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This page provides CPA Exam candidates with important study materials and resources that can help them prepare to take the Uniform CPA Examination. Note the version reference below and click on Replacement Textbooks under. CPA Resources at to learn if a newer. Passing the CPA requires time and dedication. We've curated a list of the best free study materials to help you decide how to start your study plan.

None of the above Correct answer: c. According to the IASB Framework, an item that meets the definition of an element should be recognized in the financial statements if: 1 It is probable that any future economic benefit associated with the item will flow to or from the entity; and 91 2 The item has a cost or value that can be measured with reliability. If the item meets the definition of an element and can be reliably measured, then it will be incorporated into the income statement or the statement of financial position. Under U. GAAP, an item that meets the definition of an element should be recognized in the financial statements if the item: 1 Meets the recognition criteria e. If an item possesses the characteristics that define an element, then this is a necessary but not sufficient condition for formally recognizing the item in the financial statements. Which capital-maintenance concept is applied to currently reported net income and which is applied to comprehensive income? Currently reported net Comprehensive income income a. Financial capital Physical capital b. Physical capital Physical capital c. Financial capital Financial capital d. Physical capital Financial capital Correct answer: c. The major difference between them involves the effects of price changes on assets held and liabilities owed during a period.

The same asset can be disposed at a lower value than its book value resulting to a loss on disposal. Gain on disposal: Asset account with the book value of the asset Cr. Gain on disposal account with the amount of the selling price above the book value Loss on disposal: Loss on disposal account with the amount of selling price below the book value Cr.

LTD sold on e of the existing machinery for Sh The entry will be as follows: Ltd hired the services of a professional valuer, to revalue an existing motor vehicle which they thought had a book value of less than what was shown as the net book value due to the bad state of the roads. The professional valuer valued it for Sh while us the net book value was Sh The recording will be as follows: Motor vehicle account Sh Dr. Revaluation account Sh - Sh Cr.

A trial balance can be defined as a list of account tittles and their balances in the ledger on a specific date shown in debit and credit columns. If the double entry in the respective was done correctly then the trial balance should balance i. However strange, as it may seem, a balanced trial balance is no guarantee that posting was done correctly since there are some errors that could pass unnoticed and the trial balance still balances.

These will be discussed later on this chapter. S Suppliers. Balance off all the accounts and extract a trial balance as at 30th November Year November 1 Started Started business with Sh. These two show the figures of debtors and creditors respectively. However there are some errors that would occur while entering the transactions but this would not affect the balancing of the trial balance.

The following are the errors that do not affect the balancing of the trial balance i Errors of Omission This is an error that occurs when a transaction is completely omitted from the books of accounts. For example if we bought a motor van shs Sh cash and we neither debit the motor vehicle account nor credit the cash account the trial balance would not be affected and it would still balance.

For example we download furniture fixed asset worth shs Sh for cash. We debit downloads account instead of debiting the furniture account and crediting the cash account. In such an instance the trial balance would still balance. For example sales of shs Sh sold to D. Waithaka but posted to P. The transaction would be as follows. Waithaka Cr. Sales The correct entry would have been Dr. Waithaka CR.

D Waithaka This is just a reversing transaction that transfers the amount from P. Waithaka to the correct account of D Waithaka. You will note that the sales entry is no affected by the reversal and since both P.


Waithaka and D. Waithaka are in the sales ledger, the trial balance would still balance. Since the downloads returns appear on the credit side and the sales returns appear on the debit side of the trial balance, the two would cancel out each other. downloads returns Sh Cr. Sales returns Sh S T U D Y Another example would be overstating downloads as well as sales by the same amount; overstating both sides of a particular account by the same amount e.

The figure cold eithercould either be understated or overstated. The incorrect entry would appear as follows Dr. downloads Cr.

downloads account CR. Cash at bank Sh Cr. Sh vi Complete Reversal of Entries This is an error that occurs when the correct amount is posted in the correct account but in the wrong side of the account. For Example: Kameme worth shsSh the wrong entry would appear as follows.

Sales Cr. Sales Correcting the above error is done in two stages: This is done as follows: Kameme Cr. Sales To cancel the initial entry in the accounts Dr.

P Kameme shsSh Cr. The accounts would appear as follows: It occurs when the wrong sequence of individual characters in a figure is entered. Example For exampleentering, entering shsS h as shsS h Cash Sh Cr. Sales Sh The correct entry would have been Dr. Cash - Sh Cr. Entries; narratives must be shown. Simiyu shsSh had had been entered on the credit side of capital account 7 Loan interest shs Sh had been debited in the premises account T E X T 8 Goods taken for own use shshad worth Sh had been debited to downloads account and credited to drawings account.

Suggested solution: Commissions received Correction of an error where commission received was credited to rent received 2 Dr. Fixtures Cr. Return outwards Cr. This is because if an amount was debited instead of being credited in the same account, S T U D Y a single credit entry would just cancel the initial debit.

However the second credit entry will now enter the required credit entry. Instead of showing the two credit entries separately, the amount involved is doubled and a single entry made but with a double value made. In most cases the error causing this may take long to be identified. Before then the accountant is allowed to open up an account known as the suspense account. To this account, he assigns the balance equal to the difference between the credit and debit sides of the trial balance to ensure that the trial balance balances.

For example if the debit side exceeds the credit side by Sh, suspense account will be assigned a credit balance equal to Sh thus balancing the trial balance. Later on when the cause of the error is identified, journal entries are passed against the suspense account till its balance is cleared thus eliminating it from the books.

Basically all errors affecting the balancing of the trial balance necessitate the creation of a suspense account. A few of such are discussed below. However the sales account is credited with Sh Sh This means that the credit side of the trial balance will be understated by Sh Once the error is identified then journal entries need to be passed topassed to remove the suspense account as follows: Suspense account Cr. Sales account To correct the error understating the credit balances of the trial balance Students are however cautioned that the suspense account should not be used to balance the trial balance unless the examiner specifically asks the students to do so.

Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.

Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income. Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period.

Firms often adopt the LIFO approach for the tax benefits during periods of high inflation, and studies indicate that firms with the following characteristics are more likely to adopt LIFO - rising prices for raw materials and labor, more variable inventory growth, an absence of other tax loss carry forwards, and large size. When firms switch from FIFO to LIFO in valuing inventory, there is likely to be a drop in net income and a concurrent increase in cash flows because of the tax savings.

Given the income and cash flow effects of inventory valuation methods, it is often difficult to compare firms that use different methods. There is, however, one way of adjusting for these differences.

This can be used to adjust the beginning and ending inventories, and consequently the cost of goods sold, and to restate income based upon FIFO valuation. The accounting process can be perceived as a cycle which starts with the occurrence of a transaction recording of the transaction and finally the preparation of the final statements which report on results of all the transactions that occur during the year and the position of the business as at the last date of the accounting period.

T E X T When all transactions have been entered into the specific journals, they are then entered into their respective accounts in the ledger in a process referred to as posting. What is the difference between the cash book and the petty cash book? Which is the source document for petty cash book? Name the reason for making a journal entry? Which ledger is used to keep individual customer accounts? What is the purpose of the trial balance? The cash book records amounts paid into out of the bank account.

The petty cash book records payment of small amounts of cash. Receipt and claim forms. Most commonly to correct an error. Receivables ledger. To test the accuracy of the double entry bookkeeping.

You are to draft the trading and statement of comprehensive income for the year to end 30 September and a statement of financial position as at that date.

Cash Sh. The end product is ether profit or loss. The main objective of every business organization is to make profit. However, in some instances, businesses end up make losses. It is important to measure the performance of a business organization in certain predefined periods to asses whether the business organization is making profits or losses.

It is the sales revenue for the business less all the expenses incurred to generate the sales. Stakeholders will assess entity abilities by how much profit is reported in comparison to previous years and rival entities to make mainly investment Decisions. T E X T The main reasons for preparing the statement of comprehensive income are: A statement of comprehensive income can be prepared in two formats; the vertical or horizontal format. The horizontal format is however the most common one.

It represents the amount paid for the transportation of goods into the business premises before they are sold. Sh Sh Sales Less: The closing balance of the stock is obtained by actual counting of the stock at hand at the end o the accounting period. The closing stock at the end of one period becomes the opening stock for the next period.

Sometimes items of income and expenses will not be expressly stated as income or expense. For instance the commissions, rents e. All income accounts have credit balances while the expenses have debit balances in the trial balance. The same case applies to the returns inwards and outwards. Return inwards which represent an increase in stock have a debit balance while return outwards have a credit balance. These accounts include: Prepaid expenses For some businesses expenses may tend to be prepaid in nature.

An example would be insurance premiums or, rent and rates. This are usually paid for one year upfront. However the period for which the expenses relate may not match with the accounting year.

Take for instance a business that commences operations on 1st January Beginning 1st April they pay for insurance for one year. The premiums would thus cover the period 1st April to 31st march On the other hand the business accounting period would cover from 1st January to 31st December Therefore by the end of the accounting period, premiums with respect to three months would not have been expensed, yet they have already been paid for.

This is what results to a prepayment which is an asset to the business at the end of the accounting period. Jumba Agro vet started business on 1st January They immediately insured it against fire paying insurance premiums Sh to cover the go down for the next one year. Show the entries as they would appear in the accounts on 31st December They immediately insured it against fire paying insurance premiums Sh to cover the go down for the nextOF one year. The prepaid amount is arrived at as follows: It represents the amount of money current asset that could still be lying in the bank had the company opted to pay for 8 months only to the close of the year i.

May — December i prepaid income Prepaid income on the other hand represents income already received yet the services or the goods have not been delivered e. Such incomes received in advance form a liability to the business since they remain indebted to deliver the service already paid for. It appears as under the current liabilities section of the balance sheet. The rent money received covered the period beginning 1st April and ending 31st March Show this transaction in the books of Josmumo as at 31st December i.

On receiving cash Cr. Rent income Sh ShSh Dr. Rent income Sh At close of accounting period Dr. This is simply because the money for the period 30th March has been paid yet the services have not been delivered. This is in line with the revenue recognition principle.

The balance of Sh would thereby be in the incoming years of income The balance in the rent received in advance account is posted in the statement of financial position as a short-term liability. Accrued expenses Accrued expenses represent that portion of expenses that has been used but has not been paid for.

It is common for established businesses to consume services first and pay for them later, say after 30 days e. On the other hand there are expenses that cannot be determined in advance until they have been consumed e. A common occurrence with such accounts is that by the time the final statements are being prepared, a portion of the expenses will not have been paid most likely because the bills have not been received.

These expenses need to be recognized in the period in which they were incurred. T E X T This will be in line with the matching concept which states that expenses should matched with income. On 31 st December a bill for electricity amounting to Sh had been received by the accountant. Other bills received for the period amounted to Sh These had been paid for as at 31st December Show the necessary entries with regard to electricity: Electricity expense Cr.

Accrued electricity for the period To record accrued electricity expense for the period. You will note that there are two debits to the electricity expense account. This represents the total of electricity expense incurred in the year. The entries will appear as follows in their respective accounts: The entries will appear as follows in their respective accounts:.

Once the payment is made in the following period balance sheet. Once the payment is made in the following period Dr. This would then mean that at the close of the financial period, there are some amounts yet to be cleared by the customer.

For the main line of business this income is captured in the books of original entry i. Therefore revenue owing for direct sales is already in the books in the sales account in the general ledger and the debtors account in the sales ledger and no further entries are needed. However, there may be other types of revenues for the business all of which have not been received at the end of the financial period. Such would include rent and commission receivable e.

Since they do not form major part of the sales they are usually not systematically recorded as the other business sales.

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There is need therefore at the end of the period to recognize them. The debit on the rent receivable account will represent an asset to the business to be posted in the Due to empty spaces in the warehouse XYZ Ltd Decided to sublet it at a monthly fee of Sh The payments statement were supposed of financial to be the position under made at the current of every month on 31st December when end section.

Discount given to encourage bulk downloading are referred to as trade discounts. Usually they do not feature in the books of account since the invoiced amount is usually net of such discount and the invoice itself is the source document for sales.

The discount given to encourage prompt payment is referred to as the cash discount. Discount allowed is deducted from the sales to get a net figure of sales in the trading account.

This then makes discount allowed fall under operating expense and discount received as income. The entries for discount allowed as follows: Discount allowed Cr. Jomens bought goods from us worth Sh Seven days later he settled his account fully.

Show the following entries in the ledger accounts. The maximum credit period is 30 days. The entries for the discount allowed would be as follows: T E X T The journal entries for the transaction as a whole would be: Sales account Sh When he pays on the 7th day: Discounts allowed Cr.

Jomenes account The ledger account would appear as follows. Discounts received Discounts received The discount received represents cash discount received by a business when it pays its The discount received represents cash discount received by a business when it pays its suppliers suppliers for theforamounts the amounts outstanding. They They are given are given as incentive as incentive to encourage to encourage prompt prompt payment of the payment of the amounts amounts owing owing to the to the suppliers.

It is suppliers. It note important to is important to note that discount that discount received do not represent a Decrease received in the do not download represent price of goods a Decrease in thebut rather asprice download an income to the of goods butbusiness. Some scholars however argue that discounts received and allowed are a reduction to the download price and the selling price respectively.

The entries in the books of accounts are as follows: Creditor accounts Cr. Show how the entries would appear in the books of Mabati enterprises.

Mlango Enterprises 20, Cr. Discount received 20, For a deeper understanding of the double-entry, all the entries since we bought the supplies to the time full settlement was made on downloads would be: Mlango enterprises Cr. Discount received The accounts would appear as follows.

The balance in the discounts received account is taken to the statement of comprehensive income s as an income under other incomes. The business thus undertakes the risk that some of the sales may not end up being paid. Indeed some of the sales are not paid for and such are referred to as bad debts. They are a common business expense as long as credit sales exist. Usually they occur in the following situations: When it occurs a bad debt is treated as follows: For this reason most business make an estimation of the amount of debts that will not be paid in a given accounting period, and charge it as an expense in the statement of comprehensive income of that accounting period This amount will usually be very subjective sometimes based only on past experiences which might not necessarily recur in future.

The amount set aside to cater for future debts that might never be paid for in future is referred to as the provision for bad debts. Provision for bad debts should be recognized while preparing the financial statements. It serves two main purposes: For example: Assume from the books of Mali Raha Stores the total amount of debtors for the previous period As indicated earlier, the provision for bad debts is a very subjective estimate.

Assume further that Mali Raha had estimated that out of this amount i. For However after a careful consideration example: In thefor the previous current period the balance of debtors period was Shis Sh However after The entries a careful as they they consideration woulddiscover appear that in thethis books.

In the current period the balance of debtors is Sh However in the previous year, Sh had already been provided for. Provision for doubtful debts Cr. To record reduction in provision for doubtful debts. Reduction in provision for depreciation Less Expenses xxx Net profit xxx In the balance sheet, the balance of debtors should be net of provision of doubtful debts carried forward.

For the example earlier given: S T U D Y Debtors Less Provision for bad debts ii During the following accounting period the statement of financial position would be as follows assume the case of increase in provision. Increase in provision for bad debts A company may find it necessary to increase the amount asset aside for bad debts to a figure higher than that provided for in the previous period.

In such a case the amount by which the provision is increased is treated as an expense in the statement of comprehensive income for the period in which the increase is made. The accounting entries would be: Provision for bad debts account Provision To record the increase in the for bad debts provision account for bad debts Gross profit xxx Increase in provision for bad debts Less expense: Net profit xxx Increase in provision for bad debts Net profit xxx The balance of debtors in the statement of financial position would now be reported net ofThe balance of debtors i.

This is position as shown would in thenow be reported following net of statement i. This is as shown in the following statement of financial ofposition financialextract: Statement of financial position Extract As At ending date of the current period Statement of financial position Extract As At ending date of the current period Non current assets xxx Current assets: Non current assets xxx Debtors Current assets: This is so because of the rule of double entry.

For bad debts to appear in the trial balance the entries that have been passed are as follows: Depreciation can also be defined as the loss in the value due to of usage of an asset.

Example motor vehicle, furniture used in the office, e. For example, the typewriters are fast becoming obsolete and being replaced with computers. Thus even if it were new, it would be overtaken by events. Technological advancements are the largest contributors to the obsolescence. T E X T b Inadequacy: For example a start up business in the transportation industry is using a small pick-up and as it grows it may find large tracks more S T U D Y economical and convenient.

As extraction of such assets continues they become of lesser value e. Depreciation is recognized in line with such concepts as matching concept whereby we match revenues of a particular period with the expenses incurred in the same period.

The resulting figure ids known as the residue value. The depreciation will be the difference between the cost and the amount received. The problem arises when an asset is used for more than one accounting period. We therefore can only estimate how much to allocate to each accounting period.

The methods used are: Straight line method This method assumes that an asset is depreciated uniformly over its useful life. Useful life in this case is taken in form of years.

Depreciation is calculated as follows: The percentage is calculated as follows. The furniture was expected to last 8 years and would be disposed off for Sh at the end of the eighth year. Show how depreciation to be allocated in each of the accounting period for the 8 years using the straight line method of depreciation. More so, advocates of this method argue that the cost of running an asset is not depreciation only but also costs to do with maintenance and repairs.

They argue that during the first year, costs of repairs and maintenance will be minimal and hence charge minimal depreciation during the first years to match the low repairs and maintenance cost. During later years, depreciation charge will be minimal whereas repairs and maintenance will have increased significantly.

This will therefore tend to give a uniform cost of running an asset. However this is not always the case. During the first year depreciation was higher then becoming smaller and smaller as the years go by. To obtain the percentage for reducing balance we use the following formulae: S T U D Y r Is the rate of depreciation to be applied n is the number of useful life s is the net residue value this must be a significant figure or else the answer will be absurd c s the cost of the asset Machine-hour method Under this method, the asset is depreciated on the basis of the number of hours operated during a specific accounting period.

Compared to the number of hours expected to run during its life time. Ltd bought a machine for Sh The machine is expected to run for Sh during its life time and have a scrap value residue value of Sh During its first year of operation it was run for hours. Calculate the depreciation charge for that year.

The depreciation charge is calculated by taking the sum of years the asset is expected to last and then comparing it with the number of years the asset is expected to last during an accounting period as follows.

For an asset expected to last 3 years it will be: Depreciation is calculated as: Cost of the asset x no. Calculate the depreciation charge during the year using the depletion unit method. During a particular accounting Period ended 31st December , a total of units were produced. An organization will find it appropriate to group the tools together and have a single figure and then revalue them at the end of the accounting period.

For example, in the construction industry, one would group together screw drivers, hammers mattocks, spades and all other small equipments and then revalue after a certain period of time to arrive at the depreciation during a specific accounting period. The two most commonly used methods of depreciation are straight line method also known as S T U D Y the cost approach and the reducing balance method. Once we have computed he depreciation amount, we account for it as follows in the books of account: Deprecation expense account xxxx Cr.

Depreciation can be calculated pro-rata. This means with regard to the time of acquisition. Enter the above in the books of accounts. Equipment depreciation account Cr. Accumulated depreciation account The At extracts the would end of the be as period, thefollows: The extracts Equipment wouldatbe cost as follows: This is because different assets are depreciated with different accounting policies as well as different T E X T rates.

We first open an asset account by the following entry: Assets account Cr. We therefore open a depreciation account for the assets as follows: Asset depreciation account xxx Cr. Assets could be disposed by a business due to any of the following reasons: When we dispose an asset the following will be of interest: The following entries will be entered: T E X T i Transfer the cost of the asset from the asset cost account to the asset disposal account i.

Disposal account Cr. Asset cost account ii Transfer the accumulated depreciation from the accumulated depreciation account to the asset disposal account Dr. Asset disposal account iii Record the amount of sale of the asset in the books of accounts Dr.

Debtor if sold on credit Cr. If the asset disposal account has a debit balance then this is a loss. The opposite of this results in a loss on disposal. If the disposal account has a credit balance, this is a gain on disposal. The asset disposal account will be as follows: The motor van was sold in March was sold in March at a cash price of Sh 60, full depreciation is charged on the at a cash price of Sh 60, full depreciation is charged on the year of acquisition and non yearon of the year of disposal acquisition and non on the year of disposal T E X T ShowShow the entries the entries of depreciation of depreciation expense, expense, accumulated accumulated depreciation depreciation since since as well as the as well entries as the at the entries time at the of disposal time in We calculate the correct amount of depreciation for the previous periods and then deduct the S T U D Y difference in the retained earnings profits account.

The other entry is passed in the credit of the accumulated depreciation account as follows: Retained profits earnings Cr. Accumulated depreciation account With the amount of the under charge However if it was an overcharge, the entry would be: However in the management decided to change the policy after discovering that the appropriate rate would have been reducing balance.

Show the entries for adjustment that would appear in the books of Mkulima processing plant in An element of tax should be recognized. T E X T The entries would be: Matching this expense against the revenue helps to determine the real profit. This is because the expense is provided for yet the cash does not flow out of the business allowing for cash to be used later. It is a tabular representation of the movement of tangible assets cost within a given accounting period the schedule also shows movement of depreciation for all tangible assets within the given accounting period IAS 16 property plant and equipment requires that the schedule be shown in the published account of companies.

The format is as shown below: Revaluation gains Xx - - - - Xx 4. Reclassifications - xx Xx - - - 5. Disposal xx xx xx xx xx xx 6. Revaluation xx - xx xx xx xx Eliminated on disposal xx - xx xx xx xx He has decDecided to seek your professional advice and presented the following balances of fixed assets as at 1 st may Acquisition cost Accumulated depreciation Depreciation rate Furniture Depreciation is fully charged on the year of acquisition and non in the year of disposal.

A three year old machine acquired for Sh was sold for Sh A used delivery van downloadd three years ago for Sh was traded in during the year at the value of in part exchange of the new delivery truck costing Sh 6.

Land, buildings and machinery were acquired for Sh from a company that went out of business. At the time of acquisition Sh. The revaluation indicated the following market value: Sh Land Buildings Machinery Required: Additions - Revaluation gains - - Disposal - Change for the year We have also come across a trial balance and realized that all the entries in the trial balance are used in one of two places i. The statement of financial position can be defined as a statement which shows the assets of a T E X T business at a given point in time and the claim thereof against the assets.

The claims can either be by the capital injected or liabilities to third parties. If all double entry rules have been followed the statement of financial position should balance S T U D Y. A statement of financial position is based on the fundamental business equation i. The debit side and the credit side.

The main categories in balance sheet will be as follows 1. These are economic resources created by past activities and are capable of bringing economic benefits to the firm in future. They can either be tangible or intangible. Tangible non-current assets include land motor vehicles, equipment, and computers e. Intangible assets have the ability to make revenues for a business. If someone owns exclusive copyrights over a given music item then the copy right ownership is an asset to such a business even though not touchable.

The benefits from such assets is felt within one accounting period e. Current assets are also referred to as floating assets c Fictitious Assets: Examples would include trade creditors, accrued expenses, bank overdraft, and bills of exchange payable, unpaid b Non-Current Liabilities These are financial obligations the firm has undertaken to redeem or settle over a period exceeding one accounting period.

These liabilities arise from events outside the ordinary trading activities. Non-current liabilities include bank loans, debentures, long- term bonds payable, long-term leases. Examples include damages that could be suffered due to law suits in future or pending in the courts.

These liabilities are not recorded in the books unless the amount and timing are clearly certain. Capital is usually a residue after all other claims. For different business organizations capital could be referring to the following: A statement of financial position should present in an ordinary way so that users can make deductions they would want to without taking too much time.

Therefore statements of financial position of similar organization are prepared in the same way so as to enhance understandability and compatibility. Most organizations present their statements of financial position with increasing order of liquidity also known as permanency. This means that for assets we start with those assets that are less likely to be converted into cash in the near future and ending with those that are readily convertible into cash e.

The main reasons for preparing the statement of comprehensive income are: What are the main reasons for preparing the statement of comprehensive income?

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How is the cost of goods sold calculated? What expense accrual or prepayment is charged against profit for a period even though it has not yet been paid or invoiced? If a receivable allowance is increased, what is the effect on the income statement?

What are the causes of depreciation? What are the two major methods of charging depreciation? Accrued expenses. Increase in expenses. Premises 25, Stock 11, Loan from bank 20, Of these sales Sh. Prepare a revised statement of financial position.

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S T U D Y Sole traders can be said to be business people who start their own enterprises and run them for themselves with the aim of making a profit. Sole proprietorship could be run family members or even the owner and one or two employees. They are the most common businesses that you will come across in any economic set-up. They include butcheries, kiosks, some wholesale shops and supermarkets, e.

A Sole proprietorship is a business run by a single individual with an aim of making profit. Expect questions from this chapter.

This is a sector that that has largely gone without maintaining financial statements. Sole traders have however seen the need of maintaining financial statements with Kenya Revenue Authority KRA requiring them to file tax returns.

This has resulted in high demand for bookkeeping. However, sometimes the business ends up making losses. For a sole proprietorship, most important financial statements are: Refer to the general format of the Statement of comprehensive income and the statement of financial position.

S T U D Y The only unique account in the statement of financial position of a sole proprietorship would be the drawings account.

For example a shopkeeper will take consumables from his shop and if it is not accounted for properly, one would end up deducing the that the business is not making profits while us the truth is that the business is profitable only that the profits are taken away from the business in the form of the goods or cash. When one makes a withdrawal of cash the entries will be: Drawings account Cr. The total of the drawings account is deducted from capital to know how much is left thereafter.

When we make a withdrawal of goods the entries are as follows: Drawing account Cr. These range from small scale farmers to jua kali trader to kiosk owners. These small businesses have been responsible for the current boom in the country of microfinance, informal banking like M-pesa and the increased attention by established banks like Equity bank to target small bankers commonly known as the unbaked. Why are sole traders common? What are the advantages of sole trading?

If an owner takes goods out of inventory for his personal use, how is this dealt with? The amount is debited to drawings at cost. Hassan Baraka retired from employment on 1 October and was paid terminal benefits of Sh 3,, He utilized Sh 2,, in downloading business premises and deposited the balance in a new business account at Faida Bank Ltd.

Baraka did not maintain proper books of account. However, he kept files of statements from suppliers, cheque counter foils and unpaid invoices for downloads made.

He also maintained a note book in which he recorded sales to customers who had credit accounts and settled their accounts by cheque. Cash collected from sales was banked at the end of each week after payment of certain expenses. Baraka also maintained some petty cash for office use. Baraka estimates to have paid the following business expenses from his personal bank account. Receipts Sh. Baraka estimates that during the year ended 30 September , he utilized cash collected from sales for the following purposes: Advantages of partnerships Advantages over sole traders i.

Risks are distributed over a larger number of people ii. There is access to addition capital iii. Expertise; partners bring in experience from individual fields iv. Easier to raise funds from external sources Advantages over limited liability companies i. Possibility of dispute among partners ii. Less control in the management as many people are involved iii. Less amount of profits distributed Against limited liability companies i.

Liability of partners is unlimited. They can be called to contribute personal assets incase the business cannot meet its obligations ii. Comparatively difficult to raise capital iii.

This means they cannot run parallel businesses. Profits - key to every business undertaking, partnerships aim to make profits. This chapter has been frequently examined as seen in the past paper analysis the latest being June and December sitting for and Not all partner may be part of the day to day running of the business, they will for this reason require true and fair financial statements prepared and audited for the purposes of profit sharing.

The agreement covers the following items: What this means is that if the amount allocated by the profit sharing ratio is lower than that stipulated, the partner would receive the guaranteed minimum share S T U D Y and the remainder of the profits would be share by the other partners according to the agreement.

They are; division of profits, capital investments by partners, drawings, interest on capital and interest on drawings. In other words it records items of long-term nature.

Abdi contributes Sh , and Jillo Sh , Record these initial investments in the relevant accounts. Solution Just like sole proprietorship, capital contribution is recorded thus; Dr. Cash Cr. Items that increase earnings to the partners are credited and those that decrease are debited. They normally have a credit balance, just like the capital accounts. The normal balances should be on the credit side.

S T U D Y Salaries Some partners could render services to the partnership in areas that they are competently qualified. For example accountancy services, legal etc. They are thus remunerated for those services in the form of salaries. Salaries paid to partners increase their accounts. Therefore to record salaries paid to a partner, we: Salary account Cr. The entry is therefore as follows: Profit and loss appropriation account Cr.

Current account. They are therefore not sold nor are they reflected in the closing stock. They are normally removed at cost from the trading account into a drawings account. At the end of the year, they are transferred into the current account by the following entry; Dr. Current account Cr. Drawings account Interest on drawings Fast forward — Drawings are like advancement to the partners in form of goods.

Interest is normally charged on Drawings.

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This reflects an amount over and above the value of the goods called the interest on drawings recorded thus: Profit and loss appropriation account S T U D Y Division on partnership profit Profit from a partnership is divided among the partners in accordance with the partnership deed.

In case of no such deed, profits are shared equally as noted above. To record partnership profits, we need to introduce a profit and loss appropriation account or simply appropriation account.

To record profit share: A fixed capital account is one that records the long-term items alone. As the name suggests, the amounts do not change unless additional capital is introduced by partners. Fluctuating capital account is one where both the long-term and short-term current account items items are recorded on the same account. Where fluctuating capital accounts are kept, current accounts do not exist; their items are passed onto the capital account.

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The amount of the ending balance keeps on changing due to the inclusion of short-term items hence the name fluctuating account. The format of the fluctuating capital account is as follows: In fluctuating capital account, the current account does not exist. We normally introduce the profit and loss appropriation account or simply the appropriation account.

The rest does not change in partnerships.

In arriving at the amount to be shared among the partners, we include the four basic items discussed above; salaries to partners, interest on drawings and interest on capital, the fourth item being the profit share. The basic format of an appropriation account is as follows: Let us now look at some short examples: Mogire does the accounting work while Waituka offers legal services and for each earns a salary of Sh 10, per month.

The profit or loss is shared equally. The profit for the month was Sh , Show the relevant accounts for the partnership: The remaining will be shared equally between Waituka and Kipkorir as follows: The following is their trial balance as at 30th June Dr, Sh. Sh Buildings cost Sh. Stock at 30th June was Sh 61, b. Office expenses and Wages of Sh and Sh respectively are for next year.

Provision for bad debts is to be reduced to Sh e. Not yet entered in the books is salary of Sh 1, to Ochieng f.

Interest on drawings: Ochieng, Sh 5, and Otieno Sh 5, g. Freehold land was downloadd during the year at Sh 80, vide a cheque. While the entry was passed in the cash at bank account, no other entry was made. Solution Workings: Note that the figure to the statement of comprehensive income So that they appear in balance sheet. Note that the figure to the statement of comprehensive income is is the balancing figure.

The title should use the correct wording because we are presenting three accounts in continuation. Change they say is inescapable. Partners being as they can be may effect changes in their partnership deed.

A change may occur in three areas: The challenge can be sorting through the different options and price points. We created a detailed comparison of the best CPA exam prep courses to help you compare the prices and features. By going through the video tutorials and reviewing the practice question formats, you can make a much better decision if a particular prep course is right for you.

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