Vision

“A Centre of excellence in Law Practice Education”.

Through this vision, ZIALE will ensure that it applies innovative strategies to earn international
recognition in the provision of practical legal training.

Mission
“To provide quality practical legal training”
Through this mission statement, ZIALE will develop innovative strategies to ensure that the
Institute produces competent legal practitioners and non-legal professionals to the satisfaction
of all stakeholders.

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TABLE OF CONTENTS

Vision................................................................................................................................. i

Mission.............................................................................................................................. i

Module Introduction.......................................................................................................... 1

Unit 1.1 Introduction to Accounting Principles................................................................. 2

Unit 2.1 Books of Original Entry....................................................................................... 45

Unit 3.1 The Financial Statements of Sole Traders........................................................... 86

Unit 4.1 Adjustments for Financial Statements................................................................. 105

Unit 5.1 Partnership Accounts........................................................................................... 128

Unit 6.1 Legal Practitioners Accounts............................................................................... 139

Unit 7.1 Billing Clients...................................................................................................... 152

[ NAME OF FIRM ]................................................................................................. 166

Unit 8.1 Types of Taxes and Other Statutory Obligations................................................ 169

Module Conclusion............................................................................................................ 191

Appendix 1......................................................................................................................... 192

Module Introduction
This module has been authored for the purpose of providing guidance on both the principles
of accounts, and mechanisms of bookkeeping which culminate to preparation of the financial
statements, to students studying for the Zambian Bar examinations. The module a priori
financial statements, is restricted to the income statement and statement of financial position
for a sole trader/legal practitioner, and partnership. Beyond the objective of passing the
Zambian Bar examinations, the module will in part, imbue its users with financial literacy and
the entrepreneurial spirit.

Module Outcomes
After studying this module, the student is expected to:
a) Know the principles of accounting;
b) Know the types of business documents;
c) Have practical knowledge of the accounting equation;
d). Be able to calculate capital;
e). Be able to prepare ledger accounts and balance them off;
f). Know how to draft the trial balance, and make the necessary adjustments;
g). Prepare the income statement and statement of financial position for a
sole trader and partnership;
h). Know the legal practitioner’s books of accounts;
i). Prepare the financial statements for a sole practitioner and partnership;
j). Know how to compute the bill of cost, and preparation of a fee note;
k). Know the selected taxes and statutory obligations; and
l). Be able to calculate the selected, taxes and statutory obligations.

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Unit 1.1 Introduction to Accounting Principles

Introduction
In this unit, you will learn about accounting principles, the accounting system, the accounting
equation and statement of financial position, the double entry system, balancing of ledger
accounts, and preparation of the trial balance.
Specific Unit Outcomes
After studying this unit, you should be able to:

a). Explain what accounting principles and concepts are, and their role in
management of a business;
b). Know what bookkeeping and accounting is;
c). Acquire the skill of preparing basic books of accounts;
d). Apply the principle of double entry bookkeeping; and
e). Prepare a trial balance.

1.1.1 Accounting Principles

1.1.1.1 What is bookkeeping and accounting?
According to Frank Wood’s (Bookkeeping and Accounts, 10th Edition), bookkeeping is the
process of recording in books or computers, the financial effect of business transactions and
managing such records. Paul, J. (Principles of Bookkeeping and Accounts), defines it as, the
art of recording business transactions in a systematic way so that the financial position of the
undertaking can readily be ascertained.
Frank Wood’s (Bookkeeping and Accounts, 10th Edition), defines accounting as a skill or
practice of maintaining accounts and preparing reports to aid the financial control and
management of a business. Accounting is also defined as a way of recording and summarising
transactions of a business (Paul, Principles of Bookkeeping and Accounts).
Bookkeeping and accounts is a two-staged process.
The first stage is bookkeeping and it involves the preparation of basic accounting records and
recording of business transactions in books of accounts. Accounting is the second stage and
this is concerned with the interpretation of information and figures in the accounts to explain
the financial condition of the business. This is done through the preparation of an income
statement and statement of financial position.
The two-staged process is shown below in the accounting sequence.
• The accounting sequence is:
• Recording accounting data
• Classifying data
• Summarising data
• Communicating information.

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 Recording accounting data

Classifying data

Summarising data

Communicating information

1.1.1.2 What are the aims of a business?

• To make money for the owners.
• Trade with other people and businesses.
• Money is a medium of exchange in trading.
• Control of money is therefore important.
Therefore, there is need to know how much money is going out and coming in, and this process
is known as accounting.

1.1.1.3 Financial Control and the need and Importance of Accounting

Financial control, basically means that for a business to record a profit, its sales must be greater
than the cost incurred in the running of that business. This is illustrated in the chart below.

3
 The basis of a business
(financial control)
Business is formed

Trading with others involves money

Control of money is essential

Good financial control Bad financial control

Profit Loss

Success Failure

All businesses whether small or large use the same concept of financial control. The basis of a
business is trading with others and good financial control is essential if the organisation is to
succeed. An example is shown below.
1.1.1.4 The Statement of Profit or Loss and Statement of Financial Position
• The Income Statement
– Shows how much profit or loss has been made over a period of time (period
statement)
• The Statement of Financial Position
– Is a statement of the assets and liabilities of a business at a particular point in
time (position statement).
Some definitions that are very important in this sub-unit and throughout this module are:
• Assets
– all economic resources or means with which the firm carries on business
operations (buildings, machinery, stock, accounts receivable, cash etc.
ƒ Fixed assets are:
• of long life
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 Financial control

Trader invests in goods using Buys goods for K10,000

money

Sales goods at more than he paid Sells the goods for K15,000

Difference between cost of goods Kwacha

and sales price is profit
Selling price 15,000.00
Less cost price 10,000.00
Gross Profit 5,000.00
Less expenses 3,000.00
Net profit 2,000.00

• to be used in the business, and

• not bought for resale. e.g., buildings, motor vehicles, machinery etc.
ƒ Current assets are:
• Held for resale at a profit
• Items that have a short life
• Stock, debtors, cash at the bank and cash in hand.
• Liabilities: financial obligations to others
– Capital (owners’ equity) resources put into the business by the proprietor
– Long term liabilities - liabilities not due for repayment in the short term i.e., loans
and mortgages
– Current liabilities are liabilities due for repayment in the short term e.g., bank
overdraft, trade creditors and sundry creditors.
• Profit
– the net increase in the total resources of the business earned as a result of
business operations.
• Balance sheet
– the summarised statement of assets and liabilities so as to show the financial
condition of the business at any given time.
1.1.1.5 The Users of Accounting Information
The underlisted are the users of accounting information.
• Investors
• Customers
• Suppliers
• Employees
• Tax authorities.

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 1.1.1.6 The Accounting Sequence and Internal Control

Accounting consists
nsists
nts
of two elements

Recording summarising
ng
Transactions must be The transactions for a period are
recorded as they occur in order to provide summarised in order to provide information
up to date information for management about the company to interested parties

FINANCIAL STATEMENTS

Income Statement Statement of Financial Position

performance of a business over a Reflects the position of a business at a
period of time point in time

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1.1.1.7 The Main Accounting concepts
ƒ An accounting concept is an idea that underpins the preparations of the financial
statements of an organisation
ƒ Outlined in two documents:
i). Framework for the preparation and presentation of financial statements
ii). The International Accounting Standards 1(IAS 1) Presentation of Financial
Statements.

Business entity concept

• Affairs of the business separate from personal activities of owner
• Only activities of the business are recorded in business financial statements
• Except when introducing new capital or taking drawings.
Going concern concept
• Implies that the business will continue to operate for the foreseeable future
• It is assumed that the business will continue to trade for a long period of time
• There are no plans to cease trading or liquidate the business.
Accruals (matching) concept
• Says net profit is the difference between revenues and expenses rather than difference
between cash received and cash paid:
Revenues – Expenses = Net Profit
• Sales are revenues when goods or services sold and not when the money is received
• Purchases are expenses when goods bought not when paid for.
• Expenses e.g., rent, insurance and motor expenses are treated as expenses when they
are incurred not when paid for
• Adjustments are made when preparing financial statements for expenses
owing(accruals) and those paid in advance (prepayments)
• Identifying expenses used up to obtain the revenue is referred to as matching expenses
to revenue (matching concept).

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Materiality concept
• Concept applies when the value of an item is relatively insignificant and as such does
not merit separate recording
e.g., purchase of a box of paper clips, pencils, pens. Such expenditure not material
and recorded in general expenses account.
• Whereas non-current assets such as machinery are classed as capital expenditure.

Consistency concept
• Requires that the same treatment be applied when dealing with similar items from one
period to another
• When business has adopted a method for accounting treatment of an item it should not
change it from one period to another when preparing financial statements
• If organisation allowed to change methods, it would facilitate manipulation of profits
and make comparison from one period to another difficult.

Prudence concept
• Therefor the accountant will take the figure that will understate rather than overstate
profit.
• All losses must be recorded in the books and profits should not be anticipated by
recording then before they have been gained.

Realisation concept
• Profit should only be included in the income statement when it is reasonably certain
that it has been earned.
• Profit is said to be earned when:
9 Goods or services are supplied to the buyer/consumer and;
9 Buyer/consumer incurs liability for them.

Historical cost concept

• Assets of a business are recorded in accounting records at cost price as opposed to
current market value
• Advantage is that assets can be easily verified from the source document (invoice).

Money measurement concept

• Only transactions and activities that can be measured in terms of money and whose
monetary value can be assessed with reasonable objectivity will be entered into the
accounting records.

Dual aspect concept

• All transactions affect two double entry accounts.
• One on the debit side and the other on the credit side.
The two aspects are always equal:

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 Assets = Capital + Liabilities

Exercise: 1
What type of records (documents) do you think a business uses in its operations?
Exercise: 2
List four uses of financial information.
Exercise: 3
2.1.2 The Accounting System
List and explain the five main accounting concepts.
2.1.2.1 Source documents

1.1.1.8. Main data sources and their function

Whenever a business transaction takes place there is need to record the transaction in a
document. It is not practical to record transactions directly into ledger accounts. Therefore,
there is a need for a system of source documents to record transactions before posting to the
ledger accounts. The recording and posting of transactions are usually done by a bookkeeper
(accounts clerk). In small business, one ledger is normally maintained by a bookkeeper and for
large businesses they have many ledgers which are maintained by more than one bookkeeper.
The following are the source documents:

Sales and purchase orders:

• Sales order: agreement to sell goods/services issued by the seller
• Purchase order: agreement to purchase goods/services issued by the purchaser.
• Sales or purchase order normally first document issued before a sale or a purchase of
an item.
• Record an intended rather than an actual transaction. For this reason, no transaction is
recorded in the books of account.
• An invoice is the relevant document because it records the formal occurrence of the
transactions.

Cash Sales
No need to enter these in day book as there is no money owing.

Credit Sales
Most sales will be made on credit terms rather than cash.

Sales and purchase invoices

• When a business sales goods or services to a customer:
– it issues a sales invoice to the customer.
– it keeps a copy of each sales invoice for internal use.
• To the customer the invoice represents a purchase and thus he will refer to it as a
purchase invoice.

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 • Details on the invoice:
– Name and address of the seller and purchaser
– Date of sale
– Reference to order
– Description of goods
– Amount due and terms of payment
• essential document, provides information to be entered into books of account.

Credit notes
Subsequent to a sales invoice, refers to an invoice to a customer to acknowledge amount due
against goods supplied which do not meet agreed specifications or have been over invoiced. A
Credit note therefore records goods returned by a customer or the reduction of moneys owed
by a customer.
• issued subsequent to a sales invoice and refers to that invoice.
• issued to acknowledge that the customer is due an amount against goods supplied.
A Debit note on the other hand is a document issued by a purchaser of goods to the supplier
demanding the latter to issue a credit note.

Summary of stages of accounting

The source documents (invoices credit and debit notes) are part of accounting records of a
business, the information contained in them needs to be recorded and summarised clearly. This
is achieved by using books of original entry (prime entry).

1.1.1.9 Stages of accounting and accounting records

1st stage
The source documents:
Invoices, credit and debit notes, need to be recorded and summarised clearly - achieved by
using books of original entry (prime entry).

Books of prime entry are:

• Where transactions are first recorded.
• Separate books to record particular type of transactions.
Types of books of original entry
ƒ Purchases day book
ƒ Purchases returns day book
ƒ Sales day book
ƒ Sales returns day book
ƒ Cash book
ƒ Petty cash book
ƒ Journal
They are the first point of entry in the accounting system. Accumulate transactions in each
book. Period: day, week, or month
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2nd Stage:
Transfer periodic total from each book into the relevant ledger accounts, (posting to the ledger).
3rd Stage:
Prepare final accounts from ledger accounts

1.1.2.2 Ledgers and classification of accounts

The Division of ledgers

Sales ledger (Debtors Ledger)

ƒ Customers’ personal accounts.
ƒ Has a ledger account for each debtor.
ƒ The balances indicate the amounts owing by individual credit customers
Purchases ledger (Creditors Ledger)
ƒ Suppliers’ personal accounts.
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 ƒ Individual accounts for each creditor.
ƒ The balances indicate the amounts owing to suppliers of goods and services.
General ledger
(also known as nominal ledger)
ƒ Remaining double entry accounts
ƒ e.g., expenses, revenue, fixed assets, capital, etc
ƒ A summary of all accounts.
ƒ All the balances necessary to produce financial statements.
Private ledger
ƒ To ensure privacy for the proprietor(s), the capital and drawing accounts are kept in a
private ledger

Cash book
ƒ Cash and cheque transactions.
ƒ a major part of the total transactions of a business
ƒ therefore, need for a separate book which records these transactions.

ACCOUNTS RECEIVABLE (Debtors)

Customer accounts with Debit balances.
ACCOUNTS PAYABLE (Creditors)
Suppliers accounts with credit balances.

1.1.2.3 Balancing off accounts

• Objectives:
– Close accounts when appropriate
– Balance off accounts at the end of a period and bring down the opening balance
to the next period
– Distinguish between a Debit balance and a Credit balance.
1.1.2.4 The trial balance
– A way of checking arithmetical accuracy of postings
– A source, for drawing up a firm’s final accounts
– Always has the last day of the accounting period to which it relates.
1.1.2.5 The main financial statements
Purpose
ƒ People go into business for profit
ƒ Preparation of financial statements to determine condition of business
ƒ Closing off revenue and expense accounts
ƒ Transferring balances to either the Trading account or the profit & loss account
ƒ Preparation of the Income Statement
Trading and profit and loss account
ƒ Prepared from trial balance.
ƒ Calculate profit or loss over a period of time.

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 ƒ Uses:
• Planning ahead preparation of budgets
• Comparison of results
9 one period to the other
9 whether as planned.
• Obtaining loans
ƒ Tax purposes.
ƒ Trading Account (top part)
ƒ Profit and Loss Account (bottom part)
ƒ Combined - “Trading and Profit and Loss Account”
ƒ Usually referred to simply as the ‘Profit and Loss Account.’
ƒ Both the Trading Account and Profit Account part of double entry
ƒ Income Statement merely a financial statement showing details of income and
expenditure over period. Not part of double entry.
ƒ Gross profit: This is the excess of sales
(calculated in the Trading Account) over the cost of goods sold
In the period
SALES – COST OF GOODS SOLD = GROSS PROFIT

ƒ Net profit: This is what is left of the GROSS

(calculated in the Profit and Loss Account) PROFIT after all other
Expenses have been
Deducted.

ƒ Net profit consists of the gross profit plus any revenue other than from sales, such as
rent received, or commission earned, less the total costs used up during the period other
than those already included in the ‘cost of goods sold.’
ƒ It is possible to have a separate Trading Account and Profit or Loss Account. In
practice they are normally combined to form the Trading and Profit or Loss Account.
ƒ Usually referred to simply as the ‘Profit or Loss Account’.

Gross profit
+ any revenue other than from sales,
e.g.
• rent received
• commission earned
• interest earned
- total costs for the period other than those already
included in the ‘cost of goods sold.’
Cost of goods sold
• Where all the goods in stock are sold:
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Cost of goods is equal to purchases.

• If first period (year of trading) and there is stock remaining at the end of the period:
Cost of goods sold = Purchases – Closing inventory
• Second period of trading then:
Cost of goods sold = Opening inventory + Purchases – Closing stock Cost
= Gross profit

STATEMENTS OF FINANCIAL POSITION

• Contains details on assets, liabilities and the capital of the business.
• Details retrieved from our records to draw up the statement
• All the balances remaining in our records once the Trading and Profit and Loss Account
and Income Statement for the period have been completed.
Exercise: 4r
Using information below, post the transactions to respective ledgers and balance them off for
Bwalya.

2020
January
01 Started business with K10,000 into the bank.
03 Sold goods worth K3,500.00 on cash
04 Paid for electricity K500 cash
06 Bought stationery paying by cheque K800
10 Paid wages K1,000 by cheque
14 Sold goods to Mutinta on credit K1,200
15 Paid cash for postage K250
18 Mutinta paid off her account by cheque
21 Paid cash for fuel K750.00

1.1.3 The Accounting Equation and Statement of Financial Position

1.1.3.1 The equality of the accounting equation
According to Frank Wood (10th Edition), by adding up what the accounting records say belong
to a business and deducting what they say the business owes, you can identify what a business
is worth according to those accounting records.
The whole of financial accounting is based upon this very simple idea. It is known as the
accounting equation. It can be explained by saying that if a business is to be set up and start
trading, it will need resources. Let’s assume that the business owner supplied all of the
resources. The equation will be:
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Resources supplied by the owner = Resources in the business
The resources supplied by the owner is called CAPITAL and the resources in the business are
called ASSETS. Therefore, the equation is:
Capital = Assets (C = A)

Example:1
Selisho started business with K25,000.00 cash. In this case, his capital is K25,000.00 and his asset
is also K25,000.00.
Using the above equation; Capital = Assets will be: 25,000.00 = 25,000.00
However, there are instances when the business is supplied with assets by other persons, apart
from owners of capital. The values of these assets are termed as Liabilities. This changes the
equation to:
Capital = Assets – Liabilities (C=A-L).

Example: 2
Using the same facts in Example 1 above, and with additional facts that Selisho had also borrowed
K5,000.00 cash from Alick.
The accounting equation will therefore be;
25,000.00 = 30,000.00 (25,000.00 + 5,000.00) – 5,000.00
The accounting equation formula can be switched, if we want to know the Total Assets. It would
show as below.
Assets = Capital + Liabilities

1.1.3.2 Definition of assets, liabilities and capital

Before proceeding to looking at the Double Entry System for Assets, Liabilities and Capital,
you need to know what these (Assets, Liabilities and Capital) and other items are, and what
they are denoted by.

Capital
This is a resource(s) used in the starting of a business. It is denoted by a Credit.

Liabilities
These are obligations due to other person(s) and are also denoted by a Credit.

Assets
Are any resource(s) owned by the business. Assets are denoted by a Debit.
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1.1.3.3 Introduction of the Statement of Financial Position
The accounting equation is expressed in the Statement of Financial Position, with the:
Capital (C) represented by Capital
Assets (A) comprising of non-current and current assets; and
Liabilities (L) made up of current and non-current liabilities.

Example:3
On 1 May 2017, Alick started business and deposited K 60,000 into a bank account opened
specifically for the business. On 6 May 2017. He buys some goods for K7,000 from Bwalya,
and agrees to pay for them sometime within the next two weeks.
The effect of this is that a new asset, stock of goods, is acquired, and a liability for the goods
is created. Bwalya who sold the goods and is owed money by Alick, is known in accounting
terms as a creditor.
Solution:
Alick
Statement of Financial Position

K
Assets (A)
Stock 7,000
Cash at bank 60,000
67,000
Liabilities (L)
Payables (7,000)
60,000
______
Capital (C) 60,000

1.1.4 The Double Entry System for Assets, Liabilities and Capital
1.1.4.1 The debiting and crediting of “T” Accounts
1.1.4.2 The Double Entry System for Assets, Liabilities and Capital
1.1.4.3 The debiting and crediting of “T” Accounts
Every transaction affects two items. This is entered into the books of accounts as a debit and a
credit, and is the book-keeping stage of accounting. The process is called double entry or
double entry book-keeping. The information for every item that is entered into the books is
obtained from source documents i.e. invoices credit notes etc.

Every transaction changes the Statement of Financial position. It is not practical to draw up the
statement with every transaction. Therefore instead of drawing up amended statements of
financial position after each transaction we employ the double entry system. An account shows
us the history of business transactions in relation to an asset, liability or capital for the
period under review.
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Rules of double entry
a). Every transaction affects two things and should therefore be entered twice; once on the
debit side and once on the credit side
b). The order in which it is done does not matter
c). A debit entry is always an asset or an expense. A credit entry is a liability, capital or
income
d). To increase or decrease assets, liabilities or capital

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1.1.4.2 Recording transactions affecting assets, liabilities and capital in “T” accounts

Example: 1

1.1.5 The Double Entry System for Inventory

1.1.5.1 The meaning of inventory and the accounts involved in inventory
movement
Inventory as explained above is a Current Asset and is denoted by a Debit. Inventory is
represented by the Purchases, Returns Inwards, Sales and Returns Outward Accounts.
An increase in inventory may mean that inventory has been procured and this would lead to
the Purchases Account being debited. Another way inventory may increase is through the
returns of goods sold. This means that the Returns Inwards Account will be debited.
In an increase in inventory two accounts are affected:

19
 ƒ Purchases Account
ƒ Returns Inwards Account
A reduction in inventory may mean that those goods have been sold (Sales). Another factor
that would reduce inventory is when the purchased goods have been returned.

In the case of a reduction in inventory, the affected accounts, which will be credited are:
ƒ Sales Account
ƒ Returns Outwards Account
ƒ
1.1.5.2 The difference between cost price and selling price
A cost price is an amount paid for the purchase of goods and a selling price is an amount to be
paid for goods to be bought.

1.1.5.3 The need and use of various accounts to record movement of stock
Inventory Account
Balance :
Balance carried down (c/d) closing stock entered in the balance sheet under current assets.
Balance brought down (b/d) at the beginning of the following year, representing opening stock
for the next accounting period. Balance in the account at the end of accounting period:
– included in the balance sheet
– carried down as the opening balance at the beginning of the next period
ƒ Entries made to the Inventory account at the end of the accounting period:
– opening stock is transferred to the trading and profit and loss account
– closing stock is entered into the stock account
ƒ Stock appears in the financial statements i.e., Profit and Loss Account and the Balance
Sheet three times.
ƒ Twice in the P&L
– as opening stock and as
– closing stock
ƒ Once in the Balance Sheet under current assets
Below is an illustration of the stock movement in different accounts.

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21
22
2.1.5.4 Recording the purchase and sell of goods for cash and by credit using double entry

23
 A business may buy goods either on credit or by means of a cash payment.
The double entry for goods bought on credit will be:
x Debit Purchases Account
x Credit Seller’s Account.
The double entry for goods bought by way of a cash payment will be:
x Debit Purchases Account
x Credit Cash Account.
x
Example 1: A credit purchase of inventory
On 1 August 2018, goods costing K1,650 are bought on credit from Dambwa. The twofold
effect of the transaction must be considered so that the bookkeeping entries can be worked out.

The transaction above creates two entries; a debit to the Purchases Account and a credit to
Dambwa’s Account. The business will owe Dambwa for the goods purchased and not paid for,
hence Dambwa’s account being credited. The Purchases account will be debited to complete
the DOUBLE ENTRY. This is illustrated in the two accounts below.
Purchases Account Dambwa Account
Date Details Debit Credit Date Details Debit Credit

01.08.18 Dambwa 1,650 01.08.18 Purchases 1,650

31.08.18 Balancec/d 1,650 31.08.18 Balance c/d 1,650

1,650 1,650 1,650 1,650

Example 2. A Cash purchase of Inventory

On 2 August 2018, goods costing K3,500 is bought by cash. As explained
above under example 1, the purchases account (inventory) will be debited to
reflect an increase in stock. The cash account will be credited, so as to
decrease the balance of funds in the account.

Purchases Account Cash Account

Date Details Debit Credit

Date Details Debit Credit
02.08.18 Cash 3,500
02.08.18 Purchases 3,500

31.08.18 Balance 3,500

31.08.18 Balance c/d 3,500
c/d

3,500 3,500 3,500 3,500

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 1.1.5.5 Recording the purchase and sales returns of goods
A business by its nature, at times may purchase goods for sale, which may be returned for
reasons such as different specifications, damage among others. Similarly, customers who may
have bought goods from a business may return them for the same cited reasons.

Goods which have been returned to a supplier by a business are recorded in the Returns
Outwards Account. The returns outward account is CREDITED. The Supplier’s account, if
the goods were purchased on credit will be DEBITED.
On the other hand, goods returned to the business by a customer will lead to opening of an
account called Returns Inwards Account. This account is DEBITED with the value of the
returned goods.
Example 3: Returns Outwards of inventory
On 6 August 2018, goods previously bought for K9,600 are returned by the business to Kabwe.

Returns Outwards Account Kabwe Account

Date Details Debit Credit Date Details Debit Credit

06.08.18 Kabwe 9,600 02.08.18 Returns Out 9,600

31.08.18 Bal. c/d 9,600 31.08.18 Bal. c/d 9,600

9,600 9,600 9,600 9,600

Example 4: Returns Inwards of inventory

On 5 August 2018, goods which had been previously sold to Longwe for K2,900 are now
returned to the business.
Returns Inwards Account Longwe Account

Date Details Debit Credit Date Details Debit Credit

05.08.18 Longwe 2,900 02.08.18 Returns In 2,900

31.08.18 Balance c/d 2,900 31.08.18 Balance c/d 2,900

2,900 2,900 2,900 2,900

1.1.5.6 The meaning of the terms purchases and sales

According to Frank Woods (15th Edition), purchases in accounting means the purchases of
those goods a business intends to sell, and sales means the sale of those goods the business
normally deals and which were purchased for the sole purpose of resale.
25
 1.1.5.7 The difference in recording sales for cash and on credit
Example 5: Credit sales
On 5 August 2018, sold goods to Kabwe for K9,600 on credit.

Sales Account Kabwe Account

Date Details Debit Credit Date Details Debit Credit

05.08.18 Kabwe 9,600 05.08.18 Sales 9,600

31.08.18 Balance c/d 9,600 31.08.18 Balance c/d 9,600

9,600 9,600 9,600 9,600

Example 6: Cash sales

On 5 August 2018, Longwe bought goods from us for K2,900 by paying cash.

Cash Account Sales Account

Date Details Debit Credit Date Details Debit Credit

05.08.18 Sales 2,900 05.08.18 Cash 2,900

31.08.18 Balance c/d 2,900 31.08.18 Balance c/d 2,900

2,900 2,900 2,900 2,900

1.1.6 The Double Entry System for Expenses and Income

1.1.6.1 The meaning and difference between expenses and revenue and the
nature of profit or loss
Expenses
Expenses are costs incurred in the running of business. These include items such as; salaries &
wages, rent, motor vehicle running costs, water, electricity etc.
Expenses are denoted by a Debit. These are current and/or future outflow of money to another
person or group to pay for an item or service, or for a category of costs.

Revenue
This is a resource(s) that a business has from its normal business activities, usually from the
sale of goods and/or services to customers. Revenue is also referred to as sales or turnover.
Some companies receive revenue from interest, royalties, or other fees. Revenue is denoted by
a Credit. Revenue includes items such as Sales, Fees charged for services, Interest earned,
rentals receivable etc.

26
1.1.6.2 The reason behind the usage of separate accounts for each type of
expense and revenue

Separate accounts for each type of expenses and revenue are maintained
for ease and better understanding in the calculating profits or losses.

1.1.6.3 The concept of profit and loss

Profit is when revenue from the sale of goods exceeds expenses incurred,
and losses are the opposite of profits. There are two types of profits; Gross
Profit and Net Profit.

Gross profit is when revenue of a business is higher than the cost incurred on
the goods sold, whilst Net Profit is as a result of Gross Profit being higher than
all expenses the business incurs in its operations.

1.1.6.4 The effect of profits and losses on capital and the relationship to the
accounting equation
Revenue and Expenses are used in determining Profit or Loss for a business
during a specified period. Determination of either Profit or Loss is done by
subtracting Expenses from Revenue.

When Revenue is higher than Expenses, then the business has recorded a Profit. Conversely,
when Expenses are higher the Revenue, the business would have recorded a Loss.

Profit = Revenue – Expenses

Remember! Profit/(Loss) affects Capital. Profit will increase Capital and the
opposite is true for a Loss.

1.1.6.5 Recording expenses and revenues using double entry

Expenses

Whenever an expense is incurred; either paid for or obtained on credit, the expense account

MUST BE DEBITED.
The list of expenses accounts is in exhaustive and may include among others:
ƒ Rent account
ƒ Salaries and wages account
ƒ Motor vehicle repairs account
ƒ Depreciation account
ƒ Water & electricity account
ƒ Stationery and postage accounts.

27
Example 1: Expenses
On the 10th April 2020, Banda a sole trader paid rent by cash for his business amounting to K
3,500.00.

Rent Account
Date Details Debit Credit

10.04.2020 Cash 3,500

30.04.2020 Balance c/d 3,500

3,500 3,500

Cash Account
Date Details Debit Credit

01.04.2020 Sales 7,300

10.04.2020 Rent 3,500

30.04.2020 Balance c/d 3,800

7,300 7,300

Revenue
Whenever revenue is generated, either paid in cash or on credit, it’s account MUST BE
CREDITED.
Example 2: Revenue
On the 1st April 2020, Banda sold goods on cash for K 7,300.00 and on the 11th April, he sold
goods to Mubiana valued at K 2,700.00.
Sales Account
Date Details Debit Credit

01.04.2020 Cash 7,300

11.04.2020 Mubiana 2,700

30.04.2020 Balance c/d 10,000

10,000 10,000

28
Mubiana Account
Date Details Debit Credit
11.04.2020 Sales 2,700

30.04.2020 Balance c/d 2,700

2,700 2,700

** For the cash account, please refer to the one under Example 1, above.

1.6.6 Understand the term and record ‘drawings’ and the effects of drawings
on capital
Drawings are said to take place when the owner(s) of a business take out resources from the
business for PERSONAL USE. A Drawings account is denoted by a Debit. Drawings are NOT
expenses, but they go to reducing Capital.
ƒ Where the business has made profit and there are no drawings, capital will be:
New Capital = Capital at Beginning + Net Profit
ƒ If the business has recorded a net profit and there are drawings made, capital will be:
New Capital = Capital at Beginning + Net Profit – Drawings
ƒ The business has recorded a loss and there are no drawings, new capital will be:
New Capital = Capital at Beginning – Net Loss
ƒ Where a business has recorded a loss and it has drawings, new capital will be:
New Capital = Capital at Beginning - Net Loss – Drawings

1.7 Balancing off Accounts

1.7.1 The reason why accounts are balanced off at the end of an accounting period
ƒ Objectives:
– Close accounts when appropriate
– Balance off accounts at the end of a period and bring down the opening balance
to the next period
– Distinguish between a Debit balance and a Credit balance.
1.7.2 The procedure for balancing off an account
ƒ Step 1:
– total debits
– total credits
– make a (memorandum) note of the totals
ƒ Step 2:
– insert higher total at the bottom of both the debits and credits leaving one line
for the inclusion of a ‘balance c/d’ (carried down)

29
ƒ Step 3:
– on side with lower arithmetical total, insert the narrative ‘balance c/d’ and the
amount which brings arithmetical total to the total inserted under step 2 above

ƒ Step 4:

30
– the same figure is shown on the other side of the ledger account but underneath
the totals as ‘balance b/d’ (brought down)

31
1.7.3 The distinction between a debit balance and a credit balance
• The date given for the ‘balance c/d’ is the last day of the period which is finishing and
that for the ‘balance b/d’ is given as the opening date of the next period
• If ‘balance b/d’ is on debit side the account has a debit balance. (if personal account –
Debtor)
• If ‘balance b/d’ is on credit side the account has a credit balance. (if personal account –
Creditor)
1.7.4 The opening and closing balances carried down(c/d) and brought
down (b/d)
• The expressions ‘carried forward’ (c/f ) and ‘brought forward’ ( b/f) used when an
account has so many transactions that it reaches the end of a page, at the bottom of that
page and the top of the next page respectively.
• It is then necessary to total the debit and credit sides and ‘carry forward’ the totals to a
new page, where the totals are ‘brought forward’. These expressions are not used when
balancing accounts.
Example:1
Enter the following in the personal accounts. Balance down each account at month end. After
balancing indicate which accounts represent debtors and which represent creditors.
Jun 1 Sales on credit to Tembo K1,374,000, Mengo K705,000, Gondwe K294,000
Jun 2 Purchases on credit from Kangwa K231,000, Sando K693,000, Phiri K195,000
Jun 6 Sales on credit to Mengo K1,332,000, Lombe K747,000
Jun 8 Purchases on credit from Sando K36,000, Zulu K666,000
Jun 10 Sales returns from Gondwe K27,000, Mengo K78,000
Jun 14 We return goods to Sando K72,000, Zulu K36,000
Jun 19 We paid Kangwa by cheque K231,000
32
Jun 22 Tembo paid us by cheque K900,000
Jun 24 We paid Zulu by cash K630,000
Jun 26 Tembo paid us by cash K300,000
Jun 30 Lombe paid us by cheque K747,000

Solution:

33
34
35
Example:2

2020, Jan
1 Started business with K80,000.00 in a business bank account
2 Bought premises paying by cheque K60,000.00
4 Bought shop fittings K5,000.00 from Office World paying by
cheque
5 Bought goods for K6,000.00 paying by cheque
8 Bought more shop fittings from Furniture Paradise
on credit K2,000.00
9 Sold goods for K680.00 and got paid by cheque
10 Shop fittings worth K400.00 from Furniture Paradise
are found to have defects and returned.
13 Bought goods on credit for K2,550.00 from Amin
14 Sold goods K1,060.00 on credit to Zulu
17 Returned goods to Amin K250.00
19 Paid Furniture Paradise the amount owing to them by cheque
21 Cash sales K250.00
22 Zulu returns goods K70.00
23 Paid the amount owing to Amin by cheque
25 Bought goods for K570.00 paying by cheque
27 Brought in additional capital K500.00 paying by cheque
30 Sold goods for K290.00 and was paid by cheque

Solution:

36
37
38
1.1.8 The Trial Balance
1.1.8.1 The purpose of the trial balance
A trial balance is prepared in order to check that for every Debit entry there is a reciprocating
Credit entry.

A trial balance is drawn AS AT a specified date, listing Credit balances and Debit balances in
the Accounts. KINDLY NOTE that a CREDIT balance c/d in the Accounts MUST be listed on
the DEBIT side in the Trial Balance. Conversely a DEBIT balance c/d in the Accounts MUST
be listed on the CREDIT side in the Trial Balance.

39
The totals on the Debit and Credit side MUST balance. Kindly also note that a balanced trial
balance does not mean that it is devoid of errors. A trial balance can still balance even when it
has errors.

1.1.8.2 The need for the trial balance totals to equal one another

Total debit = Total credit

• A trial balance is:
– A way of checking arithmetical accuracy of postings
– A source, for drawing up a firm’s final accounts
– Always has the last day of the accounting period to which it relates.

1.1.8.3 Errors in the accounts that will not be revealed by a trial balance
a). Errors of omission – where no entry of a transaction has been made at all.
b). Errors of commission – where an amount has been correctly posted but
to the wrong account

40
c). Errors of principle – where an item is incorrectly classified and posted to
the wrong type of account

Example:
Sales of surplus equipment classified as sales of goods i.e.,
crediting Sales Account instead of Equipment Account

d). Errors of original entry – where an incorrect amount is posted to

both the accounts in question

Example:
550 is misread as 500 and so entered on both debit and
credit sides of the correct accounts

41
 e). Compensating errors – where two or more errors cancel out each other

Example:
300 debited to an account instead of 150 then another account credited with 150 instead
of 300

f). Complete reversal of entries – where the correct accounts are used but the debit
and credit postings reversed

Example:
Paid cheque to Zulu for K300 then credited Zulu a/c and debited Bank a/c

g). Transposition errors – where wrong sequence of characters within a number are
entered on both sides

Example:
162 entered instead of 261

1.1.8.4 Steps to take when the trial balance does not balance

i. Too many errors – rewrite it.

ii. Once more add each side. If added downwards reverse and do upwards and vice versa.
iii. Find amount of discrepancy and check in the accounts for a transaction of this amount.
Confirm that double entry has been done.
iv. Halve the amount of the discrepancy and check whether there is a transaction for the
amount.
v. If amount of discrepancy is divisible by nine, it indicates that figures were transposed
e.g., 63 entered as 36 or 27 entered as 72
vi. Check that balance on each account calculated and entered correctly in the correct
column of TB
vii. Ensure that all outstanding balances from ledgers are added in TB.
viii. If error still not detected check all accounts entries from date of last TB
ix.
Example 1: Construction of a trial balance.
Using the facts underlisted below and having drawn the respective accounts, the balances c/d
from each one of the accounts will give us the Trial Balance as shown below.
2017

42
January 1 Mulenga started business with K150,000 in the bank.
2 Bought office furniture by cheque K12,000.
3 Bought machinery K14,000 on credit from Tembo Ltd.
5 Bought a van paying by cheque K60,010.
15 Paid the amount owing to Tembo Ltd K14,000 by cheque.
23 Received a loan from John K150,000 in cash.
31 Bought more machinery K65,000, cash.
Solution:
Mulenga
Trial Balance as at 31 January 2017
Debit (K) Credit (K)

Capital 150,000

Bank 63,990

Office furniture 12,000

Machinery 79,000

Van 60,010

Cash 85,000

John 150,000

300,000 300,000

Exercise: 5
You are to enter up the necessary accounts for the month of July 2020 from the following
information of your business. Balance off the accounts and extract a trial balance.
July 03 Started business with capital in cash of K800 and K3,000 in the bank.
05 Bought goods on credit from the following persons: Wana K610; Gondwe K214;
Matongo K174; Simwinga K345; Tembo K542.
07 Sold goods on credit to: Sampa K340; Banda K720; Fube K1,152.
10 Paid rent by cash K180.
10 Sampa paid us his account by cheque K340.
12 Fube paid us K1,000 by cheque.
15 We paid the following by cheque: Matongo K174; Wana K610.
15 Paid carriage by cash K38.
18 Bought goods on credit from Gondwe K291; Simwinga K940.
20 Sold goods on credit to Banda K810.
25 Paid rent by cheque K230. 43
1.1.9 Capital and Revenue Expenditure
Capital expenditure is when a business spends money to buy non-current assets or add value to
the exiting non-current asset. Revenue expenditure is money spent on the running of the
business, on a daily basis.

1.1.10 Unit Summary

In this unit, you have learnt the accounting principles, accounting systems, the double entry
system and how to enter transactions in the ledger accounts. You have also learnt how to
balance off the ledger accounts, and thereafter prepare the trial balance.

1.11 Prescribed Reading

Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapters 1-6, 24, and 32. (Any latest edition).

1.12 Recommended Further Reading

ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA .

44
Unit 2.1 Books of Original Entry
Introduction
In the preceding unit you learnt the accounting principles, the accounting system, double entry
system, and how to prepare the trial balance. In this unit you will: acquire knowledge on what
the ledger is and its subdivision; the sales and purchases day books; and the Returns Inwards
and Returns Outwards day books; cashbooks, petty cashbooks, how to prepare a bank
reconciliation, and a journal.
Specific Unit Outcomes
After studying this unit, you should be able to:

a). Know the different types of ledger divisions;

b). Prepare the sales and Purchases Day Books, with VAT;
c). Know the different types of cashbooks and how to prepare them;
d). Prepare a bank reconciliation; and
e). Know the use of a journal, and draft it.

2.1.1 The Ledger and its divisions

Division of the Ledger

The entries made in the respective Books of Original Entry are summarized and the double
entries effected in respective ledgers. There are three types of ledgers, namely; Sales ledger,
purchases ledger and general ledger as illustrated by the diagram below.

2.2.1.1 The sales ledger

Recording of all sales, both on cash or credit in the sales ledger.

2.2.1.2 The purchases ledger

Purchases either on cash or credit are recorded in the Purchases Ledger.
45
2.2.1.3 The Cash book
Payments and deposits made through the bank are recorded in the cash book.

2.2.1.4 The General ledger

This ledger constitutes various ledgers for transactions such as expenses, fixed assets, capital
etc.

2.2.1.5 Private Ledger

To ensure privacy for the proprietor(s), the capital and drawing accounts are kept in a private
ledger

2.2.1.6 Types of Accounts

ƒ Personal Accounts
These are made up of receivables and payables.
ƒ Real Accounts
These are used to record Non-current assets.
ƒ Nominal Accounts
Expenses, income and capital are recorded in these accounts.

46
2.2.2 Sales Day Book and Sales Ledger

2.2.2.1 Sales and sales returns

Sales in this case is said to have taken place when there is an exchange of goods with money
and/or with a promise to pay at a later date in the future. A sales return is when goods which
were earlier sold have been returned for whatever reasons, and the seller has accepted their
return.

2.2.2.2 Difference between cash sales and credit sales

A cash sale is said to have taken place when goods sold are immediately exchanged with money
and/or its equivalent, while in the case of credit sales, the money and/or its equivalent is only
paid at a later date in the future.

2.2.2.3 Entries in the sales day book

The information entered in the Sales Day Book is obtained from a sales invoice.
The information in the Sales Day Book will include:

a) Date of the Invoice

b) Details of the buyer
c) Invoice Number
d) Folio Number (Page of the Sales Day Book)
e) Invoice Amount.

2.2.2.4 Posting transactions to the sales ledger and general ledger

Information from the Sales Day Book is then recorded in the Sales Ledger
The total of the sales in the Sales Day Book is credited to the Sales Account and the individual
Customers’ accounts are to be debited.

Example:1
Enter up the Sales Day Book for Mutinta from the following details starting with invoice
number INV2100 for the month of June 2018. Show the transfer to the sales account in the
General Ledger and the Personal Accounts.
June 1 Credit sales to Lwiindi K520

3 Credit sales to S Banda K3,180

5 Credit sales to Juba K640
7 Credit sales to Kabwe K1,650
16 Credit sales to Tutwa K540
23 Credit sales to Womba K3,600
30 Credit sales to Fube K2,040

47
 Solution:
Mutinta
Sales Day Book (Page 010)

Date Details Invoice Number Folio Amount

K

01.06.18 Lwiindi INV2100 SL1030 520.00

03.06.18 S. Banda INV2101 SL1031 3,180.00

05.06.18 Juba INV2102 SL1032 640.00

07.06.18 Kabwe INV2103 SL1033 1,650.00

16.06.18 Tutwa INV2104 SL1034 540.00

23.06.18 Womba INV2105 SL1035 3,600.00

30.06.18 Fube INV2106 SL1036 2,040.00

TOTAL GL001 12,170.00

Lwiindi Account S. Banda Account

Date Details Folio Debit Credit Date Details Folio Debit Credit

01.06.18 Sales SL1030 520 03.06.18 Sales SL1031 3,180

30.06.18 Bal. c/d 520 30.06.18 Bal. c/d 3,180

520 520 3,180 3,180

Juba Account Kabwe Account

Date Details Folio Debit Credit
Date Details Folio Debit Credit
05.06.18 Sales SL1032 640 07.06.18 Sales SL1033 1,650

30.06.18 Bal. c/d 640 30.06.18 Bal. 1,650

c/d
640 640
1,650 1,650

48
 Tutwa Account Womba Account

Date Details Folio Debit Credit Date Details Folio Debit Credit

16.06.18 Sales SL1034 540 01.06.18 Sales SL1035 3,600

30.06.18 Bal. c/d 540 30.06.18 Bal. c/d 3,600

540 540 3,600 3,600

Fube Account Sales Account

Date Details Folio Debit Credit Date Details Folio Debit Credit

30.06.18 Sales SL1036 2,040 30.06.18 Credit sales GL001 12,170

for the
30.06.18 Bal. c/d 2,040
month
2,040 2,040
30.06.18 Bal. c/d 12,170

12,170 12,170

2.2.2.5 Trade discounts

This is a discount given by seller to their customers who buy in bulk and intend to go and
resale. Trade discounts are never shown in the books of accounts as it is simply a way of
calculating sales prices.

Example:1
Mutinta on the 1st June 2018 sold goods to Lwiindi for K2,500.00 less 10% trade discount.
The sales amount will be:
K
Sales 2,500.00
Less: 10% trade discount (250.00)
2,250.00

49
 Mutinta

Sales Day Book (Page 010)

Date Details Invoice Number Folio Amount
K

01.06.18 Lwiindi INV2100 SL1030 2,250

Lwiindi Account

Date Details Folio Debit Credit

30.06.18 Sales SL1036 2,250

2.2.3 Purchases Day Book and Purchases Ledger

2.2.3.1 Purchases and purchase returns
Purchases denotes the buying of goods for resale and purchases returns is when goods bought
for resale have been returned to the supplier, for whatever reasons, and the supplier has
accepted receipt of the same.

2.2.3.2 Difference between cash purchases and credit purchases

Cash purchases is said to have taken place when there is an exchange of goods for resale in
return for money and/or its equivalent. On the other hand, credit purchases take place when the
exchange of goods for resale is not accompanied with money and/or its equivalent. The money
and/or its equivalent is agreed to be paid at a later date in the future.

2.2.3.3 Entries in the purchases day book

The information that is recorded in the Purchases Day Book is obtained from the Purchases
invoice (Supplier’s). The recorded information in the Purchases Day Book is then entered in
the Purchases Ledger.
2.2.3.4 Posting transactions to the purchases ledger and general ledger
Just like the Sales Day Book, the Purchases Day Book will contain the underlisted information.
a) Date of the Invoice
b) Details of the Seller
c) Invoice Number
d) Folio Number (Page of the Purchases Day Book)
e) Invoice Amount.

The total of the purchases in the Purchases Day Book is debited to the Purchases Account and
the individual Suppliers’ accounts are to be credited.

50
 Example: 1
Enter up the Purchases Day Book for Mumba from the following details for the month of
November 2017.
Show the transfer to the Purchases account in the General Ledger and the Personal Accounts.

11 Bought goods on credit from Tapula K6,520 on invoice 1150.

13 Invoice 2590 shows that goods worth K1,180 were purchased on credit from
Mwaaka K1,180
17 Credit purchases from Twaambo K10,640 on invoice 099.
Solution:
Mumba
Purchases Day Book (Page 001)
Date Details Invoice Folio Amount
Number K

11.11.2017 Tapula 1150 PL010 6,520.00

13.11.2017 Mwaka 2590 PL011 1,180.00

17.11.2017 Twaambo 099 PL012 10,640.00

TOTAL GL025 18,340.00

Tapula Account Mwaaka Account

Date Details Folio Debit Credit Date Details Folio Debit Cred
it
11.11.17 Purchases PL010 6,520

30.11.17 Bal. c/d 6,520 17.11.17 Purchas PL011 1,180

es
6,520 6,520
30.11.17 Bal.c/d 1,180

1,180 1,180

Twaambo Account Purchases Account

Date Details Folio Debit Credit Date Details Folio Debit Credit

13.11.17 Purchas PL012 10,640 30.11.17 Credit GL025 18,340

es purchases
for the
30.11.17 Bal. c/d 10,640 month
1,180 1,180 30.11.17 Bal. c/d 18,340

18,340 18,340

51
2.2.4 Returns Inwards Day Book and Returns Outwards Day Book

2.2.4.1 Returns Inwards returns and Returns Outwards

Returns Inwards
When goods are sold, there is a possibility that they may be returned, for whatever reasons.
Businesses would accept the returned goods, either due to their internal policy or they may be
legally bound to do so. The returned goods are accounted for by the issuance of a Credit note
to the buyer of the goods.

Returns Outwards
Where goods purchased from a supplier have been returned, a Debit Note is issued by the
Purchaser to the Supplier.

2.2.4.2 Entering of credit notes in the Returns Inwards and Returns Outwards Daybooks
The details on the credit note are then entered in the Returns Inwards Day Book and
subsequently posted to the General and personal ledgers. Similarly, the details on the debit
note are entered in the Returns Outwards Day Book and thereafter posted to the General and
personal ledgers.

Example:1
Using the Sales Day Book information for Mutinta under sub-unit 2.2.2.4 above, the
underlisted were goods returned by customers with the last issued credit note number being
CRN1000.
Show the entries in the Returns Inwards Account in the General Ledger and the Personal
Accounts.
June
2018
3 S. Banda K580
11 Kabwe K650
25 Womba K1,600

52
Solution:

Mutinta
Returns Inwards Day Book (Page 030)
Date Details Credit Note Folio Amount
Number K

03.06.18 S. Banda CRN1001 SL1031 580.00

11.06.18 Kabwe CRN1002 SL1033 650.00

25.06.18 Womba CRN1003 SL1035 1,600.00

TOTAL GL050 2,830.00

2.2.4.2.3 Entering of debit notes in the Returns Outwards Daybook

The information on the Debit Note will be listed in the Returns Outwards Day Book and
subsequently entered in the General and personal ledgers.

Example:2
We use the Purchases information for Mumba above, the underlisted are the returns of some
of the goods he bought in the month of November 2017.
Nov. 15 Issued a debit note DN1500 in favour of Tapula for K1,120.
Nov. 20 Returned goods to Twaambo worth K3,000.00 on debit note DN1501.

Solution:
Mumba
Returns Outwards Day Book
Date Details Debit Note No. Folio Amount
K

15.11.2017 Tapula DN1500 PL010 1,120.00

20.11.2017 Twaambo DN1501 PL012 3,000.00

TOTAL GL076 4,120.00

53
2.2.4.4 Posting to the customer’s account in the Sales ledger and Purchases
ledger

a) Posting to the customer’s account in the Sales Ledger

S. Banda Account
Date Details Folio Debit Credit

03.06.18 Sales SL2101 3,180.00

03.06.18 Returns SL050 580.00

30.06.18 Bal. c/d 2,600.00

3,180.00 3,180.00

Date Details Folio Debit Credit

07.06.18 Sales SL2103 1,650.00

11.06.18 Returns 650.00

30.06.18 Bal. c/d 1,000.00

1,650.00 1,650.00
Kabwe Account

Womba Account

Date Details Folio Debit Credit

23.06.18 Sales SL1035 3,600.00

25.06.18 Returns 1,600.00

30.06.18 Bal. c/d 2,000.00

3,600.00 3,600.00

b). Posting to the suppliers’ account in the Purchases ledger

54
 Tapula Account
Date Details Folio Debit Credit

11.11.17 Purchases PL010 6,520.00

15.11.17 Returns 1,120.00

30.11.17 Bal. c/d 5,400.00

6,520.00 6,520.00
Twaambo Account
Date Details Folio Debit Credit

17.11.17 Purchases PL011 10,640.00

20.11.17 Returns 3,000.00

30.11.17 Bal. c/d 7,640.00

10,640.00 10,640.00

2.2.4.5 The returns inwards and returns outwards accounts in the general ledger

a). The returns inwards account in the general ledger

Returns Inwards Account

Date Details Folio Debit Credit

07.06.18 Returns for the GL050 2,830.00

month

30.06.18 Bal. c/d 2,830.00

2,830.00 2,830.00

b). The returns outwards account in the general ledger

55
 Returns Outwards Account
Date Details Folio Debit Credit

30.11.17 Returns outwards for the PL012 4,120.00

month

30.11.17 Bal. c/d 4,120.00

4,120.00 4,120.00

2.2.5 Cash book

2.2.5.1 Two column and three column cash books
The features of a cashbook are:
• A divisions of the ledger
• Contains transactions on the Cash and Bank Accounts
• Brings both accounts into one book
• Divided into two halves the debit and the credit sides
• Replaces the separate Cash Account and Bank Account
• Anything posted to the cash or bank column must have an opposite entry elsewhere in
the accounting system
• Cash or cheques received by the business are posted on the debit side while cash and
cheques paid by the business are posted on the credit side.

Example:1
2020, Jan
3. Started business with K1,000,000 in cash
4. Paid K500,000 of the cash into a bank account
5. Paid rent K50,000 in cash
6. Bought office equipment K250,000 paying by cheque
7. Cash sales K50,000
8. Bought goods K200,000 paying in cash
9. Cash sales K75,000 paid directly into the bank account
10. Cash drawings K105,000
11. Paid sundry expenses K35,000 in cash
12. Sold goods to Mundia for K85,000, by cheque.

56
Solution:

57
2.2.5.2 Three Column Cashbook and Discounts
A three-column cashbook has the following additions:
• Extra column, used as a memorandum column to list cash discounts received or allowed
• Cash discount:
– allowance given for quick payment.
– whether amount paid by cash or cheque.
–
2.2.5.3 Contra items
This is when the effect of a payment and receipt in the same book of the business is the same.
For example, if a payment of K250.00 is paid out from the bank and put into the cash account.
This will have the same effect in the cashbook.

2.2.5.4 Use of folios

Folio columns are added on the left side of the money columns (cash and bank columns). Their
use is to give information on the accounts that have been affected by the transactions recorded
in the cashbook. Folio columns speed up the process of finding the other accounts affected by
the double entry.

2.2.5.5 Prompt payment discount allowed and discount received

Discount Allowed
• Allowed to customers when they pay their account in time
• E.g.
– 1 September Mulenga buys from us goods K200,000 on credit with a 5% cash
discount if payment is within 30 days. He pays cash on 25 September.
– He will pay K200,000 – K10,000 = K190,000 in full settlement of his account.

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Discount Received

• Received from suppliers when accounts paid in time

Example
– 1 October we buy goods for K500,000 on credit from Patel with a 3% cash
discount if payment is made within 30 days. We pay Patel by cheque on 20
October.
– We will pay K500,000 – K15,000 = K485,000 in full settlement of the account.

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The accounts in our books would appear as follows:

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Discount columns in the cash book

• Discount accounts are in the general ledger

• In the cash book two columns are added to either side
• Discounts allowed - debit side (receipts)
• Discounts received - credit side (payments)

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Example
Write up a three-column cash book from the details that follow. Then balance the cash book at
the end of the month and show the discount accounts in the General Ledger.
2020 March 1Balance b/d: cash K300,000, bank K700,000
5Received a cheque for K114,000 from Watae after allowing him K6,000 cash discount
11 Paid a cheque for K190,000 to Tembo after allowing us K10,000 cash discount
16 We paid Chanda’s account of K240,000 by cheque, deducting 2.5 % cash discount
19 Zulu settles in cash his account of K160,000 deducting 5% cash discount
22 Received cheque for K90,000 from Phiri in full settlement of his account of K100,000
26 Paid cash of K124,000 to Gondwe in full settlement of our account of K130,000
27 Banked all the cash leaving K50,000 in the till.
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The steps to take:
1. Add the cash column debit (receipts)side
2. Add the cash column Credit (payments) side
3. Then (1) – (2)
4. From answer deduct the amount to remain in the till
5. Then make a contra posting in the cash book
Cr cash (cash column; detail ‘BanK)
Dr bank (bank column; detail ‘Cash’)

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 2.2.5.6 Cash book with VAT columns
A business that is registered for VAT and makes cash or bank payments for goods or services
that are standard rated, will need to add VAT columns on both sides of the cashbook. The VAT
column on the debit side will represent OUTPUT VAT and the one on the credit side, INPUT
VAT.
Example
Using the information from the cash book above, on the 5th March 2020, Watae bought
standard rated goods paying by cheque and on the 26th March 2020, the business bought goods
from Gondwe valued at K190 inclusive of VAT paying by cash.
The above will appear in the cash book and the general ledger as shown below.
Cash Book
Date Details F Disc. Cash Bank VAT Date Details F Disc. Cash Bank VAT
2020 K K K K 2020 K K K K
Mar Mar
5 Sales SL1 6 114 15.72 16 Purchases PL3 8 124 17.10

VAT Account
Date Details Debit Credit
2020 K K
Mar
5 Sales 15.72
16 Purchases 17.10
31 VAT claimable 1.38
17.10 17.10
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Exercise: 6
Extract a three-column cashbook (page 01) for Mwepu from the information provided below. Balance
off the cashbook at the end of the month. Show the balance as at 1 October 2019 and the discounts
accounts in the general ledger. For folios use SL (receivables), PL (Payables) and GL for general
ledgers.
2019
Sept 1. Balances brought forward: Cash K500; Bank K5,040
2. The following paid Mwepu by cheque, in each case deducting a 5% cash discount :
Banda K820; Peni K500; Hande K440; Michelo K1,000.
3. Cash sales paid into the bank K1,250.
5. Paid rent K600 by cheque.
6. Mwepu paid the following accounts by cheque less 2% discount: Puta K460; Gamala
K900; Bulaya K350
8. Withdraw cash from the bank for personal use K250
10. Cash sales K2,100
12. Paid wages by cash K1,500
16. Settled the following accounts by cheque: Puta K800 less cash discount of K80; Bulaya
K750 less cash discount of K50
20. Bought furniture using a cheque valued at K3,500.
29. Received a cheque payment from Michelo K2,500
30. Cash sales K900.
30 .Bought stationery paying by cash K500.

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2.2.6 Petty cash book

2.2.6.1 Purpose of petty cash system

1. Most payments made by cash or cheque through the main cash book.
2. But very small money amounts paid out of a float of cash drawn from the main cash
book.
3. Recorded in a petty cash book
1. e.g., payments related to postage, stationery and staff travelling expenses.

Advantage of petty cash system

• Delegated to a junior member of staff called the petty cashier.
• Posting to ledger accounts is only done at certain intervals.
• The main cash book is not clustered with a lot of entries

The imprest system

• Cash (float) given to Petty Cashier
• Each expense covered by voucher
• At the end of the period the petty cashier requests for cash to replenish the float
• The cash in hand plus the vouchers should equal the float.

Example:
K
Opening balance (float/imprest amount) 500
Less: Amount paid out during the month (vouchers) (350)
Balance of petty cash at end of the month 150
Add amount required to restore float 350
Balance carried down to next month 500

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Steps in the system

Step 1: A round sum cheque is drawn

– Dr petty cash book
– Cr cash book (bank) with amount of the petty cash float
–
Step 2: payments made by the petty cashier are recorded in the petty cash book (not
part of double entry)

Step 3: when petty cash runs low, a cheque is drawn to replenish the petty cash to
original float

– Petty cashier supports request with vouchers equal to the amount requested
– Cash in hand + vouchers = original float (imprest)
Example:1
Enter the following transactions in a petty cash book that has analysis columns for traveling
expenses, postage, stationery and a ledger column. This is to be kept on the imprest system, the
amounts spent to be reimbursed on the first day of the following week. The opening petty cash
float is K500.00

2020 K
April 1 Cash from Chief Cashier 500
2 Postage 50
3 Traveling 100
4 Stationery 75
5 Traveling 60
5 Tembo ledger account (PL 2) 45

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Example:2
2005
April 1 received from Chief Cashier K500,000
2 voucher no 01: taxi fare K30,000
4 voucher no 02: postage K5,000
7 voucher no 03: stationery K45,000
10 voucher no 04: travelling expenses K75,000
12 voucher no 05: cleaning expenses K 25,000
14 voucher no 06: donation K50,000
18 voucher no 07: Fuel K47,000
20 voucher no 08: service of van K100,000
23 voucher no 09: Toilet paper K15,000
25 voucher no 10: Soap K4,000
27 voucher no 11: train ticket K10,000
29 voucher no 12: paid Patel a creditor K80,000 ( account No. 13)
30 cash received from main cash book to restore imprest amount.

2.2.6.2 Posting to the expense ledger accounts in the general ledger

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 Exercise: 7

1. Why do some businesses keep a petty cash book as well as a cash book?
2. Kapulu keeps her petty cash book on the imprest system, the float being K2,000.

For the month of April 2019 her petty cash transactions were as follows:
K

Apr 1 Petty cash balance 51.13

2 Petty cashier presented vouchers to cashier and

obtained cash to restore the imprest 1,948.87
4 Bought postage stamps 80.50
6 Paid to Chanda, a creditor 350.00
10 Paid bus fares 150.00
16 Bought envelopes 70.00
20 Received cash for personal telephone call 150.00
25 Bought petrol 300.00

Required

Enter the above transactions in the petty cash book and balance the petty cash book at 30 April,
bringing down the balance on 1 May.
On 1 May Kapulu received an amount of cash from the cashier to restore the petty cash. Use
Postage, stationery, telephone, motor vehicle and transport, for analysis columns. The last
voucher to have been used is PV13.

2.2.7 Bank Reconciliation

2.2.7.1 Reasons for preparing bank reconciliation statements

The objective of a bank reconciliation is to show the cause of any difference between the
cashbook balance and the bank statement balance, if any.

2.2.7.2 Reconciling cash book balances with bank statement balances

In determining how the difference, if any, arose, the cashbook is UPDATED by including those
transactions which are on the bank statement but not in the cashbook (the bank part of the cash
book).
The transactions that may be in the bank statements and not in the cash book are in two types:
i) Payments out on the bank statements
• Bank charges and commissions
• Interest on loan or bank overdraft
• Standing order payments

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 • Transfers out
• Dishonoured payments (cheques)
ii) Receipts on the bank statement
• Interest on deposits
• Transfers in
After updating the cashbook, a bank reconciliation statement is then prepared. The purpose of
a bank reconciliation is to ensure that, when compared, the closing balances for the updated
cashbook and the bank statement are the same. If the balances are different, which most times
is the case, to find out what could be the reasons why the two balances are different.
The causes of the differences between the updated cash book and bank statement closing
balances, include among others the following:
i) Time differences
ii) Unpresented payments
iii) Undeposited receipts
There are two ways of preparing a bank reconciliation. You can either start the reconciliation
with the Updated Cashbook balance or the Bank Statement balance.

Example

Mutale’s cash book above with a bank balance of K23,382.01 as at 30 September 2017, the
Bank Statement extract is shown below.

Date Particulars Debit Credit Balance

K K K

01.09.17 Capital 10,940.00 10,940.00

02.09.17 Mwiinga 3,071.25 14,011.25

13.09.17 Bank commission 115.00 13,896.25

15.09.17 Sales 7,490.00 21,386.25

23.09.17 Mutale – Chq002 1,120.00 20,266.25

27.09.17 Madison standing order 560.00 19,706.25

30.09.17 Monthly bank charge 150.00 19,556.25

30.09.17 Interest earned 285.65 19,841.90

The bank statement extract shows bank commission, standing order, bank charge and interest
earned transactions are not reflected in the cashbook as at 30 September 2017.

Furthermore, cheque number 001 valued at K1,999.74 and cash deposit amounting to
K5,000.50 are also not reflected on the bank statement as at 30 September 2017.
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With the information above, update Mutale’s cashbook and prepare a bank
reconciliation statement as at 30 September 2017
Solution:

a) Adjusted the Cash book

K

Unadjusted cashbook balance 23,382.01

Add: Interest earned 285.65
23,667.66
Less: Bank commission (115.00)
Madison Standing order (560.00)
Monthly bank charge (150.00)
Adjusted Cashbook Balance 22,842.66

b) Bank Reconciliation Statement

1. Starting with the Updated Cash Book Balance

K
Updated Cash Book Balance 22,842.66
Add: Unpresented Payments 1,999.74
24,842.40
Less: Uncredited Deposits (5,000.50)
Balance as per Bank Statement 19,841.90

2. Starting with the Bank Statement Balance

K
Balance as per Bank Statement 19,841.90
Add: Uncredited Deposit 5,000.50
24,842.40
Less: Unpresented Payment (1,999.74)
Balance as per Updated Cash Book 22,842.66

2.2.7.3 Bank overdrafts

Where an account has a bank overdraft facility on it, on the bank statement the closing balance
will show a DEBIT amount. In the cashbook, the balance will be shown as a CREDIT amount.

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2.2.7.4 Dishonoured cheques

Dishonoured cheques, not yet entered in the cashbook;

– Debit the customer (to re-establish the debit balance in the account)
– Credit the bank column of the cash book.
– If an unpaid cheque is shown on the bank statement, book keeping entries must
be passed to bring the cash book up to date.

Exercise: 8

1. Write Mwansa’s cashbook up to date, and state the new balance as at 31 December
2020.
2. Draw up a bank reconciliation statement as at 31 December 2020.

Cashbook
2020 Debit K 2020 Credit K
Dec Dec
1 Balance b/d 4,500 8 Bwalya 600
5 Lumba 350 8 Chanda 1,250
20 Bulaya 1,750 15 Tambo 850
21 Chilufya 200
25 Muna 1,000
31 Balance c/d 2,700
6,600 6,600

Bank statement
2020 Debit Credit Balance
Dec K K K
1 Balance 4,500
5 Lumba 350 4,850
8 Bwalya 600 4,250
8 Chanda 1,250 3,000
21 Chilufya 200 2,800
25 Muna 1,000 1,800
31 Bank charge 150 1,650
31 Interest earned 75 1,725

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2.2.8 The Journal
2.2.8.1 Journal as original book of entry
• Regular transactions – Day books
• Irregular transactions – Journal
• Book of original entry for irregular transactions
• A diary for recording irregular transactions before the entries are made in the double
entry accounts
Not part of double entry bookkeeping
• Three instructions:
– The account to be debited
– The account to be credited
– The narrative explaining the transaction
• Each entry will contain:
– The date
– The name of account(s) to be debited and the amount(s)
– The name of the account(s)to be credited and the amount(s)
– A description and explanation of the transaction (narrative)
– A folio reference to the source documents giving proof of the transaction.
2.2.8.2 Entering a range of different transactions
Main uses of the Journal
• The purchase and sale of fixed assets
• Writing off irrecoverable debts
• Adjustments in the ledger accounts
• The correction of errors in the ledger accounts
• Closing entries when preparing final accounts
• Opening entries for a new set of books

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2.2.8.3 Posting items from the journal to the ledgers

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Opening entries

• These relate to the first transactions, which open the accounts of a business.

Example
Mwale’s assets and liabilities oin January 1 2020 are as follows:
Assets:
Van K37,000.00;
Fixtures K18,000.00
Inventory K4,200.00
Accounts receivable:
Chanda K950.00;
Bwalya K450.00;
Bank K860.00;
Cash K265.00
Liabilities:
Accounts payable:
Patel K12,900.00;
Game Stores K4,000.00

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What is Mwale’s capital?

ASSETS LIABILITIES CAPITAL

K K K
Van 37,000 - -
Fixtures 18,000 - -
Inventory 4,200 - -
Accounts receivable:
Chanda 950 - -
Bwalya 450 - -
Bank 860 - -
Cash 265 - -
Accounts payable:
Patel - 12,900 -
Game stores - 4,000 -
__________________________________
61,725 16,900 44,825

ASSETS – LIABILITIES = CAPITAL

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2.2.8.4 The advantages of using a journal
A journal can be used for the following:
ƒ Pass entries at the beginning of a business
ƒ Pass entries for unrecoverable debts
ƒ Pass entries any other transactions that may not fall within the other five books of
original entries.

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Exercise: 9
a) Mulenga’s Financial position as at 1 January 2020 is as follows:
K
Bank 2,910
Cash 160
Equipment 5,900
Premises 25,000
Accounts payable: Kongwa 890
Sinkala 610
Accounts receivable: Chanda 540
Loan from: Chitala 4,000
Show the opening entries needed to open a double entry set of books for Mulenga as at 1 January
2020. Then open up the necessary acounts in Mulenga’s ledger to record the above, as well as
the succeeding transactions.

b) During January 2020 Mulenga’s transactions were as follows:

2020, Jan 2 Bought goods from Sinkala on credit K2,100
Jan 5 Paid Kongwa on account by cheque K 500
Jan 12 Repaid Chitala by cheque K1,000
Jan 24 Sold goods to Chanda on credit K2,220
Jan 31 K8,000 of the month’s cash sales K8,560, were banked on 31 January.
Jan 31 Chanda returns goods to us, K 400
Jan 31 Paid loan interest to Chitala by cheque, K 200.
Required:
Post all accounts and extract a trial balance as at 31 January 2020.

2.2.9 Unit Summary

In this unit, you learnt the ledger and its divisions, the daybooks (Sales, cashbook, and guided
how to prepare a bank statement. You also learnt the use of a journal, and were guided on how
to prepare it.

2.2.10 Prescribed Reading

Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapters 11, 13-14, 15-17, and 30. (Any latest edition).

2.2.11 Recommended Further Reading

ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA .

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Unit 3.1 The Financial Statements of Sole Traders

Introduction
In the preceding topic, you studied the ledger and its divisions, sales and purchases daybooks,
cashbooks, petty cashbook, bank reconciliation, and the journal. In this topic, you will learn
the purpose of the financial statements, and how to prepare them. You will also learn the
purpose of the financial statements, comprising the income statement and statement of financial
position, and also the purpose each one of them to the sole trader and partnership.

Specific Unit Outcomes

After you have completed studying this unit, you should be able to:

a). Know the purpose of an income statement (profit or loss account);

b). Prepare an income statement for a sole trader;
c). Know the purpose of a statement of financial position;
d). Prepare a statement of financial position for a sole trader; and
e). Know how to treat cost of goods sold, return inwards and outwards, and carriage-in
in the income statement.

3.3.1 Statement of profit or loss

The Income Statement’s purpose is to show whether the business has made a PROFIT or a
LOSS during a specified period.

3.3.1.1 The difference between gross profit and net profit

An income statement is in two parts; Trading Account and Net Profit or Loss Account.

Trading Account
The trading account is also called Gross Profit Account. It is the first part of the Income
Statement and its purpose is to show whether the business has recorded a GROSS PROFIT
or LOSS from the sale of its goods.

The Gross Profit is arrived at by subtracting the COST OF GOODS SOLD from the SALES
or NET SALES, as shown in the formula below.

Gross Profit/(Loss) = NET SALES (Sales – Returns Inwards) – COST of Goods Sold
A Gross Profit is attained when Sales are higher than the Cost of Goods Sold, and conversely,
a Gross Loss is recorded when the Cost of Goods sold are higher than Sales.

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 Example: 1

Calculate the Gross Profit/(Loss)

Sales Returns Inwards Cost of Goods Sold Gross Profit/(Loss)

K K K K

150,000 25,600 89,500 34,900

350,000 0 217,500 ?

105,075 1,580 110,125 ?

85,800 5,800 90,000 ?

3.3.1.2 Calculating cost of goods sold

Having illustrated how Gross Profit/(Loss) is calculated, there is need to know how COST OF
GOODS SOLD is calculated.

Cost of Goods Sold value is the cost value of the goods that have been sold. This value can be
determined, if all the goods that were in the stores have been sold, then the total value at which
they were bought is the COST OF GOODS SOLD.
However, the above is not always the case. Most businesses will always have inventory at the
beginning of a period and also at the end. The business would have purchased goods during
the period, returned some (Returns Outwards) and incurred additional costs (Carriage Inwards)
to move the goods to the warehouse.

Example: 2
In a case as above, the Cost of Goods Sold value can be calculated using this formula as
illustrated below.

Opening Inventory 117,500

Add: Purchases 95,000

Carriage inwards 15,131

Less: Returns Outwards (8,159)

Total Inventory 219,472

Less: Closing Inventory (112,115)

COST OF GOODS SOLD 107,357

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3.3.1.3 Adjustments needed to be made to closing inventory at the end of the
trading period

• Balance:
(c/d) closing stock entered in the balance sheet under current assets.
(b/d) at the beginning of the following year, representing opening stock for the next
accounting period.
• Balance in the account at the end of accounting period:
– included in the balance sheet
– carried down as the opening balance at the beginning of the next period
• Entries made to the Inventory account at the end of the accounting period:
– opening stock is transferred to the trading and profit and loss account closing
stock is entered into the stock account
• Stock appears in the financial statements i.e., Profit and Loss Account and the Balance
Sheet three times
• Twice in the P&L
– as opening stock and as
– closing stock
• Once in the Balance Sheet under current assets

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3.3.1.4 The closing off of sales, purchases and relevant expense accounts at
the end of the trading period using double entry and the transfer of
balances to the trading account and profit and loss account
At the end of a period the balance in a Trading Account (Gross Profit) is to be
transferred to the Profit or Loss Account. The Gross Profit is arrived at by subtracting
the Cost of Goods Sold from the Revenue (Sales).
In a case, where a business has other Income accounts, and together with the expense
accounts, are at end of period transferred to the Income Statement (P/L a/c) as follows:
¾ Revenue a/cs (Cr. balances) debited to transfer the amounts to the credit of the
P/L (added to Gross Profit)
¾ Expense a/cs (Dr. balances) credited to transfer their contents to the Debit of the
P/L under Less: Expenses.

3.3.1.5 Preparing a statement of profit or loss from the balances in the trial
Balance

Calculations from the Statement of Profit or Loss account will provide

information as to whether the business has recorded a Net Profit or a Loss. A
Net Profit/(Loss) is calculated by subtracting EXPENSES from the GROSS
PROFIT/(LOSS).

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Where the Gross Profit has been recorded and is higher than the expenses,
the business is said to have made a NET PROFIT. However, if the business has
recorded a Gross Profit which is lower than the expenses and/or the business
has made a Gross Loss, then it will be said that the business has made a NET
LOSS.

Exercise: 10

Calculation of Net Profit/(Loss)

GROSS PROFIT/(LOSS) EXPENSES NET PROFIT/(LOSS)

K K K

125,000 57,500 67,500

(25,250) 180,525 ?

75,000 278,125 ?

389,147 278,333 ?

3.3.1.6 The transfer of net profit to the capital account at the end of an
accounting period

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3.3.2 Statement of Financial Position

3.3.2.1 The preparation of a statement of Financial Position

The purpose of a Statement of Financial Position (SoFP) is to show the NET
WORTH of a business as at the specified reporting date.
The SoFP contains the following details:
ƒ Assets,
ƒ Liabilities; and
ƒ Capital of the business.
A Statement of Financial Position is extracted from the balances remaining in
the trial balance after drawing up the Trading and Profit or loss Account and
Income statement.

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3.3.2.2 Statement of Financial Position layout
A. Assets
(a) Non-current assets:
ƒ Are of long life.
ƒ Are to be used in the business.
ƒ Not bought for resale.
– e.g., buildings, fixtures and fittings, machinery, motor vehicles.
ƒ Listed in the order based on their life expectancy in the business starting with those with
the longest.
– e.g. start with buildings and ending with those with the shortest motor vehicles.
(b) Current asset
ƒ Items held for resale (Inventory)
ƒ Cash at the bank.
ƒ Cash in hand.
ƒ Listed in order of liquidity starting with the least liquid Stock to the most liquid Cash.

B. LIABILITIES
(a) CURRENT LIABILITIES:
ƒ Due for payment in the short term, usually within one year;
ƒ e.g.,
bank overdraft, trade creditors and sundry creditors.
ƒ When current liabilities are deducted from current assets you get net current assets or
net current liabilities (also known as working capital).
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(b) Non-current liabilities:
ƒ Not due for repayment in the short term (after one year).
ƒ e.g.
loans, and mortgages (but loan instalment payable within the year is a current
liability). .
ƒ Long term liabilities are deducted after the net current assets/liabilities figure has
been added/deducted from assets in the balance sheet.
Presentation of a SoFP
A statement of Financial Position can be presented either in a horizontal or vertical format,
though the most used and recommended format is the vertical one.
a) Horizontal format

Using the trial balance above, a horizontal presentation of a SoFP is shown

below.

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b) Vertical presentation

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Below is an extract of a SoFP

Exercise: 11
Mwale started a business on the 1 January 2019. During the year, Mwale sold his parcel of land
for K48,000 which he paid into the business bank account, and he had drawn out K7,200 for his
personal use.
Assets and liabilities at 1 January 2019 31 December 2019
K K
Fixtures 18,000 16,200
Receivables 4,800 5,800
Inventory 24,000 28,000
Payables 8,000 11,000
Cash 760 240
Balance at bank 11,880 4,600
Loan 6,000 2,000
Motor vehicle – 16,000
Required
Prepare a statement of financial position as at 31st December 2019.

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Exercise: 12

Extract a trading, profit or loss account for the year ended 31 December 2018 for Gondwe. The
trial balance as at 31 December 2018 is after his first year of trading was as follows:
K K
Equipment rental 9,400
Insurance 1,804
Electricity 1,990
Motor vehicle expenses 5,350
Salaries and wages 78,000
Sales 448,044
Purchases 275,000
Sundry expenses 1,500
Motor vehicle 50,000
Payables 65,000
Receivables 31,000
Fixtures 45,000
Building 125,000
Cash at bank 15,000
Drawings 24,000
Capital 150,000
663,044 663,044
Stock at 31 December 2018 was K39,300.

3.3.3 Statements of profit or loss and Statements of Financial Position further

considerations
3.3.3.1 Further adjustments required to be made in the preparation of
financial statements at the end of an accounting period
Other expenses in the trading account
Cost of putting goods in a saleable condition.
Example
i. Trader buys oranges in bulk for resale.
ii. Buys sacks from a different supplier to pack (for example 24 in a sack).
iii. Pays wages to a person to pack the oranges in the sacks.
The above expenses will be transferred to the trading account when calculating gross
profit.

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 But NB the wages of a person selling the oranges will be transferred to the profit and
loss section of the Trading and Profit and Loss Account.

3.3.3.2 The treatment of Returns Inwards and Outwards

(a) Returns Inwards and Outwards
Sales returns (debit balance).
9 deducted from ‘sales’
Purchase returns (credit balance).
9 deducted from ‘purchases’
For example:
9 sales K38,500 sales returns K500
9 purchases K29,000 purchase returns K250.

NET SALES
K

Sales 38,500

Less: Returns inwards 500

Net sales 38,000

NET PURCHASES K

Purchases 29,000

Less: Returns outwards (250)

Net Purchases 28,750

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(b) Carriage inwards as part of the cost of goods sold

Transport cost is either included in the purchase price or paid for separately.
If paid for separately it is the cost of bringing in goods and raw materials from suppliers.

Example
Same type of goods;
– Price of supplier A K1,000 inclusive of cost of transport.
– Price of supplier B K900 but firm needs to hire transporter to deliver.
Transporter to be paid K100.
– K100 is carriage inwards.
To keep the cost of goods shown on the same basis, carriage inwards is always added
to the purchases cost in the trading account.

(c) Carriage outwards as an expense in the profit or loss account.

• Delivery charges incurred in supplying goods to customers
• Always treated as an expense to be posted to the profit and loss account

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(d) Opening and closing inventory
When a business has just started it does not have opening stock, so when preparing a trading,
profit or loss account there is only one stock, which is the closing stock. However, when a
business has been trading for some time, it is likely have both the opening and closing stock.

(e) Cost of putting goods into a saleable condition

101
(f) Gross profit and net profit or gross profit and net loss or gross loss and net loss

102
Double entry for loss

• Gross loss is shown as a credit in the trading account and a debit in the profit and loss
account
• Double entry for net loss is:
– Cr: P/L Account
– Dr: Capital Account (to reduce capital)
–

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 Exercise: 13
From Banda’s trial balance, extract a trading, profit or loss account for the year ended
31 December 2020, and a statement of financial position as at that date.

Dr Cr
K K
Stock 1 January 2020 65,000
Carriage outwards 4,150
Carriage inwards 2,300
Returns inwards 1,540
Returns outwards 3,140
Purchases 208,700
Sales 405,600
Salaries and wages 70,000
Warehouse rent 15,700
Insurance 7,500
Motor expenses 25,300
Office expenses 6,750
Electricity 3,800
General expenses 2,450
Premises 105,000
Motor vehicles 75,000
Fixtures and fittings 35,000
Receivables 42,500
Payables 52,450
Cash at bank 17,500
Drawings 23,000
Capital 250,000
711,190 711,190
Stock at 31 December 2020 was K44,780.

3.3.4 Unit Summary

Having studied this unit, you learnt the purposes of the income statement and the statement of
financial position. You also acquired the skills to prepare the two statements, and also the
treatment of; returns inwards and outwards, carriage in, and carriage outwards.

3.3.5 Prescribed Reading

Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapters 7-9. (Any latest edition).

3.3.6 Recommended Further Reading

ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA

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Unit 4.1 Adjustments for Financial Statements

Introduction
In the preceding unit, you learnt the purpose of the income statement (profit or Loss) and the
Statement of Financial Position for a sole trader. You further learnt how to prepare both
statements. In this unit you will learn the different types of adjustments that are made to the
accounts to ensure that the financial statements (Income Statement and Statement of Financial
Position) are fairly presented. These adjustments include: depreciation; irrecoverable debts;
allowance for doubtful debts; accruals; prepayments; and interest on loans.

Specific Unit Outcomes

After studying this unit, you should be able to:

a). Explain the different types of adjustments;

b). Acquire the skills to compute, and account for depreciation;
c). Acquire the skills make adjustments and account for accruals;
d). The knowledge and skill of prepayments and account for it; and
e). Make adjustments and account for interest on loan.

4.4.1 Depreciation of Non-Current Assets

4.4.1.1 Definition of Depreciation
Depreciation is that part of the cost of an asset (non-current asset) that is consumed by way of
usage (deriving economic benefits from it) , technological obsolescence, depletion, physical
deterioration and time.
4.4.1.2 Why charge depreciation
Depreciation estimates for each period is charged to the Profit or loss as an expense to absolve
the loss in value of the non-current assets due to economic value being derived from them
and/or loss in value as a result of being obsolete.
Depending on the business’ depreciation policy, depreciation may either be charged charged
in FULL in the year the asset is bought, which means that in the year of disposal, depreciation
will not be charged on that asset. In the alternative, a business may charge depreciation from
date of acquisition till the date of disposal.
The simplified way of calculating Depreciation is subtracting the scrap value (residue value)
from the cost of the asset (Cost – Scrap value = Depreciation).

The two main methods used in calculating depreciation are Straight-line Method and Reducing
(Diminishing) Balance Method.

105
4.4.1.3 Diminishing Balance method
In arriving at a depreciation charge in a year using this method, a fixed charge in percentage
and/or period terms is used. With this method depreciation charged in each year is NOT
CONSTANT.
Using data above and instead of the years a rate of 25% will be used (100/4 years = 25%), the
depreciation amount per year will be as shown below.
K
Cost 150,000.00
Year 1 (25% x K150,000) (37,500.00)
112,500.00
Year 2 (25% x K112,500) (28,125.00)
84,375.00
Year 3 (25% x K 84,375) (21,093.75)
63,281.25
Year 4 (25% x K 63,281) (15,820.31)
Scrap value 47,460.94
4.4.1.4 Straight Line method
This method uses the estimated number of years or a percentage rate to arrive at the
depreciation amount. Where the years are used, you need to divide that number into the cost of
the asset to give a depreciation charge for each year, and where a rate is provided, you multiply
it with the cost of the asset.

For example, a car costing K 150,000.00 is bought on 01.01.2019, has an estimated useful life
of 4 years, with a residue value of K20,000.
Depreciation will be: = 150,000 – 20,000
= 130,000
4
Depreciation charge per year for 4 years = K 32,500.00

If a rate of depreciation for the same asset (car) was to be 25% per annum, depreciation will
be:
= K130,000 x 25%
Depreciation charge per year for 4 years = K 32,500.00

Note: Using this method, depreciation is CONSTANT.

4.4.2 Double entry records for depreciation and the disposal of assets

4.4.2.1 Recording bookkeeping entries relating to depreciation charges

As stated above, depreciation is an expense and is charged (Debited) to the income statement
in the year its accrued. The Credit will go to reduce the Cost of the Non-Current Asset, resulting
in a NET BOOK VALUE (NBV).

106
In effecting the two entries, two ledgers are opened; Depreciation Account and Provision for
Accumulated Depreciation Account.
The Depreciation Account balance is charged to the Income Statement and the Provision for
Accumulated Depreciation Account (Accumulated Depreciation) balance is charged to the
Statement of Financial Position.
Kindly note that the Provision for Accumulated Depreciation Account accumulates each year
Depreciation is charged to it.
Example 1: Diminishing Balance Method
Using the depreciation calculated under sub-unit 2.4.1.3 above, depreciation under the
diminishing balance method is accounted as illustrated below.
Depreciation Account
Date Details Debit Credit

31.12.19 Provision for Accum. dep’n 37,500

31.12.19 Transfer to PL 37,500

37,500 37,500

Provision for Accumulated Depreciation Account

Date Details Debit Credit

31.12.19 Dep’n 37,500

31.12.19 Bal. c/d 37,500

37,500 37,500
01.01.20 Bal. b/d 37,500

Profit or Loss Account (Extract) For the Year ended 31.12.2019

K

Gross Profit xxxx

Other Income

TOTAL INCOME XXXX

Less: Expenses

Depreciation (37,500)

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 Statement of Financial Position (Extract) As at 31.12.2019
Cost Accumulated Net Book Value
Dep’n

K K K

Non-current Asset

Car 150,000 37,500 112,500

Diminishing balance method depreciation table

YEAR COST DEP’N ACCUMULATED NBV

DEP’N

K K K K

2019 150,000 37,500 37,500 112,500

2020 150,000 28,125 65,625 84,375

2021 150,000 21,093.75 86,718.75 63,281.25

2022 150,000 15,820.31 102,539.06 47,460.94

TOTAL 150,000 102,539.06 47,460.94

ANNUAL DEPRECIATION
NOT CONSTANT

THE COST IS CONSTANT THE TWO VALUES

THROUGHOUT THE LIFE OF ASSET MUST AGREE THIS IS THE SCRAP
VALUE

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Example 2: Straight Line Method
Using the depreciation calculated under sub-unit 2.4.1.4 above, depreciation using the straight-
line method is accounted as illustrated below.

Depreciation Account
Date Details Debit Credit

31.12.19 Provision for Dep’n 32,500

31.12.19 Transfer to PL 32,500

32,500 32,500

Provision for Depreciation Account

Date Details Debit Credit

31.12.19 Dep’n 32,500

31.12.19 Bal. c/d 32,500

32,500 32,500

01.01.20 Bal. b/d 32,500

Profit or Loss Account (Extract) For the Year ended 31.12.2019

K

Gross Profit xxxx

Other Income

TOTAL INCOME XXXX

Less: Expenses

Depreciation (32,500)

Statement of Financial Position (Extract) As at 31.12.2019

Cost Accumulated Net Book
Dep’n Value

K K K

Non-current Asset

Car 150,000 32,500 117,500

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Straight line method depreciation table

YEAR COST DEP’N ACCUMULATED NBV

DEP’N

K K K K

2019 150,000 32,500 32,500 117,500

2020 150,000 32,500 65,000 85,000

2021 150,000 32,500 97,500 52,500

2022 150,000 32,500 130,000 20,000

TOTAL 15 0,000 130,000 20,000

CONSTANT ANNUAL
DEPRECIATION

THE COST IS CONSTANT THE TWO VALUES THIS IS THE

THROUGHOUT THE LIFE OF ASSET
MUST AGREE SCRAP VALUE

4.4.2.2 Recording bookkeeping entries relating to the disposal of a non-current

Asset
A company may decide to sell-off its non-current asset(s) for various reasons.
A disposal of an asset affects the Asset Account and Provision for Depreciation Account.
The Asset Account is CREDITED and the Provision for Depreciation Account is DEBITED.
A new account called ASSET DISPOSAL ACCOUNT is to be opened and into which the
Sales Proceeds is CREDITED, Cost of the asset is DEBITED and Provision for
Depreciation is CREDITED. The balancing amount in the Asset Disposal Account can either
be a PROFIT or a LOSS on disposal of asset.
Kindly note that depreciation is not charged in the year the asset is disposed.

Example
In illustrating how the accounting of the disposed non-current asset, using information above
for the car costing K150,000 and depreciated using the diminishing balance method. This car
was sold in year 3 on the 10.06. 2021 at price of K 95,000.

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Solution

Car Account

Date Details Debit Credit

01.01.21 Bal. b/d 150,000

10.6.21 Disposal 150,000

TOTAL 150,000 150,000

Accumulated Depreciation Account

Date Details Debit Credit

01.01.21 Bal. b/d 65,625

10.06.21 Disposal 65,625

TOTAL 65,625 65,625

Asset Disposal Account

Date Details Debit Credit

10.06.21 Proceeds 95,000

10.06.21 Car 150,000

10.06.21 Accumulated dep’n 65,625

30.06.21 Profit on Disposal (To PL) 10,625

160,625 160,625

Summary:
K
Disposal Proceeds 95,000
Provisional for Depreciation 65,625
Cost of car (150,000)
Profit on Disposal of asset 10,625

The profit or loss on disposal of an asset is transferred to the Income statement.

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 Profit or Loss (Extract)

Gross Profit xxxx

Other Income

Profit on disposal of asset 10,625

TOTAL INCOME XXXXX

Less: Expenses

4.4.3. Irrecoverable debts and allowances for doubtful debts

Most businesses sell their goods and services on credit. In most advanced nations, credit is the
engine of economic growth. However, with credit comes with a failure to collect some of the
debts and in some instances all the debts owed.
Where a debt is irrecoverable, it is termed as an IRRECOVERABLE DEBT, and in situations,
either due to past business experience and/or expected economic constraints, it is expected that
not all that has been sold on credit will be collected, then a PROVISION FOR DOUBTFUL

DEBTS is made.
4.4.3.1 Writing off irrecoverable (Bad) debts
These arise when it is certain that the debt(s) owed will not be paid. These debts become
irrecoverable and are written off to the profit or loss account under
EXPENSES.

The double entry for an irrecoverable debt is:

Debit: Expense Account (Profit or Loss)
Credit: Receivable’s Account (Statement of Financial Position)

Example
Using information above for Lwiindi and S. Banda above, we were informed that Lwiindi and
S. Banda will fail to settle K 120.00 and K 1,180.00, respectively. Post the entries into their
respective Accounts and the Bad Debts Account.

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Solution:
Lwiindi Account
Date Details Debit Credit

01.06.18 Sales 520.00

15.06.18 Irrecoverable debt 120.00

30.06.18 Bal. c/d 400.00

520.00 520.00
S.Banda Account
Date Details Debit Credit

03.06.18 Sales 3,180.00

28.06.18 Irrecoverable debt 1,180.00

30.06.18 Bal. c/d 2,000.00

3,180.00 3,180.00

Irrecoverable (Bad) debts Account

Date Details Debit Credit

15.06.18 Lwiindi 120.00

28.06.18 S. Banda 1,180.00

30.06.18 P&L 1,300.00

1,300.00 1,300.00

Profit or Loss Account (extract) for the year ended 31.12.18

K

Gross Profit xxxx

Less: Expenses
Irrecoverable debts (1,300.00)

KINDLY NOTE that if a debt which was written off as bad is recovered either in part or full,
the amount recovered is treated as INCOME and will fall under OTHER INCOME in the
Income Statement.

113
4.4.3.2 Accounting entries necessary for recording allowances for doubtful
debts
Remember the Prudence Principle! This is also applied here to the extent that it is rare that any
business involved in credit sales may never have debts that will be unpaid (irrecoverable debts).
Therefore, to ensure that the financial performance of a business is not over and/or understated,
an allowance for doubtful debts is made in relation to outstanding debts.

The amounts to be provided for the Doubtful Debts is determined either as PERCENTAGE or
an AMOUNT of the total outstanding Debts (Receivables).

The double entry where a provision for doubtful debts is made will be:
Debit: Allowance for Doubtful Debts (Expense) Account – Profit or Loss
Credit: Allowance for Doubtful Debts - Statement of Financial Position
Example:2

At 31 December 2016, the debtors figure after deducting bad debts was K 100,000. It is
estimated that 2% of debts (K 2,000) will eventually prove to be bad debts, and it is decided to
make a provision for these. The accounts will appear as follows:

Solution:
Receivables Account
Date Details Debit Credit

01.12.16 Bal. b/d 100,000

31.12.16 Bal. c/d 100,000

100,000 100,000

Allowance for Doubtful Debts Account

Date Details Debit Credit

31.12.16 Provision 2,000

31.12.16 P&L 2,000

2,000 2,000

4.4.3.3 Accounting entries to increase or decrease allowance for doubtful

debts
There are possibilities that the provided allowance for doubtful debts may be increased and/or
reduced.

114
a) Increase in the Allowance for Doubtful Debts
An increase in the allowance for doubtful debts will give rise to an expense – Allowance for
Doubtful Debts (Expense) and increases the Allowance for Doubtful Debts amount in the
Statement of Financial Position.
The illustrated ledger accounts are shown below.

Example:3
Using the same information in Example 1 above, the Allowance for Doubtful Debts is increased
to 3% in 2017 from 2% for 2016. The adjustment to be made is only 1% (K100,000 x 1%)
which K 1,000. The ledger accounts will be:

Solution:

Receivables Account
Date Details Debit Credit

01.01.17 Bal. b/d 100,000

31.12.17 Bal. c/d 100,000

100,000 100,000

Allowance for Doubtful Debts (expenses) Account

Date Details Debit Credit

31.12.17 Provision 1,000

31.12.17 P&L 1,000

1,000 1,000

Allowance for Doubtful Debts Account

Date Details Debit Credit

1.01.17 Bal. b/d 2,000

31.12.17 Provision 1,000

31.12.17 Bal. c/d 3,000

3,000 3,000
01.01.18 Bal. b/d 3,000

115
 Profit or Loss Account (extract) for the year ended 31.12.17
K

Gross Profit xxxx

Less: Expenses
Allowance for Doubtful debts (1,0000)

Statement of Financial Position (extract) as at 31.12.17

Cost Provision for Net Book
Depreciation Value

K K K

Non-Current Assets XXXX XXXX XXXX

Current Assets
Inventory XXXX

Receivables 100,000
Less: Allowance for Doubtful (3,000)
Debts

Net Receivables 97,000

Cash and Bank XXXX

b) Reduction in the Allowance for Doubtful Debts

A reduction in the allowance for doubtful debts will give rise to an Income –
Allowance for Doubtful Debts (Income) in the Income Statement on one hand
and reduce the Allowance for Doubtful Debts amount in the Statement of
Financial Position on the other hand. The illustrated ledger accounts are shown
below.

Example:4
Using the same information as above, the Allowance for Doubtful Debts is
reduced to 1% in 2017 from 2% of 2016. The adjustment to be made is only 1%
(K100,000 x 1%) which K 1,000. The ledger accounts will be:

116
Solution:
Receivables Account
Date Details Debit Credit

01.01.17 Bal. b/d 100,000

31.12.17 Bal. c/d 100,000

100,000 100,000

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 Allowance for Doubtful Debts (expense) Account
Date Details Debit Credit

31.12.17 Provision 1,000

31.12.17 P/L 1,000

1,000 1,000

Allowance for Doubtful Account

Date Details Debit Credit

1.01.17 Bal. b/d 2,000

31.12.17 Provision 1,000

31.12.17 Bal. c/d 1,000

2,000 2,000

01.01.18 Bal. b/d 1,000

Profit or Loss Account (extract) for the year ended 31.12.17

K

Gross Profit xxxx

Other Income

Allowance for Doubtful Debts recovered 1,000

TOTAL INCOME XXXX

Less: Expenses (XXXX)

118
 Statement of Financial Position (extract) as at 31.12.17
Cost Provision for Net Book
Depreciation Value

K K K

Non-Current Assets XXXX XXXX XXXX

Current Assets

Inventory XXXX

Receivables 100,000

Less: Provision for Doubtful (1,000)

Debts

99,000

Cash and Bank XXXX

4.4.3.4 Entries in respect of the allowance for doubtful debts in the statement of
profit or loss and statement of financial position
In the income statement, a calculate allowance for doubtful debts amount is recognized as an
expense and appears under the expenses headline. On the other hand, in the statement of
financial position the same amount is deducted from the Receivables to arrive at a Net
Receivables figure.

Example:5
Using information in 3.3 above the entries in the profit or loss and statement of financial
position will be as illustrated below.

Profit or Loss (Extract) Account for the year ended 31.12.2016

K

Gross Profit xxxx

Less: Expenses
Allowance for Doubtful debts (2,0000)

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 Statement of Financial Positions (Extract) as at 31.12.2016
Cost Provision for Net Book
Depreciation Value

K K K

Non-Current Assets XXXX XXXX XXXX

Current Assets
Inventory XXXX

Receivables 100,000
Less: Allowance for Doubtful (2,000)
Debts

Net Receivables 98,000

Cash and Bank XXXX

4.4.3.5 Accounting entries to record irrecoverable debts written off but

subsequently paid
There are instances when an irrecoverable debt that was written off in the previous financial
period(s) is recovered in the subsequent period. When this happens, the following will be the
entries:
a). Reinstate the debt
Debit: Receivables (debtors) account
Credit: Irrecoverable (bad) debts recovered account
b). When payment is effected by the debtor
Debit: Bank/cash account
Credit: Receivables (debtors) account

4.4.4 Accruals, prepayments and other adjustments for financial statements

4.4.4.1 What are accruals?

There are instances when some expenses incurred in a particular period are only settled in the
following period. This may be as a result of either late delivery and/or generation of that invoice
(Bill), or non-settlement of the same.
These unsettled (unpaid) expenses are said to have ACCRUED (ACCRUALS) in the
PRECEDING PERIOD and are NOT expenses for the period they will be settled.

120
4.4.4.2 What are prepayments?
There are also instances when payments are made in the current period for a service and/or
goods to be consumed in the future.

Date Details Debit Credit

01.12.19 Balance 5,500

31.12.19 Accruals 500

31.12.19 To P/L 6,000

Total 6,000 6,000

These payments are said to have been PREPAID (PREPAYMENTS) and are NOT
expenses in the PERIOD they are PAID, but are for the period they will be CONSUMED.

4.4.4.3 Adjustments to expense accounts for accruals and prepayments Accruals

As explained above, these are expenses incurred in the preceding period but due to various
reasons, are paid and/or the bill is received in a future period.
Accruals include expenses such as (the list is inexhaustive):
i. Water bills
ii. Rates
iii. Electricity
iv. Salaries
An accrual will increase the respective expense account (Debit) and also elevate the Current
Liabilities (Credit).
Example:1
Bwalya pays K 500.00 a month for water and in twelve months at the end 31 December 2019,
had only paid K 5,500.00. This is the amount that was appearing in her books.
Solution
The total water expenses for the year (12 months) was supposed to be:
Total amount payable (K500.00 x 12) = K6,000.00,
Less amount paid (K5,500.00)
Amount owing (Accrual) K 500.00
The K500.00 will be added to the Water expenses Account as illustrated below.
Water Expenses Account
Prepayments
These are payments made for a service and/or goods to be consumed in future period(s).
Prepayments include items such as:
i. Rent
ii. Airtime
iii. Electricity (prepaid)
A prepayment will REDUCE the respective expense account (Credit) and also
ELEVATED the Receivables (Debit).
121
 Rent Account
Date
Date Details
Details Debit
Debit Credit
Credit

01.12.19
01.12.19 Balance
Balance b/d
b/d 24,000
24,000
30.12.19
30.12.19 Bank
Bank 6,000
6,000
31.12.19
31.12.19 Prepayments
Prepayments 6,000
6,000
31.12.19
31.12.19 To
To P/L
P/L 24,000
24,000
Total
Total 30,000
30,000 30,000
30,000

Example:2
Bupe pays K 2,000.00 rent per month, three months in advance. On the 30st
December 2019, he paid K6,000 for the first three months of 2020 by
cheque. The Rent account at the end of December 2019 had a balance of
K30,000.
Solution
The rent account will be Credited with K 6,000.00 and the Prepayment
(Receivables) Account will be Debited with the same amount as illustrated
below.

4.4.4.4 Accruals and Prepayments in the Income Statement

Accrual
Using example 1 above, the effect of an accrued water bill in the Income
Statement will be:

Profit or Loss Account (Extract) for the year ended 31.12.2019

K K K

Less: Expenses
Water 5,500

Add: Accrual 500

6,000
Prepayment
Using example 1 above, the effect of a rent prepayment in the Income
Statement will be:

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Profit or Loss Account (Extract) for the year ended 31.12.2019
K K K

Less: Expenses
Rent 30,000

Less: Prepayment 6,000

24,000

4.4.4.5 Accruals, prepayments and revenue accounts receivable in the

Statement of Financial Position
Accruals
Using the information under example 1 above, the entry in the Statement of
Financial Position under current liabilities as an ACCRUAL is illustrated below.
Statement of Financial Position (Extract)
Cost Accum. NBV
Depn

Less: Current Liabilities

Accruals - water 500

Prepayments
Using information under example 2 above, the entry in the Statement of
Financial Position under Current Assets as a RECEIVABLE is illustrated below.
Statement of Financial Position (Extract)
Cost Accum. NBV
Depn

Current Assets
Receivable XXXX

Add: Prepayment - rent 6,000

XXXX

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4.4.4.6 Ascertaining amount of expense and revenue items to be shown in the
statement of profit or loss after making adjustments for accruals and
prepayments
Accruals concept:
Income and expenses should be matched together and dealt with in the P/L
a/c for the period to which they relate regardless of the period in which cash
actually received or paid
Accruals basis of accounting
Means that to calculate profit for the period you should include all the income
and expenditure relating to the period whether or not cash has been receiver
paid
• Profit is therefore:
Income earned XX
Expenditure incurred (XX)
Profit XXX
Example:3
Calculate how much should be charged in the P/L a/c in the year ended 31 December
2020 in respect of the following expenses.
a) Electricity charges: K1,600 paid for 1 January 2020 to November 2020; quarter
ended February 2021 was K600.
b) Insurance: paid annually in advance on 1 April. Charge to 31 March 2020 was
K6,000 and charge to 31 March 2021 was K8,000

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1 January 2020 1 April 2020 31 December 2020 31 March 2020
Insurance paid Our year end Insurance
Paid this date
I. Insurance paid last year to our period
1 January 2020 to 31 March 2020 = 3 months
Therefore 3/12 x K6,000 was last years payment 1,500

Insurance paid in the year 8,000

Insurance paid which covers next year

1 January 2021 to 31 March 2021 = 3 months

Therefore 3/12 x K8,000 is the prepayment at the end of
this year (2,000)

Total insurance charge for the year 7,500

4.4.4.7 Drawing up the necessary accounts in respect of goods taken for own
use

125
Drawings in form of Goods

The Purchases Account is Credited

Drawings in form of Cash

The Cash Account is Credited

The Capital Account

This an important account, and is not for small transactions. Therefore, any
resource (money or stock) taken out of the business for personal use, must be
taken to the Drawings Account. All the drawings during the year are posted to
the Drawings Account. At the end of year, drawings transferred to the Debit
side of the Capital Account to record the reduction in capital.

Exercise: 14
The following is an extracted trial balance for Jamu, a sole trader, for the year ended 31 December 2017.
K K
Sales 405,000
Purchases 293,500
Carriage in 2,100
Drawings 31,000
Rent 6,500
Insurance 550
Postage 200
Advertising 7,500
Salaries 15,600
Bad debts 400
Provision for doubtful debts 1,250
Debtors 16,000
Creditors 5,500
Cash at Bank 2,750
Stock 18,000
Equipment at cost 75,000
Accumulated depreciation 15,000
Capital 42,350
469,100 469,100
The following are to be taken into account:
1. Accruals of K2,500 for advertising.
2. Rent was paid in advance by K2,500.
3. Stock as at 31 December 2020 was K9,500
4. Depreciation rate charged at 20% on diminishing method.
5. Allowance for doubtful debts to be increased to 10%

Required:
a) Prepare a trading profit or loss account for the year ended; and
b) Statement of financial position.

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4.4.5 Unit Summary
Having studied this unit, you learnt the different types of adjustments that affect the financial
statements. You also learnt how to make the adjustments, and enter them in the respective
ledger accounts, income statement and statement of financial position.
4.4.6 Prescribed Reading
Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapters 25-28. (Any latest edition).

4.4.7 Recommended Further Reading

ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA

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Unit 5.1 Partnership Accounts

Introduction
In the previous unit, you learnt about adjustments for the financial statements. In this unit, you
will learn about partnerships. The sub-units to be covered under partnerships include; the
characteristics of a partnership; how, profit is shared; salaries; interests on drawings and capital
are treated, and also how the capital and current accounts are reflected in the financial
statements.

Specific Unit Outcomes

After studying this unit, you should be able to:

a). Explain what constitutes a partnership deed;

b). Acquire the knowledge and skills to prepare a partnership income statement;
c). Prepare a profit appropriation account;
d). Prepare partner’s current accounts; and
e) Draft the partnership’s statement of financial position.

5.5.1 The need and formation of partnerships

Why establish a partnership?
Limitation on resources.
need for:
a) Additional capital from
a. bank
b. Partner (not desirable to have the business entirely dependent on borrowing).
b) Additional expertise
– Bring in other skills not possessed by trader
c) Additional management time
– difficult for one person to manage all aspects of the business.
Partnership:
– arrangement between two or more individuals to share the risks and rewards of
a joint business operation.
Need for Partnership
• Capital contribution
• Skills distribution and contribution
• Need to share burden of management
• Often members of one family need to work together.

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5.5.2 The Partnership Act 1890
In the absence of a partnership agreement certain rules laid down by the Partnership Act
1890 apply:
a) Residual profits are shared equally between the partners
b) There are no partners’ salaries
c) Partners receive no interest on the capital they invest in the business
d) Partners are entitled to interest of 5% per annum on any loans they advance to the
business in excess of their agreed capital.

Default provisions: (no written agreement)

• Residual profits shared equally
• No partners’ salaries
• No interest on capital
• Partners are entitled to interest of 5% per annum on loans they advance to the business
in excess of agreed capital.

Nature of partnership
• Formed to make profit
• Partnership Act 1890 and the Limited Partnership Act 1907
• Minimum of two and maximum of 20 persons except for professional firms
• Each partner except limited partner must pay his or her share of any debts that the
partnership is unable to pay; they are personally liable.

5.5.3 Limited partners

• Liability limited to capital contribution
• Not allowed to take part in management
• All the partners cannot be limited partners. Must be at least one partner with un limited
liability.

5.5.4 The advantages and disadvantages of a partnership

Advantages
• Less formal with fewer legal obligations
• Easy to start
• Sharing of firm’s liabilities, if any.
• Creates a pool of expertise.
• Privacy
• Increased capital
Disadvantages
• Unlimited liability
• Lack of stability
• Uncertainty as to going concern
• Loss of individual partners’ autonomy.

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5.5.5 The partnership deed or agreement
Written terms of the partnership.
financial arrangements:
• Capital - the amount to be contributed by each partner.
• Interest on capital – payment and the rate.
• Profit sharing ratio - equally, or different ratios depending on capital contributed or the
amount of work to be put in or the level of experience.
• Partners’ salaries: to some or all. Partners salaries are an appropriation of profit, and
not an expense in the profit and loss account of the business.
• Drawings: for personal use. Specify the rate of interest to be paid.

5.5.5.1 Contents of partnership agreement

Need for written agreement but not necessary (however advisable)
– Name of firm the type of business or duration
– Amount of capital to be contributed by each partner
– Proportion of sharing profits/losses
– Rate of interest if any to be paid on capital before profits are shared
– Rate of interest to be charged to partners on drawings
– Salaries paid to partners
– Performance related payments to partners
– Settling of disputes
– Preparation and audit of accounts

5.5.6 Capital contributions

Partners may agree to contribute equally and/or in unequal proportion towards the capital of
their partnership.
Cash or other assets.
a. debited to the relevant asset account
b. credit is made to the capital account.
c. Fixed capital accounts not used to record drawings or shares of profits but only for
major changes in the relations between partners.
• Fixed capital accounts used for:
– Capital introduced or withdrawn by new or retiring partners
– Revaluation adjustments.
E.g.
• Lorry contribution
– Debit: Lorry or Motor vehicles account
– Credit: Capital account
• Cash Contribution
– Debit: Cash account
Credit: Capital account

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The balances on capital accounts do not necessarily bear any relation to the division of
profits. The difference in capital is catered for by the payment of interest on capital
accounts.
This is done through the appropriation account.

5.5.7 Profit (or loss) sharing ratios

It is important to appreciate that all of the above examples are means of sharing profits
of the partnership and are not expenses of the business. A partner’s salary is not an expense
of the firm i.e., it’s not a salary in the real sense of the term.
Wages for employees deducted as an expense from gross profit before arriving at net profit,
partners salaries on the other hand are deducted from net profit.

Example:1
Chiluba and Nasilele form a partnership and agree to contribute 2/3 and 1/3 towards capital.
The total capital required is K 30,000.00. The records show that in the preceding three years,
the partnership posted profits and losses of K 15,000, K (3,000) and K 9,000, respectively. The
profit sharing will be:

Solution
Years 2017 2018 2019 Total
K K K K
Profits/(Losses) 15,000 (3,000) 9,000 21,000

Shared profits/(losses):
Chiluba (2/3) 10,000 (2,000) 6,000 14,000
Nasilele (1/3) 5,000 (1,000) 3,000 7,000

5.5.8 Interest on capital

The partnership may also agree that interest be paid to the partners on the capital each one has
contributed. Interest on capital is paid from profit of the partnership.
Example:2
Using the same information above, and where the partners agreed to pay interest of 5% on
capital, profit sharing will be:

Years 2017 2018 2019 Total

K K K K
Profits/(Losses) 15,000 (3,000) 9,000 21,000
Less: Interest on capital
Chiluba (K20,000 x 5%) (1,000) (1,000) (1,000) (3,000)
Nasilele (K10,000 x 5%) (500) (500) (500) (1,500)
13,500 (4,500) 7,500 16,500

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Shared profits/(losses):
Chiluba (2/3) 9,000 (3,000) 5,000 11,000
Nasilele (1/3) 4,500 (1,500) 2,500 5,500

5.5.9 Interest on drawings

Partners may also include in the partnership agreement, a clause which stipulates for the
payment of interest on drawings. This is charged to the individual partners who have taken any
drawings from the partnership. Interest on drawings is included in the agreement as a cure to a
mischief of partners taking out cash from the partnership. It is usually charged from date of
withdrawal to end of the financial year. However in this module interest on drawings,
regardless of the date of drawing, will be charged for the whole year.

Example:3
If Chiluba and Nasilele agree that interest of 2.5% per annum will be charged on
drawings and the underlisted are the drawings made by the partners.
15.06. 17 Chiluba; K 5,000.00
05.09.18 Nasilele; K 7,000.00
10.10.19 Chiluba and Nasilele; K 8,000 each.
Solution
Interest on drawings charged to Chiluba and Nasilele will be:

Chiluba
Drawings Interest
K
15.06.2017 5,000 x 2.5% 125
10.10.2019 8,000 x 2.5% 200
325
Nasilele
Drawings Interest
K
05.09.2018 7,000 x 2.5% 175
10.10.2019 8,000 x 2.5% 200
375
5.5.10 Partnership salaries
There may be instances when a partner is given more responsibilities than the other partner(s).
As a reward for the added responsibilities, that partner will be paid a partnership salary. The
salary is not an expense to be charged (deducted) from the gross profit and/or total income. It
will have to be deducted from the Partnership’s NET PROFIT.

Partners’ salaries are an appropriation of profit, and not an expense in the profit and loss
account of the business.

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Example:4
Running with the same data as above, Chiluba is responsible for the managing of the
partnership and commensurate to her duties she was paid K 2,500, K 3,500 and K 5,000 for
each of the respective years; 2017, 2018 and 2019.

Solution:
Years 2017 2018 2019 Total
K K K K
Profits/(Losses) 15,000 (3,000) 9,000 21,000
Add: Interest on Drawings:
Chiluba 125 - 200 325
Nasilele - 175 200 375
15,125 (2,825) 9,400 21,700
Less: partnership salaries:
Chiluba (2,500) (3,500) (5,000) (11,000)
12,625 (6,325) 4,400 10,700
Less: Interest on capital
Chiluba (K20,000 x 5%) (1,000) (1,000) (1,000) (3,000)
Nasilele (K10,000 x 5%) (500) (500) (500) (1,500)
11,125 (7,825) 2,900 6,200
Shared profits/(losses):
Chiluba (2/3) 7,416.67 (5,216.67) 1,933.33 4,133.33
Nasilele (1/3) 3,708.33 (2,608.33) 966.67 2,066.67

5.5.11 Financial statements of partnerships

Example:5
Mulenga and Banda are in partnership and have the following profit-sharing
arrangements.
Mulenga has put in K12,000,000 and Banda K9,000,000 as capital
Interest on capital is stipulated at 8% per annum
Both to receive salaries of K6,000,000 and K8,000,000 respectively
Drawings: Mulenga K5,000,000 and Banda K6,000,000
Interest to be charged on drawings. Mulenga K500,000 and Banda K600,000
Balance of profits to be shared in the ratio 3:2
Net profit before any distribution amounts to K50,000,000

133
Solution:

134
135
5.5.12 Partners current accounts
• Records regular transactions between partners and the firm :
– Share of profits, interest on capital, and partners’ salaries.
– Drawings against the annual share of profit.
• Profit, interest on capital and salaries
– credited to a current account for the partner,
– drawings and interest on drawings are debited to the account.
• The balance on the current account represents the amount of the undrawn (or
withdrawn) profits.
– credit balance undrawn profits debit balance drawings in excess of the profits.

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Exercise: 15
Aliyah and Bunda are in partnership sharing profits and losses equally. The partnership
deed provides the following:
a). Interest on capital – 5% per annum.
b). Bunda is entited to a salary of K30,000 per annum
c). Interest to be charged on drawings – 5% per annum.
The partners’ accounts as at 1 January 2020 were:
Aliyah Bunda
K K
1. Capital 30,000 10,000
2. Current (500) 1,280
3. Drawings 12,000 15,000
The partnership profit for the year ended 31 December 2020 was K45,000.00

Exercise 15 continued…
The partnership’s other accounts as at 31 December 2020 showed:
K
Motor vehicles 120,000
Fittings 30,000
Receivables 11,000
Cash at Bank 25,000
Payables 32,000
Bank loan 95,220
Required:
Prepare, for the year ended 31 December 2020
a) The firm’s profit and loss appropriation account
b) The partners’ current accounts.
c) The firm’s statement of financial position.137
5.5.13 Unit Summary
Having completed this unit, you learnt the reasons for the formation of partnership, the different
types of partnerships, and elements that constitute a partnership deed. You further learnt the
determination of profit sharing, and acquired skills to calculate interests on drawings and
capital, and also to preparing of the current accounts, profit or loss and the statement of
financial position.

5.5.14 Prescribed Readings

Text
Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapter 41. (Any latest edition).

5.5.15 Recommended Further Readings

Text
ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA

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Unit 6.1 Legal Practitioners Accounts
Introduction
In the previous unit, you learnt about partnerships and how to prepare financial statements for
a partnership. In this unit, you will learn about the legal practitioners’ accounts, and the types
of books of accounts required to be kept by a law firm. The sub-units covered under this unit
are: the books of accounts; cash books; ledgers; receipt books; petty cashbook; and financial
statements.
A legal practitioners may, having met the requisites stipulated by the Law Association of
Zambia, may set up a firm, either as a sole practice or in partnership, with other legal
practitioners of similar standing. The founding of a law practice, mandates the practitioners,
as provided under Part VIII of the Legal Practitioners Act, to maintain books of accounts.
Further, a law firm is a business, and as an economic vehicle, it is expected to return profits to
the partners.
The provisions of the law and also it being a business, makes it mandatory for practitioners in
private practice to maintain a set of books of accounts.

Specific Unit Outcomes

After studying this unit, you should be able to:

a). Explain the different types of accounts maintained by a law practice;

b). Acquire the knowledge and skills to prepare an income statement for a law practice;
and
c). Prepare a statement of financial position for a law practice.

6.6.1 The Books of Accounts

A law firm’s operations are mainly similar to other business enterprises that sell services, and
maintain books of accounts which are: cash books; ledgers; receipt books; and petty cash.

6.6.2 Cash Book

Pursuant to the provisions of the Legal Practitioners’ Act (LPA), a law firm is expected to
maintain not less than two cash books, with one specifically designated for the sole purpose of
recording transactions relating to clients (Clients’ Account), also called a trust account. The
other cash book(s) is for the firm’s operations.

The Legal Practitioners’ Act further provides for clients’ funds to be accounted for separately
from the firm’s, and any cross transactions between the two types of accounts must be within
the confirms of the law.
The cash book format in a law firm is the same as the one used by other types of businesses,
discussed under Unit 2.2, above.

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 Example
The following are KN Legal Practitioners’ transactions:
March, 2021

1. Capital: cash K6,500.00, bank K11,130, and a car K80,000

2. Received cash K15,000 for legal costs from Sun Wood Packers Ltd.
4. Paid for fuel using a cheque K1,500
5. Paid rent by cheque K7,500
6. Received in its operations account a transfer K450,000 on behalf of Meps .Ltd for a
conveyancing transaction, which was transferred to Clients’ .Account.
15. Electricity was paid by cash K500
21. A cheque valued at K35,000 was received from Mwape for legal fees.
26. Paid K320,000 by way of transfer to Meps Ltd from the clients Account.
30. Paid salaries K62,100 using a cheque.
31. Chen paid K800,000, inclusive of K75,000 legal costs, towards the settlement of judgment
debt in a case of Monze v. Chen, into Clients’ account.
31. Transferred K75,000 from the clients’ account to the operations account.
31. Chipata paid into the client’s account a deposit of K20,000 towards .legal fees.
31. A fee note to the value of K7,500 was issued to Chipata for a legal .opinion rendered.

Required
Extract KN Legal Practitioners’ cashbooks for the month of March 2021.

Solution
Cash Book – Operations (CB1)
Date Details Foli Cash Bank Date Details Foli Cash Bank
2021 o K K 2021 o K K
Mar. Mar

1 Capital 6,500 11,130 4 Fuel Ch1 1,500

2 Sun Wood R10 15,00 5 Rent Ch2 7,500
0
6 Meps Ltd R11 450,000 6 Meps Ltd CB2 450,000
21 Mwape R12 35,000 15 Electricity C01 500
31 Monze CB2 75,000 30 Salaries Ch3 62,100
31 Chipata CB2 7,500 31 Bal. c/d 21,00 57,530
0
21,50 578,630 21,50 578,630
0 0
Apr
1 Bal. b/d 21,00 57,530
0

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 Cash Book – Clients (CB2)
Date Details Foli Cash Bank Date Details Foli Cash Bank
2021 o K K 2021 o K K
Mar. Mar
6 Meps Ltd CB1 450,000 26 Meps Ltd GL1 320,000

31 Chen - Monze R13 800,000 31 Chen CB1 75,000

31 Chipata R14 20,000 31 Chipata GL3 7,500
31 Bal. c/d 867,500
1,270,000 1,270,000
Apr
1 Bal. b/d 867,500

6.6.3 Ledgers

A firm is expected to maintain ledgers of accounts relating to transactions that have been
recorded in its various primary books of accounts, with the exclusion of purchases daybook,
returns-inwards daybook, and returns outwards daybook, as the same relate to tangible goods.
The double entry system which you learnt under Unit 2.1 above is also applicable under this
sub-unit.
Kindly note the following:
1. Funds received from a client by a firm are to be treated as a prepayment by a client. The
client in this case is a Creditor.
Debit: The Cash/Bank Account
Credit: Client (Creditor)
Example
Using information under the example in sub unit 2.6.2 above, extract the ledger accounts.
Solution
Capital Account Cash Account

Date Details Debit Credit Date Details Debit Credit

01.3.21 Cash 6,500 01.3.21 Capital 6,500

01.3.21 Bank-1 11,130 02.3.21 Legal fee 15,000

01.3.21 Car 80,000 15.3.21 Electricity 500

31.3.21 Bal. c/d 97,630 31.3.21 Bal. c/d 21,000

97,630 97,630 21,500 21,500

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Bank-1 (Operations) Account Bank-2 (Clients) Account

Date Details Debit Credit Date Details Debit Credit

01.3.21 Capital 11,130 06.3.21 Bank-1 450,000

04.3.21 Fuel 1,500 26.3.21 Meps Ltd 320,000

05.3.21 Rent 7,500 31.3.21 Monze 725,000
06.3.21 Meps 450,000 31.3.21 Legal fee 75,000
Ltd
31.3.21 Bank-1 75,000
06.3.21 Bank-2 450,000
31.3.21 Chipata 20,000
21.3.21 Legal 35,000
fees 31.3.21 Legal fee 7,500

30.3.21 Salaries 62,100 Bal. c/d 867,500

31.03.21 Bank-2 75,000 1,270,000 1,270,000

31.03.21 Bank-2 7,500

Bal. c/d 57,530

578,630 578,630
Revenue Account Fuel Account
Date Details Debit Credit Date Details Debit Credit

02.3.21 Sun 15,000 04.3.21 Bank-1 1,500

Wood
31.3.21 Bal. c/d 1,500
21.3.21 Mwape 35,000
1,500 1,500
31.3.21 Chen 75,000
Car Account
31.3.21 Chipata 7,500

31.3.21 Bal. c/d 132,500

Date Details Debit Credit
132,500 132,500
01.3.21 Capital 80,000

31.3.21 Bal. c/d 80,000

80,000 80,000

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 Rent Account Electricity Account
Date Details Debit Credit Date Details Debit Credit

05.3.21 Bank-1 7,500 15.3.21 Cash 500

31.3.21 Bal. c/d 7,500 31.3.21 Bal. c/d 500

7,500 7,500 500 500

Salaries Account Meps Ltd Account

Date Details Debit Credit Date Details Debit Credit

30.3.21 Bank-1 62,100 06.3.21 Bank - 1 450,000

31.3.21 Bal. c/d 62,100 26.3.21 Bank-2 320,000

62,100 62,100 31.3.21 Bal. c/d 130,000

450,000 450,000

Monze Account Chipata Account

Date Details Debit Credit Date Details Debit Credit

31.3.21 Bank-2 725,000 31.3.21 Bank-2 20,000

31.3.21 Bal. c/d 725,000 31.3.21 Legal fee 7,500

725,000 725,000 31.3.21 Bal. c/d 12,500

20,000 20,000

6.6.4 Receipt Book

A receipt book is a document used to record ALL funds received by the firm from any source
such as: clients’ fees, advance payments (deposits) or settlement of outstanding fees (Debtors);
from judgment debtors and for onward payments to judgment creditors. These funds may be
received in the form of cash, cheques, electronic funds transfers (EFDs), mobile money
transfers (MoMo). A receipt can be manually or computer generated, and comes in the form of
a hard copy or soft copy (ICT form).
The basic features that must appear on a receipt document are:
a) Name of the firm
This feature must be very prominent, and is usually printed at the top of a receipt.
b) Receipt number
A unique number must be affixed on each page of a receipt document, and the numbers
must be in sequence.

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c) Date
A receipt must have a date section, for the insertion of a date the funds were received.
d) Name of payee
A section for the inclusion of the name of the person who has effected payment to the
firm must be provided.
e) Amounts
A receipt must have a provision for the insertion of the amounts received, both
numerical and words.
f) Description of the payment
The basis and/or purpose of the funds is descripted under this section.
g) Issuer’s particulars
A receipt must provide for a name, signature, and/or identity number of the issue of
the receipt.

An example of a receipt is shown below.

6.6.5 Petty Cash Book

As discussed under Unit 2.2 above, petty cash is utilized for small valued payments, and in the
case of a law firm, this would include: court fees, such as court filing and search fees, among
others. The format of the petty cashbook for a law firm is the same as the one under Unit 2.2.

144
6.6.6 Financial statements
For legal practitioners to ascertain whether the law firm, just like any other business is
profitable and also its net worth, there is need to prepare an Income statement (Profit or loss
account) and a statement of financial position.

6.6.6.1 Income Statement

The format of the Income statement for a law practice is the same as for a trading enterprise
you studied under units 2.3 and 2.5, for a sole trader and partnership, respectively.

The only variations are:

1. Revenue
In the income statement or profit or loss account, narration for income should read “revenue”
instead of sales. A firm earns its revenue from:
a). fees;
b). Disbursements recovered; and
c). Other Income (same as for a trading enterprise, excluding interest earned, if any, on
clients’ account).

2. Cost of sales
The term “cost of sales” is still applicable in the preparation of the income statement. However,
the computation of the cost of sales for a trading enterprise is different from one for a law
practice. The cost of sales for a law practice, are DIRECT COSTS incurred in the generation
of revenue. These will include:
a). Salaries and wages, and commissions;
The salaries and wages that will fall under the cost of sales are salaries for: legal practitioners
and all other employees (messengers, secretarial staff) who work on and/or contribute to the
work on clients files.
b). Stationery;
c). Motor vehicle costs;
d). Stationery and computers consumables;
e). Telephone costs;
f). Any other costs

3. Expenses
While expenses are the same with those for a trading enterprise, a law practice income
statement will also include the following expenses:
a). Professional costs
These costs are made up of:
i). Education and training

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 These costs can be in the form of students costs spend at the Zambia Institute of
Advanced Legal Education (ZIALE) paid by a firm, and any other skills and qualification
enhancement education and training.
ii). Practice promotion and development
Costs incurred on workshops and continued professional development (CPD) activities
iii). Practice fees
These are fees paid to professional associations such as the Law Association of Zambia,
African Bar Associations etc.
iv) Practice insurance
To mitigate against any liability, a law practice is encouraged to take up insurance
such as professional indemnity insurance, and such costs will fall under this cost line.

b). Disbursements costs

These costs include:
i) Delivery costly (courier, and postage costs); and
ii) Fax, telephone, photocopying and email.
Further note that costs incurred in the maintaining clients’ accounts (bank charges and
commissions) are NOT expenses for the firm. These are costs to the client.

6.6.6.2 Statement of Financial Position

The items in a statement of financial position for a trading vehicle is the same as that of a law
firm, with the following inclusions under:

1. Receivables
In the client’s personal account (where a client owes the firm), recoverable disbursements will
have to be charged to that account.
2. Bank accounts
As per your study under sub-unit 2.6.1 above, two distinct bank accounts will have to be
maintained. A trust (Clients) account and operations account.

3. Payables
Payables will include, among those a firm will procure goods and services on credit, Clients’
personal accounts to which funds held on their behalf will be credited to, as well as interest
earned on deposits.

4. Capital
Capital accounts for a sole and partnership will have a single and several capital accounts,
respectively. For a partnership, each partner will have his/her own capital and current accounts.
The transactions to be posted to the current accounts are no different to the ones you learnt
under unit 2.5 above.
Example
Using information in sub-unit 2.6.1 above, extract KN Legal Practitioners’ trial balance,
income statement, and statement of financial position.
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Solution

a) Trial Balance

KN Legal Practitioner
Trial Balance for the month ended 31 March 2021

K K K
Capital 97,630
Car 80,000
Cash 21,000
Bank-operations 57,530
Bank-clients 867,500
Revenue 132,500
Fuel 1,500
Rent 7,500
Electricity 500
Salaries 62,100
Payables 867,500
1,097,630 1,097,630
Note: The clients account (Bank balance) MUST ALWAYS AGREE with the payables
(Clients’ balances), as shown below.
b). Profit or Loss Account (Income statement)
Further information is provided to the effect that of K62,100 salaries, K32,100 were salaries
for associates who are solely dedicated to litigation, and K500 for fuel was used going to court.
KN Legal Practitioners
Profit or loss Account for the month ended 31 March 2021
K K
Revenue 132,500
Less: cost of sales:
Salaries 32,100
Fuel 500
Cost of sales (32,600)
Gross Income 99,900

Less: Expenses
Fuel (1,500 – 500) 1,000
Rent 7,500
Electricity 500

147
 Salaries (62,100 – 32,100) 30,000
Total expenses (39,000)
Net profit 60,900
c). Statement of Financial Position
KN Legal Practitioners
Statement of Financial Position as at 31 March 2021
Cost Accumulated Net Book Value
Depreciation
K K K
Non-current assets
Car 80,000 - 80,000

Current Assets
Bank (i) 925,030
Cash 21,000
946,030
Current Liabilities
Payables(ii) (867,500)
Working capital 78,530
TOTAL NET ASSETS 158,530

Non-current Liabilities -

Financed by:
Capital 97,630
Net profit 60,900
TOTAL EQUITY AND 158,530
LIABILITIES

When the client’s payables and bank balances, are consolidated in the Statement of Financial
Position as above (i and ii), a reconciliation showing the composition of the amounts should be
prepared, as shown below.

148
Clients’ account reconciliation
Workings:
Step: 1
i). Bank balances
K
Operations account 57,530
Clients account 867,500
Total 925,030

ii). Payables:
K
Clients:
Meps Ltd 130,000
Monze 725,000
Chipata 12,500
867,500
Other payables -
867,500

Step: 2
Clients’ account reconciliation as at 31st March 2021

Amounts due to clients 867,500

Bank (Clients) account 867,500

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Exercise: 16
The trial balance for Sakala and Sanka Advocates for the year ended 31 December 2019 is shown
below.
K K
Fees 1,125,000
Disbursements recovered 393,500
Drawings: Sakala 150,000
Sanka 235,000
Rent 65,000
Court fees 110,350
Indemnity Insurance 5,550
Postage 2,505
Salaries 760,000
Bad debts 40,000
Electricity 11,000
Provision for doubtful debts 8,125
Receivables 412,000
Payables 275,000
Bank: Operations 50,220
Clients 75,000
Equipment at cost 75,000
Accumulated depreciation 15,000
Capital: Sakala 100,000
Sanka 75,000
1,991,625 1,991,625
The following are to be taken into account:
1. Electricity owing K1,000.
2. Rent was paid in advance by K5,000.
3. Depreciation rate charged at 20% on diminishing method.
4. Allowance for doubtful debts to be increased to 5%
5. Direct costs were made up of:
65% of salaries amount
Court fees
Indemnity insurance, and postage
6. Payables include clients’ balances: Melu, K30,000; and Muna, K45,000.
7. Partners’ salary: Sakala K120,000.
8. Profit sharing ratio 1:1

150
Exercise 16 continued…
Required:
a) Prepare a profit or loss appropriation account for the year ended;
b) Statement of financial position, current accounts; and
c) Clients’ account reconciliation statement.

2.6.7 Unit Summary

Having studied this Unit, you have learnt the types of books of accounts to be had by a legal
practitioner(s) in private practice. You have also learnt how to account for clients’ money, and
preparing financial statements for a law firm.

6.6.8 Prescribed Reading

Frank Wood’s Business Accounting, 10th Edition – Allan Sangster and
Lewis Gordon. See: Chapters 1-6, 11, 13, 17-18, 25-28, 30, 32, 36 and 41. (Any latest edition).

6.6.9 Recommended Further Reading

ZICA D1 Financial Accounting Study Manual, 7th Edition – ZICA

151
Unit 7.1 Billing Clients

Introduction
In the previous unit, you learnt about the books of accounts, cashbooks, ledger accounts, receipt
book, petty cashbooks that are required to be prepared and kept by a law firm. You further
learnt how to prepare the financial statements for a law firm.
A law firm is a business and to ensure that it is able to meet its operational costs, as well as
return a profit to its partner(s), it has to ensure that all the services it provides are accurately
billed to its clients.
In this unit, you will learn: the stages of billing; source of, and how to use, the scales rates in
billing; reports that can be generated from a billing system; and how you can interpret the
information from a billing report.
Specific Unit Outcomes
After studying this unit, you should be able to:

a). Explain the stages of billing;

b). Know the different types of billing scales;
c). Compute bill of costs for different courts;
d). Prepare fee notes; and
e) Prepare different reports and interpreting the same.

7.7.1 The Stages of Billing

A billing system could either be manual or computer based, such as Legal Manager© , and
whichever system is used, the ultimate objective of the system is to generate revenue (sales)
information in the form of fee notes (invoices), which are then submitted to clients for
settlement. A billing system is critical to the going concern of a law firm, as its accuracy,
efficiency, and effectiveness has a bearing on the firm’s cashflows, and invariably its
operations.
The billing process for the provision of legal services is made in three stages, namely:

i). Pre-billing stage

This is the first step that determines whether a retainership be accepted or not. It is at this stage
that a law firm must have within its client acceptance process, onboarding vetting tools, such
as Know-Your-Client (KYC) forms. The onboarding vetting of client is now mandatory at law
(see the Financial Intelligence Act No. 46 of 2010).

Once the vetting process is completed, the next step is execution of an agreement (engagement
letter) between the firm and the client. The engagement letter will contain: the parties;
commencement and determination dates (events) of the retainership; scope of work; the legal
practitioners to be assigned and their years at the Bar; the charge-out rates; and other terms and
conditions. The engagement letter is a key element to an accurate, efficient and effective billing

152
systems. Its only upon full execution of the engagement letter, that a firm is recommended to
proceed and start acting on the client’s instructions.

ii). Active retainership stage

During this stage, assignments as stipulated in the engagement letter are being performed by
the law firm. The firm will, depending on the type of assignments, and in the case of contentious
matters, keep records of the time and work being done. The work may include; court
appearance, preparing of court documents, legal opinions and correspondences, meetings (both
physical and virtual) , receipt of any further instructions, a priori assignment.
The firm should have tools, either in manual forms or digital format, which have time recording
and retention capabilities.
Examples of time recording tools are shown below.

NAME OF FIRM
ATTENDANCE FORM
Date:………………………………………………………………………………….
Client:…………………………….…………………………………………………..

Case/cause number:…………………………………………………..………….
Before:………………………………………..……………………...……………….
Parties:……………………………………………………….……………………….
……………………………………………………………….…….…………………..
……………………………………………………………………………….………...
Scheduled time:

Start time :
Finish :
Duration :
Notes
…………………………………………………………………………………………
…………………………………………………………………………………………
……………………………………………………………………..…………………..

Prepared by:_________________________ Signature:___________________

Name

153
 NAME OF FIRM

MEETINGS ATTENDANCE FORM

Date:………………………………………………………………………………….
Client:…………………………….…………………………………………………..

Case/cause number (If applicable):………...………………………….……..

Parties(where applicable)………………..………..…………………………….
……………………………………………………….……………………….………..
Place of meeting:………………………………………………………………….
In Attendance:…………………………………….……………………………….
…………………………………………………………..……………………………..
…………………………………………………………..………………………….….
…………………………………………………………..………………………….….
Start time :
Finish :
Duration :
Notes
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

Prepared by:_________________________ Signature:___________________

Name

154
 NAME OF FIRM

DRAFTING/REVIEW FORM

Date:………………………………………………………………………………….

Client:…………………………….………………………………………...….……..

Case/cause number (If applicable):………...………………………….……..

Parties(where applicable)………………..………..…………………………….
……………………………………………………….…………………………….…..
File No.:…………………….………………..……………………………….……….
Tasks performed:………….……………..……….………………………..……….
…………………………………………………………..……………………….…….
…………………………………………………………..……………………….…….
…………………………………………………………..……………………….…….
Start time :
Finish :
Duration :
Notes
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

Prepared by:_________________________ Signature:___________________

Name

It is cardinal that the time recording system, should be designed in a way that each second, a
legal practitioner spends, as time is Counsel’s “stock in-trade”, is recorded for onward
computation of the fees.

Pursuant to the terms and conditions contained in the engagement letter, bills of costs together
with fee notes, may be submitted to the client, within agreed intervals, for settlement. A firm
that intends to have cashflow stability may look to submission of the same, in shorter intervals.

iii). Post retainership stage

Determination of a retainership may come in the form of an event such as a delivery of, a
decision by a court of law (contentious matters), or non-contentious matters such as; drafting
of legal opinion, agreement, and/or conveyancing retainership.
Relative to the terms and conditions contained in the engagement letter, a law firm may render
a final bill of cost to its client. The final bill of cost may include among others; costs covering
155
the period the assignment was subsisting and also post-event determination costs such as
“success fees.”
7.7.2 The Scales rates to be used for billing
The scales rates that are to be used in determining the value of the work done are provided for
in various pieces of legislation for both, conveyancing and non-contentious, and contentious
matters.

7.7.2.1 Conveyancing and Non-contentious matters

The Legal Practitioners (Conveyancing and Non-Contentious Matters) (Costs) Order, 2017
(Statutory Instrument No. 7 of 2017), provides the scales rates to be used when instructions
have been received for conveyancing and non-contentious assignments.

7.7.2.2 Contentious matters

The charge-out rates for contentious matters are provided in the respective, Subordinate Court,
High Court, Court of Appeal, Constitutional Court, and Supreme Courts’ Rules and/or through
subsidiary legislation of the Legal Practitioners Act.

i). The Subordinate Court

The charge-out scale rates for matters before the Subordinate Court are provided for under the
Subordinate Courts (Civil Jurisdiction) (Amendment) Rules, 2001, Statutory Instrument No.
22 of 2001.

ii). The High Court

The scales rates for matters before the High Court are stipulated in the Legal Practitioners
(Costs) Order, 2017 (Statutory Instrument No. 6 of 2017), and the
Legal Practitioners (High Court) (Fixed Costs) Order, 2016 (Statutory Instrument No. 97 of
2016.

iii). Court of Appeal

Order 12 Rule 1 (SI No. 65 of 2016) of the Court of Appeal Rules provides for the Court to
make any order as to the whole or any part of the costs of appeal or of any court below as may
be just. It [the Court] may assess the same, or direct taxation in accordance with the scales
provided for in the High Court under the High Court Act.

iv). The Constitutional Court

The Constitutional Court Rules Act, 2016 (SI No. 37 of 2016) stipulates that the prescribed
scales rates are applicable. As at the date of publishing of this manual, no Order for Costs has
been promulgated for matters before the Constitutional Court. In the current, and as a matter
of practice, the Supreme Court (Amendment) Rules, 2017 (SI No. 5of 2017) is being applied.

v). The Supreme Court

156
 The Supreme Court (Amendment) Rules, 2017 (Statutory Instrument No. 5 of 2017) of the
Supreme Court Act Cap 25, provides the applicable scales rates for matters before the Supreme
Court of Zambia.

7.7.3 Reports produced by a billing system

A firm should ensure that its billing system is capable of generating reports on a timely basis,
as information from the reports would help in decision-making, comparative analyses with the
budget and/or previous performance, among many others. The primary reports any billing
system should be able to produce include:

i). Bill of costs

A bill of costs report shows the works done on specific instructions, the time taken to perform
tasks therein, the applicable scales rates, computed values of undertaken tasks, and name(s) of
Counsel who were in conduct of the instructions. The report will also show Counsel’s years at
the bar, and also the grand total payable.
Hereunder is a manually generated excerpt of a bill of costs.
___________________________________________________________________________
BILL OF COSTS TO BE TAXED ON A PARTY-TO-PARTY BASIS PURSUANT TO
STATUTORY INSTRUMENT No. 6 OF 2017 AND THE DEFAULT JUDGMENT OF
29TH OCTOBER 2020
___________________________________________________________________________
To our professional charges for costs incurred and incidental to acting in the within action
pursuant to the rates provided under Statutory instrument No. 6 of 2017 for Advocates of 15
years and 6 years respectively.
Counsel seized with conduct of the matter;
[Inset name(s) of Counsel in conduct of matter]

Taxed Taxed Serial Date Details Part of Disbursements Charges

Off No. Schedule (K) (K)
1. 21.08.20 To attending on the III 1, 702.20
client, receiving 2.01
instructions for
retention of Legal
services at K 1, 702.20
x 1 hour

2. 21.08.20 To preparing and II 283.70

sending letter to client 4.09
with regards to
provision of Legal
Services at K 1,
702.20 x 10 minutes

157
 3. 21.08.20 To perusing II 6, 808.80
documents on file at K 5.02
1, 702.20 x 4 hours

To researching the law

4. 22.08.20 on the action at K 1, III 3, 404.40
702.20 x 2 hours 4.09

Subtotal
12, 199.10

SUMMARY

Page No. Disbursements Charges

1 - 12, 199.10
2 17, 500.00 13, 297.25
3 100.00 4,749.60
4 315.00 5, 921.01
5 - 11,349.50
6 - 14,579.93
Sub-Total 17, 915.00 62,096.48
TOTAL 80,011.48

Total plus disbursements : K 80,011.48

Add 16% VAT : K 12,801.84
10% Taxing fee : K 8, 001.15
Grand Total payable: : K 100,814.47
ii). Fee note/Invoice
An integrated billing system (Computer-based) should be able to produce a report of the total
fee notes generated in a period, together with their respective values. However, where a firm
is using a manual billing system, the system, using various time recording forms and the
applicable scales rates, should be able to culminate to issuance of fee notes.
An excerpt of a fee note is hereunder.

158
Taxed Taxed Serial Date Details Part of Disbursem Charges
off No. Schedule ents
(K) (K)

5. 22.08.20 To discussing with III 1, 702.20

other advocates in 4.09
preparation to
prepare opinion at
1, 702.20 x 1 hour

To meeting client
6. 22.08.20 and giving oral III 851.10
opinion on 7.02
prospects of action
at K 1, 702.20 x 30
minutes

To drafting Writ of
Summons
7. 23.08.20 Statement of Claim II 6, 808.80
and application for 1.02
injunction at K 1,
702.20 x 4 hours

Fees paid by the

client to be re-
imbursed
8. 23.08.20 15, 000.00
To attending on
client to sign
affidavit at K 1,
9. 24.08.20 702.20 x 30 III 851.10
minutes. 2.01

To travelling to
Court to file
commencement
10. 24.08.20 process at K 740.10 10.3 123.35
x 10 minutes plus
reasonable amounts
expended on fuel

159
 To attending to
waiting to file
commencement
process and attend
11. 24.08.20 before Judge at II 2,500.00 2, 220.60
Chambers at K 1, 4.07
110.30 x 2 hours

To travelling to and
from Defendants to
serve
commencement
process at K 740.10
12. 28.08.20 x 1 hour plus 10.3 740.10
reasonable amounts
expended on fuel

Subtotal

To drafting
affidavit of service
at
K1,110.30 x 20
minutes
17, 500.00 13, 297.25
Attending to
13. 05.09.20 travelling to and III 370.10
from court plus 6.01
waiting to attend
before Judge at K 1,
110.30 x 30
minutes
14. 05.09.20 10.3 555.15
To preparing for
hearing by taking
down notes and
perusal of file at K
1, 110.30 x 30
minutes

15. 18.09.20 To travelling to II 555.15

court to attend 2.13
hearing before
160
 Judge at 1, 110.10 x
10 minutes

To waiting to attend
16. 18.09.20 before Judge at K 1, 10.3 185.05
110.30 x 10
minutes

To attending before
Judge at K 1,
110.30 x 10
17. 18.09.20 minutes II 185.05
4.03
To attending receipt
of application to
discharge
injunction at K
18. 18.09.20 740.10 x 10 II 185.05
minutes 4.01

To perusal of
application to
19. 20.09.20 discharge III 123.35
injunction at K 1, 4.09
110.30 x 2 hours

To meeting client to
obtain instructions
at K 1, 110.30 x 20
minutes
20. 20.09.20 5.01 2, 220.60
Subtotal

To research the law

on discharge of
injunctions at K
21. 20.09.20 740.10 x 3 hours II 370.10
4.07
To drafting
affidavit in
opposition and
skeleton arguments
to discharge of 4,749.60
161
 injunction at K
22. 21.09.20 740.10 X 2 Hours III 2, 220.30
4.09
To attending upon
client to sign
affidavit at K 1,
23. 21.09.17 110.30 x 20 III 1, 480.20
minutes 6.01

To attending to
travelling to
Defendants
advocates and back
to the office to
serve process at K
24. 21.09.20 740.10 x 45 II 370.10
minutes plus 4.08
reasonable amounts
expended on fuel

To preparing notes
25. 21.09.20 for hearing at K 1, 10.3 100 555.07
1110.30 x 30 min

To travelling to
court to appear
before Judge at K 1,
1110.30 x 10
minutes plus
reasonable amounts
expended on fuel.

Waiting to attend
before Judge at K 1,
26. 16.10.20 111.30 x 10 II 555.15
minutes 2.13

Attending to
drafting default
27. 16.10.20 judgment at K 10.3 185.07
740.10 x 30
minutes

162
 Subtotal

Uplifting default
judgment at K 1,
1110.30 x 30
minutes
28. 16.10.20 II 185.07
To correspondence 4.03
with Defendants
advocates at 740.10
x 20 minutes.
29. 16.10.20 III 370.05
To correspondence 6.01
with Ministry of
Home Affairs at K
1, 11.30 x 20
minutes
100.00 5, 921.01
To researching the
30. 31.10.20 law on garnishee II 555.15
applications at K 1, 4.08
110.30 x 1 hour

To drafting
31. 01.11.20 application for III 123.35
garnishee order nisi 4.09
and affidavit of
service at K 740.10
x 2 hours

To travelling to
32. 02.11.20 court to file III 370.10
application for 4.09
garnishee order nisi
at K 740.10 x 10
minutes .

To following up
33. 06.11.20 signed garnishee III 1, 110.30
order nisi at K 1, 4.09
1110.30 x 30
minutes
163
 Correspondence
34. 06.11.20 with Attorney III 1, 480.20
General at K 1, 6.01
111.30 x 20
minutes

Attending to
drafting Bill of
Costs at K 1,
1110.30 x 4 hours 10.3 123.35
35. 08.11.20
Attending to
finalising Bill of
Costs at K 1,
1110.30 x 2 hours

Subtotal II 315.00 555.15

36. 10.11.20 4.08
Attending to
drafting and filing
of Notice of
Appointment to tax
37. 13.11.20 Bill of Costs at K 1, II 370.10
110.30 x 30 4.08
minutes

General
Responsibility,
38. 13.11.20 Care and skill II 4, 441.20
4.11
ANTICIPATORY
EXPENSES AND
PROFIT COSTS
39. 13.11.20 II 2, 220.60
Perusing through 4.11
bill of cost for
purposes of
preparing notes for
taxation hearing at 315.00 11,349.50
K 1, 110.30 x 20
40. 13.11.20 minutes II 555.15
4.11
164
 Attending taxation
hearing at K 1,
110.30 x 30
minutes

General fee for

41. 13.11.20 letters, petties, 5, 000.00
messengers,
incidentals etc at
15% of the total
bill

Subtotal

42. II 370.10
4.11

43. II 555.15
4.11

44. 8,099.53

14,579.93

165
 [ NAME OF FIRM ]
…………. & Co. Legal practitioners
FEE NOTE NO…………….
To: [ NAME OF CLIENT ]
………………………… Limited 15th December 2020
Lusaka
DESCRIPTION K

…………………………… v. ………. [Insert parties]

To our professional charges in this matter since our last fee
note no…………….; to include reading the law and making
preparations for trial scheduled, our attendance at trial and
waiting time, to include our professional skill, emails and
telecom; Our fee to exceed BUT SAY-

Total 62,096.48
16% VAT 12,801.84
Add Non- Tax 8,001.15
Disbursements 17,915.00
Less Deposit 0.00
Paid
Grand Total K 100,814.47

iii). Revenue report

A revenue report’s purpose is to show the total sales generated by a firm, in a specified period.
Further, the report should also be designed in a way that it is capable of listing all the issued
fee notes within a specified period. Both computer-based and manual billing systems, are
capable of generating a revenue report.

iv). Billed time report

166
This is a report when generated will show, depending on the design of the billing system, show
the billed time per day, week or on a monthly basis. The report can also be designed to highlight
names of the billing persons against the reported billed time.

v). Direct costs report

A direct costs report shows the direct costs incurred on each assignment. The direct costs may
include, among many others: labour costs (i.e salary of Counsel in conduct of the assignment),
court fees, and stationery.

vi). Analysis reports

These are reports that go in more detail to provide information on profitability of the firm in
general, and can be generate drilled down reports to departments and even individual Counsel’s
performance.
Analysis reports are designed in line with information required by a firm for its effective
decision-making.

7.7.4 How to interpret information in a billing report

Interpretation of information in a billing report depends on the report that has been requested
from the system. Information from the context of a bill of costs, for example, can be interpreted
from the following positions:
a) Seniority of Counsel in conduct of the matter;
b) The tasks undertaken in performing the instructions;
c) Whether there have been any disputes as to costs (an application for bill
of costs to be taxed, is evidenced);
d) The duration of the matter before its determination; and
e) The time it took to perform certain tasks.

Exercise: 17
Nkandu Nsingu, an advocate with 7 years at the Bar, and a senior associate at Chuza Legal
Practitioners is in conduct of a matter before the High Court for Zambia. A review of the file for
the month of January 2019, had the following findings:

i) Receiving instructions and preparing engagement letter (06.01.19, 1 hr each);

ii) Meetings (07.01.19, 3hrs; 10.01.19, 2hrs; 20.01.19, 3 hrs;
iii) 8.01.19, drafting of summons and statement of claim 5 hours;
iv) Undertaking research on the case 10 hours; 15.01.19, 4 hrs; 16.01.19, 3hrs;
17.01.19, 3hrs;
v) Court attendances; 25.01.19, 4 hrs; 26.01.19, 5hrs; and
vi) 28.01.19, Reimbursable disbursements K 13,200.

The Firm is VAT registered and VAT rate is 16%.

Required:
a) Extract a bill of cost; and
b) Summary of the bill of cost showing the total amount payable by the client.

167
7.7.5 Unit Summary

In this unit, you learnt the why billing of clients is important, the tools that can be used in the
billing system, types of reports that can be generated, the sources of the scales rates, and how
to interpret information from billing reports.

7.7.6 Prescribed Readings

Statute
The Constitution of Zambia Cap 1 of the Laws of Zambia.
The Supreme Court Act 25 of the Laws of Zambia.
The Constitutional Court Act No. 8 of 2016 of the Laws of Zambia.
The Court of Appeal Act No. 7 of 2016 of the Laws of Zambia.
The High Court Act Cap 27 of the Laws of Zambia.
The Subordinate Courts Act 28 pf the Laws of Zambia.
The Legal Practitioner’s Act Cap 30 of the Laws of Zambia.
The Supreme Court (Amendment) Rules, 2017, SI No. 5 of 2017.
The Legal Practitioners (Costs) Order, 2017, SI No. 6 of 2017.
The Non-Contentious Matters (Costs) Order, 2017, SI No. 7 of 2017.
The Legal Practitioners (High Court) (Fixed Costs) Order, 2016, SI No. 97 of
The Court of Appeal Rules, 2016, SI No. 65 of 2016.
The Constitutional Court Rules Act, 2016, SI No. 37 of 2016.

168
Unit 8.1 Types of Taxes and Other Statutory Obligations

Introduction

In the preceding Unit, you learnt how a law firm bills its clients, and the types of billing systems
that can be employed. You further learnt the reports a billing system can generated, and how
to interpret reports from a billing system.
In this Unit, you will learn the different types of taxes that are chargeable to individuals and
legal persons, and other statutory obligations. You will also learn how to calculate some of the
taxes and statutory obligations.

Specific Unit Outcomes

After studying this unit, you should be able to:

a). Explain the different types of taxes and statutory obligations;

b). Know the due dates for submission of taxes and statutory obligations returns,
and payments;
c). Acquire the knowledge and skills to compute different tax obligations; and
d). Acquire the knowledge and skills to compute different statutory obligations.

8.8.1 Pay As You Earn (PAYE)

The Income Tax Act Cap 323 of the Laws of Zambia provides for the payment of PAYE from
the employment earnings of a every person, resident in Zambia, with the exemptions of
individuals and organisations provided under the Second Schedule of the law. The Income Tax
Act obliges every employer to deduct from all its qualifying employees the PAYE, and remit
the same to the Zambia Revenue Authority (ZRA), a statutory body mandated to collect taxes
on behalf of the Government of the Republic of Zambia .

8.8.1.1 Type of Tax

The PAYE is a direct and progressive tax, which is collected from employees, and increases
proportionate to the employee’s earnings. The PAYE has graduated tax bands, ranging from
0% to the marginal rate of 37.5%. The due date for the submission and payment of the PAYE
by the Employer, is the10th of the following month.

8.8.1.2 Tax rates

The tax rates and earnings bands are effective from January to December of each year, and any
changes to the same are effected through the National Budget.

169
The current (January – December 2022) monthly tax bands are:

Bands Bands Chargeable %

(K) Earnings (K)

First 0 – 4,500 4,500 0

Second 4,501 - 4,800 300 25

Third 4,801 – 6,900 2,100 30

Fourth Above 6,900 37.5

Example
Bwalya, having been admitted to the Bar has had her salary elevated to K15,000. Calculate her
PAYE payable to the ZRA.

Solution

Bands Chargeable Rate PAYE

Earnings (K) (%) (K)

First 4,500 0 0.00

Second 300 25 75.00

Third 2,100 30 630.00

Fourth 8,100 37.5 3,037.50

Total 15,000 3,742.50

8.8.2 Withholding Tax (WHT)

This is a tax that is also provided for under the Income Tax Act. It is a tax withheld on behalf
of the tax payer, and/or a final tax on rental income paid by the landlord. WHT is charged on
commissions to non-employees, consultancy and management fees i.e legal fees, dividends,
royalties and interest.

170
The current (January 2022 to December 2022 ) WHT rates are:
%

LOCAL ENTITIES

Commissions, consultancy & management fees, dividends, royalties, interest 15

Rental income (final tax):

Rental income up to K800,000 per annum (K66,666.67 per month) 4
Rental income from K800,001 per annum 12.5

FOREIGN ENTITIES
Commissions, consultancy & management fees, dividends,royalties, interest and 20
branch profits

Non-resident entertainers and sports persons 20

Government Securities 15

Example: 1
Chilepa receives gross rent of K3,500.00 per month. Calculate the
WHT.
Solution
First let us annualize the rental income receivable, so that we can determine the tax rate to use.
ƒ K3,500 x 12 months = K42,000. This amount falls below the K800,000, and therefore,
the chargeable rate is 4%.
ƒ The monthly WHT is:
= K3,500 x 4%
WHT = K140
Example: 2

Having recently completed construction of three different properties, Mutale leased out all
three properties at net monthly rental incomes of, K25,000, K30,000, and K40,000,
respectively. How much WHT will he be liable to the ZRA, on a monthly basis?

First step:

171
 ƒ Calculate the total annual rental income receivable by Mutale.

= K (25,000+30,000+40,000) = K90,000 per month

= K90,000 x 12 months
= K1,080,000 per annum.
The annual rental income of K1,080,000 is above the K800,000 which is taxed at 4%, and
therefore the chargeable tax rate applicable to Mutale is 12.5%.
ƒ The monthly WHT payable by Mutale is:
K90,000 x 12.5%
WHT = K11,250
Example: 3

PM Legal Practitioners have rendered a fee note to its client to the value of K65,000, inclusive
of WHT. How much is the WHT?
Workings:
= K65,000 x 100
115
= K56,521.74 (Legal fees exclusive of WHT)
= K(65,000 – 56,521.74)
WHT = K8,478.26

8.8.3 Value Added Tax (VAT)

8.8.3.1 The value added tax system in Zambia

The Value Added Tax Act Cap 331 of the Laws of Zambia provides for tax (VAT) to be
charged on the supply of goods and services by businesses that exceed a certain amount of
annual turnover, with the current threshold being K800,000. Once registered for VAT, a
business’ VAT Tax Account is activated using the same Tax payer Identification number
(TPIN) which is issued at the time of registering for tax with the Zambia Revenue Authority
(ZRA). When a business makes a sale of goods or services it adds VAT to the price of the
goods or services.
VAT is collected at each stage of the production and distribution chain, wherever ‘value’ is
added. It is eventually borne by the final consumer. The rate of VAT varies from time to time
(changes in VAT are announced by the Min. of Finance when presenting the budget and
effected through statutory instruments. The current (January 2022 to December 202) tax rate
is 16%, and the tax return with tax payable, if any, is to be submitted and paid by the 18th of
the following month.

8.8.3.2 Differences between the various rates of VAT

• VAT Rates
¾ Standard rate, currently 16%
¾ Zero rate
• Exempt goods and services – no VAT charged
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 ¾ Itemised in the First Schedule to the Act
• Zero rated goods and services – VAT charged at 0%
¾ Itemised in the Second Schedule to the Act

8.8.3.3 VAT on goods and services

Exempted businesses
• Businesses that do not have to add VAT to the prices of goods and services supplied by
them
• They cannot obtain a refund of VAT paid on goods and services purchased by them
¾ E.g., A funeral parlour sells coffins and other services for K500,000 and
purchases motor vehicles and office furniture for K300,000 on which it pays
VAT at 16% (16/100 X 300,000=K48,000). The Funeral Parlour cannot reclaim
the K48,000 input VAT

Zero-rated businesses
• The goods and services in the Second Schedule are zero-rated this means that VAT on
these goods is charged at 0%.
• Since supplies in this business are subject to a rate of VAT (albeit 0%) any input VAT
incurred related to the business may be reclaimed.
¾ E.g., A commercial farmer who sells farm produce worth K500,000 during the
year and during that year purchases equipment and other goods for K300,000
plus VAT at 16% - will reclaim VAT:

Net(K) VAT(k) @16%

Sales 500,000 Nil
Purchases 300,000 48,000
VAT reclaimable 48,000
Standard-rated business
The goods and services are those on which the standard VAT rate currently at 16% is charged.
Example:1

At the rate of 16% and the cost of goods is K100:

ଵ଺
100 x ଵ଴଴ = ‫ܭ‬16
Therefore total cost including VAT = K100 + K16 = K116
K116 is the gross amount ie Cost + VAT
The K100 is the net amount on which 16 % is added
8.8.3.4 VAT when prompt payment discount is taken

Day books and Trade Discounts

• Where a trade discount is deducted from the retail price this is usually shown within
the daybook.

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Example: 2

2020
Jan
8 Sold goods, retail price K1,200, on credit to Kalengo, less
20% trade discount.
12 Sold goods, retail price K2,000 on credit to Kayemba
K2,000, less 25% trade discount.

From the following transactions for the month of January 2020, write up the Purchases and
Sales Day books with VAT columns, post to the Puchases, Sales and VAT accounts in the
General Ledger and post to the personal accounts in the Purchases and Sales ledgers.

The following transactions are credit purchases and sales for January 2020, in each case
amounts shown are before the addition of VAT, which is at a rate of 16%.

January
2020
1 Bought goods K2,500 on credit from Mushala, invoice no M53
3 Sold goods K2,000 on credit to Simpungwe, invoice no 541
5 Sold goods K3,000 on credit to Katongo, invoice no 542
12 Bought goods K700 on credit from Patel, invoice no P57
16 Sold goods K2,500 on credit to Mwila, invoice no 543
23 Bought goods K2,200 on credit from Ngandu, invoice no N25
26 Bought goods K1,000 on credit from Sonka, invoice no S95
174
175
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8.8.3.5 VAT when it is included in the total price of goods and services

When only the gross amount of an item is known. To find the amount of VAT that has
been added to the net amount (the formular can be used with any rate of VAT):
% ௥௔௧௘ ௢௙ ௏஺்
VAT(K) = (ଵ଴଴ା% ௥௔௧௘ ௢௙ ௏஺்) ‫ݐ݊ݑ݋݉ܣ ݏݏ݋ݎܩ ݔ‬
If the gross amount was 508 and the rate of VAT is 16% then
ଵ଺ ଵ଺
VAT(K) = (ଵ଴଴ାଵ଺Ψ) ‫ ݔ‬508 = ଵଵ଺ ‫ ݔ‬508 = 70
The net amount would then be K508 – K70 = 438
Note: When calculating VAT, the VAT is always rounded down to the nearest kwacha.

8.8.3.6 VAT transactions in the book-keeping system

Double entry book-keeping records need to show the VAT values separately so that
purchases, expenses and sales are posted net (i.e., without the addition of VAT).
When making a sale double-entry will be:
¾ Debit: Receivables account/Cash account Gross amount
(includes VAT)
¾ Credit: VAT account VAT amount
¾ Credit: Sales account Net amount
(excluding VAT)
• When making a purchase double-entry will be:
¾ Debit: Purchases account Net amount
(excluding VAT)
¾ Debit: VAT account VAT amount
¾ Credit: Payables/Cash account Gross amount
(including VAT)

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Example: 3

2020
Jan 10 Wholesaler buys goods from manufacturer AB for K1,000 plus VAT @ 16%
K
Value of inputs (excluding VAT) 1,000
Jan 14 Wholesaler sells the goods to retailer CD
K1,600 plus VAT @ 16%: value of outputs (excluding VAT) 1,600
VAT movements:
Paid to manufacturer by wholesaler 160
Collected from retailer by wholesaler 256
Paid to ZRA by wholesaler 96

Please note:

a) Purchases Account debited with amount of purchases exclusive of VAT, Sales Account
credited with amount of sales exclusive of VAT
b) The personal account of AB, the manufacturer, has been credited with the amount of
purchases inclusive of VAT, the account of CD, a retailer, has been debited with the
amount of sales inclusive of VAT.
c) If these are the only two transactions for January, the VAT Account should show a
credit balance of K20 at month end

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Capital expenditure

• Expenditure to buy an asset attracts VAT

• E.g., Purchase of a truck for K50,000 with VAT included will cost K58,000. Book-
keeping entries will be:
K
Dr: Truck Account 50,000
Dr: Value Added Tax Account 8,000
Cr: Bank Account 58,000

The K8,000 is input VAT if there are no other transactions during the quarter this would be
refunded by ZRA.
Example

Enter the following transactions for the month into the accounts of P. Daka balance each
account at the month end, and extract a trial balance at 31 January 2020 VAT is to be taken at
the rate of 16%.
January
1 Bought goods on credit from Mpande K1,000 + VAT
3 Bought goods on credit from Lungu K1,500 + VAT
6 Cash sales K800 + VAT, paid direct into the bank
8 Sold goods on credit to Tembo K1,000 + VAT
10 Cash sales K1,100 + VAT, paid direct into the bank
13 Paid Mpande the amount owing by cheque
16 Bought an office chair K2,000 + VAT on credit from FUNICOZ
19 Tembo settles the account by cheque
24 Cash sales K1,500 + VAT, paid direct into the bank
26 Bought goods on credit from Lungu K800 + VAT
31 Paid FUNICOZ the amount owing by cheque.
179
Solution

180
181
182
Purchases and Sales Day Books with VAT

Example:2

Enter the following transactions for the month into the accounts of P. Daka balance each
account at the month end, and extract a trial balance at 31 January 2020 VAT is to be taken at
the rate of 10%.
2020
1 Jan Bought goods on credit from Mpande K1,000+VAT
3 Jan Bought goods on credit from Lungu K1,500+ VAT
6 Jan Cash sales K800 + VAT, paid direct into the bank
8 Jan Sold goods on credit to Tembo K1,000 + VAT
10 Jan Cash sales K1,100 + VAT, paid direct into the bank
13 Jan Paid Mpande the amount owing by cheque
16 Jan Bought an office chair K2,000 + VAT on credit from FUNICOZ
19 Jan Tembo settles the account by cheque
24 Jan Cash sales K1,500 + VAT, paid direct into the bank
26 Jan Bought goods on credit from Lungu K800 + VAT
31 Jan Paid FUNICOZ the amount owing by cheque

183
The use of a VAT Account
A business will not send a cheque for VAT to ZRA for each individual transaction. Settlement
of VAT is made on a quartely basis (or other period stipulated in the statutory instrument in
force). Pending payment, amounts are stored in a VAT Account.

• The VAT Account is:

Debited with the amount paid on purchases from suppliers

Credited with the amount of VAT charged on sales to customers
8.8.4 Income Tax
The Income Tax Act Cap 323 of the Laws of Zambia provides for the charging of tax on a
profit made by a business resident in Zambia. Where a business has made a loss, no tax is
chargeable. The law provides for the carrying forward of a loss for a maximum period, not
exceeding five (5) years, and offset against profits from the same business.

Income Tax on profit from a Sole Practice and/or Partnership calculated using the PAYE
sliding scale, and any income tax due, in the case of a sole trader and/or partnership, is payable
by persons in their individual capacities. This means that a person trading as sole practitioner
or trader, and partners in a firm, are liable to pay income tax in their respective individual
capacities. A firm (Sole Practice or Partnership) DOES NOT pay Income Tax. Income tax is
due and payable by the 21st of June, immediately after the financial year.

8.8.4.1 Tax rates

Some of the notable current (January 2022 to December 2022) tax rates are:
BUSINESS TYPE RATE (%)

Corporate Income tax 30

Farming and agro processing 10

Turnover tax (Annual turnover not exceeding K800,000) 4

184
Example

Chilufya and Banda are partners in CB Legal Practitioners. At the end of the financial year
ended 31 December 2021, the firm recorded a net profit of K150,000. During the year Chilufya
drew a salary amounting to K42,500.00. The profit-sharing ratio is 3:2.
Required:
Calculate the partners’ income tax liability.

Solution
Step 1: calculate the appropriated profit.
K
Net profit 150,000
Less: Chilufya’s salary (42,500)
Profit to be appropriated 107,500
Profit appropriation:

Chilufya 64,500
Banda 43,000
107,500

Step 2: Calculate income tax for each partner

a). Chilufya
Bands Chargeable % PAYE
Earnings (K) K

First 4,500 0 -

Second 300 25 75.00

Third 2,100 30 630.00

Fourth 57,600 37.5 21,600.00

Total 64,500 22,305.00

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 Income tax payable = K22,305.00
b). Banda
Bands Chargeable % PAYE
Earnings (K) K

First 4,500 0 0.00

Second 300 25 75.00

Third 2,100 30 630.00

Fourth 36,100 37.5 13,537.50

Total 43,000 14,242.50

Income tax payable = K14,242.5

8.8.5 National Pensions Scheme (NPS)
The National Pension Scheme Act Cap 256 of the Laws of Zambia, constitutes the National
Pension Scheme, and establishes the National Pensions Scheme Authority (NAPSA), to
manage the pension scheme fund.

8.8.5.1 Membership
Every person who is under pensionable age of fifty-five (55) years and not below sixteen years,
employed by a contributing employer, shall be registered as a member of the scheme. A
contributing employer and eligible person shall, within one month of coming into existence
and being employed, respectively, register with the Scheme.

8.8.5.2 Contributions
The employee’s contribution is equally matched by the employer and the total amount is paid
to the NAPSA. The contribution is deducted from the employee by the employer at the rate of
5% of ALL the earnings and the employer will also contribute 5%.
The current (January 2022 to December 2022) maximum contribution deductible from an
employee per month is K1,221.80, which is also the maximum an employer can counter-
contribute. Pension contributions are due and payable by the 10th of the following month.

8.8.5.3 Exemptions to the Scheme

Persons below the age of sixteen, above the pensionable age, and those employed by religious
organisation, are exempt from registering as members of the scheme. Where a religious
organisation has elected to register as a contributing employer, its employees shall register with
the scheme.

186
Example
Mwila and Kapito are in the employ of Messrs JS Legal Practitioners as Senior Associate and
Associate, respectively. Mwila and Kapito’s gross salaries are
K35,000 and K 20,000, respectively.
Calculate the the total pension contributions paid by the firm to the NAPSA.

Solution:
Mwila: K35,000 x 5%
= K1,750.00
Actual Contribution = K1,221.80 (maximum)

Kapito: K20,000 x 5%
Actual Contribution = K1,000

JS Legal Practitioners: = K(1,221.80 + 1,000)

Actual Contribution = K2,221.80

Total Pension Contributions payable by Employer:

JS Legal Practitioners (Employer contribution) K2,221.80

Mwila (employee) K1,221.80
Kapito (employee) K1,000.00
K4,443.60
Further workings:
Gross Employee Employer Total
salary (5%) (5%)

K K K K

Mwila 35,000 1,221.80 1,221.80 2,443.60

Kapito 20,000 1,000.00 1,000.00 2,000.00

TOTAL 4,443.60

8.8.6 National Health Insurance (NHI)

The National Health Insurance Act No. 2 of 2018 provides for funding of the national health
system, and establishes the National Health Insurance Authority (NHIMA), to manage the
scheme.

8.8.6.1 Membership
The financing model of the health sector is through monthly contributions by a citizen who is
above eighteen years of age and/or an established resident.

187
2.8.6.2 Contributions
Contributions to the scheme are made through: payroll system, when a person is in
employment; and also, self-contributions in the case of the person being self employed. The
Minister in consultation with the NHIMA prescribes the contribution rates, and currently
(January 2022 to December 2022) the rate is 1% of a person’s earnings. A person in
employment contributes 1% of the basic earnings, which is matched by a 1% contribution from
the employer. In the case of a self-employed person, the expected contribution is only 1%. The
law does not provide a limit as to how much an employee can contribute. Currently, the NHI
contributions must be paid by the 10th of the following month to the NHIMA.

2.8.6.3 Exemptions to the Scheme

The law exempts persons who are: mentally and physically disabled, and are unable to work;
above 65 years; classified as poor and vulnerable by the Ministry responsible for social welfare;
and any other person as may be prescribed by the Minister.

Example
Mulenga’s earns a salary composed of:
Basic pay K15,000
Housing allowance K4,500

Required:
Calculate
a) Mulenga’s NHI contribution
b). The total NHI contribution
Solution
a). Basic pay K15,000 x 1%

Mulenga’s NHI contribution = K150.00

b). Mulenga’s contribution K150.00

Employer’s contribution K150.00
Total NHI contribution K300.00

8.8.7 Workers’ Compensation Fund

The Workers Compensation Act Cap 271 makes provisions for the establishment of fund for
the compensation of workers disabled by accidents to, or diseases contracted by, such workers
in the course of their employment, and for payment of compensation to dependants of workers
who die as a result of accidents or diseases. The Act also establishes the Workers Compensation
Fund Board, which is mandated with the managing of, and paying out of the fund to the
qualifying beneficiaries of the fund.

188
8.8.7.1 Membership

The government and any person or anybody of persons, corporate or unincorporate, having a
contract of service or apprenticeship or learnership with a worker shall be regarded as the
employer of that worker, and obligated to register under the fund for payment of annual
assessments.

8.8.7.2 Assessments

Every employer liable to assessment shall submit to the Board, a statement in a prescribed form
certified by him as true showing: earnings of each employee during the past financial year; an
estimate of earnings for which he expects to be liable during the current financial year; and any
other information as may be prescribed, or as the Board may require, in respect of his workers
or their earnings.

Differentiated assessment tariff rates in accordance with sectors in which the employers operate
in are prescribed, and the assessed contributions are due and payable by the 15th of April each
year. Currently (January 2022 to December 2022), the prescribed rates and maximum
assessable employee earnings are according to the class the business operates in.

8.8.7.3 Exemptions to the Fund

Persons who are members of: the military forces; the police; and the public service as specified
by the Minister, are exempt from the definition of a worker. The employers of such persons do
not qualify to register with the Board.
8.8.8 Other relevant taxes and fees

8.8.8.1 Personal Levy

The Personal Levy Act Cap 329 provides for the imposition, assessment and collection of an
annual personal levy by a levy authority. Levy authorities are local authorities. The personal
levy is to be collected from persons of above eighteen years of age, living within the levy
authority’s area, and who receive, in a levy year, an income. Personal levy is paid once a year.

8.8.8.2 Local authorities fees

Local authorities pursuant to their respective bye-laws do impose business permits and licence
fees.

189
 Exercise: 18
Mutende, an associate in a law firm, Temwa and Partners, attained five years at the Bar in 2022. He is
offered partnership in the firm, with a new contract with the following remuneration per month:

i) Basic salary K 35,000

ii) Housing allowance 30% of basic pay
iii) Commission 20% of basic
iv) Fuel allowance K1,500
Calculate:
a) PAYE and Net Pay.
b) Employee NAPSA contribution
c) Total NAPSA contribution
d) NHI employee contribution
e) Total NHI contribution

Exercise: 19
HNS Attorneys having successfully represented Mr. Kabwata in a criminal matter, have rendered a fee note
valued at K212,000, inclusive of Withholding tax (WHT) at the rate of 15%, before VAT. In the same
month the firm spent K62,500 inclusive of VAT on standard rated supplies. The VAT rate is 16%.

Compute:
a) WHT due from HNS Attorneys?
b) Output VAT
c) Input VAT
d) VAT payable

Exercise: 20
i) Who is liable for Workers’ compensation assessment?
ii) Which class of employees are excluded from the definition of workers?
iii) Which authority is responsible for the management and collection of personal
levy?

8.8.9 Unit Summary

Having completed this Unit, you have learnt the different types of taxes subsisting in Zambia,
their respective rates (which may change) and due dates. You have also learnt the different
statutory obligations with applicable rates used in computing amounts due by the specified
dates, and acquired the skills to be able to compute the taxes, and statutory obligations.

8.8.10 Prescribed Readings

Statutes
The Income Tax Act Cap 323 of the Laws of Zambia.
The Value Added Tax Act Cap 331 of the Laws of Zambia..
The National Pensions Scheme Act Cap 256 of the Laws of Zambia.
The National Health Insurance Act No. 2 of 2018 of the Laws of Zambia.
The Workers Compensation Act Cap 271 of the Laws of Zambia.
The Personal Levy Act Cap 329 of the Laws of Zambia.

190
Module Conclusion

Having studied this module, you have learnt the principles of accounting, the types of business
documents, acquired practical knowledge of the accounting equation, be able to; calculate
capital, prepare ledger accounts, and balance them off. Further, having completed your study
of this module, you have also acquired the skills and knowledge to prepare a trial balance,
income statement and statement of financial position for a sole trader/legal practitioner and
partnership in trade/in legal practice, be able to compute the bills of costs, and calculate
different taxes and statutory obligations.

With this module, it is hoped that you would have acquired adequate knowledge and skills for
your Bar examination, and also apply it in practice, as a legal practitioner in private practice,
corporate, or in any other capacities.

191
Appendix 1
Answers to the exercise questions

Exercise: 1

1. Sales invoices
2. Purchases invoices
3. Goods received notes
4. Credit notes
5. Debit notes
* The above list is inexhaustive

Exercise: 2

1. To know the profitability

2. To know the networth
3. For tax purposes
4. Creditworthiness
* The above list is inexhaustive

Exercise 3:

1. Accruals

Transactions are recorded when entered into and not when settled.

2. Consistency

Similar accounting policies to be followed every year.

3. Money measurement

Only monetary transactions are recorded.

4. Business entity

Owner and Business are two separate entities.

5. Going concern
Business shall continue for a foreseeable future.

192
 Exercise: 4
Capital account Bank account
Dr Cr
Jan K Jan K Dr Cr
2020 2020 Jan K Jan K
31 Bal. c/d 10,000 01 Bank 10,000 2020 2020
10,000 10,000 01 Capital 10,000 06 Stationery 800
18 Mutinta 1,200 10. Wages 1,000
31 Bal. c/d 9,400
11,200 11,200
Cash account Sales account
Dr Cr Dr Cr
Jan K Jan K Jan K Jan K
2020 2020 2020 2020
03 Sales 3,500 04 Electricity 500 31 Bal. c/d 4,700 03 Cash 3,500
15 Postage 250 14 Mutinta 1,200
21 Fuel 750 4,700 4,700
31 Bal. c/d 2,000
3,500 3,500

Stationery account Electricity account

Dr Cr
Jan K Jan K Dr Cr
2020 2020 Jan K Jan K
03 Bank 800 31 Bal. c/d 800 2020 04 Cash 2020
800 800 500 31 Bal. c/d 500
500 500
Wages account Mutinta account
Dr Cr
Jan K Jan K Dr Cr
2020 2020 Jan K Jan K
10 Bank 1,000 31 Bal. c/d 1,000 2020 14 Sales1,200 2020
1,000 1,000 18 Bank 1,200
- -

193
 Postage account Fuel account
Dr Cr
Jan K Jan K Dr Cr
2020 2020 Jan K Jan K
15 Cash 250 31 Bal. c/d 250 2020 21 2020
250 250 Cash 750 31 Bal. c/d 750
750 750

Exercise: 5
a) Ledger accounts

Capital account Cash account

Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
03 Cash 800 03 Capital 800 10 Rent 180
31 Bal. c/d 3,800 03 Bank 3,000 15 Carriage 38
3,800 3,800 31 Bal. c/d 582
800 800

Bank account Purchases account

Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
03 Capital 3,000 15 Matongo 174 05 Wana 610
10 Sampa 340 15 Wana 610 05 Gondwe 214
12 Fube 1,000 25 Rent 230 05 Matongo 174
31 Bal. c/d 3,326 05 Simwinga 345
4,340 4,340 05 Tembo 542
18 Gondwe 291
18 Simwinga 940 31 Bal. c/d 3,116
3,116 3,116
Wana account Gondwe account
Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
15 Bank 610 05 Purchases 610 05 Purchases 214
31 Bal. c/d 505 18 Purchases 291
- - 505 505

194
 Matongo account Simwinga account
Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
15 Bank 174 05 Purchases 174 05 Purchases 345
- - 31 Bal. c/d 1,285 18 Purchases 940
1,285 1,285

Tembo account Sales account

Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
31 Bal. c/d 542 05 Purchases 542 07 Sampa 340
542 542 07 Banda 720
07 Fube 1,152
31 Bal. c/d 3,022 20 Banda 810
3,022 3,022
Sampa account Banda account
Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
07 Sales 340 10 Bank 340 07 Sales 720
- - 20 Sales 810 31 Bal. c/d 1,530
1,530 1,530
Fube account Rent account
Dr Cr Dr Cr
July K July K July K July K
2020 2020 2020 2020
07 Sales 1,152 12 Bank 1,000 10 Cash 180
31 Bal. c/d 152 25 Bank 230 31 Bal. c/d 410
1,152 1,152 410 410

Carriage account

Dr Cr
July K July K
2020 2020
15 Cash 38 31 Bal. c/d 38
38 38

195
 b)
Trial balance
Debit Credit
K’ K’
Capital 3,800
Cash 582
Bank 3,326
Purchases 3,116
Gondwe 505
Simwinga 1,285
Tembo 542
Sales 3,022
Banda 1,530
Fube 152
Rent 410
Carriage 38
9,154 9,154

Exercise: 6
Mwepu
Three-column cashbook (page 01)
Date Details F Disc Cash Bank Date Details F Disc Cash Bank
2019 K’ K’ K’ 2019 K’ K’ K’
Sept Sept

1 Bal. b/d 500 5,040 5 Rent GL2 600

2 Banda SL1 41 779 6 Puta PL1 9.20 450.8
2 Peni SL2 25 475 6 Gamala PL2 18 882
2 Hande SL3 22 418 6 Bulaya PL3 7 343
2 Michelo SL4 50 950 8 Drawings GL3 250
3 Sales GL1 1,250 12 Wages GL4 1,500
10 Sales GL1 2,100 16 Puta PL1 80 720
29 Michelo SL4 2,500 16 Bulaya PL3 50 700
30 Sales GL1 900 20 Furniture GL5 3,500
30 Stationery GL6 500
30 Bal. c/d 1,500 3,966.20
138 3,500 11,412 164.2 3,500 11,412
Oct
1 Bal. b/d 1,500 3,966.20

196
 Discount Allowed account Discount Received account
Date Details Folio Dr Cr Date Details Folio Dr Cr
Sept Sept
30 Total for the CB01 138 30 Total for the CB01 164.2
month month

Exercise: 7

Petty cash book (page 065)

Receip Foli Date Details Vouche Total Postage Station Motor Transp GL
ts o r ery Vehic ort
No. le
K’ Apri K’ K’ K’ K’ K’
l
2019
51.13 01 Balance b/d
1,948. CB 02 Cash
87 01
04 Stamps PV14 80.50 80.50
06 Chanda PV15 350.00 350.
00
10 Bus fare PV16 150.00 150.00
16 Envelopes PV17 70.00 70.00
20 Cash -
150 R00 Telephone
1 use
25 Petrol 300.0
0
30 Balance c/d 1,499.5
0
2,150 2,150.0 80.50 70.00 300.0 150.00 350.
0 0 00
May
1,499. 01 Balance b/d
50
500.50 CB 01 Reimburse
01 d cash

197
Exercise: 8

a)

Updated Cashbook
2020 Debit K 2020 Credit K
Dec Dec
1 Balance b/d 4,500 8 Bwalya 600
5 Lumba 350 8 Chanda 1,250
20 Bulaya 1,750 15 Tambo 850
31 Interest earned 75 21 Chilufya 200
25 Muna 1,000
31 Bank charge 150
31 Balance c/d 2,625
6,675 6.675

b).
Bank reconciliation statement as at 31 December 2020

K
Balance as per cashbook 2,625
Add: Unpresented payments 850
3,475
Less: Uncredited lodgments (1,750)
Balance as per bank statement 1,725

Exercise: 9

a).
Mulenga
Journal (Page 1)
Date Details Folio Dr Cr

2020
Jan.
01 Bank CB1 2,910
Cash CB2 160
Equipment GL2 5,900
Premises GL1 25,000
Accounts payable:
Kongwa PL1 890
Sinkala PL2 610

198
 Accounts receivable:
Chanda SL1 540
Loan: Chintala GL3 4,000
Capital GL4 29,010
34,510 34,510

b).
Bank Account Cash Account
Date Details Folio Dr Cr Date Details Folio Dr Cr

Jan. Jan.
Bal. b/d J1 2,910 01 Bal. b/d J1 160
01 24 Sales 8,560
05 Kongwa PL1 500 24 Bank CB1 8,000
12 Loan GL3 1,000 31 Bal. c/d 720
24 Cash CB2 8,000 8,720 8,720
31 Interest GL3 200
31 Bal. c/d 9,210
10,910 10,910

Premises Account Equipment Account

Date Details Folio Dr Cr Date Details Folio Dr Cr
Jan. Jan.01
01 Bal. b/d J1 5,900 Bal. b/d J1 25,000
31 Bal. c/d 5,900 31 Bal. c/d
5,900 5,900 25,000
25,000 25,000

Kongwa Account Sinkala Account

Date Details Folio Dr Cr Date Details Folio Dr Cr
Jan. Jan.
01 Bal. b/d J1 890 01 Bal. b/d J1 610
05 Bank CB1 500 02 Purchases 2,100
31 Bal. c/d 390 31 Bal. c/d 2,710
890 890 2,710 2,710

199
 Chanda Account Loan Account
Date Details Folio Dr Cr Date Details Folio Dr Cr
Jan.
Jan. 01 Bal. b/d J1 4,000
01 Bal. b/d J1 540 12 Bank CB1 1,000
24 Sales SL 2,220 31 Interest GL6 200
31 Returns GL5 400 31 Bank CB1 200
inwards
31 Bal. c/d 3,000
31 Bal. c/d 2,360
4,200 4,200
2,760 2,760

Capital Account Purchases Account

Date Details Folio Dr Cr Date Details Folio Dr Cr
Jan.
Jan 02 Sinkala PL2 2,100
Bal. b/d J1 29,010 31 Bal. c/d 2,100
01
2,100 2,100
31 Bal. c/d 29,010
29,010 29,010

Sales Account Returns inwards Account

Date Details Folio Dr Cr Date Details Folio Dr Cr
Jan. Jan.
24 Chanda SL1 2,220 31 Chanda SL1 400
31 Cash CB2 8,560 31 Bal. c/d 400
31 Bal. c/d 10,780 400 400
10,780 10,780

Interest Account
Date Details Folio Dr Cr
Jan.
31 Loan GL3 200
31 Bal. c/d 200
200 200

200
c).

Trial Balance as at 31 January 2020

Debit Credit
K’ K’
Bank 9,210
Cash 720
Equipment 5,900
Premises 25,000
Accounts payable: Kongwa 390
Sinkala 2,710
Accounts receivable: Chanda 2,360
Loan 3,000
Capital 29,010
Purchases 2,100
Sales 10,780
Returns inwards 400
Interest 200
45,890 45,890

Exercise: 10

Gross Profit Expenses Net Profit/(Loss)

K’ K’ K’
125,000 57,500 67,500
(25,250) 180,525 (155,275)
75,000 278,125 (203,125)
389,147 278,333 110,814

Exercise: 11

Mwale
Statement of Financial Position as at 31 December 2019
Cost Provision for Net Book Value
Depreciation K
K K
Non-Current Assets
Motor vehicle 16,000 - 16,000
Fixtures 16,200 - 16,200
32,200
Current Assets
Inventory 28,000
201
 Receivables 5,800
Bank 4,600
Cash 240
38,640
Less: Current Liabilities
Payables (28,000)
Working capital 10,640
42,840

Non-current liabilities
Loan 4,600

Financed by:
Capital 45,440
Less: Drawings (7,200)
38,240
42,840

Exercise: 12

Gondwe
Trading Profit or Loss Account for the period ended as at 31 December 2018

K K K
Sales 448,044

Less; Cost of goods sold

Opening inventory -
Add: Purchases 275,000
Less: Closing inventory (39,300)
Cost of goods sold (235,700)
Gross Profit 212,344

Less; Expenses
Equipment rental 9,400
Insurance 1,804
Electricity 1,990
Motor vehicle expenses 5,350
Salaries and wages 78,000
Sundry expenses 1,500
Total expenses (98,044)
Net Profit 114,300
202
Exercise: 13

a).
Banda
Trading Profit or Loss Account for the period ended as at 31 December 2020

K K K
Sales 405,600
Less: Returns inwards (1,540)
NET SALES 404,060

Less; Cost of goods sold

Opening inventory 65,000
Add: Purchases 208,700
Carriage-inwards 2,300
276,000
Less: Returns outwards (3,140)
272,860
Less: Closing inventory (44,780)
Cost of goods sold (228,080)
Gross Profit 175,980

Less: Expenses
Carriage outwards 4,150
Salaries and wages 70,000
Warehouse rent 15,700
Insurance 7,500
Motor expenses 25,300
Office expenses 6,750
Electricity 3,800
General expenses 2,450
Total expenses (135,650)
Net Profit 40,330

203
b).
Banda
Statement of Financial Position as at 31 December 2020
Cost Provision for Net Book Value
Depreciation K
K K
Non-Current Assets
Premises 105,000 - 105,000
Motor vehicles 75,000 - 75,000
Furniture & fitting 35,000 - 35,000
215,000
Current Assets
Inventory 44,780
Receivables 42,500
Cash at bank 17,500
104,780
Less: Current Liabilities
Payables (52,450)
Working capital 52,330
267,330

Non-current liabilities
Loan -

Financed by:
Capital 250,000
Net Profit 40,330
290,330
Less: Drawings (23,000)
267,330
267,330

204
Exercise: 14

a)
Jamu
Trading Profit or Loss Account for the period ended as at 31 December 2017

K K K
Sales 405,000

Less; Cost of goods sold

Opening inventory 18,000
Add: Purchases 293,500
Carriage-inwards 2,100
313,000
Less: Closing inventory (9,500)
Cost of goods sold (304,100)
Gross Profit 100,900

Less: Expenses
*Rent (6,500 – 2,500) 4,000
Insurance 550
Postage 200
*Advertising (7,500 + 2,500) 10,000
Salaries 15,600
Bad debts 400
*Allowance for doubtful debts 350
*Depreciation 12,000
Total expenses (43,100)
Net Profit 57,800

205
b)
Jamu
Statement of Financial Position as at 31 December 2017
Cost Provision for Net Book
Depreciation Value
K K K
Non-Current Assets
Equipment 75,000 27,000 48,000

Current Assets
Inventory 9,500
* Receivables (16,000 + 2,500 – 1,600) 16,900
Cash at bank 2,750
29,150
Less: Current
Liabilities
Payables (5,500 + 2,500) (8,000)
Working capital 21,150
69,150

Non-current liabilities -

Financed by:
Capital 42,350
Net Profit 57,800
100,150
Less: Drawings (31,000)
69,150
69,150

Note*

1. Rent prepayment
The rent prepayment of K2,500 under note 2 is deducted from the rent
expenses amount and the same is added to the Receivables amount.
2. Advertising accrual
The accrual amount of K2,500 on advertising is added to the advertising
expense and also added to the payables.
3. Allowance for doubtful debts
The increase in allowance for doubtful debts of K350 is an expense and is also
added to the Provision for doubtful debts.

206
4. Depreciation
The calculated depreciation amount is charged to the income statement as an expense and also
added to the previous depreciation amount.

Exercise: 15

a)
Aliyah and Bunda
Profit or loss Appropriation Account for the year ended 31 December 2020

K K K
Net profit 45,000
Add: Interest on Drawings:
Aliya (12,000 x 5%) 600
Bunda ( 15,000 x 5%) 750
1,350
46.350
Less: Salary (Bunda) 30,000
Interest on capital:
Aliyah (30,000 x 5%) 1,500
Bunda (10,000 x 5%) 500
2,000
(32,000)
Profit to be appropriated 14,350

Shared:
Aliyah (1/2) 7,175
Bunda (1/2) 7,175
14,350

207
b).
Current Accounts

Aliyah Bunda Aliyah Bunda

Date Details Date Details
2020 K K 2020 K K
Jan. Jan
01 Bal. b/d 500 01 Bal. b/d 1,280

Jan. Cash. Dec.

01 Drawings 12,000 15,000 31 Salary 30,000
Dec. Interest on Dec. Interest on
31 Drawings 600 750 31 capital 1,500 500
Dec. Share of
31 profit 7,175 7,175
Dec. Dec. 31
31 Bal. c/d 23,205 Bal. c/d 4,425
13,100 38,955 13,100 38,955
2021 2021
Jan. Jan. 01
01 4,425 23,205

208
c).

Aliyah and Bunda

Statement of Financial Position as at 31 December 2020
Cost Provision for Net Book
Depreciation Value
K K K
Non-Current Assets
Motor vehicles 120,000 - 120,000
Fittings 30,000 30,000
150,000

Current Assets
Receivables 11,000
Cash at bank 25,000
36,000

Less: Current Liabilities

Payables (32,000)
Working capital 4,000
154,000

Non-current liabilities
Bank loan 95,220

Financed by:
Capital Accounts:
Aliyah 30,000
Bunda 10,000
40,000
Current Accounts:
Aliyah (4,425)
Bunda 23,205
18,780
154,000

209
Exercise: 16

a).

Format1:
Sakala and Sanka
Profit or Loss, and Appropriation Account for the year ended
31.12.2019
K K K
Revenue:
Fees 1,125,000
Disbursements 393,500
1,518,500
Cost of sales:
Court fees 110,350
Indemnity insurance 5,550
Postage 2,505
Salaries (760,000 x 65%) 494,000
Cost of sales (612,405)
Gross Income 906,095

Less: Expenses
Rent (65,000 – 5000) 60,000
Salaries (760,000 x 35%) 266,000
Bad debts 40,000
Electricity (11,000 + 1,000) 12,000
Allowance for doubtful debts 12,475
Depreciation 12,000
Total expenses (402,475)
NET PROFIT 503,620

Appropriation Account
K K
Net profit 503,620
Less: Partners salaries - Sakala (120,000)
Profit to be appropriated 383,620
Profit appropriation/sharing:
Sakala ½ x 383,620 (191,810)
Sanka ½ x 383,620 (191,810)
-

210
Format: 2
Revenue can be shown as one single amount of K1,518,500, rather than segregating it. The rest
of the figures remain the same.

b) Statement of Financial Position and Current Accounts

i) Current Accounts
Dr. Cr.
Sakala Sanka Sakala Sanka
K K K K
Drawings 150,000 235,000 Salaries 120,000 -
Profit sharing 191,810 191,810
Bal. c/d 161,810 - Bal. c/d - 43,190
311,810 235,000 311,810 235,000

ii) Statement of Financial Position

Format: 1
Sakala and Sanka
Statement of Financial Position as at 31.12.2019
Cost Accumulated Net Book Value
Depreciation K
K K
Non-Current Assets
Equipment 75,000 27,000 48,000

Current Assets
Receivables 412,000
Allowance for doubtful debts (20,600)
Rent prepaid 5,000
396,000
Bank: Operations 50,220
Clients 75,000
125,220
Total current assets 521,620

Less: Current Liabilities

Payables: Clients 75,000
: Others 200,000
Accruals - electricity 1,000
Total current liabilities (276,000)
Working capital 245,620
Total Net Assets 293,620

211
 Non-Current Liabilities -

Financed by:
Sakala: Capital 100,000
Current account 161,810
261,810
Sanka: Capital 75,000
Current account (43,190)
31,810
Equity and Liabilities 293,620

Format: 2
The bank and payables amounts can be combined into one, however you will need to segregate
them when preparing a Clients Account Reconciliation Statement.
c). Clients’ Accounts Reconciliation Statement as at 31.12.2019
K
Payable balances:
Melu 30,000
Muna 45,000
Total 75,000

Bank balance 75,000

Total 75,000

212
Exercise: 17

a) Bill of costs

BILL OF COSTS PURSUANT TO STATUTORY INSTRUMENT No. 6 of 2017

___________________________________________________________________________
To our professional charges for costs incurred and incidental to acting in the within action
pursuant to the rates provided under Statutory Instrument No. 6 of 2017 for an Advocate of 7
years.
Counsel in conduct of the matter:
Nkandu Nsingu
Taxed Taxed Serial Date Details Part of Disburseme Charges
off No. Schedul nts (K)
e (K)
1. 6.1.19 To taking III 740.10
instructions for 2.02
retention of legal
services at K740.1
x 1 hour
2. To preparing and III 740.10
sending of 4.09
engagement letter
to client at K740.10
x1
3. 7.1.19 To attending on III 2,220.30
client during 2.01
meeting at K740.1
x 3 hours
4. 8.1.19 To preparing of II 5,551.50
summons and 1.02
statement of claim
at K1,110.3 x 5
hours
5. 10.1.19 To attending on III 1,480.00
client during 2.01
meeting at K740.1
x 2 hours
Subtotal 10,732.00
6. 15.1.19 To researching into III 2,960.40
the law on the case 4.09
at K740.1 x 4 hours

213
 7. 16.1.19 To researching into III 2,220.30
the law on the case 4.09
at K740.1 x 3 hours
8. 17.1.19 To researching into III 2,220.30
the law on the case 4.09
at K740.1 x 3 hours
9. 20.1.19 To attending on III 2,220.30
client during 2.01
meeting at K740.1
x 3 hours
10. 25.1.19 To attending and II 4,441.20
conducting case in 4.05
court at K1,110.30
x 4 hours
11. 26.1.19 To attending and II 5,551.50
conducting case in 4.05
court at K1,110.30
x 5 hours
Subtotal 19,614.00
12. 28.1.19 Reimbursable 13,200.00
disbursement
b). Summary

Page No. Disbursements (K) Charges (K)

1 - -
2 - 10,732.00
3 13,200.00 19,614.00
TOTAL 13,200.00 30,346.00

Total plus disbursements K(13,200+30,346) : K43,546.00

Add: 16% VAT : K 6,967.36
Grand Total payable : K50,513.36

Exercise: 18

a) PAYE
Workings
K
Basic salary 34,000
Housing allowance 10,500
Commission 7,000
Fuel allowance 1,500
Gross salary 54,000
214
Solution
Band (K) Rate (%) PAYE (K)
1st 4,500 0 0.00
2nd 300 25 75.00
3rd 2,100 30 630.00
Above K6,900 47,100 37.5 17,662.50
TOTAL 54,000 18,367.50

Gross Pay K54,000.00

PAYE (K18,367.50)
NET PAY K35,632.50
b). NAPSA employee contribution
K54,000 x 5% = K2,700.00
Maximum employee contribution per month
= K1,221.80
c). Total NAPSA contributions

Employee = K1,221.80

Employer = K1,221.80

Total Contribution = K2,443.60

d). National Health Insurance (NHI) employee contribution

Basic pay K35,000 x 1%

NHI employee contribution = K350.00
e). Total NHI contribution
Employee = K350.00

Employer = K350.00

Total Contribution = K700.00

Exercise: 19

a). Withholding Tax (WHT)

Fees inclusive of WHT = K212,000
Fees exclusive of WHT are:
= K212,000 x 100/116
= K184,347.83
WHT payable is:
= K(212,000 –184,347.83)
215
 WHT liability = K27,652.17
b). Output Value Added Tax
Fees exclusive of VAT = K212,000
VAT rate x 16%
Output VAT = K33,920
c). Input VAT
Supplies inclusive of VAT = K62,500
Supplies exclusive of VAT will be:
= K62,500 x (100/116)
Supplies exclusive of VAT = K53,879.31
Input VAT is:
= K(62,500 – 53,879.31)
Input VAT = K11,120.31
d). VAT payable/claimable

= Output VAT – Input VAT

= K33,920.00 - K11,120.31
VAT payable = K22,799.31

Exercise: 20

i). Employers
ii). Military forces; police; and public service specified by the Minister.
iii). Local authorities.

216