Handout two for Financial accounting

Preparing bank reconciliation statements

Learning objectives
By the end of this topic, you will be able to;
Amend the cash book for any errors or omissions
Prepare a statement reconciling the amended cash book balance with the bank statement

Introduction
The cashbook records all transactions with the bank. The bank statement records all the bank’s
transactions with the business. A moment’s thought will suggest that the contents of the cashbook
are the same as the record provided by the bank in the form of a bank statement, and therefore our
records should correspond with the bank statement. This is in fact so, but with two important
provisos;
The ledger account maintained by the bank is the opposite way round to the cashbook.
This is because the bank records the balance in favour of an individual as a credit balance
that is a liability of the bank to the individual. From the individual’s point of view it is, of
course, an asset, that is a debit balance in his cash book (or bank control account in the
general ledger)
Timing differences must inevitably occur. A cheque payment is recorded in the cashbook
when the cheque is dispatched. The bank only records such a cheque when it is paid by
the bank, which may be several days later.

The existence of the bank statement provides an important check on the most vulnerable of a
company’s assets – cash. However, the timing differences referred to above make it essential to
reconcile the balance on the ledger account with that of the bank statement. This reconciliation
takes the form of a bank reconciliation statement.

In this topic the relationship between the balance in the cashbook (or cash account), and the balance
on the bank statement will be considered. The likely reasons for any differences will be
investigated and a statement reconciling the two balances prepared.

Bank reconciliation is the process of bringing cashbook and bank statement balances into
agreement by adjusting an account balance reported by a bank to reflect transactions that have
occurred since the reporting date.

The process by which you compare the information in the company's records with the statements
provided each month by the bank for the bank account and deal with the difference so that th e
bank's records and the company's records balance.

Banks furnish a depositor with a bank statement once each month. Included with the statement are
usually the canceled cheques and any debit or credit memos that have affected the amount. During
any month, besides the cheques drawn, the bank may deduct from the account amounts for service
charges, returned cheques and for errors. The bank notifies the depositor of each deduction with a
debit memo. The bank may also add amounts to the depositor's account for errors and interest. A
credit memo is used to notify of any additions. A copy of each memorandum should be included
with the monthly statement.
Entries on the customer’s bank account in the bank
When a cheque or cash is deposited, the customer account will be credited in the bank. When the
customer withdraws cash or when payments are made out of the customer’s account, the account
is debited.
Entries in the customer’s cashbook (bank column)
The bank column of the cashbook shows the transactions of the customer with its bankers. A
customer who deposits money debits his cashbook and when a withdrawal is made, the cashbook
is credited.
Agreement of the cash and bank balances
When all receipts are deposited intact and all payments are made by check, the bank statement
becomes a device for proving the cash in bank account. The proof normally begins with the
preparation of a reconciliation of the bank balance. To simplify this process, request the cutoff
date of the bank statement to be the last working day of the month. Thus, if all credits in the bank
were also debited to the cashbook and all debits in the bank were credited in the cashbook and
vice-versa, the two balances would agree and there would be no need of bank reconciliation.
However, this is not always the case. The balance as per bank statement rarely agrees with the
balance as per cashbook and thus the need to prepare a bank reconciliation statement.
Numerous things may cause the bank statement balance to differ from the cash balance in
the general ledger
i) Outstanding Checks/ Unpresented cheques:
These are checks that have been written and are listed on the cash disbursement
journal but have not cleared through the bank. They are drawn and credited in the
cashbook but not presented to the bank for payment. These cheques are not debited
to the bank statement.
ii) Unrecorded Deposits/ Uncredited cheques (also called Deposits in Transit):
Often deposits are made on the day following the last day of the month; consequently,
these deposits do not appear on the bank statement for that month but they appear
on the cash receipts journal. Deposited to the bank and debited to the cashbook but
not credited by the bank.
iii) Direct debits, Charges for Services and Non-Collectable Items:
A bank often deducts amounts from a depositor's account for services rendered and for
returned checks. The bank notifies you of each deduction with a debit memo. These
deductions should be recorded as soon as they are received. They are debits in the bank
statement not credited to the cashbook and payments effected by the bank without
requiring a cheque to be issued by the account holder. Since cheques are not issued for
such payments, they are not recorded in the cashbook yet debited in the bank statement.
They include the following.
Bank charges,
The bank, for services offered to the account holder, levies these charges; they include
ledger fees, commission and many others.
 Standing orders (SO)
These are arrangements where the account holder instructs the bank to make certain
routine and fixed type of payments directly to the payees on behalf of the account
holder. The account holder does not issue cheques for these types of payments. Such
transactions include; insurance premiums, paying utility organizations such as water
bills and telephone charges. Others include paying interest and amortizing fixed
installment loans.
If the deduction occurs close to the end of the month, it may not show on the bank
statement.
iv) Direct credits and Interest earned: (credits in the bank statement not debited to
the cashbook)
These are receipts that are directly credited to the bank statement without having been
debited to the cashbook. For instance, some debtors may clear their indebtedness by
paying directly to the payee’s bank account and some accounts earn interest that is
posted to the account by the bank at the end of the month making the bank statement
the only notification.

Credit advice notes (credit memo) and debit advice notes

A credit advice note (credit memo) and a direct debit note for direct credits and direct debits
are sent to the account holder and may not be included in the cashbook.
v) Clerical errors
Errors made in recording amounts or wrong postings in the cashbook or bank statement make
the cashbook and bank statement balances disagree. Regardless of care and systems of internal
control, both the bank and the depositor may make errors that affect a bank balance. These
errors are not discovered until the balance is reconciled.
vi) Dishonoured cheques
When a bank refuses to pay or recognize a cheque as an instrument for transferring money
from one person to another, such a cheque is a dishonoured cheque.

Why are cheques dishonoured?

 Lack of sufficient funds on the account
 Amount in words differing from amount in figures
 Drawer’s signature differing from specimen signatures held by the bank
 Expired cheques (cheques get stale or expire six months from the date on the cheque).
 Alterations on the cheque not counter signed.
 If there is no account title on the cheque
 Where drawer’s confirmation is required by contract and cheques are not confirmed.
 When the payee’s identity is doubted
 For some cheques, if payment vouchers are required and are not presented

Steps to follow reconciling account balances:

 STEP ONE: Compare the deposits listed on the bank statement with deposits recorded in the
cheque register and the cash receipts journal. Identify any differences and
determine which is correct. List the deposits in transit for each account on
the reconciliation form.
STEP TWO: Compare the canceled checks listed on each bank statement. Note any
discrepancies. Review the previous month's reconciliation and check off the
cheques that cleared during the current month that were outstanding last
month. List any checks that are still outstanding. Verify all deposits in
transit that were listed last month to assure that they have been recorded by
the bank on the current statement.
STEP THREE: Compare each of the cheques with its entry in the cash disbursement journal.
Identify any corrections or discrepancies. List any outstanding checks on
the reconciliation form.
STEP FOUR: Determine if any debits or credits appearing on the bank statement need to be
recorded in the cheque register. Make general journal entries to record them.
Any corrections to deposits or cheques noted should be made by general
journal entries. Do not go back and change the cash disbursement or cash
receipts journals. Changes to those records must be made in the following
month through general journal entries. The purpose of reconciling the bank
statement is to verify balances per your chequebook and to resolve
discrepancies. If discrepancies or bank errors are found, notify the bank
immediately.
STEP FIVE: Compare each of the cheques with its entry in the cash disbursement journal.
Identify any corrections or discrepancies. List any outstanding checks on the
reconciliation form. Determine if any debits or credits appearing on the bank
statement need to be recorded in the cheque register. Make general journal
entries to record them. Any corrections to deposits or cheques noted should
be made by general journal entries. Do not go back and change the cash
disbursement or cash receipts journals. Changes to those records must be
made in the following month through general journal entries. The purpose of
reconciling the bank statement is to verify balances per your chequebook and
to resolve discrepancies. If discrepancies or bank errors are found, notify the
bank immediately.
Bank statement
This is a summary of transactions between the account holder and the bank. The transactions
include deposit and withdrawals to and from the account respectively. The bank statement also
shows the running balance after every transaction. Banks prepare bank statements for their account
holders at the end of each month or any time on request.

Relevance of Bank reconciliation

Bank reconciliation strengthens an organizations internal control system through detection and
prevention of fraud. When bank transactions are involved, manipulations in the
cashbook can be discovered.
It enhances accuracy of records.
 A mistake in either the cashbook or the bank statement can be discovered and
corrected during the process of bank reconciliation.

Methods of bank reconciliation

There are three major methods of bank reconciliation

i) You can begin with the cashbook balance, adjusting, updating or correcting the
cashbook and then preparing a bank reconciliation statement. The aim of this method
is to arrive at the bank statement balance.
ii) Beginning with the bank statement balance and working towards the cashbook balance.
iii) Adjusting the cashbook balance and adjusting the bank statement balance. The aim is
to show whether the two adjusted balances agree.
As are a number of methods or ways by which a bank reconciliation can be prepared the method
adopted by this book is that prepare an adjusted cashbook (Bringing the cash book up to date) and
then proceeding to prepare a reconciliation statement.

A Simple illustration:
Mr. Bukenya runs a current account with Nile Bank. He has received a bank statement showing
his transactions with the bank in the month of December 2004 as follows.
M. Bukenya
Bank statement for the month of Dec. 2004
Date Particulars Dr. (UGX) Cr. (UGX) Balance (UGX)
1/12/2004 Balance B/f 1,600,000
Chq. No. 202 8,000,000√ 9,600,000
Chq. No. 1002 1,000,000√ 8,600,000
Chq. No. 204 500√ 9,100,000
Chq. No. 1003 2,000,000√ 7,100,000
Salary deposit 1,700,000 8,800,000
S.O-MTN (Airtime) 100,000 8,700,000
Bank charges 200,000 8,500,000

The following is an extract of his cashbook.

M. Bukenya’s Cashbook
Date Particulars Debit (UGX) Date Particulars Credit (UGX)
1/12/04 Balance b/f 1,600,000 Chq. No. 1001 500,000
Chq. No. 201 1,000,000 Chq. No. 1002 1,000,000√
Chq. No. 202 8,000,000√ Chq. No. 1003 2,000,000√
Chq. No. 203 4,500,000 Chq. No. 1004 2,500,000
Chq. No. 204 500,000√ Bal c/f 9,600,000
Total 15,600,000 Total 15,600,000

Note: Ignore Dates

Required: Reconcile the bank statement and cashbook balances
Solution
Step 1: Check off all the transactions that appear both in the cashbook and bank
statement with right amount on the right sides. (See items with the symbol
(√) in the question above).
Step 2: Prepare an adjusted cashbook as follows

M. Bukenya’s adjusted Cashbook

Date Particulars Debit (UGX) Date Particulars Credit (UGX)
1/1/05 Balance b/f 9,600,000 D. Dr. S.O-MTN (Airtime) 100,000
D. Cr. Salary 1,700,000 D. Dr. Bank charges 200,000
Bal c/f 11,000,000
Total 15,600,000 Total 15,600,000

Step 3: Prepare a bank reconciliation statement as follows

M. Bukenya’s Bank reconciliation statement

Illustration Balance as per adjusted cashbook 11,000,000

Two
Using the Add: Unpresented cheques
following Chq. No. 1001 500,000
information,
Chq. No. 1004 2,500,000 3,000,000
prepare a
bank 14,000,000
reconciliation Less: Uncredited cheques
statement for Chq No. 201 1,000,000
Goodshed Chq No. 203 4,500,000 (5,500,000)
Ltd for the Balance as per bank statement 8,500,000
month of
august.
Extracts form Goodshed Ltd’s Bank reconciliation statement for the previous month
Bank charge 200,000
Commission 100,000
Uncredited cheques
Cheque No. 004 1,000,000
Cheque No. 623 4,500,000

Unpresented cheques
Cheque No. 10 500,000
Cheque No. 12 2,500,000

Cashbook error: cheque No. 14 1,700,000

 uGoodshed
Cashbook for the month of Aug. 2004
Dr. ((UGX)) Cr. (UGX)
Bal b/f 9,600,000 Cheque No. 20 800,000
Cheque No. 2515 1,000,000 Cheque No. 21 1,200,000
Cheque No. 1119 500,000 Cheque No. 22 2,000,000
Cheque No. 990 3,000,000 Cheque No. 23 600,000
Cheque No. 224 2,400,000 Cheque No. 24 200,000
Cash 900,000 Cheque No. 26 1,400,000
Cheque No. 414 1,800,000 Cheque No. 27 2,400,000
Cheque No. 666 700,000 Cheque No. 28 700,000
Cash 1,300,000 Cheque No. 30 1,800,000
Cheque No. 804 2,100,000 S.O-Insurance 900,000
Cheque No. 707 3,400,000
Cheque No. 31 1,300,000
C.M Peter 900,000 Bal. C/f 16,900,000
Total 28,900,000 Total 28,900,000
 Goodshed
Bank statement for the month of august 2004

Dr. (UGX) Cr. (UGX) Balance (UGX)

Bal b/f 8,500,000
Cheque No. 22 2,000,000 6,500,000
24 200,000 6,300,000
623 4,500,000 10,800,000
990 3,000,000 13,800,000
C.M –Peter 900,000 14,700,000
Cheque No. 21 2,100,000 12,600,000
12 2,500,000 10,100,000
20 800,000 9,300,000
2515 1,000,000 10,300,000
1119 500,000 10,800,000
S.O –Insurance 900,000 9,900,000
Cheque No. 224 4,200,000 14,100,000
Cash 900,000 15,000,000
Cheque No. 26 1,400,000 13,600,000
27 2,400,000 11,200,000
6001 5,000,000 16,200,000
414 1,800,000 18,000,000
804 2,100,000 15,900,000
31 3,100,000 12,800,000
C.M –John 1,300,000 14,100,000
Cheque No. 28 700,000 13,400,000
Ledger fee 50,000 13,350,000
Dividend 1,500,000 14,850,000
Additional information;
i) Any mistake in amounts was made in the cashbooks by an inexperienced bookkeeper.
ii) Cheque No. 31 and 804 were entered on the wrong sides of the cashbook and bank
statement respectively.

Solution
Goodshed
Adjusted cashbook
(UGX. 000) (UGX. 000)
Bal b/f 16,900 July 2004 D. Debits
Error on cheque No 224 1,800 Bank charge 200
Cheque No 6001(D. Credit.) 5,000 Commission 100
C.M (John) 1,300 Aug 2004 D. Debits
Dividend 1,500 Ledger fee 50
Error on cheque No14 1,700 Error on cheque No. 21 900
Error on cheque No. 31 4,400
Bal. C/f 22,550
Total 28,200 Total 28,200
 Goodshed bank reconciliation statement
(UGX. 000) (UGX. 000) (UGX. 000)
Balance as per adjusted cashbook 22,550
Add: Unpresented Cheques
Cheque No. 10 500
Cheque No. 23 600
Cheque No. 30 1,800 2,900
Less: Uncredited cheques 25,450
Cheque No.004 1,000
Cheque No. 666 700
Cheque No. 707 3,400 5,100
Uncredited cash 1,300
Bank error; Cheque No. 804 4,200 10,600
Balance as per bank statement 14,850

Exercises for practice

a) State four major reasons why the cashbook balance most often differs from the bank
statement balance as at any date.
b) There is normally no serious need for preparation of a bank reconciliation statement
Discuss.
 Topic 8
Accounting cycle and Year - end Adjustments
Learning objectives
By the end of this topic, you will be able to;
Demonstrate the accounting cycle
Explain the types and nature of the adjustments required in order to prepare financial
statements
Prepare schedules of end-of year adjustments.

Introduction
Regardless of the type of business or the accounting system used, it is not possible to keep all
accounts up to date at all times. At the end of each financial (accounting) year, certain accounts
must be updated by adjusting entries, to reflect the status of the organization and financial
statements can then be prepared.

The accounting cycle

After examining documents, journals, ledgers and the trial balance, we establish a sequence known
as the accounting cycle. The accounting cycle refers to the sequence in which data is recorded and
processed until the financial statements are extracted.

The accounting cycle has the following stages:

i. Occurrence and documentation When transaction has occurred, the relevant documents
are prepared. These include invoices, receipts; good received notes, payment vouchers,
delivery notes, local purchase order etc
ii. Journalizing of the transactions Information from documents is recorded in the journals.
Journals are also referred to as the books of original entry. Examples of journals are the
general journal, sales daybook, purchases daybook etc
iii. Posting the transactions from the journals to the ledgers
Then we record the business transactions in the respective ledger accounts. Post the
information from the journals to the ledgers. Ledgers include; general ledgers and
subsidiary ledgers. Ledgers are books in which transactions concerning a particular account
are summarized. Balance off the ledger accounts are at the end of the accounting period.
iv. Preparation of the trial balance
Extract from the ledger balances, the trial balance. The trial balance is a list of debit and
credit balances extracted from the ledgers. If the double entry rule is not complied with,
the totals of the debit and credit columns will be not equal
v. Adjustments of accounts
Adjustment of some accounts is need before the preparation of the financial statements.
The major adjustments include provision for bad debts, provision for depreciation, incomes
and expenses. You make these adjustments in the work sheet. After incorporating the
adjustments in the trial balance, the financial statements are prepared.
vi. Preparing the financial statements
Financial statements are the outputs of recording organization transactions. The financial
statements include the Income statement, Balance sheet, and Cash-flow statement,
Statement of changes in equity and Notes to the financial statements. Nominal accounts
 shown in the trial balance are taken to the income statement. Net profit is added to the
capital figure brought forward and any drawings are deducted to find the adjusted capital
figure. These adjustments take place in the balance sheet. The remaining balances in the
trial balance are taken to the balance sheet.

Year – end adjustments

Why is the adjustment necessary?
Profit for the period
The profit or loss of a business is calculated by deducting the expenses incurred within a defined
period from the income earned within that same period. The accountant is concerned with income
earned and expenditure incurred during the period and not the receipts and payments actually
made.

The matching concept

The adjustments for accruals and prepayments are the result of applying the matching principle.
You should recall that this states that cash received and cash paid should be adjusted for any part
period that does not relate to the overall period in question.

Accruals and Prepayments:

When the income statement is being prepared for a specific period, we must bring into account:
a) All expenses relating to that period whether we have actually paid them or not.
b) All items of income and gains whether we have actually received them or not.

For this purpose, some adjustments are needed at the end of the accounting period relating to:

i) Accrued expenses – These are expenses, which are outstanding and have not yet been paid. In
order to ensure that the full expenses of the period have been included in the income statement,
the accountant must ensure that the expense accounts include not only those items that have been
paid for during the period but any outstanding amounts due for expenses. Accrued expenses appear
as current liabilities in the balance sheet.

The accounting entry is as follows;

Dr. Income statement or respective expense account
Cr. Accrued expense account
Illustration;
Salaries and wages paid during the year amounted to UGX 6,200,000=. Accrued wages as at 31st
Dec. amounted to UGX 250,000=. Show the entries

Dr. Salaries and wages 250,000

Cr. Accrued Salaries and wages 250,000

Income statement (extract) Balance sheet (extract)

 Salaries and wages: Current liabilities:
Paid: 6,200,000 Accrued salaries and wages: 250,000
Add: accrued 250,000 6,450,000

ii) Prepaid expenses – These are expenses, which have already been paid but relate to the
following accounting period or the normal operating cycle. As well as ensuring that all of the
expenses incurred in the period appear in the income statement, the accountant must also ensure
that items of expense that relate to future periods, but have already been paid for, are separated.
Prepaid expenses appear as current assets in the balance sheet.

Accounting entry is as follows;

Dr. Prepayments account.
Cr. Income statement or respective expense account

Illustration
Insurance paid during the year amounted to UGX.380, 000 of which UGX.120, 000 was prepaid
as at 31/12. Show the entries as are necessary to bring this sum into account.

Dr. Prepayments account 120,000

Cr. Income statement or respective expense account 120,000

Income statement (extract) Balance sheet (extract)

Insurance: Current assets:
Paid: 380,000 Prepaid insurance: 120,000
Less: Prepaid 120,000 260,000

iii) Accrued income – This is income relating to the current accounting period or operating cycle
but has not yet been received. Accrued income is presented as a current asset in the balance sheet.

Accounting entry is as follows;

Dr. Accrued income account
Cr. Income statement or respective income/gain account

Illustration
Rent received during the year amounted to UGX.650, 000. Accrued or owed rent as at 31/12
amounted to UGX.70, 000. Show the entries as are necessary to bring this sum into account.

Income statement (extract) Balance sheet (extract)

Rent receivable: Current assets:
Received: 650,000 accrued rent/rental income: 70,000
Add: Accrued 70,000
720,000
iv) Income in advance / prepaid income – This is income which has already been received but
relates to the following accounting period or operating cycle. Prepaid income is treated as current
liabilities in the balance sheet.

Accounting entries is as follows;

Dr. Income statement/ respective income account

Cr. Income in advance/ prepaid income account

Illustration
Rent received during the year amounted to UGX.800, 000 of which UGX.80, 000 was received in
advance as at 31/12. Show the entries as are necessary to bring this sum into account.

Income statement (extract) Balance sheet (extract)

Rent receivable: Current liabilities:
Cash/Bank: 800, 0000 rent in advance: 80,000
Less: Rent in advance 80,000
720,000

Reserves
These are those amounts, which are set aside out of profits to retain assets in the business. The
motive may be to strengthen the financial position of the business. The Amounts transferred to
reserves are treated as under.

Accounting entry is as follows;

Dr. Income statement account

Cr. Reserves account

More specifically, however, these amounts are shown as appropriations within equity as shown in
the statement of changes in equity.

Provisions
Are those amounts which are set aside of profits for a specific purpose. For example;
a) Provision for bad debts,
b) Provisions for discounts allowed or received
c) Provisions for depreciation, etc.

These provisions are made in view of some expected events. Any expected future loss relating to
the current accounting period must be charged to the income statement of the current year.

Bad debts and provision for doubtful debts

Bad debts: Debts due from debtors are shown as an asset. When a debt becomes irrecoverable, it
must be written off as bad debt; otherwise, the balance sheet will not show a true and fair view of
receivables/debtors. Actually if a debt is considered uncollectible then it would be prudent to
remove it totally from the accounts and to charge the amount as an expense to the income
statement. The original sale remains in the books as this did actually take place. The debt is
however removed as it is now considered that the debt will never be paid and an expense is charged
to the income statement. This bad debt is regarded as a loss to the business.

We treat this as under:

Dr. Bad debts written off account
Cr. The Receivables/debtors account.

At the end of the year:

Dr. Income statement
Cr. Bad debts written off account
These entries effectively close the Bad debts written off account, create a charge to the income
statement and the Receivables/debtors restated to a recoverable figure (net).

Illustration
As at 31/12, UGX.200, 000 owing from P Bush was written off as bad debt. Show the necessary
entries in the ledger accounts.

P Bush
Dec 31 Bal b/f 200,000 31-Dec
B/debts W/O 200,000
200,000 200,000

Bad debts written off account

De 31 P Bush 200,000 31-Dec
Income statement 200,000
200,000 200,000

Bad debts recovered: Bad debts written off in the previous accounting periods may be recovered
at a later stage in some cases. In other words there is a possible situation where debt is written off
as bad in one accounting period, perhaps because the debtor has been declared bankrupt, and the
money, or part of the money, due is then unexpectedly received in a subsequent accounting period.
These recovered bad debts are regarded as gain and are treated as under:
Step 1 Reinstate the debtor:
Dr. Receivables/debtors
Cr. Bad debts recovered

Step2 Record the receipt of cash or cheque:

Dr. Bank
Cr. Receivable/debtors
Note that this is the usual entry for cash received from a customer.

This double entry may be simplified to:

Dr. Cash account
 Cr. Bad debts recovered account
As the debit entry and credit to the receivables account cancels out each other. However, it may
be useful to pass the transaction through the customer’s account so that the fact that the debt was
eventually paid, or partly paid, is recorded there.

Step 3
Dr. Bad debts recovered account
Cr. Income statement
This last entry effectively closes the Bad debts recovered account and recognizes income in the
income statement.

Note: In examinations, it is possible to circumvent the above steps by simply:

Dr. Bank/cash
Cr Income statement
As these will be the only accounts whose balances will be affected.

Provision for bad and doubtful debts: It is a matter of common experience that some part of
debts outstanding at the last date of the accounting period becomes irrecoverable later. In other
words, a doubtful debt is one about which there is some cause for concern but which is not yet
definitely irrecoverable. Therefore, although it is prudent immediately to recognize the possible
expense of not collecting the debt in the income statement, it would also be wise to keep the
original debt in the accounts in case the debtor does in fact pay up. This is achieved as below.

The anticipated loss must be also taken into account for the computation of correct amount of net
profit. For this purpose, a provision for bad and doubtful is created and it is charged to the income
statement. This provision is credited to the provision for bad debts account and is shown as a
deduction from Total receivables/debtors in the balance sheet. The provision for Bad debts may
be computed in the following two ways.
i. Anticipated bad debts may be added up to a total figure for the provision for bad debts.
ii. A specific percentage of total receivables/debtors may be computed to get the provision figure.
This percentage depends upon debts not recovered in the previous periods and it will be
different for different firms.

The provision for bad debts is adjusted at the end of every year according to the total amount owing
from debtors. The creation of a provision for bad debts does not affect the personal accounts of the
debtors, since these debts have not yet become irrecoverable. The following entries are made in
this case:
Provision for bad debts:
(i) On creation;
Dr. Bad and doubtful debts expense
Cr Provision for bad debts account
(ii) To Increase:
Dr. Income statement (with increase)
Cr. Provision for bad debts account
(iii) To decrease:
Dr. Provision for bad debts account
 Cr. Income statement (with the decrease)

Provision for discount allowed.

(i) On creation;
Dr. Income statement
Cr. Provision for discount allowed account.
(ii) To Increase:
Dr. Income statement (with increase)
Cr. Provision for discount allowed account
(iii) To decrease:
Dr. Provision for discount allowed account
Cr. Income statement (with the decrease)

Provision for Discount received:

(j) On creation;
Dr. Provision for discount received account
Cr. Income statement
(ii) To Increase:
Dr. Provision for discount received account)
Cr. Income statement (with the increase)
(iii) To decrease:
Dr. Income statement (with decrease)
Cr. Provision for discount received account.
The balance on the provision for discount received account is shown as a deduction from
creditors in the balance sheet

Depreciation:
All Tangible non-current assets except land depreciate. Depreciation is defined as the allocation
of cost of the depreciable amount of a tangible non-current asset to the years in which benefit is
expected from the use of that asset. (‘Depreciable amount’ means book value less residual value).
IAS 16: Property, plant and equipment; requires the depreciation method used to reflect the pattern
in the asset’s economic benefits are consumed by the enterprise. (Depreciation accounting will be
dealt with later in the text).

At the end of the year, depreciation must be provided on Tangible non-current assets. Here;
Dr. Depreciation expense account
Cr. Accumulated/provision for/aggregate depreciation account

At the end of the operating cycle/financial year,

Dr. Income statement (with the depreciation expense)
Cr. The asset account (with the aggregate depreciation)

Note: This entry is necessary as far as it is necessary to comply with the requirements of IAS 16:
Tangible non-current assets to show the net book value of the asset in question.
Corporation tax:
If draft accounts of the business suggest that net profit is earned, a provision must be made for
corporation tax to be paid. Taxation is real. A provision for corporation tax therefore becomes a
liability in the balance sheet because it satisfies the definition of a liability; a present obligation
arising from past events, the settlement of which is expected to result in an outflow of resources
from the enterprise.
Thus the accounting entry required is:
Dr. Income statement (with the provision for corporation tax)
Cr. Corporation tax payable

Proposed Dividends:
Dividends are a reward to Shareholders. If profits are made, some of it must be appropriated to
shareholders as dividends. Where dividends have been proposed after the balance sheet date, then
only disclosure as a note to financial statements is required. This is only necessary to comply with
IAS 10: Events after the balance sheet. However, where the dividends are proposed before the
balance sheet date, then an obligation exists at the balance sheet date and a provision that becomes
a liability as per IAS 37 is required.
Thus;
Dr. Income statement Appropriation account (proposed dividend)
Cr. Dividends payable (Balance sheet item)
 Topic 9
Preparation of financial statements
Learning objectives
By the end of this topic, you will be able to;
Prepare a worksheet Including the adjustment of a trial balance
Draw up a set of financial statements from a trial balance plus additional information.
Incorporate the adjustments learnt from the previous topic

Introduction
The financial condition and the results of operations of business enterprises are of a major
interest to many groups including owners, managers, creditors, government agencies
particularly the tax body, employees and prospective owners and creditors. The financial
statements are the outputs of an accounting system. The principal financial statements, together
with supplementary statements and schedules, present much of the needed basic information
to make sound economic decisions regarding business enterprises.

In the previous tpics, the main areas of double entry bookkeeping that resulted in the trial
balance have been covered. Together with this, we looked at the most frequent end of year
adjustments. This Topic will bring together an assimilation of all such information and a full
set (except for cash-flow statements) of financial statements prepared

A complete set of financial statements includes the following components:

 Balance sheet
 Income statement
 A statement showing either:
o All changes in equity, or
o Changes in equity other than those arising from capital transactions with owners
and distributions to owners.
 Cash flow statement
 Accounting policies and explanatory notes.

As mentioned earlier, we shall restrict our selves to the income statement, Statement of changes in
equity and the balance sheet for purposes of this paper. The other ones we shall come to later in
the course.

INCOME STATEMENT
This statement discloses the financial performance of the enterprise during a given year/operating
cycle. That is whether the operations of the enterprise resulted in a profit or loss. It is therefore a
profitability statement that shows an organization’s revenues and expenditures or costs in a
particular period ended. This statement is normally prepared before the balance sheet because the
ending figure after subtracting expenditures from incomes (net or retained profits/loss) connects
the income statement and balance sheet.

Initially it is critical to appreciate that the income statement is part of the double entry book keeping
system, whereas the balance sheet is not.
 It is easy to be put off by the fact that the income statement is set out in vertical form,
whereas other ledger accounts are set out in ‘T’ account form. However, you must
remember that, although not presented as such, the income statement is a ‘T’ account and
the double entry principles apply therein as with any other such account. However
presented, the income statement is simply another ‘T’ account or ledger account.

The income statement takes the following format.

XYX Income statement for the year ended_________
Sales revenue xxxx
Less: Cost of goods sold
Opening inventory xxx
Add: purchases xxx
xxx
Less: Closing inventory xxx xxxx
Gross profit xxxx
Less: Operating expenses
Rent xxx
Electricity xxx
Salaries xxx
Etc xxx xxxx
Net profit before finance costs and taxation xxxx
Finance costs (xxx)
Net profit before taxation xxxx
Taxation (xxx)
Net profit for the year xxxx

The income statement has three components: The trading account that ranges from the sales
revenue up to the gross profit, the profit and loss account that ranges from gross profit up to net
profit after tax. Manufacturing companies have an additional account called the Manufacturing
account or manufacturing cost statement. This statement will be given its due treatment later.

However, the Income Statement for service firms like National water and sewerage Corporation
are slightly different in format Thus;

XYX Income statement for year ended_________

Incomes/revenues xxxx
Less: Expenditures: xxxx
Net incomes before finance costs and taxation xxxx
 Finance costs (xxx)
Net incomes/profit before taxation xxxx
Taxation (xxx)
Net incomes/profit for the year xxxx

Note: Finance costs include items of Interest on loans, overdrafts, debentures; Lease charges and
any other costs incurred in raising finances.

Statement of changes in equity

Illustrative Statement of changes in equity Format Based on IAS 1
Share Share Revaluation Translation Acc. Total
capital premium reserve reserve profit
Opening balance x X x x x X
Changes in accounting policies - - - - x X
Restated opening balance x X x x x X
Revaluations - - x - - X
Translation differences - - - x - X
Net gains or losses not recognized
in income statement - - x x - x
Net profit for the period - - - - x x
Dividends paid - - - - (x) (x)
Issue of share capital X X - - - X
Closing balance X X x x x x

A comparative statement for the prior period must also be published.

Adjustments to the opening balance figures for changes in accounting policy appear first. The
correction of a fundamental error would appear in the same position. The order of the remaining
items is significant. The order to remember is:
 Revaluations
 Subtotal of net gains and loses not recognized in the income statement
 Net profit/loss for the period
 Dividends paid in the period
 Issues or reductions of share capital

BALANCE SHEET
This statement shows the financial position of an organization at a particular date. The balance
sheet satisfies the Accounting equation of ASSETS = OWNER’S EQUITY + LIABILITIES. The
balance sheet is much more akin to the trial balance, being a balance of the ledger accounts after
double-entry has been completed, and requiring that debits thereon must equal credits. It is an
ordered list of all the ledger account balances remaining once the income statement has been
prepared.

As a minimum, the face of the balance sheet should include line items which present the following
amounts.
 1. Items of property, plant and equipment eg. Land, Buildings, fixtures and fittings
Machinery, etc.
2. Intangible assets like Good will, Patents and trade marks, Development costs, etc.
3. Financial assets (excluding amounts shown under 4,6 and 7)
4. Investments
5. Inventories
6. Trade and other payables like debtors etc
7. Cash and cash equivalents
8. Trade and other payables eg. Trade creditors
9. Tax liabilities and assets as required by IAS 12: Income taxes eg. Corporation tax payable
10. Provisions
11. Non-current interest bearing borrowings
12. Minority interest
13. Issued capital and reserves.

The balance sheet can take the following format.

XYX Balance sheet as at ___________
ASSETS
Acc. Net book
Tangible Non-current assets: Cost Depn. value
Land xxxx nil Xxxx
Motor vehicles xxxx xxxx Xxxx
Equipment xxxx xxxx Xxxx
xxxx xxxx Xxxx
Intangible assets Xxxx
Financial Assets Xxxx
Investments Xxxx
Current assets:
Inventories xxxx
Trade and other receivables (net of bad debts) xxxx
Prepayments xxxx
Cash and cash equivalents xxxx Xxxx
Total assets Xxxx
EQUITY AND LIABILITIES
Capital and reserves:
Share capital xxxx
Accumulated profits (net of drawings if any) xxxx
Other reserves xxxx Xxxx
Minority Interests** Xxxx
Non current Liabilities:
Bank loans xxxx
Debentures xxxx
Preference shares (redeemable) xxxx Xxxx
Current liabilities:
Trade and other payables e.g. creditors xxxx
Short term borrowings e.g. overdrafts xxxx
Taxation xxxx Xxxx
Total equity and liabilities Xxxx
** This item is dealt with in the third year of study.

Example 1
The following balances were extracted from the books of Elgon Heights Ltd at year-end 31
Dec.2002.
Account Title UGX’ 000s
Share capital (OE) 75,000
Creditors(L) 22,472
Inventory 31.12.2001(A) 41,415
Debtors(A) 28,560
Bank (A) 16,225
Machinery at cost (A) 28,000
Accumulated depreciation – Machinery 18,000
Accumulated depreciation – Motor vehicle 12,600
Sales 97,500
Purchases 51,380
Motor expenses 8,144
Maintenance 2,308
Utilities 1,076
Wages and salaries 11,372
Directors remuneration 6,200
Retained earnings 6,138
General reserve 8,000

The following information is also relevant to the company for the period for which the balances
were extracted.
i) Stock at December 31 was UGX.54,300,000
ii) Motor expenses of UGX.445,000 were not paid or recorded anywhere in the books
iii) Utilities of UGX.500,000 were prepaid
iv) A dividend of UGX.7,500,000 was proposed on 28th Dec. but is not paid
v) A transfer of UGX.2,000,000 to the general reserve was approved but not made
vi) Depreciation on non current assets to be provided at the rate of 20% using the reducing
balance method
Required
Prepare Journal entries, Income statement, statement of changes in equity and the balance sheet
for the company.
Solution

Elegon Heights General journal showing adjusting entries

i) Closing inventory 54,300,000
Trading account 54,300,000
ii) Motor vehicle expenses 445,000
Accrued motor vehicle expenses 445,000
iii) Prepaid utilities 500,000
Utilities expense account 500,000
iv) Retained earnings 7,500,000
Dividends payable 7,500,000
v) Retained earnings 2,000,000
General reserves 2,000,000
vi) Depreciation expense – motor vehicle 3,080,000
Accumulated depreciation – Motor vehicle 3,80,0000
Depreciation expense – Machinery 5,400,000
Accumulated depreciation – Machinery 5,400,000

Elgon Heights
Income statements for the year ended 31.12.2002
(Amounts in UGX’000s)
Sales 97,500
Less:Cost of sales
Opening stock 41,415
Add: Purchases 51,380
Goods available for sale 92,795
Less Closing Stock 54,300
Cost of goods sold (38,495)
Gross profit 59,005
Less: Operating expenses
Motor expenses 8,589
Maintenance 2,308
Utilities 576
Wages and salaries 11,372
Directors’ remuneration 6,200
Depreciation: Motor vehicle 3,080
Machinery 5,400 (37,525)
Profit for the year 21,480
 Elgon Heights Statement of changes in equity
(Amounts in UGX’000)

Share capital General Acc. profit Total

reserve
Opening balance 75,000 8,000 6,138 89,138
Net profit for the - 21,480 21,480
period
Transfer to G. reserve 2,000 (2,000)
Dividends payable – (7,500) (7,500)
Ordinary
Closing balance 75,000 10,000 18,118 103,118

Elgon Heights
Balance sheet as at 31.12.2002
(Amounts in UGX’000s)

ASSETS Cost Acc. Depn WDV

Non-current assets:
Motor vehicle 28,000 15,680 12,320
Machinery 45,000 23,400 21,600
73,000 39080 33,920
Current assets
Inventory 54,300
Debtors 28,560
Prepayments 500
Bank 16,255 99,615
Total assets 133,535

EQUITY AND LIABILITIES

Share capital and reserves:
Share capital 75,000
General reserve 10,000
Retained earnings/accumulated profits 18,118 103,118
Current liabilities
Trade creditors 22,472
Accrued motor vehicle expenses 445
Dividends payable 7,500 30,417
Total equity and liabilities 133,535
Example 2
The Bookkeeper of Mwenge Company prepared the following trial balance at the end of its
financial year on 31 December.

Trial balance as at 31/12

Dr. CR.
(UGX.'000) (UGX.'000)
Cash at hand 2,000
Cash at bank 4,000
Land, cost 100,000
Motor vehicle, cost 10,000
Accumulated depreciation - motor vehicle 2,000
Equipment, cost 20,000
Accumulated depreciation – equipment 4,000
Inventory 1/1 (Opening inventory) 1,000
Trade debtors 5,000
Provision for bad debts 2,000
Trade creditors 3,000
Sales 200,000
Purchases 110,000
Discount allowed 2,000
Discount received 1,000
Purchases returns (Returns out wards) 5,000
Sales returns (Returns inwards) 10,000
Carriage inwards 6,000
Salaries 8,000
Salaries payable (accrued salaries) 15,000
Rent 1,800
Electricity 7,000
Bad debts 1,200
Capital 26,000
Long-term Bank Loan 30,000
288,000 288,000

You ascertain the following

(a) Closing Inventory at the end of the year was valued at UGX.20,000,000
(b) Salaries of UGX.2,000,000 accrued or remained outstanding at the end of the year and was
not recorded in the trial balance
(c) Half of the rent paid is for the forthcoming financial year
(d) Depreciate Tangible non-current assets by 20% on cost at the end of the year
 (e) 20% of trade debtors are expected to default; a provision against bad debts needs to be
made.
Required:
As the company’s Accountant, prepare Mwenge Company’s Income statement for the year ending
31/12 and the balance sheet as at that date. Be sure to journalize adjusting entries.

Solution:
Mwenge Ccompany. General Journal for the period ending 31/12
DR. CR.
(a) Closing inventory 20,000,000
Trading account 20,000,000
(b) Salaries expense 2,000,000
Salaries payable 2,000,000
(c) Rent prepaid 900,000
Rent expense account 900,000
(d) Depreciation expense account (motor vehicle) 2,000,000
Accumulated depreciation account 2,000,000
Depreciation expense account (Equipment) 4,000,000
Accumulated depreciation account 4,000,000
(e) Bad debts expense 1,000,000
Bad debts provision 1,000,000

MWENGE COMPANY
INCOME STATEMENT FOR THE YEAR ENDED 31/12
(Amounts in thousands of shillings)
Sales revenue 200,000
Returns in wards (10,000) 190,000
Cost of sales:
Opening inventory 1,000
Purchases 110,000
Returns out wards (5,000)
Carriage in wards 6,000
Closing inventory (20,000) (92,000)
Gross profit 98,000
Other (miscellaneous) incomes – discount received 1,000
Less: operating incomes:
Depreciation – Motor vehicles 2,000
_ Equipment 4,000
Bad debts (1000 + 1200) 2,200
Discount allowed 2,000
Salaries: Paid 8,000
Accrued 2,000 10,000
Rent: Paid 1,800
Prepaid (900) 900
Electricity 7,000 (28,100)
Net profit for the period 70,900
 MWENGE COMPANY
BALANCE SHEET AS AT 31/12
(Amounts in thousands of shillings)
ASSETS
Tangible Non-current assets: COST AGG.DEPN NBV
Land 100,000 Nil 100,000
Motor vehicle 10,000 4,000 6,000
Equipment 20,000 8,000 12,000
130,000 12,000 118,000
Current assets:
Inventory 20,000
Trade receivables 5,000
Provision (2000 + 1000) (3,000) 2,000
Prepayments – Rent 900
Cash and cash equivalents (2000 + 4000) 6,000 28,900
Total assets 146,900

EQUITY AND LIABILITIES

Equity and reserves:
Capital 26,000
Accumulated profits 70,900 96,900
Non-current Liabilities:
Long term loan 30,000
Current liabilities:
Trade creditors 3,000
Salaries payable (15,000 + 2000) 17,000 20,000
Total equity and liabilities: 146,900

Exercise 1
The trial balance of Futi Bitangwa Ltd had the following transactions for the year ending 31 st
Particulars Debit Credit
10% preference share Capital (redeemable) @1000 50,000,000
Ordinary share capital @ 1000 80,000,000
Income statement balance 31.12.2003 26,800,000
Inventory 1.1.2004 99,000,000
Sales revenue 886,000,000
Returns in wards 42,000,000
Purchases 328,600,000
Salaries and wages 118,000,000
Debenture interest 46,800,000
Directors’ remuneration 97,000,000
 Bad debts 7,000,000
Legal and audit fees 43,000,000
Returns outwards 68,000,000
Freehold property, cost 180,000,000
Cost of plant and machinery 350,000,000
Cost of motor Vehicles 62,000,000
Cash and bank balances 31,000,000
Trade debtors 36,000,000
Debentures (redeemable in 5 years) 239,000,000
Provisions for bad debts 15,000,000
Accumulated depreciation – Motor Vehicles 8,000,000
_ Plant and machinery 35,000,000
Trade creditors 36,600,000
Interim preference dividend 4,000,0000
1,444,400 1,444,400
You ascertain that;
a. Inventory value on 31.12.2004 was UGX.33,000,000
b. Depreciation is charged at a rate of 10% on motor Vehicles and 5% on Plant and
Machinery all on cost.
c. Legal and Audit fees of UGX.13,000,000 relate to the year starting on 1.1.2005
d. UGX.2, 000,000 accrued on salaries and wages while 1,200,000 accrued on
debenture interest.
e. The directors agreed to pay the remaining amount of preference dividends at the
close of the year. They also proposed to pay a dividend of 200= per share to
ordinary shareholders on 29th Dec.2004.
 Topic 10
Suspense Accounts and correction of errors
Learning objectives
By the end of the topic you will be able to;
Describe the errors not detected by the trial balance
Correct the errors
Describe the reasons why suspense accounts are established
Prepare a statement of corrected net profit
Restate the balance sheet after the correction of errors

Introduction
A suspense account is a temporal account. It is an account in which debits or credits are held
temporarily until sufficient information is available for them to be posted to the correct accounts.
There are two situations where a suspense account might be needed.
 The bookkeeper knows in which account to make the debit entry for a transaction but does
not know where to make the corresponding credit entry. Until the mystery is sorted out,
the credit entry can be recorded in a suspense account. A typical example is when the
business receives cash through the post from a source which can not be readily determined.
The double entry in the accounts would be a debit in the cash book, and a credit to a
suspense account. Similarly, when the bookkeeper knows in which account to make a credit
entry, but for some reason does not know where to make the corresponding debit, the debit
can be posted to a suspense account.
 When a trial balance is prepared and it fails to balance. The difference by which it fails to
balance is temporarily recorded in a suspense account until the errors are discovered and
can be corrected.

Recall that the purpose of the trial balance is to check the accuracy of the books. Specifically it
detects whether;
 The principles of double entry were followed or not
 The arithmetic errors were made in balancing off the ledger accounts.

When entries are made in the books of account, some wrong postings or calculations are possible
and these are known as errors. When discovered, the necessary correcting entries must be made in
the accounts. The errors may be of two types;
 Those when made, do not affect the trial balance
 Those when made, will affect the trial balance
Once these errors are found, they must be corrected; and, for the correction of these errors, the
necessary journal entries are made. The use of the journal for the correction of errors is a common
feature.

Therefore, these errors relate to incorrect additions, subtractions, or entries on the wrong side of
the books. For the correction of these errors, a suspense account is opened and the difference in
the trial balance is posted in this account. If the debit side of a trial balance is smaller then this
amount is debited in the suspense account and when the credit side is smaller, then this amount
credited to the suspense account. When those errors affecting the trial balance are discovered, they
are corrected in by the double entry through the suspense account. As we shall see later, when all
these errors are discovered and corrected, the balance on the suspense account is eliminated. In
this case;
 Dr. Respective A/C if Omitted
Cr. Suspense account
 Dr. Suspense account
Cr. Respective account if omitted
 If any debit entry has been made on the credit side then to correct it, double amounts must be
debited and vice versa.

Typically, there are two main reasons why suspense accounts may be created:
1) On the extraction of the trial balance, the debits are not equal to the credits and the
difference is put to a suspense account
2) Of course, the other one is when the bookkeeper performing double entry is not sure where
to post one side of an entry he may debit are credit a suspense account.

Note: The rule for correcting these errors (that is those that do and do not affect the agreement of
the trial balance) is; The entry which was made correctly, make that entry into the suspense account
and the entry which was not made previously, make that entry in the respective account.

Errors that cannot be detected by the trial balance

Specifically, the following errors do not affect the agreement of the trial balance.

i. Errors of Omission .This is when a transaction is completely omitted from the books of
account. For example if goods were sold Sarah for 300,000 cash but it is not recorded
anywhere the trial balance will agree
ii. Errors of Commission; This type of error occurs when the correct amount is entered in
wrong persons account. It is important to note that here double entry is observed. For
example if the company sold goods to Martha Tendo on credit but by mistake Marias Tendo
account is debited.
iii. Errors of Original entry. These are errors made on the original documents when a
transaction is being recorded. The double entry is observed but the original figure is not
correct. For example goods for 1,500,000 cash are sold but by mistake 5,100,000 is
recorded on the receipt, the wrong amount will be transferred to the journal, ledgers and
trial balance
iv. Errors of Principle This error occurs when transactions are entered in the wrong types of
accounts. For example a computer (fixed asset) is sold and credited to the sales account the
trial balance will agree. Such a transaction is supposed to be recorded in the disposal
account
v. Errors of Complete reversal of entries This type of error occurs when correct amounts are
recorded on the wrong sides of the account. For example if a cash sale is made the cash
account is supposed to be debited while sales account credited, but the reverse is done by
debiting the sales account and the crediting the cash account.
vi. Compensating errors
This is occurs when the same error made on the debit is made also on the credit side which
implies errors cancel out each other. For example if the cash account was over debited by
 200,000 UGX at the same time the sales account was over credited by the same figure then
such errors will cancel out and the trial balance will agree.

We emphasize again that even if the above errors do not affect the agreement of the trial balance,
once detected or found out, they must be corrected and must still follow the dual concept.

Now let us look at an example involving the correction of errors (using the journal) that do
not affect the trial balance.

The Audit of Banyanga’s books for the year ending 31/12/2004 revealed the following errors;
i. A machine purchased for UGX.1.2M had been debited too the purchases account
ii. Goods purchased from Bukenya for UGX.0.15M were credited to the account of Bakanya
iii. An invoice from Orobia for UGX.0.27M was omitted
iv. Goods sold to Akileng for UGX.0.175M were entered in the sale day book as UGX.0.157M
v. The Salaries and wages account was over-added by UGX.0.035M and rent receivable
account had also been over-added by UGX.0.035M
Required: Show by means of journal entries how the following errors should be corrected in the
books of Banyanga.

Solution
Date Particulars folio DR CR
Dec.31.2004 Machinery account 1,200,000
Purchases account 1,200,000
(Being the correction of error as
machinery debited to purchases account)
-do- Bakanya 150,000
Bukenya 150,000
(being a Transfer of amount incorrectly
credited to Bakanya)
-do- Purchases account 270,000
Orobia 270,000
(Being purchase of goods previously
ommited)
-do- Akileng 18,000
Sales account 18,000
(Being adjustment for under charge of
sales)
-do- Rent receivable account 35,000
Salaries and wages account 35,000
(Being an adjustment for overcharge)

Illustration 1
You are the accountant of BBA Ltd. When you come to prepare the accounts for the year ended
31 Dec. 2005, you find that the bookkeeper has raised a suspense account with a credit balance of
UGX.80, 530. On further investigation you ascertain that this balance is made up of the following
items;
1. Proceeds from an issue of shares (at nominal value) during the year amounting to
UGX.50,000;
2. Proceeds from sale of land, shown in the books at a cost of UGX.20,000, amounting to
UGX.30,000;
3. An excess of the total of the debit side over the credit side of the trial balance due to:
a) Salaries of UGX.690 being incorrectly entered as UGX.960
b) Cash received from a debtor, Eric, amounting to UGX.130 which was incorrectly
debited to his account.
Your job is to clear the suspense account, showing the transfers to the relevant accounts.

Solution
The journals for the correction of the above entries may look as follows
Account titles Account debited Account credited
1 Suspense account 50,000
Capital account 50,000
2 Disposal account 20,000
Profit on disposal 10,000
Suspense account 30,000
3 Suspense account 270
Salaries 270
3 Suspense account 260
Debtors – Eric 260

Notes:
1. The share capital is the proprietor’s capital in a limited company. A new share issue raises
cash of UGX.50, 000 and adds UGX.50, 000 to capital. Presumably in this example, the cash
account has been debited correctly, but the share capital account has not yet been credited.
2. The UGX.30, 000 received from the sale of the land in the suspense account indicates that
the disposal has not been recorded in the accounts at all. Not only should the disposal of land
account be credited with UGX.30, 000, but also the Non-current assts account should be
credited and the disposal account debited with the cost of the land, to complete the ledger
entries.
3. The error of transposition in 3 (a) and error of commission in 3 (b) are corrected in the ways
described earlier.

Suspense account

31/12/05 Share capital 50,000 31/12/05 Bal B/f 80,530

Disposal of Land 30,000
 Salaries (over
Statement) 270
Debtors (130 + 130) 260
80,530 80,530

Share capital

1/1/05 Balance b/f X

31/12/05 Suspense 50,000

Land (cost)

1/1/05 Balance 20,000 31/12/05 Disposal of land 20,000

Disposal of land

31/12/05 Land 20,000 31/12/05 Suspense 30,000

Profit on sale 10,000
30,000 30,000

Salaries

31/1/05 Balance X 31/12/05 Suspense 270

Debtor - Eric

1/1/05 Balance 130 31/12/05 Suspense 260

Cash (incorrect) 130
260 260
 Topic 11
Depreciation accounting & disposal of tangible
Non-current (fixed) assets
Learning objectives
By the end of this topic, you will be able to
Define and explain the process of depreciation
Illustrate the different methods of computing depreciation
Explain the accounting treatment of disposals of tangible non-current assets.

Introduction
A tangible non-current asset is acquired for use within a business with a view to earning profits.
Its life extends over more than one accounting period, and so it earns profits over more than one
period. With the exception of land held on freehold or very long leasehold, every tangible non-
current asset eventually wears out over time. Machines, cars and other vehicles, fixtures and
fittings, and even buildings do not last forever. When a business acquires a non-current asset, it
will have some idea about how long it’s useful life will be, and it might be decided either;
 To keep on using the asset until it becomes completely worn out, useless, and worthless;
or
 To sell off the non-current asset at the end of the useful life, either by selling it as a second-
hand item or as scrap – this gives rise to the idea of disposal of the non-current assets

Since Non-current asset has a cost, and a limited useful life, and its value eventually declines, it
follows that a charge should be made in the income statement to reflect the use that is made of the
asset by the business. This charge is called depreciation.

Definition of depreciation:
There are as many definitions of depreciation as almost the authors in accounting, nevertheless the
following need emphasis.
Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life.
It is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising
from use, efflux ion of time or obsolescence through technology and market changes. It is the
allocation of the cost of the asset to the years in which benefit is expected from its use. It is a
method of spreading the loss in value of a capital asset over several periods

Depreciation is commonly defined as wear and tear, but in accounting this definition is
inadequate or inappropriate because wear and tear is just one of the causes of depreciation.
Some terms such as depletion, amortization etc. may sometimes be used instead of
depreciation.
Note that some intangible assets such as patent, copyright, trademark goodwill etc also do lose
value except that different terms other than depreciation are used for the loss of their value for
stance amortization of goodwill
For simplicity in accounting, depreciation of capital assets is usually determined at the close of
each fiscal year and the depreciation expense( a portion of the expired cost of the asset) for the
accounting period is charged to Income statement in accordance with the matching concept.

Important Definitions, Terms and Issues in Depreciation

There are some important definitions, terms and issues that need to be grasped at this stage to
enhance the understanding of the subsequent contents in this Topic. They include but are not
limited to the following.
1. Depreciable assets. These are assets which are expected to be used during more than one
accounting period with a limited useful life and are held by an enterprise for use in the production
or supply of goods and services, for rental to others, or for administrative purposes and not for the
purpose of sale in the ordinary course of business.
2. Useful life. This is either the period over which a depreciable asset is expected to be used by
the enterprise, or the number of production or similar units expected to be obtained from the use
of the asset by the enterprise. It is also called the life span of the asset.
3. Depreciable amount. Depreciable amount of a depreciable asset is its historical cost, or other
amount substituted for historical cost in the financial statements, less the estimated residual value.
4. Historical cost. Historical cost of a depreciable asset represents its money outlay or its
equivalent in connection with its acquisition, installation and commissioning as well as additions
to or improvements thereof. Capital assets are recorded at historical cost or, if donated, at their
estimated fair market value.
5. Residual value. This is the net amount, which the enterprise is expected to obtain from an asset
at the end of its useful life after deducting the expected costs of disposal. It is otherwise called the
scrap value or the residual value or the salvage value.
6. All non current assets (fixed assets) other than land depreciate to zero or almost zero book
values. Normally land and some types of improvements on it are not depreciated because in most
cases do not deteriorate due to use and the passage of time.
7. Some intangible assets such as patent, copyright, trademark, goodwill, mineral resources etc do
lose value except that different terms other than depreciation are used for the loss of their value
for stance amortization of goodwill depletion of the resources etc.

Consistency and Disclosure Requirements

Once a depreciation method is selected for a particular asset, it becomes an accounting policy. It
is a requirement that it should be used consistently and that similar items are treated using a similar
method.

The method of depreciation should be applied consistently so as to enhance the comparability of

the results of the operations of the enterprise from period to period.

Changing depreciation methods is discouraged as it creates distortions in financial reporting,

nevertheless a change from one method can be made only if the adoption of such a method is
required by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial statements
of the enterprise, but even then the effect of such a change on the reported net profit and balance
sheet position must be disclosed.

It is pertinent to note that a change in the method of depreciation is treated as a change in an

accounting policy and therefore should be disclosed accordingly.
It is a requirement that the depreciation methods used, the total depreciation for the period for each
class of assets, the gross amount of each class of depreciable assets and the related accumulated
depreciation be disclosed in the financial statements along with the disclosure of other accounting
policies. But depreciation rates or the useful lives of the assets are disclosed only if they are
different from the principal rates specified in the statute governing the enterprise.

Capital Expenditure and Revenue Expenditure Distinguished

It is very important to make a distinction between capital expenditures and revenue expenditures
for depreciation purposes because capital expenditures are depreciated whereas revenue
expenditures are not.

Capital expenditure is simply defined as that expenditure incurred in acquiring a fixed asset. This
also includes the expenditure that lengthens the life span of an asset and improves the efficiency
and ability of the asset to earn more income. Such an expense is debited to the appropriate fixed
asset account i.e. such expenditure is capitalized. . Any addition or extension to an existing asset
which is of a capital nature and which becomes an integral part of the existing asset is depreciated
over the remaining useful life of that asset.
Examples of capital expenditure include:
 Purchase of machines
 Installation costs
 Freight costs incurred in transporting a fixed asset
 Building an extension to a house
 Trial runs
 Commissioning
 Etc

Revenue expenditure on the other hand, is that expenditure that is incurred in the maintenance and
repair of fixed assets and operating expenditures necessary to carry on the business e.g. rent, rates,
salaries and wages etc.
Note that revenue expenditure does not increase the value of the asset of a business and therefore
cannot be depreciated but rather is debited to appropriate expense account and written off at the
end of the accounting year in the profit and loss account.

Reasons for Providing For Depreciation

 Depreciation is a cost that has to reduce profits. If depreciation is not provided for, income
will be overstated and tax liability is also overstated. Therefore since fixed assets are used
to generate revenue it follows that the part of the cost of the asset used in earning that
revenue should be charged to the profit and loss account so as to get a realistic figure of
net profit.
  To portray a true and fair view of the state of affairs of a business by subtracting the
accumulated depreciation from the cost of the asset. This enables disclosure of book values
in the balance sheet to be fairly accurate.
 It guides policy for planning maintenance and replacement of the assets

Factors Considered In Determining/Calculating Depreciation

The assessment of depreciation and the amount to be charged in respect thereof in an accounting
period are usually based on the following three factors:

1. The historical cost of the asset or any other amount substituted for the historical cost of the
depreciable asset when the asset has been revalued. The historical cost includes the purchase cost
plus transportation costs, installation costs, taxation, trial runs and all other costs that put the
asset in a serviceable or usable state and therefore which should be capitalized.

2. Estimated salvage/scrap/residual value. This is the estimated amount that the owner of the fixed
asset expects to recover at the time of disposing off the asset less any cost of disposal.

3. Estimated useful life. This is the estimated time period during which benefit or service is
expected from use of a non-current asset. Such an estimated time period is often in form of years
however it can also be in terms of months, hours, units of production etc.

Causes of Depreciation
1. Physical deterioration
a) Wear and tear; this refers to the wearing out of fixed assets after having been in use for a number
of years.
b) Rust, rot and decay; Materials in vehicles or machines eventually rust, wood eventually rots or
decays after having been used for some time – hence depreciation of that asset.
c) Accidents; may cause depreciation of fixed assets through physical damage say by fire,
explosion etc.

2. Economic factors
a) Obsolescence; this refers to the fixed assets becoming outdated. E.g. due to changes in
technology. E.g. typewriters have been depreciated by computers, record players by radio cassettes
or CD players etc. Since they are out dated, they are no longer useful.
b) Inadequacy; this arises when an asset is no longer used because of the growth or changes in the
size of the firm.

Methods of Computing Depreciation

There are various methods of calculating depreciation and the method employed may vary from
one asset to another. The depreciation method chosen by management depends on the company’s
policy and its relevancy to the asset in question.
When a method is selected for a particular asset, it should be used consistently and similar items
should be treated using a similar method i.e. in accordance with the consistency concept (as already
seen). Changing methods is discouraged as it creates distortions in financial reporting, nevertheless
where change is justifiable, the effect of the change on the reported net profit and balance sheet
position must be disclosed as earlier discussed.
The following methods may be used for computing depreciation;
 Straight-line method (SLM)/Fixed installments method.
 Reducing balance method (Diminishing balance method)
 Sum of years’ digits method
 Units of output method
 Hourly rate method
 Revaluation method

Straight Line Method (SLM)

This is otherwise called fixed installments method or fixed percentage method. It is the simplest
and most widely used method. It is based on the simple average principle. i.e it involves dividing
the total cost by an estimate of how many years we think the asset will remain usable and apply
the result year in year out. We also need to estimate any residual or salvage value that we can
reclaim at the end of the asset’s working useful life. This method is especially good for assets that
are used uniformly from year to year. However it is not realistic by assuming constant depreciation
over the lifetime of an asset. It is given as:

Depreciation per annum (p.a) = Cost – Scrap/salvage/residual value

Estimated Number of years of useful life
For example, it is 1/1/99 and we have just bought a new asset for shs 100,000 that we estimate
will have a useful life of 5 years; and that we think we will be able to dispose of for shs 20,000.
Required:
a. Calculate the annual depreciation provision for the asset.
b. Show the depreciation schedule for this asset.

Solution
Depreciation per annum (p.a) = Cost – Scrap/salvage/residual value
Estimated Number of years of useful life
= 100,000 – 20,000
5
= 16,000 per year

Depreciation Schedule
YEAR Depreciation expense Accumulated Depreciation Net Book Value

1 16,000 16,000 84,000

2 16,000 32,000 68,000
3 16,000 48,000 52,000
4 16,000 64,000 36,000
5 16,000 80,000 20,000

Example:
An equipment was purchased from England at CIF Namanve at a value of UGX 10,000,000. The
installation cost was UGX 2,000,000 while trial runs and commissioning amounted to UGX
2,600,000.The equipment is expected to be useful for 6years after which it is estimated to have a
salvage value of UGX2,600,000.
Required:
Calculate the depreciation expense for each year and accumulated depreciation up to year6.

Solution
Calculation of the cost of the equipment;

Cost up to Namanve (CIF) 10,000,000

Add installation cost 2,000,000
Trial runs and commissioning 2,600,000
Total cost of the equipment 14,600,000
Salvage value 2,600,000
Number of years of useful life= 6 years

Depreciation expense p.a. = Cost – Salvage/Scrap/residual value

Estimated Number of years of useful life

 14,600,000 - 2,600,000
6
=2,000,000

Depreciation Schedule
YEAR Depreciation expense Accumulated Depreciation Net Book Value

1 2,000,000 2,000,000 12,600,000

2 2,000,000 4,000,000 10,600,000
3 2,000,000 6,000,000 8,600,000
4 2,000,000 8,000,000 6,600,000
5 2,000,000 10,000,000 4,600,000
6 2,000,000 12,000,000 2,600,000

Note that depreciation p.a can be expressed as a percentage of depreciable cost as follows:

2,000,000 x 100 =16.667%

12,000,000

Reducing Balance Method

This is otherwise called diminishing or declining balance method. Under this method, more
depreciation is allocated to the earlier years than to later years of the asset i.e. depreciation charge
or allocation reduces as the asset gets older. This method is suitable for assets that are more useful
in earlier years than in later years like automobiles. Under this method depreciation charge is on
the book value at the beginning of the year and not the original cost. This method has two types:
 Normal reducing balance method
 Double declining balance method
Normal Reducing Balance Method
Under this method, annual depreciation is calculated as;

Depreciation p.a = Book value x Depreciation percentage

= (Cost – Accumulated depreciation) x Depreciation percentage

R
But depreciation percentage= (1  n ) x 100%
C

Where: n = estimated number of useful life

R = Residual or scrap value
C = Cost
Example
For an asset costing sh1,000,000 with a 5-year life and small residual value (say shs 30,000)
n = 5 years
C = shs 1,000,000
R = shs 30,000

30
Depreciation rate = (1  5 ) x 100% = approx 50%
1,000

To prove that the rate is 50% you will need a scientific calculator or a suitable computer
package.

Calculation of reducing balance depreciation

Year Annual Accumulated Net book value

depreciation depreciation at end of year
50% of NBV(shs) (shs) (shs)
1 500,000 500,000 500,000

2 250,000 750,000 250,000

3 125,000 875,000 125,000

4 62,500 937,500 62,500

5 31,250 968,750 31,250

DOUBLE DECLINING BALANCE METHOD

Under this method depreciation percentage is got by doubling the rate (Depn %ge) on Straight
Line method i.e.

Depr. percentage = 2 x Depreciation percentage using Straight-Line Method (SLM)

Remember:
Depr. Expense p. a
Depr. Rate (SLM) = x 100
Depreciable cost

However; Depreciable cost = Cost – Salvage value.

Therefore:

Cost - Scrap value

No. of years x 100 x2

Depr. percentage =
Cost - Scrap

Depreciation p.a.(SLM)
DDBM Depr percentage = x 100 x2
Depreciable cost

Sum Of Years’ Digits Method

Under this method, depreciation is computed by dividing the number of years remaining in the
useful life of the asset (counting from the beginning of the year) by the sum of years of useful life.
The rate of depreciation got is then multiplied by the depreciable cost (Cost – Salvage value).

Remaining useful life (Years)
Depr. Expense = X Depreciable cost
Sum of years’ digits

Example:
An equipment was bought at a cost of UGX 50,000,000. It has an estimated useful life of 5 years
at the end of which the residual value is estimated to be UGX 5,000,000=.

Required:
Calculate the depreciation expense for each year using the sum of years’ digits method.
Solution:
Year Depreciation rate Depreciation Expense
1 5
 = 5/15 (5/15) X (50000000-5000000 = 15000000
1+2+3+4+5
2 4/15 (4/15) X 45000000 = 12000000
3 3/15 (3/15) X 45000000 = 9000000
4 2/15 (2/15) X 45000000 =6000000
5 1/15 (1/15) X 45000000 = 3000000

NOTE:
Reducing balance method and sum of years’ digits method are called accelerated depreciation
methods because higher depreciation charges or allocations are made in the earlier years than in
the later years.
These two methods are used as tax incentives in some countries because they act as a tax relief
since they lead to a lower reported net profit in the earlier years when an investment is still infant.

Units of Output Method

Here depreciation is computed in proportion to the use of the asset for production i.e. it is based
on the number of units estimated to be produced by the asset in its useful life.

Units produced during the year

Depr. Expense p.a. = X Depreciable cost
Estimated units to be produced in the useful life

Example:
A machine is expected to produce 400,000 units in its useful life. It produces 75,000 units in its 1 st
year of existence. If the machine was bought at 5,500,000= and its salvage value is estimated at
500,000=.
Calculate the depreciation in the 1st year using the units of output method.

Units produced during the year = 75,000

Estimated units to be produced in useful life = 400,000
Cost = 5,500,000
Salvage value = 500,000

75,000
Depn. Expense = x (5,500,000 –500,000)
400,000

= 0.1875 x 5,000,000

= 937,500

Working Hours Method (Hourly Rate Method)

This method takes into account the running time of the machine for depreciation purposes.
Depreciation is computed basing on the number of hours the asset is expected to run in its useful
life.
Number of hours worked in the year
Depn. Expense = X Depreciable cost
Estimated working hours in useful life

Example:
A machine is expected to work for 100,000 hours during its useful life. It ran for 40,000 hours
during its 1st year of use. It had been bought at 22,000,000= and estimated to have a salvage value
of 2,000,000= at the expiry of 100,000 hours.
Required:
Calculate the depreciation expense in year 1 using the working hours method.
Solution:
Hours worked in year 1 = 40,000
Estimated No. of hours during the lifetime = 100,000
Cost = 22,000,000=
Salvage value = 2,000,000=

40,000
Depr. Expense = x (22,000,000 – 2,000,000)
100,000

= 0.4 x 20,000,000

= 8,000,000

Revaluation Method
Under this method professional valuers or Experts are used to value the non current assets/fixed
assets such as land and buildings, livestock, packages, loose tools etc. At the end of the year the
value of the asset is compared with the value at the beginning of the year and the difference is
depreciation expense.
This method is discouraged in accounting because of the subjectivity involved and the historical
cost concept except where all other methods cannot be used conveniently.

NOTE:
If the value of the asset at the end of the year is greater than at the beginning of the year, then it is
appreciation and not depreciation though in most cases depreciation is expected.

Example:
KAK Construction ltd had UGX 12,000,000 worth of loose tools at the beginning of 2004 and
during the year more loose tools worth UGX 7,000,000 were bought. At the end of the year the
valuers established the value of the tools at UGX 13,700,000, there was no disposal during the
Year.
Required:
Compute the depreciation expense for the year:
Solution:
Tools at the beginning of the year 12,000,000
Tools purchased during the year 7,000,000
19,000,000

Less the value of tools at the end of the year 13,700,000

Value of the tools used during the year 5,300,000

(Depreciation)

Disposal or Retirement of Fixed Assets

When fixed assets are worn out, become obsolete or useless, they are disposed off (sold off). Note
that disposing off of an asset is not like an ordinary sale of goods because it is not routine but
incidental and for that matter it should not be credited to the sales a/c but rather the cost of the
asset is transferred to an account called Disposal a/c (debit side).
The accumulated depreciation a/c is also closed off to the disposal a/c so as to determine whether
there is either a gain or loss on disposal. If there is a gain on disposal, it is credited to the profit
and loss account as miscellaneous income and if there is a loss on disposal then it is debited to the
profit and loss account as an expense.

Accounting Entries required for the Disposal of Fixed Assets.

i. To transfer the cost of the asset to the disposal account, open a non current asset (fixed
asset) disposal account and debit it with the cost of the fixed asset disposed off as you credit
the fixed asset account i.e.
Dr Disposal A/C xxxx
Cr Non current asset/Fixed asset A/C xxxx
ii. Transfer the accumulated depreciation of the asset being disposed off to the disposal
account i.e.
Dr Accumulated depreciation A/C xxxx
Cr Disposal A/C xxxx
iii. On sale of the asset, record the receipt of cash by debiting the Cashbook (Cash A/C or
Bank A/C) as usual and crediting the disposal account i.e.
Dr Cash/Bank A/C xxx
Cr Disposal A/C xxx
iv. On closing the disposal account to the Profit and Loss Account, the balancing figure is
either a gain or a loss on disposal i.e.
a. Gain on disposal
Dr Disposal A/C xxx
Cr Profit and Loss A/C xxx
b. Loss on disposal
Dr Profit and Loss A/C xxx
Cr Disposal A/C xxx
NOTE:
Alternatively gain or loss on disposal can be computed by deducting the net book value of the
disposed asset from the proceeds received upon disposal. For instance;

1. Travellers’ Choice Ltd sold off one of its buses, which had become old and could not cope up
with the high conditions. Its cost/carrying value was 200,000,000/=. It was sold for 100,000,000/=
and it had an accumulated depreciation of 125,000,000/=. You are required to compute the
profit/gain or loss on disposal.

Solution:
UGX UGX

Proceeds received upon disposal 100,000,000

Less NBV:
Carrying value 200,000,000
Less Acc Depn 125,000,000
75,000,000
Gain on disposal 25,000,000

2. Travellers Choice Ltd sold off another bus, which had become economically unviable. Its
cost/carrying value was 250,000,000/=. It was sold for 70,000,000/= and it had an accumulated
depreciation of 150,000,000/=. You are required to compute the profit/gain or loss on disposal.
Solution:
UGX. UGX

Proceeds received upon disposal 70,000,000

Less NBV:
Carrying value 250,000,000
Less Acc Depn 150,000,000
100,000,000
Loss on disposal 30,000,000

Illustration 1
A computer was brought on 1st Jan 1991 at shs 2, 000,000/=. It was then sold or disposed off
31/12/93 at shs 1,200,000/-. The computer was expected to last for a period of 10 years at the end
of which it would have zero salvage value. Using the straight line method of depreciation. It is the
company policy to ignore depreciation in the year of disposal.
Prepare:
a) Computer account
b) Computer Disposal account
c) Accumulated depreciation of computer account

Solution:
Depreciation expense = cost – salvage value
No. of years of useful life

= 2,000,000 – 0
10

= 200,000

ֶ Accumulated depreciation = 200,000 x 2 years = 400,000

Dr Computer A/C Cr

1993 Shs 1993 Shs

Jan 1 Bal b/d 2,000,000 Dec 31 Disposal 2,000,000

2,000,000 2,000,000

Dr Computer Disposal A/C Cr

1993 Shs 1993 Shs

Dec 31 Computer 2,000,000 Dec 31 Acc Depr 400,000
Cash 1,200,000
Loss on Disposal 400,000

2,000,000 2,000,000

Dr Acc Depreciation for Computer A/C Cr

1993 Shs 1993 Shs

Dec 31 Disposal 400,000 Jan 1 Bal b/d 400,000

400,000 400,000

Illustration 2
A company purchased a pick up costing shs 25,000,000/ on 1 st Jan 1999, and then sold it at shs
18,000,000/ on 31st Dec 2000. It is the company’s policy to provide for depreciation at 10% on a
straight line basis. Ignore depreciation in the year of disposal
Required: Prepare:
 Pick up account
 Pick up disposal account
 Accumulated depreciation for pick up account
Solution:
Depreciation expense: 10% x 25,000,000 = 2,500,000

ֶ Accumulated depreciation = 2,500,000 x 1 year = 2,500,000

Dr Pick up A/C Cr

2000 Shs 2000 Shs

Jan 1 Bal b/d 25,000,000 Dec 31 Disposal 25,000,000

25,000,000 25,000,000

Dr Pick up Disposal A/C Cr

2000 Shs 2000 Shs

Dec 31 Pick up 25,000,000 Dec 31 Acc Depr 2,500,000
Cash 18,000,000
Loss on Disposal 4,500,000

25,000,000 25,000,000

Dr Acc Depreciation for Pick up A/C Cr

2000 Shs 2000 Shs

Dec 31 Disposal 2,500,000 Jan 1 Bal b/d 2,500,000

2,500,000 2,500,000

Illustration 3
A computer was purchased on 1 st Jan 1991 at shs 2,000,000/. It was then sold or disposed off on
31/12/93 at shs 1,200,000/. Provision for depreciation is 10% on reducing balance method. A full
year’s depreciation is charged in the year of acquisition and none in the year of disposal.
Required: prepare;
  Computer account
 Accumulated depreciation for computer account
 Computer disposal account

Solution
Cost = shs 2,000,000
Year Depr expense Accum depr Net book Value
1991 200,000 200,000 1,800,000
1992 180,000 380,000 1,620,000

Note: when using reducing balance method, depreciation for the 1 st year is determined as the
provision rate x cost of asset. In the subsequent years, the depreciation expense is the rate x net
book value.

Dr Computer A/C Cr

1991 Shs 1991 Shs

Jan 1 Cash 2,000,000 Dec 31 Bal c/d 2,000,000

2,000,000 2,000,000
1992 1992
Jan 1 Bal b/d 2,000,000 Dec 31 Bal c/d 2,000,000
2,000,000 2,000,000

1993 1993
Jan 1 Bal b/d 2,000,000 Dec 31 Disposal 2,000,000
2,000,000 2,000,000

Dr Acc Depreciation for computer A/C Cr

1991 Shs 1991 Shs

Dec 31 Bal c/d 200,000 Dec 31 Depreciation 200,000
200,000 200,000
1992 1992
Jan 1 Bal b/d 200,000 Jan 1 Bal b/d 200,000
Dec 31 Depreciation 180,000
380,000 380,000

1993 1993
Dec 31 Disposal 380,000 Jan 1 Bal b/d 380,000
380,000 380,000
Dr Computer Disposal A/C Cr

1993 Shs 1993 Shs

Dec 31 Computer 2,000,000 Dec 31 Acc Depr 380,000
Cash 1,200,000
Loss on Disposal 420,000

2,000,000 2,000,000