIVE FINANCIAL STATEMENTS

11.1​Introduction
This lecture will enlighten you with accounts that have all the transactions including
adjusted accounts and how to approach the questions with adjustments.

11.3​Lecture Outline

11.3.1​ Title 11.3.1 Comprehensive Question1 and suggested solution

11.3.2​ Title 11.3.2 Comprehensive Question2 and suggested solution
11.3.3​ Title 11.3.3 Comprehensive Question3 and suggested solution
11.4​Lecture

Comprehensive Illustration for adjusted financial statements

Question One
Use the following trial balance of Mweshimiwa sole traders to draw up a statement of
comprehensive income and a statement of financial position for the year ended 30
September 2011.

Sh. Sh.
Inventory 41,600
Carriage outwards 2,100
Carriage inwards 3,700
Return inwards 1,540
Return outwards 3,410
188,43
Purchases 0
380,40
Sales 0
Salaries and wages 61,400
Warehouse rent 3,700
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating expenses 894
General expenses 245
Premises 92,000
Motor vehicles 13,400
Fixtures and fittings 1,900
Trade receivables 42,560
Trade payables 31,600
Bank 5,106
Drawings 22,000
Capital 68,843
484,25 484,25
3 3
Additional Information:
i.​ Stock at 30 September 2011 was Sh. 44,780​
ii.​ Depreciation is charged as follows
●​ Motor vehicles​ 15% p.a on cost
●​ Premises​ ​ 5% p.a on cost
iii.​ Warehouse rent of Sh. 300 was not paid during the year and Salaries and
wages paid in advance amount to Sh. 400
iv.​ The bad debts written off in the year amount to Sh. 560. A provision for
doubtful debts of 5% of remaining debtors should be made.
v.​ General expenses outstanding amount to Sh. 255.

Solution
Msheshimiwa sole trader
Statement of Comprehensive Income
For the year ended 30 September 2011
Sales 380,400
Less: Return inwards (1,540)
Net sales 378,860
Less: Cost of sales
Opening Stock 41,600
Add: Purchases 188,430
Add: Carriage inwards 3,700
Less: Return outwards (3,410)
 (44,780 (185,540
Less: Closing stock ) )
Gross profit 193,320
Less: Expenses
Depreciation: M/vehicles (wks 1) 2,100
: Premises (Wks 1) 4,600
Bad debts 560
Provision for doubtful debt (Wks 3) 2,100
Carriage outwards 2,100
Salaries: Paid 61,400
: Prepaid (400) 61,000
Warehouse rent paid: 3,700
: Accrued 300 4,000
General expenses: Paid 245
Accrued 255 500
Insurance 1,356
Motor expenses 1,910
Office expenses 412
Lighting and heating 894 (81,532)
Net profit 111,788

Mheshimiwa Sole Trader

Statement of Financial Position
As at 30 September 2011
Fixed Assets Cost Acc. Dep Net Book Value
Premises 92,000 4,600 87,400
Motor vehicle 13,400 2,100 11,300
Fixtures and fittings 1,900 1,900
100,600
Current assets
Inventory 44,780
Debtors 42,560
Less: Bad debts (560)
Provision (2,100) 39,900
Cash and bank 5,106
Prepaid salaries 400
90,186
Less: Current liabilities
Creditors 31,600
Accrued rent 300
Accrued general exp 255 (32,155) 58,031
158,631
Financed by
Capital 68,843
Add: Net profit 111,788
Less: Drawings (22,000)
158,631

Workings
1. Motor vehicles depreciation: 15% x 13,400 = Sh. 2,100
2. Premises depreciation: 5% x 92,000 = Sh. 4,600
42,56
3. Debtors adjustments: Trade receivables= 0
Less: Bad debts = (560)
42,00
0
5% x 42,000 =
Provision for doubtful debts= Sh. 2,100

Question Two
The trial balance shown below was extracted from the books of a sole trader.
Dr. Cr.
Motor vehicles 3,000,000
Fixtures 2,000,000
Stock 1,000,000
15,000,00
Sales 0
Purchases 7,000,000
Rent 1,000,000
Salaries and wages 1,000,000
Electricity 500,000
Telephone 400,000
Motor vehicle expenses 500,000
Discounts 600,000 500,000
Returns 1,000,000 500,000
Debtors 4,000,000
Creditors 3,000,000
Cash 2,000,000
Bad debts 500,000
Provision for bad and doubtful
debts 500,000
Drawings 1,000,000
Capital 6,000,000
25,000,00 25,000,00
0 0

Additional Information
i.​ Rent outstanding at the end of the year amount to Sh.200,000
ii.​ Salaries and wages paid in advance amount to Sh. 100,000
iii.​ Accrued electricity is Sh. 50,000
iv.​ Prepaid telephone bill is Sh. 100,000
v.​ Stock as at 31/10/2011 amount to Sh. 3,000,000
vi.​ Provision for bad and doubtful debts is to be set at 10% of debtors
vii.​ Depreciation is provided on motor vehicles and fixtures at 10% and 20%
respectively on cost.

Required
(a)​ Trading profit and loss account for the year ended 31/10/11
(b)​Balance sheet as at 31/10/11

Suggested Solution

Sole trader
Trading profit and loss account
For the year ended 31. 10. 11
Sales 15,000
Less: Return inwards (1,000)
Net Sales 14,000
Less: Cost of Sales
Opening inventory 1,000
Purchases 7,000
Return outwards (500)
Closing inventory (3,000) (4,500)
Gross profit 9,500
Add: Other
incomes
Discount received 500
Decrease in provision (Wks) 100
Adjusted gross profit 10,100
Less: Expenses
Rent expense: Paid 1000
Accrued 200 1,200
Salaries and wages: Paid 1000
Prepaid
(100) 900
Electricity expense: Paid 500
accrued
50 550
Telephone bill: Paid 400
Prepaid (100) 300
Depreciation:
M/ vehicle 10% x 3,000 300
Fixtures 20% x 2000 400
Motor vehicle expense 500
Discounts allowed 600
Bad debts 500 (5,250)
Net Profit 4,850

Sole trader
Balance sheet
as at 31. 10.11
Acc.
Fixed Assets Cost Dep N.B.V
Motor 3,00
vehicles 0 300 2,700
 2,00
Fixtures 0 400 1,600
4,300
Current assets
Inventory 3,000
4,00
Debtors 0
(400
Provision ) 3,600
Cash 2,000
Prepaid salaries 100
Prepaid tel. bill 100
8,800
Less: Current Liabilities
3,00
Creditors 0
Accrued rent 200
Accrued
electricity 50 (3,250) 5,550
9,850
Financed by:
Capital 6,000
Net profit 4,850
Less: drawings (1,000)
9,850

Workings:
Provision for doubtful debts is 10% x 4,000 = Sh. 400
Decrease in provision (Income) 500 – 400 = Sh. 100

Question Three
The following trial balance was extracted from 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 8,000 3,6000
depreciation
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
117,40 117,40
1 1

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.
Suggested Solution
Rodney
trading profit and loss
account
For the year ended 31 December 1997
Sales 81742
less cost of sales
opening stock 9274
add purchases 62101
(61491
less closing stock(wks1) (9884) )
Gross profit 20251
Add other
incomes
Rent received 750
Rent accrued 250 1000
Adjusted Gross profit 21251
Less expenses
Rates paid 880
Rates prepaid (40) 840
light & heat paid 246
light & heat
accrued 85 331
salaries & wages 8268
bad debts 247
provision for bad debtswks2 62
Insurance paid 172
send to motor exp (82) 90
motor expense(wks3) 943
General expense 933
Depreciation
premises 500
(13814
motor van(wks4) 1600 )
Net profit 7437

Rodney
Balance sheet
As at 31 December 1997
Net book
Fixed assets cost Acc. Dep value
Premises 15000 5500 9500
motor van 8000 5200 2800
12300
current assets
closing stock 9884
Debtors 7689
provision for bad debts (388) 7301
bank balances 1582
rent accrued 250
prepaid rates 40
Less current Liabilities 19057
Creditor
s 5462
Accrued light 85 -5547 13510
25810
Financed by
capital 20521
Add net profit 7437
less drawings (2148)
25810

working
s
1 61491
2 388-326=62
3 861+82= 943
4 20%*8000=1600
5 5547
​
Recommended Readings
1.​ Wood, Frank & Sangster, A: Business Accounting 1 – 9th ed. – New Delhi:
Pearson Education, 2002.
2.​ Maheshwari, SN. & Maheshwani, SK – An Introduction to Accountancy – 7th
ed. – New Delhi; Vikas Publishing House, 2003.
3.​ Sutherland, Jonathan and Canwell, Diane: Key Concepts in Accounting and
Finance – London: Palgrave Macmillan, 2004.

Additional Readings

1.​ Nicholson, Margaret: Mastering Accounting Skills – 2nd ed. – London: Palgrave
Macmillan, 2000.
2​ Mukherjee, Amitabha and Hanif, Mohammed: Modern Accountancy (Volume
11) – 2nd ed. – New Delhi: Tata McGraw Hill, 2003.