Accountancy: Recording, Reporting and Interpretation
Core concepts
The accountancy domain tests whether you can move confidently between the double-entry records (journal, ledger, trial balance), the year-end adjustments (accruals, prepayments, depreciation, bad and doubtful debts, closing inventory), and the published statements (statement of profit or loss, statement of financial position, statement of cash flows). Candidates must also handle partnership accounts (appropriation, goodwill on admission/retirement), company accounts (share issues, dividends, reserves), and simple ratio analysis for interpretation.
Traps that appear in questions
- Confusing capital expenditure with revenue expenditure: buying a delivery van is capital; its annual insurance is revenue.
- Forgetting that accrued income is a current asset while accrued expense is a current liability.
- Treating a provision for doubtful debts as a direct write-off. A write-off reduces receivables; a provision is an estimate shown against receivables.
- Misreading gross profit vs net profit: gross profit ignores operating expenses.
- In suspense/error questions, remembering that a one-sided error affects the trial balance while a two-sided error of principle does not.
Worked rule of thumb
For accruals, use this sentence: “Expense incurred but not paid → add to expense, create a liability; paid but not incurred → remove from expense, create an asset.” Example: rent paid Ksh 90,000 covers 9 months; 3 months (Ksh 30,000) is prepaid. Debit prepaid rent (asset) Ksh 30,000; credit rent expense Ksh 30,000. Profit rises by Ksh 30,000.
Interpretation
Ratios must be computed from the correct figures: return on capital employed uses operating profit ÷ capital employed, not net profit after tax. Always state whether a ratio is improving or deteriorating and why.