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3. Classify capital, liabilities and Assets

3. Classify Capital, Liabilities and Assets

This element involves identifying different categories of assets, liabilities, and capital, and applying correct accounting treatment for each according to accounting principles.

3.1 Accrued Expenses and Prepaid Expenses Are Determined

Accrued Expenses (Accrued Liabilities)

These are expenses incurred but not yet paid at the end of the accounting period.
They increase liabilities.

Examples

  • Accrued salaries

  • Accrued rent

  • Accrued electricity

  • Accrued interest

Double Entry

  • Dr Expense

  • Cr Accrued Expense (Liability)

Prepaid Expenses (Prepayments)

These are expenses paid in advance for future periods.
They are classified as current assets.

Examples

  • Prepaid rent

  • Prepaid insurance

  • Prepaid advertising

Double Entry

  • Dr Prepaid Expense (Asset)

  • Cr Cash/Bank

3.2 Accounting for Revenue

Revenue is recognized when earned, not when cash is received (accrual principle).

Types of Revenue

  • Sales revenue

  • Service income

  • Interest income

  • Rental income

Double Entry

When revenue is earned:

  • Dr Accounts Receivable / Cash

  • Cr Revenue

Revenue increases equity/capital.

3.3 Accounting for Accounts Receivable, Bad Debts and Allowance for Doubtful Debts

Accounts Receivable (Debtors)

Customers who owe the business money for goods/services sold on credit.
Classified as current assets.

Double Entry for Credit Sales

  • Dr Accounts Receivable

  • Cr Sales

Bad Debts

Amounts confirmed as uncollectible.
Classified as an expense.

Double Entry

  • Dr Bad Debts Expense

  • Cr Accounts Receivable

Allowance for Doubtful Debts (Provision for Bad Debts)

A percentage estimate of receivables expected to become bad.
Classified as a contra-asset (reduces accounts receivable).

Double Entry

To create allowance:

  • Dr Doubtful Debts Expense

  • Cr Allowance for Doubtful Debts

3.4 Property, Plant and Equipment (PPE) Accounts Are Managed

PPE are long-term assets used in the business for more than one year.

Examples

  • Buildings

  • Machinery

  • Motor vehicles

  • Furniture and fittings

Key Accounting Treatments

1. Initial Cost

Includes purchase price + installation + delivery.

2. Depreciation

Allocation of asset cost over its useful life.

Double Entry for Depreciation

  • Dr Depreciation Expense

  • Cr Accumulated Depreciation

3. Disposal of Asset

When asset is sold or scrapped:

  • Remove cost

  • Remove accumulated depreciation

  • Record gain or loss

3.5 Inventory Is Recognized, Measured and Valued Based on Cost Method

Inventory includes goods held for resale.

Recognition

Inventory is recorded when the business takes ownership of goods.

Measurement

Inventory is measured at cost, which includes:

  • Purchase price

  • Transport (carriage inwards)

  • Import duty

  • Handling costs

Valuation Methods

(Using cost principle)

1. FIFO (First In, First Out)

Oldest items are sold first.

2. Weighted Average Cost

Average cost per unit is applied.

3. Specific Identification

Each item tracked individually.

Note: Inventory must be valued at the lower of cost or net realizable value (NRV).

3.6 Accounting for Cash and Cash Equivalents, Bank Reconciliation

Cash and Cash Equivalents Include:

  • Cash at hand

  • Cash at bank

  • Short-term deposits

  • Treasury bills

  • Petty cash

These are classified as current assets.

Cash Book

Records all cash and bank transactions.
Acts as:

  • A book of original entry

  • A ledger account

Petty Cash Book

Used for small payments such as:

  • Postage

  • Stationery

  • Local transport

Operates under the imprest system.

Bank Reconciliation Statement

Prepared to match the cash book (bank column) with the bank statement.

Differences arise from:

  • Unpresented cheques

  • Deposits in transit

  • Bank charges

  • Direct deposits or debits

  • Errors in cash book or bank statement

Purpose:

  • Detect errors

  • Prevent fraud

  • Ensure accurate cash records

Short Exam-Ready Summary

Assets include resources such as cash, receivables, inventory, and PPE.
Liabilities include obligations such as accrued expenses and accounts payable.
Capital is the owner’s investment plus retained profits.

This element requires:

  • Determining accrued and prepaid expenses

  • Recognizing revenue when earned

  • Accounting for receivables, bad debts, and allowances

  • Managing PPE through cost, depreciation, and disposal

  • Recognizing and valuing inventory using cost methods

  • Accounting for cash, cash equivalents, and preparing bank reconciliation statements