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FINANCIAL ACCOUNTING:Book-keeping Versus Accounting:What is the difference between bookkeeping and accounting?There is some confusion over the difference between bookkeeping and accounting. This is due to the fact that two are related and there is no universal accepted line of demarcation between them.Generally bookkeeping is the art of recording of all business data/transactions in the prescribed or acceptable manner for easy reporting and understanding. The work of a bookkeeper is of the clerical in nature. Accounting is primarily the science and art of recording, summarizing, classification, interpretation and the preparation of reports. Accountants often direct and review the work of bookkeepers. Accounting is the language employed to communicate financial information of a concern to such parties.The work book or books mean books of accounts and keeping implies maintaining in proper form and order. Thus bookkeeping may be defined as the art of recording business transactions in books in a regular and systematic manner. It has been defined by different experts as:"The science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money's worth." "The art and science of recording business transactions in such a systematic way as a trader may know the result of his trade at the end of a certain period and may also prove the accuracy of such record." "The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof." It should be noted from the above definitions that bookkeeping primarily deals in the art of recording transactions in books.Accounting is defined as the art of recording, classifying, summarizing and classifying all business transactions expressed in monetary terms to enable the preparation of reports and interpretation of reports.Branches of Accounting:Accounting has three main forms of branches, financial accounting, cost accounting, and management accounting. These forms of accounting have been developed to serve different types of objectives.Financial Accounting:It is the original form of accounting, which mainly confines to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.Cost Accounting:Branch of accounting which concentrates on the function of accounting to ascertain the cost of the product and to help the management?in the identification of costs and control of costs. It takes into account of all forms costs incurred during production and distribution.[direct and indirect costs].Management Accounting or Managerial Accounting:It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities to achieve profit and wealth maximization of the business during the short and long term.WHAT ARE THE IMPORTANT FUNCTIONS OF ACCOUNTING OR BOOK-KEEPING?Accounting has a number of functions which must be appreciated by all users for specific purposes, needs vary from person to person.Accounting helps its users in the following ways.Assessing the tax liability of individuals and business firms [tax liability].Comparing the performance of firms over the period or in the industry.Protecting business assets from non-users and dishonest employees.Planning for the future financial requirements of the business.Simplifying credit transactions in business.Keeping records for future reference like solving conflict among partners.Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is to report regularly to the interested parties by means of financial statements.Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protects its assets from an unjustified and unwanted use.Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g., income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are municating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties - owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the MON TERMINOLOGIES USED IN BOOK-KEEPING:Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.Transaction:Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.Business:It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.Proprietor:He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.Drawings:The cash or goods taken away by the proprietor from the business for his personal use are called has drawings.Purchases:Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.Purchases Returns:If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.Sales:Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.Sales Returns:If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.Trade Discount:It is rebate or allowance from the scheduled price granted by the seller to the buyer attracting bulk purchases. Trade discount is usually granted in the following circumstances:(a) When selling to a fellow trader.(b) When the buyer is an old customer.(c) When sales are made in bulk.(d) As a custom of trade.Cash Discount:It is deduction or allowance allowed by creditor to a debtor for prompt payment. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discountCommission:It is a form of remuneration for services rendered by one person to another.Capital Expenditure vs revenue expenditure. Capital expenditure takes place when assets or fixed assets are purchased or capitalization of expenditure on assets while revenue expenditure refers to payment for goods and services needed or used by the business to meet its short term obligations.Expense:It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.Account:A summarized record of transactions relating to person or thing is called an account.Debtor (Account Receivable):A person who owes money to another is a debtor. When we say that we owe Mr. Odeke B Shs 200, we mean that we have received from Mr. Odeke B Shs 200 which we have to repay. We stand as debtor to Mr. Odeke B for Shs 200. It is also termed as accounts receivable.Creditor (Accounts Payable):A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.Assets:These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.Liabilities:They are the debt due by a business to its proprietor and others.Voucher:Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.Goods (Merchandise):It includes all merchandise commodities which are purchased by the business for selling.Stock (Inventory):Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.Equity:A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. Liabilities.The equities of creditors represent debts of the business and are called liabilities. The equities of the owner is called capital, proprietorship or owner's equity. PARTIES INTERESTED IN ACCOUNTING INFORMATION:Explain, who may be interested in accounting information of a company or firm?There are a number of parties who are interested in the accounting information relating to business. Accounting is the language employed to communicate financial information of a concern to such parties. The following are the groups who like to make use of the accounting information.Owners:The owner provides funds or capital for the organization. They want to know whether their funds are being properly used or not. They need accounting information to know the profitability and the financial position of the concern in which they have invested their funds. The financial statement prepared from time to time from accounting records tell them the profitability and the financial position.Management:Management is the art of getting things done through others. The management should ensure that the subordinates are doing work properly. Accounting information is an aid in this respect because it helps a manager in appraising the performance of the subordinates. Accounting information provides "the eyes and ears to management".Creditors or service providers.Creditors are the persons who supply goods on credit or bankers or lenders of money. They want to know the financial position of a concern before giving loans or granting credit. They want to be sure that the concern will not experience difficulty in making their payment in time i.e., liquid position of the concern in satisfactory. To know the liquid position, they need accounting information.Employees:Employees are interested in the financial position of a concern they serve particularly when payment of bonus depends upon the size of the profits earned. The demand for wage rise, bonus, better working conditions etc. depends upon the profitability of the concern and in turn depends upon financial position. For these reasons, this group is interested in accounting ernment:The government is interested in accounting information because it wants to know earnings or sales for a particular period for the purpose of taxation. Government also needs accounting information for compiling statistics concerning which in turn helps in compiling national accounts.Consumers:Consumers need accounting information for establishing good accounting control so that cost of production may be reduced with the resultant reduction of the prices of goods they buy. Sometimes, prices for some goods are fixed by the government, so it needs accounting information to fix reasonable prices so that consumers are not IC 1 – OVERVIEW OF ACCOUNTINGObjectives of Financial Reporting.The objective of financial reporting is to provide information about the financial position, performance and changes in the financial position of an enterprise that is useful to a wide range of users in making economic decisions. The economic decisions that are taken by the users of financial reports require an evaluation of the ability of an enterprise to generate cash and of the timing and certainty of its generation. This can be achieved if users of financial reports are provided with information that focuses on the enterprises’.Financial position which is affected by the economic resources it controls, its financial structure, its liquidity and solvency and its ability to adapt to changes in the environment in which it operates.Performance measured by the return obtained by the enterprise on the resources it controls.Cash flow by indicating the amounts and principle sources of its cash inflows and outflows.The user–groups of financial reports include:Equity investors, existing and potential;Lenders, existing and potential;Employees, existing, potential and past;Analysts / Advisers including journalists, economists, Credit Rating Agencies;Business Contacts including Customers, Suppliers, Competitors;Government including Tax Authorities;The Public.The most frequently produced financial reports are known as Financial Statements. A complete set of financial statements includes the following components:A balance sheetIncome statementCash flow statementA statement showing either;All changes in equity or;Changes in equity other than those from capital transactions with owners and distributions to owners.Accounting policies and explanatory notes. However, financial statements do not provide all the information that users need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide non – financial information.The Regulatory Framework of Accounting.In order to produce financial statements that provide information that is useful to stakeholders, certain reporting principles and guidelines are necessary. These principles and guidelines are embodied in what is known as the Regulatory framework of accounting.Financial statements prepared in line of the requirements of the Regulatory Framework of Accounting are frequently described as giving a true and fair view of or presenting fairly the financial position and performance of an enterprise.The Regulatory Framework of accounting constitutes therefore the factors which have shaped financial reporting. The following factors can be identified.The following factors can be identified:National / Local LegislationAccounting Concepts and individual judgementAccounting standardsOther international influences National / Local Legislation: Financial reporting requirements may be stipulated in the Laws governing a particular country. For example; in Uganda, the following provide specific requirements: Companies Act Cap 85, States that establish parastatals and other government bodies, Local Government Act, Public Finance and Accountability Act (2003). Accounting Concepts and Individual Judgement:Financial Statements are prepared on the basis of a number of fundamental accounting assumptions and conventions. In addition, many figures are derived from the application of judgement in putting these assumptions into practice. However, it’s possible that people exercising their judgement on the same facts can arrive at very different conclusions.Examples include: Valuation of Buildings, Accounting for inflation Valuation of intangibles. If the exercise of judgement is completely uncontrolled / any comparability between the accounts of different organizations will disappear especially where deliberate manipulation occurs in order to present accounts in the most favourable light.Accounting Standards:In an attempt to deal with some of the subjectivity and to achieve comparability between organizations, accounting standards have been developed. These are developed at both national and international levels.Accounting Standards are set by an independent private sector body called National / International Accounting Standards Committee with the objective of achieving uniformity in the accounting principles which are used by businesses and other organizations for financial reporting.In Uganda, the National Accounting Standards Board unilaterally adopted IAS except for some modification that shall be required from time to time to take account of the unique Ugandan circumstances. International Accounting Standards however, do not override local regulations on financial statements.International Accounting Standards are produced by the International Accounting Standards Committee (IASC) which was set up in 1973 to work for the improvement and harmonization of financial reporting. The IASC develops IAS’s through an international process that involves the statements and national standard setting bodies. Therefore, IASC, has the following objectives:To develop, in public interest a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions.To promote the use and rigorous application of those standards.To bring about convergence of national accounting standards and International Accounting Standards to high quality solutions.IASC is established as an independent organization composed of two main bodies: the Trustees and the Board. Other include; Standing Interpretations Committee and Standards Advisory Council.The IASC has published 41 IASs’ as well as revised standards.The advantages Uganda stands to benefit from this stem from the advantages of international harmonization:Investors, both individual and corporate, would like to be able to compare the financial results of different companies internationally as well as nationally in making investment decisions.Multinational companies would benefit from harmonization for many reasons such as;Better access would be gained to foreign investors funds.Management control would be improved because international harmonization would aid internal communication for financial information.Appraisal of enterprises would be more straight foreward.It would be easier to comply with the reporting requirements of overseas stock exchanges.A reduction in audit fees might be achieved.Transfer of accounting staff across national borders would be easier.Uganda Government will save time and money and would attempt to control the activities of foreign multinational companies.Regional economic groups usually promote trade within a specific geographical region. This would be aided by common accounting practices within the region.Barriers to International Harmonization:Different purposes of financial reporting. In some countries the purpose is solely for tax assessment while in others it is for investors’ decision making.Unique circumstances. Some countries may be experiencing unusual circumstances which affect all aspects of everyday life and impinge the ability of companies to produce proper reports.Developing countries are obviously behind in the standard setting process and they need to develop the basic standards and principles already in place in most developed countries and the man power to interpret and apply the international standards.Other InfluencesThese include Stock exchange regulations and EU directives.The Qualitative Characteristics of Financial Information.Qualitative characteristics are attributes that make the information provided in financial statements useful to others. For information to be useful, it must be:Material. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.Relevant to the decision making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming or correcting their past valuations.Reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users. To represent faithfully in terms of valid description that which it purports to represent or could reasonably be expected to represent. Thus financial information should be neutral, prudent and complete and should present the substance of economic events.Useful presented to enhance comparability and understandability. Comparability. Users of financial information must be able to compare the financial statements of an enterprise over time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and financial adaptability. Consistency is therefore required. In addition, adequate disclosure of accounting policies used in the preparation of the statements as well as the corresponding figures enhance comparability.Understandability. The information provided in financial statements should be presented in such a way that it is readily understandable by users. For this purpose, users are assumed to have abilities that is; reasonable knowledge of business, economic activities and accounting and a willingness to study the information with reasonable diligence.Constraints to the Provision of Good Quality Information:In some situations, more of one quality can only be achieved at a cost. This cost may be an actual cost or may be a reduction in the level of another quality. It’s therefore imperative to observe the following:Balance between qualitative characteristics. In practice, a balancing or a trade off between qualitative characteristics is often necessary. Generally, the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements.Timeliness. If there is undue delay in the reporting of financial information, it may lose its relevance.Benefit and cost. The benefits derived from financial information should exceed the cost of providing it.Traditional Historical Cost Accounting and Current Value Accounting.The main characteristics of HCA are generally reflected as concepts or conventions. The two main characteristics are:All transactions are recorded at their historical cost. Thus the Financial statements will reflect the transactions at historical cost.The transactions thus recorded are matched so that the income generated by the company is ‘matched’ against the costs involved in getting that income.However, the strict Historical Cost Convention is sometimes modified to include the selective revaluation of non-current assets.HCA are the prevalent form of financial statements throughout the world.Criticisms of Historical Cost Accounting.Long Term asset values are unrealistic.The pure HC Balance sheet ignores the current value of assets and thus the amounts reports are unlikely to be realistic up-to date measures of the resources employed by the business. Assets such as Land and Buildings are usually undervalued. As no account is taken of the changing value of money over time, it is also difficult to interpret trends.Depreciation is inadequate to finance the replacement of fixed assets.HC depreciation does not fully reflect the value of the asset consumed during the accounting period.Holding Gains on inventories are included in profit.During a period of high inflation, the monetary value of inventories held may increase significantly while they are being processed. The conventions of HCA lead to the realized part of this holding gain (known as inventory appreciation) being included in profit for the year.Profits (Losses) on holding of net monetary items are not shown.In periods of inflation, the purchasing power of and thus the value of money falls. It follows that an investment in money will have a lower value at the end of a period of time than it did at the beginning leading to a loss. Similarly, the real value of a monetary liability will reduce over a period of time and a gain will be parisons over time are unrealistic.The HCA tends to exaggerate growth.Possible Alternatives to HCAThe deficiency of HCA is more prominent in times of severe and prolonged inflation.Current Value Accounting is an alternative to HCA. The basic principles of this method are:To show balance sheet items at some form of current value rather than historical cost;To compute profits by matching the current value of costs at the date of consumption against revenue.The current value of an item will normally be based on replacement cost, net realizable value or economic value. Other methods of accounting include; Current Purchasing Power (CPP) and a combination of Current Value and CPP.Why Modified HCA is still Used.Modified HC Accounts are easy to prepare, to read and to understand.In periods of low inflation, HC accounts are seen as a reasonable reflection of the reality of the given situation.Resistance to change.CORPORATE GOVERNANCE AND CUURRENT ISSUES IN FINANCIAL REPORTING.Corporate governance is the system by which companies are directed and controlled. Following the collapse of major international companies during the 1980s’ including Maxwell, BCCI, Polly Peck and recently Anderson, an Audit firm issues relating to Corporate Governance are topical. These collapses were often unexpected and dubious or even fraudulent activities were often attributed to their owners and managers. Some aspects of corporate governance has generally been developed by independent committees which have produced a series of documents on corporate governance. These include:The Cadbury report (1992) which focused on the control functions of Boards of Directors and on the role of Auditors.Greenbury report (1995) focused on the setting and disclosure of Directors’ remuneration and;Hampel report (1998) brought together all the previous recommendations and submitted a proposed code to the Stock Exchange which listed companies should comply with.The Financial Aspects of Corporate Governance in the Cadbury Report.The roles of those concerns with the financial statements are described as follows:The Directors are responsible for the corporate governance of the company.The shareholders are linked to the Directors via the financial reporting system.The Auditors provide the shareholders with an external objective check on the directors’ financial statements.Other concerned users, particularly employees (to whom the Directors owe some responsibility) are indirectly addressed by the financial statements.Code of PracticeDirectors should state whether the report and accounts comply with the code and give reasons for any non0compliance. This statement of compliance should only be published after a review by the auditors.Pressure should be brought by all the relevant parties on the Directors to ensure compliance with the code.All listed companies must establish effective audit committees with formal terms of reference dealing with their membership, authority and duties.Other controls and reporting requirements include:The Directors should report on the effectiveness of their system of internal control.The Board should ensure that an objective and professional relationship is maintained with the auditors.It is the board’s duty to present a balanced and understandable assessment of their company’s position which means that setbacks should be dealt with as well as successes.The Directors should state in their report that the business is a growing concern with supporting assumptions or qualifications as necessary.Accounting Cycle:Define and explain accounting cycle. Accounting cycle refers to a complete sequence of accounting procedures which are required to be repeated in same order during each accounting period. Accounting cycle includes:Recording:First, all transactions should be recorded in the journal or books of original entry known as subsidiary books as and when they take place.Classifying:All entries in the journal of books of original entry should be posted to the appropriate ledger accounts to find out at a glance the total effect of all such transactions in a particular account.Summarising:Last stage is to prepare the trial balance and final accounts with a view to ascertaining the profit or loss made during a trading period and the financial position of the business of a particular date.?Accounting Cycle?Equation:Definition and Explanation:Accounting is the language of business. Affairs of a business unit are made understood to others as well as to those who own or manage it through accounting information which has to be suitably recorded, classified, summarized and presented. In order to make this language to convey the same meaning to all people, it is necessary that it should be based on certain uniform scientifically laid down standards. These standards are termed as accounting principles. Accounting principles may be defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transactions. In the absence of common principles there will be a chaotic situation and every accountant will have his own principles. Not only the utility of accounts will be less but these will not be comparable even in the same business. Therefore, it become essential that common principles should be followed for measuring business revenues and expenses.Essential Features of Accounting Principles:Accounting principles are accepted if they satisfy the following norms:Usefulness:A principle will be relevant only if it satisfies the needs of those who use it. The accounting principles should be able to provide useful information to its users otherwise it will not serve the purpose.Objectivity:A principle will be said to be objective if it is based on facts and figures. There should not be a scope for personal bias. If the principle can be influenced by the personal bias of users, it will not be objective and its usefulness will be limited.Feasibility:The accounting principle should be practicable. The principles should be easy to use otherwise their utility will be limited.Classification of Accounting principles:Accounting principles can be classified into two kinds:Accounting Concepts: The term concepts includes those basic assumptions or conditions upon which accounting is based?Explain important accounting principles. The term concepts includes those basic assumptions or conditions upon which accounting is based. The following are the important accounting concepts:Business Entity Concept Going Concern Concept Money Measurement Concept Cost Concept Duel Aspect Concept Accounting Period Concept Matching Concept Realisation / Realization Concepts The explanation of these concepts are as follows:Business Entity Concept:In accounting, business is treated as separate entity from its owners. Accounts are prepare to give information about the business and not about those who own it. a distinction is made between business transactions and personal transactions. Without such a distinction, the affairs of the business will be mixed up with the private affairs of the proprietor and the true picture of the firm will not be available. The 'Business' and 'owner' are taken as two separate entities. The accountant is interested to record transactions relating to business only. The private transactions of the owner will be recorded separately and will have no bearing on the business transactions. All the transactions of the business are recorded in the books of the business from the point of view of the business as an entity and even the proprietor is treated as a creditor to the extent of his capital.The concept of separate entity is applicable to all of business organizations. For example, in case of a sole proprietorship business or partnership business, though the sole proprietor or partners are not considered as separate entities in the eyes of law, but for accounting purposes they will be considered as separate entities. In the case of joint stock company, the business has a separate legal entity than the shareholders. The coming and going shareholders don not affect the entity of the business. Thus, the distinction between owner and the business unit has helped accounting in reporting profitability more objectively and fairly. It has also led to the development of 'responsibility accounting' which enables us to find out the profitability of even the different sub-units of the main business.Going Concern Concept:According to going concern concept it is assumed that the business will exist for a long time to come. Transactions are recorded in the books keeping in view the going concern aspect of the business unit. A firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs. Since business is to continue, fixed assets will be shown at cost less depreciation basis. It is due to the concept that the fixed assets are depreciated on the basis of their expected life than on the basis of market value. Money Measurement Concept:Accounting records only those transactions which can be expressed in terms of money. Transactions or events which cannot be expressed? in money do not find place in the books of accounts though they may be very useful for the business. For example, if a business has got a team of dedicated and trusted employees, it is definitely an asset to the business, but since their monetary measurement is not possible, they are not shown in the books of business. It should be remembered that money enables various things of diverse nature to be added up together and dealt with. The use of a building and the use of clerical service can be aggregated only through money values and not otherwise.Cost Concept:This concept is closely related to the going concern concept. According to this concept, an asset in ordinarily recorded in the books at the price at which it was acquired i.e., at its cost price. This cost serves the basis for the accounting of this asset during the subsequent period. The 'cost' should not be confused with 'value'. It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an asset is wrongly recorded in the books. The book values of the assets as recorded do not reflect their real value. They do not signify that values noted therein are the values for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they are reduced in value on account of depreciation charges. The idea that the transactions should be recorded? at cost rather than at a subjective or arbitrary value is known as cost concept. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost. These changes in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at cost and not at market value is the underlying principle in cost concept. According to them the current values alone will fairly represent the cost to the entity. The cost principle is based on the principle of objectivity. There is no room for personal assessment in showing the figures in accounting records. If subjectivity is flowed in records the same assets will be valued at different figures by different individual. Every body will have his own views about various assets. The cost concept is helpful in making truthful records. The records becomes more reliable and comparable.Dual Aspect Concept:This is the basic concept of accounting. Modern accounting system is based on dual aspect concept. Dual concept may be stated as "for every debit, there is a credit". Every transaction should have two sided effect to the extent of same amount. For example, if A starts a business with a capital of $10,000. There are two aspects of the transaction. On the one hand the business has assets of $10,000 while on the other hand the business has to pay to the proprietor a sum of $10,000 which is taken as proprietor's capital. This expression can be shown in the form of following equation:?Capital (Equities)=Costs (Assets)10,000=10,000The term 'assets' denotes the resources owned by a business while the term 'equities' denotes the claims of various parties against the assets. Equities are of two types. They are owners equity and outsiders equity. Owner's equity (or capital) is the claim of the owner's against the assets of the business while outsiders equity (liabilities) is the claim of outside parties against the assets of the business. Since all assets of the business are claimed by someone (either owners or outsiders), the total of assets will be equal to total of liabilities. Thus:??Equities=Assets??ORLiabilities+Capital=AssetsSuppose if the business borrows $5000 from a bank, dual aspect of this transaction will be ?Capital + Liabilities=AssetsA? Loan??10,000=15,000Thus the accounting Equation states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. As a mater of fact the entire system of double entry accounting is based on this concept.Accounting period concept:According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment. Since the life of the business is considered to be indefinite (according to going concern concept) the measurement of income and studying financial position of the business according to the above concept, after a very long period would not be helpful in taking proper corrective steps at the appropriate time. It is, therefore, absolutely necessary that after each segment or time interval the businessman must stop and see, how things are going on. In accounting such a segment or time interval is called accounting period. It is usually of a year.?At the end of each accounting period and income statement/profit & loss Account and a Balance Sheet are prepared. The income statement discloses the profit or loss made by the business during the accounting period while Balance Sheet discloses the financial position of the business as on the last day of the accounting period. While preparing these statements a proper distinction has to be made between capital and revenue expenditure.Matching concept:The aim of business is to earn profit. In order to ascertain the profit the costs (expenses) are matched to revenue. The difference between income from sales and costs of producing the goods will be the profit. When business is taken as a going concern then it becomes necessary to evaluate the performance periodically.A correct statement of income requires a distinction between past, present and future expenditures. A distinction between capital and revenue expenditure is also necessary. The revenues and costs of same period are matched. In other words, income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue. The question when the payment was received or made is irrelevant.Realization Concept:This concept emphasises that profit should be considered only when realised. The question is at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash? For answering this question the accounting is in conformity with the law and Recognises the principle of law i.e., the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when property i goods passes to the buyer, viz., when sales are made.Accounting Conventions: The term "conventions" includes those customs or traditions which guide the accountants while preparing the accounting state. What are accounting conventions? Explain important accounting conventions. The term "conventions" includes those customs or traditions which guide the accountants while preparing the accounting statements. The following are the important accounting conventions.Convention of Disclosure Convention of Materiality Convention of Consistency Convention of Conservatism Convention of Disclosure:The disclosure of all significant information is one of the important accounting conventions. It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. The term disclosure does not imply that all information that any one could desire is to be included in accounting statements. The term only implies that there is to a sufficient disclosure of information which is of material in trust to proprietors, present and potential creditors and investors. The idea behind this convention is that any body who want to study the financial statements should not be mislead. He should be able to make a free judgment. The disclosures can be in the way of foot notes. Within the body of financial statements, in the minutes of meeting of directors etc.Convention of Materiality:It refers to the relative importance of an item or even. According to this convention only those events or items should be recorded which have a significant bearing and insignificant things should be ignored. This is because otherwise accounting will be unnecessarily over burden with minute details. There is no formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision. It should be noted that an item material for one concern may be immaterial for another. Similarly, an item material in one year may not be material in the next year.Convention of Consistency:This convention means that accounting practices should remain uncharged from one period to another. For example, if stock is valued at cost or market price whichever is less; this principle should be followed year after year. Similarly, if depreciation is charged on fixed assets according to diminishing balance method, it should be done year after year. This is necessary for the purpose of comparison. However, consistency does not mean inflexibility. It does not forbid introduction of improved accounting techniques. If a change becomes necessary, the change and its effect should be stated clearly.Convention of Conservatism:This convention means a caution approach or policy of "play safe". This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. If there is a possibility of loss, it should be taken into account at the earliest. On the other hand, a prospect of profit should be ignored up to the time it does not materialise. On account of this reason, the accountants follow the rule 'anticipate no profit but provide for all possible losses'. On account of this convention, the inventory is valued 'at cost or market price whichever is less.' The effect of the above is that in case market price has gone down then provide for the 'anticipated loss' but if the market price has gone up then ignore the 'anticipated profits.' Similarly a provision is made for possible bad and doubtful debt out of current year's profits.Critics point out that conservatism to an excess degree will result in the creation of secrets reserves. This will be quite contrary to the doctrine of disclosure.Accounting Equation:Dual aspect may be stated as "for every debit, there is a credit." Every transaction should have twofold effect to the extent of the same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities. Accounting Equation:Learning Objective:Define and explain accounting equation. Give an example of accounting equation. Definition and Explanation of Accounting Equation:Dual aspect may be stated as "for every debit, there is a credit." Every transaction should have twofold effect to the extent of the same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities. In other words, for every business enterprise, the sum of the rights to the properties is equal to the sum of the properties owned. The properties of the business are called "assets". The rights to the properties are called "equities". Equities may be sub-divided into two principle types: The rights of the creditors and the rights of the owners. The equity of the creditors represents debts of the the business and are called liabilities. The equity of the owner is called capital, or proprietorship or owner's equity. The formula know as the accounting equation, thus arrived at is as follows:Assets = EquitiesORAssets = Liabilities + Proprietorship’s capital.Another method of demonstrating the mathematical relationship involves a simple variation in the form of equation. Again it begins with the position that every business owns or has interest in certain assets. It also owes certain amounts to its creditors. The difference between what it owns and what it owes represents the owner's capital or proprietorship. Thus the original equation is changed into:Assets - Liabilities = Proprietorship’s capitalEffects of Transactions on the Accounting Equation:Each and every business transaction affects the elements of accounting equation. The effect is shown by the use of (+) or (-) placed against the elements affected. Note particularly that the equation remains in balance after each transaction. The accounting equation can be understood with the help of the following example:Example:Transaction 1:Mr. Riaz commences his business with cash $50,000. This is an example of investment of asset in the business by the owner. The effect of this transaction on the accounting equation is that cash asset is increased by $50,000 and the proprietorship (Riaz's capital) is also increased by the same amount such as:Assets=Liabilities+Proprietorship’sCash??? Capital+ 50,000=----?+ 50,000Note that assets and equities increased by equal amountsTransaction 2:Purchased furniture on cash $10,000. This transaction effected accounting equation as the increase in one new asset furniture and decreases in assets cash with the same amount. ThusAssets=Liabilities+ProprietorshipCashFurniture???Riaz, Capital+ 50,000?=----?+ 50,000- 10,000+ 10,000????40,000+ 10,000=??50,000Note that this transaction has affected assets side only and no change is made in equities side of the equation.Transaction 3:Purchased merchandise for cash $10,000. This transaction will introduce a new element (merchandise) on the assets side and decrease the cash by $10,000.Assets=Liabilities+ProprietorshipCashFurnitureMerchandise???Riaz, Capital+ 40,000+ 10,000?=----?+ 50,000-10,000--+ 10,000????30,000?+ 10,000=??50,000Note that this transaction has affected assets side only and no change is made in equities side of the equation.Transaction 4:Purchased merchandise on account (on credit) $5,000.Assets=Liabilities+ProprietorshipCashFurnitureMerchandise?Creditors?Riaz, Capital+ 30,000+ 10,000+ 10,000=??+ 50,000??+ 5,000?+ 5,000??30,000+10,000+ 15,000=+ 5,000?+ 50,000Note that this transaction has affected assets side? and liabilities. Both the sides of equation has increased with the same amount.Transaction 5:Sold merchandise for cash $2,000 cost of these merchandise were $1,500.Assets=Liabilities+ProprietorshipCashFurnitureMerchandise?Creditors?Riaz, Capital+ 30,000+ 10,000+ 15,000=+ 5,000?+ 50,000+ 2,000?- 1,500???+ 500 (Profit)+ 32,000+10,000+ 13,500=+ 5,000?+ 50,500Note that this transaction has affected assets side? and also the proprietorship. Difference between sales price and cost price is treated as profit and has been added to capital.Transaction 6:Sold merchandise on credit for $4,000 costing $3,000.Assets=Liabilities+ProprietorshipCashFurnitureMerchandiseDebtors?Creditors?Riaz, Capital+ 32,000+ 10,000+ 13,500?=+ 5,000?+ 50,500??- 3,000+ 4,000???+ 1,00032,000+10,000+ 10,500+ 4000=+ 5,000?+ 51,500Note that this transaction has affected assets side? and also the proprietorship. Anew element "debtors" has been introduced. Difference between sales price and cost price is treated as profit and has been added to capital.Transaction 7:Paid $1,000 to creditors for merchandise purchased.Assets=Liabilities+ProprietorshipCashFurnitureMerchandiseDebtors?Creditors?Riaz, Capital+ 32,000+ 10,000+ 10,500+ 4,000=+ 5,000?+ 51,500- 1,000????- 1,000??31,000+10,000+ 10,500+ 4000=+ 4,000?+ 51,500Transaction 8:Received cash from a debtor $ 1,000 whom a sale on credit was made earlier. This is an example of collection from debtors. This transaction is an exchange of one asset for another. the effect is on one side of the equation, i.e., asset side. Thus:Assets=Liabilities+ProprietorshipCashFurnitureMerchandiseDebtors?Creditors?Riaz, Capital+ 31,000+ 10,000+ 10,500+ 4,000=+ 4,000?+ 51,500+ 1,000??- 1,000????32,000+10,000+ 10,500+ 3000=+ 4,000?+ 51,500Transaction 9:Paid salaries $1,000 in cash. This transaction affected the equation by decrease in a cash asset and decrease in proprietorship (i.e., capital). Thus:Assets=Liabilities+ProprietorshipCashFurnitureMerchandiseDebtors?Creditors?Riaz, Capital+ 32,000+ 10,000+ 10,500+ 4,000=+ 4,000?+ 51,500- 1,000??????- 1,00031,000+10,000+ 10,500+ 3000=+ 4,000?+ 50,500Effects of all the transactions explained above are presented in the following table:Assets=Liabilities+Proprietorship?Cash+ Furniture+ Merchandise+ Debtors?Creditors?+ Riaz, Capital1+ 50,000??????+50,00050,000=+50,0002- 10,000+ 10,000????????40,000?10,000??=?+50,0003- 10,000?+ 10,000???????30,00010,00010,000?=?+50,0004??+ 5,000??+ 5,000???30,00010,00015,000=5,000+50,0005+ 2,000- 1,500+ 500 (Profit)32,00010,00013,500=5,000+50,5006- 3,000+ 4,000+ 1,000 (Profit)32,00010,00010,5004,000=5,000+51,5007- 1,000- 1,00031,00010,00010,5004,000=4,000+51,5008+1,0001,00032,000+ 10,000+ 10,500+ 3,0004,000+51,50091,0001,000?31,00010,00010,5003,000=4,000+50,500The elements of the equation of Mr. Riaz that is,Cash+Furniture+Merchandise+Debtors=Creditors+Capital31,000+10,000+10,500+3,000=4,000+50,500This may also be stated in vertical form as shown below:EQUITIES?ASSETS?Creditors$4,000Cash$31,000Capital$50,500Debtors3,000Merchandise10,500??Furniture10,000??$54,500$54,500The presentation of the effects of transactions in tabular form is only a device which helps beginners to understand the analysis of different types of transactions. It is not practically feasible to record the effects of transactions in this form. The increases and decreases in the various elements are recorded in the journal in a special technical form.PRESENTATION OF FINANCIAL STATEMENTS AND ACCOUNTING CONVENTIONSIntroductionThe purpose of this chapter is to encourage you to think more deeply about the assumptions on which financial statements are prepared.This chapter deals with the accounting conversions which lie behind accounts preparation which accountants may have absorbed subconsciously in book keeping.BACKGROUNDAccounting practice has developed gradually over a matter of centuries. Many of its procedure are operated automatically by people who never questioned whether alternative methods exist which have equal validity. However, the procedures in common use imply the acceptance of certain concepts which by no means self-evident; nor are they the only possible concepts which could be used to build up an accounting framework.More important concepts which are taken into accounting while preparing accounts that require deeper understanding.Going concernAccrual or matchingPrudenceConsistency ConceptMaterialitySubstance over formBusiness entityMoney measurementHistorical cost conventionStable monetary unitObjectivityRealizationDualityTime intervalWe begin by considering accounting policies and those fundamental assumptions which are more crucial according to the subject of IAS 1 Presentation of financial statements (items (a)-(f) of the above list) PRESENTATION OF FINANCIAL STATEMENTS.International Accounting Satardards 1 presentation of financial statements was published in 1997. The general requirements of IAS 1 and what it says about accounting policies and fundamental assumptions. Objective of the scopeThe main objective of IAS 1 is:“to prescribe the basis of preparation of general purpose financial statements, in order to ensure the comparability both with the enterprise’s own financial statements of previous periods and with the financial statements of other enterprises”2.3.IAS 1 applies all the general purpose financial statements prepared in accordance with IASs, i.e. those intended to meet the needs of the users who are not in position to demand reports tailored to their specific needs.Purpose of financial statements2.4.The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. 2.5.In order to fulfill this objective, financial statement must provide information about the following aspects of an enterprise’s results.AssetsLiabilitiesEquityIncome and expenses (Including gains and losses)Cash flowsAlong with other information in the notes and related documents, this information will assist users in predicting the enterprise’s future cash flows2.6.According to IAS 1, a complete set of financial statements includes the following components.Balance sheetIncome statementA statement showing either all changes in equity or changes in equity other than those arising from capital transactions with and/or distribution to owners.Cash flow statementsAccounting policies and explanatory notesThe preparation of these statements is the responsibility of the Board of Directors. IAS 1 also encourages a financial review by management and the production of other reports and statements which may aid users.FAIR PRESENTATION AND COMPLIANCE WITH IASS2.7.Most importantly, financial statements should present fairly the financial position, financial performance and cash flows of an enterprise. 2.8.The following points made IAS 1 expand on this pliance with IASs should be disclosedAll relevant IASs must be followed in compliance with IASs id disclosedUse of an inappropriate accounting treatment cannot be rectified either by disclosure of accounting policies of notes/explanatory material2.10.Requirements for fair presentation of financial statements.Selection and application of accounting policiesPresentation of information in a manner which provides relevant, reliable, comparable and understandable informationAdditional disclosures where requiredAccounting policiesThe specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.2.11Accounting policies should be chosen in order to comply with IASs. Where there is no specific requirement in an IAS, policies should be developed so that the information provided by the financial statement is:Relevant to the decision making needs of usersReliable in that they:Represent faithfully the results and financial position of the enterpriseReflect the economic substance of events and transactions and not merely the legal formAre neutral, that is free from biasAre PrudentAre complete in all material respectsCompleteness of transactions.Timely report.Accurate financial prehensiveness of statements. 2.12.The IAS then considers certain important assumptions (fundamental assumptions) which underpin the preparation of financial statementsGoing ConcernThe enterprise is normally viewed as going concert, that is, as continuing in operation of the foreseeable future. It is assumed that the enterprise has neither the intension nor the necessity of liquidation or of materially the scale of its operation. 2.13.This concept assumes that, when preparing a normal set of accounts, the business will continue to operate in approximately the same manner for a foreseeable future (at least the next 12 months). In particular, the enterprise will not go into liquidation or scale down its operations in a material way.2.14.The main significance of going corker is that the assets should be valued at their “break up” value.2.15.EXAMPLE: GOING CONCERN.Emma acquired a T-shirt printing machine at a cost of $60,000. The asset has an estimated life of six years, and its normal to write off the cost of the asset to the income statement over this time. In this asset a depreciation cost of $10,000 per year is charged.2.16.Using the going concert assumption, it is pre summed that the business will continue its operation as so the asset will live out its full six years in use. The depreciation charge of $10,000 is made each year; and the value of the asset in the balance sheet is its cost less the accumulated depreciation charge to date. After one yet, the net book value of the asset is $(60,000-10,000) =$50,000, after two years it is $40,000, after three years $ 30,000 e.t.c, until it is written down to a value of 0 after 6 years.2.17. This asset has no other operational use outside the business and, in a forced sale; it would only sell for scrap. After one year of operation, its value is $8,000.2.18.The net value of the asset, applying the going concern assumption, is $50,000 after one year, but its immediate sell-off value only $80,000.It can be aged that the asset is over valued at $50,000, that it should be written down to its break-up value($80,000) and the balance of its cost should be treated as an expense. However, provided that the going concern assumption is valid, It is appropriate accounting practice to value the asset at its net book value.Question 1A retailer commences business on 1 January and buys inventory of 20 washing machines, each costing $100. During the year he sells 17 machines at $150 each. How should the remaining machines be values at 31st December in the following circumstances?He is forced to close down his business at the end of the year and the remaining machines will realize only $60 each in a forced sale.He intends to continue his business into the next yearAnswerIf the business is to be closed down, the remaining three machines must be valued at the amount they will realize in a forced sale i.e. 3 X $60 = $180If the business is regarded as a going concern, the inventory unsold at 31st December will be carried forward into the following year, when the cost of the three machines will be matched against the eventual sale proceeds in computing that year’s profits. The three machines will therefore be valued at cost , 3 X $100 = $3002.19.If the going concern assumption is not followed, that fact must be disclosed, together with the following information.The basis on which the financial statement have been preparedThe reasons why the enterprise is not considered to be a going concernAccrual basis of accountingAccrual basis of accounting. The effects of transaction and other events are recognized when they occur (and not as cash or its equivalent id received or paid) and they are recorder in the accounting records and reported in the financial statements of the periods to which they relate.2.20.Enterprises should prepare their financial statements on the basis that transactions are recorder in them, not as the cash is paid or received, but as the revenues or expenses are earned or incurred in the accounting period to which they relate2.21.According to the accrual assumption then, in computing profit revenue earned must be matched against the expenditure incurred in earning it. This is the matching convention that we first met in chapter 2.2.22EXAMPLE: ACCRUALEmma prints 20 t-shirts in her first month of trading (May) at a cost of 5$ each. Then she sells all of them for $10 each. Emma has therefore made a profit of $100, matching the revenue $200 earned against the cost $100 of acquiring them2.23If however, Emma only sells 18 t-shirts, it is incorrect to cargo her income statement with the cost of 20 t-shirts, as she still has two t-shirts in inventory. If she sells them in June, she is likely to make a profit on the sale. Therefore, only the purchase cost of 18 t-shirts 490 should be matched with her sales revenue $180, leaving her with a profit of $90.2.24.Her balance sheet will look like this.Assets$Inventory (at cost, i.e. 2X $5)10Accounts receivable (18 X $100)180190Capital LiabilitiesProprietor’s capital (profit for the period)90Accounts payable (20 X $5)1001902.25.However, if Emma had decided to give up selling t-shirts, then the going concern assumption no longer applies and the value of the two t- shirts in the balance sheet is a break0up valuation not cost. Similarly, if the two unsold t – shirts are likely to be sold at more than their cost of $50 each (say, because of damage or fall of demand) then they should be recorded on the balance sheet at net realizable value (i.e. the likely eventual sales price less any expenses incurred to make them saleable) rather than cost. This shows the application of the prudence concept, which we will look at shortly.2.26.In this example, the concepts of going and accrual are linked. Since the business is assumed to be going concern, it is possible to carry forward the cost of the unsold t-shirts as a charge against profits of the next periodConsistency of presentation2.27.To maintain consistency, the presentation and classification of items in the financial statements should stay the same from one period to the next except as follows.There is a significant change in the nature of operations or a review of the financial statements indicates a more appropriate presentationsA change in presentation is required by an IAS.Materiality and aggregation2.28.All material items should be disclosed in the financial statements2.29Amounts which are immaterial can be aggregated with amounts of a similar nature or function and need not be presented separatelyMateriality, Information is material of its omission or misstatement could influence the economic decisions of users taken on the basis of financial statements2.30. An error which is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.2.31.Determining whether or not an item is material is very subjective exercise. There is no absolute measure of materiality. It is common to apply a convenient rule of thumb (for example material items are those with a value greater than 5% of net profits). However some items disclosed in the accounts are regarded as particularly sensitive and then a very small misstatement of such an item is taken as a material error. An example, in the accounts of a limited liability company, is the amount of remuneration paid to directors of the company2.32.The assessment of an item as material or immaterial may affect its treatment in the accounts. For example, the income statement of a business shows the expenses incurred grouped under suitable captions (heating and lighting, rent and local taxes, e.t.c), but in the case of very small expenses it may be appropriate to lump them together as sundry expenses’, because a more detailed breakdown is inappropriate for such immaterial amounts.2.33.In assessing whether or not an item is material, it is not the value of the item which needs to be considered. The context is also important.If a balance sheet shows long term assets of $2millin and inventories of $30,000, an error of $20,000 in the depreciation calculations might not be regarded as material. Whereas an error of $20,000 in the inventory valuation is material. In other words, the total of which the error forms part must be consideredIf a business has a bank loan of $50,000 and a $55,000 balance on bank deposit account it will be a material misstatement if these two amounts are displayed on the balance sheet as “cash at bank $5,000”. In other words, incorrect presentation may amount to material misstatement even if there is no monetary error.Question 2Would you capitalize the following items in the accounts of the company?A box fileA computerA small plastic display standAnswer No, you would write it off to the income statement as an expenseYes. You would capitalize the computer and charge depreciation on it.Offsetting2.34.IAS 1 does not allow assets and liabilities to be offset against each other unless such a treatment is required or permitted by another IAS.2.35.Income and expenses can be offset only when one of the following appliesAn IAS requires/permits itGains, losses and related expenses arising from the same transactions are not parative information2.36.IAS 1 requires comparative information to be disclosed for the previous period for all numerical information, unless another IAS permits/requires otherwise. Comparatives should also be given in narrative information where helpful.2.paratives should be restated when the presentation or classification of items in the financial statements is amended.PrudencePrudence, the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not over stated and liabilities or expenses are not understated2.38.Prudence must be exercised when preparing financial statements because of the uncertainty surrounding many transactions. It is not permitted, however, to create secret or hidden reserves using prudence as a justification.2.39.There are three important issues to bear in mindWhere alternative procures or valuations are possible, the one selected should be the one which gives the most cautious result. For example, you may have woodened why the three washing machine in question 1 were stated in the balance sheet at their cost $100 each rather than selling price $150 each. This is simply an aspect of prudence: to value the machines at $150 would be anticipate making a profit before the profit has been raisedWhere a loss is foreseen; it should be anticipated and taken into account immediately. Even when the extract amount of lose is not known, an estimate of the loss should be made, based on the best information available. If a business purchases inventory or $1,200 but, because of a sudden slump in the market, only $900 is likely to realized when the inventory is sold; the prudence concept dictates that the inventory is valued at $900. It is not enough to wait until the inventory is sold, end then recognize the $300 loss, it must be recognized as soon as foreseenProfits should only be recognized when realized in form of cash or another asset with a reasonable certain cash value.2.40.EXAMPLES: PRUDENCESome examples might help to explain the application of prudenceA company begins trading on 1st January 20X5 and sells goods worth $100,000 during the year to 31 December. At 31 December there are accounts receivable outstanding of $15,000. Of these, the company is now doubtful whether $6,000 will ever be paid.The company should make provision for doubtful debts of 6,000. Sales for 20X5 are shown in the income statement at their full value of $100,000, but the provision for doubtful debts is a charge of $6,000. Since there is some uncertainty that the ales will be realized in form of cash, prudence indicates that the $6,000 should not be included in the profit of the year.Samson Feeble trades as a carpenter, he undertakes to make a range of kitchen furniture for a customer at an agreed price of $1,000.at the end of Samson’s accounting year the job is unfinished (being two thirds complete) and the following data has been assembled.Costs incurred in making thru furniture to date 800Further estimated cost to completion of the job400Total cost1200The incomplete job represents work in progress at the end of the year which is an asset, like inventory. Its coast to date is $800, but by the time the job is completed Samson will make a loss of $200The full $200 loss should be charged against profits of the current year. The value of the work in progress at the year end is its net realizable value, which is lower than the cost. The net realizable value can be calculated in either of two waysEventual sales value1,000Work in progress at cost800Less further costs to completionIn order to make the sale400less loss foreseen200Net releasable value600600Substance over formSubstance over form The principle that the transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal formSubstance over form usually applies to transactions which are fairly complicated. It is very important because it acts as a catch all to stop enterprises distorting their results by following the letter of law, instead of showing what the enterprise has really been doingPresentation of accounting policies2.42.There should be a specific section for accounting policies in the otes of the financial statements and the following should be disclosed thereMeasurement bases used in preparing the financial statementsEach specific accounting policy necessary for proper understanding of the financial statements2.43.To be clear and understandable it is essential that the financial statements disclose the accounting policies used in their preparation. This is because policies may vary, not only from enterprise to enterprise but also from country to county. As an aid to users, all the major accounting policies used should be disclosed in the same note.2.44.There air a wide range of policies available in many accounting areas. Examples where such differing policies exist as follows, although the list is not exhaustive and it has been selected from the standard to reflect the limited areas covered in your syllabusGeneralOverall valuation policy (e.g. historical cost, general purchasing power, replacement value)Events subsequent to the balance sheet dateAssetsReceivablesInventories and related cost of goods soldDepreciable assets and depreciationResearch and developmentPatents and trademarksGoodwillLiabilities and provisionsCommitments and contingenciesProfits and lossesMethods of revenue recognitionMaintenance, repairs and improvementsGains and losses on disposables of propertyOTHER IMPORTANT CONCEPTS AND CONVENTIONSThe business entity conceptThis concept has already been discussed in chapter 2. Briefly, the concept is that accountants regard a business as a separate entity, distinct from its owners or managers. The concept applies whether the business is limited liability company (and so recognized in the law as a separate entity) or a sole proprietorship or partnership (in which case the business is not separately recognized by the law)The money measurement conceptThe money measurement concept states that accounts only deal with those items to which a monetary value can be attributedIn the balance sheet of a business, monetary values can be attributed to such assets as machinery (e.g. the origin cost) and inventories (eg net realization value)The money measurement concept introduces limitations to the subject-mater of accounts. A business may have intangible assets, such as the flair of a good manager or the loyalty of its work force. These may be important enough to give a clear superiority over an otherwise identical business, but because they cannot be evaluated in monetary terms but they do appear anywhere in the accountsThe historical cost conventionA basic principle of accounting (some writers include it in the list of fundamental accounting assumptions) is that items are normally stated in accounts ah historical cost, i.e. at the amount which the business paid to acquire them. An important advantage of this procedure is that the objectivity of accounts is maximized: there is usually documentary evidence to prove the amount paid to purchase an asset or may pay an expense.Historical cost means that the transactions are recorded at the cost when they occurredIn general the accountants prefer to deal with cost rather than with values. This is because valuations tend to be subjective and to vary according to what the valuation is for. For example, a company acquires a machine to manufacture its products. The machine has an expected useful life of four years. At the end of the two years the company is preparing a balance sheet and has to decide what monetary amount is to be attributed to the asset.Numerous possibilities can be consideredThe original cost (historical cost) of the machineHalf of the historical cost, on the ground and half of its useful life has expiredThe amount he machine fetches on the second hand marketThe mount needed to replace the machine with a more modern incorporating the technological advances of the previous two yearsThe machine’s economic value, ire the amount of the profits expected to generate for the company during its remaining lifeAll of these evolutions have something to commend them, but the great advantage of the first two is that they are based on a figure (machine’s historical cost) which is objectively verifiable (Some authors objectively as an accounting concept in its own right). The subjective judgment involved in the other valuations, particularly (f), is so great as to lessen tar reliability of any accounts in which they are used. Stable Monetary unitThe financial statements are expressed in terms of monetary unit (e.g. in the UK the ?, in the USA the $). It is assumed that the value of this unit remains constantIn practice, of course, the value of the unit varies and comparisons between the accounts of the current year and those off previous years may be misleading (e.g. in times if inflation)ObjectivityAn accountant must show objectivity, this means answers must be free of any personal opinions or prejudice, and should be a precise and as detailed as the situation warrants. The result of this should be that any number of accountants will give the same answer independently of each otherObjectivity means accountants must be free from biasIn practice, objectivity id difficult. Two accountants faced the same accounting data may come to different conclusions as the correct treatment. It was to combat subjectivity that accounting standards were developedExam focus pointObjectivity is sometimes called neutralityThe realization conceptThe realization concept means that the revenue and profits are recognized when realizedThe realization concept states that the revenue and profits are not anticipated but are recognized by inclusion in the income statement only when realized in the form either of cash or other assets, the ultimate cash realization of which can be assessed with reasonable certainty. Provision is made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is the best estimate in the light of the information available.There are some exceptions to the rule, notably for land and buildings. With dramatic rises in property prices in some countries, it has been a common practice to revalue land and buildings periodically to current value, to avoid having a mislaying balance sheet. Even if the sale of the property is not contemplated, such reevaluations create an realistic profit:CreditLand and building accountDebitRevaluation reserve accountThis profit is sometimes known as a holding gain, because it is a profit which arises in the course of holding the asset as a result of its increase in value above the costIn spite of such exceptions, however, the realization principle has long been accepted by all practicing accountants and it is standard practice that only profits realized at the balance sheet date should be included in the income statement.Unfortunately there is no standard definition of realized profits and losses. It could be said that they are such profits of losses of a company as to be treated as realized in accordance with principles generally accepted at the time when the accounts are prepared. One aspect of the problem is the question: At what point in the business cycle should revenue be recognized as earned? We will consider this further when we look at IAS 18 in the next sectionThe duality conceptEvery transaction has two effects. This convention underpins double entry book keeping, and you have seen it work in your studies from Chapter 5 onwardsThe time interval conceptThe time interval concept is also known as the timeless, which we have looked at earlier in your studiesThis concept states that the financial statements should be produced within a time interval that enables users to make relevant economic decisions. In other words there is no point in producing information that is so out of date, that no decisions can be based on itQuestion 3You depreciate your office equipment by 20% each year because it has a useful life, on average, of five years, this year your profitability is down and you think you can squeeze an extra year’s life out of your equipment. Is it acceptable not to charge any depreciation this year?You have recently paid $4.95 for a waste paper bin which should have a useful life of about five years. Should you treat is as a long term asset?AnswerNo, because of the consistency assumption. Once the depreciation policy has been established, it should not change without good causeNo, because of the materiality concept. The cost of the bin is very small. Rather than cluttering up the balance sheet for five years, treat the $4.95 as an expense in this year’s income statement.IAS 18 REVENUEIntroductionAccruals accounting is based on the matching of costs with the revenue they generate. It us crucially important under this convention that we establish the point at which revenue is recognized, so that the cornet treatment can be applies to the related costs. For example, the cost of producing an item of finished goods should be carried as an asset in the balance sheet until such as it is sold; they should then be written off a charge to the trading account. Which of these two treatments should be applies to decide until it is clear at what moment the sale of the item takes placeThe decision has a direct impact on profits since under the prudence concept, it is unacceptable to recognize the profit on sale until a sale has taken place, in accordance with the criteria of revenue recognitionRevenue is generally recognized as earned at the point of sale, because at the point four criteria will generally have been met.The product or service has to be provided to the buyerThe buyer has recognized his liability to pay for the goods or services provided. The converse of this is that the seller has recognized the ownership of goods has passed from himself to the buyerThe buyer has indicated his willingness to hand over cash or other assets in the settlement of his liabilityThe monetary value of goods or services has been establishedAt earlier points in the business cycle, there will not in general be firm evidence that the above criteria will be met. Until work on the product is complete, there is a risk that some flaw in the manufacturing process will necessitate its writing off, even when the product is complete there is no guarantee that it will find a buyerAt later points in the business cycle, for example when the cash is received for a credit sale, the recognition of revenue may occur in a period later than that in which the related costs were charged. Revenue recognition then depends on fortuitous circumstances, such as the cash flow of a company’s receivables, and can fluctuate misleadingly from one period to another However, there are sometimes when revenue is recognized at other times that at the completion of a sale. For example, in the recognition of profit on long term construction contracts. Under IAS 11 construction contracts (not in your syllabuses) contract revenue and a contract costs are recognized by reference to the stage of completion of the contract activity at the balance sheet date. You will learn about this later in your studiesIAS 18 RevenueIAS 18 governs the recognition of revenue in specific (common) types of transaction. Generally, recognition occurs when it is probable that the future economic benefits will flow to the enterprise and when these benefits can be measured reliably.Income, as defined by the IASC’s framework document (see chapter 24), includes both revenues and gains. Revenue is income arising in the ordinary course of an enterprise’s activities such as sales, fees, interest, dividends or royalties.ScopeIAS 18 covers the revenue from specific types of trisections or eventsSale of goods (manufactured products and items purchased for resale)Rendering of servicesUse of others of enterprise assets yielding interest, royalties, and dividendsInterest, royalties and dividends are included as income because they arise from the use of an enterprise’s assets by other partiesInterest is the charge for the use of cash or cash equivalents or amounts due to the enterprise.Royalties are charges for the use of long term assets of the enterprise, e.g. Parents, computer software and trademarksDividends are distributions of profits to holders of equity investments, in proportion with their holding, of relevant class of capitalThe standard specifically excludes various types of revenue arising from leases, insurance, contrasts, changes in value of financial instruments or other current assets, natural increases in agricultural assets and mineral ore extractionDefinitionsThe following definitions are given in the standardRevenue is the gross in flow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when the inflows result in increases in equality other than increases relating to contributions from equity participantsFair value is the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in arm’s length transactionRevenue does not include sales taxes; value added taxes or goods and service tax which are only collected for third parties, because these do not represent an economic benefit flowing to the entity. The same is true for revenues collected by an agent on behalf of a principal. Revenue for agent is only the commission received for acting as agent.Measurement of revenueWhen a transaction takes place, the amount of revenue is usually decided by the agreement of the buyer and seller. The revenue is actually measured, however, as the fair value of the consideration received, which will take account of any trade discounts and volume rebates.Indication of a transactionNormally, each transaction can be looked at as a whole. Sometimes, however, transactions are more complicated, and it is necessary to break a transaction down into its component parts. For example, a sale may include the transfer of goods and the provision of future servicing, the revenue for which should be deferred over the period the servicing is performed.At the other end of the sale, seemingly separate transactions must be considered together if apart they lose their commercial meaning. An example would be to sell an asset with an agreement to buy it back at a later date. The second transaction cancels the first and so both must be considered together.Sale of goods Revenue from sale of goods should only be recognized when all these conditions are satisfiedThe enterprise has transferred the significant risks and rewards of ownership of the goods to the buyerThe enterprise has no continuing managerial involvement to the degree usually associated with ownership, and no longer has effective control over the goods soldThe amount of revenue can be measured reliablyIt is probable that the economic benefits associated with the transaction will flow to the enterpriseThe costs incurred in respect to the transaction can be measuredThe transfer of risks and rewards can only be decided by examining each transaction. Mainly, the transfer occurs at the same time as either the transfer of legal title, or the passing of possession to the buyer this is what happens when you buy something in the shopIf significant risks and rewards remain with the seller, then the transaction is not a sale and revenue cannot be recognized, for example the receipt of revenue from a particular sale depends on the buyer receiving revenue from his own sale of goodsIt is possible for the smaller to retain only an insignificant risk of ownership for the sale and revenue to be recognized. The main example here is where the seller retains title only to ensure collection of what is owed on the goods. This is a common commercial situation, and when it rises the revenue should be recognized on the date of saleThe probability of the enterprise receiving the revenue arising from a transaction must be assessed. It may only become probable that the economic benefits will be received when an uncertainty is removed, for example government permission for funds to be received from another country. Only when the uncertainty is removed should the revenue be recognized. This is in contrast with the situation where revenue has already been recognized, but where the collectability of cash is brought into doubt where recovery has been ceased to be probable, the amount should be recognized as an expense, not an adjustment of the revenue previously recognized. These points also apply to services and interest, royalties and dividends’ belowMatching should take place, i.e. the revenue and expenses relating to the same transaction should be recognized at the same time. It is usually easy to estimate expenses at the date of sale e.g. warranty costs, shipment etc. Where they cannot be estimated reliably, then revenue cannot be recognized, any consideration already received as a liabilityRendering servicesWhen the outcome of a transaction involving the rendering of services cannot be estimated reliably, the associated revenue should be recognized by reference to the stage completion of the transaction at the balance sheet date. The outcome of a transaction can estimated reliably when all these conditions are satisfiedThe amount of revenue can be measured reliablyIt is probable that the economic benefits associated with the transaction will flow to the enterpriseThe stage of completion of a transaction at a balance sheet date can be measured reliablyThe costs incurred for a transaction and the costs to complete a transaction can be measured reliablyThe parties to the transaction will normally have to agree on the following before an enterprise can make reliable estimates.Each party’s enforceable rights regarding the service to be provideThe consideration to be exchangedThe manner and terms of settlementThere are previous methods of determining the stage of completion of a transaction, but for practical purposes, when services are performed by an indeterminate number of acts over a period of time, revenue should be recognized on a straight line basis over a period, unless there is evidence for the use of a more appropriate method. If one act is of more significance than the others, then the significant act should be carried out before revenue is recognizedIn certain situations, then the outcome of a transaction involving the rendering of services cannot be estimated reliably, the standard recommends a no loss/no gain approach. Revenue is only recognized only in the extent of the expenses that are recoveredThis air particularly likely during the early stage of a transaction, but it is still probable that that the enterprise will recover the costs incurred. So the revenue recognized in such a period will be equal to the expenses incurred with no profit.Obviously, if the costs are likely to be reimbursed, then they must be recognized as an expense immediately. When the uncertainties cease it exist, revenue should be recognized as laid out.Interest, royalties and dividendsWhen others use the enterprise’s assets yielding interest, royalties and dividends, the revenue should be recognized on the bases set out belowIt is probably that the economic benefits associated with the transaction will flow to the enterpriseThe mount of the revenue can be measured reliablyThe revenue is recognized on the following baseInterest is recognized on the time proposition that takes into account the effective yield on the assetRoyalties are recognized on an accruals basis in accordance with the substance of the relevant agreementDividends are recognized when the shareholder’s right to receive payment is establishedIt is unlikely that you would be asked about anything as complex as in the exam, but you should be aware of the basic requirements of the standard. The effective yield on an asset mentioned above is the rate of interest required to discount the stream of the future cash receipts expected over the life of an assetRoyalties are usually recognized on the same basis that they accrue under the relevant agreement. Sometimes the true substance of the agreement may require so other systematic an rational method of recognitionOnce again the points made above probability and collectability on sale of goods also apply hereDisclosure The following items should be disclosedThe accounting policies adopted for the recognition of revenue, including the methods used to determine the stage of completion of transactions involving the rendering of servicesThe amount of each significant category of revenue recognized during the period including revenue arising from the sources belowThe sale of goodsThe rendering of servicesInterestRoyaltiesdividendsThe amount of revenue arising from exchange of goods or services included in each significant category of revenueQuestion 4Given the prudence in the main consideration, discuss under what circumstances, if any revenue might be recognized at the following stages of saleGoods are required by the business which is confidently expects to resell very quicklyA customer places a firm order for goodsGoods are delivered to the customer The customer is invoiced for goodsThe customer pays for the goodsThe customer’s cheque in payment for goods has been cleared by the bankAnswerA sale must never be recognized before the goods have even ordered by the customer. There is no certainty about the value of the sale, nor when it will take place even if it is virtually certain that the goods will be soldA sale must never be recognized when the customer places an order. Even though the order will be for a specific quantity of goods at a specific price, it is not yet certain that the sale transaction will go though. The customer may cancel the order, the supplier might be unable to deliver the goods as ordered or it may be decided that the customer is not a good risk takerA sale will be recognized when delivery of goods is made only when:The sale is for cash, and so the cash received at the same timeThe sale is on credit and the customer accepts deliveryThe critical event for a credit sale is usually the dispatch of an invoice to the customer. There is then a legally enforceable debt, payable on specific terms, for a completed sale transactionThe critical event for cash sale is when the delivery takes place and when the cash is received, both take place at the same timeIt would be too cautious or prudent to wait cash payment for a credit sale transaction before recognizing the sale, unless the customer is a high credit risk and there is a serious doubt about his ability to pay. But in that case, why would the business risk dispatching the good?It would be again be over cautious to wait for clearance of the customer’s cheque before recognizing sales revenue. Such a precaution would only be justified in cases where there is a very high risk of the bank refusing to honor the chequeSummary.In preparing financial statement, accounts follow certain fundamental assumptionsThree such assumptions are identified by IAS 1 presentation of financial statementGoing concern: Unless there is evidence to the contrary, it is assumed that the business will continue to trade normally for the foreseeable futureAccruals: revenue earned must be matched against the expenditure incurred in earning itConsistency: accounting policies are consistent from one period to anotherIAS 1 also considers three other concepts extremely important: prudence, substance over form and materiality should govern the selection and application of accounting policiesPrudence: Should be exercised where uncertainty existsSubstance over form: financial reality takes precedence over legal form when accounting for a transactionMateriality: all items should be disclosed which are material enough to effect evaluations or decisionsA number of other concepts may be regarded as extremely importantThe business entity concept. A business is an entity distinct from its ownersThe money measurement concept. Accounts only deal with items to which the monetary values can be attributedThe historical cost convection. Transactions are recorded at the cost whey they occurredThe stable monetary unit. The value of the unit in which accounting statements are prepared doesn’t changeObjectivity. Accountants must be free from biasThe realization concept. Revenue and profits are recognized when realizedDuality. Every transaction has two effectsTime interval Financial information must be produced timelinessIAS 18 revenue is concerned with the recognition of revenues arising from fairly common transactionsThe sale of goodsThe rendering of servicesThe use by other enterprise assets yielding interest, royalties and dividendsGenerally revenue is recognized when the enterprise has transferred to the buyer the significant risks and rewards of ownership when the revenue can be measured reliablyACCOUNTING.MEANING OF BOOK KEEPINNG.Accounting refers to the science and art of recording, classifying and summarizing of business transactions in an accurate and systematic way in business.Importance of accounting.Book keeping helps an entrepreneur to ascertain whether the business has realized a profit or it has incurred a loss.Helps an entrepreneur in credit transactions. Most business transactions are carried out on credit basis i.e. buying or selling on credit. It would therefore be difficult for the entrepreneur to remember all the purchases or sales made on credit without proper book keeping.It acts as a tool of control book keeping enables the business to keep record of all the properties of the business which help to eliminate the possibility of theft and misappropriation.It helps in tax assessment. Types like income tax, excise duty, customs duty etc. are imposed by the government depending on the records. To ensure accurate assessment of tax, book keeping records must be maintained properly to avoid under or over taxation of the business by the government.Book keeping records help an entrepreneur to acquire loans. This is because financial institutions e.g. banks usually require looking at the financial records of the business to determine whether to extend credit or not.Book keeping acts as a tool for planning. This is because most entrepreneurs base their financial decisions according to sales, purchases, profits, investments of he past and the present.Book keeping act as a proof for financial position of the business. Knowing the assets (properties of the business) and liabilities (debts of the business) the entrepreneur can easily establish.acts as a centre for reference whenever information about business is required.it helps to solve disputes among business members e.g. partnerships, companies, co-operatives etc. this is because it acts as evidence of the events which took place in the business.Users of Accounting Information.There are many users of accounting information who will use them and make judgments and to influence decisions related to the business. Owners – will use the information in order to determine the performance of the business. Also it will help them to improve on the way they manage their business and make decisions that affect the future.Lenders – Such as banks will need accounting information in order to assess the financial capacity of the business to determine whether to give out the loan or not.Customers – These will want to be sure that the business can meet their supply requirements such that the supplies will be sustained in future.Creditors – The creditors are interested to know whether the business is credit worthy such that it can meet their payments. They will also want to know more about how long they will expect to unit for payment.Employers – They want to know about the financial strength of the business and also they require information in relation to profit sharing, for better pay, job security and whether the business is still strong enough to continue ernment departments – These may include Revenue Authority and may use accounting information to determine the tax liability of the business.Share holders (in case of companies) will want to know that their investment in the business is secure and what the returns are likely to be.Local community – The public tries to know the extent to which the business is concerned about their welfare, possibility of providing employment, pricing of products to decide whether there is need to get involved and if so how.Donors – Before donors continue or stop the donations they will first have to check in the books of account.DISCUSS VARIOUS ACCOUNTING CONCEPTS THAT UNDER LIE PREPARATION AND PRESATATION OF ACCOUNTS IN ORDER TO IMPROVE THE QUALITY OF ACCOUNTING INFORMATION.INTRODUCTIONAccounting is the process of recording, reporting and analyzing the financial and other information for management and the external users, to enable them make relevant decisions regarding the enterprise.The accounting information generated and used can be categorized into branches of accounting which are aimed at solving specific problems of the entity. These include financial accounting, management accounting, financial management and auditing. Each branch of accounting has specific users of accounting information.The underlying purpose of accounting is to provide financial information about an organization that will help decision makers to make good decisions.THE USES OF ACCOUNTING INFORMATIONOrganizations are set up to achieve defined objectives the commonest which relates to entities in business is to make profit for the users (owners). Consequently the entity should produce information which shows whether this aim has been fulfilled or not and to show whether this aim has been fulfilled or not and to show the state of its assets and financial obligations.The “corporate report” a paper produced under government support in the UK explains the purpose of reports by organization (which includes accounts) as: is to communicate economic measurement of and information about the resource and performance of the reporting entity useful to those having reasonable rights to such information.Therefore the information to be reported should have all the requisite economic information to be useful.The information is also required to the performance of the entity which in business means profit communicated in such a way as to reveal to cause underlying the results Information is also required a bout the resources of the entity. This is usually shown in the balance shelf; contains information regarding the assets owned by the entity and its liabilities.Together with other non-financial information the users can be able to make informed economic decisions about the entity.USERS OF FINANCIAL INFFORMATIONDepending on the size of the entity and the persons interested in its affairs, the persons interested in the financial information produced by the entity may include:Management –the information to enable them plan and control future activities of the entity.Ownership (shareholder) –they need to know whether management is efficient and effective .This will enable them decide whether to change management/maintain/increase or dispose of their investment. Trading contacts-suppliers of an enterprise need to know whether they will be paid within a reasonable time, while the customer need to know whether the enterprise is capable of giving the required services or goods Tax authorities- need to be able to access the tax liability of the entity and whether all due taxes have been settled.Financial –the provider of loan capital to the enterprise want to know whether their loans are secure and whether the enterprise is capable of repaying on schedule. Government and its Agencies – need to know the nature and scale of operation for planning national development and to provide national statistics.Employees- they need to decide on their future careers depending on the prospects of the entity and for bargaining their future benefits. Financial analysts and Advisors – need to advise their clients for example, whether to invest or disinvest in the company, whether to provide credit and general knowledge of the public. The general public- they need to know whether the activities of the enterprise are beneficial or destructive to their communities. They may also need to know of employment opportunities, use of local materials and the effect on their environments,HOW INFORMATION REACH THE USERS .Most information of organization is kept private and is not available to all the users except management. In order to make such information available to the needy users, the following forces prevail upon managementThe Law. Company Act requires all companies to public such reports.Taxation Acts authorizes tax to receive such information to make assessments.Financiers often request such information before or after proving loans as a pre-condition.Professional accountancy bodies compel their members to follow accounting standards which require minimum level of disclosure in the financial statements.For some organizations, it may be to their interest to provide certain information to some groups like employees or to the general public.Elements of Useful Accounting Information.Accounting information which is availed to the external users should posses a minimum of qualities so as to enable users to make informed decisions.Relevancy- the contents of the report should be what is required to fulfill the needs of the users.Reliability- the information should be accurate and not misleading. This is improved through an independent audit. Comprehensibility – the reports should be such as can be easily understood. Incomplete information, too much detail or use much jargon may impair comprehensiveness Objectivity- Information must contain facts and should avoid as far as possible subjective judgment or basis towards of desires view. Completeness- all relevant information should be given to give around picture of the entity. Turneries –information gained long after it is required is of no value. The information should be given in reasonable interval and not too long after it is produced. Comparability –consistent bears should be used to prepare and present information so as to enable valid comparison to be made with other periods and similar entities. Understand ability- information about complex matter should be included in the financial analyst where as other categories is user like employee need non complex information. DEFINITION OF ACCOUNTING PRINCIPLES/CONCEPTS/CONVENTION.Financial accounting principles are also known as accounting concepts, accounting conventions or postulates of accounting. The Nomenclature varies from author to author.They are defined as basic ground rules which must be followed when financial accounts are being prepared and presented. They are also referred to as assumptions or a preposition that underlies the preparation and presentation of financial statements.To make accounting information convey the same meaning to all people, as far as practicable, and to make it full of meaning, accountants here agreed on a number of concept which they try to follow in order to disclose any intentions of doctoring accountings for misstatements.BUSINESS ENTITY: This concept requires recognition and recording of transactions relating to the entity (organization) in question and excludes private transactions of the owners or those running it. Record is only made for what the entity owes the owner (capital) and what the owner owes the entity (drawings)There is likelihood that accountants will increase expenses in order to declare lower profits and there by minimize fax liability. This might involve increasing expenses by including those of a private nature or not declaring all incomes of the entity. This would lead to misleading information to tax assessors. Such actions are deemed illegal and outlawed thus implementing its business entity concept.The limitation of this concept can be appreciated from the perspective of a humble business man/woman like a sole trader or a family run business. The owner and the business are actually inseparable. For instance if a sole trader sells but also swells in the same premises, rent and utilities paid on those premises will be difficult to apportion between the owner and the business especially if there are no clear apportionment bases.MONETARY /MONEY MEASUREMENT: According to this concept all transactions to be recorded must be quantified in monetary terms or language of money. Money is a common denomination for all transactions.Where no paper unit of measurement, unit of account and store of value is attached to a transaction, it will be easier for accountant to manipulate information because such information about a transaction will be biased. The monetary concept was not employed; it would have been very easy for accountants to give under estimations or over estimated information about a particular transaction thus giving irreverent information to users.The limitation of this concept is that it assumes that money has stable value over time and yet it is common knowledge that money losses value with time, a phenomenon referred to as inflation. Under inflationary circumstances money ceases to be an objective measure of value.Also, there are certain events or things that can not be expressed in monetary terms thus not recorded and yet they materially impede or enhance business operations. For instance if a supervisor is granted leave, business will not flow smoothly.Further more, there are some intangible assets like good will, patent, brand name etc which lead to increased turn over and profits but cannot be recorded as assets because they are difficult to quantify in financial term. Attempts are being made to value intangible assets for inclusion in the balance sheet. GOING CONCERN: This concept states that the business entity is assumed to continue is operational existence in the foreseeable future. The business is not on the verge of collapse unless there are indications to suggest so.This concept makes it possible for accountants to project or prepare estimates for a long period into the future for example preparation of budget estimates for many years into the future. The budget are useful for trend analysis and comparison profits, the accountant will not be able to underestimate the profit for a particular financial year to which the budget relate, because this will act as evidence that will raise questions on the trend of profit got by the company.This concept also enables the business to apportion the value of an asset over its useful life. Without this concept, the asset would only be used for a particular financial year and its residue value taken over by an accountant or any other member who would hence require purchase of fixed assets for every financial year.There is almost no challenge against the going concern assumption and has been embraced and estimated in accounting standard of many countries as a fundamental assumption or concept.HISTORICAL COST: This concept requires accountants to record assets and liabilities at historical cost of their acquisition. Assets are recorded at the acquisition (invoice) cost even if the value today is more than the historical cost. Likewise liabilities are recorded at amounts they were incurred though the true value of the liability might have changed due to foreign exchange fluctuations and other macro economic issues such as inflation.Without the historical cost convention in recording of assets, there is more temptation of over valuing assets in the balance sheet in order to portray a sound financial stand. This balance sheet will thus carry misleading information to users.Also without the cost concept is that during inflation, historical cost will not reflect the value of the asset to the business. The true value is not reflected. For instance if an asset was bought for shs 1900,000. The historical cost concept will require 1000,000 and not 1900,000 to be recorded.REALIZATION: This concept demands that accountants recognize income as earned only when a sale has been made and the goals have been accepted by the customer or services have been offered and enjoyed by customers or where value has been created by a transaction and legal right and obligation have resulted.Without this concept, accountants would be able to use money from operational gains and compensate it with that value calculated from holding gains. This can show misleading information in the financial statements.Also without its realization concepts, assets in the balance sheet would be under estimated. For instance accrued income will not be included under the current assets, and it would be improper to include it in the profit and loss account. This reduces its accountant’s possibility of doctoring accountants to present misleading information.There is no major problem with this concept, however questions debate is at which in time income should be recognized as earned. The majority argue that income should be reorganized when the goods have been shipped to the customer and she/he has been invoiced and there is a strong likelihood of amount being collected i.e. absence of bad debts.ACCRUAL: According to this concept, income is recorded as earned even though it might have been received cash provided there is right to income (see realization concepts). Accrual basis accounting recognizes both income and expenses without necessarily changing hands.Without the accrual concept the scope of accounting would be narrowed to preparation of its cash book. This would mean, where debtors accounts are not kept, all payments from debtors would be exploited by accountants.Also, without accrual concept, it be would be possible for accountants to include accrued items in preparation of cash flow statements which show actual or expected cash flow position of the enterprise.There is no major criticism of this concept just like the reduction concept, however when preparing a cash flow position of the enterprise, accrued items should be eliminated. Investment decisions are based on the available or expected cash, accrued items will falsify the actual cash position. MATCHING: This concept requires accurate matching of expenses against incomers by writing off only those costs or expenses that were incurred in generating specific income for the period ended. Cost or expenses paid should be adjusted for any part-period that does not relate to the overall period.Without the matching concept, it would be possible for accountants to write off all the part of the income set aside for an expense e.g. rent) including the pre payment that has been part of the total expense. The prepaid rent will also be written off it one financial year. It will not be carried forward to cater for the part of/the following financial year.Example: rent paid for one and half years 1800, 000=End of year adjustment1800,000 = 100,000 monthly rent18 (month)Therefore rent expense= 12x 100,000=1200, 000=Prepaid rent expense= 600,000=Therefore the rent to write off out of the income earned in the financial will be 1200, 000=There is no major critism with this concept as far as accounting preparations are concerned.CONSERVATISM (OR PRUDENCE). According to this concept, during valuation, estimation and measurement is preparation of account; the accountant should follow a procedure that tends to understate things.Since the valuation and preparation of estimates is subjective, without the conservation concepts, accountants would be able to value asset at high value (overstatement) and understate another asset, or over state a liability in order to use the different (overstatement) for personal issues. (Fraud)Also the prudence concept requires that accountants should not anticipate revenue and profits until realized but should provide for all possible losses. Provisions for bad debts are created and written off from profits for this reason. Provision is also made for all known contingent liabilities in order to be prudent. This will deter the accountant from presenting a higher figure for net profit that is misleading to users, for example creditors who are required to give loan to the company.The limitation of this concept is that, other than being inconsistent with the historical cost concept, prudence concept has been criticized for discourages optimism, ambition, creativity and innovation because it requires accountants to behave in a conservative manner.This concept has been criticized for discouraging ambitions and challenging of existing literature and has undermined evolution of concepts that would respond to contemporary business environment.The prudence concept is also at fault because it gives the impression that while overstatements are not bad and may be a positive virtue. Deliberate misstatement in either direction i.e. on the higher or lower side should be condoned. Un warranted conservatism in financial reporting is as bad as overstatement and contravenes objectivity concept.CONSISTENCE. This states that once a particular accounting method or base has been selected and has become accounting policy, it must be applied continuously or consistently from year to year. Changes in accounting methods or policies are permitted only if there are justifiable reasons for doing so for instance of the old one have become inappropriate for the present circumstances. When a change is made, the effect of the change on the reported net profit and balance shall position if material must be disclosed as foot notes in the accounts.Without the consistency concept it would be possible for accountants to employ different accounting bases of their interest for example in calculating depreciation which would make financial statements incomparable over a given trend. Changes from one method to another will cause distortion in financial reporing.This will prevent accurate analysis of a company’s accounts over time.Inter period comparison and inter company comparison will be difficult of some companies keep changing their accounting policies.Also, using different methods for calculating depreciation may give misleading information to final users. For instance one who use reducing balance method for calculating deprecation will have a higher value for total asset as compared to that accountant whose uses straight-line method (depreciation cost). This wills portray information to the potential lender to the firm that business has enough assets to operate as a going concern. So they will be intending to offer loans to such an assurance.The consistency concept is one of the most fundamental concepts required by UK and international accounting standards. There is no serious challenge of this concept.PERIODICITY AND DISCLOSURE. This concept makes financial reporting mandatory as enshrined in the companies Act of Uganda and many other countries. At the end on an accounting year, accompany must prepare and disclose financial statements. Publishing annual accounts is made an obligation by this concept.Disclousure can be made more that once a year if the accountant so wishes. If interim accounts are to be published, it is not discouraging. Section 147 of the companies Act requires every company to keep proper books of account in English in respect of incomes and expenditure, sales and purchase of goods and assets and liabilities of the company. There fore without the periodicity and disclosure concept it would be possible for accounts to conceal some of the information regarding items which are required by statute to be disclosed. This would mean giving misleading information to shareholders and other users of accounting information in respect of their individual requirements for financial information.There is no serious challenge of the periodicity concept.MATERIALITY CONCEPT: This requires recognition of only material items and excluding immaterial or trivial items or matters. Information is material if it is able to influence the decision (Economic decision) For instance if the cost of recording certain items is not justifiable, then they should be left out. For instance it is immaterial to record buying a bloom of 100/= in its cash book or as an asset. Some assets like good will and some low value assets are written off in the profit and loss account rather than being included as assets in the balance sheet because of materiality .CONSIDERATIONS.Without materiality concept accountants would record and report too much transaction which would portray a misleading picture of the overall nature of operation of the business. There those transaction though immaterial which would seem very risky to the business in the eyes of the users (lenders). For instance the clerk may like 500/= out of petty cash of the creditor, it will bring a picture of improper use of the company funds.The concept of materiality has to be applied with some caution because there is no threshold or quantities guideline for judging materiality of a transaction or an asset. Materiality is a matter of opinion and judgement, abuses should be guarded against.Also caution should be taken regarding the level at which views materiality. Some value may be immaterial at the overall value (as percentage of profit) but may be material at the transaction level.Objectivity Concept: This states that whatever figure is recorded in accounting books and financial statements must have a clear criteria or yardstick for its measurement. Figure must have a basis for arriving at them but not simply planted into financial statements. Accountants must be able to defend figures in financial statements using objective evidence, empirical or other will.Without the objectivity concept, accountants would have a lot of subjectivity and biased accounting information in preparation of accounts for the firm. This would with no question present misleading information to users whose interest do not match with those of the accountants in charge of preparing financial statements.The preparation of accounting statements however involves a considerable amount of individual discretion especially on judging the materiality of amounts or issues.While personal discretion cannot be done a way with completely, accounts should be prepared with minimum amount of personal bias and the maximum amount of over all objectivity.DUALITY CONCEPTS: This requires a transaction to be recorded twice (dual recording) the dual aspect rule is a recognition that every transaction involves giving and receiving effects. When some body gives something another must receive it. This is in effect a requirement for double entry book keeping..Without the duality concept, accountants would doctor accounts the way they wish hence presenting incomplete records. Incomplete records are not easy to understand by users. They do not give a true picture of the performance and operations of the business. Incomplete records carry little information to financial users of accounts, like it is not easy to ascertain opening capital of the business where all transactions are not balanced. Assets-liabilities =capitalTherefore any information where double entry system is not used may not be very useful to decision makers.There is no particular challenger to the dual aspects concept. It has been employed almost every where in preparation of accounts.SUBSTANCE OVER FORM. This states that transactions and other events should be accounted for and presented in accordance with their legal form.Lawyer say on purchase of an asset the title passes on fully paying up for that particular asset. This is not the case with accounting. The substance and reality is that one is using the asset he bought in his business, so it’s a business asset and should be recorded in its books and statements.Without the substance over form concept it would be possible for accountants to over estimate the value of a fixed asset at cost which has been for a long time in operation at the date it is fully paid for. In other words the recorded value of the asset in such a circumstance (i.e. at cost) does not exist, the asset has depreciated already already, and it is overstated. Overstatement under such a scenario will mean the value of the assets might have been exploited by the accountant or other member to the extent of it. Net book value, but a purchased item is a recorded at cost. So there is a gap for exploitation. Such an item presented in the financial statement for users (shareholders, employee, lenders) will actually be misleading in any case.There is no proper ground on which the convention has been criticized as far as accounting is concerned. However this concept conflicts with other forms of disciplines which are used hand in hand with accounting, for example law.Relevancy: Accounting to this concept the over all messages that accounts are trying to relay may be obscured if too much information is presented. Accounts statements should contain only information that complete strictly with the specific requirement of the user. This concept is at times combined with MATERIALITY CONCEPT.Without the tolerance concept it would be easy for accountants to present information that is irrelevant and un reliable to user a hide that information that will influence an economic decision. In other words it would be very possible to disclose part of the information which is material but likely to raise tension on the reliability of the accountant’s information.There is no too much challenge as far as this convention is concerned where the accounting statements contain only information that complies strictly with the specific requirement of the user. Financial analysts will require information which is more sophisticated than that employees require for decision making.CONCLUSION/RECOMMENDATIONS.In conclusion I should say, the most over riding factor to note is that accounting convention /concept being used at the different stages of the accounting system (ie selection, processing and communication) as filters of information have been a frame work for prevention of doctoring of accounts by unfaithful accountants. We cannot do away with them for proper accounting. The GAAP (General Accepted Accounting Principles) are very fundamental for a strong accounting system. Lack of any of the GAAP in an accounting system depicts a strong weakness in the system. The GAAP ensure that accountants report objectivity and do not window dress or doctor the accounts.SOURCE DOCUMENTSIn order that the entries made in the books of account are trusted they should be supported by documentary evidence. Source documents are documents which provide the accounting information where required. They include the following:-Cash sale shipThis is used for cash transactions. It is prepared by the seller and issued to the customer who has paid for the goods on spot.Cash ReceiptIs issued when a debtor pays for the goods already delivered or service already rendered. It acknowledges the receipt of cash.Cash payment voucherThis is prepared for internal use. It is prepared/approved by top management to authorize payment of cash for goods or services.Bank deposit slipThis is a document issued by the bank to its client as evidence that cash or cheque has been deposited into the bank account.Bank statementThis is a document issued by the bank to its customer showing the transactions that have taken place during a given period of time. It shows deposits made, with draws and the balance as at a given date.InvoiceIs a document which gives the quantity, quality, unit price, total value of the goods sold on creditDelivery noteThis is a document showing the list of goods, without showing their prices which is sent to the buyer. It is used for checking the goods. When the goods are delivered to the buyer, he is supposed to retain one copy and return the other copy to the seller, duly signed by him. It proves that the goods have been delivered.Credit noteThis document shows a decrease on the claim of money. It is issued when part of the goods sold or purchased are returned or price overcharged is reduced at a later stage.Debit noteThis document is sent by the seller to correct for an undercharge on the original invoice. It is issued because it is considered to issue another document rather than to do the alterations on the original invoice.BOOKS KEPT BY THE rmation contained in source documents is recorded in the following books.Cash bookThis is a book used to record all cash receipts and payments for the business. Depending on the size of the business and the nature of cash transactions, a single column, a two column, a three column cash books and a petty cash book may be used.Purchases day bookThis is a book used to record purchases made on credit. It is also called purchases journal. It is written up form incoming invoices received from suppliers.Sales day bookThis is a book used to record sales made on credit. It is therefore used to record credit sales. It is also called sales journal. It is written up from outgoing invoices which are sent to customers.Return outwards bookIt is a book used to record in goods returned by the business to creditors. The reasons for returning goods may be due to damage, expired, faculty, of wrong specification, type, size, colour etc.It is also called purchases returns book or return outwards journal. It is written up from information contained in the incoming credit notes.Return inwards bookIt is a book used to record in goods returned by customers to the business. It is also called return inwards journal sales returns book. It is written up from copies of outgoing credit notes (credit notes issued)General journalAlso called journal proper it is used to record in transactions of the business which can not be entered in other books mentioned above. Ti is used to record transactions like purchase or sale of a fixed asset on credit, to correct errors to record opening and closing entries, to record adjustments.THE LEDGER AND THE CONCEPT OF DOUBLE ENTRYThe ledger:This is an accounting book used to maintain proper records of business transactions. The ledger has two side i.e.Left hand side (Debit side)Right hand side (Credit side)The debit side is used to record the value received while the credit side is used to record the value spent or lost.A page of the ledger appears as below,Dr.Name of the ledger accountCr.DateParticularsFol.AmountDateParticularsFol.AmountThe date column is used to record the date when the transaction took place.The particulars column is used to record details/description of the transaction.The folio column is used to record the page numbers and accounts where the record is to be transferred.The amount column is used to record values of the transactions.Kinds of ledgerThere are three major kinds of ledgers. These include:-General ledger or normal ledgerSales ledger or debtors ledger.Purchases ledger or creditor’s ledger.i)General ledgerThis ledger contains the accounts relating to the proprietor (owner) and other normal transactions e.g. sales, purchases, expenses, etc.ii)Sales ledgerThis ledger is used to maintain the personal accounts of all debtors. A debtor is a person / business firm who owes is a person to the business.iii)Purchases ledgerThis ledger is used to maintain the personal accounts of all creditors. A creditor is a person to whom money is owed.An accountAn account is a record of transactions of a particular type, expressed in financial terms and recorded in the ledger.CLASSIFICATION OF ACCOUNTS.The classification of accounts is the collection of transactions of similar nature into appropriate ledger accounts. Accounts are classified into two i.e. personal and personal accounts.PERSONAL ACCOUNTSAre those accounts which appear in the ledger in the names of people or organizations e.g. debtors and creditors.IMPERSONAL ACCOUNTS.Are those accounts which appear in the ledger in the names of things / items. Impersonal accounts are further subdivided into two i.e. real and nominal accounts.Real accounts – these are accounts which relate to tangible items i.e. they appear in the ledger in the names of property e.g. land, buildings, furniture, cash, stock etc.Nominal accounts – Are accounts which relate to intangible items. They record expenses and gains or losses and incomes. Examples are wages and salaries, electricity , discount allowed discount received, rent received, rent paid etc.The following diagram may help you to understand it better.ACCOUNTSPERSONAL ACCOUNTSIMPERSONAL ACCOUNTSDebtors CreditorsReal AccountsNominal AccountsAccountsAccountsfor property of all kinds for expenses and lossesTHE CONCEPT OF DOUBLE ENTRY.Double entry principle states that for every transaction there should be both a debit entry and a corresponding credit entry, and vise versa.Rules for double entry recording:Every transaction affects at least two accountsThere must be at least one debit and one creditThe total debits must be equal to total creditsThe particulars or details in the account refer tot eh name of the other account where double entry is recorded.The following diagram shows the application of the rule of double entry.AccountsNorminal Account Real Account Personal AccountDrCrDrCrDr.Cr.Expenses IncomesWhat comesWhat goesThe The & Losses& gainsin outreceiver giverExampleMr. Opio started business with capital of shs. 1,500,000 on 1st Jan 2008. he made the following transactions during the month.2008Jan 1 purchased shop fittings for cash Shs. 400,000 ” 2 purchases goods for resale in cash Shs.150,000 ” 5 sold goods and received cash Sh. 100,000 ” 10 paid transport in cash Sh. 60,000 ” 20 received cash from Alex 90,000 ” 21 purchased goods for resale inc ash 100,000 ” 27 sold goods and received cash shs. 120,000 ” 28 paid for advertising in cash 60,000” 29 Purchased furniture inc ash 150,000” 31 paid wages in cash 50,000Required:Record the above transactions in Mr. Opio’s ledger following the double entry system.Dr.Capital AccountCr.2008Jan 1Cash 150,000Dr.Cash AccountCr.2008Shs2008ShsJan 1 Capital1,500,000Jan 1 Shop fittings 400,000 5 Sales 100,000 ” 02 Purchases 150,000 20 Alex 90,000 ”10 Transport 60,000 27 Sales 120,000 ”21 Purchases 100,000 ”28 Advertising 60,000 ”29 Furniture 150,.000 ”30 Wages 50,000Dr.Shop fittings A/CCr. Shs Jan 1Cash 400,000Dr.Purchases A/CCr.2008 ShsJan 2Cash 150,000 21Cash 100,000Dr.Sales A/CCr Shs Jan 5 Cash 100,000 ” 27 Cash 120,000Dr. Transport A/CCr.2008ShsJan 10Cash60,000Dr Alex’s Account Cr2008ShsJan 20Cash90,000Dr.Advertising AccountCr.2008ShsJan 28Cash60,000Dr.Furniture AccountCr.2008ShsJan 29Cash150,000Dr.Wages AccountCr.2008ShsJan 30Cash50,000BALANCING OFF ACCOUNTS.Balancing off accounts means to insert the difference on the side with a small title so that you get the same totals on both sides. Accounts must be balanced at the end of every month. The following steps are followed when balancing off an account.Add up both sides to find out their totalsDeduct the small total from the larger total to find the balance.Now enter the balance on the side with a smaller total to ensure that the totals on both sides are equal. The balance inserted is called balance carried down (Bal. c/d).Enter totals on the same level with each other.Transfer the balance to the opposite side of the account but below the totals. This balance below the totals is called Balance brought down (Bal. b/d). the date used should be the first day of the next period.ExampleDr.Cash AccountCr.2008Shs2008ShsJan 1st capital 180,000Jan 1 purchases80,000” 10 sales 60,000” 3 transport 5,000” 20 John 10,000” 11 furniture 10,000” 31 sales120,000” 31 wages 20,000” 31 Bal. c/d255,000370,000370,000Feb 1st Bal b/d255,000EXERCISE.K.K. Company Ltd started business dealing in motor vehicles with capital of Shs. 500,000,000 in cash on 1st May, 2008. it made the following transactions during the month of may.May 1st purchased 5 saloon cars for resale in cash Shs. 12,000,000” 5 paid transport charges in cash shs. 5,000,000” 10 Sold two saloon cars and received cash shs. 17,000,000” 15 purchased 2 Isuzu trucks in cash Shs. 50,000,000” 20 purchased machinery in cash shs. 2,000,000” 26 sold 1 Isuzu truck and received cash shs. 70,000,000” 28 paid wages and salaries in cash shs. 10, 000,000” 31 purchased furniture for ash shs. 800,000RequiredRecord the above transactions in K.K company’s ledgers.CASH TRANSACTIONS.When cash or cheque is used in buying things or in paying for certain services the action is described as a cash transaction. Buying or obtaining something by paying out cash or cheque at that particular time is cash purchaser. Selling or disposing something or providing services to someone in exchange for cash or cheque from him at that particular time in cash sale.Advantages of selling on cash basis .The entrepreneur would be free of accounting work which would involve him in expenses beyond his limited resources.It avoids risks to loses through bad debtsThe entrepreneur will have ready cash with which to buy new stock as it becomes necessary.The entrepreneurs will not get involved into borrowing money to finance his purchases since he is likely to have enough ash which he can utilize.It facilitates the sell of small items since buyers can afford to pay on spot.The entrepreneur will be in position to pay his creditors promptly and obtain cash discount.The entrepreneur is not likely to be involved in legal expenses incase the buyer failed to pay the amount due from him.The entrepreneur can plan for the use of his working capital.Management of cash sales (cash transactions)In order to ensure that cash is properly managed an entrepreneur should do the following:-All cash received in the business should be receipted and accounted for.All cash collected in business should be banked.Cash held in the business should be under lock.All cash receipts and other documents for cash be kept available for referenceThe entrepreneur should avoid to use business cash for personal uses (cash drawings)Two column cash bookThe cash book is an accounting book used to record used to record all cash receipts and cash payments of the business. Receipts are values coming in and are entered on the debit side. Payments are values going out and are entered on the credit side.The two column cash book also called double column cash book has two amount columns on both side i.e. the cash and bank columns and is used to maintain both the cash and bank account at ago. The cash or cheque paid are credited.Below is the layout of the two column cash book.Dr.Two column cash bookDateParticularsFol.CashBankDateParticularsFol. Cash BankShsShsShsShsIllustrationOn 1st April 2008 Kato started business with cash Shs. 1,300,000 and cash at bank shs. 1,500,000. the following transactions took place:April 3rd bought shop fittings for Shs. 160,000 in cash ” 5th bought goods for cash shs. 300,000 ” 6th sold goods and received a cheque for shs. 400,000 ” 7th sold goods for cash Shs. 150,000 ” 10 paid carriage inwards Shs. 200,000 by cheque. ” 15 cash sales shs. 500,000 ” 17 paid carriage inwards shs. 100,000 in cash ” 20 received a bank loan of Shs. 500,000 by cheque ” 22 paid wages in cash shs. 20,000 ” 23 paid electricity by cheque shs. 15,000 ” 29 paid rent in cash shs. 100,000Required:Record the above transactions in the two column cash book and balance it.Post the entries to ledgers(a)Two column cash bookDateParticularsFol.Cash Bank Date Particulars Fol. Cash BankShsshs shsshs2008 2008April 1 Capital 1,300,0001,500,000 April 3rd Shop fittings 160,000 ” 6 Sales 400,000 ” 5 Purchases 300,000 ” 7 Sales150,00 ” 10 Purchases 200,000 ” 15 Sales500,000” 17 Carriage In. 100,000 ” 20 Loan500,000 ” 22 Wages 20,000 ” 23 Electricity 15,000 ” 29 Rent 100,000 ”Bal. c/dMay 1st Bal b/f(b)Ledger AccountsDrCapital AccountCr.2008ShsApril 1st Cash 1,300,000 ” 1stBank1,500,000Dr.Shop fittings AccountCr.2008 ShsApril160,000Dr.Purchases AccountCr.2008ShsApril 5Cash300,000 ” 10Bank200,000Dr.Sales AccountCr.2008ShsApril 6Bank400,000 ” 7Cash150,000 ” 15Cash500,000Dr.Carriage InwardsCr.2008 Shs.April 17thCash 100,000Dr.Loan AccountCr.2008Shs.April 20Bank500,000Dr.Wages AccountCr.2008ShsApril Cash20,000Dr.Electricity AmountCr.2008ShsApril 22Cash15,000Dr.Rent AccountCr.2008ShsApril 29Bank 100,000CONTRA ENTRIES.Contra entries are entries of transactions whose double entry is completed within the cash book. They refer to cash payment into one’s bank account or cash withdrawn from bank. This means that there is both a debit entry and a credit entry of the same transaction in the cash book.Contra entries are indicated by letter “C” which is placed in the folio column in the cash book.ExampleCash paid into bankDr.Bank columnCr.Cash columnCash withdrawn from bankDr. Cash columnCr. Bank columnIllustration:Enter the following transactions in the two column cash book for the month of Nov. 2008.Nov. 1st balances brought forward:Cash in hand shs. 120,000Cash at bank shs. 350,000Nov. 2nd sold goods for shs. 80,000 in acsh ” 3rd sold goods shs. 100,000 receiving the money by cheque ” 4th Deposited in the business bank account shs. 180,000 from cash in hand ” 7th The proprietor took shs. 15,000 in cash for personal use. ” 10th Withdrew shs. 50,000 from the business bank account for official use. ” 15th Bought goods for shs. 250,000 paying by cheque shs. 200,000 and in cash shs. 50,000 ” 20th Withdraw from bank for self use. ” 26 Received shs. 40,000 in acsh from Joseph ” 28 Received a cheque of shs. 60,000 from Zziwa. ”31 Paid rent by cheque shs. 12,000TWO COLUMN CASH BOOK.DateParticularsFol.CashBankDateParticularsFol.Cash Bank20082008Nov 1stBal. b/f120,000350,000Nov. 4BankC180,000” 2ndSalesC 80,0007Drawings15,000” 3rdSales100,00010Cash50,000”4thCashC50,00020DrawingsExerciseDamuka enterprises had the following transactions for the month of June 2008.June 1 Balances brought forward from last month:Cash in hand shs. 1,500,000Cash at bank shs. 500,000June 2 Bought goods by cheque 500,000 ” 3Bought land by cheque 600,000 ” 5Cash sales shs. 700,000 ” 6Deposited cash received on June 5th ” 10Paid for wages shs. 50,000 in cash ” 15received a cheque from Odongo Shs. 350,000 ” 18Withdrew cash from bank for own use shs. 50,000 ” 20Received bank overdraft for shs. 380,000 ” 23Withdrew cash from bank for own use shs. 50,000” 26Paid for rent and rates shs. 60,000” 27 Paid rent by cheque shs. 200,000 ” 30Bought stationery in cash shs. 50,000Required:Account the above transactions in Damuka double column book and balance it.Post the entries to their corresponding ledger accountsFrom the details given below, write up a double column cash book and balance it at the end of the month.2008Oct 1Balances brought forwardCash in hand shs. 2,000,000Cash at bank shs. 4,500,000Oct 1Put shs. 500,000 of cash into bank ” 2Bought goods for cash shs. 100,000” 3Bought furniture and paid 200,000 by chque” 6Bought goods for cash 200,000”7 Sold goods for cash shs. 400,000” 9Paid expenses in cash shs. 50,000”14Sold goods and received a cheque shs. 350,000”17Banked goods for cash shs. 300,000“19Bought goods for acsh shs. 250,000”23Paid wages to an assistant in cash shs. 400,000”26 Proprietor took shs. 60,000 cash from the business for persona l use.”29Cashed cheque for office use shs. 150,000”30Paid all cash into bank leaving a balance of only shs. 200,000The Three Column Cash BookThe three column cash book is a cash book that has three amount columns on both the debit side and the credit side as illustrated below:-Dr.Three Column Cash BookCr.Date Particular Fol. Disc CashBank Date Particulars Fol. Disc Cash BankAllowed ReceivedDiscountsA discount is an allowance given by a trader on goods purchasedKinds of discountsThere are two kinds of discounts namely;Trade discountCash discountTrade discountThis is an allowance given by a trader on goods purchased in large quantities.Cash discountThis is an allowance given by a trader to encourage customers to pay their accounts promptly. Cash discounts charged as a percentage of the cost price of the goods bought.Cash discount is of two kinds namely;Discount allowedDiscount receivedDiscount allowedThis is an allowance given to debtors who pay their, accounts promptly. It is a loss tot eh business.Discount receivedThis is an allowance received from creditors when the business settles its debts promptly. It is regarded as a gain to the business.The discount allowed column and the discount received column in the three column cash book are not accounts. They are used for the convenience of keeping a list or record of all the relevant cash discounts. At the end of a given period, when the cash book is balanced, the discount columns are not balanced. Instead they are totaled and the totals posted to the general ledgers as follows:The total discount allowed accountThe total discount received is credited tot eh discount received account.IllustrationWrite up a three column cash book for Kizito from the details given below; balance it off at the end of the month and show the discount accounts in the general ledger.2008Aug 1stBalances b/f:Cash shs. 250,000Bank Shs. 740,000Aug 2nd Bought goods by cheque shs. 200,00 3rdCash sales shs. 180,000 5th Banked cash shs. 200,000 6th Paid by cheque and received 3% cash discount to:-A- John shs. 150,000H- David shs. 300,000D- Alex shs. 140,000 7th Received by cheque and allowed 5% cash discount from:B- Simon shs. 400,000Z- Ben Shs. 300,000E- Fred shs. 320,000 10th Bought office furniture by cheque shs. 300,000 15th Cash drawings shs. 50,000 20th Paid F. Andrew shs. 80,000 in cash less 3% cash discount. 22ndReceived cash from A.Smith shs. 150,000 less 4% cash discount 30th Paid wages in cash shs. 100,000.Mr. Kizito’s Three column cash bookDateDetailsFolDisc allowedCashBankDateDetailsFol.Disc ReceivedCashBank20082008Aug1st bal b/f250,000740,000Aug2Purchases200,0003rdSales180,0005thBankC200,0005thCashC200,0006thA. John4,500145,5007thB.Simon20,000380,0006thH.David9,000291,0007thZ.Ben15,000385,0006D.Alex4,200135,8007thE. Fred16,000304,00010Office furn.300,00022ndA.Smith6,000144,00015Drawings50,00020F.Adrew2,40077,60030Wages100,00031Bal.c/d146,400836,70057,000574,0001,909,00020,100574,0001,909,000Sep 1stBal b/d146,400836,700General ledger DrDiscount Allowed AccountCr.2008Shs.Aug 31 Cash57,000DrDiscount received accountCr.2008ShsAug 31Cash20,100ExerciseWrite up a three column cash book from the following details. Post the entries to ledgers.2008Shs.Jan 1stCash balance100,000Bank overdraft150,000 ” 3rdPaul paid us cash205,000Discount allowed15,000 ”5thPaid Oplot by cheque shs 50,000 in full settlement of an amount of shs. 55,000 owing to him ” 8thCash purchases120,000 ” 9thPaid cheque for goods80,000”13thReceived from Robert cash shs. 275,000 having allowed a discount of shs.25,000, he banked the amount.” 19thDrew cash from bank for private use45,000” 28thBank charges for cheque book10,000Interest charges for cheque overdraft15,000” 29th Paid Moses by cheque320,000” 30th Banked all cash in the officeOkello’s financial position on 1st Feb. 2008 was as follows:-Shs.Cash in hand 400,000Cash at bank 540,000Stock 760,000Office furniture1,560,000Debtors: Harriet 235,000 Joseph 650,000Creditors: Patrick 310,000 Dennis 265,000Transactions for the month of Feb. 2008 were as follows:-Feb. 2Paid Harriet cheque shs. 285,000 in full settlement of amount owed. 4thBought goods on credit from Dennis 360,0007thReturned damaged goods to Dennis 30,0009thCash sales220,00011thTransfer cash from office to bank150,00014thBought typewrite for office use, paid cash425,00016th Cash sales paid direct into bank530,00018thDrew cash from bank for office use100,00021stReceived cheque from Harriet220,000Discount allowed15,00025thCash purchases130,00026Received cash from Joseph230,000Discount allowed200,00027thDew cash from office for private use48,00027thPaid rent by cheque270,00028thPaid salary by cheque285,000RequiredPrepare the three column cash bookThe ledger accounts3.On 1st May 2008 Tumwine’s books had the following information:Cash balance 290,000Bank balance6,540,000Debtors:-Busigye 120,000Wasswa 180,000Kato 400,000Creditors:-Lwasa 600,000Opio 440,000Esalu 100,000During the month of May the following transactions took place:-3rd cash sales banked shs. 1,000,0006thbought stationery by cash shs. 100,00010thpaid all creditors by cheque less 10% cash discount14thbanked cash shs. 500,00015th paid mid month wages in cash shs. 300.00020thdrew cheque for own use Shs. 50,00022ndall debtors paid by cheque less 5% cash discount24thsold goods for cash shs. 450,00029threceived a cheque from David shs. 480,000 in full settlement of an amount of shs. 510,000Required:Write up a three column cash book and balance it.Open up discount accounts in the general ledger.PETTY CASH BOOKThe petty cash book is a special type of cash book (subsidiary cash book) designed to keep record of minor cash transactions i.e. transactions involving expenditure of small sums of money. Such small sums of money are known as petty cash.Every firm finds it necessary to have some cash available for payment of small items of which the services of a bank would not be convenient. These are usually for:-Postage – stamps for sending letters and parcels, telegrams.stationery – ink, ball pens, erasers, envelopes, paper, books for writing.Traveling expenses – fares for various means of transport – taxi, mini bus, bus etc.General expenses or miscellaneous expenses for items like minor repairs, tips and other miscellaneous expenses not included in Nos. 1-3Sundries – for items which are not usual petty cash items but are nevertheless paid in cash e.g. loan to employee, purchase of goods.Ledger – for payment to creditors/suppliers.The purpose of operating a petty cash system is to:-Relieve the main cash book of numerous entries of a large volume of transactions involving expenditure of small amounts of money.Enable the cashier concentrate on major cash transactions while minor/small cash transactions are handled by the petty cashier.Reduce unnecessary movement to the bank to withdraw money whenever any payment is to be made.Reduces temptation of fraud and stealing of cash in the business.Serves as a training ground for the petty cashier in managing and accounting for money.Promotes division of labour and improved efficiency in the management of money.TERMS USEDImprest systemThis is a method where the cashier gives the petty cashier an adequate amount of money to meet his petty cash payments for a given period of time say a week, fortnight or a month. At the end of the period the petty cahier gives accountability of money spent. Thereafter the petty cashier is reimbursed more money to bring the cash in hand (imprest) back to the original amount i.e. to replenish the amount of the imprest and the same cycle is repeated.Imprest amount / cash floatThis refers to a fixed sum of money given to the petty cashier to spend in a given period of time.ReimbursementThis is the topping up of the balance brought down by the petty cashier to bring the amount to its original imprest.Format of the petty cash bookThere are two rulings of the petty cash book as shown below:-Petty cash bookDateDetails/particularsVoucher No.ReceiptsAmountAnalysis columnsPetty cash bookReceiptsFol.DateParticularsVoucher No.AmountAnalysis columnsIllustration 1: PETTY CASH BOOK.Enter the following transaction in the petty cash book of Odongo Steven having analysis columns for postage, cleaning, stationery, traveling expenses and ledger .2008ShsMarch 1stReceived for petty cash float150,0001stBought stamps4,0003rdPaid for telegram6,0007thPaid bus fare10,00010thGummer labels2,00016Floor polish7,00018thPaid Ssentongo (Supplier)30,00025thBought stamps4,00027thPaid for taxi fare8,00029thPaid for paper clipssolution.PETTY CASH BOOKDateDetailsVoucher No.ReceiptsAmountANALYSIS COLUMAN.PostageCleaningStationeryTraveling exp.Ledger2008ShsShsShsShsShsShsShsMarch 1Petty cash150,0001Stamps014,0004,0003Telegram026,0006,0007Bus fare0310,00010,00010Gummed labels042,00020,00016Floor polish057,0007,00018Ssentogo0630,00030,00025Stamps074,0004,00027Taxi fare088,0008,00029Paper clips092,5002,50014,0007,0004,50018,00030,000Illustration IIThe petty cashier of Cavendish is given a weekly Imprest of shs. 200,000 during the week that Nov. 3rd 2008, she made the following transactions.Shs.Nov. 3rdBalance at hand41,0003rdCash reimbursement?4thBought office cleaning materials24,0004thPaid for staff tea15,0005thPaid for headmaster’s travel fare30,0005thBought sodas for staff10,0006thPaid for staff transport15,0006thSend mail shs. 1,500 and bought 4 reams of paper24,0007thBought 4 boxes of chalk10,0007thBought sugar and tea4,0007thBought staple wires1,0008thBought envelopes2,0008thPaid the cleaners10,0008thBought a broom5008thPaid for weekly newspaper14,000RequiredPrepare Cavendish. University petty cash book having analysis columns for stationery, cleaning, traveling, postage and office expenses.Show the necessary accounts to be made in the general ledger.DateParticularsFolVoucher No.ReceiptsAmountStationeryCleaning TravelingPostageOffice expenses2008Nov 3rdBalance b/d41,0003rdReimbursement159,0004thOffice cleaning01240,00024,0004thStaff tea0215,00015,0005thH/M travel0330,00030,0005thSodas0410,00010,0006thStaff transport0515,00015,0006thMail061,5001,5006thReams0724,00024,0007thBoxes of chalk0810,00010,0007thSugar & tea094,0004,0007thStaple wires101,0001,0008thEnvelopes112,0002,0008thCleaners1210,00010,0008thBroom135005008thNewspapers1414,00037,00034,50045,0001,50043,0009thBalance c/d200,000200,00010thBal. b/d200,000200,000ii)General ledgerDr.Stationery AccountCr.2008ShsNov. 9th Petty cash37,000Dr.Cleaning AccountCr.2008ShsNov. 9th petty cash 34,500Dr.Traveling AccountCr.2008Shs.Nov. 9th petty cash 45,000Dr.Postage AccountCr.2008shs.Nov. 9th petty cash1,500Dr. Office expensesCr.2008Shs.Nov. 9th petty cash43,000ExerciseSmart supermarket operates a petty cash imprest of shs. 500,000. on June 1st 2008 the petty cashier had a balance of shs. 65,000. the following transactions took place.June 2re-imbursed cash to replenish the imprest3rdpaid for office cleaning shs. 80,0007thpurchased postage stamps shs. 31,50011thpaid causal labour shs. 90,00014thpurchased evelopes shs. 20,00016thpurchased photocopying papers and pens shs. 80,00022ndpaid Mukoli, a creditor shs. 40,00024thpaid casual labour shs. 85,00027thpaid for registered mail shs. 35,00029thbought black books shs. 10,000RequiredEnter the above transactions in the petty cash book with analysis columns for wages, stationery, postage and ledger and balance it.Show the posting of the petty cash book to the general ledger.Annet maintains a petty cash book using the imprest system and a three column cash book. On 1st Aug 2008, the business records the following balances:-Shs.Petty cash (imprest)250,000Cash book: cash column200,000Dr.Bank column100,000Cr.You are required to:-Enter the following transactions into appropriate books of original entry.Balance the petty cash book and cash on 10 Aug 2008Note:The petty cash book has three analysis columns for postage/courier, stationery and general expenses2008Aug 1stPaid for ball pens, erasers and marker pens from petty cash15,0003rdReceived and banked cheque from charles who owes shs. 480,000. allowed him a cash discount of 5%Cash sales200,0004thCash sales450,000Paid for envelopes and cards25,0005thPaid for courier services 20,000Bought stamps13,000Paid for computer forms and diskettes listed at shs. 160,000 less 10% trade discount by cheque.7thOffice cleaning 40,000Paid for minor repairs25,0008thCash sales300,000Paid wages by cash600,00010The petty cashier received cash to mark up the imprest to the original amount. The chief cashier paid all cash received during the period into the bank except the amount reserved to mark up the petty cash.You are in business which operates a petty cash system with a monthly imprest of shs. 800,000. During the month of April 2008, the following transactions took place.ShsApril 1stBalance at hand90,0001stIssued cheque for reimbursement??2ndPaid cleaners’ wages50,0005thPaid Wandiba (a creditor)150,0006thBought envelopes & stamps30,00010thBought cleaning materials100,00014thBought printers’ ribbon55,00023rdBought books and pens75,00024thBought envelopes & stamps30,00028thBought stationery300,000The petty cash voucher commences at 501, write a petty cash book for April 2008 with analysis columns for cleaning, postage & office supplies as well as ledger.The purchases day bookThis book is also purchases journal or purchases book or bought day book.It is a book of original entry in which all credit purchases are first recorded/listed before being entered in the ledger. At the end of a given period such as a month, the total credit purchase is determined and the entries are posted (made) in the ledger as follows:-Each individual amount is credited to the respective personal account of the creditor (supplier) in the purchases ledger.The total credit purchase is debited to the purchases account in the general ledger.The source documents, used to make entries in the purchases journal are the original purchases invoices received from supplies.Illustration 1:Enter the transactions given below in the purchases journal and thereafter post the ledger accounts.2008Nov 1stPurchased the following goods on credit from Southern Electronics at a discount of 10%, 15 radios at shs. 50,000, 20 cassette players at shs. 100,000 each. Invoice No. 401Nov. 7th Purchased from Kitara electronics on credit10 CD writers at shs. 50,000 eahc, 20 television sets at shs. 250,000 each. A trade discount of 5% was allowed and invoice No. 501 issuedNov. 10th Purchased 15 digital radio from Kitara electronics at shs. 200,000 each at a trade discount of 5% invoice No. 551 was issued.DOUBLE ENTRY SYSTEM AND PREPARATION OF BOOKS OF ACCOUNTSDOUBLE ENTRY SYSTEM.This is a book keeping system where there is dual recording of transactions that is; it should be recorded twice in 2 books of Accounts.In the Double entry system, the Debit (DR) entry must have a Corresponding Credit (CR) entry and vice versa.To every transaction, the totals must be the same that is; DR and CR totals. Debit and Credit are means of increasing and decreasing an account’s balance depending on the nature of account.A Debit entry may increase or decrease or vice versa.AN ACCOUNTAn account is a means of bringing together records or it’s a means of bringing together records of all transactions which took place in a business in chorological order that is; recorded in order of time.Accounts include; “IMPERSONAL” and ‘PERSONAL ACCOUNTS”. Personal accounts include; Debtors and Creditors Accounts and Impersonal accounts are subdivided into ‘Real’ and ‘Nominal’ Accounts. Real Accounts are accounts of tangible things. For example; Furniture whereas Nominal Accounts are accounts of intangible things that is; services like; advertising.FORMATS OF ACCOUNTST Account Format. This is the Debit and Credit format in a T form that is;DR CASH A/C CRRunning Balance Format. This is a format where a balance is shown every after the recording of a transaction.CASH ACCOUNT Date Details Folio Debt Credit BalanceType of AccountIncreaseDecreaseNormal BalanceAsset AccountDebit (DR)Credit (CR)Debit (DR)Liabilities AccountCredit (CR)Debit (DR)Credit (CR)Incomes AccountCredit (CR)Debit (DR)Credit (CR)Owners’ EquityCredit (CR)Debit (DR)Credit (CR)Capital & reservesExpenditures AccountDebit (DR)Credit (CR)Debit (DR)Liabilities are obligations you have to pay in a business.Things or goods which are not for resale are not purchases.Examples;Sold goods for cash 8 millionDR CASH A/C CR DR SALES A/CSales 8m Cash 1m CASHBought furniture for 5 million and paid by cheque BANK A/C FURNITURE A/C Furniture 5mBANK 5mBought goods for 3 million on credit PURCHASES CREDITOR A/CCreditor 3mCash 1m PurchasesMade part payment 1 million cash on creditCHAPTER 11THE COST OF GOODS SOLD, ACCRUALS AND PREPAYMENTSIntroduction So far we have calculated profits as follows $Sales XLess costs of goods sold (x)Gross profit XLess expenses (X)Net profit X However, the figures for cost of sales and experiences may not always be simple adjustments may need to be made.1. THE COSTS OF GOODS SOLD Unsold goods in inventory at the end of accounting period 1.1. Goods might be unsold at the end of an accounting period and so still be held in inventory. The purchase costs of these goods should not be included therefore in the cost of the period.1.2. Example: Closing Inventory Perry P. Louis, trading as a Umbrella shop, ends his financial year on 30 September each year. On 1st October 20X4 he had no goods in inventory. During the year to 30 September 20X5, he purchased 30,000 umbrellas costing $60,00 from umbrella wholesalers and suppliers. He resold the umbrella for $5 each, and sales for the year amounted to $100,000 (20,000 umbrellas). At 30 September here were 10,000 unsold umbrellas left in inventory, valued at $2 each.What was Perry P. Louis’s gross profit for the year.1.3. Solution Perry P Louis purchased 30,000 umbrellas, but only sold 20,000. purchase costs of $60,000 and sales of $100,000 do not represent the same quantity of goods.The gross profit for the year should be calculated by ‘matching’ the sales value of the 20,000 umbrellas sold with the cost of those 20,000 umbrellas. The cost of sales in this example is therefore the cost of purchase minus the cost of goods in inventory at the year end.Sales (20,000 units)$$100,000Purchases (30,000 units)60,000Less closing inventory (10,000 units @ $2)20,000Cost of sales (20,000 units)40,000Gross profit 60,000Example continued We shall continue the example of the umbrella shop into its next accounting year, 1 October 20X5 to 30 September 20X6. during the course of this year , Perry P Louis purchased 40,000 umbrellas at a total cost of $95,000. During the year he sold 45,000 umbrellas for $230,000. At 30 September 20X6 he had 5,000 umbrellas left in inventory which had cost $12,000.Solution In this accounting year, he purchased 40,000 umbrellas to add to the 10,000 he already had in inventory at the start of the year. He sold 45,000, leaving 5,000 umbrellas in inventory at the year end. One again, gross profit should be calculated by matching the value of 45,000 units of sales with the cost of those 45,000 units.The cost of sales is the value of the 10,000 umbrellas in inventory at the beginning of the year, plus the cost of the 40,000 umbrellas purchased , less the value of the 5,000 umbrellas in inventory at the year end.$$Sales (45,00 units)230,000Opening inventory (10,000 units)20,000Add purchases (40,000 units) 95,000Less closing inventory (5,000 units)115,000Cost of sales (45,000 units)12,000Gross profit 103,000127,000The cost of goods sold The costs of goods sold is found by applying the following formula.Formula to learn $Opening inventory value XAdd cost of purchases (or , in the case of a manufacturing company, the cost of production)XXLess closing inventory value (X)Equals cost of goods sold (X)Net profit X In other words , to match ‘sales’ and ‘cost of goods sold’, it is necessary to adjust the cost of goods manufactured or purchased to allow for increase or reduction in inventory levels during the period.The ‘formula’ above is based on the logical idea. You should learn it, because it is fundamental among the principles of accounting.Example: Cost of goods sold and variations in inventory levels On 1 January 20X6, the Grand Union Food Stores had goods in inventory valued at $6,000. During 20X6 its proprietor purchased supplies costing $50,000. Sales for the year to 31 December 20XX6 amounting to $80,000. The cost of goods in inventory at 31 December 20X6 was $12,500.Calculate the gross profit for the year.Solution Grand Union Food Stores Trading Account for the Year Ended 31 December 20x6$$Sales 80,000Opening inventories 6,000Add purchases 50,000Loss closing inventories 56,000Cost of good sold 12,500Gross profit 43,50036,500The cost of carriage inward and outwards1.10. ‘Carraige’ refers to the cost of transporting purchased goods from the supplier to the premises of the business which has bought them. Someone has to pay for these delivery costs: sometimes the supplier pays, and sometimes the purchaser pays. When the purchaser pay, the cost to the purchaser is carriage inwards (into the business). When the supplier pays, the cost to the supplier is known as carriage outwards (out of the business).the cost of carriage inwards is usually to added to the cost of purchases, and is therefore included in the trading account.The cost of carriage outwards is a selling and distribution expense in the income statement.1.12. Example: Carriage inwards and carriage outwards Gwyn Tring, trading as Clickety clocks, imports and resells clocks. He pays for the costs of delivering the clocks from this suppliers in Switzerland to his shop in Wales.He resells the clocks to other traders throughout the country, paying the costs of carriage for the consignment from his business premises to his customers.On 1 July 20X5, he had clocks in inventory valued at $17,000. During the year to June 20XX6 he purchased more clocks at a cost of $75,000. Carriage inwards amounted to $2,000 excluding carriage outwards which cot $2,500. Gwny Tring took drawings of $20,000 from the business during the course of the year. The value of the goods in inventory at the year end was $15,400.Required Prepare the income statement of Clickety Clocks for the year ended 30 June 20X6.Solution CLICKETY CLOCKS Income statement for the year ended 30 June 20X6$$Sales 162,100Opening inventory 17,000Purchases75,000Carriage inward 2,00094,000Less closing inventory 15,400Cost of goods sold 78,600Gross profit 83,000Carriage outwards 2,500Other expenses 5600058,50025,000Net profit (transferred to balance sheet)Goods written off or written down A trader might be unuble to sell all the goods that he purchased, because a number of things might happen to the goods before they can be sold. For example Good might be lost of stolen Good might be damaged, become worthless and so he thrown away.Goods might become obsolete or out of fashion. These might be thrown away , or sold off at a very law price in a clearance sale.When goods are lost, stolen or thrown away as worthless, the business will make a loss on those goods because their “sales value’ will be nil.Similarly, when good lose value because they have become absolute or out of fashion, the business will make a loss if their clearance sales value is less than their costs. For example, if goods which originally cost $500 are now absolete and could only be sold for $150, the business would suffer a lossof $ 350.If, at the end an accounting period, a business still in inventory which are either worthless or worth less than original costs, the value of the inventory should be written down to:Nothing , if they are worthless Their net realizable value, if this is less than their original cost.This means that the loss will be reported as soon as the loss is foreseen, even if the goods have not yet been thrown away or sold off at a cheap price. This is an application of the prudence concept, which we looked at in Chatper 10.The costs of inventory written off or written down should not usually cause any problems in calculating the gross profit of a business, because the cost of goods sold will include the cost of inventories written off or written down, as the following example shows.Example: Inventories written off and written down Lucas Wagg , trading as Fairlock Fashions , ends his financial year on 31 March. At 1 April 20X5 he had goods in inventory valued at $8,800. During the year to 31st March 20X6 , he purchased goods costing $48,000. Fashion goods which cost $2,100 were still held in inventory at 31 March 20X6, and Lucas Wagg believes that these could only be sold at a sale price of $400. The goods still held in inventory at 31 Match 20X6 (including the fashion goods) and an original purchase costs of $7,600. Sales for the year were $81,400.Solution Initial calculations of closing inventory values Details At cost Realizable value Amount written down Fashion goods $2,100$400$1,700Other goods (balancing figure)5,5005,5007,6005,9001,700FAIRLOCK FASHIONS TRADING ACCOUNT FOR THE YEAR ENDED 31 MARCH 20X6Sales $$18,400Values of opening inventory 8,800Purchases48,00056,800Less closing inventory 5,900Cost of goods sold 50,900Gross profit 30,500By basing the figure of $5,900 for losing inventories, the cost of goods sold automatically includes the inventory written down of $1,700Question 1Gross profit for 20X7 can be calculated from purchase for 20X7, plus inventory at 31 December 20X7, less inventory at 1 January 20X7purchase for 20X7, less inventory at 31 December 20x&, plus inventory at 1st January 20X7Cost of goods sold during 20X7, plus sales during 20X7\Net profit for 20X7, plus expenses for 20x7Answer The answer is given with Question 2, so you won’t see it before you’ve though about it for yourself.2. ACCRUALS AND PREPAYMENTS Introduction It has already been stated that the gross profit for a period should be calculated by matching sales and the cost of goods sold. In the same way, the net profit for a period should be calculated by charging the expenses which relate to that period. For example, in preparing the income statement of a business for a period of, say, six months , it would be appropriate to charge six months’ expense for rent and local taxes , insurance costs and telephone costs, etc. Expenses might not be paid for during the period to which they relate. For example, a business rents a shop for $20,000 per annum and pays the full annual rent on 1st April each year. If we calculate the profit of the business for the first six months of the year 20X7, the correct charge for rent in the income statement is $10,000, even though the rent paid is $20,000/= in the period. Similarly, the rent charge in the income statement for the second six months or the year is $10,000, even though no rent was actually paid in that period.Key TermsAccrual or accrued expenses are expenses which charged against the profit for a particular period, even though they have not yet been paid for.Prepayment are payments which have been made in one accounting period, but should not be charged against profit until a later period, because they relate to the late period.Accruals and prepayment might seem difficult at first, but the following examples should help to clarify the principle involved, that expenses should be matched against the period to which they relate.Example: Accruals Horace Goodrunning, training and Good running Motor Spares ,end this financial year on 28 February each year. His telephone was installed on 1 April 20X6 and he received his telephone account quarter at the end of each quarter. On the basis of the following data, you are required to calculate the telephone expense to be charged to the income statement for the year ended 28 February 20X7.Goodrunning Motor Spares – Telephone Expense for the three months ended:$30.6.20X623.5030.09.20X627.2031.12.20X633.4031.3.20X736.00Solution The telephone expenses for the year ended 28 February 20X7 are:$1 March – 31 March 206 (no telephone)0.001 April – 30 June 20X623.501 July - 30 September 20X627.201 October – 31 December 20X633.401 January – 28 February 20X7 (two months)24.00108.10The charge for the period 1 January – 28 February 20X7 is two-thirds of the quarter bill received on 31 March. As at 28 February 20X7, no telephone bill has been received because it is not due for another month. However, it is inappropriate to ignore the telephone expenses for January and February, and so an accrued charge of $24 is made, being two-thirds of the quarter’s bill of $36.The accrued charge will also appear in the balance sheet of the business as at 28 February 20X7, as a current liability.Questions Ratsnuffer is a business dealing in pest control. Its owner, Roy Dent, employs as team of eight who were paid $12,00 per annum each in the year to 31Decamber 20XX5. At the start of 20X6 he raised salaries by 10% to $13,200 per annum each.On 1 July 20X6, he hired a trainee at a salary of $8,400 per annum.He pays his work force on the first working day of every month, one month in arrears, so that his employees receive their salary for January on the first working day in February , etc.Required (a)Calculate the cost of salaries which would be charged in the income statement of Ratsnuffer for the year ended 31 December 20X6.(b) Calculate the amount actually paid in salaries which would appear in the balance sheet of Ratsnuffer as at 31 December 20X6.AnswerSalaries cost in the income statement $Cost of 8 employees for a full year at $13,200 each105,600Cost trainer for a half year 4,200109,800b) Salaries actually paid in 20X6$December 20X5 salaries paid in January (8 employees x $1,00 per month)8,000December (8 employees x $1,100 per month x 11 months)96,800Salaries of trainee (for July – November paid in August – December 20X6:5 months $700 per month)3,500Salaries 108,000(c) Accrued salaries costs as at 31st December 20X6$(i.e Costs charged in the income statement , but not yet paid)8,8008 employee x 1 month x $1,100 per month 7001 trainee x 1 month x $700 per month 9,500(d) Summary $Accrued wages costs as at 31Decemer 20X58,000Add salaries cost for 20X6 x $700 per month 700117,800Less salaries paid 103,300Equals accrued wages costs as 31December 20X6 (liability in balance sheet) 9,500Note: The answer to Question 1 is D. Remember that: Net profit = Gross profit less expenses.Example: Prepayment The Square Wheels Garage pays fire insurance annually in advance on 1 June each year. The firm’s financial year end is 28 February. From the following record of insurance payments you are required to calculate the charge to income statement for the financial year to 28 February 20X8.$1.6.20X66001.6.20X7700Insurance cost for $(a) The 3 months, 1 March -31 May 20X7 (3/12 x $600)150(b) The 9 months , I June 20X7- 28 February 20X8 (9/12x $700)525Insurance costs for the year, charged to the income statement 675At 28 February 20X8 there is a prepayment for fire insurance, covering the period 1 March -31st May 20X8. this insurance premium was paid on 1 June 20X7, but only nine months worth of the full annual cost is chargeable to the accounting period ended 28 February current asset in the balance sheet of the Square Wheels Garage as at the date.In the same way, there was a prepayment of (3/12 x $600) $150 in the balance sheet one year earlier as at 28 February 20X7.Summary $Prepaid insurance premiums as at 28 February 20XX7150Add insurance premiums paid 1 June 20X7700850Less insurance costs charged to the income statement for the year ended 28 February 20X8675Equals prepaid insurance premiums as at 28 February 20X8 (asset in balance sheet )175Question 3The Batley Print rents a photocopying machine from a supplier for which it makes a quarter payment as follows:-Three months rental in advance A further charge of 2 pence per copy made during the quarter ended The rental agreement began on 1 August 20X4 and the fist six quarterly bills were as follows Bills dated and received Rental $Costs of copies taken $ Total $1 August 20X42.10002,1001 November 20X42,1001,5003,6001 February 20X52,1001,4003,5001 May 20X52,1001,8003,9001 August 20X52,7001,6504,3501 November 20X52,7001,9504,650The bills are paid promptly, as soon as they are received.Calculate the charge for photocopying expenses for the year to 31st August 20x4 and the amount of prepayments and/or accrued charges as at that date.Calculate the charge for photocopying expenses for the following year to 31st August 20x5, and the amount of prepayments and /or accrued charges as at the data.Answer (a) Year to 31 August 20X4$One months’ rental (1/3 xx $2,100)*700Accrued copying charges (1/3 X $1,5000)**500Photocopying expenses (Income statement)1,200* From the quarterly bill dated 1 August 20X4** From the quarterly bill dated 1 November 20X4There is a prepayment for 2 months’ rental ($1,400) as at 31 August 20X4(b) Year to 31 August 20X5$$Rental from 1 September 20X4- 31 July 20X5 (11 months at $2,100 per quarter or $700 per month)7,700Rental from 1 August – 31 August 20 x 5 (1/3 x $2,700)900Rental charge for the year 8,600Copying charges 1 September – 31 October 20X4 (2/3 x $1,500) 1,0001 November 20X4 - 31 January 20X51,4001 February -30 April 20X51,8001 May -31 July 20X51,650Accrued charges for August 20X5 (1/3 x $1,950)6,500Total is a prepayment expenses (income statement)15,100There is a prepayment for w months’ rental ($1,800) as at 31 August 20X5Summary of year 1 September 20X4-31 August 20X5Rental charges$ Copying costs $Prepayment as at 31.8.20X41,400Accrued charges as at 31.8.20X4(500)Bills received during the year 1 November 20X42,1001,5001 February 20X52,1001,4001 May 20X52,1001,8001 August 20X52,7001,650Prepayment as at 31.8.20X5(1,800)Accrued charges as at 31.8.20X5 650Charges to the income statement for the year 8,6006,500Balance sheet items as at 31 August 20X5Prepaid rental (current asset)1,800Accrued copying changes (current liability)650Further Example: Accruals Willie Woggle opens a Shop on 1 May 20XX6 to sell and camping equipment. The rent of the shop is $12,000 per annum, payable quarterly in arrears (with the fist payment on 31st July 206). Willie decides that his accounting period should end on 31st December each year.The rent account as at 31st December 20X6 will record only two rental payments ( on 31st July and 31 October) and there will be two months’ accrued rental expenses for November and December 20X6 ($2,000), since the next rental payment is not due until 31 January 20X7.The charge to the income statement for the period to 31 December 20X6 will be for 8 months’ rent (May-December inclusive) and so it follows that the total rental cost should be $8,000.So far, the rent account appear as follows Rent account$$20X620X631 July Cash3,00031 October Cash3,000 31 Dec. Income statement 8,000 To complete the picture, the accruals of $2,000 have to be put in , not only to balance the account, but also to have an opening balance of $2,000 ready for next year. So that accrued rent of $2,000 is debited to the rent account as a balance to be carried down, and credited to the rent account as a balance brought down.RENT ACCOUNT$$20x620X 631 JulyCash*3,00031 OctCash*3,00031 Dec.Balance c/D (Accruals)2,00031 DecIncome Statement 8,0008,0008,00020X71 JanBalance b/d2,00* The corresponding credit entry would be cash if rent is paid without the need for an invoice-e.g with payment by standing order or direct debt at the bank. If there is always an invoice where rent becomes payable, the double entry would be:Debit Rent account $2,000Credit Creditors $2,000Then when the rent is paid, the ledger entries would be:Debit Creditors $2,000Credit Cash $2,000The rent account for the next year to 31 December 20X7, assuming no increase in rent in that year, would be as follows.RENT ACCOUNT$$20X720X731 Jan Cash 3,0001 JanBalance b/d2,00030 April Cash 3,00031 JulyCash 3,00031 OctCash 3,00031 DecBalance c/d (Accrued)2,00031 DecIncome statement 12,00014,00014,00020X81 Jan Balance b/d2,000 A full twelve months’ rental charges are taken as an expense to the Income statement Further example: Prepayments Terry Trunk commences business as a landscape gardener on 1 September 20X5. He immediately decides to join his local trade association , the Confederation of Luton Gardeners, for which the annual membership subscription is $180, payable annually in advance. He paid this amount on 1 September. Terry decides that his account period should end on 30 June each year.In the first period to 30 June 20X 6 (10 months), a full year’s membership will have been paid, but only ten twelfths of the subscription should be charged to the period (i.e 10/12 x $180 = $150). There is a prepayment of two months of membership subscription (i.e 2/12 x $180 = $30).The prepayment is recognized in the ledger account for subscriptions. This is done in much the same way as accounting for accruals, by using the balance carried down/brought down technique.Credit Subscriptions account with prepayment as a balance sheet C/D$30Debit Subscription account with the same balance $30The remaining expenses in the subscriptions account should then be taken to the Income statement. The balance on the account will appear as a current asset (Prepaid subscriptions) in the balance sheet as 30 June 20X6.Subscriptions account$$20X520X61 SepCash18030 JanIncome statement 15030 JunBalance c/d (prepayment)3018020X61 JulBalance b/d30The subscription account for the next year, assuming no increase in the annual charge , will be:Subscriptions account$$20X620X71 JulyBalance b/d3030 JunIncome statement 1801 SepCash18030 JunBalance c/d (prepayment)3021021020X71 Jul Balance b/d30Again, the charge to the income statement is for a full year’s subscriptions Question 4.The Umbrella shop the following trail balance as at 30 September 20X8Sales $$Purchase 156,000Land and buildings – net book value at 30.9XX865,000Plant and machinery – net book value at 30.9X8125,000Inventory at 1.10 X775,000Cash bank 10,000Trade accounts receivable 12,000Trade account payable 54,000Selling expenses 40,000Cash in hand 10,000Administration expenses 2,000Finance expenses 15,000Carriage inwards5,000Carriage outwards 1,000Capital account at 1.10XX72,000180,000376,000376,000The following information is available Closing inventory at 30.9X8 is $ 13,000, after writing off damaged goods of $2,000Included in administration expenses is machinery rental of $6,000 covering the year to 31 December 208A late invoice for $12,000 covering rent for the year ended 30 June 209 has not been included in the trial balance Prepare an income statement and balance sheet for the year ended 30 September 20X8. (Tutorial note: This will provide useful revision of the forms of the income statement and balance sheet. If necessary refer back to Chapter 6 of this study text).AnswerThe umbrella shop Income statement for the year end 30 September $$156,000Sales 10,00Opening inventory 65,000Purchases 65,000Carriage inwards 1,00076,000Closing inventory (W1)13,000Carriage inwards 63,000Gross profit 93,000Selling expenses 10,000Carriage outwards 2,000Administration Expenses (W2)16,500Financial expenses 5,00033,500Net profit for the period59,500THE UMBRELLA SHOP BALANCE SHEET AT 30 SEPTEMBER 20X8$$Assets Non-current assets 125,000Land and buildings 75,000Plant and machinery 200,000Current assets Inventory (W1) 13,000Trade accounts receivable 54,000Prepayments (W4)1,500Cash at bank and in hand 14,0082,500282,500Capital and liabilities Proprietor’s capital 180,000Balance brought forward59,500239,500Profit for the period Current liabilities Trade account payable 40,000Accruals (W3)3,000282,500Working 1. Closing inventory As the figure of $13,000 is after writing off damaged good, no further adjustments are necessary .Remember that you effectively crediting closing inventory to the trading account of the income statement and the corresponding debit is to the balance sheet.2. Administration expenses Per trial balance 15,000Add: accrual (W3)3,00018,000Less: prepayment (W4)(1,500)16,5003. Accrual $Rent for year period of 30 June 20 X912,000Accrual for period to 30 September 20X8 (3/12 x &6,000) 3,0004. Prepayment $Machinery rental for the year to 31 December 20X86,000Prepayment for period 1 October to 31 December 20XX8 (3/12 x $6,000) 1,500Chapter roundup This chapter has illustrated how the amount of profit is calculated when:There are opening or closing inventories of goods in hand.There is carriage inwards and /or carriage outwards.Inventories are written off or written down in value.There are accrued charges There are prepayments of expenses The cost of goods sold is calculated as follows $Opening inventoryXPlus purchase XXLess closing inventory (X)XCarriage inwards is included in the cost of purchase. Carriage outward is a selling expense. Accrued expenses are expenses which relate to an accounting period but have not yet been paid for. They are a charge against the profit for the period and they are shown in the balances sheet as at the end of the period as a current liability.Prepayments are expenses which have already been paid bur relate to a future accounting period. They are not no charged against the profit of the current period, and they are shown in the balance sheet at the end of the period as a current asset.Quick quiz1. How is the cost of goods sold calculated Distinguish between carriage inwards and carriage outwards The cost of goods sold is $14,000. The purchases for the period are $14,00, carriage inwards is $1,000, carriage outwards is $1,500 and closing inventory is $13,00. What was the opening inventory figure?A $10,500B $11,500C $12,000D $ 13,0004. Give three reasons why goods purchased might have to be written off.5. If a business has paid rates of $1,000 for the year to 31 March 20X9, what is the prepayment 6. Define an accrual.Answer to quick quizCarriage inward is paid on goods coming into the business and is added to the cost of purchaseCarriage outwards is paid on goods going out to the business to customers and is charged to selling expens$ Opening inventory value (balancing figure)12,000Add: purchase (incl carriage inwards)15,00027,000Less: Closing inventory (13,000)Cost of goods sold 14,000If you picked A, then you wrongly included carriage outwards in cost of goods sold. If you chose B, then you used the carriage instead of the carriage inwards figure in your calculations. With D, you ignored carriage inwards and outwards altogether.Goods are stolen or lostGoods are damaged Good are obsolete 3/12 X $1,000 = $250Expenses charged against profit for a period , even though they have not yet been paid for invoiced.Now try to questions blow from the Exam questions Bank Question to tryLevelMarks Time 15Introductoryn/a36 mins16Introductoryn/a45 minsCHAPTER 12BAD DEBTS AND PROVISIONSIntroduction Ins this chapter we move closer to our goal of preparing the financial statements. We look at two types of adjustment which need to be made in respect of credit sales.Bad debts Customers who buy goods on credit might fail to pay for them, perhaps out of dishonesty or because they have gone bankrupt and cannot pay. Customers in another country might be prevented from paying by the unexpected introduction of foreign exchange control restrictions by their country’s government during the credit period.For one reason or another, a business might decide to give up expecting payment and to write the debt off as a ‘lost cause’.Key TermsA bad debt is a debt which is not expected to be repaid.Writing off bad debts When a business decides that a particular debt is unlikely to be paid, the amount of the debt is ‘written off as an expense in the income statement. Alfred’s Mini-Cab service sends an invoice for $300 to a customer who subsequently does a ‘moonlight flit’ from his office premises , never to be seen or head of again. The debt of $300 must be written off. It might seem sensible to record the business transaction as: Sales $(300-300) = $0. However, bad debts written off are accounted for as follows.Sales are shown at their invoice value in the trading account. The sale has been made and gross profit should be earned. The subsequent failure to collect the debt is a separate matter , which is reported in the income statement account.Bad debts written off are shown as an expense in the income and expense account.In our example of Alfred’s Mini-Cab Service $Sale (in the trading account)300Bad debt written off (expense in the I $ E account)3000Obviously , when a debt is written off, the value of the debtor as a current asset falls to zero. If the debt is expected to be uncollectible, its ‘net realizable value’ is nil, and so it has a zero balance sheet value.Bad debts written off and subsequently paid A bad debt which has been written off might occasionally be unexpectedly paid. The only accounting problem to consider is when a debt written off as bad in one accounting period is subsequently paid in a later accounting period. The amount paid should be recorded as additional income in the income in the income s statement of the period in which the payment is received. For example, a trading, income statement for the Blacksmith’s Forge for the year to 31 December 20X5 could be prepared as shown below from the following information.$Inventory , 1 January 20X56,000Purchases of goods 122,000Inventory, 31 December 20X58,000Cash sales 100,000Credit sales 70,000Discounts allowed 70,000Discounts received 1,200Bad debts written off 5,000Debts paid in 20X5 which were previously written off as bad in 20X42,000Other expenses 31,800BLACKSMITH’S FORGE INCOME STATEMENT FOR THE YEAR ENDED 31.12.20X5$$Sales170,000Opening inventory 6,000Purchase 122,000128,000Less closing inventory 8,000Cost of goods sold 120,000Gross profit 50,000Add: Discounts received 5,000 Debts paid, previously written off as bad 2,00057,000Expenses Discounts allowed 1,2000Bad debts written off 9,000Other expenses 31,800Net profit 42,00015,000PROVISIONS FOR DOUBTFUL DEBTS When bad debts are written off, specific debts owed to the business are identified as unlikely ever to be collected.However, because of the risks involved in selling goods on credit, it might be accepted that a certain percentage of outstanding debts at any time are unlikely to be collected. But although it might be estimated that, say, 5% of debts will turn out bad, the business will not know until later which specific debts are bad.A business commences operations on 1 July 20X4, and in the twelve months to 30 June 20X5 makes sales of $300,000 (all on credit) and writes off bad debts amounting to $6,000. Cash received from customers during the year is $244,000, so that at 30 June 20X5, the business has outstanding debtors of $50,000.$Credit sales during the year 300,000Add receivables at 1 July 20X40Total debts owned to the business 300,000Less cash received from credit customers 244,00056,000Less bad debts written off 6,000Trade receivables outstanding at 30 June 20X550,000Now , some of these outstanding debts might turn out to be bad. The business does not know on 30 June 20X5 which specific debts in the total $50,000 owed will be bad, but it might guess (from experience perhaps) that 5% of debts will eventually be found to be bad. When a business expects bad debts amongst its current debtors, but does not yet know which specific debts will be bad, it can make a provision for doubtful debts. A ‘provision’ is a ‘ providing for’ and so a provision for doubtful debts provides for future bad debts, as a prudent precaution by the business. The business will be more likely to avoid claiming profits which subsequently fail to materialize because some debts turn out to be bad.When a provision is first made , the amount of this initial provision is charged as an expense in the income statement of the business , for the period in which the provision is created.When a provision already exists, but is subsequently increased in size, the amount of the increase in provision is charged as an expense in the income statement, for the period in which the increased provision is made.When a provision already exists, but is subsequently reduced in size, the amount of the decrease in provision is recorded as an item of ‘income’ in the income statement , for the period in which the reduction in provision is made.Exam focus point In an exam you will often be required, as part of a long question , to calculate the increase or decrease in the provision of doubtful debts.The balance sheet, as well as the income statement of a business , must be adjusted to show a provision for doubtful debts.IMPORTANT The value of trade accounts receivable in the balance sheet must be shown after deducting the provision for doubtful debts.This is because the net realized value of all the receivables of the business is estimated to be less than their ‘sales value’. After all, this is the reason for making the provision in the first place. The net realizable value of trade accounts receivable is the total value of receivables minus the provision for doubtful debts. Such a provision is an example of the prudence concept , discussed in details in Chapter 10.In the example about ( in paragraph 2.23) the newly created provision for doubtful at 30 June 20X5 will be 5% $50,000 = $2,500. This means that although total trade account receivable are $50,000, eventually payment for only $47,500 is expected.In the income statement, the newly created provision of $2,500 will be shown as an expense.In the balance sheet, trade accounts receivable will be shown as $Total receivables at 30 June 20X550,000Less provision for doubtful debts 2,50047,500 Example: Provision for Doubtful debts Corin Flakes owns and runs the Aerobic Health Foods Shop in Dundee. He commenced trading on 1 January 20X1, selling health foods to customers, most of whom makes use of a credit facility that Corin offers. (Customers are allowed to purchase up to $2000 of goods on credit but must repay a certain proportion of their outstanding debt every month).This credit system gives rise to a large number of bad debts, and Corin Flake’s results for his first three years of operations are as follows.Year to 31 December 20X1Gross profit $27,000Bad debts written off$8,000Debts owed by customers as at 31 December 20X1$40,000Provision for doubtful debts 2 ? % of outstanding debts Other expenses$20,000Year to 31 December 20X2Gross profit $45,000Bad debts written off$10,000Debts owed by customers as at 31 December 20X2$50,000Provision for doubtful debts 2 ? % of outstanding debtsOther expenses$28,750Year 31 December 20X3 Gross profit $60,000Bad debts written off$11,000Debts owed by customers as at 31 December 20X3$30,000Provision for doubtful debts 3% of outstanding debtors Other expenses$32,850RequiredFor each of these three years, prepare the income statement of the business, and state the value of trade accounts receivable appearing in the balance sheet as at 31 December.Solution AEROBIC HEALTH FOOD SHOPINCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER 20X120X220X3$$$$$$Gross profit 27,00045,00060,000Sundry income: reduction in provision for doubtful debts*35060,530Expenses:Bad debts written off 8,00010,00011,000Increase in provision for doubtful doubts* 1,000250-Other expenses 20,00028,75032,85029,00039,00043,850Net (loss)/profit (2,000)6,00016,500At 1 January 201 when Corin began trading the provision for doubtful debts was nil. At 31 December 201 the provision required was 2 ? % of $40,000= $1,000. The increase in the provision is therefore $1,000. At 31 December 20X2 the provision required was 2 ? % of $50,000 = $1,250. The 20X1 provision must therefore be increase by $250. At 31 December 20X3 the provision required is 3% x $30,000 = $900. The 20X2 provision is therefore, reduced by $350.VALUE OF TRADE ACCOUNTS RECEIVABLE IN THE BALANCE SHEET As at31.12.20X1As at31.12.20X2As at31.12.20X3$$$Total value of receivables40,00050,00030,000Less provision for doubtful debts 1,0001,250900Balance sheet value 39,00048,75029,100Other Provisions A provision for doubtful debts is not the only type of provision you will come across in accounting Key terms A provision is ‘any amount written off or retained by way of providing for depreciation , renewals or diminution of value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy’. For most business, by far the largest provision in their accounts is the provision for depreciation which is described in a later chapter.You should now try to use what you have learned to attempt a solution to the following exercise, which involves preparing an income statement and balance sheet.QUESTION 1.The financial affairs of Newbegin Tools prior to the commencement of trading were as follows:NEWBEGIN TOOLS BALANCE SHEET AS AT 1 AUGUST 20X5$$AssetsNon-current assets Motor vehicle 2,000Shop fittings 3,0005,000Current assets Inventories 12,000Cash 1,00013,00018,000Capital and liabilities Capital 12,000Current liabilities 2,000Trade creditors 4,0006,000Total capital and liabilities 18,000At the end of six months the business had made the following transactions.Goods were purchased on credit at a gross amount of $10,000Trade discount received was 2% on this gross amount and there was a settlement discount received of 5% on settling debts to suppliers of $8,000. These were the only payments to suppliers in the period.Closing inventories were valued at $5,450.GENERAL JOURNALAccount TitleDebitCrediti.Stock at closeTrading A/c1.500.000/=1.500.000/=ii.Bad debtsProvision for Bad debts 30.000/= 30.000/=iii. Prepaid rentRent 100.000/= 100.000/=iv.Wages Accrued (Payable)Wages 300.000/= 300.000/=v.Depreciation (M.V)Provision for Dep1.400.000/=1.400.000vi.Depreciation (Equipment)Provision for Dep (Equipment) 500.000/= 500.000/=When Depreciation is at cost = Straight lineWhen Depreciation is at cost = DiminishingINCOME STATEMENTSales12.000.000/=Less Returns / sales Returns (DR) 50.000/=Net sales11.950.000/=Less: Cost of goods soldOpening stock600.000/=Add PurchasesLess Purchases Returns / Return outNet PurchasesCost of goods available for sale4.000.000/= 500.000/=3.500.000/=4.100.000/=Less Closing stockCost of salesGROSS PROFIT / GROSS INCOMES1.500.000/=2.600.000/=9.350.000/=Add Miscellaneous IncomeDiscount received 80.000/=9.430.000/=Less Operating ExpensesWagesRentElectricityBad debtsSales discount D----Depreciation motor vehicleEquipmentNET PROFIT / NET INCOME1.300.000/= 600.000/= 200.000/= 60.000/= 60.000/=1.400.000/= 500.000/=4.120.000/=5.310.000/=BALANCE SHEETAS AT 31ST-MARCH-1999FIXED ASSETS / NON CURRENT ASSETSCOSTACC DEPWRITTEN DOWN NET BOOK VALUEFIXED ASSETVehicleEquipment 7.000.000/= 5.000.000/=12.000.000/=1.400.000/= 500.000/=1.900.000/= 5.600.000/= 4.500.000/=10.100.000/=CURRENT ASSETStock at closeTrade DebtorsLess provision for Bad DebtsPrepaid rentBankCash 3.000.000/= 90.000/= 1.500.000/=2.910.000/= 100.000/=2.500.000/= 800.000/=7.810.000/=Less CURRENT LIABILITIESTrade creditorsIncome Tax payersAccrued WagesWorking CapitalTotal Net Assets 2.000.000/=3.500.000/= 300.000/= 2.010.000/=12.110.000/=Financed by:CapitalAdd Net Profit 6.860.000/= 5.310.000/=12.170.000/=Less drawings 2.060.000/=10.110.000/=Add Long Term Liabilities /Bank Loan 2.000.000/=12.110.000/=Title of Accountsi.StockTrading 8.000.000/= 8.000.000/=ii.Dep. PlantAcc Dep. PlantDep. Motor vehicle12.000.000/= 6.400.000/=12.000.000/= 6.400.000/=iii.Bad DebtsProv. Bad Debts 1.000.000/= 1.000.000/=iv.Debenture InterestAccrued Debenture Interest 100.000/= 100.000/=v.Prepaid InsuranceInsurance 100.000/= 100.000/=vi.Profit & Loss AppropriationDividends ProposedDividends Payable 5.600.000/= 5.600.000/=vii.DrawingsGeneral Expenses 3.000.000/= 3.000.000/=Lolo Company deals in assorted merchandise. On 31st / Dec / 1999, the following balance was extracted from the Company’s ledger.DrCrOrdinary Share Capital 10.000.000/=6% preference Share Capital 50.000.000/=Land Cost80.000.000/=Building Cost60.000.000/=Motor vehicle Cost30.000.000/=Accumulated Dep. 1st/01/1999Buildings 12.000.000/=Motor vehicles 5.000.000/=Trade Debtors and Creditors7.000.000/= 3.500.000/=Cash4.600.000/=Bank 1.280.000/=Good will1.000.000/=Insurance1.400.000/=Rent1.200.000/=Bad debts 100.000/= +1.000.000/=+ 200.000/=Bad debts provision 400.000/=Creditors (due in excess of 2 years) 13.300.000/=Carriage on purchases / Inwards 3.000.000/=Purchases120.000.000/=Salaries 4.800.000/=Discounts 120.000/= 240.000/=Returns Inwards / Outwards 1.500.000/= 700.000/=Preference Dividend paid on 30th/09/1999 2.500.000/=Sales200.000.000/=Profit & Loss A/C on 1st/01/1999 (Retained earnings) 20.000.000/=General Reserves 6.000.000/=322.420.000/=322.420.000/=The following matters must be put into account before financial statements are prepared.Stock was valued on 3/12/99 at shs 8,000,000 on FIFO basis.Building should be depreciated by 5% on cost and motor vehicles by 10% on reducing balance.December 1999 salaries amounting to 400,000 were paid on 2 / 1/ 2000.Rent was paid on 1 / 1/1999 for a product up to 30 / 6/ 2000.Direct write of bad debts of 200,000 should be made while a ----of 1,000,000 should be made for debts that are doubtful.Stock costing 2,000,000 was given to staff as a bonus at the end of the financial year.The directors proposed to pay the remaining dividend due to preference shareholders.Good will should be written off in full against the General reserve. Required.Enter adjusting information above into a general journal.Prepare the Company’s Trading / profit and loss Account Income Statement including appropriation for the year ended 31 / 12 / 1999.Prepare the Company’s Balance Sheet as 31 / 12 / 1999.GENERAL JOURNALACCOUNT TITTLESDEBITCREDITi.StockTrading A/c 8.000.000/=8.000.000/=ii.Depreciation (Buildings)Accumulated Depreciation (Buildings) 3.000.000/=3.000.000/=iii.Depreciation (motor vehicle)Accumulated Depreciation (motor vehicle) 2.500.000/=2.500.000/=iv.SalariesSalaries Accrued / Payable 400.000/= 400.000/=v.Prepaid rentRent 400.000/= 400.000/=vi.Bad debts written offDebtors 200.000/= 200.000/=vii.Bad debtsProvision for Bad debts 1.000.000/=1.000.000/=viii.PurchasesProfit & Loss Bonus 2.000.000/=2.000.000/=ix.Profit & Loss Proposed DividendDividends Payable / Accrued 500.000/= 500.000/=x.General reservesGood will 1.000.000/=1.000.000/=ii. Depreciation = Buildings = Preference Dividend = 5 x 60.000.000 6 x 50.000.000 100 100 = 3.000.000/== 3.000.000 3.000.000 – 2.500.000 = 500.000/= Depreciation motor vehicleGood will – A Straight Asset = % x Book Value- Purchase - BonusBV = Cost – Accm – Dep120.000.000 – 2.000.000 30.000.000 – 5.000.000 = 25m = 10 x 25.000.000 100 = 2.500.000iii. Prepaid Rent = Bad debts Add written of and prov. For Bad debts 6 x 1.200.000 100.000 + 200.000 + 1.000.000 18 = 1.300.000 = LOLO CO LTDTRADING / PROFIT AND LOSS A/CSales200.000.000Less Returns InwardsNet Sales1.500.000Less Cost of goods sold / cost of salesOpening stock5.200.000198.500.000Add Purchases118.000.000Add Carriage in3.000.000121.000.000Less Returns Out700.000120.300.000NET PURCHASES125.500.000LESS CLOSING STOCKCOST OF GOODS SOLDGROSS PROFIT8.000.000117.500.00081.000.000Add Other IncomesDiscount Received / Purchases discount240.00081.240.000Less Operating ExpensesInsuranceRent1.200.0001.400.000Less PrepaidBad debts400.000100.000800.000Add Prov. & write salariesSalaries1.200.0004.800.0001.300.000Add AccruedDiscount AllowedDepreciationBuildingMotor vehicleStaff Bonus400.0005.200.000120.0003.000.0002.500.0002.000.00016.32.000NET PROFIT BEFORE TAX64.920.000Add Retained Earnings B/F20.000.00084.920.000Less Appropriation (Withdrawals)Interim Preference Dividend2.500.000Add Accrued Preference DividendACCUMMULATIVE RETAINED – EARNINGS500.0003.000.00081.920.000FOR THE YEAR ENDED 31ST/12/1999Un earned fees – CreditorsAccrued Income or DebtorsQuestionThe Book keeper of Teso Ltd prepared the following Trial Balance for the year ended 30th/06/2010.DRCRShare Capital 10.000@ 50.000.000Land 148.000.000Motor vehicles 40.000.000Trade Debtors / Creditors 5.000.000 3.000.000Purchases / Sales 200.000.000350.000.000Returns In 10.000.000 20.000.000Carriage Inwards 8.000.000Bank Balance 15.000.000Cash Balance 25.000.000Discounts 2.000.000Stock 4th/07/2000 4.000.000Bad debts 6.000.000Salaries 40.000.000Miscellaneous Income 7.000.000Insurance 1.000.000Rent 1.500.000Accumulated Depreciation 3.600.000 8.000.000Provision for Bad debts 14.000.000Creditors due in 5 years 30.000.000Profit & Loss A/C (2.900.000)497.000.000497.000.000The Trial balance should be adjusted with the following information at the end of the year in the Trail balance.Closing stock 30 / 6/ 2011 20,000,000.The ---for Bad debts should be reduced to 4,000,000.Stock costing 4,000,000 was stolen by the workers.The land lady demanded rent and was paid on 1st July 2000 for 3 years.The motor vehicle should be depreciated at 20% on reducing balance.Mis---------of 3,000,000 accrued.Long term credit charge interest at a rate of 20% while the Bank charges 10% per an overdraft both were acquired on 1st July 2000.Divided of 200 per share was proposed.Profits amounting to 2,000,000 should be transferred to emergency reserves.RequiredJournalize entries for adjustment ii to ix above.Final Account / Financial statement at the end of the financial year.Provision for Bad debts viii. Dividend = 50.000.00014.000.000 – 10.000 10.000 iv. Rent 1.200.000 1 year = 5.000 3.600.000 – 1.200.000 5.000 x 200 = 1.000.000 Prepaid rent 2.400.000 = ix. T is 2.000.000Motor Vehicle = % x Book ValueBk = Cost – Acc. Dep.40.000.000 – 8.000.00020 x 32.000.000100= 6.400.000vi. Accrued Y7.000.000+ 3.000.000 = 10.000.000vii. 30.000.000 = 20 x 6.000.000 = 1.200.000 5 100TITLE OF ACCOUNTDEBITCREDITStockTrading A/c20.000.000/=20.000.000Bad debtsProvision for Bad Debts4.000.000/=4.000.000Stock stolenPurchases4.000.000/=4.000.000Prepaid rentRent2.400.000/=2.400.000Interest Chargeable Partnership accounts A partnership is a relationship between persons competent of entering a contract and doing a business in common with a view of making a profit. The persons doing the business in common should be competent in the sense in that they shouldn’t be minors but adults and such person should not be bankrupt. Partnership is guided by a partnership deed in writing or implied. It spells the follow; Share of profits or losses Interests on capital Interest on drawings Salary to partners Int on loans from partners Signatories of partnership accounts In the absence of the partnership Dee, the partnership would be guided by the provisions in the partnership Act i.e. No partner will claim int, on k No partner will be changed int, on draw No partner will claim salary from the partnership. Losses will be shared equally If any partner has advanced a loan to the partnership in addition to his capital, he will be entitled to 5% p.a. int on loan. Types of partners Active partners These have capital in the business and also take part in the day to day business management.Sleeping partners These have capital in the business but don’t take part in the day to day business management, however they share in the profits made.Holding out partners These have no capital in the business and don’t take part in the day to day business management of the partnership e.g. in hierarchal politicians. Such persons have reputation and may attract funding for the partnership; they share in the profits and losses of the partnership. Accounting treatment partnership in case of the partnership, the income statement will have 3 parts namely. Trading Account Profits and losses account Profit and loss appropriation accountThe first two accounts one like those of a sole proprietorship. The profit and loss app. Account records transit between the partners and the partnership. Capital accounts of the partnership. The capital accounts of a partnership may be prepared in two ways. Fixed capital accounts In this case, only the capital contribution of the partners is recorded in the capital accounts is recorded in the capital accounts and in an independent account called the current account is maintained to record transit between the partners and the partnership. Fluctuating capital accounts All transitions i.e. capital and other transitions are recorded in the capital account. Accounting entries (i) When partners are entitled to interest on capital. (Dr- P&L appropriation account) Dr- Int on capital account Cr- (current accounts with int due on capital 2. Introduction of capital by partners Dr- Bank/cash account Cr- Capital account with a management introduced 3. Partners drawings Dr-current accounts Cr- Bank account with a management with drawn by partners 4. When partners one entitled to salaries Dr - Partners salary account Cr- Partners current account 5. When partners are charged with int. on drawings Dr- Current account Cr- Int on drawings 6. Sharing of profits /losses (a) Dr – Share of .. (P and L application account) Cr – Current account Thus the P and L account comprises he following items; Int, on capital Int on drawings Partners salaries Share of profits and lossesPartners loan A loan from the partners to the partnership must be shown in the separate account called the loan account and must always carry an int interest on such a loan must be shown in the partners loss account i.e. its a charge against profit. MISSING WORK. TO BE TYPED.Format of an income statement of a partnership business. The income statement of partnership is comprised of 3 parts i.e. Trading account P and L account P and L application account as shown below Sales xxC.O.S xx G.P xx Exp xx N.P xxAdd Interest on drawings A xx B xx xxLess Interest on capital A xx B xx Salary A xx Profit to be shared xxx Share of profit A xx B xx Preparation of a balance sheet The proportion of the assets of the balance sheet un charged the financing section of a balance sheet must reflect the partners financing and will appear as follows. NEF ASSETS xx CAPITAL ACCOUNTSA xx B xx CURRENT ACCOUNTS A xx B xx A B A B Int. on draw XxBalance b/dxxxxDrawing XxInt. on capital xxxxBalance XxSalary sxxxxShare of IIxxxx1. P. and C are in partnership sharing capital and losses in the ratio 3:2 respectively. They are entitled to 5% p.a. int. on capital and their respective int. on drawing were O? 50 and C ?100. C is entitled to a salary of ?500 p.a their capital contribution are P?200 and C?6,000. The net profit before any distribution to partners amounted to ?5000 for the year ended 31st Dec 2000. Required Prepare a P and L appn. Account for the year ended 31st Dec 2000. 2. M and N are in partnership sharing profits equally the partnership trial balance as at 30th June 2001 was as follows. Item /account Dr Cr Building (N.BV) 50,000Fixtures (Cost) 11,000Account depn. (Fixtures)3, 300Debtors /creditors 16,24311,150Stock 30/6/200041,979Cash at bank 6.77 Sales 123,650Purchases 85,416C.O.W (carriage out)1,288Dis. All 115Loan int. 400Loan 40,000Office expenses 2,416 Salaries and wages 18,917 Prov. For B/debts 400Bad debts 503 Capital accounts M 35,000N 29,500Current accounts M 1,306 N 298 Drawings M 6,400 N 5, 650 Additional information 1. Stock at 30/6/2001 was 56,340 2. Expenses accused as at 30/6/2001Office expenses 96 Wages 2003. Depn on furniture is 10% p.a on reducing balance basis while depends on building for the year up to 30/6/01 was ?1,000. 4. The partnership salary of 800 to M was not recorded. 5. Int. on drawings was; M 180 N 120 6. Int on capital balances is provided at 10% as per the prov. in the deed. 7. You are to reduce prov. for balance debts to 320. REQUIRED; Prepare a P and L and P and L application accounts for the year ended 30/6/2001Prepare a balance sheet as at that date N.T A = 117 42l K GOOD WILL Good will is the difference between the value of the business and the fair value of its net separable assets. Characteristics /future of good will Each business has a unique good will which fluctuates continuously as factors affecting it fluctuate. Good will can not be sold separately without selling business as going concern i.e. good will exist as long as a business operates as a going concern. Valuation of good will is highly subjective i.e. it has no scientific components and SSAP22 demands that it could written off immediately. Types of good will Purchased good will This arises from a defined financial transaction and hence it is recorded in fin statements like other fixed assets. However SSAP22 provided for immediate write off of good will after acquisition. Alternatively it can be a mortised over its useful life but not exceeding 40 years SSAP = Statement of standard accounts practice Inherent (non- purchased) good will. This arises in the normal carrying out of business. It is results from a combination of various business activities as a going concern hence non-purchased good will is never recorded in accounts because to do so will be anticipate gains which have not yet been realized. Factors which induce payment of good will. When the business posses monopoly power of favorable contract of UCE. When the new business is to continue trading under the same name of the previous company e.g. UCBL If the business possesses specialized demand skills e.g. expert managers. Possession of trade marks and patents e.g. Coca-cola, Pepsi Cola Where the business has already incurred costs of research and developmentThe nature of a firm product or the reputation of its SVs e.g. price water and copper, British Airways, Earnest young. Freedom from legislative restrictions circumstances necessary ascertaining good will in partnership. At the time of admitting a new partner into establishing partnership the new has to compensate for the share he is going to enjoy. At the retirement or death of a partner from the partnership The combination of ones and two where an old partner is replaced by a new one. At the time of dissolving or closing the partnership including selling the business to an individual or a company.A change in the profit and loss sharing ratio between the partners. A charge in the made of ascertaining P and losses of the firm e.g. in depreciation rates accounting for good will in partnership in accounts by 3 methods; Premium method In hence the new partner brings cash in addition to his capital contribution she excess premium being a good will contribution in the following ways; (i) The cash premium can be paid to the old partners privately and here no acting record is made. (ii) Premium cash paid by the new partner remains in business but no good will accounts maintained. The acting entries are; On receipt of cash - Dr cash account Cr- good will account On write off the good will – Dr- good will account Cr – capital account of the old partners The cash premium by the old partner is withdrawn by the new partners and no good will account is maintained. In addition to the entries in (ii) the follow entries will be affected.Dr – capital accounts (for old partners) Cr – Cash account Revaluation method the new partner brings capital only but agrees to compensate for good will account than by cash. In this case good will account is raised and it is maintained in the books the accounting entries to be made will be. Dr – Good will account Cr – Capital accounts (for the old partners. Memorandum revaluation method in this case good will raise in the books does not remain in the records i.e. it is written off. The accounting entries are; Dr- Good will Cr- capital accounts (for the old partners)Dr- Capital accounts (for the new partners Cr- Good will account Example Partners X, Y, Z have been sharing P and L in ratio 4:3:1 respectively. On Dec. 3. 2000. They agreed to alter their profit sharing ration to 3:5:2 for X,Y,Z respectively the summarized balance sheet of the partnership a sat that date was as follows.Total assets (excluding good will) 14,000,000 Capital accounts X 6, 00,000Y 2,800,000Z 3,200,000On altering P and Loss sharing ratio the partners agreed to recognized good will of 12,00,000Required; Show the balance sheet on 1st Jan 2001 after good will had be taken into account Assume; Good will account is to be maintained in records Good will to be not to be REVALUATION OF ASSETS This maybe done under the follow circumstances Admission of a new partner Change of profit and loss sharing ratios Retirement of a partner Death of a partner The value of assets and liabs may increase or decrease on revaluation. If the value of assets increase then there a loss revaluation. Similar if the value of liabs increase there is a loss on revaluation and if the value of liabs decreases then hence a gain on revaluation Accounting entries When Asset values increase Dr- Asset account Cr- revaluation account with increase in value of the asset On reduction in assets value Dr- Revaluation account Cr- Asset account with reduction in value Increase in value of a liability Dr – Revaluation account Cr- Liability account with increase in value Decrease in value of a liability Dr- Liability account Cr- Revaluation with decrease in value N.B The balance on revaluation account is closed to the partners capital accounts i.e. shared to the partners in their profits and loss sharing ratios.The profit and loss on revaluation In case of a profit on revaluation Dr – Revaluation account Cr- Capital accounts with on revaluation In case of a loss Dr- Capita accounts Cr- Revaluation accounts with the loss on revaluation Revaluation Account Decrease in assets Increase in assets Increase in liability Decrease in liability Share of IIShare of loss Example As B have been in partnership sharing P and L in the ratio 3:2 respectively. The follow is the partnership balance sheet as at 31/12/2001.Plants machinery 1,000,000Good will 2,000,000Stock 1,960,000 Debtor 2,130,000Bank 90,000Creditors (98,000)Total Assets 7,000,000Financed by Capital accounts A 4,000,000B 3,000,000On 1/1/02 they decided to admit C as a new partner on condition that he contributes 2m as capital. The follow assets were to be revalued as follows Plants and mach 2, 000,000 Stock 900,000Other asset s and liabs are to remain at their book value. The partners also agreed that good will is valueless.Required Ledger entries to effect transaction on admission of C Balance sheet of the partnership after admitting C P and M accountBalance b/d 1,800,000Rev. 200,000 balance C/D 2,000,000 2,000,000 2,000,000Stock account Balanced b/d 1,960,000 revaluation 60,000Balance C/D 1,900,0001,960,0001,960,000 Good will account Balanced b/d 2,000,000 revaluation 2,000,000 2,000,0002,000,000Revaluation Account Stock 60,000 plants machine 200,000 Good will 2,000,000 Capital A 3/5 x 1,860,000 b111, 600B 2/5 x 1,860,000744,0002,060,0002,060,000Capital account A B C A B C Loss on Rev 1, 111,600 2 m Balance 4m 3m - Balance c/d 2,888,400 2,256,000Bank 2m4m 3m 2m 4m 3m 2m Bank account Balance sheet Plants and machinery 2,000,000 Stock 1,900,000Debtors 2,130,000Bank 2,090,000Creditors (980,000)7,140,000Capital account A 2, 888, 400B 2,856, 000C 2,000,0007,144,400On dissolution of a partnership, the partnership business may be sold and a going concern to an individual, it may be converted into a limited company or it is assets may be sold individually. When a partnership business is dissolved the proceeds from business are applied as follows , payment of non-partners (debts and laibs) payment of partners loans to the partnership.Payment of partners loans entitlements as per balances on their capital and current accounts procedure and accounting entries. Open a realization account and transfer all the assets with an exception of cash and bank balances to this account the entry is; Dr. Realization account Cr- Assets account with book values of the assets This entry closes all assets accounts in the ledger. When Assets are sold in cash Dr – Bank /cash account Cr- Realization account with the proceeds received3. If a partner takes over an asset Dr- Partners capital account Cr- Realization with the agreed take over value 4. When a liability is paid Dr- Liability account Cr- Bank account with actual amount paid 5. If a partner takes over a liability Dr- Liability account Cr – Capital account of the partner 6. If the amount of a liability paid differ from the book value Dr – realization account Cr- Liability account with the excess paid Dr – Liability account Cr- Realization account (with the discount on the liability 7. Dissolution expenses Dr- Realization account Cr – Bank account with the amount paid 8. Realization account balances Dr – Realization account Cr – Capital accounts with a II on realization (b) In case of a loss on realization Dr – Capital accounts Cr- Realization account with a loss on reduction 9. Transfer the current account balances of the partners into the capital accounts. 10. Close the capital accounts Dr- Capital accounts Cr- Bank account Realization account Assets (NBV) xx Sales xxDissolution expenses xx Dissolution on creditors xxExcess on creditors xx Assets taken xxShare of profit xx Share of loss xx xxx xxxGarner Vs murry rule In case a partner is insolvent and thus unable to meet his dues on dissolution i.e. Dr- Balance on his capital account The solvent partners share the deficiency in the ratio of their capital account balances prior to dissolution unless otherwise stipulated in the deed. BANK RECONCLIATIONUnder the Bank’s system of Accounting, the customers’ cash is a liability and it has to be credited. However, loans given to customers are Assets to the Bank and have to be debited.Standing orders also include mortgage loans where you can direct the Bank to deduct a fixed interest rate. Credit Adice Memo is an advice note sent by the Bank to a customer showing a direct credit. Debit Advice Memo is an advice note sent by the Bank to a customer showing a direct debit.Uncredited cheques are also called (Deposits in transit) refer to the drawer dishonored cheque – this is a cheque which is dishonored because there is no money n the drawer’s account.QN 3 – 144ADJUSTED CASH BOOKDirect CreditsC.M. John 5.000.000/=Dividend 2.000.000/= 7.000.000/=Bal. bf 2.450.000/=Direct DebtsLedger fee 100.000/=Standing order 800.000/=Commission 50.000/=Balance c/f 3.600.000/= 7.000.000/=JANE’S ACCOUNTSTATEMENT RECONCILING OPENING CASH BOOK AND BANK STATEMENT BALANCEBalance as per adjusted cash booksAdd un-presented chequesChq No 20Chq No 21Chq No 22Less un--- chequesChq No 1803Chq No 4204Chq No 3410Balance as per Bank statement400.000/=3.000.000/=4.500.000/=600.000/=1.400.000/=3.500.000/=3.600.000/=7.900.000/=11.500.000/=5.500.000/=6.000.000/=ADJUSTED CASH BOOKBal.bf 6.090.000/=Direct credit 31st/01/1999CM JohnDividend 2.000.000/= 13.090.000/=Direct Debts 31st/01/1999Ledger fee 100.000/=Standing order UEB 800.000/=Commission 50.000/=Balance c/f 13.090.000/=Dishonored cheques. (You just reserve the sides)Bank errors are connected in the Bank statement.Correction of under c----- credit or debt the under cost.ADJUSTED CASH BOOK METHOD 1Bal.bf 6.090.000/=Direct creditsC.M John 5.000.000/=Dividend 2.000.000/=Connection error. (Under cost) 1.800.000/=Credit transfer 600.000/=Interest 200.000/=Connection of error Chq No 43 2.250.000/=Dishonored Chq No 42 3.400.000/= 21.340.000/=Direct debtsLedger fee 100.000/=Standing order UEB 800.000/=Commission 50.000/=Correction of error 40.000/=Connection of wrong posting 800.000/=Connection of error Chq No 46 1.800.000/=Bank charge (Direct Dr) 150.000/=Dishonored Chq No 115 300.000/= 17.300.000/= 21.340.000/=ADJUSTED CASH BOOK METHOD 2Bal. b/f 3.600.000/=Total debts 24.640.000/= 28.240.000/= Total payment credits 16.100.000/=Balance c/f 12.140.000/= 28.240.000/=Note:Under statement of the balance – you also understate as per adjusted cash book (-) over statement of the balance – you also state as per adjusted cash book (-).JANE A/C WITH UCB MAINBANK RECONCILIATION STATEMENT AS AT 28TH/FEB/1999Balance as per adjusted cash book17.300.000/=Add un-presented chequesCheque No 22Cheque No 30Cheque No 36Bank error Cheque No 52214.500.000/= 700.000/=1.800.000/=7.000.000/= 300.000/= 7.300.000/=24.600.000/=Less un-credited ChequesCheque No 1803Cheque No 409Cheque No 813Bank error Cheque NoBalance as per Bank statement 600.000/= 400.000/=1.500.000/=2.500.000/=2.700.000/= 5.200.000/=19.400.000/=INTERMEDIATE ACCOUNTNG.INCOMPLETE RECORDS.KYAMBADDE EDWARD edwardkyambadde@yahoo.co.ukIncomplete records is the term used for any system of bookkeeping which does not use full double entry. There may be many reasons why a firm has incomplete records, but whatever the reason, accounts must be prepared using a number of techniques. Once you have mastered these techniques, you should find incomplete records problems more straightforward. It should be said that the techniques needed to complete examination problems are also used in practice when a client’s records are incomplete.TechniquesThe techniques to be mastered are:preparing an opening Statement of Affairs;preparing the main control accounts;preparing the Bank Account;calculating gross profit;drafting the Profit and Loss Account;drafting the Balance Sheet.It is also important to ensure that you have a sound knowledge of the double entry required for transactions involving sales (both for cash and on credit), purchases (again both for cash and on credit), as well as cash transactions for expenses and other cash received (usually capital introduced). Solving incomplete records problems is a matter of working through each of these steps. If you use standard workings for each, and insert the figures which are given in the question, the problem becomes one of finding the missing figures. Let’s consider each of the steps and the relevant workings.Opening Statement of AffairsWhen a Balance Sheet has to be prepared using estimated values, we refer to it as a Statement of Affairs. The first step is to set out the main headings which are used in a Balance Sheet. We can then use the available information to obtain the relevant values. The main headings which are needed are:Fixed AssetsCurrent AssetsStock?Debtors?Cash and BankCurrent IiabilitiesCreditors?Bank overdraft?LoansCapitalMake sure you have learned these headings before your exam.Your first task is to set out these headings and then review the question for the relevant information so that you can insert the values for as many figures as possible.Usually there will be two values missing:Fixed assets and capitalAs capital is the balancing figure, it is usually necessary to work out the value for fixed assets. A methodical approach is important here. The question will usually tell you when the various assets where acquired, as well as the depreciation policy. Your task is to calculate the net book value at the date of the Statement of Affairs by starting with the year of acquisition and applying the depreciation policy to obtain the net book value at the end of that year. Repeat that process for each year until you have reached the date of the Statement of Affairs. Once you have the value for fixed assets, the capital balance can be calculated:Fixed assets + current assets – current liabilities = capitalControl AccountsControl accounts are needed for :debtors?creditors?cashAn article in the May edition of the Technician Bulletin on the topic of Reconciliations described how to construct control accounts for debtors and creditors.Using the same principle, the Cash Account can be constructed as follows:The opening balance for cash will be obtained from the Statement of Affairs. This will be increased by the debit entry for cash received, and reduced by the credit entries for amounts lodged to the bank and amounts paid as cash expenses and drawings.This means that the three control accounts are as shown in?Figure 1.Figure 1Debtors ControlOpening balance b/dxxxxxCash received from debtorsxxxxxSalesxxxxxDiscount allowedxxxxxClosing balance c/dxxxxx_____xxxxx?__________xxxxx?_____Balance b/dxxxxxCreditors ControlPayments to suppliersxxxxxOpening balance b/dxxxxxDiscount receivedxxxxxClosing balance c/dxxxxxPurchasesxxxxx_____xxxxx?__________xxxxx?_____Balance b/dxxxxxCash AccountOpening balance b/dxxxxxLodgementsxxxxxCash receivedxxxxxCash expensesxxxxxDrawingsxxxxxClosing balance c/dxxxxx_____xxxxx?__________xxxxx?_____Balance b/dxxxxxBank AccountThe opening balance for the Bank Account will also be obtained from the Statement of Affairs. You need to take care however as the balance may be either a debit (cash at bank) or a credit (overdrawn). The value of cash lodged will be a debit entry, and the value of cheques issued will be a credit entry. The closing balance will be the balancing figure. Once again make sure you take care over whether the balance is cash on hand or an overdraft. The layout for the bank account is shown in?Figure 2.Figure 2Bank AccountOpening balance b/d(if cash at bank)?xxxxxOpening balance (if overdrawn)xxxxxLodgementsxxxxxCheques issuedxxxxxClosing balance c/d (if overdrawn)xxxxxClosing balance c/d (if cash at bank)xxxxx_____xxxxx_____Balance b/d (if overdrawn)_____xxxxx_____Balance b/d (if cash at bank)xxxxxGross profitGross profit is calculated by deducting cost of sales from the value of sales. Questions often require the calculation of either margin or mark up.MarginIf margin is to be used, the value of sales will already have been calculated as the total of credit sales (derived from the Debtors Control Account) and cash sales (derived from the Cash Account). The gross profit is found by applying the % margin to the value of sales.For example, if sales are ?80,000 and the margin is 20%, the gross profit will be ?80,000 x 20% = ?16,000.In questions which involve this calculation, you may have to derive the closing stock value from the resulting cost of sales. The opening value of stock will be taken from the Statement of Affairs. The value of purchases will be the total of credit purchases (derived from the Creditors Control Account) and cash purchases (derived from the Cash Account). Closing stock will be the balancing figure in the calculation:Sales – cost of sales = gross profitCost of sales = opening stock + purchases – closing stockMark UpFirst of all remember that mark up is gross profit expressed as a percentage of cost of sales. Questions requiring a mark up calculation will have provided all the figures to calculate cost of sales. The problem will be that the Debtors Control Account cannot be completed as two figures are missing — one of which is sales.In this case calculate the gross profit as follows:Cost of sales x mark up % = gross profitTherefore, total sales = cost of sales + gross profit and credit sales = total sales – cash sales.Profit and Loss AccountWhen constructing the Profit and Loss Account, there are two main points to remember. The first is that expenses must include both cash expenses and expenses paid by cheque. The second is that depreciation must be included — but remember to include any assets acquired during the year!Balance SheetPreparing the Balance Sheet should be relatively straightforward.Fixed assets= value from the statement of affairs?+ new assets?– depreciation for periodCurrent assetsStock = Closing stock as calculated in cost of sales?Debtors = Closing balance on the Debtors Control Account?Cash = Closing balance on the Cash Account?Bank = Closing balance on the Bank Account (if cash on hand)Current LiabilitiesCreditors = Closing balance on the Creditors Control Account?Bank = Closing balance on the Bank Account (if overdrawn)Capital = Balancing figure which can be confirmed as:opening balance from the Statement of Affairs?+ profit from the Profit and Loss Account?– drawings?+ capital introducedSummarySteps in completing incomplete recordscomplete the opening statement of affairs;set out the standard workings;insert the figures from the question;calculate the missing figures;draft the required accounting statements.Incomplete records - ExamplesExample 1Tony Cook is a self employed plumber. His financial details for the years ended 1999 and 2000 showed:?19992000Assets: ??Motor Vehicle6,500 5,500Equipment2,5002,000Stock7501,650 Cash at Bank9001,300?10,65010,450 Less Creditors750650 ??9,900?9,800Tony’s drawings for the year were ?10,650. He had sold some shares for ?1,050, the proceeds of which he had paid into his business bank account.Thus, profit for the year can be calculated as:?? Capital at start of the period9,900Add capital introduced (sale of shares)1,050?10,950Drawings for period 10,650?300 Capital at the end of the period9,800Net profit9,500??so: Capital at start of year9,900Add capital introduced 1,050?10,950Add profit for year9,500?20,450Less drawings10,650Capital at end of year9,800The balance sheet figures should be supported by reconciled bank statements, unpaid sales invoices totalling the sum included as debtors, unpaid purchase invoices totalling creditors, and receipts for payments for fixed assets along with depreciation calculations.Example 2A similar approach can be used to determine sales and purchases totals, when given a cash book showing receipts and payments, together with opening and closing debtors and creditors. The following illustrates the use of such techniques.John Risdon is a self employed motor engineer. He maintains a cash book to record his business receipts and payments. The following is a summary of the cash book for year ended 31 December 2000:Cash Book??Balance b/d1,500Cash received from work done 39,300Sale of own car 4,000???????????44,800 ??Drawings14,100Materials17,300Van running expenses4,100Wages, trainee5,100Admin250Tools and consumables600General expenses350Balance c/d3,000??44,800 Assets and liabilities at 31 December 1999 and 2000 were: ?1999? 2000? Motor van7,5005,000Stock materials1,3501,450Debtors for work done3,4003,750Creditors for supplies1,2501,450Van insurance pre-paid160170The motor vehicle had been purchased second hand on 1 January 1999 for ?10,000 and is subject to depreciation at 25% per annum, straight line, (that is, it is being written off over four years, its expected useful economic life).This information can be used to produce statements for the year ended 31 December 2000.Opening capital can be arrived at by using the “accounting equation”.?? Assets:?Motor van 7,500 Stock1,350Debtors3,400Cash at bank1,500Pre-payments 160 ?13,910 Less creditors1,250 Capital?12,660 (see cash book summary)??Work done during the year:???Cash received during the year39,300Less owed at start of the year 3,400 ?35,900 Add owed at end of the year3,750 ??39,650This can also be shown in the form of a control account:Sales Ledger Control 2000? Balance b/d3,4002000 Work done39,650?43,0502001 Balance b/d3,750 2000?Receipts from debtors (cash book)39,300Balance c/d3,750?43,050??Likewise the purchases and motor van running costs (where, because opening and closing creditors and debtors, the insurance pre-payment; and the actual amounts paid are all known, the charge for the year can be calculated).Purchase Ledger Control ??2000 Payments to creditors for materials17,300??Balance c/d1,450 ?18,750????2000 Balance b/d1,2502000 Purchases17,500???18,7502001 Balance b/d 1,450?Motor Van Running Costs ??2000 Balance b/d (pre-payment)160 2000 Payments4,100?4,2602001 Balance b/d170??2000 Charge for year4,090Balance c/d 170?4,260??Notes for Preparation of the Final AccountsNB: The difference between the opening and closing motor van valuation (?7,500 – ?5,000 = ?2,500, is the depreciation charge for the year, ie: (?10,000 x 25% per annum).The proceeds from the sale of the personal motor vehicle, which were paid into the business bank account, represent capital introduced. Other costs are shown in the summary cash book extract. We can now draft the final accounts for the year ended 31 December 2000.Trading and Profit and Loss Account of J Risdon for Year Ended 31 December 2000 ???Work done ?39,650Opening stock of materials1,350?Add purchases17,500??18,850?Less closing stock of materials1,450?Cost of materials used?17,400Gross Profit?22,250Wages5,100?Motor vehicle running costs4,090 ?Administration250?Tools and consumables600?General expenses350 ?Depreciation motor van2,500???12,890Net profit for year??9,360Balance Sheet as at 31 December 2000?Cost? Depreciation? Net Book ? Fixed assets:???Value ???Motor van10,0005,0005,000Current assets: ???Stock?1,450 ?Debtors?3,750 ?Cash at bank?3,000?Pre-payment?170 ???8,370 ?Less: ???Current liabilities: ???Creditors?1,450?????Net current assets??6,920Total assets less current liabilities??11,920Financed by: ???Opening capital??12,660Add capital introduced??4,000???16,660Add profit for year??9,360???26,020Less drawings??14,100???11,920MANUFACTURING ACCOUNTS(ACCOUNTS FOR MANUFACTURING FIRMS)Manufacturing firms or organizations transform or process raw material inputs into finished goods or products, they add to the raw material inputs but ------not cheaply merchandising. After manufactured goods are sold to customers through wholesale or the firms’ retailing them through their own outlets.Accounts maintained by manufacturing firms are quite different from those maintained by retailing firms.Manufacturing firms incur manufacturing costs and therefore have to keep Cost Accounts.Manufacturing costs are broadly divided into two.DIRECT COSTSThey are costs that are traceable or can be directly liked to a particular cost centre. For example; Department, a process, a job and so on. Direct costs can also be directly charged or allocated to cost units.Cost centre are cost units. They consist of direct material (raw materials), direct------(direct wages) and direct expenses. The ----of direct costs is called “Prime cost”.OVERHEAD COSTS (Indirect costs).There are indirect costs that can not easily be traced to a particular cost centre or cost unit. Overhead costs include; indirect material costs, indirect labour costs and indirect expenses.Since overhead costs can not be linked to or associated with only one cost centre, they must be apportioned to cost centers and thereafter to cost units using suitable bases.Sometimes manufacturing costs other than material costs are called “conversion costs”.Examples of Direct costs and Indirect costs.NOTECosts can also be categorized as product costs and period costs. Product costs are manufacturing costs that should be included in the cost of sales and closing stock.Period costs are costs that accrue or charged according to the period that the goods are sold. There are costs that are written off in profit and loss account. Period costs mostly include; office and administrative costs, selling and distribution costs and financial costs (Bank charges). Period costs should not be included under cost of goods sold. That period costs can also be classified as variable costs and fixed costs.Variable costs.These are costs that change when output increase or decreases.Fixed costs.These are costs that do not change irrespective of whether output is increased or reduced. A fixed cost for 1 unit is the same cost for 1 million more units.MANUFACTURING ACCOUNT / STATEMENTCosts related to manufacturing are collected in the manufacturing account or statement during a stated period. It shows the cost of manufactured goods.CONSTRUCTION OF A MANUFACTURING ACCOUNT OR STATEMENT.A manufacturing account or statement is constructed from the following:Cost of raw materials consumed or used. The cost of raw material consumed or used in production is determined by adding purchases of raw materials to ---stock and subtracting closing stock of raw materials.Direct labour cost / wages. Direct wages are paid to workers directly concerned with production and their wages are traceable to a cost center. Direct labour cost / direct wages are added to the cost of raw materials consumed.Non-Profit Making Organisations. [NPM]IntroductionThis resource aims to give students help with financial statements from non-profit making organisations including clubs and societies. The nature of these types of organisations means that students should also be able to understandDefinition of NPMAccounting for NPMCommon terms usedAccounts preparedEffect of life membership schemes and donations.What are non-profit making organisations? Are they businesses that make losses? Are they businesses that are run badly?Non-profit making organisations are also known as 'not for profit' organisations and this is the name we give them simply because they want to do something or provide something rather than make more and more money.What kind of organisations are we talking about that just want to do something rather than making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's Club? They are probably examples of non-profit making organisations. Here's a bigger list!AssociationsClubsSocietiesUnionsCharitiesUniversitiesChurchesThe members of these organisations are normally the only people interested in themThey are usually very simple organisations:Not that many membersNot a huge amount of money involvedNot that many activitiesIn lots of cases the only thing that the Treasurer (the bookkeeper or accountant) of a club or society needs to do is to keep track of the cash and not a lot more than that. Well, why bother with having to set up a full set of ledgers for a Youth Club that has, say, 50 members paying subscriptions of ?10 a year that meets 10 times a year and just has one dog show and an annual dinner each year? Not worth the bother is it?Jargon busterThe cash account or cash book is called the Receipts and Payments Account and the Trading and Profit and Loss Account is called the Income and Expenditure Account. Profits are not called profits, they are called surpluses (or deficits if it's a loss) and the capital account isn't the capital account now, it's called the accumulated fund.Profit Making JargonNon-Profit Making JargonCash BookProfit and Loss AccountProfitLossCapital AccountReceipts and Payments AccountIncome and Expenditure AccountSurplusDeficitAccumulated FundLet's just accumulateThe capital account is called the Accumulated Fund and that tells us that there are no private owners who have the right to keep the profits themselves or take an income from the organisation and so on - non-profit making organisations belong to all of their members together.Guess what they call the balance sheet, by the way? It's still called the balance sheet!Collecting dataWhat data will a fairly simple club or society collect? For lots of them, they will receive money for:SubscriptionsSale of refreshmentsRaffles and other competitionsSale of publicationsAnnual dinner ticket salesInterest on deposit account at the bankSale of old equipmentReceipts will come from such things as:Purchase of refreshmentsPurchase of raffle prizesCosts of running an annual dinnerPurchase of new equipmentRent of hallIn the simplest of all cases, all we need to do at the end of a year is to prepare an account like this:ReceiptsPaymentsSubscriptionsPurchase of refreshmentsSale of refreshmentsPurchase of raffle prizesRaffles and other competitionsPurchase of publicationsSale of publicationsCosts of running annual dinnerAnnual dinner ticket salesPurchase of new equipmentInterest on deposit account at the bankRent of hallSale of old equipment?Then there would be a balance carried down which is either positive or negative depending on whether they received more than they spent or spent more than they received. Let's put some figures to this example now to see how it works; but don't forget, we are dealing here with a receipts and payments account which is the same as a cash book so there are no accruals and prepayments to take into account.ReceiptsPaymentsBalance b/d1,250Purchase of refreshments923Subscriptions1,219Purchase of raffle prizes337Sale of refreshments704Purchase of publications79Raffles and other competitions118Costs of running annual dinner314Sale of publications126Purchase of new equipment421Annual dinner ticket sales404Rent of hall110Interest on deposit account at the bank11Balance c/d1,962Sale of old equipment314??4,146?4,146That's it! Wasn't too bad was it? Now try a question of your own - very, very similar to the one you just saw!For You To Do 1:Prepare the Receipts and Payments Account for the Russian Culture Society for the year 2004.Subscriptions1,346Purchase of new equipment512Costs of running annual dinner264Sale of refreshments591Purchase of publications63Annual dinner ticket sales530Purchase of refreshments804Interest on deposit account at the bank15Sale of old equipment258Rent of hall112Sale of publications142Purchase of raffle prizes322Raffles receipts101Balance b/d1,286Balance c/d2,192? Now try this - this question looks a lot different but the method is just the same as the previous question.For You To Do 2:Prepare the Receipts and Payments account for the Steel Social Club from the following information. As part of your answer you need to calculate the cash balance c/dFor You To Do 3:Prepare the Receipts and Payments account for the Kabojja Youth Society for the year ended 31 December 2010 from the following information.Kabojja Youth Society for the year ended 31/12/10??Cash Balancesb/d467?c/d331?PaymentsRefreshments554?New equipment1576?Rent of hall360?Local government levy125?Printing costs55?Stationery costs71?Postage and telephone39?Repairs to equipment322?Lighting and heating200?Wages847?Annual dinner expenses1085?Lottery prizes513ReceiptsSubscriptions2311?Sale of annual dinner tickets1886?Lottery tickets1093?Refreshments321Receipts and Payments AccountClubs and societies prepare a Receipts and Payments Account that just tells us what has been received and paid in cash.Let's prepare an Income and Expenditure Account now by looking at a very similar example to but this time with a couple of adjustments. In horizontal format prepare the IEA for the Kabojja Youth Society for the year 2010 from the following list of balances and adjustments that follow.In vertical format prepare the IEA for the Kabojja Youth Society for the year 2010 from the following list of balances and adjustments that follow.ReceiptsBalance b/d1,307Rent of hall101Sale of old equipment378Costs of running annual dinner290Purchase of new equipment516Purchase of publication65Purchase of refreshments1,004Subscriptions1,009Purchase of raffle prizes390Raffles receipts134Sale of publications107Sale of refreshments682Interest on deposit account at the bank11Annual dinner ticket sales448Balance c/d?AdjustmentsSubscriptions not yet received161Annual dinner ticket money still owing45Rent of hall paid in advance11Worked Example Solutiona. Make sure you agree with this horizontal style IEA:Kabojja Youth Society Income and Expenditure Account for the period ended 31/12/10ExpenditureIncomeRent of hall90Subscriptions1,170Costs of running annual dinner290Raffles receipts134Purchase of publication65Sale of publications107Purchase of refreshments1,004Sale of refreshments682Purchase of raffle prizes390Interest on deposit account at the bank11Surplus of Income over Expenditure758Annual dinner ticket sales493?2,597?2,597Have you spotted this?This is exactly how it should behave according to double entry bookkeeping principles and it's the same as this:Here is how we have dealt with the adjustments - we have shown these adjustments in two ways, side by side:as a simple calculation, andin ledger account formatSubscriptions: this is revenue??Subscriptions AccountAmount received, shown in the RPA1,009?IEA1,170RPA1,009Plus amount is owing for this year but not yet received161??Accrual c/d161Amount that should have been received during the year1,170??1,170?1,170Receipts and payments. [ RPA]Annual Dinner: this is revenue??Annual Dinner AccountAmount received, shown in the RPA448?IEA493RPA448Plus amount is owing for this year but not yet received45??Accrual c/d45Amount that should have been received during the year493??493?493Rent of Hall: this is a cost??Rent of Hall AccountAmount paid, shown in the RPA101?IEA101RPA11Less amount paid in advance11??Accrual c/d90Amount that should have been paid during the year90??1,170?1,170b. Now the vertical style IEA for the Kabojja Youth Society for 2010.Kabojja Youth Society Income and Expenditure Account for the period ended 31/12/10?Subscriptions1,009?plusSubscriptions not yet received1611,170??Raffles receipts?134??Sale of publications?107??Sale of refreshments?682??Interest on deposit account at the bank?11??Annual dinner ticket sales448?plusAnnual dinner ticket money still owing45493??2,597?Less: costs for the period??Rent of hall101?lessRent of hall paid in advance1190??Costs of running annual dinner?290??Purchase of publication?65??Purchase of refreshments?1,004??Purchase of raffle prizes?3901,839?Surplus/(Deficit) for the period?758Notice how the adjustments have been incorporated very nicely within the vertical format. It is possible to do the same with the horizontal format but it doesn't look so nice!These examples help us to learn the Golden Rules of Adjustments:RevenuesCostsOwing but not received in the periodAdd to RPA amountOwing but not paid in the periodAdd to RPA amountReceived but relates to next periodSubtract from RPA amountPaid but relates to next periodSubtract from RPA amountEnd .REVISION QUESTIONS.1………………..are methods developed for applying fundamental concepts a) Accounting policies b) Accounting standards c) Accounting principles d) None of the above2. Costs incurred to facilitate the sale of goods should be charged to; Trading account Profit and loss account Balance sheet None of the above 3. Which of the following are incorrect when a sole proprietor uses only his financial resources to finance his business? Assets = liabilities + owner’s equity Assets = Owners equity Owner’s equity = Assets – liabilities Liabilities = Assets + Capital (ii) and (iii) (i), (iii), and (iv) (ii), and (iv) (ii) Use the following information for question 4 and 5 A machine was acquired on 1/12005 at a cost of UGX 20,000,00 expected to be used for 10 years and then will be disposed off for UGX 1,000,00. It is depreciated using double declining balance method and the company’s policy is to charge full year’s depreciation in the year of acquisition and none in the year of disposal. 4. The company’s accounting period begins on 1st January and ends on 31st December, the depreciation charge for the year ended 31st/ 12/2006 is. UGX 3,200,000 UGX 4,000,000UGX 3,800,000UGX 5,200,000 5. On 3rd March 2007 the machine was disposed off for a cash amount of Shs 9,500,000. The entries recorded on receipt of the cash were; Debit cash account and Credit sales account by UGX 9,500,000Debit cash account and Credit machine account by UGX 20,000,000 Debit cash account and Credit machine disposal account by UGX 9,500,000Debit cash account and Credit machine disposal account by UGX 20,000,0006. The credit customer’s personal accounts are found in the; General ledger Purchase ledger Sales ledger None of the above Use the information given below to answer question 7 and 8 Audit of SORGHUM LTD’S books of accounts revealed that fuel expenses payable had been under- added by UGX 120,000 and rental income receivable had also been under-added by UGX 120,000.7. The above error is; An error of complete reversal A compensating error An error of commission An error of principle 8. To correct the error above is SORGHUM LTD’S books, Debit fuel expenses payable accounts and credit rental income receivable account by UGX 120,000Debit fuel expenses payable accounts and credit cash account by UGX 120,000 Debit cash account and credit rental income receivable account by UGX 120,000 None of the above. 9. Gross profit for an accounting period is credited to the Trading account Capital account Current asset account Drawings account 10. A provision for doubtful debts is created When debtors become bankrupt When debtors cease to be in business To provide for possible bad debts To write off bad debts SECTION B: In this section attempt QUESTION TWO and any other two QUESTION TWO: The following Trial balance was extracted from the books of A.N.L AGENCIES LTD for the Financial year ended 31.12.2006 PARTICULARS DEBIT (Shs) CREDIT (Shs)Premises 21,200Purchases 43,600Furniture & Fitting (Cost)14,000Inventory 1.1. 2006 3,200Equipment (cost)8,000Bad debts 400Bank 24,400Cash 3,640License Fees 7,960Trade Debtors 19,000Salaries 13,060Returns inwards 7,000Utilities 9,040Rent Expenses 3,600Provision for Bad debts 720Ordinary Share Capital 32,000Returns outwards 6,200Profit & Loss Account 4,200Interest rec. on bank deposit 6,200Sales 83,400Trade Creditors 20,500Bank Loan 20,000Accumulated Depreciation: Furniture & Fittings Equipment 2,9201,960TOTAL 178,100178,100The following additional information is also provided; Inventory as at 31.12.2006 was valued at Shs. 4,800 Prepaid salary expenses amounted to Shs. 400 Interest of Bank deposit of Shs, 800 accrued at the end of the year. The figure for utilities includes Shs. 1, 400 relating to purchase of Furniture and Fittings. Directors proposed on 30.12.2006 to pay dividend of Shs, 2, 400 to shareholders. Depreciation on Furniture and Fittings and Equipment is at a rate of 20% on Reducing Balance Method. Rent of Shs. 1,200 remained outstanding at the end of the year. REQUIRED:Journalize the additional information provided above ( 4 marks)Prepare A.N.L agencies’ Income – Statement, Statement of Changes in Equity and a Balance- Sheet at the close of the Financial Year ended 31.12.2006 (16 marks)QUESTION THREE: The following data was obtained from CHOGM MANUFACTURES LTD as at December 31, 2006. UGX 000Sales 500,000Raw material purchases 200,000Royalty cots 20,000Carriage in (Raw materials 500 Direct wages 60,000Sales discounts2,500Indirect factory wages 12,000 Sales returns 3,000Manufacturing expenses 8,000Show room expenses 3,000Depreciation 4,000Insurance 16,000Salaries 40,000Office stationary 100Bad debts 400Accounting fees 14,000Electricity 24,000 The following information is also relevant. 1. Stock at cost Jan 1, 2006 Dec 31, 2006 Raw materials 16, 000 12,000Finished goods 20,00024,000Work in progress 6,000 8,000Other balances Accrued salaries 5,00010,000Prepaid electricity 4,000 6,0002. The following overheads should be apportioned as follows Factory Head office Sales department Insurance 20%60%? Electricity ? ? ? Salaries 20% 40% 40% Depreciation- Factory equipment 1, 000,000 - Office building 1,000,000- Delivery van 2,000,0003. The company transfers manufactured goods at cost plus a markup of 10% to cater for factory profit. Accounting finished goods are inflated by the same percentage. Required: Prepare CHOGM LTD manufacturing, trading and profit and loss account for the year ended d December 31, 2006.5QUESTION FOUR Briefly explain the purpose of bank reconciliation (2marks)The information below relates to GOOD NEWS TRADERS. Extracts from the Bank Reconciliation Statement for GOOD NEWS for the month of July 2007 indicate the following: Uncredited cheques:UGXCheque No. 004 1,000,000Cheque No. 623 4,500,000Unpresented cheques Cheque No, 10 500,000Cheque No. 12 2,500,000CASH BOOK FOR THE MONTH OF AUGUST 2007 Dr Cr Balance b/d 11,000,000Cheque No. 20 800,000Cheque No. 2515 1,000,000Cheque No. 211,200,000Cheque No. 1119500,000Cheque No. 222,000,000Cheque No. 9903,000,000Cheque No. 23600,000Cheque No. 224 2,400,000Cheque No. 24 200,000Cash 900,000Cheque No. 261,400,000Cheque No. 414 1,800,000Cheque No. 272,400,000Cheque No. 666700,000Cheque No. 28700,000Cash 1,300,000Cheque No. 30 1,800,000Cheque No. 804 2,100,000Standing Order -UBL 900,000Cheque No. 707 3,400,000Cheque No. 31 1,300,000Credit Memo – Pamela 900,000Balance c/d18,300,00030,300,00030,300,000BANK STATEMENT FOR AUGUST 2007 DETAILS DR CR BALANCE Balance b/d 8,500,000Cheque No. 22 2,000,0006,500,000 24 200,0006,300,000 6234,500,00010,800,000 9903,000,00013,800,000Credit Memo – Pamela 900,00014,700,000ChequeNo. 21 2,100,00012,600,000122,500,00010,100,00020800,0009,300,00025151,000,00010,300,0001119500,00010,800,000Standing Order – MCHOICE 900,0009,900,000Cheque No. 2244,200,00014,100,000Cash 900,00015,000,000Cheque No. 261,400,00013,600,000272,400,00011,200,00060015,000,00016,200,0004141,800,00018,000,0008042,100,00015,900,000313,100,00012,800,000Credit Memo –Jamila 1,300,00014,100,000Cheque No. 28 700,00013,400,000Ledger fee 500,00013,350,000Dividend 1,500,00014,850,000Additional information: Where the figures in the cash book and the bank statement differ the mistakes were made in the cash book and the corresponding double entries. Assume the cheques are from credit customers or paid to credit suppliers. Cheque No. 31 and 804 were entered on the wrong side of the cash book and bank statement respectively.Required: In respect of the books of GOOD NEWS TRADERSPrepare an updated cash book for the month of August 2007 after receipt of the Bank statement(9 marks) Prepare the bank reconciliation statement as at 31.8 2007 (9 marks) QUESTION FIVE With relevant examples, distinguish between capital and revenue expenditure (5 marks)The following information relates to Motor vehicles On January 1, 2002 the company had only one Range Rover number UAA 1123 Z and its details are shown in the Balance sheet as at that date as follows. Cost Accumulated depreciation Net book value Motor vehicles 52,000,000 32,000,00020,000,000Other relevant information includes:The company bought a Tpyata Corona number UAE 1544 A on April1, 2002 at UGX 2, 000,000 On June 4, 2003, The Company bought another car, A Hammer number ‘KIWEDDE 001” at UGX 3, 000,000. The third car a Benz M class number UAJ 1222X was bought at UGX 4,000,000 on September 30, 2004. The Toyota Corona was disposed off on October 5, 2004 for UGX 1, 200,000 and the Hammer car was disposed off on October 1, 2005 for UGX 1,800,000 All motor vehicles are expected to last for 10 years at the end of which, they will have Zero scrap value. It is the company’s policy to charge full year’s depreciation in the year of acquisition and none in the year of disposal using the straight line method. All payments are by cash. Required: Show how the following accounts will appear at December 31, 2005 i) Motor vehicles (5 marks)ii) Disposal of motor vehicles account (5 marks) iii) Accumulated Depreciation on motor vehicles account(5 marks) SECTION C: Select only one question from this section. Be concise and precise QUESTION SIX: Explain the stages that accounting go through to prepare final accounts at the end d of a financial year ( 10 marks) Explain the parties that would be interested in these final accounts clearly explaining how hey would be of help to them (8 marks) Distinguish between a sale and disposal of non current assets (2 marks) QUESTION SEVEN: Your are a Head of DAVID INVESTMENT LTD , a company that was engaged to manage the pre- CHOGM construction work . You have been tasked by the Public accounts committee to present evidence of proper utilization of resources. Giving examples, explain the ways through which you would perform the task. (10 marks)Write short but concise notes about each of the following accounts concepts. Going concern concept Business entity concept Accruals concept Monetary concept Matching concept (2 marks each concep0t x 5 concepts = 10 marks) EndQUESTION ONE Select the best alternative. Answer all sub- parts of this section on your answer sheets NOT o n the question paper. i) Which accounting concept requires the practice of crediting inventory to the trading account? Conservatism Consistency Matching Going concern None of the above ii) Which of the following concepts recognizes income when a customer has accepted the good or services and is obliged to pay for the items? Accrual Matching Realization Produce None of the above iii) Mina started business with Shs. 24,000,000 cash. She acquired a bank loan of Shs 16,000,000 which she deposited to a newly opened business bank account. She purchased stock of goods worth shs. 14, 000,000 on credit sold ? of the goods to Jamal at shs 9,000,000 on credit. She bought and received shs 7,000,000 from debtors through the bank. Which of the following accounting equations is a correct record of the above? Asset = Liabilities + Owner’s Equity 51,000,000 = 14,000,0000 + 37,000,00056,000,000 = 14,000,00 + 42,000,00052,000,000 = 10,000,000 +42,000,00050,000,000 = 10,000,00 + 40,000,000None of the above. iv) Which of the following is a correct sequence in an Accounting cycle/process Journals – documents- ledgers – trial balance – final accounts Documents – journals- ledgers – trial balance – final accounts. Trial balance – final accounts – ledgers- journals – documents Ledgers- journals – documents – trial balance – final accounts None of the above.v) The following are books of original entry except Worksheet General journal Cashbook Returns inwards book None of the above vi) Rental income received during the year amounted to 650,000=. Outstanding rental income as at 31/12/2007 amounted to Shs. 70,000. The amount to be charged to the P and L a/c is? 880,000Cr720,000Dr580,000Dr 720,000Cr None of the above vii) What is the accounting treatment for a decrease in the provision for bad debts? Dr. Income Statement Cr. Accounts Receivables Dr. Bad Debts Cr. Income Statement Dr. Provision of Bad Debts Cr. Income Statement Dr Bad Debts Cr. Provision of Bad Sheet None of the above viii) Accelerated methods of depreciation are used because: Assets are less productive in the early years of their economic life Of the legal requirements Of the need to pay more tax earlier than later They are easy None of the above ix) Income received in advance is shown as ………….in the balance sheet. An asset A liability Owners equity Income of the above None of the above x) Which of the following statements most accurately describes a balance sheet? A list of receipts and payments and showing a balance at the end A statement that shows net worth of the organization A list of assets and claims against the organization A statement of total Equity and Liabilities None of the above QUESTION TWO The following were the transactions of Majumoto Ltd for the month of January 2008 1st Jan Majumoto limited started business with cash of UGX 20,000,000 and money at the bank of UGX 30, 000,000 3rd Jan purchased goods for UGX 6,000,000 cash 6th Jan Bought a Motor vehicle for UGX 10,500,000 by cheque 7th Jan Sold goods for UGX 3,000,000 cash. 15th Jan purchased more goods on credit from TK Ltd worth UGX 5,000,000. 20th Jan obtained a Bank loan of UGX 30,000,000 cash. 23rd Jan Sold goods for UGX 2, 000,000 on credit to Mary 25th Jan Mary paid UGX 800,000 cash. 26th Jan goods on credit to Peter for UGX 1,000,000. 29 Jan Purchased goods from John on credit for UGX 3,000,000. Required Enter above transactions in the company’s General Journals Post the transactions to the relevant ledgers Extract a Trial Balance QUESTION ONE Choose the most appropriate answer ABC Ltd paid rent expenses worth UGX 36,000,00 on 1st July 2005 covering a period up to 3oth June 2006. which of the following is the correct adjusting entry for rent expense relating to the financial year ended 31/12/2005? Dr. Rent expense UGX 18,000,000, Cr, Prepaid rent UGX 36,000,000Dr. Prepaid rent UGX 18,000,000, Cr, Rent expense UGX 18,000,000 Dr. P and L UGX 36,000,000, Cr. Prepaid rent UGX 36,000,000 Dr. Prepaid rent UGX 24,000,000, Cr. P and L UGX 24,000,00 The surplus of assets over liabilities is termed as Net profit Excess of income over expenditure Capital Working capital Use the information below to answer questions between iii and v. Computer Ltd bought a computer on 1st January 2002 for use in business at a cost of UGX 10,000,000. The Company’s policy was to depreciate the computer at a rate of 20% per annum on cost. On 31/12/2006, the company decided to dispose off the computer at UGX 6,000,000 since its CPU capacity couldn’t cope up with the volume of work. What was the accumulated depreciation by December 31, 2006?UGX 4,000,0000UGX 5,000,000UGX 6,000,000UGX 1000,000 What was the gain or loss on disposal? UGX 10,000,000UGXUGX00,000UGX 4,000,000What was the gain or loss on disposal? Loss of UGX 4,000,000Gain of UGX 6,000,000Gain of UGX 4,800,000Gain of UGX 16,000,000Which of the following is a mismatch? Accounts receivable Insurance paid in advance Commission fees receivable Un earned incomes (vii) Which of the following concepts requires debiting of accrued rent to the income statement? Matching concept Materiality concept Periodicity concept Additional information Stock loss worth 900,000 was omitted Rent income from Paul Scores & Co. Ltd amounting to UGX 100,000 per month accrued. Depreciate Furniture & Fittings and Motor vehicles at 5% and 20% respectively using reducing balance method. Interest on Loan is outstanding The allowances for bad debts is to be adjusted to 10% of trade debtors Insurance paid was for a period of 15 months Required: (i) Journal entries for adjusting information (qa) – (f) (6 marks) (ii) Prepare the company’s income statement for the year ended 31/12/2006 and the Balance sheet as at that date. (12 marks) SECTION B QUESTION THREE With 3 examples in each case, explain the three elements of the accounting equation On 1st January 2006, Maama Nalango started her small business of selling ladies’ Garments around the small gate of Makerere University Business School. She started with cash of UGX 5,000,000 at hand and cash at bank of UGX 10,000,000 Jan 2. Purchased stock for UGX 3,000,000, paying 60% cash and 40% on credit. Sold 2/3 of the goods at UGX 2,500,000 on credit Jan 3. Paid rent UGX 100,000 cash Jan 10. Received cash payment of UGX 2,000,000 from debtors and paid UGX 1,000,000 cash to suppliers. Jan 15. Bought motor vehicle for UGX 6,000,000, paid UGX 2,000,000 by cheque, UGX 1,000,000 cash and promised to pay the balance later. Jan 20. Sold ? of the remaining stock of goods for UGX 700,000 collecting cash of UGX 200,000 immediately and the balance to be received later. Jan 25. Paid electricity UGX 200,000 by cheque Jan29. Used business cash of UGX 200,000 to buy a trouser for her husband Jan 31. Acquired a loan of UGX 4,000,000 from a cousin brother to be repaid in two year’s time. It was deposited on the business bank account. RequiredConstruct accounting equations for each of the above transactions and at the end, come up with an elementary balance sheet. (14 marks)QUESTION FOUR Technology Business solution Ltd is a secretarial company with many computers. The company has a policy of selling its computers which have declined in their economic potential during year. On 31/12/2001, the company had the following balances as regards its computers: - UGX’ 000 d) Objectivity viii. The businessman uses the term capital, what can be used by the treasurer of the club to mean the same things?Sales day book Profit & loss account Three column cash book Petty cash book ix. Which of the following errors affect the trail balance? Casting error Error of omission Error of complete reversal of entries Error of commission x. What is accounting treatment of the increase in the provision for bad and doubtful debts? Dr. debtors, Cr. Bad debts Dr. bad debts, Cr, provision for bad debts Dr. P&L, Cr. Trading account Dr. provision account, Cr. Income statement (1 mark @part)QUESTION TWO Irish Kyebandula Ltd is a trading company dealing in general merchandise. It also rents out part of its premises to Paul Scores & Co. Ltd. The following is its Trial balance for the period ended 31/12/2006 Account Titles Dr. UGX. 000Cr. UGX. 000 Furniture & Fittings, cost 50,000Motor Vehicles, cost 20,000Gross Sales revenue 140,000Cost of sales 126,900Sales returns 6,000Insurance 3,000Wages & Salaries 4,000Bade debts written off 1,100Allowance for bad debts 1,000Ordinary share capital 62,000Office expenses 1,100Trade debtors & creditors 6,0004,000Fuel 6,100Cash in hand & at Bank 5,200200Commission received 1,20020% Bank loan 5,000Accumulated depreciation Furniture & Fittings 5,000Motor & Vehicles 8,000Rent from Paul Scores 3,000Totals 229,400229,400 The trial balance extracted from the books of Seven – to Eleven Supermarkets at December 31, 1995 was as follows: DRCr Cash 415,400Accounts receivable 464,780Provision for bad debts 22,500Inventory, Jan 1, 1995 1,875,000Prepaid rates 123,800Office equipment 154,000Acc. Depreciation – Office equipment 60,200Vehicles 458,000Acc. Depreciation – Vehicles 144,500Buildings 2,450,000Acc. Depreciation- Buildings 810,000Land 500,000 Accounts payable 1,300,000Notes payable 200,000Capital 2,000,000Retained earnings 983,780Dividends 300,000Sales 19,215,000Sales discounts 84,800Purchases 14,973,000Purchase returns & allowances 27,200Purchase discounts 44,800Transportation –in 224,200 Salaries and wages 1,112,000 Office expenses 400,000Advertising expenses 360,000Communication expenses 598,000Utilities expenses 300,000Interest expenses 15,000 24,807,980 24,807,980Further information: Inventory at December 31.1995 was worthy Shs. 1,830,000 Of the prepaid rates, three quarters had expired during the year. Shs. 38,500 of the outstanding receivables are estimated to be bad. Depreciate Shs. 11,680 on Office equipment, Shs. 92,000 on Vehicles, and Shs 50,000 on buildings. The following liabilities to be accrued Shs. 14, 900 on communication Shs. 5m 280 on utilities Shs. 2,500 on interest REQUIRED Prepare adjusting entries, a Profit and Loss account, and a Balance sheet. QUESTION 2 Tray Enterprises acquired machines and furniture at Shs. 640,000 and Shs. 128,000 on January, 1 1993 respectively. Office machines have useful life of 5 years and salvage value of Shs. 8,000. Furniture has useful life of 4 years and no salvage value. The company has used the straight line method to calculate depreciation and the net incomes reported for the years 1993, 1994 and 1995 were Shs. 148,000, Shs. 157,750, and Shs. 159,350 respectively. REQUIRED: Show how Office machines and Furniture would appear in the Balance Sheet of Tray Enterprises at the end of each of the three years. Recomputed the net incomes for each of the three years if the sum- of – year’s digits method of depreciation had been used instead of the straight line method.QUESTION 3 Write brief notes on each of the following:Perpetual inventory system Capital and Revenue expenditure Income statement approach of estimating allowance for doubtful debts Principle of consistency Cost of an asset QUESTION 4 Selected data below is from the books of Fang Fung at December 31, 1995: SHS Raw materials inventory Jan 1, 1995 750,000Raw materials inventory Dec. 31, 1995 600,000Work in process Jan. 1, 1995 450,000Work in process Dec. 31, 1995 300,000Finished goods Jan. 1, 1995 1,500,000Finished goods Dec, 31, 1995 1,200,000Direct labour 900,000Indirect labour 450,000Utilities 375,000Depreciation 210,000Purchase of raw materials 1,350,000Net sales 6,000,000Administrative expenses 380,000Selling expenses 270,00030% of depreciation is for office machines and a 1/5th of utilities is for office use. The rest are attributed to the factory. REQUIRED: Prepare a cost of goods manufactured statement and in income statement for Fang Fung for the year ended December 31, 1995.QUESTION 5 The Supermatch company reconciled its cash book bank statement balances on July 31, 1996 with only two cheques No. 706 for Shs. 1, 420 and No. 717 for Shs, 2, 750 Unpresented to the bank. The following information is available for the month of August, 1996. (i) From the Bank Date Cheques and other Debits Deposits BalanceAug,1 Balance b/f 19,120 2 2,75016,370 3 2,1803,12017,310 5 3,020 14,290 97,370 6,92012 7501,320 4,85014 5,510 10,36018 2,840 7,520 215,510 12,64028 3,4304,720 13,93029430 (NSF) 13,5003130 (LF) 9,950(CM) 23,420Code: CM Credit Memo DM Debit Memo LF Ledger fee NSF No sufficient funds (ii) From the (iii) From the Cash Receipts Journal Cash Payment Journal Date. Shs. Cheque Shs. Aug, 2 3,120 718 2,180 135,510719 3,200 205,120 720 750 274,7207217,370 312,4707221,320 Total 20,940723 1,3607242,840 725 3,430 726 530 Total 22,980 (iv)From the General Ledger Date Particulars DR CR Balance July 31Balance b/f 14,950 Aug. 31 Cash Receipts Journal 20,94035,890 31Cash Payments Journal 22,98012,910 Other5 information: Cheque No. 719 was correctly drawn for Shs. 3,020 in payment for stationary but the bookkeeper transposed the figures and entered it as Shs. 3,200 in the Cash Payments Journal.The NSF cheque was received from a customer in settlement of his account. The credit memo resulted from a Shs. 100, 000 note receivable, collected by the Bank on the company’s behalf. The Bank deducted Shs. 50 as collection fee. REQUIRED: Prepare the August 31, Bank Reconciliation Prepare in general journal form entries needed to adjust the company’s cash records. QUESTION 6Auto sport Inc. deals in values. For the month of June, 1996, the sales were Shs. 3,680, 000 at a stable price of Shs. 1,150 per value. The purchases for the month were as follows: Date No. of Units Unit Cost Balance May 31 9001,000June 3 1,1801,020 7 8001,035 156201,070 221,0001,085 The operating expenses for the month were as follows Salaries and wages Shs. 56,000 Selling expenses 85,000 Administrative expenses 60,000 REQUIRED:Computer end of June inventory cost using FIFO, LIFO, and Average cost. Prepare income statements for the month of June, 1996 in comparative form. Which method gives the most realistic Balance Sheet inventory value in light current replacement cost. And which method gives the most realistic income in light of the cost being incurred by Auto Sport to replace the valves when they are sold? The following trial balance was extracted from the books of Bipel Ltd as at 31 December, 1992. Dr CrShs. Shs.Cash 759,000Accounts receivable 330,000Patents 650,000Allowance for bad debts 60,000Inventory 1.1. 1992 384,000Prepaid rent 180,000Office suppliers 210,000Equipment at cost 1,500,000Accumulated depreciation- Equipment 300,000Accounts payable 240,000Unearned consulting fees 270,000Ordinary share capital 2,580,000Dividends paid 546,000Retained earnings 585,000Sales 2,286,000Sales discounts 90,000Sales returns and allowances120,000Purchases 1,200,000Purchase discounts 54,000Purchase returns and allowance 390,000Carriage inwards 270,000Consulting fees revenues 219, 000Office expenses 123,000Salaries & wages expense 159,000Delivery expense 381,000Bade debt expense 63,000Electricity expense 15,000 6,984,0006,984,000Information for Adjustments A physical count revealed inventory worthy Shs. 255, 000 was still on hand at 31 December, 1992. Of the rent prepared, one half has expired during the year. Included in salaries and wages expense is advance payment of Shs. 33,000 relating to 1993. Of the unearned consulting fees, Shes. 116, 000 has been earned during 1992. ]Shs. 145,000 of the office suppliers remain on hand at 31 December, 1992. One percent of the NET sales is expected to become bad debts Annual depreciation on equipment is computed at 10% of cost. The electricity bill for the last quarter of 1992 of Shs. 5,000 has to be accrued. REQUIRED: Prepare journal entries for all the adjustments (No. narrations) Prepare an income statement and a Balance Sheet after taking into account all the above. Question 2. (15 marks)What is meant by “internal control”?Describe four measures for cash in the bank that can be instituted to achieve internal control over cash. Section B: (All question carry equal marks Question 3 On April 01, 1993, the entire merchandising inventory of Kaluum & Co. was destroyed by fire. The company’s records were however saved. The company does not maintain perpetual inventory records and the last physical inventory count was made on 31 December , 1992. The company has to make an estimate of the inventory value destroyed by fire in order to file an insurance claim, and the chief accountant assigns you to do so. You are provided with the following income statement and other information. Kaluuma & Co.Income StatementFor the year ended 31 December, 1992Shs. Shs. Net Sale 480,000Cost of goods sold: Inventory 1.1.1992 288,000Purchases 1,040,000Cost of goods available 1,328,000Less Inventory 31.12.1992 26,000 Cost of goods sold 1,002,000Gross Profit 478,000Sundry operating expenses 298,000Bet Income 180,000You discover that the purchase figure above includes Shs. 25,200 of furniture bought by the company for use in the business erroneously recorded by the book- keeper. This error was not discovered when preparing the annual accounts, and is not included in ending inventory. The saved records also show the following transactions for the period 1.1. 1993 to the date of the fire. Shs. Sales 612, 000Sales returns 5,400Transportation- in 3,600Purchases 392,400 Purchase discounts 7,200 REQUIRED: Prepare a brief report to file to the insurance company supported by computation of the estimated inventory loss using the gross profit method. A part from a loss caused by natural hazards e.g. fire, explain two (2) other instances where the gross profit method of estimating inventory may be used by Accounts.QUESTION 4 The net incomes of TDK Ltd for 1989, 1990 and 1991 were Shs. 118,400 Shs. 126, 200 and Shs. 127, 480 respectively. The company acquired two machines on 1.1. 1989. Machine A cost Shs. 102,400 with salvage value of Shs. 16,000 and estimated useful life of five years. Machine B cost Shs. 52,000 with salvages value of Shs, 4,000 and d estimated useful life of four years.The policy of the company is to change depreciation on machinery in the year of purchase but none in the year of sale. On March 01, 1992, Machine A was sold for Shs. 45,000. It has now been found that the wrong method was used for depreciation of machines. The straight line method has been used, but the correct method would have been the double declaiming balance method. REQUIRED: Recomputed the net incomes of 1989, 1990 and 1991 if the correct depreciation method had been used. Computer the gain or loss on disposal of Machine A. Show how the Machinery Account, and related accumulated depreciation will appear in the Balance Sheet of TDK Ltd as at 31 December, 1992. QUESTION 5 Texo Co., a manufacturing company in Down Kampala has for its year ended 31 December 1992 the following trading and operational results. Movement of stocks during the year: 1/1/92 31/12/92 Shs Shs. Raw Materials 195,800215,300Work – in- Progress 265,700192,450Finished Goods 438,220 81,000Purchase of Raw Materials Shs. 2, 075,440Carriage in 240,000Sales 8,806,050 Costs and expenses during the year Shs Direct Wages784,280 Indirect wages 403,100Electricity 824,440Rent and Rates 235,000Advertising 793,070Administrative expenses 679,480Depreciation: Plant & Machinery 36,320 Delivery Vans 30,100 It is the company’s policy to transfer the cost of goods manufactured to the trading account at cost plus 20%. Consequently, based on the opening stock of finished goods, the provision for unrealized profit as at 1/1/1992 stood at Shs. 87, 644. Electricity, Rent and Rates are to be apportioned between factory and office in the ratio 3:1 REQUIRED: Prepare a manufacturing statement for Texo Co. for the year ended 31 December 1992 Prepare a Trading Profit and loss statement for the company for the year ended 31 December, 1992. QUESTION 6The manager of the Association Libraries submits the following Receipts and Payments Accounts and other information to you for the year ended 31 December, 1992. Receipts Shs. Payments Shs. Balance b/d 115,900 Staff salaries 925,000Annual subscriptions 1,640,000 Gross- cutter’s wages 12,500 Sales of diaries 30,000 Utilities 90,000Donations for building 250,000Stationary 115,000Extension of building 325,000Printing of dairies 14,500Repairing of furniture 21,000Annual prizes 60,000Balance c/d 247,9002,035,900 2,035,900Relevant information: Subscriptions include Shs. 225,000 respecti8vely arrears for 1991. Subscriptions for 1992 amounting to Shs. 72,500 is still outstanding. An amount of Shs. 5,000 is owing to the printers of the diaries. Staff salaries include Shs. 125,000 advance for 1993 Furniture and equipment should be depreciated at the rate of 5% and 10% respectively. On January 01, 1992, the library had the following fixed assets Shs. Buildings 2,900,000Furniture 600,000Library 740,000Equipment 250,000REQUIRED: Calculate the accumulated fund of the Association Libraries as at January 01 1992. Prepare an Income and Expenditure Account for the year ended 31 December 1992 and a Balance Sheet as at that date. Profit from the sale of diaries should be shown separately. Section A Question 1Answer all sub-parts of this question in your answer booklets NOT on the question paper. Select the best alternative.i).Which accounting concept requires the practice of crediting inventory to the trading account? a). Conservatismb). Consistencyc). Matchingd). Going concerne). None of the aboveii). which of the following concepts recognizes income when a customer has accepted the good or services and is obliged to pay for the items?a) Accrualb) Matchingc) Realizationd) Prudencee) None of the above.iii). Mina started business with shs. 24,000,000,000 cash. She acquired a bank loan of Shs 16,000,000,000 which she deposited to a newly opened business bank account. She purchased stock of goods worth shs. 14,000,000,000 on credit. She sold 1/2 of the goods to Jamal at shs 9,000,000,000 on credit. She received shs 7,000,000,000 from debtors through the bank.Which of the following accounting equations is a correct record of the above? Asset = Liabilities + Owner's Equitya). 51,000,000,000 = 14,000,000,000 + 37,000,000,000b). 56,000,000,000 = 14,000,000,000 + 42,000,000,000c). 52,000,000,000 = 10,000,000,000 + 42,000,000,000d). 50,000,000,000 = 10,000,000,000 + 40,000,000,000 e). None of the abovevi). Which of the following is a correct sequence in an Accounting cycle/ process (a) Journals - documents - ledgers - trial balance - final accounts(b) Documents - journals - ledgers - trial balance - final accounts(c) Trial balance - final accounts - ledgers - journals - documents(d) Ledgers - journals - documents - trial balance - final accounts(e) None of the above,v). The following are books of original entry except:(a). Worksheet(b). General journal(c). Cashbook(d). Returns inwards book(e). None of the above. vi) Rental income received during the year amounted to 650,000,000=. Outstanding rental income as at 31/12/2007 amounted to Shs.70, 000,000. The amount to be charged to the P & L a/c is?(a). 580.000.000 Cr.(b). 720,000,000 Dr(c). 580,000,000 Dr(d). 720,000,000Cr. (e). None of the aboveVii) What is the accounting treatment for a decrease in the provision for bad debts?a) Dr, Income StatementCr. Accounts Receivables b) Dr. Bad DebtsCr. Income Statement c) Dr. Provision for Bad DebtsCr. Income Statement d) Dr. Bad DebtsCr. Provision for Bad debts e) None of the above(vii) Accelerated methods of depreciation are used because:a). assets are less productive in the early years of their economic lifeb). of the legal requirementsc). of the need to pay more tax earlier than laterd). they are easye). none of the abovexi).Income received in advance is shown as....................in the balance sheet a) . an assetb). a liabilityc). owners equityd). income receivablee). none of the abovex).Which of the following statements most accurately describes a balance sheet?a) A list of receipts and payments and showing a balance at the endb) A statement that shows net worth of the organizationc) A list of assets and claims against the organizationd) A statement of total Equity and Liabilitiese) None of the aboveQUESTION 2The following Trial Balance extracted from the ledger accounts of New Designs Ltd. For the financial year ended 31/12/2007.Account TitleDebit (shs) Credit (shs)Ordinary shares 200,000,000Preference shares 100,000,000Plant and Machinery, cost 200,000,000 Motor vehicle, cost160,000,000Land140,000,000Accumulated Depr (1/1/2007)Plant and Machinery 60,000,000Motor Vehicle, cost 32,000,000Trade debtor 60,000,000Trade Creditors 30,000,000Cash 10,000,000Bank 70,000,000Stock (/1/2007) 9,200,000General Expenses 20,000,000Advertising Expenses 4,000,000Sales 600,000,000Returns 8, 000,000 6,000,000Bad Debts Expenses 5, 000,000Purchase 320,000,000Discounts 1,000,000 3,000,000 Carriage inwards 5,000,000Salaries expenses 20,000,000Fuel expenses 4,000,000Insurance expenses 800,000Provision foe bad debts 6,000,000Totals 1,037,000,000 1,037,000,000 Additional information Stock at 31/12/2007 was valued at shs 16,000,000= on FIFO basis. Depreciation on plant and machinery and motor vehicle is at 15% and 10% per annum respectively. The provision for bad debts is to be increased to shs. 9,000,000=? of insurance paid relates to the financial year commencing on 1/1/2008Included among the general expense is tuition fees and pocket money amounting to shs. 2,000,000= of the general niece, who is not an employee of New Designs Ltd. REQUIRED Journalize information mentioned in (i) to (vi) above (6 marks) preparethe income statement and the balance sheet for the ye ar. (14 marks) Section B (this section has Three Questions, attempt any two questions ) QUESTION 3Kadu Mukasa is an inexperienced bookkeeper for New Designs Ltd and needs assistance to complete the current account bank reconciliation for the month of November 2007. He has provided the following information.On 31 Nov 2007, the bank Colum of the cashbook showed a debit balance of shs 692,000. The bank statement on the same date showed a credit balance of shs 740,000. A comparison of the cashbook and the bank statement for 2007 reveals the following: The bank made a direct debt of shs 30,000 for a magazine subscription on 3rd Nov 2007. A loan repayment of shs 180,000 was paid by a standing order on 15 Nov 2007.Bank charges of shs 10,800 and loan interest of shs 24,000 were charged to the account on 31 Nov 2007.Cheques totaling shs 163,600 paid into the bank in Nov had not been credited to the account on 30 Nov 2007. v. On Nov 4, a credit transfer of shs 290,000 was received from a customer, NK. Stephens.vi. A cheque from M. Makumbi for shs 276,000 banked on 29 Nov 2007 was returned unpaid on 30 Nov2007.vii. Cheques drawn on 27 Nov 2007 totaling shs 335,400 had not yet been presented to the bank. viii. A cheque entered in the cashbook as credit of shs 152,800 should have been for shs 125,800. ix. Kaka supplies Ltd was paid cheque for shs 80,000 but returned it on 25 Nov 2007, unpaid. Required:Reconcile the balances of the cash book with that of the bank statement (16 marks) State four reasons why the cashbook balance most often differs from the bank statement balance as at that date (4 marks).QUESTION 4With examples distinguish between a direct cost and an overhead cost. (4 marks)b) The following data was obtained from the books of BBC Soda manufacturing Ltd. as at 31.12.2007. ParticularsAmountRaw materials purchases 250,000,000Indirect Material 15,000,000Carriage on material 2,500,000Direct Labour Cost400,000,000 Raw material Returns 4,000,000 Carriage outwards. 35,000,000Other overhead140,000,000Lighting, 30,000,000Power for Production Machines 150,000,000Indirect/labour cost 40,000,000Office salaries 13,000,000 Administration expenses 120,000,000Sales 2,150,000,000Advertising 4,500,000Bad debts provision 15,000,000Directors remuneration 60,000,000Bank charges 1,000,000Delivery van expenses 8,000,000Discount allowed 18,000,000Depreciation: Plant & machine 6,000,000Office Equipment 4,000,000Delivery Van 2,000,000The following additional information was provided:1. Stocks 1.1.200731.12. 2007 Raw materials 45,000,00030,000,000W.I.P30,000,00015,000,000Finished Goods 15,000,00018,000,0002. Power for production machines included a prepaid figure of shs 100,000,000.3. Lighting was apportioned as follows; factory ? Office ? 4. 60% of other overheads relates to the factory while the balance to the office 5. Bad debts provision should be increased by shs 2,000,000=6. Advertising expense of Shs 500,000 accrued,7. Directors remuneration was analyzed as follows:-Production Director 35,000,000Sales Director 25,000,0008. Manufacturing goods are transferred at factory cost plus a mark up of 20% to cater for factory. Accordingly, finished goods are inflated by that percentage.RequiredPrepare a Manufacturing, Trading and Profit and Loss account for the year end 31.12.2007 (16 marks).QUESTION 5a). The following information was extracted from New Furniture’s Ltd. Concerning office furniture. The company's financial year runs from 1st January to 31st December. Five (5) furniture items were bought on 1/01/2000 for Shs. 10,000,000. Six (6) Additional furniture were bought on 1/03/2001 for Shs. 6,000,000.Each furniture item is expected to last for 10 years at the end of which is expected to sell scrap value of Shs. 200,000. However on 31/12/2003, to (2) furniture items that were purchased on 1/03/2001were disposed off for Shs. 100,000 each. All transactions were by cash. It is the company's policy full depreciation in the year of purchase and none in the year of disposal.REQUIRED:Prepare the following Accounts using straight line method of depreciationi). Furniture A/Cii). Accumulated Depreciation A/C iii). Disposal of furniture A/C(l0 marks)b). The Bookkeeper of New Designs Ltd prepared a trial balance for the year ended 30 June 2003 but it failed to balance. The debit side was less than the credit side by Shs. 900,000, since he was on pressure to submit final accounts; he opened a suspense account and proceeded to prepare final accounts. During July 2003, he identified the following errors which had been in the year ended 30/06/2003.Painting of buildings for Shs. 2,000,000 was properly recorded in the cash book but was not debited to the buildings account,Cash of Shs. 200,000 which was used to purchase a gift for his sugar Mummy on Valentine's Day was credited to the cash book but was not debited to the other account.Payment to Nyakato for Shs. 300,000 was properly entered into the cashbook but posted to Nakato's account. Bank charges of Shs. 100,000 were not recorded in the cashbook. A credit purchase of Shs. 500,000 from Jose was credited as Shs. 300^000 in the purchases account and credited to the Jose's account with the correct amount. Sales and accounts receivables were each under set by Shs. 50,000.REQUIRED:i). Journal entries to correct the above errors (6 marks) ii). Suspense Account (4 marks) Section C (This section has Two Questions, attempt only one question)QUESTION 6a) Distinguish between accounts for profit making organizations and those of non profit making organizations (10 marks)(b) Using examples distinguish between accounting treatment for life subscriptions and annual subscriptions in non profit making firms (6 marks)(c) Explain briefly the purpose of suspense accounts organizations. (4 marks)QUESTION 7(a) What are control accounts and why are they important in an organizations internal control system. (5 marks)(b) Briefly described the accounting cycle clearly mentioning the books of accounts or statement prepared at each stage. (10 marks)(c) Distinguish between Realization Concept and Accrual Concept? (5 marks)Below is the Trial Balance extracted from the books of Sarasota and co. Ltd. a trading company in hard ware as at 31st December , 1991.DrCrCash/Bank1,265,000Accounts Receivable550,000 Provision for Bad 100,00012% treasury Bills 1,090,000 Inventory 1.1,1990 640,000 Prepaid- insurance 300,000Office supplies 350,000Equipment at cost 2,500,000Accumulated depreciation –equipment 500,000Motor vehicles 1,200,000Accumulated depreciation-motor-vehicles 700,000Accounts Payable 400,000Capital4,800,000Dividends paid 910,000Retained earnings 975,000 Sales3,810,000Sales discounts 150,000Purchases2,000,000Sales returns and allowances 200,000Purchase discounts 90,000Purchase returns and allowance 650,000Transportation-in 450,000Miscellaneous revenue 815,000 Rent expense 205,000Salaries expense 265,000Bad debt expense 105,000Delivery expense 405,000Interest expense 25,000Utilities expense 230,00012,840,00012,840,000Further information was given as follows:- (a) Inventory on hand at 31, 12-91 was valued at Shs.425, 000(b) Of the insurance prepaid shs. 150,000has expired during the year.Of the rent expense, shs 55,000 relates to 1992.It was decided to increase the provision for bad debts to shs. 350,000.Shs. 265,000 of office supplies remained on hand at 31.12.91.Miscellaneous income earned but not received, neither the clients billed amounts to shs.155, 000.Interest on treasury bills has accrued for one year, but not y et received.Of the utilities, shs 95,000 is outstanding on account of electricity and shs. 37,000 has accrued on account of telephone expenses. The annual depreciations is computed as 10% and 15% on equipment and, motor vehicles respectively on the declining balance. The company paid on interim dividend on 30.6.91. a final dividend of shs.300,000 was proposed to be paid to the shareholders in January , 1992. Required Give journal entries for al the adjustments ( narrations not …)Prepare an income statement for the year ended 31 December 1991, a balance sheet as at that date. Q2. Answer any THREE (3) of the following: What is meant by the term “financial Statements” and what are their use? Distinguish between ‘adjusting entries’ and ‘closing entries’. Describe ant three (3) methods of valuing inventories. Give the distinction between the ‘matching principle’ and the ‘consistency principle’.Section B (All questions carry equal marks) Q3. The following data was obtained from the records .of Tooler.Manufacturers as at 31 December, 1991.shs553,500,606,300,708,00521,700'? 524,OOCH? 644,500:l,93p-,QpO'Raw materials 1.1.91Raw materials 31-12.91Work in progress 1.1.91Work in progress 31, 12.91’524,000644,5001,930,0006,018,000507,00060,000171,000162,000310,000560,00048,300136,000219,00063,90058,700Finished goods 1.1.91Finished goods 31-12.91Raw materials purchasedSales (Set)Factory wages:, Direct labourIndirect labourElectricity Rent and ratesAdministrative expensesSelling' expensesCarriage on purchased raw materialsAdvertisingDepreciation: Plant and machinery Delivery vans Office equipmentRent and rates, and electricity are to be apportioned Factory 2/3 rds; office 3rd,Rent and rates, and electricity are to be apportioned Factory 2/3 rds; office 3rd,Required prepare a manufacturing statement, and an income statement..for the year ended 31 December,1 1991 Q4. The Balance Sheet of Ink Ltd contains the following as at 3l December, 1990:Fixed assets:Cost acc. Depreciation written Down value Shs.Shs.Shs.Vehicles (10 in number) 834,000412,000422,000During 1991, the company had the following transactions regarding vehicles:Purchases Date typecost (shs)15 April Lorry 230,00019 July van 118,00015 November Car 120,000SALES Date typedate of purchase cost proceeds Shsshs30 April van 31 January 198998,000 33,00023 June van 6 June 198764,00012,00030 Octobercar 31 December 112,000 38,00029 December lorry 14 October 210,000 182,000The company’s policy is to charge a full years depreciation in the ye are of purchase of a vehicle and none in the year of disposal. Depreciations per vehicle as charged using a straight line method for a an estimated useful life of five years and an estimated salvage value of shs. 6,000/=Required Prepare:-(i ) Vehicle account (ii) accumulated depreciation – vehicle account Disposal of vehicles account Show how the vehicles Account would appear in the balance sheet at 30th April, 1992.Q5. Below is the bank reconciliation statement of Matata Traders as at 30th April, 1992.MATATA TRADERSBANK RECONCILIATION30 APRIL 1992ShsshsBalance per cash bank 1,906,000Deduct: bank charges 100Interest on overdraft1,200 1,300Adjusted balance 1,904,700Balance per bank statement 1,840,000AddDeposit in transit 344,800 2,184,800Deduct: outstanding cheques No. 044298,600No. 0446103,000No.044778,500 280,100Adjusted balance 1,904,700At the end of May, 1992, the company received the following statement from their bankers:-DATEPARTICULARS DEBIT CREDIT BALANCE May May 1balance b/f1,840,0001,840,000 2deposit 344,8002,184,800 3deposit 210,2002,395,0006chq 044951,0002,344,000 6 chq.0446 103,0002,241,0007chq.0453720,0001,521,0008deposit 485,0002,006,00012chq.044778,5001,927,50015chq.04501,300,000627,50015ledger fee2,000625,50018deposit 112,800738,30019chq. 0455936,900 198, 6009(Dr)22chq 044836,000 235,100(Dr)22deposit 51,300 183,800(Dr)25deposit 538,800355,00028cheq . 0457132,000223,00029deposit 590,000813,00029deposit 663,400 1,476,40031deposit 1,212,0002,688,40031chq.0458213,8002,474,60031credit memo360,4002,835,00031collection charge3,6002,831,40031interest 4,8002,826,600A companying the bank statement was a credit memo issued on 31 may 1992 representing a collection from T. Kally , the company’s debtors for which the bank charged the company on the same day. DATE PARTICULARS AMOUNT DATE PARTICULAR AMOUNT May May 1sales 210,200May 3chq.044836, 5 7sales485,0003chq.0449 51,000 17sales112,8004 chq.045 1,300,00021A/c Receivables 51,3004chq.0451220, 00024sales538,8005chq.0452 76,00026sales444,0005chq.0453 720,00026A/c receivables590,0009chq.0454 112,00029A/c receivables 663,40013chq.0455 963,00030sales1,212,00018chq.0456 13,70031sales73,90020chq.0457 132,00026chq.0457213, 80030 chq.0457 412,000 31 chq.0451, 118,600Examination of the cash book : entries revealed the following. Chq. No. 0455 of shs. 936,900 was wrongly recorded in the company books keeper. It was payment to a creditor, kay. A credit sale of shs. 444,000 to Adams was erroneously recorded in the cash book instead of the debtors ‘ledger. Q6. Lukwago operates a corner shop at Wandegeya called Lukwago Stores. He has not previously employed an accountant, but for the year 1992, he was as eked to produce proper accounts in orders to obtain a trading licence. Lukwago provides you with a statement of operations for the year 1991 produced below and asks you to prepare the accounts for his submission to the licensing authorities. Lukwago stores statement of operation 1991Payment for goods shs 950,000 cash taking shs. 1,200,000Payment for expenses 160,000Profit 90,0001,200,0001,200,000Through your discussion with him, you obtain the following information Daily taking are kept in a cash box and banked a t irregular intervals. At the end of each day, the cash is counted and recorded on a slip of paper. At irregular intervals, the figures from the slips are recorded into a note book by his friend. A batch of slips was lost before the figures were entered into the note book, but Lukwago and his girl-friend estimate the takings of the year, including the amount on the destroyed slips to be shs. 1,200,000/=You discuss and accept the following balances 31.12.9031.13.91Cash in hand shs. 4,5008,700Cash at bank 15,60021,900Accounts receivable45,80049,100Accounts payable 27,90024,300Inventory at cost 195,000190,000Debts amounting to shs 35,600 were abandoned during the year as bad. But the takings include shs. 2,500 recovered from an old debt which had been abandoned the previous year. Lukwago rents the shop on which he resides at shs. 15, 600 per year. This amount is included in the expenses of shs . 160,000. It is decided to allocate 1/3 of the premises for residence purposes. Further analysis of the expenses reveal the following : Running expenses for Lukwago’s private car amounts to shs. 3,500/=Repairs and decorations of the total premises for the year amounted to shs. 6,000.Alterations on the shop premises amounted to shs 16, 000/=Lukwago made a major renovation tot the roof of the building housing the shop premises at shs . 50,000. The landlord agreed to offset this amount against future rent payments. From the business takings, Lukwago met the following private expenses. Shs. 50,000 for maintaining his house Shs. 8,000 for the girl friend’s hairdressing Lukwago‘s personal subscription to a local club of shs. 10,500. Lukwago’s graduated tax of shs. 10,000/=Shs.5, 200/= for a local competition. His winnings, which he included in the shop’s takings, amounted to shs. 6,000/= Lukwago’s cousin obtained shs. 10,000 from Lukwago which he withdraws from the business bank account. The cousin agreed to pay in installments, and so far, shs6, 000 has been recovered.Lukwago had a car accident and compensation of shs 64,000 /= was banked on the business account.Tom owed Lukwago shs. 6,900 for goods supplied from the shop. For a settlement, Tom provided his radio valued at shs. 35,000. Lukwago paid the difference to Tom by a cheque drawn on the business account Lukwago uses this radio cassette for domestic purposes. You agree to charge Lukwago shs. 4,000 for your accountancy service payable after receipt of the trading licence.Required Prepare a statement of affairs for lukwago stores as at 31.12.90Prepare an income statement for the year ended 31.12.91, and a balance sheet as at the date for submission to the licensing authorities. (Show all your workings). Question“Without some form of Accounting, Legislation it would be possible for accounting to manipulate and doctor accounts, thereby, presenting a completely misleading about the financial status of the organization. This would result into users of accounting information making wrong decisions.In light of the above statement, discuss the various accounting concepts / principles / conventions that underlie preparation and presentation of accounts and check manipulation and doctoring of the accounts.Question 2The following information was extracted from the books of MM Bakery Ltd.Stock1 / 200531 / 12 / 2005ShsshsRaw materials4,000,0006,000,000Work in progress18,000,00016,000,000Finished goods14,000,00012,000,000The firm’s transactions obtained from the ledgers were as follows:ParticularsAmount in shsShow room expenses8,000,000Water expenses 40,000,000Electricity30,000,000Indirect materials12,000,000Bad debts20,000,000Raw material purchases560,000,000Salaries90,000,000Manufacturing expenses18,000,000Sales840,000,000Direct expenses17,000,000Depreciation of delivery vans2,000,000The following additional information was provided:Salaries and electricity were apportioned as follows:FactoryOffice & AdminSelling & DistributionSalaries ________80%20%Electricity?2/4 __provision for bad debts of UGX 4,000,000/= was madeWater expenses of UGX 2,000,000/= remained at the financial year end.The company transfers goods at 20% mark upRequired:Prepare the company’s manufacturing, trading profit and loss account for the year ended 31 / 12 / 2005.Question 1Halima is an experienced book keeper for MM Enterprises and needs assistance to complete the current account bank reconciliation for the month of May 2006. she has provided the following information:On 31 May 2006, the bank column of the cash book showed a debit balance of shs 692,000. the bank statement on the same date showed a credit of shs 740,000. a comparison of the cashbook and the bank statement for May 2006 reveals the following:The bank made a direct debit of shs 30,000 for a magazine subscription on 3rd May 2006.A loan repayment of shs 180,000 was paid by a standing order on 15 May 2006Bank charges of shs 10,800 and loan interest of shs 24,000 were charged to the account on 31 May 2006.Cheques totaling shs 163,000 paid into the bank in May not been credited to the account on 31 May 2006On May 4, a credit transfer of shs 290,000 was received from a customer , R. Stephens.A cheque from M. Makumbi for shs 276,000 banked on 29 May 2006 was returned un paid on 31 May 2006Cheques drawn on 27 May 2006 totaling shs 335,400 had not yet been presented to the bankA cheque entered in the cash book as credit of shs 152,800 should have been for shs 125,800Kaka supplies Ltd paid cheque for shs 80,000 but returned it on 25 May 2006, un paid.Required:Adjust MM Enterprises’ cash bookPrepare a Bank reconciliation StatementState four reasons why the cashbook balance most often differs from the bank statement balance as at that date.1a) Explain the following accounting concepts and give examples where they are applied in the preparation of financial statements.Business Entity ConceptAccrual ConceptRealization ConceptGoing ConceptHistorical Conceptb) A.N.L Agencies is a retail business located in Wandegeya. The following transactions transpired during the month of October, 2007Oct1st Bought goods on credit from Peter for shs 800,000“2ndBought goods on credit from Jane for shs. 400,000“3rdSold goods to John on credit for shs. 2,000,000“4th Sold goods to Mary on credit for shs 800,000“5th Returned goods worth shs. 100,000 to Peter because they were defective“10th Received part payment of 1,600,000 cash from John for goods taken on credit“12th Made part payment to Peter shs. 160,000 Cash“14th Purchased goods for shs 120,000 credit from Jane“15th Mary rejected and returned goods worth shs 80,000“16thReceived a cheque of shs 300,000 from Mary as part payment for goods taken on credit“17thPaid office rent cash shs 200,000“18th Returned goods worth shs 100,000 to Jane because they were defective“19thPaid Jane shs 300,000 by cash“20thSold goods to John on credit for shs 1,600,000“22ndBought goods for shs 200,000 paying cash“23rdSold goods cash shs. 1,000,000“24thSold goods cash shs. 8,000,000 receiving payment by cheque immediately“25thPurchased goods for shs 200,000 from Peter on credit“26thPaid Peter Shs. 160,000 cash“27thJohn rejected and returned goods worth shs 200,000“28thReceived a cheque of shs 400,000 from John for goods sold to him on credit“29thpaid for electricity shs. 100,000 by cheque and shs 200,000 cash“30thPaid office rent shs. 120,000 by cheque“31stPaid salaries shs 300,000 cash and shs 320,000 by chequeREQUIREDEnter the above transactions into the General Journal properly showing entryPost to the Ledger accounts and should be fully balanced offOpen up the Individual Debtors’ subsidiary Ledgers and the Individual Creditors’ subsidiary ledgersExtract the business Trial Balance for the month ended 31st / 10 / 2007The following trial balance was extracted from the books of Atikoru PLC Capital20,000Loan account, Stanbic2,000Drawings1,750Premises8,000Furniture and fittings500Plant and machinery5,500Inventory at 1 Jan8,000Cash at Bank650Allowance for doubtful debts740Purchases86,046Sales revenue124,450Bad debts256Bad debts recovered45Trade receivables20,280Trade payables10,056Bank Charges120Rent2,000Return inwards186Return outwards135Salaries3,500Wages8,250Traveling expenses1,040Carriage inwards156Discounts allowed48Discounts received138General expenses2,056Gas, electricity and water2,560Carriage outwards546Traveler’s salaries and commission5,480Printing and stationery640157,564157,564You are provided with the following information:Inventory at 31/12/2004 UGX 7,550Interest on the loan at 5% p.a not been paid at 31/12Rent includes UGX. 250 for the premised paid in advance to 31 March nextDepreciate plant and machinery by 10% p.a, depreciate furniture and fittings by 5% p.aAdjust the allowances for doubtful debts to 5% of trade receivablesShow wages as part of cost of sales.Required:Draw the income statement for the company for the year to 31/12/2004 and the balance sheetQuestion fiveExplain why an organization has to prepare a cashbook? (3 marks)The following balances were extracted from the books of G and F on 31/06/2006Cash5,000,000Bank3,300,000 (Cr)During the month of July the following transactions took placeJuly 1st, bought goods on credit for shs 6,500,0002nd, sold goods on credit for shs 8,000,000On 4th received a cheque of shs 5,000,000 from the debtor and banked itOn 7th paid creditors shs 1,500,000 cash and shs 500,000 by chequeOn 10th rejected and returned goods worth shs 300,000 to a creditorOn 12th a debtor rejected and returned goods worth shs 100,000On 14th banked shs 1,500,000 cashOn 16th paid rent of shs 400,000 cash, shs 800,000 by cheque and electricity shs 250,000 cashOn 20th withdrew shs 1,000,000 from the bank and put in the cash box for payment of cash expensesOn 22nd paid shs 2,000,000 by cheque for the retirement loanOn 25th sold the land inherited from the father for shs 5,000,000 cashOn 27th received cash of shs 100,000 and a cheque of shs 2,000,000 from a debtorOn 30th used business cash of shs 300,000 for a social evening with his friends at a club.Required. Enter the above transactions in a two column cash book (17 marks)SECTION CQuestion sixDescribe the qualitative characteristics of financial statements )8 marks)Explain the following accounting concepts and give examples where they are applied in the preparation of financial statements.Question sevenExplain the historical accounting concept and give reasons why it is preferred as a method of valuing assets (6 marks)Identify the users of financial statements and their information requirements(14 marks)During the month of January 2003, the following errors which were made in the financial year which ended on 31st December 2002 were located.A cheque for an amount of 1,485, 000/= received from a debtor was recorded in the debtor’s A/C as 1,471,500/= but was properly recorded in the cash bookElectricity expense paid was under recorded in the bank column of the cash book by shs. 4,500/= The entry was correct in the other accountA sales invoice of 750,000/= was recorded as 705,000/= in the sales day book.A creditor had a balance of 1,500,000/= in her account but was taken to the trial balance as 1,60,000/=A cheque payment of 60,000/= for postage stamps was debited to the cash book and properly recorded in postage account in the ledger.Accrued salaries 300,000/= were not recorded in any accountPrepared insurance 90,ooo/= was credited to accrued insurance account as 105,000/= The corresponding double entry account had no problemThe debit side of the trial balance was under added by 45,000/= because of discount allowed Account which was not opened in the ledger.Directors Christmas party which was not voted for an not part of their official emoluments costed 500,000/=. This amount was withdrawn from the company’s bank account. It was debited to General expenses A/C and credited to the cash book (bank column)The provision for bad debts for 150,000/= was omitted from the ledger but, the bad debts account had been debited.RequiredJournal entries to correct all the errors(10 marks)Suspense Account(4 marks)Corrected balance sheet(6 marks)QUESTION SEVENClearly explain the importance of accounting from the perceptive of users of accounting information (10 marks)Briefly discuss accounting concepts that are fundamental under International Accounting Standards. (8 marks)Distinguish between a suspense account and a control account. (2 marks)QUESTION EIGHT“A trial tests the accuracy of the financial accounting recording system but when it balances, it does not always mean that all was alright” Briefly discuss the statement. (10 marks)Explain the following terms with examples as used in accounting regulatory frame work.Accounting concepts/conventions(2 marks)Accounting bases(2 marks)Accounting policies(3 marks)Accounting standards(3 marks)Kiwedde Limited’s Trial balance for the year ended 31 December 2007 is given below:DetailsDr (000)Cr (000)Land and buildings (cost)540,000Plant and Machinery (cost)150,000Equipment (cost)180,000Accumulated depreciation – plant and Machinery30,000 - Equipment36,000Purchases and Sales450,0001,000,000Stock on 1st January 2007350,000Carriage in wards20,000Salaries and Wages1,50010% Bank loan286,300Rent2,800Good will22,000Returns10,00012,000Capital600,000Cash and bank190,000Discounts5001,000Trade debtors and creditors200,000500,00010% Treasury Bills250,000Bad debts1,200Provision for bad debts4,700Utilities130,000Retained earnings30,000Carriage out words2,000TOTAL2,500,0002,500,000Other relevant informationInventory at the end of the year was valued at 120,000,000The buildings in the trial balance were acquired at the beginning of the year at a price of 300,000,000Depreciate non current assets at 10% on costSalaries were paid up to 31 / 3 / 2008Both interests on the treasury bills accruedMore debtors are expected to default a further provision of 10% needs to be madeRequired. Show the journal entries for the additional information 1 to 6Prepare an income statement, statement of changes in equity and the balance sheet as at 31/12/2007Question OneThe following trial balance is an extraction from the ledger accounts of Zulie Ltd for the financial year ended 31/12/2004Account TitlesDr (Shs 000)Cr (Shs 000)Capital400,000Land (cost)280,000Plant and Machinery (cost)200,000Motor vehicles (cost)320,000Accumulated depreciation:Plant and Machinery120,000Motor vehicles64,000Stock/Inventory18,400Trade debtors/Accounts receivable120,000Provision for bad debts12,000Bank140,000Cash20,000Trade creditors / Accounts payable60,000General expenses20,000Electricity10,000Rent14,000Advertising8,000Salaries40,000Bad debts10,000Insurance1,600Water8,000Sales1,200,000Sales returns12,000Purchases640,000Purchases returns12,000Carriage inwards10,000Discounts received6,000Discounts allowed2,000Total1,874,0001,874,000Stock at 31/12/2004 was valued at 14,000,000/=It is the Company’s policy to deprive fixed assets at a rate of 10% on cost per annumThe Provision for bad debts should be increased by 6,000,000/=4,000,000/= of rent relates to the forthcoming financial periodSalaries of 5,000,000/= accruedREQUIRED:Journal entries for the additional information i-vPrepare Zulie Ltd’s income statement for the period ended 31/12/2004 and the balance sheet as at 31/12/2004(20 marks)Question TwoWrite short notes on the following:i.Duality conceptiii.Accounting Equationii.Prepaid expensesiv.Financial AccountingBriefly explain the stages involved in the Accounting cycle/process.QUESTION 1.The following is a Trial Balance for Sydaka Ltd as at 31 Dec. 2001ACCOUNT TITLEDR (Shs)Cr (Shs)SSales36,000,000Purchases25,000,000Sales returns820,000Purchases returns400,000/=Stock (1.1. 2001)2,500,000Wages4,000,000Rent and rates1,600,000Building (cost)20,000,000Accumulated depreciation Building2,000,000Motor vehicles (cost)8,000,000Accumulated depreciation motor vehicles800,000Trade debtors4,400,000Bad debts expenses100,000Trade creditors1,850,000Capital31,775,000Provision (for bad and doubtful debts)200,000Balance at bank1,225,000Drawings5,880,000Discount allowed300,000Discount received800,00073,825,00073,825,000Additional informationClosing stock is valued at 1,800,000/=Wages of 360,000/= accrued (were not paid during the financial year)An amount of 200,000/= which relates to rent and rates was pre-paid for financial year commencing January 2002Bad debts expenses increased by 440,000/=Building and motor vehicles are to be depreciated by straight line method using 10% per annum.REQUIREDa)prepare Journal Entries for the additional information above(7 marks)b)prepare the trading and profit and loss account for Sydaka Ltd for the periods ended 31. Dec. 2001(6 marks)c)Construct the balance sheet for the Sydaka Ltd as at 31 Dec 2001(7 marks)The company used double declining balance sheet method and reported a net profit of shs. 15,000,000 in the second year of using the asset, if the straight line method had been used, what would have been the Net profit or loss in the second year?Shs 12,320,000Shs 14,748,000Shs 15,252,000Shs 11, 530,000None of the above.The company wants to dispose-off (Board –off) the asset at shs. 1,200,000 after using it for two years. What will be the loss or gain on disposal? (Double declining balance method being used).Shs 600,000 lossShs 480,000 gainShs 300,000 gainShs 528,000 lossNone of the aboveWhich of the following concepts is not fundamental under International Accounting Standard One (IAS 1)Going concernAccrualConsistencySubstance over formAll are fundamentalThe following information was obtained from records of a manufacturing company for the year to 31st January 2003SalesShsRaw-materials issued (used)50,000,000Raw-materials purchased10,000,000Raw-materials returned20,000,000Direct wages5,000,000Factory supervisors salaries15,000,000Direct manufacturing expenses2,000,000Factory insurance1,000,000Office Administrative overheads8,000,000Finished goods opening stock, cost4,000,000Finished goods closing stock, cost3,000,000Use the above data to answer questions (vi – viii)What is the prime cost?Shs. 40,000,000Shs 34,000,000Shs 26,000,000Shs 31,000,000None of the aboveIf the mark-up of 20% is added when transferring goods from the factory to the selling department. What is the value of goods manufactured/completed?Shs. 28,400,000Shs 30,600,000Shs 34,080,000Shs 24,600,000None of the aboveWhat is the Net profit for the year?Shs. 16,200,000Shs 14,600,000Shs 12,500,000Shs 13,900,000None of the aboveGoods for shs 680,000 were purchased from Lubega on credit but the book-keeper made a mistake by debiting account for Luboga with shs 860,000 which of the following entries corrects the error?Debit Lubega 680,000 debit suspense 180,000 and credit Luboga 860,000Debit suspense 180,000, debit Luboga 860,000 and credit LubegaCredit Lubega 680,000 credit Lubega 860,000 and suspense 1,040,000Debit purchases 680,000 and credit Lubega 680,000None of the aboveAt the end of the month, the following information was extracted from the cashbook and bank statement. Balance as per cashbook shs. 40,000,000 credit and balance as per bank statement shs. 30,000,000 debit. Total of un credited cheques was shs. 12,000,000 while total direct debit amounting to shs 500,000. total direct credits were shs 6,000,000. Assuming that the only missing items to reconcile the balance as per cashbook and balance statement were un presented cheques. QUESTION FIVEExplain the advantages of control accountsMukasa owns a retail shop in Nakawa trading centre. The following information relates to his debtors:-Balance on 1st January 2006 UGX 10,000,000, 60% of this is owed from David and the balance from Moses.Transactions for the years:-Sales of UGX 18,000,000, 60% to Moses and the balance to DavidCheque Receipts from debtors by cheque UGX 14,000,000, 50% from David the balance from Moses.Dishonored cheques UGX 3,000,000, 80% from Moses and the balance from DavidUncollectible debts were 10% of sales; ? of these debts relate to David and the balance to Moses.Returns were UGX 1,000,000 and 500,000 from Moses and David respectively.Discounts allowed of 1% and 2% to Moses and David respectively on their respective sales figures.RequiredFor the year ended 31/12/2006, draw up:-Debtors’ subsidiary ledger well close off(6 marks)Debtors’ control account well close off(9 marks)Bank Reconciliation statement.What Is a Bank Reconciliation statement?This is a periodic statement prepared to reconcile the cash book and bank statement balance correcting discrepancies.Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a bank statement.??Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.Or The process of adjusting an account balance reported by a bank to reflect transactions that have occurred since the reporting date comparing them with records appearing in the cash book records.Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies.Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances.??The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.?Causes of disagreement between Bank statement and Cash book:Usually the reasons for the disagreement are:That our banker might have allowed interest, received dividends which have not yet been entered in our cash book.(Direct credits) which is income to the business.ie cash inflow.That our banker might have debited our account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.( Direct Debits) which is an expense to the business. ie cash outflowThat some of the cheque which we drew and for which we credited our bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.(unpresented cheques to the bank for payments. Ie issued cheques)That some cheques or drafts which we have paid into bank for collection and for which we debited our bank account, were not realized within the due date of closing and therefore, not credited by the bank.( uncredited cheques with our bankers.Recieved cheques.)The banker might have credited our account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book.That cheques dishonoured might have been debited in the bank statement but have not been given effect to in our books.How to Prepare a Bank Reconciliation Statement:To prepare the bank reconciliation statement, the following rules may be useful for the students:Check the cash book receipts and payments against the bank statement.Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.Make a list of these items.Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.Make a list of these items.Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways:(i)? First method (Starting with the cash book balance)(ii) Second method (Starting with the bank statement balance)First Method (Starting With the Cash Book Balance):(a)If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.(b)If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.Second Method (Starting With the Bank Statement Balance):(a)If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on the bank but not yet presented for payment. The new balance will then be agree with the balance of the cash book.(b)If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques, drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with the balance of the cash book.Alternatively:InformationCash book shows debit balance i.e., bank statement shows credit balanceCash book shows credit balance i.e., bank statement shows debit balanceCB to BSBS to CBCB to BSBS to CBCheques issued but not presented in the bank.AddLessLessAddCheques paid into bank but not collected and credited by the bank.LessAddAddLessCredit, if any in the bank statement.AddLessLessAddDebit, if any in the bank statement.lessAddAddLessIllustration.On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was Shs 1,401 and the balance as shown by the bank statement was shs 2,253.On checking the bank statement with the cash book it was found that a cheque for Shs 116 paid in on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31 December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons shs 29, Bashir & Co. Shs 801, MA Jalil Shs 6, Khalid Bros., Shs 132.Prepare a statement recording the two balances:Solution:Bank Reconciliation Statement on 31st December 1991???First Method:??Balance as per cash book - Dr.?1,401Less cheques paid in but not collected?116????1,285Add cheques drawn but not presented:?????? Rashid & Sons29????? Bashir & Co.801????? MA Jalil6????? Khalid Bros.132968?Balance as per bank statement - Cr.2,253Second Method:Balance as per bank statement - Cr.2,253Less cheques drawn but not presented9681,285Add cheques paid in but not collected116Balance as per cash book - Dr.1,401illustration 2:On 31st March, 1991 the bank statement showed the credit balance of shs 10,500. Cheque amounting to shs 2,750 were deposited into the bank but only cheque of shs 750 had not been cleared up to 31st March. Cheques amounting to shs 3,500 were issued, but cheque for shs 1,200 had not been presented for payment in the bank up to 31st March. Bank had given the debit of shs 35 for sundry charges and also bank had received directly from customers shs 800 and dividend of shs 130 up to 31st March. Find out the balance as per cash book.Solution:Bank Reconciliation Statement as on 31st March, 1991Balance as per bank statement - Cr.10,500Add cheques deposited but not credited750??11,250Less cheques issued but not presented1,200??10,050Add bank charges made by the bank35??10,085Less omission in cash book (shs 800 + shs 130)930?Balance as per cash book9,155Note:Charges made by the bank shs 35 have not been recorded in the cash book, therefore, the balance in cash book is more. Add to bank statement balance also.Dividend and amount from customers received by the bank have not been recorded in the cash book. Therefore, in the cash book there is no entry of shs 930 (800 + 130). Deduct from the bank statement balance to adjust it according to cash book paring the Bank Statement records to the Cashbook records.When all of the receipts for a period have been written up in the cash receipts book and all of the cheque payments, standing orders and direct debits have been entered into the cash payments book, it is necessary to carry out any further checks possible on the cashbook.??The most obvious check is to compare the entries in the cash receipts and cash payments book for the period, to the entries on the bank statement, although some care does need to be taken here.Debits and CreditsOne of the most obvious differences between the cashbook and the bank statement is that the use of the terms debit and credit appear to be totally opposed to each other.If cash is paid into the bank by a business then for the business this is a receipt and is entered in the cash receipts book as a debit entry.??However, in the bank statement this will be described as a credit and the balance will be a credit balance.??This is due to the fact that if a business has money in the bank, the bank effectively owes the money back to the business and therefore the business is a creditor to the bank.Similarly, if the business writes a cheque out of the business bank account this will be entered in the cash payments book as a credit entry.??From the bank's perspective however, this is known as a debit entry and any overdrawn balance is a debit balance.How to prepare a Bank Reconciliation statement.Summarised, the procedure for performing a bank reconciliation, in four simple steps:Pre Bank Reconciliation .Compare the cash receipts book to the receipts shown on the bank statement (the credits on the bank statement) - for each receipt that agrees, tick the item in both the cashbook and the bank pare the cash payments book to the payments shown on the bank statement (the debits on the bank statement) - for each payment that agrees, tick the item in both the cashbook and the bank statement.Any un-ticked items on the bank statement (other than rare errors made by the bank) will be items that should have been entered into the adjusted cash book, but have been omitted for some reason - these should be entered into the cashbook and then the amended balance on the cashbook can be found.??To find the correct cashbook balance a ledger account is used for the bank with the original cashbook balance shown as the brought forward balance and any additional payments shown as credits and receipts as debits.??This is illustrated in the example.Finally, any un-ticked items in the cashbook will be the timing differences - unpresented cheques and outstanding lodgements - these will be used to reconcile the bank statement closing balance to the corrected cash book closing balance.Post Bank Reconciliation - Completing The Double EntryOpening Balances On The Cashbook & Bank StatementIn our example you may have noted that the opening balance on the cashbook agreed with that of the bank statement - there were no unpresented cheques or outstanding lodgements at the end of the previous period.This will not always be the case.??If there were timing differences at the end of the previous period, then a bank reconciliation statement would have to be prepared.??When comparing this period's bank statement and cashbook you will need to have the previous period's bank reconciliation statement in order to be able to tick last period's timing differences when they appear on the bank statement this period.Revision questions.Qn . 1.“It’s not always the case that the balance as per bank statement agrees with the balance as per cash book and thus need to prepare a bank reconciliation statement” This was a comment by Richard a DBA1 student during FA discussions.Account for the discrepancy between the cash book and bank statement balances at the end of the periodExplain the two principle uses of the trial balanceBriefly explain the stages involved in the accounting cycleQuestion 2The following information was extracted from the bank reconciliation statement of Excel Ltd. For the month ended 31/11/2005Direct DebitsDirect (Shs. 000) Credits(Shs 000)Bank Charges3,600Cheque no. 44526.400Commissions33,600Cheque no. 446888.000Un presented Cheque (Shs. 000) Un Credited Cheques(Shs 000)Cheque no. 22010,000Cheque no 11512,000Cheque no. 22234,000Cheque no. 11724,000Cheque no 23526,000Cheque no 12031,200The following is the cash book of Excel Ltd. For the month ended 31/12/2005DRCash Book (Bank Column)CR000000Cheque no.22472,000Bal b/d108,000Cheque no.12218,000Cheque no.3016,000Cheque no.13319,200Cheque no.312144,000Cash24,00034336,000Cheque no.23811,400Cheque no.35472,000Cheque no.19318,000Cheque no.37564,800Cheque no. 26560,000Cheque no.38686,400Cheque no.14657,600Cheque no.40748,000Cheque no.17737,200Cheque no.418112,800Cash48,000Cheque no.42957,600Cheque no.24964,800Cheque no.4318,400Cheque no.87,600Cheque no.442242,400Cash36,000Cheque no.48393,600Cheque no.11136,000Cheque no.504156,000Cheque no.16226,400Cheque no.51526,400Bal c/d688,800Cheque no.54612,000Commission33,6001,308,0001,308,000On the 31.12.2005, the bank sent the following bank statement of Excel Ltd.Debit ShsCredit ShsBalance 000 000000Bal b/d912,000Cash Deposit24,000936,000Cheque no.3016,000930,000“312144,000786,000“12031,200817,200“12218,000835,200“51530,000856,200“34336,000829,200“35472,000901,200“23578,000823,200“11136,000859,200“18396,000955,200“22030,000925,200Cash Deposit36,000961,000Cheque no.13319,200980,400“37564,800915,600“40748,000867,600“11512,000855,600“22472,000927,6000Cheque no.19318,000945,600“26560,0001,005,600“14657,6001,063,200“38686,400976,800“418112,800864,000“24964,800928,800“17737,200966,000“10239,6001,005,600Cash Deposit48,0001,053,600Cheque no.15144,4001,098,600“4318,4001,089,600“483104,400985,200Commission1,200984,000Standing Order (NWSC)6,000978,000Interest4,800982,800Additional Information:Due to some technical defaults with the computers, cheque no. 254 and 115 were wrongly treated in the bank statements.Cheque no. 546 was dishonored by the bank and was received together with bank statement.If other mistakes do exist, they should be deemed to have been made in the cashbook by the bookkeeper.Required:Prepare the Company’s Bank Reconciliation Statement for the month ended 30.06.20QUESTION 4The Bank columns in the Cash Book for June and the Bank Statement for that month for V. Mpawuko K. are as follows.Cash bookShsShsJun 1 Bal b/d4,1195-Jun D. Blake1507 B. Green1588 A. Dailey3497 T.J. Masters8812 J. Grey43316 A. Silver9315 R. Mason4422 J. Ellis7316 B. Stephens8828 M. Brown30728 G. Small1529 K. Black62429 Orange Club5730 K. Wood24930 Bal C/d4,66430 M. Barrel1785,8895,889Bank Statement.Dr(Shs)Cr(Shs)Bal (shs)1-Jan Bal B/d4,1197 Cheque884,2078 D Blackness1504,05711 A. Dailey1393,70816 Cheque933,80117 J. Gray3433,45818 B. Stephens883,37020 R. Mason333,33722 Cheque733,41028 Cheque3073,71730 UDT Standing order443,673Bank Charges923,581Credit transfer J. Walters543,63530 Johnson: Trader’s Credit903,725NoteCheque received from B Green was Dishonored and returned to Mpawuwo on the date the bank statement was received. The bank does not make mistakes!Required:(a)Bring the cashbook reconciliation statement at 30 June 10, 20118 marks(b)Prepare the bank reconciliation statement as at 30 June 7 marks(c)Explain the following terms(i)Bank reconciliation statement(ii)Bank Giro CreditDirect debitsDishonored chequeStanding order.QUESTION 5The following is a cash book and bank statement for Akamwe for the month of October, 2000Cash Book (Bank Column)DrCr(Shs. 000)(Shs 000)Bal b/f80,000Cheque No.1110 Mukasa32,000Cheque No.510 John60,000“1112 Mao40,000“512 Musa24,000“1114 Okuru30,000“514 Tino10,000“1115 Opolot14,000“515 Mugisha 4,000“1119 Alaba6,000“517 Stella34,000“1118 Atieno4,000“518 Mathew13,000“1120 Martin2,000“520 Joel2,000“1122 Mary1,000“1123 Simon4,000“ Bal c/f94,000227,000Bank StatementDrCrBalance(Shs.000)(Shs.000)(Shs.000)Bal b/f80,000Cheque No.510 John60,000140,000“1110 Mukasa32,000108,000“1112 Mao40,00068,000“1114 Okurut30,00038,000“512 Musa24,00062,000“514 Tino10,00072,000“1115 Opolot14,00058,000 C.M Rita18,00076,000 S.O (SWICO)2,00074,000 C.M Ben16,00090,000 Bank charge20089,800C.M = Credit MemoS.O = Standing OrderA cheque written to Alaba and one received from Mugisha were dishonored by the bank.Required:Adjust Cash BookBank Reconciliation StatementQUESTION. 6.The following information was extracted from the bank reconciliation statement of Excel Ltd. For the month ended 31/11/2005Direct Debits(Shs.000)Direct Credits(Shs 000)Bank Charges3,600Cheque No. 44526,400Commission33,600Cheque no. 446888,000Un presented Cheque (Shs.000)Un credited Cheques(Shs 000)Cheque No. 22010,000Cheque No. 11512,000Cheque No. 22234,000Cheque No. 11724,000Cheque No. 23526,000Cheque No. 12031,200The following is the cashbook of Excel Ltd. For the month ended 31/12/2005DRCash Book (Bank Column)CR000000Cheque no.22472,000Bal b/d108,000Cheque no.12218,000Cheque no.3016,000Cheque no.13319,200“312144,000Cash24,00034336,000Cheque no.23814,400“35472,000“19318,000“37564,800“26560,000“38686,400“14657,600“40748,000“17737,200“418112,800Cash48,000“42957,600Cheque no.24964,800“4318,400“15187,600“442242,400Cash36,000“84393,600Cheque no.11136,000“504156,000Cheque no.16226,400“51526,000Bal c/d688,800“54612,000Commission33,6001,308,0001,308,000On 31.12.2005, the bank sent the following bank statement of Excel Ltd.Debit ShsCredit ShsBalance000000000Bal b/d912,000Cash Deposit24,000936,000Cheque no.3016,000930,000“312144,000786,000“12031,200817,200“12218,000835,200“51530,000865,200“34336,000829,200“35472,000901,200“23578,000823,200“11136,000859,200“18396,000955,200“22030,000925,200Cash Deposit36,000961,200Cheque no.13319,200980,400“37564,800915,600“40748,000867,600“11512,000855,600“22472,000927,600Cheque no.19318,000945,600“26560,0001,005,600“14657,6001,063,200“38686,400975,800“418112,800864,000“24964,800928,800“17737,200966,000“10239,6001,005,600Cash Deposit48,0001,053,600Cheque no15144,4001,098,600“4318,4001,089,600“483104,400985,200Commission1,200984,000Standing Order (NWSC)6,000978,000Interest4,800982,800Additional Information:Due to some technical faults with the computers, cheques no 354 and 115 were wrongly treated in the bank statements.Cheque no 546 was dishonored by the bank and was received together with bank statement.If other mistakes do exist, they should be deemed to have been made in the cashbook by the bookkeeper.Required:Prepare the Company’s Bank Reconciliation Statement for the month ended 30.06.2002 (20 marks)QUESTION. 7.The Balance sheet of MEYER Ltd as at 31th December 2000 was as follows:Shs ‘000Shs ‘000Shs ‘000Fixed Assets (net depreciation)Stock10,000Debtors15,000Prepayments5,000Bank20,000Cash25,00075,000Suspense Account 17075,170Less: Current LiabilitiesCreditors17,500Accruals7,50025,000Working Capital50,170Net Assets550,170Financed by:Capital302,500Add. Net profit33,680336,180Less: Drawings21,010Owners equity315,170Long term bank loan235,000Capital employed550,170During the month of January 2001, the following errors which were made in the financial year ended on 31st December 2000 were located.A Cheque of an amount of 2,457,000/= received from a debtor was recorded in the debtors’ A/C as 2,452, 500/= but was properly recorded in the cash book.Electricity expense paid was under recorded in the bank column of the cash book by shs. 7,500. the entry was correct in the other account.A sales invoice of 1,250,000/= was recorded as 1,025,000/= in the sales day book.A creditor had a balance of 2,500,000/= in her account but was taken to the trial balance as 2,750,000/=A cheque payment of 100,000/= for postage stamps was debited to the cash book and properly recorded in the postage account in the ledger.Accrued salaries is 500,000/= was not recorded in any account.Prepaid insurance of 150,000/= was credited to accrued insurance account as 175,000/= The corresponding double entry account had no problem.The debit side of the trial balance was under added by 75,000/= because of discount allowed account that was opened in the ledger.Director’s Christmas party which was not voted for and not part of their official emoluments costed 1,000,000/= This amount was withdrawn from the company’s bank account. It was debited to the general expenses account and credited to the cash book (bank column)The provision for bad debts for 250,000/= was omitted from the ledger but, the bad debts account had been debited.Requires:i.Journal entries to correct all errors(10 marks)ii.Suspense Account(4 marks)Corrected Balance Sheet.Illustration oneThe accountant of starlight Ltd prepared a trial balance for his company for the month of December 1997 but failed to balance. The total on the debit side was more that the total on the credit side by 33,000/=. He opened a suspense account for the difference and proceeded to prepare final accounts. He reported a net profit profit of 1,400,000/=During the month of January 1998 he discovered the following mistakes, which had been made in December 1997.The purchases account had been under cast by 2,000/=Payment of 555,000/= by cheque for insurance was properly recorded in the cashbook but posted to insurance account by mistake as 515,000/=A sales invoice of 300,000/= was not recorded in the sales day book and therefore not posted to the ledger.The credit side of the sales account was under added by 4,000/=Motor vehicle repairs costing 50,000/= was debited to motor vehicle accountPayment of 680,000/= cash to join a creditor was properly recorded in Johns account but was wrongly recorded in the cash book as 670,000/=The book keeper had made a mistake by debiting ledger fee of 15,000/= to the account but properly recorded it in the ledger fee account.Sale of goods for 600,000/= on credit to Tino was properly recorded in the sales account but was recorded in the ledger fee account.The bank column of the cash book credit side was over added by 1000/=A credit note issued for 800,000/= was properly recorded in the customers account but was wrongly recorded in the other account necessary for completion of double entry as 820,000/=Discount received of 6,000/= was debited to discount allowed account.RequiredJournal entries to correct all the errorsA suspense accountStatement of corrected net profit. ................
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