Financial Accounting 1 Exam Question
ANSWER ONE QUESTION IN SECTION A AND ANY TWO QUESTIONS IN SECTION B QUESTION ONE
(a) Differentiate between the following terms as used in accounting. (i) A debit entry and credit
entry (1 marks) A debit entry refers to an entry made on the left-hand side of an account,
representing an increase in assets or expenses and a decrease in liabilities, equity, or revenue.
A credit entry, on the other hand, is recorded on the right-hand side of an account, indicating an
increase in liabilities, equity, or revenue and a decrease in assets or expenses.
(b) (ii) Return inwards and return outwards (1marks) (iii) An asset account and liability account
(1marks) (iv) An expense account and revenue account (1 marks) (v) A trail balance and a
balance sheet (1 marks)
Return Inwards vs. Return Outwards:Return inwards, also known as sales returns or
merchandise returns, refer to goods returned by customers to the seller due to various reasons
such as defects, dissatisfaction, or overstock.
Return outwards, also termed as purchases returns or goods returned outward, are goods
returned by a business to its suppliers due to reasons like defects, overstock, or incorrect
shipments.
(iii) Asset Account vs. Liability Account:
An asset account records resources owned by a business, such as cash, inventory, property, or
equipment, which provide future economic benefits.
A liability account represents obligations of a business, such as loans, accounts payable, or accrued
expenses, which the business owes to external parties.
(iv) Expense Account vs. Revenue Account:
An expense account records the costs incurred by a business in its operations, such as salaries, rent,
utilities, and depreciation.
A revenue account documents the income earned by a business through its primary activities, such
as sales revenue, service revenue, or interest income.
(v) Trial Balance vs. Balance Sheet:
A trial balance is a list of all general ledger accounts and their respective balances at a specific point
in time, usually at the end of an accounting period. It ensures that debits equal credits and helps in the
preparation of financial statements.
A balance sheet, also known as the statement of financial position, presents a snapshot of a
company's financial position at a specific date, typically at the end of an accounting period. It lists assets,
liabilities, and equity, showing the company's net worth.
b) The following is a trial balance of ABC Ltd KshsKshs Stock 1 Jan 20092,368,000 Carriage
inwards200,000 Carriage outwards310,000 Return outwards205,000 Return outwards322,000
Purchases11,870,000 Sales18,600,000 Rent3,862,000 Salaries & Wages304,000 Insurance78,000 Motor
expenses216,000 Lighting and heating expenses166,000 General expenses314,000 Premises500,000
Motor vehicles1,800.000 Debtors3,896,000 Fixture and fittings350,000 Creditors1,731,000 Cash at
Bank482,000 Drawings1,200,000 Capital8,132,000 28,785,000 Stock at 30 December 2009 was Sh.
2,946,000 Required: Draw up a statement of comprehensive income for the year ended 31st Dec. 2009
and statement of financial position as at 31/12/2009. (10 marks)
Statement of Comprehensive Income and Statement of Financial Position:
Statement of Comprehensive Income for the year ended 31st Dec. 2009:
Sales 18,600,000
Less: Cost of Goods Sold
Opening Stock 2,368,000
Add: Purchases 11,870,000
Less: Closing Stock (2,946,000)
11,292,000
Add: Carriage Inwards 200,000
Less: Carriage Outwards (310,000)
Gross Profit 7,090,000
Operating Expenses:
Rent 3,862,000
Salaries & Wages 304,000
Insurance 78,000
Motor Expenses 216,000
Lighting and Heating Expenses 166,000
General Expenses 314,000
Total Operating Expenses 4,940,000
Net Profit before Tax 2,150,000
Statement of Financial Position as at 31/12/2009:
Assets:
Stock 2,946,000
Debtors 3,896,000
Premises 500,000
Motor Vehicles 1,800,000
Fixtures and Fittings 350,000
Cash at Bank 482,000
Total Assets 10,974,000
Liabilities:
Creditors 1,731,000
Equity:
Capital 8,132,000
Add: Net Profit 2,150,000
Total Equity 10,282,000
Total Liabilities and Equity 10,974,000
