Course: S5: Financial Accounting

Topic outline

General
Unit 1 YEAR - END ADJUSTMENTS
Key unit competence: To be able to carry out adjustments and prepare
an adjusted trial balance
Introductory activity
Regardless of the type of the 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 year, some accounts must be updated by adjusting entries.
Adjustments or provisions are normally made for bad and doubtful
debts, depreciation, prepaid expenses and income, accrued expenses
and income, provisions are also made for corporation taxes payable and
for appropriations such as payment of dividends or proposed dividends,
transfers to reserves etc.
After adjusted recorded entries and affected accounts in the adjusted trial
balance, the accounts will reflect the current status of the organization and
financial statements can then be prepared.
1. Why do businesses make adjustments?
2. List at least four types of transactions that may be the cause of the
adjustment
3. How does an adjusted trial balance differ from an unadjusted trial
balance?
1.1.Closing stock
Learning Activity 1.1
During a given period of time, the business purchases items for reselling
them to different customers. By the end of this time some unsold items are
remaining in the store.
a) What is the accounting terminology for goods not yet sold at
reporting date?
b) What is their use in determining the cost of goods sold?
1.1.1.Meaning of the closing stock
Closing stock is the amount of inventory that a business still has on hand at
the end of a reporting period. This includes raw materials, work-in-process,
and finished goods inventory. Certain items charged to expense as incurred,
such as production supplies, are not considered to be part of closing stock.
The amount of closing stock can be ascertained with a physical count of
the inventory. It can also be determined by using a perpetual inventory
system and cycle counting to continually adjust inventory records to arrive
at ending balances.
The amount of closing stock (properly valued) is used to arrive at the cost of
goods sold in a periodic inventory system with the following calculation:

Opening stock + Purchases - Closing stock = Cost of goods sold

The opening stock for the next reporting period is the same as the closing stock
from the immediately preceding period.

There are a variety of methods available for calculating the recorded value of
closing stock, including the methods noted below:
• First in, first out method (FIFO)
Under the first in, first out method, the costs of all separately-purchased goods
are stored in cost layers. When a unit is sold, the cost of the oldest item in
inventory is assigned to it. Assuming inflation is present, this tends to result in
a lower cost of goods sold, and therefore more reported profits.
• Last in, first out (LIFO)
Under the last in, first out method, the costs of all separately-purchased goods
are stored in cost layers. When a unit is sold, the cost of the newest item in
inventory is assigned to it. Assuming inflation is present, this tends to result in
a higher cost of goods sold, and therefore lower reported profits.
• Weighted average method
Under the weighted average method, the costs of all separately-purchased
goods are combined to create a weighted-average cost. Since it results in an
average cost, it tends to result in reasonable cost of goods sold and profit
figures, irrespective of the inflation rate.
1.1.2. Determine the use of closing stock
Inventory system
For merchandising firms, an initial step in assessing profitability is gross profit
(also called profit margin or gross margin), which is the difference between
sales revenues and cost of the goods sold. When they sell the goods, the cost
of the inventory becomes an expense, cost of goods sold or cost of sales, in the
income statement. We deduct this expense from net sales to determine gross
profit, and we deduct additional expenses from gross profit to determine net
income.
Methods of recording stock (Inventory system)
There are 2 main methods of recording stock. These are: periodic method and
perpetual method.
a) Perpetual inventory system
Perpetual inventory system or method is the method that consists to keep a
continuous record of inventories and cost of goods sold. This daily record helps
managers to control inventory levels and prepare interim financial statements.
Perpetual inventory: It is a system of stock maintenance consisting in
continuous taking of stock flows so to provide at any time the stock in trade
and cost of sales.
In the perpetual inventory system, the journal entries are:
• When inventory is purchased:
Merchandise inventory…………..xxx
Accounts payable (creditors) or cash …………xxx
• When inventory is sold:
Accounts receivable (debtors) or cash…yyy
Sales revenue…………………………………………….yyy
Cost of goods sold…………………………….xxx
Inventory……………………………………………xxx
EX: On 6^th May, Sosso purchases some merchandises for RWF 500 000 from
Tindo, and agrees to pay for them within the next two weeks. On 10^th May,
goods which had cost RWF100 000 were sold on credit to Pupette for RWF 200
000. Show journal entries to record the above transaction.
a) Periodic inventory system
Periodic inventory system or method does not involve a day-to-day record of
inventories or of the cost of goods sold. Instead, we compute the cost of goods
sold and an updated inventory balance only at the end of an accounting period.
Physical count:
It is the process of examining and identifying all items in inventory. The
physical count allows management to remove damaged or obsolete goods from
inventory and thus helps reveal inventory shrinkage, which refers to losses of
inventory from theft, breakage and loss. Under the periodic inventory method,
we delay computing cost of goods sold until we make a physical count:
Beginning Inventory + Purchasing – Ending Inventory = Cost goods sold Goods
available for sale – Inventory left over = Cost of Goods Sold
Beginning inventory: Are the goods (products) which are remained at the end
of last period
These are goods that we have in our store when we begin the period.
Example ones:
Opening stock: RWF 12,000,000
Periodical Purchasing: RWF 20,000,000
Closing stock: RWF 10,000,000
Calculate: inventory available for sale and cost of goods sold
Solution:
Inventory available for sale = Opening inventory + Purchasing = RWF 12,000,000
+ RWF 20,000 000 = RWF 32,000,000
Cost of goods sold: Opening inventory + purchasing – closing inventory
= RWF 12,000,000 + RWF 20,000,000 – RWF 10,000,000 = RWF 22,000,000
Or: Goods available for sale – Closing inventory = RWF 32,000,000 – RWF
10,000,000 = RWF 22,000,000.
Example two:
Compute the following:
Closing stock: Cost of goods available for sale – Cost of goods sold
Cost of goods available for sale: Opening stock + net purchases
Net purchase: (purchases-purchases returns) + carriage inwards
Purchases…………………. 200,000
Opening stock………….…100,000
Cost of goods sold………...180,000
Purchases return……………50,000
Carriage inwards……….…. 20,000
Solution:
Opening stock…………………………………………….…100,000
Purchases………......................................200,000
Less: Purchases return……………………… (50,000)
150,000
Add: Carriage inwards………………………...20,000
Net purchases………………………………………………. 170,000
Cost of goods available for sale……………….………. 270,000
Less: Cost of goods sold…………………………...........(180,000)
Closing stock…………………………………...…….………90,000
Example three:
Cost of goods sold (C.G.S):
Cost of goods available for sale – Closing stock
Purchases………………....340,000
Opening stock………….…150,000
Closing stock…….………...80,000
Purchases return……………70,000
Carriage inwards……….…. 30,000
What is the cost of goods sols?
Solution:
Opening stock…………………………………………….…150,000
Purchases………............................340,000
Less: Purchases return……………… (70,000)
270,000
Add: Carriage inwards……………..30,000
Net purchases…………………………………………. …. 300,000
Cost of goods available for sale…………………………. 450,000
Less: Closing stock…….………….…………………….... (80,000)
Cost of goods sold...………………………………………..370,000
Illustration
– July 1: Goods purchased from Haraka RWF 500,000 (1,000 units at
RWF 500 each).
– July 4: 100 units of goods costing RWF 50,000 are returned to the
supplier being defective.
– July 6: Sold 400 units for cash at RWF700 each.
– July 14: Sold 200 units at RWF 800 each to Jambo on credit.
– July 18: Jambo returned 10 units being poor in quality.
Required: Prepare journal entries of the above transactions using periodic
and perpetual inventory
Answer:
Periodic inventory
Perpetual inventory

In trading account, when the perpetual inventory is used, the cost of sales is
available without using the formula: Cost of Goods Sold = Opening Stock + Net
Purchases-Closing Stock. One of the advantages of the perpetual inventory is a
simple detection of thefts and losses in stock.
Application activity 1.1
1. Define the closing stock
2. How is it used in determining the cost of goods sold?
3. What are the different methods applied for calculating the recorded
value of the closing stock?
4. Answer by yes or no:
• The opening stock for the next reporting period is the same as the
closing stock from the immediately preceding period.
• The closing stock for the next reporting period is the same as the
opening stock from the immediately preceding period.
• The opening stock from the immediately preceding period is the
same as the closing stock for the next reporting period
• The opening stock for the next reporting period is the same as the
opening stock from the immediately preceding period.
1.2. Bad and doubtful debts
Learning Activity 1.2
In large businesses, most of transactions are made on credit basis. Due to
various reasons, the outstanding amounts in debtor accounts are likely
not to be collected fully or partly and then, the book keeper has a task of
providing for this unknown liability:
a) State any two reasons why a debt may be irrecoverable?
b) What can you do if someone who owes you money informed you
that he/she will not pay due to insolvency?
Introduction on bad debts
Bad debt refers to the sum due from the debtors, which remains unrealized,
and so they are written off in the company’s books of accounts. As against,
doubtful debts refer to the debt, with which there is an uncertainty, as to the
degree to which amount will be recovered from the debtor.
Bad debts are incurred when it is reasonably certain that a debtor to a business
will not be paying. For example, the debtor’s business may itself have collapsedleaving
no funds in which to pay its obligations.
You should treat bad debts in the same manner as any other expense. In other
words, we pass a journal entry where bad debts are debited, and debtor’s
account is credited.
Doubtful debts, in addition to bad debts, you may also be required to account
for doubtful debts. In practice, businesses have learnt from experience that
some debtors will not pay, but they are not certain which debtors this applies
to at the end of the year.
Provision for doubtful & bad debts
The provision for doubtful debts is an estimated amount of bad debts that are
likely to arise from the accounts receivable that have been given but not yet
collected from the debtors. This is subtracted from the trade receivables figure
on the balance sheet so as to give a more realistic figure for the amounts likely
to be collected. It is similar to the allowance for doubtful accounts.
Provision is an amount set aside for a probable loss of receivables which cannot
be calculated with absolute accuracy. When a debtor becomes bad / doubtful, a
provision for bad debt is to be created.
Reasons for bad and doubtful debt
1. Failure to pay despite persistent reminders
2. Death of a debtor
3. Bankruptcy of a debtor
4. Default by debtor
5. Etc
Creating provision for bad and doubtful debts
Provision for bad debts should be created for all those accounts that have a high
possibility of not being collected. For example, a company has debtors totaling
RWF 5,000,000 but 10% of them are doubtful and are likely not to pay. If it is
the 1^st year of trading (1^st year of making provision), a provision for bad and
doubtful debts should be created by making the following entry:
Dr: Bad and doubtful debts expense A/C 500,000
Cr: Provision for bad and doubtful debts A/C 500,000
Bad and doubtful debts account above is sometimes simply referred to as bad
debts expense account.
A provision for doubtful debts can either be for a specific or general provision.
A specific provision is where a debtor is known and chances of recovering the
debt are low. The general provision is where a provision is made on the balance
of the total debtors i.e. debtors less bad debts and specific provision.
Writing off a bad debt
In some cases, the debtors who were once doubtful truly become bad and
their amounts are irrecoverable. Their accounts have to be written off. The
accounting entry to write off a debt for which a provision had been created,
using the above example:
Dr Provision for bad and doubtful debts A/C RWF 500,000
CR Debtor’s A/C RWF 500,000
Direct write off of a bad debt
For small debtor’s amounts or receivables, there is no need to create a provision
for bad debts, a direct write off can be made to the profit and loss A/C. For
example, Jane deals in sale of stationery items, she sold a pen to John for RWF
10,000 on credit but John has defaulted and is not likely to pay.

The accounting entry to write off the small amount is as follows:
Dr Profit and Loss (P&L) A/C (bad debts) 10,000
Cr Debtor’s A/C (John’s A/C) 10,000
Increasing the provision for bad debts
At times the provision for bad debts might have to be increased beyond the
current provision i.e. in the subsequent periods. For example, if the current
provision for bad debts is RWF 2,000,000 but has to be increased to RWF
3,000,000.
The accounting entry is as follows:
Dr Bad debts expenses A/C 1,000,000
Cr Provision for bad debts A/C 1,000,0000
The accounting entry is performed with the difference ie. RWF 3,000,000 –
RWF 2,000,000 = RWF 1,000,000
Decreasing the provision for bad debts
If debtors start pa and there is little doubt about the amounts being collected,
a provision for bad debts which was once high can be reduced. For example, a
provision of RWF 5,000,000 had been made against bad debts; the provision is
now to be reduced to RWF 3,000,000.
Accounting entry is as follows:
Dr provision for bad debts A/C 2,000,000
Cr Profit and Loss A/C (Reduction in bad debts provision) 2,000,000
Collecting a bad debt that had been written off
An account that had been written off as irrecoverable, or bad can be collected
at a future date may be after 2 or more years. For instance, Mary sold goods
to Joseph for RWF 10,000,000 on credit. Joseph failed to pay and disappeared
for long time and was subsequently written off by Mary as a bad debtor.
Surprisingly after 5 years, Joseph surfaced and paid Mary by cheque in full
settlement of his debt.
The accounting entries to record the above are as follows:
The first step is to reinstate Joseph as a debtor and the following entry is made:
Dr Debtor’s (Joseph’s A/C) 10,000,000
Cr Bad debts recovered A/C 10,000,000
The second step is to record the receipt of a cheque using the following entry:
Dr Bank A/C 10,000,000
Cr Debtors A/C (Joseph’s A/C) 10,000,000
The third step is to close the bad debts recovered A/C to the profit and loss A/C
by using the following entry:
Dr Bad debts recovered A/C 10,000,000
Cr Profit and Loss A/C 10,000,000
The following journal entries illustrate the points discussed above:

Example
The following information related to trade debtors in the books of Joel, a retailer,
at 31^st March 2004.

A further RWF 900 is to be written off as an additional bad debt while the
provision for bad debts is to be adjusted to 2% on the remaining balance of
debtors. The accounting book closes each year on 31st March.
Required: Record the above information in Joel’s journal and ledger.
Solution:
Joel
Adjusting Entries-Journal

Application activity 1.2
1. State any two reasons why a debt may be irrecoverable
2. What does the supplier do when it is confirmed that the customer
will not settle his/her account?
3. State the respect steps to adjust the provision for bad and doubtful
debts
4. Distinguish bad debts from doubtful debts
1.3. Prepayments and accruals
Learning Activity 1.3
By the end of the reporting period, some expenses and income may be
incurred/occurred but not yet paid or received. On the other hand, some
expenses and income may be paid or received but not yet occurred or
incurred.
1. State some reasons why expenses or income may be incurred /
occurred by the end of the reporting period but remain unpaid or
uncollected
1.3.1. Accruals
Accruals are revenues earned or expenses incurred that impact a company’s
net income on the income statement, although cash to the transaction has not
yet changed hands. Accruals also affect the balance sheet, as they involve noncash
assets and liabilities
a) Accrued expenses/outstanding expenses
The expenses incurred in one financial year but not paid until the next financial
year, are called accrued expenses.
– They are added to the expenses actually paid
– In the balance sheet they appear as current liabilities (CL)
Accounting entries
Dr Profit and Loss account or respective Expenses account
Cr Accrued expenses account
For instance, a company’s financial year ends on 31st December. During a
particular financial year, December salaries totaling RWF 4,000,000 could not
be paid until January the following year. Record the adjusting entry at the end
of the financial year for the accrued salaries.
Dr Salaries A/C 4,000,000
Cr salaries payable A/C 4,000,000
Instead of using the word salaries payable, accrued salaries could have been
used.
b) Accrued income/ incomes outstanding
Income earned in one financial year but not received until the following
financial year is called accrued income. It is treated as a current asset in the
balance sheet.
– Incomes outstanding are added to incomes actually received for the
period.
– Accrued income is a current asset in a balance sheet.
Accounting entries:
Dr Accrued income A/C
Cr Profit and Loss or respective Income received or gain A/C
For instance, Peter offered consultancy services to a client and invoiced him
RWF 3,000,000 but the client could not pay in the financial year and promised
to pay in the next financial year. Record the adjusting entry for the consultancy
fees which accrued at the end of the financial year.
Dr consultancy fees receivable A/C (Debtor’s A/C) 3,000,000
Cr Consultancy fees (revenue/income) A/C 3,000,000
Illustration
1. Monthly rent of A&B stores is RWF 4,000. Rent paid during the year
amounted to RWF 40,000. Show the entries in Rent Account and Profit
and Loss Account as at 31st December.
Answer:
Entries in rent account and profit and loss account:
Dr: Rent account/profit and loss account 48,000
Cr: Cash/bank account 40,000
Cr: Accrued rent account 8,000
Or:
Dr: Rent account/profit and loss account 40,000
Cr: cash/bank account 40,000
Dr: Rent/ profit and loss account 8,000
Cr: Accrued rent account 8,000
1.3.2. Prepayments
Prepayment refers to paying off an expense or debt obligation before the due
date. Often, companies make advance payments for expenses as well as goods
and services to shed their financial burden.
a) Prepaid expenses/ expenses paid in advance or unexpired values
These are expenses paid in advance. Adjustment must be made for expenses
that are paid in one financial year but benefit the next/following financial year.
• Such expenses are deducted from the period’s expenses in the profit
and loss account
• Expenses in advance are current assets (CA) in the balance sheet.
Accounting entries:
Dr: prepaid expenses account
Cr Profit and Loss Account or respective Expenses account
Example 1
Rent of RWF 3,000,000 cash was paid on 1^stJanuary 1999 to cover a period to
31^stMarch 2000 (15 months). Record the adjusting entry for the prepaid rent
at the end of the financial year on 31^st December 1999.
Monthly rent payment = RWF 3,000,000/15= RWF 200,000
Since the financial year is 12 months and the rent had been paid for 15 months’
rent spills to the following financial year and is called prepaid rent.
Prepaid rent = 200,000 × 3 = RWF 600,000
Adjusting entry for the prepaid rent is as follows:
Dr: Prepaid Rent A/C 600,000
Cr: Rent 600,000
Prepaid rent of RWF 600,000 will appear in the balance sheet as an asset while
in the income statement, the rent expense will be RWF 2,400,000
i.e: RWF 3,000,000 – RWF 600,000
Example 2
During 2004, electricity is paid RWF 25,000 every 4 months. An excess of RWF
25,000 has been made as a prepayment, and thus it is paid and therefore carried
forward to the next year. Show the electricity account
b) Prepaid income/ income received in advance
Some businesses receive income before it is earned. For instance, it is a common
practice in Rwanda for landlords or land ladies to ask tenants to prepay or pay
rent in advance for 2 years, 3 years etc. Adjustments must be made for that
income which was received but services were not offered to the customer.
Unearned income is treated as a current liability in the balance sheet.
– The incomes received in advance are subtracted from the incomes for
the period in income statement
– In the balance sheet, income in advance is short term liability.
Accounting entries:
Dr: Profit and Loss A/C or Income received account
Cr: Income received in advance or respective income or gain A/C
Example
A tenant was made to pay rent of RWF 1,800,000 cash for the period of 1 ½
years.
Required:
– Journalize the entries when the rent was paid
– Journalize the adjusting entry at the end of the financial year (1st 12
months)
Answer:
i. Dr Cash A/C 1,800,000
Cr Unearned rent Income A/C 1,800,000
Monthly rent payment = RWF 1,800,000/18 =RWF 100,000
Rent earned for the year =RWF 100,000 × 12 = RWF 1,200,000
The following entry is then performed to recognize the income which was
unearned but has now been earned.
ii. Dr: Unearned rent income A/C 1,200,000
Cr: Earned rent income A/c 1,200,000
Application activity 1.3
1. Distinguish prepaid income from prepaid expenses
2. How do accrued expenses differ from accrued income?
3. Answer by yes or no:
• Accrued income is a current liability
• Accrued expense is a current asset
• Prepaid income is a current liability
• Prepaid expense is a current asset
• To adjust for accrued expenses, debit the amount outstanding to the
respective expenses account and credit it to the liability account.
4. Insurance of RWF 4,000,000 had been prepaid cash for 2 years. At
the end of the 1st year half of the prepaid insurance had expired or
got used up.
Required: Record the adjusting entry at the end of the first financial
year.
1.4. Depreciation for non-current assets
Learning Activity 1.4
Non-current assets may be characterized as assets that will generate
economic value for one or more fiscal periods into the future. For example,
consider a business that owns manufacturing equipment; an effective
management team will use that equipment to manufacture products for as
long as it is safe and practical to do so. The economic benefit materializes
in the future when those products are sold to generate revenue and then,
these assets decrease their original value progressively.
a) State the causes why a fixed asset decreases its value
b) How do they call this decrease in value of an asset?
1.4.1. Meaning of depreciation
Depreciation is the loss of value sustained by non-current asset over its lifetime
in the business. Depreciation of fixed assets is an accounting term that is
used to represent how much of an asset’s value has been used up over
time. Depreciation is therefore a calculated expense, which leads to a decrease
in earnings. Depreciation is an expense to the business even if it does not
necessarily involve cash outlay. It is prudent to charge depreciation annually to
the profit and loss account.
1.4.2. Causes of depreciation
Depreciation on non-current assets is caused by:
a) Wear and tear
b) Passage of time
c) Obsolescence
d) Physical factors
e) Economic factors
1.4.3. Reasons for providing depreciation
Once a decision is made to depreciate an asset, the amount of depreciation
written off is transferred to the profit and loss account as an operating expense
for the period. Depreciation is debited to the profit and loss account for the
period thus reducing current profits otherwise profit will be overstated.
Provision for depreciation is made for the following reasons:
a) It ensures that revenues recognized during a particular accounting
period bear the full cost of the permanent resources used up during
the same period,
b) It allocates the depreciable amount of an asset over its useful life,
ensuring that each accounting period bears part of the depreciation
expense,
c) It provides a meaningful base of valuation and disclosure of noncurrent
assets in financial statements,
d) It ensures that provision is made for the loss sustained by non-current
assets.
e) It ensures availability of tax benefit
1.4.4. Factors for depreciation
• Cost of the asset: purchase cost + transportation Cost (if any) +
installation costs (if any) + other costs that should be capitalized.
• Estimated useful/economic life of an asset: this refers to the period
during which an asset is expected to serve the business.
• Scrap/residual value/ estimated salvage: the estimated amount that
the owner of a fixed asset expects to receive at the time of disposing off
the asset.
1.4.5. Methods of charging depreciation
There are four (4) different methods of calculating the depreciation:
a) Straight line method
A fixed amount of depreciation is charged on the non-current asset, over its
useful life, from the date of its acquisition. The useful life is the estimated life
of the asset will remain in the business. Depreciation charge is calculated as a
fixed percentage on the cost of the asset each year, until it is completely written
off. This method is also known as the fixed instalment method.
Annual depreciation is calculated as under:

Or, depreciable value × depreciation rate
Illustration:
A motor vehicle was purchased from Japan at Cost, Insurance and Freight (CIF)
Mombasa at a value of RWF 5,000,000. It costs RWF 500,000 to transport the
vehicle from Mombasa to Kigali. Total taxes paid on the purchases transaction
of the vehicle amounted were to RWF 2,000,000. The vehicle is expected to be
used for 5 years, the end of which it will have a scrap value of RWF 1,500,000.
Required:
a) Calculate the depreciation expense for each year and expense for each
year and accumulated depreciation to year 5
b) Draw up the depreciation schedule
Solution
Total cost of the vehicle up to Kigali: RWF 5,000,000 + RWF 500,000 + RWF
2,000,000 = RWF 7,500,000
Scrap/salvage/residual value: RWF 1,500,000
Number of years of useful life: 5 years
Depreciation expenses are thus calculated:
Depreciation per annum could be expressed as a percentage of depreciable cost
as follows:
=1,500,000/6,000,000*100=25%
The depreciation schedule looks like:
b) Reducing balance method (Diminishing or declining balance
method)
It is also known as declining or diminishing balance method. An appropriate
percentage is applied to the net value of the non-current asset brought forward
to obtain the depreciation expense for the period.
Depreciation is therefore calculated as a constant proportion of the book
value (cost less depreciation) of the asset after deducting the total amount of
depreciation expense previously written off. As the depreciation is calculated
on the reduced balance of the asset brought forward, it declines the asset over
the years the asset is retained in the business, hence the name reducing balance
method.
A gradual decreasing amount of depreciation charge is recorded on the asset
over the years as a constant percentage is being applied to a decreasing book
value of the asset.
The depreciation rate (expressed in percentage) is found as under:
Illustration:
A machine was bought at a cost of RWF 9,500,000. Installing the machine before
use cost of RWF 500,000, scrap value is expected to be RWF 1,296,000 at the
end of estimated life of 4 years.
Required: calculate depreciation expense and accumulated depreciation at the
end of each year using normal reducing balance method.
c) Sum of years method or digital method
Under this method, the depreciation charge is calculated by applying a given
rate on the depreciable value until it is completely written off.
Example:
Let a fixed asset having a useful life estimated at five (5) years, its annual
depreciation rates are calculated as follows:
Sum of years: 1+2+3+4+5 = 15
• Rate of the period one: 5/15
• Rate of the period two: 4/15
• Rate of the period three:3/15
• Rate of the period four: 2/15
• Rate of the period five: 1/15
Illustration:
A fixed asset was bought at a cost of RWF 8,000,000, has estimated salvage
value of the RWF 800,000 and estimated useful life of four years.
Calculate the depreciation expense for each year using sum of years/digits
method.
Solution
d) Unit of production method
Unit of production depreciation, also called the activity method, calculates
depreciation based on the unit of production and ignores the passage of time
over the useful life of an asset; in other words, a unit of production depreciation
is directly proportional to production. It is mainly used in the manufacturing
sector.
The value of the same asset may be different due to its usage. For example, one
asset, X, produces ten units, and another asset, Y, produce 20 units. Both are the
same asset, but the depreciation of Y will be higher as compared to the X asset
because of more units produced.
Under this method:
Where the depreciation rate changes period by period depending on the annual
production and then, it is calculated as under:
Annual depreciation rate = annual production/total production
And the annual depreciation is found as under:
Depreciable value * annual depreciation
Illustration:
1. A plant costing RWF 110 million was purchased on April 1^st, 2020.
The salvage value was estimated to be RWF 10 million. The expected
production was 150 million units. The plant was used to produce
15 million units till the year ended December 31, 2020. Calculate the
depreciation on the plant for the year ended December 31^st, 2020.
Solution:
Depreciation = (15/150) × ( RWF 110 million – RWF 10 million) = RWF 10
million
2. A coal mine was purchased by X Corporation for RWF 16 million. It was
estimated that the mine has capacity to produce 200,000 tons of coal.
The company extracted 46,000 tons during its first year of operation.
Calculated the depreciation.
Solution:
Depreciation = (46,000/200,000) × RWF 16 million = RWF 3.68 million
Working hours method:
Depreciation is computed based on the number of hours the asset is expected
to run in its useful life.
Depreciation expense = (number of hours worked in the year/estimated
number of working hours in productive life) × (cost-salvage value).
Example
A machine costs RWF 400,000 with a salvage value of RWF 20,000. Its useful
life is six years. In the first year, 4000 hours, in the second year, 6,000 hours and
8,000 hours on the third year. The expected flow of the machine is 38000 hours
in six years. What is the depreciation at the end of the second year?
Solution
a) Solve for the depreciation per hour
Depreciation per hour = (FC - SV) / Total number of hours
Depreciation per hour = (400,000 - 20,000) / 38000
Depreciation per hour = 10
b) Solve for the depreciation at the end of 2^nd year
Depreciation = 10 (6,000)
Depreciation = RWF 60,000
Application activity 1.4
1. Define the depreciation
2. Give some four causes for depreciation
3. What are the depreciation methods?
4. A firm bought a machine for RWF 3,200,000. It is to be depreciated at
a rate of 25 per cent using the reducing balance method. What would
be the remaining book value after 2 years?
a) RWF 1,600,000
b) RWF 2,400,000
c) RWF 1,800,000
d) Some other figure
5. A machine costs RWF 400,000 with a salvage value of RWF 20,000.
Its useful life is six years. In the first year 4000 hours, in the second
year 6000 hours and 8000 hours on the third year. The expected flow
of the machine is 38000 hours in six years. What is the depreciation
at the end of the second year?
1.5. Disposal of non-current asset
Learning Activity 1.5
KEZA Company Ltd, a manufacturer, holds a machine purchased 4 years
ago. The machine with the useful life estimated at 10 years is depreciated
annually under reducing balance method. The machine is no longer
appropriate to company manufacturing and it is decided to replace the old
machine by a new one which is appropriate.
1. What will the company do with the old machine?
2. What will happen in the books of account?
Introduction
The usual way of disposing of a non-current asset is by sale though an
asset could be disposed by donation, trade-in, damage, etc. Whatever
approach is used the non-current asset account in respect of the asset sold
must be eliminated from the books to record the fact that such an asset no
longer forms part of the net worth of the business. Also, the accumulated
depreciation on the asset being disposed must be eliminated from the
provision for depreciation account.
Disposal or sale of fixed asset is not defined as a sale in accounting and should
not be credited to the sales account if the asset was bought with no intention
of selling to make a profit. Credits are made to sales account for the sale of
those goods that were bought with the prime intention of selling them and the
domain of the business is in sale of such goods or assets.
Sale or disposal of fixed assets is not routine but incidental. It should be noted
that it is only the gain on disposal of fixed assets that is credited to the profit
and loss account as miscellaneous income while the loss on disposal is debited
to the profit and loss account as an expense.
Gain/loss on disposal=sale/disposal amount-book value
N.B. If sale or disposal amount is greater than the book value a gain on disposal
results and if the sale or disposal proceeds’ are less than the book value, the nit
is a loss on disposal
Accounting entries for a disposal transaction
Recording a disposal transaction requires a series of entries as follows:
1. On a fixed asset disposal account and credit that account and debit that
account with the cost of fixed asset disposed off. A credit is made to the
fixed asset account for fulfilment of double entry.
Dr. Disposal a/c with the cost price xxx
Cr. Fixed asset a/c with the cost price xxx
It should be emphasized that the above entries are performed using the cost of
the asset disposed off.
2. Transfer the accumulated depreciation of the asset being disposed off to
the disposal account. The following entry is made:
Dr. Accumulated depreciation a/c
Cr. Disposal a/c
3. Record cash received on disposal a/c i.e. disposal proceeds
Dr. Cash/bank a/c with the cash received
Cr. Disposal a/c with the cash received
4. On closing the disposal accounts to the profit and loss account, the
balancing figure is either a gain or a loss on disposal.
a) Gain on disposal
Dr. Disposal a/c
Cr. Profit and loss a/c
b) Loss on disposal
Dr. Profit and loss a/c
Cr. Disposal a/c
Note: Alternatively gain or loss on disposal can be computed by deducting net
book value of the disposed asset from the proceeds received upon disposal.
Illustration:
Kelly Ltd bought a motor van on 1st January 2004 at RWF 180,000 estimated
to last for 5 years after which it will have a scrap value of RWF 30,000. The van
was sold on 31st December 2006 for RWF 100,000.
Required:
a) Motor van a/c
b) Provision for depreciation a/c
c) Disposal of Motor van a/c
Solution: a. Motor vehicle account

Note: There are 2 ways of considering when calculating provision for
depreciation for an asset bought or sold:
1. Full year’s depreciation is calculated on the assets purchased (on
acquisition) irrespective of the date of purchase during any accounting
period and no depreciation charged in the year of sale of the assets.
2. Depreciation is calculated on the basis of number of months that asset
was in ownership of the business but fractions of the months are usually
ignored.
Application activity 1.5
1. State different ways of disposing an asset.
2. Why must the asset account be closed off when the asset has been
sold?
3. In disposal account, the total debit records must be compared to
the total credit records. What is the meaning of the equality of total
debit records and credit records in the disposal account?
4. Brighton Ltd Company bought a motor van on 1st January 2002 at
RWF 180,000 estimated to last five years after which it will have
a scrap value of RWF 30,000. The van was sold on 31st December
2004 for RWF 350,000
Required:
a) Motor van account
b) Provision for depreciation on motor van account
c) Disposal of motor van account
1.6.Provision for discount allowed
Learning Activity 1.6
As discussed above in 1.2, in large businesses, most of transactions
are made on credit basis and the businesses, in order to stimulate their
customers to buy a bulk quantity or pay promptly, they decide either to
reduce monetary amount or a percentage of the normal selling price of a
product or service, or to reduce the total amount payable on the invoice
for an early payment discount on credit sales.
1. Why do these businesses allow this kind of discount?
2. What is the impact of this discount to the net profit?
1.6.1. Meaning of discount
A discount is the reduction of either the monetary amount or a percentage of
the normal selling price of a product or service. For example, a discount of RWF
10 may be offered from the list price of a product, or as a 10% discount from
the list price.
Discount results in the reduction of the selling price of the product, which
makes it more attractive for the customer. Reduction in price makes a
psychological impact on the customer which results in the purchase. The two
types of discount offered are trade discount and cash discount.
Discounts are reductions of the regular price of a product or service in order
to obtain or increase sales. These discounts also commonly referred to as
“sales” or markdowns are utilized in a wide range of industries by both
retailers and manufacturers.
A discount allowed is when the seller of goods or services grants a payment
discount to a buyer. This discount is frequently an early payment discount on
credit sales, but it can also be for other reasons, such as a discount for paying
cash up front, or for buying in high volume, or for buying during a promotion
period when goods or services are offered at a reduced price. It may also
apply to discounted purchases of specific goods that the seller is trying to
eliminate from the stock, perhaps to make way for new models.
A discount received is the reverse situation, where the buyer of goods or
services is granted a discount by the seller.
The examples just noted for a discount allowed also apply to a discount
received.
A discount may be given for a variety of reasons, including:
• Earlier payment than the normal credit terms offered to customers,
such as a 1% discount in exchange for paying within 10 days,
• A price breaks due to the purchase of an unusually large number of
units, such as a 5% discount if at least 100 units are ordered,
• A price break if a purchase is made by a specific date, such as the end
of the month.
• A price break to take goods damaged in transit, or which differ from
what the customer ordered.
1.6.2. Types of discount
The two types of discount offered are trade discount and cash discount :
Trade discount
Trade discount is referred to the discount that is offered by a seller to the
buyer of the product in the form of reduction in the price of the item.

Trade discounts are offered to increase the sales of the product and make the
customers feel that they are getting the best offer.
Cash discount
Cash discount is referred to the discount that is offered by the seller of a product
to the buyer at the time of payment for the purchase. This reduction is provided
at the value of the invoice. Cash discount is offered to make the customer or
the buyer pay for the product promptly, it helps the business in reducing or
avoiding the credit risk completely.
Such discounts are mostly used in business transactions, where a creditor will
be reducing the amount to be paid by the debtor, if the payment is processed
within the time limit. Proper records are maintained for all such discount
transactions both by the buyer and seller.
1.6.3. Differences between trade discount and cash discount
As we have discussed the meaning and example of the two types of discount,
now we will move forward to talk about the differences between trade discount
and cash discount :
Trade Discount is a subtraction from the list price of the goods, allowed by
the trader to the customer at an agreed rate. On the contrary, a Cash Discount
is a discount allowed to the customer, when he/she makes cash payment of the
goods purchased, within the stipulated time.
Trade discount is based on the amount of purchase or sales, i.e. the more the
sales the more will be the rate of discount, whereas cash discount is based on
time, i.e. the earlier the payment made by the debtor, the more will be the cash
discount allowed.
Trade Discount is always provided to the customer in fixed percentage, whereas
the percentage of cash discount may or may not be fixed.
Trade Discount is allowed to the customers because of business considerations
like trade practices, bulk orders, etc. Conversely, Cash Discount acts as an
incentive or motivation for stimulating payment within the specified time.
Trade Discount is provided to increase sales in bulk quantity, while Cash
Discount is given to the customers to encourage early and prompt payment.
Trade discount is allowed on both cash and credit transactions. In contrast, a
cash discount is allowed to the customers only on cash payments.
Trade Discount is not specifically shown in the company’s financial books, and
all the transactions are entered in the purchases or sales book in net amount
only.
In contrast, Cash Discount separately appears in the financial books, as an
expense in the Profit and Loss Account.
Trade Discount is deducted from the invoice value or catalog price of the goods.
As against, Cash Discount is deducted from the invoice value of goods
1.6.4. Provision for discount allowed
Provision for discount allowed is an additional allowance created to adjust the
debtor values in addition to losses experienced from the aforementioned cash
discount and provision made on doubtful debts.
Provision for discount is recorded in similar way as provision for bad and
doubtful debts. It is important to also note that debtors written off are not
allowed any discount. The amount set aside as a provision for bad and doubtful
debts is therefore exempted from any provision for discount. Then, when
calculating the amount of provision for discount, they first must deduct from
the debtor, total that amount already provided for bad and doubtful debts.
Application activity 1.6
1. Why do these businesses allow this discount to their customers?
2. What is the impact of this discount allowed to the customers on net
profit?
3. Answer by true or false:
a) Trade Discount is a subtraction from the list price of the goods,
allowed by the trader to the customer at an agreed rate. On the
contrary, a Cash Discount is a discount allowed to the customer,
when he/she makes cash payment of the goods purchased, within
the stipulated time
b) Cash discount is allowed on both cash and credit transactions. In
contrast, a trade discount is allowed to the customers only on cash
payments.
c) Trade Discount is provided to increase sales in bulk quantity,
while Cash Discount is given to the customers to encourage early
and prompt payment.
1.7. Adjusted trial balance
Learning Activity 1.7
The accounting cycle states that after journalizing all business transactions,
the ledger account is prepared in order to go on with the preparation of the
trial balance. The prepared trial balance is, sometimes inaccurate due to
some transactions that need adjustments. Once the adjustments are made,
a new trial balance is needed to present a true performance and picture of
the company.
1. Is it necessary to prepare the new trial balance after adjustments for
the company?
2. In which purpose the adjusted trial balance is prepared?
1.7.1.Meaning of the adjusted trial balance
An adjusted trial balance is a listing of a company accounts that will appear
in the financial statement after year-end adjusting entries have been made.
Preparing an adjusted trial balance is the fifth step in the accounting cycle and
is the last step before financial statements can be produced.
1.7.2. Preparation of the adjusted trial balance
There are two methods for the preparation:
a) The first method is similar to the preparation of an unadjusted trial
balance. The ledger accounts are adjusted for the end of periods and
the account balance is listed to prepare an adjusted trial balance. This
method takes a lot of time, but it is very systematic and usually used by
large companies where many adjustments need to be made,
b) The second method is quite fast and straightforward, but it is
not systematic and usually used by small companies where less
adjustments need to be done. In this adjustment, entries are directly
added to the unadjusted trial balance to convert it to an adjusted trial
balance.
Note: in each case, the format of the adjusted trial balance does not differ from
that of the unadjusted one. i.e any trial balance contains three columns as
follow:
a) a column of particulars
b) a column of debit balances
c) a column of credit balances
1.7.3. Purpose of the adjusted trial balance
• The primary purpose of the trial balance is a document that shows
the total amount of debit against the total amount of credit. It is not
considered as a financial statement because it is only used as an
internal document.
• Hence, it is beneficial for big companies to adjust many entries. It
also ensures that entries are done correctly; if balances entered into
financial statements are incorrect, the financial statements themselves
will be inaccurate, and the total must be equal.
• Any difference indicates some error in entries, ledger, or calculations.
So it gives a clear picture of the performance and financial position of
the company. It also helps to monitor the company’s performance as
the adjusted trial balance is prepared after considering all adjustments
of entries of different accounts.
1.7.4 Difference between trial balance and adjusted trial
balance
• The trial balance is prepared first, whereas adjusted trial balance
prepared post-trial balance. The trial balance excludes some entries
like accrued expenses, accrued income, prepaid income, prepaid
expenses and depreciation, whereas adjusted trial balance includes
the same.
• A trial balance is a list of closing balances of ledger account on a
particular point in time. In contrast, adjusted trial balance is a list of
general accounts and their balances at a point of time after the adjusting
entries have been posted.
Application activity 1.7
1. Is it necessary to prepare the new trial balance after adjustments
for the company?
2. In which purpose the adjusted trial balance is prepared?
3. Give some two aspects of how the adjusted trial balance differs from
the unadjusted trial balance
Skills Lab 1
Students in small groups prepare an adjusted trial balance from case
studies. Through a case study, students conduct a field visit to school
bursar office, check how the students pay the school fees, where they find
three different categories of payment: (i) some of them, at the end of the
term, only totally pay the due amount, (ii) other students do not pay in full
the due amount, (iii) a few number of students pay the total amount due
and a part of the coming term.
End unit assessment 1
1. Distinguish bad debts from doubtful debts
2. Answer by yes or no:
• Accrued income is a current liability
• Accrued expense is a current asset
• Prepaid income is a current liability
• Prepaid expense is a current asset
• To adjust for accrued expenses, debit the amount outstanding to
the respective expenses account and credit it to the liability account
3. In disposal account, the total debit records must be compared to
the total credit records. What is the meaning of the equality of total
debit records and credit records in the disposal account?
4. At the end of the fiscal year, account receivable has a balance of RWF
100,000 and allowance for doubtful debts account has a balance
of RWF 7,000. The expected net realizable value of the account
receivable is
a) RWF 7,000
b) RWF 93,000
c) RWF 100,000
d) RWF 107,000
5. A manufacturing company Ltd acquired a plant for RWF 15,500,000
on 31st August 2015 while its accounting period starts on 1st January
every year. The management administration decided to depreciate
the plant using declining balance method in 5 years at the end of
which, remaining value of the plant will be RWF 5,000,000
As an accountant of the organization, what is the schedule of the
depreciation you propose to administration manager?
Unit 2 FINANCIAL STATEMENTS FOR A SOLE TRADER AFTER ADJUSTMENTS
Key Unit competence: To be able to prepare financial statements of a
sole trader after adjustments.
Introductory activity
Joyce, a sole trader in Remera, she records her business transactions
daily. After preparing the trial balance for the year 2022, she found out
some additional information which caused the trial balance to be adjusted
following the accounting cycle. The step of accounting cycle after adjusted
trial balance is to prepare financial statements.
Required:
a) As a professional accountant, advice Joyce (sole trader) on the
main financial statements that can be prepared for the proper
books of accounts of her business.
b) Show the main elements of each financial statement to be prepared
by Joyce.
2.1. Income statement/ Statement of Profit or Loss after
adjustments
Learning Activity 2.1
ABC business has been performing well almost for five years since 2016
and currently it is experiencing a drop/loss in their profits according to
the financial performance for the year 2021. Apart from this drop, after
deep checking, some additional information needs adjustments. Owners
are complaining about the current performance of their business. As an
accountant of ABC Business, explain to the owners about the performance
of their business.
a) The loss for the period can be identified using which component of
financial statement?
b) Show the main parts/components of statement of profit or Loss.
As seen in Senior 4 unit 10, at the end of year, every business must ascertain its
net profit/loss. This is done in two stages.
1. Finding out the Gross Profit / Gross Loss which is got with Trading
Account
2. Finding out the Net Profit / Loss which is got with Profit or Loss Account
2..1.1.Determination of Gross Profit /Gross Loss after adjustments
The entries/items that will appear in the Trading Account to ascertain the Gross
Profit/Loss will be: (some items will be debited while other will be credited)
i. Items to be debited
1. Opening stock
It speaks of the inventory that was on hand at the start of the prior accounting
year. Opening stock is the quantity of an item present at the start of a new period
for keeping inventory. It contains the worth of the goods that the company
deals in and serves as the opening stock for the current accounting year.
2. Purchases
It refers to the value of goods (in which the concern deals) which are purchased
either on cash or on credit for the purpose of resale. The balance of purchases
account, appearing in the trial balance, reflects the total purchases made during
the accounting period. While dealing with purchases, we must bear in mind the
following aspects:
a) Purchase of capital asset should not be added with the purchases. If it
is already included in purchases, it should be deducted immediately.
b) If goods are purchased for personal consumption and they are added
with the purchases, they should be excluded. These types of purchases
should be treated as drawings.
c) If some of goods purchased are still in transit at the year-end, it is
better to debit stock-in-transit Account and credit Cash or Supplier’s
Account.
d) If the amounts of purchases include goods received on consignment, on
approval or on hire purchase, these should be excluded from purchases.
e) Cost of goods sent on consignment must be deducted from the
purchases in case of trading concern.
3. Sales return/ Return Inwards
In the books of account, Returns Inwards Account or Sales Returns Account
is debited and buyer’s account is credited. It appears on the debit side of Trial
Balance. We can show the sales returns in Trading Account in two ways. It may
be shown by way of deduction from sales in the Trading Account. An alternative
way to show the sales returns is in the debit side of the Trading Account.
4. Direct expenses/carriage inwards
These types of expenses are directly incurred in connection with purchases,
procurement or production of goods. These expenses are directly related to the
process of production. They also include expenses that bring the goods up to
the point of sale.
ii. Items to be credited
1. Sales
It refers to the sale of goods in which the business deals and includes both
cash and credit sales. It does not include sale of old, obsolete or depreciated
assets, which were acquired for utilization in business. However, goods sent to
customers on approval basis, free samples and sales tax, if any, included in the
sales figure should be excluded.
2. Purchases returns
It may come about that due to some reasons: the goods are sent back to the
supplier. In that case, the supplier is debited in the books of accounts and
purchases returns or returns outwards are credited. It appears on credit side in
the trial balance. There are two ways of showing the purchases returns in the
income statement. It may be shown by way of deduction from purchases in the
income statement. An alternative way is to show the purchases returns in the
credit side of the income statement.
3. Closing stock
It refers to the value of goods lying unsold at the end of any accounting year.
This stock at the end is called closing stock and is valued at either cost or market
price, which is lower. The trial balance generally does not include closing stock.
Therefore, the following entry is recorded to incorporate the effect of closing
stock in the income statement;
Dr. Closing Stock A/C
Cr. To Trading A/C
However, if closing stock forms a part of Trial Balance, it will not be transferred
to Income Statement but taken only to the statement of Financial Position. In
case of the goods that have been dispatched to customers on approval basis,
such goods should be included in the value of closing stock.
Ascertain the Gross Profit or Loss
After recording the above items in the respective sides of the income
statement, the balance is calculated to ascertain Gross Profit or Gross Loss.
As seen in Senior 4, if the total of credit side is more than that of the debit side,
the excess represents Gross Profit. Conversely, if the total debit side is more
than that of the credit side, the excess represents Gross Loss. Remember that
the Gross profit is ascertained using the Trading Account.
TRADING ACCOUNT (HORIZONTAL FORMAT)
Name of the company (date/month/year)
Or
TRADING ACCOUNT (HORIZONTAL FORMAT)
Name of the company (date/month/year)

TRADING ACCOUNT (VERTICAL FORMAT)

Illustration1
From the following details draw up the trading account of Mr Kamanda for the
year ended 31^st December 2022, which was his first year in business.

Mr Kamanda
Trading Account for the year ended 31 December 2022

Mr. Kamanda
Trading Account for the year ended 31 December 2022

Illustration 2
The following details for the year ended 31st March 2022 are available for
Bosco’s business. Draw up the Trading account of Bosco for that year.

Bosco
Trading Account for the year ended 31 March 2022
Determination of net profit (or Loss) after adjustments
After ascertaining the gross profit, the subsequent step is to ascertain net profit
or net loss during an accounting period. The net income/profit is measured by
matching revenues and expenses. Net income is the difference between total
revenues and total expenses.
a) Items to be debited to the Income Statement
i. Management expenses
These are the expenses incurred for carrying out the day-to-day administration
of a business. Expenses under this head include office salaries, office rent and
lighting, printing and stationery, telegrams, telephone charges etc.
ii. Selling and distribution expenses
These expenses are incurred for selling and distribution of products and
services, as the name indicates, they comprise of commissions and salaries of
salesmen, advertising expenses, packaging, bad debts etc.
iii. Maintenance Expenses
These expenses are incurred for maintaining the fixed assets of the
administrative offices in a good condition. They include expenses towards
repairs and renewals.
iv. Financial expenses
These expenses are incurred for arranging finances necessary for running the
business. These include interest on loans, discount on bills, brokerage and legal
expenses for raising loans etc.
v. Abnormal losses
Some abnormal losses may arise during the accounting period. All types of
abnormal losses are treated as unusual expenses and debited to Profit and Loss
Account. Examples are stock lost by fire but not covered by insurance, loss on
sale of machinery, cash defalcation etc.
vi. Wages and salaries earned by the worker-whether paid or not
N.B: To ascertain the amount of expenses to be debited to the income statement,
four types of events are essentially considered and then cash payment is made
in connection with these events they are as under:
Expenses incurred and paid out in that year: those will be debited to the
income statement.
Expenses incurred but not paid out, partly or fully, during the current year
(outstanding expenses): on the date of the final accounts, those are in form of
both the expenses and a liability and they exist without having been recorded
in the books of accounts. For recording it, the following entry is to be passed:
• Dr. Expenses A/C Dr. (will be shown in the income statement account)
• Cr. Outstanding Expenses A/C (will appear in the liabilities side of
statement of Financial Position)
• Expenses paid for during the current year, but not incurred as
yet, partly or fully (prepaid expenses): these are assets and will be
shown in the Statement of Financial Position.
• Expenses of the current year, likely to arise in subsequent period:
in such case, we make a provision for the anticipated loss and a charge
is created against the profit for the current period. This provision is
shown as either a liability or contingent asset, i.e. it appears in the
statement of Financial Position as a deduction from some other assets.
The best example of this anticipated expense is Provision for Bad Debt.
a) Items to be credited to the Income Statement
i. Other incomes
Sometimes a business might generate some profits, which is not due to the sale
of its goods or services because the business may have some other source of
financial income. The examples are discount or commission received.
ii. Non-trading Income
The business may have various transactions with the bank. At the end of the
year, the business may earn some amount of interest, which will find a place in
the profit & Loss Account as non-trading income. The business may have some
investment outside the business in the form of shares, debentures or units. All
sorts of gains obtained from such kinds of investments are considered as nontrading
income and are treated accordingly.
iii. Abnormal gains
There may be capital gains arising during the course of the year, e.g. profit
arising out of sale of a fixed asset. The profit is shown as a separate income
on the credit side of the Profit & Loss Account. We must remember that all
incomes from the abnormal gains or other incomes should be credited to the
Profit &Loss Account if they arise of accrues during the period. Similarly, income
received in advance should be deducted from the income.
Ascertaining the net Profit &Loss
Once the respective accounts are transferred from trial balance to income
statement, gross profit/ loss ascertained and all adjustments are taken care of,
the income statement will now be balanced. The totals of incomes and expenses
are computed and the difference between these totals is either a net profit or
net loss. If the total of expenses exceeds the total of incomes, there is a net Loss,
whereas when the total of incomes exceeds the total of expenses, there is a net
profit. Net profit/ loss is the last item to be recorded in income statement.
When the Profit and loss account shows a net profit, we pass the following
entry:
Dr. Profit &Loss A/C
Cr. Net Profit A/C
If the Profit and Loss Account shows a net loss, the entry will be reserved.
Format of income Statement
The Formats of Statement of Profit or Loss was discussed in S4 Unit 10
Illustration 1
The following trial balance was extracted from the books of Mugabe, a sole
trader as at 31^st August 2022.
Additional information
1. Inventory as at 31^st August 2022 was valued at FRW 3,690,000
2. Allowance for bad debts is to be adjusted at 10 % of debts
3. Goods which costed FRW 300,000 had erroneously been invoiced to a
customer for FRW 400,000 and had been accounted for in sales
4. Electricity accrued as at 31^stAugust 2022 was FRW 130,000 and
prepaid rates amounted to FRW 210,000 as at 31st August 2022
5. Stock of stationery as at 31^st August 2021 was FRW 230,000
6. Depreciation is to be provided on pro rata basis as follows:
• Motor vehicles 20% on reducing balance method
• Plant and machinery 25% on reducing balance
7. A motor vehicle was sold on credit on 1^stDecember 2021 for FRW
458,000. The motor vehicle had been bought on 1^st June 2020 for FRW
1,000,000 the sale had not been recorded to the ledger., proportionate
depreciation is applicable until disposal date
8. During the year, Mugabe took goods worth FRW 350,000 from the
business for his own use.

Required: Prepare Income Statement/ Statement of Profit or Loss for the
year ended 31^stAugust 2022
Solution
Workings:
1. Provision for bad debts = 7,300,000*10% = 730,000
Increase in previous for bad debts = 730,000 - 530,000 = 200,000
2. Motor vehicle depreciation:
1^st period of 3 months 20%*1,000,000*3/12 50,000
2^nd period full year 20%*(1,000,000 - 50,000) 190,000
3^rd period 20% (1,000,000-50,000 - 190,000) *3/12 38,000
278,000
NBV = 1,000,000 – 278,000 = 722,000
Mugabe Income statement/ statement of Profit or Loss for the year ended
31^st August 2022

Illustration 2
The following trial balance was extracted from the books of MIRIMO, a sole
trader for the year ended 31st December 2020
FRW ‘000

Additional information:
1. Stock as at 31st December 2020 was valued at FRW 1,760,000
2. Depreciation on fixtures and fittings and motor vehicle is to be provided
at the rate of 5% and 10 % per annum respectively
3. Rates prepaid as at 31^stDecember 2020 amounted to FRW 25,600,000
4. Unexpired insurance as at 31^st December 2020 is to be made at FRW 4
Million.
5. Additional FRW 1,758,240 Discount received is to be made

Required:
Prepare Statement of Profit or Loss for the year ended 31^stDecember 2020
Solution
MIRIMO
Statement of Profit or Loss for the year ended 31December 2020

Illustration 3
The following balances were extracted from ENOCK’s accounting books at the
end of the financial year on 30^th June 2020.
Additional information
a) Stock of goods in trade was valued at FRW 1,800,000 at the end of the
year
b) FRW 300,000 of the carriage relates to purchases and the balance
relates to sales
c) Enock receives a commission of 1% of gross purchases. The outstanding
balance of the commission for the year ended is to be received on 5^th
day of the following financial year.
d) The provision for bad debts is to be reduced by 10% of the trade
debtor’s figure
e) Rent was paid on the first day of the financial year to cover a period of
18 months.
f) The loan from cousin was acquired on 1^stJanuary (within the financial
year), it is at interest rate of 20% per annum. Interest due for the period
is outstanding.
g) Vehicles are to be depreciated by 20% per annum on reducing balance
method and furniture and fittings by 10% per annum on cost.
h) Prepaid insurance of FRW 1,000,000 expired on 30th June 2020 (the
last day of the financial year).
Required:
a) a) Journal entry to record adjusting information c-h
b) b) Statement of Profit or Loss (Income Statement) for the year ended
30^th June 2020.
Solution:
Enock
Journal entries to record Adjusting information on 30/6/2020

Enock
Statement of Profit or Loss for the year ended 30/6/2020

Income statement/ Statement of Profit or Loss in service firms
The income statement/ Statement of Profit or Loss for service sector firms e.g.
banks; insurance companies, etc are simple to draw up as it does not contain
the trading Account. Their formats are shown as follows:
Statement of Profit or Loss

Illustration 4
Peter, a consultant in accountancy services prepared the following trial balance
for his Door way consultancy for the financial year ended 31/8/2019

Information for adjustments at the end of the year
1. Consultancy fees of FRW 2,000,000 which were unearned were earned
on 31/8/2019. The trial balance does not reflect this information.
2. Customers who were provided with services during the year ended
to June 2019 amounting to FRW 3,500,000 were not yet invoiced by
31/8/2019.
3. Hand count of office supplies on 31/8/2019 revealed that office supplies
worth FRW 500,000 remained in inventory
4. Depreciate Furniture and fittings and motor vehicles by 10% on cost
5. Loan interest for one year accrued
6. Electricity bills amounting to FRW 1,500,000 remained outstanding on
31/8/2019
7. A provision of corporation tax to be paid at the rate of 30% of pre-tax net
profit should be made.
Required:
Statement of Profit or Loss of Peter’s Consultancy at the end of the Financial
Year on 31/8/2019
Solution
Door way Consultancy Income Statement/ Statement of Profit or Loss for
the period ended 31/8/2019

Application activity 2.1
Mr Amandi has been trading for some years as Wine merchant. The
following list of balances has been extracted from his ledger as at 30 April
2020, the end of his financial year.
Additional information:
a) Stock at the close of business was valued at FRW 17,750.
b) Insurance has been prepaid by FRW 1,120
c) Heating and lighting is accrued by FRW 1,360
d) Rates have been prepaid by FRW 5,435
e) The provision for bad debts is to be adjusted so that it is 3% of trade
debtors
REQUIRED: Prepare Mr Amandi’s trading, profit and Loss account for the year
ended 30 April 2020.
2.2. Balance sheet (statement of Financial position) after
adjustments
Learning Activity 2.2
A local business located in Nyabihu District owned by Annette collects and
distributes Irish potatoes. At the end of 2022, while closing the financial
period, Annette was not aware on the statement to be prepared. You are
asked
1. To advise her on which statement to be prepared in order to know
the financial position of her business.
Learning Activity 2.2
A Statement of Financial Position is a summary of the financial balances of a sole
proprietorship, business partnership or a company. It is a statement that helps
us to establish the financial position of a business enterprise on a particular
date, i.e. on a date when financial statements or final accounts are prepared or
books of accounts are closed.
In facts, this statement treats the balances of all those ledger accounts that have
not yet been squared up. These accounts relate to assets owned, expenses due
but not paid, incomes accrued but not received or certain receipts which are
not due or accrued. In other words, it deals with all those real and personal
accounts which have not been accounted for in trading or Profit & Loss accounts.
Therefore, an important feature of a statement of financial position is to show
the exact financial picture of a business concern on a particular date.
2.2.1. Difference between trial balance and Statement of Financial
Position

2.2.2. Preparation and presentation of statement of Financial
position
The process of preparation and presentation of statement of financial position
involves two steps:
• Grouping
• Marshalling
Grouping
In the first step, the different items to be shown as assets and liabilities in the
Statement of Financial Position are grouped appropriately. For this purpose,
items of similar nature are grouped under one head so that the Balance Sheet
could convey an honest and true message to its users. For example, stock,
debtors, bills receivables, bank, cash in hand etc. are grouped under the
heading current Assets and land and Building, plant and Machinery, Furniture
and fittings, tools and equipment under Non-Current Assets. Similarly, sundry
creditors for goods must be shown separately and distinguished from money
owing, other than due to credit sales of goods.
Marshalling
The second step involves marshalling of assets and liabilities. This involves
a sequential arrangement of all the assets and liabilities in the statement of
Financial Position. There are two methods of presentation:
• The order of liquidity
• The order of permanence
Under liquidity order, assets are shown on the basis of liquidity or reliability.
These are rearranged in an order of most liquid, more liquid, liquid, least liquid
and not liquid (fixed) assets. Similarly, liabilities are arranged in the order in
which they are to be paid or discharged.
Under order of permanence, the assets are arranged on the basis of their useful
life. The assets predicted to be most fruitful for the business transaction for
the longest duration will be shown first. In other words, this method puts the
first method in the reverse gear. Similarly, in case of liabilities, after capital,
the liabilities are arranged as long term, medium term, short term and current
liabilities. This is the commonly used method.
Classification of assets
1. Non-current assets
2. Intangible assets
3. Current assets
4. Fictitious assets
5. Wasting assets
6. Contingent assets
i. Non-current assets
These are those assets, which are acquired for the purpose of producing Goods
or rendering services. These are not held for resale in the normal course of
business. Fixed assets are used for the purpose of earning revenue and hence
these are held for a longer duration. Investment in these assets is known as
‘Sunk Cost”. All fixed assets are tangible by nature.
ii. Intangible assets
Intangible assets are those capital assets, which do not have any physical
existence. Although these assets cannot be seen or touched, they are long lasting
and prove to be profitable to owner by virtue of the right conferred upon them
by mere possession.
They also help the owner to generate income. Goodwill, trademarks, copyrights
and patents are the example of intangible assets.
iii. Current assets
Current assets include cash and other assets, which are converted or realized
into cash within a normal operating cycle or say, within a year.
Current assets are also known as Floating Assets or Circulating Assets.
iv. Liquid or quick assets
These are current assets that can be converted into cash at a very short notice
or immediately, without incurring much loss or exposure to high risk. Quick
assets can be worked out by deducting Stock (raw materials, work-in-progress
or finished goods) and prepaid expenses out of total current assets.
v. Fictitious assets
These are the non-existent worthless items which represent unwritten-off
losses or costs incurred in the past, which cannot be recovered in future or
realized in cash. Examples of such assets are preliminary expenses (formation
expenses), advertisement expense, underwriting commission, discount on
issue of shares and debentures, Loss on issue of debentures and debit balance
of income statement account. These fictitious assets are written off or wiped
out by debiting them to income statement account.
vi. Wasting assets
An asset that has a limited life and therefore windless in value over time it is
called wasting asset. This type of asset has a limited useful life by nature and
depletes over a limited duration. These assets become worthless once their
utility is over or exhausts. During the life of productive usage, assets of this type
produce revenue, but eventually reach a state where the worth of the assets
begins to diminish. Such assets are natural resources like timber and coal, oil,
mineral deposits etc.
vii. Contingent assets
Contingent assets are probable assets, which may or may not become assets,
as that depends upon occurrence or non-occurrence of a specified event or
performance or non-performance of a specified act. For example, a suit is
pending in the court of law against ownership title or a disputed property. If
the business does not win the lawsuit, it will not have ownership rights of the
property; it will be of no use to it. However, if it wins, the contingent asset will
become the asset of the concern. Such assets are shown by means of footnotes
and hence do not form part of assets shown in the Balance Sheet.
Besides this, hire- purchase contract, uncalled share capital etc… are other
examples of contingent assets.
Classification of liabilities
i. Non-current liabilities/long-term liabilities
ii. Current liabilities
iii. Contingent liabilities:
Contingent liability is an actual liability but anticipated (probable) liability
which may or may not become payable. It depends upon the occurrence of certain
events or performance of certain acts. If a parent guarantees a daughter’s first
car loan, the parent has a contingent liability. Contingent liabilities are shown
as footnotes under the statement of financial position.
Illustration1. From illustration 2 in 2.1., prepare Mirimo’s Statement of
Financial Position
Solution
MIRIMO
Statement of Financial Position

2.2.3. Prepare the Statement of Financial Position showing
working capital and capital employed
Types of capital
Different types of capital can be calculated as below:
i. Capital net worth/owned = total assets + total liabilities. The capital net
worth is also referred to as net worth or net assets
ii. Working capital = current assets – current liabilities
Working capital = capital employed –fixed assets
iii. Capital employed = total fixed assets + working capital or
Capital employed = owner’s equity + Long term liabilities
Illustration 2
Prepare the Statement of Financial Position of Enock for the period ended
31/6/2020 from illustration 3 in 2.1.
Solution
ENOCK
Statement of Financial Position as at 31/6/ 2020

Application activity 2.2
1. At 31st March 2022 Shalon was owed FRW 47,744,000 by her
customers. At the same date her allowance for receivables was
FRW 3,500,000. How should these balances be reported on Shalon’s
Statement of Financial position?
i. FRW 44,244,000 as a current asset
ii. FRW 3,500,000 as a current asset and FRW 47,744 as a current
liability
iii. FRW 47,7444 as a current asset and FRW 3,500,000 as a current
liability
iv. FRW 51,244,000 as a current asset
2. From the illustration 4 in 2.1. Prepare door Consultancy Balance
Sheet as at 31/8/2019
2.3. Cash-Flow Statement (Statement of Cash-Flow)
Learning Activity 2.3
Visit your neighboring company and ask the accountant to show you the
school financial Statements.
a) Check on them differently and find which statement that shows
the movement of cash.
b) You will find different parts and elements in the statement of cash
flow. How do we call the cash that are coming in business, cash that
are going out the business and their difference?
Learning Activity 2.3
In senior four, the direct method of cash flow statement was discussed on, that
is why only indirect method will be seen.
Rules of preparing statement of cash flow in indirect method
Although the Financial Accounting Standard Board favors the direct method for
preparing the statement of cash flows, most companies do not use the direct
method opting instead for the indirect method because it is easier to prepare
and provides less detailed information to competitors.
Under the indirect method, the cash flow statement begins with net income
on an accrual basis with assumption that net income equals cash and
subsequently adds and subtracts non-cash items to reconcile to actual cash
flows from operations. An increase in an asset account is subtracted for net
income, and an increase in a liability account is added back to net income.
The following rules can be followed to calculate Cash Flows from Operating
Activities when given only a two-year comparative balance sheet and the
Net Income figure.
– Decrease in non-cash current assets are added to net income
– Increase in non-cash current asset are subtracted from net income
– Increase in current liabilities are added to net income
– Decrease in current liabilities are subtracted from net income
– Expenses with no cash outflows are added back to net income
(depreciation and/or amortization expense are the only operating
items that have no effect on cash flows in the period)
– Revenues with no cash inflows are subtracted from net income
– Non-operating losses are added back to net income
– Non-operating gains are subtracted from net income
It is important to understand why certain items are added and others
subtracted. Note the following points:
a) Depreciation is not a cash expense, but is deducted in arriving at
profit. It makes sense, therefore, to eliminate it by adding it back.
b) By the same logic, a loss on disposal of a non-current asset (arising
through under provision of depreciation) needs to be added back
and a profit deducted.
c) An increase in inventories means less cash you have spent cash on
buying inventory.
d) An increase in receivables means the company’s debtors have not
paid as much and therefore there is less cash.
e) If we payoff payables, causing the figure to increase, again we have
less cash.
Rules (Financing Activities)
Finding the Cash Flows from Financing Activities is much more intuitive and
needs little explanation. Generally, the things to account for are financing
activities:
• Include as outflows, reductions of long term note payable (as would
represent the cash repayment of debt on the balance sheet)
• Or as inflows, the issuance of new notes payable
• Include as outflows, all dividends paid by the entity to outside parties
• Or as inflows, dividend payments received from outside parties
• Include as outflows, the purchase of notes stocks or bonds
• Or as inflows, the receipt of payments on such financing vehicles.
• In the case of more advanced accounting situations, such as when
dealing with subsidiaries, the accountant must:
• Exclude intra-company dividend payments.
• Exclude intra-company bond interest
Preparation of Statement of Financial Statement using indirect method
Format of cashflow statement (indirect method)

N.B Further details on components of cash flow (cash flow from operating
activities, cash flow from investing activities and financing activities) are
discussed in Senior 4 unit 10.
Illustration 1
The following are balance sheets of Neema private ltd for the years ended 31st
Dec 2003 and 2004 respectively
Balance sheet/ statement of financial position as at 31st Dec 2003

Neema private ltd
Balance sheet/ Statement of Financial Position as at 31st Dec 2004

i. A piece of land was sold in July 2004 for FRW 610,000 and investment in
October 2004 for FRW 175,000
ii. Some motor vehicle was bought in 2004 for FRW 520,000. No furniture
was bought or sold during the year
iii. Profit before tax for the year ended on31 December 2004 was FRW
200,000
Required: Statement of Cash Flow to explain the change in cash
Solution
Adjustments:
a) Gain on disposal (land) = 610,000-(1,500,000-1,200,000) = 610,000-
300,000=310,000
b) Loss on disposal (investment) = 200,000 - 175,000 = 25,000
c) Depreciation on furniture= 100,000-40,000=60,000
d) Depreciation on Motor Vehicle= 520,000-(880,000-550,000) =190,000
Neema private ltd
Statement cash flow (indirect method)

Dells Company started its business on 1st July 2014 and it is operating its
business activities nearby your school. At the 30 June, its accountant presented
the business’s Balance Sheet for two years (2014 and 2015) which follows:

Required: Prepare Dells Statement of Cash Flow for the year ended 30 June
2015 using indirect method.

Answer

Application activity 2.3

1. Outline the uses of statement of cash flow to the visited business.
2. Maria is a sole trader who prepares his accounts annually to 30 April. His
summarized balance sheets for the last two years are shown:
Balance sheets as at 30 April

You are required to prepare the statement of Cash Flow as at 30 April 2015
Skills Lab
After visiting any neighboring sole proprietorship business and checking
its financial statements,
1. Outline different Financial Statements prepared by a sole trader
2. Discuss about the use of financial statements to the visited business
3. As an accountant, advice the sole traders on the impact of negligence
in the preparation of Financial Statements.
End unit assessment 2
After visiting any neighboring sole proprietorship business and checking
its financial statements,
1. Outline different Financial Statements prepared by a sole trader
2. Discuss about the use of financial statements to the visited business
3. As an accountant, advice the sole traders on the impact of negligence
in the preparation of Financial Statements.
End unit assessment 2
1. Explain three reasons why the amount of cash flow of a business
entity might differ from the profit generated by the business entity
during the same period.
2. The book keeper of Mella Enterprise Ltd prepared the following trial
balance for the financial year ended31st march 2020
Unit 3 PARTNERSHIP ACCOUNTS
Key unit competence: To be able to prepare financial statements for a
partnership business
Introductory activity
Observe the picture above and answer the following questions:
1. What do you see on this image?
2. Among forms of business, which one is formed by partners?
3. What do you understand by partnership agreement?
4. Which accounts to be prepared in partnership
3.1. Introduction to partnership
Learning Activity 3.1
Read the following case study and answer the given questions.
A partnership is a business owned by two or more people. In most forms
of partnerships, each partner has unlimited liability for the debts incurred
by the business. The three most prevalent types of for-profit partnerships
are: general partnerships, limited partnerships, and limited liability
partnerships. Partnerships are arrangements between individuals to carry
on business in common with a view to profit. A partnership, however,
involves obligations to others, and so a partnership is usually governed
by a partnership agreement. Unless it is a limited liability partnership
(LLP), partners will be fully liable for debts and liabilities, for example if
the partnership issued. A partnership is a group of individuals who are
trading together with the intention of making a profit. Partnerships are
often created as a sole trader’s business expands and more capital and
expertise are needed within the business. Typical partnerships are those of
accountants, solicitors and dentists and usually comprise between about 2
and 20 partners. As partnerships tend to be larger than sole traders, there
will usually be more employees and a greater likelihood of a bookkeeper
being employed to maintain the accounting records. Each of the partners
will contribute capital to the business and will normally take part in the
business activities. The profits of the business will be shared between the
partners, and this is normally done by setting up a partnership agreement
where the financial rights of each partner are set out. Just as with sole
traders, the partners will withdraw part of the profits that are due to them
in the form of drawings from the business although, in some cases, partners
may also be paid a salary by the business.
After reading this case study, answer the following questions
1. A partnership is a group of individuals who are ……..….. together
with the intention of making profit.
a) Business
b) Arrangements
c) Involves
d) Trading
2. What are the most types of for- profit partnership?
3. What are the advantages and disadvantages of partnership?
3.1.1. Meaning of partnership business
Partnership may be defined as: a relation between persons carrying on a
business in common with a view of profit. A partnership is owned by two
or more people but not more than twenty persons except in certain cases.
In most forms of partnerships, each partner has unlimited liability for the
debts incurred by the business. The three most prevalent types of for-profit
partnerships are:
• General partnerships
• Limited liabilities partnerships
• Limited partnerships. E.g: practicing solicitors, professional
accountants and members of the stock exchange where this figure
may be exceeded.

Types of partners:
1. According to participation in the running of the business
a) Active partner: This actively participates in the day to day running
of the business.
b) Dormant/sleeping partner: Does not actively participate in the
day to day running of the business
2. According to age
a) Major partner: This is a partner who is above the maturity age
b) Minor partner: This partner has not attained maturity age and
therefore has limited liability.
3. According to liability
a) Limited partner: This partner has limited liability. This means that
his/her liability towards the debts of the partnership is limited to
his/her capital contributions. Minor partners have limited liability.
b) Unlimited partner: This partner is liable for all the debts of the
partnership to the extent of selling personal property to pay the
debts of the partnership.
4. According to capital contributions
a) Quasi partner: This does not contribute capital, but allows his/her
name to be used by the partnership.
b) General partner: This is a partner because of capital contributions.
Advantages and disadvantages of partnerships
Advantages of partnership:
• More capital is raised from bigger membership
• Better skills from a variety of members
• Better decisions can be made compared to sole proprietors
• Partnerships are easy to form compared to limited companies
• Risks are minimal as they are spread across many members.
• Partnerships can easily access credit from financial institutions
since lenders find it easier to deal with a group of people than one
individual
Disadvantages of partnerships:
• Profits are reduced as they are shared among many members
• Partners have unlimited liability_ they have equal sharing when it
comes to the liabilities of a partnership
• Delays in decision making compared to sole proprietors
• They are not permanent in nature because the death or retirement
of a partner may lead to its dissolution
Business usually depends on active partners and is likely to be affected in
case they die
Application activity 3.1
Read carefully and discuss on the following questions:
a) What are the components of a partnership deed?
b) What happens if no partnership deed exists?
c) State and explain the types of goodwill.
3.1.2. Partnership agreement or deed
This is a written agreement among partners regarding the terms and
conditions of the partnership business.
Components of partnership agreement or deed
A partnership deed usually contains the following;
– Capital to be contributed by each member.
– Names of partners
– Profit and loss sharing ratios
– Salaries paid to partners
– Partners drawing rights and interest on drawings
– Preparation and auditing of books of accounts
– Duties, powers and liabilities of each member.
– Basis of valuation of good will
– Methods of dealing with the death, retirement and insolvency of
partners
– Methods of admission of a new partner
– Method of settling the accounts in case of dissolution.
If no partnership deed that exists
– Profits and losses are shared equally
– There will be no interest on capital
– There will be no interest on drawings
– No payment of salaries to partners
– If a partner gives a loan to the partnership business, he is entitled to
5% interest per annum.
Accounting for goodwill in partnership accounts
Goodwill is an intangible asset arising from the business’s ability to earn more
profits as compared to other firms in the same or similar trade. Goodwill arises
when the value of the business as a going concern is greater than the value
of its separate tangible assets. It is the excess of purchase consideration of a
business sold as a going concern above the fair market value of the business
assets.
Goodwill arises in the business because of the following reasons,
– The business may have enjoyed some form of monopoly either
nationally or locally for example there may not be sufficient trade to
out compete some Engineering firms, which have been managed or
run for a long period.
– A new business may continue to trade under the same name as that
of the original firm. The fact that the firm was well known could mean
that new customers and old customers are attracted for this reason.
– The value of labor force including management skills other than that
of the retiring proprietor may be carried forward. Skilled management
is an asset to the business.
– The possession of patent rights and trademarks may account for
goodwill. These may have cost the original owner little or nothing
and they could be shown in the balance sheet. They are normally
unsellable, unless the business is sold as a going concern.
– The location for the Business premises may be more valuable if the
business does not change. Where the business is strategically located
this is an advantage.
– The cost of research and development, which might have brought
about cheaper manufacturing methods or cheaper products, may be
charged to the current buyer. The amount that the buyer is prepared
to pay will depend on his view of the future profits which will accrue
to the factors mentioned above.
Types of goodwill:
In accounting, goodwill is classified into inherent goodwill, purchased
goodwill and negative goodwill.
1. Purchased goodwill arises from a defined financial transaction and
hence its recorded in the financial statement like any other assets in
accordance with international financial reporting standard 3 IFRS3-
BUSINESS COMBINATION.IFRS3 Provides for immediate write-off of
goodwill after acquisition or amortization for a period not exceeding
twenty years using straight-line method.
2. Inherent goodwill on the other hand arises out of normal carrying
out of the business activities. It is never recorded in the books because
recording it would mean anticipating gains that would only be realized
on the sale of the business that may never happen.
3. Negative goodwill arises when the realizable value of the business
sold as a going concern is exceeded by the fair market value realized
from individual assets.
Circumstances that lead to ascertainment of good will
When dealing with partnership accounts, goodwill may be recognized under
the following circumstances:
-Admission of a new partner into the established partnership especially
when the old partners have built goodwill into the business. This is to enable
the new partner to compensate for the share of the good will he/she is going
to enjoy.
– On death or retirement of one partner from an established
partnership.
– At dissolution of the partnership.
– When there is a change in the mode of ascertaining profit and loss of
the firm.
– When there is a change in the profit sharing ratios.
3.2. Introduction to partnership accounts
Learning Activity 3.2
On 01.01.2020. Kefa and Sifa started a partnership business which is
located in HUYE district. They agreed to contribute equally and their capital
contribution amounted to 250,000 RWF. Upon their agreement Kefa and
Sifa injected in addition capital of 20,000 RWF. On 31.3.2020, they shared
interest on the capital on the profit made. On 5.3.2020, they withdrew
money for personal use. On 30.5.2020, they paid interest on drawings. A
salary was also paid to Sifa. After paying all the expense profit was shared
by the partners by using their sharing ratios. After two years their business
made a loss.
Required:
After understanding this scenario, as an accountant who completed in S4
Accounting,
What are the necessary accounting entries for this partnership?
3.2.1. Meaning of accounting entry
An accounting entry is a formal record that documents transaction. In most
cases, an accounting entry is made using the double entry bookkeeping system,
which requires one to make both a debit and credit entry, and which eventually
leads to the creation of a complete set of financial statements. An accounting
entry can also be made in a single entry accounting system; this system typically
tracks only cash receipts and cash disbursements and shows only those results
needed to construct an income statement.
Types of accounting entries:
They are three primary types of accounting entries, which are noted below
1. Transaction entry
A transaction entry is the primary type of business event for which the accountant
would create an accounting entry. Examples of accounting transactions are the
record of an invoice to a Customer, an invoice from a supplier, the receipt of
cash and the purchase of a fixed asset. This type of accounting entry is used
under both the accrual basis and cash basis of accounting.
2. Adjusting entry
An adjusting entry is a journal entry used at the end of an accounting period to
adjust the balances in various general ledger accounts to more closely align the
reported results and financial position of a business to meet the requirements
of an accounting framework, such as GAAP or IFRS. This type of accounting
entry is used under the accrual basis of accounting
3. Closing entry
A closing entry is a journal entry used at the end of an accounting period to shift
the ending balances in all revenue, expense, gain, and loss accounts (known
as temporary accounts) into the retained earnings account. Doing so empties
out the temporary accounts, so that they can begin accumulating transactional
information in the next accounting period.
How to create accounting entries?
Accounting entries for transactions are typically created through a transaction
interface in the accounting software, so that you may not even realize that
you are creating an accounting entry (such as, for example: when creating a
customer invoice). If you are creating an adjusting accounting entry, then you
will use a journal entry format (assuming that a double entry accounting system
is being used). If you are closing the books at the end of an accounting period,
the accounting software will likely create the closing entry automatically; you
will not even see the entry.
Accounting entries
1. In case of additional capital contributed.
Dr. cash/bank/asset a/c
Cr. Individual partner capital a/c
2. In case of interest on capital
Dr. Interest on capital a/c
Cr. Individual partner`s current a/c
3. In case of any drawings
Dr. Individual partner’s current a/c
Cr. Cash/bank/asset a/c
4. In case of any interest on drawings
Dr. individual partner`s current a/c
Cr. Interest on drawings
5. Salaries paid to a partner
Dr. salaries a/c
Cr. Individual partner`s current a/c
6. Share of profits by a partner
Dr. income statement a/c
Cr. Individual partner current a/c
7. Share of loss by a partner
Dr. Individual partner current a/c
Cr. Income statement a/c
3.3. Components of Partnership Final accounts
Learning Activity 3.3
On 01.01.2010, Ineza, Louise and Gisa started a partnership firm in
Nyagatare District, buying and selling cars. After 1 year, they needed to
ascertain if they got a profit or loss.
1. Which document can help them to know if they made a profit or
loss?
3.3.1. Income statement of partnerships
The trading on profit and loss of a partnership is the same as that of a sole
trader only that it has an extension called the appropriation account.
Format of the income statement of partnerships

NB:
– Interest on a loan is a business expense and treated as a business
expense and treated in the profit and loss a/c
– If a partnership gives out a loan in return for interest, the interest
received is treated as an income.
– If a partner gives a loan to a partnership, interest charges on the loan is
a business expense and charged against the profit and loss a/c.
Illustration1:
The following trial balance was extracted from the books of Nema, keza and
Manzi at 31 December 1990 (trading account has already been prepared
Required: The preparation of a profit and Loss account for the year ended 31
December1990
Addition information:
– Interest is to be allowed at 6% per annum on partners ‘capital accounts.
– RWF 5,000 is to be allowed as a salary to Manzi
Answer:
Nema, Keza Manzi
P&L a/c for the year ended 31 December 1990

Illustration 2
Martin and Melvin are in a partnership sharing profits and losses equally. The
following is their trial balance as at 30.06.2010

Required: Prepare profit and loss account for the year ended 30.06.2010
a) Stock 30.06.2010 was 56,340
b) Expenses to be accrued; office expenses 96, wages 200
c) Depreciate fixtures 10% on reducing balance basis, buildings 1,000
d) Reduce provision for bad debts to 320
e) Partnership salary 800 to Martin not yet paid.
f) Interest on drawings: Martin 180
Melvin 120
g) Interest on capital account at 10%.
Solution
Martin and Melvin
Income statement for the year ended 31.12.2010
Partnership appropriation account
The appropriation account is prepared after preparing Profit & Loss A/C. In the
case of partnership firms, it is prepared to show how profits are distributed
among the partners involved in the partnership.
In the case of LLC (Limited Liability Company), the purpose of preparing this
account is the same but the format is different. We will start with the year’s
profit before the taxation figure, from which we will subtract corporate taxes
and dividends to find the retained earnings for the year.
In the government’s case, the appropriation account is used to show the funds
allocated to the specific project. Any expenses are reduced from the funds
allocated.
The following are the adjustment/items included in this account:
1. Net Profit: It is the opening balance of appropriation a/c. This balance is
taken from Profit & Loss a/c after making all the necessary adjustments
for the period.
2. Interest on Capital: The expense for the company as a partner will be
paid interest on the amount of capital invested in the business.
3. Interest on Drawings: It is an income for the company. The company
will charge interest from the partner on any amount of capital withdrawn
during the year.
4. Partner’s Salary: It is pre-agreed as per the partnership deed and is an
expense for the business.
5. Partner’s Commission: It is pre-agreed as per the partnership deed
and is an expense for the business.
6. Net Profit transferred to Partner’s Account: After making all the
above adjustments, this is the final profit amount.
Format of profit and loss appropriation (P&L)
P&L appropriation a/c for the year ended 31/12/xxx

Profit & Loss (P&L) Appropriation A/c
A & B started a partnership firm on 01.01.2017. They contributed RWF 50,000
each as their capital. The terms of a partnership are as under:
– A& B to get monthly salary of RWF 1,000 & RWF 1,500 respectively
– B is allowed a commission at the rate of 5% of Net profit
– Interest on capital & drawings will be 10% p.a.
– Sharing of profit & Loss will be in the ratio of capital sharing.
Before making the above appropriations, the profit for the year ending
31.12.2017 is RWF 75,000. Drawings of A & B were RWF 10,000 & RWF 20,000
respectively. Prepare Profit & Loss Appropriation Account.
Solution
Working
WN 1 Interest on Capital @10% of the Capital Invested
Partner A = 50000*10% = 5000
Partner B = 50000*10% = 5000
WN2 Commission @5% of Net Profits
Partner B = 75000*5% = 3750
WN3 Interest on Drawings @ 10% of Amount of Drawings
Partner A = 10000*10% = 1000
Partner B = 20000*10% = 2000
WN4 Net Profit divided among partners in ratio of their capital i.e 50% each
Partner A = (78000-(5000+5000+12000+18000+3750))/2 =17125
Partner B = (78000-(5000+5000+12000+18000+3750))/2 =17125
P&L Appropriation A/C for the year ended 31/12/2017

Illustration 2:
Hirwa and Manzi started business in partnership on 1st January, 2015 without
any agreement. Mr. Hirwa introduced capital RWF. 60,000 and Mr. Manzi RWF
40,000. On March 1st, 2015Mr. Manzi advanced RWF 20,000 by way of loan at
an interest rate of 6% per annum. The profit for the year ended 31st, December
2015, was amounted to RWF 18,000.
Required: Prepare Profit and Loss Appropriation Account at the end of 2015.
Solution:
Hirwa and Manzi P&L Appropriation A/C for the period ended 31st
December, 2015

Illustration 3
Tony, Feza and Sifa are in partnership with capital of RWF 200,000; 80,000 and
RWF 20,000 respectively. Their partnership deed provides for the following:
i. Interest on capital at 4% per annum
ii. Interest chargeable on drawings at 5% per annum
iii. Tony and Feza to receive salaries of RWF20,000 each per annum
iv. Tony, Feza and Sifa are to share the profits and losses in the ratio 6:3:1
respectively.
The following information is available for the year ended 30 June 2000:

Required:
The appropriation account for the year ended 30 June 2000
Solution
Tony, Feza and Sifa
The appropriation account for the year ended 30 June 2000

Working:
W-1. Interest on drawing, 5% per annum
Tony: drawing 2,400; Interest: 2,400*5/100=120
Feza: drawing 1,800; Interest: 1,800*5/100=90
Sifa: drawing 1, 800; Interest: 1,800*5/100=90
W-2. Interest on capital 4% per annum
Tony: capital 200,000; Interest: 200,000*4%=8,000
Feza: capital 80,000; Interest: 80,000*4%=3,200
Sifa: capital 20,000; Interest: 20,000*4%=800
W-3. Balance of profit to be shared
Total profits=RWF 53,300
Tony, Feza, and Sifa =6:3:1
Tony: 53,300*6/100=3,198
Feza: 53,300*3/100=1,599
Sifa: 53,300*1/100=533
Importance of Appropriation Account
This account shows the number of profits divided among various heads.
It shows the number of profits transferred to reserves and distributed as
dividends.
It gives information on how the profits are divided among partners and how
the various adjustments are made during the year.
Conclusion
Hence, the appropriation account shows how the profits are appropriated or
distributed among various heads. This account is prepared on behalf of the
firm.
3.3.2. Partnership capital accounts
Definition:
A partnership capital account is an account that contains all the transactions
occurring between the partners and the partnership firm, such as the initial
contribution of capital in partnership, the interest of capital paid, drawings,
the share of profit, and others adjustments. It is required to maintain proper
accountability and transparency between the partners and the firm.
Fixed capital accounts, Current accounts, Fluctuating capital accounts:
When fixed capital accounts are maintained, the capital account records the
partner’s capital contribution only.
A current account is opened up where partner’s dealings with the partnership
are recorded e.g. interest on capital, interest on drawings, partner’s salaries etc.
Under fluctuating capital balance method, the capital account records the
capital contributions and other partners’ dealings with the partnership e.g.
salaries, interest on capital, drawings, interest on drawings, share of profits etc.
Fixed capitals are more preferable than fluctuating capitals. With current
accounts where a partner is drawing more than his share of profit, the partner’s
current account will show a debit balance and this is a warning that his drawings
are excessive.
Note: Fluctuating capital accounts is a combination of Fixed capital accounts
and Current accounts
Fixed capital balance method
Capital account

Current account

Capital accounts

Illustration 1
Charles and Robert are in partnership sharing profits and losses in a ratio 3:2
respectively. They are entitled to 5% per annum interest on capitals. Their
capitals are; Charles 20,000 and Robert 60,000.
Robert is to have a salary of 5,000.
They charge interest on drawings Charles being 500 and Robert 1,000.
During the year drawings for Charles and Robert were 20,000 each.
Their share of profits is 25,500 and 17,000.
Required: Show the partners’ capital accounts.
Fixed capital accounts

Current accounts

Fluctuating capital accounts

Illustration2
ABC and Co. are a partnership firm with the three partners, A, B, and C. Profit
sharing ratio of each partner is equal, and the capital contribution of each
partner is also equal. The total requirement of investment in the business is
FWR 300,000. The firm does not maintain a separate current account and all the
transactions are to be recorded in the capital account itself. Other details are as
under:

Required: Draw the Partners Capital account and record the above transactions.
Solution:
Capital Contribution = RWF 300,000 / 3 = RWF 100,000
Interest on Capital = RWF 100,000 * 12% = RWF 12,000 per partner.
Profit Share =RWF 75,000/3 =RWF 25,000 per partner
3.3.3 Balance sheet (statement of financial position)
Definition:
Balance sheet summarized a company’s assets, liabilities and shareholders’
equity at a specific point in time (as indicated at the top of the statement).
It is one of the fundamental documents that make up a company’s financial
statements. The balance sheet also reveals the book value of a company’s assets,
liabilities and shareholder’s equity.
Structure of the balance sheet

NB: A positive balance means a credit balance while a negative balance
means a debit balance.
We used the same example which is above
Illustration1
Martin and Melvin are in a partnership sharing profits and losses equally. The
following is their trial balance as at 30.06.2010

Required: Prepare balance sheet for the year ended 30.06.2010
Additional information:
a) Stock 30.06.2010 was 56,340
b) Expenses to be accrued; office expenses 96, wages 200
c) Depreciate fixtures 10% on reducing balance basis, buildings 1,000
d) Reduce provision for bad debts to 320
e) Partnership salary 800 to Martin not yet paid.
f) Interest on drawings: Martin 180
Melvin 120
g) Interest on capital account at 10%.
Solution:
Balance sheet as at 30.06.2010

Changes in ownership of partnership
These include:
– Admission of a partner
– Death of a partner
– Dissolution
i. Admission of a partner
A new partner(s) can be introduced after all partners are in agreement to
this effect. The old partnership ceases to exist and a new partnership starts.
The accounts of the old partnership can be closed then a new set of accounts
prepared for the new partnership. This is really followed. So admission of a
partner merely entails addition of a capital column for the new partner and the
following entries thereafter:
Dr Asset accounts
Cr Capital account (with assets received from the joining partner which can
be cash)
However, both admission and retirement/death bring about the following
additional issues:
Goodwill will be recorded during any change in ownership as follows:
Dr Goodwill account
Cr Capital accounts (in old profit sharing ratio)
This can remain in the accounts like this or it can be eliminated. If it remains
in the accounts, then the partners’ capital would have increased.
Goodwill can be eliminated as soon as transition in ownership is complete by:
Dr Capital accounts (in new profit sharing ratio)
Cr Goodwill
This is of course, subject to continuance of the business. Goodwill will not be
eliminated if there is no business continuance like in dissolution.
This process ensures that the joining partner pays for the goodwill that
had already existed. This is because the new profit share ratio will include
the new partner.
Revaluation account
Revaluation of assets and liabilities are usually carried out during changes in
ownership. In such cases account will be opened.

After opening the revaluation account is just to find increase or decrease due
to revaluation, which is dealt with in the following way.
Loss from revaluation (using the old profit sharing ratios)
If there any changes in between the year then the profit or loss up to this date
has to be shared to the old partners. After the changes the profit/loss earned
or incurred is shared to the new partnership in the new structure. Sometimes
the expenses can be divided between the periods to be able to determine the
profit that period.
Nziza and Mwiza are in partnership sharing profits and losses equally. The
following is their balance as at 30 June 2001
Additional information:
i. Stock, 30 June, RWF 650,000
ii. Expenses to be accrued: Office expenses RWF 800, wages RWF1,500
iii. Depreciate fixtures 10 per cent on reducing balance basis, building
RWF 12,000
iv. Reduce provision for bad debts to RWF 3,200
v. Partnership salary: RWF1,500 to Nziza
vi. Interest on drawings: Nziza RWF 1,500; Mwiza RWF 1,100
vii. Interest on capital account balances at 10 per cent.
Required:
Prepare a trading and Profit and Loss appropriation account for the year
ended 30 June 2001, and a balance sheet as at that date.
End unit assessment 3
1. What do you understand about:
– Fixed capital accounts
– Current accounts
– Fluctuating capital accounts
2. Where partners do not prepare an agreement.
3. Okello, Opio and Ouma are in partnership. At the end of the first
year they had the following details; on 31/12/2006.

Additional information
i. Depreciate all fixed assets at a rate of 10% p.a
ii. There was no partnership agreement.
Required:
a) Prepare a profit and Loss Appropriation account
b) Prepare partners current accounts
3. 3. The following list of balances as at 30 September 2009 has been
extracted from the books of Brick and Stone, trading partnership,
sharing the balance of profits and losses in the proportions 3:2
respectively.

Additional information
i. RWF 10,000 is to be transferred from Brick’s capital account to a
newly opened Brick Loan
Account on 1 July 2009, interest at 10 per cent p.an on the loan is to
be credited to Brick
ii. Stone is to be credited with a salary at the rate of RWF12,000 per
annum from 1 April 2009.
iii. Inventory at 30 September 2009 has been valued at cost at
RWF32,000.
iv. Telephone charges accrued due at 30 September 2009 amounted to
RWF400 and rent of RWF600 prepaid at that date.
v. During the year ended 30 September 2009 Stone has taken goods
costing RWF1,000 for his own use.
vi. Depreciation is to be provided at the following annual rates on the
straight line basis: Fixtures and fittings 10% Motor vehicles 20%
Required:
a) Income statement and appropriation account for the year ended
30 September 2009.
b) Prepare a Statement of financial position as at 30 September
2009, which should include summaries of the partners’ capital
and current accounts for the year ended on that date
Unit 4 INTRODUCTION TO NONPROFIT ORGANIZATIONS
Key unit competence: To be able to prepare financial statements for
non-profit organizations
Introductory activity
Schools, hospital, clubs, Charitable Organizations, NGOs etc share common
features as they do not operate like trading organizations. Their objectives
are rather limited to various social and charitable features. Thus the nature
of their accounting records must reflect the nature of their operating
activities and take form of there
What do you think can be the accounts that are done by non-profit making
organizations?
4.1. Introduction to non-profit organizations
Learning Activity 4.1
Non-profit making organizations record and report their transactions in
form of accounts same as profit making organizations.
Required: What do you think is the difference between the two?
Learning Activity 4.1
The topic of accounting for nonprofit organizations (NPOs), differs from
commercial accounting in many respects. NPOs’ main goal is to serve the
public rather than to make money for their collaborators or owners. Nonprofit
organizations (NPOs) are money oriented, whereas commercial organizations
are profit focused, because their expenses must be met by revenues, which are
financed by grants or contributions rather than market transactions.
These organizations whose establishment is mainly non-profit making are
namely ; Schools, hospital, clubs, Charitable Organizations, NGOs etc.
These organizations provide specific services to the community without profit
drive. Although these organization charge fees to the services provided to the
beneficiaries, its low compared to the benefit.
Non-profits organizations prepare final accounts like profit making
organizations but they differ in the following circumstances :
• A cash book is replaced by receipts and payments A/C
• Profit and loss A/c is replaced by income and expenditure A/C
• Capital is replaced by accumulated funds
• Net profit is called excess of income over expenditure
• Net loss is called excess of expenditure
Differences between Profit making and Non-profit making organizations

Receipts and payments Account of non-government organizations
This is a summary of all cash and Bank transactions that took place during a
particular accounting period and these include ;
• Opening balance
• The receipts for the period
• The payment for the period
• Closing balance
Illustration
Receipts and Payments Account

NOTE : Receipts and payments account is simply a summarized cash account
Incomes and expenditure Account
As contrast to profit making organizations, profit generated from non-profit
making organizations is termed as excess of income over expenditure same as
for the loss.
Income and expenditure account is presented in same manner as the profit and
loss account for profit making organization in such way that costs incurred are
compared to the revenues or incomes.
The main features of income and expenditure account ;
• It is a summary of all items relating to income and expenditure on
accrual basis
• It deals with only revenue and expenditure items
• Income is credited while expenditure is debited
• Account balance is represents a surplus or deficit for the period and is
transferred to the accumulated funds.
• The main sources of income are subscriptions, incomes from social
activities like dance parties, film, plays, donations etc.
NOTE : Sometimes Bar account is prepared separately like a trading account.
Mostly is prepared within the income and expenditure account.
Illustration
Income and Expenditure Account

Bar trading Account
The club may occasionally establish a bar to serve drinks to its participants
when they meet. In this case the bar is set for the purpose of earning additional
income to the club. The account for the bar will be prepared in the same way as
of profit making business and the profit will be transferred to the income and
the expenditure account as an income.
Bar trading Account

Surplus and Deficit
A surplus is the excess of income over expenditure that is, when (incomes
exceed the expenditures). It is arrived at from the income and expenditure
account. At the end of every financial period the surplus is added to the
accumulated funds in the balance sheet.
When the expenditure exceeds the income the difference is a deficit. A deficit
appears as reduction from accumulated funds in the balance sheet.
Accumulated fund
The capital account of a non-profit organization is termed as accumulated
fund. Any surplus from the income and expenditure account is transferred to
this account and vice versa.
Balance sheet
The term balance sheet refers to a financial statement that reports a company’s
assets, liabilities, and shareholder equity at a specific point in time.
Non-profit making organizations prepare balance sheet like Profit making
organization and their items are treated the same except that for capital in
trading organizations. Non-profit making organization’s balance sheet is
called accumulated fund.
Balance sheet

In non-profit making organizations Accumulated fund= Assets
i.e Assets- liabilities=Accumulated fund,
Thus, accumulated fund + liabilities=Assets
Types of revenues
Business receipts are inflow of economic resources mostly in the form of cash
and cash equivalents.
There are mainly two types of revenues notably ;
• Capital receipts
• Revenue receipts
Capital receipts
Capital receipts are commercial receipts that are unrelated to a company’s
ongoing business operations. They are infrequent yet are advantageous in the
long run.
In any business capital is introduced for the smooth running of the business.
When realize, capital receipts are often disclosed in the business’s balance
sheet. This is the money that is paid by the sole trader, partners or members
of the company known as shareholders, loans, proceeds from the sale of fixed
assets etc. Similarly, non-profit making organizations receive capital in form of
membership fees, subscriptions, grants, donations etc.
Example 1.
Suppose, in annual general meeting of Barnabas and sons ltd company, the
issue of right shares was approved at the rate of RWF.1000 per share. Barnabas
and sons ltd allocated shares to all the existing members of the company
proportionately and in return received cash. The cash received by Barnabas
and sons ltd company was a capital receipt.
Revenue receipts
The money that a business makes from its regular business operations is known
as revenue receipts. These are recurring in nature and have a direct impact
on the company’s earnings and loss. Consequently, it is necessary to disclose
revenue receipts in the company’s or organization’s income statement.

These include ;
• Revenue received from sale of goods to customers.
• Revenue received from provision of services to clients
• Income received as interest on a saving account.
• Dividend income received from shares of various companies.
• Rental income received by a company.
• Bad debts recovered by a company
• Cash discount received from vendors.
• Commission income received by a company
• Interest received
• Interest on investment
• Trading profit
• Rental income
• Bad debts recovered, etc
Whereas non-profit making organizations get their receipts from annual
subscriptions, cash sales from trading activity of an organization or charges
from the use of premises etc.
Example 2.
Suppose ABC ltd Company is in the business of manufacturing and selling
clothes in bulk to wholesalers and retailers. ABC ltd invoices its customers on
receipt of goods by them and maintains an average collection period of 30 days.
ABC records its sale/revenue on receipt of goods by the customers. The sales
revenue received by ABC company is a revenue receipt.
Subscription
Subscriptions are made from the members of the organization as major
source of non-profit making organizations and these can be ordinary or life
subscriptions.
Accounting treatment for subscriptions
• Subscriptions due or arrears are current assets
• Subscriptions received in advance or prepaid are current liabilities
• Subscription taken as income for a particular year should exclude
subscriptions received in arrears and subscription received in advance.
Below is the format of subscription account

Life subscription
In some clubs, members are allowed to become life members by paying life
subscription, which allows them to access the club facilities for the rest of their
life.
Accounting entries when life subscription is paid ;
Dr Receipts and payment A/c xx
Cr life subscription A/c xx
Instructions must be given regarding how much of the life subscription is to be
transferred to the income and expenditure account at the end of the each year.
When transfer is done, the following entries are affected ;
Dr Life subscription A/c xx
Cr income and expenditure A/c xx
The credit balance in the life subscription A/c is long-term liability of the club
Types of expenditure
Expenditure is a payment made using cash or credit to purchase goods or
services.
Expenditures are of two that is ;
1. Capital expenditure
2. Revenue expenditure
Capital expenditure is the Cost incurred for the acquisition of fixed assets and
their additions. The advantage from this expenditure is divided over multiple
periods rather than being entirely utilized in one. It includes fixed assets
purchased with the intention of generating income or enhancing the company’s
ability to generate income. For instance, buying land and buildings and adding
things like renovations to buildings, buying plants and machinery, or buying
more machinery, etc.
Capital expenditure appears in the balance sheet
Revenue expenditure comprises of expenses paid for during one accounting
period that have a fully utilized benefit throughout that period.
Revenue expenditures are just the expenses incurred over a specific time
period to operate the firm ; they do not increase the value of fixed assets. It
includes things like depreciation, current business expenses, replacements,
maintenance, or renewals e.g wages and salaries, rent, rates, carriages etc.
Such items appear in Trading and profit and loss accounts for profit making
organizations and in an income and expenditure account for non-profit making
organizations.
Application activity 4.1
The following information provided is taken from the books of ABC as at
31.12.2022
Subscription received during the year ending 31.12.2022 RWF 1,000,000
Subscription due at the end of 31.12.2022 RWF 100,000
Subscription received in advance for the following year starting on
1.1.2023 RWF 300,000
Required:
Determine the amount of subscription to be taken as income for the year
for ABC.
4.2. Accounting for non-profit making organization
Learning Activity 4.2
A new school has been opened in Kagarama Sector due to a number of
Students that were moving for a long distance and others could not afford
the schools around.
This school has come to carter for the above problems as it receives funding
from the government and other donors. It is claimed that much money has
been spent on this school.
Required:
In which ways would you expect the ministry of Education to monitor the
financial performance of this school?
Nonprofit accounting is the unique process by which nonprofit making
organizations plan, record, and report upon their finances. Non-profit
organizations focus on accountability and profit making organizations focus on
profit making. They adhere to a particular set of guidelines and practices that
aid them in maintaining their accountability to their contributions and donors.
Application activity 4.2
Given below are the receipts and payments account ended 31rst December
2021 for Kigali Arena Social Club.

Additional information
Stock of refreshment 1/1/2021 RWF 200,000
Stock of refreshment as at 31/12/2021 RWF 300,000
Prepaid rent RWF 100,000
Ground hire dues RWF 50,000
Subscription RWF 300,000
Required
Bar trading account
Prepare an income statement and expenditure account for the year ended
31/12/1021
Balance sheet
End unit assessment 4
1. What are final accounts for non-profit organizations?
a) Receipts and payment account
b) Trading and profit and loss account
c) Income and expenditure account
d) Both a and c
2. From the following receipts and payments account for Gikoba foot
ball club and the additional information is provided. Prepare an
income and expenditure account for the year ended 31 December
2021.
Receipts and payments Account

Additional information on 31 December 2021
I. The club consists of 200 members paying annual subscription of
RWF 2,000 and only180 members had paid their subscription fully
while 10 had paid for 2022.
II. Wages outstanding amounted to RWF 8,000; insurance prepaid RWF
6,000 and stock of unused stationery RWF 2,500.
Required:
1. Prepare Income and expenditure statement
2. Extract the balance sheet
Unit 5 PUBLIC SECTOR ACCOUNTING
Key unit competence: To be able to prepare accounts for public sector
organizations
Introductory activity
MASENGESHO has previously worked as accountant for a limited liability
company. In May 2022 he has changed the employer and became a chief
accountant for Gatsibo District just during the period of closing fiscal year.
One of his duties is to prepare financial statements for the district. Besides
his not familiar of preparing them because he was in private sector.

Required: Enumerate five financial statements prepared in public
organizations.
5.1. Public Finance management (PFM) legal framework
Learning Activity 5.1
HABAKUBANA Elaste, a budget Manager, asked you to describe the PFM
cycle which is different from accounting cycle described in senior four.
Required: Convince him by describing the PFM cycle.
5.1.1. Introduction to Public Sector Accounting
According to International Public Sector Accounting Standards Board (IPSASB),
the term” Public sector” refers to national governments, Regional (eg: State,
provincial, territorial) governments, local (eg; City, town) governments
and related government entities (eg; agencies, boards, commissions and
enterprises).
Public sector plays a fundamental role in the political and economic structure
of a country.
The Rwanda Public Sector consists of the Following:
– Central Government, Ministries, Donor projects, Embassies
– Local government eg. Kigali city council
– Public enterprises or parastatals eg. RITCO, WASAC, National post
office, BNR
– Charitable organizations
Government organizations differ from business organizations discussed in
previous units in that:
– Governments have no stockholders or other owners;
– They render services with no expectation of earning profit, and
– They have power to require taxpayers to support financial operations
whether or not they receive benefits in proportion to tax paid.
– Similarly, non-profit organizations exist to lender services to the people
with no expectation of earning profit from those services, have no
owners, and seek financial resources from persons who do not expect
either repayment or economic benefits in proportion to the resources
provided
– Governments and non-profit organizations are governed mainly by
their budgets not by the market place. Through the budgetary process,
these organizations control or strongly influence both their revenues
and expenditures.
Public sector organisations provide a great number of diversified services to
the community. These organisations are also regarded non-profit organisation.
All public sector bodies have one feature in common. Their specific powers are
derived from parliament and their responsibilities are ultimately to parliament.
Examples of public sector activity may include delivering Social security;
administering urban planning and organizing national defence.
The organization of the public sector can take several forms, including:
Direct administration funded through taxation; the delivering organization to
meet commercial success criteria and production decisions are determined by
the government.
5.1.2. Public finance
Public finance describes finance as related to sovereign states and sub-national
entities (states/provinces, countries, municipalities, etc.) and related public
entities (eg. schools, districts) or agencies.
Public finance is concerned with:
• Identification of required expenditure of a public sector entity
• Sources(s) of that entity’s revenue
• The budgeting process
• Debt issuance (municipal bonds for public sector works projects)
Public Finance deals with the finances of public. It thus deals with the finances
of government. The finances of the government include the raising and
disbursement of government funds. It is concerned with the operation of the
public treasury.
5.1.3. Role of Public sector in the economy
In the developing countries also the growth of public sector has been
phenomenal.
a) Information control
To ensure that the general public has adequate information to make informed
choices, the government ensure that business make available all necessary
information to the public. This includes proper labelling on all goods available
for sale. In this way, the government protects public health and safety.
b) Monopoly control
To keep any one business or company from becoming too powerful and
concerning the market place, the government has to create antitrust laws to
control or break up any monopolies. This allows the consumer to have a variety
of fair option the market to choose from.
c) Regulation Control
To ensure that the businesses are held accountable for their actions, the
government has created strict regulations for each different type of business.
Individual businesses must take ownership of any negative effects created while
doing business. Any example of a business creating negative effects includes a
factory creating pollution.
d) To drive Economic Development
Most countries desire to achieve a high rate of economic development. However,
the resources required to achieve the desired growth far exceeds the resources
of local private enterprise and spontaneous will proactively intervene through
the concept of state entrepreneurship
e) Industrialization
Industrialization is the most important requisite for economic development.
Industrialization in the developing countries necessitates the extension
of the public sector. In the developing countries the state is the only force
that possesses the necessary levers for influencing the economy, the means
for mobilizing and properly utilizing financial, natural, labor and material
resources, applying scientific and technological achievements and overcoming
a number of difficulties and contradictions typical of developing countries.
f) Promotion of Science and Technology & Research
Scientific and Technological revolution has an important bearing on economic
development.
The public sector has become the instrument for the development of science
and technology and also the vehicle for the application of scientific and
technological achievements in industrial and agricultural production.
g) Planning
Economic planning also has provided a stimulus to public sector in many
countries. Expansion of the public sector is essential to make planning more
effective.
h) Public Utilities
There are certain types of services known as public utilities such electricity, city
transportation, water supply, railways, etc., are the examples of public utilities.
The provision of these services needs huge investment. They are also
monopolistic in nature. It has been realized that these services can be provided
efficiently, economically and continuously only when the public utilities will be
owned and operated by the state
i) Resource Allocation
The nature and pattern of resource allocation has an important bearing on
economic development. The main reason for the expansion of the public sector
in India, for example, lies in the pattern of resource allocation fixed in the plans.
The nature and volume of public investment substantially affects the tone and
texture of economic activity.
j) Prevent Exploitation
Sometimes the monopolist private producers have a tendency to reduce their
output and raise the prices, and thus exploit the consumers in the process.
Public takeover through nationalization a method by which exploitation of
consumers can be prevented
5.1.4. PFM Legal Framework and Institution Arrangement
a) The public Finance Management Cycle
The government of Rwanda Public finance management(PFM) cycle entails
determination of national priorities, developing MTEF and the Budget,
preparation and approval of the finance law, resources mobilization,
procurement and budget execution, accounting and financial reporting, audit
and legislative oversight.

The PFM cycle described above generally covers a three years’ period.
Therefore, at any one point in time, three years budgets are at different points
in the cycle: for example, in October of any year, the budget of the previous
year is being audited, the budget of the current year is being executed, and next
year’s budget preparation has already started.
b) PFM legal framework
Laws and regulations: The Government has put in place laws and regulations
to enforce an effective and functional PFM system.
– The 2003 Rwanda Constitution (as revised in 2015) especially
Articles, 162,163,164,165,167,166,167 dealing with the PFM function
of GoR.
– Organic Law No12/2013/OL on State Finances and Property of
2013 which is the principal law on the financial management within
the Government of Rwanda and is subsidiary to the constitution.
Under Article 13 of Organic law on State Finance and Property; Minister has
the responsibility to enforce this Organic law and any prescribed norms and
standards including any prescribed standards of accounting practice and
uniform classification systems, in central and local Government administrative
entities.
– Ministerial order no 001/16/10/TC of 26/01/2016 relating to
Financial regulations, 2016 on the Organic on State Finances and
Property – which elaborates more on the implementation of the
Organic law on State Finances and Property of 2013.
– Laws and regulations on public procurement – which prescribe the
procurement procedures within the General Government
– Law establishing sources of revenues and property of decentralized
entities- which provides for the list of taxes, fees and other charges
levied by decentralized entities and determining their thresholds.
Law describes and regulates the sources of revenues for decentralized
entities in Rwanda.
– Laws on Taxes – which prescribe provisions, on which tax payers
including government agencies must also, adhere to in fulfilling tax
obligations. They include:
i. Law on direct taxes on incomes as modified and complemented to date;
ii. Law establishing the value added tax
iii. Law on tax procedures as modified and complemented to date;
iv. Ministerial Order and Commissioner General’s governing direct taxes on
income; and
v. Any other law or modifications to the above laws.
Human resource management and payroll – the following legislations
govern human resource management and payroll:
• Law regulating labor in Rwanda;
• Law on general statutes for Rwanda Public service;
• Presidential Order governing modalities for the recruitment of public
servants;
• Presidential Order determining the amount of salaries and other
fringe benefits to state high political leaders and modalities of their
allocation;
• National employment policy;
• Guidelines for fixing salaries in the Rwandan Public Sector;
• Any other law or modifications to the above laws.
– Asset management – underpinned by the following laws, regulation,
policies and procedures:
• Ministerial order determining the organization and functioning of the
asset disposal evaluation committee to set value for state private assets
to be sold, exchanged, donated or completely destroyed;
• The fleet policy of government of Rwanda;
• Law on disposal of state assets which determines the procedure
governing the disposal of State private assets; and
• The law governing privatization of public institutions and national
investment.
• Any other law or modifications to the above laws.
C) PFM Institutional arrangements
In accordance with Article 61 and 65 of the 2003 Constitution of Rwanda as
revised in 2015, the PFM institutional framework of the GoR comprises of:
i. Legislature/Parliament – The Constitution establishes a bi-cameral
parliament comprising the Chamber of Deputies (Deputies) and the Senate
(Senators) to carry out legislative and oversight function by debating and
passing laws. It also legislates and exercises control over the Executive.
ii. The executive – Article 97 of The Constitution vests all executive power
on the President of the Cabinet. The cabinet is accountable to both the
president and parliament in accordance with the Constitution. The
Cabinet through the Minister retains the overall financial accountability.
iii. The judiciary – The Constitution establishes the judiciary and provides
that the judicial authority is vested in the judiciary composed or ordinary
Courts and Specialized Courts. Courts consist of ordinary and specialized
Courts. Ordinary Courts are comprised of the Supreme Court, the High
Court, Intermediate Courts and Primary Courts. Specialized Courts are
comprised of Commercial Courts and Military Courts.
iv. The Office of Ombudsman – the Ombudsman as an independent public
institution to carry out the following responsibilities:
• To act as a link between the citizen and public and private institutions;
to prevent and fight against injustice, corruption and other related
offences in public and private administration;
• To receive and examine complaints from individuals and independent
associations against the acts of public officials or organs in order to
find solutions to such complaints if they are well founded;
• To receive declaration of assets of the president of the Republic, the
president of the Senate, the Speaker of the Chamber of Deputies, the
President of the Supreme Court, The Prime Minister; other members of
the Cabinet and other public officers entrusted with the management
of state finances and property.
v. Office of the Auditor General – Under Article 65 of The constitution
provides for the Office of Auditor general and to complete the accountability
cycle, the Article 66 of The Constitution requires the Auditor General to
submit an annual audited financial report to Parliament.
The audit report indicates the manner in which the budget was utilized,
unnecessary expenses which were incurred or expenses which were contrary
to the law and whether there was misappropriation or general misuse of public
funds.
Parliament reviews, debates and provides oversight function on the executive.
The Auditor general submits a copy of the report to the President of the republic,
Cabinet, the President of the Supreme Court and The Prosecutor General of the
Republic.
The Parliament, after receiving the report of the Auditor General referred to
in this article, examines the report and takes appropriate decisions within six
months.
5.1.5. Accounting Policies
In general, there are two alternative bases of accounting:
i. Cash basis of accounting
ii. Accrual basis of accounting.
The cash basis of accounting is an accounting methodology under which
transactions and events are recognized in the books of accounts only when
cash and cash equivalents is received or paid by the entity. Therefore, the
transactions and events are recorded in the books of accounts in the period in
which the associated cash flows occur.
Cash is defined as the cash on hand, cash at bank and demand on deposits.
Whereas, cash equivalents is defined as short term, highly liquid investments
(with maturity is less than three months from the date of purchase) that are
readily convertible to known amounts of cash and which are not subject to a
significant risk of change in value.
The accrual basis of accounting is an accounting methodology under which
transactions and other events are recognized in the books of accounts when
they occur (and not only when cash or cash equivalent is received or paid).
Therefore, the transaction and events are recorded in the books of accounts
and recognized in the financial statements of the period to which they relate.
The following table shows a summary of differences between the two accounting
bases:
In between the basis of accounting described above, are the following modified
bases of accounting:
• Modified cash basis of accounting; and
• Modified Accrual basis of accounting
Under the Modified cash basis, the main basis of accounting is cash i.e. for all
intents and purposes economic transactions of a reporting entity are measured,
recorded, and reported on the basis of cash, with a few exceptions to the general
rule, where certain economic events are identified, measured, recorded and
reported on, not strictly on receipt or payment, but are “accrued”.
Conversely where the main basis of recognizing, measuring, recording and
reporting on economic events and transactions is the “accrual basis” but the
reporting entity has allowed a few exceptions to the general rule, for example
certain of its expenses and or income are only recognized on cash payment
(cash outflow) or receipt (cash inflow), then the basis of accounting is referred
to as “modified accrual basis”.
Except for the subsidiary entities affiliated to the centralized entities, public
entities were used to maintain their books of accounts on a modified accrual
basis of accounting.
The subsidiary entities affiliated to the decentralized entities were used to
maintain their books of accounts on a modified cash basis of accounting and
progressively move to the same accounting basis as that of the rest of the
public entities but now the Government of Rwanda is moving to accrual basis
in maintaining its books of account.
Application activity 5.1
1. There are several arguments that justify government intervention
in economies. The following are included in these reasons with
exception of:
A. Market Failure
B. Redistribution
C. Political ideology
D. Monetary Policy
2. Choose the most accurate statement among the following in
relation to Public Finance Management (PFM) cycle:
A. In Rwanda, the government’s national budget runs from 30 June to
1 July
B. In Rwanda, budgets should be approved by the legislature, which
should be able to effectively scrutinize government plans
C. In Rwanda, annual financial reports should be subject to dependent
external audit and scrutiny
D. There should be no predictability but control in the budget execution
In public finance management, the three fundamental aspects to
treasury management include:
i. The financing of operations in a way that minimizes funding costs and
matches cash flow needs
ii. The management of working capital
iii. The management of financial risks to which cash flows are exposed
A. (i) Only
B. (i), (ii)&(iii)
C. (i)&(iii) only
D. None of the above
5.2. Record Government Revenues and Expenditures
Learning Activity 5.2
You are hired as a public accountant, what are the minimum books of
accounts will you keep?
5.2.1. Books of accounts
The finance department shall maintain the necessary books of accounts to
ensure that financial information is comprehensive. In keeping books of
accounts, double entry concept will be applied. This entails that a financial
transaction gives rise to two equal and opposite entries one debit and the other
credit.
An account is a record in ledger form summarizing all the transactions that have
taken place to a particular event or activity that ledger record relates. These
can be classified as Personal and Impersonal Accounts. Personal accounts are
those that relate to debtors and creditors (customers and suppliers) while
Impersonal Accounts can be divided between Real account and Nominal
accounts. Real accounts are those in which possessions are recorded such as
buildings, machinery, fixtures and fittings, stocks while nominal accounts are
those in which expenses, income and capital are recorded.
Public entities should at a minimum maintain the following books of accounts
in electronic or manual form:
1. Cash book
2. Petty cash book
3. General ledger
4. Accounts payable ledger
5. Accounts receivable ledger
6. The journal
Note: Description of the books above have been seen in Senior 4 units 3 and 4
5.2.2. Government standard chart of accounts
1. Overview of the Standard Chart of Accounts
The Standard Chart of Accounts (SCoA) is a classification system by which
financial transactions are recorded. Article 97 of the Ministerial Order No.
001/16/10TC of 26/01/2016 relating to financial regulations requires the
Minister and upon the advice of the Accountant General to issue a standardised
Chart of Accounts generally applicable to all public entities excluding public
institutions. Under the regulations, public institutions are empowered to
develop their own chart of accounts adapted to their financial operations. The
SCoA provides a basis for a uniform budget classification and execution. It is
mandatory for all Government entities within general Government to use the
coding structure of SCoA to budget and execute the budget. For entities using
IFMIS, the SCoA is already set up in the system, however, for entities using stand
alone systems the SCoA has to be set independently.
Consistent with Article 97 of the Ministerial Order No 001/16/10/TC of
26/01/2016

Relating to financial regulations, the coding structure of the SCoA comprises
five segments. When recording a transaction, a selection must be made from
each of the five segments, meaning that all segments must be used for recording
a single transaction by answering the questions provided in the diagram below:

1. The structure of the SCoA
The diagram below illustrates the structure of the SCoA of the Government and
shows the interaction between the segments and classifications within each
segment
The following is a description of each of the five segments of the SCoA:
a) Administrative Segment
This is based on administrative responsibility, which Executive (Ministry/

District) has overall responsibility and accountability for the inflows and
outflows of financial and other resources, and also provides for the lower
delegated levels of responsibility and accountability.
The administrative segment provides for four levels as follows:
• Level 1 – Ministry/District: represents the highest level of administrative
responsibility
• Level 2 – Public entity: represents the public level where budget
appropriations are made.
• Level 3 – Sub public entity: at the disposal of the public entities which
may wish to drive accountability to lower levels of their structures.
• Level 4- revenue/cost centre: at the disposal of the public entities which
may wish to drive accountability to lower levels of their structure
b) Fund Segment
This segment defines the source and type of funding. The segment helps track
revenues and expenditures per source and type of funding. The segment applies
to both revenues (inflows) and expenditures (outflows). “Source of funding”
defines the source of funding for inflows.
In broad term, there are two broad sources of revenues – Domestic and External
sources. Domestic sources may be from Government of other local institutions
and individuals.
c) Program/Function/EDPRS Segment
This segment defines the purpose of the transactions through programmatic
classification. The Government programmes and sub-programmes reflect
Government policy, goals and objectives.
d) Economic Segment
This segment defines the natural accounting nature of the transaction, visà-
vis, revenue, expense, asset, liability and capital (consolidated fund).
The classification includes the five (5) classes accordingly. The economic
classification is closely aligned to the GFS system in terms of operating revenues
and expenses.
The categorisation for economic item under the chart of accounts is classified
as follows: Class – Chapter – Sub-chapter – Item – Sub-item.
The following illustrates coding under the economic segments of the SCoA:
e) Location Segment
The geographical segment defines where the authority for budget execution
(e.g. expenditure) lies. However, some expenditure made centrally for example
in a Ministry Headquarters will actually be benefiting the people in a district,
e.g. the building of a district hospital or school.
This segment comprises 5 digits and provides for classifying the beneficiary
of the spending by Province, District (Akarere) and Sector (Umurenge).
The following illustrates coding under the location segments of the SCoA:

3. Updating the Government SCoA
The accountant General may on his or her own or, on the proposal of a Chief
Budget Manager modify the Chart of accounts. The final authority for updating
the chart of accounts rests with the Accountant General.
The following procedures will be followed in updating the chart of accounts:
a) Where a Chief Budget Manager has identified the need for new accounts
codes, he or she apply to the Accountant General for the new codes.
b) The Accountant General shall review the request submitted and
determine whether it is justified after making any consultations that he
or she may consider necessary. Where the request is not justified and
the existing Chart of accounts can be used to track the transactions, the
Accountant General shall advise the Chief Budget Manager on which
codes to use and how to report on their transactions.
The Accountant General shall publish the updated CoA whenever an updates is
made
5.2.3. Purpose of Government Accounting
The purposes of government accounting include:
• Demonstrating the proprietary of transactions and their conformity
with the law, established rules and regulations
• Measuring current performance
• Providing useful information for the efficient control and effective
management of government operations
• Facilitating audit exercise to be carried out
• Planning future operations
• Appraising those in the authority, in efficiency and effectiveness
Users of Government Accounting Information
There are two groups of users of Government Accounting information: internal
and External.
Internal Users and Interest Areas
This group of users includes:
• The Labour union in the public service which will press for improved
conditions of employment and security of tenure for their members.
• The Members of the Executive Arm of Government: such as the
President, Ministers, Governors, and Mayors. Their interest areas
are to ensure probity and accountability through score keeping
and performance control which are achieved through accounting
information.
• The Top Management members: Permanent Secretaries of various
Ministries for example. They are the conduit of accounting information
generation and transmission and serve as liaison officers between
Government, employees and the public.
External Users and Areas of Interest
External Users include
• Members of the Legislature at both National, State and Local
Government levels. Information in the accounts of Government is the
major media through which politicians render stewardship to their
constituencies and appraise them of the endeavours of governance.
• The Members of the Public, to demonstrate accountability and assist
the people to appreciate or otherwise the efforts of Governments
• Researchers and Financial Journalists: Researchers are expected
to develop new and better ideas of governance. Financial journalists
cherish accounting information to advise existing and potential
investors.
• Financial Institutions, such as Commercial Banks, World Bank,
International Monetary Fund. Accounting information assists them to
evaluate the credit rating of a borrowing Nation.
• Governments, apart from the ones reporting: Governments
collaborate on ideas of investment and research. They require
accounting information on the well-being or otherwise of each other.
• Suppliers and Contractors: Suppliers and contractors are eager to
ascertain the ability of a Government to pay for goods and services
delivered. Only Accounting information can be revealing.
5.2.4. Source of Government Finance
The Government revenue means the amounts which are received by the
Government during a particular year. In other words, the income of the
Government is known as public or government revenue. The sources may be
classified as:
1. Internal sources
2. External sources
These sources are explained as under:
I. Internal sources
Internal sources consist of those amounts which are received by the Government
internally or from the individuals of the country. The main internal sources of
revenue of Rwanda Government are:
• Direct taxation
This taxation includes income tax, corporation tax and capital gains tax. About
70% of Rwanda Government’s revenue comes from direct taxation.
• Indirect taxation
Indirect taxation includes:
1. Tax on domestic manufacturers
2. Customs duty on import and exports
3. Excise duties: It is duty imposed mostly on production activities for
sales purposes, largely collected at manufacturing stage, showing
downward trend
4. VAT
Indirect taxation is the major source of Government revenue from internal
sources. This taxation contributes about 50% of Government revenue in
Rwanda.
• License fees
The Government of Rwanda receives fees from business and trading licenses,
license fees under traffic act and other miscellaneous licenses. This source
contributes about 5% of Government revenue in Rwanda.
• Fines and penalties
Fines and penalties is another source of revenue. These fines and penalties
are imposed on the individuals for not obeying the laws, rules and regulations
of the country. This source contributes about 5% of total income of Rwanda
Government from internal sources.
• Sale of goods, services and properties
The Government also receives income from the sale of different goods and
services properties. About 3% to 4% of income of Government of Rwanda
comes from this source
• Rent
Closed school buildings, empty state-owned buildings, and park shelter and
reception facilities are examples of facilities that can be rented out. Government
agencies also earn rent proceeds for the use of property by other agencies. For
example, if the federal government needs space in a small town, the feds might
arrange to rent out an unused office in the town hall from the municipality.
Unusable properties are sold off.
• Investments
Government sometimes uses revenues as a means of earning interest and
dividends. While the investment might be made up of tax francs, the interest,
dividends and capital gains are considered non-tax revenue. The investment
opportunities might be in the form of mutual funds, bonds, foreign exchange
rates and government-backed loans to businesses and individuals, such as
small business loans and mortgages.
• Grants and Gifts
Gifts are Voluntary contributions by individuals or institutions to the
government. Gifts are significant source of revenue during war and emergency.
A grant from one government to another is an important source of revenue in
the modern days.
The government at the Centre provides grants to State governments and the
State governments provide grants to the local government to carry out their
functions. Grants from foreign countries are known as Foreign Aid. Developing
countries receive military aid, food aid, technological aid, etc from developed
countries.
• Borrowings
The government may force various individuals, firms and institutions to lend
to it at a much lower rate than the market would have offered.
• Other sources
In addition to the above sources, the Government receives income from some
other miscellaneous sources. These sources contribute a small amount of
Government revenue.
II. External sources
External sources of Government revenue consist of external loans and grants.
These loans and grants are obtained by the Government for development
purposes. These loans and grants are the main sources of income of capital
budgets.
These loans and grants are obtained from different countries and international
organizations. The Rwanda government obtains loans and grants mainly from
the U.S.A, Germany, Japan, Netherlands, Denmark, U.K and so on.

The main international organizations which provide loans to Rwanda are World
Bank, African Development Bank, International Monetary fund, Arab League,
European Economic Community, International Development Agencies, etc
Government expenditure
Government expenditure means those amounts which are spent by the
Government for different purposes. The Government expenditure may be
classified as:
a) Recurrent expenditure
b) Development expenditure
These are explained as under:
Recurrent expenditure
Recurrent expenditure means revenue expenditure. This expenditure is
incurred by the Government on normal activities. The amounts which are
spent by the Government on regular activities like defense, health, education,
administration, etc, are referred to as recurrent expenditure the main
expenditure heads of recurrent expenditure are:
General public administration
This expenditure is incurred on general administration of the country. About
10% to 15% of total expenditure in Rwanda is incurred for this purpose.
Defense
Defense of the country is of great importance for its stability. The government
of Rwanda spends about …. % of recurrent expenditure on the defense. This
percentage is very low as compared to other countries.
Education

Education is the main priority of Rwanda Government. About 20% to 25% of
recurrent expenditure is incurred on education.
Health
The government spends on health facilities. About 6% of recurrent expenditure
is incurred for providing health services.
Social welfare
The government of Rwanda spends on social services like housing, sports; etc
the share of this head in total recurrent expenditure is about 2%.
Economic services
The government of Rwanda spends huge amounts on providing economic
services. These include agriculture, forestry, fishing, electricity, gas, water,
transport and communication, etc. About 16% of total recurrent expenditure is
incurred for this purpose.
Other services
There are some miscellaneous items of recurrent expenditure. About 30% of
total expenditure is incurred for this purpose.
Development expenditure
Development expenditure is incurred for the establishment of new agricultural
and industrial projects, installation of new plant and machinery, construction
of new roads and buildings, purchase of new equipments etc.
Development expenditure is mainly financed from external loans and grants.
Internal borrowing is also another source of financing the development
expenditure. Development expenditure is shown in capital budget.
5.2.5. Role of IFMIS in Effective PFM
The Government has put in place an Integrated Financial Management
Information System (IFMIS) as the principal system of Government for
financial management. It is intended that the system will cover all the General
Government entities with the implementation being carried out in a phased
manner. Accordingly, the IFMIS shall be used for the following purposes:
• Centerpiece of the government financial management processes of
planning, budget preparation, budget execution, revenue management,
inventory management, assets management, accounting and financial
reporting.
• Preparing financial management reports: these enable improved
management decisions making through provision of real time financial
statements.
• Harmonizing processing of transactions: transaction processing across
Government is made uniform through use of SCoA therefore offering a
common integrated enterprise platform for consistency in process and
procedures;
• On-line inquiries: users can access the system from any location with
the required authorization details;
• Controls for commitments, expenditure and budgetary adjustments
are made possible; and
• Special accounting needs such as development projects and special
funds are also provided.

The figure below summaries the typical structure of the IFMIS

5.2.6. Recording Government Revenue and Expenditure
Although the recording of government revenue and expenditure is based on
the concept of double entry but the procedure of recording transactions in the
government sector is different from a commercial enterprise. In the government
sector, the theory of fund accounting is followed.
A fund is an independent fiscal and accounting entity with resources and
obligations. Each government unit can be regarded as a fund and complete
accounting records maintained for each fund. There are various government
ministries and in each ministry there are various departments. For example,
the ministry of commerce has the following departments:
General administration and planning
• Department of internal trade
• External trade services
• Inspectorate of weights and measures
Each department of the ministry of commerce can be regarded as a separate
fund.
Major steps in the government accounting in Rwanda are the following:
Annual estimates
These estimates are prepared by the various ministries and these submitted to
the treasury. These estimates include revenue and expenditure figures for the
next year.
Presentation of the budget
The Minister of finance presents the budget for the next financial year before
the parliament in the month of June every year. The financial year of the
government starts from 1st July and ends on 30th June next year.
The budget contains the estimate of government revenue and government
expenditure for the next year. The various proposals of the budget are
debated in the parliament. After the approval of the parliament the budget is
implemented.
Spending by Ministries
Some specific amounts are appropriated by the Parliament to different
ministries. The government ministries can spend the amounts appropriated
to them. Appropriated amounts can be used by the ministries to perform their
duties, there are different vote numbers assigned to different ministries.
These votes may be further divided into recurrent (R) and development (D)
votes. These vote numbers are used for reference purposes. For example, vote
R- 11 and D11 are recurrent and development vote numbers for the ministry
of health. In each Ministry, there are sub votes for different departments of any
ministry.
The Fund System of Governmental Accounting
Public funds are monies owned by the Nation and controlled and applied by
the central government for public works and services. In Rwanda, all resources
(revenue from tax, non-fiscal revenues) are recorded into a fund known as
a consolidated fund. The consolidated fund account is kept by the treasury
under the ministry of finance, and all revenues and grants received by the
Government are paid into this account. No money can be withdrawn from this
account without approval of Parliament, i.e. Parliament is the sole signatory to
this account.
The fund accounting system is a concept which is used to describe how
government resources are accounted for from one major fund source. The word
fund is therefore used to describe the whole government set up as one big fund
in terms of structure.
Governmental fund
Government funds are used to finance general government activities such as
police and fire protection, courts, inspection, and general administration. Most
of their financial resources are subsequently budgeted (Appropriated) for
specific “general government” uses (expenditures) by the legislative body.
Government funds include:
– The general Fund
– Special Revenue Fund
– Capital Project Funds
– Debt Service Funds
The accounting equation of most governmental funds is:
Current Assets – Current Liabilities = Fund Balance
Thus, Governmental funds are essentially “Working capital” funds and their
operations are measured terms of sources and uses of working capital, that it
is, changes in working capital.
When Fund Balance is positive, there is a greater likelihood that the government
will pay it is liabilities. When Fund Balance is negative, short term creditors
may not be paid, and public organization may be forced into bankruptcy.
A. The General Fund
The primary governmental is used to account for most routine operations of the
governmental entity. All general governmental resources that are not required
to be accounted for in another fund are accounted for in the General Fund.
– General fund revenue consists primarily of taxes (Property, sales,
income, and excise), licenses, fines, and interest.
– General fund revenue expenditures are budgeted and appropriated for
by council or other legislative body.
Typical journal entries include:
a) To record the budget :
Estimations revenues XX
Appropriations XX
Fund Balance for the last year XX
Note: The budgetary entry causes the Fund Balance account to be carried
during the year at it is planned end of year balance.
b) To record revenues
Cash or receivable XX
Allowance for collectives’ receivables XX
Revenues XX
c) To record collection of receivables and write off of uncollectible
Cash or receivable XX
Receivable XX
Allowance for uncollectible receivables XX
Receivable XX
d) To record purchase order issued or contract commitment
Encumbrances (Expected expenditures) XX
Reserve for encumbrances XX
e) To record Expenditures upon receipt of invoice
Reserve for encumbrances XX
Encumbrances (Expected expenditures) XX
Expenditures (Actual cost) XX
Vouchers Payable XX
Note: While goods and services committed for by purchase order or other
contract are encumbered in governmental funds to avoid overspending
appropriations, many expenditures are controlled by other means and need
not to be encumbered. For example, wages are set by contract and controlled
by established payroll procedures and are not encumbered.
f) To record supplies
Supplies inventory XX
Fund Balance reserve for supplies inventory XX
The supplies inventory indicates that portion of fund balance is not available
Note: This customary entry compounds these two more proper entries.
6a. Supplies inventory XX
Fund Balance XX
6b. Fund Balance XX
Fund balance reserve for supplies inventory XX
The entry (ies) would be reversed had supplies inventory decreased. The
increase (decrease) in supplies inventory is reported as an “other Financing
Source (Use)” in the governmental fund “Operating Statement”, the statement
of Revenues, Expenditures, and Change in Fund Balance.
g) To record closing entries at year end
Revenues XX
Appropriations (budgeted) XX
Collection of prior year error XX
Fund balance (difference – Debit or credit) XX
Estimated revenues XX
Expenditures XX
Encumbrances XX
Cumulative effect of change in accounting XX
Appropriations is the authorizations of asset outflows of uses estimated of
fund working capital
h) To record encumbrance reversing entry – beginning of next year
Encumbrances XX
Fund balances (reserves) XX
The encumbrance system is used in most governmental fund to prevent over
expenditure and to demonstrate compliance with legal requirements. When it
comes to close the end of fiscal year the encumbrance account is credited.
B. Special Revenue Funds
They are used to account that are externally restricted or designated by the
legislative body for specific general government purposes. For example, motor
fuel taxes used to finance the provincial road construction would be accounted
for in a Special Revenue Fund.
C. Capital Project Funds
The capital project funds used to account for acquisition and use for financial
resources to construct or otherwise acquire long-lived general government real
property and equipment. For example, to construct a new city hall, conference
center, stadium, Airport.
D. Debt Service Funds
The Debt Service Funds used to account for repayment of all general government
long term debit recorded in the General Long Term Debt Account Group and
payment of related interest and fiscal agent charges. Debit Service Fund
budgetary may be used to record the estimated revenues (e.g., from taxes),
estimated other financing sources (e.g. from inter fund transfer from General
Fund) and estimated income (e.g., from investment)
Example:
1. To record tax revenues and other financing sources
Cash or receivables XX
Allowances for uncollectible taxes XX
Tax revenues XX
Operating transfer from General Fund XX
2. To record investment made
Investment XX
Cash XX
3. To record investment income
Cash XX
Investment revenues XX
4. To record expenditures for debt principal retirement (at maturity date)
and interest (at due date)
Expenditures XX
Bonds payables (At maturity date) XX
Interest payable XX
5. To record payment of matured debt and interest due
Bond payables XX
Interest payable (At maturity date) XX
Cash XX
E. Account groups
Account groups are memorandum list and offset accounts that provide a record
of general government fixed assets and long term debt, which are not recorded
in the governmental funds.
Account groups include:
The general Fixed Assets Account Group (GFAAG)
The account group accounting equations are:
GFAAG: General Fixed Assets = Investment in General Fixed Assets
GLTDAG: Amount Available in Debt Service Fund for GLTD Retirement
+ Amount to be provided in Future Years for GLTD Retirement
-------------------------------------------------------------------------
= General Long Term Debt Payable

Example for some records:
1. To record general fixed assets (e.g., Police cars fire trucks) acquired the
General Fund or Special Revenue Funds:
Machinery and equipment (Police cars or fire trucks) XX
Investment in General Fixed Assets XX
2. To record general long term debt incurred
Amount to be provided for payment of bonds XX
Amount to be provided for payment of long-term notes XX
Amount to be provided for payment of capital lease principal XX
Bonds payable XX
Long term notes payable XX
Capital lease (Principal) payable XX
Proprietary Funds
Proprietary funds are used to finance a government’s self-supporting “business
type” activities (e.g., utilities).
Proprietary funds include:
– Enterprise Funds (Electricity, Gas, water)
– Internal Service Funds (supplies, photocopies)
The accounting equation of proprietary funds:
curr. Assets + Fixed Assets +Other Assets
−Curr.Liab.+ Long term Debt +Contrib.Capital
+Retained Earnings
The accounting equation of proprietary funds is identical to that of a business
corporation, it includes accounts for all related assets and liabilities, not just
for current assets and current liabilities as well as for contributed capital and
retained earnings.
Proprietary fund operations are measured in terms of revenues earned,
expenses incurred, and net income or loss.
Sample entries:
1. To record operating revenues :
Cash XX
Revenue from sale XX
Revenue from appliances XX
Revenues from Other XX
2. To record governmental grants for operating and capital purposes
Cash or receivables XX
Cash construction XX
Revenues – State grants XX
Contributed capital (Capital Grant) XX
3. To record operating expenses
Expenses - cost electricity purchased XX
Expenses – depreciation XX
Expenses – Salaries and wages XX
Expenses – other XX
Accumulated depreciation XX
Cash XX
Payable XX
4. To close the account at year-end
Revenues from sales XX
Revenues from sale of appliances XX
Revenues – State Grants XX
Revenues from Other XX
Expenses –cost purchased XX
Expenses –depreciation XX
Expenses Salaries and Wages XX
Expenses – Interest XX
Expenses – Other XX
Retained earnings (Dr or Cr) XX
– The General Long-Term Debt Account Group (GLTDAG)
Fiduciary Funds
Fiduciary Funds are used account for government’s fiduciary or stewardship
responsibilities as an agent (Agency Funds) or trustee (Trust Funds) for other
governments, funds, organizations, and or individuals.
Fiducially funds include:
– Nonexpendable Trust Funds (e.g., Donations)
– Expendable Trust Funds (e.g., library books)
– Pension Trust Funds (Pension, retirement)
– Agency Funds (e.g, City, Schools district…)
Expendable Trust Funds are accounted for like governmental funds, and
both nonexpendable Trust Funds and Pension Trust Fund are accounted for
like proprietary funds. Agency Funds are purely custodial (Current Assets =
Current Liabilities).
For agency Funds, the government has no equity. Further, Agency Funds do not
have operating accounts and no operating statement is prepared for Agency
Funds.
F. Some Special Funds
In relation to fund accounting in the public sector, there are some special funds
which are established. These are explained as under:
a) Trust funds
Trust funds are those funds whereby the government receives money in
the capacity of a trustee e.g. Survivors fund, widows and children’s pension
fund. In this fund, all married civil servants contribute a certain amount of
their monthly salaries and they get the refund on the retirement. Some other
examples of trust funds are former known as National Social Security Fund
(N.S.S.F) and RAMA. (Currently known as RSSB: Rwanda Social Security Board)
A trust fund is an independent accounting entity. It may own some property
and other assets like investments etc. Withdrawals from a trust fund are made
in accordance with some statutory provisions. A trust fund is also known as a
fiduciary fund.
b) Sinking funds
These funds are created with the purpose of the repayment of public debts.
Mostly, these funds are set up by the approval of the Parliament. Some annual
appropriations are made in these funds. The amounts appropriated are
invested to earn some interest. When any public debt matures then the sinking
fund is used to redeem this debt.
c) Revolving funds
These funds are also set up by the approval of the parliament. These funds
provide the financial resources for achieving some specified objectives.
Some Government enterprises are set up through revolving funds. The initial
appropriation in these funds is made out of the consolidated fund. The receipts
generated in such funds are automatically used by the respective enterprises in
accordance with the provisions of the Act that set up the fund.
d) Capital project funds
The purpose of capital project is to provide resources for the completion of
some specific capital project. Main sources of financing include the proceeds of
bond issues, grants and transfers from other funds. A separate capital project
fund is created for each major project.
Conclusion
Most governmental fund accounting systems use both budgetary accounts and
regular accounts
– Budgetary accounts are nominal accounts used to record approved
budgetary estimates of revenues and expenditures (appropriations)
– Regular accounts are used to record the actual revenues, expenditures
and other transactions affecting the funds
The followings accounts are usually employed in governmental funds:
– Estimated revenues: Estimated sources of fund working capital.
The estimated account is debited to record the revenue budget and i
closed at the end of the period.
– Appropriations: Estimated uses of fund working capital (except for
other financing uses). The appropriation account is credited to record
the budgeted expenditures and is closed at the end of the period.
– Revenues
– Other financing sources: Non revenues sources
– Expenditures
– Fund balance and Reserve
Application activity 5.2
A police department orders some stationary on 11 December 2012. On
15 December 2012, the police department received an invoice requesting
payment for the stationary that had been ordered. Payment was requested
to be made by 11 January 2013 but the police department actually paid for
the stationary by same-day bank transfer on 3 January 2013. The stationary
order was delivered to the police department and signed as received on 28
December 2013.
The police department’s financial year runs from 1 January to 31 December.
Compare how the police department would report the stationary order
under:
a) Cash basis
b) Modified cash basis, with one month specified period
c) Accruals basis
5.3. Preparation of financial statements for public
institutions
Learning Activity 5.3
Your District Accountant is hiring you to help him in closing the financial
period due to the numerous activities to be done during a given period.
Required: Discuss any five financial statements that you will need to
prepare for your District.
General guidance relating to preparation of financial statements
Financial statements must present fairly the financial position, financial
performance and cash flows of an entity to ensure that the users of financial
statements are provided with useful information for decision making
purposes. The general qualitative characteristics of financial reporting are:
• Understandability – the information must be readily
understandable to users of financial statements. This means that
information must be clearly presented, with additional information
supplied in the supporting notes as needed to assist in clarification.
• Relevance – The information must be relevant to the needs of the users,
which is the case when information influences the financial decisions
of users. This may involve reporting particularly relevant information,
or information whose omission or misstatement could influence the
financial decisions of users.
• Reliability – The information must be free of material errors and bias,
and not misleading. Thus, the information should faithfully represent
transactions and other events, reflect the underlying substance of
events, and prudently represent estimates and uncertainties through
proper disclosure.
• Comparability – The information must be comparable to the financial
information presented for other accounting periods, so that users
can identify trends in the performance and financial position of the
reporting entities.
• Going concern assumption – When preparing financial statements,
a public entity is required to assess whether it can be assumed that it
is able to continue as a going concern. Generally, financial statements
of a public entity are prepared on going concern basis unless there
is an intention to liquidate the entity or discontinue business or
administrative operations or there is no alternative but to do so. Such
uncertainties must be disclosed.
• Consistency of presentation – The presentation and classification of
items in the financial statements must be consistent from one period
to another unless required otherwise by a significant change in the
nature of the entity’s operations or a change in one or more IPSASs.
• Materiality and aggregation – Each material class of items in the
financial statements must be presented separately. Aggregating items
of a different nature or function is permitted only if they are immaterial
individually.
• Offsetting – Assets and liabilities, and revenue and expenses, may not
be offset.
• Comparative information – comparative prior period information
must be presented for all amounts shown in the financial statements
and notes to the extent relevant for understanding of the current
period’s financial statements
5.3.1. Statement of financial performance
Statement of performance is a financial report which shows revenues and
expenditures.
The following illustrates the format of statement of performance:
Statement of Financial Performance

5.3.2. Statement of financial position
Statement of financial position is a statement showing at a given date, assets
and liabilities of an entity.
The following illustrates the format of statement of financial position:
Statement of Financial Position

5.3.3. Statement of cash flows
This statement shows, at a given date inflows and outflows of cash and cash
equivalent.
Statement of Cash Flows

5.3.4. Statement of change in net assets
Statement of Changes in Net Assets/Equity

5.3.5. statement of Comparison of Budget and Actual Amounts
Statement of comparison of Budget and Actual Amounts

The following notes and schedules should accompany a complete set of
financial statements:
i. Accounting policies followed in the preparation of Financial Statements;
ii. Bank reconciliation statements and supporting copies of bank statements
for entities;
iii. Petty cash account certificates;
iv. Detailed schedules of debtors and other receivables, creditors and other
payables;
v. Summary of physical assets extracted and reconciled to the fixed assets
register and summary of inventory;
vi. Summary of intangible assets;
vii. Summary of investments made by the entity to date;
viii. Summary of consumable inventory;
ix. Summary of contingent liabilities;
x. Trial balance;
xi. A statement showing the purposes of implementation of audit
recommendations; and
xii. Any other schedule that will enhance easy understanding of the financial
statements.
Application activity 5.3
Identify the key users of the financial statements for a public entity and
consider their information needs.
5.4. Government budget in accordance with the
requirements of IPSAS24
Learning Activity 5.4
Mr GATERA criticized the annual government budget prepared advancing
the reason that an annual budget is short sighted, he was provided with
long –term government programs that cover several years and he also
found them to have a long-term perspective such that there is another tool
necessary to link the budget to such long-term program.
Required:
a) As an accountant, who understands the budgeting process in
Rwanda, identify for Mr GATERA, a tool used in planning and
budget process that can serve as a link between annual budget and
long-term government programs and briefly explain how the tool
works.
b) Explain the objectives of the tool used in planning and budget
process that can serve a link between annual budget and longterm
government programs.
5.4.1. Government budgeting
A budget is a quantitative expression of a plan of action prepared in advance
of the period to which it relates to. Budgets set out the costs and revenues
that are expected to be incurred or earned in future periods.
Purposes of budgeting
Planning for the future, in line with the objectives of the organization
Evaluation: To judge managerial performance.
Controlling costs: To compare with actual results to enable investigations
into significant differences.
Coordination of different activities to ensure goal congruence
Authorization of expenditures
Motivation of managers by encouraging them to beat targets set at the
beginning of the budget period. Bonuses are often based on beating budgets.
Communication: Budgets communicate the targets of the organization to
individual managers.
Budgeting in Public Sector
• Budgeting and financial management are at the core of economic and
public sector reform programs in most nations around the world.
With the growing pressures for enhanced service delivery and the
challenges of budgetary crises and fiscal shocks, the need for improved
budget processes and innovative financial management techniques is
especially critical in developing and emerging economies.
To the government, budget usually serves as:
• An estimate of revenue and expenditure for a given fiscal year;
• A guide towards the execution of the year’s activities; and
• An instrument of evaluating performance.
Based on the information above, budget in the public sector is normally
used as an effective instrument for the following.
• As an instrument for economic policy
• Instrument for effective management
• Instrument for evaluating performance
Approaches to Budgeting
• Traditional or Incremental Based Budgeting
• Zero Based Budgeting
• Program and Planning Based Budgeting
• Performance Based Budgeting
5.4.2. International Public Sector Accounting Standards
(IPSAS)
The IPSASB develops and publishes the IPSAS. Now, the IPSASB aim to develop
high quality accounting standards to support public sector entities to prepare
general purpose financial reporting and improve the quality and transparency
of financial reporting in the public sector.
Many IPSAS are based on the International Financial Reporting Standards
(IFRS) or the former International Accounting Standards (IAS) which tend to
be adopted in the private sector.
The following table illustrates IPSAS and corresponding IFRS. IPSAS continue
to be published. However, as at June 2019 the following are in publication
As you can see from the table above, many of the IPSAS use different terminology
to the IAS or IFRS on which they are based. This is perhaps unsurprising as the
nature of public sector entities also differ.
You may have also noticed that the final entry in the table is the Cash Basis IPSAS.
It is worth highlighting that all other IPSAS are based on the accrual method of
accounting which reflects the IPSASB’s preference for accrual based reporting.
Indeed, one of the aims of the IPSASB is to move public sector organizations
from the cash to the accruals basis of accounting and even the cash basis IPSAS
is intended to be a stepping stone towards achieving accruals reporting.
Application activity 5.4
The budget officer of the Ministry of Health is preparing a consolidated
budget for the financial year 2021/2022. During that exercise one of its
budget including the following items:
Required:
a) Differentiate recurrent from development budgets
b) Classify the above provided items under recurrent and development
budget
Skills Lab 1
With the teacher, students carry a visit to nearest Public sector entity. They
ask for some books of accounts held by the entity and available financial
statements for previous years from the Accountant officer. They observe,
and share findings thereafter.
End unit assessment 5
1. The Government of Rwanda adopted the use of IFMIS as an
information management tool. The benefits of using IFMIS include:
i. Enabling government reform and improving efficiency and controls
ii. Improving confidence through transparency
A. (i) only
B. (i) & (ii) only
C. (i), (ii) & (iii)
D. (ii) & (iii) only
2. A government that follows full IPSAS accrual must present a
statement of financial position that complies with IPSAS for the
line items presented. The IPSAS that guide the presentation of
property, plant and Equipment is:
A. IPSAS 16
B. 1PSAS 1
C. IPSAS 19
D. None of the above
3. One of the important Public Financial Management (PFM) reforms
that the government of Rwanda has put in place is the use of
Integrated Financial Management Information System (IFMIS).
The implementation of IFMIS came with a lot of benefits but it
also presents certain risks which include but not limited to lack of
capacity, weak commitment to change and technical challenges.
Required:
Explain any Five (5) internal controls that can be put in place to minimize
these risks associated with the use of IFMIS
Unit 6 INTRODUCTION TO COMPANY ACCOUNTS
Key unit competence : To be able to prepare books of accounts for a
limited Liability company
Introductory activity
Company accounts analyses Company financial activities over a period of
12 Months. They are prepared and maintained for every period to show
the Company’s performance and its assets against liabilities. Unlike sole
proprietorship or Partnerships, Company accounts records amounts from
shares, debentures etc.
From the knowledge acquired from the previous subjects, what do you
think is the distinction between, a sole proprietorship, Partnership from
Company accounts?
6.1. Introduction to limited liability Company
Learning Activity 6.1
Sole proprietorship, partnership differs from companies in terms of the
size and the share capital.
1. What are the benefits of forming companies?
6.1.1. Company as corporate legal body
A company is a legal entity formed by a group of individuals to engage in
and operate a commercial business. Similarly, a company is described as a
voluntary association of persons who have come together for carrying on
business and sharing the profits. Members of the company work together
with the same goal to accomplish particular goal. The members of the Company
are called Shareholders. They are called shareholders because they bought
shares.
Being considered a legal entity in the terms of the law, companies are able
to enter into contracts, hold and dispose of property, raise capital through
the issuance of shares, etc. The members of a company enjoy a separate and
distinct existence from members. Unlike single traders/ sole proprietorships,
and partnerships. The company business pays off its liabilities and debt.
According to Rwanda’s Law Governing Companies 17/2018, company
accounts must be filed three months after the year’s end. They frequently
include specific guidelines on the minimal data that must be included in
a company’s financial statements. Non-incorporated enterprises, often
known as unlimited liability companies, frequently experience relative
freedom from statutory regulation.
Companies are classified into two namely ;
1. Limited liability Company
2. Unlimited liability Company.
1. Limited liability Company
What is a limited liability Company ?
A limited company is a company limited by shares or a limited liability
Company is form of company where the shareholders are only limited by their
shares.
Limited liability means that a company’s owners or investors are only liable
for the total amount of money (in form of shares) they have invested in the
business. The shareholders of the business will be protected in the case of
bankruptcy if it is registered as a limited liability company. Furthermore
«limited liability» will imply that the owner’s losses are only restricted to
the proportion of their specific share and that they are not liable for losses
that exceed their shares. In this case, if the company suffers losses or goes
Bankrupt, they cannot attack their own properties.
2. Unlimited liability
Unlimited liability is the opposite of limited liability. Unlimited liability means
that if the company incurs debts that it is unable to pay, the owners will be
held personally accountable for the unpaid debts and may be required to sell
their personal properties in order to pay back the debts.
Characteristics of limited Companies
1. All members have a limited liability
2. They have a separate legal existence
3. The debts of the company are separate from those of the shareholders
4. Shareholders are not liable for the day to day activities of the business
5. It can carry out any activity as long as it does not go against the law.
Advantages of Companies
• Shareholders enjoy limited liability
• Larger capital is raised through larger membership
• Risk of fraud is minimized because their accounts are audited annually.
• They are more permanent in nature because the death or retirement
of a
• Shareholder does not affect the company.
• Companies can easily access funds from financial institutions.
• Companies operate in legal frame work-companies Act.
Disadvantages of companies
• They pay formation and registration costs
• Burden of taxes : companies pay corporation tax.
• The shares of a company are scattered and the transferability of the
shares
• Kills the morale of the shareholders and when the morale is down,
the affairs of the company are not considered which gives chance to
managers to promote their own interests.
• Companies are difficult to form because they have to produce a number
of documents and have to follow legal procedures before they are
formed.
• If profits are made, they are reduced as they have to be shared among
shareholders.

6.1.2. Difference between Sole trader, Partnership and Limited
Company.

Formation of registration of companies in Rwanda :
A company is formed by incorporation. Incorporation is done by :
• Filling appropriate forms for Memorandum of association and may
have also
• Articles of association given to registrar of companies with appropriate
fees and a certificate of incorporation is issued.
Memorandum of association is a document that shows the relationship between
the company and the outsiders. It contains the following ;
• The name and address of the company,
• The objectives of the company, showing whether it is :
– Limited or unlimited
– Private or public and the authorized share capital
Articles of association shows the rules and regulations for the company internal
structure.
It contains items like :
• The number of directors,
• When the annual general meetings are to be held.
• The voting rights of the shareholders,
• Dividends policy, and
• Other rules.
NOTE : It is a pre-requisite for companies to prepare Articles and Memorandum
of Association and get them notarized by a Public Notary. One copy is retained
at the Notary’s Office, one at the Registrar General’s Office at RDB and one at
the Office of the Official Gazette for publication.
Certificate of incorporation
A certificate of incorporation is obtained at the Company registry at RDB upon
submitting an application letter addressed to the Registrar General, a receipt
of registration fees payable at the National Bank of Rwanda and three copies
of the articles and memorandum of Association
Establishing a subsidiary/branch
Foreign companies wishing to establish a branch or a subsidiary company
in Rwanda apply to the Minister of Trade and Industry for authorization to
establish a branch and the Registrar General of RDB for registration in the
registry of companies. RDB is the principal Government Agency responsible
for facilitating investors to realize their investment projects in Rwanda
They must present a board resolution/declaration of the company to invest in
Rwanda, articles and memorandum of association of the parent company and
certificate of incorporation.
6.1.3. Shares and share capital
Definition of shares
A share is a unit of Capital to a company. It is the interest a shareholder or
owner has in a company. Memorandum of association (company constitution)
must statea fixed amount of a share.
Types of shares
Shares are broadly divided into two;
• Ordinary shares
• Preference shares.
Ordinary shares
Ordinary shares are those shares which do not carry a fixed rate of dividends
and the dividend rate depends on amount of profits and directors` decisions.
Ordinary dividends are paid after tax and after full payment of preference
dividends. The holders of ordinary shares are called ordinary shareholders
and they are paid ordinary dividends out the profits make by company
business.
Ordinary shares are considered as risk takers as they get their dividends after
the full payment of the preference dividends. However, they are able to use
their rights to manage the firm’s affairs by voting at meetings of the company.
Preference shares
Preference shares right a fixed rate of dividends out of profits distributed for
any year and their holders claim first their dividends before ordinary shares.
Ordinary dividends cannot be paid before preference shareholders are paid in
full. The holders of preference shares are called preference shareholders and
are entitled to preference dividends out of the profits made by the company
business. In the event of a company’s liquidation, preference shareholders
will have priority over ordinary shareholders in receiving their capital back.
Preference shareholders do not carry a voting right.
Types of preference shares
Cumulative preference shares: These shares entitle their holders to a
fixed rate of dividend. If there are not sufficient profits to pay this fixed rate
in a particular year, arrears will be paid in the following year or at a first
opportunity when profits are made.
Non-cumulative preference shares: These also claim a fixed rate of
dividend and if there are not sufficient profits to pay in a particular year their
holders do not claim arrears in the following year.
Example Dividends on ordinary shares and preference shares
UMUCYO Ltd has issued 50, 000,000 ordinary shares of RWF500 each and
20,000,000 7% preference shares of RWF100 each. Its profits after taxation
for the year to 30 September 20X5 were RWF840 million. The management
board has decided to pay an ordinary dividend (ie a dividend on ordinary
shares) which is 50% of profits after tax and preference dividend.
Required
Show the amount in total of dividends and of retained profits, and calculate
the dividend per share on Ordinary shares.
Answer :
RWFm
Profit after tax 840
Preference dividend (7% of RWF100 u 20, 000,000) 140
Earnings (profit after tax and preference dividend) 700
Ordinary dividend (50% of earnings) 350
Retained earnings (also 50% of earnings) 350
The ordinary dividend is RWF7 per share (RWF350 million by 50 million
ordinary shares).
The appropriation of profit would be as follows :
RWFm RWFm
Profit after tax 840
Dividends : preference 140
Ordinary 350
490
Retained earnings 350
As we will see later, appropriations of profit do not appear in the statement of
profit or loss, but are shown as movements on reserves.
Share capital of the company
Share capital is the amount of money a company raises by selling shares to
public and private sources or investors.
The company act provides that the Memorandum of association must state
the amount of share capital with which the company has to register and the
division of the share capital into shares of a fixed amount.
The share capital of the company forms the permanent fund in the company
and is reported in the balance sheet.
The investor will then pay for and be issued with the shares and therefore,
they become owners. Each share has a flat value called Par value/face value/
nominal value.
Example 1
For example, if a company decides to set up a share capital of RWF 200,000, it
may decide to issue :
200,000 shares of RWF1 each per value. (200,000 x 1=200,000RWF)
100,000 shares of RWF 2 each per value. (100,000 x 2= 200,000RWF)
400,000 shares of RWF 0.50 each per value. (400,000 x 0.50=200,000RWF)
Forms of share capital:
The capital of the company is called share capital because it consists of or
raised by selling shares. The following are forms of share capital:
1. Authorized or registered share capital or nominal capital: This is
the maximum amount as stated in the memorandum of association, a
company may raise by selling shares.
For example
If a company wishes to sell 1,000 shares of RWF1,000 each, its authorized
share capital is RWF. 1,000,000
i.e number of shares *price of the share=1,000*1,000=RWF. 1,000,000
2. Issued share capital: This is the value of the shares that have been
issued whether or not the full amount against them has been called up.
It is also called Subscribed capital
For example
If the above company has issued 600 shares for sale, the issued share capital
would be RWF. 600,000.
i.e number of shares *price of the share=600*1000=RWF600,000
3. Called up share capital: This is the amount that the shareholders have
been asked to pay. When shares are issued or allotted, a company does
not always expect to bepaid the full amount for the shares at once. It
might instead call up only a part of the issue price, and wait until a later
time before it calls up the remainder.
e.g. if the above company has asked its shareholders to pay only 600 RWF per
share, it’s called up share capital would be 600*600 =360,000RWF.
4. Uncalled up share capital: This is the total amount which is to be received
in future, but which has not been asked for. 600*400=240,000RWF.
5. Paid up share capital: This is the amount that has actually been received
from the shareholders. Like everyone else, investors are not always
prompt or reliable payers. When capital is called up, some shareholders
might delay their payment (or even default on payment). Paid-up capital
is the amount of called-up capital that has been paid.
e.g. in the above case shareholders holding 50 shares have failed to pay a call of
200RWF per share, the paid up would be;
Called up 360,000
Less: arrears 10,000
Paid up capital 350,000
6. Calls in arrears: This is total amount which has been asked i.e. (called
for) but has not yet been paid by shareholders. 50*200=10,000 RWF
7. Minimum share capital: This is the amount stated by the promoters
when making application for registration of the company as the minimum
required amount to commence trading effectively.
Application activity 6.1
1. What is a share?
2. What is the difference between ordinary and preference shares?
6.2. Accounting and adjustments of shares
Learning Activity 6.2
A company ABC wishes to issue shares as per stated in its memorandum
of Association. The members only know about the market value of shares
and they do not know about other relevant information. They need you as
a professional accountant to give you some clarification such as:
a) Distinguish between a share issues at par, an issue at premium, at
a discount
b) The market value of a share is irrelevant to the company when
preparing its financial statements.’ Discuss this statement’
6.2.1. Stages on issue of shares
When the company has been registered the following stages should be taken
for the company to be able to collect money from the public by issuing shares :
1. Prospectus.
When a public company plans to raise capital by selling shares to the general
public. A copy of prospectus asks the public to submit an offer to purchase
company share on or before the date of publication and this copy must be sent
to the registrar of businesses for registration.
It must provide a summary/information of the business, its track/past record,
and the project that the company is issuing shares for. It also includes the
starting and the closing date of the issue of shares, application fee, at the
time of allotment and on calls, name of the Bank for application fee deposit,
accepted minimum number of shares to be issued etc.
2. Application
After the public have finished reading and they are satisfied, they can apply to
the company for the purchase of shares on the printed subscribed form. After,
the public sends an application form together with the application money to
specified bank account and receives a receipt. The application money cannot
be withdrawn by the company until the allotment is done.
3. Allotment
Company shares are issued on the understanding that they are payable by
installments and the following points would be considered;
That when the public apply for shares, they send a sum of money known as
the application money. This is not a guarantee that they will receive shares
and this money can always be refunded to the applicants. At this stage the
directors will send what is known as allotment letters to the successful
applicants. These letters reflect the acceptance of the allotment of shares and
the binding contract now exists between the company and the subscriber.
Finally, the applications and the allotment account must only remain with the
right nominal value expected on application and allotment. The amounts in
these accounts is transferred to shareholder’s share capital account.
Accounting entries made
There are two methods by which accounting entries are made on application
and allotment :
Method 1
In this first method, application and allotment account should be treated
separately. In this case the application account records, the application money
and allotment account records the money (share capital) from the allotted
shares.
Application account

Method 2 :
Here both the application and the allotment account are treated the same and
the accounting entries are the following ;
1. Application money received :
• Debit : Bank account
• Credit : Application and allotment account
2. Application money refund to unsuccessful applicants :
• Debit : Application and allotment account
• Credit : Bank account
3. On allotment of shares
• Debit : Application and allotment account
• Credit : share capital account
4. Allotment money received :
• Bank account
• Credit : Applicant and allotment account

Example
ABC ltd issued 1,000 ordinary shares each at RWF100, payable on the following
conditions ;
– RWF.40 on application
– RWF. 60 on allotment
Applications received were 1,200 shares. On 2nd March, allotment was done and
the excess applicant were returned to the unsuccessful applicants.

Required: Show the journal entries and ledger a/cs to record the above
transactions and extract a balance sheet at 31th March 2021, assuming that the
sums of money were received in due time.
ABC LTD
I. The Journal

II. The ledger

6.2.2. Issue of shares
On market shares are sold on the following conditions :
1. At par/nominal value : This is where a share is issue at the price that is
stated in the memorandum of association of a Company.
2. At premium : This is where on the market the share is issued at price
above par value of nominal value. In this case a share is issue at a premium
and the amount of the shares is called share premium. If a company
issue shares at a premium, they need to open a separate account called
share premium account that appears in the credit side of the balance
sheet.
3. At discount : This is where shares are issued at a price lower than the
price that is stated in the memorandum of association of the Company.
Share premium:
The amount at which the shares are issued may exceed their par value.
Premium means additional cash due to the difference between the issue
price of the share and its par value.
When a company is first set up the issue price of its shares will probably be
the same as their par value and so there would be no share premium. If the
company does well, the market value of its shares will increase, but not the
par value. The price of any new shares issued will be approximately their
market value.
For example, 1 : A company might issue 100,000 shares of RWF100 at a
price of RWF120 each. Subscribers will then pay a total of RWF12, 000,000.
The issued share capital of the company would be shown in its accounts at
par value, RWF10, 000,000. The excess of RWF2, 000,000 is described not as
share capital, but as share premium or capital paid-up in excess of par
value.
Example 2. The difference between cash received by the company and the
par value of the new shares issued is transferred to the share premium
account.
i.e if Umucyo Ltd issues 1,000 RWF100 ordinary shares at RWF260 each the
book entry will be :
FRW FRW
DEBIT ; Cash 260,000
CREDIT : Ordinary shares 100,000
Share premium account 160,000
A share premium account is an account into which sums received as
payment for shares in excess of their nominal value must be placed.
Once established, the share premium account constitutes capital of the
company which cannot be paid out in dividends, i.e it is a capital reserve. The
share premium account will increase in value if and when new shares are
issued at a price above their par-value. The share premium account can be
‘used’ – and so decrease in value – only in certain very limited ways, which
are largely beyond the scope of yourbasic financial accounting syllabus.
One common use of the share premium account, however, is to’finance’ the
issue of bonus shares. Other uses of this account may depend on national
legislation.
The reason for creating such non-distributable reserves is to maintain the capital
of the company. This capital ‘base’ provides some security for the company’s
creditors, bearing in mind that the liability of shareholders is limited in the
event that the company cannot repay its debts. It would be most unjust – and
illegal – for a company to pay its shareholders a dividend out of its base capital
when it is not even able to pay back its debts.
Example Share issue
AB Co issues 5, 000,00 at 500RWF for 6, 000RWF million. What are the entries
for share capital and share premium in the statement of financial position ?
Share capital Share premium
A. 5,000 RWF million 1,000 RWF million
B. 1,000 RWF million 5,000 RWF million
C. 3,500 RWF million 3,500 RWF million
D.2, 500 RWF million 3,500 RWF million
Solution
Price per share is 500 RWF each (ie par value/face value /nominal value) and
shares were issued at 1,200RWF each (ie RWF 6,000m/5 shares). Of this, 500
RWF is the price of the share capital and 700 RWF is share premium price.

Therefore, option D is the correct answer.
6.2.3. Under and Over subscription of shares
Under Subscription is defined as the situation where the number of shares
applied by the public is less than the shares that are issued by the company.
Companies that have just started or lack a good reputation will experience
under-subscription.
Oversubscription is defined as the situation where a company receives more
applications from share buyers than the number of shares made available for
the public. In simpler terms, oversubscription happens when the demand for
shares exceeds the supply. Oversubscription does not always guarantee a
company’s success, since projected success must happen in order for shares
to remain in high demand.
Differences between under and over subscription
Let’s consider a situation where MBC directors allot to applicants only a
fraction of shares applied for. Following such kind of allotment, the company is
required to refund the applicant money for the fraction of shares that are not
allotted. On the hand, the applicants once allotted some shares, become liable
for payment of the required balance on their allotted shares. Other than refund,
the company therefore retains the un-used applicant money to make payment
against the allotment money when it becomes due.
The following are the accounting entries ;
i. On application : record the total value of the application money received
ii. On allotment : successful applicants (applicants who receive a fraction of
shares applied for) will pay allotment money.
Example : MBC ltd. Company offered 100,000 ordinary shares each of 10RWF
at a premium of 2 RWF payable in installments.
i. On application 3RWF
ii. ON allotment (including premium) 7RWF
iii. On first call and final 2RWF
12 RWF
Applicants received 130,000shares and the allotment was done as follows ;
Applicants for 80,000 shares- full shares allotted
Applicants for 40,000shares - 20,000 shares allotted
Applicants for 100,000 shares - rejected
Excess application money for partially accepted applicants is to be used to
reduce the amount due on allotment. All money due on allotment and first and
final call was received expect 6,000 shares allotted to Mugabo, who failed to pay
for the first and final call.
Workings
a) Application money received : 130,000 shares *3 RWF=390,000 RWF,
The number of shares offered are 100,000 less than number
of shares applied for thus ; there is going to be a refund to
unsuccessful applicants ie
b) Application refund=30,000 shares*3RWF=6,000 RWF
c) Total value payable on application and allotment=100,000shares
*8RWF=800,000 RWF
d) Excess on application ; 40.000shares applied were allotted 20,000
shares ie20, 000shares *3=60,000RWF
e) Premium cash/money=10,000 shares *2RWF=20,000RWF
f) Received on allotment including premium=allotment due (including
premium) - Excess application :
100,000shares *7 RWF= 700,000
Less : Excess application= 60,000
640,000
g) Money received on first and final call
94,000 shares *2 RWF= 188,000 RWF
h) Calls in arrears =6,000*2=12,000RWF
6.2.4 Forfeiture and reissue of forfeited shares
Forfeiture of shares refers to the cancellation of shares allotted to the
shareholders for non-payment.
There are instances in business where a stakeholder loses their share due to
non-payment of their financial liability of installments or dues. The only way
a company can forfeit a share is if the firm’s articles of association permit it.
Also, Shareholders whose shares are forfeited lose their shareholder rights and
interests as well as their membership in the organization.
A person whose shares have been forfeited ceases to be a member in respect of
the forfeited shares but remain liable to pay the company all the monies which
at the time of forfeit, were payable. To record forfeit of shares, open a forfeited
shares account. The total nominal value of the shares forfeited is credited to
this account and debited to share capital account. The amount unpaid on the
shares in arrears account and debited to the forfeited shares account.
Example
UWUNO Co. Ltd have an authorized capital 1.000,000 RWF divided into 20,000
ordinary shares of 50 RWF issued and fully paid except 200 shares held of
MUCYO on which only 5,000RWF has been paid.
Following many reminders and demands for payment, the board of directors
made a decision to forfeit the shares held by MUCYO.
Required :
Show the journal entries in the company’s journal and ledger recording the
forfeiture of shares.
Solution
Journal entries
Dr Cr
Ordinary share capital account 10,000
Forfeited shares account 10,000
(200 ordinary shares of RWF 50 each forfeited
For non-payment of call as per resolution of directors)
Forfeit shares account 5,000
Calls in arrears account 5,000
(Calls in arrears RWF 25 per share on 200
Ordinary shares forfeited)
Re-issue of forfeited shares
If shares are forfeited the membership of the shareholder stands cancelled and
the shares become the property of the company. Thereafter, the company has
an option of selling such forfeited shares. The sale of forfeited shares is called
‘reissue of shares’
Therefore, re-issue of shares is the selling of forfeited shares. When re-issuing
shares the new purchaser must be pay the shares at the nominal value. if shares
are re-issued at the value above the nominal value, the surplus should go to
share capital account and the following are the necessary accounting entries;
1. Debit : forfeited shares re-issued account

Credit : Share capital account
(With nominal value of shares re-issued)
2. Debit : Forfeited shares account
Credit : forfeited shares re-issued account
(With amount received before to forfeiture in respect of shares re-issued)
3. Debit : Bank account
Credit : Forfeited shares re-issued account
(With amount received on re-issue of forfeited shares)
4. Debit : Forfeited shares re-issued account
Credit : Shares premium account
(With the balancing figure on the forfeited shares re-issued account)
Example
UCOMO Company ltd issued 3,000 ordinary shares of RWF10 at RWF 120 each
as shown below ;
On application RWF 3
On allotment RWF 5 (including premium)
On first and final call RWF 4
Applications were received and the allotment was med to successful applicants.
All the installments were paid expect the first and final call of RWF for 1,000
shares held by MUHIMA whose shares were forfeited on 10th August 2021 and
re-issued on 19th September 2021each at RWF 8.
Required :
Show the following accounts as they appear in the ledger
i. Forfeited share account
ii. Forfeited shares re-issued account
NOTE : Ignore completing double entry in the rest of the accounts
Working ;
i. Calls in arrears forfeited =1,000 shares *RWF 4=RWF4, 000
ii. Amount received before forfeiture
Application 1,000 shares *RWF 3=RWF 3,000
Allotment 1,000 shares * RWF3=RWF 6,000
iii. Amount received on re-issue=1,000 shares *RWF 8=RWF8, 000
iv. Nominal value of re-issued shares=1,000shares*RWF 10=RWF10, 000
v. Share premium on re-issue =1,000 shares*RWF2=RWF12, 000
Application activity 6.2
1. A company issues five million RWF100 shares at a price of RWF125
per share. How much should be posted to the share premium
account?
A. RWF 5 million
B. RWF 1.25 million
C. RWF 6.25 million
D. RWF 6 million
5. KAMANI co.ltd has the authorized share, 500,000 @ 120RWF
per share, and shares issued were 380,000. The company asked
shareholders to pay 100RWF per share who actually paid 80RWF
per share.
Required:
Calculate for the following;
i. Authorized share capital
ii. Issued share capital
iii. Called up share capital
iv. Uncalled share capital
v. Paid-up share capital
End unit assessment 6
1. UTC Ltd. Co.ltd issues 100000 equity shares of face value of 100 RWF
on 1st June 2018 at 20% premium. The arrangements for payment
are:
June 1, 2018: On Application 20RWF
July 1, 2018: On Allotment including Premium 70RWF
September 1, 2018: On First and final call 30RWF
The company receives applications for 285000 shares. This is a case of
oversubscription. It deals with them in the following manner:
1. Applicants for 25000 shares receive a full allotment.
2. The applicants for 225000 shares receive one share for every three
shares applied for on pro-rata basis.
3. It rejects the applications for 35000 shares.
The company duly receives the entire amount. Pass necessary journal
entries.
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Topic 7
Topic 8
Topic 9

Topic outline

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