ACCOUNTING SYSTEM IN PRIMARY HEALTH

CARE
COURSE CODE: CHE 263

DURATION 15 hours(1hour Lecture, 2 hours practical)

COURSE DESCRIPTION

Accounting measures process and communicates financial information about an

organization’s economic activities including the primary health centres. It also
conveys this information to a variety of users including investors, creditors,
management, and regulators.

GOAL This course is designed to equip the student with

the knowledge and skills to enable him/her operate
a simple accounting system.

GENERAL OBJECTIVES

At the end of the Course, the learners should be able to:

1.0 Describe the Basic Principles of Accounting Systems

2.0 Discuss the Difference between Government and Commercial
Accounting Procedures
3.0 Identify the various Books used in Accounting
UNIT 1:
4.0 Discuss the Concept of Budgeting
TOPIC: DESCRIBE THE BASIC PRINCIPLES OF ACCOUNTING
SYSTEMS

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INSTRUCTIONAL MATERIALS

- Flip Chart
- White Board
- Poster with diagram of Ear, Nose and Throat

TEACHING METHOD

- Lecture
- Demonstration
- Group Discussion using Buzz
- Brainstorming/mind mapping

ASSESSMENT

- Assignment – Take home/group

- Quiz
- Multiple Choice Question

LEARNING OBJECTIVES-

By the end of this lesson the students should be able to:

1.1 Define Accounting Systems in PHC

1.2 Describe Principles of Accounting

1.3 Describe Types of Money

1.1 DEFINE ACCOUNTING SYSTEMS IN PHC

Definition of Accounting
Accounting, like many other subjects, has been defined by many individuals and
institutions from different perspectives. However, what is clear from all those definitions
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is that accounting involves the provisior1 of information that guides decision making by
various user groups.

The American Institute of Certified Public Accountants (AIPCA, 1961) defines

accounting as “the art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least, of a financial
character, and interpreting the result thereof”.

Meigs, Meigs, Bettner and Whittington (1996) view accounting as simply “the means by
which we measure and describe the results of economic activities”. The Institute of
Chartered Accountants of Nigeria (ICAN, 2006), defines accounting as “the process of
obtaining, classifying, summarizing, reporting, interpreting and presenting financial
information in a manner that will facilitate informed decisions by users of the
information”.

Igben (2009) defines accounting as “the process of collecting, recording, presenting and
analyzing/interpreting financial information for the users of financial statements”.

The definition of accounting, which has relatively enjoyed greater acceptability among
accounting scholars, perhaps than any other definition, is the one given by the American
Accounting Association-AAA- in 1966, which defined accounting as the process of
identifying, measuring and communicating economic information to permit informed
judgments and decisions by the users of the information. This definition echoes the fact
that the fundamental objective of accounting is the provision of timely, relevant, reliable,
adequate, understandable, and comparable information to guide various decisions
(economic. social, developmental and political) by the users of the information.

From all the above given definitions, three key phases can be identified:
(i) Data Collection Phase: This phase has to do with obtaining details of financial
transactions from source documents (invoices, receipts, payment vouchers etc.) as
they occur.

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 (ii) Recording Phase: Here, the accountant will classify and summarize transactions
into meaningful groups and record them in relevant books of accounts (journals,
cash books and ledgers).
(iii) Interpretation Phase: Finally, the transactions will be presented and
communicated as information to those who need them. In doing this, the
accountant will analyze and interpret the information in a manner that will make it
comprehensible for the users of the information, who in turn, can take appropriate
decisions.

Definition of Book-Keeping
Meigs, Meigs, Bettner and Whittington (1996) see book-keeping as the clerical side of
accounting, as it has to do with recording of routine transactions and day to day record
keeping. Wood and Sangster (2009) define book-keeping as the process of recording data
relating to an accounting transaction in the accounting books.

The Association of Accountancy Bodies in West Africa (ABWA, 2009) also see book-keeping as
the recording phase of accounting, as it involves the classification and recording of
business transactions in the books of accounts.

Book-keeping from the definitions given, can be clearly seen to involve only the
recording phase of accounting. The major processes involved in book-keeping are:
(i) The classification of business transactions using source documents.
(ii) Recording of classified transactions in appropriate subsidiary books or books of
prime entry.
(iii) Posting of entries from subsidiary books to the ledger.
(iv) Extraction of the trial balance.

The Differences between Book-Keeping and Accounting

1. Book-keeping is the act of recording and maintaining the classified records for
reference.

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2. Accounting deals with the act of analyzing, interpreting and communicating the
results so arrived at to its users for a decision making eg. Management, directors
and shareholders (or owner managers).
It is however, important to note that one cannot do without the other as the process is
such that the later evolves from the formers. As such they relate to one another.

Origin of Book Keeping and Accounting System

Accounting, as a record keeping process, has evolved over many centuries to serve the
changing social and economic needs of society. Book-keeping and accounting started
long time ago, though the exact date is not known, there is evidence to suggest that they
originated right from the time people started having financial dealings among one
another. Financial records keeping is thought to have begun in about 4000 B.C. in the
ancient kingdoms of Babylonia, Summeria and Assyria. Clay tablets were used in the
Babylonian Empire to record various facts. Many of these records contained lists of
events as they occurred or lists of goods belonging to an individual or estate. Similar
types of records have also been found describing business activities in ancient Greece,
Egypt, and Rome. All these early records contained mostly lists of inventories of goods
and debts, later records began to reflect a concern for computing profit and loss from the
ventures. Although these early records are interesting, they add little insight in to the
development of modern day accounting, which is based on a double entry method.

The crucial event in accounting history was the introduction of “Double Entry Book-
Keeping” which consisted of the practices employed by the merchants of the Italian city
states during the 15th century, which began during the 13th and 14th centuries in several
trading centres in Northern Italy. The main principles of the “Method of Venice” as it
was then known were described by a Franciscan, by name Luca Pacioli, a mathematician,
a teacher and a scholar at University for most of his life. Luca Pacioli published a book
entitled “Summa de Arithmetica, Geometrica, Proportioni et Proportionalita” (i.e.
Everything about Arithmetic, Geometry, Proportions and Proportionalities) in Venice in
1494. Though the book is essentially on mathematics, it included a section on double
entry book-keeping called “particularis de computis et scriptures” (i.e. details of
accounting and recording). In the book, Pacioli described three wait books of accounts:
the waste book (rough notes showing transactions), the journal and the ledger. Those who

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are familiar with the manual banking operations can recalled the waste book, were all
vouchers for a day’s transactions are collated in a bank. Pacioli opined that every
accounting transaction involves two things: gaining and losing of value. And, like an
algebraic expression (which is solved by performing the same operation on both sides of
the equality sign, accounting transaction is solve by debiting one account (the receiver of
value) and crediting another account (the giver of value). By tension, this means that the
total assets of a business should equal to the sum of its capital and liabilities.

In the late 15th Century, the science of recording and measurement of economic
information rapidly developed under pressures brought about by accelerated
development in the technological and economic fields. By then, the influence of Italy on
the accounting profession has dwindled almost to the point of insignificance. Much of
the current thinking in the profession is now mainly dictated by two countries; the
United Kingdom (UK) and the United States of America (USA).

The introduction of double entry is therefore an important event that marked a turning
point in the history of accounting, which deserves a significant position in the annals of
accounting history. However, as a result of the dynamism of accounting, being mostly
influenced by the volatility of its environment, socio-cultural and otherwise, accounting
history is a continuous exercise that seems to have no foreseeable end.

The Industrial Revolution in Europe during the eighteenth and nineteenth centuries
produced many significant social and economic changes, including the automation of
production (i.e. a change from the handicraft production to factory system). The factory
system was based on the use of machinery and equipment for mass production.
Relatively, large industrial and commercial outfits developed, requiring large investments
of capital, many of which were incorporated as limited liability companies (i.e. joint
stock companies, as they were then called), given them separate legal personalities, quite
distinct and separate from their shareholders. Large capital requirements by companies
necessitated the separations of ownerships from management. This brought about the
need for the periodic reporting of results of operations and financial positions of
companies to their owners as opposed to the venture system. The stewards (managers of

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resources) rendered periodic accounts of their stewardship as a demonstration of
accountability. It is this practice that has metamorphosed into the preparation and
presentation of financial statements by companies today.

The extra-ordinary expansion of business that was witnessed during the industrial
revolution which led to the evolution of great corporations was a phenomenon common
to America, England and Germany. It became necessary at his juncture for managers
to report to the owners of the business their activities during the period under review.
Such reports would include:
i) How the financial resources of the business have been invested during the period.
ii) The profit earned or loss incurred during the period.
iii) The assets, liabilities and owners’ equity at the end of the period under review.

Financial information was not only then needed by management but also by different
categories of users, including shareholders, creditors and government, among other for
their decisions making. This development also necessitated and brought about the
statutory audits of companies by independent but competent auditors who attest to the
truth and fairness of financial statements in order to lend more credence to them. As a
result, accounting gradually began to serve as a communication process, as well as, a
means of keeping records.

Similarly, the emergence of management accounting is associated with the advent of

industrial capitalism as a result of the industrial revolution. The emergence of
management accounting was necessitated by the need to develop an accounting technique
that would assist in the management of companies. Management needed much more
detailed and timely accounting information than the summarized results often found in
financial statements. As a result of mass production, it became imperative for
management of corporations to device costing techniques that could be applied in
determining cost of production which would serve as guide in decisions making,
particularly in the areas of pricing and cost control, inventory valuation, determination of
cost of product etc. Management accounting developed further, as a result of the
scientific management movement by Fredrick Winslow Taylor.

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 Furthermore, the development of computer and Information and Communication
Technology along with it, marked yet another important point in the history of
accounting. Like other social, environmental or technological changes, the development
of computer has also impacted on accounting profession. The emergence of computers
has refined the procedures for applications of earlier developed accounting principles and
has significantly facilitated accounting practice, which facilitate timely and accurate
processing and communication of accounting information to various user groups.

Roles of Accounting
Accounting happens to be one field of study without which the organization would not be
able to carry on for a long time without crumbling, and that is why it is popularly
referred to as the “language of business”. The following are some of the roles of
Accounting:
(i) Supports Management Planning and Decisions: Accounting provides adequate flow
of essential financial data within the organization on the one hand, and between the
organization and its wider environment (i.e. owners, government, suppliers, leaders,
etc.) on the other hand which helps to support management planning and decisions.
(ii) Promotes of Efficiency: Accounting’s main strength lies in its ability to promote
efficiency through providing periodic information which improves decisions and
judgments thereby ensuring the usage of fewer resources in the attainment of desired
objectives.
(iii) Ensures regular flow on information: The periodic provision of information about
organization’s performance among various stakeholders assists in helping them to take
informed judgments and decisions at a reasonable cost concerning their stake in the
business. Similarly, Accounting also provides information (economic or financial)
which may be put to different uses by various groups of interested persons.
(iv) Enhances budget and budgetary control: Accounting provides futuristic accounting
information (through estimates and projection i.e. budgets) which assist management in
budget and budgetary control.

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(v) Determination of results of operations: Accounting helps in the preparation of financial
statements which allow a business to accurately determine the profit or loss for a given
period of time.
(vi) Reduce wastages and Fraud: Accounting also assists management with the aid of
relevant information to curb or eliminate wastages and aids in investigating frauds
through periodic audits.
(vii) Enables Determination of Tax Liability: Accounting provides information which helps
in accurate determination of tax liability of business to the government.
(viii) Enhances financial administration and treasury management: Accounting provides
information which aid in taking financing decisions, investment decisions and dividend
decisions in a firm. Similarly provides a platform for treasury management.
(ix) Provides Information on firm’s financial health: Information provided by the
accounting system helps in determining the financial health of a business.
(x) Aids performance evaluation: Accounting provides information which serve as the
basis for various performance evaluations including determination of liquidity, gearing,
capital structure, profitability, activity, investment and overall performance of a firm. It
also facilitates responsibility accounting by providing information on the basis of which
individuals’ and units’ performance can be evaluated.

Accounting Concept

This refers to those basic assumptions or conditions upon which the science of
Accounting is based. They are usually rules and conventions that lay down the way in
which activities of a business are recorded. These concepts are:
1) Entity Concept: This concept states that every economic unit, regardless of its
legal form of existence, is treated as a separate entity from parties having
propriety or economic interest in it. In Accounting, a business organization is
considered as a separate entity from its proprietor(s). This concept is applicable to
all forms of business organizations.
2) Going-Concern Concept: This is the assumption that a business unit will
continue to operate into perpetuity; that is, the business is not expected to
liquidate in the foreseeable future.

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 3) Periodicity Concept: According to this concept, the life of the business is divided
into appropriate periods for the purpose of determining its results of operations. In
accounting, such a segment or time interval is called “accounting period”, and it is
usually a year. Though, a business organization may produce quarterly or half
yearly abridge financial statement, before the end of its financial year, for the
purposes of planning, performance evaluation and control.
4) Realization Concept: This concept states that revenue is recognized when
transaction is completed, whether payment is received or not, that is immaterial.
For example is considered complete at the point when the property in goods
passes to the buyer and he/she becomes legally liable to pay.
5) Matching Concept: This concept states that all the revenue earned and all the
expenses incurred in generating the revenue should be matched together and
reported for the period, with a view to determining the net financial position of
the business. Thus, all expenses incurred (whether they are actually paid for or
not) should be match against the revenue earned (whether they are actually
received or not).
6) Historical Cost Concept: This concept states that the basis for initial accounting
recognition of all assets acquisitions, services rendered or received, expenses
incurred, creditors and owners’ interests is the actual cost for the transaction(s).
7) Money Measurement: This concept states that accounting is only concern with
those facts that can be measured in money terms with fair degree of accuracy and
objective.
8) Dual Aspect Concept: This concept states that there are two aspects of
accounting; one is represented by the resources owned by a business and the other
by the claim against them. Double entry is therefore meant to uphold this concept.

Accounting Conventions

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These are approaches which are followed by the Accountant in the application of the
accounting concepts. These include:

1) Conservatism/Prudence: This convention states that greater care should be taken in

the recognition of profit and all known expenses, even those that cannot be exactly
determined, should be adequately provided for in the accounts. In other words, when
the Accountant is faced with the problem of choice between alternative courses of
action, he should opt for a method that would understate, rather than overstate the
financial position of the business.

2) Materiality: The principle holds that only items of material values are accorded their
strict accounting treatment. In other words, materiality may affect the way an item is
reported in the books of account. An item is said to be material if its disclosure or
non-disclosure can affect the judgments to be reached by a user on the financial
statements.
3) Consistency Concept: This concept holds that when an enterprise has adopted a
method of treating an item or accounting transactions in the books of accounts, it
should continue to use that method in subsequent periods so that comparison of
accounting figures overtime could be possible. Thus, it follows therefore that, where
it becomes necessary for any method to be change, the Accountant should report the
reasons for such change and its implications on the financial statements of the
business.

4) Substance over Form: This convention states that business transactions should be
accounted for and presented in accordance with their substance and financial reality
and not necessarily with their legal form. In other words, where there is conflict
between the financial reality of a transaction and its legal form, the financial reality
(i.e. the substance) should take precedence over the legal form.

5) Objectivity/Fairness: According to this convention, data presented on the financial

statements should be supported by verifiable evidence and demands the
independence of judgment on the part of the Accountant preparing the financial

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 statements. Similarly, it is required that accounting reports should be prepared not to
favour any group or segment of society.
1.2 DESCRIBE PRINCIPLES OF ACCOUNTING

Principle of Record Keeping

Accounting is about record keeping of financial transactions which are to be summarized
at the end of a period, to show the performance of business for the period and the
financial position of the business. The two means of record-keeping used in accounting
are Journal (or Day Book) and the Ledger. During the data collection phase, relevant
details relating to financial transactions are captured as they occur. The details are
captured from source documents, including invoice, bills, debit notes, receipts, vouchers,
credit notes etc. An accounting document will have the following key information: date
of the transaction(s); brief details about or description of the transaction(s); amount of the
transaction in money terms; and the signature of the authorizing /approving officer.

The recording phase immediately follows the data collection phase. During this phase,
the information on the source documents is recorded in the books of accounts. The most
important book of accounts is the Ledger. The ledger is the book that contains all the
accounts for the transactions of a business. An account is a page (or folio) in the ledger
divided into two equal halves with a vertical line and with a horizontal line on top. The
left-hand side of an account is the debit (Dr.) side while the right hand side is the credit
(Cr.) side. At the top of an account will be the name of the account to which the
transaction relates e.g. Rent Account, Salaries Account, Motor Vehicles Account etc. The
word account is sometimes abbreviated to A/C.

Principle of Double Entry

Transactions are recorded (or posted) to the accounts in line with double-entry principle.
This principle requires the dual effect (i.e. double effect of every transaction) to be
recorded by passing a debit entry to one account and a corresponding credit entry to
another account. This is why it is sometimes said that: “for every debit entry, there is a
corresponding credit entry and vice versa”.

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The double entry principle states that “for every debit entry, there must be a
corresponding credit entry and vice-versa”. The double entry system employs the
concept of debit (Dr.) and credit (Cr.). understand this system of recording, it is useful to
think in terms of what is gained and what is lost as a result of each transaction e.g. If
goods were purchased for cash; goods are gained (received) while cash is lost (given);
thus, goods a/c called purchases a/c will receive a debit, while cash account will receive
the corresponding credit entry.

In order to apply the double-entry principle, it is necessary to first identify the two
accounts required. Having done this, the next step is to identify the account which is
receiving the value of the transaction and the account which is giving the value. It should
be noted that for every transaction, one account is receiving value and other giving value.
Having identified the receiver and giver of the value, a debit entry shall be posted to the
account which is receiving value, while credit entry shall be posted to the account which
is giving value. This is the double-entry rule which is sometimes expressed as: “debit the
receiver and credit the giver”. The double entry principles/rules may be broken down into
three, as follows:

1. Dr Receiver
Cr Giver

2. Dr Assets
Cr Liabilities and Capital
(Where the value is decreasing with the transaction, reverse is the case)

3. Dr Expenses and Losses

Cr Gains and Income
(Where the value is decreasing with the transaction, reverse is the case)

Qualities of Good Accounting Information

i) Relevance: It must include enough facts to satisfy the need of the user.

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 ii) Reliability: The source of information must be verifiable, unbiased and free from
error and one source of evidence must corroborate the other.
iii) Comparability: There should be no change in the basis for the preparation of
accounting information from period to period so that it will be easy to compare
the result of operations over some accounting periods.
iv) Timeliness: Accounting information must be made available early enough for its
use, if not; the information will be rendered not useful for the purpose it is
required for.

v) Objectivity: There must be no bias, window dressing or subjective judgments in

the presentation of accounting information. Objectivity includes the ability to
trace transactions to documentary evidence and also compliance with required
regulations in its presentation.
vi) Comprehensiveness: Accounting information should contain enough details for
good understanding. The detail must neither be too little, nor too much.

Classification of Accounts
There are two broad classifications of accounts. These are Personal Accounts and
Impersonal Accounts.
1. Personal accounts; are the accounts of persons, natural or corporate, who have business
dealings with the organization. The personal accounts comprise debtors’ accounts,
creditors’ accounts, capital account and bank account.
2. Impersonal accounts; are the accounts of non-persons. Impersonal accounts are further
subdivided into real accounts and nominal accounts. Real accounts relate to tangible
assets such as buildings, furniture and stock. Nominal accounts relate to revenue/income,
expenses and intangibles assets. Nominal accounts also includes sales account, discount
received account, rent accounts, and goodwill account.

Users of Accounting Information and their Information Needs

Financial statements provide information regarding the position and performance of a
business, such as its assets, liabilities, equity, income, expenses and cash flow. Users
need this information to make better investment, credit and operational decisions. The

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financial statements are therefore the basis for a wide range of business analysis.
Accounting information allows individuals to understand the financial health and stability
of a business. Companies typically share their accounting information via financial
statements, which help users’ measure performance and make better financial decisions.
Several types of people utilize financial statements, which are generally classified into
two, namely internal and external users.

Internal Users (Primary Users)

Internal users accounting information reside within the reporting company. Accounting
information is presented to internal users usually in the form of management accounts,
budgets, forecasts and financial statements. Internal users are called primary users of
accounting information and they include the following:

(i) Management: Managers or management are the main internal users of

accounting information. Managers need the information for making various
decisions. Managers need the information to protect the property of business from
fraud, mismanagement, to make specific decision, to plan for future, to measure
the performance and take appropriate measures to improve the company results.
They use it to monitor and judge their firm’s performance relative to competitors,
to communicate with external investors, to help judge what financial policies they
should pursue, and evaluate potential new business to acquire as part of their
investment strategy.
(ii) Shareholders/Owners: These are; sole traders, partners and shareholders who
use accounting information to analyze the viability and profitability of their
investment and determine alternative future courses of action. They review the
streams of revenue their businesses bring in as well as the amount of expenses
consumed to decide which opportunities to pursue and which processes to
discontinue.
(iii) Employees: Employees use accounting information to assess company's
profitability and its consequence on their future remuneration and job security.
Employees are interested in the company’s profitability and stability to determine
the ability of the company to pay salaries and other allowances and to assess the

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 possibility of company expansion and career opportunities in the light of the
financial standing of their employer.

External Users (Secondary Users)

External users of accounting information are user groups who lie outside of the company.
This includes the following:
(i) Suppliers: Suppliers need to assess the financial health and payment history of a
company when selling on credit payment terms with a view to determining credit
worthiness, the extent of credit and terms of sales.
(ii) Investors: Investors use accounting information to assess the feasibility of
investing in the company. Investors want to make sure they can earn a reasonable
return on their investment before they commit any financial resources to the
company. Investors providing start-up capital ensure the viability of companies
seeking funding by reviewing their long-term financial outlook. Buyers of stocks
and bonds analyzed financial statements to help make trading decisions that
provide profitable returns.
(iii) Barkers/Lenders: Barkers use them in deciding whether to extend a loan to a
customer and how to determine the terms of the loan. Lenders of funds such as
banks and other financial institutions are interested in the company’s ability to
pay liabilities upon maturity (solvency). Investment bankers use them as a basis
for valuing and analyzing prospective buyouts, mergers and acquisitions.
(iv) Regulatory Agencies: Government needs the information for various regulatory
purposes. They are interested in the accounting information on account of
taxation, labor and corporate laws. Different agencies like FIRS, CBN, SEC,
NDIC, CAC, FRCN, IASB, IOSCO, among other use the information for framing
policies for the betterment of the economy. Regulatory agencies use accounting
information to assess whether the company's disclosure of accounting information
is in accordance with the rules and regulations set in order to protect the interests
of the stakeholders who rely on such information in forming their decisions, to
carry out their regulatory functions and to determining the credibility of the tax
returns filed on behalf of the company.
(v) Customers: Customers use accounting information to assess the financial
position of its suppliers which is necessary for them to maintain a stable source of
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 supply in the long term. Customers are interested to judge the profitability and
solvency of the business for knowing the ability of the company to survive so that
they are supplied with to goods on regular basis. Strong financial background also
implies quality products and more money on innovation of products.
(vi) Creditors: Creditors are the person who owes money to the business. Both short
term and long term creditors need the information. Long term creditors are
interested in both the solvency and liquidity of the business. On the other hand
short term creditors are interested to determine whether the amount owing to them
will be paid when due.
(vii) General Public: Anyone outside the company such as researchers, students,
analysts and others are interested in the financial statements of a company for
some valid reason including corporate social responsibility, environmental
pollution control, extending the frontier and various competitive analyses.
Securities analysts use financial statements to rate and value companies they
recommend to their clients.

1.3 DESCRIBE TYPES OF MONEY

Introduction
In this unit, we learn about our financial system and its importance to our economy
The money supply is classified by its accessibility. The cash in our wallet or purse being the
most accessible form of money
We will also learn about how banks create money. Yes, banks actually create new money from
deposits they receive!
Concept 1: Money
Before we had money, people engaged in barter. Barter is the direct exchange of one good for
another, without the use of money.
Barter continues to exist today, especially within countries with unstable currency.
Have you ever bartered?
For example, if a friend helps you repair your car and in return you help him paint his house you
are engaging in bart

The Concept of Money

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In economics money is defined as an asset (a store of value) which functions as a generally
accepted medium of exchange, i.e., it can be used directly to buy any good offered for sale in the
economy. A note of IOU (a bill of exchange) may also be a medium of exchange, but it is not
generally accepted and is therefore not money. Moreover, the extent to which an IOU is
acceptable in exchange depends on the general state in the economy. In contrast, money is
characterized by being a fully liquid asset. An asset is fully liquid if it can be used directly,
instantly, and without any extra costs or restrictions to make payments.

Definition of Money

Money is defined as anything generally and legally acceptable for exchange of services
and goods.

Through the ages, different items have served different communities as money. These
range from food items (such as salt, corn, or rice) to implements things (such as hoes,
cutlass) to metals such as (copper, iron or gold), and paper money. What is a common
factor about these items was the general acceptability in a particular society of them as a
means of payment.

The Origin of Money

Exchange can take place in the absence of money through a system of trade by barter (the
exchange of goods or services for goods and services). However, this system of
exchange has many problems which include:

i. Lack of unit measurement – There are much kind of goods and services that are
very difficult to measure them equally in relationship to exchange, because of unit
of measurement, e.g exchange sugar Cain with grains.

ii. Lack of double coincide of wants – Trade by barter become cumbersome

because of the problem of lack of double coincidence of wants, for example a
man who had a goats and wants yams may have to spend time to look for a man
that has the need for a goat and has yam. Money is the only common factors that
can avoid this inconvenience, as the seller of goats can sell his goat for money and
use the proceeds any time he wants to use for the item of his interest.

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 iii. Impossibility of future contracts – Wages, salaries, interest or rent which extend
a period of time is contractual arrangements. Even if future contracts were
feasible under barter, the problems of the type of goods the quality and the
quantity etc. that could be used to effect the arrangement were constraints.

iv. Lack of means of storage wealth – it was very difficult to store wealth under
trade by barter. There were problems of space and inability to maintain the
quantity and the quality of the commodities used as money.

In modern society money is use in running a business (capital), and money is everything
in an organization or world, sometime things are quantified in terms of money. Money is
the life wire of every management. Without money management is crumble.

Many services solemnly depend on money for effectiveness and quality service
deliveries. Money in services is managed and control through budgeting and proper
record keeping, for evaluation and references.

Types of Money

There are so many types of money, depending on the society where people decide to
make use of something in form of money. While according to Wikipedia the free
encyclopedia stated that generally there are three (3) types of money namely:

i. Commodity money – This is the type of money that has value or use aside from its
use as money. In late 18 th century use former in the Pennsylvania back Country they
used whisky for money. They buy and sold items by the jug, also in ancient Rome
soldiers were paid in salt.

ii. Representative money – Can be redeemed for something of real value. In the past
most representative money was backed by gold and silver. Countries pegged the
value of their currency to a certain amount of the precious metal and promised to
exchange their currency to a certain amount of the precious metal and promised to
exchange their currency for the metal on demand. In other words if you had a
hundred dollar bill, you could walk into a U.S.A. Mint and exchange your paper for a

19
 hundred of dollar worth of gold. Gold was a real thing with real value. The paper
money had value only because it was redeemable for gold.

iii. Flat money – Is the staff in your wallet which is money because the government says
it is. It is not backed by gold or any other substance of real value as a form of
currency. And its value is thus set by the market force of supply and demand. Just
like everything else. As long as people want dollars they will have value.

If everyone in the world suddenly decided tomorrow that dollar are worthless… Well
then they will be worthless.

But for the purpose of our study in Primary Health Care Accounting

There are two types of money namely:

1. Visible money

2. Invisible money

Visible Money

This is type of money that you can handle with your hands within your possession, which
you can spend when the needs arise, and it is referred to as cash. Example of visible
money is cash.

Invisible Money

This is type of money that is under your possession but you cannot spend it directly unless some
protocols are following. Invisible money includes:

i. Bankdraft
ii. Cheque
iii. Credit card
iv. Bank account.

Qualities of Money

20
For money to perform its functions satisfactorily, it must possess some qualities and
characteristics such as:

1. Generally acceptability – for anything to serve as money it must be generally

accepted by people and society.

2. Durability – It must be capable of being stored for relative long time without losing
its form or value.

3. Divisibility – it must be possible to sub-divide itself into smaller units as payment

have to be made in various values.

4. Portability – Money must capable of being carried about from one place to the other
without difficulties.

5. Homogeneity – this means that one unit of money is identical to another unit of the
same value and can be exchanged for another.

6. Relatively scarcity – money must be relatively scarce once in awhile. It must neither
be too plentiful nor too scarce so that the value can be maintained.

7. Recognition – for anything to serve as money, it must be easily recognizable within

the scarcity in which it is serving as money.

8. Commander of variety – it must bestow on its holder to buy what he wants, when he
wants and where he wants it. Money can be use to buy many different things.

Functions of Money

Money performs a number of roles in an economy, for transactions to take place there
must be the use of money. The most recognized functions of money include:

 Medium of exchange of goods.

 A liquid form of store of value.
 A measurement unit for values of goods, and
 Savings and debts of economic units.
 A discharge of debt, i.e. the final way to repay a loan.

21
 1. Medium for Exchange – A medium is anything which serves as a go-between. It
permits or makes it easier to something to happen. Money is a medium of exchange
because it makes it easier to exchange things – trade things. As a medium of exchange
money helps to overcome some of the problems of trade by barter.

2. Unit or Standard of value – money serves as the standard or unit of valuing things
people automatically compare the values of things in terms of how much money each
thing is worth.

The “unit of value” and “medium of exchange” functions of money are known as primary
functions of money. The primary functions are the functions which money performs at
the present time, - the functions of valuing things and exchanging things now.

The two other functions of money serve the purpose of transferring value from one time
to another. There are called the secondary functions of money – the futures functions of
money.

3. Whenever a person or a business takes on an obligation and agrees to make some

payments, the obligation (debts) is usually stated in monetary terms. The money unit is
usually the most convenient way to express the value of the debts. When money is used
this way, we say that it is functioning as the standard for deferred payments.

4. In its other secondary functions, money serves as a convenient form in which to hold
savings. It is a thing which can be used to “store up value” for the future. When you
hold the value of your assets in the form of money, your money is serving as a store of
value.

STUDENT
ACTIVITY

TOPIC: DESCRIBE THE BASIC PRINCIPLES OF ACCOUNTING SYSTEMS

STUDENT
OUTCOME:
22
At the end of this unit learners should be able to:

1. Define Accounting
2. Describe Principles of Accounting
3. Describe Types of money

TASK:
1. Assignment
2. Quiz (Multiple choice and Essay
questions)
UNIT: 2
3. Group activities

DIFFERENCES BETWEEN GOVERNMENT ACCOUNTING AND

TOPIC: COMMERCIAL ACCOUNTING PROCEDURES

INSTRUCTIONAL MATERIALS

- Flip Chart
- White Board
- Poster with diagram of Ear, Nose and Throat

TEACHING METHOD

- Lecture
- Demonstration
- Group Discussion using Buzz
- Brainstorming/mind mapping

ASSESSMENT

- Assignment – Take home/group

- Quiz
23
 - Multiple Choice Question

LEARNING OBJECTIVES-

By the end of this lesson the students should be able to:

Discuss the Differences between Government Accounting and Commercial

Accounting Procedures

GOVERNMENT ACCOUNTING AND COMMERCIAL ACCOUNTING

Introduction
Government accounting and commercial accounting both are primarily concerned with
record keeping of the financial transaction incurred by these institutions during a certain
period. Principally, there is no difference among these two accounting systems, as both
system follows the same rules, same principle for debiting and crediting the transactions.
However, the objectives of government institutions and commercial undertakings are quite
different. Therefore, accounting practices and procedures to be followed by these
institutions, have been designed differently in order to meet their objectives. The objective
of commercial undertakings is to earn profit, the objective of government institutions is to
present the true picture of financial statement of the government offices, which includes
presentation of annual budget, allocation and monitoring the expenditures to insure their
best utilization for public welfare. Therefore, the practices and procedures followed by these
two accounting system are quite different. The points of difference between government
accounting and commercial accounting have been summarized below.

Commercial Accounting
Commercial accounting is defined as the accounting operated by business enterprises, with
an aim to make profit. These business enterprises may be involved in trading or in
manufacturing. Business enterprises engage in profit making ventures, and the capital use

24
 in starting and running the business is contributed by shareholders and some percentage of
the capital may be long or short time loan from Banks, goods manufactured and sold etc.

Government Accounting
Government accounting is define as the type of accounting operated by non-profit
organizations or establishment e.g. the Government accounting are operate by government
ministries both federal, state and local government agencies etc. The government through
the ministries and agencies engage in social services. The course of funds to the ministries is
through allocations from the government, and the government in turn derives its fund from
taxes, investments, stocks, royalties etc. The Government establishments are non-profit
making.

Differences between Government Accounting and Commercial Accounting Procedures

S/NO Government Accounting Commercial Accounting

1. The governmental accounting is regulated Commercial accounting is regulated by the
by laws, rules, regulations and directives trade practices, principles and the prevailing
from the government. They are issued from accounting rules and Commercial accounting
the finance ministry and the planning is used to record transactions in commercial
ministry. organizations.
Government accounting is used to record
transaction that takes place in government
organizations.
2 The course of funds to the ministries is Business enterprises engage in profit making
through allocations from the government, ventures, and the capital use in starting and
and the government in turn derives its fund running the business is contributed by
from taxes, investments, stocks, royalties shareholders and some percentage of the
etc. capital may be long or short time loan from
Banks, goods manufactured and sold etc.
By loan every profit making organization

25
 must pay tax, therefore, external auditor
audits the account and submit the report to
the federal inland revenue to be assessed for
tax payment.
3 Government accounting in no way is related Commercial accounting is concerned with
to show profit or loss of the government profit or loss of the concern. And the types of
office. Government establishments are non- accounting procedures operates are:
profit making therefore, they are not taxed, (a) Personal Account
and the types of accounting procedures (b) Nominal and
operated are: (c) Real Account.
i. Receipt and payment account These are classified accounting to Double
ii. Income and expenditure account Entry principles.
4 Government accounting is normally Commercial accounting is maintained in
maintained in cash basis. accrual basis.
5 Government accounting is maintained Commercial accounting is not necessarily
strictly following the provisions made in bound to follow the finance act and rules. It
finance act and rules. It is rigid. is guided by its internal rules. It is liberal in
practice.
6 Government accounting gives information Commercial accounting provides
concerned to receipt or transfer of funds and information concerning their operating
disposed of government properties. efficiency and performance result along with
financial position of the concern.
7 In government account a separate bank In commercial account, unless necessary,
accounts are operated for each kinds of fund only one account is operated. However,
operated. bank accounts in different banks may be
operated simultaneously.
8 Government accounts are audited by a Commercial accounts are audited by
constituted body constituted by the professional having valid audit license.
government under constitutional law. The
account is not subject to audit by external
auditors, except in an instance where fraud
is implicated, but is usually for internal

26
 consumption.
9 Government accounting is based on Commercial accounts is not rigidly guided
budgeting principle. Thus it is controlled by and controlled by budget. However, some
budget. control by budget is exercised.
10 The accountant or whoever is in charge of The accountant or whoever is in charge of
managing the funds is accountable to the managing the funds is accountable to the
superior officer, or the persons that organization, or the persons that own
provided the funding. company.
11 If there was a left-over of the allocated fund At the end of the year, the organization will
the account will be declared a “Surplus” but prepared a profit and loss account to
if the allocated funds were not enough for determine the profit and loss, and also a
carrying out the intended projects, the balance sheet. The account is published in
account will be declared a “Deficit”. the news paper for the shareholder. The
interest incurred will be shared by the share
holders
12 Governmental accounting has revenues and The commercial accounting has assets and
expenses. Moreover, the assets are treated liabilities.
statistically in records. It has no relationship
with the accounting cycle. However, in the
theory of units, cash makes the accounting
unit assets.
13 The governmental accounting is related to On the other hand, the commercial
the state- developed plan. accounting is related to the main goal of the
institution and activity.
14 The governmental accounting is closer to The commercial accounting represents assets
the public capital in a facility than in assets and liabilities in its balance sheet graded
and liabilities. It faces a main interest for according to its liquidity. There are fixed
cash represented in fund or bank in a lesser assets and circulating ones and fixed
degree than stock and much lesser degree liabilities and circulating ones. The reminder
than assets of the governmental body. They between the circulating assets and the
are registered in statistic records unrelated circulating liabilities expresses public capital
to the accounting operations for the in a corporation.

27
 governmental accounting
15 Governmental accounting, expanses Expanses in the commercial accounting
represent obligation on the credits of the represent the necessary sacrifices to make
governmental body should be spent revenues. The difference between revenue
according to rules, directives and the and expanse is the profit of facility.
regulations regulating the expanse process.
16 In the governmental accounting, calculating Commercial accounting, performance
performance in the governmental programs assessment aims to achieve the greatest profit
aims at achieving service for citizens in a for the institution, and the commercial
better way and at the least cost. The accounting, performance assessment is
performance measure greatly contributes to connected with achieving the greatest flows
improving the services offered to citizens. for the institution. Therefore, it is related to
the increase of revenues and profits and not
performance.
17 The governmental accounting often pursues The commercial accounting applies the
the cash principle in revenues and expenses. maturity principle in its accounting system
Moreover, it may adopt maturity principle for the relation between expanses and
in expanses to display them correctly. revenues in the fiscal year regardless of
However, the cash principle for the collection or spending. As a result, this
revenues along with systematic restrictions facilitates the comparison processes
necessary to confine the due revenues but in necessary to evaluate the performance of the
a way that does not affect the real accounts facility.
for the governmental bodies. The effect of
revenues here in the systematic accounts is
for reminding only and not in accounts
affecting the final account and the budget
credits.

28
 Similarity and Disparity between the Governmental Accounting and the Profit-generated
Corporations

There are some aspects of similarity between the governmental accounting and the profit-
generated corporations. They are shown as follows:

1. Both of them use the concept of the double-entry system (this concept does not exist in
Seif’s Original Budget)

2. Both of them are recorded in journal and posted to the ledger and the subsidiary ledger.
The scientific accounting style in forming accounting structure does not differ from the
governmental accounting about the commercial accounting. Recording is done in
documents of the general journal and it is posted to ledgers or the subsidiary ledgers. In
addition, results are extracted in budget and the final accounts.

3. They prepare the balances of the daily and monthly audit.

4. They have the same classification operations for accounts either in revenues or expanses
in the private sector accounting manual or the typical manual or the unified accounting
system in the governmental bodies divided into sections, groups, items and kinds as it is
in Kuwait and Egypt.
5. Both of them share the same accounting names as expanses for furniture, cars and lands.
All the accounting terms in the governmental or the commercial accounting like
revenues, expanses and cash accounts.
6. The accounting unit in the governmental body similar to that of the accounting unit in the
commercial accounting. Both of them are parts of the economic entity. They use money
in exchange and revenues. The financial systems are similar in both of them. Likewise,
both of them use a cost system similar to the purpose of getting unit cost or the rendered
service.
7. Both of them agree on the concept of the one-year periodical unit of calculating the
business results. This period may differ in the governmental accounting and the

29
 commercial accounting in accordance with the circumstances of each sector and the state
itself. However, both of them agree that the period aspect is often a year.
8. Both of them use money as a calculating unit used in both the governmental accounting
and the commercial accounting. In both of them, the calculating unit is cash as a means
either in the items of the double-entry books or in the final results. This is despite the
reservation in using the theory of units (Seif’s Original Budget). This is due to the fact
that the measuring unit is unit and not the value. In addition, the measuring tool is the
classified unit and not the cash.

STUDENT
ACTIVITY

TOPIC: Discuss the Differences between Government Accounting and Commercial

Accounting Procedures

STUDENT
OUTCOME:

1. Describe Government Accounting

2. Describe Commercial of Accounting
3. Differentiate between government and
commercial accounting

TASK:
4. Assignment
5. Quiz (Multiple choice and Essay
UNIT: 3 questions)
6. Group activities
TOPIC: BOOK KEEPING IN ACCOUNTING

30
INSTRUCTIONAL MATERIALS

- Flip Chart
- White Board
- Poster with diagram of Ear, Nose and Throat

TEACHING METHOD

- Lecture
- Demonstration
- Group Discussion using Buzz
- Brainstorming/mind mapping

ASSESSMENT

- Assignment – Take home/group

- Quiz
- Multiple Choice Question

LEARNING OBJECTIVES-

By the end of this lesson the students should be able to:

3.1 Describe books used in accounting

3.2 Describe double entry Book-Keeping system
3.3 Describe a petty cash Imprest system
3.4 Describe how to order, receive and stock supplies
3.5 Describe how to keep inventory of expendable supplies

3.1 DESCRIBE BOOKS USED IN ACCOUNTING

Subsidiary Books of Account

The books of prime entry; also referred to as the books of original entry or subsidiary
books; are books used to record transactions from source documents in chronological

31
order before posting to the individual ledger accounts. These books are the books in
which transactions are first recorded, and as such, have the following advantages which
the ledger does not have:
i) They record the total of transactions in one place, rather than the individual
accounts.
ii) They provide an explanation of the transactions recorded. i.e. the journal shows
the complete story of a transaction.
iii) They provide records of transactions in chronological order. i.e. sequentially as
they occur.
iv) They help to prevent error, as the total in the book of original entry can be
reconciled with the total in the individual account.

Transactions are not normally posted directly to the ledger. They are normally recorded
first in the journals before the totals are periodically transferred to the ledger. The use of
subsidiary books (otherwise known as journals or day books) prevents the ledger from
containing unnecessary details. In a trading organization, a very large proportion of
transactions relate to credit sales, credit purchases, returns from customers and returns to
suppliers. If these are posted directly to the ledger as they occur, the sales account,
purchases account, returns inwards account and returns outward account respectively will
end up containing too many entries. Apart from the four transactions mentioned above,
another type of transaction that occurs in very large number is the receipt and payment of
money. Again, to prevent the ledger from being cluttered up with too many details, the
bank account and cash account are taken out of the ledger and combined into a subsidiary
book known as the cash book. Other transactions outside the ones mentioned above are
recorded first in Journals before being posted into the ledger. The following subsidiary
books are, therefore, used.
(i) Cash book
(ii) Ledger book
(iii) Imprest or petty cash book
(iv) Sales Day Book
(v) Purchases Day Book
(vi) Returns Inwards Day Book

32
 (vii) Returns Outwards Day Book
(viii) Balance sheet
(ix) Stock account book
(x) Invoice book
(xi) Voucher sheet
(xii) Journal Proper

Other names for subsidiary books are books of original entry, books of prime entry
and Journals. Each subsidiary book will now be considered in greater detail.

3.2 DESCRIBE DOUBLE ENTRY BOOK-KEEPING SYSTEM

Accounting Books and Posting

The principles and techniques in posting books of records or data so generated are vested
in the care of anyone who has been identified and trained as an accounts clerk of
personnel charged with the responsibility of recording all such business transactions.

The main principle involved in this record keeping is the “DOUBLE ENTRY
SYSTEM”, which is the main pivot of the accounting profession without which no
accounting information can be accurately obtained and ascertained as correctly done. It
is also known as the “GOLDEN RULE” in accounting.

As values exchange hands between individuals and organizations in any business

transaction, a record must be kept for reference and to determine the performance of the
organization on the end of a particular period of transaction. It is not possible for an
individual to carry out business with himself. There must be two or more parties
involved. The one giving out value (cash) or services in exchange and the other receiving
the value (cash) or services in exchange. The giver is credited in the book of account,
while the receiver is debited “credit the giver and debit the receiver”.

The principle of double entry therefore, states that “for every debit entry there must be a
corresponding credit entry” verse-versa. Thus for every single transaction made, it must
be recorded twice to complete the double entry. For example, John gave N5000 to Rita
on the account of a business transaction. To record this single item in the books, the

33
 entry must be made in both John and Rita’s account at the same time. Since John gave,
you credit him, and Rita received you debit her e.g

Sales Day Book

The sales day book is the book of original entry that records credit sales. As credit sales
occur, they are listed in the sales day book. The sales journal shows the following:
i) A list of the sales invoice in the order in which they are issued.
ii) The date of issue
iii) Name of the customer
iv) The invoice number
v) The sales ledger page number to which the individual accounts are posted
vi) The net amount of the invoice after deducting trade discount

As credit sales occur, they are listed in the sales day book which is ruled up to show, among
others, the date of the sale, the customer’s name and the amount. The customer’s personal
account is debited while the credit entry to sales account is delayed. At the end of the period
(which may be weekly, monthly, quarterly or any other convenient period), the total of the
sales day book shall be posted to the credit side of sales account in the general ledger. At this
point, the double entry for the credit sales is now complete. The sales day book is not an
account and therefore does not from part of the double-entry records. The use of the sales day
book therefore considerably reduces the number of entries in the sales account. Another
name for the sales day book is sales journal.

The Ledger
The ledger is a book in whose pages accounts are kept. An account, therefore, is page in
the ledger in which transactions of a business are recorded. A typical account has two
sides, the debit (Dr) and the credit (Cr). The left hand side is the debit side, while the
right hand side is the credit side. Both sides are divided by a clear line of demarcation,
with each side ruled to show the Date, Particulars, Folio, and Amount. And, the name of
the account is clearly written at the top middle of the account.

Account Name

34
 Date Particulars Folio Amount Date Particulars Folio Amount

N K N K

(i) Date: This is the date of the transaction.

(ii) Particulars: This is a short description of the transaction, usually the name of the
account containing the corresponding entry.
(iii) Folio: This is the ledger page number of the corresponding account.
(iv) Amount: This is the monetary value of the transaction.
The account is traditionally ruled in ‘T’ form (however, with the advent of computers, the debit
and the credit sides are sometimes brought side-by-side, inside of the ‘T’ form). Thus, the
original or normal ruling of the ledger has been changed by different businesses to suit their
needs. Banks, for example, have the statements of their customers ruled to show the debit, credit
and balance columns all on the right side of the statement. The account is, therefore, balanced up
at the end of each transaction with the bank, to reflect new balance in the account.

In a small business organization, a single ledger book might be kept by the entrepreneur. But, as
the business grows, and transactions increase, it is evident that the business will require many
ledger books to record the numerous transactions that will take place. It is, therefore, usual to
find the ledger in such business being divided into sections. The Sales Ledgers may, for example,
be divided with respect to names alphabetically e.g. A-I, J-R, S-Z.
Importance of the Ledger Accounts
i) They serve as the means of keeping permanent records of assets, liabilities, income
and expenses.
ii) They provide relevant information that is required to prepare the income statement
and the balance sheet.
iii) They give the origin of every transaction and the parties involved.
iv) They show the details of the movement in each account.
v) The trial balance is extracted from the ledger accounts at the end of the accounting
period.

35
Sub-Division of the Ledger
In a large business organization, it may not be convenient and practical to maintain a single
ledger. In the situation, the ledger may be divided into the following:
1. Debtors Ledger or Sales Ledger — this ledger will contain the accounts of the credit
customers i.e. trade debtors.
2. Creditors Ledger or Purchases Ledger — this ledger will contain the accounts of the
credit supplies i.e. trade creditors.
3. General Ledger- this ledger will contain all other accounts except accounts of trade
debtors and trade, creditors. Examples are real accounts (accounts of assets) and nominal
accounts (accounts of expenses, revenue and intangible assets).

The format of the sales journal is depicted below:

Sales Journal
Date Invoice Names & Particulars L/F Details Net Total
No.
₦ ₦

Date column: should reflect the dates of the various transactions during the period.
Invoice number column: shows the invoices issued by the business for goods sold to customers.
The invoices are numbered and should be filed in chronological (numerical) order.
Names and Particulars column: shows the names of the debtors and the items sold to them
with their selling prices. Trade discount is to be deducted from the total value of the goods sold
on credit before arriving at the value or amount receivable from the debtors.
Ledger Folio column: refers interested persons to the corresponding accounts in the ledger.
Details column: shows the analysis made before arriving at the amount receivable from a
customer taking into account the deduction in respect of trade discount.

36
Net Total column: shows the amount receivable from the individual customers and the total to
be posted to sales account.

Purchases Day Book

The same factors which necessitate the use of sales day book for credit sales also make it
necessary to use purchases day book for credit purchases. The credit purchases are listed in the
purchases day book, the suppliers’ personal accounts being credited. The debit entry to purchases
account is delayed until the end of the period. Then the total of the purchases day book is
transferred to the debit of the purchases account thereby completing the double entry for the
credit purchases. The purchases day book, not being an account, is not part of double-entry
records. Its use however saves the purchases account from containing too much detail. The
purchases day book is also known as purchases journal.
Purchases Journal.

Date Details Gross Net Amount

Returns Inwards Day Book

When customers return goods, “credit notes” are issued to the customers indicating that their
personal accounts are credited by reducing the amount being owed by them. In a typical trading
business, the volume of returns from customers is relatively large. In furtherance of the objective
of preventing the ledger from containing unnecessary details, a returns inwards day book is
maintained in which all the credit notes are listed, personal accounts are credited. At the end of
the period determined, the total is posted to the debit of the returns inwards account in the
general ledger thereby completing the double entry for the returns from customers. As with the
two day books already discussed, returns inwards day book is outside the double-entry system.
The returns inwards book is sometimes called returns inwards journal or sales returns day
book.

37
 Returns Inwards Journal

Date Details Gross Net Amount

Returns Outwards Day Book

When goods are returned to suppliers, “debit notes” an issued to them to indicate that the
suppliers’ personal accounts are being debited to reduce the debt being owed to them. These
debit notes are listed in the returns outwards day book while the suppliers’ personal accounts are
debited. The double entry shall be completed when, at the end of the period, the total of the
returns outwards day book is posted to the credit of the returns outwards account in the general
ledger. The return outwards day book is not part of the double-entry records. Alternative names
for this day book are returns outwards journal or purchases returns day book.

Returns Outwards Journal

Date Details Gross Net Amount

Journal Proper/General Journal

This is a subsidiary book in which businesses record the details of transactions that do not
fit into other subsidiary books. The information recorded in the journal about each
transaction includes:
i) The date of the transaction
ii) The debit and credit changes in specific ledger accounts
iii) A brief explanation of the transaction, referred to as narration or narrative. The
narration is required to indicate the purpose and authority of the transaction. It
should however be noted that, a journal entry is not complete without a narration.

38
 Uses of a General Journal
i) Opening entries in the ledger to determine a missing aspect of accounting
equation. e.g. Capital
ii) the purchase and sale of fixed assets on credit
iii) Correction of Book-keeping errors
iv) Issue and Redemption of shares and debentures
v) Transfer from one account to another
vi) Transactions in unusual items like:
(a) Sale or Purchase of assets on credit
(b) Bad debts and Provision for bad and doubtful debts
(c) Depreciation provision
(d) Other provisions
(e) Purchase of new business
(f) End of period adjustment
(xiii) Any other item not recorded in any of the other subsidiary books

The journal proper serves three purposes:

(i) The journal proper is a kind of diary of transactions which fall outside the ones
recorded in other subsidiary books;
(ii) It gives the explanation for each entry through the “narration” attached to each
journal entry; and
(iii) It serves as a book of instruction, in that it tells the book-keeper which account to
debit and which to credit.

Journal Proper or General Journal can take two forms:

Journal
Date Particulars Folio Debit Credit

Narration:

39
 OR
Journal
Date Particulars Folio Debit Credit Narration

Note: The account to be debited is always listed first.

Treatment of Discounts
There are basically two types of discounts;
i) Cash discount
ii) Trade discount

(i) Cash Discount: is the discount given to encourage prompt payment, and is
normally enjoyed at the time of payment of debt. This discount takes two forms:
Discount allowed – is an expense to a business because it is granted to a debtor,
hence, the debtor will be paying less than the amount receivable because of the
discount allowed to him/her.
Discount received – is a gain to the business since the business is paying its
supplier an amount less than the amount payable.
Note: These two accounts affect the cash book and will be fully treated under
cash book.

(ii) Trade Discount: is the discount which is computed in the books of original entry
(journals or day books) and deducted from the value of goods purchased or sold in
order to arrive at the amount receivable or payable. It does not form any part of
the double entry system at all, therefore, it is not posted to the ledger.

Cash Book
In a business organization, the function of receiving and paying out money (either in the
form of cash or cheque) requires a considerable number of entries. If the transactions are
posted directly to the ledger, the bank account and cash accounts will contain too many

40
entries. The objective of decongesting the ledger is carried one step further by taking the
bank account and cash account out of the ledger and combining them in one subsidiary
book called the cash book.

The cash book is a book of account which combines the features of both the day books
and the ledger, as such, it performs a dual role; as transactions which involve cash (cash
purchases, cash sales, settlement of debts or payments of expenses) are recorded in the
cash book as they occur, thereby, making it a book of prime entry. The cash book also
doubles as a ledger account which receives corresponding debit or credit entries relating
to all transactions involving cash. The cash book therefore, doubles as both the day book
and the ledger. There are basically three major types of cash books in use;
i) Single/One Column Cash Account
ii) Double/Two Column Cash Book
iii) Three Column Cash Book
Petty Cash Book: There is another cash book also referred to as the petty cash book,
which has a different format from the above mentioned ones.

Single Column Cash Account– This cash book is like a typical ledger account with one
amount column each on the debit and credit side. The receipt of cash is entered on the
debit side, while payments are entered credits. The format for single column cash book is
the same as that of the ledger.
Cash Account
Date Particulars Folio Amount Date Particulars Folio Amount

Double/Two Column Cash Book – This cash book also derives its name from its two
amounts columns; cash column and bank column. This cash book enjoys a convenient
way of reflecting money transactions in the books of accounts of those businesses that
deal with banks. Below is the format of the double column cash book:
Cash Book

41
Date Particulars Foli Cash Bank Date Particulars Foli Cash Bank
o o

Contra Entries: When the double entry for a transaction appears on both side of the
cash book, this is called a “Contra Entry”. The term used to describe the entries which
are made in the two column cash book to record the movement of cash between the office
and the bank. They are made when cash is deposited into the bank account out of cash in
hand; or; when cash is withdrawn from the bank account for office use. These cash
movements are termed “contra” because the account that is receiving is credited while the
account giving is debited, this is because; the double entry of the transaction is effected at
once in the same account.
Three Column Cash Book – The three column cash book has an additional column
added to the cash and bank column obtained in the two column cash book. The third
column added is the “discount column” which is used to record cash discounts allowed to
debtors (on the debit side) and cash discounts received from creditors (on the credit side).
However, the discounts column are not balanced off at the end of the period, rather, their
totals are entered in their respective ledger accounts i.e. discount allowed a/c and
discount received a/c.

A three-column cash book has a third column (in addition to the two columns for bank
and cash) for recording the cash discounts allowed to debtors and cash discounts received
from creditors. A cash discount is the amount allowed off (i.e. deducted from) debts to
encourage settlement of the debts within a specified period of time.

The discount column on the debit side of the cash book is for discounts allowed to
debtors while the discount column on the credit side records discounts received from
creditors. Due to the relatively large number of discounts allowed and received by a
trading organization, the discount allowed account and discount received account would
contain too many entries if an entry is made to these accounts every time discount is
allowed or received. To prevent this, the discounts columns are used. For example, when

42
 a customer is allowed a cash discount, this is listed in the discount allowed column while
the personal account of the customer is credited. At the end of the period, the total of the
discount allowed column is transferred to the debit side of the discount allowed account
in the general ledger. Conversely, when cash discount is received from a creditor, this is
listed in the discount received column while the creditor’s personal account is debited. At
the end of the period, the total of discount received column is transferred to the credit of
the discount received account in the general ledger. The discounts columns are
“memoranda” i.e. they are not part of the double-entry system. The format of this cash
book is depicted below:

Cash Book
Date Particulars Folio Discount Cash Bank Date Particulars Folio Discount Cash Bank
1/1/20 Sales xx 1/1/20 stationary xx
3/1/20 f/planning xx 7/1/20 wages xx

31/1/20 Balance xx
c/d
Total xx xx xx xx

Balance xx
b/d

Periodic Balancing Off of Accounts:

The technique of periodic balancing off of accounts is a technique which involves the
following steps:
i) The debit and credit sides of the account are totaled independently.
ii) The difference between the two sides is ascertained.

43
 iii) The difference is then inserted on the smaller side as “balance c/d” (balance
carried down) or “balance c/f” (balance carried forward), thereby making the two
sides equal.
iv) The difference is again taken to the other side below the line as “balance b/d”
(balance brought down) or balance b/f” (balance brought forward).

The term balance in accounting is a term used for the difference between the debit side
and credit side of an account. The balancing off of accounts is carried out at each
accounting period or as often as necessary (usually one month) for the purpose of
checking on the accuracy of postings.

3.3 DESCRIBE A PETTY CASH IMPREST SYSTEM

Petty Cash Book

The petty cash book is a record in columnar form of small cash payments made on a day
to day basis. It is different from the regular cash book as it records mostly small and
much more frequent payments, as such, much clerical effort is saved in posting in totals
to the ledger, what would otherwise have been a large volume of small entries.

The petty cash book is allocated small amount of money to cover daily and minor
expenses such as purchase of stationery, repairs, fuelling, transport, postage, telephone
calls etc. These expenses are taken care of by the imbursements and re-imbursements of
cash made periodically (mostly monthly, or when the need arises) to petty cash book
through the petty cashier. The expenses are however grouped into headings, and at the
end of the period, the total spending will suggest the re-imbursement required.

The Imprest System – The petty cash book is operated on the imprest system in which
the ‘cash float’ is maintained. The cash float is an amount set aside by the management to
be used for all petty transactions. This float is given to the main cashier who hands it over
to the petty cashier. The petty cashier then disburses from the cash float, with each
disbursement being supported by a Petty Cash Voucher (PCV) signed by the recipient. At

44
 the end of the month or when the need arises, the petty cashier applies for re-
imbursement of an equal amount that has been disbursed. The petty cash voucher will be
submitted by him/her as evidence of cash disbursed. If the main cashier is satisfied, then
re-imbursement will be made to restore the float.

Advantages of the Imprest System and Petty Cash Book

i) It trains young staff (the petty cashier) to be responsible about money and be
accurate in accounting for it.
ii) It saves the time of the main cashier who has great responsibilities.
iii) The main cash book will not be overloaded with payment of items with low
amounts.
iv) It makes expense analysis and monitoring easy.
v) It reduces the number of accounts to be opened in the ledger accounts, thereby,
facilitating balancing of periodic accounts with ease.

Format of a Petty Cash Book

Receipts Date Particulars Pcv PAYMENTS
No. Tota Postage Transpor Cleaning Stationery Motor
l t Expenses
₦ 2014 ₦ ₦ ₦ ₦ ₦ ₦
Xx 1/1 Cash float -
3/1 Postages x x
5/1 Transport x x
fare
8/1 Cleaning x x
materials
9/1 Stationery x x
14/1 Petrol for x X
Delivery Van
Xx 30/1 Re- x
imbursements
- x x x x X
Xx Balance c/d xx

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 X Balance b/d x

An organization may choose to maintain a petty cash book in addition to a regular cash book, or
it may opt to add it with the cash book. Where the latter is adopted, the cash book is referred to
as “Analytical Cash Book”. The Analytical cash book has analysis columns with appropriate
headings maintained on either side of the cash book for proper analysis of sums received or paid.
It is depicted below:
Date Particulars Discount Cash Bank Debtors Sales Contra Date Particulars Discount Cash Bank Creditors Purchases Electricity Rent Contra

Trial Balance as at…

Date Particulars Dr. Cr.

The trial balance serves two purposes:

(i) It serves as a check on the “arithmetical accuracy” of the entries in the ledger; and
(ii) It serves as the basis for the preparation of Trading, Profit and Loss Account and
Balance Sheet.

It must be emphasized, however, that the agreement of the trial balance does not mean
that there are no errors in the ledger entries. There are some errors which will not prevent
the trial balance from agreement, and so therefore, the trial balance does not have the
power to disclose them. These are: error of principle; error of omission; error of
commission; error of complete reversal of entry; error of original entry/transposition;
and compensating error.

46
Exercises
Question One
(a) Briefly discuss the different ledgers that a business enterprise may have to create
for the complete record of all its transactions.
(b) List and explain any two errors each that affect and that do not affect the
agreement of the Trial Balance.
(c) List and explain any three (3) types of journals you know.
(d) What is a journal? List and explain four uses of a general journal.
(e) What is a Trial Balance? When is a suspense account required?
(f) Distinguish between trade discounts and cash discounts describe briefly the
accounting treatment of each one of them.

Question Two
Ahmad’s financial position as at 1st August, 2014 was as follows:
Cash in hand N 6,300.00
Cash at bank N 24,000.00
Stock N 3,600.00
You are required to open Ahmad’s books by means of the journal, enter the following
transactions and extract a trial balance:

August 2 Purchased goods in cash 4,000

5 Bought goods from Kamal on credit 17,500
7 Bought shop fittings and paid by cheque 2,400
11 Cash sales 2,800
12 Sold goods to Kasimu on credit 850
15 Paid Kamal by cheque on account 10,000
18 Cash sales 4,700
19 Paid cash into bank 800
20 Paid carriage in cash 200
23 Bought goods from Mantau in cash 640
27 Sold goods to Kenneth on credit 1,300
28 Bought new bicycle and paid by cheque 4,000

47
 31 Paid rent of premises by cheque 2,500

General Journal
Particulars Dr. Cr.
N K N K
Cash in hand 6,300. 00
Cash at bank 24,000 00
Stock 3,600 00
Capital being opening balance at 1/1/2020 33,900 00

Capital Account
Date Particular Amount Date Particular Amount
N K N K
31/1/2020 Balance c/d 33,900 00 1/1/202 Balance b/d 33,900 00
0

1/2/202 Balance b/d 33,900 00

0

Date Particula Amount Date Particular Amount

r N K N K
1/1/2020 Balance b/d 6,300 00 2/1/2020 Purchase 4,000 00
11/2/2020 Sales 2,800 00 19/1/2020 Bank (c) 800 00
18/1/2020 Sales 4,700 00 20/1/2020 Carriage 200 00
23/1/2020 Purchase 640 00

48
 31/1/2020 Balance c/d 8,160 00

Total 13,800 00 13,800 00

1/2/2020 Balance b/d 8,160 00

Trial Balance As At 31st January

S/No Particulars Dr. Cr.
N K N K
1 Cash at hand 8,160 00
2 Kamal 7,500 00
3 Capital 33,900 00
4 Stock 3,600 00
5 Bank 5,900 00
6 Shop fittings 2,400 00
7 Purchase 22,140 00
8 Kasimu 850 00
9 Kenneth 1,300 00
10 Sales 9,650 00
11 Carriage 200 00
12 Bicycle 4,000 00
13 Rent 2,500 00
Total 51,050 00 51,050 00

Question Four
Ahmed Umar has the following credit purchases and sales for the month of June 2011.
March 3 Sold on credit to Dudu the following: 4 tins of paint at N30 per ton, N20 paint brushes at
N40 each, 10 percent trade discount allowed on both items.
March 7 Purchased on credit from Bello: 10 ladders at N100 each, 4 hammers at N20 each, less 25
percent trade discount on both items.
March 10 Bought on credit from Aliyu: 40 screw drivers at N30 each, 10 hammers at N120 each,
less 331/3 percent trade discount on both items.
March 20 Sold on credit to Taye: 6 ladder at Nl00 each, 2 hammers at Nl20 each and 1 tin of paint
at N360. No trade discount.
March 28 sold on credit to Garba: 8 paint brushes at N50 each less 5 percent trade discount.
You are required to enter the above transactions in the appropriate journal of Ahmed Umar and
post the items to the personal accounts in the ledger. In addition, the journal totals are to
be posted to the appropriate accounts in the ledger.

49
 Question Five

Write up a three-column cash book from the following details, balance off at the end of the month and show
the relevant discount accounts as they would appear in the general ledger: October 2014

1 Balances brought forward: Cash in hand N780 and Cash at the bank N 12,560
2 The following persons paid their accounts by cheque, in each case deducting 5 per cent cash
discount. Accounts: Musa N 800; M. Kamal N 600; Kaka N 200; and H. Jibril N l,200
3 Paid rent in cash N 120
4 Paid T. Musa his account of N 670 by cheque, no discount being deducted
5 Cash sales paid direct into the bank N 750
6 Paid the following accounts by cheque, in each case deducting a 5 per cent cash discount. Accounts:
Nasir N 200; Mansur N 600; Saleh N 3,600; and Gambo N 800
10 Cash drawings N 400
11 K. Faruk paid his account of N 890 by cheque N 850, deducting N 40 cash discount
I7 Cash withdrawn from the bank N1,000 for business use
19 Salaries paid in cash N 800
20 The following persons paid their accounts by cheque, in each case deducting a 5 per cent cash
discount; Accounts: J. Maryam N l,400; M. Mgbenwelu N l,000; and D. Bayo N 3,800
25 Internet browsing in cash N 300
28 The proprietor pays a further N10,000 capital into the bank from his private monies
30 Balarabe paid N 760 in cash
31 The proprietor bank all the money in the office except N 150

You are required to enter up the transactions in the:

(a) Cash book and show the relevant transfer of the discounts amounts into their respective accounts in
the ledger.
(b) Distinguish between trade discounts and cash discounts and describe briefly the accounting
treatment of each one of them.
(c) What do you understand by contra entry? Briefly explain

A.
Cash Book
Foli Particula Foli
Date Particular Discount Cash Bank Date Discount Cash Bank
o r o
Oct.14 N N N Oct. 14 N N N

1 Balance b/d 780 12,560 3 Rent 120

2 Musa 40 760 6 Nasir 10 190

M. Kamal 30 570 Mansur 30 570
Kaka 10 190 Saleh 180 3,420
H. Jibril 60 1,140 Gambo 40 760

4 T. Musa 670 10 Drawings 400

50
5 Sales 750 17 Cash c 1,000
11 K.Faruk 40 850 19 Salaries 800
17 Bank c 1,000 25 Browsing 300
20 J. Maryam 70 1,400 31 Bank c 770
M. Mgbenwelu 50 950 Bal. c/d 150 28,280
D. Bayo 190 3,610
28 Capital 10,000
30 Balarabe 760
31 Cash c 770
490 2,540 34,220 260 2,540 34,220
Nov.
2014
1 Balance b/d 150 28,280

B.
Discount Allowed
N N
31/10/14 Sundry 490 31/10/14 Bal. c/d 490

1 Nov. 14 Bal. b/d 490

C.
Discount Received
N N
31/10/14 Bal. c/d 260 31/10/14 Sundry 260

1 Nov. 14 Bal. b/d 260

(b) Cash discount is the amount allowed off (i.e. deducted from) debts to encourage
settlement of the debts within a specified period of time. While a trade discount is a
discount that is given as a result of bulk purchases so as to differentiate between different
entrepreneurs along the chain of distribution. While trade discount is treated in the
journal cash discount is treated in the ledger. Students are to explain further.
(c) When the double entry for a transaction appears on both side of the cash book, it is
called a “Contra Entry”. Contra entries in the cash book are made when cash is deposited

51
 into the bank account out of the cash in hand or when cash is withdrawn from the bank
account for office use.

3.4 DESCRIBE HOW TO ORDER, RECEIVE AND STOCK SUPPLIES

Order and Supply

Orders for Work, Goods and Services

As far as possible the functions of ordering, receiving supplies and processing invoices
should be carried out by different individuals. It is most important that responsibilities are
clearly defined and understood by all concerned.

To order for supplies that means to purchase materials, equipments and drugs for Clinic
consumption it is very important to follow the purchasing procedure that is generally
accepted, this include:

1. Determining Purchase Budget:

Officer Incharge or Purchase Manager prepares a purchase budget for the

forthcoming financial year. Purchase budget is prepared with the help of
production planning department. It contains detailed information regarding
quantity to be purchased, quality of materials, time of purchase and the sources of
procurement. A schedule of materials and components needed for various jobs,
known as bill of materials, is also prescribed for working out details of purchase
budget. A bill of materials is also useful in exercising control over the utilization
of materials.

2. Receipt of Purchase Requisition:

The purchase officer initiates action for the purchase of materials only when he
receives a request for the same. The store-keeper and departmental heads send
requisition slips to purchase department giving details of materials required by
their departments etc. A purchase requisition is a form used as a formal request to
the purchasing department to purchase materials. This form is prepared by the
store keeper for regular stock materials and by the departmental head for specific

52
 materials not stocked as regular items. The storekeeper knows when an action or
fresh procurements is to be initiated. He will send the requisition when materials
reach re-ordering level. He retains one copy of the requisition with him for future
reference .It is on the basis of purchase requisition that orders are placed for
materials.

3. Determining Sources of Supply:

Purchase Manager remains in touch with various suppliers of materials. The

quotations are invited for the purchase of specific items. After receiving
quotations a comparative study is made regarding terms and conditions offered.
The factors to be considered include price, quantity, quality, time of delivery,
terms of payment, trade discount and reputation of suppliers. After looking at
various factors a final decision is taken about the supplier of goods.

4. Placing Order:

After selecting a supplier a formal purchase order is sent for the supply of goods.
A purchase order is sent on a printed form and is duly authorized by the purchase
manager. This order should contain details about the quantity, quality, price,
mode of delivery, terms of payment etc. The purchase order authorizes the vendor
to dispatch goods specified in it. It establishes a contractual relation between the
buyer and the vendor.

5. Follow-Up of Purchase Order:

A purchase order normally bears a date by which the goods must be delivered It is
in the interest of the organization that goods are received in time for keeping
uninterrupted flow of materials. The suppliers may be reminded of the date of
delivery of goods. A follow-up of purchase order is necessary to receive stocks in
time.

6. Receipt and Inspection of Materials:

53
 In big concerns the task of receiving materials is assigned to the purchase
department whereas in small concerns this work is done by the store keeper. After
unpacking goods their quantity is compared to that given in delivery challans.
Any discrepancy in items is reported to the purchase department. The
specifications and quality of goods is also checked at this stage.

7. Checking Invoices:

Lastly, purchase department checks the invoices supplied by the vendor with that
of its own records. The quantity, quality, price, terms etc. are compared with those
given in purchase order. After making full checking the invoices are sent to
accounts department for payment.

Steps Involved in Purchasing Cycle of Materials

Step1: Receiving and analyzing purchasing requisition:

Purchase requisitions start with the department or person who will be the ultimate user. In the
material requirements planning environment, the planner releases a planned order authorizing the
purchasing department to go ahead and process a purchase order. The purchase requisition
contains, at least, the following information:

a. Identity of originator, signed approval, and account to which cost is

assigned.
b. Material specification.
c. Quantity and unit of measure.
d. Required delivery date and place.
Step 2: Selecting suppliers:

Identifying and selecting suppliers are important responsibilities of the purchasing department.
For routine items or those that have not been purchased in the past, a list of approved suppliers is
kept. If the item has not been purchased before or there is no acceptable supplier on file, a search
must be made.

If the order is of small value or for standard items, a supplier can probably be found in a
catalogue, trade journal, or directory.

54
Step 3: Requesting quotations:

For major items, it is usually desirable to issue a request for quotation. This is a written inquiry
that is sent to many suppliers to ensure that competitive and reliable quotations are received. It is
not a sales order. After the suppliers have completed the quotations and returned it to the buyer,
the quotations are analysed for price, compliance to specification, terms and conditions of sale,
delivery, and payment terms.

For items where specifications can be accurately written, the choice is probably made on price,
delivery, and terms of sale. For items where specifications cannot be accurately written, the
items quoted will vary. The quotations must be evaluated for technical factors and price. Usually
both the issuing and purchasing departments are involved in the decision.

Step 4: Determining the right price:

This is the responsibility of the purchasing department and is closely tied to the selection of
suppliers. The purchasing department is also responsible for price negotiation and will try to
obtain the best price from the supplier.

Step 5: Issuing a purchasing order:

A purchase order is a legal offer to purchase. Once accepted by the supplier, it becomes legal
contract for delivery of the goods according to the terms and conditions specified in the purchase
agreement. The purchase order is prepared from the purchase requisition or the quotations and
from any other additional information needed.

A copy is sent to the supplier; copies are retained by purchasing and are also sent to other
departments such as accounting, the originating department, and receiving.

Step 6: Following-up and delivery:

The supplier is responsible for delivering the items ordered on time. The purchasing department
is responsible for ensuring that suppliers do deliver on time. If there is doubt that delivery dates
can be met, purchasing must find out the problem in time and take corrective action.

This might involve expediting transportation, alternate sources of supply, working with the
supplier to solve its problems, or rescheduling production.

55
The purchasing department is also responsible for working with the supplier on any changes in
delivery requirements. Demand for items changes with time, and it may be necessary to expedite
certain items or push delivery back on some others. The buyer must keep the supplier informed
of the true requirements so that the supplier is able to provide what is wanted and when.

Step 7: Receiving and accepting goods:

When the goods are received, the receiving department inspects the goods to ensure that correct
ones have been sent, are in the right quantity, and the bill of lading supplied by the carrier. The
receiving department then accepts the goods and writes up a receiving report noting any
variance. If further inspection is required, such as by quality control, the goods are sent to quality
control or held there for inspection.

If the goods are received damaged, the receiving department will advise the purchasing
department and hold the goods for further action. Provided the goods are in order and require no
further inspection, they will be sent to the originating department or to inventory.

A copy of the receiving report is then sent to the purchasing department noting any variance or
discrepancy from the purchase order. If the order is considered complete in all respects, the
receiving department closes out its copy of the purchase order and advises the purchasing
department accordingly.

If it is not, the purchase order is held open awaiting completion. If the goods have also been
inspected by the quality control department, they, too, will advise the purchasing department
whether the goods have been accepted or not.

Step 8: Approving supplier’s invoice for payment:

When the supplier’s invoice is received, there are three pieces of information that should agree –
the purchase order, the receiving report, and the invoice. The items and the quantities should be
the same on all; the prices, and extensions to prices, should be the same on the purchase order
and the invoice.

All discounts and terms of the original purchase order must be checked against the invoice. It is
the job of the purchasing department to verify these and to resolve any difference. Once
approved, the invoice is sent to accounts payable for payment.

56
Factors influencing ordering and receiving suppliers

This lecture note throws light upon the factors that may influence ordering and receiving
supplies. The factors include:

1. Right Quality

2. Right Quantity

3. Right Time of Delivery

4. Right Price

5. Right Place of Delivery

6. Right Source of Supply:

1. Right Quality:

The word ‘right’ does not necessarily mean the highest quality nor does it mean
the lowest price. It really means the best of each of the features in relation to
others. Certain factors are to be taken into consideration which formulating
purchase policy. The factors as said earlier, relate to quality and quantity, price,
time of delivery and source of supply.

2. Right Quantity:

The best quality as needed for the organisation along with the right and
reasonable quantum of materials are very essential and these must be ensured
along with reasonable price. The source of supply has to be chosen on various
consideration—not only price but also many short and long term factors,
condition & terms of purchase. It must also be ensured that purchases are received
on time. Early arrival of purchases or the late arrival—both may have adverse
effects on the purchases pushing up its cost for the ultimate production.

3. Right Time of Delivery:

Purchasing policy must incorporate in it that standard quality and just the requisite
quantity materials are purchased. Bulk purchases are generally encouraged for
various allowances received there on. But caution must be taken to avoid

57
 excessive stock palpation which may lead to wastage and consequently rise in the
price of the final product.

4. Right Price:

That price is a serious consideration does not need any elaboration. In the price
consideration, not only the present market but also the future market has a bearing
upon price. Terms of delivery may account for ultimate rise or fall in price. While
settling the terms of delivery, the purchase manager must take a long term view of
the effects of the terms of delivery.

5. Right Place of Delivery:

The mode or delivery and other attendant matters must not be lost sight of
Determination of the source of supply presents sometimes difficulties to choose
the right source. There may remain a number of sources—the balancing the
relative merits and demerits of such sources is imperative in prudent purchasing.

6. Right Source of Supply:

In today’s competitive economy, a manufacturer must always keep a vigilant

watch over the market for the raw materials as will for the disposal of the final
products. Purchases cannot have right policies; they must be flexible and easily
adjustable according to market fluctuations.

There are factors which cannot be foreseen but through farsightedness and by (.he
past experience, the purchase manager can guess what might be the future market.

Political, social and economic considerations— are all to be taken into policy
formulation, so that purchases may be made with the least possible flaws. The
production department controls the purchase department, co-ordinates with it in
various ways to make purchases as fool-proof as possible.

3.5 DESCRIBE HOW TO KEEP INVENTORY OF EXPENDABLE SUPPLIES

Managing inventory is an important task in many businesses. Inventory comprises the

total amount of finished goods and materials on hand and the process of counting them.
Many companies do periodic inventory checks to ensure that they will not run out of

58
 popular items, while others match the total amount of goods ordered with the physical
count. If this process results in an overage or shortage, it will alert you to a problem, such
as incorrect inventory tracking or possible theft.

Setting up Stock Levels

1. Know the four categories of inventory. Your inventory consists of everything you use
to run your business and to provide your service or produce your products. Inventory can
be broken down into four categories. The type of inventory determines how much of it
you should keep on hand.
i. Raw materials and components are items that you use to produce products.
ii. Work in progress is your stock of goods that are in the midst of production. They
are unfinished.
iii. Finished goods are your finished products that are ready to be sold.

59
 iv. Consumables are materials you use to run your business, such as office supplies
or fuel.
2. Understand the advantages and disadvantages of holding on to inventory. You can
choose to keep small amounts of stock on hand and have it delivered as you need it.
Alternatively, you can choose to keep a lot of stock on hand and store what you are not
using currently. Each method has advantages and disadvantages.

Keeping little or no stock on hand saves you money in storage costs and allows you to
always use the most up-to-date components. However, you must have reliable suppliers,
and you also run the risk of running out of materials in the midst of production. This also
means your costs are related to the latest prices, since every purchase reflects the current
price and the purchased inventory is quickly used up.

Keeping a lot of stock on hand means you may be able to save money by buying
materials in bulk, and you never have to worry about running out of materials. However,
you may have to pay for storage, and items may expire or become outdated before you
can use them. You also assume a price risk if purchases go down in price versus the price
of your inventory (but make gain if prices rise).

3. Understand the costs of holding inventory. Determining the optimum stock level
involves balancing the different costs associated with storing and purchasing stock. The
costs of inventory involve purchasing costs, carrying costs and stock out costs.

Ordering costs include paying for transportation, paying for staff to receive, store and
control quality of materials and paying clerical staff to prepare requisitions, place orders
and manage the ordering process.

Carrying costs include the cost of storage in outside facilities, insurance, taxes, capital
costs and the cost of staff to handle the materials.

Stock out costs refer to the interruption in production if you run out of materials.

4. Learn how the type of stock influences how much you need to store. The levels of
stock you keep may vary depending on the type of stock. For each category, consider the
reliability of your suppliers. The price is also a consideration. The price of some materials
fluctuates, and you may get discounts for buying certain materials in bulk.

60
 With raw materials, the schedule and reliability of your suppliers drives how much you
keep on hand. It's a good idea to have alternative sources of materials in case of a
problem with your supplier. Also, if the price of materials fluctuates you may have to
time purchases to take advantage of the best prices.

Keeping a stock of works in progress can come in handy if there is a problem with
delivery of raw materials that interrupts production.

Only keep a supply of finished products on hand if you are producing items in batches or
you are in the midst of producing a large order.

The level of stock for consumable supplies depends on how you use them, discounts for
purchasing in bulk and the reliability of your suppliers.

You will also need to know how to properly store your products. For example, some
products may need to be stored at a specific temperature, or stored in a way that is easy
for employees to pick, pack, and ship them easily.

5. Set a minimum level. This is the level below which stock on hand should never fall.
Lead time affects this level. This means how much time it takes to replace stock you have
used. Also, the rate of consumption determines the minimum level. Know how quickly
you use materials and how much you will use during lead time.

Lead time is the amount of time you need to replenish the inventory. It is the number of
days between when you place an order and when you receive it.

The rate of consumption is refers to how much of an item you use in a specified time
frame.

Suppose, for example, that you run an office and you need to determine the minimum
number of reams of printing paper to keep on hand.

You know that your supplier can get an order of paper to you within five business days.
This is your lead time.

Also, you know that the office uses an average of three reams of paper per day. This is
your consumption rate.

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 Since you know your lead time is five days, you must never allow your inventory of
paper to fall below five days' worth of paper. If your office uses three reams of paper per
day, then a five-day supply would be 15 reams of paper.

Your minimum stock level is 15 reams of paper.

6. Determine a re-ordering level. This is the level at which it is time to re-order stock. It is
typically somewhere between the maximum and minimum levels. When stock reaches
this level, a staff member needs to initiate a purchase requisition. This will start the
process of restocking inventory with fresh materials.

Using the above example, it might not be the best practice to always let your supply of
paper dwindle to the minimum level before initiating a replacement order. Any number of
circumstances could delay the delivery, and you would be left without any paper in the
office.

To determine a reordering level, you would consider the reliability of your supplier. For
example, suppose you know that on a few occasions during the winter months, bad
weather delayed your delivery for a few days.

Based on your history with this supplier, you decide to reorder when your inventory of
paper falls to 10 days' worth of paper, or 30 reams.

The reordering level for paper would be 30 reams.

7. Set a maximum level. This is the quantity of materials above which you should not keep
stock. Setting this level is influenced by many factors. For example, you need to consider
the amount of space you have available and the cost of storage. In addition, depending on
the type of stock you have, government requirements may limit the amount you can store.
However, make sure to consider the chances that you will exceed the maximum level and
have a plan in place to liquidate the excess inventory, such as by donating, selling at a
discount, or throwing it away. Also, seasonal needs may impact how much you need to
have on hand. Finally, depending on your industry, changes in fashion or demand may
influence your maximum level of certain materials.

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 Some businesses use the reordering level in a formula to calculate maximum stock levels.
This formula is: Maximum Level = Re-ordering Level - Consumption Rate * Lead Time
+ Economic Order Quantity.

Economic order quantity (EOQ) is a calculation used to determine a fixed amount when
re-ordering inventory. It is discussed later in this article. For this example, assume the
EOQ is 30 reams of paper.

Using the above information, the maximum stock level could be calculated with the
formula {display style 30-3*5+30=27*35=945}30-3*5+30=27*35=945.

The maximum level for paper would be 945 reams.

Controlling Inventory

1. Understand the purpose of controlling inventory.

Inventory control comprises the methods you use to maintain your optimum level of
stock. You can use whatever combination of methods that makes sense for your business.
The first step in inventory control is prioritizing inventory to determine the most
important items to manage.

2. Prioritize inventory using the ABC method.

This is a method of controlling stock levels by categorizing inventory into three
categories. It is also known as “stock control according to value,” “selective value
approach” or “proportional parts value approach.” The purpose is to set priorities for
attention to management of these materials. Using this method helps companies to reduce
storage expenses and to preserve expensive materials.
a. Group A consists of expensive items. These items typically represent 10 to 20
percent of total inventory but 50 percent of the value of inventory. You would
invest the bulk of your efforts in controlling these items.
b. Group B represents 20 to 30 percent of total inventory and approximately 30
percent of the value of your inventory. These items require moderate inventory
control measures.
c. Group C represents 70 to 80 percent of total inventory but only about 20 percent
of the value. Routine procedures can be used to control this category.

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3. Maintain inventory with a continuous system.
A continuous system means that you are ordering a fixed amount each time you order.
You order this fixed amount each time inventory reaches a predetermined level. You
would use this method with the items you categorized in your “A” category. These are
the expensive items that you want to track carefully. You don't want to spend a lot of
money in carrying costs, but you don't want to run out of them, so you continuously
monitor how much you have.

Calculate the Economic Order Quantity (EOQ) to set the fixed quantity order
amount.
This mathematical formula is used to determine the optimum level of stock. It is a
continuous method of inventory control. You use it to determine the fixed quantity you
should order each time you place an order for these items in your inventory. You would
use it with your “A” category of inventory items.
The formula for EOQ is .

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  In the formula, Q = the quantity per order, A = the annual amount needed of the
item, S = the cost per order and I = the inventory carrying cost per unit per year in
dollars.
For example, suppose you sold basketballs. The cost per order is $400, the
carrying cost is $10 per unit per year and you have a demand of 20,000
basketballs per year.
 The optimum average order should be 1,265 basketballs. If the annual demand is
20,000, then you will have to place 16 orders in a year ().

4. Maintain inventory levels with a periodic system.

This means you reorder items after a fixed time period. An order is placed for a variable
amount after a fixed amount of time has passed. For example, once per month you place

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 an order for an item, and the amount varies depending on how much the item was used in
the previous month. This method works well for the items in your “B” and “C”
categories. You don't have to keep control so strictly how much you have on hand, and
you can accept the risk of over-ordering by ordering in bulk.

Keeping Track of Your Stock

1. Perform regular stocktaking. As part of your accounting process, you need to perform
an annual stocktaking exercise to determine the value of your inventory. This means
making a list, or inventory, of your stock, noting its location and recording its value.
Tools such as barcodes or radiofrequency identification (RFID) tags help you to keep
track of your stock. You can keep track manually by having staff physically count the
stock or electronically with stock control software.

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 2. Develop a schedule for cycle counting. Many inventory management software systems
make it easy to cycle count by category or subcategory, so make sure to prepare what you
plan to count each time. Each time you perform a cycle count, you will need to:
i. Close out any open inventory transactions.
ii. Restock all of your overstock, understock, or back stock.
iii. Account for all of the received purchase orders and inbound transfers in your
system.
iv. Put away all items.
v. Close and invoice all completed customer orders.

3. Use a manual method. Manual systems work best for small businesses with few stock
items. You can choose from two methods for manual inventory control. The first is
known as the two bin inventory control system. The second system involves creating a
descriptive index and using inventory control cards.

For the two bin system, determine a buying cycle for items and the amount purchased in
each cycle. For example, offices may purchase office supplies weekly or monthly. To
begin, purchase enough of the item to last two buying cycles. Divide the items into two
bundles. When the first bundle is used up, it's time to reorder enough for one buying
cycle of the item. Materials from the second bundle are used while the materials are being
reordered.

For the second system, create an index that lists all of the items in inventory and a file of
cards for each item. On each card, record an item description. When an item is purchased
or reordered, someone records the amount received, the unit price and other information
such as an ordering description, a catalog number or the serial number.

4. Use computer software. Inventory management software tracks inventory levels and
records purchases, deliveries and sales of items in inventory. Factories can also use it to
produce production-related documents such as work orders and bills or materials. It can
perform an EOQ analysis of your inventory to help you keep optimum levels of inventory
on hand.

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 The advantages of using inventory management software include decreased carrying cost
and ordering costs, increased efficiency of inventory management, better organization
and security and information about trends in how materials are used.

The disadvantages are that the software can be expensive, and it can be complex to use.

STUDENT
ACTIVITY

TOPIC: Discuss the Differences between Government Accounting and Commercial

Accounting Procedures

STUDENT
OUTCOME:

3.1 Describe books used in accounting

3.2 Describe double entry Book-Keeping system
3.3 Describe a petty cash Imprest system
3.4 Describe how to order, 68
receive and stock supplies
3.5 Describe how to keep inventory of expendable supplies
 TASK:
7. Assignment
8. Quiz (Multiple choice and Essay
questions)
9. Group activities

UNIT 4:

TOPIC: BUDGETING

INSTRUCTIONAL MATERIALS

- Flip Chart
- White Board
- Poster with sample Budgets

TEACHING METHOD

- Lecture
- Demonstration
- Group Discussion using Buzz
- Brainstorming/mind mapping

ASSESSMENT

- Assignment – Take home/group

- Quiz
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 - Multiple Choice Question

LEARNING OBJECTIVES-

By the end of this lesson the students should be able to:

4.1 Define budget

4.2 Explain the effects of improper budgeting
4.3 Explain a financial report
4.4 Discuss drug revolving fund account
4.5 Discuss cost recovery in primary healthcare system

4.1 DEFINE BUDGET

BUDGET

Introduction

One of the tasks you face as a financial officer, especially if your organization makes
frequent business transactions, is that of preparing a budget. A budget is a tool used for
planning and controlling your financial resources. It is a guideline for your future plan of
action, expressed in financial terms within a set period of time. A budget does not have to
be complex

Definition

A budget is a formal statement of estimated income and expenses based on future plans
and objectives. In other words, a budget is a document that management makes to
estimate the revenues and expenses for an upcoming period based on their goals for the
business.
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 Budgeting can also be defined as the expression of plans in comparable financial terms
therefore, budgeting can simple be define as monetary planning.

A government budget is an annual financial statement which outlines the estimated

government expenditure and expected government receipts or revenues for the
forthcoming fiscal year. Depending on the feasibility of these estimates, budgets are of
three types -- balanced budget, surplus budget and deficit budget. Mentioned below are
brief explanations of these three types of budgets:
Budgeting is the making of short or long planning decision for investment for financing.

In the general sense, the budget is described as a precise statement, representing a

financial estimate of income and expenditure of the government for a certain period. In
cost accounting, budget means a quantitative statement, prepared before a particular
period to serve as an estimate of future receipts and disbursements.

Types of Budgets

1. Balanced Budget
A government budget is said to be a balanced budget if the estimated government
expenditure is equal to expected government receipts in a particular financial year.
Advocated by many classical economists, this type of budget is based on the principle of
“living within means.” They believed the government’s expenditure should not exceed
their revenue.
Though an ideal approach to achieve a balanced economy and maintain fiscal discipline,
a balanced budget does not ensure financial stability at times of economic depression or
deflation. Theoretically.
Merits of a Balanced Budget
 Ensures economic stability, if implemented successfully.
 Ensures that the government refrains from imprudent expenditures.

Demerits of a Balanced Budget

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  Unviable at times of recession and does not offer any solution to problems such as
unemployment.
 Inapplicable in less developed countries as it limits the scope of economic growth.
 Restricts the government from spending on public welfare.

2. Surplus Budget
A government budget is said to be a surplus budget if the expected government revenues
exceed the estimated government expenditure in a particular financial year. This means
that the government’s earnings from taxes levied are greater than the amount the
government spends on public welfare. A surplus budget denotes the financial affluence of
a country. Such a budget can be implemented at times of inflation to reduce aggregate
demand.

3. Deficit Budget
A government budget is said to be a deficit budget if the estimated government
expenditure exceeds the expected government revenue in a particular financial year. This
type of budget is best suited for developing economies, such as India. Especially helpful
at times of recession, a deficit budget helps generate additional demand and boost the rate
of economic growth. Here, the government incurs the excessive expenditure to improve
the employment rate. This results in an increase in demand for goods and services which
helps in reviving the economy. The government covers this amount through public
borrowings (by issuing government bonds) or by withdrawing from its accumulated
reserve surplus.

Merits of a Deficit Budget

 Helps in addressing public concerns such as unemployment at times of economic
recession.
 Enables the government to spend on public welfare.

Demerits of a Deficit Budget

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  Can encourage imprudent expenditures by the government.
 Increases burden on the government by accumulating debts.

The integrated process of preparing, implementing and operating budgets is called

as Budgeting.

Features or Characteristics of Budget

5. It is an estimate of the economic activities of an entity which related to a
specified future period.
6. It must be written and approved by the appropriate authority.
7. It should be modified or corrected, whenever, there is a change in
circumstances.
8. It plays the role of a business barometer that helps in measuring the
performance of the business by comparing actual and budgeted results.
9. It is prepared on the basis of past experiences and trends in the business.
10. It is a business practice, which is used to forecast the operating activities and
financial position of the business.
11. Budget is used to fix targets in monetary terms and control the deviations if
any. Further, it can also be used as a basis to measure the performance of the
organization.

Classification of Budgets

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Based on time
i. Long-term Budget: The budget designed by the management for a long-term, i.e.
three to ten years is called as long-term budget.
ii. Short-term Budget: As the name suggests, the budget which is prepared for a period
ranging from 1 to 2 years, is called short-term budget.
Based on Capacity
i. Fixed Budget: The budget created for a fixed activity level, i.e. the budget
remains constant regardless of the level of activity, is called as fixed budget.
ii. Flexible Budget: The budget which changes with the change in the level of
activity is a flexible budget. It identifies the fixed cost, semi-variable cost and
variable cost, to show the expected results at different volumes.
Based on Scope
i. Functional Budget: The budget which is concerned with the business functions
is called as functional budget. It can be further classified as:
 Sales Budget: Sales budget is used to determine the quantity of
anticipated sales and the expected selling price per unit.
 Production Budget: It is prepared to indicate the production for the
specified period and is expressed in the units of outputs produced.

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  Materials Budget: The budget prepared to show the quantities of direct
material and raw material required to manufacture the finished product.
 Purchase Budget: Purchase budget is designed to estimate the quantity
and value of different items to be bought at different points of time,
considering the production schedule and inventory required.
 Cash Budget: The budget highlights the cash needed by the business in a
specified period, taking into account all the receipts and payments of the
business.
Apart from those discussed above, there are other functional budgets also,
i.e.
 Plant utilization budget,
 Direct material usage budget,
 Factory overhead budget,
 Production cost budget,
 Cost of goods sold budget,
 Selling and distribution cost budget,
 Administration expenses budget, etc.

ii. Master Budget: Once all the functional budgets are created, then the financial
officer will prepare a master budget. It is an integrated budget that reflects the
estimated profit and loss and financial position using Budgeted Profit & Loss
Account and Budgeted Balance Sheet of the concern.
Based on Receipts and Expenditure
i. Capital Budget: The budget takes into account the estimated capital receipts and
expenditure of the business for a specified period.
ii. Revenue Budget: The budget that covers all the revenue receipts and expenses of
a particular financial year is a revenue budget.
A budget acts as a map for the future economic activities of the business, which are
prepared as per the policies of the different organizational functions. It aims at making
optimum utilization of the capital and other resources of the organization.

Budgetary Control

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Definition:
Budgetary control refers to a method of management control and accounting, wherein the
budgets are established, by forecasting the activities beforehand to the maximum extent
and a constant comparison is made between the actual results and the budgeted figures,
so as calculate the variances (if any) and take corrective steps accordingly to ensure the
achievement of targets.
Hence we can say that the budget is the cause, and budgetary control is the effect.

Functions of Budgetary Control

 Establishing or Setting up of budgets

 Policymaking

 Comparing the actual and budgeted results.

 Taking corrective steps and remedial measures, (if possible) or revising the
budgets (if required).

 Placing responsibility when there is a failure to attain the target.

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 Budgetary control implies a system that involves an ongoing comparison of the actual
performance with the budgets and taking remedial steps immediately, to ensure adherence
to the plan.

Characteristics of Budgetary Control

1. Determination of goals: Budgetary Control helps in ascertaining the goals to be

achieved over the accounting period and the policies that are to be implemented for the
attainment of these objectives.
2. Attainment of goals: It ascertains the range of activities which are to be carried out for
the achievement of objectives.
3. Laying out of plan: It assists in formulating a plan or sketches out the operations,
concerning every stage of activity, both physically and monetarily, for the entire period.

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4. Making comparison: It establishes a system for comparing the actual performance with
the budgeted ones, by every individual, unit or department and ascertains the causes for
discrepancies.
5. Correction or Revision: Budgetary control makes sure that the required corrective steps
will be taken at the right time when there are deviations from the budgeted targets and if
that cannot be implemented then the plan is revised considering all the factors.

Budgetary Control aims at prescribing in exact terms what should be done, how it is to be done
in future and ensuring that actual performance is in tandem with the budgets.

Objectives of Budgetary Control

 To delineate the objectives of the business with precision and establish the
performance targets, for every unit and department of business.

 To define the responsibilities of each supervisor, manager and other personnel, so

that every member of the organization knows about his job, rights and duties.

 To provide a benchmark for making a comparison between standard targets and

the actual results, and identify the reasons for so, in order to take necessary actions to
correct the divergence.

 To make optimum utilization of the organization’s resources in order to increase

productivity and profitability.

 To monitor that the firm is not deviated from the path of its long term objectives,
without being affected by contingencies.

 To identify where efforts are required to cope with the situation.

 To align the activities of the business, centralizing the control,

while decentralizing the authority and responsibility to executives, in the business
interest.

 To assist in waste elimination, losses during the production and removal of excess
costs.

 To provide a logical basis for the revision of present and future policies.

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 To formulate plans for long term with maximum accuracy.

In a nutshell, budgetary control analyses how efficiently managers utilize budgets to

manage cost and operations in a particular period. It helps the company’s management in
delegating the responsibility to the executives and provide a basis for forecasting, so as to
measure the variances between actual and estimated results.

Who is responsible for preparing a budget in PHC?

 In a large scale concern or organization, a committee is usually set for preparing
and implementing the budget.
 In a small scale concern, the manager or the accountant or officer incharge.

Therefore, in a small health unit or facility, the community health officer should be
responsible for preparing the budget for the running of the unit, and for health services
activities.

The Procedure for Preparing a Budget in Health Care System

The main idea behind a budget is to spend less than you earn. And if you don't have one
then you should. You may feel that it will require to sacrificing things you enjoy,
however, this is not necessarily the case. In fact, a budget can give you the freedom to
spend more confidently because you know exactly how much you can afford for different
things. You may even be reluctant to set up a budget because you think that you're not
financially savvy or the process is too difficult to understand. This is simply not true–
budgets for an individual or a family are as simple as making a list of money in, money
out. Furthermore, there are a ton of different tools that make the process simple and fast.
Whether you use a pen and paper or financial software, the basic process to set up your
budget is always the same. Here's how it works:

Step 1: Money In
List your sources of income for the month. If you're a dual-income household, include
both your and your spouse's earnings. Aside from your regular paycheck (after taxes),

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 also include any other regular sources of income including dividend or interest income,
rental income, pensions, social security, alimony, or child support.

Step 2: Money Out

Next, look back over your last few months of bank statements to help you list all of your
monthly expenses. First, list all of your fixed expenses–these are the expenses you must
pay, such as your mortgage, car payment, insurance, and utilities. Some of these may be
the same fixed amount every month and some, such as electric, water, or groceries, may
vary. After your list of fixed expenses is complete, list all the categories of your flexible
spending–these are the things you have the most control over such as dining out,
entertainment, and clothes shopping. For these, and other variable expenses, take an
average over the past few months to get an accurate representation.
Step 3: Assess the Situation
After all of your income sources and expenses are listed, take a moment to evaluate
where you stand. You will find yourself in one of the following three scenarios:

1. Income is not sufficient to cover even your bottom line expenses. This, obviously,
is the worst case scenario. If this is your situation, you need to either add some
additional source of income or consider which monthly bill you can do without.
2. Income covers encumbered expenses but not flexible spending. In this situation,
your basic financial needs are being met but you're spending too much on
discretionary items. The surplus of income after fixed expenses is what you have
available to work with. Ideally, you should first commit a portion of this surplus
to savings, then limit your flexible spending to an amount within the excess.
3. Your total income is greater than your total expenses. Obviously this is the best
scenario, but even if you're in this category, you're not necessarily off the hook.
There is always room for improvement, particularly if you have a financial goal to
meet like saving for further education or a vacation. A portion of your budget
should always be going toward savings, both retirement and an emergency cash
fund, and it is always a good idea to periodically evaluate your discretionary
spending to keep it in check.

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STEP 4: Using and Maintaining Your Budget
Once your budget is set up, use your budget to dictate your allowable spending each
month. Be sure to check in periodically to ensure you're staying within your confines and
to adjust as needed for added or lost income sources or expenses. While there are
thousands of basic budgeting templates out there, one of the favorites is this template
from Money under 30. It's simple, straightforward, and within minutes, you will have
your bottom line.

Pre-Budget Consideration
Considering the organization’s priorities, objectives and goals will helps in preparing a
budget. As you begin, outlining the plan, by answering the following question:
• What is the time period with which you are working (e.g., one term, entire school year)?
• What does your group most want to accomplish?
• How will you accomplish this?
• How much will it cost?
• Where is the money coming from?
Once these questions have been answered, you are ready to begin preparing your budget.

Preparing a Budget
• Prepare an outline the organization’s planned future activities.
• Determine and record available funds (e.g., carryover balance from previous year).
• Estimate and record expected income and when it will be available (dues, drugs sales,
Hospital equipments, etc.)
• Define and record needed expenses (advertising, drugs and equipments purchase,
printing, supplies, etc.)
• Review, revise, and then assemble into a final budget.
• Have members vote for budget approval.

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The budget must be flexible enough to anticipate conditions that might have been
overlooked during the planning process.

Managing the Budget

• Set and maintain a minimum cash balance.
• Formulate general policies and procedures needed to achieve objectives while
providing internal control (e.g., allow only approved expenditures).
• Keep an accurate written log of financial transactions (income and expenses).
• Periodically compare the budget to your actual logged expenditures.

A Sample Budget

Income Expenditure
Details Amount Details Amount
Drugs sale 50,000 00 Utility bills 5,000 00
Dues 10,000 00 Buildings 10,000 00
Cards 5,000 00 Drugs purchase 10,000 00
Admission 20,000 00 Hospital material 20,000 00
Immunization 10,000 00 Salaries 40,000 00
Ante-natal 10,000 00 Transportation 10,000 00
Family planning 20,000 00 Fueling vehicle 10,000 00
Outreach/mobile services 10,000 00 Generator 2,000 00

Total 135,000 00 Total 107,000 00

Determine the outcome of each expense and revenue as the budget period is ending.
Review and judge actual costs in order to establish priorities for the next budgeted period.
Begin preparing for the next budget a month or more prior to the current budgeted period
and then begin the process anew.

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4.2 EXPLAIN THE EFFECTS OF IMPROPER BUDGETING

Improper Budget
This can be define as a situation where budget is under or over budgeted, which shows
deficit or excess budget respectively.
• Over Budget - This is surplus or excess budget, and is a situation whereby income
exceeds its expenditure.
• Under Budget - This is deficit budget, and refers to a situation whereby the
expenditure exceeds the income.
The Implication of Over Budget

1. Over employment – assigning many workers to perform a duty that few workers
can handle, because of surplus budget.
2. Excess funds – excess fund in a programme can result into money embezzlement,
and fraud.
3. Wastage of resources – because of over budget it could allowed waste of
materials and resources, eg. Perishable material or expendable materials.
Therefore leading the organization into bankrupt’s situation.
4. Unrealistic budget – Over budget could lead to unrealistic budget in future
preparation

The Implication of Under Budget

1. Under budget could results in insufficient funds for executing such a programme.
And it may result into the following:
a. Shortage of resources (materials and human).
b. Create redundancies in work area.
c. Workers are discouraged on the job because of lack of pay.
d. Workers stealing organization resources.
e. It could create a forum for gossiping

2. Recruitment of few staff tom performs a larger work, because of shortage of staff.

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 3. It could lead to poor population coverage in health activities, therefore, the health
needs of the population is not covered.
4. If care is not taken it could lead to total collapse of an organization.
5. It could also lead to delay payment of staff salaries and wages. Therefore resulting in
low productivities, frustration and low staff performance.

Implication of lack of Budgeting

1. There will be more difficulty to achieve financial goals
2. Lack of savings
3. Less financial control
4. It’s too easy to overspend
5. Organization will incurs more debt
6. It became more harder to navigate unexpected expenses
7. There will be less financial contentment
8. Organization management will experience more stress

4.3 DESCRIBE FINANCIAL REPORT

Introduction Financial Report

Financial reporting is the financial results of an organization that are released its
stakeholders and the public. This reporting is a key function of the controller, who may
be assisted by the investor relations officer if an organization is publicly held. Financial
reporting typically encompasses the following documents and postings:

1. Financial statements, which include the income statement, balance sheet, and
statement of cash flows
2. Accompanying footnote disclosures, which include more detail on certain topics,
as prescribed by the relevant accounting framework
3. Any financial information that the company chooses to post about itself on its
website
4. Annual reports issued to shareholders

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5. Any prospectus issued to potential investors concerning the issuance of securities
by the organization
If a business is publicly held, financial reporting also includes the following
(in addition to the preceding items):
6. The quarterly Form 10-Q and annual Form 10-K, which are filed with the
Securities and Exchange Commission
7. The annual report issued to shareholders, which could be a stripped-down version
that is called a wrap report
8. Press releases containing financial information about the company
9. Earnings calls, during which management discusses the company's financial
results and other matters
10. Financial reporting may be subject to the requirements of the applicable
accounting framework, such as GAAP or IFRS.

What kind of financial reporting requirements does GAAP set out?

Per Generally Accepted Accounting Principles (GAAP), companies are responsible for
providing reports on their cash flows, profit-making operations, and overall financial
conditions. The following three major financial statements are required under GAAP:

1. The income statement

2. The balance sheet
3. The cash flow statement.

The income statement recaps the revenue earned by a company during the reporting
period, along with any corresponding expenses. This includes revenue from operating
and non-operating activities, allowing investors and lenders to evaluate profitability. It is
sometimes referred to as the profit and loss (P&L) statement.

Balance Sheet and Cash Flow

A company's balance sheet summarizes assets and sets them equal to liabilities and
shareholder's equity. These three categories highlight what a company owns and how it

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finances its operations. The balance sheet is an open snapshot of a company at a specific
point in time.

GAAP also requires a cash flow statement, which acts as a record of cash as it enters and
leaves the company. The cash flow statement is crucial because the income statement and
balance sheet are constructed using the accrual basis of accounting, which largely ignores
real cash flow. Investors and lenders can see how effectively a company maintains
liquidity, makes investments and collects on its receivables.

The Securities and Exchange Commission

In the United States, publicly traded companies are regulated by the Securities and
Exchange Commission (SEC). Since its inception, the SEC has delegated its accounting
and financial reporting standards responsibilities to private-sector groups. The Financial
Accounting Standards Board (FASB) is responsible for generating rulings under GAAP,
and the SEC enforces those standards on the financial community.

Key Points

 Per Generally Accepted Accounting Principles (GAAP), companies are responsible for
providing reports on their cash flows, profit-making operations, and overall financial
conditions.
 The following three major financial statements are required under GAAP: The income
statement, the balance sheet, and The cash flow statement.
 A company's balance sheet summarizes assets and sets them equal to liabilities and
shareholder's equity. These three categories highlight what a company owns and how it
finances its operations.

Financial Statements

There are four main financial statements. They are: (1) balance sheets; (2) income
statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance
sheets show what a company owns and what it owes at a fixed point in time. Income
statements show how much money a company made and spent over a period of time.

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 Cash flow statements show the exchange of money between a company and the outside
world also over a period of time. The fourth financial statement, called a “statement of
shareholders’ equity,” shows changes in the interests of the company’s shareholders over
time.

Let’s look at each of the first three financial statements in more detail.

1. Balance Sheets

A balance sheet provides detailed information about a company’s assets, liabilities and
shareholders’ equity.

Assets are things that a company owns that have value. This typically means they can
either be sold or used by the company to make products or provide services that can be
sold. Assets include physical property, such as plants, trucks, equipment and inventory. It
also includes things that can’t be touched but nevertheless exist and have value, such as
trademarks and patents. And cash itself is an asset. So are investments a company makes.

Liabilities are amounts of money that a company owes to others. This can include all
kinds of obligations, like money borrowed from a bank to launch a new product, rent for
use of a building, money owed to suppliers for materials, payroll a company owes to its
employees, environmental cleanup costs, or taxes owed to the government. Liabilities
also include obligations to provide goods or services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would
be left if a company sold all of its assets and paid off all of its liabilities. This leftover
money belongs to the shareholders, or the owners, of the company.

The following formula summarizes what a balance sheet shows:

ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY

A company's assets have to equal, or "balance," the sum of its liabilities and shareholders'
equity.

A company’s balance sheet is set up like the basic accounting equation shown above. On
the left side of the balance sheet, companies list their assets. On the right side, they list

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 their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top,
followed by liabilities, with shareholders’ equity at the bottom.

Assets are generally listed based on how quickly they will be converted into cash.
Current assets are things a company expects to convert to cash within one year. A good
example is inventory. Most companies expect to sell their inventory for cash within one
year. Noncurrent assets are things a company does not expect to convert to cash within
one year or that would take longer than one year to sell. Noncurrent assets include fixed
assets. Fixed assets are those assets used to operate the business but that are not available
for sale, such as trucks, office furniture and other property.

Liabilities are generally listed based on their due dates. Liabilities are said to be either
current or long-term. Current liabilities are obligations a company expects to pay off
within the year. Long-term liabilities are obligations due more than one year away.

Shareholders’ equity is the amount owners invested in the company’s stock plus or minus
the company’s earnings or losses since inception. Sometimes companies distribute
earnings, instead of retaining them. These distributions are called dividends.

A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’

equity at the end of the reporting period. It does not show the flows into and out of the
accounts during the period.

2. Income Statements

An income statement is a report that shows how much revenue a company earned over a
specific time period (usually for a year or some portion of a year). An income statement
also shows the costs and expenses associated with earning that revenue. The literal
“bottom line” of the statement usually shows the company’s net earnings or losses. This
tells you how much the company earned or lost over the period.

Income statements also report earnings per share (or “EPS”). This calculation tells you
how much money shareholders would receive if the company decided to distribute all of
the net earnings for the period. (Companies almost never distribute all of their earnings.
Usually they reinvest them in the business.)

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To understand how income statements are set up, think of them as a set of stairs. You
start at the top with the total amount of sales made during the accounting period. Then
you go down, one step at a time. At each step, you make a deduction for certain costs or
other operating expenses associated with earning the revenue. At the bottom of the stairs,
after deducting all of the expenses, you learn how much the company actually earned or
lost during the accounting period. People often call this “the bottom line.”

At the top of the income statement is the total amount of money brought in from sales of
products or services. This top line is often referred to as gross revenues or sales. It’s
called “gross” because expenses have not been deducted from it yet. So the number is
“gross” or unrefined.

The next line is money the company doesn’t expect to collect on certain sales. This could
be due, for example, to sales discounts or merchandise returns.

When you subtract the returns and allowances from the gross revenues, you arrive at the
company’s net revenues. It’s called “net” because, if you can imagine a net, these
revenues are left in the net after the deductions for returns and allowances have come out.

Moving down the stairs from the net revenue line, there are several lines that represent
various kinds of operating expenses. Although these lines can be reported in various
orders, the next line after net revenues typically shows the costs of the sales. This number
tells you the amount of money the company spent to produce the goods or services it sold
during the accounting period.

The next line subtracts the costs of sales from the net revenues to arrive at a subtotal
called “gross profit” or sometimes “gross margin.” It’s considered “gross” because there
are certain expenses that haven’t been deducted from it yet.

The next section deals with operating expenses. These are expenses that go toward
supporting a company’s operations for a given period – for example, salaries of
administrative personnel and costs of researching new products. Marketing expenses are
another example. Operating expenses are different from “costs of sales,” which were
deducted above, because operating expenses cannot be linked directly to the production
of the products or services being sold.

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 Depreciation is also deducted from gross profit. Depreciation takes into account the wear
and tear on some assets, such as machinery, tools and furniture, which are used over the
long term. Companies spread the cost of these assets over the periods they are used. This
process of spreading these costs is called depreciation or amortization. The “charge” for
using these assets during the period is a fraction of the original cost of the assets.

After all operating expenses are deducted from gross profit, you arrive at operating profit
before interest and income tax expenses. This is often called “income from operations.”

Next companies must account for interest income and interest expense. Interest income is
the money companies make from keeping their cash in interest-bearing savings accounts,
money market funds and the like. On the other hand, interest expense is the money
companies paid in interest for money they borrow. Some income statements show interest
income and interest expense separately. Some income statements combine the two
numbers. The interest income and expense are then added or subtracted from the
operating profits to arrive at operating profit before income tax.

Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses.
(Net profit is also called net income or net earnings.) This tells you how much the
company actually earned or lost during the accounting period. Did the company make a
profit or did it lose money?

Earnings Per Share or EPS

Most income statements include a calculation of earnings per share or EPS. This
calculation tells you how much money shareholders would receive for each share of stock
they own if the company distributed all of its net income for the period.

To calculate EPS, you take the total net income and divide it by the number of
outstanding shares of the company.

3. Cash Flow Statements

Cash flow statements report a company’s inflows and outflows of cash. This is important
because a company needs to have enough cash on hand to pay its expenses and purchase

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assets. While an income statement can tell you whether a company made a profit, a cash
flow statement can tell you whether the company generated cash.

A cash flow statement shows changes over time rather than absolute dollar amounts at a
point in time. It uses and reorders the information from a company’s balance sheet and
income statement.

The bottom line of the cash flow statement shows the net increase or decrease in cash for
the period. Generally, cash flow statements are divided into three main parts. Each part
reviews the cash flow from one of three types of activities: (1) operating activities; (2)
investing activities; and (3) financing activities.

i. Operating Activities

The first part of a cash flow statement analyzes a company’s cash flow from net
income or losses. For most companies, this section of the cash flow statement
reconciles the net income (as shown on the income statement) to the actual cash
the company received from or used in its operating activities. To do this, it adjusts
net income for any non-cash items (such as adding back depreciation expenses)
and adjusts for any cash that was used or provided by other operating assets and
liabilities.

ii. Investing Activities

The second part of a cash flow statement shows the cash flow from all investing
activities, which generally include purchases or sales of long-term assets, such as
property, plant and equipment, as well as investment securities. If a company
buys a piece of machinery, the cash flow statement would reflect this activity as a
cash outflow from investing activities because it used cash. If the company
decided to sell off some investments from an investment portfolio, the proceeds
from the sales would show up as a cash inflow from investing activities because it
provided cash.

iii. Financing Activities

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 The third part of a cash flow statement shows the cash flow from all financing
activities. Typical sources of cash flow include cash raised by selling stocks and
bonds or borrowing from banks. Likewise, paying back a bank loan would show
up as a use of cash flow.

4. Financial Statement Ratios and Calculations

You’ve probably heard people banter around phrases like “P/E ratio,” “current ratio” and
“operating margin.” But what do these terms mean and why don’t they show up on
financial statements? Listed below are just some of the many ratios that investors
calculate from information on financial statements and then use to evaluate a company.
As a general rule, desirable ratios vary by industry.

If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two
dollars of debt to every one dollar shareholders invest in the company. In other words, the
company is taking on debt at twice the rate that its owners are investing in the company.

i. Inventory Turnover Ratio = Cost of Sales / Average Inventory for the Period If
a company has an inventory turnover ratio of 2 to 1, it means that the company’s
inventory turned over twice in the reporting period.
ii. Operating Margin = Income from Operations / Net Revenues. Operating
margin is usually expressed as a percentage. It shows, for each dollar of sales,
what percentage was profit.
iii. P/E Ratio = Price per share / Earnings per share: If a company’s stock is selling
at $20 per share and the company is earning $2 per share, then the company’s P/E
Ratio is 10 to 1. The company’s stock is selling at 10 times its earnings.
iv. Working Capital = Current Assets – Current Liabilities: Debt-to-equity ratio
compares a company’s total debt to shareholders’ equity. Both of these numbers
can be found on a company’s balance sheet. To calculate debt-to-equity ratio, you
divide a company’s total liabilities by its shareholder equity, or

Inventory turnover ratio compares a company’s cost of sales on its income statement with
its average inventory balance for the period. To calculate the average inventory balance
for the period, look at the inventory numbers listed on the balance sheet. Take the balance

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listed for the period of the report and add it to the balance listed for the previous
comparable period, and then divide by two. (Remember that balance sheets are snapshots
in time. So the inventory balance for the previous period is the beginning balance for the
current period, and the inventory balance for the current period is the ending balance.)

To calculate the inventory turnover ratio, you divide a company’s cost of sales (just
below the net revenues on the income statement) by the average inventory for the period,
or

Operating margin compares a company’s operating income to net revenues. Both of these
numbers can be found on a company’s income statement. To calculate operating margin,
you divide a company’s income from operations (before interest and income tax
expenses) by its net revenues, or

P/E ratio compares a company’s common stock price with its earnings per share. To
calculate a company’s P/E ratio, you divide a company’s stock price by its earnings per
share, or

Working capital is the money leftover if a company paid its current liabilities (that is, its
debts due within one-year of the date of the balance sheet) from its current assets.

Bringing It All Together

Although this brochure discusses each financial statement separately, keep in mind that
they are all related. The changes in assets and liabilities that you see on the balance sheet
are also reflected in the revenues and expenses that you see on the income statement,
which result in the company’s gains or losses. Cash flows provide more information
about cash assets listed on a balance sheet and are related, but not equivalent, to net
income shown on the income statement. And so on. No one financial statement tells the
complete story. But combined, they provide very powerful information for investors. And
information is the investor’s best tool when it comes to investing wisely.

Definition of Financial Modeling

Financial Reporting involves the disclosure of financial information to the various

stakeholders about the financial performance and financial position of the organization

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over a specified period of time. These stakeholders include – investors, creditors, public,
debt providers, governments & government agencies. In case of listed companies the
frequency of financial reporting is quarterly & annual.

Financial Reporting is usually considered an end product of Accounting. The typical

components of financial reporting are:

1. The financial statements – Balance Sheet, Profit & loss account, Cash flow statement
& Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)

The Government and the Institute of Chartered Accounts of India (ICAI) have issued
various accounting standards & guidance notes which are applied for the purpose of
financial reporting. This ensures uniformity across various diversified industries when
they prepare & present their financial statements. Now let’s discuss about the objectives
& purposes of financial reporting.

Objectives of Financial Reporting

According to International Accounting Standard Board (IASB), the objective of financial

reporting is “to provide information about the financial position, performance and
changes in financial position of an enterprise that is useful to a wide range of users in
making economic decisions.”

The following points sum up the objectives & purposes of financial reporting:

i. Providing information to the management of an organization which is used for the

purpose of planning, analysis, benchmarking and decision making.

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ii. Providing information to investors, promoters, debt provider and creditors which
is used to enable them to male rational and prudent decisions regarding
investment, credit etc.
iii. Providing information to shareholders & public at large in case of listed
companies about various aspects of an organization.
iv. Providing information about the economic resources of an organization, claims to
those resources (liabilities & owner’s equity) and how these resources and claims
have undergone change over a period of time.
v. Providing information as to how an organization is procuring & using various
resources.
vi. Providing information to various stakeholders regarding performance
management of an organization as to how diligently & ethically they are
discharging their fiduciary duties & responsibilities.
vii. Providing information to the statutory auditors which in turn facilitates audit.
Enhancing social welfare by looking into the interest of employees, trade union &
Government.

Importance of Financial Reporting

The importance of financial reporting cannot be over emphasized. It is required by each

and every stakeholder for multiple reasons & purposes. The following points highlights
why financial reporting framework is important –

1. In help and organization to comply with various statues and regulatory requirements.
The organizations are required to file financial statements to ROC, Government
Agencies. In case of listed companies, quarterly as well as annual results are required
to be filed to stock exchanges and published.
2. It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.
3. Financial Reports forms the backbone for financial planning, analysis, benchmarking
and decision making. These are used for above purposes by various stakeholders.
4. Financial reporting helps organizations to raise capital both domestic as well as
overseas.

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 5. On the basis of financials, the public in large can analyze the performance of the
organization as well as of its management.
6. For the purpose of bidding, labor contract, government supplies etc., organizations
are required to furnish their financial reports & statements.

Conclusion

So we can conclude from the above points that financial reporting is very important from
various stakeholders point of view. At times for large organizations, it becomes very
complex but the benefits are far more than such complexities. We can say that financial
reporting contains reliable and relevant information which are used by multiple
stakeholders for various purposes. A sound & robust financial reporting system across
industries promotes good competition and also facilitates capital inflows. This, in turn,
helps in economic development.

4.4 DRUG REVOLVING FUND ACCOUNT

Overview on Management of Drug Revolving Fund

MEANING OF DRUG REVOLVING FUND

Drug Revolving Fund (DRF) is a system whereby the revenue generated from the sale of
drugs to patients is used to purchase new drugs and ensure availability, effective and
efficient system. DRF is also seen as a cost-recovery or “user fee” system to ensure that
drugs are made available and affordable in public health care facilities. Its scheme focus
is to ensure the sustainability and continuity of the essential drugs program.

Historical Perspective

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The concept of DRF was introduced through the Bamako Initiative to be one of the ways
of solving the challenges and difficulties in having available medicines. Nigeria has been
one of the most active supporters of Bamako Initiative, viewing the initiative as a
strategic opportunity to support local councils in promoting health care delivery at the
grass root.

The DRF mechanism within Bamako initiative was adopted as the initial approach for
sustainable financing of drug supply at the local level. The initiative also emphasized the
use of essential drug list and general prescribing. It was adopted in 1988 with financial
and technical support from donor and support agencies like the World Health
Organization (WHO), United Nations Children’s Fund, and the United Kingdom
Departments for International Development (DFID).

Reasons of Drugs Management

Drugs need to be managed properly for the following three reasons:

1. Drugs are part of the link between the patient and health services; hence their
availability or absence will contribute to the positive or negative impact on health.
2. Drugs are no longer the responsibility of health workers only. Political, economic,
financial and traditional considerations have become so crucial in health care that
it has become imperative to look at drugs and health care from these perspectives.

Proper drug management may also be a source of revenue.

Drug Management Cycle

Drug management functions are undertaken in four principal phases which are interlinked
and are reinforced by appropriate management support systems (i.e. tools).

From drug selection to drug use, passing through procurement, storage and distribution, a
whole range of management capacities are required and necessitate using the appropriate
tools within a given legal and policy framework. The Selection of drugs for use at health
centres is determined at the national level by the Ministry of Health. After quantification,
based on price, delivery conditions and quality, the selected drugs go through a
procurement process. After storage and distribution, the use of the drugs requires
prescribing, packaging, dispensing and counseling.

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How DRF Scheme Works?

DRF Scheme starts with one-time capital investment (seed money), provided by the
government, donor agencies or interested communities which is used to purchase an
original stock of essential and commonly used medicines to be dispensed at prices
sufficient to replace the stock of medicines and ensure a continuous supply. Medicine
financing can be in different forms which include:

i. Managed care (National Health Insurance Scheme)

ii. Free drugs policy
iii. Cost sharing and
iv. DRF (user fee)
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The medicinal store located at the Local Government Area (LGA) headquarters is usually
stocked with the initial seed stock. The Health Centre store make requisition to the
medical store in an approved manner, from the Health Centre store, supplies are sent to
the dispensary store, and from the dispensary store drugs are sent to the dispensary and
finally to the patient. The money so realized is placed in a bank account from where
money is withdrawn to make fresh procurement. The cycle continues and expenses for
each cycle equals receipts.

Note: In some health centres located in communities where there are no banks a safe is
installed in the dispensary.

Requirements for Setting-up a DRF

A DRF requires a number of factors to enable its setting up and these include:

i. Political will from Government and Implementers.

ii. A DRF management committee should be set up - the ward health committee can
play this role:Someone representing the Local Government (LG) health
committee can also be included in the proposed DRF committee.
iii. It is needful for a pharmacist to be included in the committee who will serve as
the secretary.
iv. There should be adequate staffing with relevant and competent operators.
v. The functions of the operators should be cleanly delineated i.e. the DRF
committee, medical store staff and facility staff.
vi. Relevant technical staff should be involved in procurement of drugs in-line with
State public procurement law, National drug policy, National health policy, and
other pertinent regulations e.g. PHC drug code. Technical staff should carry out
drug selection, quantification and tender management.
vii. Efficient inventory control with the support tools.
viii. DRF bank account: There should be a dedicated account for DRF financial
operations.
ix. In communities where there is no bank a safe should be installed in the
dispensary.
x. A warehouse and other things necessary for proper warehousing; this will serve as
the medical store and should be located at the LGA headquarters.

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xi. There should be a Health Centre store, Dispensary unit with a store, and a
Delivery van
xii. Monthly account report to management or DRF committee is a necessity
xiii. Insurance cover: There should be adequate insurance to cover losses to stock in
transit as well as facility dispensary store. It may be necessary to also provide
persons in custody of drug stocks fidelity insurance cover.
xiv. A Supervision/inspection team
xv. A rational prescribing and correct drug dispensing (emphasis on EDL and
generics)
xvi. Accounting records: The operators at all levels should use the DRF manual on
financial management and accounting system. Accounting records should be
properly and promptly updated.
xvii. Internal and external audit: This is very vital as a check mechanism. External
audit should be a must at the medical store level while at the facility level the
internal auditor is used who should report to the head of the health centre.
xviii. Incentive payment: DRF operations increase the overall work load of the
operators. They should be paid a form of incentive to ensure the success of the
scheme. Every DRF staff is expected to be paid his/her basic salary as incentive.
xix. Requisition system must be pull to avoid the expiring of drugs and other health
commodities.
xx. Cash and carry: All sales of drugs should be on cash and carry basis. No credit
sales
xxi. Staff Drug Consumption: Staff should pay for their drugs and be reimbursed by
the LGA.
xxii. Training: Opportunities for the training of operators of the DRF should be
provided regularly to enhance the quantity and quality of services rendered.
xxiii. Management Information System (MIS): The appropriate indicator forms
developed for the purpose of monitoring the DRF should be used as required. The
information derived from the exercise should be appropriately disseminated and
used to improve the system.
xxiv. Pilferage/Theft: Acceptable loss due to pilferage should not exceed 2% while loss
due to breakages and stock expiry should not exceed 3%.

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 xxv. Pricing: Retail pricing at the facility level should consider purchase price,
transportation charges and markup to cover administrative and other costs.
xxvi. Emergency patients: A clear policy on payments by emergency patients should be
put in place. The use of emergency packs may be a way forward.

Costing of Drugs in the DRF Framework

This is determined at the national level. The factors to consider in determining price
include purchase price, shipping cost, clearing and custom charges, transportation
charges and markup to cover administrative and other costs. In determining the price, a
factor is also included to take care of inflation so that the revenue generated will not be
eroded with time; this is important for the sustainability of the drug fund. It is also
important not to price drugs at the health centre below the national determined price. At
the local level, the health committee may add another makeup to cover local expenses.

Steps and Procedures in Drug Revolving Fund

1. Selection of Drugs in DRF Scheme

Ministry of Health normally determines the types of drugs and dosage forms that are
selected for use in a country for all levels of health care: primary, secondary and tertiary.
The Criteria for Selection of drugs includes:

i. Keeping costs of drugs and dosage forms affordable and cost-effective so as to

optimize the use of financial resources.
ii. Having drugs available for the treatment of the most prevalent diseases, ailments,
sicknesses at the levels of care provided.
iii. Availability of safe, effective and good quality drugs.

Drugs are selected using WHO essential drugs list as a model. However, Nigeria
governments have their own Essential Drug Lists (EDLs) which used the WHO model as
a template. The EDLs is based on National Health Policies such as the free health care
policy, the subsidized health care policy and, on National Drug Policies such as free drug
policy, subsidized cost of drugs or cost recovery and Cost sharing. Others consideration

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 include patterns and prevalence of diseases, Quality and type of care provided (Primary,
Secondary, Tertiary) and available human resources

The International Nonproprietary Names (INNs), also known as generic names, are
normally used in identifying selected drugs. However, the choice of drugs by generic
names requires the existence of an effective Drug Regulatory Authority (NAFDAC) to
ensure the availability of good-quality, safe, effective and affordable drugs.

Primary Health Centres, which is the main focus of this document, usually have ten to
thirty drugs from the national essential drugs lists. This small number of drugs makes
procurement, storage and distribution easy.

2. Procurement of Drug Requirements

Procurement is made up of drug quantification and tender management and it is based on

selected drugs, dosage forms and available financial resources. The following procedures
are adopted in procuring drugs:

i. Estimating quantity of each drug product required for a given period,

ii. Finding out the prices of the different drug dosage forms required
iii. Allocating funds for each drug dosage form depending on
iv. Priority nature of drug and dosage form,
v. Available finances

Note: Requisition for drug and dosage forms ought to be made after due consultation
with prescribers.

3. Estimation of Drug Requirements

The estimate of the drug and dosage forms required for a given period is undertaken to
avoid shortages (out of stock), ensure credible health care service, prevent excess stock
and avoid waste (loss or mismanagement of financial resources). The following factors
influences choice and quantity of drugs:

i. Population which the health institution serves;

ii. Disease pattern;
iii. Seasonal variation in disease pattern;

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 iv. Monthly (rate of) drug consumption;
v. Knowledge of quantity of each dosage form that is regularly consumed’
vi. Delivery (lead) time;
vii. Time lag between placing orders and receiving the orders;
viii. Request indicator (re-order level);
ix. Quantity of drug product that serves as a signal for re-ordering.

The maximum quantity of drugs held in stock is determined by distance from the central
health services area or regional medical story, size of the health centre store and number
of clients (patients) visiting the health centre. The following three factors are usually
considered as the basis for calculating the appropriate quantity of a particular drug to be
ordered.

4. Delivery (Lead) time

It is the estimated time between ordering drugs and receiving the drugs. It is also the time
when new stock is ordered and when it is received and available for use.

Delivery time may be days, weeks or even months; it may be longer than two months
because of the following reasons:

 Poor road conditions, particularly in the rainy season

 Poor condition of delivery vehicles
 Increased work load at the issuing store
 Non-availability of adequate resources at the central store

5. Consumption Rate of Drugs

Monthly Consumption

Monthly consumption may be collated with data obtained from the Bin (stock) cards,
Daily use record, daily cash record, Drug register (See appendix). The normal monthly
consumption is obtained by:

i. Calculating the average consumption over a period of time (e.g. six months) Or

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 ii. Dividing the total consumption over the period by the number of months the drug
dosage form was consumed.

6. Request Indicator (re-order)

The Request Indicator (RI) is the level of drugs in stock; it indicates when fresh orders
should be made. It is the quantity that is calculated to last between the period of placing
the order and the delivery of the new consignment.

The RI is marked with pencil in the space “RI” on the top right-hand corner of the stock
card. It should be updated at least twice a year because consumption may vary due to
seasonal changes or epidemics. This will ensure that no shortage of stock errors before
the next consignment is expected. The stock should not be allowed to fall below this level
before a new order is placed. Each stock card must have an RI that is updated from time
to time as consumption varies.

The stock should never reach “zero level” before a request is made, as there will be a
shortage of stock for some time. It is easy to calculate the RI once the monthly
consumption is obtained.

7. Determining the Quantity of Drug to be Requested

In determining the quantity to be requested for, some factors need to be put into
consideration:

i. Consider the lead or delivery time.

ii. The number of patients to be treated (using national treatment guidelines)
iii. Collaborate with the head of the health centre (prescriber) when making a new
request. The prescriber is better placed to know for which item an extra quantity
has to be requested because of epidemics or seasonal changes in disease pattern.
iv. Look through all the stock cards in a systematic manner and compare the RI with
the current stock balances.
v. Request only those items where the stock balance approaches the RI, equals the
RI or is below the RI.

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vi. If the item is being requested for the first time, the stock now in inventory will be
zero.
vii. Stock now in inventory (SI) is the quantity of an item available for dispensing or
distribution, including safety stock. (Safety stock is the reserve stock of an item
needed to prevent stock outs due to unforeseen events like late receipt of orders or
to an increase in use of the item.)

Requisition, Supply and Receipts of Drugs in a DRF Scheme

Drugs that are ordered for use in the health centre must be approved in the centre. These
drugs should be relevant to the pattern of endemic diseases as well as the type of services
being provided in the HC. It is advisable and important to request drugs on a regular
basis, as drugs will only be delivered when requested; this will also help prevent
shortages and avoid patients losing confidence in the health centre. The delivery time
should be taken into consideration in ensuring that drugs are not in short supply.

Supply of drugs from medical stores: Stores requisition/delivery (issue) form

A stores requisition/delivery (issue) form should accompany any supply made from the
medical stores. Health Centre normally receives their drug supplies from central, regional
or health, services area medical stores. In very rare cases they may obtain drugs from
other sources. The following points should be noted:

i. Supplies are issued on the basis of request made to the medical store by the health
centre on an approved stores requisition/delivery (issue) form.
ii. The request should not be excessive and should preferably ask for quantities that
can be used in between delivery times.

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iii. The quantity of drugs requested is made in the appropriate column of the form
and sent to the medical store from which drugs are supplied.
iv. The request is made on the basis of approved delivery time, time frame or in
emergency.
v. The quantities of drugs delivered or issued from the medical stores should be
entered in the appropriate column of the form.
vi. The records of requisition and receipt of drugs from the medical store are kept in
the health centre in an approved manner.
vii. The delivery note from the central medical store should indicate what has been
supplied as indicated in the stores requisition/delivery (issue) form.

Receipt of drugs at dispensary

In receipt of drug at the dispensary, the following should be noted:

i. The consignment must come with two copies of the stores requisition/delivery
(issue) form
ii. Check that the quantity issued actually corresponds to the quantity indicated on
the stores requisition/delivery (issue) form.
iii. Check off each drug after checking.
iv. Take note of the unit price of each drug and compare it to the previous unit price.
v. Check that all original boxes, tins or bottles are unopened and are in good
condition.
vi. Check the labels and ensure that there are no expired drugs being received.
vii. Any drugs already expired or soon to expire that cannot be consumed before
expiration or drugs not in good condition should be returned for destruction or
redistribution to other Centre.
viii. Sign two copies of the stores requisition/delivery (issue) forms if the above
procedures have been completed.
ix. Return one copy of the signed stores requisition/delivery issue form to the
medical stores and place another copy in the “drug order” file.
x. Place drugs with shorter expiration dates in front of the shelf so that they can be
reached and used first. (FIFO – first in first out)

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 xi. Remember to record the new stock on the respective stock (bin) cards and
appropriate forms.

8. Dealing With Discrepancies in Receiving Drugs

Where there is a difference in the quantities of drugs issued and the quantities actually
received, the delivery team should be to give an immediate explanation and make the
necessary correction on the stores requisition/delivery (issue) form. If there are broken
bottles or leaking packages, hand those over to the delivery team along with an internal
drug return (IDR) form.

Discrepancies should always be recorded in the remarks column on the stores

requisition/delivery (issue) form (diagram 2).

9. Dealing with “Expiry Before Use” (Dexp)

It is possible to calculate the quantity of a product likely to pass the expiry date before
use. This calculation helps in determining drugs that cannot be used in the HC before the
expiry date. These drugs should be returned to the medical store using the IDR form. It
also helps determine if stock-outs could occur, caused by the loss of stock due to expiry.

The following formula is used to calculate Dexp:

Dexp= (Si- (No. of months until expiry date x CA)

Where:

Si= stock now in inventory (also called current stock)

CA= Average monthly consumption

10. Completing Stores Requisition/Delivery (Issue) Form

This form is usually filled when the HC dispensary is ordering items from the medical or
central store. It is advisable to make a request on a standard stores requisition/delivery
(issue) form see Diagram 2. This form should be produced in four copies. The original
and two other copies of the form will be sent to the central store when completed. The

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 fourth copy is kept in the dispensary to remind the health worker in charge of drugs of
items requested.

In filling the forms, one must ensure that the following items are filled in correctly:

1. Name of drug and dosage form;

2. Unit of issue and quantity requested;
3. The requisition number (it is preferable to begin with a new number each year,
e.g.)
4. The name of the dispensary and the date the requisition was made;
5. The name and signature of the health worker making the requisition;
6. Where the stores requisition, delivery (issue) form is designed to contain all the
items listed, fill in only the quantities of those items needed.
7. Write down the approximate unit price of each requested item and the appropriate
total cost of each item;
8. Name and signature of the health worker making the requisition;
9. The head of the health centre and a representative of the health committee should
endorse the stores requisition/delivery (issue) form.

11. Transfer Voucher or Internal Drug Return (IDR) Form

The transfer voucher effects the movement of the following items to the medical store:

 Expiring drugs
 Damaged or spoiled drugs
 Drug soon to expire
 Excess stock resulting from wrong RI or low consumption.

An internal transfer directly from one dispensary to another without including the central
store should not be done because this will create confusion in accounting. The following
rules should be kept in mind:

1. It is important that drugs are not allowed to expire in the health Centre because of
changes in disease pattern or for any other reasons.

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 2. Items that can be used elsewhere should be transferred immediately using an IDR
form to the medical stores for subsequent redistribution (Diagram 3)
3. Expired or spoiled items should be transferred immediately using the IDR form to
the medical stores for destruction.
4. Excess stock should normally be transferred at least 3 months before expiration to
the medical store using the IDR form.
5. An internal transfer directly from one dispensary to another without involving the
central store is not permitted for accounting purposes.
6. The IDR form should be filled in triplicate. The triplicate copy is retained in the
health centre while the original and duplicate copies accompany the returned
days.

12. Procedure for supply drugs to health care wards and outpatient clinics

Where the Health Centre has lying in-wards and outpatient clinics to which drugs are
supplied, the Health Centre store will supply the drugs in accordance with the following:

 A request is made from the ward/clinic in an approved manner.

 Supplies are made on the basis of the request, and quantities of drugs supplied are
recorded in an approved manner.
 Entries of quantities of drugs supplied are made on bin cards as well as the drug
register maintained (in the store) for drugs received and supplied.

Normally, drugs are supplied from the Health Centre (dispensary) store to the dispensing
area. Entries of such drug quantities are also made on bin cards or the drug register
maintained in the store in an approved manner.

13. Drug Distribution

At the Health Centre level, drug distribution concerns mainly dispensing drugs to
patients. This requires an understanding of the patients (who may not speak or understand
the language of the dispenser) and practical skills in dispensing and record keeping. The
other aspect of distribution of drugs at the Health Centre is the return of overstocked and

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 nearly expired drugs to the medical store. Drug distribution also includes movement of
drugs from medical store to Health Centre store.

The Push/Pull Systems

The pull system is the recommended option in a drug revolving fund scheme. It is a
distributive system where the Primary Health Care center makes a requisition to the
medical store, the advantage is that the Health Centre gets the drug they need and this
leads to reduce expiration of drugs. The push system on the other hand is when the
medical store supplies whatever drugs they wish to the PHC; the disadvantage of this
system is that it brings about increased expiration of drugs at the Health Centre.

14. Storage of Drugs, Stock Management and Drug Use

Drugs must be stored in a specially designed secure area or space of a building for the
following reasons:
 Avoid contamination or deterioration,
 Avoid disfiguration of labels,
 Maintain integrity of packaging and so guarantee quality and potency of drugs
during shelf life,
 Prevent or reduce pilferage, theft or losses,
 Prevent infestation of pests and vermin.

A drug storage environment should have an adequate temperature, a sufficient lighting,

clean conditions, humidity control, cold storage facilities, and an adequate shelving to
ensure integrity of the stored drugs.

Arrangement of drugs on shelves

The following guidelines should be duly followed in the arrangement of drugs:

 Shelves should be made of steel or treated wood.

 Shelves should be strong and robust.
 Drugs are arranged in alphabetical order of generic names.
 Each dosage form of drug is arranged in separate and distinct areas.

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 Sufficient empty space should demarcate one drug or dosage form from another.

Most recently received drugs are placed behind old stock on the shelf except where new
drugs have shorter expiration dates. To have access to drugs with shorter expiration dates
first, put these in front of the shelves. Those with longer expiration dates should be
placed behind those with shorter dates.

The storeroom

A well-arranged store enables easy identification of drugs and saves time when picking a
drug from the shelves. The following procedure will facilitate managing the drugs in the
store:

 Put drugs on the shelves in alphabetical order corresponding to the essential drug
list. This helps remove drugs quickly and makes for easy inventory control.
 The rule of FIRST IN FIRST OUT (FIFO) should be applied always. So, drugs
that were received first should be used first, except where the new stock has
shorter expiration dates than the old stock. In this regard, the principle of FIRST
TO EXPIRE FIRST OUT (FEFO) should apply.
The Dispensary/Health facility

Good arrangement facilitates dispensing work. Hence, the following must be done to
have well-arranged dispensary:

 Retain a daily drug use record in the dispensary.

 Provide a table for dispensing drugs.
 To facilitate work, do not overcrowd the dispensing table.
 Arrange documents in an orderly manner on the table, away from the dispensing
area.
 Clean after each use tablet counters and place within easy reach on the table.
 Avoid dispensing wrong drugs by arranging drugs on the table in alphabetical
order so that the drug being dispensed is not confused with another.
 Always close drug containers from which drugs are not being dispensed to
prevent spillage or dispensing the wrong drug.

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15. Drug Stock Management Support Tools
Record-keeping is an important part of drug management. Mistakes on records should be
neatly crossed out and signed for but not obliterated. The following stock management
records (See appendix for examples) should be completed in the order described in the
following sections.
The Bin Card
 They are important for good accountability of stock movement.
 The cards should be made of stiff cardboard and be placed near the drug products
that they refer to on the shelves.
 If one dosage form is available in two different strengths, open separate stock
cards for each strength
 Enter quantity of seed stock in the “in” and “balance” columns with date, unit
price and supplier.
 Enter quantity of any new stock in the “in” column with date, unit price, supplier
and delivery number.
 Enter balance of stock brought forward in “balance” column with date.
 Entries of receipt and issue of drugs are made after the event.
 Always have a balance of stock entered in the “balance” column with date.
 Always issue out full containers of drugs from the store and enter the quantity of
drug issued in the “out” column.
 Physically check the actual balance of stock against current balance in stock card
from time to time to detect any discrepancy.
 Maintain a stock (bin) card for each drug or dosage form of a drug in the store
where drugs are kept.
 Other names for bin cards are tally card, stock cards e.t.c.

Entries to be made in stock (bin) card

 When an item is received, from the central store, enter the quantity received in the
“IN” column on the stock card using a red pen.
 Add the number to the previous balance on the stock card to obtain the current
balance.

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  Enter the unit price
 Enter the date and number of the delivery note of the central store in the column
“Ref. No”.
 It is preferable to take a full container of a drug from the shelf in the store to the
dispensing area when the stock in the dispensing area is finished or almost
finished.
 Each time a full container of a drug is taken from the shelf to the dispensing area,
an empty of the number of containers taken out is made in the stock (bin) card
using a blue or black pen in the “out” column.
 Subtract the number of containers taken out from the previous balance in the
stock card to obtain the current balance.

16. Consumption records at the dispensary level

The record on consumption of drugs used in the dispensary is called the daily use record
book and its uses are to:

 Make entries of all drugs dispensed on a daily basis.

 Maintain a daily use record in the daily use record book in the format shown in
diagram 8
 Use a fresh page for making entries for each drug dosage form.
 Reserve a page or two for every month’s consumption of drugs.
 Make entries from actual receipts issued.
 When a drug item is taken out of the dispensary store, an entry is made in the
“OUT” column in the stock (bin) card in the store. An entry is also made in the
“IN” column, with red pin, in the daily use record in the dispensing area as well as
the date the entry was made.
 Add the quantity of drugs taken from the store to the dispensary to the previous
balance in the daily use record to obtain current balance.
 Enter the dispensing date and the total quantity of dosage form dispensed daily in
the “OUT” column.
 Subtract the quantity dispensed or used daily from the balance to obtain current
balance.

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  Enter any shortage in the “OUT” column and necessary remarks in the
“REMARKS” column

17. Dealing with Discrepancies

Discrepancies should always be recorded in the “REMARKS” column as in (Diagram 8).

Discrepancies may arise for one of the following reasons:

 Some of the tablets may have crushed into powder or broken.

 A shortage may result from a mistake by the manufacturer.
 A shortage may occur in the containers when tablets issues are not recorded in the
daily use record sheet,
 Arithmetic errors may result in shortages or excess stock.

If there is nothing remaining in the container and entries were made of all drugs
dispensed in the daily use record book, then it could be concluded that the shortage came
from the manufacturer during packaging. Keep all available evidence and report to the
medical store as soon as possible. The medical store may receive similar reports from
other health centres and can then estimate the average shortage per container for that
particular drug item and credit your account.

This irregularity may also be reported by the medical store to the suppliers for
compensation, where possible. This exercise can only be accurately done with proper
documentation in the daily use record book.

18. Daily use/cash record

The daily use/cash record has to be filled on a daily basis and in particular when
payments are made for dispensed drugs. The following data could be transferred from the
duplicate copies of the receipt book to the daily use/cash record sheet (Diagram 10) when
the last patient (client) for the day has been served:

 Date,
 Name of patient,
 Receipt number,

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  Quantity of each drug dispensed,
 Money collected from the patient.

Draw a line under the last entry for the day in your daily use/cash record sheet using a red
pen. The quantity of drugs is expressed as number of tablets (for tablets) or volume in ml.
(for liquids) dispensed. Add up the quantities of each drug dispensed and cash collected
to give the details of daily transactions.

19. Financial Record Book

The total daily cash from the column “CASH RECEIVED” of a daily use/cash record
should be transferred to the financial record book (FRB) and the new balance calculated
in the FRB as shown in item 11.

20. Custody of cash

Commercial banks usually do not have branches in most villages where Health Centre are
located. It is, therefore, important to adopt convenient methods for securing all cash and
always having money available for the replenishment of drugs.

The following procedures can be helpful in the handling of cash:

1. A locally-made durable safe cash should be provided and buried in the floor in
such a way that it cannot easily be located by other people. This safe should be
used in such a way that once money has been deposited, it can only be taken out
in the presence of a member of the health committee or supervisory team who has
one of the keys.
2. Purchase money orders with cash collected. Address such money orders to the
medical store, if possible, and keep in the safe for making payment to the medical
store during the next supply.
3. Take money along for making payments for supplies whenever a trip is made to
the medical store.
4. The delivery team could collect cash for supplies made to the Health Centre when
delivering supplies.

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 5. Only person from the central store team should collect money from the Health
Centre
6. Any amount that is not paid out (balance) is carried forward and used to pay
during the next visit to the medical store.
7. A receipt, such as that in Diagram 12, could be used to document the collection
and payment of cash in the FRB.

21. Current Capital Situation Card (CCSC)

The current capital situation card (CCSC) is an important source of financial information
for the dispensary, supervisory team and members of the health committee. It should be
possible to give, at any time, a report on the finances of the dispensary using the CCS
card. This means that all financial transactions in the health centre dispensary are
documented.

This document is used to follow up the value of stock and cash in the dispensary at any
time. When a drug consignment is received, the cash value of stock at the dispensary
increases. When an internal drug return is made, it reduces the dispensary’s value of
stock. At any time, the value of stock/cash should be equivalent to the figure on the
CCSC.

The following transactions are recorded on the CCSC as shown in item 13:

1. When drugs are received, their total value is entered in the column “SUPPLY”
and this is added to the previous balance.
2. Cash paid to the medical store should be entered in the column “CASH PAID”
and subtracted from the previous balance.
3. All internal drug returns should also be expressed in cash and entered in the
column “IDR” with a red pen and subtracted from the previous balance. Note
“IDR” under “REMARKS” (Diagram 13).
4. Any price revision is entered in the column “SUPPLY” and added to or subtracted
from the previous balance depending on whether the revision has resulted in an

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 increase or decrease in the value of stock. Note “Price Revision” under
“REMARKS” (Diagram 13).
5. Whenever there is an inventory-taking exercise, enter the value of stock taking in
the column “BALANCE”. The balance represents the amount of cash in hand and
the drugs not dispensed (in stock) reflected as cash.
22. Monthly Return form

The monthly return form is used at the end of each month to collect data for the medical
store. This data will help the medical store to assess monthly consumption in the health
centre and determine the future purchases at the health centre. This financial progress of
the dispensary in relation to attendance at the health centre can also be assessed with the
data. The information on the monthly return form (item 14) is:

 Cash collected for the month (as in the FRB),

 Total number of patients that attended the health centre. Information provided by
the head of the health centre,
 Quantities of each drug dispensed for the month (refer to daily use record or the
daily use/cash record sheet.

23. Inventory form

The inventory form (Item 15) is used at the end of each financial year or at any time it
becomes necessary to undertake an inventory exercise in the dispensary. Both shortages
and excesses can be found in the exercise. In either situation, a thorough investigation
needs to be done (e.g. reviewing all additions and subtractions in the inventory sheets). It
is advisable to carry out an inventory exercise at six-monthly intervals (or even quarterly)
in order to identify any problems early enough rather than waiting for the end of the year.

A representative of both the medical store and the health committee should participate in
the inventory exercise. The following activities should be carried out during the
inventory:

1. Any cash in hand should be counted first and included in the inventory figures.
2. Any supply made before the inventory must be counted with the other items.

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 3. Count all drugs in the store and dispensing area and record the numbers. Use a
tablet counter to prevent contamination.
4. Do not open full tins and packages to count the contents.
5. Verify all full tins and packages to make sure that their contents are intact.
6. Calculate the total value of stock by adding the values of all items. Compare this
number with the current balance in the CCSC. The two should correspond if there
has been efficient management of stock and cash during the period being audited.
7. These figures will be used by an external auditor to prepare a balance sheet for the
dispensary.
8. The health worker should pay for any deficits established at the end of the audit.
9. Profits declared in the audit report should be put back into the health system.

24. Storage of documents

For easy reference, documents should be numbered and put into different files. Various
colours of files may be used for easy reference. The following documents should be put
into different files:

 Daily use/cash record,

 Financial documents (e.g. IDR),
 Requisition/delivery form,
 General correspondence,
 Miscellaneous.

Keep all used documents (e.g. receipt booklets, FRB, stock cards, CCSC) in safe custody
for at least five years before they are thrown away.

25. Use of drugs rationally

The rational use of drugs requires that the drug is prescribed for a particular patient after
proper diagnosis of a health problem. Prescriptions should promote the rational use of
drugs. Rational use of drugs requires that a particular patient with a specific health
problem receives drugs according to the following:

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  Appropriate doses
 Appropriate dosage form;
 Appropriate route of administration;
 Appropriate frequency of administration
 Appropriate duration of treatment;
 Appropriate information to the patient;
 Adequate follow up

26. Supervision/Inspection

Two teams should be involved in conducting inspection of the dispensary. The first is the
team from the appropriate authority. A pharmacist should be a member of this team. The
second team is represented by some members of the health committee. The health
committee has to meet on a regular basis with the head of the health centre to plan
activities for the health centre and dispensary and prepare strategies for the
implementation of planned activities.

The duties of the appropriate authority are as follows:

1. Ensure that drugs are properly arranged on shelves in the dispensary.

2. Check that security measures are in place.
3. Collect a few names with dates at random from receipt books, cross-check with
the health centre consultation register and verify if those patients were actually
consulted before coming to the dispensary.
4. Recalculate at random the figures in the Financial Record Book (FRB) to ensure
that they are correct.
5. In consultation with the health committee, make payments following laid down
criteria.
6. Decide with the health committee who will be responsible for deficits and
surpluses.
7. Make advance payment of salary to the health committee who will later pay the
health worker on a monthly basis.
8. Pay incentives where approved.
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 9. Recommend to the health committee further work to be done in the dispensary.
10. Give on-the-job training so that records are always kept up-to-date.
11. Establish a report on-the-spot on observations and leave a copy in the health
centre.
12. Confirms the availability of all approved drugs on the list.

The role of the health committee for proper functioning of the dispensary is stated as
follows:

1. Go through previous inspection reports made by the appropriate authority and

note any action to be taken.
2. Check the general cleanliness of the dispensary.
3. Compare monthly turnover at the dispensary in relation to the number of patients
that were seen at the health centre.
4. Confirm the availability of all approved drugs on the list in the dispensary.
5. Provide adequate furniture for the centre.
6. Procure shelves for the drugs.
7. Use an appropriate method to select a candidate to work in the dispensary.
8. Follow up training of selected candidates at the medical store.
9. Engage the trained candidate on contract.
10. Inspect financial documents and detect any deficits early enough.
11. Check that all administrative records in the dispensary are up-to-date.
12. Ensure maintenance, cleanliness and proper-set up of the dispensary.
13. Participate in handing over the dispensary in case of any absence.
14. Sensitize the population on the advantages of the use of the dispensary.
15. Assist in receiving drugs for the health centre, when necessary.
16. Assist in all inventory taking.
17. Employ a watchman for the dispensary and health centre.

Reference

Chabot J. The Bamako initiative. Lancet. 1988 Dec 10;2(8624):1366–1367.

UNICEF (1988).The Bamako Initiative. New York: UNICEF. (MimeographE/ICEF/1988/I/L40)

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4.5 COST RECOVERY IN PRIMARY HEALTHCARE SYSTEM

Cost Recovery Method

The cost recovery method of revenue recognition is a concept in accounting that refers to a
method in which a business does not recognize income related to a sale until the cash collected
exceeds the cost of the good or service sold. In other words, using this method, revenue is only
recognized when cash payments have recovered the seller’s cost.

Cost Recovery Method in Primary Health care System

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The cost recovery method is a way of recognizing and classifying revenue in accounting. When
using the cost recovery method, a business doesn’t record income related to the sale of its
services until the money collected from a client exceeds the cost of the services rendered. You
might also hear the cost recovery method referred to as the collection method.

As a freelancer using the cost recovery method, you wouldn’t record your profits until the
payment you receive from a client covered all your expenses related to the project.

The cost recovery method is also defined as a method of revenue recognition in which there is
uncertainty. Therefore, it is used to account for revenue when revenue streams from a sale cannot
be accurately determined. Accounting standards IAS 18 require a company to recognize revenue
only when the amount is measurable and cash flows are probable. The underlying concept
behind this method is as follows: Net profit is not recognized until the cash collected exceeds the
cost of the item and/or service sold.

Revenue Recognition

Revenue recognition is a generally accepted accounting principle that identifies points at which
income becomes actual revenue. Revenue recognition is a key process in accrual accounting.

Using the principle of revenue recognition, revenue is recognized and recorded when it is
actually earned and when there’s an assurance of payment. Cost recovery method is one type of
revenue recognition. You can get a full rundown of revenue recognition methods here.

The cost recovery method can give an accurate view of the financial state of your business at any
given time, as it doesn’t predict future revenue. Because of this, the cost recovery method is
considered to be the most conservative form of revenue recognition in business accounting.

If you’re not sure that you’ll ever receive the full income for which you’ve invoiced a client, or if
you don’t know that you’ll receive all payments in a single calendar year, it’s a good idea to use
the cost recovery method of accounting so you don’t overestimate the revenue you’re likely to
receive. In any instance of uncertainty around revenue, the cost recovery method is
recommended.

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How to Calculate Cost Recovery

The following steps will have you calculate cost recovery for your business revenues:

1. Calculate Project Costs - To calculate cost recovery, you first need to determine the
costs you’re incurring to complete a project. Do you have costs for subcontractors,
equipment or software? Add all these up to calculate your total project costs.
2. Track the flow of Revenue - Whether your client sends you a lump sum payment after
you’ve completed a project, or pays in multiple installments over a longer period of time,
you’ll want to track all the revenue flowing in to your company, along with your
unrecovered costs.
3. Determine your Profits - Calculate the profits you make on the project using the cost
recovery method, by subtracting your project costs from your total revenue. All of your
revenue and costs should be recorded as business transactions.

Cost Recovery Method Example

Let’s say you’re a freelance web developer working on a project for a new client and
you’ve hired a freelance copywriter to produce all the content for your client’s website.
You’ve heard feedback from other developers that this particular client has sometimes
failed to pay their invoices, or failed to do so in a timely manner, so you’re using the cost
recovery method to record your revenue.

Assuming that hiring a copywriter is the only cost you’ve incurred for the project, under
the cost recovery method, you would only recognize and record the revenue earned from
this project when your income exceeds the cost of employing the copywriter.

You’re billing the client $20,000 for the project. You pay the copywriter you hired a flat
fee of $10,000 for their work, beginning September 1.

The client will pay the cost of your services in installments, with an initial deposit of
$5,000 paid on September 1 and the outstanding balance to be paid in two installments of
$7,500 on October 1 and November 1.

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 Using the cost recovery method, you would recognize the client’s payments in the
following way:

Date Cash Debit Installment Accounts Unrecovered Realized

Receivable (credit) Cost Gross Profit
N K N K N N K
January 1 20,000 00 10,000 00
January 1 5,000 00 5,000 00 5,000 00
February 1 7,500 00 7,500 00 0 00 2,500 00
March 1 7,500 00 7,500 00 0 00 10,000 00
20,000 00 20,000 00 10,000 00

What Is Meant by Cost Recovery?

Cost recovery is the principle of recovering business expenditure, and generally refers to
regaining the cost of any business-related expense.

For accountants, cost recovery accounting is a tax concept that refers to the recovery of
an expense, and accountants generally do this through depreciation. Using depreciation
tax law, an accountant can lower the taxes a business pays which then increase the profits
the company earns.

Example

Shiny Clothes Ltd. is a retail store that recently purchased inventory costing N 100,
000.00. The retail store sells its inventory to multiple customers for a total sale price of N
130,000.00 – implying a N 30,000.00 profit. The sales were made on credit, and Shiny
Clothes Ltd. does not know the recovery rate of their sales to customers. The company
decides to use the cost recovery method to recognize revenue.

The retail store made sales of N 100,000.00 in period 0 and received cash flows from
sales of N 50,000.00, N 60,000.00 and N 20,000.00 in the following three periods,

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respectively. The cash flows from the sale of N 100,000.00 inventory are shown as
follows:

Period 0 Period 1 Period 2 Period 3

N100, 000.00 N50,000.00 N60,000.00 N20,000.00

Recall that costs must be covered before any profit is recognized. In the scenario above,
Shiny Clothes Ltd. would start recognizing profit in period 2 when the money inflow
exceeds the cost of the sale. Profit for the sale of inventory under the cost recovery
method would be recognized as follows:

Period 0 Period 1 Period 2 Period 3

N0.00 N 0.00 N10,000.00 N20,000.00

Journal Entries for the Cost Recovery Method

With reference to the example above, the journal entries for Shiny Clothes Ltd for the
sale of N100,000.00 worth of inventory would be as follows:

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 Date Account Title Debit Credit
N K N K
Period 0 Sales Revenue 130,000 00
Cost of goods sold 100,000 00
Deferred gross profit 30,000 00

Date Account Title Debit Credit

N K N K
Period 1 No Journal entry

Date Account Title Debit Credit

N K N K
Period 2 Deferred gross profit 10,000 00
Realize gross profit 10,000 00

Date Account Title Debit Credit

N K N K
Period 3 Deferred gross profit 20,000 00
Realize gross profit 20,000 00

Impact of the Cost Recovery Method on a Company’s Earnings

If we accounted for the sale by Shiny Clothes Ltd. as a regular sale, the amount of profit
recognized would be $30,000 in period 0. It would result in an immediate impact on a
company’s earnings:

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 Period 1: +$30,000 in earnings

However, with the cost recovery method, there is uncertainty in the collection of money
resulting from the sale. Therefore, no earnings will be recognized until the cash inflows
exceed the cost. In the example above with Shiny Clothes Ltd., under the cost recovery
method, the company’s earnings will be impacted as follows:

i. Period 0: No effect
ii. Period 1: No effect
iii. Period 2: + N10,000 in earnings
iv. Period 3: + N 20,000 in earnings

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 STUDENT
ACTIVITY

TOPIC: Discuss the differences between Government Accounting and Commercial Accounting
Procedures

STUDENT
OUTCOME:

4.1 Define budget

4.2 Explain the effects of improper budgeting
4.3 Explain a financial report
4.4 Discuss drug revolving fund account
4.5 Discuss cost recovery in primary healthcare system

TASK:
10. Assignment
11. Quiz (Multiple choice and Essay
questions)
12. Group activities

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