Updated Curriculum A Practical Approach

FORM
to

Principles 3
of Accounting

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Donemore Muchemwa Learner’s Book

 A Practical Approach
to

Principles of
Accounting
Form 3

Learner’s Book

Donemore Muchemwa
 CONTENTS

Chapter 1: Methods of data processing.......................................................................... 1

Unit 1.1 Manual and electronic methods........................................................................................ 1

Chapter 2: Subsidiary books............................................................................................ 6

Unit 2.1 Use of the general journal/journal proper...................................................................... 6

Unit 2.2 Post journal ............................................................................................................................... 7

Chapter 3: The Ledger....................................................................................................... 14

Unit 3.1 Classification, posting and balancing ledger accounts.............................................. 14

Chapter 4: Capital and revenue expenditure.................................................................. 24

Unit 4.1 Common errors that are not revealed by trial balance.............................................. 24

Chapter 5: The suspense accounts and errors................................................................ 31

Unit 5.1 Errors and the suspense account....................................................................................... 31

Examination I .......................................................................................................................... 40
Paper 1 .................................................................................................................................... 40
Paper 2 .................................................................................................................................... 42

Chapter 6: End of year financial accounts....................................................................... 45

Unit 6.1 The income statement........................................................................................................... 45

Unit 6.2 The profit and loss account.................................................................................................. 46
Unit 6.3 The statement of financial position................................................................................... 49
Unit 6.4 Working capital......................................................................................................................... 51

Chapter 7: Accounting concepts...................................................................................... 57

Unit 7.1 Accounting concepts.............................................................................................................. 57

Chapter 8: Depreciation................................................................................................... 61

Unit 8.1 What is depreciation............................................................................................................... 61

Unit 8.2 Accounting for depreciation................................................................................................ 65
Unit 8.3 Disposal of non-current assets............................................................................................ 67

Chapter 9: Accruals and prepayments............................................................................ 74

Unit 9.1 Accrued and prepaid expenses.......................................................................................... 74

Unit 9.2 Accrued and prepaid revenue............................................................................................. 77
Chapter 10: Bad debts and provisions............................................................................... 81

Unit 10.1 Bad debts.................................................................................................................................... 81

Unit 10.2 Provisions for doubtful debts.............................................................................................. 83
Unit 10.3 Provisions for discounts allowed........................................................................................ 86

Examination 2 .......................................................................................................................... 92
Paper 1 .................................................................................................................................... 92
Paper 2 .................................................................................................................................... 95

Chapter 11: Financial statement with adjustments......................................................... 97

Unit 11.1 The statement of comprehensive income and statement of financial position 97

Chapter 12: Control accounts............................................................................................. 106

Unit 12.1 Control accounts...................................................................................................................... 106

Chapter 13: Bank reconciliation statement and errors.................................................... 116

Unit 13.1 Difference between bank balances in the cash book and on bank statement. 116
Unit 13.2 Update the cash book............................................................................................................ 119
Unit 13.3 The bank reconciliation statement.................................................................................... 120
Unit 13.4 Overdrafts................................................................................................................................... 121
Unit 13.5 Errors............................................................................................................................................. 124

Chapter 14: Capital and revenue expenditure.................................................................. 130

Unit 14.1 Expenditure................................................................................................................................ 130

Unit 14.2 Financial statements............................................................................................................... 132

Chapter 15: Departmental accounts.................................................................................. 136

Unit 15.1 The importance of department trading accounts....................................................... 136

Unit 15.2 Apportionment of expenses................................................................................................ 138
Unit 15.3 The profit and loss account.................................................................................................. 139
Unit 15.4 Statement of financial position........................................................................................... 142

Examination 3 .......................................................................................................................... 150

Paper 1 .................................................................................................................................... 150
Paper 2 .................................................................................................................................... 154
Index .................................................................................................................................... 158
 Chapter METHODS OF DATA
PROCESSING
1
Chapter objectives
At the end of this chapter, you should be able to:
•• apply manual methods of data processing.
•• demonstrate the use of electronic methods.

Introduction
Data processing is the transformation of raw data into meaningful information. It involves recording,
calculating, sorting, summarising, analysing, classifying and reporting of information. This topic focuses
on manual and electronic methods of processing data.

UNIT 1.1 MANUAL AND ELECTRONIC METHODS

The accounting cycle shows the sequential steps followed when recording and processing data until it
becomes ready for use by the users of information as shown by fig. 1.1 below:

BOOKS
SOURCE PRIME THE LEDGER:
DOCUMENTS: ENTRY STATEMENT
Receivables and TRIAL INCOME
Invoices, Sales journal OF
receipts, debit purchases journal, payables ledger BALANCE STATEMENTS FINANCIAL
notes, credit returns inwards,
notes, vouchers. journal, returns POSITION
outwards journal,
cash book.

Fig. 1.1 The accounting cycle

Manual methods of data processing

This refers to a simple record keeping system which is paper based. No machine or tool is required. Mainly
used by small businesses. Data from the source documents is recoded in the books of prime entry and
then posted to the ledger. At the end of the period, the ledger accounts are balanced off and a trial balance
is extracted. Then financial statements are prepared.
Advantages of manual methods
•• The system is less expensive to set up.
•• Less risk of data getting lost.

1
 •• The process is simplified.
•• Correction and location of errors may be easier as compared to computerised systems.
Disadvantages of manual methods
•• Time consuming.
•• High probability of error.
•• Labour intensive.
•• Very slow.
•• Poor retrival capability.

Electronic methods of data processing

monitor
C.P.U
printer

microphone

speakers keyboard

mouse

Basic parts of a computer

Fig. 1.2 A computer system

Modern techniques of data processing which require the use of a computer are referred to electronic
methods. A computer is a programmed electronic device that accepts data input, processes data, gives out
the result (data output) and stores the output for future use.
Computer software refer to packages and programs that control the functions of a computer. It can either
be operating software such as Windows or application software like Microsoft office. Computers make use
of accounting software such as pastel and excel. Computer hardware are those tangible components of
a computer that can be seen by naked eyes such as monitor, key board, mouse, central processing unit,
printer, speaker and microphone.
Collecting of data is the first stage in processing of data. It involves the gathering of the data needed for
processing from source documents such as sales and purchases invoices and receipts. Where the source
document is prepared in a machine sensible form, it will be easier to obtain the data in a computer.

2
 Activity 1.1 Individual work
Use Microsoft Excel to prepare the invoice below:
Description Quantity Price per unit Total cost
$ $
4 cartoons of sugar 4 9 ?
10 crates assorted drinks 10 11 ?
12 boxes washing powder 12 31 ?
9 dozen eggs 9 3 ?
Total amount ?
Less 20% trade discount ?
Net amount ?

Use Microsoft Excel formulas to calculate the following:

1. Total costs for each of the following (sugar, drinks, washing powder and eggs).
2. The total amount (add the total costs).
3. 20% of the total amount.
4. Net amount (total amount less 20% discount).

Activity 1.2 Field trip

Visit at least three local businesses and inquire on the following:
(a) The method of data processing used.
(b) The process followed (data input, data processing and output).
(c) Strengths of the method being used.
(d) Challenges faced because of the method being used.

Exercise 1.1
Write a letter to a local trader advising him/her on the advantages and disadvantages of shifting from
manual to electronic methods of processing data. You should type your letter using Microsoft word and
then print it.

Interesting facts
Both manual and electronic methods of data processing follow the accounting cycle.
Summary of the chapter
•• Data is processed either manually or electronically.
•• Manual methods refer to a paper-based system while electronic methods make use of computers.
•• The processing of data follows sequential steps known as the accounting cycle.
Glossary of terms
Accounting cycle – the sequential steps followed when recording and processing data until it
becomes ready for use by the users of information.
Data capture – is the process of obtain data in computer sensible form at the point of its origin.

4
Data collection – involves the gathering of the data needed for processing from source documents.
Data processing – transforming raw data into meaningful information.

Revision Exercises
Multiples Choice Questions
1. The central processing unit ___________.
A. is an input device B. is an output device
C. manipulates information D. prints out information
2. Which of the following is a computer software?
A. Mouse. B. Pastel. C. Monitor. D. Scanner.
3. The following are input devices except ___________.
A. mouse B. scanner C. monitor D. key board
4. The transforming of raw data into meaningful information is __________.
A. data capture B. data collection C. data input D. data processing
5. Which of the following is a computer output device?
A. Monitor. B. Keyboard. C. Mouse. D. Central processing unit.
6. The following shows an account cycle. What is represented by Q?

Source Q Income
The Ledger
documents statement
A. Cash book. B. Control accounts.
C. Trial balance. D. Statement of financial position.
Structured Questions
1. Name any two computer softwares used in accounting.
2. State any four uses of Microsoft excel in accounting.
3. Discuss the impact of technology on accounting.
4. Distinguish between manual and electronic methods of processing data.
5. Explain the stages of the accounting cycle.

5
 Chapter SUBSIDIARY BOOKS

2
Chapter objectives
At the end of this chapter, you should be able to:
•• state the uses of the general journal.
•• prepare journal entries.
•• explain the entries in the general journal.
•• post journal entries to the ledger.

Introduction
Books of original entry are the entry points for all business transactions into the books of accounts. Specialty
books of original entry (namely cash book, sales journal, purchases journal, returns inwards journal and
returns outwards journal) are used to record specific routine transactions. All other transactions that do not
fit into these predetermined categories for example, purchase of fixed assets are recorded in the General
Journal. In this topic, you will learn about the uses of the general journal, interpret journal entries as well
as posting them to the ledger.

UNIT 2.1 USE OF THE GENERAL JOURNAL/JOURNAL PROPER

The following are the common books of original entries and their uses:

Book of original entry Use

Sales journal Credit sales
Purchases journal Credit purchases
Returns inwards journal Returns on sales
Returns outwards journal Returns on purchases
Cash book Cash/cheque receipts and payments
General journal ?

Uses of the general journal

A general journal is used to enter unique business transactions that cannot by nature be recorded into. It
records various transaction in order based on the day of occurrence.

6
Detail Folio Debit Credit
$ $
Drawings GL67 300
Sale GL12 300
Recording of goods taken by the owner for own use at selling price

Correction of errors
On 31 December 2019, it was discovered that a cheque received from G. Dube a debtor had been entered
in the books as $417 instead of $471. A correction needs to done to ensure the correct amount is entered
in the books. In this case, only the difference between $471 and $417 needs to be adjusted for.

(a) Journal entry

Date Detail Folio Debit Credit

2019 $ $
Dec 31 Bank CB 1 54
G. Dube SL 7 54
Being a correction of the error of where a cheque received from debtor was undercast by $54.

(b) Cash book

Date Detail Folio Cash Bank Date Detail Folio Cash Bank
2019 $ $ $ $
Dec G. Dube GJ8 54

(c) Sales ledger

G. Dube

Date Detail Folio $ Date Detail Folio $

2019
Dec 31 Bank GJ 8 54

Writing off bad debts

R. Gonzo, a debtor who owed, was declared bankrupt on the 31st of July 2017. Since Gonzo is no longer
able to pay us our money we have to write him off from our assets (trade receivables).
Journal entry
Date Detail Folio Debit Credit
2017 $ $
July 31 Bad debts GL11 670
R. Gonzo SL32 670
A debt being written off as bad

8
 Loan (Women’s Bank) Account
Date Detail Folio $ Date Detail Folio $
March 1 Balance GJ1 4 100

Capital Account
Date Detail Folio $ Date Detail Folio $
March 1 Balance GJ1 6 870

Cash Book Account

Date Detail Folio Cash Bank Date Detail Folio Cash Bank
$ $ $ $
March 1 Balance GL1 600 1 200

Purchases Ledger
MM Suppliers Account

Date Detail Folio $ Date Detail Folio $

March 1 Balance GJ1 900

DKT Beverages Account

Date Detail Folio $ Date Detail Folio $

March 1 Balance GJ1 430

Activity 2.2 Individual work

Enter the following in the general journal.

2019
Jan 1 Bought a delivery van on credit for DK Motors $ 7 900.
7 The owner took goods costing $450 from the business for personal use without paying for them.
12 C. Banda, a debtor owing $4 700 was written off as a bad debt.
17 Acquired office equipment on credit from Modern Furnishers $9 800.
25 Machinery bought on credit for $4 000 was returned to the supplier TF Suppliers as it was not fit for the
purpose. The full amount was recovered.

11
Revision Exercises
Multiples Choice Questions
1. Which book of prime is used to record the acquisition of premises on credit?
A. Sales day book. B. Purchases day book. C. General journal. D. General ledger.
2. Which is not a use of the general journal?
A. Correction of errors. B. Adjustment in the ledger accounts.
C. Acquisition of non-current assets for cash. D. Opening new set of books.
3. The owner took goods costing $7 000 from the business for personal use and did not pay for them.
Identify the account to be credited.
A. Sales. B. Purchases. C. Inventory. D. Drawings.
4. Which of the following transactions is entered in the journal?
A. Credit sales. B. Sale of non-current assets on credit.
C. Goods returned by a trade customer. D. Cash sales.
5. The owner took groceries from the business at selling price for own use. Which account is credited?
A. Sales. B. Capital. C. Drawings. D. Purchases.
6. When a customer receives an invoice with an undercharge, which document is used to correct the
error?
A. Debit note. B. Credit note.
C. Receipt. D. Statement of account.

Structured Questions

1. Kudzai provided you with following information on 1 May 2018:

Trade debtors owed $150 (T. Asana $100 and V. Gora $50).
The business owed $470 to trade creditors (P. Mushaya $300 and L. Leco $170).
Motor vehicles $3 490.
Inventory $9 000.
Bank overdraft $230.
Machinery $5 100.
Loan from ZB Bank $1 700.
You are required to open a new set of books for Kudzai on 1 May 2019, showing the general journal
and the ledger accounts.
2. The following transactions relates to Hove. Identify the book of original entry and the source
document used.
(a) Goods sold on credit.
(b) Goods sold for cash.
(c) A customer returened damaged goods.
(d) Purchased a motor van on credit from D. Garage.
(e) Bought stationery paying by cash.
(f ) Sold old machinery on credit to H. Tarry.

13
 Chapter THE LEDGER

3
Chapter objectives
At the end of this chapter, you should be able to:
•• define the term account.
•• outline types of ledger accounts.
•• post entries from jpurnals to ledger accounts.
•• explain the entries in the ledger accounts.
•• use the folio column for reference purpose.
•• interpret the final balances in the accounts.

Introduction
From the books of original entry, entries are posted to ledger accounts. This topic focuses on types of
ledger accounts. You will learn how to post entries from books of prime entry to ledger accounts while
making use of the folio column for reference purposes.

UNIT 3.1 CLASSIFICATION, POSTING AND BALANCING OFF LEDGER ACCOUNTS

The ledger is used to summarise and sort transactions from the books of prime entry. The commonly used
ledger books are the sales ledger, purchases ledger and general ledger. Each ledger is used to record entries
of a specific nature. In line with the terminolgy of the International Accounting Standards (IAS) framework,
the new curriculum framework uses the terms “Trade Receivables ledger” and “Trade payable” for Sales and
Purchases ledgers respectively.

Sales ledger Shows the accounts of customers and the amount is they owe to the business.
Purchases ledger Shows the accounts of credit suppliers and the amounts they owed to them by the business.
General ledger All the accounts which are not entered either in the sales ledger or purchases ledger.

Classification of ledger accounts

In the ledger, details from books of prime entry are posted to specific accounts. These contains a record
of balances, changes and summary relating to a specific item or person. Ledger accounts can either be
personal or impersonal.

14
 Sales Journal Account
Date Detail Invoice no Folio Amount
2019 $
July 10 K. Yale 2 000
10 B. Hem 5 000
27 B. Hem 3 000
27 T. Rawa 2 900
31 Total for the month 12 900
Purchases journal
Date Detail Invoice no Folio Amount
2019 $
July 7 D. Holdings 3 000
7 R. Chasi 1 000
7 G. Wholesalers 2 300
27 R. Chasi 4 000
27 G. Wholesalers 6 000
31 Total for the month 16 300
Returns inwards journal
Date Detail Credit note Folio Amount
2019 $
July 16 B. Hem 300
31 Total for the month 300
Returns outwards journal
Date Detail Debit note Folio Amount
2019 $
July 10 D. Holdings 100
10 R. Chasi 400
31 Total for the month 500
Cash book
Date Detail Folio Discount Cash Bank Date Detail Folio Discount Cash Bank
2019 $ $ $ 2019 $ $ $
July 1 Capital GL1 5 000 9 000 July 2 Rent GL3 1 200
14 B. Hem SL1 4 000 4 Fixtures GL4 700
19 K. Yale SL2 200 1 800 28 D. Holdings PL1 100 2 800
28 Cash 5 000 28 R. Chasi PL2 4 500
28 G. Wholesale PL3 300 7 000
28 Bank 5 000
31 Balance c/d 600 3 000
200 6 800 18 000 400 6 800 18 000
Aug 1 Balance b/d 600 3 000

16
 G. Wholesalers
Date Detail Folio $ Date Detail Folio $
2019 2019
July 27 Bank CB1 7 000 July 7 Purchases PJ1 2 300
27 Discount received CB1 300 27 Purchases PJ1 6 000
31 Balance c/d 1 000
8 300 8 300
Aug 1 Balance b/d 1000
General ledger
Capital Account
Date Detail Folio $ Date Detail Folio $
2019 2019
July 31 Balance c/d 14 000 July 1 Cash GJ1 5 000
1 Bank GJ1 9 000
14 000 14 000
2019
Aug 1 Balance b/d 14 000
Rent Account
Date Detail Folio $ Date Detail Folio $
2019
July 2 Cash CB1 1 200
Fixtures Account
Date Detail Folio $ Date Detail Folio $
2019 2019
July 4 Bank CB1 700 July 31 Balance c/d 700
700 700
Aug 1 Balance b/d 700
Discount allowed Account
Date Detail Folio $ Date Detail Folio $
2019
July 31 Total for the month CB 1 200
Discount received account
Date Detail Folio $ Date Detail Folio $
2019 2019
July 31 Total for the month CB 1 400
Sales account
Date Detail Folio $ Date Detail Folio $
2019
July 31 Total credit sales SJ1 12 900

18
Revision Exercises
Multiples Choice Questions
1. Use the rent account below to answer questions 1 and 2.
Rent account
Date Detail Folio $ Date Detail Folio $
2019
July 2 Cash CB1 1 200
Name the ledger in which the rent account is kept.
A. Purchases ledger. B. Sales ledger.
C. General ledger. D. Expenses ledger.
2. Give the transaction represented by the entry on 2 July 2019.
Paid rent by cash $1 200.
Paid rent by cheque $1 200.
Received rent by cash $1 200.
Rent account balance $1 200.
Which of the following is an example of a personal account?
A. Motor van account. B. Insurance account.
B. Zesa limited account D. Capital account
3. A drawings account is an example of __________.
A. real account B. nominal account
C. personal account D. expenses account
4. Which of the following is an example of a personal account?
A. Motor van account. B. Insurance account.
B. Zesa limited account D. Capital account
5. A ledger record showing balances, changes and summary related to a specific item or person is referred
to as _____________.
A. an account B. a transaction
C. a debtor D. capital

Structured Questions

1. The following information relates to the business of F. Maidei. For each transaction given below, name
the book or original entry used, the account to be debited and the account to be credited.
(a) Credit sales $23 to V. Bhebhe.
(b) Credit purchases $45 from PH Stationery.
(c) The owner took goods worth $70 for personal use.
(d) Paid R. Jongwe, a creditor, $800 by cheque in full settlement of a purchases invoice with a total
$820.
(e) Received an invoice from DT Cleaners $90 in respect of cleaning services they have rendered us
during the month.
(f) Credit purchases from Morden Stationery $1 000 less 15% trade discount.
(g) Withdrew petty cash from the bank $390.
(h) A cheque from a debtor AC Academy $1 900 had been returned by the bank marked ‘refer to drawer’.
AC Academy had been allowed a $100 cash discount in respect of this payment.
(i) Received a debit note $12 from PH Stationery in respect of a purchases undercharge.

21
 THE TRIAL BALANCE
Chapter
AND ERRORS

4
Chapter objectives
At the end of this chapter, you should be able to:
•• outline various type of errors that are not revealed by the trial balance.
•• identify the type of error that have occurred.
•• prepare journal entries to correct errors that are not revealed by the trial balance.

Introduction
This chapter focuses on errors that do not affect the trial balance. The The debit and credit columns of the
Trial Balance will still come to balance even when such errors have occured. In this chapter, you will learn
different kinds of errors and how there are corrected.

UNIT 4.1 COMMON ERRORS THAT ARE NOT REVEALED BY THE TRIAL BALANCE
When correcting an error take note of the following:
(a) To increase an asset, we debit the account.
(b) To reduce an asset, we credit the account.
(c) To increase a liability, we credit the account.
(d) To reduce a liability, we debit the account.

1. Error of omission
This is when a transaction is not recorded at all in the books if it has been omitted. The transaction has not
been entered in the books of accounts.
Example 1
A sale of goods for $670 on credit to C. Ball was completely omitted from the books.
Correcting the error
This error means that our trade receivables were undercast by $670. The sales figure was also understated
by the same amount. Thus, there is need to increase both our sales and trade receivables.

24
Example 6
The discount received account being undercast by $900 while the trade payables.
account being over cast by the same amount.
Correcting the error
An over cast in the trade payables is cancelling out the understatement of discount received.
General Journal

Detail Debit Credit

$ $
Trade payables 900
Discount received 900
Being a correction of compensating errors between the trade payables and discount received.

7. Complete reversal of entries

When entries are made on the wrong sides of the correct accounts. The amount and accounts are correct
but the double entry is wrong. The account which was supposed to be debited is credited and the account
which was supposed to be credited is debited.
Example 7
Cheque paid to T. Tana $230 was debited in the cash book and credited in T. Tana’s account.
Correcting the error
To correct this error, we should double the amount ($230 × 2). The first $230 will be for cancelling the
wrong entry and second $230 will be for making the entry on the correct side as if should have been made
in the first place.

Detail Debit Credit

$ $
T. Tana ($230 × 2) 460
Bank ($230 × 2) 460
Being a correction of an error of complete reversal of entries.

The Ledger
T. Tana

$ $
Bank (correction of error) 460

Bank
$ $
T. Tana (correction of error) 460

28
 Activity 4.1 Group work
Prepare journal entries necessary to correct the following errors.
•• Renovations to office furniture for $3 000 was debited to office furniture account.
•• A sales invoice valued at $400 was completely omitted from the books.
•• Credit purchases from D. Feva $900 was credited in error in D. Heva’s account.
•• No entry was made in the books in respect of goods costing $560 taken by the owner for private use.
•• An amount of $132 paid for wages was debited in error to business rates account.

Exercise 4.2
Sales returns $700 from T. Bisa had been entered in error in T. Moyo’s account.
A sale an old delivery van for $5 700 on credit to R. Damba was not recorded in the books.
A sales invoice to D. Farisai for $78 was entered in the books as $87.
Commission received $500 had been credited to the discount received account.
Discount received $309 had been credited in error to discount allowed account.
A cheque received from P. Tanaka a debtor $200 was debited to Tanaka’s account and credited in the cash
book.
(a) Name the types of the above errors.
(b) Show journal entries required to correct the above errors.

Interesting facts
Mnemonic
CROP-COT
C Commission
R Reversal
O Omission
P Principle
C Compensating
O Original entry
T Transposition
Summary of the chapter
•• The occurrence of trial balance errors does not affect the balancing of the trial balance.
•• These include; error of omission, error of commission, error of original entry, transposition errors,
error of principle, compensating errors and complete reversal of entries.
Glossary of terms
Commission – this is when an entry is made in the wrong account but of the correct class.
Reversal – when entries are made on the wrong sides of the correct accounts.
Omission – this is when a transaction is not recorded at all in the books.
Principle – an entry being made in the wrong account of wrong class.
Compensating – where two or more errors cancel out each other.
Original entry – the original figure entered in the books of accounts is different from the figure on
the source document.
Transposition – when characters or digits in a number are incorrectly placed.

29
 Chapter THE SUSPENSE ACCOUNT

5
AND ERRORS

Chapter objectives
At the end of this chapter, you should be able to:
•• identify the uses of a suspense account.
•• identify errors that are revealed by the trial balance.
•• prepare journal entries to correct errors.
•• draw up a suspense account.
•• prepare a corrected trial balance.

Introduction
A suspense account is a temporary account that holds doubtful entries before the proper account can be
determined. It is also used to enter a trial balance difference where the total amount on the debit side of
the trial balance do not match with the total on the credit side, until the cause of the difference in located
and corrected. This topic focuses on the use of suspense account and correction of errors not revealed by
the trial balance. You will also learn how to correct the trial balance.

UNIT 5.1 ERRORS AND THE SUSPENSE ACCOUNT

Errors which do not affect the balancing of the trial balance do not require us to use the suspense account
(errors covered in the previous chapter). However, those that affect the balancing of the trial balance
require us to use the suspense account. These include:
(a) error of single entry – incomplete double entry.
(b) arithmetic errors – incorrect additions.
(c) taking a wrong balance from the account to the trail balance.
(d) entering an amount to the incorrect side of the trial balance.

Correction of errors
One of the uses of the journal is correction of errors. Journal entries are prepared and then posted to
respective ledger accounts. For errors that affect the balancing of the trial balance, the entries are posted
to the suspense account. When correcting errors, it is important to be able to understand what was done
and what should have been done, then decide on adjustments needed to correct the error.

31
(b) The suspense account:
Suspense account

$ $
Trial balance difference 130 Discount received 420
Trade receivables 180
Bank 110
420 420

(c) Corrected trial balance

G. Mhara
Trial Balance as at 31 December 2018

$ $
Purchases ($4 500 – $510) 3 990
Drawings 510
Motor vehicles 12 000
Trade receivables ($5 000 – $180) 4 820
Trade payables 4 000
Bank ($3 900 – $110) 3 790
Rent 1 200
Discount received ($630 – $420) 210
Capital 12 100

26 310 26 310

Exercise 5.2
D. Choga prepared the following trial balance on 30 June 2019.
Trial balance as at 30 June 2019 for D. Choga
$ $
Purchases 9 000
General expenses 5 000
Sales 11 000
Capital 15 000
Motor vehicles 6 000
Trade receivables 9 400
Trade payables 7 000
Bank 2 300
Drawings 600
32 300 33 000
A suspense account was opened for the trial balance.

36
5. Returns outwards, $100 was posted to the debit side of the trial balance. How will this error affect the
trial balance totals?
A. Credit side $100 less than the debit side.
B. Credit side $200 less than the debit side.
C. Credit side $100 more than the debit side.
D. Credit side $200 more than the debit side.

Structured Questions

1. B. Moyo prepared the following trial balance on 31 May 2015. The total of the credit side disagreed
with the total of the debit side. A suspense account was opened for the difference.

Trial Balance as at 31 May 2015 for B. Moyo

$ $
Trade payables 22 400
Trade receivable 66 800
Capital 166 600
Drawings 40 800
Bank 33 000
Machinery 43 800
Inventory 57 000
Purchases 400 000
Sales 500 500
Sundry expenses 48 900
Suspense account 800
690 300 690 300
The following errors were discovered.
•• A purchases ledger credit balance of $1 000 for D. Dube was omitted from the trial balance figure.
•• The sundry expenses figure includes $3 000 for private expenses.
•• A sale to D. Keita of $1 700 was correctly entered in the sales journal but posted to Keita’s account
as $1 900.
•• Sales day book overcast by $1 400.
•• A payment by cheque of $1 000 was correctly entered in the stationery but posted the wrong side
of the bank account.
Required:
(a) The journal entries to correct the above errors. (Narrations are not required).
(b) Write up a suspense account.
(c) Prepare a corrected trial balance.
(d) Name four errors that are not revealed by the trial balance.

38
EXAMINATION 1
Paper 1: Multiple Choice Questions [20 marks]
Answer all the questions by choosing the correct answer from A, B, C or D.
1. The part of the central processing unit that is responsible for data processing is known as _________
hardware.
A. software B. barcode
C. printer D. mouse
2. An advantage of using electronic methods of data processing is that the system _____.
A. is cheap to set up B. is labour intensive
C. is time consuming D. allows back up of records
3. Which of the following is a disadvantage of manual methods of processing data?
A. Time consuming. B. Allows back up of records.
C. Cheap to set up. D. Labour intensive.
4. The part of a computer that manipulates accounting data is the___________.
A. mouse B. scanner
C. central processing unit D. visual display unit
5. Name the subsidiary book used to record the purchase of non-current asset on credit.
A. Cashbook. B. Purchases day book.
C. General journal. D. Asset register
6. The following are subsidiary books except _________.
A. the journal B. general ledger
C. cash book D. return inwards daybook
7. Which document contains totals of monthly purchases and payments?
A. Invoice. B. Voucher.
C. Statement of account. D. Debit note.
8. Which of the following is a source document for the sales returns journal?
A. Sales returns invoice. B. Debit note.
C. Credit note. D. Bank statement.
9. Which book of prime entry is part of double entry?
A. Sales journal. B. Purchases ledger.
C. Cashbook. D. Petty cash book.
10. Cash taken by the owner for private use is credited to the _________account.
A. drawings B. capital
C. cash D. purchases
11. An invoice of $3 800 to K Malunda, a debtor was not entered in the books at all.
How will this error affect the trial balance totals?
A. Credit side $3 800 less than the debit side. B. Credit side $7 600 less than the debit side.
C. Credit side $3 800 more than the debit side. D. No effect.
12. A payment by cheque of $12 800 made to a creditor, M Hove was credited to M Hove’s Account and
debited in the cash book. Which type of error is this?
A. Double entry. B. Complete reversal of entries.
C. Transposition error. D. Error of original entry.
13. Discount received, $1 000 was posted to the debit side of the trial balance. How will this error affect
the trial balance totals?
A. Credit side $1 000 less than the debit side. B. Credit side $2 000 less than the debit side.
C. Credit side $1 000 more than the debit side. D. Credit side $2 000 more than the debit side.

40
18. Name the book of prime entry represented by Q.
Sales
Sales Invoice Q
Ledger

A. Sales journal. B. Purchases journal.

C. Returns inwards day book. D. Returns outwards day book.
20. The reason for offering a cash discount is to ___________.
A. encourage prompt payment B. encourage bulk buying
C. reduce bad debts D. discourage bulk buying

Paper 2: Structured Questions

There are 4 compulsory questions carrying 20 marks each and you are expected to answer all.
1. For each of the following transactions name the source document, book of prime entry, account to be
debited and account to be credited.
(a) Paid rent by cash $2 900.
(b) Purchased factory machinery from Modern Suppliers for $39 000 on credit.
(c) Paid salaries and wages by cheque $11 200.
(d) The owner withdrew $2 000 from the bank for private use.
(e) Paid $40 for postage out of petty cash.
(f ) Sold goods on credit to R. Mafa $2 070.
Use the format below. The first one is done for you.
Book of
Source document Account to be debited Account to be credited
Prime entry
Receipt Cash book Rent account Cash account

2. (a) Identify the following;

(i) Any four input devices of a computer.
(ii) Any software used in accounting.
(b) Give any four advantages of using manual methods of data processing in accounting.
(c) What do you understand by the term ‘accounting cycle’?

42
 Chapter
END OF YEAR FINANCIAL
STATEMENTS
6
Chapter objectives
At the end of this chapter, you should be able to:
•• define income statements and statements of financial position.
•• outline the purpose income statements and statements of financial position.
•• prepare income statements.
•• draw up the statements of financial position.

Introduction
This chapter focuses on financial statements. It looks at the purpose of income statements and statements
of financial position. You will learn how to draw up an income statement as well as the statement of
financial position.

UNIT 6.1 THE INCOME STATEMENT

An income statement is a financial statement which shows whether a business has made either profit or
loss. It comprises of the Trading Account where gross profit is calculated and the Profit and loss Account
which presents the net profit.

The trading accounting

In the trading account, the cost of goods sold is subtracted from turnover to get gross profit. Cost of goods
sold or cost of sales refer to the total direct costs incurred in respect of goods sold. To get turnover or net
sales returns inwards are subtracted from sales.
Calculating cost of sales

$ $
Opening inventory xxxx
Add purchases xxxx
Less return outwards xxxx xxxx
Add carriage inwards xxxx
xxxx
Less closing inventory xxxx
Cost of sales xxxx

45
Exercise 6.1
From the trial balance of D. Neyma prepare an income statement for the year ended 31 December 2019.
D. Neyma’s Trial Balance as at 31 December 2019
$ $
Sales 14 000
Purchases 8 000
Inventory on 1 January 2018 1 100
Carriage inwards 1 400
Carriage outwards 640
Returns inwards 1 120
Returns outwards 200
Equipment 3 000
Premises 8 500
Fixtures 2 300
Cash 2 300
Bank 500
Rent 670
Insurance 400
Discount allowed 750
Interest on loan 400
Accounts receivable 2 000
Accounts payable 2 200
Commission received 840
Drawings 1 200
10% loan repayable 2023 4 000
Capital 13 040
34 280 34 280
Inventory on 31 December 2019 was $1 980.

UNIT 6.3 THE STATEMENT OF FINANCIAL POSITION

The statement of financial position is based on the accounting equation. It shows assets, liabilities and
capital of a business.
The accounting equation: Assets = capital + liabilities
In the statement of financial position current assets are arranged in the order of liquidity, starting with the
least liquid asset while non-current is arranged in the of permanency starting with the most permanent
asset.
Non-current assets are long term assets bought for use in business with the intention of generating
income such as motor vehicles, buildings, machinery, plant and equipment as well fixtures and fittings.
Current assets are short term assets such as inventory, cash, bank, accounts receivable and prepayments.

49
Exercise 6.2
The following trial balance was extracted from the books of F. Farmer on 30 September 2016. You are
required to draw the income statement for the year ending 30 September 2016 and the statement of
financial position as at that date.
F. Farmer’s Trial Balance as at 30 September 2016
$ $
Inventory on 1 October 2015 1 200
Purchases 29 000
Sales 37 000
Buildings 12 000
Accounts receivable 8 000
Accounts payable 8 000
Commission received 8 700
Commission paid 680
Drawings 5 100
Capital 30 290
Cash in hand 7 600
Bank 14 000
Rent 5 050
Wages and salaries 7 300
Discount received 2 900
Discount allowed 1 290
Business rates 6 870
General expenses 3 000
Carriage inwards 400
Carriage outwards 1 700
Returns outwards 5 000
Office equipment 7 800
Fixtures and fittings 8 900
105 890 105 890
Inventory on 30 September 2016.

UNIT 6.4 WORKING CAPITAL

Working capital refers to resources available for day to day operations of the business. It is the difference
between the current assets and current liabilities. Shortage of working capital results in what is known
as over trading. Business should ensure that they have adequate working capital to avoid over trading.
However, large amounts of working capital may show that resources are being tied up.
Working Capital = Current Assets – Current Liabilities

51
Example 6.3
From the information given below calculate working capital.
Inventory $3 000, accrued wages $2 500, trade receivables $7 000, trade payables $7 500, cash at bank $6
500, cash in hand $2 000 and prepaid rent $1 500.
Then state the effect of the following transactions on working capital:
(a) Received a cheque of $900 from a debtor.
(b) The owner brought additional capital of $3 500 cash.
(c) Bought a new motor van for $4 500 paying by cheque.

Calculating working capital

Current assets – Current liabilities = Working capital

Inventory $3 000 Accrued wages $2 500
Trade receivables $7 000 Trade payables $7 500
Prepaid rent $1 500
Cash at bank $6 500
Cash in hand $2 000
$20 000 – $10 000 = $10 000

Effect of transactions on working capital

(a) Received a cheque of $900 from a debtor.
This will reduce the trade receivables by $900 and also increase cash at bank by the same amount but the
total current assets figure will not change. Thus, working capital will not change hence this transaction
does not affect the working capital.
(b) The owner brought additional capital of $3 500 cash.
This will increase the current assets by$3 500 but the current liabilities will remain the same as shown
below:

Current assets – Current liabilities = Working capital

Inventory $3 000 Accrued wages $2 500
Trade receivables $7 000 Trade payables $7 500
Prepaid rent $1 500
Cash at bank (6 500 + 3
500) $10 000
Cash in hand $2000
$23 500 – $10 000 = $13 500

Working capital has increased by $3 500. The effect of this transaction is that it increases the working
capital.
(c) Bought a new motor van for $4 500 paying by cheque.

52
 Interesting facts
Cost of sales comprises of direct costs only.
Summary of the chapter
•• An income statement comprises of the Trading Account where gross profit is calculated and the
Profit and loss Account which presents the net profit.
•• The cost of goods sold is subtracted from turnover to get gross profit.
•• The statement of financial position is based on the accounting equation. It shows assets, liabilities
and capital of a business.
•• Working capital refers to resources available for day to day operations of the business.
•• Shortage of working capital results in what is known as over trading.
Glossary of terms
Assets – short- and long-term recourses owned by the business.
Gross profit – turnover minus cost of sales.
Net profit – gross profit minus operating expenses.
Operating expenses – expenses of a revenue nature which are uncured in the day to day running
of the business.
Profit and loss account – the second part of the income statement where net profit is calculated.
Trading account – the first part on the income statement where the cost of sales is subtracted
from turnover to get gross profit.
Working capital – current assets minus current liabilities.

Revision Exercises
Multiple Choice Questions
1. Working capital = ___________.
A. Assets – liabilities
B. Current assets – current liabilities
C. Total assets – total liabilities
D. Non-current assets – non-current liabilities
2. __________ is when working capital is no longer adequate.
A. Overdraft B. Overtrading C. Liquidity D. Insolvency
3. Given that: inventory $1 200, wages owing $200, debtors $300 and long-term bank loan $490, calculate
working capital.
A. $1 300 B. $810 C. $1 210 D. $1 500
4. Which of the following is not entered in the trading account?
A. Returns inwards. B. Returns outwards.
C. Carriage inwards. D. Carriage outwards.
5. In the statement of financial position, current assets are arranged based on _________.
A. liquidity B. permanency C. inventory D. accounting equation

54
 UNIT 8.2 ACCOUNTING FOR DEPRECIATION
In order to maintain our non-current assets at cost, depreciation is no longer recorded in the asset account.
A separate account known as the accumulated depreciation account or provision for depreciation account
is used to record depreciation.
Example 8.4
B. Nare acquire fixtures for $12 000 on 1 January 2015. It is to be depreciated at 20% per annum using the
reducing balance.
For the first three years (2015, 2016 and 2017) entries will be as follows:
Working:
Calculating depreciation

2015
Annual depreciation = 20 (Cost – accumulated depreciation)
100 × 10 000
($12 000 – $0)
= $2 400 $12 000
2016
Annual depreciation = 20 (Cost – accumulated depreciation)
100 × 10 000
= ($12 000 – $2 400)
= $1 920 $9 600
2017
Annual depreciation = 20 (Cost – accumulated depreciation)
100 × 10 000
[$12 000 – ($2 400 + $1 920)]
= $1 536 ($12 000 – $4 320)
= $7 680

Fixtures
2015 $ 2015 $
Jan 1 Bank/cash 12 000 Dec 31 Balance c/d 12 000
2016 2016
Jan 1 Balance b/d 12 000 Dec 31 Balance c/d 12 000
2017 2017
Jan 1 Balance b/d 12 000 Dec 31 Balance c/d 12 000
2018
Jan 1 Balance b/d 12 000

65
Statement of financial position extracts
B. Nare
The extract of the statement of financial position as at 31 Dec 2015
Non-current assets Cost Accumulated NBV
depreciation
$ $ $
Fixtures 12 000 2 400 9 600
B. Nare
The extract of the statement of financial position as at 31 Dec 2016
Non-current assets Cost Accumulated NBV
depreciation
$ $ $
Fixtures 12 000 4 320 7 680
B. Nare
The extract of the statement of financial position as at 31 Dec 2017
Non-current assets Cost Accumulated NBV
depreciation
$ $ $
Fixtures 12 000 5 856 6 144

Exercise 8.2
1. B. Matongo bought a motor van on 1 January 2011 for $7 000 which is to be depreciated at 20% per
annum using the reducing balance method.
For each of the first three years:
(a) Calculate annual depreciation.
(b) Draw up the motor van account.
(c) Prepare the provision for depreciation account.
(d) The extracts of the income statement and statement of financial position as at December 31.

UNIT 8.3 DISPOSALS OF NON-CURRENT ASSETS

When a business disposes a non-current asset, the asset has to be removed from the books of accounts. A
Disposals Account is opened. It helps to remove the asset from the books as well as to calculate whether
profit or loss has been realised on disposals.

Entries to record the disposal of a non-current asset

Major journal entries which are supposed to be made to record the disposal of a non-current asset are
based on:
•• the cost of the asset being disposed.
•• the accumulated depreciation for the asset being disposed.
•• the amount received for the asset being disposed.

67
 Provision for depreciation
2017 $ 2017 $
Dec 31 Disposals 5 000 Jan 1 Balance b/d 20 000
31 Balance c/d 24 000 Dec 31 Profit and loss (10% x 90 000) 9 000
29 000 29 000
2018
Jan 1 Balance b/d 25 000
Motor disposal account
2017 $ 2017 $
Dec 31 Motor van 25 000 Dec 31 Provision for depreciation 5 000
31 Cash 7 000
31 Profit and loss 13 000
25 000 25 000

Exercise 8.3
0n 1 January 2018, Shava Trading had the following balances: Machinery at cost $60 000 and Provision for
depreciation on Machinery was $18 000.
On 30 June 2018, a machine acquired for $10 000 on 1 January 2017 was sold for $8 000 cash. A new
machine was acquired on the same date on credit for TA Suppliers for $15 000.
Depreciation is charged at the rate of 20% on cost for each month of ownership. The financial year end on
December 31.
Prepare;
(a) machinery account.
(b) provision for depreciation account.
(c) disposals account.
(d) the extracts of the income statement and statement of financial position as at 31 December 2018.

Interesting facts
A balance on the debit side of the disposals account represents profit on disposal. If the balance is on the
credit side it would be a loss on disposals.
Summary of the chapter
•• Depreciation is a way of spreading the cost of a non-current asset over its useful life
•• Causes of depreciation includes physical deterioration, economic factors, passage of time and
exhaustion.
•• Methods of calculating depreciation are straight line method, reducing balance method and
revaluation method.
•• Depreciation is recorded a separate account known as the accumulated depreciation account or
provision for depreciation account is used to record depreciation.
•• Major journal entries which are supposed to be made to record the disposal of a non-current asset
are based on the cost of the asset being disposed, the accumulated depreciation for the asset
being disposed and the amount received for the asset being disposed.

70
Glossary of terms
Depreciation – is a way of charging the costs of an asset among all the periods in which
the asset is in use.
Estimated residual value – the estimated scrape value of the asset at end of its useful life.
Straight line method – a method of calculating depreciation where the amount charged for
depreciation will be the same every year over the useful life of the non-
current asset.
Reducing balance method – a method of calculating depreciation which allocates higher depreciation
expenses in the earlier years of a non-current asset’s useful life.
Revaluation method – a method of calculating depreciation which requires the valuation of non-
assets at the end of each accounting period by an expect
Useful life – the number of years the asset is expected to be used.

Revision Exercises
Multiple Choice Questions
1. Banda acquired machinery for $8 000 on 1 January 2014, which he experts to use for 42 months. At the
time of disposal, the machine is expected to have a scrape value of $1 000. Calculate depreciation for
the year ended 31 December 2014 using the straight-line method.
A. $2 000 B. $2 570 C. $200 D. $4 000
2. 0n 1 January 2018, F. Dawa had the following balances: Machinery at cost $100 000 and Provision for
depreciation on Machinery was $40 000. Calculate depreciation for the year ended 31 December 2018
using a rate of 20% per annum on cost.
A. $20 000 B. $12 000 C. $8 000 D. $40 000
3. Which method assumes that the asset is more productive in the earlier years?
A. Straight line. B. Reducing balance. C. Sum of digits. D. Revaluation.
4. Which method of calculating depreciation which requires the valuation of non-current assets at the
end of each accounting period by an expect?
A. Straight line. B. Reducing balance. C. Sum of digits. D. Revaluation.
5. D. Sibanda acquired a delivery on 1 January 2014 for $9 000. Depreciation is charged at 10% per annum
using the reducing balance method. The net book value to be shown in the statement of financial
position as at 31 December 2016 is _____.
A. $9 000 B. $6 561 C. $900 D. $8 100
6. The following account appeared in the general ledger of T. Mura. What does the entry on 31 December
represent?
Disposals account
2018 $ 2018 $
Sept 30 Machinery 6 000 Sept 30 Provision for depreciation 2 000
30 Bank 3 000
Dec 31 Profit and loss 1 000
6 000 6 000

A. Loss on disposal of a motor vehicle. B. Loss on disposals of machinery.

C. Profit on disposal of a motor vehicle. D. Profit on disposal of machinery.

71
 Chapter
BAD DEBTS AND

10 PROVISIONS

Chapter objectives
By the end of this chapter, you should be able to:
•• define bad debts.
•• outline reasons for writing off bad debts.
•• write off bad debts.
•• explain reasons for creating provision for doubtful debts and provision for discount allowed.
•• calculate and record provision for doubtful debts in the books of accounts.
•• calculate and record provision for discount allowed in the books of accounts.
•• show bad debts,provision for doubtful debts and provision for discount allowed in the financial
statements.

Introduction
This chapter focuses on the accounting for debtors who are unable pay their accounts. You will learn how
to make the necessary entries required to write off bad debts. The chapter also looks at the provisions for
doubtful debts and discount allowed.

UNIT 10.1 BAD DEBTS

Credit customers who are unable to pay their debts are referred as bad debts. Bad debts may arise due a
number of reasons which include the following:
•• the debtor has become bankrupt.
•• the debtor has become insolvent.
•• the debtor has died.
•• the debtor has gone overseas.
•• trade disputes.
•• fraud.
Debts which have proved to be bad should be cleared from the sales ledger. As soon as debts are declared
bad, they cease to be an asset to the business. They are transferred to the bad debts account. At the end
of the financial year, the balance in the bad debts account is transferred to the profit and loss account. Bad
debts should be excluded from the total debtors shown the statement of financial position.

81
Example 10.2
The following information was extracted from the books of G. Goto.

Year ended 31 December Total trade receivables Bad debts

2001 $3 000 $100
2002 $4 700 $200
2003 $3 900 $150
On 31 December 2001, Goto decided to create a provision for doubtful debts of 2% of the trade
receivables balance. Show the necessary entries to record the provision for doubtful debts if the
provision for doubtful debts is to be maintained at 2%.
Calculating the provision for doubtful debts.
2001 2% × ($3 000 – $100) = $58
2002 2% × ($4 700 – $200) = $90
2003 2% × ($3 900 – $150) = $75

The provision for doubtful debts account

General ledger
Provision for doubtful debts

2001 $ 2001 $
Dec 31 Balance c/d 58 Dec 31 Profit and loss 58
2002 2002
Jan 1 Balance b/d 58
Dec 31 Balance c/d 90 Dec 31 Profit and loss ($90 – $58) 32
90 90
2003 2003
Dec 31 Profit and loss ($90 – $75) 15 Jan 1 Balance b/d 90
Balance c/d 75
90 90
2004
Jan 1 Balance b/d 75

The extract of the Income Statement for the year ended 31 December 2001 for G. Goto

$ $
Gross profit
Less Expenses
Bad debts 100
Provision for doubtful debts 58

84
The extract of the Income Statement for the year ended 31 December 2002 for G. Goto

$ $
Gross profit
Less Expenses
Bad debts 200
Increase in provision for doubtful debts 32

B. Nare’s extract of the Income Statement for the year ended 31 December 2003

$ $
Gross profit
Add decrease in Provision for doubtful debts 15
Less Expenses
Bad debts 150

The extract of the statement of financial position as at 31 December 2001 for G. Goto

Current assets $ $ $
Trade receivables 3 000
Less bad debts (100)
Less provision for doubtful debts (58) 2 842

The extract of the statement of financial position as at 31 December 2002 for G. Goto

Current assets $ $ $
Trade receivables 4700
Less bad debts (200)
Less provision for doubtful debts (90) 4410

The extract of the statement of financial position as at 31 December 2003 for G. Goto
Current assets $ $ $
Trade receivables 3 900
Less bad debts (150)
Less provision for doubtful debts (75) 3 675

Activity 10.2 Individual work

On 31 December 2018, S. Johnson’s total trade receivables stood at $4 500. He decided to create a provision for
doubtful debts of 5% of trade receivables. You are required to:
(a) Prepare the provision for doubtful debts account on 31 December 2018 and an extract of the statement
of financial position at the same date.

85
General ledger
Provision for discount allowed
2011 $ 2011 $
Dec 31 Balance c/d 57 Dec 31 Profit and loss 57
2012 2012
Jan 1 Balance b/d 57
Dec 31 Balance c/d 76 Dec 31 Profit and loss ($76 – $57) 19
76 76
2013 2013
Dec 31 Profit and loss ($76 – $38) 38 Jan 1 Balance b/d 76
Balance c/d 38
76 76
2014
Jan 1 Balance b/d 38

The extract of the Income Statement for the year ended 31 December 2011 for T. Tarisai

$ $
Gross profit
Less Expenses
Provision for doubtful debts 300
Provision for discount allowed 57

The extract of the Income Statement for the year ended 31 December 2012 for T. Tarisai
$ $
Gross profit
Less Expenses
Increase in provision for doubtful debts 400
Increase in provision for discount allowed 19

The extract of the Income Statement for the year ended 31 December 2013 for T. Tarisai
$ $
Gross profit
Add decrease in Provision for doubtful debts 200
Add decrease in Provision for discount allowed 38 238
Less Expenses

87
Summary of the chapter
•• Bad debt should be cleared from the sales ledger. They should be transferred to the bad debts
account.
•• The balance in the bad debts account is transferred to the profit and loss account.
•• Bad debts should be excluded from the total debtors shown the statement of financial position.
•• It is prudent for a business to create a provision to recognise the possible loss arising from debtors
which might become bad.
•• Provision for doubtful debts is calculated as a percentage of trade receivables available at the end
of the period after deducting bad debts.
•• Besides providing for doubtful debts businesses also need to create provisions for discount
allowed.
Glossary of terms
Bad debts – customers who are not able to pay off their account balances.
Provision for doubtful debts – an estimate based on past records of the proportion of the total trade
receivables balance at the end of the year which are likely to become
irrecoverable.

Revision Exercises
Multiples Choice Questions
1. Increase in provision for doubtful debts is ________.
A. debited to provision for bad debts account
B. credited to provision for bad debts account
C. credited to the profit and loss account
D. deducted from bad debts
2. F. Gube decided to create a provision for doubtful debts of 5% of trade receivables and provision for
discount allowed of 2%. Trade receivables at the end of the were $10 000. The amount shown for
trade receivables in the statement of financial position is ______.
A. $9 310 B. $10 000 C. $9 800 D. $9 500
3. Which of the following is added to gross profit?
A. Increase in provision for bad debts.
B. Decrease in provision for bad debts.
C. Increase in bad debts.
D. Decrease in bad debts.
4. On 31 December 2018, total trade receivables balances in the sales ledger amounted to $40 000. A
debtor who owed $8 000 was to be written off as bad. A provision for doubtful debts of 5% of trade
receivables is to be created and also a provision for discount allowed of 2% of trade receivables.
Calculate the provision for discount allowed.
A. $800 B. $640 C. $608 D. $1 600

89
4. On 31 December 2018, Mpondo’s books showed that Trade receivables were $16 000. A provision
for doubtful debts of 5% of trade receivables was created. At 31 December 2019 trade receivables
stood at $20 000. Mpondo decided to maintain a 5% provision on trade discount and also to create
1% provision for discount of allowed on net trade receivables.
Prepare;
(a) the provision for doubtful debts account for 2018 and 2019.
(b) the provision for discount allowed account for 2019.
(c) extracts of the profit and loss account for the years ending 31 December 2018 and 2019.
(d) extract of the statement of financial position for the year 2019.
5. The following items were extracted from the trial balance of F. Mateta on 31 December 2018.

Debit Credit
$ $
Trade receivables (Debtors) 80 000
Bad debts 7 580
Discount allowed 4 000
Provision for discount allowed (1 January 2018) 1 200
Provision for bad debts (1 January 2018) 5 100

Mateta maintains provision of bad debts at 5% of trade receivable and provision at discount allowed
at 2% of trade receivables.
You are required to prepare;
(a) The provision for bad debts account and the provision for discount allowed account for the year
ended 31 December 2018.
(b) The extract of the profit and loss account for the year ended 31 December 2018.
(c) The extract of the statement of financial position as at 31 December 2018.

91
EXAMINATION 2
Paper 1: Multiple Choice Questions [20 marks]
Answer all the questions by choosing the correct answer from A, B, C or D.
1. A business always depreciates its machinery using the straight-line method. Name the accounting
concept being followed.
A. Prudence. B. Consistency. C. Matching. D. Dual.
2. Which accounting principle state that expenses should not be understated?
A. Matching. B. Going. C. Prudence. D. Double entry.
3. Where exactly in the statement of financial position is rent payable owing entered?
A. Current assets. B. Current liabilities. C. Revenue. D. Profit and loss.
4. Tanaka charges his tenants monthly rent of $2 000. At the end of the year, 31 December 2011, the
tenants owed $500. What is the total rent receivable for the year?
A. $23 500. B. $2 500. C. $1 500. D. $24 000.
5. Which of the following causes physical deterioration of non-current assets?
A. Rusting. B. Time. C. Obsolescence. D. Inadequacy.
6. Mapisa acquired equipment for $4 000 on 1 January 2018, which she experts to use for 24 months. At
the time of disposal, the equipment is expected to have a scrape value of $1 000. Calculate depreciation
for the year ended 31 December 2019 using the straight line method.
A. $1 500. B. $1 000. C. $2 500. D. $2 000.
7. Inventory of stationery at the end of the year in shown in the statement of financial position as_____.
A. expenses B. current assets C. current liabilities D. revenue
8. Given that the net profit of a business is $1000, operating expenses $2 500 and turnover $9 500.
Calculate cost of goods sold.
A. $13 000. B. $11 000. C. $3 500. D. $6 000.
9. If a payment of rent of $1 450 by cheque is recorded in error in both bank account and rent as $1 540,
this is error of __________.
A. transposition B. commission C. complete reversal of entries D. principle
10. A business has total non-current assets of $2 000, trade receivables $1 200, inventory $2 300, bank and
cash $3 000, trade payables $3 500 and rent receivable owing $1 100. Calculate the working capital.
A. $29 900 B. $3 000 C. $4 100 D. $1 900
11. Given that the opening capital is $1 000, closing capital $1 500, drawings $300. Calculate net profit.
A. $800 B. $200 C. $2 200 D. $2 800
12. Which of the following transactions increases working capital?
A. Bought goods for resale on credit. B. Bought goods for resale paying by cheque.
C. Donating $7 800 to an orphanage home. D. Owner deposited $7 400 additional capital into bank.
13. How is an increase in provision for discount allowed recorded?
Debit Credit
A. Provision for discount allowed account Profit and loss account
B. Profit and loss account Provision for discount allowed account
C. Provision for discount allowed account Bank account
D. Discount allowed account Provision for discount allowed account
14. M. Mashaya created a provision for doubtful debts of 10% of trade receivables and an allowance of
discount allowed of 2% of net trade receivables. At the end of the year trade receivables amounted
to $5000. Calculate the allowance of discount allowed.
A. $500. B. $100. C. $490. D. $90.

92
Paper 2: Structured Questions
There are 5 compulsory questions carrying 20 marks each and you are expected to answer all.
1. The following trial balance was extracted from the books of F. Sinara as at 31 December 2017.
Debit Credit
$ $
Inventory on 1 January 2017 1 000
Purchases 34 000
Sales 50 000
Buildings 15 000
Accounts receivable 8 000
Accounts payable 2 300
Commission received 8 700
Drawings 9 200
Capital 26 950
Cash in hand 2 900
Bank 9 700
Rent 7 000
Wages and salaries 7 300
Discount received 2 900
Discount allowed 1 200
General expenses 2 700
Carriage inwards 500
Carriage outwards 700
Returns outwards 950
Office equipment 12 000
101 500 101 500
Inventory at 31 December 2017 was valued at $1 900.
You are required to prepare:
(a) The Statement of comprehensive income for the year ended 31 December 2017.
(b) The statement of financial position as at 31 December 2017.
2. The following information was extracted from the books of D. Sibanda:
The following transactions took place during the year ending 30 September 2018:
i. Paid $11 000 for stationery by cheque.
ii. Paid $7 100 for electricity in cash.
You are required to:
(a) Prepare the Stationery Account.
(b) Prepare the Electricity Account.
(c) Explain the following accounting concepts, giving examples;
i. The matching concept.
ii. The prudence concept.

95
 Chapter FINANCIAL STATEMENTS

11 WITH ADJUSTMENTS

Chapter objectives
At the end of this chapter, you should be able to:
•• make the necessary adjustments and show the following in the financial statements.
•• depreciation.
•• provision for depreciation.
•• bad debts.
•• provision for doubtful debts.
•• accruals and prepayments.
•• provision for discount allowed.

Introduction
In the previous chapters, we have covered end of year adjustment, we now move on to prepare end of
year financial statements with adjustment. It is important to show all your workings.

UNIT 11.1 THE STATEMENT OF COMPREHENSIVE INCOME AND THE STATEMENT OF

FINANCIAL POSITION
Fully worked example
The following trial balance was extracted from the books of Anotida on 31 December 2016.
Anotida’s trial balance as at 31 December 2016
$ $
Capital at 1 January 2016 12 000
Trade payables 1 700
Trade receivables 3 200
Cash in hand 1 500
Cash at bank 2 800
Motor vehicles at cost 7 000
Office equipment at cost 3 000
Sales 11 000
Purchases 6 000
Motor expenses 100

97
Rent ($900 + $100) W2 1 000
Insurance ($300 – $50) W1 250
General expenses 600
Bad debts 200
Increase in provision for bad debts ($300 – $200) W4 100
Provision for discount allowed (2% × $2 700) W5 54
Depreciation: motor van (20% × $7 000) W3 1 400
Office equipment (10% × $2 700) W3 270 3 974
Net profit 1 198
The statement of financial position
Anotida’s statement of financial position as at 31 December 2016
Cost Accumulated Carrying
Depreciation Amount
Non-current assets
Motor vehicles ($2 800 + $1 400) 7000 4 200 2 800
Office equipment ($300 + $270) 3 000 570 2 430
10 000 4 770 5 230
Current assets
Inventory 2 700
Trade receivables 3 200
Less bad debts 200
Less provision for bad debts W4 300
Less provision for discount allowed W5 54 2 646
Prepayment: Insurance W1 50
Cash at bank 2 800
Cash in hand 1 500 9 696
Total assets 14 926
Capital and liabilities
Capital
Capital at 1 January 2016 12 000
Add net profit 1 198
13 198
Less drawings W6 72
13 126
Liabilities
Current liabilities
Trade payables 1 700
Accrual: Rent W2 100 1 800
14 926

99
6. The following account appeared in the books of F. Mukaro. What does the entry on 31 December
represent?
Disposals account
2018 $ 2018 $
Sept 30 Motor vehicle 6 000 Sept 30 Provision for depreciation 4 000
Dec 31 Profit and loss 1 000 30 Bank 3 000

7 000 7 000
A. Loss on disposal of a motor vehicle.
B. Loss on disposals of machinery.
C. Profit on disposal of a motor vehicle.
D. Profit on disposal of machinery.
Structured Questions
1. The following trial balance was extracted from the books of D. Vanessa on 31 December 2018.
D. Vanessa’s trial balance as at 31 December 2018
$ $
Purchases 2 000
Sales 4 500
Sales returns 40
Inventory on 1 January 2015 461
Trade receivable and trade payables 400 570
Provision for bad debts 20
Office equipment 1 900
Provision for depreciation:
Office equipment 90
Drawings 250
Capital at 1 January 2018 1 700
Cash in hand 117
Bank 519
Rent 450
Wages and salaries 240
Bad debts 70
General expenses 230
Railage inwards 69
Carriage outwards 134
6 880 6 880

103
 Chapter
CONTROL ACCOUNTS

12
Chapter objectives
At the end of this chapter, you should be able to:
•• define control accounts.
•• outline the purposes of control accounts.
•• name the types of control accounts.
•• identify sources of information for control accounts.
•• prepare control accounts.

Introduction
This chapter looks at control accounts. You will learn the purposes of control accounts as well as how
to prepare accounts sales ledger and purchases ledger control accounts. The chapter also identifies the
sources of information used to prepare control accounts.

UNIT 12.1 CONTROL ACCOUNTS

A control account essentially summarise data from large numbers of related accounts. It is composed
of the periodic totals of all the postings made to a given ledger, hence may also be referred to as total
accounts. The most common control accounts are the sales ledger and purchases ledger control accounts.
The balances of the control accounts should be equal to the total of the balances in the ledger which
it controls, for example, the totals of balance in the accounts receivables ledger should be equal to the
balance in the accounts receivables control account. A control account is prepared in the general ledger.

Reasons for preparing control accounts

Control accounts serves the following purposes:
(a) Checking on the arithmetical accuracy of the ledger.
(b) Assist in locating errors.
(c) Calculating total credit trade receivables and credit trade payables.
(d) Speeding up the preparation of financial statements.
(e) Detecting and reducing fraud.
(f ) Calculating missing figures in incomplete records.

106
2. Purchases ledger control account
A purchases ledge control account is also known as the creditors’ or trade receivables control account.
It contains information which relates to persons whom the business owes money for goods or services
supplied.
Purchases ledger control account

May 1 Balance b/d (debit balance, if xxx May 1 Balance b/d (credit balance from xxxx
any, from last month) last month)

31 Purchases returns for month (total xxx 31 Credit purchases for the month xxxx
from returns outwards journal) (total from purchases journal)

Cash/cheques paid to suppliers (total Interest charged by suppliers on

from cash book) xxxx overdue accounts (from cash book or xxxx
purchases journal)

Discount received xxx Cash refunds from supplies (from cash xxxx
(total from cash book) book)
Set off (from general journal) xxx

Balance c/d (credit balance carried xxx Balance c/d (debit balance carried, if xxxx
forward) any, forward)
xxx xxxx
June 1 Balance b/d (debit balance, if any, xxx June 1 Balance b/d (credit balance from last xxxx
from last month) month)

Trade payables carry a credit balance; they fall under liabilities. Thus, the purchases ledger control
account should also carry a credit balance. Sometimes a purchases ledger control account may carry
two balances: a credit balance and a debit balance at the same time. The possible reasons for the debit
balance in the purchases ledger control account include the following:
•• Goods returned to the supplier after the payment has been made.
•• When a business makes an advance payment to the supplier.
•• When a business makes an overpayment to the supplier and the refund is not yet received.
Example 12.2 Purchases ledger control account

The following information was obtained from the books of Anotida for the month ended 31 January 2018.

2019 $
June 1 Purchases ledger – credit balance 5 400
Purchases ledger – debit balance 310
30 Cash purchases 14 000
Credit purchases 10 000
Set off against sales ledger 140

109
 (d) Purchases day book was undercast by $700.
(e) A payment by cash of $1 400 was correctly entered in the rent but posted the wrong side of the cash
account.
Required:
(a) The journal entries to correct the above errors. (Narrations are not required). [10]
(b) Write up a suspense account. [5]
(c) Prepare a corrected trial balance. [6]
(d) Name 2 errors that are not revealed by the trial balance. [2]
5. T. Price operates a shop with two departments, X and Y. The following information was available at 31
July 2011.
A B
$ $
Purchases 260 000 290 000
Customs duty - 8 000
Carriage inwards 29 000
Carriage outwards 37 000 15 000
Sales 610 000 480 000
Returns inwards 39 000
Returns outwards 14 000 -
Inventory at 1 April 2017 90 000 110 000
Inventory at 31 March 2018 80 000 140 000
(a) You are required to prepare the Departmental Trading Account for the year ending 31 July 2011 in
columnar form. [10]
(b) Give a reason for preparing the Departmental Trading Account in columnar form. [2]

157
INDEX 105, 130, 132, 142, 145, 146, 147, 148,
149, 152, 155
A Direct debit 128
Dishonoured cheque 118
Account 5, 7, 9, 12, 13, 14, 19, 20, 21, 22, 23, 24, 25, 26,
28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, E
42, 43, 44, 45, 46, 54, 57, 58, 59, 60, 61, 65, 67,
68, 69, 70, 71, 72, 73, 74, 76, 77, 78, 79, 80, 81, Estimated residual value 62, 158
82, 83, 84, 85, 88, 89, 90, 91, 92, 93, 94, 96, 97,
102, 103, 106, 107, 108, 109, 110, 111, 112, 113, G
114, 115, 116, 118, 119, 126, 128, 129, 132, 133,
Going concern 57, 58, 59
134, 135, 137, 138, 139, 140, 141, 142, 143, 144,
Gross profit 45, 46, 54, 83, 89, 102, 133, 136, 137, 146,
146, 147, 149, 150, 151, 152, 153, 154, 155, 156,
147, 153
157
Accounting cycle 1, 4, 5, 42
Accrued expenses 78, 102
H
Accrued revenue 77, 78 Historic cost concept 58, 59
Apportion 136, 138, 139, 146
Assets 7, 8, 9, 10, 12, 13, 21, 26, 49, 50, 51, 52, 53, 54, 57, M
58, 59, 61, 62, 64, 65, 67, 71, 74, 77, 78, 85, 88,
92, 93, 94, 99, 102, 107, 130, 131, 132, 133, 134, Matching concept 58, 74, 96
135, 142, 144, 150, 151 Materiality concept 58, 59

B N
Bad debts 7, 8, 12, 41, 42, 58, 81, 82, 85, 86, 88, 89, Net profit 45, 46, 50, 54, 92, 94, 99, 102, 132, 133, 134,
90, 91, 93, 94, 96, 97, 99, 100, 101, 102, 103, 139, 144, 146, 147, 151, 152, 154
104, 107, 111, 142, 143, 144, 145, 146, 148, Nominal account 21
151, 152, 155 Non-current assets 7, 9, 12, 13, 57, 61, 62, 65, 71, 92, 93,
Bank reconciliation statement 116, 120, 121, 122, 123, 94, 130, 132, 133, 135
124, 125, 126, 127, 128,
129, 155 O
Bank statement 94, 116, 117, 118, 119, 120, 121, 123, Operating expenses 46, 48, 54, 92, 94
124, 125, 126, 127, 128, 129, 152, 155
P
C
Personal accounts 15, 21
Capital expenditure 130, 132, 133, 134, 135, 151, 155 Prepaid expenses 74
Commission 25, 29, 30, 38, 77, 78, 92, 154 Principle 26, 29, 30, 38, 92, 93, 150
Compensating 28, 29 Profit and loss account 46, 69, 78, 79, 81, 83, 89, 91,
Consistency concept 58, 59 102, 132, 133, 134, 139, 140,
Control accounts 106, 107, 112, 114, 151 141, 142, 146, 147, 149, 153,
Credit transfer 155 154

D Provision for doubtful debts  81, 83, 84, 85, 86, 87,
88, 89, 90, 91, 93, 94, 97,
Data capture 5 102, 155, 156
Data collection 5 Prudence concept 83, 96
Data processing 1, 2, 3, 4, 5, 40, 42, 150 Purchases journal 1, 6, 12, 37, 109
Departmental accounts 136
Depreciation 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71,
72, 73, 92, 94, 96, 97, 98, 102, 103, 104,

158
 A Practical Approach to Principles of Accounting | Form 1 - 4 Series
Updated Curriculum A Practical Approach A Practical Approach

Updated Curriculum
FORM FORM
to to

Principles 1 Principles 2
of Accounting
This is a learner centred comprehensive book which gives learners an effective
understanding of the learning area. It constitutes the following:
• well-structured content as outlined in the syllabus.
of Accounting
• interesting facts about the subject that motivate and stimulate interest in the
learning of Accounting.
• activities that require learners to actively participate in their learning process.
• knowledge of accounting skills, techniques and procedures.
• demonstration of unhu/vumunhu/ubuntu when performing business
transactions.
• simple language to enhance understanding.
• multi-sensory approach to allow the learners to visualise and examine
accounting information.
• thorough revision exercises at the end of the chapter and follow up
examinations meant to evaluate the extent to which taught skills and
knowledge have been grasped.

Approved by the Ministry of Primary and Secondary Education

Nyasha Goredema Learner’s Book Mahuyu Joburg

Ashley Simbarashe Paradza
Learner’s Book

A Practical Approach A Practical Approach

Updated Curriculum
Updated Curriculum

FORM FORM
to to

Principles 3 Principles 4
A Practical Approach to Principles of Accounting | Form 3

A Practical Approach to Principles of Accounting | Form 4

This is a learner centred comprehensive book which gives learners an effective

understanding of the learning area. It constitutes the following:
• well-structured content as outlined in the syllabus.
of Accounting of Accounting
• interesting facts about the subject that motivate and stimulate interest in the
learning of Accounting.
• activities that require learners to actively participate in their learning process.
• knowledge of accounting skills, techniques and procedures.
• demonstration of unhu/vumunhu/ubuntu when performing business
transactions.
• simple language to enhance understanding.
• multi-sensory approach to allow the learners to visualise and examine
accounting information.
• thorough revision exercises at the end of the chapter and follow up
examinations meant to evaluate the extent to which taught skills and
knowledge have been grasped.

Approved by the Ministry of Primary and Secondary Education

Trust Chikuni Learner’s Book

Donemore Muchemwa Learner’s Book

All Approved by the Ministry of Primary and Secondary Education

160