Financial Accounting — July 2024

KNEC Diploma in Project Management — Module I. Paper code: 2922/102

Attempt the questions before reading the answers. These are independent revision answers, not official KNEC marking schemes. Every printed question is answered, including optional questions. Printed data errors are identified explicitly in the relevant worked answer.

Time: 3 hours. Seven questions; answer any five in the examination. Show all workings. All questions are answered here. Handwritten annotations on the supplied scan are not part of the printed questions. Any ambiguity or imbalance in the printed data is identified in the worked answer.

Question 1(a)

Salamah Bookshop incurred the following expenses during the month of November 2023.

Expense Ksh
Furniture and fixtures 180,000
Textbooks and stationery 572,700
Magazines and newspapers 61,800
Renovation of bookshop 19,500
Internet (wifi) installation 10,400
New logo on delivery van 23,000
Internet expenses 19,200
Salaries 319,600
Installation of air conditioner 15,600
Electricity 14,200
Cleaning expenses 7,100
Neon sign for the bookshop 105,000
Insurance 32,400
Consumable stationery 18,900

Determine the: (i) Total capital expenditure; (ii) Total revenue expenditure.

(8 marks)

Answer

Classification depends on the nature of the spending, not merely its size. The baseline treats the unspecified renovation as ordinary upkeep, the van logo as advertising, and the installed network, air conditioner and durable neon sign as assets used beyond the current period. Goods bought for resale are revenue expenditure in this classification; unsold goods would remain inventory rather than all being expensed immediately.

Item Classification and reason KSh
Furniture and fixtures Capital: durable shop assets 180,000
Textbooks and stationery Revenue: stock for resale 572,700
Magazines and newspapers Revenue: stock for resale 61,800
Renovation of bookshop Revenue, assuming ordinary restoration or maintenance 19,500
Internet (wifi) installation Capital, assuming an installed network asset 10,400
New logo on delivery van Revenue: advertising/branding, not a separate non-current asset 23,000
Internet expenses Revenue: recurring service 19,200
Salaries Revenue: operating cost 319,600
Installation of air conditioner Capital: bringing a durable asset into use 15,600
Electricity Revenue: operating cost 14,200
Cleaning expenses Revenue: operating cost 7,100
Neon sign for the bookshop Capital: durable physical sign 105,000
Insurance Revenue: operating cost 32,400
Consumable stationery Revenue: consumables 18,900
Required total Working KSh
(i) Capital expenditure 180,000 + 10,400 + 15,600 + 105,000 311,000
(ii) Revenue expenditure Sum of the other ten items 1,088,400
Check: all listed expenditure 311,000 + 1,088,400 1,399,400

If the KSh 19,500 renovation is instead a documented improvement or initial fit-out that brings the shop into usable condition, classify it as capital: capital becomes KSh 330,500 and revenue becomes KSh 1,068,900. The paper does not describe the work sufficiently to choose that alternative without an assumption.

Question 1(b)

The following information relates to Karamu wholesalers for the Month of November 2023.

Invoices received
November 2023 Supplier and reference Ksh
1 Abdi Retailers Invoice No.0439 537,300
17 Better Enterprises Invoice No.1238 299,800
Invoices issued
November 2023 Customer and reference Ksh
13 Rahisi School Invoice No.5112 456,100
22 Litsa Laundry Invoice No.5113 315,600
29 Majani Solutions Invoice No.5114 201,000
Credit notes received
November 2023 Supplier and printed reference Ksh
15 Abdi Retailers Invoice No.0147 3,800
30 Better Enterprises Invoice No.0056 4,100
Credit notes issued
November 2023 Customer and reference Ksh
5 Rahisi School Note No.018 1,200
20 Majani Solutions Note No.019 900

Prepare: (i) Purchases journal; (ii) Sales journal; (iii) Returns inwards journal; (iv) Returns outwards journal.

(12 marks)

Answer

(i) Purchases Journal — November 2023
Date Supplier Invoice KSh
1 Nov Abdi Retailers 0439 537,300
17 Nov Better Enterprises 1238 299,800
Total: Dr Purchases; Cr payables 837,100
(ii) Sales Journal — November 2023
Date Customer Invoice KSh
13 Nov Rahisi School 5112 456,100
22 Nov Litsa Laundry 5113 315,600
29 Nov Majani Solutions 5114 201,000
Total: Dr receivables; Cr Sales 972,700
(iii) Returns Inwards Journal — November 2023
Date Customer Credit note KSh
5 Nov Rahisi School 018 1,200
20 Nov Majani Solutions 019 900
Total: Dr Returns inwards; Cr receivables 2,100
(iv) Returns Outwards Journal — November 2023
Date Supplier Printed reference KSh
15 Nov Abdi Retailers 0147 3,800
30 Nov Better Enterprises 0056 4,100
Total: Dr payables; Cr Returns outwards 7,900

The references under “Credit notes received” are printed as “Invoice No.”; the dates, references and amounts are retained, and the documents are classified by the credit-note heading. No VAT adjustment is introduced because none is supplied.

Question 2(a)

Explain four errors that affect the agreement of a trial balance.

(8 marks)

Answer

  1. A one-sided omission: recording only the debit or only the credit leaves the totals unequal by the omitted amount.
  2. Posting different amounts to the debit and credit sides of a transaction creates a difference equal to the mismatch.
  3. Posting an amount to the wrong side of a ledger account creates a difference of twice that amount when the other entry is correct.
  4. An arithmetic or transfer error, such as miscasting an account or placing a balance in the wrong trial-balance column, can make the trial-balance totals disagree.

Question 2(b)

On 1 October 2023, Barra Traders had cash in hand Ksh.26,400 and Ksh.52,100 at the bank. The following transactions took place during the month 2023:

October 2023 Transaction
3 Received a cheque for Ksh.9,900 from David after deducting a cash discount of 10%
7 Paid a telephone bill of Ksh.5,200 in cash.
10 Withdrew Ksh.8,000 from the bank for office use.
14 Telta Enterprises settled their account of Ksh.64,000 less 5% cash discount
15 Settled Maona Limited’s account of Ksh.40,000 by cheque less 5% cash discount
19 Bought an equipment for Ksh.25,000 and paid by cheque.
25 Repaid a loan of Ksh.5,000 from TN Bank through Electronic Funds Transfer (EFT)
26 Bought stationery for Ksh.4,300 and paid in cash.
27 Withdrew Ksh.12,800 from the bank for personal use.
29 Paid rates of Ksh.5,400 in cash.
30 Received a cheque for Ksh.7,600 from Jason.
31 Paid Sawa Traders Ksh.11,000 by cheque.

Prepare a three column cash book for the month of October 2023.

(12 marks)

Answer

Working Calculation KSh
David’s account before discount 9,900 ÷ 90% 11,000
Discount allowed to David 11,000 − 9,900 1,100
Discount allowed to Telta 64,000 × 5% 3,200
Receipt from Telta 64,000 − 3,200 60,800
Discount received from Maona 40,000 × 5% 2,000
Payment to Maona 40,000 − 2,000 38,000

Telta’s settlement does not state the payment medium. The cash book below treats it as cash; the bank alternative is given afterwards. The KSh 8,000 bank withdrawal is a contra entry, not income.

Barra Traders — three-column cash book, October 2023
Debit date Receipts Discount allowed KSh Cash KSh Bank KSh Credit date Payments Discount received KSh Cash KSh Bank KSh
1 Oct Balance b/d 26,400 52,100 7 Oct Telephone 5,200
3 Oct David 1,100 9,900 10 Oct Cash (C) 8,000
10 Oct Bank (C) 8,000 15 Oct Maona 2,000 38,000
14 Oct Telta 3,200 60,800 19 Oct Equipment 25,000
30 Oct Jason 7,600 25 Oct Loan repayment 5,000
31 Oct Balance c/d: overdraft 30,200 26 Oct Stationery 4,300
27 Oct Drawings 12,800
29 Oct Rates 5,400
31 Oct Sawa Traders 11,000
31 Oct Balance c/d 80,300
Totals 4,300 95,200 99,800 Totals 2,000 95,200 99,800

1 November balances: cash Dr KSh 80,300; bank Cr KSh 30,200. Discount columns are totalled and posted to the appropriate discount accounts, not balanced as cash. If Telta’s payment is banked directly instead, closing cash is KSh 19,500 Dr and closing bank is KSh 30,600 Dr.

Question 3(a)

The following balances were extracted from the books of account of Jambo Retailers as at 31 December 2023.

Item Ksh
Buildings 9,800,000
Capital 8,443,300
Inventory (1 January 2023) 1,010,000
Discounts received 114,500
Bad debts written off 219,600
Drawings 659,200
Accounts receivable 2,972,300
Sales 6,203,800
Accounts payable 1,824,100
Purchases 3,721,500
Office expenses 597,800
Loan from KETTA finance 2,300,000
Loan to Massy 52,000
Bank overdraft 310,400
Carriage outwards 67,200
Cash 96,500

Prepare a trial balance as at 31 December 2023.

(10 marks)

Answer

Jambo Retailers — Trial Balance as at 31 December 2023
Account Debit KSh Credit KSh
Buildings 9,800,000
Capital 8,443,300
Opening inventory 1,010,000
Discounts received 114,500
Bad debts written off 219,600
Drawings 659,200
Accounts receivable 2,972,300
Sales 6,203,800
Accounts payable 1,824,100
Purchases 3,721,500
Office expenses 597,800
Loan from KETTA finance 2,300,000
Loan to Massy 52,000
Bank overdraft 310,400
Carriage outwards 67,200
Cash 96,500
TOTAL 19,196,100 19,196,100

A loan made to Massy is an asset (debit), while the loan received from KETTA finance and the bank overdraft are liabilities (credit).

Question 3(b)

Mudah Enterprises operate a petty cash book on an imprest system. The petty cashier is reimbursed at the end of the month. On 1 August 2023, the petty cashier had Ksh.50,000 in hand. During the month, the petty cashier made the following payments.

August 2023 Payment Ksh
2 Mobile phone airtime 1,000
4 Petrol 5,500
7 Detergents 800
10 Telephone bill 2,400
16 Tyres 9,700
17 Cleaner’s wages 2,500
19 Mobile phone airtime 2,000
20 Printing papers 3,500
21 Office diaries 1,200
26 Buckets 1,800
28 Lubricants 560
31 Phone repairs 1,600

Prepare a petty cash book using the following analysis columns: Motor Vehicle expenses; Telephone expenses; Stationery; Cleaning expenses.

(10 marks)

Answer

Mudah Enterprises — petty cash book, August 2023
Date Details Receipts KSh Payments KSh Motor vehicle KSh Telephone KSh Stationery KSh Cleaning KSh
1 Aug Balance b/d 50,000
2 Aug Airtime 1,000 1,000
4 Aug Petrol 5,500 5,500
7 Aug Detergents 800 800
10 Aug Telephone bill 2,400 2,400
16 Aug Tyres 9,700 9,700
17 Aug Cleaner’s wages 2,500 2,500
19 Aug Airtime 2,000 2,000
20 Aug Printing papers 3,500 3,500
21 Aug Office diaries 1,200 1,200
26 Aug Buckets 1,800 1,800
28 Aug Lubricants 560 560
31 Aug Phone repairs 1,600 1,600
Expenditure totals 32,560 15,760 7,000 4,700 5,100
31 Aug Reimbursement received 32,560
31 Aug Balance c/d after reimbursement 50,000
Cash-book totals 82,560 82,560

Cash before reimbursement = 50,000 − 32,560 = KSh 17,440. The stated end-of-month reimbursement is KSh 32,560, restoring the closing imprest to KSh 50,000. The analysis totals add to KSh 32,560; reimbursement is a receipt, not an additional expense.

Question 4(a)

Explain each of the following accounting concepts. (i) business entity concept; (ii) prudence concept; (iii) consistency concept; (iv) historical cost concept.

(8 marks)

Answer

Concept Explanation
Business entity Record the business’s transactions separately from those of its owner. Owner contributions are capital and personal withdrawals are drawings; this accounting separation does not itself make every business a separate legal person.
Prudence Use caution in uncertain estimates, without deliberately overstating or understating assets, liabilities, income or expenses.
Consistency Use the same accounting policies for comparable transactions and across periods unless a justified change is made and explained.
Historical cost Initially record an asset at the cost incurred to acquire it and bring it into use. Subsequent depreciation or other adjustments follow the relevant accounting policy rather than an arbitrary current selling price.

Question 4(b)

The following balances were extracted from the books of accounts of Majina Social Club as at 31 December 2023:

Item Ksh
Subscription received 1,260,000
Rent paid 360,000
Secretary’s honorarium 100,000
Maintenance of equipment 48,200
Bar sales 575,200
Equipment at cost 450,000
Bar purchases 391,800
Bar inventory (1 January 2023) 16,600
Bar wages 336,000
Income from investments 12,000
Stationery 11,900
Sale of raffle tickets 7,300
Cost of riffle prizes 4,700
Internet and telephone expenses 32,800
Additional information: As at 31 December 2023
  1. Bar inventory was valued at Ksh.51,100.
  2. Subscriptions outstanding amounted to Ksh.116,000.
  3. Secretary’s honorarium due was Ksh.20,000.

Depreciation on equipment is charged at 10% per annum.

(i) For the year ended 31 December 2023, prepare: (I) Bar trading account; (II) Income statement. (ii) Using the results obtained in (i) above, advise the management committee of the club.

(12 marks)

Answer

Adjustment Working KSh
Subscription income 1,260,000 + 116,000 1,376,000
Honorarium expense 100,000 + 20,000 120,000
Equipment depreciation 450,000 × 10% 45,000
Raffle surplus 7,300 − 4,700 2,600
(i)(I) Majina Social Club — Bar Trading Account, year ended 31 December 2023
Particulars KSh
Bar sales 575,200
Opening inventory 16,600
Add: purchases 391,800
Goods available 408,400
Less: closing inventory (51,100)
Cost of sales 357,300
Gross profit 217,900
Less: bar wages (336,000)
Net bar loss (118,100)
(i)(II) Income Statement, year ended 31 December 2023
Particulars KSh
Subscription income 1,376,000
Investment income 12,000
Raffle surplus 2,600
Total income 1,390,600
Net bar loss 118,100
Rent 360,000
Secretary’s honorarium 120,000
Maintenance of equipment 48,200
Stationery 11,900
Internet and telephone expenses 32,800
Equipment depreciation 45,000
Total expenditure 736,000
Surplus for the year 654,600
(ii) Advice to the management committee

The club as a whole has a surplus of KSh 654,600, but its bar loses KSh 118,100 after bar wages. The committee should review bar pricing, stock losses, purchase terms and staffing schedules rather than assuming strong sales mean the bar is profitable. It should collect the KSh 116,000 subscription arrears, settle the KSh 20,000 honorarium due and budget for equipment replacement. Subscriptions currently support the loss-making bar, so bar performance should be monitored separately. No opening accruals or prepayments are assumed because none are given.

Question 5(a)

The following balances relate to Angaza Retailers as at 1 August 2023.

Opening balances at 1 August 2023 Ksh
Sales ledger 582,800 Dr
Purchase ledger 397,600 Cr
Totals for the month
Item Ksh
Credit sales 2,620,900
Credit purchases 992,800
Return outwards 55,500
Returns inwards 34,900
Discounts received 38,900
Discounts allowed 56,800
Interest charged on overdue accounts 4,100
Bad debts written off 47,100
Contra settlements 64,500
Cheques received from credit customers 1,790,000
Cheques issued to suppliers 1,010,300
Cash received from credit customers 23,400
Dishonoured cheques from credit customers 17,200

Prepare a: (i) Sales ledger control account. (ii) Purchases ledger control account.

(10 marks)

Answer

(i) Sales ledger control account
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Aug Balance b/d 582,800 Aug Returns inwards 34,900
Aug Credit sales 2,620,900 Aug Discounts allowed 56,800
Aug Interest on overdue accounts 4,100 Aug Bad debts 47,100
Aug Dishonoured cheques 17,200 Aug Contra settlements 64,500
Aug Cheques received 1,790,000
Aug Cash received 23,400
31 Aug Balance c/d 1,208,300
Total 3,225,000 Total 3,225,000

1 Sep: balance b/d Dr KSh 1,208,300.

(ii) Purchases ledger control account
Debit date Debit particulars KSh Credit date Credit particulars KSh
Aug Returns outwards 55,500 1 Aug Balance b/d 397,600
Aug Discounts received 38,900 Aug Credit purchases 992,800
Aug Contra settlements 64,500
Aug Cheques issued 1,010,300
31 Aug Balance c/d 221,200
Total 1,390,400 Total 1,390,400

1 Sep: balance b/d Cr KSh 221,200.

Closing receivables = KSh 1,208,300 Dr. Closing payables = KSh 221,200 Cr. A dishonoured customer cheque increases receivables again; a contra settlement reduces both receivables and payables.

Question 5(b)

The following balances were obtained from the books of account of Kilimas Enterprises as at 31 December 2023.

Item Ksh
Plant and machinery at cost 3,000,000
Accumulated provision for depreciation on plant and machinery 980,000
Furniture and fitting at cost 1,210,400
Accumulated provision for depreciation on furniture and fittings 450,600
Capital 2,100,600
Accounts payable 200,800
Accounts receivable 158,200
Prepaid insurance expense 42,000
Prepaid rent income 48,000
Loan for JST bank 800,000
Accrued commission income 11,400
Cash in hand 31,300
Drawings 316,000
Bank overdraft 147,700
Net profit for the year 742,500
Accrued electricity expenses 19,200

Prepare a statement of financial position as at 31 December 2023.

(10 marks)

Answer

The supplied printed balances do not satisfy the accounting equation. The statement below classifies every supplied amount and shows the difference openly; no unsupported asset, expense or suspense balance is inserted to make it agree. “Loan for JST bank” is treated as a bank borrowing; its maturity is not supplied, so it is shown separately from the identified current liabilities.

Kilimas Enterprises — Statement of Financial Position as at 31 December 2023, using the printed balances
Particulars KSh
NON-CURRENT ASSETS
Plant and machinery: 3,000,000 − 980,000 2,020,000
Furniture and fittings: 1,210,400 − 450,600 759,800
Total non-current assets 2,779,800
CURRENT ASSETS
Accounts receivable 158,200
Prepaid insurance expense 42,000
Accrued commission income 11,400
Cash in hand 31,300
Total current assets 242,900
TOTAL ASSETS 3,022,700
EQUITY
Capital 2,100,600
Add: net profit 742,500
Less: drawings (316,000)
Closing capital 2,527,100
BANK BORROWING
Loan for JST bank 800,000
IDENTIFIED CURRENT LIABILITIES
Accounts payable 200,800
Rent income received in advance 48,000
Bank overdraft 147,700
Accrued electricity 19,200
Total identified current liabilities 415,700
Total liabilities 1,215,700
TOTAL EQUITY AND LIABILITIES 3,742,800
UNRESOLVED PRINTED-DATA DIFFERENCE: 3,742,800 − 3,022,700 720,100

Prepaid rent income is an obligation to provide future rental services, so it is a liability. With all other printed figures unchanged, the balancing opening capital would be KSh 1,380,500, not the printed KSh 2,100,600. This is only an illustration of the discrepancy, not evidence that capital is the misprinted item; the original records must establish the actual correction.

Question 6(a)

Explain four qualitative characteristics of good accounting information.

(8 marks)

Answer

  1. Relevance: it helps users make decisions by providing useful predictive or confirmatory information.
  2. Faithful representation: it gives a complete, neutral and materially accurate account of the transactions it describes.
  3. Comparability: users can identify similarities and differences between periods or organizations.
  4. Understandability: clear classification, presentation and explanation help reasonably informed users interpret the information.

Question 6(b)

On 1 September 2023, the cash book (bank column) of Zaidi Traders had a debit balance of Ksh.14,600 while the bank statement showed a credit balance of Ksh.3,200. Upon investigations, the following discrepancies were revealed:

  1. Bank charges of Ksh.1,200 were reflected on the bank statement only.
  2. Elega Retailers made a direct deposit of Ksh.56,400 into the bank account.
  3. The bank effected a standing order of rent amounting to Ksh.69,700.
  4. The bank had received dividend of Ksh3,900 on behalf of the firm.

(v) Cheque issued to suppliers and not presented to the bank for payment were:

Supplier Ksh.
Tom Enterprises 48,200
Furaha wholesalers 13,500

(vi) The following cheques received from customers had not been credited by the bank:

Customer Ksh.
Zella limited 23,000
Hassan Transporters 39,500

Prepare: (i) An updated cash book. (ii) A bank reconciliation statement.

(12 marks)

Answer

(i) Updated cash book — bank column
Debit date Debit particulars KSh Credit date Credit particulars KSh
1 Sep Balance before update 14,600 1 Sep Bank charges 1,200
1 Sep Direct deposit: Elega 56,400 1 Sep Rent standing order 69,700
1 Sep Dividend received 3,900 1 Sep Balance c/d 4,000
Total 74,900 Total 74,900

After update: balance b/d Dr KSh 4,000.

(ii) Zaidi Traders — Bank Reconciliation Statement as at 1 September 2023
Particulars KSh
Adjusted cash-book balance: debit 4,000
Add: unpresented cheque — Tom Enterprises 48,200
Add: unpresented cheque — Furaha wholesalers 13,500
Subtotal 65,700
Less: uncredited cheque — Zella limited (23,000)
Less: uncredited cheque — Hassan Transporters (39,500)
Balance per bank statement: credit 3,200

Question 7(a)

Explain four causes of depreciation of non-current assets.

(8 marks)

Answer

  1. Wear and tear: use and friction gradually reduce an asset’s service potential.
  2. Passage of time and deterioration: ageing, corrosion or exposure can reduce usefulness even when an asset is idle.
  3. Technological obsolescence: newer methods or equipment can make an existing asset less useful or economical.
  4. Depletion or exhaustion: extraction uses up a wasting asset such as a mineral deposit, reducing the remaining economic benefit.

Question 7(b)

Paula Traders do not maintain proper books of account. The following are the assets and liabilities of the business as at 31 December:

Asset or liability 31 December 2022 Ksh. 31 December 2023 Ksh.
Motor vehicles 4,000,000 6,700,000
Bank 97,500 —
Furniture 850,000 780,000
Inventory 290,000 319,500
Accounts receivable 625,000 749,800
Accounts payable 331,800 472,100
Bank overdraft — 34,800
Bank loan — 2,000,000
Accrued electricity 19,700 9,200

During the year, the proprietor brought into the business personal cash of Ksh.400,000. The proprietor took Ksh.350,000 from the business for children’s college fees.

Prepare a (i) Statement of affairs as at 1 January 2023. (ii) Statement of financial position as at 31 December 2023, showing the net profit for the year.

(12 marks)

Answer

(i) Paula Traders — Statement of Affairs as at 1 January 2023
Particulars KSh
Motor vehicles 4,000,000
Furniture 850,000
Bank 97,500
Inventory 290,000
Accounts receivable 625,000
Total assets 5,862,500
Accounts payable 331,800
Accrued electricity 19,700
Total liabilities 351,500
Opening capital: 5,862,500 − 351,500 5,511,000
Net-profit working KSh
Closing net assets: 8,549,300 − 2,516,100 6,033,200
Less: opening capital (5,511,000)
Add: drawings 350,000
Less: additional capital introduced (400,000)
NET PROFIT 472,200
(ii) Statement of Financial Position as at 31 December 2023
Particulars KSh
NON-CURRENT ASSETS
Motor vehicles 6,700,000
Furniture 780,000
Total non-current assets 7,480,000
CURRENT ASSETS
Inventory 319,500
Accounts receivable 749,800
Total current assets 1,069,300
TOTAL ASSETS 8,549,300
EQUITY
Opening capital 5,511,000
Add: capital introduced 400,000
Add: net profit 472,200
Less: drawings for college fees (350,000)
Closing capital 6,033,200
BANK LOAN
Bank loan: maturity not stated 2,000,000
CURRENT LIABILITIES
Accounts payable 472,100
Bank overdraft 34,800
Accrued electricity 9,200
Total current liabilities 516,100
Total liabilities 2,516,100
TOTAL EQUITY AND LIABILITIES 8,549,300
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