84 Further Adjustments to Accounts

e) DEPRECIATION
It is the loss of value of a non-current asset throughout its period of use by the firm. IAS 16 on property,
plant and equipment defines depreciation as the allocation of a depreciable amount of a non-current asset
over its estimated useful life.
Under the matching concept, all incomes or revenues and expenses for a particular period should be
reported in the financial statements and because depreciation is an expense of the business therefore, it will
be charged in the P&L A/C.

Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them becoming inadequate e.g. when a
business grows or expands then some buildings may become inadequate due to
space. Also some machines that are unable to manufacture a large number of
goods.
b) Obsolescence: Some assets become obsolete due to change in technology or different
methods of production e.g. computers.

3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw materials, minerals or oil.
Such assets include mines, oil wells, and quarries.

Methods of Calculating Depreciation

These are the methods developed to assist in estimating the amount of depreciation to be charged in the P&L
a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting practice, accounting
standards and suit the firm’s non-current assets. There are 2 main methods of estimating depreciation and 5
others that will apply in a firm’s situation.
The main methods are: Straight-line method and Reducing Balance method. The other 5 methods include:

i. Sum of the digits methods – uses a formular.

ii. Revaluation method – applies to a non-current asset of low value.
iii. Machine-Hour method – depreciation is based on number of hours a machine is expected to operate
(manufacturing process).
iv. Unit of output method – depreciation is based on the number of units a machine is expected to
produce.
v. Depletion of units – depreciation is based on number of units extracted from the asset.
Lesson Five 85

Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L a/c for a particular asset
and is based on the following formular:

Depreciation for year = Cost of asset – Residual Value = £100,000 - £20,000

Estimated useful life 8

= £10,000 per year.

Cost of Asset – Residual Value

Estimated useful life of asset.

Residual Value
The amount the firm expects to sell the asset after the period of use in the firm, also called Sales Value /
Scrap Value.

Estimated Useful Life

The period the asset is expected to be used in the firm.

Example 4.1
A firm buys a machine for £100,000 which it expects to use in the firm for eight years. After the eight years
the machine will be sold for £20,000. Under the straight-line method, the depreciation amount will be
computed as follows:

This means for this asset £10,000 will be charged in the P&L account as depreciation expense on the
machine.
The straight line method assumes that benefits accruing on use of a non-current asset are spread out evenly
over the life of the asset e.g. buildings use straight-line method.
Percentage rate based on cost as opposed to number of years can also be used to calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset during the first period of
use. The same rate is applied in the subsequent financial periods but the rate is applied on the reduced value
of the asset. (Cost of asset – total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L account in the earlier
periods of use and lower amounts in the latter periods of use as shown in the following example:

Example 4.12
Assume a firm buys machinery for £100,000 and provides depreciation on machines at 20% p.a. on reducing
balance method. The depreciation charged to the P&L will be as follows for the next 3 years.
86 Further Adjustments to Accounts

Year 1

£
Cost 100,000
Depreciation 20% of 100,000 (20,000) P&L YR 1

Balance to YR 2 80,000

Year 2
Depreciation 20% of 80,000 80,000
(16,000) P&L YR 2

Balance to YR 3 64,000

Year 3
Depreciation 20 % of 64,000 64,000
(12,800) P&L YR 3

Balance to YR 4 51,200

Reducing balance method (diminishing balance method) assumes that benefits accruing from the use of
an asset are higher in the first periods of use and lower in the latter periods e.g.
 Fixtures, furniture and fitting.
 Plant and machinery.
 Motor vehicles.

ACCOUNTING TREATMENT ON DEPRECIATION

When non-current assets are depreciated, a new account for each type of asset is opened; this account is
called a provision for depreciation whereby the following entries will be made:
Debit – P&L a/c
Credit – Provision for depreciation a/c
With the amount of depreciation charged for the period.

Example on straight-line method

The entries will be as follows:
Debit – P&L a/c with £10,000
Credit – Provision for depreciation. Machines a/c with £10,000 being depreciation provided for the
machine.

The ledger accounts will be as follows:

Machinery Provision for Depreciation Machinery
£ £ £ £
Cashbook 100,000 31/12 Bal c/d 100,000 31/12 Bal c/d 10,000 P&L 10,000

The final accounts extracts will be shown as follows:

(a) Profit And Loss Account (Extract) for the year ended
Lesson Five 87

Expenses £ £
Depreciation:
Buildings x
Plant and machinery 10,000
Furniture, Fixtures and Fittings x
Motor vehicles x

(b) Balance sheet (Extract) as at________

Non Current Assets Cost Total NBV (Net Book Value)

£ Depreciation (£) £

Land x - x
Buildings x (x) x
Plant and Machinery x (x) x
Furniture, Fixtures & fittings x (x) x
Motor vehicles x (x) x
x x x

Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor cars account and the
provision for depreciation account for the year ended 31 December 2002 from the information given below.
Depreciation is at the rate of 20 per cent per annum. Using the basis of one month’s ownership needs one
month’s depreciation.

2002 Bought two motor vans for £12,000 each on 1 January

Bought one motor van for £14,000 on 1 July.

Motorcars a/c

2002 £ 2002 £
1/1 Cashbook 24,000
1/7 Cashbook 14,000 31/12 Bal c/d 38,000
38,000 38,000

Calculation for depreciation

1/1 24,000 x 20 x 12 = £4,800 + 1/7( 14,000 x 20 x 6 = 1,400 )
100 12 100 12

= £4,800 + 1,400 = £6,200

88 Further Adjustments to Accounts

Provision- Depreciation for Motor cars A/c

2002 £ 2002 £

31/12 Bal c/d 6,200 31/12 P&L 6,200

Profit And Loss Account (Extract) for the period.

Expenses £ £
Depreciation:
Motor vans 6200

Balance Sheet (Extract) as at 31/12/2002

Non-current Assets Cost Total NBV

Depreciation
Motor vans 38,000 (6200) 31,800

Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31 December.
You are to show:

a. The plant account.

b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.

The machinery bought was:

1999 1 January 1 plant costing £8,000

2000 1 July 2 plant costing £5,000 each
1 October 1 plant costing £6,000
2002 1 April 1 plant costing £2,000

Depreciation is at the rate of 10 per cent per annum, using the straight-line method, plant being depreciated
for each proportion of a year.
Lesson Five 89

Plant a/c
1999 £ 199 £
1/1 Cashbook 8000 31/12 Bal c/d 8000

2000 2000
1/1 Bal b/d 8000
1/7 Cashbook 10,000
1/10 Cashbook 6,000 31/12 Bal c/d 24,000
24,000 24,000

2001 2001
1/1 Bal b/d 24,000 31/12 Bal c/d 24,000

2002 2002
1/1 Bal b/d 24,000
1/4 Cashbook 2,000 31/12 Bal c/d 26,000
26,000 26,000

Calculation for Depreciation

1999 £ Accumulated Depreciation

£8,000 x 10/100 x 12/12 = 800 800

2000
£10,000 x 10/100 x 6/12 = 500

£6,000 x 10/100 x 3/12 = 150

£8,000 x 10/100 x 12/12 = 800

1,450 2,250

2001
£24,000 x 10/100 x 12/12 = 2400 4,650

2002
£24,000 x 10/100 x 12/12 = 2400

£2,000 x 10/100 x 9/12 = 150

2,250 7,200
90 Further Adjustments to Accounts

Provision – Depreciation Machines

1999 £ 1999 £
31/12 Bal c/d 800 31/12 P&L 800

2000 £ 2000 £
1/1 Bal b/d 800
31/12 Bal c/d 2,250 P&L 1,450
2,250 2,250

2001 £ 2001 £
1/1 Bal b/d 2,250
31/12 Bal c/d 4,650 P&L 2,400
4650 4650

2002 £ 2002 £
1/1 Bal b/d 4,650
31/12 Bal c/d 7,200 P&L 2,550
7,200 7,200

Balance Sheet (Extract) as at 31/12/99 – 31/12/02

Non Current Assets Cost Total NBV

Depreciation
1999
Motor vans 8,000 (800) 7,200

1999
Motor vans 24,000 (2,250) 21,750

1999
Motor vans 24,000 (4,650) 19,350

1999
Motor vans 26,000 (7,200) 18,800

DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
When an asset is disposed and is no longer used by the firm, the appropriate entries should be made in the
asset account and the total depreciation provided to date on the asset and the entries required will depend on
the type of disposal.
Lesson Five 91

When the asset is sold, the following entries will be made:

(a) Debit – asset disposal a/c

Credit – asset a/c
With the cost of the asset being disposed.

(b) Debit – provision for depreciation of asset a/c.

Credit – asset disposal a/c
With the total depreciation provided to date on the asset.

(c) Debit – cashbook.

Credit – asset disposal a/c
With the cash received on disposal.

When an asset is written off as a result of damage/accident/theft. If it was insured and the insurance
company accept liability but by the end of the period the insurance company has not yet paid.
(a) Debit – asset disposal a/c
Credit – asset a/c
With the cost of the asset damaged.

(b) Debit – provision for depreciation of asset a/c

Credit – asset disposal a/c

(c) Debit – insurance receivable a/c

Credit – asset disposal a/c
With the amount expected from the insurance.

If the insurance pays before the end of the financial period, it will not be necessary to create an insurance
debtor so the following entries will be made:

Debit – cashbook.
Credit – asset disposal a/c

If the asset is not used anymore or scrapped by the firm, the appropriate entries will be made in the asset
account and provision for depreciation a/c only.

Debit – asset disposal a/c

Credit – asset a/c
With the cost of the asset no longer in use.

Debit – provision for depreciation for asset

Credit – asset disposal a/c
With the total depreciation provided to date.

The balance in the disposal a/c after the above entries will either be a debit balance or a credit balance. A
credit balance represents a profit on disposal, which is reported in the profit and loss a/c together with other
incomes. The entry will be:

Debit – asset disposal a/c

Credit – P&L a/c
With the balance in the account.
92 Further Adjustments to Accounts

A debit balance in the asset disposal a/c is loss on disposal which is reported in the P&L a/c as an expense
and therefore the entry will be.

Example 4.15
A firm has a motor vehicle costing £1,000 total depreciation provided to date is £800. The firm decides to
trade in the motor vehicle with a new one the value of the new one being £500. The supplier of the new
vehicle agree with the firm that the old motor vehicle is worth £300, therefore the difference will be paid by
cash.

Motor vehicle a/c

£ £
Bal b/d 1,000 Motor vehicle disposal 1,000
Disposals 300
Cashbook 200 Bal c/d 500
1,500 1,500
===== ====

Motor Vehicle Disposal a/c

£ £
Motor vehicle a/c 1,000 Provision for depreciation 800
P&L 100 Motor vehicle 300
1,100 1,100

JOURNAL ENTRIES £ £
Debit – motor vehicles disposal 1,000
Credit – motor vehicles a/c 1,000
(Motor vehicle being traded in now transferred to disposal a/c)

Debit – Provision for depreciation – motor vehicles 800

Credit – Motor vehicle disposal a/c 800
(Total depreciation provided for motor vehicle)

Debit – Motor vehicle a/c 500

Credit – Asset disposal a/c 300
- Cashbook 200
(New motor vehicle acquired by trade-in value
of £300 and cheque payment of £200)

Debit – Asset disposal a/c 100

Credit – P&L 100
(Profit made on disposal)

In case of a loss,

Debit – P&L a/c

Credit – asset disposal a/c
Lesson Five 93

If the firm trades in an old asset for a new one, the following entries will be made in addition to the
movements in the asset and depreciation a/c.
Debit – asset a/c (value of the new asset)
Credit – cashbook (cash paid as difference of new value i.e. trade in value of old asset)
Asset disposal a/c (with trade-in value of old asset)

Example 4.16
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for each month of
ownership. From the following details draw up the plant account and the provision for depreciation account
for each of the years 1999, 2000, 2001 and 2002.

1999 Bought plant costing £900 on 1 January.

Bought plant costing £600 on 1 October.
2001 Bought plant costing £550 on 1 July.
2002 Sold plant which had been bought for £900 on 1 January 1999 for the sum of £275 on
30 September 2002.

You are also required to draw up the plant disposal account and the extracts from the balance sheet as at the
end of each year.

Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500

2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d 1,500

2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d 2,050
2,050 2,050

2002 2002
1/1 Bal b/d 2,050 30/9 Disposal 900
31/12 Bal c/d 1,150
2,050 2,050
94 Further Adjustments to Accounts

Plant Provision for Depreciation a/c

1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210

2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510

2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865

2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230

Calculation for Depreciation

Date Cost Months Depreciation charge £
1999
1/1 900 12 20/100 x 900 x 12/12 = 180
1/10 600 3 20/100 x 600 x 3/12 = 30
210

2000
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300

2001
1/1 1,500 12 20/100 x 1,500 x 12/12 = 300
1/2 550 6 20/100 x 550 x 6/12 = 55
355

2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365

Plant Disposal a/c

2002 £ 2002 £
Plant a/c 900 30/9 Provision for depreciation 675
P&L 50 30/9 Cashbook 275
950 950
Lesson Five 95

Balance Sheet (Extract)

Total
Non Current Assets Cost Depreciation NBV
1999 Plant 1,500 (210) 1,290

2000 Plant 1,500 (510) 990

2001 Plant 2,050 (865) 1,695

2002 Plant 1,150 (555) 595

CHANGE OF DEPRECIATION POLICY

A firm may change its depreciation policy in several ways e.g. from straight line to reducing balance or vice
versa, or it may increase/decrease the number of estimated useful years of an asset. A firm should always
follow the depreciation policy adopted consistently and incase there is need to change the policy may be due
to a new accounting standard or change in circumstances. This change should be disclosed in the financial
statements.
When there is change in the depreciation policy this may result in an increase or a decrease in the depreciation
to be charged in the Profit and loss account .IAS 16 requires that depreciation should be based on the
remaining net book value at the start of the period.
Example 4.17
A firm buys a machine for £100,000 for which it expects to use for the next 10 years. The firm depreciates
the machines on a straight-line basis on the years of the number of estimated useful years. In the 4 th year, the
estimated useful life of the machine is now reduced to 8 years. year.
Required:
Show the charge in the provision for depreciation a/c and the balance carried down for year 4. Change
for 10yr – 8 yr is same as change from 10% to 12.5%

Provision for Depreciation

Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000

Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000
Year 3 Year 3
1/1 Bal b/d 20,000
31/12 Bal c/d 30,000 31/12 P&L 10,000
30,000 30,000

Year 4 Year 4
1/1 Bal b/d 30,000
31/12 P&L 14,000
31/12 Bal c/d 44,000
44,000 44,000

Workings:
96 Further Adjustments to Accounts

The net book value at the beginning of Year 4 is £ 70,000 (100,000- 30,000). And the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be

£ 70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease but increases from 10 years
to 13 years.

Required: Show the provision of depreciation account in year 4

Provision for Depreciation

Year 1 £ Year 1 £
31/12 Bal c/d 10,000 31/12 P&L 10,000

Year 2 Year 2
1/1 Bal b/d 10,000
31/12 Bal c/d 20,000 P&L 10,000
20,000 20,000

Year 3 Year 3
31/12 Bal c/d 30,000 1/1 Bal b/d 20,000

_____ P&L 10,000

30,000 30,000

Year 4 Year 4
1/1 Bal b/d 30,000
31/12 Bal c/d 37,000 31/12 P&L 7,000
37,000 37,000

REVALUATION OF NON CURRENT ASSETS

Some of the non-current assets in a firm tend to appreciate in value rather than depreciate e.g. land and
buildings. IAS 16 on property, plant and equipment requires that such assets may be carried in the accounts
at the revalued amounts (may be based on the their market price).
Land is not depreciated, and therefore the adjustments required are minimal, but for buildings, changes
should be made at the cost and depreciation reserve account is usually opened for the purpose of these
adjustments.
Example 4.18
A firm has the following assets as part of the non-current assets:
Asset Cost Depreciation

(a) Land £1,000,000 -

Lesson Five 97

(b) Buildings £800,000 40,000

Illustration 1
The firm decides to revalue these two assets to reflect their current market prices and these are revalued at:
Land -£ 1,200,00
Buildings -£ 900,000
The following entries would be made
(a) Debit – Land A/c – with revaluation gain - £ 200,000
Credit – Revaluation Reserve a/c with the same - £ 200,000
(Revaluation gain on the land  1,200,000 – 1,000,000)
(b) Debit – Building a/c with revaluation gain - £100,000
Credit – Revaluation Reserve a/c with the same - £100,000
(Revaluation gain on buildings  900,000 – 800,000)
(c) Debit – Provision for depreciation for buildings a/c with £ 40,000
Credit – Revaluation Reserve a/c with the same £ 40,000
Total credit depreciation charged to date on buildings now transferred to revaluation reserve a/c
The ledger a/c will be as follows:
Land a/c
£ £
Bal B/D 1,000,000
Revaluation reserve __200,000 Bal C/D 1,200,000
1,2000,000 1,200,000

Buildings a/c
£ £
Bal B/D 800,000
Revaluation reserve 100,000 Bal C/D 900,000
900,000 900,000
Revaluation Reserve a/c
£ £
Land 200,000
Buildings 100,000
Bal C/D 340,000 Provision for depr. 40,000
340,000 340,000
98 Further Adjustments to Accounts

Provision for depreciation (Buildings)

£ £
Revaluation 40,000 Bal B/D 40,000

Bal c/d 45,000 P&L 45,000

85,000 85,000
The balances in the Land and Building a/c will be shown as cost in the Balance Sheet and the
revaluation reserve a/c appears together with the capital as a revaluation reserve (especially used in
company accounts.

Land 1,200,000 – 1,000,000 = 200,000

Buildings 900,000 – 760,000 = 140,000 340,000

Any depreciation to be charged for the buildings should be based on the revalued amount (900,000)
If we assume depreciation of 5% for buildings, we shall have £45,000 charged in the P & L and will
also be the Bal c/d in the provision for depreciation a/c.
Assume again that the firm decides to revalue its non-current assets or land and buildings downwards
in year 3 to the following values:
Land : £900,000
Buildings: £700,000
These amounts are to be reflected in the accounts for year 3.

The Ledger accounts will be as follows:

Land
Year 3 £ Year 3 £

1/1 Bal B/D 1,200,000 31/12 Revaluation 200,000

P&L 100,000

________ Bal C/D __900,000

1,200,000 1,200,000
Lesson Five 99

Buildings
Year 3 £ Year 3 £
1/1 Bal B/D 900,000 31/12 Revaluation 100,000
P&L 100,000
_______ Bal C/D 700,000
900,000 900,000

Revaluation Reserve
Year 3 £ Year 3 £
31/12 Land 200,000 1/1/ Bal B/D 340,000
31/12 Building 100,000
31/12 Prov. For depr. _40,000 _______
340,000 340,000

Exam Type Question 4.19 (December 1995 ) Question 4

James Mbuvi started a taxi business in Nairobi March 1990 under the firm name Mbuvi Taxis. The firm had
two vehicles KA and KB, which had been purchased forSh.560, 000, and Sh.720, 000 respectively earlier in
the year.
In February 1992 vehicle KB was involved in an accident and was written off. The insurance company paid
the firm Sh.160, 000 for the vehicle. In the same year the firm purchased two vehicles, KC and KD for
Sh.800, 000 each.
In November 1993 vehicle KC was sold for Sh.716, 000. In January 1994 vehicle KE was purchased for
Shs.840,000. In March 1994 another vehicle KF was purchased for
Sh.960, 000.
The firm’s policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand at the end of
the year irrespective of the date of purchase. Depreciation is not provided for vehicle disposed of during the
year. The firm’s year ends on 31 December.

Required:
a) Calculate the amount of depreciation charged in the profit and loss account for each of the five
years. (7 marks)
b) Prepare the motor vehicle account (at cost). (8 marks)
c) Calculate the profit and loss on disposal of each of the vehicles disposed of by the company.
(5 marks)
(Total: 20 marks)
100 Further Adjustments to Accounts

a
Vehicle 1990 1991 1992 1993 1994
KA 560,000 560,000 560,000 560,000
KB 720000 720,000 - - -
KC - - 800,000 - -
KD - - 800,000 800,000 800,000
KE - - - - 840,000
KF - - - - 960,000
Total cost 1,280,000 1,280,000 2,160,000 1,360,000 2,600,000
Depreciation at 25% 320,000 320,000 540,000 340,000 650,000

Motor Vehicle
1990 Sh 1990 Sh
1/3 Cashbook 1,280,000 31/12 Bal c/d 1,280,000
1991 1991
1/1 Bal b/d 1,280,000 31/12 Bal c/d 1,280,000
1992 1992
1/1 bal b/d 1,280,000 1/2 Disposal 720,000
Cashbook 1,600,000 31/12 Bal c/d 2,160,000
2,880,000 2,880,000
1993 1993
1/1 Bal b/d 2,160,000 1/11 Disposal 800,000
________ 31/12 Bal c/d 1,360,000
2,160,000 2,160,000
1994 1994
1/1 Bal b/d 1,360,000
1/1 Cashbook 840,000
1/3 Cashbook 960,000 31/12 Bal c/d 3,160,000
3,160,00 3,160,000
Lesson Five 101

Provision For Depreciation – M/V

1990 Sh 1990 Sh
31/12 Balc/d 320,000 31/12 P&L 320,000
1991 1991
1/1 Bal b/d 320,000
1992
31/12 Bal c/d 640,000 31/12 P& L 320,000
640,000 640,000
1992 1992
1/2 Disposal 360,000 1/1 Bal b/d 640,000

31/12 Bal c/d 820,000 3/12 P&L 540,000

1,180,000 1,180,000
1993 1993
1/11 Disposal 200,000 1/1 Bal b/d 820,000
31/12 Bal c/ 960,000 31/12 P&L 340,000
1,160,000 1,1
60,000
1994 1994
31/1 Bal b/d 960,000
31/12 Bal c/d 1,610,000 P&L 650,000
1,610,000 1,610,000

Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost still remains until the asset is
disposed. So depreciation ;

= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each year.
At 1 July 1999 the company’s balance sheet included the following figures:
l
 102 Further Adjustments to Accounts

Accumulated Net book

Cost Depreciation Value
£000 £000 £000
Land 4,000 Nil 4,000
Buildings 2,200 800 1,400
Plant and machinery 1,600 600 1,000
Motor vehicles 600 200 400

Depreciation is charged at the following annual rates (all straight line):

Land Nil
Buildings 2%
Plant and machinery 15%
Motor vehicles 20%
Appropriate depreciation charge is made in the year of purchase, sale or revaluation of an asset
During the year ended 30 June 2000 the following transactions took place:

1. I January 2000 The company decided to adopt a policy of revaluing its buildings; and they were
revalued to £3.4m.
2. 1 January 2000 Plant which has cost £300,000 was sold for £50,000. Accumulated depreciation on this
plant at 30 June 1999 amounted to £230,000.New plant was purchased at a cost of £400,000.
3. 1 April 2000 A new motor vehicle was purchased for £30,000. part of the purchase price was settled by
part exchanging another motor vehicle, which had cost £20,000, at an agreed value of £12,000. the
balance of £18,000 was paid in cash.
4. The motor vehicle given in part-exchange had a net book value (cost less depreciation) at 30 June 1999
of £10,000

Required:
Prepare ledger accounts to record these transactions in the records of Pentland Limited.
(16 marks)

Land
1999 £ 1999 £
1/7 Bal b/d 4,000

2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 5,200
5,200 5,200
Lesson Five 103

Buildings
1999 £ 1999 £
1/7 Bal b/d 2,200

2000 2000
1/1 Revaluation 1,200 30/6 Bal c/d 3,400
3,400 3,400

Revaluation Reserve
2000 £ 2000 £
1/1 Buildings 1,200
30/6 Bal C/D 2,022 1/1 Provision for depr. 822
2,022 2,022

Provision for Depreciation - Building

1999 £ 1999 £
1/7 Bal b/d 800

2000 2000
1/1 Revaluation 822 30/6 P&L
2,200 x ½ x 15
30/6 Bal c/d 34_ 3,400 x ½ x 15 56_
856 856

Plant
1999 £ 1999 £
1/7 Bal B/D 1,600

2000 2000
1/1 Cashbook 400 1/1 Disposal 300
_____ 30/6 Bal c/d 1,700
2,000 2,000

Provision for Depreciation - Plant

1999 £ 1999 £
1/7 Bal b/d 600

2000 2000
1/1 Disposal 252.50 30/6 P&L 247.50
Bal c/d 595.00
847.50 847.50
104 Further Adjustments to Accounts

Motor Vehicles
1999 £ 1999 £
1/7 Bal b/d 600

2000 2000
1/4 Disposal 12 1/4 Disposal 20
1/4 Cash book 18 30/6 Bal C/D 610
630 630

Motor Vehicle Disposal

2000 £ 2000 £
1/4 Motor Vehicle 20 1/4 Provision for depr. 13
P&L 5 1/4 Motor Vehicle 12
25 25

Provision for depreciation - Vehicle

1999 £ 1999 £
1/7 Bal b/d 200

2000 2000
1/4 Disposal 13 1/4 P&L 120.5
30/6 Bal c/d 307.5 30/6 Bal C/D ______
320.50 320.50

Plant - Disposal
2000 £ 2000 £
1/1 Plant 300 1/1 Provision for depr. 252.50
P&L 2.50 Cash book 50___
25 302.50

Property, Plant and Equipment Schedule (Formerly fixed asset movement schedule)
The property, plant and equipment schedule is a summary report on the balances and transactions of the
asset and provision for depreciation account as per the requirements of IAS 16 to be reported in the
published accounts of companies. The format is as follows:
Lesson Five 105

Property, Plant and Equipment Schedule:

Cost/ Valuation Freehold Leasehold Property Plant and Fixture, Furniture Total
property

(£) Long leases Short lease Machinery And fittings (£) (£)
(£) (£) (£)
Bal as at 1/1/01 x x x x x x
Additions xx xx xx xx xx xx
Revaluations xx - - - - xx
(gains)
Reclassifications - (xx) xx - - -
Disposals (xx) (xx) (xx) (xx) (xx) (xx)
Bal as at
31/12/01 xx xx xx xx xx xx

Depreciation/
Amortization
Bal as at 1/1/10 xx - xx xx xx xx
Change for year xx - xx xx xx xx
Revaluation (xx) - (xx) (xx) (xx) (xx)
Eliminated on
Disposal (xx) - (xx) (xx) (xx) (xx)
Bal as at -
31/12/01 (xx) (xx) (xx) (xx) (xx)
N.B. V as at xx xx xx xx xx xx
31/12/01
NBV as at xx xx xx xx xx xx
31/12/01

Additional information is in this schedule called reclassifications where some of the non-current assets are
transferred into a different class. (e.g.) some of the properties hold under long leases (over 50 years) will be
transferred to the short leases classes when their term becomes less than 50 years. This is a reclassification
from long lease to short lease and so is shown in the schedule at the value of transfer as a deduction in the
long lease class and on addition in the short lease class

Exam Type Questions

May 2000 Question Three

a) Briefly explain the nature and purpose of accounting for depreciation.
b) The chief accountant of Jitegemea Ltd has encountered difficulties while accounting for fixed assets and
the related depreciation in the company’s draft accounts for the year ended 30 April 2000. He has
decided to seek your professional advice and presented the following balances of fixed assets as at 1 May
1999:
106 Further Adjustments to Accounts

Acquisition Accumulated Depreciation

Cost Depreciation Rates
Sh. Sh. %
Furniture 900,000 300,000 12.5
Trucks 3,525,000 1,470,000 25
Plant and machinery 7,387,500 4,462,500 10
Land 2,775,000 - Nil
Buildings 2,925,000 292,500 2.5

The following additional information was also available:

1. It is the company’s policy to write off cost of the assets using above percentages on cost.
2. Depreciation is fully charged in the year of acquisition and none in the year of disposal.
3. A three year old machine acquired for sh.187,500 was sold for sh.15,750.
4. It has been decided to adjust and charge depreciation on buildings at 4%.
5. A used delivery truck purchased three years ago for sh.248,250 was traded in during the year at a value of
sh.157,500 in part exchange of the new delivery truck costing sh.450,000.
6. Land, buildings and machinery were acquired for sh.1,350,000 from a company that went out of
business. At the time of acquisition sh.90,000 was paid to have the assets revalued by a professionally
qualified valuer. The revaluation indicated the following market values.
Sh.
Land 900,000
Buildings 600,000
Machinery 300,000

Required:
A schedule of movement of fixed assets as requested by the Chief Accountant for inclusion in the company’s
accounts for the year ended 30 April 2000. (10 marks)
(Total: 15 marks)

SOLUTION
Depreciation is the loss of value of an asset (non-current) throughout the period of use by the firm. IAS 16
on property plant and equipment defines depreciation as allocation of a depreciable amount of a non-current
asset throughout its useful life.
Under the matching concept, all revenues should be matched with all the expenses that relate to a particular
financial period and therefore because the firm to earn revenue or income uses the assets, then the loss of
value should be marched with these revenues.
A charge is made in the Profit and Loss account as a depreciation expense for the non-current asset.
Lesson Five 107

Property, Plant & Equipment Schedule:

Cost/Valuation Land, Buildings Furniture Motor Total
And Machinery
Sh. Sh. Sh. Sh.
Bal as at 1/5/99 13,087,500 900,000 3,225,000 17,512,500
Additions 1,350,000 - 450,000 1,800,000
Revaluation 450,000 - - 450,000
Disposals (187500) _____- (248,250) (435,750)
Bal as at 30/4/2000 14,700,000 900,000 3,726,750 19,326,750

Depreciation
Bal as at 1/5/99 4,755,000 300,000 1,470,000 6,525,000
Charge for the year 1,066,500 112,500 931,687.5 2,110,687.5
Eliminated on disposal (37,500) -______ (124,125) (161,625)
Bal as at 30/4/2000 5,784,000 412,500 2,277,562.5 8,474,062.5
NBV 1/5/99 8,332,500 600,000 2,055,000 10,987,500
NBV 30/4/2000 8,916,000 487,500 1,449,187.5 10852,687.8

Workings:

Depreciation on Furniture = 900,000 x 12.5% = 112,500

Motor vehicle = cost 3,525,000

Add 450,000
3,726,750 x 25% = 931,687.5

Buildings = (292,500 + 600,000) x 4%

= 141,000
At 2.5% = 2,925,000 x 2.5% x 4 = 292,500
4% = 292,500 x 4% x 4 = 468,000
175,500

Machinery: cost c/f + Additions – Disposals = Bal x 10%

73,787,500 + 300,000 – (187,500) = 7,500,000 x 10%

= 750,000
108 Further Adjustments to Accounts

LESSON FIVE

FURTHER ADJUSTMNETS TO ACCOUNTS

(a) CONTROL ACCOUNTS

Control accounts are so called because they control a section of the ledgers. By control we mean that the
total on the control accounts should be the same as the totals on the ledger accounts. There are two main
types of control accounts:

(i) Sales ledger control Account – also called total debtors. The balance on the sales ledger control
account should be the same as the total of the balances in the sale ledger.

(ii) Purchases Ledger Control Account – also called total creditors .The balance carried down (Bal
c/d) on the purchases Ledger Control Account should be the same as the total of the balances in the
purchases ledger.

Example (Sales Ledger Control a/c)

Sales Ledger Control A/c

Sales = 200 + 300 + 400 + 500
Sales 1400 CashBook 700 Cashbook = 50 + 100 + 250 + 300
Bal C/D 700 Balance c/d = 150 + 150 + 200 + 200
1400 1400

SALES LEDGER
Debtor A a/c

Sales 200 C/B 50

Bal c/d 150
200 200

Debtor B a/c

Sales 400 C/B 250

Bal c/d 150
400 400

Debtor C a/c

Sales 300 C/B 100

Bal c/d 200
300 300
Lesson Five 109

Debtor D a/c

Sales 500 C/B 300

Bal c/d 200
500 500

Example: Purchases Ledger Control a/c

Purchases Ledger Control a/c

C/B 1900 Purchases 2600

Bal c/d 700
2600 2600

PURCHASES LEDGER

Creditor A

C/B 400 Purchases 600

Bal c/d 200
600 600

Creditor B

C/B 450 Purchases 700

Bal c/d 250
700 700

Creditor C

C/B 350 Purchases 500

Bal c/d 150
500 500

Creditor D

C/B 700 Purchases 800

Bal c/d 100
800 800

Purpose of Control Accounts

1. Provide for arithmetical check on the postings made in the individual accounts (either in the sales
ledger or purchases ledger.)
2. To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.
3. To detect and prevent errors and frauds in the customers and suppliers account.
4. To facilitate delegation of duties among the debtors and creditors clerks.
110 Further Adjustments to Accounts

FORMAT OF A SALES LEDGER CONTROL

Sales Ledger Control a/c

1. Balance b/d of the total debit 1. Total credit balances of the sales
balances from previous period ledger brought forward
2. Total credit sales for the period (from 2. Total cash received from credit
the sales journal) customers/debtors (from cash book)
3. Refunds to customers (from 3. Total cheques received from credit
cashbook) customers/debtors (from cash book)
4. Dishonored cheques (from cashbook) 4. Total returns-inwards (returns-inwards
journal)
5. Bad debts recovered (from general 5. Total cash discount allowed to
journal) customers (from cash book)
6. Bad debtors written-off (from general
journal)
7. Cash received from bad debtors
recovered (cash book)
8. Purchases Ledger contra

9. Allowances to customers (price

reduction in excess to discounts
allowed)
6. Total credit balances of the sales 10. Total debit balance carried down to
Ledger carried forward the next period – to be derived after
posting all those transactions

Refunds to Customers
Sometimes a firm can refund some cash on the customers account. This takes place when there is a credit
balance on the debtor’s a/c and the customer is not a creditor too.
The entry will be:

Dr. Debtor’s a/c

Cr. Cashbook

Example:
Debtor A
£ £
Sales 1000 Cashbook 950
(Refunds) C/B 100 Discounts 50
Returns 100
1100 1100
If the firm has not paid this amount owed to the customer, then it’s carried forward to the next period then is
a credit balance in the customer’s a/c. Therefore, if a firm has several customer, this information will be
shown in the control a/cs as total balance c/f
(debit side).
Lesson Five 111

Contra against the purchases ledger balances:

Some debtors may also be creditors in the same firm and therefore, if the amount due to them as creditors is
less than what they owe as debtors, then the credit balance is transferred from their creditors a/c to their
debtors a/c as a contra entry.

Example:
Debtor (A)

Sales 2000 Contra- purchases 1000

Bal c/d 1000
2000 1100

Creditor (A)

Contra - Debtor 1000 Purchases 1000

FORMAT OF A PURCHASES LEDGER CONTROL ACCOUNT

Purchases Ledger Control A/C
1. Total debit balances from purchases 1. Total credit balance brought forward (of
ledger brought forward from previous purchases ledger from the previous
period period)
2. Total cash paid to creditors 2. Total credit purchases for the period
(from cash book) (from purchases journal)
3. Total cheques paid to creditors 3. Refunds from suppliers
(from cash book) (from cash book)
4. Total cash discounts received
(from cash book)
5. Allowances by suppliers

6. Sales ledger contra

7. Total returns outwards

(from returns-outwards journal)
8. Total credit balance 4. Total debit balances (of the purchases
(to be derived after posting entries) ledger carried forward)

NOTES:
The following notes should be taken into consideration:

1) Cash received from CASH SALES should NOT be included in sales ledger control a/c.
2) Only cash discounts (allowable & receivables) should be included. Trade discounts should NOT be
included.
3) Provision for doubtful debts is NOT included in the sales ledger control a/c. i.e. increase or
decrease in provisions for doubtful debts will not affect this account.
4) Cash purchases are NOT posted to the Purchases Ledger Control A/C. However in some cases it
can be included especially where there are incomplete records (Topic to be covered later).
5) Interest due that is charged on over due customers’ account may also be shown on the debit side of
the sales ledger control. However when trying to determine the turnover under incomplete records
then it is wise to omit it.
112 Further Adjustments to Accounts

Example 5.1
You are required to prepare a purchases ledger control account from the following for the month of June.
The balance of the account is to be taken as the amount of creditors as on 30 June.

2003 £
June 1 Purchases ledger balances 36,760
Totals for June:
Purchases journal 422,570
Returns outwards journal 10,980
Cheques paid to suppliers 387,650
Discounts received from suppliers 8,870
June 30 Purchases ledger balances ?

Solution
Purchases Ledger Control A/C
2003 £ 2003 £
Returns out 10,980 Bal b/d (1/6) 36,760
Bank 387,950
Discounts received 8,870
Bal c/d (30/6) 51,830 Purchases 422,570
459,330 459,330

Example 5.2
Prepare a sales ledger control account from the following:
£
2003
May 1 Debit balances 64,200
Totals for May:
Sales journal 128,000
Cash and cheques received from debtors 103,700
Discounts allowed 3,950
Debit balances in the sales ledger set off against credit
balances in the purchases ledger 1,450
May 31 Debit balances ?
Credit balances 500

Solution

Sales Ledger Control A/C

2003 £ 2003 £
1/5 Bal b/d 64,200 Cash book 103,700
Sales 128,000 Discounts allowed 3,950
Purchases contra 1,450
31/5 Bal c/d 500 31/5 Bal c/d 83,600
192,700 192,700
Lesson Five 113

Example 5.3 (Exam type question – November 1997 Question 2)

(a) Explain the purposes for which control accounts are prepared. (3 marks)
(b) The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of
November 1997 are listed below:-

Sh.
Balances on 1 November 1997:
Sales ledger 9,123,000 (debit)
211,000 (credit)
Purchases ledger 4,490,000 (credit)
88,000 (debit)
Transactions during November 1997:
Purchases on credit 18,135,000
Allowances from suppliers 629,000
Receipts from customers by cheques 27,370,000
Sale on credit 36,755,000
Discount received 1,105,000
Payments to creditors by cheques 15,413,000
Contra settlements 3,046,000
Bills of exchange receivable 6,506,000
Allowances to customers 1,720,000
Customers cheques dishonored 489,000
Cash received from credit customers 4,201,000
Refunds to customers for overpayments 53,000
Discounts allowed 732,000
Balances on 30 November 1997
Sales ledger 136,000 (credit)
Purchases ledger 67,000 (debit)

Required:

The sales ledger and purchases ledger control accounts for the month of November 1997 and show the
respective debit and credit closing balances on 30 November 1997.
(17 marks)
(Total: 20 marks)
(a)
i) Provide for arithmetical check on the postings made in the individual accounts (either in
the sales ledger or purchases ledger.)

ii) To provide for a quick total of the balances to be shown in the trial balance as debtors
and creditors.

iii) To detect and prevent errors and frauds in the customers and suppliers account.

iv) To facilitate delegation of duties among the debtors and creditors clerks.
114 Further Adjustments to Accounts

Kopesha Ltd

Sales Ledger Control A/C

1997 Sh 1997 Sh
1/11 Bal b/d 9,123,000 1/11 Bal b/d 211,000
Sales 36,755,000 Bank 27,370,000
Dishonored cheques
489,000 Contra 3,046,000
Refunds to customers Bills of exchange
53,000 receivable 6,506,000
Allowances 720,000
Cash 4,201,000
Discounts allowed 732,000
30/11 Bal c/d 136,000 30/11 Bal c/d 2,770,000
46,556,000 46,556,000

Purchases Ledger Control A/C

1997 Sh 1997 Sh
1/11 Bal b/d 88,000 1/11 Bal b/d 4,490,000
Allowances from Purchases 18,135,000
suppliers 629,000
Discounts received 1,105,000
Bank 15,413,000
Contra settlement 3,046,000
30/11 Bal c/d 2,411,000 30/11 Bal c/d 67,000
22,692,000 22,692,000

Example 5.4 (Exam Question – May 2000 Question 4)

Poesha Limited keeps sales and purchases control accounts in the General Ledger. The transactions for the
month ended 30 April 2000 were as follows:
Sh
Credit balances on 1 April 2000 -Sales ledger 154,000
-Purchases ledger 569,000
Debit balances on 1 April 2000 -Sales ledger 956,000
-Purchases ledger 196,000
Credit balances on 30 April 2000 -Sales ledger 178,000
Debit balances on 30 April 2000 Purchases ledger 189,000
Credit purchases 2,450,000
Credit sales 4,563,000
Cheques received from debtors 3,140,000
Cash received from debtors 1,367,000
Cheque payments to creditors 1,994,000
Cash payments to creditors 352,000
Bad debts written off 68,000
Discounts received 104,000
Discounts allowed 169,000
Contra entry to sales ledger from purchases ledger 234,000
Refunds to debtors 62,000
Returns outwards 138,000
Returns inwards 231,000
Lesson Five 115

Required:
Sales ledger and purchases ledger control accounts for the month ended 30 April 2000.
(20 marks)
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
 Errors that don’t affect the trial balance
 Errors that affect the trial balance

Errors that don’t affect the trial balance

The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the same as the
credits. However, on taking a close check on the balances and transactions posted, errors may have been
made and therefore the balances shown on the trial balance may be incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are explained as follows:

a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not made e.g. a
sales invoice of £400 is not posted in the sales journal therefore no entry is made in the debtor’s account and
the sales account i.e. both debit of £400 in debtor’s account and credit of £ 400 in the sales account.

The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:

Debiting debtors £400

Crediting sales £400

b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same class.
Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount of £ 200. Instead
of a debit to T Thompson’s account it is made to L Thompson’s account and the corresponding credit in the
sales account is correct.

Although the debit entry is made into the wrong account, the two accounts are of the same class i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson by:
£

(i) Debit T Thompson a/c 200

(ii) Credit L Thompson a/c 200

c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different class e.g.
Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c. (Instead of debiting motor
vehicles, we debited motor vehicle expenses a/c and the credit entry in the cashbook is correct)

The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense account.
Therefore a capital expenditure has been posted as revenue expenditure.

To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c by:
£
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400
116 Further Adjustments to Accounts

d) Complete reversal of entries

A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit is posted as
a credit and a credit is posted as a debit. Example: cash drawn from the bank of £150 for business use is
posted as a debit in the bank account and credit in cash in hand.

To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
(ii) Post the transaction correctly

The entries will therefore be as follows:

(i) Debit Cash in hand by £150

Credit bank by £150

To correct the error of £ 150 posted in the wrong sides of these account

(ii) Debit cash by £150

Credit bank by £150
To post the entries correctly

e) Error of Original entry

Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is either
under/over stated. In some cases, this is known as a transposition error e.g. cash received from a debtor of
£980 is credited/posted to the customer’s account as £890.

To correct this error, the amount understated or overstated is posted to these accounts to reflect the correct
balance. In this case, we will:

£
Debit cash book 90
Credit debtors 90

f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the debits or
credits then another error may take place to overstate the debits or credits by the same amount, hence
canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but shown in the trial balance
as £3,890 and another error carried to the trial balance of fixture amounting to £4,540 instead of £4,450:
Lesson Five 117

£
Purchases 3,980
3,890
(90)

£
Fixtures 4,450
(4,540)
90

This type of error is corrected by use of a suspense account.

Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are required.

a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in the
cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.
118 Further Adjustments to Accounts

Solution
THE JOURNAL
Debit Credit
Sales 10,000
Capital 10,000
Additional capital passed into sales a/c now
transferred to capital a/c

Drawings 700
General expenses 700
Drawings debited in general expense now
transferred to drawing a/c
Drawings 89
Insurance 89
Private insurance transferred from insurance
a/c to drawings a/c
Purchases 270
C Kelly 270
Purchases and creditors amount to 857
initially entered as £587
Bank 390
Cash 390
Correct error in posting
Bank 390
Cash 390
To post the cash banked correctly
Bank 400
Cash 400
Cash drawings correctly started from bank to
cash
J Charlton 168
M McCarthy
Returns in from McCarthy entered in error
in J Carlton now transferred to his a/c 168
Motor expenses 1000
Motor disposal a/c 1000
To correct error in recording sales proceeds
In expense account

Example 5.6 (Exam type question – May 200 Question 2)

The balance sheet of N Patel, a sole trader, as at 31 March 2000 was as follows:
Lesson Five 119

Sh’000 Sh’000 Sh’000 Sh’000

Capital 1 April 1999 1,890 Land and buildings (at
valuation) 1,650
Profit for the year ended 31 Machinery (at cost) 1,200
March 2000 450
Deduct: drawings 150 300 Deduct: depreciation 750 450
Creditors 630 Stock at cost 570
Bank overdraft 270 Debtors 420 990
3,090 3,090

Further investigation reveals the following information:

1. The closing stock includes damaged goods which, although they had cost Sh. 10,000 have an
estimated sale value of Sh.7, 500.
2. Debtors include Sh. 20,000 in respect of a customer who has gone bankrupt. A provision for
doubtful debts of 2 ½% is also required on the balance of the debtors.
3. The machinery was acquired five years ago and is being depreciated to its scrap value on a straight-
line basis over eight years. A more realistic estimate indicates that the life span will be 10 years.
4. Wages owing at 31 March 2000 amounted to Sh. 9,500 but this has not been reflected in the
accounts.
5. Charges for the bank overdraft, amounting Sh 8,000 have not been reflected in the accounts.
6. In arriving at the profit for the period, a drawing of Sh 100,000 paid to Mr. Patel had been deducted
as an expense.
7. Sh 20,000 rent owing to Mr. Patel for the letting of part of his business premises to external party
had not been received and no entry had been made in the books in respect of this item.
Required:
a) Journal entries to correct errors and omissions. (10 marks)
b) A statement of revised profit for the year ended 31 March 2000. (8 marks)
c) A revised balance sheet as at 31 March 2000. (7 marks)
(Total: 25 marks)
Solution
120 Further Adjustments to Accounts

a) THE JOURNAL
Debit Credit
Trading account 2,500
Stock 2,500
Being a reduction in stock for damaged goods
Profit and loss(Bad debts) 20,000
Debtors 20,000
Debtors gone bankrupt written off
Profit and loss) 10,000
Provision for doubtful debts 10,000
Being a provision for doubtful debts created at 20%.
Provision for depreciation 150,000
Profit and loss 150,000
A change in estimated lifespan for machinery
Profit and loss( wages ) 9,500
Accrued expenses 9,500
Wages owing omitted in the accounts
Profit and loss (Bank overdraft charges) 8,000
Bank overdraft 8,000
Changes for overdraft not reflected in the accounts.
Drawings 100,000
Profit and loss 100,000
Drawing to Mr. Patel deducted as an expense.
Accrued income 20,000
Profit and loss (rent income) 20,000
Rent receivable owing not reflected in the accounts.

b) STATEMENT OF ADJUSTED NET PROFIT

Sh Sh
Net profit as per the account 450,000
Add: Provision for depreciation 50,000
Drawings 100,000
Accrued income (rent) 20,000 170,000
620,000
Less: Stock reduction 2,500
Bad debts 20,000
Provision for doubtful debts 10,000
Accrued expenses 9,500
Bank charges 8,000 (50,000)
Net profit (revised) 570,000
Lesson Five 121

REVISED BALANCE SHEET AS AT 31 MARCH 2000

Sh Sh Sh
Land and buildings 1,650,000 - 1,650,000
Machinery 1,200,000 (700,000) 500,000
2,850,000 700,000 2,150,000
Add: Current Assets
Stock 567,500
Debtors 400,00
Less: Provision for doubtful debts (10,000) 390,000
Accrued rent income 20,000
977,500
Less Current liabilities
Creditors 630,000
Accrued wage expense 9,500
Bank overdraft 278,000 (917,500) 60,000
2,210,000
Capital 1,890,000
Add Net Profit 570,000
2,460,000
Less drawings (250,000)
2,210,000

Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the credits. The
debits may be more than the credits and vice versa.
Examples include:

1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash
received from a debtor is debited to the cashbook and no other entry is made in the account, i.e. no
credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a
payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s acco unts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit. Example –
cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £ 540 in the
debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to
mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts or
when taken up to the trial balance. Example Bal c/d in the cash book for cash at bank of £ 2000 is
shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The balance may also be
brought down as an overdraft instead of a debit balance in the trial balance.
6. A balance is omitted from the trial balance on the accounts in total.

To correct the above errors, the appropriate or the adjusting entries are made through an account called a
suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are posted
here. The balance to be shown on the suspense accounts depends on which side the error is shown on the
trial balance.
122 Further Adjustments to Accounts

If the debits  credits, then an amount is included on the credit side of the trial balance so that the debits =
credits. This is a credit balance and will be taken to the suspense account on the credit side.

Example:
DR CR
Total 240 200
Suspense - 40
240 240

Suspense a/c
£ £
Difference as per T/B 40

If the credits are more than the debits this is a debit balance and therefore we require an amount to be added
to the total of the debits for the two side to be same. This debit balance is posted to the debit sid e of the
suspense a/c.

DR CR
Total 260 300
Suspense 40 -
300 300

Suspense a/c
£ £
Difference as per T/B 40

Posting the correct entries should eliminate the balance on the suspense account.

In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a balance.
This balance depends on whether it is a credit or debit and whether it is material or not for purposes of
proper accounting treatment. The following is the recommended approach:

Balance Material Not Material

Debit Show as an asset (eg) other Charge in P& L as an expense
debtors
Credit Show as a liability (eg) other Report as income in P&L
creditors

Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a shortage on the
credit side of the trial balance. A suspense account was opened for the difference.
In January 2003 the following errors made in 2003 were found:

(i) Sales daybook had been undercast by £1,000.

(ii) Sales of £2,500 to J Church had been debited in error to J Chane account.
(iii) Rent account had been undercast by £700.
(iv) Discounts received account had been under cast by £3,000.
(v) The sale of a motor vehicle at book value had been credited in error to Sales account £3,600.
Lesson Five 123

You are required to:

a) Show the journal entries necessary to correct the errors.

b) Draw up the suspense account after the errors described have been corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended 31 December 2002,
show the calculations of the corrected net profit

Solution
THE JOURNAL
£ £
Suspense 1,000
Sales ,1000
Sales under cast of £100 now corrected
J Church 2,500
J Chane 2,500
Sale to J Church posted to J Chane corrected
Rent 700
Suspense 700
Under cast in rent balance now corrected
Suspense 3,000
Discount received 3,000
Under cast in discount received balance now corrected
Sales a/c 3,600
Disposal ,3600
Sale of motor vehicle entered in sales a/c now corrected

Suspense a/c
£ £
Sales 1,000 Bal b/d 3,300
Discount received 3,000 Rent 700
4,000 4,000

STATEMENT OF CORRECTED NET PROFIT

£ £
Net profit as per account 79,000
Add:
Sales 1,000
Discount received 3,000 4,000
Less:
Rent 700
Sales 3,600 (4,300)
Corrected net profit 78,700

Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is extracted at the
end of each month, and a profit and loss account and balance sheet are computed. This month, however, the
trial balance did not balance, the credits exceeding debits by £1,536.
124 Further Adjustments to Accounts

Your are asked to help and after inspection of the ledgers discover the following errors:

(i) A balance of £87 on a debtor’s account has been omitted from the schedule of debtors, the total of
which was entered as debtors in the trial balance.
(ii) A small piece of machinery purchased for £1,200 had been written off to repairs.
(iii) The recipiets’ side of the cashbook had been under cast by £720.
(iv) The total of one page of the sales daybook had been carried forward as £8,154, whereas the correct
amount was £8,514.
(v) A credit note for £179 received from a supplier had been posted to the wrong side of his account.
(vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
(vii) Mr. Smith, whose past debts to the company had been the subject of a provision, at last paid £731 to
clear his account. His personal account has been credited but the cheque has not yet passed through
the cashbook.

Solution
Suspense a/c
£ £
Opening balance 1,536.00 Debtors 87.00
Sales - under record 360.00 Cashbook under cast 720.00
Creditors error 179.00
Creditors (correct) 179.00
Cashbook: smiths debt paid 731.00
1,896.00 1,896.00

i. Increase total for debtors by 87.

ii. Add 1,200 to fixed assets and reduce repair costs by 1,200 therefore an increase in profits.
iii. Increase sales by 360.
iv. Reduce the creditors by 358.
v. accruals by 152 and reduce profits by the same.
vi. Increase the cash balance by 731.
Lesson Five 125

Example 5.9 (Exam type question – May 2002 question 1).

On 31 December 2001, an inexperienced bookkeeper working for Wanji, a sole trader extracted a trial
balance. Due to errors committed by the bookkeeper, the trial balance failed to balance by Sh 369,400. He
placed the difference in a suspense account as shown below:

Wanji trial balance as at 31 December 2001

Sh Sh
Fixed assets – cost 832,000
Stocks:
1 January 2001 148,000
31 December 2001 98,800
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for depreciation 166,400
Purchases 733,000
Operating expenses 126,000
Provision for doubtful debts 3,800
Discounts received 5,000
Discounts allowed 5,800
Suspense account ________ 369,400
2,548,400 2,548,400

Investigations carried out after preparing the above trial balance detected the following errors:

1. The total of the sales daybook for December 2001 was overcast by Sh 25,700.
2. On July 2001, the business purchased office equipment for Sh 40,000. These were debited to purchases
account. Depreciation on the equipment is at the rate of 10% per annum on cost and based on the
period (months) of usage in the year.
3. A payment to a creditor by cheque of Sh. 8,500 was erroneously credited to the creditor’s account.
4. A payment of Sh. 4,500 for telephone expenses was debited to telephone account as Sh 5,400.
5. An amount of Sh 15,000 received from a debtor was not posted to the debtor’s account from the
cashbook.
6. Purchases daybook for October 2001 was under cast by Sh 28,000.

Assume the business had reported a net profit of Sh 85,800 before adjusting for the above errors.
Required:
(a) The adjusted trial balance and the correct balance of the suspense account. (6 marks)
(b) Journal entries to correct the errors (Narrations not required) (6 marks)
(c) Suspense account starting with the balance determined in the adjusted trial balance in (a) above.
(4 marks)
(d) The adjusted net profit for the year. (4 marks)
126 Further Adjustments to Accounts

Solution:
Adjusted Trial Balance
Sh Sh
Fixed assets – cost 832,000
Stock - 1 January 2001 148,000
Trade debtors 76,000
Prepayments 10,000
Trade creditors 34,600
Bank overdraft 15,200
Accruals 16,000
Drawings 359,600
Capital 1,054,000
Sales 1,043,200
Provision for depreciation 166,400
Purchases 733,000
Operating expenses 126,000
Provision for doubtful debts 3,800
Discounts received 5,000
Discounts allowed 5,800
Suspense account 47,800 _______
2,338,200 2,338,200

THE JOURNAL
Dr Cr
Sales 25,700
Suspense 25,700

Office equipment 40,000

Purchases 40,000

Provision for depreciation 2,000

Profit and loss 2,000

Creditors 8,500
Suspense 8,500
Creditors 8,500
Suspense 8,500

Suspense 900
Telephone 900

Suspense 15,000
Debtor 15,000

Suspense 2,500
Discounts allowed 2,500

Suspense 2,500
Discounts received 2,500

Purchases 28,000
Suspense 28,000
 Lesson Five 127

SUSPENSE ACCOUNT
2001 Sh 2001 Sh
1 Jan Bal b/d 47,800 1 Jan Sales 25,700
Telephone 900 Creditors 8,500
Debtors 15,000 Creditors 8,500
Discount allowed 2,500 Purchases 28,000
Discount received 2,500
Bal c/d 2,000 ______
70,700 70,700

STATEMENT OF ADJUSTED NET PROFIT

Sh Sh
Net profit as per the accounts 85,800
Add
Purchases 40,000
Telephone expenses 900
Discount allowed + received 5,000 45,900
131,700
Less
Sales 25,700
Depreciation 2,000
Purchases 28,000 (55,700)
Corrected Net Profit 76,000

c) STOCK VALUATION (IAS 2 INVENTORIES)

inventories in a firm includes:

(a) Finished goods (assets held for sale)

(b) Work in progress (assets still in production for purposes of sale)
(c) Raw materials (to be used in production process).

The cost of inventories should include all costs of purchase. (Purchase price and other taxes like import
duties), costs of conversion (e.g. direct labour) and other costs incurred in bringing the inventories into their
present location and condition (carriage inwards).
Inventories or stock is a sensitive area, as it does not form part of the double entry. In most cases either
carrying out stocktaking or checking the stock records that the firm is kept determines the value of stock at
the end of the financial period. Stocktaking involves counting the number of units of finished goods, work in
progress or raw materials available or in the stores/warehouse/saleroom.
The value of stock to the final accounts is then derived by multiplying the cost per unit to the total number of
units available.

Example.
A firm has three products A, B and C whose costs are shs.200, shs.300 and shs.400 each respectively. At the
end of year 2002, stocktaking was carried out and the following units were available:

Product A 200,000 units

Product B 20,000 units
Product C 30,000 units
128 Further Adjustments to Accounts

Required:
Compute the cost of stock to be included in the final accounts.

Solution:
(200,000 x 200) + (20,000 x300) + (30,000 x 400) = shs.58, 000,000

Cost Formular:
The cost of the different units of stock that a firm has should be assigned to each unit as far as the business
can be able to identify each item.
For those units that the business cannot identify the specific cost due to the number of transactions and
changes in the cost price, IAS 2 on inventories recommends the use of the following estimates:

(i) First In First Out (FIFO)

The business assumes that items of stocks that were purchased first are sold first and therefore, items left as
part of closing stock were purchased recently.
(ii) Weighted Average Cost (AVCO)
Under this method, the cost of each item is determined from the weighted average of the cost of similar items
at the beginning of the period and the cost of similar items purchased during the period.
(iii) Last In First Out (LIFO)
This method assumes that items of stock which were purchased last are sold first and therefore, the closing
stock shows items that were bought first.

Net Realizable Value (SP- Expenses)

This is the estimated selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
In some cases, the value of stock may decline where below the cost price (either actual or estimated under the
different methods) and if the firm was to sell the stock, then it will fetch an amount below this cost.
IAS 2 requires that closing stock should be stated at the lower of cost or net realizable value.

Example:
A firm has a closing stock of Sh 300,000 (cost) out of which stock valued Sh 20,000 is damaged. This stock
can fetch the firm Sh 22,000 after repairs and packaging that will cost Sh 4,000.

Required:
What value will be attached on this damaged units and the total closing stock for the final accounts purposes.
Sh
Cost 20,000
Selling price 22,000
Repairs 4,000
NRV (22-4) 18,000

The NRV (22,000 – 4,000) is lower than the cost of Sh. 20,000 and therefore, this damaged unit will be
shown as Sh 18,000. The balance of the stock of Sh 280,000 + 18,000 of the damaged stock will be included
in the final accounts and shown together as Sh 298,000.
Lesson Five 129

d) WORKSHEETS
A work sheet is a simple report that shows the final accounts inclusive of the trial balance in column form. A
work sheet has 8-10 columns and the simple headings are as follows:

TRIAL ADJUSTMENT TRADING PROFIT & BALANCE SHEET

BALANCE ACCOUNT LOSS
ACCOUNT
Dr Cr Dr Cr Dr Cr Dr Cr Assets Liabilities + Capital
£ £ £ £ £ £ £ £ £ £

Example 5.10
Mr Chai has been trading for some years as a wine merchant. The following list of balances has been
extracted from his ledger as at 30 April 19X7, the end of his most recent financial year.
£
Capital 83,887
Sales 259,870
Trade creditors 19,840
Returns out 13,407
Provision for bad debts 512
Discounts allowed 2,306
Discounts received 1,750
Purchases 135,680
Returns inwards 5,624
Carriage outwards 4,562
Drawings 18,440
Carriage inwards 11,830
Rent, rates and insurance 25,973
Heating and lighting 11,010
Postage, stationery and telephone 2,410
Advertising 5,980
Salaries and wages 38,521
Bad debts 2,008
Cash in hand 534
Cash at bank 4,440
Stock as at 1 May 19x6 15,654
Trade debtors 24,500
Fixtures and fittings – at cost 120,740
Provision for depreciation on fixtures and
fittings – as at 30 April 19X7 63,020
Depreciation 12,074

The following additional information as at 30 April 19X7 is available:

(a) Stock at the close of business was valued at £17,750.
(b) Insurances have been prepaid by £1,120.
(c) Heating and lighting is accrued by £1,360.
(d) Rates have been prepaid by £5,435.
(e) The provision for bad debts is to be adjusted so that it is 3% of trade debtors.
 130 Further Adjustments to Accounts

Required:
MR CHAI Trial Balance Adjustments Trading account Profit & loss a/c Balance sheet
WORKSHEET £ £ £ £ £ £ £ £ £ £
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Capital 83,887 83,88
7
Sales 259,870 259,870
Trade creditors 19,840 19,84
0
Returns 13,407 13,407
outwards
Provision for B 512 223 735
debts
Discounts 2, 2,306
allowed 306
Discounts 1,750 1,750
received
Purchases 135,680 135,680
Returns Inwards 5,624 5,624
Carriage 4,562 4,562
outwards
Drawings 18,440 18,440
Carriage inwards 11,830 11,830
Rent, rates & 25,973 6,555 19,418
insurance
Heating & 11,010 1,360 12,370
lighting
Postage, 2,410 2,410
stationery and
telephone
Advertising 5,980 5,980
Salaries and 38,521 38,521
wages
Bad debts 2,008 2,008
Cash in hand 534 534
Cash at bank 4,440 4,440
Stock at 1 May 15,654 15,654
19X6
Trade debtors 24,500 24,500
Fixtures & 120,740 120,740
fittings at cost
Provision for 63,020 63,02
depreciation 0
Depreciation 12,074 12,074
442,286 442,286

Stocks 17,750 17,750

30.04.19X7 –
asset
Stocks
30.04.19X7 – 17,750 17,750
Cost of Sales
 Lesson Five 131

Insurance 1,120 1,120

prepaid
Heating and 1,360 1,360
lighting accrued
Rates prepaid 5,435 5,435
Provision for bad 223 223
debts
25,888 25,888
Gross profit 122,239
(Balancing 122,239
figure)
291,027 291,027

Net profit
(Balancing 24,117 24,11
figure) 7
123,989 123,989 192,959 192,9
59
Prepare a worksheet for the year to 30 April 19X7
Solution
This marks the end of the session on preparing final accounts with adjustments. In the next session we shall
prepare the final accounts incorporating these adjustments. Some adjustments will affect the format of final
accounts and therefore they will look as follows:

FORMAT OF FINAL ACCOUNTS WITH ADJUSTMENTS

NAME
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DEC …
£ £ £
Sales XX
Less Returns (XX)
inwards
XX
Less cost of
sales
Opening XX
stock
Purchases XX
Add carriage XX
in
XX
Less Returns (XX) XX
out
XX
Less closing (XX) (XX)
stock
Gross profit XX
Discount XX
received
132 Further Adjustments to Accounts

Other XX
incomes
(rent,
interests,
dividends)
Profit on XX
disposal of
non-current
assets
Reduction in XX
provision for
doubtful
debts
Reduction in XX
provision for
discount
allowable
Interest on XX
overdue
debtors
balances
XX
Less
Expenses
Bad debts XX
Depreciation: XX
(eg) Plant
XX
Motor
vehicle
Increase in XX
provision for
doubtful
debts
Increase in XX
provision for
discount
allowable
Loss on XX
disposal of
non current
assets
Loss of other XX
assets (eg)
stock
Interest XX
charged by
creditors
Other XX
expenses:
Rent
Insurance XX
Lesson Five 133

Postage XX
Interest on XX (XX)
loan etc
NET XX
PROFIT

BALANCE SHEET AS AT 31 DEC…….

Non current assets £ £ £

Land XX - XX
Buildings XX (XX) XX
Plant and machinery XX (XX) XX

Fixtures, furniture and XX (XX) XX

fittings

Motor vehicle XX (XX) XX

XX XX XX
Current assets

Stock XX
Debtors XX
Less provision for (XX) XX
doubtful debts

Accrued income XX

Prepaid expenses XX

Cash at bank XX

Cash in hand XX
134 Further Adjustments to Accounts

Current liabilities

Bank overdraft XX

Trade creditors XX

Prepaid income XX (XX)

Net current assets X

X

Net assets XX

Capital XX
Add net profit X
X
XX
Less drawings (XX)

XX
Non current liabilities

Loan X
X
XX
Non current liabilities

Loan X
X
XX
Non current liabilities

Loan X
X
XX
Non current liabilities

Loan X
X
XX
Lesson Five 135

Non current liabilities XX

Loan

Example 5.11
Given the question 5.10, the final accounts for the year ended 30 April 19X2 will be as follows:
Mr Chai
Trading and Profit and Loss Account for year ended 30 April 19X7
£ £ £
Sales 259,870
Less (5,624)
Returns
inwards
254,246
Less cost
of sales
Opening 15,654
stock
Purchases 135,680
Add 1
carriage in 1
,
8
3
0
147,510
Less (13,407) 134,103
Returns
out
Cost of 149,757
goods
available
for sale
Less (17,750) (132,00
closing 7)
stock
Gross 122,239
profit
Add: 1,750
Discount
received
123,989
Less
Expenses
Discount 2,306
allowed
Carriage 4,562
outwards
Rent, rates 19,418
and
insurance
136 Further Adjustments to Accounts

Heating 12,370
and
lighting

Postage, 2,410
stationery
and
telephone
Advertisin 5,980
g
Salaries 38,521
and Wages

Bad debts 2,008

Provision 223
for bad
debts

Provision
for
depreciati
on –
fixtures 12,074 99,872
and fitting

Net profit 24,117

Mr Chai
Balance Sheet as at 30 April 19X7
Lesson Five 137

Non £ £ £
current
asset
Fixtures and 120,740 (63,020) 57,720
fittings
Current
assets
Stock 17,750
Debtors 24,500
Less (735) 23,765
provision
for doubtful
debts
Prepayments 6,555
Cash at 4,440
bank
Cash in 5
hand 34
53,044
Current
liabilities
Creditors 19,840
Accruals 1,360 (21,200) 31,844
89,564
Capital 83,887
Add net 24,117
profit
108,004
Less (18,440)
drawings
89,564

Example 5.12
The following trial balance has been extracted from the ledger of Mr. Yousef, a sole trader.
Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.

£ £
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Rent, rates and insurance 6,622
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Provision for bad debts 130
Debtors 12,120
Creditors 6,471
Cash in hand 177
Cash at bank 1,002
138 Further Adjustments to Accounts

Stock at at 1 June 19X5 11,927

Equipment
At cost 58,000
Accumulated depreciation 19,000
Capital ______ 53,091
216,770 216,770

The following additional information as at 31 May 19X6 is available:

(a) Rent is accrued by £210.
(b) Rates have been prepaid by £880.
(c) £2,211 of carriage represents carriage inwards on purchases.
(d) Equipment is to be depreciated at 15% per annum using the straight line method.
(e) The provision for bad debts to be increased by£40.
(f) Stock at the close of business has been valued at £13,551.
Required:
Prepare a trading and profit and loss account for the year ended 31 May 19X6 and a balance sheet as at that
date.
Solution:
Lesson Five 139

Mr. Yousef
Trading and Profit and Loss Account for the year ended 31 May 19X6.
£ £ £
Sales 138,078
Less cost of sales
Opening stock 11,927
Purchases 82,350
Carriage inwards 2,211 84,561
96,488
Less closing stock (13,551) (82,937
Gross profit 55,141
Less expenses
Carriage outwards 2,933
Rent, rates and insurance 5,952
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Bad debts 877
Increase in provision for bad debts 40
Depreciation – equipment 8,700 (49,253
Net profit 5,888

Mr. Yousef
Balance Sheet as at 31 May 19X6.

£ £ £
Non Current assets
Equipment 58,000 (27,700) 30,300
Current Assets
Stocks 13,551
Debtors 12,120
Less provision for doubtful debts (170) 11,950
Prepayments 880
Cash in hand 177
Cash at bank 1,002
Current Liabilities 27,560
Creditors 6,471
Accruals 210 6,681 20,879
51,179

Capital 53,091
Add: Net Profit 5,888
58,979
Less Drawings (7,800)
51,179
140 Further Adjustments to Accounts

Example 5.13
The following trial balance has been extracted from the ledger of Herbert Howell, a sole trader, as at 31 May
20X9, the end of his most recent financial year.

Herbert Howell
Trial Balance As At 31 May 20x9
Dr Cr
£ £
Property at cost 90,000
Equipment at cost 57,500
Provision for depreciation (as at 1 June 20X8)
Property 12,500
Equipment 32,500
Stock as at 1 June 20X8 27,400
Purchases 259,600
Sales 405,000
Discounts allowed 3,370
Discounts received 4,420
Wages and salaries 52,360
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,800
Trade debtors 46,200
Trade creditors 33,600
Provision for bad debts 280
Cash on hand 151
Bank overdraft 14,500
Drawings 28,930
13% loan 12,000
Capital, as at 1 June 20X8 ______ 98,101
612,901 612,901

The following additional information as at 31 May 20X9 is available:

(a) Stock as at the close of business was valued at £25,900.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:

Property - 1% using the straight-line method

Equipment - 15% using the straight-line method

(c) Wages and salaries are accrued by £140.

(d) Other operating expenses include certain expenses prepaid by £500. Other expenses included under this
heading are accrued by £200.
(e) The provision for bad debts is to be adjusted so that it is 0.5% of trade debtors as at 31 May 20X9.
(f) Purchases include goods valued at £1,040, which were withdrawn by Mr Howell for his own personal
use.

Required:
Prepare Mr. Howell’s trading and profit and loss account for the year ended 31 May 20X9 and his balance
sheet as at 31 May 20X9. (20 marks)
Lesson Five 141

Solution:
£ £
Sales 405,000
Less cost of sales
Opening stock 27,400
Purchases 258,560
285,960
Less closing stock (25,900) (260,060)
Gross profit 144,940
Discounts received 4,420
Decrease in provision for bad debts ____49
149,409
Less expenses
Depreciation: Property 900
Equipment 8,625
Discounts allowed 3,370
Wages and salaries 52,500
Bad debts 1,720
Loan interest 1,560
Carriage out 5,310
Other operating expenses 38,500 (112,485)
NET PROFIT 86,924

Herbert Howell
Balance Sheet as at 31 May 2000
£ £ £
Non current Assets
Property 90,000 (13,400) 76,600
Equipment 57,500 (41,125) 16,375
147,500 54,525 92,975
Current Assets
Stock 25,900
Debtor 46,200
Less provision (231) 45,969
Prepayments 500
Cash in hand 151
72,520
Current liabilities
Bank overdraft 14,500
Creditors 33,600
Accruals __340 (48,440)
24,080
117,055
Capital 98,101
Add net profit 36,924
135,025
Less drawings (29,975)
105,055
Non current liabilities
Loan (13%) 12,000
117,055
142 Further Adjustments to Accounts

Workings:
1) Depreciation for:
Property 1% X 90,000 = 900
Equipment 15% X 57,500 = 8,625

2) Provision for bad debts

0.5% X (46,200) =231
Decrease in provision for bad debts
280 – 231= 49

3) Wages and salaries

Paid 52,360
Accruals 140
52,500
4) Other operating expenses
Paid 8,800
Pre-paid (500)
8,300
Accruals 200
8,500

5) Purchases: 259,600 – 1,040 = 258,560

Drawings: 28,930 + 1,040 = 29,990
Lesson Five 143

REINFORCEMENT QUESTIONS

QUESTION ONE
David Dolgellau, a sole trader has prepared the following balance as at 31 March 2001

Sales 378,500.00
Discount Received 2,400.00
Rent Received 7,500.00
Returns outwards 7,700.00
Creditors 18,700.00
Bank Overdraft 30,000.00
Capital 287,500.00
Purchases 261,700.00
Salaries and Wages 45,700.00
Office expenses 8,400.00
Insurance premiums 3,100.00
Electricity 1,600.00
Stationery 6,200.00
Advertising 8,400.00
Telephone 2,100.00
Business Rates 7,500.00
Discounts allowed 600.00
Returns Inwards 4,100.00
Stocks as at 1 April 2000 120,600.00
Warehouse, shop and office 210,000.00
Fixtures and fittings 12,800.00
Debtors 13,000.00
Cash in till 500.00
Drawings 26,000.00

The following further information was obtained:

 Closing stock was £ 102,500.00

 Electricity charges accrued £ 700.00
 Advertising expenses accrued £ 500.00
 Insurance premiums paid in advance £ 900.00
 Business rates prepaid £ 1,500.00

Required:
Prepare a trial balance, trading, profit and loss account for the year ended 31 March 2001 and balance sheet as
at that date.
144 Further Adjustments to Accounts

QUESTION TWO
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.

TRIAL BALANCE AS AT 31 DECEMBER 20X0

Debit Credit
£ £
Capital at 1 January 20X0 26,094
Debtors 42,737
Cash In Hand 1,411
Creditors 35,404
Fixtures and fittings at cost 42,200
Discounts allowed 1,304
Discounts received 1,175
Stock at 1 January 20X0 18,460
Sales 491,620
Purchases 387,936
Motor Vehicles at cost 45,730
Lightning and heating 6,184
Motor expenses 2,862
Rent 8,841
General expenses 7,413
Balance at bank 19,861
Provision for depreciation
Fixtures and fitting 2,200
Motor vehicles 15,292
Drawings _26,568 _______
591,646 591,646

The following information as at 31 December is also available:

a) £218 is owing for motor expenses.

b) £680 has been prepaid for rent.
c) Depreciation is to be provided of the year as follows:
Motor vehicles: 20% on cost
Fixtures and fittings: 10% reducing balance method
d) Stock at the close of business was valued at £19,926.

Required

Prepare Donald Brown’s trading and profit and loss account for the year ended 31 December 20X0 and his
balance sheet at that date.
Lesson Five 145

QUESTION THREE
The following trial balance has been extracted from the accounts of Brenda Bailey, a sole trader.

Brenda Bailey
Trial Balance As At 30 June 20x9
Dr Cr
£ £
Sales 427,726
Purchases 302,419
Carriage inwards 476
Carriage outwards 829
Wages and salaries 64,210
Rent and rates 12,466
Heat and light 4,757
Stock at 1 July 20X8 15,310
Drawings 21,600
Equipment at cost 102,000
Motor vehicles at cost 43,270
Provision for depreciation:
Equipment 22,250
Motor vehicles 8,920
Debtors 50,633
Creditors 41,792
Bank 3,295
Sundry expenses 8,426
Cash 477
Capital ______ 122,890
626,873 626,873

The following information as at 30 June 20X9 is also available.

a) £350 is owing for heat and light.

b) £620 has been prepaid for rent and rates.
c) Depreciation is to be provided for the year as follows:
Equipment - 10% on cost
Motor vehicles - 20% on cost
d) Stock at the close of business was valued at £16,480

Required
Prepare Brenda Bailey’s trading and profit and loss account for the year ended 30June 20X9 and her balance
sheet at that date.
146 Further Adjustments to Accounts

QUESTION FOUR
On 10 January 19X9, Frank Mercer received his monthly bank statement for December 19X9. The statement
showed the following.

MIDWEST BANK

F Mercer: Statement of Account

Date Particulars Debits Credits Balance
19X8 $ $ $
Dec 1 Balance 1,862
Dec 5 417864 243 1,619
Dec 5 Dividend 26 1,645
Dec 5 Bank Giro Credit 212 1,857
Dec 8 417866 174 1,683
Dec 10 417867 17 1,666
Dec 11 Sundry Credit 1,851
Dec 14 Standing Order 32 185 1,819
Dec 20 417865 307 1,512
Dec 20 Bank Giro Credit 1,630
Dec 21 417868 95 118 1,535
Dec 21 416870 161 1,374
Dec 24 Bank charges 18 1,356
Dec 27 Bank Giro Credit 1,403
Dec 28 Direct Debit 88 47 1,315
Dec 29 417873 12 1,303
Dec 29 Bank Giro Credit 1,582
Dec 31 417871 25 279 1,557
Lesson Five 147

His cashbook for the corresponding period was as follows.

CASH BOOK
19x8 $ 19x8 Cheque $
No
Dec 1 Balance b/d 1,862 Dec 1 Electricity 243
864
Dec 4 J Shannon 212 Dec 2 P Simpson 865 307
Dec 9 M Lipton 185 Dec 5 D Underhill 866 174
Dec 19 G Hurst 118 Dec 6 A Young 867 17
Dec 26 M Evans 47 Dec 10 T Unwin 868 95
Dec 27 J Smith 279 Dec 14 B Oliver 869 71
Dec 29 V Owen 98 Dec 16 Rent 870 161
Dec 30 K Walters 134 Dec 20 M Peters 871 25
Dec 21 L Philips 872 37
Dec 22 W Hamilton 873 12
Dec 31 Balance c/d 1,793
_____ 2,935

2,935

Required
a) Bring the cash book balance of $1,793 up to date as at 31 December 19X8.
(10 marks)
b) Draw up a bank reconciliation statement as at 31 December 19X8
(5 marks)

CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE STUDY PACK
148 Revision Aid

LESSON SIX

OTHER ASPECTS OF FINAL ACCOUNTS

(a) INCOMPLETE RECORDS

An incomplete record situation is whereby, the accounting system falls short of the double entry. This m ay
be due to:
 Lack of records at all; or
 Insufficient records that will facilitate the preparation of final accounts.
Reasons for incomplete records:
a) Managers or owners may not have the skills or expertise in preparing and maintaining an accounting
system (records and procedures).
b) It may not be economical for the business to maintain accounting records due to the volume or/and
nature of transactions (small scale businesses)
c) Records are destroyed (e.g. through fire), stolen or misplaced.

There are 4 main approaches in preparing final accounts where there are insufficient records.

a) Estimating income from the net assets.

b) Estimating income from the use of ratios.
c) Use of a simple cashbook and bank statement.
d) Use of control accounts.

N/B: approach number c and d are normally used together.

(a) Estimating Income from the Net Assets

Where the available records are so deficient (i.e. it is impossible to compile a reasonable complete cash
summary, the only method of estimating the profits or loss for the period, is to prepare statement of affairs
showing the net worth of the business at the beginning and at the end of the period.

The profit/loss is estimated by use of the following formulas:

Profit or loss = Closing – Opening + Drawings – Additional

Capital Capital Capital

Or where there are no non current liabilities then this optional formula can be used

Profit or loss = Closing - Opening + Drawings - Additional

Net Asset Net Asset Capital
Lesson Nine 149

Example: 6.1
A sole trader’s capital position is as follows:
31 December

19X2 19X3
£ £
Motor vehicle:
Cost 7,500 7,500
Depreciation 3,000 4,500
4,500 3,000
Stock 2,960 3,450
Debtors 1,150 2,060
Bank 925 2,125
Cash __263 ___54
9,798 10,689
Creditors 2,860 3,340
Net assets 6,938 7,349

He has estimated his drawings for 19X3 at £12,500. Estimate his net profit for the year.

Solution:
Net profit = Closing - Opening + Drawings - Additional
Net Asset Net Asset Net assets

= 7,349 – 6,938 + 12,500

= £12,911

(b) Use of Ratios

There are 3 important ratios to be looked at:
1) Gross profit margin
2) Mark up
3) Stock turnover
If a firm has a uniform Gross Profit for all the items sold then any information available on sales or
purchases can be used to derive the total Gross Profit for the period and incase there is sufficient information
on expenses, then the Net Profit can also be derived.

The above ratios are computed as follows:

1) Gross Profit Margin = Gross Profit x 100

Sales (selling price)

E.g. If the selling price of a unit is £100 and Gross Profit made per unit is £25, the Gross Profit Margin will
be:

= 25 x 100
100

= 25%
150 Revision Aid

If a firm sells 1,000 units in a financial period, then the Gross Profit will be:

= 25% (£100,000)

= £25,000

2) Mark up

= Gross Profit x 100

Cost of Sales (cost price per unit)

In the above example, the mark up will be:

= 25 x 100
75

= 33.33%

N/B: 75 = 100 – 25
Cost = selling price – gross profit

3) Stock Turnover

Measures the rate at which a firm uses its stocks to make sales or turnover.

The formula is: = Cost of Sales

Average Stocks expressed as number of times

Average stock = Opening Stock + Closing Stock

2

Example: A firm has the following data for the period:

Opening stock £ 20,000

Purchases £300,000
Closing stock £ 30,000

Required: The Stock Turnover Ratio.

Average Stock = 30,000 + 20,000

2
= 25,000

Cost of sales = (20,000 + 300,000) – 30,000

= 290,000

Stock Turnover = 300,000

25,000

= 11.6 times
Lesson Nine 151

Example 6.2
M Jones gives you the following information as at 30 June 2002
£
Stock 1 July 2001 6,000
Purchases 54,000

Jones’s mark-up is 50% on cost of goods sold. His average stock during the year was £12,000. Draw up a
trading and profit and loss account for the year ended 30 June 2002.
a) Calculate the closing stock as at 30 June 19X7.
b) State the total amount of profit and loss expenditure Jones must not exceed if he is to maintain a
net profit on sales of 10%.

Solution

a) Average Stock = Opening Stock + closing stock

2
12,000 = 6,000 + C
2
C = 24,000 – 6,000

= 18,000

Gross profit = 50%

Cost of Sales = 42,000

Gross Profit = 50%

42,000

Gross Profit = 21,000.

MEMORANDUM TRADING ACCOUNT

£
Sales 63,000
Less cost of sales (42,000)
Gross profit 21,000
Expenses (14,700)
Net profit 6,300

Example 6.3
W White’s business has a rate of turnover of 7 times. Average stock is £12,600. Trade discount (i.e. margin
allowed) is 33¼% off all selling prices. Expenses are 66 ¾% of gross profit.

You are to calculate:

(a) Cost of goods sold.
(b) Gross profit margin.
(c) Turnover.
(d) Total expenses.
(e) Net profit.
152 Revision Aid

Solution:
Profit schedule
£
Turnover 132,300
Cost of goods sold 88,200
Gross profit 44,100
Expenses (29,400)
Net profit 14,700

Turnover = Cost of Sales

Average stock

Margin = Gross Profit

Sales

7 = Cost of Sales
12,600

Cost of Sales = 88,200

(c) Use of Cashbook and Bank Statement (in addition) Control Accounts.
If there is sufficient information relating to cash payments and receipts, then a simple cashbook for both cash
in hand and cash at bank can be prepared in confirmation of deposits and payments made from the bank
statement.
The information can then be posted to the relevant accounts e.g. any income received to the relevant income
accounts, expenses to relevant expense accounts and assets and liabilities to relevant accounts.
Information relating to amounts owed to suppliers/creditors and amounts due from debtors can be posted in
summary to the control accounts.
The preparation of the cashbook and control accounts will enable one to estimate any cash sales or credit
sales and cash purchases or credit purchases.

Steps in Preparing the Final Accounts

1) Prepare a statement of affairs at the beginning of the period (a list of all assets and liabilities) to
determine the beginning capital.
2) Open and post the balances and transactions to these 3 relevant accounts (i.e. the cashbook (for both
cash in hand and bank), sales ledger control account and purchases ledger control account.
Any other account can be opened where necessary.
3) Make adjustments for any accruals or prepayments.
4) Extract a list of the balances. (Trial balance).
5) Prepare the final accounts.

Example 6.4
Hobbs does not keep proper books of account. You ascertain that his bank payments and receipts during the
year to 31 December 19X8 were as follows:
Lesson Nine 153

Reciepts Payments
£ £
Balance 1 Jan 19X8 572 Purchases 10,007
Cheques for sales 13,179 Expenses 2,950
Cash banked 14,005 Drawings 11,250
Balance 31 Dec 19X8 3,751 Delivery van 7,300
31,507 31,507

From a cash notebook you ascertain:

£
Cash in hand 1 January 19X8 62
Cash takings 16,300
Purchases paid in cash 1,850
Expenses paid in cash 375
Cash in hand 31 December 19X8 65
Drawings by proprietor in cash Unknown

You discover that assets and liabilities were as follows:

1 Jan 19X8 31 Dec 19X8

£ £
Debtors 1,850 2,070
Trade creditors 1,250 1,420
Stock on hand 2,650 2,990

Depreciation on the van is to be provided at the rate of 20% per annum.

Statement of Affairs as at 1 January 19x8

£
CURRENT ASSETS
Cash at bank 572
Cash in hand 62
Debtors 1,850
Stock 2,650
5,134
CURRENT L IABILITIES
Creditors (1,250)
Net Assets 3,884

Capital 3,884

Sales Ledger Control Account

£ £
Balance b/d 1,850 Cash Takings 16,300
Sales 29,699 Bank 13,179
______ Bal c/d 2,070
31,549 31,549
154 Revision Aid

Purchases Ledger Control Account

£ £
Cash purchases 1,850 Bal b/d 1,250
Bank 10,007 Purchases 12,027
13,277 13,277

Cash in Hand Account

£ £
Balance b/d 62 Creditors 1,850
Debtors/sales 16,300 Expenses 375
Bank 14,005
Bal c/d 65
_____ Drawings ___67
16,362 16,362

 The capital invested at any point of time in a business by the owner is represented by the difference
between the assets and liabilities at that time.
 The difference between the capital at the end and the capital at the beginning of the trading period
represents the trading profit made during that period, unless there were withdrawals or investments
of additional capital.

Hobbs
Trading and Profit and Loss Account for the year ending 31 December 19X8
£ £
Sales 29,699
Less cost of goods sold:
Opening stock 2,650
Add purchases 12,027
14,677
Less closing stock (2,990) 11,687
GROSS PROFIT 18,012
Less Expenses:
Expenses (375 + 2,950) 3,325
Depreciation 1,460 (4,785)
NET PROFIT 13,227
Lesson Nine 155

Hobbs
Balance Sheet as at 31 December 19X8
£ £ £
Fixed Assets Cost Depreciation NBV
Delivery van 7,300 1,460 5,840

Current Assets
Stock 2,990
Debtors 2,070
Cash ___65
5,125
Less current liabilities
Creditors 1,420
Bank overdraft 3,751 5,171 __46
5,794
Financed by:
Capital 3,884
3,884
Add net profit 13,22
7
17,111
Less drawings (11,250 + 67) 11,317
5,794

Example 6.5 (Exam Type Questions May 2001 Question 3)

Kimeu commenced his business of making furniture on 1 April 2000. Due to his limited accounting
knowledge he has not maintained proper books of account. You have been engaged to examine his records
and prepare appropriate accounts there from. You perform an examination of the records and from
interviews with Kimeu you ascertain the following information.

1. At the commencement of business on 1 April 2000, he deposited Sh 1,200,000 into business bank
account. On the same day he brought into the firm his pickup and estimated that it was worth Sh
660,000 and then that from 1 April 2000 it will have useful life of three years.
2. To increase his working capital he borrowed Sh 400,000 at 15% interest per annum on 1 July 2000 from
his sister but no interest has yet been paid.
3. On 1 April 2000, Sally was employed as a clerk at a salary of Sh. 720,000 per annum.
4. He had drawn Sh 18,000 per week from the business account for private use during the year.
5. He purchased timber worth Sh 1,960,000 out of which Sh 158,000 worth of stock was retained in the
workshop on 31 March 2001. He also spent Sh 960,000 on the purchase of some equipment at the
commencement of the business which he estimates will last him five years.
6. Electricity bills received up to 31 January 2001 were Sh 240,000. Bills for the remaining two months
were estimated to be Sh 48,000. Motor vehicle expenses were Sh 182,000 while general expenses
amounted to Sh 270,000 for the year. Insurance premium for the year to 30 June 2001 was Sh 160,000.
All these expenses have been paid by cheque.
7. Rates for the year to June 2001 were Sh 36,000 but these had not been paid.
8. Sally sent out invoices to customers for Sh 6,178,000 but only Sh 5,080,000 had been received by 31
March 2001. Debt totaling to Sh 17,000 were abandoned during the year as bad. Other customers for
jobs too small to invoice have paid Sh 726,000 in cash for work done of which Sh 560,000 was banked.
Kimeu used Sh 75,000 of the difference to pay for his family’s foodstuff, bought Kenya Charity
Sweepstake tickets worth 24,000 and Sally used the rest on general expenses except for Sh 30,100 which
was left in the office on 31 March 2001.
156 Revision Aid

9. You agree with Kimeu that he will pay you Sh 55,000 for accountancy fee.

Required:
(a) Profit and loss account for the year ended 31 March 2001. (10 marks)
(b) Balance sheet as at 31 March 2001. (10 marks)
(Total: 20 marks)

Solution:
Cash book – Bank
Sh Sh
Capital 1,200,000 Salary 120,000
Loan 400,000 Drawings 936,000
Debtors 5,080,000 Timber 1,960,000
Cash 560,000 Equipment 960,000
Electricity 240,000
Motor vehicle expenses 182,000
General expenses 270,000
Insurance 160,000
________ Bal c/d 1,812,000
7,240,000 7,240,000

Capital
Sh Sh
Bank 1,200,000
Bal c/d 1,860,000 Pick up 660,000
1,860,000 1,860,000

Debtors
Sh Sh
Sales 6,178,000 Bank 5,080,000
Bad debts 17,000
________ Bal c/d 1,081,000
6,178,000 6,178,000

Cash book - cash in hand

Sh Sh
Sales 726,000 Bank 5,080,000
Drawings 17,000
Drawings 1,081,000
General Expenses 36,900
______ Bal c/d 30,100
726,000 726,000
Lesson Nine 157

Loan interest = 400,000 x 15% x 9/12

Rates = 36,000 x 9/12 = 27,000

Accruals = Electricity bills = 48,000

Rates = 27,000
Agency fees = 55,000
Loan interest = 45,000
175,000

Kimeu
Profit and Loss Account For the year ended 31 March 2001
Sh Sh
Sales (cash + credit) 6,904,000
Less expenses
Timber used (1,960,000 – 158,000) 1,802,000
Depreciation – motor vehicle 220,000
- Equipment 192,000
Loan interest 45,000
Salary 720,000
Electricity bills 288,000
Motor vehicle expenses 182,000
General expenses 306,900
Insurance premium 120,000
Rates 27,000
Bad debts 17,000
Accountancy fees 55,000 (3,974,900)
Net profit 2,929,100
158 Revision Aid

Kimeu
Balance Sheet as at 31 March 2001
Non current Asset Sh Sh Sh
Equipment 960,000 192,000 768,000
Motor vehicle 660,000 220,000 440,000
1,620,000 412,000 1,208,000

Current Assets
Stock 158,000
Debtors 108,000
Insurance – prepayments 40,000
Cash at bank 181,200
Cash in hand 30,000
3,121,100
Less current liabilities
Accruals 175,000 2,946,100
4,154,100

Capital 1,860,000
Add net profit 2,929,100
4,789,100
Less drawings 1,035,000
3,754,100
Non current liability
Loan 15% 400,000
4,154,100

Example 6.6 (Exam Type) June 1995 Question 2

Abi, a proprietor of a grocery and general store has not previously engaged an accountant. He informs you
that this year his bankers have insisted on a proper set of accounts. Abi supplies you with his trading results
for the year ended 30 June 1994 which are as follows:

Sh Sh
Payments for goods 4,747,500 Takings 5,465,000
Payments for expenses 565,000
Profits 152,500 ________
5,465,000 5,465,000

Abi instructs you to examine his records and prepare accounts. From your examination of the records and
interview with your client, you ascertain the following information:

1. The takings are kept in a drawer under the counter; at the end of each day the cash is counted and
recorded on a scrap of paper; at irregular intervals Mrs. Abi transcribes the figures into a notebook; a
batch of slips of paper was inadvertently destroyed before the figures had been written into the
notebook, but Mr. And Mrs. Abi carefully estimated their takings for that period, and the estimated
figure is included in the total of Sh. 5,465,000.
2. Mr. Abi involved himself in betting for 30 weeks of the year, spending Sh. 500 per week with cash taken
from the drawer. His winnings totaled Sh. 29,500.
Lesson Nine 159

3. The following balances are ascertained as correct:

30 June
1994 1993
Sh Sh
Cash in hand 43,500 22,500
Balance at bank 109,500 78,000
Sales debtors 245,500 229,000
Creditors for purchases of stock 121,500 139,500
Stock at cost 950,000 975,000

4. Debts totaling Sh. 178,000 were abandoned during the year as bad; the takings included Sh 12,500
recovered in respect of an old debt abandoned in the previous year.
5. Mr. Abi rents the shop for living accommodation at Sh. 1,500 per week for 52 weeks in a year; the rent is
included in expenses of Sh 565,000. The living accommodation comprises one-third of the building.
6. The total expenses also include:

 Sh. 17,500 running expenses of Abi’s private car;

 Sh. 30,000 for exterior decoration of the whole premises;
 Sh. 80,000 for alterations to the premises to enlarge the storage accommodation.

7. Mr. Abi takes Sh. 5,000 per week from the business for his wife’s personal expenses. This excludes the
amount indicated in note 8.
8. Mr. Abi draws Sh. 750 per week for cigarettes and beer.
9. During the year, Mr. Abi bought a secondhand car (not for use in the business) from a friend; the price
agreed was Sh. 175,000, but as the friend owed Mr. Abi Sh. 33,500 for goods supplied from the business,
the difference was settled by cheque.
10. An insurance policy for Mr. Abi’s life matured and realized Sh. 320,500.
11. Mr. Abi cashed a cheque for Sh. 50,000 for a friend; the cheque was dishonored and the friend is
repaying the Sh. 50,000 by installments. He had paid Sh. 20,000 by 30 June 1994.
12. Other private payments by cheque totaled Sh. 48,000 plus a further sum of Sh. 55,000 for income tax.
13. You are to provide Sh. 21,000 for accountancy fees.

N.B. All receipts and payments of Mr. Abi are made through his business account.
Required:
(a) Mr. Abi’s balance sheet for the business at 30 June 1993. (4 marks)
(b) Mr. Abi’s profit and loss account for the year ended 30 June 1994. (12 marks)
(c) Mr. Abi’s balance sheet for the business at 30 June 1994. (6 marks)
(Total: 20 marks)
160 Revision Aid

Solution:
Abi
Balance Sheet as at 30 June 1993

Current Assets Sh Sh
Stock 97,500
Debtors 229,000
Cash at bank 78,000
Cash in hand 22,500
1,304,500
Current liabilities
Creditors (139,500) 1,165,000
1,165,000

Capital 1,165,000

Cash at Bank
Sh Sh
Balance b/d 78,000 Drawings – personal expense for wife 260,000
Sales ledger control a/c 12,500 Drawings – cigarettes and beer 39,000
Insurance (drawings) 320,500 Expenses 565,000
Drawings 50,000 Drawings – second hand car 141,500
Drawings 20,000 Cash in hand 6,500
Debtors 5,591,000 Drawings – friend 50,000
Creditors 4,747,500
Dishonored cheque – drawings 50,000
Drawings 48,000
Income tax 55,000
________ Balance c/d 109,500
6,072,000 6,072,000

Cash in Hand
Sh Sh
Balance b/d 22,500 Drawings 15,000
Drawings – betting 12,500
Bank 6,500 Balance c/d 43,500
58,500 58,500

Sales Ledger Control A/c

Sh Sh
Balance b/d 229,000 Bad debts 178,000
Bad debts recovered 12,500 Bank 12,500
Credit sales 5,819,000 Drawings 33,500
Bank 5,591,000
________ Balance c/d 245,500
6,060,500 6,060,500
Lesson Nine 161

Purchases Ledger Control A/c

Sh Sh
Bank 4,747,500 Balance c/d 139,500
Balance c/d 121,500 Credit purchases 4,729,500
4,869,000 4,869,000

Expenses
Total Business Private
Rent 78,000 52,000 26,000
Motor running expenses 17,500 - 17,500
Decoration 30,000 20,000 10,000
Alterations 80,000 80,000
Other expenses 359,500 359,500 _____
565,000 532,500 53,500

Abi
Trading Profit and Loss Account for the year ended 30 June 1994
£ £
Sales 5,819,000
Less cost of sales
Opening stock 975,000
Purchases 4,729,500
57,040,500
Less closing stock 950,000 4,754,500
Gross profit 1,064,500
Less expenses
Rent 52,000
Decoration 20,000
Alterations 80,000
Other expenses 359,500
Bad debts 165,500
Accountancy fees 21,000 (698,000)
Net profit 366,500

Abi
Balance Sheet as at 30 June 1994
Cost Depreciation Book Value
Current Assets: £ £ £
Stock 950,000
Debtors 245,500
Cash at bank 109,500
Cash in hand 43,500
1,348,500
Current Liabilities
Creditors 121,500
Accruals 21,000 (142,500) 1,206,000
Capital 1,165,000
Add net profit 366,500
1,531,500
Less drawings (325,500)
1,206,000
162 Revision Aid

NON PROFIT MAKING ORGANIZATIONS (Club, Associations and Others)

These are some form of organizations that are set up to promote or to cater for the welfare of the members
involved and not to make a profit. These include clubs, (e.g. football clubs, sports clubs), welfare associations
and any other societies (charitable institutions).
Because these organizations are not trading, the types of accounts to prepare are different from the ones of
trading organizations.

Example:

1. Instead of a cashbook, the clubs will maintain a receipts and payments which has similar entries to those
of a cashbook.
2. Instead of profit and loss account, we have an income and expenditure account.
3. Because the club is not formed by any one owner (has no owner), it is funded by members’
contributions, donations, income from investments to get an accumulated fund instead of capital.

From the income and expenditure account, if the incomes are more than the expenditures for the period,
then the club has a surplus and not a net profit.
If the expenditure is more than incomes, then the club has a deficit and not a loss.
The club may carry out some trading activities on a small scale to finance some of the clubs activities and
incase a firm has a trading activity, then in addition to the income and expenditure account and the balance
sheet, prepare a Bar Trading Account.
Lesson Nine 163

Format of the Final Accounts

Name
Income and Expenditure Account for the year ended 31 December ……

Incomes £ £

Profit from trading activities XX

Subscriptions XX

Income from investments XX

Donations XX

Income from other activities

[dinner dance, raffles, festivals] XX

XX

Expenditure

Depreciation XX

Salaries and wages XX

Expenses on other activities [prizes] XX

Loss from trading activities XX

All other expenses XX (XX)

SURPLUS/( DEFICIT ) XX/(XX)

164 Revision Aid

NAME
BALANCE SHEET AS AT 31 DECEMBER ……
Non current Assets £ £ £
Buildings XX (XX) XX
Fixtures, fittings and equipment XX (XX) XX
Motor vehicle XX (XX) XX
XX (XX) XX
Investments XX
Current Assets
Stocks XX
Debtors XX
Prepayments and accrued income XX
Cash at bank/hand (receipts + XX
payments)
XX
Current liabilities
Creditors XX
Accrued expenses and prepaid income XX
Bank overdraft XX (XX) XX
XX
Accumulated fund balance b/f XX
Add/less surplus / deficit XX/(XX)

Other funds
Life membership fund XX
Building fund XX
Education fund XX XX
XX

Notes To The Above Format:

1. Subscriptions:
These are the amounts received by the club from the members to renew their membership. It is often paid
on an annual basis.

 It is income for the club and therefore reported in the income and expenditure account.
 Depending on the policy of a club, any subscriptions due but not received are shown as accrued income
(debtors for subscriptions) in the balance sheet.
 Any amounts prepaid are shown as prepaid (creditors for subscriptions).
 Some clubs will not report subscriptions as income until it is received in form of cash.

2. Income from Investments:

Some clubs invest excess cash in the bank (fixed deposit account), shares of limited companies, treasury bills
and any other investment that may be available.

 If the club is investing with no specific intention (i.e a general investment) then income from this
investment should be reported in the income and expenditure account.
 If the investment is for a specific purpose and relates to a specific fund (e.g building fund) it will not be
reported in the income and expenditure account but credited directly to the fund.
Lesson Nine 165

3. Other funds
 These are funds set up for a specific purpose and not general. They will be shown together with the
accumulated fund.
 Any incomes relating to these funds, will be credited directly to the funds and any expenses will be taken
off from these funds e.g. building fund, education fund.

Life Membership Fund

Some members may pay some amount to become life members of the club and if this happens, there may be
a need to spread out this income over the expected life of the members in the club.
Depending on the policy of a club, the following accounting treatment may be allowed:

i. The full amount is reported in the Income and Expenditure account in the year it is received and
therefore no balance is retained in the life membership account.
ii. The amount is shown separately in the life membership fund with no transfer in the Income and
Expenditure account and hence no balance in the life membership account.
iii. To transfer some amounts from the life membership funds to the income and expenditure account
over the expected life of membership to the club.

Example 6.7
The following is the receipts and payments account of the Friendship Club for the year ended 31 December
19X1:
£ £

Balance at bank
31 December 19X0 102 Bar purchases 4,434
Entrance fees 42 Wages 416
Subscriptions: 19X0 25 Rent 186
19X1 305 Heating and lighting 128
19X2 35 Postage and stationery 33
Bar Sales 5,227 Insurance 18
Sale of investments 750 General expenses 46
Payments on account
of new furniture 450
Balance at bank,
_____ 31 December 19X1 775
6,486 6,486

The following information is also supplied:

(1) 31 December 19X0 31 December 19X1

Bar stock, at cost 272 315
Creditors for bar purchases 306 358
Rent due 18 36
Heating and lighting expenses due 16 19
Subscriptions due 25 40
Insurance paid in advance 5 7
166 Revision Aid

2) On 31 December 19X0, the club held investments which cost £500. During the year ended 31
December 19X1, these were sold for £750.
3) Furniture was valued at £300 on 31 December 19X0. On June 19X1, the club purchased additional
furniture at a cost of £520. Depreciation of all furniture is to be provided for at the rate of 10% per
annum.

Required:
(a) Prepare an income and expenditure account for the year ended 31 December 19X1.
(b) Prepare a balance sheet at that date.

Solution:
Friendship Club
Accumulated Fund As at 1.1.19X1

Assets £ £

Stock 272
Subscriptions due 25
Insurance prepaid 5
Investments 500
Furniture 300
Balance at bank 102
1,204
Liabilities
Creditors 306
Rent due 18
Heating and lighting expenses 16 (340)
Accumulated fund 864

Creditors
£ £
Receipts and payments 4,434 Balance b/f 306
Balance c/d 358 Purchases 4,486
4,792 4,792

Subscriptions
£ £
Balance b/d 25 Receipts & payments 365
Income & expenditure 345
Balance c/d 35 Balance c/d 40
405 405
Lesson Nine 167

Friendship Club
Bar, Trading Account for the year ended 31 December 19X1

£ £

Sales 5,227

Less: Cost of Sales

Opening stock 272

Purchases 4,486

4,758

Less closing stock (315) (4,443)

Gross profit to income & expenditure a/c 784

Friendship Club
Income and Expenditure Account for the year ended 31 December 19X1
£ £
Profit from bar trading 784
Entrance fees 42
Subscriptions 345
Profit from sale of investments 250
1,421
Expenditure
Wages 416
Rent 204
Heating and lighting 131
Postage and stationery 33
Insurance 16
General expenses 46
Depreciation – furniture 56 (902)
Surplus 519
168 Revision Aid

Friendship Club
Balance Sheet as at 31 December 19X1
Non current Assets £ £ £
Furniture 820 (56) 764

Current Assets
Stock 315
Subscriptions due 40
Prepaid expense 7
Cash at bank 775
1,137
Current liabilities
Creditors 398
Prepaid subscriptions 35
Accrued expenses 55
Creditors fixtures 70 (518) 619
1,383
Accumulated fund b/f 864
Add surplus 519
1,383

Example 6.8 (Exam Type) November 2001

(a) State and briefly explain any three distinguishing features between (i) a receipts and payments account
and (ii) an income and expenditure account. (6 marks)
(b) The accountant of Mamba Sports Club has extracted the following information from the books of
account for the year ended 31 March 2001.
Lesson Nine 169

Receipts Payments

Sh Sh

Balance brought forward 288,000 Salaries and wages 254,000

Subscriptions New equipment 565,000

Year: 1999/2000 249,000 Repairs and maintenance 124,000

2000/2001 2,050,000 Office expenses 415,000

2001/2002 194,000 Printing and stationery 168,000

Dinner dance 723,000 Purchase of beverages 497,000

Beverage sales 657,000 Dinner dance expenses 315,000

Investments income 400,000 Refund of subscriptions 45,000

Sports prizes 25,000

Transport 248,000

Investments 1,500,000

_______ Balance carried forward _405,000

4,561,000 4,561,000

Balances as at 31 March 2000 31 March 2001

Furniture and fittings (net) 240,000 -

Equipment (net) 690,000 -

Investment at cost 3,500,000 -

Subscriptions in arrears 300,000 375,000

Salaries accrued 68,000 72,000

Stock of beverages 162,000 184,000

Subscriptions in advance 85,000 -

170 Revision Aid

Additional information:

1. Subscriptions in arrears are written-off after twelve months.

2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on furniture and
fittings and equipment respectively.
3. Investments, which had cost Sh. 500,000, were sold on 30 March 2001 for Sh. 625,000. No entries have
been made in the books in this respect.

Required:
(a) Income and expenditure account for the year ended 31 March 2001. (8 marks)
(b) Balance sheet as at 31 March 2001. (6 marks)
(Total: 20 marks)

Solution:

Mamba Sports Club

Statement of Affairs
Assets Sh Sh

Furniture and fittings 240,000

Equipment 690,000

Receipts and payments 288,000

Investment at cost 3,500,000

Subscriptions in arrears 300,000

Stock of beverages 162,000

5,180,000

Liabilities

Subscriptions accrued 85,000

Accrued salaries 68,000 (153,000)

5,027,000
Lesson Nine 171

Mamba Sports Club

Trading Account for the year ended 31.3.2001
Sh Sh
Sales 657,000
Less cost of sales
Opening stock 162,000
Purchases 497,000
659,000
Less closing stock (184,000) (475,000)
Profit to income and expenditure 182,000

Subscriptions
2001 Sh 2001 £
Balance b/d 300,000 Balance b/f 85,000
Receipts and payments 45,000 Receipt and payment 2,493,000
Income & expenditure 2,465,000 Income & expenditure 51,000
Balance c/f 194,000 Balance c/f 375,000
3,004,000 3,004,000

Mamba Sports Club

Income and Expenditure Account for the year ended 31 March 2001

Incomes Sh
Profit from trading account 182,000
Subscriptions 2,465,000
Dinner dance 723,000
Investment income 400,000
Profit on sale of investments 125,000
3,895,000
172 Revision Aid

Example 6.9 (Exam Type) DECEMBER 2000 QUESTION 3

The following trial balance was extracted from the books of Literary and Philosophical Society as at 30
September 2000:
Sh Sh
Balance at bank: current account 724,800
Accumulated fund 1 October 1999 5,771,200
Land and buildings, at cost 3,700,000
Debtors for subscription 62,000
Furniture and fittings 1,874,000
Provision for depreciation of furniture & fittings 284,000
Subscriptions 1,450,800
Lecturer’s fees 920,000
Lecturer’s travel and accommodation expenses 358,000
Donations 108,000
Camera and projector repairs 17,000
Projectors, cameras and audio equipment 190,400
Depreciation of equipment 54,400
Rates and water 277,000
Lighting and heating 367,200
Rental of rooms 495,000
Wages – Caretaker 880,000
- Restaurant 1,600,000
- Bar staff 800,000
Purchase of food 1,565,800
Stock – bar 1 October 1999 473,600
Bar receipts 4,032,000
Bar purchases 2,842,000
Restaurant receipts 3,642,000
Loan 1,600,000
Deposit account – bank 1,000,000
Interest payable and receivable 36,000
Creditors for bar and food ________ 178,400
17,651,800 17,651,800

Additional information:
1. The bar stock was valued at Sh. 642,800 as at 30 September 2000.
2. It is expected that, of the debtors for subscriptions, Sh. 43,600 will not be collectable.
3. The interest account is net. The loan is at a concessional rate of 4% while 10% has been earned on the
deposit account. No changes have taken place all year in the principal sums involved.
4. An invoice for Sh. 43,000 of wine had been omitted from the records at the close of the year although
the wine had been included in the bar stock valuation.
5. Depreciation for the year is to be provided as follows:
Furniture and fittings Sh. 194,000
Projectors, cameras, etc. Sh. 19,000.
Required:
(a) Bar and restaurant trading account for the year ended 30 September 2000 (6 marks)
(b) An income and expenditure account for the year ended 30 September 2000 (8 marks)
(c) A balance sheet as at 30 September 2000 (6 marks)
(Total: 20 marks)
Lesson Nine 173

Solution:
Literary and Philosophical Society
Bar and Restaurant Trading Account for the year ended 30 September 2000

Sh Sh
Sales 7,674,000
Less cost of sales
Opening stock 473,600
Add purchases 4,450,800
4,924,400
Less closing stock
Profit to the income and expenditure (642,800) (4,281,600)
3,392,400

Literary and Philosophical Society

Income and Expenditure Account for the year ended 30 September 2000

Income Sh Sh
Profit on trading account 992,400
Interest on bank deposit account 100,000
Subscriptions 1,450,000
Donations 108,000
Rental of rooms 495,000
3,146,200
Expenditure
Lecturer’s fees 920,000
Depreciation on furniture and fitting 194,000
Equipment 19,000
Lecturer’s travel and accommodation exp. 358,000
Camera repairs 17,000
Rates and water 277,000
Lighting and heating 867,200
Caretakers wages 880,000
Interest on loan 64,000
Provision for subscription 43,600 (3,139,800)
Surplus 6,400
174 Revision Aid

Literary and Philosophical Society

Balance Sheet as at 30 September 2000

Non current Assets Sh Sh Sh

Land and buildings 3,700,000 - 3,700,000
Fixtures and fittings 1,874,000 (478,000) 1,396,000
Equipment 190,400 (73,400) 117,000
5,764,400 551,400 5,213,000
Current assets
Stock 642,800
Debtors of subscription 18,400
Balance at bank – deposit a/c 1,000,000
- Current a/c 724,800
2,386,000
Current liabilities
Creditors (221,400) 2,164,600
7,377,600
Accumulated fund b/f 5,771,200
Add surplus ___6,400
5,777,600
Non current liabilities
4% loan 1,600,000
7,377,600

(c ) Manufacturing Accounts
Some firms may manufacture or produce goods rather than buy due to savings in operational costs. (i.e. it is
cheaper to produce the goods rather than buy).
Due to additional costs involved in the production process, additional information is reported in the final
accounts.
Therefore, in addition to a trading, profit and loss account, a new account called manufacturing account is
shown before these others.
The purpose of the manufacturing account is to report all the costs incurred in producing the goods. These
costs are divided into 2 classes:
1) Direct costs (prime costs)
2) Indirect costs (overheads)

Direct Costs/Prime Costs

This is a cost that can be traced directly to a unit that has been produced. This include
1) Direct material
2) Direct labour (wages)
3) Direct expense
Indirect costs/Production overheads
These are all other costs incurred in the production of manufacturing of goods but cannot be traced directly
to any particular unit. Example:
1) Rent for the factory
2) Salaries to supervisors and factory managers
3) Depreciation of plant and machinery used in production
The manufacturing account will show the factory cost of goods produced that will be shown in the trading
account in place of purchases.
Lesson Nine 175

FORMAT
Name
Manufacturing Trading Profit and Loss Account for the year ended 31 December
£ £
Raw Materials
Opening stock of raw materials XX
Purchases of raw materials XX
Add carriage inwards XX
XX
Less returns outwards (XX) XX
Cost of raw materials available for use XX
Less closing stock of raw materials (XX)
Raw materials consumed XX
Direct labour (factory wages) XX
Direct expenses XX
Prime cost XX
Factory overheads
Salary to factory manager XX
Depreciation on – Plant and machinery XX
- Factory buildings XX
Other expenses – Factory power XX
Lighting and heating XX
Water XX
Cleaners wages XX XX
Total cost of production XX
Add: opening Work In Progress XX
Less: closing Work In Progress (XX) XX
Factory cost of production (cost of finished goods) XX Note 1
FACTORY PROFIT XX
Finished goods at a transfer price XX Note 2

Sales XX
Less returns inwards (XX)
XX
Less cost of sales
Opening stock – finished goods XX
Factory cost of production/transfer price XX
XX
Less closing stock of finished goods (XX) (XX)
Gross profit XX
Add factory profit XX
Other incomes – discount received XX
- Profit on disposal XX
XX
Less expenses
Salaries and wages – administration & non production XX
Rent for administration building XX
Depreciation - Delivery vans XX
- Fixtures and distribution XX
Other selling and distribution costs XX (XX)
Net profit/(net loss) XX/(XX)
176 Revision Aid

For the balance sheet, the format is the same for all the assets and liabilities except for the current assets
section whereby the stock at the end of the period should be shown for each type of stock as per this format:

Current Assets £ £
Stock: raw materials XX
Work in progress XX
Finished goods XX XX

Note 1: This represents the total costs of all the units produced during the period and therefore will be taken
to the trading account as the goods are transferred to the selling department.
Note 2: If the firm transfers the goods to the selling department at a price higher than the cost of
production, then this generates a factory profit. The goods will be shown in the trading account at the
transfer price and the factory profit is added to the Gross Profit of the period.
Expenses can also be classified into:
1) Administration Expenses
These are expenses incurred in running or managing the affairs of the firm and includes managers salaries
(not factory managers), legal and accounting fees, depreciation of furniture and fixtures and equipment not
used in production, finance cost e.g. loan interest.
2) Selling and Distribution
These are expenses incurred to generate sales income e.g.

 Salaries and commission to the sales manager and staff

 Carriage outwards (i.e. to deliver goods to the customers
 Depreciation on motor vehicles (used for the delivery purpose)
 Advertising
 Bad debts
Lesson Nine 177

Example 6.10
B spikes
Trial Balance as on 31 December 2002
Dr Cr
Stock of raw materials 1.1.2002 21,000
Stock of finished goods 1.1.2002 38,900
Work in progress 1.1.2002 13,500
Wages(direct £180,000: factory indirect£145,000) 325,000
Royalties 7,000
Carriage inwards (on raw materials) 3,500
Purchases of raw materials 370,000
Productive machinery (cost £280,000) 230,000
Accounting machinery (cost £20,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Administrative salaries 44,000
Sales representatives’ salaries 30,000
Commission on sales 11,500
Rent 12,000
Insurance 4,200
General administration expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Sales 1000,000
Debtors and creditors 142,300 125,000
Bank 56,800
Cash 1,500
Drawings 20,000
Capital as at 1.1.2002 ______ 29,680
1,421,800 1,421,800

Notes at 31.12.2002

1. Stock of raw materials £24,000, stock of finished goods £40,000, work in progress £15,000.
2. Lighting, and rent and insurance are to be apportioned: factory 5/6ths, administration 1/6 th.
3. Depreciation on productive and accounting machinery at 10 per cent per annum on cost.

Required:
Prepare a manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002.
178 Revision Aid

Solution:

B Spikes
Manufacturing, Trading Profit and Loss Account for the year ended 31 December 2002
Raw Materials £ £
Opening Stock of raw materials 21,000
Purchases 370,000
Carriage inwards on raw materials 3,500 373,500
394,500
Less: closing stock of raw materials (24,000)
Raw materials consumed 370,500
Direct wages 180,000
PRIME COST 550,500
Factory Overheads
Wages 145,000
Royalties 7,000
Depreciation: productive machinery 28,000
General factory expenses 31,000
Lighting( 5/6 x 7,500) 6,250
Factory power 13,700
Rent(5/6 x 12,000) 10,000
Insurance( 5/6 x 4,200 ) 3,500 24,4,450
Total cost of production 794,950
Add: opening work in progress 13,500
808,450
Less: closing work in progress (15,000)
Factory cost production per finished goods 793,450
Sales 1,000,000
Less cost of sales
Opening stock of finished goods 38,900
Factory cost of production 793,450
832,350
Less closing stock of finished goods (40,000) 792,350
Gross profit 207,650
Expenses
Accounting machinery – depreciation 2,000
Lighting (1/6 x 7,500) 1,250
Administrative salaries 44,000
Sales representatives salaries 30,000
Commission on sales 11,500
Rent ( 1/6 x 12,000) 2,000
Insurance (1/6 x 4200) 700
General administrative expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900 (117,850)
Net profit 89,800
Lesson Nine 179

B Spikes
Balance Sheet as at 31 December 2002

COST DEPRECIATION NET BOOK

VALUE
Non current Assets £ £ £
Productive machinery 280,000 (78,000) 202,000
Accounting machinery 20,000 (10,000) 10,000
300,000 88,000 212,000
Current Assets
Stock: raw materials 24,000
Finished goods 40,000
Work in progress 15,000 79,000
Debtors 142,300
Cash at bank 56,800
Cash in hand 1,500
279,600
Current liabilities
Creditors (125,000) 154,600
366,600
Capital 296,800
Add net profit 89,800
386,600
Less drawings (20,000)
366,600
180 Revision Aid

Example 6.11 (Exam Type – June 1986 Question Two)

Bibi Maridadi owns and manages a small manufacturing business. The following balances have been
extracted from her books of account at 31 January 1986:

Dr Cr
Sh Sh
Capital at 1 February 1985 171,120
Accounts payable 86,000
Bank and cash balance 5,400
Accounts receivable 92,000
Drawings 60,000
Administration expenses 150,360
Advertising expenses 12,000
Factory direct wages 60,000
Factory indirect wages 24,000
Factory power 36,000
Furniture and fittings (all offices) 18,400
Heat and light 16,000
Plant and equipment 276,800
Motor vehicle (used by salesmen) 144,000
Plant hire 4,000
Provision for bad debts 3,200
Provision for depreciation 1 February 1985:
 Furniture and fittings 9,200
 Plant and equipment 138,400
 Motor vehicle 24,000
Raw material purchases 228,000
Rent rates 20,000
Sales 829,440
Selling and distribution expenses 66,400
Inventories at cost, 1 February 1985:
 Raw materials 8,000
 Work in progress 16,000
 Finished goods 24,000 _______
1,261,360 1,261,360

The following additional information is provided:

(i) Accruals at 31 January 1986 were:
Factory power - Sh.1,600
Rent and rates - Sh. 4,000

There was also prepayment of Sh. 800 for salesmen’s motor vehicle insurance.
(ii) Inventories at 31 January 1986, were valued at cost as follows:

Raw materials - Sh. 15,200

Work in progress - Sh. 30,400
Finished goods - Sh. 45,600
Lesson Nine 181

(iii) Depreciation is to be charged on plant and equipment, motor vehicle, furniture and fittings at the rates
of 20%, 25% and 10% per annum respectively on cost.
(iv) Expenditure on heat and light, and rent and rates is to be apportioned between the factory and office in
the ratio of 9 to 1 and 3 to 2 respectively.
(v) The provision for bad debts is to be made equal to 5% of accounts receivable at 31 January 1986.
Required:
Using the vertical method, prepare Bibi Maridadi’s manufacturing, trading and profit and loss account for the
year ended 31 January 1986 and a balance sheet as at that date. (22 marks)

Solution:
Bibi Maridadi
Manufacturing, Trading and Profit and Loss Account for the year ended 31 January 1986
Direct materials Sh Sh
Opening stock of raw materials 8,000
Add: purchases of raw materials 228,000
236,000
Less: closing stock of raw materials (15,200)
Raw materials consumed 220,800
Factory direct wages 60,000
PRIME COST 280,800
Factory overheads
Factory indirect wages 24,000
Factory power 37,600
Plant hire 4,000
Heat and light 14,400
Rent and rates 14,400
Depreciation on plant 55,360 149,760
430,560
Add opening work in progress 16,000
446,560
Less closing work in progress (30,400)
Factory cost of production 416,160
Sales 829,440
Less cost of sales
Opening stock of finished goods 24,000
Add factory cost of production 416,160
440,160
Less closing stock of finished goods (45,600) 394,560
Gross profit 434,880
Less expenses
Increase in provision for doubtful debts 1,400
Rent and rates 9,600
Heat and light 1,600
Depreciation: motor vehicle 36,000
Furniture and fittings 1,840
Selling and distribution expenses 65,600
Administration expenses 150,360
Advertising expenses 12,000 278,400
Net profit 156,480

Bibi Maridadi
182 Revision Aid

Balance Sheet as at 31 January 1986

COST DEPRECIATION NET BOOK
VALUE
Non current Assets £ £ £
Plant and equipment 276,800 (193,760) 83,040
Furniture and fittings 18,400 (11,040) 7,360
Motor vehicle 144,000 (60,000) 84,000
439,200 (264,800) 174,400
Current Assets
Stock: Raw materials 15,200
Work in progress 30,400
Finished goods 45,600 91,200
Debtors 92,000
Less: provision for doubtful debts (4,600) 87,400
Prepayments 800
Cash in hand and bank 5,400
184,800
Current liabilities
Creditors 86,000
Accruals 5,600 (91,600) 93,200
267,600
Capital 171,120
Add net profit 156,480
327,600
Less drawings (60,000)
267,600

UNREALISED PROFITS ON CLOSING STOCK

In most cases where business transfers finished goods at a profit to the selling department and the goods are
reflected in the balance sheet at the transfer price, then the closing stock includes a profit that has not been
earned or realised. If the mark up profit (the profit based on cost of production is always uniform, then any
changes in the value of closing stock will result in a reduction or an increase in the unrealised profits.
If there is an increase on unrealised profit on the closing stock, then this increase will be reduced from the
gross profit from our profit and loss account and if there is a reduction in unrealised profits, then this
reduction will be added to the gross profit in our profit and loss account.
Any unrealised profit of closing stock should be deducted from the closing stock in the balance sheet.
The slight change in the format of the Profit and Loss Account and Balance Sheet will be as follows
Lesson Nine 183

Increase in unrealised profit in closing stock (UPCS)

Profit and loss (extract) Account for year ended………..
£ £
Gross profit X
Add: factory profit X
Add: other expenses X
X
Less expenses
Other expenses X
Increase in unrealised profit on closing stock X (X)
Net profit X

Decrease in UPCS
Profit and Loss Account (extract) for year ended …………
£ £
Gross profit X
Add: factory profit X
Add: other incomes X
Add: decrease in UPCS X
X
Less expenses
Other expenses (X)
Net profit X

Example:
A firm always values its stock (finished goods) at a mark-up of 20% on cost of production. The opening
stock of finished goods for the period was valued at Sh. 100,000. (The marked up cost) The closing stock at
the end of the financial period was Sh.160,000.

Opening Stock: 100,000 (marked up) = 120%

(16,667) = (20%)
83,333 = 100%

Closing Stock 160,000 (marked up) = 120%

(26,667) = (20%)
133,333 = 100%

UPCS
Balance b/f 16,667
Balance c/d 26,667 Profit and loss a/c 10,000
26,667 26,667
184 Revision Aid

Profit and Loss (Extract)

Less: Expenses: Sh Sh
Increase in unrealized profits on closing stock 10,000

Balance Sheet (Extract)

Current Assets Sh Sh
Stock:
Raw materials X
Work in progress X
Finished goods 160,000
Less: UPCS (26,667) 133,333

(d) DEPARTMENTAL ACCOUNTS

Some organizations have various departments carrying out trade and therefore the profitability of each
department needs to be established. For each department, trading, profit and loss account should be
prepared. The final accounts will be very important for the management to assess the performance of each
department.
The expenses in relation to a specific department should be charged in the Profit and Loss account for that
department. The accounts will be represented in columnar form and the format will be as follows: (Assume a
firm has departments A and B).

Name
Trading Profit and Loss account for the year ended 31 December

Department A Department B Department C

£ £ £ £ £ £
Sales XX XX XX
Less cost of sales
Opening stock XX XX XX
Purchases XX XX XX
XX XX XX
Less closing stock (XX) (XX) (XX) (XX) (XX) (XX)
Gross profit XX XX XX XX
Other incomes XX XX XX
XX XX XX
Less expenses
Salaries and wages XX XX XX
Depreciation XX XX XX
Other expenses XX XX XX
Managers commission XX (XX) XX (XX) XX (XX)
NET PROFIT XX XX XX

The balance sheet will reflect the position of the whole organization and therefore a departmental balance
sheet is not required.
Lesson Nine 185

When departments in a firm are sharing resources, then the various expenses need to be apportioned between
or among the different departments e.g. if the departments are sharing a building, then rent expense should
be apportioned among the departments.
The following guidelines can be followed in apportioning the expenses among the departments.

Type of Expense Basis of apportionment

1) Rent, rates, heat, light, repairs to Floor area occupied by each department.
buildings,
depreciation of buildings and insurance.

2) Depreciation, insurance and maintenance Cost or net book value of the equipment in
of equipment each department.

3) Salaries, canteen expenses, welfare and Number of employees in each department

other expenses relating to employees.

4) Carriage inwards. Purchases in each department.

5) Advertising, depreciation and Value of sales in each department.

maintenance of delivery van.

6) Increase in provision for doubtful debts, Sales or debtors in each department.

bad debts and discounts allowed.

Example 6.12
J Spratt is the proprietor of a shop selling books, periodicals, newspapers and children’s games and toys. For
the purposes of his accounts, he wishes the business to be divided into two departments:

Department A Books, periodicals and newspapers

Department B Games, toys and fancy goods.

The following balances have been extracted from his nominal ledger at 31 March 19X9:

Dr Cr
Sales Department A 15,000
Sales Department B 10,000
Stocks Department A, 1 April 19X8 250
Stocks Department B, 1 April 19x8 200
Purchases Department A 11,800
Purchases Department B 8,200
Wages of sales assistants Department A 1,000
Wages of sales assistants Department B 750
Newspaper delivery wages 150
General office salaries 750
Rates 130
Fire insurance – buildings 50
Lighting and air conditioning 120
Repairs to premises 25
Internal telephone 25
186 Revision Aid

Cleaning 30
Accountancy and audit charges 120
General office expenses 60
25,000 25,000

Stocks at 31 March 19X9 were valued at:

Department A £300
Department B £150

The proportion of the total floor area occupied by each department was:

Department A one fifth

Department B four-fifths

Prepare J Spratt’s trading and profit and loss account for the year ended 31 March 19X9, apportioning the
overhead expenses, where necessary, to show the Department profit or loss.

The apportionment should be made by using the methods as shown:

Area - Rates, Fire insurance, Lighting and air conditioning, Repairs, Telephone, Cleaning:

Turnover -General office salaries, Accountancy, General office expenses.

Lesson Nine 187

Solution:
J Sprat
Trading, Profit and Loss Account for the year ended 31 March 19X9

Department A Department B Department C

£ £ £ £ £ £
Sales 15,000 10,000 25,000
Less cost of sales
Opening stock 250 200 450
Purchases 11,800 8,200 20,000
12,500 8,400 20,450
Less closing stock (300) (11,750) (150) (8,250) (450) (20,000)
Gross profit 3,250 1,750 5,000

Less expenses
Wages 1,000 750 1,750
Newspaper delivery wages 150 - 150
General office salaries 450 300 750
Rates 26 104 130
Fire insurance – buildings 10 40 50
Lighting and air-conditioning 24 96 120
Repairs to premises 5 20 25
Internal telephone 5 20 25
Cleaning 6 24 30
Accountancy or audit charges 72 48 120
General office expenses 36 (1,784) 24 (1,426) 60 (3,210)
NET PROFIT 1,466 324 1,790

Workings:

1) General Office Salaries: A = 15,000 X 750 = 450

25,000

B = 10,000 X 750 = 300

25,000

2) Rates: A = 1/5 X 130 = 26

B = 4/5 X 130 = 104

3) Fire Insurance: A = 1/5 X 50 = 10

B = 4/5 X 50 = 40

4) Lighting: A = 1/5 X 120 = 24

B = 4/5 x 120 = 96

5) Repairs: A = 1/5 X 25 = 5
B = 4/5 X 25 = 20 etc.
188 Revision Aid

Interdepartmental Trading
A department may buy goods from another department in the same firm and therefore the departments trade
with one another. Example, in 4.16 above, department A sells goods to Department B. (Department B is
buying from department A). Interdepartmental sales and purchases should be excluded from the total sales
and total purchases of the whole firm. If we assume that A sold goods to B amounting to £1,000 and this
figure is included in sales of A and purchases of B, the trading account for the whole firm will be as follows
(other items will remain the same):
£ £
Sales 24,000
Less cost of sales
Opening stock 450
Purchases 19,000
19,450
Less closing stock (450) (19,000)
Gross profit 5,000

Managers Commission
A commission based on the net profit made in each department may reward managers of each department.
The commission is normally a percentage of the net profit but it may be a percentage on the net profit before
or after charging the commission.

1) Percentage Before Charging Commission

If we assume in example 4.16 that the managers in each department is paid a commission of 5%, before
charging such commission, the commission will be as follows:

Department A Department B Total

Net profit before commission 1,466 324 1,790
Managers commission @ 5% (73.3) (16.2) (89.5)
Net profit after commission 1,392.7 307.8 1,700.5

2) Percentage After Charging Commission

Assume the commission is 5% of the net profit after charging such commission:

Department A Department B Total

Net profit before commission 1,466 324 1,790
Managers commission @ 5% (69.8) (15.4) (85.2)
Net profit after commission 1,392.2 308.6 1,704.5

Note:
If we use percentage for each commission assuming a 5% rate, the commission will be computed as follows:

Before charging After charging

commission commission
Net profit before commission 100 105
Commission of 5% __5 __5
Net profit after commission 95 100
Lesson Nine 189

LESSON SEVEN

PARTNERSHIPS

A partnership is a relationship that subsists between two or more persons carrying on a business common
with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.

Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms (e.g.)
lawyers, doctors, accountants etc. whose maximum membership is twenty (20) persons.

Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree on the terms
upon which the partnership will be run and the relationship between each other. This is done in writing and
signed off as agreed by all the partners and therefore it becomes a partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.

Accounting for partnerships.

The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to remain fixed.
It will only change when the partners agree or incase of any changes in the partnership like admission of or
retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities of
the partnership (i.e.) the profits or losses and any drawings made by the partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital account
becomes a fixed capital account. When there is no distinction between a capital account and a current
account then any short- term changes are passed through the capital account therefore the capital account
becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are shown in the
following formats.

(Assume a firm of 3 partners A, B and C)

CAPITAL ACCOUNT
190 Revision Aid

A B C A B C
£ £ £ £ £ £
Loss or revaluation xx xx xx Bal b/d xx xx xx
Goodwill written off xx xx xx Additional capital xx xx xx
(c/book or asset)
Gains on revaluation xx xx xx
Bal c/d xx xx xx Goodwill xx xx xx
xx xx xx xx xx xx
Bal b/d xx xx xx

CURRENT ACCOUNT
A B C A B C
£ £ £ £ £ £
Bal b/d xx Bal b/d xx xx
Interest on drawings xx xx xx Interest on capital xx xx xx
Drawings xx xx xx Salaries xx xx xx
Share of profits xx xx xx
Bal c/d xx xx - Loan interest - xx -
Bal c/d xx
xx xx xx xx xx xx
xx Bal b/d xx xx xx

Format For Final Accounts:

Profit and Loss Account
The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss
account, a new section called the Appropriation account is included and this account shows how the partners
share the Net Profit for the period. (In addition to other expenses in the profit and loss, an expense for
interest on loan given by one of the partners is included and the credit entry is made on the partner’s current
account.)
The format for the Appropriation account is as follows:
Lesson Nine 191

£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)

£ £
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)

Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the business
should be shown separately and any loan given by a partner to the firm is also shown separately in the non-
correct liability section therefore, the format will be as follows.

£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx
192 Revision Aid

Example 7.1
Read the following and answer the questions below.

A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:

Capital: A- £60,000; B - £48,000.

Partnership salaries: A - £9,000; B - £6,000.
Drawings: A - £12,000; B - £13,400.

The firm’s net profit for the year was £32,840.

Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.

(a) From the information above prepared the firm’s appropriation account and the partners’ current
accounts.

SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840

Less: Interest on capital

A 6000
B 4800 (10,800)
22,040
Less: Salaries
A 9000
B 6000 (15,000)
Balance of profit to be shared in Profit Share Ratio 7,040
A ½ 3520
B ½ 3520 (7,040)

CURRENT ACCOUNT
A B A B
£ £ £ £
Drawings 12,860 13,400 Interest on capital 6,000 4,800
Salaries 9,000 6,000
Bal c/d 5,660 920 Profit shared. 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920
Lesson Nine 193

EXAMPLE 7.2
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and balance sheet
extracts at the date, from the following:

i. Net profits £30,350

ii. Interest to be charged on capitals: W £2,000; P £1,500; H £900
iii. Interest to be charged on drawings; W £240; P £180; H £130
iv. Salaries to be credited: P £2,000; H £3,500.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/f W £1,860; P £946; H £717
vii. Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
viii. Drawings: W £9,200; P £7,100; H £6,900.

SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)

Current Account
W P H W P H
£ £ £ £ £ £
Interest on draw 240 180 130 Bal b/d 1,860 946 717
Drawings 9,200 7,100 6,900 Interest on capital 2,000 1,500 900
Bal c/d Salaries 2,000 3,500
Share of profits 10,000 6,300 4,200
Bal c/d 4,920 3,466 2,287
14,360 10,746 9,317 14,360 10,746 9,317
194 Revision Aid

Balance sheet (extract) as at 31 Dec 2002

£ £ £
Net Assets xx
Capital W 40,000
P 30,000
H 18,000
88,000
Current Accounts
W 4,920
Pl 3,466
H 2,287 10,673
98,673

Example 7.3
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and
Stone, trading partnership, sharing the balance of profits and losses in the proportions 3:2 respectively.
£
Printing, stationery and postage 3,500
Sales 322,100
Stock in hand at 1 October 19X8 23,000
Purchases 208,200
Rent and rates 10,300
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running costs 5,620
Discounts allowable 950
Discount receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings: at cost 26,000
Provision for depreciation 11,200
Motor vehicles: at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current account balances
At 1 October 19X8:
Brick 3,600 credit
Stone 2,400 credit
Capital account balances
At 1 October 19X8:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
Lesson Nine 195

Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1
July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at
that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%

Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include summaries of the partners’
capital and current accounts for the year ended on that date.

Note: In both (a) and (b) vertical forms of presentation should be used.

SOLUTION
Brick And Stone.
Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
Discounts allowable 950
Discounts receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings at cost 26,000
Provision for depreciation 11,200
Motor vehicles at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
196 Revision Aid

Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470

TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER 19X9
£ £ £
Sales 322,100
Less: Sales returns 2,100
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
Interest on loan (adjustment) 250 (82,320)
Net profit 44,250
Less: Salaries Stone (adjustment) (6,000)
Balance of profit to be shared 38,250
Brick 3 5 22,950
Stone 52 15,300 (38,250
Lesson Nine 197

Balance sheet as at 30 September 19X9

Non current Asset £ £ £
Fixtures and fittings 26,000 (13,800) 12,200
Motor vehicles 46,000 (34,200) 11,800
72,000 48,000 24,000
Current Asset
Stock 32,000
Debtors 9,300
Less: Provision (300) 9,000
Payments 600
Cash at bank 7,700
49,300
Current Liabilities
Creditors 8,400
Accruals 400 (8,800) 40,500
64,500
Capital
Brick (adjustment) 23,000
Stone 17,000
Current:
Brick adjustment 2,800
Stone 11,700 14,500
54,500
Non-Current Liabilities
10% loan – Brick 10,000
64,500

Current Account
Brick Stone Brick Stone
£ £ £ £
Drawings 24,000 12,000 Bal b/d 3,600 2,400
(adj)
Interest on loan 250
Bal c/d 2,800 11,700 Salaries. 6,000
Share profits 22,950 15,300
26,800 26,800 26,800 23,700
198 Revision Aid

EXAMPLE 7.4
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance as at
30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 19X8 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,000
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040

Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 19X9 and a balance
sheet as at that date.

a) Stock, 30 June 2003, £563,400

b) Expenses to be accrued: Office Expenses £960; Wages £2,000
c) Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
d) Reduce provision for bad debts to £3,200.
e) Partnership salary: £8,000 to Mack. Not yet entered
f) Interest on drawings: Mack£1,800; Spencer £1,200.
g) Interest on capital account balances at 10 per cent.
Lesson Nine 199

Mack and Spencer

Q 5.2 Trading and Profit Loss Account for the year ended 30 June 2003
£ £ £
Sales 1,236,500
Less cost of sales
Opening Stock 419,790
Add: Purchases 854,160
1273,950
Less: Closing Stock (563,400) 710,550
Gross Profit 525,950
Reduction in provision for bad debts (400-300) 800
526,750
Less Expenses
Depreciation: Fixtures & Fittings (110,000-33,000 x 10
100 )7,700
Buildings 10,000
Carriage outwards 12,880
Discount allowed 1,150
Office expenses (24160 + 960) 25,120
Loan interest 40,000
Salaries and wages (18,9170 + 2000) 191,170
Bad debts 5,030 (293050)
Net Profit for the period 233,700
Add: Interest on drawings:
Mack 1,800
Spencer 1,200 3,000
236,700
Less: Salaries – Mack (8,000)
228,700
Less: interest on capital
Mack 35,000
Spencer 29,500 (64,500)
164,200
Balance of profits
Mack ½ 82,100
Spencer ½ 82,100 164,200

Mack – Current Account

£ £
Drawings 64,000 balance b/d 13,060
Interest on drawings 1,800 salary 8,000
Interest on capital 35,000
Profit 82,100
bal c/d 72,360
138,160 138,160
200 Revision Aid

Spencer – Current Account

£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580

Balance Sheet as at 30 June 19X9

£ £ £
Non Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300

Current Assets
Stock 56,3400
Debtors (16,243 – 320) 15,9230
Cash at bank 6770
72,9400
Current Liabilities
Creditors 111,500
Accruals (200 + 96) 2,960 (114,460) 61,4940
1,174,240

Capital Accounts: Mack 35,000

Spencer 29,500 64,500
Current Accounts: Mack 72,360
Spencer 56,880 129,240

Loan from J. King 400,000

1,174,240
Lesson Nine 201

Example 7.5
JUNE 1998 QUESTION 4

The balance sheet of the partnership of Kombo and Nzuki as at 31 March 1997 was as follows:

Capital accounts: Shs. Sh. Fixed asset sh. sh

Kombo 1,400,000 (at cost less depreciation
Nzuki 1,400,000 2,800,000 Premises 1,200,000
Equipment 520,000
Vehicles 418,000 2,138,000
Current Accounts:
Kombo 136,000
Nzuki (81,200) 54,800

Current Liabilities: Current Assets:

Creditors 501,600 Stock 894,200
Accruals 25,600 527,200 debtors 475,900
Provision (46,400) 429,500
Prepayments 28,600
Suspense account 326,300 Bank and cash 281,000 1,570,300
3,708,300 3,708,300

After a lengthy check of all the entries, the following errors were identified
1. Discounts received, sh.26,400 had been debited to discounts allowed.
2. The sales account had been under cast by sh.200,000.
3. A credit sale of Sh.29,400 had been debited to a customer’s account as Sh.42,900.
4. A vehicle bought originally for sh.140,000 four years ago and depreciated at 20% by straight line
method on an assumed residual value of Sh.20,000 had been sold at Sh.60,000 but no entries,
other than in the bank account had been passed through the books.
5. An accrual of Sh.11,200 for electricity charges had completely been omitted.
6. A bad debt of Sh.31,200 had not been written off an provision for bad debts should have been
maintained at 10% of debtors.
7. Kombo’s current account had been credited with a partnership salary of Sh.60,000 which should
have been credited to Nzuki’s current account.
8. Kombo had withdrawn, for personal use, goods to the value of Sh.39,200. No entries had been
made in the books.
9. The partners share of profits and losses as follows:
Kombo 60% and Nzuki 40%

Required:
a) A statement of adjustments to show the correct net profit for the y
(12 marks)
b) A suspense account showing how the balance is eliminated from the books.
(2 marks)
c) A corrected balance sheet as at 31 March 1997. (8 marks)
202 Revision Aid

SOLUTION
The following journal can be included although not required in the question.

DR CR
i) DR: Suspense Account 26,400
CR: Discount Allowed Account 26,400

DR: Suspense Account 26,400

CR: Discount receive 26,400
Making the correct in the accounts

ii) DR: Suspense Account 200,000

CR: Sales Account 200,000
Sales undercast now corrected

iii) DR: Suspense Account 13,500

CR: Debtors Account 13,500
Being an overstatement of debtors
account now corrected

iv) DR: Asset Disposals Account 140,000

CR: Asset Account 140,000
DR: Provision for depreciation Account
CR: Asset Disposal Account
DR: Suspense Account 60,000
CR: Asset Disposal Account 60,000
DR: Asset Disposal Account 16,000
CR: Profit and Loss Account 16,000

v) DR: Profit and Loss Account 11,200

CR: Accrue expenses Account 11,200

vi) DR: Profit and Loss Account 31,200

CR: Debtors Account 31,200
DR: Provision for doubtful debts Account 3,280
CR: Profit and Loss Account 3,280

DR: Kombo’s Current Account 60,000

CR: Nzuki’s Current Account 60,000
DR: Kombo’s Current Account 39,200
CR: Profit and Loss Account (Purchases) 39,200
Lesson Nine 203

(a) Kombo and Nzuki Partnership

Statement of Corrected Net Profit for the year
Sh. Sh.
Adjustments
Discount allowed 26,400
Discount received 26,400
Sales undercasted 200,000
Profit on disposal of asset 16,000
Accrued electricity charges (11,200)
Bad debts (31,200)
Decrease in provision for bad debts 3,280
Drawings (goods) 39,200
Net adjustments to Net Profit 268,880

Partners Current Account

Kombo Nzuki Kombo Nzuki
Shs Shs. Shs. Shs.
Bal b/d - 81,200 Bal b/d 136,000 -
Nzuki 60,000 - Kombo - 60,000
Drawings 39,200 - Net profit adjustments 161,328 107,552
Bal c/d 198,128 86,352

297,328 167,552 297,328 167,552

(b) Suspense Account

Shs. Shs.
Discount allowed 26,400 bal b/d 326,300
Discount received 26,400
Sales 200,000
Debtors 13,500
Motor vehicle disposal 60,000
326,300 326,300
204 Revision Aid

(c) Kombo and Nzuki

Balance Sheet as at 31 March 1997
Fixed Assets Shs. Shs. Shs.
Premises 1,200,000
Equipment 520,000
Vehicles 374,000
2,094,000
Current Assets
Stocks 894,200
Debtors (431,200 – 43,120) 388,080
Prepayments 28,600
Bank and Cash 218,000
1,528,880
Current Liabilities
Creditors 501,600
Accruals (25,600 + 11,200) 36,800 (538,400) 990,480
3,084,480

Capital Accounts
Kombo 1,400,000
Nzuki 1,400,000 2,800,000

Current Accounts
Kombo 198,128
Nzuki 86,352 284,480
3,084,480

NB
This is a very good question on partnership as it combines both errors on the accounts and Partnerships.
Please study it carefully and follow up the entries and adjustments.

The next example is still on past paper and combines both incomplete records and partnerships.

EXAMPLE 7.6 JUNE 1997

Question 1
Kefa and Mark are partners sharing profits and losses equally. They do not maintain proper books of
accounts. The following information has been obtained from the available records on 31 March:
1996 1997
Sh. Sh.
Balance at bank 94,800 169,680
Stock in trade 541,200 488,640
Trade debtors 612,000 ?
Trade creditors ? 305,760
Furniture 360,000
Motor vehicles (book value) 1,920,000

Total sales during the year ended 31 March 1997 amounted to Sh.3,849,120 while purchases, all on credit for
the same period were Sh.2,952,480. On 31 March 1996 Kefa’s capital was Sh.200,000 less than that of Mark.
The analysis of the cash book for the year ended 31 March 1997 shows the following:
Lesson Nine 205

Receipts:
Cash from credit sales 3,491,520
Additional capital by Kefa 240,000
Cash sales 586,800
Payments:
For purchases 3,070,080
Salaries paid 420,000
Rent paid (for 6 months to 30.9.96) 144,000
Rates paid (for 6 months to 30.6.97) 120,000
Electricity charges 60,000
Advertising 41,760
Motor vehicle expenses 119,520
Sundry expenses 33,600
Drawings - Kefa 132,480
Mark 102,000

On 31 March 1997 liabilities were as follows:

Sh.
Electricity charges 12,480
Advertisement 6,240
Sundry expenses 3,600

On 20 March 1997 the firm decided to dispose of two of its motor vehicles. One vehicle was sold on credit
for Sh.640, 000 while the other was taken over by Kefa at a valuation of sh.250, 000. the combined book
value of the two vehicles was Sh.660,000. the transaction has not been recorded in the books.
Depreciation at the rate of 10 percent is to be provided on furniture and motor vehicles on hand at 31 March
1997. No depreciation is to be provided for the vehicles, which were disposed of.
Required:
a) Trading, profit and loss account for the year ended 31 March 1997. (10 marks)
b) Balance sheet as at 31 March 1997. (8 marks)
c) Partner’s capital accounts (4 marks)
(Total: 20 marks)
SOLUTION
June 1997 Question 1

KEFA and MARK

STATEMENT OF AFFAIRS AS AT 31 March 1997
Assets Sh. Sh.
Bank 94,800
Stock 541,200
Debtors 612,000
Furniture 360,000
Motor vehicle 1,920,000
3,528,000
Liabilities
Creditors (423,360)
Net Assets 3,104,640
Capital Kefa 1,452,320
Mark 1,652,320 3,104,640
206 Revision Aid

Trading, Profit and loss account for the year ended 31 March 1997
Sh Sh.
Sales 3,849,120
Less cost of sales
Opening stock 541,200
Purchases 2,952,480
Less: Closing stock 488,640) (3,005,040)
Gross profit 844,080
Profit on disposal adjustment 230,000
1,074,080
Less Expenses
Salaries 420,000
Rent adjustment 288,000
Rates 60,000
Electricity 72,480
Advertising 48,000
Motor vehicle 119,520
Sundry expense 37,200
Depreciation – Furniture 36,000
- Motor vehicle 126,000 (1,207,200)
(133,120)
Net Loss should in PSR
Kefa (66,560)
Mark (66,560) 133,120

Balance sheet as at 31 March 1997

Non-current Assets Sh. Sh. Sh.
Furniture 360,000 (36,000) 324,000
Motor vehicle 1,260,000 (126,000) 1,134,000
1,620,000 (162,000) 1,458,000

Current Assets
Stock 488,640
Debtors – Trade Adjustment 382,800
- others vehicle 640,000
Prepayments 60,000
Bank 169,680
1,741,120
Current Liabilities
Creditors 305,760
Accruals 166,320 (472,080) 1,269,040
2,727,040
Capital - Kefa 1,243,280
Mark 1,483,760
2,727,040
Lesson Nine 207

Capital Account
Kefa Mark Kefa mark
Shs. Shs. Shs. Shs.
Drawings 132,480 102,000 Bal b/d 1,452,320 1,652,320
Disposal 250,000 Cash 240,000
Loss shared 66,560 66,560
Bal c/d 1,243,280 1,483,760
1,692,320 1,652,320 1,692,320 1,652,320

(c) GOODWILL AND REVALUATION OF ASSETS

This is defined as the advantage, whatever it may be, a person gets by continuing to be entitled to
represent to the outside would that he is carrying on a business which has been carried on for
sometime previously. “Judge Warey in Hull V Frases”
Goodwill is the element that arises from a business due to its reputation and therefore, enjoys
benefits that a new business may not get.
(e.g.) A new business may not make profits easily during the first year of trading.

Factors that contribute to goodwill

1. Quality of products/Services
2. Good personnel
3. Marketing
4. Location
5.
In accounting, goodwill is very important for ascertaining the element or the share of a partner’s
effort to improve the business. The problem is normally to ascertain the value or cost of goodwill.
There are two types of goodwill:

1. Non-Purchase goodwill
Non- purchased goodwill is determined by using subjective estimates. There are various
approaches to these. Goodwill maybe arrived at by taking the average profits for lets say three
previous years of trading.
Due to this subjective estimate, this type of goodwill is not maintained or shown in the accounts.

2. Purchased goodwill
This is less subjective because it is the excess amount paid for a business above its net assets.
This is less subjective because it is the excess amounts paid for a business above its net assets.
(e.g) If a business pays Sh.3.5 m to acquire the net assets (i.e. in these case the net assets will be
total assets less total liabilities) of another business that is still trading on and the value of the net
asset is 3 M, therefore the purchased goodwill may be shown in the accounts as an intangible
asset. Purchased goodwill can be treated in the following three main ways:

1) Goodwill is written off from the accounts

2) Is carried at its value an amortized over a period of time
3) Carried at its value without being amortized.

The practice is normally to carry it in the accounts together with the other assets (as an intangible
asset) and amortize it over estimated period of time.
208 Revision Aid

In a partnership, there are normally three situations where goodwill is accounted for in the accounts:

a) If there is a change in the profit sharing ratio.

b) On admission of a new partner.
c) On retirement of an old partner.
d)
Example (when there is a change in profit sharing ratio)
When there is a change in the profit sharing ratio, then goodwill is introduced in the accounts by

Dr. Goodwill account

Cr. Partner’s capital account ( the credit is based on the old
profit sharing ratio.)

The goodwill may remain in the accounts and therefore no partner entries will be made.
If the goodwill is to be written off from the accounts, this will be done by
Debiting partner’s capital account (in the New profit sharing ratio)
Crediting goodwill account

Example:
A and B have been trading as partners sharing profits and losses equally. They decided to change profit
sharing ration to 3:2. The capital balances are:
A: - Sh.1,000,000
B: - Sh.1,500,000
Goodwill has been agreed at Sh.500,00.

Required: The partner’s capital balances assuming that:

1) Goodwill is to be retained in the accounts
2) Goodwill is to be written off form the accounts.

Solution:

1) CAPITAL ACCOUNT
A B A B
Bal b/d 1,000,000 1,500,000
Goodwill(OPSR) 250,000 250,000
Bal c/d 12,500,000 1,750,000
12,500,000 1,750,000

2) CAPITAL ACCOUNT
A B A B
Goodwill (NPRS) 300,000 200,000 Bal b/d 1,000,000 1,500,000
Bal c/d (NPSR) 950,000 1,550,000 Goodwill 250,000 250,000
(OPSR)
12,500,000 1,750,000 12,500,000 1,750,000

REVALUATION OF ASSETS.
The business may revalue some of the assets to reflect their fair values (e.g.) based on market price.
The revaluation is normally done when a new partner is to be admitted or an old partner is retiring.
Lesson Nine 209

Any revaluation gains or losses are passed through a new account (i.e) a Revaluation account and the balance
on this account profit or low on revaluation is transferred to the partner’s capital accounts in the existing
profit sharing ratio.

Example:
(A, B, and C are trading as partners sharing profits and losses in the ratio of 2:2:1. They have the following
assets and liabilities at the book values and they wish to restate these values at market values and agreed
values.

Assets/Liabilities Book value Market price/Agreed value Gain)

£ £ Loss
Buildings 2,000,000 2,500,000 100,000
Fixtures, Fittings & furniture 900,000 800,000 (100,000)
Motor vehicle 1,200,000 1,150,000 (50,000)
Stock 700,000 650,000 (50,000)
Debtors 450,000 400,000 (50,000)
Creditors 800,000 700,000 100,000

Required:
Prepare Revaluation account and the partner’s capital account given the partner’s balances as
A £3,000,000
B £2,500,000
C £1,500,000

REVALUATION ACCOUNT
£ £
Fixtures 100,000 buildings 500,000
Motor vehicles 50,000 Creditors 100,000
Stock 50,000
Debtors 50,000
Capital A/C A 2
5 140,000
B 2
5 140,000
C 1
5 70,000
600,000 600,000

CAPITAL ACCOUNT
A B C A B C
Goodwill £ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Bal b/d 3,000 2,500 1,500
Bal c/d 3,140 2,640 1,510 Revaluation 140 140 70
3,140 2,640 1,570 3,140 2,640 1,570

If there is a profit on revaluation, then the profit will be transferred to the partner’s capital account by:
Dr. Revaluation
Cr. Partner’s capital account in the profit share ratio
210 Revision Aid

If there is loss then

Dr. Partner’s capital account
Cr. Revaluation in the profit share ratio

EXAMPLE 7.7
Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respectively.

The balance sheet for the partnership as at 30 June 19X6 is as follows;

Fixed Assets £ £
Premises 90,000
Plant 37,000
Vehicles 15,000
Fixtures 2,000
144,000
Current Assets
Stock 62,379
Debtors 34,980
Cash ___760 98,119
£242,119
Capital
Alan 85,000
Bob 65,000
Charles 35,000
185,000
Current account
Alan 3,714
Bob (2,509)
Charles 4,678 5,883

Loan – Charles 28,000

Current liabilities
Creditors 19,036
Bank overdraft 4,200
£242,119

Charles decides to retire from the business on 30 June 19X6, and Don is admitted as a partner on that date.
The following matters are agreed:
Lesson Nine 211

a) Certain assets were revalued;

- Premises £120,000
- Plant £35,000
- Stock £54,179
b) Provision is to be made for doubtful debts in the sum of £3,000.
c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners
in the new firm do not wish to maintain a goodwill account so that amount is to be written back against
the new partners’ capital accounts.
d) Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of
profits as Bob.
e) Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by
the firm in cash except £20,000 which he is willing to leave as a loan account.
f) The partners in the new firm are to start on an equal footing so far as capital and current accounts are
concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as
the original partner from the old firm who has the lower investment in the business.

The original partner in the old firm who has the higher investment will draw out cash so that his capital and
current account balances equal those of his new partners.

Required;
a) Account for the above transactions, including goodwill and retiring partners’ accounts.
b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 19X6.

Solution:
Capital Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
Goodwill
written off 12,000 18,000 12,000 - Bal b/d - 85,000 65,000 35,000
Motor - - - 3,900 Goodwill - 21,000 14,000 7,000
vehicle
Cashbook - 21,000 38,100 Cash book 79,000 - - -
Bal c/d 67,000 67,000 67,000 -
79,000 106,000 79,000 42,000 79,000 106,000 79,000 42,000

Current Accounts
Don Alan Bob Charles Don Alan Bob Charles
£ £ £ £ £ £ £ £
Bal b/d - - 2,509 - Bal b/d - 3,714 - 4,678
Cash book 9,023 7,478 Revaluation a/c - 8,400 5,600 2,800
Cash book 3,091 - - -
Bal c/d 3,091 3,091 3,091 -
3,091 12,114 5,600 7,478 3,091 12,114 5,600 7,478
212 Revision Aid

Revaluation Account
£ £
Plant 2,000 Premises 30,000
Stock 8,200
Debtors 3,000
Profits shared:
Alan 8,400
Bob 5,600
Charles 2,800 _____
30,000 30,000

Cash book
£ £
Bal b/d 760 Charles – capital account 38,100
Don - capital account 79,000 Loan 8,000
Current account 3,091 Current account 7,478
Alan – capital account 21,000
Current account 9,023
Bal c/d ******

Cash book
£ £
Bal b/d 4,200
Don - capital account 79,000 Charles – capital account 38,100
Current account 3,091 Loan account 8,000
Current account 7,478
Alan – capital account 21,000
Current account 9,023
Lesson Nine 213

Alan, Bob and Don Partnership

Balance Sheet as at 30 June 19X6

Fixed Assets Cost Depreciation NBV

Premises 120,000
Plant 35,000
Vehicles 1,100
Fixtures 2,000
168,100
Current Assets
Stock 54,179
Debtors 31,980
Cash __760
86,919
Less Current Liabilities
Creditors 19,036
Bank overdraft 5,710 (24,746) 62,173
230,273
Capital accounts
Alan 67,000
Bob 67,000
Don 67,000 201,000

Current Accounts
Alan 3,091
Bob 3,091
Don 3,091 9,273
210,273
Non current liabilities
Loan – Charles 20,000
230,273

NOTE:

i. Goodwill introduced shared among the partners in the old partnership in current profit sharing ratios.
ii. Same case applies for any gain or loss in the revaluation of assets.
iii. Goodwill written off in the new profit sharing ratios against the capital accounts only for the new
partners.
iv. When there is no enough cash to be paid to the retiring partners, his balance remains in the business as a
loan.

(d) Admission of a new partner.

When a new partner is admitted into the firm, this marks the end of the old partnership and the beginning of
a new one.
The new partner will have to bring in the capital that is due from him as per the agreement and also pay for a
share of the goodwill.
Goodwill is credited to the partner’s account(only the old) and is again written off by debiting the partner’s
account(inclusive of the new one in the new Profit Sharing Ratio).
214 Revision Aid

If the admission is taking place part way through the financial period, then the new partner will be entitled
to the profits or losses for the remaining part of the financial period. (i.e from the point of joining the
partnership).
Care should be taken when apportioning interest on capital, salaries and profits because of the changes

Example:
The following was the partnership trial balance as at 30 April 2001:
Sh. Sh.
Fixed capital accounts
Rotich 750,000
Sinei 500,000
Current accounts
Rotich 400,000
Sinei 300,000
Leasehold premises (purchased 1 May 2000) 2,250,000
Purchases 4,100,000
Motor vehicle (cost) 1,600,000
Balance at bank 820,000
Salaries (including partners’ drawings) 1,300,000
Stocks: 30 April 2000 1,200,000
Furniture and fittings (cost) 300,000
Debtors 225,000
Accountancy and audit fees 105,000
Wages 550,000
Rent, rates and electricity 310,000
General expenses (Sh.352,400 for the six months
to 31 October 2000) 660,000
Cash introduced – Tonui 1,250,000
Sh. Sh.
Sales (Sh.3,500,000 to 31 October 2000) 8,750,000
Accumulated depreciation: 1 May 2000
Motor vehicle 300,000
Furniture and fittings 100,000
Creditors 1,070,000
13,420,000 13,420,000
Additional information:
1. On I November 2000 Tonui was admitted as a partner and from that date profits and losses were to be
shared on the ratio 2:2:1. For the purposes of this admission, the value of goodwill was agreed at Sh.3,
000,000. No account for goodwill was to be maintained in the books, adjusting entries for transactions
between the partners being made in their current accounts. On that date, Tonui introduced
Sh.1,250,000 more into the firm of which Sh.375,000 comprised his fixed capital and the balance was
credited to his current account.
2. Interest on fixed capitals was still to be allowed at the rate of 10% per annum after Tonui’s admission.
In addition, after Tonui’s admission, no interest was to be charged or allowed on current accounts.
3. Any apportionment of gross profit was to be made on the basis of sales. Expenses, unless otherwise
indicated were to be apportioned on a time basis.
4. A charge was to be made fro depreciation on motor vehicle and furniture and fittings at 20% and 10%
per annum respectively, calculated on cost.
5. On 30 April, the stock was valued at Sh.1,275,000.

6. Salaries included the following partners’ drawings:

Rotich Sh.150,000, Sinei Sh.120,000 and Tonui Sh. 62,500
Lesson Nine 215

7. A difference in the books of Sh.48,000 had been written off at 30 April 2001 to general expenses,
which was later found to be due to the following clerical errors:
 Sales returns of Sh. 32,000 had been debited to sales returns but had not been posted to the account
of the customer concerned;
 The purchases journal had been undercast by Sh.80,000
8. Doubtful debts (for which full provision was required) amounted to Sh.30,000 and Sh.40,000 as at 31
October 2000 and 30 April 2001 respectively.
9. On 30 April 2001, rates and rent paid in advance amounted to Sh.50,000 and a provision of Sh.15,000
for electricity consumed was required.

Required:
a) Trading and profit and loss account for the year ended 30 April 2001. (9 marks)
b) Partners’ current accounts for the year ended 30 April 2001 (4 marks)
c) Balance sheet as at 30 April 2001 (7 marks)
(Total: 20 marks)

Solution
a) ROTICH, SINEI AND TONUI
TRADING, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 APRIL 2001
Sh. Sh.
Sales 8,750,000
Less: cost of sales
Opening stock 1,200,000
Purchases 4,180,000
5,380,000
Less: Closing stock (1,275,000) 4,105,000 Gross Profit
4,645,000
216 Revision Aid

1.3.2000-3.10.2000 1.11.2000-30.4.2001
Sh Sh Sh Sh Sh Sh
Gross profit S
 GP 1,858,000 2,787,000 4,645,000
TS

Expenses
Dep. Motor Vehicle 160,000 160,000 320,000
Furniture 15,000 15,000 30,000
Salaries 483,750 483,750 967,500
Accountancy fees 52,500 52500 105,000
Wages 275,000 275,000 550,000
Rent, rates, electricity 137,500 137,500 275,000
General expenses 362,400 359,600 612,000
Prov. For depreciation 30,000 (1,506,150) 10,000 (1,393,350) 40,000 2,899,500
Net Profit 351,850 1,393,650 1,745,500
Less: Interest on
capital
Rotich 37,500 37,500 75,000
Sinei 25,000 25,000 50,000
Tonui - (62,500) 18,750 (81,250) 18,750 (143,750)
Balance of profit 289,350 1,312,400 1,601,750
shared
Rotich 2 3 2 5 192,900 524,960 717,860
Sinei 13 2 5 96,450 524,960 621,410
Tonui - 15 - (289,350) 262,480 (1,312,400) 262,480 (1,601,750

b)

Current Account
R S T R S C
Sh. Sh. Sh. Bal b/d Sh. Sh. Sh.
Goodwill 1,200,000 1,200,000 600,000 400,000 300,000 -
w/o
Capital A/C - - 375,000 Cash book 1,250,000
Drawings 150,000 120,000 62,500 Goodwill 2,000,000 1,000,000
(2:1)
Interest on 75,000 50,000 18,750
capital
Profit share 717,860 621,410 262,480
Bal c/d 1,842,860 651,410 493,730
3,192,860 1,971,410 1,531,230 3,192,860 1,971,410 1,531,230
Lesson Nine 217

c) Rotich, Sinei and Tonui

Balance Sheet as at 30 April 2001

Non-Current Assets Sh Sh. Sh.

Leasehold premises 2,250,000 - 2,250,000
Furniture and Fittings 300,000 (130,000) 170,000
Motor vehicle 1,600,000 (620,000 980,000
4,150,000 (750,000) 3,400,000

Current Assets
Stock 1,275,000
Debtors 193,000
Less Provision (40,000) 153,000
Prepayments 50,000
Balance at bank 820,000
2,298,000
Current Liability
Creditors 1,070,000
Accruals 15,000 (1,085,000) 1,213,000
4,613,000

Capital: Rotich 750,000

Sinei 500,000
Tonui 375,000
1,625,000
Current Account: Rotich 1,842,860
Sinei 651,410
Tonui 493,730 2,988,000
4,613,000

(d) The adjusting entries on admission of a new partner should be made to the capital account (i.e) for any
introduction of goodwill and revaluation of assets

Some of the adjustments may also be made in the current accounts if adjustments are made in the
capital account and the admission is partway through the financial period, then any interest to be
charged on capital will be based on the adjusted capital balance.

If the adjustments are made in the current account then there will be no change on the capital balance
and therefore no change on the interest charged on the capital balances.

(e) Retirement of a partner

When a partner retires (i.e.) leaves the firm and the others partners are left to continue with the
business then the retirement marks the end of one partnership and the start of a new one.
The partner who is leaving should be paid all the amounts due to him. This include:
1) Capital balance
This will be all the amounts the partner has invested in the firm. Some firms may not be able to refund
the amount in full and therefore it may be transferred t o a loan account whereby interest will be paid
on the balance.
2) Goodwill
218 Revision Aid

Because this partner contributed to the improvement (existence) of the partnership therefore it will be fair
to pay him his share of the goodwill. Goodwill is introduced to the accounts in the old profit sharing
ratio ((i.e.) credited to all the partner’s capital accounts in the old profit sharing ratio), then written off
from the accounts by debiting the capital accounts of the remaining partners in the new profit share
ratio.

2) Credit balance on the current account

This amount due to the partner is paid directly from the cashbook or transferred to the
capital account whereby the total cash payable is to be determined.
The transfer is made by:
Dr. Current account
Cr. Capital account
4) Share of profits
If the retirement takes place during the financial period, then the retiring partner is entitled to take
profits made up to the point of retirement. Any interest of capital, salaries and balance of profit shared
in profit share ratio will be credited to the partner’s current account.
Therefore the profit and loss account will be split between the two periods and appointment of profits
done and this will be based on the terms of the partnership in each period.

EXAMPLE 7.9
May 2002 Question 3
Kyamba, Onyango and Wakil were partners in a manufacturing and retail business and shared profits
and losses in the ratio 2:2:1 respectively

Given below is the balance sheet of the partnership as at 31 March 2001.

Balance sheet as at 31 March 2001
Assets Sh. Sh.
Non-current assets:
Fixed assets 465,000
Current assets:
Stock 294,000
Debtors 209,000 503,000
968,000
Capital and liabilities:
Capital accounts:
Kyamba 160,000
Onyango 140,000
Wakil 200,000
500,000
Current accounts:
Kyamba 65,300
Onyango 49,000
Wakil 53,000
167,300
667,300
Current Liabilities:
Bank overdraft 48,000
Trade creditors 252,000
300,700
968,000
Lesson Nine 219

Additional information:

1. On 1 April 2001, Wakil retired from the partnership and was to start a business as a sole trader while
Kyamba and Onyango continued in partnership.
2. On retirement of Wakil, the manufacturing business was transferred to him while Kyamba and Onyango
continued with the retail business
The assets and liabilities transferred to Wakil were as follows:
Net book value Transfer value
Sh Sh.
Fixed assets 260,000 306,000
Stocks 166,000 157,000
Debtors 172,000 165,000
Creditors 156,000 156,000
Wakil obtained a loan from a commercial bank and paid into the partnership the net amount due for
him.
3. On retirement of Wakil form the partnership, goodwill was valued at Sh.200, 000 but was not to be
maintained in the books of the partnership of Kyamba and Onyango.
4. After retirement of Wakil on 1 April 2001, Kyamba and Onyango agreed on the following terms and
details of the new partnership.

 Kyamba and Onyango to introduce additional capital of Sh.48, 000 and Sh.68, 000 respectively.
 Each partner was entitled to interest on capital at 10% per annum with effect from 1 April 2001
and the balance of the profits be shared equally after allowing for annual salaries of Sh.72, 000 to
Kyamba and Sh.60, 000 to Onyango.

5. The profit of the new partnership before interest on capitals and partners’ salaries was Sh.240,000 for the
year ended 31 March 2002.
6. The profits made by the new partnership increased stocks by Sh.100,000, debtors by Sh.90,000 and bank
balance by Sh.50,000.
7. Drawings by the partners in the year were Kyamba Sh.85,000 and Onyango Sh.70,000.

Required:
a) Profit and loss and appropriation account for the year ended 31 March 2002.(4 marks)
b) Capital accounts for the year ended 31 March 2002 (4 marks)
c) Current accounts for the year ended 31 March 2002. (4 marks)
d) Balance sheet of the new partnership as at 31 March 2002. (8 marks)
(Total: 20 marks)
220 Revision Aid

SOLUTION
a) Kyamba and Onyango
Profit and loss appropriation account for the year ended 31.3.2002

Sh Sh.
Net profit for the year 240,000
Less: Interest on capital
Kyamba 20,000
Onyango 20,000 (40,000)
200,000
Less: Salaries
Kyamba 72,000
Onyango 60,000 (132,000)
Balance of profits shared in PSR 68,000
Kyamba ½ 34,000
Onyango ½ 34,000 (68,000)

b) CAPITAL ACCOUNT
K O W K O W
(2) Goodwill in 100,000 100,000 - Bal b/d 160,000 140,000 200,000
New PSR
(4) Fixed Assets 306,000 (1)Goodwill in 80,000 80,000 40,000
old PSR
Stocks 157,000 Cashbook 48,000 68,000 -
Debtors 165,000 Profit on transfer 12,000 12,000 6,000
in old PSR
Creditors 156,000
Bal c/d 200,000 200,000 Current account 53,000
(3)
Cash book (**) 173,000
300,000 3000,000 628,000 300,000 300,000 628,000

c) CURRENT ACCOUNT
K O W K O W
Sh Sh Sh Sh Sh sh
Capital - - 53,000 Bal b/d 65,300 49,000 53,000
Drawings 85,000 70,000 - Interest on 20,000 20,000 -
capital
Salaries 72,000 60,000 -
Bal c/d 106,300 93,000 - Share of profits 34,000 34,000 -

191,300 163,000 53,000 191,300 163,000 53,000

Lesson Nine 221

KYAMBA AND ONYANGO

Balance Sheet as at 31 March 2002.
Non-Current Assets Sh. Sh.
Current Assets 205,000
Stock 228,000
Debtors 127,000
Bank 135,300
490,300
Liabilities
Creditors (96,000) 394,300
599,300
Capital:
Kyamba 200,000
Onyango 200,000
400,000
Current:
Kyamba 106,300
Onyango 93,000 199,300
599,300
b) Bank

Working capital 173,000 Bal b/d 48,700

Kyamba- capital 48,000 Drawings
Onyango – capital 68,000 Kyamba 85,000
Increase 50,000 Onyango 10,000
_______ Bal c/d 135,300
339,000 339,000

Workings:

Non Current Assets:

Bal b/f 465,000
Transfer 260,000
Balance 205,000

Stock:
Bal b/f 294,000
Transfer (166,000)
Increase 100,000
228,000

Debtors:
Bal b/f 209,000
Transfer (172,000)
Increase 90,000
127,000
Creditors:
Bal b/f 252,000
Transfer 156,000
96,000
222 Revision Aid

EXAMPLE 7.10
Upp and Downe are in partnership. The following trial balance has been extracted from their books of
account as at 31 March 19 –2 after their trading and profit and loss account has been prepared, but
before any consequent adjustments have been made to the partners’ respective capital accounts.
Dr. Cr.
Capital accounts (as at 1 April 19 – 1): £ £
Upp 60,000
Downe 40,000
Cash 6,600
Creditors 29,250
Debtors 201,000
Downe: goods withdrawn 400
Drawings:
Upp (all at 31 December 19 – 1) 20,000
Downe (all at 30 September 19 – 1) 15,000
Fixed assets: at cost 200,000
Accumulated depreciation 90,000
Accrued interest on Upp’s Loan account 10,000
Loan account: Upp 50,000
Net profit for the year to 31 March 19 – 2) 179,750
Salary: Downe 12,000
Stocks 3,500
Upp: private expenses paid (on 31 March 19 – 2) 500
£459,000 459,000

Additional information
1. The partnership agreement contains the following provisions:
a) Profits and losses are to be shared equally;
b) Current accounts are not to be kept;
c) The partners will be entitled to interest on their capital account balances as at 1 April in each year at a
rate of 15% per annum;
d) The partners will be charged interest on any cash drawings made during the year at a rate of interest
of 10% per annum;
e) Downe is to be allowed a salary of £16,000 per annum;
f) A specific loan made by any partner is to bear interest at a rate of 20% per annum;
g) Upon the retirement of a partner the partnership assets and liabilities ar to be revalued at their
market value as at the date of retirement of the partner.

2. Upp decided to retire at 31 March 19 – 2. In accordance with the partnership agreement, the assets
and liabilities were revalued as follows:
£
Car (to be retained by UPP) 10,000
Remaining fixed assets taken over by the new partnership 50,000
Stocks 5,000
Debtors 180,000
Creditors 35,000
Goodwill 40,000
Legal and other expenses connected with the partnership change 4,750
3. Following Upp’s decision to retire, Downe invited Side to join him in partnership as fro 1 April 19 – 2.
Side agreed to pay £75,000 into the new partnership as at that date as his capital contribution. Profits
Lesson Nine 223

and losses are to be shared in the proportion Downe 75% and side 25%. Goodwill is not to be
retained in the books of the partnership.
4. Upp agreed to leave half of the total amount owing to him on his retirement as a long run term loan
in the new partnership, the other half being paid to him in cash.
5. It may be assumed that all of the transactions relating to the changes in the respective partnerships take
place on 1 April 19 – 2. The legal and other expenses connected with the partnership changes were
due for payment on 30 April 19 – 2.

Required:
Prepare:
a. Upp and Downe’s profit and loss appropriation account for the year to 31 March 19 – 2.
b. Upp, Downe and Side’s respective capital accounts sufficient to reflect all of the above transactions.
and
c. Downe and Side’s balance sheet as at 1 April 19 – 2 immediately after all of the above transactions
have
been settled.
(Detailed working should be submitted with your answer).

SOLUTION
(a)
Upp and Downe
Profit and loss appropriation account for the year ended 31 March 19-2

£ £ £
Net profit b/d 179,750
Add interest on drawings
Upp [3/12 x (10% x 20,000)] 500
Downe [16/12 x (10% x 15,000)] 750 1,250
181,000
Less:
Interest on capital 9,000
Upp [15% x 60,000] 6,000 (15,000)
Downe [15% x 40,000 166,000
Less: Salary – Downe (16,000)
Balance of profits shared in PSR 150,000
Capital – Upp (1/2) 75,000
- Downe (1/2) 75,000 150,000
_____-
224 Revision Aid

(b)

Capital Accounts
Upp Downe Upp Downe
£ £ £ £
Appropriation Balances b/d 60,000 40,000
- interest on drawings 500 750 Loan interest 10,000
Salary 12,000 Appropriation
Drawings 20,000 15,000 -salary 16,000
Private expenses/goods 500 400 -interest on capital 9,000 6,000
Car 10,000 -residual profit 75,000 75,000
Revaluation (deficit) (W1) 20,000 20,000
[see workings after (c)]
Loan (balancing figure) 103,000
Balance c/d _____- 88,850 ______ ______
154,000 137,000 154,000 137,000

Side Downe Side Downe

£ £ £ £
Goodwill written back (W2) 10,000 30,000 Balance b/d - 88,850
Balances c/d 65,000 58,850 Cash 75,000 ____-
75,000 88,850 75,000 88,850

(c)
Balance Sheet as at 1 April 19-2
£ £
Non current assets 50,000
Current assets
Stocks 5,000
Debtors 180,000
Cash (W3) __5,100
190,100
Current liabilities
Creditors [35,000 + 4,750] 39,750
Working capital 150,350
Net assets employed 200,350
Financed by
Capital
Downe 58,850
Side 65,000
123,850
Loan
Upp (W4) _76,500
200,350
Lesson Nine 225

Workings

W1
Revaluation
£ £
Debtors 201,000 Creditors 29,250
Fixed assets (cost) 200,000 Provision for depreciation 90,000
Stocks 3,500 Capital – Upp (car) 10,000
Legal etc expenses 4,750 Fixed assets 50,000
Creditors 35,000 Stocks 5,000
Debtors 180,000
Goodwill 40,000
______ Balance c/d (deficit) 40,000
444,250 444,250

Balance b/d 40,000 Capital

-Downe (1/2) 20,000
_____ -Upp (1/2) 20,000
40,000 40,000

W2
Goodwill
£ £
Revaluation 40,000 Capital
-Downe (75%) 30,000
_____ -Side (25%) 10,000
40,000 40,000

W3
Cash
£ £
Balance b/d 6,600 Loan
Capital -Upp [1/2 x 153,000] 76,500
-Side 75,000 Balance c/d 5,100
81,600 81,600
Bal b/d 5,100

W4
Loan - Upp
£ £
Cash 76,500 Balance b/d 50,000
Balance c/d 76,500 Capital
-Upp 103,000
153,000 153,000
Balance b/d 76,500
226 Revision Aid

LESSON EIGHT

COMPANY ACCOUNTS

Introduction:
COMPANY ACCOUNTS:
Limited companies come into existence because of the growth in size of business and the need to have many
investors in the business.
Partnerships were not suitable for such businesses because the membership is limited to 20 persons.
Types of companies
There are 2 principle types of companies:
Private companies
These have the words limited at the end of the name. Being private, they cannot invite the members of the
public to invest in their ownership.
Public companies
There much larger in size as compared to private companies. They have the words public limited company at
the end of their name.
They can invite the members of the public to invest in their ownership and the companies may be quoted on
the stock exchange.
Share capital of a company.
The owner’s interest in a limited company consists of share capital. The share capital is divided into shares.
The investor will then pay for and be issued with the shares and therefore, they become owners.
Each share has a flat value called Par value/face value/nominal value. (e.g.) If a company decides to set up a
share capital of Sh. 200,000, it may decide to issue:
200,000 shares of Sh. 1 each per value.
100,000 shares of Sh. 2 each per value.
400,000 shares of Sh. 50 each per value.

There are 2 main types of share capital

Preference share capital
This is made up of preference shares and a preference share carries the right to a final dividend, which is
expressed as a percentage of their par value. E.g. 10% preference shares.
Preference shares do not carry a right to vote and therefore no control in the company.
Ordinary Share capital
These are the most common shares. They carry no right to a fixed dividend but are entitled to residual value
of the business during winding up, and all profits after the claim on all of the preference dividend have been
paid. The more the no. of ordinary share held, the higher the control.
Lesson Nine 227

Share capital may also have the following meaning:

Authorized share capital
Also called, registered or nominal capital. Is the total of the share capital which the company is allowed to
issue to shareholders. A company cannot issue more shares than the amount that is authorized.
Issued share capital
This is the total of the share capital actually issued to the shareholders.
Called up share capital
This is the amount the shareholders have been asked to pay where the amount of capital required is less than
the issued share capital.
(e.g.) If a firm issues ordinary shares of £1 each and request the shareholders to pay 60p. Assuming that the
issued 100,000 shares, then the called up share capital will be:
60p  100,000 = £60,000
Uncalled share capital
This is part of the issued share capital for which the company has not requested for payment and therefore
these amounts will be received in the future.
In the above (e.g.) because the firm had not requested for 40p, therefore the uncalled capital is 40p  100,000
= £40,000.
Paid-up share capital
This is the total of the share capital, which has been paid for by the shareholders.

Illustration
A limited has an authorized share capital of 200,000 shares of £1 each out of which only 150,000 share have
been issued, Although the firm requested the shareholders to pay 80p per share, the shareholders were able to
pay 50p per share.

Required:
Determine the:
 Authorized share capital
 Issued share capital
 Called up share capital
 Uncalled up share capital
 Paid up share capital

Authorized share capital

200,000  £ = £200,000

Issued share capital

150,000  £1 = £150,000

Called up share capital

150,000  80p = 120,000

Uncalled up share capital

150,000 20 p = £30,000

Paid up share capital

150,000  50p = £75,000

The principal distinctions between unlimited partnerships and limited companies are:
228 Revision Aid

Unlimited Partnerships Limited Companies

No separate Legal Entity apart Separate legal entity, which is not

from its members affect by changes in its
membership. A company may
contract, sue or be sued in it’s own
name.
Liability of each member for If the company is limited by share,
debts of the firm is unlimited. each shareholder is limited to the
amount he has agreed to pay the
company for share allotted.
Number of partners limited to 20 A limited company must have at
except for professional firms. least 2 members. The maximum
number of shares is restricted to
the company’s authorized share
capital.
Every partner can normally take Rights to management are
part in the management of the delegated to directors who alone
business. He can legally bind the can act on behalf of and bind the
firm by his action. company.
Copy of accounts need not be Copies of accounts must be
filed with the Registrar of registered with the Registrar of
Companies Companies
Although a written Partnership A company is required to have a
deed is desirable it is not memorandum and articles of
mandatory. association which defines powers
and duties of directors.
A partnership is subject to the A company is subject to the
partnership Act which can be Companies Act the provisions of
varied by mutual agreement. which cannot be varied.
The partners contribute the The authorized share capital is
capital by agreement. The fixed by the memorandum of
amount need not be fixed. association. It can be altered by
passing ordinary resolution or by
the court.
A share in a partnership cannot In public companies shares are
be transferable except by the freely transferable. In private
consent of all partners. companies share transfer are
subject to any restrictions imposed
by the articles of association.
A partnership is not obliged to A company is required to keep
keep statutory books of account specialized accounting records and
and an audit is not compulsory. is subject to compulsory audit.

Format Of Final Account

The P & L of a company, is the same as that of a sole trader, but there are additional expenses that are unique
to the company and therefore, they should be included in the P & L A/ C.
(e.g.)
 Director’s fees salaries and other expenses
 Audit fees
 Amortization e.g. goodwill
Lesson Nine 229

 Debenture interest
In addition to the P & L A/C, just like a partnership has an appropriation A/ C which shows the allocation of
the net profit for the period. Therefore, the format will be as shown:
Format for Company Accounts
B Limited
Trading, profit and loss and Appropriation Account for the year ended 31.12
£ £ £
Sales x
Less Returns inwards (x)
x
Less Cost of Sales
Opening Stock x
Purchases x
Add Carriage in x
x
Less purchase returns (x) x
x
Less Closing stock (x) (x)
Gross Profit x
Add incomes x
Discount received x
Profit on disposal (sale of Assets) x
Income from investment (can also be shown below) x
Other incomes e.g. interest received from bank x
x
Less Expenses x
Other expenses x
Directors salaries/fees/---- x
Audit fees x
Debenture Interest x
Amortization of good will (x)
Operating profit for the period x
Add investment income x
Profit before tax x
Taxation: Corporation tax x
Transfer to deferred tax x
Under or over provision x (x)
Profit after tax x
Less: transfer to the general reserve (x)
x
Less: Dividends
Preference dividend: Interim paid x
Final proposed x
x
Ordinary dividend: Interim paid x
Final proposed x (x)
Retained profit for the year x
Retained profit b/f x
Retained profit c/d x
230 Revision Aid

B Limited
Balance sheet as at 31.12………
£ £ £
Non current Assets
Land & Building x (x) x
Plant and Machinery x (x) x
Fixtures, Furniture & Fittings x (x) x
Motor vehicle x (x) x
x x x
Intangible Assets
Goodwill x (x) x
Copyrights, patents x (x) x
x x
(Longterm) Investments (mkt value sh x) x
x
Current Assets
Stock x
Debtors x
Less provision for bad debts (x) x
Prepayments x
(Short term) Investments x
Cash at bank x
Cash in hand x
x
Current liabilities
Bank overdraft x
Creditors x
Accruals x
Interest payable(debenture interest) x
Tax payable x
Dividends payable x (x) x
x
Financed by
Authorized share capital x
100,000 ordinary shares of £1 each x
100,000 preference shares of £1 each x
(x)
Issued and Fully paid x
80,000 ordinary shares of £1 each
50,000 10% preference shares of £1 each x
x
Capital Reserves
Share premium x
Revaluation Reserve x
Capital Redemption Reserve x x
Revenue Reserves
General Reserve x
Profit and loss A/ C x x
x
Deffered tax A/ C x
Non Current Liabilities
10% debenture x
Lesson Nine 231

Other Long term Loans x x

x

Director’s salaries:
Salaries, fees and other expenses in relation to the directors are expenses as far as company accounts are
concerned.
This is different from that of Partnerships & Sole traders which are shown as appropriations – expenses.
Audit fees
All companies are required to prepare the accounts which should be audited and therefore any fees paid in
relation to audit and accountancy is an expense.
Debenture interest
Loans taken up by companies are called debentures. The interest paid on these loans are charged as an
expenses and unpaid amount are shown as current liabilities in the business.
The debenture is classified under non-current liability.
Corporation tax
Companies pay corporation tax on the profirs they earn. This is shown in the accounts because a company is
a separate legal entity unlike for sole traders and partnerships whose tax is shown as drawings.
The tax is listed under those 3 items as shown in the appropriation (under/over provision for previous
period, transfer to deferred tax corporation tax for the year).
The under provision and corporation tax relate to direct liability to the government and therefore is a
deduction from the net profit for the period .
Transfer to deferred tax is to cater for future possible tax liability.

Assume that a firm had estimated that the corporation tax for the year ended 31.12.99 is £150,000. In 2000,
the liability is now agreed at £160,000, which the company pays and at the end of the year 2000, the company
estimates that the tax liability is £140,000.
Prepare a tax A/ C and show the amount to be deducted as tax for the year (ignore deferred tax).

(e.g.) Taxation Account

Cashbook 160,000 Bal b/d 150,000

Bal c/d 140,000 Appropriation 150,000
300,000 300,000

Under provision 10,000 (160 -150)

Corporation tax 140,000

DIVIDENDS
Shareholders are also entitled to a share of profits made by the company and this is because the shareholders
do not make drawings from the company.
A company may pay dividends in 2 stages during the cause of the financial period:
Interim dividends
Is paid part way --- the financial period. (e.g.) after the 6 -----

Final proposed
Is paid after the year-end or after the completion to final accounts.
If a company pays in these 2 stages then the dividend section of the P & L appropriation should disclose
interim paid and final proposed.
232 Revision Aid

CAPITAL RESERVES
Amounts reflected in Capital reserves cannot be paid out or distributed to shareholders. The three types of
capital reserves are:

Share Premium: A share premium arises when accompany issues shares at a price that is more than the par
value. The share Premium may be applied in:

 Paying un issued shares.

 Writing off preliminary expenses.
 Write off discounts on shares.

Example:
A Ltd wishes to raise capital by issuing 100,000 ordinary shares at £1 each (per value) and the issue price
(selling price) is £1.5 each.
The following are the entries to be made in the A/C.
Dr Cashbook (100,000  £1.5) 150,000
Cr Ordinary shares capital (100,000  £1) 100,000
Cr Sahre Premium A/ C (100,000 £0.5) 50,000
Issue of shares at a premium of £0.5

Revaluation Reserve: Any gain made on revaluation of non current Assets especially for Land and
buildings. When company sills it’s property to realize the gain, the amount is transferred to the Profit and
Loss Account.

Capital Redemption Reserve: A reserve created after redemption or purchase of Preference shares without
issuing new shares. The transfer is made from either the share premium or the profit and loss account.

REVENUE RESERVES
This can be distributed and includes the retained profits (P & L Accounts) and the General Reserves.
Transfers are made from the Profits to the General reserves to provide for expansion or purchase of non
current assets. The General Reserves can also be used to issue bonus Shares.
DEBENTURE LOANS
The term debenture is used when a limited company receives money on loan, and certificates called debenture
certificates are issued to the lender.
They are also called loan stock or loan capital. Debenture interest has to be paid whether profits are made or
not. A debenture may either be redeemable of irredeemable. Redeemable is repayable at or by a particular
date and irredeemable is payable when the company is officially terminated.
BONUS SHARES
Shares issued to existing shareholders free of charge. They are paid out from either the share premium,
balance of retained profits of the General Reserves.
A scrip issue is similar to bonus issue only that a scrip issue gives the shareholder the choice of receiving
cash or stock dividends. In a bonus issue the shareholder has no choice but to take up the shares.
Example
A Ltd has 100,000 shares at £1 each to form an ordinary share capital of £100,000 and a balance on the share
premium A/ C of £50,000. It issues some bonus shares to existing shareholders at a rate of 1 share for every
5shares held. This amount is to be financed by the share premium. The entries will be as follows:
Lesson Nine 233

Shares to be issued:
100,000  1 =20,000
5

Dr share premium A/ C [20,000  £1 ] 20,000

Cr ordinary share capital 20,000
A bonus issue of 20,000 shares

Balance sheet (extract)

Ordinary shares of £1 120,000

Capital Reserves
Share premium 30,000

Rights Issue
A right issue is an option on the part of the shareholder given by the company to existing shareholders at a
price lower than the market price.
It involves selling ordinary shares to existing shareholders of the company on a prorata basis. When the rights
are issued the shareholders have 2 options available.
Buy the new shares and exercise their rights
Sell the rights in the market,
Ignore the rights.
A rights issue therefore gives the shareholder the right (but not an obligation) to buy the new shares issued by
the company.

Example:
A Ltd has a share capital of £200,000 trade up of 100,000shares of £2 each. The balance on the share
premium is £60,000. Additional capital is raised by way of a right issue. The term are:
For every 5 shares held in the company, a shareholder can buy 2 shares at a price of £2.5 per share.
Required:
The journal entries to reflect the above transaction assuming that all the shareholders exercise their rights and
the relevant balance sheet extract.

Shares to be issued
100,000  2 =40,000 shares
5
Dr cash book [40,000  £2.5 ] £100,000
Cr Ordinary share capital [40,000  £2 ] £80,000
Cr Share Premium [40,000  £0.5 ] £20,000

Balance sheet (extract)

140,000 Ordinary shares @ £2 280,000
Capital Reserves
Share premium 80,000

The following examples will illustrate the preparation of final Account for companies.

Example 8.1
Just before you launch yourself into the question that follows remember that everything you have learnt
about double entry bookkeeping and the presentation of year end accounts is valid in the context of
companies, subject only to the points we have added in this session.
234 Revision Aid

The following is the trial balance of Transit Ltd at 31 March 19X8.

£ £
Issued share capital (ordinary shares of £1 each) 42,000
Leasehold properties, at cost 75,000
Motor vans, at cost (used for distribution) 2,500
Provision for depreciation on motor vans to 31 March 19X7 1,000
Administration expenses 7,650
Distribution expenses 10,000
Stock, 31 March 19X7 12,000
Purchases 138,750
Sales 206,500
Directors’ remuneration (administrative) 25,000
Rents receivable 3,600
Investments at cost 6,750
Investment income 340
7% Debentures 15,000
Debenture interest 1,050
Bank interest 162
Bank overdraft 730
Debtors and creditors 31,000 24,100
Interim dividend paid 1,260
Profit and loss account, 31 March 19X7 17,852
311,122 311,122

You ascertain the following:

All the motor vans were purchased on 1 April 19X5. Depreciation has been, and is to be, provided at the rate
of 20% per annum on cost from the date of purchase to the date of sale. On 31 March 19X8 one van, which
had cost £900, was sold for £550, as part settlement of the price of £800 of a new van, but no entries with
regard to these transactions were made in the books.
The estimated corporation tax liability for the year to 31 March 19X8 is £12,700.
It is proposed to pay a final dividend of 10% for the year to 31 March 19X8.
Stock at the lower of cost or net realizable value on 31 March 19X8 is £16,700.

Required:

Prepare, without taking into account the relevant statutory provisions:

 A profit and loss account for the year ended 31 March 19X8:
 A balance sheet at that date. (22 marks)
Lesson Nine 235

Solution:
Transit Ltd
Profit and Loss A/ C for the year ended 31.3.19X8
£ £
Gross profit 72,450
Profit on disposal of van 190
Rent Receivable 3,600
76,240
Less: Expenses
Depreciation on motor vans 500
Administration expenses 32,650
Distribution expenses 10,000
Debenture interest 1,050
Bank interest 162 (44,362)
Trading profit for the year 31,878
Add investment income 340
Profit before tax 32,218
Taxation (12,700)
Profit after tax 19,518
Less: Dividends
Interim paid 1,260
Final proposed 4,200 (5,460)
Retained profit for the year 14,058
Retained profit b/f 17,852
Retained profit c/d 31,910
236 Revision Aid

Transit Ltd
Balance sheet as at 31.3.19X8
£ £ £
Non-Current Assets
Leasehold properties 75,000 - 75,000
Motor vans 2,400 (960) 1,440
77,400 960 76,440
Investments 6,750
83,190
Current Assets
Stock 16,700
Debtors 31,000
47,700
Current liabilities
Bank overdraft 980
Creditors 24,100
Tax payable 12,700
Proposed dividends 4,200 (41,980) 5,720
88,910
Financed by:
Authorized issued and fully paid
42000 ordinary share of £1 42,000
Revenue Reserves
Profit and Loss A/ C c/f 31,910
73,910
Non-Current liabilities
7% Debentures 15,000
88,910

Workings
Sales 206,500
Less: Cost of sales
Opening stock 12,000
Purchases 138,750
150,750
Less Closing stock (16,700) (134,050)
Gross profit 72,450

Motor Vehicle – Depreciation

Disposal 540 Bal b/d 1,000
Bal c/d 960 P&L 500
1,500 1,500

Motor vehicle
Bal b/f 2,500 Disposal 900
Disposal 550
Cashbook 250 Bal c/d 2,400
3,300 3,300
Lesson Nine 237

Motor vehicle Disposal

Disposal 900 Motor Vehicle 550
P&L 190 Depreciation 540
1090 1090

Example 8.2
The Following Trial Balance Was Extracted From The Books Of Collins Ltd At 31 December 19X5
£ £
Share capital authorized and issued:

80,000 ordinary shares of £1 each 80,000

Freehold premises at cost 59,000
Motor vans
Balance 1 January 19X5 at cost 15,000
Additions less sale proceeds 650
Provisions for depreciation of motor vans to 31 December
19X4 6,750
Stock in trade 31 December 19X4 13,930
Balance at bank 6,615
Provision for doubtful debts 31 December 19X4 275
Trade debtors and creditors 12,395 11,380
Directors’ remuneration 4,000
Wages and salaries 13,127
Motor and delivery expenses 3,258
Rates 700
Purchases 108,440
Sales 142,770
Legal expenses 644
General expenses 5,846
Profit and loss account: balance at 31 December 19X4 2,430
243,605 243,605

You are given the following information.:

i. Stock in trade, 31 December 19X5, £14,600.

ii. Rates paid in advance, 31 December 19X5, £140.
iii. Debts of £1,075 to be written off and the provision to be increased to £350.
iv. On 1 January 19X5, a motor van which had cost £680, was sold for £125.
v. Depreciation provided for this van up to 31 December 19X4 was £475.
vi. Provide for depreciation of motor vans (including additions) at 20% of cost.
vii. The balance on legal expenses account included £380 in connection with the purchase of one of
the freehold properties.
viii. The directors have decided to recommend a dividend of 5%.

Required:
With particular emphasis on presentation, prepare a trading and profit and loss account for the year 19X5,
and a balance sheet at 31 December 19X5, ignoring taxation. (24 marks)
238 Revision Aid

Solution:
Trading and profit and loss account
for the year ended 31 December 19X5
£ £
Sales 142,770
Opening stock 13,930
Purchases 108,440
122,370
Less: Closing stock 14,600
Cost of goods sold 107,770
35,000
Directors’ remuneration 4,000
Wages and salaries 13,127
Motor and delivery expenses 3,258
Rates (700 - 140) 560
Legal expenses (644 - 380) 264
General expenses 5,846
Bad debts 1,150
Loss on disposal 80
Depreciation 3,019
Net profit 31,304
3,696
Proposed dividend 4,000
(304)
Retained profit brought forward 2,430
Retained profit carried forward 2,126

Balance sheet at 31 December 19X5

£ £ £
Non-Current Assets
Freehold properties 59,380 ---- 59,380
Motor vans 15,095 (9,294) 5,801
74,475 (9,294) 65,181
Current Assets
Stock 14,600
Debtors and prepayments, less provision for
doubtful debts 11,110
Cash at bank 6,615
32,325
Current liabilities
Creditors 11,380
Proposed dividends 4,000
15,380
16,945
82,126

Share capital
Ordinary shares of £1 each 80,000
Profit and loss account 2,126
82,126
Lesson Nine 239

Workings
Bad debts
£ £
Debtors 1,075 Balance b/f 275
Balance c/f 350 Profit and loss account 1,150
1,425 1,425

Motor vans
£ £
Balance b/f 15,000 Disposals 680
Additions 775 Balance c/f 15,095
15,775 15,775

Provision for depreciation

£ £
Disposals 475 Balance b/f 6,750
Balance c/f 9,294 Profit and loss account 3,019
9,769 9,769

Disposals
£ £
Motor vans 680 Provision for depreciation 475
Proceeds 125
Loss on capital 80
680 680

Example 8.3
Owik-Freez p.l.c. is a company which provides refrigerated storage facilities to local farmers.
Services offered include the collection of produce, the use of rapid freezing equipment, storage of the frozen
produce and transport from frozen storage in refrigerated vehicles to any point within the country. Orders for
these services are secured by the company’s sales staff.

The company’s revenue consists of charges for transport and freezing, and of storage rentals. Customers may
hire storage space either on a long-term contract basis at advantageous charges (payable in advance) or on a
casual basis (invoiced monthly).

A considerable amount of electricity from the public supply is used by the company in the freezing and
storage operations. In the event of a sudden failure in this supply, the company is able to generate its own
emergency supplies from standby generators kept for this purpose. An insurance policy has been taken out to
protect the company against the claims which would arise should any of the frozen produce deteriorate as the
result of power or equipment failure.

At the end of the company’s financial year ended 30 September 1982, the assistant accountant extracted the
following balances from the ledgers.
240 Revision Aid

Assets Account £
Land and buildings (at cost) 390,000
Plant (at cost) 271,900
Vehicle (at cost) 82,600
Provision for depreciation (at 1 October 1981):
Land and buildings 39,600
Plant 144,800
Vehicles 27,050
Stock of consumable stores (at 30 September 1982) 23,449
Debtor – for rentals 18,204
for charges 2,332
Bank 30,710
Cash 1,103

Liability Accounts
Trade Creditors 7,390
7% Debentures 2004/2012 80,000
Ordinary Share Capital (see note 7) 200,000
General reserve 25,000
Unappropriated profit (at 1 October 1981) 108,284
Share Premium 15,000

Revenue Accounts
Storage rentals – long term contracts 302,090
Casual 85,063
Freezing charges 112,810
Transport charges 90,107

Expense Accounts
Wages, salaries and related expenses 128,004
Rates 79,112
Electricity 76,860
Transport costs 43,271
Repairs 30,319
Consumable stores 29,800
Postages, stationery, telephones 15,604
Insurance premium 7,800
Debenture interest 5,600
Sundries 9,176

Other Accounts
Suspense (credit balance) 8,650

Notes at 30 September 1982:

At the beginning of the 1981-82 financial year, the company had sold refrigeration plant (which had originally
cost £26,000 and on which £20,800 had been provided as depreciation to date of disposal) for £4,000. The
only accounting entries relative to this disposal which have been made so far, are a debit to Bank and a credit
to Suspense of the amount of the sale proceeds.
In April 1982, the compressor unit in No.7 storage unit failed and as a consequence the contents deteriorated
to such an extent that they had to be disposed of by incineration. Compensation of £1,350 was paid to the
farmer by Owik – Freez by cheque and debited to Suspense.
Lesson Nine 241

The insurance company has admitted liability under the policy but no further ledger entries have as yet been
made.
During the 1981-82 financial year, the company replaced one of its refrigerated vehicles, which has originally
cost £16,400 and on which £13,120 had been provided as depreciation to date of disposal. A trade-in (part
exchange) allowance of £6,000 was granted in respect to this vehicle. A replacement vehicle was acquired at a
list price of £27,000. The entries relating to the disposal of the old vehicle have not yet been made, except
that the trade-in allowance has been debited to Vehicles and credited to Suspense. The balance of the price of
the new vehicle has been paid by cheque and debited to Vehicles account.
It is the company’s policy to provide for depreciation on a straight line basis calculated on the cost of fixed
assets held at the end of each financial year and assuming no residual value. Annual depreciation rates are:
%
Building 2
Plant 10
Vehicles 25

The ‘Buildings’ content of the item Land and Buildings included in asset account balances is £120,000.
Adjustments, not yet posted to the accounts, should be made for the following items:
£
Storage rentals received in advance 25,631
Insurance premium prepaid 600
Wages and Salaried accrued 1,920
Rates prepaid 28,820
Electricity accrued 5,757

Consumable stores include £4131 and Repairs include £9972 relating to vehicles.
The authorized and issued capital of the company consists of 400000 Ordinary Shares of £0.50 per share.
The directors have recommended a dividend for the year of £0.12 per share.

Required:
Prepare, for internal circulation purposes, a Profit and Loss account for Qwik-Freez p.l.c.for the year ended
30 September 1982 and a Balance Sheet at that date. All workings must be shown.
(31 marks)
Open the Suspense account and post the entries needed to eliminate the opening credit balance.
(2 marks)
(33 marks)
Solution:
Qwik-Freez (East Anglia) p.l.c.
Profit and Loss Account for the year ended 30 September 1982
Workings:
242 Revision Aid

£ £
Revenue
Storage rentals – long term (302,090 – 25631) 276,459
casual 85,063
Freezing charges 112,810
Transport charges 90,107
564,439
Less:
Expenses
Wages, Salaries etc. (128,004 + 1,920) 129,924
Rates (79,112 – 28,820) 50,292
Electricity (76,860 – 5,757) 82,617
Transport costs (43,271 + 4,131 + 9,972) 57,374
Repairs (30,319 – 9,972) 20,347
Consumable stores (29,800 – 4,131) 25,669
Postages, stationery, telephones 15,604
Insurance premiums (7,800 - 600) 7,200
1,2 *Depreciation 43,540
Debenture Interest 5,600
Sundries 9,176
447,343
117,096
5 Profit (less loss) on disposal of fixed assets 1,520
Net Profit For The Year 118,616
Retained profit brought forward 108,284
Distributed profit 226,900
Less:
Ordinary dividends proposed 48,000
Retained profit carried forward 178,900

Workings:
Land Buildings Plant Vehicle Total
Fixed Assets: £ £ £ £ £
Balance 1 October 1981 270,000 120,000 271,900 55,600 717,500
(veh 82,600 – (6,000 + 21,000))
Acquisitions (21,000 – 6,000) 27000 27,000
Disposals (26,000) (16,400) (42,400)
Balance 30 September 1982 270,000 120,000 245,900 66,200 702,100

Depreciation
-rate - 2% 10 25
£ £ £ £ £
-current year charge - 2,400 24,590 16,550 43,540
Alternatively the depreciation charge for vehicles (£16,550) can be classified as a transport cost, thereby
increasing that figure to £73,924.
Lesson Nine 243

Provision for Depreciation:

Balance 1 October 1981 - 39,600 144,800 27,050 211,450
Disposals (20,800) (13,120) (33,920)
Current year charge - 2,400 24,590 16,550 43,540
- 42,000 148,590 30,480 221,070
Balance 30 September 1982

£ £ £ £ £
Written down values at 30
September 1982 270,000 78,000 97,310 35,720 481,030

Proceeds from disposals 4,000 6,000 10,000

Less:
Written down values of disposals 5,200 3,280 8,480
(26,000 – 20,800)
(16,400 – 13,120)
Profit/(Loss) on disposals £(1,200) 2,720 1,520

Qwik-Freez (East Anglisa) p.l.c

Balance Sheet as at 30 September 1982
Workings:
244 Revision Aid

Fixed Assets
Land and Buildings
Plant
Vehicles
1,3,4
Current Assets
Stocks
Debtors
- for rentals
- for charges
- for insured losses
Prepaid expenses (600 + 28,820)
Bank
Cash
Less:
Current Liabilities
Creditors
Accrued expenses (1920 + 5757)
Advance receipts
Proposed dividends
Working Capital
Net Assets employed
Financed by:
Share Capital, authorized, issued and fully paid,
400000 Ordinary shares of £0.50 per share
16
Reserves
Share Premium
General Reserve
Profit and Loss account
Shareholders’ funds
Long-term loan
7% Debentures 2004/2012
Cost
£
390,000
245,900
66,200
Depreciation
£
42,000
148,590
30,480
Net
£
348,000
97,310
35,720
702,100
221,070
481,030
Lesson Nine 245

Suspense
£ £
Fixed Asset Disposals:
` Plant 4000 Balance b/d 8650
Vehicle 6000 Debtors (insured loss) 1350
10000 10000
Example 8.4
Mwanga and Sons Ltd is a small manufacturing firm owned by members of the family. The following trial
balance was extracted from the books of the company as at 31 March 1993:

Sh. Sh.
Freehold property, at cost (land Sh. 75,000) 125,000
Plant, at cost 130,000
Depreciation 62,000
Motor vehicle, at cost 53,000
Depreciation – motor vehicle 30,500
Fittings and fixtures, at cost 38,600
Depreciation – fittings and fixtures 11,790
20,000 Ordinary shares of Sh. 10 each authorized, issued and
fully paid 200,000
Share premium 50,000
General reserve 120,000
Interim dividend paid 16,000
Cash at bank and in hand 33,570
Accounts receivable and payable 130,540 57,430
15% Debentures 100,000
Discount received 3,640
Profit and loss account 1 April 1992 103,870
Purchases of raw materials 942,380
Sales of finished goods 1,254,760
Inventories 1 April 1992:
Raw materials 33,060
Work in progress 57,660
Finished goods 107,860
Provision for doubtful debts 6,400
Bad debts 4,890
Rates and insurance 9,430
Wages 108,370
Factory power 22,560
Light and water 16,280
Plant maintenance 10,970
Salaries 90,000
Returns of raw material 3,240
Sales returns 1,360
Advertising 8,580
Transport expenses (Sales department) 24,320
Bank charges 3,040
General expenses 36,160
2,003,630 2,003,630
246 Revision Aid

Additional information:

 Depreciation is to be provided for the year using the reducing balance method and applying rates of
15% on plant, 25% on motor vehicle and 10% on fittings and fixtures.
 Building is to be depreciated at the rate of 4% using the straight-line method. (Assume the whole
building is used for manufacturing purposes).
 Provision for doubtful debts is to be adjusted to a figure equal to 10% of accounts receivable.
 Light and water, insurance and general expenses are to be apportioned in the ratio 4:1 between
factory and administrative overheads.

Sh.
Electricity and wateer accrued was 860
Insurance prepaid was 270
Rates prepaid were 780

Inventories were valued at:

Raw materials 139,630

Work in progress 82,450
Finished goods 124,320

 Debenture interest has not yet been paid.

 The directors require provision for a final dividend which will bring the dividend for the year up to
Sh. 2 per share.

Required:
Prepare in vertical form a Manufacturing, Trading and Profit and Loss Account for the year ended 31 March
1983 and a Balance Sheet as at that date. (25 marks)

MWANGA AND SONS LTD

Manufacturing Account for the year ended 31 March 1993
Raw materials:
Opening stocks 33,060
Purchases 942,380
Less Returns In. (3,240) 939,140
972,140
Less Closing stocks (139,630)
Prime Costs 832,570
Factory Overheads:
Plant depreciation 10,200
Rates and insurance 2,000
Factory power 6,704
Light and water 22,560
Plant maintenance 13,712
General expenses 10,970
28,928 95,074
Opening W.I.P. 927,644
Less: Closing W.I.P. 57,660
Goods manufactured (82,450) (24,790)
902,854
Lesson Nine 247

Trading, Profit And Loss Account For The Year Ended 31 March 1993
Shs Shs
Sales 1,254,760
Less: Closing stocks (1,360)
1,253,400
Opening stock 107,860
Goods manufactured 902,854
1,010,714
Less: Closing stocks (124,320) 886,394
367,006
Discount received 3,640
370,646
Debenture interest 15,000
Provision for bad debts 6,654
Depreciation
- Motor vehicle 5,625
- Fittings and fixtures 2,681
Dividend
- Interim 16,000
- Fianl 24,000 40,000
Retained Profit for the year 49,150
Retained Profit brought forward 103,870
Retained Profit carried forward 153,870
248 Revision Aid

Balance Sheet As At 31 March 1993

Cost Depreciation Net
Fixed Assets £ £ £
Freehold property 125,000 2,000 123,000
Plant 130,000 72,200 57,800
Motor vehicle 53,000 36,125 16,875
Fittings and fixtures 38,600 14,471 24,129
346,600 124,796 221,804

Current Assets
Stocks
- Raw materials 139,630
- work in progress 82,450
- finished goods 124,320 346,400
Debtors, less provisions 117,486
Cash at bank and in hand 33,570
Prepaid expenses 1,050
498,506
Current Liabilities
Creditors 57,430
Accruals 15,860
Dividend proposed 24,000
97,290
Net current assets 401,216
623,020

Financed by:
Authorized, and issued share capital:
20,000 Ordinary shares each Sh. 10 200,000
Reserves:
Share Premium 50,000
General Reserve 120,000
Profit and Loss account 153,000 323,020
523,020

15% debentures 100,000

623,020

Workings:

Rate And Insurance

B/d 9,430 Prepaid 270
Prepaid 780
Profit and Loss Account 1,676
Factory 6,704
9,430 9,430