Adjusted Financial Statements
Adjusted Financial Statements
The principle rule is that, for every debit entry, there must be an equal and
corresponding credit entry. This means that, if the rule has been followed when
preparing the ledger accounts, the trial balance, must balance, that is both the
debit and credit entry.
The errors, include:
1. Errors of Omission: Where a transaction is completely omitted from the
books. If we sold a Ksh. 900 good to XYZ, but did not enter it in either the
sales or the XYZ’s personal account, the trial balance, will still balance.
2. Errors of Commission: This type of errors occurs when the correct amount
is entered but in the wrong person’s account. For example, where sales of
Ksh. 100 to C green is entered in the accounts of K green. It will be noted
that the correct class of account was used, both the accounts concerned
being personal accounts.
3. Errors of principle: Where an item is entered in the wrong class of account,
for example, if the purchase of a fixed asset, such as a van is debited to an
expense account, such as motor expenses account.
4. Compensating errors: Where errors cancel each other out. If sales account
was added up to be Ksh. 100 too much and the purchases account was also
accidentally added up to be Ksh. 100 too much, then these two errors
would cancel out in the trial balance. This is because the totals of both the
debit side and the credit side of the trial balance will be Ksh. 100 too much.
5. Errors of original entry: Where the original figure is incorrect, yet the
double entry is still observed using the incorrect figure. An instance of this
could be where there were sales of Ksh 1,500 good but an error made in
calculating the sales invoice. If it were calculated as Ksh. 1300 and Ksh. 1300
debited to the personal account and Ksh. 1300 credited to the sales
account, the trial balance will still balance.
6. Complete reversal entries: Where the correct accounts are used but each
item is shown on the wrong side of the account. Suppose we had paid a
cheque to D wiliams for Ksh. 2000, the double entry of which Is Cr Bank Ksh.
2000 and DR, D Williams Ksh. 2000. In the error its entered as CR D Wiliams
and Dr Bank. This means that the trial balance will still balance.
7. Transposition Errors: Where the wrong sequence of the individual
characters within a number was entered. For example, Ksh. 142 entered
instead of Ksh, 124. This is quite a common error and is very difficult to spot
when the error has occurred in both the debit and credit entries as the trial
balance would still balance.
Assignment; Research on the errors that affect the trial balance, that is the errors
that will make a trial balance not to balance. Also get an understanding of what is
a suspense account.
Read on the users of accounting information, characteristics of accounting
information and the accounting concept.
DEPRECIATION
This is the process where an asset losses value. For example a motor vehicle
purchased at Ksh, 2,000,000 in the year 20X1, when evaluated, the value in the
year 20X4, its found to be worthy Ksh. 1,200,000. This means that it has lost value
by Ksh. 800,000.
Methods of calculating depreciation.
There are two common methods, that is straight line method and reducing
balance method.
Straight line method
This is where an asset is presumed to be losing a constant value on a yearly basis.
For example:
A Motor vehicle that had a cost price of Ksh. 2,000,000 is expected to depreciate
in value at the rate of 10% per annum using straight line method. What is the
value of the Motor Vehicle after 4 years.
Solution
10% of 2,000,000= Ksh. 200,000
Its assumed that the asset will be losing Ksh. 200,000 per annum.
For four years, it will have lost Ksh, 200,000* 4 years = Ksh. 800,000
The value of the MV after 4 years = Ksh. 2,000,000- 800,000= Ksh. 1,200,000
Reducing balance method
Here Depreciation is calculated on a yearly basis, from the reduced amount.
Example
A Motor vehicle that had a cost price of Ksh. 2,000,000 is expected to depreciate
in value at the rate of 10% per annum on reducing balance method. What is the
value of the Motor Vehicle after 4 years.
Solution
First year = 10% of Ksh. 2,000,000= Ksh. 200,000
The value of MV in the first year= Ksh. 2,000,000- Ksh. 200,000= Ksh. 1,800,000
Second year = 10% of Ksh. 1,800,000= Ksh. 180,000
The value of MV in the second year = Ksh. 1,800,000- Ksh. 180,000= Ksh.
1,620,000
Mr. Chai
Statement of financial position
As at 30th April 20X7
Ksh Ksh
Assets
Non-Current
Fixtures and fittings at 120,740
cost
Less depreciation to date (63,020) 57,720
(Accumulated
depreciation)
Current assets
Stock (Closing) 17,750
Trade debtors 24,500
Prepaid expenses 6,555
1120+5435
Bank 4440
Cash 534 53,779
Total assets 111,499
Capital and liability
Capital 83887
Add net profit 24,117
Less drawings (18,440) 89,564
Liabilities
Creditors 19840
Expenses accrued 1360
Provision for doubtful 735 21,935
debts (3% of trade
debtors)
Total capital and 111,499
liabilities