Unit Page

1. Accounting Equation & the Balance Sheet 1

2. Income Statement 10
3. Capital & Revenue Expenditure 17
4. The accounting Ratios 20
5. Double Entry 33
6. The trial Balance 42
7. Cash Book & Documents 50
8. Daybooks (Books of Prime Entry) 62
9. The General Journal & the Accounting Cycle 72
10. Petty Cash Book 80
11. Single Entry and Incomplete Records 86
12. Adjustments at Year End 91
13. Manufacturing Account 100
14. Depreciation and Disposal 106
15. Irrecoverable Debts & Provision for Doubtful Debts 114
16. Accounting Concepts 121
17. Control Account 128
18. The Errors 134
19. Adjustments for Financial Statements 142
20. Bank Reconciliation Statement 148
21. Partnership 159
22. Non-Profit Organizations 169
23. Accounts of Limited Companies 180
24. Service Business 195
 Financial Statements

Statement of Financial Position Income Statement

(Which shows the financial position (Which shows profit
of the year at year cut) or loss for the year)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
depends on depends on

Assets = Capital + Liabilities Sales Revenue

Less
Less Cost of of sales
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Gross
G oss pr profit
rofit
+ other
otherr income
in
ncome
– other
othe
ther e expenses
xpenses
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
ofitt / Loss
Profit
for the year

By M
B Mrs. Carol
C l Wassef
W f 01223414711 2
Accounting : - is a system of recording and reporting Business financial
t
transactions to be used by interested parties for
decision making and performance assessment.

Uses of Accounting
Internal
In
nternal users: -
Owners,
Ow
wners, Management
Ma
anagement & Employees
Emplo

Accounting information are used by

External
Ex
xternal users: -
Bank
Ba
ankk Manager,
Manager Government,
M Governmen
Creditors & Customers

Book Keeping
g This
This is a process
h pr of detailed
dettailed recording
record
rding
d off alllll financial
transactions of Business
tr Busineess using
usiin
ngg double
ouble entry
entntr
try system.

* Acc
Accounting
counting uses bookk kkeeping
eeping reco
records
ords to prepare
prep
pare financial
financia
fi al statements
statements
(Income Statements & Statement of Financial Position) at regular intervals.
(Inc

* Wee can use accounting information in these ways: -

1 T
1. To monitor progress 2 U
2. Using accounting ra
ratios
For decision making
3. F 4. F
For future planning
5. F
For comparison purposes with previous years or other business

* Ad
Advantages
dvantages of maintaining accounting records using double entry: -
1 L
1. Less risk of errors 3 E
3. Easier to refer to previous transactions
transaction
Less risk of fraud
2. L Easier to make business decisions
4. E
Easier to calculate accounting ratios
5. E

By M
B Mrs. Carol
C l Wassef
W f 01223414711 3
Statement of financial position: -
- It shows a snapshot of the financial position
positio of the firm at any given time.
- Itt shows the Assets, Liabilities and Capital at any given time.
Based upon the accounting equation:
Assets = Capital + Liabilities

The meaning
ng
goof each side: -
1.. Assets:
1 A : - Th
The
The items owned by the firm
f using its sources of financ
finance.
e.

* No
Non-Current
on-Current Assets (fixed Assets):
Items
Ite
ems
emms owned by the Business for Long-term
Long term use with no intent of turning
them
the
em into cash.
They
y are: -
o Pr
Premises:
Premises: Land
remises L & buildings
buildings
o M
Motor
otor van
van
oF
Furniture
Furn
nitu
ure
oF
Fixtures
Fixt
ture
es & Fittings
Fi
Fitting
gs
o M
Machinery
achine
chin
n ry
oE
Equipment
Equipm
mentt

* Go
Goodwill
oodwill (intangible): Lands,
L Building, Equipment, Machine,
Fi
Fixtures and Fittings.

** Cu
Current
urrent Assets: ItItems
tems owned by the firm which can be easily turned
into cash.
They
y are: -
o Ca
Cash
Cash on Hand
Han
and
o Ca
Cash
Cash on Ban
Bank
nkk
o Other
O
Ot Receivable
bl (Prepayments): Expenses paid in advance
advancce
Such as: pprepaid rents and rates.
rate
es.

o Tr
Trade
Trade Receivable (Debtors): People who owe the Business money
mone
ey
for good sold on credit.
o IInventory
nventory (Stock): good held by the firm for resale
l at any tim
time.
e.

By M
B Mrs. Carol
C l Wassef
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 2. Liabilities:
L - Consists
Consists of money owing for goods supplied to firm
m
and
a for expenses and for loans made to the firm.

* Cu
Current
urrent Liabilities: re
represents
epresents amounts payable within
a period of 12 months (short terms, short period).

oB
Bank over draft: (Loan
(Loan repayable within 12 months)
withdraw
thdraws
amount due to the bank when the company withdraws
more than it’s balance.
o Trade
T Payables: (Creditors)
(Creditorrs)
T amount due to suppliers
The who provide the company with inventory.
ers wh
oO
Other payables: (Accruals)
(Accruals)
ring the
Expenses incurred during th financial year
that have not
have n ot yet
yet been paid.
paiid.

Such
Such as:
as: (O
(Owning,
Own
ning,
ng, Outst
Outstanding,
Outsta
tanding, in Arrear,
rea
ar, Accruals,
Ac
Accru
uaals,
lss, Unp
Unpa
Unpaid,
paaid
id
d, Accrued,
Wages, Rent & insura
insurance)
nsu
urancce
e)

* No
Non-Current
on-Current Liab
Liabilities:
bilities: R
Represent
eprese
ent amountt payable
payable wit
within
ithin more than one year
(long-term,
(lo -term, Long period)
(long
o Loa
Loan
L an (Repayable
(R
Repayable within more than one year).
& (Debentures)

* Wh
What
hat is the difference between Debtors and Trade debtors ((Receivable)?
Receivable)?

Debtors
D Value owed to the firm by credit customers buying goods,
Non-Current Assets on credit.

Trade Debtors Value owed to the firm by credit customers buying

d on credit.
goods

By M
B Mrs. Carol
C l Wassef
W f 01223414711 5
 3. E
Equity Capital: - It is the contribution of the owner in financing firm.

oT
The figure of capital will change at the end of each year when preparing
preparing
a balance sheet as follows:

Capital opening 100,000

+ Additional Capital
Capita
al ((introduced)
in
ntroduced) 30,000
+ profit 20,000
or – Loss
– Drawings (15,000)
˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Capital Ending
g 135,000

* Ne
Net
et Assets: T
The
Th
he d
difference
ifference b
between
etween tota
total
al A
Assetss a
an
and
nd total
t L
Liabilities
iab
bilities = Capital
o In
IIncrease
ncrease
e in Net Assets = Net Profit (profit
pro
ofit for
for the
e yyear)
yea
ear))

By M
B Mrs. Carol
C l Wassef
W f 01223414711 6
 Business

Suppliers Customers

Cash on Credit Cash on Credit

Trade Payable Trade Receivable
Creditors Debtors
Liabilities Asset

Types
p of Business
Bu
us
sine
es
sss

1. S
Sole Trader

2.. P
2 Partnership
Partn
nership

3. LLimited Liabilities Company

4. M
Manufacturing Business

5. S
Service Business

By M
B Mrs. Carol
C l Wassef
W f 01223414711 7
E
Example
l
The following information is taken from the Books of Ahmed
at 31st December 2018: -
Premises (Property) 120,000
Machinery 70,000
Provision for depreciation of Machinery 10,000
Fixture and Fittings 30,000
Provision for depreciation of (F&F) 2,000
Inventory 17,000
Loan 40,000
Cash 10,000
Debtors 15,000
15
5,000
5,
Accruals 8,000
8,0
,00
000
Creditors 2,000
2,000
Capital 1st Jan 2018
20 100,000
100,000
Profit for the year 150,000
15
50,000
Drawings 50,000

* Dra
Draw
aw up the Ahmed’s Statement of financial position at 31 st
Dec. 2018

By M
B Mrs. Carol
C l Wassef
W f 01223414711 8
 Ahmed’s
Statementt of Financial Position
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰
(Ahmed’s Balance Sheet at 31st De
Dec. 2018)
D

Cost Dep Net Book Value

Non-Current Assets: -
Premises (Property) 120,000 120,000
Machinery 70,000 (10,000) 60,000
Fixture and Fittings 30,000 (2,000) 28,000
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
208,000
Current Assets: -
Inventory 17,000
Debtors 15,000
0
Cash 10,000
0
42,000

Total Assets
As
sse
ets
e 250,000

Capital and Liabilities:

Liab
abiillities: -
Capital opening 100,000
+ Net Profit 150,000
- Drawings (50,000)
Capital ending 200,000
Non-Current Liabilities: -
Loan 40,000

Current Liabilities: -
Creditors 2,000
Accruals 8,000
10,000

Total Capital & Liabilities 250,000

By M
B Mrs. Carol
C l Wassef
W f 01223414711 9
 Difference between Short-term Loan & Long-term Loan

Shot-term Loan
Long-term Loan
(Bank Overdraft)
Carry variable Rate of Interest Carry fixed rate of interest

Considered as Current Liabilities Considered as Non-Current Liabilities

Repaid within one year Repaid within more than one year

* Ad
Advantages
dvantages to take Long-term
Long-term Loan than Short -term Loan:
1 Will
1. W pay fixed rate of interest which lower than Short-term
Short term Loan
Loan.
n.
2 Will
2. W pay the money after more than one year,
w
which help business to make more investment.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 10
 2.. IIncome
2 ncome Statement
Trading and Profit and Loss accounts

Income Statemen
Statement
nt A statement comprised of revenues and expenses for
a specific period.

W Business owner prepares an Income Statement?

¾ Why
- To know if he has made a profit / has an adequate return on his investment.

¾ Uses
Uses:: -
U
- I/S is an account which shows the company’s performance during a period.
- Used to calculate the profit or loss.
- Used to compare between what have been hoped to achieve and actual
results.
- Assists in obtaining
obttaining
ning loa
l ans
ns.
s
loans.
- Assists in
n selling
se
elling the business.

Gross Profit The

The
h e difference
differ
iffere
ence between
betw
ween saless revenues
revenues and
an
and cost
cost of sales
(cost
(co
(c off g
ost o goods
oods sold).
sold
d).
Gross Profit = Revenues (Sales – Cost of sales)

Cost of sales Allll Costs incurred in bringing the goods to a stable

Al
A stable condition.

It Includes the price paid for goods, transportation costs and repacking cost
Cost of sales = Revenues – Gross profit

By M
B Mrs. Carol
C l Wassef
W f 01223414711 12
Profit for the year:
y -T
This is left the Gross profit after all other expenses have been
(Net Profit) d
deducted.

Profit for the year = Gross profit + Other income – Other expenses

Income Statement for the year ended

Trading Account

Revenue (sales) ˰˰˰˰˰˰˰˰˰˰

- Sales returns (returns Inwards) (˰˰˰˰˰˰˰˰˰˰) ˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰
Net Sales (sales turnover) ˰˰˰˰˰˰˰˰˰˰

Less cost of sales: -

Opening Inventory
Invento
ory (beginning
(begiinnin
ng of the year)
yea ˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
˰
+ Purchases ˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
˰
(goods taken for
fo
or own use) (˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰)
- Purchases returns
urn
ns (returns
(return
retu ns Outwards)
Outwards) (˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰)
+ Carriage Inwards
Inward
ds ˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰
- Closing inventory (closing of the year) (˰˰˰˰˰˰˰˰˰˰)
˰˰˰˰˰˰˰˰˰˰ ( )
˰˰˰˰˰˰˰˰˰˰
Gross Profit ˰˰˰˰˰˰˰˰˰˰˰˰
˰

By M
B Mrs. Carol
C l Wassef
W f 01223414711 13
 Profit & Loss section

Gross Profit ˰˰˰˰˰˰˰˰˰˰

All other income: -

Interest Received ˰˰˰˰˰˰˰˰˰˰

Discount Received ˰˰˰˰˰˰˰˰˰˰
Irrecoverable debts recovered ˰˰˰˰˰˰˰˰˰˰
Commission Received ˰˰˰˰˰˰˰˰˰˰
Rent Receivable ˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰
Less other expenses: -

Wages
Wag
ges & S
Salaries
alaries ˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
Rent
R ent
nt & Rates
Rate
es ˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰
Interest
Int
terest Paid ˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰
Insurance
In
nsurance
n e ˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
Advertising
Advertis
siing ˰˰˰˰˰
˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰
Electricity & Power ˰˰˰˰˰˰˰˰˰˰
Heating & Lighting ˰˰˰˰˰˰˰˰˰˰
Discount Allowed ˰˰˰˰˰˰˰˰˰˰
Carriage Outwards ˰˰˰˰˰˰˰˰˰˰
Sundry expenses ˰˰˰˰˰˰˰˰˰˰
Irrecoverable debts ˰˰˰˰˰˰˰˰˰˰
Depreciation expenses ˰˰˰˰˰˰˰˰˰˰
Bank charges ˰˰˰˰˰˰˰˰˰˰
((˰˰˰˰˰˰˰˰˰˰))
(˰˰˰˰˰˰˰˰˰˰

Profit / Loss for the year

By M
B Mrs. Carol
C l Wassef
W f 01223414711 14
Diff
Difference between
b t

Carriage Inwards: - T
The transportation cost of transferring the goods from
from
t supplier to the business.
the
o Treatment:
T Itt is added to the purchases in the cost of sale
sales.
es.

Carriage Outwards: - T
The Transportation cost of transferring the goods from
the business to the customer.

o Treatment
Treatment:: Itt is considered an expense and is charged to I/S.
T I/S
S.
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Discount Allowed: - A reduction given to customers who pay their accounts within
t time allowed (for speedy payment).
the

o Treatment:
T Itt is considered an expense and is charged to I/S.
I/S
S.

Discount Receive
Received:
ed: - A reduction
red
ducction
du tio given to
o uss by
b suppliers
su
upp
pliers
liers
lie
e s whe
when
en we pay amounts
du before the time allowed
due llow
wed tto
ou s..
us.
oT
Treatment:
Treatment
t: Itt is considered an income an
and
nd charged
cch
harge
rged
ed to
to I/S.
I/S
S.
S
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Returns Inwards (sa
(sales
ales rreturns):
eturrns): - G
Goods
oods returned
ret
eturned
d by
b customers
cu
ustomers to the
business. This can
business ca happen for the following reasons:

Goods are of wrong type, wrong color or quality, damaged goods, late delivery,
overstated Invoice

Returns Outwards (Purchases returns): - G

Goods returned
turned by the business to a
supplier because of same reason s:
reasons:

By M
B Mrs. Carol
C l Wassef
W f 01223414711 15
¾ W
Why should the firm make profit?
- To be able to pay its expenses (Wages, Rent, …..).
- To be able to repay its Trade Payables.
- To reduce its financial risk.
- To reward the owner for the risk assumed.

¾ State
S e the
he differences
d s between
b n an
a Income
Income Statement and
a Statement of Financial Position?
- An Income Statement deals with revenues and costs.
oW
Whilst a Statement of Financial Position deals with Assets and Liabilities.

- An Income Statement
ntt covers
Statemen covers a period time.
perriod of time
e.
oW
Whilst a Statement
Statement of
of Financial
Financial Position
Posssition
ition is
is for
for a specific
speccificc date.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 16
* Th
The
he relation between opening inventory & closing inventory
with G.P & Net Profit.

Opening Inventory Cost of Sales Of the

Direct

Closing Inventory Inverse

Current Asset Inverse

Gross Profit Inverse

Profit
P rrofit for tthe
he year
earr IInverse
nver e

Closing Inventory
Inventtor
tory Currentt Asset
Asset
Direct

Opening Inventory Inverse

Gross Profit Direct

Profit for the year Direct

Note If sales understated Profit for the year will be understated.

If purchases are understated Profit for the year will be overstated.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 17
 Capital expenditure Revenue expenditure
Payment made for buying new fixed Expenses needed for the day-to-day
Assets or improved it. or to adding value running of the business which will benefit
of existing fixed Assets which will benefit the firm for short period of time and will
the firm for a long period of time. This be recorded in the Income Statement.
payment will appear in the Statement of
Financial Position.

EX: P
Purchase of land, machines, EX:
expanding
ex a building.

- Paying legal fees with purchase F.A. - Petrol cost for motor van.

- Painting a building for the first time. - Repairs for motor van.

- Putting extra headlights on motor - Electricity cost of using machine.

van.

- Wages paid to
o builders
builders for building
building - Treee year
yea
arr llater – repainting
repainting outside
garage. of the
the bu
building.
uild
dn .

- Cost of extending
ding
g the factory
facto
ory - Main
a in
ntenan
tenance
nce of
Maintenance of motor van.
building.

- Purchase of printer for computer. - Carriage cost on goods.

- Cost of painting firm’s name on a - Carriage cost on sales.

new van.

- Fitting a new engine to the van. - Purchase of goods.

- Rent of premises.

- Wages, salaries
(for doing their normal job)

- Repainting the buildings.

- Printing papers and ink.

- Fitting four new tyres to van

(or any parts replaced)

By M
B Mrs. Carol
C l Wassef
W f 01223414711 19
 Capital Receipts Revenue Receipts

Amounts Received from any source other Amounts Received from the normal
than the normal activities of the business. activities of the business.

EX:
EX
X: - S
Selling
elling Non-Current Assets. EX:
EX
X: - Sales of goods.
- Loan. - Other revenue.
- Capital introduced. - Revenue from providing a service.

1. Capital expenditure is incorrectly treated as revenue expenditure.

For example, a purchase of Machinery was wrongly treated to repairs
to Machinery Account.
oT
The net profit will be understated.

o Non
Non-Current
N -C
Currentt Assets
Assets will be understated.
und
derstated
d.

oC
Capital
Cap
pita
al Balance will
will be understated.
understate
sta
at d.

2. Revenue ex
expenditure
xppe
enditture is
s inco
incorrectly
orrectly trea
treated
reated as C
Cap
Capital
apittal expenditure.
Maintenance
inttenance to Machinery was added to the value of
For example, Mai
Machinery.
oN
Net profit will be overstated (expenses understated).
understated
d).

o Non
Non-Current
N -Current Assets will be overstated.

oC
Capital Balance will be overstated.

By Mrs.
B M Carol
C l Wassef
W f 01223414711 20
 To Judge the performance of the business firm by analysis of: -

1. Liquidity 2. Efficiency 3. Profitability

1.. Liquidit
1 Liquidity
L ty of an asset: A
Ability of asset to be turned into cash
easily without losing its value
e e.
value.

of the business: A
Ability of the business to pay its
current Liabilities from its current Asset
curren Assets
on due date. (within 12 months)
monthss)
Current Assets
* Cu
Current
rrent Ratio =
Current
rrentt L
Current iabilities
ia
ab
Liabilities
accepte
ed value
Generally accepted value 2:1 or more is fine.

Current Ratio
o How
How man
manyny times
times our immediate
immed
mmed dia
ate Assets
Asse
ssetss
cover immediate
co im
mm
meediate Liabilities.
Liabilities
ies.

Current Assets – Inventory

* Qu
Quick
uick Ratio =
Current Liabilities
Generally accepted value 1:1 or more is fine.

Quick Ratio
o How
How many times Liquid Assets cover immediate Liabilities
without inventory.

- Quick Ratio is a better measure of liquidity than any other ratio.

Because:

1. It
It measures the firm ability to pay its Liabilities immediately without using
i
inventory.

2. Inventory
Inventory can be damaged, out of date, out of fashion,
or sold..
o can be difficult to be sold

By M
B Mrs. Carol
C l Wassef
W f 01223414711 22
* Wo
Working
orking Capital = Current Assets – Current Liabilities

Working Capita
Capital
al It is the amount of money available for running the business
on day-to-day
day-to-day basis after covering current Liabilities.

A shortage in the Working Capital might lead to these problems:

1. M
May not be able to meet Liabilities as they fall due
e.
due.

2. Unable to pay day-to-day running expenses.

expensess.

Unable to take advantages of Cash Discounts.

3. U Discountss.

Unable to replace the inventory

4. U inventory.
y.

* Ho
How
ow can a busine
business
ess iimprove
mprro
mp ove its liquid
liquidity
dity ((Working
Work
king
ki g Capita
Capital)?
a l) ?
- Sale of old orr unused
nused Non-Current
un Non
n-Current Assets.
setss

- Borrowing loans.
lo
oan
ns.

- Further Capital
tal introduced
in
introduc ed by
troduce by the owner.

- Selling inventory
yaatt a p
price higher
er than
rice highe than its cost.
cost.

- Reducing drawings.

- Obtain Cash Discount.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 23
 Working Capital = Current Assets – Current Liabilities – effect on W.C

Effect
Transaction C.A C.L
on W.C
- Additional Capital ˰˰˰˰˰˰˰˰˰˰

- Payment to Creditors No effect

- Collection of Trade Receivable ˰˰˰˰˰˰˰˰˰˰ No effect

- Reduce drawing

- Repayment of long-term loan ˰˰˰˰˰˰˰˰˰˰

- Selling N.C.A ˰˰˰˰˰˰˰˰˰˰

- Obtain Cash Dis

Discount
scou
unt ˰˰˰˰˰˰˰˰˰˰

* Dis
Disadvantage
sadvantage of
of having e
excess
exc
cess Working
Working C
Ca
Capital
apittal (too
ommuch).
uch).
1. Maybe
1 M too much
holding too much inventory
iin
nvento
ory
r where the
the money
one could
ccoul
oulld have been used
i a better investment.
in
also, the inventory could be expired thus causing loss.

Too much Trade Receivable may increase the risk of irrecoverable debts.
2. T

Too much Cash in Hand represents more investment and gain extra income.
3. T
(
(Interest Received)

By M
B Mrs. Carol
C l Wassef
W f 01223414711 24
2.. E
2 Effi i
Efficiency measures

* Ra
Rate
te of inventory turnover (times)
es) =
Cost of Sales
Average inventory

Opening inventory + Closing inventory

oA
Average inventory
y=
2

Average inventory
* Ra
Rate
te of inventory turnover (days)
s) =
Cost of Sales
X 36
365
65
6

o R
Rate of inventory: -
How many times the inventory
H invento is sold and replaced during a period of time.
The s tthe
The higher is better.
he bette
e r.

o W
We can im
improve
mprrove inventory
inven
ntory turnover:
er:: -
1. H
Higher sales
sa
ale
es activity. 2.. L
Lower
owerr inventory
in
nve
n enttory level.

˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

* Re
Receivable
ceivable collection period =
Trade Receivable
Credit Sales
X 365

o Trade
T Receivable
Receivable collection period: H
How long it takess us to
t collect our
money from Trade
Trade Receivable
e.
Receivable.
The shorter is the better.

Trade Payable
* Pay
Payable
yable payment period
d=
Credit Purchases
X3
365

oH
How long it takes us to pay our Trade Payables.
The longer is the better.
er

But The company Should avoid

paying interest charges.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 25
* Re
Reasons
easons for the change in Rate of turnover from one year to another: -
1 Changes
1. C in cost prices.
prices.

2. Changes
C customers demand.
demand
d.

3. Changes
C in competition.
competition
n.

4. Changes
C in the firm policies.
policies.
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

* Wh
What
hat are the advantage
advantagess of paying credit supplier before the due date?
- Improving relationship with suppliers.

- Might benefit from Cash Discounts.

- Avoiding interest charged

harged on delayed payments.
ch payments.

* Sta
State
ate a disadv
disadvantage
vantage of paying
va pay Creditors
rs ear
earlier
earliie
ier th
than
han
n due
ue
eddate.
ate.
- The
T business
businesss iss deprived of
o the money earlier
e
earlieer than
arlier than necessary.
neces
necc ssary.

* Wh
What
hat are the disadvantages
disad
dvantages of not
no
ot paying
paying c
credit
redit suppliers
supp
pliers promptly?
- May not be able to get Cash Discounts from suppliers for speedy payments.

- Good relationship between the firm and the supplier may be damaged.

- Creditors may insist on Cash Payments only in the future.

- Creditors may refuse further supplies of goods to the firm

and charge interest for delay.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 26
P fit bilit measures
Profitability
Profitability Ab
Ability
bility of the firm to generate profits using its available
re
resources.

oT
The resources are Capital employed and the ratio can be linked to sale.

Gross Profit
* Gro
Gross
oss profit margin
n=
Revenue
X 100
1 = ………. %

(Percentage of Gross Profit to revenue)

oG
G.P. Margin: - Fo
For
or each 100
100$$ of sales, the company can generate
a specific amount of G.P, the higher is the better.

Gross
oss Profit
Gro
* Ma
Markup
arku
rku
kup
up =
u
Cost
Cos
ost of Sales
X 10
100
00 = ……….
0 ……….. %

o Markup:
M - Fo
For
or each
each
h 100$
10
00$ o
off Co
Cost
ost of Sale
Sales,
es, the
th
he compa
comp
company
pan
nyy can generate
a specific
specific amount
unt of G.P, tthe
amou he higherr iis
s the better.

* Ne
Nett Profit Margin =
Profit for the year
Revenue
X 100 = ………. %

oN
Net Profit Margin: - Fo
For
or each 100$ of sales the company can generate
a specific amount of profit for the year, the higher is the better.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 27
C it l employed
Capital l d
The long-term sources of finance available to the business firm.

o Where
W Capital employed can be measured in three different ways: -

Capital employed = Non-Current Assets + Working Capital

or = Total Assets – Current Liabilities

or = Owner’s Capital balance + Loan

To compare with two business in controlling it’s expense

We must use expenses to sales ratio

To measure
To m asure the efficiency
eas
ea efficie
ennccy of the business
the bussiness
u
In controlling
cco rollin expenses,
ontrolling exp
pe the
eSSmaller
aller is
Smalle is the
th
he
h better.
e bet
ttter
err.

Expenses
X 100 = ……
……. %
……….
Sales

or *3í1HW3URILW
*3í1HW3URI
ILW
IL  «««

By M
B Mrs. Carol
C l Wassef
W f 01223414711 28
 Profit for the year
* Re
Return
turn on Capital employed =
Capital employed
X 100 = ………. %
(ROCE)

o Roce
R To know the profit earned from each 100$ used in the business.
The higher is the better.

High
Hig
gh Because
Be
ecause Higher profit for the year with lower
Higher
C apital employed.
Capital

Low
w Because
Be
ecause Higher Capital employed with lower
Higher
profit for the year
p year..

Why is it impo
ortant ffor
important or tthe
he owner off a business
b
busine
usiness to
to know
w th
he (ROCE)?
the
- It measures tthe
he
h e profitabilit
profitability
ty o
off the firm
irm w
which
hich will b
will bee compared
compa
c mpa
are
ed with other
similar firms an
nd / or previous years
and s.
years.

- It shows efficiently
ntly the Capital
efficien
cien pital being employed
Cap ployyed into
employ into the
he business.
th bu
ussinesss.

- It shows the profit

prro
roffiitt e arned for
earned for every
eve
ery
ry 100$ invested
inv
nveested in the
th
he business.
businesss.

- To be able to take corrective action if needed.

needed
d.

Reasons for the difference between a business with high (ROCE)

and one with low (ROCE).
(ROCE)
- Different types of business.
businesss.

- Different Products
s.
Products.

Capita
al.
- Different Capital.

- Different Net Profit.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 29
 Measure
Measur
re Possible reasons for improvement
improvemen
nt
- More cash introduced.
introduced
d.
- Obtain or borrowing loans
loan
ns

Current Ratio - Selling goods

goods.
s.
- Less drawings
drawings.
s.
- Admission of a new partner.

- Selling goods.
Quick Ratio
- Improvement in current ratio.

- Increase selling price.

Gross Profit - Buying from cheaper suppliers.
- Buying in bulk (to take Trade discount).

rollling expenses.
- Controlling exp
pense
ses.
e
Net Pro
Profit
ofitt - Increase any other
se any err income.
othe in
incom
ncom
me
e..
- Increase
e Gross
oss Profit.
Gro
G Pro
ro
ofittt..

- Controlling
Controlling
Co ng expenses.
exxpensess.
Return on Capital em
employed
mployed
- Better
Better invest
tment.
investment.
(ROCE)
- Improve Gross Profit.

- Higher sales activity.

Rate of inventory turnover - Lower inventory level.
- Success full selling strategy.

- Offer Cash Discounts to encourage speedy

payments.

Trade Receivables - Charge interest on balances overdue.

collection period - Use credit limit of credit facilities.
- Don’t extend Credit Sales to those who don’t
pay on time.

Trade Payables - Improvement in the liquidity of the firm.

Payment Period - Better offers (credit facilities) from suppliers.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 30
Comparing Ratios calculated for the current financial year:
With those of: -
companies.
- Similar companies
s.

- Previous year.

Problems of inter firm comparison:

A Comparison
C is between two or more business of the same type, of approximately
the same size, and in the same Trade.

Problems of comparison include the following:

The business may apply different accounting policies.
1. T policiess.

Non-monetary
2. N
Non -monetary
onet items such as the skill of the workforce and goodwill of the
busines.
b
busines
s.

T financial years
3. The yearrs may
ma
m ay end
nd on different
en entt dates which
ates whic
ich make
ch can makke the
ccomparison difficult.
diff
fficullt.

4. T
The accounts
accountts are
are based on historic costt and
an
nd don’t
don’t show
sho tthe
he effect of inflation.

By Mrs.
B M Carol
C l Wassef
W f 01223414711 31
* Us
Users
ers of Accounting Statements:

1.. IInternal
1 nternal users:
users: -

Interested Partly Reason of their interest

oT
To check profit
profitability
ability and liquidity.
- Owner
o To
T assess the business performance & Progress.

oA
Assessment of past performance.

- Manager
oB
Basis of future planning.
oC
Controlling the activities of the business.
o Id
Identifying
dentifying corrective actions if required.

oT
To
o assess the abilityy of the busines to continue operating.
- Employees
oT
To e
ensure
nsure
ns
su their wages
wages and
d salaries
sala
laries
a ies will
will b
bee paid.

2. E
External us
users:
serrs: -

oT
The
he a
as
assess
ssesss the
the prospec
prospects
pectss of any re
requested
eq
quuested loan /
Bank Manager overdraft being
beiing repaid when
wh
hen due dat.
oT
To assess the prospects of any interest on loan /
overdraft being paid when due date

oA
Assessment of liquidity position.
oT
To determine the credit limit.
Creditors
o Id
Identifying
dentifying future prospects of the business.
oC
Check likelihood of being paid.

Government
department
oT
To checking that the correct amount of tax is being paid.

Customers oT
To ensure the continuity of supplies.

Potential partner oC
Check on profitability and prospects.
& buyers

Competitor oC
Comparison of profitability

By M
B Mrs.
Mr Carol
C l Wassef
W f 01223414711 32
 Limitation of accounting statement
The accounting statements prepared at the end of the financial year provide
only a limited amount of information about the business.

g may
State how each of the following y be regarded
g as limitation
of accounting statements.
statements
Historic cost
- All transactions are recorded at the actual cost price. It is difficult to compare
transactions taking places at different times.

Money measurement
- Accounts only record information which can be expressed in monetary terms.
This means that manyy factors which affect the performance of a business
will not appear in
in the
the accounting
acco
a cccounting recor
rds.
s
records.

Time factor
- Accounting statements
sta
tat
atements are
e a record of what
wh
ha hhas
as happened
happe
happ
hap ene
ed in the past.
- Either they are
re
e not
not necessarily
nece
nec essa
arrily a guide
guide to ffuture
utu
urre perfo
perform
orman
nce.
performance.
- Or significant eve
ve
ents can
events can occur between
between the
he e nd of the
end e ffinancial
inancial period and the
time wen the accounting statements are available.

Accounting policies
- Where business have used different accounting policies, it is difficult to make
a meaningful comparison between their results.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 33
Double Entry:
y - Th
The
he system used to record business financial transactions.
so that the accounting equation is upheld.
It is an application of the duality concept.

Asset = Capital + Liabilities

Dr

* Eve
Every
ery transaction Tw
Two
wo entries

Cr

The double entry

Th y rules for accounting
g are:
are: -

Dr+ + í Nature
Natur
re + í &Uí

Ass
ssets
setts Lia
iabilities
biilillitie
itiie
es

Dra
rawing
awin
ng Eqquity
uity
t

Exp
xpenses
pe
enses Rev
evenue
venue
(purchases
(purc s)
(purchases) (Sa
(Sales)
Sales returns
return
ns Purchases returns
return
ns
Irrecoverable debt
debts
ts Provision for depreciation
recovere
ed
Irrecoverable debts recovered

By M
B Mrs. Carol
C l Wassef
W f 01223414711 35
 What are the advantages
g ((uses)) of maintaining
g accounting records using
the double entry system?
- Less risk of error.

- Easier to refer to previous transaction.

- Easier to calculate accounting ratios.

- Facilitates decision making.

- Help preparation of financial statements.

Types of Legers

General Nominal
Cash Book Sales Leger Purchases Leger
Leger

Cash Bank Contains the Cont

C onta
ta
ain
Containin
n the
th
he Co
Contain: -
Contain:
Account Accounnt
Account Trade Receivable Traade
a
Traded Payables
Payabyables
blees - Non-Current
Accoo u n ts
Accounts Accoounts
Accounts Assets
each T.R)
(for each T.R)) for each
(for each T.P)
T.PP)
- Non-Current
&d oes not
does not include
incluude
e & does
oes not
not include
includ
incl de
Liabilities
Cash Sales. Cash Purchases.
- Expenses &
Income
- Sales
- Purchases
- Capital
- Drawings
- Inventory

What are the advantages of dividing the Leger into three sections?
- Ability to divide the work between several people.
- Ability to know total balances easily.
- Trace errors.
- Reduce fraud.
- Easier to introduce checking procedures.

By Mrs.
B M Carol
C l Wassef
W f 01223414711 36
E
Example
l 1
2018 Aug 1: Started a business putting 2,000$ into a business Bank Account.

Aug 2: Bought fixture fitting on credit from Sasha 300$.

Aug 3: Bought motor van paying cash 120$.

Aug 4: Withdrew 150$ cash from the bank and placed it in the cash.

Aug 7: Sold some fixture fitting for 100$ on credit to Marwa.

Aug 10: Returned some fixture fitting value 50$ to Sasha.

Aug 21: Marwa pays the firm the amount owing 100$ cheque.

Aug 28: Bought another Motor van paying by cheque 350$.

Aug 30: Paid the amount of 250$ to Sasha by cheque.

Answer 1

Dr+ Bank A \C
A\C Cr–
r
Aug 1, Capital
itall 2
2000
000 Aug
Aug 4, Cash
Cassh 150

Aug 21, Marwa

a 1
100
00 Aug
Aug 28, M
Motor
otor van 350

Aug 30, Sasha 250

Aug 31, c\ d 1350

2100 2100

Sep 1, b\d 1350

By M
B Mrs. Carol
C l Wassef
W f 01223414711 37
 Dr–
r Capital A/C Cr+
Aug 31, c/d 2000 Aug 1, Bank 2000

2000 2000

Sep 1, b/d 2000

Dr+ Fixture & Fitting A/C Cr–

r
Aug 2, Sasha 300 Aug 7, Marwa 100
Aug 10, Sasha 50
Aug 31, c/d 150

300 300

Sep
Sep 1,
1, b
b\\ d 150
0

Dr–
r Sasha
Sasha A/C (T.P)
(T.P) Cr+
r+
+
Aug 10, Returns F,F
F,F 50
50 Aug
Aug 2,
2, Fixture
Fixture 300
Aug 30, Bank 250
2 50 & Fitting

300 300

Dr+ Cash A/C Cr–

r
Aug 4, Bank 150 Aug 3, Motor van 120
Aug 31, c/d 30

150 150

Sep 1, b/d 30

By M
B Mrs. Carol
C l Wassef
W f 01223414711 38
Dr+ Motor van A/C Cr–
r
Aug 3, Cash 120 Aug 31, c/d 470
Aug 28, Bank 350

470 470

Sep 1, b/d 470

Dr+ Marwa (T.R) Cr–

r
Aug 7, Fixture, fitting 100 Aug 21, Bank 100

100 100

By M
B Mrs. Carol
C l Wassef
W f 01223414711 39
 Notes

x Purchases of Non- current Assets (fixed Assets) are entered in the N.C.A
account and not the Purchases Account.
x Any goods purchased or sold entered in the Purchases Account and
sales account only.
x Returns Inwards and returns outward accounts are used for the returns
of goods only and not for returns of Non-Current Assets (fixed Assets).

Example 2
2019 Sep 1: Cash balance 3,000$
Bought goods on credit 200$ form Gana.

Sep 2: Bought goods on credit 70$ from Adam.

Sep 5: Sold goods

go
oods on
on credit
cred
dit to Amir for
or 1
100$.

Sep 7: Sold goods

goods on credit
cred
dit to Aly for 6 0$
60$.

Sep 10: Returned

Retturn
ned goods 80$ to Gana.

Sep 12: Goods

ds bought
bought for
for cash
cash 300$.
300$.

Sep 15: Bought goods

good
ds on credit 250$ from Adam.

Sep 19: Aly returned 20$ goods to us.

Sep 21: Goods sold for cash 150$.

Sep 22: Paid cash to Gana 120$.

Sep 30: Amir paid the amount owing by him 100$ in cash.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 40
Dr+ Cash A/C Cr–
r
Aug 1, b/d 3000 Sep 21, Purchase 300
Sep 21, Sales 150 Sep 22, Gana 120
Sep 30, Amirr 100 Sep 30, c/d 2830

3250 3250

Oct 1, b/d 2830

Dr+ Purchases A/C Cr–

r
Sep 1, Gana 200 Sep 30, Income 820
Sep 2, Adam 70 Statement

Sep
S 12,
ep 1 2, Cash 300
15,
Sep 1 5,, Adam
5 250

820
82
20 820

Dr–
r G
Gana
ana A/C
A/C (T.P)
(T.P) Cr+
Sep 10, Returns 80 Sep 1, Purchases 200
Sep 22, Cash 120

200 200

Dr–
r Adam A/C (T.P) Cr+
Sep 30, c/d 320 Sep 2, Purchases 70
Sep 15, Purchases 250

320 320

Oct 1, b/d 320

By M
B Mrs. Carol
C l Wassef
W f 01223414711 41
Dr+ Amir A/C (T.R) Cr–
r
Sep 5, Sales 100 Sep 30, Cash 100

100 100

Dr–
r Sales A/C Cr+
Sep 30, Income 310 Sep 5, Amir 100
Statement Sep 7, Aly 60
Sep 21, Cash 150

310 310

Dr+ A
Aly
ly A\C
A\C (T.R)
(T.R) Cr–
Crr–
Sep 7, Sales 60 Sep
Sep 7, Saless returns
re
eturn
e turns 20
20
Sep 30, c/d 40
0

6
600 60

Oct 1, Sales 40

Dr–
r Purchase
Purchases
s returns A/C Cr+
Sep 30, I/S 80 Sep 10, Gana 80

80 80

Dr+ Sales returns A/C Cr–

r
Sep 19, Aly 20 Sep 30, I/S 20

20 60

By M
B Mrs. Carol
C l Wassef
W f 01223414711 42
Definition: - It is a list of debit and credit balances from the Books
of
of secondary entry at given time.

oW
What are the purposes of T.B (uses)?
T check the arithmetical accuracy of the accounts balance
1. To e.
balance.

2. IIt’s
t’s used for the preparing the final accounts
s.
accounts.

To
3. T ensuring
nsuring that every debit entry has credit entry.
o en entryy.

Rules of T.B

o In
Inventory
nventory in the T.B Opening

oC
Capital in the T.B Opening

oA
Any provision
n in
in the
the T
T.B
.B
B Old
d

oT
The debit balance
ba
ala
ance Expenses
ens s a
and
nd
dAAssets
Asse
s ets Account
Accoun
nt

o The
T credit balance
ala
a Income
me a
and
nd Liability
Liab
L abil
illit
itty Accoun
Account
nt

o In
Inventory
nventory closing
closin
ng ((If
If T.B iincludes
ncludes N
Net
et Profit)

oW
Why the Capital Account balance in the T.B is opening?

The T.B was drawn up before the preparation of the Income Statement before
profit for the year has been calculated.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 44
 It’s not reliable of accurate because some errors can’t be deleted.
o Errors that don’t affect the Trial Balance agreement. 4/8

Example 1 Th
The
he following were the balances in the Books of Samia
a 31st July 2019, omitting the Equity (Capital) Account,
at
you are asked to prepare the trial balance at 31st July 2019.
The Capital Account being included as the balancing figure:

Motor vehicle 4,400

Purchases 10,000
Trade Payables 3,200
Revenue
Reve
enue 28,00
28,000
00
Inventory
Inv
ventory 3,000
3,00
00
General
Genera
al expenses
expenses 800
80
00
Bank
k overdraft
overdraft 2,000
2,000
Motor vehicle
vehic
ic
cle
e expenses
expens
se
es 600
60
6 00
Drawings
s 8,000
8,0
000
Commission Received 2,000
Trade Receivable 20,000
Postage 300
Premises 33,000

By M
B Mrs. Carol
C l Wassef
W f 01223414711 45
 Answer 1

Samia
Trial Balance

Details Dr Cr

Motor vehicle 4,400

4,40
00
Purchases
Purchase
es 10,00
10,000
00
Trade Payables
Payable
es 3,200
3,20
00
Revenue 28,00
28,000
00
Inventory
Inventor
ry 3,000
3,00
00
General expenses
expense
es 800
80
00
Bank overdraft
ove
erdrra
aft
ft 2,000
2,00
00
Motor vehicle
vehic
cle expenses
cl expense
es 600
60
6 00
Drawings
Draw
win
ngs 8,000
8,00
8 ,0
000
Commission
n Received
Receive
ed 2,000
2,00
00
Trade Receivable
Receiivable 20,0
20,000
000
Postage 300
30
00
Premises
Premise
es 33,00
33,000
00
Capital ?
??? 44,90
44,900
00

80,100 80,100

By M
B Mrs. Carol
C l Wassef
W f 01223414711 46
E
Example
l 2 M
Mahenda sells craft items from a market stall. She sells for cash and
buys
bu his goods on credit. She prepared the following Trial Balance
at 31st October 2018. Although the trial balance totals

Mahenda
Trial Balance at 31stt October 2018

Dr Cr
Capital 2,600
Motor vehicle 4,400
Trade payables 3,200
Purchases 12,400
Revenue 30,800
Inventory 31st O
October
ctoberr 2018
2018 3,300
3
Operating
g expenses
ex
xpenses 600
6
Cash at
at Bank
Bank 5,200
Motor veh
vehicle
hic
cle
c le fuel 860
86
8 60
Drawings
Drawing
gs 8,640
8,6
640

36,000 36,000

Mahenda
enda had inventory
i on 1st November 2017 of 4500.

repare a corrected Trial Balance at 31st October 2018.

Prepa
Prepare

By M
B Mrs. Carol
C l Wassef
W f 01223414711 47
A
Answer 2

Mahenda
Corrected Trial Balance at 31st October 2018

Dr Cr
Capital 2,600
Motor vehicle 4,400
Trade payables 3,200
Purchases 12,400
Revenue 30,800
Inventory 1st November 2017 4,500
Operating expenses
exp
penses 600
Cash att Bank
Bank 5,200
5
Motor ve
vehicle
ehic
cle fuel 860
8
Drawings
Draw
win
ngs 8,640
8,64
8 ,6
640

36,600
36,60
6,,60
00 36,600

By M
B Mrs. Carol
C l Wassef
W f 01223414711 48
 Accounting
g Cycle
y
Transaction

Documents

Books of Prime entry

Books of Secondary entry

Trial
T rial Balance
an

Physical
Phy
ysiic count
cal c ou
un o know
nt (To know closing
c
clos
lo
osing inventory)
n inve
inv
ventory)

Financial Statements

Statement of financial Income Statement

position

By M
B Mrs. Carol
C l Wassef
W f 01223414711 49
 Accounting
g cycle
y
T
Transaction
ti

Documents

Books of Prime entry

Cash Petty Sales Sales Purchases Purchases General

Book Cash Journal returns Journal returns Journal
Journal Journal

Books of Secon
Secondary
nda
ary
yeentry
nttry
y

Cash S
Sales
a le s Purchases Nominal
Book Legerr Legerr Leger

Trial Balance

Physical count (To know closing inventory)

Financial Statements

Statement of financial Income Statement

By M
B Mrs. Carol
C l Wassef
W f 01223414711 50
 1..Cash
1 Cash Book (A)
C (

Definition: - Consists
C of the Cash Account and the Bank Account put together
in one book.
This mean that we can record all money Received and paid out on a particular date
on the same page as:

Dr Dr Cr Cr

Cash Book Cash Book

Any money Received Any money Paid
in cash or cheque. in cash or cheque.

* Wh
Why
hy the Cash B
Bo
Book
ook both off P
Prime
rime entry
y and
a a also
lso
o of
of doub
double
ble
e entry system?

- The
T Cash Bookookk is
Bo is a book of prime entry b
because
beca written
e ausse it iss wri
w itte
it en up from
the business documents.
doc

- It is part of the double

double entry
entry system
em as it acts
syste accts as Legerr Account
Acccount for
A
the cash and bank.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 52
Types of Discounts: -
1- Cash
C Discount: -
It is a reduction in C
Cash
ash Payments, given by the supplier to the customer
to
o encourage
enco early payments.
o Cash
C Discount appears in the Cash Book (Discount columns)

It has two types:

- Discount Allowed: -
C
Cash reduction Allowed by a firm to its customers when they pay
their accounts quickly.
Treatment: T
The
he total of the Discount Allowed Account is posted to the debit side
o the Discount Allowed Account in the Nominal Leger.
of
oT
Then is transferred to the Income Statement as an expense.

- Discount Receiv
Received:
ved: -
C
Cash reduction rec
received
ce
eiv
iivved
d by the firm
firm from its ssuppliers
up
p swwhen
hen
n it pa
pays
ayss
their account quickkly
ly.
quickly.
Treatment: The
T total
to
ota
ta
al of Discount
Discoun
nt Received Account
Accou
ccount is posted
po
osted to
o the credit side
o the
of eD iisscount Re
Discount Receeived Accountt in
Received n th
he genera
the gene
eraal L
general eger.
Leger.
oT
Then is transferred
transfferre
rred
ed to
to the
e Income
Inccome Statement
Stattement ass an
n income.

2-- Trade
2 T Discount: -
It is a reduction in the amount to be paid by customer given to encourage
bulk purchase, it is also given to regular customers.
oD Doesn’t appear in the Leger.
oA Appear in the Invoice / Credit Note.

By Mrs.
B M Carol
C l Wassef
W f 01223414711 53
 The Cash Book with 2 columns

Example 1
Prepare Stefanee Cash Book
May 1: Stefanee puts Capital 1,000$ into a Bank Account
and 100$ into a Cash Account for business use.

May 2: Cash Sales 400$.

May 8: Received from Ali 300$ by cheque.

May 9: Paid Rent by cash 70$.

May 12: Bought goods by cheque 500$.

May 22: Paid wages 50$ cash.

May 28: Banked the cashh over

cassh er the
ove t sum of 1
100$.
00
00$.

May 30: Bought equipment

eq
quiipment for 600$
uipment 600 by cheque.
que

Stefanee
Stefane
ee
Cash Boo
Book
ok

Date Detail Cash Bank Date Detail Cash Bank

May 1 Capital 100 1,000 May 9 Rent 70

May 2 Sales 400 May 12 Purchase 500

May 8 Ali 300 May 22 Wages 50

May 28 Cash 220 May 28 Bank 220

May 30 Equipment 600

May 31 C/d 160 420

500 1,520 500 1,520

June 1 b/d 160 420

By M
B Mrs. Carol
C l Wassef
W f 01223414711 54
* Wh
What
hat is meant by a "contra entry
entry”?
”?
It means
mea transferring money from the bank to the cash or vice versa.
This transaction causes a debit entry and a credit entry to be shown
in the Cash Book.

* Wh
Why
hy might the bank column of the Cash Book sometimes produce
ac
credit
dit balance?
b l
balance ?
- Due to bank over draft where the payments made by cheques
exceeds the receipts.

* Ca
Cann we have a credit balance in the cash column in a Cash Book?

- No, because we can't pay cash more than we have.

˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰

Cash
C ash B
Book
oo
ok
k with tthree
h c
columns
olu
lumn
u ns
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Example 2
On 1st January 20188 Stewart
Ste
Stewart
rt Hanson
Han
anson
ns had
had the following
foll
ollo
owwing
i debit
bit balance
balance
a
in his Cash book.
Cash 100
Bank 1942
Stewart Hanson's transaction for the month of January 2018 included the following:
Jan 3: Paid Paul Yim 398$ by cheque in full settlement of his account of 410$.

Jan 8: Purchase office equipment 1795$, and paid by cheque.

Jan 13: Withdrew 250$, by cheque, to pay personal motor expenses.

Jan 20: A cheque Received in December 2017 for 115$ from Sue west was
dishonored and returned by the bank.

Jan 28: Cash Sales, 1970$

Jan 30: Paid all the remaining cash into bank except 50$.

Balance the Cash Book at 31st January 2018, and bring down the balance
he Cash
on 1st February 2018.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 55
 Discount
iscount Di
Discount
Date Details Cash Bank Date Details Cash Bank
Allowed
A llowed Received
R e

2018 2018

Jan 1 B/d 100 1942 3 Paul Yim 12 398

28 Sales 1970 Office

8 1795
equipment

30 Cash (c) 2020

2 020 13 Dr
Drawing
rawing 250

20
2 0
Sue
Su
S ue west
115
(di
dis:cheque)
(dis:cheque)

30 Bank (c) 2020

31 Balance c/d 50 1404

2070 3962 12 2070 3962

Feb 1 b/d 50 1404

2018

By Mrs. Carol Wassef 01223414711 56

* Ex
Explain
xplain why only the total of Discount Allowed and
Discount Received
Dis Received are entered in these accounts?
The Discount Allowed and Discount Received are not a part of the Cash Book
and the total of them has to be posted to the Discount Allowed
and Discount Received Account in the Nominal Leger.

2.The
2.The
T Documents (B)

1. Invoice:
In
nvoice
e: A document issued by a supplier to a customer buying on credit
sho
sshowing the items purchase, quantity, price per
er unit (list price),
total amount due and when it should be settled.
settle
ed.

2.. Sales
2 S Invoice: A document issued by supplier showing
owing the details
of goods so
ssold
old and the price of those goods.
goods.

3.. Purchases
3 P s Invoice:
In
nv
voice: A ddocument
ocument received
o ece
e b
byy customer
cus
u
ustomer
sstom r showing
sh
howing
e details
the de
etails of goods
goo bought and
nd their
t r price.
pric
icee.

4.. Debit
4 D Note
Note:
e: A documentt ssent
ent to a supplier
plie
e by
by the customer
ccus
ussto
omer as a request
est
for retu
rreturn
etturn of g
e oodss, or asking for
goods, or a reduction
re
educti
duction
n in
in the
the amount due
e.
due.

5.. Credit
5 C Note: A ddocument
ocument issued
d by suppl
supplier
lier to customer as an acc
acceptance
for retu
returned good, or approved an over charge Invoice
e.
Invoice.

6.. Statement
6 S of Account: A copy of a customer's personal account in the
supplier's books
boo sent to remind the customer of amounts due
and it is a summary of all transactions of the period between a
supplier and his customers.

7.. Petty
7 P Cash
Cash Voucher: A payment
ayme documents for every transaction paid
by the Petty C
Petty ash er.
ashie
Cashier.

8.. Cheque
8 C (cheque counterfoil): A document
cume for the bank receipts
and payments in the Cash Book.
Cash Book.

* Wh
What
hat are the possible reasons for
for return of goods by customer?
1. Da
1 Damaged goods
D 2. Goods
G not matching the requirement
((wrong size / color, quantity)

3. Late
L delivery. Over stated Invoice.
4. O

By M
B Mrs. Carol
C l Wassef
W f 01223414711 57
 Sales Invoice (copy)
Cus
Customer
Statement of Account At Purchase
rchase
he
the Invoice
To remind them the amounts due.
1. T due. e nd
end (Original)
Original)
Supplier of
2 T summarize all transactions of the period.
2.. To he
the
y ear
year
T allow customer to check his records.
3.. To
3
Issued

Debit
D ebit Note
Ass a request
q to returned g
goods,,
Reduction in the
t amount due.
e
Credit Note
A acceptance
As pt to
t returned
t dggoods,
d ,
due
Or reduction in the amount due.
To record returns
To record returns
s

In sales returns
t journal
urnal In Purchases
Purch returns Journal
By Mrs. Carol Wassef 01223414711 58
 To selling of goods
The form of invoice: -
Invoice
Shady Co.
Head office Invoice No: 167
7 Ahmed Refaee St. Date: 8/11/2019

Description Quantity Price Total

Packet of Biscuits 200 6 1200

Bottle of Juice 100 4 400
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
1600
Less Trade Discount
isc
c 10% (160)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
1440

To: Bassem Co.

47 El-Ahram St.
3% Cash Discount for payment within 14 days

Used to record
Shady’s Books Sales Journal
Bassem’s Books & Purchases
Journal

List price the price before applying any type of discount.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 59
 To asking to return of goods
The form of debit note
e
Bassem Co.
Debit Note
47 El-Ahram St. D/N/ 421
D/N date 18/11/2019

Description Quantity Price Total

Packet of Biscuits 20 6 120

Bottle of Juice 10 4 40
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
180
Less 10% Tra
Trade
ade Discount (18)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
162

Reason for return – Wrong number supplied

Please issue a Credit Note.
To: Shady Co.
7 Ahmed Refaee St.

Note De
Debit
ebit Note not recorded in any books because it's a request
or asking only.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 60
 To return of goods
The form of credit Note
e
Shady Co.
Credit Note
7 Ahmed Refaee St. C/N No: SR / 113
C/N date 27/11/2019

Description Quantity Price Total

Packet of Biscuits 20 6 120

Bottle of Juice 10 4 40
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Total
Total goods
otal good
ds 180
Trade
ade Discount
Less 10% Tra (18)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Credit
it total
to
otal
t 162
e t)
(net)
To: Bassem Co.
47 El-Ahram St.

Used to record
Shady’s Books Sales returns
Journal
Bassem’s Books & Purchases
returns Journal

By M
B Mrs. Carol
C l Wassef
W f 01223414711 61
 At the end of the year
To form of Statement of Account,
To remind customer with the amount due,
To summarize all transaction of the period,
& To help in locating any possible errors
errors.
s.
Shady Co.
Statement of Account
Date 31/12/2019

Date Details
De
etails
tails Dr
Dr Cr
Cr Balance
B
Nov 1 Balance
Balance b/d
a 600
60
00 600 Dr
12 Invoice
nvoice no: 165
16
65 700
0 1300 Dr
14 Creditit Note
Not
Note No.
No. 110
1 100 1200 Dr
20 1
Cheque 630
6 (500))
2 70 4
Discount 3 700
28 Invoice No. 167 1440 5 1940Dr

1. The
T amount of cheque which paid
700 – 70 = 630
2. The
T amount of Discount (Cash Discount) of the cheque
700 x 10% = 70
3. The
T original amount of cheque
630 + 70 = 700
4. The
T remaining balance of the customer before adding last invoice
1200 – 700 = 500
The last balance of customer and it represent
5. T
500 + 1440 = 1940 (demand of payment)

By M
B Mrs. Carol
C l Wassef
W f 01223414711 62
Definition: - Th
The
The book where transactions are first recorded.

Types of Books: -

Cash Book For receipts and payments of cash and cheques

Sales Journal For Credit Sales

Purchases Journal For Credit Purchases

Sales returns Journal For sales returns (returns Inwards)

Purchases returns Journal For purchases returns (returns Outwards)

Petty Cash Book For small payments (expenses)

General Journal For other items

* Pu
Purpose
rpose
p of pre
p
preparing
ep
pa
aring
g Daybooks
Daybooks:
y :-

1 To
1. T record the
e daily
daily
ily transac
transaction.
ction.

2. Help
H e the
to prepare th
he Books
Bookkss of
of sec
con
ndary en
secondary ntryy.
entry.

T reduce the number of entries in the Leger

3. To

* Ad
Advantages
vantages
g of preparing
p p g Daybooks:
y -

- Reduce fraud.

- Reduce number of entries.

- Ability to know the total of amount of sales or purchase.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 64
* Pu
Purpose
rpose
p of using
g Sales Journal: -

1 R
1. Recording the Credit Sales.

2. R
Reducing number of entries.

3. D
Divide work with several people.
people.

Rules

1. All
A values must be recorded by net (after deducing Trade Discount).

2. Trade
T Discount must be shown in the Journal, Invoice & Credit Note.

3. Cash
C Discount is neglected while recording in the Daybook.

* An Example ooff pposting Credit Sales.

May 1: We sold goods
odss for
for 1,00
fo 1,000$
00$ (list price)
(list p ccredit
rice) on crredit to M.Ahmed
M.A
M.Ah
Ahmed
Trad
de Discount
and took Trade Diiscoun
scouunt 20%.

May 3: We sold goods for 600$ (list price) on credit to S.Kareem.

May 12: We sold goods for 700$ (list price) on credit to H.Mohamed
and took Trade Discount 15%.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 65
 Sales Journal

Date Details $ $
May 1 M.Ahmed 1,000
(–) Trade Discount (20%) (200)
˰˰˰˰˰˰˰˰˰˰ 800
May 3 S.Kareem 600
˰˰˰˰˰˰˰˰˰˰ 600
May 12 H.Mohamed 700
(–) Trade Discount (15%) (105)
˰˰˰˰˰˰˰˰˰˰ 595
Total sales of the period
May 31 1,995
transferred Account
transferred to Sales Account
ccountt

Sales
S es Journal
rna

Each balance must be The total is to be posted

posted separately to the Sales Account
to Sales Leger (T.R) (Nominal leger)
(Ahmed, Kareem & Mohamed)

Dr+ A Cr–
r Dr+ K Cr–
r Dr–
r Sales AC Cr+

800 600 1995

Dr+ M Cr–
r

595

By M
B Mrs. Carol
C l Wassef
W f 01223414711 66
* An Example of posting Credit Purchases.
Aug 1: We bought goods for 2,000$ (list price) on credit from Omar
and took Trade Discount 30%.

Aug 4: We bought goods for 1,500$ (list price) on credit from Aly
and took Trade Discount 30%.

Aug 15: We bought goods for 1,200$ (list price) on credit from Nour.

Purchases Journal

Date Details $ $
Aug 1 Omar 2,000
(––)) Trade
Trade Discountt (3
(30%)
30%)
3 ((600)
600)
˰˰˰˰˰˰˰˰˰˰ 1,400
Aug 4 Aly 1,500
(–) Trade
Trad
de D
Discount
iscount (30%)
(30%
0%) (225)
˰˰˰˰˰˰˰˰˰˰ 1,275
Aug 15 Nour 1,200
˰˰˰˰˰˰˰˰˰˰ 1,200
Total purchases of the period
May 31 3,875
transferred to Purchases Account

By M
B Mrs. Carol
C l Wassef
W f 01223414711 67
 Purchases Journal

Each balance mustt bbe The

h ttotal
t l is to be posted
posted separately to the Purchase Account
to Purchase Leger (T.R) (Nominal Leger)
(Omar, Aly & Nour)

Dr–
r Omar Cr+ Dr–
r Aly Cr+ Dr+ Purchase AC Cr–
r

1400 1275 3875

Dr–
r Nour
Nou
ur Cr+

1200

* An Example of posting the returns Daybook.

May 4: M.Ahmed returned goods to us for 300$ (list price).

May 15: S.Kareem returned goods to us for 100$ (list price).

May 20: H.Mohamed returned goods to us for 200$ (list price).

By M
B Mrs. Carol
C l Wassef
W f 01223414711 68
 Sales returns Journal

Date Details $ $
May 4 M.Ahmed 300
(–) Trade Discount (20%) (60)
˰˰˰˰˰˰˰˰˰˰ 240
May 15 S.Kareem 100
˰˰˰˰˰˰˰˰˰˰ 100
May 20 H.Mohamed 200
(–) Trade Discount (15%) (30)
˰˰˰˰˰˰˰˰˰˰ 170
Total sales returns of the period
May 31 510
transferred
nsferred tto
tran oSSales
ales returns
urn Account
n Accoountt

Sales returns
Journal

Each balance must be The total is to be posted

posted separately to the Sales returns Account
to Sales Leger (T.R) (Nominal Leger)
(Ahmed, Kareem & Mohamed)

Dr+ M.A Cr–

r Dr+ S.K Cr–
r Dr–
r S.R AC Cr+

800 240 600 100 410

Dr+ H.M Cr–

r

595 170
By M
B Mrs. Carol
C l Wassef
W f 01223414711 69
* An Example of posting Purchases ret
returns
urns Daybook.

Aug 9: We returned goods to Omar for 500$ (list price).

Aug 12: We returned goods to Aly for 300$ (list price).

Aug 20: We returned goods to Nour for 200$ (list price).

Purchases returns Journal

Date Details $ $
Aug 9 Omar 500
(–) Trade Discount (30%) (150)
˰˰˰˰˰˰˰˰˰˰ 350
Aug 12 Aly 300
3 00
(–) Trade
Tra
adde
e Discount ((30%)
30 (45)
˰˰˰˰˰˰˰˰˰˰ 255
Aug 20 Nour 200
˰˰˰˰˰˰˰˰˰˰ 200
Total
Total purchases
purchas
ses returns
return
ns
May 31 805
transferred to Purchases returns Account

By M
B Mrs. Carol
C l Wassef
W f 01223414711 70
 Purchases returns
Journal

Each balance must be The total is to be posted

posted separately to the Purchase returns Account
to purchase Leger (T.R) (Nominal Leger)
(Omar, Aly & Nour)

Dr–
r Omar Cr+ Dr–
Dr– Aly
Aly Cr+ Dr+
Dr
r+ Purchase
Purcha
urchasse returns
returns AC Cr–
r

350 255 805

Dr–
r Nour
Nou
ur Cr+

200

By M
B Mrs. Carol
C l Wassef
W f 01223414711 71
 * Th
The
he Books of Prime entry and their Documents

Transaction
Document Book of Prime entry
(Purpose)

To record sales Sales Invoice Sales Journal

purchases Purchases Invoice Purchases Journal
Sales returns Credit Note (Issued) Sales returns Journal
Purchase returns Credit Note (Received) Purchases returns
Journal
Cash Receipts,
Cheque Cash Book
payments
(Small items)
item
ms))
(Paymentss of
of Petty Cash Vou
uche
u er
Voucher Pe
ettty Cash Book
Petty
expenses)
expense
es)
All transactions
transactio
on
ns
s
recorded
unlike to be recordded
in other Daybooks ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ General Journal
such as correction
of errors

* Thee Books of Secondary entry.

1. The
1 T Sales Legerr for Trade Receivables Account only (name).

2. The
T Purchase Legerr for Trade Payables Account only (name).

3. The
T Cash Book (Cash & Bank Accounts).

4. The
T Nominal Legerr for everything except T.R, T.P, cash and bank.
/ general

By Mrs.
B M Carol
C l Wassef
W f 01223414711 72
General journal:
j - Is a book of prime entry used to record any transaction
unlikely
un to be recorded in the other Books of prime entry.
such as:
- Opening entries of the business.

- Closing entries.

- Year – end adjustments.

- Correction of error.

- Writing off account of Trade Receivable as Irrecoverable debts.

- Buying and selling of Non-Current Assets (fixed Assets) on credit.

* Wh
What
hat is meant by narratives, and why are they used?

A narrative is a brief explanation

expla
ana
natio
ion
on of why the entry
en is made.
ma
ade.
de
e
o ItIt's
t's n
necessary
ecessa
ary b
because
ecause off tthe
he great variety
rie
et of transactions,
tr a
annssactions
acc s,
which are recorded
w reeco
orded in the Journal.
oS
So, the reason
reasson
n for each entry can be understood
unders
derstoood in the
the ffuture
uttu
ure
by too manyy groups
b oups such
grrroups h ass the owner, auditors
au
audito tax.
ors & ta
ax..

By M
B Mrs. Carol
C l Wassef
W f 01223414711 74
 Practice
- M
Make the double entry: -
o When:
W purchases
p rchases a ma
machine
chine on credit from Omar for 5 ,000$ on 29th August.
5,000$

Answer
Answe
er

Date Details Dr Cr
August 29 Machine 5,000
Omar 5,000
Narrative Purchase of machine on credit.

(T.P)

Becaus
Because se the purchase
off machine
ne is on credit.
macchin

o When:
W Sales
Sale
S es of motor van for 2,000$
2,000$ on
on cre
ccredit
re
ed
dit
itt to Amany
Aman on 30th Sep.
Am ny on

Answer
Answe
er

Date Details Dr Cr
Sep 30 Amany 2,000
Motor van 2,000
Narrative A sales motor van on credit.

(T.R)

Be
Because
ecause the sales
of
o van is on credit.
credit.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 75
 o When:
W recording
re
ecording an irrecoverable debt.
A debt of 900$ owing to us form Morad written off as an Irrecoverable debt
on 31st July.

Date Details Dr Cr
July 31 Irrecoverable debts 900
Morad (T.R) 900
Narrative Irrecoverable debt written off

Example
Entry The following transaction in Michael Journal
and narrative is not required.
requiire
red.

June 1: Bought machinery

ma
ach 9,000$
00$ on credit from
hinery 9,000 Ann.
from Ann
n.

June 5: Sold moto

motor
or vvan
an 1,000$ by cash.

June 10: Bought fitting

ttin
ng 4,00$ by
by cheque.
cheque.

June 20: Return machine

mach
hine to
to Ann
Ann 200$.
200$
$.

June 22: Sold equipment to Rana 300$ on credit.

June 24: Michael withdraws (take) goods cost 100$ for his own use.

June 26: Return equipment 50$ by Rana.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 76
 The Journal

Date Details Dr Cr
June 1 Machinery 9,000
Ann 9,000
June 5 Cash 1,000
Motor van 1,000
June 10 Fitting 400
Bank 400
June 20 Ann 2,000
Machine 2,000
June 22 Rana
R ana 300
Equipment
Equipmen
nt 300
June 24 Drawing
D rawing 100
Purchases
Purchases 100
June 26 Equipment
Equi
ipment 50
Rana 50

By M
B Mrs. Carol
C l Wassef
W f 01223414711 77
E
Example
l
On Feb First Carol started a business bringing inventory 5000$, Machine
for 10,000$ & Cash deposited in the bank 2000$.

On the same day, the business obtained a Loan from Assia for 6,000$,
deposited it all in the bank.

The Journal

Date Details Dr Cr
Feb 1 Inventory 5,000
Machinery 10,000
Bank
Bank 8,000
8,000
Capital 17,000
Loan (Assia)
a) 6,000

23,000 23,000

By M
B Mrs. Carol
C l Wassef
W f 01223414711 78
 Journal is used to record transactions
Important Transactions
Details Dr Cr
Owner started business Cash 10,000
bringing 10,000$ cash.
Capital 10,000
Owner A and B started Bank 15,000
business bringing 10,000$
Capital A 10,000
and 5,000 by cheque.
B 5,000
Owner started business Inventory 10,000
bringing inventory 10,000$ /
Machinery 3,000
Machinery 3,000 /
Bank 3,000 of which 2,800 Bank 2,800
deposited at the bank and Petty Cash 200
the balance 200 was s kept
kept Capital
Ca 16,000
for Petty Cash.
Ca
ash.
On the same dayy bo borrowed
orrowed B Bank
ank 2,000
2,000$ from h is u
his ncle
uncle
Loan Has
Hassan
H ss
sssa
an 2,000
Hassan (even tho oug
thoughgh same
day it’s a new transaction
nsac so
reccord
you should record d
separately).
Business borrowed 1,000$ Bank 1,000
from bank.
Loan 1,000
Irrecoverable debts of 200$. Irrecoverable debts expense 200
Trade Receivable 200
Increase in provision Income Statement 200
for doubtful debts.
Prov for doubtful debts 200
Decrease in provision Prov for doubtful debts 300
for doubtful debts.
Income Statement 300
Charging interest on Jack 10
customer Jack.
Interest Received 10
Interest charged Interest Paid 4
by supplier Fiona.
Fiona 4
Payment cash of Carriage Inwards 50
Carriage Inwards.
Cash 50

By M
B Mrs. Carol
C l Wassef
W f 01223414711 79
* Ho
How
ow do you transfer Discount Allowed
Allowed to income Statement at year-end?
- Income Statement 13
Discount Allowed 13

* Pa
Paid
aid 100$ Carriage Outwards y cash, and then made another payment
100$
10
00$ by
b cheque?
h ?
- Carriage Outwards 100
Cash 100

- Carriage Outwards 100

Bank 100
Carriage Outwards

Cash
h 100 IIncome
ncome 200
Statement
Statement
Bank
Ban
nk 100
0
200
20
2 00 200

By M
B Mrs. Carol
C l Wassef
W f 01223414711 80
* Wh
What’s
hat’s a Petty Cash Book?

It’s a b
book of Prime Entry used for recording small items paid during the month.

* Wh
What’s
hat’s meant by the imprest system?

It’s a ffixed amount of money is provided to Petty Cashier by the chief cashier
to covering small items.

such as:
1. Stationar
S
Stationary
ry 2. Postage
P 3. Cleaning
C
4. Trave
T lin
ng
Traveling 5. S
Sundry expenses
6. S
Settlement of Trade Payables

* Wh
What
hat are the advantages
adv
vantages of using a Petty
ty Cas
Cash
Cas
sh Boo
B
Book?
ook?
ok

1. Saving
1 S and
d effort for the
time and the main cahier
r.
cahier.

2. Saving
S h room
enough room iin
n the
the main
n Cash
Ca
ash Book
ok for
for im
importan
orrtan
nt transactions.
important

3. Training
T junior accountants.

4. The
T petty Cash Book has analysis columns for various items of expenses.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 82
* Wh
What
hat are the advantages of using the imprest system?

1. The
1 T chief cashier will be aware of how much is spent during the period.

2. The
T total Petty Cash Vouchers and Petty Cash in hand should always
be
b equal to the imprest amount.

* Wh
What
hat are the advantages of using analysis columns
in tthe Petty Cash Book
Book??
1. IIdentifying
dentifying the amount spent on each item.

Be able to control and reduce it.

2. B

3. The
T total of these columns will be transferred to the leger account and charged
tto the Income Statement.
Statement.

* Ex
Explain
plain how th
the
he double
double entry is completed
eted fo
for
for the
tth
he analysis
analy
an
nalys
ysis
s columns
of a Petty Cash
hBBook?
ook?

At the end of each m on

ntth, tthe
month, he totals
totals off e ach of tthe
each he analysis cco
analysis olu
umns are posted
columns
to the debit side of the relevant
relevant expense
re expensse account
accountt in
in the Nom
Nominal
nal Leger.
mina

- and the creditors column individual entries are posted to the debit side
of the relevant creditor in the Purchase Leger.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 83
E
Example
l
Amir is a sole trader who keeps an analyzed Petty Cash Book
on the imprest system. The imprest amount is 300$.
His transactions for the month of August 2019 were as follows:

$
August 1: Petty Cash in hand. 54
August 1: Petty Cash restored to imprest amount. ?
August 6: Bought office stationery. 14
August 8: Loan to employee. 70
August 10: Received stationery refund. 4
August 12: Paid travelling
travvelling expenses.
expenses. 24
August 14: Paid
d cl
cle
cleaner’s
leaner’s wages.
wag
wages. 40
August 16: Bought
Bou
ugh
ht postage stamps. 18
August 18: Bought
ght typing papers.
pap
pe
ers. 28
August 20: Employee
Employe
ye
ee repaid
repaid the loan.
loa
an. 70
August 21: Paid cleaner’s wages. 40
August 25: Bought postage stamps. 6
August 28: Paid travelling expenses. 8

Write up Amir’s Petty Cash Book,

Balance the Petty Cash Book at 31st August 2019 and bring down the balance

& Make the entry on 1st Sep 2019 to restore the Petty Cash Book
imprest amount.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 84
 Petty
Petty Cash Book
Dr Cr
Total Total Stationery Cleaning Trav
Travel Postage
g Others
Received Date Details Paid
$ $ $ $ $
$ $
54 Aug 1 Balance b/d
246 1 Cash / Bank
6 Stationery 14 14
8 Loan
oan to employee
employe ee 7
700 70
4 10 Stationery
tationery refund
refu
und
12 Travelling
velling expe
expenses
ensses 24 24
14 Cleaner’s
eaner’s Wages
ges 4
400 40
16 Postage
ostage Stampss 1
188 18
18 Typing paper 38 38
70 20 Loann from employee
21 Cleaner’s
leaner’s wages 40 40
25 Postage
ostage stamps 6 6
28 Travelling
velling expenses 8 8
258 52 80 32 24 70
31 Balance c/d 116
374 374
116 Sep 1 Balance b/d
184 Sep 1 Cash / Bank

By Mrs. Carol Wassef 01223414711 85

Notes

1. Always
A get totals of what you paid before restoring whether it’s by the end
o the month or next month.
of

2. Envelopes
E postage.
are stationery Not postage.

3. Imprest
Imprest system = P.C.H + P.C.V

P.C.remaining
o Iff not equal

Then it may be due to lost voucher or missing voucher.

Stationery
Statione
nerry
y

Aug 31 Petty
y 52
52 Aug 31
31 Petty 4
Cashh Cash
Cleaning
Clean
anin
ng
g

Aug
Au
ug 31 P
Pe
Petty
etty 80
Cash

Travel

Aug 31 Petty 32
Cash

Postage

Aug 31 Petty 24
Cash

Other or Purchase Leger

Aug 31 Petty 70
Cash

By M
B Mrs. Carol
C l Wassef
W f 01223414711 86
* Sa
Sales
ales = Cash Sales + Credit Sales

* Pu
Purchases
urchases = Cash Purchases + Credit Purchases
Purchase
es

oH
How to calculate the Revenue (Sales) if it is not given?

Assume credit sales missing

My rule

$
Received from Trade Receivable 54,000
+ Trade Receivable closing 5,500
− Trade Receiva
Receivable
able o
opining
pining (10,000)
+ Sales returnss 4,000
+ Discount Allowed
Allo
owed 1,500
+ Irrecoverable d
deeb
btts
debts 500
− Interest (2,000)
− Dishonored cheque (3,000)
‫ــــــــــــــــــــــــــــــ‬
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
‫ــــ‬
= Credit Sales
Sale
es 100,000

Dr+ Sales Leger

g r &Uí
Receivable
eceivables
Trade Receivabless

Balance B/ d 10,000 Sales returns 4,000

Credit sales ?? Cash / Bank Received 54,000
Interest 200 Discount Allowed 1,500
Dishonored 3,000 Irrecoverable debt 500
Balance c/d 5,500
11500 11500
b/d 5500
By M
B Mrs. Carol
C l Wassef
W f 01223414711 88
 oH
How to calculate the Purchases if it is not given?

Assume credit Purchases missing

My rule

Payment to credit supplier xxx

+ Trade Payable closing xxx
− Trade Payable opining xxx
+ Purchases returns xxx
+ Discount Received xxx
− Interest charged by supplier xxx
‫ــــــــــــــــــــــــــــــ‬
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــ‬
‫ــــــــــــــــــــــــــــ‬
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
‫ــــــــــ‬
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
= Credit Purcha
Purchases
ases XXXX

Drí Purchases LLege

Leger
eger Cr+
T rade Payable
Trade Paya
Payab
able
e

Purchases returns xx Bala

xxxx Balance
ance b/d xxx
Cash / Bank paid xxx Credit Purchases xxx
Discount Received xxx Interest xxx
Balance c/d xxx

XXXX XXXX
b/d xxx

By M
B Mrs. Carol
C l Wassef
W f 01223414711 89
 2.. S
2 Statement of affairs
My rule

Capital = Total Assets – Total Liabilities

C N.c C N.c

Statement of affairs
Non-Current Assets (fixed Assets) xxx
Current Assets xxx
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Total Assets xxx
Less (−)
Current
C urrent Liabilities
Liab
L iabilities xxx
Non-Current
No
N on-Current Liabilities xxx
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Capital
C apiittal xxx

˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

Calculate profit
p for the year
y or (loss)
( )
Capital opening xxx
+ Capital introduced xxx
+ Profit for the year ???
− Drawings xxx
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Capital Closing xxx
Dr–
r Capital Acc. Cr+
Drawings xxx b/d xxx
Loss xx? Cash / Bank xxx
& N.C.A
c/d xxx
Profit xx?

b/d xxx
By M
B Mrs. Carol
C l Wassef
W f 01223414711 90
 3.. U
3 Using Markup and Margin
to prepare Income
om
me Statement
me S from Incomplete
Incomplete information

Gross Profit Gross Profit

Makeup = Margin =
Cost of Sales Sales

tto calculate gross profit

oM
Markup X Cost of Sales
or M
Margin X Sales

* if you’re
y given mark u
up
p to sales = 25%
G.P 2
255 25
Makeup = = Marg
M
Margin
gin =
C.o.S 100 125

(100
0 + 25)
25
5)
G.P
CoS + G.
G .P
.P

Example

Revenue (Sales) = 50,000

Opening inventory = 11,000
Purchases = 35,000
What is the value of closing stock if markup is 25%?

By M
B Mrs. Carol
C l Wassef
W f 01223414711 91
 The Accounting
g cycle
y
1. Transaction
T are recorded in

Documents

2. Information
Information from document is posted to

Books of Prime Entry

3. Information
Information from the books of Prime Entry is posted to

Books of Seco
Books ondary Ent
Secondary try
Entry

4. The
Th
T he books
books
k off S
Secondary
e E
Entry
nttr are
eB alanced
a la
anced
Balanceddo ff
off

5. The
T balance
ce of the books of Secondary
darr entry
enttrry a
are
re
e used
us
use
seed
d to prepare

Tria
al Balance
Trial Balance
e

6. Made
M after the preparation of trial balance

Adjustments

7. Close
C the Accounts are transfer to

Income Statement

Statement of Financial Position

By Mrs.
B M Carol
C l Wassef
W f 01223414711 93
 A.. In
A Inventory
nventory
y valuation:
valuation: -
Closing inventory is known at year end by physical count
and normally recorded at cost.

Define the prudence concept

We should expect, estimate and record any possible future loss or expense.

oA
As an application
pp of prudence
p concept:
concept
p:-
Stock
St k should be valued at the lower of cost and net realizable val
value.
ue.
(NRV)
( )
Cost
Net Realizable
ealizable Value
V
Purchase price + Carriage Inwards Selling price – Selling expenses
120 + 5
125
1 25 C
Carriage
arrriage
riiage O
Outwards
utwards
Repair
Repai
R epair
ir costs
costs
Commission
Com
C ommission
130
1 30 – [[5+5
[5+5+5]
5+5+5] = 115

o W
Why we are applying the prudence concept: -
To not over state current Assets (Inventory) in SOFP.
T

To not over state profit in I/S.

By M
B Mrs. Carol
C l Wassef
W f 01223414711 94
Key
y words: -
Accrued / in arrear / unpaid expense / owing / due / outstanding
Prepayment = paid in advance

B.. Matching
B M tching
Ma g concept:
p -
The exact costs of the period should be matched against the exact revenues
of the period to be able to calculate the exact profit or loss for the year.
o Why
W we are applying Accruals (Matching) concept?
B spreading the cost of the Asset over its use for life
By
and charging I/S with the part consumed during the year.
year.
Adjustments:
j -
Prepaid Unpaid
Opening + –
Closing
C los
siing – +
SOFP
SOF
FP C.A C
C.L
.L

Dep
Depreciation: -

1. Straight-Line
Straight-L
S -L
Lin
ne
e Method
Method 2. R
Reducing
educing
gbbalance
alance Method
Cost x Rate = Dep [Ignore scrap value]
or Cost – Scrap NBV x Rate = Dep
# of years (Cost – Dep)

or Cost – Scrap x Rate = Dep

It always constant It always decline

3. Revaluation
R Method: -
Because it’s used to small item (small tools)
We must make revaluation: -
Beginning value 1,000
Add (any additional purchase) 500
Less Ending value (1,200)

Depreciation expense 300

By M
B Mrs. Carol
C l Wassef
W f 01223414711 95
Straight-Line
g Method
d: - E
Equal installment method / on cost / fixed installment.

Note Used
Us
sed in Buildings
Building
gs

Treatment Method: -

I/S SOFP N.B.V

Cost x Rate = Depreciation Dep
Expense
Y1 100,000 x 10% = 10,000 10,000 90,000
Y2 100,000 x 10% = 00 +
10,00
10,000 = 20,000 80,000
Y3 100,000 x 10% = 00 +
10,00
10,000 = 30,000 70,000

Reducing
g Balance
Balan
nc
ce
e Method
d: -

Note Used
Us
sed in C
Com
Computers,
omputers
uters
s, M
Motor
otor vehicles
s&H
High
iigh
h te
tech
ech

Treatment Method: -

I/S SOFP N.B.V

N.B.V x Rate = Depreciation Dep
Expense
Y1 100,000 x 10% = 10,000 10,000 90,000
Y2 90,000 x 10% = 0 +
9,000 = 19,000 81,000
Y3 81,000 x 10% = 0 +
8,100 = 27,100 72,900

By M
B Mrs. Carol
C l Wassef
W f 01223414711 96
Revaluation Method: -

Note Used in: LLoose tools

tools,, China cups, Small equipments.

* Ba
Balance
lance of china and cups at start valued at 1
1,000$
,000$
the are revalued (valuation) at end 820$.
they 820$.

Answerr
Dep = 1,000 – 820 = 180 $

* Bef
Before
fore (valuation of
of)
f) T.V
T.V
V sset
et on 1 st
Jan 23,000$.
23,0
000$.
We
W e bought by ccheque
heq
que new TT.V
.V 00$ at 5thh M
6,000$
V sets for 6 ,0 0 May.
ay.
a
stt
were
The T.V sets we
w e valued at 21,000$ on 3
ere 311 Decc (at
(a
at eend).
ndd

Answer
Dep = 23,000
23
3 ,0 0 0
+ 6,000
– 21,000
8,000$

By M
B Mrs. Carol
C l Wassef
W f 01223414711 97
 C.. P
C Provision for doubtful debts: -
We calculate the amount off provision ffor the year (subtracted from debtors
debtors in SOFP)
and compare to the old provision to calculate the increase / decrease.
If it is an increase charge it as an expense to I/S.
If it is a decrease then add it as an income in I/S.

Treatment Method: -

SOFP I/S
Trade Receivable x Prov = Prov Prov

Y1 5000 x 10% = 500 (500)

Y2 6000 x 10% = 600 (100)
Y3 4000
000 x 10%
40 10% = 400
400 200

Y
Y1 I/S
Other expenses
expenses:
s: -
Prov. for doubtful
ul d
debts
ebts 500
5 00

Y1 SOFP
Current Assets: -
Trade Receivables 5,000
less: prov. (500)
for doubtful debts

Net T.R 4,500

By M
B Mrs. Carol
C l Wassef
W f 01223414711 98
Y2 I/S
Other expenses: -
Increase in prov. (100)
for
f doubtful debts

Y2 SOFP
Current Assets: -
Trade Receivables 6,000
less: prov. (600)
for doubtful debts

Net T.R 5,400

Y3 II/S
/S
Other expenses
expenses:
s: -
Decrease in n prov.
prrov. 200
2 00
ffor doubtful d
debts
ebb

Y3 SOFP
Current Assets: -
Trade Receivables 4,000
less: prov. (400)
for doubtful debts

Net T.R 3,600

By M
B Mrs. Carol
C l Wassef
W f 01223414711 99
 List of Adjustment
j

Treatment Treatment
Information given
in I/S in SOFP

1. Goods purchased: T.P

Purchases Dr / Purchases Profit
Cr / T.P
2. Goods sold: T.R
Sales Dr / T.R Profit
Cr / Revenue (Sales)
3. Goods taken Drawing
Purchases for own use: Profit
Profit
Dr / Drawing
Dr ng
Purchas
urc
c ases
Cr / Purchases
Subtracted
d 4. Unrecorded
Un
nrecorded Current
Current Assets:
from expense
see Prepaid
Prrepaiid expense
P expense
nse Other
Otther Receivable
O
Profit Profit
5. Unrecorded: Current liabilities:
Added to expenses
Unpaid expense Other Payables
Profit
Profit
6. Sales return: T.R
Sales returns Dr / Sales return Profit
Cr / T.R
7. Purchase returns T.P
Purchases returns Dr / T.P Profit
Cr / Purchases returns
8. Bank charge: Bank
Expense
Dr/ Bank charges Over Draft
Profit
Cr / Bank Profit

By M
B Mrs. Carol
C l Wassef
W f 01223414711 100
10
Manufacturing
g Account: - It is and internal account in which we record
all items of cost of goods manufactured.
Direct Costs: -
It is the cost of making an item have been able to be traced to the item
being
be g manufactured.
a u These costs change with the amount of output produced.
Such as: D Direct
irect raw material, Direct labor, Wages and Direct expenses (Royalties).

Indirect Costs: -
It is the cost which can’t easily be traced. And costs that are expected
to remain constant regardless of the output produced. They can be divided between
Manufacturing
a u ac u overheads, administrative and distribution expenses.
Such as: Fa Factory
actory rent & Factory insurance.

Overheads: - In
Indirect
ndirect costs which are allocated to Manufacturing
Manufacturing.
g.
Such as: F
Factory
t re
rent,
ent, Factory
Fa
accto
ory
ryy depreciation,
depreciation,
n, Factory
F y rate
rates.
e

Prime Cost: - A ssum

um
m of all direct costs of factory
cto
o y fo
for
or ccertain
ertain
er
rtaii pe
period
erio
od of time.

Row Materials: - G
Goods
oods that are
are purchased by
by a Manufacturing
Manufactu
nufa
actturin
ing
ng business
for
ffo
or the
the purpose
purpose of b
being
eing conve
converted
nvert
rted into finished
ffin
in
niish
sh
hed items.

Work in Progress:
g - Ite
Items
ems which are partly made but are not yet completed
as finished goods.

Finished Goods: - C
Completed
ompleted items that are ready for sale.

102
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Manufacturing Account

Opening inventory of R.M xxx

+ Purchases of R.M xxx
− Purchases returns of R.M xxx
+ Carriage Inwards of R.M xxx
− Closing inventory xxx
Cost of R.M Consumed XXXX
+ Direct wages / labour xxx
(workers / Machine operator / Factory production wages)

+ Direct expenses (Royalties)

(Roy
oyaltlties) xxx
Prime
Prim
me C
Cost XXXX
+ Overheads “Factory
“F
Fac
ctory indirect costs”
o R
Rent and rates
tes off factory
factorry xxx
o G
General factoryy expenses
expense xxx
o F
Factory lighting & electricity xxx
o Deprecation
D of plant and machinery of factory xxx
o F
Factory insurance xxx
xxx
o D
Depreciation of loose tools
xxx
o IIndirect
ndirect wages
+ Opening inventory of WiP xxx
− Closing inventory of WiP xxx
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Cost of Production of Finished goods XXXX

Transfer to I/S

103
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Income Statement

Revenue (Sales) XXXX

Less: Cost of sales: -
Opening inventory of finished goods xxx
+ Cost of production of finished goods xxx
+ Purchases of finished goods xxx
− Purchases returns of finished goods xxx
− Closing inventory of finished goods xxx (xxx)
Gross Profit XXXX
Less: Expenses:: -
o A
Administration
Administratio
on salaries xxx
(Managers / Legal
(M ega
a / Accountancy / Secretarial
ariia
all salaries)
salaries
la
a s)
o D
Depreciation
n of
of account
accounting
accounting machine xxx
o D
Depreciation o
off d
delivery
eliverry
y van
v xxx
o A
Administration expenses xxx
(Light / Rent / Insurance) of office
(L
o S
Sales staff salaries xxx
o C
Commission of sales men xxx
(Selling and distribution expenses)
(S
o C
Carriage Outwards xxx
o A
Advertising & Display expenses xxx
o B
Bank Charges xxx
o D
Discount Allowed xxx
(xxx)

Profit of the year XXXX

104
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 SOFP Extract

Inventory closing xxx

Raw materials xxx
Work in Progress xxx
Finished goods xxx
XXXX

* Wh
What
hat is the difference between a manufacturer and retailer?

A man
manufacturer is a producer or maker of finished goods. A manufactures goods
into finished goods and then sells them to wholesalers
and retailers who resells them.
Advantage of preparing
prepa
a r in
ng
gMManufacturing
anufacturing account?
cco
1. T
To calculate cost
co
osst of produc
ction.
production.

2. T
To calculate
e Prime
Prrime Cost.

3. To
T be able to calculate
cal
calculate the
th
he average
average cost p err un
per nit
unit
t determine the
to th
he selling
sellling price
price correctly.
corrrecctly.

4. T
4 To calculate factory
fa overheads.

* Wh
Why
hy might a bus
business
siness buy goods rather than make them?

1. Production
1 P levels cannot meet demand.

2. It
It might be cheaper to buy the goods.

3. It
It might have better quality.

4. The
T business might not have the capacity, machines & materials
t produce a specific item.
to

105
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Exam yourself:
y -

Manufacturing
g Income
Account Statement

Depreciation of factory machine

Depreciation of delivery van
Royalties
Factory rent
Sales man’s commission
Factory supervisor’s salary
Sales re
returns
eturns

Closin
Closing
ng inventory
inventory
ventory
y
of Work
Worrk in
in Progress
Purchase of
of finished
f goods
goods

106
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* De
Depreciation:
epreciation
p : - It is an estimated of the loss in value of Non-Current
Non-Current Asset
ov its expected useful life.
over
(It is part of the cost of the N.C.A).

* Me
Methods
ethods of Depreciation:
Depreciation
p :
1 Straight-Line
1. S
Straight -Line Method.

2. Reducing
R Balance Method.

3. Revaluation
R Method.

* Re
Reasons
asons why a firm makes Provision for Depreciation for its N.C.A?
N.C.A

1.. A
1 Application
pp to Matching
g / Accruals Concept:
p
To spread the cost of N.C.A over its useful life and charge the I/S
with the part consumed
co
onsu
umed dduring
uring the year.
du yeaar.

2. App
Application
n to
o Prudence
Prudenc Concept:
p
To not overstate
oversstatte N.C.A in the SOFP and
d not
no
ot overstate
ovve
ersta
rstate
ate pr
profit
rofit in the I/S.

* Wh
Why
hy do some firm
firms
ms p
prefer
refe
referr tto
o use
e tthe
he Redu
h Reducing
ucing Balan
Balance
nce Method?

A some assetss (such as: C

As Computers,
omputers, cars and high tech)
will lose most off their value in earlier years.

* Wh
What
hat is the most appropriate method used for providing for depreciation
of small tools? And why?
Revaluation Method, as small tools do not have an expected useful life.

108
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 * Co
Comparison
omparison between Straight-Line
Straight-Line Method & Reducing Balance Method.

Comparison
p Straight-Line
g Reducing
g Balance
Criterion Method Method

Method of Used the original cost Used the Net Book

calculation value
Dep expense Fixed each year Declines every year
Net Profit is higher Net Profit is higher
Effect on Profit in early years as the assts get older
of the asset
Preferred by most
b usinesses
businesses
Application in R
Reality
eality Simple and
Simple nd eeasy becau us
because se
e it is realistic
but unrealistic
alis
s an
nd allows
and
for increasing
for in
ncreasing cost of
repairs

* Ca
Causes
uses of Depreciation:
Depre
p ecia
iation: -

1.. P
1 Physical
y deterioration
deterioration:: Th
This
his is the result of “Wear & Tear”
due tto normal usage of the fixed asse
asset.
et.

2. E
Economic reasons:
reasons: The
Th
he fixed asset may become inadequate
as it can no longer meet the needs of the business
and more efficient assts become available.

3. P
Passage
g of time:
time: Th
This
his arises where a fixed asset has a fixed life,
a set of number of years.

4. Depletion
Depletion:
D p : T
This arises in connection with fixed assets
such as wells and mines.

109
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Wh
Why
hy Shouldn’t a firm change its method of depreciation
from one year to another?
fro

1. Application
App to Consistency y Concept:p W Which states that
tthe depreciation method d of ccertain asset should
sh not be changed
over the life of the asse
et.
asset.

2. Application
App to Prudence Concept: p Ass we should
should not
no
ot change
tthe depreciation method in order not to overstate
o the
he pr
profit for the year.
yea
ar.

* It iss not usual to charge depreciation on land.

Suggest three reasons why depreciation should not be charged on land.
Su
Land increases in value overtime.
1. L

2. L indefinite
finite estimated
Land has an indef estimated life.

3. L
Land is not used
used
d up or consumed
consu
con
nsu
umed overtime.
rttim
m

* Ex
Explain
plain the St
Straight-Line
trai
aig
ight-Line Method
Me
ethod of depreciation?
deprecia
recia
attio
io
on?

The Straight-Line
S Method
Straight-Line Me hod calculates
Meth calcu
ulaates depreciation
la de on ass a percentage
epreciation perc
percen age of the cost.
centa

Circumstances in which using the Straight-Line Method is most suitable?

oW
When the benefit of an asset expected to be the
the same each year.
yea
ar.

* Ex
Explain
plain the Reducing Balance Method?

It calc
calculates depreciation as a percentage of N.B.V of the asset.
Under this method the depreciation charge decreases every year.

Circumstances in which using

g the Reducing Balance Method
is most suitable?

oW
When the benefit of an asset is expected to be higher in earlier years
of its useful time.

110
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Ex
Explain
plain the Revaluation Method of depreciation?

Non-Current
Non-C
Non Current Assets are valued at the end of each financial year.
This value is compared with the previous valuation and the amount
by which the asset has fallen in value is the deprecation of the year.

Circumstances when
w it is not practical to keep a detailed record of a certain assets
as it has not expected
as expec useful life. (Materiality Concept).

Disposal
p of Non-Current Assets

* Pu
Purpose
rpose of the Disposal Acco
Account.
unt.

1. With
1 W this account we can reduce the disposed asset from our books.

2. It
It enables us to
to calculate
calcula
alculate
e the
the gain or loss
oss on sale
ssa
ale of
of fixed
fixed asset.
asset.

* Re
Reasons
asons for preparing
prep
paring the Disposal Account
ountt E
Entries:
ntrie
tries:
es: -

1. To
1 T eliminate the
the sold
sold asset
assset from
a from our
our books.
books
ks.

2. To
T eliminate the accumulated depreciation of the sold asset from the books.

3. To
T calculate the amount of gain or loss from the sale of the fixed asset.

Note Don’t forget to calculate Depreciation Expense on the remaining Assets

at the end of second year and each year.

Example 1 Jan 2018 we purchased 2 machines on credit from Bill

A $10,000
B $20,000
- We decided to depreciate with straight line method by rate 10% calculate from
the date of purchase.
- On 1 July 2019 we sold machine A by cash $7,000.

Required:
Prepare machine account, depreciation account & disposal account
Of the year ending 31 December 2018 & 2019.

111
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Dr+ Machinery Account &Uí

1 Jan 2018 Bill A:10,000

31 Dec 2018, c/d 30,000
B:20,000
30,000

1 Jan 2019, b/d 30,000 1 July 2019, Disposal A:10,000

31 Dec 2019, c/d 20,000

27,000 30,000

1 Jan 2020, b/d 20,000

'Uí Depreciation
Depreciation
n Account
Accoun
Acco nt Cr+
31 Dec 2018, c/d 3,000
3 ,000 31
1 Dec
Dec 2018,
201
188, I/S
I///S
S A:1,000
B:2,000
3
3,000
,000 3,000

30 July 2019, Disposal 1,500 1 Jan 2019, b/d 3,000

30 July 2019, c/d 4,000 31 Dec 2019, I/S A:500

B:2,000
5,500 5,500
1 Jan 2020, b/d 4,000

112
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Disposal Account
1 July 2019, Machine A 10,000 1 July 2019, Prov for Dep 1,500
1 July 2019, Cash 7,000
31 Dec 2019, I/S 1,500
(Loss)
10,000 10,000

Journal Entries: -
1. Eliminate
E the cost of disposed machine
Disposal xxx
Machinery xxx

2. Eliminate
E the P
Provision
ovision for
rov
ro depreciation
for depreciation
nooff the d
disposed
isp
pos
osed machine
sed ma
ach
hine
for
Provision fo Depreciation
or Depreciatio
on xxx
Disposal A/C xxx
x xx
x

3. R
Record the se
selling
elliin price 6.. G
6 Gain
ain
i or loss
loss Entries
lo Entries
Cash / Bank / D
Debtor
eb
btor xxx
x - Gain
A/C
Disposall A/C xxx
Disposal
Di xxx
Gain or loss
4. G I/S xxx
- Gain - Loss
Disposal A/C xxx I/S
/S xxx
Income Statement xxx
Disposal A/C xxx
- Loss
Income Statement xxx
Disposal A/C xxx

113
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Irrecoverable Debts: - Va
Value
alue owed by the business by credit cu
customers
stomers
who are unwilling or unable to pay.

Provision for Doubtful Debts: - Ann estimate of the amount owed

by Trade Receivables that is likely to be turned into irrecoverable debts.

Irrecoverable Debts recovered: - D

Debts
ebts which were considered as
Irrecoverable Debts in a previous
previo period are now being collected.

* Ex
Explain
plain the difference between irrecoverable Debts and Provision
for Doubtful Debts
Irrecoverable Debts are already written of the books
as some of our Trade Receivables did not pay their debts.
While: Provision for Doubtful Debts is an estimate of the like hood
that some of our debts will not be paid in the future.

* Ho
How
ow is a Provis
Provision
sion for Doubtful
Dou
ubttf Debts e
estimate
estimated?
stimate
ed?

1. Based
1 B on ex
xpe
erience gained from previous
experience ouss ye
earrs.
years.

2. Based
B the experience
upon the experienc
xperie ce o
off other similar
ar ffirms
iirrm
ms in the
th
he ssame
ame field.

3. An
A expectation of
of the
the amount
amount that
tha
at might
might not
no
ot be
be collecte
ted in the future.
collected

* Na
Name
me two methods of calculating Prov. for Doubtful Debts.

- Calculating Provision as a percentage of Trade Receivables.

- Calculating Provision as a fixed amount of money.

115
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Wh
Why
hy do businesses calculate Provision for Doubtful D
Debts?
ebts?

3.. A
3 Application
pp to Prudence Concept:
p
To not overstate the Trade Receivable in the Statement of Financial Position
and not overstate profit in the Income Statement.

4. A
Application
pp to Matching
g / Accruals Concept:
p
To charge the Income Statement with the expense or income of the period
(Change in Prov.) to calculate exact profit / Loss.

E
5. Ensures that Trade Receivables are shown in the SOFP
a a more realistic value.
at

* Ho
How
ow is the Provision for Doubtful Debts shown in SOFP?

It is deduced
de from the
eTTrade Receivables
rade Receivables under
nder the Current
un Currre Assets.
rent Asse
etss..

* Ho
How
ow can a bus
business
sin
ine
ness encourage its customers
tom s to
o pay
pay their
the
e ir a
accounts?
ccounts?

5. Offer
5 O Cash Disccounts for sspeedy
Discounts peedy Payments
ntss.
Payments.

6. Charge
C interesst
sts over
interests ovve
er d ue
dueed ate.
date.

7. Set
S Credit limit.

* Ho
How
ow can a business reduce the risk o
off Irrecoverable Debts?

1. By
1 B obtaining reference from new Credit customers.

2. By
B dealing with trusted customers.

3. By
B using Credit limit.

4. By
B checking the liquidity position of customers regularly.

116
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Irrecoverable Debts ((expense)
p )DDrr: -
To record Irrecoverable Debts: -
Dr / Irrecoverable Debts xxx
Cr / Trade Receivables xxx

At year end (transfer to I/S) or closed B.D Account

Dr / I/S xxx
Cr / Irrecoverable Debts xxx

Example W
We sold goods for 500$ to Hany on credit and to Olla for 600$
at April 5th 2015.
Hany and Olla are Trade Receivables (Debtors) at Feb 8th 2015.
At Sep 17th, Olla paid 200 cash to us.
At December 31st, both of them was unable to pay their account.

Dr+ Hany (T.R)

T.R
R &Uí
2015 201
2015
15
Feb 8, Revenue (Sale
Salles)
(Sales) 500 Decc 331,
1, Irrecoverable
Irreco ablle Debts
rrecovera
era 500
500
5 00 500

Dr+ Olla (T.R) &Uí

2015 2015
April 5, Revenue (Sales) 600 Sep 17, Cash 200
Dec 31, Irrecoverable Debts 400
600 600

Dr+ Irrecoverable Debts Acc &Uí

2015 2015
Dec 31, Hany (Debtor) 500 Dec 31, I/S 900
Dec 31, Olla (Debtor) 400
900 900

117
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Irrecoverable Debts recovered ((income)) C
Crr: -
When receiving the debts by cash from Joula which written off in previous year.
Dr / Cash xxx
Cr / Irrecoverable Debts recovered xxx

At the end of the period to be posted to the I/S Closed

Dr / Irrecoverable Debts recovered xxx

Cr / I/S xxx

Dr+ Irrecoverable Debts recovered &Uí

I/S xxx Cash / Bank xxx

XXX XXX

˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

'Uí Prov. for Doubtful

tfu Debts
Debts Cr+
I/S
II/
/S Balance
Balanc
ance b/d (old)

Balance b/d (new) I/S

˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰
b/d (old)

Double Entry

1. IIff increase in Prov.

D / I/S
Dr xxx
Cr / Prov. for Doubtful Debts xxx

2. IIff decrease in Prov.

C / Prov. for Doubtful Debts
Cr xxx
Dr / I/S xxx

118
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Rule
New Provision: Trade receivables x Prov. rate = Answer
SOFP

If Income Statement (expense)

If Income Statement (income)

Statement of Financial Position (extract)

Current Assets

Trade Receivables ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

Less: Prov. for Doubtful Debts (xxx)

˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Net
N Trade
et T rade Receivables
Re
ecceivables XXX
X

* Wh
What
hat happens
swwhen
hen I don’t adjust my Provision?
Provisi
Provisio
ioon
n?
My expenses
es are understated
nse unde
erstated therefore
ore
emmy
y profit
profits are
ts a overstated.
re o verstated.
My Current Assets Trade
s/T Receivables
rade R bles are overstated
eceivab verstated because
ov be
beca
ecauusse I didn’t deduct it.

119
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Cases for Example:
p -
State, giving a reason, WhWhatt entries
t i should
h be made
in the following situations.
O 31st Dec 2019, kareem a debtor, owes 100$ for goods
1. On
p
purchased on credit in 2015, Sherry has been unable to find Kareem.

Action, W
Write Kareem’s account of an Irrecoverable Debt.

Reason, Am
Amount
moun
nt now
no
ow outstanding for over one year with unlikely for recovery.

O 31st Dec 2019, Engy debtor owes 540$ for goods purchased on credit
2. On
iin November 2019. The period of credit all owed is 1 month.
Engy has informed Sherry that she is unlikely to pay the amount due
before February 2020.

Action, N
No
o entries in
in the
the acc
acco
accounting
counting record
records
rds are necessary.
neccess
essary.
s

Reason, Ac
Account
ccountt is still
still likely
likel to
o be
be paid, there
ere
e is no
o evidence
evviidence
e de ce till
tiillll now
ti now
that it will
th will not
not be paid by Engy.

O 31st Dec 2019,

3. On 2019
2019, Sherry
Sherrry examines
Sh exammine
ines her Sales
S
Sa ale
es Leger
Lege
er and
and decides
tthat she unlikel
ly tto
unlikely o rreceive
eceive 350
0$ of the ttotal
350$ otal amounnt o
amount wing to her.
owing

Action, C
Create
reate a Provision for Doubtful Debts of 350$.

Reason, Sh
She
he must ensure that her profit for the year is not overstated.

120
By Mrs.
B M Carol
C l Wassef
W f 01223414711
One Set of Financial Statements should be prepared for all purposes whether it was
given to the banker,
Someone wishing to buy the business, Owner, Tax Department.
Financial Accounting seeks Objectivity
j y.
The use of a method which all can agree to instead off every
eve one using their own
method. Is said to bee Objective
j .
Subjective,
j ,mmeans that you want to use your own method even though no one else
may agree to it.
Therefore, Financial Accounting seeks Objectivity
j y an
and ot Subjectivity
nd not
no j y.

Concepts

Objectivity
j ity Subjectivity
S bjj y
(4 Concepts) (10 Concepts)

122
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Accounting
g Policies to provide
p the following
g Objectives:
j -

1. Relevance
Relevance:: -
R
Financial
Fi i Information is only relevant if it can be used:

- As the basis and affects the business decisions.

- To confirm or correct prior expectations about past events.

- To assist informing, revising or confirming expectations about the future.

2. Reliability:
R y -
Information must be reliable either:

- It must be free from bias.

- It must be free from significant errors.

- It must be capable
capab off being
b le o being independently
independe y verified.
ently verifie
ed.

- It must be capable
apable of being
ca ng depended
bein depended upon
upon as a a faithful
fa itthful representation
aithful re
eprresentation
of the underl
underlying
ng transactions and events
lyin nts itt rrep
represents.
pre
ese
sents.
entts

- It must be prepared
prre
ep suitable
uitable caution being
pared with su be ng applied
bein
ein appliied to
to any
any judgments
and estimates.
estimatess.

3. Compara
Comparability:
C p bility:y -
Could be compared with other periods and similar businesses.

4. Understandability
Understandability:
U y: -
- The Financial Report “I/S & SOFP” must be capable of being understood
by the users of the report.

- Users of Financial Report are able to grasp the meaning of data provided
which Accounting Policy has been applied.

123
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Accounting
g Policies to provide
p the following
g Subjectives:
j -

1. T
The Business Entity
y Concept:
Concept
p:-
We assume that
h theh bbusiness
i fi
firm h
has a separate legal identity other than its owner,
we are keeping the books for the firm and not the owner’s personal books.
According to this concept the owner will be treated as being:
- A Creditor: - Whe
When
W en in
introducing
troducing Capital to the firm
firm.
m.

- A Debtor: - W
When making any drawings from the firm.

Why do business firms record the Capital

p (Equity)
( q y) on the Liabilities side
of the Statement of Financial Position?
Due to business entity concept where we consider the business separately
from its owner.
2. T
The Accruals (Matching)
(Matching
g) Concept:
Concep
p
ptt: -
The exact cost
cosst o
off the
the peri
period
iod sshould be m
matched
atched ag against
gaainst
in
nst thee exact
exxact revenue
e
of the
th
he period
period to calculate
ccallc
lculate exactt profit
prr fit / llos
oss off the period.
loss pe
p eriod.
- Expense unp
pai
aid
i & expense prepaid.
unpaid

- Recording alll the

the expenses
expensses against
expense against the income
come in the
inco e I/S.
I//S.

- Recording all costt of

of N.C.A
C.A overr their
N.C their life (Depreciation).
(D
Depreciation
n).

- Provision of Doubtful Debts.

3. T
The Prudence Concept:
p -
We should
W h ld expect and
d record all the possible expenses and losses
to not overstated profit.

Not to overstate in Not to overstate in

SOFP I/S
Inventory Valuation Current Assets (Inventory) Profit

Depreciation Non-Current Assets Profit

Provision for Doubtful Current Assets Profit

Debts (Trade Receivables)

Irrecoverable Debts Current Assets Profit

(Trade Receivables)

124
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 4. T
The Realisation Concep
Concept:
pt: -
Profit
f is said to be earned when goods or services are passed to the customer
and then incurs Liabilities for them.
- Revenue is recorded when its earned transfer of ownership to customer.

- Revenue is regarded as being earned / when title to the goods is passed.

- No profit is recognised when goods are ordered.

5. T
The Going
g Concern Concept
Concept:
p:-
We assume that
W h theh firm
fi will
ill continue its activities and operations
for the foreseeable future / operate indefinitely.
- And the firm is not likely to terminate its operations in the near future.

Applications:

oD
Dep. Of Non
Non-Current
-Current Assets.

oP
Paid expenses
expense
es in
in advance.
advancce.
adva

oU
Unpaid expens
expenses
ensses / accrued.

* Wh
Why
hy do other re
receivables
eceivable
bles a
and
nd pa
payables
ayables appear
app
ppea
ar in the
t eSSOFP?
OFP?
According
Accord to the going Concern
Concern Concept: We will deal as if the business
will continue in the future.

6. D
Duality
y Concept
Concept:
p:-
The concept states that there are two aspects of accounting, one represented
by the assets of the business and the other by the claims against them.
- The concept states that these two aspects are always equal to each other.

Assets = Capital + Liabilities

Ex Cash
Cash Sales

Dr Cr
Cash Book Sales

125
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 7. T
The Consistencyy Concept:
Concept
p:-
The same accounting treatment
atment should be applied to similar items at all times
times.
s.
(Such as: DDep.
ep. Method)
Applications:

* Wh
When
hen using the Straight-line
Straight-line Method for charging Depreciation
for Non
Non-Current
-Current Assts. The same method will be used in every consequent year.

* Wh
When
hen using a certain method in inventory valuation.
The same method will be used in the following year.

8. T
The Money
y Measurement Concept
Concept:
p:-
Financial
Fi i lSStatements only
l includes
i l d items
i which
hi can be recorded / expressed
in monetary terms.
Applications:

a) Whether
W the
the firm
firm
rm has good
goo
good or bad managers
m
managers.
an
n s.
(Management
(M
Management Skills)

b) That
T there
eaare
re serious problems
problems with workforce.
work
workkffor
orce.

c) That
T a rivall product
pro
oduct is
is about
about to
o take
take away
wa
ay o
off our best
be
est ccustomers.
ustomers.

d) That
T the government is about to pass a law which will cost us
a lot of extra expenses in the future.

e) Non-Monetary
N -Monetary items such as Goodwill and Labor Skills can’t be recorded.
Non

9. T
The Cost Concept
p (Historic
( Cost):
) -
The assets and
Th d expenses off the
h business
b i should be shown at actual cost
not its market value.

126
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 10. T
The Materiality
y Concept
Concept:
p:-
O
Other principles may be ignored if the time of recording a transaction
and / or the cost of recording it on strict way exceeds the benefit from recording
it in that way. This applies to low value / immaterial items.
Because it will be more costly to make dept to each item separately.

Applications:

o Non
Non-Current
N -Current Assets of low value (Loose tools, Cutlery, Kitchen utilities)
are
are depreciated using the Revaluation Method.

oS
Small expenses, are grouped in one account General Expense,
Other Operating Expenses.
O

o In
Inventories
nventories of office supplies: are treated as an expense in the purchase
even though there are some remaining at the period-end.
e period-end.

o Non
Non-Current
N -Current Assets
Asssets of
of extremely
extremely small
sma
all value
value are
arre charged
charged as
as an expense to
The Statement.
T income State
ementt.

Example
- The cost of calculator was an immaterial amount.
- The cost of recording the calculator as a non-current asset would have
outweighed the benefit.
- The amount of depreciation would be insignificant.
- The calculator may not last for over 12 months.

127
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Control Account: -
Is an account, which checks the arithmetical accuracy of a Leger.

Sales Leger
g Account: -
A summary off allll balances
b l related
l to the Trade Receivables during the period.

Purchases Leger
g Account: -
A summary off allll balances
b l related
l d to the Trade Payables during the period.

* Sta
State
ate advantages of preparing Control Account.

oT
Trace errors.

oP
Proves the arithmetical accuracy of Sales / Purchases Leger.

oE
Enable the S
SOFP
OFP to be p
prepared
repared
re
ep quickly.
cklyy

oP
Provide summary
sum
mmary of all transactions relating
atiing to
to Debtors
Deb
ebtors
bto
os/CCreditors.
reditors.

oR
Reduce fraud
fraud.
d.

Advantages
A dvantage
es of preparing:
prep
eparing: -

Sales Leger Control Purchases Leger Control

1. P
Provide summary
summary of all T.R 1. P
Provide summery of all T.P

2. Proves
P arithmetical accuracy 2. Proves
P arithmetical accuracy
of Sales Leger
o of Purchases Leger
o

3. Enables
E the SOFP 3. Enables
E the SOFP
tto be prepared quickly tto be prepared
prepared quickly

129
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 o IItems
tems not recorded in the Sales Leger Control Account: -
1 Cash
1. C Sale
Sales
es 2. P
Provision for Doubtful Debts
Debtts

3. IIrrecoverable
rrecoverable Debts recovered
recovere
ed

o IItems
tems not recorded in the Purchases Leger Control Account: -
- Cash
C Purchases

* Wh
What
hat is meant by a contra entry in the Control Account?
A cont
contra entry is one of business / person which appears on the debit side
of the Purchases Leger Control Account and the credit side
of the sales Leger Control Account.

Reason Th
The
he entry is made when Sales Leger Account is set off against
pu s Leger
purchases Leger Account
Account of the
e same
same person
erson / busine
per business.
busi ess.

* Wh
What
hat is the dif
difference
fferrence between the Sales
s Leg
L
Leger
eg
gerr
and
d th
the S
Sales
l Leger
Leg
ger Contro
Contr
C
Control
trol A
Account?
ccount?
t?
- The Sales Leger
Lege er iiss a book
book of Secondary
econdary Entry
Se Enttrry used for
or kkeeping
d ffo eeping
the personal accounts of credit customers (individual).

- The Sales Leger Control Account is a summery of all such accounts.

* Ex
Explain
plain why information obtained from books of Prime Entry
and
d nott ffrom th
the S
Sales
l L Leger?
?
Because the same mistakes will be repeated and errors will not be discovered.

130
By Mrs.
B M Carol
C l Wassef
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 Note Sa
Sales
ales Leger Control Account acts as a check on Sales Leger (T.R)
Second
Se Entry, and so information of the Control Account
should be obtained from the books of Prime Entry (other source);
otherwise errors will not be discovered.

* Wh
What
hat is the source of information used to write up the Control Account?

Item Source
- Credit Sales Sales Journal

- Sales returns Sales returns Journal

- Receipts from Debtors, Discount Allowed,

Cash refunded to customers Cash Book
& Dishonored cheques

- Irrecoverable Debts,
Debts, Interest
Interest charged
charg
ged Journal
Journal
on Debtors & CContra
Co
ontra
ra

- Credit Purc
Purchases
cha
ases Purchases
hases Journal
Purrccha

- Purchases
s returns
re
etturns Purchases
Purcha
urccha es returns Journal
asse

- Payments too Creditors,

Crredit
C itors, Discount
Disco
ount Receiv
Received
e iv e d Cash Book
& Cash refunded
refundded b yC
by reditors
Creditorss

- Interest charged by Creditors & Contra Journal

131
By Mrs.
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C l Wassef
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Dr+ Sales Leger Control Account Cr–
r

Debit Side Credit Side

Balance b/d Balance b/d if any

Credit Sales (Sales Journal) Sales returns (Sales returns Journal)

Refunds to customers (Cash Book) Cash / Bank Received (Cash Book)

Dishonored cheques (Cash Book) Discount Allowed (Disc column Cash Book)

Interest charged to customers Irrecoverable Debts written off (Journal)

on overdue accounts (Journal)

Sales Leger Balances offset

Balance c/d if any against balances in Purchases Leger
(Journal) “Contra”

Balance
Balance c/d
c /d

Drí Purchases Leger Control

ont oll Account
Ac
ccount
ou t Cr+

it Side
Debit S Credit
Credit Side
edit Side
Balance b/d
d if
if any
any Balance
Bala
ance b/d

Purchases returns Credit Purchases (Purchases Journal)

(Purchases returns Journal)

Cash / Bank Paid (Cash Book) Refunds from supplier ( Cash Book)

Discount Received Interest charged by suppliers

(Discount column of Cash Book) on overdue invoice (Journal)

Purchases Leger Balances offset Balance c/d if any

against balances in Sales Leger
(Journal) “Contra”

Balance c/d

132
By Mrs.
B M Carol
C l Wassef
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 Entry of Refunds to customers
SLCA xx
Cash xx
Explain?

Trade Receivable Account Trade Payable

y Account
may show a Credit Balance to: ay show a Debit Balance to:
may
- Overpayment by customer - Overpayment to supplier

- Customer paying in advance - Paying supplier in advance

for goods for goods

- Customer returned goods - Returned goods to supplier

after paying the account after paying the account

Note W
When I talk
ta
alk about
about tthe
he balance,
ba Io
only
nlyy care about
abou
utt the Balance
Bala
ance b/d
not the cc/d
no /d
d.
c/d.

Note Why we aren’t

W aren’’t recorded
reco
corded th
these
hese items in
in the
th SLC
SLCA?
LC
CA?

1. Cash
C Sales:: -
Sales
Because it doesn’t enter in the Sales Leger (Debtors Account).

2. Provision
P for Doubtful Debts
Debts:: -
Because it’s not a feature in Sales Leger Control Accounts
Because the Provision Accounts are kept in the General Leger
not the Sales Leger.
Irrecoverable Debts recovered: -
3. Irrecoverable
Are not recorded in Sales Leger Control Account.

133
By Mrs.
B M Carol
C l Wassef
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Error not affecting
g the Trial Balance: -

1. E
Error of Omission
Omission ((Over looked,, Omitted))
When transaction
Wh i totally
ll omitted from the books.

Ex W pay 3
We 3,000$
,000$ insurance through the bank, and that wasn't entered
in the books.
Dr / Insurance 3,000
Cr / Bank 3,000

2. E
Error of Co
Commission
mmission ((Wrong
g account name))
When transaction posted to wrong account name of right class
[Both same class such as 2 expenses, 2T.R, 2T.R ].

Ex We recorded wages 2
W 2,000$
,000$ as electricity.
Dr / Wages 2,000
Cr / E
El
lectricit
ctricitty
Electricity 2,0
0000
2,0000

3. E
Error of Pr
Principle
rincipl
pe ((Wrong
gcclass)
la
a )
When transaction
on posted to wrong class.
[Capital expend
diitu
tu
ure
expendituree treated a
ass Revenue
Revenue expend
pe dit
itu
ture and
expenditure an
nd vise
viise
se
e versa].

Ex Motor ex
M expense,
xpen
ens
nse, 1
150$
50
5 0$ debited
deb
bited to moto
m
motor
otor vehicl
vehicles
les account.
account.
Dr / Motor expenses 150
Cr / Motor vehicles (N.C.A) 150

4. E
Error of Compensating
p g (Undercasting,
((Undercasting
U g,, Overcasting
g with same
amount))
amount
Two separate errors that cancel out each other.

Ex We debited 200$ to wages instead of 300$

W
and
nd recorded
an
n recorded Sales Account 400$ instead of 500$.
Dr / Wages 100
Cr / Sales 100

5. E
Error of Original
g Entrie
Entries
s ((Wrong
g amount))
When transaction recorded with wrong amount in book of Prime Entery.

Ex The
Th
he balance of cash sales of 800$ has been recorded as 500$.
Dr / Cash 300
Cr / Sales 300

135
By Mrs.
B M Carol
C l Wassef
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 6. E
Error of Complete
p Reversa
Reversall ((wrong
g side,, Type)
yp )
When Debit Entry posted on Credit
C side and vice versa.
versa.

Ex W
We pay Cash for wages 2,000$ and we debit Cash and Credit wages.
Dr / Wages 4,000
Cr / Cash 4,000

˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

Example
For each of the item 1- 6 state the type of error that was made: -

1. General
G expanses, paid in cash, 150$ had not been recorded
recorded.
d.

2. Motor
M expenses, 430$, had been debited to the Motor vehicles Account.
Accoun
nt.

3. A cheque, 250$, received from a credit customer had been cred

credited
to
t the Bank Account
Acccoun and
nt a nd
n debited
dd ebited to the Customer's
e Custome
Custome Account.
er's Accoun
n t.

4. Goods
G purchased
purch
ha ed on credit
assed crediit from
from Soha, 680$,
80$, had
68 had d been correctly
been co
orr
rrectly entered
ntered in
the
t Purchases
es Account but had been posted
ostted to
to tthe
he Account
e Accou
Accou Noha.
untt of Nohaa.

5. Insurance,
Insurance, 100$,
$, were entered
100$
00$ entte
ere
red in the Cash Book
sh Boo $10.
ok as $
$10
10
0..
0

6. Wages
W recorded
ed as
recorde heating
as h ea
e attiin the
ng in th books.
he b ooks
s.

1. Omissio
O
Omission
on

Principle
2. Principl
P le

Reversal
3. Reversa
R al

Commission
4. Commissio
C on

5. O entries
Original entrie
es

Commission
6. Commissio
C on

136
By Mrs.
B M Carol
C l Wassef
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Error that affect the agreement
g of Trial Balance: -
1.. Error
E of Addition
Addition:: -

Overvaluation of one of the sides.

2.. Error
E Subtraction:: -
of Subtraction

Undervaluation of one of the sides.

sidess.

3.. Single Entry:

S g Entry y: -

Entering only one side of transaction.

transaction
n.

- If two sides of T.B don’t agree, we open Suspense Account

to record the difference on the trial balance.

Suspense
p Accountt
An account that
tha
at iss opened temporarily
tem
temporarily when
hen
n the two
tw
wo
o sides
sides off the
th
he trial balance
ree
don’t agree.
- The value off the
th
h Suspense - the difference
ce be
etw
wee
een the
between th
h two
two sides
Ba
ala
ance.
an
of the Trial Balance.

- The value of thee Suspense

Suspense Account
Acco
ount will be
e recorded
recorded on
n the
the side
with the lower total.

- If all errors were discovered and corrected then the suspense will disappear
[the Suspense Account will have no balance]

- If not, all errors discovered then the suspense will exist

and will be recorded in SOFP as current asset (if suspense was Dr)
or as Current Liabilities (if Suspense was Cr).

Uses of Suspense Account

1. To
T make tthe
he Trial Balance agree.

2. To
T be able to prepare draft Financial Statement.

137
By Mrs.
B M Carol
C l Wassef
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E
Example
l
Sally, a trader prepared her trial balance on 31st January 2018.
The totals of the trial balanced not agree.
Sally entered the difference a credit balance of 1,110$,
in a Suspense Account. The following errors were later discovered.

The wages account had been under cost by 270$.

1. T

Rent
2. R
Re nt Received, 1,000$, had been correctly entered in the bank account
but no other entry had been made.
b

Goods Purchased on Credit form Simone, 680$, had been correctly entered
3. G
iin the purchases account but had been posted to the account of Simone.

No entry had been made for stationary, 35$,

4. N 35$, paid in cash.

Motor vehicle repairs,

5. M repairs, 700$, had been debited to the Motor vehicles Account.

6. Purchases
P returns,
retturnns, 190$,
190$, had
ad been correctly
ha ectly entered
orre en d in the
nterred
ed e Supplier's
Supplier's Account
but had been
b n debited
d
de Sales
ebited to Sa Account.
ales returns Accccount
ountt.

Prepare the Journall Entries.

1. P Entries.

Note
- If we have a balance b/d then not all errors were discovered.

oW
We open a Trial Balance when the Trial Balance fails to agree.

138
By Mrs.
B M Carol
C l Wassef
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A
Answer
r1

Journal Entries

Details Dr Cr

Dr / Wages 270
1.
Cr / Suspense 270
Dr / Suspense 1,000
2.
Cr / Rent Received 1,000
Dr / Simone 680
3.
Cr / Simon 680
Dr / Stationery 35
4.
Cr / Cash
Ca
ash
s 35
Dr / Motor
Motor expense
ens
s 700
5.
Cr / Motor
or vehicle
oto vehicle
e 700
Drr / S
Suspense
usp
pense 380
6. Crr / Purc
C Purchases
chases returns
retu
urns 190
Cr / Sales returns 190

139
By Mrs.
B M Carol
C l Wassef
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 2. Prepare
P the Suspense Account making the necessary entries
tto correct errors, Balance or total the account as required.

Answer 2

Sally Suspense Account

Date Rent Receivable 1,000 Date Difference in T.B 1,110
2018 2018
Purchases returns 190 Wages 270
Jan Jan
31st Sales returns 31st
190

1380 1380

3. State
S whether all
all errors
error
rrors in
in Sally's account
ac
cco
ount
ount have
ha
ave been
been discovered.
dis
diis
sccovered.
G
Give rea
aso
on: -
your reason:

Answer 3 Ye
Yes,
es, al
allll errors are d
discovered.
iscovered.
Because
use tthe
Becaus he Suspense
Su
usp
peense Account
Account has
has been
been cleared
ared (Closed).
een clear
clea

140
By Mrs.
B M Carol
C l Wassef
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 Sally's draft profit for the year ended 31st January 2018 was 24,250$
before any errors was corrected.
4. Complete
C the statement to show the corrected profit
ffor the year ended 31st January 2018. If an error has no effect on profit
place a tick ( ) in the "No Effect" column.

Answer 4

Statement of corrected profit for the year ended 31st Jan 2018

No effect Increase Decrease $

Draft profit 24,250
Error 1 270
Error 2 1,000
Error 3

Error 4 35
3 5
Error 5 700
70
7 00
Error 6
*380
1,380 1,005 375
Corrected profit 24,625

Note
Effect of not correcting the error on profit?
1. Items
Items inversely proportionate to profit: -

Sales returns, Opening Inventory, Purchases, Carriage Inwards, Expenses.

2. Items
Items directly proportionate to profit: -

Sales, Closing Inventory, Purchases returns, Other Revenue.

141
By Mrs.
B M Carol
C l Wassef
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In the Income Statement; you have boked at have taken,
The Revenue (Sales) of the period and deducted all the expenses for that period,
the result being a Net Profit (or a Net Loss).

Difference between a Prepayment and Accrual: -

- Prepayment: iss an amount paid in advance for a service
which
w has not yet been received
received.
d.

- Accruals: iss an amount owed for a service which has been received
but not paid.
b paid
d.

Matching Concept Application: -

Dr+ Expense Acc &Uí

Prepaid Opening
g b/d
b/d xxx Un
Unpaid Ope
ening
n
Opening b//d
b/d xxx
Bank / Cash xxx Income
nco S
Statement
tat
atemen
tem nt xxx
Unpaid Closing
g c/d
c//d xxx Prepaid
Prepai
epaid Closing
Clos
losi
losing
sing
g c/d
c/d xxx
XXXX
XXX
XX XXXX
Prepaid Opening b/d Unpaid Opening b/d

C
C.A C.L
'Uí Revenue (Income) Acc Cr+

Unpaid Opening b/d xxx Prepaid Opening b/d xxx

Income Statement xxx Bank / Cash xxx
Prepaid Closing c/d xxx Unpaid Closing c/d xxx
XXXX XXXX
Unpaid Opening b/d Prepaid Opening b/d

C
C.A C.L

143
By Mrs.
B M Carol
C l Wassef
W f 01223414711
E
Example
l 1
Malek is a trader. His financial year ends on 31st March.
He employs a Book Keeper to maintain his financial records.
The Following Account appeared in Malek’s Leger.

Rates Account
2009 2010
April 1, Balance b/d 320 March 31, Income Statement 2,120
2010
July 1, Bank 1,620
March 31, Balance c/d 180
2,120 2,120
2010
April
April 1, Balance
alance b/d
Ba 180

1. Explain
E each
heentry
try in the
eaabove
bove account.
unt
S
State where th
the double
he d ouble eentry
ntry ffor transaction
or each ttra
ransaction
would have beenen
nm ade.
made.
oB
Balance 1st April 2009:
Explanation
E l This is the amount of rates prepaid during
This
the pre
previous financial year which related to the current financial year.

Double Entry C
Credit Account for year ended 31st March 2009.

oB
Bank 1st July 2010:
Explanation
E l This
This is the total amount of rate paid by cheque.

Double Entry Credit

C Bank column in Cash Book.

o In
ncome Statement 31st March 2010:
Income
Explanation
E l This is the rates relating to the current financial year
This
tr
transferred to I/S.

Double Entry D
Debit Income Statement.

144
By Mrs.
B M Carol
C l Wassef
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 2. Explain
E the significance of 180$ shown at the end of the account.
The balance represents the amount of rates still outstanding
for the financial year ended 31st March 2010.

3. Explain
E the Accruals (Matching) Principle
Principle..
Th Accruals (Matching) Principle requires the revenue of the accounting period
The
to be matched against the costs of the same period.

4. Explain
E how the Books Keeper applied this principle when he prepared
tthe
th e Rates Account.
The total rates relating to the financial year ended 31st March 2010
were transferred to the Income Statement.

* Ma
Malek
alek paid 1,000$ for insurance. This was for 750$ insurance premium
on his business and 250$ insurance premium on his house.
The Book Keeper credited the bank with 1,000$,
Insurance
debited the Insur
rance
eAAccount
cc 750$
count with 75 50$
and the Drawinngs A
Drawings ccounnt w
Account with 250$.

Nam
me the Accounting Principle
Name le the
eB ook
k Kee
Book Keep
eper has applied.
Keeper

Business
B usiness E
En
Entity
ntitty

* Thee Book Keeper didn’t make any entries in the Accounting Records
forr orders received for goods to be supplied in the following financial year.

Name the Accounting Principle the Book Keeper has applied.

Realisation

145
By Mrs.
B M Carol
C l Wassef
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E
Example
l 2
Omar is a trader with financial year end of 31st August.
He advertises in a monthly trade magazine.
He provided the following information.

1st November 2018: Paid a total of 450$ for an adverting in the January,
February and March 2018 editions.
1st May 2018: Paid a total of 620$ for an advertising in the June, July, August
and September 2019 editions.

Prepare Omar’s
O Advertising Account for the year ended 31st August 2014.
Balance the account and bring down the balance on 1st September 2014.

Dr+ Advertising
Advertisiin
ng
g Acc &Uí
2018 20
2018
018
8
Nov 1, Bank / Cash
Ca
ash
h 450 Aug
ug 31,, Income
Au In
ncom
ome Statement
me Sta
ate
ement 915
2019
May 1, Bank / Cash
h 620
62
20 Balance
Balan
lancce
e c/d 155
1,070 1,070
2019
Sep 1, Balance b/d 155

146
By Mrs.
B M Carol
C l Wassef
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 - An Insurance Account showed a prepayment of 180$ on 1st July 2018.
A payment 2,340$ for insurance was made on 2nd August 2018.
There was a prepayment of 195$ showing on the account
30th June 2019.
on the 3

Prepa the Insurance Account for the year ended 30th June 2019.
Prepare

Dr+ Insurance Acc &Uí

2018 2018
July 1, Balance b/d 180 June 30, Income Statement 2,325
Aug 2, Bank / Cash 2,340 Balance c/d 195
2,520 2,520
2019
July 1, Balance b/
b/d
/d
/d 195

147
By Mrs.
B M Carol
C l Wassef
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Definition: -
Bank Statement: - It is a copy of the Business Current Account
Account
sent to it by the bank.

Bank Reconciliation: - It is a mathematical calculation to compare between the

Bank Balance
Balan in the Cash Book and the Bank Statement Balance.

oR
Reasons for preparing
p p g a Bank Reconciliation Statement.
Statement.
1 Finding
1. F errors.

2. Reducing
R fraud.

3. To
T prove that the difference between the Cash Book and the Bank Statement
are
a due to timing and not
not error.

4. To
T update the Cash Book and obtain the true Bank Balance.

* Item
Items
ms which ma
may
ay a
appear
ppear in
n th
the
h Cash Book
oo bu
but n
not
ot o
on
n the
eBBank
ank Statement.

oB
Bank Lodgments
Lodgm
men
nts (cheques not presented).
ed)

oU
Unpresented
d cheques
che ues ((a
(amounts
amounts not credited).
credite
dite
ed).

oC
Cash Book errors.
errorss.

* Item
Items
ms which may appear in the Bank Statement but not on the Cash Book.

oS
Standing orders. oC
Credit transfers

oD
Direct debits oD
Dishonored cheques

oB
Bank charges oB
Bank errors

149
By Mrs.
B M Carol
C l Wassef
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 The Form

Dr+ Cash Book &Uí

Bank Lodgments Unpresented Cheques

Deposit in Transit Outstanding Cheques
Cheque received but not yet Cheques issued but not yet
credited (added) by bank. debited (deducted) by bank.

Bank Statement

Dr Cr Balance
Credit transferr in xxx ˰˰˰˰˰˰˰˰˰˰

Credit interest on dep

deposit
posit in
n xxx
xxx ˰˰˰˰˰˰˰˰˰˰
(Finance Income / Investment
Inve
vesttm
ve ment
ment Revenue)
Revven
R e u
ue)
e

Debit interest (interest

(inttere
est overdraft) out xxx
xxx ˰˰˰˰˰˰˰˰˰˰

Bank Charges out xxx ˰˰˰˰˰˰˰˰˰˰

Direct debit out xxx ˰˰˰˰˰˰˰˰˰˰

Standing orderr out xxx ˰˰˰˰˰˰˰˰˰˰

Dishonored cheques out xxx ˰˰˰˰˰˰˰˰˰˰

150
By Mrs.
B M Carol
C l Wassef
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* Ex
Explain
plain why the items entered on the debit side of the Cash Book
appear on th
ap the credit
dit side
id off th
the B
Bank
k St
Statement
t t and
d vice
i versa?
?
When the firm prepares its Cash Book, the Bank Account is an Asset for the firm
having a debit nature. However, the Bank Statement is sent from the perspective
of the bank, where business money represents a Liability of the bank
and thus has a credit nature.

* Re
Reasons
asons why a cheque might be returned by the bank as dishonored?
1. Insufficient
1 Insufficient funds in the Debtor’s Balance.

2. Errors
E in the information on the cheque (Date, Amount, Signature).

3. The
T cheque is stale (out of date).

* Wh
What
hat is the differenc
difference
ce b
between
etween a Dishonored Cheq
Cheque
que
and
d an U
Unpresented
nprese
entte
ed Cheque?
Cheque?
Dishonored Cheque:
Chequ
ue: Iss a cheque that has been
en ref
refused
refuused b
byy the
he bbank
ank
(due to insufficient balance
(d ce or
o any
any other
otther reason).
re
eason).

Unpresented Cheque:
que: Iss a cheque
cheq
quee paid by the bu
b
business
usinne
n ess
wh
w hich has
which has not yyet
ett been presented
p
prese
ressented to
o the
th
he bank for payment.

* Wh
What
hat is the difference between a Standing Order and a Direct Debit?
Standing Order: Iss an order given by the customer to the bank to pay fixed amounts
Stand
to specific
specific person at stated dates.

Direct Debit: Iss an authority given by a customer to the bank to make payments
to a specified person on upon request.
request.

151
By Mrs.
B M Carol
C l Wassef
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E
Example
l 1
Miguel reconciles the balance on his Cash Book with the balance
on his Bank Statement.
a) Complete
C this sentence.
Items in the Cash Book which not appear on the Bank Statement
are usually caused by …………………….. differences.

Miguel’s Cash Book (Bank columns only) showed the following entries.
2018 $ 2018 $
May 2 Cash Sales 4,216 May 1 Balance b/d 1,168
3 Alice 420 2 David 3,112
3 Bertram 280 3 Vehicle repairs 180
4 Cash Saless 2,132 4 Edward 1,181
5 Charles
Charrles 111
1 5 Wage
Wages
es 1,112
7 Balance
Ba
alan
nce c/d 2,720
2 ,720 6 Francis
Fran
nccis
iss 3,126
9,879 9,879
May
y8 Balance
Ba
ala
ance b/d 2,720

His Bank Statement for the same period showed the following.
Dr Cr Balance
$ $ $
May 1 Balance 1,168 Dr
2 Insurance 120 1,288 Dr
5 Cash 4,216 2,928 Cr
5 Alice 420 3,348 Cr
5 Bertram 280 3,628 Cr
5 Wages 1,112 2,516 Cr
6 Interests 65 2,415 Cr
6 David 3,112 661 Dr
7 Edward 1,181 1,842 Dr
7 Gordon 920 922 Dr

152
By Mrs.
B M Carol
C l Wassef
W f 01223414711
The Steps
p of Solving:
g -
Step 1 T
The
he Cashier will tick off the items that appear in both the Cash Book
an the Bank Statement.
and

Step 2 The
The unticked items on the Bank Statement are entered
into the Bank columns of the Cash Book to bring it up to date.
in

Step 3 The
The Bank columns of the Cash Book are now balanced
to find the revised figure.

Step 4 T
The
he remaining unticked items from the Cash Book
will be the timing difference.
w

Step 5 T
The
he timing differences are used to prepare
the Bank Reconciliation Statement.
th

Step 6 T
The
he remaining unticked items from the Bank Statement
w be used
will d to
to prepare
prepare updated Cash
Cash Bo
Book
k.
Book.

Step 7 E
Errors
rrors
Errors in
E in C
Cash
ash Book C
Corrected
orrrrecte
r ed in the the Updated
Up
pdda
ated Cash Book.
Errors in Bank Statement Correct
orrr ctte
Corrected edd in Bank
Ban Reconciliation.
Re
R econciliation.

As:
A s: -
D
Drr if ((Add
(Add)
d)
Cr if (Subtract)

b)) Update
Up Cash Book and bring down the balance on 8th May 2018.
the C

153
By Mrs.
B M Carol
C l Wassef
W f 01223414711
A
Answer
Miguel
Updated Cash Book (Bank columns only)
2018 $ 2018 $
May 8 Gordon 920 May 8 Balance b/d 2,720
Balance c/d 1,985 Insurance 120
Interest 65
2,905 2,905
2018
May 8 Balance b/d 1,985

c) Prepare
P the Bank Reconciliation Statement at 8th May 2018.

Case 1:
Migue
el
Miguel
Bank
nk Reconciliation Statemen
Ban Statement
ment att 7th
nt a th M
May
Ma
ay 2
2018
018
$ $
Balance on Bank
Bank Statement
Statementt (922)
Add Amounts not yet credited Sales 2,132
Charles 111 2,243
1,321
Less Cheques not yet presented Vehicle repairs 180
Francis 3,126 3,306
Balance in Cash Book (1,985)

154
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Case 2: A
Alternative Presentation
Miguel
Bank Reconciliation Statement at 7th May 2018
$ $
Balance in Cash Book (1,985)
Add Cheques not yet presented Vehicle repairs 180
Francis 3,126 3,306
1,321
Less Amounts not yet credited Sales 2,132
Charles 111 2,243
Balance on Bank Statement (922)
˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰

Example 2
On 1st Nove
November
ember 2013 Donald Mackey’s ey’’s Cash
Cash B
Ca Book
oook ((Bank
Bank column)
Showed a Deebitt Balance of 741$. On the
Debit he ssa
ame day
same yh his
is
sB ank Statement
Bank
Showed
Showed a no
an verdrawn bal
overdrawn balancce of 394
balance 3944$.
394$.
Donald Mack
key C
Mackey ompared the
Compared eC ash Book
Cash ook
k with the
eB ank Statement
Bank
and tthe
he ffollowing
ollowing differences were found.
differences

1. Items recorded only in Cash Book $

Cash Sales 844
Cheques Paid to Lan Campbell 98
2. Items recorded only on the Bank Statement $
Monthly insurance paid by direct debit 58
Dishonored cheque (Received from Alex Smith in October 340
3. Errors

A cheque received from Flora McBeth 989$,

had been incorrectly recorded by the bank as 898$
The Credit side of the Cash Book had been overcast by 100$.

a) Update
U the Cash Book. Bring down the updated Cash Book Balance
on 1st November 2019.
o
155
By Mrs.
B M Carol
C l Wassef
W f 01223414711
A
Answer
Donald Mackey
Updated Cash Book (Bank columns only)
2013 $ 2013 $
Nov 1 Balance b/d 741 Nov 1 Insurance 58
Correction 100 A Smith 340
(Dis. chq.)
Balance c/d 443
841 841
2013
Nov 1 Balance b/d 443

b) P
Prepare a Bank
kRReconciliation tement 1st N
econciliation Stat
Statement November
ovember 2013.
2013.

Case 1:
Ban
nk Reconciliation Statement
Bank Statemen
ement a
att 1sstt N
Nov
No
ov 2013
2013
$ $
Balance sho
shown
own on B
Bank
ank Stat
Statement
tement (394)
Add Amounts not credited – Cash Sales 844
Bank error 91 935
541
Less Cheques not presented – Lan Campbell 98
Balance shown on Cash Book 443

156
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Case 2: A
Alternative Presentation
Bank Reconciliation Statement at 1st Nov 2013
$ $
Balance shown on Cash Book 443
Add Cheques not presented – Lan Campbell 98
541
Less Amounts not credited – Cash Sales 844
Bank error 91 935
Balance shown on Bank Statement (394)

c) State
S why the updated Cash Book balance rather
t
than the balance on the Bank Statement
would appear in the Balance Sheet.
The Balannce Sheet
Balance Sheet would
would not balance
lan e if theeB
Bank
ank Stat tement balance
Statement
incclu
ud
ded
was includedd because
bec use
e only balances
nce
es on the
the
e books
boooks of
of the
tth
he business
can be included in the Balance
can ancce Sheet
Shheeet o
off the
the business.
bussiness.
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰ ˰˰˰ ˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

Notes To
o record
dddishonored
ishonorred ch
cheque:
heque: - (T
(Treatment)
Treatment)

Dr+ Trade Receivable Cr–

r

Bank
(Dishonored cheques) 100

Dr+ Bank Cr–

r

Trade Receivable
((Debtor)
Debtor)
(Dishonored cheques) 100

157
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Item Location Explanation

Cheques received from customers

and recorded in the Cash Book
Bank Lodgments Cash Book of the firm and sent to the bank
but had not yet been received
by the bank

Cheques paid by the firm

to suppliers
Unpresented Cheques Cash Book that had not yet been presented
by the suppliers to the bank
for collection

Cheques received from customers

Credit Transfer Bank Statement paid directly into the bank
without
witho
out
o informing
ut inform
minng the firm

Cheques
Cheq
heq quees received
e ei ed from customers
re
receive
Dishonored Cheques
Ch
heq
ques Bank Statement andd sent
sentt to
o the bank
but
bu
b ut returned
ned unpaid
return
eturned unp paid by the bank

A char
chargee deducted
ded
d educted from the
Bank Charges Bank Statement business Bank Balance
in return of the services
provided by the bank to the firm

158
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Definition: -
Ab
business
i in which two or more people work together
together as owners
with a view of profit.

Advantage
g of Partnership:
p -
1. Partners
P share skills, ideas and experience.

2. Ability
A to raise more capital.
capital.

3. Partners
P can help each other in decision making.

4. Losses
L are shared.

Disadvantage
g of Partnership:
p -
1. Unlimited
U Liability.

2. Profits
P
Profit shared.
s are share
ed.

3. Disagreements
ntss could happen.
Disagreemen
D happ
pen.

4. Lack
L of continuity
uity of existence.
conttiinu
nu

Partnership
p Agreement:
Agree
greement:: -
It is an agreementt pr
p
prepared
repared to avoid disagreements between
bettween partners
and covers the following items: -

1. C
Capital
p (Equity):
((Equity)
q y): HHow
ow much each partner should contribute in the busines
business.
s.
2. P
Profit / Loss sharing
g ratio
ratio..
3. Salaries
Salaries:: O
S One or more partners maybe entitled a salary
to contribute for the effort done in running the business.
4.. IInterest on Capital
Capital:
p :A An amount rewarded to each partner as a percentage
off their capital to distinguish between the partners
contribution
according to their contribu
ac tion in financing the firm.
Also, to encourage partners with less Capital
to invest more in the business.
5. IInterest on Drawings
Drawings:
g :A An amount charged against the partnerss
to discourage or limit
l their cash drawings from the firm
which effects the liquidity of the business.
6. A
Agreement
g for admission of new partners.
partner
p s.
7. P
Procedures to be followed when a partner
p dies / retires
retires..
160
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Wh
What
hat are the advantages of accepting a new partner?
1. Different
1 D skills and experience needed to be added.

2. Need
N for additional Capital.

3. Replacing
R an old partner.

* Wh
What
hat are the disadvantages of accepting anew partner?
1. Profits
1 P will be shared, less profit.

2. Conflict
C might increase among partners.

3. Control
C will be less.

* Wh
Why
hy might the contract
con
ntract a
agreement
greement inc
include
clude inter
interest
rest on Cap
Capital?
pital?
- To
T compensate
compensa
ate the
the partners
part erss with higher
er C
Capita
al in
Capital iinvested
nvested
ves in
n tthe
he business.

- To encourage
encourag
ge partners
partners with less Capitall to
o invest
invvest mo
more
ore in
n th
he business.
the

* Why
hy m
might the c
contract
on
nttract agreement
agrre
eeme
ent iinclude
l de a p
partner's
artner's
artner'
t 's sa
salary
alary
t one off th
to the partners?
t ?
- To compensate him / her for the extra effort and time spent in the business.

161
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* What
ha is
s an Appropriation Account?
It is an account which shows the distribution of Net Profit / Loss for the year
and how it is allocated to each partner.

The form
Profit & Loss Appropriation
pp p Account

Profit for the year (net profit) xxx

Add: Interest on Drawings.
A ˰˰˰˰˰˰˰˰˰˰
B ˰˰˰˰˰˰˰˰˰˰
C ˰˰˰˰˰˰˰˰˰˰
Less: Interest on
on C
Capital.
ap
pital.
pi ‫ـــــــــــــــــــــ‬
‫ـــــــــــــــــــ‬ xxx
A ( )
B ( )
C ( )
Salary:
A ( )
B ( )
C ( )
( )
‫ــــــــــــــــــ‬
Residual Profit / Loss xxxx
Profit Sharing
A ˰˰˰˰˰˰˰˰˰˰
B ˰˰˰˰˰˰˰˰˰˰
C ˰˰˰˰˰˰˰˰˰˰

162
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* What
ha is
s a partner's Current Account?
Used to show any amount owed to or by each partner separately.

Any Money Any Money

the company the partners
wants from wants from
the partners the company

Drí Current Account Cr+

A B C A B C

Balance b/d xxx xxx xxx Balance b/d xxx xxx xxx

Drawing xxxx
xx xxxx
xx xxx Interest
In
nterest
n terest o
on
nCCapital xxxx
xx xxx xxx

Interest on Draw
Drawing
wiing
ng
g xxx xxx xxx S
Salary
alla
aryy xxx

Loss share xxx xxx xxx Pr

P
Profit
rofi
fit sha
share
are xxx xxx xxx

c/d xxx
xxx Interest
Inte
nte
erres
est on Loan
Lo
oan xxx xxx xxx
to
to partner

c/d xxx xxx

Balance b/d xxxx xxxx Balance b/d xxxx

Suggest two reas

reasons
sons how the Debit Balance on the current accounts
could have arisen?
- The partnership was making losses.

- The partnership may make excess drawings.

163
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Wh
Why
hy do partnerships keep Current Accounts and Capital Accounts?

o Capital
C p Accounts: A
Are kept to record the initial contribution of the partners
in financing the firm which are supposed to remain fixed
by agreement.

o Capital
C Account Balances do not change from one year to another.

o C
Current Accounts
Accounts:: A
Are used to show any amount owed to
or by each partner separately.

* Wh
What
hat is the purpose of preparing Cu
Current
rrent Accounts
(beside
(be
(b id Capital
C it l A
Accounts)?
t )?
To be able to keep the Capital (Equity) fixed and not change.
1. T

Easier to see profit

2. E profiit retained
retained by each partner.
partner.

To be able to
3. T o record
ecord balance
re bal nce down
e brought d wn from
ow mpprevious
evious periods.
rrevious pe
p eriods.

To record int
4. T interest
erest on capital, salary & profit
ter rofi / loss
osss shares.
lo
lo sh
harr s..

5. T
To record drawings interest
awin s & inte
erres drawings.
esst on drawings
s.

* Sta
State
ate and explain the difference in accounting treatment between
employees’
em l ’ salaries
l i andd partner's
t ' salaries?
l i ?
o E
Employee’s
p y Salaries
Salaries:: T
This item consider expense of the business,
record in Income Statement to be able to calculate
profit / loss of the year.

o P
Partner's Salaries:
Salaries: T
This item in is not a business expense,
not recorded in I/S but recorded in Appropriation Account.

164
By Mrs.
B M Carol
C l Wassef
W f 01223414711
E
Example
l
Ali, Omar & Reda are in partnership their partnership agreement provides that:
Interest on Capital 10%
1. Interest

Interest on Drawings 10%

2. Interest

S
3. Salary to Ali 4 000
4000

P
4. Profit for the year 13000

5. Profit
P is to be shared in the ratio 2:2:1

The financial year provided the following information: -

Capital Account Balances: $

Ali 20,000

Omar
Omar 10,000
0

Red
da
Reda 20,00
2 ,000
00
20,000

Drawings during th
he y
the ear:
year:

Ali
Ali 2,0
2 ,0
000
2,000

Omar 1,000

Reda 7,000

Current account at beginning of the year: -

Ali 1,000 Credit

Omar 1,000 Credit

Reda 2,000 Debit

Draw up
A
1. Appropriation Account.

C
2. Current Account.

165
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Profit & Loss Appropriation
pp p Account

Profit for the year 13,000

Add: Interest on Drawings.
Ali 200
Omar 100
Reda 700
‫ـــــــــــــــــــ‬ 1,000
‫ــــــــــــــــــ‬
14,000
Less: Interest on Capital.
Ali (20000 x 10%) 2,000
Omar
Om
mar (10000
(10000 x 10%) 1,000
1,0
000
Reda
R eda (20000
(200
00
00
0 x 10%) 2,000
2,00
00
Salary:
Ali 4,000
4,000
(9,000)
(14000 – 9000) ‫ــــــــــــــــــ‬
Residual Profit 5,000
2:2:1 Profit Sharing
Ali 2,000
Omar 2,000
Reda 1,000

166
By Mrs.
B M Carol
C l Wassef
W f 01223414711
'Uí Current Account Cr+
A O R A O R

Balance b/d 2,000 Balance b/d 1,000 1,000

Drawing 2,000 1,000 7,000 Interest on Capital 2,000 1,000 2,000

Interest on Drawing 200 100 700 Salary 4,000 ‫ـــــ‬ ‫ـــــ‬

Profit share 2,000 2,000 1,000

Balance c/d 6,800 2,900 Balance c/d 6,700

9,000 4,000 9,700 9,000 4,000 9,700

Balance b/d 6,700 Balance b/d 6,800 2,900

˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰ ˰˰˰˰˰˰˰ ˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰

Goodwill
Goodwi
willl
It is an intangible
e Non-Current
Noon-Currentt Asset
Asset representing
representin
ntiing the
the good
g od reputation
rep putation of the firm,
which equals the difference
diffferencce between
bettween
n the
the Net Assets
Asssse
A ets and S
Se
ellilin
ing Price of the firm.
Selling
Good
od
dwi
will = Selling P
Goodwill rice – T
Price ottal Net Assets.
Total

Net Assets = Total Assets – Total Liabilities.

- In what ways is good will measured?

1. B
Based on net profits every year.

2. S
Similar firms in the same industry.

3. S
Sales of the business.

- Where in the Statement of Financial Position you expect to find goodwill?

Under the heading of Non-Current Assets.

167
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Notes

- A transfer Credit Balance from the Current Account to the Capital Account.

Journal Entry:
Dr / Current Account xxx
Cr / Capital Account xxx

- A transfer Debit Balance from the Current Account to the Capital Account.

Journal Entry:
Dr / Capital Account xxx
Cr / Current Account xxx

Note In
Interest
nterest on partner loan is to be changed to the Profit and Loss Account
an not the P
and rofit and
Profit and Loss Appropriation
Approopriation
ation Ac
ccou
unt.
Account.

Test yourself:
y -

Income
Incomee pp p
Appropriation
Item
IIte
te
em
Sta
atemennt
Statement Account

Interest on Capital
Interest on Drawings
Interest on Bank Loan
Interest on Partner Loan
Sales man’s commission
Partner's Salary
Employees Salary
Rent of Premise
Sales
Insurance

168
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Definition: -
Organizations that do not aim for achieving profits.
O
Such as: Sp
Sports
ports Club, Charities, Association.

The main aims of Non-Profiting

g Organizations:
g -
1. Making
M Provision of Satisfactory Services to the community or society
society.
y.

2. Making
M survival (Making enough income to cover the expenses.
expenses.

Accounting g terms used byy Non-Tradingg Organizations

g
that are different from those used by Trading Business.
Business

Trading Business Non-Trading Business

Capital: The contribution
contribbution of
of the
the owner Accumu
A cumullated
ate
e Fund
Accumulated ds: The difference
Funds:
g the
in financing the business.
busiiness
ss.
s. betw
ween Assets
between Assets and
an
nd Liabilities.
(Owneer’ss Equity)
(Owner’s

Trade Receivables
Receiva
ablles (Debtors) C.A Subscription
Subs
bscription
rip
pti n Unpaid
Unpaid C.A

Trade Payable
Payables
es ((Creditors)
Creditor
reditors
rs) C
C.L
.L Subscription
Subscriptio
bscrip
ptiion Prepaid C.L

Profit for the year

yea
ar (Net
(Net P
Profit)
rofit) S
Surplus
urplus

Net Loss Deficit

Cash Book Receipts and Payments Account

(No Adjustments) (No Adjustments)

Income Statement Income & Expenditure

(Full Adjustments) (Full Adjustments)

Drawing exist No Drawings

* Fro
From
om where the Non
Non-Profit
-Profit Organization gets its income?

- Members Subscriptions - Grants

- Profit from the bar - Interest on Deposit (investment)

- Donations - Profit on Sale of Fixed Assets

- Tickets
170
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 1. B
Balance Sheet of Non-Profit
Non-Profit Organization
g
Wadi
W adi Degla Balance Sheet at 31st Dec 2019

Non-Current Assets
((Fixed Assets):-
Assets)):
Club House and Ground xxx Accumulated Funds (Beginning)

Sports Equipment xxx + Surplus

F&F xxx − Deficit

Stands xxx = Accumulated Funds (Ending)

Non-Current Liabilities: -
Loans

Current Assets: - Current

C
Cuurren
urrent
e Liabilities:
Liabilities:
bilities
s: -

{
Bar Inventory
Invento
oryy (Stock)
(Stock) xxx Tr
T
Trade
rade P
ra Payabl
Payable
ayable
le (Creditors)
(Creditors)

{
Subscription
Subscriptio
on Unpaid xxx Overdraft
Ove
Ove
erdraft
Closing
Closing
Closing
Closing

Prepayments
Prepayment
nts xxx A
Accruals
cccru
ruals

Bank xx
xxx
xx Subscr
Subscription
ription Prepaid

Cash xxx

Total Assets Total Liabilities

= and Accumulated Funds

171
By Mrs.
B M Carol
C l Wassef
W f 01223414711
- Café
- Refr
Refreshment
reshment or
- Sho
Shopp
2.. Bar
2 B Trading Account (Income Statement)
Bar Sales xxx
Less: Cost of Sales
Opening Inventory for Bar xxx
+ Purchases xxx
+ Carriage Inwards xxx
− Purchases returns (xxx)
− Closing Inventory (xxx)
˰˰˰˰˰˰˰˰˰˰ (xxxx)
Gross Profit xxxx
−A
Any
ny E
Expenses
xpenses of Bar
xp (xxx
(xxx)
x)
˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰
Bar Profit / Loss

N
Note Purchases
Pu
urchases
se
es = Payments
Paymmentts – Creditors
ors
s Opening
Openi
pening
g + Creditors Closing
tto
o
Bar Creditors

3.. Receipts
3 R and Payments Account

Receipts Payments

x Bank Balance b/d xx

xxx
xx Payments for Suppliers xxx
Subscription Received xxx Wages xxx
x Loan xxx Barman Wages xxx
Bar Sale xxx Bar Expenses xxx
Sales of Tickets xxx Transport xxx
x Proceeds of Sales xxx x Equipment Purchased xxx
of Fixed Assets
x Bank Balance c/d xxx

x (These items are recorded in the Receipts and

d payments
pay
and not in the Income & Expenditure
Expenditure)
e)

172
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Income & Expenditure Account

Income: -
Subscriptions xxx

Profit from the Bar xxx

Donations xxx
Competitions
Sales of Tickets xxx
Entrance
Exhibitions Fees xxx

x Gain on Sales of Non-Current Assets xxx xxxx

Less: Expenditure: -
Wages - Groundmen

Repairs
Rep
e pairs to
to S
Stands
tands

Ground up
p - Keep

Secretary
Secretary Expenses

Transport
Transp
port Cost
Cost

x D
Depreciation:
epreciation: -

of Stands & Equipment

x Loss on Sales of Non-Current Assets

x Surplus / Deficit

x (These items are recorded in the Income & Expenditure

nditu
and not in the Receipts and payments
payments)
s)

N
Note In
n order to prepare Income and Expenditure
we need to calculate Profit from Bar and Income from Subscription.

173
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Subscriptions
p

* Sta
State
ate what is meant by the term “Subscription” in a Club’s Account.
- An
A amount paid by a member for the right to use the facilities of a club.

* Ho
How
ow to calculate Subscription for a year?
Subscription Received
+ Sub. Prepaid Opening
+ Sub. Unpaid Closing
í Sub Unpaid Opening
í Sub Prepaid Closing
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Subscription for a year

Subscription
Sub
ubscription
n Accou
A
Account
cou
unt
“Unpaid
d Opening”
Op
pening” b/d “Prepaid
“P
Prep
repaid
paid
d Opening”
Ope
ening” b/d

Income & Ex
E
Expenditure
xpenditurre ?
??
? ““Receipts
Receiptss P
Payments”
ayyments” Bank
a

Irrecoverable
Irrecov
verable Debts

“Prepaid Closing” c/d “Unpaid Closing” c/d

Unpaid Opening b/d Prepaid Opening b/d

C.A C.L

174
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Ex
Explain
plain why the Subscription Accoun
Accountt can have two Opening Balances?
Some members of the club may be in areas with their Subscription
and other members may have Prepaid the Subscription.

Example

Subscriptions Account

2015 $ 2015 $
Aug 1, Balance b/d 750 Aug 1, Balance b/d 300
2016 2016
July 31, Income & Expenditure 4,500 July 31, Bank 5,850
Balance c/d 900

6
6,150
,150 6,150
Balance
Balance
nce
e b/d
b /d 900

Explain each
h off the
the ffollowing
ollowing e
entries
ntries in
n the
the
e Subscri
Subscriptions
criip
pttions Account
as it appears
appears in the Leger
Leger of El-Nil
El-N
Nil Sailing
ng
gC Club.
lub.
State where the Double entry for each transaction would be made.

2015,, Aug
g 1 Balance 750$:
$ -
Explanation: This
This represents the amount of subscription still outstanding
fro members for the financial year ended 31st July 2015.
from

Double Entry: Credit

C Subscriptions Account for the year ended 31st July 2015.

2016,, July
y 31 Bank 5,850$:
, $ -
Explanation: This
This is the total amount of Subscriptions Received
from members during the financial year ended 31st July 2016.
fro

Double Entry: Debit

D Bank Account.

175
By Mrs.
B M Carol
C l Wassef
W f 01223414711
2016,, July
y 31 Income and Expenditure
p Account: -
Explanation: This
This is the total amount of Subscriptions
which related to the financial year ended 31st July 2016.
w

Double Entry: Credit

C Income and Expenditure.
Expenditure.

The significance
g of the 900$
$ shown at the end of the account: -
This represents the amount paid by members
during the financial year ended 31st July 2016,
but which relates to the following financial year.
It will appear as a Current Liability in the Balance Sheet at 31st July 2016.

* Su
Suggest
ggest two reasons why a Sport Club’s Bank Balance is not equal to the
surplus
su l ffor th
the yea
year?
r?
?
- The income & Expenditure Account includes only revenue items.

- The income & Expenditure

Exxp nditure Account
pend A includes
clu
u Non-Monetary
No
on--M y items.
Monetary
o ittems.

- The income & Expenditure

Expenditure Account adjust
ust figures
figu
ures
for Accruals and
an
nd Prepayments.

- The Receiptss and

an Payments
n Payme
Paymen shows
hows ttotal
entss Accounts show otal money
oney paid and received.
tal mon

176
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* A mmember of the club is worried that the Surplus or Deficit
i tthe
in h IIncome and
d Expenditure
E p dit Account
A t doesn’t
d ’t agree
g
with the Bank Balance shown in the Balance Sheet at 31st July 2019.
State and explain the reasons for the difference
difference.

Bank Balance Income and Expenditure Account

1. No
N adjustments made 1. IItems
tems are adjusted
f Accruals and Prepayments
for Prepayments.. ffor Accruals and Prepayments
s.
Prepayments.

2. Includes
Includes all money 2. IIncludes
ncludes only Revenue
r
received and paid. R
Receipts Expenditure
e.
and Expenditure.

3. Includes
Includes only monetary items. 3. IIncludes
ncludes Non-monetary
Non-monetary items.
itemss.

* Item
Items
ms that appearr in
in the
the
h Income
IIn
ncome and Expenditure
Ex
xpenditur
p nditurre A
Account
ccount
countt
butt d
b don’t
’t appea
appear
ar iin
n the
th Rec
R
Receip
Receipts
ceiip
pts
t and
dPPayments
ayments
ts Account:
Ac
ccount:
co
o t
- Gain / Loss on
on disposal of Non-Current Assets.
Assets
As e s.

- Depreciation..

- Surplus / Deficit.
Deficiit.

* Item
Items
ms that appear in the Receipts and Payments Account
butt d
b don’t
’t appear iin th
the IIncome and
d Expenditure
E dit A
Account:
t
- Bank Balance (opening / Closing)

- Loan.

- Proceeds on sale of Non-Current Asset (Selling Price).

- Purchase of new Non-Current Assets.

177
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Co
Complete
omplete the table below put two ticks ( ) in each row
iind
dicate
d i t whether
indicate h th the
th item
it ld appear
would pp on th
the D bit side
Debit id or Credit
C Side
of the Receipts and Payments Account or the Income and Expenditure
Expenditure.

p
Receipts Income
and and
Debit Credit
y
Payment p
penditu
Expenditure
Account Account
Depreciation Charge

Proceeds of Sale of Equipment

Loss on Disposal of Equipment

Unpaid Subscriptions written off

Purchases of new
wEEq
Equipment
quipme
ennt

Profit of Refreshment
Re
efre
eshment

Example Question
ion

* If tthe
he Club’s Expenditure has exceeded its Income.
Income.
State th
Stat
St the reason why
h thi
this should
h ld not
nott b
be allowed
ll d tto continue?
Because the club has to pay a day-to-day basis Expenditure
and if the club doesn’t have a sufficient funds to pay this kind of Expenditure
the activity will stop.

178
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Ho
How
ow can we improve the performance of organizations?
- Reduce Expenditure.

- Increase Subscriptions.

- Get Donations.

- Introduce other activities to increase the profit.

* Thee club wh
which
ich does not make a good profit every year should be closed.
Di
Discuss the statement.
th t t t
The main of Non-Profit Organizations is making provision of satisfactory and service
to the society and survival by making enough income to cover the expenditure
without looking for making a good profit.

So: The club which

The whicch doesn’t
do
oeesn’t
’t make a good
make d profit
prr fit eve
ery yyear
every ar shouldn’t
sho
ould
dn’t be closed.

179
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Limited Companies
Legal entity which
hi h has
h a separate
t identity
id tit from
f its members.

Called “Shareholders”
Def: O
Owners of the share Capital of a limited
limit Liability company.

Main Aims

2. Protect
P the This Liability
1.. Fa
1 F
Facilitate
acilitate
members ffor the Company’s debts
to raising
ra
a of is
Capital with Limited
Liabilities Limited
Limite
Limited
ed liability
liability meaning

They
The
e can’t
ccan
n’tt lose more than

the
ey invested
they invvested in the company

Limited
Limited
dCCompanies
ompa
panies

Public Companies Private Companies

“PLC” “LTD”

Offer its shares Not offer its shares

On the Stock exchange to the public
on the stock exchange

The authorized Capital The authorized Capital

must be at least 50,000$ maybe less than 50,000$

181
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Stock Exchange

Firm
1. A
Authorized Share Capital
Is the maximum amount off S
Share C
Capital C
Company
y is allowed
a to issue.

2. IIssued Share Capital

Is the amount off Share
S Capital
C actually issued (sold).

What’s the difference between Called-up Capital and Paid-up Capital?

Called-up Capital Paid-up Capital

Is the total amount of capital Is the part of the Called-up Capital
a company has as requested
ha requested for
foor which
wh
hich
ich thee company
company
from its Shareholders
Sharehoold
ders
de has actually
ually received
acttually eived money
reccei
ffrom
om iits
ro tts Shareholders
Sha
S areeholders

Notes

Authorized Capital is the maximum value of shares the company could issue “Sell”.
- Issued Capital is the number of Issued Shares x Par value/share.

- Par value = Nominal value = Stated value

182
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Shares

Preference Shares Ordinary Shares

1. Receive
R a fixed rate of dividends. 1. R
Receive a variable rate of dividends.

2. Usually
U don’t carry voting rights. 2. C
Carry voting rights.

3. Receive
R their dividends 3. Receive
R their dividends of profit
o profit before the ordinary dividend
of after the pref
a erence share dividend.
preference
(higher priority).

4. Capital
C is returned
returne
ed 4.
4. O
Ordinar
Ordinary
ry S
ry Sh
Shareholders
harehold derrs
t preference Shareholders
to Shareholde
Sh olderss are the
a e last
last
last to
t be repaid
repaid
before ordinaryy Share
Share
hare Capital.
Capita
Capi al. in
n a Share
Sh
haarre
re Capita
C apital
a l.
Capital.

The
e Similars
Similarrs

Not secured on assets of the company

Consider members of the company

p
/ part of the company’s
company s Capital
Capital

Preference Shares

Redeemable Non-Redeemable

Are part of the equity Are a Non-Current Liability

183
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Debentures
Main features
M features:: -
oD
Debentures are Long-term
Long-term Loan (Long-term Liability) carry fixed rate of interest.

oD
Debentures holders not members of the company debenture
n part of Company’s Capital.
not

oD
Don’t carry voting rights.

oD
Debentures holders are considered as lenders to the business.

o In
Interest
nterest is paid whether the company makes profit or loss.

o In
Interest
nterest is paid before any share dividend (preference & Ordinary).

oD
Debentures repaid before any Share Capital on Liquidation (Winding-up).

oS
Secured on the
e asset
asset of
of the
th
hee ccompany.

oD
Debentures are
are recorded in the statement
nt o
off fin
financial
nancia
cial
al p
posit
position
osittion
n
under the Non
u Non-Current
n-C
Current Liabilities.

Preference Shares
Shares Debentures

o aare considered part of the capital oA

Are considered Long -term Liabilities.
of the company.

oR
Receive a fixed rate of dividends. oR
Receive a fixed rate of interest.

oA
Are members of the company. oA
Are lenders to the company.

oN
Not secured on the asset o Secured
S on the asst of the company.
of the company
company..

184
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Stock Exchange

120000
Retained Profit
General Reserve Co
Considered
onsidered Capital
Capittal
The accumulated Net Income
These are created of the companyy in the company or the profit
to strengthen which kept in the company
the financial position rather than
of the company. paid out to Shareholders
20,000 as dividends.
100,000

The most important source

of finance
Dividends and a strong indicator
of the business.
Profits are distributed among
g shareholders
are
ehold which are often stated in the form of per
percentag
percentage
rce of nominal value of share.

Proposed Dividends
D Interim Dividends
D
Are proposed d ((outstanding)
t t di
ding)) b
by the
th di
directors Are half-way
half-
f way dividends th
that have been already paid
at the next year end will not be paid by the date during the
t year.
and must therefore be shownown in SOFP as Liability. Not included in the Liabilities is SOFP

185
By Mrs. Carol Wassef 01223414711
¾ Preference
P dividends, both Interim and Proposed,
are recorded in the Income Statement.
a

¾ Proposed
P Preference dividends (unpaid) are to be recorded
under the heading of Current Liabilities in the SOFP.
u

¾ IInterim Ordinary dividends and Proposed of the previous year

which are paid during the current financial year are to be recorded
w
in Statement of Changes in Equity.

¾ P
Proposed Ordinary dividends at the end of the current year are ignored: -

- Not recorded in anyy account or statement.

- Not recorded
ded in
record in Statement
Statteme
State n of Changes
ent gess in Equity.
Eq
quitty.
qu

- Not recordedd in SOFP.

recorrded

¾ Then
T the
the Pro
Proposed
opo osed
ed Ordina
Ordinary
ary dividends during
uri g the
the year
ear
a not to be recorded
are eccorded in
rrec i the
the Statement off Changes
Changes of
ha of Equity.
Equity.

Final Proposed
Propos
ose
sed (unpaid)
(unp
npaid) Ordinary
Orrdinary dividends
diviidends are tto
o be
be ignored,
not recorded in all accounts.

186
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Q
Question
ti 1
The financial year of Samy (Ltd) ends on 31st July.
The following information is available for the year ended 31st July 2013.

Issued Share Capital $

Ordinary shares of 1$ each 80 000
80,000
5% Preference shares of 1$ each 50,000

- The profit for the year ended 31st July 2013

before Preference share dividends was 20,000$.

- The retained profit on 1st August 2012 amounted to 7500$.

- During the year, 3,000$ Proposed Ordinary dividends for 31st July 2012 was paid.

- During the year ended 31st July 2013 an Interim Ordinary dividend
of 0.05$ per share
e was
was paid.
pai
aid
id.

oA
At 31st July 2013:
20
013
3: -
1 Six
1. S months Preference
Pre
eference share dividend was
wass to
o be
be Accrued
Acc
Ac
ccrued
d (Proposed).
((P
Proposed).

2. It ed tto
It was decided 8,000$
o transferr 8
8,0
,0 General
000$ to Genera Reserve.
eral R
Re
eserve
e.

3. It
It was decided that
th Ordinary
hat Ordinary share
are dividends
sha ds of 7% wo
dividend would
ould be paid.

a. Calculate
C the profit for the year ended 31st July 2013
after the preference share dividend.

Prepare the Statement of Changes of Equity of Samy (Ltd)

b. P
for the year ended 31st July 2013.

187
By Mrs.
B M Carol
C l Wassef
W f 01223414711
A
Answer
r $

a. Profit
P for the year before Preference dividends 20,000
Less: Preference dividends Interim (50,000 x 2.5%) (1,250)
Less: Preference dividends Proposed (1,250)
Profit after Preference dividends 17,500
Calculation of retained p
profit for the year
y
Profit for the year after Preference div. $17,500
(−) Interim Ordinary dividends of this yearr (4,000)
(−) Final Ordinary dividends paid of the previous yearr (3,000)
(−) Transfer to General Reserve (ending) (8,000)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Retained
Rettained profit forr tthe
he yearr $2,500
((+)
+) Retain
+ Retained
ned profit Opening
enin
n $7,500
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰ ˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
= Retaine
Retained
ed profit Closing
ing
g $10,000

188
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 b. Statement of Changes in Equity Holders

Pref. Ord. share

G.R R.P Total
share Capital
Capital
Balance b/f 50,000 80,000 ˰˰˰˰˰ 7,500 137,500
Profit for the year 17,500 17,500
Ordinary dividends
(4,000) (4,000)
paid for the year

Final Ordinary
(3,000) (3,000)
dividends
of previous year

Transfer to
8,000
8 ,000 (8,000)
(8,,0
000) ˰˰˰˰˰
General Reserve
e

Balance c/ff 50,000 80,000

0,000 8,000
000 1
10,000
0,000 148,000

Capital
C apital
p
Extract from SOFP to showing
i C
Capital:
i l -

Share Capital and Reserves: -

Share Capital: 5% Preference shares of 1$ 50,000

Ordinary shares of 1$ 80,000

Reserves: General reserve (Opening + Closing) 8,000

Retained profit (ending) 10,000
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Shareholders’ funds 148,000

189
By Mrs.
B M Carol
C l Wassef
W f 01223414711
E
Example
l 2
Waleed Limited Provided the following information.

Trial Balance at 30th September 2018

(After preparation of Income Statement for the year ended 30th Sep 2018)

$ $
Dr Cr
Premises at cost 99,000
Fixtures and Fittings at cost 65,000
Motor vehicles at cost 33,000
Provision for Depreciation of Fixtures and Fittings 23,000
Provision of Depreciation of Motor vehicle 11,000
Ordinary
Or d in
naary S
Share
ha
h are Capital 120,000
General
Gene
eral Reserve 1stt O
Reserve (1 October
ctober 2017)
017
7 20,000
Retain d earnings (1st October 2017)
Retained
ned 017 9,000
Profit for the
the year 38,000
Interim
m Ordinary
Ordina
ary
ryy share
share dividend
divvidend 6,000
6 ,000
4% Debentures 10,000
Inventory (30th Sep 2018) 19,300
Trade Payables 16,300
Trade Receivables 28,000
Other Payables 350
Other Receivables 300
Provision for Doubtful Debts 1,400
Bank 2,050
Cash 500

251,100 251,100

On 30th September 2018, it was Proposed to pay

a final Ordinary share dividends of 2,000$
to transfer 12,000
, to General Reserve.
190
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Calculate of retained Profit.

Answerr $

Profit for the yearr 38,000

(−) Interim Ordinary dividends paid of this year (6,000)
(−) Final Ordinary dividends paid of the previous yearr ‫ــــــــــ‬
(−) Transfer to General Reserve (12,000)
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Retained profit for the yearr 20,000
(+) Retained profit Opening 9,000
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
˰˰˰˰˰ ˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
= Retained profit Closing $29,000

Statement of Changes
Changes iin
n Equity
E for the year
or the year ended
e d330
0th Sep 2018

Share Ge
G en
e ne
era
Generalal Retained
Retained
Total
Capital R eser
es erve
Reserve e Profit
Profit
Balance b/f
b /f 120,000
12
20,
0,0
,000 20,000
20,000 9,000 149,000
Profit for the year 38,000 16,500
Interim Ordinary div. paid (6,000) (6,000)
Transfer of
12,000 (12,000)
General Reserve

Balance c/f 120,000 32,000 29,000 181,000

191
By Mrs.
B M Carol
C l Wassef
W f 01223414711
 Prepare the statement of Financial Position of Waleed Limited
for the year ended 30th Sep 2018
Waleed Limited
Statement of Financial Position at 30th Sep 2018

$ $ $

Prov
Cost NBV
for Dep
Assets:
Non-Current Assets:
Premises at cost 99,000 99,000
Fixtures and Fittings at cost 65,000 (23,000) 42,000
Motor vehicles at cost 33,000 (11,000) 22,000
197,000
19
97,000 34,000
34,000 163,000
Current Assets::
IInventory
nventory 19,300
1 9,3
,300
300
Trade
Tr
radde Receivable 28,000
28
2 8,0
,000
000
Prov. for
fo
or Doubtful Debts
Debts ((1,400)
1,40
,400)
00)
Other
ther Receivable
Receiva
Receiv able
e 300
Cash
Cas
Cash 500 46,700
Total Assets 206,700
Capital & Reserves
Share Capital: Ordinary shares 120,000
General Reserve 32,000
Retained earnings 29,000
,
181,000
Current Liabilities:
Trade Payable 16,300
Other Payable 350
Bank Overdraft 2,050
Non-Current Liabilities:
Loan 10,000
˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰˰
Total Capital & Liabilities 206,700

192
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Some important
p discuss questions:
d q -
What’s the effect:

* Ho
How
ow the shareholders (Ordinary) maybe effected
if tth
the
he ((Ltd)) company
p y raised
i d the
th additional
dditi l funds
f d
by the issue of Preference shares?
o R
Reduction
eduction profit available for Ordinary share
shares.
s.

oP
Prior claim on profit to preference.
preference
e.

oP
Prior claim on asset in event of winding-up
winding-up to preference.
preference
e.

* Sta
State
ate reasons why (Ltd) company retains some profit each year.

o Be
Because
B ecause the
there
ere is
is not enough
en
enoug
ugh
g cash to pay
payy dividends.
divide
endss..
o too retain cas
cash
sh within
within the business
business then the
th
he profit
pro
ofitt m
may
ay be low,
lo
oww,
there may be
th be a loss.
loss.

* Sta
State
ate advantage
eooff O
Ordinary
rdin
rd nary
ysshareholders
harreholders
s
if ((Ltd) company ra
raises
aises tthe
he mone
money
ey by
by issui
iissuing
ing
ng Debentu
Debentures.
ture
ures.
- Will not dilute their stake in the company, will not dilute their voting right.

- If expansion profitable, potential for higher dividends as Debenture holders

receive fixed interest.

* Sta
State
ate one disadvantage to Ordinary Shareholders
if ((Ltd) company raises
i th
the money by
b issuing
i i D
Debentures.
b t
- Annual profit reduced because of Debenture interest reduced profit available
for Ordinary Shareholders

- Prior claim on assets in winding-up.

193
By Mrs.
B M Carol
C l Wassef
W f 01223414711
* Su
Suggest
ggest reasons why it maybe more beneficial to Ordinary Shareholders
if th
tthe additional
dditi l ffunds
d were raised
i d by
b an issue
i off O
Ordinary
di shares.
h
- No prior claims on profit.

- No fixed interest of dividend to pay.

- All the shares will rank equally for dividend.

- No prior claims on assets in winding-up.

* SState
ta
ate the reasons why a sole trader might wish to turn his business
into
iint
t a Li
Limited
it d company.
- Separate legal identity from its owner.

- Can issue shares to raise capital.

easier
ier tto
- May find it easi ooobtain
ob
btaiin loans.

- Issue Debentures.
Deben
nturres.
nt

- Continuity.

* SState
ta
ate why the dir
directors
recttors c
chose
hose to iissue
ss
sue Deben
Debentures
ben
ntures
rather
rat
th ththan iissue more O
Ordinary
di shares.
h
- To avoid dilution of control.

- Because debenture don’t have voting right.

194
By Mrs.
B M Carol
C l Wassef
W f 01223414711
Income Statement of the year:

Income: -

Fees Earned
Commission Received
Rent Received
Irrecoverable Debts recovered
Gain on sale of NCA
Reduction in Provision for Doubtful Debts
xxx
Less:
Less
s:: Expenses:
Exp
penses: -

Depreciation
D epreciatio
eprecia ion Expense
e
Heating / Lighting
Rent
R ent / Rates
Ra
ates / Insurance
Ins
surance
Loss on sale of NCA
Increase in Provision for Doubtful Debts
(xxx)
Profit / Loss xxxx

* Thee Statement of Financial Position of a sole trader in the service business

iis presented
p t d iin th
the same fformatt as the
th St
Statement
t t off Fi
Financial
i l Position
P iti
of a sole trader.
trader

Copyright © 2020 Mrs. Carol. All rights reserved

196
By Mrs.
B M Carol
C l Wassef
W f 01223414711