March 25, 2021

CHAPTER 12 DEPRECIATION OF NON – CURRENT ASSETS LEARNING OBJECTIVES This chapter aims at explaining the principle of depreciation of non-current assets. Determining the cost of property, plant and equipment, explaining the nature and purpose of depreciation and the different methods of depreciation and their possible effect on income, accounting for the acquisition, disposition and depreciation of non – current assets, describing the reporting of depreciation in the financial statements, and explaining the nature of wasting assets and the different methods of accounting for their depletion are the areas covered. CLASSIFICATION OF NON – CURRENT ASSETS Non – Current assets can be grouped into Real Property which includes land and anything attached to it. Personal Property which includes everything else that be owned other than real property. These are things such as plant, equipment, furniture, motor vehicles, machinery, patents and copyrights. Non – current assets can also be grouped as tangible and intangible assets. That is those with physical form such as machinery and equipment and intangible assets being those without physical substance like patents, copyrights, leases, franchises, trademarks and goodwill. These are said to be long term because they are expected to bring future economic benefit and have legal status that allow them to be classified as property (expect for goodwill). Long term investments such as Government bonds are shown in the balance sheet under the heading of investments. Non – depreciable and depreciable assets: Land is non – depreciable because it does not loose its capability to serve its purpose. Property, plant and equipment are depreciable assets because they wear and tear due to use or as time pass on. Amortisation is the process of depreciating intangible assets such as patent. Depletion is the process of depreciating wasting assets such as mines, oil and gas wells, fisheries and timber plots. 12.2 THE COST OF NON – CURRENT ASSETS Non – Current Assets may be purchased for cash or on account. The amount at which Non – Current Assets should be recorded in the books of accounts is the total initial outlay needed to put them in use . This includes: – x Purchase price x Transportation charges x Installation costs x Interest charges x Any other costs incurred up to the point of placing the asset in service. Transactions involving the purchase of non – current assets may be recorded by debiting the appropriate asset account and crediting the bank account or appropriate liability account such as Accounts payable, notes payable or mortgage payable. Improvements to property, plant and machinery add value and the total cost of such improvements should be added by debiting the asset. 1Depreciation of non – current assets As is the case with all adjustments in the accounts the main task in attempting to determine net income or loss on a periodic basis is to allocate revenue to the period in which it is earned and to assign expenses to the periods that have benefited from the outlays. Non – current assets frequently last for many years and accordingly benefit a number of periods. The process of determining and recording the depreciations of most long – term assets is carried out in an effort to assign their cost to the periods that they benefit or serve. Depreciation is there for a process of cost allocation and not asset valuation. The net amount of an asset i.e. Cost less depreciation are simply the portions of the original costs which have not yet been allocated to expense. It does not represent current values. It is therefore important to remember that the statement of financial position does not reflect the current values of a business. CAUSES OF DEPRECIATION Most non – current assets lose their usefulness over time. Depreciation is the allocation of the         cost of the long – term assets over future periods expected to benefit from its use. The two major types of depreciation are: – Physical depreciation: This refers to the loss of usefulness of an asset because of: – Deterioration from age and wear and tear. It is generally continuous though not necessarily uniform from period to period. Erosion, rust, rot and decay: Assets exposed to the elements may wear out at a fairly regular rate than those that are protected. The speed of deterioration is however related to the extent to which they are used.  Functional Depreciation: This refers to the loss of usefulness because of inadequacy or     obsolescence. Obsolescence is the process of becoming out of date. Technological development is bringing new and better and more efficient machines and equipments replacing old ones very fast. Inadequacy: The growth of a business may bring about a need for bigger machines and equipments x Time: Amortisation is based on the length of time an asset has been used e.g. a lease is based on time, patents are also based on length of time. x Extraction: Depletion is a result of extracting raw materials such as oil, minerals e,t,c. Information for calculating depreciation There many and different ways of calculating depreciation for non – current assets but in all cases the following information is essential: – The cost of the asset The estimated salvage value or scrap value. Estimated economic life of the asset. The rate of depreciation. All the four items listed above are estimates subject to changes in environmental and personal factors. For instance the salvage value of an asset cannot be realistically estimated because of time. It may be many years to come before the asset is disposed. The economic life as is influenced by many factors such as usage, or technological developments. The rate of depreciation is dependent upon usage and the environment under which the asset is being used. To sum up therefore it is evident that all the information necessary to calculate the amount of depreciation is subjective. METHODS OF CALCULATING DEPRECIATION The most commonly used methods of calculating depreciation are: – 1.           Straight – line method Declining – balance method Sum – of – the –

CHAPTER 11 BAD DEBTS AND ALLOWANCES FOR DOUBTFUL DEBTS 11.0        LEARNING OBJECTIVES This section will cover some adjustments that must be made to the accounts in the form of:  bad debts and allowances for doubtful debts 11.1BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS (Uncollectable accounts Receivable): Bad debts arise from credit sales. Customers who buy goods on credit may fail to pay perhaps due to dishonesty, bankruptcy or death. For one reason or another business may decide that a debt is uncollectable. Bad debts are a business risk. They are therefore accounted for as normal business expenses. They must be charged to the Income Statement as an expense when calculating profit. 11.2 WRITING OFF UNCOLLECTABLE ACCOUNTS RECEIVABLES: When a sale is made, the invoiced amount is shown in the trading account and the gross profit earned is shown in the account. Subsequent failure to collect the debt is a separate matter which is reported in the Income Statement as bad debts written off. ILLUSTRATION (I)   ABC Traders sold goods to John worth K 3000.00  on 29th June 20xx Account Entry 1     Debit John (Debtor)                  K 3,000 Credit Sales                                K 3,000 These two entries will subsequently go into the trial balance and be taken to the trading account. (ii) At the end of the accounting period it ascertained that John will pay his debt of K 3000 Accounting Entry:            Debit Bad Debts Account                          K 3,000 Credit       John                                             K 3,000 When posted the account of John as a debtor will balance off. The value of John as a debtor becomes zero. The bad debts account reduces the profit that would have been reported during that period. 11.3 BAD DEBTS WRITTEN OFF AND SUBSQUENTLY PAID Sometimes a debtor who was written off may pay. In such case the amount received should be recorded as additional income in the Income Statement of the period in which the payment is received. The entries to affect this would be: – Cash Received K 3000 John                                                                                                    K 3000 Recording the receipt of cash asset 93 John K 3000 Bad debts Recovered                                                                               K 3000                       Introducing the Bad Debt recovered Account Bad Debts recovered Account K 3000 Income Statement                                                                                     K 3000 Transferring the amount previously written off to the current Income Statement. 11.4 ALLOWANCES  FOR DOUBTFUL DEBTS The previous section has assumed that the bad debtor John was a known customer. In most business situations the identities of uncollectable amounts is not known until after some period. When a business expects uncollectable debts but does not yet know which specific debts will be bad, it can make a provision for doubtful debts. A provision for doubtful debts provide for future bad debts as required by the prudence concept. Determining the size of the Provision A provision for bad and doubtful debts may be estimated through: – x Past experience: Experience will show how many debtors default payment after a certain period x Aging: A process of aging will show how many debtors remain past the credit period. x Percentage of outstanding debtors: Like experience, businesses have established percentages of defaulting debtors in their respective areas of trade. (a) Making the Provision When a provision is made for the first time the initial amount of the provision is charged as an expense in the Income Statement. Increasing the Provision When a provision already exists but is to be increased, the amount of the increase in the provision is charged in the Income Statement as an expense. ILLUSTRATION ABC Traders have decided to increase the provision to K 520,000 Debit Income Statement                                                       K 20,000 Credit Provision for Doubtful Debts                                                       K20,000 To increase the provision. In the Income Statement only K 20,000 would be charged as an expense for the period. In the Balance Sheet K 520,000 (the whole amount) should be deducted from total amounts of receivables. (c) Reducing the Provision   When a provision already exists but there is need to reduce it, the amount of the reduction should be credited to the Income Statement and debited to the Provision Account. ILLUSTRATION ABC Traders have decided that that the provision for doubtful debts should be reduced to K 510,000 this year Entry: Debit Provision for Doubtful debt   K 10,000 Credit Income Statement                                K10,000 To reduce the Provision. In the Income Statement only K 10,000 will be credited. In the Balance Sheet the whole amount of the revised provision of K 510,000 should be deducted from the total debtors. SUMMARY A business cannot avoid losses arising from bad debts: –  x Bad debts should be written off as soon as they are known. x If a debtor was written off, but subsequently pays his or her debt, the amount received must be added to the Income Statement of the period in which cash was received. x When the specific debt is not yet known a provision for the general debts must be made through a charge to the Income Statement. x Changes in the provision will be affected through debiting or crediting the Income Statement with the difference i.e. debiting to increase or crediting to decrease the provision. x The adjusted provision should be deducted from total accounts receivable in the balance Sheet to give a realistic estimate of the net realizable value of the receivables. SUMMARY OF THE CHAPTER This chapter illustrated the nature and purpose of the allowance for doubtful debts including how the allowance may be estimated, the accounting entries necessary to recognize the allowance, how the allowance may be increased or decreased and the impact of cash discounts on accounts receivable. END OF CHAPTER QUESTIONS Q1 A business has always made an allowance for doubtful debts at a rate of 5% of trade receivables. On 01st January 2013 the allowance for this, brought forward from the previous year, was K260,000. During the yearto 31st December 2013 the bad debts written off amounted to K540,000. On 31st December 2013 the remaining trade receivables totaled K6,200,000 and the usual allowance for doubtful debts should be made. You are

CHAPTER 10  BALANCING OF ACCOUNTS AND PREPARING A TRIAL BALANCE 10.0 LEARNING OBJECTIVES By the end of this chapter, students will be able to prepare ledger balances, clearly showing the balances carried down and brought down as appropriate, define and understand the nature of a trial balance and understand the nature and  impact of errors and closing inventory on the trial balance, and how these are dealt with. 10.1 BALANCING OFF ACCOUNTS Balancing the accounts is done in five stages as follows: (vi)Add up both sides of the accounts  to find out their totals (do not write any thing in the account yet) Deduct the smaller total from the larger total to find the balance Now enter the balance on the side with the smaller total. The totals will now be equal. (ix)Enter the totals on both sides of the accounts level with each other. (x) Now enter the balance on the line below the totals on the opposite side to the balance shown above the totals. The balance above the totals is described as the balance carried down (balance/d) The balance below the totals is described as the balance brought down (balance b/d) When the total of the debit side originally exceeded the credit side, the balance is kwon as a debit balance whereas when the total of the credit side originally exceeded the debit side, the balance is known as a credit balance. Accounts for creditors and debtors When balancing the accounts for creditors and debtors there will be two situations, (i) where the account has been fully paid and (ii) where the account has not been paid for in full Where the account has been paid in full The following example shows how to balance the account when it has been fully paid up PREPARING A TRIAL BALANCE A trial balance is a list of balances extracted from the accounts. All the debit balances are shown in one column and credit balances in the next column. If the double entry for the transactions has been done properly, the total of all the debit balances must be equal to the total of all the credit balances. Where this is not the case, it means that errors may have been made when recording the transactions. Total debit entries = Total credit entries. Under the double entry bookkeeping: x For each debit entry there is a corresponding credit entry. x For each credit entry there is a corresponding debit entry. Therefore all the items recorded in all the accounts on the debit side should equal, in total, to all the items recorded on the credit side of the accounts. Total debit balances = total credit balances The trial balance always has the date of the last day of the accounting period to which it relates. It is normal to prepare a trial balance at the end of an accounting period before preparing an income statement and statement of financial position (balance sheet). An income statement shows what profit has been earned in a period. A statement of financial position (balance sheet) shows what assets and liabilities of a business are at the end of the period. 3 TRIAL BALANCES AND ERRORS The fact that the trial balance ‘balances’, does not necessarily mean that all the entries in accounts are correct. There are certain types of error that will not affect the balancing of a trial balance. Errors that would be revealed by a trial balance are; addition errors, using one figure for a debit entry and another for the credit entry, and entering only one side of a transaction.    Closing inventory Inventory at the end of a period is not usually found in an account in the ledger. It is found from stock records and physical stocktaking. Sinceit is not generally found in the ledger, it does not generally appear in a trial balance. However, opening inventory is often recorded in a ledger account, so that the inventory balance at the start of a period would be included in the trial balance prepared at the end of that period. SUMMARY OF THE CHAPTER This chapter illustrated the five steps towards the balancing of ledger accounts and justified the frequency of balancing of ledger accounts. It also illustrated how ledger balances are derived clearly showing the balances carried down and brought down as appropriate. Then, the nature of a trial balance was explained and how the adjustments to errors and closing inventories are dealt with were explained.

CHAPTER 8 THE ACCOUNTING EQUATION 8.0   LEARNING OBJECTIVES The objective of this chapter is to introduce to the students the concept of the Accounting Equation. The students will therefore appreciate that the whole financial accounting is premised on this simple idea. 8.1 THE ACCOUNTING EQUATION By adding up what the accounting records say belongs to a business and deducting what they say the business owes, one can identify what a business is worth according to those accounting records. The whole financial accounting is based on this very simple idea and is known as the accounting equation. It is explained by saying that if a business is to be set up and start trading, it will need resources. If these are entirely supplied by the owner of the business, it can be shown as: Resources supplied by the owner = Resources in the business, or Capital = Assets Usually, however, people other than the owner will have supplied some of the assets. Liabilities is the name given to the amounts owing by the business. The equation therefore now changes to: Capital = Assets – Liabilities This is the most common way in which the accounting equation is expressed. It can be seen that the two sides of the equation will have the same totals. This is because we are dealing with the same thing from two different points of view – the value of the owners’ investment in the business and the value of what is owned by the owners. 8.2 ALTERNATIVE PRESENTATION With the form of accounting equation given in the section above, one can no longer see at a glance what value is presented by the resources in the business. You can see this more clearly if you switch assets and capital around to produce the alternative form of the accounting equation: Assets = Capital + Liabilities This can then be replaced with words describing the resources of the business: Resources: what they are = Resources : who supplied them (Assets)                                (Capital + Liabilities 8.3 EQUALITY OF THE ACCOUNTING EQUATION  It is a fact that no matter how one present the accounting equation, the totals of both sides will always equal each other, and that will always be true no matter how many transactions there may be. The actual assets, liabilities and capital may change, but the total of those assets will always equal to capital +liabilities. The ultimate conclusion of business transaction will therefore be explained by the effect on statement of financial position totals. Capital is often called equity or net worth. It comprises funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner. 8.4 DUAL ASPECT As stated, there are two aspects to accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspects are always equal to each other. Double entry is the name given to the method of recording transactions under the dual aspect concept. 8.4 WHAT ELSE WOULD AFFECT CAPITAL? The accounting equation is expressed in a financial position statement called the statement of financial position. The statement shows the financial position of an organization at a point in time. It presents a snapshot of the organization at the date for which it is prepared. There are many transactions that affect the statement. Examples are: The introduction of capital The purchase of an asset by cheque The purchase of an asset and the incurring of a liability The sale of an asset on credit The sale of an asset for immediate payment The payment of a liability SUMMARY OF THE CHAPTER This chapter introduced the accounting equation and the dual aspect concept. Alternative form of presenting the equation was also explained. END OF CHAPTER QUESTION Consider various transactions and names of accounts that are to be debited and those that are to be credited. Appreciate the effect these transactions have on the accounting equation and capital of a business. Q1 You are given the following list of transactions for Attika Mwaswera (AM), an entrepreneur: 2013 November  1 Started business with K100,000 in the bank. November 2  Tatandala lent AM K4,000 in cash. November 3 Bought goods on credit from Fatsani worth K8,400 and from Sokosa worth K36,000. November 4  Took K2,500 cash and paid it into the bank. November 6     Sold goods on credit at a sum of K1,800 to Chazilala. November 8     Chazilala returned goods to MB whose amount was K400. November 10 Sold goods on credit to Moyenda and Penyani, invoicing them K1,900 and K3,200 respectively. November 12 MB returned goods to Fatsani whose value was K1,400. November 14  Bought scrap van for K26,000 on credit from Chelsea Motors. November 15 Bought office furniture on credit at an amount of K6,000 from Kalipentala. November 18  MB returned goods to Sokosa whose value was K1,100. November 19 Bought goods worth K2,200 in cash. November 20  Goods for an amount of K700 was sold for cash. November 24 Paid Fatsani K10,700 by cheque. November 25  Moyenda returned goods to MB whose invoice value was K300. November 26 Returned some of the furniture costing K1,600 to Kalipentala. November 27  MB put a further K5,000 into the business in the form of cash. November 28  Paid Chelsea Motors K26,000 by cheque for the purchase of the scrap van. Required: Record the transactions above in the accounts of Attika Mwaswera using T- Accounts.                                                                [TOTAL 20 MARKS]  

CHAPTER 7 CHARTS OF ACCOUNTS AND CODING OF ACCOUNTS 7.0   LEARNING OBJECTIVES The objective of this chapter is to explain the importance of charting and coding of accounts in processing of financial transactions. The accounting code and different types of codes including sequence, block, significant digit, and hierarchical faceted are also explained. Finally, code supplier and customer accounts and aspects of coding general ledger accounts are handled. 7.1        CODING DATA CODES It is necessary to take a look at the importance of coding in transaction processing because coding is at the centre of transaction processing and the integrity of the information obtained from it. Codes are used because the can identify items more precisely and concisely than written descriptions, as such the help to classify items into groups for recording data. A code is defined as a system of symbols designed to be applied to a classified set of items to give a brief accurate reference, facilitating entry, collection and analysis Coding saves time in copying out data because codes are shorter than longhand descriptions. In view of this, and to save storage space, computer systems make use of coded data 7.2        CODING IN THE ACCOUNTS RECEIVABLE LEDGER  The accounts receivable ledger consists of individual accounts for each credit customer. Each customer is allocated an account and identified by a unique code number. If there were two customers with the same name, with a unique code, these would be distinguished. In addition to the customer account number other examples of codes in a sales system can incorporate the following important information: x Sale invoice numbers A sequential coding of invoices ensures completeness and helps elimination of errors such as missing invoices, or goods not being invoiced x Product or service code numbers In addition to customer identification number, a code can incorporate product identification. For example customer John may be buying more than one type of product form the company such as home theatres and television sets. Separate identification of the products will enable the transaction to be correctly posted not just in the accounts receivable ledger but also in all relevant accounts in the general ledger. 4000 Electric light bulbs 4025 25 watts 4040 40 watts 4060 60 watts 4100 100 watts 7.6       HIERARCHICAL CODES 4                      Business 4 2                   Finance 4 2 1                Cost accounting 4 2 1.4             Standard costing 4 2 1.4 7          Variance analysis 4 2 1.4 7 2       Fixed overhead variance 7.7 FACETED CODEs Faceted codes are made up of a number of sections each section of the code representing a different feature of the item. A good example may be found in a clothing factory where a code might be based on the following facets. Garment type              Customer type             Colour             Size               Style If SU stood for suit, M for male, B for blue, a garment might be given the code SU M B 36 15. On the other hand, ND F W 14 22 might represent a woman’s white night dress size 14, style 22. One of the greatest advantages of this system is the type of item can be recognized from the code. Faceted codes can also be entirely numerical. 7.8       CODING IN THE GENERAL (NOMINAL) LEDGER A nominal ledger consists of a large number of coded accounts. Part of a nominal ledger might, for example, be as follows: Account code Account name 100200 Plant and machinery (cost) 100300 Motor vehicles (cost) 300000 Total receivables 400000 Total payables 500130 Wages and salaries 500140 Rent and rates 500150 Advertising expenses 500160 Bank charges 500170 Motor expenses 500180 Telephone expenses 600000 Sales 700000 Cash         A business chooses its own codes for the nominal ledger. The codes given above have been taken from a sample in a manual.   7.9       POSTING THE DAY BOOK TOTALS The day book totals for sales and returns are posted to the nominal ledger receivables control account, the sales tax control and the sales account. The amounts owed by individual customers are entered in the sales ledger personal accounts (where these are maintained as memorandum accounts separate from the nominal ledger). It has been seen above how details of sales may be entered in the sales day book. One of the reasons for maintaining the sales day book was the need to make sure that the business receives the money due from all of the sales it makes. There is therefore need to have a record which shows when the business should ask for the money. The sale day book cannot provide such information for the following reasons: For many businesses the chronological record of the sales transactions might involve very large numbers of invoices per day or week The same customer might appear in several places in the sales day book, for purchases he makes on credit at different times, so that a customer may owe money on several unpaid invoices at any point in time. There is, therefore the need for a way of showing who owes what amount to the business and when 7.10     PERSONAL ACCOUNTS FOR RECEIVABLES The above need is met by maintaining personal accounts for each individual customer in the receivables ledger. Each individual sales transaction is entered in the sales day book and needs to be recorded in the personal receivables ledger account of the customer. The totals of the day books need to be posted to the total receivables and sales accounts in the general ledger. Personal accounts are also called memorandum accounts to indicate that, recording of transactions in these books are not part of the double entry 7.11     RECORDING THE DOUBLE ENTRY The transactions entered in the sales day book need to be recorded in the double entry system of bookkeeping. To do this the sales day books must be totalled and ruled off, to include all transactions since the book was last ruled off as

CHAPTER 6  THE CASH BOOK 6.0   LEARNING OBJECTIVES The objective of this chapter is to introduce to the students the Cash Book as one of books of original entry.  Therefore by end of this topic, the students will be expected to understand the cash book, its uses, the bank reconciliations and how these are prepared. 6.1 CASH BOOKS 6.1.1 Drawing up a Cash Book The cash book consists of the cash account and bank account put together in one book.  In the cash book, the debit column for cash is put next to the debit column for bank.  The credit column for cash is put next to the credit column for bank. This enables the business to record all money received and paid out on a particular date on the same page. The bank column contains details of the payments made by cheque and direct transfers from the bank account and of money received and paid into the bank.  The bank will have its own record of the account in its books.  From time to time, or on request from the business, the bank sends a copy of the account in its books to the business known as a bank statement, which the business uses to check against the bank columns in its cash book to ensure that there are no errors. 6.1.2    Cash paid into the bank When customers pay their accounts in cash and, later, a part of the cash is paid into the bank, the receipt of the cash is debited to the cash column on the date received, the credit entry being in the customer’s personal account. The cash banked has the effect of (i) decreasing the asset cash; therefore, credit the asset cash account represented by the cash column in the cash book, and (ii) increasing the asset of bank; therefore debit the asset bank account, which is represented by the bank column in the cash book. When the whole of the cash received is banked immediately the receipt is entered directly into the bank column. When the business requires cash, it may withdraw the cash from the bank.  The effect is (i) asset bank is decreased; the action being crediting the bank account that is the bank column in the cash book and (ii) the asset of cash is increased; the action being debiting the asset account; that is the cash column in the cash book. 51 .3    The use of folio column When many books are being used, mentioning the other account in which the transaction is to be found, may not be enough information to find the other account quickly.  Therefore a folio column is introduced to facilitate quicker finding of the other account. In each account and in each book being used, a folio column is added, shown on the left of the money columns.  The name of the other book and the number of the page in the other book where the other part of the double entry was made is stated against each and every entry in this column.  To ensure that the double entry is completed the folio column should only be filled when the double entry has been completed. Using one book as a means of entering transactions into the accounts, so as to perform or complete the double entry is called posting.  The advantage of using folio entries is that they speed up the process of finding the other side of the double entry.  If an entry has not been filled in, it may indicate that the double entry has not yet been made.  Looking through the entry lines in the folio columns to ensure that they have all been filled helps detect such errors quickly. CASH DISCOUNTS In order to induce customers to pay their accounts quickly, a business may accept a smaller sum in full settlement if payment is made within a certain period of time.  The amount of the reduction of the sum to be paid is known as cash discount. The rate of the cash discount is shown as a percentage.  The percentage allowed, and the period within which payment is to be made, are quoted on all sales documents by the seller. Cash discounts always appear in the profit and loss part of the Trading and Profit and Loss account.  They are not part of the cost of goods sold, nor are they a deduction from selling price. Discounts column in cash book The discount s allowed account and the discounts received account are maintained in the general ledger along with other revenue and expense accounts.  To avoid too much reference to the General ledger, extra columns for discount are used in the cash book. Each side of the cash book will have an extra column added in which the amounts of discounts are entered.  Discounts received are entered in the discounts column on the credit side of the cash book, and discounts allowed in the discounts column on the debit side of the cash book. Example Enter the following transactions for the month of May 2013 in the cash book, balance off the cash book and show the discount accounts in the general ledger 52 May 1 balance brought down from April:                                                          K Cash                                                                                                      29            Bank                                                                                                    654 Accounts receivables accounts: B Konda                                                                                              120 M Kaka                                                                                                280 D Songa                                                                                                40 Accounts payables accounts: U Banda                                                                                                60 A Kande                                                                                              440 R Seka                                                                                                100 2 B Konda pays us by cheque, having deducted 2.5% cash discount k3      117 8 we pay R Seka his account by cheque, deducting 5% cash discount k5     95 11 we withdrew k100 from the bank for business use                                    100 16 M Kaka pays us his account by cheque less 2.5% discount k7                 273 25 we paid office expenses in cash                                                                  92 D Songa pays us in cash after deducting a discount of k2 38 we pay U Banda by cheque less 5% discount k3 57 we pay A Kande by cheque less 2.5% discount k11           429 Cash

CHAPTER 5 BOOKS OF ORIGINAL ENTRY AND LEDGERS 5.0   LEARNING OBJECTIVES The objective of this chapter is to introduce to the students books of original entry and ledgers.  By end of this topic, the students will therefore be expected to understand the types of books used in accounting. Uses of these records are explained and coding and control accounts are also mentioned. However, as one of the day books, the cash book is discussed later in detail to underline its importance. 5.1 THE GROWTH OF A BUSINESS When a business is small, all the double entry accounts can be kept in one book called a ledger.  With the growth of the business, it becomes impossible to use just our book because of the large number of pages required for a lot of transactions, which would make the book too large to handle.  Furthermore, the growth in the business might necessitate the employment of several bookkeepers, and using one book would make it difficult for each one to do his/her work. As a result of this, there is need to use more books whereby similar types of transaction are put together and have one book in which they are recorded. 5.2 BOOKS OF ORIGINAL ENTRY When transactions take place, there is need to record as much details as possible of the transactions. Books of original entry are the books in which transactions are first recorded.  Each type of transaction will have a separate book. The nature of the transaction affects which book it is entered into.  The following details of transactions are entered in these books:-  x The date on which each transaction took place (transactions are recorded in date order) x Details relating to the transaction are entered in the details column. x A folio column entry is made cross-referencing back to the source document. x The monetary amounts are entered in columns provided in the books of original entry for that purpose. 5.3       TYPES OF BOOKS OF ORIGINAL ENTRY Books of original entry are called “day books” or “journals.” Ͳ      Sales day book (sales journal) in which credit sales are entered. Ͳ    Purchases day book (purchases journal) in which credit purchases are recorded. Ͳ Returns inwards day book (returns inwards journal) in which returns inwards are entered Ͳ Returns outwards day book (Returns outwards journal) in which returns outwards are recorded. Ͳ    Cash book in which receipts and payments are recorded (both cash and cheque transactions) Ͳ    General journal (journal) for other items 5.4       USING MORE THAN ONE LEDGER Entries are made in the books of original entry, and then summarized, and the summary information is entered, in double entry, to accounts kept in various ledgers.  The use of a set of ledgers rather than just one big ledger makes it easier to divide the work between different bookkeepers. 5.5       TYPES OF LEDGERS Most businesses use the following ledger: Ͳ    Sales ledger.  This is for customers’ personal accounts Ͳ    Purchases ledger.  This is for suppliers’ personal accounts Ͳ General ledger.  This contains the remaining double entry accounts; expenses, income, fixed assets and capital 5.6       TYPES OF ACCOUNTS All accounts are sometimes described as personal accounts or as impersonal accounts. Ͳ    Personal accounts: for debtors and debtors and creditors (customers and suppliers) Ͳ    Impersonal accounts These are divided into “real” accounts and “nominal” accounts. Ͳ    Real accounts are accounts in which possessions such as buildings, machinery, fixtures and stock, are recorded. Ͳ    Nominal accounts are accounts in which expenses, income andcapitalare recorded   5.7       THE PURCHASE DAY BOOK Purchase day book is used to keep a list of invoices received from suppliers of goods and services to the business. It is a “book” of prime entry or a primary record. The need for the purchase day book A business needs to keep track of all of its purchases transactions together so that it knows how much it owes to particular suppliers at any one time. It is simpler to allow the amount it owes to the supplier to build up and then “make a single payment” to each supplier rather than to pay each invoice separately. The business needs to take full advantage of the credit period offered by suppliers and pay close to the end of the credit period of which the supplier allows It will want to keep a record of the total purchases which it makes in each period Taking advantage of the suppliers’ allowed credit periods helps the cash flow of the business. If it pays earlier than it needs:- It may pay more interest on larger bank overdraft it needs Lose interest on a positive amount of cash instead of an overdraft To meet these needs the source documents must be recorded in the purchases day book Example of the purchases day book DATE                SUPPLIER NAME     REF             TOTAL   SALES TAX 12.08.13                  Maya Trading         PL 1               K5000        K324 14.08.13                 Viwemi Ltd             PL 2               K4300       K134 23.08.13                 Twanda Plc              PL 3               K14500     K2110 Note The purchases day book is regularly summarized and the information is posted to the general ledger by debiting the purchases account and crediting the payables control account. The same information should also be posted to the individual supplier’s accounts concerned by crediting their accounts in the payables personal ledger. Some organizations assign “sequential numbers to purchase invoices” to ensure that all purchases invoices are included in the reports. 5.8       THE PURCHASE RETURNS DAY BOOK The purchase returns day book lists credit notes received in respect of the purchase returns in chronological order. A business will return goods that are “faulty” or damaged and will expect a credit note from the supplier Goods bought on “sale or returns” basis will be returned if they cannot be sold If goods have been ordered by the business and are in good condition but are “surplus to the requirements” the supplier may or may not agree to accept them as returns and to issue a credit note. Purchase returns might

CHAPTER 4 TYPES OF BUSINESS TRANSACTIONS 4.0 LEARNING OBJECTIVES By the end of this chapter, students are expected to understand a range of types of business transactions including Sales, Purchases, Receipts, Payments, Petty cash and Payroll. They will also understand the implications of cash and credit transactions, including where applicable, the effect of cash and trade discounts. 4.1 NATURE OF A TRANSACTION There are many forms which a business deal can take. At this point you may be aware that various events change two items in the statement of financial position. This aspect will be discussed further when we shall be dealing with Double Entry system of accounting, Events which result in such changes are known as ‘transactions’ This means that if the proprietor asks the price of some goods, but does not buy them, there is no be Accounting for Sales Sales of inventory may be on credit or on cash basis. Suppose that on 3 August 2013 goods were sold for K375,000 to Luwani. First, an asset account is increased. The increase in the asset of trade receivables requires a debit and the debtor is Luwani, so that the account concerned is that of Luwani. Second, the asset inventory is decreased. For this a credit entry to reduce an asset is needed. The movement of inventory is clearly the result of a ‘sale’ and so it is the sales account that needs to be credited. If on 4 August 2013 goods are sold for K55,000 cash being received immediately at the time of sale then the asset of cash is increased so that the cash account must b debited. The asset of inventory is reduced. The reduction of an asset requires a credit and the movement of inventory is represented by ‘sales’. Thus the entry needed is a credit in the sales account. Accounting for Purchases Similarly, purchases of inventory may be on credit or on cash basis. Suppose that on 1 August 2013 goods costing K165,000 are bought on credit from Jamali. First, the twofold effect of the transaction must be considered so that bookkeeping entries can be worked out. The asset of inventory is increased. An increase in asset needs a debit entry in an account. Here the account is one designed for this type of inventory movement. It is clearly a ‘purchase, movement so that the account to use must be the purchases account. Second, there is an increase in a liability. This is the liability of the business to Jamali because the goods bought have not yet been paid for. An increase in a liability needs a credit entry. In this case, it would be a credit entry to Jamali’s account. If on 4 August 2013 goods costing K310,000 are bought, cash being paid for them immediately at the time of purchase, as before asset inventory has increased, so a debit entry will be needed. The movement of inventory is that of a ‘purchase’, so the purchases account needs to be debited. Second, the asset cash is reduced and must be credited. Accounting for Receipts All receipts must reflect that an asset cash (if paid for in cash) or bank (if by cheque) has increased by debiting either cash account or bank account and crediting the source (say a debtor’s account). Accounting for Payments Similarly, all payments must reflect that an asset cash (if paid for in cash) or bank (if by cheque) has reduced by crediting either cash account or bank account and debiting the receiver of the funds (say a creditor’s account). Accounting for Petty cash Petty cash is recorded through a petty cash book. The question is where does the money paid come from? The imprest system is one where the cashier gives petty cashier enough cash to meet the petty cash needs for the following period. Then at the end of the period, the cashier finds out the amounts spent by the petty cashier, by looking at the entries in the petty cash book. At the same time the petty cashier may give the petty cash vouchers to the cashier so that the entries in the petty cash book may be checked. The cashier then passes cash to the value of the amount spent on petty cash to bring it back up to the level it was at when the period started. This amount is known as petty cash float. 38 The relevance of discounts Discounts may be offered to retailers by wholesalers or manufacturers for bulk purchases (trade discount) or in order to induce customers to pay their accounts quickly (cash discounts). Whereas cash discounts always appear in the profit and loss part of the Trading and Profit and Loss account and part of double entry trade discount are just netted off the initial selling price on the invoice but are not part of bookkeeping entries Accounting for Payroll Modern accounting systems include a payroll module. Businesses with large number of employees would find this particularly useful as payroll systems require a good deal of regular processing. Some of important aspects this module should handle are PAYE, pension, and loans and advances. This area of accounting is usually under a specialized accounting officer and contained some in-built controls such as salaries and wages control accounts as part of internal checks. 4.2 SAMPLES OF VARIOUS DOCUMENTS USED IN ACCOUNTING ENVIRONMENT An invoice This is a source document used to record credit sales. A credit note This is a source document used to record a reduction in an amount which a customer is owing. A payment voucher A payment voucher is a document that explains the intent of a company to pay an external affiliate. For example, a company may make a purchase or a payment to another company and provide a voucher to explain the costs involved. SUMMARY OF THE CHAPTER The chapter explained the accounting treatment of the main types of business transactions and justified the treatment as given. It also highlighted the operation of key elements in

CHAPTER3 ACCOUNTING INFORMATION 3.0       LEARNING OBJECTIVES By the end of this topic, students will be expected to know the elements of accounting information and how these elements relate to the accounting equation. They will also be able to explain why and how the accounting equation should balance.      3.1        ELEMENTS OF ACCOUNTING INFORMATION a) Assets Assets are the resources, that is, items belonging to a business and used in the running of the business. They may be non-current assets, (such as buildings, machinery or office furniture), or current assets (such as inventory, accounts receivable or cash) An asset is something valuable which a business owns or has the use of. Assets include property of all kinds; buildings, machinery, motor vehicles and inventory of goods, and others are debts owed by customers and the amount of money in the bank. Non- current assets Non-current assets are assets that have long life, bought with the intention of using them in the business and not meant for resale. This means that non-current assets are held and used in operation over a number of accounting period. Current assets These are assets that are held only for a short time and include inventory heldfor resale, amounts receivable from customers, cash and other assets with a short life b) Liabilities Liabilities are sums of money owed by a business to outsiders such as a bank or trade accounts payable. A liability is something which is owed to somebody else. ‘Liabilities’ is the accounting term given to debts of the business and are owed to accounts payable. Liabilities include amounts owed by the business for goods and services supplied to the business and for expenses incurred but not yet paid by the business. Money borrowed by the business is also a liability. 3.2                      THE ACCOUNTING EQUATION AND STATEMENT OF FINANCIAL POSITION (a) The accounting equation This is the basic fundamental rule of accounting which states that the assets and liabilities of a business must always be equal. It can be explained by saying that if a business is to be set up and start trading, it will need resources. If the owner of the business has supplied all of the resources, this can be shown as: Resources supplied by the owner = resources in the business In accounting, the amount of the resources supplied by the owner is called capital and the actual resources that the business has are called assets. Hence in this case the accounting equation can be shown as Capital = Assets However, usually other people other than the owner provide resources for some of the assets. Liabilities is the name given to the amount owing to these people for these assets. In this case, the accounting equation is changed to: Capital = Assets – Liabilities This is the most common way in which the accounting equation is presented. Alternatively, the accounting equation may be shown as: Assets = Capital + Liabilities (b) The statement of financial position (balance sheet) and the effects of business transactions The accounting equation is expressed in a statement of financial position called the balance sheet. The balance sheet shows the financial position of an organization at a particular point in time. In other words it represents a snapshot of the organization at that date for which it was prepared. EQUALITY OF THE ACCOUNTING EQUATION As noticed from the examples above every transaction has affected two items. It has either changed two assets by reducing one and increasing the other or changed the liabilities. This is the reason why the two sections of the balance sheet or the accounting equation are always equal. Some of the examples of the effects of transactions on the accounting equation are: Example of transaction effect Owner pays capital into the bank increase assets                increase capital (Bank) Buy goods by cheque decrease asset                   increase asset                                                   (Bank)                        (Stock of goods) c) Buy goods on credit                  increase asset                      increase liability                                                          (Stock of goods)       (Trade Payables) d) Sale of goods on credit                decrease assets           increase asset                                                            (Stock of goods)          (Trade Receivables) e) Sale of goods for cash                   decrease assets           increase asset (Stock of goods)          (Bank) Pay creditor decrease asset             decrease liability                                                         (Bank)                        (Creditor) Debtors pay money owing By cheque                                               decrease asset              increase asset                                                   (Receivables)               (Bank) h) Owner takes money out of The business bank account For own use (drawings)                          decrease asset            decrease capital                                                  (Bank) i) Owner pays creditors from Private money outside the Business                                            decrease liability        increase capital (Creditor) SUMMARY OF THE CHAPTER The chapter gave explanation to elements of accounting information. It also incorporated the accounting equation as well as illustrating how business transactions affect the statement of financial position in various instances. The reason for always having the two sections of the statement of financial equation or the accounting equal was given. END OF CHAPTER QUESTIONS Q1 Using the statement of financial position (or the statement of financial condition), give a detailed example of accounting equation that highlights the equality of the accounting equation. Q2 In testing the equality of the accounting equation, show the effects which the following transactions will have on the accounting equation for a business entity (that is, indicate whether there will be an increase, a decrease or no effect in every case on assets, liabilities and capital).  

CHAPTER 2 REGULATION OF ACCOUNTING IN MALAWI 2.0     LEARNING OBJECTIVES This chapter aims to introduce the regime that regulates the accounting profession in Malawi. It therefore highlights the relevant regulatory framework and the institutions that regulate enforces the required standards and systems within the profession. 2.1       MALAWI STOCK EXCHANGE The main provisions that regulate listed companies in Malawi are contained in three documents. These are: MSE Listing Requirements – Section 8 sets out financial information which may be required to be included in listing particulars, pre-listing statements, circulars, interim and preliminary reports and the annual financial statements. Section 5 is also relevant as it outlines the different methods of bringing securities to listing and includes specific requirements to be followed in relation to each method. Listing Requirements on Alternative Markets– the relevant guideline is 16.8.All the provisions of Section 5 of the MSE Listings Requirements are applicable with the exception that the period of the immediate past performance is one year instead of three years. Members’ rules – The Board shall ensure that proper books of account are kept of the financial affairs of the Exchange and that these books of account shall be kept at the principal office of the Exchange. Such books will be preserved by the Secretary for a period of seven (7) years from the date of the last entry therein and shall at all reasonable times be open for inspection by any member of the Board. Within five (3) months of the end of every financial year the Board will ensure that an annual report, audited Accounts consisting of a Balance sheet and a Revenue and Expenditure Account and any subsidiary statements and accounts as may be necessary or required by law shall be prepared and signed by the Chairman and two members of the Board. The Secretary will lodge a signed copy of these documents together with the Annual Report of the Board with the Registrar within not more than five (5) months of the end of the financial year. Copies will also be circulated to every member of the Exchange. 2.2 THE SOCIETY OF ACCOUNTANTS IN MALAWI (INSTITUTE OF CHARTERED ACCOUNTANTS IN MALAWI) AND MALAWI ACCOUNTANTS BOARD (MAB) The Society of accountants in Malawi has not directly and exclusively charged with the regulation of the profession in Malawi. However the successor institution Institute of the Chartered Accounts in Malawi through the Malawi Accountants Board division does the regulating. In May 2013 the Malawi Parliament passed Public Accounts and Auditors bill into law. The effect of the enactment has been: to repeal the Public Accountants and Auditors Act of 1982 and introduce a new legislation that will reform the regulation and control of the accountancy profession in the country To set up a body representing accountants and auditors in the country through allowing the establishment of Malawi Accountants Board To allow the country to have its own regulatory accountancy board which will also be administering accountancy examinations thereby avoiding reliance on foreign accountancy professional bodies to administer exams, thereby easing the problems that students encounter when processing their exams Public Accountants Examinations Council (PAEC) is thus abolished and a new body known as the Institute of Chartered Accountants in Malawi (ICAM) formed. This restructuring has provided for a stronger Government regulation with a mechanism to oversee the activities of the profession, National qualification of accounts profession as there will be a removal of dual membership of foreign accountancy bodies and corruption fight since the profession is a strong gate keeper in the fight against corruption and money laundering. 2.3 COMPANIES ACT Chapter 46:03 of Laws of Malawi covers Accounts and Audit in Part X. There are sections covering Keeping of Accounting Records, Annual Return, Circulation of Statement of Accounts and Reports, Group Accounts, Directors’ Report, Auditors and Penalties among other contents. 2.4 INTERNATIONAL ACCOUNTING STANDARDS (IFRSs) Financial Reporting Framework in Malawi In Malawi, all the companies that have public accountability are required to apply Full IFRSs. A company has public accountability if: x it is a listed company or is in the process of listing with the Malawi Stock Exchange or any other recognised stock exchange. The listing can either be for the company’s equity or debt. x its articles provide for unrestricted transfer of shares or it is a Public Company in terms of the Malawi Companies Act 1984 x it is permitted by its articles to offer shares to the public x it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, an insurance entity, securities dealer/broker, pension fund or mutual fund x it is a corporation or company that is owned by the public through the Government for example statutory corporations, also known as Parastatals  x it is has a legal requirement to publish general purpose financial statements in any public media x it is a material subsidiary of an entity with public accountability Malawi plans to require the IFRS for SMEs for all other companies. In May 2013, the Pan African Federation of Accountants (PAFA) recently decided to adopt international standards in accounting and auditing, including IFRSs, IPSASs, ISAs and the IFRS for SMEs. SUMMARY OF THE CHAPTER  

CHAPTER 1 INTRODUCTION TO ACCOUNTING 1.0 LEARNING OBJECTIVES The objective of this chapter is to impart on to the students the definition of Accounting, with an emphasis on the differences between two main branches of accounting. It also highlights the common users of accounting information and their information needs as well as qualities of good accounting information. 1.1       ACCOUNTING AND THE ACCOUNTING PROCESS Accounting is the process of identifying, measuring and communicating  economic information to permit informed judgments and decisions by users of  the information. The managers of businesses want to know whether they are making profits or not, how much they owe to different stakeholders and how much the business is owed. The purpose of accounting is, therefore, to provide the information required by presenting it in standard and logical form. Accounting can be divided into ‘financial accounting’ and ‘management accounting’. 1.2       FINANCIAL ACCOUNTING Financial accounting consists of two elements: Ͳ Bookkeeping, is that part of accounting concerned with the recording of business transactions on a day-to-day basis, Ͳ Preparation of financial statements from the book-keeping records. These financial statements summarize the business transactions for a period, normally one year. 1.3       MANAGEMENT ACCOUNTING  The Charted Institute of Management Accountants defines management accounting as ‘the application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operations of the undertaking’. 1.4     THE MAIN DIFFERENCES BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING The main differences are now summarized through a comparison chart below: Comparison chart Attribute Financial Accounting                                Management Accounting Format: Financial accounts are supposed to be in accordance with a specific format No specific format is designed for by IAS so that financial accounts of management accounting systems. different organizations can be easily compared. Planning and control: Management        Accounting      helps Financial accounting helps in making             management to record, plan and investment decision, in credit rating. control activities to aid decisionmaking process. External Vs. Internal: A     financial     accounting     system A management accounting system produces information that is used by produces information that is used parties external to the organization, within   an            organization,    by such     as         shareholders,   bank     and managers and employees. creditors. Focus:           Management accounting focuses Financial                                                      accounting           focuses             on on future & Present. history. Users: Management accounting reports Financial accounting reports are are exclusively used by internal primarily used by external users, such users       viz.      managers       and as shareholders, bank and creditors. employees. Reporting frequency Well-defined     –     annually,     semi-         As    needed    –    daily,     weekly,                             annually, quarterly                                        monthly. and duration: There are no legal requirements to Preparing financial accounting reports prepare reports on management Optional:                                                                            are mandatory especially for limited accounting. companies. The           main    objectives        of The main objectives of financial Management Accounting are to accounting are :i) to disclose the end help management by providing Objectives: results of the business, and ii) to depict information that used by the financial condition of the business management to plan, evaluate, and on a particular date. control. Drafted according to GAAP – General          Drafted according to management Legal/rules: Accepted Accounting Procedure.                  suitability. Attribute Financial Accounting                                Management Accounting Accounting process:          Cost accounts are not preserved Follows a full process of recording, under Management Accounting. classifying, and summarising for the The necessary data from financial purpose of analysis and interpretation statements and cost ledgers are of the financial information. analyzed. Segment reporting:          May pertain to smaller business Pertains to the entire organization or units or individual departments, in materially significant business units. addition to the entire organization. Nature Focus on both qualitative and of                   Focus on quantitative information quantitative information information: 1.5      THE MAIN FINANCIAL STATEMENTS AND THE NEEDS OF THEIR USERS There are two main financial statements that are normally prepared by various organizations. These are: The Statement of Profit and Loss and Comprehensive Income (Trading profit and loss account) This is basically used to show the financial performance of the business by stating whether the business has made a profit or a loss. It is normally divided into two parts with one part reporting the amount of Gross profit that the business has made and the other part reporting the amount of Net profit made by the business. The Statement of Financial Position (Balance sheet) This is used to show the financial position of the business as at a particular date in terms of assets, liabilities and capital that the business has at that particular point in time. Other financial statements that business organizations prepare include: the cash flow statement, the statement of changes in equity and (c) group accounts For this syllabus we will only look at the income statement and the statement of financial position. 1.6       USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS There are many stakeholders interested in the financial information of businesses with diverse needs. x Management Management will be interested in the analysis of revenues and expenses so as to  obtain information that is useful when formulating plans and making decisions.  When the budget for the business has been prepared, the accounting function can  produce figures for what actually happens as the period progresses and compare it  with the budgets. Deviations from plans can then be investigated and appropriate  action taken. x Shareholders/ (owners) and potential shareholders Shareholders need to be informed about the way in which management has used  the funds which the shareholders or owners have invested in the business. This  involves reporting on past events, however, shareholders and potential  shareholders will additionally be interested in the future performance and the  historical information will act as a guide to the future if they have to decide  whether to sell their shares or vote on proposals. x Financial analysts/ advisors Financial analysts who