------------------ ELEVEN -----------------

Copyright ©2017

Contents
1. ADJUSTEMENTS TO FINAL ACCOUNTS
2. LIMITATIONS OF THE TRIAL BALANCE AND SUSPENSE ACCOUNT
3. BANK RECOCILIATION STATEMENT
4. CONTRAL ACCOUNTS
 5. ACCOUNTS OF NON PROFIT MAKING ORGANISATIONS
6. CAPITAL AND REVENUE EXPENDITURE AND RECEIPTS

1. ADJUSTMENTS TO FINAL ACCOUNTS

ADJUSTMENTS TO FINAL ACCOUNTS

 Explain the purpose of adjustments to final accounts.
 Identify adjustments to final accounts.

 Record all the adjustments correctly.

1) DEPRECIAITON
EXPLAIN DEPRECIATION

Depreciation is the measure of the wearing out, consumption or other reductions in the useful
economic life of a fixed asset. It is loss of value of a fixed asset.

This may arise from:

use of the asset eg, Plant and machinery, motor vehicles etc.
passing of time eg, a term, year lease of property.
Obsolescence through technology and market changes eg, machinery of a specialised nature.
Depletion eg, extraction of minerals from a mine.

Purpose of depreciation

The purpose of depreciation is to allocate the cost of the fixed asset over the expected life of that asset. It is
not a method for providing for, or saving up for, replacement of fixed assets.

DESCRIBE METHODS OF DEPRECIATION

METHODS OF CALCULATING DEPRECIATION

There are several methods of calculating depreciation, but the following are the two most common ones:
1) Straight line method or Equal/fixed instalment method
2) Reducing balance method or diminishing balance method

Examiners will specify which method is to be used in an examination. If they do not, the straight line
method should generally be adopted as it is the easiest to use.
 i) STRAIGHT LINE METHOD
Under this method, an equal amount is charged as depreciation for each year of the expected life of the
asset. To calculate the depreciation charge, the following information is necessary:

 the original or historical cost of the asset

 an estimate of its useful life to the business
 an estimate of its residual value at the end of its useful life

The depreciation charge is calculated as follows:

Annual depreciation = Original cost - estimated residual value

Estimated useful life

CALCULATE DEPRECIATION ON FIXED ASSETS

QUESTION:

A motor vehicle was purchased on 1st January 2005 at a cost of K25 000 000. It is
estimated that its useful life is eight years, after which it will have a scrap value of
K5 000 000. Calculate the annual depreciation charge.

Solution:

Annual depreciation = cost of asset - estimated residual value

Estimated useful life

= 25 000 000 - 5 000 000

8
= K2 500 0000

Notes:

 Depreciation is often expressed as percentage of the original cost eg, 20% on cost p.a.
 In most cases the residual value is not specified, and in such cases, it should be taken to be zero.
ii) REDUCING BALANCE METHOD
DESCRIBE THIS METHOD OF DEPRECIATION

Under this method the depreciation charge is higher in the earlier years of the life of the
asset. It is calculated using a fixed percentage on the net book value. Net book value
(NBV) of a fixed asset is its cost less the accumulated
depreciation on the asset to date.

CALCULATE DEPRECIATION ON FIXED ASSETS

QUESTION:

A trader bought a machine at K10 000 000. Depreciation is charged at a rate of 20% pa on
net book value. Calculate the depreciation charges for the first 4 years of its life.

Solution
Year NBV Depreciaiton charge Accumulated depreciaiton
K K
1 10 000 000 x 20% 2 000 000 2 000 000

2 8 000 000 x 20% 1 600 000 3 600 000

3 6 400 000 x 20% 1 280 000 4 880 000

4 5 120 000 x 20% 1 024 000 5 904 000

iii) DISPOSAL OF FIXED ASSETS

DESCRIBE THIS METHOD OF DEPRECIATION

Disposal involves the selling of fixed assets that are no longer useful. The accounting process
 For the disposal of fixed assets is as follows:

i) When the asset is sold, the first step is to remove the original cost of that asset from our accounting
records. The double entry being:

Dr - Disposal of fixed assets account

Cr - Fixed asset account
ii) The next step is to remove all the depreciation that has been charged on that asset from our
accounting records. The double entry being:
Dr - Provision for depreciation account
Cr - Disposal of fixed asset account

iii) When the proceeds from the disposal are received, the double entry is:
Dr - Cash book
Cr - Disposal of fixed asset account
If the asset is sold on credit, then the double entry is:
Dr - Debtor account
Cr - Disposal of fixed asset account

The balance in the disposal account, which represents a profit or loss on disposal, will be
Transferred to the profit and loss account at the end of the year as follows:
a) If there is a profit, the double entry is:
Dr - Disposal of fixed asset account
Cr - Profit and loss account
b) If there is a loss, the double entry is:
Dr - Profit and loss account
Cr - Disposal of fixed asset account

CALCULATE DEPRECIATION ON FIXED ASSETS

QUESTION:
Zulu and co. Ltd has been trading for many years, making up accounts to 31st December.
On 1st July 2002, the company bought a motor van at a cost of K24 000 000. The van has an estimated
useful life of five years, with a residual value of K3 000 000.

On 1st April 2003, the company bought another van for K36 000 000. This van is also estimated to have
a useful life of five years after which its residual value is estimated at K4 000 000.

Zulu and co. Ltd sold the first van on 31st March 2004 for K18 000 000, the amount being paid into the
bank account.

The company provides for depreciation on all its fixed assets using the straight line method.

You are required to show:

a) The motor van account for the years ended 31st December 2002, 2003 and 2004.
b) The motor van provision for depreciation account for the years ended 31st December 2002, 2003 and
2004.
c) Extracts from the profit and loss account for the year ended 31st December 2004.
d) Extracts from the balance sheet for the years ended 31st December 2002, 2003 and 2004.
Solution:

a)
Motor van account

________________________________________________________________________
Date Details F Dr Cr
2002 K’000 K’000
July 1 Bank 24 000
Dec. 31 Balance c/d 24 000
24 000 24 000
2003
Jan. 1 Balance b/d 24 000
April 1 Bank 36 000
Dec. 31 Balance c/d
60 000 60 000
2004
Jan. 1 Balance b/d 60 000
March 31 Disposal 24 000
Dec. 31 Balance c/d 36 000
60 000
2005
Jan. 1 Balance b/d 36 000

_______________________________________________________________

b) Motor van provision for depreciation account

________________________________________________________________________
Date Details F Dr Cr
2002 K’000 K’000
Dec 31 Profit and loss account 2 100
Dec 31 Balance c/d 2 100 ___
2 100 2 100
2003
Jan. 1 Balance b/d 2 100
Dec 31 Profit and loss account 9 000
Dec 31 Balance c/d 11 100 ___
11 100 11 100
2004
Jan. 1 Balance b/d 11 100
March 31 Disposal 7 350
 Dec 31 Profit and loss account 7 450
Dec 31 Balance c/d 11 200 ___
18 550
18 550
2005
Jan. 1 Balance b/d 11 200
_______________________________________________________________________

c)
Motor van disposal account
________________________________________________________________________
Date Details F Dr Cr
2004 K’000 K’000
March 31 Motor van 24 000
March 31 Provision for depreciation 7 350
March 31 Bank 18 000
Dec. 31 Profit and loss 1 350
25 350 25 350
_______________________________________________________________________

d)

Profit and loss account extract for the year ended 31st December 2004
K’000 K’000
Add: Gains:
Profit on disposal of van 1 350

Less: Expenses:
Depreciation: - motor van 7 450

e)
Balance sheet extract as at 31st December 2002
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Motor van 24 000 2 100 21 900

Balance sheet extract as at 31st December 2003

Cost Dep. Value
 Fixed assets: K’000 K’000 K’000
Motor van 60 000 11 100 48 900

Balance sheet extract as at 31st December 2004

Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Motor van 36 000 11 200 24 800

HINTS
ADJUSTMENTS
TRADING, PROFIT AND LOSS ALC BALANCE SHEET
(1) DEPRECIATION
 List under expenses (-) less from the cost of fixed assrt

(2) ACCCRUED EXPENSES

 (+) Add to the expenses list under current liabilities

(3) ACCRUED INCOME

 (+) Add to the income list under current asserts

(4)PREPAID EXPENSES
 (-) Less from the expense list under current asserts
(5) PREPAID INCOME
 (-) Less from the gain list under current liabilities

(6) BAD DEBTS\

BAD DEBTRECOVVERED\ PROVISIONS FOR DOUBTFUL DEBTS\
PROVISION FOR DISCOUNTS ALLOWED.
 List under expenses (-) less from debtors
 ACCRUALS AND PREPAYMENTS
EXPLAIN EACH TYPE OF ADJUSTMENT AND SHOW EACH
CALCULATION OF ADJUSTMENT

2) ACCRUED EXPENSES
An accrued expenses is an item of expense that has been incurred during the accounting period but has
not yet been paid for.

When preparing final accounts, an accrued expense for the year should be included as an expense in the
profit and loss account and also shown in the balance sheet under current liabilities.

QUESTION:
Mwanawina’s business has an accounting year-end of 31st December. He rents a factory at a
rental cost of K 6 000 00 per quarter payable in arrears. During the year 31st December 2004
his cash payment for rent has been as follows:

March 31 K6 000 000

June 29 K6 000 000
October 28 K6 000 000

The final payment due on 31st December 2004 for the quarter to that date was not paid until
4th January 2004.

You are required to prepare the transfer to the profit and

loss account, and the balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Less: Expenses:
Rent (amount paid) 18 000
Add: accrued rent 6 000
24 000
Balance sheet extract as at 31st December 2004
K’000 K’000 K’000
Current liabilities:
Rent accrued 6 000

Note:
Where the adjustment is being made from a given trial balance, the common way of adjusting
the figure that goes to the profit and loss account is as follows:
3) ACCRUED INCOME
An accrued income is income receivable during the accounting period but has not yet been received.
 When preparing final accounts the accrued amount should be included as an income in profit and loss
account since it relates to the current accounting period. In the balance the accrued income should be
shown under current assets.

QUESTION:

In the books of J. Kafula, rent is receivable annually at K8 400 000. During the year
31st December 2004, the following receipts were made:

31 May 2004 K3 600 000

31 Dec. 2004 K4 400 000

Prepare the profit and loss account and show the balance sheet extracted as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Add: Gains:
Rent receivable 8 000
Add: accrued rent 400
8 400

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Rent receivable accrued 400

4) PREPAID EXPENSES:
A prepaid expense is an expense that has been paid for during the accounting period but relates to the
next accounting period(s).

When preparing the final accounts, a prepaid expense should be excluded from the current profit and
loss account, but should be shown in the balance sheet under current assets.
 Example 1:

J. Chibale pays insurance on his motor vehicles at an annual cost of K12 000 000.
During the year to 31st December 2004, he paid a total of K 14 000 000 on insurance costs.

Show the profit and loss extract and balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Less: Expenses:
Insurance 14 000
Less: prepaid insurance 2 000
12 000

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Insurance prepaid 2 000

Note:

Had the adjustment been made from a given trial balance without using the account method, the
adjustment for the figure that goes to the profit and loss account would have been:

3)PREPAID INCOME
This is income received during the current accounting period but relates to the next
accounting period(s).

Since the income relates to the next accounting period(s), it should not be included as income in the
current accounting period. In the balance sheet, prepaid income should appear under current liabilities.

QUESTION:

S. Phiri receives an annual commission of K3 600 000. During the year to 31st December 2004, he
received a total commission of K4 000 000.

Prepare the profit and loss account and show the balance sheet extract as at 31st December 2004.

Profit and loss account extract

K’000 K’000 K’000
Add: Gains:
Commission received 4 000
 Less: prepaid commission 400
3 600

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current liabilities:
Commission receivable prepaid 400

Summary
1. An expense accrued is a liability to the business whereas on income accrued is an asset to the business.
2. An expense prepaid is an asset to the business whereas an income prepaid is a liability to the
business.

5. BAD DEBTS/BAD DEBTS RECOVERED/ PROVISIONS FOR

DOUBTFUL DEBTS AND PROVISION FOR DISCOUNTS ALLOWED.
a) BAD DEBTS

Some debtors may fail to pay for their debts and so it is prudent accounting to write off such debts as
bad debts. A bad debt is a debt that is considered to be uncollectable. A bad debtor is a debtor who fails to
pay parts or the whole debt for a number of reasons such as:

 Running away without trace

 Bankruptcy
 Insanity
 Death etc.

QUESTION:

On 1st May 2004, we are told that our debtor, Matumbo Walikolwa who owes us K300 000 has
disappeared without trace. The balance is to be written off as a bad debt.

c) PROVISION FOR DOUBTFUL DEBTS

A provision for doubtful debts is an estimated expense of debtors that are likely to become
bad. A provision for doubtful debts is set aside when there is some doubt as to whether all the
debts of the business will be recovered in full.

QUESTION:

During the first year of trading, Kalilo wrote off bad debts amounting to K330 000. In view
of this, Kalilo decided to create a 5% provision for doubtful debts on the total debtors of
K30 000 000 as at 31st December 2003.
Profit and loss account extract
K’000 K’000
Less: Expenses:
Bad debts 330
Provision for doubtful debts 1 500

Balance sheet extract as at 31st December 2003

K’000 K’000 K’000
Current assets:
Debtors 30 000
Less: provision for doubtful debts 1 500

28 500
1. PROVISION FOR DISCOUNTS ALLOWED

A provision for discounts allowed is an estimated expense of the discounts to be allowed on

debtors who pay promptly. The provision for doubtful debts should first be deducted from
debtors before the provision for discounts allowed is estimated.
A provision for discounts allowed is accounted for in the same manner as that provision for
doubtful debts. Thus, an increase in the provisions is an expense while a decrease is a gain
to the business.

QUESTION:
During the year to 31st December 2004, Mubita wrote off bad debts amounting to K400 000
and allowed discounts totalling K100 000.

At the end of the year, debtors outstanding amounted to K5 000 000. A 10% provision for
doubtful debts was set aside, with a further 10% provision for discounts allowed on the
remaining debtors:

Profit and loss account extract

K’000 K’000
Less: Expenses:
Bad debts 400
Discount allowed 100
Provision for doubtful debts 500
Provision for discounts allowed 450
iv)

Balance sheet extract as at 31st December 2004

K’000 K’000 K’000
Current assets:
Debtors 5 000
Less: provision for doubtful debts 500
provision for discounts allowed 450
4 050

FINAL ACCOUNTS WITH ADJUSTMENTS

 Having looked at the individual adjustments, we now look at final accounts with these
adjustments.

QUESTION:
The following trial balance was extracted from the books of B Zulu, a trader, at 31st March
2004.
Dr Cr
K’000 K’000
Sales 81 742
Opening stock 1st April 2003 9 274
Purchases 62 101
Rent and rates 880
Light and heating 246
Salaries and wages 8 268
Bad debts 247
st
Provision for bad debts (at 31 March 2003) 326
Insurance 172
General expenses 933
Motor expenses 861
Rent received 750
Cash at bank 1 582
Freehold premises 15 000
Provision for depreciation - buildings (at 31st March 2003) 5 000
Motor Van at cost 8 000
Provision for depreciation - motor van (at 31st March 2003) 3 600
Proceeds on sale of motor van 250
Debtors 7 689
Creditors 5 462
Drawings 2 148
Capital 20 271
117 401 117 401 The
following matters have to be taken into account:
1. Stock at 31st March 2004 was valued as follows: Cost K9 884 000; NRV K9 988 000.
2. Rates paid in advance on 31st March 2004 amounted to K40 000.
3. Rent receivable due at 31st March 2004, K250 000.
4. Lighting and heating due on 31st March 2004, K85 000.
5. Provisions for doubtful debts to be increased to K388 000.
6. Included in the amount for insurance, K172 000, is an item for K82 000 for motor insurance and
the amount should bee transferred to motor expenses.
7. Depreciation has been and is to be charged on vans at an annual rate of 20% on cost.
8. Depreciation - buildings K500 000.
9. On 1st April 2003, a van which had been purchased for K1 000 000 on 1st April 200 was sold for
K250 000. The only record of the matter is the credit of K250 000 to proceeds of sales of van
account.
10. During the year, Zulu got goods worth K601 000 from his business purchases. No record of this
has been made in the books of account.
Required:
Prepare the trading and profit and loss account for the year ended 31st March 2004 and the
balance sheet as at that date.

Solution:
 Zulu
Trading and profit and loss account for the year ended 31st March 2004
K’000 K’000 K’000
Sales 81 742
Opening stock 9 274
Purchases 62 101
Less: drawings in kind 601
61 500
70 774
Less: closing stock 9 884
Cost of sales 60 890
Gross profit 20 852
Add Gains:
Rent received 750
Add: rent accrued 250
1 000
Total income 21 852
Less expenses:
Rent and rates 880
Less: rates prepaid 40
840
Lighting and heating 246
Add: accrual 85
331

Salaries and wages 8 268

Bad debts 247
Insurance 172
Less: motor insurance transfer 82
90
Motor expenses 861
Add: motor insurance transfer 82
943
General expenses 933
Provision for bad debts (388 - 326) 62
Loss on disposal of van (w ) 150
Depreciation: - motor van 1 400
- buildings 500
Total expenses 13 764
Net profit 8 088

Zulu
Balance sheet as at 31st March 2004
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Freehold premises 15 000 5 500 15 000
Motor van 7 000 4 400 2 600
22 000 9 900 12 100
Current assets:
Stock 9 884
Debtors 7 689
Less: provision for bad debts 388
7 301
Cash at bank 1 582
Rent receivable accrued 250
Rent and rates prepaid 40
19 057
Less: current liabilities:
Creditors 5 462
Lighting and heating accrued 85
5 547
Working capital 13 510
Net assets 25 610

Financed by:
Capital 20 271
Add: net profit 8 088
28 359
Less: drawings (2 148 + 601) 2 749
25 610

______________________________________________________________________________
REVIEW QUESTION

The trial balance of Mubiyana at 31st May 2005 is as follows:

Dr Cr
K’000 K’000
Capital 15 258
Drawings 5 970
Purchases 73 010
Returns inwards 1 076
Returns outwards 3 720
Credit sales 96 520
Cash sales 30 296
Discounts 1 870 965
Stock 7 650
Customs duty 11 760
Carriage inwards 2 930
Carriage outwards 1 762
Sales man's commission 711
Sales man's salary 3 970
Office salaries 7 207
Bank charges 980
Loan interest 450
Light and heat 2 653
Sundry expenses 2 100
Rent and rates 7 315
Printing and postage 2 103
Advertising 1 044
 Bad debts 1 791
Doubtful debts provision (at 31st May 2004) 437
Debtors 10 760
Creditors 7 411
Cash at bank 2 634
Cash in hand 75
Motor expenses 986
New delivery van (less trade-in) 2 200
Furniture and equipment:
Cost 8 000
Depreciation at 1st June 2004 2 400
Old delivery van:
Cost 2 000
Depreciation at 1st June 2004 1 000
Loan account at 9% (repayable in five years) 5 000
163 007 163 007

You ascertain the following information:

1. Closing stock has been valued for accounts purposes at K8 490 000.

2. The motor van was sold on 31st August 2004 and traded in against the cost of a new van. The
trade-in price was K1 million and the cost of the new van was K3 200 000.

3. Depreciation on the straight-line basis is to be provide at the following annual rates:

Motor vans 25%

Furniture and equipment 10%

4. 5% of the closing debtors' total is estimated to be doubtful.

5. An accrual of K372 000 is required in respect of light and heat.

6. A quarter's rent to 30th June 2005 amounting to K900 000 was paid on 2nd April 2005. Rates for
the year to 31st March 2006 amounting to K1 680 000 were paid on 16th April 2005.

You are required to:

Prepare the trading and profit and loss account for the year ended 31st May 2005 and the
balance sheet as at that date.
______________________________________________________________________
2 LIMITATIONS TO THE TRIAL BALANCE AND THE SUSPENSE ACCOUNT

LIMITATIONS OF THE TRIAL BALANCE

At the end of this chapter PSBAT:

 To explain the errors that are not revealed/disclosed by the trial balance.
  To correct all errors which do not affect the trial balance totals being equal.
 Prepare Journal entries.
 Explain errors that are disclosed by a trial balance.
 Prepare the suspense account.

There are certain kinds of errors which would not affect the agreement of the trial balance totals, even if
they are discovered in the trial balance. These are:

(1) ERROR OF OMISSION – this is when a transaction is completely omitted from the books. For
example: If we sold K90 worth of goods to J. Bowa, but where not entered in either the sales
or Bowa’s personal account, the trial balance would still balance.
(2) ERRORS OF COMMISSION – this is an error where an entry is posted to a wrong personal
account. This error is caused due to similarity of names. Example: The sale of K100 to Chama
Green is entered in the account of Chanda Green.
(3) ERROR OF PRINCIPLE – where an item is entered in the wrong class of account. For example,
the purchase of an asset being debited to the purchase account.
(4) COMPENSATING ERRORS – This is where errors cancel out or compensate each other. If the
sales account was added up to K150 too much and the purchases account was also added up to
be K150 too much, then these two errors would cancel out in the trial balance.
(5) ERROR OF ORIGINAL ENTRY – this is an error where double entry is observed using an
incorrect figure. E.g a payment of rent by cash K3500 was entered in both accounts as K3050.
This error is caused by transposition of figures .
(6) COMPLETE REVERSAL OF ENTRIES – this is an error where the correct accounts are used
yet double entry is observed using wrong sides. E.g a sale of good by cheque is entered on the
debit side of the sales account and on the credit side of the bank account.

CORRECTION OF ERRORS

Show the correction by means of |Journal entries:

1. ERROR OF OMISSION
The sale of goods, K95 to Desmaund, has been completely omitted from the books. It must be
corrected by entering in the books. The Journal entries for the correction are shown as:

The Journal

Dr. Cr.
K K
 Desmaund 95
Sales 95
Being correction of error of
ommission

2. ERROR OF COMMISION
A purchase of goods, K400 from C. Musonda was entered in C. Mulumbi’s account. To collect
thus, it must be cancelled out of C. Mulumbi’s account and then entered in C. Musonda’s account.
The double entry will be:
C. Mulumbi

2017 K 2017 K

May 30 C. Musonda 400 May 30 Purchases 400

C. Musonda

2017 K

May 30 C. Mulumbi’s 400

The Journal entry will be

General Journal
K
K
C. Mulumbi 400
C. Musonda 400
Being correction of error of commission

3. ERROR OF PRINCIPLE
This is an error where an amount is posted to the wrong class of account. Eg, a purchase of
machinery K 800 is entered in the purchases account.
CORRECTION
A purchase of a fixed asset should never be entered in the purchases account, it should be entered
in the fixed assets name, hence DR machinery account and CR purchases.
The Journal
Dr. Dr.
K K
Machinery account 800
Purchases account 800
Being correction of error of principle

4. COMPENSATING ERROR
The sales account is overcast by K200 as also is the wages account. The trial balance therefore still
balances. We assume that these are the only two errors found in the book.

The Journal
Dr. Dr.
K K
Sales account 200
Wages account 200
Being correction of error of
compensation

5. ERROR OF ORIGINAL ENTRY

A sale of K98 to A. Mwaba was entered in the books as K89.
CORRECTION
Determine whether there is an overcast or undercast so that you deduce as to which account you
will DR and CR

The Journal
Dr. Cr
K K
A. Musonda 9
Sales account 9
Correction of error whereby sales
were understated by K9.

6. COMPLETE REVERSAL OF ENTRIES

A payment of cash of K160 to M. Desmaund was entered on the receipt side of the cash book in
error and credited to M. Desmaund’s account. To correct this error, we do the double entry for the
actual amount first recorded.

Cash
K
M. Desmaund 160

M. Desmaund
K
Cash 160

This was entered wrongly as:

 Cash
K
M. Desmaund 160

M. Desmaund
K
Cash 160

We can now see that we have to enter double the original amount to correct the error.

Cash
K K
M. Desmaund 160 M. Desmaund 320

M. Desmaund
K K
Cash (error corrected) 320 M. Desmaund 160

Below is the procedure to follow when correcting errors using the suspense account.
1. The opening balance is recorded on the suspense account.
2. Identify the accounts affected by the error and the particular entries required to correct the error.
3. If the correcting needs a debit and credit entry in the ledger then double entry is satisfied and we
don’t use the suspense account.
4. If correcting requires only entry in the ledger, the second entry is made in the suspense account
to satisfy double entry. If it is a debit entry in the ledger that corrects the error then the
corresponding credit entry is made on the suspense account together with the amount.
5. If correcting an error require two debit or two credit entries in the ledger, their corresponding
entries have to be made in the suspense account to satisfy double entry.

A suspense account is an account used for correcting errors by the trial balance.

EXERCISE 1
The following errors were discovered in the books of C. Kalunga on 31 December 2012.
(i) A sale of goods K25,000 to Martha Zimba had been entered in Mary Zimba’s account.
(ii) A purchase of a machine on credit from Access |Motors Ltd for K20,000 had been completely
omitted from the books.
(iii) The purchase of a motor van K60,000 had been entered in error in the Motor Expenses Account.
(iv) A sale of K4,430,000 to James Phiri had been entered in the books as K4,340,000.
(v) Commission received K43,000 had been entered in error in the Sales Account.
(vi) A cash receipt of K90,000 from Rhoda Mbewe had been entered on the credit side of the Cash
Account and on the debit side of the personal account.
You are required to show the journal entries necessary to correct the above errors.

GENERAL JOURNAL
DATE DETAILS FOLIO Dr (K) Cr (K)
2012
31 Dec Martha Zimba 25,000
Mary Zimba 25,000
Being correction of error where sale of goods on
credit was entered in a wrong account.
31 Dec Machine 20,000
Access Motors Ltd 20,000
Being correction of error where purchase of a
machine on credit was omitted.
31 Dec Motor Van 60,000
Motor Expenses 60,000
Being correction of an error where the purchase of
a motor van was wrongfully entered in Motor
Expenses Account.
31 Dec James Phiri 90,000
Sales 90,000
Being correction of error where the sale of goods
to James Phiri was undercast by K90,000.
31 Dec Sales 43,000
Commission Received 43,000
Being correction of error where the commission
received was entered in error in the Sales Account 180,000
31 Dec Cash 180,000
Rhoda Mbewe
Being correction of an error of complete reversal
of entries.

EXERCISE 2
The following errors were discovered in the books of Charles Banda on 31st January 2014. Prepare the
journal entries innthe books of J. Daka.
(i) A payment of K68,000 cheque was entered in both the sales and cash accounts as K86,000.
(ii) A payment of K10,000 for private insurance was included in the business insurance account.
(iii) The withdrawal of goods worth K209,000 from the business by the proprietor for his own
private use was recorded in both accounts as K290,000
(iv) A sales of goods for K200 to P. Jacks on credit was debited to P. Jackle Ltd account.
(v) Office furniture purchased for K1,000 for use in the business had been debited to the purchases
account.

THE JOURNAL ENTRIES

DATE DETAILS FOLIO Dr (K) Cr (K)
2014
31 Jan Sales 18
Cash 18
 Being correction of error where the sales
by cash was overcast by K18.
31 Jan Drawings 10,000
Insurance 10,000
Being correction of error where the
private insurance was included in the
business.
31 Jan Drawings 81
Capital 81
Being correction of error where the goods
withdrawn by the proprietor was recorded
in both accounts as K290,000 instead of
K209,000.
31 Jan P. Jacks 200
P. |Jackles 200
Being correction of error where sale of
goods was entered in a wrong account.
31 Jan Office Furniture 1,000
Purchases 1,000
Being correction of error where the
purchase of office furniture was wrongly
entered in Purchases account.

EXERCISE 3
Rupiah Banda prepared a trial balance on 31st January 2011, which showed that the total of the credit
balance was K110 more than the total of the debit balances. A Suspense Account was opened with this
figure to make the books balance. Later investigations revealed the following errors in her books.
(i) A Purchase of K300 was entered wrongly as K200 in the account of the supplier, J. Zimba.
(ii) The purchase by cheque of a piece of office equipment for use in the office, at the cost of K600
had been posted to the Purchases Account
(iii) The total of the Sales Returns Book, amounting to K120, had not been posted to the ledger.
(iv) A debit balance on P. Bwalya’s Account of K540 was brought down as K450 and this later was
included in the Debtors’ total entered in the trial balance.

Required;
(a) Make necessary journal entries to correct the errors.
(b) Write up a Suspense Account duly balanced.

JOURNAL ENTRIES
DATE DETAILS FOLIO Dr (K) Cr (K)
2011
31 Jan Suspense 100
J. Zimba 100
Being correction error where a purchase figure was
wrongly entered in the account of the supplier.
31 Jan Office Equipment 600
Purchases 600
Being correction of an error of principle.
31 Jan Sales Returns 120
Suspense 120
Being correction of error of single entry.
31 Jan P. Bwalya 90
Suspense 90
Being correction of error of transposition in one
account.

SUSPENSE ACCOUNT
DATE DETAILS FOLI Dr. (K) Cr. (K)
2011 O

Difference in books 110

J. Zimba 100
Sales Returns 120
P. Bwalya 90
210 210

EXERCISE 4
(a) Prepare journal entries to correct each error.
(b) Write up the Suspense Account and show the trial balance difference.
(i) Goods to the value of K20 sold for cash to J. Zimba were entered in the cash book and posted to
the credit of J. Zimba’s personal account.
(ii) Cash sales to the value of K40 were omitted from the books altogether.
(iii) A new lorry bought for K2,000 was posted to the debit of purchases account as K1,900.
(iv) A cheque for K600 received from J. Phiri whose account had previously been written off as bad
was posted to the credit of his personal account.
(v) Credit sales of K270 to N. Kabwe were entered in the sales journal as K170.
(vi) The total of the discount column on the credit side of the cash book amounting to K30 was
posted to the credit of the discount received account as K50.
(vii) Goods to the value of K60 returned by Joe Banda were entered in the purchases book.
(viii) The sale on credit of worn-out furniture for K300 was entered in the sales journal.

THE JOURNAL PROPER

DATE DETAILS FOLIO Dr. (K) Cr. (K)
J. Zimba 40
Suspense 40
Being correction of error in posting.
Cash 40
Sales 40
Being correction of error of omission.
 Lorry
Suspense 2,000 100
Purchases 1,900
Being correction of error of principle and error
in posting.
J. Phiri 600
Bad Debt Recovered 600
Being bad debts recovered.
Suspense 100
Sales 100
Being correction of error in posting.
Discount Received 20
Suspense 20
Being correction of error posting a wrong figure.
Returns Inwards 60
Purchases
60
Being correction of error of principle.
Sales
Sales 300
Being correction of error of principle. 300

SUSPENSE ACCOUNT
DATE DETAILS FOLI Dr. (K) Cr. (K)
O

J. Zimba 40
Lorry 100
Sales 100
Discount Received 20
Trial Balance difference 60
160 160

EXERCISE 5
Chosa extracted a trial balance and drew up the final accounts for the year ended 31.12.2004. There was a
shortage of K22,920,000 on the credit side of the trial balance and Suspense Account was opened for the
difference.
On January 2005 the following errors made in 2004 were located.
(i) Purchases Day Book has been overcast by K600,000.
(ii) A private purchase of K1,150,000 had been undercasted in the business purchases account.
(iii) K550,000 received from sales of old office equipment had been entered in the sales account.
(iv) Bank charges K380,000 entered in the Cash Book had not been posted to the Bank Charges
Account.
(v) A sale of goods to B. Kachepa K6,900,000 was correctly entered in the sales day book but
entered in B. Kachepa’s personal account as K9,600,000.
You are required to prepare:
A. Journal entries to show the correction of errors.
B. Write up the Suspense Account.

CHOSA’S JOURNAL ENTRIES

DETAILS (K) (K)
Sales 550,000
Suspense 550,000

Suspense
600,000
Purchases 600,000
Drawings 1,150,000
1,150,000
Purchases
Bank Charges 380,000
Suspense 380,000

CHOSA’S SUSPENSE A/C

K K
Difference in books 22,920,000
Purchases 600,000
Bank Charges 380,000
Kachepa 2,700,000
3,300,000 3,300,000
3 BANK RECONCILIATION STATEMENTS

BANK RECONCILIATION STATEMENT

Where the organizations bank statement balance does not agree with its cash book balance, a bank reconciliation
state are:

-it acts as a control check to ensure that the cheques were issued for amounts shown in the cash book.

-it assists in verification of the cash book balances.

-it assists in establishing the accuracy of the cash book entries.

-it assists in identifying possible errors made by the bank.

The differences between the bank statement balance and the cash book balance are mainly due to errors and
timing differences.

ERRORS

These could have been made either in the cash book or on the bank statement.

TIMING DIFFERENCES

A) items not yet on the bank statement.

-unpresented cheques.

These are Cheques drawn and entered in the cash book but which have not yet been presented at the bank.

-uncredited cheques

These are Cheques which have been received but have not yet been credited to the customer’s account.

B) items not yet in the cash book .

-bank charges ;

Amounts charged by the bank for the services given on maintaining the customer’s account.

-credit transfer / bank Giro;

These are receipts that have been paid directly into the firm’s bank account.
-standing orders;

An instruction to a bank by a firm to make regular payments of fixed amount at stated dates to certain
organizations.

-DIRECT DEBIT;

-A payment where the authority to get the money is given to the firm to whom money is to be paid.

HOW TO RECONCILE.

-identify items appearing in the cash book but not on the bank statement.

-identify items appearing on the bank statement but not in the cash book.

-Once items have been identified draw a bank reconciliation statement, starting with either the balance as per cash
book or balance as per bank statement.

EXAMPLE;

Banda received his bank statement on 31 Jan, 2003 which showed a balance difference from his cash book on the
same date. Details of this are shown below.

CASH BOOK (Bank column only)

DATE DETAILS DR (K) CR (K)

Jan 1 Balance b/f 18 000
‘’ 7 Joshua 7 000
‘’ 10 Howard 4 000
‘’ 14 Edward 3 000
‘’ 15 Nelson 6 000
‘’ 23 David 4 000
‘’ 23 Paul 2 500
‘’ 29 Phillip 3 500
‘’ 31 Balance c/d 22 000

35 000 35 000
Feb 1 Balance b/d 22 000

BANK STATEMENT
DATE DETAILS DR (K) CR (K) BALANCE
(WITHDRAWAL) (DEPOSITS)
Jan 1 Balance cr 18 000
‘’ 8 Cheque deposit 7 000 25 000
‘’ 10 Howard 4 000 21 000
‘’ 14 Edward 3 000 18 000
‘’ 16 Cheque deposit 6 000 24 000
‘’ 20 Credit transfer: Sam 3 000 27 000
‘’ 24 Paul 2 500 24 000
‘’ 26 Direct debit: Zesco 4 500 20 000
‘’ 31 Bank charges 500 19 500

Bank Reconciliation Statement as on 31 st January 2003

( K) (k)
Balance as per cash book 22 000
Add: Un presented cheque: phillip 3 500
Credit transfer 3 000
6 500
28 500
Less: Un credited cheque: David 4 000
Direct debit: Zesco 4 500
Bank charges 500
9 000
Balance as per bank statement 19 500

Bank Reconciliation statement as on 31 Jan 2003

Balance as per bank statement 19 500

Add: Un credited cheque: David 4 000
Direct debit: Zesco 4 500
Bank charges 500
9 000
28 500

Less: Un presented cheque: Phillip 3 500

Credit transfer 3 000
6 500
Balance as per cash book 22 000

UPDATING THE CASH BOOK BEFORE RECONCILING

This is done as follows:

-Identify items that appear on the bank statement but not in the cash book.
-Enter those items that are for the business in the cash book.

In addition, make the necessary adjustments in the cash book if there are any errors.

EXAMPLE

Using the example given above update the cash book.

CASH BOOK

DATE DETAILS DR (K) CR (K)

Jan 1 Balance b/d 22 000
‘’ 20 Credit transfer: Sam 3 000
‘’ 26 Direct debit: Zesco 4 500
‘’ 31 Bank charges 500
‘’ 31 Balance c/d 20 000

25 000 25 000
Feb 1 Balance b/d 20 000

Bank Reconciliation statement

Balance as per cash book 20 000

Add: Un presented cheques: Phillip 3 500
23 500
Less: Un credited cheque: David 4 000
Balance as per bank statement 19 500

4 CONTROL ACCOUNTS

 Define a control account.

 Explain the purpose of control accounts.
 Give the advantages of control accounts.
 Identify the sources of information for control accounts.
 Explain the principle used in preparing control accounts.
 Draw up control accounts for debtors and creditors
 Explain the accounting of a contra settlement between the sales ledger and purchases ledger.
 Reconcile the control accounts balances with the total of balances on the individual accounts.

EXPLAIN CONTROL ACCOUNTS

MEANING OR PURPOSE OF CONTROL ACCOUNTS

 A control account is a total account that checks the arithmetic errors of a ledger.
 Control accounts are like a trial balance for each particular ledger.
 The use of control accounts is technique used to quickly identify the section of the accounting
records that has errors.
 Therefore, only the ledger whose control account fails to agree with the individual balances will
need to be checked to locate the errors.

EXPLAIN TYPES OF CONTROL ACCOUNTS

Two control accounts are normally prepared:

(a) A control account for the sales ledger, known as the sales ledger control account or the
total debtors account.

(b) A control account for the purchases ledger, known as the purchases ledger control
account or the total creditors account.

Advantages of control accounts

In addition to the advantage of locating errors quickly, control accounts also have the following
advantages:

(i) Control accounts are normally under the charge of the responsible official and so fraud is
made more difficult because transfers made (in an effort) to disguise fraud will have to
pass the scrutiny of this official.

(ii) For management control purpose, the balances on the control accounts can always be
taken to equal the debtors and creditors at any point. Therefore, management control is
aided by the quick information provided from the control accounts.

EXPLAIN THE SOURCE OF INFORMATION FOR CONTROL ACCOUNTS

SOURCE OF INFORMATION FOR CONTROL ACCOUNTS

The source of information for preparing control accounts is from the journals and the cash book as shown
by the list below:
(a) Sales ledger control account

Item Source of the total

1. Opening balances List of the last period’s balances

2. Credit sales Total of Sales Journal/day book
3. Sales Returns Total of sales returns Journal
4. Cash from customers Cash book: Bank column on the debit side
5. Cheques from customers Cash book: Bank column on the debit side
6. Discount allowed Total of discounts allowed column in cash
Book
7. Cash refunds to customers Cash book: cash column on the payment
side.
8. Dishonoured cheque Cash book: bank column or journal proper.
9. Bad debts Journal proper
10. Other transfers Journal proper
11. Closing balances Lists of debtors drawn at the end of the
period.

(b) Purchases ledger control account

Item Source of total

1. Opening balances List of last period’s balances

2. Credit purchases Total of purchases journal/Day book
3. Purchases Returns Total of purchases returns Journal
4. Cash paid to supplies Cash book: cash column of the credit side
5. Cheques paid to supplies Cash book: bank column of the credit side
6. Discount received Total of discount received column in the
cash book
7. Cash refund from suppliers Cash book: Cash column on the receipt side
8. Transfers Journal proper
9. Closing balances List of creditors at the end of the period.

PREPARING CONTROL ACCOUNTS

Control accounts are prepared based on the principle that if the opening balance is known together with
additions and deduction then the closing balance can be computed.

The sales ledger control account is prepared using the same principles as that of preparing a debtors
account, whereas the purchases ledger control account was the principle of preparing the creditors account.

QUESTION 1:

You are required to prepare the sales ledger control from the following for the month of March
2005:
 2005 K’000
March 1 Sales ledger balances 4 936
Totals for the month:
Sales journal 49 916
Returns inwards journal 1 139
Cheques and cash received from customers 46 490
Discount allowed 1 455
March 31 Sales ledger balances 5 768

Solution:

Sales ledger control account

________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
March 1 Balance b/d 4 936
31 Sales 49 916
31 Sales returns 1 139
31 Cheques and cash from customers 46 490
31 Discounts allowed 1 455
31 Balance c/d 5 768
54 852 54 852
April 1 Balance b/d 5 768

QUESTION 2:

You are required to prepare a purchases ledger control account from the following for the
month of January 2005. The balance of the account is to be taken as the amount of the
creditors as on 31st January, 2005.

2005 K’000
January 1 Purchases ledger balances 3 676
Totals for the month:
Purchases journal 42 257
Returns outwards journal 1 098
Cheques paid suppliers 38 765
Discount received from suppliers 887
January 31 Purchases ledger balances ?

Solution:
Purchases ledger control account
 ________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
Jan. 1 Balance b/d 3 676
31 Purchases 42 257
31 Purchases returns 1 139
31 Cheques paid to suppliers 38 765
31 Discounts received 887
31 Balance c/d 5 183 _____
45 933 45 933
Feb 1 Balance b/d 5 183

EXPAIN THE CONTRA SETTLEMENTS

A contra is a transfer between the ledger accounts for the same person. It may happen that a customer in
the sales ledger is also a supplier in the purchases ledger. Normally the parties involved settle their
accounts in full, but it is also possible to set off the balances and for the party with a greater balance to pay
the difference.

QUESTION 3:

The account of Zulu appeared both in the purchases ledger and sales ledger with balances of
K2 000 000 and K 1 400 000 respectively. Show the accounts of Zulu as they would appear in the ledgers
if the two balances are set off.

Solution:

Sales Ledger
Zulu account
________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
Balance b/d 1 400
Purchases ledger contra 1 400
1 400 1 400

Purchases ledger
Zulu account
________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
Balance b/d 2 000
Sales ledger contra 1 400
Balance c/d 600 ____
 2 000 1 400
Balance b/d 600

Note: Contra settlements appear in both the sales ledger control account and the purchases
ledger control account. They are debited in the purchases ledger control account and
credited in the sales ledger control A/c.

Credit balances in the sales ledger

Credit balances in the sales ledger can arise where a customer has over paid us or made a payment in
advance for goods for which an invoice has not yet been issued.

Debit balances in the purchases ledger

Debit balances in the purchases ledger can arise where we have over paid a supplier or made an
advance payment for goods for which our supplier has not yet invoiced us.

QUESTION 4

From the following details prepare the sales ledger and purchases ledger control account as they would
appear in the general ledger of Minor Ltd for the month of April 2005.

Sales Ledger:
K’000
Debit balances on 1st April 2005 50 432
Credit balances on 1st April 2005 260
Credit balances on 30th April 2005 425

Purchases ledger:

Credit balances on 1st April 2005 48 652

Debit balances on 1st April 2005 185
Debit balances on 30th April 2005 225

Transactions for the month:

Credit sales 88 360
Credit purchases 40 030
Discounts allowed 4 855
Purchases returns 1 645
Allowances to customers 464
Discounts received 2 809
Sales returns 1 817
Bad debts written off 109
Contra settlements 7 891
Payments to suppliers 38 123
Customers’ cheques dishonoured 607
 Receipts from customers 76 945
Allowances from suppliers 464

Solution:
Sales ledger control account
________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
April 1 Balances b/d 50 432 260
30 Sales 88 360
30 Sales returns 1 817
30 Bad debts 109
30 Receipts from customers 76 945
30 Discounts allowed 4 855
30 Allowances to customers 464
30 Contra settlements 7 891
30 Dishonoured cheques 607
30 Balances c/d 425 47 483
139 824 139 824
May 1 Balances b/d 47 483 425

Purchases ledger control account

________________________________________________________________________
Date Details F Dr Cr
2005 K’000 K’000
April 1 Balances b/d 185 48 652
30 Purchases 40 030
30 Purchases returns 1 645
30 Payments to suppliers 38 123
30 Discounts received 2 809
30 Contra settlements 7 891
30 Allowances from suppliers 464
30 Balances c/d 37 790 __225
88 907 88 907
May 1 Balances b/d 225 37 790
______________________________________________________________________________
ACTIVITY

From the following information that was extracted from the books of Chicken limited as at 30th September
2004, you are required to prepare the sales and purchases ledger control accounts for the year.

K’000
st
Sales ledger balances: 1 October, 2003 32 854 (Dr)
Purchases ledger balances: 1st October, 2003 22 383 (Cr)
Totals for the year ended 30th September 2004:
Sales journal 306 475
Purchases journal 220 389
Returns outwards journal 5 138
Returns inwards journal 4 586
Payments to suppliers 211 260
Receipts from Customers 266 669
Discount received 11 235
Discount allowed 4 074
Bad debts written off 1 755
Dishonoured cheques from customers 560
Refunds from suppliers in respect of overpayment 780
Interest charged on customers overdue accounts 312
Sales ledger balances set off against balances in the purchases ledger 663
th
Credit balances in the sales ledger on 30 September 2004 229
Debt balances in the purchases ledger on 30th September 2004 195
______________________________________________________________________________

5 ACCOUNTS OF NON PROFIT MAKING ORGANISATIONS

1. Accounts of Non-Profit Making Organisation or Clubs Accounts
No-trading organisations are those whose objective is to provide services to their members (e.g. social
clubs, sports, societies, charity and other organisations
Since a non- profit trading organisation does not exist to make profit it is not appropriate to refer to it as
profit and loss account.
Only financial statements are prepared for such organisations and are in a form of income and
expenditure account and a balance sheet.
Sources of income for non-trading organisations
a) Membership subscription
b) Payments for life membership
c) Profit form bar sales
d) Profit from sale of food in the club restaurant or cafeteria
e) Profit from social events such as dinner dance
f) Interest received on investment
g) Donations
h) Legacies funds

BOOKS OF ACCOUNTS

Receipts and payments account

Receipts and payments account is similar to the cash or bank account of a profit making organisation.

Example 1

Cash at bank (01.01.2004) K N

2,100
subscriptions 8,006
donations 574
Bank interest 201
Salaries 3,102
Telephone 700
Rent and rates 2,400
Sundry cash in hand(01.01.2004) 50
Enter the information above into the Mumana Gardening Society receipts and payments account for the
year ended 31st December 2004.

Mumana Gardening Society

Receipts and payment account for the year ended 31st December 2004.

K K
Receipts
Subscription 8,006
Donations 574
Bank Interest 201
8,781
Payments
Salaries 3,102
 Telephone 700
Rent And Rates 2,400
Sundry Expenses 750
6,950
1,829
Add: balance at bank (01.01.2004) 2,100
Cash in hand (01.01.2004) 50
2,150
3,979
Income and expenditure account

This is the equivalent of the profit and loss account of a sore trader. It is a part of double entry bookkeeping
system. The only difference between it and the profit and loss account is the way in which it is presented
and the terms used.

Terms used

Profit making organisation Non-profit organisation

Trading, profit and loss Account ........ Income and expenditure account
Net profit .......................................... Surplus of income over expenditure
Net loss.............................................. Excess of expenditure over income

Example 2

Using the entries in the example above we can prepare the income and expenditure account for the year as
follows

K
Income
Subscription 8,006
Donations 574
Bank interest 201
8,781
Expenditure
Salaries 3,102
Telephone 700
Rent and rates 2,400
Sundry expenses 750
6,950
Surplus of income over expenditure, transferred to accumulated funds 1,829

Balance sheet

It is prepared at the end of the end of financial position and its format is similar to that of trading business
except that for non-profit making organisation they use the term accumulated funds as shown above to refer
to capital.

Prepared using the accounting equation formula

Assets - Liability = Accumulated Fund

The following info appeared in the Mumana Gardening Society’s books on 01.01.2005

Cash in 01.01.2005 K 3,500

Subscription in advance 01.01.2005 K 1,200
Subscription in area 01.01.2005 K 2,300
Bar expenses owing 01.01.2005 K 1,500
Equipment 01.01.2005 K 5,000
Calculate the societies fund as at 01.01.2005

Calculation of cumulated fund

Assets K K
Cash in hand (01.01.2005) 3,500
Subscription in advance (01.01.2005 2,300
Equipment 5,000
10,800
Less: liabilities
Subscription in advance 1,200
Bar expenses owing 1,500
2,700
Accumulated funds as at 01.05. 2005 8,100

SUBSCRIPTION ACCOUNT

Annual membership subscriptions of the clubs and societies are usually payable one year in advance. This
means that payments are received from members who have not enjoyed the benefits of their payments;
therefore payments from members are receipts in advance and are shown under liabilities in the balance
sheet. This also means that membership for the year ahs to run as up to the balance date.

Numerical example

Nkana football club charges an annual membership of k 50 payable in advance on the first of October each
year. All the 40 members pay their subscriptions promptly on 1 st October 2016. If the clubs accounting year
ends on 30th December, total subscriptions of 40xk50 = k 2000would be treated as follows

40 x 9 months
a) x k 50=k 1,500
12 months

K 1,500will appear in the balance sheet of the club as at 31st December 2016 as a current liability
‘subscription in advance’. These subscriptions related to the period 1st January to 30th September 2017

40 x 3 months
b) x k 50=k 500
12 months

K 500 will appear as income in the income and expenditure account for the period 1st October to 31st
December 2016.

When in ARREARS, with subscriptions or owed money;

 i) They are all debtors
j) To appear as current assets in the balance sheet (subscription in arrears)
k) These should be shown as separate items in the balance sheet and should not be netted off against
subscription in advance

Suppose that Nkana squash club has 100 members, each of whom pays an annual membership of k60 0n 1st
November. Of these 100 members, 90 pay their subscriptions before 31st December 1995 (for the
1995/1996 year) but 10 have still not paid. If the clubs accounting year ends on 31st December, then as 31st
December 1995 the balance sheet of the club will include the following items;

a) Subscription in advance (current liability)

10 months
90 members 12months x k 60=k 4,500

b) Subscription in arrears ( current assets)

2months
10 members 12months x k 60=k 100

It is not uncommon for clubs to take no credit for subscription income until the money is received. In such
cases the subscription in areas are not credited to income and not shown as a current asset. It is essential
to read the question carefully.
Example
At January 1 2008, Kitwe little theatre had membership subscription paid in advance of K1, 600, and
subscription in arrears K250. During the year to 31st December 2008 receipts of subscription payments
amounted to K18, 400. At 31st December 2008 subscription in advance amounted to K1, 750 and
subscription in arrears to K240.

What is the income from subscription to be shown in the income and expenditure account for the year to
31st December 2008?
Solution
This question does not say that subscriptions are only accounted for when received. You can assume that
the society takes credit for subscriptions as they become due, whether or not they are received.

Payments received in the year 18,400

Add: subscriptions due but not yet received

(i.e. subscriptions in arrears -31st December 2008) 240

Subscriptions received last year related to current year

(subscriptions in advance 1st January 2008) 1,600
1,840
 20,240
Less: subscriptions received in current year related to last year
(subscription in arrears 1st January 2008) 250

Subscriptions received in current year relating to next year

(subscription in advance 31st December 2008) 1,750

2,000
Income from subscriptions for the year 18,240

RE FRESHMENTS ACCOUNT
Receipts and payment account of the Kitwe Cricket Club for the year ended 31st December 2012 was as
follows;

RECEIPTS PAYMENTS
K K
Balance (01.01.2012) K 290 Rent and rates K 820
Subscriptions K 1,235 Postage and stationery K 235
Donations K 65 Cost of refreshments K 430
Gift for purchase of equipment K 200 New equipments K 350
Sales of refreshments K 620 Sundry expenses K 255
Wages for refreshments preparations K 100
Balance c/d K 220
K 2,410 K 2,410

Consider the following information

I JAN 2012 31 DEC 2012

Stocks of refreshments K35 K 30
Owing to suppliers for refreshments K 25 -
Subscription s in arrears - K 25
Subscription i advance K 40
Equipment of evaluation K 340 K 590
Required:

i. Prepare refreshments accounts

ii. Show the income and expenditure
iii. And the balance sheet as at that date

Solution

i. Kitwe cricket club’s refreshment a/c for the years ended 31st December 2012

Sales 620
Opening stock 35
Add purchases 405
Total refreshments available 440
Less closing stock 30
Cost of sales 410
Add: wages for prep. Of refreshments 100
510
Profit on sale of refreshments 110

Workings 1

Purchase control account

F Dr Cr
Balance b/f 25
cash 430
Trading account 405
430 430
 The opening balance of K25 is amount owning to suppliers of refreshments at start the K430
debited is the cash paid to suppliers during the year. For this control a/c there is no balance owed to
suppliers as at close. Therefore, the shortage on the credit side as we attempt to balance the a/c is
the amount taken to the trading a/c.

Workings 2

F Dr Cr
Balance b/f 25
cash 430
Trading account 405
430 430
  The cash in the subscriptions account is from receipts and payments account.
 Remember that subscription in arrears have a debt balance while those in advance have a credit
balance whether at opening or close.
 The amount k1300 is the one to be taken to the inc. & Exp A/c as an income for that particular year.

Kitwe Cricket Club income and expenditure account for year ended 31st December 2012

Income K K
Subscriptions 1,300
Profit from sale of refreshment 110
Donations 65
1,475
Less: expenses
Rent and rates account 820
Postage and stationery 235
Sundry expenses 255
Dep. Equipment ( 340+359)-590 100
Total expenses 1,410
Surplus 65

Balance sheet

Fixed assets K Cost K Dep. K N.B.V

Equipment 690 100 590
690 100 590
Currents assets
Stock 30
Subscription in arrears 25
Cash balance 220
Total current assets 275
Net assets 865
Financed by:
Acc. Funds 600+200 gift for purchase of Eqi. 800
Add: surplus of income over expenditure 65
Capital employed 865

Assets at 1 Jan 2012

Balance b/f 290
stock 35
equipment 340
665
Less liabilities at Jan 2012
Owings to suppliers 25
Subscription in advance 40
65
Accumulated funds 600
7 CAPITAL AND REVENUE EXPENDITURE AND RECEIPTS

Be aware that ‘capital expenditure’ has nothing to do with the owner’s Capital Account.
The two terms happen to start with the same first word and they are both things that are
likely to be around the business for quite a long time. While both are, in a sense, long-
term investments, one made by the business, made by the owner, they are, by definition,
two very different things.

Capital expenditure
is incurred when a business spends money either to
 buy fixed assets,
 add to the value of an existing fixed asset.
Included in such amounts should be spending on
 acquiring fixed assets
 bringing them into the business
 legal costs of buying buildings
 carriage inwards on machinery bought
 Any other cost needed to get a fixed asset ready for use.

Revenue expenditure
Expenditure which is not spent on increasing the value of fixed assets, but on running the business on a
day-to-day basis, is known as revenue expenditure.
The difference between revenue expenditure and capital expenditure can be seen clearly with the:-
 Total cost of using a van for a business.
Buying a van is capital expenditure. The van will be in use for several years and is, therefore, a
fixed asset.
 Paying for petrol to use in the van is revenue expenditure. This is because the expenditure is used up
in a short time and does not add to the value of fixed assets.
QUESTIONS:

(1) DISTIQUISH BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

Solution

Expenditure Type of Expenditure

1 Buying van -Capital

2 Petrol costs for van -Revenue

3 Repairs to van -Revenue

4 Putting extra headlights on van - Capital

5 Buying - Capital

6 Electricity costs of using machinery - Revenue

7 Painting outside of new building - Capital

8 Repainting outside of building in (7) - Revenue

24.2
9 We spent £1,500 on machinery:
 £1,000 was for (improvement) added to the machine; - Capital
 £500 was for repairs Revenue £500 - Revenue
2

CAPITAL AND REVENUE RECEIPTS

EXPLAIN CAPITAL RECEIPTS ITEMS
(INCOME FROM SALE OF FIXED ASSETS)

When an item of capital expenditure is sold, the receipt is called a capital receipt.

QUESTION:

Suppose a van is bought for £5,000, and sold five years later for £750.Distiquish between capital receipts
and revenue receipts.

SOLUTION:

Then £5,000 was treated as capital expenditure,

The £750 received is treated as a capital receipt,
and credited to the fixed asset account in the General Ledger.

Revenue receipts are sales and other revenue items that are added to gross profit,
such as rent receivable and commissions receivable.
Finally

The rules are:

1 If expenditure is directly incurred in bringing a fixed asset into use for the first time, it is capital
expenditure.

2 If expenditure improves a fixed asset (by making it superior to what it was when it was first owned by the
organization, e.g. building an extension to a warehouse), it is capital expenditure.

3 All other expenditures are revenue expenditure.