St.

Maarten Academy
Department of Business

Principles of Accounts

Course Guide
Form 4
2021-2022
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Topic: Review

The accounting, its purposes Part 2: Purpose of accounting

& its users
Certain people in the business world, known as
decision makers, are interested in having
information about the financial affairs of a
business. Accounting provides the necessary
information decision makers need to make
proper decisions (objectives).

This information needs to:

a. Have clarity or understanding

(Understandability)- It has to be easily
understood. To do this, standard formats and
layouts are used.

Part 1: Introduction b. Be relevant (Relevance)- It must be

useful for its intended purpose.
Many people become interested in the
profession of accounting because they believe c. Be accurate (Reliability)- It must be
that accountants make a lot of money for based on facts, not opinions. It also must be
themselves and other people. Successful correct and unbiased.
accountants can indeed help others make a lot
of money. d. Be comparable (Comparability)- It
must be consistent. Also, it must follow the
To become a successful accountant, your proper principles.
study of accounting begins with an introduction
to
1. The language of accounting Part 3: The users of accounting
information
2. Why one prepares accounting
records for different users In the business world, the main users of
accounting information identified as either
3. The principles which guide the internal users or external users of the
accounting process. information.

Accounting is the process of recording, The internal users are people within the
interpreting and reporting financial information company which require the information for
or transactions in the form of financial making decision for the company.
statements, unlike bookkeeping. This refers
to the process of mainly recording financial The external users are the parties outside the
information. company which require the information for their
reasons relating to the company.
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Topic 1
Internal users Careers in accounting
-Shareholders of the company: It shows them
the progress of their investment in the
business. They need to keep track of the
business profitability and obligations.

-The manager of the business: It helps them to

be efficient and profitable. It. also helps in
making future plans or goals.

Employees- They rely on this information to

verify job security or any concerns about job
security.

External users Accountants have careers that use e a wide

variety of skills applicable to specialized
-Banks and other creditors- These group of functions.
people wants to know if the business has the They work with individuals, small businesses,
ability to repay any additional financing. large limited liability companies, non-profits
organisations and government to prepare and
-Government- it depends on the business organize its financial records and tax
financial data to determine the tax amount to documents, in such industries as banking,
be collected. insurance, automotive, fast food , retail, etc….

Part 1: For Government and Non-

Profit accounting jobs:
a. Fund Accountancy- Manage and
keep track of fund activity
b. Tax department- Acts as auditors
whose responsibility is to ensure that the
correct of tax is collected from businesses and
individuals

Part 2: For Accounting, banking and

insurance companies:
a. Forensic Accountant- Responsible for
finding discrepancy in financial records
b. Tax Accountant- Prepares and
investigates tax issues
c. Accounting Clerk- records the
transactions and post transactions to the
ledgers
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d. Accounts Payable/Receivable Clerk- Topic 2

Responsible for making sure all receipts are The concepts, conventions
received and payables are paid to and by the and principles of accounting
company.
e. Actuarial Accountant/Insurance
Accountant- determine and analyzes
probabilities and statistical information.

Part 1: Accounting rules

The financial industry has created a number of
rules which must be applied or used by
everyone involved in creating and using
financial information.

If every business followed their own set of

rules, it would be impossible for other financial
individuals and institutions to understand the
position of the business and nearly impossible
to compare the financial results of two or more
businesses.

Question
Explain ONE reason why accounting rules
are necessary.

Part 2: Accounting concepts and

principles
Accounting principles are also known as
accounting “concepts” or “conventions.”
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must be the one use consistently from one

A concept is a rule which sets how the accounting year to the other. If this is not
financial activities, or transactions, are done, comparing the financial records of a
recorded. business from year to year is very difficult and
A convention is an acceptable method in the profit recorded might be unrealistic.
which a concept is used in a known situation.
f. Accruals principle: This is also known as
The main accounting principles used in “matching principle”. This principle is related to
practice in the business are stated and explain the realization principle. The rule states that
below. the revenue earned during a specific period
should be matched or off-set by the expenses
a. Business entity or accounting entity concept: of the same period. This must be done even if
A business must be treated as a totally the money to be received or paid has not yet
separate being from its owner. Any personal occurred. The treatment or adjustment of
assets or debts of the owner should not appear prepaid or accrued revenue and expenses falls
in the records of the business. under this accounting principle.

b. Duality principle or Dual aspect principle: Question

Every transaction has two aspect or view. A customer orders goods on March 5th.
There is a receiving view and a giving view. The goods are delivered to the customer on
The double-entry system is used to describe May 16th. A cheque is received from the
how these two views are recorded or entered customer on June 1. State the date on
in the books of the business. which the profit is regarded as realized.
Give one example of your answer.
c. Money measurement principle: States that
only information that can be calculated in terms g. Prudence or conservatism principle: It is
of money can be recorded or entered in the used by accountants to make sure that the
books of a business. financial records of the business shows a
realistic and true depiction of the business
Question finances at a specific period of time. The
No entry is made in the accounting records assets and profits of the business should not
of Lambston Stores when a competitor be overstated or overvalued, as well as the
reduces his prices by 20%. Explain why. losses and liabilities should not be understated
or undervalued.
d. Realisation Principle: A business cannot
record or enter having a profit in their books h. Going concern principle: A business should
until it has actually earned. Profit is considered always operate as if it will continue for an
earned when the goods or services has passed indefinite amount of time and there is no
from seller to the buyer. The buyer at this point, intention of closing operations, if there is those
the buyer has a debt (liability) to pay for the intentions. This is always to be continuity.
goods. A profit is not earned when a customer
place an order instead it is earned when the i. Materiality principle: Items of low value do not
goods exchange hands, even if the goods are have to be recorded as separate items. Other
sold on credit. accounting principles can be foregone or
ignored if the time and cost of recording the
e. Consistency principle: If there are various transaction outweighs the benefit of applying
methods from which to choose, the method the principles.
with the most realistic numbers should be the
method use. The method chosen to be used
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e. Separate entity 5. Take into account all

Example expenses and all
A wireless mouse is bought for the office. revenues or the year
Instead of recording the transaction as a fixed f. Money
asset name “Mouse”, it is included in the measurement 6. Every transaction results
account known as “office expenses” with the in a giving and a receiving
rest of the minor office expense. of value

j. Historical cost principle: This principle states g. Double-entry 7. Account for transactions
that all assets and expenses must be recorded in terms of the relevant
in the books (ledgers) of the business at their currency
actual cost.

Exercises
1. Name the accounting principle which is
described in the following sentences.
a. The same accounting treatment
should be applied to similar items at all times
b. Only the financial transactions of the
business should be recorded in the business’s
records
c. The profit of a business should not be
overstated by ignoring predicted losses and
revenue should not be recorded before it is
earned.

2. List the FOUR objectives which a business

must consider when selecting accounting
principles.

3. Match the term on the left with the

description on the right.

a. Prudence 1. The unchanging use of the

policies decided
b. Consistency 2. The assumption that the
business is continuing to
operate
c. Accrual 3. The business is
operating apart from its
owners

d. Going concern 4. Account for the least

favourable effects or
outcomes on income
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Types of assets
Topic 3
There are two types of assets:
Accounts used in a business
a. Fixed or Noncurrent assets: Items or
resources owned by a business or individual
which will last more than one year and will
bring future benefits to the business.

Such as: Land, Building, Fixtures, Fittings,

Equipment, Machinery, Furniture, Motor
vehicle.

Also includes: Long-term investments (in

other companies)

b. Current or short-term assets: Items or

resources owned by a business or individual
Part 1: Introduction which will last less than one year and will bring
future benefit to the business
Every transaction involves two or more
accounts. A transaction refers to any activity Such as: Inventory, Accounts receivable, Cash
or event which occurred during business at bank, Cash in hand
operations. An account holds all information Also includes: Short-term investments (in
relating to a specific item. other companies), Prepaid expenses &
Revenue owing (accrued)
According to ALCIE and RECAL, there are five
(5) types of accounts: Assets, Liabilities,
Capital, Income and Expenses. II. Liabilities

There is ONE account used for each item. The liabilities- refers to the debts of a
business.
Every transaction is entered twice, as a debit
entry and as a credit entry. The account will increase as a credit and will
decrease as a debit. .
Part 2: Assets, Liabilities and Capital
Types of Liabilities
I. Assets- refer to the items which are owned
by a business. Liabilities may be classified as a short-term
liability or Long-term liability.
The account receiving or increasing is debited
and the account giving up or decreasing is Short-term or current liabilities are debts or
credited. obligations of a business that has to be paid
within the next year. These include: Accounts
payable (creditors), Personal loans (less than a
year), Bank overdraft
Also include: Expenses owing, Revenue
prepaid.
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V: Expenses
Long-term liabilities are debts or obligations of
a business that last more than a year. Such Expenses -represents the costs a business
as: Bank loans, Mortgage, Personal loans must incur in order to operate on a day-to-day
(more than a year) basis.
Expenses include: Rent, utilities, salaries,
III. Capital wages, discounts allowed, Return-inwards,
shipping.
The capital- refers to the resources put into a
business by its owners or the resources a The account will increase as a debit and will
business has (after all obligations are met). decrease as a credit .
business.
Example
Like liabilities, the capital account will increase June 10 Paid utilities by cheque
as a credit and will decrease as a debit. .
Step 1::Received: A bill for utilities $150
(Debit)
Part 3: Income and Expenses
Step 2: Give up: A cheque for $150 (Credit)
A new business uses its capital to fund its
operation and to buy any assets which might
be needed. Once the business is up and
running, the income of the business is needed
to fund the day-to-day operations of the
business.

IV: Income or Revenue

Income or revenue-refers to the money a

business receives in return for providing a
good or service.
This income includes such items as Sales,
Interest received, Commission received,
Discounts received, Discount received,
Return-outwards.

The account will increase as a credit and will

decrease as a debit. .

Example
Dec. 15 Received a tax refund of $150 cash

Step 1::Received: Cash valued at $150 (Debit)

Step 2: Give up: Tax refund $150 (Credit)

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Topic 4
Example 3
Types of transactions Dec. 1 Took a loan for $5,000 cash

Step 1::Received: Cash valued at $5,000

(Debit)

Step 2: Give up: Future resources valued at

$5,000 in the form of a loan. (Credit)

Example 4
Sept. 12 Bought Building with a mortgage of
$100,000.
There are various types of ways a transaction
Step 1: Received: Business received a
may occur. It may occur by:
building worth $100,000 (Debit)
-Cash
-Cheque
Step 2: Give up: In return, the business was
-On credit
supposed to give up cash or cheque of
-Credit card
$100,000. Since it is by mortgage, it now owes
-Wire transfer
the cash or cheque, so mortgage will take the
place of cash and cheque until the business
Transaction by cash:
finish paying the mortgage. (Credit)
Example 1
May 3 Bought a car paying by cash $25,000.
Example 5
July 1 Started a business with $12,000 in the
Step 1: Received: You are receiving the car
bank
worth 25,000 (Debit)
Step 1: Received: The business is receiving
Step 2: Give up: In return, you gave up cash of
$12,000 in the form of a cheque (Debit)
$25,000 (Credit)
Step 2: Give up: In return, the owner gave up
Transaction on credit:
$12,000 to the business in the form of capital
(Credit)
Example 2
April 9 Sold furniture on credit to Nancy $1,750

Step 1: Give up: You gave up furniture worth

$1,750 (Credit)

Step 2:
Received: In return, you were supposed to
receive cash or cheque, since it is on credit,
Nancy owes you the cash or cheque. So,her
name is used instead of cash or cheque, until
she pays you the money. (Debit)
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Topic 5
General Journal Example
July 1 Bought furniture by cash $105

Date Details Fo Dr. Cr.

July 1 Furniture 105

Cash 105
Bought fixed asset paying cash

Exercises
Part 1: Introduction 1. Copy the following table and state the name
of the account to be debited and the name of
The general journal is one of the books of the account to be credited.
original entry. It has several uses.
Transactions Account Account
a. Records all the daily transactions.
to be to be
b. Records any transactions not recorded in
debited credited
the subsidiary journals
a. Sold fittings for cash
c. Records any corrections of errors
b. Bought computer
d. Records opening balances
on credit from Arora
c. The owner took
cash for her own use.
Part 2: What are journal entries? d. Returned computer
to M. Arora
Journal entries are records of transactions
e. Paid for carriage
made in the general journal.
cost by cheque
f. IKEA sent a rebate
Format
cheque to us
Date Details Fo Dr. Cr.
2. Megan Peal, a trader, provides the following
information relating to the cash account for
Account $ February 2018:
Account $
February:
Narrations are short explanations of each 1 Balance in the cash account $450
transaction is written under each entry.
3 Paid property tax $60 by cash

6 Sales by cheque $980

11 Bought office supplies $35 by cheque

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19 B. Bosco paid cash $125 less a 4. Ajay had the following balances on July 1,
10% discount 2017:
$
28 Receive a refund of $50 cash Cash 80,000
Bank 30,000
a. Prepare the journal entry to record each
transaction July 3 Bought fixtures costing $5,100 and paid
by cheque
b. What was the cash balance amount at the
end of the month?’’ July 5 Bought equipment paying by cash
$2,900
3. M. Manson owns a store. On December 31,
2016, he had the following debtors and July 18 Sold some fixtures on credit to
creditors: Thomas James $700
$
S. Surrey 5,000 July 25 Received cash $175 and cheque $225
H. Harvey 3,600 from Thomas James
E. Early 1,775
July 30 Loan to Janice Mead $1,000 cash
During the month of January 2017, The
following transactions took place: For EACH transaction,

January 3 Paid S. Surrey 50% of the bill by a. Identify the accounts involved in each
cheque transaction

January 7 Sold $2,100 worth of Machinery to b. State which account will be debited and
E. Early $2,100 receiving cash Less 5% credited
discount
c. Prepare the journal entries
January 14 E. Early returned $200 of damage
Machinery back to us

January 25 H. Harvey sent a cheque for $1200

a. Identify the name(s) of the debtor(s).

b. Identify the name(s) of the creditor(s)

c. Prepare the journal entries

d. How much is still owed to or by each of

the debtors and creditors on Dec. 31, 2016?
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Topic 6 Other types of ledgers:

d. Private ledger- is used to keep the
Types of ledgers accounts relating to the directors and possibly
other highly confidential accounts

Part 4: Format: ledger

(T-account)
Dr. Cr.
Date Particular Amount Date Particular Amount
Enter name of
asset here
Year
1st Bal. b/d x

Part 1: Introduction Exercises

A ledger is a record (or book) used to record 1. Identify in which of the ledger each of the
the financial activities in a business. It is part of following accounts belong.
the double-entry system.
Account Ledger
Part 2: Purpose Furniture
Bank
Commission received
The ledgers maintain all information needed to
Electricity
prepare a business’ financial statements at the
Peggy, a debtor
end of the financial year.
Bank loan
Equipment
Part 3: Types of ledgers

There are three (3) types of ledgers: 2. Identify in which of the ledger each of the
following accounts belong.
Ledgers can be personal or impersonal. The
ledgers pertaining to debtors and creditors are Account Ledger
classified as personal. All other ledgers are Cash
impersonal. Internet
a. Sales ledger- Maintains the accounts of all Mortgage
customers that owe the business. (Debtors or Fixtures
Account Receivable) Discount received
Capital
b. Purchases ledger- Maintains the accounts
Lee, a creditor
of all suppliers still owed by the business.
(Creditors or Account payable)

c General ledger- Holds all non-personal

(nominal & real) accounts.
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3. Copy the following table. On the table,

indicate with a (X), (a) The type of account (b) Topic 7
the normal side of the account (c) the class of Double-Entry System
account and (d) the type of ledger (e) whether
it increases or decreases capital.

a. b. c.
Account Type of Normal Class of
Account side account
A L C I E DR CR R N P
. .
Bank loan
Accounts
receivabl
e
Inventory
Loan to
Andy
Accounts Part 1: Introduction
payable
Double-entry system states that for
every entry to an account, a corresponding or
d. Type of e. Effect on opposite entry to a different account is
ledger capital required. The double entry has an equal debit
SL PL GL INCR. DECR. and credit entry.

This two-part system is the most essential part

of the accounting cycle (See graph below). It
shows all the entries made and changes made
in the accounts of the business.

Transfer
Transfer Post to account
Source to Books the balances
documents of original ledgers to the trial
entry balance
Trading Profit
Prepare

account
& Loss

Closing Prepare the

entries Statement of
Position
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Part 2: Double-entry for assets Example 2

June 8 Paid $700 by cheque for machinery
The normal side of an asset is DEBIT.
Therefore, an asset value will increase on the Account involved:
debit side of an account and decrease on the Machinery  An asset Increasing Dr.
credit side of an account. Cheque  An asset  Decreasing  Cr.

If BUYING the asset by cash or cheque: The

Dr. Cr.
entry should reflect this transaction. Date Particular Amount Date Particular Amount
General ledger
Debit: Name of asset account Machinery a/c
Credit: Cash or bank account June Bank 700
If on credit: 8
,
Bank a/c
Debit: Name of asset account June Machinery 700
Credit: Name of creditor account 8
-------------------------------------------------------
If SELLING the asset by cash or cheque: The
entry should reflect this transaction.
Exercises
Debit: Cash or Bank account
Credit: Name of asset account
1. The following transactions occurred during
If on credit:
the month of July 2018:
Debit: Name of person (debtor)
Credit: Name of asset account July 3 Bought fixtures costing $5,100 and
paid by cheque

Example1 July 5 Bought equipment paying by cash

April 9 Sold furniture on credit to Nancy $2,900
$1,750
July 18 Sold some fixtures on credit to
Account involved: Thomas James $800
Furniture  An asset Decreasing Cr.
Nancy  An asset  Increasing  Dr. July 25 Received cash $175 and cheque $225
from Thomas James
Dr. Cr.
Date Particular Amount Date Particular Amount
General ledger
July 30 Loan to Janice Mead $1,000 cash
Furniture a/c
April Nancy 1,750 Post the transactions to the necessary
9 ledger accounts
,

2. Jessica Balboa started a business on

Sales ledger (debtors)
January 1, 2016 with capital of $25,000
Nancy a/c
April Furniture 1,750
9 January 3 Transferred $5,000 cash into the
business’ bank account
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January 7 Bought additional inventory Dr. Cr.

Date Particular Amount Date Particular Amount
$2,000 by cheque
General ledger
Bank a/c
January 18 Traded $1,200 of inventory for July WIB
some office equipment 17 Loan 10,000

January 22 Received $3,050 worth of

Date Particular Amount Date Particular Amount
cheques from my debtors WIB Bank-
loan a/c
January 28 Sold $800 worth of machinery on July Bank 10,000
credit to Nicholas Jay. 17

Post the transactions to the necessary

ledger accounts Example 2
Sept. 12 Bought Building with a mortgage of
$100,000.
Part 3: Double-entry for liabilities and
capital Account involved:
Building  An asset Increasing Dr.
The normal side of a liabilities and capital is Mortgage  A Liability  Increasing  Dr.
CREDIT. Therefore, a liability value and
capital’s value will increase on the credit side Dr. Cr.
of the account and decrease on the debit side Date Particular Amount Date Particular Amount
of the account. General ledger
- Mortgage a/c +
Sept. Building 100,000
a. Liabilities 12

If OBTAINING a debt (or liability) by cash or

Date Particular Amount Date Particular Amount
cheque: The entry should reflect this
+ Building a/c -
transaction. Sept. Mortgage 100,000
12
Debit: Cash or bank account
Credit: Type or name of liability b. Capital
If PAYING on a liability: If INITIAL INVESTMENT is by cash or cheque:
The entry should reflect this transaction.
Debit: Type or name of liability
Credit: Cash or bank account Debit: Cash or bank account
Credit: Capital account
Example 1
July 17 Took a loan from WIB Bank receiving If REDUCING the amount of INVESTMENT:
a cheque for $10,000
Bank Debit: Capital account
Credit: Cash or bank account
Account involved:
Bank  An asset Increasing Dr.
Loan A Liability Increasing Cr.
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Example 3 To transfer the drawings account balance at

June 1 Thomas Lake invested $5,000 cash into year-end:
starting a new sole proprietorship.

Account involved: Example 5

Cash  An asset Increasing Dr. December 31, the drawings account is
Capital Capital Increasing Cr. transferred to the Statement of Positions

Account involved:
Dr. Cr. Capital is Dr.
Date Particular Amount Date Particular Amount
Drawings is  Cr.
General ledger
Cash a/c
June Capital
1 5,000 Dr. Cr.
Date Particular Amount Date Particular Amount
General ledger
Date Particular Amount Date Particular Amount Capital a/c
Capital a/c Dec. Drawings 200
June Capital 5,000 31
1

Date Particular Amount Date Particular Amount

Drawings a/c
Example 4 Dec. Capital 200
October 10 Thomas Lake took out $200 cash 31
for personal use.
Exercises
Account involved:
Drawings An asset Increasing Dr. 1. Jennifer Arnez had the following information
Cash Capital Increasing Cr. available for the month of July 2017:

July 1 Started business with cash of $2,000

Dr. Cr. and a bank loan of $8,000
Date Particular Amount Date Particular Amount
General ledger
Drawings a/c July2 Furniture on credit from Kwik Bargains
Oct. Cash 200 $2,350
10
July3 Bought another chair (furniture) for the
Date Particular Amount Date Particular Amount
office $215 by cash
Cash a/c
Oct. Drawings 200 July 8 Deposited $400 cash into the bank
10
July 17 Sold a chair to Kloe on credit $90

July 22 Received half of the payment from

Kloe by cheque

Post month’s transactions to the

appropriate accounts in the ledgers
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2. The accountant for Jacob Miller Inc. showed This income includes such items as Sales,
the following financial information: Interest received, Commission received,
Discounts received, Discount received,
October 1 Balances: Return-outwards.
$
Cash 13,000 Income involves the receipt of money for a sale
Bank 26,500 made or a service provided. Money should be
Premises 90,000 coming into the business, meanwhile the good
Mortgage 20,500 should be giving up by the business.
Fittings & furniture 3,345
Account payable 1,040 If receiving payment by cash or cheque: The
Accounts receivable 1,890 entry should reflect this transaction.

Oct. 4 Sold furniture on credit $800 Debit: Cash or Bank

Credit: The income account
If on credit:
Oct. 5 Received $490 from creditors by cheque
Debit: Name of person (debtor)
Oct. 9 Paid mortgage $650 towards the Credit: The income account
mortgage
Example 1
Oct. 21 Paid 20% of the amount still owed to May 5 Sold goods by cash $800
creditors by cheque Sales

a. Prepare the opening entries in the Date Particular Amount Date Particular Amount
ledgers, showing the balances on October General ledger
1st. - Sales a/c +
May Cash 800
5
b. Post month’s transactions to the
appropriate accounts in the ledgers
Cash a/c
+ -
May Sales 800
Part 4: Double-entry for income or 5
revenue
The normal side of a revenue or income is Example 2
Credit. Therefore, an income value will
increase on the credit side of an account and May 8 Received a cheque of $600 and cash
decrease on the debit side of an account. $300 for interest. bank

Once the business is up and running, the

Date Particular Amount Date Particular Amount
income of the business is needed to fund the General Ledger
day-to-day operations of the business. Bank a/c
May 8 Interest 600
Rec.
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To record an expense in the books of the

business:
Cash a/c
May 8 Interest 300
Rec. Debit: The expense
Credit: Cash or cheque

Example 1
Interest June 10 Paid utilities by cheque $150
Received a/c
May 8 Bank 600
May 8 Cash 300
Date Particular Amount Date Particular Amount
General ledger
Example 3 Utilities
+ Expense a/c
-
Sales June Bank 150
May 15 Sold goods on credit to Janice $250 10
less a 10% discount Disc. Allowed.
Bank a/c
-Sales worth: $250 + -
-Discount amount: (250 x 10%= $25 discount) June Utilities 150
-Amount owed by Janice: ($250-$25= $225 10 expense
owed)
Part 6: Double-entry for inventory
Date Particular Amount Date Particular Amount account
General ledger
Sales a/c Inventory (goods or stocks) represents the
May Janice 225
15
items bought with the sole intention of reselling
May Discount 25 to customers.
15 all. There are FOUR accounts used to record all
250 transactions involving inventory.
Discount
allowed a/c a. The BUYING of inventory
May Sales 25
15
The buying inventory by cash or cheque:
Sales ledger
Janice a/c Debit: Purchases account
May Sales 225 Credit: Cash or bank account
15
If on credit:
Part 5: Double-entry for expenses
Debit: Purchases account
Credit: Name of creditor account
Expenses represent the costs a business must
incur in order to operate on a day-to-day basis.
Expenses include: Rent, utilities, salaries,
wages, discounts allowed, Return-inwards,
shipping.
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. b. The SELLING of inventory Exercises

The selling inventory by cash or cheque: 1. Copy the following table and state the
name of the account to be debited and the
Debit: Cash or bank account name of the account to be credited.
Credit: Sales account

If on credit: Transactions Account Account

to be to be
Debit: Name of debtor account debited credited
Credit: Sales account a. Sold goods for cash
b. Bought goods on
credit from M. Arora
c. The RETURNS BY CUSTOMERS of c. The owner took
inventory cash for her own use.
d. Returned goods to
The return of inventory by customers by M. Arora
cash or cheque: e. Paid for carriage on
goods by cheque
Debit: Return-inwards account f. Sold motor vehicle
Credit: Cash or bank account to Vincent for cash
If for credit:
2. Megan Peal, a trader, provides the following
Debit: Return-inwards account information relating to the cash account for
Credit: Name of debtor account February 2018:

d. The RETURNS TO SUPPLIERS of February 1 Balance $450

inventory 3 Paid property tax $60
6 Cash sales $98
The return of inventory to suppliers by cash 11 Bought office supplies $35
or cheque: 19 B. Bosco paid cash $125 less a
10% discount
Debit: Cash or bank account 28 Bought goods $500 and
Credit: Return-outwards account Machinery $1,100 by cash

If for credit: Prepare Megan Peal’s Cash account for the

month of February 2018.
Debit: Name of creditor account
Credit: Return-outwards account
 P a g e | 20

3. M. Manson owns a store. On December 31, August 9 Purchased goods paying by

2016 he had the following debtors: cheque $1,330 after a $70 discount
$
S. Surrey 5,000 August 14 Bought office stationery by cash
H. Harvey 3,600 $90
E. Early 1,775
August 18 Jason Miel returned $50 in goods
During the month of January 2017, The (worth $22)
following transactions took place:
August 22 Paid rate expense by cheque
January 3 S. Surrey paid 50% of the bill by $100
cheque
August 25 Bought additional equipment on
January 7 Sold $2,100 worth of goods to E. credit from Lee Levenson $60
Early $2,100 receiving cash Less 5% discount
August 28 Paid Manny Price $320 by
January 14 E. Early returned $200 of cheque
damage goods back to us
a. Open the accounts in the appropriate
January 25 H. Harvey sent a cheque for ledger.
$1200
b. Post the transaction in the appropriate
a. Prepare the accounts in the appropriate ledgers. (Must show sales ledger,
ledgers. (Must show sales ledger and purchases ledger and general ledger).
general ledger).
c. Prepare the Accounts Receivable
b. Prepare the Accounts receivable account.
account, in the general ledger, posting all
entries.

4. The following details relates to the business

of M. Maury, a sole trader, during the 2nd
month of trading, August 2016.

August 1 Balances:
Cash in hand $12,900
Inventory $20,000
Cash at bank $15,100
Equipment $ 7,000
Manny Price $ 1,200
Machinery $ 4,500

August 2 Sold goods by cash $2,000

(worth $800) less a 10% discount

August 3 Sold goods on credit to Jason

Miel $400 (worth $205)
 P a g e | 21

Format:
Topic 8 Name of business
Trial Balance Trial balance as at…..

Details fo Dr. Cr.

$ $

Example 1

Thomas Lee had the following information

available:

January 1 Started business with cash $1000

11 Paid rent by cash $150
16 Bought goods on credit from
Part 1: Introduction Andy Smith $200
22 Sold goods by cheque $400
A trial balance is a statement showing a list of
balances on the accounts in the ledger at a
specific time. It shows if the total of the debit a. Post to the ledgers
balances is equal to the total credit balances.
Date Particular Amount Date Particular Amount
General ledger
Part 2: Purpose of a trial balance Capital a/c
Jan. Bal. c/d 1000 Jan. Cash 1000
The trial balance is prepared to: 31 1
1000 1000
a. Check the arithmetical accuracy of the
Feb. Bal b/d 1000
double entry bookkeeping 1

b. Prepare the financial statements of the

business. Cash a/c
Jan. Capital 1000 Jan. Rent 150
1 11
The trial balance is not a part of the double Bal. c/d 850
entry system. It is simply a list of balance 31
b/ds. It does not prove the balance b/s is 1000 1000
correct. Feb. Bal b/d 1000
1
Rent a/c
Jan. Cash 150 Jan. Profit 150
11 31 and loss
150 150
Purchases
a/c
Jan. Andy 200 Jan. Trading 200
16 Smith 31 a/c
200 200
 P a g e | 22

a. Copy the account and balance it.

Sales a/c b. Post the entries to the appropriate
Jan. Trading 400 Jan. Bank 400 account.
31 a/c 22
400 400
c. Prepare a trial balance.
Bank a/c
Jan. Sales 400 Jan. Bal. c/d 400 2. The following accounts were provided by
22 31 Lamster & Co.
400 400
Feb. Bal. b/d 400 Utilities a/c
1 Sept. Cash 105
3

Purchases ledger Purchases

Andy Smith a/c
a/c Sept Cash 140
Jan. Bal c/d 200 Jan. Purchases 200 7
31 11
200 200 Loan- Amy
Feb. Bal. b/d 200 a/c
1 Sept. Cash 5000
2
b. Prepare the trial balance
Fixtures a/c
Sept. Cash 200 Sept. Cash 50
Thomas Lee 14 17
Trial balance as at Jan. 31st, 2018
Jessie
Details fo Dr. Cr. Lancon a/c
$ $ Sept. Sales 300 Sept. Cash 150
19 21
Capital Gl1 1000
Cash Gl2 850 Sales a/c
Rent Gl3 150 Sept. Cash 300
Purchases Gl4 200 30
Sales Gl5 400
Bank Gl6 400
Andy smith Pl1 200 Cash a/c
1600 1600 Sept. Loan - 5000 Sept. Utilities 105
2 Amy 3
Sept. Fixtures 50 Sept. Purchases 140
Exercises 17 7
Sept. Jessie 150 Sept. Fixtures 200
1. The following accounts were provided by 21 Lancon 14
Jaxmon Lendon. Sept. Sales 300
30
Date Particular Amount Date Particular Amount
General ledger
Cash in hand a. Copy the accounts and balance them.
a/c b. Prepare a trial balance.
May Bal. b/d 5000 May Rent 450
1 4
May Andy 300 May Purchase 800
6 10
May Interest 175 May Carriage- 105
12 Rec. 22 in
 P a g e | 23

3. Prepare a corrected trial balance as at 31

December 2018
Topic 9
Cindy Lauper Trading, Profit & Loss
Trial Balance as at 31 December 2018 Account
Dr. Cr.
$ $
Cash 300
Bank overdraft 3000
Capital 42500
Drawings 750
Land and building 30000
Office equipment 1050
Loan 2200
Inventory 7500
Purchases 9850 Part 1: Introduction
Sales 10650
Sales return(-in) 940 A person who starts a business aims to make a
Purchases return(-out) 1030 profit. This profit is calculated in the financial
Carriage-in 400 statements which are usually prepared at the
Wages 1500 end of the financial year.
Rent received 830
General expenses 1290 The financial statements consist of two
Trade receivables 12300 statements:
Trade payables 5670 1. Trading profit and loss account (or
63670 63670 Income statement)
2. Balance sheet

Part 2: Terms to know

There are certain terms which are associated
with the preparation of the Trading Profit and
Loss a/c. These terms include:

a. Carriage-inwards: Money spent by the

business to ship goods into the business

b. Carriage-outwards: This is based on “FOB”.

FOB stands for “Free on Board”. This relates to
international shipping. It means that the seller
is responsible for shipping goods until they
arrive at the arrival port to customer. The
customer is then responsible to getting the
goods to their final destination. Money spent by
the business to ship goods to a customer

c. Net sales: The sales revenue after the

deduction of returns from customers.
 P a g e | 24

d. Net purchases: The purchases of goods A. The Trading Account

after adding any carriage cost and the This account is used to calculate a company’s
deduction of returns to suppliers gross profit or gross loss.

e. Goods available for sale: The amount of Format:

goods that the company has in stock to sell to Trading Account
customers Sales I $
-Return-inwards ($)
f. Cost of goods sold: This refers to original =Net sales $
cost price of the goods that were sold to the
customers. Opening stock II $
Purchases III
$
g. Gross profit: The amount of revenue or
-Return-out ($)
income a business made from providing goods
+Carriage- $
or services BEFORE the deduction of its inward
expenses. =Net $III
purchases
h. Net profit: The amount of revenue or income Goods available $
a business made from providing goods or for sale
services AFTER the deduction of its expenses. -Closing stock IV ($)
=Cost of goods
i. Additional income: This is income received sold V $
by the business from other sources other than Gross profit or $
sales. loss

Part 3: Trading Profit and Loss Example 1

Account (or Income Statement) Sandy Miller had the following information
available for the period ending December 31,
The Trading profit and loss account consists of 2017:
two sections: Purchases $ 13,000
a. Trading account (top) – its purpose Sales $ 55,000
is to calculate the gross profit or loss (before Return-in $ 250
any deductions are made) Return-out $ 450
Carriage-in $ 100
b. Profit and Loss account (bottom)- Inventory:
This account is used to calculate the net profit January 1 $ 625
(after deductions) December 31 $ 375

Prepare the Trading Account for the period

ending December 31, 2017
 P a g e | 25

Example 2
Sandy Miller Using the example in Part a, the other
Trading Account for the period ending information available:
December 31, 2017 Rent $450
Discount allowed $ 80
Sales I Interest received $205
$55,000
-Return-inwards ($250)
=Net sales $54,750 Prepare the Profit and Loss Appropriation
Account for the period ending December
Opening stock II 31, 2017
$625
Purchases III $13,000 Sandy Miller
-Return-out ($450) Profit and Loss Account
+Carriage- $100 for the period ending December 31, 2017
inward Gross profit or loss $41,850
=Net $12,650 Add: Additional
purchases income
Goods available $13,275 (Received) :
for sale Interest received $205
-Closing stock IV $42,055
($375) Less: Expenses:
=Cost of goods $12,900 Rent expense ($450)
sold
Discount allowed ($80) ($530)
Gross profit or $41,850
loss Equals: Net profit $41,525
or loss
B. The Profit and Loss Account
This account is used to calculate a company’s Exercises
net profit or net loss.
1. Martha Adebo owns a small retail shop. Her
financial year ends on 31 August 2014. Her income
Format:
statement for the period is shown below. Some
Profit and Loss Account
words and figures are missing. Write down the
Gross profit or loss $
numbers iv to v and write the missing information.
Add: Additional income
(Received): Trading Account
Discount received $ Sales revenue 106,000
$ Less: Sales returns I 100,000
Less: Expenses:
Opening II 12,000
Name of expense ($) Purchases III
Name of expense ($) ($) Less: Returns-out 4,000
Equals: Net profit or loss $ 67,000
Plus: Carriage-in 5,000 72,000
84,000
Less: end stock IV 70,000
Gross profit V
 P a g e | 26

2. Piyush Daal is a financial adviser. He 4. The following trial balance appeared in the
provided the following information on October books (ledger) of Sandy Lane Fine Ideas as of
31,2017: May 31, 2016:
Sandy Lane Fine Ideas
Commission earned $72,100 Trial Balance
Interest received 2,900 $ $
Staff salaries 28,500 Cash in hand 1,500
Rent 9,400 Cash at bank 10,500
Telephone expenses 5,700 Stock, June 1 2015 26,000
Light and heat 1,100 Sales 226,000
Insurance 800 Sales return 1,650
Discount received 2,100
Prepare the Profit and Loss a/c or Income Commission received 4,200
Statement for the period ending October 31, Plant and property 420,000
2017 Equipment 185,000
Furniture 190,000
3. Mr. John Upscale has been operating his Motor vehicles 98,000
business for five years. He has always 10-year bank loan 320,000
prepared his final accounts using the horizontal Accounts receivable 45,000
presentation. His final accounts are shown Accounts payable 38,900
below: Drawings 15,000
Purchases 200,000
John Upscale Purchases returns 1,598
Income Statement Discount allowed 1,600
$ $ Payroll 6,300
Sales 210,000 Electricity 5,000
Opening stock 35,000 Cleaning 1,100
Add purchases 115,000 Telephone 6,500
Goods available 150,000 General expenses 8,700
Less: End stock 15,000 Capital 629,851
Cost of goods sold 135,000 1,222,650 1,222,650
Gross profit c/d 75,000
210,000 210,000 a. From the trial balance shown above,
select the information needed to prepare
the Income statement. (Note: Some
Gross profit b/d 75,000 balances do not belong to the Income
Wages and salaries 43,000 statement).
Light 5,200
Telephone 2,800 b. Prepare the Income Statement or Trading
General expenses 4,000 Profit and Loss Account for the period
Net profit 20,000 ended 31 May 2016
75,000 75,000

Prepare a vertical Income statement for the

period ending June 30, 2018.
 P a g e | 27

5. Clare Mill has the following balances in her Topic 10

capital account as at 1 January 2016. The
capital balance is $32,000. Statement of Position
(or Balance Sheet)
During the year ended 31 December 2016, the
following transactions were recorded directly in
the capital account.

Cash and credit sales 86,000

Cost price of goods sold 51,000
Selling expenses 15,000
General expenses 4,000
Additional capital 10,000
Rent received 2,000
Drawings 13,000

a. Redraft the Capital account showing the

correct entries which are needed to be
entered in the account.
Part 1: Introduction
b. Prepare the Trading Profit and Loss
A statement is a statement used to record the
Account for the period ending December
assets, liabilities and capital of a business as at
31, 2016
a specific date. It shows the business financial
position at a specific time.

Part 2: Preparing a comprehensive

balance sheet
In completing a comprehensive balance sheet,
certain information must be included. This
includes:
a. Accumulated depreciation
b. Provision for Doubtful debts
c. Net profit or loss
d. Drawings

Steps to preparing a balance sheet:

Note 1: Calculate the Net Book Value (NBV) of

all fixed assets:
Cost price – Accumulated depreciation

Note 2: Calculate the Net Accounts receivable

in the current asset section.
Accounts receivable – Provision for Doubtful
debt
 P a g e | 28

Note 3: Calculate closing or ending capital, in

the finance by section. Calculate:
Beginning capital +/- Net profit (loss) –
Drawings a. Working capital or net current assets
b. Net assets
Statement of Position (Balance Sheet) c. Net profit
as at --------
Cost Accumulated Net Book 2. The information below was taken from a sole
price Depreciation Value proprietor’s Balance Sheet which was drawn
(NBV)
up at the end of the financial period.
Fixed assets:
Premises $ ($) $
Furniture $ ($) $ $
$ ($) $ Capital, at start 10,000
Net profit 5,600
Current Asset: Current liabilities 500
Inventory $
Net fixed assets 10,000
Accts. Rec. $
- Prov. Doubtful ($) $
Current assets 3,000
Cash $
- Current Liab. : Calculate:
Accts. Payable ($)
= Working Cap. $ a. Working capital or net current assets\
-Long-term b. What was the trader’s drawings for the
Liab.:
Bank loan ($)
year?
=Net assets $ c. What is another term used to describe
net fixed assets?
Financed by:
Capital, at start $ 3. Choose the correct answer to each
+/- Net profit $ or ($) question.
(loss)
-Drawings ($)
=New or end $ I. The Manga Company hire an accountant. On
capital July 9, you received an invoice with the goods
from Bobbin Ltd. for $900. In which book of
Exercises original entry would you record the
transaction?
a. Sales daybook
1. The following list of balances were extracted
b. Purchases return daybook
from Ms. Matthew’s ledger on December 31,
c. Purchases daybook
2016:
d. Sales return daybook
List of Balances
$
Capital, at start 8,000
Current liabilities 400
Net fixed assets 8,000
Current assets 2,000
 P a g e | 29

II. If Jenny Ceal returns goods to her supplier,

how should she record the transaction in his VI. When the two sides of a trial balance agree,
financial books? this means that
i. Enter in Return-in journal
ii. Enter in Return-out journal a. All transactions are treated correctly
iii. Post to the debit side of supplier’s account b. There are no errors
iv. Post to the credit side of supplier’s c. All accounts in the ledgers have been posted
account with equal debits and credits
d. The addition of the trial balance is correct
a. i and ii only
b. i and iv only 4. G. Williams, a tailor, produces coats for
c. ii and iii only men. He had the following account balances
d. ii and iv only for the period ending August 31, 2017:

III. B. Long’s Balance Sheet shows the Bank loan 13,000

following balances. Building 75,000
Cash in hand 1,460
Accounts payable 4,300 Cash at bank 8,440
Accounts receivable 400 Accounts receivable 9,500
Inventory 5,417 Furniture & fittings 16,000
Short-term loan 325 Motor vehicle 12,000
Bank overdraft 410 Office equipment 6,000
Cash in hand 200 Sewing machine 24,900
Inventory 7,780
What is the total of the company’s current Trade payables 5,460
liabilities? Net profit 2,120
Accumulated depreciation- Motor
a. $4,825 vehicle $300
b. $5,025 Accumulated depreciation-Office
c. $5,035 equipment $200
d. $5,435
Prepare a classified
IV. The balances listed below appear in a sole Statement of Position showing the initial
proprietor’s trial balance. The item which will capital. Using the order of liquidity.
be entered on the Profit and Loss Account of
the business will be

a. Taxes paid on purchases

b. Drawings
c. Carriage outwards for the period
d. Return-outwards

V. What does a debit balance b/d in the

inventory account represent?

a. Purchases for the period

b. Sales for the period
c. Stock damaged
d. Stock at the start
 P a g e | 30

5. The following balances relate to the Jason Topic 11

Leigh business as at December 31, 2017
Ratios
Capital, at start ? (Analysis & interpretation)
Drawings 1,800
Furniture 2,000
Equipment 6,500
Inventory:
January 1 4,525
December 31 3,000
Purchases 26,375
Sales 27,500
Return inwards 125 Part 1: Introduction
Return outwards 350 It is necessary to analyse and interpret the
Carriage inwards 225 financial records of a business to determine its
Carriage outwards 145 performance for a periods or a number of
General expenses 325 periods.
Tax refund 200 When a business analyse its financial
Discount received 475 information, it examines the information or data
Commissioned received 290 available. It then interprets this information by
Accounts receivable 8,145 comparing the information against other
Accounts payable 6,350 business of similar size and objectives.

a. Prepare an Income Statement for the Part 2: Types of accounting ratios

period ending December 31, 2017
b. Prepare a Balance Sheet as at December The comparison of accounting information is
31, 2017. usually expressed to others, inside and outside
the business, in ratios. These ratios are
normally identified as two separate groups:
Profitability ratios and Liquidity ratios.

Part 3: Liquidity ratios

These ratios allows the user of the information
to see how easily and how fast a business can
convert its assets to cash.
Types of liquidity ratios

1. Current ratio or Working Capital ratio

Let’s the business know if there are enough
assets in the short run to cover any obligations
coming due.
Current assets = #:1
Current liabilities

Any answer which is 1:5 or greater is

considered satisfactory
 P a g e | 31

2: Acid test ratio or Quick ratio 4. Debtor’s ratios

It is similar to the current ratio, but it shows the It measures the amount of time it takes a
business ability to meet its obligations without business to collect its debts. The longer the
needing to sell it inventory. time, the least likely it will be collected. It
shows the efficiency of the business in
Current assets – ending inventory = # : collecting its debt. It can be measured in
1 months, days or weeks.
Current liabilities
Debtor’s x 12 months = # months
If there is a great difference between the Credit sales
current ratio result and the Quick result, then
the company is too reliant on inventory to meet Debtor’s x 365 days = # days
its debt. Credit sales

A business with a negative working capital may Debtor’s x 52 weeks = # weeks

find itself incapable of: Credit sales
- Pay its liabilities current liabilities
- Pay for its supplies If the payment collection period is too long, a
- Take advantage of cash discounts business may choose to:
-Improve their control policy, by sending
Businesses in order to resolve a tight working debt collection agency
capital will: -Offering cash discount for early
-Introduce more capital into the payments
business -Charging interest on late payments
-Obtain a long-term loan from a bank
-Sell some of its fixed assets 5. Creditor’s ratios
It measures the amount of time it takes a
Other liquidity ratios which are also known as business to pays its suppliers. It can be
“efficiency ratios” measured in months, days or weeks.

3. Rate of inventory or stock turnover Creditor’s x 12 months = # months

It measures the number of times the business Credit purchases
sold out and reordered inventory
Creditor’s x 365 days = # days
Cost of goods sold or “Cost of sales” = # Credit purchases
times
Average stock or inventory Creditor’s x 52 weeks = # weeks
Credit purchases
The results let’s you how often the company
had to reorder stock. The average turnover A business may choose to pay their suppliers
ratio for a retail business is 4 times per year or late in order to use the funds for other
financial year. payments, but this may result in:
-The supplier refusing to grant future credit
A low rate of stock turnover may be due to: -The loss of any discount
-Less sales of inventory -The damage in the client/supplier relationship
-Too much inventory bought
-A fall in demand by customers
-Price of good is too high
 P a g e | 32

Part 4: Profitability ratios 4. Gross profit mark-up

These ratios are used to inform a company It reflects the additional profit added to the cost
about the profitability of its operations. price of an item bought for resale.

Types of profitability ratios Gross profit for the year x 100= %

Cost of goods sold
1. Return on capital employed (ROCE)
Its result will show the profit earned for every It helps a business to determine if consumers
$100 invested in the business. are willing to pay more for items which other
businesses are selling. As a result, the
Net profit for the year x business may have to increase or decrease
100= % their prices.
Capital employed (Ending capital + long-term
liabilities) 5. Expense to sales ratio
This ratio helps to measure the amount of
2. Gross profit percentage of sales sales which is spent to meet the amount
It shows the profit made by the company for needed to pay all expenses.
every $100 of sales before any deductions are
made. Total expenses x 100= %
Net sales
Gross profit for the year x 100= %
Net sales Even though a company’s expenses may be
more in comparison to another company, the
A low gross profit percentage can be improved overall efficiency is ultimately determined by
by: the net sales of the individual company.
-Increase the sales price
-Buying cheaper material Exercises
-Increase advertising and sales
promotions 1. Deep Line has prepared the following
balance sheet.
3. Net profit percentage
It states the amount of profit that is earned on
every $100 of sales after all deductions are Fixed assets $26,000
made. Current assets (stock $1200)
14,000
Net profit for the year x 100= % 40,000
Net sales
Long-term liabilities 15,000
If there is a significant difference between the Current liabilities 8,000
gross and net profit percentage, it reflects a Capital, end 17,000
significant amount of income being spent on 40,000
expenses.

Calculate the
a. Working capital
b. Current ratio
c. Acid test ratio
 P a g e | 33

4. During the year ended 3o November 2017,

2. The following amounts appear in the Kathy Mayfield had an opening stock of $8,000
business trial balance at the end of the year and a closing stock of $3,000. Her sales
(360 days) amounted to $98,000. Her selling prices were
obtained by adding a gross profit margin of 25
$ percent. Her selling and Office expenses
Opening stock 4,000 amounted to 10 percent of sales.
Closing stock 6,000
Sales (2/3 on credit) 132,600 Calculate for Kathy:
Capital 125,000 a. Gross profit for the year
Purchases (all on 80,000 b. Cost of sales for the year
credit) c. The business Mark-up
Expenses 37,000 d. Rate of stock turnover
Sales return 600 e. The net profit for the year
Average debtors 11,000 f. The gross profit, if she decreases her
Average creditors 6,000 mark- up to 25%

Calculate the following: 5. The following information relates to Jamesly

Ltd. for the years ended 30 April 2017 and
a. Stock turnover 2018:
b. Cost of sales 2017 2018
c. Gross profit mark-up Sales $560,000 $400,000
d. Net profit percentage Gross profit 170,000 240,000
e. Capital employed Operating expenses 48,000 70,000
f. Debtor’s ratio in days Net profit 132,000 170,000
g. Debtors ratio in months Total current assets 185,000 175,000
h. Creditor’s ratio in weeks Total current liabilities 80,000 105,000
i. Creditor’s ratio in months Capital 420,000 540,000
Closing stock 90,000 84,000
3. For the year ended 30 June 2018, M. Joss
books showed the following: From the information stated above, calculate
a. Gross profit percentage
b. Net profit percentage
Opening inventory 16,550
c. Current ratio
Sales 149,760
d. Acid test ratio
Closing inventory 7,850
e. Return on capital employed
Purchases 99,000
f. Stock turnover
Return inwards 1,760
Return outward 1,500
General expenses 14,500

Calculate the:
a. Cost of goods sold
b. Rate of stock turnover
c. Gross profit percentage
d. Net profit percentage
 P a g e | 34

Topic 12 Part 3: Types of receipts

Revenue & Capital This refers to money collected by the business
(Receipts, Payments) A capital receipts is the money received from
the sale of a fixed asset or the introduction of a
fixed asset by the owner of a business.

Example 3
Sold a motor vehicle on credit

A revenue receipts refers to money received by

the business from the operating of the
business or money received not related to fixed
assets.
Part 1: Introduction
It is extremely important to classify and treat a
Example 4
business expenditure and receipt properly.
Received a cheque from interest on
These expenditure and receipt can be
investments
classified in two different ways: Capital or
Revenue.
Exercises
Part 2: Types of expenditures 1. Choose the correct answer to each question
This refers to money spent by the business
I. Purchase of showcases and shelves
A capital expenditure is an expenditure which
a. Revenue expenditure
occurred by a business and will benefit a
b. Capital expenditure
business over a number of years. E.g. fixed
c. Revenue receipts
assets.
d. Capital receipts
It is the purchase of a fixed asset or the
II. Payment to carpenters to fit shelves and
addition of value to an existing fixed asset.
showcases
Such as: From the time of purchase to the
a. Revenue expenditure
actual operating of the fixed, all cost
b. Capital expenditure
incurred is capital.
c. Revenue receipts
d. Capital receipts
Example 1
Bought new machinery for the business
III. Purchase of goods for resale on credit
a. Revenue expenditure
A revenue expenditure is a cost which relates
b. Capital expenditure
to the daily operation of the business or the up
c. Revenue receipts
keep of an existing fixed asset.
d. Capital receipts
Example 2
IV. Receipt of bank loan form National Bank
Paid utilities for the office
a. Revenue expenditure
b. Capital expenditure
c. Revenue receipts
d. Capital receipts
 P a g e | 35

A trial run to make sure it was working properly

V. Payment of insurance on building premises was done at a cost of $45. What was the
a. Revenue expenditure actual cost of the computer?
b. Capital expenditure
c. Revenue receipts 5. A. Dennis bought a building for $95 000.
d. Capital receipts He painted the building at a cost of $5 000 to
get it ready for the grand opening of the
VI. Payment of rates and taxes business. Three years later, the building color
a. Revenue expenditure was faded and needed to be re-painted at a
b. Capital expenditure cost of $2000.
c. Revenue receipts
d. Capital receipts a. How much was capital expenditure?
b. How much was revenue expenditure?
VII. Commission received on goods sold for an
agent 6. Yousef Khan started a business with $50
a. Revenue expenditure 000 in cash. He has calculated that his sales,
b. Capital expenditure all on credit, was $33 000 for his first year of
c. Revenue receipts operation while his purchases, all in cash, was
d. Capital receipts $18 000. He has to decide which of the
following cash transactions should be
VIII. Sale of goods on credit considered revenue transactions and which
a. Revenue expenditure should be capital transactions.
b. Capital expenditure
c. Revenue receipts i. Sale of office furniture $1 000
d. Capital receipts ii. urchase of furniture $1 600
iii. Advertising cost $ 800
IX. Withdrawal of cash by the owner iv. Travelling cost $3 200
a. Revenue expenditure v. Installation of electric sign $ 400
b. Capital expenditure vi. Paving of the new driveway to office
c. Revenue receipts $1 100
d. Capital receipts a. Calculate EACH of the following amounts:
i. Revenue receipts
X. Payment of cheque to a creditor ii. Capital receipts
a. Revenue expenditure iii. Revenue expenditures
b. Capital expenditure iv. Capital expenditures
c. Revenue receipts
d. Capital receipts b. Calculate the profit of the business. (Show
the working)
2. State the difference between a capital
expenditure and revenue expenditure. 7. Calculate the value of the capital or revenue
transaction in the following cases.
3. State the difference between a capital
receipt and a revenue receipt. a. A company purchases a new machine for a
catalogue price of $40,000 and paid
4. A new piece of furniture was purchased at a immediately to earn the 5 percent cash
cost of $10 000. The transport costs were $75 discount
and the installation cost was $115.
 P a g e | 36

b. The cost to transport the machine was Topic 13

$1000 and the cost of installation was $2500.
A wall was moved two feet at a cost of $1500 Subsidiary Journals
to accommodate the machine. (Daybooks)
c. During the first year of operation, the
machine products were sold for $35,000.

d. During the second year of use, the machine

stopped working. The business had insured
the machine against this problem for $30,000.
The insurance company accepted their claim
and the money was paid promptly.

e. During the third year of use, the cost of the Part 1: Introduction
raw materials used by the business rose 20%
to $27,300. Each day of operation, a business conducts
many transactions. When there are numerous
credit transactions, it is necessary to record
them in separate books. These books makes it
easier for the accountant to classify the
accounts. All credit transactions related to
goods bought for resale are recorded in the
books called subsidiary journals.

There are FOUR such journals; Purchases,

Sales, Return-inwards and Return-outwards.
The journals are NOT part of the double entry
system.

Part 2: Types of Subsidiary Journals

(Daybooks)

The journals necessary for credit transactions

of goods are:

a. Purchases journal- Records goods bought

on credit
b. Sales journal- Records goods sold on credit
c. Return-in journal- Records returns made by
customers to the business
d. Return-out journal- Records returns made by
the business to its suppliers
 P a g e | 37

Part 4: Posting the ledgers from the

Part 3: Format of the Subsidiary daybooks
Journals
Dat Particul fo Amou Dat Particul fo Amou
e ar nt e ar nt
a. Purchases Journal or daybook Sales ledger
Debtor
Date Name of Folio Invoice Amount Name
Creditor # # $ a/c
Sales SJ $ Ret-in RIJ $
PL

Transfer to GL $ Purchases ledger

31 purchases A/c Creditor
Name
a/c
Ret-out RO $ Purchas PJ $
b. Sales Journal or daybook J e

General ledger
Date Name of Folio Invoice Amount Purchases
debtor # # $ a/c
SL Total PJ $
credit
Transfer to GL $
Sales a/c
31 Sales A/c Total SJ $
credit

Return-in
c. Return-in Journal or daybook a/c
Total RIJ $
credit
Date Name of Folio Invoice Amount
debtor # # $ Return-out
SL a/c
Total RO $
Transfer to GL $ credit J
31 Ret-in A/c
Example 1
June 3 Bought goods on credit from James
d. Return-out Journal or daybook $2000 (pl 15)

Date Name of Folio Invoice Amount June 5 Bought goods on credit from Tom
Creditor # # $ $1000 (pl 19)
PL
June 8 Sold goods on credit to Marcy
Transfer to GL $
31 Return-out A/c $4000 (sl7)

June 10 Sold goods on credit to Arthur

$5500 (sl 13)

June 12 Returned goods to Tom $300

June 19 Arthur returned goods to the

business $550
 P a g e | 38

a. Prepare the necessary daybooks

b. Post to the appropriate ledger
i. Purchases Journal or daybook
Date Details fo Amount Date Details fo Amount
Date Account Folio Invoice Amount Sales ledger
Marcy a/c (Sl 7)
# # $
June Sales SJ 4,000
June 3 James Pl 15 00000 2,000
8
June 5 Tom Pl 19 00000 1,000
Arthur a/c (Sl 19)
June 30 Transfer to Gl 1 3,000
June Sales 5,500 June Ret-in RIJ 550
purchases a/c 10 19
June Bal c/d 4,950
30
ii. Sales Journal or daybook 5,500 5,500

Date Account Folio Invoice Amount Purchases ledger

# # $ James a/c (Pl 15)
June 8 Marcy Sl 17 00000 4,000 June Purcha PJ 2,000
3 se
June Arthur Sl 13 00000 5,500
10 Tom a/c (Pl 19)
June Transfer to Gl 2 9,500 June Ret-out ROJ 300 June Purcha PJ 1,000
12 5 se
30 sales a/c June Bal c/d 700
30
1,000 1,000
iii. Return-in Journal or daybook
General ledger
Date Account Folio Invoice Amount Purchases
# # $ a/c
June Arthur Sl 13 00000 550 June Total PJ 3,000
19 30 credit
June Transfer to Gl 3
30 return-in a/c 550 Sales a/c
June Total SJ 9,500
30 credit
iv. Return-out Journal or daybook
Return-in a/c
June Total RIJ 550
Date Account Folio Invoice Amount 30 credit
# # $
June Tom Pl 19 00000 300 Return-out
12 a/c
Transfer to Gl 4 June Total Roj 300
31 return-out a/c 300 30 credit

Exercises
1. Choose the correct answer to each question

I. A credit note should be entered in the

a. Sales journal
b. Return-out journal
c. Return-in journal
d. Purchases journal
 P a g e | 39

c.) Jack, a customer,

II. Which of the following is not listed in the returned goods
subsidiary journals? previously bought to
a. Cash payment to a creditor the company
b. Return of goods by a customer for d.)Jesse returned
credit goods previously
c. Purchase of goods on credit bought to True Value
d. The sale of goods on credit
5. In June 2009, Mr. Thomas made the
III. Which of the following is NOT a heading in following credit purchases from three suppliers,
the subsidiary journal? who each offered a 5% trade discount and a
a. Folio 2% cash discount if the amount is paid within
b. Date one month,
c. Invoice
d. Ledger Harris & Sons Ltd.
June 5 4 bags of rice @$230 each
IV. Another name associated with the 3 cases of milk @$155 each
subsidiary journals are 4 bottles of oil @$20 each
a. Personal journals
b. Subsidize journals L.J. Enterprises
c. Nominal journals June 11 5 bags salt @$40 each
d. Specialised journals 6 bags onions @$80 each

V. In which of the following ledgers does the A. Harden

personal accounts appear? June 19 4 cases soda @$48 each
a. General ledger and Trial balance 3 cases orange juice@$65 each
b. Sales ledger and purchases ledger 3 cases ketchup @$110 each
c. General ledger and cashbook
d. General ledger and sales ledger On June 18 he had the following bulk sales on
credit:
2. Give TWO reasons why a business would 2 bags of rice @$330 each to T.M Dinnes
maintain or keep subsidiary journals. 3 bag of onions @$190 each to S. P. Smith

3. Name TWO accounts which would be found On June 23 he had the following bulk sales on
in a debtor’s account in the sales ledger. credit:
2 cases of ketchup @$205 each to Sammy
4. State (i) the most appropriate source Club
document and (ii.) the daybook which Jesse
should use for each of the following Returns made were:
transactions.
June 21 1 bag of rice was returned to
Transactions (i) (ii.) Harris & Sons Ltd.
Daybook Source June 24 1 case of ketchup was returned
document by Sammy club
a.) Jesse paid a
cheque to T. Mason for a. Prepare the appropriate daybooks or
goods bought journals
b.) Bought goods on b. Post to the appropriate ledger
credit to Alex Priest
 P a g e | 40

6. Mr. Lee had the following information Topic 14

available in his daybooks:
Adjustments
Purchases Journal (Prepaid & Accrued)
Date Account Fo # Invoice # Amount
May 5 Debbie Pl 3 AB1030 $600
May 9 Sammy Pl 7 CG2199 100
May 31 Purchases a/c Gl 3 700

Return-out Journal
Date Account Fo # Invoice # Amount
May 5 Debbie Pl 3 AB1030 $175
May 31 Ret-out a/c Gl 8 175

Post the information to the appropriate

ledger
Part 1: Introduction
Adjustments to the final accounts of a business
are changes made at the end of the period to
reflect a true or fair valuation of a business
assets, liabilities, capital, income and expense
accounts.

Part 2: Types of adjustments

There various types of adjustments made at
the end of the financial period. Two of these
adjustments are: Prepayments and Accruals.

I. Prepayments -are payments made to the

business by individuals for services not yet
rendered or performed. It’s also known as “paid
in advance”

a. Prepaid revenue or income- is money paid

to you for services not yet performed by you.
-Therefore, you owe someone, and anyone
you owe is a CREDITOR
- Result: prepaid revenue is a current
liability

b. Prepaid expense- is money paid by you to

someone for services not yet rendered by
them. -Therefore, they now owe you,
and anyone who owes you is a DEBTOR
-Result: Prepaid expenses is a current
asset
 P a g e | 41

II. Accrual- is payments not yet made or Types of Account

received for services already rendered or Debit side Credit
performed. Dr. side
-Also known as “owing, outstanding, due, Cr.
arrears. Expense Add (+) Deduct (-)
Revenue Deduct (-) Add (+)
a. Revenue accrued- money owed to the
business for services already performed by
you.
- Anything or anyone owing the business is a “Revenue” a/c
DEBTOR Dr. (-) Cr.(+)
-Result: Revenue owing is a current asset Revenue (owing), at start $ Revenue prepaid, at start $
(Bal b/d) (Bal b/d)

b. Expenses accrued- money owed by the Profit & loss A/c Revenue received $
business for services already performed for $
Revenue (owing), end $
them. Revenue prepaid , end $ (Bal c/d
-Anything or anyone the business owes is a (Bal c/d)
CREDITOR $ $
-Result: Expenses owing is a current
liability
“Expense” a/c
Part 3: How to calculate the amount Dr. (+) Cr. (-)
of expense or revenue to be Expense prepaid, at start $ Expense owing, at start $
transferred to the income statement (Bal b/d) (Bal b/d)

Expense paid $ Profit & loss A/c $

Adjustments
Expense owing , end $ Expenses prepaid, end $
Beginning End of (Bal c/d) (Bal c/d)
of year/period
year/period $ $
Prepaid Add Deduct
Accrual Deduct Add Exercises
(owe)
Amount received/Paid Add 1. Prepaid expenses
during the year a. What are prepaid expenses?
b. How is it treated on the income
Part 4: Posting entries to the ledger statement (Trading Profit and Loss
Account)?
Since expenses normal side is the debit side, c. How is it recorded on the Balance
all entries to increase the account will be Sheet?
recorded on the debit side.

Also, revenue accounts normally have a credit

balance, therefore all entries to increase the
account will be entered on the credit side of the
account.
 P a g e | 42

2 . Prepaid Revenue or income 7. Mr. Selon rents an apartment on a monthly

a. What is prepaid revenue or income? basis. The tenant paid $5,000 at the start of the
b. How is it treated on the income current financial year and pays him a cheque
statement (Trading Profit and Loss for $18,000 at the end of the year. $2,000 is
Account)? prepaid for the upcoming financial year.
c. How is it recorded on the Balance
Sheet? a. Prepare the rent account
b. Show how it would be recorded in
3. Accrued expenses the profit and loss account (Show an
a. What are accrued expenses? extract)
b. How is it treated on the income c. Prepare a Statement of Position
statement (Trading Profit and Loss extract
Account)?
c. How is it recorded on the Balance 8. C. Brandy must take the following
Sheet? information into consideration in preparing her
profit and loss account for the year ended 31
4. Accrued revenue or income July 2018.
a. What is accrued revenue or income?
b. How is it treated on the income i. Wages paid $46,000; Due but unpaid
statement (Trading Profit and Loss $3,400
Account)? ii. Rates and taxes paid $6,846; rates & taxes
c. How is it recorded on the Balance prepaid $846
Sheet? iii. Commissions received $1,800;
commissions owed to Ghandi $200
5. M. Vee rents office space for $12,000 per iv. Rent received from tenant $20,000; rent
year or annum. He pays $10,000 in the year. overpaid $800
a. Prepare the rent account
b. Show how it would be recorded in the a. Prepare the ledger accounts showing
profit and loss account (Show an the amounts to be transferred to the Profit
extract) and Loss account.
b. Prepare the Profit and Loss Account
6. John Mason rents one of his factories for c. Prepare a Statement of Position extract
$160,000 per annum. He had $35,000 prepaid
for the rent and received $100,000 from his
tenant for the current year 2005. He is still
owed $20,000.
a. Prepare the rent account
b. Show how it would be recorded in the
profit and loss account (Show an
extract)
c. Prepare a Balance Sheet extract
 P a g e | 43

9. Milo Ltd. had the following information for

the period ending Dec. 31, 2017: Topic 15
Gross profit $35, 500 Adjustments
Rent paid $2100 (Correction of Errors)
Electricity paid $825
Interest received $340
Discount received $60

Additional information:
i. Rent paid in advance $200
ii. Interest received accrued $45
iii. Electricity still owing $100
iv. Interest on loan outstanding $210

Part 1: Purpose
a. Prepare the following accounts:
i. Rent account The correction of any errors is necessary in
ii. Interest received order to ensure that the amounts being
iii. Electricity transferred to the final accounts are the true
b. Prepare the Profit and Loss Account for amount.
the period ending Dec. 31, 2017
c. Prepare a Statement of Position extract Part 2: Type of errors
There are two types of errors which can be
made during the process of preparing a
company’s financial statement.

- Errors that do not affect the trial balance

(COPCOR)
- Errors that affect the trial balance
(Suspense account)

Part 3: Errors that DO NOT affect the

trial balance (COPCOR)
1. Error of Commission
2. Error of Omission
3. Error of Principle
4. Error of Compensation
5. Error of Original entry
6. Error of Complete reversal
 P a g e | 44

Example 2
A: Errors which relates to the accounts of a Goods sold by cash $50 was omitted from the
business books of the business

1. Error of commission (C) Journal entry:

-Correct amount but wrong personal
account Date Particular Dr. Cr.
-The people’s names are usually similar Original Cash 50
entry:
To correct: Sales 50
-Cancel the wrong personal account and Error made: -------
enter the correct personal account --------

Example 1 Corrections Cash 50

made:
John Smith bought goods for $100 but was
Sales 50
recorded in Jean Smith account.

Journal entry: Exercises

Date Particular Dr. Cr. 1. Rent paid to landlord $500 cash was omitted
Original Purchase 600 from the books.
entry:
John Smith 600 2. Purchases of goods $1000 on credit from
James Lloyd was omitted from the books.
Error Purchase 600
made: 3. Error of principle (P)
Jean 600
Smith The correct amount is recorded but in the
wrong nominal or real account
To Jean Smith 600
correct: To correct:
John Smith 600 Cancel the wrong nominal or real account and
enter the correct nominal or real account
Exercises
1. A chair sold on credit to Missy Day for $40
was entered in Misty Dennis account.

2. Cash received from Monica Sue $75 was

entered in Monique Szue account.

2. Error of complete omission (O)

The entire transaction was omitted from the

books. No amount. No account

To correct:
Enter the transaction in the books of the
business
 P a g e | 45

Example 4
Example 3 The sales journal and the purchases journal
Equipment bought by cheque $95 was were overcast by $1000.
entered in the purchases account
Journal entry:
Journal entry:
Date Particular Dr. Cr.
Date Particular Dr. Cr. Original Cash or bank or ----
Original Equipment 95 entry: credit
entry: Sales ----
Bank 95
Error ---- ----
Error made: Purchases 95 made:
Bank 95 ------- ----

Corrections Equipment 95 To Sales 1000

made: correct:
Purchases 95 Purchases 1000

Exercises
Exercises
1. Rent paid of $300 was overstated and rent
1. Bought fixtures of $45 from John James by received was overstated at $300.
cash and was entered on the fittings account.
2. The interest received account was under-
2. A cheque paid to the landlord of $650 was casted by $150 and Commission expense was
entered in the cash account under-casted by $150

B: Errors which relates to the amounts of a 5. Error of original entry (O)

business.
The wrong amount was entered but in the
4. Error of compensation (C) correct accounts.
The amounts are usually similar
The wrong amounts was entered but in the
correct accounts To correct:
It’s associated with the terms “overcast, -Step 1: Find the difference in the amounts
undercast, overstated, understated, too little or -Step 2: Add: the difference to the accounts,
too much”. by staying on the same side as the original.
Or, Deduct: the difference to the accounts, by
To correct: going on the opposite side of the original.
i. Add: the difference to the accounts, by
staying on the same side as the original side.
ii. Deduct: the difference to the accounts, by
going on the opposite side of the original side
 P a g e | 46

Example 5 Exercises
A cheque received from Smith for $513 was
entered as $531 in the books of the business. 1. A car bought for $4000 cash was credited to
the motor vehicle account and debited to the
Journal entry: cash account.

Date Particular Dr. Cr. 2. Returns made by the company to its

Original Bank 513 suppliers $75 was debited to the returned-out
entry: account and credited to the supplier’s account.
Smith 513

Error Bank 531

made: Part 4: Errors which affects the trial
Smith 513 balance- Suspense account

To Smith 18 The Suspense Account is an account used to

correct: correct errors that cause the trial balance to not
Purchases 18 balance. These are errors made to one of the
accounts in a transaction.
6. Error of complete reversal (R) The suspense account is open in order to
record the difference in the balance on the trial
The correct amount was entered and in the balance
correct accounts but on the wrong side.
Exceptions are:
To correct: -Error of commission
-Put the accounts on their correct sides and - Error of principle
double the amount
Example 7
Example 6 Trial balance
Paid rent by cheque $800 was entered on the Dr. Cr.
credit side of rent and the debit side of bank Debtors 100
Cash 740
Journal entry: Furniture 160
Capital 980
Date Particular Dr. Cr. 1000 980
Original Rent expense 800
entry: The following errors were discovered:
Bank 800
i. Bought fixtures by cheque $60 but it was
Error made: Bank 800 omitted from the fixtures a/c.
Rent 800 ii. A discount received of $40 was recorded
expense
on the debit side of the discount allowed
To correct: Rent expense 1600
account.
Bank 1600 iii. A cheque received from D. James for $55
was entered in the account of T. Jaymes
 P a g e | 47

a. Open the suspense account Exercises

b. Prepare the journal entries to make the
necessary corrections 1. (I) Prepare the journal entry needed to
c. Enter all the appropriate corrections in correct each of the errors given below.
the suspense account
a. A loan issued to Jason Smith $500 was
a. Open the suspense account entered in Jay Smith’s account.
b. A loan issued by Broehms Bank for $5,000
Date Particular Amount Date Particular Amount
was recorded as Broe Hemms.
Suspense a/c c. Sale of goods to Ander May $150 was
Difference 20 credited to Mae Van Holsen.
per trial
balance d. The purchased $800 worth of goods in cash
was not entered in the books of the business.
e. The withdrawal of cash from the bank $1000
was omitted from the cashbook
b. Prepare the journal entry to correct the
f. Rent paid by cheque $210 was not entered in
errors
the rent expense account.
g. Furniture of $90 bought on account (credit)
Date Particular Dr. Cr.
Dec. 31 Fixtures 60 from Home Depot was recorded as purchases.
i. h. A cheque received from a debtor $40 was
Suspense a/c 60 record in the cashbook as Cash.
Record error of i. The sales of goods to customers was
omission overstated by $2,000 in the sales account
meanwhile the purchased of goods from
ii. Suspense a/c 80
Discount received 80
suppliers was overstated by $2000 in the
Record error of purchases account.
reversal j. Returns-outward was understated by $200
k. A cheque paid to Don Jenson, a supplier, for
iii. T. Jaymes 55 $414 was entered as $441.
D. James 55 l. $330 received in cash for commission
Record error of
commission
revenue was entered as $303
m. A discount received from Sammy, a
c. Post corrections to the suspense creditor, for $67 was entered as $767
account n. Return-in of $50 from Sandra Dee was
credited to the return-in account and debited to
Date Particular Amount Date Particular Amount Sandra Dee.
o. Carriage-out paid on goods shipped to a
Suspense a/c customer $225 cash, was debited to the cash
Discount Difference 20 account.
received 80 per trial
balance
(II)
Fixtures 60
(a) State which errors would have an impact on
80 80
the net profit of a business
(b) State whether it would cause the net profit
to be understated or overstated
 P a g e | 48

2. Jennifer Hassell adjusted trial balance for Topic 16

the period ending June 30, 2015 showed the
following balances: Adjustments
Jennifer Hassell (Correction of Errors)
Trial Balance as at June 30, 2015
Dr. $ Cr. $
Cash 5,000
Trade receivables 450
Inventory 1,100
Machinery 8,000
Accounts payable 300
Notes payable 275
Owner’s equity (capital) 10,000
14,550 10,575

a. What is the difference per trial balance? Part 1: What is Provision for
depreciation?
b. Open the suspense account, showing the
difference per trial balance. It is an estimate of the lost or reduction in the
value of a fixed asset over its useful economic
On checking the books, some errors were life.
found:
Part 2: The causes of depreciation
i. Cash received from a debtor for $210 was a. Physical deterioration factor- wear and tear,
recorded as $120 erosion
ii. Machinery bought for $500 was recorded in b. Economic factors- Asset may have become
the inventory account obsolete (outdated) or inadequate (The size of
iii. Machinery sold for $900 on account (credit) the business may have changed)
to Lumber Ltd. was omitted from the books c. Time factor- (The life of the asset may have
iv. A receipt of $550 cash from Lumber Ltd. expired)
was credited to the cash account d. Depletion factor- (This occurs with natural
v. A cheque paid for $5075 for machinery was resources)
omitted from the cashbook only.
Part 3: Methods of calculating
c. Prepare the journal entry (journalize) to
depreciation cost
correct the errors.
1. Straight-line method
d. Post the necessary entries to the
Suspense Account. -Equal (fixed) amount is deducted each year

e. State which entries will affect the net Formula: Cost price – Scrap Residual) value= Deprec.
profit. (e.g. a, b, c, d, or e) Economic life per year

**Note: Depreciation expense is the same

amount each year, exception may happen in
year one or year of sale
 P a g e | 49

2. Reduced (Diminishing) Balance Method Straight-line w/ percentage Method.

-A fixed annual percentage is of the book value
Formula
is deducted each year. Cost price 10 000
-Depr. (20%) (2 000) a year
Formula: =Book value 8 000
Cost price or book value x Depreciation
rate= Depreciation for the year Book Value:

2009 Cost price 10 000

The time factor (n/12) affects the first year only -Depr. (1 000*)
unless the asset is being sold 2010 Book value 9 000
-Depr. (2 000)
3. Straight-line with percentage 2011 Book value 7 000
-Depr. (2000)
-The first year of depreciation is calculated 2012 Book value 5,000
using the percentage rate. Then, that amount
is used for each of the following years
Depreciation Depreciation
expense for: expense for:
Formula: 2009 $900 * 2009 $1000* 2009 $1000 *
First year only: Cost price x Depreciation 2010 $1800 2010 $1800 2010 $2000
rate = Depreciation each year 2011 $1800 2011 $1440 2011 $2000
*1800 x 6/12 = $900 *2000 x 6/12 = *2000 x 6/12 =
$1000 $1000
The time factor (n/12) affects the first year only
unless the asset is being sold
Part 4: Journal entries (Journalizing)
Example 1 for recording depreciation
July 1, 2009 John bought 2 trucks for $5000
each. He plans to keep it for 5 years with a
Example 2
scrap value of $500 each. It has a depreciation
July 1, 2009 John bought 2 trucks for $5000
rate of 20%. The final year ends on December
each paying with cash.
31 each year.
He plans to keep it for 5 years with a scrap
value of $500 each. It has a depreciation rate
1. Calculate the depreciation expense for
of 20%. The final year ends on December 31
the first THREE years, using the:
each year.
Straight-line Method Reduced Diminishing /
Return method
Formula: Straight-line Method
Book Value:
10 000 – 1000 = 9000 - No formula-
5 5 Formula:
2009 Cost price $10,000
1800 each year 10 000 – 1000 = 9 000=1800 -Deprec. (900*)
5 5
2010 Book value 9,100
Book Value: Book Value: -Deprec. (1 800)
$1800 each year
2009 Cost price 10,000 Cost price 10, 2011 Book value 7,300
-Deprec. 000 -Deprec. (1,800)
(900*) -Depr. (20%) (1, 2012 Book value 5,500
2010 Book value 9,100 000*)
-Deprec. (1 =Book value 9 000
800) -Depr. (20%) (1,
2011 Book value 7,300 800)
-Deprec. =Book value 7,200
(1,800) -Depr. (20%) (1,440)
2012 Book value 5,500 =Book value 5,760
 P a g e | 50

b. To record the depreciation cost each

year
A. To record the purchase of a fixed asset
Date Particular Dr. Cr.
To record the receipt of the asset and the payment 2009
of the money, it is necessary to debit the fixed Dec. 31 Profit and Loss a/c 900
asset account and credit the method of payment. Provision for 900
depreciation
Debit: The fixed asset
Credit: Cash, bank or name of creditor
2010
Dec. Profit and Loss a/c 1,800
To record the purchase of the asset 31
Provision for 1,800
Date Particular Dr. Cr. depreciation
2009 2011
July 1 Motor vehicles 10,000 Dec. Profit and Loss a/c 1,800
Cash 10,000 31
Purchased a fixed Provision for 1,800
asset depreciation

Exercises
B. To record the depreciation expense each
year 1. For each transaction given below, answer
each of the following questions based on the
The depreciation expense of each year is method stated at the end of the transaction.
recorded as an expense in the Profit and
Loss Account (Income Statement) section of i. Calculate the depreciation expense for the
the Trading Profit and Loss Account and then first year of ownership
added to the accumulated (total) depreciation, ii. Calculate the net book value of the asset at
in the Provision for Depreciation Account. the end of year 2 of ownership
The total or “accumulated” depreciation in the iii. Calculate the net book value of the asset at
Provision for Depreciation account is then the end of year 3 of ownership
transferred to the fixed asset section of the
balance sheet of a company. iv. Calculate the accumulated depreciation for
the first three year
Provision for depreciation, like any other
provision account, is treated as a “contra- v. State the amount to be entered in the
asset” account. This means the value of the Income Statement (Trading Profit and Loss
account will decrease the value of its related A/c) at the end of year 3.
asset account. vi. State the amount to be entered on the
balance sheet at the end of year 2?
To record the journal entry (journalize)
depreciation cost, it is necessary to: vii. Prepare the journal entry to record the
purchase of the asset.
Debit: The Profit and Loss Account (Income
Statement) viii. Prepare the journal entry to record the
Credit: The Provision for Depreciation depreciation expense or cost for the first year
Account
 P a g e | 51

The depreciation for each year must be

CREDITED to the Provision for Depreciation
Transactions Account in order to find the total amount.
a. Jason Mowry bought furniture on January 1,
2010 by cash $6000. It has an economic life of Since a “provision” account works contra to an
asset account, if all assets are normally on the
5 years. The residual value is $1000. (Using
debit side of the ledger, it would then require all
the straight-line method)
provisions to be on opposite side, the credit
b. Anderson Constructions bought a truck on side, of the ledger.
May 2, 2014 by cheque for $20000. It has an
General ledger
economic life of 10 years. The residual value is
$0. (Using Straight-line method) Date Particular Amount Date Particular Amount
-
Start here!
Profit & +
c. Jessie May bought a computer for $2200 on Loss
August 31, 2013 on credit from HP. It has an a/c
economic life of 16 months with no residual Year Prov.
value. The depreciation rate is 20% per month. -end For x
(Using reduced-balance method) 1 depr.
1
d. Thomas had the following purchases: Year Prov.
- Bought a bike on September 1, 2012 for -end For x
$5000 cash. 2 depr. 2
- Bought 2 bikes on December 31, 2012 for
Provision for
$3000 each by cheque
Depreciation
- Bought another bike for $4500 on October a/c
Start here!
16, 2013 by cash. Year Year Profit &
-end Bal. c/d x -end Loss x
Additional note: 1 1
x x
*All purchases made before the 20th of the Year
month is depreciated for the entire month. -end Bal. b/d x
* All bikes have a scrap value of $600 1
*All bikes have an economic life of 4 years Year Year Profit &
*All bikes depreciate at a rate of 10% per -end Bal. c/d -end Loss x
annum-Using straight-line method with percent 2 2
x x
Part 5: Double-entry accounts for
depreciation
Part 6: The selling or Disposal of a
The double-entry accounts or ledgers must fixed asset
be posted in order to reflect the change in
value of any fixed asset and the total value loss To record the sale of an asset, there are FOUR
on those assets. (4) steps to the transaction:

a. Provision for Depreciation Account. (The Step 1: The removal of the asset from the
accumulation of depreciation) asset account, at its cost price

Debit: The Disposal a/c

Credit: The fixed asset a/c
 P a g e | 52

b. Calculate the depreciation expense per

annum.
Step 2: The removal of all depreciation cost
(Accumulated depreciation), associated with 2018: Cost price $400
that asset - 2018 Dep. (10%) (16.67) ($40x 5/12)
= Net book value 383.33
Debit: The Prov. For depreciation a/c - 2019 Dep. (10%) (38.33)
Credit: The Disposal a/c = Net book value 344.98
- 2020 Dep. (20%) (5.83) ($34.98x2/12)
Step 3: The recording of the sale of the asset
and the price c. Prepare the Double entry account up until
the date of sale.
Debit: The Cash or Bank a/c
Credit: The Disposal a/c I. The Asset account:

Step 5: Recording any GAIN or LOSS on the Date Particular Amount Date Particular Amount
sale of the asset Chairs-
Furniture a/c
Gain on sale: 2018 Discount $400 Dec. Bal c/d 400
Aug.2 Furniture 31
400 400
Debit: The Disposal a/c
Credit: Gain on sale- “Name of asset” 2019
Jan. Bal. b/d 400 Dec. Bal c/d 400
Loss on sale: 1 31
400 400
Debit: Loss on Sale- “Name of asset”
2020
Credit: The Disposal a/c
Jan. Bal. b/d 400 Mar. Disposal 200
1 1 a/c
Example
Jannie Hodge bought two chairs costing $200 *Step 1: Removal of the asset
each on August 2, 2018 on credit from
Discount Furniture. They depreciate at a rate of II. The Provision for depreciation account:
10% per annum under the Reduced or
Diminishing Balance method. Date Particular Amount Date Particular Amount

Situation 1: On March 1, 2020, she sold one Prov. For

of the chairs for $165 cash. Deprec. a/c
2018 Bal. c/d 16.67 Dec. Profit & 16.67
Situation 2: On March 1, 2020, she sold one Dec. 31 Loss a/c
of the chairs for $170 cash. 31
16.67 16.67
a. Prepare the journal entry to record the 2019
Dec. Bal. c/d 55 Jan. Bal b/d 16.67
purchase of the chairs. 31 1
Dec. Profit & 38.33
Date Particular Dr. Cr. 31 Loss a/c
2018 55 55
Aug. 2 Chairs-Furniture 400 2020
Discount Furniture 400 Mar. Disposal 30.42* Jan. Bal. b/d 55
1 a/c 1
Purchased a fixed Mar. Bal. c/d 30.42 Mar. Profit & 5.83
asset 1 1 Loss a/c
60.83
 P a g e | 53

*Step 2: Removal of the accumulated Dep. on 1 chair

as of Mar. 1 *$60.83/2=$30.42 per chair

III. The Disposal Account

It must reflect the current value of the asset,
Loss on sale: If the Credit Side is GREATER than the Debit net book value, after any depreciation
Side.
Statement of Position as at…..
Situation 1 Cost price Accumulated Net Book
or Depreciation Value
Date Particular Amount Date Particular Amount
Historical (NBV)
Disposal a/c cost
2020 Chair- $200 Mar. Prov. For 34.42 x (x) x
Mar. furniture 1 Deprec.
1
Mar. Cash 165
1 1. Dane Hu made the following purchases of
Mar. Loss on .58
1 Sale
machinery:
$199.42 $199.42 -Bought machinery on June 1, 2015 for
*Step 3 & 4: Recording the selling price and loss on $20000 cash.
the sale of the 1 chair as of Mar. 1 -Bought additional machinery on January 1,
2016 for $22000 on credit from Lowes
Gain on sale: If the Credit Side is LESS than the Debit
Side.
Additional information:
*All machinery has a residual value of $1500
Situation 2
and an economic life of 6 years.
Date Particular Amount Date Particular Amount *Depreciation rate on machinery is 20% per
Disposal a/c annum
2020 Chair- $200 Mar. Prov. For 34.42
Mar. furniture 1 Deprec. a. Calculate the depreciation expense or cost
1
for each of the first three years under the:
Mar. Cash 170
1 i. Straight-Line Method
Mar. Gain on 4.42 ii. Reduced-Balance Method
1 sale iii. Straight-Line (with a percentage) Method
$199.42 $204.42
*Step 3 & 4: Recording the selling price and gainon
the sale of the 1 chair as of Mar. 1 b. For the first THREE years, you are required
to:
i. The asset account, showing the cost
Part 7: The Balance Sheet (Statement price or historical cost of the asset
ii. The Provision for Depreciation Account,
of Position) showing the accumulated depreciation
iii. An extract of the Balance Sheet for each
The Balance Sheet is one of the two final
year
statements created in a business final records.
The other being the Income Statement
2. Sammy Lee bought 3 motor vehicles on
(Trading Profit & Loss a/).
September 1, 2010 paying $15000 cash for
each. Each vehicle has a residual or scrap
value of $1000 and an economic life of 7 years.

a. Calculate the depreciation expense or cost

for the first three years under the straight-Line
Method
 P a g e | 54

b. For the first three years, you are required to: 4. Vitablend Ltd bought the following furniture
i. The asset account for their main office:
ii. The Provision for Depreciation Account
iii. A Balance Sheet extract showing fixed April 30, 2014 Bought 20 chairs for $5,000
asset section only paying by cheque
December 1, 2014 Bought 10 more chairs for
3. Michelle Simms made the following $2,750 by cash
purchases:
Each chair has an economic life of 10 years
January 1, 2015 Bought 2 bikes for $8,000 and a residual value of $50. The depreciation
each by cheque rate on the chairs is 5% per annum
July 1, 2017 Bought another 2 bikes totaling
$17,000 by cash a. Calculate the depreciation expense for the
first FOUR years using the
Each bike has an economic life of 8 years and i. Straight-line method
a residual value of $2200. The depreciation ii. Reduced method
rate on vehicles is 10% per annum iii. Straight-line with percentage method

a. Calculate the depreciation expense for the b. For the first THREE years:
first FOUR years using the i. Prepare the asset account
i. Straight-line method ii. Prepare the Provision for Depreciation
ii. Reduced method Account using the straight-line method.
iii. Straight-line with percentage method iii. Prepare a Balance Sheet extract.

b. For the first THREE years: c. What is the net book value of each chair
i. Prepare the asset account bought on December 1 at the end of 2016?
ii. Prepare the Provision for Depreciation
Account using the reduced method.
iii. Prepare a Balance Sheet extract.

c. What is the total depreciation amount lost on

each of the 4 bikes?
 P a g e | 55

a. Prepare the journal entry to record the

creation of the doubtful debt account.
Topic 17
Adjustments Date Particular Fo Dr. Cr.
(Provision for Bad Debts) 2015
Dec. Profit and loss account
$
105
$

31
Provision for doubtful 105
debts a/c

b. Post to the ledger (double-entry)

Date Particular Amount Date Particular Amount
- Provision for +
doubtful debts
a/c
Part 1: Provision for Bad Debts or 2015 2015
Uncollectible Accounts Dec. Bal. c/d 105 Dec. Profit & 105
31 31 loss
222 222
This is an estimate of the amount of the
company’s debtor’s debt that will not be
collected. The estimate has to be adjusted at Part 3: To INCREASE the Provision
the end of each period. It is a “contra-asset”
account. for doubtful debts estimate
The original estimated amount has to be
The company will provide or make allowances
adjusted to reflect the current estimated
for a projected loss for the period. This is done
amount of debt which will not be collected.
in accordance to the Conservatism or
Prudence Concept.
To increase the original estimate, find the
DIFFERENCE between the original estimate
Part 2: To record the CREATION OR and the current estimate. This difference is
ORIGINAL estimate for Provision for entered on the same side (credit side) of the
Bad debt A/c original estimate

Find the Percentage of the debtors which is The entry to record the increase in estimate:
estimated to be not collected. Debit: Profit and Loss account
The entry: Credit: Provision for Bad Debts account

Debit: Profit and Loss Account Example 2

Credit: Provision for Bad Debts or
doubtful debts account Jason Neek provision for doubtful debts was
$122 at the end of 2016, on accounts
Example 1 receivable of $2440.
Jason Neek debtors or accounts receivable for
2015 was $2100. He created a provision for
doubtful debts account with a rate of 5%.
 P a g e | 56

a. Prepare the journal entry to record the Debit: Provision for Bad Debts account
increase in the doubtful debt account. ($122 - Credit: Profit and Loss account
$105) = +17

Date Particular Fo Dr. Cr. Example 3

2015 $ $
Dec. Profit and loss account 17 Jason Neek accounts receivable totaled $2360
31 and the provision for doubtful debts was $118
Provision for 17
doubtful debts a/c at the end of 2017.

b. Post to the ledger (double-entry)

a. Prepare the journal entry to record the
decrease in the doubtful debt account. ($118 -
Date Particular Amount Date Particular Amount
$122) = -4
- Provision +
for doubtful
Date Particular Fo Dr. Cr.
debts
a/c 2015 $ $
2015 Dec. Provision for doubtful 4
31 debts a/c
Dec Bal. 105 Dec. Profit & 105
. 31 c/d 31 loss Profit and Loss a/c 4
222 222
b. Post to the ledger (double-entry)

Date Particular Amount Date Particular Amount

- Provision for + 2016
doubtful Dec Bal. 122 Jan. Bal. b/d 105
debts . 31 c/d 1
a/c
Dec. Profit & 17
2015
31 loss
Dec. Bal. c/d 105 Dec. Profit & 105
122 122
31 31 loss
222 222
2017
2016 Dec Bal. 118 Jan. Bal. b/d 122
Dec Bal. c/d 122 Jan. Bal. b/d 105 . 31 c/d 1
. 31 1 Dec Profit 4
Dec. Profit & 17 . 31 & loss
31 loss 122 122
122 122
Part 5: Effects of Provision for
Doubtful Debts on a company’s
Balance Sheet (Statement of
Part 4: To DECREASE the Provision Position)
for Bad Debts account
The ending balance in the Provision for
To decrease the original estimate, find the Doubtful Accounts has a reducing effect on the
DIFFERENCE between the original estimate Accounts Receivable Account in the current
and the current estimate. This difference is asset section of a company’s balance sheet
entered on the opposite side (debit side) of the (Statement of Position)
original estimate

The entry to record that difference:

 P a g e | 57

Accounts receivable 2360

Less: Prov. For
doubtful debts (118) 2242

The balance sheet (Statement of Position) Exercises

format below shows the effects of Provision for
doubtful debts on accounts receivable. 1. In 2014, the Accounts Receivable (debtors)
balance in the business written off was $8,600. The
Format: firm decides to provide for doubtful debts at a rate
of 4% per annum. In 2015, Accounts receivable
Fixed assets: Cost Accumulated Net (debtors) balance was $5,100.
(Noncurrent) Price depreciation book
value
a. Prepare the Journal entry to record the provision
Name of asset x (x) x for doubtful accounts.
b. Post to the Provision for Doubtful Accounts.
Current assets:
Inventory x 2. Refer to the following information relating to
Accounts x debtors:
receivable
Less: Prov. For (x) x Period Amount Provision rate
doubtful debts Year 1 $6,000 3% of debtors
Cash at bank x Year 2 $4,000 2% of debtors
Cash in hand x Year 3 $8,000 1% of debtors
x
a. Prepare the Journal entry to record the provision
for doubtful accounts.
b. Post to the Provision for Doubtful Accounts.
Example 4 c. Prepare a Balance Sheet extract for the first 2
Prepare a Statement of Position extract, in the years.
books of Jason Neeks as at Dec. 31, 2015, 3. J. Maxwell commences business on January 1,
2016 and 2017. 2015. His accounts receivable at
December 31, 2016 were $25,000
December 31, 2017 were $22,000
Jason Neeks December 31, 2018 were $24,000
Statement of Position as at Dec. 31, 2015
A provision for bad debts of 6 percent is to be
Current assets:
created on debts at the end of each year.
2100
Accounts receivable
a. Show the Provisions for Bad Debts Account for
Less: Prov. For EACH of the three years
doubtful debts (105) 1995
b. Prepare the journal entry to record the provision
for depreciation of each of the three years
Jason Neeks c. Show the extracts from the third year’s balance
Statement of Position as at Dec. 31, 2016 sheet.
Current assets:
Accounts receivable 2440
Less: Prov. For
doubtful debts (122) 2318

Jason Neeks
Statement of Position as at Dec. 31, 2017
Current assets:
 P a g e | 58

a. Prepare the journal entry to record the

4. The Jameson Company started a business in transactions on June 10, and August 1.
January 2017 and made all sales on a credit basis.
Being prudent or conservative, the management Date Particular Fo Dr. Cr.
decided to create a provision for doubtful debts of 2016 $ $
3% of the year-end accounts receivable (debtors). June Bank 95
The debtors for the following three years were as 10
follows: Accounts 95
December 31, 2014 were $17,000 receivable (R. Farmer)
December 31, 2015 were $19,500
December 31, 2016 were $18,400 August Bad Debt Expense 285
December 31, 2017 were $20,200 1 (380-95)
Accounts 285
Prepare the Provision for Doubtful Account
receivable (R. Farmer)
for the four years
b. Post the Bad Debts Expense account
Part 6: How to write off a Bad Debt
Date Particular Amount Date Particular Amount
A: Bad Debts only - Bad Debt +
expense a/c
It is the amount of the total accounts receivable 2016
(debtors) that is being written-off as Aug. Acct Rec- 285 Dec. Profit & 285
1 R. 31 loss
uncollectible.
Farmer
285 285
It is entered as an expense on the trading
Profit and Loss Account and NOT reported on B: Bad Debts written off effect on Provision
the Balance Sheet. for Doubtful Debts
To write off (cancel) a debtor’s debt gone bad, Bad Debt written off is deducted from the
beginning balance of the Provision for Doubtful
Debit: Bad Debt Expense Debt account.
Credit: Accounts receivable (debtors)
The remaining Provision for Doubtful Debts is
By debiting “Bad Debt Expense”, you are now adjusted to the ending balance in the Provision
creating and increasing the Bad Debt Expense for Doubtful Debt.
account and by crediting Accounts Receivable,
you are decreasing the debtor’s account. Calculations:
Provision for Doubtful Debt on the 1st day
Example 1 Less: Bad Debt written off
Less: Current Provision for Doubtful Debt on
R. Farmer, a debtor, who owed $380, sent a last day
cheque for $95 along with a letter stating he = Adjustment to the Provision for Doubtful Debt
filed for bankruptcy on June 10. His debt was Account
written off as a gesture of sympathy on August
1, 2016.
 P a g e | 59

Example 2 d. Prepare a Balance Sheet (Statement of

Position) extract
The Provision for Doubtful Debts account
Statement of Position as at Dec. 31, 2016
balance was $800. $550 in debt was written
Current assets:
off. On December 31, 2016, the current Accounts receivable 6100
Provision for Doubtful Debts is $950 on Less: Prov. For
Accounts Receivable of $6100. doubtful debts (950) 5150
$800 – 550=250 remaining from balance – C: Effects of an increase or decrease in the
950 new balance = +700
Provision for Doubtful estimate on the
Trading Profit and Loss Account of a
a. Prepare the journal entry to record the
business.
transactions on June 10, and August 1.

Date Particular Fo Dr. Cr. An increased refers to an underestimate of an

2016 $ $ expense. Therefore, additional funds must be
Dec. Bad Debt Expense a/c 550 allocated to bring the expense to the correct
31 amount. So, it is an extra expense.
Accounts 550
receivable (debtors) a/c A decreased in amount, shows that the amount
allocated or put aside was overestimated, so
Profit and Loss a/c 700 additional funds will be coming back to the
Provision for 700 business. Therefore, it is additional revenue or
Doubtful Debts a/c income.
b. Post the Bad Debts Expense account Profit and Loss A/c
for the period ending Dec. 31, 2016
Date Particul Amou Date Particula Amo Gross Profit x
ar nt r unt Add: Receives (additional
- Bad Debt + revenue:
Expense a/c Decreased in Prov. x
2016 For Doubtful
Dec. Accts 550 Dec.3 Profit & 550 Debts A/c
31 Rec. 1 loss x
550 550 Less: Expenses:
Bad Debts Expense (x)
c. Post the Provision for Doubtful account Increased Prov. For (x)
doubtful debts
Provision for
Doubtful Example 3
Debts a/c The Provision for Doubtful Debts account
Jan. 1 Balance 250 balance was $800. $550 in debt was written
b/d off. On December 31, 2016, the current
Dec. Bal. c/d 950 Dec. Profit & 700
Provision for Doubtful Debts is $950 on
31 31 loss
950 950
Accounts Receivable of $6100.
 P a g e | 60

2013 Debtors $6300

$800 – 550=250 remaining from balance – 2014 Debtors $5950
950 new balance = +700
The Provision for doubtful rate is 10% per annum
on the balance of the debtors after any bad debts
Prepare the Profit & Loss a/c section (of the are written off.
Trading Profit and Loss Account)
a. Calculate the Provision for Doubtful amount for
Profit and Loss A/c each year.
for the period ending Dec. 31, 2016 b. Calculate the adjustment (amount) needed for
Gross Profit x each year
Add: Receives (additional x c. Draw up a Balance sheet extract, showing the
revenue: current asset sections
x for each of the years.
Less: Expenses:
Bad Debts Expense (550) 4. Anderson Loopy had the following information
Increased Prov. For (700) available:
doubtful debts
2014 Accounts Receivable (debtors) $8,000;
Bad debts $660
Exercise
2015 Accounts Receivable (debtors) $7,910;
Bad debts $440
1. Anthony Mason sold goods worth $500 to Holly
2016 Accounts Receivable (debtors) $6,830;
May on June 1, 2015 on credit. Holly paid ten cents
Bad debts $305
on every dollar owed to Mr. Mason with cash on
July 2. On August 3, she sent a letter explaining
**The provision for doubtful debts rate is 5%.
that she was laid-off and could no longer meet her
bill every month.
For the years depicted in the question, you are
required to,
a. Who is the debtor and who is the creditor in this
a. Draw up the Bad Debt Expense account.
transaction?
b. Prepare the Provision for Doubtful Debt account
b. How much cash did Holly pay on July 2?
c. Prepare the Income Statement (Profit and Loss
c. How much debt does Mr. Mason had to write-off
account)
as bad?
d. Prepare a Balance Sheet extract
d. Prepare the journal entry to record the
transactions on July 2 and August 3.
5. Sheila Gant is a sole trader. Her financial year
ends on June 30. On June 30, 2015, the balances
2. Janice Miller is a debtor in the ledger of
in her books included the following:
Homestead Ltd on January 1st, 2014 with a
$
balance of $430. On February 2nd, Homestead
Bad debts written off 210
sold $2100 worth of goods on credit to Janice
Trade receivables (debtors) 15530
Miller. She sent a cheque on May 14th for $630.
Janice Miller filed for bankruptcy on August 10th
On June 30, 2015, Sheila Gant decided to:
stating that she was unable to pay her debt.
-Write off $90 owed to K. Singh
-Create a provision for doubtful debts of 2.5% of the
a. Calculate the amount of her debt to be written off
remaining trade receivables (debtors)
as bad debt.
b. Prepare the journal entries to record the
a. Calculate the amount of the Provision for
transactions of Feb. 2, May 14, & August 10.
doubtful debts
c. Prepare Janice Miller’s A/c in the books of
b. Prepare the Bad Debts Expense account.
Homestead Ltd.
c. Prepare the Provision for Doubtful Debts account
d. Prepare the Trade receivable account
3. Joshua Jeffreys had the following information
available for the years ending December 31:
2012 Debtors $6000
 P a g e | 61

Part 7: Schedule of Aging Accounts Exercises

There are TWO ways of estimating the amount of 1. J & J Company in the past experienced 2.5%
Doubtful debts. They are: bad debts on payments 30 days past due, 8% on
payments past due 31-60 days and 20% on
i. Looking at the debt itself and making an payments over 60 days late. The most recent aging
estimate (shown previously) report submitted by the company’s accountant
ii. Based on experience, what percentage will shows that $625,000 fell in the 30-day bracket,
result in bad debt $310,000 in the 31-60 days bracket and $65,000
fell in the over 60 days bracket.
The longer a debt has been owing, the more likely it
will not be collected. An “Aging Schedule” shows Using the information given, calculate the amount
the length of time a debt has be owed to the of Provision for Doubtful Debt. (Show an aging
business. The older the debt, the higher the schedule)
percentage estimate.
2. The following is the Aging Schedule and the
Format Probability of Collection of XYZ Company.

Aging Schedules of Doubtful Debts Aging schedule and collections

Period of Amount of % of doubtful Age of Amount of Probability Provision
Prov. for Debt debt of for Doubtful
debt debt debt doubtful Collecting
debt debt
$ 97.00%
$ 93.00%
Less of 1 88.00%
month x x x 70.00%
1 -2 months x x x 40.00%
Over 2 months x x x
x
Example a. Fill in the missing information on the following
table.
Aging Schedules of Doubtful Debts b. Determine the total balance for the Provision for
Doubtful Debt at the end of the year and fill in the
Period of Amount of % of doubtful Provision for answer.
debt debt debt doubtful debt
$
$ Note:
Less of Age Amount Outstanding Probability of Collection
1 month 5,000 10 500 in 0 to 30 days $2,500,000 97.00%; 31 to 60 days
1 -2 months 3,000 30 900 $1,800,400 93.00%; 61 to 90 days $875,250
Over 2 88.00%; 91 to 120 days $530,600 70.00%; Over
Months 2,000 4 800 120 days $305,150 40.00%
10,000 2,200
 P a g e | 62

3. The accounting clerk for Margin Markup Industry

prepared the following completed aging schedules
Topic 17
as of August 31, the end of the period. (Control accounts)
Days
Past Due
Customer Balance Not past 1-30 31-60
61-9 Over
due
90
Kleg 12,000 12,000
Jasco 14,000 14,000
Collis 16,000 16,000

The following accounts were omitted but not

intentionally.

Customer Balance Due date

Builder’s paradise $61,000 May 12
Ucorn Ltd. 29,500 June 25
Green Leaf 15,000 October 15 Part 1: Purpose
Minese Inc. 18,000 September 29
The control accounts of a business acts as a
Debts 1-30 days delinquent is 20% likely not to be trial balance for the accounts receivables
collected, 31-60 days 25%, 61-90 days 35% and (debtor’s) and accounts payable (creditor’s)
over 90 days 45%. accounts.

a. Determine the number of days past due for each

customer
b. Complete the aging schedule, include the Part 2: Various types of control
omitted information in days. accounts
c. Complete the aging schedule, include the
omitted information in dollars. There are two types of control accounts. They
are:

a. Sales ledger (Debtors or Account

Receivable) Control Account

b. Purchases ledger (Creditors or Accounts

Payable) Control Account
 P a g e | 63

Part 3: Sales (Debtors or Account Part 4: Purchases (Creditors or

Receivable) Control Account Account payable) Control Account

It records all the information relating to the It records all the information relating to the
debtors or account receivable of a business creditors or account payable.

Sales (Debtors or Accounts Receivable) Purchases (Creditors or Accounts payable)

Control A/c Control A/c

Date Particular Amount Date Particular Amount Date Particular Amount Date Particular Amount
- +
- 1st Debit x 1st Credit bal. x
+ bal. b/d b/d
1st Debit bal. b/d x 1st Credit x
bal. b/d Cash x Credit x
Bad x paid purchases
debts Cheques x
Credit sales x Cash x paid
received Return- x
Dishonoured x Cheque x out
cheque received Discount x
received
Late charges x Return- x
Set off to x
in
sales
Discoun x
ledger
t
30/31 Credit x 30/ Debit bal. x
allowed
bal. c/d 31 c/d
Set off
x x
sales
ledger
to Exercises
purchas x
es
1. S. Melon maintains a self-balancing ledger
ledger
30/ Credit bal. 30/ Debit system. From the following information,
31 c/d x 31 bal. c/d x prepare the sales ledger control account for the
x x month of January 2018:

Debit balance on January 1 $33, 490

Credit balance on January 1 155
Sales during the month 65,884
Cash received from customers 53,861
Discount allowed 4,580
Returns from customers 2,314
Bad debts 890
Credit balance on January 31 63
 P a g e | 64

Interest charged on late debtors 914

2. From the following information, prepare the April 30 Sales ledger debits transferred to
purchases control ledger control of Marcy purchases ledger $105
Melfried for the month of July 2017: April 30 Credit balance in sales ledger $79
April 30 Debit balance in purchases ledger
Credit balance on July 1 $84,902 $104
Purchases for the month 72,466
Return-out 6,339
Cheques paid to creditors 78,885 5. Sales Journal ( Daybook)
Discount received 7,539 (SDB)
Sales ledger transferred to purchases
Ledger 322 Date Customer Folio Invoice Amount
# # ($)
3. The following information is available for the
month of February 2016: May 2 Customer SL 1 201 310
X
Sales ledger debit balance on Feb.1 $102,500
Purchases ledger credit balance on Feb.1 95,866 May 4 Customer SL 2 202 270
Purchases from creditors 83,005
Y
Sales to debtors during the month 78,300
Cheques paid to creditors 8,775
May 9 Customer SL 1 203 180
Cheques received from debtors 95,308
Discount received 3,428 X
Discount allowed 4,322
Bad debts 560 May Customer SL 3 204 220
Returned cheque 1,120 14 Z
Returns to creditors 6,459
Returns to debtors 7,546 May Customer SL 3 205 160
18 Z
a. Prepare the sales ledger control account
b. Prepare the purchases ledger control May Customer SL 2 206 205
account 29 Y

4. Using the following information provided Cashbook - Debit side only

below, prepare the:
a. Sales ledger control account
b. Purchases ledger control account Date Particular Folio Disc Cash Bank
# .
April 1 Credit balance in purchases ledger $7,868
1 Debit balance in purchases ledger 48 May 6 Sales Y Gl 1 100 900
1 Debit balance in sales ledger 6,742
1 Credit balance in sales ledger 67 May Customer SL 1 20 380
11 X
Purchases for the month 44,394
Sales for the month 50,048 May Customer SL 2 170
Sales returns 3,284 17 Y
Purchases returns 2,166
Receipts from debtors 49,668 May Customer SL 3 105
Payments t o creditors 45,612 31 Z
Bad debts written off 846
 P a g e | 65

Return -Inwards Daybook

Date Customer Folio Invoice Amount
# # ($)

May 8 Customer SL 1 201 20

X

May Customer SL 2 202 45

10 Y

a. Calculate the totals for the Sales daybook

and the return-inwards daybook.

b. Prepare the journal entry to record the

transactions shown in the books of original
entry for May 10, 29, 30 and 31.

c. Prepare Customer’s X account.

d. Post entries to the individual’s account in the

sales (account receivable) ledger

e. Post entries to the nominal accounts in

general ledger

d. Prepare the Sales control ledger