March 25, 2021

CHAPTER 9 DOUBLE ENTRY BOOK KEEPING 9.0 LEARNING OBJECTIVES By the end of this chapter, students will be able to record the entries in books of accounts using the double entry book-keeping. 9.1 THE DOUBLE ENTRY SYSTEM FOR ASSETS, LIABILITIES AND CAPITAL Double entry book keeping is the system of accounting which reflects the fact that: x Every financial transaction affects the entity in two ways and gives rise to two accounting entries, one a debit entry and the other a credit entry. x The total value of the debit entries is therefore always equal at any time to the total value of credit entries. 9.2       THE ACCOUNTS FOR DOUBLE ENTRY Each account should be shown on a separate page in the accounting books. The double entry system divides each page into two halves. The left side of each page is called the debit side while the right hand side of the page is called the credit side. The title of each account is written a cross the top of the account at the centre. i.e. Title of the account Left hand side DEBIT side Right hand side CREDIT side These are commonly called T – accounts. As observed in the previous chapter, transactions increase or decrease assets, liabilities or capital. Thus in terms assets, liabilities and capital: x To increase an asset we make a debit entry. x To decrease an asset we make a credit entry. x To increase a liability/capital account we make a credit entry. x To decrease a liability/capital account we make a debit entry. Worked examples Enter the following transactions using the double entry book keeping system 1)         The owner starts the business with K10, 000 in cash on 1 August 2013. Effect of the transaction                                        action Increases the asset cash                             debit the cash account Increases the capital                                   credit the capital account  THE ASSET OF INVENTORY Inventory movements x Increase in inventory Increases in inventory may be due to the following causes: The purchase of additional goods The return into the business of goods previously sold. To distinguish the two aspects of the increase of inventory of goods, two accounts are opened: A purchase account in which purchases of goods are recorded A returns inwards account in which goods being returned into the business are recorded (this is also called a sales return account) So for increases in inventory, we need to choose which of these accounts to use to record the debit entry of the transaction x Decrease in inventory Decreases in inventory can be due to the following causes The sale of goods Goods previously bought by the business now being returned to the supplier In order to distinguish the two aspects of the decreases in inventory, two accounts are opened: A sales account to record the value of goods sold A return outwards account in which goods returned to suppliers are recorded. (This is also called a purchase returns account). So for decreases in inventory, we need to choose which of these two accounts to use to record the credit side of the transaction. DOUBLE ENTRY FOR EXPENSES AND REVENUE Example Rent of K20 is paid in cash. Here the dual effect is as follows: The total of the expenses of rent is increased. Expenses entries are shown as debits; therefore the action is to debit the rent account with K200. The asset of cash is decreased. This means the cash must be credited with K200 to show the decrease of the asset. Summary:       Debit Rent account with K200. Credit Cash account with K200. Motor expenses of K355 are paid by cheque. The dual effect is as follows: The total for motor expenses paid is increased, hence the action required is to debit the motor expenses account with K355. The asset cash in the bank is decreased. This means that the bank account must be credited with K355 to show the decrease of the asset. Summary:      Debit Motor expenses account.         Credit Bank account. K60 cash is received for commission earned by the business. The dual effect is as follows: The asset cash is increased; hence a debit entry of K60 is made on the cash account to increase the asset. The revenue account, commission received is increased. Revenue is shown by a credit entry; hence the commission received account is credited with K60. Summary:       Debit Cash account with K60. Credit Commission received with K60. 9.5        DRAWINGS x Sometimes the owners take cash out of the business for their private use. This is known as drawings. x Any money taken out of a business will educe capital. Drawings should be treated as expenses of a business. x An increase in drawings is a debit entry in the drawings account with the corresponding credit being an asset account such as cash or bank. NB: In theory, the debit entry should be made in the capital account since drawings decrease capital, However to prevent the capital account becoming full of small transactions, drawings are not entered in the capital account, instead a drawings account is opened. Example: On 25th August the owner takes K50 cash out of the business for his own use. The dual effect of the transaction is as follows: 1) Capital is decreased; hence the drawings account is debited. 2) Cash is decreased and the cash account is credited. i.e.                        Drawings                                  Cash Cash     K 50                                                                    Drawings K 50 Exercise1 Prepare the T accounts for the following transactions for the month of June July    1      started in business with K5000 in the bank and K1000 cash bought stationery by cheque K75 bought goods on credit from smart K2100 sold goods for cash K340 paid insurance by cash K290 bought a computer on credit from M Jere K700 paid expenses by cheque k32 sold goods on credit to Mr. Mbewe K630 returned goods to smart K550 14        paid wages by cash K210 17        paid rent by cheque K225 received a cheque for

CHAPTER 1 INTRODUCTION TO ACCOUNTING. CHAPTER 2 REGULATION OF ACCOUNTING CHAPTER 3 ACCOUNTING INFORMATION CHAPTER 4 TYPES OF BUSINESS TRANSACTIONS CHAPTER 5 BOOKS OF ORIGINAL ENTRY AND LEDGERS CHAPTER 6 THE CASH BOOK CHAPTER 7 CHARTS OF ACCOUNTS AND CODING OF ACCOUNTS CHAPTER 8 THE ACCOUNTING EQUATION CHAPTER 9 DOUBLE ENTRY BOOK KEEPING CHAPTER 10 BALANCING OF ACCOUNTS AND PREPARING A TRIAL BALANCE CHAPTER 11 BAD DEBTS AND ALLOWANCES FOR DOUBTFUL DEBTS CHAPTER 12 DEPRECIATION OF NON – CURRENT ASSETS CHAPTER 13 ACRUALS AND PREPAYMENTS CHAPTER 14 STATEMENTS OF PROFIT OR LOSS CHAPTER 15 STATEMENT OF FINANCIAL POSITION CHAPTER 16 CLOSING INVENTORY VALUATION CHAPTER 17 ERRORS AND THEIR CORRECTION CHAPTER 18 CONTROL ACCOUNTS CHAPTER 19 BANK RECONCILIATION CHAPTER 20 PARTNERSHIPS CHAPTER 21 LIMITED COMPANIES CHAPTER 22 INCOMPLETE RECORDS

CHAPTER 22 INCOMPLETE RECORDS 22.0 LEARNING OBJECTIVES At the end of this chapter, students are expected to construct final accounts from any set of accounting records which fall short of complete double entry. Since in extreme cases there may be no any records whatever of the day-to-day transactions, it is expected that the students shall be able to build up accounts largely from estimates.  In other instances, books may have been kept by ‘single entry’ or data may be available by means of which double entry can be constructed. 22.1     APPROACH TO BE ADOPTED In order to prepare the Statement of Profit and Loss and Comprehensive Income and the Statement of Financial Position, the following procedure is recommended: Stage 1 Construct a statement of the financial condition at the beginning of the period. This requires assets and liabilities to be determined. The values of any non-current assets can be obtained from such details as the trader is able to supply of their cost and the dates upon which they were acquired, provision for depreciation from the date of acquisition to the commencement of the current period being deducted. The trader must provide an estimate of the value of his inventories and particulars of any book debts and liabilities. Accounts should be opened, and estimated asset values posted to the debit side. Total of the book debts should be debited to total trade receivables account, and the total of the liabilities credited to a total trade payables account. This is illustrated in a later section. The excess of the aggregate of the assets over the liabilities may be taken to represent the amount of the trader’s capital at the commencement of the period and should be credited to his/her capital account. Stage 2 A careful analysis should be made of the bank statement, and a cash summary (which may take a form of receipts and payments account). For this purpose, analysis columns should be prepared for each of the principal headings of receipts and payments. For example, the lodgments into the bank may be analysed under the heading of cash takings, income from investments, the sale of assets, new capital paid in and private income of the trader. Payments from the bank should be analysed as between payments for goods purchased, rent, rates, insurances and other business expenses, cheques cashed for wages, petty cash and personal expenditure, and cheques drawn for the trader’s private purposes. Stage 3 Ascertain the amounts of any cash takings which have not been paid into the bank, but have been used by the trader for the payment of business expenses, goods purchased for cash and personal expenses. An estimate should also be obtained of the value of any inventory which may have been withdrawn by the trader for his own personal use or for that of his/her family. Stage 4 On completion of the above analysis, postings will be made as follows: From the debit side of the cash summary: cash takings to the credit side of the total trade receivables account; income from investments (if any) to the credit of income from investments account; proceeds of sale of assets (if any) to the credit of the appropriate asset accounts; other items to the credit of the respective accounts. If a profit or loss on the sale of assets is disclosed, this should be transferred either to Income Statement (the Statement of Profit and Loss and Comprehensive Income) or the proprietor’s capital account. From the credit side of the cash summary: payments for goods purchased to the debit of total trade payables account; payments of expenses to the debit of the relevant nominal account; cheques drawn for petty cash to the debit of petty cash account; the proprietor’s personal drawings to the debit of his current account; the purchase of assets (if any) to the debit of the respective assets accounts. Stage 5 The amount of any cash takings used for business or private purposes should be noted, the appropriate account debited and the appropriate receivables (trade or other) account credited. Note, however, that in incomplete record situations, private drawings may need to be calculated as a balancing figure. Stage 6 This involves calculating year-end adjustments and balances. A schedule should be compiled of the book debts outstanding, the total of which should be carried down in the total trade receivables account. The balance of this account will now represent the total sales for the period and should be transferred to the credit of trading account. Similarly, s schedule should be made of liabilities outstanding trade and other payables. The total should be carried down in the total trade payables account. The balance of this account will now represent the total purchase for the period and should be transferred to the debit of trading account. Accruals and prepayments will be carried down as closing balances in the relevant expenses accounts. Stage 7 The whole of the transactions will now be recorded in total double entry form and it will be possible to extract a Statement of Profit and Loss and Comprehensive Income as well as a Statement of Financial Position in the usual way. 22.3 RELIABILITY OF INFORMATION The gross profit percentage revealed by the trading account may afford some indication as to the accuracy or otherwise of the data and estimates used in compiling the accounts. If it is found that this percentage is substantially lower than the percentage of gross profit normally earned in the particular trade, doubt would be thrown on the accuracy of the amounts of the opening and closing inventories, purchases or sales. Further enquiry would therefore be necessary. In particular, information should be elicited as to the style in which the trader lives. It will often be found that the amount of cash takings alleged to be withdrawn for private use is wholly incompatible with the size and character of the trader’s domestic establishment and mode of life. A re-estimation of the amount of personal drawings might thus

CHAPTER 21 LIMITED COMPANIES 21.0 LEARNING OBJECTIVES The objective of this chapter is to help students understand what items to be included in the financial statements. It also aims to remind the students on how to prepare financial statements in accordance to International Accounting Standards and assist them to differentiate between profit and cash flow, and understand the need for management to control cash flow. 21.1 NEED FOR LIMITED COMPANIES Limited liability companies, more commonly referred to as limited companies, came into existence originally because of the growth in the size of businesses, and the need to have a lot of people investing in the business who would not be able to take part in its management. 21.1     PRIMARY FINANCIAL STATEMENTS The preparation of final accounts start with the trial balance. When the debit and credit sides of the trial balance agrees, then the information is used to prepare Statement of Profit or loss and Other Comprehensive Income and Statement of Financial Position. Statement of Profit or Loss and Other Comprehensive Income This starts with Income (Revenue) for the whole period and then charges to the Income, cost of making that income in the Trading account. This then calculates gross profit which we subtract all expenses of running the business. Statement of Comprehensive Income for XYZ for the year ending 31st December 2013                 MK Revenue        XX Less Return Inwards       (XX)   Less Cost of Sales (COSA)        XX Opening Inventory      XX   Add Purchases     XX          XX   Less: Closing Inventory     (XX) (XX) Gross Profit Less : Expenses        XX Rent     XX   Salaries and wages     XX   Water and electricity     XX   Other operating expenses     XX (XX) Profit for the period       XX Other comprehensive Income Revaluation Reserves     XX Total comprehensive Income     XX A Statement of Financial Position This is a statement which shows all the list of assets and liabilities. The statement of financial position is a snapshot of what the business is wealth. This statement of financial position is not for the whole year but represents the values as at a particular date. The statement of financial position has the Asset on one side and Capital with liability on the other side. The arrangements of items in the statement of financial position starts with items which are not very liquid enough and ends with very liquid items. Pro-forma Statement of Financial Position of XYZ as at 31st December 2013 Non-Current Assets                             Cost (NBV)   Dpn   C/ Amount MK   MK     MK Property, Plant and Equipment           XX   XX     XX Intangible Assets                                 XX   XX     XX   Current Assets         XX Inventory   XX       Receivables   XX       Prepayments   XX       Bank   XX       Cash   XX     XX                                                               Financed by Capital and Liabilities         XX Capital         XX Share Premium         XX Add: Profit         XX Other reserves         XX   Non-Current Liabilities         XX Long term loan         XX Provisions         XX   Current Liabilities         XX Current portion of long term loan   XX       Payables   XX       Accruals   XX     XX           XX 169 The capital side of a sole trader is represented as follows:     Capital    XX Add: Profit   XX XX Less: Withdrawals   (XX) Capital While as capital side for a partnership is reflected as follows:   XX Capital                                    : A   XX                                                   B                                                                   XX XX Current Accounts                   :A                                            XX B                                            XX           XX XX The above formats mostly refer to sole traders and partnerships. However, with limited companies some items need emphasizing: Share capital: shareholders of a limited company obtain their reward in form of a share of the profits, known as dividend. Main types of shares are preference shares and ordinary shares. Share capital has different meanings as can be authorized share capital and/or issued share capital. It can also be called-up capital, uncalled capital, calls in arrears, and paid-up capital. Debentures: this term is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender. Interest will be paid to the holder, the rate of interest being shown on the certificate. Directors’ remuneration: as directors exist only in companies, this type of expense is only found in company accounts. Directors are legally employees of the company, appointed by the shareholders. Their remuneration is charged to statement of profit or loss. END OF CHAPTER SUMMARY This chapter was included as a revision on the preparation of financial statements with emphasis for the sole trader and partnerships. Formatting is an important element in the preparation of financial statements and it is important that students should have a full understanding as to where assets, liability, Capital, income and expenditure are presented in the financial statement.

CHAPTER 20 PARTNERSHIPS 20.1     LEARNING OBJECTIVES  After studying this chapter, students are expected to define partnership and explain the purpose and content of a partnership agreement, explain, calculate and account for appropriation of partnership profit. Further they will be able to explain the difference between partner’s capital and current accounts and prepare the final accounts for a partnership as well as explain and account for the admission of a new partner including the treatment of any goodwill arising. 20.1      THE NATURE OF A PARTNERSHIP A partnership can be defined as the relationship which subsists between persons carrying on a business in common with a view of profits. The people who own a partnership are called partners. A partnership has the following characteristics It is formed to make profits It must obey the law as given in the partnership Act Normally there can be a minimum of two partners and a maximum of twenty partners except for banks where there cannot be more than ten partners, and there is no limit on the maximum number for firms of accountants, solicitors, stock exchange members, surveyors, auctioneers, valuers, estate agents, land agents, estate managers or insurance brokers. The personal liability of each partner for the firm’s liabilities is un limited except for limited partners. This means that individuals’ personal assets may be used to meet any partnership liabilities in the event of partnership bankruptcy. Partners who are not limited partners are known as general partners. Limited partnerships are partnerships containing one or more limited partners. Limited partners have the following characteristics: Their liability for the debts of the partnership is limited to the capital they have contributed into the firm. They cannot be asked for more money than their capital to pay for the firm’s debts. They are not allowed to take part in the management of the partnership. They are not allowed to take out or receive back any parts of their contribution to the partnership during the life time of the partnership. All the partners cannot be limited partners, so there must be at lest one general partner with unlimited liability. 20.2      PARTNERSHIP AGREEMENT A partnership agreement is usually drawn up in order to specify the provisions of the contract between the partners. The agreement is likely to specify the following: Capital to be contributed by each partner Ratio for sharing profits or losses Rate of interest if any to be paid on capital (d) Rate of interest to be paid charged on drawings (e) Salaries to be paid to partners. Arrangements for the admission of new partners Procedure to be carried out when a partner retires or dies. CAPITAL CONTRIBUTION Partners must agree on how much capital each partner should contribute towards the firm operations. PROFIT OR LOSS SHARING RATIO Partners can agree to share profit or losses in any ratio that they wish. However, sometimes profits or losses might be shared in proportion to the amount of capital contributed by each partner. INTEREST ON CAPITAL If partners agree to pay interest on their capital the interest on capital is treated as a deduction prior to the calculation of profit and their distribution among the partners according to the profit ratio. The rate of interest on capital is often based on the return which the partners would have received if they had the capital invested elsewhere. INTEREST ON DRAWINGS To deter the partners from taking out cash unnecessarily, partners may agree to be charging interest at an agreed rate on each withdrawal of money by the partner from the firm. The rate of interest on drawings should be sufficient to achieve for this purpose without being too harsh. PARTNERSHIP SALARIES One or more partners may have more responsibilities or tasks than the other partners, as a reward for this the partners may have a partnership salary which is deducted before sharing the balance of profits. Salaries for partners are treated as appropriation of profits, not as a charge against profit. Performance – related payments to partners Partners may agree that commission or performance – related bonuses be payable to some or all of the partners linked to their individual performance. As with salaries, these would be deducted before sharing the balance of profits. PARTNERSHIP CAPITAL AND CURRENT ACCOUNTS In the partnership statement of financial position, net assets are financed by partners’ capital and current accounts. A current account for each partner is maintained to record a wide range of items on a continuous basis for example to charge drawings and other personal benefits of the partners and to credit salaries, interest on capital, share of profits e.t.c. Each partner’s capital account normally remains constant from year to year. These are called fixed capital accounts Sometimes partners may wish to use fluctuating capital accounts, where the distribution of profits are credited to the capital accounts, and drawings and interest on drawings are debited to the capital accounts. In this case the balance on the capital account does not remain the same from year to year. PREPARING FINAL ACCOUNTS FOR PARTNERSHIPS Income statement and the statement of financial position for partnership Income Statement If sales, inventory and expenses of a partnership are the same as those of a sale trade, then the income statement would be identical with that prepared for the sole trader, however a partnership would have an extra section at the end of the income section known as the profit and loss appropriation account. This is where the distribution of profit among partners is shown. Statement of financial position The statement of financial position for a partnership is similar to that of a sole trader with the only difference being on the capital part which is split between capital account and current account for different partners. 10 GOOD WILL Good will is an intangible asset, which exist if the business was purchased and the amount paid was greater than the value of the net asset in most cases good will represents the value of the

CHAPTER 19  BANK RECONCILIATION 19.0LEARNING OUTCOMES By the end of this chapter, the students should be able to explain the purpose of reconciliation between the bank ledger and the corresponding bank statement; identify errors and omissions in the bank ledger account and in the bank statement; identify timing differences; make the correcting entries in the bank ledger account; and prepare the reconciliation between the bank statement balance and the corrected bank ledger account. THE NEED FOR BANK RECONCILIATION STATEMENTS In chapter 6 you looked at how to prepare a cash book. You will recall that the cash books columns for cash and bank transactions. The bank columns are for all the transactions which go through an entity’s bank account. In this case, the transactions which have been recorded in the bank columns of the cash book should be the same as the bank records for the business, which are being maintained by the bank. The records prepared by the bank will be in a form of a bank statement. However, there are times when the two sets of records are different. This calls for the preparation of a bank reconciliation statement. BANK STATEMENT AND CASH BOOK BALANCES Any transaction the business undertakes with the bank is recorded by both the business and the bank. One would expect that that the balance in the cash book of the business must be equal to that in the bank’s books because the records of the two parties are the same. However, this is unlikely to be the case for the following reasons: Bank Charges: Banks charge for the services they offer to their customer and these charges are directly recorded (debited)into the customer’s account. The balance shown by the bank will therefore be different from that of the cash book of the business because the cash book will not record this charge made by the bank. 146 Bank Interests: Just as bank charges, a bank may give interest to the customers directly through the bank accounts or may charge interests on overdraft balances directly. This may bring about the differences in the balances reported by the two entities. iii. Standing Orders: These are orders customers give the bank to make regular payments at stated dates to persons or companies. The bank simply obeys the command and the payment is only reflected in the books of the bank and not the business’ books, hence a cause of the disagreements between the two balances. Direct Debits: This where an instruction is given to the business’ creditors, (not the bank), to obtain the money directly from the business’ bank account. Credit Transfers/Bank Giro Credits: These are the amounts that the business’ customers pay directly into the business’ bank account. The receipt will therefore be recorded in the books of the bank alone hence the difference arises between the two balances. Unpresented Cheques: These are cheques that have been issued by the business to its payables but have not been presented to the bank to effect payment. This will be recorded in the business’ cash book but the bank will not record this payment until the payables have actually presented the cheques to the bank. Outstanding Bank Lodgements: These are the amounts or cheques that the business has deposited at the bank but the bank has not yet cleared them. They are also called uncredited cheques. These will be recorded by the business in its cash book but the bank will record these only when they are cleared. Errors: In chapter 18 you noted that accounts personnel are bound to make errors. These errors may be committed when dealing with bank transactions. For example an error may be made when balancing the cash book and so the resulting balance might not be correct. Such an error will not appear in the bank’s records. The implication is that there will be a difference between the balance shown by the cash book and that shown by the bank’s records. Dishonored cheques (or R/D cheques). These are cheques that the bank has denied to clear for various reasons. This cheque had been recorded initially in the business’ books and when the bank denies payment, it won’t be recorded in the bank’s records. Until the business reverses the transaction involving that dishonored cheque, there will be a difference between the balance in the cash book and that in the bank statement. When the cash book balance and the bank balance are not equal, we need to find out why the balances are not equal. This is achieved through the reconciliation process. The reconciliation process is a control measure to detect cash fraud. 19.3 FREQUENCY AND PURPOSES OF BANK RECONCILIATION Bank reconciliation is an accounting procedure for agreeing the balance as per bank statement with the balance as per cash book. It is good practice to reconcile the bank balance with the cashbook balance as frequent as possible say at least once a month. How frequent the bank reconciliation statement may be prepared will depend on the following factors: Frequency and volume of transactions :The likelihood of error is greater where there are more transactions Other controls: If there are very few other checks on cash, the greater the need for bank reconciliation. Cash flows: If the company has to keep a very close watch on its cash position, then the reconciliation should be performed as often as the information on cash balance is required. Number of bank accounts: The more the bank accounts are operated, the more difficult it becomes to perform regular reconciliation. The bank reconciliation serves the following purposes: Analysing the difference between the cashbook and the bank statement. ii. Detecting   and correcting  errors committed by the bank or cash office iii. Detecting  possible misappropriation of funds iv. Recognising or identifying appropriate expenditures or receipts made directly by the bank. Ensuring that Commercial Bank’s claims for reimbursement are not duplicated. 19.4 BANK RECONCILIATION PROCESS To reconcile the two balances the following procedures are to be followed: Update the

CHAPTER 18 CONTROL ACCOUNTS 18.1LEARNING OUTCOMES By the end of this chapter, the students should be able to explain the importance of control accounts, draw up a receivables control account and draw up a payables control account. 18.1 BACK GROUND INFORMATION To ensure financial soundness of a business, managers of the business must put in place measures to ensure that the business’s assets and resources are controlled. Such measures are known as internal controls. It is imperative that that every system of transactions undertaken in the business has internal controls to ensure that the information reported by such system is true and fair. To ensure the appropriateness of accounting records, control accounts are prepared for a particular system (say a purchase system). The control accounts record the same information that is recorded in the sales ledger (for a sales system) or the purchase ledger (for a purchase system) and at the end the information in the control is compared to that in the ledger concerned. This is done to check the arithmetical accuracy as well as proper entries in the records. A control account is an account in the general ledger which keeps a record of a total number of similar individual items. For large entities, the control account forms part of the double entry system. 18.2 THE RECEIVABLES/ SALES LEDGER CONTROL ACCOUNT This is an account which keeps a record of all trade receivables in total. A business can have numerous trade receivables and each of them will have his/her account in the sales ledger. One special account will be needed to control the entries in all the trade receivables accounts, that is, the receivables control account. The amount that is transferred to the receivables control account is the total in the sales day book. Remember that the total in the sales day book is transferred to the sales account in the general ledger. If control accounts are being used, this total has to be transferred to the receivables control account as well. Any item that is recorded in one or more receivables’ accounts in the sales ledger is also recorded in total in the receivables control account. It is important to know on which side   of the control account, entries will be made. For instance, the following items will have to be totaled and entered in the receivables control account on the debit side: Total of credit sales from the sales day book Total of customers’ dishonored cheques and refunds made to customers Total of any interests charged on overdue accounts of customers. The following items will have to be totaled and entered in the receivables control account on the credit side: Total of cash /cheques received from customers Total of cash discounts allowed to customers Total of sales returns made by customers Total of debts that have been written off as irrecoverable. 18.3 TRADE PAYABLES/PURCHASES CONTROL ACCOUNT This is an account which keeps a record of all trade payables in total. A business can have numerous trade payables and each of them will have his/her account in the purchases ledger. One special account will be needed to control the entries in all the trade payables’ accounts, that is, the payables/purchases ledger control account. The amount that is transferred to the payables control account is the total in the purchases day book. Remember also that the total in the purchases day book is transferred to the purchases account in the general ledger. If control accounts are being used, this total has to be transferred to the payables control account as well. Any item that is recorded in one or more payables’ accounts in the purchases ledger is also recorded in total in the payables control account. For instance, the following items will have to be totaled and entered in the payables control account on the debit side: x Total of cash/cheques paid to suppliers x Total of purchases returns made to suppliers x Total of any discounts received from suppliers. The following items will have to be totaled and entered in the receivables control account on the credit side: x Total of credit purchases from suppliers x Total of any interests charged by suppliers on overdue accounts 18.4 CONTRA ENTRIES In a situation where one person/entity becomes both a customer and a supplier, for the purposes of control accounts, the balances in the two ledgers, that is the sales and purchases ledger, are off set to come up with one balance in the control account. The double entries required for the set offs are: Dr        Payables Control account         Cr             Receivables Control account With the amount involved. 18.5 IMPORTANCE OF CONTROL ACCOUNTS You have learnt how the receivables and payables control accounts. But why do we need to prepare control accounts?  Control accounts are important for the following reasons: Provide a check on the accuracy of entries made in the personal accounts in the sales and purchases ledger. Assist in location of errors Provide an internal check where there is segregation of duties Assist in extracting closing receivables, and payables ledger balances for use in the trial balance and statement of financial position. 18.6 CONTROL ACCOUNT RECONCILIATION AND THE LEDGER At the end of a specified period, the balance on the control account must be checked and compared with the sum of the balances from the individual accounts in the sales or purchases ledger. In normal circumstances, the two totals must agree. However, if the balances do not agree, we should reconcile the two balances to ensure that all errors are discovered and any fraud, if any, is detected. When reconciling the control account balance to the sum of balances of the accounts in the ledger, the following procedures should be followed: Update the control account. This is achieved by bringing into the control account any item which has not been included in it but is supposed to be included; as well as removing from the control account any item which has been included

CHAPTER 17  ERRORS AND THEIR CORRECTION 17.0LEARNING OUTCOMES By the end of this chapter, students should be able to explain the types of errors, correct errors, and prepare suspense accounts. INTRODUCTION Human beings are prone to making mistakes and errors in everything they do. The area of accounting is no exception. Individuals who are responsible for providing financial information may make mistakes and errors. This may be due lack of accounting knowledge, negligence, fraud or even mere failure to follow laid down procedures. The implication of mistakes and errors is that the financial information which will be provided in a form of financial statements may not give a true state of affairs. You should remember that accounting information forms a basis of decision-making and so provision of distorted and misleading information will affect the decisions which will be made. In this case, it is imperative that accounting errors and mistakes should be corrected. In this chapter you will learn how to correct errors. TYPESOF ERRORS There are two types of errors in accounting: Errors that do not affect the trial balance Errors that affect the trial balance 17.2.1 Errors That Do Not Affect the Balancing of the Trial Balance In chapter 10 you learnt that once the accounts have been balanced off, the next step is to prepare a trial balance. Remember that a trial balance is a list of account balance. The idea behind the trial balance is that the totals in the debit column should be equal to the totals in the credit column. We can assume that once the totals have agreed, then there are no errors. However, under certain circumstances, the trial balance may agree even though we have made some errors. These are the errors which do not affect the trial balance; the totals still agree. The errors are as follows: Errors of Omission This is where a transaction is completely omitted from the books. Example: The purchase of goods for resale from Chisomo Kampeni for K50, 000 on invoice number 11256 was not entered in the purchases day book. This transaction would not be posted to the purchases ledger, but when a trial balance is extracted it would still balance. The error should be corrected by entering the transaction in the books. The journal entries are as follows: DATE DESCRIPTION DEBIT CREDIT   Purchases Chisomo Kampeni Being correction of transaction previously omitted 50,000 50,000 Errors of Commission This type of error arises where the correct amount is entered, but in the wrong account. Example Purchase of goods from J Cham’bwinja for K65, 000 entered in the account J Chambwinda. The error should be corrected as follows: DATE DESCRIPTION DEBIT CREDIT   J. Chambinda J. Cham’bwinja Being correction of transaction entered in wrong account 65,000 65,000 Errors of Principle This type of error occurs when the correct amount is entered in the wrong class of account. Example An acquisition of a second-hand motor vehicle for K950, 000 is debited to motor expenses account. This error will be corrected by debiting the motor vehicle account and crediting the motor expenses account. Compensating Errors This is where errors cancel each other out i.e. a debit entry cancelling out a credit entry. For example, the amounts transferred from the cash book to the salaries account and motor expenses have been overstated and understated by K35, 000 respectively. The trial balance will still balance. To correct this error we should debit the motor expenses account by K35,000 and credit the salaries account by K35,000 as well. Errors of Original Entry An error of original entry occurs where the original amount is incorrect, yet the double entry is correctly done using this incorrect amount. In this case, the equality of the trial balance will still be maintained. For example, a cheque in settlement of an electricity bill for K5, 560 is entered in the books as K8, 560. In this case, both the expense account and the cash book will be understated by K3,000 but the trial balance will still balance. To correct this error we should debit the electricity account by K3,000 and credit the cash book by a similar amount. Complete reversal of the entries With this type of error the correct amounts and accounts are used, but each item is entered on the wrong side of the accounts. For example, a receipt of cash K2, 500 from a customer is entered on the credit side of the cash book and on the debit side of the customer’s account. Correcting this type of errors involves two stages namely: reversing the entries and then entering the amounts on the correct sides of the two accounts.  In terms of reversing the entries, we should debit the cash book by K2,500 and credit the customer’s account by K2,500. The incorrect entries have now been reversed. We should then debit the cash book by K2,500  and credit the customer’s account by K2,500. The second set of entries implies that the correct entries have now been made in the two accounts. You will notice that in total the cash book has been debited by K5,000 while the customer’s account has been credited by a similar amount. In other ways, we just need to double the initial amount and make sure that the amount has been entered on the correct sides of the accounts. Transposition errors This is where a wrong sequence of the individual characters within a number is entered. Example K856 entered as K586 in the general expenses account and cash book. The transposition must be in both the debit and credit entries. Correcting this error involves adding K270 to K586 so that the figure which has been recorded in both accounts should be K856 i.e. debiting the general expenses account and crediting the cash book by K270. 17.2.2 Errors that Affect the Balancing of the Trial Balance    The totals on the two sides of the trial balance should be equal. However, sometimes the totals might not be equal. This

CHAPTER 16 CLOSING INVENTORY VALUATION 16.1LEARNING OUTCOMES By the end of this chapter, students should be able to explain the methods of valuing inventory and the advantages and disadvantages of inventory valuation method. They are also expected to value inventory and explain the inventory taking methods. 16.1 INVENTORY VALUATION You noted in chapter 14 that calculation of cost of goods sold in the trading account takes into account of opening and closing inventories. In this chapter, you will learn how to value inventories. Valuation of inventories is important for the following reasons: x It enables businesses  to establish the value of closing inventories x Values attached to inventories form a basis for setting selling prices x It facilitates the calculation of cost of sales and profits You can see that inventory valuation is important when preparing financial statements as the above reasons affect either the income statement or the statement of financial position. Historical costs are generally used in the valuation of inventories. Historical costs are the costs which were incurred to produce or purchase inventories. The main ways of determining the historical cost of inventory are: First In First Out (FIFO) method Average Cost (AVCO) method 16.1.1 First In First Out (FIFO) This method assumes that the first components of inventory to be brought into stock are the first ones to be sold out or issued out to production in the case of a manufacturing business. The FIFO method is logical in the sense that it portrays what should happen in practice; goods acquired first should be used first. The method is very easy to use. It is also recommended by International Accounting Standard (IAS 2) Inventories. However, the assumption that the inventories which have been acquired should be used first might not hold true if the goods have been mixed up in a warehouse or store room. Average Cost (AVCO) The AVCO method involves valuing items of inventory sold or issued to production at the average cost of all inventories in stock. This means that a new average cost will be calculated whenever additional items of inventories have been acquired or produced. Unlike the FIFO method which assumes that goods acquired first will also be used first, the AVCO method implies that this assumption might not work. You have learnt that goods acquired on different times may be mixed up. In this case, it is difficult to identify the goods which were bought first. The use of average costs will be ideal in this scenario. This method is recommended by the IAS 2. On the other hand, the use of the AVCO method is tedious as the business is required to calculate a new average cost upon receipt of additional inventories. COMPARISON OF FIFO AND AVCO METHODS Table 16.3: Comparison of FIFO and AVCO methods   Method Costofsales(K) Closinginventory(K) 1 FIFO 7,750 1,100 2 AVCO 6,250 1,040 You can see that each method gives a different value of inventory and cost of sales. This means that the profit figures reported by each method will also be different.  It is important for businesses to apply the method which they will adopt consistently. This is in line with the consistency concept which you covered in …..Applying accounting policies facilitates effective comparison of financial statements. 16.3 INVENTORY TAKING Inventory taking is the process of verifying the quantity balances of the entire range of items held in stock. It is vital to take into account of security issues when conducting an inventory taking exercise. These may include ensuring that inventories are located in a secure building (location), not allowing unauthorized persons not allowed access and proper custody of store keys. Inventory taking is important because: It enables businesses to verify accuracy of stock records It provides support the value of stock in the statement of financial position. It may assist in the identification of fraud, theft or loss and other weakness in the management of inventory. 16.4 INVENTORY TAKING METHODS There are two major methods of inventory taking. These are: Periodic Perpetual (Continuous) 16.4.1 Periodic Method Under this method, inventory taking exercise takes place at the end of a given period. This can be at the end of the year or any other point in time. Thorough is preparation needed; programme drawn up and agreed with all concerned parties, Stocktaking sheets prepared and duties communicated to all concerned parties 16.4.2 Perpetual (Continuous) Method Inventory taking is conducted continuously throughout the year. The procedures for this method are similar to periodic inventory taking except that: There is no need to close down stores while inventory taking Normal posting of receipts and issues on the inventory records can continue without interruption Inventory taking is done by few specially appointed, experienced and trained staff completely independent of stores staff SUMMARY OF THE CHAPTER This chapter was about the inventory valuation. You have learnt that you can use the First In First Out (FIFO) and the Weighted Average method (AVCO) to value inventories. You have also learnt that inventory taking is a very important exercise in inventory management.  

CHAPTER 15 STATEMENT OF FINANCIAL POSITION LEARNING OUTCOMES By the end of this chapter students are expected to be able to prepare a statement of financial position. PURPOSE OF THE STATEMENT OF FINANCIAL POSITION In the previous, chapter you looked at the accounting process. You will recall that the last step in this process is the production of financial statements. A statement of financial position is one of the components of financial statements which should be prepared as one way of communicating financial information. The statement of financial position shows the position of a business at any particular point in time. Financial position is presented in terms of the business’s assets, liabilities and capital. FORMAT OF A STATEMENT OF FINANCIAL POSITION The statement of financial position contains assets, liabilities and capital of a business.  Assets Assets represent resources which are owned by the business. When preparing the statement of financial position, assets are grouped into two: x Non-current assets and; x Current assets  Non-current assets Non-current assets are assets which are expected to be used by the organization for a long time in the course of generating revenue or income for the business. The business will benefit through the use of these assets for a long period of time. The intention of the business is to use the assets and not necessarily reselling them. Land, buildings, fixtures, plant and machinery are the examples of non-current assets. You should remember that non-current assets are generally depreciated. However, there are other non-current assets which are not depreciated. An example of such assets is land. Depreciation has been covered in chapter 12. Current assets Current assets are assets that are held only for a short time and are certainly going to change their form within twelve months of the date of the statement of financial position. These assets are not depreciated. Examples of current assets are inventories, trade receivables, cash at bank and cash in hand. Current assets are presented in the statement of financial position according to their liquidity. Liquidity means the easiness of current assets when they are being converted into cash. So we start with those current assets that are furthest away from being converted into cash and finish with the cash itself. The order of presenting current assets will be as follows: Inventory Accounts receivable Cash at bank Cash in hand Liabilities Liabilities represent obligations which the business expects to settle. Liabilities are also classified into two: x Current liabilities x Non-current liabilities Current liabilities Current liabilities are obligations that must be paid within a year from the end of the previous accounting period. Examples of current liabilities are accounts payables and bank overdrafts. Non-current (long-term) liabilities Non-current (long-term) liabilities are obligations that will be paid in a period of more than one year from the end of the previous accounting period. They include loan notes/debentures and bank loans Capital Capital represents money and other resources put into the business by the owner. The net profit for the year increases capital. On the other hand, drawings (amounts withdrawn by the owner from the business for personal use), reduce capital. When preparing the statement, assets are equal to capital plus liabilities. You will recall that this is the accounting equation. SUMMARY OF THE CHAPTER This chapter has focused on the preparation of the statement of financial position. You have leant that the purpose of this statement is to show the financial position of a business as at any particular point in time in terms of assets, liabilities and capital.  

CHAPTER 14 STATEMENTS OF PROFIT OR LOSS 14.0 LEARNING OBJECTIVES By the end of this chapter, you should be able to explain the importance of the income statements and prepare the income statement with all the adjustments. 14.1  INTRODUCTION TO FINANCIAL STATEMENTS You learnt in an earlier chapter that accounting is a process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. This process is shown in figure 1. By now you have looked at the first five stages shown in the figure.  The communication aspect that has been mentioned in this definition is the same as stage six in the figure. This is the last step in the definition of accounting. It refers to the preparation and presentation of financial statements. Financial statements ensure that the economic information is communicated to users in an effective manner. Figure 14.1: The Accounting Process The income statement is one of the components of financial statements which we should prepare and present to the users of accounting or economic information. 14.2 PURPOSE OF INCOME STATEMENTS Businesses are set up for the sole reason of making profits. It is important for the owners of businesses to check whether they are making profits or not. The income statement is prepared in order to assess if the business is making profits or losses in a given period. This is referred to as financial performance of a business. This statement is prepared for a period and not as at any particular point in time. 14.3 INCOME STATEMENT FORMAT The income statement has two components: x Trading account x Profit and loss account 14.3.1 Trading Account This section focuses on the revenue from the sale of goods and the cost of the goods which have been sold. The difference between the sales figure (revenue) and the cost of goods is called gross profit. Gross profit is an indicator of the initial profit earned by a business. If the cost of goods sold is greater than the sales figure, the outcome will be a gross loss. Normally, businesses should have gross profits. The profits will enable the organisations to cover non-trading expenses. The cost of goods sold is made up opening inventories and purchase made in the period less closing inventories. Closing inventories, which are unsold inventories during a period, are not included in the cost of goods sold because they have not been sold. Closing inventories will become opening inventories in the following year. They will be part of the cost of goods sold in the period in which they will be sold. 2 Profit and Loss Account Once the gross profit has been calculated in the trading account, the next step is to consider all the expenses not related to the trading activities. The net profit is calculated in this section. The net profit is the difference between gross profit and the other expenses. This figure is very important when assessing the financial performance of a business. Expenses to be included in the preparation of the profit and loss account would have been included in the trial balance as shown in figure 1. So these expenses will be isolated from the trial balance prepared for the period. Example 2 Continuing from example 1, Atate had the following expenses in the year ended 31 December 2012: Generalexpenses K40,000 Lightingexpenses K80,000 Rent K190,000 Returns In chapter 5, you covered returns inwards (sales returns) and returns outwards (purchases returns) day books. Returns inwards reduce the sales figure in the trading account. Returns outwards are subtracted from the purchases figure. Returns inwards and outwards are also recorded in the trial balance for the period. Example 3 The following is an extract of the trial balance of Atate as at 31 December 2013.   Dr Cr   K K Sales   1,000,000 Purchases 500,000   Returnsinwards 90,000   Returnsoutwards   60,000 You are required to prepare a trading account for the period ended 31 December 2013. Trading account for the year ended 31 December 2013 14.4.3 Carriage When businesses have purchased inventory, they need to transport the inventories to the business premises. In the course of doing this, the businesses incur costs. These costs are called carriage inwards. In the trading account, carriage inwards is added to purchases. As part of a marketing strategy, businesses may deliver goods to customers. In this case the business incurs costs. These costs are called carriage outwards. Carriage outwards are recorded as expenses in the profit and loss account. 14.4.4 Accruals and Prepayments In chapter 13 you looked at how to account for accruals and prepayments. Accruals increase the respective expense items while prepayments reduce the respective expenses. This ensures that all the expenses period should be recorded as expenses in that period. 14.4.5 Depreciation You have learnt that depreciation is an expense. As such depreciation charge for the period should be recorded as an expense in the profit and loss account. 14.4.6 Allowances for Receivables and Irrecoverable Debts You will recall that irrecoverable debts (bad debts) are treated as expenses in the profit and loss account. Increases in the allowance for receivables (provision for doubtful debts) are recorded as expenses in the profit and loss account. On the other hand, decreases in the allowance for receivables are treated as income and so are added to gross profit in the profit and loss account. SUMMARY OF THE CHAPTER In this chapter you have looked at the purpose and preparation of the income statement. You have learnt that you need to make adjustment in order to establish a proper income statement. Some of the adjustments include allowances for receivables and irrecoverable debts, depreciation, accruals and depreciation.  

CHAPTER 13 ACRUALS AND PREPAYMENTS LEARNING OBJECTIVES The accruals basis of accounting consists of recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred. The receipt or disbursement of cash in the same period may or may not be involved. Revenue is generally recognized when services are performed or goods are provided, and is considered to be earned when in exchange for something of value is received or legal claim is made. Expenses should be recognized when goods or services are consumed. The accruals basis of accounting involves the period – by – period matching of revenue with expenses that caused or aided in producing that revenue. In keeping business records, accountants must think in terms of time intervals and must be sure that the revenues and expenses are accounted for in the proper accounting period. PREPAID EXPENSES A prepaid expense is an item that was purchased and considered to be an asset when acquired but which will be consumed or used up in the near future and thus become an expense. Purchase of various sorts of supplies and payments for utilities and insurance are good examples of prepaid expenses. At the end of the period, the portions of such assets that have expired or have been consumed must be determined and entries made by debiting the proper expense accounts and crediting the proper prepaid expense accounts. ACRUED INCOME The accrued basis concept of accounting states that revenue is recognized in the accounting period in which it is earned and expenses are recognized in the accounting period in which they are incurred. Accrued income is income earned but not received during an accounting period i.e. amount owed or where a business receives income other than sales revenue it may have earned some income. For Example Accrued interest may be interest payable or interest receivable. Accrued rent may be rent payable or rent receivable. One is an expense the other is revenue. 13.3 OTHER CONSIDERATIONS The combined effect of the realization and matching concepts plus the accruals basis concept provide some assurance that income is accurately measured. Under the accruals basis concept Expenses may be paid for in advance (prepayments) or in arrears (accrued). Similarly revenue may be received in advance or be accrued. Debit closing balances in an expense account represent an outstanding balance of a prepayment. It is an asset shown as a current asset in the balance sheet. Credit closing balance, in an expense account; represent outstanding balance in amount owing. It is a liability and appears as a current liability in the balance sheet. SUMMARY OF THE CHAPTER The chapter introduced periodic adjustments to accounts in the forms of accruals and prepayments. This introduction was supported through the use of the principles contained in the accruals concept after which respective nature and purpose of the adjustments were illustrated. The treatment of revenue owing at the end of a period was also provided followed by presentation of the items in financial statements.