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ACCOUNTING FOR LAWYERS

DEALER – the formula that helps to know what to debit and what to
credit (the ledgers)
D- Dividends Debit when
they
E-Expenses (water, electricity, salaries and wages increase,
A-Assets (debtors, cash, bank, Motor vehicle, credit when
they
purchases ) decrease

Credit
L-Liabilities (creditors) when they
E-Equity (capital) increase,
debit when
R-Revenue (sales, income) they
Others decrease

Return inwards- Debit, Return outwards- Credit, Drawings- Debit

SUMMARY OF THE FORMULA
When they increase, you debit

DR. Cr. When they increase,

you credit

D E A L E R

When they
decrease, When they
you credit decrease, you
debit
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1. THE LEDGER
-Has 2 parts (the debit side and the credit side)
-Use the dealer formula to know what to debit and what to credit
- The difference of between sides is called balance carried down (bal. c/d) or
balance carried forward (bal. c/f). The difference is carried to the lesser side so
as to balance the ledger.
-When closing off the ledger account, the balance carried down (bal. c/d), is
written on the side with more money, as the next financial year, and is called
balance brought down (bal. b/d) or balance brought foward (bal. b/f). If it falls
on the debit side it is called a debit balance, whereas if it falls on the credit side,
it is called a credit balance.
i.e (Using the example of a purchases account as shown below, balance off the
ledger as at 31/03/22)

Purchses Account
DR. CR.
Date Details Amount Date Details Amount
10/03/2022 Bank 10,000 31/03/2022 bal. c/d 30,000
20/03/2022 Cash 10,000
25/03/2022 Cheque 10,000
TOTAL 30,000 30,000
01/04/2022 Bal. b/d 30,000

Note;
-The balance carried down is at the required balancing date of 31/03/22, while
the balance brought down is at 01/04/22, the date for the next financial year.
-The purchases ledger therefore has a debit balance, since the debit side has
more money than the credit side. This balance is what is taken to the trial
balance under the debit side, after which both sides are summed up and the
totals on the credit side should be equal to the totals on the debit side. Then
we’ll say that our trial balance has balanced.
-Each ledger has a balance, either debit or credit balance, which is taken to the
trial balance apart from those accounts that balance by themselves without
having to carry forward any difference.
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2. The Trial Balance

-Has a debit and a credit side.
Write down the accounts, if an account has a debit balance write it on the
debit side, if it has a credit balance write it on the credit side.
I.e illustrated below
JABALI MUSA TRIAL BALANCE AS AT 31/03/22
DETAILS DR. CR.
Capital a/c 3,500,000
Cash a/c 1,220,000
Bank a/c 2,510,000
Purchases a/c 1,450,000
Nyambura a/c 360,000
Nmutoko a/c 340,000
Stationery a/c 170,000
Seal honey ltd a/c 170,000
sales a/c 1,235,000
wakindiri a/c 70,000
hassan a/c 150,000
electricity a/c 55,000
furniture a/c 480,000
supreme a/c 480,000
salaries and wages a/c 120,000
Return outwards a/c 100,000
Motor vehicle a/c 700,000
shailoki a/c 800,000
return inwards a/c 60,000
TOTAL 6,985,000 6,985,000

Note;
-You notice that the trial balance balances. This happens only if the ledgers
have been balanced off correctly so as to get the required balance.
-The trial balance is then used to extract the income statement (to get net
profit) and the balance sheet (statement of financial position)
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3. INCOME STATEMENT.- calculating net profit

FORMULAS
Net sales= Sales- Return inwards
Cost of sales= (opening stock +Purchases +carriage inwards) - return outwards-
closing stock
Gross profit= Net sales – cost of sales
Net profit= (Gross profit + other incomes) – Total Expenses
What to do with what
a. Provision for doubtful debts
-There is an opening provision provided and the closing provision provided.
- If the closing provision is more than the opening provision, the difference
between the two, is added to the expenses.
-If the closing provision is lesser than the opening provision, the difference
between the two, is added to other incomes.

b. Accruals and prepaid

Accruals are added to the specific expenses while the prepaid amounts are
subtracted from the specific expense. i.e; Total expense= (expense + accrual) -
prepaid amount

c. Carriage Outwards
This is added as an expense in the income statement.

d. Depreciations
Depreciation on any asset is always an expense. These are added to the
expenses.
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Calculating Depreciation.
Can be calculated using 2 formulas;
I. Straight line method (On Cost)
Here, you directly multiply the original cost by the depreciation percentage
rate to get the depreciation value of the specific period. E.g
Buildings are valued originally at Ksh. 862,000. The depreciation is calculated
at a 2% rate p.a. Calculate the depreciation of the buildings.
WORKING
2/100 * 862,000= 17,240

II. Fixed Rate Reducing Balance.

Here, you take the original cost and subtract the given accumulated
depreciation from the trial balance. The difference is then multiplied by the
depreciation percentage rate of the specific period. E.g;
A motor vehicle is values ta Ksh. 57,809. The accumulated depreciation (from
the trial balance), is Ksh. 29,424. Depreciation is calculated at 10% reducing
balance rate per annum. Calculate the depreciation of the motor vehicle for
the specific period.
WORKING
Step 1: get the difference between the original cost and the depreciation
value provided.
57809- 29424= 28,385
Step 2: multiply the difference with the rate p.a
28385*10/100=2,838.50
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The income statement itself.

Let’s use the example below.’
Practice Question
The following trial balance has been extracted from the books of Jomumba, a sole trader as at
31 March 2011:
Dr. Cr.
Shs. Shs.
Freehold land: Cost 243,000
Buildings: Cost 862,000
Accumulated depreciation 137,920
Plant and machinery: Cost 128,344
Accumulated depreciation 32,148
Purchases and sales 1,678,008 2,625,134
Cash in hand 2,536
Creditors ledger control account 42,344
Electricity 13,834
Capital (1.4.2010) 690,000
Provision for doubtful debts 2,114
Cash at bank 2,420
Debtors ledger control account 122,148
Inventory as at 1.4. 2010: 92,424
Motor vehicle expenses 8,348
Sundry expenses 4,004
Wages and salaries 340,967
Rent and rates 3,242
Motor vehicles: Cost 57,809
Accumulated depreciation 29,424
3,559,084 3,559,084
The following additional information is available:
1. Stock as at 31 March 2011 was valued at Shs. 120,000.
2. “Sales” include goods returned by customers amounting to Shs. 100,000.
3. The following are the prepayments and accruals
Prepayments Accruals
Shs Shs
Sundry expenses 10,000 6,000
Wages and salaries 25,000 7,500
Rent and rates 5,000 2,500
4. The provision for doubtful debts is to be adjusted to 2% of the debtors figure, after
including bad debts of Shs. 20,000.
5. Depreciation is to be provided as follows:
Rate per annum
Buildings 2% on cost
Plant and machinery 10% on cost
Motor vehicles 10% reducing balance
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Required:

a) Income statement for the year ended 31 March 2011.

JOMUMBA STATEMENT OF COMPREHENSIVE INCOME FOR THE THE YEAR ENDED 31/03/2011
SHS SHS
Sales 2,625,134
return inwards 100,000
Net sales 2,525,134
COST OF SALES
Opening stock 92,424
purchases 1,678,008
carriage Inwards 0
Return outwards 0
Closing stock 120,000 1,650,432
GROSS PROFIT 874,702
Other incomes
Provision for doubtful debt 71.04
discount received 0
bank interest received 0 71.04
EXPENSES
Carriage outwards 0
electricity 13,834
Motor vehicle expenses 8,348
sundry expenses 4
wages and salaries 323467
rent and rates 742
motor vehicle depreciation 2838.5
buildings depreciation 17240
plant and machinery depreciation 12834.4
bad debts 20000 399,308
NET PROFIT 475,465

Income statement workings;

 PROVISION FOR DOUBTFUL DEBT WORKINGS
Original provision =2114
The provision for doubtful debts is to be adjusted to 2% of the debtors figure, after including
bad debts of Shs. 20,000. This 20,000 is both a bad debts on its own and is also used in
calculating the provision for bad and doubtful debts at the end.
Debtors= 122,148 i.e
(122,148-20000)* 2% =2042.96 (provision for doubtful debts at the end)
NB: Since the value 2042.96 is lesser than the original provision of 2114, the
difference between the two which is 71.04, is added to other incomes.
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 Prepaid and Accruals Workings

The following are the prepayments and accruals

Prepayments Accruals
Shs Shs
Sundry expenses 10,000 6,000
Wages and salaries 25,000 7,500
Rent and rates 5,000 2,500
Sundry expenses
= (sundry expense from the trial balance + accrual value) – prepayments value
= (4004+6000) – 10000 = 4
Wages and salaries
= (wages and salaries from the trial balance + accrual value) – prepayments
value
= (340,967+ 7500) -25,000 =323,467
Rent and rates
= (rent and rates from the trial balance + accrual value) – prepayments value
= (3242 + 2500) – 5000 = 742
NB: These values are then used in the expenses as the new values respectively.
 Depreciation workings

Depreciation is to be provided as follows:

Rate per annum
Buildings 2% on cost
Plant and machinery 10% on cost
Motor vehicles 10% reducing balance
On cost means straight line method.
Buildings depreciation working
Cost* rate per annum= 862000*2/100= 17,240
Plant and Machinery depreciation working
Cost* rate per annum= 128344* 10/100= 12834.40
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Motor vehicle depreciation working (Reducing balance)

= (Original cost – Accumulated depreciation) * rate per annum
= (57809-29424) * 10/100= 2838.50
These values are used as expenses for the specific depreciated assets.

4. THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

THE ACCOUNTING FORMULA;
NCA+ (CA-CL) = (NCL+C+NP) – Drawings
NET ASSETS = TOTAL CAPITAL
NCA- Non- Current Assets
CA- Current Assets
CL- Current Liabilities
NCL- Non- Current Liabilities
C- Capital
NP- Net Profit
If done properly, the left side of the equation should balance with the right
side of the equation.
The balance sheet contains;
THE LEFT SIDE OF THE FORMULA (NET ASSETS) { NCA + (CA-CL)}
 Non-Current Assets
-These are fixed assets such as land, plant and machinery, buildings and motor
vehicles.
-Here the net book value of each asset is calculated. Remember the
depreciation workings in the income statement? The depreciation values of
each asset from the income statement are added to the depreciation value of
each asset from the trial balance. This provides for the total depreciation of
the asset. From this, we can then calculate the net book value of each asset.
i.e;
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Total depreciation= (calculated depreciation in the income statement +

depreciation value of each asset from the trial balance)
Net Book Value = (Original cost of the asset – Total depreciation)
 Current assets
-These include cash equivalents: closing stock, Debtors, cash in hand, cash
at bank, and prepaid amounts.
- Here we calculate the debtors’ new value;
(Remember the closing provision for doubtful debts from the income
statement?)
Debtors= (debtors value in trial balance – closing provision for doubtful
debts)
NB;
-If the debtors’ value included bad debts, the bad debts are subtracted then
the final provision for doubtful debts subtracted. i.e;
Debtors= (debtors value in trial balance – bad debts) - closing provision for
doubtful debts)
-If the sales value included return inwards, the debtors’ value will be;
Debtors= (debtors value in trial balance – bad debts) - closing provision for
doubtful debts) – Return Inwards

 Current Liabilities.
These include: creditors and accruals.

THE RIGHT SIDE OF THE FORMULA (TOTAL CAPITAL) {(NCL+C+NP) – Drawings}

This side contains;
 Non- current liabilities
-These are long term debts, over a year.
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 Capital
-The capital at the beginning of the financial year.
 Net Profit
-This is the final result calculated from the income statement
 Drawings
- This is the amount taken from the business by the owner for personal
use.’
THE BALANCE SHEET ITSELF;
Using our question above on income statement’;
Required:
b.Statement of financial position as at 31 March 2011.

JOMUMBA STATEMENT OF FINANCIAL POSITION FOR THE PERIOD ENDED 31/3/2011

NON-CURRENT ASSETS ORIGINAL COST ACC. DEPRECIATION NET BOOK VALUE
buildings 862000 155160 706840
motor vehicle 57809 32262.5 25546.5
freehold land 243000 0 243000
plant and machinery 128344 44982.4 83361.6
1058748.1
CURRENT ASSETS
closing stock 120000
Debtors 105
cash in hand 2536
cash at bank 2420
salaries and wages prepaids 25000
Sundry expenses prepaids 10000
rent and rates prepaid expenses 5000 165061
CURRENT LIABILITIES
Creditors 42344
salaries and wages accruals 7500
Sundry expenses accruals 6000
rent and rates prepaid accruals 2500 58344 106717
NET ASSETS 1165465.1
FINANCED BY
NON-CURRENT LIABILITIES 0
CAPITAL 690000
NET PROFIT 475465.1
DRAWINGS 0
TOTAL CAPITAL 1165465.1

You notice that the balance sheet balances. i.e

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NET ASSETS= TOTAL CAPITAL

Balance sheet workings

 Debtors
Debtors= (debtors value in trial balance – bad debts) - closing provision for
doubtful debts) – Return Inwards
= (122,148-20000) -2043- 100000
=105
This is used as the new debtor’s value in the balance sheet, under current
assets.