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BGCSE Accounting

Foundations, double entry, subsidiary books, final accounts, adjustments, verifying accounts, and partnerships & company accounts. Topic notes below are placeholders — swap in your own content topic by topic.

Topic 1

Foundations of Accounting

Lesson 1: Introduction to Accounting

Every business, from a small spaza shop in Gaborone to a large mining company like Debswana, needs to keep track of its money. Accounting is the process of identifying, recording, classifying, summarising, and interpreting the financial transactions of a business, so that the information can be communicated to people who need it to make decisions. Accounting is often called "the language of business" because it turns thousands of individual transactions — sales, purchases, wages, rent — into a small number of reports that anyone can read and understand.

Book-keeping is not the same thing as accounting, although the two are closely related. Book-keeping is the day-to-day, routine recording of financial transactions in the books of account (journals and ledgers). Accounting is the wider process that includes book-keeping, but also involves classifying, summarising, analysing, and interpreting the recorded data to produce financial statements and reports that are useful for decision-making.

Book-keeping vs. Accounting

  • Book-keeping = recording transactions accurately, day by day (a mechanical, clerical task)
  • Accounting = the whole process — recording, classifying, summarising, and interpreting the results so owners, managers, and others can make decisions
  • Every accountant needs book-keeping skills, but not every book-keeper needs to interpret the figures
StageWhat happensExample
1. IdentifyingDeciding which events are financial transactions worth recordingA cash sale of P500 is a transaction; a staff meeting is not
2. RecordingWriting the transaction into a book of original entry (journal)Entering the P500 sale into the Sales Journal or Cash Book
3. ClassifyingGrouping similar transactions together in ledger accountsPosting the sale to the Sales Account in the ledger
4. SummarisingPreparing a trial balance and financial statements from the ledgerIncluding the sale in total revenue on the Trading Account
5. InterpretingAnalysing the figures to help decision-makingComparing this year's sales to last year's to judge performance

Who Needs Accounting Information?

Financial statements are not prepared just to satisfy a legal requirement — they are used by a wide range of people and organisations, both inside and outside the business, each with a different reason for wanting the information.

UserWhy they need accounting information
ManagersTo plan, control costs, set prices, and make day-to-day and long-term decisions about running the business
GovernmentTo assess how much tax (income tax, VAT) the business owes, and to compile national statistics on trade and the economy
Investors / ShareholdersTo judge whether the business is profitable and worth investing in, and whether to expect a return (dividend) on their money
SuppliersTo decide whether the business can be trusted to pay for goods bought on credit, and how much credit to allow
CustomersTo judge whether the business is stable enough to continue supplying goods or honouring warranties in future
EmployeesTo assess job security, and to support wage negotiations by seeing whether the business can afford pay increases
Worked example A bank is deciding whether to lend Kgosi's Hardware P50,000 to expand the shop. Which user group does the bank belong to, and what would it look for?

The bank is best grouped with investors/lenders. It would examine the financial statements to check whether the business is profitable, whether it already owes a lot of money to others, and whether it generates enough cash to repay the loan with interest.

Notice that different users often want conflicting things from the same set of figures. A manager may prefer to show lower profit to reduce the tax bill, while investors want to see the highest possible profit to justify their investment; the government wants an accurate profit figure to calculate the correct tax, regardless of what either the manager or the investor would prefer to see. This is exactly why accounting concepts and standardised formats (covered later in this lesson) exist — so that the same figures mean the same thing to every user, and cannot easily be manipulated to please one group at the expense of another.

Internal vs. external users

  • Internal users (inside the business) — managers and employees, who typically have access to detailed, frequent, internal reports
  • External users (outside the business) — government, investors, suppliers, and customers, who normally only see the published, less detailed annual financial statements
  • This distinction matters because internal users can request extra information whenever they need it, while external users must rely entirely on what the business chooses (or is legally required) to publish

Branches of Accounting

As businesses have grown larger and more complex, accounting has developed into several specialised branches, each serving a different purpose and, often, a different audience. A small spaza shop may only need simple financial accounting, but a large manufacturer such as a textile factory needs cost accounting to work out exactly what it costs to produce each garment, and management accounting to decide whether a new production line is worth investing in.

BranchFocusTypical user
Financial accountingRecording transactions and preparing financial statements (Trading, Profit and Loss Account, Balance Sheet) that summarise the whole business over a periodExternal users — investors, banks, government, suppliers
Cost accountingRecording and analysing the costs of producing specific goods or services, to help control and reduce costsProduction and operations managers
Management accountingUsing financial and cost information to plan, budget, and make internal decisions (e.g. whether to launch a new product)Internal managers and directors

Backward-looking vs. forward-looking

  • Financial accounting is mostly backward-looking — it reports what has already happened, in a fixed, standardised format required by law and accounting practice
  • Cost and management accounting are mostly forward-looking — used for budgeting, planning, and decision-making about the future, and are not required to follow any fixed external format since they are for internal use only
Worked example A furniture manufacturer wants to know three things: (1) whether the whole business made a profit last year, to show its bank; (2) exactly how much it costs to produce one wooden chair, including timber, labour, and a share of factory overheads; (3) whether it is worth buying a new machine that would speed up production. Which branch of accounting answers each question?

(1) Financial accounting — preparing the Trading and Profit and Loss Account and Balance Sheet for external use by the bank.
(2) Cost accounting — building up the cost per chair from its individual materials, labour, and overhead components.
(3) Management accounting — using cost and revenue projections to decide whether the new machine is a worthwhile investment for the future.

The Accounting Principles and Concepts

For financial statements from different businesses — or from the same business in different years — to be meaningful and comparable, accountants follow an agreed set of rules known as accounting concepts (sometimes called principles or conventions). These concepts are the foundation on which all recording and reporting rests.

ConceptWhat it means
Money measurementOnly transactions and events that can be expressed in monetary terms are recorded in the accounts. The skill or morale of staff, however valuable, cannot be recorded because it cannot be measured in Pula.
Going concernThe business is assumed to continue operating for the foreseeable future, not to be closing down. Assets are therefore valued at their cost to the business, not at what they would fetch in a forced sale.
Business entityThe business is treated as a separate entity from its owner. The owner's personal belongings, debts, and bank account are kept completely separate from the business's accounts.
RealisationRevenue (income) is recognised as earned at the point goods or services are sold and legal ownership passes to the customer — not necessarily when the cash is received.
Dual aspectEvery transaction has two effects on the accounting equation — a giving effect and a receiving effect — which is why every transaction is recorded on two sides (this is the basis of double entry, covered in Topic 2).
Cost conceptAssets are recorded at their original purchase price (historical cost), not at what they might be worth today, because cost is an objective, verifiable figure.
Accrual conceptIncome and expenses are recorded when they are earned or incurred, not necessarily when the cash is actually received or paid.
Matching conceptThe expenses incurred in earning revenue in a period are matched against that same period's revenue, so that profit is fairly calculated for that period.
Consistency conceptOnce a business chooses a particular accounting method (e.g. a depreciation method), it should keep using that same method from year to year, so figures remain comparable.
Materiality conceptOnly information significant enough to influence the decisions of users needs to be disclosed precisely; very small, insignificant amounts can be treated in the simplest way possible.
Prudence (conservatism)Accountants should not overstate profits or asset values. Anticipate all possible losses, but only record profits once they are reasonably certain (e.g. writing off likely bad debts before they actually happen).

Exam favourites among the concepts

  • Business entity — owner's private house is NOT a business asset
  • Going concern — assets valued at cost, not "what if we closed down tomorrow"
  • Prudence — "anticipate losses, but never anticipate profits"
  • Matching — expenses are matched to the revenue they helped earn, in the same period
  • Examiners often give a short scenario and ask you to name the concept being applied or broken — learn the concepts by their one-line definition, not just the list of names
Worked example Thato, the owner of Thato's Butchery, pays his daughter's school fees of P3,000 out of the business bank account, and records it as a business expense called "Staff Training". Which accounting concept has been broken, and why?

The business entity concept has been broken. School fees are a personal (private) expense of the owner, not a cost of running the business, so they should never be recorded as a business expense — they should instead be treated as drawings (the owner withdrawing value from the business for personal use).

Lesson 2: The Accounting Equation

All double-entry accounting rests on one simple but powerful equation, known as the accounting equation. It expresses the relationship between what a business owns and what it owes.

The accounting equation

Assets = Capital + Liabilities

  • Assets — resources owned or controlled by the business that have future economic value (e.g. buildings, vehicles, stock, cash, money owed by debtors)
  • Capital — the amount the owner has invested in the business; from the business's point of view, this is what it owes back to the owner
  • Liabilities — amounts the business owes to outsiders (e.g. loans, money owed to creditors)

The equation can also be rearranged in two other useful ways, depending on which figure is unknown:

FormUsed to find
Assets = Capital + LiabilitiesTotal assets, when capital and liabilities are known
Capital = Assets − LiabilitiesCapital, when total assets and liabilities are known
Liabilities = Assets − CapitalTotal liabilities, when assets and capital are known

Both assets and liabilities can be split further, into current and non-current categories, which becomes important when preparing a balance sheet (see Lesson 3):

CategoryMeaningExamples
Non-current (fixed) assetsOwned for long-term use in the business, not for resaleLand and buildings, machinery, motor vehicles, fixtures and fittings
Current assetsExpected to be turned into cash, sold, or used up within one yearStock (inventory), debtors, cash at bank, cash in hand
Non-current (long-term) liabilitiesDebts not due for repayment within one yearBank loan repayable in five years, mortgage
Current liabilitiesDebts due for repayment within one yearCreditors, bank overdraft, short-term loan
Worked example 1 Kagiso starts a business with the following: Cash at bank P20,000, Motor vehicle P45,000, Loan from bank P15,000. Calculate her capital.

Assets = P20,000 + P45,000 = P65,000
Capital = Assets − Liabilities = P65,000 − P15,000 = P50,000
Worked example 2 Neo's business has capital of P80,000 and liabilities of P25,000. Calculate the total assets.

Assets = Capital + Liabilities = P80,000 + P25,000 = P105,000

Effects of Business Transactions on the Accounting Equation

Because of the dual aspect concept, every transaction affects the accounting equation in at least two ways, and the equation must always remain in balance after each transaction. There are four broad types of effect a transaction can have:

No matter how complicated a transaction looks, it always fits into one of these four patterns. The trick to answering an accounting equation question quickly is to ask, in order: "which two things have changed?", "are they both assets, or is one a liability or capital?", and "did each one go up or down?" Once those three questions are answered, the correct row in the table below tells you exactly how the equation should move.

Type of transactionEffect on the equation
Increases one asset, increases another (or capital/liability)e.g. buying a vehicle on credit — asset (vehicle) up, liability (creditor) up
Increases one asset, decreases another assete.g. buying stock for cash — asset (stock) up, asset (cash) down
Decreases one asset, decreases a liability or capitale.g. paying off a creditor from the bank — asset (bank) down, liability (creditor) down
Increases/decreases capital directlye.g. owner introducing more cash (capital up) or withdrawing cash for personal use (capital down, via drawings)
Worked example — a series of transactions Track the effect of each transaction below on Boitumelo's accounting equation. She starts with Capital P30,000 and Cash P30,000.
TransactionAssets=Capital+Liabilities
Start: introduces P30,000 cashCash 30,000=30,000+0
Buys stock P8,000 for cashCash 22,000; Stock 8,000=30,000+0
Buys equipment P10,000 on creditCash 22,000; Stock 8,000; Equipment 10,000=30,000+10,000
Pays P4,000 off the creditorCash 18,000; Stock 8,000; Equipment 10,000=30,000+6,000

Check: Total assets after all transactions = 18,000 + 8,000 + 10,000 = P36,000. Capital + Liabilities = 30,000 + 6,000 = P36,000. The equation still balances.

Golden rule

  • The accounting equation must balance after every single transaction, not just at the end of the year
  • If your two sides don't match, you have made a recording error somewhere — go back and check each transaction

Lesson 3: The Balance Sheet

A balance sheet is a financial statement that lists a business's assets, liabilities, and capital at one specific point in time (a "snapshot", not a record of activity over a period). It is simply the accounting equation, set out in a formal, structured layout.

Because it is a snapshot, a balance sheet is always headed "as at" a particular date (e.g. "as at 31 December"), never "for the year ended" — that second phrase is reserved for statements that summarise activity over a period, such as the Trading and Profit and Loss Account covered in Topic 4. A balance sheet prepared the day after another one may look completely different, since every transaction that has happened in between will have changed some of the figures — but the two sides must always still be equal to each other on any given day, for exactly the same reason the accounting equation must always balance.

Left / top: assetsRight / bottom: capital + liabilities
Non-current assets, then current assetsCapital, then non-current liabilities, then current liabilities

"As at" vs. "for the year ended"

  • "As at [date]" — a snapshot statement, describing the position on one single day (the Balance Sheet)
  • "For the year/period ended [date]" — a summary of activity throughout a stretch of time (the Trading and Profit and Loss Account, and the Cash Book)
  • Using the wrong heading is a common, easily avoidable way to lose marks in an exam — always check which type of statement you are labelling
Worked example — recording a simple balance sheet On 1 January, Refilwe starts a business with Cash at bank P40,000, Motor vehicle P25,000, Stock P10,000, and a Loan from a relative of P15,000. Prepare her opening balance sheet.
Refilwe — Balance Sheet as at 1 January
Non-current assets
  Motor vehicle25,000
Current assets
  Stock10,000
  Cash at bank40,000
Total assets75,000
Capital60,000
Non-current liabilities
  Loan15,000
Total capital + liabilities75,000

Capital was found using: Capital = Assets − Liabilities = 75,000 − 15,000 = P60,000.

Effects of Transactions in a Balance Sheet

As a business trades during the year, its balance sheet keeps changing. Three items in particular have a direct and important effect on capital:

ItemMeaningEffect on capital
DrawingsCash, goods, or other assets the owner withdraws from the business for personal useDecreases capital (the owner is taking value out of the business)
ExpensesCosts incurred in running the business and earning revenue (e.g. rent, wages, electricity)Decreases capital (reduces profit, which reduces capital)
RevenueIncome earned by the business, mainly from selling goods or servicesIncreases capital (increases profit, which increases capital)

How capital changes over a period

Closing Capital = Opening Capital + Additional Capital Introduced + Profit − Drawings

  • Profit itself = Total Revenue − Total Expenses for the period
  • Drawings are never treated as a business expense — they are a reduction of capital, because of the business entity concept
Worked example — drawings, expenses and revenue together Molefi started the year with capital of P50,000. During the year his business earned revenue of P60,000, incurred expenses of P38,000, and he withdrew P8,000 in drawings for personal use. He introduced no additional capital. Calculate his closing capital.

Profit = Revenue − Expenses = 60,000 − 38,000 = P22,000
Closing Capital = Opening Capital + Profit − Drawings = 50,000 + 22,000 − 8,000 = P64,000
Scenario — putting it all together Palesa runs a small tuck-shop. At the start of the month her assets and liabilities were: Cash P5,000, Stock P3,000, Creditor P1,500. During the month she: bought extra stock worth P2,000 on credit; received cash sales revenue of P3,200; paid rent of P600 cash (expense); and took P400 cash out of the business for herself (drawings). Find her closing capital, and confirm the balance sheet balances at month end.

Step 1 — opening capital: Capital = Assets − Liabilities = (5,000 + 3,000) − 1,500 = P6,500
Step 2 — profit for the month: Profit = Revenue − Expenses = 3,200 − 600 = P2,600
Step 3 — closing capital: Closing Capital = 6,500 + 2,600 − 400 = P8,700
Step 4 — closing assets and liabilities: Cash = 5,000 + 3,200 − 600 − 400 = 7,200; Stock = 3,000 + 2,000 = 5,000; Creditor = 1,500 + 2,000 = 3,500
Check: Total assets = 7,200 + 5,000 = P12,200. Capital + Liabilities = 8,700 + 3,500 = P12,200. The balance sheet balances.

Common exam mistakes to avoid

  • Do not list drawings as an expense in the Profit and Loss Account — it is a withdrawal against capital
  • Do not confuse capital introduced (increases capital directly) with revenue (increases capital only after being included in profit)
  • Always double-check that Total Assets = Capital + Total Liabilities before submitting any balance sheet answer
  • Fixed/non-current assets are listed in order of permanency (least liquid first); current assets in order of liquidity (least liquid first, cash last) — covered fully in Topic 4

Topic 2

Double Entry Bookkeeping

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Topic 3

Subsidiary Books and Journals

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Topic 4

Preparing Final Accounts

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Topic 5

Adjustments to Final Accounts

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Topic 6

Verifying and Correcting Accounts

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Topic 7

Partnerships and Company Accounts

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Flashcards

Key Terms

78 cards covering every topic below.

TermAccounting
DefinitionThe systematic process of identifying, recording, classifying, summarising, interpreting and communicating financial information to be useful for decision making.
TermFinancial accounting
DefinitionThe branch of accounting concerned with recording and classifying transactions and preparing financial statements for internal and external users.
TermManagement accounting
DefinitionProvides information for internal users (managers) for budgeting, forecasting, cost analysis and evaluating decisions.
TermCost accounting
DefinitionDetermines the costs of carrying out business activities and helps management exercise strict cost control.
TermBusiness entity concept
DefinitionThe business and its owner are treated as separate — the owner's personal transactions are not recorded in the business's books.
TermMoney measurement concept
DefinitionOnly transactions that can be expressed in monetary terms are recorded in the business's books.
TermAccounting equation
DefinitionAssets = Liabilities + Owner's Equity (Capital) — the business's assets are financed by what it owes plus what the owner has invested.
TermAssets
DefinitionResources owned or controlled by a business from which future economic benefit is expected — e.g. cash, inventory, premises.
TermLiabilities
DefinitionA business's obligations — amounts it owes to outsiders, e.g. trade payables, loans.
TermOwner's equity (Capital)
DefinitionThe amount invested by the owner plus cumulative retained profit not yet withdrawn — the owner's stake in the business.
TermStatement of financial position
DefinitionAlso called the balance sheet — a "snapshot" of a business's assets, liabilities and equity at a single point in time.
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TermDouble entry system
DefinitionA system in which every transaction is recorded twice — a debit entry in one account and an equal, corresponding credit entry in another.
TermDuality principle
DefinitionFor every debit entry there will always be an equal credit entry, so total debits always equal total credits.
TermDebit
DefinitionThe left-hand side of an account — records increases in assets and expenses, and decreases in liabilities, capital and income.
TermCredit
DefinitionThe right-hand side of an account — records increases in liabilities, capital and income, and decreases in assets and expenses.
TermLedger
DefinitionA book (or file) that contains all of a business's individual accounts.
TermT-account
DefinitionAn account format resembling the letter "T", with a debit side on the left and a credit side on the right.
TermBalance c/d and b/d
DefinitionBalance carried down (c/d) closes an account at the end of a period; the same figure is brought down (b/d) as the opening balance of the next period.
TermTrial balance
DefinitionA list of all ledger account balances, split into debit and credit columns, which should total to the same amount.
TermDrawings
DefinitionCash, goods or other assets withdrawn from the business by the owner for personal use — debited to the Drawings account.
TermDivision of the ledger
DefinitionThe ledger is split into the Sales ledger (customer accounts), Purchases ledger (supplier accounts) and General ledger (everything else).
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TermBooks of original entry
DefinitionAlso called subsidiary books — the first, day-to-day records of transactions before they are posted to the ledger.
TermSales journal
DefinitionRecords credit sales of inventory only, using sales invoices as the source document.
TermPurchases journal
DefinitionRecords credit purchases of inventory only, using purchase invoices received from suppliers.
TermReturns inwards journal
DefinitionRecords goods returned by customers (sales returns), based on credit notes sent out.
TermReturns outwards journal
DefinitionRecords goods returned to suppliers (purchases returns), based on credit notes received.
TermGeneral journal
DefinitionRecords transactions that don't fit any other book of original entry — e.g. non-current asset purchases on credit, correction of errors, opening entries.
TermCash book
DefinitionRecords all cash and bank receipts and payments — unique among books of original entry because it is also a ledger account.
TermPetty cash book
DefinitionRecords small cash payments, usually operated using the imprest system, to keep minor transactions out of the main cash book.
TermImprest system
DefinitionThe petty cashier is given a fixed float at the start of a period; at the end, the amount spent is reimbursed to restore the float to its original level.
TermInvoice
DefinitionA document sent to a credit customer detailing goods supplied, unit prices, and payment terms.
TermCredit note
DefinitionSent to a buyer to reduce the amount owed on an invoice, usually because goods were returned or overcharged.
TermTrade discount vs. cash discount
DefinitionA trade discount reduces the catalogue price to encourage bulk buying and is never recorded in the ledger; a cash discount rewards prompt payment and is recorded in the discount columns of the cash book.
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TermTrading account
DefinitionCalculates gross profit by deducting the cost of goods sold from net sales.
TermGross profit
DefinitionNet sales minus cost of sales — the profit made purely from buying and selling goods, before other expenses.
TermCost of sales
DefinitionOpening inventory + purchases (+ carriage inwards − purchases returns) − closing inventory.
TermIncome statement
DefinitionCombines the trading account and profit and loss account under one heading, showing gross profit through to profit for the year.
TermProfit for the year (net profit)
DefinitionGross profit plus other income, minus all other business expenses.
TermWorking capital
DefinitionCurrent assets minus current liabilities — the funds available for day-to-day operations.
TermNon-current assets
DefinitionResources kept and used for more than one year, e.g. premises, machinery, motor vehicles.
TermCurrent assets
DefinitionResources expected to be turned into cash within one year, e.g. inventory, trade receivables, cash.
TermCurrent liabilities
DefinitionDebts due for repayment within one year, e.g. trade payables, bank overdraft.
TermService business
DefinitionA business that earns income by providing a service rather than buying and selling goods, so it prepares an income statement without a trading account section.
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TermAccrued expense
DefinitionAn expense owing but unpaid at the end of the financial year — added to the expense for the year and shown as a current liability.
TermPrepaid expense
DefinitionAn expense paid in advance for a future period — deducted from the expense for the year and shown as a current asset.
TermAccrued income
DefinitionIncome earned but not yet received at the year end — added to income received and shown as a current asset.
TermPrepaid income
DefinitionIncome received in advance for a future period — deducted from income received and shown as a current liability.
TermBad debt
DefinitionAn amount owed by a trade receivable that will definitely not be paid, and so is written off as an expense (prudence concept).
TermProvision for doubtful debts
DefinitionAn estimate, usually a percentage of trade receivables, of debts likely to become bad in the future — deducted from trade receivables in the statement of financial position.
TermProvision for discount allowed
DefinitionAn estimate of the cash discount likely to be given to trade receivables who pay promptly — deducted from trade receivables after the doubtful debts provision.
TermDepreciation
DefinitionAn estimate of the loss in value of a non-current asset over its expected working life.
TermStraight line method
DefinitionCharges the same amount of depreciation every year: (Cost − Residual value) ÷ Number of expected years of use.
TermReducing balance method
DefinitionApplies a fixed percentage to the net book value each year, so depreciation is highest in the early years and falls over time.
TermRevaluation method
DefinitionUsed for low-value items like loose tools — the asset is revalued each year and the fall in value is the depreciation charge.
TermNet book value (NBV)
DefinitionCost of a non-current asset minus accumulated depreciation to date.
TermDisposal account
DefinitionA ledger account opened when a non-current asset is sold, recording its cost, accumulated depreciation, and sale proceeds to reveal a profit or loss on disposal.
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TermBank reconciliation statement
DefinitionA statement that compares and explains the difference between the cash book balance and the bank statement balance.
TermUnpresented cheque
DefinitionA cheque issued and recorded in the cash book but not yet presented to the bank for payment.
TermAmount not yet credited
DefinitionMoney paid into the bank and recorded in the cash book, but not yet shown on the bank statement.
TermDishonoured cheque
DefinitionA cheque the bank refuses to pay, e.g. due to insufficient funds — it must be cancelled out in the cash book.
TermError of omission
DefinitionA transaction is completely left out of the books — neither debited nor credited anywhere.
TermError of principle
DefinitionA transaction is entered in the wrong class of account, e.g. a new machine debited to purchases instead of a non-current asset account.
TermError of commission
DefinitionA transaction is entered in the wrong account of the correct class, e.g. posted to the wrong customer's account.
TermComplete reversal of entries
DefinitionThe correct accounts and amount are used, but the debit and credit sides are swapped.
TermCompensating error
DefinitionTwo or more errors of equal size cancel each other out, so the trial balance still agrees.
TermSuspense account
DefinitionA temporary account used to hold the difference on a trial balance until the underlying errors are found and corrected.
TermControl account
DefinitionA "total account" (e.g. sales ledger or purchases ledger control account) that summarises all entries in a section of the ledger, providing a check on its arithmetical accuracy.
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TermPartnership
DefinitionA business owned by two or more people who share capital, skills, workload and (usually) unlimited liability.
TermPartnership agreement
DefinitionA document setting out how profits/losses are shared, interest on capital and drawings, and partners' salaries — without one, the Partnership Act requires equal profit sharing.
TermProfit and loss appropriation account
DefinitionShows how a partnership's profit for the year is divided among the partners, after interest on capital and partners' salaries.
TermInterest on capital
DefinitionA reward credited to each partner based on the capital they have invested, before the residual profit is shared.
TermInterest on drawings
DefinitionA charge against a partner who withdraws cash or goods during the year, discouraging excessive drawings.
TermPartner's salary
DefinitionA fixed amount credited to a partner (e.g. for extra work done), deducted before the residual profit is shared — only where the agreement provides for it.
TermCurrent account (partner)
DefinitionRecords a partner's share of profit, interest on capital, salary, drawings and interest on drawings — fluctuates year to year, unlike the capital account.
TermCapital account (partner)
DefinitionRecords the fixed amount of capital a partner has permanently invested — normally only changes when capital is formally introduced or withdrawn.
TermLimited liability
DefinitionShareholders can lose no more than the amount they invested in shares — their personal assets are protected.
TermDividend
DefinitionThe portion of a company's profit distributed to shareholders, in proportion to the shares they hold.
TermDebenture
DefinitionA long-term, fixed-interest loan to a company — debenture holders are lenders, not owners, so debentures don't affect ownership or control.
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Foundations of Accounting

1
4 marks
Define accounting, and state two objectives of accounting.
Model answer Accounting is the systematic process of identifying, recording, classifying, summarising, interpreting and communicating financial information to be useful for decision making. Any two objectives: to keep systematic records; to protect business properties; to determine operational profit or loss; to determine the financial position of the business; to help in rational decision making.
2
6 marks
For each user of accounting information below, state whether they are an internal or external user, and give one reason they need accounting information.
  1. A bank considering a loan application
  2. The business's own management
  3. The Botswana Unified Revenue Service (BURS)
Model answer
  1. External — a lender assesses the business's creditworthiness before extending or continuing credit.
  2. Internal — management analyses performance and position to take measures to improve business results.
  3. External — the tax authority uses the information to determine the tax to be charged.
3
5 marks
Ndaba, a sole trader, paid his daughter's school fees of P4,500 out of the business bank account and did not record it anywhere in the business books. State which accounting concept has been breached, explain the concept, and state how the transaction should have been recorded.
Model answer The business entity concept has been breached — it states that the business and its owner are separate entities, so the owner's personal transactions should not be recorded in the business's books, and business funds used for personal purposes must still be accounted for. The correct treatment is to record the P4,500 as drawings (Debit Drawings, Credit Bank), since it is money the owner has taken out of the business for personal use, not a business expense.
4
5 marks
State the accounting equation, and use it to calculate the missing figure in each case. (a) Assets P24,000, Liabilities P9,500, Capital ? (b) Assets ?, Liabilities P3,200, Capital P18,700 (c) Assets P31,000, Liabilities ?, Capital P22,400.
Model answer Assets = Liabilities + Capital. (a) Capital = 24,000 − 9,500 = P14,500. (b) Assets = 3,200 + 18,700 = P21,900. (c) Liabilities = 31,000 − 22,400 = P8,600.

Topic 2

Double Entry BookkeepingDouble Entry Bookkeeping

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Topic 3

Subsidiary Books and JournalsSubsidiary Books and Journals

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Topic 4

Preparing Final AccountsPreparing Final Accounts

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Topic 5

Adjustments to Final AccountsAdjustments to Final Accounts

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Topic 6

Verifying and Correcting AccountsVerifying and Correcting Accounts

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Topic 7

Partnerships and Company AccountsPartnerships and Company Accounts

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Mock Exams & Past Papers

Full Papers

Three full-length mock papers in the BGCSE Accounting exam style, drawing on every topic above — from the accounting equation through to partnerships and company accounts. Work through each paper under timed conditions on your own paper, then reveal each answer to mark yourself.

Paper 1 — Multiple Choice

Time allowed: 45 minutes  •  Total marks: 20

Instructions

  • Answer all 20 questions.
  • Each question carries 1 mark. Choose the single best answer.
1
1 mark
The accounting equation is correctly stated as:
  • A.Capital = Assets + Liabilities
  • B.Assets = Liabilities + Capital
  • C.Liabilities = Assets + Capital
  • D.Assets = Capital − Liabilities
2
1 mark
The concept which states that the business and its owner are treated as two separate entities is the:
  • A.Money measurement concept
  • B.Business entity concept
  • C.Going concern concept
  • D.Prudence concept
3
1 mark
Under the rules of double entry, an increase in an asset account is recorded as a:
  • A.Debit
  • B.Credit
  • C.Either debit or credit
  • D.Neither debit nor credit
4
1 mark
Credit purchases of goods for resale are first recorded in the:
  • A.Sales journal
  • B.Purchases journal
  • C.General journal
  • D.Cash book
5
1 mark
A document sent to a customer to reduce the amount owing, usually because goods were returned, is called a:
  • A.Debit note
  • B.Credit note
  • C.Invoice
  • D.Statement of account
6
1 mark
The fixed amount of cash given to a petty cashier at the start of a period, to be topped up to the same level at the end of the period, is called the:
  • A.Float
  • B.Imprest
  • C.Reserve
  • D.Provision
7
1 mark
Which of the following is entered in the General Journal?
  • A.Cash sales
  • B.Credit sales of inventory
  • C.Purchase of a non-current asset on credit
  • D.Cheque payments to trade payables
8
1 mark
Gross profit is calculated as:
  • A.Sales − Cost of sales
  • B.Sales − Total expenses
  • C.Sales + Closing inventory
  • D.Cost of sales − Sales
9
1 mark
Writing off a bad debt is an application of which accounting concept?
  • A.Consistency
  • B.Going concern
  • C.Prudence
  • D.Realisation
10
1 mark
A machine costing P20,000 with an estimated residual value of P2,000 is to be depreciated over 6 years using the straight line method. The annual depreciation charge is:
  • A.P3,333
  • B.P3,000
  • C.P2,000
  • D.P22,000
11
1 mark
A cheque paid into the bank but not yet cleared by the bank is called:
  • A.An unpresented cheque
  • B.An uncredited deposit
  • C.A dishonoured cheque
  • D.A standing order
12
1 mark
Which error would NOT cause the trial balance totals to disagree?
  • A.A single entry error
  • B.Error of complete reversal
  • C.An addition error in an account
  • D.Posting a debit twice without a matching credit
13
1 mark
A temporary account used to hold the difference on a trial balance until errors are found is called the:
  • A.Control account
  • B.Suspense account
  • C.Disposal account
  • D.Drawings account
14
1 mark
In a partnership, interest charged on partners' drawings is:
  • A.Credited to the appropriation account and debited to the partner's current account
  • B.Debited to the partner's current account and credited to the appropriation account
  • C.Debited to the capital account only
  • D.Ignored in the appropriation account
15
1 mark
The sales ledger control account is also known as the:
  • A.Total trade payables account
  • B.Total trade receivables account
  • C.Purchases ledger account
  • D.Nominal ledger account
16
1 mark
Rent received in advance at the end of the year should be:
  • A.Added to rent received and shown as a current asset
  • B.Deducted from rent received and shown as a current liability
  • C.Deducted from rent received and shown as a current asset
  • D.Ignored until it is received in cash
17
1 mark
In a limited company's financial statements, the item "share premium" is shown under:
  • A.Non-current assets
  • B.Current liabilities
  • C.Equity/reserves
  • D.Current assets
18
1 mark
Which method of depreciation charges the highest amount of depreciation in the asset's early years and progressively less in later years?
  • A.Straight line method
  • B.Reducing balance method
  • C.Revaluation method
  • D.All three methods charge the same amount each year
19
1 mark
If closing inventory is overstated, the effect on the current year's gross profit is that it will be:
  • A.Overstated
  • B.Understated
  • C.Unaffected
  • D.Turned into a loss
20
1 mark
A business had trade receivables of P8,000 and created a provision for doubtful debts of 5%. The net trade receivables shown in the statement of financial position is:
  • A.P8,400
  • B.P7,600
  • C.P400
  • D.P8,000

Paper 2 — Structured Questions

Time allowed: 2 hours  •  Total marks: 100

Instructions

  • Answer all questions in the spaces or working area on your own paper.
  • Show all your workings — marks are awarded for method as well as for the final figure.
  • Where a question asks for a ledger account or financial statement, set it out under a clear title with a date.
1
10 marks
On 1 March 2024, Kefilwe started a stationery business, paying P80,000 into a business bank account. During March she completed the following transactions.
  1. March 2: Bought a delivery van by cheque, P25,000.
  2. March 5: Bought inventory on credit from Palapye Supplies, P6,400.
  3. March 12: Sold goods on credit to Tumo, P3,200.
  4. March 20: Withdrew P600 cash from the bank for her own use.
State, for each transaction, the two accounts affected and whether each is debited or credited. (8 marks)
State which accounting concept is applied when Kefilwe's personal drawings are kept separate from the business's expenses. (2 marks)
Model answer
  1. Debit Bank, Credit Capital — P80,000.
  2. Debit Motor vehicle (delivery van), Credit Bank — P25,000.
  3. Debit Purchases, Credit Palapye Supplies — P6,400.
  4. Debit Tumo, Credit Sales — P3,200.
  5. Debit Drawings, Credit Bank — P600.
The business entity concept is applied — the business and its owner are treated as separate for accounting purposes, so drawings (a private transaction) are removed from business expenses and shown separately against capital.
2
8 marks
Mpho's trade receivables account with Boitumelo showed the following: on 1 April the balance owing was P1,450. On 8 April, Boitumelo bought goods on credit, P940. On 15 April, she returned faulty goods worth P210. On 28 April, she paid P1,600 by cheque, receiving a cash discount of P80.
  1. Write up Boitumelo's account in Mpho's sales ledger for April, balancing it off at the end of the month. (6 marks)
  2. State the balance carried down and explain what it represents. (2 marks)
Model answer
  1. Debit side: Balance b/d 1,450; Sales 940 (Total 2,390). Credit side: Returns inwards 210; Bank 1,600; Discount allowed 80; Balance c/d 500 (Total 2,390).
  2. Balance c/d of P500 is brought down on the debit side on 1 May — it represents the amount Boitumelo still owes Mpho at the end of April, an asset (trade receivable) of the business.
3
10 marks
The following balances remained in the books of Naledi after her trial balance failed to agree on 30 April 2024: Capital P34,900, Bank P6,200, Trade receivables P9,100, Trade payables P5,800, Inventory P7,400, Fixtures and fittings P12,000, Sales P58,000, Purchases P41,000, Rent P7,530, Drawings P3,000, Wages P12,000.
  1. Draw up Naledi's trial balance as at 30 April 2024, inserting the difference in a suspense account. (8 marks)
  2. State whether the balance on the suspense account should appear as a current asset or a current liability if a statement of financial position were prepared before the error is found, and explain your answer. (2 marks)
Model answer
  1. Debit column: Bank 6,200 + Trade receivables 9,100 + Inventory 7,400 + Fixtures and fittings 12,000 + Purchases 41,000 + Rent 7,530 + Drawings 3,000 + Wages 12,000 = P98,230. Credit column: Capital 34,900 + Trade payables 5,800 + Sales 58,000 = P98,700. The credit column exceeds the debit column by P470, so a Suspense account with a debit balance of P470 is inserted on the debit side to make both column totals agree at P98,700.
  2. A debit balance on a suspense account (as here) would appear as a current asset, because it is simply a holding figure standing in for an amount that has not yet been posted or has been understated somewhere on the debit side; a credit balance would instead appear as a current liability. Either way it is a temporary figure that disappears once the underlying error is traced and corrected.
4
12 marks
Thabo extracted the following figures for the year ended 31 December 2024: Opening inventory P9,500, Purchases P62,000, Carriage inwards P1,200, Purchases returns P2,100, Closing inventory P11,800, Sales P108,000, Sales returns P3,000.
  1. Prepare the trading account section of Thabo's income statement, showing cost of sales and gross profit clearly. (8 marks)
  2. Explain, using this example, why carriage inwards is added to purchases while carriage outwards would not be. (4 marks)
Model answer
  1. Net sales = 108,000 − 3,000 = 105,000. Net purchases = 62,000 − 2,100 = 59,900. Cost of sales = Opening inventory 9,500 + Net purchases 59,900 + Carriage inwards 1,200 − Closing inventory 11,800 = P58,800. Gross profit = 105,000 − 58,800 = P46,200.
  2. Carriage inwards is the cost of bringing purchased goods to the business, so it forms part of the cost of getting inventory ready for sale and is added to purchases in cost of sales. Carriage outwards is the cost of delivering goods already sold to customers, which is a selling/distribution expense incurred after the sale, so it is deducted as an expense in the profit and loss section rather than added to cost of sales.
5
10 marks
Refilwe's financial year ends on 31 December. Her rent expense account shows P14,400 paid by cheque during 2024. At 1 January 2024 rent of P1,200 was owing (accrued), and at 31 December 2024 rent of P800 had been prepaid.
  1. Calculate the rent expense to be transferred to the income statement for the year ended 31 December 2024. (6 marks)
  2. State how the prepayment of P800 would be shown in the statement of financial position at 31 December 2024, and explain why. (4 marks)
Model answer
  1. Rent expense for the year = Amount paid 14,400 − Opening accrual 1,200 − Closing prepayment 800 = P12,400 (the opening accrual relates to 2023 so it is removed, and the closing prepayment relates to 2025 so it is also removed).
  2. The P800 prepayment is shown as a current asset in the statement of financial position, because it represents a short-term benefit (rent already paid for the following period) that the business is entitled to receive the use of in the next financial year.
6
10 marks
On 1 January 2023, Onalenna bought equipment for P36,000, paying by cheque, and estimated a residual value of P6,000 after 5 years of use. Her financial year ends 31 December, and she uses the straight line method.
  1. Calculate the annual depreciation charge. (2 marks)
  2. Calculate the net book value of the equipment at 31 December 2024, after two years of depreciation. (4 marks)
  3. Explain one advantage and one disadvantage of the straight line method compared with the reducing balance method. (4 marks)
Model answer
  1. Annual depreciation = (Cost 36,000 − Residual value 6,000) ÷ 5 years = P6,000 per year.
  2. Accumulated depreciation after 2 years = 6,000 × 2 = 12,000. Net book value = 36,000 − 12,000 = P24,000.
  3. Advantage: the straight line method is simple to calculate and gives the same, predictable charge every year, which suits assets that provide roughly equal benefit each year. Disadvantage: it assumes even use over the asset's life, which may not reflect reality for assets (like vehicles) that lose more value and need more repairs in their later years — the reducing balance method matches this pattern better by charging more depreciation early on.
7
10 marks
At 31 May 2024, Keabetswe's cash book showed a bank balance of P4,150. On comparing this with the bank statement, the following were found: bank charges of P90 had not been entered in the cash book; a cheque for P620 paid to a supplier had not yet been presented; a deposit of P1,340 paid in on 30 May had not yet been credited by the bank; and a standing order of P260 for insurance had not been entered in the cash book.
  1. Update Keabetswe's cash book and state the corrected balance. (6 marks)
  2. Starting from the corrected cash book balance, prepare a bank reconciliation statement to arrive at the balance shown on the bank statement. (4 marks)
Model answer
  1. Corrected cash book: Balance b/d 4,150 − Bank charges 90 − Standing order (insurance) 260 = P3,800.
  2. Balance as per updated cash book 3,800; Add: Unpresented cheque 620; Less: Uncredited deposit (1,340); Balance as per bank statement = P3,080.
8
12 marks
Boago maintains a sales ledger control account. On 1 June 2024 the balance brought down was P22,600 (debit). During June the following totals were extracted from the books of original entry: Credit sales P31,400; Cash and cheques received from trade receivables P28,900; Sales returns P1,150; Discount allowed P620; Bad debts written off P780; Dishonoured cheque P450.
  1. Prepare the sales ledger control account for June 2024, bringing down the balance at 1 July. (8 marks)
  2. State two reasons why a business would keep a sales ledger control account in addition to individual trade receivables accounts. (4 marks)
Model answer
  1. Debit side: Balance b/d 22,600; Sales 31,400; Dishonoured cheque 450 (Total 54,450). Credit side: Bank 28,900; Sales returns 1,150; Discount allowed 620; Bad debts 780; Balance c/d 23,000 (Total 54,450). Balance b/d on 1 July = P23,000.
  2. Any two of: it provides an immediate total of trade receivables for the trial balance and statement of financial position without listing every individual account; it acts as a check on the arithmetical accuracy of the sales ledger, since its balance should agree with the sum of individual accounts; it helps locate errors more quickly when a trial balance does not agree; and it can help highlight fraud by providing an internal check separate from the personal ledger.
9
10 marks
Kagiso and Lorato are in partnership sharing profits and losses equally. There is no partnership agreement covering interest on capital, interest on drawings, or partners' salaries. For the year ended 31 December 2024, the partnership made a profit for the year of P54,000 before any appropriations.
  1. Explain what governs the sharing of profit between Kagiso and Lorato in the absence of a partnership agreement, and state each partner's share of the P54,000 profit. (4 marks)
  2. Lorato argues that she should receive a bigger share because she works full-time in the business while Kagiso only works two days a week. Explain, with reference to the rules that apply when there is no agreement, whether Lorato is entitled to extra pay for the additional time she works. (6 marks)
Model answer
  1. In the absence of a partnership agreement, the Partnership Act requires that profits and losses be shared equally between the partners, regardless of the amount of capital contributed or work done. Each partner's share = 54,000 ÷ 2 = P27,000.
  2. Under the default rules that apply when there is no agreement, no partner is entitled to a salary or extra reward for working more hours or doing more work in the business — all partners are assumed to have agreed to contribute their effort as part of the partnership, and profits are still shared equally. If Lorato wants to be paid for the additional time she puts in, she and Kagiso would need to draw up (or amend) a partnership agreement that provides for a partner's salary or an unequal profit-sharing ratio reflecting their different contributions.
10
8 marks
Distinguish between a private limited company and a partnership, referring in your answer to (a) the liability of the owners, and (b) how the profit is shared with or distributed to the owners.
Model answer (a) In a partnership, the partners generally have unlimited liability — each partner can be held personally responsible for the debts of the business, and personal assets may be used to settle them. In a private limited company, the shareholders have limited liability — they can only lose the amount they invested in shares, and their personal assets are protected. (b) In a partnership, profit is shared between the partners according to the profit-sharing ratio in the partnership agreement (or equally if there is none), and is credited directly to partners' current accounts. In a limited company, profit belongs to the company itself; a portion may be distributed to shareholders as a dividend, while the rest is retained in the business as retained earnings/reserves — shareholders do not automatically receive all of the profit as partners do.

Paper 3 — Extended Practical Questions

Time allowed: 1 hour 30 minutes  •  Total marks: 60

Instructions

  • Answer all four questions. Each question draws together several topics, as a real BGCSE paper does.
  • Set out any account, journal, or financial statement clearly, with a title and the correct date.
1
15 marks
Pontsho's trial balance at 30 June 2024 included the following: Capital P62,000, Drawings P8,400, Bank (dr) P5,900, Trade receivables P14,200, Trade payables P9,800, Inventory at 1 July 2023 P11,600, Purchases P73,000, Sales P128,500, Sales returns P2,000, Purchases returns P1,700, Wages and salaries P18,900, Rent P7,200, General expenses P3,100, Motor vehicle (at cost) P28,000, Provision for depreciation on motor vehicle P8,400. Inventory at 30 June 2024 was valued at P13,900. Depreciation on the motor vehicle is to be charged at 20% per annum on cost using the straight line method.
  1. Prepare Pontsho's income statement for the year ended 30 June 2024. (10 marks)
  2. Prepare the non-current assets section of Pontsho's statement of financial position at 30 June 2024, showing cost, accumulated depreciation, and net book value for the motor vehicle. (5 marks)
Model answer
  1. Net sales = 128,500 − 2,000 = 126,500. Net purchases = 73,000 − 1,700 = 71,300. Cost of sales = Opening inventory 11,600 + Net purchases 71,300 − Closing inventory 13,900 = 69,000. Gross profit = 126,500 − 69,000 = 57,500. Depreciation for the year = 20% × 28,000 = 5,600. Total expenses = Wages and salaries 18,900 + Rent 7,200 + General expenses 3,100 + Depreciation 5,600 = 34,800. Profit for the year = 57,500 − 34,800 = P22,700.
  2. Motor vehicle — Cost 28,000; Accumulated depreciation = 8,400 (brought forward) + 5,600 (this year) = 14,000; Net book value = 28,000 − 14,000 = P14,000.
2
15 marks
Using your answer to Question 1, and given that Pontsho's remaining trial balance figures were Capital P62,000 and Drawings P8,400, together with the profit for the year you calculated:
  1. Calculate Pontsho's closing capital at 30 June 2024. (4 marks)
  2. Given that Pontsho's current assets (inventory, trade receivables and bank) total P72,100 and her only current liability is trade payables of P9,800, prepare the "financed by" section of the statement of financial position and confirm it agrees with total net assets. (7 marks)
  3. Explain, in your own words, why the profit for the year is added to capital rather than treated as a liability owed to someone outside the business. (4 marks)
Model answer
  1. Closing capital = Opening capital 62,000 + Profit for the year 22,700 − Drawings 8,400 = P76,300.
  2. Non-current assets 14,000 + Working capital (Current assets 72,100 − Current liabilities 9,800 = 62,300) = Total net assets P76,300. Financed by: Capital 62,000 + Profit for the year 22,700 − Drawings 8,400 = P76,300, which agrees exactly with total net assets, confirming the accounting equation Assets − Liabilities = Capital holds.
  3. Profit belongs to the owner, not to an outside party, because it is the increase in the value of the owner's stake in the business created by trading during the year. Since the owner's capital represents what the business owes back to the owner, any profit earned increases what the business owes the owner (and any loss reduces it) — it is not a debt to a third party, so it is added to capital rather than shown as a liability.
3
15 marks
Dineo's trial balance failed to agree by P750, a credit shortage (i.e. the debit column exceeded the credit column) which was posted to a suspense account. On investigation, she found: (i) the sales journal had been undercast by P300; (ii) a payment of P170 for insurance had been entered correctly in the cash book but posted to the insurance account as P710; (iii) discount received of P90 had been credited correctly in the discount received account but no entry had been made in the trade payable's account.
  1. Prepare journal entries to correct each of the three errors, without narratives. (9 marks)
  2. Write up the suspense account, starting with the original difference, and showing it is fully cleared once the errors above are corrected. (4 marks)
  3. State, giving a reason, whether the correction of error (ii) will increase, decrease, or have no effect on the profit for the year. (2 marks)
Model answer
  1. (i) Debit Suspense account 300; Credit Sales account 300 (the credit side of the ledger was 300 too low, so Sales is credited and Suspense takes the matching debit). (ii) Debit Suspense account 540; Credit Insurance account 540 (the account was overcast by 710 − 170 = 540, so Insurance is credited down to its correct balance and Suspense takes the matching debit). (iii) Debit Trade payable's account 90; Credit Suspense account 90 (the missing debit entry is now made in the payable's account, with Suspense credited).
  2. Suspense account: Credit side — Difference on trial balance (opening credit shortage) 750, Trade payable correction 90 (Total 840). Debit side — Sales correction 300, Insurance correction 540 (Total 840). Both sides total P840 and the account closes to zero, confirming that these three errors fully account for the original P750 difference.
  3. The correction of error (ii) will increase the profit for the year, because the insurance expense was originally overstated by P540 (710 was posted instead of 170); reducing the expense back down to its correct amount reduces total expenses charged against gross profit, which increases the profit for the year.
4
15 marks
Selelo and Mmoloki are partners sharing profits and losses in the ratio 3:2. Interest on capital is allowed at 5% per annum, and Selelo is entitled to a partner's salary of P6,000 per year. Capital balances are Selelo P40,000 and Mmoloki P30,000. The partnership's profit for the year before appropriations was P38,000.
  1. Prepare the profit and loss appropriation account for the year, showing interest on capital, the partner's salary, and the residual profit shared between the partners. (10 marks)
  2. State two items, other than the residual profit share, that would be recorded in a partner's current account (rather than their capital account) during the year. (3 marks)
  3. Explain why interest on capital is allowed in a partnership even though the business does not actually pay interest to a bank. (2 marks)
Model answer
  1. Profit for the year 38,000. Less: Interest on capital — Selelo (5% × 40,000) 2,000, Mmoloki (5% × 30,000) 1,500 (Total 3,500). Less: Selelo's salary 6,000. Residual profit to share = 38,000 − 3,500 − 6,000 = 28,500. Shared 3:2 — Selelo = 28,500 × 3/5 = 17,100; Mmoloki = 28,500 × 2/5 = 11,400. Total appropriated: Selelo (2,000 + 6,000 + 17,100) = 25,100; Mmoloki (1,500 + 11,400) = 12,900; Total = P38,000, agreeing with the profit for the year.
  2. Any two of: interest on capital, a partner's salary, interest charged on drawings, and the partner's share of residual profit (or loss) — these fluctuate year to year and are recorded in the current account, keeping the fixed capital account balance unchanged unless capital is formally introduced or withdrawn.
  3. Interest on capital rewards partners fairly for the different amounts of capital they have tied up in the business, since a partner who has invested more capital would otherwise receive the same share of profit as one who invested less (once the profit-sharing ratio is applied) — charging notional interest before sharing the residual profit compensates for this difference in investment, even though no actual cash interest changes hands with an outside party.