*Page 1* *ACOUNTING IN INCOMPLETE ACCOUNTING SYSTEMS* Incomplete records may be described as any system which is not exactly a double

entry system. It is a mixture of: Double entry system Single entry system No entry system The features of incomplete recording system include: i. Maintenance of personal accounts while real and nominal accounts are avoided. ii. Maintenance of the cash book-a cashbook is invariably maintained usually mixing personal and business transactions iii. Dependence on original vouchers to determine necessary account values iv. Lack of uniformity and consistency in recording v. Simplicity which is often touted as the greatest advantage of this recording system. Such a system f record keeping has the following disadvantages: i. There is no check on the arithmetic accuracy of recording as would have been provided by a trial balance in the double entry recording system ii. Lack of verifiability-the profit or loss determined from this system cannot be verified iii. The system may show a false financial position. *Ascertaining balances* Final accounts may be prepared by converting to the double entry accounting system. For this, cash and bank transactions are analyzed to ascertain the payments to creditors, for expenses, cash purchases and collections from customers. The following are some of the steps in preparing final accounts: *i.* *Ascertainment of Debtors and Sales* Credit sales may be found by opening a total debtors account. Cash sales are ascertained from the cash book. *Debtors account* Debit Credit Balance b/f XX Credit sales XX Dishonoured cheques XX Bills receivable XX Discount allowed disallowed XX

Surcharges and price adjustments XX Bad debts recoveries XX Balance c/f XX XX Balance b/f XX Cash collected XX Bills receivable cashed XX Discount allowed XX Returns inwards XX Bad debts write offs XX Increase in provision for bad debts XX Contra settlements XX Price adjustments XX Balance c/f XX XX Any one of the figures may be found out as the balancing figure if all the others are known. -----------------------------*ii.* *Ascertainment of Creditors and Purchases* The amount of the credit purchases may be ascertained by opening the total creditors account. Cash purchases are ascertained from the cash book. *Creditors account* Debit Credit Balance b/f XX cash paid out XX Bills payable cashed XX discount received

XX Returns out XX Surcharges and price adjustments XX Contra settlements XX Balance c/f XX XX Balance b/f XX Credit purchases XX Bills payable XX Discount received disallowed XX Price adjustments XX Balance c/f XX XX Any one of the figures may be found out as the balancing figure if all the others are known. *iii.* *Ascertainment of Asset Balances* The balances of assets such as land, buildings, furniture, fixtures, etc can be acsetained by taking into account the following: Balance at the beginning of the year as shown by last years balance sheet. Any purchases and sales of assets as shown in the cashbook Depreciation on the basis of the additional information provided or the policy of the organization. *iv.* *Ascertainment of Capital* Capital at the beginning of the year may be found out from the opening balance sheet. If such a balance is not available, the capital can be found out by drafting a statement of affairs. Introduction of new capital and withdrawals as shown in the cashbook are adjusted with the opening capital in order to arrive at the closing capital. *Final accounts* After the missing figures have been found, final accounts may be drafted. The trading profit and loss account and the balance sheet should be prepared simultaneously slotting in the known items and tracing the remaining information. *INTRODUCTION TO PARTNERSHIP ACCOUNTS* *Introduction*

The Partnership Act Cap. 29 of the laws of Kenya defines a partnership as are lationship that subsists between two or more people carrying out a business in common with a view of sharing profits. It has a mutual agreement which sets out the conditions on which the business is to be carried out and the rights and duties of the individual partners. This agreement is called a partnership deed. It includes: The names of the partners, Business objectives, The rules to be followed in division of profits, Admission or retirement of partners, The name of the firm, Salaries to partners, Interest on capital and loans, Capital contributions, The arbitration clause, etc. The Equity Accounts of a Partnership There are three accounts of equity. These include: i. The Partners Capital Accounts:This is an account that is credited with the capital contributed as provided for in the partnership deed. Any increase is credited, while a decrease is debited to the account. The amounts are usually fixed. ii. The Partners Current Accounts The current account for each partner records increases and decreases of equity of each partner. Drawings, salaries, interest on capital and share of residual profits pass through the current account. When a partner has advanced a loan, any interest due to him is credited to the current account. iii The Loan Account Capital may either take the form of borrowing on long term or advance from partners. These advances will be credited to the partners loan accounts. Interest should be credited to this account and debited in the profit and loss account as a financing expense. Accounting for Initial Capital Contribution. There are various methods of accounting for initial capital contribution as can be observed from the following illustration: Illustration: Tom and Dick have started a partnership with the following contributions: Tom Dick Cash (Ksh.) 30,000

60,000 Merchandise 30,000 Building 90,000 Furniture and equipment 15,000 The building is a security to a mortgage loan of Sh.75,000 that is to be adjusted by the partnership. Approaches to record the initial contributions of the partnership include: a) Net contribution method: Each partner is given capital credit which is equal to the net asset contributed. DR. Cash 90,000 DR. Merchandise 30,000 DR. Building 90,000 DR. Furniture 15,000 CR. Tom Capital Account 45,000 CR. Dick Capital Account 105,000 CR. Mortgage Account 75,000 (being capital contribution) b) The bonus method: the method constitutes the transferring of capital equity from one partner to another in order to equalize the capital credit. DR. Cash 90,000 DR. Merchandise 30,000 DR. Building 90,000 DR. Furniture 15,000 CR. Tom Capital Account 75,000 CR. Dick Capital Account 75,000 CR. Mortgage Account 75,000

(being capital contribution) c) The goodwill method: it is based on the assumption that one partner contributes an intangible asset valuable to the partnership business. The value of the asset is equal to the difference between the net tangible contributions of the partners. DR. Cash 90,000 DR. Merchandise 30,000 DR. Building 90,000 DR. Furniture 15,000 DR. Goodwill 60,000 CR. Tom Capital Account 105,000 CR. Dick Capital Account 105,000 CR. Mortgage Account 75,000 (being capital contribution) Some Items of Interest in a Partnership Agreement The following are some of the important issues an accountant has to deal with when accounting for partnerships: i. Profit Sharing The partnership deed sets out procedures that will be followed in the allocation of profits. Should it be silent, then the law assumes that profits and losses are shared equally among the partners. The allocation will be based on a combination of: a) Salaries to partners b) Interest on capital c) Interest on drawings d) Profit sharing ratios of residual profit. ii. Partners Salaries The deed provides for salaries to be paid to partners under special circumstances as: -----------------------------a) Where some partners play a bigger role in managerial duties. b) Where some partners are junior partners and they have to be paid a salary c) Where the business is wholly managed by partners and it is desired to ascertain the true profits.

iii. Interest on Drawings When partners make drawings of varying amounts and at irregular intervals, interest may be charged in order to balance off the partners accounts to reflect the size of drawings in the period concerted. iv .Retirement of partners During the life of the partnership, partners may occasionally leave or die. When this occurs, the following accounting procedures will be necessary to account for the exit of the partners: a) Where the withdrawal takes place during the financial year, an income statement is to be prepared for the portion of the year that has expired. The aim is to ascertain the profit and apportion it among all the partners. Since settlement is made on the basis of current values, there should be a general revaluation of assets. The revaluation will lead to an adjustment of partners capital accounts by giving them the benefit of any capital got or capital loss. This follows the profit and loss sharing ratios. b) Goodwill if any will be recognized and partners capital accounts credited with the goodwill in the profit sharing ratios. Where the remaining partners do not wish to maintain a goodwill account, the balance in the account will be written off against the remaining partners capital account on the basis of their new profit sharing ratios. c) The balance on the outgoing partners current account should be transferred to their capital accounts, thus showing in one account their equity position in the firm. The debt due to the withdrawing partner is settled by: a) Using the partnership assets or cash b) The amount owing may remain as a loan to the firm. c) A life assurance policy d) The remaining partners buying out the equity of the outgoing partner. Illustration John and Dick are in partnership trading as Jodi. The trial balance for Jodi as at 31 October 2010 was as follows: DR (Sh). CR (Sh.) Purchases 430,600 Selling expenses 35,000 Carriage inwards 2,300 Returns inwards

7,200 Rent 26,000 Sales revenue 610,800 Bank 2,900 General expenses 3,800 Trade payables 90,200 Current accounts at 1 November 2009: John 5,120 Dick 2,740 Trade receivables 102,800 Inventory at 1 November 2009 47,000 Motor vehicle expenses 13,600 Provision for bad debts 1,400 Wages 18,180 Drawings: John 15,680 Dick 11,200 Capital accounts at 1.11.2009 John 24,000 Dick 12,000 Non current assets at cost 48,000 Accumulated depreciation at 1 November 2009: 18,000 *764,260* *764,260* The following additional information as at 31 October 2010 is available: i. John and Dick share profits and losses in the ratio 1:1 respectively. ii. Interest on drawings for the year is 5% of the drawings iii. Dick is entitled to a salary of Sh.5,000 per annum before profits are shared.

iv. Inventory was valued at Sh.40,000 at year end v. Depreciation is to be provided on non current assets at 10% reducing balance method Required: The Income and appropriations statement for the year ending 31 October 2010 and Balance sheet as at that date ACCOUNTING FOR NON-PROFIT MAKING ORGANISATIONS Introduction Non-profit making organisations include such organisations as clubs, associations,unions, charities, universities, churches and societies. Non-profit making organisations are also known as 'not for profit' organisations. Accounting Issues There are various specialised terms associated with accounting for non profit making organisations. The table below makes a comparison of these terms with those applied for profit making organisations. Profit Making Terms Non-Profit Making Terms Cash Book Profit and Loss Account Profit Loss Capital Account Balance Sheet Receipts and Payments Account Income and Expenditure Account Surplus Deficit Accumulated Fund Balance Sheet Receipts are derived from such activities as: Subscriptions Sale of refreshments Raffles and other competitions Sale of publications Annual dinner ticket sales Interest on deposit account at the bank Sale of old equipment Payments are made for such activities as: Purchase of refreshments Purchase of raffle prizes Costs of running an annual dinner Purchase of new equipment

 Rent of hall Then there would be a balance carried down which is either positive or negative depending on whether they received more than they spent or spent more than they received. Let's put some figures to this example now to see how it works; but don't forget, we are dealing here with a receipts and payments account which is the same as a cash book so there are no accruals and prepayments to take into account. Clubs and societies prepare a *Receipts and Payments Account *that just tells us what has been received and paid in cash. This means that such non-profit making organisations might not always apply the *accruals concept of accounting*. Not applying the accruals concept is not a problem for the kinds of organisations we are dealing with here. *Illustration* *ABC Sports and Social Club - Receipts and Payments for the year ended 31/08/11* Receipts Sh Payment Sh Cash in hand 01/09/10 3,000 Bar purchases 24,000 Interest 1,500 Purchase of equipment 20,000 Subscriptions 36,000 General expenses 26,000 Bar sales 50,000 Competition costs 3,000 Competition receipts 2,000 Cash balance 31/08/04 19,500 92,500 92,500 *Other Balances as at 01/09/10* Clubhouse and land 100,000 Equipment 25,000 Bar stock 4,000 Investments 20,000 General expenses owing 500 Subscriptions due 1,000 *Additional information as at 31/08/04* Bar stock 6,000 Bar creditors 400 General expenses prepaid 300 Subscriptions prepaid 900 Equipment held on 31/08/03 to be depreciated by 20% *Required* a. Prepare a statement showing the club's accumulated fund at 01/09/03 b. Prepare the club's income and expenditure account for the year ended 31/08/04

c. Prepare the club's balance sheet as at 31/08/04