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INTRODUCTION TO ACCOUNTING

ACCOUNTING-is a systematic process of identifying, recording, measuring, classifying,

verifying, summarizing, interpreting and communicating of financial information to be
useful for decision making.

Or is a process of recording and summarizing financial information in a useful way.

OBJECTIVES OF ACCOUNTING

1. To keep systematic records

2. To protect business properties
3. To determine the operational profit/loss
4. To determine the financial position of business
5. To help in rational decision making

USERS OF ACCOUNTING INFORMATION

Accounting information helps users to make better financial decisions. Users of

accounting information may be both internal and external to the organization.

Internal users (Primary users)

1. Management- helps in analyzing the organization’s performance and position and

taking appropriate measures to improve the business results.

2. Employees-helps them to assess the business profitability and its consequence

on their future remuneration and job security.

3. Owners-helps to analyse the viability and profitability of their investment and

determining any future course of action.

External users (Secondary users)

1. Creditors- helps determine the credit worthiness of the business/

organization. Terms of credit are set by creditors according to the

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assessment of their customer’s financial health. Creditors include suppliers,

as well as lenders of finance such as banks.

2. Government-to determine the tax to be charged and contribution on the

economy.

3. Investors-to determine the return on their investment and whether to

increase their investment.

4. Customers-to determine if the business is reliable as their supplier which is

necessary for them to maintain a stable source of supply in the long term.

5. Regulatory authorities-for ensuring that the business’s disclosure of

accounting information is in accordance with the rules and regulations set in
order to protect the interest of stakeholders who rely on such information in
forming their decisions.

Branches of Accounting

1. Financial Accounting-concerned with the recording and classifying of business

transactions and periodic preparation and presentation of financial statements to
be used by various users (internal and external).

2. Management Accounting-focuses on providing information for use by internal

users(managers) which involves interpretation of accounting information to help
management in financial analysis, budgeting, forecasting, cost analysis, evaluation
of business decisions and similar areas.

3. Cost Accounting-helps determine the costs incurred for carrying out different
business activities and to assist the management to exercise strict cost control.

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Business entity concept- it states that the business and the owner of business should
be treated as separate i.e. the personal transactions of the owner should not be recorded
in the business books.

Money measurement concept-is states that business transactions are measured in

monetary terms i.e. only business transactions that are expressed in terms of money are
recorded in the business books while other factors that affect the business and not
expressed in terms of money are ignored.

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THE ACCOUNTING EQUATION

The accounting equation (or basic accounting equation) essentially shows what the firm
or business owns (its assets) are purchased by either what it owes (its liabilities) or by
what its owners invest (its owner’s equity or capital). This relationship is expressed in a
simple way to understand how these three elements relate to each other as:

Assets =Liabilities + Owner’s Equity (Capital)

Assets-are a business or company’s resources- things the business or company owns.

Examples of assets include; cash, accounts receivable, inventory, prepaid insurance,
investments, land, buildings, equipment and goodwill.

Liabilities-are a business or company’s obligations- amounts the business owes.

Examples of liabilities includes notes or loans payable, accounts payable, income taxes
payable. Liabilities can be viewed in two ways;

1) As claims by creditors against the business’ assets and

2) A source-along with owner equity of the business’ assets.

Owner’s Equity (Capital)-is the amounts invested into the business by the owner plus
the cumulative net income (profit) of the business that has not been withdrawn or
distributed to the owner.

If the business keeps accurate records, the accounting equation will always be “in
balance”, meaning the left side should always equal the right side. The balance is
maintained because every business transaction affects at least two of a business’
accounts. For example, when a business borrows money from a bank, the business’
assets will increase and its liabilities will increase by the same amount. When a business
purchase inventory for cash, one asset will increase and one asset will decrease.

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Statement of Financial Position (Balance Sheet)

 Statement of Financial Position, also known as the Balance sheet, presents the
financial position of an entity at a given date.
 It is often described as a “snapshot” of the company’s financial position at a point
(a moment or an instant) in time.
 It is comprised of three main components: Assets, liabilities and equity.
 Statement of financial position helps users of financial statements to assess the
financial soundness of an entity in terms of liquidity risk, financial risk, credit risk
and business risk.

Classification of components

Statement of financial position consists of the following key elements:

Assets

 An asset is something that an entity owns or controls in order to derive economic

benefits from its use.
 Assets must be classified in the statement of financial position as current and non-
current depending on the duration over which the reporting entity expects to derive
economic benefits from its use.
 An asset which will deliver economic benefits to the entity over the long term is
classified as non-current, whereas those assets that are expected to realise within
one year from reporting date are classified as current assets.

Assets are also classified in the statement of financial position on the basis of their nature:

 Tangible and intangible: Non-current assets with physical substance are classified
as property, plant and equipment whereas assets without any physical substance
are classified as intangible assets; Goodwill is a type of an intangible asset.
 Inventories balance includes goods that are held for sale in the ordinary course of
the business. Inventories may include raw materials, finished goods, and work in
progress.

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 Trade receivables include the amounts that are recoverable from customers upon
credit sales. Trade receivables are presented in the Statement of financial position
after the deduction of allowance for bad debts.
 Cash and cash equivalents include cash in hand along with any short term
investments that are readily convertible into known amounts of cash.

Liabilities

 A liability is an obligation that a business owes to someone and its settlement

involves the transfer of cash or other resources.
 Liabilities must be classified in the Statement of financial position as current and
non-current depending on the duration over which the entity intends to settle the
liability.
 A liability which will be settled over the long term is classified as non-current
whereas those liabilities that are expected to be settled within one year from the
reporting date are classified as current liabilities.

Liabilities are also classified in the Statement of financial position on the basis of their
nature:

 Trade and other payables primarily include liabilities due to suppliers and
contractors for credit purchases. Sundry payables which are too insignificant to be
presented separately on the face of the balance sheet are also classified in this
category.
 Short-term borrowings typically include bank overdrafts and short-term bank loans
with a repayment schedule of less than 12 months.
 Long-term borrowings comprises of loans which are to be repaid over a period that
exceeds one year. Current portion of long-term borrowings include the installments
of long-term borrowing that are due within one year of the reporting date.
 Current tax payable is usually presented as a separate line item in the statement
of financial position due to the materiality of the amount.

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Equity

 Equity is what the business owes to its owners. It is derived by deducting total
liabilities from the total assets.
 It therefore represents the residual interest in the business that belongs to the
owners.

Equity is usually presented in the Statement of financial position under the following
categories;

 Share capital represents the amounts invested by the owners in the entity.
 Retained earnings comprises of the total net profit or loss retained in the business
after distribution to the owners in the form of dividends.

Revaluation reserves contain the net surplus of any upward revaluation of property, plant
and equipment recognized directly in equity.

LAYOUT OF STATEMENT OF FINANCIAL POSITION

TITLE

P P P
Non-current assets
Premises xx
Furniture xx
xx (A)
Current assets
Inventory xx
Trade receivables xx
Cash xx xx (B)

Less current liabilities

Trade payables xx
Bank overdraft xx xx (C)
Working capital/ Net current assets xx (B-C) D
Total net assets xx (A+D) E

Financed by
Capital xx (F)

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Example
Prepare a Statement of financial position of Modise Enterprises as at 31 December 2017,
using the balances provided below; calculate the capital balance.
P
Capital (owner’s equity) December 31 2018 ?
Premises 300 000
Furniture 20 000
Trade receivables 10 200
Bank (Cr) 3 800
Inventory at 31 Dec 2018 26 000
Trade payables 10 000
Machinery 40 000

Solution;
Statement of financial position of Modise Enterprise as at 31 December 2017
P P P
Non-current assets
Premises 300 000
Furniture 20 000
Machinery 40 000
360 000
Current assets
Inventory 26 000
Trade receivables 10 200 36 200

Less current liabilities

Trade payables 10 000
Bank overdraft 3 800 13 800
Working capital/ Net current assets 22 400
Total net assets 382 400

Financed by
Capital 382 400

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Effects of Transactions on the Accounting Equation and the Statement of Financial

Position
 Business transactions occur on a daily basis as a result of doing business. Items
are purchased or sold, credit is extended or borrowed, income is made or
expenses assumed.
 These business transactions result in changes to the three elements of the basic
accounting equation.
 A transaction that increases total assets must also increase total liabilities or
owner’s equity.
 A transaction that decreases total assets must also decrease total liabilities or
owner’s equity.
 Some transactions may increase an account and decrease another on the same
side of the equation i.e. one asset increase and another decreases.

Examples
Transaction 1. The owner Mr. Modise started a consultancy business called Modise &
Co, he deposits P100 000 in the business bank account to begin operations.
Assets =Liabilities + Owner’s Equity (Capital)
+P100 000= No effect + P100 000
The asset “bank “is increased by P100 000and the owner’s equity is increased by P100
000. The business owes the owner P100 000.

Transaction 2. The business purchases a computer, on credit, P4 500.

Assets =Liabilities + Owner’s Equity (Capital)
+P4 500=+P4 500 + No effect
The asset “Computer” is increased by P4 500 and the liability is also increased P4 500
because the business now owes the store P4 500.

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Transaction 3. The business purchases office supplies using P550 cash.

Assets =Liabilities + Owner’s Equity (Capital)
+P550
-P550
The asset “Office Supplies” is increased P550 and the asset “Cash” is decreased P550.

The Expanded Accounting Equation breaks out the owner’s equity section into two
components: Revenues and Expenses.
Revenue- what the business earns for providing goods and services.
Expenses-the cost of assets the business uses to generate revenues (payroll,
depreciation, rent, utilities, taxes)
The business Profit or Loss equals the Revenue minus Expenses. If Revenues are more
than Expenses, there is Profit. If Expenses are more than Revenues, there is loss.
The owner of the business also has the option to withdraw equity from the business in the
form of drawings (proprietorship and partnership) or dividends (corporations).

When you look at these relationship to owner’s equity in terms of the accounting equation
you see that;
Revenues increase Owner’s Equity
Expenses decrease Owner’s Equity
Drawings or Dividends decreases Owner’s Equity

The expanded Accounting Equation look like this;

Assets =Liabilities + Owner’s Equity (Capital) + Revenue- Expenses-Drawings
Examples
Transaction 1. The business sells goods for P1200 cash.
Assets =Liabilities + Owner’s Equity (Capital)
+P1200= No effect + P1200 (Revenue)
The asset “Cash” is increased P1200 and the revenue increases Owner’s Equity P1200.

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Transaction 2. The business pays its monthly rent of P950 using a cheque.
Assets =Liabilities + Owner’s Equity (Capital)
-P950=No effect –P950 (Expenses)
The asset “Bank” is decreased P950 and the expenses decrease Owner’s Equity P950.

Transaction 3. The business owner withdraws P2000 for his personal use.
Assets =Liabilities + Owner’s Equity (Capital)
-P2000= No effect -P2000 (Drawing)
The asset “Bank” is decreased P2000 and the drawings decreases Owner’s Equity
P2000.

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DOUBLE ENRTY SYSTEM

MEANING OF DOUBLE ENTRY SYSTEM
 A system of bookkeeping so named because every entry to an account requires a
corresponding and opposite entry to a different account.
 Every transaction has two effects.
 Accounting attempts to record both effects of a transaction or event on the entity’s
financial statements.
 This is the application of double entry concept.
 Without applying double entry concept, accounting records could only reflect a
partial view of the business or entity’s affairs.
 The two effects of an accounting entry are known as Debit (Dr) and Credit (Cr).
Accounting system is based on the principal that for every Debit entry, there will
always be an equal Credit entry. This is known as the Duality Principal.

RELATING DOUBLE ENTRY TO ACCOUNTING EQUATION

 The accounting equation is a statement of equity between the debits and credits.
The rules of debit and credit depend on the nature of an account.
 The accounts are classified into the following five types; Assets, Liabilities,
Income/Revenue, Expenses or Capital gains/losses.
 If there is an increase or decrease in one account, there will be equal decrease or
increase in another account.
 There may be equal increases to both accounts, depending on what kind of
accounts they are. There may also be equal decrease to both accounts.

Accordingly, the following rules of debit and credit in respect to the various categories of
accounts can be obtained. The rules may be summarized as below;

1. Assets accounts: debit increases in assets and credit decreases in assets.

2. Capital accounts: credit increases in capital and debit decrease in capital

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3. Liabilities accounts: credit increases in liabilities and debit decreases in liabilities.

4. Revenues or Incomes accounts: credit increases in income and gains, and debit
decreases in income and gains.
5. Expenses or losses accounts: debit increases in expenses and losses, and credit
decreases in expenses and losses.

Table 1 below summarises the rules.

Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Income/Revenue Decrease Increase
Expenses Increase Decrease
Capital Decrease Increase

THE LEDGER
A ledger is a book that contains accounts.
An account- is a record of the day to day changes to a specific item.

FORMAT OF ACCOUNTS
There are two ways of presenting accounts.
i. T-account format
ii. Columnar format (Running balance method)

T-ACCOUNT FORMAT
The ledger account resembles a letter “T” and sometimes known as a T-account.
The account has a debit and credit sides.
The left hand side is the debit side abbreviated as Dr and the right hand side is the credit
side abbreviated as Cr.

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The T-account format is used mainly in manual systems and because of its two-sided
nature, it makes the learning of account rules easier.

The layout of a ledger account

Debit (Dr) Title Credit (Cr)
Date Details Amount Date Details Amount

Title- represent the name of the particular account.

Date column- used to enter the date when the transaction took place
Details column- used for entering the name of the account where the other
corresponding entry is made or where the double entry is completed.
Amount column-used for entering the monetary value of the transaction.
Columnar format
Also known as the running balance method.
The columnar account format is illustrated as follows;
Title
Date Details Debit Credit Balance

The columnar format is suitable for use in the computer. It has an advantage over the T-
account as with every entry in the account, a new balance is created.

RECORDING TRANSATIONS IN THE LEDGER

The following steps are taken when transactions are recorded according to the double
entry procedure.

1. Identify/ determine the ledger accounts involved

2. State the type of account-asset, liability or owner’s equity’

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3. Decide whether the effect is an increase or a decrease for each account

4. Translate the increase or decrease into debits and credits of the accounts
5. Complete the column for details by entering the name of the corresponding
account.

Example;
1. Proprietor started business with P100 000 paid into the business bank account on
June 1 2017.

Account Effect Entry

capital owner’s equity-increase credit
bank asset-increase debit

Dr Capital account Cr
Date Details Amount Date Details Amount
2017
June 1 bank 100 000

Dr Bank account Cr
Date Details Amount Date Details Amount
2017
June 1 capital 100 000

2. Bought a motor vehicle on credit P45 000 from Sianang Motors on 1 October 2018.

Account Effect Entry

motor vehicle asset-increase debit
sianang motors liability-increase credit

Dr Motor vehicle account Cr

Date Details Amount Date Details Amount
2018
October 1 sianang motors 45 000

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Dr Sianang motors account Cr

Date Details Amount Date Details Amount
2017
October 1 motor vehicle 45 000

DOUBLE ENTRY SYSTEM FOR ASSETS CAPITAL AND LIABILITIES

 Transactions are recorded based on the accounting equation;

 Assets =Liabilities +Capital.
 Transactions is recorded twice, account receiving value is debited and account giving
value is credited.
 If there is an increase or decrease is one account, there will be equal decrease or
increase in another account.
 There may be equal increase to both accounts, depending on what kinds of account
they are.
 There may also be equal decrease to both accounts.

RULES FOR DOUBLE ENTRY FOR ASSETS, CAPITAL AND LIABILITIES

ACCOUNTS TO RECORD ENTRY ON ACCOUNT
ASSETS An increase Debit
A decrease Credit
CAPITAL An increase Credit
A decrease Debit
LIABILITIES An increase Credit
A decrease Debit

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ASSET OF INVENTORY
Inventory is an asset that is strictly bought by business/firm for the purpose of reselling
within a possible short period of time.
Transactions either increase or decrease inventory.
Increase in inventory may be due to;
 Sales returns i.e. goods that were bought by customers returned to business.
 Purchase of additional inventory
Decrease in inventory may be due to;
 Purchases returns i.e. goods returned by business to the suppliers
 Sales of goods.
DOUBLE ENTRY FOR EXPENSES AND REVENUE

EXPENSES-costs incurred in the running or operation of the business e.g. rent,

electricity, salaries etc.

REVENUE-money received form goods sold and services rendered e.g. commission
received, interest received, and rent received etc.

RECORDING OF EXPENSES AND REVENUE

Double entry rules for assets, capital and liabilities also apply to expenses and revenue.
The account receiving value is debited and the account giving value is credited.

Entries include;
Expenses
Dr: Expenses account
Cr: Cash/Bank account (cashbook)
Revenue
Dr: Cash/ Bank account (cashbook)
Cr: Revenue account

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DOUBLE ENTRY FOR DRAWINGS

Drawings are a value taken out of the business by the owner for his/ her own use.

The value taken out can be in the form of money, goods or non-current assets held by
the business.

Any drawings are debited to the Drawings account to show the value going into that
account. Credit entry will be in the account that gives value that is either cash/bank, goods
(purchases) or non-current asset.

When money is taken out for own use by the owner, the cash/bank account will be
credited, i.e.

Dr: Drawings account

Cr: Cash/ bank account

When goods are taken out for personal use, the purchases account will be credited, this
is because the goods were originally bought for resale and the amount of goods available
for resale is reduced when goods are taken for personal use.

Dr: Drawings

Cr: Purchases account

When a non-current asset is taken out for owner’s own use, e.g. a computer, the
appropriate asset account will be credited, in this case computer account.

Dr: Drawings account

Cr: Non-current asset (Computer)

At the end of the financial year, the total of the drawings account is transferred to the
capital account, this reduces the amount owed by the business to the owner of the
business.

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DIVISION OF THE LEDGER

The ledger is divided into specialist areas being; Sales ledger, Purchases ledger and
General ledger.
Sales ledger contains accounts of customers/ trade receivables/ debtors.
Purchases ledger contains accounts of suppliers/ trade payables/ creditors.
General ledger contains accounts of other types of accounts not found in the two other
ledgers.

RECORDING TRANSACTIONS IN THE SALES, PURCHASES AND GENERAL

LEDGER
Example
The following are transactions of Masego who is involved in retail business. He buys and
sells goods.
2016
August 2 Bought goods on credit from Tirelo holdings, P1200
August 6 Sold goods for cash, P570
August 11 Bought goods and paid by cheque, P600
August 12 Sold goods on credit to Lame, P350
August 19 Returned goods to Tirelo holdings, P208
August 24 Paid Tirelo holdings amount owing by cheque
August 24 Lame returned some of the goods, P105
August 29 Lame paid the amount she owes by cash

Required;
Record the above transactions in Masego’s ledger.

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Solutions;

Masego’s ledger
General ledger
Dr Purchases account Cr
Date Details Amount Date Details Amount
2016
august 2 tirelo holdings 1 200
august 11 bank 600

Dr Sales account Cr
Date Details Amount Date Details Amount
2016
august 6 cash 570
august 12 Lame 350

Dr Returns outwards account Cr

Date Details Amount Date Details Amount
2016
august 19 tirelo 208
holdings

Dr Returns inwards account Cr

Date Details Amount Date Details Amount
2016
august 24 Lame 105

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Dr Bank account Cr
Date Details Amount Date Details Amount
2016
august 11 purchases 600
august 24 tirelo 992
holdings

Dr Cash account Cr
Date Details Amount Date Details Amount
2016
august 6 sales 570
august 29 lame 245

Purchases ledger

Dr Tirelo holdings account Cr

Date Details Amount Date Details Amount
2016 returns 2016
august 19 outwards 208 august 2 purchases 1 200
august 24 bank 992

Sales ledger

Dr Lame account Cr
Date Details Amount Date Details Amount
2016 2016 returns
august 12 sales 350 august 24 inwards 105
august 29 cash 245

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BALANCING OF LEDGER ACCOUNTS

Is the process of equalising the two sides of an account i.e. debit side and credit side.
It is done periodically.

STEPS FOR BALANCING LEDGER ACCOUNTS

1. ADD up the totals of each side (separately)
2. Find the difference between the two sides i.e. subtract the smallest total from the
largest total, this is the balancing figure.
3. Enter the difference(balancing figure) on the side with the smallest total, its details
being balance carried down (Balance c/d)
4. Enter the totals on a level with each other, underlined with two lines to show that
they are equal.
5. Write the difference on a line below the totals in the opposite side to the difference
above the totals, details being balance brought down (Balance b/d) i.e. bring down
the balance.

If the total of debit side of an account exceeds the total of credit side, then the account
has a Debit balance.

If the total of credit side of an account exceeds the total of debit side, then the account
has a Credit balance.

The balance brought down is usually at the beginning of period i.e. month, balance carried
down at the end of period.

Example;

The following transactions are for the first month of trading;

2018
March 1 Started business with P100 000 deposited into the business bank account.
March 4 Bought goods, P5 000 and paid by cheque.
March 10 Bought goods on credit from Morongwa stores P1 700.
March 22 Paid Morongwa stores by cheque.

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Required;

Record the above transactions in their respective ledger accounts. Balance the accounts
at 31 March 2018 and bring down the balances at 1 April 2018.

Solution;

General ledger

Capital account
Date Details Amount Date Details Amount
2018 2018
March 31 Balance c/d 100 000 March 1 Bank 100 000
100 000 100 000
2018
April 1 Balance b/d 100 000

Bank account
Date Details Amount Date Details Amount
2018 2018
March 1 capital 100 000 March 4 Purchases 5 000
March 22 Morongwa
stores 1 700
March 31 Balance c/d 93 300
100 000 100 000

Purchases account
Date Details Amount Date Details Amount
2018 2018
March 4 bank 5 000
March 10 morongwa 1 700 March 31 balance c/d 6 700
stores
6 700 6 700
April 1 balance b/d 6 700

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Purchases ledger
Morongwa Stores account
Date Details Amount Date Details Amount
2018 2018
March 22 Bank 1 700 March 10 Purchases 1 700

TRIAL BALANCE
MEANING
 Is a list of all the general ledger accounts contained in the ledger of a business or
is a list of accounts title and their balances, debit and credit, the balances should
agree, i.e. equal to each other.
 This list will contain the name of the ledger account and the value of that ledger
account.
 The value of the ledger will hold either a debit balance value or a credit balance
value.
 The debit balance values will be listed in the debit column of the trial balance and
the credit value balance will be listed in the credit column.

PURPOSE OF TRIAL BALANCE

 Acts as the first step in the preparation of financial statements.
 Ensures that for every debit entry recorded, a corresponding credit entry has been
recorded in books in accordance with the double entry concept of accounting.
 Ensures that the account balances are accurately extracted from accounting
ledgers.
 Assists in the identification and rectification of errors.

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PREPARATION OF TRIAL BALANCE

 The trial balance is usually prepared by a bookkeeper or accountant who has used
daybooks to record financial transactions and then post them to the nominal
ledgers and personal ledgers.
 The trial balance is part of the double entry bookkeeping system and uses the
classic “T” account format for presenting values.
 Title provided at the top shows the name of the entity and accounting period and
for which trial balance has been prepared.
 Account titles shows the name of the accounting ledgers from which the balances
have been extracted.
 Balances relating to assets and expenses are presented in the column (debit side)
whereas those relating to liabilities, income and equity are shown on the right
column (credit side).
 The sums of all debit and credit balances are shown at the bottom of their
respective columns.
 However, a balancing trial balance does not guarantee that there are no errors.

Layout of trial balance

Title
Account titles Debit Credit
Sales 20 000
Purchases, etc. 15 000

Note; if the total of the debit column does not equal the total value of credit column then
this would show that there is an error in the nominal ledger accounts. This error must be
found before an income statement and statement of financial position can be produced.

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Example
Bathusi owns a small retail business the buys and sells goods. The following are balances
extracted from his books on 31 December 2018.
P
Inventory 1 January 2018 6 000
Bank (dr) 5 000
Sales (Revenue) 68 000
Trade receivables 8 400
Fixtures and fittings 20 000
Purchases 42 000
Rent paid 1 500
Trade payables 7 200

Required;
Prepare a trial balance for Bathusi at 31 December 2018
Solution;
BATHUSI
TRIAL BALANCE AT 31 DECEMBER 2018
ACCOUNT TITLES DEBIT CREDIT
P P
Inventory 1 January 2018 6 000
Bank 5 000
Sales 58 000
Trade receivables 8 400
Fixtures and fittings 20 000
Purchases 42 000
Rent paid 1 500
Trade payables 7 200
Capital (balancing figure) 17 700
82 900 82 900

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SUBSIDIARY BOOKS
BOOKS OF PRIME (ORIGINAL) ENTRY/SUBSIDIARY BOOKS

 In many businesses today, some form of documentation usually supports business

transactions.
 These source documents, as they are called, are used to record information in
daily journal or books of original entries.
 These journals are the first form of official records of any transaction.
 Generally, they are not part of the double entry system.
 With the exception of the cashbook and general journal the terms debit and credit
do not appear in any other of the book of original entry.

RECORDING TRANSACTIONS
Specialised Journals for Stock (Inventory)
 The Sales, Purchases and Return Journals, also called books of original entry
or day books, record transactions dealing only with stock (inventories).
 Cash sales and purchases of goods are not recorded here, neither the purchase
nor sale of non-current assets.
 These are recorded in the Cash book and the General Journal, respectively.

BENEFITS OF USING SUBSIDIARY BOOKS/ BOOKS OF ORIGINAL ENTRY

 The use of Books of Original Entry promotes the division of the ledger which assists
management in data analysis.
 They make it easier to retrieve information on trade receivables (debtors) and trade
payables (creditors), saves time and eliminates many details from the ledger.

The following table shows a list of the books of original entry as well as the source
documents which form the basis of the recording in the books.

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Books of Original Entry Transactions recorded Source document used

Sales Day Book/ Sales Credit sales of inventory Sales invoices
Journal (stock)
Purchases Day Book/ Credit purchases of Purchases invoices
Purchases Journal inventory (stock)
Cashbook All cash and cheques Bank deposit and
transactions e.g. cash withdrawal slips, cheques,
sales, receipts from debtors debit and credit card
(accounts receivables), and receipts.
payments to creditors
(accounts payable)
Returns Inwards Journal Goods returned by Credit note sent
customers
Returns Outwards Journal Goods returned to Credit note received
suppliers
Petty Cashbook Cash transactions of small Petty cash vouchers, cash
value. till receipts.
General Journal All transactions which Bills, receipts, vouchers,
cannot be recorded in any cancelled cheques.
other book of original entry.

THE ACCOUNTNG CYCLE/PROCESS

 Is a series of procedures in the collection, processing and communication of
financial information of a business or company, from when the transaction occurs,
to its representation of the financial statements to closing the accounts.
 The steps involved are;
1. Identifying and analyzing business transactions-this involves the
financial transactions that happened during the period.
2. Recording in the books of prime entry i.e. journalizing- the transactions
are then recorded in the different books of original entry.
3. Posting in the ledger accounts- the information from the subsidiary
books are then posted to the respective ledger where individual accounts
are debited and credited.
4. Preparation of trial balance-a total balance is calculated for the accounts.
Ledger accounts are grouped into debit and credit totals.

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5. Preparation of financial statements- the information from the trial

balance can be used to prepare income statement and statement of
financial position.
6. Close the accounts/period- It provides a report for analysis of
performance.

CASH AND CREDIT TRANSACTIONS

 Cash transactions occur when payment is received or made than when the
transaction takes place.
 This includes the use of credit cards and debit cards.
 A credit transaction is one where payment is to be made some time in the future,
after the transaction.
 It is important to distinguish between these two types of transactions since the
accounting treatment differs as well as the impact on the statement of financial
position.

Discounts

 A discount is a reduction in the price of an item.

 In accounting there are two types of discounts; cash discounts and trade discounts.
 Cash discounts are given as incentives to customers to make payments on their
account within a specified period of time.
 Trade discounts reduce the catalogue price of an item and are intended to
encourage trade.
 Although they are shown on the sellers invoice, trade discounts are not recorded
in the ledger of the buyer or seller.

SOURCE DOCUMENTS

 A source document records the essential elements of any transaction; the date,
name and address of the names of the parties involved and the value of the
transaction.

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 They form the basis for the accounting records that are kept by the business.
 These documents are retained for future verification. The documents can be
identified as follows;
 When goods are sold on credit to a customer-invoice
 When goods are returned by the customer-credit/debit notes
 To summarise several transactions over a period –statement of account.

Invoice

 An invoice is a document sent to credit customers giving a detailed description of

the items, unit price and the terms and conditions of the transaction.
 The order number, as well as the name and address of the customer, are also
printed on the invoice.
 Sometimes the invoice would also alert customers of interest charges when there
are overdue balances.
 An invoice is made in triplicate and the copies are used by different departments
to keep their own records.
 Sales invoices are used to record transactions in the Sales Journal.
 The Purchases Invoice is sent by vendors and is used to make records in the
Purchases Journal.
 Both the buyer and the seller receive copies of the invoice and use them to make
records.

Statement of account

Is issued by the supplier and shows;

 Amounts of all invoices during the period
 Amounts of all credit notes issued during the period
 Payments received during the period
 The balance due at the end of the period

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PURCHASES JOURNAL

Purchases- goods bought by either cash or credit with the intention of reselling.

Cash purchases- goods bought and paid for immediately by either cash or cheque.

Whenever goods are bought for cash, the purchases account will receive value, and will
be debited, the other entry will be a credit entry in the cash or bank account depending
on the method of payment.

Dr: Purchases account

Cr: Cash/bank account

Credit purchases- goods bought and paid for at a later date by business.

Purchases account will still receive value, and will be debited. The credit entry will be
made in the account of the supplier, known as the Trade payable, to show the value
coming from that account.

Dr: Purchases account

Cr: Supplier/ Trade payable (creditor)

When payment is made later to the supplier, either by cash or cheque, the supplier will
receive value and will be debited. The cash/bank account will be credited to show the
value coming from that account.

Dr: supplier account

Cr: cash/bank account

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IMPORTANCE OF CHECKING INVOICE AGAINST DELIVERY NOTE AND

PURCHASE ORDER
 Check that the goods were ordered
 Check all goods have been received in good condition and details corresponds
with the order
 Check prices charged on the invoice are correct

USE OF PURCHASES JOURNAL

 The Purchases Journal records credit purchases of stock/inventory.
 It is prepared using original invoices from supplies.

Layout of purchases journal

Purchases journal
Date Details Invoice number Amount

Example;
2019
January 10 Bought goods from Selelo traders on credit, P 1800
January 18 Received invoice from Babusi enterprise for goods purchased, P2 400

Recording in the journal;

Purchase journal
Date Details Invoice number Amount
P
2019
January 10 Selelo traders 001 1 800
January 18 Babusi enterprise 065 2 400
Transferred to purchases account 4 200

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Posting to the ledger

Purchases ledger
Selelo traders’ account
Date Details Amount Date Details Amount
2019
January 10 Purchases 1 800

Babusi enterprise account

Date Details Amount Date Details Amount
2019
January 18 Purchases 2 400

Nominal/General ledger
Purchases account
Date Details Amount Date Details Amount
2019 Total for the
January 31 month 4 200

SALES JOURNAL
Sales- goods sold by either on cash or credit.

Cash sales- goods sold and payment is received at the time of sale.

Whenever goods are sold, the sales account gives value and will be credited. The other
entry will be a debit entry in the bank or cash account depending on whether the amount
received was by cash or cheque.

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Dr: cash/bank account

Cr: sales account

Credit sale- goods sold and payment is received at a later date.

The sales account is credited as it gives value, the debit entry will be in the account of
the customer whom goods are sold to, known as the Trade receivable.

Dr: Trade receivable/ customer (debtor)

Cr: sales account
When payment is received later from the customer by either cash or cheque, the cash or
bank account will be debited and the customers’ account credited.
Dr: cash/bank account
Cr: Trade receivable/ customer (debtor)

TERMS RELATING TO SALES ON THE INVOICE

Trade discount-is a reduction in the list price of the commodity/ product to facilitate bulk
sales. It is shown on the invoice as a deduction itself.

E&OE- “Errors and Omissions Excepted”, it is intended to reduce the legal liability of
the business preparing the invoice. Mistake of this kind are usually a result of an oversight
and are usually mistakenly and not purposely written.

Cash discount-is a reduction in the amount of an invoice that the seller allows the buyer.
Is given in exchange for the buyer paying the invoice earlier than its normal payment date.
The reasons why a seller might make this offer;

 To obtain earlier use of cash, which may be necessary if the seller is short of it.
 To offer discount for immediate cash payment in order to entirely avoid the effort
of billing the customer or cases of bad debts.

Carriage forward-means that the cost of shipping goods will be paid by the buyer.

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Carriage paid- means that the seller is responsible for arranging carriage to the named
place, but not for insuring the goods to the named place. (i.e. usually buyer’s warehouse)
Or the seller pays the freight for the carriage of goods to the named destination.

USES OF SALES JOURNAL

 The Sales journal record only credit sales of stock/inventory.
 It is prepared using copies of invoices sent tot customers.

Layout of Sales journal

Sales journal
Date Details Invoice number Amount

Example;
2019
January 15 Sold goods to Gaone on credit, P750
January 22 Sent an invoice to Madikwe Brothers, P510

Recording in the journal

Sales journal
Date Details Invoice number Amount
P
2019
January 15 Gaone 0205 750
January 22 Madikwe brothers 1680 510
Transferred to sales account 1 260

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Posting to the ledger

Sales ledger
Gaone’s account
Date Details Amount Date Details Amount
2019
January 15 Sales 750

Madikwe brothers’ account

Date Details Amount Date Details Amount
2019
January 22 Sales 510

Nominal/General ledger
Sales account
Date Details Amount Date Details Amount
2019 Total for the 1 260
January 31 month

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RETURNS JOURNAL

RETURNS- goods returned either by business or customer for various reasons.

Reasons for returning goods

 Faulty goods
 Wrong size/ type
 Expired goods
 Goods are in excess
 Wrong order being supplied

Types of returns

 Sales returns/ returns inwards

 Purchases returns/ returns outwards

Returns inwards-goods returned by customers to the business. These goods are sales
as such known as Sales returns. The inventory held by the business is increased by
debiting the returns inwards account. The credit entry will be in the account of the
customer who returned the goods.

Dr: Returns inwards account

Cr: Customer’s account

Returns outwards- goods returned by the business to the supplier. These goods are
purchases as such known as Purchases returns. The inventory held by the business is
reduced by crediting the returns outwards account. The debit entry will be made in the
account of the supplier whom goods are returned to.

Dr: supplier’s account

Cr: Returns outwards account

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USES OF RETURNS JOURNALS

 The Returns Journals records goods previously bought or sold on credit that have
been returned to suppliers or by customers.
 Prepared using copies of credit notes sent to customers (returns inwards journal)
and original credit note from the supplier (returns outwards journal).

Credit Note

 This is a document sent to a buyer when there is a reduction in the amount charged
on an invoice.
 This may occur when goods are returned or when there is an error in pricing.
 Goods would normally be returned if they are faulty or damaged in some way.

Debit Note
 If errors occur when an invoice is being prepared the document which is sent to
customers to change the amount charged on the original invoice is a debit note.
 It is sometimes referred to as a supplementary invoice.
 Errors may occur if additional goods were sent to the customer or there was an
error on the original invoice

Example
Demonstrating the recording of transactions in Books of Original Entry
Thato Dijeng is the sole owner of Dijeng Investments. Her records show the following
transactions for the month of June 2019.
June 01 Sold goods on credit to G. Tiro P110, R. Fane P689 and S. Thuso P725
June 05 Received Invoices from T. Bogosi P1 750 and S. Seane P1 105
June 10 Bought goods on credit from Planters Place P1875
June 13 S. Thuso returned P125 worth of goods
June 18 Sold goods on credit to R. Fane with a list price of P1800, allowing a 2.5% Trade
discount.
June 20 Returned goods to T. Bogosi P250

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Required;
Record the above transactions in the appropriate books of original entry.

Solution;
SALES JOURNAL
Date Details Folio Amount (P)

01/06/19 G. Tiro SL 110.00

R. Fane SL 689.00

S. Thuso SL 725.00

18/06/19 R. Fane SL 1800

Less 2½% trade discount (45) 1 755.00

Total Credited to the Sales A/C 3279.00

PURCHASES JOURNAL
Date Details Folio Amount Amount (P)

05/06/19 T. Bogosi PL 1 750.00

S. Seane PL 1 105.00

10/06/19 Planters Place PL 1 875.00

30/06/19 Total Debited to Purchases A/C GL 4 730.00

RETURN OUTWARDS JOURNAL

Date Details Folio Amount Amount(P)
20/06/19 T. Bogosi PL 250

Total Credited to Return Outwards a/c 250

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RETURN INWARDS JOURNAL

Date Details Folio Amount Amount(P)
13/06/19 S. Thuso 125

Total Debited to Return Inward a/c 125

GENERAL JOURNAL

 We just learnt that the specialised journals are used to record transactions dealing
with credit sales and purchases of inventory (stock).
 Other transactions that are unable to fit into those categories, such as the credit
purchase or sale of non-current assets, are recorded in the General Journal.
 Although the format is essentially the same as that of the specialised journals, the
general journal further analyses the transactions into debit and credit, indicating
which account is to be debited and which account is to be credited.

The format of the General Journal is shown below.

GENERAL JOURNAL

Date Details Folio Debit Credit

 Journalising is the process of recording entries in the Journal.

 As with the specialised journals, transactions are recorded in chronological order.
 The accounts involved are identified and the account to be debited is written first
under the details column. Indented on the second line is the account to be
credited.
 A special feature of the general journal is the narration, which follows every journal
entry.
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 The narration briefly explains the transaction recorded.

 The amounts of the transaction are entered under the debit and credit columns.

Example

Demonstrate the use of the General Journal in recording varying transactions.

1. May 16 2019 Dijeng Investment purchased, on credit, machinery costing P17 890, from
Moroka Limited.

2. May 20 2019, the Cashier received a voucher for P1150 to pay the insurance for the
owner’s personal car.

3. May 30th 2019, the owner invested a further P21 000 into the business from her private
savings.

Solution;

The journal

A/C
Date Details Folio A/C Credited
Debited

2019 May 16 Machinery GL 17 800

Moroka Limited GL 17 800

(Non-current asset purchases

on credit)

2019 May 20 Drawings GL 1 150

Cash GL 1 150

(Cash paid for owners

personal insurance)

2019 May 30 Bank GL 21 000

Capital 21 000

(Additional investment by
owner)

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NB: Before these are recorded in the journal, the accounts involved are identified. Then,
using double entry rules of entry they are recorded in the general journal.

The following transactions are usually recorded in the General Journal:

 Opening entries – this is a list of assets and liabilities used to begin a new
accounting period. (See the example below).
 The purchase and sale of fixed assets on credit.
 Correction of errors.
 Closing entries.
 Writing off uncollectible debts (bad debts)
 Depreciating non-current assets.

Example

The following shows the opening entries of J. Tumiso 1 June 2019

J. Tumiso began his second year of trading as a sole trader on 1 June 2019 with the
following balances: Cash P1 650; Bank P8 200, Trade receivables: W. Wabatho P750,
Plant and Machinery P97 000; Office Equipment P34 000; Inventory P4 370; Trade
payables: S. Sesinyi P1450.

Journalise the above opening entries.

Solution;

The journal

Debit Credit
Date Details (Account Titles) Folio
P P
1/6/19 Plant and Machinery 97 000
Office Equipment 34 000
Inventory 4 370
Cash in hand 1 650
Bank 8 200

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Trade receivables:
W. Wabatho 750
Trade payables: S.Sesinyi 1 450
Capital 144 520

Being Assets, Liabilities

145 970 145 970
and Capital as at 1 June 19

THE CASH BOOK

TYPES OF BANK ACCOUNTS

CURRENT ACCOUNT

 No interest is paid on the account

 Account holders pay a ledger fee
 Cheque books are issued to the account holder for withdrawal and payments.
 Offers free bank statements at regular intervals
 Account holders are eligible for other bank services such credit transfers, standing
orders, direct debit and overdraft facilities.

SAVINGS ACCOUNT

 It has low opening and low minimum balance

 Interest is paid
 No ledger fees are charged
 No cheque book to account holder

FIXED DEPOSIT ACCOUNT

 Money deposited for a fixed period of time

 Interest rates are fixed for the period of deposit.
 Interest is payable on fixed deposit accounts.
 Customers can choose to reinvest their money with or without interest.

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PAYMENTS THROUGH THE BANKING SYSTEM

STANDING ORDER

 Is an instruction to the bank to transfer funds of a specific amount to another

account on a specific date on a recurring basis.
 It is very similar to a direct debit except that the amount and date of payment
cannot be varied.
 The payment is initiated by the payee himself although the account in which the
funds will be transferred needs to be first authorized by the payer.
 Standing orders are useful where regular payments of fixed amounts are to be
made to certain parties such as the payment of mortgage rent and loan
installments.

DIRECT DEBIT

 Is an instruction to the bank to let someone/person to take money from your

account on regular basis of varying amounts on varying dates.
 It is different from standing order because the period of payment or amount
transferred may change.
 Direct debit is useful for paying regular bills, such as water or electricity especially
if the amount regularly changes.

CREDIT TRANSFER

 Is a payment instruction from a customer (payer) to his her bank to transfer an

amount of money to another account (beneficiary/ payee).
 Single or multiple transfer can be made under this service.
 Credit transfer is useful when an employer is paying the employees their monthly
salaries.

THE CASH BOOK

 The Cash book is a unique book of original entry.
 Although it is a journal, it also acts as an account for Cash and Bank.

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 This is the only book of original entry that is balanced and the double entry is
completed in the ledger.
 The cash book records the receipts and payments of cash and bank.
 Discounts received and allowed are also recorded in the cashbook for
convenience.
 The format of the Cash book is also unique, in that the accounts for cash and bank
stand side by side along with the discount column. All receipts are debited and
payments credited.

The illustration below shows the basic format of a three-column cash book, (which
includes the discount columns). A two column cash book is one without the discount
columns.

THE CASH BOOK

Date Details F Cash Bank Dis Date Details F Cash Bank Dis
(Receipts) All (Payments) Rec

DEBIT CREDIT
SIDE SIDE

DISCOUNT ALLOWED
 An allowance given to a customer by a business when they pay their accounts
within the time limit specified.
 This is an expense to the business as it reduces the amount the business is
supposed to receive as payment.

DISCOUNT RECEIVED
 Allowance given to a business by a supplier when it pays its account within time
limit specified.
 This is income to the business as it reduces the amount the business is supposed
to pay to the supplier.

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Recording Entries in the Cash Book

 When a document is received, the first analysis is to determine where it should be

recorded.
 Any document relating to cash or bank, such as, cheque vouchers, cash tills and
receipts are used to make records in the cash book.
 Again it is done in chronological order and the name of the account in the ledger
is written in the details column.
 If the transaction involves the bank then the amount is written in the bank column.
 If it is a cash transaction, then the amount is written in the cash column.
 Any discount received or allowed is placed in the discount column.

Required;

List at least five source documents that can be used to make entries in a three column
cash book.

Solution;

Receipts, Cash tills, Payment vouchers, Deposit slips, Cash register slips, and cheque
counterfoil.
Contra Entries
 Since both cash and bank accounts are in the cash book, it is possible to complete
the double entry in the cash book if the transaction involves both accounts.
 When this happens it is described as a contra entry.
 These occur when cash is deposited into the bank or cash is withdrawn from the
bank for use in the office.

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BALANCING THE CASH BOOK

 The Cash Book is balanced to determine the amount of cash in hand and bank.
 To balance the Cash Book means making both sides equal.
 The columns for Cash and Bank on both sides of the cash book are totaled.
 The difference (balance) is determined and added to the side with the smaller
amount.
 The cash column will always carry a debit balance; this means that the debit side
will always be greater than the credit side, since it is not possible to overspend
cash.
 A credit balance (also called an overdraft) on the bank account signifies that the
account has been overdrawn, that is, cheques were written in excess of the
amount in the bank.
 Sometimes this is done with the permission of the bank.
 If no permission is given then any cheques presented for payment would not be
honored by the bank for payment. (Dishonoured cheque)

Example
Record the following transactions of Selena Dipuo, a retailer, in her three column cash
book for the month of April 2019.
P

April

01 Cash at bank 1 800

03 Cash sales 1 490
08 Paid cash for cleaning 124
10 Received a cheque from B. Koko 1 500
15 Purchases paid by cheque 1 380
17 Paid rent by cheque 750
19 Received a cheque from S. Leeto to settle his account of P700 less 5% discount
21 Paid cash into bank P1 200
24 Received P900 cash from P. Pilane to settle his account of P950
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26 Paid D. Seretse by cheque to settle an account of P840 less 5% discount

Required;
Prepare the cash book and bring down the balance as at 1 May
2019.
Solution;

THE CASH BOOK

Date Details F Cash Bank Dis Date Details F Cash Bank Dis
All
(RECEIPTS) (PAYMENTS) Rec
01/04/19 Balance b/f 1800 08/04/19 Cleaning 124
03/04/19 Sales 1490 15/04/19 Purchases 1380
10/04/19 B. Koko sl 1500 17/04/19 Rent 750
19/04/19 S. Leeto sl 665 35 21/04/19 Bank C 1200

21/04/19 Cash C 1200 26/04/19 D. Seretse 798 42

24/04/19 P. Pilane 900 50 30/04/19 Balance c/d 1066 2237
2390 5165 85 2390 5165 42
01/05/19 Balance b/d 1066 2237

THE PETTY CASH BOOK (PCB)

 Petty means small or minor.

 A petty cashbook is a book that is used to record small/minor cash payments.
 Small cash payments and receipts can be omitted from the Cash Book to avoid
overcrowding.
 When this is done, a Petty Cash Book is used.
 The format of the PCB facilitates the analysis of transactions so that certain types
of transactions can be posted in aggregate to the ledger.

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 The debit side of the PCB represents receipts whilst the credit side, which
represents payments, is divided into several money columns called ANALYSIS
COLUMNS. (See example below).

PETTY CASH BOOK

Receipts Date Details/ Voucher Total Travelling Postage Stationery Office
Particulars No. paid Expenses

ANALYSIS COLUMNS

THE IMPREST SYSTEM

 The PCB operates with an Imprest System.

 This means that the Petty Cashier is given a fixed amount called float (imprest)
at the beginning of a period from which funds are disbursed.
 Requests for payment are written on vouchers which briefly explain the purpose
of the payment and indicate the amount.
 At the end of the period (month) the total cash paid is then reimbursed by the main
cashier. This is referred to as restoring the imprest.
 This means that the petty cashier is given the exact amount she has
disbursed/spent.
 The totals of the analysis columns are then posted to the general ledger.
 Small sums received in the office are also recorded in the petty cash book on the
receipt side, although generally there is no analysis.
 These small receipts would reduce the amount to be reimbursed.

Example: To determine the amount to restore the imprest

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The imprest of a business is P1000 per week. At the end of a week the petty cashier
disbursed funds for the following: car wash P50, Stationery P145, received for telephone
calls P15, cleaning P175, Coffee and Tea P230.

Required;
Determine the amount to be reimbursed by the cashier
Solution:
Imprest at the start of the week 1000
Total expenses * 585
Balance of cash remaining 415
Cash required to restore imprest 585
Cash at the start of the following week 1000

*The total sum disbursed = 50+145+175+230=600 less 15 (received) =P585 to restore

imprest.

WHY WILL THE BUSINESS MAINTAIN A PETTY CASH BOOK AND MAIN CASH
BOOK
 To remove small expenses from the main cash book.
 To allow the main chief cashier to delegate some of the work to junior staff.
 To provide useful training to junior cashiers.
 To reduce the number of entries in the main cash book.

Example 2.
Moagi is a sole trader, he keeps a petty cash book using the imprest system. The amount
of imprest is P350. He provided the following information for the month of July 2019;

2019

July 1 cash received P350

July 5 bought window cleaner P20
July 6 bought pencil and pen P12
July 14 paid T. Lesego, a creditor, P56

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July 17 paid bus fare P12

July 21 bought printing paper P18
July 25 paid taxi fare P5
July 27 paid K. Namane, a creditor P68
July 29 paid office cleaner P75

Required;
a) Draw up Moagi’s petty cash book for the month of July 2019. The petty cash book
should have four analysis columns; cleaning, stationery, travel and ledger account.
b) Balance the petty cash book on 31 July and carry down the balance. Show the
restoration of the imprest amount on 1 August 2019.
c) Make the necessary entries in Moagi’s nominal ledger and purchases ledger.

Solution;
Moagi’s petty cash book

Details/ Total Postage& Cleaning

Receipts Date Traveling Ledger
Particulars paid Stationery Expenses
P350 1/7 Cash

window
5/7 20 20
cleaner
6/7 pencil & pen 12 12
14/7 T. Lesego 56 56
17/7 bus fare 12 12

printing
21/7 18 18
paper
25/7 taxi fare 5 5
27/7 K.Namane 68 68

office
29/7 75 75
cleaner

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266 17 30 95 124

31/7 Balance c/d 84 GL GL GL GL

350 350

84 1/8 Balance b/d

Cash
266 1/8 (restored
imprest)

VERIFICATION OF ACCOUNTS
BANK RECONCILIATION

 Bank reconciliation statement is a report which compares the bank balance as per
business's accounting records with the balance stated in the bank statement.
 It is normal for a business's bank balance as per accounting records to differ from
the balance as per bank statement due to timing differences.
 Certain transactions are recorded by the entity that are updated in the bank's
system after a certain time has elapsed.
 Likewise, some transactions are accounted for in the bank's financial system
before the business incorporates them into its own accounting system.
 Such timing differences appear as reconciling items in the Bank Reconciliation
Statement.

The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies

between the accounting records of the entity and the bank besides those due to normal
timing differences. Such discrepancies might exist due to an error on the part of the
business or the bank.

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Importance of Bank Reconciliation

 Preparation of bank reconciliation helps in the identification of errors in the

accounting records of the company or the bank.
 Cash is the most vulnerable asset of an entity. Bank reconciliations provide the
necessary control mechanism to help protect the valuable resource through
uncovering irregularities such as unauthorized bank withdrawals. However, in
order for the control process to work effectively, it is necessary to segregate the
duties of persons responsible for accounting and authorizing of bank transactions
and those responsible for preparing and monitoring bank reconciliation
statements.
 If the bank balance appearing in the accounting records can be confirmed to be
correct by comparing it with the bank statement balance, it provides added comfort
that the bank transactions have been recorded correctly in the company records.
 Monthly preparation of bank reconciliation assists in the regular monitoring of cash
flows of a business.

REASONS WHY CASH BOOK BALANCES DIFFER FROM THE BANK STATEMENT
BALANCES

Differences usually occur because of;

a) Items in the cashbook not appearing in the bank statement

i. Unpresented cheques-These represent cheques that have been issued

by an entity to a customer or another third party but which have not
presented to the bank by the reconciliation date.

ii. Bank lodgments/ cheques not credited-cheques received by an entity

but not yet presented to the bank for payment.

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iii. Error in the cashbook- Errors or omissions in the cash book can lead to a
difference between the balance as per bank statement and the balance as
per cash book.

b) Items appearing in the bank statement not in the cashbook

i. Bank charges- the various fees accountholders are charged in respect of

maintenance of the account along with any other charges incurred in respect
of specific transactions (e.g. cheque clearance charges, fund transfer
charges, collection charges, etc.). Bank charges are charged directly to the
customer account thereby reducing the bank balance shown in the bank
statement. These charges are usually not recorded by the business until the
bank provides the bank statement at the end of a month which is why balance
as per bank statement may be lower than the cash book balance.

ii. Bank interest-Interest earned on various saving accounts may be credited

directly into the accounts by the bank at the end of a month. The account
holding company records the interest receipt after it receives information from
the bank through bank statement. Therefore, until the interest received is
recorded in the cash book, the balance as per bank statement will be higher
than the cash book balance

iii. Amounts paid directly into the bank-Direct Credits or Direct Deposits are
amounts deposited directly by someone into an account of the company.
Bank records the amount received as soon as the transfer through direct
credit is made but the business entity records the amount when it receives
information by the bank through bank statement or otherwise. Therefore, the
balance as per bank statement may be higher than the balance as per cash
book due to direct credits not yet accounted for by the entity.

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iv. Errors in the bank statement-Errors or omissions by the bank can lead to a
difference between the balance as per bank statement and the balance as
per cash book. For instance, bank may incorrectly record the deposits or
withdrawals of another account into the company's bank account.

v. Amount paid directly by the business to the bank-There may be a time

lag between when a company deposits cash or cheque in its account and
when the bank credits it. Since the company records the increase in bank
balance in its accounting records as soon as the cash or cheque is deposited,
the balance as per bank statement would be lower than the balance as per
cash book until the deposit is processed by the bank.

PROCEDURE FOR BANK RECONCILIATION

1. Compare the bank account in the cashbook with the bank statement, i.e. the debit
side of the cashbook is compared with the credit side of the bank statement and
credit side of the cashbook with debit side of the bank statement.
2. Update the cashbook, i.e. enter items appearing in the bank statement but are not
appearing in the bank account of the cashbook.

a) Items debited in the bank statement (e.g. bank charges, credit transfer etc.)
paid by the business should be entered on the credit side of the cashbook.
b) Items credited on the bank statement (e.g. direct debits, standing orders)
paid into the bank should be entered on the debit side of the cashbook.
3. Correct any errors in the cashbook
4. Balance the cashbook and carry down the balance. This balance is the correct
balance, if it is at the end of the financial year, this is the balance which should
appear in the statement of financial position.

5. Prepare a bank reconciliation statement, this should show why the balance on
the updated cashbook and the bank statement differ.
a) Start with the balance shown in the bank statement at the end of a month

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b) ADD any items which appear on the debit side of the cashbook but which
do not appear on the bank statement. (e.g. amount not credited/ bank
lodgment)
c) DEDUCT any items which appear on the credit side of the cashbook which
do not appear on the bank statement (e.g. unpresented cheques)
d) Make any adjustments to bank errors by adding amounts debited in error
by the bank and deducting amounts credited in error by bank.
e) The total of these calculations should be equal to the bank balance of the
cashbook.

Preparing a Bank Reconciliation Statement

Following is a sample Bank Reconciliation Statement:

Deco Enterprises

Bank Reconciliation Statement as at 31 December 2019

P P
Balance as per bank statement xx
Add: Amounts not credited xx
Error in bank statement xx xx
xx
Less:
Unpresented cheques xx
Balance as per updated cashbook xx

NB-It is possible to start the bank reconciliation with the updated cashbook balance, then
it is necessary to reverse the items (b), (c) and (d).

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The format will be as follows;

Bank Reconciliation Statement as at 31 December 2019

P P
Balance as per updated cashbook xx
Add: Unpresented cheques xx
xx
Less:
Amounts not credited xx
Error in bank statement xx xx
Balance as per bank statement xx

Assuming the balance in the cashbook is a debit balance, we can summarise the basic
method of preparing a Bank Reconciliation Statement;

Item When bank reconciliation statement starts with balance

in the
Cashbook (bank Bank statement
column)
Unpresented ADD DEDUCT
cheques
Amount not DEDUCT ADD
credited

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Example

The cashbook and bank statement for Daniel Molato for April 2019 are shown below.
The first step is to identify those items which only appear in one record. This is done by
placing a tick (√) against items appearing in the cash book and bank statement.

Cash book (bank column only)

Date Details Amount Date Details Amount

2019 2019

April 1 Balance b/d 1400√ April 4 Purchases 256√

6 K. Dikago 200√ 7 Abi Stores 1000

10 L. Sedimo 500 12 Rutang 300√

15 Sales 900 23 Bogolo 150

30 Balance c/d 1294

3000 3000

May 1 Balance b/d 1294

Note: It was discovered that the transaction on the 4 April should have been P265
and not P256.

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Bank Statement April 2019

Date Details Dr Cr Balance

2019

April 1 Balance b/f 1400√ Cr

4 Cheque No. 2015 265√ 1135 Cr

6 Cheque No.1277 200√ 1335 Cr

14 Cheque No. 2016 300√ 1035 Cr

25 Standing order- 90 945 Cr

Maungo

27 Credit transfer- 100 1045 Cr

Dividend

30 Bank charges 25 1020 Cr

Required;

a) Make any additional entries that are required in Daniel Molato’s cashbook, balance
the cashbook and bring down the balance.

Solution;

Updated cashbook
Date Details Amount Date Details Amount

2019 2019

May 1 Balance b/d 1 294 May 1 Error 9

Dividend 100 Standing order 90

Bank charges 25

Balance c/d 1270

1394 1394

May 2 Balance b/d 1270

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b) Prepare Daniel Molato’s bank reconciliation statement at 30 April 2019.

Daniel Molato

Bank Reconciliation Statement as at 30 April 2019

P P

Balance as per bank statement 1 020

Add: Amount not credited
L. Sedimo 500
Sales 900 1 400
2 420
Less: unpresented cheques
Abi Stores 1 000
Bogolo 150 1 150
Balance as per updated cashbook 1 270

BANK RECONCILIATION WHEN THERE’S AN OVERDRAFT

When there’s an overdraft the balance in the cashbook and bank statement then
becomes;

 In the cashbook a credit balance as a liability to the bank

 In the bank statement a debit balance as an asset in the bank

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When a bank reconciliation statement is prepared when there is an overdraft, the

adjustments are reversed, as follows;

Bank Reconciliation Statement as at 31 December 2019

P P
Overdraft as per bank statement xx
Add: Unpresented cheques xx
xx
Less:
Amounts not credited xx
Errors in bank statement
Overdraft as per updated cashbook xx

A bank overdraft may also be shown as a negative amount by having the value being in
brackets, the bank reconciliation is prepared in the usual way;

Bank Reconciliation Statement as at 31 December 2019

P P
Balance as per bank statement (xx)
Add: Amounts not credited xx
Error in bank statement xx xx
xx
Less:
Unpresented cheques xx
Balance as per updated cashbook (xx)

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CORRECTION OF ERRORS
ERROS WHICH DO NOT AFFECT TRIAL BALANCE

When these errors are made the trial balance will still agree, i.e. the debit column total
will be equal to the total of the credit column.

The errors include;

1. Error of omission-this error occurs when a transaction is completely not recorded

in the books of accounts, i.e. neither a debit entry nor credit entry is made.

2. Error of principle-occurs when the transaction is entered in the wrong class of

accounts, e.g. purchase of new motor vehicle entered in the purchase account.

3. Error of commission-entering the transaction in the wrong account of the same

class, e.g. purchase of goods on credit from Saone entered in Baone account.

4. Error of original entry- occurs when an incorrect figure is used when a

transaction is first recorded in the books of account. E.g. sales of goods for P219
entered as P201.

5. Error of complete reversal-occurs when entering a transaction in the right

account, using the correct amount but wrong side of an account, e.g. a cheque
received from Botho entered by debit Botho account and credit bank account.

6. Compensating error-occurs when a combination of two or more errors cancelling

each other, e.g. Purchases account under cast by P1000, sales account also under
cast by P1000.

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JOURNAL ENTRIES AND CORRECTION OF ERRORS

Errors are corrected by means of a journal before making entries in the appropriate
ledger accounts.
The Journal

Errors which do not affect Errors which affect

Trial balance Trial balance

No suspense account used suspense account used

CORRECTION OF ERRORS WHICH DO NOT AFFECT THE TRIAL BALANCE

Example

Mafoko prepared a trial balance on 31 December 2018, the totals of a trial balance agree,
but the following errors were discovered on 10th January 2019.

a) The purchase of goods on credit from Letlole stores, P340, was omitted from the
books.
b) The purchase of computer costing P5 000 was posted to the purchases account.
c) The sale of goods on credit to Bonolo, P820, were entered in error to the account
of Boingotlo.
d) A cheque of P230, received from Marea was debited in her account and credited
in the bank account.
Required;

Prepare the journal entries to correct the above errors. Narratives are required.

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Solution;
Mafoko
Journal
Date Details Debit Credit
P P
2019 Purchases 340
January 10 Letlole stores 340
(purchases of goods from
letlole stores now recorded)
January 10 Computer 5 000
Purchases 5 000
(error in posting the computer
to purchases account now
corrected)
January 10 Boingotlo 820
Bonolo 820
(error of posting to the wrong
personal account now
corrected)
January 10 Bank 460
Marea 460
(cheque from Marea credited
to bank account and debited
to Marea account in error,
now corrected)

ERRORS WHICH AFFECT THE TRIAL BALANCE

When errors of this types occurs, the trial balance totals will not agree. The errors include
the following;

1. An addition error in an account-occurs because of an error in arithmetic

calculation when balancing an account. E.g. sales journal is under cast by P100,
the total of the sales account will be less by P100, the effect on the trial balance,
the credit column total will be less than the debit column total by P100.

2. An error in completing the double entry- occurs when a wrong figure/amount is

used when completing the double entry, e.g. a cheque of P200 paid by Tiro is

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entered in Tiro’s account as P200 and in the cashbook as P220. This could cause
the debit column to exceed the credit column by P20.

3. Single entry error-occurs from failure to complete the double entry, i.e. only one
entry is made from the transaction. E.g. P300 cash received from Mpho, credited
to Mpho’s account but no entry is made in the cash account. The credit column of
the trial balance will exceed the debit column by P300.

SUSEPENSE ACCOUNT

 Is a temporary holding account in which the difference in the trial balance is held
until the errors are discovered and corrected.
 If the shortage is on the debit side of the trial balance, the difference is entered or
posted in the debit side of the suspense account.
 If the shortage is on the credit side of the trial balance, the difference is entered or
posted in the credit side of the suspense account.
 Suspense account is opened to balance the books, it is therefore has its balance,
debit or credit.
 If the Statement of financial position is prepared before the errors are corrected;
 A debit balance on a suspense account will appear as a current asset
 A credit balance on a suspense account will appear as a current liability.

 When all errors are discovered and corrected, the suspense account will close
automatically.

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CORRECTION OF ERRORS WHICH AFFECT THE TRIAL BALANCE

Example
On 30 April 2019, Thuso’s trial balance showed a difference of P360 being a shortage on
the debit side. The difference was posted to a suspense account.

Thuso later discovered the following errors;

a) The sales journal had been under cast by P840

b) A cheque for P250 received from Koloi had been credited to the account of Kololo.
c) A payment of P600 for rent had been credited to the credit side of rent account.
Required;

a) Prepare journal entries to correct the above errors. Narratives are not required.
b) Write up a suspense account as it would appear after the errors are corrected.
Solution;
Thuso
Journal
Error Details Dr Cr
P P
1. Suspense account 840
Sales account 840
2. Kololo 250
Koloi 250
3. Rent 1 200
Suspense account 1 200

Suspense account
Date Details Amount Date Details Amount

2019 2019

April 30 Difference on trial 360 April 30 Rent 1 200

balance

Sales 840

1 200 1 200

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CONTROL ACCOUNTS
 Known as TOTAL ACCOUNTS.
 Summarise the information in totals for all items in the sales and purchases
ledger.

PURPOSE OF CONTROL ACCOUNTS

 They provide immediate totals of trade receivables/debtors and trade

payables/creditors for inclusion in the trial balance.
 They are a proof of arithmetic accuracy of the entries in the ledger they
control.
 They can assist in locating errors when a trial balance does not agree
 They enable the draft of financial statements to be prepared quickly
 They help reduce the chances of fraud by providing an internal check on
the ledgers

CONTROL ACCOUNTS AND SOURCES OF INFORMATION

SALES LEDGER CONTROL ACCOUNTS

 Referred to as the total trade receivables/ debtors control account.

 It resembles the account of the trade receivable/debtor.
 Contains accounts of all trade receivables or all transactions relating to trade
receivables.
 It is prepared using information from the books of prime entry.

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The sales ledger control account would be drawn up using the following information;

Item (total) Source of information

Credit sales Sales journal
Sales returns Sales returns journal
Cash and cheques received from Cashbook
trade receivables
Discounts allowed Cashbook (discount allowed
column)
Dishonoured cheques Cashbook
Other adjustments e.g. bad debts The Journal/ General journal

PURCHASES LEDGER CONTROL ACCOUNTS

 Known as total trade payables/ creditors control account.

 It resembles the account of the trade payable/ creditor
 It contains all transactions relating to the trade payables of the business
 It is prepared using information from the books of prime entry.

The purchases ledger control account would be drawn up using the following information;

Item (total) Source of information

Credit purchases Purchases journal
Purchases returns Purchases returns journal
Cash and cheques paid to trade Cashbook
payables
Discounts received Cashbook (discount received
column)
Other adjustments The Journal/ General journal

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The control accounts will be balanced at the end of the period. If the balance agrees with
the total of the individual accounts in the sales ledger or purchases ledger, the entries are
arithmetically correct.

Example;

Boipelo prepares a trade receivable control account and trade payables control account
at the end of each month.
On 1 January 2019 the balances brought down on the control accounts were;
P
Trade receivables control account 12 500 dr
Trade payables control account 9 400 cr
The following information was supplied for the month ended 31 January 2019.
P
Credit sales 16 400
Credit purchases 8 700
Cheques received from trade receivables 11 300
Sales returns 800
Payment to trade payables 6 200
Purchases returns 560
Trade receivables’ cheques dishonoured 1 250
Discount allowed 500
Bad debts written off 1 340
Discount received 200

Required
a) Prepare Boipelo’s trade receivables control account.
b) Prepare Boipelo’s trade payables control account.

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Solution;
a)
Boipelo’s trade receivable control account
Date Details Amount Date Details Amount
2019 2019
January 1 Balance b/d 12 500 January 31 Bank 11 300
January 31 Sales 16 400 January 31 Sales returns 800
January 31 Bank 1 250 January 31 Discount allowed 500
(dishonoured cheques)
January 31 Bad debts 1 340
January 31 Balance c/d 16 210
30 150 30 150
February 1 Balance b/d 16 210

b)
Boipelo’s trade payables control account
Date Details Amount Date Details Amount
2019 2019
January 31 Bank/ cash 6 200 January 1 Balance b/d 9 400
January 31 Discount received 200 January 31 Purchases 8 700
January 31 Purchases returns 560
January 31 Balance c/d 11 140
18 100 18 100
February 1 Balance b/d 11 140

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BALANCES ON BOTH SIDES OF A CONTROL ACCOUNT

Both the trade receivables control account and trade payables control account may have
two balances.

The trade receivables control account may have two balances;

 The usual debit balance representing amount owing by trade receivables/ debtors
and the unusual credit balance representing amount owing to trade receivables/
debtors.
The trade receivables control account may have a credit balance due to the following
factors;

 Trade receivables paid in advance for goods

 Trade receivables returning goods after paying the account
 Overpayment by the trade receivable

The trade payables control account will also have two balances;

 The usual credit balance representing amount of money owing to trade payables
by business and the unusual debit balance representing amount of money owing
by trade payables.
The trade payables control account may have a debit balance due the following factors;

 Paying the trade payable in advance for the goods

 Returning goods to the trade payable after paying the account
 Overpayment to the trade payable

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Example;

Ditebogo maintains a full set of accounting records and prepares control accounts at the
end of each month.
On 1 May 2018, Ditebogo total trade receivables account had a debit balance of P1 360.
Ditebogo provided the following information for the month ended 31 May 2018.
P
2018
May 31 Credit sales 12 100
Returns inwards 270
Cheques received from credit customers 6 400
Discount allowed 255
Cheques dishonoured 420
Cash refund to a trade receivable 85
Bad debts written off 150
Set-off 360
June 1 Credit balances in the sales ledger 90
Debit balances in the sales ledger ?

Required;
Prepare Ditebogo’s trade receivables control account for the month of May 2018.

Solution;

Trade receivables control account

Date Details Amount Date Details Amount

2018 2018
May 1 Balance b/d 1 360 May 31 Bank 9 400

May 31 Sales 12 100 Sales returns 270

Dishonoured cheques 420 Bad debts 150

cash refund 85 Discount allowed 255

Set-off 360

Balance c/d 90 Balance c/d

14 055 14 055

June 1 Balance b/d 3 620 June 1 Balance b/d 90

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CONTRA ENTRIES IN CONTROL ACCOUNTS

 Known as inter ledger transfers or set-offs.

 It may happen that a business sells to another business and also buys goods from
that business, this means that there will be two accounts, one in the sales ledger
another in the purchases ledger.
 Instead of each business sending each other a cheque to settle their accounts,
they may agree to set-off one account against each other and the outstanding
amount will be settled by one business.
Example;
Tumelo provided the following information;
2019
June 10 Sold goods P1 800 on credit to Badiri Stores.
June 18 Tumelo bought goods P2 400 on credit from Badiri Stores.
June 30 The balances of the two accounts for Badiri Stores were set-off and Tumelo sent
a cheque for the remaining balance.
Solution; Sales ledger
Badiri Stores account
Date Details P Date Details P
2019 2019
June Sales 1 800 June Purchases 1 800
10 30 ledger/
set-off

Purchases ledger
Badiri Stores account
Date Details P Date Details P
2019 201
9
June Sales ledger/ 1 800 June Purchases 2 400
30 set-off 18
Bank 600
2 400 2 400

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RECONCILIATION OF CONTROL ACCOUNTS

If the totals in the control accounts are not equal to the entries from the respective ledgers,
then there is error somewhere and reconciliation of the two balances have to be made.

Example

On 30 June 2019, the totals of the individual trade receivables accounts in the sales
ledger was P17 700. This did not agree with the balance in the sales ledger control
account at the same date.

The following errors were later discovered;

1. Bonang was allowed a discount of P40, which was recorded correctly in the
cashbook, but had been entered in the wrong side of Bonang’s account.
2. Goods to the value of P800 sold on credit to Kefilwe was not entered on the books.

After the necessary corrections were made on the sales ledger control account, the
balance on this account was P18 420. No corrections were made on the individual trade
receivables accounts.

Required;
Prepare a statement reconciling the original total of the sales ledger balance and control
balance.
Solution
Statement reconciling sales ledger control account balance and sales ledger balance
P
Balance as per sales ledger 17 700
Add sales omitted 800
18 500
Less error in Bonang account 80
Balance as per sales ledger control account 18 420

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ACCOUNTING CONCEPTS

Name of accounting Explanation

principle or policy

Duality Every transaction has two effects.

Prudence Profits should not be overstated.

Money measurement Financial statements only include items which can be

expressed in monetary terms.

Going concern Accounting assumes that a business will continue to

operate indefinitely
Business entity A distinction is made between the financial
transactions of a business and those of its owner(s)
Reliability Accounting information should be free from error and
bias.

Consistency The same accounting treatment should be applied to

similar items at all times.
Matching/ Accrual The income for one period is matched against the cost
of the same period or expense and revenue incurred
and earned, whether paid or not, received or not
should be reflected in the current financial period.
Realisation Revenue is recognised as earned when ownership of
goods passes to the customer.
Historical cost Business transactions should be recorded at their
actual cost (original cost).
Materiality Applies to items of low value which are not worth
recording as separate items.

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FINANCIAL STATEMENTS
ACCOUNTS OF THE SOLE TRADER
Every business activity is started with the aim of making profit. The profit is the reward
for the sole trader for taking the risk of starting a business also he/she should get a return
for his/her investment.
The profit/loss is calculated in the financial statements that are prepared at the end of the
trading or financial period.

Financial statements consists of 3 sections

i. A Trading account in which Gross profit/loss is calculated

ii. An Income Statement (profit and loss) in which the Profit for the year is
calculated.
iii. Statement of financial position which shows the assets, liabilities and capital
of the business at a certain date.
Financial statements are usually prepared from the trial balance. Each item in a trial
balance is used once in a set of financial statements.

Any notes or additional information to the trial balance is used twice in a set of financial
statements.

Trading account

 Is concerned with the buying and selling of goods.

 Its purpose is to calculate the profit earned on the goods sold.
 This known as the Gross Profit.
 Gross Profit = Sales minus Cost of sales
 Sales (Revenue) represents total sales less sales returns / returns inwards.
 Cost of sales represents the total costs of goods actually sold.
 Cost of sales =opening inventory + purchases less closing inventory
 Opening inventory-goods that are available for sale at the beginning of the financial
year/ trading period.

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 Purchases- goods bought for resale during the trading period. Purchases
represent purchases plus carriage on purchases less purchases returns/ returns
outwards.
 Closing inventory-goods available at the end of the trading period. (Unsold goods/
inventory)

Layout of a trading account

Title
P P P
Sales/ Revenue xx
Less sales returns/ returns inwards (xx)
Net sale xx
Less Cost of sales
Opening inventory xx
Purchases xx
Add carriage on purchases xx
xx
Less purchases returns/ returns outwards (xx) xx
Goods available for sale xx
Less closing inventory (xx)
Cost of sales xx
Gross profit/(loss) xx

PROFIT AND LOSS ACCOUNT

 Shows the net profit/loss of the business after all expenses are paid.
 NET PROFIT= Gross profit plus other income minus Expenses.
 If the expenses exceeds the Gross profit and other income, the result is Net loss.

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Layout of a profit and loss account

Title
P P P
Gross profit (from trading account) xx
Add: other income
Discount received xx
Rent receivable xx xx
Total income xx
Less expenses
Discount allowed xx
Carriage outwards xx
Salaries and wages xx
Insurance xx
Depreciation etc. (xx)
Total expenses xx
Net profit/(loss) (profit for the year) xx

Usually the trading account and profit and loss account are combined under one heading
called the INCOME STATEMENT.

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Layout of an Income Statement

Title
P P P
Sales/ Revenue xx
Less sales returns/ returns inwards (xx)
Net sale xx
Less Cost of sales
Opening inventory xx
Purchases xx
Add carriage on purchases xx
xx
Less purchases returns/ returns outwards (xx) xx
Goods available for sale xx
Less closing inventory (xx)
Cost of sales xx
Gross profit xx
Add: other income
Discount received xx
Rent receivable xx xx
Total income xx
Less expenses
Discount allowed xx
Carriage outwards xx
Salaries and wages xx
Insurance xx
Depreciation etc. (xx)
Total expenses xx
Profit/(loss) for the year xx

The profit for the year from the Income Statement is transferred to the Statement of
Financial position and entered under the capital section.

Profit is added to capital as it increases it, while the loss is subtracted from the capital
as it decreases it.

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Example
Lesego has extracted the following trial balance for the year ended 31 July 2017.
Lesego
Trial balance as at 31 July 2017
ACCOUNT TITLES DEBIT CREDIT
P P
Inventory 1 January 2018 6 000
Bank 16 400
Sales 98 200
Trade receivables 20 400
Fixtures and fittings 19 600
Purchases 72 600
Rent paid 1 500
Trade payables 15 200
Capital 53 930
Drawings 7 500
salaries 18 740
Motor expenses 3 700
General expenses 290
Insurance 600
167 330 167 330

Inventory at 31 July 2017 was P12 800.

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Solution;
Lesego
Income statement as at 31 July 2017
P P P
Sales/ Revenue 98 200
Less Cost of sales
Opening inventory 6 000
Add Purchases 72 600
Goods available for sale 78 600
Less closing inventory 12 800
Cost of sales 65 800
Gross profit 32 400
Less expenses
Motor expenses 3 700
Rent paid 1 500
Salaries 18 740
Insurance 600
General expenses 290
Total expenses 24 830
Profit/(loss) for the year 7 570

SERVICE BUSINESS

These are businesses that makes their profit by rendering services to their customers/
clientele and charge money for the services rendered. The expenses incurred by service
organisations/ businesses are not different from those of mechanizing businesses. Some
of the service businesses includes;

 Hospitals
 Schools
 Football clubs
 Societies
 Churches

The service business will prepare an Income Statement showing the source of income
or funds for the business and also the expenses incurred during the period of operation.

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Example
Prepare an Income Statement for Mephato Private Secondary School for the year ended
30 April 2018 from the information given below;
P
Stationery 6 700
Wages and salaries 32 000
School fees 54 500
Donations from government 12 000
Rent of school by outsiders 4 200
Purchases of drinks and snacks 5 800
General expenses 3 100
Sales of drinks and snacks 9 600

Solution;
Income Statement for Mephato Private School for the year ended 30 April 2018.
P P P
Income
School fees 54 500
Donations 12 000
Sales of drinks and snacks 9 600
Rent of school by outsiders 4 200 80 300

Less expenditure
Stationery 6 700
Wages and salaries 32 000
Purchase of drinks and snacks 5 800
General expenses 3 100 47 600
Profit for the year 32 700

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DIFFERENCES BETWEEN MECHANDISED AND SERVICE BUSINESSESS

MECHANDISED SERVICE
1. Buy and sell goods 1. Provide service
2. Prepare income statement (trading, 2. Prepare income statement (profit
profit and loss account section) and loss account section)
3. Maintains accounts for inventory of 3. Do not maintain accounts for
goods, purchases, sales and returns. inventory of goods, purchases, sales
and returns.

STATEMENT OF FINANCIAL POSITION

Statement of Financial Position, also known as the Balance sheet, presents the financial
position of an entity at a given date. It is often described as a “snapshot” of the company’s
financial position at a point (a moment or an instant) in time. It is comprised of three main
components: Assets, liabilities and equity.

LAYOUT OF STATEMENT OF FINANCIAL POSITION

TITLE
P P P
Non-current assets
Premises xx
Furniture xx
xx
Current assets
Inventory xx
Trade receivables xx
Cash xx xx

Less current liabilities

Trade payables xx
Bank overdraft xx xx
Working capital/ Net current assets xx
Total net assets xx

Financed by
Capital xx
Add profit for the year xx
xx
Less drawings xx
xx

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ADJUSTMENTS FOR FINANCIAL STATEMENTS

ADJUSTMENTS TO FINANCIAL STATEMENTS

The financial statements are prepared at a specific period of time so only items relating
to that particular time period should be included in the financial statements.

The timing of the actual receipts and payments is not relevant. It is necessary therefore
to adjust the items within an income statement for amounts PREPAID and ACCRUED.
This means that the profit/loss will be shown at a more accurate figure and it allows for
more meaningful comparisons of the financial statements from year to year.

ACCRUALS
 Amount due in a financial year or accounting period which remains unpaid or not
received by the business at the end of the financial period or year.
Accrued expense/ outstanding liability- amount due in a financial year which remains
unpaid at the end of the financial year.

Example

The rent bill is P12 000 per year, the business paid P10 000 by cheque for the year ended
31 December 2018, the outstanding amount is P2 000, this is the accrued expense.

Any amount due and unpaid at the end of financial year is ADDED to the amount paid is
and the total expense related to that financial year transferred to the income statement
(profit and loss account).

The amount unpaid is a LIABILITY to the business so it will appear in the statement of
financial position as a CURRENT LIABILITY.

Accrued income/revenue-amount due in a financial year which is not paid to or not

received by a business at the end of the financial period.

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Example

The commission receivable for the business is P60 000 per year, in the year ended 31
December 2018 the business only received P50 000, and this means P10 000 is not
received, this is accrued income.

Any amount due and not received at the end of the year is ADDED to the amount received
and the total income relating to the financial year transferred to the income statement
(profit/loss account).

The amount not received is an ASSET to the business. It will be shown in the Statement
of financial position as a CURRENT ASSET.

PREPAYMENTS

 Amount that is paid or received by business for next/ future accounting period.
Prepaid expense-amount paid by business in advance/ for a future accounting period.
Example;

The business insurance premium is P3 000 in each year, in the year ended 31 December
2018, the business paid the premiums to the amount of P3 500, this means P500 is paid
for the next period, hence is a prepaid expense.

Any amount paid in advance by business will be DEDUCTED from the total amount paid
so that only amount relating to the current financial year will be transferred to the income
statement.

Amount paid in advance by business represent a short-term benefit to the business. It

has to be paid in the near future by business. The amount will be shown in the statement
of financial position as a current asset.

Prepaid income-money paid to or received by business in advance/ for a future

accounting period.

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Example;

The business is to receive rent P15 000 each year for subletting part of its premises, in
the year ended 31 December 2018 the business received P18 750, this means that P3
750 was received by business in advance, hence prepaid income.

Any amount received in advance will be DEDUCTED from the total amount received so
that only amount relating to the financial period will be transferred to the income
statement (profit and loss account).

The amount received in advance will be reflected in the Statement of financial position as
a current liability as the business have not provided the service that is has been paid
for.

PREPAID AND ACCRUED EXPENSE MAY BE SUMMARISED AS FOLLOWS;

At the start of the year At the end of the year

Prepayments ADD to the amount paid during the DEDUCT from the amount paid
year. during the year.
Accruals DEDUCT from the amount paid ADD to the paid during the year.
during the year.

PREPAID AND ACCRUED INCOME MAY BE SUMMARISED AS FOLLOWS;

At the start of the year At the end of the year

Prepayments ADD to the amount received during DEDUCT from the amount
the year. received during the year.
Accruals DEDUCT from the amount received ADD to the received during the
during the year. year.

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Example

1. Thato’s financial ends on 30 June. He receives fixed monthly rentals from Tebogo. On
30 June 2019, he provided the following information;
2018
July 1 Tebogo owed one month’s rental P900.
Sept 1 Tebogo paid rent for 15 months to 30 June 2019 by cheque, P13 500.

Required:

Prepare the Rent receivable account in Thato’s ledger for the year ended 30 June 2019.

Solution;

Rent receivable account

Date Details Amount Date Details Amount

2018 July 1 Balance b/d (Accrued 900 2018 Sept 1 Bank 13 500
b/d)

2019 June 30 Income statement 10 800

Balance c/d 1 800

13 500 13 500

2019July 1 Balance b/d 1 800

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2. Williams has the following balances at 1 January 2018;

Insurance paid in advance P720
During the year he paid for insurance P 1340 by cheque.
At 31 December 2018 insurance prepaid was P465

Solution;
Insurance account

Date Details Amount Date Details Amount

2018 Jan 1 Balance b/d (Prepaid 720 2018 Dec 31 Income

b/d) statement

2018 Dec 31 Bank 1 340 Dec 31 Balance c/d 465

2 060 2 060

2019 Jan 1 Balance b/d 465

BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS

BAD DEBTS

 Amount owing to a business which will not be paid by the trade receivable/
debtor.
Reason for bad debts

 debtor being declared bankrupt

 trade receivable/debtor cannot be traced/ disappeared
 trade receivable/debtor has died
 Debtor/trade receivable has gone out of business.
It is worthless to keep that debt in the business as an asset so it needs to be written off.

Writing off bad debt is an example of application of the prudence concept.

If a debt cannot be regarded as an asset it is written off so that the assets are not
overstated.

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The amount of bad debt is regarded as loss for the year, so must be included in the
income statement, otherwise the net profit will be overstated.

A bad debt should be treated as an expense for that particular financial year.

ENTRIES

When debt is written off;

Dr: Bad debts account

Cr: Trade receivables account

At the year end;

Dr: Income Statement

Cr: Bad debts account

BAD DEBTS RECOVERED

 Arise when a debtor/trade receivables pays some or all the amount owed after
the amount was written off.
ENTRIES

When the amount is received;

Dr: Cashbook (bank or cash)

Cr: Bad debts Recovered account

Or

Dr: Cashbook account

Cr: Trade receivable account

Dr: Trade receivable account

Cr: Bad debts Recovered account
At the year end

Dr: Bad debts Recovered account

Cr: Income Statement or Bad debts account

At the end of the year, the Bad debts recovered amount can either be transferred to the
credit of the income statement (as income for the year) or transferred to the credit side

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of the bad debts account (where it reduces the bad debts written off during the year). The
effect on the profit the year (net profit) is the same in both cases.

Example

Tiro’s financial year ends on 31 December. Tiro sold goods on credit to Bame on 1
February 2017 for P600. On this date Bame purchased further goods on credit for P320.

After several attempts to recover the amount due, Tiro wrote off Bame’s account as a bad
debt on 31 December 2017. On 31 October 2018 Tiro received a cheque from Bame for
P600. Tiro wrote off bad debts totalling P780 in 2018.

Required;

Write up the following accounts in Tiro’s ledger for each of the year ended 31 December
2017 and 2018;

a) Bame’s account
b) Bad debts account
c) Bad debts Recovered account
d) Extract of income statement

Solution;

Tiro’s ledger

Bame’s account

Date Details Amount Date Details Amount

2017 Feb 1 Sales 600 2017 Feb 28 Bank 600

2017 Feb 28 Sales 320 Dec 31 Bad debts 320

920 920

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Bad debts account

Date Details Amount Date Details Amount

2017 Dec 31 Bame 320 2017 Dec 28 Income 320

statement

2018 Dec 31 Trade receivables 780 Dec 31 Income 780

statement

Bad debts Recovered

Date Details Amount Date Details Amount

2018 Dec 31 Income statement 600 2017 Oct 31 Bank 600

(Bad debts) (Bame)

600 600

Income Statement Extract 31 December 2017

P P P
Gross profit xx
Less expenses
Bad debts 600

Income Statement Extract 31 December 2018

P P P
Gross profit xx
Add Bad debts Recovered 600
Less expenses
Bad debts 780

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Or

Income Statement Extract 31 December 2018

P P P
Gross profit xx
Less expenses
Bad debts 180

WAYS IN WHICH THE BUSINESS CAN REDUCE THE RISK OF BAD DEBTS

 Supply goods on cash on delivery basis

 Fix a credit limit for each customer and do not allow customers to go over that limit.
 Follow up overdue accounts promptly.
 Send out invoices and statement of accounts promptly to remind customers
 Refuse further supplies until customer pays outstanding account.
 Obtain references from new credit customers
 Charge interest on an overdue balance
 Offer cash discount to encourage prompt payment

PROVISION FOR DOUBTFUL DEBTS

 Estimate of the amount which the business will lose for a financial year because
of bad debts.
 It is usually estimated as a percentage of trade receivables.
At the end of the financial year many businesses try to anticipate the amount that will be
lost because of bad debts. This ensures that the Profit for the year (net profit) in the
income statement (profit and loss account) is not overstated and the amount of trade
receivables in the statement of financial position is shown at a realistic level
(application of prudence concept).

The matching concept is also applied as the amount of sales for which the business is
unlikely to be paid is matched against the sales of the year in which the sale was made.

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The entries include the following;

Dr: Income Statement (profit/loss account)

Cr: Provision for doubtful debts account

In the Statement of financial position deduct the balance on the provision for doubtful
debts account from the trade receivables.

Example

On 31 December 2016, Tiro’s trade receivables amount to P12 000, he decided to create
a provision for doubtful debts of 4% of the trade receivables. Show how this is recorded
in the books of accounts.

Tiro’s ledger

Provision for doubtful debts account

Date Details Amount Date Details Amount

2016 Dec 31 Balance c/d 480 2016 Dec 31 Income statement 480

2017 Jan 1 Balance b/d 480

Income Statement Extracted 31 December 2016

P P P
Gross profit xx
Less expenses
Provision for doubtful debts 480

Statement of financial position extract 31 December 2016

P P P
Current assets xx
Trade receivables 12 000
Less provision for doubtful debts 480 11 520

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INCREASE IN PROVISION FOR DOUBTFUL DEBTS

Depending on factors such as increased trade receivables or increased bad debts or any
other factor which may increase the trade receivables, the provision needs to be
increased.

Entries;

Dr: Income Statement

Cr: Provision for doubtful debts account

(With the increase in provision)

(I.e. deduct the increase in provision as an expense from the Gross profit)

Example

On December 2017, Tiro’s trade receivables has increased to P15 000, he maintains the
provision for doubtful debts at 4% of trade receivables. Show how this is recorded in the
books of accounts.

Tiro’s ledger

Provision for doubtful debts account

Date Details Amount Date Details Amount

2017 Dec 31 Balance c/d 600 2017 Jan 1 Balance b/d 480

2017 Dec 31 Income statement 120

600 600

2018 Jan 1 Balance b/d 600

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Income Statement Extracted 31 December 2017

P P P
Gross profit xx
Less expenses
Provision for doubtful debts 120

Statement of financial position extract 31 December 2017

P P P
Current assets xx
Trade receivables 15 000
Less provision for doubtful debts 600 14 400

REDUCING THE PROVISION FOR DOUBTFUL DEBTS

As like for increasing the provision, the amount owing by trade receivables may decrease,
the provision also has to be reduced.

Alternatively, may be the business decided that the percentage rate is too high, the
provision will therefore have to be reduced.

Entries;

Dr: Provision for doubtful debts

Cr: Income statement (profit and loss) (with the reduction in provision)

Example

On December 2018, Tiro’s trade receivables has decreased to P14 000, the provision is
still maintained at 4% of the trade receivables. Show how this is recorded in the books of
accounts.

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Solution;

Tiro’s ledger
Provision for doubtful debts account

Date Details Amount Date Details Amount

2018 Dec 31 Income 40 2018 Jan 1 Balance b/d 600

statement

Balance c/d 560

600 600

2019 Jan 1 Balance b/d 560

Income Statement Extracted 31 December 2018

P P P
Gross profit xx
Add; Reduction in provision 40
Less expenses

Statement of financial position extract 31 December 2018

P P P
Current assets xx
Trade receivables 14 000
Less provision for doubtful debts 560 880

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PROVISION FOR DISCOUNT ALLOWED

The business must make a provision for discount allowed on trade receivables in
anticipation of reduction from total receipts of cash from its trade receivables.

The provision for discount allowed is an expense and must be debited to the income
statement and to complete the double entry, the provision for discount allowed
account is credited.

I.e. Dr: Income statement (profit and loss account)

Cr: Provision for discount allowed account

The provision for discount allowable is also deducted from the net total amount of trade
receivables (trade receivables less provision for doubtful debts) in the Statement of
financial position (This the application of prudence concept).

Applying the matching concept, an estimate of the amount of discount to be allowed

should be charged in the period in which the sales were made.

Example
Boago maintains a provision for doubtful debts of 5% of the trade receivables at the end
of each year. He also maintains a provision for discount allowable of 2% of the trade
receivables at the end of each year. On 1 May 2017, Boago’s trade receivables owed
P10 000 and on 30 April 2018 they owed P12 000.

Required;

Show the relevant extract from Boago’s Income statement and Statement of financial
position for the year ended 30 April 2018.

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Calculation of the provisions;

Provision for Doubtful debts

May 1 2017 30 April 2018

5 × P10 000= P500 5 × P12 000= P600

100 100

Increase in Provision for doubtful debts is P100.

Provision for discount allowable

May 1 2017 30 April 2018

2 × (P10 000-500) = P190 2 × (P12 000-600) = P228

100 100

Increase in Provision for discount allowed is P38.

Income Statement Extracted 30 April 2018

P P P
Gross profit xx
Less expenses
Increase in provision for doubtful debts 100
Increase in provision for discount allowable 38

Statement of financial position extract 30 April 2018

P P P
Current assets xx
Trade receivables 12 000
Less provision for doubtful debts 600
Provision for discount allowable 228 11 172

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DEPRECIATION OF NON-CURRENT ASSETS

Depreciation- is an estimate of loss in value of a non-current asset over its expected

working life.

CAUSES OF DEPRECIATION

There are four main causes summarized as follows;

a) Physical deterioration
i. Wear and tear-when asset gets worn out as it is used in the business.
ii. Rust, rot and decay-asset falls into a bad physical state associated with the
elements of weather.

b) Economic factors/ reasons

i. Obsolescence- asset becomes outdated because of newer and efficient
assets are available.
ii. Inadequacy- asset is not used because it did not have the capacity to meet
the demand of the business.

c) Passage of time/ time factor

When an asset have a fixed life;
Contracts-lease royalty
-copy right

d) Depletion
When the value of the asset such as mine or oil well falls over a period of time as
minerals or oil is taken out.

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METHODS OF CALCULATING DEPRECIATION

1. Straight line method

2. Reducing balance method
3. Revaluation method

STRAIGHT LINE METHOD

 It is also known as the fixed instalment method

 The non-current asset is assumed to depreciate by equal amount every year over
its expected working life.
 The cost of the non-current asset is spread evenly over its working life.

Formulae= cost
Number of expected years of use

Example

Tirelo’s financial year ends on 31 March. On 1 April 2016, he bought a machine for
P12000 paying by cheque. He estimated to use the machine for 4 years.
Calculate the annual depreciation charged on the machine.

Cost
Number of expected years of use

= P12 000
4 years

= P3 000 per year

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Showing depreciation charged each year.

P
Cost 12 000
Depreciation year 1 3 000
Net Book Value year 1 9 000
Depreciation year 2 3 000
Net Book Value year 2 6 000
Depreciation year 3 3 000
Net Book Value year 3 3 000
Depreciation year 4 3 000
Net Book Value 4 0

When an asset has no expected value at the end of its useful life, its value will fall to zero
or nil like in the above case.
When it is estimated that the asset will have value at the end of its working life that should
be included in the formula or calculations, such value is known as RESIDUAL VALUE.

Formula = Cost –Residual value

Number of expected years of use

Example

Assuming Tirelo estimated that he will be able to sell his machine for P2 000 at the end
the four years. The annual depreciation will be;

P12 000-2 000

4 years

=P2 500

Showing depreciation charged each year.

P
Cost 12 000
Depreciation year 1 2 500
Net Book Value year 1 9 500
Depreciation year 2 2 500
Net Book Value year 2 7 000
Depreciation year 3 2 500
Net Book Value year 3 4 500
Depreciation year 4 2 500
Net Book Value 4 2 000

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The main advantage of the straight line method is that it is easy to calculate and
understand.

The main disadvantage is that the method assumes that the non-current asset will give
the same amount of service annually through their lifetime, however, in actual fact the
services given may not be uniform but may vary from year to year depending on the state
of demand and level of economic activity.

REDUCING BALANCE METHOD

 Also referred to as Diminishing balance method

 The depreciation will be reduced each year as the name implies
 The same percentage rate is applied, but it is calculated on a different amount
each year.
 At the end of the first year, the depreciation is calculated on the cost of the asset.
 The depreciation for the following year is calculated (using same percentage) on
the cost less depreciation previously charged or written off.
 The figure of the cost less the depreciation is known as the NET BOOK VALUE
(NBV)

EXAMPLE

Assuming Tirelo wishes to calculate depreciation using the Reducing Balance Method at
the rate of 30% per annum.
The depreciation charged each year will be;

P
Cost 12 000
Depreciation at 30% year 1 3 600
Net Book Value year 1 8 400
Depreciation at 30% year 2 2 520
Net Book Value year 2 5 880
Depreciation at 30% year 3 1 764
Net Book Value year 3 4 116
Depreciation at 30% year 4 1 235
Net Book Value 4 2 881
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The main advantage of the reducing balance method is that in the income statement the
amount of the overall expenses charged for the use of the non-current asset would be
more or less constant throughout the asset life’s time.

The main disadvantage is that the non-current asset will be written off the books.

THE DIFFERENCE BETWEEN STRAIGHT LINE METHOD AND REDUCING

BALANCE METHOD

STRAIGHT LINE METHOD REDUCING BALANCE METHOD

1. Depreciation is the same percentage 1. Depreciation is the same
and same amount every year. percentage but a different amount
every year.

2. Same amount of depreciation every 2. High amount of depreciation in

year. earlier years and lower in later years.
3. Asset value can reach a nil value if no 3. Asset value never reaches nil
residual value is expected. value.
4. Useful for assets from which equal 4. Useful for assets which in the early
benefit will be gained each year. E.g. years have lower maintenance cost
lease and give greater benefits. E.g.
delivery van

REVALUATION METHOD

 The method is used for depreciation of non-current assets such as hand tools (e.g.
spanners, screwdrivers) packaging cases and small items of low-cost equipment
in offices and laboratories.
 It is difficult and often impractical to keep detailed records for such items.
 Instead, they are valued at the end of each year.

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 The amount by which the value has fallen since the previous revaluation is
depreciation charge.

Example

Kabelo plans to deliver goods to his customers in packaging cases. These will then be
returned to Kabelo. On 1 January 2017 he purchased packaging cases for P3 000 by
cheque. On 31 December 2017, the end of Kabelo’s year the packaging cases were
valued at P2 200.
The depreciation for the year will be;

P
Cost of cases at 1 Jan 2017 3 000
Value of cases at 31 Dec 2017 2 200
Depreciation for the year 800

CHOOSING A METHOD

 Different types of non-current assets are often depreciated at different rates and
using different methods.

 The method chosen should be one that allocates the cost of the asset as fairly as
possible to each period benefiting from the use of the asset.

 Once a method of depreciation has been selected for a particular asset it is

important that this method is applied consistently (consistency concept).

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RECORDING DEPRECIATION IN THE LEDGER

 Recording depreciation using the straight line method and reducing balance
method is exactly the same.
 Each type of non-current asset has two ledger accounts;
 An account for recording the cost of the asset (i.e. Asset account)
 An account for recording the depreciation charged (i.e. Provision for Depreciation
account)
 The Asset account will show a debit balance while the Provision for
Depreciation account will show a credit balance.

 The difference between the balances of the two accounts represent the NET
BOOK VALUE (NBV) of the asset.

Entries can be summarized as follows;

1. During the year when the asset is purchased;

Dr: Asset account

Cr: Cashbook/ Supplier} with cost price of the asset

2. At the end of the year

Dr: Income Statement

Cr: Provision for Depreciation account} with the depreciation charged for the year

 The accounts are balanced at the end of the year and their balances are brought
down.
 The balance brought down on the Provision for Depreciation account shows the
total depreciation charged on the asset which has accumulated up to that date.

Example 1
A firm bought a machine for P12 000 and paid by cheque on 1 October 2015, the residual
value is estimated to be P 2 000. The machine is to be used for 4 years. The financial
year ends on 30 September. The firm is to use the straight line method.

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Required;

Record the relevant entries for the years ended 30 September 2016, 2017, 2018 and
2019 in the following accounts;

a) Machinery account
b) Provision for depreciation account
Machinery account

Date Details Amount Date Details Amount

2015 Oct 1 Bank 12 000 2016 Sept 30 Balance c/d 12 000

2016 Oct 1 Balance b/d 12 000 2017 Sept 30 Balance c/d 12 000

2017 Oct 1 Balance b/d 12 000 2018 Sept 30 Balance c/d 12 000

2018 Oct 1 Balance b/d 12 000 2019 Sept 30 Balance c/d 12 000

Provision for Depreciation account

Date Details Amount Date Details Amount

2016 Sept 30 Balance c/d 2 500 2016 Sept 30 Income statement 2 500

2017 Sept 30 Balance c/d 5 000 2016 Oct 1 Balance b/d 2 500
2017 Sept 30 Income statement 2 500

5 000 5 000

2018 Sept 30 Balance c/d 7 500 2017 Oct 1 Balance b/d 5 000
2018 Sept 30 Income statement 2 500

7 500 7 500

2019 Sept 30 Balance c/d 9 500 2018 Oct 1 Balance b/d 7 500
2019 Sept 30 Income statement 2 500

9 500 9 500

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Example 2
Thabo’s financial year ends on 31 March. He purchased a deliver van costing P40 000
on 1 April 2015 and paid by cheque. He estimated that he will use the delivery van for 4
years and sell it for P12 500. Depreciation is charged at 40% per annum using the
reducing balance method.
Required;
Prepare the delivery van account and Provision for depreciation account for the year
ended 31 March 2016, 2017, 2018 and 2019.

Delivery van account

Date Details Amount Date Details Amount

2015 April 1 Bank 40 000 2016 March 31 Balance c/d 40 000

2016 April 1 Balance b/d 40 000 2017 March 31 Balance c/d 40 000

2017 April 1 Balance b/d 40 000 2018 March 31 Balance c/d 40 000

2018 April 1 Balance b/d 40 000 2019 March 31 Balance c/d 40 000

Provision for Depreciation account

Date Details Amount Date Details Amount

2016 March 31 Balance c/d 12 000 2016 March 31 Income statement 12 000

2017 March 31 Balance c/d 23 400 2016 April1 Balance b/d 12 000
2017 March 31 Income statement 11 200

23 400 23 400

2018 March 31 Balance c/d 30 120 2017 April1 Balance b/d 23 400
2018 March 31 Income statement 6 720

30 120 30 120

2019 March 31 Balance c/d 34 152 2018 April 1 Balance b/d 30 120
2019 March 31 Income statement 4 032

34 152 34 152

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RECORDING DEPRECIATION IN THE FINANCIAL STATEMENTS

Recording depreciation in the income statement

 Depreciation for the year for each type of non-current asset is credited to the
provision for depreciation account in the nominal ledger and debited to the
income statement (profit and loss account), this reduces the profit for the year
of the business.

 Depreciation charged is a non-monetary expense, it is usually shown after all

other monetary expenses in the income statement (profit and loss account).

Recording depreciation in the Statement of financial position

 Each type of non-current asset should be shown at cost price and deducting the
depreciation to date (i.e. accumulated depreciation) to give the net book value
(NBV).

Example 1
Itumeleng purchased a motor vehicles on 1 January 2016 for P40 000 and paid by
cheque. The residual value is estimated to be P8 000. She used the straight line method
to depreciate her motor vehicle. The motor vehicle is to be used for 4 years.

Required;
Show the relevant extract for the years ended 31 December 2016 and 2017 for;
a) Income statement
b) Statement of financial position

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Income Statement Extracted 31 December 2016

P P P
Gross profit xx
Less expenses
Depreciation- motor vehicle 8 000

Income Statement Extracted 31 December 2017

P P P
Gross profit xx
Less expenses
Depreciation-Motor vehicle 8 000

Statement of financial position extract 31 December 2016

P P P
Non-Current assets Cost Accumulated Net book
Depreciation value
Motor vehicle 40 000 8 000 32 000

Statement of financial position extract 31 December 2017

P P P
Non-Current assets Cost Accumulated Net book
Depreciation value
Motor vehicle 40 000 16 000 24 000

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DISPOSAL OF NON-CURRENT ASSETS

 Sometimes a business will sell a non-current asset if it no longer needs it or which

has reached the end of its useful life.

 When a non-current asset is sold or disposed of, a special account called Disposal
of non-current asset account is opened.

 In this account we enter the cost of the asset being sold, the depreciation written
off the asset and the proceeds from sales.

 It is quite unlikely that the account will balance, any difference on the disposal
account is either a profit or loss on disposal.

When an asset is disposed of, it must be removed from the accounting records of the
business, the accounting entries to do that are as follows;
1. On the date of sale

Dr: Disposal of non-current asset account

Cr: Non-current asset account
(With the cost price of the asset sold)

Dr: Provision for depreciation account

Cr: Disposal of non-current asset account
(With the total depreciation of the asset sold)

Dr: Cashbook/ Trade receivables

Cr: Disposal of non-current asset account
(With the proceeds from sale)

2. At the end of the financial year

Dr: Income statement (profit and loss account)

Cr: Disposal of non-current asset account
(With any loss on sale)

Dr: Disposal of non-current asset account

Cr: Income statement (profit and loss account)
(With any profit on sale)

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Example

A machine was bought on 1 January 2016 for P12 000 and paid for by cheque. It
was depreciated using the straight line method at 20% per annum. On 1 October
2018 it was sold for P7400 in cash. The financial year ends on 31 December.

Required;

Show the relevant entries for each of the following accounts for the year ended 31
December 2016, 2017 and 2018.

a) Machinery account
b) Provision for depreciation account
c) Disposal of machinery account

Machinery account

Date Details Amount Date Details Amount

2016 Jan 1 Bank 12 000 2016 Dec 31 Balance c/d 12 000

2017 Jan 1 Balance b/d 12 000 2017 Dec 31 Balance c/d 12 000

2018 Jan 1 Balance b/d 12 000 2018 Oct 1 Disposal 12 000

Provision for Depreciation account

Date Details Amount Date Details Amount

2016 Dec 31 Balance c/d 2 400 2016 Dec 31 Income statement 2 400

2017 Dec 31 Balance c/d 4 800 2017 Jan 1 Balance b/d 2 400

2017 Dec 31 Income statement 2 400

4 800 4 800

2018 Oct 1 Disposal 6 600 2018 Jan 1 Balance b/d 4 800

2018 Dec 31 Income statement 1 800

6 600 6 600

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Disposal of machinery account

Date Details Amount Date Details Amount

2018 Oct 1 Machinery 12 000 2018 Oct 1 Provision for 6 600

depreciation

2018 Dec 31 Income statement 2 000 2018 Oct 1 Cash 7 400

14 000 14 000

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PREPARED BY M. GABATWESEPE