December 12, 2020

Introduction Inflation refers to an economic situation where the demand for goods and services in the economy is continuously increasing without corresponding increase in supply which pushes the general prices up. The opposite of inflation is called deflation. Inflation is measured by considering the Consumer Price Index (C.P.I) which involves comparison of prices of certain goods and services for two different periods. In constructing the C.P.I; A basket of commodities is selected which includes selecting the generally consumed commodities by average consumers. Choosing the base period which should be a period when the prices were fairly stable. The price of commodities both in the current period (P1) and base period (P2) Consumer Price Index (C.P.I)= × 100 Types and causes of inflation Inflation is classified in relation to its causes. Demand pull inflation This is a type of inflation caused by excessive demand for goods and services without a corresponding increase in production resulting into rise in prices. Causes of demand pull inflation Increase in population.;Increased number of people in a family calls for increased demand of goods and services thus fueling demand-pull inflation. Increase in government expenditure;The government expenditure has the effect of making money available to people thus increasing the aggregate demand for goods and services. A fall in the level of savings; This increases the consumer expenditure on goods and services which brings pressure on the available goods and services thereby pulling up prices. Effects of credit creation by the commercial banks; When banks lend more money to the public, their purchasing power increases hence increasing demand which in turn leads to increase in the prices. Consumers’ expectation of future price increases; When consumers expect the prices of goods and services to increase in the future, they will buy more in the present thus increasing the demand thus fueling demand-pull inflation. General shortages of goods and services; Any shortage in goods caused by factors such as; adverse climatic conditions, hoarding, smuggling, withdrawal of firms from the industry and decline in level of technology calls for scramble for the available goods thus increasing their demand and prices.   \ Cost push inflation This is a type of inflation caused by increase in cost of factors of production which translates to increased prices of goods and services. Causes of cost push inflation. Increase in wages and salaries; An increase in the wages and salaries may increase the cost of labour. The increased cost of labour may be reflected in the increased prices of commodities which in turn would cause wage push inflation. Increase in cost of raw materials and other inputs; This increases the cost of production thus increased prices. Increase in indirect taxes; This increases the cost of production and this causes firms to raise the prices of their product. Increase in profit margin; If the business decides to raise its profit, it leads to an increase in the price of the commodities resulting to profit push inflation. Reduction in subsidies; removal of a subsidy implies that the producer would produce at a higher cost that was being met by the subsidy. This increase cost is finally reflected in increased prices.   Imported inflation This is a type of inflation which is caused by importation of high priced inputs of production such as; technology/machines, skilled human resources and crude oil. This in turn increases the prices of locally produced goods which may lead to inflation. Causes of imported inflation Importation of expensive technology especially highly skilled labour. Importation of expensive machines and equipment. Importation of high priced oil. The currency depreciating thus increasing the price of the country’s imports. LEVELS OF INFLATION Mild / Creeping/Moderate Inflation This a slow rise in price level of not more than 5 % per annum. It is associated with some beneficial effects on an economy especially to firms and debtors. Galloping /Rapid Inflation This is a very rapid accelerating inflation characterized by a situation whereby the general prices levels increase rapidly. Stagflation; This is an economic condition in which unemployment is high, the economy is stagnant, but prices are rising. Hyper /Runway Inflation; This is when prices are rising at double or triple digit rates of 20%, 100%, 200%. The price levels are extremely high and under this situation people may lose confidence in the money as a medium of exchange and as a store of value.   EFFECTS OF INFLATION IN AN ECONOMY positive effects of inflation Mild inflation motivates people to work hard as they try to cope with the effects of the inflation in order to maintain their standards of living. Mild inflation encourages proper utilization of resources with an attempt of avoiding wastage as much as possible. Mild inflation increases investment especially in trading activities since sellers buy goods when prices are low and sell later when prices are higher. It promotes creativity in an economy in terms of production in order to survive the effects of inflation. It benefits debtors since they obtain goods on credit and pay for them in future at the old low prices.   Negative effects It leads to reduction in profits as sales volumes reduce since inflation reduces the purchasing power of consumers resulting to low sales. It wastes time as a lot of time is wasted in shopping around for reasonable prices and also firms may waste a lot of time adjusting their price lists to reflect new prices. It leads to conflicts between employers and employees as firms are pressurized by employees and trade unions to raise wages and salaries to cope with inflation. It leads to loss by creditors as they lend money when the value of money is high but at the time of payment is low since the value of money will have been eroded by inflation. It leads to decline in standards of living as consumers’ purchasing power decrease and therefore one can not lead the lifestyle he/she used to live before. Leads to unemployment. Discourages savings and investment since during inflation people tend to

Public finance refers to the activities carried out by the government associated with raising of finances and the spending of the finances raised (it is the study of how government collects revenue and how it spends it) The components of public finance are; Public revenue Public expenditure Public debt Public revenue-refers to the revenues (income) and resources received by the government from different sources. Public expenditure-refers to the resources spent by the government. Public debt-refers to the money and resources borrowed by the government. Purpose of public finance Provision of essential goods and services. The government has a responsibility of providing its citizens with essential goods and services such as security,health,schools,drought control, law e.t.c such facilities and services may not be adequately covered by the private sector because of the high costs involved and risks. Encouraging consumption of certain commodities-The government may encourage consumption of certain commodities e.g. maize by subsidizing on their productions or lowering their taxes. Controlling consumption of certain commodities-The government may also encourage consumption of some commodities e.g. cigarettes and alcohol by imposing heavy taxes on them. Promotion of Balanced regional development-This may be done by initiating economic projects in areas that are under developed/lagging behind. Wealth Redistribution-This is done by heavily taxing the rich and using the money raised to provide goods and services that benefit the poor To promote economic stability-Economic instability may be caused by factors such as unemployment. Such problems can be solved through public expenditure in projects that generate employment such as ‘kazi kwa vijana’ Creation of a conducive Business Environment-Through public expenditure, the government may develop infrastructure such as roads, electricity, security e.t.c thereby creating a conducive environment for businesses to thrive in. To raise government revenue-Through public finance, the government raises revenue which it uses in provision of essential goods and services to the public. Improving balance of payment-This may be done by improving heavy taxes such as customs duty to discourage importation. Sources of public finance There are two major sources of public finance i.e. Public revenue Public debt (government borrowing) Public revenue-This is the income that the government gets from its citizens. The main sources of public revenue are; Tax; This is a compulsory payment levied by the government on individuals and firms without any direct benefit to the payer. Fines and penalties-These are the charges imposed on individuals, firms and corporations who break the laws of the country.(offenders) Fees; These are the payments charged by the government for the direct services it renders to its people e.g. road licence fee, marriage certificate fee and import licence fee. Rent and rates; Charged on use of government properties e.g. game parks, forests e.t.c Eschiats; Income obtained from properties of persons who die without legal heirs or proper wills. Such people’s properties are taken over by the state. Dividends and profits; These are the income received from the government direct investments e.g. income/surplus from public corporations. Interest from loans-This is the interest on loans advanced by the government to firms and individuals through its agencies such as ICDc, AFC e.t.c Proceeds from scale of government property. Public debt (Government borrowing)-This is the money that the government borrows when public revenue is insufficient to meet all its financial obligations. Government borrowing is also referred to as national debt. It includes all outstanding borrowing by the central government, local authorities and government corporations. These are two majorly two sources of public debts; Internal borrowing External borrowing Internal borrowing This refers to borrowing by government from firms and individuals within the country. This may be done through; Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from. External borrowing This refers to government borrowing from external sources. It may either be on a bilateral or multilateral basis. Bilateral borrowing is where the government borrows directly from another country. Multilateral borrowing is where the government borrows from international financial institutions such as international monetary fund (IMF), World Bank, African Development bank e.t.c.such bodies get finances from various sources which they lend to their member countries who are in need of such funds. Generally, external borrowing has strings attached. The borrowing country is expected to meet some set conditions, sometimes adversely affecting some sectors of the economy.  The total internal borrowing (internal debt) added to the total external borrowing (external debt) constitutes the national debt. Classes of public (National debt) These are two classes of national debt; Reproductive debt Dead-weight debt. (i) Reproductive debt This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production e.t.c. dead-weight debt     This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief e.t.c Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment. Factors to consider before the government decides whether to borrow internally or externally This refers to how the government spends the finances it has raised on behalf of its citizens. Categories of government expenditure Recurrent expenditure Development expenditure Transfer payments. Recurrent expenditure This refers to government spending that takes place regularly e.g. payments of salaries to civil servants, fuelling of government vehicles e.g. Every financial year, the government must allocate funds to meet such expenditure. Recurrent expenditure is also known as consumption expenditure. Development expenditure This is also referred to as capital expenditure .It is government spending on projects that facilitate economic development. Such projects includes construction of railway lines, roads, airports, rural electrification e.t.c Once completed expenditure on such projects ceases and may only require maintenance. Transfer payments This is expenditure on things/people who do

Barter trade This is a form of trade where goods and services are exchanged for other goods and services.   Benefits Satisfaction of wants: And individual is able to get what he or she needs. Surplus disposal: an individual or country is able to dispose off its surpluses. Social relations: it promotes social links since the communities trade together. Specialization: some communities shall specialize in a particular commodity. Improved living standards: this is enhanced by receiving what one is unable to produce. Limitations of Barter trade Lack of double coincidence of wants: – it is difficult to find two people with the need for each other’s product at the same time. Lack of store of value/ perishability of some commodities: – some goods are perishable thus their value cannot be stored for a long time for future purposes e.g. one cannot store vegetables for exchange purposes in future. Indivisibility of some commodities: -it is difficult to divide some products like livestock into smaller units to be exchanged with other commodities. Lack of standard measure of value: – It is not easy to determine how much one commodity can be exchanged for a given quantity of another commodity. Transportation problem: It is difficult to transport bulky goods especially when there is no faster means of transport. Lack of a standard deferred payment: – The exchange of goods cannot be postponed since by the time the payment is made, there could be fluctuation in value, demand for a commodity may not exist and the nature and quality of a good may not be guaranteed. It may be therefore difficult what to decide what to accept for future payment. Lack of specialization: – Everyone strives to produce all the goods he or she needs due to the problem of double coincidence of wants. Lacks unit of account- it is difficult to assess the value of commodities and keep their record.     MONEY SYSTEM Money is anything that is generally accepted and used as a medium of exchange for goods and services. Features/ characteristics of Money For anything to serve as money, it must have the following characteristics: Acceptability: The item must be acceptable to everyone. Durability: The material used to make money must be able to last long without getting torn, defaced or losing its shape or texture. Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it value. Cognizability: The material used to make money should be easily recognized. This helps reduce chances of forgery. It also helps people to differentiate between various denominations. Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk of confusion and forgeries. Portability: – Money should be easy to carry regardless of its value. Stability in value: The value of money should remain fairly stable over a given time period. Liquidity: – it should be easily convertible to other forms of wealth (assets). Scarcity: – It should be limited in supply. If it is abundantly available its value will reduce. Malleability- the material used to make money should be easy to cast into various shapes. Not easy to forge- money should not be easy to imitate. Functions of Money Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus eliminates the need for double coincidence of wants. Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for future transactions. Measure of value: Value of goods and services are expressed in money form. Performance of businesses is measured in terms of money. Unit of account: It is a unit by which the value of goods and services are calculated and records kept. Standard of deferred payment: it is used to settle credit transactions. Transfer of immovable items (assets): Money is used to transfer assets such as land from one person to another.   DEMAND FOR MONEY This is the tendency or desire by an individual or general public to hold onto money instead of spending it. It also refers to as liquidity preference. Money is held by people in various forms: Notes and coins Securities and bonds Demand deposits such bank current account balances. Time deposits such as fixed account balances   REASONS (MOTIVES) FOR HOLDING MONEY   Transaction Motive: Money is held with a motive of meeting daily expenses for both the firms and individuals. The demand for money for transaction purpose by individuals depends on the following factors: Size/level of individual’s income: The higher the income of and individual, the more the number of transactions thus high demand for transactions. Interval between pay days/ receipt of money: if the interval is long, then high amount of money will be held for transaction reasons. Price of commodities: if the prices are high, the value of transactions will also increase thus more money balances required. Individuals spending habits-people who spend a lot of money on luxuries will hold more money than those who only spend money on basics. Availability of credit-people who have easy access to credit facilities hold little amount of money for daily transactions than those who do not have easy access to credit. The transaction motive can further be divided to; Income motive i.e. holding money to spend on personal/ family needs. Business motive i.e. holding money to meet business recurring needs such as paying wages, postage, raw materials. Etc Precautionary Motive: Money is held in order to be used during emergencies such as sicknesses. The amount of money held for this motive will depend on the factors such as: Level of income- the higher the income the higher the amount of money held for precautionary motive. Family status- high class families tend to hold more money for precautionary motive than low class families. Age of the individual- the aged tend to hold more money for precautionary motive than the young since they have more uncertainties than the young. Number of

These are prepared at the end of a given trading period to determine the profit and losses of the business, and also to show the financial position of the business at a given time. They includes; trading account, profit and loss account, trading profit and loss account and the balance sheet. They are also referred to as the final statements. The trading period is the duration through which the trading activities are carried out in the business before it decides to determines it performances in terms of profit or loss. It may be one week, month, six months or even a year depending on what the owner wants. Most of the business use one year as their trading period. It is also referred to as the accounting period. At the end of the accounting period, the following takes place; All the accounts are balanced off A trial balance is extracted Profit or loss is determined The balance sheet is prepared   Determining the profit or loss of a business When a business sells its stock above the buying price/cost of acquiring the stock, it makes a profit, while if it sells below it makes a loss. The profit realized when the business sell it stock beyond the cost is what is referred to as the gross profit, while if it is a loss then it is referred to as a gross loss. It is referred to as the gross profit /loss because it has not been used to cater for the expenses that may have been incurred in selling that stock, such as the salary of the salesman, rent for the premises, water bills, etc. it therefore implies that the businessman cannot take the whole gross profit for its personal use but must first deduct the total cost of all other expenses that may have been incurred. The profit realized after the cost of all the expenses incurred has been deducted is what becomes the real profit for the owner of the business, and is referred to as Net profit. The net profit can be determined through calculation or preparation of profit and loss account. In calculating the gross profit, the following adjustments are put in place Return inwards/Sales return: – these are goods that had been sold to the customers, but they have returned them to the business for one reason or the other. It therefore reduces the value of sales, and is therefore subtracted from sales to obtain the net sales Therefore Net sales = Sales – Return inwards Return outwards/purchases return: – these are goods that had been bought from the suppliers to the business and have been returned to them for one reason or the other. It reduces the purchases and is therefore subtracted from the purchases to obtain the net purchases. Drawings: – this refers to goods that the owner of the business has taken from the business for his own use. It reduces the value of purchases, and is therefore subtracted from purchases when determining the net purchases. It is different from the other drawing in that it is purely goods and not money Carriage inwards/Carriage on purchases: – this is the cost incurred by the suppliers in transporting the goods from his premises to the customers business. It is treated as part of the purchases, and therefore increases the value of purchases. It is added to purchases to determine the actual value of purchases/Net purchases.   Therefore Net Purchases = Purchases + Carriage inwards – Return Outwards – Drawings   Carriage outwards/Carriage on sales: – this is the cost that the business has incurred in transporting goods from its premises to the customers premises. The cost reduces the business profit that would have been realized as a result of the sale, and is therefore treated as an expense and is subtracted from the gross profit, before determining the net profit. Opening stock is the stock of goods at the beginning of the trading period, while the closing stock is the stock of the goods at the end of the trading period Gross profit is therefore calculated as follows; Gross Profit = Sales – Return inwards – (Opening stock + Purchases + carriage inwards – Return outwards – Closing stock)       Or       Gross profit = Net sales – Cost of Goods Sold (COGS)         COGS = Opening Stock + Net Purchases – Closing stock   Net Profit = Gross profit – Total expenses       Trading Account This is prepared by the business to determine the gross profit/loss during that trading period It takes the following format; Name of the business Trading Account Dr                                                   For the period (date)                                            Cr                                        Shs                 Shs Opening stock                                    xxxxxx add Purchases              xxxxx add Carriage inwards      xxx less Return Outwards      xxx less Drawings                   xx            xxxxx Goods available for sale                    xxxxxx Less Closing Stock                                 xxx Cost Of Goods Sold (COGS)             xxxxxx Gross profit c/d                                    xxxx xxxxxx                                      Shs                    Shs Sales                             xxxxxx Less Return inwards          xxx Net sales                                          xxxxxx             xxxxxx Gross profit b/d                           xxxx   The trading account is completed by the time the gross profit b/d is determined For example The following balances were obtained from the books of Ramera Traders for the year ending may 31st 2010 Sales                                                    670 000 Purchases                                            380 000 Return inwards                                                  40 000 Carriage outwards                                18 000 Return outwards                                                 20 000 Carriage inwards                                                 10 000 Additional information; During the year the owner took goods worth sh 5 000 for his family use The stock as at 1st June 2009 was shs 60 000, while the stock as at 31st May 2011 was shs 70 000 Required; Prepare Ramera Traders trading account for the period ending 31st May 2010 Ramera Traders Trading Account Dr                                                               For the period ending 31/5/2010                                      cr                                        Shs                 Shs Opening stock                                     60 000 add Purchases              380 000 add Carriage inwards     10 000 less Return Outwards     20 000 less Drawings                   5 000        365 000 Goods available for sale             

These are documents containing the information that makes basis of making entries in the books of accounts. They act as evidence that the transaction actually took place. They includes Cash sale receipt: – a document that shows that cash as been received or paid out of the business either in form of cash or cheque. It is a source document that is mainly used in making records in the cash journals cash book, cash accounts or bank accounts. If the receipt is received, it means payments has been made and therefore will be credited in the above accounts, or taken to cash disbursement/payment journals, while when issued, it means cash/cheque has been received and therefore will be debited in the above accounts or taken to cash receipt journals   Invoice: – a document issued when the transaction was done on credit to demand for their payment. If the invoice is an incoming invoice/invoice received, then it implies that the purchases were made on credit, and if it is an outgoing/invoice issued then it implies that sales were made on credit. The incoming invoice will be used to record the information in the purchases journals/diary, while an outgoing invoice will be used to record information in sales journals/diaries   Credit note: – a document issued when goods are returned to the business by the customer or the business return goods to the supplier and to correct any overcharge that may have taken place. If it is received, then it means part of the purchases has been returned and therefore the information will be used to record information in the purchases return journals, while if issued then it means the part of sales has been returned by the customers and therefore used to record the information in the sales return journals/diaries   Debit note: – a document used to correct an undercharge that may have taken place to inform the debtor to pay more. It therefore acts as an additional invoice   Payment voucher: – a document used where it is not possible to get a receipt for the cash/cheque that has been received or issued. The person being paid must sign on it to make it authentic. It is therefore used to record information just as receipts   Books of original entries/Journals/Diaries/day’s books/Subsidiary books These are books where the transactions are listed when they first occur, with their entries being made on a daily basis before they are posted to their respective ledger accounts. The information in the source documents are used to make entries in these books. The books of original entries include: Sales journals Sales return journals/Return inwards journals Purchases journals/creditors journals/bought journals Purchases return journals/return outwards journal Cash receipt journals Cash payment/cash disbursement journals Three column cash book The petty cash book Analysis cash book General journals/journal proper   Sales journals This is used to record credit sales of goods before they can be recorded in their various ledgers. The information obtained in the outgoing invoice/invoice issued is used to record the information in this journal as the source document The overall total in the sales journal is therefore posted in the sales account in the general ledger on credit side and debtors account in the sales ledger as a debit entry Sales journal Date Particulars/details Invoice no Ledger folio amount             Example: The following information relates to Tirop traders for the month of June 2010 June   1: Sold goods to wafula on credit of ksh 200, invoice no 0114 2: Sold to the following debtors on credit; Wanjiru ksh 400, Musyoka ksh 300,    Wafula ksh 300 5: sold goods on credit to Wanjiru of ksh 300 10: Sold goods to the following on credit Kanini ksh 100, Wafula ksh 500, Wanjiru ksh 600 12: Sold goods on credit to musyoka of ksh 350 Required: Prepare the relevant day book for the above transactions; hence post the various amounts to their respective individual accounts Sales journal Date Particulars/details Invoice no Ledger folio amount June 2010: 1 2 2 2 5 10 10 10 12 15   Wafula Wanjiru Musyoka Wafula Wanjiru Wanjiru Wafula Kanini Musyoka Totals posted to the sales account (Cr)   0114                       SL SL SL SL SL SL SL SL SL   GL   200 400 300 300 300 600 500 100 350   3050   (Post the rest to their individual debtors account)   Sales Return Journals/Return inwards journals This is for recording the goods that the customers/debtors have returned to the business. It uses the information in the credit note issued as a source document to prepare it. The information is therefore recorded to the return inwards account in the general ledger, while the individual’s entries are reflected (credited) also in their respective debtors account for double entry to be completed. It takes the following format Sales return journal Date Particulars/details Credit note no Ledger folio amount             For example; Record the following transaction for the 2007 in their relevant diaries, hence post them to their respective ledger accounts; May 1: goods that had been sold to M Okondo of shs 2600 on credit was returned to the business “   2: G. Otuya returned good worth shs 1320 that was sold to him on credit to the business “    8: the following returned goods that had been sent to them on credit to the business H Wati shs 3500, Muya shs 4700 M Okondo shs 2900 “    12: G Otuya returned goods worth shs 5400 that were sold on credit to the business “  30: Goods worth sh 8900 that had been sold on credit to G Otuya were returned to the business Sales Return journal Date Particulars/details Credit note no Ledger folio amount May 2007: 1 2 8 8 8 12 30   M Okondo G Otuya H Wati Muya M Okondo G Otuya G Otuya Totals posted to Return Inwards

This is a special ledger which is used to record cash and cheque transactions. It contains only the cash in hand and cash at bank (i.e. cash and bank) accounts Nominal ledger This ledger is used to record business expenses and incomes (gains).It contains all the nominal accounts. Private ledger This ledger is used in recording private accounts i.e. confidential and valuable fixed assets and the personal accounts of the proprietors such as capital accounts and drawing accounts. The general ledger The general ledger contains all other accounts that are not kept in any other ledger e.g. buildings, furniture and stock accounts. -Personal accounts of debtors or creditors who do not arise out of sale or purchase of goods on credit are found in the general ledger e.g. debtors as a result of sale of fixed asset on credit and expense creditors. C) Private accounts These are accounts that the business considers to be confidential and are not availed to everybody except the management and the owners. -These accounts may be personal or impersonal. -They include capital account, drawings accounts, trading, profit and loss accounts. Types of ledgers The following are the main types of ledgers that are used to keep the various accounts The sales ledger (Debtors ledger) This is the ledger in which accounts of individual debtors are kept. -It is used to record the value of goods sold on credit and the customers to whom the credit sales are made, hence contains the personal names of the debtors. -It is called a sales ledger because the accounts of debtors kept here in are as a result of sale of goods on credit. An account is kept for each customer to which is debited the value of credit sale. Payment made by the debtor are credited to the account and debited in the cash book. Purchases ledger(creditors ledger) The purchases ledger contains accounts of creditors i.e. contains the records of the value of goods bought on credit and the suppliers of such goods. It is a record of the debts payable by the business due to credit purchases. An account is kept for each creditor to the credit side of which is posted the value of. b) Impersonal accounts This category of ledger accounts includes all other accounts that are not personal in nature e.g. buildings, purchases, rent, sales and discounts received. Impersonal accounts fall into two types Real accounts Nominal accounts Real accounts; These are accounts of tangible assets or property e.g. buildings,land,furniture,fittings,machinery,stock,cash(at bank and in hand)e.t.c These accounts are also used to draw up the balance sheet. Nominal accounts; These are accounts of items that relate to gains and losses and whose balances at the end of the accounting period. -All expenses, revenues, sales and purchases are hence nominal accounts. -The main business expenses include purchases,sales,returns,insurance,stationary,repairs,depreciation,heating,discount allowed, lighting interests,printing,wages,rent,rates and advertising.      The value of losses is included in the same side as the expenses when drawing up the final accounts though it is not an expense.    -The income (revenues) include sales,returns,claims out, interest receivable, dividends receivable and commission receivable. Profit is usually categorised together with these incomes when drawing up the final accounts. Classification of ledger accounts Many businesses handle few transactions, hence they have few records to keep. Their accounts can thus be kept in a single ledger referred to as the general ledger As a business grows the volume of transactions increases. This single ledger, therefore, becomes very bulky with accounts and it becomes difficult to make reference to it. In order to simplify the recording of transactions and facilitate reference to the accounts, ledger accounts are usually classified and each category kept in a special ledger. NOTE (i) Since many transactions are cash transactions which are normally recorded in the bank and cash accounts a need arises to remove them from the main/general ledger to a separate ledger called the cash book. (ii)  The number of ledgers kept depends on the size of the business. Classes of accounts All accounts can be classified into either personal or impersonal accounts. Personal accounts -These are account of persons -They relate to personal, companies or associations. -They are mainly accounts of debtors and creditors.   NOTE: capital account is the proprietors personal account, showing the net worth of the business hence it is a personal account. -The account balances of these accounts are used to draw up the balance sheet. -In the ledger, the trial balance total is not affected. Purpose of a trial balance The purpose of a trial balance include; Checking the accuracy in the ledger accounts as to whether; i-The rule of double entry has been adhered to or observed/ complied with. ii-There are arithmetical errors in the ledger accounts Gives a summary of the ledger i.e. summary of the transactions which have taken place during a given period Provide information (account balances) for preparing final accounts such as the trading account, profit and loss account and the balance sheet. Test whether the ledger account balances have been posted to the right side of the trial balance. Limitations of a trial balance Even when the trial balance totals are equal, it does not mean that there are no errors made in the ledgers. This is because there are some errors that do not affect the trial balance. A trial balance only assures the book keeper that the total of debit entries is equal to total credit entries. The errors that do not affect the trial balances are; Error of total omission; This occurs when a transaction takes place and nothing about it is recorded in the books of accounts i.e. it is completely omitted such that neither a credit nor a debit entry is made in the ledgers. Error of original entry; this occurs where both the debit and credit entries are made using similar but erroneous figures. As the wrong amount is recorded in the two accounts. Error of commission; This occurs where double entry is completed but in the wrong

Introduction Population refers to the number of human beings living in a particular region at a particular time. The size of the population is ascertained through national headcount, which is referred to as a national census. It is an international requirement that each country must hold a national census at least every ten years. Population issues are major concerns to business people because people are consumers of goods and services as well as providers of factors of production. Basic concepts in population Fertility – this is defined as the ability of a woman to give birth to a live child. Fertility rate – refers to the average number of children born per woman during her child bearing years in a given population. Factors that determine fertility rate Literacy levels among women. The marriage rate among people in the productive age bracket. Cost of bringing up children. Economic significance of a large family, e.g. children seen as a source of cheap labour e.t.c. Cultural beliefs e.g. where many children were a source of prestige. Availability of medical facilities. Religious factors e.g. where some religions prohibits use of family planning Birth rate – refers to the number of live births per 1000 people per year. This is also referred to as crude birth rate and may be calculated as follows: CBR= Number of Births    x 1000     Total population Factors that are likely to lead to high birth rates Cultural practices e.g taking children as security during old age. Early marriages prolomnging the woman’s reprodcutive life. Children being seen as a sou=rce of cheap labour. Where people are opposed to family planning methods Ignorance- lack of knowledge to family planning methods Religious beliefs which encourage large families and discourage use of family planning methods. Factors that may lead to decline in birth rates Delayed marriages dues to such things as staying in school for long period Craving for high standards of living leading to people having few children Where small families are considered fashionable Use of family planning methods Availability of retirement schemes making people to stop children as security in old age. Mortality/death rate – refer to the number of people who die per thousand people per year. Is also known as natural attrition rate and may be calculated as follows: MR= Number of death   x 1000     Total population Infant mortality rate- refers to the number of child deaths per thousand children below the age one year per annum. Population growth rate – refers to the rate at which the population of a country is increasing or decreasing. It can be calculated as follows.

This is the total income received by the providers/owners of the factors of production in a given country over a given time period. Terms used in national income Gross Domestic Product (GDP). This is the total monetary value of all goods and services produced in a country during a particular year. Such goods and services must have been produced within the country. Net Domestic Product (NDP). This is the GDP less depreciation. Depreciation is the loss in value of the assets such as machines used in the production of goods and services. Gross National Product (GNP). This measures the total monetary value of all the goods and services produced by the people of a country regardless of whether they in or outside the country. It takes into account exports and imports. The difference between exports and imports is called net Factor Income from abroad. GNP therefore is the sum of GDP and net factor income from abroad. Net National Product (NNP). This recognizes the loss in value of the capital used in the production of goods. Capital here refers to capital goods. NNP is the difference between GNP and the depreciation. Per capita income. This is the average income per head per year in a given country. It is also the national income divided by the population of the country. CIRCULAR FLOW OF INCOME This is the continuous movement of income between the households (providers of factors of production) and the firms (producers of goods and services). The factors of production are received from households. The firms pay the rewards of such factors to the households (expenditure to the firms and income to the households). The households in turn use the income to buy the goods and services produced by the firms (expenditure to households and income to firms). Assumptions/features of circular flow of income Existence of two sectors only. It is assumed that the economy has only two sectors that is households and firms. The households provide the factors of production while firms are involved in the production of goods and services. Total spending by households. It is assumed that the households spend all their income on the goods and services produced by the firms i.e. no savings. Total spending by the firms. It is assumed that the firms spend the money received from the sale of goods and services to pay for the rewards of production factors. Lack of government intervention. The government does not influence how the firms and households carry out their activities. Such interventions are in the form of taxes, price controls among others. Closed economy. Exports and imports do not exist in such an economy. Factors affecting the circular flow of income The factors can either lead to increase in income and expenditure (injections) or lead to a reduction in the volume of flow (withdrawals).   The factors include the following: This takes place when the households do not spend all their income on the purchase of goods and services. This reduces the income to be received by firms hence savings is a withdrawal from the circular flow of income. Taxation reduces the amount of money available for spending therefore it is a withdrawal/leakage from the circular flow of income. Government expenditure. The government may buy goods from the firms or provide subsidies. This will translate in to an injection into the circular flow of income. When firms put more capital into the production, output will increase hence an increase in income (injection). When goods and services are bought from other countries, money will be spent hence a reduction in the circular flow of income (withdrawal). Through exports, a country is able to receive money from other countries (injections) Injections Investments Government spending Exports Withdrawals Savings Taxation Imports APPROACHES USED IN MEASURING NATIONAL INCOME Expenditure Approach. National income is arrived at summing expenditure on all final goods and services (that have reached the final stage of production). Such expenditure is divided into: Expenditure on consumer goods ( C) Expenditure on capital goods (I) Expenditure by government (G) Expenditure on net exports (X – M) Therefore national income = C+I+G+(X – M) Problems associated with expenditure approach Lack of accurate records particularly in the private sector. Approximation of expenditure of the subsistence sector. Difficulty in differentiating between final expenditure and intermediate expenditure Double counting may exist Fluctuating exchange rates may cause problems in the valuation of imports and exports. Income approach In this method, the national income is arrived at by summing all the money received by those who participate in the production of goods and services. Such incomes are in the form of rewards to the production factors (wages, rent, interest and profits). Public income is also taken into account i.e. it is the income received by the government from its investments (Parastatals, joint ventures). Transfer payments are excluded since they represent a redistribution of incomes from those who have earned them to the recipient’s e.g. National insurance schemes. Problems related to this method Determination of what proportion of transfer payments constitute in the income of a country. Inaccurate data may exist since business people may not tell the truth about their income in order to evade tax. Price fluctuations may make national income determination difficult. Income from illegal activities is not captured. Valuation of income from subsistence economy may be difficult e.g. housewives. Assignment: Read and make short notes on Output approach (refer to Inventor book three pages 65 – 66). USES OF NATIONAL INCOME STATISTICS Indicators of standards of living. If the national income is equitably distributed, then the standards of living will be high. Measuring economic growth. The statistics of one year are compared with previous year to show whether there is improvement or not. Inter country comparison. They are used to compare the economic welfare among countries hence knowing which country is better off and by how much. However, the following challenges may be faced when carrying the comparisons: different in currencies, different goods and services, disparity in income

Introduction Channels of distribution are the paths that goods and or services follow from the producers to the final users. The persons involved in the distribution of goods from the producer to consumer are called middlemen or intermediaries. There are different channels that different products follow. Some of the channels include the following: Producer agent      wholesaler      retailer Producer co – operative society    marketing board      wholesaler     retailer Producer marketing board      wholesaler     retailer Producer wholesaler      retailer Producer wholesaler       consumer Producer retailer      consumer Producer  consumer Costs incurred by middlemen while distributing goods Buying costs. They incur this cost by paying for them from the producers or other middlemen. Transport cost. Some middlemen do transport goods from the producer to other middlemen or to the final users. Storage costs. Middlemen do keep the goods until their demand arises. This will therefore require them to hire or construct their own warehouses. Advertising or marketing costs. Some middlemen do carry out marketing of goods on behalf of the producers and other middlemen. In the process, they pay for such services. Insurance costs. Middlemen do insure the goods they are trading in to ensure compensation in the event of loss. Operation costs. Middlemen just like other businesses do incur operating costs such as salaries to employees, electricity, maintenance among others. Preparation costs. Some middlemen to prepare goods before they are sold to the consumers. Such activities include packing, assembling and blending. They have to meet such costs on behalf the producer, other middlemen and consumers. CHANNELS OF DISTRIBUTING VARIOUS PRODUCTS (refer to Inventor book three pages 50 to 53) ROLES OF MIDDLEMEN The following are some the roles performed by middlemen in the chain of distribution Bulk accumulation (assembling). They similar goods from different producers in small quantities and then offering the large amount gathered to buyers who may want to buy in large volumes. Reducing transactions. The interactions between the producers and the consumers will be reduced since the middlemen are the ones who will be communicating to the consumers. Bulk breaking. They buy in large quantities and then sell in small quantities as desired by the consumers. Risk taking. They assume all the risks related with the movement of goods from the producers to the consumers. Such risks include theft, damages, loss due to bad debts. Finance provision. Middlemen provide finance to the producers by buying goods in large quantities and paying for them in time. Provision of information. Middlemen gather market information from the consumers then pass to the producers who in turn produce goods in line with the tastes of consumers. Marketing/product promotion. Middlemen are involved in marketing of goods hence stimulating the interest of consumers. Provision of transport. Middlemen do transport goods from the producers up to the where the consumers can access them. Both the producers and consumers are hence relieved of transport costs. Storage Variety provision Availing goods to consumers FACTORS TO CONSIDER BEFORE SELECTING A DISTRIBUTION CHANNEL Factors that influence the choice of a distribution channel include the following: Product nature. Perishable products should be sold directly to the consumers because delays may result to losses since they go bad fast. In addition, bulky products need direct selling in order to reduce transportation and stock handling costs. Nature of the market. Where the market is concentrated in one area, direct selling is appropriate. A longer channel of distribution is preferred where the market is widely spread. Role of intermediary. The channel chosen should be able to perform the services related to the product being sold e.g. for technical goods, the middleman should be able to offer technical support to the customers. Resources and size of the firm/producer. If the producer is small, then direct selling would be appropriate. Large firms with sufficient financial resources can opt for long channels of distribution. Channels used by competitors. If a firm wants its products to compete with those of the competitors, then is it prudent to use similar channels. A firm that wants to avoid competition should use a different channel of distribution. Government policy. The channel chosen should be able to meet government regulations such as all middlemen distributing pharmaceutical products must be recognized by the relevant government bodies (Pharmacy and Poisons Board). Marketing risks. In the event the firm wants to avoid risks related to distribution, it will opt for middlemen.   Questions State four channels for distributing imported goods. Explain five factors that can influence the choice of a channel of distribution. Outline five costs incurred by middlemen in the distribution process. Describe the roles played by middlemen in the distribution chain. Outline the circumstances under which a producer would sell directly to consumers.  

The term ‘market’ is usually used to mean the place where buyers and sellers meet to transact business. In Business studies, however, the term ‘market’ is used to refer to the interaction of buyers and sellers where there is an exchange of goods and services for a consideration. NOTE: The contact between sellers and buyers may be physical or otherwise hence a market is not necessarily a place, but any situation in which buying and selling takes place. A market exists whenever opportunities for exchange of goods and services are available, made known and used regularly. Definition: Product market; Is a particular market in which specific goods and services are sold and with particular features that distinguish it from the other markets. -The features are mainly in terms of the number of sellers and buyers and whether the goods sold are homogeneous or heterogeneous -Product market is also referred to as market structure. -Markets may be classified according to the number of firms in the industry or the type of products sold in them.. TYPES OF PRODUCT MARKET The number of firms operating in a particular market will determine the degree of competition that will exist in a given industry. In some markets there are many sellers meaning that the degree of competition is very high, where as in other markets there is no competition because only one firm exists. When markets are classified according to the degree of competition, there are four main types, these are; Perfect competition Pure monopoly(monopoly) Monopolistic competition Oligopoly PERFECT COMPETITION The word ‘perfect’ connotes an ideal situation. This kind of situation is however very rare in real life; a perfect competition is therefore an hypothetical situation. This is a market structure in which there are many small buyers and many sellers who produce a homogeneous product. The action of any firm in this market has no effect on the price and output levels in the market since its production is negligible. Feature of Perfect Competition Large number of buyers and sellers: The buyers and sellers are so many that separate actions of each one of them have no effect on the market. This implies that no single buyer or seller can influence the price of the commodity. This is because a single firms (sellers) supply of the product is so small in relation to the total supply in the industry. Similarly; the demand of one buyer is so small compared to the total demand of one buyer is so small compared to the total demand in the market that he/she cannot influence the price. Firms (suppliers) in such a market structure are therefore price takers i.e. they accept the prevailing market price for their products. Identical or homogeneous products; Commodities from different producers are identical in all aspects e.g. size; brand and quality such that one cannot distinguish them. Buyers cannot therefore show preference for the products of one firm over those of the other. Perfect knowledge of the market; Each buyer and seller has perfect knowledge about the market and therefore no one would effect business at any price other than the equilibrium price (market price).If one firm raises the price of its commodity above the prevailing market price, the firm will make no sale since consumers are aware of other firms that are offering a lower price i.e. market price. All firms (sellers) are also assumed to know the profits being made by other firms in the industry (in selling the product) Freedom of entry or exit in the industry; The buyers and sellers have the freedom to enter and leave the market at will i.e. firms are free to join the market and start production so long as the prevailing market price for the commodity guarantees profit. However if conditions change the firms are free to leave in order to avoid making loss. In this market structure, it is assumed that no barrier exists in entering or leaving the industry. Uniformity of buyers and sellers; All buyers are identical in the eyes of the seller. There are therefore, no advantages or disadvantages of selling to particular buyers. Similarly, all the sellers are identical and hence there would be no special benefit derived from buying from a certain supplier. No government interference; The government plays no part in the operations of the industry. The price prevailing in the market is determined strictly by the interplay of demand and supply. There should be no government intervention in form of taxes and subsidies, quotas, price controls and other regulations. No excess supply or demand; The sellers are able to sell all what they supply into the market. This means that there is no excess supply. Similarly, the buyers are able to buy all what they require with the result that there is no difficult in supply. Perfect mobility of factors of production; The assumption here is that producers are able to switch factors of production from producing one commodity to another depending on which commodity is more profitable to sell. Factors of production are also freely movable from one geographical area to another. No transport costs; The assumption here is that all sellers are located in one area, therefore none of them incurs extra transport costs or carriage of goods. The sellers cannot hence charge higher prices to cover the cost of transport. Buyers, on the other hand, would not prefer some sellers to others in an attempt to cut down on transport costs. NOTE: The market (perfect competition) has normal demand and supply curves. The individual buyers demand curve is however; perfectly elastic since one can buy all what he/she wants at the equilibrium price. Similarly, the individual sellers supply curve is also perfectly elastic because one can sell all what he/she produces at the equilibrium price. Perfect competition market hold on the following assumptions; There are no transport costs in the industry Buyers and sellers have perfect knowledge of the market Factors of production are perfectly mobile There is no government

Meaning of firm and industry A firm is an individual enterprise or business unit under one control an ownership e.g. a business unit carrying the production of a good or service such as production of soap or a legal service firm. A firm is a single business unit or enterprise under one ownership, management and control e.g. KCC, Brookside etc. An industry consists of all those firms producing the same type of products in the same line of production. A sop industry consists of all those firms producing soap while an insurance industry consists of all these firms providing insurance services. An industry refers to a group of firms producing the same products for a given market e.g. the milk industry which includes firms such KCC and Brookside. In some cases where we have a single firm, the firm becomes the industry. Factors which influence the decision on what goods and services to produce. Profitability Businesses tend to provide goods and services that would yield maximum profit. Level of competition In order to survive in a competitive market, firms must come up with products with products that consumers prefer. A firm may therefore develop products that are not currently available or copy rivals ideals and improve on them. Cost of production A firm would produce commodities for which production costs are low. Demand/ market A firm will produce commodities that have the highest demand since demand leads to high sales volume. Availability of resources A firm can only produce commodities for which the necessary resources are available. Such resources include raw materials, labor, equipment, adequate space and appropriate technology. Government policy A firm should produce goods which are favored by the government policy e.g. low taxation and subsidies. Firms should not produce goods that are illegal as it will be breaking the law. Determining the size of the firm The following are some of the ways/factors which the size of a firm may be determined: Level of output/volume of output A firm’s size may be judged by the level of output. A large firm will produce on large scale, while a small firm will produce on small scale. Number of employs in the firm A small firm is likely to employ only a few employees, while a large firm will most often employ many workers. Floor area covered by the premises A firm with large floor area covered by premises may be said to be large. Size of the market controlled by the firm Large firms control large proportions of the total market of a particular product. Small firms may only control a small size of the market. Capital invested The larger the capital of the firm in terms of assets the larger the firm and vice versa. Methods of production adopted A large firm will most often adopt capital intensive methods of technology, where operations will be highly mechanized while small firms use more labour then machinery. Sales of volume Small firms have low levels of sales with a given period while large firms have huge levels of sales. Location of the firm Location is the site or place from which the business operations/firms would be established. The management has to make appropriate decisions concerning the location of the firm since a good location would lead to success while a bad location would lead to failure of the business enterprise.   Factors that influence the location of a firm Raw materials The availability of raw materials is one of the factors that determine the locations of a firm. Firms should be located near the source of raw material when: The raw materials are heavy and bulky so as to avoid high transport as cost to the firm. The raw materials are perishable so as to ensure they get the firm in fresh. The competition for the raw materials is high should be located near their source so as to ensure that it gets all the raw materials it requires at all times.           Advantages of locating a firm near the source of raw materials Transport cost of raw materials in minimized Storage cost of raw materials will be minimized. It is easier for the firm to select the quality of raw materials required. Easier to get fresh raw materials and undamaged raw materials. Production process can run uninterrupted because of constant supply of raw materials thus continuous production.   Labour (human resources) Labour is a basic factor of production. It can be skilled, unskilled or semi-skilled labour. It is important for firms ton be located in an area where there is large supply of labour so as to ensure adequate supply of this important factor. Location of the firms near the source of labour reduces the cost of transporting labour force to factories and also reduces time wasting in transporting labour from far. The market Reasons for locating near market If the finished product is perishable, then the firm should be located near the market so as to ensure that it gets to the market in fresh state. If the finished product is bulky, the firm should be located near the market so as to avoid high cost of transport to the market. If the final product is fragile, the firm should be located near the market so as to avoid losses that may result from breakages as the product is transported to the market. If there is high completion, the firm should be located near the market as this will make it easy to get to the customers fast. Where a product is made as per customers’ specification, the firm should be located near the market.   Transport and communication A firm should be located in an area that is well served by means of transport. This ensures that both raw materials and finished products can be transported with ease. A firm should be located in an area that is well served by means of communication. This ensures that the firm is able to communicate with its

Meaning of demand Demand is the quantity of a product that buyers are willing and able to buy at a given price over a given period of time.   Factors that determine the demand for a product (determinants of demand) The price of a product:  if the price is low, more will be demanded, if high less will be demanded. The buyer’s income: the higher the people’s income the higher the demand for gods and services and vice versa. Government policy: if the government imposes high taxes on a commodity, it becomes expensive and less of it is demanded. The effects of a subsidy are to lower the price of the product leading to an increase in its demand. The government may also influence the demand of a product by enacting laws that either limits or promotes the consumption of a product. The population: with many people available more of the goods are demanded and if the people are few, less is bought from the market. Tastes, fashions and preferences:  if people have a preference for a product they will demand more of it. If their preferences changes to another product, they will reduce the demand of the product they were using before. The distribution of incomes: where income is well distributed, the demand for goods and services is high as opposed to when the income in the hands of a few people.  Future expectations of price changes: if the prices are expected to go up in the future, more goods will be demanded in the present and if the price is expected to go down in the future, fewer goods will be demanded in the present. The weather: certain goods are demanded more during certain weather conditions e.g heavy clothes during cold seasons or umbrellas during rainy seasons. Price of related products: for goods that are compliments of one another, e.g pen and ink, a fall in the price of one leads to an increase in the demand of the other. In the case of the goods that are substitutes of one another, e.g soda and fruit juice, an increase in the price of one leads to an increase in the demand of the other. The terms of sale: the better the terms of sale, for example, provision of credit or better discounts, the higher the demand for a given product.   Types of demand   Derived demand:  a product is said to have derived demand when it is demanded to help in the production of other goods and services for example the demand of building materials arising from the demand of houses. Joint demand: items are said to have joint demand if the use of one will require the use of another. The goods are complimentarily used together like pen and ink.   Demand schedule and demand curve Demand schedule A demand schedule is a table showing the quantities of a commodity that consumers are willing and able to buy at different prices within a given period of time. A demand schedule can be prepared for an individual or for the entire market.   Demand curve A demand curve is the graph showing the quantities demanded against the prices. On the y-axis is recorded price and the x-axis the quantities demanded.   Draw a demand curve given the following demand schedule   Price of the product in shs Quantity of the goods demanded in kg 10 20 30 40 50 60 70 80 40 35 30 25 20 15 10 5     The graph shows that the demand curve (DD) slopes from the left to the right, indicating that as prices goes down the quantity demanded increases and vice versa. This tendency of demand to increase as price decrease and to reduce as the price increase is referred to as the law of demand. Therefore a normal demand curve slopes from left to right.   Movement along a demand curve and a shift in demand curve   Movement along the demand curve A movement along a demand curve refers to changes in quantity of a product demanded as a result of change in its price only. As the price of the product increases the quantity demanded decreases. It leads to a movement from one point to another on the same demand curve as shown below: (ii)               In a movement along the demand curve no new demand curve is created. If price increase from P0 to P1 in the diagram above quantity demanded will fall from Q1 to Q2e. movement from a to b. If price fall from P2 to P3, the quantity demanded increase from Q2 to Q3e. movement from a to c.     Shift of the demand curve   This is when the demand curve moves either to the right or left. It occurs as results of changes in factors influencing demand other than price of the product concerned. This can be illustrated as below:   In (i) at price OP the quantity demanded is OQ. After the demand curve shift from D0D0 to DD a different quantity OQ1 is demanded although the price remains at OP. thus points L and M are on different demand curves.   Similarly when the demand curve shifts from D1D1 to D2D2 as in (ii) a different quantity OQ3 is demand at the same price OP2 as before. Thus the two points R and S are on two different demand curves. A shift of demand curve to the left (decrease in demand) can be brought about by the following factors:   A decrease in people’s incomes. A decrease in the price of a substitute product. Lower population in the area. Negative changes in tastes, fashions and preferences towards the product. The introduction of a new but cheaper substitute. Deterioration in the terms of sale e.g. lower discounts   A shift of demand curve to the right (increase in demand) can be as a result of: An increase in the people’s incomes.