ACCA F3 - FA Support Material by FBT

F B T P U B L I SH I N G A C CA F 3 F i n a n c i a l A c c o u n t i n g P a g e 1
ACCA F3
FINANCIAL ACCOUNTING
Int er nat i onal St r eam
TUITION
CLASS NOTES


Appendi x
The f ol l ow i ng n ot es ar e sui t abl e f or bot h t he i nt er nat i onal and UK st r eams. Ther e wi l l some
t er minol ogy di f f er ences bet w een t he t w o st r eams. These ar e summar i sed bel ow :

Int ernat ional UK
St at ement of compr ehensi ve i ncome Pr of i t and l oss account
St at ement of f i nanci al posi t i on Bal ance sheet
Non-cur r ent asset s Fi xed asset s
Invent or y St ock
Tr ade r ecei vabl es Debt or s
Non-cur r ent l i abi l i t i es Long t er m l i abi l i t i es
Tr ade payabl es Cr edi t or s
Ir r ecover abl e debt s Bad debt s

F B T P U B L I SH I N G A C CA F 3 F i n a n c i a l A c c o u n t i n g P a g e S

Cont ent s
Paper backgr ound
Sessi on 1 Int r oduct i on t o accou nt i ng
Sessi on 2 Fi nanci al st at ement s
Sessi on 3 Doubl e ent r y book keepi ng
Sessi on 4 Non-cur r ent asset s
Sessi on 5 Invent ory
Sessi on 6 Ir r ecover able Debt s
Sessi on 7 Cont r ol Account s
Sessi on 8 Bank Reconci l i at i ons
Sessi on 9 Accr uals and pr epayment s
Sessi on 10 Li mi t ed Company account s
Sessi on 11 St at ement s of cash f l ow
Sessi on 12 Incomplet e r ecor ds
Sessi on 13 Par t ner shi ps


Paper backgr ound
Ai m
The ai m of t hi s paper i s t o devel op know l edge and under st andi ng of t he under l yi ng pr i nci pl es and
concept s r el at i ng t o f i nanci al account i ng and t echni cal pr of i ci ency i n t he use of doubl e-ent r y
account i ng t echni ques i ncl udi ng t he pr epar at i on of basi c f i nanci al st at ement s.

M ai n capabi l i t i es
On compl et i on of t hi s paper , you shoul d be abl e t o:
Expl ai n t he cont ext and pur pose of f i nanci al r epor t i ng
Def i ne t he qual i t at i ve char act er i st i cs of f i nanci al i nf or mat i on and t he f undament al bases of
account i ng
Demonst r at e t he use of doubl e-ent r y and account i ng syst ems
Recor d t r ansact i ons and event s
Pr epar e a t r i al bal ance (i ncl udi ng i dent i f yi ng and cor r ect i ng er r or s)
Pr epar e basi c f i nanci al st at ement s f or i ncor por at ed an d uni ncor por at ed ent i t i es

The assessment
The exam can be sat ei t her w r i t t en or comput er based, bot h met hods ar e 2 hour s l ong.
Wr i t t en
40 x 2 mar k quest i ons M ul t i pl e choi ce A / B / C / D
10 X 1 mar k quest i ons M ul t i pl e choi ce A / B or A / B / C
Comput er based
40 x 2 mar k quest i ons Quest i ons can be mul t i pl e choi ce, mul t i pl e r esponse, mat chi ng or number
ent r y
10 x 1 mar k quest i ons M ul t i pl e r esponse (cor r ect l y i dent i f y t wo f r om t hr ee r i ght answer s)
The pass mar k i s 50%
SESSION 1 INTRODUCTION TO ACCOUNTING

F B T P U B L I SH I N G A C CA F 3 F i n a n c i a l A c c o u n t i n g P a g e S

Lear ni ng out comes
Under st and t he pur pose of account i ng
Ident i f y t he di f f er ent t ypes of busi nesses
Indent i f y t he user s of account s
Expl ai n t he qual i t at i ve char act er i st i cs of f i nanci al st at ement s
Under st and t he under l yi ng assumpt i ons of f i nanci al st at ement s

Int r oduct i on
WHAT IS ACCOUNTING?
Account i ng i s made up of t w o el ement s:
I. Recor di ng busi ness t r ansact i ons - Book keepi ng
II. Pr esent i ng t he i nf or mat i on
WHAT IS A BUSINESS?
A busi ness i s a commer ci al or gani sat i on w hi ch exi st s wi t h a vi ew t o maki ng a pr of i t . Ther e ar e
di f f er ent t ypes of busi nesses whi ch wi l l f al l i nt o 3 cat egor i es:
Sol e Tr ader
Thi s i s a busi ness t hat i s ow ned and oper at ed by o ne p er son
Par t nership
Thi s t ype of busi ness i s ow ned by sever al i ndi vi dual s, some of w hi ch wi l l act i vel y be i nvol ved i n t he
busi ness
Compani es
Thi s t ype of busi ness i s owned by shar ehol der s and i s oper at ed on t hei r behal f by a nomi nat ed boar d
of di r ect or s. Compani es wi l l be cover ed i n gr eat er det ai l i n l at er sessi ons


User s of account s
The user s of account s wi l l depend on t he t ype of account s t hat ar e pr odu ced. Ther e ar e t wo mai n
t ypes of account s:
M anagement account s
Fi nanci al account s
M anagement account s
These ar e pr oduced as of t en as a busi ness want s t hem (usual l y mont hl y). They ar e pr oduced f or
i nt er nal use and w i l l not , usual l y be seen by ext er nal peopl e. M anagement account s can be
pr epar ed usi ng t he company s ow n i nt er nal pol i ci es.
Fi nanci al account s
These account s ar e usual l y pr oduced annual l y. They ar e based on hi st or i cal i nf or mat i on and ar e
r ar el y used i nt er nall y. Fi nanci al account s ar e used by ext er nal user s f or sever al r easons:
Invest or s

Lender s

Empl oyees

Gover nment

Publ i c


SESSION 2 FINANCIAL STATEM ENTS
Af t er compl et i ng t hi s chapt er , you shoul d be abl e t o:
Ident i f y t he l ayout of a St at ement of Fi nanci al Posi t i on f or a sol e t r ader and a company
Ident i f y t he l ayout of a St at ement of Compr ehensi ve i ncome f or a sol e t r ader an d a
company
Under st and t he pr i nci pl es and l ayout f or a St at ement of Changes i n Equi t y

Int r oduct i on
Ther e ar e f our key f i nanci al st at ement s:
St at ement of Fi nanci al Posit i on
Thi s f i nanci al st at ement l i st s t he asset s and l i abi l i t i es of a busi ness at a p oi nt i n t i me. It i s a snapshot
of t he company s posi t i on AS AT A POINT IN TIM E
St at ement of Compr ehensi ve Income
Thi s st at ement i s a summar y of t he i ncome and expendi t ur e of t he busi ness f or a PERIOD OF TIM E .
St at ement of Changes i n Equi t y
Thi s st at ement l i nks t he st at ement s of compr ehensi ve i ncome and f i nanci al posi t i on.
St at ement of Cash Fl ow
The st at ement of cash f l ow r epor t s t he cash gener at i on and cash absor pt i on f or a PERIOD OF TIM E .

The st ar t i ng poi nt i n t he pr epar at i on of t he f i nanci al st at ement s i s t o pr oduce a TRIAL BALANCE. The
t r i al bal ance i s basi cal l y a l i st of l edger bal ances. A busi ness wi l l use a t r i al bal ance as an INDICATION
t hat al l account i ng ent r i es have been r ecor ded and al l ent r i es ar e cor r ect .
A t r i al bal ance M UST bal ance. If t her e i s an i mbal ance, t hi s i ndi cat es an er r or i n t he i ni t i al ent r i es. I n
t hi s case a suspense account i s cr eat ed unt i l t he er r or s can be det ect ed.


Pr of or ma set of f i nanci al st at ement s f or a sol e t r ader .
St at ement of Fi nanci al Posi t i on as at 31 December 2007
Non cur r ent asset s
Cost Dep n NBV

Bui l di ngs 150,000 (12,000) 138,000
Fi xt ur es and f i t t i ngs 45,000 (11,250) 33,750
M ot or vehi cl es 26,000 (13,260) 12,740

221,000 (36,510) 184,490

Cur r ent asset s

Invent or y 13,777
Tr ade r ecei vabl es 12,775
Pr epayment s 2,800
Cash 3,400 32,752

Tot al asset s 217,242

Openi ng capi t al 152,465
Pr of i t 51,787
Dr aw i ngs (35,900) 168,352

Non cur r ent l i abi l i t i es

Loan 20,000

Cur r ent l i abi l i t i es

Tr ade payabl es 12,445
Accr ued Loan i nt er est 1,000
Ot her accr ual s 15,445 28,890

Tot al l i abi l i t i es 217,242


St at ement of Compr ehensi ve Income f or t he year ended 31 December 2007
Revenue 233,000

Less: Cost of sal es

Openi ng i nvent or y 12,332
Pur chases 119,098
Car r i age i nw ar ds 1,009
132,439
Cl osi ng i nvent or y (13,777) 118,662

GROSS PROFIT 114,338

Di scount s r ecei ved 5,111

Ot her i ncome 4,000

123,449

Less: Expenses

Di scount s al l ow ed 3,444
Depr eci at i on 10,710
Gas and el ect r i ci t y 14,122
Ir r ecover abl e debt s 7,134
Loan i nt er est 4,000
Car r i age out w ar ds 5,666
Wat er r at es 8,444
Adver t i si ng 15,000
Ot her expenses 3,142 71,662

NET PROFIT 51,787

F B T P U B L I SH I N G A C CA F 3 F i n a n c i a l A c c o u n t i n g P a g e 1 0

Pr of or ma set of f i nanci al st at ement s f or a l i mi t ed company or Pl c
St at ement of f i nanci al posi t i on as at 31 December 2007
Not e
Int angi bl e asset s 6 200,000
Tangi bl e asset s 7 187,999

Cur r ent asset s

Invent or y 8 88,432
Tr ade r ecei vabl es 9 97,455
Cash 13,400 199,287


Equi t y and l i abi l i t i es

Shar e capi t al 100,000
Ret ai ned ear ni ngs 220,497
Reval uat i on r eser ve 7 38,000 358,497


Int er est bear i ng bor r ow i ngs 10 100,000


Taxat i on 5 51,000 128,789



St at ement of compr ehensi ve i ncome f or t he year ended 31 December 2007

Not e
Revenue (Sal es) 385,000

Cost of sal es 1 188,000


Di st r i but i on cost s 2 38,500

Admi ni st r at i on expenses 3 37,700

PROFIT FROM OPERATIONS 120,800

Fi nance cost s 8,000

PROFIT BEFORE TAX 112,800

Income t ax 53,000

PROFIT FOR THE PERIOD 59,800

St at ement Of Changes In Equi t y f or t he year ended 31 December 2007 (SOCIE)
Shar e Ret ai ned Reval uat ion
Capi t al Ear ni ngs Reser ve Tot al

Bal ance as at 1

Jan 2007 100,000 188,697 40,000 328,697

Pr of i t f or t he per i od 59,800 59,800

Sur pl us depr eci at i on (not impt f or F 3) 2,000 (2,000)

Di vi dend pai d (30,000) (30,000)

Cl osi ng bal ance 100,000 220,497 38,000 358,497

The f or mat f or company account s i s l ai d dow n i n I.A.S. 1 Pr esent at i on of Fi nanci al St at ement s. Thi s
st r uct ur ed f or mat ai ds compar abi l i t y and makes i nf ormat i on mor e usef ul .
Not es det ai l i ng t he bal ances i n t he f i nanci al st at ement s ar e pr ovi ded gi vi ng a det ai l ed br eakdown of
t he bal ance.


SESSION 3 DOUBLE ENTRY BOOK KEEPING
When you have compl et ed t hi s chap t er , you sh oul d be abl e t o:
Under st and t he pr i nci pl es of doubl e ent r y bookkeepi ng
Appl y doubl e ent r y bookkeepi ng t o a l i st of t r ansact i on s
Pr epar e f i nanci al st at ement s f or a sol e t r ader

Int r oduct i on
Bookkeepi ng i s t he r ecor di ng of monet ar y t r ansact i ons of a busi ness.

Doubl e ent r y bookkeepi ng
Doubl e ent r y bookkeepi ng i s t he f undament al concept under l yi ng account ancy. Al l account i ng
t r ansact i ons shoul d be r ecor ded usi ng t he dou bl e ent r y syst em. Ther e ar e some basi c r ul es t hat we
M UST f ol l ow :
1. Ever y debi t must have a cr edi t
2. A debi t ent r y i s an ASSET i n t he STATEM ENT OF FINANCIAL POSITION or an EXPENSE i n t he
STATEM ENT OF COM PREHENSIVE INCOM E
3. A cr edi t ent r y i s a LIABILITY i n t he STATEM ENT OF FINANCIAL POSITION or an INCOM E i n t he
STATEM ENT OF COM PREHENSIVE INCOM E

T account s
In or der t o assi st us w i t h t he pr epar at i on of t he f i nancial st at ement s w e use T account s f or si mpl i ci t y.
The pr i nci pl es of T account s ar e:
Ever y debi t ent r y has a cr edi t ent r y
Ever y T account w i l l bel ong t o t he st at ement of f i nanci al posi t i on or t he st at ement of
compr ehensi ve i ncome
The cl osi ng bal ance of a T account at t he end of t he per i od i s ent er ed i nt o a t r i al bal ance


EXAM PLE 1
Geor ge commences busi ness on 1 Apr i l 2006. The f ol l owi ng t r ansact i ons t ake pl ace i n hi s f i r st t wo
w eeks of t r adi ng.
1 Apr i l He i nvest s $50,000 i n t o a busi ness
1 Apr i l He pur chases $5,000 wor t h of goods on cr edi t
2 Apr i l He sel l s hal f of t he i nvent or y f or $6,000 cash
5 Apr i l He i ssues a cheque t o pay f or t he goods he r ecei ved on cr edi t
4 Apr i l Pays hi s r ent f or Apr i l of $450 by cheque
7 Apr i l He sel l s hi s r emai ni ng st ock f or $6,000 on cr edi t
10 Apr i l Pur chased goods on cr edi t f or $7,000
14 Apr i l He pur chases a del i ver y van f or $7,000 cash
Requi r ed
For t he f i r st t wo w eeks of t r adi ng pr epar e:
The T account s f or Geor ge (St at e i f t he account i s Posi t i on or I ncome)
The t r i al bal ance
The St at ement of Compr ehensi ve Income
The St at ement of Fi nanci al Posi t i on


EXAM PLE 2
Ti na st ar t s her busi ness on 1 Januar y 2007. The f ol l owi ng t r ansact i ons t ake pl ace i n her f i r st mont h
of t r adi ng:
1 Jan She i nvest s $65,000 i n t o t he busi ness
2 Jan She pur chases $8,000 wor t h of goods on cr edi t
2 Jan She sel l s a quar t er of t he i nvent or y f or $4,000 cash
3 Jan Issues a cheque t o pay f or hal f of t he goods she r ecei ved on cr edi t
14 Jan Pays her i nsur ance f or Januar y by i ssui ng a cheque f or $75
15 Jan She sel l s t he r emai ni ng i nvent or y f or $12,000 on cr edi t
16 Jan Pur chases i nvent or y at a cost of $10,000 on cr edi t
18 Jan Pur chases some of f i ce equi pment f or $3,000 cash
20 Jan Pays her r ent f or Januar y by cheque $150
21 Jan Sel l s hal f her i nvent or y f or $10,000 cash
25 Jan Wi t hdr aw s $100 f or pet t y cash
31 Jan Pur chases of f i ce suppl i es w or t h $30 f r om pet t y cash

Requi r ed
For t he f i r st mont h of t r adi ng pr epar e:
The T accoun t s f or Ti na (st at e i f t he account i s Posi t i on or Income)
The t r i al bal ance
The St at ement of Compr ehensi ve Income
The St at ement of Fi nanci al Posi t i on


ANSWER TO EXAM PLE 1 GEORGE
Bank Account

Dr Cr
1 Apr i l Capi t al 50,000 5 Apr i l Tr ade Payabl es 5,000
2 Apr i l Sal es 6,000 4 Apr i l Rent 450
14 Apr i l Del i very Van 7,000
Car r i ed For w ar d 43,550

56,000 56,000

Bought For w ar d 43,550

Capit al Account

Dr Cr
1 Apr i l Bank 50,000

Pur chases

Dr Cr
1 Apr i l Tr ade Payabl es 5,000
10 Apr i l Tr ade Payabl es 7,000 Car r i ed For w ar d 12,000

12,000 12,000


Tr ade Payabl es

Dr Cr
5 Apr i l Bank 5,000 1 Apr i l Pur chases 5,000
Car r i ed For w ar d 7,000 10 Apr i l Pur chases 7,000

12,000 12,000



Sal es

Dr Cr
2 Apr i l Cash 6,000
Car r i ed For w ar d 12,000 7 Apr i l Tr ade Recei vabl es 6,000

12,000 12,000

Rent

Dr Cr
4 Apr i l Bank 450

Tr ade Recei vabl es

Dr Cr
7 Apr i l Sal es 6,000

Deli ver y Van

Dr Cr
14 Apr i l Bank 7,000


Geor ge Tr i al Bal ance
St at ement Dr Cr

Bank Account FP 43,550

Capi t al Account FP 50,000

Pur chases CI 12,000

Tr ade Payabl es FP 7,000

Sal es CI 12,000

Rent CI 450

Tr ade Recei vabl es FP 6,000

Del i ver y Van FP 7,000

Tot al 69,000 69,000


Geor ge
2 Week Per i od Ended 14 Apr i l 2007

Sal es 12,000

Cost of sales

Openi ng i nvent or y 0

Pur chases 12,000

12,000

Cl osi ng i nvent or y (7,000)
5,000

GROSS PROFIT 7,000

Less expenses

Rent 450

NET PROFIT 6,550


Geor ge
as at 14 Apr i l 2007

Non Cur r ent Asset s

Del i ver y Van 7,000

Cur r ent Asset s

Invent or y 7,000
Tr ade Recei vabl es 6,000
Bank Account 43,550
56,550

TOTAL ASSETS 63,550

Capi t al 50,000
Pr of i t 6,550
56,550

Non Cur r ent Li abi l i t i es 0

Cur r ent Li abi l i t i es

Tr ade Payabl es 7,000

63,550


ANSWER TO EXAM PLE 2 TINA
Bank Account

Dr Cr
1 Jan Capi t al 65,000 3 Jan Tr ade Payabl es 4,000
2 Jan Sal es 4,000 14 Jan Insur ance 75
21 Jan Sal es 10,000 18 Jan Of f i ce Equi pment 3,000
20 Jan Rent 150
25 Jan Pet t y Cash 100
c/ f 71,675

79,000 79,000

b/ f 71,675

Capit al Account

Dr Cr
1 Jan Bank 65,000

Pur chases

Dr Cr
2 Jan Tr ade Payabl es 8,000
16 Jan Tr ade Payabl es 10,000 c/ f 18,000

18,000 18,000

b/ f 18,000

Tr ade Payabl es

Dr Cr
3 Jan Bank 4,000 2 Jan Pur chases 8,000
c/ f 14,000 16 Jan Pur chases 10,000

18,000 18,000

b/ f 14,000


Sal es

Dr Cr
2 Jan Bank 4,000
15 Jan Tr ade Recei vabl es 12,000
c/ f 26,000 21 Jan Bank 10,000

26,000 26,000

b/ f 26,000

Insur ance

Dr Cr
14 Jan Bank 75

Tr ade Recei vabl es

Dr Cr
15 Jan Sal es 12,000

Of f i ce Equi pment

Dr Cr
18 Jan Bank 3,000

Rent


Dr Cr
20 Jan Bank 150

Pet t y Cash

Dr Cr
25 Jan Bank 100 31 Jan Of f i ce Suppl i es 30
c/ f 70

100 100

b/ f 70

Of f i ce Suppl i es

Dr Cr
31 Jan Pet t y Cash 30


Ti na Tr ial Bal ance
St at ement Dr Cr

Bank Account FP 71,675

Capi t al Account FP 65,000

Pur chases CI 18,000

Tr ade Payabl es FP 14,000

Sal es CI 26,000

Insur ance CI 75

Tr ade Recei vabl es FP 12,000

Of f i ce Equi pment FP 3,000

Rent CI 150

Pet t y Cash FP 70

Of f i ce Suppl i es CI 30

Tot al s 105,000 105,000


Ti na
For Januar y 2007

Revenue 26,000

Cost of sales


Pur chases 18,000

18,000


GROSS PROFIT 13,000

Less expenses:

Insur ance 75

Rent 150

Of f i ce suppl i es 30
255

NET PROFIT 12,745


Ti na
as at 31 Januar y 2007

Non Cur r ent Asset s

Of f i ce Equi pment 3,000

Cur r ent Asset s

Invent or y 5,000
Bank Account 71,675
Pet t y Cash 70
88,745

TOTAL ASSETS 91,745

Capi t al 65,000
Pr of i t 12,745
77,745

Non Cur r ent Li abi l i t i es 0

Cur r ent Li abi l i t i es

Tr ade Payabl es 14,000

91,745


SESSION 4 NON CURRENT ASSETS
Def i ne a non cur r ent asset
Di st i ngui sh bet ween t angi bl e and i nt angi bl e non-cur r ent asset s
Expl ai n t he di f f er ences bet w een capi t al and r evenue expendi t ur e
Under st and t he concept s of I.A.S. 16 Account i ng f or no n-cur r ent asset s
Compi l e a non cur r ent asset r egi st er
Cal cul at e and account f or depr eci at i on
Recor d t he accoun t i ng ent r i es f or di sposal s of non-cur r ent asset s
Int r oduct i on
A non-cur r ent asset i s i nt ended f or cont i nued use i n a busi ness. Thi s woul d gener al l y mean f or
mor e t han one account i ng per i od. Non-cur r ent s asset s can be ei t her TANGIBLE or INTANGIBLE.
ACCA F3 concent r at es on t angi bl e non-cur r ent asset s, however a know l edge of i nt angi bl e non
cur r ent asset s i s needed.
Tangibl e non-cur rent asset s
These ar e asset s t hat have physi cal subst ance. Exampl es of t angi bl e non-cur r ent asset s w oul d be:
Land and bui l di ngs
Pl ant and equi pment
M ot or vehi cl es
Comput er s
Fi xt ur es and f i t t i ngs
Int angibl e non-cur rent asset s
These asset s have no physi cal subst ance. An exampl e of an i nt angi bl e non-cur r ent asset woul d be:
Goodwi l l
Devel opment


Non-cur r ent asset s ar e nor mal l y of subst ant i al val ue and t hei r acco unt i ng can have a mat er i al i mpact
on t he f i nanci al st at ement s. As a r esul t of t hi s t her e ar e l ar ge number s of account i ng st andar ds t hat
hel p t he pr epar er s of f i nanci al st at ement s t o account f or t hem.
The key accoun t i ng st andar d r el evant at t hi s l evel i s I.A.S. 16 Non-Cur r ent Asset s
Non-cur r ent asset r egi st er
The maj or i t y of compani es wi l l own a number of non-cur r ent asset s, and i t i s i mper at i ve t hat
ef f ect i ve cont r ol i s kept over t hem. In or der t o ensur e management ar e aw ar e exact l y w her e each
i t em i s l ocat ed and t hat t hey ar e adequat el y mai nt ai ned and ser vi ced, a non cur r ent asset r egi st er i s
mai nt ai ned.
A non-cur r ent asset r egi st er i s gener al l y mai nt ai ned i n t he f i nance depar t ment . Compani es can
pur chase speci f i cal l y desi gned packages or a r egi st er can si mpl y be mai nt ai ned on an Excel
spr eadsheet .
A r egi st er woul d i ncl ude t he f ol l owi ng i nf ormat i on:
It em code
Dat e of pur chase
It em descr i pt i on
Cost
Est i mat ed usef ul l i f e
Resi dual val ue (i f any)
Depr eci at i on met hod
Locat i on
Di sposal det ai l s


Capit al and r evenue expendi t ur e
One of t he key ar eas of account i ng f or non-cur r ent asset s i s deci di ng w het her expendi t ur e i ncur r ed
i s CAPITAL or REVENUE expendi t ur e.
If i t i s capi t al expendi t ur e i t wi l l be capi t al i sed i n t he st at ement of f i nanci al posi t i on and t hen
depr eci at ed over t he usef ul economi c l i f e of t he asset . If i t i s r evenue expendi t ur e i t wi l l be
expensed t hr ough t he st at ement of compr ehensi ve i ncome.
We need t o cl assi f y expendi t ur e i ncur r ed as ei t her capi t al or r evenue i n or der t o ensur e appr opr i at e
account i ng ent r i es ar e made.
Capi t al expendi t ur e i s expendi t ur e l i kel y t o i ncr ease t h e f ut ur e ear ni ng capaci t y of t he or gani sat i on
w her eas r evenue expendi t ur e i s r egar ded as mai nt ai ni ng t he or gani sat i on s pr esent ear ni ng capaci t y.
Per I.A.S. 16 t he f ol l owi ng cost s may be capi t al i sed on acqui si t i on of a non-cur r ent asset :
Ini t i al cost
Del i very cost s
Non-r ef undabl e i mpor t t axes
Inst al l at i on cost s
Any cost s i ncur r ed i n br i ngi ng t he asset i nt o i nt ended use
Ini t i al t r ai ni ng cost s
Subsequent expendi t ur e t hat ENHANCES t he per f or mance of t he asset
Cost s t hat ar e r egar ded as r evenue expendi t ur e and m ay not be capi t al i sed per I .A.S. 16 ar e:
Insur ance cost s
Repai r s
M ai nt enance

EXAM PLE 1
Capi t al Revenue
Pur chase of a mot or vehi cl e
Pur chase of a t ax di sc
Fuel
Insur ance
C D pl ayer
Al l oy w heel s
New t yr e
Ear l y set t l ement di scount

Depr eci at i on


Depr eci at i on i s t he char ge t o t he st at ement of compr ehensi ve i ncome t o r ef l ect t he consumpt i on of
an asset i n a per i od.
By appl yi ng depr eci at i on char ges, we ar e consi st ent wi t h t he ACCRUALS / M ATCHING CONCEPT i .e.
appl yi ng t he cost of usi ng t he asset t o t he st at ement o f compr ehensi ve i ncome f or t he same per i od.
Al l t angi bl e non-cur r ent asset s shoul d be depr eci at ed on a syst emat i c basi s per I.A.S. 16, wi t h t he
except i on of l and. Thi s i s because l and i s seen t o appr eci at e i n val ue.
Int angi bl e non-cur r ent asset s ar e amor t i sed over t hei r usef ul economi c l i f e (t hi s i s j ust anot her t er m
f or depr eci at i on).
Depr eci at i on pol i ci es
Cal cul at i ng depr eci at i on i n a gi ven per i od ar e common quest i ons i n t hi s paper . The mai n met hods of
cal cul at i ng depr eci at i on ar e:
St r ai ght l i ne
Reduci ng bal ance
St r ai ght l i ne depr eci at i on
Depr eci at i on i s char ged on a st r ai ght l i ne basi s over t he l i f e of t he non-cur r ent asset . Thus an equal
amount i s char ged i n ever y account i ng per i od over t he l i f e of t he asset .
To cal cul at e t he depr eci at i on char ge t he f ol l owi ng f or mul a i s used:

Depr eci at i on per annum = Or i gi nal cost est i mat ed r esi dual val ue
Est i mat ed usef ul Li f e


EXAM PLE 2
Company A pur chased a non-cur r ent asset on 31st Jul y f or $150,000. The asset has an expect ed
usef ul l i f e of 5 year s and a r esi dual val ue of $20,000.
Cal cul at e t he depr eci at i on char ges f or t he year ended 31
st
December on t he basi s:
i . A f ul l year s char ge i s made i n t he year of acqui si t i on and none i n t he year of di sposal .
i i . The company s pol i cy i s t o t i me-appor t i on depr eci at i on char ges.

EXAM PLE 3
Company B pur chases a machi ne f or $23,000. They expect t o use i t f or f our year s and t hen sel l i t f or
$3,000.
What i s t he annual depr eci at i on char ge?

Reduci ng bal ance
Thi s met hod of depr eci at i on i s gener al l y used f or asset s whi ch t end t o l ose mor e val ue i n t he i ni t i al
year s and r equi r e gr eat er mai nt enance i n t he l at er year s. A good exampl e w oul d be a br and new
mot or vehi cl e. M ot or vehi cl es t end t o depr eci at e r api dl y i n t he ear l i er year s and r equi r e ver y l i t t l e
mai nt enance.
A f i xed per cent age i s char ged t o t he net book val ue on an annual basi s. Hence, as t he book val ue of
an asset r educes, t he depr eci at i on char ge r educes accor di ngl y.
EXAM PLE 4
Company C pur chases a mot or vehi cl e f or $25,000 and wi l l depr eci at e i t at a r at e of 25%.
Cal cul at e t he depr eci at i on f or t he f i r st t hr ee year s.

Once t he depr eci at i on char ge has been cal cul at ed i t shoul d be ent er ed i nt o t he account s vi a a
j our nal .
The j our nal f or depr eci at i on i s:
Dr Depr eci at i on expense (St at ement of compr ehensi ve i ncome)
Cr Accumul at ed Depr eci at i on (St at ement of f i nanci al posi t i on)


Revaluat ions
When a non-cur r ent asset i s pur chased we r ecor d t hem at t hei r i ni t i al cost . However , over t i me
t hese val ues may mat er i al l y di f f er f r om t hei r mar ket val ue.
For exampl e, i f a company pur chased a pr oper t y 20 year s ago and t her ef or e subsequent l y char ged
depr eci at i on f or 20 year s, i t woul d be saf e t o assume t hat t he b ook val ue of t he asset woul d be
si gni f i cant l y di f f er ent f r om t oday s mar ket val ue.
In or der t o over come t hi s i ssue I.A.S. 16 per mi t s compani es t o r ef l ect t he mar ket val ue i n t he
st at ement of f i nanci al posi t i on. Thi s pol i cy may be adopt ed, and i f so t he f ol l owi ng r ul es must be
appl i ed per t he st andar d:
i . If a company chooses t o r eval ue an asset t hey must r eval ue al l asset s i n t hat cat egor y
i i . Reval uat i ons must be r egul ar
i i i. Subsequent depr eci at i on must be based on t he r eval ued amount s
i v. Gai ns f r om r eval uat i ons ar e not t aken t o t he st at ement of compr ehensi ve i ncome, as no
gai n as been r eal i sed. Thi s i s cover ed by t he PRUDENCE concept .
EXAM PLE 5
Company X pur chased a bui l di ng f or $45,000 15 year ago, and char ges depr eci at i on of 2% on a
st r ai ght l i ne basi s.
The pr oper t y has been val ued by a qual i f i ed per son at $150,000 dur i ng t he cur r ent f i nanci al year .
The di r ect or s woul d l i ke t o encompass t hese f i gur es i n t he f i nanci al st at ement s.
Requir ed:
Compl et e t he necessar y j our nal s t o account f or t he r eval uat i on.


Di sposal of a non-cur r ent asset
When a busi ness di sposes of an asset i t i s unl i kel y t hat t he sal e pr oceeds w i l l agr ee w i t h t he net
book val ue. Ther ef or e, a gai n or l oss wi l l ar i se f r om t he sal e.

EXAM PLE 6
Company C has a mot or vehi cl e w i t h a book val ue of $6,000 (cost $22,000) and di sposes of i t f or
$8,000.
We can est abl i sh t hat t her e i s a gai n of $2,000 (pr oceeds book val ue).
The acco unt i ng ent r i es w i l l need t o f ol l ow t hr ee st eps
1. Cl ear t he cost f r om t he cost account
2. Cl ear t he depr eci at i on f r om t he accumul at ed depr eci at i on account
3. Ent er t he pr oceeds
The ent r i es ar e t her ef or e:
Dr Di sposal Account $22,000
Cr M ot or vehi cl e cost account $22,000

Dr Accumul at ed depr eci at i on $16,000
Cr Di sposal Account $16,000

Dr Bank $8,000
Cr Di sposal Account $8,000


ANSWERS TO EXAM PLE 1
Capi t al Revenue
Pur chase of a mot or vehi cl e
Pur chase of a t ax di sc
Fuel
Insur ance
C D pl ayer
Al l oy w heel s
New t yr e
Ear l y set t l ement di scount

ANSWER TO EXAM PLE 2
i
150,000 - 20,000 = 26,000
5

Ii
26,000 x 5 = 10,833
12

23,000 - 3,000 = 5,000
4

Year 1 25,000 x 25% = 6,250
Year 2 25,000 - 6,250 x 25% = 4,688
Year 3 25,000 - 6,250 - 4,688 x 25% = 3,516


Pr e Reval uat i on Post Reval uat i on
Bui l ding Cost
Account
Accumul at ed
Depreci at i on
Net Book
Val ue
Bui l ding Cost
Account
Accumulat ed
Depreci at i on
Net Book
Val ue

45,000 13,500 31,500 150,000 4,286 145,714

Accumulat ed depreci at i on pr e r eval uat i on
45,000 X 2% X 15 Year s = 13,500

Accumulat ed depreci at i on post r eval uat ion
150,000 / 35 Year s = 4,286 pa

Journal s Requir ed
Dr Bui l di ngs Cost 105,000
Dr Accumul at ed Depr eci at i on
13,500

Cr Reval uat i on Reserve 118,500

Dr Depr eci at i on 4,286
Cr Accumul at ed Depr eci at i on
4,286


SESSION 5 INVENTORY
Lear ni ng Out comes
When you have compl et ed t hi s chap t er you shoul d be abl e t o:
Expl ai n t he pr i nci pl es of I. A.S. 2 Invent or i es
Expl ai n and appl y t he di f f er ent met hods of i nvent or y val uat i on i ncl udi ng F.I.F.O., A.V.C.O.
and L.I.F.O.
Under st and and appl y t he doubl e ent r y f or i nvent or y

Int r oduct i on
Invent or y i s t he pr oduct we pur chase and sel l i n a busi ness.
In a busi ness i t i s unl i kel y t hat al l of t he i nvent or y wi l l be sol d at t he end of an account i ng per i od,
t her ef or e t her e wi l l be an adj ust ment needed i n t he f i nanci al st at ement s f or t he val ue of t he cl osi ng
i nvent or y.
Openi ng and cl osi ng i nvent or y needs t o be i ncl uded i n t he st at ement of compr ehensi ve i ncome i n
or der t o cal cul at e t he cost of t he goods sol d wi t h-i n a gi ven per i od. The st at ement of f i nanci al
posi t i on wi l l show t he val ue of t he i nvent or y at t he end of t he account i ng per i od (t he cl osi ng
i nvent or y).
I.A.S. 2 i s t he accoun t i ng st andar d t hat gi ves us det ai l ed gui dance on how t o val ue our cl osi ng
i nvent or y.
RULE: Cl osi ng i nvent or y shoul d be val ued at t he l ower of cost and net r eal i sabl e val ue (N.R.V.)
By appl yi ng t he I.A.S. 2 r ul e w e ensur e our i nvent or y i s never over st at ed i n t he st at ement of f i nanci al
posi t i on, hence t he PRUDENCE concept .
Val uat i on of cl osing i nvent or y
We wi l l cover t hr ee met hods of val ui ng t he cl osi ng i nvent or y:
F.I.F.O. Fi r st In Fi r st Out
The cl osi ng i nvent or y consi st s of i t ems pur chased at t he l at est dat es, as we assume t he i t ems t hat
wer e pur chased f i r st wer e t he i t ems sol d f i r st .
In t i mes of r i si ng pr i ces, cl osi ng i nvent or y wi l l have a hi gher cost and t her ef or e pr of i t wi l l be hi gher .


Wei ght ed aver age cost (AVCO)
Under t hi s met hod w e assume:
Al l uni t s ar e i ssued at t he cur r ent w ei ght ed aver age cost per uni t
A new aver age cost i s cal cul at ed w henever mor e i t ems ar e pur chased
L.I.F.O. Last In Fi r st Out
The cl osi ng i nvent or y consi st s of i t ems pur chased at t he ear l i est dat e, as w e assume t he l ast i t em
pur chased i s t he f i r st i t em t o be sol d.
In t i mes of r i si ng pr i ces t he cl osi ng i nvent or y w i l l have a l ower val ue and t her ef or e pr of i t wi l l be
l ow er .
Fr om a pr act i cal per spect i ve i t i s unl i kel y l ast i t ems pur chased wi l l be sol d f i r st , and as a r esul t of t hi s
I.A.S. 2 does not per mi t L.I.F.O. met hod of st ock val uat i on.
W.I.P. Wor k i n pr ogr ess
In some cases, wher e a company has modi f i ed i t s i nvent or y i t i s necessar y t o t ake t he cost of t hat
modi f i cat i on i nt o account when val ui ng cl osi ng i nvent or y.
Net r eal i sabl e val ue
Net r eal i sabl e val ue i s t he amount w e can get f r om sel l i ng i nvent or y l ess any f ur t her cost s t o be
i ncur r ed.
Account i ng Ent r i es
The doubl e ent r y t o account f or cl osi ng st ock i s:
Dr Invent or y St at ement of f i nanci al posi t i on
Cr Invent or y St at ement of compr ehensi ve i ncome


EXAM PLE 1
Navi gat or Of f i ce Suppl i es made t he f ol l ow i ng pur chases and sal es i n Januar y:
Pur chases
3
r d
500 pens @ 4.00 = 2,000
12
t h
500 pens @ 4.60 = 2,300
16
t h
400 pens @ 4.75 = 1,900
22
nd
700 pens @ 5.25 = 3,675
31
st
900 pens @ 5.40 = 4,860

3,000 14,735

Sal es
7
t h
300 pens @ 10.00 = 3,000
13
t h
400 pens @ 10.00 = 4,000
17
t h
300 pens @ 10.00 = 3,000
29
nd
700 pens @ 10.00 = 7,000

1,700 17,000

Requi r ed
Assumi ng t her e i s no openi ng i nvent or i es pr epar e t he st at ement of compr ehensi ve i ncome usi ng t he
f ol l ow i ng:
LIFO
FIFO
AVCO


L.I.FO.
IN OUT BALANCE
Dat e No. Cost Tot al No. Cost Tot al No. Cost Tot al
03/ 01 500 4.00 2000.00 500 2000.00
07/ 01 300 4.00 1200.00 200 800.00
12/ 01 500 4.60 2300.00 700 3100.00
13/ 01 400 4.60 1840.00 300 1260.00
16/ 01 400 4.75 1900.00 700 3160.00
17/ 01 300 4.75 1425.00 400 1735.00
22/ 01 700 5.25 3675.00 1100 5410.00
29/ 01 700 5.25 3675.00 400 1735.00
31/ 01 900 5.40 4860.00 1300 6595.00

F.I.F.O
Tot al Pur chases 3,000 pens
Tot al Sal es 1,700 pens
Cl osi ng i nvent or y 1,300 pens
Val uat i on
900 @ $5.40 each $4,860
400 @ $5.25 each $2,100
= $6,960


AVCO
IN OUT BALANCE
Dat e No. Cost Tot al No. Cost Tot al No. Cost Tot al
03/ 01 500 4.00 2000.00 500 2000.00
07/ 01 300 4.00 1200.00 200 800.00
12/ 01 500 4.60 2300.00 700 3100.00
13/ 01 400 3100
di vi ded
by 700

1771.00 300 1329.00
16/ 01 400 4.75 1900.00 700 3229.00
17/ 01 300 3229
di vi ded
by 700
1384.00 400 1845.00
22/ 01 700 5.25 3675.00 1100 5520.00
29/ 01 700 5520
di vi ded
by
1100
3513.00 400 2007.00
31/ 01 900 5.40 4860.00 1300 6867.00

Ther ef or e Income St at ement i s as f ol l ows:
Al l $ L.I.F.O. F.I.F.O. AVCO

Revenue 17,000 17,000 17,000

Cost of sal es

Openi ng i nvent or y 0 0 0
Pur chases 14,735 14,735 14,735
Cl osi ng i nvent or y -6,595 -6,960 -6,867
8,140 7,775 7,868

8,860 9,225 9,132


EXAM PLE 2
Radi ance Ki t chenw ar e has t he f ol l owi ng i t ems i n t hei r f i nanci al st at ement s f or t he year ended 31
st

December 2007:
Invent or y @ 01/ 01/ 07 $45,678
Pur chases $98,000
Invent or y @ 31/ 12/ 07 $42,800
Cl osi ng i nvent or y i ncl udes t he f ol l owi ng damaged i t ems:
A t abl e w as pur chased f or $500. Due t o f i r e damage t he maxi mum i t can be sol d f or i s $200
af t er a wax pr oduct cost i ng $50 has been appl i ed.
Four chai r s cost i ng $100 each wer e al so damaged i n t he f i r e. They can be sol d f or $20.
Requi r ed
Cal cul at e t he cost of sal es f or 2007.

St ock Val uat i on
Cl osi ng val uat i on 42,800

Less
Damaged i nvent or y Tabl e 500
Chai r s 400 900
Add NRV
Tabl e (200 50) 150
Chai r s 80 230

42,130

Cost of Sal es

Pur chases 98,000
Cl osi ng i nvent or y -42,130
101,548


SESSION 6 IRRECOVERABLE DEBTS AND PROVISION FOR DOUBTFUL DEBTS
Expl ai n t he di f f er ence bet w een a i r r ecover abl e debt and a doubt f ul debt
Comput e t he doubl e ent r i es r equi r ed f or i r r ecover abl e debt s and t he pr ovi si on f or doub t f ul
debt s
Int r oduct i on
The maj or i t y of compani es sel l t hei r pr oduct on cr edi t . The l engt h of cr edi t wi l l var y bet w een
compani es, but t he most common l engt h of cr edi t i s 30 days.
If how ever , someone f ai l s t o pay w e need t o be abl e t o account f or t hi s i s our l edger s. It woul d not
be pr udent t o hol d a r ecei vabl e i n our st at ement of f i nanci al posi t i on i f we wer e awar e t hat t hey ar e
unl i kel y t o pay.
Ther e ar e 2 t ypes of debt s t hat we need t o consi der :
Ir r ecover abl e debt (bad debt )
Doubt f ul debt
Ther e i s a cl ear di st i nct i on bet ween i r r ecover abl e and doubt f ul debt s:
Irr ecover abl e Debt
Thi s i s a debt t hat you consi der t o be uncol l ect abl e. Ci r cumst ances wher e t hi s woul d occur ar e i f t he
company has been f r audul ent , gone bankr upt or di sappear ed. Thus i t i s unl i kel y t hat w e wi l l r ecei ve
t he money due t o us.
If t hi s i s t he case w e shoul d no t have t hi s bal ance i n our r ecei vabl es, and w oul d t her ef or e w r i t e t he
debt of f .
The doubl e ent r y w oul d be:
Dr Ir r ecover abl e debt s St at ement of compr ehensi ve i ncome
Cr Tr ade r ecei vabl es St at ement of f i nanci al posi t i on

EXAM PLE 1


Geor ge has a smal l ant i ques busi ness and at t he end of t he f i nanci al year ended 30
t h
Apr i l 2007 has a
r ecei vabl es bal ance of $42,500. Incl uded i n t he year end bal ance i s $4,000 t hat i s owed by Zi ppy
Tr ader s. Geor ge has hear d t hat t hey have been cl osed down due t o f i nanci al i r r egul ar i t i es and t hat
al l t he di r ect or s have di sappear ed.
Al so i ncl uded i n t he amount i s $500 owed by Bungl e w ho i s Geor ge s br ot her -i n-l aw. Bungl e has l ef t
Geor ge s si st er and Geor ge i s not sur e i f he wi l l pay hi s debt whi ch i s due i n 2 weeks t i me.
Requi r ed
How shoul d Geor ge account f or t hese i t ems?

Recoveri ng debt s w ri t t en of f
If a debt t hat has been wr i t t en of f i s l at er r ecover ed, w e w i l l need t o adj ust t he l edger s t o r ef l ect t hi s.
The ent r y r equi r ed w oul d be:
Dr Bank
Cr Ir r ecover abl e debt s

Doubt f ul debt
A doubt f ul debt i s a debt t hat i s owed t o a busi ness, but t hey ar e dubi ous about i t s col l ect abi l i t y.
The di st i ngui shi ng f act or i s t hat t hi s debt coul d be col l ect ed as i t i s doub t f ul not bad. We t her ef or e,
make a pr ovi si on f or t hi s amount .
Dr Ir r ecover abl e debt s St at ement of compr ehensi ve i ncome
Cr Pr ovi si on f or doubt f ul deb t s St at ement of f i nanci al posi t i on
Thi s t ype of pr ovi si on i s cal l ed a speci f i c al l owance as w e know exact l y w hi ch debt s t he pr ovi si on i s
f or . As you can see t he debt r emai ns i n t he r ecei vabl es l edger , as a r esul t t he company can st i l l
act i vel y chase t he debt . If or when t he company pays t he debt t he doubl e ent r y w oul d be t he
nor mal ent r y f or a r ecei pt i .e.
Dr Bank
Cr Tr ade r ecei vabl es
We woul d t hen r ever se t he pr ovi si on we had f or t hi s d ebt .
General al l ow ance


In or der t o appl y t he pr udence concept we need t o r evi ew our r ecei vabl es at t he end of t he f i nanci al
year and t ake a vi ew of col l ect abl es. A l ar ge number of compani es have a const an t pr ovi si on f or
r ecei vabl es. Thi s w oul d be cal cul at ed as a per cent age of t he r ecei vabl es bal ance.

EXAM PLE 2
For t he year ended 31
st
December 2005 a company s r ecei vabl es bal ance was $150,000. They had a
gener al al l owance of 5%. At t he year ended 31
st
December 2006 t he company s r ecei vabl es ar e
$135,000 t he company w oul d l i ke t o mai nt ai n a 5% gener al al l owance.
Requi r ed
What i s t he i mpact on t he st at ement of compr ehensi ve i ncome and how wi l l t he r ecei vabl es be
pr esent ed i n t he st at ement of f i nanci al posi t i on?


Zi ppy Tr ader s
Thi s debt shoul d be t r eat ed as an i r r ecover abl e debt . Ther ef or e t he ent r y needed w oul d be:
Dr Ir r ecover abl e debt s $4,000
Cr Tr ade r ecei vabl es $4,000

Bungl e
Thi s debt i s nei t her an i r r ecover abl e or doubt f ul deb t at t hi s st age. Thi s i s because t he debt i s no t
yet due and we know wher e Bungl e l i ves. We al so have no r eason t o suspect t hat Bungl e cannot
af f or d t o r epay t he debt .

31
ST
December 2005
Gener al pr ovi si on 5% x $150,000 = $7,500
Doubl e ent r y
Dr Ir r ecover abl e debt s 7,500
Cr Al l ow ance f or r ecei vabl es 7,500
Ext r act f r om st at ement of f i nanci al posi t i on:
Cur r ent asset s

Recei vables 150,000
Gener al Al l ow ance -7,500
142,500


31
st
December 2006
Gener al Pr ovi si on 5% x $135,000 = $6,750
Pr ovi si on bought f or war d = $7,500
Ther ef or e over pr ovi si on = $750 (7,500 6,750)
Doubl e ent r y
Cr Ir r ecover abl e debt s 750
Dr Al l ow ance f or r ecei vabl es 750
Cur r ent asset s

Recei vables 135,000
Gener al Al l ow ance -6,750
128,250


SESSION 7 CONTROL ACCOUNTS AND CORRECTION OF ERRORS
Under st and t he pr i nci pl es of cont r ol account s
Pr epar e t he cont r ol accoun t s f or t r ade r ecei vabl es and t r ade payabl es
Expl ai n t he f unct i on of a suspense account
Pr epar e nomi nal l edger account s
Pr epar e j our nal ent r i es

Int r oduct i on
In sessi on 3 w e pr epar ed f i nanci al st at ement s f r om T account s. The number of t r ansact i ons was
l i mi t ed, and t her ef or e t he pr ocess w as si mpl e t o f ol l ow. If an er r or had been made i t woul d have
been easy t o det ect .
How ever , i n t he r eal wor l d of busi ness t he number of t r ansact i ons i s l ar ge, and t o hel p us det ect
er r or s w e use cont r ol account s. Ther ef or e, dai l y ent r i es ar e nor mal l y made i n a number of Pr i me
Ent r y books and t hen a summar y t ot al i s t r ansf er r ed t o t he nomi nal l edger per i odi cal l y. Thi s coul d
be done dai l y, weekl y or even mont hl y.
The f ol l owi ng have a l ar ge vol ume of t r ansact i ons on a dai l y basi s and ar e used as pr i me ent r i es:
Sal es day book
Pur chase day book
Sal e r et ur ns day book
Pur chase r et ur ns day book
Cash book
Pet t y cash book
Jour nal ent r i es
The t r ansact i ons ar e r ecor ded i n t he pr i me ent r y books. They ar e t hen t r ansf er r ed t o t he nomi nal
(gener al ) l edger and we t hen ext r act a t r i al bal ance i n or der t o pr epar e our f i nanci al st at ement s.


Sal es day book
Thi s book r ecor ds al l t he sal es w e make on cr edi t . Sal es shoul d be r ecor ded net of t r ade di scoun t
but bef or e cash (set t l ement ) di scount .
Pur chase day book
Thi s book of pr i me ent r y r ecor ds al l pur chases we make on cr edi t .
Sal e r et ur ns day book
If a cr edi t cust omer r et ur ns goods, t hi s wi l l be r ecor ded i n t he sal es r et ur ns day book.
Pur chase r et ur ns day book
Thi s book wi l l r ecor d al l t he cr edi t pur chases t hat we r et ur n t o suppl i er s.
Cash book
Thi s book wi l l r ecor d al l t he money t hat we wi l l pay i nt o t he bank account , and any payment s we
make f r om t he bank account . Thi s w i l l al so r ecor d any cash (set t l ement ) di scount s w e al l ow or
r ecei ve.
Pet t y cash book
Thi s r ecor ds al l t he smal l sundr y t r ansact i ons occur r i ng i n a busi ness on a day t o day basi s.
Jour nal ent r i es
These ar e used f or ad hoc ent r i es t hat d o no t f al l i nt o any of t he above cat egor i es. They ar e al so
used t o cor r ect er r or s, bot h t empor ar y and per manent .


EXAM PLE 1
L & M had t he f ol l owi ng t r ansact i ons dur i ng t he f i r st w eek i n December 2007.
1
st
December 2007
Pur chased goods on cr edi t f r om A Lt d f or $595 r ecei vi ng a t r ade di scount of 9.5%
Pur chased goods on cr edi t f or $795 f r om KP Lt d
Sol d goods on cr edi t t o JK Lt d f or $999
3
r d
December
Ret ur ned KP Lt d goods as t hey w er e def ect i ve
Sol d goods on cr edi t t o A Jones f or $995
5
t h
December
Sol d goods on cr edi t t o A Jones f or $795
Pur chased goods on cr edi t f r om A Lt d f or $995, agai n wi t h a 9.5% t r ade di scoun t
NB Sal es t ax i s 17.5%
SOLUTION
SALES DAY BOOK

DATE INV NO. CUSTOM ER NET SALES TAX TOTAL
@17.5%
01/ 12 100555 J K Li mi t ed 999.00 174.82 1173.82
03/ 12 100556 A Jones 995.00 174.12 1169.12
05/ 12 100557 A Jones 795.00 139.12 934.12

2789.00 488.06 3277.06

PURCHASE DAY BOOK

DATE INV NO. SUPPLIER NET SALES TAX TOTAL
@17.5%
01/ 12 999241 A Li mi t ed 538.47 94.23 632.70
01/ 12 867544 K P Li mi t ed 795.00 139.12 934.12
05/ 12 999242 A Li mi t ed 900.47 157.58 1058.05

2233.94 390.93 2624.87


PURCHASE RETURNS DAY BOOK

DATE INV NO. SUPPLIER VALUE SALES TAX TOTAL

03/ 12 867544 K P Li mi t ed 795.00 139.12 934.12

795.00 139.12 934.12


EXAM PLE 2
The f ol l owi ng ar e t he bal ances on Expl or er s l edger account s i n t he mont h of Januar y
Openi ng r ecei vabl es bal ance 22,500

Sal es day book 88,650

Cash sal es 23,950

Sal e r et ur ns day book 5,555

Ref unds t o cust omer s 3,325



Incr ease i n pr ovi si on 500

Pur chase l edger cont r a 1,200

Requi r ed
Cal cul at e t ot al cash r ecei ved f r om cust omer s i n Januar y
Sol ut i on
RECEIVABLES CONTROL ACCOUNT

Dr Cr
Al l Jan Al l Jan
Openi ng bal ance 22,500 Ret ur ns book 5,555
Sal es day book 88,650 Di scount s al l ow ed 6,786
Ref unds 3,325 Ir r ecover abl e debt s 4,455
Cont r a 1,200
Cl osi ng bal ance 18,650
Recei pt s (bal f i g) 77,829

114,475 114,475

Feb Openi ng bal ance 18,650


EXAM PLE 3
The f ol l owi ng ar e t he bal ances on a company s l edger account s i n t he mont h of M ar ch:
Openi ng payabl es bal ance 12,785

Pur chase day book 44,999

Ret ur ns out w ar ds daybook 3,950

Ret ur ns i nw ar ds day book 2,300

Cheques pai d t o suppl i er s 37,500


Sal es l edger cont r as 900

Requi r ed
Cal cul at e t he cl osi ng bal ance f or t he payabl es account at t he end of M ar ch.
Sol ut i on
PAYABLES CONTROL ACCOUNT

Dr Cr
Al l M ar ch Al l M ar ch
Ret ur ns out w ar ds 3,950 Openi ng bal ance 12,785
Payment s 37,500 Pur chase day book
44,999
Cont r a 900
Cl osi ng bal (bal f ig)
14,034

57,784 57,784

Apr i l Openi ng bal ance 14,034

Reconci l ing t he cont r ol account s


Nor mal l y at t he end of each mont h we check t o ensur e our con t r ol account s r econci l e t o t he
i ndi vi dual bal ances on our l edger account s. We do t hi s by:
Checki ng our l i st of i ndi vi dual bal ances t i e i nt o t he con t r ol account bal ance. If t her e i s an i mbal ance
t hen i t must be i nvest i gat ed. The mai n di scr epanci es ar e due t o:
Cast i ng er r or i n t he day books
Post i ng er r or
A one si ded cont r a
An ent r y t hat has been made i n t he i ndi vi dual account but not i n t he cont r ol account s
An ent r y bei ng omi t t ed f r om t he cont r ol account

EXAM PLE 4
At t he f i nanci al year end 31 December 2007 Expl or er Rai n Wear had a bal ance on t he payabl es
cont r ol account of $22,550. The bal ance on t hei r pur chase l edger s was $20,650. The management
account ant f ound t he f ol l owi ng di scr epanci es:
1. An i nvoi ce of $1,200 had been omi t t ed f r om t he cont r ol account
2. The pur chase day book t ot al was over st at ed by $1,000
3. Goods r et ur ned of $1,590 had no t been r ecor ded i n t he cont r ol account
4. Di scount s r ecei ved of $10 had not been post ed
5. Cont r a ent r i es of $500 need t o be r ecor ded i n t he cont r ol account
Af t er t hese adj ust ment s ar e made, t he cont r ol account shoul d bal ance.

Sol ut i on
Unt i l a f ul l knowl edge of doubl e ent r y i s known, t he easi est way t o t ackl e t hi s quest i on i s t o i dent i f y
wher e t he er r or has occur r ed and amend accor di ngl y. In t hi s case:
Er r or No. Locat i on of Er r or Amend

1 Cont r ol Account Cont r ol Account


Dr Cr


Al l Dec Al l Dec
Er r or 2 1,000 Or i gi nal bal ance 22,550
Er r or 3 1,590 Er r or 1 1,200
Er r or 4 10
Er r or 5 500
Amended bal ance 20,650

23,750 23,750

Jan Openi ng bal ance 20,650

Bal ancer per l i st 20,650

EXAM PLE 5
Hi ppo M anuf act ur i ng had t he f ol l ow i ng bal ances on t hei r payabl es / r ecei vabl es f or t he f i nanci al
year ended 30 June 2006.
Cr edi t sal es 450,000
Cash sal es 22,000
Cr edi t pur chases 300,000
Cash pur chases 4,500
Ret ur ns i nw ar ds 17,000
Ret ur ns out w ar ds 14,000
Payment s made t o payabl es 263,100
Cash r ecei ved f r om r ecei vabl es 438,580
Cont r a s 17,500

Bal ance at 1 Jul y 2005:
Payabl es 53,500
Recei vables 51,500
Pr ovi si on f or doubt f ul deb t s 3,400

Bad debt pr ovi si on i s t o be mai nt ai ned @ 1.5% of cr edi t sal es

Requir ed:
Comput e t he r ecei vabl es and payabl es cont r ol account and ext r act t he cl osi ng bal ances f or t he
f i nanci al year end.


SOLUTION
Thi s i s a common CBA quest i on. It i s desi gned t o ensur e you know exact l y w hat shoul d go i nt o
cont r ol account s and al so your knowl edge of doubl e ent r y. Agai n unt i l you ar e comf or t abl e w i t h
debi t s and cr edi t s i t i s easi er t o w r i t e exact l y w her e t hi ngs w i l l go bef or e at t empt i ng t o bal ance t he
account s. In t hi s case:
Recei vabl es / Payabl es Debi t / Cr edi t

Cr edi t sal es Recei vabl es Debi t
Cash sal es Nei t her n/ a
Cr edi t pur chases Payabl es Cr edi t
Cash pur chases Nei t her n/ a
Ret ur ns i nw ar ds Recei vabl es Cr edi t
Ret ur ns out w ar ds Payabl es Debi t
Di scount s al l ow ed Recei vables Cr edi t
Di scount s r ecei ved Payabl es Debi t
Ir r ecover abl e debt s Recei vabl es Cr edi t
Payment s made Payabl es Debi t
Cash Recei ved Recei vabl es Cr edi t
Cont r a Recei vabl es / Payables Cr edi t / Debi t


Dr Cr

Ret ur ns out w ar ds 14,000 Openi ng bal ance 53,500
Di scount s r ecei ved 12,000 Cr edi t pur chases 300,000
Payment s 263,100
Cont r a 17,500

Cl osi ng bal (bal f ig) 46,900

353,500 353,500


RECEIVABLES CONTROL ACCOUNT

Dr Cr

Openi ng bal ance 51,500 Ret ur ns i nw ar ds 17,000
Cr edi t sal es 450,000 Di scount s al l ow ed 11,000
Cash r ecei ved 438,580
Cont r a 17,500
Cl osi ng bal (bal f ig) 14,920

501,500 501,500

Cor r ect i on of er r or s
At t he end of an account i ng per i od we ext r act a t r i al bal ance, and use t hi s as a basi s f or pr epar i ng
t he f i nanci al st at ement s.
The f ol l owi ng ar e t he mai n pur poses of a t r i al bal ance:
Account bal ances ar e r evi ew ed t o check f or obscur i t i es
Reconci l e al l cont r ol account bal ances w i t h t he i ndi vi dual l edger s
Ensur e debi t s equal t he cr edi t s.
If t her e i s an i mbal ance a SUSPENSE ACCOUNT wi l l be cr eat ed. Ther ef or e, a suspense account may
have a debi t or cr edi t bal ance.
Er r or s t hat wi l l cause a di f f er ence i n t he t r i al bal ance ar e:
Tr ansposi t i on er r or En t er i ng f i gur es t he w r ong way round
Si ngl e ent r i es Onl y one si de of t he t r ansact i on has been post ed
Bot h ent r i es ent er ed on t he same si de of t he l edger account
Cast i ng er r or An account has been i ncor r ect l y added
Al t hough ext r act i ng a t r i al bal ance pr oves t he above, t her e ar e cer t ai n er r or s t hat a t r i al bal ance wi l l
not i dent i f y. These ar e:
Er r or of pr i nci pl e An ent r y has been ent er ed i n t he w r ong f i nanci al st at ement .
Er r or s of omi ssi on A t r ansact i on has been mi ssed out .
Er r or s of commi ssi on Ent er i ng an amount i n t he w r ong account , but i n t he cor r ect f i nanci al
st at ement .
Compensat i ng er r or s Wher e t w o or mor e er r or s cancel each ot her . Thi s i s ext r emel y r ar e.

Journal s


Jour nal s ar e used f or sever al r easons:
Post uni que, one of f t r ansact i ons
Tr ansf er i t ems bet ween account s
Adj ust bal ances t hat ar e i ncor r ect
Cor r ect i t ems t hat have been i ncor r ect l y post ed
Jour nal s shoul d have a uni que number and shoul d be cl ear l y l abel l ed.
Exampl e 6
Cor r ect t he f ol l owi ng er r or s usi ng j our nal s:
1. A sal es day book has been under cast by $1,000.
2. Invent or y pur chased f or $1,000 has been p ost ed t o st at i oner y
3. A non-cur r ent asset has been pur chased f or $7,000 on cr edi t , but has no t been r ecor ded.

Sol ut i on
Account Name Descr i pt i on Debi t Cr edi t

Sal es Revenue SDB under cast 1,000

St at i oner y Incor r ect l y coded 1,000
Pur chases 1,000

Non-cur r ent asset Capi t al pur chased 7,000
Ot her payabl es 7,000

Exampl e 7


Pet er has t he f ol l owi ng bal ances on i t s t r i al bal ance at t he end of t he f i nanci al year :
Debi t $213,852
Cr edi t $212,390
A suspense account has been cr eat ed f or t he di f f er ence.
The f ol l owi ng er r or s have been i dent i f i ed by t he accou nt ant ; af t er t hese er r or s have been cor r ect ed
t he bal ance on t he suspense account shoul d be r emoved.
1. A payment f or st at i oner y f or $440 was debi t ed t o st at i oner y as $780.
2. Di scount s al l owed of $1,310 have been r ecor ded as a cr edi t .
3. Ot her i ncome of $3,742 has onl y been r ecor ded i n t he cash book.
Requi r ed
Cor r ect t he ent r i es and cl ear t he suspense account .
Sol ut i on
Account Name Descr i pt i on Debi t Cr edi t

Suspense Incor r ect t ot al post ed 340
St at i oner y 340

Di scount s al l ow ed Post i ng t o i ncor r ect si de 2,620
Suspense 2,620

Suspense One si ded ent r y 3,742
Ot her i ncome 3,742

Suspense Account

Jour nal 1 340 Openi ng Bal ance 1,462
Jour nal 3 3,742 Jour nal 2 2,620

4,082 4,082


SESSION 8 BANK RECONCILIATIONS

Pr epar e cash and bank account s
Pr epar e a bank r econci l i at i on

Int r oduct i on
Wi t hi n t he l edger account i s a bank account l edger , an d i t i s i mpor t ant t hat t he bal ance i n t he l edger
r econci l es t o t he bal ance on t he act ual bank st at ement . We cal l t hi s exer ci se a bank r econci l i at i on.
Dependant on t he si ze of t he company, t hi s can be do ne on a w eekl y or mont hl y basi s, and i n some
l ar ger compani es even dai l y.
Pr epar i ng a bank r econci l i at i on has many advant ages. They i ncl ude:
Pr ovi des a check on accur acy of r ecor di ngs i n t he cash book
Hi ghl i ght s any er r or s
Assi st s i n t he day t o day cash management
Any di f f er ences can be i dent i f i ed qui ckl y
Debi t s and Cr edi t s
On a bank st at ement t he bal ances wi l l be f r om t he per spect i ve of t he bank n ot t hat of t he busi ness.
Ther ef or e, i f a bank st at ement shows a cr edi t bal ance, t he bank has a cr edi t or . I n ot her w or ds t he
bank owes t he busi ness money and i s t her ef or e i n a po si t i ve posi t i on.
If t he bank st at ement sh ows a debi t bal ance t hi s i ndi cat es t he busi ness i s over dr awn. i .e. i t i s an
asset f r om t he bank s poi nt of vi ew .

Reconci l i ng It ems


It i s ext r emel y unl i kel y t hat t he bal ance on t he l edger account and t he bal ance on t he bank
st at ement wi l l agr ee. Thi s can be due t o t he f ol l owi ng r easons:
Cheques i ssued by t he company ar e i mmedi at el y ent er ed i nt o t he cash book, but t hey w i l l
not appear on t he bank st at ement unt i l t hey ar e pr esent ed t o t he bank. These ar e cal l ed
unpr esent ed cheques.
Recei pt s by t he busi ness ar e i mmedi at el y ent er ed i n t he cash book and t hen banked. Thi s
can t ake a n umber of days t o cl ear .
Ther e may be i t ems i n t he bank st at ement t hat have n ot been pr o cessed t hr ough t he cash
book e.g. BACS t r ansf er , st andi ng or der s, di r ect debi t s, di shonour ed cheques and bank
char ges.

Pr of orma bank r econci l i at i on
Bal ance per bank st at ement 65,455

Less : Unpr esent ed cheques (1,950)

Add: Out st andi ng l odgement s 1,700

Bal ance per cash book 65,205

Pr epar ing a bank r econci l i at i on
1. Compar e t he cash book and bank st at ement and t i ck mat chi ng i t ems

2. Post cor r ect i ons t o t he cash book i .e. i t ems on t he ban k st at ement t hat have not been
pr ocessed t hr ough t he l edger

3. Put i n i t ems t hat ar e i n t he cash book t hat have yet t o be pr esent ed t o t he bank as a
r econci l i ng i t em.
UNLESS OTHERWISE TOLD, ASSUM E FIGURES ON THE BANK STATEM ENT ARE CORRECT.


Exampl e 1
Cash Book

01/ 04/ 07 b/ d 14,500 01/ 04/ 07 1437 450
03/ 04/ 07 27 3,650 01/ 04/ 07 1438 600
05/ 04/ 07 28 1,200 01/ 04/ 07 1439 750
12/ 04/ 07 29 1,100 01/ 04/ 07 1440 150
29/ 04/ 07 30 3,000 12/ 04/ 07 1441 250
12/ 04/ 07 1442 350
27/ 04/ 07 1443 395
27/ 04/ 07 1444 165
27/ 04/ 07 1445 245
30/ 04/ 07 c/ d 20,095

23,450 23,450

30/ 04/ 07 b/ d 20,095

Bank St at ement
Dat e Det ai l s Payment Recei pt Bal ance

01/ 04/ 07 Openi ng bal ance 14,500
04/ 04/ 07 1437 450 14,050
05/ 04/ 07 1438 600 13,450
08/ 04/ 07 27 3,650 17,100
10/ 04/ 07 28 1,200 18,300
11/ 04/ 07 St andi ng Or der P.S.L. 750 17,550
12/ 04/ 07 1439 750 16,800
14/ 04/ 07 Di r ect Debi t Di r ect Li ne 750 16,050
17/ 04/ 07 1441 250 15,800
17/ 04/ 07 BACS (Bank Aut omat ed Cl ear ance
Syst em) Tr ansf er

3,500

19,300
18/ 04/ 07 1442 350 18,950
20/ 04/ 07 29 1,100 20,050
24/ 04/ 07 Bank Char ges 500 19,550


Sol ut i on
Cash Book

30/ 04/ 07 b/ d 20,095 11/ 04/ 07 St andi ng Or der 750
17/ 04/ 07 BACS 3,500 14/ 04/ 07 Di r ect Debi t 750
24/ 04/ 07 Bank Char ges 500
30/ 04/ 07 c/ d 21,595

23,595 23,595

30/ 04/ 07 b/ d 21,595

Bank Reconci l i at i on

Bal ance per bank st at ement 19,550

Less: unpr esent ed cheques 1440 150
1443 395
1444 165
1445 245 (955)

Add: Out st andi ng l odgement s 30 3,000

21,595


Exampl e 2
The assi st ant account ant of Rai nbow i s t r yi ng t o pr epar e a bank r econ ci l i at i on as at 30
t h
November
2007. The cash book has a cr edi t bal ance of $2,400 and t he bank st at ement at t hat dat e has an
over dr aw n bal ance of $1,550.
As hi s manager he has asked you f or hel p w i t h t he f ol l owi ng i t ems:
1. He has di scover ed cheque number 100678 has been ent er ed i nt o t he cash bo ok t wi ce f or
$459.
2. A di r ect debi t of $225 has been t aken f r om t he account and no t been ent er ed i nt o t he cash
book
3. Ther e ar e unpr esent ed cheques t ot al l i ng $5,840.
4. Ther e ar e out st andi ng l odgement s of $8,390.
5. A cheque r ecei pt f or $1,450 has been di shonour ed by t he bank.
6. Bank char ges of $1,400 have been char ged by t he ban k.
7. A BACS t r ansf er of $6,196 has been r ecei ved by t he bank and not been account ed f or i n t he
cash book.
8. He has ent er ed cheque payment number 100600 i nt o t he cash b ook as $1,680, when t he
cor r ect amoun t i s $1,860.
Requir ed:
Cor r ect t he cash book w i t h t he above and pr epar e a bank r econci l i at i on.


Sol ut i on:
Cash Book

30/ 11/ 07 Chq 100678 (1) 459 30/ 11/ 07 b/ d 2,400
30/ 11/ 07 BACS 6,196 30/ 11/ 07 Di r ect Debi t (2) 225
30/ 11/ 07 Di shonour ed
Cheque (5)

1,450
30/ 11/ 07 Bank Char ges (6)
1,400
30/ 11/ 07 Chq 100600 (8) 180
30/ 11/ 07 c/ d 1,000

6,655 6,655

30/ 11/ 07 b/ d 1,000

Bank Reconci l i at i on

Bal ance per bank st at ement (1,550)

Less : Unpr esent ed cheques (3) (5,840)

Add: Out st andi ng l odgement s (4) 8,390

1,000


SESSION 9 ACCRUALS AND PREPAYM ENTS

Expl ai n w hy adj ust ment s ar e necessar y w hen pr epar i ng f i nanci al st at ement s
Comput e t he adj ust ment s needed
Int r oduct i on
The mat chi ng concept s st at es t hat i ncome and expenses i ncur r ed i n t he per i od shoul d be account ed
f or i n t hat per i od, r egar dl ess of when i nvoi ces ar e r ai sed or r ecei ved.
The f undament al r ul e i s t hat i ncome and expendi t ur e ar e r ecogni sed as t hey ar e ear ned or i ncur r ed,
not as money i s r ecei ved or pai d.
In or der t o ensur e i ncome and expendi t ur e i s r ecor ded i n t he cor r ect per i od, i t i s of t en necessar y t o
adj ust t he f i nanci al st at ement s.
Exampl e 1 - Accrual s
A sol e t r ader r ecei ves hi s busi ness gas bi l l quar t er l y i n ar r ear s. In t he year ended 31
st
December
2007 t he f ol l owi ng bi l l s w er e r ecei ved and pai d on t he dat es i ndi cat ed.
30/ 04/ 07 $300
31/ 07/ 07 $310
31/ 10/ 07 $300
When pr epar i ng t he account s f or t he year end t he account ant must adj ust t he Gas l edger account t o
r ef l ect t hat no t al l char ges have been r ecor ded. In t hi s case char ges f or November and December
need t o be i ncl uded.
Accr ual s and pr epayment s wi l l be t he est i mat e of t he adj ust ment needed. The adj ust ment i s
cal cul at ed usi ng t he most up t o dat e i nf or mat i on avai l abl e. In t he exampl e above t hi s wi l l be t he
31/ 10/ 07 bi l l . Ther ef or e t he adj ust ment needed w oul d be 2/ 3 x $300.
The ent r y needed woul d be:
Dr Gas account $200
Cr Accr ual s $200


The l edger account woul d t her ef or e l ook l i ke t hi s:
Gas Account

30/ 04/ 07 Cash 300
31/ 07/ 07 Cash 310
31/ 10/ 07 Cash 300
31/ 12/ 07 Accr ual 200 31/ 12/ 07 Inc St at ement 1,110

1,110 1.110

01/ 01/ 08 Accr ual b/ d 200

It i s i mport ant t o remember t o carr y f orward any accr ual or prepayment t o t he next account i ng
peri od.
(Assumpt i on: busi ness began on 1. 2. 07)


Exampl e 2 - Pr epayment s
Jul i e st ar t s her busi ness on 1
st
August 2007, and pays her busi ness i nsur ance f or t he year t o 31
st
Jul y
2008 t ot al l i ng $1,800. Her year end i s 31
st
December each year .
What char ges f or i nsur ance w oul d be st at ed i n t he i ncome st at ement f or t he per i od ended 31
st

December 2007?

Insur ance Account

01/ 08/ 07 Cash 1,800 31/ 12/ 07 Pr epayment (7/ 12) 1,050
31/ 12/ 07 Inc St at ement 750

1,800 1.800

01/ 01/ 08 Pr epayment b/ d 1,050

Assumi ng t he i nsur ance char ge r emai ns t he same f or t he year ended 31
st
Jul y 2009, t he l edger
account w oul d l ook l i ke t hi s:
Insur ance Account

01/ 08/ 07 Cash 1,800 31/ 12/ 07 Pr epayment (7/ 12) 1,050
31/ 12/ 07 Inc St at ement 750

1,800 1.800

01/ 01/ 08 Pr epayment b/ d 1,050
01/ 08/ 08 Cash 1,800 31/ 12/ 08 Pr epayment (7/ 12 1,050
31/ 12/ 08 Inc St at ement 1,800

2,850 2,850

01/ 01/ 09 Pr epayment b/ d 1,050


SESSION 10 LIM ITED COM PANY ACCOUNTS

Pr epar e a st at ement of compr ehensi ve i ncome
Pr epar e a st at ement of changes i n equi t y
Pr epar e a st at ement of f i nanci al posi t i on

Int r oduct i on
M any busi nesses ar e const i t ut ed i n t he f or m of l i mi t ed compani es. The ow ner s of l i mi t ed
compani es ar e r ef er r ed t o as shar ehol der s and ar e of t en di f f er ent f r om t he peopl e t hat r un t he
company.
The shar ehol der s have ver y l i t t l e, i f any i nvol vement i n t he day t o day r unni ng of t he busi ness and
empl oy di r ect or s t o r un i t on t hei r behal f .
Li mi t ed company f i nanci al st at ement s have ver y st r i ct r equi r ement s w hi ch must be f ol l owed by al l
compani es. These ar e gover ned by:
Compani es Act 2006 (or l ocal count r y l egi sl at i on)
The Int er nat i onal Account i ng St andar ds Boar d


The f or mat t o be adher ed t o per I.A. S. must be t he f or mat we adopt i n our st udi es. The pr of or ma
f i nanci al st at ement s f or l i mi t ed compani es wer e gi ven i n sessi on 2, however a copy i s gi ven bel ow
f or r ef er ence:
Pr of or ma set of f i nanci al st at ement s f or a l i mi t ed company or Pl c
St at ement of f i nanci al posi t i on as at 31 December 2007
Not e
Int angi bl e asset s 6 200,000
Tangi bl e asset s 7 187,999

Cur r ent asset s

Invent or y 8 88,432
Tr ade r ecei vabl es 9 97,455
Cash 13,400 199,287



Shar e capi t al 100,000
Reval uat i on r eser ve 7 38,000 358,497


Int er est bear i ng bor r ow i ngs 10 100,000


Taxat i on 5 51,000 128,789



St at ement of compr ehensi ve i ncome f or t he year ended 31 December 2007
Not e
Revenue 385,000

Cost of sal es 1 188,000


Di st r i but i on cost s 2 38,500

Admi ni st r at i on expenses 3 37,700


Fi nance cost s 8,000


Income t ax 53,000


St at ement Of changes i n equi t y f or t he year ended 31 December 2007
Shar e Ret ai ned Reval uat ion
Capi t al Ear ni ngs Reser ve Tot al

Bal ance as at 1

Jan 2007 100,000 188,697 40,000 328,697

Pr of i t f or t he per i od 59,800 59,800

Excess depr eci at i on 2,000 (2,000)

Di vi dend pai d (30,000) (30,000)

Cl osi ng bal ance 100,000 220,497 38,000 358,497


A l i mi t ed company must f i l e t hei r st at ut or y account s w i t h compani es house. A f ul l set of st at ut or y
account s wi l l i ncl ude:
1. St at ement of compr ehensi ve i ncome
2. St at ement of changes i n equi t y
3. St at ement of f i nanci al posi t i on
4. Cash f l ow st at ement
These st at ement s ar e suppor t ed by not es expl ai ni ng t he bal ances i n t he f i nanci al st at ement s.
One of t he key di f f er ences bet ween a company and a sol e t r ader i s t hat a company i s cl assed as a
separ at e l egal ent i t y. Thi s means t hat a company i s deemed t o be a per son i n i t s own r i ght .
Ther ef or e, a company can sue i ndi vi dual s and can al so be sued. The name l i mi t ed company comes
f r om t he f act t hat t he shar ehol der s have l i mi t ed l i abi l i t y, i n ot her w or ds t hei r l i abi l i t y i s r est r i ct ed t o
t he amount t hey have pai d f or t hei r shar es.
Pr of i t s of a company ar e di st r i but ed by way of di vi dend payment s. These payment s ar e at t he
di r ect or s di scr et i on.
Exampl e 1
Fr eedom Li mi t ed has 100,000 or di nar y shar es i n i ssue. The nomi nal val ue (par val ue) i s $1.00 and
t he di r ect or s deci de t o pay a di vi dend of 75c per shar e.
If t hi s i s t he case t he company w oul d pay $75,000 (100,000 x 0.75) i n di vi dends
Pr ef er ence shar es
Thi s t ype of shar e i s known as a non-equi t y shar e, and get s a f i xed r et ur n on t he val ue of t he shar e.
Pr ef er ence shar e hol der s wi l l r ecei ve t hei r di vi dend ever y year pr ovi di ng t he company has
di st r i but abl e pr of i t .
Or di nar y shar e hol der s wi l l r ecei ve a di vi dend i f t he di r ect or s deci de t o pay one.


Exampl e 2
The f ol l owi ng i nf or mat i on r el at es t o Voyager Li mi t ed
Year ended 31
st
December 2007 $
Shar e capi t al (25c shar es) 100,000
6% Pr ef er ence shar es 50,000

The di r ect or s pr opose an or di nar y di vi dend of 75c per shar e.
Requir ed:
Cal cul at e t he di vi dend payabl e.

Sol ut i on
Or di nar y shar es

100,000 / 0.25 = 400,000 shar es i n i ssue

400,000 x 0.75 300,000


50,000 x 6% 3,000

Tot al di vi dends pai d 303,000


Shar e pr emi um
If a company i ssues shar es af t er t he i ni t i al i ncor por at i on, i t i s unl i kel y t hey wi l l i ssue t hem at a
nomi nal / par val ue. As t he company has est abl i shed i t sel f , t he net wor t h of t he company woul d
i ncr ease. Thi s woul d be r ef l ect ed i n t he shar e pr i ce.
Exampl e 3
The f ol l owi ng r el at es t o Radi ance Li mi t ed
Capi t al and r eser ves
Shar e capi t al ($1.00) 200,000


Reval uat i on r eser ve 125,000

Say t he mar ket val ue pr i ce per shar e i s $3.85 and t he d i r ect or s wi sh t o i ssue a f ur t her 50,000 shar es
f or cash i nj ect i on pur poses.
Cr Shar e Capi t al (50,000 x $1.00) 50,000

Cr Shar e Pr emi um (50,000 x $2.85) 142,500

Dr Bank (50,000 x $3.85) 192,500

The Capi t al and r eser ves woul d now be:
Shar e capi t al ($1.00) 250,000

Shar e pr emi um 142,500


Reval uat i on r eser ve 125,000


Capi t al r eser ve
The shar e pr emi um account i s cl assed as a Capi t al r eser ve. Thi s means t hat t he accoun t cannot be
used t o pay ou t di vi dends. The use of capi t al r eser ves i s ver y l i mi t ed. The key use of t he r eser ve
woul d be t o f i nance a bonus i ssue of shar es. Thi s i s when t he di r ect or s di st r i but e f r ee shar es t o
exi st i ng shar ehol der s.
The account i ng ent r y f or t hi s woul d be:
Cr Shar e capi t al
Dr Shar e pr emi um

Di vi dends
As we have seen pr evi ousl y i n t hi s chapt er , di vi dend payment s ar e used t o di st r i but e pr of i t t o
shar ehol der s. In or der t hat a di vi dend can be pai d, t he company must have r eser ves t hat ar e
di st r i but abl e i .e. t hey cannot be pai d out of any r eser ve t hat i s no t r eal i sed (Reval uat i on r eserve).
Fi nal di vi dends ar e pai d af t er t he year end; on ce t he f i nanci al st at ement s have been compl et ed, and
t he di r ect or s have deci ded t he di vi dend amount .
An i nt er i m di vi dend can al so be pai d mi d way t hr ough t he year .
Exampl e 4
Shar e capi t al (50c) 200,000

10% Pr ef er ence shar es 25,000

An i nt er i m di vi dend of 8c per shar e w as pai d dur i ng t he year and t he di r ect or s woul d l i ke t o pr opose
a f i nal di vi dend of 9c per shar e.
Requir ed:
Cal cul at e t he t ot al di vi dend payabl e f or t he year ended 31
st
M ay 2007.


Sol ut i on
Or di nar y shar es

$200,000 / $ 0.50 = 400,000 shar es i n i ssue

Int er i m di vi dend (400,000 x 8c) 32,000

Fi nal di vi dend (400,000 x 9c) 36,000


10% x $25,000 2,500

70,500

Taxat ion
Al l compani es have t o pay t ax on t he t axabl e pr of i t s. The t ax char ge i s nor mal l y est i mat ed at t he
end of t he f i nanci al year and char ged t o t he st at ement of compr ehensi ve i ncome, and i s pai d i n t he
f ol l ow i ng year .
The account i ng ent r y f or t axat i on w oul d be:
Dr Taxat i on Compr ehensi ve i ncome
Cr Taxat i on l i abi li t y Fi nanci al posi t i on


Exampl e 5
The t r i al bal ance of Jew el Li mi t ed as at 31
st
M ar ch 2007 w as as f ol l ow s:
Dr Cr

Shar e capi t al (50c) 100,000
6% Pr ef er ence shar es ($1.00) 50,000
Ret ai ned ear ni ngs at 01/ 04/ 06 234,666
Debent ur e 10% 100,000
Invent or y at 01/ 04/ 06 32,000
Tr ade r ecei vabl es 45,987
Recei vabl es pr ovi si on 5.987
Cash 73,958
Bui l di ng cost account 150,000
Pl ant and machi ner y at net book val ue 422,987
Debent ur e i nt er est 5,000
Admi ni st r at i ve expenses 48,000
Di st r i but i on expenses 49,000
Pr of i t on di sposal s 1,000
Pur chases 69,666
Revenue 365,000

896,598 896,598

Not es
1. Depr eci at i on on bui l di ng i s t o be char ged at 2%
2. Depr eci at i on on pl ant and machi ner y i s t o be char ged at 10% r educi ng bal ance
3. Cl osi ng i nvent or y was val ued at $28,990
4. A pr ovi si on of 5% of r ecei vabl es i s t o be mai nt ai ned
5. Tax char ge i s est i mat ed at $25,000
6. A f i nal di vi dend of 15c per shar e has been pr oposed bef or e t he year end.
Requi r ed
Pr epar e t he st at ement of compr ehensi ve i ncome, st at ement of changes i n equi t y and t he st at ement
of f i nanci al posi t i on f or Jewel Li mi t ed f or t he year ended 31
st
M ar ch 2007.


Sol ut i on
Journal s
Dr Cr

1. Dr Depr eci at i on char ge (150,000 x 2%) 3,000
Cr Accumul at ed depr eci at i on - Bui l di ngs
3,000

2. Dr Depr eci at i on char ge (422,987 x 10%) 42,299
Cr Accumul at ed depr eci at i on P & M 42,299

3. Dr Cl osi ng i nvent or y (comp i ncome) 28,990
Cr Cl osi ng i nvent or y (f i nanci al posi t i on) 28,990

4. Dr Recei vabl es pr ovi si on account Wor k
1
3,688
Cr Admi ni st r at i on expenses 3,688

5. Dr Taxat i on 25,000
Cr Taxat i on l i abi li t y 25,000

6. Dr Pr ef Di vi dends 3,000
Cr Pr oposed Di v (pr ef s) 3,000

7. Dr Di vi dends i n SOCIE (100,000 / 0.5 x 15c)
30,000

Cr Pr oposed di vi dends 30,000

8. Dr Debent ur e i nt er est (10,000 5,000) 5,000
Cr Debent ur e i nt er est accr ual 5,000

Wor ki ng 1
Recei vabl es Pr ovision Account

01/ 04/ 06 b/ d 5,987

31/ 03/ 07 Admi n expenses
(w r i t t en back t o
I/ S)

3,688

31/ 03/ 07 c/ d (45,987 x 5%)
2,299

5,987 5,987


Jew el Li mi t ed
Year ended 31
st
M ar ch 2007

Revenue 365,000

Cost of sal es (32,000 + 69666 28990) (72,676)


Di st r i but i on cost s (49,000)

Admi ni st r at i on expenses (48,000 + 3000 + 42,299 3688 + 1000)
(88,611)


Fi nance cost s (10,000)


Income t ax (25,000)



Jew el Li mi t ed
St at ement of f i nanci al posi t i on
As at 31
st
M ar ch 2007


Tangi bl e asset s (150,000 + 422,987 3,000 42,299)
527,688

Cur r ent asset s

Invent or y 28,990
Tr ade r ecei vabl es (45,987 2,299) 43,688
Cash 73,958
146,636


Or di nar y shar e capi t al 100,000
Pr ef er ence shar e capi t al 50,000
Ret ai ned ear ni ngs (234,666 + 119,713 30,000
3,000 Pr ef Di v)

321,379

471,379


Debent ur e 100,000


Debent ur e accr ual 5,000
Pr oposed di vi dend 33,000
Taxat i on 25,000
102,945



Or di nary
Shar es
Pr ef er ence
Shar es
Revaluat ion
Reser ve
Ret ai ned
Ear ni ngs
Tot al

Bal ance @ 01/ 04/ 06 100,000 50,000 234,666 384,666

Pr of i t f or t he year 119,713 119,713

Di vi dends: or d (30,000) (30,000)
pr ef (3,000) (3,000)
Shar es i ssued

Reval uat i on

Bal ance @ 31/ 03/ 07 100,000 50,000 321,379 471,379


SESSION 11 STATEM ENTS OF CASH FLOW

Expl ai n t he pur pose of pr o duci ng a cash f l ow st at ement
Di scuss t he advant ages of a cash f l ow st at ement
Expl ai n t he pr i nci pl es of I. A.S. 7
Pr oduce a cash f l ow st at ement
Int r oduct i on
The cash f l ow st at ement i s a pr i mar y f i nanci al st at ement and pr ovi des f undament al i nf or mat i on t o
t he user of account s. It hi ghl i ght s t he key ar eas w her e a busi ness has gener at ed and spent physi cal
cash.
Good cash management ensur es a busi ness has suf f i ci ent cash t o r un i t s day t o day oper at i ons.
Pr i or t o t hi s sessi on w e have f ocused on pr of i t , but cash i s equal l y vi t al f or t he success of a busi ness,
especi al l y i n t he shor t t er m. If a busi ness has l i mi t ed cash f unds avai l abl e i t wi l l st r uggl e t o sur vi ve i n
t he shor t t er m.
Advant ages
Cash f l ow bal ances ar e a mat t er of f act and ar e not di st or t ed by accoun t i ng pol i ci es
Cash f l ow bal ances ar e obj ect i ve, unl i ke pr of i t whi ch i s subj ect i ve
User s of f i nanci al st at ement s can est abl i sh exact l y t he cash gener at i on of a busi ness
User s can i dent i f y exact l y how t hi s cash has been ut i l i sed
User s can assess t he l i qui di t y of a busi ness and assess i t s abi l i t y t o r epay debt s as t hey f al l
due
Loans r epai d and r ecei ved ar e cl ear l y l i st ed i n t he cash f l ow st at ement
User s can assess management at t i t ude t o capi t al expendi t ur e
Int er est payment s ar e hi ghl i ght ed i n t he cash f l ow


I.A.S. 7
I.A.S. 7 l ays down t he r equi r ement s of a cash f l ow st at ement . It gi ves us a det ai l ed pr of or ma and
cer t ai n def i ni t i ons:
Cash
Cash t hat i s avai l abl e on demand. An exampl e w oul d be cash i n t he bank l ess any over dr af t .
Cash equi val ent s
Shor t t er m, hi ghl y l i qui d i nvest ment s (w i l l be st at ed as cur r ent asset s i n St at ement of Fi nanci al
Posi t i on)
I.A.S. 7 has t hr ee mai n headi ngs. St udent s shoul d f ami l i ar i se t he l ayout of a cash f l ow as quest i ons
i n t he exam wi l l t est t hi s ar ea.
The t hr ee mai n headi ngs ar e:
Cash f l ows f r om oper at i ng act i vi t i es
Cash f l ow s f r om i nvest i ng act i vi t i es
Cash f l ow s f r om f i nanci ng act i vi t i es


Pr of or ma
St at ement of Cash Fl ow f or year t o .
$ $

Cash f l ow s f r om oper at i ng act i vi t i es

Pr of i t bef or e t ax X

Adj ust ment s f or :

Int er est payabl e X
Depr eci at i on X
(Pr of i t ) / l oss on t he di sposal of a non cur r ent asset (X) X

Oper at i ng pr of i t bef or e w or ki ng capi t al changes X

Wor ki ng capi t al changes

(Incr ease) / Decr ease i n i nvent or i es (X) X
(Incr ease) / Decr ease i n r ecei vabl es (X) X
Incr ease / (Decr ease) i n payabl es X (X)

Cash gener at ed f r om operat ions X

Int er est pai d (X)
Taxat i on pai d (X)

NET CASH FROM OPERATING ACTIVITIES X


Pr of orma cont i nued
$ $

NET CASH FROM OPERATING ACTIVITIES X

Cash f l ow f r om i nvest i ng act i vi t i es

Pur chase of a non-cur r ent asset (X)
Di sposal of a non-cur r ent asset X
Int er est r ecei ved X
Di vi dends r eceived X

CASH FLOW FROM INVESTING ACTIVITIES X

Cash f l ow f r om f i nanci ng act i vi t i es

Pr oceeds f r om t he i ssue of shar es X
Recei pt of l oans X
Repayment of l oans (X)
Di vi dends pai d (X)

CASH FLOW FROM FINANCING ACTIVITIES X

NET CASH FLOW X

Cash and cash equi val ent s at t he begi nni ng of t he per i od
X

Cash and cash equi val ent s at t he end of t he per i od X


Exampl e 1
Radi ance Li mi t ed
As at 31 December 2007
2006 2007
Non-cur r ent asset s
Cost 180 220
Accumul at ed depr eci at i on (78) (92)
102 128
Cur r ent asset s
Invent or y 12 17
Tr ade r ecei vabl es 2 10
Bonds 10 10
Cash 3 16
129 181
Capit al and r eser ves
Shar e capi t al 45 65
Shar e pr emi um 10 12
Accumul at ed pr of i t s 24 68

Non-cur r ent l i abi l i t i es
Loan 30 20

Payabl es 19 13
Tax 1 3
129 181

Not es
The t ax char ge i n t he st at ement of compr ehensi ve i ncome i s $6,000.
Loan was r epai d at t he end of t he f i nanci al year .
Requi r ed
Pr epar e t he cash f l ow st at ement f or t he year ended 31
st
December 2007.


Sol ut i on
$ $

Cash f l ow s f r om oper at i ng act i vi t i es

Pr of i t bef or e t ax (68 24) + 6 50

Adj ust ment s f or :

Int er est payabl e -
Depr eci at i on (92 78) 14
(Pr of i t ) / l oss on t he di sposal of a non cur r ent asset -

Oper at i ng pr of i t bef or e w or ki ng capi t al changes 64

Wor ki ng capi t al changes

(Incr ease) i n i nvent or y (17 12) (5)
(Incr ease) i n r ecei vabl es (10 2) (8)
(Decr ease) i n payabl es (19 13) (6)

Cash gener at ed f r om operat ions 45

Int er est pai d -
Taxat i on pai d (w or ki ng 1) (4)

NET CASH FROM OPERATING ACTIVITIES 41


$ $

NET CASH FROM OPERATING ACTIVITIES 41

Cash f l ow f r om i nvest i ng act i vi t i es

Pur chase of a non-cur r ent asset (220 180) (40)
Di sposal of a non-cur r ent asset s -
Int er est r ecei ved -
Di vi dends r eceived -

NET CASH USED IN INVESTING ACTIVITIES (40)

Cash f l ow f r om f i nanci ng act i vi t i es

Pr oceeds f r om t he i ssue of shar es (65 45) + (12 10) 22
Recei pt of l oans -
Repayment of l oans (10)
Di vi dends pai d -

CASH FLOW FROM FINANCING ACTIVITI ES 12

NET CASH FLOW 13

Cash and cash equi val ent s at t he begi nni ng of t he per i od (10+3)
13

Cash and cash equi val ent s at t he end of t he per i od (10+3)
26


Wor ki ng 1
Taxat i on Li abi l i t y

01/ 01/ 07 b/ d 1
Cash pai d (Bal Fi g) 4 31/ 12/ 07 Char ge f or year 6
31/ 12/ 07 c/ d 3

7 7

01/ 01/ 08 b/ d 7

Di r ect M et hod
The di r ect met hod i nvol ves addi ng t oget her t he cash i nf l ows and deduct i ng t he cash out f l ows.
Exampl e 2
The f ol l owi ng i nf or mat i on r el at es t o Empr ess Li mi t ed:
Cash sal es 55,000
Cash r ecei ved f r om cust omer s 44,000
Cash pai d t o suppl i er s 12,000
Cash expenses 11,000
Cash w ages and sal ar i es 20,000

Requir ed:
Cal cul at e t he cash gener at i on f or Empr ess Li mi t ed


Sol ut i on
Cash sal es 55,000
Cash r ecei ved f r om cust omer s 44,000

Tot al cash r ecei ved 99,000

Cash pai d t o suppl i er s 12,000
Cash expenses 11,000
Cash w ages and sal ar i es 20,000

Tot al cash pai d 76,000

Cash gener at ed 23,000


SESSION 12 INCOM PLETE RECORDS

Int r oduct i on
As t he name suggest s, i ncompl et e r ecor ds ar e any f or m of account i ng r ecor ds o t her t han t he f ul l
doubl e ent r y syst em.
In r eal i t y, account ant s come acr oss i ncompl et e r ecor d s al most dai l y. Thi s i s because t hei r cl i ent s ar e
not l i kel y t o f ul l y under st and t he doubl e en t r y syst em. We st i l l however , need t o pr epar e a set of
f i nanci al st at ement s f or t he cl i ent .
Dur i ng t he exam, st udent s wi l l of t en come acr oss i ncompl et e r ecor ds. The mai n r eason i s of t en due
t o a f l ood or f i r e at t he busi ness pr emi ses.
Calcul at i ng pr of i t
If a busi ness has ver y l i t t l e i nf or mat i on about i t s t r ansact i ons, i t may onl y be possi bl e t o cal cul at e i t s
net pr of i t f or t he year . Thi s can be done by usi ng t he account i ng equat i on ( t hi s i s ver y i mpor t ant ).
The account i ng equat i on can be w r i t t en as:
Net Asset s = Capit al + Prof it - Drawings
Or
Change i n net asset s = Capi t al i nt roduced + Prof i t Dr awi ngs
You may r eal i se t hat t hi s i s ver y si mi l ar t o t he st at ement of f i nanci al posi t i on.
Exampl e 1
A sol e t r ader s st at ement of f i nanci al posi t i on at 31
st
December 2006 show s t hat t he busi ness has
net asset s of $5,000. The st at ement of f i nanci al posi t i on at 31
st
December 2007 show s t hat t he
busi ness has net asset s of $8,000. The ow ner s dr aw i ngs f or t he year amount ed t o $2,500 and he
di dn t i nt r oduce any f ur t her capi t al i n t he year
Requi r ed
Cal cul at e t he pr of i t f or t he year ended 31
st
December 2007.


Sol ut i on:
Change in
net asset s
Capit al
i nt r oduced
Pr of i t f or
t he year
Dr aw i ng i n
per i od

3,000 = 0 + ? - 2,500

Thi s can be w r i t t en as:

3,000 - 0 + 2,500 = Pr of i t

Pr of i t = 5,500

As you can see i t i s i mpossi bl e t o know t he make-up of t he net pr of i t f i gur e due t o l ack of
i nf or mat i on.
Pr epar ing f i nanci al st at ement s f r om i ncompl et e r ecords
In t he maj or i t y of cases a smal l busi ness wi l l keep l i mi t ed amount of r ecor ds.
In t hese t ypes of quest i ons you wi l l be gi ven i nf or mat i on r egar di ng t he openi ng and cl osi ng bal ances
of asset s and l i abi l i t i es of t he busi ness. You wi l l al so be gi ven i nf or mat i on about cer t ai n t r ansact i ons
dur i ng t he per i od; t hi s i s usual l y a summar y of t he cash book.
Ther e ar e t wo mai n t echni ques used i n i ncompl et e r ecor ds:
1. Bal anci ng f i gur es i n l edger account s
2. Rat i os f or mar k-up (based on cost ) or mar gi n (based on sel l i ng pr i ce)
Bal anci ng f i gur es
The bal anci ng f i gur e appr oach i s commonl y used t he f ol l owi ng w ay:
Ledger Account M i ssi ng Fi gur e
Account s r ecei vabl e Sal es
M oney r ecei ved f r om account s
r ecei vabl e
Account s payabl e Pur chases
M oney pai d t o account s payabl e
Cash at bank Dr aw i ngs
M oney st ol en
Cash i n hand Cash sal es
Cash st ol en
Exampl e 2


Suppose t hat t he openi ng bal ance on t he account s r ecei vabl es l edger w as $50,000, t her e had been
r ecei pt s f r om account r ecei vabl es i n t he year of $45,000, i r r ecover abl e debt s have been wr i t t en of f
wor t h $5,000 and t he cl osi ng bal ance w as $55,000.
Requir ed:
What w er e t he cr edi t sal es f or t he year ?
Account Recei vabl es

Openi ng b/ d 50,000 Recei pt s 45,000
Sal es (Bal Fi g) 55,000 Bad debt s 5,000
Cl osi ng c/ d 55,000

105,000 105,000

Exampl e 3
Suppose t hat t he openi ng account s r ecei vabl es bal ance w as $30,000, t her e have been t ot al r ecei pt s
f r om cust omer s of $55,000 of whi ch $15,000 r el at es t o cash sal es and $40,000 r el at es t o r ecei pt s
f r om account s r ecei vabl es. Di scount s al l owed i n t he year t ot al l ed $3,000 and t he cl osi ng bal ance
was $37,000.
Requir ed:
What ar e t he t ot al sal es f or t he year ?
Due t o t he i nf or mat i on gi ven i n t he quest i on we can appr oach t hi s i n 2 di f f er ent ways. We can
cal cul at e cr edi t sal es as above and t hen add on cash sal es, or w e can use t he l edger account t o
cal cul at e t ot al sal es. Bot h met hods ar e show n bel ow:
Sol ut i on 1 - Tot al sal es
Account Recei vabl es (Tot al Sal es a/ c)

01/ 01/ 07 b/ d 30,000 31/ 12/ 07 Tot al r ecei pt s 55,000
31/ 12/ 07 Tot al sal es (Bal f i g)
65,000
31/ 12/ 07 Di scount s al l ow ed 3,000
31/ 12/ 07 c/ d 37,000

95,000 95,000

Sol ut i on 2 - Separ at e sal es
Account Recei vabl es


01/ 01/ 07 b/ d 30,000 31/ 12/ 07 Cr edi t r ecei pt s 40,000
31/ 12/ 07 Cr edi t sal es 50,000 31/ 12/ 07 Di scount s al l ow ed 3,000
31/ 12/ 07 c/ d 37,000

80,000 80,000

Cr edi t sal es 50,000
Cash sal es 15,000
Tot al sal es 65,000

Exampl e 4
The openi ng bal ance on t he account s payabl e l edger w as $30,000. Payment s made t o account
payabl es dur i ng t he year wer e $33.000, di scount s r ecei ved ar e $4,000 and t he cl osi ng bal ance w as
$26,000.
Requir ed:
What w as t he t ot al pur chases f i gur e f or t he year ?
Sol ut i on:
Payabl es Cont r ol a/ c

31/ 12/ 07 Payment s 33,000 01/ 12/ 07 b/ d 30,000
31/ 12/ 07 Di scount s r ecei ved 4,000
31/ 12/ 07 c/ d 26,000 31/ 12/ 07 Pur chases 33,000

63,000 63,000


Exampl e 5
Suppose t he openi ng account s payabl e bal ance i s $15,000, t he t ot al payment s made t o suppl i er s
was $14,000 of whi ch $10,000 r el at ed t o cr edi t pur chases. Di scount s r ecei ved wer e $500 and t he
cl osi ng bal ance w as 11,000.
Requir ed:
What w as t he t ot al pur chases f i gur e f or t he year ?
Sol ut i on:
Tot al Pur chases a/ c (Account Payabl es)

31/ 12/ 07 Tot al payment s 14,000 01/ 12/ 07 b/ d 15,000
31/ 12/ 07 Di scount s r ecei ved 500
31/ 12/ 07 c/ d 11,000 31/ 12/ 07 Pur chases 10,500

25,500 25,500

Exampl e 6
The f ol l owi ng i nf or mat i on r el at es t o t he r ent and r at es f or Susan f or t he year ended 31
st
December
2007.
Openi ng bal ance Rent pr epai d 300
Rat es accr ued 500
Cash pai d dur i ng t he year Rent and r at es 4,100
Cl osi ng bal ance Rent pr epai d 350
Rat es accr ued 450

Sol ut i on:
Rent and Rat es

01/ 01/ 07 Rent b/ d (Pr epai d)
300
01/ 01/ 07 Rat es b/ d
(Accr ued)

500
31/ 12/ 07 Cash pai d 4,100 31/ 12/ 07 Char ge (Bal Fi g) 4,000
31/ 12/ 07 Rat es accr ued 450 31/ 12/ 07 Rent pr epai d 350

4,850 4,850


Exampl e 7
On 1
st
Januar y t he bank i s over dr aw n by $1,367, paym ent s i n t he year t ot al l ed $8,536 and on 31
st

December t he cl osi ng bal ance was a posi t i ve bal ance of $2,227.
Requir ed:
What i s t he t ot al r ecei pt s f i gur e f or t he year ?
Sol ut i on:
Cash Book

31/ 12/ 07 Recei pt s 12,130 01/ 01/ 07 b/ d 1,367
31/ 12/ 07 Payment s 8,536
31/ 12/ 07 c/ d 2,227

12,130 12,130

Exampl e 8
Scot t has a cash f l oat at t he begi nni ng of t he year of $900. Dur i ng t he year cash of $10,000 was
banked, $1,000 was pai d out f or dr awi ngs and wages of $2,000 was pai d. Scot t deci ded t o i ncr ease
t he f l oat t o $1,000 at t he end of t he year .
Requir ed:
How much cash was r ecei ved f r om cust omer s dur i ng t he year ?
Sol ut i on:
Cash Account

01/ 01/ 07 b/ d 900 31/ 12/ 07 Banked 10,000
31/ 12/ 07 Dr aw i ngs 1,000
31/ 12/ 07 Recei pt s 13,100 31/ 12/ 07 Wages 2,000
31/ 12/ 07 c/ d 1,000

14,000 14,000


Rat i os M ar k-up and M argi n
The gr oss pr of i t of a company can be expr essed as a per cent age. Thi s per cent age can be cal cul at ed
based on t he sal es f i gur e or t he cost of sal es f i gur e.
Gr oss Pr of i t M ar k-up Based on Cost of Sal es
Gr oss Pr of i t M ar gi n Based on Sal es
If we l ook at t he f ol l owi ng t r adi ng account :
Sal es REvenue 5,000

Cost of sal es 4,000

Gr oss pr of i t 1,000

Gr oss pr of i t mar k-up 1,000 / 4,000 x 100 = 25%
Gr oss pr of i t mar gi n 1,000 / 5,000 x 100 = 20%

Exampl e 9
M ar gi n 25% Sal es $1,000
Requir ed:
What i s t he gr oss pr of i t and cost of sal es?
$ %
Sal es 1,000 100%

Cost of sal es (1,000 / 100 x 75) (Bal f i g) 750 75%

Gr oss pr of i t 250 25%


Exampl e 10
M ar k-up 25% Cost of sal es $600
Requir ed:
What i s gr oss pr of i t and sal es?
Sal es (600 / 100 x 125) 750 125%

Cost of sal es 600 100%


Exampl e 11
M ar k-up 10%
Sal es $6,600
Openi ng i nvent or y $300
Cl osi ng i nvent or y $500
Requir ed:
Compl et e a t r adi ng account f r om t he above i nf or mat i on.
Sal es 6,600 110%

Cost of sales

Pur chases (Bal anci ng Fi gur e) 6,200
Cl osi ng i nvent or y (500)
6,000 100%

Gr oss pr of i t (6,600 / 110 x 10) 600 10%


Exampl e 12
M ar gi n 5%
Pur chases $2,840
Openi ng i nvent or y $800
Cl osi ng i nvent or y $600
Requir ed:
Sal es (3,040 / 95 x 100) 3,200 100%

Cost of sales

Pur chases 2,840
Cl osi ng i nvent or y (600)
3,040 95%


Cost of l ost i nvent or y
In i ncompl et e r ecor d quest i ons, i t i s l i kel y t hat i nvent or y has been l ost due t o t he i nf amous f i r e or
f l ood.
Cl osi ng i nvent or y t hat has not been l ost i s subt r act ed i n cost of sal es because by def i ni t i on, t he
i nvent or y has not been sol d i n t he year .
Lost i nvent or y has al so no t been sol d i n t he year and t her ef or e al so needs subt r act i ng wi t hi n cost of
sal es.
Ther ef or e, t o wor k out t he cost of l ost i nvent or y, com pl et e t he t r adi ng account f r om t he i nf or mat i on
gi ven and t hen l ost i nvent or y can be cal cul at ed as a bal anci ng f i gure.


Exampl e 13
M ar gi n 20%
Sal es $100,000
Openi ng i nvent or y $10,000
Cl osi ng i nvent or y (af t er f i r e) $3,000
Pur chases $82,000
Requir ed:
Sal es 100,000 100%

Cost of sales

Pur chases 82,000
Invent or y l ost i n f i r e (bal anci ng f i gur e) (9,000)
80,000 80%

Gr oss pr of i t (100,000 / 100 x 20) 20,000 20%


SESSION 13 PARTNERSHIPS
Def i ni t i on
The r el at i onshi p whi ch subsi st s bet ween per sons car r yi ng on a busi ness i n common wi t h a vi ew t o
pr of i t
A par t ner shi p t her ef or e has t wo or mor e par t ner s or owner s. In t he same way as f or a sol e t r ader ,
t he pr of i t s of t he busi ness ar e owned by t he par t ner s. Thi s makes i t necessar y t o shar e t he pr of i t s of
t he busi ness amongst t he par t ner s.
A par t ner shi p wi l l usual l y have a Par t ner shi p Agr eement whi ch wi l l st at e how t he pr of i t s ar e t o be
shar ed amongst ot her t hi ngs.
THE SHARING STORY
A par t ner shi p has f our par t ner s Jason, Howar d, Gar y and M ar k. In t he year t o 30
t h
June 2007 t he
par t ner shi p has made pr of i t s t ot al l i ng $106,250.
Jason i s r i ch but st upi d. He was made a par t ner becau se he coul d i nvest $100,000 i nt o t he
par t ner shi p. He wi t hdr ew $30,000 f r om t he busi ness on 1
st
Jul y 2006.
How ar d i s poor but cl ever and coul d onl y i nvest $20,000 i nt o t he par t ner shi p. Due t o hi m bei ng
cl ever and compl et i ng wor k qui cker t han t he ot her par t ner s he t ook r esponsi bi l i t y f or hi r i ng and
f i r i ng st af f i n t he busi ness. He wi t hdr ew $30,000 on 30
t h
June 2007.
Gar y i nvest ed $50,000 i nt o t he par t ner shi p. He has a l i ki ng f or desi gner cl ot hes and f ast car s.
Consequent l y he w i t hdr ew $25,000 on 1
st
Jul y 2006 an d a f ur t her $25,000 on 1
st
Januar y 2007.
M ar k al so i nvest ed $50,000 and wi t hdr ew $30,000 on 1
st
Jul y 2006. M ar k s w i f e has j ust had a baby
and he woul d t her ef or e l i ke t o have a guar ant eed shar e of t he pr of i t s.
The par t ner s have deci ded t hat pr of i t s shoul d be di st r i but ed at a r at i o of 2 : 1 : 3 : 4 (Jason : Howar d :
Gar y : M ar k)

How do you t hi nk t he pr of i t s shoul d be shar ed amongst t he par t ner s?

F B T P U B L I SH I N G A CC A F 3 F i n a n c i a l A c c o u n t i n g P a g e 1 0 0

Int er est on capi t al
To r ew ar d par t ner s w ho have i nvest ed mor e i nt o t he b usi ness, t he par t ner shi p may al l ocat e some of
t he pr of i t s based on t he l evel of capi t al i nvest ed. Thi s i s cal l ed i nt er est on capi t al .
Sal ari es
To r ew ar d t hose par t ner s w ho t ake on ext r a r esponsi bi l i t i es w i t h-i n t he busi ness, t hey may r ecei ve a
sal ar y. A par t ner s sal ar y i s not a busi ness expense l i ke t he sal ar y of an empl oyee, but a way i n
whi ch pr of i t s ar e al l ocat ed.
Int er est on dr aw i ngs
To penal i se t hose par t ner s who t ake out mor e dr awi ngs f r om t he busi ness, t he par t ner shi p may
char ge i nt er est on dr aw i ngs. Int er est on dr aw i ngs r esul t s i n a r educt i on i n t he amount of pr of i t t he
par t ner i s al l ocat ed.
Pr of i t shar ing r at i o
Thi s i s t he r at i o i n whi ch any r emai ni ng pr of i t s shoul d be shar ed amongst t he par t ner s af t er t hey
have been al l ocat ed i nt er est on capi t al , sal ar i es and i nt er est on dr awi ngs.
Guarant eed mi ni mum pr of i t shar e
A par t ner may be guar ant eed a mi ni mum shar e of t he pr of i t s. If t he par t ner has not r ecei ved t hi s
shar e af t er al l ocat i ng pr of i t s i n accor dance t o t he above, t he shor t f al l shoul d be gi ven t o t he par t ner .
The shor t f al l i s t hen t aken f r om t he o t her par t ner s i n accor dance wi t h t he pr of i t shar i ng r at i o.
Exampl e 1
Usi ng t he amount s det ai l ed i n t he shar i ng st or y, al l ocat e t he pr of i t s of t he busi ness i n accor dance
wi t h t he f ol l owi ng par t ner shi p agr eement :
a) Int er est on capi t al i s 5% per annum
b) Howar d i s t o r ecei ve a sal ar y of $5,000
c) Int er est on dr awi ngs i s 10% per annum
d) Pr of i t shar i ng r at i o i s as st at ed 2 : 1 : 3 : 4
e) M ar k has a guar ant eed mi ni mum pr of i t shar e of $42,500


Appr opr iat i on of Prof i t Account

Jason How ar d Gar y M ar k Tot al

Pr of i t 106,250

Int er est on capi t al 5,000 1,000 2,500 2,500 (11,000)
Sal ar i es - 5,000 - - (5,000)
Int er est on dr awi ngs (3,000) - (3,750) (3,000) 9,750
100,000
P.S.R. 2 : 1 : 3 : 4 20,000 10,000 30,000 40,000 (100,000)
22,000 16,000 28,750 39,500 -
Guar ant eed shar e (1,000) (500) (1,500) 3,000
21,000 15,500 27,250 42,500

Fi nanci al st at ement s f or a par t nership
The f or mat of t he f i nanci al st at ement s f or a par t ner shi p wi l l be t he same as f or a sol e t r ader except
f or t he capi t al sect i on of t he st at ement of f i nanci al posi t i on.
Each par t ner w i l l have a capi t al account and a cur r ent account .
Capit al account
Thi s wi l l r ecor d t he asset s t hat have been i nt r oduced i nt o t he par t ner shi p. The account wi l l r emai n
f i xed unl ess mor e asset s ar e i nt r oduced. The capi t al account wi l l have a cr edi t bal ance.
Capit al Account s
A B C A B C

Bal ance b/ d X X X

Bank X X X

Bal ance c/ d X X X

X X X X X X


Curr ent account
The cur r ent account wi l l r ecor d t he par t ner s shar e of pr of i t s and dr awi ngs. The cur r ent account wi l l
usual l y have a cr edi t bal ance but may have a debi t bal ance i ndi cat i ng t hat t hey have w i t hdr aw n
mor e t han t he pr of i t s t hey ar e ent i t l ed t o.
Cur r ent Account s
A B C A B C

Bal ance b/ d X X X
Shar e of pr of i t s X X X
Dr aw i ngs X X X Loan i nt er est X X X
Bal ance c/ d X X X

X X X X X X

The capi t al sect i on of t he st at ement of f i nanci al posi t i on w i l l l ook l i ke:
Capit al Account s A X
B X
C X
X
Curr ent Account s A X
B X
C X
X

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