CA SRI LANKA CURRICULUM 2015 KE1 Financial Accounting & Reporting Fundamentals (English) Additional Study Support Material This document is designed to use as an additional study support material. The students are advised to refer the contents presented in the study text and the additional study support material under each chapter. The students who have already purchased the “Executive Level KE 1 – Financial Accounting & Reporting Fundamentals” study text are also advised to refer this study support material.
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C A S R I L A N K A C U R R I C U L U M 2 0 1 5
KE1
Financial Accounting &
Reporting Fundamentals
(English)
A d d i t i o n a l S t u d y S u p p o r t M a t e r i a l
This document is designed to use as an additional study support material. The students are
advised to refer the contents presented in the study text and the additional study support
material under each chapter. The students who have already purchased the “Executive
Level KE 1 – Financial Accounting & Reporting Fundamentals” study text are also advised
to refer this study support material.
KE1 – Additional Study Support Material
2 All Rights Reserved
Contents
KE1 Financial Accounting and Reporting Fundamentals
Part A Business Environment and Accounting Framework
1 Accounting and accountability 3
2 Financial statements 11
3 The conceptual framework 16
Part B Accounting Records and Preparing Financial Statements
4 Accounting records 18
5 Double entry bookkeeping and ledger accounting 21
9 Non-current Assets 22
Part C Error Identification and Correction
11 Bank reconciliations 24
Part D Other Types of Entity
15 Partnerships 30
16 Introduction to company accounting 56
Part E Accounting standards
18. Preparation of Financial Statements for Companies 59
27. Interpretation of Financial Statements 80
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Additional Content for Chapter 1
Accounting and Accountability
Heading: 5 :Governance (Learning Outcome 1.1.1)
Page No. 18
The section in the Study Text explains only about the Directors and their responsibilities
under the governance structure. The role of Chairman, Chief Executive Officer and other
committees are also a part of the governance structure of a company and are further
explained below.
Chairman and Chief Executive Officer
There are two key tasks at the top of every company. They are conducting business of the
board, and facilitating executive responsibility for management of the company’s
business. While the chairman of a company is responsible for conducting the business of
board, Chief Executive Officer is responsible for day to day management of the company’s
business.
Chairman’s Role
Chairman is responsible for conducting business of the board. As the person responsible
for running the board, the chairman should preserve order and facilitate the effective
discharge of board functions. The chairman should conduct board proceedings in a
proper manner and ensure the following;
The board is in complete control of the company’s affairs and alert all the
stakeholders towards its obligations.
A proper balance of power between executive and non-executive directors should
be maintained.
All directors are encouraged to make an effective contribution within their
respective capabilities.
The effective participation of both executive and non-executive directors are
secured.
Chief Executive Officer’s Role
Chief Executive Officer (CEO) is the most senior role in any company. The CEO is selected
and appointed by the board and reports through the chairman to the board. The CEO is
responsible for the attainment of the company’s mission and business growth,
profitability and service level objectives through leadership that inspires people
efficiently & effectively to execute strategies and plans.
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Committees of a Modern Business Organisation
It can be increasingly seen that several committees have been established within the
limited liability companies by the Board of Directors to ensure proper discharge of their
duties to the company. Generally all committees of business organisations are headed by
a member of the board who will be supported by other board/non-board members.
Committees discuss the matters pertaining to the scope of the committee and inform
board about the decisions taken for ratification/information.
The following committees could be commonly seen in most of the business organisations.
Audit committee
Risk management committee
Remuneration committee
Related partly transaction review committee
Duties and responsibilities of some of these committees are explained below.
Audit Committee
Generally the audit committee consists of the non-executive directors of the company.
Chairman of the audit committee should be a member of a professional accountancy body.
Given below are some of the activities of the audit committee.
Reviewing the internal controls and recommending improvements to the internal
control system.
Review and approve internal audit plan
Provide directions to the internal audit team.
Ensure that the financial statements are prepared in compliance with an
applicable financial reporting framework.
Risk Management Committee
Risk Management Committee is a subcommittee of the board whose principal functions
are as follows.
Review and formulate management’s recommendations to the board on risk and
risk management.
Make recommendations to the board on the company’s risk appetite.
Provide direction to management and employees on risk matters.
Maintain oversight of the risk management function and enterprise risk
management.
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Remuneration Committee
This consists of independent directors of the company. The following are some of the
activities of the committee.
Decide the remuneration policy especially for the CEO and the other management
team.
Deciding the targets for board of directors & CEO.
Dissolution of partnership is discussed below in addition to contents presented in the
Study Text.
Dissolution of Partnership
A partnership may dissolve after the time period which had been originally decided by
the partners or after achieving their objectives or any other reason specified in the
partnership agreement. On dissolution, partners of a partnership would take necessary
steps to sell all the assets of the partnership and settle all the liabilities of the
partnership. After doing so the partners may distribute any excess amount among the
partners on their profit sharing ratio. This process is known as dissolution of a
partnership.
The procedures of dissolution of partnership are explained in sections 32, 33, 34 and 35
of the Partnership Act.
Section 32
1. With the consent of partners
2. By expiration of agreed time period
3. After the achievement of the objectives
Section 33
1. If the partners become bankrupt
2. Death of the partners
Section 34
Becoming the partnership business illegal
Section 35
1. Mental disorder of the partners
2. Incurring continuous losses in the partnership business
3. Misconduct of a partner
4. By an order of the court
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Due to one or more reasons given above there is a possibility of dissolving a
partnership business. Further due to one of the below mentioned reasons a partner can
make a request from the court for the dissolution of the partnership business.
1. Becoming a partner to mental disorder
2. Failure of adhering to the partnership agreement
3. Behaviour of any partner in a way of damaging the goodwill of the partnership
4. Violation of conditions in the partnership business by one of the partners
5. Incurring continuous losses in the partnership business
6. Any reason that the courts decide is just an equitable
Section 44 of the Partnership Act explains the preferential order of releasing the
liabilities from the money received from realisation of assets.
1. Payment of realisation expenses
2. Settlement of external liabilities as per the preferential order
3. Settlement of any loan or an advance given by a partner in addition to the capital
4. Settlement of the capital provided by the partners
5. Distribution at Profit Sharing Ratio (PSR) if there is a balance after settling the
above.
Accounting for dissolution of partnership
Accounting for dissolution of a partnership is done using either of the following
two accounts.
i. Using a realisation account
ii. Using a realisation profit and loss account
1. Realisation Account Method
Realisation account is prepared for computing the profit and loss of the dissolution
of partnership business.
Just as the sale of every property, plant and equipment is recorded in an appropriate
disposal account, for determining the profit or loss on such disposal, the disposal of
all the assets and liabilities of a partnership for the purpose of dissolution of the firm
itself, is recorded in an account which is usually called a realisation account because it
shows the conversion into cash (realisation) of all the assets. The realisation account
which is also referred to as dissolution account is in similar form to the disposal
account of a property, plant and equipment. In that, it compares the cost of the assets
to the extent not already written off, with the sale proceeds thereof, and determines the
profit or loss on the realisation.
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The following entries are relevant for this.
1. All the assets other than cash on the date of dissolution;
Realisation account Debit
Relevant asset account Credit
2. Provision accounts of the assets that were transferred to the realisation account;
Relevant provision account Debit
Realisation account Credit
3. Liabilities of the partnership do not transfer into the realisation account. Instead,
the individual ledger accounts are prepared for each liability account.
4. Cash received by realisation of the assets that have been transferred to the
realisation account;
Cash / bank account Debit
Realisation account Credit
5. If a partner acquires an asset of the partnership business; (undertaken value of
such an asset) (who takes over the assets)
Partner's account Debit
Realisation account Credit
6. If a partner had guaranteed a particular asset, the partner has to undertake the
responsibility of realising such asset. As an example if the recovery of a
particular debtor is guaranteed by a partner, it is the responsibility of the partner
to ensure the full realisation of the asset. If there is a deficit, the partner has to
bare it.
Partner’s (decided by the guarantee) account Debit
Realisation account Credit
7. If a partner undertakes a particular liability,
Relevant liability account Debit
Partner’s account Credit
8. Paid cash for releasing the liabilities;
Relevant liability account Debit
Cash account Credit
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9. If there is a profit or loss in releasing the liabilities, it has to be transferred to
the realisation account.
10. When making the realisation expenses,
Realisation account Debit
Cash account Credit
11. If the contingent liabilities are crystallised in the dissolution, those have to be
settled.
Realisation account Debit
Cash book Credit
12. After recording the above transactions the realisation account has to be
balanced.
If there is a profit;
Realisation account Debit
Partner's account Credit
If there is a Loss;
Partner's account Debit
Realisation account Credit
13. Finally the partner’s accounts have to be closed down. There are two methods
to do this.
If there is a debit balance in partner's account,
That means the partner has to bring money to the business. The following are
relevant for this.
a) Whether the partner is bankrupt or not.
When a partner is unable to make the debit balance looks good because he has
become insolvent, the Garner vs. Murray decision applies. This legal decision
rules that the deficiency must be borne by the solvent partners in their last agreed
capital ratio and not in the profit sharing ratio which should be used only for
appropriation of profits and losses arising to the business, whereas the capital
deficiency of a partner must be treated as belonging personally to the remaining
partner and must be borne by them in the ratio of their ownership.
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The phrase, last agreed capital ratio means the ratio in which partners last agreed
to hold their capital balance, ignoring the current balances, the loan account
balances and the impact of the profit or loss on realisation on the capital account
balances for this purpose.
b) Whether the partner is a limited partner;
If there is a bankrupt partner at the time of dissolution of partnership business,
the court decision given in Garner Vs Murray is applicable. Accordingly the debit
balance of the bankrupt partner's account has to be borne by the remaining
partners at the ratio of final capital balance.
c) When a partner is a limited partner
If a particular partner’s liability is limited up to the amount of capital, he is known
as a limited partner. In this instance, if the partner’s account has a debit balance, it
is not required for him to bring cash in. Therefore this debit balance has to be
borne by the remaining partners at the PSR.
Other than the above mentioned cash bought by the partners, everything else has to
be recorded as follows.
Cash Book Debit
Relevant partner’s account Credit
If there is a credit balance in partner's account;
Meaning of this is that the partner should get money from the partnership
business as the settlement.
The following double entries are relevant for this.
Relevant partner’s account Debit
Cash book Credit
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2. Realisation profit and loss account method
Where the sale of each asset and discharge of every liability is recorded in individual
account, for separately determining the profit or loss on each such activity and where
the profits and losses are thereafter transferred to a common account for determining the
combined effect of all these activities, this common account is known as Realisation
Profit and Loss account.
In this method, only the profits or losses are recorded. Here the profits or losses of
realisation of assets are computed separately and transferred to this account. This
transfer can be made only for the profits or losses in revenue nature. Profits or losses
in capital nature have to be transferred to the capital account of the partners.
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Example
Ruwan, Sandun and Thushara were sharing their profit at the ratio of 3:2:1 of their
Partnership. Balance sheet as at March 31, 2016 was as follows.
Ruwan, Sandun and Thushara’s Partnership Statement of Financial Position as
at March 31, 2016
Rs ‘000’ Rs ‘000’
Assets
Non-current Assets
Land at Revaluation
250
Building at Revaluation 320
Provision for Depreciation on Building (140 ) 180
Other Property, Plant and Equipment 640
Provision for Depreciation on other Assets (230) 410
Investments 190
Life Insurance Policy 300
Fixed Deposits 210
Good will 180
1,720
Current Assets
Inventories 635
Receivable Accounts 840
Loan – Thushara 300
Prepayments 140
Cash and Cash Equivalents 155 2,070
2,070 Total Assets 3,790
Equity and Liabilities Capital Accounts
Ruwan 900
Sandun 400
Thushara 350 1,650
Current Accounts
Ruwan 462
Sandun (109 )
Thushara (139 ) 214
1,864
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The following additional information is given.
(1) The partners have realised that the activities carried out by the partnership
are not profitable and therefore they decided to dissolve the partnership at the
earliest.
(2) 3 years ago, partnership has given a personal loan to Thushara, at an interest rate
of 12% per annum. However Thushara has not been able to pay the loan interest
and, as such the loan interest has not been accounted for during the previous 3
year period. At the dissolution, the partners decided to transfer the balance of
loan account to his capital account. Further they have agreed to compute the
loan interest for the past 3 years and make relevant entries in the books of
accounts through the partners’ current accounts.
(3) Mortgage loan has been taken from a finance company against the Land and
Buildings of the partnership. At the time of the dissolution the partnership had
to transfer the title of Land and Buildings to the lending finance company with an
additional payment of Rs. 55,000/- to settle total capital outstanding of the
Mortgage Loan Account.
(4) An investment which costs Rs. 80,000/- was acquired by Ruwan for the value of
Rs.90,000/-
Life Insurance Policy 300
Total Equity 2,164
Non - current Liabilities
Bank Loan 890
Mortgage Loan 460 1,350
Current - Liabilities
Payable Accounts 210
Accrued Expenses 66 276
Total Equity and Liabilities 3,790
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(5) Other assets of the company have been realised at the amount given below.
Rs.
Other Property, Plant and Equipment 360,000
Other Investments 65,000
Fixed Deposits 240,000
Inventories 530,000
Cash Collected from Debtors 635,000
Cash collected from Prepayment balances 86,000
(6) When the bank loan was settled the partnership had to pay an additional
interest amounting to Rs. 24,000/- which has not been provided in the books of
accounts as at March 31, 2016. Creditors have settled fully after deducting 10%
discount. It was revealed that Rs. 26,000/- of accrued expenses were merely an
over provision in the books of accounts.
(7) Rs. 210,000/- received from the life assurance policy.
(8) At the dissolution partnership paid Rs. 96,000/- as compensation to the
employees. Further Rs. 23,000/- was paid as realisation expenses.
(9) It has been revealed that no personal assets are owned by Thushara to meet any
deficit arising on dissolution.
Required:
Prepare,
(i) Relevant accounts which are needed to dissolve the partnership
(ii) Partners’ Equity Accounts and Current Accounts
(iii) Cash Book of the Partnership.
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Answer
Ruwan, Sandun and Thushara’s Partnership
Realised Account
Other property plant &
equipment
640 Other property , plant & equipment
Provision for depreciation
230
Investments 190 Transferred investments
for Ruwan’s Equity A/C
90
Fixed deposits 210
Cash- other PPE
360 Good will 180
Inventory 635 Other investments 65
Receivable accounts 840 Inventories 530
Prepayments 140 Receivable A/C 635
Mortgage loan Interest 25 Prepayments 86
Employees compensation 96 Fixed deposits 240
Extra Bank loan Interest 24 Discounts received 21
Realisation expenses 23 Over provisions of accrued expenses 26
Loss on realisation - capital a/c
- Ruwan 360
- Sandun 240
- Thushara 120 720
3,003 3,003
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Partner’s Capital (Rs. 000)
Date
Description
Ruwan
Sadun
Thushara
2016/03/31 Capital balance 900 400 350
Thushara’s loan account - - (300)
Investments account (90) - -
Life Insurance fund 105 70 35
Loss on realisation (360) (240) (120)
Transferred from Current A/C 516 (73) (229)
Thushara's deficit (182.76) (81.24) 264
(According to Garner Vs Murray
rule) cash - balance paid
(888.24) (75.76) -
- - -
Cash A/C
(Rs 000) (Rs 000)
2015/04/01 Balance 155 Mortgage loan 55
Realised A/C Bank loan (890 + 24) 914
Other P.P.E. 360 Creditors(210 - 21) 189
Other investments 65 Accrued expenses 40
Fixed deposits 240 Employees compensation 96
Inventories 530 Realised expenses 23
Receivable A/C 635 Equity A/C
Pre - payments 86 Ruwan 888.24
Cash from Life Insurance policy 210 Sandun 75.76
2,281 2,281
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Partner’s Current A/C (Rs. 000)
Date
Description
Ruwan
Sadun
Thushara
2016/03/31 Current account balance 462 (109 ) (139)
Thushara’s loan interest - for three years - - (108)
Profit adjustment on Thushara’s loan interest 54 36 18
Transferred to capital A/C (516) 73 229
- - -
Land and Building A/C (Rs. 000)
Land 250 Building depreciation provision 140
Building 320 Transferred of land and building
for Mortgage loan
430
570 570
Mortgage Loan ( Rs 000)
Transferred of land and building 430 Balance 460
Cash payments 55 Extra interest to realisation
account
25
485 485
Life Insurance Policy ( Rs. 000)
Balance 300 Cash 210
Life Insurance Fund A/C 90
300 300
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Life Insurance Fund ( Rs. 000)
Life Insurance Policy A/C 90 Balance 300
Capital A/C - Ruwan 105
Sandun 70
Thushara 35 210
300 300
Creditors / Payables (Rs. 000)
Cash 189 Balance 210
Discount Received 21
210 210
(Rs. 000)
Thushara’s Deficit 264
Ruwan’s and Sandun’s capital ratio 9:4
According to Garner Vs Murray the amount to be borne by Ruwan 264 x 9
13
182.76
According to Garner Vs Murray the amount to be borne by Sandun 264 x 4
13
81.24
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The above answer is given below under Realisation Profit and Loss Account method.
Ruwan, Sandun and Thushara’s Partnership
Realisation profit and loss A/C
(Rs. 000) (Rs.000)
Other P.P.E. Loss 50 Profit from transfer of
investments to Ruwan
10
Loss on other investments 45 Profit from fixed Deposits 30
Discounts from creditors 21
Good will 180 Over provision of Accruals
26
loss on Inventories 105 Loss on Realisation - capital A/C
Receivable A/C - Loss 205 - Ruwan 360
Prepayment A/C - 54 - Sandun 240
loss 25 - Thushara 120 720
Extra Interest for mortgage 24
loan Extra bank loan Interest 96
Employees Compensation 23
Realisation expenses 807 807
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Partner’s Capital A/C (Rs. 000)
Date
Description
Ruwan
Sadun
Thushara
2016/03/31 Balance
900 400 350
Transfer of Thushara’s - - (300)
loan Investments (90) - -
Life Insurance 105 70 35
Fund Loss on Realisation (360) (240) (120)
Transfer from Current 516 (73) (229)
A/C Thushara’s Deficit
(According to Garner Vs Murray rule)
(182.76) (81.24) 264
-
(888.24) (75.76) -
Cash A/C (Rs. 000)
2016/04/01 Balance
155
Interest on Mortgage Loan 55
Bank loan (890+24)
914
Other P.P.E
360
Creditors (210 - 21) 189
Other Investments 65 Accrued Expenses(66 - 26) 40
Fixed Deposits 240 Employees Compensation 96
Inventories 530 Realisation expenses 23
Receivable A/C 635 Capital A/C
Prepayments
86 Ruwan 888.24
Life Insurance 210 Sandun 75.76
2,281 2,281
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Partner’s Current A/C (Rs. 000)
Date
Description
Ruwan
Sadun
Thushara
2016/03/31 Balance
462 (109) (139)
Loan Interest of Thushara’s
- - (108)
Profit based on Thushara’s loan Interest
to
54 36 18
Capital A/C (516) 73 229
Land and Building A/C (Rs 000)
Land 250 Building 140
Building 320 Transfer of building & land to
settle the Mortgage loan
430
570 570
Mortgage Loan (Rs 000)
Acquisition of buildings & land 430 Balance 460
Cash paid 55 Extra Interest to Realisation
A/C
25
485 485
Life Insurance fund (Rs 000)
Life Insurance policy A/C 90 Balance 300
Capital A/C - Ruwan 105
- Sandun 70
- Thushara 35 210
300 300
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Creditors A/C (Rs 000)
Cash 189 Balance 210
Discount Received 21
210 210
Other Property, Plant & Equipment (Rs 000)
Balance – Cost 640 Balance – Accumulated Dep 230
Cash 360
Realisation P/L A/C 50
640 640
Investment A/C (Rs 000)
Balance 190 Acquired by Ruwan 90
To Realisation Profit & Loss Account 10 Cash 65
Realisation Profit & Loss A/C 45
200 200
Rs (000)
Deficit of Thushara’s
264
Capital Ratio of Ruwan’s and Sandun’s
9:4
According to Garney VS Murray rule amount borne by Ruwan 264 x 9
13
182.76
According to Garney Vs Murray rule amount borne by Sandun 264 x 4
13
81.24
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Examples for final accounts in partnership
1. Aruna and Bandara were in partnership business without having a written agreement
for a long period in buying and selling goods. Their financial year ends on March 31
of each year.
October 1, 2015 Chamil was admitted to the partnership business, subject to the
following conditions.
a. Goodwill is valued for 60% of average profit of the last 3 years ended as of the
date on which the goodwill valuation is done. Goodwill is not shown in the
Statement of Financial Positions as an intangible asset.
b. Salary for Aruna Rs.2.000/- per month. Interest will be paid for capital is 6% p.a.
Profit Sharing Ratio, Aruna: Bandara: Chamil =3: 2: 1. 4% interest will be charged
for drawings.
c. It is required to transfer the balances in current account of Bandara and Chamil
into their capital account at the end of each year and the carried down balances of
the capital accounts should be arranged according to the ratio of PSR. For this
exercise capital account of Aruna is considered as the basis. Chamil brought
Rs.250,000/- in cash on October 1, 2015 when he entered into the Partnership
Business.
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Following balances were extracted from the trial balance as at March 31, 2016
Debt (Rs.) Credit (Rs.)
Land at cost 920,000
- Receivables and payables 212,500 139,000
Stock as at 01/04/2015 173,000 -
Salaries 123,500 -
Rent 27,500 -
Bank OD - 38,000
Sales - 970,500
Provision for doubtful debt - 6,125
Motor vehicle at cost 260,000 -
Provision for depreciation of motor vehicle - 120,000
Purchases 562,000 -
Stationary 7,000 -
Advertising 18,000 -
Partners drawings 111,000 -
Capital - Aruna - 750,000
- Bandara - 300,000
- Chamil - 250,000
General expenses 16,500 -
Loan of Aruna - 150,000 Cash in hand 292,625 -
2,723,625 2,723,625
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The following additional information is also given.
1. Advertising material of Rs.3000/= is included in the stock value of Rs.237,500/-
physically counted on March 31, 2016.
2. Salaries taken by Aruna is also included in the salaries account. Furthermore,
drawings of Aruna and Bandara in each month were Rs. 5,000/- and Rs. 3,000/-
respectively. Chamil has drawn Rs. 2,500 on the 15th of each month starting
October 15, 2015.
3. Rent for the premises Rs. 2500/- per month
4. Motor vehicles are to be depreciated at 20% on reducing balance method
5. Provision for bad debt as at March 31, 2016 should be 5% from the debtors
6. No entries were made for the goods taken by Aruna for the value of Rs. 20,000/-
on January 1,2016 and the goods taken by Chamil on February 1, 2016 for the
value of Rs. 30,000/- as a gift for Bandara’s wedding.
7. Profits in more recent 3 years are as follows
Year ended 31.03.2013 Rs.220, 000/-
Year ended 31.03.2014 Rs.336, 000/-
Profit in 31.03. 2015 Rs.304, 000/-
8 . Interest amounting to Rs.7,500 is payable for the loan taken from Aruna for the
year ended March 31, 2016.
No adjustments have been done in the books required for the admission of Chamil.
Required: Prepare the following:
a. Trading Account and Statement of Comprehensive Income of Aruna,Bandara and
Chamil partnership for the year ended March 31, 2016.
b. Current and capital accounts of partners.
c. The Statement of Financial Positions as at March 31, 2016.
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Answer
Trading Account and Statement of Comprehensive Income of Aruna,Bandara
and Chamil partnership for the year ended March 31, 2016
Description Rs Rs Rs
Sales
970,500
970,500
Cost of Sales
Stock as at 01.04.2015 173,000
Purchases 562,000
735,000
Drawings in goods [20,000 + 30,000]
(50,000)
685,000
Stock as at 31.03.2016 [237,500 – 3,000] (234,500) (450,500)
Gross Profit 520,000
Administration and Establishment
expense
Rent 30,000
Salaries (123,500 – 12,000) 111,500
Stationeries 7,000
General expenses 16,500 165,000
Selling and distribution expense
Advertising (18,000 – 3,000) 15,000
Depreciation of Motor Vehicle 28,000
Provision for Doubtful debts 4,500 47,500
Finance expenses
Interest for Aruna’s Loan 7,500 7,500 (220,000)
Profit for the year 300,000
01.04.2015 to
30.09.2015
01.10.2015 to
31.03.2015
Net Profit in the year 150,000
150,000
Add : Interest on drawing
Aruna 683
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Bandara 150
Chamil 217
Less: Interest on Capital
Aruna (22,500)
Bandara (9,900)
Chamil (6,600)
Salaries
Aruna (12,000)
Profits
Aruna (50,025)
Bandara (75,000) (33,350)
Chamil (75,000) (16,675)
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Aruna, Bandara and Chamil Partnership
Statement of Financial Position as at March 31, 2016
Rs Rs Rs
Assets
Non-current assets Cost Depreciation Net
Property plan and equipment
Free hold land 920,000
- 920,000
Motor vehicle 260,000 148,000 112,000
1,180,000 148,000 1,032,000
Current Assets
Trading stocks 234,500
Advertising material stocks 3,000
Receivable 212,500
Provision for bad doubtful debts (10,625) 201,875
Cash and cash equivalent 292,625 732,000
Total assets 1,764,000
Equity and liabilities
Capital accounts Aruna 750,000
Bandara 500,000
Chamil 250,000 1,500,000
Current Accounts Aruna 54,342
Bandara (87,900)
)
Chamil (31,942) (65,500)
1,434,500
Non-current liabilities
38,000
Loan taken from Aruna 150,000
Current Liabilities
Bank OD 38,000
Creditors 139,000
Rent payable 2,500 179,500
Total equity and liabilities 1,764,000
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Adjusting the Capital as per PSR
Aruna
Bandara
Chamil
Capital balance as at 01.10.2015 750,000 300,000 250,000
PSR 3 2 1
Capital by considering Aruna as the basis 750,000 500,000 250,000
Amount to be transferred from current
account
- 200,000 -
Advertising
Balance 18,000 Stock 3,000
P and L 15,000
18,000 18,000
Salaries
Balance 123,500 Aruna’s salary 12,000
P and L 111,500
123,500 123,500
Rent
Balance 27,500 P and L 30,000
C/D 2,500
30,000 30000
Drawings
Cash Goods
Aruna 60,000 20,000
Bandara 36,000 --
Chamil 15,000 30,000
111,000 50,000
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Current account of partners
Computation of Goodwill
Aruna Bandara Chamil
Drawings in cash (60,000) (36,000) (15,000)
Drawings in goods (40,000) - (10,000) Interest on drawings (683) (150) (217) Profits shares in 1st 6 months 75,000 75,000 -
Loan interest of Aruna 7,500 - - Interest on Capital 22,500 9,900 6,600 Profit share in last 6 months 50,025 33,350 16,675 Transfer to Capital Accounts - (170,000) (30,000)
Balance as at 31.03.2016 54,342 (87900)
((87,900)
(31,942)
Computation of interest on drawings
Rs.
Aruna 30,000 x 4/100 X 3 ½ /12 + 20,000 X 4/100 X 3/12+
20,000 X 4/100 X 2/12
683
Bandara 18,000 x 4/100 X 2 ½ /12 150
Chamil 15,000 x 4/100 X 3/12 + 10,000 X 4/100 X 2/12
217
1,050
Goodwill on the date Chamil's admission
Year Net profit
2012/2013 (6 Months) 110,000
2013/2014 336,000
2014/2015 304,000
2015/2016 (6 Months) 150,000
900,000 x 60%
3
180,000
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Capital account of Partners
Aruna Bandara Chamil
Capital balances 750,000 300,000 250,000
Goodwill adjustment 90,000 90,000 -
Eliminating the Goodwill (90,000) (60,000) (30,000)
Transfer from Current A/C on 31.03.2016 - 170,000 30,000
Balance as at 31.03. 2016 750,000 500,000 250,000
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Additional Content for Chapter 16
Introduction to Company Accounting
Accounting for issue of shares
The double entries to record raising of finance by issue of shares are provided below.
Consideration received on application (issue price x no. of shares applied for).
Bank Account Debit
Application and Allotment Account Credit
When shares are allotted (Issue price x No. of shares allotted)
Application and Allotment Account Debit
Stated Capital Account Credit
There may be a situation of oversubscription of a share issue. Then, the excess money
received should be returned to the applicants when shares are allotted. The double entry
to record this return of excess money is;
Application and Allotment Account Debit
Bank Account Credit
Example 1
Big Plc issues 10Mn shares at a price of Rs.25.00 each. Applications have been received
for Rs. 10Mn shares and they have been allocated accordingly. Prepare the book-keeping
entries to record this share issue.
Answer
Receipts of consideration on application ( for 10Mn shares x Rs.25 each = 250Mn)
Bank Account Debit Rs. 250Mn
Application and Allotment Account Credit Rs.250Mn
Allotment of Shares (10Mn shares x Rs.25 each = 250Mn)
Application and Allotment Account Debit Rs. 250Mn
Stated Capital Account Credit Rs. 250Mn
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Application Allotment Account
Stated Capital Account 250Mn Bank Account 250Mn
250Mn 250Mn
Stated Capital Account
Balance C/F 250Mn Application and
Allotment Account
250Mn
250Mn 250Mn
Balance B/F 250Mn
Example 2
Big Plc issues 20Mn shares at a price of Rs. 25 each. Applications had been received for
30Mn shares and the excess application money was rejected when allotting shares.
Prepare the book-keeping entries to record this share issue.
Answer
Receipts of consideration on application ( for 30Mn shares x Rs.25 each = 750Mn)
Bank Account Debit Rs. 750Mn
Application and Allotment Account Credit Rs.750Mn
Allotment of Shares (10Mn shares x Rs.25 each = 250Mn)
Application and Allotment Account Debit Rs. 250Mn
Stated Capital Account Credit Rs. 250Mn
Application Allotment Account
Bank Account 250Mn Bank Account 750Mn
Stated Capital Account 500Mn
750Mn 750Mn
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Stated Capital Account
Sometimes, shares may not be paid in full upon issue. The consideration for a share may
be called in number of steps such as on application, on allotment and on series of calls.
Balance C/F 500Mn Application and
Allotment Account
500Mn
500Mn 500Mn
Balance B/F 500Mn
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Additional Content for Chapter 18
Preparation of Financial Statements for Companies
Learning Outcome 4.1.2/4.1.3
Format to be used in preparing the financial statements for internal use is given below with two
examples.
Specimen statement of Profit & Loss Account for Internal Management purpose.
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XYZ Plc
Statement of profit & Loss Account for the year ended March 31, 2016
Rs. Rs.
Revenue xxxx
Less: cost of sales
Stocks as at April 1, 2015 xxxx
Add: Purchases xxxx
Carriage inwards xxxx
xxxx
Less: closing stock (xxxx)
Stocks lost (xxxx)
Cost of Sales (xxxx)
Gross profit xxxx
Add: Other income xxxx
Less : expenses
Administration expenses
Building rent (xxxx)
Staff wages (xxxx)
Insurance (xxxx) (xxxx)
Selling & distribution expenses (xxxx)
Commissions (xxxx)
Advertising cost (xxxx)
Salaries and wages – sales and delivery staff (xxxx)
Finance cost (xxxx)
Interest paid on loan (xxxx)
xxxx
Profit before tax xxxx
Less: income tax (xxxx)
Profit for the year xxxx
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Example 1
Hiruka (Pvt) Ltd has been carrying on a business of importing, local buying, whole sale and
retail selling of motor vehicle spare parts. Following trial balance was extracted from the
books of Hiruka (Pvt) Ltd as at March 31, 2012.
Trial balance as at March 31, 2012 (Rs. ‘000)
Particulars Debit
(Rs. ‘000)
Credit
(Rs. ‘000)
Stated capital 50,000 Retained profit 18,240 Land 10,500 Buildings 20,500 Motor vehicles 27,700
Equipment, tools and computers 18,500 Sales 275,120 Cash in hand 275 Salaries and wages – sales and delivery
Office
12,750 - Office staff 4,500
Stock as at April 1, 2011 77,400 Provisions for depreciation as at April 1, 2011
- Buildings 6,800
- Motor Vehicles 11,400 - Equipment, tools and computers 13,500
Purchases - Imports
124,350 - Local purchases 15,530
Income tax 1,750
Overtime - sales staff 2,750 Import duty and clearance 2,450 Fixed deposit (12%) 25,000 Trade debtors 28,500 Insurance- Building 500 Motor Vehicles 750 Equipment and computers 200 Sales promotion 12,850 Business promotion expenses 2,550 Bank overdraft 1,650 Creditors control account 37,250 EPF & ETF - sales and delivery
- office
1,830 - Office 640
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Electricity 2,670
Water 550 Security charges 2,440 Stationery 1,230 Building maintenance 122 Fuel expenses 7,430 Vehicle maintenance 5,350 Donation 500 Audit fees 250 Provision for bad debts 2,250 Discounts 600 VAT payable 1,290 Carriage inwards 320 Overdraft Interest 280 Bad debts written off 2,210 Sales returns 120 Telephone 198 Other administration expenses 1,455 417,500 417,500
The following information is also available for your consideration.
(1) Value of physical stocks as at March 31, 2012 was Rs. 71,550,000.
Spare parts stocks costing Rs.2, 500,000 (sold for Rs. 5,000,000 to a wholesale
customer) awaiting collection by the wholesale customer was included in the above
closing stock of the business as at March 31, 2012.
(2) Annual insurance premium of Rs. 300,000 was paid for building insurance for the
period December 1, 2011 to November 30, 2012, and this amount has been debited
to the building insurance account.
(3) New oil filters used for three wheelers costing Rs. 50,000 were distributed during
the year as free samples. However no entries have been recorded in the financial
statements in this regard.
(4) A motor lorry that had a cost of Rs. 8 Mn and accumulated depreciation of Rs. 3.2 Mn
as at April 1,2011 was given in part exchange for a new motor lorry costing Rs. 10 Mn
on October 1, 2011, and an invoice for the net amount payable of Rs. 4 Mn was paid by
a cheque. The accountant has debited the motor vehicle maintenance account with Rs.
4 Mn and credited the bank account with Rs.4 Mn and no other entries have been
recorded in the books of account.
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(5) Depreciation should be provided at the following rates per annum on straight line
basis.
Buildings - 2% Equipment, tools and computers - 20% Motor vehicles - 20%
(6) The following expenses need to be accrued as at March 31,2012.
Rs.
Electricity 550,000
Security 120,000
Water 20,000
(7) Bank balance shown in the trial balance was extracted prior to the preparation of bank
reconciliation statement for the month of March 2012. Upon preparing the bank
reconciliation the followings were noted.
A cheque received from a debtor amounting to Rs. 500,000 was deposited in
the bank on March 25, 2012. This cheque has been dishonoured by the bank on
March 28, 2012 and a bank charge of Rs. 3,000 has been charged as a fee.
However none of the above actions have been recorded in the books of the
business.
Overdraft interest amounting to Rs. 25,000 has been charged by the bank for
the month of March 2012. This has not been recorded in the books of the
business.
A cheque payment made to a supplier amounting to Rs. 250,000 has been
debited to the Hiruka’s business bank account as Rs. 520,000 by the bank.
(8) Trade debtors shown in the trial balance include debts outstanding for more than one
year amounting to Rs. 2.7 Mn. It was identified that Rs. 1.7 Mn of the above is not
recoverable and needs to be written off. Further it was decided to provide a specific
bad and doubtful debt provision of 50% for a customer whose outstanding balance as
at March 31, 2012 was of Rs.1Mn.
General provision for debts should be made for the total debtors outstanding except
above Rs. 2.7 Mn at 10%.
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(9) The trade creditors control account balance included in the trial balance does not agree
with the totals of the creditor’s ledger. The followings were noted during the review of
creditors control account and the creditor’s ledger.
A batch total of local credit purchases of spare parts amounting to Rs. 875,000 have
been entered in the double entry system as Rs. 785,000. However, individual ledger
account entries were done correctly in the creditor’s account.
Interest charged by the suppliers for delay in payments amounting to Rs. 50,000 has
not been recorded in the control account. However, this transaction has been correctly
recorded in the creditor’s ledger.
Discount received from the suppliers for prompt payments amounting to Rs. 100,000
has not been recorded in the creditor’s ledger, even though this has been correctly
recorded in the creditor’s control account.
(10) Fixed deposit balance shown in the trial balance was the balance held as at April 1,
2011. Interest on this fixed deposit for the financial year 2011/2012 has not been
recognised in the books of accounts.
Required,
Prepare the followings for the use of internal management of the business.
(a) Statement of profit & loss and other comprehensive income for the year ended
March 31, 2012.
(b) Statement of Financial Position as at March 31, 2012
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Example 2
Haymal (Pvt) Ltd has been in the business of manufacturing and selling of components
used in washing machines. The trial balance of his business as at March 31, 2016 is as
follows.
Haymal’s Business (Pvt) Ltd
Trial Balance as at March 31, 2016
Debit
(Rs. '000)
Credit
(Rs. '000)
Stated Capital 150,000
Retained Profit 22,400
Land 57,500 Office building 25,000
Plant & Machinery 62,500
Motor vehicles 18,200
Equipment 5,400 Accumulated Depreciation – April 1, 2016