Topic 1

PRINCIPLES OF ACCOUTNING EDB 100

INTRODUCTION
Definition: accounting can be said to be the process of
recording business transaction , analyzing and summarizing the
said business for the purpose of production of the final financial
statements . the main final financial statements consist of the
income statement and financial position or balance sheet.
OBJECTIVES OF FINANCIAL ACCOUNTING
The financial accounting standard board (FASB) have identified
several objectives of preparing financial statements this
objectives include.
i) It provides information that is useful to present and
potential investors and creditors and other users in
making rational investment and credit decisions.
ii) Provide information about a company s economic
resources obligation and owners equity
iii) Provide information about a company’s comprehensive
income and its components,
iv) To provide information about a company’s cash flow
Types of accounting
Generally there are two types of accounting
a) Financial accounting
b) Management accounting
Financial accounting- is concerned with the production of
financial statements for external use. The financial report on

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the directors stewardship of the funds entrusted to them by
the shareholders.
Investors need to be able to choose companies to invest in and
compare there investment. To facilitate comparison, financial
account are prepared using accepted accounting conventions
and standards. These standards help reduce the deference in
the way that companies draw their financial statements in
different countries.
Management accounting- is concerned with production of
information to help the management to control the business
and plan for the future.
Management accounting is an integral part of management
activity concerned with identifying, presenting and
interpreting information used for :-
-formulating strategy
-planning and controlling activity
-decision making
-optimizing the use of resources

USERS OF THE FINANCIAL STATEMENTS

There are several groups of people who have vested interest in
business organization this include
i) Management
ii) Investors and shareholders
iii) Customers
iv) Employees
v) Government
vi) Competitors
vii) Creditors/lenders/ suppliers
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i) Information needs of shareholders and investors-
through the financial statements produced by the
accounting process the investors are interested to know
the returns of there investments in the company .
ii) Information needs of the management- managers have
3 main functions, planning, organizing, and controlling
the activities of the organization. This management
functions are all concerned with making decisions and
one main requirement for making such decision is
getting financial information which is given by
accounting process. The accounting information helps
the manages in decision making.
iii) Information needs of employees- employees of the
organization are interested in the financial state of the
organization especially when it comes to wage
negotiation. The business owners or managers will only
agree to increase in wage if the business ids making
good returns .
iv) Information needs of the government- the government
require financial accounting information to determine
the taxes that the business should pay from the profits
it makes.
v) Information needs of creditors /lenders/suppliers-
these are individuals or institutions such as banks and
insurance companies who lend money to firms. These
lenders need to determine if these borrowers have the ability to repay such loans.
vi) Information needs of competitors- they require information in their capacity as potential
investors or take over bidders) and to help promote their own efficiency

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ACCOUNTING POLICIES(PRINCIPLES AND ASSUMPTIONS
The statement of standard accounting practices number two
( disclosure of accounting policies) discusses the issue of the
assumptions which underlie the preparation of the financial accounts.
The ssap 2 identifies three crucial terms.
i) Accounting policies
ii) Accounting bases
iii) Fundamental accounting concepts and assumptions
These terms are expounded as follows.
i) Accounting policies- are the specific accounting methods
selected and consistently followed by a business enterprise as
being appropriate and best suited to present fairly its results
and financial position.
Those those accounting policies which are judged material or crucial
in determine profit or loss for the year and in stating the financial
position should be disclosed by way of note to the accounts..
For example company A and company B may select different
accounting bases for dealing with particular accounting matters.

Different accounting bases

Accounting policy of
Area Company A
Company B
Depreciation straight line Reducing
balance
Stock valuation FIFO LIFO
Note
Before accompany determines accounting policies which are
relevant to its circumstances it must have regard to both
fundamental accounting concepts and accounting policies.

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Accounting bases/methods- these are methods developed for
applying fundamental accounting concepts to to financial
transactions and items for the purpose of financial accounts.
Bases are crucial in determining which period particular revenues
and costs should be recognized and assessing the amound at which
balance sheet items should be stated.
There are many accounting matters for which different accounting
bases are recognized.

Accounting arears and bases/methods

Accounting area possible
base/methods
Depreciation straight line,
reducing balance etc
Stock valuation FIFI,LIFO etc

Fundamental accounting concepts and assumptions

These are the broad basic assumptions that underlie the preparation
of periodic financial accounts of business enterprise
These concepts are.
i) Going concern concept- these concept states that accounts
are prepared on the assumption that the enterprise will
continue in operational existence for the foreseeable future.
The significance of these assumption is that the balance
sheet does not attempt to show what assets would realize if
disposed of on a forced sale.
ii) Accrual concept(matching)- the concept states that revenues
and costs are shown in the accounts as they are earned or
incurred not when cash is received or paid . as far as possible

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 expenditure is matched with related income thus profit for
the year does not necessarily equal any inflow of cash.
iii) Consistency- these concept states that there is a consistency
of accounting treatment of like items within each accounting
period and from one period to the next. These convention
helps promote comparability of accounting statements and
also promotes objectivity.eg use of depreciation basis
iv) Prudence( conservatism)- revenues and profits must not be
anticipated but they should be recognized and included in
the profit and loss account when realized in the form-:
a) Cash or
b) Assets whose ultimate cash realization can be assessed with
reasonable certainty. Provision is made for all known
liabilities ( whether expenses or losses) irrespective of
iiiiiiiiiiiiiiiiiiiiiiilkkkkkkkkkkkkkkkkkkkwhether the actual
amount is known with certainty or is a best estimate in the
light of information available.
v) Materiality – an item is likely to be material if knowledge of
it might be expected to influence the user of the financial
statements. Immaterial items which are used in the business
for more than one accounting period can be treated as
expenses rather than fixed assets and therefore subjected to
depreciation. Eg, paper punch
vi) Substance over form- the transaction and other events
should be accounted for and presented in accordance with
their substance and financial reality and not merely with
their legal form. These concept is applicable in hire purchase
transactions such that though the item(asset) is not legally
owned by the business it is reflected in the financial
statements as though it belongs to the business.
vii) Business entity concept- these concept states that the
personal financial affairs of the owner of the business should

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 be kept separate from those of the business itself. For
example if the owner buys a birthday gift for the wife such
transaction will not be recorded as part of the business
transaction.
viii) Cost concept- the assets should always be recorded normally
at the price paid for them except where a diminution in value
has occurred in which case the prudence concept requires
that the lower value be used

Topic 2

ACCOUNTING EQUATION
The whole accounting and bookkeeping is based on a very simple
idea called the Accounting Equation.
All that this means is that if you were to start a business then you
will have to be able to have some resources to start with. In most
business this will be cash.
This can be shown as:
Resources in the business = Resources supplied by the owner.
If therefore you started a kiosk business with Kshs.50,000 cash
from your savings. Then resources in the business will be
Kshs.50,000 cash which will be equal to the resources supplied
by you of Kshs.50000.
In Accounting and in any other subject we use terms to describe
things. Therefore, the amount expressed in money as the
resource supplied by the owner is referred to as Capital while the
actual resource in the business are called Assets.
The above accounting equation can be shown as
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Assets = Capital
↑ ↑
Resource in the business Resources supplied by owner
However sometimes some resources in the business could be
supplied by other persons who are not owners. Resources in the
business supplied by others is known as Liabilities.
If you borrow an additional Kshs.20000 from your dad to boost
your business, and you are given cash by your dad then you will
have a total cash resources of Kshs.70000 in the business.
The accounting equation will now be written as
Assets = Capital + Liabilities

Resources in the business Resources supplied by owner

Resources supplied
supplied by others

At any one particular time the amount of assets will always be

equal to capital and liabilities. As the business starts trading the
actual assets will change but the accounting equation will be the
same. The total amount of the assets will always be equal to
capital and liabilities.
ASSETS
Consist of property of all kinds such as:
-Land
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-Building
-Machinery
-Motor vehicles
-Cash
-Stock etc
LIABILITIES
Consist of money owing for goods and items supplied to the
business such as
-Creditors for goods supplied
-Loans for finances advanced to the business

HOW BUSINESS TRANSACTION AFFECTS THE BALANCE

SHEET
The accounting equation is expressed in financial statement
position known as Balance sheet. We now look at how business
transaction affect the accounting equation or balance sheet.
1. Introduction of Capital
On 1 May 2020 Kamau started business with Sh.50000 from his
savings. This money was deposited in the business bank
account.
Kamau
Balance Sheet as at 1.5.2020

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 Assets Sh. Capital
Sh.
Cash at bank 50000 Capital
50000

2. Purchase of Asset by Cheque

On 2 May 2020 Kamau buys equipment (weighing scale) for
Kshs.4000.
Effect of transaction
-Asset of cash at bank is decreased
-Asset of equipment is increased

Kamau
Balance sheet as at 2.5.2020

Assets Sh. Sh.

Cash at bank 46000 Capital 50000

Equipment 4000

50000 50000

3. Purchase of an Asset and incurring Liability

On 5th May 2020 Kamau bought goods for resale from K. Shah enterprises for
Sh.10000 on credit.

Effect of transaction

-Asset of stock is increased

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-Liabilities of creditors is creased

Kamau

Balance Sheet as at 5.5.2020

Assets Sh. Sh.

Cash at bank 46000 Capital 50000

Equipment 4000 Creditors 10000

Stock 10000

60000 60000

Note: A creditor is a person who the business owes money.

4. Sale of an Asset on Credit

On 7th May Kamau sold goods of Kshs.5000 to Njoroge on credit.

Effect on transaction

-Asset of stock is decreased

-Asset of Debtors is increased

Kamau

Balance Sheet as at 7.5.2020

Assets Sh. Sh.

Cash at bank 46000 Capital 50000

Equipment 4000 Creditors 10000

Stock 5000

Debtors 5000

60000 60000

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Note:

A Debtor is a person who owes money the business.

5. Payment of Liability
On 15.5.2020 Kamau paid K.Shah enterprises Kshs.5000 by cheque.

Effect of transaction

-The asset of cash at bank decreased

-The liability of creditors is decreased

Kamau

Balance Sheet as at 15.5.2020

Assets Sh. Sh.

Cash at bank 41000 Capital 50000

Equipment 4000

Stock 5000 Creditors 5000

Debtors 5000

55000 55000

6. Collection of an Asset
On 16 May 2020 Njoroge who owed Kamau paid cash Ksh.2000

Effect on transaction

-Increase in asset of cash

-Decrease in asset of debtors

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 Kamau

Balance Sheet as at 16.5.2020

Assets Sh. Sh.

Cash at bank 41000

Equipment 4000 Capital 50000

Debtors 5000 Creditors 5000

Cash 2000

55000 55000

Summary

It can be noted that every transaction has affected two items:

-Sometimes it has changed two assets by reducing one and increasing the other. Other
times it has reacted differently.

Looking at the transaction we note that it has maintained the equality of the balance
sheet or accounting equation.

Assets = Capital + Liabilities

Assignment

O.Kagiri has the following balance sheet as at 31 December 2019.

Balance Sheet as at 31.12.2019

Assets Sh Sh.

Equipment 12000 Capital 44000

Motor vehicle 9000 Loan 20000

Stock 16000 Creditors 9000

Debtors 12500

Cash at bank 3000

73000 73000

During the month of January 2020, the following transactions took place:
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2nd January paid creditors Kshs.900

3rd January debtors paid Sh.300

4th January 2020 bought additional equipment for Sh.800a and paid by cheque

4th January paid into the bank Sh.500 from outside private savings

7th January bought Sh.700 stock on credit

Required

1. Show how the above transaction have affected the balance sheet items.
Draw a new balance sheet on 7th January

DOUBLE ENTRY SYSTEM

So far we note that each transaction affects two items. Therefore when doing bookkeeping we
have to show this effect of each transaction on each of this items

For each transaction it means that book keeping will have to be made to show the increase or
decrease of that item and another entry to show the increase or decrease of the other item. This is
what is referred to double entry

Instead of drawing up a balance sheet to show the effect of transaction on the assets capital and
ratability items . The double entry system has an account for every asset, capital and ratability
items

Therefore there will be a land account, building account, motor vehicle account debtors account,
capital account etc.

Each account is shown on a separate page the double entry system divides each page into two
halves

1. The left hand side of each page is called the debit side
2. While the right hand side is called the credit side

The title of the account is written across the top of the account or the centre

TITLE OF THE ACCOUNT E.G. LAND ACCOUNT

Left hand side of page debit side Right hand side of the page “credit side”

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DOUBLE ENTRY SYSTEM RULES

The double entry system follows rules in recording transitions using the accounts. This is known as the
double entry rules. Therefore there will be double entry rules for assets, capital and abilities

ACCOUNTS TO RECORD ENTRY IN THE ACCOUNT

assets An increase Debit

A decrease Credit

Liability An increase Debit

A decrease Credit

capital An increase Debit

A decrease Credit

Looking at the account the rule will appear as

Assets Liabilities + capital

To increase each item debit Credit credit

To decrease each item credit Debit debit

Note

The double entry rules for liabilities and capital are the same but are exactly the opposite as those
for assets . this is because assets are on the opposite side of the equation and therefore follow
opposite rules

Looking at accounts they will appear as

Asset account

increase decrease

liability account

increase Decrease

capital account
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increase Decrease

ENTERING TRANSACTION IN ASSETS, LIABILITY AND CAPITAL ACCOUNT

USING DOUBLE ENTRY RULES

1) Mr koech started a grocery business with ksh 50,000 from his savings on 1/5/2020

EFFECT ACTION

Increase of capital to business Credit capital account

Increase of cash Debit cash account

Cash account

Date details amt Date details amt

1.5.20 capital 50,000 2/5/20 equipment a/c 5000

5/5/20 bandptai Ac 6000

Capital account

Date details amt Date details amt

1/5/20 cash 5000

2) On 2/5/2020 bought equipment ksh 5000 cash

EFFECT ACTION

Decrease in asset of cash Credit cash account

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Increase in asset of equipments Debit equipment account

EQUIPMENT ACCOUNT

Date details amt Date details amt

2/5/20 cash A/c 5000

3) On 3/5/2020 bought goods for resale on credit from bandaptai enterprises kshs 20,000

EFFECT ACTION

Increase in asset of stock Debit stock account

Increase in liabilities of creditors Credit band capital account

STOCK ACCOUNT

Date details amt Date details amt

3/5/20 bandaptai 20,000 4/5/20 kamau 5000

EQUIPMENT ACCOUNT

Date details amt Date details amt

5/5/20 cash A/c 6000 3/5/20 stock 20,000

4) On 4/5/2020 sold ksh 5000 on credit to kamau

Effect Action

decrease in asset of stock Credit stock account

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Increase in asset of debit of debit Debit debtor account

KAMAU ACCOUNT

Date details amt Date details amt

4/5/20 stock 5000

5) On 5/5/20 paid bandaptai cash kshs 6000

EFFECT ACTION

decrease liabilities of bandaptai Debit bandaptai account

Decrease asset of cash Credit cash account

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ILLUSTRATION 2

Write up tha accounts necessary to to record the following transaction in the records of a Nabea

2020

 July 1 started business with sh 63,000 in thye bank

 July 2 bought business building sh50, 000 paying by cheque
 July 2 borrowed sh 40, from L. odak who gave in cheque
 July 5 bought machinery sh 87560 on credit from k. Macharia
 July 6 withdrew sh 2000 from the bank and placed it in the cash box
 July 7 bought for cash office equipment sh 800
 July 10 the owner a nabea paid into the bank sh 6000 from the sale of privet asset
 July 15 porched office equipment sh 3500 on credit from n.odani
 July 17 repaid by cheque sh 10,000 in part repayment of loan from l.odak
 Jul;y 23 sold on credit to N.Kogo suplus machinery sh 900

THE ASSET OF STOCK

The asset of stock is a little bit unique as compared to others assets. This asset is constantly
changing because some is bought some are sold, some is returned to suppliers and some is
returned to the firms customers

To keep check on the movement of stock an account is opened for each type of dealing in goods.
Therefore we will have the following accounts

1. Purchase account – to record increase in asset of stock due to parches

2. Sales account - to record decrease in the asset of stock due to sale
3. Returns invoices account – to record increase in stock when goods are returned by
customers
4. Returns outstand account – to record decrease in assets of stock when goods are returned
to supplies

Note

When the above accounts are used then there will be no needs for the stock account. The above
for accounts take care of the movement of the assets of stock

Illustration

Enter the following transactions in the required accounts

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2020

 May 3 bought goods from l.Obado on credit for kshs3850 credit

 May 4 sold goods for kshs 2000 to koech
 May 5 bought goods on credit from N. Kahenya kshs 4720
 May 7 returned goods kshs 250 to L.Obado
 May 12 sold goods kshs 2400 to A.Lunalo on credit
 May 13 Koech returned goods ksh 400 to the business

Purchase Account

Date details amt Date details amt

3/10 L.Obado 3850

5/10 kahenya 4720

L.Obado Account

Date details amt Date details amt

7/10 returns 250 3/5 purchases A/C 3850

Sales Account

Date details amt Date details amt

4/10 koech A/C 2000

12/10 LONALO 2400

Koech Account

Date details amt Date details amt

4/10 Sales 2000 13/10 perform 400

N.Kahenya

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Date details amt Date details amt

3/10 purchases A/C 4720

Returns Outwards

Date details amt Date details amt

7/10 l.obado 250

A. Lunalo

Date details amt Date details amt

12/10 sales A/C 2400

Returns in wards

Date details amt Date details amt

13/10 KOECHA/C 400

DOUBLE ENTRY SYSTEM FOR EXPENSES AND REVENUES

We have so far looked at the double entry rules for assets, liabilities and capital. Next we look at
the entry rules for expense and revenue

Expenses are the amounts used by the business to generate income revenue . typically example
of business expenses are

 Rent
 Salaries
 Transport
 Lighting
 Water etc

In recording business expenses every expense will have its on account .eg rent account, salaries
account etc.

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REVENUE OR INCOME

This is the recourses that are generated by the business that flows into the business

Example of business revenues are

 Sales
 rent income
 dividend income
 intetest income
 commission etc

Double entry rate for revenues and expenses

ACCOUNTS TO RECORD ENTRY IN THE ACCOUNT

Expenses An increase Debit

A decrease Credit

Revenues An increase Debit

A decrease Credit

ILLUSTRATION

Kimani

1/5/20 started business with kshs 50,000 cash from his savings

2/5/20 he opened a business bank account and banked kshs 20,000

3/5/20 bought good on credit kshs 20,000 from njoro enterprise

4/5/20 bought equipment kshs 6000 for cash

5/5/20 paid rent expenses ksh 10,000

6/5/20 cash sale ksh 10,000

7/5/20 sold goods on credit to koech kshs 10,000

8/5/20 returnrd goods to njoroge ksh400

9/5/20 porchased goods cash ksh 10,000

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10/5/20 koech returned ksh 300 goods to the business

REQUIRED

Record the above transactions in the books of Kimani

CAPITAL ACCOUNT

1/5/20 cash 50,000

CASH ACCOUNT

1/5/20 capital a/c 50,000 2/5/20 bank 20,000

4/5/20 equipment 6000

5/5/20 rent 10,000

9/5/20 porche 10,000

BANK ACCOUNT

2/5/20 cash 20,000

PURCHASE ACCOUNT

3/5/20 njoro sent 20,000

9/5/20 cash 10, 000

NJORO ENTERPRISE

8/5/20 n 400 3/5/20 porchars A/C 20,000

EQIUPMENT ACCOUNT

4/5/20 cash A/C 6,000

RENT ACCOUNT
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5/5/20 cash 10,000

SALES account

6/5/20 cash 6,000

7/5/20 KOECH 10,000

KOECH account

7/5/20 sale 10,000 10/5/20 referring 300

RETURNS OUT WARDS

4/5/20 njoroge 400

RETURNS INWARDS

10/5/20 koech 400

Balancing off accounts

this is the process of determining account balances at the end of the of a certain period eg one
month, three months, six months or one year.

A business that sales goods on credit would like to know how much its customers owe it at the
end of the month.

The process of balancing off accounts are.

i) First add up the sides of the accounts . the debit side and the credit entries to determin
the side with the greatest total

ii) Second determin the deference between the greater total and the smaller total

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 iii) Insert the difference (balance) to the side with the smaller total. This will make the
two total debit and credit totals to be equal, this balance is called balance carried
down of forward.

iv) The totals of the two sides will be done and entered on the same level of the account.

v) You should complete the double entry of the balance by entering the balancing figure
below the totals, this balance is known as balance brought down.

Illustration

D. ORWA ACCOUNT

May 1 sales 15,800 may 28 cash 15,800

May 15 sales 20,600 may 29 returns 4,000

May 30 sales 11,800 may 30 bal c/d 28,400

48,200 48,200

June 1 balance b/d 28.400

Note

1. The date given to balance c/d is the last day of the period which is ending.
The balance b/d given the opening date of the next period,

2. Since the totals of the credit side is more than the totals of the credit
balance this balance is known as the debit balance.

3. If the totals of the credit side is more than the totals of th debit side then
this totals is known as credit balance.

INCOME STATEMENT

The income statement or profit and loss account is one of the financial statement
prepared by businesses at the end of a period. The main reason why people go into
business is to make profit and increase their wealth. Therefore, the only way to know if
your business has made profit or loss is to prepare an income statement or trading profit
and loss account.
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What you need to prepare income statement

From the book keeping records one has to

i) Balance off the account

ii) Extract a trial balance
iii) Use the trial balance information to prepare the income statement.
iv) The income statement essentially is divided into two main section.
1.Trading Account-This is the section where we determine the gross profit made by
the business.

Gross profit = sales-cost of sales

Cost of sales = opening stock + purchases –closing stock

Opening stock – is the amount of goods unsold at the beginning of the financial period
under consideration.

Closing stock – is the amount of goods unsold at the end of the financial period.

The closing stock is usually determined through a physical stock count.

Other items to consider in preparing the trading account

i) Return inwards- this amount will be subtracted from the sales figure because
it constitutes sales made that were returned back by customers.
ii) Returns Outward- This amount will be subtracted from the purchase figure. It
constitutes purchases that were returned back to the suppliers.
iii) Carriage inwards – This are cost incurred by the business to transport goods
to the premises. This cost is added to purchases.
2.Profit and Loss Account

This is the portion of the income statement that we determine that profit or loss made by
the business. In this section we subtract the business operating expenses form the
gross profit. If the gross profit is higher than the expenses then we have net profit but if
the gross profit is lower than the expenses then we have net loss.

The format of income statement

Mr. Kimani

Income statement for the year ended………

Sales xxxxx

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Less sales returns or returns inwards (xx)

Net sales xxxx

Less cost of goods sold

Opening stock xxx

Add purchases xxx

Add carriage inwards xxx

Less returns outward (xxx)

Less closing stock (xxx)

xxxx

Gross profit xxxx

Less operating expenses

Rent xxx

Depreciation xxx

Salaries xxx

Transport xxx

Bad debts xxx

Lighting xxx

Insurance xxx

xxx

Net profit/loss xxx

Illustration

Extract a trading and profit and loss account for the year ended 30 June 2020 for
F.Apoko. the trial balance as at 30.6.2020 after his first year of trading was as follows:

Dr Cr

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Rent 4710

Insurance 870

Lighting expenses 1600

Motor expenses 5840

Salaries and wages 14220

Sales 107800

Purchases 93160

Sundry expenses 2522

Motor vans 10500

Creditors 9750

Debtors 20160

Fixtures 11112

Building 84000

Cash at bank 3484

Drawings 19166

Capital 153794

271344 271344

Stock at 30 June was Kshs.31050

Answer

F.Apuko

Income Statement for the year ended 30 June 2020

Sales 107,800

Less cost of sales

Opening stock xxx

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Purchases 93160

Less closing stock 31050

62110 62,110

Gross profit 45690

Sundry expenses 2522

Rent 4710

Insurance 870

Lighting expenses 1600

Motor expenses 5840

Salaries and wages 14220 29762

Net profit 15,928

BALANCE SHEET

A balance sheet is a financial statement prepared at the end of a financial period that
shows the financial status of the business. The balance sheet is prepared after the
income statement has been prepared. The balance is not part of the double entry
system like the trading profit and loss account but a statement that lists the balance
remaining in the trial balance after the income statement has been prepared according
to whether they are assets, capital or liabilities.

Balance Sheet Layout

All the items in the balance sheet should be shown in an orderly way. This makes the
reading of the statement easy. It is also important to follow a certain pattern in laying
out the items so as to enable comparison of a balance sheet to be made easier.

Assets

Assets are normally shown under two headings

1) Fixed Assets- Assets are called fixed assets when they are:
a) Of long life
b) They are to be used in the business
c) Bought with the intention of sale
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Example of fixed assets are:

-Building

-Machinery

-Motor vehicle

-Fixtures and fittings

Current Assets-Assets are called current assets when they are

a) They represent cash

b) Primarily for conversion into cash
c) Have a short life
Examples of current assets are

-Cash

-Debtors

-Stock

-Cash at bank

Assets are normally arranged in the balance sheet starting with the most permanent
asset progressing to the asset which is least permanent or easiest to turn into cash. In
this case assets will be listed as follows:

Fixed Assets

1.land and building

2.Fixtures and fitting

3.Machinery

4.motor vehicles

Current assets

1. Stock
2. Debtors
3. Bank
4. Cash
On the side of capital and liabilities the order is preferably that of starting with
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1.Capital

2.Long term liabilities

3.Current liabilities

Illustration

Using the previous example prepare a balance sheet of Mr.Apuko for the year ended 30
June 2020.

Mr.Apuko

Balance Sheet as at 30 June 2020

Fixed assets

Building 84000

Fixtures 11112

Motor vans 10500

Current assets

Stock 31050

Debtors 20160

Cash at bank 3484

160306

Capital 153794

Add net profit 15928

Less drawings (19166)

Liabilities

Creditors 9750

160306

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BOOKS OF ACCOUNT

These are the basic books used by Accountants to record business transactions.

The books are generally divided into two categories

i) The books of original entry or day books

ii) The ledger
1.Books of original entry

These are books used to record business transaction first. When recording transaction
in these books, we use several source documents such as:

(i) Sales invoices

(ii) Purchase invoice
(iii) Cash sale receipts
(iv) Debit notes
(v) Credit notes
The books of original entry are:

i) Purchase journal
ii) Sales journal
iii) Returns inwards journal
iv) Returns outward journal
v) The journal

1. Purchase Journal
Is also known as purchases day book. In this book we record the details of the goods
purchased by the business on credit. In making entries in the purchase journal the
source document used is the purchase invoice.

Format of Journal

Purchase Journal

Date Name Invoice No. Folio Amount

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2. Sales Journal
Also known as sales day book. In this book we record the details of the goods sold by
the business on credit. In making entries in this book the source document used is the
sales invoice.

Format of Sales Journal

Date Name Invoice No. Folio Amount

3. Returns Inwards Journal

Also known as returns inwards day book. In this book we record the details of
customers who have returned goods back to the business. In making records in this
book the source document used is the credit note indicating that the debtors account
has been credited to reduce the amount due from him or her.

Format of Returns inward journal

Date Name Credit Note Folio Amount

No.

4. Returns Outward Journal

Also known as returns outwards day book

In this book we record the details of suppliers who the business has returned goods to.
In making entries in this book the source document we use is debit note. Indicating that
the suppliers account has been debited to reduce the amount owed.

Format of Return Outward Journal

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Date Name Debit Note Folio Amount
No.

5. The Journal
This is the book of original entry that we record other transactions that are not recorded
in:

- Sales journal
- Purchase journal
- Return inwards journal
- Returns outward journal
- Cash book
These items or transaction that pass through the journal are much less common and
sometimes much more complicated in nature. It would be easier for the bookkeeper to
forget what these transactions were all about.

This book is a form of diary to record such transactions before the entries are actually
made in the double entry accounts. It will contain for each such transaction:

i) Date
ii) Name of the accounts(s) to be debited and the amounts
iii) The name of the accounts to be credited and amount
iv) A description of the transaction(this is called a narrative)
The use of journal makes fraud by book keepers more difficult and it also reduces the
risk of entering the item once only instead of having double entry.

Uses of the Journal

i) The purchase and sale of fixed assets on credit

ii) The correction of errors
iii) Writing off bad debts
iv) Opening entries. These are entries needed to open a new set of books.
THE LEDGER

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The ledger is the main book of accounts. This is the book that holds all the accounts. If
a business is small then it is sufficient to have only one book to hold all the assets,
capital, liabilities, revenue and expenses accounts.

However, if the business is big then there is need to divide the ledger into several
books. This will facilitate the sharing of responsibility in recording voluminous
transactions of the business.

Typical division of the ledger will have:

1. Sale ledger: this is the book that will hold the personal account of entries and
persons that the business has sold goods on credit.
2. Purchases ledger: this is the book that will hold the personal account of entities
that business has bought goods on credit.
3. Cash book: this book will contain the cash and bank accounts. To record money
received or paid by the business either by cash or by cheques.
4. The General ledger: this book will now hold other accounts that are not found in
the above three books e.g Building account, rent expense accounts, capital
account etc.

How Book of Accounts Are Used to Record Business Transactions

1. Sales journal/Sales ledger/General ledger

Illustration

Enter the following transaction in the sale journal and returns inward journal. Post the
items to the relevant accounts in the sales ledger and general ledger.

2020 Jan

1. Credit sales to J.Wasike invoice No.231 Kshs.23000

12. Credit sales to A.Chue invoice No.232 Kshs12,300
13. J.Wasike returned goods Kshs.3000 credit note No.73
24. Credit sales to M.Luteka invoice No.233 Kshs14500

25. A.Chui returned goods Kshs.1200 to the business credit note No.671

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The Sales Journal Page 1

Date Name Invoice No. Folio Amount

Jan.1 J.Wasike 231 SL1 23000

Jan.12 A.Chui 232 SL2 12300

Jan.24 M.Luteka 233 SL3 14500

Transfer to GL 1 49,800
sales Account

Returns Inwards Journal

Date Name Credit Note Folio Amount

No.

Jan.13 J.Wasike 73 3000

Jan.25 A.Chui 671 1200

Transfer to GL 2 4200
Returns Inward
Account

Note

The entries can be made in the journal at the same time an entry can be posted to the
respective personal accounts of the debtors in the sales ledger.

Sales Ledger

Page 1

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 J.Wasike Account

Date details Folio Amount Date Details Folio Amount

1/1 Sales SJ1 23000 13/1 Returns RIJ1 3000

Page 2

A.Chui Account

Date Details Folio Amount Date Details Folio Amount

12/1 Sales SJ2 300 25/1 Returns RIJ 1 1200

Mr. Luteka Account

Date Details Folio Amount Date Details Folio Amount

24/1 Sales SJ3 14500

Note:

After the various entries have been made in the personal account then the journals
should be posted to the General Ledger. In this case the totals are taken to the credit
side of the sales account and debit side of the returns inwards account.

General Ledger

Page 1

Sales Account

Date Details Folio Amount Date Details Folio Amount

31/1/20 Credit sales SJ1 49800

For the month

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 Page 2

Returns Inwards Account

Date Details Folio Amount Date Details Folio Amount

31/1 Returns inward RIJI 4200

For the month

Note

The amount transferred or posted to the sales and returns inward account are the totals
for the month, meaning that this two account will ultimately have only 12 entries by the
end of the financial period.

2. Purchases Journal/Purchases Ledger/General ledger

Illustration

Enter the following transactions in the purchase journal and returns outward journal.
Post the items to the relevant accounts in the purchase ledger and general ledger.

2020 January

1. Credit purchases from R.Njoki Kshs.6700 invoice No.241

12. Credit purchase from K.Shar Kshs23,000 invoice No.924

13. Returned goods to R.Njoki Kshs1400 debit note No.634

24. Credit purchase from C.Omamo Kshs.24000 Invoice No.112.

25. Returned goods to C.Omamo Kshs.2000 Debit Note No.635

Page 1

Purchases Journal

Date Name Invoice No. Folio Amount

1 jan.20 R. Njoki 241 PL1 6700

12 Jan.20 K.Shah 924 PL2 23000

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24 Jan.20 C.Omamo 112 PL3 24000

Transferred to GL1 53700

purchase
account

Page 1

Returns Outward Journal

Date Name Debit Folio Amount

Note No.

13/1 R.Njoki 634 PL1 1400

25/1 C.Omamo 635 PL3 2000

Transferred to GL2 3400

Returns outward

Account

Purchases Ledger

Page 1

R.Njoki Account

Date Details Folio Amount Date Details Folio Amount

13/1 Returns RIJ1 1400 1/1 Purchase PJ1 6700

Page 2

K. Shah Enterprise Account

Date Details Folio Amount Date Details Folio Amount

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 12/1 Purchase PJ1 23000

Page 3

C.Omamo Account

Date Details Folio Amount Date Details Folio Amount

25/1 Returns RIJ1 2000 24/1 Purchase PJ1 24000

General Ledger

Page1

Purchase Account

Date Details Folio Amount Date Details Folio Amount

31/1 Credit purchases DJ1 53700

For the month

Page 2

Returns Outward Account

Date Details Folio Amount Date Details Folio Amount

31/1 Returns for ROJ1 3400

the month

CASH BOOK

The cash book has two accounts put together in one book. Thus accounts are cash
account and bank accounts. This book records cash received and paid by the business
by way of cash or cheques. In addition, to the cash and bank columns in the cash book,
we have additional column to accommodate the cash discounts.
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Cash Discounts

Cash discounts are allowances given to customer and suppliers to encourage them
settle their accounts within short term period. There are two types of cash discounts

i) Cash discount received- This is an allowance given to the business when it

settles its accounts within a certain period of time.
ii) Cash discount allowed – This is an allowance given to customers when they
settle their accounts within a stipulated time.

Three Column Cash book

Format

CASH BOOK

Dat Detail Foli Dis.Allo Cas Ban Dat Detail Foli Dis.Rec Cas Ban
e s o . h k e s o . h k

Illustration

Opiyo is a sole trader who enters all the cash and bank transaction in a three column
cash book. His transaction for the month of October 2019 are as follows:

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 October 2019

1 Balances brought forward

Cash in hand sh.2200

Cash at bank sh2700

4 Paid to N.Togom by cheque shs710 being in full settlement of a debt of shs750

less sh 40 discount.

6 Received from T.Owora a cheque for shs420 being in full settlement of my debt

of sh.450 less sh30 discount.

11 Received from S.Choka sh.510 cash being in full settlement of his debt of sh.560

less sh.50 discount

16 Paid into the bank account the sum of sh.900.

23 Paid to L.Ireri by cheque sh.630 being in full settlement of a debt of sh.700 less

sh.70 discount.

25 Drew cheque for sh.300 for office cash

30 Paid wages in cash sh.270

Required

i) Draw up the three column cash book for the month of October carrying down
the balances of cash in hand and cash at bank

ii) Total the two discounts columns

Page1

CASH BOOK

Date Details Folio Dis.All. Cash Bank Date Details Folio Dis.Rec. Cash Bank

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Oct.1 Bal.b/d 2200 2700 Oct.4 N.Togom DL 40 710

Oct.6 T.Owora SL1 30 420

Oct.11 S.Choka SL2 50 510 Oct.16 Bank C 900

Oct.16 Cash C 900 Oct.23 I.Ireri 70 630

Oct.25 Bank C 300 Oct.25 Cash C 300

Oct.30 Wage 270

Oct.30 Bal.c/d 2260 1960

80 3430 3600 110 3430 3600

Nov1 Bal.b/d 2260 1960

Purchases Ledger Book

N.Togom Account Page 1

Date Details Folio Amount Date Details Folio Amount

Oct.4 Bank A/c CB1 710 1/10 Bal.b/d CB1 750

Oct.4 Disc.Rec. CB1 40

T.Ireri Account Page 2

Date Details Folio Amount Date Details Folio Amount

OCT.23 Bank A/c CB1 630 1.10 Bal.b/d CB1 700

Disc.Rec. CB1 70

43 | P a g e
Sales Ledger Book

T.Owora Account Page 1

Date Details Folio Amount Date Details Folio Amount

1/10 Bal.b/d CB1 450 6/10 Bank CB1 420

A/c

6/10 Disc.All. CB1 30

S.Choka Account Page 2

Date Details Folio Amount Date Details Folio Amount

1/10 Bal.b/d CB1 560 11/10 Bank CB1 420

A/c

6/10 Disc.All. CB1 30

General Ledger Book

Discount Received Account Page 1

Date Details Folio Amount Date Details Folio Amount

Oct.30 Disc.for CB1 110

the
month

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 Discount Allowed Account

Date Details Folio Amount Date Details Folio Amount

30/10 Disc.for CB1 80

the
month

ERRORS IN ACCOUNTING

There are two main types of errors in accounting

I) Errors that do not affect the agreement of the trial balance

II) Errors that affect the agreement of the trial balnce

i) Errors not affecting agreement of the trial balance

This are those errors that when committed the trial balance will still balance

Types of errors

1.Errors of omission-a case where the transaction is completely omitted from the
books.

2.Errors of commission – this is a case where the correct amount is entered but in the
wrong person’s account.

3. Errors of principle- this is a case where an item is entered in the wrong class of
account e.g

4. Compensating errors – where errors cancel each other out

5. Errors of original entry – this a case where the original figure is incorrect yet double
entry is still observed using the incorrect figure.

45 | P a g e
6.Complete reversal of entries – where the correct accounts are used but each item is
shown on the wrong side of the account.

7.Transposition errors- this a case where wrong sequence of the individual characters
within a number was entered.

CORRECTION

Most errors are found at a date later than the one in which they are first made when we
correct them we should not do so by crossing out items, tearing out accounts and
throwing them away.

We make correction to double entry accounts by preparing journal entries.

1.show the correction by means of journal entries and then

2.show the correction in the double entry set of accounts by posting these journal
entries to the ledger accounts affected.

suspense accounts and errors that affects the agreement of the trial balance

We have so far looked at those errors that do not affect the trial balance. However
some other errors will mean that the trial balance totals will not be equal. This erros
includes

i) incorrect addition in any account

ii) single entry

ii) entering different amount in the debit side and different amount on the credit
side.

Suspense Account

Normally once the trial balance does not agree then a search must be done to establish
the error. When such an error cannot be found the trial balance totals can be made to
agree with each other by inserting the amount of the difference between the two sides in
a suspense account.

Illustration

K.K.Shop

46 | P a g e
 Trial Balance as on 31 December 2005

Total after all the accounts have been listed 100,000 99400

Suspense account 600

100,000 100,000

To make the two sides equal a figure of sh.600 for suspense account has been shown
on the credit side of the trial balance. A suspense account is opened and the sh.600
difference is also shown there on the credit side.

Suspense Account

2005 sh. 2005 sh.

31 March Sales 600 31 December Difference per trial balance 600

Note

If the errors are discovered before financial statement are prepared the suspense
account balance will be included in the balance sheet. Where the balance is a credit
balance it should be included on the capital and liabilities side of the balance sheet.
When the balance is a debit balance it should be shown on the asset side of the
balance sheet.

CORRECTION OF ERRORS

When such errors are discovered, they must be corrected using double entry. Each
correction must first have an entry in the journal describing it and then posted to the
accounts concerned.

Illustration(one error only)

Assume that the error of sh.600 in the above trial balance is found in the following year
on 31 March 2006. The error was that the sales account was undercast by sh.600. The
action is:

Dr:Suspense account with sh.600

Cr:Sales account
47 | P a g e
 Sales Account

March 31 Suspense Account 600

Journal Entries

March 31 Suspense 600

Sales 600

Correction of undercasting of sale by sh.600 in last year’s account.

More than one error

Illustration 2

The trial balance at 31 December 2005 showed a difference of sh7700 being a shorage
on the debit side.

Suspense Account

31 Dec.2005 Difference per L.Ken Account 15000

Trial balance 7700 Purchases A/c 2000

Sang 9300

17000 17000

On 28 February 2006 all the errors from the previous years were found

a) A cheque of 15000 paid to L.Ken had been correctly entered in the cash book but
had not been entered in Ken account
b) The purchase account had been undercast by sh.2000
c) A cheque of sh.9300 received from K.Sang had been correctly entered in the
cash book but had not been entered in Sang account.
Correction

These errors resulted in the total difference of sh.7700 on the debit side of trial balance.

Journal Entries

Date Details Dr. Cr.

L.Ken A/c 15000

Suspense A/c 15000

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To correct entry not made to Ken account

Purchase account 2000

Suspense A/c 2000

To correct undercast in purchase account

Suspense A/c 4300

Sang 9300

Correction of omission of entry in Sang’s A/c

Effects of Errors on Profits

Some of the errors will have meant that original profit calculated will be wrong. Other
errors will have no effect upon profits.

BAD DEBTS, PROVISIONS FOR DOUBTFUL DEBTS AND PROVISION FOR

DISCOUNTS ON DEBTORS

BAD DEBTS

This are debtors which the business has no hope of recovering them and therefore
needs to be written off from the accounts. When a debt is recognized as bad then
entries will be

Dr:Bad debts account

Cr:The respective debtors Account

At the end of the year the bad debts is charged to profit and loss account because its an
expense.

Dr: profit and loss Account

Cr:Bad debts account

Illustration 1

Teacher to give off the cu….

49 | P a g e
PROVISION FOR DOUBTFUL DEBTS

Why provision are needed.

To show in the balance sheet a debtors figure as close as possible to the true value to
debtor’s at the balance sheet date.

Under normal circumstances nor all the outstanding debts will be paid and therefore to
show the balance of debts as they are then the debtors balance and the profit reported
in the profit and loss account will be overstated.

To arrive at the figure for the provision for doubtful debts the business will always make
a percentage estimate derived from past experience as the estimate of provision for
doubtful debts. This percentage is applied over all debtor balance(after deducting the
bad debts).

ACCOUNTING ENTRIES FOR PROVISIONS FOR DOUBTFUL DEBTS

Dr: profit and loss Account

Cr: provision for doubtful debts account

Illustration 2

At 31 December 2005. The debtors figure after subtracting bad debts was 100,000. It
is estimated that 2% of the debts will eventually prove to be bad and provision is to be
made.

INCREASING THE PROVISION

After the initial provision for doubtful debts has been made subsequent years will either
require increasing the figure or reducing the figure accordingly.

Illustration 3

Suppose that at the year end 31 December 2006 the provision for doubtful debts need
to be increased. This will happen if:

i) If the 2% is maintained but the debts balance went up to 120,000.

ii) If the debtors remain constant but the percentage was increased.
If the debtors went up to 120,000 and the percentage remained at 2% then the total
provision will be 2400. What needs to be done is provision for extra 400.
50 | P a g e
Dr:Profit and loss account

Cr:Provision for doubtful debts account with 400/=

REDUCING THE PROVISION

To reduce the provision;

Dr:Provision for doubtful debts accounts

Cr:Profit and loss account with the amount reduced

Assume the debtors figure fallen to 105,000 but the provision remained at 2% for the
year 31 December 2007.

Since provision was previously 2400 it now needs to be reduced by sh.300.

BAD DEBTS RECOVERED

It is not uncommon for a debt written off in previous years to be recovered when they
happen.

i) Reinstate the debt

Dr:Debtors account
Cr:Bad debts recovered account
ii) When payment is received from the debtor in settlement of all or part of the
debt.
Dr:Cash/bank
Cr:Debtor’s account
At the end of the year the balance in the bad debts recovered is transferred to bad
debts account or direct to profit and loss account.

PROVISIONS FOR CASH DISCOUNTS ON DEBTORS

Some business create provisions for cash discounts to be allowed on the debtors
outstanding at the balance sheet date. The procedure for dealing with this is similar to
the doubtful debts provision. The provision for cash discount allowed is based on the
net figure of debtors less doubtful debts provision.

Illustration

Year end 31 Dec. Debtors at end Bad debts w/off Provision for Provision for
51 | P a g e
 Of year(after bad during year doubtful cash

Debts w/off debts 2% discount

2002 60,000 4230

2003 70,000

2004 77,500

2005 65,000

2006 90,000

DEPRECIATION OF FIXED ASSETS

Depreciation can be said to be the cost of a fixed asset consumed during its useful time.
If you buy an asset for 20,000 and after 5 years you sell it at sh.5000. then the value
depreciated for 5 years was sh.15000.

As the assets is being used the value of depreciation each year of the assets use can
only be estimated.

Depreciating is an expense which should be charged to the profit and loss account as
that part of the fixed asset consumed that year to generate revenues.

Causes of Depreciation

1. Physical deterioration
i) Wear and tear
ii) Erosion, rust, rot and decay
2. Economic Factors
i) Obsolescence- process of becoming out of date
ii) Inadequacy – the asset cannot fit to the expanded operations
3. Time Factor
Example of assets that depreciate with time are leases or patents. Life of a
patent is 16 years.

4. Depletion
Some assets are of wasting character perhaps due to the extraction of raw
materials from them. Mines, quarries and oil well come under this category.

52 | P a g e
 5. Land and Building
FRS 15 of 1999 requires that buildings be subjected to depreciation whereas
freehold land does not normally require a provision for depreciation.
Appreciation

This is a situation where the value of the property has gone up. Under normal
circumstances it is to ignore such appreciation and not to recognize in the financial
statement. However, FRS15 has allowed fixed assets to be revalued and for
depreciation to then be calculated on the basis of the revalued amount.

PROVISION FOR DEPRECIATION AS AN ALLOCATION OR COST

This is the allocation of the cost of the fixed asset which is estimated to have been
consumed each year to the profit and loss account as an expense. There is no truly
accurate method of doing this allocation.

Methods of calculating depreciation

There are two methods:

1. Straight Line Method

By the method the number of years of use is estimated. The cost is then divided by the
number of years to give the depreciation charge each year.

Example 1

A lorry is bought for sh.2,200,000 it will be kept for 4 years and then sold for 200,000
the depreciation for 4 years will be:

Cost – Disposal value

No. of years

2,200,000-200,000

= 500,000

2. Reducing Balance Method

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A fixed percentage for depreciation is deducted from the cost in the 1 st year in the
second of later years the same percentage is taken of the reduced balance.

Illustration 2

A machine is bought on 1.5.12 for sh.100,000 and depreciation is charged at 20% the
calculator for the 1st 3 years would be:

Cost 100,000

1st year depreciation 20% 20,000

80,000

2nd year depreciation 20% 16,000

64,000

3rd year depreciation 20% 12,800

57,200

Depreciation Provision and Assets bought or Sold

There are two main methods of calculating depreciation provision for assets bought or
sold during an accounting period.

1. Ignore the dates during the accounting period that the assets were bought or sold
and simply calculate a full period’s depreciation on the assets in use at the end of
the period. This assets sold during the accounting period will have had no
provision for depreciation made for that last period irrespective of how many
months they were in use. Conversely assets bought during the period will have a
full period of depreciation provision calculated even though they may not have
been owned throughout the whole of the period.

2. Provide for depreciation on the basis of one month ownership = one month’s
provision for depreciation fraction of months are usually ignored.

DOUBLE ENTRY RECORDS FOR DEPRECIATION

The method used involves maintaining each fixed asset at its costs on the ledger
account while operating another ledger account where depreciation to-date is recorded.
This account is called accumulated provision for depreciation account

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Illustration

END OF THE YEAR ADJUSTMENTS

ACCRUALS AND PREPAYMENTS AND OTHER ADJUSTMENTS FOR FINANCIAL

STATEMENTS

So far we have considered revenue as belong…exactly one year and also revenues
also belong… to exactly one year. There was no rent owing at the beginning of the year
nor any owing at the end of the year, nor had any rent been paid in advance.

Adjustment needed

1. Business A pays sh.10,000 in the year. At the year end it owes sh.2000 for rent.
Rent expense used up sh.12000
Rent paid for 10000
Accrued Expense

Assume that rent of sh.10000 per year is payable at the end of every three months.
The rent was pad as follows: The year ends on 31 December.

Amount Rent due Rent paid

2500 31.3.05 31.3.2005

2500 30.6.05 2.7.2005

2500 30.9.05 4.10.2005

2500 31.12.05 5.1.2006

Rent Account

31.3.05 Cash 2500

2.7.05 Cash 2500 31.12.05 Profit & loss 10,000

4.10.05 Cash 2500

31.12.05 Accrued c/d 2500

10,000 10,000

Note

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The balance c/d has been described as accrued c/d rather than as balance c/d. this is
to explain what the balance is for.

Prepaid Expenses

A company whose year end at 31 December pays insurance at the rate of sh.84000 a
year, starting from 1 Jan.2005. The company pays this at the rate of sh.21000 every 3
months. Payment was made as follows:

Amount Insurance due Insurance paid

21,000 31.3.05 21000 28.02.05

21,000 30.6.05

21000 30.9.05 42000 31.08.05

21000 31.12.05 42000 18.11.05

This insurance account will look like

Insurance Account

28.02.05 Cash 21000

31.08.05 Cash 42000 31.12.05 Profit and loss A/c 84000

18.11.05 Cash 42000 Prepayment c/d 21000

105000 105000

Packaging Materials

Packaging materials in hand at the end of the period is treated as stock which needs to
be carried down to the following period.

Year ended 31 December 2005

Packaging material bought in the year sh.22000

stock of packaging materials in hand as at 31 December 2005 4000

56 | P a g e
 Packing Materials

2005

31 Dec. Bank 22,000 31 Dec. Profit &loss 18000

31 Dec. Stock c/d 4000

22000 22000

This amount is not added to stock of unsold goods in hand but added to prepayments of
expenses.

Revenue Owing at the end of Period

Our warehouse is larger than we need. We rent part of it to another business for
sh.8000 per year. Details for the year ended 31 December 2006.

Amount Rent Due Rent Received

2000 31.3.05 4.4.2005

2000 30.6.05 6.07.2005

2000 30.9.05 9.10.2005

2000 31.12.05 7.1.2006

The account will look

Rent Receivable

4.4.05 Cash 2000

31 Dec. Profit & loss 8000 6.7.05 Cash 2000

9.10.05 Cash 2000

31.12.05 Accrued c/d 2000

8000 8000

Expenses and Revenue Account balances and the balance sheet

57 | P a g e
Accruals

Prepayment

EXPENSES AND REVENUE ACCOUNTS COVERING MORE THAN ONE PERIOD

What happens when we have accruals and prepayment balances at the beginning of
the year.

Illustration

i) On 31 Dec.2004 3 months rent sh.30000 was owing

ii) The rent chargeable per year was sh.120000
iii) The following rent prepayment were made in the year 2005
6 Jan. sh.30000, 4 April sh.30,000, 7 July 30,000, 18 October 30,000
iv) The final 3 months rent for 2005 is still owing
Rent Account

2005 1.1.05 Accrued 30,000

Jan 6 Bank 30,000

April 4 Bank 30,000 31.Dec Profit&loss A/c 120,000

July 7 Bank 30,000

July 18 Bank 30,000

Dec.31 Accrued c/d 30,000

150,000 150,000

1.1.06 Accrued b/d 30,000

Illustration

Rent and rates account are put together as one account. The following details for the
year ended 31 December 2005.

i) Rent for the year sh.60,000

ii) Rates sh.40,000 per annum are paid by instalment
iii) At 1 January 2005, rent of sh.10,000 had been prepaid in 2004
iv) On 1 January 2005 rates of sh.4000 were owed
v) During 2005 rates of sh.50,000 was paid
58 | P a g e
 vi) During 2005 rent of sh.45000 was paid
vii) On 31 December 2005 rent of sh.5000 was owing
viii) On 31 December 2005 rates of sh.6000 had been prepaid.

BANK RECONCILIATION STATEMENT

Bank reconciliation statement is a statement that seeks to reconcile the

cash book bank balance and the bank statement balance. These
statement is prepared at the end of every month. At the end of every
month the bank will issue a bank statement which shows the details of
transactions that the account holder did during the month, at the same
time the accountant at the business will also balance the cash book at
the end of the moth and produce a balance, in most instances these
two balances will not agree. Some of the reasons why these two
balances will not agree are.

a) Standing orders- these are instructions given by the customer to

the bank to make regular payments directly from the account
either to suppliers or other creditors. This entry will appear only in
the bank statement but will be missing in the cash book at the
end of the month.
b) Bank charges- these are charges levied by the bank on the
customer for maintaining the account with the bank. This charges
will show in the bank statement but not in the cash book at the
end of the month.
c) Dishonoured cheques- this are cheques which were written in
favour of the business and presented to the bank but because of
one reason or the other the cheque could not be paid by the
bank. the bank will cancel these cheque and make an entry in the
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 bank statement indicating that it has been dishonored. These
means the entry will appear in the bank statement but miss in
the cash book.
d) Direct credit- these are amount of money paid directly into the
bank account of the business by business customers. This amount
will appear in the bank statement but will miss out the cash book
at the end of the month.
e) Uncredited cheques- this are cheques written in favour of the
business and taken to the bank but by the bank has not credited
the business bank account at the close of the month. These
amount will appear in the cash book but miss out in the bank
statement.
f) Unpresented cheques- these are cheques written in favour of
suppliers or creditors for goods and services, but have not been
presented by the cheque holders by the end of the month for
payment. These means that the mount will appear in the cash
book but will miss out in the bank statement at the close of the
month.

Stapes followed to prepare a bank reconciliation statement

Bank reconciliation statement is prepared at the end of every

month. To do that the accountant needs the get a copy of bank
statement.
Stape 1
Go through the cash book and the bank statement to identify the
items that are causing the two balances not to agree.
Stape 2
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Update the cash book- this is done by bringing those entries that
are in the statement but are missing in the cash book to the cash
book
Stape 3
Once the cash book is updated there will be a new balance for the
cash book. These is the balance that will be reconciled or made to
agree with the bank statement balance.
Stape 4
Prepare the bank reconciliation statement by starting with the
cash book balance and make this balance agree with the bank
statement balance using the items identified as causing the
diference.

Illustration.
the following information is taken from the bank column of the
cash book and the bank statement respectively of Nyanam
cooperative society

cash book(bank column)

may 1 balance b/d 17500 may 4 B.Ndolo 7500
may 5 E. mambo 850 may 6 contra 280
may 6 Contra 280 may 8 M.Njeri 1300
may 11 W.Hamisi 1,100 may 11 A. Ramadan 1800
may 14 Olenjaro 4500 may 15 balance c/d 13,350
24,230 24,230
june 1 balance b/d 13,350

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 Bank statement
Date debit credit balance
Shs shs shs
May 1 balance b/f 17500
,, 4 standing order 470 17030
,, 7 B.Ndolo 7500 9530
,, 8 E. mambo 850 10380
,, 11 M.Njeri 1300 9080
,, 11 bank charges 125 8955
,, 13 W. Hamisi 1100 10055
,, 14 unpaid cheque-E.Mambo 850 9205
,, 30 rent receivable 3000 12205

Required
a) Update the cash book
b) Prepare a statement to reconcile the fefference between the
two balances on may 30th.

Updated cash book

(bank column)
may 1 balance b/d 17500 may 4 B.Ndolo 7500
may 4 standing order 470
may 5 E. mambo 850 may 6 contra 280
may 6 Contra 280 may 8 M.Njeri 1300
may 11 bank charges
125
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 may 11 W.Hamisi 1,100 may 11 A. Ramadan 1800
may 14 Olenjaro 4500 may 14 dish cheque 850
may 30 rent income 3000 may 30 bal c/d 14905
27230 27230
june 1 balance b/d 14905

Nyanam cooperative society

Bank reconciliation statement for the month ended 30 th may
2020
Balance as per the updated cashbook 14905

Add unpresented cheque. A Ramadan 1800

16705

Less uncredited cheques - olenjaro 4500

Balance as per the bank statement 12205

CONTROL ACCOUNTS

The growth of a business present with it great challenges. The counting work has to be
divided up such that there are several ledgers in such case its difficult to find out errors

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if a trial balance was the only device used to try to detect errors. Every item in the
ledger will have to be checked to find the error that caused the trail balance not to
balance. What is required is a type of trial balance for each ledger and this requirement
is met by control accounts.

A control account is a summary account that enables you to see at a glance whether
the general ledger balance for the ledger to which that control account belongs agree
with the total of all the individual accounts held within that ledger. Using control
accounts means that it is only the ledgers whose control accounts do not balance that
need detailed checking to find errors.

Principle of Control Accounts

The principle behind the control account is very simple and it is that;

If the opening blance of an account is known then add information and less deduction
dring the year then you will get the closing balance.

Applying this to a complete ledger it ban be illustrated as

Total opening balances 1 Jan.2005 xxx

Add entries which have increased the balance xxx

Less:Total of entries which have reduced the balance (xxx)

Total of closing balances should be xxx

Because total are used control accounts are sometimes known as ‘’total accounts’’.
Thus a control account for sales ledger could be known as either a sale ledger control
account of as ‘’total debtors account’’.

Similarly control account for a purchase ledger could be known either as a purchase
ledger control account or as a total creditors account.

Control accounts usually looks like any other “T” account.

Sales Ledger Control Account

2005 2005

Jan.1 Balance b/d xxx Jan.31 Cashbook(Total cheques

Received from debtors) xxx

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Jan.31 Sales daybook

Total sales unrolled xxx Jan.31 Balance c/d xxx

Information for Control Account

Sales Ledger Control Source

1.opening debtors -List of debtors balance drawn up at the end of

the previous period

2.Credit sales -Total from the sales day book

3.Returns inwards -Total returns inwards day book

4.Cheques received -Cash book

5.Cash received -Cash book

6.Closing debtors -List of debtors balance drawn up at the end of

the period.

Purchase Ledger Control Source

1.Opening creditors

2.Creditors purchases

3.Returns outwards

4.Cheques paid

5. Cash paid

6. Closing creditors

Illustration 1

Debit balance on 1 Jan.2005 18940

Total credit sales for the month 102900

Cheques received from customers in the month 72840

Cast received from customers in the month 12360

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Returns inwards 2960

Debit balance on 31 Jan extracted from s/ledger 33680

Sales Ledger Control

2005 2005

Jan.1 Balance b/d 18940 Jan 31 Bank 72840

Jan.31 Sales 102900 Cash 12360

Returns inwards 2960

Balance c/d 33680

121,840 121840

We have proved the ledger to be correct arithmetically because the control account

balances with the amount equaling the total of the balances extracted from sales ledger.

Purchase ledger control Account data

Credit balances on 1 Jan 2005 38900

Cheques paid to suppliers during the month 36200

Returns outwards to suppliers in the month 950

Bought from suppliers in the month 49360

Credit balance on 31 Jan.as extracted from purchase ledger 5151

Purchases Ledger Control

Jan.31 Bank 36200 Balance b/d 38900

Returns 950 Purchases 49360

Balance c/d 5151

8866 8826

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As long as all the totals transferred into the purchase ledger account from the books or
original entry were correct there is sh.400 difference between the debit and credit
entries in the purchase ledger.

We will need to check purchases ledger in details to find the errors.

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