CAT L1.1 INTRODUCTION TO FINANCIAL ACCOUNTING Revision Guide
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CAT Certified Accounting Technicians Examination Stage: Level 1 L1.1 Subject Title: Introduction to Financial Accounting Revision Guide INSIDE COVER - BLANK CONTENTS Title Page Study Techniques 3 Examination Techniques 4 Assessment Strategy 9 Learning Resources 10 Sample Questions and Solutions 11 Page 1 BLANK Page 2 STUDY TECHNIQUE What is the best way to manage my time? • Identify all available free time between now and the examinations. • Prepare a revision timetable with a list of “must do” activities. • Remember to take a break (approx 10 minutes) after periods of intense study. What areas should I revise? • Rank your competence from Low to Medium to High for each topic. • Allocate the least amount of time to topics ranked as high. • Allocate between 25% - 50% of time for medium competence. • Allocate up to 50% of time for low competence. How do I prevent myself veering off-track? • Introduce variety to your revision schedule. • Change from one subject to another during the course of the day. • Stick to your revision timetable to avoid spending too much time on one topic. Are study groups a good idea? • Yes, great learning happens in groups. • Organise a study group with 4 – 6 people. • Invite classmates of different strengths so that you can learn from one another. • Share your notes to identify any gaps. Page 3 EXAMINATION TECHNIQUES INTRODUCTION Solving and dealing with problems is an essential part of learning, thinking and intelligence. A career in accounting will require you to deal with many problems. In order to prepare you for this important task, professional accounting bodies are placing greater emphasis on problem solving as part of their examination process. In exams, some problems we face are relatively straightforward, and you will be able to deal with them directly and quickly. However, some issues are more complex and you will need to work around the problem before you can either solve it or deal with it in some other way. The purpose of this article is to help students to deal with problems in an exam setting. To achieve this, the remaining parts of the article contain the following sections: • Preliminary issues • An approach to dealing with and solving problems • Conclusion. Preliminaries The first problem that you must deal with is your reaction to exam questions. When presented with an exam paper, most students will quickly read through the questions and then many will … PANIC! Assuming that you have done a reasonable amount of work beforehand, you shouldn’t be overly concerned about this reaction. It is both natural and essential. It is natural to panic in stressful situations because that is how the brain is programmed. Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For most of this time, we have been hunters, gatherers and protectors. In order to survive on this planet we had to be good at spotting unusual items, because any strange occurrence in our immediate vicinity probably meant the presence of danger. The brain’s natural reaction to sensing any extraordinary item is to prepare the body for ‘fight or flight’. Unfortunately, neither reaction is appropriate in an exam setting. The good news is that if you have spotted something unusual in the exam question, you have completed the first step in dealing with the problem: its identification. Students may wish to use various relaxation techniques in order to control the effects of the brain’s extreme reaction to the unforeseen items that will occur in all examination questions. Page 4 However, you should also be reassured that once you have identified the unusual item, you can now prepare yourself for dealing with this, and other problems, contained in the exam paper. A Suggested Approach for Solving and Dealing with Problems in Exams. The main stages in the suggested approach are: 1. Identify the Problem 2. Define the Problem 3. Find and Implement a Solution 4. Review 1. Identify the Problem As discussed in the previous section, there is a natural tendency to panic when faced with unusual items. We suggest the following approach for the preliminary stage of solving and dealing with problems in exams: Scan through the exam question You should expect to find problem areas and that your body will react to these items. PANIC!! Remember that this is both natural and essential. Pause Take deep breaths or whatever it takes to help your mind and body to calm down. Try not to exhale too loudly – you will only distract other students! Do something practical Look at the question requirements. Note the items that are essential and are worth the most marks. Start your solution by neatly putting in the question number and labelling each part of your answer in accordance with the stated requirements. Actively reread the question Underline (or highlight) important items that refer to the question requirements. Tick or otherwise indicate the issues that you are familiar with. Put a circle around unusual items that will require further consideration. Page 5 2. Define the Problem Having dealt with the preliminary issues outlined above, you have already made a good start by identifying the problem areas. Before you attempt to solve the problem, you should make sure that the problem is properly defined. This may take only a few seconds, but will be time well spent. In order to make sure that the problem is properly defined you should refer back to the question requirements. This is worth repeating: Every year, Examiner Reports note that students fail to pass exams because they do not answer the question asked. Examiners have a marking scheme and they can only award marks for solutions that deal with the issues as stipulated in the question requirements. Anything else is a waste of time. After you have reread the question requirements ask yourself these questions in relation to the problem areas that you have identified: Is this item essential in order to answer the question? Remember that occasionally, examiners will put ‘red herrings’ (irrelevant issues) into the question in order to test your knowledge of a topic. What’s it worth? Figure out approximately how many marks the problem item is worth. This will help you to allocate the appropriate amount of time to this issue. Can I break it down into smaller parts? In many cases, significant problems can be broken down into its component parts. Some parts of the problem might be easy to solve. Can I ignore this item (at least temporarily)? Obviously, you don’t want to do this very often, but it can be a useful strategy for problems that cannot be solved immediately. Note that if you leave something out, you should leave space in the solution to put in the answer at a later stage. There are a number of possible advantages to be gained from this approach: 1) It will allow you to make progress and complete other parts of the question that you are familiar with. This means that you will gain marks rather than fretting over something that your mind is not ready to deal with yet. 2) As you are working on the tasks that you are familiar with, your mind will relax and you may remember how to deal with the problem area. 3) When you complete parts of the answer, it may become apparent how to fill in the missing pieces of information. Many accounting questions are like jigsaw puzzles: when Page 6 you put in some of the parts that fit together, it is easier to see where the missing pieces should go and what they look like. 3. Find and Implement a Solution In many cases, after identifying and defining the problem, it will be easy to deal with the issue and to move on to the next part of the question. However, for complex problems that are worth significant marks, you will have to spend more time working on the issue in order to deal with the problem. When this happens, you should follow these steps: Map out the problem Depending on your preferred learning style, you can do this in a variety of ways including diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best to do this in a working on a separate page (not on the exam paper) because some of this work will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you have a systematic approach to answering the question. Summarise what you know about the problem Make sure that this is brief and that it relates to the question requirements. Put this information into the working where you have mapped out the problem. Be succinct and relevant. The information can be based on data contained in the question and your own knowledge and experience. Don’t spend too long at this stage, but complete your workings as neatly as possible because this will maximise the marks you will be awarded. Consider alternative solutions Review your workings and compare this information to the question requirements. Complete as much of the solution as you can. Make sure it is in the format as stipulated in the question requirements. Consider different ways of solving the problem and try to eliminate at least one alternative. Implement a solution Go with your instinct and write in your solution. Leave extra space on the page for a change of mind and/or supplementary information. Make sure the solution refers to your workings that have been numbered. 4. Review After dealing with each problem and question, you should spend a short while reviewing your solution. The temptation is to rush onto the next question, but a few moments spent in Page 7 reviewing your solution can help you to gain many marks. There are three questions to ask yourself here: Have I met the question requirements? Yes, we have mentioned this already. Examiner Reports over the years advise that failure to follow the instructions provided in the question requirements is a significant factor in causing students to lose marks. For instance, easy marks can be gained by putting your answer in the correct format. This could be in the form of a report or memo or whatever is asked in the question. Likewise, look carefully at the time period requested. The standard accounting period is 12 months, but occasionally examiners will specify a different accounting period. Is my solution reasonable? Look at the figures in your solution. How do they compare relative to the size of the figures provided in the question? For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million, then clearly this is worth checking. If there were some extraordinary events it is possible for this to be correct, but more than likely, you have misread a figure from your calculator. Likewise, the depreciation expense should be a fraction of the value of the fixed assets. What have I learned? Very often in exams, different parts of the solution are interlinked. An answer from one of your workings can frequently be used in another part of the solution. The method used to figure out an answer may also be applicable to other parts of your solution. Conclusion In order to pass your exams you will have to solve many problems. The first problem to overcome is your reaction to unusual items. You must expect problems to arise in exams and be prepared to deal with them in a systematic manner. John Foster Dulles, a former US Secretary of State noted that: The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year. We hope that, by applying the principles outlined in this article, you will be successful in your examinations and that you can move on to solve and deal with new problems. Page 8 Stage: Level 1 Subject Title: Introduction to Financial Accounting Examination Duration: 3 Hours Assessment Strategy Examination Approach The examination seeks to test the students’ knowledge and understanding of the application of accounting concepts and principles. Questions 1, 2 and 3 are compulsory and usually involve the preparation and presentation of financial statements for sole traders, limited companies, and other organisations in accordance with current standards and guidelines. Other questions provide the opportunity for students to demonstrate their understanding of the role, function and basic principles, (including double entry bookkeeping), of financial accounting. Emphasis in this examination is placed on proper layout and presentation as well as on numerical accuracy. Students must demonstrate sound technical knowledge and presentation skills and the ability to integrate learning from different parts of this and other syllabi, as appropriate. Examination Format The examination is unseen, closed book and 3 hours’ in duration. Students are required to answer 5 questions out of 7. Questions 1, 2 and 3 are compulsory and carry 20 marks each. Students are required to answer 2 of the remaining 3 questions each carrying 20 marks. Marks Allocation Marks Compulsory questions 60 Choice of 2 questions out of 3 (20 marks allocated to each question) 40 TOTAL 100 Page 9 Learning Resources Core Texts Wood F and Sangster A / Business Accounting 1 and 2 11th ed / Pearson 2008 / ISBN 0273712128 / ISBN 0273712136 Connolly / International Financial Accounting and Reporting 3rd ed. / CAI 2011 / ISBN 9781907214646 Manuals Institute of Certified Public Accountants of Rwanda – L1.1 Introduction to Financial Accounting Useful Websites (as at date of publication) www.icparwanda.com www.ifac.org/ - The International Federation of Accountants. www.ifrs.org/ - The International Financial Reporting Standards Foundation. www.iasplus.com - Deloitte Touche Tohmatsu. Summaries of International Financial Reporting Standards (IFRS). www.frc.org.uk/ - The Financial Reporting Council. ASB - Accounting Standards Board. www.frc.org.uk/pob/ - The Professional Oversight Board. http://ec.europa.eu/internal_market/accounting/ias/index_en.htm www.ipsas.org www.intosai.org Page 10 LEVEL 1 L1.1 INTRODUCTION TO FINANCIAL ACCOUNTING Page 11 QUESTION 1 a) Outline four activities that accountants normally undertake within business organisations. (6 Marks) b) Accounting provides useful information to a wide variety of user s. You are required to: i. List four users of accounting information. ii. State the type of information that each user is interested in. iii. State whether the user is internal or external to an organisation. Note: one user must be internal. (6 Marks) c) Financial and management accounting are two different branches of accounting that have developed over time to meet the informational requirements of the users of financial information. You are required to: i. Provide an appropriate definition of financial accounting and management accounting. (4 Marks) ii. Outline four differences between management accounting and financial accounting. (4 Marks) (Total 20 Marks) Page 12 QUESTION 2 a) The following information is available for sole trader Mr Jalloh for the year ended 31 December 2011: RWF Opening receivables debit balances Opening receivables credit balances Credit sales Credit sales returns Cash received from customers (95% from credit customers) Irrecoverable debts Irrecoverable debts previously written off recovered Opening allowance for receivables Contra entry with balances on payables ledger Refunds to receivables for over payment 487,900 3,290 1,060,800 32,650 987,420 21,700 6,300 25,000 4,750 2,780 You are required to: i. With the aid of a receivables control account, calculate the closing receivables figure as at 31 December 2011. (8 Marks) ii. Calculate the closing allowance for receivables assuming that Mr Jalloh wishes to set the closing allowance for receivables at 5% of outstanding receivables as at 31 December 2011. (2 Marks) iii. Prepare appropriate income statement and statement of financial position extracts to illustrate how the information above would be presented in the financial statements of Mr Jalloh for the year ended 31 December 2011. (6 Marks) Page 13 b) Explain your understanding of the accounting concept ‘prudence’ and illustrate how establishing an allowance for receivables can be considered as an application of the prudence concept. (4 Marks) (Total 20 Marks) QUESTION 3 Mr Keita is a sole trader with a small business. The trial balance extracted as at 31December 2011 failed to agree. The debits exceeded the credits by RWF4,120. A detailed examination of the books was undertaken and the following matters were uncovered: 1. The total in the sales day book was RWF42,100 - the figure used when posting sales to the T accounts was RWF41,200. 2. No entry had been made for expenses paid in cash from the petty cash tin, the expenses paid in this manner were as follows: i. ii. iii. Canteen supplies RWF75 Postage stamps RWF35 Present for retiring employee RWF170 3. Discounts allowed of RWF65 were credited to the discount received account. The entry in the receivable’s personal account was correct. 4. A credit note for RWF770 for purchases returns was treated correctly in the supplier’s account and debited to the purchases returns account as RWF880. 5. A cheque payment to a payable for RWF1,300 was treated appropriately in the supplier’s account and debited to drawings. 6. Cash drawings by Mr Keita of RWF1,110 were treated as cash sales in error. Page 14 7. An old motor vehicle was sold on December 15th for RWF3,700. The vehicle originally cost RWF16,750 and had a balance in the accumulated depreciation account of RWF14,100 at the time of sale. The only entry that has been made to record the transaction is to debit bank and credit sales with RWF3,700. (Ignore the effects of VAT and depreciation) You are required to: a) Prepare the journal entries, with the appropriate narratives, necessary to correct the above errors. (11 Marks) b) Prepare a suspense account to clear the difference. (5 Marks) c) Prepare a working showing the effect on proprietor’s profit (if any) of correcting each of the above errors. (4 Marks) (Total 20 Marks) QUESTION 4 Write a briefing note on each of the following terms: i) ii) iii) iv) Objectives of financial statements Users of financial statements Ethical requirements of accountancy professionals Whistle blowing (Total 20 Marks) Page 15 QUESTION 5 The following trial balance was extracted from the books of Mr Ayim, a sole trader, on 31 December 2011: RWF 550,000 Buildings at cost Buildings accumulated depreciation Fixtures and fittings at cost Fixtures and fittings accumulated depreciation Motor vehicles at cost Motor vehicles accumulated depreciation Receivables Payables Bank Cash 5% Loan Inventories Sales and purchases Sales return Light and heat Telephone and internet Discounts received and allowed Carriage 5% Loan interest Rental income Wages and salaries Insurance Bank charges Capital 1/1/11 Drawings RWF 77,000 71,200 24,920 52,000 20,500 63,000 49,700 9,600 800 150,000 29,400 241,050 11,000 970 1,980 2,200 15,400 7,500 410,000 1,900 34,500 74,200 14,230 410 371,820 14,600 1,149,940 1,149,940 The following information, which has not been accounted for above, is also available: 1. The inventory take as at 31 December 2011 showed inventory items at cost of RWF31,110. Included in this figure were inventories items with a cost price of RWF6,100 and a net realisable value of RWF3,000. 2. During the year to 31 December 2011, Mr Ayim took RWF9,800 of inventory items for his personal use. Page 16 3. Depreciation is provided for at the following rates: a) Buildings b) Fixtures and fittings c) Motor vehicles 2% straight line 10% straight line 15% reducing balance 4. An irrecoverable debt of RWF5,400 is to be written off as irrecoverable. Mr Ayim is satisfied that the remaining receivables’ balances are all recoverable and that no closing allowance for receivables is required. 5. 40% of carriage is carriage inwards and the remainder is carriage outwards. 6. An amount of RWF510 is prepaid in relation to insurance as at 31 December 2011. You are required to prepare: a) The income statement for the year ended 31 December 2011. (11 Marks) b) The statement of financial position as at that date. (7 Marks) (Presentation and format. 2 Marks) (Total 20 Marks) Page 17 QUESTION 6 The following information is available for Kigali Golf Club for the year to 31 December 2011. Details Balance c/d Subscriptions received Proceeds from raffle Bar sales Interest received Opening balance c/d Receipts and Payments Account RWF Details ?? Light and heat (50% relates to bar) Clubhouse fixtures & fittings 186,320 Clubhouse rent 19,750 Barperson salary 201,790 Insurance (60% relates to bar) 540 Raffle prizes & associated costs Greenkeeper salary Bar purchases Club secretary & president expenses Green maintenance Bar cleaning Closing bank balance c/d 422,085 109,730 Other assets and liabilities of the club are as follows: Clubhouse fixtures and fittings (NBV) Clubhouse rent prepayment Bar inventory Bar purchases payables Subscriptions in advance Subscriptions in arrears Accruals green maintenance 01/01/2011 RWF 30,150 15,000 19,060 9,710 9,730 2,670 115 Page 18 31/12/2011 RWF ??? ??? 17,005 8,090 6,330 10,440 80 RWF 11,110 7,580 90,000 17,500 22,000 4,620 31,500 102,005 9,000 9,940 7,100 109,730 422,085 Notes: 1. Depreciation on fixtures and fittings is to be provided for at a rate of 5% per annum reducing balance method 2. Rent is paid every two months in advance, for example rent for January and February 2011 is paid on the 31 December 2010. The annual rent charge is RWF 90,000 You are required to: i. Calculate the accumulated fund as at 1 January 2011. (4 Marks) ii. Prepare a bar trading account (income statement) for the year ended 31December 2011. (4 Marks) iii. Calculate the proceeds from the raffle. (2 Marks) iv. Prepare the club’s income and expenditure account for the year end 31 December 2011. (8 Marks) (Presentation and format. 2 Marks) (Total 20 Marks) Page 19 QUESTION 7 The following trial balance was extracted from the books of Mr Magoro on the 31 December 2011. The trial balance of Mr Magoro as at 31 December 2011 Dr RWF 63,000 Bank Capital Cash Creditors Debtors Drawings Fixtures Motor Expenses Motor Vehicles Repairs to fixtures Premises Purchases Salaries Sales Stock 1/1/11 Cr RWF 1,308,000 6,000 75,000 54,000 24,000 48,000 78,000 93,000 12,000 1,200,000 300,000 375,000 900,000 30,000 2,283,000 2,283,000 You are provided with the following additional information: Ignore depreciation Stock at 31 December 2011 is RWF 45,000. You are required to: Prepare the Trading Profit & Loss account for the year ended 31 December 2011 and the Balance Sheet as at 31 December 2011. (8 Marks) After preparing the Trading Profit & Loss account and balance sheet for 31 December 2011 the following information came to light: i. A motor vehicle purchases for RWF42,000 had been entered in the motor expenses account in error Page 20 ii. iii. Included in Premises is RWF15,000 posted from Repairs to Premises in error Motor expenses included a charge of RWF5,000 incurred by Mr Magoro personally (annual holiday) Requirement You are now required to: a) Prepare journals to correct these errors (3 Marks) b) Prepare the Trading Profit & Loss account for the year ended 31 December 2011 and the Balance Sheet as at 31 December 2011 after the journals (8 Marks) c) Explain what impact journalising these adjustments had on both the Trading Profit & Loss account and the Balance Sheet for Mr Magoro (1 Mark) (Total 20 Marks) QUESTION 8 The Debtors Ledger control account of ABC as at 31st December 2011 showed the following balances RWF79,266 Dr. and RWF1,332 Cr. These balances did not agree with the list of debtors balances extracted on that date RWF74,790. An examination of the books of ABC revealed the following: 1. ABC had accepted returns of RWF1,200 from a customer and entered them correctly in the books. He subsequently decided that a restocking charge of 12% was to be charged to the customer. This restocking charge was posted to the credit of the customer’s personal account only. Page 21 2. A credit note was sent to a customer for RWF732. The only entry made in the books was RWF132 debited to the customer’s account. 3. Cash sales RWF300 and credit sales RWF600 posted correctly in the Sales book but both had been entered by ABC on the credit of a debtors account. 4. ABC had charged a customer interest on an overdue account amounting to RWF279. The only entry made in the books was a credit of RWF117 to the debtors account. After a discussion with the debtor and payment in full of the original balance the interest charge was reduced to RWF150. No entry was made in respect of this reduction in the books. 5. A cheque for RWF1,200 received from a debtor in full settlement of a debt of RWF1,430 had been entered in the books, however the cheque was dishonoured. No record had been made in the books regarding the dishonoured cheque. 6. ABC had sent an invoice to a customer for RWF1,650. This had been entered in the appropriate day book as RWF1,515, when posting from this book to the ledger. No entry had been made in the personal account. Requirement You are required to show the following: a) Adjusted debtors ledger control account (10 Marks) b) Adjusted schedule of debtors. (10 Marks) (Total 20 Marks) Page 22 QUESTION 9 KIGALI TRANSPORT prepares its financial accounts to 31 December each year. The company's policy is to depreciate its vehicles from the month of purchase to the month preceding the month of sale/disposal. Depreciation rate used by KIGALI TRANSPORT is 20% straight line. On the 1st January 2011 KIGALI TRANSPORT had the following vehicles. Vehicle No. 1 No. 2 No. 3 Date of purchase 1st January 2009 1st July 2009 1st December 2010 Residual value Cost RWF RWF 0 15,000 0 80,000 75,000 96,000 You have been provided with the following information by KIGALI TRANSPORT: (i) On the 1st July 2011 Vehicle No. 1 was traded in for RWF32,000 against a new vehicle costing RWF93,000, (no residual value). Vehicle No. 1 had modifications done to it on 1st January 2010 costing RWF15,000, (no residual value). These modification had been depreciated at a rate of 40% in year one and thereafter at a rate of 20% Straight Line. (ii) On the 1st September 2011 Vehicle No. 3 was crashed and traded in against a new vehicle costing RWF120,000 (no residual value). KIGALI TRANSPORT claimed against its insurance policy and recouped compensation to the value of RWF25,000. The amount paid by cheque for the new vehicle was RWF80,000. Page 23 Requirement You are required to show with workings for each of the years 2009, 2010 and 2011: a) Vehicle Account (6 Marks) b) The Provision for Depreciation account (6 Marks) c) The Vehicle Disposal Account. (8 Marks) (Total 20 Marks) QUESTION 10 Write a short note to a client dealing with the following points: 1. The qualitative characteristics of Financial Statements (4 Marks) 2. The historical cost accounting convention/system (4 Marks) 3. Briefly outline the role of the International Accounting Standards Board (4 Marks) 4. Briefly explain what is meant by the business entity concept (4 Marks) 5. Explain what is meant by an Imprest System of Petty Cash (4 Marks) Page 24 SUGGESTED SOLUTIONS SOLUTION 1 a) The accountant’s role in the organisation can be analysed as follows: 1. Preparation and presentation of timely accurate financial/management accounts to management to help management interpret the financial information. 2. Identification of areas of inefficiency and wastages of resources in the business. 3. Treasury functions: The accountant also plays the role of treasury functions in such a way that they raise finance, cash management, etc. 4. Setting up an effective system of internal and accounting controls. 5. Preparation of feasibility reports: These reports assist management in assessing the viability/profitability or otherwise proposed capital expenditure such as the opening of a new factory or branch. 6. Investigation of the performance/operations of competing business organisations to assist management in policy formulation. 7. Investigation of fraud within the organisation, this is a key role of the accountant in preparation of an audit at year-end. Any other reasonable answers will be accepted. b) Any four of the following are acceptable – however one must be internal. Investors/Owners Investors are concerned about risk and return in relation to their investments. They require information to decide whether they should continue to invest in a business. They also need to be able to access whether a business will be able to pay dividends, and measure the performance of the business’ management overall. Page 25 The key accounting information for an investor is therefore: • • • • • Information about growth, sales, volumes Profitability (profit margins, overall level of profit) Investment (amounts invested, assets owned) Business value (share price) Comparative information of competitors. They are usually considered external but in private limited companies with a small number of investors they can be considered internal. Lenders Banks and loan stockholders who lend money to a business require information that helps them determine whether loans and interest will be paid when due. The key accounting information for lenders is therefore: • • • Cash flow Security of assets against which the lending may be secured Investment requirements in the business. Payables Suppliers and trade payables require information that helps them understand and assess the short-term liquidity of a business. Is the business able to pay short-term debt when it falls due? The key accounting information for payables is therefore: • • • Cash flow Management of working capital Payment policy. Page 26 Receivables Customers and trade receivables require information about the ability of the business to survive and prosper. As customers of the company’s products, they have a long-term interest in the company’s range of products and services. They may even be dependent on the business for certain products and services. The key accounting information for receivables is therefore: • • • Sales growth New product development Investment in the business (e.g. production capacity). Employees Employees (and organisations that represent them – e.g. trade unions) require information about the stability and continuing profitability of the business. They are crucially interested in information about employment prospects and the maintenance of pension funding and retirement benefits. They are also likely to be interested in the pay and benefits obtained by senior management. The key accounting information for employees is therefore: • • • • Revenue and profit growth Levels of investment in the business Overall employment data (numbers employed, wages and salary costs) Status and valuation of the company pension schemes/levels of company contributions. Government There are many government agencies and departments that are interested in accounting information. For example, the revenue authority needs information on business profitability in order to levy and collect Corporation Tax. Customs and Excise need accounting information to verify Value Added Tax (VAT) returns; local government need similar information to levy local taxes and rates. Various regulatory agencies (i.e. the Environment Management Authority) need information to support decisions about grants, for example. Page 27 Analysts Investment analysts are an important user group – specifically for companies quoted on the Stock Exchange. They require very detailed financial and other information in order to analyse the competitive performance of a business and its sector. However, additional accounting information is usually provided to analysts via informal company briefings and interviews. Public at large Interest groups, formed by various groups of individuals who have a specific interest in the activities and performance of businesses, will also require accounting information. c) i. Financial Accounting This is the process of summarising financial information in order to prepare the company’s financial statements. The financial statements of an organisation are the Income Statement, Statement of Financial Position, Statement of Cash Flow and Explanatory Notes. These statements are primarily of interest to external users of accounting information. Financial statements are historical in nature in that they are prepared on a semi-annual/annual basis and are concerned primarily with the financial performance of the company in the income statement and the financial position of the company reported in the statement of financial position. Therefore from the perspective of management the information contained therein is not timely being six months or a year out of date by the time it is reported. Financial accounting is thus the manner in which an organisation communicates financial information, namely performance, position and cash flow to the outside world. It represents a report on the directors’ stewardship of the funds entrusted to them by the shareholders. The financial statements are public documents they are easily accessible, normally under the investor relations section on the company’s website. A copy of the financial statements must also be filed with the Office of Registrar General (OFG) where they can be publicly accessed. Therefore they would not reveal details about, for example, an individual products’ profitability. That information would be contained in the management accounts of the business. Page 28 Management Accounting This is the process of providing detailed information to management on current and planned events. This information assists managers in their roles of planning, controlling and making decisions. Usually management accounts are only available to internal users of accounting information. Management accounting will contain information such as department budgets, product profitability, information on production costs etc. ii) The differences between management and financial accounting can be assessed under the following headings: Legal Requirements Limited companies are required by law to prepare on an annual basis the financial statements for the company. While most companies will have a management accounting function within the business there is no legal requirement to do so. Users The users of financial information are external to the business whereas the users of management accounts are internal to the business. Indeed within an organisation, management accounting information for example how profitable an individual product line is may only be available to senior management. Audit Process In some cases the financial statements of the company must be audited by an independent audit company before the information is released to shareholders. The function of the audit process is to give those who rely on the financial statements of the company assurance that the information contained therein represents a true and fair view of the company. The management accounts of a company do not have to be audited and indeed in many cases will contain information which may only be approximate (think for example of a budget which will contain estimates of future levels of income and expenditure). They are prepared internally and used internally within the company – thus there is no need for an audit as there does not exist the same conflict of interest which exists when financial accounts are being prepared. Page 29 Professional Regulations The financial statements of a company must comply with all relevant professional standards (International Financial Reporting Standards or IFRS). Management accounts do not have any such regulation to be complied with. The formats of accounts is at the management’s discretion as is the manner in which the figures are calculated and the assumptions which are made. Timeliness The main drawback of financial accounting is that the information contained in the financial statements is out of date by the time the financial statements are published to shareholders in the annual report. The emphasis in financial accounting is upon accuracy as opposed to timeliness. For example the financial statements for year ended 31 December 2011 may not be published to the public until March 2012, thus the information is largely out of date. In management accounting, while accuracy is important, receiving the information in a timely manner is essential if the information is to be of any use to managers in the decision making process. There is no point in receiving information about a decision after the decision has been made. Time Line Financial accounting deals with information that is historic, all the figures shown have already happened in the past. Management accounting can deal with figures in the past, present and future. In addition financial information is prepared quarterly, semi-annually or annually whereas management accounting is prepared whenever it is required by managers. Scope Financial statements deal with the organisation as a whole, in that the financial statements are reporting on the financial performance, position and cash flow of the whole company. Management accounts tend to examine segments of the business and individual products, for example a departmental budget or the costing of a particular product line. Detail The information contained in financial accounting tends to aggregate numbers and therefore some detail has been lost. This aggregation is essential as without it the financial statements would become very cluttered and difficult to understand. The notes to the financial statements attempt to add detail to the aggregated information in the financial statements. Managers involved in the day-to-day running of the organisation require much more detailed information than that contained in the financial accounts of the organisation. Thus management accounts tend to be more detailed. Page 30 SOLUTION 2 a) i) Receivables Control Account Date Details RWF 01/01/2011 Balance b/d Sales Irrecoverable debt Date 01/01/2012 Balance b/d RWF 487,900 01/01/2011 Balance b/d 1,060,800 Sales returns 3,290 32,650 6,300 938,049 Cash receipts Irrecoverable debts Irrecoverable debts recovered Contra 31/12/2011 Balance c/d recovered Refunds Details 2,780 1,557,780 551,041 ii) Closing Allowance for Receivables: RWF 551,041 * 5% = RWF27,552 iii) Mr Jalloh Statement of Financial Position as at 31 December 2011 (Extract) Current Assets Receivables Closing allowance for receivables 551,041 (27,552) 523,489 Page 31 21,700 6,300 4,750 551,041 1,557,780 Mr Jalloh Income Statement for the year ended 31 December 2011 (Extract) Credit Sales Credit Sales Returns Net Sales 1,060,800 (32,650) 1,028,150 Less Expenses Irrecoverable debt recovered Irrecoverable debts Increase in allowance for receivables (6,300) 21,700 2,552 b) Prudence Prudence states that under conditions of uncertainty that assets are not overstated and that liabilities are not understated. The establishing of a closing allowance for receivables is an example of the application of the prudence concept because as at the year-end a business will have a receivable’s listing all of whom owe the business monies. However from past experience and general economic environment knowledge the business owner realises, in all probability, that all balances owed by receivables will not be received. However the business owner does not have specific knowledge of what balances will turn out to be unrecoverable in the future. Therefore a general allowance is established based on past experience and general market knowledge to account for the fact that in all probability all receivables’ balances will not be recovered. Therefore the balance for receivables that is presented in the Statement of Financial Position is a realistic valuation of the year end receivables balance under conditions of uncertainty regarding future payment by receivables. Page 32 SOLUTION 3 i) 1 Dr Cr Debit RWF 900 Receivables Sales Credit RWF 900 Being sales book undercast 2 Dr Dr Dr Cr Canteen Postage Entertainment Petty Cash 75 35 170 280 Being an error of omission 3 Dr Dr Cr Discount received Discount allowed Suspense 65 65 130 Being discounts allowed inappropriately recorded 4 Dr Cr Suspense Purchases returns 1,650 1,650 Being purchases returns inappropriately recorded 5 Dr Cr Cr Suspense Bank Drawings 2,600 1,300 1,300 Being cheque payments treated as drawings in error 6 Dr Cr Cash sales Bank 1,110 Dr Cr Drawings Bank 1,110 1,110 1,110 Being drawing treated as sales in error 7 Dr Sales 3,700 Page 33 Cr Disposals Dr Cr Disposals Non current assets at cost 16,750 Dr Cr Accumulated depreciation Disposals 14,100 Dr Cr Disposals Income statement 1,050 Being disposal unrecorded 3,700 16,750 1,050 of non-current ii) Suspense Account Details RWF Details RWF Error 5 Error 4 Balance Error 3 4,120 130 2,600 1,650 4,250 4,250 iii) Proprietor’s Profit RWF Error 1 Error 2 Error 3 Error 4 Error 5 Error 6 Error 7 900 (280) (130) 1,650 (1,110) (2,650) (1,620) 14,100 Page 34 asset SOLUTION 4 i) Objectives of Financial Statements The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Financial position reveals information about the economic resources that an entity controls, its financial structure, its liquidity and solvency and its ability to change. This information is contained in the balance sheet. Changes in financial position are revealed in a Cash Flow Statement. Financial Performance means the return obtained on the resources which the entity controls. This information can be extracted from the profit and loss account. In International Accounting the profit and loss account is referred to as the Income Statement. The Reporting Entity Financial Statements report on all of the activities and resources under the control of the entity that has prepared them whether it is a sole trader, a club or society or a limited company. ii) Users of Financial Statements Users of financial statements include the following: a) Existing and potential shareholders Information is required in relation to profit, dividends, trends and prospects in connection with share price. b) Loan Creditors Information is required in relation to liquidity and to highlight the risk of non-payment. c) Business Contact Group i.e. suppliers, customers, competitors and merger/acquisition situations. Information is required to ensure ability to pay debts, continuity of supply and trade information. d) Analysts and investors Information on performance, trends and prospects is required for clients Page 35 e) Government Information is required as a base for taxation and to ensure compliance with company law f) Employees Information about employment security and to assist with collective pay bargaining g) Public Any member of the public may require details of the contribution to the local and national economy made by the company and the environmental impact. iii) Ethical requirements of professional accountants The conduct towards which an accountant should strive is embodied in six broad principles stated as affirmative Ethical Principles:1. Independence, Integrity and Objectivity An accountant should maintain his/her integrity and objectivity and, when engaged in the practice of public accounting, be independent of those he/she serves 2. Competence and Technical Standards An accountant should observe the profession's technical standards and strive continually to improve this competence and the quality of his/her services 3. Responsibilities to Clients An accountant should be fair and candid with his/her clients and serve them to the best of his/her ability, with professional concern for their best interests, consistent with his/her responsibilities to the public 4. Responsibilities to Colleagues An accountant should conduct himself/herself in a manner, which will promote co-operation and good relations among members of the profession 5. Other Responsibilities and Practice An accountant should conduct himself/herself in a manner, which will enhance the stature of the profession and its ability to serve the public 6. Responsibility of Members Not In Practice An accountant not in practice must uphold the standards and etiquette of the profession Page 36 iv) Whistle Blowing A whistle blower is a person who alleges misconduct in the workplace and it covers all methods of reporting by employees of any criminal practices within their company. Whistle blowers make their allegations internally (e.g. to other people with the accused’s organisation) or externally (to law enforcement agencies, to the media or to groups concerned with the issues). This practice may cause discontent in the work place as it involves a clash between loyalty and confidentiality. Page 37 SOLUTION 5 Mr Ayim Income Statement for the year ended 31 December 2011 RWF Sales Sales returns Net sales Cost of sales Opening inventory Purchases Carriage inwards RWF 410,000 -11,000 399,000 29,400 231,250 6,160 266,810 -28,010 Less closing inventory Cost of sales -238,800 Gross Profit 160,200 Discount Received Rental Income 1,900 34,500 Less Expenses Carriage outwards Light and heat Bank charges Insurance Interest Wages and salaries Discount allowed Depreciation of buildings Depreciation of fixtures & fittings Depreciation of motor vehicles Irrecoverable debts Telephone and internet Total expenses 9,240 970 410 13,720 7,500 74,200 2,200 11,000 7,120 4,725 5,400 1,980 Operating Profit -138,465 58,135 Page 38 Mr Ayim Statement of Financial Position as at 31 December 2011 Non-current assets Buildings Fixtures and fittings Motor Vehicles 2011 2011 2011 550,000 71,200 52,000 -88,000 -32,040 -25,225 462,000 39,160 26,775 527,935 Current assets Closing inventory Receivables Prepayments Cash 28,010 57,600 510 800 86,920 614,855 Total Assets Equity and Liabilities Equity Capital Profit for 2011 Accumulated profits 371,820 58,135 429,955 Drawings -24,400 405,555 Non-current liabilities Term loan 150,000 Current liabilities Payables Bank overdraft 49,700 9,600 59,300 614,855 Total Equity and Liabilities Workings 1 Closing inventory as per question: Less write down of inventory RWF 31,110 -3,100 28,010 Write down of inventory Page 39 Cost NRV of inventory Difference between cost and NRV 6,100 -3,000 3,100 Workings 2 Purchases Drawings Restated purchases RWF 241,010 -9,800 231,250 Drawings as per TB Drawings Restated drawings 14,600 9,800 24,400 Workings 3 Cost of buildings Depreciation Depreciation RWF 550,000 2% 11,000 Cost of fixtures and fittings Depreciation Depreciation 71,200 10% 7,120 Cost of MV Depreciation 52,000 -20,500 31,500 15% 4,725 Depreciation 15% RBM Workings 4 Receivables as per TB Irrecoverable debts RWF 63,000 -5,400 57,600 Workings 5 Insurance as TB Prepayments RWF 14,230 510 13,720 Workings 6 Page 40 Term loan as per TB Interest RWF 150,000 5% 7,500 Page 41 SOLUTION 6 i) Receipts and Payments Account Details RWF Balance c/d 13,685 Subscriptions received Proceeds from raffle Bar sales Interest received 186,320 19,750 201,790 540 Opening balance c/d 422,085 109,730 Details Light and heat (50% relates to bar) Clubhouse fixtures & fittings Clubhouse rent Barperson salary Insurance (60% relates to bar) Raffle prizes & associated costs Greenkeeper salary Bar purchases Club secretary & president expenses Green maintenance Bar cleaning Closing bank balance c/d 2011 RWF Assets Fixtures and fittings Inventories Prepayments (rent) Subs in arrears Bank 2011 RWF 30,150 19,060 15,000 2,670 13,685 80,565 Liabilities Payables Accruals telephone Subs in advance 9,710 115 9,730 -19,555 61,010 Proprietors capital Page 42 RWF 11,110 7,580 90,000 17,500 22,000 4,620 31,500 102,005 9,000 9,940 7,100 109,730 422,085 ii) Kigali Golf Club Bar Trading Account (income statement) for the year ended 31 December 2011 2011 RWF Sales Cost of sales Opening inventory Purchases Less closing inventory Cost of sales 19,060 100,385 119,445 -17,005 -102,440 Gross profit Less Expenses Light and heat Bar person salaries Bar insurance Bar cleaning 2011 RWF 201,790 99,350 5,555 17,500 13,200 7,100 Total expenses -43,355 Operating Profit 55,995 Payables Control A/C Bank payments Balance c/d RWF 102,005 8,090 110,095 Balance c/d Purchases Balance b/d Page 43 RWF 9,710 100,385 110,095 8,090 iii) RWF Proceeds of the raffle 19,750 Costs of the raffle (4,620 15,130 iv) Subscriptions A/C Details Opening subs in arrears I/S value for subs Closing subs in advance Opening subs in arrears RWF 2,670 197,490 6,330 206,490 10,440 Details Opening subs in advance Cash received for subs Closing subs in arrears Opening subs in advance RWF 9,730 186,320 10,440 206,490 6,330 Kigali Golf Club Income and Expenditure Account for the year 31 December 2011 RWF Income Subscriptions Proceeds from raffle Bar profits Interest received 197,490 15,130 55,995 540 269,155 Expenditure Rent Light and heat Green keeper salary Depreciation Insurance Club secretary expenses Green maintenance (9,940-115+80) 90,000 5,555 31,500 1,887 8,800 9,000 9,905 (156,647) 112,508 Excess of income over expenses Depreciation of F&F NBV of FF Additions RWF 30,150 7,580 37,730 Page 44 Depreciation 5% of RBM 5% 1,887 Rent Charge for PL Rent prepaid as at 1/1/11 Rent paid 15,000 90,000 105,000 15,000 90,000 Rent prepaid as at 31/12/11 (Note: Closing Accumulated Fund not asked in the question – it is presented as a learning aid only) Kigali Golf Club Accumulated Fund as at 31 December 2011 RWF RWF Non-current assets Fixtures & fittings Current assets Closing inventories Subs in arrears Prepayments Cash 35,843 17,005 10,440 15,000 109,730 152,175 188,018 Total assets Equity and Liabilities Accumulated fund Accumulated fund 1/1/11 Excess of income over expenditure 2011 RWF 61,010 112,508 173,518 Current liabilities Payables Subs in advance Accruals 8,090 6,330 80 14,500 188,018 Total Equity and Liabilities Page 45 SOLUTION 7 A) Journals Dr Motor Vehicles Motor Expenses B/S P&L 42,000 Repairs Premises P&L B/S 15,000 Drawings Motor Expenses B/S P&L 5,000 Cr 42,000 15,000 5,000 B) Trading & Profit & Loss Account for the year ended 31 December 2011 RWF Sales Cost of Sales Opening Stock Purchases Less Closing Stock Gross Profit RWF 900,000 Journals Dr Cr 30,000 300,000 330,000 -45,000 285,000 615,000 Adjusted RWF RWF 900,000 30,000 300,000 330,000 -45,000 285,000 615,000 Expenses Motor expenses Repairs Salaries 78,000 12,000 15,000 375,000 465,000 150,000 Page 46 47,000 31,000 27,000 375,000 433,000 182,000 Balance Sheet as at 31 December 2011 Journals RWF RWF RWF Dr Cr Fixed assets Premises 1,200,000 15,000 Fixtures 48,000 Motor Vehicles 93,000 42,000 1,341,000 Current Assets Stock 45,000 Cash 63,000 Bank 6,000 Debtors 54,000 168,000 Current Liabilities Creditors 75,000 Net Current Assets Net Assets 75,000 Financed by: Capital Profit & Loss Less Drawings Adjusted RWF RWF RWF 1,185,000 48,000 135,000 1,368,000 45,000 63,000 6,000 54,000 168,000 75,000 75,000 93,000 1,434,000 93,000 1,461,000 1,308,000 150,000 -24,000 5,000 1,434,000 62,000 1,308,000 182,000 -29,000 1,461,000 62,000 C) 1. Period profit rises by RWF32,000 2. Net assets increased by RWF27,000- (RWF42,000-RWF15,000) 3. This is balances by increased profit (Credit) of RWF32,000 & increased drawings (Debit) of RWF5,000 Page 47 SOLUTION 8 A) Debtors Control Account Balance Restocking Charge Interest Charge Dishonoured Cheque Understated Invoice W1 W2 W3 W4 79,266 144 150 1,430 135 Balance Credit Note 1,332 732 Adjusted balance 79,061 81,125 W1 W2 W3 W4 1200*12% Reduced int charge (per note 4 in Q) 81,125 144 279 -129 150 Dishonoured Cheque 1,200 Discount on settling 230 1,430 See note 6 in Q 1,650 -1,515 135 B) Balance per debtors listing 74,790 288 -132 -732 300 1,200 279 117 -129 1,430 1,650 Adjusted balance Restocking Charge 144 posted as Credit should have been Debit Cancellation of Credit note posted as debit Correct credit note entered Add back cash which does not relate to debtors Sale RWF600 entered as Credit should have been debit (600+600) Add original interest charge to customer account per Note 4 in Q Debit (add back) original entry of RWF117 which was entered as credit Reduce interest charge from RWF279 to RWF150 as agreed with debtor See W3 Invoice not posted to individual debtor's account per Note 6 in Q 79,061 Page 48 SOLUTION 9 A) Vehicle Account 01/01/2009 Veh 1 01/07/2009 Veh 2 01/01/2010 01/01/2010 01/12/2010 Balance b/d Modification Veh1 Additions Veh 3 80,000 75,000 155,000 31/12/2009 155,000 15,000 96,000 266,000 31/12/2010 01/07/2011 01/09/2011 31/12/2011 01/01/2011 01/07/2011 01/09/2011 Balance b/d Additions Veh 4 Additions Veh 5 266,000 93,000 120,000 479,000 01/01/2012 Balance b/d 288,000 Balance c/d 155,000 155,000 Balance c/d 266,000 266,000 Disposal Veh 1 Disposal Veh 3 Balance c/d 95,000 96,000 288,000 479,000 B) Purchase Date Cost Additions 1/01/10 Disposals Vehicle 1 01/01/200 9 80,000 Net book value Vehicle 3 01/12/201 0 96,000 Vehicle 4 01/07/201 1 93,000 Vehicle 5 01/09/201 1 120,000 15,000 -95,000 0 Accumulated dep'n 2009 16,000 2010 22,000 2011 9,500 Disposals 2009 2010 2011 Vehicle 2 01/07/200 9 75,000 -47,500 0 0 Totals 464,000 15,000 75,000 6,000 12,000 12,000 -96,000 0 1,600 12,800 93,000 9,300 120,000 191,000 288,000 8,000 22,000 35,600 51,600 30,000 -14,400 0 9,300 8,000 0 0 -61,900 47,300 45,000 0 83,700 112,000 240,700 Page 49 Disposals 01/07/2011 01/09/2011 95,000 96,000 Trade in Veh 1 Veh 1 acc dep'n Loss Insurance Claim 32,000 47,500 15,500 Bank Veh 1 32,000 Veh 3 25,000 P&L Account Veh 1 Loss 15,500 25,000 Veh Loss Trade In 40,000 Veh 3 Acc dep'n 14,400 Loss 16,600 191,000 191,000 3 16,600 C) Provision (Accumulated) Depreciation Account 31/12/2009 Balance c/d 22,000 22,000 31/12/2010 Balance c/d 57,600 01/07/2011 01/09/2011 31/12/2011 Disp Veh 1 Disp Veh 3 Balance c/d 47,500 14,400 47,300 109,200 31/12/2009 Annual Charge 22,000 22,000 01/01/2010 31/12/2010 Balance b/d Annual Charge 22,000 35,600 57,600 01/01/2011 31/12/2011 Balance b/d Annual Charge 57,600 51,600 109,200 01/01/2012 Page 50 47,300 SOLUTION 10 1) The qualitative characteristics of Financial Statements In deciding what information should be included in financial statements, when it should be included and how it should be presented, the aim is to ensure that financial statements yield useful information. Financial information is useful if it is: Relevant - If it has the ability to influence the economic decisions of users and is provided in time to influence those decisions Reliable - Reliability is characterised by: • Faithful representation • Substance over form recognition of the economic substance of a transaction over its legal form • Neutrality - free from bias • Prudence - a degree of caution in making estimates in conditions of uncertainty • Completeness - an omission can cause information to be false or misleading - It enables users to discern and evaluate similarities in, and differences between, the nature and effects of transactions and other events over time and across different reporting entities. Understandable - Its significance can be perceived by users who have a reasonable knowledge of business and economic activities and accounting and a willingness to study with reasonable diligence the information provided. Comparable If a conflict arises between these characteristics, a trade-off needs to be found that still enables the objective of financial statements to be met. For example, if the information that is the most relevant is not the most reliable and vice versa, it will usually be appropriate to use the item of information that is the most relevant of those that are reliable. Financial information with the above characteristics will be most useful to the users of financial statements. In deciding whether to present financial information separately in the financial statements the accountant must assess the information’s ability to influence economic decisions it is considered to be material and should be presented separately in the financial statements. Page 51 2) Historical Cost Accounting Convention/System Conventionally, financial accounts are based on historical cost – which is assets/liabilities recorded in the balance sheet at their cost of acquisition. Expenses are charged against revenues in determining profit based upon historic cost of assets used in generation of the revenues. Advantages of Historical Cost Accounting: (a) Consistent with fundamental accounting concepts (b) Objective and the information it produces is easily verified. (c) Simple and inexpensive to record the information. (d) Easily understood by the users of financial statements. Disadvantages of Historical Cost Accounting: 3) (a) Assets values unrealistic, in particular land and buildings. (b) Comparisons over time meaningless. (c) Maintenance of the physical substance of business ignored. Role of the International Accounting Standards Board (IASB) International Accounting Standards Board (IASB): In April 2001 the International Accounting Standards Board was formed to take over the work of the International Accounting Standards Committee (IASC). The International Accounting Standards Committee was set up in 1973. The role of this body was to formulate and publish accounting standards to be observed in the presentation of financial statements and to promote their world-wide acceptance and observance and to work for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial reporting. Objectives of the IASB The objectives of the IASB are set out in its mission statement: • “To develop, in the public interest a single set of high quality, understandable and enforceable global accounting standards that require high quality transparent and comparable information in financial statements.” • To promote the use of rigorous application of these standards. • To work actively with actual standard-setters to achieve conveyance of accounting standards around the world. Page 52 4) The Business Entity Concept An organisation or part of an organisation that for accounting purposes stands apart as a separate economic unit. Usually a business entity is regarded as separate from its owners and accounting information should be restricted to the transactions that affect the entity itself. A business entity treats transactions with its owners in an arms length way as monies and assets introduced into a business by the owners is recorded as a liability of the business and recorded as capital while goods, cash or assets taken from the business are recorded as drawings and reduce the capital introduced and thereby the liability of the business to the owners. 5) Imprest system of petty cash An imprest system of petty cash means that the Petty Cash general ledger account will remain at a set amount from period to period. For example, if the petty cashier is entrusted with RWF100, then the Petty Cash account will always report a debit balance of RWF100. The RWF100 is the imprest balance. When the money in the petty cash box is low the petty cashier will request a fund replenishment. Since the funds are drawn on the organisation’s bank account, the bank account (not the petty cash account) is credited. The debits will go to the expense accounts indicated by the petty cash receipts i.e. postage, supplies, etc. Under the imprest system, the petty cashier should have a combination of coins, currency and petty cash receipts equal to the imprest amount of RWF100. Control over petty cash involves review of the petty cash receipts attached to each cheque request for replenishment. Occasional spot checks on the petty cash box also ensures that the items in the petty cash add up to the imprest amount. Page 53
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