CERTIFICATE 4 IN ACCOUNTING

Unit Code: CIA030408

Unit Name: Prepare Financial Reports

LEARNING RESOURCE

Learning Hours: 24

Course Coordinator

Mr. Aaron Hihina

Head, School of Accounting, IBS College of TVET

* Approved by the National Training Council

 Published By : IBS College of TVET
Lot 10, Section 57,
Magila Street, 6 Mile,
Saraga Campus,
Port Moresby, National Capital District,
Papua New Guinea

Telephone : +675 3254053 / 3254078

Fax: : +675 328 1513
e-mail : corporate@ibs.ac.pg
Web-site : www.ibs.ac.pg

Year of Publication : January 2019

Issue No / Revision No. : 01 / 00

Author : Mr. Kevin Rivera

Contact No. : +675 325 4053
e-mail id: : nil

Name of the School : School of Accounting

Head of the School : Dr. Thirumal Raman
Department : Accounting
Contact No. : +675 325 4053
e-mail id: : Thirumal.Raman@ibs.ac.pg

© IBS College of TVET

The material in this publication has been written by the author of IBS College of TVET or compiled from
other sources in compliance with the Copyright and Neighboring Rights Act 2000. Apart from any fair
dealing for the purposes of research or private study as permitted by international and / or Papua New
Guinea copyright law. This publication may not be reproduced, stored or transmitted, in any form or by
any means, without the prior permission of the publisher.

Printed at IBSU Printers, Boroko, NCD, Papua New Guinea

1|Page
 CONTENTS

S.No. Particulars Page No.

1. Introduction to the Unit Guide 03
2. About the Unit Trainer 03
3. Unit Aim, Rationale and Description 03
4. Job Prospects 03
5. Advanced Standing Eligibility 03
6. Unit Contents and Schedule of Activities 03
7. Teaching / Training Methods 04
8. Learning Resources 06
9. Assessment Marking Criteria 06
10. Evidence Guide 08
11. Academic Misconduct 08
12. Grade of Achievement 11
13. Final Examination 12
14. Study Material - Introduction 13
14.1 Topic One 14
14.2 Topic Two 28
14.3 Topic Three 48
14.4 Topic Four 56
14.5 Comprehensive Illustration 66
14.6 Additional Note 1 83
14.7 Additional Note 2 90
14.8 Other References 96
14.9 Cover Pages 97-98

2|Page
1. Introduction to the Unit Guide

This material provides information to assess the unit CIA160408 - Prepare financial reports. This unit
forms part of an accredited training course. Accreditation means that it must meet the required
standards and this includes ensuring all units of competency are assessed fairly, flexibly and provide
sufficient, authentic evidence to make a judgement and decision on competence.

The training and assessment activities for this unit and the other units included in the qualification are
designed to reflect workplace requirements and to equip a student to be an effective worker.

After successful completion of course, educational outcomes and pathways may include an entry into
further training and/or higher education.

2. About the Unit Trainer

All lecturers of the IBS College of TVET are certified National Training Council trainers.

3. Unit Aim, Rationale and Description

This resource covers the unit CIA160408 - Prepare financial reports.

This unit describes skills and knowledge required to record general journal adjustment entries and to
prepare end of period financial reports.

It applies to individuals employed in a range of work environments who are responsible for preparing
financial reports. They may be individuals providing administrative support within an enterprise, or
they might have responsibility for these tasks in relation to their own workgroup or role.

No licensing, legislative or certification requirements apply to this unit at the time of publication.

4. Job Prospects

Accounting and Financial Administration

5. Advanced Standing Eligibility

The CIA030408 - Prepare financial reports is an advance standing unit for Certificate 4 in Accounting.

6. Unit Contents and Schedule of Activities

Week Elements of Assessment

Performance Criteria
No. Competency Due Dates
1 1. Maintain asset 1.1 Prepare a register of property, plant and
register equipment from fixed asset transactions in
accordance with legislative and organisational
policy and procedures Assessment
1.2 Determine method of calculating depreciation – 1 (20%)
in accordance with organisational requirements
1.3 Maintain asset register and associated
depreciation schedule in accordance with
organisational policy, procedures and accounting
2 2. Record general 2.1 Record depreciation of non-current assets and Assessment
journal entries disposal of fixed assets in accordance with – 2 (20%)

3|Page
 for balance day organisational policy, procedures and accounting
adjustments requirements
2.2 Adjust expense accounts and revenue accounts
for prepayments and accruals
2.3 Record bad and doubtful debts in accordance
with organisational policy, procedures and accounting
requirements
2.4 Adjust ledger accounts for inventories, if required,
and transfer to final accounts
3 3. Prepare final 3.1 Make general journal entries for balance day
general ledger adjustments in general ledger system in
accounts accordance with organisational policy, procedures
and accounting requirements Quiz-1 (15%)
3.2 Post revenue and expense account balances to
final general ledger accounts system
3.3 Prepare final general ledger accounts to reflect
gross and net profits for reporting period
4 4. Prepare end of 4.1 Prepare revenue statement in accordance with
period financial organisational requirements to reflect operating
reports profit for reporting period
4.2 Prepare balance sheet to reflect financial position Quiz-2 (15%)
of business at end of reporting period
4.3 Identify and correct, or refer errors for resolution
in accordance with organisational policy and
procedures
Practical
5-6 Final and Continuous Assessment Assessment
– 3 (10%)

7. Teaching / Training Methods

A number of delivery methods will be used in delivering this unit. The learner is required to take full
responsibility for his or her own learning. These methods include:

7.1 Modified Lectures: This approach is a mixture of lecture and discussion. Learning activities are
designed to engage learners to participate in the lecture. The trainer creates and encourages group
participation through questioning techniques. Opportunities will be given to learners to share
experiences to generate some form of discussion. Thus acknowledging and recognizing learner’s prior
knowledge and experiences.

7.2 Group Discussions: Group discussion is one method that learner will be actively involved in. This
activity can be approached in many different ways. However, the more frequently used ones are the
‘structured’ and the ‘open-forum’ discussion.

The ‘structured’ approach learners will be participating in very carefully designed discussion activity
that is meant to achieve certain objectives.

4|Page
The ‘open-forum’ discussion, on the other hand is unstructured and is basically ‘free-for-all’, with the
facilitator / trainer acting as the referee or go-between. It is mainly used to have learners’ voice
opinions.

7.3 One-on-one Coaching: Coaching is a process of providing one-on-one guidance and instruction to
improve the work performance of the person being coached in a specific area.

7.4 Mentoring: Mentoring is more concerned with improving the employee’s fitness within the
organization than improving technical aspects of performance, thus differentiating it from coaching.

7.5 Moodle Learning Platform: The classes will be handled with the aid of power point presentation
and the same will be uploaded in the Moodle site on the day of delivery for reference by students. The
students are expected to upload their assignments through Moodle within the stipulated time period.
The late submission will not be entertained unless there should be a reasonable ground and approval
from the concerned unit trainer. Such late submission will lead to fix penalty by reduction of
assignment marks. The TURNITIN software will help to identify the percentage of plagiarism before
uploading the documents. If it shows more than 30% of plagiarism on the uploaded assignments, then
that will be decided by the concerned unit trainer. Under such circumstances, the decision of the
quality assurance cell is the final. Hence, original contribution will enhance the quality of learning
and avoid unnecessary delay.

7.6 Industrial Visits: It also requires students to participate in industry visit and attending online
conferences/sessions wherever applicable.

7.7 Learning activities:

Activities could include, but not limited to, one or more of the following. The focus of all activities are
based on Student Centred Learning.
i) Formal training workshops (e.g., modified lectures and discussions)
ii) On-the-job training (workplace learning projects coupled with mentoring and coaching)
iii) Life experiences (reflections and enhancing work practice using improved work tools)
iv) Work experiences (enhancing current practice using improved work tools – continuous
improvements)
v) Group / individual projects (personal innovative ideas and creativity)
vi) analysis (reflective analysis of current work practices and improvement plan)
vii) Role Plays
viii) Case Studies

The trainer serves as a resource person to facilitate learning. Personal attention will be addressed
through work site visits where coaching and mentoring approaches will be used.

7.8 Class Attendance and General Studies: For the successful completion of this unit, the student is
required to undertake exercise and general studies in addition to the class room learning. In addition
to that the students are expected to attend all training sessions. 75% attendance is expected from the
students’ side for all training hours. Attendance records will be taken at all each sessions.

5|Page
 Total Study Hours for the Unit

Nature of the work Hours for the

Semester
Class Room training (4 hours per week for 6 weeks) 24 Hours
Independent Study (6 hours per week for 6 weeks) 36 Hours
Total 60 Hours

8. Learning Resources:

The requested text book(s) will be issued to students on the induction day or the first day of the
teaching period. Students’ Services and Logistics will assist the schools in distributing the above.
8.1 Prescribed Text :
Wilson, Freeman & Freeman. Accounting: A Practical Approach, 3rd Edition, Pearson Education
Australia. ISBN 9781442528000

Clarke, Edward A, 2007, Accounting: An Introduction to Principles and Practice, + Workbook,

Cengage Learning, Australia.

8.2 Reference Book:

Bandara, Panditha, 2014. Introductory Accounting for Papua New Guinea 5th edition, Published
Kottawa, Sri Lanka. ISBN: 9789555844734.

Duncan, Andrew, 2008, Introductory Accounting, National Core Accounting Publications, ISBN: 1 876
602 384.

Marley and Pedersen, 2005, Accounting for Business (Revised): An Introduction, Pearson Education,
Australia. ISBN: 0 9780733977428

Mills et al., 1996, Foundations of accounting, UNSW Press, Sydney, ISBN: 0 908237928.

Willis, D, 2005, Introductory Accounting, McGraw-Hill, Sydney, ISBN: 0 9780074719718.

Woodford, Wilson, Freeman and Freeman, 2007, Accounting - A practical approach, Pearson
Education, Australia. ISBN: 0 9780409323573

*See other references at the last part of this material.

8.3 Library Services and On-line Data Bases:

The necessary learning resources are stacked in the library, which can be used as per the library policy.
For additional learning, assignment and research purposes, you are permitted to browse and KOHA
host on-line data base can be used as per IT Services Policy.

8.4 Computer Lab Facilities:

Dedicated computer labs are provided to the students to upload their assignments as per the allotted
time slot by the unit lecturer. In addition to the lab facilities, the students can also access through
digital library for their academic purpose. As the entire campus is fully served with wi-fi facility, there
will not be any difficulty in submission of assignments and browsing academic contents by using their
own lap-tops.

6|Page
9. Assessment Marking Criteria

Competency based assessment is the process of collecting evidence and making judgments on
whether competence has been achieved. This confirms that an individual can perform to the standard
expected in the workplace as expressed in the nationally endorsed competency standards where they
exist or on competency standards developed by relevant industry, enterprise, community or
professional groups (or outcomes of accredited courses if there are no relevant nationally endorsed
competency standards).

It is important to remember that assessment of a participant’s achievements is measured against

defined outcomes. It is not about comparing their performance to another person’s. Assessment is a
process not an event so it can occur formally and informally over a period of time.

Unit lecturers / trainers are responsible for the setting of unit assessment / assignment shall produce
a marking guide with clearly written suggested solutions to enable easy and prompt marking of the
tests / assignment papers. Test/Assignment feedback shall be promptly given to the students within 5
working days from the date of test or from the due date of assignment. In cases of any delays in
obtaining the assessment feedback on time, the students shall report the same to the Head of School
responsible for the unit.

9.1 Assessment Task Details

Assessment Evaluation Components Total
Components Marks
Assessment – 1 10 questions x 1 mark. Multiple Choice/Numerical/True or False
20 Marks
Short Answers 5 questions x 2 mark. Short note problem
Assessment – 2
5 numeric problems x 4 marks 20 Marks
Numeric Problem
Assessment – 3
5 numeric problems x 4 marks 20 Marks
Numeric Problem
Quiz 1 15 questions x 1 mark. Multiple Choice/Numerical/True or False 15 Marks
Quiz 2 15 questions x 1 mark. Multiple Choice/Numerical/True or False 15 Marks
Attendance 6 weeks = 12 sessions 10 Marks
Total 100 Marks

Important Notes:

a) Students who might fail to perform well in a given internal assessment for different reasons
will be supported through an ongoing remedial action taking into account individual cases as
much as possible.
b) An assessment(s) might be dropped when the instructor believes there is a reason to take
another assessment.
c) The students will be advised of the assessment due dates during the study period.
d) You are not permitted to bring the following into the exam room: electronic devices like
mobile phones, electronic dictionaries and computers. For more details visit Moodle site.

7|Page
9.2 Assessment Methods

This is a graded unit and grades shall be awarded as detailed in Assessment Guidelines. In order to
achieve a passing grade in the overall competency level of 50% or more must be obtained.
Assessment Individual / Group Grading Indicator Minimum Score Weight Length / Duration Due Date

Assessment-1 Individual Graded 20% 2nd week

Assessment–2 Individual Graded 20% 4th week

Assessment–3 Group Graded 20% 6th week

Overall 50%
Quiz – 1 Individual Graded 15% 3rd week

Quiz – 2 Individual Graded 15% 5th week

Attendance 10%

10. Evidence Guide:

This describes the essential knowledge and skills and their level required for this unit.

A) Knowledge Evidence

On completion of the unit, the individual must:

• Explain double-entry bookkeeping principles

• Identify general journal and general ledger entries
• List the key provisions of relevant legislation, regulations, standards and codes of practice that
may preparation of financial reports
• Describe organisational accounting systems
• Outline relevant organisational policies, procedures and accounting standards.

B) Performance Evidence:

Evidence of ability to:

• Produce a detailed asset register and depreciation schedule

• Accurately record entries for balance day adjustments
• Prepare financial reports
• Trace and reconcile errors systematically or seek expert advice if required
• Apply double-entry principles
• Complete all tasks according to organisational policies and industry standards.

8|Page
11. Range of Conditions

This section specifies different work environments and conditions that may affect
performance. Essential operating conditions that may be present (depending on the work
situation, needs of the candidate, accessibility of the item, and local industry and regional
contexts) are included.

Revenue statement comprises:

• cost of goods sold if applicable
• gross profit
• operating net profit
• unclassified adjusted expenses and
revenue

Balance sheet comprises:

• narrative or T format
• unclassified assets and liabilities

12. Academic Misconduct

Students must conduct their studies at the IBS College of TVET honestly, ethically and in
accordance with accepted standards of academic conduct. Any form of academic conduct that
is contrary to these standards is academic misconduct and is unacceptable. Some students
engage deliberately in academic misconduct, with intent to deceive. This conscious,
premeditated form of cheating is one of the worst forms of fraudulent academic behavior, for
which the IBS College of TVET has zero tolerance and for which penalties, including exclusion
from the IBSU, will be applied. However the IBS College of TVET recognizes many students
commit academic misconduct without intent to deceive. These students may be required to
undertake additional educational activities to remediate their behavior. Specifically it is
academic misconduct for a student to:

12.1 Plagiarism
Plagiarise by representing the work of another as their own original work, without appropriate
acknowledgement of the author or the source. This category of cheating includes the following:
• collusion, where a piece of work prepared by a group is represented as if it were the
student's own;
• acquiring or commissioning a piece of work, which is not his/her own and representing
it as if it were, by
o purchasing a paper from a commercial service, including internet sites, whether
pre-written or specially prepared for the student concerned
o submitting a paper written by another person, either by a fellow student or a
person who is not a member of the IBSU;
• duplication of the same or almost identical work for more than one assessment item;
• copying ideas, concepts, research data, images, sounds or text;
• paraphrasing a paper from a source text, whether in manuscript, printed or electronic
form, without appropriate acknowledgement;
• cutting or pasting statements from multiple sources or piecing together work of others
and representing them as original work;
• submitting, as one own work, all or part of another student's work, even with the
student's knowledge or consent.

9|Page
A student who willingly assists another student to plagiaries (for example by willingly giving them their
own work to copy from) is also breaching academic integrity, and may be subject to disciplinary action.
12.1.1 Penalties:
For an act of plagiarism, any one or more of the following penalties may be imposed:
b. a mark of zero for the item of assessment in which the plagiarism occurred;
c. failure or cancellation or refusal of credit for the unit in which the plagiarism occurred;
d. suspension from the University for a specified period;
e. expulsion from the University.

12.2 Cheat in examinations and tests by communicating, or attempting to communicate, with a fellow
individual who is neither an invigilator or member of staff; by copying, or attempting to copy from a
fellow student; attempting to introduce or consult during the examination, any unauthorized (not
explicitly allowed by the course instructor) printed or written material, or electronic calculating or
information storage device; and/or other communication device, or impersonates another.

12.3 Fabricate results by claiming to have carried out tests, experiments or observations that have not
taken place or by presenting results not supported by the evidence with the object of obtaining an
unfair advantage.

12.4 Misrepresent themselves by presenting an untrue statement or not disclosing where there is a
duty to disclose in order to create a false appearance or identity.

13. Grade of Achievement

(i) Subject to the IBS College of TVET By-Laws a candidate shall be recorded as having attained in each
unit for which he/she has enrolled a level of achievement, which shall be graded as follows:
• HD - High Distinction. This grade will be awarded to students with an exceptional
understanding of all aspects of the course, with competence in application, a high
ability to present material and arguments logically, and a high degree of theoretical
and practical understanding.
• D - Distinction. This grade will be awarded to a student with strong ability to apply
concepts to realistic situations, as for the HD-grade but lacking exceptional
performance in each area.
• C - Credit. This grade will be awarded to a student with a better than average ability
to apply fundamentals, with a satisfactory degree of theoretical and practical
understanding and is able to integrate information into a logical argument.
• P - Pass. This grade will be awarded to a student with a satisfactory understanding
and is able to complete basic tasks and apply material to problem solving in many
situations.
• F – Fail. This grade will be awarded to a student who has failed to grasp the basic and
most important concepts after attending all academic activities.
• ABF – Absent Fail – Non-fulfillment of any assessments
• IC – Incomplete – Non-fulfillment of partial assessments will be termed as confirmed
grade in due course.
• DF - Deferred grade. This category may be entered when the assessment is not yet
complete. Students those who have acquired this grade need to complete the unit
requirement as per IBSU assessment policy.
• WF- Withdrawal Fail Withdrawn after census due date
All non-credit units are entered as S for satisfactory or NS for unsatisfactory.

10 | P a g e
(ii) The letter grade, grade points, status of description and class description shall be computed from
the range of marks as given below:
Equivalence Grade
Range of Marks Class Abbreviation Class Description
Points
80 – 100 HD 5 High Distinction
70 – 79.99 D 4 Distinction
60 – 69.99 C 3 Credit
50 – 59.99 P 2 Pass
<50 F 0 Fail
ABF 0 Absent Fail
WF 0 Withdrawn Fail
DF 0 Deferred Fail
IC 0 Incomplete

(iii) On graduation a Grade Point Average (GPA) will be entered on the candidate’s
transcript. The grade point average will be computed as the average of all units taken
by him or her.

14. Final Examination

a) The scheduled examination shall be administered at the end of each study period if applicable.
b) Timetables shall be prepared and placed on the notice board one week prior to the proper
scheduled examination.
c) It is a requirement that scheduled examination question papers shall be collected back from
the students by the exam invigilators after the examination along with answer scripts.
d) A pass mark shall be the only grade awarded to students who pass their re-sit examination.
e) Special examination under compassionate circumstances will be treated on par with regular
grade.
f) On completion of Board of Assessor’s Approval, the results will be uploaded in the Student
Management System Result Platform.

14.1 Query on Final Assessment Grade

a) A student may query the grade awarded for any unit. A query of an assessment grade shall be
made in writing to the Head of the School responsible for the unit within 5 working days of the
date of formal notification of the grade to the student. If, as a result of such query it is deemed
appropriate to vary the grade, the Head of the School responsible for the unit may make such
variation in accordance with policy.
b) The Head of the School responsible for the unit shall formally notify the student in writing of
the outcome of the query of an assessment grade.

14.2 Appeal against a Final Assessment Grade

(a) A student who is not satisfied with the decision of the final assessment grade, may appeal to the
Principal, IBS College of TVET on one or more of the following grounds:
i. improper action in the conduct of an assessment task;
ii. irregularity in the conduct of an assessment task;
iii. negligence on the part of any person involved in the conduct of the assessment task;
iv. unlawful discrimination against the student;

11 | P a g e
 v. prejudice or bias on the part of the assessor or any other person involved in determining the
grade to be awarded;
vi. the assessment process as detailed in the unit statement, and any subsequent amendment
made in accordance with rule not being followed;
vii. where additional evidence for special consideration can be provided, or where procedures for
consideration of an application for special consideration were not properly followed.

(b) An appeal can be lodged with the Principal, IBS College of TVET within five working days of the date
of formal notification of assessment grade.

12 | P a g e
 INTRODUCTION
Welcome to the unit CIA160408 - Prepare financial reports.

This unit describes skills and knowledge required to record general journal adjustment
entries and to prepare end of period financial reports.

It applies to individuals employed in a range of work environments who are responsible for
preparing financial reports. They may be individuals providing administrative support within
an enterprise, or they might have responsibility for these tasks in relation to their own
workgroup or role.

In this unit you will learn how to:

• Maintain asset register

• Record general journal entries for balance day adjustments
• Prepare final general ledger accounts
• Prepare end of period financial reports

At the conclusion of this training you will be asked to complete an assessment pack for this
unit of competency. The information in this resource will help you complete this task.

It is expected that you will be able to produce professional documents for the work place.

Assessment must be conducted in a safe environment where evidence gathered

demonstrates consistent performance of typical activities experienced in the financial
administration field of work and include access to:

• Office equipment and resources

• Computer equipment and relevant software
• Relevant standards
• Samples of financial data
• Workplace reference materials such procedural manuals and company policy
• Case studies and, where possible, real situations.

Assessors must satisfy PNGQF-NTC assessor requirements.

Let’s begin!

13 | P a g e
 TOPIC 1 – MAINTAIN ASSET REGISTER
Prepare a register of property, plant and equipment from fixed asset transactions in
accordance with legislative and organisational policy and procedures

The asset register is an accounting method used to record details about the fixed assets of a
company and is a key part of an asset management of all companies, regardless of size and
types of their assets. In other words, it is simply a list of fixed assets owned and controlled
by the firm. The main purposes of the fixed asset register are:

• Asset planning (for instance, it helps to determine current condition of assets and
necessity of its replacing)
• Support in accounting, taxation and insurance (for example, in selecting useful life
of the asset for computation of depreciation and in case of a natural disaster, a
good fixed asset register can help expedite the filing of an insurance claim)
• Ensuring control and preventing misappropriation of assets

In addition, fixed asset register is used by management as a source of information for

different types of reports.

According to the IFRS (International Financial Reporting Standards) definition, an asset is a

resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity. IFRSs defines a number of assets with different
characteristics (nature):

• Inventory
• Property
• Plant and equipment
• Intangibles
• Investment property
• Financial assets

Property, plant and equipment (PPE) represent a major portion of the asset base of a
company and is therefore significant in the presentation of its financial position. For an item
to be classified as PPE, it must first meet the definition of an asset and then meet the
recognition criteria for classification as PPE:

14 | P a g e
 • It is probable that any future economic benefit associated with the item will flow
to the entity
• The item has a cost or value that can be measured with reliability

Property, plant and equipment are tangible items that: (a) are held for use in the production
or supply of goods or services, for rental to others, or for administrative purposes, and (b)
are expected to be used during more than one reporting period.

A fixed asset register must be kept in order to be in compliance with organisational policy
and procedures of the company. As usual, asset register appears as a computerised list, and
detailed elaboration of asset register varies from company to company. It may contain the
following information about each asset:

• Asset information - an asset identification number, asset description, asset

supplier, model, manufacturer, invoice number
• Accounting information - asset type, asset category and tax code, the date the
asset was acquired, acquisition cost, valuation basis, date of last valuation,
depreciation method, accumulated depreciation, net book value, and estimated
useful life
• Manageability – location of asset, license number, license expiry date, last turn
date, next turn date, name of manager
• Performance of asset – use, maintenance criteria, current condition, warranty
conditions, life-cycle costs

15 | P a g e
The information recorded in the asset register could include data illustrated in Figure
1 below.

Figure 1. Sample of fixed asset register

Other samples of asset register:

Asset Register Card

Item Transit Van General ledger account Motor Vehicle at Cost

Supplier Summerville Motors Depreciation method Diminishing Value Method
Reg No DV001 Depreciation rate% pa 40%
Est. life 5 year Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
7/1/2009 Summerville Motors 15000.00 15000.00 15000.00
6/30/2010 Depreciation 6000.00 6000.00 9000.00
6/30/2011 Depreciation 3600.00 9600.00 5400.00
6/1/2012 Depreciation 1980.00 11580.00 3420.00
Disposal of Asset 11580.00 0.00 15000.00
Disposal of Asset 15000.00 0.00 0.00

Record of Repairs and Maintenance

Date Supplier Nature of Repairs Amount
10/10/2009 Summerville Motors Service 380.00
4/15/2010 Summerville Tyres New tyres 400.00
4/15/2010 Summerville Motors Service 490.00

16 | P a g e
 Asset Register Card

Item Vehicle General ledger account Motor Vehicle at Cost

Supplier Summerville Motors Depreciation method Diminishing Value Method
Reg No DV001 Depreciation rate% pa 40%
Est. life 5 year Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
7/1/2009 Summerville Motors 20000.00 20000.00 20000.00
6/30/2010 Depreciation 8000.00 8000.00 12000.00
6/30/2011 Depreciation 4800.00 12800.00 7200.00
6/30/2012 Depreciation 2880.00 15680.00 4320.00

Record of Repairs and Maintenance

Date Supplier Nature of Repairs Amount
3/7/2008 Summerville Motors Service 390.00
4/30/2009 Summerville Tyres New tyres 560.00
4/15/2010 Summerville Motors Service 320.00

Asset Register Card

Item Transit Van General ledger account Motor Vehicle at Cost

Supplier Summerville Motors Depreciation method Diminishing Value Method
Reg No SV 496 Depreciation rate% pa 40%
Est. life 5 years Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
6/1/2012 Summerville Motors 50500.00 50500.00 50500.00
6/10/2012 Car Art 2000.00 52500.00 52500.00
6/30/2012 Depreciation 1727.00 1727.00 50773.00

Record of Repairs and Maintenance

Date Supplier Nature of Repairs Amount

17 | P a g e
 Asset Register Card

Item Coffee machine General ledger account Kitchen equipment at cost

Supplier Bacco Coffee Supplies Depreciation method Straight line
Reg No CM001 Depreciation rate% pa 15%
Est. life 8 years Other Details
Location Coastal Catering Gourmet Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
7/1/2006 Bacco Coffee Supplies 4400.00 4400.00 4400.00
6/30/2007 Depreciation 660.00 660.00 3740.00
6/30/2008 Depreciation 660.00 1320.00 3080.00
6/30/2009 Depreciation 660.00 1980.00 2420.00
6/30/2010 Depreciation 660.00 2640.00 1760.00
6/30/2011 Depreciation 660.00 3300.00 1100.00
5/1/2012 Depreciation 550.00 3850.00 550.00
5/1/2012 Disposal of Asset 3850.00 0.00 4400.00
5/1/2012 Disposal of Asset 4400.00 0.00 0.00

Record of Repairs and Maintenance

Date Supplier Nature of Repairs Amount
7/1/2006 Bacco Coffee Supplies Yearly maintenance. 220.00
7/1/2007 Bacco Coffee Supplies Yearly maintenance. 220.00
7/1/2008 Bacco Coffee Supplies Yearly maintenance. 220.00
7/1/2009 Bacco Coffee Supplies Yearly maintenance. 220.00
7/1/2010 Bacco Coffee Supplies Yearly maintenance. 220.00
7/1/2011 Bacco Coffee Supplies Yearly maintenance, including new filter and steam tips. 420.00

18 | P a g e
 Asset Register Card

Item Coffee machine General ledger account Kitchen equipment at cost

Supplier Coffee Machine Supplier Depreciation method Straight line
Reg No CM002 Depreciation rate% pa 15%
Est. life 8 years Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
5/1/2012 Coffee Machine Supplier 8060.00 8060.00 8060.00
5/1/2012 Local Plumber 500.00 8560.00 8560.00
6/30/2012 Depreciation 214.00 214.00 8346.00

Record of Repairs and Maintenance

Date Supplier Nature of Repairs Amount
5/1/2012 Coffee Machine Suppler Annual Maintenance Contract 1200.00

Asset Register Card

Item Office Equipment General ledger account Office Equipment at Cost

Supplier Various Depreciation method Straight line
Reg No Depreciation rate% pa 20%
Est. life 5 years Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
1/1/2010 4000.00 4000.00 4000.00
6/30/2010 Depreciation 400.00 400.00 3600.00
6/30/2011 Depreciation 800.00 1200.00 2800.00
6/30/2012 Depreciation 800.00 2000.00 2000.00

19 | P a g e
 Asset Register Card

Item Café Furniture General ledger account Café Furniture at Cost

Supplier Various Depreciation method Straight line
Reg No Depreciation rate% pa 25%
Est. life 4 years Other Details
Location Coastal Café

Financial History
Accumulated Carrying
Date Particulars Asset
depreciation Amount
Dr Cr Balance Dr Cr Balance
2/10/2010 26000.00 26000.00 26000.00
6/30/2010 Depreciation 2500.00 2500.00 23500.00
6/30/2011 Depreciation 6500.00 9000.00 17000.00
6/30/2012 Depreciation 6500.00 15500.00 10500.00

Companies with a significant asset base fully integrate the asset register into their financial
management information system to obtain relevant and reliable information for review and
decision- making. This helps to ensure that any asset transactions are updated on a real-time
basis and that data integrity is maintained between the fixed asset register and other
systems including: general ledger, project management, accounts receivable, accounts
payable and asset management systems.

The latter is a very important aspect because the calculation of the depreciation of assets
will affect the Income Statement of the company and the net value of fixed assets in Balance
Sheet. When no proper register is maintained, the situation of depreciation manipulation
may change the actual financial position by increasing or decreasing the net value of assets,
which will have a reflection on Net Worth as well as on Net Profit.

20 | P a g e
Determine method of calculating depreciation in accordance
with organisational requirements
According to International Accounting Standard 16 Property, Plant and Equipment,
depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life. The amount of depreciation expense is paid during the whole time of using an
asset and shows how much of its value has been used for generating the revenue for the
company. Property, Plant and Equipment which are depreciable, include; buildings, plant
and equipment, machinery, vehicles, office and computer equipment, furniture, etc. An
exception is land, because of its indefinite life. All these types of assets will last more than
one year and every year they will put some part of their value on produced goods and
services. The used portion of the asset is the depreciation expense.

Depreciation is used for tax purposes and accounting procedures. For example, the amount
of depreciation expense reduces taxable income, and, therefore, allows the company
(taxpayer) to use this money for cost-recovery purposes. It should be mentioned that for a
taxpayer to be allowed a depreciation deduction for a property, according to IFRS, the asset
has to meet some requirements:

• The taxpayer must own the property

• A taxpayer must use the property in business or in an income-producing activity
• The property must have a determinable useful life of more than one year

Under the useful life of the asset, we usually understand the period of time over which an
asset will be used by the company.

There are a few methods of depreciation for calculating depreciation expense. The method
of depreciation is chosen by the management and depends on business features, economic
environment of operating activity and organisational policies of the company.

Methods for depreciation expense calculation:

• Straight-line depreciation method

• Methods of accelerated depreciation, including Sum-of-years-digits depreciation
method, diminishing balance depreciation method, Units of Production
depreciation method

21 | P a g e
The straight-line method is the most common used because of its simplicity and its usability
for financial statement purposes. Under this method, the depreciation for each accounting
period (full year) is some equal portion of the asset's cost.

For instance, company A bought equipment for K0.5 million. Expected salvage value was
established in K3000 amount. A useful life for this purchased equipment was set 10 years.
Therefore it will be depreciated over 5 years. According to the straight-line depreciation
method, depreciation expense per year:

K500,000 – K3000=K497,000

K497,000 / 5 = K99,400.

Units of Production Depreciation method is often used in production line businesses; this is
because of a link between the activity of an asset and its capacity wearing down. Here is the
outline of the Units of Production depreciation method:

1. Depreciation per unit of production = (Assets cost - Expected salvage value) /

Expected total units of production during the useful life of the asset involved.
2. Depreciation Expense = Depreciation per unit of production * Number of units
produced.

For example, company B purchased a machine that costs of K200,000 and salvage value K0.
The machine is expected to produce 10,000 units of production during the useful life of this
asset and in the first year has produced 500 units. Depreciation Expense, in this case, will be:

(K200,000 - K0) / 10,000 * 500 = K10,000.

Under Diminishing Value method, some equal portion of the initial cost of an asset is applied
annually. First, with the help of the straight-line method of depreciation we find the
depreciation rate. If a Company C purchased some asset for K 500,000 with useful life of 5
years, depreciation rate is 100% / 5 = 20 %. In case of the double-declining balance method,
the rate will be: 20 % * 2 = 40 %. Then we subtract that amount from the book value of the
asset. This method ignores salvage value and is calculated to the nearest full month (if an
asset was purchased in March, depreciation for the first year would be multiplied by 10/12
(10 months are left out of 12)), and for the next years – by 12/12).

22 | P a g e
Table below shows an example of this method.

Period Beginning Depreciation End-period

Depreciation Expense
(Year) Book Value Rate Book Value

K 166,666.67 =K 500,000.00 *
1 K 500,000.00 40% K 333,333.33
40% * 10/12

K 133,333.33 = K 333,333.33 *
2 K 333,333.33 40% K 200,000.00
40%*12/12

K 80,000.00 = K 200,000.00 *
3 K 200,000.00 40% K 120,000.00
40%*12/12

K 48,000.00 = K 120,000.00*
4 K 120,000.00 40% K 72,000.00
40%*12/12

K 28,800.00= K 72,000.00*
5 K 72,000.00 40% K 43,200.00
40%*12/12

The sum of the book value of K 43,200 will be the salvage value of the asset.

If company management decides to change the method of depreciation, then depreciation

charge should reflect the changes in usage of the asset and be adequate, keeping in view the
generally accepted principles of accounting for depreciation.

23 | P a g e
 Other Examples

Straight line depreciation

Depreciation = (Cost - Residual value) / Useful life

On April 1, 2016, A company purchased an equipment at the cost of 140, 000. This equipment is
estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value)
will be 20, 000. Company recognizes depreciation to the nearest whole month. Calculate the
depreciation expenses for 2016 and 2017 using straight line depreciation method.

Depreciation for 2016 = (140,000 - 20,000) x 1/5 x 9/12 = 18,000

Depreciation for 2017 = (140,000 - 20,000) x 1/5 x 12/12 = 24,000

Reducing Balance Depreciation Method

Depreciation rate = [1 – n √ r/c] x 100

Where
n = the useful life in years =4
r = the estimated residual value = K3 000
c = the cost of the asset = K33 000

Depreciation rate = [1 – n √ r/c] x 100

Depreciation rate = [1 – 4 √ 3000/33000] x 100

Depreciation rate = [1 – 4 √ 0.090909] x 100

Depreciation rate = [1 – 0.5491] x 100

Depreciation rate = 0.4509 x 100

Depreciation rate = 45%

The rate is then applied to the carrying amount of the asset at the beginning of the year to
calculate depreciation expense for each period, as indicated in the following tabulation;

Year Carrying Amount at Rate Annual depreciation Carrying

beginning of the expense amount end
year of year
1 33 000 45% 14850 18150
2 18150 45% 8168 9982
3 9982 45% 4492 5490
4 5490 45% (5490 – 3000) 2490 3000

24 | P a g e
Exercise

1. Using straight line method calculate the amount of depreciation for the following assets
for ABC Ltd.

Fixed Asset Cost Estimated Residual Estimated Useful Depreciation

Value Life amount
K100 000 K5 000 4
K250 000 K5 000 5
K75 000 K 4 000 5

2. ABC Ltd has a machine costing K250 000 and a useful like of 5 years and an estimated
residual value of K49 000.

a) Determine the depreciation rate using the reducing balance method. (Round your answer
to the nearest whole number)

b) Complete the schedule for the Fixed Asset using the depreciation rate calculated above

Year Carrying Amount at Rate Annual Depreciation Carrying

Beginning Expense Amount at end
of Year
1
2
3
4
5

25 | P a g e
 Maintain asset register and associated depreciation
schedule in accordance with organisational policy,
procedures and accounting requirements
Asset Maintenance is a systematic and coordinated process of improvement management of
the availability, safety, reliability and longevity of physical assets. No matter of size, every
company faces the problem of tracking its assets and maintaining control over them. The
main purposes of such control are theft deterrence, preventive maintenance and financial
accounting. The asset register is a very helpful tool for the companies to track the quantity,
location, current condition and maintenance and depreciation status of their fixed assets.

Tracking, maintenance and asset registration responsibilities are often met using a special
asset tracking software or Excel spreadsheets. In such programs information about assets
can be sorted by category and department, check-in/check-out, net book value of assets,
assets past due, audit history, transactions, etc. This data is also accessible on mobile
devices. As a result, companies can reduce expenses through loss prevention and improved
equipment maintenance. Companies may reduce new and unnecessary equipment
purchases, and they can more accurately calculate taxes based on depreciation schedules.
This leads to savings and increased profitability of the business.

Accounting or finance managers should take care to follow proper process, asset
classification and inventory procedures. This may be done using prefixes itemised below
followed by a unique numerical numbers for each specific item (for example, FF-00001 for
Air conditioner Panasonic, where FF class belongs to Furniture and Fittings). Other examples
of asset classification may be Land & Buildings (LB), Plant & Equipment (PE), Computer
Equipment (CE), Office Equipment (OE), and Motor Vehicles (MV)).

A proper depreciation schedule needs to be prepared so that the remaining value of an

asset is visible and assessable when needed. The format of the depreciation schedule may
vary, but it usually includes the following data: Year, Value of the Asset, Depreciation, and
Cumulative Depreciation. Depreciation Schedule is a table that shows the depreciation
amount over the lifetime of an asset. There are a number of built-in functions for
depreciation calculation in Excel. These include SLN (straight-line), SYD (sum-of-year's digits),
DDB (declining balance with the default being double-declining), VDB (declining balance with
switch to straight-line), DB (fixed-declining balance).

26 | P a g e
Let’s consider a Company that purchased some assets and wants to calculate the total
amount of depreciation expense of each asset per year. Assume that useful life of assets is
equal to 10 years. Then, depreciation schedule will look as following:

Take note that despite calling depreciation payment as an expense, the company will not
pay out any cash for this expense during those years. That is, the actual cash paid by the
company for this equipment will occur as zero. That is why Depreciation Expense is
sometimes referred to as a noncash expense. Net income of the company before income
taxes will be reduced in each of the years 1 through 10 by 21,000. At the same time, Cash
account will not be reduced.

27 | P a g e
 TOPIC 2 - RECORD GENERAL JOURNAL ENTRIES FOR
BALANCE DAY ADJUSTMENTS
Record depreciation of non-current assets and disposal of fixed assets in
accordance with organisational policy, procedures and accounting
requirements
A fixed asset accounting system is a system of policies, procedures, and methods for
recording and reporting monetary amounts associated with fixed asset transactions. These
transactions include purchase, revaluation, depreciation, disposal and sale of the asset. It is
important to account for these transactions properly because it affects the accuracy
financial records and reports of the company.

Generally accepted accounting principles, or GAAP, require fixed assets to be depreciated on

a periodic basis. Additionally, in accounting the record depreciation of non-current assets
should be provided under the matching principle. Because of gradual decrease in assets’
cost during its useful life and revenue that was generated by these assets, it is reasonable to
match revenues with related expenses. That also means that if the full amount of
depreciation is split into parts for the purpose of accounting, the same should be done with
the revenues generated by the said asset. The deprecation journal entry differs from other
entries in the way that it actually does not record an event in business activity, but records
instead the use of an asset as time passed.

After a company has chosen a method of depreciation, the company accountant should
make a debit record for depreciation expense and the accumulated depreciation is credited
at the end of each fiscal year, until the end of the asset’s useful life. Depreciation expense
account is shown in the Income Statement while Accumulated Depreciation appears in the
Balance Sheet showing the reduced cost of an asset. There will be no journal entries for
depreciation expense when asset’s cost become zero because of continuous decrease of its
cost. Going back to the example of straight-line method of depreciation, where company A
bought a piece of equipment for K0.5 million, expected salvage value was established at
K3000, and the useful life of this purchased equipment was set at 10 years, journal entries
should be as follows:

Table 1

Name of account Debit Credit

Depreciation Expense K99,400
Accumulated Depreciation K99,400
Total K99,400 K99,400
Table 1. Journal entries for depreciation expense

28 | P a g e
There are two reasons for a company to dispose of a fixed asset: it was decided not to use it
or if the asset is sold off. These transactions need to be reflected accordingly. In the first
situation, a company does not receive any payment in return for writing-off an asset. The
journal records will be as follows:

Table 2

Name of account Debit Credit

Accumulated Depreciation K250,000
Asset K250,000
Total K250,000 K250,000
Table 2. Journal entries for disposal of the fully depreciated asset as a result of any further use

If some loss occurs because of disposal of the asset that has not yet been completely
depreciated, but the company did not gain anything (did not sell the asset), and then journal
entries will look like this:

Table 3

Name of account Debit Credit

Loss on asset disposal K10,000
Accumulated Depreciation K240,000
Asset K250,000
Total K250,000 K250,000
Table 3. Journal entries for disposal of the not fully depreciated asset as a result of any further use

The second scenario occurs when a company sells an asset. If, for example, a piece of
equipment was not fully depreciated, and it was sold for K30,000, the Company A will record
the following:

29 | P a g e
Table 4

Name of account Debit Credit

Cash K30,000
Gain on asset disposal K10,000
Accumulated Depreciation K220,00
Asset K240,000
Total K250,000 K250,000
Table 4. Journal entries for disposal of the not fully depreciated asset as a result of any further use

If there is no gain from selling an asset, then the record will show cash received on the Cash
account (Debit), Loss on asset disposal (Debit), Accumulated Depreciation (Debit), and Asset
account (Credit).

It is important to record all transactions related to disposal of fixed assets as soon as

possible. Balance sheets should not be burdened with assets and accumulated depreciation
that are no longer relevant. This step should be included in the monthly closing procedure.

30 | P a g e
Adjust expense accounts and revenue accounts for prepayments and accruals
To follow the revenue recognition and matching principle in accounting, the finance or
account manager should assign the cost of fixed assets, maintenance, and operating
expenses to the correct periods. Financial statements require that income and expense must
be recognised in the accounting periods to which they relate rather than on cash basis. Thus,
expenses must be recognised when incurred rather than when paid and income should be
recognised when earned, not received. However, in practice it may not always be possible to
assign financial transactions to one period because they impact more than one period of
time. This is why it is necessary to adjust expense accounts and revenue accounts for
prepayments and accruals.

Goods and services may be paid and received in advance and be used and provided in the
following periods. Examples of prepayments are the telephone bill for next month; rent
payments, insurance, public utility payments in advance. The company cannot record the
total amount in the period that it paid for it, as the expense needs to be carried over periods
that are in the future. At the end of each month that passes, the expense is recorded. If the
company did not receive or pay money for provided goods and services, the amount prepaid
would be put into Balance Sheet as prepayment. With prepayments, the balance sheet
accounts are overstated (Prepaid insurance) and the Income

Statement account (insurance expense) is understated. The adjusting entry is required to

bring these accounts into line with the matching principle. The balance sheet account is
credited, and the income statement account is debited.

Accruals are usually short-term liabilities which occur during an accounting period and are
estimated on the base of previous payments. Examples for accrual accounts are wages,
utilities, interest and taxes. Accruals allow a company to record assets which will be received
or paid in the future.

To adjust expense accounts and revenue accounts for prepayments and accruals a company
has to record the following types of transactions: prepaid income, prepaid expense, accrued
income, and accrued expense.

31 | P a g e
If a company earned income but has not received it yet, then accrued income will occur. It
should be recorded in the period of earning. For instance, a company will provide some
services for a customer (rent for K300) for three months and will receive money at the end
of this term. The company can accrue parts of the income earned after each month, even
though it will receive total physical payment after three months. The journal entries will be:

Debit Credit
Rent Income Receivable K300
Income K300

When a company gets money, the accounting records will be:

Debit Credit
Bank K300
Rent Income Receivable K300

Accrued expenses represent expenses which occur in one period but will be paid for in
another. This is why expense will be on the debit side to record the accrued expense, and
corresponding payable will be on the credit side of the transaction. Accrued expenses are
opposite of prepaid expenses. If a company decided to pay wages to its employees for the
past month at the beginning of the next, then salary expense for the past month will be
mirrored in the following entries in the end of month:

Debit Credit
Wages expense K100,000
Wages payable K100,000

When a company pays money, the accounting records will be:

Debit Credit
Wages payable K100,000
Bank K100,000

In the case of prepaid income a company receives revenue from the prepayments in
advance but actual earnings will be in future. Thus, it will be necessary to show prepaid
revenues over time and not as income in the current period. Instead, it must be recorded in
time when goods are received. This is because income must be recorded in the accounting
period in which it is earned. Thus, in Balance Sheet amount of prepaid income will decrease
over time. There are two ways of recording unearned revenue: the liability method, and the
income method.

32 | P a g e
Assume in May 2014 a company collected some money in advance from its client for rent.
The journal entry according the income method will be:

Debit Credit
Cash K10,000
Prepaid Income (liability) K10,000

The prepaid income will be recorded as income in June:

Debit Credit
Prepaid Income (liability) K10,000
Rent Income K10,000

Prepaid expense is expense paid in advance, but it will be incurred later. Because expenses
must be shown in the period of incurrence, prepaid expense must be presented as such
when goods or services are received. So, the first record will be:

Debit Credit
Prepaid Expense (Asset) K10,000
Cash K10,000

The prepaid expense will be recognised as expense in the next accounting period to which
the asset expense relates to the entry:

Debit Credit
Asset Expense K10,000
Prepaid Expense (Asset) K10,000

33 | P a g e
 Record bad and doubtful debts in accordance with organisational policy,
procedures and accounting requirements
Accounts receivable may not always be collected fully due for many reasons. A doubtful
debt is a current account receivable for products or services in relation to which uncertainty
of its retrieval by a debtor exists. Customers may go bankrupt or evade payments, and this
make debt uncollectible or a bad debt. Doubtful debts make the real result of sales
overstated. A company must avoid this risk and properly record its losses and bad debt. This
should be done at the moment of sales revenue recognition and not when buyers are not
able to pay. Thus, accounts receivable must be recognised on a net realisation cost which is
sales minus doubtful debts.

The allowance for doubtful debts is contra-asset account and is presented in Balance Sheet
by subtracting from accounts receivable. An example of allowance for doubtful debts is
shown below:

Debit Credit
Accounts Receivable K50,000
Less: Allowance for Doubtful K2,500
Accounts
Accounts Receivable, net K47,500

Doubtful debts for accounting period are reflected in other operational expenses part in
Income Statement. As a debt is defined as bad, it should be written off from accounts. The
reason for writing off a bad debt as an uncollectible account receivable is that it may no
longer be considered as an asset which will bring economic benefits in future.

A doubtful debt is an account receivable which is likely become a bad debt at some point in
the future or, in other words, this is potential bad debt.

There are two methods of accounting for bad debts:

1. Direct Write-off Method

2. Allowance Method

In short, the direct write-off method directly writes off accounts receivable against income.
Such a write off is not supported by GAAP because the matching principle of accounting is
not always done with it. The allowance method is the one supported by GAAP. The

34 | P a g e
allowance method requires creating some reserve account where doubtful debts stay until
they are actually determined as uncollectible.

There is not any allowance or reserve account for direct write-off method. Instead,
uncollectible accounts receivable are directly written off against income at the time when
they are actually determined as bad debts. The entry is as follows:

Debit Credit
Bad Debts Expense K3,000
Accounts Receivable K3,000

Despite the simplicity of the direct write-off method, it is not according to GAAP, and it may
not be advised for use. Thus, the allowance method of bad debts treatment is preferred.
According to allowance method, the doubtful debts are estimated, and bad debts expense is
recognised before the debts actually become uncollectible. To estimate the value of bad
debts under the allowance method, it is necessary to find a percentage of the value of bad
debts in total accounts receivable balance.

Using the past experience of uncollectible accounts receivable value, a company may find an
approximate value for a current accounting period. If, for example, in previous periods this
part was around 5% of the total K50,000 accounts receivable amount, then the allowance
for bad debts account must be credited on K2,500 (5% of K50,000). As mentioned before,
contrarily direct write-off method, a company does not credit accounts receivable at this
stage because it is actually a control account of many individual debtor accounts. The
amount credited is just an estimation of receivables which are likely to end up uncollected.
In accounting this called adjusting entry for allowance for doubtful accounts. Thus, the entry
is as follows:

Debit Credit
Bad Debts Expense K2,500
Allowance for Doubtful Accounts K2,500

Allowance for Doubtful Account will have credit or debit balance in the new accounting
period unless all necessary records for previous accounts are completed prior to calculating
the closing balance. This means that if a company overestimated write‐offs, then the
account will have a debit balance while if write‐offs were less than expected, the account
would have a credit balance.

35 | P a g e
In the next period, when a debt is determined as uncollectible for instance in K350 amount
(credit balance), the accountant will make the next journal entry:

Debit Credit
Allowance for Doubtful Accounts K350
Accounts Receivable K350

When a company gets back bad debt, two journal entries are needed. Thus:

Debit Credit
Accounts Receivable K350
Allowance for Doubtful K350
Debts

The second one deals with getting money:

Debit Credit
Cash (Bank) K350
Accounts Receivable K350

At the end of next accounting period, bad debts are estimated again, and the balance in the
allowance account is adjusted.

36 | P a g e
 Adjust ledger accounts for inventories, if required, and transfer to final
accounts
At the end of an accounting period (month, year, etc.) a company may find differences in
inventory values. There are many reasons why the amount of inventories on the general
ledger may be lower than that reflected in inventory value in reality. Among them are
employee theft, a decline in inventory cost, damage to the inventory after purchase, and
obsolescence. Generally accepted accounting principles (GAAP) require companies to
examine periodically their inventory balance for inventory that is no longer able to be sold
for as much as the company paid for them. Conduct of a physical audit of company’s
inventory helps to make clear the real number of items the company currently maintains in
each inventory type. The result of a failure to periodically adjust inventory is overstatement
of inventory value on the balance sheet. That is why corresponding adjustments to the
accounting general ledger, in order to properly reflect the value of inventory, is obligatory. It
is obvious that the value of spoiled or obsolete inventory frequently will be lower than its
cost. According to GAAP, companies must make cost adjustment using accounting
transactions as part of the closing entry process.

Using an adjusting entry, a company amends necessary records on Inventory Change

Account, which is as usual credited on an amount of difference found. To find the amount of
loss the accountant multiplies the total number contained in each inventory type by the
current value of the items. The current value of the inventory items may be the price paid
for that item of inventory on company’s last order.

Consider, for example, a company which actual inventories appeared to be K20,000 at the
end of accounting period. However, the inventory account in the general ledger is lower by
K3,000 and has a debit balance of K17,000. So, the accountant of the company will make the
following adjusting entry:

Debit Credit
Inventory K3,000
Inventory Change K3,000

If the situation is opposite, where actual inventories appear to be less than that in in general
ledger, the accountant will credit Inventory for K3,000 and debit Inventory Change for
K3,000.

37 | P a g e
If a company decides to get rid of the obsolete inventory, the accountant debits the Reserve
for obsolete inventory account and credits the Inventory account. The reserve for obsolete
inventory account is used to reduce the value of the company's inventory balance to market
value. If it is impossible to get any payment for the inventory, the expense write-off
becomes the same as the inventory's book value. However, sometimes a company may
dispose of inventory at a reduced price and only has to write off part of the value as an
expense. GAAP requires writing off all obsolete inventory at once, however, the amounts of
obsolete inventory as an expense may be large and have a big impact on a company's
financial statement.

Further explanation with samples of BALANCE DAY ADJUSTMENTS and

GENERAL JOURNAL:

a) Accrued Expenses

Accrued expenses are expenses incurred during the financial year, but have not been paid by
balance date. Therefore, accrued expenses are liabilities for the business at balance date. As
accrued expenses are liabilities, they should be credited to the Accrued Expenses account
and debited to the relevant expense account.

38 | P a g e
b) Accrued Revenues

Accrued revenues are revenues, which the business has earned during the financial year, but
have not been received by balance date. Therefore, accrued revenues are assets for the
business at balance date. As accrued revenues are assets, they should be debited to the
Accrued Revenues account and credited to the relevant revenue accounts.

39 | P a g e
c) Prepaid Expenses

Prepaid expenses are expenses which have been paid and recorded during the financial year
but have not been incurred by balance date. Benefits from these prepayments will occur
over the next accounting period. As prepaid expenses are assets, they should be debited to
the Prepaid Expenses account and credited to the relevant expense account.

40 | P a g e
d) Revenues Received in Advance

Revenues received in advance are revenues which have been received during the financial
period but have not been earned by balance date. Therefore, revenues received in advance
are liabilities for the business at balance date. As revenues received in advance are liabilities
they should be credited to the Revenues Received in Advance account and debited to the
relevant revenue account.

41 | P a g e
e) Inventory

Trading businesses keep trade goods on hand for sale. These trade goods are called
“Inventory” or “Stock”. The trade goods, which have not been sold at balance date, are
referred to as “Closing Inventory” or “Closing Stock”. This Closing Inventory represents an
asset for a business at balance date. As Closing Inventory is an asset it should be debited to
the Inventory account and credited to the Trading account which is prepared at balance
date.

42 | P a g e
f) Bad Debts

Sometimes the business may encounter an accounts receivable account that has proved to
be uncollectable, either due to bankruptcy or the firm’s inability to trace the accounts
receivable. At the balance date it is necessary to examine all the accounts receivable
accounts that have been written off as bad debts. As a bad debt is a loss at balance date, it
should be debited to the Bad Debts account and credited to the Accounts Receivable
Account. The bad debts include GST Output, which is 1/11 of the bad debts amount. Since it
has become irrecoverable, Internal Revenue Commission allows businesses’ to reverse the
GST Output by debiting it.

43 | P a g e
g) Provision for Doubtful Debts;

The Provision for Doubtful Debts shows the estimated amount of accounts receivable that
are unlikely to be received when due in the following period. To provide for doubtful debts it
is necessary to create the Doubtful Debts account and Provision for Doubtful Debts account.
As doubtful debt is an expense it should be debited to Doubtful Debts account and credited
to Provision for Doubtful Debts account.

44 | P a g e
h) Depreciation

Depreciation is the allocation of the depreciable value of an asset over its useful life. It is
applicable to non-current assets of the business, except land. There are a number of ways or
methods for the calculation of depreciation. However, the text will not discuss the methods
for calculation of depreciation. Since the depreciation is a loss in value of assets it should be
debited to Depreciation account and credited to Accumulated Depreciation account that has
the effect of showing the carrying amount of the asset in the Statement of Financial
Position. The asset cannot be credited directly because depreciation is only an estimate.

45 | P a g e
 Exercise

At 31 December 2016, the ledger of K. Benedict contained the following balances:

Motor Vehicle expenses 2,650 Dr

Accounts Receivable 35,500 Dr

Provision for Doubtful Debts 650 Cr

Bad Debts 340 Dr

Rent Revenue 4,400 Cr

Commission Revenue 2,750 Cr

Equipment 5,000 Dr

GST Output 530 Cr

GST Input 800 Dr

Adjustments:

• Further Bad Debts to be written off K165 (inclusive of GST 10%)

• Provision for Doubtful Debts to be K800

• Rent for January 2017 received in advance K200

• Motor Vehicle expenses owing K250

• Commission due but not received K350

• Depreciation of K500 to be provided on equipment

Required:

a) Open the ledger accounts for the above and enter the balances therein.

b) Prepare the journal entries to make the necessary adjustments and post to the ledger

(open any additional accounts required).

46 | P a g e
 TOPIC 3 - PREPARE FINAL GENERAL LEDGER ACCOUNTS
Make general journal entries for balance day adjustments in general ledger system in
accordance with organisational policy, procedures and accounting requirements

Day adjustments are general journal entries made to allow all transactions to be according
to matching principle and, therefore, better matching of revenues and expenses. As a result,
more accurate figures of profit will occur at the end of the accounting period. Among
balance day adjustments in general ledger system are the following:

• Prepaid expenses
• Prepaid (unearned) revenues
• Accrual expenses revenues
• Accrual revenues
• Doubtful debts
• Depreciation
• Employee entitlements
• Inventory variances
• Stock of Stationery on Hand

Adjustments to the balances in ledger accounts may be necessary at the end of the
accounting period to ensure that all items of revenue and expenses, which are related to the
particular accounting period, have been included in the accounts. Other adjustments may be
necessary because the company may not be aware of or be able to calculate certain
revenues or expenses until the end of the accounting period.

Because adjustments are completed at the end of an accounting period, they are referred to
as balance day adjustments. At the end of the reporting period (balance day), the accounts
may only show the amount received, or the amount paid during this particular period. For
example, there may be electricity that has been consumed in the current period
(representing a consumption of an economic benefit – an expense) but will not be paid for
until the next period.

As was mentioned before, all expenses and revenues must be shown in the accounting
records when they have been earned or incurred, regardless of cash associated with the
transaction is either received or paid. For this purpose, at the time money is actually paid or
goods are received these amounts will need to be taken out of the ledger accounts for the
current accounting period and transferred to the next accounting period. At the moment of

47 | P a g e
occurrence of such expenses or revenues, the accountant need to make a journal entry for
Prepaid Income account (Credit) and Cash (Debit) or Prepaid Expense (Debit) and Cash
(Credit). For example, adjusting records for prepaid income: Prepaid Income account (Debit)
and Income (Credit). In addition, if the cash did not come to a company and, therefore, the
accountant did not record the transaction, it was not recorded in ledger accounts. However,
the changes in revenue and expenses being earned or incurred in the current accounting
period will be recorded. This will lead to changes in the balance of ledger accounts and/or
the introduction of additional ledger accounts.

To avoid double-counting, balance day adjustments are considered to be a temporary

adjustment only. That is, the relevant ledger accounts are adjusted on the balance date and
the financial reports are prepared using the adjusted balances. Once this has been done, the
adjustment has served its purpose and on the first day of the next period, before the cash is
issued for the actual payment, the adjustment is reversed. When the money is paid and
recorded in the next period, there is no longer any double-counting. After balance day
adjustments have been completed the account manager will prepare a new trial balance.
This new trial balance is referred to as the Adjusted Trial Balance. The financial reports of
the company (Income Statement and Balance Sheet) are then prepared using the account
balances in the adjusted trial balance.

Since some examples of balance day adjustments were shown before, consider adjustments
of stock of stationery on hand. When a company purchases stationery, the accountant
makes a debit entry in the stationery expense ledger. However, if the company has not used
all the stationery that has been purchased during the current accounting period, the amount
that is left at the balance date should appear in the financial reports as an asset or stock of
stationery not as an expense. Thus, a temporary adjustment is needed to complete to
temporarily transfer the value of unused stationery out of the stationery expense ledger and
into the stock of stationery ledger. The stock of stationery is considered as an asset at the
balance date because it represents value owned by the company. After an adjustment was
made, it should be reversed on the first day of the next period. That is, the unused amount
will be used in the next period and, therefore, cease to be an asset.

48 | P a g e
Let’s consider a situation where at the end of the accounting period stationery expense
account of the company has a balance of K1,000 representing stationery purchased during
the period. At the same time, a stock-take undertaken on the last day of accounting period
indicates unused stationery valued at K200. The stationery expense for the current period
should be the cost of stationery used, not purchased. So, the accountant will take K200 out
of the stationery expense ledger and temporarily transfer it to the asset ledger – stock of
stationery. The stationery expense ledger will be credited, and the stock of stationery will be
debited.

49 | P a g e
 Post revenue and expense account balances to final general ledger
accounts system
All operations are recorded in the accounting journal or book of original entry, which is a list
of transactions in ascending order by date. There are two types of journal: a general journal
and a special journal. They differ from each other in the way they detail the records. If, for
example, a company has a lot of similar transactions, then it is reasonable for the
accountant to create sales journal, cash journal, purchases journal and payroll journal. After
all transactions are ready, they are transferred to the General Ledger system.

The process of transferring transactions from journal to General Ledger accounts is called
posting. Posting transactions to a General Ledger means that similar transactions will be
grouped and summarised into the same location. The information from General Ledger is
used by managers for creating financial reports and making decisions about company’s
activity. Data from General Ledger is also used for preparing the Balance Sheet and Income
Statement. Usually, companies have a computerised system of accounting and posting
process does not take a lot of time. As a rule, posting is done on a daily base; however, it
often depends on the type of transactions and their quantity.

General Ledger system is referred to as double entry system which links at least two
accounts. A double entry system means that the amount of transaction appears on debit
(left) and credit (right) sides which should be in a balance. General Ledger consists of Charts
of accounts and typically has the following data:

• Accounting code
• Description
• Balance of an account
• Transaction currency

There are the following groups of accounts in the Charts of accounts of General Ledger:

ASSETS ACCOUNT

Assets account is an active account and all assets that are owned by the company are
recorded there. This includes things like cash, investments, inventories, liquid funds,
buildings, machinery, intangibles, etc. Such items as inventories are represented in the
current asset account while buildings and machinery held by the company are recorded in
the long term asset account. Accounts receivable are also an asset account. Assets account
increases on debit and decreases on credit and would usually have a positive debit balance.

50 | P a g e
 LIABILITY ACCOUNT

Liability account has a credit balance and is used to reflect money that the company owes to
its creditors (investors, suppliers, banks and other financial institutions). These may be
credits, bonds payable, obligations, etc. Liabilities are also recorded in the Accounts Payable.

EQUITY ACCOUNT

Equity account represents sources of assets contributed by the owners of the company. As
well as liabilities account, it has a credit balance and is a part of Balance Sheet. Assets,
Liability and Equity accounts are parts of financial equations, where Equity is Assets minus
Liabilities.

REVENUE ACCOUNT

Revenue account is money earned by the company when it sells goods or services. This is a
passive account with a credit balance. Revenue earned during normal activity of the
company is called operational revenue while non-operative revenues represent other
money inflow such as interest payments, dividends, rent payments, etc.

EXPENSES

Expenses are costs of goods produced and services consumed during the accounting period.
Depending on the production process, they may be direct and indirect. Examples of
expenses may be public utilities, salaries and wages, administration expenses, rent
expenses, depreciation costs, costs of goods sold, marketing and advertisement expenses,
etc. The increase in expenses reflects on the debit side and decrease on the credit side.

After posting all the journal entries, the accountant will prepare the final general ledger
accounts to reflect gross and net profits for reporting period.

51 | P a g e
Prepare final general ledger accounts to reflect gross and net profits
for reporting period
At the end of the accounting period, the profit or loss is calculated by the company to show
the results of its activity. To calculate profit, the accountant uses two sources of data: the
earned revenue and expenses for this period. The difference between company’s total
revenue and total expenses is referred to as net profit or net income. If the result of this
equation is negative, then the company lost money in this period.

As part of this process, at the end of the accounting period the revenue and expenses
account are closed and at the beginning of new accounting period the balance for them will
be zero. The reason for such closing is that revenue and expense accounts are temporary
accounts, they hold a balance for only one accounting period. In contrast, assets account
holds a balance for more than one period and transfers the final balance to the beginning of
a new accounting period. To achieve this, it is necessary to transfer summarised amounts
from the revenue and expenses accounts to a new account called the Profit and Loss
account. In accounting ledger it will appear as follows:

Debit Credit
Revenues K450,000
Income Summary K450,000

According to GAAP, a company’s gross profit is the difference between revenues from sales
and cost of goods sold (COGS). In turn, the cost of sales are the direct costs such as raw
materials, direct labour costs of producing goods and services, etc.

Net profit is the amount left after subtracting from the gross profit indirect costs such as
administrative costs, financial costs, depreciation costs and other expenses that cannot be
directly related to production of goods and services, such as interest and taxes. All these
items are shown in the Profit and Loss Statement of the company and are retrieved from
summarised general ledger accounts.

52 | P a g e
The accountant will credit all expense accounts by their balance to make them zero. The
records will be as follows:

Debit Credit
Wage expenses K100,000
Expenses K100,000

Debit Credit
Public utilities expenses K10,000
Expenses K10,000

Debit Credit
Marketing and K80,000
Advertisement expenses
Expenses K80,000

Debit Credit
Other Expenses K100,000
Expenses K100,000

Then, to reach the total amount of expenses it is necessary to add them together and debit
the result to the Income Summary account. If the balance in the Income Summary account is
on credit side then, a company has ‘net profit’ for the period. That is, all records that were
on the credit side of the account were items that increase net profit, and the records that
were on the debit side of the account were items that decrease net profit. If the balance in
the Income Summary account is on the debit side, then in this period the company has a ‘net
loss’. The record is as follows:

Debit Credit
Total Expenses K290,000
Income Summary K450,000
Balance (Profit) K160,000

After the balance of Income Summary account is found, the accountant makes its closing
entries because the income summary account has a balance equal to the net profit of the
company for the particular accounting period. Balance from income summary account is
then transferred to the retained earnings account.

53 | P a g e
The record is as follows:

Debit Credit
Income Summary K160,000
Retained Earnings K160,000

If a company pays dividends then the next record is reducing net profit for the amount of
dividends paid. The record is the following:

Debit Credit
Retained Earnings K50,000
Dividend Account K50,000

After the Dividends account will become zero.

54 | P a g e
 TOPIC 4 - PREPARE END OF PERIOD FINANCIAL REPORTS
Prepare revenue statement in accordance with organisational requirements
to reflect operating profit for reporting period
The Income Statement is one of the main financial statements which most companies
prepare at the end of the accounting period. Other names for the Income Statement are the
Profit and Loss Statement (P&L), the Statement of Operations, and the Revenue Statement.
The Income Statement allows the company to define the net profit and show all sources of
this profit. The Income Statement is an important source of information for auditors,
external and internal investors, creditors, government and other stakeholders of the
company. It provides the data for financial analysis of the company’s activity because it
measures a company's financial performance over a specific accounting period.

The Income Statement begins with revenues and gains amounts and then considers all
expenses, including write-offs, to reach the amount of net profit or loss. If the net amount of
revenues and gains is bigger than that of expenses and losses, the company has net income.
If the final calculated amount of net income is negative, then there is a net loss.

It depends on the complexity of the company’s activity how the Income Statement looks,
but it is a common practice to use pro-formas for creating Income Statements. There are
usually the following items included in the Income Statement:

• Revenue
• Cost of sales
• Operating expenses
• Depreciation
• Other Expenses
• Interest Expense
• Interest Income
• Income Tax
• Net Income/ Net Loss

Preparing of the Income Statement may be on an annual basis, monthly, or quarterly. This
allows managers to control the dynamics of changes of company’s activity.

There is an example below of the real Income Statement of Kernel Holding SA, which is a
public traded company on the Warsaw Stock Exchange.

55 | P a g e
 Figure 1. Income Statement of Kernel Holding SA as of October 2014

Revenue refers to all cash inflow occurred from company’s operational activity during the
reporting period. This may be sales from goods produced or services provided. Revenues
from non-operational activity may include rent revenues or revenues from reselling goods.
All information about cash inflow the accountant manager retrieves from general ledger
accounts.

Expenses include costs of goods sold (COGS), administrative expenses, selling expenses, and
general expenses which are related to the reporting period. Costs of goods sold are those
which relate to goods produced and include raw material costs, direct labour costs and
other costs directly related to the production process. The difference between Revenues
and COGS is called gross profit which as usual is also recorded in the Income Statement.

As a part of expenses, depreciation costs reflect the value of fixed assets which contributed
to the production of goods during the reporting period. Interest Expenses and Interest
Income shows the financial revenues or expenses from borrowing or lending money. Other
expenses may include foreign exchange loss, insurance premiums, outsourcing costs, travel
hosting expenses, buildings maintenance and repair work, studies and research costs,
external personnel charges, advertising costs, transportation charges, the cost of meetings
and receptions, cargo and courier expenses.

56 | P a g e
After gross profit is calculated, the manager subtracts all of other expenses and depreciation
from this number in order to generate company’s operating profit, or earnings before
interest and taxes (EBIT). EBIT is an intermediate metric between gross and net profit of the
company and is frequently used for calculating different financial ratios.

The next step in preparing the Income Statement is to subtract the interest expenses from
operational profit in order to abstract from company’s capital structure (not to consider
debt capital) and get earnings before taxes. So, after subtracting tax expenses, the
accountant manager will finally get the net profit. Net profit may be divided between
common shareholders or may be attributed to company’s development as retained
earnings.

57 | P a g e
 Prepare balance sheet to reflect financial position of business at end of
reporting period
The Balance Sheet is the main financial statement that reveals a company's assets, liabilities
and shareholders' equity for a given period of time. The other name for the Balance Sheet is
Statement of Financial Position. As well as Income Statement the Balance Sheet is prepared
annually, quarterly or monthly. A company's assets, liabilities and shareholders' equity
provide all stakeholders (owners, investors, creditors, managers, etc.) the information of
what the company owns and owes, as well as the amount contributed by the shareholders.
These three parts of the Balance Sheet should meet the following rule or equation:

Assets = Liabilities + Equity

After the general ledger accounts are prepared, the accountant prepares a trial balance. A
trial balance is considered a working paper for an accountant when preparing the Balance
Sheet. A trial balance is a chart of all active (on a debit side) and passive (on a credit side)
accounts with their total balances. If the totals of all debit and credit accounts are equal, it
means that trial balance is balanced. Balanced means to be in equality. That is, all liabilities
and equity are the resources of company’s assets and must be equal to them.

The first part of the Balance Sheet are Assets which represent things that the company has.
They include the following items: cash, investments, accounts receivable, inventories,
buildings, land, machinery, equipment, and goodwill. All these types of assets are grouped in
the Balance Sheet and usually appear in order like the following:

• Current Assets (accounts receivable, inventories, cash and equivalents that will
be used in a period less than one year)
• Investments (long-term investments in bonds and stocks)
• Property, Plant, and Equipment (buildings, land, machinery, equipment)
• Intangible Assets (goodwill, copyrights, patents, trademarks, etc.)
• Other Assets (other long-term assets)

The amounts reported in the asset accounts and on the balance sheet are company's assets
at their original historical cost or actual costs recorded at the time of a transaction.

58 | P a g e
The second part of records in the Balance Sheet are Liabilities. Liabilities reflect obligations
of the company to its creditors or suppliers. All liabilities accounts have a credit balance and
include the following items: accounts payable, salaries and wages payable, interest payable,
income tax payable, accrued expenses payable, notes and bonds payable, other short term
debts, unearned revenue. As well as assets the liabilities consist of groups which are the
current liabilities and long-term liabilities. The short-term or current liabilities are those that
are payable within one year (for instance, accounts payable, salaries and wages payable,
interest payable, income tax payable, accrued expenses payable), while long-term liabilities
are due within more than one year (examples are bonds and notes payable). It is worth to
note, that in case of long-term debt the principal for the next year will be considered as
current liabilities in preparing the Balance Sheet, while the rest amount will be reported as
the long-term liabilities.

Equity reported on the Balance Sheet represents funds initially contributed by the owners
into a business and retained earnings of the company in the next periods. Along with
liabilities, equity may be classified as resources of company’s assets. If a company is public,
then in the Balance Sheet will be recorded shareholders’ equity. In contrast, for sole
proprietorship in the Balance Sheet will be recorded the owner’s equity. Company’s equity
may include preferred stock - redeemable, preferred stock - non redeemable, common
stock, additional paid-in capital, retained earnings, and other equity.

The Balance Sheet is an important source of data for calculating many types of ratios,
including debt-to-equity ratio, current ratio, working capital ratio, quick ratio, inventory
turnover, accounts receivable turnover and others.

An example of the Balance Sheet of Kernel Holding SA is shown in Figure 2.

59 | P a g e
 Figure 2. Income Statement of Kernel Holding SA as of October 2014

60 | P a g e
 Identify and correct, or refer errors for resolution in accordance with
organisational policy and procedures
It is common practice in preparing financial statements to find some errors in the Balance
Sheet or in the Income Statement. Mistakes may vary, but usually they are as follows:
omission of transaction, calculation error, wrong journal entry (errors of commission, errors
of principal) and error in posting to general ledger. Trial balance serves in identification of
accounting mistakes. The double entry system assumes that for every debit entry there is a
related credit entry. This means that if totals are not equal, then some records may be
missed or recorded into a journal with a mistake. At the same time, the trial balance may
not show any inequality but errors will exist. For example, if some transaction was missed
then both debit and credit records were not made. Another example may be putting certain
transactions into the wrong account.

If calculation error was found, then it is necessary to subtract the smaller total from the
bigger total to find the missing amount. After checking each of ledger account balances and
finding the missing amount, the recalculation of balances is needed.

Some types of mistakes may be corrected in the journal by changing the wrong record into
the correct one. This may be done by drawing the line through wrong record or deleting it
and writing the right record above or instead it. If the record was already posted into
general ledger, and it is hard to find an error or it will take a lot of time, then correcting
entries will be needed to fix the mistake using the suspense accounts. For this reason, the
suspense accounts are opened to make the two sides of the Trial Balance equal temporarily.
In this case, no ledger entry is needed.

Consider an example when there is a difference in totals of trial balance like this:

Debit Total Credit Total

Total of all records K450,000 K448,300

To achieve equality in trial balance, we will make an additional record for credit side.

Debit Total Credit Total

Total of all records K450,000 K448,300
Suspense account K1,700

61 | P a g e
After it is reasonable to create an account in trial balance for an amount that has been
added. The record will be as follows:

Debit Total Credit Total

Difference in trial balance - K1,700

It should be mentioned that there is a link between the Balance Sheet and the Income
Statement. Thus, the amount of net income from the Income Statement must be equal to
the amount of retained earnings in the Balance Sheet. This must be taken into account while
preparing the two statements.

62 | P a g e
 Exercise

Prepare journal entries for the balance day adjustments, show the relevant ledger accounts
affected and prepare a Statement of Financial Performance and a Statement of Financial
Position from the following Trial Balance, extracted from the books of Boroko Traders
Boroko Traders
Trial Balance as at 31 December 2016
Particulars Dr Cr
Sales K 25,000
Sales returns K 100
Rent revenue 400
Discount revenue 30
Purchases 20,000
Purchases returns 400
Cartage on purchases 200
Advertising 800
Cartage on sales 240
Salaries – sales 2,640
Motor vehicle expenses 400
Office expenses 260
Salaries – office 1,410
Rates 350
Bad Debts expense 200
Discount expense 40
Loss on sale of business segment 5,500
Cash at Bank 1,950
Accounts Receivable 1,800
Inventory (1 January 2010) 7,660
Motor Vehicle 9,000
Accumulated Depreciation on Motor Vehicle 5,000
Premises 7,000
Land 8,000
GST Output 8,000
GST Input 4,000
Accounts Payable 2,000
Mortgage 11,000
Capital 20,000
Drawings 280
K 71,830 K 71,830

Adjustments
• Inventory at 31 December 2016, K4,000.
• Rent received in advance, K40.
• Salaries accrued for office staff, K150.
• Rates paid in advance, K50.
• Depreciation to be charged on motor vehicle, K1,000.
• Further bad debts to be written off K220 (inclusive of GST 10%)
• Provision for doubtful debts to be estimated at K100.

63 | P a g e
 COMPREHENSIVE ILLUSTRATION
Task 1 - Case study

Ben Cook owns and operates a business called Ben Cook Traders, which sells products to
retail outlets throughout the country.

The business has been trading for 10 years. On the3rd July 2014 a fire destroyed the building
in which all the accounting documentation was held. All business documentation was
burned however, Ben had recently prepared his end of financial year business trial and had
kept a copy on his computer at home.

Ben needs to get some documentation completed again and has asked you to do it for him.
He has provided you with the trial balance sheet from home and has requested you
complete the following tasks:

1. Record the account balances in the general ledger accounts

2. Record the adjustment for 30th June 2014 in the general journal

3. Post the journals to the ledger, including an asset register card for the motor
vehicle that was sold through the year. Ben has provided you with acquisition
details he obtained from the vehicle supplier

4. Prepare a trial balance once adjustments have been posted

5. Record the journal entries to close accounts at 30 June 2014

6. Post the closing entries to the general ledger

7. Prepare a trial balance after accounts have been closed

8. Prepare the financial reports for the year ending 30 June 2014

Ben has requested that the accounts and reports be prepared in a professional manner and
presented within one week.

64 | P a g e
 Ben Cook Traders
Trial Balance
As at 30 June 2014
Account name Debit Credit
Advertising 55000
Bad debts 12000
Bank 30000
Buildings 800000
Buying expenses 14800
Cartage outwards 120000
Commission revenue 59900
Discount expense 2500
Discount received 1800
Donations 5000
Electricity 40000
GST payable 15000
Input tax credits 10000
Interest expense 176000
Lease expense 6000
Legal costs 75000
Loan BL Finance due 2020 600000
Mortgage 400000
Motor vehicle expense 50000
Office salaries 40000
Manager salaries 100000
Wages 80000
Office stationary 4000
Petty cash advance 500
Provision for annual leave 25300
Provision for long service leave 15000
Purchases 360000
Purchases returns and allowances 27000
Rates and taxes 15250
Rent revenue 300000
Sales 900000
Stock (1/7/14) 120000
Creditors control 50000
Debtors control 80000
Provision for doubtful debts 2800
Equipment 900000
Accumulated depreciation – equipment 315000
Drawings 63750
Motor vehicle 320000
Accumulated depreciation – motor vehicle 168000
Capital 540000
3449800 3449800

65 | P a g e
Adjustments:

• Interest owing on loan K4000

• Wages owing to employees K10000

• Additional bad debts to be written off (inclusive of GST) K5500

• Provision for doubtful debts to be equal to 4% of debtors

• Commission revenue yet to be received K5100

• The provision for long service leave is to be increased by 3% of all salaries and
wages

• Provision for annual leave is to be doubled

• Advertising paid in advance K5000

• Equipment is being depreciated @15% p/a using the reduced balance method
depreciation

• Motor vehicles are being depreciated @20% p/a using the straight line method of
depreciation

• On April 1 2014 one of the vehicles (BMW) Registration number STR333 was
traded for K25000 on a new Volvo costing K66000 GST Inc, the balance payable
over 3 years financed by a loan from ACG Finance. The BMW was purchased on 1
January 2010 from Smart car sales with an expected life of 5 years with no
residual payment

o Cost price INC GST K120000

o Delivery costs INC GST K5000

o Registration and insurance K2500

Note: the disposal of the vehicle has not been recorded in the accounts

Stock on hand @ 30 June 2014 is K100000

66 | P a g e
1

Ben Cook Trader’s

General Ledger
Date Details Debit Credit Balance
Advertising
30.06.14 Balance 55,000.00 Dr
Prepaid advertising 5,000.00 50,000.00 Dr
Profit and loss 50,000.00 0.00
Bad Debits
30.06.14 Balance 12,000.00 Dr
Debtors control 5,000.00 17,000.00 Dr
Provision for doubtful debts 17,000.00 0.00
Bank
30.06.14 Balance 30,000.00 Cr
Buildings
30.06.14 Balance 800,000.00 Dr
Buying Expenses
30.06.14 Balance 14,800.00 Dr
Trading 14,800.00 0.00
Cartage Outwards
30.06.14 Balance 120,000.00 Dr
Profit and loss 120,000.00 0.00
Commission Revenue
30.06.14 Balance 59,900.00 Cr
Accrued revenue 5,100.00 65,000.00 Cr
Profit and loss 65,000.00 0.00
Discount Expense
30.06.14 Balance 2,500.00 Dr
Profit and loss 2,500.00 0.00
Discount Received
30.06.14 Balance 1,800.00 Cr
Profit and loss 1,800.00 0.00
Donations
30.06.14 Balance 5,000.00 Dr
Profit and loss 5,000.00 0.00
Electricity
30.06.14 Balance 40,000.00 Dr
Profit and loss 40,000.00 0.00
GST Payable
30.06.14 Balance 15,000.00 Cr
Debtors control 500.00 14,500.00 Cr
Input Tax Credits
30.06.14 Balance 10,000.00 Dr
Loan ACG Finance Ltd 6,000.00 16,000.00 Dr
Interest Expense

67 | P a g e
 30.06.14 Balance 176,000.00 Dr
Accrued expense 4,000.00 180,000.00 Dr
Profit and Loss 180,000.00 0.00
Lease Expense
30.06.14 Balance 6,000.00 Dr
Profit and loss 6,000.00 0.00
Legal Costs
30.06.14 Balance 75,000.00 Dr
Profit and loss 75,000.00 0.00
Loan – BL Finance (due 2017)
30.06.14 Balance 600,000.00 Dr
Mortgage
30.06.14 Balance 400,000.00 Cr
Motor Vehicle Expenses
30.06.14 Balance 50,000.00 Cr
Profit and loss 50,000.00 0.00
Other salaries
30.06.14 Balance 40,000.00 Dr
Profit and loss 40,000.00 0.00
Managers Salaries
30.06.14 Balance 100,000.00 Dr
Profit and loss 100,000.00 0.00
Wages
30.06.14 Balance 80,000.00 Dr
Accrued expense 10,000.00 90,000.00 Dr
Profit and loss 90,000.00 0.00
Office Stationery
30.06.14 Balance 4,000.00 Dr
Profit and loss 4,000.00 0.00
Petty Cash Advance
30.06.14 Balance 500.00 Dr
Provision for Annual Leave
30.06.14 Balance 25,300.00 25,300.00 Cr
Annual leave expense 50,600.00 Cr
Provision for Long Service Leave
30.06.14 Balance 15,000.00 Cr
Long Service leave expense 6,900.00 21,900.00 Cr
Purchases
30.06.14 Balance 360,000.00 Dr
Trading 360,000.00 0.00
Purchases Returns and Allowances
30.06.14 Balance 27,000.00 Cr
Trading 27,000.00 0.00
Rates and Taxes
30.06.14 Balance 15,250.00 Dr
Profit and loss 15,250.00 0.00

68 | P a g e
 Rent Revenue
30.06.14 Balance 300,000.00 Cr
Profit and loss 300,000.00 0.00
Sales
30.06.14 Balance 900,000.00 Cr
Trading 900,000.00 0.00

Stock
30.06.14 Balance 120,000.00 Dr
Trading 100,000.00 220,000.00 Dr
Trading 120,000.00 100,000.00 Dr
Creditors Control
30.06.14 Balance 50,000.00 Cr
Debtors Control
30.06.14 Balance 80,000.00 Dr
Bad debts 5,500.00 74,500.00 Dr
Provision for Doubtful Debts
30.06.14 Balance 2,800.00 Cr
Bad debts 17,000.00 14,200.00 Dr
Doubtful debts expense 17,180.00 2,980.00 Cr
Equipment
30.06.14 Balance 900,000.00 Dr
Accumulated Depreciation – Equipment
30.06.14 Balance 315,000.00 Cr
Depreciation – equipment 87,750.00 402,750.00 Cr
Drawings
30.06.14 Balance 63,750.00 Dr
Capital 63,750.00 0.00
Motor Vehicles
30.06.14 Balance 320,000.00 Dr
Disposal of motor vehicle 125,000.00 195,000.00 Dr
Purchase (Ford) 60,000.00 255,000.00 Dr

Ben Cook Trader’s

General Ledger - Continued

Date Details Debit Credit Balance

69 | P a g e
 Accumulated Depreciation – Motor Vehicles
30.06.14 Balance 168,000.00 Cr
Depreciation – motor vehicle 48,000.00 216,000.00 Cr
Disposal of motor vehicle 106,250.00 109,750.00 Cr
Depreciation – motor vehicle 12,750.00 122,500.00 Cr
Capital
30.06.14 Balance 540,000.00 Cr
Drawings 63,750.00 476,250.00 Cr
Profit and Loss 70,380.00 405,870.00 Cr
Accrued Expense
30.06.14 Interest expense 4,000.00 4,000.00 Cr
Wages 10,000.00 14,000.00 Cr
Doubtful Debts Expense
30.06.14 Provision for doubtful debts 17,180.00 17,180.00 Dr
Profit and loss 17,180.00 0.00
Accrued Revenue
30.06.14 Commission Revenue 5,100.00 5,100.00 Dr
Long Service Leave Expense
30.06.14 Provision for long service leave 6,900.00 6,900.00 Dr
Profit and loss 6,900.00 0.00
Annual Leave Expense
30.06.14 Provision for annual leave 25,300.00 25,300.00 Dr
Profit and loss 25,300.00 0.00
Prepaid Advertising
30.06.14 Advertising expense 5,000.00 5,000.0 Dr
Depreciation – Equipment
30.06.14 Accumulated dep’n – equipment 87,750.00 87,750.00 Dr
Profit and loss 87,750.00 0.00
Depreciation – Motor Vehicles
30.06.14 Accumulated dep’n – motor
vehicles 48,000.00 48,000.00 Dr
Accumulated dep’n – motor
vehicles 12,750.00 60,750.00 Dr
Profit and loss 60,750.00 0.00
Disposal of Motor Vehicle
30.06.14 Motor vehicle 125,000.00 125,000.00 Dr
Accumulated dep’n – motor
vehicles 106,250.00 18,750.00 Dr
Loan ACG Finance Ltd 25,000.00 6,250.00 Cr
Profit on disposal of vehicle 6,250.00 0.00
Profit on Disposal of Vehicle
30.06.14 Disposal of motor vehicle 6,250.00 6,250.00 Cr
Profit and loss 6,250.00 0.00

Ben Cook Trader’s

70 | P a g e
 General Ledger - Continued
Date Details Debit Credit Balance
Loan ACG Finance Ltd
30.06.14 Motor vehicle 66,000.00 66,000.00 Cr
Disposal of motor vehicle 25,000.00 41,000.00 Cr
Trading
30.06.14 Sales 900,000.00 900,000.00 Cr
Purchases returns and Cr
allowances 27,000.00 927,000.00 Cr
Stock (01.07.2013) 120,000.00 807,000.00 Cr
Buying expenses 14,800.00 792,200.00 Cr
Purchases 360,000.00 432,200.00 Cr
Stock (30.06.2014) 100,000.00 532,200.00
Profit and Loss 532,200.00 0.00
Profit and Loss
30.06.14 Trading 532,200.00 532,200.00 Cr
Commission revenue 65,000.00 597,200.00 Cr
Discount received 1,800.00 599,000.00 Cr
Rent revenue 300,000.00 899,000.00 Cr
Profit on disposal of vehicle 6,250.00 905,250.00 Cr
Advertising 50,000.00 855,250.00 Cr
Cartage outwards 120,000.00 735,250.00 Cr
Discount expense 2,500.00 732,750.00 Cr
Donations 5,000.00 727,750.00 Cr
Electricity 40,000.00 687,750.00 Cr
Interest expense 180,000.00 507,750.00 Cr
Lease expense 6,000.00 501,750.00 Cr
Legal costs 75,000.00 426,750.00 Dr
Motor vehicle expenses 50,000.00 376,750.00 Dr
Office salaries 40,000.00 336,750.00 Dr
Managers salaries 100,000.00 236,750.00 Cr
Wages 90,000.00 146,750.00 Cr
Office stationery 4,000.00 142,750.00 Cr
Rates and taxes 15,250.00 127,500.00 Cr
Doubtful debts expense 17,180.00 110,320.00 Cr
Long service leave expense 6,900.00 103,420.00 Cr
Annual leave expense 25,300.00 78,120.00 Cr
Depreciation – equipment 87,750.00 9,630.00 Dr
Depreciation – motor vehicle 60,750.00 70,380.00 Dr
Capital (net loss) 70,380.00 0.00

71 | P a g e
2

Ben Cook Trader’s

General Journal
Date Details Debit Credit
30.06.14 Interest expense 4,000.00
Accrued expense 4,000.00
Adjustment for interest owing
Wages 10,000.00
Accrued expense 10,000.00
Adjustment for accrued wages
Bad debts 5,000.00
GST payable 500.00
Debtors control 5,500.00
Additional bad debts written off
Provision for doubtful debts 17,000.00
Bad debts 17,000.00
Transferred account balance
Doubtful debts expense 17,180.00
Provision for doubtful debts 17,180.00
Adjusted provision account to 4% of debtors
Accrued revenue 5,100.00
Commission revenue 5,100.00
Adjustment for commission receivable
Long service leave expense 6,900.00
Provision for long service leave 6,900.00
Increased provision by 3% of all salaries and
wages
Annual leave expense 25,300.00
Provision for annual leave 25,300.00
Doubled the provision account
Prepaid advertising 5,000.00
Advertising expense 5,000.00
Adjustment for advertising paid in advance
Depreciation – equipment 87,750.00
Accumulated depreciation – equipment 87,750.00
Depreciated assets at 15% using RB method
for 12 months
Depreciation - motor vehicles 48,000.00
Accumulated depreciation - motor vehicles 48,000.00
Depreciated assets at 20% using SL method
for 9 months from1.07.08 - 31.03.09
Disposal of motor vehicle 125,000.00
Motor vehicle 125,000.00
Transferred cost price of sold vehicle

72 | P a g e
Ben Cook Trader’s

General Journal - Continue

Date Details Debit Credit
30.06.14 Accumulated depreciation - motor vehicles 106,250.00
Disposal of motor vehicle 106,250.00
Transferred depreciation on sold vehicle
Motor vehicle 60,000.00
Input tax credits 6,000.00
Disposal of motor vehicle 25,000.00
Loan ACG Finance Ltd 41,000.00
Purchase of new vehicle after trade in of old
vehicle
Disposal of motor vehicle 6,250.00
Profit on disposal of vehicle 6,250.00
Transfer of account balance
Depreciation - motor vehicles 12,750.00
Accumulated depreciation - motor vehicles 12,750.00
Depreciated balance of vehicles at 20% using
SL method for 3 months.
Stock 100,000.00
Trading 100,000.00
Adjustment for closing stock
Sales 900,000.00
Purchases returns and allowances 27,000.00
Trading 927,000.00
Closed accounts
Trading 494,800.00
Stock (01.07.2013) 120,000.00
Buying expenses 14,800.00
Purchases 360,000.00
Closed accounts
Trading 532,200.00
Profit and loss 532,200.00
Transferred gross profit
Commission revenue 65,000.00
Discount received 1,800.00
Rent revenue 300,000.00
Profit on disposal of vehicle 6,250.00
Profit and loss 373,050.00
Closed accounts

73 | P a g e
Ben Cook Trader’s

General Journal - Continue

Date Details Debit Credit
30.06.14 Profit and loss 975,630.00
Advertising 50,000.00
Cartage outwards 120,000.00
Discount expense 2,500.00
Donations 5,000.00
Electricity 40,000.00
Interest expense 180,000.00
Lease expense 6,000.00
Legal costs 75,000.00
Motor vehicle expenses 50,000.00
Office salaries 40,000.00
Managers salaries 100,000.00
Wages 90,000.00
Office stationery 4,000.00
Rates and taxes 15,250.00
Doubtful debts expense 17,180.00
Long service leave expense 6,900.00
Annual leave expense 25,300.00
Depreciation – equipment 87,750.00
Depreciation - motor vehicles 60,750.00
Closed accounts
Capital 70,380.00
Profit and loss 70,380.00
Transferred net loss
Capital 63,750.00
Drawings 63,750.00
Closed account

74 | P a g e
3

Ben Cook Trader’s

Asset Register Card

Description: BMW Estimated Residual: Nil
Asset ID: STR 333 Depreciated method: Straight line
Depreciation rate: 20% per annum
Supplier: Smart Car Sales Estimated useful life: 5 years
Original Total Depreciation Written
capital Capital Down
Date Details Annual Accumulated
Cost Cost Value
K K
K K K
1.01.10 Cost 120,000 120,000
Delivery costs 5,000 125,000
30.06.10 Depreciation 6 months 12,500 12,500 112,500
30.06.11 Depreciation 12 months 25,000 37,500 87,500
30.06.12 Depreciation 12 months 25,000 62,500 62,500
30.06.13 Depreciation 12 months 25,000 87,500 37,500
1.04.14 Depreciation 9 months 18,750 106,250 18,750
Traded in (125,000) (106,250)
Trade in value 25,000
Profit on disposal 6,250

75 | P a g e
4

Ben Cook Trader’s

Trial Balance
As at 30 June 2014 (After Adjustments)
Account Name Dr Cr
Advertising 50,000.00
Bank 30,000.00
Buildings 800,000.00
Buying expenses 14,800.00
Cartage outwards 120,000.00
Commission revenue 65,000.00
Discount expense 2,500.00
Discount received 1,800.00
Donations 5,000.00
Electricity 40,000.00
GST payable 14,500.00
Input tax credits 16,000.00
Interest expense 180,000.00
Lease expense 6,000.00
Legal costs 75,000.00
Loan – BL Finance (due 2017) 600,000.00
Mortgage 400,000.00
Motor vehicle expenses 50,000.00
Office salaries 40,000.00
Managers salaries 100,000.00
Wages 90,000.00
Office stationery 4,000.00
Petty cash advance 500.00
Provision for annual leave 50,600.00
Provision for long service leave 21,900.00
Purchases 360,000.00
Purchases returns and allowances 27,000.00
Rates and taxes 15,250.00
Rent revenue 300,000.00
Sales 900,000.00
Stock (1.7.13) 120,000.00
Creditors control 50,000.00
Debtors control 74,500.00
Provision for doubtful debts 2,980.00
Equipment 900,000.00
Accumulated depreciation – equipment 402,750.00
Drawings 63,750.00
Motor vehicles 255,000.00
Accumulated depreciation - motor vehicles 122,500.00
Capital 540,000.00

76 | P a g e
 Accrued expense 14,000.00
Doubtful debts expense 17,180.00
Accrued revenue 5,100.00
Long service leave expense 6,900.00
Annual leave expense 25,300.00
Prepaid advertising 5,000.00
Depreciation – equipment 87,750.00
Depreciation - motor vehicles 60,750.00
Profit on disposal of vehicle 6,250.00
Loan ACG Finance Ltd 41,000.00
3,590,280.00 3,590,280.00
Note: Stock adjustment as at 30.06.09 K100 000 not yet shown in trial balance

77 | P a g e
7

Ben Cook Trading

Trial Balance
As at 30 June 2014 (After Closing)
Account Name Dr Cr
Bank 30,000.00
Buildings 800,000.00
GST payable 14,500.00
Input tax credits 16,000.00
Loan – BL Finance (due 2017) 600,000.00
Mortgage 400,000.00
Petty cash advance 500.00
Provision for annual leave 50,600.00
Provision for long service leave 21,900.00
Stock (1.7.13) 100,000.00
Creditors control 50,000.00
Debtors control 74,500.00
Provision for doubtful debts 2,980.00
Equipment 900,000.00
Accumulated depreciation – equipment 402,750.00
Drawings
Motor vehicles 255,000.00
Accumulated depreciation - motor vehicles 122,500.00
Capital 405,870.00
Accrued expense 14,000.00
Accrued revenue 5,100.00
Prepaid advertising 5,000.00
Loan ACG Finance Ltd 41,000.00
2,156,100.00 2,156,100.00

78 | P a g e
8

Ben Cook Trader’s

Income Statement
For Year Ended 30 June 2014
K K K
Sales 900,000.00
Less Cost of goods sold
Stock (01.07.2013) 120,000.00
Purchases 36,000.00
Purchases returns and allowances 27,000.00 333,000.00
Buying expenses 14,800.00
467,800.00
Stock (30.06.2014) 100,000.00 367,800.00
Gross profit 532,200.00
Other income
Commission revenue 65,000.00
Discount received 1,800.00
Rent revenue 300,000.00
Profit on disposal of vehicle 6,250.00 373,050.00
905,250.00
Expenses
Advertising 50,000.00
Cartage outwards 120,000.00
Discount expense 2,500.00
Donations 5,000.00
Electricity 40,000.00
Interest expense 180,000.00
Lease expense 6,000.00
Legal costs 75,000.00
Motor vehicle expenses 50,000.00
Office salaries 40,000.00
Managers salaries 100,000.00
Wages 90,000.00
Office stationery 4,000.00
Rates and taxes 15,250.00
Doubtful debts expense 17,180.00
Long service leave expense 6,900.00
Annual leave expense 25,300.00
Depreciation – equipment 87,750.00
Depreciation - motor vehicles 60,750.00 975,630.00
Net profit (loss) (70,380.00)

79 | P a g e
9

Ben Cook Trader’s

Statement of Financial Position

As at Ended 30 June 2014
K K K
Assets
Current
Input tax credits 16,000.00
Petty cash advance 500.00
Stock (30.06.2014) 100,000.00
Debtors control 74,500.00
Provision for doubtful debts 2,980.00 71,520.00
Accrued revenue 5,100.00
Prepaid advertising 5,000.00 198,120.00
Non-current
Buildings 800,000.00
Equipment 900,000.00
Accumulated depreciation – equipment 402,750.00 497,250.00
Motor vehicles 255,000.00
Accumulated depreciation - motor
Vehicles 122,500.00 132,500.00 1,429,750.00
Total assets 1,627,870.00
Liabilities
Current
Bank 30,000.00
GST payable 14,500.00
Creditors control 50,000.00
Accrued expense 14,000.00
Provision for annual leave 50,600.00
Provision for long service leave 21,900.00 181,000.00
Non-current
Loan – BL Finance (due 2017) 600,000.00
Mortgage 400,000.00
Loan ACG Finance Ltd 41,000.00 1,041,000.00
Total liabilities 1,222,000.00
Net Assets 405,870.00
Owner's Equity
Capital 540,000.00
Drawings 63,750.00 476,250.00
Net loss 70,380.00
Total Equity 405,870.00

80 | P a g e
 ADDITIONAL NOTE1

BALANCE DAY ADJUSTMENTS – ALWAYS TAKE GST OUT

TIME LINE End of Period (Days, Weeks, Months, Year)

Periods before End Period after End

Portion of the period payment has Adjustment Commencement of next period.

made to. Amount On day 1 we reverse the Adjustment Amount

Adjustment
Period
Balance Day Adjustments (BDA).
- Doing a book entry – NO CASH INVOLVED
We are creating a transaction to match all Income and Expenditure to the Fiscal Period they relate
too. In other words we are accounting for Income and Expenditure in their rightful period.
Treat all transactions as fair in the Income Statement and Balance Sheet.
Because its and adjustment it’s not a real transactions in strict sense but merely a book entry.
These are the BDA’s are reversed on the following day, the first day of the new fiscal period.

There are 4 items that require BDA’s and they refer to Revenue and Expenses items only.

Accrued Items

Owing Owed
| |
Owed by the business Owed to the business
But not PAID But paid in advance
| |
Expenses Income
| |
Current Liability Current Assets

Prepaid

By the Business To the Business

The business has paid an The business receives
Expenses but the benefit Income and the benefit
carries in the next fiscal and the benefit carries into
period. next fiscal period.
e.g., Insurance, Rent, etc e.g., Rent Received, Interest Received, etc

81 | P a g e
Balance Day Adjustments consist of two parts;
1. Expenses or Income to reflect the Kvalue of number of Periods to the End of the period.
Expenses represent an increase in the expense to pay .
Expenses = Dr. Expense Account
Prepaid Expenses represents a decrease in the expense we pay .
Prepaid Expenses = Dr. Prepaid – Expenses Account.

2. We create a “NEW ACCOUNT to reflect what we owe or are owes.

For Accrued Expenses we create a Liability account Cr. Accrued – Name of the Expense.
For Prepaid Expenses we create a Liability account Cr. Prepaid – Name of Prepaid Expense.

Example:
Company A pay wages every Wednesday for the previous week ending Sunday. Weekly wages total
K27,000. The fiscal year end on 30th June which is a Saturday, the last pay for the current year was
Wednesday 27th June. Calculate the accrued wages for the end of the current fiscal year.

S S M T W T F S S
23 24 25 26 27 28 29 30 1

Adjustment Period
Period close for wages
Wages paid End of Fiscal Period

1. Wages per week K27,000

2. K27,000/7 = K3,000 per day
3. Adjustment period = 6 Days
4. Adjustment amount 6*K3,000 = K18,000

General Journal entries for 30th June;

Date Particulars Debit Credit
30/6 Wages K18,000
Accrued – Wages K18,000
(Balance day Adjustments wages 30/6)
General Journal entries for 1st July;
Date Particulars Debit Credit
1/7 Accrued – Wages K18,000
Wages K18,000
(Reversal of Balance Day Adjustment wages)

Pre-Payments relate to expenses paid in advance.

- Paying expenses NOW but the benefit goes into the next fiscal period.
e.g., Paid Insurance premiums K13,200 on 1/4/20XX for the period if 1/4/20XX to 31/3/20XY

82 | P a g e
With any payment that has had GST included it must be removed from the amount.
K13,200/11 = K1,200GST Insurance = K12,000

1. Premium = K12,000
2. Paid in advance = K12,000/12 * 9 = K9,000

General Journal entries for 30th June;

Date Particulars Debit Credit
30/6 Prepaid - Insurance K9,000
Insurance K9,000
(Balance day Adjustments Insurance 30/6)
General Journal entries for 1st July;
Date Particulars Debit Credit
1/7 Insurance K9,000
Prepaid - Insurance K9,000
(Reversal of Balance Day Adjustment Insurance)

INCOME:

Balance Day Adjustment Cycle for

Income

Owing Owed

Not Received Paid In Advance

Increase Income (Cr) Decrease Income (Dr)

Create ASSET Account (Dr) Create LIABILITY Account (Cr)

Reverse Entries on 1st day of next Fiscal Period

83 | P a g e
Eg; income owing but not yet received is K1370
Date Particulars Debit Credit
(a) K K
20X4
June 30 Accrued income 1370
Commission income 1 370
Income due not received
(b)
July 1 Commission income 1 370
Accrued income 1 370
Reversal of balance day adjustment

(c)
Commission Income 2004
20X4 20X4
June 30 Profit & loss 1 370 June 30 Accrued income 1 370

Commission Income 2005

20X4
July 1 Accrued income ® 1 370

(d)
Accrued Income
20X4 20X4
June 30 Commission income 1 370 June 30 Balance c/d 1 370
1 370 1 370
July 1 Balance b/d 1 370 July 1 Commission income ® 1 370

INCOME RECEIVED IN ADVANCE

(Pre received Income)
Relates to income received in advance e.g. rent, commissions, etc
REMEMBER TAKE OUT ANY GST.
Dr Income
Cr Income Received in Advance ( current Liability)

84 | P a g e
 Example of BDA as they affect the Financial Statements

Books of E. Giffen
Trial Balance as at 30 June 20X4

Trial Balance Balance Day Trial Balance

Pre Adjustments Adjustment Post Adjustments

Particulars Debit Credit Debit Credit Debit Credit

Stock 11,400
Land & Buildings 140,000
Office Equipment 14,700
Bank 11,000
GST- Paid 7,900
GST – Collected 8,000
Sales 86,400
Commission Income 5,100
Rent Income 8,600
Cost of Goods Sold 51,300
Insurance 16,100
Salaries 10,400
General Expenses 1,760
Capital 156,460
Totals 264,560 264,560

85 | P a g e
 Books of E. Giffen
Trial Balance as at 30 June 20X4

Trial Balance Balance Day Trial Balance

Pre Adjustments Adjustment Post Adjustments

Particulars Debit Credit Debit Credit Debit Credit

Stock 11,400
Land & Buildings 140,000
Office Equipment 14,700
Bank 11,000
GST- Paid 7,900
GST – Collected 8,000
Sales 86,400
Commission Income 5,100 350
Rent Income 8,600 1,100
Cost of Goods Sold 51,300
Insurance 16,100 700
Salaries 10,400 440
General Expenses 1,760
Capital 156,460
Totals 264,560 264,560
Accrued Expenses - Salaries 440
Pre-paid Insurance 700
Accrued Income – Commission 350
Income Received In Adv - Rent 1,100
Totals 2,590 2,590

86 | P a g e
 Books of E. Giffen
Trial Balance as at 30 June 20X4

Trial Balance Balance Day Trial Balance

Pre Adjustments Adjustment Post Adjustments

Particulars Debit Credit Debit Credit Debit Credit

Stock 11,400 11,400
Land & Buildings 140,000 140,000
Office Equipment 14,700 14,700
Bank 11,000 11,000
GST- Paid 7,900 7,900
GST – Collected 8,000 8,000
Sales 86,400 86,400
Commission Income 5,100 350 5,450
Rent Income 8,600 1,100 7,500
Cost of Goods Sold 51,300 51,300
Insurance 16,100 700 15,400
Salaries 10,400 440 10.840
General Expenses 1,760 1,760
Capital 156,460 156,460
Totals 264,560 264,560
Accrued Expenses - Salaries 440 440
Pre-paid Insurance 700 700
Accrued Income – Commission 350 350
Income Received In Adv - Rent 1,100 1,100
Totals 2,590 2,590 265,350 265,350

87 | P a g e
 ADDITIONAL NOTE2
Non- Reversible Balance Day Adjustments
Doubtful Debts:
Before calculating doubtful debts you must finalise any outstanding bad debts in your
account receivable accounts.
Bad Debt – Is a financial expense that the business is prepared to accept when a customer is
not willing to repay or make any further payments’. The following represents the journal
entries to pass to clear the balance from A/R record and claim the expenses.
Dr. Bad Debts
Dr. GST-Collected
Cr. Accounts Receivable
Doubtful Debts are a provision of a portion on the Accounts Receivable balance that the
owners of the business are prepared to accept unlikely to be repaid. The following represent
the journal entries to pass to create the accounts in the General Ledger, Income Statement
and Balance Sheet.

Dr. Doubtful Debts (Financial Expense)

Cr. Allowance for Doubtful Debts (Negative Current Asset)

The Balance Sheet would reflect the Allowance for Doubtful Debts like this;

Accounts Receivable 100000

Less Allowance for Doubtful Debt 10000 90000

Example:
Accounts Receivable as at 30/6 was K220,000
Mr. X account has been classified as a bad debt and owes K2,200
Managing Director has instructed that the Doubtful Debts for this year will be 20% of A/R.

First write off bad debts:

Dr. Bad Debts 2000
Dr. GST-Collected 200
Cr. Accounts Receivable 2200
(Write off Mr. X as at 30/6)
Secondly we calculate the Accounts Receivable balance;
K220,000 - K2,200 = K217,800
Thirdly we calculate the Doubtful Debts as per instructions:
K217,800 * 20% = K43,560

88 | P a g e
Should you have a balance in the account from previous years you will subtract (or add if
less than the balance) to the balance; e.g. Balance Sheet shows Allowance for Doubtful
Debts as K30,600 thereby your entry would be for 43,560 – 30,600 = 12,960. As we have not
been given this information our entries are;
Dr. Doubtful Debts 43,560
Cr. Allowance for Doubtful Debts 43,560
(Doubtful Debt allowance as per MD Instructions)

What our general ledger account look like?

Accounts Receivable Bad Debts

30/6 Bal 220000 |30/6 Bad Debts 2200 30/6 Acc Rec 2000 |
|30 /6 Bal C/D 217800

Allowance for Doubtful Debts Doubtful Debts

|30/6 Doubtful Debts 43560 30/6 Allow DD 43560 |

Balance Sheet EXTRACT

Accounts Receivable 217800
Less Allowance for Doubtful Debts 43560 174240

Income Statement EXTRACT

Financial Expenses
Bad Debts 2000
Doubtful Debts 43560

EXAMPLE TO FOLLOW
Trial Balance Dr Cr
Accounts Receivable 400000
Bad Debts 2500
Doubtful Debts 3000
Allowance for Doubtful Debt 5000
Capital 400500
405500 405500

89 | P a g e
Memo from Management:
Write of Mr. Y Account current balance K5500 since Aug last year.
Make allowance for Doubtful Debts to be 10% of Accounts Receivable as at 30/6

General Ledger Trial Balance Adjustments New Trial Balance

Account Debit Credit Debit Credit Debit Credit
Accounts Receivable 400000 5500 394500
Bad Debts 2500 5000 7500
Doubtful Debts 3000 34450 37450
Allowance for Doubtful 5000 34450 39450
Debts
Capital 400500 400500
GST-Collected 500 500
Totals 405500 405500 34950 34950 439950 439950

General Journals – look at the adjustments column to see how accounts are affected !!!!!
30/6 Dr. Bad Debts 5000
Dr. GST-Collected 500
Cr. Accounts Receivable 5500
30/6 Dr. Doubtful Debts 34450
Cr. Allowance for Doubtful Debts 34450

__________________________________________________

BALANCE DAY ADJUSTMENTS – DEPRECIATION

Definition:
The gradual conversion of the cost of a tangible capital asset or fixed asset into an
operational expense (called depreciation expense) over the asset's estimated useful life.

There are 3 methods of depreciation:

1. Straight Line Depreciation (Prime Cost)

2. Reducing Balance ( Diminishing Value)
3. Units of Use/Production

90 | P a g e
Methods of working out decline in value
You generally have the choice of two methods 1 or 2 to work out the decline in value of a
depreciating asset: the Straight Line(prime cost) method or the Reducing
Balance(diminishing value) method. You can generally choose to use either method for each
depreciating asset you hold.
Once you have chosen a method for a particular asset, you cannot change to the other
method for that asset.

When calculating Depreciation………… Everything must be EXCLUSIVE of GST

The Straight Line method assumes that the value of a depreciating asset decreases
uniformly over its effective life. The formula for the annual decline in value using the SL
method is:

Cost + Installation Costs – Residual Value = Depreciable Amount / effective life

This calculates the kina Depreciation expense for the year.
*can be 366 in a leap year

The Reducing Value method assumes that the decline in value each year is a constant
proportion of the remaining value and produces a progressively smaller decline over time.
The rate is provided as a % per annum.
Residual Value is not used in Reducing Balance

Journal Entries for 30/6

Dr. Depreciation – Asset name
Cr. Accumulated for Depreciation – Asset Name
Income Statement Account:
General Expenses
Depreciation – Asset Name

Balance Sheet Account

Accumulated for Depreciation – Asset Account
And displayed like this;
Motor Vehicles at Cost
Less Accumulated Depreciation for – Motor Vehicles

_______________________________________________________________________

91 | P a g e
LEAVE PROVISIONS
There are many type of leave in business these days;
Annual Leave
Long Service Leave
Sick Leave
Maternity Leave
Stress Leave

Your journal entries are;

Dr. Leave Expense
Cr. Provision for Leave

_________________________________________________________________________

STOCK ADJUSTMENT – Perpetual Inventory Variance

Stocktake is the Physical count of all you Inventory (Stock) at a given point in time.
When you complete your stocktake, you apply a Kvalue to the stocktake.
The stocktake value is then compared to the General Ledger balance.
The rule is that the PHYSICAL COUNT VALUE takes precedence over the general ledger
balance.

If the Physical value is greater than the General Ledger you journal entries are;
Dr. Inventory (this is to increase to Stocktake level)
Cr. Cost of Goods Sold (this reflects the “gain” you have received)

If the Physical value is less than the General Ledger you journal entries are;
Dr. Cost of Goods Sold ( reflects the loss of stock )
Cr. Inventory ( decrease stock to stocktake amount)

BALANCE DAY ADJUSTMENTS – NOT REVERSED

NAME Dr Cr Balance Sheet Income

Statement
Depreciation Depreciation Accumulated Accum Dep’n INCREASE
Expense- name Dep’n – name DEDUCTED Dep’n
the NCA the NCA from relevant GENERAL EXP
NCA
Allowance for Doubtful Debts Allowance for Allowance for INCREASE
Doubtful debts Doubtful Debts Doubtful Debts /DECREASE
DEDUCTED Doubtful debts
from According to
ACCOUNTS the question
RECEIVABLE FINANCIAL EXP

92 | P a g e
 Provision for Leave Expense Provision for Prov’n for Leave
‘ANY” Leave Leave Leave GENERAL
Current OR non EXPENSE
current Liability
Stock take COGS INVENTORY DECREASE INCREASE
GREATER than Inventory COGS
Inventory

Stock take LESS INVENTORY COGS INCREASE DECREASE

than Inventory Inventory COGS

EXTRACT OF BALANCE SHEET EXTRACT OF INCOME STATEMENT

CURRENT ASSETS SELLING EXPENSE

Accounts Receivable Depreciation – SALESMAN Motor vehicle
LESS Allowance for Doubtful Debts

NON CURRENT ASSETS GENERAL EXPENSES

Plant & Machinery Depreciation - Plant & Machinery
LESS Accumulated Depreciation Depreciation - Motor Vehicle
Depreciation - Furniture & Fittings
Motor Vehicle Leave
LESS Accumulated Depreciation
FINANCIAL EXPENSES
Furniture & Fittings Doubtful Debts
LESS Accumulated Depreciation

93 | P a g e
 REFERENCES
Business Dictionary. Asset account definition. Retrieved September 25, 2018, from
http://www.businessdictionary.com/definition/asset-account.html#ixzz3L3GDsSWr

Investor Words. Revenue definition. Retrieved October 5, 2018, from

http://www.investorwords.com#ixzz3KzmDC7Jx

Accounting Principles. Financial Skills. (2013) Retrieved October 5, 2018, from

http://www.free-management-ebooks.com/dldebk-pdf/fme-accounting-principles.pdf

The General Ledger. Retrieved October 5, 2018, from http://www.college-

cram.com/study/accounting/accounting-cycle/general-ledger-accounting/

What is a general ledger account? AccountingCoach. Retrieved October 5, 2018, from

http://www.accountingcoach.com/blog/what-is-a-general-ledger-account

General Ledger. Retrieved October 5, 2018, from http://www.covesys.net/streamv-erp-

help/default.htm?turl=generalledger.htm
Hermanson, Edwards, and Maher. (1998) Accounting Principles A Business Perspective Chapter 1 to 9.
Retrieved December 5, 2014, from https://archive.org/stream/ost-business-
tbq_pa_accounting_chpt_01_08/TBQ_PA_Accounting_chpt_01_08#page/n1/mode/2up
ACCA Corporate Reporting. Retrieved December 7, 2014, from http://papers.xtremepapers.com/ACCA/

Equity definition. Investopedia. Retrieved October 5, 2018 from

http://www.investopedia.com/terms/e/equity.asp

Income Statement. Investopedia. Retrieved October 5, 2018, from

http://www.investopedia.com/terms/i/incomestatement.asp

Kernel Holding SAKER: WSE. Financials. Retrieved October 8, 2018, from

http://markets.ft.com/research/Markets/Tearsheets/Financials?s=KER:WSE&subview=IncomeStatement

Other Operating Expenses. IPlanner. Retrieved October 8, 2018, from

https://www.iplanner.net/help/en/business-plan-help/opex.htm

Suspense accounts and error correction. ACCA. The global body for professional accountants. Retrieved
October 8, 2018, from http://www.accaglobal.com/hk/en/student/acca-qual-student-journey/qual-
resource/acca-qualification/f7/technical-articles/suspense-accounts.html

What is a Trial Balance? Accounting-Simplified. Retrieved October 8, 2018, from http://accounting-

simplified.com/trial-balance.html#sthash.0LgpXYsH.dpuf

94 | P a g e
 ASSIGNMENT COVER PAGE

(For manual submission)

Student Name: ............................................ Student No: .......................

Course No: CIA160408

Course Name: Prepare Financial Reports

Assignment No: ………………………………………………………………

Assignment Name: …………………………………………………………..

Facilitator: ...........................................................................

Date Submitted: .................................................................

Declaration (this must be signed):

I declare that this submission is my own work with respect to plagiarism and does not
violate copyright laws. This work has not been submitted for academic credit in any other
course or subject.

Signature: ..........................................................................................................................

Due Date: ..........................................................................................................................

Name: ………………………..……………...………....… Date Submitted: ..……..…….

95 | P a g e
 ASSIGNMENT COVER PAGE

For use with online submission of assignments

Please use this sheet as the first page of each file of your assignment – do not send it as a
separate document.

Your assignments must be submitted as either Word documents, text documents with .rtf
extension or as .pdf documents. If you wish to submit in any other file format please discuss
this with your lecturer well before the assignment submission date.

Course Title :

Unit Name :

Unit Code:

Trainer’s Name:

Assignment No.:

Assignment Title:

Due date:

Date submitted:

Declaration:

I have read and understand the Rules Relating to Awards as contained in the IBS College of TVET
Academic, Grading and Accreditation Policy. I understand the penalties that apply for plagiarism and
agree to be bound by these rules. The work I am submitting electronically is entirely my own work.

Signature with Date:

(Please type your name)

96 | P a g e