BOOKS OF ORIGINAL ENTRY

INTRODUCTION AND DEFINITION

A business must ensure that its accounting system includes all detail of every single transaction.
It is however, very unlikely, even in small organisations to record all transactions a single
journal.

Organisation normally maintain numerous journals to record similar types of transactions

separately/.

Books of original entry are also referred to as books of prime entry, day books or journals.

JOURNALS

The word journal is derived from the French word “ journal” so journals are also known as
known as day books due to the fact that transactions are recoreded on daily basis.

Whenever a transaction takes place, it is first posted to journals to from source documents such
as receipts, invoices, bank deposit slips, payment vouchers etc, the process of posting
transactions from source documents to journals is referred to as journalising.

COMPONENTS OF BOOKS OF ORIGINAL ENTRY OR BOOKS OF PRIME

ENTRY/DAY BOOKS

Entries in the books of original consist of

1. Date of the transaction

2. Details relating transactions
3. References to the relevant ledger account i.e folio
4. Monetary amount of the transaction
5. References to original source documents eg invoice number

TYPES OF JOURNALS

1. GENERAL JOURNAL

This refers to a type of a journal which any type of a transaction is recorded. General journal is
also referred as journal proper. Where special journals are kept, the its only transactions that are
not recorded in these journals that are posted in the general journal. It has columns that show
debit and credit thus confirming to the rule of double entry.

Page 1 of 72
FORMAT OF GENERAL JOURNAL

Date Details(account Folio/ LP Debit Credit

heads and
narrations)

EXAMPLES OF POSTING TRANSACTIONS IN JOURNALS

ICBM for paid rent due for august 2019 cash worth K 100,000

DATE ACCOUNT FOLIO DEBIT CREDIT

NAME

1/09/2019 K K

Rent expense 100,000

Cash 100,000

To record rent expenses for the month of August 2019 paid by cash

VCT made purchases worth K5,000,000 on 5/9/2019 on credit to sale to customers from MK
enterprises.

Date Account name Folio debit Credit

5/9/2019 Inventory 5,000,000

Accounts payable 5,000,000

(MK Enterprises)

To record purchases from MK enterprises worth K 5,000,000 on credit on 5th September 2019

Page 2 of 72
Exercises to preparation of the general journal

The following are the transactions of XYZ co ltd for the month of August 2019. You are required
to enter them into general journal.

Aug. 1 started business with cash of K 20,000,000

Aug. 2 purchased land for business K 2,000,000, paying cash

Aug. 4 purchased office equipment on credit from AB Enterprise on credit at K 2,000,000

Aug. 5 obtained bank loan of K 8,000,000 deposing it into bank account

Aug. 15 made part payment of K 15,000,000 to AB enterprise, the equipment suppliers by

cheque

Aug. 17 bought motor vehicle from Toyota Motors ltd at a cost of K 15,000,000. A cash
payment of K 10,000,000 was made, paid K 3,000,000 by cheque and promised to pay balance
later of K 2,000,000

Aug.20 sold part of the land that was not being used for K 500,000 for cash.

Aug. 25 paid the balance of K2,000,000 by cheque due to Toyota Motors ltd for the vehicle

Aug. 30 K 800,000 business cash was used the owner to school fees of his son

Solution

Date Accounts title explanation Folio Dr. (K) Cr. ( K)

LP

Aug 1 2019 Cash a/c 01 20,000,000

Capital a/c 02 20,000,000

To record cash for starting a

business

Aug 2 Land a/c 03 3,000,000

Page 3 of 72
 Cash a/c 01 3,000,000

Aug 4 Office equipment a/c 04 2,000,000

AB enterprise 05 2,000,000

Being purchase of
equipment on credit from
AB Enterprise

Aug 5 Bank a/c 06 8,000,0000

Loan 07 8,000,000

Being acquisition of bank

loan

Aug 15 AB enterprises a/c 05 1,500,000

Bank 06 1,500,000

Being part payment to AB

enterprises by cheque

Aug 17 Motor vehicle a/ 08 1,500,000

Cash a/c 01 10,000,000

Bank alc 06 3,000,000

Toyota Motors 09 2,000,000

Being purchase of motors

vehicle from, making by
cash and bank and balance
outstanding

Aug 25 Toyota motors a/c 09 2,000,000

Bank a/c 06 2,000,000

Aug 30 Drawings 10 800,000

Cash a/c 01 8,000,000

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 Record of cash used for
private purposes

Aug 30 Drawings a/c 10 800,000

Cash a/c 01 800,000

Record of cash used for

private purposes

NB: Refer to the attached for recording of purchases, sales, returns and expenses.

2. SPECIAL JOURNALS

Some organisations have huge volume of transactions that necessitate to keep other types of
journals. So specialised journals are journals in which transactions not posted in the general
journal are posted. They include the following;

a) Sales journal/ sales day book

These are journals in which record sales invoices issued by the firm when selling goods on credit
are posted

Format

Date Account Invoice no Folio Amount

debited(debtors
accounts)

Example

Mk company sold goods on credit to the following people

1 Jan 2019 Mukuye Abdulrahman for K4,500,000 Invoice no102

4 Jan Mukasa Sarah for K 10,000,000 ‘’ 103

6 Jan Bob Musamali K 9,000,000 ‘’ 104

7 jan Kasilima Jane for K 5,000,000 ‘’ 105

Page 5 of 72
Required

Record above transactions into MK Co sales journal

Solution

Date Account Invoice Folio Amount(K)

01/01/2023 Mukuye Abdulrahman 101 001 4,500,000

4/01/2023 Mukasa Sarah 103 002 10,000,000

06/01/2023 Bob Musamali 104 0003 9,000,000

07/01/2023 Kasilima Jane 105 004 5,000,000

Total 28,500,000

Total posted to sales A/c and debtors A/c in the general ledger

b) Purchases journal/purchases day book

Journals in which record of purchases invoices received by the business from suppliers, when
buying goods on credit are made

Format

Date Account Invoice no folio Amount

credited( credit
ors/ suppliers
account)

Example

MK co ltd purchased goods on credit as detailed below

1/9/2023 bought goods on credit from Wambewo Ronald for K 20,000,000 invoice no 101

02/09/2023 bought goods from Maryam Kesa on credit for K 5,000,000 invoice no 200

Page 6 of 72
03/09/2023 bought goods from Kamu Mira on credit K 4,000,000 invoice number 105

10/09/2023 bought goods from Joice Mika on credit K15,000,000 invoice no 455

Purchase journal/ purchases daybook

Date Account Invoice no Folio Amount

( creditor’s/
supplier a/c

01/01/2023 Wambewo Rolnald 101 001 20,000,000

04/01/2023 Maryam Sarah 200 002 5,000,000

06/01/2023 Kamu Mira 105 003 4,000,000

07/01/2023 Joyce Mika 455 004 15,000,000

Total 44,000,000

Total posted to purchases a/c and creditor a/c in the general ledger

c) Return inwards journal/ sales returns journal/ sales returns daybook

A sales returns journal is a book of prime entry in which the seller records all sales that have
been returned by customers. Below is a format of a sales return journal

Sales returns journal

Date Credit note no Customer and Folio Amount ( K)

goods

When a debit note is received along with the goods returned from the buyer, it is a claim on the
seller. If this claim this claim is accepted, the seller then issues a credit note in duplicate. The top
copy is sent to the buyer who has returned the goods/. The second copy is given to the accounts
department where it is recorded in the sals return journal.

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The credit notes are credited immediately to the respective customer accounts in the receivables
ledger.

At the end of the period, the total amount for the sales returns is posted once as follows;

Dr sales returns account

Cr receivables ledger account

Example

Record the following goods returned to Victoria ltd by te various customers in the accounting
records of the company

Date Customer credit note no Amount Reason

2.9.23 Mukasa J 789 30,000 Expired items

06.09.23 Thoko P 790 60,000 Damaged items

25.09.23 Opio T 791 40,000 Wrong size

Date Credit note Customer & Folio Amount ( K)

goods

Sept 2023

2 789 Mukasa J 1 30,000

6 790 Thoko P 2 60,000

25 791 Opio T 3 40,000

30 130,000

d) Return outwards journal

To record purchase returns to suppliers

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A purchase returns journal is a record is a record of original entry where goods returned to
supplier are recorded. Below is an example of a purchase returns journal

Purchase returns journal

Date Debit note no Supplier & Folio Amount ( K)

goods

Goods once purchased on credit may subsequently be returned to the seller for certain reasons
like the purchaser finds that the goods are unsatisfactory for some reasons, eg. Wrong colour,
wrong size, not according to the sample, not up to specification, not properly finished or
damaged in transit.

When returning goods goods, the buyer sends a debit note to the seller that contains the quantity
of goods returned and reasons for returning the goods. The buyer prepares two copies, one copy
is the retained and the other copy is sent to the seller together with goods. Using the copy
retained, the buyer records the transaction in the purchases returns journal

The debit notes are debited immediately to the respective supplier accounts in the payables
ledger

At the end of the period, the total amount for the purchase returns is posted once as follows

Dr Payables ledger account

Cr Purchase returns account

Example

Record the following goods returned by the Victoria ltd to the various suppliers in the purchase
returns journal and the ledger accounts of the company

Date Supplier debit note cost of goods( K) Reasons

15.9.2023 Mugisa G 301 100,000 Damaged in transit

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18.9.23 Tana B 302 50,000 Not on order

26.9.23 Obama H 303 200,000 wrong size

Date Debit note no Supplier & Folio Amount ( K)

goods

Sept 2023

15 301 Mugisa G 4 100,000

18 302 Tana B 5 50,000

26 303 Obama H 6 200,000

30 Bal 350,000

Advantages of a journal

A journal ;

e) Makes it easy for managers and auditors to understand the transactions later
f) Minimise posting errors by showing accounts to be debited and credited
g) Shows details of transactions that checks fraud by employees
However, a journal does not also show balances for the various accounts and therefore all
transactions in the journal have to be posted to various accounts in the general ledger.

Page 10 of 72
ILLUSTRATION

Hariet Banda, a sole trader made the following transactions in January 2022

January

1 Credit purchases from Frimpong $ 4,000, Animah $ 3,000 Honesty $ 2,500; in each case
a trade discount of 10% allowed

5 Credit sales to Bonsu $ 5,000 Bamfo $ 3,000, Opoku $ 2,000 in each case a trade
discount of 15% allowed.

10 Credit purchase from Agweve $ 4,000, Salmatha $ 2,500, Obeng K 2,700

15 Credit sales to Cobblah $ 6,000, Ampofol $ 3,500, Mensah K 4,500

20 Harriet returns goods to Animah $ 200, Honesty $ 300, Agweve K 500

25 Goods returned to Harriet from Bonsu $ 1,000, Mensa $ 400, Cobbla $ 800

28 credit sales to Bamfo $ 6,600, subject to 15% trade discount, Ampofol $ 1,800

30 credit purchases from F rimpong $ 3,000, Agweve $ 2,200

Required

i) Open the relevant subsidiaries and

ii) Post the items in the relevant ledgers

Solution

Date Particulars L/F Details Amount ( K)

f) The cashbook

The cashbook is a subsidiary book of accounts that is used to record the cash transactions

It is the only book that follows the double entry system

It is basically a book that records cash receipts and payments

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A cashbook, therefore, is treated as both a book of primary entry as well as a ledger because it
deal with a particular account ie cash

Types of Cashbook

1. Single column cashbook

2. Double column cashbook
3. Three column cashbook
4. Petty cash

1. Single column cashbook

This has one column for each side and is used by the small firms that have no bank accounts

Below is a format

Date Receipt Details Folio Amount Date Voucher Details Folio Amount
no no

Example

ICBM maintains a single column cashbook for its canteen. Below were the transactions during
the month of august 2023

1/8/23 opening balance K 1,000,000

5/8 /23 bought newspapers worth K 50,000 by cash

7/8/23 received cash for advertsing services worth K 100,000

10/8/23 paid electricity bills for July 2020 that were presented on 10/8/23 worth K 150,000

15/8/23 paid salaries for the month of july 2022 on 2/8/22 worth K 600,000

Required

Enter the above transactions in the cashbook of ICBM Canteen

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 2. Two column cashbook

This has cash and bank columns on each side. It is the commonest cashbook as many businesses
maintains bank accounts. Cash transactions are recorded in the cash column and bank
transactions in the bank columns. Below is the format of two column cashbook

Date Receipt no Detail Folio Cash Ban Date Cheque Details Folio Cas Bank
s k no h

Example

Enter the following transactions in a double column – cashbook

January 2022 K

1. Cash balance b/f 10,900,000

2. Paid cash into the bank 8,000,000
3. Cash sales 14,000,000
4. Purchased goods, paid by cheque 3,600,000
5. Goods sold, received cheque 400,000
1. Cash sales 2,400,000
2. Paid cleaner in cash 200,000
3. Paid for petrol by cash 300,000
4. Cash sales 1,800,000
5. Paid cash into the bank 4,000,000
6. Purchased goods paid cheque 3,000,000
15 Received cheque for goods from Y Peter 2,600,000
16 Paid wages in cash 600,000

Page 13 of 72
 17 Paid rent by cheque 1,000,000
18 Cash received from Rajab K 22,000,000
25. Paid cash into the bank 4,000,000
27. Cash received from Y. Mary 1,600,000

THREE COLUMN CASHBOOK

This type of cashbook has a third column for discount allowed on the left side and discount
received on the right side

The cashbook is maintained as follows;

 Cash receipts are debited in the cashbook and credited to the relevant ledger A/c
 The individual discount allowed are credited to the receivables accounts
 Cash payments are credited in the cashbook and debited to the payables accounts
 The double entry for contra entries is completely in the cashbook
 Usually at the end of the month, only the cash and bank columns are balanced
 The cash balance carried forward at the end of the period ( this is cash in hand ) is
always on the right side
 The bank balance carried forward may be on either side
 The balance carried forward on the left side is bank overdraft ie account is
overdrawn. The customer pays interest on the overdraft to the bank
 The total for discounts allowed in the cashbook is posted to the discount allowed
account using the following journal entry
Dr discount Allowed A/c
Cr Receivables control account
 The total for discounts received in the cashbook is posted to the discount received
account using the following journal entry
Dr Payables Control A/c
Discount received account

Example

The following information relates to Eye Late Ltd for the month of January

January

Page 14 of 72
2. Started business with K 60,000 in the bank

3. Withdrew cash from bank for business use K 40,000,000

4. The following paid Eye Late ltd by cheque; Godwin K 18,000,000, Sulaiman K8,500,000
and Muha K 5,000,000.All cases subject to10 % discount

7 Paid the following by cheque, deducting 15% cash discount in all cases; Boadu K9,500,000,
Lira K 7,700,000 and Modey K 6,000,000

11 Paid Daniel his account of K 10,500,000 by cash less K 1,500,000 cash discount

You are required to prepare a three column cashbook

ASSIGNMENT 1

Record the following transactions in three column cash book of Mr. Yaqoob at the end of
September 2012.

1st Started the business with a person saving of K2,500,0000 on the business bank account

2nd Bought goods for K 380,000 by cheque

3rd Bought goods for K 500,000 from Matata on credit

4th Sold goods K 260,000 to Abigaba on credit

5th Cashed a cheque for K 200,000 for office use

6th Bought goods for K 740,000 from Yuda on credit

7th Sold goods for K 370,000 to Kalema on credit

8th Paid K 30,000 cash for water used the by the business.

10th Sold goods for K 250,000 cash

11th Paid Matata the amount due to him 5 % discount by cheque

12th Received a cheque from Abigaba for the amount due less 4 % discount

13th Paid K 25,000 cash for the business electricity bill

17th Paid the amount owed to Yuda by cheque after deducting a discount of 3%

Page 15 of 72
20th Received the amount owed by Kalema in cash, allowed a discount of 2.5%

30th Paid K 100,000 cash for wages

30th Banked K 500,000 cash

ASSIGNMENT 2

From the following information, prepare a three column cashbook for KAKA for the month of
August

1. Balances brought down from August

Cash balance K290,000

Bank balance K 6,540,000

Debtors accounts K
Kandulu 1,200,000
Chabwera 2,800,000
Shakira 400,000

Creditors Accounts K
Bule 600,000
Aha 4,400,000
Longwe 1,000,000
2. Kandulu pays us by cheque having deducted 2.5% cash discount
8 We pay Longwe his account by cheque, deducting 5% cash discount

11 we withdrew K 1,000 cash from the bank for business use

1. Chabwera pays us his account by cheque, deducting 2.5% discount

25 we paid office expenses in cash K 920,000

28 Shakira pays us in cash after having deducted 5% cash discount

29 we pay Bule by cheque less 2.5% cash discount

30. We pay Aha by cheque less 2.5% cash discount

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PETTY CASHBOOK

Besides the main cashbook, many companies also maintain a cashbook known as petty cashbook
to record small day to day expenditures of the business. These expenses may include transport,
office tea, Newspapers, fuel, hired labour etc

The person responsible for spending petty cash and recording it in a petty cashbook is required is
referred to as petty cashier

ADVANTAGES OF MAINTAINING PETTY CASHBOOK

1. Ensure that the main cashbook is not congested with numerous small payments
2. It facilitates the segregation of duties between various cashiers

PETTY CASH SYSTEMS

The cash allocated for petty cash expenses for a specified period is entered on the debit side of
the petty cashbook and entered on the credit side of the main cashbook. Cash is given to the petty
cashier either on the ordinary system or imprest system

1. ORDINARY SYSTEM

Under this system, a lump sum of cash is given to the petty cashier. When all the amount is
spent, the petty cashier submits the details of petty expenditures recorded in the petty cash book
to the concerned cashier. When all the amount is spent, the petty cashier submits the details of
petty expenditures recorded in the petty cashbook to the concerned officer and then he or she is
given another lump of some money

2. IMPREST SYSTEM

Under this system, a fixed amount of money known as float is given to the petty cashier to meet
petty expenditures for an agreed period which may be a week or a month or as deemed
necessary. At the end of the period, the petty cashier submits details of all expenditures incurred
by him to meet petty cash expenditures

Page 17 of 72
The total cash spent by the petty cashier is reimbursed to him and the total cash available to
spend at the start of the next period becomes equal to the original sum ie float. At any time, the
total of petty cash balance and all expenditures incurred is equal to the agreed float.

ADVANTAGES OF IMPREST SYSTEM

a. Reduced chance of misuse of cash balance because the float can be immediately reduced
if it is found to be more than adequate for the agreed period.
b. The chief cashier periodically checks the record of petty cash. If an error is committed
by the petty cashier, it can be detected and rectified
c. It saves the time of chief cashier who is busy with responsibilities of handling large and
payments by cash and bank.
d. There is limited chances of misappropriation of cash since the imprest is usually small.

LIMITATIONS OF IMPREST SYSTEM

There is the possibility of abusing the system by the cashier by using the money and refunding
later

FORMAT OF PETTY CASHBOOK

DR CR

Receipt Date Details VN Total Exp 1 Exp 2 Exp 3 Exp 4

Company petty cash Book

Example

The following were the petty cash transactions for the month of September 2022

Page 18 of 72
1st received a petty cash cheque for K 500,000

5th Paid K 100,000 for transport

10th Paid K 100,000 for Photocopying

25th Paid K200,000 for transport

27 Paid K 80,000 for transport

1st Oct received petty cash reimbursement by cheque

You are required to record the above transactions in the petty cash book for September 2022,
balance it and post the transactions to the relevant ledger accounts

SUMMARY OF THE SPECIAL JOURNALS

SPECIAL JOURNAL PURPOSE SOURCE DOCUMENTS

Purchases journal Credit purchases Purchases invoices

Sales journal Credit sales Sales invoices

Sales Return Journal Sales returns Credit notes

Cashbook Cash sale and payment Receipts, cheque, Counter

folios

Petty cashbook Petty cash payment Petty cash vouchers

Purchases returns journal Purchases returns Debit note

ADVANTAGES OF MAINTAINING BOOKS OF ORIGINAL ENTRY

a. Future references to the transactions become easy as transactions of similar nature are
recorded in one journal

Page 19 of 72
 b. Mistakes in the ledger accounts can be easily detected
c. Chronological recording of the transactions reduces the chances of frauds
d. Journals show all the transactions in detail so it is not necessary to rewrite them in detail,
so leger accounts may be kept brief and neat and organised
e. If records are lost, then the ledger and the books of
f. Handling of each type of a journal by different member of staff prevents any person
having exclusive control on the accounting original entry may act as a backup for each
other system
g. In order to ensure no documents go unrecorded, source documents are normally reprinted
with consecutive numbers and are noted in the day books while recording transactions

LEDGERS

This the group of accounts or place of storage of accounts

Transactions are posted from the journal to the ledgers

TYPES OF LEDGERS

1. SALES LEDGER/ ACCOUNTS RECEIVABLE LEDGER

This record customer individual accounts

2. PURCHASES LEDGER/ ACCOUNTS PAYABLE

This contains supplier individual accounts

3. GENERAL LEDGER

This contains the remaining double entry accounts for instance

 Expenses
 Income
 Fixed assets
 Liabilities
 Capital/ equity

FORMAT OF THE LEDGER

A ledger account can be written in two ways

Format 1, T – Accounts Format

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Organisation with manual accounting systems use T account format of the ledger account. This
necessitates balancing off or closing the ledger accounts at the end of the period because it has
no running balance. This format is shown below.

Format 2, with a running balance

Most computerised accounting systems use this format. Whenever a debit or a credit is entered,
the balance automatically adjusts. This format does not necessitate balancing off or closing the
ledger account

This format is shown below

Date Explanation/ Folio Debit Credit Balance

Narrative

EXAMPLES OF POSTING ENTRY TO THE LEDGERS

As mentioned above, entries are posted from the journals to the ledgers

EXAMPLES OF HOW TRANSACTIONS ARE POSTED FROM THE JOURNAL TO

THE LEGER

XYZ company sold goods on credit on 01/01/23 to the following customers

A K 1,000,000

B K 1,650,000

C K 1,350,0000

Solution

Sales journal

Date Description Folio Amount

Page 21 of 72
1/01/22 Customer A 1,00,000

Customer B 1,650,000

Customer C 1,350,000

Customer A

01/01/22 sales 1,000,000

Customer B

01/01/22 Sales 1,650,000

Customer C

1/ 01/ 22 Sales 1,650,00

Sales Account

Various customers 400,000

Example ii

The general Journal

Page 22 of 72
 Date Accounts title/ LP DR DR

Explanation

Oct Cash a/c 01 20,000,000

Capital a/c 02 20,000,000

Illustration of posting

Cash A/C

Capital 20,000,000

Capital A/c

Cash 20,000,000

Lets now complete all the transactions recorded in XYX Co ltd general journal into its ledger,
then closing or balancing off the ledger accounts and be able to extract a trial balance

TRIAL BALANCE

Page 23 of 72
This is the list of account titles and their balances from the ledger on a specific date shown on
debit and credit columns. The general rule of the trial balance states that the debit totals and
credit totals should be equal.

Please take note that, balance brought forward from the account is the one appears in the trial
balance. However, if balance carried down in the account appears on the debit side, then the
balance will appear on the credit column of the trial balance and vice versa

Example 1

Enter the following transactions of Chiyambaka shop in the accounts, balance them off and then
extract a trial balance as at 31st march 2023

March

1. Started business with K 80,000 in the bank

2. Bought goods on credit from the following persons Hawa K7,600, Hannah K2,700,
Bangula K 5,600
5. Cash sales K 8,700
6. Paid wages in cash K 1,400
7. Sold goods on credit to Ellina K3,500, Lane K 4,200, Charity K7,000

9. Bought goods for cash K 4,600

10. Bought goods on credit from Hannah K 5,700, Bangula K 9,800

12. Paid wages in cash K 1,400

13. Sold goods on credit to Lane K 3,200, charity K 2,300

15. Bought shop fixtures on credit from Kaka limited K 5,000

17. Paid Hannah by cheque K 8,400

18. We returned goods to Bangula K 2,000

21. Paid Kaka limited by cheque K 5,000

24. Charity paid us her account by cheque K 9,500

27 .We returned goods to Hawa K 2,400

30. Kamwendo lent us K 6,000 by cash

31. Bought a van by paying cheque K 40,000

Page 24 of 72
Example 2

The following are the transactions of XYZ co ltd for the month of August 2019. You are required
to prepare enter them into their ledger accounts, balance them off and hence prepare trial balance

Aug. 1 started business with cash of K 20,000,000

Aug. 2 purchased land for business K 2,000,000, paying cash

Aug. 4 purchased office equipment on credit from AB Enterprise on credit at K 2,000,000

Aug. 5 obtained bank loan of K 8,000,000 deposing it into bank account

Aug. 15 made part payment of K 15,000,000 to AB enterprise, the equipment suppliers by

cheque

Aug. 17 bought motor vehicle from Toyota Motors ltd at a cost of K 15,000,000. A cash
payment of K 10,000,000 was made, paid K 3,000,000 by cheque and promised to pay balance
later of K 2,000,000

Aug.20 sold part of the land that was not being used for K 500,000 for cash.

Aug. 25 paid the balance of K2,000,000 by cheque due to Toyota Motors ltd for the vehicle

Aug. 30 K 800,000 business cash was used the owner to school fees of his son

After the ledger accounts, the trial balance is going to look as follows

XYZ COMPANY LIMITED

TRIAL BALANCE AS AT 31 OCTOBER 2022

Accounts title Debit Credit

Cash 6,700,000

Bank 1,500,000

Land 2,500,000

Office equipment 2,000,000

Motor vehicle 800,000

Drawings 20,000,000

Page 25 of 72
Capital 500,000

Equipment S ltd 8,000,000

Loan

Total 28,500,000 28,500,000

Exercise

The following is a list of balances as they appear in the general ledger of Global Furniture
ltd as at 30th June 2022

ACCOUNT BALANCES ( K)

Capital 32,890,000

Drawings 5,200,000

Loan from Julius 10,000,000

Cash 1,470,000

Bank overdraft 1,720,000

Sales revenue 45,600,000

Purchases 29,300,000

Return inwards 3,700,000

Page 26 of 72
Return outwards 2,700,000

Carriage outwards 820,000

Trade receivables 7,390,000

Trade payables 4,620,000

Land 10,000,000

Buildings 16,000,000

Plant and machinery 13,500,000

Listed Investments 4,800,000

Interest paid 1,200,000

Interest received 450,000

Rent received 630,000

Salaries 3,720,000

Repairs 810,000

Plant hire charges 360,000

Bank charges 240,000

Page 27 of 72
Required

Prepare a trial balance of global furniture ltd

EERORS NOT AFFECTING AGREEMENT TRIAL BALANCE

Under the double entry system, we learnt that every double entry needs a corresponding credit
entry and vice versa. The balances extracted from the ledgers are shown in the trial balance.
However, the general rule of a trial balance states that debit column totals and credit column
totals should be equal.

TYPES OF ERRORS NOT AFFECTING THE AGREEMENT OFTRIAL BALANCE

AND ITS CORRECTION

The corrections are made to double entry by

a. Preparing corrections by means of journal entries, and then

b. Post the journal entries to appropriate ledgers

1. Error of Omission

It occurs where a transaction is completely omitted from the books eg. If we sold goods to
Shamim, but did not enter in either the sales account or Shamim’s account, the trial balance
would still balance.

Example and its correction

A sale of K 12,000 worth of goods to Tamandan has been completely omitted from the books

The journal

Dr (K) Cr( K)

Tamandan 12,000

Sales 12,0000

Page 28 of 72
Being the correction of sales omission

2. Error of Commission

It occurs when the correct amount is entered but in the wrong person’s account eg where
purchase of K 19,000 to Chikond is entered in Chizondi’s account.

Example and its correction

A purchase of K 6400 worth of goods from Chikondi has been entered in error in Chizondi’s
account.

The journal

Dr Cr

chizondi 6,400

chikondi 6,400

Being the correction of purchases entered in entered in the wrong person’s account

3. Error of principle

These are errors due to not following basic principles/ it occurs where an item is entered in the
wrong class of account ie. Errors due to wrong classification between capital and revenue items
eg assets and expenses

Also

If a purchase of a fixed asset, such as van, is debited to an expense account, such as motor
expense expenses account.

Example 1

Painting of a building costing amount of K 500,000 and paid by bank debited to buildings
account

The general journal

Page 29 of 72
 Dr Cr

Building maintenance expense 500,000

Building account 500,000

Correction of amounts paid for building maintenance wrongly posted to building account in the
accounts.

Example 2

The purchase of a machine for K23,000 is debited to purchase account instead of being debited
to machinery account.

The journal

Dr Cr

Machinery 23,000

Purchases 23,000

4. Compensation errors

These occur when the effect of one error is offset by an error in another account leaving no effect
on the trial balance.

Or this is where errors cancel out each other Eg if sales account was over casted by K 3,000 and
wages account was also overstated by K 3,000, then these are errors would cancel out in the trial
balance.

Example 1

Utility expenses of K 500,000 wrongly posted as K 550,000 while building repairs and
maintenance of K 500,000 posted as K 450,000

General Journal

Dr Cr

Building maint. Expense 50,000

Page 30 of 72
 Utility expense 50,000

Correction of an under cast on building maintenance and an overcast of utility expense by

K50,000

Example 2.

In the cashbook, the amount of cash sales transferred to the sales account was overstated by K
600 and the amount transferred to wages account was also overstated by K 600

The journal

Dr Cr

Sales 600

Wages 600

Being the correction of sales and wages account overstated

5. Error of original entry

It occurs where the original figure is incorrect, yet double entry is done using the incorrect figure
eg a sale totalling K 20,000 has been entered in the accounts as K 16,000

Example

A sale of K 9,800 TO Sylivia Makalani was entered in the books as K 8,800

The journal

Dr Cr

Sylivia Makalani 1,000

Sales 1,000

Being the correction of sales undercasted

6. Error of complete reversal

Page 31 of 72
This occurs when an entry is posted on wrong side of accounts.ie a debit entry is credited or
credit entry is debited

Or

This is where the correct account are used but each item is shown on the wrong side of the
account. Eg paid Chisomo by cheque K12,000. Instead of debiting Chisomo a/c and crediting
bank a/c, in error, chisomo’s a/c is credited and bank is debited

Example 1

Payment of cash of K 50,000 to creditor X is debited to cash and credited to him

The Journal

Dr Cr

Creditor X 100,000

Cash 100,000

Correction of amount of K 50,000 paid to creditor X wrongly posted on debit instead of

crediting

Example 2

A payment of cash of K 19,000 to Kacha was entered on the receipts side of the cashbook in
error and credited to Kacha’s account

The journal

Dr Cr

Kacha 38,000

Cash 38,000

Being correction of payment of cash entered in the wrong side of the account

7. Transposition error

It occurs where the wrong sequence of the individual characters within a number was entered eg.
K 786 was entered as K 876.

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 Example

A credit purchase from Wamie costing K 780 was entered in the books as K 870

The journal

Dr Cr

Wamie 90

Purchases 90

Being correction of purchases overcasted

ERRRORS THAT AFFECT THE AGREEMENT OF TRIAL BALANCE

Due to some errors, the debit and credit balances of the trial balance will not balance

Steps taken

1. Find out the difference

2. Put the difference on the suspense account
3. Find the reasons for the differences
4. Rectify the errors by passing the necessary journal entries.

Suspense Account

This is a temporary account formed to enter the difference of the trial balance until the errors are
rectified

Reasons for the errors necessitating creation of a suspense account

1. Omission of one entry/ single entry

2. Recording two different amounts
3. Recording the double entry in the same side of both accounts/ error of partial reversal of
entry
4. Errors in preparation of trial balance

CORRECTION OF ABOVE ERRORS USING THE SUSPENSE ACCOUNT

The following journal entries are used to correct such errors

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Dr Respective Account if omitted or understated

Cr Suspense Account

OR

Dr Suspense Account

Cr Respective Account if omitted or undercasted

EXAMPLES

1. Omission of one entry

Example

Payment of cash K 50,000 for rent entered in cash book without corresponding entry in rent
account

Correction

General journal entry

DR CR

Rent expense a/c 50,000

Suspense a/c 50,000

Correction of amount of
K50,000 entered only in cash
book without posting to rent
expense a/c

2. Recording of two different amounts

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Example

Rent paid for K 50,000 but cash credited with K 5,000

General Journal entry

DR CR

Suspense a/c 45,000

Cash a/c 45,000

Correction of amount of K
50,000 paid for rent entered
in cash book as K 5,000

3. Recording of double entry in the same side of both accounts/ error of partial
reversal of entry

Example

Payment of rent of K 50,000 recorded on both sides of rent and cash

General journal entry

DR CR

Suspense a/c 100,000

Cash a/c 100,000

Correction of amount of
K50,000 paid for rent entered
on debit side of cash book
and rent expense a/c

4. Errors in casting, balancing and transferring of prime entry books into ledger
accounts

Page 35 of 72
 Example

K 50,000 is under casted in sales account

General journal entry

DR CR

Suspense a/c 50,000

Sales a/c 50,000

Correction of amount of K
50,000 under casted on sales
account

5. Error in preparation of trial balance

To correct such error, an entry is made only in the suspense account to correct the error

Exam Based Question

A student pursuing the certificate in financial accounting (CIFA) course at ICBM was recruited
on a temporary basis to assist in reducing the workload in the accounting department of Sana
Retail Shop.

The student was asked to correct the following errors for the transactions for the month of July
2023

1. Credit purchases from J. Bhana amounting to K 24,000 were recorded correctly in the
personal account but in purchases account it was recorded as K 42,000
2. A cash discount of K 15,000 from a supplier was recorded as credit to suppliers’ account
and a s debit to the discount received account

Page 36 of 72
 3. Cash sales amounting to K 40,000 were completely omitted from the accounting records
4. Goods returned by cash customers amounting to K12,000 were recorded in the debtors
control account
5. Purchase of computers for resale amounting to K 70,000 were recorded as fixed assets
6. Rent paid amounting to K 30,000 was debited both the rent and cash book accounts.
7. The cash book was credited with an account of salaries paid amounting to K 65,000 but
no corresponding entry was made in the salaries account.

Required

From the information given above 1-7, prepare journal entries without narratives to correct the
errors identified (7 marks)

Example 1

The trial balance of Giant did not agree because the debit balance totalled K 12,000 whereas the
credit balances totalled K 8,700. An investigation was conducted. The causes, the following
errors were discovered

a. A sale of K 2,200 was debited to Smith instead of Simon

b. A sale for K 4,200 was correctly entered in the sales account but was not debited to Jones
personal account
c. A purchase of K 7,500 was correctly entered in the nominal account but was omitted
from personal account

Prepare journal entries to show the correction of above errors and hence prepare suspense
account

Example 2

The trial balance of Express Ltd as at 31st December 2023 has been extracted by the
accountant but has been found not to balance. In order to temporarily balance, the accountant
has used the suspense account. The details are given below;

Express LTD

Trial balance as at 31st December 2023

MK MK

Page 37 of 72
 Sales 250,425

Purchases 135,450

Salaries and wages 9,986

Utility expenses 2,205

Furniture and fittings 320,250

Debtors and creditors 70,140 114,555

Cash in hand 210

Cash at bank 15,855

Capital account 227,588

Drawings account 7,350

Suspense account 31,122

592,568 592,568

On cross checking, the accountant discovered the following errors

1. Opening balance of K 372,750 for furniture and fitting account was wrongly brought
forward as K 320,250
2. Purchases account was undercasted by K 10,500
3. Salaries and wages account K 9,608 but in the trial balance was K 9,986
4. Sales on credit to Williams K of K 15,750 posted correctly to sales account but wrongly
posted to Williams account as K 26,250

Page 38 of 72
 5. Purchases of K 21,000 from AbdulRahman on credit has been posted correctly to
purchases account but not on his purchases ledger

Required

Pass the necessary entries for correction of above errors with their corresponding ledger and
corrected trial balance

PREPARATION OF FINAL ACCOUNTS FROM A TRIAL BALANCE

Example

The following trial balance was extracted from books of Adijah on 30th April 2023. From it and
the note about stock, prepare her income statement for the year ending 30th April 2004 and the
statement of financial position.

DR ( K) CR ( K)

Sales 210, 420

Purchases 108,680

Stock 1 May 2003 9,410

Carriage outwards 1,115

Carriage inwards 840

Return inwards 4,900

Page 39 of 72
Return outwards 3,720

Salaries and wages 41800

Motor expenses 912

Rent 6800

Sundry expenses 318

Motor vehicles 14400

Fixtures and fittings 912

Debtors 23,200

Creditors 14,100

Cash at bank 4,100

Cash in hand 240

Drawings 29,440

Closing stock 30th may 2023 11,290

ADJUSTMENTS BEFORE FINAL ACCOUNTS/ END OF YEAR ADJUSTMENTS

In the context of preparation of final accounts and trial balance, adjusting entries are transactions
relating to the organisation which have not yet been journalized. Final accounting is done after
the end of the accounting period. It is therefore important to update some accounts in order to
reflect true and fair view of these accounts. This is done through adjusting entries. Major
adjustments/ provisions include the following

1. Depreciation of fixed assets

2. Bad debts and provision for bad debts
3. Accrued expense and prepaid expenses
4. Accrued/ outstanding income and pre received income

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 1. ACCRUALS & PREPAYMENTS/ ACCRUED EXPENSES & PREPAID EXPENSES

The accrual basis of accounting consist of recording revenue in the period in which it is earned
and recording expenses in the period in which they are incurred. The receipt or disbursement of
cash in the same period may or may not be involved.

Revenue is generally recognised when services are performed or goods are provided, and is
considered to be earned when exchange for something of value is received or legal claim is made

Expenses should be recognised when goods or services are consumed. The accrual basis of
accounting involves the period by period matching of revenue with expenses that caused or aided
in producing that revenue. In keeping business records, accountants must think in terms of time
intervals and must be sure that the revenues and expenses are accounted for in the proper
accounting period.

ACCRUED EXPENSES

These are expenses incurred within the accounting year but payment has not yet been made.
Accrued expenses also known as unpaid expenses should be added to the concerned expenses
in P and L Alc and shown as a current liability in the statement of financial position

Example

XYZ co, ltd is renting space for its offices. At the end of Accounting period year ended 31st
December 2022, rent amounting to K 1,000,000 had not been paid.

Solution

Entries involved

Dr Rent Expense K 1,000,000

Cr Accrued Rent Expense K 1,000,000

Being recognition of rent expense incurred in Dec 22, not paid

Note;

 Rent expense will be added on rent expense A/c which will affect P and L a/c
 Accrued rent expense is a liability and will affect liability account in the statement of
financial position.

Page 41 of 72
PREPAID EXPENSES

These are expenses paid in advance. Sometimes expenses are paid but part of the amount extends
to the following accounting year. These expenses are also referred to as unexpired expenses ie
payment of utilities and insurance

Advance amount should be deducted from the concerned expenses and shown as current asset in
the statement of financial position.

Example

ICBM paid for its TAC shop for its 6 months on 1st April 2019 amounting to K 1,200,000. The
monthly rent is K 200,000. The accounting year for ICBM is from 1st Aug to 31st July. The
accounts assistant had expensed off the entire amount to the rent expense account.

Required

Account for the expired rent expense for the year 2018/2019

Solution

Entries passed by the accounts assistant were

Dr Rent expense a/c 1,200,000

Cr Cash a/c 1,200,000

ADJUSTING ENTRIES

Rent paid covered 2 months into the year 2019/2020 ie 200,000 x 2 months= K 400,000,
therefore;

Dr Prepaid Rent Expense 400,000

Cr rent expense 400,000

NB

Prepaid rent is a current asset and therefore will be reflected in the statement of financial position
while rent expense of that particular date, will reduce by K 400,000 in the P and L A/c

Page 42 of 72
Example 2

In a bid to avoid unnecessary disconnections by water board ICBM paid in advance water bills
for a period of one year on 1st January 2019 amounting to K 5,000,000.

The accounts assistant debited the account of prepaid water bills the whole figure. By the year
end on 31st July 2019, Water Board had billed ICBM water bills amounting to K3,000,000. Since
the year has ended there is need to pass the necessary adjustments.

Required

As an intern in the office of the bursar, you are required to pass the necessary adjusting entries.

Solution

Amount paid and posted to prepaid water bill A/c K 5,000,000

Less Accrued water bill incurred K 3,000,000

Actual prepaid water bill K 2,000,000

Therefore entries

Dr Water bill expense K 3,000,000

Cr Prepaid water bill K 3,000,000

Being adjusting entries to recognise actual water bill incurred for the period 1st January 2019 to
31st July 2019.

NB

The above adjusting entries will result in prepaid water bill remaining with K 2,000,000 to be
consumed in August 2019 and September 2019. This figure will be reflected in the statement of
financial position as a current asset and water bill expense A/c will increase by K3,000,000.

INCOME RECEIVED IN ADVANCE/ UNERANED INCOME

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This refers to income received for goods or services that have not been delivered or offered
respectively. If amounts received have partly not earned, entries must be made to reflect the
correct position. Unearned income /income received in advance is current liability reflected in
the statement of financial position.

Example

King Fahad Plaza as ICBM investment rents out space for tenants. During the year 2018/2019,
some tenants paid K 30,000,000 their rent in advance for 12 months on 1st January 2019. King
Fahd Plaza’s accounting year follows the one of ICBM and therefore the year ended on 31st July
2019

By this time only K 20,000,000 had been consumed by the tenants leaving a balance of
K10,000,000

Required

Show the first entries made in the books of King Fahd Plaza on 1st January and the adjusting
entries on 31st July 2019

Solution

Entries on 1st January 2019

Dr Cash a/c K 30,000,000

Cr Rental Income K 30,000,000

Being the receipt of amounts from tenants for rent during the whole year.

Adjusting entries

Dr rental income K10,000,000 ( will net off up there)

Cr unearned Rental K10,000,000

Being recognition of rental income received in advance for the period of August to December
2019.

NB

Page 44 of 72
Rental income is reduced to reflect the correct amounts earned for the period from January 2018
to July 2019. The services of a period from August to December 2019 have not been provided
and therefore a liability to King Fahd Plaza which is reflected in the statement of Financial
position.

Example

On 31st July 2019, the date when accounting year for King Fahd Plaza ends, one tenant paid K
5,000,000 for 6 month rent that starts on 1st August 2019.

Required

Pass the necessary entries in the books of King Fahd Plaza

Dr Cash A/c K 5,000,000

Cr unearned Rental income received K 5,000,000

Being recognised of rental income received in advance to cover period from August 2019 up to
January 2020.

NB: This is a straight way transaction and cannot be regarded as an adjusting entry.

ACCRUED INCOME

Accrued income refers to income earned within the accounting year but money has not been
received ie services have been rendered but money not received until the following year.

Example

King Fahd Plaza has some tenants who did not pay for services offered for three months (May to
July 2019) at the close of 2018/2019 amounting to K 10,000,000

Required

Pass the entries

Dr Rental income receivable A/c K 10,000,000

Page 45 of 72
 Cr Rental income A/c K 10,000,000

Being Rental income earned for May to July 2019 but money not yet received

NB; Rental income receivable being a current asset will be reflected in the statement of financial
position.

Summary

Adjustment Treat in F/P Treat in P& L

Expenses prepaid Current asset Subtract in P and L to relev.

Exp

Expenses owing Current liability Added to relev exp

Income prepaid Current liability Subtracted to relev exp

Income owing Current asset Its added to relev. exp

BAD DEBTS

Bad debts represent amount due from debtors but regarded as uncollectable. Ie a portion of credit
sales that are hard to be collected. Bad debts are a loss to an organisation and therefore debited to
profit or loss account and deducted from the debtors in the statement of a financial position.

Example

Two tenants of King Fahd Plaza left the premises with an outstanding amount of K10,000,000
five years ago. Management of Plaza have tried all possible means to recover the money but in
vain including engaging a lawyer. The policy of Plaza regarding debtors is to write off any
amount outstanding in their books for five years and above. It has decided to write off the
amounts of the two tenants as bad debts

Page 46 of 72
Required

Pass the necessary journal entries

Dr Bad debts written off account K 10,000,000

Cr Debtors A/c K 10,000,000

Writing off bad debts that are five years old from the books

PROVISION FOR BAD AND DOUBTFUL DEBTS

Some large organisations have a lot of transactions on credit basis which results into sizeable
amount of debtors. It is rare to collect all the amounts from debtors. Instead of inflating current
assets with a big amount of debtors some of will never be collected, it is prudent to bring down
the amount of debtors to reflected a fairly true position. This is done by creating an account
called provision for bad debts based on experience.

Example

King Fahd Plaza has outstanding debtors in its books amounting to K 100,000,000.From the
previous experience, at least 2% of outstanding debtors turn to be bad debts. Management of the
Plaza decided to have a policy of providing for bad debts of 2% every year.

Required

Pass the necessary entries in the books of King Plaza

Solution

Dr Bad and doubtful debts K 2,000,000

Cr Provision for bad debts and doubtful debts K 2,000,000

Being recognition of provision of debtors who may turn out to be bad debts at 2%

COLLECTING A BAD DEBT THAT HAD BEEN WRITTEN OFF

Sometimes a debtor who had been written off resurfaces and pays the money. In such a case, the
following entries are made

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STEP 1

Dr Debtors A/c ( Re- instating the account)

Cr Bad debts recovered a/c updating books

STEP 2

Dr Bank Al/c / cash A/c

Cr Debtors A/c Recognise the money

STEP 3

Dr Bad debts recovered

Cr Profit and Loss account transfer profit account
Ie closing bad debts A/c to profit and loss

Reasons why businesses fail to honour debts

 Dishonesty
 Bankruptcy
 Death

BAD DEBTS WRITTEN OFF AND SUBSEQUENTLY PAY

Sometimes a debtor who was written off may pay. In such a case the amount received should be
recorded as additional income in the income statement of the period in which payment is
received.

Entries would be; an alternative of one up there

1. Dr Cash Received 3,000
Cr John 3,000
Recording receipts

2. John 3,000
Cr Bad debts recovered 3,000
Introducing bad debts recovered

3. Dr bad debts recovered 3,000

Page 48 of 72
 Cr income statement 3,000
Transferring the amount previously written off to income statement

ALLOWANCES FOR DOUBTFUL DEBTS

In businesses situations most identities of uncollectable amounts are not known until after some
period.

When a business expects uncollectable debts but does not yet know which specifies debts will be
bad, it can make a provision for doubtful debts. A provision for doubtful debts provide for future
bad debts as a required by prudence concept

DETERMINANTS OF SIZE OF PROVISON

 Past experience
 Aging- receivables taking time
 Percentage of outstanding debtors

BAD DEBTS AND ALLOWANCES FOR DOUBTFUL DEBTS

BAD DEBTS AND PROVISITION FOR DOUBTFUL DEBTS (UNCOLLECTABLE

ACCOUNTS RECEIVABLE)

Bad debts arises from credit sales. Customers who buy goods on credit may fail to pay perhaps
due to dishonesty, bankruptcy or death. For one reason or another, a business may decide that a
debt is uncollectable. Bad debts are business risk. They are therefore accounted as an expense
and are charged in P and L

WRITING OFF UNCOLLECTABLE ACCOUNTS RECEIVABLES

When a sale is made, the invoiced amount is shown in the account and gross profit is shown in
the account. Subsequently failure to collect the debt is a separate matter which is reported in the
income statement as bad debts written off

ILLUSTRATION

ABC traders sold goods to John worth K 3000 on 29 June

Entries

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Debit John (Debtor) 3000

Cr Sales 3000

At the end of the period John fails to pay

Entries

Dr Bad debts A/c 3000

Cr John 3000

When this posted the account of John as a debtor will balance off becoming Zero and bad debts
reduces profit

INCREASING THE PROVISION

When a provision already exists but is to be increased, the amount of the increase in the
provision is charged in the income statement as an expense

Illustration

ABC Traders have decided to increase the provision from K500,000 to K 520,000

Dr Income statement K 20,000

Cr Provision for doubtful debts K 20,000

To increase the provision

NB In the income statement only K 20,0000 would be charged as an expense for the period. In
the balance sheet K 520,000 (whole amount) should be deducted from the total amount of
receivables

REDUCING PROVISION

When a provision already exists but there is need to reduce it, the amount of the reduction should
be credited to the income statement and debited to the provision account

ILLUSTRATION

ABC Traders have decided that the provision for doubtful debts should be reduced to K510,000
this year

Entry

Page 50 of 72
 Dr provision for doubtful debts K10,0000

Cr income statement K10,0000

To reduce the provision

In the income statement, only K 10,000 will be credited as other incomes and the whole amount
of K 510,000 should be deducted from the total of debtors

Provision for doubtful debts, type and treatment

Type Trial balance Additional information

Treatment

Leave it alone, its for the last year

Type 1 Appear Doesn’t

Take the full figure as expense in the

Type 2 Doesn’t Appear P& l

Take the full figure and subtract it from

debtors

Compare and take the difference

Type 3 Appear Appear
-an increase is an expense and decrease
is an income

- take the whole figure and subtract from

debtorss

DEPRECIATION

Depreciation can be defined as reduction in the value an asset due to wear

and tear arising out of continued use.
Depreciation expense is used to better reflect the expense and value of a
long term asset as it relates to revenue it generates.
It is treated as an operating expense though it does not involve cash outflow
and it is done to reflect a fair value of fixed assets.
It is used to allocate cost of a tangible asset

Page 51 of 72
It is important to make distinction between capital expenditure and revenue
expenditures because capital expenditure are depreciated while revenue
expenditures are not.

Classification of noncurrent assets

1. Real and personal property
Real property which includes land and anything attached to it where as
personal property which includes everything else that can be owned other
than real property, these are the things such as plant, equipment, furniture,
motor vehicles, machinery, patents, copy rights.
2. Tangible and intangible assets
Tangible are those assets with physical form such as machinery and
equipment and intangible assets being those without physical substance like
patents, copyrights, leases, franchises, trademarks and goodwill. These are
said to be long term because they are expected to bring future economic
benefits and have legal status that allow them to be classified as property
(except for goodwill) long term investments such as governments bonds are
shown in balance sheet under the heading investments.
3. Non depreciable and depreciable assets
Land is non depreciable because it does not lose its capacity to serve its
purpose where as property plant and equipment are depreciable because
they wear and tear due to use or as time pass on

ARMOTISATION
Is the process of depreciating intangible assets such as patents
DEPLETION
Is the process of depreciating wasting assets such as mines, oil and gas
wells, fisheries and timber plots

The cost of noncurrent asset

Noncurrent assets may be purchased for cash or on account.
The amount at which noncurrent assets should be recorded in the books of
accounts is the total initial outlay needed to put them in use. This includes;
 Purchase price
 Transaction charges
 Installation costs
 Interest charge
 Any other costs incurred up to the point of placing asset in service

Transactions involving the purchase of noncurrent assets may be recorded

by debiting the asset being purchased and credit appropriate liability
account such as accounts payable, notes payable or mortgage payable.
Improvements to property, plant and machinery add value and the total cost
of such improvements should be added by debiting the asset.

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Accounting entries for depreciation
Dr Depreciation Expense A/c
Cr Accumulated Depreciation

Depreciation expense is closed to profit and loss account while accumulated

depreciation reduces the value of fixed assets

Reasons for providing for depreciation

1. It is a cost to the business because it is an expenses though we don’t
have flow of cash
2. It enables disclosure of fair figures of fixed assets since accumulated
depreciation is deducted from the cost of fixed assets
3. Provision for depreciation guides policy for planning and replacement
of fixed assets

Causes of depreciation
1. The major cause of depreciation is physical deterioration that results
from wear and tear due to continued use and exposure to adverse
climate conditions
2. Inefficiency and obsolescence (becoming out of date)
Fixed assets lose their original value one a better alternative is
introduced in the market

3. Usage right expiration

Assets such as software and licenses have a typical span of time over
which it is used. It cannot be written off once it expires but spread
during the life span of the asset costs
4. Ineadequancy – the growth of the business may bring about a need for
bigger machines equipments
5. Superfluity (opposite of ineadequancy) when business is going down, u
need small machine to suit your less customer and bigger machine is
going to be depreciated

Factors for considered when determining or calculating depreciation

1. Cost of the asset

When determining the cost of an asset, all costs incurred to bring the asset
to use need to be capitalized. Such costs include purchase price,
transportation costs, installation costs and other relevant costs incurred to
make the asset work. It does not include repair and maintenance costs

2. Estimated salvage/ scrap/ residual value

This refers to value of the asset at the time of disposal(selling)

3. Estimated useful life of the asset

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 This is the period in years (most times) during which the organization derives
benefits (in production of goods or offer of services) from the asset.

Methods of calculating depreciation

There are various acceptable methods of calculating depreciation expense.
The method chosen depends on the company policy. The common methods
of calculating depreciation include;
a. Straight line method
b. Reducing balance method
c. Sum of the years digits method
d. Hourly rate method
e. Revaluation method

1. Straight line method

Straight line depreciation is the most commonly used and easiest method for
allocating depreciation of an asset. With the straight line method, the annual
depreciation expense equals the cost of an asset minus the salvage value,
divided by the useful life (years). In straight line depreciation, the expense
amount is the same every year over the useful life of the asset.

Depreciation formula for the straight line method

Depreciation expense = Cost – Salvage / useful life

Example
ICBM bought equipment that costs K 25,000,000 with an estimated useful life
of 8 years and a K 0 salvage value. The depreciation expense per year for
this equipment would be as follows;

Depreciation expense = Cost of the equipment – Salvage value

Useful life of the equipment (ie number of years )

25,000,0000- 0
8
K 3,125,000

Year 0 1 2 3 4 5 6 7 8

Open 25,000,0 25,000,0 21,875,0 18,750,0 15,565,00 12,500, 9,375,0 6,250,0 3,125,0
ing 00 00 00 00 0 000 00 00 00

Bok
value

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Depr 0 3,125,00 3,125,00 3,125,00 3,125,000 3,125,0 3,125,0 3,125,0 3,125,0
eciati 0 0 0 00 00 00 00
on

Closi 25,000,0 21,875,0 21,875,0 15,625,0 12,500,00 9,325,0 6,250,0 3,125,0 0

ng 00 00 00 00 0 00 00 00

Book
value

2. Reducing balance method

Reducing balance method is also referred to as declining balance method. This assumes that an
asset is more useful in earlier years of purchase that later years when it has become old. It
therefore allocates more depreciation expense in earlier years and this charge reduces as the asset
gets order.

There are two approaches to reducing balance method.

a. Normal reducing balance method

b. Double declining method

a. Normal declining method

This method uses the formula below to calculate the depreciation percentage/ charge

r = 1- ( S/C)^1/n

n is the number of years ie useful life of the asset

S is the scrap value

C is the cost of the asset

Example

Icbm bought a big generator at a cost of K 10,000,000. Its transportation cost including
installation amounted to K 1,000,000. The generator is estimated to last 6 years after which it
will be sold at an estimated value of K 500,000

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Required

Calculate depreciation expense and accumulated depreciation using normal reducing balance
method

Solution

Cost of the generator = purchase price plus related costs to put the asset to its intended use

= K 10,000,000 + 1,000,000

= K 11,000,000

n= 6 years

Depreciation rate / percentage= 1- (500,000/11,000,000)^1/6

= 1- ( 0.04545) ^0.167

=1-0.5968

= 0.4032

= 40%

Cost Depreciation Accumulated Book value

expense depreciation
11,000,000

1 4,400,000 4,400,000 6,600,000

2 2,264,000 7,040,000 3,960,000

3 1,584,000 8,624,000 2,376,000

4 950,400 9,574,400 1,425,000

5 570,240 10,144,640 855,360

6 342,144 10,486,784 513,216

b. Double declining balance method

Under this method, depreciation rate is got by doubling the rate on straight line method

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Example

Victoria Hotel ltd bought a big washing machine at a cost of K 10,000,000 in 2015 and is
estimated to last for 5 years with zero scrap value. Transportation was K500,000 from Lilongwe,
consultancy services in relation to installation was K 1,000,000 and repair and maintenance costs
after 3 months of use was K 200,000

Required

Calculate depreciation expense and accumulated depreciation using double declining balance

Solution

Cost of the washing machine = 10,000,000 + 500,000 +1, 000,000

K 11,000,000

Depreciation per year = cost – scrap value

Number of years

Depreciation per year = 11,500,000 – 0

5 years

K 2,300,000 per year

Depreciation rate = [ Depreciation expense per year x 100%]

Cost - scrap value

2,300,000 x 100%

11,500,000

20%

Depreciation percentage = 2 x depreciation rate on straight line method

2 x 20% = 40%

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 Year 0 1 2 3 4 5

Opening 11,500,000 11,500,000 6,900,000 4,140,000 2,484,000 1,490,000

Book value

Depreciation 0 4,600,000 2,760,000 1,656,000 993,600 594,160

Closing 11,500,000 6,900,000 4,140,000 2,84,000 1,490,400 894,240

Bookvalue

3. Sum of the years digits

This method also allocates more depreciation expense in earlier periods than later years. The rate
of depreciation is computed by dividing the number of years remaining in the useful life of the
assets (from the beginning) the sum of the useful life. The rate obtained is then multiplied by
depreciable of the asset ie cost less salvage

Example

ICBM bought a heavy duty photocopying machine at a cost of K 7,000,000. Its useful life is
estimated at 5 years with scrap value of K 500,000

Required

Using sum of the year’s digits method, calculate depreciation expense for each year

Solution

Year Depreciation Depreciation expense

1 5/15= 0.333 0.333 x ( 7,000,000 – 500,0000)

= 2,164,500

2 4/15= 0.267 0.267 x( 7,000,000 – 500,000)

= 1,735,000

3 3/15= 0.2 0.2 x ( 7,000,000 -500,0000

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 = 1,300,000

4 2/15= 0.133 0.133 x ( 7,000,00 – 500,000)

= 864,500

5 1/15= 0.067 0.067 x ( 7,000,000 – 500,000)

= 435,500

4. Units of production / output method

This method is based on number of units estimated to be produced by the asset in its useful life

Depreciation expense = units produced during the year x (cost – salvage value)

Estimated number of units to be produced in productive life

Example

ABC co ltd bought a machine that costs K 25,000,000, with an estimated total unit production of
100 million and K 0 salvage value with life span of 4 years. During the years of activity, the
machine produced 40 million units, 30 million, 20 million and 10 million respective respectively.

Required

Calculate depreciation expense for each of the 4 years

Solution

1st year depreciation expense = 40,000,000 x ( 25,000,000 – 0)

100,000,0000

K 10,000,000

2nd year Dpn exp = 30,000,000 x ( 25,000,000 – 0)

100,000,000

K 7,500,000

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3rd year Dpn Exp = 20,000,000 x ( 25,000,000- 0)

100,000,000

K 5,000,000

4thyear Dpn Exp = 10,000,000 x ( 25,000,000 -0)

100,000,000

K2,500,000

Year 1 2 3 5

Units ( production) 40,000,000 30,000,000 20,000,000 10,000,000

Opening book value 25,000,000 15,000,000 7,500,000 2,500,000

Depreciation 10,000,000 7,5000,000 5,000,000 2,500,0000

Closing book value 15,000,000 7,500,000 2,500,000 0

0

5. Working Hours method

Depreciation expense is based on the number of hours the asset is expected to run in its useful
life.

Depreciation expense = number of hours worked in the year x ( cost – salvage value )

Estimated no of working hours in productive life

6. Revaluation method
Revaluation is the examination of an asset’s value at a particular point in time. Revaluation of
tangible assets is discouraged in accounting as far as accounting standards are concerned but
restricted to few assets such as land and buildings

In case of revaluation, depreciation is the difference between the value of the fixed asset at the
beginning of the year and at the end of the year if the value of asset declines. In case the value
value of the asset goes up, then the difference is taken to appreciation value and not depreciation.

7. Depletion method

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Depletion method of depreciation is used by the companies which extract natural resources like
oil gas, metals, coal stones etc. from wells mines, quarries etc

This method is named as depletion method because the reduction of natural resource is known as
the depletion of that resource

Those assets (wells, mines, quarries etc) are also called as wasting assets because their value
reduces with increasing extraction of resources

For example in case of a coal mine, more the coal is extracted, more will be the depletion of the
mine.

Formula

Depreciation = depreciable amount x actual extracted during the year

Total units expected to be extracted

Example

M/s Surya & co took lease of a quarry on 1-1-2017 for K 10,000,000. As per technical estimate
the total quantity of mineral deposit is 200,000 tones. Depreciation was charged on the basis of
depletion method. Extraction pattern is given in the following table

Year Quantity of minerals extracted

2017 2,000 tones

2018 10,000

2019 15,000

Required

Account for each year from 2017 to 2019

Solution

2017

10,000,000 x 2000 = K 100,000

200,000

2018 10,000,000 x 10,000 = K500,000

200,000

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2019

10,000,000 x 15,000 = K750,000

200,000

DOUBLE ENTRY FOR DEPRECIATION

Recoding depreciation involves maintaining each fixed at its cost in the ledger account while
operating another ledger account where depreciation to date is recorded.

This account is known as ‘accumulated depreciation for depreciation’. Where depreciation

has been calculated the following entries are needed;

Dr ----- profit and loss account

Cr Accumulated Provision for depreciation account

Example

A business has a financial year end of 31 December. Abuilding is bought for K20,000 on 1st
January 2005. It is to be depreciated at the rate of 20% using the reducing balance method.

You are required to prepare necessary accounts for the first three years

Solution

Building Account

2005 Jan 1 cash 20,000 K 2005

Accumulated depreciation

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2005 K 2005 K

31/ Dec Balance c/d 4,000 31 Dec profit and loss 4,000

2006 2006

31/ Dec Balance c/d 7200 1 Jan Bal bf 4000

31 Dec profit and loss 3,200

THE DISPOSAL OF AN ASSET

Disposal an asset means selling of that particular asset. This means that the cost of that asset
needs to be taken out of the asset account. In addition the accumulated depreciation on the asset
which has been sold will have to be taken out of accumulated provision. Finally the profit or loss
on sale, if any will have to be calculated and posted to profit and loss account

Accounting entries needed

a. Transfer the cost price of the asset sold to asset disposal account
Dr--- Asset disposal Account
Cr--- Asset Account
b. Transfer the depreciation already charged to the asset disposal account
Dr Accumulated Provision for depreciation account
Cr Asset disposal account

c. For the amount received on disposal

Dr Cashbook
Cr Asset Disposal Account
d. Transfer the difference ( ie the amount needed to balance the asset disposal account to the
profit and loss account)

i) If the asset disposal account shows a difference on the debit side

Dr Asset disposal account

Cr profit and loss account

iii) If the asset disposal account shows a difference on the credit side
Dr Debit Profit and loss account
Cr asset disposal account

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Example 1

A machine is bought on 1 January 2006, for 10,000 and another one on October 2006 for K
12,000.The first machine is sold on 30 June 2008 for K7,200. The businesses’ financial year
ends on 31st December. Machinery is to be depreciated at 10% using the straight line method.
Machinery in existence at the end of a year is to be depreciated at a full year. No depreciation is
to be charged on any machinery disposed of during the year. Your are required to prepare
necessary accounts

Example 2

A business with its financial year end on 31 December buys two vans on first January 2001. No
1 for K 8,000 and No 2 for K 5,000. It also buys another van No 3 on 1st July 2003 for K 9,000
and another, No 4 on 1st October 2003 for K 7,200. The first two vans are sold, No 1 for K 2,290
ON 30th September 2004and No 2 for scrap value for K 50ON 30th June 2005

Depreciation is on the staright line basis, 20% per annum, ignoring scrap value in this case when
calculating depreciation per annum. You are required to prepare the necessary accounts and the
balance sheet extract for the years ended 31st December 2001,2002,2003,2004 and 2005.

DEPRECIATION OF NCA

1. The asset account

2. Provision for depreciation
3. Asset disposal Account

ILLUSTRATION

The following data relates to the fleet of the vehicles of Ipondeni Fada Company limited

Vehicle Date of Purchase Cost Date of disposal

Registration No

GR 424T 1/01/2015 20,000 30/06/2017

AR 636A 30/06/2015 30,000

CR 717B 1/01/2017 40,000 31/12/2018

ER 252D 30/09/2017 50,000

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The company depreciates its vehicles at the rate of 20% per annum using the straight line method
on a one month ownership basis. The company’s financial year ends at 31st December each year.

Note; motor vehicle with registration number GR 424T and CR717 were sold for K 12,500 and
K 22,000 respectively

You are required to prepare

a. Motor vehicle account
b. Provision for depreciation account
c. Motor vehicle disposal account
d. Profit or loss account and statement of financial position extracts

ASSIGNMENT FOR STUDENTS

The data below was extracted from the books of chairman general

Non- current asset Cost Date of purchase Date of disposal

Machine No. 1 2,000 1/1/2011 01/10/2014

Machine No. 2 3,000 30/06/2011

Machine No. 3 4,000 31/12/2012 30/06/2014

Machine No .4 5,400 01/12/2013

Additional information
i) A full year’s depreciation is charged in the year of acquisition. No depreciation is
charged in the year of disposal
ii) Machine No. 1 an No. 2 are depreciated 10% on reducing balance while No. 3 and
No. 4, a 10% straight line basis
iii) Accounts are prepared to November 30
iv) You are required to;
a. Show the machine account as it would appear on 30/11/2014
b. Prepare provision for depreciation and assets disposal accounts assuming the
machine No. 1 was sold for K 1,500 and machine No. 3 was sold for k 3,000

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PREPARATION OF FINAL ACCOUNTS

Financial statements are written records that convey the business activities and the financial
performance of a company

Financial statements can also be defined as reports prepared by a company’s management to

present the financial performance and position at appoint in time

A general purpose set of financial statements usually includes;

1. Statement of financial position

2. Statement of profit or loss
3. Statement of changes in equity
4. Statement of cash flows
5. Group accounts

After the adjusted trial balance, final accounts or financial statements are prepared. These
statements are called final accounts because they are prepared at the end of each financial year
and are a product of an accounting system. Interim financial statements can also be produced
when necessary. Some business even produce on quarterly or monthly especially those using
computerised systems

Financial statements of a sole proprietor majorly consists of statement of profit and loss ( or
income statement or trading and profit and loss account) and statement of financial position/
balance sheet. Other statements such as statement of changes in equity and cash flow statement
can also be prepared.

Definition of terms

1. Purchases

Purchases are the goods bought for resale. It is the total of credit and cash purchases. Purchases
do not include the purchase of fixed assets. Purchases must be debited to the trading account

2. Sales

This is the total of cash and credit sales during the trading period. Sales is credited to the trading
account and it does not include sale of fixed assets.

3. Opening stock

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This is the stock of goods available for sale at the beginning of the year

4. Closing stock

This is the stock of goods at the end of trading period

5. Return outwards

These are goods returned to the suppliers. It must be deducted from the purchase for the period

6. Return inwards

These are goods returned by the customer. It must be deducted from the sales for the period.

7. Carriage inwards

This is the cost of transporting goods to the company. It is normally added to purchases.

8. Carriage outwards

It is the cost of transporting goods to the customers. It is incurred on sales and must be treated as
expenses

9. Cost of goods available for sale

This is the amount arrived at after adding the purchases to the opening stock

10. Cost of goods sold

This is the cost of goods actually sold. When the closing stock is deducted from the cost of goods
available for sale, the remaining balance is the cost of goods or cost of sales.

11. Gross profit

This is the excess of sale(less return) over the cost of goods sold. It can equally be defined as
profit arrived at before operating expenses are deducted.

12. Net profit

This is the profit arrived at after deduction of all operating expenses incurred during the period

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FEATURES OF FINANCIAL STATEMENTS

1. Financial statements should be relevant for which they are prepared. Unnecessary and
confusing disclosures should be avoided. All relevant and material information should be
included
2. They should convey full and accurate information about the performance and position of
the organisation. One’s personal prejudice should not distort facts.
3. Financial statements should be easily comparable with previous statements or with those
of similar concerns or industry. Comparability increases utility of financial statements.
4. They should be prepared in a classified form so that better and meaningful information
can be done
5. They should be prepared and presented timely. Undue delay would reduce their
significance and utility
6. They must have acceptability and understanding ie preparations of information should
have followed generally accepted accounting principles
7. Financial statements should comply with legal requirements as regard to form, contents
and disclosures eg compliance of company’s Act.

IMPORTANCE OF FINANCIAL STATEMENTS

Importance of financial statements lies in their utility to satisfy the varied interest of different
stakeholders as analysed below;

a. To management- management requires financial statements to understand the

performance and position of the business. This enables them to formulate appropriate
policies and courses of action for the future. Comparative analysis reveals the trend of
information contained in financial statements which enables the management to make
suitable changes in policies to avert unfavourable situations
b. To shareholders- financial statements enable shareholders to know the efficiency and
effectiveness of management and the earning capacity and financial strength of the the
company. The potential investors would ascertain the profit earning capacity, present
position and future prospects of the company and decide about making their investments
in the company.
c. They serve as a guide to the present and future suppliers and lenders of a company. These
statements show them liquidity, profitability and long term solvency position of a
company
d. Workers use the information to negotiate wages and get assurance of their jobs if a
company is doing well

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e. Financial statements are used by the public such as lawyers, trade associations
researchers and financial analysts etc to make judgements about the company

LIMITATIONS OF FINACIAL STATEMENTS

a. Qualitative information ignored

Financial statements depict only those items of quantitative information that are
expressed in monetary terms. Qualitative information such as reputation of the
company, good management, customer satisfaction, comparative strength etc cannot
be reflected in financial statements.
b. Show historical information

Financial statements are compiled with on the basis of historical costs. They fail to take
into account such factors as the decrease in money value or increase in price level
changes. This limits usage in decision making.

c. Financial statements are based on accounting concepts and conventions

Accounting concepts and conventions are used for preparation of financial statements.
Some conventions may lead under or over statement of items are income or expenses. Eg
convention such as conservatism fails to disclose the true income if probable losses are
included and probable and probable income excluded

d. Personal judgement of preparers influence financial statements

Many items in accounting are left to the judgement of the accountant eg methods of
depreciation, method of inventory valuation, deferred revenue and expenditure etc

Statement of profit and loss/ income statement

Purpose

Statement of profit and loss provides a summary of the results of a business’s trading
activities during a given accounting year

- It enable users of financial statements such as owners to evaluate the financial

performance of the business for a particular year
- It is also used to determine the amount of taxation by the owner either sole trader,
partnership in case of partnership or company
- For the case of a company, part of the profits is also distributed to shareholders in form of
dividends

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It is important to note that profit is not equal to amount of cash / money the business has made
during the year. This is due to the principles used such as matching concept, accrual concept
realisation among others

In order to determine profit or loss made during the year, it is important to deduct expenses from
sales or revenue (income). Refer to structure the structure of profit and loss for details

Trading account

This is the first stage in determination of profit for the year which involves calculating the gross
profit. This part of the profit and loss statement can be presented separately as a trading account.
This account indicates the following

Trading account

K K

Sales XXX

Less sales returns XXX

Net sales XXX

Cost of sales

Opening stock XXX

Add: purchases XXX

Less: purchase returns XXX

Goods available for sale XXX

Less closing stock ( XXX) (XXX)

Gross profit XXX

FORMAT OF INCOME STATEMENT / STATEMENT OF PROFITI OR LOSS

K K

Sales XXX

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Less sales returns/ sales returns XXX

Net sales XXX

Cost of sales/cost of goods sold

Opening stock XXX

Add: purchases XXX

Add: carriage inwards XXX

Less: purchase returns XXX

Goods available for sale XXX

Less closing stock ( XXX) (XXX)

Gross profit XXX

Other incomes

Discount received XXX

Commission received XXX

Rent received XXX

Rent received XXX

Decrease in doubtful debts XXX

Net gross profit XXX

Less: operating Expenses

Carriage outwards XXX

Salaries and wages XXX

Discount allowed XXX

Rent expense XXX

Bad debts XXX

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Increase in doubtful debts XXX

Depreciation XXX (XXX)

Net profit (XXX)

STATEMENT OF FINANCIAL POSITION

Page 72 of 72