THE INSTITUTE OF CAT L2.1 FINANCIAL ACCOUNTING Study Manual

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INSTITUTE OF

CERTIFIED PUBLIC ACCOUNTANTS
OF

RWANDA
Level 2
L2.1 FINANCIAL ACCOUNTING
First Edition 2012
This study manual has been fully revised and updated
in accordance with the current syllabus.
It has been developed in consultation with experienced lecturers.

All rights reserved.
The text of this publication, or any part thereof, may not be reproduced or transmitted in any
form or by any means, electronic or mechanical, including photocopying, recording, storage
in an information retrieval system, or otherwise, without prior permission of the publisher.

Whilst every effort has been made to ensure that the contents of this book are accurate, no
responsibility for loss occasioned to any person acting or refraining from action as a result of
any material in this publication can be accepted by the publisher or authors. In addition to
this, the authors and publishers accept no legal responsibility or liability for any errors or
omissions in relation to the contents of this book.

Page 1

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Page 2

Contents
Study Unit

Title

Page

Introduction to the Course
SECTION 1:

GENERAL FRAMEWORK OF ACCOUNTING

General Framework of Accounting
Introduction
The Objective of Financial Statements
Users of Financial Statements
Stewardship and Economic Decisions
The Qualitative Characteristics of Financial Information
Components of Financial Statements
The Statement of Financial Position
The Statement of Comprehensive Income
The Statement of Changes in Equity
The Cash Flow Statement
Elements of Financial Statements
Recognition in Financial Statements
Measurement in Financial Statements
The Historical Cost Convention/System
The Accounting Profession and the Role of the Accountant
Internal and External Auditors
Internal Control Systems

13
14
14
14
16
17
18
18
18
18
19
19
20
20
21
21
23
25

Regulatory & Non Regulatory Framework
Generally Accepted Accounting Policies (GAAP)
The Regulatory Framework – Non Statutory
The Regulatory Framework – Statutory

29
30
30
38

SECTION 2:
3

BOOK-KEEPING

Double Entry, Trial Balance, Statement of Financial Position
Books of Original Entry
Nominal Ledger
Double Entry
The Accounting Equation
The Statement of Comprehensive Income
The Statement of Financial Position
The Effects of Transaction on a Statement of Financial Position
Capital Expenditure and Revenue Expenditure
Questions / Solutions

Page 3

41
42
47
49
49
50
52
53
62
63

Study Unit

Title

Page

Accruals and Prepayment
Accruals and Prepayments
Questions / Solutions

81
82
85

Trade Receivables, Bad Debts and Provisions
Provisions
Trade Receivables, Bad Debts, Bad Debts Recovered and Provisions
Other Provisions
Provisions for Discounts Allowed
Provisions for Discounts Received
Questions / Solutions

89
90
90
94
95
96
99

Control Accounts
Control Accounts
Trade Receivables Control Account
Trade Payables Control Account
Questions / Solutions
Accounting for VAT

103
104
105
107
108
114

Bank Reconciliation Statements
The Cash Book and Bank reconciliation Statement
Bank Reconciliations Questions / Solutions
Questions / Solutions

121
122
125
127

Suspense Accounts
Suspense Accounts
Example
Errors not affecting the Trial Balance
Questions / Solutions
The Journal
Questions / Solutions

133
134
134
135
135
137
139

SECTION 3: ACCOUNTING TREATMENT OF IDENTIFIED
IAS’S
9

IAS 1 – Presentation of Financial Statements
Objective
Purpose of Financial Statements
Components of Financial Statements
Financial Review by Management
Structure, Content and Reporting
Definitions
Statement of Financial Position Format
Example 1 – Statement of Financial Position
The Statement of Comprehensive Income
Function of Expenditure Method
Page 4

145
147
147
147
147
148
148
148
150
151
151

Study Unit

Title

Page

Nature of Expenditure Method
Changes in Inventories of Finished Goods and Work in Progress
Raw Materials and Consumables Used
Information to be presented either on the face of the Statement of
Comprehensive Income or in the notes
Statement of Changes in Equity
Statement of Recognised Income and Expense
Disclosure of Significant Accounting Policies
Questions / Solutions

151
152
152
153

IAS 2 – Inventories
Introduction - Inventories
Definitions
Measurement
Disclosure
Methods of Costing

163
164
164
165
165
166

IAS 8 – Accounting Policies, Changes in Accounting Estimates &
Errors
Introduction
Definitions
Accounting Policies
Changes in Accounting Policies
Disclosure – Change in Accounting Policies
Changes in Accounting Estimates
Disclosure – Changes in Accounting Estimates
Errors
Disclosure – Prior Period Errors

169

IAS 10 – Events after the Reporting Period
Objective
Definitions
Recognition & Measurement
Dividends
Going Concern
Disclosure

175
176
176
176
177
177
177

IAS 16 – Property, Plant and Equipment
Objective
Definitions
Depreciation
Accounting for Depreciation
Disposal of Property, Plant and Equipment
Ledger Accounts and Journal Entries
Recognition & Measurement
Disclosure

179
180
180
180
181
185
185
188
190

Page 5

155
156
156
157

170
170
170
171
171
172
172
172
173

Study Unit

Title

Page

Examples

190

IAS 18 - Revenue
Objective
Definitions
Recognition & Measurement
Sale of Goods
Rendering of Services
Interest, Royalties and Dividends
Disclosure

195
196
196
196
197
197
197
197

IAS 20 – Government Grants
Objective
Basic Concepts
Definitions
Types of Grant Available
Accounting Treatment
Disclosure
Repayment of Grants
Grant Recognition

199
200
200
200
201
201
203
203
204

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
Objective
Definition
Recognition
Measurement
Changes in Provisions
Uses of Provisions
Application of Recognition and Measurement Rules
Disclosure
Examples – Recognition

205
206
206
207
207
208
208
208
209
210

IAS 12 – Income Taxes
Objective
Definition
Recognition and Presentation
Disclosure

213
214
214
214
214

IAS 17 – Leases
Objective
Classification of Leases
Accounting by Lessees
Disclosure: Lessees – Finance Leases
Disclosure: Lessees – Operating Leases

217
218
218
219
219
220

Page 6

Study Unit

Title

Page

SECTION 4: PREPARATION OF FINANCIAL STATEMENTS
FOR DIFFERENT FORMS OF BUSINESS ENTITY
19

Sole Traders
Preparing Financial Statements for Different Forms of Business Entity
Sole Trader Accounts - Introduction
Two Approaches in Preparing Accounts
Double Entry Approach
Question / Solution
Single Entry Approach
Question / Solution
Use of Ratios
Question / Solution

221
222
223
224
224
228
231
231
233
234

Company Accounts 1
Introduction – Statement of Comprehensive Income
Dividends
Transfer to Reserve
Statement of Financial Position
Share Capital
Corporation Tax / Income Tax Expense
Issue of Shares
Ultra Vires
Returns, Statutory Books, Director’s Reports, Notices, Resolutions and
Accounts to be Filed
Ethical Obligations of Company Directors

239
240
241
241
241
241
242
243
249
250

Company Accounts
Introduction
Preparation of Limited Company Accounts
Sample Questions / Solutions
Questions / Solutions

255
256
269
270
275

Income and Expenditure
Introduction – Income and Expenditure Accounts
Sources of Income
Expenditure
Statement of Financial Position
Question / Solution

291
292
292
295
295
295

Page 7

254

Study Unit

Title

Page

SECTION 5: INTERPRETATION OF FINANCIAL
STATEMENTS
23

IAS 7 – Cash Flow Statements
Cash Management
Objective
Operating Activities
Investing Activities
Financing Activities
Reporting Cash Flows from Operating Activities
Worked Examples
Disposal of a Tangible Net Asset
Taxation
Dividends
Worked Example

299
300
300
300
301
301
301
304
310
311
311
311

Ratio Analysis & Interpretation of Financial Statement
General
Ratios on Return on Capital
Ratios of Profitability
Ratios of Activity
Ratios of Leverage / Gearing
Ratios of Liquidity
Limitations of Ratio Analysis
Summary
Checklist

315
316
317
317
319
322
323
325
325
326

Manufacturing Accounts
General
Divisions of Costs
Worked Example

329
330
330
331

IPSAS – International Public Sector Accounting Standards
Introduction
IPSAS 1
IPSAS 2
IPSAS 12
IPSAS 3
IPSAS 14
IPSAS 17
IPSAS 31
IPSAS 16
IPSAS 19
IPSAS 9 & 23

335
336
338
339
340
341
342
343
346
347
348
349

Page 8

Page 9

INTRODUCTION TO THE COURSE
Stage:
Subject Title:

Level 2
L2.1 Financial Accounting

Aim
The aim of this subject is to ensure that students understand how role, function and basic
principles of financial accounting and to prepare accounts for basic reporting entities in
accordance with International Financial Reporting standards (IFRSs) Students should have an
ability to analyse and interpret financial statements.

Learning Outcomes
On successful completion of this subject students should be able to:
•
•
•
•
•

An understanding of the influence of legislation and accounting together with the standard
setting process.
Be able to recognise and comment on relevant ethical issues relevant to business owners,
managers and accountants.
The ability to prepare accounts from incomplete records, partnerships, limited companies,
together with an understanding of the importance of cash to a business and to prepare cash
flow statements for limited companies.
The ability to use ratio analysis as a technique in decision making and performance
evaluation.
The ability to analyse and interpret financial statements

Page 10

Syllabus:
•

•
•
•
•

1. Conceptual and regulatory framework
Influence of legislation and accounting standards on the production of published accounting
information for organisations

Impact of legislation on the preparation and reporting of financial statements
Roles of the International Accounting Standards Board, The Standards Advisory
Council and the International Financial Reporting Interpretations Committee
Application of International Accounting Standards and International Financial
Reporting Standards to the preparation and presentation of financial statements
Framework for the Preparation and Presentation of Financial Statements
-

•

The objective of financial statements
Underlying Assumptions
Qualitative characteristics of financial statements
Elements of financial statements

Standard setting process
- Standard setting process
- Accounting standards and the law on Published Accounts
- The role of the stock exchange

•

Internal and external auditors and ethical issues for the Accounting Technician
- Role and duties of internal and external auditors
- Internal control systems
- Ethical issues and responsibilities accruing

•

•
•

Content and application of specified accounting standards
- Presentation of Financial Statements
- Inventories
- Cash Flow Statements
- Accounting policies, change in accounting estimates and errors
- Events after the Reporting Period
- Income taxes (excluding deferred tax)
- Property, Plant and Equipment
- Leases (Lessee accounting only)
- Accounting for Government Grants and Disclosure of Government Assistance
- Provisions, Contingent Liabilities and Contingent Assets
Professional ethical issues relevant to business owners, managers and accountants
- Understanding and application of ethical issues
Government accounting
- General Introduction to Government Accounting
- The IPSAS regime and the public sector

Page 11

•

2. Financial statements
Financial statements for limited companies for internal and external purposes
- Preparation of financial statements for limited companies
- Differences between a sole trader and a limited company
- Accounting records of a limited company
- Capital structure of a limited company
- Share premium account
- Dividends
- Reserves
- Practical application of IAS/IFRS requirements

Disclosure and filing requirements for limited companies
-

•

3.
•

Cash flow statements for limited companies and an understanding of the importance of
cash to the business entity
- Preparation of cash flow statements in accordance with the IFRS regime
- Importance of cash to a business entity
- Preparation of reports on the interpretation of a Cash flow statement
The accounts of manufacturing businesses
- Classification of costs
- Work in Progress
- Preparation of the manufacturing account
Preparation of accounts from incomplete records
- Incomplete records
- Preparation of accounts from incomplete records

Interpretation of financial statements
Ratio Analysis of accounting information
-

•

Broad categories of ratios
Profitability and return on capital employed
Long term solvency and stability
Short term solvency and liquidity
Efficiency
Shareholders' investment ratios

Interpretation of Financial Statements and explanation of ratios used
-

•

Format and filing requirements
Wording and layout of a Statement of Comprehensive Income (Statement of
Comprehensive Income) and Statement of financial Position (Statement of Financial
Position)
Size criteria for companies
Disclosure Requirements
Split of turnover
Details regarding staff numbers and remuneration
Movement in non-current assets
Details of taxes owing

Interpretation of Financial Statements
Explanation of information provided by ratios
Limitations of ratio analysis

Preparation of reports for the users of accounting information as a tool in the
decision making process
-

Preparation of reports in a professional manner
Ratio analysis in the decision making process

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Page 13

Study Unit 1
The General Framework of Accounting
Contents
A.

Introduction

The Objective of Financial Statements

Users of Financial Statements

Stewardship and Economic Decisions

The Qualitative Characteristics of Financial Information

Components of Financial Statements

The Statement of Financial Position

The Statement of Comprehensive Income

The Statement of Changes in Equity

The Cash Flow Statement

Elements of Financial Statement

Recognition in Financial Statements

Measurement in Financial Statements

The Historical Cost Convention/System

The Accounting Profession and the Role of the Accountant

Page 14

A. INTRODUCTION
Financial accounting is a branch of economics. It involves gathering, recording, summarising
and presenting information to the various users of financial information.

THE OBJECTIVE 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 Statement of Financial Position. 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 Statement of Comprehensive
Income.
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.

C. 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

(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
Page 15

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.
Creditors
Government
Employers

Users of Financial
Statements

Investors

Employees
Public

The objective of accounting is to provide sufficient information to meet the needs of the
various users at the lowest possible cost. There are two branches of accounting, that reflect
the internal and external users of accounting information. Management accounting is
concerned with the provision of information to people within the organisation to help them
make better decisions and improve the efficiency and effectiveness of existing operations,
whereas financial accounting is concerned with the provision of information to external
parties outside the organisation. As such, management accounting could be called internal
accounting and financial accounting could be called external accounting.
Differences between management accounting and financial accounting
The major differences between these two branches of accounting are:
• Legal requirements. There is a statutory requirement for public limited companies to
produce annual financial accounts regardless of whether or not management regards
this information as useful. Management accounting is entirely optional and
information should only be produced if it is considered that the benefits from the use
of the information by management exceed the cost of collecting it.
• Focus on individual parts or segments of the business. Financial accounting reports
describe the whole of the business whereas management accounting focuses on small
parts of the organisation i.e. profitability of products, services etc. Management
accounting information measures the economic performance of decentralised
operating units, such as divisions and departments
• Generally accepted accounting principles. Financial accounting statements must be
prepared to conform with the legal requirements and the generally accepted
accounting principles established by the regulatory bodies. These requirements are
essential to ensure the uniformity and consistency that is needed for external financial
statements. Outside users need assurance that external statements are prepared in
accordance with generally accepted accounting principles so that the inter-company
and historical comparisons are possible. In contrast, management accountants are not
Page 16

•

required to adhere to generally accepted accounting principles when providing
managerial information for internal purposes. Instead, the focus is on the serving
management’s needs and providing information that is useful to managers relating to
their decision-making, planning and control functions.
Time dimension. Financial accounting reports what has happened in the past in an
organisation, whereas management accounting is concerned with future information
as well as past information. Decisions are concerned with future events and
management therefore requires details of expected future costs and revenues.
Report frequency. A detailed set of financial accounts is published annually and less
detailed accounts are published semi-annually. Management requires information
quickly. Consequently, management accounting reports on various activities may be
prepared at daily, weekly or monthly intervals.

D. STEWARDSHIP AND ECONOMIC DECISIONS
Stewardship entails the safekeeping and proper use of an entity’s resources and their efficient
and profitable use. Existing investors assess management’s stewardship in order to decide
whether to seek a change in management or to change the level of their shareholding in the
entity.
Ethical Issues for Management
Ethical behaviour is an important element of stewardship. Increased accountability and legal
frameworks across the globe now require that businesses take stock of their actions. Ethical
debates in business are not new, however, and the area is large and often hard to quantify.
Business ethics are moral principles that guide how a business behaves and they are the
foundation of lasting business success. When a business practices ethical decision-making
they are practising the values of a democratic society within the workplace. Therefore a
business that places emphasis on ethics provides an environment that promotes honest
working practices. This is especially important in a world that has recently witnessed mass
corporate failures and questionable accounting practices. It is therefore important that
businesses apply appropriate values, ethics and attitudes.
Businesses or other corporate structures will usually have their own statement of business
principles or a code, which sets out their core values and standards. This statement of
principle or code enables the application of a common code of basic values that all persons
within the organisation can agree on. It forces employers and companies to adhere to high
standards of performance by not only following company law legislation but also by “doing
the right thing.” A business ethical code emphasises the importance of applying moral values
to company decisions. It is also important to realise that a code will apply to all members of
the organisation regardless of their position in the company. However, a higher expectation is
placed on qualified professionals such as accountants, who are held in a position of trust
which is damaged by unscrupulous behaviour or poor practice.

Page 17

The advantages of ethical behaviour include:
Higher revenues – demand from positive consumer support
• Improved brand and business awareness and recognition
• Better employee motivation and recruitment
• New sources of finance – e.g. from ethical investors
The disadvantages claimed for ethical business include:
• Higher costs – e.g. sourcing from Fairtrade suppliers rather than lowest price
• Higher overheads – e.g. training & communication of ethical policy
• A danger of building up false expectations

E. THE QUALITATIVE
INFORMATION

CHARACTERISTICS

FINANCIAL

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:

Comparable

•

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.
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
Page 18

economic decisions it is considered to be material and should be presented separately in the
financial statements.

COMPONENTS OF FINANCIAL STATEMENTS

The primary financial statements are currently:
(a)

Trading Profit and Loss Account/the Statement of Comprehensive Income

(b)

A Statement of Changes in Equity

(c)

The Statement of Financial Position

(d)

The Cash Flow Statement

Notes to these primary financial statements are used to amplify and explain the primary
statements. The notes on primary financial statements form an integral part of the financial
statements.

G. THE STATEMENT OF FINANCIAL POSITION
This is a financial statement of the assets, liabilities and ownership interests drawn up at a
particular point in time. This point in time for the annual financial statement is referred to as
the entity’s year end.

H. THE STATEMENT OF COMPREHENSIVE INCOME (PROFIT &
LOSS)
The Statement of Comprehensive Income details the trading results for the period. It details
the Revenue earned and the expenses incurred.

THE STATEMENT OF CHANGES IN EQUITY

A statement of changes in equity shows the following items:
•

Net profit/loss for the period

•

Gains/losses recognised directly in equity e.g. surplus on revaluation of land and
buildings

•

Cumulative effect of changes in accounting policy and the correction of fundamental
errors (per IAS 8, which will be dealt with in a later chapter)

•

Capital transactions with owners, for example, dividend payments share issue.

•

Accumulated profit/loss

•

−

At start of the year

−

Movement for year

−

At end of year

Reconciliation between carrying amount at the start and end of the year for:
Page 19

−

Each class of equity

−

Share premium

−

Each reserve

THE CASH FLOW STATEMENT

This statement shows the increase or decrease in the amount of cash/cash equivalents the
entity has generated since the previous year end.

ELEMENTS OF FINANCIAL STATEMENTS

Financial statements need to reflect the effects of transactions and other events on the
reporting entity’s financial performance and financial position. This involves a high degree
of classification and aggregation. Order is imposed on this process by specifying and
defining the classes of items – the elements – that encapsulate the key aspects of the effects
of those transactions and other events. The main elements and their definitions are as
follows:
•

Assets – a resource controlled by an entity as a result of past events from which future
economic benefits are expected to flow. Assets are broken down between current assets
and non-current assets (formerly known as fixed assets).

•

Liabilities – present obligations of the entity arising from past events, settlement of
which is expected to result in an outflow of resources embodying economic benefits.
Liabilities are broken down between current liabilities and non-current liabilities.

•

Equity – the residual interest in the assets of the entity after deducting all its liabilities.

•

Income – increases in economic benefits in the form of inflows of assets or decreases of
liabilities that result in increases in equity.

•

Expenses – decreases in economic benefits in the form of outflows of assets or
incurrence of liabilities that result in decreases in equity.

 Assets
Future Economic Benefits – If an item does not generate future economic benefits it is
not an asset. There must be evidence that cash will be received in the future.
Controlled by an Entity – Though ownership is not essential control is a vital element.
Control means the ability to restrict use.
Past Transactions or Events – The transaction or event must be in the past before an
asset can arise. Access to economic benefits obtained after the Statement of Financial
Position date cannot constitute an asset.


Liabilities
Obligations – These may be legal or constructive. A legal obligation derives from a
contract, legislation or other operation of law. A constructive obligation derives from
the entity’s actions e.g. refunds to dis-satisfied customers.

Page 20

Transfer of Economic Benefits – This normally represents a transfer of cash but could
involve the exchange of an asset e.g. trade in of a motor vehicle.
Obligations that are not expected to result in a transfer of economic benefits e.g. the
guarantee of a loan, are referred to as contingent liabilities
Past Transactions or Events – The transaction or event must be in the past.

RECOGNITION IN FINANCIAL STATEMENTS

The objective of financial statements is achieved to a large extent by showing in the primary
financial statements, in words and by a monetary amount, the effects that transactions and
other events have on the elements. This process is known as recognition.
For example, if the effect of a transaction is to create a new asset or liability or to add to an
existing asset or liability, that new asset or liability or addition will be recognised in the
Statement of Financial Position if there is sufficient evidence that it exists and it can be
measured reliably enough as a monetary amount. A gain or loss will be recognised at the
same time, unless there has been no change in the total net assets or the whole of the change
is the result of capital contributions or distributions.

M. MEASUREMENT IN FINANCIAL STATEMENTS
In order that an asset or liability can be recognised, it needs to be assigned a monetary
carrying amount. Two measurement bases could be used for this purpose:
•

Historical Cost – which is the lower of cost and recoverable amount (as defined below)
Or

•

Current Value – which is the lower amount of replacement cost and recoverable amount.

Most assets and liabilities arise from arm’s length transactions. In such circumstances and
regardless of the measurement basis used, the carrying amount assigned on initial recognition
will be the transaction cost.
The carrying amounts derived from the two bases will usually change after initial recognition,
making it necessary to decide which basis to use. The approach adopted by many entities
involves measuring some Statement of Financial Position categories at historical cost and
some at current value. Although this is often referred to as the modified historical cost basis,
it is more accurately referred to as the mixed measurement system.
It is envisaged that the measurement basis used for a category of assets or liabilities will be
determined by reference to factors such as the objective of financial statements, the nature of
the assets or liabilities concerned and the particular circumstances involved. It is also
envisaged that a separate decision as to the appropriate measurement basis will be taken for
each Statement of Financial Position category. That decision will need to be kept under
review as accounting thought, access to markets, and circumstances change.

Page 21

Whatever the measurement base chosen, the carrying amount may need to be changed from
time to time. This process is known as re-measurement.
•

When historical cost measure is used, re-measurements are necessary to ensure that
items are stated at the lower of cost and recoverable amount.

•

When a current value is used, re-measurements are necessary to ensure that items are
stated at up to date current value.

Re-measurements will be recognised only if there is sufficient evidence that the monetary
amount has changed and the new amount can be measured with sufficient reliability.
Recoverable amount is the higher of realisable value and value in use. Realisable value is the
amount that could be obtained by selling the asset in an orderly disposal. Value in use is the
present discounted value of the future cash flows obtainable as a result of an asset’s
continued use, including those resulting from its ultimate disposal.

N. THE HISTORICAL CONVENTION/SYSTEM
Conventionally, financial accounts are based on historical cost – which is assets/liabilities
recorded in the Statement of Financial Position 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:
(a) Assets values unrealistic, in particular land and buildings.
(b)

Comparisons over time meaningless.

(c)

Maintenance of the physical substance of business ignored.

O. THE ACCOUNTING PROFESSION AND THE ROLE OF THE
ACCOUNTANT
Professional independence is a concept fundamental to the accountancy profession. It is
essentially an attitude of mind characterised by integrity and an objective approach to
professional work. A practising member should both be and appear to be, in each
professional assignment he undertakes, free of any interest, which might be regarded,
whatever its actual effect, as being incompatible with objectivity. The fact that this is selfevident in the exercise of the reporting function must not obscure its relevance in respect of
other professional work. Accountants cannot avoid external pressures on their integrity and
objectivity in the course of their professional work, but they are expected to resist these
pressures. They must, in fact, retain their integrity and objectivity in all phases of their
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practice and, when expressing "opinions" on financial statements avoid involvement in
situations that would impair the credibility of their independence in the minds of reasonable
people familiar with the facts.
The accountancy profession exists to ensure that all interested parties entitled to knowledge
of certain facts have those facts presented objectively. That is the essence of high
professional standards and is as appropriate to the accountant in commerce and industry as to
the accountant in public practice. Anything, which tends to impair or might appear to impair
objectivity, in relation to any particular assignment or client must cast grave doubt on the
propriety of the accountant acting in the assignment for the client in question. Examples of
undesirable financial involvement are
•

An accountant should not make a loan to a client or guarantee a client’s overdraft

•

A loan should not be accepted from a client

•

An accountant should not give advice to a client, where such advice, if acted upon
would result in receipt of commission by the accountant, unless the client is made aware
of the receipt of such commission

It is undesirable that a practice should derive too great a part of its professional income
from one client or group of connected clients. A practice, therefore, should endeavour
to ensure that the recurring fees paid by one client or group of connected clients do not
exceed 10% of the gross fees of the practice or, in the case of a member practising parttime, 10% of his gross earned income. It is recognised that a new practice seeking to
establish itself or an old practice running itself down may well not, in the short term, be
able to comply with this criterion. If a member is dependent for his income on the
profits of any one office within a practice and the gross income of that office is regularly
dependent on one client or a group of connected clients for more than 10% of its gross
fees, a partner from another office of the practice should take final responsibility for
any report made by the practice on the affairs of that client.
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
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
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

Responsibilities to Colleagues
An accountant should conduct himself/herself in a manner, which will promote cooperation and good relations among members of the profession

Other Responsibilities and Practice

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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

The foregoing Ethical Principles are intended as a broad guideline. They constitute the
philosophical foundation upon which the professional conduct of accountants is based.

INTERNAL AND EXERNAL AUDITORS

The role and function of external auditors
Financial statements are used for a variety of purposes and decisions. For example, financial
statements are used by owners to evaluate management’s stewardship, by investors for
making decisions about whether to buy or sell securities, by credit rating services for making
decisions about credit worthiness of entities, and by bankers for making decisions about
whether to lend money. Effective use of financial statements requires that the reader
understand the roles of those responsible for preparing and auditing financial statements.
Financial statements are the representations of management. When using management’s
statements, the reader must recognize that the preparation of these statements requires
management to make significant accounting estimates and judgments, as well as to determine
from among several alternative accounting principles and methods those that are most
appropriate within the framework of generally accepted accounting standards.
In contrast, the auditor’s responsibility is to express an opinion on whether management has
fairly presented the information in the financial statements. In an audit, the financial
statements are evaluated by the auditor, who is objective and knowledgeable about auditing,
accounting, and financial reporting matters.
During the audit, the auditor collects evidence to obtain reasonable assurance that the
amounts and disclosures in the financial statements are free of material misstatement.
However, the characteristics of evaluating evidence on a test basis, the fact that accounting
estimates are inherently imprecise, and the difficulties associated with detecting
misstatements hidden by collusion and careful forgery, prevent the auditor from finding every
error or irregularity that may affect a user’s decision.
The auditor also evaluates whether audit evidence raises doubt about the ability of the client
to continue as a going concern in the foreseeable future. However, readers should recognize
that future business performance is uncertain, and an auditor cannot guarantee business
success.
Through the audit process, the auditor adds credibility to management’s financial statements,
which allows owners, investors, bankers, and other creditors to use them with greater
confidence.

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The auditor expresses his assurance on the financial statements in an auditor’s report. The
report, which contains standard words and phrases that have a specific meaning, conveys the
auditor’s opinion related to whether the financial statements fairly present the entity’s
financial position and results of operations. If the auditor has reservations about amounts or
disclosures in the statements, he modifies the report to describe the reservations.
The auditor’s report and management’s financial statements are only useful to those who
make the effort to understand them.
Auditor’s duties
Auditors duties include:• Duty to provide an Audit Report – report to the members of the company on the
financial statements examined by them. The auditors’ report must be read at the
general meeting and should be made available to every member of the company.
• Duty to report failure to maintain proper books of account – where auditors form
the opinion that the company being audited is disobeying, or has disobeyed its
obligations to maintain proper books of account, they are obliged to serve notice on
the company informing it of that opinion. The auditors may report this to the Office
of the Registrar General (ORG)
• Duty to exercise Professional Integrity – Auditor is under a duty to carry out the
audit with professional integrity. In preparing their report, they must exercise skill,
car and caution of a reasonably competent, careful and cautious auditor.
Duties and responsibilities of Internal Auditor
Internal auditing is an independent, objective assurance and consulting activity designed to
add value and improve an organisation’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes.
Independence is established by the organisational and reporting structure. Objectivity is
achieved by an appropriate mind-set. The internal audit activity evaluates risk exposures
relating to the organization's governance, operations and information systems, in relation to:


Effectiveness and efficiency of operations.
 Reliability and integrity of financial and operational information.
 Safeguarding of assets.
 Compliance with laws, regulations, and contracts.
Based on the results of the risk assessment, the internal auditors evaluate the adequacy and
effectiveness of how risks are identified and managed in the above areas. They also assess
other aspects such as ethics and values within the organisation, performance management,
communication of risk and control information within the organization in order to facilitate a
good governance process.
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The internal auditors are expected to provide recommendations for improvement in those
areas where opportunities or deficiencies are identified. While management is responsible for
internal controls, the internal audit activity provides assurance to management and the audit
committee that internal controls are effective and working as intended.
An effective internal audit activity is a valuable resource for management and the board or its
equivalent, and the audit committee due to its understanding of the organisation and its
culture, operations, and risk profile. The objectivity, skills, and knowledge of competent
internal auditors can significantly add value to an organization's internal control, risk
management, and governance processes. Similarly an effective internal audit activity can
provide assurance to other stakeholders such as regulators, employees, providers of finance,
and shareholders.

Q. INTERNAL CONTROL SYSTEMS
Internal control systems are control procedures put in place by the management of an
organisation to ensure efficient and effective operation of its activities, so as to meet the
organisation's objectives.
The importance of internal control and risk management
A company’s system of internal control has a key role in the management of risks that are
significant to the fulfilment of its business objectives. A sound system of internal control
contributes to safeguarding the shareholders’ investment and the company’s assets.
Internal control facilitates the effectiveness and efficiency of operations, helps ensure the
reliability of internal and external reporting and assists compliance with laws and regulations.
Effective financial controls, including the maintenance of proper accounting records, are an
important element of internal control. They help ensure that the company is not unnecessarily
exposed to avoidable financial risks and that financial information used within the business
and for publication is reliable. They also contribute to the safeguarding of assets, including
the prevention and detection of fraud.
A company’s objectives, its internal organisation and the environment in which it operates
are continually evolving and, as a result, the risks it faces are continually changing. A sound
system of internal control therefore depends on a thorough and regular evaluation of the
nature and extent of the risks to which the company is exposed. Since profits are, in part, the
reward for successful risk-taking in business, the purpose of internal control is to help
manage and control risk appropriately rather than to eliminate it.
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Maintaining a sound system of internal control
Responsibilities
The board of directors is responsible for the company’s system of internal control. It should
set appropriate policies on internal control and seek regular assurance that will enable it to
satisfy itself that the system is functioning effectively. The board must further ensure that the
system of internal control is effective in managing risks in the manner which it has approved.
In determining its policies with regard to internal control, and thereby assessing what
constitutes a sound system of internal control in the particular circumstances of the company,
the board’s deliberations should include consideration of the following factors:
 the nature and extent of the risks facing the company;
 the extent and categories of risk which it regards as acceptable for the company to
bear;
 the likelihood of the risks concerned materialising;
 the company’s ability to reduce the incidence and impact on the business of risks that
do materialise; and
 the costs of operating particular controls relative to the benefit thereby obtained in
managing the related risks.
It is the role of management to implement board policies on risk and control. In fulfilling its
responsibilities, management should identify and evaluate the risks faced by the company for
consideration by the board and design, operate and monitor a suitable system of internal
control which implements the policies adopted by the board.
All employees have some responsibility for internal control as part of their accountability for
achieving objectives. They, collectively, should have the necessary knowledge, skills,
information and authority to establish, operate and monitor the system of internal control.
This will require an understanding of the company, its objectives, the industries and markets
in which it operates, and the risks it faces.
Elements of a sound system of internal control
An internal control system encompasses the policies, processes, tasks, behaviours and other
aspects of a company that, taken together: facilitate its effective and efficient operation by
enabling it to respond appropriately to significant business, operational, financial, compliance
and other risks to achieving the company’s objectives.

Page 27

This includes:
 safeguarding of assets from inappropriate use or from loss and fraud, and ensuring
that liabilities are identified and managed;
 ensuring the quality of internal and external reporting. This requires the maintenance
of proper records and processes that generate a flow of timely, relevant and reliable
information from within and outside the organisation;
 ensuring compliance with applicable laws and regulations, and also with internal
policies with respect to the conduct of business.
A company’s system of internal control will reflect its control environment which
encompasses its organisational structure. The system will include:
 control activities;
 information and communications processes; and
 processes for monitoring the continuing effectiveness of the system of internal
control.
The system of internal control should:
 be embedded in the operations of the company and form part of its culture;
 be capable of responding quickly to evolving risks to the business arising from factors
within the company and to changes in the business environment; and
 include procedures for reporting immediately to appropriate levels of management
any significant control failings or weaknesses that are identified together with details
of corrective action being undertaken.
A sound system of internal control reduces, but cannot eliminate, the possibility of poor
judgement in decision-making; human error; control processes being deliberately
circumvented by employees and others; management overriding controls; and the occurrence
of unforeseeable circumstances.
A sound system of internal control therefore provides reasonable, but not absolute, assurance
that a company will not be hindered in achieving its business objectives, or in the orderly and
legitimate conduct of its business, by circumstances which may reasonably be foreseen. A
system of internal control cannot, however, provide protection with certainty against a
company failing to meet its business objectives or all material errors, losses, fraud, or
breaches of laws or regulations.
Reviewing the effectiveness of internal control
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Responsibilities
Reviewing the effectiveness of internal control is an essential part of the board’s
responsibilities. The board will need to form its own view on effectiveness after due and
careful enquiry based on the information and assurances provided to it.
Management is accountable to the board for monitoring the system of internal control and for
providing assurance to the board that it has done so.
The role of board committees in the review process, including that of the audit committee, is
for the board to decide and will depend upon factors such as the size and composition of the
board; the scale, diversity and complexity of the company’s operations; and the nature of the
significant risks that the company faces. To the extent that designated board committees carry
out, on behalf of the board, tasks that are attributed in this guidance document to the board,
the results of the relevant committees’ work should be reported to, and considered by, the
board. The board takes responsibility for the disclosures on internal control in the annual
report and accounts.

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Study Unit 2
Regulatory & Non-Regulatory Framework
Contents
A.

Generally Accepted Accounting Principles (GAAP)

The Regulatory Framework – Non Statutory

The Regulatory Framework – Statutory

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A. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
The phrase Generally Accepted Accounting Principles is a technical accounting term that
encompasses the conventions, rules and procedures necessary to define accepted accounting
practice at a particular time. It includes not only broad guidelines of general application, but
also detailed practices and procedures. These conventions, rules and procedures provide a
standard by which to measure financial presentations.
GAAP includes the requirements of the Companies Acts and accounting standards. It also
includes acceptable accounting treatments whether or not they are set out in law and
accounting standards.
Sources of GAAP
The main sources of GAAP are:
(a)

Company Law

(b)

International and Local Accounting Standards

The International Framework for the preparation and presentation of financial
statements.

(e)

Any other generally accepted concepts and principles e.g. the money measurement
concept.

THE REGULATORY FRAMEWORK – NON STATUTORY

Accounting rules and regulations in certain jurisdictions for example (Ireland, UK) are
governed by a Financial Reporting Council (FRC). The FRC (UK & Ireland) has two
divisions – the Accounting Standards Board (ASB) and the Review Panel. There are 25
members on the council plus some observers, comprising a chairman and three deputy
chairmen. Member representation is from both users and preparers and from auditors and
drawn from three broad establishments – the accountancy profession, the financial
community and the world of business and administration at large. The council meets
approximately three times a year.
The main functions of a Financial Reporting Council (FRC) are to:
•

Provide funding for its two divisions – the ASB and the Review Panel.

•

Enforce compliance with standards currently in issue and in particular to the Review
Panel – it is the FRC which takes companies to court to enforce changes to accounts
where a company has refused to make changes recommended by the review panel.

•

Set a general work programme for the ASB.

•

Give guidance to the ASB and the Review Panel to ensure their work is carried out
efficiently and economically.

•

Provide a forum for public debate and support of accounting standards.

Prior to the creation of the FRC (UK & Ireland) accounting rules and regulations were
governed by the Accounting Standards Committee (ASC). In total the ASC issued 25
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Statements of Standard Accounting Practice (SSAP) covering such areas as stocks and long
term contracts research and development and post Statement of Financial Position events.
In Rwanda: The Companies Act, Law No 7/2009 of 27/4/2009 Relating to Companies
(Article 254 and others) mandates the application of International Accounting Standards with
regard to financial reporting by the registered companies. At present, the banks and other
financial institutions are required by the National Bank of Rwanda to follow IFRS. The
newly established ICPAR has been legally mandated to prepare accounting and auditing
standards consistent with IFRS and ISA respectively.
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.

Structure
IASC Foundation
19 Trustees

Standards Advisory
Council (SAC)

IASB
14 Members

International financial Reporting
Interpretations Committee (IFRIC)

Foundation Trustees
These are 19 individuals from different geographical and functional backgrounds.
Among their functions are the appointment of the Council, The Board and The Interpretation
Committee. Also they monitor the effectiveness of the IASB, secure funding and approve
budgets and have responsibility for constitutional change.

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IASB
This comprises 14 members (12 full time) who are appointed by the trustees for an initial
term of three to five years. The Board’s responsibilities include:
•
Develop and publish discussion documents for public comment
•

Prepare and issue exposure drafts

•

Setting up procedures for reviewing comments received on documents published for
comment

•

Preparation and issue of International Accounting Standards

Standards Advisory Council (SAC)
About 45 members make up the Standards Advisory Council. It meets in public at least three
times a year with the Board. It advises the Board on agenda decisions and priorities.
International Financial Reporting Interpretations Committee (IFRIC)
The committee is made up of accounting experts from different countries. The objective of
IFRIC is to develop conceptually sound and practicable interpretations of International
Accounting Standards to be applied on a global basis.
These interpretations are developed for financial reporting issues not specifically addressed
by the International Accounting Standard and where unsatisfactory conflicting interpretations
of a standard have developed. These pronouncements have the same force as an International
Accounting Standard.
Discussion Documents
The IASB develops and publishes discussion documents. These represent a study of a
financial reporting issue. They present alternative solutions to the issue under consideration
and set out arrangements and implications relative to each. Following the receipt of
comments IASB develops and publishes on Exposure Draft.
Exposure Draft
An exposure draft is a proposed accounting standard. The IASB invites comments thereon.
After a reasonable time period, normally 120 days, an accounting standard is produced.
International Accounting Standards/International Financial Reporting Standards
The International Accounting Standards Committee (IASC) produced accounting standards
called International Accounting Standards (IAS). It has published 41 International
Accounting Standards some of which are no longer in force.
The International Accounting Standards Board, which took over from the IASC produces
accounting standards called International Financial Reporting Standards IFRS. To date it has
produced five of these.
Rwandan Stock Exchange
Public limited companies (Ltd) are required to observe requirements as set by the Rwandan
Stock Exchange. Most of its requirements are covered by compliance with company law.
Statements of Recommended Practice (SORPs)
Statements of Recommended Practice are developed in the public interest and set out current
best accounting practice. The primary aims in issuing SORPs are to narrow the areas of
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difference and variety in the accounting treatment of the matters with which they deal and to
enhance the usefulness of published accounting information. SORPs are issued on subjects
on which it is not considered appropriate to issue an accounting standard at the time.
SORPs may be developed and issued by the Accounting Standards Board or they may be
developed and issued by an "industry" group which is representative of the industry
concerned for the purpose of the developing SORPs specific to that industry and is
recognised as such by the ASR. Such SORPs are sent for approval and franking by the ASB
and are referred to as "franked SORPs". Before approving and franking a franked SORP, the
ASB will review the proposed statement and the procedures involved in its development.
Although SORPs are not mandatory, entities falling within their scope are encouraged to
follow them and to state in their accounts that they have done so. They are also encouraged
to disclose any departure from the recommendations and the reasons for it. The provisions
need not be applied to immaterial items.
Advantages of Standards
(a) Provide the accounting profession with a manual of useful working rules
(b)

Forces improvements in the quality of the work of the accountant

(c)

Strengthen the accountant's resistance against pressure from directors to use an
accounting policy which may be suspect

(d)

Ensure that the users of financial statements get more complete and clearer information
on a consistent basis from period to period

(e)

Help in the comparison users may make between the financial statements of one
organisation and another

(f)

Direct financial statements towards establishing the economic truth of the entity's
performance

Disadvantages of Standards
(a) The working rules are bureaucratic and lead to rigidity
(b)

The quality of the work is restricted because firms and industries differ and change, as
do the environments within which they operate. Standards, which are based on
averages, lead to rigidity and reduce the scope for professional judgements.

(c)

Official acceptance reduces the accountant's strength to resist the application of an
inappropriate standard when the directors wish to follow it

(d)

Users are likely to think that the financial statements produced using accounting
standards are infallible

(e)

Although providing formulae, standards are still low for the figures used as inputs are
selected with some subjectivity, which reduces the possible benefits of comparison
between firms, when the input base may not be known

(f)

They have been derived through social or political pressures which may reduce the
freedom and lead to manipulation of the profession

(g)

They impair the development of critical thought

(h)

The more standards there are the more costly the financial statements are to produce
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True and Fair
True relates to the correctness of an item in the financial statements. Fair is a judgmental
characteristic relating to the description and measurement of an item in the financial
statements. Consider the following sentence: A motor vehicle cost RWF15,000,000 and its
expected useful life is five years, the cost of RWF15,000,000 can be verified, it is true,
however the useful life of five years is an estimate which can be regarded as fair. If the
expected life was stated as 50 years this would not be regarded as fair.
Compliance with accounting standards is taken as the best indication that the financial
statements show a true and fair view.
Framework for the Presentation and Preparation of Financial Statements
An accounting standard-setter’s conceptual framework or statement of principles describes
the accounting model that it uses as the conceptual underpinning for its work. The Statement
describes the standard-setter’s views on:
•
The activities that should be reported on in financial statements
•

The aspects of those activities that should be highlighted

•

The attributes that information needs to have if it is to be included in the financial
statements

•

How information should be presented in those financial statements

The Purpose of the Framework
The framework documents can have a variety of roles. The main role of the Framework is to
provide conceptual input into the IASB’s work on the preparation and appraisal of accounting
standards. The Framework is not, therefore, an accounting standard, nor does it contain any
requirements on how financial statements are to be prepared.
A number of the principles in the Framework play fundamental roles in existing accounting
standards, for example, several draw on the statement’s definitions of assets and liabilities;
IAS 37: Provisions, Contingent Liabilities and Contingent Assets.
The Framework therefore plays a very important role in the standard-setting process,
although it is only one of the factors that the ASB takes into account when setting standards.
Other factors include legal requirements, cost-benefit considerations, industry-specific issues,
and the desirability of evolutionary change and implementation issues.
The six stages of standard setting
International Financial Reporting Standards (IFRSs) are developed through an international
consultation process, the "due process", which involves interested individuals and
organisations from around the world.
The due process comprises six stages, with the Trustees having the opportunity to ensure
compliance at various points throughout:
Stage 1: Setting the agenda

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The IASB, by developing high quality accounting standards, seeks to address a demand for
better-quality information that is of value to all users of financial statements. Better–quality
information will also be of value to preparers of financial statements.
The IASB evaluates the merits of adding a potential item to its agenda mainly by reference to
the needs of investors.
The IASB considers:






the relevance to users of the information and the reliability of information that could
be provided
whether existing guidance available
the possibility of increasing convergence
the quality of the standard to be developed
resource constraints

To help the IASB in considering its future agenda, its staff are asked to identify, review and
raise issues that might warrant the IASB’s attention.
New issues may also arise from a change in the IASB’s conceptual framework. In addition,
the IASB raises and discusses potential agenda items in the light of comments from other
standard-setters and other interested parties, the IFRS Advisory Council and the IFRS
Interpretations Committee, and staff research and other recommendations.
The IASB receives requests from constituents to interpret, review or amend existing
publications. The staff consider all such requests, summarise major or common issues raised,
and present them to the IASB from time to time as candidates for when the IASB is next
considering its agenda.
IASB meetings
The IASB’s discussions of potential projects and its decisions to adopt new projects take
place in public IASB meetings.
Before reaching such decisions the IASB consults the IFRS Advisory Council and accounting
standard-setting bodies on proposed agenda items and setting priorities. In making decisions
regarding its agenda priorities, the IASB also considers factors related to its convergence
initiatives with accounting standard-setters.
The IASB’s approval to add agenda items, as well as its decisions on their priority, is by a
simple majority vote at an IASB meeting.
Stage 2: Project planning
When adding an item to its active agenda, the IASB also decides whether to:



conduct the project alone, or
jointly with another standard-setter

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Similar due process is followed under both approaches.
After considering the nature of the issues and the level of interest among constituents, the
IASB may establish a working group at this stage.
A team is selected for the project by the two most senior members of the technical staff:



The Director of Technical Activities; and
The Director of Research

The project manager draws up a project plan under the supervision of those Directors. The
team may also include members of staff from other accounting standard-setters, as deemed
appropriate by the IASB.
Stage 3: Development and publication
Although a discussion paper is not mandatory, the IASB normally publishes it as its first
publication on any major new topic to explain the issue and solicit early comment from
constituents.
If the IASB decides to omit this step, it will state why. Typically, a discussion paper includes:





a comprehensive overview of the issue;
possible approaches in addressing the issue;
the preliminary views of its authors or the IASB; and
an invitation to comment

This approach may differ if another accounting standard-setter develops the research paper.
Discussion papers may result either from:
 a research project being conducted by another accounting standard-setter; or
 as the first stage of an active agenda project carried out by the IASB
In the first case, the discussion paper is drafted by another standard-setter and published by
the IASB. Issues related to the discussion paper are discussed in IASB meetings, and
publication of such a paper requires a simple majority vote by the IASB.
If the discussion paper includes the preliminary views of other authors, the IASB reviews the
draft discussion paper to ensure that its analysis is an appropriate basis on which to invite
public comments.
For discussion papers on agenda items that are under the IASB’s direction, or include its
preliminary views, the IASB develops the paper or its views on the basis of analysis drawn
from staff research and recommendations, as well as suggestions made by the IFRS Advisory
Council, working groups and standard-setters and presentations from invited parties.
All discussions of technical issues related to the draft paper take place in public sessions.
Stage 4: Development and publication of an exposure draft
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Publication of an exposure draft is a mandatory step in due process.
Irrespective of whether the IASB has published a discussion paper, an exposure
draft is the IASB’s main vehicle for consulting the public.
Unlike a discussion paper, an exposure draft sets out a specific proposal in the form
of a proposed standard (or amendment to an existing standard)
The development of an exposure draft begins with the IASB considering:
 issues on the basis of staff research and recommendations;
 comments received on any discussion paper; and
 suggestions made by the IFRS Advisory Council, working groups and accounting
standard-setters, and arising from public education sessions
After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft.
When the draft has been completed, and the IASB has balloted on it, the IASB publishes it
for public comment.
Stage 5: Development and publication of an IFRS
The development of an IFRS is carried out during IASB meetings, when the IASB
considers the comments received on the exposure draft.
After resolving issues arising from the exposure draft, the IASB considers whether it
should expose its revised proposals for public comment, for example by publishing a
second exposure draft.
In considering the need for re-exposure, the IASB:


identifies substantial issues that emerged during the comment period on the
exposure draft that it had not previously considered
 assesses the evidence that it has considered
 evaluates whether it has sufficiently understood the issues and actively
sought the views of constituents
 considers whether the various viewpoints were aired in the exposure draft
and adequately discussed and reviewed in the basis for conclusions.
Stage 6: Drafting the IFRS
The IASB’s decision on whether to publish its revised proposals for another round
of comment is made in an IASB meeting. If the IASB decides that re-exposure is
necessary, the due process to be followed is the same as for the first exposure draft.
When the IASB is satisfied that it has reached a conclusion on the issues arising
from the exposure draft, it instructs the staff to draft the IFRS.
Pre-ballot draft
Page 38

A pre-ballot draft is usually subject to external review, normally by the IFRIC.
Shortly before the IASB ballots the standard, a near-final draft is posted on eIFRS.
Finally, after the due process is completed, all outstanding issues are resolved, and
the IASB members have balloted in favour of publication, the IFRS is issued.
Procedures after an IFRS is issued
After an IFRS is issued, the staff and the IASB members hold regular meetings with
interested parties, including other standard-setting bodies, to help understand
unanticipated issues related to the practical implementation and potential impact of
its proposals.
The IFRS Foundation also fosters educational activities to ensure consistency in the
application of IFRSs.
After a suitable time, the IASB may consider initiating studies in the light of:



its review of the IFRS’s application,
changes in the financial reporting environment and regulatory
requirements, and
 comments by the IFRS Advisory Council, the IFRS Interpretations
Committee, standard-setters and constituents about the quality of the IFRS
Those studies may result in items being added to the IASB’s agenda.

C. THE REGULATORY FRAMEWORK – STATUTORY
Company Law
The main law governing financial statements is the Companies Act Law no. 7/2009 of
27/4/2009 relating to companies.
1.

It applies to companies both private and public.

All companies should file accounts with the Office of Registrar General.

All accounts must show a true and fair view.

IFRS and IASB standards must be adhered to.

CONCEPTS
Prior to the introduction of the Framework the following accounting concepts were used:
Going Concern

Continuity of the entity in its present form for the foreseeable
future/there is no intention to put the company into liquidation
or to drastically cut back the scale of operations

Prudence

Cautious presentation of the entity's financial position. Profits
are recognised only when realised while losses are provided for
as soon as they are foreseen

Accruals

Revenue earned in the period matched with costs incurred in
Page 39

earning it, not as money is received or paid
Consistency

There is similar accounting treatment of like items within each
accounting period and from one period to the next

Entity

That the accounts recognise the business as a distinct separate
entity from its owners

Money Measurement

Accounts only deal with those items to which a monetary value
can be attributed

Materiality

If omission, misstatement or non-disclosure affects the view
given, the item is material and disclosure is required

Substance
Form

over

Legal Recognises economic substance from legal form e.g. assets
acquired on hire purchase

Stable Monetary Unit

That the value of the monetary unit used is consistent over time

Accounting Periods

Accounts are prepared for discrete time periods

Page 40

BLANK

Page 41

Study Unit 3
Double Entry, Trial Balance, Statement of Financial Position
Contents
__________________________________________________________________________________

A. Books of Original Entry
___________________________________________________________________________
B. Nominal Ledger
___________________________________________________________________________
C. Double Entry
___________________________________________________________________________
D. The Accounting Equation
___________________________________________________________________________
E. The Statement of Comprehensive Income
___________________________________________________________________________
F. The Statement of Financial Position
___________________________________________________________________________
G. The Effects of Transactions on a Statement of Financial Position
___________________________________________________________________________
H. Capital Expenditure and Revenue Expenditure
___________________________________________________________________________
I.
Questions/Solutions
___________________________________________________________________________

Page 42

A. BOOKS
OF
ORIGINAL
ENTRY/BOOKS
ENTRY/BOOKS OF FIRST ENTRY

PRIME

In order to extract a trial balance, a Statement of Comprehensive Income and Statement of
Financial Position, the information must be posted to the accounting books. These
accounting books are known by a number of names - the books of original entry, the books of
prime entry or the books of first entry. The books of original entry comprise the following
books:
•

Sales Book

•

Sales Return Book

•

Cash Receipts Book

•

Debtors (Trade Receivables)Ledger

•

Purchases Book

•

Purchases Return Book

•

Cheque Payment Book

•

Creditors (Trade Payables) Ledger

•

Petty Cash Book

SALES BOOK: Written from Sales Invoice
Each sales invoice should be entered in the sales book as follows:
(a)

Date of invoice

(b)

Customers name

(c)

Invoice number - all sales invoices should be sequentially numbered at the printers

(d)

Total amount of invoice

(e)

Trade Receivables ledger account

(f)

Cash sale amount - if not a credit sale

(g)

Analysis columns appropriate to the various different types of sales including VAT
analysis columns - showing net goods and VAT for the respective rates and then the
analysis excluding VAT. Analysis columns can be specifically tailored to the nature of
the entity's business and transactions type. Analysis headings should only be set up for
items, which are expected to recur regularly. All other items should be analysed under
a sundry column with a brief narrative as to their nature beside that item.

The sales book should be totalled and ruled off monthly. The total should agree with the
cross tot of the analysis columns. Each month should be commenced on a new page.
A separate section should be opened in the sales book for all sales credit notes issued and
these should be dealt with in the same fashion as above in relation to recording sales invoices.
This can be a separate book, if required, known as the sales returns book.

Page 43

A sales summary may be prepared at the back of the sales book by entering the totals of both
invoices and credit notes for each month.
Example Layout of Sales Day Book:
Sales Day Book
Date

Details

Folio No.

Total

VAT

NET

CASH RECEIPTS BOOK
This book should record all monies received and lodged to the bank accounts. Each receipt
will be entered into the cash receipt book as follows:
(a)

Date received

(b)

Details of receipt i.e. from whom received

(c)

The amount of the receipt

(d)

Analysis of receipts i.e. debtors receipt, cash sales receipt and miscellaneous receipts.
Miscellaneous receipts should have a written narrative beside such receipts for
identification purposes e.g. VAT refunds etc. These miscellaneous receipts will have
no corresponding entry in the debtors’ ledger. Cash sales will be analysed in the sales
book both for the type of transaction and VAT analysis

(e)

Lodgement column - This should be the last column and should record all lodgements
made to the bank

The total of all the analysis columns at the end of each month should be equal to the total
column - excluding the lodgement column. The total column ought to agree with the total of
the lodgement column, provided daily lodgements are being made. The cash receipts book
should be totalled and ruled off monthly and each month should be commenced on a new
page.
Bank stamped lodgement slips should be retained and kept on a special file.
Example Layout of Cash Receipt Book:
Cash Receipt Book
Date

Details
Sundry
Receipts

Total Receipts A/C Ref
From DRS

Page 44

VAT

Analysis
of Col.

PURCHASES BOOK
On receipt of a purchase invoice, the invoice should be assigned an internal sequential
number. This number has no relevance to the supplier but it is a method of filing and
retrieving it, if required. All calculations, additions and extensions on the purchase invoice
should be checked. It is also a means to check that all invoices are entered into the “books”.
I.e. numbers should be sequential and it is easier to check if any are missing from the relevant
books and analysis sheets.
Each invoice should be entered in the purchase book detailing the following:
(a)

Date of invoice - i.e. date received and entered

(b)

Supplier's name

(c)

Internal sequential number of invoice

(d)

Total amount

(e)

Creditor’s ledger amount - if applicable

(f)

Analysis columns for purchase of materials by category e.g. capital expenditure, subcontract work, travel, entertainment, sundry, etc. including VAT analysis columns. The
analysis columns should show net goods and VAT at the respective rates and the
analysis excluding VAT. The VAT analysis columns will be split between items for resale and non-re-sale items and any further analysis required for the annual VAT returns.
Analysis columns will be specifically tailored to the nature of the entity's business and
the transactions type. Analysis headings should only be set up for items which are
expected to recur regularly. All other items should be analysed under a sundry column
and a brief narrative as to their nature beside that item.

The purchase book should be totalled and ruled off monthly. The total column must agree
with the cross total of the analysis columns plus the VAT column. Each month should be
commenced on a new page.
A separate section should be opened in the purchases book for all purchases credit notes
received and these should be dealt with in the same fashion as noted above related to
recording purchase invoices. This can be kept as a separate book, if necessary and called the
purchase returns book.
A purchase summary should be prepared at the back of the purchases book by entering the
total of the invoices and credit notes for each month.
Example Layout of Purchases Day Book:
Purchases Day Book
Date

Details

No.

Total

Page 45

VAT

NET

CHEQUE PAYMENTS BOOK
This records all payments made through the bank accounts. Each payment amount will be
entered into the cheque payments book as follows:
(a)

Date of cheque

(b)

Details of payment i.e. to whom payable and for what

(c)

Cheque number

(d)

Cheque total

(e)

Analysis of payment i.e. creditors payments, salaries, wages, motor expenses, etc.
Apart from payment to creditors, other payments will be made directly by cheque i.e. no
corresponding entry will exist in the purchase book or creditors ledger. The exact
analysis of items other than payments processed through the payments relating to
purchases book and the creditors’ ledger will be dependent on the nature of the
company's business and transactions. Analysis headings should only be set up for
items, which are expected to recur regularly. All other times should be analysed under
a sundry column with a brief narrative as to their nature beside that item.

It is essential that when cheques are being presented for signature that they must be
accompanied by the supporting documentation i.e. invoice, goods received note and/or
supplier’s statement. On payment, the supporting documentation should be stamped "Paid"
and initialled by the cheque signatory in order to prevent re-payment. All cheques should be
crossed "Account Payee only - non-negotiable". Suppliers’ statements should be agreed with
invoices to hand and if applicable, the creditors’ ledger balances.
The total of all the analysis columns at the end of the month should be equal to the total
column. The cheque payments should be totalled and ruled off monthly and each month
should be commenced on a new page.
Example Layout of Cheque Payments Book:
Cheque Payments Book
Date

Ch.
No.

Payee

Total
Payments
Payments to Creditors

A/C Wages Bank
Other
Ref
Interest Analysis
Charges
Columns

DEBTORS (Trade Receivables) LEDGER/SALES LEDGER
A debtors’ (trade receivables) ledger is used to keep a record of all amounts due to the
company in respect of sales made. A loose-leaf type ledger would be the appropriate form to
operate. An account should be maintained for each debtor (trade receivables) - including
debtors (trade receivables) in foreign currencies, if any. An index at the front of the ledger
can record the debtors’ name.
All sales to customers should be posted from the sales book to the DEBIT side of the
individual accounts involved. Each entry should show the date, the description i.e. goods or
services, the invoice number, the sales book reference and the amount - including VAT.

Page 46

All returns from customers should be posted from the sales return book on the CREDIT side
of the individual accounts involved. Each entry should show the date, the description, the
credit note number, the sales returns book reference and the amount, including VAT.
Any receipts from debtors (trade receivables) should be posted from the debtors’ (trade
receivables) columns in the cash receipts book on the CREDIT side of the individual
accounts involved. Each entry should show the date received, description i.e. cash or cheque,
the cash receipts book reference and the amount received.
A list of balances should be maintained periodically and this list should show the amount due
by debtors (trade receivables) to the company at that date.
A control account should be maintained at the front of the ledger to which the total sales,
total credits and total receipts for each month should be posted. The balance on this control
account at the end of every month should agree with the total of the debtors’(trade
receivables) balances at that date.
CREDITORS (Trade Payables) LEDGER/PURCHASES LEDGER
A creditors’ (trade payables) ledger is used to keep a record of all amounts due by the
company in respect of purchases made. Initially, a creditor’s ledger account should only be
opened where the amounts involved are relatively large or for a supplier where transactions
are expected to recur on a regular basis. At a later date, when the overall volume of
transactions increases, to maintain a control, all purchases may be processed through the
creditors’ (trade payables) ledger whether for cash/cheque or credit. A Creditor’s Ledger is
useful to analyse from whom purchase are made, how often and how much
A loose-leaf type ledger would be the appropriate form to operate. An account should be
maintained for each creditor - including foreign currency creditors. An index at the front of
the ledger can record the creditors’ (trade payables) name.
All purchases from suppliers should be posted from the purchase book to the CREDIT side of
the individual account involved. Each entry should show the date of the purchase, the
description i.e. goods or services, the internal reference number, the purchase book reference
and the amount, including VAT.
All returns to customers should be posted from the purchases returns book on the DEBIT side
of the individual accounts involved. Each entry should show the date, the description, the
credit note number, the purchases returns book reference and the amount, including VAT.
Any payments to creditors (trade payables) should be posted from the creditor columns in the
cheque payments book on the DEBIT side of the individual accounts involved. Each entry
should show the date paid, description i.e. cash or cheque, the cheque number, the cheque
payments book reference and the amount paid.
A list of balances should be maintained periodically and this list should show the amount due
to creditors by the company at that date.
A control account should be maintained at the front of the ledger to which the total
purchases, total credits and total payments for each month should be posted. The balance on

Page 47

this control account at the end of every month should agree with the total of the creditors
(trade payables) balance at that date.
PETTY CASH BOOK or PETTY CASH ACCOUNT
This should record all cheques drawn to fund petty cash. These should be recorded as
receipts in the petty cash book. Furthermore, a full record should be kept, with supporting
documentation, of all disbursements made out of petty cash. These disbursements should be
analysed under appropriate columns as follows:
(a) Date
(b)

Narrative

(c)

Petty cash docket reference number

(d)

Total amount

(e)

VAT analysis split between items for re-sale and non-re-sale items recording the net
goods and VAT amount for each rate of VAT

(f)

The analysis of the nature of the disbursements will be the amount exclusive of VAT
and all probably cover headings such as postage, entertainment, travel, publications,
office requisitions, etc. and a sundry column. The sundry column is for items, which
are not expected to recur regularly and each entry in this column should have a brief
narrative as to the nature of transaction.

It is preferable that an imprest petty cash system be operated whereby a pre-set amount of
cash be introduced into petty cash, i.e. RWF100,000 and this would be topped up to the preset amount at the end of each week, or when required. The exact amount to be put into petty
cash will be determined by the volume of transaction processed through petty cash and the
amount of the individual transactions. It would be preferable to establish a maximum amount
that may be processed for any transaction through petty cash i.e. RWF10,000. Thereafter,
any amounts in excess of that amount are paid by cheque.

NOMINAL LEDGER

The information to prepare a Statement of Comprehensive Income and Statement of Financial
Position is extracted from the NOMINAL LEDGER.
The NOMINAL LEDGER is a book/record containing what are referred to as LEDGER
ACCOUNTS.
An individual LEDGER ACCOUNT shows details of transactions in relation to the various
ASSETS, LIABILITIES, EXPENSES and REVENUE.
Each account is given a separate page. The page is divided into two halves. The left-hand
side of the page is called the debit side while the right hand side of the page is called the
credit side. The title of the account is shown across the top of the account at the centre.
EXAMPLE Capital of RWF10,000 introduced into business and lodged to the Bank
Account

Page 48

BANK ACCOUNT
Debit Side
1 Jan

Capital Account

Credit Side
RWF
10,000

RWF

CAPITAL ACCOUNT
Debit Side

Credit Side
RWF
1 Jan

Bank Account

RWF
10,000

DOUBLE ENTRY
The method of bookkeeping in use is called the double entry method. It was invented in the
15th century by Luca Pacioli
1. For every debit entry, there is an equal and corresponding credit entry.
2. For every credit entry, there is an equal and corresponding debit entry.

TRIAL BALANCE
All the items recorded in all the accounts on the debit side should equal in total all the items
recorded on the credit side.
In accounting terminology to see if the two sides of the NOMINAL LEDGER agree, a
TRIAL BALANCE is drawn up.
EXAMPLE
Trial Balance
Debit
RWF
5,800
5,000
400
500
5,500
1,000

Bank
Premises
Furniture
Van
Inventory
Trade Receivables
Capital
Loan
Trade Payables
Profit & Loss

18,200

Page 49

Credit
RWF

10,000
4,000
3,250
950
18,200

C. DOUBLE ENTRY
Accounting involves the systematic interpretation of economic transactions and activities and
the communication of the results to the decision-makers.
The two basic rules relating to double entry bookkeeping are:
(a)

Debits are to the LEFT while credits are to the RIGHT in a standard ledger account.

(b)

Every DEBIT must have a CREDIT – or more specifically, the value of entries posted
to the DEBIT side must equal the value of entries posted to the CREDIT side i.e. both
sides should be equal and balance at all times.
Ledger Account
Debit Side

Credit Side

Following these rules, as the value of the total debits must be equal to the value of the credit,
then
Assets = Liabilities and Capital

D. THE ACCOUNTING EQUATION
The resources of a firm are known as ASSETS. Someone must have supplied these
resources. The total amount supplied by the owner of the business is known as CAPITAL.
Therefore, if all the resources of the business are supplied by the owner, the following must
be true:
ASSETS = CAPITAL
However, some of the assets normally have been provided by some other person than the
owner. This indebtedness of a firm is referred to as LIABILITIES. Therefore, the equation
is now referred to as
ASSETS = CAPITAL + LIABILITIES
or
ASSETS - LIABILITIES = CAPITAL
This equality of assets with the total of capital and liabilities will always hold true.
ASSETS are made up of items such as PREMISES, PLANT and MACHINERY, MOTOR
VEHICLES, FIXTURES and FITTINGS, etc.
LIABILITIES are made up of money owing for goods purchased, for expenses incurred and
loans received by the firm, etc.
CAPITAL refers to the owners’ EQUITY or NET WORTH.
Page 50

EXERCISE
T. Chahine. starts a business. Before he actually starts to sell anything he has bought the
following:
Fixtures RWF2,000, Motor Vehicle RWF5,000 and stock of RWF3,500. Although he has
paid in full for the fixtures and motor vehicle, he still owes RWF1,400 for some of the goods.
J. Ayim. has lent him RWF3,000, which is payable within 1 year. T. Chahine., after the
above, has RWF2,800 in the business bank account and RWF100 cash in hand.
You are required to prepare a Statement of Financial Position of the business.
T. Chahine.
Statement of Financial Position As At …
RWF
Non-current Assets
Fixtures
Motor Vehicle

RWF

2,000
5,000
7,000

Current Assets
Stock
Bank
Cash

3,500
2,800
100
6,400
13,400
9,000

Capital (Balancing Figure)
Current Liabilities
Trade Payables
Loan

1,400
3,000
4,400
13,400

THE STATEMENT OF COMPREHENSIVE INCOME

The Statement of Comprehensive Income shows details how the PROFIT or LOSS of a
period has been made.
THERE ARE TWO COMPONENTS PARTS:
•

THE TRADING ACCOUNT:
This shows the GROSS PROFIT for the account period.
The GROSS PROFIT is the difference between:
SALES and COST OF GOODS SOLD

•

THE PROFIT AND LOSS ACCOUNT:
This shows the NET PROFIT for the period.
NET PROFIT = GROSS PROFIT plus INCOME FROM OTHER SOURCES less
EXPENSES
Page 51

EXAMPLE
HORIZONTAL FORMAT
Statement of Comprehensive Income for year ended 31st December 20X0
RWF
11,300
29,100
20,300
60,700

Opening Inventory
Purchases
Gross Profit

RWF
50,000
10,700

Sales
Closing Inventory

60,700

Statement of Comprehensive Income for year ended 31st December, 20X0
RWF
Administration
Expenses:
Salaries/Wages
Rent and Rates
Depreciation

RWF
20,300

Gross Profit
8,300
3,200
1,100

Financial Expenses:
Bad Debts
Selling & Distribution
Expenses:
Travelling
Advertising
NET PROFIT

RWF

12,600
200

210
1,000

1,210
6,290
20,300

20,300

EXAMPLE
VERTICAL FORMAT
Statement of Comprehensive Income for year ended 31st December, 20X0
RWF
Sales
Opening Inventory
Purchases

RWF
50,000

11,300
29,100
40,400
(10,700)

Closing Inventory
Cost of Sales
Gross Profit
Expenses:
Administration Expenses:
Salaries and Wages
Rent and Rates
Depreciation

RWF

(29,700)
20,300

8,300
3,200
1,100
Page 52

12,600

Financial Expenses:
Bad Debts
Selling & Distribution Expenses:
Travelling Expenses
Advertising

200

210
1,000

1,210
(14,010)
6,290

Net Profit
EXERCISE: PLB LIMITED

Statement of Comprehensive Income: Basic
The following list of balances has been extracted from the ledger of PLB Ltd as at 31st
December 20X2
RWF
32,279
1,978
3,271
242
785
8,437
125
16,346

Sales
Bank Interest paid
Rent and Rates
Postage and Stationery
Advertising
Salaries and Wages
Repairs and Renewals
Cost of Sales

Required:
Prepare the Statement of Comprehensive Income for the year ended 31st December, 20X2
PLB Limited
Statement of Comprehensive Income for the Year Ended 31st December 20X2
RWF
Sales
Cost of Sales
Gross Profit
Expenses:
Rent and Rates
Bank Interest
Postage and Stationery
Advertising
Salaries
Repairs

3,271
1,978
242
785
8,437
125
14,838
1,095

Net Profit

RWF
32,279
(16,346)
15,933

THE STATEMENT OF FINANCIAL POSITION

This is simply a list of all the ASSETS CONTROLLED and all LIABILITIES OWED by the
business at a particular date. It is a snapshot of the financial position of the business at a
given moment in time. In the Statement of Financial Position, assets and liabilities are subdivided into:
Page 53

Non-current Assets
An asset with a LONG LIFE acquired FOR USE IN THE BUSINESS and NOT
PURCHASED FOR RESALE
(i)

INTANGIBLE e.g. Goodwill

(ii)

TANGIBLE

(iii) FINANCIAL

e.g. Plant and machinery
e.g. Investments

Current Assets
An asset owned by the business with the INTENTION OF CONVERSION INTO CASH
within ONE YEAR. These are shown in order of LIQUIDITY – Inventory (stock, finished
and unfinished goods), Trade Receivables, Prepaid Expenses, Bank and Cash (the more
liquid, the lower down the list).
Current Liabilities
Amounts PAYABLE WITHIN ONE YEAR - Examples: Trade Payables, Accrued Expenses
Long-Term Liabilities
Amounts PAYABLE AFTER MORE THAN ONE YEAR - Examples: Debentures, Loans
Capital
This is a special type of LIABILITY, representing what is owed by THE BUSINESS to ITS
OWNERS i.e. the proprietors claim against the business. In non-commercial entities, this is
often referred to as an accumulated fund.

G. THE EFFECT OF TRANSACTIONS ON A STATEMENT OF
FINANCIAL POSITION
Any transaction completed by the owner/employees of the business will affect the business
Statement of Financial Position. The reason for this is because at all times, the golden rule is
being applied i.e. every DEBIT has a CREDIT or more precisely, the value of the DEBITS is
equal to the value of the CREDITS. For example, if the owner buys an asset with cash, the
cash balance decreases (Credit) while the non-current assets increase (Debit).
The Statement of Financial Position may be presented in one of two ways:
Horizontal Format
Example Limited
Statement of Financial Position as at 31 December 20XX

Non-current Assets
Current Assets:
Inventory
Trade Receivables

1,400
4,800

RWF
8,800 Capital:
Share Capital
Reserves
6,200 Shareholders’ Funds
Loan Capital
Current Liabilities
Trade Payables
Taxation
Page 54

RWF
3,500
3,000
6,500
3,000
3,500
2,000

5,500

15,000

Vertical Format
Example Limited
Statement of Financial Position as at 31 December 20XX
RWF
Non-current Assets
Current Assets
Inventory
Trade Receivables

RWF
8,800

RWF

1,400
4,800
6,200
15,000
3,500
3,000
6,500
3,000

Share Capital
Reserves
Shareholders
Non-current Liabilities
Current Liabilities
Trade Payables
Tax Payable

3,500
2,000

5,500
15,000

Complete the following business transactions in the pro forma Statement of Financial
Position set out below: (The solutions are set out further in this unit)
1.

The Introduction of Capital:
G. Sarr. sets himself up in business on 1 January by paying RWF10,000 into a business
bank account
Statement of Financial Position of G. Sarr. as at 1 January
ASSETS
LIABILITIES
RWF
RWF

The Purchase of an Asset by Cheque and the Incurring of a Liability:
January 2 - Purchase of premises for RWF5,000 satisfied by cheque RWF1,000 and
mortgage RWF4,000
Statement of Financial Position of G. Sarr. as at 2 January
ASSETS
LIABILITIES
RWF
RWF

Page 55

Purchase of Assets for Credit and for Cash:
January 3 - Purchase of van RWF500, on credit and office furniture RWF400 for cash
Statement of Financial Position of G. Sarr. as at 3 January
ASSETS
LIABILITIES
RWF
RWF

Purchase of asset for cash:
January 4 - Purchase of Inventory for cash RWF4,000
Statement of Financial Position of G, Sarr, as at 4 January
ASSETS
LIABILITIES
RWF
RWF

Sale of an Asset on Credit at a Profit:
January 5 - Sale of Inventory, which cost RWF1,500, for RWF2,500 on credit
Statement of Financial Position of G. Sarr. as at 5 January
ASSETS
LIABILITIES
RWF
RWF

The Payment of a Liability by Cheque:
January 6 - RWF250, being half the cost of the van, is paid by cheque
Statement of Financial Position of G. Sarr. as at 6 January
ASSETS
LIABILITIES
RWF
RWF

The Payment of an Expense by Cheque:
January 7 - Electricity bill paid, RWF50
Statement of Financial Position of G. Sarr. as at 7 January
ASSETS
LIABILITIES
RWF
RWF

Page 56

Purchase of an Asset on Credit:
January 8 - Further Inventory purchased on credit at a cost of RWF3,000
Statement of Financial Position of G. Sarr. as at 8 January
ASSETS
RWF

LIABILITIES
RWF

Collection of an Asset:
January 9 - RWF1,500 is received in part settlement of the original debt for RWF2,500
Statement of Financial Position of G. Sarr. as at 9 January
ASSETS
RWF

LIABILITIES
RWF

Solutions
1.

The Statement of Financial Position of G Sarr
Statement of Financial Position of G. S.arr as at 1 January

Cash at Bank

ASSETS
RWF
10,000 Capital

LIABILITIES
RWF
10,000

10,000

The business is separate from G. arr. as an individual. Therefore, the business has an
asset of RWF10,000 and a liability, i.e. an amount owing to a person, of RWF10,000.
In this case, the amount is owing to the proprietor, G. Sarr., and by convention is called
Capital, i.e. the amount the individual has invested in the business.
2.

Statement of Financial Position as at 2 January
Statement of Financial Position of G. Sarr. as at 2 January
RWF
Non-current Assets:
Premises
5,000 Capital
Current Assets:
Non-current Liabilities
Cash at Bank
9,000 Mortgage
14,000

RWF
10,000
4,000
14,000

The business has acquired an additional source of finance - a mortgage loan. There are
now two types of asset, fixed and current and it is important to distinguish between
them. Note that fixed or non-current assets are recorded first.
Page 57

Statement of Financial Position as at 3 January
Statement of Financial Position of G. Sarr. as at 3 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Non-current Liabilities
Van
500 Mortgage
5,900 Current Liability:
Trade Payables
Current Assets:
Cash at Bank
8,600
14,500

RWF
10,000
4,000
500
14,500

A further source of finance has arisen – Creditors (Trade Payables). As it is of a shortterm nature, it is classified separately from the other sources of finance. The assets
acquired are non-current assets and are listed in order of permanence under the heading.
A sub-total of non-current assets is always made.
4. Statement of Financial Position as at 4 January
Statement of Financial Position of G. Sarr. as at 4 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Non-current Liabilities
Van
500 Mortgage
5,900 Current Liability:
Trade Payables
Current Assets:
Inventory
4,000
Cash at Bank
4,600
14,500

RWF
10,000
4,000
500

14,500

There is no change in the sources of finance; only the assets have been deployed
differently. In the current assets, there are now two categories. (Note that the two items
are listed in reverse order for ease of convertibility to cash). The grand totals of the
Statement of Financial Position are shown on the same line.
5.

Statement of Financial Position as at 5 January
Statement of Financial Position of G. Sarr. as at 5 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Profit to date
Van
500
5,900 Non-current Liabilities
Mortgage
Current Assets:
Inventory
2,500 Current Liability:
Trade Receivables
2,500 Trade Payables
Page 58

RWF
10,000
1,000
11,000
4,000
500

Cash at Bank

4,600
15,500

15,500

An additional source of finance has been found. The profit on the transaction has been
in the business. It belongs to the proprietor and is added to his Capital Account. The
inventory has cost RWF1,500 so Inventory Account is reduced by that amount. A
credit sale means that payment will be received later. The business is owed money for
the Inventory by a debtor (trade receivables) and the amount owing, RWF2,500, is
shown as a Current Asset in Trade Receivables.

Statement of Financial Position as at 6 January
Statement of Financial Position of G. Sarr. as at 6 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Profit to date
Van
500
5,900 Non-current Liabilities
Mortgage
Current Assets:
Inventory
2,500 Current Liability:
Trade Receivables
2,500 Trade Payables
Cash at Bank
4,350
15,250

RWF
10,000
1,000
11,000
4,000
250
15,250

The liability is met by issuing a cheque. Both the cash at bank and the creditor balance
are reduced by RWF250.
7.

Statement of Financial Position as at 7 January
Statement of Financial Position of G. Sarr. as at 7 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Profit to date
Van
500
5,900 Non-current Liabilities
Mortgage
Current Assets:
Inventory
2,500 Current Liability:
Trade Receivables
2,500 Trade Payables
Cash at Bank
4,300
15,200

RWF
10,000
950
10,950
4,000
250
15,200

The expense paid out of the bank reduces the value of the business; in this case, the
profit of the period to date is reduced by the expense disbursed.

Page 59

Statement of Financial Position as at 8 January
Statement of Financial Position of G. Sarr. as at 8 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Profit to date
Van
500
5,900 Non-current Liabilities
Mortgage
Current Assets:
Inventory
5,500 Current Liability:
Trade Receivables
2,500 Trade Payables
Cash at Bank
4,300
18,200

RWF
10,000
950
10,950
4,000
3,250
18,200

The creation of the additional asset, Inventory, is matched by a corresponding increase
in trade payables, as the whole of the additional Inventory was purchased on credit.
9.

Statement of Financial Position as at 9 January
Statement of Financial Position of G. Sarr.as at 9 January
RWF
Non-current Assets:
Premises
5,000 Capital
Furniture
400 Profit to date
Van
500
5,900 Non-current Liabilities
Mortgage
Current Assets:
Inventory
5,500 Current Liability:
Trade Receivables
1,000 Trade Payables
Cash at Bank
5,800
18,200

RWF
10,000
950
10,950
4,000
3,250
18,200

The effect of the collection of the debt is to reduce one asset, the Trade Receivables,
and to increase another, cash.
From the examples given, it can be seen that even the simplest transactions effected by daily
business are reflected in the Statement of Financial Position
The above mentioned transactions can also be recorded in the nominal ledger as follows:
Note the details show where the other entry or entries can be found

Page 60

BANK A/C
DR
1 Jan
2 Jan
9 Jan

CR
Capital
Mortgage Loan
Trade Receivables

RWF
10,000
4,000
1,500

2 Jan
3 Jan
4 Jan
6 Jan
7 Jan
9 Jan

RWF
5,000
400
4,000
250
50
5,800
15,500

Premises
Furniture
Inventory
Trade Pay
Electricity
Balance c/d

15,500
9 Jan

Balance b/d

5,800

PREMISES A/C
DR
2 Jan

CR
Bank

RWF
5,000

RWF

FURNITURE A/C
DR
2 Jan

CR
Bank

RWF
400

RWF

VAN A/C
DR
3 Jan

CR
Creditor

RWF
500

RWF

INVENTORY A/C
DR

4 Jan

Bank

8 Jan

Creditor

RWF
4,000

3,000
7,000

9 Jan

Statement
Comprehensive
Income
Balance c/d

RWF
1,500

5,500
7,000

TRADE RECEIVABLES A/C
DR
5 Jan

CR
Sales

RWF
2,500

Page 61

9 Jan
9 Jan

Bank
Balance c/d

RWF
1,500
1,000

2,500
ELECTRICITY EXPENSE A/C
DR
9 Jan

RWF
50

Bank

Statement
of
Comprehensive Income

2,500
CR
RWF
50
50

CAPITAL A/C
DR

CR
RWF
1 Jan

Bank

RWF
10,000

MORTGAGE LOAN A/C
DR

CR
RWF
2 Jan

Bank

RWF
4,000

TRADE PAYABLE
A/C
DR
6 Jan
9 Jan

Bank
Balance c/d

RWF
250
3,250
3,500

3 Jan
8 Jan

Van
Inventory

9 Jan

Balance b/d

CR
RWF
500
3,000
3,500
3,250

SALES A/C
DR

CR
Statement
of
Comprehensive Income

RWF
2,500

5 Jan

Trade Receivables

2,500

RWF
2,500
2,500

STATEMENT OF COMPREHENSIVE INCOME A/C
DR

CR
Inventory
Profit c/d

RWF
1,500
1,000
2,500

Sales

2,500
Profit b/d

Electricity

50
Page 62

RWF
2,500

1,000

Profit c/d

950
1,000

1,000

The trial balance is extracted before final adjustments are made to ensure that the double
entry has so far been correctly dealt with.
G.Sarr.
Trial Balance as at 9th January
Debit
RWF
5,800
5,000
400
500
5,500
1,000

Bank
Premises
Furniture
Van
Inventory
Trade Receivables
Capital
Loan
Trade Payables
Statement of Comprehensive Income

18,200

Credit
RWF

10,000
4,000
3,250
950
18,200

CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

CAPITAL EXPENDITURE is expenditure, which results in the ACQUISITION OF NONCURRENT ASSETS or an IMPROVEMENT in their EARNINGS CAPACITY
⇒ NOT CHARGED AS AN EXPENSE in the PROFIT AND LOSS ACCOUNT
⇒ APPEARS UNDER "NON-CURRENT ASSETS" in the STATEMENT OF
FINANCIAL POSITION
REVENUE EXPENDITURE is expenditure for the purpose of either:
⇒ TRADE OR BUSINESS e.g. administration, distribution
⇒ MAINTAINING the EXISTING EARNINGS CAPACITY OF NON-CURRENT
ASSETS e.g. repairs
⇒ CHARGED to the STATEMENT OF COMPREHENSIVE INCOME IN THE
PERIOD TO WHICH IT RELATES

Effects of incorrect treatment
•
•
•

Amount of Expense
Amount of Asset
Amount of Profit (Net/Gross)

The following table shows the effect of incorrect treatment of revenue and capital
expenditure:
Page 63

Incorrect
Classification

Effect on Accounts

Effect on Net Profit

Purchase of fixed
asset treated as
revenue expenditure
Revenue expenditure
treated as a capital
item

Expense overstated
Fixed asset account
understated
Expense understated
Fixed asset account
overstated

Understated

Overstated

Effect on Statement
of Financial
Position
Capital understated
Fixed asset
understated
Capital overstated
Fixed asset
overstated

EXAMPLE
State whether each of the following items should be classified as "capital" or "revenue"
expenditure for the purpose of a trading, profit and loss account and Statement of Financial
Position:
1.

Purchase of leasehold premises

Lawyers’ fees in connection with the purchase of leasehold premises

Annual depreciation charge for the use of leasehold premises

Annual ground rent of lease

Cost of new machinery

Customs duty charged on new machinery from supplier to factory

Carriage on new machinery from supplier to factory

Cost of installing new machinery

Removal expenses

10.

Annual patent renewal fees

SOLUTION:
1.
Capital
2.

Capital

Revenue

Capital

Revenue

10.

Revenue

QUESTIONS/SOLUTIONS

Question: MR. Balewa.
Page 64

Mr. Balewa. commenced business on 1 January 20X2. All expenses were paid by cheque and
any cash received was banked daily. The following is a summary of the transactions, which
took place during the first year of trading:
(a)

On 1 January 20X2, Mr. Balewa. commenced business with RWF5,000 which he
lodged to the business bank account

(b)

During the period, total purchases amounted to RWF4,000 and payments made to
suppliers were RWF3,550. On 31 December, 20X2, RWF450 was still due to
suppliers in respect of these purchases

(c)

Sales for the year totalled RWF9,000 all on credit. Amounts received from customers
during the year were RWF8,100. On 31 December, 20X2, RWF900 was still owing
from customers

(d)

Mr B. purchased a van in December costing RWF2,500

(e)

Administration Expenses were RWF2,300 for the year

Required:
1.
Write up the ledger accounts for Mr Balewa,
2.

Extract the Trial Balance

Prepare the Statement of Comprehensive Income for the year ended 31 December,
20X2 given that the value of Inventory at 31 December 20X2 was RWF500

Prepare the Statement of Financial Position as at 31 December, 20X2

Question: MR A. Igwe.
Mr A. Igwe. commenced business as a retail butcher on 1 January 20X9. All expenses were
paid by cheque and any cash received was banked daily. The following is a summary of the
transactions, which took place during the first year of trading:
(a) On 1 January, 20X9 Mr A. Igwe. paid RWF4,000 into the business bank account
(b)

Credit sales totalled RWF8,000 - RWF6,500 was received and RWF1,500 was
outstanding at the end of the year

(c)

Cash sales amounted to RWF15,000

(d)

A delivery van was purchased on 1 January 20X9 at a cost of RWF3,900

(e)

During the period, purchases amounted to RWF7,800,. Suppliers had been paid
RWF7,200 for meat and invoices totalling RWF600 remained unpaid at 31 December
20X9

(f)

Sundry expense (all paid during the period and relating to it) amounted to RWF2,200.
During the year,
Mr A. Igwe. drew RWF2,000 from the business

(g)

The annual rent of the shop was RWF1,200 and Mr A. Igwe. paid this amount on 1
January 20X9

(h)

Mr A. Igwe. paid his assistant RWF1,900 during the year

Required:
1.
Write up the ledger accounts and cash book of Mr A. Igwe. to 31 December, 20X9
2.
Extract a Trial Balance
Page 65

3.
4.

Prepare the Statement of Comprehensive Income for the year ended 31 December 20X9
- closing Inventory at 31 December was RWF850
Prepare the Statement of Financial Position as at 31 December 20X9

Question: BSB Ltd
The following balances have been extracted from the books of BSB Limited as at the 31st
December, 20X3
RWF
2,340
2,678
2,431
5,720
10,410
348
1,279
6,000
11,292

Trade Receivables
Trade Creditors
Inventory
Equipment
Premises
Cash in hand
Bank Overdraft
Capital
Statement of Comprehensive Income
Required:
1.
Prepare a Statement of Financial Position as at 31 December 20X3
EXERCISE 1
Q.1 Which of the following is not an asset?
(a)

Buildings

(b)

Cash Balance

(c)

Trade Receivables

(d)

Loan from Mrs K. Diop.

Q.2 Which one of the following is a liability?
(a)

Machinery

(b)

Trade Payables for goods

(c)

Motor Vehicles

(d)

Cash at Bank

Q.3 Gross Profit is:
(a)

Excess of sales over cost of goods sold

(b)

Sales less purchases

(c)

Cost of goods sold plus Opening Inventory

(d)

Net profit less expenses of the period

Q.4 The descending order in which current assets should be shown in the Statement of
Financial Position are:
(a)

Inventory, Trade Receivables, Bank, Cash

(b)

Cash, Bank, Trade Receivables, Inventory
Page 66

(c)

Trade Receivables, Inventory, Bank, Cash

(d)

Inventory, Trade Receivables, Cash, Bank

Q.6

Capital expenditure is:
(a)

The extra capital paid in by the proprietor

(b)

The cost of running the business on a day-to-day basis

(c)

Money spent on buying Non-current assets or adding value to them

(d)

Money spent on selling Non-current assets

Q.7

Q.8

Working capital is:
(a)

The Trade Receivables of a business

(b)

The balance at bank of a business

(c)

The current assets less long-term liabilities of a business

(d)

The excess of current assets over current liabilities of a business
Which of the following items are shown under the wrong headings:

Assets

Liabilities

Cash at bank

Loan from J. Gowon

Fixtures

Machinery

Creditors

Motor Vehicles

Buildings

Inventory of Goods

Trade Receivables
Capital
PTT LIMITED
The following are details of the assets, liabilities at 31st December 20X0 and revenue and
expenses for the year ended 31st December 20X0 of PTT Limited which commenced
business on 1st January 20X0. The figures are presented in the form of a list of balances:RWF
Share Capital
3,500
Non-current Assets
8,800
Inventory
400
Sales
30,000
Trade Receivables
800
Cost of Sales
20,000
Trade Payables
500
Administration Expenses
3,000
Selling and Distribution Expenses
4,000
Loan Capital
3,000
PREPARE:
1.
Statement of Comprehensive Income for year ended 31st December, 20X0
Page 67

The Statement of Financial Position as at 31st December, 20X0

EXERCISE 2
Q.1 Which of the following is incorrect?
(a)

Assets - Capital = Liabilities

(b)

Liabilities + Capital = Assets

(c)

Liabilities + Assets = Capital

(d)

Assets - Liabilities = Capital

Q.2 Which of the following is incorrect?

(a)

Assets
RWF
7,850

Liabilities
RWF
1,250

Capital
RWF
6,600

(b)

8,200

2,800

5,400

(c)

9,550

1,150

8,200

(d)

6,540

1,120

5,420

Q.3 You are to complete the gaps on the following table?

(a)
(b)

Assets
RWF
55,000

Liabilities
RWF
16,900

Capital
RWF
?

17,200

34,400

(c)

36,100

(d)

119,500

(e)

88,000

?
15,400
?

(f)
?
Mr Balewa.: Pro Forma Solution

49,000

28,500
?
62,000
110,000

(a)
Capital
RWF

RWF

Purchases
RWF

RWF

Sales
RWF

RWF
Page 68

Non-current Asset – Vehicle
RWF

RWF

Administration Expenses
RWF

RWF

Bank
RWF

RWF

Trade Payables
RWF

RWF

Trade Receivables
RWF

RWF

(b)
Trial Balance
Debit
RWF

Credit
RWF

Capital
Van at Cost
Trade Receivables
Trade Payables
Bank
Sales
Purchases
Administration Expenses

RWF

Purchases
Less Closing Inventory
Cost of Goods Sold
Gross Profit
Less Expenses
Administration Expenses
Net Profit

(d)
Statement of Financial Position as at 31st December 20X2
RWF

RWF

Non-current Assets
Van
Current Assets
Inventory
Trade Receivables
Bank
Financed By:
Capital
Add: Net Profit
Current Liabilities
Trade Payables

Mr Balewa.: Solution
(a)
Capital
RWF
Bank

Creditors

Purchases
RWF
4,000

RWF
5,000

RWF

Sales
RWF
Trade Receivables

RWF
9,000

Non-current Asset - Vehicle
Bank

RWF
2,500
Page 70

RWF

Administration Expenses
RWF
2,300

Bank

RWF

Bank
Capital
Trade Receivables

RWF
5,000
8,100

Trade Payables
Van
Administration
Balance c/d

13,100

RWF
3,550
2,500
2,300
4,750
13,100

Trade Payables
Bank
Balance c/d

RWF
3,550
450
4,000

RWF
4,000

Purchases

4,000

Trade Receivables
RWF
9,000

Sales

RWF
8,100
900
9,000

Bank
Balance c/d

9,000

(b)
Trial Balance
Debit
RWF
Capital
Van at Cost
Trade Receivables
Trade Payables
Bank
Sales
Purchases
Administration Expenses

Credit
RWF
5,000

2,500
900
450
4,750
9,000
4,000
2,300
14,450

14,450

Sales
Purchases
Less Closing Inventory
Cost of Goods Sold
Gross Profit
Less Expenses
Administration Expenses
Net Profit

9,000
4,000
(500)
3,500
5,500
(2,300)
3,200

(d)
Statement of Financial Position as at 31st December 20X2
RWF
Non-current Assets
Van
Current Assets
Inventory
Trade Receivables
Bank

500
900
4,750

Financed By:
Capital
Add: Net Profit

RWF
2,500

6,150
8,650
5,000
3,200
8,200

Current Liabilities
Trade Payables

(450)
8,650

Mr A. Igwe. : Pro Forma Solution
Trade Receivables
RWF

RWF

Sales

Bank
31 December 20X9
Balance c/d

31 December 20X9
Balance b/d
Capital Account
RWF

RWF
1 Jan 20X9 Bank

Delivery Van
RWF

RWF

1 Jan 20X9 Bank
Trade Payables
Page 72

RWF

Bank
31 December 20X9
Balance c/d

Purchases

31 December 20X9
Balance b/d
Purchases
RWF

RWF

Suppliers
Sundry Expenses
RWF

RWF

Bank
Drawings
RWF

RWF

Bank
Rent
RWF

RWF

Bank
(b)
Trial Balance as at December 20X9
RWF

RWF

Bank
Trade Receivables
Capital
Delivery Van
Trade Payables
Drawings
Sales
Purchases
Sundry Expenses
Rent
Assistant’s Wages

Page 73

Cost of goods sold
Purchases
Closing Inventory on 31 December 20X9

Gross Profit
Less:
Expenses
Sundry
Rent
Assistant’s Wages
Net Profit
(d)
Statement of Financial Position as at 31st December 20X9
RWF
Non-current Assets
Delivery Van
Current Assets
Inventory
Trade Receivables
Cash at Bank

Financed By:
Proprietor’s interest
Capital at 1 January
Profit for year
Less: Drawings
Current Liabilities
Trade Payables

Page 74

RWF

Mr A. Igwe : Solution
Bank
Capital
Sales – Cash
Trade Receivables

RWF
4,000
15,000
6,500

Delivery Van
Trade Payables
Sundry Expenses
Drawings
Rent
Assistant’s Wages
31 December 20X9
Balance c/d

25,500
Balance b/d

RWF
3,900
7,200
2,200
2,000
1,200
1,900
7,100
25,500

7,100

Sales Account
RWF
Cash Sales
Trade Receivables

RWF
15,000
8,000
23,000

Assistant’s Wages
Bank

RWF
1,900

RWF

Trade Receivables
Sales

RWF
8,000

Bank
31 December 20X9
Balance c/d

8,000
31 December 20X9
Balance b/d

RWF
6,500
1,500
8,000

1,500

Capital Account
RWF
1 Jan 20X9 Bank

Page 75

RWF
4,000

Delivery Van
1 Jan 20X9 Bank

RWF
3,900

RWF

Trade Payables
Bank
31 December 20X9
Balance c/d

RWF
7,200

RWF
7,800

Purchases

600
7,800

7,800
31 December 20X9
Balance b/d

Suppliers

Purchases
RWF
7,800

600

RWF

Sundry Expenses
Bank

RWF
2,200

RWF

Drawings
Bank

RWF
2,000

RWF

Rent
Bank

RWF
1,200

RWF

(b)
Trial Balance as at December 20X9
RWF
7,100
1,500

Bank
Trade Receivables
Capital
Delivery Van
Trade Payables
Drawings
Sales
Purchases
Sundry Expenses

RWF

4,000
3,900
600
2,000
23,000
7,800
2,200
Page 76

Rent
Assistant’s Wages

1,200
1,900
27,600

27,600

The trial balance is extracted before final adjustments are made to ensure that the double
entry has so far been correctly dealt with. Drawings are amounts taken out of the business by
the owner; therefore these are deducted from the capital.
(c)
Statement of Comprehensive Income for the Year ended 31st December 20X9
RWF
RWF
Sales
23,300
Less:
Cost of goods sold
Purchases
7,800
Closing Inventory on 31 December 20X9
850
6,950
16,050
Gross Profit
Less:
Expenses
Sundry
2,200
Rent
1,200
Assistant’s Wages
1,900
5,300
Net Profit
10,750
(d)
Statement of Financial Position as at 31st December 20X9
RWF
Non-current Assets
Delivery Van
Current Assets
Inventory
850
Trade Receivables
1,500
Cash at Bank
7,100

Financed By:
Proprietor’s interest
Capital at 1 January
Profit for year

3,900

9,450
13,350

4,000
10,750
14,750
2,000

Less: Drawings
Current Liabilities
Trade Payables

BSB Ltd:

RWF

600
13,350

Pro Forma Solution

Statement of Financial Position of BSB Ltd. as at 31st December 20X3
RWF
Non-current Assets
Page 77

RWF

Premises
Equipment
Current Assets
Inventory
Trade Receivables
Cash in Hand
Financed By:
Capital
Statement of Comprehensive Income
Current Liabilities:
Creditors
Bank Overdraft

BSB Ltd: Solution
Statement of Financial Position As at 31st December 20X3
RWF
Non-current Assets
Premises
10,410
Equipment
5,720
Current Assets
Inventory
2,431
Trade Receivables
2,340
Cash in Hand
348
Financed By:
Capital
Statement of Comprehensive Income

(b)

(a)

(b)

(a)

(c)

(d)

Assets:

16,130

5,119
21,249
6,000
11,292
17,292

Current Liabilities:
Creditors
Bank Overdraft

Exercise 1:
1.
(d)

RWF

2,678
1,279

Solution

Creditors and Capital
Page 78

3,957
21,249

Liabilities: Machinery, motor vehicles and Inventory
PTT LIMITED:
Pro Forma Solution
Statement of Comprehensive Income for the year ended 31st December 20X0
RWF
RWF
Sales
Less:
Cost of Sales
Gross Profit
Less:
Administration Expenses
Selling and Distribution Expenses
Net Profit

PTT Limited
Statement of Financial Position as at 31st December 20X0
(Horizontal Layout)
RWF
Assets
Liabilities
Non-current Assets
Share Capital
Reserves (Profit for Year)
Shareholders Funds
Current Assets
Inventory
Non-current Liabilities
Trade Receivables
Current Liabilities

RWF

PTT LIMITED
Statement of Financial Position as at 31st December 20X0
(Vertical Layout)
RWF
Employment of Capital
Non-current Assets
Current Assets
Inventory
Trade Receivables
Capital Employment
Share Capital
Reserves (Revenue)
Shareholders Funds
Non-current Liabilities
Current Liabilities

PTT LIMITED:

Solution
Page 79

RWF

Statement of Comprehensive Income for the year ended 31st December 20X0
RWF
RWF
Sales
30,000
Less:
Cost of Sales
20,000
Gross Profit
10,000
Less:
Administration Expenses
(3,000)
Selling and Distribution Expenses
(4,000)
(7,000)
Net Profit
3,000
PTT Limited
Statement of Financial Position as at 31st December 20X0
(Horizontal Layout)
RWF
Assets
Liabilities
Non-current Assets
8,800
Share Capital
Reserves (Profit for Year)
Shareholders Funds
Current Assets
Inventory
400
Non-current Liabilities
Trade Receivables
800
Current Liabilities
10,000

PTT LIMITED
Statement of Financial Position as at 31st December 20X0
(Vertical Layout)
RWF
Employment of Capital
Non-current Assets
Current Assets
Inventory
400
Trade Receivables
800
Capital Employment
Share Capital
Reserves (Revenue)
Shareholders’ Funds
Non-current Liabilities
Current Liabilities

Exercise 2:
1.

(c)

RWF
3,500
3,000
6,500
3,000
500
10,000

RWF
8,800

1,200
10,000
3,500
3,000
6,500
3,000
500
10,000

Solution

Page 80

3.
(a)

RWF
38,100

(b)

51,600

(c)

7,600

(d) 104,100
(e)

26,00

(f) 159,000

Page 81

Study Unit 4
Accruals and Prepayments
Contents
__________________________________________________________________________
A.

Accruals and Prepayments
______________________________________________________________________

Questions/Solutions
______________________________________________________________________

Page 82

A. ACCRUALS AND PREPAYMENTS
The overriding criteria when preparing accounts, is that the Statement of Comprehensive
Income must give a true and fair view of the profit or loss earned for the period and that the
Statement of Financial Position must give a true and fair view of the position of the entity at a
specified date. In order to achieve this true and fair view, a number of concepts were
introduced and are followed. These are:
Going Concern

Continuity of the entity in its present form for the foreseeable
future - there is no intention to put the company into liquidation or
drastically to cut back the scale of operations

Prudence

Cautious presentation of the entity's financial position. Profits are
recognised only when realised while losses are provided for as
soon as they are foreseen

Accruals

Revenue earned in the period matched with costs incurred in
earning it, not as money is received or paid

Consistency

There is similar accounting treatment of like items within each
accounting period and from one period to the next

Entity

The accounts recognise the business as a distinct separate entity
from its owners

Money Measurement

Accounts only deal with those items to which a monetary
can be attributed

Materiality

If omission, misstatement or non-disclosure affects the view given,
item is material and disclosure is required

value

Substance over Legal Form Recognises economic substance from legal form e.g. assets
acquired on hire purchase
Stable Monetary Unit

The value of the monetary unit used is consistent over time

Accounting Periods

Accounts are prepared for discrete time periods

On examination of the definition of the "Accruals" concept - revenue earned in the period
matched with costs incurred in earning it, and not as money is received or paid - the entire
concept of accruals and prepayments is born. In other words, the profit as reported for a
period will include some invoices/expenses not yet received but the costs of which relate to
the period - accrued expenses - while some invoices cover a period of time beyond the time
frame of the present accounts – pre-payments or payments in advance.

Page 83

EXAMPLE 1
ACC LTD commenced business on 1 Jan 20X4. During the first year of trading, the
following telephone invoices were received.
TELEPHONE ACCOUNT
DR
CR
RWF
RWF
Feb
Invoice – Jan
600
31 Dec Statement
of
Comprehensive Income
Mar
Invoice – Feb
600
Apr
Invoice – Mar
600
May
Invoice – Apr
600
Jun
Invoice – May
600
Jul
Invoice – Jun
600
Aug
Invoice – Jul
600
Sep
Invoice – Aug
600
Oct
Invoice – Sep
600
Nov
Invoice – Oct
600
Dec
Invoice – Nov
600
If the account was closed now, the figure transferred to the Statement of Comprehensive
Income would be RWF6,600. However, the invoice for December has not been received. In
order to give the correct charge for telephone in the period, a journal must be posted:
DR Telephone
CR Accruals

600
600

Now, the telephone account can be closed off and the figure of RWF7,200 transferred to the
Statement of Comprehensive Income. The figure of RWF600 will appear in the Statement of
Financial Position under current liabilities. In Jan, the accrual of RWF600 is reversed DR Accruals
CR Telephone

600
600

On receipt of the invoice in January, the invoice is processed as normal.
TELEPHONE ACCOUNT
DR
CR
RWF
RWF
Feb
Invoice – Jan
600
31 Dec Statement
of 7,200
Comprehensive Income
Mar
Invoice – Feb
600
Apr
Invoice – Mar
600
May
Invoice – Apr
600
Jun
Invoice – May
600
Jul
Invoice – Jun
600
Aug
Invoice – Jul
600
Sep
Invoice – Aug
600
Oct
Invoice – Sep
600
Nov
Invoice – Oct
600
Dec
Invoice – Nov
600
Dec
Accrual – Dec
600
7,200
7,200
Page 84

Jan

Invoice – Dec

600

Jan

Accrual – Dec

600

EXAMPLE 2
ACC LTD paid an insurance bill in January 20X4, for RWF3,000, which covered assets on a
temporary basis. During the next six months, a number of other assets were included and on
30th June 20X4, the finance director negotiated the insurance premium for the following 12
months. The premium agreed was RWF7,000 for the year, which was paid immediately.
INSURANCE ACCOUNT
DR
Jan

Invoice

RWF
3,000

June

Invoice

7,000

CR
RWF
31 Dec

Statement
of
Comprehensive Income

If this account is closed now, with the costs transferred to the Statement of Comprehensive
Income, the profit or loss would be distorted by RWF3,500. To prevent this, a journal entry
is posted:
DR Prepayments
CR Insurance

3,500
3,500

The account can now be closed and the costs of RWF6,500 transferred to the Statement of
Comprehensive Income. The figure of RWF3,500 will appear in the Statement of Financial
Position under current assets. In January 20X5, the journal is reversed to ensure the cost
transferred from 20X4 is correctly accounted for in 2005.
DR Insurance
CR Prepayments

3,500
3,500

INSURANCE ACCOUNT
DR
Jan

Invoice

June

Invoice

Jan

Prepayment

RWF
3,000

31 Dec

7,000
10,000
3,500

Page 85

Statement
of
Comprehensive Income
Prepayments

CR
RWF
6,500
3,500
10,000

Accruals and Prepayments – Alternative Approach
The alternative approach to accruals and prepayments is to enter these as balancing figures in
the respective ledger accounts. These balances are then brought down in the next accounting
period.

EXAMPLE 1
TELEPHONE ACCOUNT
DR
Feb

Etc… Invoices

Dec

Balance c/d

RWF
6,600

Dec

CR
RWF
Statement
of 7,200
Comprehensive Income

600
7,200

7,200
Jan

Balance b/d

600

EXAMPLE 2
INSURANCE ACCOUNT
DR
Jan
June

RWF
3,000
7,000

Invoice/Bank
Invoice/Bank

Dec
Dec

Balance c/d
Statement
of
Comprehensive Income

10,000
Jan

Balance b/d

CR
RWF
3,500
6,500
10,000

3,500

QUESTIONS/SOLUTIONS

Questions
1.
Mr T. Jalloh.
On 1 January 20X4 the following balances, among others, stood in the books of Mr T.
Jalloh.:
(a)

Lighting, (Dr) RWF277.

(b)

Insurance, (Dr) RWF307.
During the year ended 31 December 20X4 the information related to these two
accounts is as follows:
(i)

Fire insurance, RWF960, covering the year ended 30 April was paid.

(ii) General insurance, RWF630, covering the year ended 31 August 20X5 was
paid.
Page 86

(iii) An insurance rebate of RWF55 was received on 30 June 20X4.
(iv) Electricity bills of RWF874 were paid.
(v)

An electricity bill of RWF83 for December 20X4 was unpaid as on 31
December 20X4.

(vi) Fuel bills of RWF1,260 were paid.
(vii) Stock of oil as on 31 December was RWF92.
2.

Mr J. Osie.
Mr J. Osie.’s year ended on 30 June 20X4. Write up the ledger accounts, showing the
transfers to the final accounts and the balances carried down to the next year for the
following:
(a) Stationery: Paid for the year to 30 June 20X4 RWF855; Stocks of stationery at 30
June 20X3 RWF290; at 30 June 20X4 RWF345.
(b) General expenses: Paid for the year to 30 June 20X4 RWF590; Owing at 30 June
20X3 RWF64; Owing at 30 June 20X4 RWF90.
(c) Rent and Rates (combined account): Paid in the year to 30 June 20X4 RWF3,890;
Rent owing at 30 June 20X3 RWF160; Rent paid in advance at 30 June 20X4
RWF250; Rates owing at 30 June 20X3 RWF205; Rates owing 30 June 20X4
RWF360.
(d) Motor Expenses: Paid in the year to 30 June 20X4 RWF4,750; Owing as at 30
June 20X3 RWF180; Owing as at 30 June 20X4 RWF375.
(e) Commission Receivable: Received during the year to 30 June 20X4 RWF850;
owing at 30 June 20X3 RWF80; owing as at 30 June 20X4 RWF145.
Solutions

Mr T. Jalloh.
LIGHTING & FUEL
Jan 1

Balance b/d

Dec
31
Dec
31
Dec
31

Bank (Electric)
Bank (Fuel)
Owing c/d

RWF
277

874

Dec
31
Dec
31

Statement of
Comprehensive
Income
Stock c/d

RWF
2,402

1,260
83
2,494

2,494

INSURANCE
Jan 1
Dec
31

Balance b/d
Bank (Fire)

RWF
307
960

Page 87

Jun 30
Dec
31

Bank
Statement of
Comprehensive
Income

RWF
55
1,102

Dec
31

Bank (General)

630

Dec
31

Prepaid c/d*

1,897

*Prepaid calculated:

740
1,897

Fire 4 months 960 x 4/12
General 8 months x 8/12

=
=

320
420
740

Mr J. Osie.

(a)
STATIONERY
20X3
Jul 1

Stock b/f

20X4
Jun 30

Cash & Bank

290

855
1,145

20X4
Jun 30

Jun 30

Statement of
Comprehensive
Income
Stock c/d

800

345
1,145

(b)
GENERAL EXPENSES
20X4
Jun
30
Jun
30

Cash & Bank
Owing c/d

590

20X3
Jul 1

20X4
Jun 30

Owing b/f

Statement of
Comprehensive Income

680

616
680

Cash & Bank
Rates Owing c/d

3,890
360

20X3
Jul 1

20X4
Jun 30

Jun 20
4,250
Page 88

Owing b/f
Rent
Rates
Statement of
Comprehensive
Income
Rent prepaid c/d

160
205
3,635

250
4,250

(d)
MOTOR EXPENSES
20X4
Jun 30
Jun 30

Cash & Bank
Owing c/d

4,750
375

20X3
Jul 1
20X4
Jun 30

Owing b/f
Statement of
Comprehensive
Income

5,125

180
4,945

5,125

(e)
COMMISSION RECEIVABLE
20X3
Jul 1
20X4
Jun 30

Owing b/f
Statement of
Comprehensive
Income

20X4
Jun 30
Jun 30

Cash & Bank
Owing c/d

850
145

915

995

Page 89

995

Study Unit 5
Trade Receivables, Bad Debts and Provisions
Contents
___________________________________________________________________________
A. Provisions
___________________________________________________________________________
B. Trade Receivables, Bad Debts, Bad Debts Recovered and Provision for Bad Debts
___________________________________________________________________________
C. Other Provisions
___________________________________________________________________________
D. Provisions for Discounts Allowed
___________________________________________________________________________
E. Provisions for Discounts Received
___________________________________________________________________________
F.

Question/Solutions

__________________________________________________________________________________

Page 90

PROVISIONS

Leading on from accruals and prepayments, in order to insure the accounts give a true and
fair view, certain provisions may have to be created. Examples could include:
•

Bad debts,

•

Provision for bad debts,

•

Bad debts recovered and

•

Provisions for discounts - both discount allowed and received.

TRADE RECEIVABLES, BAD
PROVISION FOR BAD DEBTS

DEBTS

RECOVERED

AND

The overriding criterion is the prudence concept - provide for all bad debts. Such bad debts
are written off as an expense in the Statement of Comprehensive Income. A provision for
bad debts is an estimate of the expense for bad debts. The amount of the initial provision is
charged to the Statement of Comprehensive Income. When a provision exists but is
subsequently increased, the amount of the increase is a charge in the Statement of
Comprehensive Income. When a provision exists and is reduced, the decrease is recorded in
Statement of Comprehensive Income as income or as a reduction in the bad debt expense.
The Statement of Financial Position must also be adjusted. The value of Trade Receivables
should be shown in the Statement of Financial Position after deducting the bad debt provision
(in full not just the change in the provision).

BAD DEBTS
When a company sells goods/services, the effect of which is to
DR Trade Receivables
CR Sales
When the cash/cheque has been received, the effect is
DR Bank
CR Trade Receivables

The company who has purchased the goods/services records these transactions as follows:
DR Purchases
CR Trade Payables
When the company makes payment to the creditor
DR Trade Payables
CR Bank

Page 91

With each sale, there is a risk associated with it - that is the risk that the money may not be
received i.e. that the debtor may not pay. From time to time, entities within an industry go
bankrupt or are put into liquidation. The result of which is that the payables may get not paid
at all or get x Rwandan Francs for every RWF1,000 due. From the suppliers' view, some
entries must be posted in the accounts to adjust for this.
EXAMPLE
BAD LTD sold goods on credit for RWF1,000 to DE Ltd. DE Ltd. subsequently went into
liquidation and BAD Ltd does not expect to receive any money. Record the transactions in
the books of BAD Ltd.
Journal Entries
On selling the goods
DR Trade Receivables – DE Ltd
CR Sales

RWF RWF
1,000
1,000

On receipt of notice of Liquidation
RWF RWF
DR Bad Debts A/C
1,000
CR Trade Receivables – DE Ltd
1,000
At the end of the period, close the Bad Debts account and transfer the expense to the
Statement of Comprehensive Income.
The net effect of this is that the asset is not being recognised and the benefit of the sale is not
recognised in the profit and loss for the period.
BAD DEBTS RECOVERED
Where the liquidator states that x Rwandan Francs in the RWF1 will be paid, prudence
prevails - profits are recognised only when realised while losses are provided for as soon as
they are foreseen - and the above journal should still be posted. On receipt of the x Rwandan
Francs, the amount can be dealt as a bad debt recovered. The journal entry is:

DR
Trade Receivables - with the
amount received
CR
Bad Debts recovered

Bank - with the amount received
CR
Trade Receivables

The amount received is posted to the trade receivables individual account twice. Once when
notification is received from the liquidator stating the amount and date when it will be paid to
acknowledge monies due and on the second time, then the actual amount is received. This is
Page 92

to ensure maximum information in relation to the trade receivables is available on the Trade
Receivables' individual account. It also complies with the prudence concept.
At the end of the period, the balance on the bad debt recovered is transferred to the Statement
of Comprehensive Income as revenue.
DOUBTFUL DEBTS
From time to time, the management of the company will review outstanding Trade
Receivables to assess their collectability. Any known bad debts are written off as described
above. Management may concede that while all known bad debts are written off, there may
be other Trade Receivables who will not pay the full debt. In these instances, a provision for
bad debts is created. There are two types of provisions:

(a)

Specific
provision

(b)

General
provision

A specific provision is created where individual accounts throughout the Trade
Receivables' ledger are identified where invoices are under dispute and either the full
amount of the invoice or part of the invoice will remain unpaid. A list of Trade
Receivables' names, together with the amount, is compiled and totalled. The total amount
is the amount to be provided by way of specific provision.
A general provision is created where no one individual account can be identified where
invoices are subject to dispute. The provision is created on a generalisation that x% of Trade
Receivable will not pay.
Irrespective of whether the provision is a specific or a general provision, the journal entries
are still the same. To create an opening provision, the journal entries are:
DR Statement of Comprehensive Income
Provision for Bad Debts
CR Provision for Bad Debts Account

–

BAD DEBT PROVISION A/C
DR
Yr 1

Balance c/d

RWF
7,000
7,000

Yr 1

Bad Debts

Yr 2

Balance b/d

CR
RWF
7,000
7,000
7,000

The balance in the Bad Debt Provision A/c is shown in the Statement of Financial Position,
under Current Assets, deducted from the Trade Receivables figure. The provision has the
Page 93

effect of reducing the asset, while the amount written off to the Statement of Comprehensive
Income ensures that the benefit of the sale is not recognised in the Statement of
Comprehensive Income for the period. This again agrees with the requirements of the
prudence concept.
In the second and subsequent years, the closing balance from the previous year becomes the
opening balance for the next year. Management must review Trade Receivables' accounts on
a yearly basis using the same criteria as described. After the review is carried out and a
figure for the final provision for bad debts is agreed, the Provision for Bad Debts Account
may comply with one of these three situations:
1.
The amount for the provision for this year agrees exactly with the provision for last
year.
2.

The amount for the provision for this year is higher than the provision for last year.

The amount for the provision for this year is lower than the provision for last year.

If the amount for this year's provision for this year agrees exactly with the provision for last
year, there is no change in the provision for bad debts account.
BAD DEBT PROVISION A/C
DR
Yr 1

Balance c/d

Yr 2

Balance c/d

RWF
7,000
7,000
7,000
7,000

CR
RWF
7,000
7,000

Yr 1

Bad Debts

Yr 2

Balance b/d

7,000
7,000

Yr 3

Balance b/d

7,000

Where the amount for the provision for this year is higher than the provision for last year.
Journal entry is:
DR Provision for Bad Debts – Statement of
Comprehensive Income
CR Provision for Bad Debts Account
BAD DEBT PROVISION A/C
DR
Yr 1

Yr 2

Balance c/d

RWF
7,000
7,000

8,000
8,000

CR
RWF
7,000
7,000

Yr 1

Bad Debts

Yr 2

Statement
of 1,000
Comprehensive Income
Balance b/d
7,000
8,000

Yr 2

Yr 3

Page 94

Balance b/d

8,000

Where the amount for the provision for this year is lower than the provision for last year.
The journal entry is:
DR Provision for Bad Debts Account
CR Provision for Bad Debts – Statement of
Comprehensive Income

BAD DEBT PROVISION A/C
DR
RWF
7,000
7,000

Yr 1

Balance c/d

Yr 2

Statement
of 1,000
Comprehensive Income
Balance c/d
6,000
7,000

Yr 2

CR
RWF
7,000
7,000

Yr 1

Bad Debts

Yr 2

Balance b/d

7,000
7,000

Yr 3

Balance b/d

6,000

The full amount of the bad debt provision is deducted from the trade receivables in the
Statement of Financial Position.
Statement of Financial Position Extract:
RWF
Current Assets
Trade Receivables
Less Bad Debt Provision

100,000
6,000
94,000

C. OTHER PROVISIONS
A company' management may provide for other costs and revenues, by way of provisions.
The most common are discount allowed and discount received but there may be others.
However, the accounting treatment will be similar throughout.
There are two types of discounts - trade discounts and cash discounts. A trade discount is a
discount which is given when the sale transaction is being completed between two parties of
the same or linked trades. A cash discount is given on settlement of the debt if settlement is
within a specified period of time. For example, two people go into a timber merchant’s yard.
One person works in the trade, the other not. The trade discount would normally be given to
the person who works in the trade while the one not working in the trade must pay the full
price. Both agree to pay immediately. Both may now get the cash discount. So, in
hindsight, the person who works in the industry gets both the trade discount and the cash
discount while the person who works outside the trade only gets the cash discount.
Irrespective of whether the discount is a trade discount or a cash discount, a company may
give a discount to their trade receivables - discount allowed - or receive a discount from their
trade payables - discount received. At period end the management must review both the

Page 95

Trade Receivables accounts and the Trade Payables accounts to estimate the amount of
discounts involved. Once agreed upon, the necessary journal entries must be made.

D. PROVISIONS FOR DISCOUNTS ALLOWED
Where a discount is being established for the first year, the journal entry is:
DR Provision for Discount Allowed – Statement of
Comprehensive Income
CR Provision for Discount Allowed Account
PROVISION FOR DISCOUNT ALLOWED A/C
DR
Yr 1

Balance c/d

RWF
1,000
1,000

Yr 1

Discount Allowed

Yr 2

Balance b/d

CR
RWF
1,000
1,000
1,000

In the second and subsequent years, the closing balance from the previous year becomes the
opening balance for the next year. Management must review Trade Receivables accounts on
a yearly basis using the same criteria as described. After the review is carried out and a
figure of a final provision for discounts allowed is agreed, the Provision for Discounts
Allowed Account may comply with one of these three situations:
1.
The amount for the provision for this year agrees exactly with the provision for last
year.
2.

The amount for the provision for this year is higher than the provision for last year.

The amount for the provision for this year is lower than the provision for last year.

The necessary adjustments apply here as with the provision for bad debts.
The full amount of the provision for discount allowed account is deducted from Trade
Receivables in the Statement of Financial Position. The provision has the effect of reducing
the Trade Receivables shown in the Statement of Financial Position.
The discount allowed provision is usually calculated as a percentage of Trade Receivables
after deducting the year end bad debt provision.
Example
The year end Trade Receivables figure for ALL Ltd was RWF20,400. You are supplied with
the following information:
(a)

A customer has been declared bankrupt owing RWF400. This is to be written off.

(b)

It has been decided that a 1% provision for discounts allowed should be made.

(c)

The provision for doubtful debts should be 3% of Trade Receivables.

(d)

The bad debts provision was RWF360.

Page 96

Solution
1.
Bad Debt Expense ... RWF400
2.

Bad Debt Provision (RWF20,400 – 400) x 3% = RWF600.

The increase in the bad debt provision is RWF600 – 360 i.e. RWF240.

The discount allowed provision is calculated as follows:
(RWF20,400 – 400 – 600) x 1% ... RWF194.

Statement of Comprehensive Income Entries
RWF
400
240
194

Bad Debt Expense (W1)
Increase in Bad Debt Provision (W3)
Increase in Discount Allowed Provision (W4)
Statement of Financial Position
RWF
20,000
(600)
(194)

Trade Receivables
Less: Bad Debt Provision
Provision for Discounts Allowed

RWF

19,206

PROVISIONS FOR DISCOUNTS RECEIVED

Where a discount provision is being set up and received for the first year, the journal entry is:
DR Provision for Discount Received Account
CR Provision for Discount Received – Statement
of Comprehensive Income
PROVISION FOR DISCOUNT RECEIVED A/C
DR
Yr 1

Yr 2

RWF
Statement
of 1,500
Comprehensive Income
1,500
Balance b/d

Yr 1

Balance c/d

CR
RWF
1,500
1,500

1,500

In the second and subsequent years, the closing balance from the previous year becomes the
opening balance for the next year. Management must review Trade Payables accounts on a
yearly basis using the same criteria as described. After the review is carried out and a figure
of a final provision for discounts received is agreed, the Provision for Discounts Received
Account may comply with, again, one of these three situations:
1.
The amount for the provision for this year agrees exactly with the provision for last
year.
2.

The amount for the provision for this year is higher than the provision for last year.

The amount for the provision for this year is lower than the provision for last year.
Page 97

If the amount for this year's provision for this year agrees exactly with the provision for last
year, there is no change in the provision for discount received account.
PROVISION FOR DISCOUNT RECEIVED A/C
DR
RWF
1,500
1,500

Yr 1

Income Received

Yr 2

Balance b/d

1,500
1,500

Yr 3

Balance c/d

1,500

Yr 1

Balance c/d

Yr 2

Balance c/d

CR
RWF
1,500
1,500
1,500
1,500

Where the amount for the provision for this year is higher than the provision for last year.
Journal entry is:
DR Provision for Discount Received Account – with the increase
CR Provision for Discount Received – Statement of
Comprehensive Income

PROVISION FOR DISCOUNT RECEIVED A/C
DR
Yr 1

Statement
Comprehensive Income

RWF
of 1,500

Yr 1

Balance c/d

1,500
Yr 2
Yr 2

Yr 3

Balance b/d
1,500
Statement
of
500
Comprehensive Income
2,000
Balance c/d

CR
RWF
1,500
1,500

Yr 2

Balance c/d

2,000

Where the amount for the provision for this year is lower than the provision for last year.
The journal entry is:
DR Provision for Discount Received Account – Statement of
Comprehensive Income
CR Provision for Discount Received Account

Page 98

PROVISION FOR DISCOUNT RECEIVED A/C
DR
Yr 1

Discount Received

RWF
1,500
1,500

Yr 2

Balance b/d

1,500

CR
RWF
1,500
1,500

Yr 1

Balance c/d

Yr 2
Yr 2

Discount Received
Balance c/d

1,500
Yr 3

Balance c/d

500
1,000
1,500

1,000

The provision for discount received account is shown in the Statement of Financial Position,
under Current Liabilities, relating to Trade Payables. The provision has the effect of reducing
the total liability due to Trade Payables.
Example of an Aged Trade Receivables Listing:

P. Red
B. Brown
G. Green
N. Blue
L. Yellow

Total
Outstandi
ng
RWF
2,000
10,000
5,000
4,000
1,500
22,500

Dec

Nov

Oct

RWF
1,000
10,000
1,000
500
500
13,000

RWF
1,000
1,500
500
3,000

RWF
1,500
1,500

Over
3
Mths
RWF
1,500
750
2,250

Over
6
Mths
RWF
750
1,000
1,750

Management may use an aged Trade Receivables Listing to assess likelihood of the debt not
being paid. A higher provision is set against long outstanding sums.

Page 99

QUESTION/SOLUTION

Question
1.

Mr N. Keita.
The books of Mr N. Keita. showed a Provision for Bad Debts amounting to RWF1,400
on 1st February 20X4. The total debts, at that date, amounted to RWF36,000 of which it
was known that RWF1,000 would not be received. It was decided to make the
Provision for Bad Debts to an amount equal to 5% of the Trade Receivables.
You are required to show:
(a) The Provision for Bad Debts Account after implementing the foregoing
transactions.
(b)

How the Trade Receivables will appear on the Statement of Financial Position.

Solution -

Mr N. Keita.
PROVISION FOR BAD DEBTS

DR
Balance c/d (W1)

RWF
1,750

1 Feb X4 Balance b/d
Statement of Comprehensive
Income

1,750

CR
RWF
1,400
350
1,750

BAD DEBTS A/C
DR
Trade Receivables

RWF
1,000

Statement of Comprehensive
Income

W1 Provision for Bad Debts
Trade Receivables
Less Bad Debts written off

CR
RWF
1,000

36,000
(1,000)
35,000

Provision required @ 5%
Provision at 1st Feb 20X4
Increase required in provision

1,750
(1,400)
350

Statement of Comprehensive Income Entries
Bad Debt Expense
Increase in Bad Debt Provision (W1)
Statement of Financial Position Extract
Page 100

RWF
1,000
350

RWF
Trade Receivables
35,000
Less: Provision for Bad Debts 5%
1,750
33,250
Statement of Comprehensive Income – Take the increase/decrease in provision to
Statement of Comprehensive Income and deduct the full amount of the provision from
Trade Receivables in Statement of Financial Position.
2.

A Business
A Business started trading on 1st January 20X6. During the two years ended at 31st
December 20X6 and 20X7 the following debts were written off to bad debts account on
the dates stated.
31
30
28
31
30

August
September
February
August
November

20X6
20X6
20X7
20X7
20X7

MR W Balewa
MR S Ayim
MR LJ Fofana
MR N Muller
MR A Orji

RWF85
RWF140
RWF180
RWF60
RWF250

On 31st December 20X6 there had been a total of trade receivables remaining of
RWF40,500. It was decided to make a provision for doubtful debts of RWF550.
On 31st December 20X7 there had been a total of trade receivables remaining of
RWF47,300. It was decided to make a provision for doubtful debts of RWF600.
You are required to show:
(a) The Bad Debts Account for each of the two years, with the provisions included in
this account.
(b)

The charges to the Statement of Comprehensive Income for each of the two years.

(c) The relevant extracts from the Statement of Financial Position as at 31st December
20X6 and 31st December 20X7.
Solution – A Business
(a)

20X6
Aug 31

MR WBalewa

Sep 30
Dec 31

MR SAyim
Provision c/d

20X7
Feb 28
Aug 31

MR LJ Fofana
MR NMuller

BAD DEBTS A/C
RWF
20X6
85
Dec
Statement
31
Comprehensive
Income
140
550
775

180
60

Page 101

20X7
Jan 1
Dec
31

Provision b/d
Statement
Comprehensive

RWF
of

775

550
540

Income
Nov 30
Dec 31

MR AOrji
Provision c/d

250
600
1,090

1,090

(b)
Statement of Comprehensive Income (Extracts)
20X6
20X7

RWF
775
540

Bad Debts
Bad Debts

20X7
Trade Receivables
Less Provision for Bad Debts

RWF
40,500
(550)
39,950

47,300
(600)
46,700

Page 102

BLANK

Page 103

Study Unit 6
Control Accounts
Contents

Control Accounts

Trade Receivables Control Account

Trade Payables Control Account

Questions/Solutions

E. Accounting for VAT
___________________________________________________________________________

Page 104

CONTROL ACCOUNTS

The two most common examples of control accounts are the sales ledger control account and
purchases ledger control account. These are sometimes known respectively as the trade
receivables ledger and the trade payables ledger control accounts.
A control account (or total account) is debited and credited with the total amounts of all
transactions which have been debited and credited in detail to individual ledger accounts. For
example, a company has 100 credit sales transactions with its Trade Receivables in a
particular period, the total of these transactions is debited to the Trade Receivables Control
account and each individual transaction is debited to the individual debtor account. The Trade
Receivables control in this instance acts as a control on the Sales ledger, since the balance on
the Trade Receivables control account at any time should equal the sum of the balances of all
individual Trade Receivables’ accounts within that ledger, and provides a check on the
accuracy of such balance. The Trade Payables Control account and the Purchases Ledger
operate in the same way.
The principle on which the control account is based is known, together with information of
the additions and deductions entered in the account, the closing balance can be calculated.
Applying this to a complete personal ledger the total of opening balance together with the
additions and deductions during the period should give the total of closing balances.
Format of Control Accounts
Sometimes considerable confusion arises over which side of the Control Accounts (i.e. Debit
or Credit) should the different aspects of the transaction be included. So it is important to
emphasise at this point that control accounts are not necessarily a part of the double entry
system. They are merely arithmetical proofs performing the same function as a trial balance
to a particular ledger.
(a)

Memorandum Accounts
It is usual to find the control accounts in the same form as an account, with the totals of
the debit entries in the ledger on the left hand side of the control account, and the totals
of the various credit entries in the ledger on the right hand side of the control account.
Therefore, the control accounts are treated as an integral part of the double entry
system, the balances of the control accounts being taken for the purpose of extracting a
trial balance. In this case the personal accounts are being used as memorandum records
only, i.e. they do not form part of the double entry system.

(b)

Self-Balancing Ledger
A self-balancing ledger is one whose balances, when extracted, form a complete trial
balance. It is obvious that the Trade Receivables and Trade Payables ledgers will not
balance, because the balances they contain will be one sided. Thus the creditor’s ledger
will comprise all credit balances, the debtors’ ledger all debit balances. The ledgers
could be made self-balancing by means of a control or total account, which would be an
extra account inserted at the back of the ledger to make it self-balancing.
Items are posted to the individual ledger accounts in the usual way, but when the
postings are complete, the total is posted to the opposite side of the control account.
Therefore, at the end of a period the balances on the control account will be equal and
opposite to the sum of balances on the ledger accounts thus proving the ledger and
Page 105

allowing a trial balance to be extracted for each ledger. The principle of check
underlying the total account is that “the whole must be equal to the sum of all its parts”.
The remainder of this note is based on the assumption that the control accounts form an
integral part of the double entry system while the individual balances on personal ledger
accounts are being used for memorandum purposes only.

THE TRADE RECEIVABLES CONTROL ACCOUNT

This account is debited with the total of Trade Receivables brought forward from the
previous period. For the period in question the account is then debited with the total of all the
items which have been debited in detail to individual personal accounts in the sales ledger,
and credited with the total of all the items which have been credited to such accounts. The
balance of the Trade Receivables control account should therefore be equal to the total of all
individual balances appearing in the sales ledgers at the end of the period.
It must be remembered that the sales ledger may contain a few accounts showing credit
balances, and the balance of the Trade Receivables control account will only represent the
differences between the total of the debit balances and the total of the credit balances (if any)
in the sales ledger. Therefore, an adjustment should be made to bring down balances on both
sides of the Trade Receivables control account.
The following is an illustration showing some of the items which will appear in the Trade
Receivables control account:
Trade Receivables Control Account
Opening Balance
Sales made during the period

RWF
i
ii

Dishonoured bills and cheques
Cash refunded to Trade Receivables
Transfers and other items
Bad Debts Recovered
Closing Credit Balances

iii
ix
RWF
x
xi

Opening Credit Balance
Cash
received
from
Receivables
Discounted allowed
Returns inwards
Bills receivable
Bad debts written off
Bad debts recovered
Transfers and other items
Closing debit balance

RWF

RWF
i
Trade
iv
vii
viii
v
vi
x
RWF
xii
RWF

Notes to Illustration
(i)

The opening balances will be brought down from the previous period, and will agree
with the total of the last list of individual Trade Receivables balances.

(ii)

The total amount of credit sales for the period will be obtained from the sales day book,
the totals of which should be posted monthly or at other regular intervals to the Trade
Receivables control account.

(iii) Dishonoured bills and cheques will be detailed in the bills receivable book, and bank
statements respectively.

Page 106

(iv) The total amount of cash received from Trade Receivables which has been posted to the
sales ledgers during the period will be obtained from the sales ledger column in the cash
book and posted to the control account at monthly or other regular intervals.
(v)

Bills receivable will be total of the bills receivable book.

(vi) Bad debts written off will be obtained from an analysis from the journal.
(vii) Discounts are totals of the discount column of the debit side of the cash book.
(viii) Returns inwards will be obtained from the totals of the returns inwards day book.
(ix) Cash refunded to Trade Receivables will be obtained from the credit side of the cash
book.
(x)

When a Bad debt is written off the balance on the receivable account is cleared to zero,
the accounting entry are:
Dr Bad Debts
Cr Trade Receivables
To record the write off of the Bad debt.
If a trade receivable subsequently repays the bad debt we need to re-instate the debt and
then record the subsequent repayment:
Dr Trade Receivable
Cr Bad Debts Recovered
To record amount to be received from debtor previously written of
Then
Dr Bank / Cash
Cr Trade Receivable
To record the receipt of payment.

(xi) Closing credit balance appears on left hand side of ledger account (debit side) and is
brought down as an opening credit balance on the right hand side of the account.
(xii) Closing debit balance appears on right hand side of ledger account (credit side) and is
brought down as an opening debit balance on the left hand side of the account.

Page 107

C. THE TRADE PAYABLES CONTROL ACCOUNT
This account operates as a control account of the purchase ledgers and should disclose a
balance equal to the total of all the individual balances in the creditor’s ledgers.
Trade Payables Ledger Control Account
Opening debit balances
Cash paid to Trade Payables
Discounts received
Bill payable accepted
Returns Outwards
Transfers and other items
Closing credit balances

RWF
i
iii
iv
v
vi
viii
xii
RWF

Opening Credit Balances
Purchases during the period
Transfers and other items
Closing debit balances

RWF
i
ii
vii
xii

RWF

Notes to Illustration
(i)

The opening balances will be brought down from the previous period, and will agree
with the total of the last schedule of individual Trade Payables balances.

(ii)

The total amount of goods purchased during the period will be obtained from the
payables ledger column in the cash book.

(iii) The total amount of cash paid to Trade Payables during the period will be obtained from
the payables ledger column in the cash book.
(iv) Discounts received will be obtained from the totals of the Discount column on the credit
side of the cash book, and from the cash discount column (if any) in the bills payable
book. If no such column is provided in the bills payable book, and the items have not
been passed through the discount column in the cash book, the total will be obtained
from analysis of the journal.
(v) Bills payable will be obtainable from the totals of the bills payable book.
(vi) Returns outwards will be obtained from the totals of the purchases returns book.
Advantages of Control Accounts
The advantages of control accounts are as follows:
(a)

For management purposes the balances on the control account can always be taken to
equal Trade Receivables and Trade Payables without waiting for an extraction of
individual balances. Management control is thereby aided, for the speed at which
information is obtained is one of the pre-requisites of efficient control.

(b)

If kept under the control of a responsible official, and not made accessible to the ledger
clerks whose duty it is to post to the Trade Receivables and Trade Payables ledgers, the
control accounts operate as a control over those ledgers, and constitute a valuable
feature of the system of internal check.

(c)

Key control accounts such as Trade Receivables, Trade Payables, bank and stock can be
agreed as an intermediate step before the extraction of a trial balance. As a result of this
the time spent in agreeing the trial balance itself should be considerably reduced.

Page 108

D. QUESTIONS/SOLUTIONS
DB Limited
The following information relates to transactions with the Trade Receivables of DB Limited
for the year-ended 31st December 20X1.
Customer

Cash/
Credit

LK & Co.
Mr. Bekker
SM Ltd.
BS Ltd.
Total

Credit
Credit
Credit
Cash

Balance
at 1st Jan
RWF
20,000
16,000
14,000

Sales
RWF
116,000
24,000
160,000
20,000
320,000

50,000

Sales
Return
RWF
8,000
2,000
10,000

Cash
Received
RWF
109,000
32,000
125,000
20,000
286,000

Discount
Allowed
RWF
3,000
1,000
4,000

The balance on Mr. Bekker account proved irrecoverable during the year and was written off.
You are asked to:
(a)

Write up the Trade Receivables ledger as at 31st December 20X1.

(b)

Prepare the Trade Receivables control account as at 31st December 20X1.

Solution DB Limited
LK & Co. Trade Receivables Account
1 Jan X1
During X1

Balance b/d
Sales

RWF
20,000
116,000

During X1
During X1
During X1
31 Dec X1

Sales Returns
Cash Received
Discount Allowed
Balance c/d

136,000
1 Jan X2

Balance b/d

RWF
8,000
109,000
3,000
16,000
136,000

16,000

Mr. Bekker Trade Receivables Account
1 Jan X1
During X1

Balance b/d
Sales

RWF
16,000
24,000

During X1
During X1
During X1

Sales Returns
Cash Received
Bad Debts

During X1
During X1
31 Dec X1

Cash Received
Discount Allowed
Balance c/d

40,000

RWF
2,000
32,000
6,000
40,000

SM Ltd. Trade Receivables
1 Jan X1
During X1

Balance b/d
Sales

RWF
14,000
160,000
174,000

1 Jan X2

Balance b/d

48,000

Page 109

RWF
125,000
1,000
48,000
174,000

Trade Receivables Control Account
RWF
50,000
300,000

Balance b/d
Sales on Credit (Note 1)

RWF
10,000
4,000
266,000
6,000
64,000
350,000

Sales Returns
Discount Allowed
Bank/Cash
Bad Debt
Balance c/d

350,000
Balance b/d

64,000

List of Trade Receivables:
RWF
6,000
48,000
64,000

LK & Company
SM Limited

Note 1: BS Ltd is a cash customer, therefore no Trade Receivables ledger account opened
and not included in the Trade Receivables control.
CC Limited
The following information relates to transactions with the Trade Payables by CC Limited for
the year-ended 31st December 20X1.
Supplier

Cash/
Credit

Mr Marx
CLO Ltd.
NAV Ltd.
JZR Ltd.

Credit
Credit
Credit
Cash

Balance
at 1st Jan
RWF
8,000
28,000
36,000

Purchases Purchases
Return
RWF
RWF
40,000
2,000
20,000
140,000
4,000
40,000
240,000
6,000

Cash Paid
RWF
34,000
12,000
130,000
40,000
216,000

You are asked to:
(a)

Write up the Trade Payables ledger as at 31st December 20X1.

(b)

Prepare the Trade Payables control account as at 31st December 20X1.

Page 110

Discount
Received
RWF
2,000
2,000
4,000

CC Limited
Mr. Marx – Trade Payables Account
During X1
During X1
During X1
31 Dec X1

Bank
Discount Received
Purchases Returns
Balance c/d

RWF
34,000
2,000
2,000
10,000
48,000

1 Jan X1
During X1

Balance b/d
Purchases

RWF
8,000
40,000

48,000
1 Jan X2

Balance b/d

10,000

Purchases

RWF
20,000

CLO Limited – Trade Payables Account
During X1
During X1

Bank
Balance c/d

RWF
12,000
8,000
20,000

During X1

20,000
1 Jan X2

Balance b/d

8,000

NAV Limited – Trade Payables Account
During X1
During X1
During X1
31 Dec X1

Bank
Discount Received
Purchases Returns
Balance c/d

RWF
130,000
2,000
4,000
32,000
168,000

1 Jan X1
Balance b/d
During X1 Purchases

RWF
28,000
140,000

168,000
1 Jan X2

Balance b/d

32,000

Trade Payables Control Account
Purchases Returns
Bank/Cash
Discount Received
Balance c/d

RWF
6,000
176,000
4,000
50,000
236,000

Balance b/d
Non-cash Purchases

RWF
36,000
200,000

236,000
Balance b/d

50,000

List of Trade Payables:
RWF
10,000
8,000
32,000
50,000

Mr Marx
CLO Limited
NAV Limited

Page 111

Control Accounts
Example 1
From the following details you are required to write up the debtors’ (trade receivables) ledger
and creditors' (trade payables) ledger control accounts for the month of January.
RWF
Trade Receivables at January 1
9,753
Trade Payables at January 1
3,456
Credit Sales for month
19,506
Credit Purchases for month
6,912
Returns Outward for month
115
Returns Inward for month
97
Cash Received from Customers
18,912
Customers Cheques Dishonoured
100
Cash Paid to Suppliers
5,814
Discount Allowed
178
Discount Received
117
Interest Charged to Customers on Overdue Accounts
5
Bad Debts Written Off
76
Accounts Settled by “Contra”
345
DR Balances in Trade Payables Ledger at January 31
28
CR Balances in Trade Receivables Ledger at January 31
49

Page 112

Solution 1
Trade Receivables Control Account
1 Jan

Balance b/d
Sales
Cheques
Dishonoured
Interest Charged
Balance c/d

RWF
9,753
19,506
100

1 Jan

5
49

Sales Returns
Cash
Discount Allowed
Bad Debts
Contra
Balance

29,413
31 Jan

Balance b/d

9,805

31 Jan

RWF
97
18,912
178
76
345
9,805
29,413

Balance b/d

Balance b/d
Purchases
Balance c/d

RWF
3,456
6,912
28

Trade Payables Control Account
1 Jan

Returns Outwards
Cash
Discount Received
Contra
Balance

31 Jan

Balance b/d

RWF
115
5,814
117
345
4,005
10,396
28

1 Jan

10,396
31 Jan

Balance b/d

4,005

Example 2
You are given the following information extracted from the books of the company.
On 1 July, 2001, trade receivables ledger balances were RWF7,560 debit and RWF32 credit,
and the trade payables ledger balances RWF4,250 credit and RWF59 debit.
During the year-ended 30th June, 20X2, sales amounted to RWF52,130; purchases to
RWF42,173; discount allowable RWF1,825; discount receivable RWF1,524; returns inwards
RWF725; returns outwards RWF520; bad debts written off RWF220; a debit balance RWF25
in Trade Payables ledger was transferred to the Trade Receivables ledger; a contra entry of
RWF1,000 was made between the ledgers in respect of T. Webb, who was a debtor of the
firm for this amount but who was also a creditor of the firm for a much larger sum, cash
received from Trade Receivables RWF48,270; cash paid to Trade Payables RWF40,250.
On 30th June, 20X2, Trade Receivables ledger balances were RWF7,643 debit, RWF nil
credit and the Trade Payables ledger balances were RWF3,126 credit, RWF34 debit.
You are required to prepare:
(a)

A Trade Payables control account for the year-ended 30th June, 20X2, and

(b)

A Trade Receivables control account for the year-ended 30th June, 20X2.
Page 113

Solution 2
Trade Receivables Control Account 30 June 20X2
Balance b/d
Sales
Contra

RWF
7,560
52,130
25

Balance b/d
Discount Allowed
Returns Inwards
Bad Debts
Contra (T Webb)
Bank
Balance

59,715
Balance b/d

RWF
32
1,825
725
220
1,000
48,270
7,643
59,715

7,643

Trade Payables Control Account 30 June 20X2
Balance b/d
Discount
Returns Outwards
Contra (T Webb)
Bank
Balance c/d

Balance b/d

RWF
59
1,524
520
1,000
40,250
3,126
46,479
34

Balance b/d
Purchases
Contra
Balance c/d

RWF
4,250
42,170
25
34

46,479
Balance b/d

3,126

Example 3
TRADE RECEIVABLES CONTROL ACCOUNT
B. Chahine maintains the control account in the nominal ledger in respect of the Trade
Receivables ledger. The net total of the balances extracted from the Trade Receivables
ledger as on 31 December 20X9 amounted to RWF12,876, which did not agree with the
balance on the Trade Receivables ledger control account. On checking the following errors
were discovered, after the adjustment of which the books balanced and the corrected net total
of the sales ledger balances agreed with the amended balance of the control account:
1.

The sales return day book had been overcast by RWF200.

A balance owing by A.Debt of RWF478 had been written off as irrecoverable on 31
December 20X9 and debited to bad debts but no entry had been made on the control
account.

No entries had been made in the control accounts in respect of a transfer of RWF360
standing to the credit of C. Sekibo’s account in the Trade Payables ledger to his account
in the Trade Receivables ledger.

A debit balance of RWF1,470 and credit balances amounting to RWF46 had been
omitted from the list of balances.

Page 114

A cheque for RWF254 received from D.I.S. had been dishonoured but the entry
recording this fact in the cash book had not been posted to D.I.S. account.

You are required (where applicable):
(a)

To amend the list of balances extracted from the personal ledger.

(b)

To set out the Trade Receivables ledger control account showing the balance before and
after the correction of the errors.
Trade Receivables Control Accounts

(a)

Calculation of Personal Ledger Balance
RWF
12,876
1,470
14,346
46
14,300
254
14,554

Original List Total
Plus debit balances omitted (4)
Less credit balances omitted (4)
Plus dishonoured cheque not posted (5)
Amended Total
(b)
Trade Receivables Ledger Control Account
31
Dec
31
Dec

Balance (balancing fig)
Sales Returns DB

RWF
15,192

31 Dec

Bad debt (D Debt)

RWF
478

200

31 Dec

C Sekibo (Contra)

360

Net Balances c/d
(as per (a) calculation)
15,392
1 Jan

Balance b/d

14,554
15,392

14,554

E. Accounting for VAT
Scope of VAT
Other than exempt goods and services, Value Added Tax (VAT) is charged on the following:
• every taxable supply in Rwanda; and
• every taxable import of goods or services.
A person is required to register by law if he or she carries on a business in Rwanda whose
turnover exceeds or is likely to exceed RWF 20 million (approximately US $34,000) in any
relevant year or RWF 5 million (approximately US $8,500) in a calendar quarter.
The tax is paid:
• in the case of taxable supply by the taxable person making the supply
Page 115

• in the case of imported goods, by the importer
• in the case of imported services, by the receiver of the service.
Goods will be deemed to be supplied outside Rwanda if their supply involves delivery to a
place outside Rwanda for the purpose of installation, processing assembly or any other
purposes whatsoever.
Services are regarded as supplied in Rwanda if the supplier of the services:
• has a place of business in Rwanda and no place of business elsewhere
• has no place of business in Rwanda or elsewhere but his usual place of residence is in
Rwanda
• has places of business in Rwanda and elsewhere but the place of business most directly
concerned with the supply of the services in question is the one in Rwanda
• has no place of business in Rwanda, has place of business elsewhere but the recipient of the
service uses or obtains the benefit of the services in Rwanda.
Where a taxable supplier does not have a business establishment or a usual place of residence
in Rwanda, the Commissioner General may require the taxable supplier to appoint a “tax
agent’’ to act on his or her behalf in matters relating to tax.
Where a supplier is deemed to have a place of supply in Rwanda and makes supplies in the
course of his business in Rwanda, then he will be liable to register and account for VAT in
Rwanda.
VAT rates
Once it is established that a supplier falls within the scope of VAT in Rwanda, it is necessary
to determine whether he or she makes taxable or non-taxable (exempt) supplies. Taxable
supplies are supplies which are subject to VAT at a rate of 0% (zero-rated) or 18% (standard
rated).
The VAT Act specifies those supplies that are classified as exempt or zero- rated supplies.
Exempt supplies are not subject to output VAT.
In the case of zero rated supplies, VAT is chargeable but at 0%. Suppliers who provide
services or goods which are zero rated are entitled to recover the input VAT they have
incurred. This is unlike exempt supplies where input VAT recovery is restricted.
Any supplies which are not specifically included in the exempt and zero rated schedules
under the VAT Act will be subject to VAT at the standard rate of 18%.
In addition to charging VAT on the sale and supply of taxable goods and services, VAT is
also payable on the importation of goods and services into Rwanda. VAT paid on the
importation of goods is treated in the same way as input VAT on local supplies i.e. can be
recovered unless restricted as set out above. On the other hand, VAT reverse charge payable
on importation of services cannot be automatically reclaimed.

VAT reverse charge
Page 116

A local recipient of services from a foreign supplier will be required to account for VAT
reverse charge at 18% of the value of the services procured. The Act further provides that the
recipient may not reclaim the corresponding input VAT unless the services so procured are
not available in the local market. This means that the cost of any services procured from
outside Rwanda will increase by 18% where the reverse charge VAT is not recoverable. The
RRA may deem services to be available in Rwanda even when the actual services procured
are of a different specification/quality standard to those available locally.
However, in respect of imported transport services, consumers of such services are allowed a
deduction of VAT reverse charge even if the services are available in Rwanda.
Time of supply
VAT on the supply of goods and services must be accounted for by reference to the tax point
rules.
The tax point for any supply will be the earliest of:
• date of supply
• date of invoice
• date of payment.
Compliance obligations
When a supplier makes a taxable supply or where he procures services from abroad for the
purposes of his business, he must charge VAT (output VAT for supplies or VAT reverse
charge for imported services) at the appropriate rate (0% to 18%) and account for it to RRA.
A supplier who is registered for VAT and incurs input VAT on business purchases is entitled
(subject to specific statutory exclusions) to reclaim the input VAT by offsetting it against the
output VAT liability.
The net liability to VAT, including VAT reverse charge must be accounted for to RRA in the
prescribed VAT declaration and relevant supporting schedules. The VAT return together with
any payment due has to be filed/ made to the RRA within 15 days following the end of the
month for which the VAT is accounted for.
From July 2010, VAT taxpayers with annual turnover of RWF 200 million (US $340,000) or
below may elect to make declarations or payments on a quarterly or monthly basis.
Failure to register as a taxable supplier, to submit the VAT return on a timely basis or
submission of an incorrect return, or failure to pay VAT due on time will render the taxpayer
liable to interest and penalties.
Input tax not deductible (Blocked VAT supplies)
Input tax is not deductible on the following supplies:

Page 117

Supply
Supply of motor cars

Business entertainment

Telephone, fuel and power services.

Exports and reverse charge

Description
VAT charged on the supply or importation of
a motor car unless the supply of the motor
car is:
• by way of hire or rental
• for purposes of resale, by a car dealer, or for
use in the course of a car hire or driving
instruction business.
VAT charged on services used or to be used
for the purpose of business entertainment
of a third party.
VAT paid on business overheads (e.g.
electricity and fuel) whose use cannot be
practically separable from private or nonbusiness is restricted to a claim of 40% of
the input tax.
VAT paid on exported goods or services
whose proceeds are not repatriated into
Rwanda.
The VAT on reverse charge applying on
imported services is not automatically
deductible as input tax unless similar services
are not available in Rwanda.

Time limit for claiming input tax
Input tax may not be deducted or credited after a period of three years from the date of the
relevant tax invoice.
Tax paid prior to registration
On registration as a taxable supplier, one may claim input tax paid in respect of goods
received up to six months prior to the date of registration.
Requirements of a valid tax invoice
All VAT registered suppliers must raise a tax invoice which includes the following:
• the word “tax invoice’’ in a prominent place
• the address and VAT registration number of the supplier
• the name, address and VAT registration number of the supplier
• the serial number of the invoice and date of issue
• the quantity or volume of the goods or services supplied
• a description of the goods or services supplied
• the selling price excluding VAT
• the total amount of VAT charged
• the selling price including VAT

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Invoices that do not include the last three items may be admissible if they contain:
• the selling price including VAT; and
• a statement that the price includes VAT, with the rate of VAT.
Simplified tax invoice
The law provides for the issue of a simplified tax invoices by a taxable supplier who makes
taxable supplies of less than RWF1,000 (US $1.7) per supply.
Exempt supplies
Supplies that are specifically exempt are as listed below:
Item
Water supply service

Description
• The main supply of clean water.
• Sewerage treatment services to protect the
environment for a non-profit motive.
Goods and services for health purposes
• The supply of health and medical services.
• Articles designed for a person with
disability.
• The supply of equipment and drugs to
hospitals and health centres.
• Supply or importation of drugs and medical
equipment made by authorised persons for
medical use, to patients and persons with
disability.
Education materials and services
• Education services provided to preprimary, primary and secondary students.
• Educational services provided by social
organisations to students and other youth,
meant for promoting the social intellectual
and spiritual development of the members
other than for profit.
• Education services provided to vocational
and other high learning institutions.
• Education material supplied directly to
learning institutions.
Books, newspapers, journals and other Certain books and newspapers are exempted
electronic equipment used as educational from VAT. However commercial services,
materials
such as advertisement provided through
newspapers and electronic media are not
exempted.
Transport services
• Transportation of persons by road in
licensed buses and coaches with a seating
capacity of 14 persons or more.
• Transportation of persons by air.
• Transportation of persons by railway.
• Transportation of persons or goods by boat.
• Transportation of goods by road.
Page 119

Lending leasing and sale

• The sale or lease of an interest in land.
• Sale of a building or part of a building, flat
or tenement meant for residential purposes.
• The renting of, or other grant of the right to
use accommodation in a building used
predominantly as a place of residence of any
person and his family, if the period
of accommodation for a continuous term
exceeds 90 days.
• The premium charged on the provision of
life and medical insurance services.
• Fees charged on the operation of current
account.
• Transfer of shares.
• Capital market transactions for listed
securities.
• Exchange operations carried out by
recognised financial institutions.
• Interest chargeable on credit and deposits.
• Operations of the National Bank of
Rwanda.
• Fees charged on vouchers and bank
instruments.
• The supply of gold bullion to a Bank .The
supply must conform to the specification of
No 71.08.2000 of the Customs Harmonised
Systems Code.
• The supply of any goods or services in the
course of a person’s burial or cremation.
• Energy saving lamps.
• Solar water-heaters.
• Wind energy systems.
• Liquefied petroleum gas, cylinders and
invertors.
• Equipment used in the supply of biogas
energy.
• Kerosene intended for domestic use
premium and gasoil.

Financial and insurance services

Precious metals

Funeral services
Energy supplies

Trade union subscriptions
Leasing of exempt goods
All unprocessed agricultural and livestock
products
Agricultural inputs and equipment
Certain goods and services imported by
persons with investment certificates
Equipment for information communication
and technology
Mobile
handsets
and
subscriber
identification module (SIM) cards
Page 120

Zero rated supplies
Item
Exports

Supplies to Privileged Persons

Description
• Export of goods from Rwanda by or on
behalf of a taxable supplier.
• The supply of services, including transport
and ancillary services which are directly
linked to the export of goods under the point
above.
• The supply of freight transport services
from or to Rwanda, including transhipment
and ancillary services that are directly linked
to the transit of goods through Rwanda to
destinations outside Rwanda.
• The supply of goods by a duty free shop.
• The supply of goods for use in aircraft
stores on flights to destinations outside
Rwanda.
• The supply of aviation fuel.
• The supply of services which are physically
rendered outside Rwanda.
• The supply, by a tour operator or travel
agent, licensed as such, to a tourist of an
inclusive tour, subject to such conditions as
the Commissioner General may require.
• Goods imported for the official purposes of
a diplomatic mission accredited by the
Republic of Rwanda.
• Supplies made under special agreements
between the Government of Rwanda and
donor(s).
• Supplies made to a Donor in Rwanda, in the
course of implementing donor funded
projects.
• Supplies or importation made under special
technical aid agreements, which are
exempted under other laws of the country.
Persons entitled to zero rating of goods
imported by them or supplies otherwise
received by them are required to pay VAT at
the time of importation or receiving the
supply and then apply for a refund of the
VAT paid.

Page 121

Study Unit 7
Bank Reconciliation Statements
Contents
_________________
A.

The Cash Book and Bank Reconciliation Statements
_________________

Bank Reconciliation Questions/Solutions
_________________

Questions/Solutions
_________________

Page 122

A. THE CASH BOOK AND BANK RECONCILIATION
STATEMENTS
The Cash Book - Introduction
Cash transactions are the simplest and most universal form of business transaction.
For example:
A sells B some goods for RWF150.
From A’s point of view, he has gained RWF150 in cash but sold the goods.
This, in book-keeping terms, is the double aspect of every transaction.
A debits “cash a/c” with RWF150 and credits “sales a/c” with RWF150.
From B’s point of view, he has decreased cash by RWF150 but has gained the goods.
In book-keeping terms, B debits “purchase account” with RWF150 and credits his “cash
account” with RWF150.
To record cash transactions, a cash book is used. By convention receipts (debits) are on the
left hand side and payments (credits) are on the right hand side.
Cash may be kept in hand or at the bank. Separate books can be kept, but usually one Cash
Book is kept for both cash and bank. It is important to differentiate between cash and bank.
Separate columns are used so that the balance of cash in hand and cash at bank can be found
as required.
Use of Cash Book
Payments:
Payments by cash are entered in the cash column on the credit side
Payments by cheque are entered in the bank column on the credit side in date and cheque
number order.
Receipts:
Receipts are normally all entered in the cash column on the debit side, then when paid into
the bank the amount banked is credited to the cash (i.e. a payment out of cash) and debited to
bank (i.e. a receipt by bank). The entries are referenced to one another in the folio column
with a “C” meaning Contra.
In some cases where bankings are made daily, the receipts can be debited straight into the
bank column.
Discount:
When payment is made within a period of credit, a cash discount is sometimes allowed. This
means, for example, that a credit of RWF100 may be settled for RWF95 if payment is made
within seven days (a 5% cash discount).

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The Book-Keeping Entry is:
Enter the amount of the cheque in the bank column (RWF95),the discount in the discount
column (RWF5), both on the credit side.
General
Balances
Cash is a material object. It is therefore a debit balance (i.e. one has some of the asset cash)
or it is a nil balance (i.e. one has none). The bank is different because one can (with the
bank’s approval) overdraw an account and thus owe the bank. The bank overdraft is shown
as a credit balance (i.e. a liability to the bank).
Autonomous Items
In the bank transactions arise which are at the instigation of persons other than the operator of
the account.
(i)

Bank Charges and Commission

(ii)

Bank Interest

(iii) Standing Orders
(iv) Credit Transfers (Bank Giro)
(v)

Returned Cheques

(vi) Direct Debits
Entries of these items must be made when notified by the bank.
Bank Reconciliation Statements – Introduction
The bank statement shows all the transactions of which the bank has knowledge, and should
normally show the same entries as the customer’s cash book. Therefore, it would be
reasonable to assume that the balance shown on the bank statement should be the same as the
bank balance in the cash book at any given date. In practice, you will find that they seldom
agree.
The main reason (apart from errors) for the difference is that either the bank statement or the
cash book is not up to date. The purpose of a bank reconciliation statement is to reconcile
differences due to this cause. It can then be seen whether or not there are any errors.
Differences
There are two types of differences:
Items in Cash Book Not on Bank Statement
Items on Bank Statement Not in Cash Book

Items that are in the cash book but have not yet reached the bank’s records: These items are
either cheques drawn but not yet presented for payment by the payee (un-presented cheques),
or cash and cheques paid into the bank but not yet recorded on the bank statement
Page 124

(lodgements not credited). To find these items, all entries in the cash book (bank) are ticked
to the items of the bank statement, any entries left in the cash book are either errors or the
items mentioned above. Errors in the cash book must first be corrected by entries in the cash
book. The un-presented cheques and the lodgements not credited will appear in the
reconciliation.
Autonomous Items
These items were mentioned in the cash book note. They will appear on the bank statements,
but not all of them will appear in the cash book. After the cash book and statement have been
ticked, these items will appear as unchecked on the bank statement. After their authenticity
has been checked, they must be put into the cash book by suitable entries.
Examples of these items would be:
(i)
(ii)
(iii)
(iv)
(v)

Bank Interest
Bank Charges
Standing Orders
Direct debits
Giro Credits

Procedure
Check that all bank statements are there.
On the bank statement, underline the last entry of the date on which the reconciliation is to be
made.
Taking the debit side of the cash book, tick all the items to the credit side of the bank
statements. By observation of dates and adding items together as necessary, it can be ensured
that the items ticked are the same items.
Taking the credit side of the cash book, tick all the items to the debit side of the bank
statement. By observation of dates and cheque numbers it is usually possible to ensure that
the items ticked are the same items.
Any errors and/or omissions must be written in to the cash book.
The reconciliation can now be written out. It starts with the balance per the bank statement
and ends with the balance in the cash book (bank).
Lodgements not credited are added to the balance at bank as if they have been credited by the
bank. Conversely, lodgements not credited are deducted from a bank overdraft as, if they had
been credited by the bank and as if the bank overdraft had fallen.
Un-presented cheques are deducted from a balance at bank, but added to a bank overdraft.

Page 125

B. BANK RECONCILIATIONS STATEMENTS
QUESTIONS/SOLUTIONS
B Bank
The bank columns in B Bank’s cash book for the month of September were as follows:
Sept 1
Sept 9
Sept 15
Sept 29
Sept 30

Balance b/d
G Cawood
B Clase
G Grayling
H Hall

RWF
420
50
220
80
45

Sept 5
Sept 10
Sept 17
Sept 28
Sept 28
Sept 30
Sept 30

L Laas
Wages
G Malan
G Wilson
A White
Petty Cash
Balance c/d

815
Oct 1

Balance b/d
325
The bank statements showed B Bank’s account was as follows:
Dr

Sept 1
Sept 8
Sept 10
Sept 10
Sept 17
Sept 19
Sept 30

RWF
80
130
40
120
80
40
325
815

843
SNDS
844
SNDS
845
848

80.00
50.00
130.00
220.00
40.00
40.00

You are required to prepare a statement reconciling the balance as 30th September.

Page 126

Balance
420.00
340.00
390.00
260.00
480.00
440.00
400.00

Bank Reconciliations
B BANK
Bank Reconciliation Statement as at 30th September
RWF
Balance per Bank Statement
Add:
Lodgements not credited:
Sept 29
G Grayling
Sept 30
H Hall

RWF
400

80
45
125

Less:

Cheques drawn but not presented
Sept 28
G Wilson
Sept 28
A White

120
80
200

Balance per Cash Book at 30th September

RWF325

C Count
The Bank columns in C Count’s cash book for the month of June were as follows:
June

1
3
5
7
11
13
20
22
29
29

Balance b/d
D Brink
T Geyer
W Dafel
Z Mann
S Shaw
V Jones
NCA Ltd
S X Ltd
B Buys

RWF
240
320
64
27
169
82
79
300
210
450

July

Balance b/d

899

June

3
4
8
9
14
17
29
30
30
30

Wages
S Nell
W Wiese
B Jacob
Petty Cash
Wages
J T Ltd
C Cleef
N Mouy
Balance c/d

RWF
137
62
55
325
20
145
167
47
84
899

The statement received from the bank for the month of June showed the following entries:
Dr
RWF
June 1
June 3
June 6
June 10
June 10
June 10
June 11
June 12
June 14
June 15
June 17
June 24
June 28

Brought Forward
094
SNDS
097
095
SNDS
096
SNDS
098
SNDS
099
SNDS
CHGS

Cr
RWF

137.00
384.00
325.00
62.00
27.00
55.00
169.00
20.00
82.00
145.00
379.00
22.00

Page 127

Balance
RWF
240.00
103.00
487.00
100.00
127.00
72.00
241.00
221.00
303.00
158.00
537.00
515.00

STEP 1
C Count
Cash Book
RWF
899.00

June 30 Balance b/f

June
28
June
30

Charges

RWF
22.00

Balance c/d

877.00

899.00
July 1

Balance b/d

899.00

877.00

Step 2
Bank Reconciliation at 30th June 20X1
RWF
Balance per Bank Statement
Add:
Lodgements not credited:
June 29 S X Ltd
June 29 B Buys

RWF
515

210
450
660
1,175

Less:

Cheques drawn but not presented
June 29 J T Ltd
June 30 C Cleef
June 30 N Mouy

167
47
84
298
877

Balance as per Cash Book

C. QUESTIONS/SOLUTIONS
Questions
1.

A Mostert
You are given the following information extracted from the records of A Mostert.
Cash Book Details: Bank
Dr

1 Dec
2 Dec
2 Dec
10
Dec
14
Dec
21
Dec
23
Dec

Cheque
No

RWF
16,491
962
1,103
2,312

1 Dec
6 Dec
14 Dec
17 Dec

Alice
David
Pascal
Chantal

782
783
784
785

RWF
857
221
511
97

Delta & Co

419

24 Dec

Joseph

786

343

EHO Ltd

327

29 Dec

Rent

787

260

Cash Sales to Bank

529

31 Dec

Balance
c/d

Total b/f
ABE Ltd
BKR Ltd
CHR Ltd

Page 128

19,973

30
Dec

George

119
22,262

22,262

P B Ltd.
Bank Statement
A Mostert
Detail
Balance
Forward
836780
Remittance
836782
Charges
836781
Counter Credit
Standing Order
836783
Remittance
836784
Counter Credit
Remittance
Counter Credit
836786
310923

Payments

Lodgements

426
176
857
47
737
2,065
137
212
2,312
511
419
327
528
343
297

Date
1 Dec

Balance
17,478

2 Dec
2 Dec
5 Dec
5 Dec
6 Dec
6 Dec
10 Dec
11 Dec
13 Dec
17 Dec
17 Dec
23 Dec
24 Dec
28 Dec
30 Dec

17,052
17,228
16,371
16,334
15,587
17,652
17,515
17,303
19,615
19,104
19,523
19,850
20,378
20,035
19,738

You are required to:
(a) From the above data, correct the cash book and prepare a bank reconciliation as at
31st December.
(b)

List the reasons for preparing such a statement.

(c)

Comment briefly upon any aspects of your reconciliation which might require
further investigation.

Page 129

Mr Rabe
On 15th May 20X8, Mr Rabe received his monthly bank statement for the month ended
30 April 20X8. The bank Statement contained the following details.
Statement of Account with Money Limited
All values are in thousands

Date

Particulars

1 April
2 April
3 April
6 April
6 April
9 April
10 April
12 April
17 April
20 April
23 April
23 April
25 April
27 April
30 April

Payments
RWF

Balance
236127
Bank Giro Credit
236126
Charges
236129
427519 DD ESB
236128
Standing Order
Sundry Credit
236130
236132
Bank Giro Credit
Sundry Credit
236133

Receipts
RWF

210.70
192.35
15.21
12.80
43.82
19.47
111.70
32.52
249.50
77.87
59.09
21.47
304.20
71.18

Balance
RWF
1,053.29
842.59
1,034.94
1,019.73
1,006.93
963.11
943.64
831.94
799.42
1,048.92
971.05
911.96
933.43
1,237.63
1,166.45

For the corresponding period, Mr Rabe’s own records contained the following bank
account details:
Date

1 April
2 April
18
April
24
April
30
April

Detail

Balance
Sales
Sales
Sales
Sales

RWF

Date

827.38
192,35
249.50
304.20
192.80

_______
1,766.23

5 April
10 April
16 April
18 April
20 April
25 April
30 April
30 April

Detail

Purchases
Electricity
Purchases
Rent
Purchases
Purchases
Wages
Balance

Chequ
e
No.
128
129
130
131
132
133
134
c/d

RWF

111.70
43.82
87.77
30.00
59.09
71.18
52.27
1,310.40
1,766.23

Required:
(a) From the above data correct the cash book and prepare a bank reconciliation
statement.
(b)

Explain briefly which items in your bank reconciliation statement would require
further investigation.

Page 130

Solutions
1.

A Mostert
The opening balance in the bank statement and Cash book records do not agree:
RWF
17,478
16,491
987

Bank Statement
Cash Book
Difference

In practice you would have in addition to the Bank Statements and the Cash Book
records, a copy of the last Bank Reconciliation Statement. How do we explain the
above difference?
Looking at the Cash Book Records for the period we can see that the first cheque issued
in the period was number 782 but in the Bank Statement there are a number of cheques
that were issued before this number (in a previous period):
Cheque Number
836780
836781

Amount
426
737
1,163

This doesn’t fully explain the difference but if we look again at the Bank Statement and
the Cash Book Records we can see that in the Bank Statement on 2nd December there is
a lodgement of RWF176 that does not appear in the cash book records. Given that this
lodgement is at the start of the period we can assume that it was part of the difference
between the opening balances. (If you look at the other lodgements credited to the Bank
over the period you will note that the date on the Bank Statement is generally 2 to 6
days after the date in the cash book records.)
Cheque Number
836780
836781

Amount
426
737
1,163
(176)
987

Lodgement

None of these items will appear in the reconciliation for the period because they relate
to items outstanding at the end of the previous period.
CASH BOOK ACCOUNT
Balance b/d
Cheque Overstated (No. 783)

RWF
19,973
9

19,982

Page 131

RWF
Bank Charges
47
Standing Order
137
Payment no in cash book (923)
297
Error in Lodgement
1
Balance c/d
19,500
19,982

Bank Reconciliation as at 31st December
(a)
RWF
Balance as per Bank Statement
Less: Payments not presented

RWF
19,738

97
260

357
119
19,500

Add: Lodgement not yet on Statement
Balance per Cash Book
(b)

A bank reconciliation is prepared:
(i)

To provide an independent check on the legitimacy of the entries in the cash

book.
(ii)
(c)

To provide an independent check on the accuracy of cash book entries.

Aspects requiring further investigation are:
(i)

Correct amount of payment to David

(ii)

Validity of standing order – is it A Mostert?

(iii) Payment of RWF297 – Cheques are not in ‘sequence’ number.
(iv) The nature of the bank charges – why are there any at all with a current
account balance of almost RWF20,000?
2.

Mr Rabe
The opening balance in the bank statement and Cash book records do not agree:
RWF
1,053.29
827.38
225.91

Bank Statement
Cash Book
Difference
Cheque No 236127
Cheque No 236126

210.70
15.21

These cheques will not form part of the reconciliation.

Page 132

225.91

CASH BOOK ACCOUNT
Balance b/d
Bank Giro Credit
Cheque (No 130) Overstated

RWF
1,310.40
21.47
9.90

Bank Charges
Cheque (No 519)
Standing Order
Balance c/d

1,341.77

RWF
12.80
19.47
32.52
1,276.98
1,341.77

(a)
RWF
Balance as per Bank Statement
Add: Outstanding Lodgements
Less: Outstanding Cheques
236131 Rent
236134 Wages
Balance per Bank Account
(b)

30.00
52.27

RWF
1,166.45
192.80

82.27
1,276.98

Items which require further investigation are:
(i)

Authority for and nature of standing order for RWF32.52.

(ii)

Authenticity of the cheque for RWF19.47 – the cheque number would
indicate that it may have been wrongly charged by the bank.

(iii) Correct amount for cheque 236130 – is it RWF87.77 or RWF77.87?
(iv) Authenticity and nature of the bank giro credit for RWF21.47.

Page 133

Study Unit 8
Suspense Account and Journal Entries
Contents
______
A.

Suspense Accounts
______

Example
______

Errors not affecting the Trial Balance
______

Question/Solution
______

The Journal
______

Questions/Solutions
______

Page 134

A. SUSPENSE ACCOUNTS
A suspense account is a nominal ledger account which is created in two main situations:
(a)

If the trial balance does not balance the difference is placed in a suspense account; and

(b)

If the bookkeeper is unsure of the posting of one side of the double entry he may post
the debit/credit to the suspense account.

The suspense account is a temporary account. Once errors are located or the correct double
entry has been ascertained the suspense account is cleared out.

EXAMPLE

After the preparation of a trial balance, an unexplained difference of DR RWF406 remains; a
Suspense Account is opened for that amount. Subsequent investigations reveal:
(i)

RWF35 received from A. Jalloh and credited to his account has not been entered in the
bank account.

(ii)

A payment of RWF47 to M. Strauss has been credited to that account.

(iii) Discounts allowed (RWF198) and discounts received (RWF213) have been posted to
the discount accounts as credits and debits respectively.
(iv) Bank interest received of RWF111 has not been entered in the bank account.
(v)

The carriage outwards (RWF98) has been treated as a revenue item.

Required:
Prepare the Suspense Account making the entries necessary to eliminate the debit balance
there is.
SUSPENSE ACCOUNT
Balance per Trial Balance
(iii) Discounts received

RWF
406
426

(i)
(ii)
(iv)
(v)
(vi)

832

Bank Account
M Strauss
Discount Allowed
Bank Account
Carriage Outward

RWF
35
94
396
111
196
832

(i)

The double entry is not complete. It is necessary to debit bank and credit suspense
account.

(ii)

A payment to a supplier should be debited to that account but in this instance it has been
credited, it is necessary to debit the account twice or with double the amount and credit
suspense account to correct the error.

(iii) Discount allowed should be debited to the discounts account; discount received should
be credited to that account.

Page 135

To correct the error it is necessary to debit the discount account with double the amount
of the discount allowed and double the amount of the discount received, the
corresponding entries will be in the suspense account.
(iv) The double entry is not complete it is necessary to debit the bank account and credit the
suspense account.
(v)

Carriage outwards is an expense and therefore should be debited to the carriage
outwards account, to correct the error it is necessary to debit the carriage outwards
account with double the amount and credit the suspense account.

C. ERRORS NOT AFFECTING THE TRIAL BALANCE
There are six types of errors which will not affect the trial balance. These are as follows:
1.

The complete omission of a transaction.

Posting to the correct side of the ledger but to the wrong account.

Compensating errors e.g. if the sales account was added up to by RWF20 too much and
the purchases account was also added up to by RWF20 too much, then these two errors
would cancel out in the trial balance.

Error of principle – where an item is entered in the wrong class of account e.g. if a fixed
asset such as a motor van is debited to an expenses account such as the motor expenses
account.

Errors of original entry – where the original figure is incorrect yet double entry is
observed using this incorrect figure.

Complete reversal of entries – where the correct accounts are used but each item is
shown on the wrong side of the account. Suppose we received a cheque of RWF200
from D. Mare the double entry would be debit bank and credit D.Mare. In error it is
entered as debit D. Mare and credit bank.

D. QUESTION/SOLUTION
Question - Sam Horak
You act as accountant to Sam Horak. Mr Horak has requested you draw up the Statement of
Comprehensive Income for previous year’s trading together with Statement of Financial
Position. To this end he supplied you with a trial balance as at 31st December 20X3. He
pointed out, however, that the debit side of said trial balance exceeded the credit side by
RWF3,769.48. To balance the Trial Balance he opened a suspense account on the credit side.
His bookkeeper further investigated and discovered the following discrepancies:
(i)

Sale of goods to J G Ltd. was posted to sales a/c as RWF990 and not RWF99 as
originally recorded in sales day book.

(ii)

A machine was sold on 28th October to Michael Quint. The proceeds were RWF3,700.
The book value of the machine at 28th October was RWF3,970. Unfortunately when
posting the entry to machinery account the proceeds were entered as RWF4,470 and the
profit/loss computed accordingly.

(iii) Purchase of motor vehicle costing RWF3,750 was posted to purchases account.

Page 136

(iv) Purchases returns in the sum of RWF350 were posted to the debit side of purchases
returns account.
(v)

RWF760 discounts allowed posted to the credit side of the discounts received account.

(vi) Bank overdraft in the sum of RWF3,000 was entered on the incorrect side of the trial
balance.
(vii) A trade payable account in the sum of RWF1,765 entered in the incorrect side of the
trial balance.
(viii) Sale of goods in the sum of RWF78,52 was posted in error to the account of John Hugo
instead of Ernest Hugo.
(ix) Goods taken from stock in the sum of RWF1,900 were credited to the sales account
only.
(x)

Purchase of wrapping paper in the sum of RWF210.10 was included in the purchases
day book but was not posted to the relevant account in the nominal ledger.

(xi) Carriage inwards in the sum of RWF584.71 was entered on the incorrect side of the trial
balance.
You are required to draw up the suspense ledger account incorporating the relevant
adjustments.
Solution -

Sam Horak
SUSPENSE ACCOUNT

Machinery Sales
Purchase Returns
Bank Account
Trade Creditors

RWF
3,700.00
700.00
6,000.00
3,530.00

Balance
Sales Account
Sale of Machinery
Discounts Received
Drawings
Carriage Inwards
Wrapping Paper

13,930.00

RWF
3,769.48
891.00
4,470.00
1,520.00
1,900.00
1,169.42
210.10
13,930.00

Notes
1.
The posting of the motor vehicle to the purchases account is an error of principle,
if it does not affect the trial balance.
2.
The posting of the sale of goods to John Hugo’s account instead of Ernest Hugo’s
account will not affect the trial balance.

Page 137

THE JOURNAL

Introduction
A Journal, like other books of prime entry, is used to record a transaction prior to its entry in
the ledger. Since the vast majority of transactions are capable of being assigned to one or the
other of the day books, the use of the Journal is confined to items such as:
(a)

Opening and closing entries of the business.

(b)

Correcting and adjusting entries.

(c)

The purchase and sale of non-current assets.

(d)

Transfers from one account to another.

Method of Writing up the Journal
In the Journal, a memorandum is made, in the simplest possible terms, of entries to be
made in the ledger. The essential information consists of:
(a) The date
(b)

The name of the account to be debited.

(c)

The name of the account to be credited.

(d)

The amount of money.

(e)

A brief description of the transaction.

(f)

The ruling of the Journal and the method of entry are as follows:

Journal
Date
(Date)

Folio
(A/C to be debited)
(A/c to be credited)
Brief description of
transactions

Dr
Cr

Fol
Fol

DR
RWF
Amount

CR
RWF
Amount

Notes
(a) The amount to be debited appears first in the Journal by convention. Note the use of the
word “Dr”.
(b)

Each entry must be accompanied by an explanation called the “narrative”. The
narrative should contain full information as to the nature of the transaction and the dates
of contracts, minutes, resolutions, etc. giving rise to it, so that the authority for the
transaction as well as the origin of the entry will be shown.

(c)

The folio column should be entered when the transaction is posted to the ledger.

(d)

Always total up the debit and credit columns, making sure they balance.

Advantages of a Journal
The main advantages to be gained from the use of journals are:
•

The risk of omission of one or both of the entries required for each transaction is
reduced. This is particularly important where more than one ledger is kept.

Page 138

•

More information on the nature of the transaction can be recorded than is possible in the
ledger.

•

The journal affords a permanent record of the nature of important transactions which
can be referred to in future.

Important
Remember to journalise all important and unusual items. It is essential that journal entries be
written neatly and completely.
Use of Journals
Opening Entries:
When either a new set of books is opened or a new business is started, the opening entries in
the books are frequently journalised.
Example
A. Limited commenced trading on 1st April 20X4, with capital introduced of RWF5,000. He
acquired the following:
RWF
1,000
500
2,000
200

Lease of a Shop
Motor Car
Inventory
Furniture and Fixtures
Write up the opening journal entry.
Solution
JOURNAL
Date
20X4
April 1

Leasehold
Motor Vehicles
Furniture & Fixtures
Inventory
Cash
Capital

Folio

L1
M1
F1
S1
CB

1,000
500
200
2,000
1,300
_____
RWF5,000

5,000
RWF5,000

Being capital introduced and assets
acquired on commencement of trading.

Note
The balancing figure of RWF1,300 represents the cash remaining in the business.
Correction of Errors
If an error is made in the books, it is important to remember that the wrong entries should not
be deleted from the books, but instead new entries, correcting or cancelling the old, are made.
A journal is usefully employed to achieve this end.

Page 139

Example
On 10th March 20X4, it was discovered that a cheque for RWF30, paid to M. Jalloh on 1st
March, was posted in error to the account of T. Everts.
This cheque would have been wrongly debited in T. Everts’ account. To correct this, a credit
entry in his account is required, and a debit entry is required to the account of M. Jalloh, thus:
JOURNAL
Date
20X4
March 10

Folio
M. Jalloh
Dr.
T. Everts
Cheque No. ... paid to M. Jalloh on
March 1st posted in error to T. Everts,
C.B. Folio ...

J5
E3

Dr.
RWF
30

Cr.
RWF
30

Purchase/Sale of Property, Plant and Equipment
A journal is commonly used to enter the purchases of capital items so that a permanent record
of important purchases can be maintained. This record comes in useful when calculating
depreciation and computing tax.
The most common entries are:
(i)

Purchase of property, plant and equipment on credit/cash.

(ii)

Disposal of property, plant and equipment.

(iii) Scrapping of property, plant and equipment.
Transferring Items Incorrectly Posted.
The principle here is similar to the correction of errors.

QUESTIONS/SOLUTIONS

Question - E. Truter
Record the following transactions as journal entries.
(a)

Sale of a machine used by the business for RWF5,000 cash, this being the book value.

(b)

Purchase of RWF10,000 of goods on credit.

(c)

Withdrawal of RWF1,000 cash by the proprietor for his personal use.

(d)

Collection of RWF1,000 from E. Jalloh who has an account receivable with the firm.

(e)

Return of RWF2,000 of goods to a supplier because it is faulty. The supplier has
granted the firm credit for the original goods.

(f)

Payment of RWF15,000 by the business to a supplier on account of an account payable.

(g)

Purchase for machinery for RWF3,000 on credit.

(h)

Additional cash of RWF10,000 invested in the business by the proprietor.

(i)

Sale of machine for RWF2,000 on credit (at book value).
Page 140

Solution - E. Truter
Journal Entries
(a) Dr

Cash
Cr

RWF5,000
Non Current Assets

RWF5,000

To record the sale of a printing machine at book value
(b) Dr

Purchases
Cr

RWF10,000

Trade Payables

RWF10,000

To record the purchase of goods on credit
(c) Dr

Drawings
Cr

RWF1,000

Cash

RWF1,000

To record the withdrawal of cash by the proprietor
(d) Dr

Cash
Cr

RWF1,000
Trade Receivables (E Jones)

RWF1,000

To record the collection of cash from E Jones
(e) Dr

Trade Payables
Cr

RWF2,000

Purchase Returns

RWF2,000

To record the return of goods
(f) Dr

Trade Payables
Cr

RWF15,000

Cash

RWF15,000

To record a payment made to a supplier
(g) Dr

Non-Current Assets
Cr

RWF3,000

Trade Payables

RWF3,000

To record the purchase of machinery on credit
(h) Dr

Cash
Cr

RWF10,000
Capital

RWF10,000

To record additional cash invested in the business by the proprietor
(j)

Trade Receivables
Cr

RWF2,000

Non-Current Assets – Net Book Value

To record the sale of a machine at book value on credit

Page 141

RWF2,000

Question - Jean Claude
Jean Claude’s trial balance failed to agree on 31/12/20X4 and he entered the difference in a
suspense account. On examination of the books the following errors were revealed.
(i)

Interest paid by Jean Claude RWF100 had been entered on the incorrect side of the
interest account.

(ii)

Bank charges RWF15 entered correctly in the cash book had not been posted to the
ledger.

(iii) A payment of RWF140 for repairs to motor vehicles had been debited to the motor
vehicles account.
(iv) A cheque for RWF96 received from a debtor M. Otto, had been entered correctly in the
cash book but credited to the trade receivables account as RWF69.
(v)

Goods sold on credit for RWF180 had not been entered in the books.

(vi) The purchases day book had been over-cast by RWF25.
You are required to:
(a)

Journalise the necessary corrections.

(b)

Show the Suspense Account.

(c)

Calculate the correct net profit if the original figure was RWF9,800.

Solution - Jean Claude
Journal
DR
(a) (i)

Interest Account

200

Suspense Account

200

To reverse posting to incorrect side of interest account
(ii)

Bank Charges Account

Suspense Account

To post amount omitted
(iii) Motor Repairs Account

140

Motor Vehicles Account

140

To correct error of posting to incorrect Account
(iv) Suspense Account

M Otto (debtor)

To correct error of crediting trade payables with RWF69 instead of RWF96
(v)

Trade Receivable Account

180

Sales Account

180

Correction of omission of sale

Page 142

(vi) Suspense Account

Purchases Account

Correction of error whereby purchases were overstated
(b)
JEAN CLAUDE – SUSPENSE ACCOUNT
Difference in Trial
Balance
M Otto (debtor)
Purchases

RWF
163
(iv)
(iv)

27
25
215

Interest

(i)

RWF
200

Bank Charges

(ii)

15
215

Net Profit as originally calculated
Add: Sales understated
Purchases overstated

Less: Interest understated
Bank charges understated
Motor repairs understated
Corrected Net Profit for
Year

(v)
(vi)

180
25

(i)
(ii)
(iii)

200
15
140

205
10,005

(355)
9,650

Question - J. Kemp
Having prepared the Trial Balance of J. Kemp for year-ended 31st January 20X4 you discover
that it does not balance and, pending later investigation, you place the difference in a
suspense account. You prepare Final Accounts, which show a net profit of RWF8,735. Your
investigations reveal the following:
(i)

A refund of rates RWF150 had been debited to the rates account.

(ii)

A payment of RWF750 for motor expenses had been debited to motor vehicles account.

(iii) A payment of RWF538 for cash purchases had been credited to the purchase account as
RWF358.
(iv) The sales book had been under-cast by RWF1,000.
(v)

Discounts received RWF750 had been debited to discounts allowed account.

(vi) A payment to trade payable P. Henning of RWF690 had been debited to the purchases
account.
(vii) An invoice for stationery RWF365 had been debited to purchases account.

Page 143

Required:
(a)

The journal entries for the above.

(b)

Show entries in the suspense account.

(c)

Show your calculation of the corrected net profit.

Solution - J. Kemp
Journal Entries
DR
(a) (i)

Suspense

300

Rates 2 x 150

300

Being correction of error; rates refund debited to rates account
(ii)

Motor Expenses

750

Motor Vehicles

750

Being correction of error; payment for motor expenses posted to motor vehicles
(iii) Purchases

896

Suspense

896

Being correction of error; payment of RWF538 for purchases posted to credit side
as RWF358
(iv) Suspense

1,000

Sales

1,000

Being correction of error; the sales book had been under cast by RWF1,000

DR
(v)

Suspense

1,500

Discounts Allowed

750

Discounts Received

750

Being correction of error; discounts received RWF750 debited to discounts
allowed
(vi) Trade Payables (P Henning)

690

Purchases

690

Being correction of error; a payment to a creditor debited to purchases
(vii) Stationery

365

Purchases

365

Being correction of error; an invoice for stationery posted to purchases

Page 144

(b)
SUSPENSE ACCOUNT
RWF
20X4 Jan 31
Rates

(i)

Sales
Discounts Received
Discounts Allowed

(iv)
(v)
(v)

300
1,000
750
750
2,800

RWF
20X4 Jan 31
Trial Balance
difference
Purchases

1,904
(iii)

896

2,800

Original Net Profit
Add
Back
(i) Rates
(iv) Sales
(v) Discounts
(vi) Purchases

300
1,000
1,500
690
12,225

Less:
(ii) Motor Expenses
(iii) Purchases
Current Net Profit
Note:

(750)
(896)
10,579

Item vii does not alter the profit.

Page 145

Study Unit 9
IAS 1 – Presentation of Financial Statements
Contents
______________________________________________________________________
A.

Objective

Purpose of Financial Statements

Components of Financial Statements

Financial Review by Management

Structure, Content and Reporting

Definitions

Statement of Financial Position Format

Example 1 – Statement of Financial Position

The Statement of Comprehensive Income

Function of Expenditure Method

Nature of Expenditure Method

Changes in Inventories of Finished Goods and Work-In-Progress

Raw Materials and Consumables Used

Information to be Presented either on the face of the Statement of
Comprehensive Income or in the Notes

Statement of Changes in Equity

Page 146

Continued
Page

Contents (continued)

Statement of Recognised Income and Expense

115

Disclosure of Significant Accounting Policies

115

Question/Solution

115

Page 147

A. OBJECTIVE
The objectives of IAS 1 are to:
1.

Provide the formats for the presentation of Financial Statements, such as Statement of
Comprehensive Income and Statement of Financial Position.

Ensure that the Financial Statements are comparable year on year for the entity and
comparable to competitors.

Set out the disclosure required by management relating to the judgements they have
made in selecting the entity’s accounting policies.

Set out the disclosure to be made in relation to estimating uncertainty at the Statement
of Financial Position date, in particular where there is a significant risk of causing a
material adjustment to the carrying amounts at which assets and liabilities will be
presented in the next financial year.

PURPOSE OF FINANCIAL STATEMENTS

The objective of general purpose financial statements is to provide information about the
financial position of an entity. Financial statements also show the results of management’s
stewardship of the entity’s resources.

C. COMPONENTS OF FINANCIAL STATEMENTS
A complete set of financial statements comprises a:
(a)

Statement of Financial Position

(b)

Statement of Comprehensive Income

(c)

A statement showing either:

(d)

(i)

All changes in equity or

(ii)

Changes in equity other than capital transactions/distributions to owners

Cash (or Funds) Flow Statement

(e) Notes to the accounts comprising a summary of significant accounting policies and
explanatory notes.

D. FINANCIAL REVIEW BY MANAGEMENT
In addition to the Financial Statements identified in Section C above, management may
present a Financial Review outside the Financial Statements. The Financial Review explains
the main features of the entities financial performance and financial position as well as the
main areas of uncertainty. This Financial Review typically includes:
(a)

An outline of the main factors affecting performance including changes in the business
environment in which the entity operates. How the entity has reacted to those changes
and the effect.

(b)

Entity’s policy for investment and its dividend policy.

(c)

How the entity is financed.
Page 148

(d)

Any resources that the entity uses that are not disclosed on the Statement of Financial
Position in accordance with IFRSs.

Other reports which may be included are:
(a)

Environmental Reports – Particularly in industries where environmental issues are of
significance.

(b)

Value Added Statements.

Any reports provided in addition to the Financial Statements are outside the scope of the
IASs.

STRUCTURE, CONTENT AND REPORTING

•

The financial statements shall be identified clearly and distinguished from other
information.

•

The financial statements should show:
−

The name of the reporting entity

−

The Statement of Financial Position date or the period covered by the Statement
of Comprehensive Income

•

The currency in which the financial statements are presented

•

The level of rounding used in presenting amounts e.g. RWF’000, RWFm or the like.

•

The financial statements shall be presented at least annually.

DEFINITIONS

Material – “Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions of users taken on the basis of the Financial
Statements. Materiality depends in the size and nature of the omission or misstatement judged
in the circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.”

G. STATEMENT OF FINANCIAL POSITION FORMAT
It is important before attempting a Statement of Financial Position clearly to understand the
split between current and non-current assets and liabilities
Current Assets
An asset shall be classified as current when it satisfies any of the following criteria:
(a) It is expected to be realised or is intended for sale or use in the entity’s normal operating
cycle;
(b)

It is held primarily for the purpose of being traded;

It is cash or a cash equivalent (as defined by IAS 7 Cash Flow Statements)
Page 149

All other assets shall be classified as non-current.
Current Liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
(a)

It is expected to be settled in the entity’s normal operating cycle;

(b)

It is held primarily for the purpose of being traded;

(c)

It is due to be settled within 12 months after the Statement of Financial Position date.

All other liabilities shall be classified as non-current liabilities.
ABC LTD
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 20X4
RWFm
RWFm
Assets
Non-Current Assets
Property
Plant and Equipment
Intangible Assets
Investments

150
78
22
30
280

Current Assets
Inventories (raw materials, work in progress, finished
goods etc.)
Trade Receivables
Prepayments
Cash and Cash Equivalents

81
76
4
22
183
463

Total Assets
Equity and Liabilities
Shareholders’ Equity
Share Capital
Share Premium
Revaluation Reserve
Retained Earnings
Total Equity

100
20
35
97
252

Non-Current Liabilities
Long-Term Borrowings
Long-Term Provisions
Total Non-Current Liabilities

150
10
160

Current Liabilities
Trade Payables
Accruals
Income Tax Payable
Total Current Liabilities

35
4
12
51

Page 150

Total Equity and Liabilities

463

H. EXAMPLE 1 – STATEMENT OF FINANCIAL POSITION
The following information is available about the balances of ALP, a limited liability
company.
Balances at 31st May 20X4
Non-Current
- Cost
Assets
- Accumulated Depreciation
Cash at Bank
Issued Share Capital – Ordinary Shares of RWF1 each
Inventory (raw mats., wip, finished goods)
Trade Payables
Retained Earnings
10% Loan Notes
Trade Receivables
Loan Note Interest Owing

RWF
500,000
100,000
95,000
200,000
125,000
82,000
292,500
150,000
112,000
7,500

REQUIREMENT:
Prepare the Statement of Financial Position of ALP as at 31st May 20X4 using the format IAS
1 – Presentation of Financial Statements.
ALP Limited
Statement of Financial Position as at 31st May 20X4
RWF

Assets
Non-Current Assets:
Cost
Less Accumulated Depreciation

RWF

500,000
(100,000)
400,000

Current Assets
Inventory
Trade Receivables
Cash at Bank

125,000
112,000
95,000
332,000
732,000

Total Assets
Equity and Liabilities
Shareholders’ Equity
Share Capital
Retained Earnings

200,000
292,500
492,500

Non-Current Liabilities
10% Loan Notes

150,000

Current Liabilities
Trade Payables
Accruals
Total Current Liabilities
Total Liabilities
Total Equity and Liabilities

82,000
7,500

89,500
239,500
732,000

Page 151

THE STATEMENT OF COMPREHENSIVE INCOME

There are two different layouts for the Statement of Comprehensive Income. One format
presents an analysis of expenses based on their function within the entity, the other format
uses a classification based on the nature of expenses.

FUNCTION OF EXPENDITURE METHOD

This form of analysis classifies expenses according to their function as part of cost of sales or
for example the costs of distribution or administrative activities. This method can provide
more relevant information to users than the classification of expenses by nature but the
allocation of costs to functions may require arbitrary allocations and involve considerable
judgement.
Example
RWF
10,500
(4,100)
6,400
300
(2,200)
(1,800)
2,700
(300)
2,400
(380)
2,020

Sales Revenue
Cost of Sales
Gross Profit
Other Operating Income
Distribution Costs
Administrative Expenses
Profit from Operations
Finance Cost (Interest)
Profit Before Tax
Income Tax Expense
Net Profit for the Period

K. NATURE OF EXPENDITURE METHOD
Expenses are combined in the Statement of Comprehensive Income according to their nature,
for example depreciation, purchase of materials, employee benefits and advertising costs.
The method is simple to apply because no allocations of expenses to functions are required.
Example
Sales Revenue
Other Income
Changes in Inventories of Finished Goods and Work-In-Progress
Raw Materials and Consumables Used
Employee Benefits Cost
Depreciation Expense
Other Expenses
Total Expenses
Profit from Operations
Finance Cost (Interest)
Profit Before Tax
Income Tax Expense
Net Profit for the Period

Page 152

RWF
10,500
300
200
3,900
2,500
600
900
(8,100)
2,700
(300)
2,400
380
2,020

The choice between the two methods depends on historical and industry factors and the
nature of the entity. Management is required to select the most relevant and reliable
presentation.
However, because information on the nature of expenses is useful in predicting future cash
flows additional disclosure is required when the function of expense classification is used.

CHANGES IN INVENTORIES OF FINISHED GOODS AND
WORK-IN-PROGRESS

This represents the difference between the opening and closing inventories of finished goods
and work-in-progress. If Closing Stock (in total for both Finished Goods and Work in
Progress) is lower in value than opening stock then you add this figure to the other expenses
being deducted from Sales Revenue to give you Profit from operations. If Closing Stock (in
total for both Finished Goods and Work in Progress) is higher in value than opening stock
then you deduct this figure from the total expenses being deducted from Sales Revenue to
give you Profit from operations.

M. RAW MATERIALS AND CONSUMABLES USED
This represents opening inventories of raw materials and consumables plus purchases of these
minus closing inventories of raw materials and consumables.
Example
PLO Limited’s directors have supplied you with the following information in respect of their
Statement of Comprehensive Income.
Opening Inventories:
Raw Materials
Work-In-Progress
Finished Goods
Purchases of Raw Materials
Closing Inventories:
Raw Materials
Work-In-Progress
Finished Goods

RWFm
120
300
180
500
160
280
170

REQUIREMENT:
Calculate the required amounts for the headings:
(a)

“Changes in inventories of finished goods and work-in-progress” ,

(b)

“Raw materials and consumables used” and

(c)

Cost of Sales

Page 153

SOLUTION:
(a) Changes in inventories of finished goods and work-in-progress
(180 – 170) + (300 – 280)
(b)

(c)

Raw materials and consumables used
(120 + 500 – 160)
Cost of Sales
Opening Stock (120 + 300 + 180)
Purchases
Less Closing Stock (160 + 280 + 170)
Cost of Goods Sold

(30)

(460)

600
500
1,100
(610)
490

Note: The cost of sales figure is the same as the total of the changes in inventories of finished
goods and work in progress (30) and Raw materials and consumables used (460).
In the event that there is an increase in the inventories of finished goods and work-in-progress
this amount will be shown as a credit in the Statement of Comprehensive Income.

N. INFORMATION TO BE PRESENTED EITHER ON THE FACE OF
THE STATEMENT OF COMPREHENSIVE INCOME OR IN THE
NOTES
When items of income and expense are material, their nature and amount shall be disclosed
separately. Examples of these would include:
(a)

The write down of inventories to net realisable value

(b)

The write down of property, plant and equipment to recoverable amount

(c)

Gains/losses on disposal of property, plant and equipment

(d)

Gains/losses on disposal of investments

(e)

Legal settlements

An entity shall not present any items of income and expenses as extraordinary items. The
description extraordinary item was used in the past to represent income and expenses arising
from events outside the ordinary activities of the business. IAS 1 has abolished this
classification of items.
Example – Statement of Comprehensive Income: Function of Expenditure Method
Set out below are details from the financial records of WAT Limited:
RWFm
Distribution Costs
5,470
Finance Costs
647
Cost of Sales
18,230
Sales Revenue
44,870
Income Tax Expense
1,617
Administration Expenses
9,740

Page 154

REQUIREMENT:
Prepare the Statement of Comprehensive Income using the Function of Expenditure Method.
SOLUTION:
WAT Limited
Statement of Comprehensive Income for the year-ended 31st March 20X4
RWFm
44,870
18,230
26,640
(9,740)
(5,470)
11,430
(647)
10,783
(1,617)
9,166

Sales Revenue
Cost of Sales
Gross Profit
Administration Expenses
Distribution Costs
Profit from Operations
Finance Costs
Profit Before Tax
Income Tax Expense
Net Profit for the Year

Example – Statement of Comprehensive Income : Nature of Expenses Method
Set out below are details from the financial records of FRD Limited for the year-ended 31st
March 20X4:
RWFm
9,430
520
8,750
10,650
44,870
4,090
1,617
647

Depreciation
Decrease in inventories of finished goods and work-in-progress
Raw Materials Used
Staff Costs
Sales Revenue
Other Operating Expenses
Income Tax Expense
Finance Costs

REQUIREMENT:
Prepare the Statement of Comprehensive Income using the Nature of Expenditure Method.
SOLUTION:
FRD Limited
Statement of Comprehensive Income for the year-ended 31st March 20X4
Sales Revenue
Decrease in inventories of finished goods and work-in-progress
Raw Materials Used
Staff Costs
Depreciation
Other Operating Expenses
Total Expenses
Profit from Operations
Finance Costs
Profit Before Tax
Income Tax Expense
Net Profit for the Year

Page 155

RWFm
44,870
520
8,750
10,650
9,430
4,090
33,440
11,430
(647)
10,783
(1,617)
9,166

Example
Set out below are details from the financial records of FYN Limited for the year-ended 31st
March 20X4:
RWFm
8,760
450
6,350
8,650
46,340
5,180
1,800

Depreciation
Increase in inventories of finished goods and work-in-progress
Raw Materials Used
Staff Costs
Sales Revenue
Other Operating Expenses
Income Tax Expense

Interest Costs

750

REQUIREMENT:
Prepare the Statement of Comprehensive Income using the Nature of Expenditure Method.
SOLUTION:
FYN Limited
Statement of Comprehensive Income for the year-ended 31st March 20X4
Sales Revenue
Increase in inventories of finished goods and work-in-progress
Raw Materials Used
Staff Costs
Depreciation
Other Operating Expenses
Total Expenses
Profit from Operations
Finance Costs
Profit Before Tax
Income Tax Expense
Net Profit for the Year

RWFm
46,340
(450)
6,350
8,650
8,760
5,180
28,490
17,850
(750)
17,100
(1,800)
15,300

O. STATEMENT OF CHANGES IN EQUITY
An entity shall present a statement of changes in equity showing on the face of the statement:
(a)

Profit or loss for the period

(b)

Each item of income and expense for the period that is recognised directly in equity e.g.
a revaluation surplus on the revaluation of property

(c)

The effects of changes in accounting policies and correction of errors recognised in
accordance with IAS8

(d)

The amounts of transactions with equity holders e.g. issue of shares, any premium
thereon and dividends to equity holders.

(e)

The balance of retained earnings (accumulated profit) at the start of the year, changes
during the year and the balance at the end of the year.

(f)

The balance on each reserve account at the start of the year, changes during the year and
the balance at the end of the year.

Page 156

Example – Statement of Changes in Equity

Opening Balance
Issue of Share
Capital
Revaluation of
Property
Net Profit
Dividend Paid
Closing Balance

Share
Capital
RWFm
150
50

Share
Premium
RWFm
70
20

Revaluation
Reserve
RWFm
110
-

Accumulated
Profit
RWFm
39
-

Total
RWFm
369
70

200

150

51
(10)
80

51
(10)
520

Essentially the statement of changes in equity presents, in a columnar format, all the changes
which have affected the various equity balances of share capital and reserves.

STATEMENT OF RECOGNISED INCOME AND EXPENSE

Example
Gain / Loss on Revaluation of Properties
Exchange differences on translation of foreign operations
Net Income recognised directly in Equity
Profit for the period
Total Recognised Income and Expense for the Period

RWF
100,000
50,000
150,000
460,000
610,000

The Statement of Recognised Income and Expense (formerly known as Statement of
Recognised Gains and Losses) represents the total income and expenses of the entity for the
period. It includes income and expenses that are taken directly to Reserves, for example
Revaluation of Non-Current assets and Foreign Currency Translation as well as the profit /
loss generated by the entity for the period.

Q. DISCLOSURE OF SIGNIFICANT ACCOUNTING POLICIES
An entity shall disclose the significant accounting policies used in preparing the financial
statements.

Page 157

R. QUESTION/SOLUTION
Question – APA
The following information is available about the balances and transactions of APA, a limited
liability company.
Balances at 30th April 20X3
Non-current assets - Cost
- Accumulated Depreciation
Inventory All Raw Materials
Trade Receivables
Cash at Bank
Trade Payables
Issued Share Capital – ordinary shares of RWF1 each
Accumulated Profits
10% Loan Notes
Loan Note Interest Owing

RWF
1,000,000
230,000
410,000
380,000
87,000
219,000
400,000
818,000
200,000
10,000

Transactions during year-ended 30th April 20X4
Sales Revenue
Purchases
Staff Costs
Other Operating Expenses
Interest on loan notes paid during year
Issue of 100,000 RWF1 ordinary shares at a premium of RWF0.50 per share

RWF
4,006,000
2,120,000
1,340,000
300,000
20,000

There were no purchases or sales of non-current assets during the year.
Adjustments at 30th April 20X4
(1)

Depreciation of RWF100,000 is to be allowed for

(2)

Receivables totalling RWF20,000 are to be written off.
RWF

Balances at 30th April 20X4
(1) Inventory All Raw Materials

450,000

(2)

Trade Receivables (before writing off debts shown above)

690,000

(3)

Cash at Bank

114,000

(4)

Trade Payables

180,000

REQUIREMENT:
Prepare the Statement of Comprehensive Income for the year-ended 30th April 20X4 and the
Statement of Financial Position of APA as at 30th April 20X4 in accordance with IAS 1
Presentation of Financial Statements. The Statement of Comprehensive Income should be
prepared using the nature of expenditure method.

Page 158

SOLUTION:
APA Limited
Statement of Comprehensive Income for the year-ended 30th April 20X4
RWF’000
Sales Revenue
4,006
Raw Materials Used (410 + 2,120 – 450)
2,080
Staff Costs
1,340
Depreciation
100
Other Operating Expenses (300 + 20)
320
Total Expenses
(3,840)
Profit from Operations
166
Interest Costs
(20)
Profit Before Tax
146
Income Tax
Profit for the Year
146
APA Limited
Statement of Financial Position for the year-ended 30th April 20X4
RWF

Assets
Non-Current Assets
Cost
Accumulated Depreciation

1,000,000
330,000

Current Assets:
Inventory
Trade Receivables
Cash at Bank

RWF

670,000

450,000
670,000
114,000

Total Assets

1,234,000
1,904,000

Equity and Liabilities
Shareholders’ Equity
Issued Capital
Share Premium
Retained Earnings (818 + 146)
Total Equity

500,000
50,000
964,000
1,514,000

Non-Current Liabilities
10% Loan Notes
Current Liabilities
Payables
Interest accrued
Total Current Liabilities
Total Equity and Liabilities

200,000
180,000
10,000
190,000
1,904,000

Page 159

Question – CNS
The following items have been extracted from the trial balance of CNS, a limited liability
company, as at 30th September 20X4.
Ref. To
RWF
RWF
Notes
Opening Inventory
186,400
Purchases
1,748,200
Carriage Inwards
38,100
Carriage Outwards
2
47,250
Sales Revenue
3,210,000
Trade Receivables
318,000
Wages & Salaries
2 and 3
694,200
Sundry Administrative Expenses
2
381,000
Allowance for doubtful debts,
4
18,200
st
as at 1 October 20X3
Bad Debts written off during the year
4
14,680
Office Equipment as at 1st October 20X3:
Cost
5
214,000
Accumulated Depreciation
5
88,700
Office Equipment: Additions during the year
5
48,000
Proceeds of sale of items during the year
5
12,600
Interest paid
2
30,000
Notes:
1.
Closing inventory amounted to RWF219,600
2.
Prepayments and accruals:
Prepayments
RWF
Carriage Outwards
Wages & Salaries
Sundry Administrative Expenses
Interest Payable
3.

4,900

Wages and salaries cost is to be allocated:
Cost of Sales
Distribution Costs
Administrative Expenses

Accruals
RWF
1,250
5,800
13,600
30,000
10%
20%
70%

Further bad debts totalling RWF8,000 are to be written off, and the closing allowance
for doubtful debts is to be equal to 5% of the final trade receivables figure. The bad and
doubtful debt expense is to be included in administrative expenses.

Office equipment:
Depreciation is to be provided at 20% per annum on the straight-line basis, with a full
year’s charge in the year of purchase and none in the year of sale.
During the year office equipment, which had cost RWF40,000 with accumulated
depreciation of RWF26,800 was sold for RWF12,600.
All office equipment is used for administrative purposes.

Income Tax of RWF22,000 is to be provided for.
Page 160

REQUIREMENT:
Prepare the company’s Statement of Comprehensive Income for the year-ended 30th
September 20X4 using the function of expenditure layout in accordance with IAS 1
Presentation of Financial Statements.
SOLUTION:
CNS Limited
Statement of Comprehensive Income for the year-ended 30th September 20X4
RWF
Sales Revenue
Cost of Sales (W1)
Gross Profit
Distribution Costs (W1)
Administrative Expenses (W1)
Profit from operations
Interest payable (30,000 + 30,000)
Profit before Tax
Income Tax
Profit for the Year

(188,500)
(944,680)

RWF
3,210,000
(1,823,100)
1,386,900
(1,133,180)
253,720
(60,000)
193,720
22,000
171,720

Opening Inventory
Purchases
Carriage Inwards
Carriage Outwards (47,250 + 1,250)
Wages and Salaries
694,200
5,800
700,000

Cost of
Sales
RWF
186,400
1,748,200
38,100

Distribution
Costs
RWF

Administrative
Expenses
RWF

48,500

70,000

Sundry administrative expenses
(381,000 + 13,600 – 4,900)
Bad and doubtful debts
(14,680 + 8,000 – 2,700) (W2)
Depreciation of office equipment
20% x (214,000 – 40,000 +
48,000)
Loss on sale (W3)
Closing inventory
(219,600)
1,823,100

Page 161

140,000

490,000

389,700
19,980
44,400
600
188,500

944,680

W2 Provision for Bad Debts
Trade Receivables per Question
Bad Debts to write off
Provision Required at 5%
Current Provision
Decrease in Provision Required

318,000
(8,000)
310,000
15,500
(18,200)
2,700

W3 Profit / Loss on Disposal
Cost
Accumulated Depreciation
Net Book Value

40,000
(26,800)
13,200

Sales Proceeds
Net Book Value
Profit / (Loss) on disposal

12,600
(13,200)
(600)

Page 162

BLANK

Page 163

Study Unit 10
IAS 2 - Inventories
Contents
_________
A. Introduction - Inventories
_________
B. Definitions
_________
C. Measurement
_________
D. Disclosure
_________
E. Methods of Costing
_________

Page 164

A. INTRODUCTION
Introduction - Inventories
An Inventory is a list, but as raw materials, work-in-progress and finished good are detailed
on lists or inventories, the term inventories is now commonly used to mean the items on those
lists.
The calculation of the amounts at which inventories are stated in the accounts in one of the
most important and difficult areas in financial reporting. Relatively small variations in the
values at which inventories are stated can have significant impact on reported profits, while
the proper valuation of inventories involves the exercise of judgement.
The determination of profit for an accounting year requires the matching of costs with related
revenues. The cost of unsold or unconsumed inventories will have been incurred in the
expectation of future revenue. It is appropriate to carry forward this cost to be matched with
the revenue when it arises. If there is no reasonable expectation of sufficient future revenue
to cover cost incurred e.g. as a result of deterioration, obsolescence or a change in demand,
the irrecoverable cost should be charged to revenue in the year under review. Thus,
inventories need to be stated at the lower of cost and net realisable value.

DEFINITIONS

Inventories are assets:
(a) Held for resale in the ordinary course of business
(b) In the process of production for resale e.g. raw materials, work-in-progress and finished
goods
(c)

In the form of materials or supplies to be consumed in the production process or of
services

Cost shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
Cost of purchase comprises purchase price including import duties, non-returnable taxes,
transport and handling costs and any other directly attributable costs, less trade discounts,
rebates and subsidies.
Cost of conversion comprises:
(a) Costs which are directly related to units of production e.g. direct labour, direct
expenses and sub-contracted work
(b) Production overheads
(c)

Other overheads, if any attributable in the particular circumstances of the business to
bringing the product or service to its present location and condition

Production overheads: overheads incurred in respect of materials, labour or services for
production, based on the normal capacity as expected on average under normal
circumstances, taking one year with another. Each overhead should be classified according
to function e.g. production, selling or administration so as to ensure the inclusion, in cost of
conversion, of those overheads including depreciation which relate to production,
notwithstanding that these may accrue wholly or partly on a time basis.
Page 165

Net realisable value is: the estimated selling price in the ordinary course of business less:
(a) The estimated costs of completion and
(b)

Estimated costs necessary to make the sale.

Fair Value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction.

C. MEASUREMENT
INVENTORIES ARE MEASURED AT THE LOWER OF COST AND NET REALISABLE
VALUE FOR EACH SEPARATE ITEM IN THE PERIODIC FINANCIAL STATEMENTS.
SIMILAR ITEMS MAY BE GROUPED TOGETHER FOR VALUATION PURPOSES.

D. DISCLOSURE
The accounting policies which have been used in calculating the cost and net realisable value
are disclosed in the statements and reports. A suitable description of the amount at which
inventories are stated in accounts might be "at the lower of cost and net realisable value".
In general, inventories should be sub-classified in the Statement of Financial Position or in
the notes in the financial statements so as to indicate the amounts held in each of the main
categories in the standard Statement of Financial Position formats.
Statement of Financial Position (Excerpt)
RWF
2,370,000
X
X
X
X

Inventories (Note 9)
Trade Receivables
Quoted Investments
Cash
Note 9

RWF
500,000
670,000
1,200,000
2,370,000

Raw materials
Work in progress
Finished goods

EXAMPLE 1
Z Ltd. has an item in closing inventory which cost RWF250 with an expected selling price of
RWF290. After the Statement of Financial Position date, due to severe competition, the
selling price falls to RWF245.
Under IAS 2 stock should be valued at the lower of cost and net realisable value. The cost is
RWF250, however the net realisable value is RWF245. The stock should therefore be stated
at RWF245.

Page 166

EXAMPLE 2
H Ltd. has an item in closing inventory which cost RWF750 with a then expected selling
price of RWF850. The item was damaged while being moved in the stores. It will cost
RWF90 to repair this item and it can then be sold for RWF800.
The cost of the item is RWF750, its net realisable value is RWF800 – 90 i.e. RWF710. The
inventory item should be stated at a value of RWF710.

METHODS OF COSTING

It is frequently not practicable to relate expenditure to specific units of inventory. The
ascertainment of the nearest approximation to cost gives rise to two problems:
(i)

(ii)

The selection of an appropriate method for calculating the related costs where a number
of identical items have been purchased or made at different times i.e.:
(a)

First In, First Out (FIFO)

(b)

Last In, First Out (LIFO)

(c)

Weighted Average

The selection of an appropriate method for relating costs to inventories i.e.:
(a)

Job costing

(b)

Batch costing

(c)

Process costing

(d)

Standard costing

In selecting the methods referred to above, management must exercise judgement to ensure
that the methods chosen provide the fairest practical approximation to 'actual cost'.
FIFO: The assumption underlying it is that the first inventory item to be bought is the first to
be sold. The closing inventory is, therefore, the most recently acquired. In a period of rising
prices, this method will result in a high stock valuation. This will represent the actual cost of
the inventory as long as the issues to production/sales have followed a first-in, first-out
pattern.
LIFO: The underlying assumption is that the last inventory to be bought is the first to be
sold. The value of the closing inventory is, therefore, that of the earliest inventory acquired.
It should be noted that LIFO is no longer permitted as a valuation method by IAS 2.
Weighted Average: The underlying assumption in charging out inventory sold is that the
value of the closing inventory is the average price paid for it over the period. It is calculated
by dividing the total value of purchases by the total number of units/tonnes purchased. In
times of rising price levels, this method gives a lower valuation to unsold inventory than
FIFO above and a higher valuation than LIFO and vice versa when price levels fall.

Page 167

EXAMPLE 3
A grain merchant, who has no opening inventory, has four deliveries of a grain made to the
same loading bay over a period of three months. The quantities delivered and the invoiced
costs are as follows:
Tonnes
1 January
4 February
26 February
15 March

Cost per Tonne

1,000 tonnes
600 tonnes
800 tonnes
1,200 tonnes

@ RWF80 per tonne
@ RWF84 per tonne
@ RWF101 per tonne
@ RWF100 per tonne

Total
RWF
80,000
50,400
80,800
120,000
RWF331,200

During the same period, he sells 2,200 tonnes of the 3,600 tonnes, delivered, at RWF120 per
tonne. Obviously, he has 1,400 tonnes left but what was the cost of these? How much profit
was made?
The answers lie in the valuation of closing inventory.
Establish:
Sales
Purchases

2,200 x RWF120

RWF264,000
RWF331,200

- Fact
- Fact

The closing inventory valuation depends on the valuation method used.
Using FIFO, the value of the closing inventory would be
1,200 tonnes
200 tonnes

@ RWF100
@ RWF101

120,000
20,200
RWF140,200

Using Weighted Average, the value of the closing inventory would be:
RWF331,200
3,600 tonnes
1,400 tonnes x
RWF92

(RWF92 per
tonne

= RWF128,800
FIFO
RWF

Profit for the
Period
Sales
Less: Purchases
Closing
Inventory
Cost of Sales
Profit

Weighted Average
RWF
RWF

RWF

264,000
331,200
(140,200)

Summary
Closing Inventory Valuation
Profit

264,000
331,200
(128,800)

(191,000)
73,000

(202,400)
61,600

140,200
73,000

128,800
61,600

Page 168

COSTING METHODS
Job costing is a costing method where costs are incurred for a specific order undertaken for a
customer’s special requirements and each order is for a short duration e.g. Manufacturing a
sailing boat.
Batch costing is a costing method where costs are incurred for a specific order undertaken but
the costs apply to similar articles e.g. bean processing and pea processing.
Process costing is a costing method where goods are produced from continuous operations
e.g. pentium chip making.
Standard costing is a budgetary control technique which compares standard costs and
standard revenues with actual results obtained.
Absorption costing is a costing method which charges a proportion of fixed overheads for the
period against the items produced.
Direct costing or Marginal costing is a costing system which does not charge a proportion of
fixed overheads for the period against the items produced i.e. the inventory is charged with
variable costs and valued on that basis.
Production Overheads IAS 2 requires that the cost of inventory should include production
overheads. The production overheads should be absorbed into inventory based on the normal
production capacity.
Example 4
ZEN Ltd. manufactures a single product called the Alpha. The company manufactured 8,000
units of Alpha during the year and sold 6,000 units at RWF12 each. The variable cost of each
unit of Alpha is RWF4 per unit and fixed production overheads were RWF50,000 for the
year. The normal capacity is assumed to be 10,000 units.
The 2,000 units in closing stock will be valued as follows:
Variable Cost
Fixed Production Overhead (RWF50,000 ÷ 10,000 units)

RWF
4
5
RWF9

Closing Inventory Valuation RWF9 x 2,000 units = RWF18,000
Note: The fixed production overhead is calculated based on the normal capacity of 10,000
units and not the actual quantity manufactured.

Page 169

Study Unit 11
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Contents

Introduction

Definitions

Accounting Policies

Changes in Accounting Policies

Disclosure – Changes in Accounting Policies

Changes in Accounting Estimates

Disclosure – Changes in Accounting Estimates

Errors

Disclosure – Prior Period Errors

Page 170

A. INTRODUCTION
The objectives of IAS 8 Accounting Policies, Changes in Estimate and Errors are:
•

Set out the criteria for choosing and changing accounting policies and

•

Accounting treatment and disclosure of changes in accounting policies, changes in
accounting estimates and correction of errors.

DEFINITIONS

Accounting Policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
A change in Accounting Estimate is an adjustment of the carrying amount of an asset,
liability, or an amount of the periodic consumption of an asset, that results from the
assessment of present status of, and expected future benefits and obligations associated with,
assets and liabilities. Changes in accounting estimates result from new information or new
developments and, accordingly, are not corrections of errors.
Material Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions of users taken on the basis of the financial
statements. Materiality depends on the size and nature of the omission or misstatement
judged in the surrounding circumstances. The size or nature of the items, or a combination of
both, could be the determining factor.
Prior Period Errors are omissions from, and misstatements in, the entity’s financial
statements for prior periods arising from a failure to use, or misuse, reliable information that:
(a)

Was available when financial statements for those periods were authorised for issue;
and

(b)

Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

C. ACCOUNTING POLICIES
If there is an accounting standard that applies to a transaction or event, the accounting policy
to be applied in reporting that transaction or event shall be chosen by referring to the
Accounting Standard. The entity does not have to apply the standard if the effect of applying
the standard is immaterial
If there is no Accounting Standard relating to the transaction or event, management should
use their judgement in developing and applying an accounting policy that results in
information that is:
(a)

Relevant to the users of the Financial Statements, and

(b)

Reliable:
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(i)

Faithful presentation of Financial position, financial performance and cash flow,

(ii)

Reflect the substance of the transaction and not just the legal form,

(iii) Free from bias,
(iv) Prudent and
(v)

Complete.

The entity shall apply accounting standards consistently for similar transactions and events
and over time, unless the standard specifically allows or requires categorisation of items for
which different policies may be appropriate.

D. CHANGES IN ACCOUNTING POLICIES
An entity can only change an accounting policy if:
(a)

It is required by a standard, or

(b)

It provides more reliable and relevant information about the effects of the transactions,
other events or conditions on the entity’s financial position, performance or cash flows.

Transactions that are different from those which have previously occurred and transactions
that have not occurred before do not represent a change in an Accounting Policy.

DISCLOSURE – CHANGES IN ACCOUNTING POLICY

Where an entity makes a voluntary change in an accounting policy which has an effect on the
current period or prior periods, that would have an effect on that period but it is not possible
to determine the amount of the adjustment, or might have an effect on future periods, the
entity should disclose:
(a)

Nature of the change in accounting policy,

(b)

Reasons why the change will provide more reliable and relevant information,

(c)

Amount of the adjustment for current period and each prior period for each financial
statement line item affected,

(d)

Amount of the adjustment relating to prior periods before those presented, if
practicable,

(e)

The circumstances that caused the existence of that condition and a description of how
and from when the change in the accounting policy has been applied.

When the effect of the initial application of a standard has an impact on the current period or
any prior period, but it is not practicable to estimate the amount of the adjustment, or it might
have an effect on future periods, an entity shall disclose:
(a)

Title of the Standard,

(b)

Where relevant the change in the accounting policy is made in accordance with its
transitional provisions,

(c)

Nature of the change in accounting Policy,

(d)

A description of the transitional provisions,
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(e)

If applicable, the transitional provisions might have an effect on future periods,

(f)

For the current period and each prior period presented the amount of the adjustment for
each line item in the financial statements,

(g)

Amount of the adjustment relating to periods before those presented to the extent that it
is practicable. If retrospective application is not possible the circumstances that caused
the existence of that condition and a description of how and from when the change in
the accounting policy has been applied.

When an entity has not applied a standard that has been issued but is not yet effective, the
entity shall disclose:
(a)

This fact and

(b)

Known or reasonably estimated information relevant to assessing the possible impact
that application of the new standard will have on the entity’s financial statement in the
period of initial application.

CHANGES IN ACCOUNTING ESTIMATES

Some items cannot be measured with precision but can only be estimated. These estimates
are based on the most recently available information. Examples of items that require
estimation are Bad Debts and Useful lives of assets.
Use of estimates is common practice in Financial Statements they do not mean that the
information is unreliable. How estimates are calculated may change over time due to a
change in business practices, more experience in the area or the availability of additional
information. A revision of an estimate is neither a change in an accounting estimate nor the
correction of an error.
A change in a measurement basis being applied is a change in an accounting policy and not a
change in an accounting estimate.
When a change in an accounting estimate gives rise to a change in assets, liabilities or equity
it should be recognised by adjusting the carrying amount of the asset, liability or equity as
appropriate.

G. DISCLOSURE – CHANGES IN ACCOUNTING ESTIMATES
The entity shall disclose the nature and amount of the change in accounting estimate where it
has an effect on the current period or future periods. The entity does not have to disclose the
effect on future periods if it is impracticable to do so, but must disclose this fact.

H. ERRORS
Errors can occur in the recognition, measurement, presentation or disclosure of elements of
financial statements. Financial statements that contain errors do not comply with IFRSs, these
errors can be either material or immaterial but made intentionally to present a particular
aspect of the entity’s financial position or performance.
Errors in the current period should be corrected before the financial statements are authorised
for issue. However, errors that are not discovered until a subsequent period are corrected in
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the comparative information presented in the financial statements for that subsequent period,
for example, an error is discovered in the financial statements relating to the year-ended 30th
September 2008 while finalising the accounts for the year-ended 30th September 2009, the
comparative information presented in the “prior year comparatives” in the financial
statements for the year-ended 30th September 2009 will be corrected.
A material prior period error shall be corrected in the first set of financial statements
authorised for issue after the discovery of the error:
(a)

Restate the comparative amount for the prior period(s) presented in which the error
occurred, or

(b)

If the error occurred before the earliest period presented, restating the opening balances
of assets, liabilities and equity for the earliest prior period presented.

DISCLOSURE OF PRIOR PERIOD ERRORS

The entity has to make the following disclosure:
(a)

Nature of the error,

(b)

As far as practicable, the amount of the correction for each financial statement line item
affected,

(c)

Amount of the correction at the beginning of the earliest prior period presented, and

(d)

If a retrospective restatement is not possible then the circumstances that led to the
existence of the error and a description of how and from when the error has been
corrected.

These disclosures do not need to be repeated in subsequent Financial Statements.

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BLANK

Page 175

Study Unit 12
IAS 10 – Events after the Reporting Period
Contents
___________________________________________________________________________
A. Objective
___________________________________________________________________________
B. Definitions
___________________________________________________________________________
C. Recognition & Measurement
___________________________________________________________________________
D. Dividends
___________________________________________________________________________
E. Going Concern
___________________________________________________________________________
F. Disclosure
___________________________________________________________________________

Page 176

A. OBJECTIVE
The objective of this standard is to set out the circumstances in which an entity should adjust
its financial statements for events that occur after the Statement of Financial Position Date
but before the Financial Statements are approved by the Board of Directors. The standard
also sets out the disclosures to be made about these events.
The standard indicates that an entity should not prepare its financial statements on a going
concern basis if events after the Statement of Financial Position clearly indicate that this is no
longer appropriate.

B. DEFINITIONS
Events after the Reporting Period are those events, favourable and unfavourable, that occur
between the Statement of Financial Position date and the date when the financial statements
are authorised for issue. Two types of Events can be identified:
(a)

Those that provide evidence of conditions that existed at the Statement of Financial
Position date (adjusting Events after the Reporting Period); and

(b)

Those that are indicative of conditions that arose after the Statement of Financial
Position date (Non-adjusting events after the balance date).

C. RECOGNITION AND MEASUREMENT
ADJUSTING EVENTS AFTER THE REPORTING PERIOD
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
Events after the Reporting Period. The following are examples of adjusting events that
require the entity to adjust the amounts shown in the financial statement:
(a)

Settlement of a Court case after the Statement of Financial Position date which confirms
that the entity has a present obligation

(b)

Discovery of fraud or errors that show the financial statements are incorrect

(c)

Non-Current Assets - The subsequent determination of the purchase price or of the
proceeds of sale of assets purchased or sold before the year-end

(d)

Property - A valuation which provides evidence of a permanent diminution in value.

(e)

Investments - The receipt of a copy of the financial statements or other information in
respect of any company which provides evidence of a permanent diminution in the
value of a long-term investment.

(f)

Inventory - The receipt of proceeds of sales after the Statement of Financial Position
date or other evidence concerning the net realisable value of inventory.

(g)

Receivables - The renegotiation of amounts owing by receivables, or the bankruptcy of
a customer.

(h)

Taxation - The receipt of information regarding rates of taxation.

(i)

Claims - Amounts received or receivable in respect of insurance claims which were in
the course of negotiation at the Statement of Financial Position date.

Page 177

NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD
An entity shall not adjust the amounts recognised in its financial statements to reflect nonadjusting Events after the Reporting Period.
(a) A major business combination after the Statement of Financial Position or disposing of
a major subsidiary.
(b)

Issues of shares and debentures

(c)

Purchases and sales of non-current assets and investments

(d) Losses of non-current assets or inventory as a result of a catastrophe such as fire or
flood
(e)

Announcing or commencing the implementation of a major restructuring. (See IAS 37)

(f)

Announcing a plan to discontinue an operation

(g)

Strikes and other labour disputes

D. DIVIDENDS
If an entity declares dividends to equity shareholders after the Statement of Financial Position
date the entity shall not recognise those dividends as a liability at the Statement of Financial
Position date.
The dividends are not recognised as a liability at the Statement of Financial Position date
because they are not a present obligation at the Statement of Financial Position date.

GOING CONCERN

An entity shall not prepare its financial statements on a going concern basis if management
determines after the Statement of Financial Position date that it intends to liquidate the entity
or to cease trading or that it has no realistic alternative but to do so.

DISCLOSURE

An entity shall disclose the date when the financial statements were authorised for issue and
who gave the authorisation.
If an entity receives information after the Statement of Financial Position date about
conditions that existed at the Statement of Financial Position, it shall update disclosures that
relate to those conditions, in the light of the new information.
For non-adjusting events an entity shall disclose:
(a)

The nature of the event, and

(b)

An estimate of its financial effect or a statement that such an estimate cannot be made.

Page 178

BLANK

Page 179

Study Unit 13
IAS 16 Property, Plant and Equipment
Contents
____________
A.

Objective
____________

Definitions
____________

Depreciation
____________

Accounting for Depreciation
____________

Disposal of Property, Plant and Equipment
____________

Ledger Accounts and Journal Entries
____________

Recognition and Measurement
____________

Disclosure
____________

Examples
____________

Page 180

A. OBJECTIVE
The Objective of IAS 16 is to set out the accounting treatment for Property, Plant and
Equipment. The main areas dealt with in the standard are:
•

Recognition of non-current assets(fixed assets),

•

Determination of the carrying amount,

•

Determination of the depreciation charges

•

Determination of the impairment losses to be recognised in the financial statements.

DEFINITIONS

Property, Plant and Equipment: Tangible assets held for use in production or supply of goods
or services or for rental or administration purposes and are expected to be used during more
than one accounting period.
Depreciation: Systematic allocation of depreciable amount, the cost (or re-valued amount)
less residual value over an asset’s useful life
Carrying amount is the amount at which the asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
An Impairment Loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Fair Value: The amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s length transaction.
Recoverable Amount: The higher of the asset’s net selling price and its value in use.
Value in Use (IAS 36): The present value of estimated future cash flows expected from the
continuing use of an asset and from its disposal at the end of its useful life.

C. DEPRECIATION
The assessment of depreciation and its allocation to accounting periods involves the
consideration of three factors:
(a)

The carrying amount of the asset - whether cost or valuation

(b)

The length of the asset's expected useful economic life to the business of the enterprise,
having due regard to the incidence of obsolescence
and
The estimated residual value of the asset at the end of its useful economic life in the
business of the enterprise

(c)

Page 181

The useful economic life of an asset is the period over which the present owner will derive
economic benefits from its use. The following factors need to be considered in determining
the useful life of an asset:
(a)

The expected usage of the asset by the enterprise. The usage is of an asset is determined
by the expected capacity of the asset or its physical output.

(b)

The expected physical wear and tear is affected by operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme of the enterprise and the care and maintenance of the asset when idle.

(c)

Technical obsolescence arising from changes or improvements in production or from a
change in the market demand for the product or service output of the asset

(d)

Legal or similar limits on the use of the asset, such as expiry dates of related leases.

The useful economic lives and depreciation methods of assets should be reviewed regularly
and, where necessary, revised and accounted for as a change in estimate.

D. ACCOUNTING FOR DEPRECIATION
Provision for depreciation of non-current asset having a finite useful economic life should be
made by allocating the cost or re-valued amount less the estimated residual value of the assets
as fairly as possible to the periods expected to benefit from their use. The depreciation
methods used should be the one which is the most appropriate having regard to the type of
asset and their use in the business.
Methods of Calculation
There are a number of different methods used in calculating the depreciation charge. The
most common methods are:
(a)

The Straight line method

(b)

The Reducing balance method

The Straight Line Method
Under this method, the total depreciable amount is charged in equal instalments to each
accounting period over the expected useful life of the asset.
Formula:
Cost of Asset - the Residual Value (e.g.
scrap value)
Expected useful life of the asset
Example
CDE Ltd. acquired a non-current asset which cost RWF10,000 on 1st January 20X0. The
estimated useful life of the asset is 5 years with no residual value. The depreciation charge in
the profit and loss account each year is calculated as follows:
RWF10,000
– nil
= RWF2,000 per annum
5 years

Page 182

Example
CDE Ltd. acquired a non-current asset which cost RWF60,000 on 1st January 20X0. The
estimated useful life of the asset is 5 years with a residual value of RWF5,000. The
depreciation charge in the profit and loss account each year is calculated as follows:
RWF60,000 –
RWF5,000
5 years

= RWF11,000 per annum

The net book value (NBV) of the non-current asset would be:
Year-end
31.12.X0
31.12.X1
31.12.X2

31.12.X3

Cost

RWF
60,000

Acc. Dep’n

11,000

22,000

33,000

44,000

NBV

49,000

38,000

27,000

16,000

31.12.X
4
RWF
60,00
0
55,00
0
5,000

Non-current asset is shown in the Statement of Financial Position at its cost less accumulated
depreciation to date.
The Reducing Balance Method
Under this method, the annual depreciation charge is a fixed percentage of the net book value
of the asset at the end of the previous accounting period.
Example
CDE Ltd. acquired a non-current asset which cost RWF10,000 on 1st January 20X0. The
reducing balance rate is 40%. The depreciation charge in the Statement of Comprehensive
Income each year is calculated as follows:
Acc. Dep’n
Asset Cost
Depreciation 20X0
NBV end of 20X0
Depreciation 20X1

RWF
10,000
(4,000)
6,000
(2,400)

NBV end of 20X1
Depreciation 20X2

3,600
(1,440)

NBV end of 20X2

2,160

RWF
4,000
6,400 (4,000 +
2,400)
7,840 (6,400 +
1,440)

Both methods compared
Example
CDE Ltd. acquired a non-current asset which cost RWF8,000 on 1st January 20X1. The
estimated useful life of the asset is 4 years with a residual value of RWF500. The reducing
balance rate is 50%.

Page 183

The depreciation charge in the Statement of Comprehensive Income each year is calculated
as follows:
Straight Line Method:
RWF8,000
– RWF500
4 years

= RWF1,875 per annum

Straight Line

Cost
Depreciation 20X1

RWF
8,000
(1,875)

NBV ye/ 31.12.X1
Depreciation 20X2

6,125
(1,875)

NBV y/e 31.12.X2
Depreciation 20X3

4,250
(1,875)

NBV y/e 31.12.X3
Depreciation 20X4

2,375
(1,875)

NBV y/e 31.12.X4

500

Reducing
Balance
RWF
8,000
(4,000) i.e. 50% x
8,000
4,000
(2,000) i.e. 50% x
4,000
2,000
(1,000) i.e. 50% x
2,000
1,000
(500) i.e. 50% x
1,000
500

Straight Line Method – Statement of Financial Position Extract
Year-end

Cost
Acc. Dep’n
NBV

31.12.X1

31.12.X2

31.12.X3

RWF
8,000
1,875
6,125

RWF
8,000
3,750
4,250

RWF
8,000
5,625
2,375

31.12.X
4
RWF
8,000
7,500
500

Reducing Balance Method – Statement of Financial Position Extract
Year-end

Cost
Acc. Dep’n
NBV

31.12.X1

31.12.X2

31.12.X3

RWF
8,000
4,000
4,000

RWF
8,000
6,000
2,000

RWF
8,000
7,000
1,000

31.12.X
4
RWF
8,000
7,500
500

Exercise
(a) A Van is bought for RWF6,000 on 1st January 20X2. It will be used for 3 years and
then sold back to the supplier for RWF3,072. Show the depreciation calculations for
each year using:
(a)

The reducing balance method with a rate of 20%

(b)

The straight line method
Page 184

(b)

A company, which makes up its accounts annually to 31 December, provides for
depreciation of its machinery at the rate of 10% per annum on the diminishing balance
system
On 31 December, 20X2, the machinery consisted of three items purchased as follows:
On 1 January 20X0
On 1 April 20X1
On 1 July 20X2

Machine A
Machine B
Machine C

RWF
3,000
2,000
1,000

Cost
Cost
Cost

Required:
Your calculations showing the depreciation provision for the year 20X2.
Solution:
(a)
Reducing Line Method
RWF
Van cost
6,000
2002 Dep’n 20%
1,200
NBV end Yr 1
4,800
2003 Dep’n 20%
960
NBV end Yr 2
3,840
2004 Dep’n 20%
768
NBV end Yr 3
3,072

Straight Line Method
RWF
Van cost
6,000
2002 Dep’n
976
NBV end Yr 1
5,024
2003 Dep’n
976
NBV end Yr 2
4,048
2004 Dep’n
976
NBV end Yr 3
3,072

“Straight-line” Calculation:
6,000 –
3,072
3 yrs

2,928
=

= 976
3

(b)
A
3,000
300
2,700

Bought 1/1/20X0
20X0 Dep’n 10% for 12 mths

2001

Bought 1/4/20X1
Dep’n 10% x 2,700
Dep’n 10% for 9 mths

Machines
B

2,000
270
2,430

Bought 1/7/20X2
20X2 Dep’n 10% of 2,430
Dep’n 10% x 1,850
Dep’n 10% for 6 mths

150
1,850
1,000

243
185
2,187

20X2 Total depreciation (243 + 185 +
50)
Page 185

1,665
RWF478

50
950

DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT

A profit/loss on the disposal of property, plant and equipment is calculated as the difference
between the net disposal proceeds and the net book value. The profit / loss on disposal is
included in the Statement of Comprehensive Income in the year in which the disposal occurs.
Example
On 1st July 20X2 M Ltd sold a plant for RWF4,500. The plant was bought on 1st January
20X0 for RWF16,000. Depreciation is calculated on a straight line basis over 4 years. The
company’s year-end is 31st December.
Solution
Profit/Loss on Disposal
RWF
4,500
(6,000)
(1,500)

Sale proceeds
Carrying Amount (W1)
Profit/(loss) on disposal
W1 Calculation of Carrying Amount/Net Book Value

RWF
16,000

Cost 1 January 20X0
Depreciation – Year-end
31st December 20X0
31st December 20X1
31st December 20X2 (4,000 x 6/12)
Carrying Amount as at 1st July 20X2

(4,000)
(4,000)
(2,000)
6,000

LEDGER ACCOUNTS AND JOURNAL ENTRIES

Property, Plant and Equipment – Additions
When a tangible fixed asset is bought the cost is entered into a tangible fixed asset account in
the nominal ledger….
Plant and Equipment Account
RWF
RWF
1st
Jan Bank
10,000
X4

The journal entry for the purchase of a tangible fixed asset is:
Debit

Plant
and
Equipment
Account
Credit
Bank

Property, Plant and Equipment – Depreciation
When property, plant and equipment is depreciated the charge for the year is entered in the
depreciation expense account and the accumulated depreciation account.

Page 186

Plant and Equipment – Accumulated Depreciation Account
RWF
1st Jan X4 Opening Balance
31st Dec Depreciation expense
X4

RWF
X
2,500

Plant and Equipment –Depreciation Expense Account
31st Dec Statement
X4
Comprehensive
Income

RWF
2,500

31st Dec Plant & Equipment
X4

RWF
2,500

Acc Dep’n

The journal entries for the depreciation charge for the year is:
Debit

Plant and Machinery Depreciation Expense Account
Credit
Accumulated Depreciation Account

The Depreciation Expense account is cleared out at the end of the year to the Statement of
Comprehensive Income.
Debit

Statement of Comprehensive Income - Depreciation
Credit
Plant & Equipment – Depreciation Expense Account

The balance in the Accumulated Depreciation account represents the total amount of
depreciation charged against the asset since the purchase date.
Property, Plant and Equipment – Disposal
When property, plant and equipment is sold or scrapped the cost is transferred to a disposal
account. Also the accumulated depreciation to date should be transferred from the
accumulated depreciation account to the disposal account.
Lastly the proceeds of sale should be credited to disposal account.
The journal entries for the disposal of property, plant and equipment are:
(1)

Debit

Disposal Account
Credit
Property, Plant and Equipment Cost Account

To transfer the original cost of the asset to the disposal account
(2)

Debit

Accumulated Depreciation Account
Credit
Disposal Account

To transfer the accumulated depreciation charged to the Statement of Comprehensive
Income from date of purchase to date of disposal.
(3)

Debit

Bank
Page 187

Credit

Disposal Account

To record the cash received on sale/disposal of the asset
Disposal Account
RWF
1st Jul X4 Plant & Equipment 10,000
A/C

1st Jul X4 Acc
Depreciation
Account
1st Jul X4 Bank
Loss to Statement of
Comprehensive
Income

10,000

RWF
6,125
3,000
875

10,000

Trade in Allowance
Often when a motor vehicle is being replaced it is traded in against a new vehicle. The
double entry for this transaction is debit motor vehicles cost account and credit motor
vehicles disposal account with the trade in value of the motor vehicle.
Example
X Limited traded in a motor vehicle which originally cost RWF20,000 against a new motor
vehicle costing RWF35,000. The garage gave a trade-in allowance to X Limited of
RWF10,000. At the date of the trade-in the accumulated depreciation on the old motor
vehicle was RWF8,000. X Limited paid the garage a cheque for RWF25,000.
Motor Vehicle - Cost Account
(1)
(3)
(4)

Balance b/d
Disposal A/C
Bank

Balance b/d

RWF
20,000
10,000
25,000
55,000

(2)

Disposal Account
Balance c/d

RWF
20,000
35,000
55,000

35,000

Disposal Account
(2)

Motor Vehicle A/C

RWF
20,000

(3)
(5)
(6)

20,000

RWF
Motor Vehicle A/C
10,000
Acc. Depreciation A/C
8,000
Loss to Statement of 2,000
Comprehensive
Income
20,000

Notes to Ledger Account
1.
Opening balance represents the original cost of the asset on hand at the start of the
financial period.

Page 188

The motor vehicle is traded in against a new vehicle, therefore the asset is removed
(that is, credited) from the Motor Vehicle Cost Account and debited to the disposal
account.

On disposal of the vehicle the company is given a trade in allowance rather than cash,
the accounting entries are:
DR Motor Vehicle Cost
Cr

Disposal Account

The cash paid out in addition to the trade in allowance for the new vehicle.

The total depreciation charged on the asset is debited from the Motor Vehicle –
Accumulated Depreciation Account and credited to the Disposal Account.

The loss on disposal balances the account, it is calculated as sales proceeds less the net
book value:
Sales Proceeds/Trade in Allowance
Net Book Value (20,000 – 8,000)
Profit/(loss) on disposal

10,000
(12,000)
(2,000)

G. RECOGNITION AND MEASUREMENT
An item of property, plant and equipment should be recognised as an asset when:
•

It is probable that future economic benefits associated with it will flow to the entity and;

•

Cost of the asset can be measured reliably.

Initial Measurement
Property, plant and equipment should initially be measured at cost. Cost is the purchase
price, import duties and non-deductible purchase taxes/VAT. Cost should also include
directly attributable costs of bringing the asset to working condition for its intended use.
Examples of directly attributable costs include initial delivery and handling costs, site
preparation, installation costs, and cost of employee wages arising directly from construction
or acquisition.
Exchange of Assets
Cost is measured at fair value of asset received which is equal to fair value of the asset given
up e.g. trade-in allowance, plus cash transferred.
Measurement Subsequent to Initial Recognition
An entity may choose between the cost model and the revaluation model. The choice of
measurement is applied consistently to the entire class of property, plant and equipment.
Cost Model
In this model the assets are carried at cost less accumulated depreciation and any accumulated
impairment losses.
Revaluation Model
In this model the assets are carried at their re-valued amount, being fair value at date of
revaluation, less any subsequent depreciation and any accumulated impairment losses.
Page 189

Accounting Treatment of Revaluation
Any revaluation increase is normally credited directly to the revaluation surplus in equity.
However, if the asset had previously been the subject of a revaluation decrease then the entity
reverses the amount of the decrease previously taken to the Statement of Comprehensive
Income.

Example
Original Cost of Asset

650,000

Current Carrying Amount

500,000

The asset has been re-valued and the surveyor believes its true value is RWF700,000.
Solution
The asset originally cost RWF650,000 but was previously re-valued downwards to
RWF500,000, a decrease of RWF150,000. This decrease would have been debited to the
Statement of Comprehensive Income, so now that the asset is being re-valued upwards what
entries do we pass in our account:
Because of the previous diminution in value:
Dr
Asset
Cr
Statement of Comprehensive Income
Cr

200,000

Revaluation Reserve – Statement of Financial
Position

150,000
50,000

If the asset had not been the subject of a previous decrease in value through revaluation then
the entries passed would have been:
Dr
Asset
200,000
Cr
Revaluation Reserve – Statement of Financial
200,000
Position
Any revaluation decrease is normally recognised in the Statement of Comprehensive Income,
except where it reverses a previous revaluation increase of the asset then it is offset against
the balance on the revaluation reserve.
Example
Original Cost of Asset

400,000

Current Carrying Amount

500,000

The asset has been re-valued and the surveyor believes its true value is RWF450,000.
Solution
The asset originally cost RWF400,000 but was previously re-valued upwards to
RWF500,000, an increase of RWF100,000. This increase would have been credited to the
Revaluation Reserve Account, so now that the asset is been re-valued downwards what
entries do we pass in our account?

Page 190

Because of the previous revaluation:
Dr

Revaluation Reserve
Cr
Asset

50,000
50,000

If the asset had not been the subject of a previous decrease in value through revaluation then
the entries passed would have been:
Dr

Statement of Comprehensive Income
Cr
Asset

50,000
50,000

H. DISCLOSURE
The financial statements should disclose, for each class of property, plant and equipment:
(a)

The measurement bases used for determining the gross carrying amount.

(b)

The depreciation methods used

(c)

The useful lives or depreciation rates used

(d) The gross carrying amount and the accumulated depreciation at the beginning and end
of the period
(e)

A reconciliation of the carrying amount at the beginning and end of the period showing:
(i)

Additions

(ii)

Disposals

(iii)

Increases or decreases during the period resulting from revaluations

(iv)

Depreciation

EXAMPLES

Question 1
A company makes up its accounts to the 31st December each year. It provides for
depreciation on a reducing balance method at a rate of 10%.
On 31st December 20X4 the assets consisted of the following items:
•

Machine A purchased April 20X1 for RWF3,000

•

Machine B purchased July 20X2 for RWF2,000

•

Machine C purchased October 20X3 for RWF1,000

Required:
Calculate the depreciation charge for the year-end 31st December 20X4.
Question 2
An asset was bought in 20X0 for RWF3,000. It had an expected useful life of 10 years with
no expected residual value. In February 20X5 a decision was taken to sell the asset for

Page 191

RWF1,200. The Year-end is 31st December 20X5. Assume a full year’s depreciation in the
year of purchase and none in the year of sale.
Required:
Calculate the profit / loss on disposal under each of the methods:
a)

Reducing Balance at 10%,

Straight Line Method

Question 3
An asset was purchased on 1st July 20X0 for RWF10,000, if has an expected life of 5 years.
The company uses the straight line method of depreciation. The asset was sold in 1st April
20X3 for RWF5,000. Company year-end is 31st December.
Required:
Prepare the ledger accounts for each of the years assuming:
a)

The company pro-rates the depreciation charge in the year of purchase and disposal.

The company takes a full years charge in the year of purchase of none in the year of
disposal.

Solution – Question 1

20X1

20X2

Bought 1.4.20X1
Dep’n 10% x 3,000 x 3/4

A
3,000
225
2,775

Bought 1.7.20X2
Dep’n 10% x 2,775
Dep’n 10% 2,000 x 1/2

277

Bought 1.10.20X3
Dep’n 10% of 2,498
Dep’n 10% x 1,900
Dep’n 10% x 1,000 x 3/12

20X4 Depreciation @ 10%
Net Book Value

2,000

2,498
20X3

100
1,900
1,000

249
190
2,248
225
2,023

Depreciation Charge for 20X4 is (225 + 171 + 97)

Page 192

1,710
171
1,539
RWF493

25
975
97
878

Solution – Question 2

Straight Line
Method

COST
DEPRECIATION Y/E 31.12.X0
NET BOOK VALUE 31.12.X0
DEPRECIATION Y/E 31.12.X1
NET BOOK VALUE 31.12.X1
DEPRECIATION Y/E 31.12.X2
NET BOOK VALUE 31.12.X2
DEPRECIATION Y/E 31.12.X3
NET BOOK VALUE 31.12.X3
DEPRECIATION Y/E 31.12.X4
NET BOOK VALUE 31.12.X4

Reducing
Balance

3,000
(300)
2,700
(300)
2,400
(300)
2,100
(300)
1,800
(300)
1,500

3,000
(300)
2,700
(270)
2,430
(243)
2,187
(219)
1,968
(196)
1,772

Straight Line
Method
1,200
(1,500)
(300)

PROCEEDS
NET BOOK VALUE
PROFIT/(LOSS) ON DISPOSAL

Reducing
Balance
1,200
(1,772)
(572)

Solution – Question 3
(a)
Asset – Cost Account
1.7.X0 Bank

1.1.X3 Balance b/d

31.12.X0 Balance c/d

31.12.X1 Balance c/d

RWF
10,000
10,000
10,000
10,000

Balance c/d

4.X3

Disposal Account

Asset – Accumulated Depreciation
RWF
1,000
31.12.X0 Statement of
Comprehensive
Income
1,000
3,000

1.1.X1
Balance b/d
31.12.X1 Statement of
Comprehensive
Income

3,000
31.12.X2 Balance c/d

5,000

Page 193

RWF
10,000
10,000
10,000
10,000

RWF
1,000

1,000
1,000
2,000

3,000
1.1.X2
Balance b/d
31.12.X2 Statement of
Comprehensive
Income

3,000
2,000

5,000
1.4.X3

Disposal Account

5,500

5,000
1.1.X3
31.3.X3

Balance b/d
Statement of
Comprehensive
Income

5,500

5,000
500

5,500

Disposal Account
Motor Vehicle A/C
Profit – Statement of
Comprehensive
Income

RWF
10,000
500

Bank
Acc. Depreciation A/C

10,500

RWF
5,000
5,500

10,500

Depreciation X0: 10,000 x 20% = 2,000 x 6/12 = 1,000
Depreciation X3: 2,000 x 3/12 = 500
(b)

Full year Depreciation in the year of purchase and none in the year of sale.
Asset – Cost Account
1.7.X0 Bank

1.1.X3 Balance b/d

RWF
10,000
10,000
10,000
10,000

Balance c/d

4.X3

Disposal Account

RWF
10,000
10,000
10,000
10,000

Asset – Accumulated Depreciation
31.12.X0 Balance c/d

RWF
2,000

31.12.X0 Statement of
Comprehensive
Income

2,000
31.12.X1 Balance c/d

4,000

2,000
1.1.X1
Balance b/d
31.12.X1 Statement of
Comprehensive
Income

4,000
31.12.X2 Balance c/d

6,000

Page 194

RWF
2,000

2,000
2,000

4,000
1.1.X2
Balance b/d
31.12.X2 Statement of
Comprehensive

4,000
2,000

Income
6,000
1.4.X3

Disposal Account

6,000
6,000

6,000
1.1.X3

Balance b/d

6,000
6,000

Disposal Account
Motor Vehicle A/C
Profit – Statement of
Comprehensive
Income

RWF
10,000
1,000

11,000

Page 195

Bank
Acc. Depreciation A/C

RWF
5,000
6,000

11,000

Study Unit 14
IAS 18 – Revenue
Contents
___________________________________________________________________________
A. Objective
___________________________________________________________________________
B. Definitions
___________________________________________________________________________
C. Recognition & Measurement
___________________________________________________________________________
D. Sale of Goods
___________________________________________________________________________
E. Rendering of Services
___________________________________________________________________________
F.
Interest, Royalties and Dividends
___________________________________________________________________________
G. Disclosure
___________________________________________________________________________

Page 196

OBJECTIVE

The objective of this standard is to provide assistance in determining when to recognise
revenue. It should be recognised when it is probable that economic benefits that can be
measured reliably have accrued to the entity. IAS 18 Revenue sets out the criteria as to
when revenue should be recognised and gives practical guidance as to the application of these
criteria.

B. DEFINITIONS
Revenue is the gross inflow of economic benefits during the period arising in the course of
the ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants.
Revenue only represents amounts received by the entity in its own account, it excludes
monies received on behalf of third parties, such as sales taxes and value added taxes. When
the entity acts as an agent the commission earned is treated as revenue and not the amounts
received on behalf of the principal.
Fair Value is the amount for which an asset will be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.

RECOGNITION AND MEASUREMENT

IAS 18 Revenue states that revenue shall be measured as fair value either received or
receivable taking into account any trade discounts or volume rebates allowed. The
consideration in the vast majority of cases is in the form of cash and cash equivalents,
however, companies may offer interest free credit and in this case the fair value is calculated
by discounting the future cash flows using an imputed rate of interest. This imputed rate of
interest is determined by either:
1)

The prevailing rate of interest on similar credit facilities, or

The rate of interest that discounts the nominal amount of the facility to the current cash
sales price of the goods or services.

In some circumstances it is necessary to recognise separately identifiable components of a
transaction. Forr example, the sale of goods that includes a service contract: the entity should
recognise a portion of the proceeds now that relates to the sale of the goods and defer an
amount over the period of the service contract.
Goods and services may be exchanged for similar goods and services; this is not recognised
as a transaction that generates revenue. If the goods and services swapped are dissimilar then
the transaction is recognised as a transaction that generates revenue and the revenue
recognised is fair value of the goods / services received adjusted by the amount of any cash or
cash equivalents transferred. Fair value of goods received is only appropriate when it can be
measured reliably, otherwise use the fair value of goods / services given up adjusted by the
amount of cash / cash equivalents transferred.

Page 197

SALE OF GOODS

Revenue from the sale of goods will be recognised when the following conditions are all met:
a)

The entity (seller) has transferred all the significant risks and rewards of ownership to
the purchaser,

The entity has no managerial involvement or control of the asset,

The amount of revenue attributed to the sale can be measured reliably,

Economic benefits will flow to the entity (seller) as a result of the transaction and

The costs associated with the transaction can be measured reliably.

In most cases the transfer of significant risks and rewards usually occurs when legal title to
the goods / asset is transferred. Revenue and expenses relating to a particular transaction
should be recognised at the same time, this is known as matching.

RENDERING OF SERVICES

When an entity is involved with the provision of services, the revenue relating to a
transaction is recognised in the Statement of Comprehensive Income by considering the stage
of completion of the service at the Statement of Financial Position date. The result of a
transaction can be estimated reliably when the following conditions are satisfied:
a)

Revenue can be measured reliably,

Economic benefits will probably flow to the entity,

The stage of completion of the transaction can be measured reliably at the Statement of
Financial Position date and

Both the costs incurred to date and the costs to complete can be measured reliably.

If the outcome of a transaction cannot be measured reliably or there is uncertainty, revenue
should only be recognised to the extent of the expenses that have been recognised that are
recoverable.

INTEREST, ROYALTIES AND DIVIDENDS

Revenue is recognised on the following bases:
a)

Interest recognised as the effective interest method per IAS39 (not examinable at
Formation 2).

Royalties recognised on an accruals basis.

Dividends recognised when the shareholder’s right to receive payment is established.

G. DISCLOSURE
An entity will make the following disclosures:
1)

The entity’s accounting policies for recognising revenue and determining the stage of
completion of transactions involved in the provision of services.
Page 198

Revenue analysed between:
(i)

Sale of Goods

(ii) Rendering of Services
(iii) Interest
(iv) Royalties and
(v) Dividends
3)

Amount of revenue from exchange of goods or services included in each of the
categories identified in (2) above.

Page 199

Study Unit 15
IAS 20 - Government Grants
Contents

Objective

Basic Concepts

Definitions

Types of Grant Available

Accounting Treatment

Disclosure

Repayment of Grants

Grant Recognition

Page 200

A. OBJECTIVE
The objective of IAS 20 is to set out the accounting treatment for both government grants
and other forms of government assistance.
Government assistance takes many forms, including grants, equity finance, subsidised loans
and advisory assistance. Government grants are made in order to persuade or assist
enterprises to pursue courses of action, which are deemed to be socially or economically
desirable. The range of grants available is wide and changes regularly, reflecting changes in
government policy. More significantly, different grants tend to be given on different terms as
to eligibility, manner of determination, manner of payment and conditions to be fulfilled.
The term 'government' covers national government and all of the various tiers of local and
district/regional government of any country, government agencies and 'non-departmental
public bodies'.

BASIC CONCEPTS

The accruals concept requires that revenue and costs are accrued, matched with one another
so far as their relationship can be established or justifiably assumed, and dealt with in the
Statement of Comprehensive Income of the period to which they relate. Government grants
should be recognised in the Statement of Comprehensive Income so as to match them with
the expenditure towards which they are intended to contribute.
The prudence concept requires that revenue and profits are not anticipated, but are recognised
by inclusion in the Statement of Comprehensive Income only when realised in the form either
of cash or of other assets the ultimate cash realisation of which can be established with
reasonable certainty. Accordingly, government grants should not be recognised in the
Statement of Comprehensive Income until the conditions for their receipt have been complied
with and there is reasonable assurance that the grant will be received.
In many cases, the grant-making body has the right to recover all or part of a grant paid if the
enterprise has not complied with the conditions under which the grant was made. On the
assumption that the enterprise is a going concern, the application of the prudence concept
does not normally require postponement of the recognition of the grant in the Statement of
Comprehensive Income solely because there is a possibility that it might have to be repaid in
the future. The enterprise should consider regularly whether there is a likelihood of a breach
of the conditions on which the grant was made. If such a breach has occurred, or appears
likely to occur, and it is probable that some grant will have to be repaid, provision should be
made for the liability.

C. DEFINITIONS
Government Grants are assistance by government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity.

Page 201

D. TYPES OF GRANT AVAILABLE
Government grants may be given for a number of projects. Examples would be:
(a)

Grants related to Assets: Primary condition is that the entity qualifying for them should
purchase, construct or otherwise acquire long-term assets

(b)

Grants related to Income: Other than those related to assets e.g. towards staff training
costs

ACCOUNTING TREATMENT

Grants Related to Assets
Government grants shall be recognised as income over the periods necessary to match them
with the related costs on a systematic basis. They shall not be credited directly to
shareholders’ interests.
Presentation of Grants Related to Assets
Government grants related to assets shall be presented in the Statement of Financial Position
either by setting up the grant as deferred income or by deducting the grant in arriving at the
carrying amount of the asset.
Example
B Limited has an asset to which the following details apply:
Asset cost
RWF20,000
Useful life
5 years
Grant received RWF5,000
The accounting treatment of this grant is as follows:
(a)

Income Approach
RWF20,000 divided by 5 years
RWF5,000 divided by 5 years

= RWF4,000 depreciation expense per annum
= RWF1,000 income per annum

Each year Statement of Comprehensive Income (Extract)
Dr
RWF
Grant amortisation
Depreciation expense
Statement of Financial
Position (Extract)

Cr
RWF
1,000

4,000
Yr 3

Yr 4

Yr 5

RWF
20,000

(4,000)

(8,000)

(12,000)

(16,000)

(20,000)

16,000

12,000

8,000

4,000

Nil

Creditors: amounts due over/under
1 year
Government Grant
4,000

3,000

2,000

1,000

Nil

Non-Current Asset –
Cost
- Accumulated
Depreciation
- Net Book Value

Yr 1

Yr 2

RWF
20,000

Deferred Income method - Journal Entries on receipt of a Capital Grant
Page 202

DR Bank
CR Liabilities
With the amount of the grant received

(b)

DR Liabilities
CR Statement of Comprehensive Income
With the annual amount of the grant amortisation

Net Cost Method/Immediate Deduction Method
RWF
20,000
5,000
15,000 Divided by 5 years = RWF3,000
depreciation per annum

Cost
Less grant
Balance

Each year Statement of
Comprehensive Income (Extract)
RWF
3,000

Depreciation cost

Statement of Financial
Position (Extract)
Non-Current Asset – Cost
- Depreciation
- Net book value

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

RWF
15,000
(3,000)
12,000

RWF
15,000
(6,000)
9,000

RWF
15,000
(9,000)
6,000

RWF
15,000
(12,000)
3,000

RWF
15,000
(15,000)
Nil

Immediate Deduction Method - Journal Entries on receipt of a Capital Grant
DR Bank
CR Fixed Assets
With the amount of the grant received
Grants Related to Income
The matching of grants received and expenditure is straightforward if the grant is made as a
contribution toward specified items of expenditure and is described as such. Once the
relationship between the grant and the related expenditure has been established, the
recognition of the grant in the Statement of Comprehensive Income will follow. The grant
should be recognised in the same period as the related expenditure - 'matching' concept.

Page 203

Example
XYZ Ltd. incurred expenditure on staff training costs of RWF4,500 during the year-ended 31
December 20X6. They received a grant towards this cost of RWF2,200. Show the Journal
entry and the Statement of Comprehensive Income for the period.
RWF
RWF
1. DR Staff Training Costs
4,500
CR Bank/Cash
4,500

DR Bank
CR Staff Training Costs

2,200
2,200

20X6 Statement of Comprehensive Income (Extract)
Staff Training Costs

2,300

(4,500
2,200)

–

Difficulties arise where the terms of the grant do not specify precisely the expenditure it is
intended to meet, but use such phrases as 'to assist with a project' or 'to encourage job
creation' or where the basis of calculation is related to two or more criteria - e.g. the capital
expenditure incurred and the number of jobs created. In these instances, it is usually
appropriate to consider the circumstances which give rise to the payment of the grant. If the
grant is paid when evidence is produced that certain expenditure has been incurred, the grant
should be matched with that expenditure. If the grant is paid on a different basis, it will
usually be paid on the achievement of a non-financial objective, such as the creation of a
specified number of new jobs. In these circumstances, the grant should be matched with the
identifiable cost of achieving that objective e.g. the cost of creating and, maintaining for the
required period the specified new jobs.

F. DISCLOSURE
(a)

The financial statement should disclose the accounting policy adopted for government
grants, including the methods of presentation adopted in the financial statements

(b)

The nature and extent of grants recognised

(c)

An indication of other forms of government assistance providing direct benefit

(d)

Unfulfilled conditions and other contingencies attaching to government assistance
recognised

G. REPAYMENT OF GOVERNMENT GRANTS
A government grant that becomes repayable shall be accounted for as a revision to an
accounting estimate.
Repayment of a grant shall be applied first against any unamortised credit. To the extent that
the repayment exceeds any such deferred credit or where no deferred credit exists, the
repayment shall be recognised immediately as an expense.
Repayment of a grant relating to an asset shall be recorded by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable.
Page 204

The cumulative additional depreciation that would have been recognised to date as an
expense, if no grant had been received, shall be recognised immediately as an expense.
Example
Using the example of B Limited above and assuming the grant of RWF5,000 was repaid in
full in year 3, show the accounting entries in year 3 under:
(a) The income approach and
(b)

The net cost method

For the repayment of the grant:
(a)

Income Approach
RWF
2,000
3,000

Debit

Expense
Deferred Income – Grant
Credit Bank
(b)

RWF

5,000

Net Cost Method
RWF
2,000
5,000

Debit

Expense
Non-Current Asset – Cost
Credit Bank
Accumulated Depreciation

RWF

5,000
2,000

In the Statement of Comprehensive Income depreciation will be RWF4,000 for year 3 and in
the Statement of Financial Position the non-current assets will be shown at RWF20,000 less
accumulated depreciation of RWF12,000.

H. GRANT RECOGNITION
A government grant is not recognised until there is reasonable assurance that the entity will
comply with the conditions attaching to it and the grant will be received.

Page 205

Study Unit 16
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
Contents
___________________________________________________________________________
A. Objective
___________________________________________________________________________
B. Definitions
___________________________________________________________________________
C. Recognition
___________________________________________________________________________
D. Measurement
___________________________________________________________________________
E. Changes in Provisions
___________________________________________________________________________
F.
Use of Provisions
___________________________________________________________________________
G. Application of the Recognition and Measurement Rules
___________________________________________________________________________
H. Disclosure
___________________________________________________________________________
I.
Example - Recognition
___________________________________________________________________________

Page 206

OBJECTIVE

The objective of this standard is to ensure that the appropriate recognition rules and
measurement bases are applied to provisions, contingent liabilities and contingent assets. The
standard also sets out the disclosure to be made to ensure that sufficient information is
available to assist users in understanding the nature, timing and amount of any provisions,
contingent liabilities and contingent assets.

DEFINITIONS

A Provision is a liability of uncertain timing or amount.
A liability is a present obligation of an entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefit.
An obligating event is an event that creates a legal or constructive obligation that results in an
entity having no realistic alternative to settling that obligation.
A legal obligation is an obligation that derives from:
a)

A contract,

Legislation or

Operation of law.

A constructive obligation is an obligation that derives from an entity’s actions where:
a)

By an established pattern or past practice, published policies or a sufficiently specific
current statement, the entity has indicated to other parties that it will accept certain
responsibilities, and

As a result, the entity has created a valid expectation on the part of those other parties
that it will discharge those responsibilities.

A contingent liability is:
a)

A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity, and

A present obligation that arises from past events but is not recognised because:
(i)

It is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligations, or

(ii)

The amount of the obligation cannot be measured with sufficient reliability.

A contingent asset is a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the entity.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations
under the contract exceed the economic benefits expected to be received under it.
Page 207

A restructuring is a programme that is planned and controlled by management, and materially
changes either:
a)

The scope of the business undertaken by an entity, or

The manner in which that business is conducted.

A provision differs from other liabilities due to the uncertainty as to the timing and amount of
the expenditure involved.

RECOGNITION

A provision is recognised when all of the following conditions are met:
a)

An entity has a present obligation as a result of a past event,

It is probable that there will be an outflow of economic benefits to settle the obligation,

A reliable estimate of the amount of the obligation can be made.

Contingent Liability
If the possibility of an outflow of economic benefit is remote then the entity does not need to
disclose the contingent liability.
If the possibility of an outflow of economic benefit is probable and a reliable estimate of the
amount can be made then a provision should be made.
Contingent Asset
A contingent asset is the possibility of an inflow of economic benefits. Where the possibility
is virtually certain the contingent asset should be recognised.
If the possibility of the inflow of economic benefits is probable then details of the contingent
asset should be disclosed.
Both contingent assets and contingent liabilities should be reviewed continually to ensure that
are accurately presented in the financial statements.

MEASUREMENT

The amount of the provision presented in the financial statements will be the best estimate of
the amount of the expenditure required to settle the present obligation as at the Statement of
Financial Position date. These estimates are based on the judgement of the management of
the entity with reference to their past experience of similar transactions and, on some
occasions, the advice of experts.
Example
COD Ltd sells domestic appliances with a warranty that covers the cost of repairs of any
manufacturing defects that occur within the first year. If minor defects occurred in all goods
sold, the cost would be RWF2m. If major defects occurred in all goods sold, the cost would
be RWF8m. Based on COD’s past experience 80% of the goods sold will have no defects,
15% will have minor defects and 5% will have major defects.

Page 208

The expected cost of the entity’s warranty is:
No defects
Minor Defects
Major Defects
Total Provision for Warranty Claims

(80% x Nil)
(15% x RWF2m)
(5% x RWF8m)

Nil
300k
400k
700k

In calculating the best estimate of a provision consideration should be given to any risks and
uncertainties that exist. This does not justify the creation of excessive provisions or a
deliberate overstatement of liabilities.
Future events that may affect the amount required to settle an obligation shall be reflected in
the amount of the provision where there is sufficient objective evidence that they will occur.
Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognised when, and only when, it
is virtually certain that reimbursement will be received. The reimbursement shall be treated as
a separate asset. The amount recognised for the reimbursement shall not exceed the amount
of the provision. In the Statement of Comprehensive Income, the expense relating to a
provision may be presented net of the amount recognised for a reimbursement.

CHANGES IN PROVISIONS

Provisions should be reviewed annually at the Statement of Financial Position date to ensure
that it represents the best estimate. If there is no longer a requirement for the provision, that
is, we do not expect that there will be an outflow of economic benefit, we should reverse the
provision.

USES OF PROVISIONS

A provision should only be used for expenditure for which the provision was originally
established.

G. APPLICATIONOF THE RECOGNITION AND MEASUREMENT
RULES
Future Operating Losses
No provision shall be made for future operating losses.
Onerous Contracts
If an entity has an onerous contract then the present obligation under the contract should be
recognised and measured as a provision.
Restructuring
The following are examples of events that are considered to be restructuring:
a)

Sale or termination of a part of the business,

Closure of business in a country or region or the relocation of business activities from
one country or region to another,

Change in management structure,
Page 209

Fundamental reorganisation that have a material effect on the nature and focus of the
entity’s operations.

A constructive obligation to restructure arises only when an entity:
a)

Has a detailed plan for restructuring, identifying at least:
(i)

Business or part of business concerned,

(ii)

Principal locations affected,

(iii) Location, function, and approximate number of employees who will be
compensated for termination of their services,
(iv) Expenditure to be undertaken and
(v)
b)

when the plan will be implemented and

Has raised a valid expectation in those affected that it will carry out the restructuring by
starting to implement that plan or announcing its main features to those affected by it.

A decision by the Board of Management prior to the Statement of Financial Position date to
implement a restructuring plan does not of itself constitute a constructive obligation unless
they have started to implement the restructuring plan or they have announced the main
features of the plan to those affected.
No obligation arises for the sale of an operation until the entity is committed to the sale, that
is, there is a binding sale agreement.
A restructuring provision shall include only the direct expenditure arising from the
restructuring, which is both necessarily entailed by the restructuring and not associated with
the on-going activities of the entity.

DISCLOSURE

For each class of provision an entity must disclose:
a)

The carrying amounts at the beginning and end of the period,

Additional provisions made in the period, including an increase to existing provisions,

Amounts used during the period,

Unused amounts reversed during the period and

Any increase during the period in the discounted amount arising from the passage of
time and the effect of any change in the discount rate.

Comparative information is not required.
An entity shall disclose for each class of provision:
a)

A brief description of the nature and timing of any expected outflow of economic
benefit,

Details of any uncertainties about the amount and timing of these outflows, it may be
necessary to disclose any major assumptions made concerning future events,

Amount of any expected reimbursement, stating the amount of any asset that has been
recognised for that expected reimbursement.
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For each Contingent liability where the possibility of the settlement is not remote the entity
should provide a brief description of the nature of the contingent liability, and where
practicable:
a)

An estimate of the financial effect,

An indication of the uncertainties relating to the amount or timing of any outflow,

The possibility of any reimbursement.

For each contingent asset disclose:
a)

A brief description of the nature of the contingent asset,

An estimate of the financial effect.

EXAMPLES - RECOGNITION

Warranties
The obligating event is the sale of the product with a warranty. It is probable that there will
be an outflow of resources. A provision is recognised for the best estimate of the cost of
correcting the defects on goods sold prior to the Statement of Financial Position date.
Contaminated Land – Legislation virtually certain to be enacted
It is probable that there will be an outflow of resources as the enactment of the legislation is
virtually certain and therefore an obligating event. It is necessary to recognise a provision for
the best estimate of the cost to clean up the contaminated land.
Contaminated Land – No environmental legislation but company has a widely
publicised environmental policy to clean up any contamination
The company has an obligation to clean up the contaminated land as a result of its past
practice. The likelihood that there will be an outflow of resources to correct the
contamination is probable. The entity will recognise a provision for the best estimate of the
costs of the clean-up.
Offshore Oilfield
A licensing agreement requires it to remove the oil rig at the end of the production and
restore the seabed. Ninety per cent of the eventual costs relate to the removal of the rig and
the restoration of the damage to the seabed, the remaining ten per cent arises through the
extraction of the oil.
The obligating event is the construction of the oil rig and its removal and restorationof the
seabed. The likelihood attaching to the event is highly probable. A provision should be raised
for the best estimate of the cost of removing the oil rig and restoring the sea bed, that is, the
ninety per cent of the eventual costs. The balance is recognised as a liability when the oil is
extracted.
Refunds Policy
A retail company refunds dissatisfied customers even though this is not required by
legislation. The obligating event is the sale of goods to customers who have an expectation
based on past experience that they will receive a refund if they are unhappy with their
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purchases. The likelihood that the company will have to refund customers is probable. A
provision is recognised for the best estimate of the cost of the refunds.
Closure of a Division – No implementation before the Statement of Financial Position
Date
There is no obligating event as no action has been taken at the Statement of Financial
Position date so therefore no provision can be raised.
Closure of a Division – Communication / Implementation before Statement of Financial
Position Date
The fact that the company has communicated its plans to close a division. As a result of the
communication it is highly probable that the division will be closed. A provision should be
recognised, this should represent the best estimate of the cost involved in closing the division.
Staff retraining as a result of changes in the Statement of Comprehensive Income
For example, changes in Income Tax Legislation: certain companies will need to retrain their
administrative staff to ensure compliance with the legislation. At the Statement of Financial
Position date no retraining has taken place. There is no obligating event because no retraining
has taken place, so no provision is recognised.
Onerous Contract
A company has moved during the year to new premises but their old premises still has 4
years remaining on its lease. The company cannot cancel the lease and they cannot sublet the
premises. The obligating event is the signing of the original lease agreement and this gives
rise to a legal obligation. A provision is recognised for the best estimate of the unavoidable
lease payments.
Refurbishment Costs – No legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the
Statement of Financial Position date, the lining has been in use for three years. There is no
obligating event as at the Statement of Financial Position date as the lining exists
independently of the company’s future actions – even the intention to incur the expenditure
depends on the company deciding to continue operating the furnace or to replace the lining.
Instead of a provision being recognised, the depreciation of the lining takes account of its
consumption, that is, it is depreciated over five years. The re-lining costs then incurred are
capitalised with the consumption of each new lining shown by depreciation over the
subsequent five years. There is noevent so no provision is recognised.
Refurbishment Costs – Legislative Requirement
An airline is required by law to overhaul its aircraft once every three years. There is no event
so therefore no provision is recognised.
The rationale is the same as in the previous example of Refurbishment costs where there is no
legislative requirement.

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BLANK

Page 213

Study Unit 17
IAS 12 – Income Taxes
Contents

Objective

Definitions

Recognition and Presentation

Disclosure

Page 214

OBJECTIVE

The objective of IAS 12 is to prescribe the accounting treatment for income taxes.

DEFINITION

Temporary difference: a difference between the carrying amount of an asset or liability and
its tax base.
Taxable temporary difference: a temporary difference that will result in taxable amounts in
the future when the carrying amount of the asset is recovered or the liability is settled.
Deductible temporary difference: a temporary difference that will result in amounts that are
tax deductible in the future when the carrying amount of the asset if recovered or the liability
is settled.

RECOGNITION AND PRESENTATION

Recognition of current tax
Current tax for the current and prior periods should be recognised as a liability to the extent
that it has not yet been settled, and as an asset to the extent that the amounts already paid
exceed the amount due. The benefit of a tax loss which can be carried back to recover current
tax of a prior period should be recognised as an asset. Current tax assets and liabilities should
be measured at the amount expected to be paid to (recovered from) taxation authorities, using
rates/laws that have been enacted or substantively enacted by the Statement of Financial
Position date.
Presentation
Current tax assets and current tax liabilities should be offset on the Statement of Financial
Position only if the entity has the legal right and the intention to settle on a net basis.

DISCLOSURE

IAS 12 requires the following disclosures:
•

Major components of tax expense (tax income), including:
- Current tax expense (income)
- Any adjustments of taxes of prior periods
- Amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences
- Amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes
- Amount of the benefit arising from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period
- Write-down, or reversal of a previous write down, of a deferred tax asset
- Amount of tax expense (income) relating to changes in accounting policies and
corrections of errors

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• Aggregate current and deferred tax relating to items reported directly in equity
• Tax relating to each component of other comprehensive income
• Explanation of the relationship between tax expense (income) and the tax that would
be expected by applying the current tax rate to accounting profit or loss
• Changes in tax rates
• Amounts and other details of deductible temporary differences, unused tax losses, and
unused tax credits
• Temporary differences associated with investments in subsidiaries, associates,
branches, and joint ventures
• For each type of temporary difference and unused tax loss and credit, the amount of
deferred tax assets or liabilities recognised in the statement of financial position and
the amount of deferred tax income or expense recognised in the Statement of
Comprehensive Income
• Tax relating to discontinued operations
• Tax consequences of dividends declared after the end of the reporting period
• Details of deferred tax assets
• Tax consequences of future dividend payments

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BLANK

Page 217

Study Unit 18
IAS 17 – Leases
Contents

Objective

Classification of Leases

Accounting by Lessees

Disclosure: Lessees – Finance Lease

Disclosure: Lessees – Operating Lease

Page 218

A. OBJECTIVE
The objective of IAS 17 is to prescribe, for lesses and lessors, the appropriate accounting
policies and disclosures to apply in relation to finance and operating leases.

CLASSIFICATION OF LEASES

A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incident to ownership. All other leases are classified as operating leases. Classification is
made at the inception of the lease.
Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form. Situations that would normally lead to a lease being
classified as a finance lease include the following:
•
•
•
•
•

the lease transfers ownership of the asset to the lessee by the end of the lease term
the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than fair value at the date the option becomes exercisable that, at
the inception of the lease, it is reasonably certain that the option will be exercised
the lease term is for the major part of the economic life of the asset, even if title is
not transferred
at the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset
the lease assets are of a specialised nature such that only the lessee can use them
without major modifications being made

Other situations that might also lead to classification as a finance lease are:
•
•
•

if the lessee is entitled to cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee
gains or losses from fluctuations in the fair value of the residual fall to the lessee
(for example, by means of a rebate of lease payments)
the lessee has the ability to continue to lease for a secondary period at a rent that is
substantially lower than market rent

In classifying a lease of land and buildings, land and buildings elements would normally be
classified separately. The minimum lease payments are allocated between the land and
buildings elements in proportion to their relative fair values. The land element is normally
classified as an operating lease unless title passes to the lessee at the end of the lease term.
The buildings element is classified as an operating or finance lease by applying the
classification criteria in IAS 17. However, separate measurement of the land and buildings
elements is not required if the lessee’s interest in both land and buildings is classified as an
investment property in accordance with IAS 40 and the fair value model is adopted.

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C. ACCOUNTING BY LESSEES
The following principles should be applied in the financial statements of lessees:
•

•
•

•

At commencement if the lease term, finance leases should be recorded as an asset
and a liability at the lower of the fair value of the asset and the present value of the
minimum lease payments (discounted at the interest rate implicit in the lease, if
practicable, or else at the entity’s incremental borrowing rate)
Finance lease payments should be apportioned between the finance charge and the
reduction of the outstanding liability (the finance charge to be allocated so as to
produce a constant periodic rate of interest on the remaining balance of the liability)
The depreciation policy for assets held under finance leases should be consistent
with that for owned assets. If there is no reasonable certainty that the lessee will
obtain ownership at the end of the lease – the asset should be depreciated over the
shorted of the lease term or the life of the asset.
For operating leases, the lease payments should be recognised as an expense in the
Statement of Comprehensive Income over the lease term on a straight-line basis,
unless another systematic basis is more representative of the time pattern of the
user’s benefit

Incentives for the agreement of a new or renewed operating lease should be recognised by the
lessee as a reduction of the rental expense over the lease term, irrespective of the incentive’s
nature or form, or the timing of payments.

D. DISCLOSURE: LESSEES – FINANCE LEASE
•
•
•

Carrying amount of asset
Reconciliation between total minimum lease payments and their present value
Amounts of minimum lease payments at Statement of Financial Position date and the
present value thereof, for:
o the next year
o years 2 through 5 combined
o beyond 5 years

•
•
•

Contingent rent recognised as an expense
Total future minimum sublease income under non-cancellable subleases
General description of significant leasing arrangements, including contingent rent
provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing

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DISCLOSURES: LESSEES – OPERATING LEASE
•

Amounts of minimum lease payments at the Statement of Financial Position date
under non-cancellable operating leases for:




•
•
•
•

The next year
Years 2 through 5 combined
Beyond five years

Total future minimum sublease income under non-cancellable subleases
Lease and sublease payments recognised in income for the period
Contingent rent recognised as an expense
General description of significant leasing arrangements, including contingent rent
provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing

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Study Unit 19
Sole Traders
Contents

Preparing Financial Statements for Different Forms of Business Entity

Sole Trader Accounts - Introduction

Two Approaches in Preparing Accounts

Double Entry Approach

Question/Solution

Single Entry Approach

Question/Solution

Use of Ratios

Question/Solution

Page 222

PREPARING FINANCIAL STATEMENTS FOR DIFFERENT
FORMS OF BUSINESS ENTITY

There are a number of different forms of business entity. These are:
(i)

Sole-trader e.g. shop-keeper

(ii) Companies, limited by shares or by guarantee
(iii) Companies, unlimited

A number of substantial differences exist between all of these. These are:
1.

The business of the sole trader is not governed by one identifiable Act but is subject to
provisions of customary / common law and other acts related to commercial activities..

A sole trader operates as a single individual. A private company must have a minimum
of two members and a maximum of one hundred, while a public company must have a
minimum of seven members with no maximum number of members. (Companies Act
7/2009 , Article 6)

A sole trader operates his business on a personal basis; a company is a separate legal
entity, distinct from its members.

The sole trader has the capacity to enter into binding contracts. The management of a
company must act within the terms outlined in the Memorandum and Articles of
Association of the company and is deemed to be an agent of the company.

A sole trader may commence trading without much formality. A company must
complete a number of formalities before business can commence. Such legal
documents include memorandum and articles of association.

A sole trader is liable for the debts of his business without limit.
Company Limited by Guarantee
Company formed on the principle of having the liability of its members limited by its
constitution to such amount as the members may respectively undertake to contribute to
the assets of the company in the event of its being wound up.
Company Limited by Shares
Company in which the liability of shareholders is limited to the number of subscribed
shares, whether paid or not.

Company Limited by Shares & Guarantee
Is a Company formed on the principle of having the following liability of its members
limited to:(a) the amount paid by shareholders or the amount agreed to pay on the shares
respectively held by them, if any;
(b) the security issued by shareholders equivalent to the amount agreed as surety in case
of liquidations.
Page 223

Reference: Companies Act Law No 07/2009 of 27/04/09
7.

Payables of a sole trader's business have a right of action against the sole trader
personally. The payables of a company have a right of action against the company itself
and not against its members.

The property of a sole trader belongs to the individual himself and may be used for his
own purposes, irrespective of whether for business or private use. The assets of the
company do not belong to the members but rather to the company in its own separate
legal right.

A sole trader often experiences difficulty in negotiating loans as lending institutions
seek security on such a loan by way of charges on assets. A company has that capacity
as the shareholders do not have the capacity to remove the assets for their own personal
use.

10.

On death, the business of the sole trader ceases.
unaffected by death of a member.

11.

A sole trader may sell his business to another (the original owner is liable for all debts
up to the date of sale).

12.

The accounts of sole traders need not be filed with any public office except possibly the
Rwandan Revenue Authority for Income tax purposes. Subsequently, those accounts
are not available for inspection by other interested parties. A company, on the other
hand, must make annual returns to the Office of Registrar General and these are
available for inspection.

The business of a company is

When preparing financial statements for any of the above, the principles of double-entry still
apply. However, each will have their own individual requirements.

SOLE TRADER ACCOUNTS - INTRODUCTION

The business activities of a sole trader should be separate from his personal transactions. To
assist in preparing the accounts, the sole trader should operate two bank accounts - one for
the business and one for personal expenses. Any money put into the business from the sole
trader's private resources are treated as capital. Any assets withdrawn from the business
during the course of the year is known as drawings e.g. stock taken for own use, cash, motor
vehicle. Drawings are not included as expenses in the Statement of Comprehensive Income.
Rather, the drawings are debited to the capital account in the Statement of Financial Position.
The profit at the end of the period belongs solely to the trader. At the end of the accounting
period, the profit is credited to the capital account in the Statement of Financial Position
while a loss is debited.
One major disadvantage of being a sole trader is that the sole trader has not got limited
liability; i.e. should the business incur debts and there are insufficient resources in the
business to pay all the payables, the sole trader must pay the payables from private funds. In
some instances, the sole trader's private assets i.e. house, may have to be sold to pay the debts
involved.
Page 224

When preparing the accounts of sole traders or other small businesses, the books or records
may fall short of a complete system of double entry. Such situations may vary from cases
where virtually no records or bank accounts are maintained to cases where bank accounts and
some record of transactions are maintained. Such accounting records, which fall short of a
system of complete double entry, are known as incomplete records.
The approach of the accountant in preparing accounts from incomplete records will
depend on the extent of the incompleteness of the records. However, in all cases he will
be attempting to:
(a) Compute a Statement of Comprehensive Income for the accounting period
(b)

Prepare a Statement of Financial Position at the end of the accounting period

TWO APPROACHES IN PREPARING ACCOUNTS

Incomplete records can be divided into two types and there are, therefore, two methods of
preparing accounts from such records. These are:
(a) Double Entry Approach
In cases where the double entry approach is used, bank statements will exist and
probably some other record of transactions for the year - possibly cash records and
cheque books. The approach here is prepare an opening statement of affairs, to establish
the balance on the capital account and then to open ledger accounts and complete the
double entry for the year. A final trial balance at the year-end will then be prepared and
from this, a trading, a Statement of Comprehensive Income, together with a Statement of
Financial Position can be completed.
(b) Single Entry Approach
In cases where the single entry approach is used, no bank account will have been
maintained which means that it will not be possible to prepare a cash account for the
year. In such cases, the accountant will prepare a statement of affairs as at the beginning
and end of the accounting period, showing the total assets, total liabilities and net worth
of the business at each of those dates. The increase in net worth i.e. net assets will be
adjusted for cash introduced and drawings during the year and the resulting balance will
represent the profit or loss for the year. In such cases, it will not be possible to prepare a
Statement of Comprehensive Income for the year.

DOUBLE ENTRY APPROACH

The followings are the steps that should be taken in preparing final accounts under the double
entry approach.
1.

Opening Statement of Affairs
A statement of affairs should be prepared as at the commencement of the accounting
period. This will include a list of all the balances on the asset and liability accounts at
that date and the resulting balance of net assets will represent the opening balance of
the capital account for the period.

Page 225

Each of the different classes of assets and liabilities will then be posted to the
relevant ledger account as an opening balance.
2.

Preparation of Cash Account
Using the bank statements, lodgement dockets and cheque stubs, all of the receipts and
payments should be analysed for the year. In practice, ruled analysis sheets will be
used in the preparation of such an analysis of expenditure. A cash account will then be
prepared for the year showing the different classes of income received and expenditure
incurred during the year. It is important to include in the cash account, cash receipts
during the year which were not lodged and which may have been taken as drawings or
used to purchase further goods or pay for expenses in cash.

Example
Cash Account – Year Ended 31 December 20X4
1.01.X4 Balance b/d

RWF
1,500

Receipts from
Trade
Receivables
Cash Sales
Capital
Introduced

12,500
2,000
3,500

Payments to trade payables
(goods)
Expense
- ESB
payments
- Rent
Drawings
31.12.X5 Balance c/d

19,500
1.01.X5 Balance b/d

RWF
11,000
1,500
2,500
600
3,900
19,500

3,900

In order to complete the double entry, the individual items of income and expenditure
will be posted to the appropriate ledger accounts.
3.

Trade Receivables Control Account
The next step is the preparation of the trade receivables control account. This account
should already contain an opening debit balance, which will be the figure posted from
the statement of affairs. It will also contain a credit entry being the cash received from
trade receivables during the year.
A listing of the outstanding trade receivables at the end of the accounting period should
now be prepared and posted to the credit of the account as the closing balance. No
adjustment should be made in the trade receivables control account for bad debts.
The balancing debit figure in the account will represent the value of sales during the
period.

Example
You are given the following information at 31 Dec 20X4 and are requested to
prepare a debtors control account.
RWF
Balance of trade receivables at 1 Jan 20X4
6,000
Cash received from trade receivables
27,500
Page 226

Balance on trade receivables control 31 Dec 20X4

7,500

Trade Receivables Control Account
RWF
6,000
for 29,000

RWF
Cash received – trade 27,500
receivables
31.12.X4 Balance c/d
7,500

35,000

1.01.X4 Balance b/d
***

Total
year

sales

1.01.X5 Balance b/d

7,500

*** Balancing figure
4.

Trade Payables Control Account
Similarly, a trade payables control account will be prepared for the year. This account
will show an opening credit balance being the trade payables transferred from the
statement of affairs and a debit entry being the payments made to trade payables during
the year. A list of credit balances will be prepared and posted to the debit of the
account as a closing balance. The value of cash purchases will also be posted to the
debit of the account.
The balance on the account will now represent the value of purchases during the year.
Example
Prepare a creditors control account from the following information extracted for the
year ended 31 Dec 20X4.
RWF
Balance on trade payables control at 1 Jan 20X4
15,000
Payments to trade payables
13,000
Balance on trade payables at 31 Dec 20X4
9,000
Trade Payables Control Account
Payments to trade payables
31.12.X4 Balance c/d

RWF
13,000
9,000
22,000

RWF
1.01.X4 Balance b/d
15,000
***
Total purchases for 7,000
year
22,000
1.01.X5 Balance b/d

9,000

*** Balancing figure
5.

Accruals and Prepayments
At the end of the accounting period, a list of accruals and prepayments should be
prepared, journalised and posted to the appropriate ledger account. Example of
accounts on which accruals and prepayments might arise are:
•

Rent Account

•

Rates Account

•

Electricity Account
Page 227

•
6.

Subscription Account

Other asset and liability accounts
Postings should now be made on any other asset or liability accounts which affect the
financial results of the business and which are not included above i.e. provision
accounts. Examples:
(a)

Provision for depreciation
DR
Depreciation account
CR Accumulated depreciation account/provision for depreciation account

(b)

Provision for bad debts
DR
Bad debts account
CR Provision for bad debts account

Preparation of final accounts
(i) An inventory figure at the end of the accounting period will be calculated.
(ii)

Transfer from the various accounts will be made to the Statement of
Comprehensive Income. Accounts should be balanced and balances carried down
to the next period.

(iii) A Statement of Financial Position will be prepared from the list of closing
balances. The balance on the Statement of Comprehensive Income will be added
to the capital account. Having adjusted this account for drawings during the year,
the closing balance will represent the capital of the business at the end of the
accounting period.
8.

Reasonableness check on results for year
A reasonableness check on the results for the year could be carried out, by comparing
the gross profit ratios extracted from the accounts with:
(a)

The gross profit ratio in previous accounting periods
And/or

(b)

Gross profit ratios produced by similar business concerns.

A divergence in this ratio from the expected figure might raise doubts about accuracy
of the stock figure or whether stock has been drawn from business for private use.
9.

Inventory for Private use
The owner of the business may take goods for private use. This is accounted for by the
following journal entry:
Debit
Credit

Drawings Account
Purchases Account

Page 228

QUESTION/SOLUTION

Question
Joseph Otto has been in business five years. He does not maintain a ledger. His summary
receipts and payments account for the year ended 31st March 20X4 is as follows:
Balance 1/4/20X3
Sales receipts
Loan from Pascal Otto
Sale of private car
Balance 31/3/20X4

RWF
8,400
211,550
25,000
4,350
7,550

Drawings
Purchases
Van Expenses
Workshop: Rent
Rates
Wages:
Yves Moller

256,850

RWF
31,500
188,500
14,500
3,500
2,850
16,000
256,850

Additional information:
(a)

Depreciation is provided on the van annually at the rate of 20% of the book value.

(b)

The loan from Pascal Otto was received on 1st January 20X4; interest is payable on the
loan at the rate of 10% per annum.

(c)

In addition to the items mentioned above, the assets and liabilities of Joseph Otto were
as follows:
At 31st March
Van purchased 1/10/20X2, at cost
Accumulated depreciation on van
Inventory
Trade receivables
Van expenses prepaid
Workshop rent accrued due
Trade payables

20X3
20,000
2,000
25,000
23,000
14,500

20X4
20,000
2,000
40,000
61,450
500
1,000
11,000

Requirement:
Prepare the trading and Statement of Comprehensive Income for the year ended 31st March
20X4, and a Statement of Financial Position as at that date.
Solution
1.
Opening Statement of Affairs
1st April 20x3
Assets
Van
Less Accumulated Depreciation

RWF
20,000
(2,000)
18,000
25,000
23,000
8,400
74,400

Inventory
Trade Receivables
Bank
Liabilities
Trade Payables

14,500

∴ Opening Capital
2.

RWF59,900

Bank Account as Per Question
Page 229

3.
Trade Receivables Control Account
RWF
23,000
250,000
273,000

Opening
∴ Sales

RWF
61,450
211,550
273,000

Closing
Bank

4.
Trade Payables Control Account
RWF
11,000
Opening
188,500
Purchases
199,500

Closing
Bank

RWF
14,500
185,000
199,500

(a)
Accruals and Prepayments: Van Expenses Account
Bank

RWF
14,500

RWF
500
14,000

Prepaid c/d
Statement of Comprehensive
Income

14,500

(b)
Workshop Rent Account
Bank
Accrued c/d

RWF
3,500

Statement of Comprehensive
Income

1,000
4,500

RWF
4,500

4,500

Other Asset/Liability Accounts
(a)

Depreciation on Van:
Net book value at 1/4/X3

(b)

RWF18,000 x 20%

RWF3,600

Loan Interest:
Loan from Pascal Otto

RWF25,000 x 10% x 3/12

Page 230

RWF625

Preparation of Final Accounts:

Statement of Comprehensive Income
RWF
Sales
Inventory 1/4/X3
Purchases

RWF
250,000

25,000
185,00
0
40,000

Inventory 31/3/X4
Cost of Sales
Gross Profit
Rent
Rates
Wages
Van Expenses
Loan Interest
Depreciation
Net Profit

170,000
80,000
4,500
2,850
16,000
14,000
625
3,600

Statement of Financial Position
Cost
Non-currentNon-Current Assets
Van

RWF
20,00
0

Current Assets
Inventories
Trade Receivables
Prepayment

Accumulated
Depreciation
RWF
5,600

41,575
38,425

Net Book
Amount
RWF
14,400

40,000
61,450
500
101,950
116,350

Capital:
Balance 1/4/X4
Sales of Private Car – capital introduced
Add net Profit

RWF
59,900
4,350
38,425
102,67
5
31,500

Less Drawings

71,175
(25,000)

Non-current Liabilities
Current Liabilities
Creditors

11,00
0
7,550

Bank Overdraft
Page 231

Interest Due
Rent Due

625
1,000

20,175
116,350

SINGLE ENTRY APPROACH

Introduction
In certain cases, owing to the deficiency of the records, it will be impossible to complete
double entry accounts as described above. This might occur because no bank accounts were
maintained and the records of the cash received and payments made were insufficient to give
details of the transactions entered into.
In order to establish the profit for the year and the financial position at the year end, the
following steps should be taken: 1.
2.
3.

An opening statement of affairs should be prepared as described above.
A statement of affairs at the end of the accounting period should be prepared.
The net increase in capital for the year can then be found by subtracting the balances on
the capital accounts in 1 and 2 above from one another. This net increase in capital will
then be reduced by the capital introduced during the year, increased by the drawings
during the year and the resulting balance will represent the profit or loss for the year.

G. QUESTION/SOLUTION
J.Klopper
J.Klopper is a dealer who has not kept proper books of account. At 31st August 20X4 his
state of affairs was as follows:
RWF
Cash
115
Bank Balance
2,209
Fixtures
4,000
Inventory
16,740
Trade Receivables
11,890
Trade Payables
9,052
Motor Van
3,000
During the year to 31st August 20X5 his drawings amounted to RWF7,560. Winnings from a
Casino RWF2,800 were put into the business. Extra fixtures were bought for RWF2,000.
At 31st August 20X5 his assets and liabilities were: Cash RWF84, Bank Overdraft RWF165,
Inventory RWF21,491, Trade Payables for goods RWF6,002, Payables for Expenses
RWF236, Fixtures to be depreciated RWF600, Motor Van to be valued at RWF2,500, Trade
Receivables RWF15,821, Pre-paid Expenses RWF72.
Draw up a statement showing the profit or loss made by Klopper for the year ended 31st
August 20X5.

Page 232

Solution
J. Klopper Opening Capital: 1st September 20X4
Cash
Bank
Fixtures
Inventory
Trade Receivables
Motor Van
Less Trade Payables

RWF
115
2,209
4,000
16,740
11,890
3,000

RWF

37,954
9,052
28,902
st
J. Klopper Statement of Financial Position as at 31 August 20X5
RWF
RWF

Non-current Assets
Motor Van
Less Depreciation
Fixtures
Less Depreciation

3,000
500
6,000
600

Current Assets
Inventories
Trade Receivables
Prepaid Expenses
Cash

21,491
15,821
72
84

Financed By:
Capital
Add Net Profit (W1)
Add Cash Introduced

2,500
5,400
7,900

37,468
45,368
28,902
14,823
2,800
46,525
7,560
38,965

Less Drawings
Current Liabilities
Trade Creditors
Expenses Owing
Bank Overdraft

6,002
236
165

6,403
45,368

(W1) Net Profit Calculation
RWF
38,965
28,902
10,063
7,560
17,623
(2,800)
14,823

Closing Net Assets
Minus Opening Net Assets
Increase
Add Drawings
Less Capital Introduced
Net Profit
Page 233

USE OF RATIOS

Occasionally, ratios may be required to complete the question. Two key ratios are used –
Mark-up and margin.

Margin

Mark
Up

Gross Profit
x 100
Sales

Gross Profit
x 100
Cost of
Sales

Often referred to as the Gross Profit
Percentage

These two ratios are examined in a number of ways. Therefore, it is important to be
fully familiar with them.
Example 1:
Goods cost RWF10,000. Mark-up by 20%. What is the selling price?
Solution:
Selling
Price

10,000 x 120
100

= RWF12,000

Example 2:
GOODS COST RWF10,000. GROSS PROFIT PERCENTAGE IS 20%. WHAT IS THE
SELLING PRICE?
Solution:
Selling
Price

10,000 x 100
80

= RWF12,500

Example 3:
Goods sold for RWF10,000. Gross Profit Percentage is 20%. What is the cost price? What
is the mark-up expressed as a % of cost?
Solution:
Cost
=
Price

Mark Up =

10,000 x 80
100

= RWF8,000

10,000 – 8,000 x
100
8,000

= 25%

Example 4:
GOODS SOLD FOR RWF10,000. MARK-UP IS 10%. WHAT IS THE COST PRICE

Page 234

Solution:
Cost
=
Price

10,000 x 100
110

= RWF9,091

QUESTION/SOLUTION

Eric Grewar - Incomplete Records
Eric Grewar commenced business as a retailer on 1st April 20X2. On the same date he
opened a Bank Account but has not kept any proper accounting records. In May 20X4 you
are called in to assist in the preparation of accounts for tax purposes. You ascertain that on
1st April 20X3 Grewar had the following assets and liabilities.
RWF
Furniture and Equipment (Cost RWF5,400)
3,800
Motor Vehicles (Cost RWF2,800)
2,100
Goodwill (at cost)
2,000
Inventory
6,300
Loan from Jean Jones
1,500
Bank Overdraft
1,000
Trade Receivables
1,000
Trade Payables
3,200
Prepaid Expenses
500
Accrued Expenses
650
An analysis of the Bank Account for the year ended 31st March 20X4 revealed the following
information:
Receipts
Trade Receivables
Cash Sales
New Loan from Jean Jones

Payments
RWF
5,200
34,300
5,500

Cash Purchases
Trade Payables
Expenses
Motor Vehicles
Drawings

45,000

RWF
23,200
8,900
5,300
1,750
5,200
44,350

The following additional information also came to light.
(1)

Mr Grewar has taken goods costing RWF100 for his own personal use.

(2)

The amounts outstanding for trade receivables and trade payables at the end of the
current financial year were RWF1,300 and RWF3,800 respectively. Bad Debts of
RWF100 had been taken into account in arriving at the trade receivables figure.

(3)

RWF450 was accrued and RWF520 prepaid at 31st March 20X4.

(4)

The inventory valuation at the end of the current year was RWF5,850.

(5)

Interest of 10% is to be provided for on both loans.

(6)

The agreed maximum on the bank overdraft is RWF5,000 and RWF50 interest is
outstanding.

(7)

Depreciation of 20% on the original cost of all furniture, equipment and Motor
Vehicles is to be provided.

Page 235

You are required to:
Prepare the Statement of Comprehensive Income for the year ended 31st March 20X4 and a
Statement of Financial Position at the same date, showing all relevant workings.
Solution - Eric Grewar
Step 1 Prepare an opening statement of affairs in order to ascertain the capital at the
beginning of the year.
Assets
Furniture and Equipment
Motor Vehicles
Goodwill
Inventory
Trade Receivables
Prepaid Expenses

RWF
3,800
2,100
2,000
6,300
1,000
500
15,700

Liabilities
Loan from Jean Jones
Bank Overdraft
Trade Payables
Accrued Expenses

1,500
1,000
3,200
650
6,350

∴ Opening Capital
Step 2 Prepare Cash and Bank Account

RWF9,350
Bank Account

Trade Receivables
Cash Sales
New loan from Jean Jones
Balance c/d

RWF
5,200
34,300
5,500
350

Balance b/d
Cash Purchases
Trade Payables
Expenses
Motor Vehicles
Drawings

45,350

Step 3

RWF
1,000
23,200
8,900
5,300
1,750
5,200
45,350

Balance b/d
350
Prepare Trade Receivables and Trade Payables Accounts to find Sales and Purchase

Balance
Sales

Bank
Balance c/d

Trade Receivables
RWF
1,000
Bank
5,600
Bad debts
Balance
6,600
Trade Payables
RWF
8,900
Balance b/d
3,800
Purchases
12,700

Page 236

RWF
5,200
100
1,300
6,600
RWF
3,200
9,500
12,700

Step 4 Deal with Accruals and Payments
Expenses Account
Balance b/d
Bank
Balance c/d

RWF
500
5,300
450
6,250

Balance b/d
Statement of Comprehensive
Income
Balance c/d

RWF
650
5,080
520
6,250

Eric Grewar Statement of Comprehensive Income for the Year ended 31st March 20X4
RWF
RWF
Sales (5,600 + 34,300)
39,900
Cost of Sales
Opening Inventory
6,300
Purchases (W1)
32,60
0
38,90
0
Less Closing Inventory
5,850
Cost of Goods Sold
33,050
Gross Profit
6,850
5,080
Deduct Expenses
Bad Debts
100
Loan Interest (7,000 x 10%)
700
Overdraft Interest
50
Depreciation 20% x 5,400
1,08
0
Motor Vehicles (W2)
910
1,990
Net Loss
7,920
RWF(1,070)
W1
RWF
Credit Purchases
9,500
Cash Purchases
23,200
32,700
Less Goods for Own Use
100
32,600
W2
RWF
2,800
1,750
4,550

Motor Vehicles at start of the year
Acquired during the year
Total Cost of Motor Vehicles
Depreciation @ 20%

910

Page 237

Eric Grewar Statement of Financial Position as at 31st March 20X4
Cost

Non-current Assets
Goodwill
Furniture & Equipment
Motor Vehicles

Accumulated

RWF
2,000
5,400
4,550
11,950

Depreciation
RWF

RWF

2,680
1,610
4,290

Current Assets
Inventories
Trade Receivables
Prepaid Expenses

Net
Book
Value
RWF
2,000
2,720
2,940
7,660

5,850
1,300
520
7,670
15,330

Represented by:
Eric Grewar Capital 1/4/20X2
Less Loss for Year
Drawings 5,200 + 100

9,350
1,070
5,300

Loan – Eric Grewar (5,500 +
1,500)
Current Liabilities
Trade Payables
Accrued Expenses (W3)
Bank Overdraft

6,370
2,980
7,000

3,800
1,200
350
5,350
15,330

W3
RWF
450
50
700
1,200

Accrued Expenses
Bank Overdraft
Loan Interest

Page 238

BLANK

Page 239

Study Unit 20
Company Accounts I
Contents

Introduction – Statement of Comprehensive Income

Dividends

Transfer to Reserve

Statement of Financial Position

Share Capital

Corporation Tax / Income Tax Expense

Issue of Shares

Ultra Vires

Returns, Statutory Books, Director’s Reports, Notices, Resolutions and Accounts
to be Filed

Ethical Obligations of Company Directors

___________________________________________________________________________

Page 240

A. INTRODUCTION – STATEMENT OF COMPREHENSIVE
INCOME
In England in 1897 the House of Lords ruled in the case, Salomon V Salomon & Co. Ltd,
that a company is a separate legal entity from its owners.
The owners’ liability to the
company is limited to the amount of money the owner has invested in the company. This
compares to the sole trader, who must make good all debts incurred by the business, even if
he must provide funds from his own private resources. The owners of a company may walk
away if the business is unable to pay its debts i.e. the members cannot be sued in their own
right for the debts of the company. The exception to this is where a company traded
fraudulently; the owners may be sued in their personal capacity. The owners are known as
members or shareholders.
A company which is registered at the Office of Registrar General as a limited liability
company according to Law 7/2009 of 27/04/2009 Relating to Companies must have the word
"limited" after its name which indicates to third parties that the liability of the owner is
limited to the amount invested. A company may be limited by shares or by guarantee. For
the most part, companies are limited by shares.
The layout of the Statement of Comprehensive Income for a limited company for external
reporting purposes is as follows:
RWF
20,000
11,000
9,000
2,000
2,000
5,000
(1,000)
4,000
1,000
3,000

Revenue
Cost of Sales
Gross Profit
Administration Expenses
Distribution Expenses
Operating Profit
Finance Costs
Profit before Taxation
Income Tax
Profit for Year

Corporation Tax / Income Tax:
The figure shown in the Statement of Comprehensive Income is a provision for tax, based on
the profits for the period. To record this provision, the following journal is posted:
DR Taxation (Statement of Comprehensive Income)
CR Taxation (Liabilities payable within 1 year B/S)
The corporation tax must be paid shortly after the year end. When it is paid, the journal to be
posted is:
DR Taxation (Current Liability)
CR

Bank

Page 241

DIVIDENDS

Dividends represent the return given to the shareholders/owners for investing money in the
company. There are two major categories of shares - preference shares and ordinary shares.
The preference shareholder is entitled to a dividend before the ordinary shareholder can
receive anything. The directors of the company decide on the dividend to be paid to the
ordinary shareholder, based on their assessment of the requirement of the company to hold on
to its reserves for working capital purposes and for future expansion. Should the directors
decide that no dividend is payable to the ordinary shareholder, the shareholder is powerless to
alter this decision.
The dividend to ordinary shareholders is expressed as Rwandan franc per share i.e. RWF.07
per share. The company may pay the dividend twice yearly - the interim dividend and the
final dividend. When the interim dividend is paid, the necessary journal is:
DR Dividends paid account (Retained Earnings)
CR

Bank

The rule is that a company that has no profits including retained profits cannot pay a
dividend.

TRANSFER TO RESERVE

As said earlier, the directors decide the level of profits which must be retained for future
growth. The profits are transferred to reserves, by completing the following entry:
DR Statement of Comprehensive Income
CR Reserves in Statement of Financial Position

STATEMENT OF FINANCIAL POSITION
SEE CHAPTER 9 IAS 1 FOR DETAILS ON THE LAYOUT OF STATEMENT OF
FINANCIAL POSITION.

SHARE CAPITAL

The total amount of share capital the company can issue is governed by the companys' own
Memorandum and Articles of Association. This is known as the authorised share capital of
the company. The Memorandum and Articles also state the minimum amount for which the
shares can be issued. This figure is normally shown, by way of example, as follows:
Authorised share capital - 100,000 shares of RWF1 each
Note: Not all the authorised shares are issued and the value shown is the nominal share price
or par value.
When the company issues some of the shares, it must issue them at the par value or above.
Where the shares are issued at par value, the double entry is:
DR Bank
Page 242

Share Capital

Share Premium:
When the company issues the shares above the minimum price, the journal entry is:
DR Bank (Total received)
CR Share Capital (with the par value)
CR Share Premium (with the difference between the par value and the issued price)
The share premium account is a capital reserve in the company. It cannot, be distributed to
the members by way of dividend.
The share premium account must be disclosed as part of the shareholders' funds in the
Statement of Financial Position. This is achieved by:
(i) Including the share premium account with the Capital Reserves in the Statement of
Financial Position and showing by way of note, the make-up of the figure for Capital
Reserves (including share premium), or,
(ii) Showing the share premium account in the Statement of Financial Position separately
from Share Capital and Capital Reserves

CORPORATION TAX / INCOME TAX EXPENSE

The tax levied on a company is generally referred to as Corporation Tax (or Income Tax
Expense as referred to in International Accounting Standards). The accounting entries for
this are as follows:
DR Tax Charge – Statement of Comprehensive Income
CR Corporation Tax / Income Tax (Accruals) - Statement of Financial Position
Example
XYZ Limited have profits before tax of RWF90,000 for the year ended 31 December, 20X4.
The estimated tax liability for the year is RWF35,000
20X4 Statement of Comprehensive Income Extracts
Profit before tax
Taxation/Income Tax
Profit after tax

RWF
90,000
35,000
55,000

20X4 Statement of Financial Position Extracts
Current Liabilities
Corporation Tax/Income Tax

RWF
35,000

Often in the subsequent year, the estimated corporation tax provided proves to be inadequate
or excessive. To account for the change in estimate, the following journal is posted:
Where there is an under provision:
DR Tax Charge – Statement of Comprehensive Income
CR
Corporation Tax / Income Tax (Accruals) - Statement of Financial Position
Page 243

Where there is an overprovision:
DR Corporation Tax / Income Tax (Accruals) - Statement of Financial Position
CR
Tax Charge – Statement of Comprehensive Income
Example
In the year ended 31 December 20X5, XYZ Limited agreed and paid its tax liability for 31
December 2004 - the final agreed figure was RWF37,500
RWF
x

20X5 Statement of Comprehensive Income Extracts
Profit before tax
Taxation Charge
Under-provision of Corporation Tax/Income Tax
Corporation Tax/Income Tax
Profit after tax

2,500
x
x

Corporation Tax/Income Tax Payable Account (Extract)
RWF
37,500

20X5 Bank

20X5
20X5

Balance b/d
Statement of
Comprehensive Income

37,500

RWF
35,000
2,500
37,500

Example
If the tax liability finally agreed and paid had been RWF32,000, the overprovision would
have been accounted for as follows:
RWF
x

20X5 Statement of Comprehensive Income Extracts
Profit before tax
Taxation Charge
Under-provision of Corporation Tax/Income Tax
Corporation Tax/Income Tax
Profit after tax

3,000
x
x

Corporation Tax/Income Tax Payable Account (Extract)
20X5 Statement of
Comprehensive Income
20X5 Bank

RWF
3,000

20X5

32,000
35,000

Balance b/d

RWF
35,000

35,000

G. ISSUE OF SHARES
Introduction
When a company issues shares, it may issue them in a number of different ways such as
rights issue, par value, at a premium and a bonus issue.

Page 244

Rights Issue
If a company issues ordinary shares for cash, it must first offer them to its existing ordinary
shareholders in proportion to their shareholdings.
Par Value
Shares issued at the same value to the value stated in the memorandum and articles of
association i.e. authorised share capital RWF50,000 RWF1 shares - shares issued for RWF1
each.
At a Premium
Shares issued at a value above the par value - this premium is recorded in the share premium
account, e.g. issue of 10,000 RWF1 shares at RWF1.50, the premium of RWF5000 is
recorded in the Share Premium Account.
Bonus Issue
In issuing shares, a company may capitalise available reserves in paying up the shares wholly
or in part. The effect is to convert the reserves into permanent capital. The members pay for
their additional shares by foregoing whatever right they had to the reserves. A bonus issue is
usually made at 1 share for every x owned as per the register
Issue and Forfeiture of Shares
The recording of an issue and forfeiture of shares is best explained by way of example.
Issue of Shares
Example 1
X Ltd issued 100,000 ordinary shares @ RWF1 each - at par value
(potential shareholders apply for shares which are then allocated)
We ultimately want the bank account and the issued share capital account to show an increase
of RWF100,000.
Journal Entry:
DR Bank
CR
Applicants Account

100,000

DR Allotment Account
CR
Ordinary Share Capital

100,000

By joining the Applicants account and the Allotment account together to become the
Applications and Allotment account, the above journal entry can be modified slightly to DR Bank Account
CR
Application and Allotment
Account

100,000

DR Application and Allotment Account
CR
Issued Ordinary Share Capital
Account

100,000

Page 245

100,000

Example 2
Several years later from example 1, the Statement of Financial Position of X Ltd. is as
follows:
RWF
150,000

Net Assets
Issued Share Capital
Reserves

100,000
50,000
150,000

The company decides to issue 100,000 shares at RWF1.50 - at a premium of RWF0.50 per
share
Journal Entry:
DR Bank
CR
Application and Allotment
Account

150,000

DR Application and Allotment Account
CR
Issued Ordinary Share Capital

100,000

150,000

DR Application and Allotment Account
CR
Share Premium Account

100,000
50,000
50,000

Example 3
Y Ltd issued 100,000 RWF1 shares at various stages - at par value
On application

RWF0.20

On allotment

RWF0.30

On 1st call

RWF0.10

On final call

RWF0.40

Let us assume that the issue was not over-subscribed.
Journal Entries:
On Application:
DR Bank
CR
Application and Allotment Account
On Allotment:
DR Bank
CR
Application and Allotment Account

RWF
20,000

30,000
30,000

Then:
DR Application and Allotment Account
CR
Issued Share Capital

50,000
50,000

Page 246

On First Call:
DR Bank
CR
First and Final Call Account

10,000
10,000

On Final Call:
DR Bank
CR
First and Final Call Account

40,000
40,000

Then:
DR First and Final Call Account
CR
Issued Share Capital

50,000
50,000

Example 4
Z Ltd issued 100,000 RWF1 shares at various stages - at par value
On application

Rwf 0.2

On allotment

Rwf 0.3

On final call

Rwf 0.5

In this instance, the company received 1,200,000 applicants i.e. over-subscribed. Of the
monies received on application, RWF100 per share is to be put against amounts due on
allotment and the balance returned to the applicants.
Journal Entry:
On Application:
DR Bank
CR
Application and Allotment Account

RWF
24,000

Being 120,000 applicants received x Rwf 0.2 per share
Return of Funds:
DR Application and Allotment Account
CR
Bank

3,000
3,000

Being RWF4,000 over-subscribed and returning RWF3,000 to applicants as instructed
On Allotment:
DR Bank
CR
Application and Allotment Account

29,000
29,000

Being amounts due on allotment less RWF1 from application as instructed
Then:
DR Application and Allotment Account
CR
Issued Share Capital

50,000
50,000

Page 247

On Final Call:
DR Bank
CR
First and Final Call Account

50,000
50,000

Then:
DR First and Final Call Account
CR
Issued Share Capital

50,000
50,000

Forfeited Shares - Example 1
A Ltd. issued 100,000 shares @Rwf1 each - at par value. All application and allotment
money were received. One shareholder who acquired 1,000 shares failed to pay First & Final
Call monies due.
On Application

RWF0.20

On Allotment

RWF0.30

On First & Final Call

RWF0.50

Journal Entries:
On Application:
DR Bank
CR
Application and Allotment Account

RWF
20,000

On Allotment:
DR Bank
CR
Application and Allotment Account

30,000
30,000

Then:
DR Application and Allotment Account
CR
Issued Share Capital

50,000
50,000

On Final Call:
DR Bank
CR
First and Final Call Account

49,500
49,500

Being 99,000 shares @ RWF0.50 - i.e. actual amount received
Then:
DR First and Final Call Account
CR
Issued Share Capital

50,000
50,000

Being 100,000 shares @ RWF0.50 - i.e. the expected amount to be received
This leaves a balance on the First & Final Call account of RWF500. This amount is referred
to as calls in arrears and at the balance date is shown under current assets. In the event that
the shareholder has not paid the balance due, the shares are not issued to him. The amounts
paid by him on application and allotment are not refunded to him. This amounts to RWF500
Page 248

i.e. 1,000 shares @ RWF0.20 and @ RWF0.30. To complete the task, ultimately we want to
show that the issued share capital has increased by RWF99,000 only i.e. 99,000 shares @
RWF1 each. The necessary journal entries are:
RWF
1,000

DR Issued Share Capital Account
CR
Forfeited Share Account

RWF
1,000

Being 1,000 shares not issued
DR Forfeited Share Account
CR
First and Final Account

500
500

Being the first & final account being closed off
DR Forfeited Share Account
CR
Share Premium

500
500

Being the amount received on application and allotment on shares which were not
subsequently reissued.
Example 2
Same details as above but the forfeited shares are re-issued at RWF1.10 per share. The
journal entries as shown above as far as the first & final account are used here, thereafter, the
journal entries are:
RWF
1,000

DR Issued Share Capital Account
CR
Forfeited Share Account

RWF
1,000

Being 1,000 shares not issued
DR Forfeited Share Account
CR
First and Final Account

500
500

Being the first & final account being closed off
DR Forfeited Share Account
CR
Reissued Forfeited Share Account

500
500

Being the necessary entry to close the Forfeited Share Account
DR Reissued Forfeited Share Account
CR
Issued Share Capital

1,000
1,000

Being the forfeited shares being reissued
DR Bank
CR
Reissued Forfeited Share Account

1,100
1,100

Being the proceeds for the reissued forfeited shares
DR Reissued Forfeited Share Account
CR
Share Premium Account

600
600
Page 249

Being the premium on issue of the reissued forfeited shares
(This can be calculated independently - RWF500 on application and allotment originally and
RWF100 on the reissue - 1,000 shares @ RWF0.10 (RWF1.10 - RWF1)

H. ULTRA VIRES
A company is required to state the objects for which it has been incorporated in its
memorandum of association. The company in the course of its business then pursues these
objects. If the company pursues any object which is not in accordance with the provisions of
the memorandum of association, it is beyond the company’s capacity and is termed ultra
vires.
Some cases in English Law have been used across the world and the two below are such:
Case: Ashbury Railway Carriage and Iron Company V Riche 1875
In this case, it was held that if a company has a main or dominant object, than all other
activities specified in the memorandum of association are deemed to be subordinate or
ancillary to that main object.
Case: German Date Coffee Ltd. 1882
A company was formed to obtain a German patent and carry on the business associated with
that patent. The company failed to obtain a German patent but obtained a Swedish patent.
The company traded using only the Swedish patent, although the memorandum specifically
provided that the business of the company would be conducted once the German patent had
been obtained.
Held: The Company must be wound up, as it had not obtained the German patent and the
main object of the company could only be conducted when the German patent had been
obtained. The deciding factor in this case was that it was impossible for the company to carry
on its main objective as the German patent had not been obtained and all other activities
specified in the memorandum of association were subordinate or ancillary to that main object.
The modern tendency is to state in substantial detail the objects of the company. But to
ensure that the object clauses are not translated in too rigid a way certain clauses are inserted.
These are:
1.

Plenipotentiary Clause (means “catch all”)
A clause is inserted which enables the directors in their absolute discretion to decide
that a particular contract be entered into by the company as such a contract would be
for the benefit of the company.

Independent Objects Clause
The company incorporates a clause, which provides that all of the objects are to be
independent of each other. By doing so, the rigid application of the objects without this
clause can be circumvented so the first object will not be deemed to be the main object
of the company and subsequent objects treated as ancillary thereto.

Page 250

Where a contract is ultra vires, the third party may be able to enforce that contract against the
company by virtue of the modification of the ultra vires rule.

RETURNS, STATUTORY BOOKS, DIRECTORS’ REPORTS,
NOTICES, RESOLUTIONS AND ACCOUNTS TO BE FILED

From Law No. 7/2009 of 27/04/2009 Relating to Companies
Article 258 : Filing financial statements Every company, other than a small private
company, shall ensure that, within thirty (30) days after the financial statements of the
company and any group financial statements are required to be signed, copies of those
statements together with a copy of the auditor’s report on those statements are filed with the
Registrar General for registration.
Article 253 : Financial statement preparation The Board of Directors of every company
shall ensure that, within three (3) months following the end of a financial statement the audit
is made and signed by at least one representative of the company. Such an audit shall be
submitted to the Registrar General.
Article 254 : Standards for financial statement preparation The financial statements of a
company shall comply with international standards. Members of the Board of directors shall
provide such information and explanations as are necessary for auditing process to be
conducted.
Article 255 : Obligation to provide consolidated financial statement The Board of
Directors of a company that has one or more subsidiaries, shall, ensure that, within six (6)
months after the financial year, a consolidated balance is prepared. Such a consolidated
financial statement shall be signed by at least one of the parent company’s shareholders.
Such consolidated financial statements shall not be required for the case of a subsidiary of
any company incorporated in Rwanda or for a virtually wholly owned subsidiary of any
company incorporated in Rwanda which has obtained the approval of the minority
shareholders.
Article 259 : Providing a financial summary A small private company shall file with the
Registrar General a financial summary for registration.
Article 260 : Where a company does not have financial statement
A company shall have a Statement of Financial Position date in each calendar year. A
company may not have a Statement of Financial Position date in the calendar year in which it
is incorporated where its first financial statement date is in the following calendar year and is
not later than eighteen (18) months after the date of its formation or incorporation.
Article 269 Format of the Annual Report
Every annual report for a company shall be in writing and be dated and shall:
1. describe, so far as the Board believes is material for the shareholders to have an
appreciation of the state of the company‟s affairs and is not harmful to the business of the
company or of any of its subsidiaries, especially any change during the accounting period
in:
a) the nature of the business of the company or any of its subsidiaries;
Page 251

b) the classes of business in which the company has an interest, whether as a
shareholder of another company or otherwise;
2. include financial statements for the accounting period and any group financial statements
for the accounting period completed and signed in accordance with this Law;
3. where an auditor’s report is required in relation to the financial statements or group
financial statements, included in the report, include that auditor‟s report;
4. state particulars of entries in the interests register made during the accounting period;
5. state the amount which represents the total of the remuneration and benefits received by
or due and receivable from the company and any related corporation by:
a) executive directors of a company engaged in the full time employment of the
company and its related corporations, including all bonuses and commissions
received by them as employees;
b) separate statement, the non-executive directors of the company;
6. state the total amount of donations made by the company and other subsidiaries during
the accounting period;
7. state the names of the persons holding office as directors of the company as at the end of
the accounting period and the names of any persons who ceased to hold office as directors
of the company during the accounting period;
8. state the amounts payable by the company to the person or firm holding office as auditor
of the company as audit fees and, as a separate item, fees payable by the company for
other services provided by that person or firm;
9. be signed on behalf of the Board of Directors by two (2) directors of the company or,
where the company has only one director, by that director;
10. disclose related party transactions and full information about the nature and extent of the
conflict of interest;
11. Any other details which are necessary for the report to be well understood.
Any company whose subsidiary companies are located outside Rwanda shall also comply
with the provisions of this article within eight (8) weeks after the dates contained therein.
The above is only a summary and guide. For full details, it is recommended the student
acquires a copy of the Law No. 7/2009.of 27/04/2009 Relating to Companies.
Statutory Books
1.
Register of members. Gives names, addresses and amount of shares held by each
shareholder. It enables those interested to establish the identities of the shareholders.
2.

Register of debenture holders. Gives names, addresses and amount of debentures held.
It enables those interested to establish the identities of the debenture holders.
Page 252

Register of charges. Give details of charges on the company. It enables those
interested to establish the amount of charges, what they have been secured on and the
parties involved.

Register of Directors’ interests in shares and debentures. Gives details of shares and
debentures held by directors or their close relatives.

Minute Book – General meetings. Gives account of items discussed and resolutions
passed.

Minute Book – Directors’ meetings. Gives account of items discussed and decisions
taken. It is not open for inspection.

Record of declarations by directors of interests in company contracts. Give details of
declarations by directors of personal interests in company contracts. Its purpose is to
avoid ethical problems and conflict of interest claims arising from directors having a
personal interest in company business.

DIRECTORS’ REPORT
A copy of the directors’ report must be attached to its Statement of Financial Position and
laid before the members of the company at the company’s annual general meeting. The
directors’ report must refer to the state of affairs of the company and any of its subsidiaries.
It must also refer to the amount, if any, which is to be paid by way of a dividend together
with the amount of reserves, which it is proposed to carry. It must deal with any change
during the financial year in the nature of the business of the company or of any of the
company’s subsidiary companies. It must give a fair review of the development of the
business of the company and of its subsidiaries, if any, during the financial year. It must give
particulars of any important events affecting the company or any of its subsidiaries, if any,
which have occurred since the end of the financial year. It must give an indication of likely
future development in the business of the company and of its subsidiaries. It must give an
indication of the activities, if any, of the company and its subsidiaries, in the field of research
and development. Where shares in the company have been acquired by the company by
forfeiture or acquired by another person which are subject to a lien or other charge, the
directors’ report must state the number and nominal value of shares acquired, the maximum
number and nominal value of shares held at any time during the year, the number and
nominal value of shares disposed of during the year, the value or consideration of that
disposal, the number and nominal value of shares as a percentage of the called-up share
capital of the company and the amount of the charge (if relevant). The directors’ report must
also distinguish between subsidiaries and associated companies. Two directors on behalf of
the board must sign the directors’ report.
Notices
1.
Directors’ meetings – no provision for a specified period of notice to be given.
2.

Annual meetings – minimum period of notice is not stated in the Law, but annual
reports must be sent to shareholders 15 days before the Annual Meeting (Article 268).

The following persons are entitled to receive notice of Annual and Special meetings:(a)

Every member of the company

Page 253

(b)

Personal representatives or the official assignee in bankruptcy if the member they
represent would have been entitled to receive such notice

(c)

Auditors of the company

If any of the rules relating to the giving of notice are breached in accordance with either
the provisions of the laws relating to Companies or the articles of association of the
company, it is possible for a shareholder to bring proceedings to have the meeting and
the resolutions passed at that meeting rendered invalid.

Resolutions
1.
Directors’ meetings – all questions arising may be decided by a majority of votes.
2.

Annual Meeting – two types of resolutions may be passed i.e. ordinary resolution or
special resolution. An ordinary resolution is a resolution which requires a simple
majority of the number of votes cast

Ordinary resolutions
1. Rights and obligations of shareholders – changes by Board of Directors (BoD) to
confirmed
2. Divide, subdivide or consolidate shares
3. Appointment of directors (unless provided otherwise by the memorandum of association
4. Removal from office of a director
5. A director of a private limited company may be removed from office by special resolution
passed at a meeting called for that purpose.
6. Approval of the directors’ remuneration,
7. The rescinding of decisions made by the BoD regarding remunerarion of directors or
compensation for loss of office. Shareholders with at least 10% of the shares can call the
meeting to which the motion is put. An ordinary resolution will decide.
8. Per Article 238 – the appointment of an inspector to investigate the company’s affairs
Article 142 : Powers exercised by special resolution
The shareholders exercise a power to :
1.
2.
3.
4.

adopt articles of association , if it has , to alter or to revoke them ;
approve a major transaction - see Article 189 of Law 7/2009;
approve an amalgamation of the company;
put the company into liquidation;

Such power shall be exercised by special resolution. A special resolution shall only be
rescinded by a special resolution.
Accounts to be Filed
Accounts must be prepared for two purposes – for shareholders and for publication.
Definitions of Criteria:
Turnover – Income from sale of goods and services, net of trade discounts, VAT and other
sales taxes.
Statement of Financial Position Totals – Fixed assets and current assets

Page 254

Employees – Total number of employees employed each week in the year divided by the
number of weeks in the year.
DISCLOSURE REQUIREMENTS FOR EMPLOYEES
1.
Average number of staff under contracts of service and the aggregate amount
respectively of wages and salaries, social welfare costs and other pension costs.
2.

The average number of staff sub-divided into categories selected by the directors
having regard to the manner in which the company’s activities are organised.

DISCLOSURE REQUIREMENTS FOR DIRECTORS’ EMOLUMENTS
The amount of
1.

Emoluments (including fees, percentages, taxed allowances, pension contributions and
estimated money value of taxed benefits-in-kind).

Directors’ and past directors’ pensions, except from a Pension scheme.

Particulars of commitments relating wholly or firstly to pensions payable to past
directors.

Compensation to directors or past directors for loss of office.

J. ETHICAL OBLIGATIONS OF COMPANY DIRECTORS
Directors duties
Company directors’ responsibilities are wide and diverse. Their duties arise primarily from:•
•

Statute Legislation
Company Law

Directors duties include:•
•
•
•
•
•
•
•
•
•

Exercising their powers in good faith and in the interests of the company as a whole
Not allowed to make an undisclosed profit from their position as directors
Carrying out their functions with due care, skill and diligence
Maintaining proper books of account
Preparing annual accounts
Maintaining certain registrars and other documents
Filing certain documents with the Office of the Registrar General (ORG)
Disclosure of certain personal information
Convening at general meetings of the company
Transactions with the company

Page 255

Study Unit 21
Company Accounts - 2
Contents

Introduction

Preparation of Limited Company Accounts

Sample Question/Solution

Questions/Solutions

Page 256

INTRODUCTION

The following is a checklist of frequent adjustments. Students should ensure that they
understand fully the treatment of each one:
1.

Depreciation of Non-Current Assets,

Write off of Bad Debts

Change to Bad Debt Provision

Dividend to Preference Shareholders

Debenture Interest

Accrual / Prepayment of expenses

Opening stock under/over stated

Provision of Goods on Approval

Cost of asset included in closing stock valuation

10.

Insurance Due for damage to stock

11.

Proceeds from sale of motor vehicle included in sales

12.

Proceeds from issue of shares included in sales

13.

Stock damaged – Include at lower of cost and net realisable value

14.

Provision for discount on Trade Receivables

15.

Extension to warehouse cost included in purchases and wages

16.
17.

Goods supplied free of charge by way of promotion
Revaluation of Land

We will now work through each of the adjustments listed above then work through a number
of full exam standard questions.
Adjustment 1 Depreciation
Trial Balance (Extract) at 31.12.20X4
RWF
500,000
150,000
120,000

Buildings
Office Equipment
Motor Vehicles
Accumulated Depreciation
Buildings
Office Equipment
Motor Vehicles

80,000
60,000
43,800

Additional Information:
Depreciation should be charged at:
•

2% on cost of Buildings

•

20% on cost of Office Equipment

RWF

Page 257

•

20% on written down value of Motor Vehicles often referred to as the Reducing
Balance Method.
Solution to Adjustment 1
Cost
As at 1 Jan 20X4
Additions
Disposals
As at 31 Dec 20X4

Buildings
500,000
Nil
Nil
500,000

Office Equipment
150,000
Nil
Nil
150,000

Motor Vehicles
120,000
Nil
Nil
120,000

Accumulated
Depreciation
As at 1 Jan 20X4
Disposals
Depreciation (W1)
As at 31 Dec 20X4

80,000
Nil
10,000
90,000

60,000
Nil
30,000
90,000

43,800
Nil
15,240
59,040

Net Book Value

410,000

60,000

60,960

W1 Depreciation Calculation
Buildings: 500,000 x 2% = 10,000
Office Equipment: 150,000 x 20% = 30,000
Motor Vehicles: Depreciation is calculated on the net book value:
Cost
120,000
Less Accumulated
(43,800)
Depreciation
Net Book Value
76,200
Depreciation 20% of Net Book Value
15,240 (76,200 x 20%)
Adjustment 2 Write off Bad Debts
Trial Balance (Extract) at 31.12.20X4
RWF
Trade Receivables
Bad Debts

1,250

Additional Information:
A customer has been declared bankrupt owing RWF350. This is to be written off.

Page 258

RWF
46,800

Solution to Adjustment 2
The bad debt expense has to be increased and the balance on Trade Receivables reduced. The
accounting entries are:
DR Bad Debt Expense
CR
Trade Receivables

350
350
Trade
Receivables
Statement of
Financial
Position
RWF
46,800
(350)
46,450

Balance per Trial Balance
Write off – Bankrupt (Cr) / Dr

Bad Debts
Statement of
Comprehensive
Income
RWF
1,250
350
1,600

Adjustment 3 – Provision for Bad Debts
Trial Balance (Extract) at 31.12.20X4
RWF
Trade Receivables
Bad Debts
Provision for Doubtful Debts

RWF
52,400

1,050
750

Additional Information:
1.
A customer has been declared bankrupt owing RWF400. This is to be written off.
2.

The provision for doubtful debts should be 2% of Trade Receivables.

Solution to Adjustment 3
Trade
Receivables
RWF
52,400
(400)
52,000
1,040
(750)
290

Balance per Trial Balance
Write off – Bankrupt
Provision Required – 2% of 52,000
Current Provision
Increase in Provision

Bad
Debts
RWF
1,050
400
1,450

Statement of Comprehensive Income (Extract)
RWF
Expenses
Bad Debts
Increase

1,450
290
Statement of Financial Position (Extract)
RWF

Current Assets
Trade Receivables
Less Provision for Bad Debts

52,000
(1,040)
Page 259

50,960
Note: Take the increase / decrease in the provisions for doubtful debts to the Statement of
Comprehensive Income but deduct the full amount of the provisions from the Trade
Receivables figure in the Statement of Financial Position.
Adjustment 4 – Dividend on Preference Shares
Trial Balance (Extract) at 31.12.20X4
RWF
6% Redeemable Preference Shares
Preference Dividend

RWF
20,000

400

Note: No adjustment will be listed in the additional information section of the question, so
you must check whether the full amount of dividend due on the preference shares was paid if
not the amount due will have to be accrued.
Solution to Adjustment 4
RWF
1,600
(400)
1,200

Total Dividend Due – 20,000 x 8%
Dividend Paid
Amount outstanding
Statement of Financial Position (Extract)

RWF
Current Liabilities
Preference Dividend

1,200

Adjustment 5 – Debenture Interest
Trial Balance (Extract) at 31.12.20X4
RWF
50,000

10% Debentures

Note: No adjustment will be listed in the additional information section of the question, so
you must check whether the full amount of the interest on the debentures has been paid. Look
down through the Trial Balance for an amount of debenture interest paid, if there is no entry
then no payment for the interest has been made as at the year end.
Solution to Adjustment 5
RWF
5,000
Nil
5,000

Total Interest to be paid – 50,000 x 10%
Less Interest paid per Trial Balance
Amount of Interest to be paid
Statement of Comprehensive Income (Extract)

RWF
Expenses
Debenture Interest

5,000
Statement of Financial Position (Extract)
Page 260

RWF
Current Liabilities
Interest Due

(5,000)

Adjustment 6 – Accrual / Prepayment
Trial Balance (Extract) at 31.12.20X4
RWF
12,800
43,500

Rent and Rates
Wages
Additional Information:
1.

The annual charge for Rent is RWF7,200 and this is paid up to 31st March 20X5.

Wages are outstanding at the Statement of Financial Position date of RWF2,750.
Solution to Adjustment 6
Rent
&
Rates
RWF
12,800
(1,800)
11,000

Balance per Trial Balance
Prepayment 7,200 x 3/12

Wages
RWF
43,500
2,750
46,250

Balance per Trial Balance
Accrual

Statement of Comprehensive Income (Extract)
RWF
Expenses
Rent and Rates
Wages

11,000
46,250

Page 261

Statement of Financial Position (Extract)
RWF
Current Assets
Prepayments

1,800

Current Liabilities
Accruals

2,750

Adjustment 7 – Opening Inventory Understated
Trial Balance (Extract) at 31.12.20X4
RWF
59,750

Opening Inventory
Revenue Reserves

RWF
128,400

Additional Information:
1.
Inventory on hand at 1st January 20X4 has been understated by RWF2,500 due to a
clerical error.
Solution to Adjustment 7
Inventory
Balance per Trial Balance
Write off – Bankrupt

Revenue
Reserves
128,400
2,500
130,900

59,750
2,500
62,250

The opening stock for this period was last year’s closing stock, so if this figure was
understated it means profit was understated. A simple example clarifies the point.
Sales
Less Cost of Goods Sold
Opening Inventory
Purchases
Closing Inventory
Cost of Goods Sold
Gross Profit

120,000
5,000
85,000
90,000
(10,000)

120,000
5,000
85,000
90,000
(15,000)

(80,000
40,000

(75,000)
45,000

The only difference between the two Trading accounts above is the value of the Closing
Stock, as the value of closing inventory increases from RWF10,000 to RWF15,000, the net
profit increase by the same amount from RWF40,000 to RWF45,000. If the opening
inventory is overstated then the value of closing inventory and revenue reserves should be
decreased.
Adjustment 8 – Goods on Approval
Trial Balance (Extract) at 31.12.20X4
RWF
Sales
Trade Receivables

76,350

Page 262

RWF
457,300

Additional Information:
1.
Stock on hand at 31st December 20X4 was valued at RWF32,650.
2.

Included in sales is an amount of RWF1,800 for goods sent on approval to a customer.
On 5th January 20X5 the customer decided to accept part of the goods paying
RWF1,200 and returning the balance. The mark up on the goods was 20%.

Solution to Adjustment 8
Inventory
Balance per Trial Balance and Notes
Goods on Approval

32,650
1,500
34,150

Trade
Receivables
76,350
(1,800)
74,550

Sales
457,300
(1,800)
455,500

The above adjustments may seem to be confusing but a number of points need to be
remembered:
•

In the records provided a sale has been recognised for goods that have been provided to
a customer but no confirmation of a sale has been received from the customer at the
Statement of Financial Position date.

•

In line with the prudence concept, revenue should not be recognised until the sale is a
certainty; there is no certainty attaching at the Statement of Financial Position date
therefore the sale should be reversed.

•

The only way the sale could have been accounted for would be as a credit sale :
–

Sales

–

Trade Receivables

•

The reversal against sales and Trade Receivables is for the full amount, that is, the cost
of stock plus the mark up.

•

Closing inventory figure is based on a physical inventory take. Therefore, the closing
stock figure does not include the goods sent on approval to the customer. The
adjustment required to the closing inventory figure is to increase it by the cost of the
goods RWF1,500 (1,800 x 20/120).

Adjustment 9 – Asset included in stock
Trial Balance (Extract) at 31.12.20X4
Purchases
Office Equipment – Cost
Office Equipment – Accumulated Depreciation

RWF
198,500
140,000

RWF

56,000

Additional Information:
1.
Inventory on hand 31st December 20X4 was RWF42,670, which included the
following:
(a)
2.

A printer for the sales office. This was purchased for RWF500 in November
20X4. The invoice has been included in purchases.

Depreciation is to be provided on office equipment held at the Statement of Financial
Position date at a rate of 20% on cost.
Page 263

Solution to Adjustment 9
Inventory
42,670
(500)
42,170

Per Trial Balance
Less cost of Printer
Cost
As at 1 Jan 20X4
Additions
Disposals
As at 31 Dec 20X4

Purchases
198,500
(500)
198,000
Office Equipment
140,000
500
Nil
140,500

Accumulated Depreciation
As at 1 Jan 20X4
Disposals
Depreciation (140,500 x 20%)
As at 31 Dec 20X4
Net Book Value

56,000
Nil
28,100
84,100
56,400

Adjustment 10 – Insurance Due
Trial Balance (Extract) at 31.12.20X4
RWF
284,700

Purchases
Additional Information:
1.
Inventory on hand 31st December 20X4 was RWF34,500.
2.

During November 20X4 a water pipe burst destroying inventory which had a cost of
RWF1,500. Only one third of this amount will be recovered from the insurance
company.

Solution to Adjustment 10
RWF
284,700
(1,500)
283,200

Purchase per Trial Balance
Less destroyed inventory

Cost of Damaged Inventory not recoverable from Insurance
(1,500 x 2/3)

1,000

Insurance Due (1,500 x 1/3)

500

Accounting Entries:
DR Statement of Comprehensive Income –
Damaged Inventory
DR Current Assets – Insurance Due (Statement of
Financial Position)
CR
Purchases
Page 264

1,000
500
1,500

Adjustment 11 – Proceeds from Motor Vehicle included in sales Proceeds
Trial Balance (Extract) at 31.12.20X4
RWF
Sales
Motor Vehicles – Cost
Motor Vehicles – Accumulated Depreciation

RWF
472,600

150,000
54,000

Additional Information:
1.
Included in the sales figure is an amount of RWF8,500 which was the proceeds from
the disposal of a van purchased in 20X1 for RWF20,000.
2.

Depreciation is to be provided on Motor Vehicles at a rate of 20% on a reducing
balance basis.

Solution to Adjustment 11
Sales per Trial Balance
Less proceeds from sale of van

472,600
(8,500)
464,100

Cost of asset purchased in 20X1
Depreciation – year end 31.12.X1
Net Bok Value
Depreciation – year end 31.12.X2
Net Book Value
Depreciation – year end 31.12.X3
Net Book Value

20,000
(4,000)
16,000
(3,200)
12,800
(2,560)
10,240

Proceeds
Net Book Value
Profit/(loss) on disposal

8,500
(10,240)
(1,740)
Cost
As at 1 Jan 20X4
Additions
Disposals
As at 31 Dec 20X4

Motor Vehicle
150,000
Nil
(20,000)
130,000

Accumulated
Depreciation
As at 1 Jan 20X4
Disposals (W1)
Depreciation (W2)
As at 31 Dec 20X4

54,000
(9,760)
17,152
61,392

Net Book Value

68,608

Page 265

20,000 x 20%
16,000 x 20%
12,800 x 20%

W1: Disposed Asset Accumulated Depreciation 9,760 (4,000 + 3,200 + 2,560).
W2: Depreciation (130,000 - 44,240) x 20% = 17,152
44,240
= 54,000 - 9,760 (Accumulated Depreciation at the start of the year less the
accumulated depreciation for the asset disposed of during the year)
Statement of Comprehensive Income (Extract)
RWF
Sales
Less Expenses
Loss on Disposal
Depreciation – Motor Vehicles

1,740
17,152

Statement of Financial Position (Extract)
Cost
Acc Dep
Non-Current Asset
Motor Vehicle

RWF
464,100

130,000

61,392

NBV
68,608

Adjustment 12 – Proceeds from Share Issue included in Sales
Trial Balance (Extract) at 31.12.20X4
RWF
513,000
100,000
20,000

Sales
Ordinary Shares – Rwf 0.5 each
Share Premium

Additional Information:
Included in the sales figure is RWF5,000 being the proceeds from the issue of ordinary
shares.

Solution to Adjustment 12
Sales
Balance per Trial Balance
Adjustment

513,000
(5,000)
508,000

Ordinary
Shares
100,000
500
100,500

Share
Premium
20,000
4,500
24,500

We issued 1,000 ordinary shares each having a nominal value of Rwf 0.5 each, the total
nominal value of the shares issued is RWF1,000. However, we have received RWF5,000.
The difference between the amount received and the nominal value is taken to the Share
Premium Account.
Statement of Financial Position (Extract)
RWF
Equity & Liabilities
Shareholders’ Equity
Share Premium
Total Equity

100,500
24,500
125,000

Page 266

Adjustment 13 – Damaged Inventory
Inventory on hand 31st December 20X4 was valued at RWF25,480, which included inventory
costing and included at RWF250 (selling price RWF320). This was damaged on 25th
November 20X4 while being moved in the stores. It will cost RWF50 to repair this item and
then it will be sold for RWF290.
Solution to Adjustment 13
Cost
Net Realisable Value

250
240

(Selling price less costs to achieve selling price –
290 – 50)

IAS 2 rule for valuing inventories is the lower of:
•

Cost and

•

Net Realisable Value.

The valuation of the inventory item damaged should be reduced from RWF250 to RWF240.
The value of closing inventory in the financial statements should be RWF25,470 (25,480 250 + 240).
Adjustment 14 – Provision of Discounts
Trial Balance (Extract) at 31.12.20X4
RWF
Trade Receivables
Bad Debts
Provision for Doubtful Debts

RWF
63,600

1,400
1,600

Additional Information:
1.
A customer has been declared bankrupt owing RWF600. This is to be written off.
2.

The provision for doubtful debts should be 2% of Trade Receivables.

A provision is to be raised for discounts at a rate of 1%.

Solution to Adjustment 14
Trade
Receivables
63,600
(600)
63,000

Balance per Trial Balance
Write off – Bankrupt

Provision Required – 2% x 63,000
Current Provision
Decrease in Provision

Bad
Debts
1,400
600
2,000

1,260
(1,600)
(340)

Provision for Discounts
Trade Receivables less provision for Bad Debts
(63,000 – 1,260)
Provision for Discounts – 61,740 x 1%

Page 267

61,740
(617)
61,123

Statement of Comprehensive Income (Extract)
RWF
Expenses
Bad Debts
Decrease in Bad Debt Provision
Provision for Discounts

2,000
(340)
617

Statement of Financial Position (Extract)
RWF
Current Assets
Trade Receivables

61,123

Adjustment 15 – Extension to Warehouse
Trial Balance (Extract) at 31.12.20X4
RWF
72,400
154,500
250,000

Wages
Purchases
Buildings – Cost
Buildings – Accumulated Depreciation

RWF

50,000

Additional Information:
1.
Wages includes RWF5,400 and materials of RWF4,600 used for the construction of a
warehouse extension.
2.

Depreciation is to be provided at a rate of 2% on the cost of Buildings.

Solution to Adjustment 15
Wages
72,400
(5,400)
67,000

Per Trial Balance
Warehouse Construction

Purchases
154,500
(4,600)
149,900

Cost
As at 1 Jan 20X4
Additions (W1)
Disposals
As at 31 Dec 20X4

Buildings
250,000
10,000
Nil
260,000

Accumulated Depreciation
As at 1 Jan 20X4
Disposals
Depreciation (W2)
As at 31 Dec 20X4

50,000
Nil
5,200
55,200

Net Book Value

204,800

W1: Additions 10,000 (Wages 5,400 + Purchases 4,600)
Page 268

W2: Depreciation 260,000 x 2% = 5,200
Statement of Comprehensive Income (Extract)
RWF
Expenses
Wages
Purchases
Depreciation – Buildings
Statement of Financial Position (Extract)
Cost
Acc Dep
Non-Current Asset
Buildings
260,000
55,200

67,000
149,400
5,200
NBV
204,800

Adjustment 16 – Goods Supplied Free of Charge
Inventory on hand 31st December 20X4 was valued at RWF33,670, which included at
RWF290 were goods supplied free of charge by a supplier as a means of promoting a new
product. The normal purchase price of these will be RWF400 and they are expected to retail
at RWF500.
Solution to Adjustment 16
Closing Inventory
Less Goods supplied free of charge

33,670
(290)
33,380

It is not appropriate to include a cost of RWF290 for goods which we have received free of
charge. Remember our valuation rule set out in IAS 2 is the lower of cost and net realisable
value. Our cost in this situation is zero.
Adjustment 17 – Revaluation of Land
Trial Balance (Extract) at 31.12.20X4
RWF
250,000

Land – Cost
Revaluation Reserve

RWF
50,000

Additional Information:
Surveyors Armitage & Co have provided a valuation of land of RWF400,000.
Solution to Adjustment 17
Accounting Entries to be passed are:
DR Land
CR
Revaluation Reserve

150,000
150,000

To record the increase in valuation of Land

Page 269

PREPARATION OF LIMITED COMPANY ACCOUNTS

To prepare the Statement of Comprehensive Income and Statement of Financial Position of a
limited company the following steps should be followed:
Step 1
Extract a trial balance from the nominal ledger. In the Formation Two Accounting
Framework examination this is normally given in the question.
Step 2
Ascertain the correct closing inventory figure. A closing inventory figure is usually given
which requires certain adjustments:
(a)

Goods sold on a sale or return basis or on approval will have to be included in closing
inventory at their cost.

(b)

Damaged inventory will be shown at the lower of cost and net realisable value.

(c)

Capital expenditure items incorrectly included in closing inventory.

Step 3
The sales figure will need to be adjusted for any or all of the following:
(a)

Goods on a sale or return basis or on approval, these should be deducted from sales
with a corresponding reduction in Trade Receivables.

(b)

The proceeds from the sale of property, plant and equipment.

(c)

Value added recoverable tax which should be brought to the value added tax account.

Step 4
The opening inventory may be incorrectly stated. This can be dealt with by altering the
opening inventory and the opening reserve figures.
Step 5
Purchases for operating expenditure may have to be adjusted for:
(a)

The fact that some of the goods may have been used in the construction of property,
plant and equipment, in which case the amount should be excluded from purchases and
included in the cost of the property, plant and equipment.

(b)

It may include items which are of capital nature e.g. purchase of office equipment.

Step 6
Wages should be adjusted if they include amounts paid to staff while involved in the
construction of a property, plant and equipment.
Step 7
Account for bad debts, the bad debt provision, the discount allowed provision and Trade
Receivables.
Step 8
Provide for depreciation as instructed in the question and calculate any profit/loss on disposal
of property, plant and equipment.
Page 270

Step 9
Account for accruals and prepayments including any interest accrual.
Step 10
Provide for proposed final dividends.
Step 11
Prepare a Statement of Comprehensive Income account.
Step 12
Prepare a Statement of Financial Position.

SAMPLE QUESTION/SOLUTION

The following trial balance was extracted from the books of ABC Ltd, at the close of
business on 31st December 20X4.
DEBIT
CREDIT
RWF
RWF
Buildings
160,000
Plant and Machinery
75,000
Vehicles
52,000
Revenue Reserves
85,370
Ordinary Share RWF0.50 each
60,000
8% Preference Share Capital
10,000
Share Premium Account
10,000
10% Debentures
10,000
Provision for Depreciation:
Buildings
20,000
Plant and Machinery
45,000
Vehicles
28,550
Inventory
27,500
Purchases/Sales
165,00
315,800
Trade Receivables/Payables
17,960
10,510
Returns
780
870
Discounts
2,300
3,200
Provision for Doubtful Debts
760
Bank
1,760
Ordinary Dividends
800
Preference Dividends
800
Rent and Rates
13,800
Postage and Stationery
3,200
Wages and Salaries
76,800
Bad Debts
2,360
600,060
600,060
The following additional information is available:
1.

Inventory on hands at 31st December 20X4:RWF32,350.

Page 271

Included in sales is an amount of RWF1,500 for goods sent on approval to a customer.
On 10th January 20X5 the customer decided to accept part of the goods paying
RWF1,000, and returning the balance. The mark up on the goods was 50%.

A customer has been declared bankrupt owing RWF460. This is to be written off.

It has been declared that a 2% provision for discounts allowed should be made.

The provision for doubtful debts should be 5% of Trade Receivables.

The annual charge for rates is RWF6,000 and these are paid up to 30th September 20X5.

Wages includes RWF3,650 for materials used on the construction of a warehouse
extension.

Depreciation is provided on assets held at the Statement of Financial Position date as
follows:
(a)

Buildings:

2% on cost

(b)

Plant and Machinery:

(c)

Vehicles:

20% on cost

25% reducing balance method.

It is proposed to pay a final dividend on the ordinary shares of RWF0.015 per share.

10.

Included in the sales figure is an amount of RWF5,500 which was the proceeds from
the disposal of a van purchased in 20X1 for RWF16,000.

Requirement:
Prepare for internal use a Statement of Comprehensive Income account for the year ending
31st December 20X4 and a Statement of Financial Position as at that date.
Solutions – Workings
RWF
1.

Closing Inventory
Per Trial Balance
Plus Goods on Approval

32,350
1,000
33,350

Sales
Per Trial Balance
Less Goods on Approval
Less Sale Proceeds on Disposal of Van

Purchases
Per Trial Balance
Less Goods used on Construction of Warehouse Extension

Wages and Salaries
Per Trial Balance
Less Wages Paid on Construction of Warehouse Extension

Page 272

315,800
(1,500)
(5,500)
308,800

165,000
(3,650)
161,350

76,800
(4,350)
72,450

Bad Debts Etc
(a) Trade Receivables
Less Bad Debt

17,960
(460)
17,500
(1,500)
16,000

Less Goods on Approval

(b)

Provision at 5%
Less Opening Provision
Increase

(c)

Trade Receivables
Less Provision

800
(760)
40
16,000
(800)
15,200

Discount Allowed provision @ 2%
6.

Depreciation
(a) Buildings:

(b)

Plant:

(c)

304

RWF160,000 + RWF3,650
RWF168,000 @ 2% =

RWF4,350

RWF75,000 x 20% =

RWF3,360

RWF15,000

Cost

Motor
Vehicles
Disposal

RWF
52,000

Acc
Depn
RWF
28,550

(16,000)
36,000

(9,250)
19,300

Book Value
RWF
23,450
(6,750)
16,700
@ 25% = RWF4,175

Van Disposal Account
RWF
16,000

Cost

Sale Proceeds
Accumulated Depreciation
Loss on Sale

16,000

RWF
5,500
9,250
1,250
16,000

Accumulated Depreciation:
Cost
DEPN 20X1

-25%

DEPN 20X2

-25%

DEPN 20X3

-25%

RWF
16,000
(4,000)
12,000
(3,000)
9,000
2,250
6,750
Page 273

Acc Depn
4,000
7,000
9,250

Accruals and Prepayments
(a) Debenture Interest RWF10,000 x 10% =
(b)

RWF1,000

Rent and Rates
RWF
13,800
1,500
15,300

Per Trial Balance
Add Accrual RWF6,000 x 3/12

ABC Ltd.
Statement of Comprehensive Income Account for the year ending 31st December 20X4
RWF

RWF

Sales
Less Returns
Cost of Sales
Inventory 1/1/20X4
Purchases
Less Returns

RWF
308,800
780
308,020

27,500
161,350
870

Less Inventory 31/12/20X4
Cost of Sales
Gross Profit
Discounts Received

160,480
187,980
33,350
154,630
153,390
3,200
156,590

Discounts Allowed
Rent and Rates
Post and Stationery
Wages and Salaries
Bad Debts
Provision for Bad Debts
Provision for Discounts
Loss on Sale of Van
Depreciation:
Buildings
Plant and Machinery
Vehicles
Debenture Interest
Net Profit

2,300
15,300
3,200
72,450
2,820
40
304
1,250
3,360
15,000
4,175
1,000

Movement on Reserves:
Net Profit
Less Ordinary Dividends
Paid
Less Preference Dividends
Due
Retained for Year
Balance Brought Forward
Balance Carried Forward

121,199
35,391

35,391
800
800

Page 274

(1,600)
33,791
85,370
119,161

ABC Ltd.
Statement of Financial Position as at 31st December 20X4
Cost
Acc Depn
RWF
RWF
Non-Current Assets
Buildings
168,000
23,360
Plant and Machinery
75,000
60,000
Vehicles
36,000
23,475
279,000
106,835
Current Assets
Inventories
33,350
Trade Receivables
16,000
Less: Provisions Bad Debts
800
Discounts
304
14,896
Cash and Cash Equivalents
1,760

NBV
RWF
144,640
15,000
12,525
172,165

50,006
222,171
Equity and Liabilities
Ordinary Share Capital
Preference Share Capital
Share Premium Account
Revenue Reserves

60,000
10,000
10,000
119,161

Non-Current Liabilities
10% Debentures

199,161

10,000

Current Liabilities
Trade Payables
Rent
Debenture Interest

10,510
1,500
1,000
13,010
222,171

Page 275

D. QUESTIONS/SOLUTIONS
Question - TDR Ltd
The following trial balance was extracted from the books of TDR Ltd as at 31st December
20X4.

Buildings
Office equipment
Vehicles
Revenue Reserves
Ordinary shares
8% Redeemable Preference Share Capital
Share Premium account
10% Debentures
Provision for depreciation:
Buildings
Office equipment
Vehicles
Inventory
Purchases/Sales
Trade Receivables/Payables
VAT
Returns
Discounts
Provision for doubtful debts
Bank
Ordinary dividends
Preference dividends
Bad Debts
Rent and rates
Postage and stationary
Wages and salaries
Motor expenses

DEBIT
RWF
140,00
0
25,000
32,000

CREDIT
RWF

35,270
40,000
10,000
10,000
20,000
30,000
15,000
8,500
31,700
135,60
0
20,400
690
3,200
1,760
400
400
900
13,800
3,200
56,800
2,760
468,61
0

283,700
11,220
1,100
960
2,300
560

468,610

The following additional information is available:
1.

Inventory on hand at 31stDecember 20X4: RWF35,170, which included the following:
(a)

A printer for the sales office. This was purchased for RWF400 in May 20X4.
The invoice had been posted to purchases.

(b)

Inventory costing and included at RWF200 (selling price RWF280). This was
damaged on 15th November 20X4 while being moved in the stores. It will cost
RWF60 to repair this item and then it will be sold for RWF250.

(c)

Also included at RWF320 were goods supplied free of charge by a supplier as a
means of promoting a new product. The normal purchase price of these will be
Page 276

RWF450 and they are expected to retail for RWF630
2.

Inventory on hand at 1st January 20X4 had been overstated by RWF4,000 due to a
clerical error.

A customer has been declared bankrupt owing RWF400. This is to be written off.

It has been decided that a 1% provision for discounts allowed should be made.

The provision for doubtful debts should be 2% of Trade Receivables.

The annual charge for rates is RWF6,000 and these are paid up to 30th September 20X4.

During November 20X4 water from a burst pipe destroyed inventory which had cost
RWF2,000. Only half of this amount will be recovered from the insurance company.
8.
Depreciation is provided on assets held at Statement of Financial Position date as
follows:
(a)

Buildings:

2% on cost

(b)

Plant & machinery: 20% on cost

(c)

Vehicles:

25% Reducing Balance Method

REQUIREMENT:
Prepare for internal use, a draft Statement of Comprehensive Income account for the year
ending 31st December 20X4 and a draft Statement of Financial Position as at that date.
Solution
1. Closing Inventory
Per Question
Less Printer
Less Damaged Inventory Cost
Add Damaged Inventory Net Realisable Value (250-60)
Less Goods Supplied Free

RWF
35,170
(400)
(200)
190
(320)
34,440

Opening Inventory
This was overstated by RWF4,000, reduce opening inventory and reduce opening
Revenue Reserves.

Purchases
Per Trial Balance
Less Printer
Less Inventory Destroyed

135,600
(400)
(2,000)
133,200

Bad Debts etc
(a) Trade Receivables per Trial Balance
Bad Debts

(b)

Provision RWF20,000 @ 2%

20,400
(400)
20,000
400

Page 277

Less Opening Provision
Decrease
(c)

560
160

Provision for Discount Allowed
Trade Receivables
Less Bad Debt Provision

20,000
(400)
19,600

RWF19,600 x 1% = RWF196
5.

Depreciation
Buildings
Plant
Motors

2,800
5,080
5,875

Loss on Destroyed Inventory
Cost of Inventory
Less Insurance Debtor
Loss
Accruals and Prepayments
(a) Debenture Interest:
(b)

RWF140,000 @ 2% =
RWF25,000 + 400 =
@ 20%
RWF32,000 – 8,500 =
@ 25%

2,000
(1,000)
1,000

RWF20,000 x 10%

Rent and Rates per Trial
Balance
Add Accrual
RWF6,000 x 3/12

Dividends
Preference

RWF10,000 x 8%

Page 278

2,000
13,800
1,500
15,300

= RWF800 – paid
RWF400

400

TDRs Ltd Statement of Comprehensive Income Account for the year ending 31st 20X4
RWF
RWF
RWF
Sales
283,700
Less Returns
690
283,010
Cost of Sales
Inventory 1/1/20X4
27,000
Purchases
133,200
Less Returns
960
132,240
159,940
Inventory 31/12/20X4
34,440
Cost of Sales
125,500
Gross Profit
157,510
Discounts Received
2,300
Provision for Bad Debts
160
159,970
Loss on Destroyed Inventory
1,000
Discounts Allowed
3,200
Rent and Rates
15,300
Post and Stationery
3,200
Wages and Salaries
56,800
Bad Debts (900 + 400)
1,300
Motor Expenses
2,760
Provision for Discounts
196
Depreciation:
Buildings
2,800
Plant and Machinery
5,080
Vehicles
5,875
Debenture Interest
2,000
Preference Dividend
800
(100,311)
59,659
Movement on Reserves
Profit Before Tax
59,659
Less Ordinary Dividends
Ordinary Paid
(400)
59,259
Balance Brought Forward
31,270
Balance Carried Forward
90,529

Page 279

TDR Ltd Statement of Financial Position as at 31st December 20X4
Cost
Acc
Depn
RWF
RWF
Non-Current Assets
Buildings
140,000
32,800
Plant and Machinery
25,400
20,080
Vehicles
32,000
14,375
197,400
67,255
Current Assets
Inventories
34,440
Trade Receivables
20,000
Provision:
Bad Debts
(400)
Discounts
(196)
19,404
Insurance Due
1,000
Cash and Cash Equivalents
1,760

Equity and Liabilities
Ordinary Shares
Share Premium
Revenue Reserves

NBV
RWF
107,200
5,320
17,625
130,145

56,604
186,749

40,000
10,000
90,529
140,529

Non-Current Liabilities
10% Debentures
8% Redeemable Preference Shares

20,000
10,000

Current Liabilities
Payables
Dividends Due
Interest
VAT
Rates

11,220
400
2,000
1,100
1,500

Page 280

16,220
186,749

Question - HWNHWN Company Limited
The following list of balances was extracted from the books of the HWN Co. Ltd at 31st
December 20X4:
RWF
RWF1 Ordinary Shares
8% Redeemable Preference Shares
7% Debentures
General Reserve
Land at Cost
Plant and Machinery at Cost
Undistributed profit at 1 January 20X4
Share Premium Account
Inventory at 1 January 20X4
Sales
Discount Allowed and Received
Trade Receivables and Payables
Provision for depreciation –
Plant and Machinery at 1 January 20X4
Bank
Carriage Inwards
Purchases
Suspense Account
Wages
Lighting and Heating
Office Salaries
Debenture Interest
Directors Fees
Interim Dividends:
Ordinary
(5%)
Preference (4%)
Provision for Doubtful Debts
General Expenses

RWF
150,000
50,000
100,000
65,000

111,000
382,000
35,000
20,000
35,000
3,200
48,000

290,000
4,600
27,000
85,500

7,500
1,100
165,000
400
23,500
2,900
8,600
7,000
12,800
7,500
2,000
1,500
11,900
RWF829,
000

RWF829,
000

Inspection of the books and records of the company yields the following additional
information:
(a)

On 31 December 20X4 the company issued bonus shares to the ordinary shareholders
on a 1 for 10 basis. No entry relating to this has yet been made in the books.

(b)

The authorised share capital of the company is 200,000 RWF1 ordinary shares and
50,000 8% RWF1 irredeemable preference shares.

(c)

Inventory at 31 December 20X4 was valued at RWF41,000.

(d)

The suspense account (RWF400) relates to cash received for the sale of some
machinery on 1 January 20X4. This machinery cost RWF2,000 and the depreciation
accumulated thereon amounted to RWF1,500.

Page 281

(e)

The directors, on the advice of an independent valuer, wish to revalue the land at
RWF180,000 thus bringing the value into line with current prices.

(f)

Wages owing at 31 December 20X4 amount to RWF150.

(g)

Depreciation is to be provided on plant and machinery at 10% on cost.

(h)

General expenses (RWF11,900) includes an insurance premium (RWF200) which
relates to the period 1 April 20X4 to 31 March 20X5.

(i)

The provision for doubtful debts is to be reduced to 2½% of Trade Receivables.

(j)

The directors wish to provide for:
(i)

A final preference dividend.

(ii)

A transfer to general reserve of RWF5,000.

You are required to prepare, in vertical form, the Statement of Comprehensive Income
accounts of the HWN Company Ltd. for the period ended 31 December 20X4 and a
Statement of Financial Position as at that date.
Solution - HWN Company Limited
Notes
1.

The bonus share issue of 1/10 x 150,000 shares can be made out of the share premium:
i.e.
DR Share Premium Account
CR Ordinary Share Account

RWF15,000
RWF15,000

The issued share capital is now RWF165,000 and the share premium RWF5,000.
2.

The sale of the plant and machinery has not yet been entered in the accounts, since the
cash received has been debited to cash, but credited to a suspense account.
Disposal of Plant and Machinery
RWF
RWF
Plant & Machinery
Suspense Account – Sale
400
Account
price
- Cost of Plant &
2,000
Provision for Depreciation of
Machinery sold
Plant
& Machinery Account
1,500
Loss on Disposal – Statement
100
of Comprehensive Income
RWF2,000
RWF2,000

Plant and machinery at cost is now RWF382,000 - RWF2,000 sold = RWF380,000.

Depreciation for the year on plant and machinery 10% of RWF380,000 = RWF38,000.
Accumulated provision for depreciation
RWF
Per Trial Balance
85,500
Less Depreciation on Plant and Machinery Sold
1,500
Page 282

84,000
38,000
122,000

Add Depreciation for the year

RWF
180,000
111,000
69,000

Land and Revalued Amount
Land at Cost* (per trial balance)
Credit to Revaluation Reserve
*The land is not depreciated so there is no net book value to consider.

The insurance premium paid includes a prepayment of 3/12 x RWF200 = RWF50, and
so general expenses in the Statement of Comprehensive Income will be RWF11,900 RWF50 = RWF11,850.

Trade Receivables

48,000

Provision for Doubtful Debts required (2½%)
Provision per Trial Balance
Reduction in Provision (Credit Statement of Comprehensive Income)
8.

1,200
1,500
300

Since debenture interest (7% of RWF100,000) - RWF7,000 is included in the trial
balance in full, this means that it must already have been paid for the year, and
accounted for by:
DR Debenture Interest
CR Cash

RWF7,000
RWF7,000

Page 283

HWN Limited Statement of Comprehensive Income Account for the period ended 31st
December 20X4
RWF
Sales
Less: Cost of Sales
Opening Inventory
Purchases
Carriage Inwards

RWF

RWF
290,000

35,000
165,000
1,100
201,100
41,000

Less Closing Inventory
Cost of Sales
Gross Profit
Provision for Doubtful Debts
Discounts Received

160,100
129,900
300
4,600
134,800

Less: Expenses
Wages
Office Salaries
Directors Fee
General Lighting
Light and Heating
Depreciation on Machinery
Loss on Sale of Machinery
Discounts Allowed
Debenture Interest
Net Profit Before Tax

23,650
8,600
12,800
11,850
2,900
38,000
100
3,200
7,000

Movement on Reserves:
Profit Before Tax
Dividends Paid (interim)
5% Ordinary
8% Preference x 6 months
Dividends Due
General Reserve Transfer

108,100
26,700

26,700
7,500
2,000

Undistributed Profit at 1 January 20X4
Undistributed Profit at 31 December 20X4

Page 284

9,500
2,000
5,000

(16,500)
10,200
35,000
45,200

HWN Limited Statement of Financial Position as at 31 December 20X4
RWF
RWF
Non-Current Assets
Land (at valuation)
180,000
Plant and Machinery (cost)
380,000
Less Depreciation
122,000
258,000
438,000
Current Assets
Inventories
41,000
Trade Receivables and Prepayments
46,850
Cash and Cash Equivalents
7,500
93,350
533,350
Equity & Liabilities
Called Up and Issued Share Capital
165,000 RWF1 Ordinary Shares
165,000
50,000 8% Irredeemable Preference Shares
50,000
Share Premium
5,000
Revaluation Reserve
69,000
General Reserve (65,000 + 5,000)
70,000
Undistributed Profit
45,200
404,200
Non-Current Liabilities
Loan Capital: 7% Debentures

100,000

Current Liabilities
Payables and Accruals
Dividends Accruals

27,150
2,000

Page 285

27,150
533,350

Question - WKS Ltd
WKS Ltd. has an authorised capital of RWF550,000 divided into 400,000 ordinary shares of
RWF1 each and 150,000 12% Irredeemable Preference shares of RWF1 each. The following
trial balance was extracted from its books on 31/12/20X3.
RWF
RWF
Issued Capital
300,000 Ordinary Shares @ RWF1 each
300,000
50,000 12% Irredeemable Preference Shares @ RWF1 Each
50,000
Freehold Premises (cost RWF250,000)
235,00
0
Delivery Vans (cost RWF57,000)
46,800
Machinery (cost RWF260,000)
200,00
0
Trade Receivables and Payables
40,500
32,000
15% Debentures
80,000
Calls in Arrear
200
Inventory (including stationery RWF200) at 1/1/20X3
47,700
Carriage on Sales
2,600
Salaries and General Expenses
95,000
Advertising
4,000
Carriage on Purchases
1,800
Rent Account 1/1/20X3
100
Rent
5,600
Debenture Interest (for first 3 mths) accrued
3,000
Debenture Interest
3,000
Purchases and Sales
570,00
800,000
0
Provision for Bad Debts
1,100
Stationery
1,500
Discounts
650
Interim Dividend on Preference Shares (1/4 yr)
1,500
Statement of Comprehensive Income Balance
2,000
Bank
19,350
1,271,70
1,271,700
0
The following information and instructions are to be taken into account:
1.

Inventory at 31/12/20X3 is valued at RWF45,800 and included stock of stationery
RWF300.

Provision is to be made for Debenture Interest due.

Advertising includes an amount of RWF2,100 which is full payment for an advertising
campaign which will not end until 30th April 20X4 and which commenced on 1st May
20X3.

Goods with a sales value of RWF1,000 were sent out to a customer during December
20X3 on a “sale or return” basis. These goods had been treated in the books as a credit
sale at a mark-up on cost of 25%.

Page 286

On 1st January 20X3 a Delivery Van, which had cost of RWF4,800, was sold for
RWF660 cash. At the date of sale the book value of the van was RWF500. This sale
had been treated in the books as a sale of trading inventory.

A bad debt of RWF200 written off in 20X0 is now known to be recoverable in full. A
further debt of RWF600 is to be written off and the provision for bad debts is to be
adjusted to 4% of Trade Receivables.

The figure for bank in the trial balance has been taken from the firm’s cash book.
However a bank statement dated 31/12/20X3 has subsequently arrived showing a
balance of RWF6,700. A comparison of the cash book and bank statement has revealed
the following discrepancies:
(a)

Trade Payables cheques not yet presented for payment RWF800.

(b) Rent for 3 months ending 31/12/20X3 paid direct into firm’s bank account
RWF1,600.
(c)
8.

Bank charges RWF50.

The directors recommend that:
(a)

(b)

Depreciation be provided for as follows:
Machinery

20% of cost

Delivery Vans

25% of cost

The preference dividend due to be provided for.

You are required to prepare a:
(a) Statement of Comprehensive Income Account for the year ended 31/12/20X3
(b)

Statement of Financial Position at 31/12/20X3.

Page 287

Solution
Workings:
RWF
1.

Sales
As per Trial Balance
Less: Goods on Sale or Return
Proceeds from Sale of Van

RWF

800,000
1,000
660

(1,660)

798,340

Opening Inventory
As per Trial Balance
Less: Stationery Inventory

47,700
(200)

47,500

Closing Inventory
As given in question
Less Stationery Inventory

45,800
(300)

45,500

660
(500)

160

Profit on Sale of Van
Proceeds
Less: Book Value
Rent Receivable:
Received as per Trial Balance
Add:
Paid directly to Bank Account
Less:
Accrued due at 1/1/X3
Trade Receivables and Provision for Bad Debts
Trade Receivables as per Trial Balance
Add:
Debt previously written off as bad
Less:
Goods on sale or return
Written off as bad
Provision for bad debts required: 4% x 39,100
Increase required to reach new provision (1,564
less 1,100)
Bad debts written off (RWF600 less RWF200
previously written off
and now recoverable
Stationery:
RWF1,500 Plus Opening Inventory
Less Closing Inventory

5,600
1,600
(100)

40,500
200
(1,000)
(600)

10. Bank:
Page 288

39,100
1,564
464

400

200
(300)

Advertising:
RWF4,000 less 1/3 of RWF2,100 prepayment
Delivery Vans and Depreciation thereof:
Delivery Vans: Balance as per Trial Balance
Less Disposal
Depreciation:
25% x 52,200

7,100

1,400

3,300

57,000
(4,800)

52,200
13,050

Balance as per Trial Balance
Add:
Rent paid direct into bank
Less:
Bank Charges

19,350
1,600
(50)

20,900

WKS Limited Statement of Comprehensive Income for the Year Ended 31st December
20X3
RWF
Sales
Less: Cost of Sales
Opening Inventory
Purchases
Carriage Inwards

RWF
798,340

47,500
570,000
1,800
571,800
619,300
(46,300)

Closing Inventory
Cost of Sales
Gross Profit
Profit on Sale of Van
Rent Receivable

573,000
225,340
160
7,100
232,600

Less: Expenses
Salaries and General Expenses
Bad Debts Written Off
Provision for Bad Debts
Stationery
Depreciation on Premises
Depreciation on Machinery
Bank Charges
Discount Allowed
Debenture Interest
Preference Dividend
Carriage Outward
Advertising
Depreciation of Delivery Vans
Profit Before Tax

95,000
400
464
1,400
5,000
52,000
50
650
12,000
6,000
2,600
3,300
13,050

Movement on Reserves:
Profit Before Tax
Balance brought forward
Balance carried forward

191,914
40,686

40,686
(2,000)
38,686

Page 289

WKS Limited Statement of Financial Position as at 31st December 20X3

Non-Current Assets
Freehold Premises
Machinery
Delivery Vans
Current Assets
Inventories (Trade)
(Stationery)
Trade Receivables and Prepayments
Less Provision for Bad Debts
Calls in Arrears
Cash and Cash Equivalents

Equity & Liabilities
Share Capital
Ordinary RWF1 each
Retained Profit

Cost

Acc Depn
RWF

NBV
RWF

250,000
260,000
52,200
562,200

(20,000)
(112,000)
(18,950)
(150,950)

230,000
148,000
33,250
411,250

46,300
300
39,800
(1,564)

Authorised
RWF
400,000

46,600
38,236
200
20,900

Issued
RWF
300,000

Non-Current Liabilities
15% Debentures
12% Redeemable Preference Shares

105,936
517,186

RWF
300,000
38,686
338,686
80,000
50,000

Current Liabilities
Trade Payables
Debenture Interest
Proposed Dividends

32,000
12,000
4,500

Page 290

48,500
517,186

BLANK

Page 291

Study Unit 22
Income and Expenditure Accounts
Contents

Income and Expenditure Accounts Introduction

Sources of Income

Expenditure

Statement of Financial Position

Question/Solution

Page 292

INCOME AND EXPENDITURE ACCOUNTS INTRODUCTION

Clubs, societies, credit unions and other non-profit organisations do not draw up Statement of
Comprehensive Incomes; instead they prepare an INCOME AND EXPENDITURE
ACCOUNT.
Where income is greater than expenditure the excess is referred to as the surplus of income
over expenditure.
Where expenditure is greater than income the excess is referred to as the excess of
expenditure over income.
In the Statement of Financial Position commercial entities describe the net assets as
CAPITAL whereas non-profit organisations describe net assets as accumulated funds.

SOURCES OF INCOME

The main sources of income for clubs and societies are:
1.

Social events

Members subscriptions

Life members’ subscriptions

Special events e.g. annual dinner evening

Investment income

Social event - Example
The RGT Sports and Social Club have provided you with the following information:
RWF
4,552
2,674

Takings
Payments for purchases
At the start of the year Restaurant and Bar Inventory was
And Trade Payables were

190
275

At the year-end Inventory was
And Trade Payables were
Staff wages

225
324
764

Requirement:
Prepare a Statement of Comprehensive Income for the year assuming the steward is
entitled to a bonus of 10% of the surplus after charging the bonus.

Page 293

Solution
Social events Statement of Comprehensive Income for the Year Ended ...
RWF
RWF
Sales
4,552
Opening Inventory
Purchases (324 + 2674 - 275)
Closing Inventory
Cost of Sales
Gross Surplus
Staff Wages
Profit before Bonus
Bonus RWF1,100 x 10/110
Surplus

190
2,723
(225)
2,688
1,864
764
1,100
100
RWF
1,000

Members Subscriptions
Members of clubs and societies usually pay an annual subscription to the club/society.
The income received plus arrears of subscriptions for the current year, less arrears
subscriptions for the previous year are treated as income in the income and expenditure
account. Subscriptions received in advance are treated as an accrual in the Statement of
Financial Position.
Example
The RGT Sports and Social Club has provided you with the following details in relation
to its subscriptions:RWF
Members subscriptions received
4,970
Members subscriptions owing at the start of the year
140
Members subscriptions owing at the end of the year
175
Members subscriptions received in respect of the forthcoming year
70
Solution
Members Subscription Club
Balance b/d
Balance c/d
Income and Expenditure
Account

RWF
140
70
4,935

Bank
Balance c/d

5,145
Balance b/d

175

RWF
4,970
175

5,145
Balance b/d

Life Members’ Subscription
Often members of a club/society may pay a life members subscription, this should be
recognised in the income and expenditure account over a defined period of time for
example 10 years. The residue should be shown in the Statement of Financial Position
beneath the accumulated fund.
Page 294

Example
The RGT Sports and Social Club received RWF12,000 in life members’ subscriptions
during the year. It is the accounting policy of the club to amortise life members’
subscriptions to the income and expenditure account over 10 years.
In the income and expenditure account RWF1,200 is recognised as income. In the
Statement of Financial Position RWF12,000 - RWF1,200 i.e. RWF10,800 is shown
beneath the accumulated fund and described as the life members fund account.
4.

Special Events
It is usual to show the surplus/deficit arising on special events as a separate item of
income/expenditure in the income and expenditure account.
Example
The RGT Sports and Social Club has supplied you with the following information
regarding its competitions:
RWF
Competition receipts
722
Competition prizes
311
Stock of competition prizes at the start of the year
40
Stock of competition prizes at the end of the year
48
Solution
The surplus on competitions to be shown in the income and expenditure account is as
follows:
Income and Expenditure Account for the Year Ended ...
Surplus on competitions

RWF419

This is calculated as follows:
RWF
Competition receipts
Competition Prizes:
Opening Inventory
Purchases/Payments
Closing Inventory

40
311
(48)
303
419

Surplus
5.

RWF
722

Investment Income
The investment income accruing for the year should be included in the income and
expenditure account.
Example
The RGT Sports and Social Club has a building society bank deposit account. Interest
is credited by the bank to the deposit account on 2 January and 2 July. On 2 July 20X8,
RWF25 was credited; RWF27 was credited on 2 January 20X9 and RWF31 on 2 July
20X9. The club’s year end is the 30 June 20X9.
Page 295

Solution
The investment income to be included in the income and expenditure account for the year
ended 30 June 20X9 is RWF27 + RWF31 i.e. RWF58. The amount received on 2 July 20X8
relates to the year ended 30 June 20X8.

C. EXPENDITURE
The main items of expenditure for clubs and societies are: rent, rates, light and heat, postage
and stationery, depreciation of equipment, staff wages and a secretary’s/treasurer’s
honorarium.

STATEMENT OF FINANCIAL POSITION

The Statement of Financial Position of a club/society follows the same format as commercial
entities. However, the net assets are represented by an accumulated fund rather than capital.

QUESTION/SOLUTION

The treasurer of the OT Social & Sports Club has produced the following receipts and
payments account for the year ended 30 June 20X1.
RECEIPTS
Balance at Bank 1/7/20X0
Credit Union a/c 1/7/20X0
Members subscriptions
Entrance fees
Bar takings
Competition receipts
Interest received

RWF
229
400
1,824
160
3,175
412
35

Payments
Bar purchases
Rent
Rates
Staff wages
Electricity & water
Competition prizes
Postage & stationery
Credit Union a/c 30/6/X1
Balance at bank 30/6/X1

6,235

RWF
2,642
600
120
840
435
210
320
835
233
6,235

The assets of the club on 1 July 20X0 were furniture and equipment RWF3,200, prizes
RWF50 and bar inventory RWF180. Bar suppliers were owed RWF290.
On 30 June 20X1 bar suppliers were owed RWF310; bar inventory amounted to RWF175
and prizes on hand had cost RWF30; subscriptions unpaid totalled RWF50.
During the year ended 30 June 20X1 subscriptions received included RWF35 in respect of
the previous year and RWF20 in respect of the year beginning 1 July 20X1.
The Steward is to receive a bonus of 5% of the restaurant profits after deducting the bonus.
Interest on the Credit Union account is credited on 2 January and 2 July each year.
On 2 July 20X0 RWF15 was credited; RWF20 was credited on 2 January 20X1 and RWF25
on 2 July 20X1.
Page 296

Furniture and equipment should be depreciated by 10%.
The rent paid was for the year ending 31 December 20X1. The rent for 20X0 was RWF480.
Requirement:
(a)

A Restaurant trading account for the year ending 30 June 20X1.

(b)

An income and expenditure account for the year ending 30 June 20X1.

(c)

A Statement of Financial Position as at 30 June 20X1.

Solution
Restaurant Trading Account for the Year Ended 30 June 20X1
RWF
Sales
Opening inventory
Purchases (W1)

RWF
3,175

180
2,662
2,842
175

Closing inventory
Cost of Sales
Gross profit
Bonus
Profit

2,667
508
24
484

OT SOCIAL AND SPORTS CLUB
Income and Expenditure Account for the year ended 30 June 20X1
RWF
Income
Subscriptions (W2)
Financial Institution Interest (W3)
Entrance fees
Surplus on competitions (W4)
Restaurant profit

RWF
1,819
45
160
182
484
2,690

Expenditure
Rent (W5)
Rates
Staff wages
Electricity & water
Postage & stationery
Depreciation (W6)
Surplus

540
120
840
435
320
320

Page 297

2,575
115

Statement of Financial Position as at 30 June 20X1
RWF
Non-Current Assets
Furniture (3,200 – 320)
Current Assets
Inventory: bar
175
Prizes
30
Prepayment: Rent
Subscription in arrears
Credit Union account
Interest due
Bank
Current Liabilities
Bar Creditors
Subscriptions in advance
Bonus due to Steward

310
20
24

Accumulated fund: Balance 1/7/20X0
Surplus for year

RWF
2,880

205
300
50
835
25
233
4,528

354
4,174
4,059
115
4,174

Workings
1.
Restaurant Trade Payables
Bank
Balance c/d

RWF
2,642
310
2,952

Balance b/d
Purchases

RWF
290
2,662
2,952

Subscriptions
RWF
35
Cash
1,819
Balance c/d
20
1,874

RWF
1,824
50

Balance b/d
Income and Expenditure
Balance c/d

Page 298

1,874

Statement of Opening Accumulated Fund
RWF
229
400
240
3,200
180
15
50
35
4,349
290
4,059

Bank
Credit Union
Rent
Furniture
Bar inventory
Interest due
Prizes
Subs. in arrears
Owing

Credit Union Interest: RWF20 + 25 = RWF45

Surplus on Competitions
RWF
412

Competition Receipts
Competition Prizes
Opening Inventory
Purchases

50
21
0
26
0
30

Closing Inventory

230
182

Surplus on Competitions
5.

Rent
Prepaid at start of Year RWF480 x 6/12
Paid for Year

Prepaid at end of Year RWF600 x 6/12

RWF
240
600
840
300
540

Depreciation
Furniture and Equipment

RWF3,200

Depreciation at 10%

RWF320

Study Unit 23
Page 299

IAS 7 – Cash Flow Statements
Contents

Cash Management

Objective of IAS 7

Operating Activities

Investing Activities

Financing Activities

Reporting Cash Flows from Operating Activities

Worked Examples

Disposal of a Tangible Fixed Asset

Taxation

Dividends

Worked Example

Page 300

CASH MANAGEMENT

Cash management is concerned with maintaining a balance between servicing operating
needs (liquidity) and earning maximum returns (profitability). Sound cash management is
vital for the survival of a company. A company needs to ensure that it has sufficient working
capital to fund the day-to-day operations of the company, while not holding excessive cash
balances which have an opportunity costs as these funds could be invested elsewhere to earn
a return.
Cash management should focus on maximising equity holder return. This can be achieved by
maximising the return that can be obtained from investing cash, with the costs associated
with not maintaining an appropriate level of liquidity.
Cash flows of a company are separately analysed for different stakeholders in a company’s
annual report and financial statements. A cash flow statement is regarded as a key measure of
performance. It presents information that is not available from the Statement of
Comprehensive Income and the Statement of Financial Position.
One of the main features of the cash flow statement is that is gives an indication of the
relationship between the profitability of an entity and the cash generating ability of that
entity. Profitability and cash generating ability are both important but distinct aspects of
corporate performance. In addition, the cash flow statement provides information on how an
entity has used the cash it has generated.

OBJECTIVE

The objective of IAS 7 is to require an entity to provide information about the historical
changes in cash and cash equivalents by means of a cash flow statement. Cash flows are
classified into:
•

Operating Activities

•

Investing Activities

•

Financing Activities

Cash equivalents are short term highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.

OPERATING ACTIVITIES

The cash flow from operating activities is a key indicator of the extent to which the
operations of the entity has generated cash to:
•

Repay loans

•

Maintain the operating capability

•

Pay dividends

•

Make new investments

Without using external sources of finance.

Page 301

Examples of Cash Flows from Operating Activities
(a)

Cash receipts from sale of goods and the rendering of services.

(b)

Cash payments to suppliers.

(c)

Cash payments to employees.

(d)

Cash payments/refunds of income tax.

INVESTING ACTIVITIES

It is important to disclose the cash flows from investing activities because these represent the
extent to which expenditures have been made for resources intended to generate future
income and cash flows.
Examples of Cash Flows from Investing Activities
(a)

Cash payments to acquire property, plant and equipment and intangibles.

(b)

Cash receipts from sales of property, plant and equipment and intangibles.

(c)

Cash payments to acquire an investment in shares or loans in other entities.

(d)

Cash receipts from sale of investments

(e)

Cash advances and loans made to other parties (non-financial institutions)

(f)

Cash receipts from the repayment of advances and loans made to other parties (again
non-financial institutions)

FINANCING ACTIVITIES

The disclosure of cash flows arising from financing activities is useful in predicting claims on
future cash flows by providers of capital.
Examples of Cash Flows from Financing Activities
(a)

Cash proceeds from issuing shares.

(b)

Cash payments to owners to buy back shares.

(c)

Cash proceeds from issuing debentures and loans.

(d)

Cash repayments of amounts borrowed.

REPORTING CASH FLOWS FROM OPERATING ACTIVITIES

The reporting of cash flows from operating activities can be either by:
(a)

The Direct Method, whereby major classes of gross cash receipts and gross cash
payments and cash receipts from customers, and cash payments to suppliers are
disclosed
OR

(b)

The Indirect Method, whereby profit or loss is adjusted for the effects of transactions
of a non-cash nature and the accrual or deferral of past or future operating cash receipts
Page 302

or payments e.g. profit adjusted for depreciation and any increase in trade payables and
accruals.
The standard encourages the use of the direct method as it provides information which may
be useful in estimating future cash flows.
Interest and Dividends
Cash flows from interest and dividends received and paid should each be disclosed
separately. IAS 7 does not specify the classification of these under operating, investing or
financing activities. However, each should be classified in a consistent manner.
Taxes on Income
Cash flows from taxes on income should be separately disclosed and classified under
operating activities unless they can be specifically identified with financing and investing
activities.

Page 303

Indirect Method Cash Flow Statement
RWFm
3,450

Cash Flow from Operating Activities
Profit before taxation
Adjustments for:
Depreciation
Investment Income
Interest Expense

RWFm

470
(400)
350
3,870
(600)
(1,120)
400
2,550
(270)
(900)

Increase in Trade Receivables
Increase in Inventory
Increase in Trade Payables
Cash Generated from Operations
Interest Paid
Income Tax Paid
Net Cash from Operating Activities

1,380

Cash Flow from Investing Activities
Purchase of Property, Plant and Equipment
Proceeds from Sale of Plant and Equipment
Interest Received
Dividends Received
Net Cash Used in Investing Activities

(900)
20
200
200

Cash Flow from Financing Activities
Proceeds from Issue of Shares
Proceeds from Long Term Borrowing
Dividend Paid
Net Cash Used in Financing Activities

250
160
(1,200)

(480)

(790)

Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Start of Year
Cash and Cash Equivalents at End of Year

110
120
230

Direct Method Cash Flow Statement
RWFm
30,150
(27,600)
2,550
(270)
(900)

Cash Flow from Financing Activities
Cash Received from Customers
Cash Paid to Suppliers and Employees
Cash Generated from Operations
Interest Paid
Income Taxes Paid
Net Cash Flow Operating Activities

RWFm

1,380

The remainder of the cash flow statement is the same as the indirect method.

Page 304

G. WORKED EXAMPLES
A cash flow statement essentially links together the opening Statement of Financial Position,
the Statement of Comprehensive Income and the closing Statement of Financial Position.
Example 1
Z Ltd’s opening Statement of Financial Position had cash of RWF60,000 and ordinary shares
of RWF60,000. Its trading activities for the year ended 31 December 20X4 are as follows:
RWF
Cash Sales
Cash Purchases
Closing Inventory
Cost of Sales
Gross Profit
Cash Expenses
Profit

RWF
100,000

70,000
Nil
(70,000)
30,000
(12,000)
18,000

The Statement of Financial Positions at the year end and at the start of the year are set out
below:

Non-Current Assets
Cash (60 + 18)
Shareholders’ Equity
Ordinary Shares
Retained Earnings

Year End
RWF’000
Nil
78
78

Start
RWF’000
Nil
60
60

60
18
78

60
60

CASH FLOW STATEMENT - INDIRECT METHOD
Profit
Adjusted for depreciation and changes in inventory etc.
Net cash from operating activities
Net increase in cash
Cash at Start of Year
Cash at End of Year

RWF
18,000
Nil
18,000
18,000
60,000
78,000

Cash Flow Statement – Direct Method
Cash received from customers
Cash paid to suppliers
Cash paid to employers and other cash payments
Net Cash from operating activities
Net increase in Cash
Cash at Start of Year
Cash at End of Year
Page 305

RWF
100,000
(70,000)
(12,000)
18,000
18,000
60,000
78,000

Example 2
In the year ended 31 December 20X3, Z Ltd borrowed RWF40,000 on a long-term basis. It
bought equipment for RWF20,000. Its trading activities for the year ended 31 December
20X3 are as follows:
RWF
RWF
Cash sales
130,000
Cash purchases
90,00
0
Closing Inventory
Nil
Cost of sales
(90,000)
Gross profit
40,000
Cash expenses
(14,000)
Depreciation
(5,000)
21,000
Interest paid
2,000
Profit before Taxation

19,000

The opening and closing Statement of Financial Positions are set out below:Statement of Financial
Position
Year End
Start
RWF
RWF
’000
’000
Non-Current Assets (20 – 5)
15
Nil
Cash*
122
78
137
78
Liabilities
Loan
40
40
Shareholders’ Equity
Ordinary Shares
60
60
Retained Earnings
37
18
97
78
Total Liabilities and Equity
137
78
RWF
’000
78
130
(90)
(14)
40
(2)
(20)
122

*Cash at start
Cash sales
Cash purchases
Cash expenses
Loan
Interest Paid
Non-Current Asset

Page 306

Cash Flow Statement – Indirect Method
RWF
19,000

Cash Flows from Operating Activities
Profit before Taxation
Adjustments for:
Depreciation
Interest Expense
Cash Generated from Operations
Interest Paid
Net Cash from Operating Activities

RWF

5,000
2,000
26,000
(2,000)
24,000

Cash Flows from Investing Activities
Purchase of Equipment
Net Cash used in Investing Activities
Cash Flows from Financing Activities
Proceeds from Loan

(20,000)
(20,000)
40,00
0

Net Cash from Financing Activities

40,000

Net Increase in Cash
Cash and Cash equivalents at Start of Year
Cash and cash equivalents at End of Year

44,000
78,000
122,000

Cash Flow Statement – Direct Method

Cash Received from Customers
Cash Paid to Suppliers
Cash Paid to Employees and Other Cash Payments
Interest Paid
Net Cash Inflow from Operating Activities

RWF’
000
130
(90)
(14)
(2)
24

Investing and Financing Activities as above.
Example 3
In the year ended 31 December 20X3 Z Ltd had the following trading activities:
RWF’000
RWF’000
Sales
175
Opening Inventory
Nil
Purchases
116
Closing Inventory
(25)
Cost of Sales
(91)
Gross Profit
84
Cash Expenses
(22)
Depreciation
(5)
Operating Profit
57
Interest Paid
(4)
Profit before Taxation
53
Income Tax Paid
(14)
Profit after Taxation
39
Page 307

The opening and closing Statement of Financial Positions are as follows:
Statement of Financial
Position
Year End
Start
RWF’
RWF
000
’000
Non-Current Assets
10
15
Inventory
25
Receivables
18
Bank*
139
122
182
122
Total Assets
192
137
Liabilities
Trade Payables
16
Tax Payable
16
Loan
40
40
Total Liabilities
56
40
Shareholders’ Equity
Ordinary Shares
60
60
Retained Earnings
76
37
Total Shareholders’ Equity
136
97
Total Liabilities and Shareholders’ Equity
192
137
*Bank at Start
Received from Customers (175 – 18)
Paid to Suppliers (116 – 16)
Cash Expenses
Interest Paid
Tax Paid

122
157
(100)
(22)
(4)
(14)
139

Page 308

Cash Flow Statement – Indirect Method
RWF
Cash Flows from Operating Activities
’000
Profit before Taxation
53
Adjustments for:
Depreciation
5
Interest Expense
4
62
Increase in Inventory
(25)
Increase in Trade Receivables
(18)
Increase in Trade Payables
16
Cash Generated from Operations
Interest Paid
Income Tax Paid
Net Cash from Operating Activities

RWF
’000

35
(4)
(14)
17
-

Cash Flows from Investing Activities
Cash Flows from Financing Activities
Net Increase in Cash
Cash at Start of Year
Cash at End of Year
Cash Flow Statement – Direct Method
Cash Flows from Operating Activities
Cash Receipts from Customers (175 – 18)
Cash Paid to Suppliers (116 – 16)
Cash Paid to Employees and Other Cash Payments
Interest Paid
Income Tax Paid
Net Cash from Operating Activities

17
122
139
RWF
’000
157
(100)
(22)
(4)
(14)

Example 4
In the year ended 31st December 20X4 Z Ltd had the following trading activities:
RWF’000
Sales
Opening Inventory
25
Purchases
127
Closing Inventory
(34)
Cost of Sales
Gross Profit
Cash Expenses
Depreciation
Operating Profit
Interest Expense
Profit before Taxation
Income Tax
Profit after Taxation
Dividend Paid
Retained for Year
Page 309

RWF
’000

RWF’000
220

(118)
102
(28)
(5)
69
(4)
65
(22)
43
(10)
33

The opening and closing Statement of Financial Positions are as follows:
Statement of Financial
Position
Year End
Start
RWF’000
RWF’000
Non-Current Assets
5
10
Inventory
34
25
Trade Receivable
23
18
Bank
186
153
243
196
Total Assets
258
206
Liabilities
Trade Payables
Interest Accrued
Income Tax Payable
Loan
Total Liabilities
Shareholders’ Equity
Ordinary Shares
Retained Earnings
Total Liabilities and Shareholders’ Equity
CASH FLOW STATEMENT – INDIRECT METHOD
Cash Flows from Operating Activities
Profit before Taxation
Adjustments for:
Depreciation
Interest Expense
Increase in Inventory
Increase in Trade Receivable
Increase in Trade Payable
Cash Generated from Operations
Interest Paid (4 – 2)
Income Tax Paid
Net Cash from Operating Activities

25
2
22
49
30
79

16
14
30
40
70

60
109
169
248

60
76
136
206

RWF’000
65

RWF’000

5
4
74
(9)
(5)
9
69
(2)
(14)
53
-

Cash Flow from Investing Activities
Cash Flow from Financing Activities
Loan Repaid
Dividend Paid
Net Cash Used in financing Activities
Net Increase in Cash
Cash and Cash Equivalents at Start of Year
Cash and Cash Equivalents at End of Year
Page 310

(10)
(10)
(20)
33
153
186

H. DISPOSAL OF A TANGIBLE NET ASSET
The disposal of a tangible net asset has two implications for a cash flow statement:
(i)

Adjust the profit before taxation for any profit or loss on disposal, if a loss, add to profit
before taxation and if a profit deduct from profit before taxation
and

(ii)

The sale proceeds will be included under the heading “investing activities”.

Example

Plant

Yr 1
RWF’000
1,000
400

- cost
- depreciation

Yr 2
RWF’000
800
480

During the year plant costing RWF200,000 which had been depreciated by RWF120,000 was
sold for RWF90,000.
The depreciation charge and profit/loss on disposal can be ascertained using 'T' accounts:

Disposal
Balance c/f

Plant – cost
Profit on disposal (bal.
figure)

Plant – Depreciation
RWF000
Balances b/f
120
Statement of Comprehensive
Income (bal. Figure)
480
600

PLANT – DISPOSAL
RWF000
200
Plant – depreciation
10
Bank
210

RWF000
400
200

600

RWF000
120
90
210

Cash Flow Statement (Extracts)
Cash Flows from Operating Activities

RWF
’000
X

Profit before Taxation
Adjustments for:
Depreciation
Profit on Disposal of Plant

200
(10)

Cash Flow from Investing Activities
Proceeds from Sale of Plant

Page 311

TAXATION

The taxation paid figure in the cash flow statement is calculated as follows:

Balance b/d
∴Bank tax paid

Taxation Account
RWF000
135
Balance b/d
120
Statement of Comprehensive
Income
255

RWF000
120
135
255

DIVIDENDS

The dividends paid figure in the cash flow statement is calculated in a similar fashion to the
taxation paid:

Balance c/d
∴Bank Dividend paid

Dividend Account
RWF000
100
Balance b/d
80
Statement of Comprehensive
Income
180

RWF000
80
100
180

K. WORKED EXAMPLE
The financial statements of E Ltd are set out below:
E Ltd Statement of Comprehensive Income For The Year Ended 31 December Year 2
RWF000
2,553
1,814
739
125
264
350
25
75
300
140
160
100
60

Sales
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Interest received
Interest paid
Profit before taxation
Taxation
Profit after taxation
Dividends
Retained profit for the year

Page 312

Statement of Financial Positions As At 31 December

Non-Current Assets
Tangible
Intangible
Investments
Current Assets
Inventory
Trade receivables
Investments
Cash in hand
Total Assets
Shareholders’Equity
Share Capital
Share Premium
Retained Earnings
Non-Current Liabilities
Current Liabilities
Trade Payables
Bank Overdraft
Income Tax Payable
Dividend Payable
Total Liabilities and Shareholders’Equity

Yr 2
RWF000

Yr 1
RWF000

380
250
630

305
200
25
530

150
390
50
2
592
1222

102
315
1
418
948

200
160
260
620
100
520

150
150
200
500
500

127
85
190
100
1,222

119
89
160
80
948

Notes:
(1) Non-current asset investments were sold in Yr 2 for RWF30,000.
(2)

Non-current assets (cost RWF85,000, net book value RWF45,000) were sold for
RWF32,000 in Yr 2.

(3)

The following information relates to the fixed assets:
31.12.Yr 2
RWF000
720
340
380

Cost
Depreciation
Net book value

31.12.Yr
1
RWF000
595
290
305

(4) 50,000 ordinary RWF1 shares were issued at a premium of RWF0.2 per share during Yr
2.
(5) The current asset investments are readily disposable.

Page 313

Required:
Prepare a cash flow statement for the year ended 31 December Yr 2 using the indirect method
to comply with the provisions of IAS 7 Cash Flow Statements.
E Ltd Cash Flow Statement for the Year Ended 31 December Year 2
RWF
’000
300

Cash Flows from Operating Activities
Profit before Taxation
Adjustments for:
Interest Paid
Interest Received
Depreciation
Profit on Disposal of Investment
Loss on Disposal

RWF’
000

75
(25)
90
(5)
13
448
(48)
(75)
8
333
(75)
(110)

Increase in Inventory
Increase in Trade Receivables
Increase in Trade Payables
Cash Generated from Operations
Interest Paid
Income Tax Paid
Net Cash from Operating Activities

148

Cash Flows from Investing Activities
Payments for Tangible Non-Current Assets
Payments for Intangible Assets
Proceeds from Disposal of Tangibles
Proceeds from Disposal of Investments
Interest Received
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Proceeds from Issue of Shares
Proceeds from Long-Term Loan
Dividend Paid
Net Cash from Financing Activities
Net Increase for Cash and Cash Equivalents
Cash and Cash Equivalents at Start of Year (89 – 1)
Cash and Cash Equivalents at End of Year
Cash and Cash Equivalents at End of Year
Investments
Cash
Bank Overdraft

Page 314

(210)
(50)
32
30
25
(173)

60
100
(80)
80
55
(88)
(33)

50
2
(85)
(33)

Workings
1.
Non-Current Assets
Opening
Additions

RWF’000
595
210
805

Closing
Disposal

RWF’000
720
85
805

Accumulated Depreciation
Closing
Disposal

RWF’000
340
40
380

Opening
Depreciation

RWF’000
290
90
380

Disposal
Cost

RWF’000
85

Accumulated Depreciation
Bank
Loss

RWF’000
40
32
13
85

2.
Income Tax
Closing
Bank

RWF’000
190
110

Opening
Statement of Comprehensive
Income

300

RWF’000
160
140
300

3.
Dividends
Closing
Bank

RWF’000
100
80
180

Page 315

Opening
Statement of Comprehensive
Income

RWF’000
80
100
180

Study Unit 24
Ratio Analysis and Interpretation of Financial Statements
Contents

General

Ratios on Return on Capital

Ratios of Profitability

Ratios of Activity

Ratios of Liquidity

Ratios of Gearing (Leverage)

Limitations of Ratio Analysis

Summary

Checklist

Page 316

GENERAL

Accounting ratios provide a useful basis on which to review a company's performance from
its accounts. The essence of the approach is to measure company performance by a criterion,
which takes account of the profit generated by the company, and the resources utilised to
generate that profit. This criterion is called return on capital which is referred to as the
primary ratio. In essence, it is the return, which the shareholders earn for every RWF1
invested by them in the company for the time being. The ratio is compared from one period
to the next. In order to establish the reasons for changes in the ratio i.e. improvement or
deterioration in return on capital, the ratio is broken down into its component elements. The
component elements are also ratios and are referred to as secondary ratios.
The relationship between the primary ratio, return on capital, and the secondary ratios of
which it is composed can be seen from the following ratio pyramid.
Ratio on
Return on Capital

Ratios on
Profitability

Ratios on
Activity

Ratios
on
Gearing

The mathematical relationship can be simply expressed as can be seen from the following:
Profitability
Profit
Sales

Activity

Sales
x

Total
Assets

Gearing

Total Assets
x

Capital
Employed

Capital
Employed
Shareholders’
Funds

A movement in any one of these four components will affect the return on shareholders’
funds. A fall in any one of the ratios will yield a lower return on shareholders’ funds.
Correspondingly if any one of the ratios increases, there will be an increase in return to the
shareholders.
In addition to the categories of ratios referred to above, there are also ratios of liquidity which
are used to gauge the solvency of the enterprise. Ratios, therefore, come under the following
headings:
•

Ratios of Return on Capital

•

Ratios of Profitability

•

Ratios of Activity

•

Ratios of Gearing

•

Ratios of Liquidity

Page 317

RATIOS ON RETURN ON CAPITAL

The ratio that the shareholders are concerned with is: Net Profit Before
Taxation
Average Shareholders’
Funds
Average shareholders’ funds would be the average amounts of the shareholders’ funds during
the year, usually a simple average of the amounts shown by the opening and closing
Statement of Financial Positions. This is the return to the shareholders, which is derived by
the business.
Another way of measuring return on capital is: Net Profit Before Interest and
Taxation
Average Capital Employed
Average capital employed is again the average of the opening and the closing Statement of
Financial Positions figures for capital employed. Capital employed, however, includes both
shareholders’ funds and long-term liabilities. This ratio shows the average return generated
by the company on all long term capital used by it. As such, it is of less significance to the
shareholder. It is useful to management in assessing the overall performance of the company
in utilising all of its long-term capital.

RATIOS ON PROFITABILITY

These ratios measure the profitability of the company's sales. They state the average amount
of profit or the amount of specific expenses included per RWF1 of sales by the company.
The following are the ratios commonly computed and their interrelationship.

Ratios of Profitability - commonly computed
(a)

Cost of goods sold to Sales (Key ratio)

(b)

Net profit to Sales

(c)

Production materials to Sales

(d)

Direct Labour to Sales

(e)

Overhead costs to Sales

(Key ratio)

Page 318

Ratios of Profitability - Inter-relationship
Trading Profit
Sales

Gross Profit
Sales
Administration Expenses
Sales
Selling Expenses
Sales
Individual Expenses
Sales
Individual Expenses
Sales

Raw Materials Costs
Sales

Labour Costs
Sales

Overhead Costs
Sales

Gross Profit to Sales
This ratio is invariable expressed as a percentage. It reveals the gross profit as a percentage
of the sales value. The figure obtained should be uniform for all firms in the same industry
whether they are the largest or the smallest.
Any significant deviation or change in the ratio may be due to:
(i)

Manipulation of Inventory, purchase or sales figures

(ii)

Changes in price policy

(iii) Changes in the purchases or sales mix
(iv) Changes in the cost of raw materials without a corresponding change in sales prices
Businesses with a faster Inventory turnover usually have a low gross profit margin e.g. a
supermarket. On the other hand the lower the Inventory turnover the higher the gross profit
margin e.g. a furniture retailer.
Net Profit to Sales
The profit margin indicates the extent to which the business is protected against potential
losses arising from increased costs or falling prices.
A low ratio indicates that a firm's selling prices are too low or that its costs are too high or
both. However, the ratio may be lowered by a high charge for depreciation on Non-Current
Assets and raised by a low charge for depreciation.

Page 319

Profit Margin on Sales
Profit Before Interest and
Taxation
Sales
Production Materials to Sales
Production Materials
Costs
Sales
Direct Labour to Sales
Direct Labour
Sales
Other ratios, which may prove useful in the analysis of Operating Statements, include
administration/sales, showing the percentage of administrative costs to sales; selling and
distribution costs/sales showing the percentage of sales costs to sales. Care should be taken
with the latter ratio, as high selling and distributive costs may be incurred in a new product
launch.
Questions prompted by the use of Profitability Ratios:
(a)

Manipulation of Inventories, purchases and sales figures

(b)

Changes in product mix

(c)

Changes in pricing policy

(d)

Changes in costs of raw materials

(e)

The velocity of Inventory turnover

(f)

The incidence of costs including depreciation in earning profits

(g)

The margin of safety

(h)

The proportions of materials, direct labour, administrative cost to sales

RATIOS OF ACTIVITY

Ratios of activity measure the extent of use made of the assets of the company measured in
terms of turnover generated per RWF1 of asset used. Turnover is related to total assets and to
each category of asset individually to establish by comparison from year to year if the
efficiency of usage of any asset is declining. The following is the inter-relationship between
the ratios: -

Page 320

Sales
Total Assets

Sales
Non-Current Assets

Sales
Plant

Sales
Current Assets

Sales
Premises

Sales
Inventory

Sales
Trade Receivables

Sales
Raw Materials

Sales
Work-in-Progress

Sales
Finished
Goods

The following should be noted about the individual ratios.
Sales/Non-Current Assets
This ratio is not of great value because the numerator and denominator are very often not
comparable.
Non-Current assets are stated at their cost, perhaps many years prior to the Statement of
Financial Position date. Sales, however, are valued at prices prevailing in the current year
and hence the two values are incomparable. Furthermore, non-Current assets will decline in
value due to depreciation without any reduction in the capacity of the plant and equipment.
However, the reduction in value of the denominator increases the ratio and gives a false
impression of higher utilisation of non-current assets. For this reason, a ratio-measured in
terms of tonnage produced per unit of plant capacity tends to be more meaningful than the
sales to non-current assets ratio.
Sales/Inventory
There are three main ways of presenting the relationship of sales to Inventories
(a)

Cost of Sales (Cost of Goods
Sold)
Average Inventory

This relationship expresses the frequency with which the average level of inventory
investment was 'recouped' or 'turned over' through operations. Presumably, the higher the
turnover, the better the performance by the firm, for it has managed to operate with a
relatively small average commitment of funds. This, in turn, may indicate that the inventory
Page 321

must be relatively 'current' and useful, and contains little unusable inventory. On the other
hand, a high turnover could mean Inventory shortages and incomplete satisfaction of
customer desires. The final judgement will depend upon the industry, company and the
method of valuing inventory and any observable trends.
(b)

Sales
Closing Inventory

The ratio is a cruder standard for the same purposes as (a). The most important shortcoming
is in the use of the ending inventory figure, which may not be representative of the level of
inventory throughout the year. Furthermore, the investment in inventory corresponds in
terms of value to the cost of goods sold, whereas sales contain the mark-up for other costs
and profit over and above the recorded cost of the goods as carried in inventory. Thus, the
relationship is not entirely that of comparable figures. Finally, comparability between
companies may be impaired through differences in the gross margin taken on sales, which is
more adequately represented by cost of goods sold.
The Sales/Inventory ratio can also be broken down into:(a)

Sales/Raw Materials Inventories

(b)

Sales/Work-in-Progress

(c)

Sales/Finished Goods Inventory

Sales/Trade Receivables
The result is expressed in terms of "days' sales represented by Trade Receivables" or, more
commonly, as the "collection period". This measure can be compared to the credit terms
granted to customers in the industry in question and a major deviation from this norm toward
slower collections will be a warning signal, especially if there is a trend over a number of
periods. The promptness with which accounts are collected is an indicator of the managerial
effectiveness of the credit department, as well as a reflection of the quality of the Trade
Receivables. Extremely close adherence to credit terms could, on the other hand, mean that
the credit policies of the company are unduly strict and profits from sales to somewhat slower
customers are being lost. The ratio can be computed as follows:
Trade
Receivables
Credit Sales

x 365
Days

As pointed out before, the collection period is a rough measure of the overall quality of the
Trade Receivables and of the credit policies of a business, but is subject to distortion,
especially if sales fluctuate widely in a given period. Also, a business selling both for cash
and on account presents a problem, since a separation of credit sales must be made. For a
more exact picture, a detailed "ageing" of Trade Receivables can be prepared, through a
classification of accounts into groups by dates of sale, in monthly or other relevant time
intervals (depending on the credit terms) to see which portion is current and which is
overdue. A ratio analysis of overdue accounts in proportion to outstanding accounts from
selected or all periods can then be made. This information is not always available to the
outsider, however.
Page 322

RATIOS OF LEVERAGE/GEARING

These ratios measure the extent to which the company has managed to finance its assets from
sources of finance other than the shareholders and in particular from:
(i)

Trade Payables
And

(ii)

Long term loan capital

The inter-relationship between the ratios can be seen to be as follows: Total Assets
Shareholders’Funds
=
Total Assets
Capital
Employed

Short Term
Gearing
(Trade
Payables)

Capital Employed
Shareholders’Funds

Long Term
Gearing
(Loan Capital)

Capital employed is the total long-term finance of the business from shareholders and by way
of loan capital. If total assets exceed capital employed, Trade Payables must finance them.
A measure of the extent of the financing by Trade Payables is got from the total assets to
Capital Employed ratio. It should be remembered that this form of finance is free since no
interest would normally be paid to Trade Payables on their outstanding balances (as would be
paid on Loan Capital finance).
This ratio of capital employed to shareholders funds indicates the proportion of the long-term
capital of the business provided by shareholders.
Another important ratio of gearing is the average period of credit received from Trade
Payables.
Average Period of Credit Received
Trade Payables
x 365
Credit
Days
Purchases
From the point of view of the creditor of a business, as well as the financial analyst, it is often
desirable to apply a test to Trade Payables similar to the one for Trade Receivables. The
basis of this measure is a comparison of the creditor balance with the purchases for the
Page 323

period. Again, a detailed ageing of the accounts would yield the most exact picture of the
way in which the business handles its obligations to Trade Payables, that is, how promptly its
bills are paid. In the absence of such data, the rougher measure must suffice. This ratio can
be compared to the credit terms extended by the suppliers of the business to see if any abuses
of these terms are made, and trends may be significant.
However, this ratio is seldom available to outsiders, since the amount of purchases are not
commonly made public. In the case of a manufacturing firm, purchases may be
approximated by taking the material cost from the Manufacturing Account, if available and
adjusting for the change in the raw materials content of Inventories. Lacking such detail,
some analysts take cost of goods sold, if available, and adjust for the change in Inventories.
The latter measure is a very crude approximation, since usually cost of goods sold contains
many cash charges, such as labour, repairs and so forth. It can be used without difficulty in
the case of a wholesales or retailer, however. Another difficulty lies in the fact that Trade
Payables often include debts incurred for purposes other than raw material purchases and
such debts may vary greatly from time to time. Consequently, the ratio, if obtained, is
usually less reliable than the Trade Receivables measure.
Finally, the remaining gearing ratio to be considered is the coverage of fixed interest charges.
This ratio tells the number of times by which profit before interest would have to fall before
the company is unable to pay its interest on loan capital. It is computed as follows:
Profit Before
Interest
Total Interest
Payable

RATIOS OF LIQUIDITY

There are two key ratios of liquidity:
(i)

The Current Ratio

(ii)

The Acid Test Ratio

The Current Ratio
Current Assets
Current Liabilities
The current ratio is one of the most commonly used indices of financial strength, although it
is a rather crude measure. The basic question underlying this ratio is the ability of the
business to meet its current obligations with a margin of safety to allow for a possible
shrinkage of value in its various current assets, such as Inventories and Trade Receivables.
This test, applied at a single point in time, implies a liquidation approach rather than a
judgement on the going concern, for it does not explicitly take into account the revolving
nature of current assets and current liabilities.

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The general impression regarding this measure is that the higher the ratio the better. In fact,
there are many instances where financial managers try to improve the current ratio of periodic
Statement of Financial Positions by paying off with cash as many of their current obligations
as possible on the day prior to the Statement of Financial Position date. If the company has a
current ratio of better than 1:1, this process will raise the current ratio, since the same amount
will be deducted from both sides of the ratio. The process will worsen the picture if the ratio
is less than 1:1. From the point of view of the Trade Payables, this may be true. From the
standpoint of prudent management, there may be serious doubts about the wisdom of an
excessive build-up, especially of redundant cash lying idle, or worse, a build-up of
Inventories out of proportion to the needs of the business. Another distorting factor is the
seasonal character of some businesses, which can be reflected to a great extent in a
fluctuating current ratio. In the interpretation of this ratio thought should, therefore, be given
to the components (for example, cash, Trade Receivables, Inventories, Trade Payables, and
so forth) forming the ratio, the character of the business and the industry, as well as future
expectations.
A general popular rule of thumb for the current ratio is considered to be a 2:1 relationship.
Used without caution and discrimination, however, such a vague overall standard is rather
dangerous. A 2:1 current ratio or even a 10:1 current ratio does not of itself guarantee reserve
strength to meet current obligations, or the ability to turn current assets (especially
Inventories) into cash as needed liquidity. Much depends on the quality and character of the
current assets. Furthermore, the type of industry involved plays a major role in the need for
more or less current financial strength and liquidity. For instance, a public utility with a
preponderance of Non-Current Assets and a steady cash flow faces a need for current
payment much different from those of wholesalers whose primary investment is in Inventory
and Trade Receivables subject to changes in value. A manufacturer has financial problems
different from those of a rental store, because of differences in the character of investments
and operations.
A figure related to the current ratio is the item "net current assets" or "net working capital".
This is simply the difference between current assets and current liabilities. The analyst
(especially the credit analyst) looks upon this figure, and its movements over several periods,
as an indicator of reserve strength to weather adversities. Bank loans are often tied to a
minimum requirement for working capital (i.e. restrictive covenants).
The Liquidity Ratio or "Acid Test"
Trade Receivables, Cash, Marketable
Securities
Current Liabilities

Current Assets – Closing
Inventory
Current Liabilities

This ratio arises from the same basic desire to measure a business' ability to meet its current
obligations through the use of its current assets as does the current ratio. It is, however, a far
more severe test since it is an attempt is eliminate some of the disadvantages of the current
ratio by concentrating on strictly liquid assets whose value is fairly certain. By excluding
investors from consideration, the questions asked in fact become: "If the business were to
stop selling today, what are its chances for paying off its current obligations with the readily
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convertible funds on hand?" The acid test thus again backs away from the assumption of a
going concern, by not considering future funds flows of the business.
A rule of thumb of 1:1 is commonly applied here with a little more justification, since a preselection of presumable liquid assets has been made. A result far below 1:1 can be a warning
signal, but a blind application of this rule should be avoided.

G. LIMITATIONS OF RATIO ANALYSIS
There are a number of points, which should be borne in mind when using ratio analyses in
interpreting accounting information.
(i)

The source information on which ratios are based is usually the final accounts of a
business comprising of the Statement of Comprehensive Income and the Statement of
Financial Position of the concern in question. The Statement of Financial Position is a
position of the firm at a specific point in time. If the Statement of Financial Position
has been drawn up one month earlier or later it would perhaps have shown a completely
different picture especially the Current Asset/Current Liability situation. The Statement
of Financial Position is a static piece of accounting information and therefore any ratio
based wholly or partly on Statement of Financial Position figures must suffer from the
same defect. In addition seasonal variations must also be considered.

(ii)

The revenue accounts of a business i.e. the Statement of Comprehensive Income show a
cumulative or dynamic situation. In other words, the underlying trends of the concern
would be equally well shown by revenue accounts drawn up for periods of less than one
year bearing in mind seasonal variation. Therefore, more reliability may be placed on
those ratios computed wholly from revenue account figures.

(iii) A ratio by itself may be almost worthless, a standard will, therefore, have to be
established, this may be found either from a firm at a similar stage of development in
the same industry, or from previous years accounts of the same firm.. As sources of
information, these have their limitations as they are based on published accounts.
(iv) Ratio analysis does not provide the answers to business problems. It is a tool, which
enables the financial manager or investigator to ask the right questions.

H. SUMMARY
The prime objectives of analysis and interpretation of accounting information is to ascertain:
(i) The operating performance of the firm in terms of how well the business is utilising its
assets
(ii)

Whether there is excessive investment in Non-Current Assets

(iii) If the business is adequately financed
(iv) The Inventories position of the firm and find out if it carries excessive or obsolete
Inventories
(v)

The liquidity position of the concern
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(vi) Whether its profit margin are in line with comparable businesses
In other words, the objective of ratio analysis is to discover the reality behind the situation.

CHECKLIST

Introduction
The purpose of this checklist is to illustrate in a logical sequence the main points, which
should be highlighted when analysing and interpreting financial information. It may be used
in a general situation where an overall analysis is required or in a specialised situation where
only particular information is needed by making reference to specific sections.
SECTION 1
Liquidity
(i) Current Ratio
The ability of the firm to meet its current obligations.
1.5 to 1 leaves a reasonable margin: greater than 2 indicate idle assets.
Less than 1 indicates inability to satisfy current obligation out of current assets.
(ii)

Liquidity Ratio
1 to 1.1 is ideal
Compare with Current ratio to show incidence of Inventory as a current asset.
General - Large Trade Receivables/Trade Payables, little cash or large overdraft may
indicate overtrading.
Overtrading - A firm is said to be 'overtrading' when it conducts a volume of trade far
in excess of that justified by the proprietors "own funds", so that the substantial
circulating assets needed to support the high level of trade are unduly dependent on
outside finance.

(iii) Trade Receivables Ratio
(a) The question of Credit Control
(b)

Incidence of Bad Debts

(c)

Suggest preparation of age Analysis of Trade Receivables

(d)

Examine the mix of cash to credit sales

(a)

Trade Payables Ratio Easing or tightening of credit by suppliers

(iv)
(b)

Mix of cash to credit purchases

Express (iii) and (iv) above in terms of days. Take a year as being 365 days. In
practice, it is customary to take the figure for Trade Receivables or Trade Payables at
the year end and express the Trade Receivables/Trade Payables Ratios by the number
of months’ sales or purchases the figure represents.
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General - Trade Payables Ratio should exceed Trade Receivables Ratio so as to take
maximum advantage of finance provided. However, take note nature of business e.g. in
supermarket business, there are cash sales and, therefore, no Trade Receivables while in
the professional business, there are few Trade Payables, but normally a high debtor’s
figure.
(v)

Inventories
(a) Over/undervaluation
(b)

Obsolete or slow moving Inventory

(c)

Second quality/sub-standard goods

(d)

Too much/too little to support level of business activity

(e)

Poor Inventory control

Definitions
Solvency A business is said to be SOLVENT when it can meet its CURRENT AND
FIXED LIABILITIES out of its TOTAL ASSETS
Liquid

A business is said to be LIQUID when it can meet its CURRENT LIABILITIES
out of its CURRENT ASSETS

SECTION 2
Efficiency
(i) Return on Capital Employed
(a) Compute in terms of MARKET VALUE of assets
(b)
(ii)

Prime yardstick for measuring EFFICIENCY of business

Net Asset Turnover
(a) Utilisation of assets, but note incidence of costs to achieve this objective
(b)

Compute in conjunction with Profit/Sales Ratio to achieve (i) above

(iii) Fixed Asset Turnover
(a) High Ratio - Greater efficiency in fixed asset utilisation
(b)

Low Ratio - Poor efficiency. Remedy dispose of idle assets

(iv) Sales to Net Current Assets
The amount of capital required achieving an additional RWF1 of sales, given no
shortage of capacity
SECTION 3
Profitability
(i) Gross Profit to Sales
(a) Use of comparison with previous years and other firms in the same industry
(b)

Deviations
–

Manipulations in Inventory, purchases, sales
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(ii)

–

Changes in purchases/sales mix

–

Changes in raw materials costs with a corresponding

–

Change in sales prices

–

Poor cut-off

Profit Margin on Sales
(a) Compute with Net Asset Turnover above
(b)

Selling price too low/costs too high

(iii) Other ratios, which are Significant in Analysis of Operating Statements.
i.e. (i) Production Materials/Sales
(ii)

Direct Labour/Sales

(iii) Employee Ratio - Sales per employee

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Study Unit 25
Manufacturing Accounts

Contents

A. General
___________________________________________________________________________
B. Division of Costs
___________________________________________________________________________
C. Layout of a Manufacturing Account
___________________________________________________________________________

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GENERAL

A manufacturing account is prepared in addition to the trading and profit and loss accounts.
It is produced for internal use, mainly for the owners and managers of organisations.

DIVISION OF COSTS

Costs in a manufacturing business are divided into different types. These can be defined as
Prime Costs and Production Costs.
Cost of Production = Prime Cost + Factory Overheads+ Opening Work in Progress- Closing
Work in Progress.
A direct cost is known as a prime cost,
Examples:
 direct materials
 direct labour
 direct expenses.
If a cost cannot easily be traced to the item being manufactured, then it is an indirect cost and
will be included under indirect manufacturing costs.
Examples of Indirect Costs: Wages to Cleaners
 Rent of a factory
 Factory lighting
 Factory Power
Administration expenses include manager and administrative salaries, legal and accountancy
fees, depreciation of machinery.
Selling and distribution expenses include sales staff salaries and commission, carriage
outwards, depreciation of delivery vans, promotion and display expenses.
Financial charges include expenses items such as bank charges and discounts allowed, bad
debts.
Administration expenses, selling and distribution expenses and financial charges are charged
to the Profit and Loss account part of the manufacturing account.
Rent can be allocated as following in the manufacturing account: Selling and Distribution
 Factory Part
 Administration Buildings
Only one figure of rent may be paid, and can be apportioned using a range of methods
including
 Floor area
 Property valuations of each part of the buildings and land

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C. LAYOUT OF A MANUFACTURING ACCOUNT
Company Name
Manufacturing, Trading and Profit and Loss Account
for the year ended 31 December 200X
RWF
RWF
Raw Materials
Opening Stock
Purchases (Raw Materials)
Add : Carriage Inwards

xxxx
xx

Less Return Outwards

xxxx
(xx)

RWF

Xxx

Xxxx
Xxxx
(xx)

Less: Closing Stock (Raw Materials)
Cost of Raw Materials consumed
Direct Materials
Direct Expenses (Royalty)

xxxx
xxx
xxx

PRIME COST
FACTORY OVERHEADS:
Factory rent and rates
Fuel and power
Indirect wages
Lubricants (
)
Depreciation of plant and machinery

XXXX
Xxx
Xxx
Xx
Xxx
Xxx
XXXX
XXXX

WORK-IN-PROGRESS
Opening Work-in-Progress (1.1.200x)
Less: Closing Work-in-Progress (31.12.200y)

Xxxx
(xxx)
XXX

PRODUCTION COST OF GOODS COMPLETED c/d

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XXXX

(Trading Account)
Finished Goods
Sales
Less: Cost of Goods Sold
Opening Stock
Add: Production Cost of Goods Completed b/d
Less: Closing Stock
GROSS PROFIT
Less: Expenses
Administrative Expenses (Office expenses)
e.g. Office rent and rates
Administrative salaries
General administration expenses
Depreciation of office furniture, office equipment
Selling and Distribution Expenses
e.g. Advertising expenses
Sales Commissions
Carriage Outwards
Financial Expenses
e.g. Discounts allowed
Bad Debts
Provisions for Bad Debts

xxxx
xxx
xxxx
xxxx
(xxx)
(xxx)
XXX

(xxx)
NET PROFIT FOR THE YEAR

XXX

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Statement of Financial Position as at 31 December 200X
FIXED ASSETS
Cost Accumulated
Depreciation
Machinery
Office Equipment

CURRENT ASSETS
Stock:
Raw Materials
Work in Progress
Finished Goods
Debtors
Less: Provisions for Bad Debts

xxxxx
xxxx

Xxx
Xxx

Net
Book
Value
xxxx
xxxx

xxxxx

Xxx

xxxx

Xxx
Xx
Xxx
xxx
(xxx)
Xxx
Xx
Xxx
Xxx

Prepaid Expenses
Bank
Cash

Xxxx
Less: CURRENT LIABILITIES
Creditors
Accrued expenses

xxx
xx
(xxx)

Working Capital

xxx
xxxx

FINANCED BY:
Capital on 1.1.200x
Add: Net Profit for the year

xxxx
xxx

xxxx
(xxx)

Less: Drawings

xxxx

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BLANK

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Study Unit 26
IPSAS
Contents
A. Introduction
___________________________________________________________________________
B. IPSAS 1
___________________________________________________________________________
C. IPSAS 2
___________________________________________________________________________
D. IPSAS 12
___________________________________________________________________________
E.

IPSAS 3

F.
IPSAS 14
___________________________________________________________________________
G.

IPSAS 17

H. IPSAS 31
___________________________________________________________________________
I.
IPSAS 16
___________________________________________________________________________
J.

IPSAS 19

K.
IPSAS 9 and 23
___________________________________________________________________________

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A. INTRODUCTION
International Public Sector Accounting Standards (IPSASs)
Recent years have seen ongoing efforts to codify a set of accounting standards that can be
applied specifically to the public sector. Most of these have focused on variations of private
sector accounting based on the IFRS regime. In some countries, such as the United Kingdom,
New Zealand and Australia a national version of the IFRSs for the public sector has been
prepared. However a set of international –public sector standards have also been developed,
the IPSASs, and these are gaining increasing credibility across the globe. They have been
adopted by a number of countries, including Rwanda, in theory although there is still a
considerable amount of practical work to be done before they may be considered to be
practically implemented. They have also been adopted by some leading international
organisations such as the United Nations and the World Food Programme.
IPSASs have been in existence from 2000 but a major updating process on them took place in
2009. Recognising that cash accounting is still in place for the public sectors of many
countries, there is a Cash-Basis IPSAS. There are also 32 accruals-based IPSASs in existence
as at the end of 2011. Recognising that there are many countries that plan to transition from a
cash to an accruals based method of accounting in the public sector, there is also a section of
the IPSAS devoted to disclosures that could be made under a modified cash basis, which
essentially provides guidance on the data that could be collected and disclosed as part of an
interim step from one to the other.
The IPSAS are published by the IPSAS Board (IPSASB) which is part of the IFAC
(International Federation of Accountants) organisation based in New York. In the same way
as would be the case with an IFRS there will be a consultation process involving the issuance
of an Exposure Draft for public comment before publication.
The 32 accruals-based IPSAS are:
IPSAS 1—Presentation of Financial Statements
IPSAS 2—Cash Flow Statements
IPSAS 3—Accounting Policies, Changes in Accounting Estimates and Errors
IPSAS 4—The Effects of Changes in Foreign Exchange Rates
IPSAS 5—Borrowing Costs
IPSAS 6—Consolidated and Separate Financial Statements
IPSAS 7—Investments in Associates
IPSAS 8—Interests in Joint Ventures
IPSAS 9—Revenue from Exchange Transactions
IPSAS 10—Financial Reporting in Hyperinflationary Economies
IPSAS 11—Construction Contracts
IPSAS 12—Inventories
IPSAS 13—Leases
IPSAS 14—Events after the Reporting Date
IPSAS 15—Financial Instruments: Disclosure and Presentation
IPSAS 16—Investment Property
IPSAS 17—Property, Plant, and Equipment
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IPSAS 18—Segment Reporting
IPSAS 19—Provisions, Contingent Liabilities and Contingent Assets
IPSAS 20—Related Party Disclosures
IPSAS 21—Impairment of Non-Cash-Generating Assets
IPSAS 22—Disclosure of Financial Information about the General
Government Sector
IPSAS 23—Revenue from Non-Exchange Transactions
(Taxes and Transfers)
IPSAS 24—Presentation of Budget Information in Financial Statements
IPSAS 25—Employee Benefits
IPSAS 26—Impairment of Cash-Generating Assets
IPSAS 27—Agriculture
IPSAS 28—Financial Instruments: Presentation
IPSAS 29—Financial Instruments: Recognition and Measurement
IPSAS 30—Financial Instruments: Disclosures
IPSAS 31—Intangible Assets
IPSAS 32 – Service Concessions
There is an increasing recognition that good accounting is good accounting whether it be in
the private or public sector, though there is also an understanding that the uses for which
financial information is used is often different in each case. For example, financial
information in the private sector is frequently prepared with the aim of meeting the needs of
investors including shareholders whereas in the public sector it is more an aid to assisting in
holding spenders of public funds accountable for their actions.
There are though many similarities in good practice. As a result, most of the accruals-based
IPSASs are derived from an IFRS (the sequencing of this is important: normally an IFRS will
come first and will be followed by an IPSAS that is derived from it). Whilst there will be
some redrafting to take account of the specific needs of the public sector in a number of cases
the most marked difference between an IFRS and its connected IPSAS is one of terminology
(for example whereas an IFRS will talk about a Statement of Comprehensive Income an
IPSASs will discuss a Statement of Financial Position or an IFRS will mention equity
whereas an IPSAS will discuss net assets). Each IPSAS will explain how it is different in any
material way from the IFRS from which it is derived. In common with IFRS, the IPSAS
regime is an accounting and reporting tool, explaining both how to account for various
transactions and also the level of disclosures that are required.
The exceptions to the general rule that an IPSAS is normally linked to an IFRS are as
follows:
IPSAS 21: Impairment of Non-Cash Generating Assets – non-cash-generating assets are
those which are not used for a commercial purpose, which covers many in the public sector
IPSAS 22: Disclosure of Financial Information about the General Government Sector
IPSAS 23: Revenue from non-exchange transactions, which gives guidance on how to
account for taxes and transfers as revenues
IPSAS 24: Presentation of budget information in financial statements, which recognises that
budgeting is an important method of ensuring accountability in the public sector whereas in
the private sector it is more a method of internal control
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IPSAS 1

Presentation of Financial Statements - IPSAS 1
IPSAS 1 (“Presentation of Financial Statements”) gives general guidance as to the types of
financial statements to be prepared in the public sector (along with IPSAS 2 on the cash flow
statement). It is drawn primarily from IAS 1. It should be applied to all general purpose
financial statements prepared and presented under the accrual basis of accounting in
accordance with IPSASs. In common with most IPSASs, it applies to all public sector entities
other than Government Business Enterprises which use IFRSs for their financial reporting.
It outlines that there are six basic components of financial statements namely a Statement of
Financial Position, a Statement of Financial Performance, a statement of changes in net
assets/equity, a cash flow statement, a comparison of budget and actual amounts (only if the
budget is made publicly available) and the notes to the financial statements. It is important to
emphasise that the disclosures in the notes are considered a fundamental part of the financial
statements – but detailed guidelines on what should go into the notes for specific elements of
the financial statements are found in individual IPSASs on the topics involved and not in
IPSAS 1, which sets out high level contents only.
Many of these financial statements are similar to those in use within the private sector. One
important difference however is the comparison of budget and actual amounts. This reflects
the fact that in the public sector the budget has a greater and different significance than it
does in the private sector. In particular it is a tool to help ensure accountability of those
responsible for the control of resources and their effective, efficient and economic use.
IPSAS 1 does not give detailed guidance on the budget v actual comparison statement which
is covered in more detail within IPSAS 24, “Presentation of Budget Information in Financial
Statements” (this is one of the few IPSASs for which there is no equivalent IFRS).
Entities are encouraged to present other information than that included in the financial
statements to assist users in assessing the performance of the entity, its stewardship of assets
and making an informed evaluation about decisions on the allocation of resources. Such
information might include performance indicators, statements of service performance,
program reviews and other reports by management. These areas will be further covered in the
“Conceptual Framework” which is currently being prepared by IFAC to provide a framework
within which future IPSASs will be prepared and current IPSASs possibly revised.
IPSAS 1 states that financial statements shall present fairly the financial position, financial
performance, and cash flows of an entity. Fair presentation requires the faithful representation
of the effects of transactions, other events, and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, revenue, and expenses set out in IPSASs. The
application of IPSASs, with additional disclosures when necessary, is presumed to result in
financial statements that achieve a fair presentation.
An entity whose financial statements comply with IPSASs shall make an explicit and
unreserved statement of such compliance in the notes. Financial statements shall not be
described as complying with IPSASs unless they comply with all the requirements of IPSASs
– in other words selective application of IPSASs is not permitted.

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In addition to the over-arching consideration of ‘fair presentation’ other important concepts
are included, for example;
that the financial statements are prepared on the basis that the entity is a ‘going
concern’
that there is in normal circumstances consistency of presentation from one reporting
period to the next
the concept of materiality and aggregation of large numbers of transactions into
classes for reporting purposes
that the offsetting of assets and liabilities, or revenue and expenses, is not permitted
unless specifically allowed or required by an IPSAS
that comparative information for previous periods will be included in the financial
statements unless an IPSAS allows or requires its non-inclusion (e.g. in the first reporting
period for a new entity)
Much of the detailed guidance in IPSAS 1 replicates that found in IAS 1 and is therefore not
replicated here. The main differences between the two are shown below:
•
•

•

•
•
•

Commentary additional to that in IAS 1 has been included in IPSAS 1 to clarify the
applicability of the Standard to accounting by public sector entities, e.g., discussion
on the application of the going concern concept has been expanded.
IAS 1 allows the presentation of either a statement showing all changes in net
assets/equity, or a statement showing changes in net assets/equity, other than those
arising from capital transactions with owners and distributions to owners in their
capacity as owners. IPSAS 1 requires the presentation of a statement showing all
changes in net assets/equity.
IPSAS 1 uses different terminology, in certain instances, from IAS 1. The most
significant examples are the use of the terms “statement of financial performance,”
and “net assets/equity” in IPSAS 1. The equivalent terms in IAS 1 are “Statement of
Comprehensive Income,” and “equity”.
IPSAS 1 does not use the term “income,” which in IAS 1 has a broader meaning than
the term “revenue.”
IPSAS 1 contains commentary on timeliness of financial statements, because of the
lack of an equivalent Framework in IPSASs (paragraph 69). However this may be
revised once the Conceptual Framework is finalised.
IPSAS 1 contains an authoritative summary of qualitative characteristics (based on
the IASB framework) in Appendix A. Again, this may be revised once the Conceptual
Framework is finalised.

C. IPSAS 2
Cash Flow Statements – IPSAS 2
IPSAS 2 is drawn primarily from International Accounting Standard (IAS) 7, Cash Flow
Statements. You should note that although cash flow statements are discussed in detail in
IPSAS 2, IPSAS 1 on the presentation of financial statements also makes reference to them.

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In practice, there are no significant differences between IPSAS 2 and IAS 7. However there
are some differences in the detail, namely:
•

•
•

Commentary additional to that in IAS 7 has been included in IPSAS 2 to clarify the
applicability of the standards to accounting by public sector entities. IPSAS 2 uses
different terminology, in certain instances, from IAS 7. The most significant examples are
the use of the terms “revenue,” “statement of financial performance,” and “net
assets/equity” in IPSAS 2. The equivalent terms in IAS 7 are “income,” “Statement of
Comprehensive Income,” and “equity.”
IPSAS 2 contains a different set of definitions of technical terms from IAS 7 (paragraph
8).
In common with IAS 7, IPSAS 2 allows either the direct or indirect method to be used to
present cash flows from operating activities. Where the direct method is used to present
cash flows from operating activities, IPSAS 2 encourages disclosure of a reconciliation of
surplus or deficit to operating cash flows in the notes to the financial statements
(paragraph 29).

D. IPSAS 12
Inventories - IPSAS 12
IPSAS 12 (“Inventories”) is drawn substantially from IAS 2. As the name suggests, its
objective is to prescribe the accounting treatment for inventories. Specifically it provides
guidance on the calculation of cost and the subsequent recognition of inventories as expenses
when they are consumed or sold. They also provide guidance on the write-down of
inventories to their Net Realisable Value (in the case of inventories held for re-sale, defined
as the future sales proceeds of any inventory less any future costs that would be incurred to
make that sale happen).
The IPSAS outlines a number of situations where the rules outlined do not apply, for
example:
• Work-in-progress on construction contracts (specific rules are in IPSAS 11)
• Financial instruments (see IPSASs 28 and 29)
• Biological assets (IPSAS 27)
The basic rule, as it is in IAS 2, is that inventories should be carried in the Statement of
Financial Position (sometimes known as the Statement of Financial Position) until it is used
or sold, at which point the inventory will be charged to the Statement of Financial
Performance. The accounting is quite simple as the following example shows:
Entity X, a public sector education establishment buys 20,000,000 RwF of fuel oil in
December 2012, which it does not plan to use until 2013:
In the financial statements, the double entry for this transaction (assuming it is paid for in
cash when purchased is):
DEBIT Inventories (Statement of Financial Position)
CREDIT Cash
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20,000,000
(20,000,000)

When it is then used in 2013, the double entry would be:
DEBIT Expenses (Statement of Financial Performance)
CREDIT Inventories

20,000,000
(20,000,000)

Inventories in the public sector may take a number of different forms, some of them quite
unusual. These include:
•
•
•
•
•

Ammunition
Consumable stores
Maintenance materials
Energy reserves
Stocks of unissued currency

The cost of inventories shall comprise all costs of purchase, costs of conversion, and other
costs incurred in bringing the inventories to their present location and condition. Costs of
purchase includes any non-reclaimable taxes and import duties. If there are any conversion
costs, such as would be the case with a publicly-owned manufacturing environment which
takes raw materials and turns them into finished goods then any attributable overheads may
also be added to the cost as long as these overhead costs are allocated in a systematic fashion.
The accounting treatment in IPSAS 12 is similar to that in IAS 2. Basically, when inventories
are sold, exchanged, or distributed, the carrying amount of those inventories shall be
recognized as an expense in the period in which the related revenue is recognized. If there is
no related revenue, the expense is recognized when the goods are distributed or the related
service is rendered.
There are only a few differences between IPSAS 12 and IAS 2. IPSAS 12 requires that where
inventories are provided at no charge or for a nominal charge, they are to be valued at the
lower of cost and current replacement cost (in the public sector it is not as unusual for
inventories to move from one organisation to another on a free-of-charge basis as it is in the
private sector). In addition the financial statement known as the ‘Statement of Financial
Performance’ is known as the ‘Statement of Comprehensive Income’ in IAS 2, which also
uses the term ‘income’ rather than ‘revenue’.

E. IPSAS 3
Accounting Policies, Changes in Accounting Estimates and Errors - IPSAS 3
IPSAS 3 (“Accounting Policies, Changes in Accounting Estimates and Errors”) is drawn
from IAS 8. The objective of this Standard is to prescribe the criteria for selecting and
changing accounting policies, together with the (a) accounting treatment and disclosure of
changes in accounting policies, (b) changes in accounting estimates, and (c) the corrections of
errors. This Standard is intended to enhance the relevance and reliability of an entity’s
financial statements, and the comparability of those financial statements over time and with
the financial statements of other entities.

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In the public, as in the private, sector an entity has some discretion as to the accounting
policies it adopts to most fairly represent the financial transactions of the business. Therefore
it is important that there is some guidance laid out to ensure that there is an appropriate
methodology for the adoption of accounting policies and also around how they are changed.
Equally, mistakes will from time to time be made in the preparation of financial statements
and they may not always be picked up in the audit subsequently. Therefore guidance is also
required to ensure that if errors are not discovered until after the financial statements have
been formally approved then there are appropriate measures adopted to react to the situation.
It should be noted that one of the allowable reasons for changing an accounting policy is the
publication of a new IPSAS. Entities will always have a transition period during which they
may move from the existing accounting treatment to that which is required by the new
IPSAS. On the other hand the management of the entity may feel that a different policy is
required because of changes that have taken place within the entity itself. Changes of
accounting policy, which usually require restatement of comparative figures and opening
balances should not be confused with changes in accounting estimate, which do not.
Estimates may often be used in government accounting for example estimated amounts of tax
revenues, estimated bad debt provisions for uncollected debts or the obsolescence of
inventory. When these estimates turn out to be in need of correction – and remember that an
estimate is almost certain to be incorrect to some extent because the outcome is uncertain.
These estimates should be corrected in the current financial period and not previous ones.
Errors can arise in respect of the recognition, measurement, presentation, or disclosure of
elements of financial statements. Financial statements do not comply with IPSASs if they
contain either material errors, or immaterial errors made intentionally to achieve a particular
presentation of an entity’s financial position, financial performance, or cash flows.
Nevertheless some financial statements may inadvertently contain material errors which are
not picked up. If they do and the financial statements have not yet been finalised then the
drafts of these should of course be collected before publication. However if they are only
picked up once the financial statements are approved then the correct accounting treatment is
to adjust the comparative figures in the next year’s financial statements and adjust the
opening balances accordingly.
Once more the major differences between IPSAS 3 and IAS 8 mainly revolve around
terminology. IPSAS 3 uses the terms ‘Statement of Financial Performance’, accumulated
surplus or deficit and net assets/equity whereas in IAS 8 these are termed ‘Statement of
Comprehensive Income’, ‘retained earnings’ and ‘equity’. Also IPSAS 3 talks of ‘revenue’,
which is called ‘income’ in IAS 8. In addition, unlike IAS 8 IPSAS 3 does not require
disclosures about earnings per share, which are not normally relevant in a public sector
context.

F. IPSAS 14
Events after the reporting date - IPSAS 14
IPSAS 14, “Events after the reporting date”, is drawn from IAS 10, “Events after the
Reporting Period”. Its objective is to prescribe;
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a) When an entity should adjust its financial statements for events after the reporting
date; and
b) The disclosures that an entity should give about the date when the financial statements
were authorized for issue, and about events after the reporting date.
It also requires that an entity should not prepare its financial statements on a going concern
basis if events subsequent to the reporting date mean that this is not appropriate.
Events after the reporting date may be analysed into adjusting and non-adjusting in nature.
Adjusting events occur when information is received after the reporting date which gives
more evidence about a condition that already existed at the reporting date. One example
would be when a court case has been commenced against the entity where, say, a provision of
30,000,000 RwF has been established. If the court case is decided after the reporting date but
before the financial statements are organised and the court finds that the entity is liable to
make payments of 40,000,000 RwF then the financial statements should be adjusted
accordingly.
Non-adjusting events are those which occur after the reporting date and, although significant,
do not normally give evidence of a condition existing at the Statement of Financial Position
date. Examples given by IPSAS 14 include a major fire after the reporting date that destroys a
substantial asset, a major acquisition or disposal, changes in tax rates or tax laws, large falls
in asset values or big foreign exchange losses. These non-adjusting events do not require the
financial statements to be re-stated but they should be disclosed in the notes to the financial
statements if they are material.
There are no major differences in principle between IPSAS 14 and IAS 10, although some
extra guidance is given in the former to explain better how it applies to the private sector.
Other than that the differences are once more largely in terminology.

G. IPSAS 17
Property, Plant and Equipment - IPSAS 17
IPSAS 17 (“Property, Plant and Equipment”) is drawn primarily from IAS 16, which has the
same name. It provides one of the major challenges when public sector accounting moves
from a cash to an accruals basis for the first time. It is often a major exercise to assemble all
the information required to accurately state an entity’s Property, Plant and Equipment (PPE)
values for the first time. It is also necessary to establish policies on depreciation, that is
allocating the cost of the asset over the period in which it is expected to have a useful life and
amortisation, which is effectively a write-down that must be made when an asset suffers a
permanent diminution in value.
The objective of IPSAS 17 is to prescribe the accounting treatment for property, plant, and
equipment so that users of financial statements can discern information about an entity’s
investment in this and the changes in such investment. The principal issues in accounting for
property, plant, and equipment are (a) the recognition of the assets, (b) the determination of
their carrying amounts (a carrying amount is the value that the asset has in the Statement of
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Financial Position), and (c) the depreciation charges and impairment losses to be recognized
in relation to them.
The Standard applies to all assets (except some which are specifically dealt with by other
IPSAS) including some that are quite specific to the public sector such as specialist military
equipment and infrastructure assets (these would be for example roads or bridges). It does not
however apply to mining activities when mineral reserves such as oil or gas are depleted by
uses. It does not apply either to biological assets (these include animals kept for resale or
slaughter or crops grown for harvesting) which are dealt with by IPSAS 27. Other IPSAS also
deal with assets in specific situations, such as IPSAS 16, which deals with properties held for
investment purposes, or IPSAS 13 on leased assets.
As in private sector accounting, the general rules are that the cost of an item of property,
plant, and equipment shall be recognized as an asset if, and only if:
(a) It is probable that future economic benefits or service potential associated with the item
will flow to the entity; and
(b) The cost or fair value of the item can be measured reliably (fair value is the price at which
the property could be exchanged between knowledgeable, willing parties in an arm’s length
transaction).
The cost of an item of property, plant, and equipment comprises:
(a) Its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.
(b) Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
(c) The initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when the item is
acquired, or as a consequence of having used the item during a particular period for purposes
other than to produce inventories during that period.
Only directly attributable costs may be capitalised as part of the asset value. IPSAS 17 says
that these include:
(a) The costs of employee benefits (as defined in the relevant international or national
accounting standard dealing with employee benefits – the IPSAS dealing with this is IPSAS
25) arising directly from the construction or acquisition of the item of property, plant, and
equipment;
(b) Costs of site preparation;
(c) Initial delivery and handling costs;
(d) Installation and assembly costs;
(e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items produced while bringing the asset to that location and condition (such
as samples produced when testing equipment); and
(f) Professional fees.
An important element of IPSAS 17 is that entities that are making the transition to accruals
accounting based on IPSAS for the first time have a five-year period to make that transition
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as far as the recognition of plant, property and equipment under this particular Standard is
concerned.
Further, an entity that adopts accrual accounting for the first time in accordance with IPSASs
shall initially recognize property, plant, and equipment at cost or fair value. For items of
property, plant, and equipment that were acquired at no cost, or for a nominal cost, cost is the
item’s fair value as at the date of acquisition (this might be the case if for example an asset
was gifted as part of a legacy or was transferred at no cost from another government
department).
In such situations, the entity shall recognize the effect of the initial recognition of property,
plant, and equipment as an adjustment to the opening balance of accumulated surpluses or
deficits for the period in which the property, plant, and equipment is initially recognized.
Although IPSAS 17 is drawn primarily from IAS 16, Property, Plant and Equipment, as
amended by IAS 16 (part of the Improvements to IFRSs which was issued in May 2008) there
are some differences between the private and public sector versions of the Standard. As one
detailed example, at the time of issuing IPSAS 17, the IPSASB has not yet considered the
applicability of IFRS 5, Non-current Assets Held for Sale andDiscontinued Operations to
public sector entities; therefore, IPSAS 17 does not reflect amendments made to IAS 16
consequent upon the issue of IFRS 5.
However, the main differences between IPSAS 17 and IAS 16 (2003) are as follows:
•

•
•
•
•

IPSAS 17 does not require or prohibit the recognition of heritage assets. An entity that
recognizes heritage assets is required to comply with the disclosure requirements of
this Standard with respect to those heritage assets that have been recognized and may,
but is not required to, comply with other requirements of this Standard in respect of
those heritage assets. IAS 16 does not have a similar exclusion. (A heritage asset is
one which has particular historic or cultural significance, such as a Parliament
building or an archaeological site which makes the use of conventional asset valuation
rules of limited relevance)
IAS 16 requires items of property, plant, and equipment to be initially measured at
cost. IPSAS 17 states that where an item is acquired at no cost, or for a nominal cost,
its cost is its fair value as at the date it is acquired.
IAS 16 requires, where an enterprise adopts the revaluation model and carries items of
property, plant, and equipment at revalued amounts, the equivalent historical cost
amounts should be disclosed. This requirement is not included in IPSAS 17.
Under IAS 16, revaluation increases and decreases may only be matched on an
individual item basis. Under IPSAS 17, revaluation increases and decreases are offset
on a class of asset basis (this could make a significant difference).
IPSAS 17 contains transitional provisions for both the first time adoption and
changeover from the previous version of IPSAS 17. IAS 16 only contains transitional
provisions for entities that have already used IFRSs. Specifically, IPSAS 17 contains
transitional provisions allowing entities to not recognize property, plant, and
equipment for reporting periods beginning on a date within five years following the
date of first adoption of accrual accounting in accordance with IPSASs. The
transitional provisions also allow entities to recognize property, plant, and equipment
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•

at fair value on first adopting this Standard. IAS 16 does not include these transitional
provisions. This is an important concession in that it can sometimes be very difficult
to assemble all the necessary data to allow the transition to an accruals-based
approach to asset accounting and it allows public sector entities a significant amount
of time to do so.
IPSAS 17 contains definitions of “impairment loss of a non-cash-generating asset”
and “recoverable service amount.” IAS 16 does not contain these definitions. This is
an important distinction. A non-cash generating asset is one that is not held for the
generation of a commercial return and there are a number of these in use in the public
sector which would not be the case in the private sector.
IPSAS 17 uses different terminology, in certain instances, from IAS 16. The most
significant examples are the use of the terms “statement of financial performance,”
and “net assets/equity” in IPSAS 17. The equivalent terms in IAS 16 are “Statement
of Comprehensive Income” and “equity.” IPSAS 17 does not use the term “income,”
which in IAS 16 has a broader meaning than the term “revenue.”

H. Intangible Assets – IPSAS 31
This is one of the most recent IPSASs to be created and is based on International Accounting
Standard (IAS) 38, Intangible Assets published by the International Accounting Standards
Board (IASB). It also contains extracts from the Standing Interpretations Committee
Interpretation 32 (SIC 32), Intangible Assets—Web Site Costs. It includes useful application
guidance on how to deal with website costs and has a number of illustrative examples which
show how accounting for intangible assets could be applied in various situations such as
when a patent, copyright or license is acquired from a public sector entity.
The main differences between IPSAS 31 and IAS 38 are as follows:
•
•

•
•

•

IPSAS 31 incorporates the guidance contained in the Standing Interpretation
Committee’s Interpretation 32, Intangible Assets—Web Site Costs as Application
Guidance to illustrate the relevant accounting principles.
IPSAS 31 does not require or prohibit the recognition of intangible heritage assets (as
is also the case with tangible assets dealt with by IPSAS 17). An entity that recognizes
intangible heritage assets is required to comply with the disclosure requirements of
this Standard with respect to those intangible heritage assets that have been
recognized and may, but is not required to, comply with other requirements of this
Standard in respect of those intangible heritage assets. IAS 38 does not have similar
guidance.
IAS 38 contains requirements and guidance on goodwill and intangible assets
acquired in a business combination. IPSAS 31 does not include this guidance.
IAS 38 contains guidance on intangible assets acquired by way of a government grant.
Paragraphs 50–51 of IPSAS 31 modify this guidance to refer to intangible assets
acquired through non-exchange transactions. IPSAS 31 states that where an intangible
asset is acquired through a non-exchange transaction, the cost is its fair value as at the
date it is acquired.
IAS 38 provides guidance on exchanges of assets when an exchange transaction lacks
commercial substance. IPSAS 31 does not include this guidance.
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•
•

The examples included in IAS 38 have been modified to better address public sector
circumstances.
IPSAS 31 uses different terminology, in certain instances, from IAS 38. The most
significant examples are the use of the terms “revenue,” “statement of financial
performance,” “surplus or deficit,” “future economic benefits or service potential,”
“accumulated surpluses or deficits,” “operating/operation,” “rights from binding
arrangements (including rights from contracts or other legal rights),” and “net
assets/equity” in IPSAS 31. The equivalent terms in IAS 38 are “income,” “statement
of comprehensive income,” “profit or loss,” “future economic benefits,” “retained
earnings,” “business,” “contractual or other legal rights,” and “equity.”

I. IPSAS 16
Investment Property – IPSAS 16
IPSAS 16 is drawn primarily from International Accounting Standard (IAS) 40
(Revised 2003), Investment Property. In common with some other IPSASs, there are
some transitional arrangements that apply when an entity adopts accrual accounting
for the first time in accordance with IPSASs. These state that in such circumstances
the entity shall initially recognize investment property at cost or fair value. For
investment properties that were acquired at no cost, or for a nominal cost, cost is the
investment property’s fair value as at the date of acquisition. The entity should
recognize the effect of the initial recognition of investment property as an adjustment
to the opening balance of accumulated surpluses or deficits for the period in which
accrual accounting is first adopted in accordance with IPSASs.
In terms of the comparison of IPSAS 16 to IAS 40 (2003), Investment Property, the
IPSAS notes that the IPSASB has not yet considered the applicability of IFRS 4,
Insurance Contracts, and IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations, to public sector entities; therefore
IPSAS 16 does not reflect amendments made to IAS 40 consequent upon the issue of
those IFRSs.
The other main differences between IPSAS 16 and IAS 40 are as follows:
•

•

•
•

IPSAS 16 requires that investment property initially be measured at cost and
specifies that where an asset is acquired for no cost or for a nominal cost, its cost
is its fair value as at the date of acquisition. IAS 40 requires investment property
to be initially measured at cost.
There is additional commentary to make clear that IPSAS 16 does not apply to
property held to deliver a social service that also generates cash inflows. Such
property is accounted for in accordance with IPSAS 17, Property, Plant, and
Equipment.
IPSAS 16 contains transitional provisions for both the first time adoption and
changeover from the previous version of IPSAS 16. IAS 40 only contains
transitional provisions for entities that have already used IFRSs.
IFRS 1 deals with first time adoption of IFRSs. IPSAS 16 includes additional
transitional provisions that specify that when an entity adopts the accrual basis of
accounting for the first time and recognizes investment property that was
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•
•

previously unrecognized, the adjustment should be reported in the opening
balance of accumulated surpluses or deficits.
Commentary additional to that in IAS 40 has been included in IPSAS 16 to clarify
the applicability of the standards to accounting by public sector entities.
IPSAS 16 uses different terminology, in certain instances, from IAS 40. The most
significant example is the use of the term “statement of financial performance” in
IPSAS 16. The equivalent term in IAS 40 is “Statement of Comprehensive
Income.” In addition, IPSAS 16 does not use the term “income,” which in IAS 40
has a broader meaning than the term “revenue.”

J. IPSAS 19
Provisions, Contingent Liabilities and Contingent Assets – IPSAS 19
This International Public Sector Accounting Standard (IPSAS) is drawn primarily from
International Accounting Standard (IAS) 37 (1998), Provisions, Contingent Liabilities and
Contingent Assets. It includes guidance on what action should be taken when transitioning to
using IPSAS 19 for the first time, namely that the effect of adopting this Standard shall be
reported as an adjustment to the opening balance of accumulated surpluses/(deficits) for the
period in which the Standard is first adopted. Entities are encouraged, but not required, to (a)
adjust the opening balance of accumulated surpluses/(deficits) for the earliest period
presented, and (b) to restate comparative information. If comparative information is not
restated, this fact shall be disclosed.
There are some differences between IPSAS 19 and IAS 37 as follows:
•

IPSAS 19 includes commentary additional to that in IAS 37 to clarify the applicability of
the standards to accounting by public sector entities. In particular, the scope of IPSAS 19
clarifies that it does not apply to provisions and contingent liabilities arising from social
benefits provided by an entity for which it does not receive consideration that is
approximately equal to the value of the goods and services provided directly in return
from recipients of those benefits (this is to take account of the fact that public sector
entities often provide goods or services that are “free at the point of delivery” to the end
user or at least provided in return for consideration that is below normal market values).
However, if the entity elects to recognize provisions for social benefits, IPSAS 19
requires certain disclosures in this respect.
• The scope paragraph in IPSAS 19 makes it clear that while provisions, contingent
liabilities, and contingent assets arising from employee benefits are excluded from the
scope of the Standard, the Standard, however, applies to provisions, contingent
liabilities, and contingent assets arising from termination benefits that result from a
restructuring dealt with in the Standard.
• IPSAS 19 uses different terminology, in certain instances, from IAS 37. The most
significant examples are the use of the terms “revenue” and “statement of financial
performance” in IPSAS 19. The equivalent terms in IAS 37 are “income” and
“Statement of Comprehensive Income.”
• The Implementation Guidance included in IPSAS 19 has been amended to be more
reflective of the public sector.
• IPSAS 19 contains an Illustrated Example that illustrates the journal entries for
recognition of the change in the value of a provision over time, due to the impact of
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the discount factor (the discount factor measures the way that time affects the value of
money and is built into the calculations of long-term provisions).

K. IPSASs 9 and 23
Accounting for revenues in the public sector (IPSASs 9 and 23)
There are two IPSASs in particular that focus on accounting for revenues in the public sector.
IPSAS 9 deals with accounting for what is known as exchange transactions and IPSAS 23
deals with accounting for non-exchange transactions, especially taxes and transfers. As
IPSAS 23 has no IFRS equivalent it will be necessary to discuss this in more detail than some
other IPSASs.
What is the difference between exchange and a non-exchange transactions?
Exchange transactions are transactions in which one entity receives assets or services, or has
liabilities extinguished, and directly gives approximately equal value (primarily in the form
of cash, goods, services, or use of assets) to another entity in exchange. This might be thought
of as being equivalent to a commercial transactions which explains why this IPSAS is based
on an IFRS (IAS 18, Revenue). So when, for example, a public sector provides goods and/or
services for which it receives in return a payment that is related to their market value then it
should apply IPSAS 9 in its accounting treatment.
If on the other hand there is no exchange of approximately equal value then IPSAS 23 will
apply – such transactions will be described as ‘non-exchange’ in nature. This will be the case
for many public sector transactions. For example when governments raise taxation revenues,
there is no direct correlation between them and consequent expenditures. Although the
taxpayer will rightly expect ‘value’ from their tax contributions, it is not normally possible to
directly match their individual contributions to say expenditures on health, education, defence
or many other public services.
IPSAS 9 – Exchange Transactions
As already mentioned these have a similar nature to commercial transactions and are
therefore based on IAS 18. IPSAS 9 reminds us that revenue is recognised when it is
probable that future economic benefits or service potential will flow to the entity and when
such benefits can be measured reliably.
There are no significant variations between IPSAS 9 and IAS 18, with the differences in
detail being as follows:
•
•
•

The title of IPSAS 9 differs from that of IAS 18, and this difference clarifies that
IPSAS 9 does not deal with revenue from non-exchange transactions.
The definition of “revenue” adopted in IPSAS 9 is similar to the definition adopted in
IAS 18. The main difference is that the definition in IAS 18 refers to ordinary
activities (IPSAS 9 makes no such distinction).
Commentary additional to that in IAS 18 has also been included in IPSAS 9 to clarify
the applicability of the standards to accounting by public sector entities.
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•

IPSAS 9 uses different terminology, in certain instances, from IAS 18. The most
significant example is the use of the term “net assets/equity” in IPSAS 9. The
equivalent term in IAS 18 is “equity.”

IPSAS 23 – Non-Exchange Transactions
The introduction to IPSAS 23 notes that the majority of government revenues is generated in
the form of taxes and transfers but that, until the passing of the Standard, there was no
specific guidance in how to deal with transactions involving such items.
In summary, IPSAS 23:
(a) Takes a transactional analysis approach whereby entities are required to analyse inflows
of resources from non-exchange transactions to determine if they meet the definition of an
asset and the criteria for recognition as an asset, and if they do, determine whether a liability
is also required to be recognized;
(b) Requires that assets recognized as a result of a non-exchange transaction initially be
measured at their fair value as at the date of acquisition;
(c) Requires that liabilities recognized as a result of a non-exchange transaction be
recognized in accordance with the principles established in IPSAS 19, Provisions, Contingent
Liabilities and Contingent Assets;
(d) Requires that revenue equal to the increase in net assets associated with an inflow of
resources be recognized;
(e) Provides specific guidance that addresses:
(i) Taxes; and
(ii) Transfers, including:
a. Debt forgiveness and assumption of liabilities;
b. Fines;
c. Bequests;
d. Gifts and Donations, including goods in-kind;
e. Services in-kind;
(f) Permits, but does not require, the recognition of services in-kind; and
(g) Requires disclosures to be made in respect of revenue from non-exchange transactions.
An entity will recognize an asset arising from a non-exchange transaction when it gains
control of resources that meet the definition of an asset and satisfy the recognition criteria.
Contributions from owners do not give rise to revenue, so each type of transaction is
analysed, and any contributions from owners are accounted for separately. Consistent with
the approach set out in this Standard, entities will analyse non-exchange transactions to
determine which elements of general purpose financial statements will be recognized as a
result of the transactions.
Two kinds of revenue transaction are relevant within the framework of IPSAS 23. The first is
when an asset comes under the control of an entity without an approximately equivalent
exchange taking place in return. This would be the case when for example an asset is
transferred to an organisation free of charge (or, if there is a charge, it is significantly below
market value). In such circumstances a simple yes/no decision tree needs to be followed
which is illustrated below.
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Simplistically summarised, the flowchart shows that in certain circumstances when a nonexchange transaction takes place then it creates both an asset and also revenue. For example,
if an entity were given an asset for which they paid nothing but its market value was worth
5,000,000 RwF then the double entry for this would be to create an asset of 5,000,000 RwF
and to recognise revenue (as a credit entry) also of 5,000,000 RwF. However, if the entity
incurs a liability for that asset which is below its market value then the revenue should be
reduced to the extent of that liability.
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Revenue from taxes
The general rule is that an entity shall recognize an asset in respect of taxes when the taxable
event occurs and the asset recognition criteria are met. The definition of an asset is met when
the entity controls the resources as a result of a past event (the taxable event) and expects to
receive future economic benefits or service potential from those resources. In addition, it
must be probable that the inflow of resources will occur and that their fair value can be
reliably measured.
Taxation revenue arises only for the government that imposes the tax, and not for other
entities. For example, where the Rwandan government imposes a tax that is collected by the
RRA, assets and revenue accrue to the government, not the taxation agency which is
effectively acting as a collection agency on behalf of government.
Taxes do not satisfy the definition of contributions from owners, because the payment of
taxes does not give the taxpayers a right to receive (a) distributions of future economic
benefits or service potential by the entity during its life, or (b) distribution of any excess of
assets over liabilities in the event of the government being wound up. Nor does the payment
of taxes provide taxpayers with an ownership right in the government that can be sold,
exchanged, transferred, or redeemed.
On the other hand, taxes satisfy the definition of a non-exchange transaction because the
taxpayer transfers resources to the government, without receiving approximately equal value
directly in exchange. While the taxpayer may benefit from a range of social policies
established by the government, these are not provided directly in exchange as consideration
for the payment of taxes.
Recognition of taxation revenue is based on the time at which the taxable event takes place,
examples of which are when:
(a) Income tax is the earning of assessable income during the taxation period by the taxpayer;
(b) Value-added tax is the undertaking of taxable activity during the taxation period by the
taxpayer;
(c) Goods and services tax is the purchase or sale of taxable goods and services during the
taxation period;
(d) Customs duty is the movement of dutiable goods or services across the customs boundary;
(e) Property tax is the passing of the date on which the tax is levied, or the period for which
the tax is levied, if the tax is levied on a periodic basis.

Other types of non-exchange revenue
Fines are economic benefits or service potential received or receivable by a public sector
entity, from an individual or other entity, as determined by a court or other law enforcement
body, as a consequence of the individual or other entity breaching the requirements of laws or
regulations.

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Fines normally require an entity to transfer a fixed amount of cash to the government, and do
not impose on the government any obligations which may be recognized as a liability. As
such, fines are recognized as revenue when the receivable meets the definition of an asset and
satisfies the criteria for recognition as an asset which have already been discussed. Where an
entity collects fines in the capacity of an agent, the fine will not be revenue of the collecting
entity. Assets arising from fines are measured at the best estimate of the inflow of resources
to the entity.
Sometimes a bequest may be made to a government entity. A bequest is a transfer made
according to the provisions of a deceased person’s will. The past event giving rise to the
control of resources embodying future economic benefits or service potential for a bequest
occurs when the entity has an enforceable claim, for example on the death of the person
making the bequest.
.
Bequests that satisfy the definition of an asset are recognized as assets and revenue when it is
probable that the future economic benefits or service potential will flow to the entity, and the
fair value of the assets can be measured reliably. Determining the probability of an inflow of
future economic benefits or service potential may be problematic if a period of time elapses
between the death of the testator and the entity receiving any assets.
The entity will need to determine if the deceased person’s estate is sufficient to meet all
claims on it, and satisfy all bequests. If the will is disputed, this will also affect the
probability of assets flowing to the entity. Therefore it can be seen that asset and revenue
recognition is not always a straightforward situation with bequests. It is necessary to obtain
an estimate of the fair value of bequeathed assets, for example by obtaining the latest market
values for assets bequeathed.
Disclosures
Both IFRSs and IPSASs are as much about disclosure as they are about accounting treatment.
IPSAS 23 has a list of disclosure requirements that apply specifically to non-exchange
transactions. These include a requirement to disclose the following details:
• Either on the face of, or in the notes to, the general purpose financial statements:
UBLIC SECTOR
(a) The amount of revenue from non-exchange transactions recognized during the
period by major classes showing separately:
(i) Taxes, showing separately major classes of taxes; and
(ii) Transfers, showing separately major classes of transfer revenue.
(b) The amount of receivables recognized in respect of non-exchange revenue;
(c) The amount of liabilities recognized in respect of transferred assets subject to
conditions
(d) The amount of assets recognized that are subject to restrictions and the nature of
those restrictions; and
(e) The existence and amounts of any advance receipts in respect of non-exchange
transactions.
•

An entity shall disclose in the notes to the general purpose financial statements:
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(a) The accounting policies adopted for the recognition of revenue from non-exchange
transactions;
(b) For major classes of revenue from non-exchange transactions, the basis on which the
fair value of inflowing resources was measured;
(c) For major classes of taxation revenue that the entity cannot measure reliably during
the period in which the taxable event occurs, information about the nature of the tax; and
(d) The nature and type of major classes of bequests, gifts, and donations.

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Source Exif Data:

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THE INSTITUTE OF CAT L2.1 FINANCIAL ACCOUNTING Study Manual

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