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Accounts PDF

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ZIMSEC O Level Principles of Accounts Notes: Introduction and basic terms, + Accounting isa system comprising the following elements: In summary Accounting is the process of identifyirg, reasurng and communicating business information to assist users in making informed, useful decisions. + Only monetary transactions are recorded in accountingusing the historical and mo jetaryprinciples. + This simply means that only transactions that can be resordedin monetary terms ze recorded and thisis done ona historical basis i2, we only record these amounts that weactually expencled or received + Capital any resources; monetary or otherwise used by the business to starta business. Accets + Infinancial accounting, assets are economic resources. Anything tangible orintangible that is capable of being uned of controlled to produce value and that isheld to have positive economie value is considered an asset + There are two el sesof assets namely: + Non Currant assets.these are assets held by a business for more than one accounting period eg, motor vehicles, buildings. Non current assets are sometimes known 29 Fixed Assets. + Current assets-assets-held by a business for less thanone accounting period They can easily te converted into cash e.g cash bankdebtors and inventory. + Actimes a business may have assets that may be classified as intangible assets for example goodwill These ts and ther nature will be examined in the relevanttopie. Liabilities + Present obligations resulting from past events, the settlement of which leads to decreases in economic benefits Liablitiestherefore represent amounts that the ent [business owes to outside parties or debts ofthe business which i has to settle at some future point in time, + There aretwo classes of abilies names + Current tia thes these are liabilities which have 2 repayment date of less than oneyear.e.g creditors + Non current liabilities: :hese are lstilties whieh havea repayment dateof more than eneaccounting, period ‘unting period lasts for one year altnough companies have loans and debentures. Usually an diferent policies so customary non curent Labllites ae those that havea paymert date of more than one year ther important accounting terms and their definitions += Purchases goods bouht for esate + Sales goods sold by a business which were originally bought withthe intention a exelling them. + Drawings-Goods or money taken out the business by the owner forprivate purposes + Returns inwards/Sales Returns-2oorks turned tothe business byitscustoness + Returns outwards{purchases retums ils retuned by the business 0 tssunpies, ZIMSEC O Level Principles of Accounting Notes: Types of Business Organisations + A business can be defined as an economie or commercial activity + All business activity can be subdivided into individual and separate transactions + A transaction is an event that results in a change in an asset abil yor net worth of a business + In accounting warious wards are used ta refer to.a business these include: = Entity = Organisation © Concern = Corporation = Firm = Enterprise = Venture = Company + ILisimportant to note that sorne of these have very specific meanings + There are different types of businesses and businesses can be divided in 2 number of ways, + In accounting the most important way to view businesses is by grouping them using: 41. The ownership structure of the business 2. The economic sector oF type of the business 3. Size 4. Purpose There are generally two types of business: 1. Those that sell goods end 2. Those that sell services ‘Goods are tangible items that are sold in order to satisfy human needs and wants examples of goods include food, furniture ete Services are intangible ums that ara sold in arder to satisfy human needs and wants examples of services include accommodation, hair cut, teaching, medical check up, car repairete Examples of business that offer services inclucle hospitals, hotels and garages Businesses especially those that sell goods can also be divided into: 1. Trading businesses 2. Manufacturing businesses “Trading businesses purchase goods, keep and maintain them as stack and sell them to consumers/other businesses Amanutacturing business is any business that uses components, parts or raw materials to make 2 Finished/semi finished good Business ean also be grouped according to the sector they are found in Primary sector businesses for example mines Secondary sector businesses stich as factories “Tertiary sector business that sell services for example schools and hospitals “These goods are then sold eithercliectly to constumers or other businesses Each type of business demancsa different approach in accounting, + Businesses can also be grouped accordingto their size + There are small simple business operations for example a street vendor + These are Sraall andl medium-sized enterprises (SMES) + An SME in Zimbabwe is defined as 2 registered business whose total assets does not exceed US$100 000 oF + Whose annual turnover/sales doves not exceed USS240 000 + There are large enterprises whose size range from being merely larger than SMES to being multinational entities + Accounting operations vary according to size + In large entities accounting is divided into various branches/departments, Purpose + Businesses can be divided! into we: + For profit businesses i. businesses that exists primarily to make a profitand + Not for profit businesses i.e. non profit organisations whose overriding aim is usually to provide a service to Its members + Examples of non profits include charities and foundations ZIMSEC O Level Principles of Accounting Notes: The Accounting Cycle + As has already been pointed out accounting includes the recording and presentation of transactions + This recording and presentation is donein a systernic manner i. itfollows a set pattern + This pattern isknown as the accounting cycle + The accounting cycle refers to the sequence of si steps in the processing of financial transactions (from the time they occur to their inclusion in financial statements) pertaining to an accounting period + These steps are shown on the diagram below The accounting cycleinvolvessixsteps 1. First a transaction occ + Atransaction isa financial event for example the purchase of goods for resale, injection of capital into the business, the sale of goods on credit or for cash etc + The transaction is analysed and the accounts involved are determined as well asthe amounts involved 2. The transaction is then recorded on source documents/founding documents these could be in the form of receipts invoices, eedit note, debitnote, contract of sale ete 3, Then the transaction isrecorded in the appropriate book(s) of original ertry/subsidiary books these include the Sales Day Book, the Purchases Day Book etc 4, From there the transactions are recorded into various ledgeraccounts in the General Ledger, Purchases Ledger, Sales Ledger or the cash book depending on their nature 5, Atthe end of each accounting period each account is the books is balanced off any balances are extracted and tabulated into a trial balance which matches credit balances against debit balances 6. When al the stages have been completed its time to prepare financial statements + these are also sometimes known as the flnal accounts quite obviously because they are prepared last in the gle « Theseare made up of + The Statement of comprehensive/income Statement formerly known as the Trading and Profit and Loss ‘Account which measures the performance ofthe business in profitjioss terms, + The Statement of Financial Pestion formerly known as the Balance Sheet which shows the financial position of the business atthe end of the accounting period * Although itis beyond the scope of Form 1-4 Level, it might be of interest to some to point out that businesses also prepare: + Thea Statement of Cash Flows which messures the business's performance in terms + AStaterent of Changes in Equity which shows capital changes within the business during the accounting period + Financial Statements comprise of these four statements, + The entire process is repeated during each accounting period and for each transaction + It's important to note that typcellysteps 5 and 6 are only cartied out once at the endof the each accounting period although large businesses often prepare financial statements for each quarter(3 months) ZIMSEC O Level Principles of Accounting Notes: Introduction to data processing + Partof accounting involves data processing or processing data + Data-refers to raw and unprocessed information for example a transaction event such as the sale of goods bought for resale in exchange for cash + Information- isa term that is used to refer to date + Thatis timely and aceurate * Specific and organised for a specific purpose + Presented ina way and context that gives it meaning and relevant + Isarranged ina meaningful way that aids understanding + In short information is processed data + Anexample of information in accounting are the financial statements which are yielded after processing data in the form of transaction + The net profit figure at the end of the accounting period is an example ofa piece of useful information + Although the exact steps taken in data processing vary al the steps can be grouped into the following steps: + Data Collection: this involves the gathering of data e.g, in receipts and other source documents. itis important. tomake sure that data is complete and accurate at this stage otherwise the information obtained in the end will also be inaccurate + Preparation- the collected data is analysed and prepared for input, this might involved summarizing transactions and preparing for double entry + Input the data is entered into records including books of original entry and ledgers, here data has to bein strict accounting format + Data Pracessing-is the manipulation of items of data to produce meaningful information + Operations are performed on a given set of data to extract the required information in an appropriate form suchas diagrams, reports or tables + In accounting terms this involves balancing off accounts, + Extracting the balances and preparing a Tal Balance = Preparing the Financial Statements + Output and ingerpretation- his when the processed information is presented andl interpreted + This often comes in the presentation of financial statements and the accompanyingnotes + Thefinal accounts areatten compared to past performance, industrial average perlormance or against competitors + Storage-the information is ther stored for further usage and retrieval as and when needed + Data processing can be done using manual methods or + Increasingly through electronic methods + Often though both manual processing and electronic processing are used, ZIMSEC O Level Principles of Accounting Notes: Manual processing + Data processing has been performed manually for millennia (thousands of years) Manual data processing literary means data processing by hand ‘Ancient merchants used te record their trading transactions on clay tablets Kings would record their trade, census and tax data on clay. copper, bronze, brass and stone tablets ‘This data would be laboriously processed by scribes and clerks who would tabulate, add andl subtract it This would allow the king and merchants to understand their financial position and male informed decisions With the invention of paper and books transactions started being recorded in books Atfrst these transactions were recorded in a single book. [But with time andl with the advancement of commerce transactions are now entered in several books + ASales Journal which is usedl as a diary to record daily sales transactions + Purchases Journal which is used as a diary to record daily purchase transactions + AGeneral Journal to record all the other transactions ‘These transactions are further transferred to books known as ledgers In manual accounting these are actual physical books when ones full a newone's started Normally both these books their pages are numbered to aid the recording and processing processes Ina typical Business these books comprise: © AGeneral Ledger © ASales Ledger © Purchases Ledger + Acash Book + APetty Cash Back In manuel processing: ‘The transactions are man ually recorded in physical tangible books such as the receipt book, invoice book ‘The clerks physically record the information in actual books of original entry ‘The information is then recorded in actual ledger books This part was helpfully called bookkeeping Finally the information is processed by hand into financial statements + Its important to note that manual processing alsa involves what is known as single entry accounting + This is where only ane entry is made in the books instead of following the double entry principle Advantages + itis simple to start using and even natural + terequires tele training + Ie does not require expensive upfront costs such as buying a computer and an accounting package which is especially important to small businesses + Is suitable for simple businesses such as a vendor or tuckshop + Is not affected by power cuts, hacking ane malware: + It's flexible Le. can suit the needs of various businesses be it manufacturing, service of retail electronic processing often involwes the purchase of Disadwantages. + Ibis time consuming te record and present data + The accuracy of the data can be hard to verify and mistakes are not easy to comect as mistakes can be made at each of the processing stages for example errors in recording a Total Sales figure will affect all the following, stones + Takes time to adapt to new standarels or methods while a simple patch will electronic processing is all that is required w effect change + Istedious as repetitive tasks have to be repeated + Is limiteclin scope to what humans can do + Isdifficult to implement in large business for exemple Multinational Companies + Involves alot of labour costs ZIMSEC O Level Principles of Accounting Notes: Electronic Data Processing + withthe advent of computers electronic data processing has become prevalent + Electronie data processing is the use of computersin recording, classilying, manipulating.presenting and summarizing data + In the early days of computers electronic processing was rather limited + Atfistit involved the use of electronic calculators to ald manual date processing + Electronic spreadsheets were introduced fist in larger businesses and until their usage reached even smaller + Packages tke excol are sometimes used in conjunetion with manual processing to create and present trial balances and finencial statements + Later on complete accounting packages were introduced such as Sage Pastel and Quicken + These replaced the actual accounting books with electronic versions: + The Day Books + The Ledgers + Transactions are only entered once ein the Sales Day Book and the other entries are automatically recorded, + Once the period ends the software automaticaly balances off the accounts, creates the Trial Balance and Financial Statements + For this reason electronic processingis often called automatic processing + In recent times extensive use has been made of ICT + F€T stands for Information and Communication Technologies + Thisis when Infomation Techrology('T) is combined with Communications Technology + Information technology- she application of computers to store, study, reteve, transmit, and manipulate data, orinformation + Communication technology relers ts all those innovations that allow digital communication to take place ‘allowing people to share and exchange data and information + ICT refers to technologies that provide access to information through telecommunications: + This includes the internet, wireless networks, cell phones, and other communication mediums + With ICT every/most aspect ofthe accounting function is automated + Computerized tills ecord sells and automatically adjust the stock figure, purchases are made automatically, vehicle mileage is used to calculatedepreciation for the period ete + Branches in other locations, countries oF continents can submit their data quickly and itis included in the group financial statements + Electronic data processing often involves hardware and software: + Hordware refers to the tangible parts such as the actual computers, network equipment such as wires, fiber and printers + Software refers tothe intangible parts of the system that comein the form of apalications &.g aecounting, packages such as Pastel, spreadsheet packages such as Excel ete Advantages + Speed electronic processing fast ard data can be quickly stored and retrieved + Efficient. source document can be quickly stored and retrieved cheaply they also accupy little physical space + Reduceslabour costs + Can carry out repetitive tasks quickly without getting bored or making mistakes + Accuracy isimproved for example 2 bar code is scanned and the price of the item appears on the screen andis {quickly Incorporated into the sales figure with no manual intervention + Implementing corrections is trivial + Ibis adaptable a single change can be quickly applied to the entire data set + Principles can be applied retroactively to all data instantly for example a change to straight depreciation can be applied to past data for comparison Disadvantages + Electronic data processing can require expensive upfront costs although technologies such as cloud computing hhas done much to reduce this + Expensive software licencing costs + Requires training which con be time consuming ard expensive + Results in redundant layoF of some beokkeepers and record keeping personnel + Can be expensive to maintain the systems + Thesystems are vulnerable to hacking, malware and powercuts NB Withits advantages and dueto the fact that most ofits advantages can be ezsily mitigated electronic processing, tobe preferred, Infact there is very litle use case for manual processing in the real world exceptin very small businesses such as vendors ZIMSEC O Lev | Principles of Accounts Notes: Source Documents and their uses + Accounting isthe systematic reoording of fnancial trnesetins in manstiry terms + Everytime @ business makes transaction in the eal world « paper trai created + The paper is known aslare 8 soures decument(e) + Asouroe documents the original document tht shows that transection tok place + For example the evidence thats eash sale took place might bein the form of cash receipt eopy inthe receipts book. + Typical is transaction involves ouside paris ie, people who are not pt ofthe ent, bath the enty and the outside party obisin copies ofthe transaction. For example the business purchases goods for resale on cre rom a trader tke Mohammed Musa, the business cbsins an invsice showing the emount of gods purchased and Mchammed Mussa retains a capy ofthe invoice for their ‘own accounting while the business can use their own copy ofthe invoice to record @ purchases transaction inthe books of accounts. + Subsequently ift a later stage the business makes a payment towards that purchase they wll sive a raceipt as a proof of payment ‘which they can also use as evidence inthe books to record the trensaction + Original documents weusly show the folowing information + The dt of he traction + The amounlamounts involved + The peopletbusinesses/prtes involved in the transaction. + Avreferenoe number fer example an Invi of Receipt number that ean be used to tase the transaction + description or summary details ofthe transaction for example: Sales, deposit to + Souree doeumants shoul be kept and retuned fer future reference and fer aust purposes snes ausitorsoftan do a sample check of ‘source dacumentsin order to determine whether the eocouns of @ business show a tue and fer value of the business. + Common source documents include: invoices credit note. debit note,chaque voucher, receipt, bank ststements and statements of ‘secounis, These have been extensively looked atin the commerce notes cick on esch ta reed more about it Importance and use of source documents in accounts + They ec as proof io show thet the transaction recorded inthe books of accounts hes occured + Thay show the amount. dete, detls and nature ofthe transaction as wall asthe peoplesbusiness/paras involved + Are used in cect transactions e.g, crit sles (when they sre issued to customers and the business reins its own copy) and crect purchases. + They ere used to record crac sles, cect purchases, the purchase of assets on crecit andthe sale of assets on cect + Cracit sles invoioes are racorded in the Sales Journal Credit Purchases are recorded in the Purchases Journal and the sling and buying of assets i recorded in the General Journ + Inallthese sates an invoice acts asthe souree document Cea Note + Is iseued by & supplier tothe customer when they have overcharged the customer ar when, + The customer has retumed goods to the supple. + For example when the business retums damaged goods ts the supplier (Purchases Retums/Retums Outward) the suppl issues & ‘rest not to the business andthe transection is recorded in the Purchases Jour + fs consumers for some reason dssatisiad with the goods sldto him by the business end retums them. The business wll ssue hiner wih a credt note end the transaction wll be recorded in the Ssles Returns Journal + the customer was overcharged then hese is issued wih credit note end tha transection wil be recorded inthe Salas Journal + Inallthese cases the credit note acs ase source decument Debst Note + Is issued by the supplier whan they undercharged @ customer. + the business was undercharged they will eosive a debit note rom the supplier and thay willuse histo reoord the transaction inthe Purcheses Jour. + Conversely ifthe business undercharged a customer they wlssue 8 debi order to that customer and make adjustments in the Sales Journal Shecue + Cheques and cheque counterols are used to recor all bank ransactons inthe Seles Journ Purchases Journsl General Jour ‘and the Gash Book, + These wil fypcaly include payments tosupplers and other oreditors, recip rom customers and other recevablesidebtors, ‘cancelled cheques and bounoed checks Vouchers + At ies veuehars ae used insted! af exzh o make purchases for example ful purchases. + Insuoh instances they are used in much the same way as cheques as evidence of payment fr goods and services end recorded in the proper origins book as such + For example a sale io 2 customer wil be recorded inthe Cash Book as 2 sale + They ae also used by customers to getdeals and special ccounts in which case they are recorded in the Cash Bockin the Discount Allowed and Dsseunt Receive eslume. Reosiots + Are used as evidence of cash payments and cash rece Ifa generl cazh paymentis made the tansotin is recorded in the Cazh Book and Ganeral Jeumsl + Inthe event of «cach sale the transaction is alco reoordad inthe Cashbook and General Jou + a customer sets their account using cash the transaction is recorded inthe Cash Book ard Sales Ledger + lfthe business pays amounts owed io their suppliers using cash te transaction is recorded inthe Cash Bok and the Purchases ledger. + however itis each purchase the ammount ar recone inthe Ganeral Jouml and the Cath Beak, Bonk Statements + Areiissved by the benk to the business, = They are used fo update the Cash Book and to create @ Sank Reconciliation statement ‘Statement of Accounts + Are igtued te the businass by thele suppliers and ethar eresitors. + They era used fo updite the Purchases Journal and + to do e Purchases Ledger Reconciliation. NB.These are by no means the only source documents there are others including Ar Waybils, Bills of Exchange etc. ZIMSEC O Level Principles of Accounts Notes: Books of Original Entry + These ae the books in which transactions are st recorded for example when a cra see is made + Thay ae also know as subsiiry boks + When a transaction takes place in the business itis often important and imperative to record as much details about a transection as possible + Theres separate book fr each kind oftansecon. + The nature of a transection determines which book itis recorded into. + Sales er recorded in their own book, Puchsses in another and Cashin yet another and goon + The following dels re recorded inthe Books of Original entry + The date ofthe transaction-the transactions ere grouped and arranged aocording to their dates. + Adela column where the dels ofthe transaction ae recorded + Aalocolurm where an entry which points to the where the infomation is reeoded in he ledger for exemple an the soon umber inthe SelesPurchases Ledger wher the informations reorded +The monetary column where the tensaction smount is rcorded + Books of originlenty ae also krawn es ‘aural or“dy book" + The other book of orginal ents simply known esa joumal” + The Cash Books special book of riginal ent. + The names aural (synonym for dary) ard dey bck reflects the use ofthe books fr memorande purposes within the organisation i, rensctions ere recorded andy today basis, + Typical businesses use te folowing books of orignal ent + The Sales JoumalSeles Day Book force sole rensactons “The Purchases Jounal/Purchases Day Book-or ered purchases +The Returns Outwards Journal Retums Outwards Day Bock/Purcheses Retums Joumal(Furcheses Retums Day Bock)Mor Purchesesrelums (Retums outwards) + The Retums Ivars JourelRetums inwards Day book)’Sles Returns JouraSles Day Bock}o record Seles RetuRetuns Irwards + Cash Book for cash and bank related payments and receipts + The Joumal whichis used for everthing eles thet does rat have a day bank sbave + Afr entries have bean madi the books of orignal entry they are then summrised and entered into accounts kept in vrious ‘corresponding ledgers folowing the double entry principle. + Each seperate ledger is kept by a ofierent bookkeeper to ease the workload and as contol mesure against erors and fraud The Double Enty Concept INTRODUCTION Se ‘You need to pay close attention because this is where the accounting part in accounting begins. This is the basic rule in accounting which states that any accounting transaction should be recorded twice Every debit should have e corresponding credit end every credit should have a corresponding credit No matter the case,there are always two sides or aspects to every financial transaction @ debit and a credit In accounts you should always credit the giver and debit the receiver. Often tim he receiver and the giver are not actual persons but “accounts” or representations for example business might an account for J. imu but can alze havea Wages account where they cecord all the wages payments they make to their employees. An account thereloreis a collection of summarised financial transaction of similar class, category and nature or pertaining to the same persan, entity oF expense, revenue, liality asset ete The fist thing you need to do when recording transaction ito identily the accounts involved Identify which accountis giving and therefore must be credited Next identify the account receiving which therefore must be debited “The identify the effective amounts involved int the transaction. Below are some of the most business transactions that you will encounter during your course. Wustration of the double entry principle. + M. Mukoy! started a business by depositing a cheque of $25 000 inte the business bank account Account to be debited: 8:1 Account to be credited: Capits (owner's) name in his/her own book of accounts. The proprietor’s stake in the business is always represented by the Capital account which is almost always Creditect except in instances that are beyond the scope of Ordinary Level accounts. Amount involved:$25 000 Bample2 Cash Purchases Goods (intended for resale) are bought on cash for $1 500 Account to be credited: (>: Amount involved: 51.500 ‘You should never confuse the Purchases account ( which always has a debited balance) and the Purchases (Ledger) Central account which will be examined laterin your studies = Amount invotved: 5800 + Amount involved: 55 000 z 5 - 9, 40, + You are required to.open the asset and liability and capital accounts and record the Following transactions for June 20%8 in the records ef T. Moyo. 20x8 June 1 Started business with $12,000 in cash. 2 Paid $11 700 of the opening cash into. bank account for the business. 5 Bought office furniture on credit from Musorowegome Ltd for $1 900. 8 Bought a van paying by cheque $5 250, 12 Bought equipment from Mutape and Sons on credit $2 300. 18 Returned faulty office furniture costing $120 to Dream Ltd, 25 Sold some of the equipment for $200 cash, 25 Paid amount owing to Musorowegamo Ltd $1 780 by cheque. 28 Took $130 out of the bank and added tocash 30 E Makandiwa lent us $4 000~ giving us the money by cheque. + Always remember the following steps, + The first step is to identity the accounts involved, + The second step is to identify the account "Receiving" and therefore is to be debited, + The third step isto identify the account which is “giving” and therefore Is to be credited, += With practice you can become more proficient and will not need this checklist. Solution 2 ame 28June 26.June 28.June s0June earn Bank office Furniture Equipment Nusexowegomo Nusexowegomo cosh Banke pete cash musoromenorns Mutspe and Sons Office Furniture Equipment eank eank E Makenalives si1700 $1800 $5250 $2300 siz0 200 sira0 sis0 $4000 ‘Anexample of journal enuies. magecredit Fank Wood's Business Accounting b ZIMSEC O Level Principles of Accounts Notes: The General Journal ‘Asalieady sad there are several bocks of Prime ntry namely: + The Sales Day 800k + The Purchases Day Book + The Returrs inwards Day Beok + The Returrs Outwards Day Book + The Cash Bock + Eechaf these books is devoted toa particule typeof transection. For example all Purchases returns are ecarded inthe Returns Outwards Day Book. + There ae, however othe types o transactions which do not passthrough these books + These transactions are much rarer in businesses when compared to those transactions which ae recordedin the above books, + These wansactions are recorded inthe Journal. + The Journal is also known as the General Journal or Jounal Proper. + This book acts as a diery forall these the transactions belore they are transferred tothe General Lede + For each transaction refoliowing are record: 1. The date: 2. The name of account(s) to be debited and the amok (3) 3. The name of the account{s) © be credited and the amount(s) 4. Adescription and explanation of the transaction (this is called 2 narrative) 5. Afalio reference to the source documents giving proof of the transection + Using. journal prevents fraud and eors. Uses of the Journat + Some ofthe main uses of the Journal are sted below 1 The purchase and sale of fixecl assets on credit. 2 Writing off bad debts 8 3 The correction ofertas in the ledger accounts. BL 4 Openingentries, These are the entries needled to open anew set of books. & 5 Aaljustments to any of the entries in the ledgers. NB-This is not an exhaustive lst ‘The layout of a journal ‘The Journal ‘Date | Details rouio | Or | ‘The name of the account to be debited. ‘The name of the account to be credited. The narrative. The layout ofa journal. image credit Frank Wood's Business Accounting 1 + Theirs ine ecords the account to be debited + Thesecond line records the account to bedebited. + Thefinal ine provides a summary of the transaction and what transpired. + The journal isnot partof the double entry system but rather acts as a dary + Once an entry has been made it is recorded into the relevant accounts in the General Ledger.

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