FINANCIAL ACCOUNTING

- L413

By Mrs Bridget P Shula

 RECOMMENDED TEXT BOOK

BUSINESS ACCOUNTING – TENTH EDITION

By Frank Wood & Alan Sangster.

 COURSE OUTLINE
UNIT 1 – Introduction to Principles of Accounting

UNIT 2 - Financial Statements ( Income statement, Equity movement &

Financial position)

UNIT 3 - Cash-flow Statement.

UNIT 4 - Adjustments for Financial Statements.

UNIT 5 - Accounting Standards & Concepts

UNIT 6 - Books of Original entry.

 UNIT 1
Introduction to Principles of Accounting

1. Introduction to Accounting practice.

2. Accounting system.
3. Accounting equation.
4. Double entry system for assets, liabilities & Capital.
5. Double entry system for inventory.
6. Double entry for expenses and revenues.
7. Balancing off accounts.
8. Trial Balance.
9. Capital & Revenue expenditure.
 ACCOUNTING DEFINED
• Accounting is the process of identifying, measuring, recording, and communicating
an organization’s economic activities to users. It is often called the language of
business because it uses a unique vocabulary.

• Users need information for decision making.

• Internal users of accounting information work for the organization and are
responsible for planning, organizing, and operating the entity.

• The area of accounting known as managerial accounting serves the decision-making

needs of internal users
 ACCOUNTING DEFINED
• External users do not work for the organization and include investors,
creditors, labour unions, and customers.

• Financial accounting is the area of accounting that focuses on external

reporting and meeting the needs of external users.
 THE OBJECTIVES OF ACCOUNTING

1)Check whether they are making a profit or a loss;

2)What the business is worth;
3)What a transaction is worth to the business;
4)How much cash the business has;
5)How much the business is owed;
6)How much the business owes others;
7)To keep enough information so that they can keep a financial check on the things they do.

THE PRIMARY OBJECTIVE OF ACCOUNTING IS TO PROVIDE

INFORMATION FOR DECISION MAKING.
 BUSINESS ORGANISATIONS
• An organization is a group of individuals who come together to pursue a common set of goals and
objectives.
• There are two types of business organizations: business and non-business. A business organization sells
products and/or services for profit.

• A non-business organization, such as a charity or hospital, exists to meet various societal needs and
does not have profit as a goal.

• All businesses, regardless of type, record, report, and, most importantly, use accounting information
for making decisions.

• There are three common forms of business organizations — a proprietorship, a partnership, and a
corporation.
 TYPES OF BUSINESS ORGANISATION
There are three main types of business organisation within the private sector.

1. Proprietorship (Sole traders). Is a one-person business (the business is owned by one

person but others can be employed to work within the business).

The sole trader is an unincorporated business organisation. This means that the legal status
of the business is no different to that of the owner. If the business cannot pay its debts then it
would be up to the owner to clear the debts even if this meant selling personal (non-business)
assets to clear the business debt.

Sole traders are generally small organizations but are very common – mainly due to the ease of
setting up as a sole trader.
 SECTORS IN THE ECONOMY
It is common to classify economic activity into two sectors: the public sector and the private sector.

 THE PUBLIC SECTOR.

The public sector is owned and controlled by the government. This covers all levels of government –
from local to central government – and includes all the organizations
which are funded by the taxpayer. The public sector is not as large as, say, thirty years ago, due to
successive governments pursuing a policy of privatization (transferring organizations from the public
to the private sector).

 THE PRIVATE SECTOR.

The private sector consists of businesses owned and controlled by private individuals acting either on
their own or in groups. Although private sector organizations have to comply with laws and
regulations set out by the government, these businesses are free to pursue their own ends.
2. PARTNERSHIP - They are also unincorporated businesses. Historically, a
partnership was owned by between two and twenty partners, although the limit on
the maximum number of partners was relaxed in 2002.
A greater number of owners potentially allows a greater contribution of capital
into the business thus increasing the chances of success and minimizing risk of
failure.

A limited partnership was a variant on the partnership. This form of organisation

allowed some (but not all) partners to enjoy limited liability, which meant that
they avoided the risk of selling personal possessions.
3. LIMITED COMPANIES – A company has to undergo the process of
incorporation. This means a company exists separately from those who own the
company.
This means that the company will carry on independently from the owners. The
owners of limited companies are known as shareholders.
There are two types of limited company: public limited companies and private
limited companies. They are run by directors elected by the shareholders. It is
appropriate to talk of a ‘separation of ownership from control’ – it is the
shareholders who own the company, but it is the directors and managers who
actually run the company.
 FUNDAMENTALS OF FINANCIAL ACCOUNTING
There are three terms which underpin much of the system of financial accounting: assets, liabilities and
capital (or equity).

1. Assets - Are the resources which are used by the business as part of the activities of the business (e.g.
property, equipment and cash).

2. Liabilities - Represent the debts of the business – i.e. what is owed by the
business to others. These may be short-term debts which are to be repaid soon or
long-term debts which may be outstanding and owing for many years (e.g. a
mortgage).

3. Capital -refers to the resources supplied to the business by the owner(s) of the (or equity) business. This
capital could be in the form of money or as other assets.
 EXERCISE 1A
Classify the following into assets, liabilities or capital:

(a) Business premises

(b) Bank overdraft
(c) Money owed by others to the business
(d) Equipment owned by the business
(e) Mortgage on premises
(f ) Cash held at the Bank.
(g)Unpaid bill.
(h) Money owed to other businesses.
(i) Money introduced in the business by the owner.
 ANSWER - 1A
Classify the following into assets, liabilities or capital:

(a) Business premises - ASSET

(b) Bank overdraft - LIABILITY
(c) Money owed by others to the business -ASSET
(d) Equipment owned by the business - ASSET
(e) Mortgage on premises - LIABILITY
(f ) Cash held in till - ASSET
(g)Unpaid bill. - LIABILITY
(h) Money owed to other business – LIABILITY
(i) Money introduced in the business by the owner – CAPITAL.
 THE ACCOUNTING EQUATION

 One of the major principle that underlie much of the financial accounting is the principle of
duality.

This relates to the idea that accounting transactions can be considered from two different
perspectives. The accounting equation encapsulates this duality and is as follows:

Assets = Capital + Liabilities

 THE ACCOUNTING EQUATION

 What this equation represents is the two sides of the business –

The physical side of the business (i.e. the assets) and The financial side of the
business (i.e. the capital and the liabilities).

The equation must always be true;

 if there is an increase in the assets of the business then these assets must have
been financed through either more resources from the owner (i.e. more capital) or
more resources that have been borrowed (i.e. more liabilities).
 DOUBLE ENTRY RULES
1.ALL ASSETS – To INCREASE - DEBIT the Account
To DECREASE - CREDIT the Account

2.ALL LIABILITIES - To DECREASE - DEBIT the Account

To INCREASE – CREDIT the Account

3. CAPITAL - To DECREASE - DEBIT the Account

To INCREASE – CREDIT the Account.

4. REVENUE - To DECREASE – DEBIT the Account

To INCREASE – CREDIT the Account

5.EXPENSE - To INCREASE – DEBIT the Account

To DECREASE – CREDIT the Account.
 SUMMARY OF DOUBLE ENTRY RULES
TYPE OF ACCOUNTS TYPE OF ACCOUNTS
• Group A Group B

ASSETS LIABILITIES
DIVIDENDS / DRAWINGS CAPITAL
 EXPENSES REVENUE

Increases are DEBITED. Increases are CREDITED.

Decreases are CREDITED. Decreases are DEBITED.

 INTERNATIONAL STANDARDS
Accounting systems must follow rules. There are different ways of recording
and presenting accounts and financial statements. Rules and regulations are not
as important for the purpose of internal accounts as they are for those for
external publication and external use.

It is good practice and useful to see how the rules and regulations which apply
to larger business organizations would also apply to those of a small
organisation.

Accounting standards are a set of continually evolving documents which

provide guidance on various aspects of financial accounting.
 TERMINOLOGIES
OLD TERMS NEW TERMS

1 Profit and loss account Statement of comprehensive income

2 Balance sheet Statement of financial position
3 Fixed assets Non-current assets
4 Long-term liabilities Non-current liabilities
5 Stock Inventory/inventories
6 Debtors (or accounts receivable) Trade receivables
7 Creditors (or accounts payable) Trade payables
8 Sales revenue Turnover
9 Shareholders’ funds Equity
10 Profit or loss balance Retained earnings
 DOUBLE
ENTRY –
BOOKKEEPING
 RULES FOR DOUBLE – ENTRY TRANSACTIONS
It is vital that transactions are recorded correctly. For this
we need to establish on which ‘side’ of the account each
transaction needs to be recorded – i.e. should we ‘debit’ or
‘credit’ an account?

This will depend on the type of account that we are dealing

with. To start with we will consider three separate types of
account as being for assets, liabilities, capital, expenses and
revenue.
 SAMPLE OF T - ACCOUNTS

Account Name
Debit side (Dr) Credit side (Cr)

Date Acct Amount Date Acct Amount

details details
 WHAT DOES THE ACCOUNT SHOW?
• The ‘T’ shaped appearance of the accounts are often referred to as ‘T’ accounts. Each of these
accounts will show the following:

1. Account name -The name of the account refers to the type of transaction. For example, if the
account is dealing with buying or selling machinery, then the account could simply be known
as ‘machinery’. This means that each different type of transaction would be recorded in a
separate account.

2. Debits and credits -The debit side (Dr) and credit side (Cr) refer to the left-hand and right-
hand sides of each account. These terms can be used to refer to how entries are made. For
example, if we talk of ‘debiting’ an account, all we mean is that we would be placing an entry
on the debit side – the left-hand side – of the account.
 WHAT DOES THE ACCOUNT SHOW?
ACCOUNT DETAILS –
The details element of each side of the account will contain the name
of the other account which the transaction also affects.

 As a form of symmetry, each transaction will affect two accounts –

hence the term ‘double-entry’ – and the details included in each
account will refer to the other account to be affected.
 WHAT DOES THE ACCOUNT SHOW?
ACCOUNT DETAILS –

There are some basic principles that must be applied when recording double-
entry transactions:

i) Every transaction requires two entries to be made in separate

accounts.
ii) Every transaction requires one debit entry and one credit entry
to be made in each of the two accounts.
 RULES FOR DOUBLE-ENTRY (T ACCOUNTS)
ALL ASSETS ACCOUNTS
. Debit side (Dr) Credit side (Cr)

INCREASE enter HERE DECREASE enter HERE

ALL LIABILITIES ACCOUNTS

Debit side (Dr) Credit side (Cr)

DECREASE enter HERE INCREASE enter HERE

ALL CAPITAL ACCOUNTS

Debit side (Dr) Credit side (Cr)

DECREASE enter HERE INCREASE enter HERE

 EXAMPLE – JAMES MULENGA
On 1 January 2020, Mulenga the owner places K20,000 of her own money into the bank
account of the new business.
• IMPLICATION - The asset of bank has increased – so we debit that account. The capital of
the business has increased – so we credit that account.
BANK ACCOUNT
Debit side (Dr) Credit side (Cr)

1st Jan 2020 Capital 20,000

CAPITAL ACCOUNT
Debit side (Dr) Credit side (Cr)

1st Jan 2020 Bank 20,000

 EXAMPLE – JAMES MULENGA
 On 5th January, 2020, Mulenga bought a printing machine for K3,000.
IMPLICATION : The Bank which is an Asset is reduced;

An asset in the name of a Printing machine was acquired. The asset increased;

BANK ACCOUNT

1-JanCapital 20,000 5th Jan Printer 3,000

PRINTER ACCOUNT

5th Jan Bank 3,000      

 
 EXAMPLE – JAMES MULENGA
 On 6th January 2020 Mulenga purchases A4 Printing paper for K4,000 from Book world. He
does not pay cash but is allowed to pay after 30 days.

 IMPLICATION: Paper as Inventory has increased and since the transactions was not by cash
a Creditor (Trade payable Acct) has been created.
INVENTORY (Stock) ACCOUNT

6th Jan 2020 Bookworld 4,000

BOOKWORLD (Trade payable) ACCOUNT

6th Jan 2020 Inventory 4,000

 DOUBLE –ENTRY CONTINUED…
The books which contain the accounts that record these transactions are known
as ledgers. In reality, most accounts will contain more than one transaction and
one single account could easily take up many pages in the ledger.

When completing questions that involve maintaining double-entry accounts, it

is a good idea to read through the complete list of transactions first so as to get a
rough idea of how many entries will be needed in each account.

Typically, the bank and cash accounts are used frequently, whereas the capital
account is only affected by one or two entries.
 WHAT DO WE MEAN BY INVENTORY?
Profits are earned by these businesses trading in goods: buying goods and
selling the goods to customers. Inventory refers to goods that the firm buys
with the intention of selling at a profit.

However, another firm may see the purchase of a computer as the purchase
of an asset and the entry for this purchase would be in a ‘computer’ account.

This distinction between purchases of assets and purchases of inventory is

important as it has implications later on for calculating the profit of the
business.
 ACCOUNTING FOR INVENTORY
Goods that are bought with the intention of being sold are referred to as inventory.
Inventory is an asset and will therefore follow the rules of an asset account.

There are four separate accounts to record different movements in inventory: The
four accounts for inventory are :

1. Purchases – for purchases of inventory

2. Sales – for sales of inventory
3. Returns inwards – when a customer returns inventory to the firm.
4. Returns outwards – when the business returns inventory to the supplier.
 DOUBLE ENTRY TRANSACTIONS FOR INVENTORY
Inventory is an asset and will therefore follow the rules of an asset account. It is possible that
both purchases and sales will be either for immediate payment or receipt – these would be
referred to as ‘cash transactions’.

However, they may be on ‘credit terms’ where the payment or receipt is made at a later date.

Nature of inventory transaction

Cash transaction = Immediate payment

Credit transaction = Payment made at a later date
 EXERCISE – YOYO STEVE
On 20th September, the Steve Yoyo purchases K8,000 worth of inventory. The purchase of
inventory will require a debit entry into the purchases account as an asset has increased, but
there are two options for the corresponding credit entry:
A = Cash purchase
B = Credit purchase;
Cash Purchase Credit Purchase
BANK ACCOUNT ACCOUNTS PAYABLE

20th Sept Purchases 8,000.00 20th Sept Purchases 8,000

PURCHASES ACCOUNT
PURCHASES ACCOUNT

20th Sept Bank 8,000 20th Sept Accts payable 8,000

 EXERCISE (SALE OF INVENTORY)

• On 27th September, the Steve Yoyo sold goods worth K1,000 of inventory. The value of goods
sold is K600.

Required:
i. Record the transaction of the sale as a cash sale.
ii. Record the transaction of the sale as a credit sales.
A) CASH SALE B) CREDIT SALE

BANK ACCOUNT ACCOUNTS RECEIVABLE

Sales 1,000 27-Sep Sales 1,000

SALES ACCOUNT SALES ACCOUNT

27-Sep Bank 1,000 27-Sep Bank 1,000

PURCHASES ACCOUNT PURCHASES ACCOUNT

Bank 8,000 27-Sep COGS 600 20-Sep 27-Sep COGS 600

COST OF GOODS SOLD COST OF GOODS SOLD

Purchases 600 27-Sep Purchases 600
 EXERCISE – AMOS ZULU
• Amos Zulu is in the business of purchases Laptops for resale.
• On 19th January, 2021 he purchased laptops (5) worth K25,000. The selling price of the laptops
is K8,000 each.
• On 28th January, 2021 he managed to sell 2 laptops at the selling price of K8,000 each.
Required;
i) Record the transactions that occurred on the 19th January, 2021 as;
a) Cash purchase;
b) Credit purchase;
ii) Record the transaction for the sale of laptops on 28th January as;
a) Cash sale;
b) Credit sale.
 ANSWER (I A & B) – AMOS ZULU
A) CASH PURCHASE B) CREDIT PURCHASE

BANK ACCOUNT ACCOUNTS PAYABLE

19-Jan Purchases 25,000 19-Jan Purchases 25,000

PURCHASES (LAPTOP) ACCOUNT PURCHASES (LAPTOP) ACCOUNT

19-Jan Bank 25,000 19-Jan Accts payable 25,000
 ANSWER (II A&B) – AMOS ZULU
A) CASH SALE B) CREDIT SALE

BANK ACCOUNT ACCOUNTS RECEIVABLE

28-Jan Sales(LTP) 16,000 28-Jan Purchases 16,000

SALES ACCOUNT SALES ACCOUNT

28-Jan Bank 16,000 28-Jan Bank 16,000

PURCHASES ACCOUNT PURCHASES ACCOUNT

28-Jan COGS 10,000 28-Jan COGS 10,000

COST OF GOODS SOLD ACCT COST OF GOODS SOLD ACCT

28-Jan Purchases 10,000 28-Jan Purchases 10,000
 RETURNS OF INVENTORY (GOODS)
It is possible that goods will be returned to the original supplier. If there is some issue with the
order, such as the order itself being incorrect, or the items faulty, then it is normal practice for
the goods to be returned.

Both returns inwards and returns outwards will affect the asset of inventory accounts and
will follow the rules of an asset account.

Returns inwards refer to the goods which are sent back to the firm from the customer. For this
reason they are also known as sales returns.
 RETURNS (INWARDS/ OUTWARDS) LEDGER ACCOUNTS
1. Returns inwards account
 The returns inwards account is DEBITED with the value of goods returned for each
transaction.
 The total value of the returns inwards for the period is transferred to the SALES/
REVENUE account as a debit entry to reduce the value of Sales for the period.

2. Returns outwards account.

The returns outwards account is CREDITED with the value of goods returned for each
transaction.
The total value of the returns outwards is transferred to the PURCHASES account as a credit
entry to reduce the value of purchases bought for the period.
 EXAMPLE (RETURNED INWARDS)
Goods sold on credit to Chanda on 2nd October valued K300 were returned to the firm on 12
October due to the goods being faulty.
REQUIRED;
Record the transaction of the 2nd October when the sale took place;
SALES ACCOUNT
           
Chanda
2nd Oct (AR) 300
 
 

CHANDA (ACCTS RECEIVABLE)

ACCOUNT
           
2nd Oct Sales 300 
 
 EXAMPLE (RETURNED INWARDS)
Record the 12th October transactions after the return of goods.

RETURNS INWARD ACCOUNT

12-Oct Chanda (AR) 300

CHANDA (Accounts receivable) ACCOUNT

12-Oct Returns inward 300

 EXAMPLE (RETURNS OUTWARD)
Returns outwards refer to the goods which the business returns to the original suppliers. They
are purchases that are unsuitable and for this reason are also known as purchases returns.
Goods previously purchased from Lungu on 1st Feb for K250 were found to be faulty and were
subsequently returned to him on 10th February.
The transaction that took place on 1st February was recorded as follows:

PURCHASES ACCOUNT
           
1st Feb Lungu 250 
 

LUNGU (ACCTS PAYABLE) ACCOUNT

           
1st Feb Purchases 250
 
 
 EXAMPLE (RETURNS OUTWARD)
Goods previously purchased from Lungu for K250 were found to be faulty and
were subsequently returned to him on 10th February.

RETURNS OUTWARD ACCOUNT

10th Feb Lungu (Ap) 250

LUNGU (Accounts payable) ACCOUNT

10th Feb Returns Outward 250

 EXERCISE – JACK MATE & CO.
• Jack Mate & Co purchased 20 washing machines for resale on 1st March, 2020. The value of the
total purchase was K20,000. The purchase was on credit.
• On 14th March the company returned 3 washing machines that were faulty to the supplier.

REQUIRED:
i. Record the entries in Jack Mate’s books on 1st March, 2020.
ii. Record the transactions of the 14th March in Jack Mate’s books.
A) purchase of 20 washing machines B) Return of 3 washing machines

TRADE PAYABLE ACCOUNT RETURNS OUTWARD ACCOUNT

1st Mar 21 Purc hases20,000 14-Mar-21 TP Account 3,000

PURCHASES (Washing Machine) ACCOUNT TRADE PAYABLE ACCOUNT

1st Mar 21 TP Account 20,000 14-Mar-21 RO Acct 3,000 1st Mar 2021 Purc hases 20,000
 EXERCISE – JOHN GONDWE
• John Gondwe owns a hardware shop. On 5th February he sold a wheelbarrow to ABC Co on
credit. The value of the wheelbarrow was
K 2,500, while the cost to John Gondwe was K1,500.

 On 12th February ABC Co returned the wheel barrow back to the shop because it was faulty.

REQUIRED;
i. Record the transaction that took place on 5th February;
ii. Record the transaction that took place on 12th February.
A) CREDIT SALE (WHEELBARROW) B) THE RETURN OF THE WHEELBARROW

TRADE RECEIVABLE (ABC Co.) ACCOUNT TRADE RECEIVABLE (ABC Co.) ACCOUNT
5-Fe b Sa le s Ac c t 2,500 5-Fe b Sa le s Ac c t 2,500 12-Fe b RI Ac c t 2,500

SALES / REVENUE ACCOUNT RETURN INWARDS ACCOUNT

5-Fe b TR Ac c t 2,500 12-Fe b TR Ac c o unt 2,500

PURCHASES ( WHEEL BARROW) ACCT PURCHASES ( WHEEL BARROW) ACCT

5-Fe b C O G S 1,500 12-Fe b C O G S 1,500 5-Fe b COGS 1,500

COSTOF GOODS SOLD ACCT COSTOF GOODS SOLD ACCT

5-Fe b Purc ha se s 1,500 5-Fe b Purc ha se s 1,500 12-Fe b C O G S 1,500
 Drawings
 The owner of the business adds resources to the business in the form of Capital.

 Resources taken out of the business by the owner are known as drawings. As
the owner will be withdrawing assets from the business, the relevant asset
account will be credited; the debit entry is in the drawings account.

Hence, the double-entry for drawings is completed as follows:

 Debit - Drawings Acct

Credit - Bank Acct
 EXERCISE – HENRY DUBE
 On 17th July the Henry Dube the owner of the business decided to withdraw an amount of
K1,500 from the business.

DRAWINGS ACCOUNT
17th July Ba nk Ac c t 1,500

BANK ACCOUNT
17 th July Dra wing s 1,500

The total drawings for the year would be transferred to the capital account at
the end of the trading period. This will adjust the existing capital of the
business to give us the new capital account balance for the following trading
period – this adjustment will also appear on the statement of financial position.
 INCOME & EXPENSES
 Businesses will generate income and incur expenses as part of their normal
trading operations.

In addition, the business may have other income in addition to the sales revenue
earned from selling goods.

Additional forms of income for the business may include rental income (known
as rent received).
 INCOME & EXPENSES
 It is often easier to think of these transactions in terms of their effect on the bank or cash
account –

As a payment will involve the bank or cash account being credited, the debit entry for this
transaction must be in the relevant expense account.

Similarly, if money is received as business income then we would debit either the cash
account or the bank account.

This means that the credit entry for this transaction would be in the relevant income account
(Eg Interest or dividend received)
 RECORDING INCOME & EXPENSES

Accounts to DEBITED Accounts to be CREDITED

EXPENSES Expense Bank/ Trade payable Acct

REVENUE/ SALES Bank / Trade receivable Acct Sales/ Income / Revenue.

 Example 2I

On 19th January, the business paid rentals an amount of K1,500 in cash.

RENT ACCOUNT

19th Jan Bank 1,500

BANK ACCOUNT

19th Jan Rent 1,500

 HOW MANY DIFFERENT EXPENSE ACCOUNTS SHOULD BE OPENED?
 An account should be opened for each separate expense generated by the
business. Smaller expenses that are incurred, for example tea or coffee costs for a
staff office, could be kept in a ‘general’ or a ‘sundry’ expenses account.

It is better to keep each expense separate so as to provide information for the
managers of the business as to what expenses are being incurred, and thus give
them information that can be used to control these costs and prevent them rising
too quickly.

Incomes will be credited to the income account as the money received for the
income would be debited to either bank or cash.
 EXERCISE 2A
For the following transactions state which accounts should be debited, and which
should be credited.

(a) Equipment bought on credit from Auto world.

(b) Motor car bought and payment made by cheque.
(c) Owner pays own money into bank account.
(d) Furnitures sold on credit to Jerry Hatembo.
(e) Cheque sent to Andrew Jumbe, a creditor.
(f ) Cash received from Peter Sampa, a debtor.
 RONALD LIYUNGA & CO.

1. For the following transactions state which accounts should be

debited, and which should be credited.
 
(a) Equipment bought on credit from Moses Sitali.
(b) Motor car bought from Nissan and payment made by cheque.
(c) Owner of business pays own money into bank account.
(d) Furniture sold on credit to John Hatembo.
(e) Cheque sent to Andrew Jumbe, a creditor.
(f ) Cash received from Pamela Zulu, a debtor.
 ANSWER TO RONALD LIYUNGA & CO.
Debit Credit

a) Equipment Trade Payable (MS)

b) Motor Vehicle Bank
c) Bank Capital
d) T/ R (JH) Furniture
e) T/ r (AJ) Bank
 JOHN TEMBO & CO.
Write up the following transactions in double-entry accounts of John Tembo.

• 1 July Tembo places K30,000 of his own money into the cash till for business use.
• 5 July He places K15,000 of the cash into a business bank account.
• 9 July Tembo buys K12,000 of machinery, paying by cheque.
• 11 July Tembo buys shop fittings for K2,000 on credit from Mwape Yeta.
• 13 July Machinery worth K1,400 is sold for the same value for Bank.
• 19 July Tembo decided to bring his own computer into the business at a valuation of K8,000.
 BALANCING ACCOUNTS
At the end of a given accounting period (which could be weekly,
monthly or yearly), the double-entry accounts will be balanced.

The main purpose of balancing the accounts is so that the financial

statements of the business can be produced. Balancing off accounts
involves comparing the totals of the debit entries in the individual accounts
with the total of the credit entries.

The balance on an account arises where there is a difference between the

total of the debits and the total of the credits.
 Common balances

Debit Credit
Balances Balances

Assets Liabilities
Drawings Capital
Expenses Revenue

Some balances can be debit or credit. For example, the bank balance can be either
be a debit balance if there is money in the bank or a credit balance if there is an
overdrawn balance.
 SAMPLE (WHERE NO BALANCE EXISTS)
BANK ACCOUNT

2nd Jan Sales 10,000 1st Jan Purchases 7,000

15th Jan Loan 25,000 20th Jan Rent 6,000
21st Jan Insurance 3,000
23rd Jan Advertising 2,000
24th Jan Taxes 4,000
25th Jan Sundries 6,000
31st Jan Salaries 7,000

35,000 35,000
EXAMPLE : ENTRIES ONLY ON ONE SIDE OF THE ACCOUNT
 Example – Entries on both sides
 In some accounts there will be multiple entries in the accounts and the totals of each side will
not be equal, as in the following account:

KANGWA STEPHEN ACCT

12th Jan Sales 1,500 20th Jan Returns outward 200
23rd Jan Bank 800

31st Jan Closing balance 500

1,500 1,500

1st Feb Opening bal 500

 Homework questions

1. Record the following transactions for Steve Phiri’s first month of business operations and close off the
accounts.
2012.

2 February K25,000 of owner’s money placed into business bank account.

7 February Premises are bought for K15,000, payment made by cheque.
14 February K900 from bank paid into cash till.
17 February Fixtures are purchased for K4,000 on credit from Charles Lungu.
19 February Office supplies bought for cash K500.
23 February Fixtures worth K750 sold for the same amount on credit to David Bwalya.

2. Record the following transactions in ledger accounts for Royce Likando for July 2013 and close off the
Accounts.

1 July Royce places K30,000 of his own money into the business Account.
5 July Machinery is bought for K4,000 with payment made by cheque.
12 July Equipment is bought on credit for K2,500 from Bobby Songwe.
14 July A motor car is bought on credit for K13,000 from Chanda Ambali.
18 July A cheque is sent to Bobby Songwe for K2,500.
21 July Royce pays her Accountant salary of K2,000 by cheque.
 BANK ACCOUNT CASH ACCOUNT
5-Jul Cash 15,000 9-Jul Machinery 12,000 1-Jul Capital 30,000 5-Jul Bank 15,000
13-Jul Machinery 1,400

MACHINERY ACCOUNT SHOP FITTINGS ACCT

9-Jul Bank 12,000 11-Jul MY (AP) 2,000
13-Jul Bank 1,400

COMPUTER ACCOUNT CAPITAL ACCOUNT

19-Jul Capital 8,000 1-Jul Cash 30,000
19-Jul Computer 8,000

MWAPE YETA (AP) ACCT

11-Jul Sfittings 2,000
 BANK ACCOUNT CASH TILL ACCOUNT
2-Feb Capital 25,000 7-Feb Premises 15,000 14-Feb Bank 900 19-Feb O/Supp. 500
14-Feb Cash 900
19-Feb O supplies 500

FIXTURES ACCOUNT CHARLES LUNGU (AP) ACCUNT

17-Feb CL (AP) 4,000 23-Feb DB (AR) 750 17-Feb Fixtures 4,000

DAVID BWALYA (AR) ACCOUNT PREMISES ACCOUNT

20-Feb Fixtures 750 7-Feb Bank 15,000

OFFICE SUPPLIES ACCOUNT CAPITAL ACCOUNT

19-Feb Cash 500 2-Feb Bank 25,000
 ROYCE LIKANDO’S BOOKS
BANK ACCOUNT SALARIES ACCOUNT
1-Jul Capital 30,000 5-Jul Machinery 4,000 21-Jul Bank 2,000
18-Jul BS (AP) 2,500
21-Jul Salaries 2,000

MACHINERY ACCOUNT EQUIPMENT ACCOUNT

5-Jul Bank 4,000 12-Jul BS (AP) 2,500

MOTOR VEHICLE ACCOUNT BOBBY SONGWE (AP) ACCOUNT

14-Jul CA (AP) 13,000 18-Jul Bank 2,500 12-Jul Equip. 2,500

CHARLES AMBALI (AP) ACCT CAPITAL ACCOUNT

14-Jul MV 13,000 1-Jul Bank 30,000
 JK TRADING & CO.
Post the following transactions to the double-entry accounts of and balance off the accounts at 31 st May 2019 and prepare
the Trial Balance.

1 May Owner places K5,000 of her own money into the business bank account.
4 May Goods purchased on credit from James Shinde for K600.
5 May Goods purchased on credit from Pauline Konga for K850.
8 May Sales made on credit to Chris Tumelo for K900.
12 May Owner returns goods worth K220 to Konga.
16 May Commission received K450 by cheque.
18 May Sales made on credit to Rodgers Ntema for K680.
20 May Owner returns K150 of the goods purchased from Shinde.
24 May Owner withdraws K400 from the bank for own private use.
25 May Cheque received totaling K500 from Tumelo.
28 May Wages paid by cheque K900.
JK TRADING CO.- JOURNAL ENTRIES
Acct Name Debit Credit

1 BANK 5,000
CAPITAL 5,000
4 PURCHASES 600
J SHINDE (AP) 600
5 PURCHASES 850
P KONGA 850
8 C TUMELO (AR) 900
SALES 900
12 P KONGA 220
RETURNS OT 220
16 BANK 450
COMMISSION 450
18 R NTEMA (AR) 680
SALES 680
20 J SHINDE (AP) 150
RETURNS OT 150
24 DRAWINGS 400
BANK 400
25 BANK 500
C TUMELO (AR) 500
28 WAGES 900
BANK 900
 BANK ACCOUNT
T - ACCOUNTS CAPITAL ACCOUNT
                       
1st May Capital 5,000 24th May Drawings 400 31st May Closing Bal 5,000 1st May Bank 5,000
16th May Commission 450 28th May Wages 900  
25th May C Tumelo 500 31st May Closing Bal. 4,650  
  5,000   5,000
5,950   5,950  
Opening
  1st June Bal. 5,000
1st June Opening Bal 4,650  

PURCHASES ACCOUNT P KONGA (A/P)

                       
4th May J SHINDE 600 12-MayReturns/ O 220 12-MayReturns / O 220 5-MayPurchases 850
5th May P KONGA 850 20-MayReturns / O 150 31-MayClosing Bal 630  
31-MayClosing Bal. 1,080  
  850   850
1,450   1,450  
Opening
  1st June Bal. 630
1st June Opening Bal. 1,080  
 JK TRADING T - ACCOUNTS
SALES ACCOUNT C TUMELO ACCOUNT
                       
C TUMELO
31-MayClosing Bal 1,580 8-May(AR) 900 8-MaySales 900 25-MayBank 500
Closing
18-MayR NTEMA 680 31-MayBal. 400
   
  900   900
1,580   1,580  
  1-JunOpen. Bal 400
1-JunOpen. Bal 1,580

COMMISSION ACCOUNT RODGERS NTEMA ACCOUNT

                       
Closing
31-MayBal. 450 16-MayBank 450 18-MaySales 680 31-MayClosing Bal 680
   
450   450 680   680
   
Open.
1-JunOpen. Bal. 450 1-JunBal. 680  
 JK TRADING CO. - T - ACCOUNTS
DRAWINGS ACCOUNT WAGES ACCOUNT
                       
Closing
24-MayBank 400 31-MayClosing Bal. 400 28-MayBank 900 31-MayBal. 900
   
400   400 900   900
   
Open.
1-JunOpen. Bal. 400   1-JunBal. 900  

J NSHINDE ACCOUNT
           
31-MayClosing Bal. 450 4-MayPurchases 450
 
450   450
 
Opening
1-JunBal. 450
 BANK ACCOUNT CAPITAL ACCOUNT
Clo sing Typ e o f Clo sing Typ e o f
DATE DETAILS DR CR Ba la nc e Ba la nc e DATE DETAILS DR CR Ba la nc e Ba la nc e

1st Ma y C a p ita l 5,000 5,000 De b it 1st Ma y Ba nk 5,000 5,000 Cre d it

16 th Ma y C o m m issio n 450 5,450 De b it
24th Ma y Dra w ing s 400 5,050 De b it
25th Ma y C Tum e lo 500 5,550 De b it PAULINE KONGA ACCOUNT
28th Ma y Wa g e s 900 4,650 De b it Clo sing Typ e o f
DATE DETAILS DR CR Ba la nc e Ba la nc e

PURCHASES ACCOUNT 5th Ma y Purc ha se s 850 850 C re d it

Clo sing Typ e o f 12th Ma y Re turns 220 630 Cre d it
DATE DETAILS DR CR Ba la nc e Ba la nc e

4th Ma y Ja m e s Shind e 600 600 De b it

5th Ma y P Ko ng a 850 1,450 De b it JAMES SHINDE ACCOUNT
Clo sing Typ e o f
DATE DETAILS DR CR Ba la nc e Ba la nc e
RETURNS OUTWARDS ACCOUNT
Clo sing Typ e o f 4th Ma y Purc ha se s 600 600 C re d it
DATE DETAILS DR CR Ba la nc e Ba la nc e 5th Ma y Re turns O150 450 Cre d it

12th Ma y Pa uline Ko ng a 220 220 C re d it

5th Ma y Ja m e s Shind e 150 370 Cre d it
 SALES ACCOUNT CHRIS TUMELO ACCOUNT
Clo sing Type o f Clo sing Type o f
DATE DETAILS DR CR Ba la nc e Ba la nc e DATE DETAILS DR CR Ba la nc e Ba la nc e

8th Ma y C hris Tum e lo 900 900 C re d it 8th Ma y Sa le s 900 900 De bit

18th Ma y Ro d g e rs Nte m a 680 1,580 Cre dit 25th Ma y Ba nk 500 400 De bit

RODGERS NTEMA ACCOUNT

COMMISSION ACCOUNT Clo sing Type o f
Clo sing Type o f DATE DETAILS DR CR Ba la nc e Ba la nc e
DATE DETAILS DR CR Ba la nc e Ba la nc e
18th Ma y Sa le s 680 680 De b it
16th Ma y Ba nk 450 450 Cre dit

DRAWINGS ACCOUNT WAGES ACCOUNT

Clo sing Type o f Clo sing Type o f
DATE DETAILS DR CR Ba la nc e Ba la nc e DATE DETAILS DR CR Ba la nc e Ba la nc e

24th Ma y Ba nk 400 400 De bit 28th Ma y Ba nk 900 900 De bit

JK TRADING CO.- TRIAL BALANCE
JK TRADING COMPANY
TRIAL BALANCE

ACCOUNT NAME DEBIT   CREDIT

BANK 4,650
CAPITAL 5,000
SALES 1580
PURCHASES 1,080
P KONGA (AP) 630
J SHINDE (AP) 450
C TUMELO (AR) 400
R NTEMA (AR) 680
COMMISSION 450
DRAWINGS 400
WAGES 900

8,110 8,110
 ZIMBA & CO. – CLOSING OFF EXERCISE
1 Jan - Kelvin deposited an amount of K500,000 in the Business account.
2 Jan - Rent amount of K5,000 was paid for in advance by cheque.
3 Jan – Goods worth K80,000 were bought by cheque.
6 Jan – A Company car was bought by bank cheque valued at K50,000
10 Jan – Good bought were sold and an amount of K120,000 was received at Bank.
12 Jan – A new deep freezer was bought on credit from Zmart valued at K6,500.
15 Jan – An amount of K2,500 was spent for purchasing cleaning materials.
18 Jan – Goods were bought on credit from Kalunga V valued at K100,000.
20 Jan – A new printer was purchased by Bank cheque, valued at K10,000
22 Jan – Goods valued at K80,000 were sold on credit to Henry Zulu.
24 Jan – An amount of K4,000 was paid for by cheque for utilities.
28 Jan – The 2 sales officers were paid an amount of K25,000 as their salaries.
30 Jan – Kelvin with drew an amount of K30,000 from the business.
Prepare the T Accounts , close off the ledgers and prepare the Trial Balance.
 ZIMBA & CO.– JOURNAL ENTRIES
DATE DESCRIPTION Debit   Credit DATE DESCRIPTION Debit   Credit

1-Jan BANK 500,000     15-Jan C/ MATERIALS 2,500    

  CAPITAL   5,000   BANK   2,500
             
2-Jan RENT 5,000   18-Jan PURCHASES 100,000  
  BANK   5,000   V KALUNGA   100,000
             
3-Jan PURCHASES 80,000   20-Jan PRINTER 10,000  

  BANK   80,000   BANK   10,000

             
6-Jan M/CAR 50,000   22-Jan H ZULU 80,000  
  BANK   50,000   SALES   80,000
             
10-Jan BANK 120,000   24-Jan UTILITIES 4,000  
  SALES   120,000   BANK   4,000
             
12-Jan D/FREEZER 6,500   28-Jan SALARIES 25,000  
  ZMART     6,500   BANK   25,000
     
30-Jan DRAWINGS 30,000  
  BANK     30,000
 BANK ACCOUNT CAPITAL ACCOUNT

1-Jan Capital 500,000 2-Jan Rent 5,000 31-Jan C/ Balance 500,000 1-Jan Bank 500,000
10-Jan Sales 120,000 3-Jan Purchases 80,000
6-Jan M/ Car 50,000
15-Jan C/ Materials 2,500 500,000 500,000
20-Jan Printer 10,000
24-Jan Utilities 4,000 1-Feb O/ Balance 500,000
28-Jan Salaries 25,000
30-Jan Drawings 30,000
31-Jan Closing Bal 413,500 RENT ACCOUNT

620,000 620,000 2-Jan Bank 5,000 31-Jan C/ Balance 5,000

1-Feb Opening Bal 413,500
5,000 5,000
PURCHASES ACCOUNT 1-Feb O/ Balance 5,000

3-Jan BANK 80,000 31-Jan Closing Bal 180,000 MOTOR CAR ACCOUNT
18-Jan V Kalunga 100,000
6-Jan Bank 50,000 31-Jan Closing Bal 50,000
180,000 180,000
1-Feb Opening Bal 180,000 50,000 50,000
1-Feb O / Bal 50,000
 SALES ACCOUNT V KALUNGA (A/P)
31-Jan C/ Balance 200,000 10-Jan Bank 120,000
22-Jan H Zulu 80,000 31-Jan C/ Balance 100,000 18-Jan Purchases 100,000

200,000 200,000 100,000 100,000

1-Feb O / Balance 200,000 1-Feb O/ Balance 100,000

DEEP FREEZER ACCOUNT ZMART (AP) ACCOUNT

12-Jan ZMART 6,500 31-Jan C/ Balance 6,500 31-Jan C/ Balance 6,500 12-Jan D/ Freezer 6,500

6,500 6,500 6,500 6,500

1-Feb O/ Balance 6,500 1-Feb O/ Balance 6,500

CLEANING MATERIALS ACCOUNT PRINTER ACCOUNT

15-Jan Bank 2,500 31-Jan C/ Balance 2,500 20-Jan Bank 10,000 31-Jan C/ Balance 10,000

2,500 2,500 10,000 10,000

1-Feb O/ Balance 2,500 1-Feb O/ Balance 10,000
 ZIMBA & CO. – TRIAL BALANCE
TRIAL B ALANCE

ACCOUNT NAM E DEB IT CREDIT

BANK 413,500
CAPITAL 500,000
PURCHASES 180,000
MOTOR VEHICLE 50,000
SALES 200,000
D/ FREEZER 6,500
ZM ART (AP) 6,500
V KALUNGA (AP) 100,000
C/ MATERIALS 2,500
PRINTER 10,000
H ZULU (AR) 80,000
RENT 5,000
UTILITIES 4,000
SALARIES 25,000
DRAWINGS 30,000

806,500 806,500
 KCL ENTERPRISES – LEDGER BALANCES YE DEC 2010

REVENUE 95,000 ADMIN COSTS 1,000

RETURNS OUTWARDS 1,000 INTERNET SERVICES 3,200
PURCHASES 55,000 CLEANING MATERIALS 1,800
RENT RECEIVED 4,000 TRADE RECEIVABLES 28,000
PROPERTY 55,000 MORTGAGE 65,000
BANK 95,000 CAPITAL 80,000
TRADE PAYABLES 35,000 ELECTRICITY 2,800
EQUIPMENT 25,000 SALARIES 12,000
INSURANCE 1,200 ** Prepare the Trial Balance for
KCL Enterprises.
ENTERPRISES – TRIAL BALANCE
ACCOUNT NAME DEBIT CREDIT

REVENUE   95,000
RETURNS OUTWARDS   1,000
PURCHASES 55,000  
RENT RECEIVED   4,000
PROPERTY 55,000  
BANK 95,000  
TRADE PAYABLES   35,000
EQUIPMENT 25,000  
INSURANCE 1,200  
ADMIN COSTS 1,000  
INTERNET SERVICES 3,200  
C/ MATERIALS 1,800  
TRADE RECEIVABLES 28,000  
MORTGAGE   65,000
CAPITAL   80,000
ELECTRICITY 2,800  
SALARIES 12,000  

280,000 280,000
 GENERAL RULES GOVERNING BALANCING ACCOUNTS
1. Balances only exist if there is a difference between the totals on each side of the account.

2. The totals of each side of the account are not the balances.

3. The balancing figure on the account will be the amount needed to ensure the
totals of each side are equal.
4. Ensure that the totals of the accounts are written on the same line down.

5. Bring the balance down on to the opposite side of the account from the
balancing figure.
 HANDY HINTS
The following hints will help you avoid errors.

i. Always ensure that you make two entries for each double-entry transaction.
ii. Always complete one debit entry and one credit entry for each transaction.
iii. Memorise the basic rules for asset, liability and capital accounts.
iv. Leave plenty of room when drawing up accounts – for extra entries and also room for
balancing off the account.
v. Inventory is accounted for just as any other asset.
vi. Each separate expense should be kept in a separate account.
vii. Incomes and expenses should be kept in separate accounts and not combined.
 TRIAL
BALANCE
 Introduction

According to IAS 1, the objective of the financial statements is to

provide information about the financial position and financial
performance of the business for a period of time.

Once the double-entry accounts have been balanced off then it is

possible to construct a Trial Balance for the business which will
facilitate our construction of the financial statements.

Although accounting standards do not apply to sole traders as they

would to limited companies some of the terminology used in the
presentation of limited company accounts are introduced in our study.
 Sample – Trial balance
ALMART COMPANY
TRIAL BALANCE - AS AT 31ST DECEMBER, 2020

De bit Credit

ADMINISTRATION EXPENSES 12,000

BANK 24,000
CAPITAL 50,000
DRAWINGS 6,000
GENERAL EXPENSES 1,500
INSURANCE 1,200
LIGHTNING & HEATING 800
LOAN 15,000
MACHINERY 30,000
PURCHASES 25,000
RENT RECEIVED 15,000
SALES 45,000
TRADE PAYABLES 5,000
TRADE RECEIVABLES 29,500

130,000 130,000
 Trial balance continued
In the trial balance there will be a mixture of balances from different types of
accounts. Some accounts will have no outstanding balance and therefore will not
appear in the trial balance.
 Any inventory left unsold at the end of the period would be treated as an asset and
would be stated outside the trial balance.
For Financial Statements, it is important to get the correct format of the title. Think
of this as a three-part process:
● Who? – the name of the person or business
● What? – what type of statement
● When? – for what time period This may be referred to as the three Ws.
Whether the financial statement is for a particular point in time (i.e. a day) or for a
period of time (e.g. a year) is an important distinction to make and be aware of.
 It is important that you can remember the balances of particular types of account –
whether debit or credit. The common balances are as follows:
 CAPITAL
&
REVENUE EXPENDITURE
 INTRODUCTION
 Businesses will purchase assets, some for business use, and some for resale. The distinction
is that any asset purchased with the intention of resale would be entered into the purchases
account whereas any asset purchased to be used within the business would appear in its own
asset account according to the type of asset purchased (e.g. vehicles, machinery and
equipment).

The distinction of asset type has an impact on where these items would appear in the
financial statement. Items that were counted as ‘assets’ were not included as expenses in the
statement of comprehensive income for that year. Only assets which were counted as
purchases appeared as expenses.

We should categorise the expenditure on assets by introducing new terminology in the form
of capital and revenue expenditure.
 CLASSIFYING CAPITAL & REVENUE EXPENDITURE
 Capital expenditure is where a firm spends money on the purchase of a fixed asset or in the adding of
value to an existing fixed asset.

Capital expenditure will also include the amount spent on getting the asset into useable condition, and
so would not only include the purchase price of the fixed asset but would also include the transportation
costs of the fixed asset to the business, the installation costs of the asset, and any legal costs involved in
acquiring the asset.

Revenue expenditure refers to those expenses which do not add value to the fixed assets of the
business and are incurred on a day-to-day basis. These costs will normally be attributable to a particular
period of time. For example, the wages for a particular month would count as revenue expenditure. The
purchase of stock because it is not to be kept within the business would also be counted as revenue
expenditure.
 TRUCK Z LTD
Truck-Z Ltd has spent the following amounts in the last financial year relating to the purchase and
operation of a pick-up truck.

Kwacha
Cost of purchasing pick-up truck 25,000
Painting business logo on side of van 800
Replacing worn-out tyres 500
Road tax for year 360
Fuel costs for year 700
Upgrading of truck with new engine 1,000

The expenditure can be classified into capital and revenue expenditure as shown in.
 Answer to Example 6A

Example Type of Explanation Capital Revenue

Expenditure Expenditure Expenditure

Cost of purchasing pick-up truck Capital Buying new asset 25,000

Painting business logo on side of van Capital Adding value to asset 800
Replacing worn-out tyres Revenue Running expenses 500
Road tax for year Revenue Regular expense 360
Fuel costs for year Revenue Day-to-day expense 700
Upgrading of truck with new engine Capital Adding value to asset 1,000

26,800 1,560
 JOINT EXPENDITURE
 An item of expenditure might be split into both capital and revenue expenditure.
This is known as joint expenditure. This means that part of the total expense
would be classified as capital expenditure with the remainder classified as
revenue expenditure.

 For example, a heating system for a factory might involve expenditure on

repairing an existing system but also include some expenditure on improving the
system. In this case, we should attempt to allocate the amount belonging to
repairs as revenue expenditure with the amount spent on improving the system
being allocated as capital expenditure.

 Some degree of estimation may be required.

 CAPITAL & REVENUE RECEIPT
The same reasoning as we use with classifying expenditure is used in classifying revenues and
monies received by the business.

The sale of fixed assets would be included as a capital receipt. Other capital receipts would
include the issue of shares (for a limited company) and the receipt of money on taking out a
business loan.

The sale of inventory (either for cash or on credit) would be counted as a revenue receipt.

Incomes relating to the operations of the business, such as rental income and commission
earned, would be countered as revenue receipts.
 INCORRECT CLASSIFICATION OF EXPENDITURE
Mistakes in classification of expenditure – Whether it is capital or revenue expenditure – can be
made. If this occurs then the following will occur:
1. The profit calculated will be incorrect – profits will be either higher or lower as a result of the error.

2. The statement of financial position will not be correct – Though it may still balance. For example, if a
purchase of furniture which is to be used within the business is treated as revenue expenditure then the
business expenses will be higher than their correct level. As a result, reported profits will be lower than
they would be if the expense had been correctly classified.

3.In addition, the balance for non-current assets will be lower on the statement of financial position. This
type of error would not necessarily show in the financial statements – It would be termed an error of
principle.