Introduction To Accounting Notes

INDICATIVE CONTENT
CHAPTER ONE:
INTRODUCTION TO FINANCIAL ACCOUNTING

 The Accountant's role in an organization and
key Accounting terminologies;
 The Accounting Concepts,
 Principles and Accounting Equation;
 The users of accounting information and
their information needs ;
 Qualitative characteristics of Financial
Information
CHAPTER TWO:
DOUBLE ENTRY BOOK-KEEPING

 Source documents
 Books of original entry
 Types of ledger accounts and Cashbooks
 Balancing of accounts,
 Extracting The trial balance
CHAPTER THREE:
BANK RECONCILIATION
STATEMENT-
 The purposes of a bank reconciliation
statement and
 Steps in preparing a bank reconciliation
statement.
CHAPTER FOUR:
ADJUSTMENTS TO FINANCIAL
STATEMENTS [ACCOUNTING FOR
ASSETS AND LIABILITIES]
 Accruals and prepayments ;
 Bad and doubtful debts ;
 Depreciation, disposal of property,Plant
and equipment and revaluation of assets.
CHAPTER FIVE:
PREPARATION OF FINANCIAL
STATEMENTS FOR SOLE TRADERS-
 Income statement
 Balance sheet with Adjustments.
CHAPTER SIX:
RECTIFICATION OF ERRORS AND

PREPARATION SUSPENSE ACCOUNT.
 Errors that do not affect the List of
account balances (trial balance);
 Errors that do affect the List of account
balances (trial balance)
CHAPTER SEVEN:
CONTROL ACCOUNTS
• Sales ledger control Account
• Purchases Ledger Control Account
CHAPTER ONE: INTRODUCTION TO FINANCIAL
ACCOUNTING
A. NATURE OF FINANCIAL ACCOUNTING
Accounting is defined as the process of identifying, recording,

classifying and summarizing economic data so as to come up
with useful information to help users make informed
decisions.
Many businesses carry out transactions. With a financial

implication i.e. either cash is received or paid out.
Examples selling goods, buying goods, paying employees.
Accounting is involved with identifying these transactions

measuring (attaching a value) and reporting on these
transactions.
FUNDAMENTAL CONCEPTS OF ACCOUNTING
 Accounting is the language of business and it is used to

communicate financial information.
 In order for that information to make sense, accounting is

based on fundamental concepts. These fundamental
concepts then form the basis for all of the Generally
Accepted Accounting Principles (GAAP).
 By using these concepts as the foundation, readers of

financial statements and other accounting information do
not need to make assumptions about what the numbers
mean.
B. USERS OF ACCOUNTING INFORMATION
• Accounting information is produced in form of financial
statements. These financial statements provide information
about an entity financial position, performance and changes in
financial position.
• Financial position of a firm is what the resources the business

has and how much belongs to the owners and others.
• The financial performance reflects how the business has

performed, whether it has made profits or losses.
• Changes in financial positions determine whether the

resources have increased or reduced.
• The users of accounting information have an interest in the
existence of the firm. Therefore the information contained in
Owners:
• They have invested in the business ; Examples : sole traders,
• partners (partnerships) and shareholders (company).
• This information will enable them to assess how the managers

of the business are performing whether the business is
profitable or not and whether to make drawings or put in
additional capital.
Need information in order to assess the quality and the price of
shares of a company
Customers
• Customers rely on the business for goods and services. They
would like to know how the business is performing and its
financial position.
• This information would enable them to assess whether they can

rely on the firm for future supplies.
Suppliers
 They supply goods or services to the firm for cash or credit. The
suppliers would like to have information on the financial
performance and position so as to assess whether the business
would be able to pay up for the goods and services provided.
Managers
 The managers are involved in the day-to-day activities of the
business. They would like determine whether the business is
operating as per the plans.
 In case the plan is not achieved then the managers come up
with appropriate measures (controls).
The Lenders
 They have provided loans and others sources of capital to the
business. Such lenders include banks and other financial
institutions.
 They would like to assess whether the business is profitable
enough to pay the interest on loans and whether it has enough
resources to pay back the principal amount when it is due.
The Government and its agencies
 To be able to assess the tax to be collected in the case
there are any profits made by the business.
 The other government agencies are interested : to be able

to come with National Statistics. This statistics measure the
average performance of the economy.
The Financial Analyst and Advisors

 To interpret the financial information. Examples include
stockbrokers who advise investors on shares to buy in the
stock market
 To advise their clients on how much is the value their

investment i.e. whether it is profitable or not and what is the
value.
 Others advisors would include the press who will then pass
the information to other relevant users.
The Employees
 They work for the business/entity. They would like to have
information so as to make decisions on their terms of employment.
 This information would be important as they can use it to negotiate

for better terms including salaries, training and other benefits.
 They can also use it to assess whether the firm is financially sound
and therefore their jobs are secure.
The Public
 Institutions and other welfare associations and groups represent the
public. This information will be important for them to assess how
socially responsible is the firm.
 This responsibility is in form the employment opportunities the firm

offers, charitable activities and the effect of firm’s activities on the
environment.
C. FORMS OF BUSINESSES
Sole trader business
 Is owned by one person, the sole trader. Sole trader is not legally
separate from the business.
Partnership
 Is owned by two or more persons the partners. Partners are
legally not separate from the partnership.
Company
 Is a legally separate business owned by two or more persons, the
shareholders.
Other forms of businesses
 Cooperatives – members come together to start the business to

satisfy their needs
 Not for profit entity – they are started to just offer a given service
or good but are they do not have profit as the motive.
 Parastatal – is a company wholly owned by the government
D. QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
The four principal qualities of useful financial information are :
Understandability:
 information provided in the financial statements must be readily
understandable by users.
 users are assumed to have a reasonable knowledge of business
and economic activities and accounting.
Relevance:
 Information has the quality of being relevant when it influences the

economic decisions of users by helping them evaluate past,
present or future events or confirming or correcting their past
evaluations. The relevance of information is affected by its nature
and materiality.
 accounting information must assist a user to form, confirm or
maybe revise a view - usually in the context of making a decision
(e.g. should I invest, should I lend money to this business? Should I
Reliability:
 To be reliable then the information should:
 Be represented faithfully,
 Be accounted for and presented in accordance with their

substance and economic reality and not merely their legal
form,
 Be neutral i.e. free from bias,
 Include some degree of caution especially where

uncertainties surround some events and transactions
(prudence),
 Be complete i.e. must be within the bounds of materiality

and cost. An omission can cause information to be false.
Comparability:
 Users must be able to compare the financial statements of
an enterprise through time in order to identify trends in its
financial position and performance. Compliance with
WORK
In order that the business can satisfy all interested parties it
must follow certain accounting procedures and practices in
a formal sequence. Explain each part of the following
sequences :
Recording accounting data
Classifying data
Summarizing data
Communicating information
ACCOUNTING CONCEPTS
1. The going concern concept:

 Implies that the business will continue in operational
existence for the foreseeable future, and that there is no
intention to put the company into liquidation or to make
drastic cutback to the scale of operations.
 Financial statements should be prepared under the going
concern basis unless the entity is being (or is going to be)
liquidated or if it has ceased (or is about to cease) trading.
ACCOUNTING CONCEPTS
 A business firm will continue to carry on its activities for an

indefinite period of time. Simply stated, it means that every
business entity has continuity of life.
 This concept facilitates preparation of financial statements.
 It is of great help to the investors, because, it assures them that

they will continue to get income on their investments.
 In the absence of this concept, the cost of a fixed asset will be

treated as an expense in the year of its purchase.
 A business is judged for its capacity to earn profits in future

2. The Business entity concept:
The concept is that accountants regard a business
as a separate entity, distinct from its owners or
managers. The concept applies whether the
business is a limited company (and so recognized in
law as a separate entity) or a sole proprietorship or
partnership (in which case the business is not
separately recognized by the law.
Example. Suppose Mr. Sahoo started business

investing Rwf 100,000. He purchased goods for Rwf
40,000, Furniture for Rwf20,000 and plant and
machinery of Rwf30,000. Rwf10,000 remains in
hand. These are the assets of the business and not
of the owner.
The Business entity concept(cont)
According to the business entity concept Rwf100,000 will
be treated by business as capital i.e. a liability of
business towards the owner of the business.
 Now suppose, he takes away Rwf5,000 cash or goods

worth Rwf5,000 for his domestic purposes.
 This withdrawal of cash/goods by the owner from the

business is his private expense and not an expense of
the business. It is termed as Drawings.
 Thus, the business entity concept states that business

and the owner are two separate/distinct persons.
3. The money measurement concept:
 The money measurement concept states that

accounts will only deal with those items to which a
monetary value can be attributed.
For example, in the balance sheet of a business,
monetary values can be attributed to such assets as
machinery (e.g. the original cost of the machinery; or
the amount it would cost to replace the machinery)
and stocks of goods (e.g. the original cost of goods, or,
theoretically, the price at which the goods are likely to
be sold).
 As per the money measurement concept, transactions

which can be expressed in terms of money are
recorded in the books of accounts.
– For example, sale of goods worth Rwf200,000,
purchase of raw materials Rwf100,000, Rent Paid
Rwf10,000 etc. are expressed in terms of money,
and they are recorded in the books of accounts.
– But the transactions which cannot be expressed in

monetary terms are not recorded in the books of
accounts.
– For example, sincerity, loyalty, honesty of
employees are not recorded in books of accounts
because these cannot be measured in terms of
money although they do affect the profits and
losses of the business concern.
4. Accounting period concept
All the transactions are recorded in the

books of accounts on the assumption
that profits on these transactions are to
be determined for a specified period. This
is known as accounting period concept.
• Thus, this concept requires that a

balance sheet and profit and loss account
should be prepared at regular intervals.
• This is necessary for different purposes

5. The historical cost convention:
A basic principle of accounting is that resources are
normally stated in accounts at historical cost, i.e. at
the amount that the business paid to acquire them.
An important advantage of this procedure is that the

objectivity of accounts is maximized: there is usually
objective, documentary evidence to prove the amount
paid to purchase an asset or pay an expense. Historical
cost means transactions are recorded at the cost when
they occurred.
In general, accountants prefer to deal with costs,
rather than with ‘values’. This is because valuations
tend to be subjective and to vary according to what
the valuation is for.
Accounting period concept(cont)
Further, this concept assumes that,

indefinite life of business is divided into
parts. These parts are known as
Accounting Period. It may be of one year,
six months, three months, one month, etc.
But usually one year is taken as one

accounting period which may be a
calendar year or a financial year.
The historical cost convention(cont):
 For example, a machine was purchased by XYZ Limited

for Rwf500,000, for manufacturing shoes. An amount of
Rwf1,000 were spent on transporting the machine to the
factory site. In addition, Rwf2,000 were spent on its
installation. The total amount at which the machine will
be recorded in the books of accounts would be the sum
of all these items i.e. Rwf503,000.
Suppose the market price of the same is now Rwf 90,000

it will not be shown at this value. Further, it may be
clarified that cost means original or acquisition cost only
for new assets and for the used ones, cost means
original cost less depreciation.
6. Duality aspect concept:
Every transaction has two-fold effect in the accounts

and is the basis of double entry bookkeeping.
This concept assumes that every transaction has a
dual effect, i.e. it affects two accounts in their
respective opposite sides. the transaction should be
recorded at two places.
For example :
Goods purchased for cash has two aspects :

(i) Giving of cash
(ii) Receiving of goods
Capital brought in by the owner of the business

(i) Receipt of cash
(ii) Increase in Capital (owners equity)
• Purchase of machinery by cheque
(i) Reduction in Bank Balance
(ii) Owning of Machinery
• Goods sold for cash

(i) Receipt of cash
(ii) Delivery of goods to the customer
• Rent paid in cash to the landlord

(i) Payment of cash
(ii) Rent (Expenses incurred).
7.The realization concept:
Realization: Revenue and profits are recognized when

realized.
The concept states that revenues and profits are not
anticipated but are recognized by inclusion in the
income statement only when realized in the form of
either cash or of other assets.
Example :
N.P. Jeweller received an order to supply gold ornaments
worth Rwf500,000. They supplied ornaments worth
Rwf200,000 up to the year ending 31st December 2005
and rest of the ornaments were supplied in January
2006.
The revenue for the year 2005 for N.P. Jeweller is

Rwf200,000. Getting an order is not considered as
revenue until the goods have been delivered.
8. The accruals concept (or matching concept):
States that revenue and costs must be
recognized as they are earned or incurred, not
as money is received or paid.
The accrual concept under accounting assumes
that revenue is realized at the time of sale of
goods or services irrespective of the fact when
the cash is received.
Example: a firm sells goods for Rwf 55,000 on

25th March 2005 and the payment is not
received until 10th April 2005, the amount is due
and payable to the firm on the date of sale i.e.
25th March 2005.
The accruals concept(cont)
It must be included in the revenue for the year

ending 31st March 2005. Similarly, expenses are
recognized at the time services provided,
irrespective of the fact when actual payment for
these services are made.
Example: if the firm received goods costing

Rwf20,000 on 29th March 2005 but the payment
is made on 2nd April 2005
the accrual concept requires that expenses

must be recorded for the year ending 31st
March 2005 although no payment has been
9. The Prudence Concept:
The prudence concept states that where

alternative procedures, or alternative
valuations, are possible, the one selected
should be the one that gives the most helpful
presentation of the business’s financial
position or results.
Assets and profits should not be overstated,

but a balance must be achieved to prevent
the material overstatement of liabilities or
losses.
The Prudence Concept(cont):
Example :
A company begins trading on 1 January 2010 and
sells goods worth Rwf100,000 during the year to 31
December.
At 31 December there are debts outstanding of

Rwf15,000. Of these, the company is now doubtful
whether Rwf6,000 will ever be paid.
The company should make a provision for doubtful

debts of Rwf6,000. Sales for 2010 will be shown in
the profit and loss account at their full value of
Rwf100,000,
but the provision for doubtful debts would be a

charge of Rwf6,000 which should not be included in
10. The consistency concept:
 The consistency concept states that in preparing

accounts consistency should be observed in two
aspects.
 a) Similar items within a single set of accounts

should be given similar accounting treatment.
 b) The same treatment should be applied from one
period to another in accounting for similar items.
This enables valid comparisons to be made from
one period to the next.
 Example:
 Method of depreciation(see later)
 Stock valuation (see later)
11. The separate valuation principle:
The separate valuation principle states that, in determining the
amount to be attributed to an asset or liability in the balance
sheet, each component item of the asset or liability must be
determined separately.
These separate valuations must then be aggregated to arrive at the
balance sheet figure.
 For example, if a company’s stock comprises 50 separate items, a

valuation must (in theory) be arrived at for each item separately;
the 50 figures must then be aggregated and the total is the stock
figure which should appear in the balance sheet.
12. The materiality concept:
An item is considered material if it’s omission or

misstatement will affect the decision making process
of the users.
 Materiality depends on the nature and size of the

item. Only items material in amount or in their nature
will affect the true and fair view given by a set of
accounts.
In preparing accounts it is important to assess what is

material and what is not, so that time and money are
not wasted in the pursuit of excessive detail
The materiality concept(cont)
Example :
If a business has a bank loan of Rwf50,000 balance
and a Rwf55,000 balance on bank deposit account,
it might well be regarded as a material
misstatement if these two amounts were displayed
on the balance sheet as ‘cash at bank FRw5,000’.
Small payments such as postage, stationery and

cleaning expenses should not be disclosed
separately. They should be grouped together as
sundry expenses
In other words, incorrect presentation may amount

to material misstatement even if there is no
 12. Objectivity (neutrality):
 An accountant must show objectivity in his work. This
means he should try to strip his answers of any
personal opinion or prejudice and should be as
precise and as detailed as the situation warrants.
 The result of this should be that any number of

accountants will give the same answer independently
of each other. Objectivity means that accountants
must be free from bias. They must adopt a neutral
stance when analyzing accounting data. In practice
objectivity is difficult.
 The accounting information should be free from

bias and capable of independent verification
 The information should be based upon verifiable

evidence such as invoices or contracts
13. Substance over form:
 The principle that transactions and other

events are accounted for and presented in
accordance with their substance and economic
reality and not merely their legal form.
Example :
 A non current asset on Hire purchase although
is not legally owned by the enterprise until it is
fully paid for, it is reflected in the accounts as
an asset and depreciation provided for in the
normal accounting way.
QUESTIONS
QUESTIONS 1
Fill in the blanks with suitable word/words
(i) The accounting concepts are basic....................... of accounting.
(ii) The main objective of accounting concepts is to
maintain....................... and....................... in the accounting record.
(iii) ....................... concept assumes that business enterprise and its
owners are two separate independent entities.
(iv) The goods drawn from business for owner’s personal use are
called……
QUESTIONS 2
Put a tick mark (√) against the information that should be recorded in the
books of accounts and cross mark (X) against the information that
should not be recorded
(i) Health of a managing director
(ii) Purchase of factory building Rwf10
(iii) Rent paid Rwf100,000
(iv) Goods worth Rwf10,000 given as charity
(v) Delay in supply of raw materials
CHAPTER TWO: DOUBLE ENTRY
CONCEPTS
A. THE ACCOUNTING EQUATION
A business owns properties. These
properties are called assets. The assets
are the business resources that enable it
to trade and carry out trading.
They are financed or funded by the owners

of the business who put in funds. These
funds, including assets that the owner may
put is called capital.
Other persons who are not owners of
the firm may also finance assets. Funds
from these sources are called
liabilities.
The total assets must be equal to the

total funding i.e. both from owners and
non-owners. This is expressed in form of
accounting equation which is stated as
follows
ASSETS = LIABILITIES + EQUITY
Assets
Asset is a resource controlled by a business
entity/firm as a result of past events for which
economic benefits are expected to flow to the firm.
Assets consist of property of all kinds, such as
buildings, machinery, equipments, stocks of goods
and motor vehicles.
Other assets include debts owed by customers and
the amount of money in bank account.
Assets are classified into two main types:
i) Non current assets (formerly called fixed assets).
ii) Current assets.

Assets(cont)
Non current assets are acquired by the
business to assist in earning revenues and
not for resale. They are normally expected
to be in business for a period of more than
one year. Major examples include:
Land and buildings
Plant and machinery
Fixtures, furniture, fittings and equipment
Motor vehicles
Current assets are not expected to last
for more than one year. They are in most
cases directly related to the trading
activities of the firm. Examples include:
Stock of goods – for purpose of selling.
Trade debtors/accounts receivables – owe
the business amounts
Other debtors – owe the firm amounts
other than for trading.
Cash at bank.
Cash in hand.
Liabilities:
These are obligations of a business as a result of past
events settlement of which is expected to result to an
economic outflow of amounts from the firm.
An example is when a business buys goods on credit,

then the firm has a liability called creditor.
The past event is the credit purchase and the liability

being the creditor the firm will pay cash to the creditor
and therefore there is an out flow of cash from the
business. Liabilities are also classified in
i) Non-current liabilities (or long term liabilities)
ii) Current liabilities.

Liabilities:
Non-current liabilities are expected to last or be paid

after one year. This includes long-term loans from
banks or other financial institutions.
Current liabilities last for a period of less than one

year and therefore will be paid within one year. Major
examples:
Trade creditors/or accounts payable – owed amounts
as a result of business buying goods on credit.
Other creditors - owed amounts for services supplied
to the firm other than goods.
Bank overdraft - amounts advanced by the bank for a
Equity:
• This is the residual amount on the owner’s

interest in the firm after deducting liabilities
from the assets.
• Items like introduced capital, profit/loss and

drawings appear under equity.
• The Accounting equation can be expressed in

a simple report called the Balance Sheet. The
basic format is as follows(vertical format):
ASSETS
Non Current Assets Rwf Rwf
Land & Buildings xx
Plant & Machinery xx
Fixtures, furniture & fittings xx
Motors vehicles xx
Goodwill
Total non-current assets Xx
Current Assets
Stocks/inventories xx
Debtors/ trade receivables xx
Cash at bank xx
Cash in hand xx
Total current assets xx
Total assets XX
EQUITY AND LIABILITIES
Capital
Opening balance xx
Profit/(Loss) xx/(xx)
Drawings (xx)
Closing balance xx
Non Current Liabilities
Long term loan xx
Creditors/trade payables xx
5 Months Loan xx
Bank Overdraft xx
Total current liabilities xx
Balance sheet using vertical format
• The Non Current assets are listed in order of
permanence as shown i.e. from Land and
Buildings to motor vehicles. The Current Assets
are listed in order of liquidity i.e. which asset is far
from being converted into cash. Example: stock is
not yet sold, (i.e. not yet realized yet) then when
it is sold we either get cash or a debtor (if sold on
credit). When the debtor pays then the debtor
may pay by cheque or cash.
• The Current Liabilities are listed in order of
payment i.e. which is due for payment
first. Bank overdraft is payable on demand
by the bank, then followed by creditors.
• Note that in the vertical format, current

liabilities are deducted from current assets
to give net current assets. This is added to
Non Current assets, which give us net
assets.
• Net assets should be the same as the total

of Capital and Non Current Liabilities.
exercises
Question 1
• Justine decides to open a retail shop selling greetings
cards and gifts. Her uncle lends her Rwf300,000 to help
her with financing the venture.
• Justine buys shop premises costing Rwf500,000, a
motor vehicle for Rwf100,000 and stock of goods for
50,000. Justine did not pay for her stock of goods in full
and still owes 21,000 to her supplier in respect of them.
• After the events described above and before she starts

trading, Justine has Rwf 1,000 cash in hand and 70,000
cash at bank. You are required to calculate the amount
of capital that Justine invested in her business.
Question 2
Draw up John’s balance sheet using the vertical presentation
method, from the following information as at 31 December 2010.
items Rwf
Capital 3,482,300
Delivery van 1,200,000
Debtors 1,089,200
Office furniture 864,000
Stock of goods 422,000
Cash at bank 1,172,200
Creditors 1,265,100
Question 3
Draw up Tom’s balance sheet as at 31 March 2010 from the
following information
items Rwf
Premises 5,000,000
Plant and machinery 2,650,000
Debtors 2,879,000
Creditors 3,232,000
Bank overdraft 362,500
Stock 2,100,000
Cash in hand 3,500
Capital 9,038,000
EXTENDED ACCOUNTING EQUATION
• To know the financial performance
and position to be determined, the
opening and closing capital
information is obtained and
compared.
• Any other information like drawings

and additional capital is also
obtained.
EXTENDED ACCOUNTING EQUATION
• The accounting equation is then
used to determine the profit or loss
for the period.
• The accounting equation in extended

format is as follows
Opening capital + additional capital + Profit(loss) –

Drawings = Closing capital
Example 1
From the extended accounting equation,
what is the profit or loss from the following
given information
Abasfor Bob
each ofCome
the business
Dan
Rwf Rwf Rwf Rwf
of Abas, Bob, Come and Dan.
Capital (at the 186,000 235,500 0 567,000
beginning of the year)
Capital (at the end of 274,000 201,400 254,000 423,000
the year)
During the year :
Cash taken by the 68,000 16,000 45,000 170,000
owner
Additional capital 50,000 125,000 200,000 0
Goods taken by the 20,000 0 10,000 25,000
owner
Example 2
The following information is provided for Jane
traders.
(i) Capital at 1 October 2008, FRw230,000.
(ii) Total assets at 30 September 2009, FRw1,010,000.
(iii) Total liabilities at 30 September 2009, FRw530,000.
(iv) Inventory taken by Jane, the proprietor, for her personal

use on 1 April 2009, FRw50,200.
(v) Cash drawings by Jane during the year to 30 Sept. 2009,

FRw3,500 per week(52 weeks the whole year).
(vi) Legacy received by Jane on the death of a relative and
paid into the business bank account on 1 sept. Rwf 70,300.
Required: Calculate the profit of Jane

Traders for
the year to 30 September
During the year Brian had taken monies from the business for his
own private use to the value of FRw70,000 per month.
During the financial year Brian had a small win on the football game
amounting to Rwf200,000, which he paid into the business.
1.1.2010 31.12.2010
Inventory 108,000 122,000
Accounts payables for goods 130,900 141,000
Accounts receivables for goods 212,000 198,000
Bank 144,200 156,400
Fixtures at valuation 180,000 160,000
C. DOUBLE ENTRY ASPECTS
• The Accounting equation forms the basis

of double entry and therefore it should
always be maintained.
• Any change in assets, liabilities or capital
will have a double effect such that assets
will always be equal to liabilities plus
capital.
• If the owners put in additional capital
then this will increase the cash at bank
and the capital amount therefore the
equation is still maintained.
•
The T account
• For the double entry to be reflected in the

accounts, every debit entry must have a
corresponding credit entry.
• The transactions affecting these accounts

are posted in the account as debit entry
and credit entry to complete the double
entry.
The T account
Debit / Dr Account Name Credit /

Cr
Date Detail Folio Amount Date Detail Folio Amount

The T account
In this account the date will show the
opening period of the asset, liability or capital
i.e. the balance brought forward(b/f) or
brought down(b/d).
It will also show the date when a transaction

took place (i.e. either an asset was bought or
liability incurred). The balance carry forward
(c/f) or carry down(c/d).
The detail column (also called the particulars

column) shows the nature of the transaction
and reference to the corresponding account.
The T account(cont)
• The Folio Column for purposes of
detailed recording shows the
reference number of the
corresponding account. The
amount column shows the amount
of the asset, liability or capital.
The T account(cont)
• The left side of the account is called

the debit side and the right side is
called the credit side.
• All assets are shown or recorded on
the debit side while all the liabilities
and capital are recorded on the
credit side.
The T account(cont)
• Each type of asset or liability must
have its own account whereby all
transactions affecting them are
recorded in this account.
• Therefore there should be an

account for Premises, Plant and
Machinery, Stock, Debtors,
Creditors, etc…
The T account(cont)
• Under the accounting equation if all

assets are represented by liabilities
and capital therefore all debits
should be the same as credits.
CAPITAL ACCOUNT
Decreases Increases
- +
ASSET ACCOUNT
Increases Decreases
+ -
LIABILITY ACCOUNT
Decreases Increases
- +
When we make a debit entry we are either:
• Increasing the value of an asset.
• Reducing the value of a liability.
• Reducing the value of capital.
The T account(cont)
When we make a credit entry we are either:
• Reducing the value of an asset.
• Increasing the value of a liability.
• Increasing the value of capital.
Examples
Ex1. Paid cash Rwf 200,000 to buy machinery
EFFECT ACTION
Machinery comes IN A debit entry in the Machinery
A/c
Cash goes OUT A Credit entry in the cash A/c
• Ex2. Took Rwf50,000 out of the cash

in hand of the business and paid it
into the bank account of the
EFFECT ACTION
business
Money comes IN to the A debit entry in the Bank A/c
bank
Cash goes OUT A Credit entry in the cash
A/c
Ex3. The proprietor starts the business with Rwf
300,000 in cash on 1/8/2010
EFFECT ACTION
Increases the assets of Debit the cash A/c – cash goes
cash IN
Increases the capital Credit the capital A/c- cash
comes OUT of the owner’s
money
Dr CASH ACCOUNT Cr
1/8/2010 capital 300,000
Dr CAPITAL ACCOUNT
Cr
1/8/2010 cash
300,000
Exercise
Write up the various accounts needed to
record the
following transactions for May 2009.
• May 1, Started a business putting Rwf100,000 in Bank a/c (A)
• May 3, Bought machinery on credit from Unique Machines
Rwf 27,500 (B)
• May 4, Withdrew Rwf 20,000 cash from the bank and placed it
in Cash book (C)
• May 7, Bought a motor van paying in cash Rwf18,000 (D)
• May 10, Sold some of the machinery for 1,500 on credit to
Barnes (E)
• May 21, returned some ot the machinery, value Rwf 2,700 to
Unique Machine(F)
• May 28, Barnes pays for the business Rwf 1,500 by cheque(G)
• May 30, Bought another motor van for Rwf42,000 by cheque(H)
• May 31, Paid Rwf24,800 to Unique Machines by cheque(I)
D. ACCOUNTING FOR SALES, PURCHASES,
INCOMES AND EXPENSES.
Sales:
This is the sell of goods that were bought
by a firm ( bought for resale). Sales are
divided into cash sales and credit sales.
For a cash sale, the entries to be made are.

Debit cash either at bank or in hand.
Credit sales account.
For a credit sale:

Debit debtors/ Accounts receivable
account.
Credit sales account.
Purchases:
Buying of goods meant for resale.
Purchases can also be for cash or on
credit.
For cash purchases:

Debit purchases.
Credit cash at bank/cash in hand
For credit purchases

Debit purchases.
Credit creditors for goods.
Note: No entry is made into
the stocks account.
Incomes:
A firm may have other incomes apart from that
generated from trading (sales). Such incomes
include:
Rent
Bank interest
Discounts received.
When the firm receives cash, from these incomes, the
following entries are made:
Debit cash in hand/at bank.
Credit income account.
Incomes increase the value of capital and that is

the reason why they are posted on the credit side
of their respective accounts.
Expenses:
These are amounts paid out for services rendered
other than those paid for purchases. Examples
include:
 Postage and stationery
 Salary and wages
 Telephone bills
 Motor vehicle running expenses.
 Bank charges.
When a firm pays for an expense,

we:
 Debit the expense account.
 Credit cash at bank/in hand.
Expenses decrease the value of capital and thus the

posting is made on the debit side of their accounts.
E. RETURNS INWARDS AND RETURNS OUTWARDS
Returns Inwards:
These are goods that have been returned
by customers due to various reasons
e.g.
 They may be defective/damaged,
 Being of the wrong type.
 Excess goods being delivered .
For Goods returned that relate to cash

sales :
 Debit returns – inwards
 Credit cashbook.
For goods returned that relate to credit

sales :
 Debit returns inwards.
 Credit debtors.
Returns Outwards:
These are goods returned to

suppliers/creditors. They may be for cash
purchases or for credit purchases.
For cash purchases , a cash refund is given to

the firm by the supplier :
Debit the cashbook (cash at bank/hand).
Credit returns outwards.
For credit purchases and no refund has been

made:
Debit creditors.
Credit returns outwards.
F. ACCOUNTING FOR DRAWINGS, DISCOUNTS ALLOWED
AND DISCOUNTS RECEIVED.
Drawings
Cash or bank withdrawals :
When the owner withdraws money from the business we
debit drawings and credit cashbook (cash in hand or cash at
bank).
Taking goods for own use :
 We debit drawings and credit purchases
 Personal expenses, paid by the business :
 We debit drawings and credit expense account
 Taking some of the other assets from the business :

 We debit drawings and credit the relevant asset ,
e.g. motor vehicles
Discounts received.
A discount received is an allowance by
the creditors to the firm to encourage
the firm to pay the amount dues within
the agreed time. It is an amount
deducted from the invoice price.
 When a discount is given by the supplier then we debit creditor’s
account and credit discounts received
 E.g. A. Ltd sells some goods on credit to B Ltd. ₤1,000 under the
terms of sale, B Ltd, will receive a discount of 5% if they pay the
amount due within one month.
 B decides to take up the offer and pays the amount within the
given time. B will record the transaction as follows.
Debit: Creditor – A Ltd

Credit: Discounts Received
Discounts Allowed
These are the allowances made by a firm on

the amounts receivable from the customers to
encourage prompt payment.
The amounts deducted from the sales invoice.

In the previous example when A Ltd issued the
discount and was taken up by B the entries will
be:

Debit - discount allowed
Credit - debtors - B Ltd.
G. TRIAL BALANCE
• The trial balance is a simple report that
shows the list of account balances classified
as per the debits and credits.
• The purpose of the trial balance is to show

the accuracy of the double entries made
and to facilitate the preparation of final
accounts i.e. the trading, profit & loss
account and a balance sheet.
• The debits of the trial balance should be the

same as the credits; if not then there is an
error in one or more of the accounts.
TRIAL BALANCE(cont)
• From the trial balance please note that

assets and expenses are on the debit side.
• Capital, liabilities and incomes are normally

listed on the credit side.
• The next example is a detailed one that
shows extracting of trial balance once all
the postings have been made
• in the relevant accounts.
SUMMARY OF TRIAL BALANCE
DEBIT CREDIT
XXX
ASSETS
XXX
CAPITAL
XXX
LIABILITIES
XXX
INCOME
XXX
EXPENSES
XXX
DRAWINGS
Ex: Trial balance of ….. as at 31 march
2009
Designation Debit Credit Rwf
Rwf
Rent – income 5,000
Debtor – U Foot 7,000
Motor vehicle 300,000
Bank 1,555,000
Purchases 289,000
Wages 187,000
Capital 2,000,000
Creditor– M Rooks 152,000
Furniture & Fittings 150,000
Sales 352,000
Cash in hand 72,000
Creditor – P Scot 114,000
Expenses – Rent 15,000
Expenses – Stationery 27,000
Returns Outwards 23,000
Drawings 44,000
QUESTION 1: RECONSTRUCT THE TRIAL BALANCE
AFTER MAKING NECESSARY
CORRECTIONS
Capital 199,560
Sales 1,194,390
Stationery 12,000
General expenses 27,450
Motor expenses 44,760
Cash at bank 19,500
Stock 1 July 2008 76,680
Wages and salaries 94,920
Rent and rates(charges) 105,000
Office equipment 60,000
Purchases 817,530
heating and lighting 22,080
Rent received 21,390
Debtors 103,530
Drawings 42,000
• EXERCISES(see questions
Handout)
QUESTION No 9
Required: T account
and Trial balance
H. ACCOUNTING CYCLE/PROCESS/SYSTEM
The diagram in notes(page18) shows

the components of an accounting
system for a firm that carries out
trading activities ;
 From the source documents that
record the evidence of
transactions,
H. ACCOUNTING CYCLE/PROCESS/SYSTEM………………
Where the documents are recorded

and the postings to are to be made.
A brief description of each component is

explained below:
SOURCE DOCUMENTS
This shows the evidence of
transactions. They are collected,
filed and posted in the books of
prime entry.
Example, if a firm sells goods on
credit, then an invoice is raised.
The source documents as shown in
the above include:
Cont…………………
• Sales invoice
• Purchases invoice
• Credit note
• Debit note
• Receipts, cheques and petty cash
vouchers
• Other correspondences.
• (i) Sales Invoice
• The sales invoice is raised by the firm and sent to the

debtor/customer when the firm makes a credit sale.
• The sales invoice contains the following:

– Name and address of the firm
– Name and address of the buying firm
– Date of making the sale – invoice date.
– Invoice number
– Amount due (net of trade discount)
– Description of goods sold
– Terms of sale
• (ii) Purchases Invoice
• A purchase invoice is raised by the creditor and

sent to the firm when the firm makes a credit
purchase. It shows the following:
– Name and the address of the creditor/seller

– Date of the purchase (invoice date)
– Invoice number
– Amount due
– Description of goods sold
– Terms of sale
(iii) Credit note
 A credit note is raised by the firm and issued to the debtor when
the debtor returns some goods back to the firm. It’s contents
include:
 Name and address of the firm
 Name and address of the debtor
 Amount of credit
 Credit note number
 Reason for credit e.g. if goods sent but of the wrong type.
 The purpose of the credit note is to inform the debtor or

customer that the debtor’s account with the firm has been
credited i.e. the amount due to the firm has been reduced or
cancelled.
 The credit note may also be issued when the firm gives an
allowance of the amounts due from the debtors.
 From the context we can assume that all credit notes are issued
when goods are returned.
(iv) Debit note
• This is raised by the creditor and issued to
the firm when the firm returns some goods
to the creditor. It includes the following
items:
– Name and address of the creditor
– Amount of debit
– Debit Note number
– Reason for the debit
Cont…………
• The purpose of the debit note is to inform the
firm that the amount due to the creditor has
been reduced or cancelled.
– Credit sales (sales invoice)
– Returns inwards (credit note)
– Credit purchase (purchase invoice)
– Returns outwards (debit note)
(v) Receipts
• A receipt is raised by the firm and issued to
customers or debtors when they make payments
in the form of cash or cheques. It shows:
– The name and address of the firm

– The date of the receipt
– Amount received (cash or cheque or other
means of payment)
– Receipt number.
Cheques
When a firm opens a current account with the
bank, a cheque book containing cheques is
issued.
The cheques allow the firm to make payments

against the account with the bank.
When a firm issues a cheque to its creditors for

payments, it authorizes the bank to honor
payments against the firm’s account with the
bank.
The cheque contains the following information:
 Name and account number of the firm (account holder)
 The date of the cheque
 Name of the payee (creditor)
 Name of the firm’s bank
 Amount payable in words and figures
 The cheque number
 The authorized signature(s)
Petty cash vouchers
A petty cash voucher is raised by a cashier
to seek(request) authority for payments
(payments of small value in the firm ;
which require cash payments e.g. fuel, bus-
fare, office snacks),
which is approved by a senior manager and
filed for record purpose. It shows:
 Date of payment
 Amount paid
 Reason for payment
 Authorized signature(s):
 Person approving
 Person receiving
The person receiving the money must then
return a document supporting how the
money was utilized e.g. fuel receipt, bus
ticket e.t.c.
• (vii) Other correspondence
• These include information received
within or outside the firm that has a
financial implication in the accounts.
• Examples are:
– Letters from the firm’s lawyers about
debtors balance.
– Hire - purchase/credit sale or credit
purchase agreements that relate to non-
current assets.
Cont……
– Memorandum from a senior manager
requiring changes to be made in the
accounts.
– Bank statement from the bank, e.g.
bank charges.
BOOKS OF ORIGINAL ENTRY
They record the source documents.
1. Sales Journal
It is also called a Sales Day Book. It records all
the sales invoices issued by the firm during a
particular financial period.
It shows
Date of sale
Name of customer to whom the goods have been
sold
Folio
Final amount of invoice
The format is as follows (with simple records
of invoice).
SALES DAY BOOK
Date Detail Folio Amount Rwf
1st March S. Spikes SL.10 200.00
3rd March T. Binns SL.19 350.00
5th March L.Thompson SL,8 150.00
Total 700.00
The individual entries in the sales journal are posted to

the debit side of the debtor’s accounts in the sales
ledger and
the total is posted on the credit side of the sales

account in the general ledger. This is shown below
Sales ledger(customer a/c)
Dr S Spikes Cr
1/3 Sales 200
Dr T Binus Cr
3/3 Sales 350
Dr L Thompson Cr
3/3 Sales 150
General ledger(sales a/c)
Sales account
5/3 Credit sales for period
700
Purchases Journal
• Purchases journal is also called a purchases
day-book.
• It records all the purchases invoices
received by the firm during a particular
financial period.
• It has the following format (including
records of invoices).
PURCHASES JOURNAL

1st May C. Kelly PL.10 400.00
2nd May L. Smailes PL.20 350.00
Total 750.00
The individual entries in the purchases journal are

posted to the credit side of the creditor’s accounts
in the purchases ledger and
the total is posted on the debit side of the

purchases account in the general ledger. This is
shown below
• Purchases Ledger
Dr C. Kelly
Cr
Purchases 400
Dr L. Smailes
Cr
Purchases 350
• General ledger
Dr Purchases account Cr
Sundry(various)
750 creditors
RETURNS INWARDS
1st March S. Spikes SL.22 20
3rd March T. Binns SL.18 18
5th March L.Thompson SL. 9 15
Total 53
The individual entries in the Returns inwards journal are

posted to the credit side of the debtor’s accounts in the
sales ledger and
the total is posted on the Debit side of the Returns

inwards account in the general ledger. This is shown below
Dr SSales ledger
Spikes
Cr
1/3 Returns In 20
Dr C Kelly
Cr
2/3 Returns In 18
Dr T Bills Cr
5/3 Returns In 15
General ledger
Returns In account
Sundry Debtors 53
RETURNS OUTWARDS
2 May L. Thompson PL. 15 14
3 May M. Hyatt
T. Bills PL. 10 12
4 May
PL. 7 19
Total 45
The individual entries in the Returns outwards journal

are posted to the debit side of the creditor’s accounts in
the purchases ledger and
the total is posted on the credit side of the Returns

outwards account in the general ledger. This is shown
below
Dr L. Purchases
Thompson ledger Cr
2/5 Returns out 14
Dr M. Hyatt Cr
3/5 Returns out 12
Dr T Bills Cr
4/5 Returns Out 19
General ledger
Returns Out account
Sundry creditors
45
Example
You are to enter the following items in the books, post to personal
accounts, and show transfers to the general ledger.
• 1/7 Credit purchases from: K Hill FRw3800; M Norman FRw500; N
Senior FRw106.
• 3/7 Credit sales to: Rigby FRw510; Phillips FRw246; Thompson
FRw356.
• 5/7 Credit purchases from: Morton FRw200; Cook FRw180; Edwards
FRw410; C Davies FRw66.
• 8/7 Credit sales to: Green FRw307; George FRw250; Ferguson
FRw185.
• “ 12 Returns outwards to: M Norman FRw30; N Senior FRw16.
• “ 14 Returns inwards from: E Phillips FRw18; F Thompson FRw22.
• “ 20 Credit sales to: E Phillips FRw188; F Powell FRw310; E Lee
FRw420.
• “ 24 Credit purchases from: Ferguson FRw550; K Ennevor FRw900.
• “ 31 Returns inwards from: E Phillips FRw27; E. Rigby FRw30.
• “ 31 Returns outwards to: J Cook FRw13; C Davies FRw11.
• Study the solution provided:
SALES JOURNAL
DATE DETAIL AMOUNT (FRw)
3 July E. Rigby 510
3 July E. Phillips 246
3 July F. Thompson 356
8 July A. Green 307
8 July H. George 250
8 July J. Ferguson 185
20 July E. Phillips 188
20 July F. Powell 310
20 July E. Lee 420
TOTAL 2,772
CASH BOOKS
• A cashbook records all the receipts
(cash and cheques from customers
and debtors or other sources of
income) and all the payments (to
creditors or suppliers and other
expenses) for a particular financial
period.
• The cashbook will also show us the

cash at bank and cash in hand
position of the firm.
Cont……………..
There are two types of cashbooks:
• i. Cash in hand cashbook, which
records the cash transactions in the
firm or business.
• ii. Cash at bank cashbook, which

records the transactions at/with, the
bank.
Two-column cashbook
Dr cash book Cr
Date Detail Cash Bank Date Detail Cash Bank

(Rwf) (Rwf) (Rwf) (Rwf)
Additional columns for discounts allowed and discounts
received can be included with the cash at bank
columns to get a 3 – column cashbook. The format is as
follows:
Dr cash book Cr
Date Detail Discount Cash Bank Date Detail Discount Cash Bank
allowed (Rwf) (Rwf) received (Rwf) (Rwf)
Write up a two-column cashbook from the following details, and balance
off as at the end of the month:
 May 1 Started business with capital in cash FRw1,000.
 “ 2 Paid rent by cash FRw100.
 “ 3 F Lake lent us FRw5,000, paid by cheque.
 “ 4 We paid B McKenzie by cheque FRw650.
 “ 5 Cash sales FRw980.
 “ 7 N Miller paid us by cheque FRw620.
 “ 9 We paid B Burton in cash FRw220.
 “ 11 Cash sales paid direct into the bank FRw530.
 “ 15 G Moores paid us in cash FRw650.
 “ 16 We took FRw500 out of the cash till and paid it into the bank
account.
 “ 19 We repaid F Lake FRw1,000 by cheque.
 “ 22 Cash sales paid direct into the bank FRw660.
 “ 26 Paid motor expenses by cheque FRw120.
 “ 30 Withdrew FRw1,000 cash from the bank for business use.
 “ 31 Paid wages in cash FRw970.
Cash Bank Cas Bank
h
Capital 1000 Rent 100
F. Lake 5000 B McKenzie 650
(Loan)
Sales 980 B Burton 220
N Miller 620 Bank C 500
Sales 530 F Lake 1000
(loan)
G Moores 650 Motor 120
Expenses
Cash C 500 Cash C 100
Sales 660 Wages 970
The followings transactions are written up in
the form of a cash book.
2009 Rwf(‘000’)
• Sept. 1 Proprietor puts capital into a bank a/c 10,940
• Sept. 2 received cheque from M Boon 115
• Sept. 4 cash sales 1,102
• Sept. 6 bought stationery and paid by cash 35
• Sept. 7 banked of the cash held by business 400
• Sept. 15 cash sales paid direct into the bank 40
• Sept. 23 paid cheque to S Willis 277
• Sept. 29 Withdrew cash from bank 120
• Sept. 30 paid wages in cash 518
folio Cash Bank folio Cas Bank
h
1Capital GL 1 10,940 6 GL 65 35
stationery
2M SL 98 115 7 banked C 400
Boon
4 sales GL 87 1,102 23 S Willis PL 23 277
7 cash C 400 29 cash C 120
15 Sales GL 87 40 30 wages GL 39 518
29 cash C 120 30 Balance c/d 269 11,098
1,222 11,495 Money out
1/10 bal b/d 269 11,098

Money in
Exercise
A Two column is to be written up from the
• 2010 following Rwf(‘000’)
• March . 1 started business with 4,000 in the bank
• March. 2 paid fixtures by cheque 660
• March. 4 cash sales 225: paid rent by cash 140
• March 6 Tom paid us by cheque 188
• March 8 Cash sales paid direct into the bank 308
• March 10 King paid us in cash 300
• March 12 paid wages in cash 275
• March 14 walters lent us 500 paying by cheque
• March 15 withdrew 200 from the bank for business use
• March 20 bought stationery paying by cash 60
• March 22 and 28 Paid French by cheque 166,
• March 28 cash drawings 100
• March 30 Scott paid us by cheque 277
• March 31 cash sales 66
Petty Cash Book and the
imprest system of Accounting.
• Petty Cash Book is a record of all the petty cash

vouchers raised and kept by the cashier.
• The petty cash vouchers will show summary

expenses paid by the cashier and this information is
listed and classified in the petty cash book
• The headings of the relevant expenses are for

example :
– Postage and stationery
– Traveling
– Cleaning expenses.
The format is as shown:
Petty Cash Book
Receipts Date Detai Payments expenses The
l Rwf Ledger
Postage Stationer Travel
Rwf y Rwf
Rwf
The balance c/d of the petty cash book will signify the balance of
cash in
hand or form part of cash in hand.
The totals of the expenses are posted to the debit side of the expense
accounts. If a firm operates another cashbook in addition to the petty
cash book, then the totals of the expenses will also be posted on the
credit side of the cash in hand cashbook.
The Imprest system
• This system of accounting operates on a simple principle that
the cashier is refunded the exact amount spent on the
expenses during a particular financial period.
• At the beginning of each period, a cash float is agreed upon

and the cashier is given this amount to start with.
• Once the cashier makes payments for the period he will get a
total of all the payments made against which he will claim a
reimbursement of the same amount that will bring back the
amount to the cash float at the beginning of the period.
• This is demonstrated as follows:
FRw
– Start with (float) 1,000
– Expenses paid (720)
– Balance 280
– Reimbursement 720
– Cash float 1,000
Example
• A cashier in a firm starts with FRw2,000 in the month of March
(that is the cash float). I n the following week, the following
payments are made:
FRw
• 1st March – bought stamps for 80
• 2nd March – paid bus fare for 120
• 2nd March – cleaning materials 240
• 3rd March – bought fuel 150
• 3rd March – cleaning wages 300
• 4th March – bought stamps 200
• 4th March – paid L. Thompson (creditor) 400
• 5th March – fuel costs 150
• On the 5th of March the cashier requested for a refund of the
cash spent and this amount was reimbursed back.
Required:
• Prepare a detailed petty cash book showing the balance c/f to
the next period and the relevant expense accounts, as they
would appear on the General Ledger.
ANSWER Petty Cash Book
Receipts Date Detail Payments expenses The
Ledger
Rwf Rwf Postage cleaning Travel

Rwf Rwf Rwf
20,000 1/3 Bal b/d

1/3 Stamps 80 80
2/3 Bus Fare 120 120
2/3 Cleaning 240 240
Materials
3/3 Fuel 150 150
3/3 Cleaning 300 300
wages
4/3 Stamp 200 200
4/3 Thompson 400 400
5/3 Fuel 150 150
1,640 5/3 1,640 280 540 420 400
5/3 Bal c/d 2,000

3,640 3,640
2,000 6/3 Bal b/d
The General Journal
It records information from other correspondence (information
that is not recorded in the above books of prime entry).
It explains the type of entries that will be made in the ledger
accounts giving a reason for these entries.
For each transaction the following details are recorded

i. The date
ii. The name of the accounts to be debited and credited and the
amount
iii.A description and explanation of the transaction, which is
known as the narrative
a reference number for the source document as proof of the
transaction
Journal entries
The type of transactions recorded here
are:
i. The purchase and sale of fixed assets on credit
ii. Writing off bad debts
iii. Opening entries – the entries needed to open a new
set of books
iv. Drawings for goods or other assets from the business
by the owner, not cash drawings.
v. The correction of errors
vi. Other items: adjustments to any of the entries in the
ledgers
The format is as shown:
Dat Detail Debit Credi

e t
The name of the account to be debited
The name of the account to be x
credited
the narrative x
1. Purchase and sale of fixed assets
Ex. A machine was bought on
credit from Toolmakers Ltd for Rwf
550,000 on 1/7/2010
DrGeneral ledger Machinery a/c
Cr
1/7 Toolmakers
550,000

DrPurchaseToolmakers
ledger ltd a/c Cr
1/7 Machinery
550,000
The journal:
Dat Detail Debit Credit

e
Machinery 550,000
Toolmakers 550,00
Purchase of milling machine on 0
credit
2. Writing off bad debts
 Ex. A debt of 78,000 owing to us form Mander is written
off as a b. ad debts on 31 /8/2010(we have to stop
showing this debt as an asset)
THE LEDGER
• The ledger is simply the list of accounts.

The Ledger is classified into 3 main classes.
• Sales Ledger, which is a list of accounts of all
debtors.
• Purchases Ledger, which is a list of accounts of
all creditors.
• The General Ledger. Has all the other accounts
i.e. other assets, liability, incomes and expenses
and capital.
CHAPTER THREE: BANK RECONCILIATIONS
• Bank reconciliation refers to the process of

reconciling between bank balance as per the
company’s books of accounts(cash
book/nominal ledger) and bank balance as per
the bank statement
• Cash book: records all the transactions taking
place at the bank i.e. the movements of the
account held with the bank
BANK RECONCILIATIONS
• bank statement: this is statement showing a summary
of financial transactions which have occurred over a
given period on a bank account held by a person or
business and the balance as per a given date.
• It shows: Deposits,
withdrawals, checks paid, interest earned, and service
charges or penalties incurred on an account.
• Ideally, the records as per the bank and the
cashbook should be the same and therefore
the balance carried down in the cashbook
should be the same as the balance carried
down by the bank in the bank statement.
• In practice however, this is not the case and
the two (balance as per the bank and firm) are
different.
• Thus, A bank reconciliation statement will
explain the difference between the balance at
the bank as per the cashbook and balance at
bank as per the bank statement
– CAUSES/REASONS OF THE DIFFERENCES:
• i) Items Appearing In the Cashbook but
Not Reflected In The Bank Statement
• Unpresented Cheques
• Uncredited deposits/cheques
• Errors made in the cashbook……..including:
Payments over/understated
Deposits over/understated
Deposits and payments mis-posted
Overcastting and under casting the Bal c/d in the cashbook.
• ii) Items appearing in the bank statement
and not reflected in the cashbook:
• Bank charges: These charges include service,
commission or cheques.
• Interest charges on overdrafts.
• Direct Debits (standing orders) e.g. to pay
Sonarwa insurance.
• Dishonored cheques…..
• Direct credits
• Interest Income/Dividend incomes
• Errors on the Bank Statement (made by the
Bank)including:
• Overstating/understating.
• Deposits
• Withdrawals
Cont………
Reasons for a cheque to be dishonored:
1.Stale cheques--- presented at the paying bank after a
certain period (typically six months) of its payment date
2.Post – dated cheques

3.Insufficient funds
4.Differences in amounts in words and figures.
THE PURPOSES OF A BANK RECONCILIATION
STATEMENT
1.To update the cashbook with some of the items
appearing in the bank statement but not in the
cashbook e.g. bank charges, interest charges and
dishonored cheques .
2.To detect and prevent errors or frauds relating to the
cashbook.
3.To detect and prevent errors or frauds relating to the
bank.
• STEPS IN PREPARING A BANK RECONCILIATION STATEMENT
• Update the cashbook with the items
appearing in the bank statement and not
appearing in the cashbook except for errors in
the bank statement.
• Compare the debit side of the cashbook with
the credit side of the bank statement to
determine the uncredited deposits by the
bank.
• Compare the credit side of the cashbook with
the debit side of the bank statement to
determine the un-presented cheques.
• Prepare the bank reconciliation statement as
per the format below:
Frw Frw
Balance at bank as per cashbook x
(updated)
Add:
Un presented cheques x
Errors increasing the bank Statement x
x
Less:
Un-credited deposits/cheques x
Errors decreasing the bank Statement (x)
x
Balance at bank as per bank statement x
PREPARATION OF FINANCIAL
STATEMENTS( without adjustemnts)
• from double entry records, it is possible to

prepare the ﬁnancial statements of sole
traders.
CHAP FOUR:
ADJUSTMENTS FOR
FINANCIAL STATEMENT
1. Accruals and Prepayments
• Expenses and revenues are not always paid or
received on time.
• Cash paid and received in a year should not be
entered directly into the profit and loss
account of that year.
• Adjustment should be made.
Prepaid expenses
those to be used in the following period but have
been paid for in advance. EXPENSES PAID IN
ADVANCE
Accrued expenses
those which have been used up in the current year,
but have not yet been paid for. EXPENESES
INCURRED BUT NOT YET PAID----PAID IN ARREARS
Prepaid income
those to be earned in the following period but have
been received in advance. INCOMES RECEIVED IN
ADVANCE
Accrued income
those which have been earned in the current
period but have not yet been received.
Example
• 2 firms who pay rent for buildings in Hong
Kong. The rent for each building is $1,200 a
year.
1. Firm A paid $1,000 in the year. Own $200 for
rent.
2. Firm B paid $1,300 in the year. $100 in advance
for the following year.
• P & L accounts for 12 months needs 12
months rent as an expense = $1,200.
1. Firm A, $200 accrued expenses be
adjusted.
2. Firm B, $100 prepaid expenses be
adjusted
Accrued Expenses
Accrued expenses
• Assume that rent of $1,000 per year is
payable at the end of every 3 months.
• The rent was not always paid on time
Amount Rent due Rent paid
$250 31 March 2005 31 March 2005
$250 30 June 2005 2 July 2005
$250 30 Sept. 2005 4 Oct. 2005
$250 31 Dec. 2005 5 January
2006
Rent
2005 $ 2005 $
Mar 31 Bank 250 Dec 31 Profit and loss 1,000
Jul 2 Bank 250
Oct 4 Bank 250
Dec 31 Accrued c/d 250
1,000 1,000
2006
Jan 1 Accrued b/d 250
Prepaid Expenses
Prepaid expenses
• Insurance for a firm is at the rate $840 a
year, starting from 11 January 2005.
• The firm has agreed to pay this at the rate
of $210 every 3 months.
Amount Insurance due Insurance paid
$210 31 March 2005 $210 28 Feb 2005
$210 30 June 2005

$420 31 Aug. 2005
$210 30 Sept. 2005
$210 31 Dec. 2005 $420 18 Nov. 2005
Insurance
2005 $ 2005 $
Feb 28 Bank 210 Dec 31 Profit and loss 840
Aug 31 Bank 420 Dec 31 Prepaid c/d 210
Nov 18 Bank 420
1,050 1,050
2006
Jan 1 Prepaid b/d 210
• Prepayment will also happen when items
other than purchases are bought for use in
the business, and they are not fully used up
in the period.
• For instance, stationery is normally not
entirely used up over the period in which it
is bought.
Example
• Year ended 31 December 2005
• Stationery bought in the year $2,200
• Stock of stationery in hand as at 31 December
2005 $400
Stationery
2005 2005 $
$
Dec 31 Bank 2,200 Dec 31 Profit and loss
1,800
Dec 31 Stock c/d 400
2,200 2,200
2006
Jan 1 Stock b/d 400
The stock of stationery is not added to the stock of unsold goods in hand in the
balance sheet, but is added to the other prepayments of expense.
Accrued Income
Accrued income
• Assumed our warehouse is larger than we
need. We rent part of it to another firm for
$800 per annum.
Amount Rent due Rent received
$200 31 March 2005 4 April 2005
$200 30 June 2005 6 July 2005
$200 30 Sept. 2005 9 Oct. 2005
$200 31 Dec. 2005 7 Jan. 2006
Rent receivable
2005 2005
$
Dec 31 Profit and Loss 800 $ 5
Apr Bank 200
Jul 6 Bank 200
Oct 9 Bank 200
Dec 31 Accrued c/d 200
800
800
2006
Jan 1 Accrued b/d 200
Expenses and revenue accounts
covering more than one period
Example:
• On 31 Dec. 2004 3 months rent of $3,000 was
owing.
• The rent chargeable per year was $12,000.
• The following payments were made in the year
2005: 6 Jan. $3,000; 4 April $3,000; 7 July
$3,000; 18 Oct $3,000
• The final 3 months rent for 2005 is still owing.
Rent
2005 2005
$ 6
Jan Bank $
Jan 1
Accrued b/d 3,000
3,000
Apr 4 Bank 3,000 Dec 31 Profit and loss 12,000
Jul 7 Bank 3,000
Oct 18 Bank 3,000
Dec 31 Accrued c/d 3,000
15,000 15,000
2006
Jan 1 Owning b/d 3000
Example
Rent and rates are joined together.
• Rent is payable of 6000 per annum
• Rates of $4,000 per annum are payable by
instalments.
• At 1 Jan 20x5 rent $1,000 had been prepaid in 20x4.
• On 1 Jan 20x5 rates were owned of $400.
• During 20x5 rent was paid $4,500.
• During 20x5 rates were paid $5,000.
• On 31 Dec 20x5 rent $500 was owing.
• On 31 Dec 20x5 rates of $600 had been
prepaid.
Rent and Rates
2005 2005
$ 1
Jan Rent prepaid b/d $
Jan 1 Rates owing b/d
Dec1,000
31 Bank: rent 4,500 Dec 31400
Profit and loss 10,000
Dec 31 Bank: rates 5,000Dec 31 Rates prepaid c/d 600
Dec 31 Owing c/d 500
11,000 11,000
2006 2006
Jan 1 Prepaid b/d 600 Jan 1 Owing b/d 500
Expenses for the period
= Cash paid – Accruals in last year + Accruals in
this year + Prepayments in last year –
Prepayment in this year
Income for the period
= Receipt – Accruals in last year + Accruals in this
year + Prepayments in last year –
Prepayments in this year
2. Bad debts and Provision for
Bad debts
Bad Debts
• When the firm finds that it is impossible to

collect a debt, that debt should be written
off as a bad debt.
• Accounting Entries:
With the irrecoverable amount of a
Dr Bad Debts debt
Cr Debtor
Example
• During the year, a company sold goods for
$2,000 to Mr. Lee, $1,500 to Mr.Wong and
$300 to Mr. Wu.
• Mr. Lee and Mr. Wong paid the company
$800 and $1,000 respectively
• Later, Mr. Wong and Mr. Wu became
bankrupt, and it is impossible for the
company to collect these debts.
• The company decided to write these off as
bad debts.
Mr. Lee
$ $
Sales 2,000 Bank 800
Balance c/f 1,200
2,000 2,000
Mr. Wong
$ $
Sales 1,500 Bank 1,000
Bad Debts 500
1,500 1,500
Mr. Wu
$ $
Sales Bad Debts 300
300
Bad Debts
$ $
Mr. Wong 500 P/L 800
Mr. Wu 300
800 800
B. Provision for Bad / Doubtful Debts
• A provision for bad and doubtful debts may be
made when a firm thinks that there will be
problems in recovering a debt.
Accounting entries
1. Increase in
provision With the increase in the amount of
Dr Profit and Loss provision for bad debts
Cr Provision for Bad
Debts
2. Decrease in
provision With the decrease in the amount of
Dr Provision for Bad provision for bad debts
Debts
Cr Profit and Loss
Increase in provision for bad debts
Example
A firm decided to make a provision for bad

debts at 10% of the debtors’ accounts
which totalled $50,000 on 31 December
1994.
On 31 December 1995, the debtors
accounts totalled $60,000. The firm
maintained the provision at 10% of its total
debtors.
Provision for Bad Debts
1994 $ 1994 $
Dec 31 Balance c/d 5,000Dec 31 Profit and loss 5,000
($50,000 * 10%)
Profit and Loss Account for the year ended 31 December

(Extract)
1994
$ $
Gross profit
X
Less: Expenses
Increase in provision for bad debt 5,000
Balance Sheet as at 31 December (Extract)

1994
Current Assets
Debtors 50,000
Less: provision for bad debt5,000
45,000
1994 $ 1994 $
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss
5,000
($50,000 * 10%)
1995 1995
Dec 31 Balance c/f Jan 1 Balance b/d 5,000
($60,000*10%) 6,000Dec 31 Profit and Loss 1,000
6,000 6,000

(Extract)
1994 1995
$ $ $ $
Gross profit
X X
Less: Expenses
Increase in provision for bad debt 5,000 1,000
1994 1995
Current Assets
Debtors 50,000 60,000
Less: provision for bad debt5,000 6,000
45,000 54,000
Decrease in Provision for bad debts
Example
The debtors’ accounts on 31 December

1996 totalled $40,000. The firm decided to
maintain the provision at 10% of the total
debtors.
1994 $ 1994 $
Dec 31 Balance c/d 5,000 Dec 31 Profit and loss
5,000
($50,000 * 10%)
1995 1995
Dec 31 Balance c/f Jan 1 Balance b/d 5,000
($60,000*10%) 6,000Dec 31 Profit and Loss 1,000
6,000 6,000
1996 $ 1996 $
Dec 31 Profit and Loss 2,000Jan 1 Bal b/f 6,000
31 Balance c/f
($40,000*10%) 4,000
6,000 6,000
(Extract)
1994 1995 1996
$ $ $ $ $ $
Gross profit
X X X
Add: Decrease in provision for bad debts
Less:
2,000Expenses
Increase in provision for bad debt 5,000 1,000

1994 1995 1996
Current Assets
Debtors 50,000 60,000 40,000
Less: provision for bad debt5,000 6,000 4,000
45,000 54,000 36,000
C. Bad Debts Recovered
• Bad debts recovered refers to debts formerly
written off to be recovered later.
Accounting
entries
Dr Debtors With the debt reinstated in the

Cr Bad Debts debtor’s account
Recovered
Dr Cash/Bank With the amount received
Cr Debtors
Dr Bad Debts With the debt written off in this
Recovered year to be recovered
Cr Bad Debts OR
OR With the debt written off in a
Dr Bad Debts previous year to be recovered
Recovered
Cr Profit and Loss
Example
The following balances were part of the trial
balance of Mr. Chan on 31 December 1996:
$
Debtors 10,000
Bad Debts 1,000
During the year, Mr. Chan received $300 and
$1,200 from debtors, whose debts had been
previously written off as bad debts in the current
year and last year respectively. No entry has been
made for these transactions
Bank
1996
$
Dec 31 Debtors 1,500
Debtors
1996 1996
$
Dec 31 Bal b/d 10,000 $
Dec 31 Bank 1,500
Dec 31 B.D.R. 300
Dec 31 B.D.R. 1,200
Bad Debt
1996 1996
$Dec 31 Bal b/d 1,000 Dec
$ 31 B.D.R. 300
Dec 31 P & L 700
1,000 1,000
Bad Debt Recovered
1996 1996
$ Dec 31 Bad Debt 300 $
Dec 31 Debtors 300
Dec 31 P & L
Dec 31 Debtors 1,200
1,200
1,500 1,500
(Extract) 1996
$ $
Gross profit X
Add: Bad Debt Recovered
1,200
Less: Expenses
Bad Debt 700
3. DEPRECIATION OF
NON CURRENT ASSETS
Introduction
Capital Expenditure: This is the amount
spent on the acquisition of a non-current
asset or adding value to a non-current asset.
Examples of expenses incurred in
acquisition:
1.Purchase price/cost of the asset.
2.Delivery/carriage inwards costs (e.g.
shipping charges or import taxes).
3. Installation
4. Demolition costs in order to
construct a new building.
5. Architect fees for construction and
supervision
6. Legal fees incurred in acquisition of a
new asset (e.g. lease agreement)
Introduction-------cont……….
Revenue Expenditure: There’s an amount

spent by the firm in the normal trading
process or to assist in earning revenues or
income. Examples:
1.Postage and stationery.
2.Carriage outwards (sales).
3.Repairs and maintenance.
Definition
Depreciation is defined as
the ‘ systematic
allocation of the
depreciable amount of
an asset over its
estimated useful life’.
The Objective of Depreciation
• According to the matching concept, revenues
should be matched with expenses in order to
determine the true accounting profit.
• The cost of the asset purchased should be
spread over the periods in which the asset will
benefit a company.
Depreciable Assets
• The assets are acquired or constructed with the
intention of being used and not with the intention
for resale.
• Assets are regarded as depreciable when they
– Are expected to be used in more than one
accounting period.
– Have a finite useful life, and
– Are held for use in the production or supply of
goods and services, for rental to others, or for
administrative purposes.
Non-Depreciable Asset
• Freehold Land
– It has an indefinite useful life, and it retains its value
indefinitely.
• Leasehold Land (Long Lease)
– It has an unexpired lease period not less than 50
years
• Investment Property
– Which construction work and development have
been completed
– Which is held for its investment potential, any rental
income being negotiated at arm’s length.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or
lose value due to use overtime
 e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not
well maintained by the firm e.g. Some machines.
2. Economic Factors
a) Inadequacy: Some assets lose value due to them
becoming inadequate e.g. when a business grows or
expands then some buildings may become inadequate
due to space. Also some machines that are unable to
manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to
change in technology or different methods of
production e.g. computers.
Causes of Depreciation---CONT…….
• 3. Time Factors
• Some assets have a legal fixed time e.g.
properties on lease.
•
• 4. Depletion
• This occurs when some assets have a wasting
character due to extraction of raw materials,
minerals or oil. Such assets include mines, oil
wells, and quarries.
Depreciation Methods
• (A) Straight Line Method
• (B) Reducing Balance Method/Diminishing
Balance Method
• (C) Revaluation Method
• (D) Sum of Digits Method/Sum of The Years’
Digits Method
• (E) Production Output Method/Units of
Production Method
(A) Straight Line Method
• Depreciation is computed by dividing the
depreciable amount of the asset by the
expected useful life.
Depreciation = Cost of Asset – Estimated Residual Value

Estimated Useful Life
Useful Economic Life
• Useful economic life is not equal to physical
life
• It is the period over which the present owner
intends to use the asset
• The period the asset is expected to be used in
the business.
Residual Value/ Scrap Value.
• It is the amount received after disposal of

the asset---value that an asset will have at
the end of its useful life
Cost of asset - Residual value = Total amount to be depreciated (depreciable
amount)
Example
Cost of asset $1200
Residual/scrap/salvage value $200
Estimated useful life 4 years
Annual charge for depreciation

= $1200-$200
4
= $1000
4
=$250
Cont……….
• Additional capital expenditures are made to
increase the value of a fixed asset
• Depreciation of those extra capital
expenditures should be charged over the
remaining useful life of the asset
Example
• A company bought a machine for $1,000 on 1

January 1996
• Estimated life of 4 years, no scrap value
• 1 January 1997, an additional motor of $90
was fitted into the machine
• Expected that the useful life of the machine
would not be affected
Depreciation for 1996
= $1000
4
= $250
Annual depreciation from 1997 onwards

= $1000 $90
4 +
3
= $280
(B) Reducing Balance Method / Diminishing
Balance Method
• Under this method, the firm determines a
fixed percentage rate that is applied on the
cost of the asset during the first period of use.
The same rate is applied in the subsequent
financial periods but the rate is applied on the
reduced value of the asset. (Cost of asset –
total depreciation provided to date).
Cont……………………..
• Reason
– Greater benefit is to be obtained from the early
years of using an asset
– Appropriate to use the reducing balance method
which charges more in the earlier years.
Annual Depreciation = Net Book Value x Depreciation Rate
= (Cost – Accumulated Depreciation) x Depreciation Rate

How to get depreciation Rate
n R
= (1 - ) x 100%
C
n=Useful life
R=Residual Value
C=Cost
Example
Cost of assets $10,000
Residual value $256
Useful life 4 years
Depreciation Rate
4 256
= (1 - ) x 100%
10,000
= (1 – 0.4) x 100%
= 60%
Annual Depreciation
Annual Depreciation
= Net Book Value x Depreciation Rate
= (Cost – Accumulated Depreciation) x Depreciation Rate
Year 1 (10,000-0) x 60% = $6,000

Year 2 (10,000 – 6,000) x 60% = $2,400
Year 3 (10,000 – 8,400) x 60% = $ 960
Year 4 (10,000 – 9,360) x 60% =$ 384
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(C) Revaluation Method
• For some small-value assets such as loose
tools Depreciation is computed as follows:
FRw
Valuation at the start xx
Acquisitions xx
Disposal (xx)
Expected value xx
Valuation at the end (xx)
Depreciation xx
Asset
Balance b/f opening P & L – Depreciation X

Bank purchases Balance c/f closing
X X
Depreciation for the year is the balancing figure.

Example
The value of the loose tools changes during 1996 as shown below:
1996
Jan 1 $2,000
Dec 31 $ 500
Dec 31 Value of loose tools $1,000
Loose Tools
1996 $ 1996 $
Jan 1 Balance b/f 2,000 Dec 31 P & L 1,500
Dec 31 Bank-purchases 500 Disposal 0
2,500 Dec 31 Balance c/f 1,000
2,500
Depreciation for the year = $1,500
(D) Sum of Digits Method / Sum of The Years’
Digits Method
• It provides higher depreciation to be charged

in the early years, and lower depreciation in
the later periods.
Sum of digits = n(n+1) / 2
Where n = Useful economic life (number of

years)
Depreciation should be charged as
follows:
Year 1 (Cost – Residual value) x n / Sum of digits

Year 2 (Cost – Residual value) x (n-1) / Sum of digits
With diminishing years of
Year 3 (Cost – Residual value) x (n-2) / Sum of digits life to run
Year 4 (Cost – Residual value) x (n-3) / Sum of digits
Year n (Cost – Residual value) x 1 / Sum of digits
No. of years remaining from start of the year

Depreciation= Sum of digits
x depreciable amount
Example
Cost of asset $9,000
Estimated useful life 5 years
No scrap value
Sum of digits = 5(5+1) / 2 = 15
Depreciation charge:
Year 1 $9,000 x 5/15 = $3,000
Year 2 $9,000 x 4/15 = $2,400
Year 3 $9,000 x 3/15 = $1,800
Year 4 $9,000 x 2/15 = $1,200
Year 5 $9,000 x 1/15 = $ 600

E. Production Output Method / Units of
Production Method
• Depreciation is computed with reference to
the use or output of the asset in that period.
• Depreciation is based on the number of units
produced by an asset
Example
• A company bought a machine at $10,000 and
expects that the machine would run for 2,000
hours during its life. It is expected to have no
scrap value.
Year 1 800 hours
Year 2 600 hours
Year 3 350 hours
Year 4 250 hours
Depreciation charge:
Year 1 $10,000 x 800/2,000 = $4,000
Year 2 $10,000 x 600/2,000 = $3,000
Year 3 $10,000 x 350/2,000 = $1,750
Year 4 $10,000 x 250/2,000 = $1,250

Accounting for Depreciation
Accounting Treatment
Dr. Non current Asset Purchase price and other capital

Cr. Cash/Bank/creditor expenditure
Dr. Profit and Loss(Depreciation)

Cr. Accumulated Depreciation
Example
• In a business with financial years ended 31
December. A machine is bought for $2,000 on 1
January Year 1. The estimated useful life is 5
years.
• You are to show:
– (a) Machinery account
– (b) Accumulated depreciation
– (c) Profit and loss account for the year ended
31 Dec Year 1, 2, and 3.
– (d) Balance sheet as at those date
• (1) Using straight line method and reducing
balance method, at the rate of 20%.
Straight Line Method
Year 1
Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,000 Dec 31 Bal c/d 2,000
Provision for dep. – Machinery

Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400

(2000/5)
Profit and Loss for the year ended 31 Dec
Year 1
$
Less: Expenses
Depreciation - Machinery
400
Balance Sheets as at 31 Dec
Year 1
$
Fixed Asset
Machinery at cost
2,000
Less: Provision for Dep.
400
1,600
Year 2
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400
Year 2 Year 2
Dec 31 Bal. c/d 800 Jan 1 Bal. b/d 400
Dec 31 P/L 400

800 (2000/5) 800
Year 1 Year 2
$ $
Less: Expenses
400 400
Year 1 Year 2
$ $
Fixed Asset
Machinery at cost
2,000 2,000
400 800
1,600 1,200
Year 3
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400
Year 2 Year 2
Dec 31 P/L 400

800 800
Year 3 Year 3
Dec 31 Bal. c/d 1,200 Jan 1 Bal. b/d 800
Dec 31 P/L 400
1,200 1,200
Year 1 Year 2 Year 3
$ $ $
Less: Expenses
400 400 400

$ $ $
Fixed Asset
Machinery at cost
2,000 2,000 2,000
400 800 1,200
1,600 1,200 800
Reducing Balance Method
Year 1 Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,000 Dec 31 Bal c/d 2,000

Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400

(2000*20%)
Year 1
$
Less: Expenses
400
Year 1
$
Fixed Asset
Machinery at cost
2,000
400
1,600
Year 2
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400
Year 2 Year 2
Dec 31 P/L 320

720 (2000-400)*20% 720
Year 1 Year 2
$ $
Less: Expenses
400 320
Year 1 Year 2
$ $
Fixed Asset
Machinery at cost
2,000 2,000
400 720
1,600 1,280
Year 3
Year 1 $ Year 1 $
Dec 31 Bal. c/d 400 Dec 31 P/L 400
Year 2 Year 2
Dec 31 P/L 320

720 720
Year 3 Year 3
Dec 31 P/L 256
976 (2000-720)*20% 976

$ $ $
Less: Expenses
400 320 256

$ $ $
Fixed Asset
Machinery at cost
2,000 2,000 2,000
400 720 976
1,600 1,280 1,024
Disposal of non-current assets
• On disposal(sale) of non-current assets, the
profit or loss from the disposal has to be
determined.
• The following steps are to be followed:

Accounting Treatment
1. Dr. Disposal
Transferring cost to disposal
Cr. Non current asset
2. Dr. Accumulated
Depreciation Transferring depreciation already
charged on the assets disposed
Cr. Disposal
3.Dr. Cash / bank/debtor/asset Proceeds received / receivable on
Cr. Disposal the disposal
In case of loss on the disposal (proceeds less than Carrying amount )
4. a) Dr. Profit and Loss
With any loss on the disposal
Cr. Disposal
In case of profit on the disposal (proceeds greater than Carrying
amount )
4.b) Dr. Disposal
With any profit on the disposal
Cr. Profit and Loss
Example
• In a business with financial years ended 31
December. A machine is bought for $2,000 on 1
January Year 1. The estimated useful life is 5
years. In Year 4, the machinery has been sold for
$1,070. Show the accounting entries:
• You are to show:
– (a) Machinery account
– (b) Provision for depreciation
– (c) Disposal account
– (d) Profit and loss account and Balance sheet
as at 31 Dec Year 4
Machinery
Year 4 $ Year 4 $
Jan 1 Bal. b/d 2,000 Dec 31 Disposal 2,000
Pro. For Dep.
Year 4 $ Year 4 $
Dec 31 Disposal 976 Jan 1 Bal. b/d 976
Disposal
Year 4 $ Year 4 $
Dec 31 Machinery 2,000 Dec 31 Pro. For Dep. 976
Dec 31 P/L – gain 46 Dec 31 Bank 1,070
2,046 2,046
Year 4
$ $
Gross profit X
Add: Gains on disposal 46
Less: Expenses
Loss on disposal X
E.g. if the machinery was sold for $ 900.

Disposal
Year 4 $ Year 4 $
Dec 31 Machinery 2,000 Dec 31 Pro. For Dep. 976

Dec 31 Bank 900
Dec 31 P/L- loss on 124
disposal
2,000 2,000
Depreciation on monthly/full-year
basis
Assumptions on depreciation for assets acquired or
disposed during the year
1. Proportional depreciation for assets acquired or
disposed during the year (pro-rata basis – according to
the number of months the asset was used)
2. Full years depreciation in the year of acquisition
but none in the year of disposal
3. Proportional depreciation in the year of acquisition
but none in the year of disposal
4. Full years depreciation in the year of acquisition
and proportional depreciation in the year of disposal
Example
• A company bought two motor vehicles for $2,400
each on 1 July 1996. One of the vehicles was sold for
$1,500 on 1 April 1998.
• Depreciation is to be charged:
1. At 20% on the straight line basis (monthly basis)
2. At 20%, using the straight line method,and bases on
assets in existence at the end of each year, ignoring
items sold during the year
• Prepare the following accounts:
Motor vehicle account
Provision for depreciation,
Disposal account for the year ended 31 Dec 1996,1997 and 1998.
(1.)
Motor Vehicles
1996 $ 1996 $
July 1 Bank 4,800 Dec 31 Bal. c/d 4,800
Provision for dep. – Motor Vehicles

1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 P/L 480
($4,800 x 20% x 6/12)
Motor Vehicles
1996 $ 1996 $

1997 1997
Jan 1 Bal. b/d 4,800 Dec 31 Bal. c/d 4,800
1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 P/L
($4,800 x 20% x 6/12) 480
1997 1997
Dec 31 P/L
($4,800 x 20%) 960
1,440 1,440
Motor Vehicles
1996 $ $
1997 Year 2
1998 1998
Jan 1 Bal. b/d 4,800 Apr 1 Disposal of MV 2,400
Dec 31 Bal. c/f 2,400
4,800 4,800
1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 P/L
($4,800 x 20% x 6/12) 480
1997 1997
Dec 31 P/L
($4,800 x 20%) 960
1,440 1,440
1998 1998
Dec 31 Disposal [$2,400 Jan 1 Bal. b/d 1,440
x 20% x (6/12 + 1 + 3/12)] 840 Dec 31 P/L ($2,400 x 20%
Dec 31 Bal. c/f 1,200 x 3/12 + $2,400 x 20%) 600
2,040 2,040
Disposal of Motor Vehicle
1998 $ 1998 $
Dec 31 Machinery 2,400 Apr 1 Pro. For Dep.[$2,400

x 20% x (6/12 + 1 + 3/12)] 840
Apr 1 Bank 1,500
Dec 31 P/L – loss 60
2,400 2,400
(2.)
Motor Vehicles
1996 $ 1996 $

1996 $ 1996 $
Dec 31 Bal. c/d 480 Dec 31 P/L 960
($4,800 x 20% )
Motor Vehicles
1996 $ 1996 $

1997 1997
1996 $ 1996 $
Dec 31 Bal. c/d 960 Dec 31 P/L ($4,800 x 20%) 960
1997 1997
Dec 31 P/L ($4,800 x 20%) 960
1,920 1,920
(2.)
Motor Vehicles
1996 $ 1996 $
1997 Year 2
1998 1998
Jan 1 Bal. b/d 4,800 Apr 1 Disposal 2,400
Dec 31 Bal. c/f 2,400
4,800 4,800
1996 $ 1996 $
Dec 31 Bal. c/d 960 Dec 31 P/L ($4,800 x 20%) 960
1997 1997
Dec 31 P/L ($4,800 x 20%) 960
1,920 1,920
1998 1998
Apr 1 Disposal ($2,400 Jan 1 Bal. b/d 1,920
x 20% x 2)] 960 Dec 31 P/L ($2,400 x 20%) 480
Dec 31 Bal. c/f 1,440
2,400 2,400
Disposal of Motor Vehicle
1998 $ 1998 $
Dec 31 Machinery 2,400 Apr 1 Pro. For Dep.($2,400

Dec 31 P/L – gain 60 x 20% x 2) 960
Apr 1 Bank 1,500
2,460 2,460
Trade-in-allowance/exchange
• The assets being trade in for a new assets
– Accounting entries:
• Dr. Fixed Assets
• Cr. Disposal
– With the trade-in value of disposed asset
Example
A company purchased machine for $2,500 each
on 1 Jan. Year 1.
 It is the company’s policy to provide for
depreciation on its machinery at a rate of 20%,
with a full year’s depreciation made in the year in
which a machine is purchased, but none in the
year of sale.
One machine was traded in and a new machine
for $4,000 was purchased on 1 Feb. Year 2.
The trade-in value of the old machine was $1,000.
Machinery
Year 1 $ Year 1 $
Jan 1 Bank 2,500 Dec 31 Bal. c/d 2,500
Provision for dep.-Machinery

Year 1 $ Year 1 $
Dec 31 Bal. c/d 500 Dec 31 P/L 500

(2500*20%)
Machinery
Year 2 $ Year 2 $
Jan 1 Bal. b/d 2,500 Feb 1 Disposal 2,500
Feb1 Disposal: trade- Dec 31 Bal. c/d 4,000
in-allowance 1,000
Feb1 Bank 3,000
6,500 6,500
Provision for dep.-Machinery
Year 1 $ Year 1 $
Dec 31 Bal. c/d 500 Dec 31 P/L 500
Year 2 Year 2
Feb 1 Disposal 500 Jan 1 Bal b/d 500
Disposal
Year 2 $ Year 2 $
Feb 1 Machinery 2,500 Feb1 Dep. 500
Feb 1 Machinery:
trade-in-allowance 1,000
2,500 2,500
•REVALUATION OF NON-CURRENT
ASSETS.
An allowed alternative subsequent to the
initial recognition, an asset, could be carried
at a revalued amount less any subsequent
accumulated depreciation. The revalued
amount is the fair value (market value) at the
date of revaluation.
In such a case the revaluation should be done
regularly and it should be for an entire class
of the assets concerned.
At the time of revaluation the accumulated
depreciation is either reduced from the non-
current asset before revaluation or
transferred directly to the revaluation
reserve. The increase/decrease in
cost/carrying amount is then transferred to
the revaluation reserve.
for an asset that is not depreciated ------
and there is increase
Dr Non-current asset X
Cr Revaluation reserve X
Revaluation increase
------ and there is decrease

Dr Profit/loss account X
Cr Non-current asset X
Revaluation decrease
For asset that is depreciated,
The revaluation is from the carrying amount at
the time of revaluation. In other words,
depreciation already provided on the asset
being revalued must be transferred out to the
revaluation account as part of the revaluation
process. The main point to understand is that
after the revaluation we start depreciating
using the revalued amount. The revalued
amount is apportioned over the remaining
useful life.
-----If there is a revaluation increase.
Dr Accumulated depreciation a/c X

Cr Non-current asset a/c X
Accumulated depreciation so far
Dr Non-current asset a/c X
Cr Revaluation surplus a/c X
Revaluation increase from carrying amount
-----If there is a revaluation decrease.
Dr Accumulated depreciation a/c X

Cr Non-current asset a/c X
Accumulated depreciation so far
Dr Profit & Loss a/c X
Cr Non Current Asset a/c X
Revaluation decrease from carrying amount
In a nutshell,
If an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be recognised in other
comprehensive income and accumulated in equity under the
heading of revaluation surplus. However, the increase shall
be recognised in profit or loss to the extent that it reverses a
revaluation decrease of the same asset previously
recognised in profit or loss.
If an asset’s carrying amount is decreased as a result of a

revaluation, the decrease shall be recognised in profit or
loss. However, the decrease shall be recognised in other
comprehensive income to the extent of any credit balance
existing in the revaluation surplus in respect of that asset.
The decrease recognized in other comprehensive income
reduces the amount accumulated in equity under the heading
of revaluation surplus.
CHAP FIVE--PREPARATION OF
FINANCIAL STATEMENTS
( with adjustments)
We prepare financial statements

after incorporating all adjustments
Income Statement
• Income statement: a statement showing the
financial performance (profitability) of the
business for a given period. It helps in the
computation of the profit or loss
• Profit/Loss= Incomes-expenses
Balance Sheet
• Balance sheet: statement showing the
financial position of the business as at a given
date. It shows the assets, capital and liabilities
• Assets=Capital+Liabilities
FORMATS
READ PAGE 71 and 72 IN THE
HANDOUT OF NOTES
CHAPT. SIX: RECTIFICATION OF
ERRORS AND SUSPENSE ACCOUNTS
• While recording transactions, posting to the
various accounts and extraction of list of
account balances, it is possible for errors to
be committed. Such errors may or may not
affect the totals of the list of account
balances.
TYPES OF ERRORS
• There are two major types of errors in
accounts:
Errors that do not affect the List of account
Errors that do affect the List of account
1. Errors that do not affect the List of
account balances (trial balance)
• When these errors are committed, The totals
of the list of account balances equal each
other. However, on taking a close check on
the balances and transactions posted, errors
may have been made and therefore the
balances shown on the list of account
balances may be incorrect
Errors cont……….
• Error of omission
• Here, a transaction is completely omitted
from the books of accounts and therefore the
double entry is not made--------transaction is
not recorded at all.
Example: sales invoice of 500,000Rwf found
under the table unrecorded
Errors Cont………
FRw FRw
Debit Account to be debited XX

Credit Account to be credited XX
To correct error of omission
Errors cont……
• Error of Commission
• This error occurs when a transaction is posted
to a wrong account but in correct class of
account
• Example: sales on credit to debtor MUGABE
was recorded to a debtor MUGABO
(Although the debit entry is made into the wrong
account, the two accounts are of the same class
of Debtors)
Errors cont…..
FRw FRw
Debit Account to be debited XX

Credit Account to be credited XX
To correct error of comission
Errors cont…..
• Error of Principle
This type of error occurs when a transaction is
posted to the wrong class of account------an
expense is recorded as an asset or a liability is
recorded as income
Example: Furniture purchased for FRw. 4,000
cash is debited to the Furniture repairs
account instead of debiting Furniture account
Errors cont……
• To correct such an error, the amount in the
wrong class of account has to be removed and
transferred to the right class of account.
FRw FRw
Debit Furniture account 4,000
Credit Furniture repairs account 4,000
To correct error of principle
Errors cont……
• Complete reversal of entries
• A transaction is posted to the correct accounts
but to the wrong sides of the accounts
An account to be debited is credited and an
account to be credited is debited
Example: sales on credit is debited to sales and
credited to debtor
Errors cont….
• To correct this error:
FRw FR
w
Debit Account to be debited ( with double amount) XX
Credit Account to be credited ( with double amount) XX
To correct error of complete reversal
Errors cont…..
• Error of Original entry
Here a transaction is posted to the correct accounts but the
amount posted is not correct. That is, it is either
under/over stated
It is possible that the figure in the amount might be
interchanged. Such is a transposition error/ factor 9 error
To correct this error, the amount understated or overstated
is posted to these accounts so as to increase or reduce
the amounts in the accounts to get the right amount
Errors cont…..
• Compensating Errors
• These are errors that have the effect that tend
to cancel out each other in amounts. That is, if
the effect of one error is to understate the
debits or credits then another error may take
place to overstate the debits or credits by the
same amount, hence canceling out each
other.
2. Errors affecting trial balance and
the suspense account
• When these errors are committed , the totals of debit
balances will not equal the totals of credit balances
• They include:
 Transaction amount is posted only on one side of the accounts
 A transaction is posted only on one side of both accounts
 A transaction is posted correctly following double entry but different
amounts
 Error on balances of accounts. Under/overstatement of an account
balances
 Balance on an account is shown on the wrong side of the account
when opening the ledger accounts or when taken up to the trial
balance
 A balance is omitted from the trial balance
SUSPENSE ACCOUNT
• To correct such errors, only one account will be
needed. The other account to fulfill double entry
will be the suspense account.
• Suspense account is a temporary account that is
opened to take care of differences between the
totals of trial balances.
• This account can also be used in case a bookkeeper
does not know the other account to debit or credit
• Suspense account is posted on the lowest side
Suspense account
• The balance in the suspense account has to be
cleared by correction of errors.
• All efforts should be done to clear the
suspense account.
• However, If the balance is not cleared , will
be shown in financial statements as follows:
Suspense account
• If material the amount is carried to the
balance sheet as a current asset (if debit
balance) or current liability (if credit balance).
• If immaterial, the amount is shown in the
income statement as an expense (if debit
balance) or income (if credit balance).
• Materiality will depend on amounts and the
cut-off-point given for a given organization
Statement of corrected profit and revised
balance sheet
• It is possible after preparation of financial
statements, that errors are discovered and
corrected. In there correction, profit originally
calculated may be affected. Furthermore the
balances reported in the balance sheet may
also change.
Statement of corrected net profit
FRw. FRw.
Net profit/Loss as per account/IS XX
Add:
increase in Sales XX
Decrease in purchases XX
increase in incomes XX
Decrease in expenses XX XX
Less:
Decrease in sales XX
Increase in purchases XX
Increase in expenses XX
Decrease in incomes XX (XX)
Corrected net profit/Loss XXX
CHAPTER SEVEN: CONTROL
ACCOUNTS
• Control account is a summary account appearing in
the general ledger for the purpose of controlling the
accuracy of the detailed postings to other ledgers
(SALES AND PURCHASES LEDGERS).
• Control accounts are so called because they control
a section of the ledgers.
• By control we mean that the total on the control
accounts should be the same as the totals on the
ledger accounts
Types of Control Accounts
• Sales ledger control Account (also known as
debtors or accounts receivable control
account)—prepared to ensure the accuracy of
sales ledger( list of accounts of debtors)
• Purchases Ledger Control Account (also
known as creditors or accounts payable
control account) )—prepared to ensure the
accuracy of purchases ledger( list of accounts
of creditors)
PURPOSE OF CONTROL ACCOUNTS
1. Provide for arithmetical check on the
postings made in the individual accounts of
debtors/creditors
2. To provide for a quick total of the balances in
a trial balance
3. To detect and prevent errors and frauds in
the customers and suppliers account.
4. To facilitate delegation of duties among the
debtors and creditors clerks.
FORMATS OF CONTROL ACCOUNTS
Sales ledger/Debtors/Accounts Receivable control account
Debit Credi
t
FRw. FRw.
Balance b/f XX Balance b/f XX
Credit sales XX Cash/Bank (receipts from XX
debtors)
Bank (refunds to customers) XX Bills of exchange XX
receivable
Bank (dishonoured cheque) XX Returns inwards XX
Bad debts recovered XX Bad debts XX
Discounts allowed
Other allowances XX
Contras XX
Balance c/f XX Balance c/f XX
XX XX
FORMATS
Purchases ledger control account
FRw. FRw
.
Balance b/f XX Balance b/f XX
Cash/bank (payment to XX Credit purchase XX
suppliers)
Bill of exchange payable XX Cash/bank (refunds by XX
suppliers)
Discount received
Other allowance (by supplier) XX
Returns out XX
Contra XX
Balance c/f XX Balance c/f XX
XX XX
Contras
• This represents a situation where a

supplier/Creditor is also a customer/debtor.
The contra is a settlement between creditor
and debtor so as to find out how much to pay
or receive as the difference in the account.
• Contra is recorded in both accounts
• EXAMPLES
END OF THE SEMESTER
299
CONT………..
300
Bye……………………
301

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INDICATIVE CONTENT

INTRODUCTION TO FINANCIAL ACCOUNTING

DOUBLE ENTRY BOOK-KEEPING

RECTIFICATION OF ERRORS AND

Accounting is defined as the process of identifying, recording,

Many businesses carry out transactions. With a financial

Accounting is involved with identifying these transactions

 Accounting is the language of business and it is used to

 In order for that information to make sense, accounting is

 By using these concepts as the foundation, readers of

• Financial position of a firm is what the resources the business

• The financial performance reflects how the business has

• Changes in financial positions determine whether the

• This information will enable them to assess how the managers

• This information would enable them to assess whether they can

 The other government agencies are interested : to be able

The Financial Analyst and Advisors

 To advise their clients on how much is the value their

 This information would be important as they can use it to negotiate

 This responsibility is in form the employment opportunities the firm

Other forms of businesses

 Cooperatives – members come together to start the business to

 Information has the quality of being relevant when it influences the

 Be accounted for and presented in accordance with their

 Include some degree of caution especially where

 Be complete i.e. must be within the bounds of materiality

1. The going concern concept:

 A business firm will continue to carry on its activities for an

 This concept facilitates preparation of financial statements.

 It is of great help to the investors, because, it assures them that

 In the absence of this concept, the cost of a fixed asset will be

 A business is judged for its capacity to earn profits in future

Example. Suppose Mr. Sahoo started business

 Now suppose, he takes away Rwf5,000 cash or goods

 This withdrawal of cash/goods by the owner from the

 Thus, the business entity concept states that business

 The money measurement concept states that

 As per the money measurement concept, transactions

– But the transactions which cannot be expressed in

All the transactions are recorded in the

• Thus, this concept requires that a

• This is necessary for different purposes

An important advantage of this procedure is that the

Further, this concept assumes that,

But usually one year is taken as one

 For example, a machine was purchased by XYZ Limited

Suppose the market price of the same is now Rwf 90,000

Every transaction has two-fold effect in the accounts

Goods purchased for cash has two aspects :

Capital brought in by the owner of the business

• Goods sold for cash

• Rent paid in cash to the landlord

Realization: Revenue and profits are recognized when

The revenue for the year 2005 for N.P. Jeweller is

Example: a firm sells goods for Rwf 55,000 on

It must be included in the revenue for the year

Example: if the firm received goods costing

the accrual concept requires that expenses

The prudence concept states that where