MAF 1101: Fundamentals of Accounting

Course Level: 1 (Semester 1)

Credit Units: 4 Credits

Hours: 60

Instructor: Dr. Stephen Kasumba,

Senior Lecturer and Director, Institute of Distance Education, E-

Learning and Learning Centres, Kyambogo University

Brief Description

The course explores the principles, techniques, and methods that

accountants follow when preparing financial statements. Topics covered
include; introduction to accounting, recording accounting information, and
accounting for cash, year-end adjustments, and preparation of final financial
statements for sole proprietorship.

Learning Outcomes

By the end of the course, the learners should be able to:

• Prepare accounting records.

• Prepare financial statements.
• Record transactions in books of accounts using double entry system,
including preparation of bank reconciliation statements
• Use accounting reporting framework
• Account for non-current assets and depreciation
• Prepare financial statements for business organisations, using
international financial reporting standards.

Course outline

Introduction to accounting (8 hrs)

• Definitions – Accounting, bookkeeping

 • The accounting cycle
• Accounting terminologies, principles, concepts, and conventions
• Overview of International Accounting Standards/International
Financial Reporting Standards
• Accounting equation and the statement of financial position
• The double entry system and effect of transaction on the statement of
financial position
• Forms of business associations: Sole proprietorships, Partnerships and
Companies

Recording accounting information (18 hrs)

• Source documents (receipts, vouchers, invoices, credit and debit

notes…)
• Books of original entry (general journal, sales journal, purchases
journal, sales returns journal, purchases journal, asset schedule…)
• The ledger (general, sales, purchases, returns…)
• The trial balance
• Types of errors disclosed (suspense accounts) and not disclosed by the
trial balance
• Correction of errors

Accounting for cash (10 hrs)

• Internal controls over cash

• The cash book (Single, Double and Three-Column)
• The petty cash book
• Bank reconciliation statements

Year-end adjustments (14 hrs)

• The need for year-end adjustments

• Accruals and prepayments
• Bad debts and allowances for bad debts
• Depreciation and allowances for depreciation
• Asset acquisition and disposal
Preparation of Financial Statements for Sole traders (for internal use) (10
hrs)

• Statement of Comprehensive Income (Income Statement)

• Statement of Financial Position

Assessment Methodology

Continuous assessment 40%

End of semester Exam 60%

Teaching methods

Face to face lectures, tutorials, and group and class discussions

Reading List
Sangster, A. and Lewis, G, (2024) Frank Wood’s Business Accounting,
Vol. 1, 16th Edition, Pearson, UK
ACCA (2024) Financial Reporting Study Text
IASB (2012), International Financial Reporting Standards
Weetman, P. (2019). Financial Accounting: An Introduction, Pearson;
8th edition
Elliott, B. and Elliott, J. (2009). Financial Accounting and Reporting,
13th Edition, Pearson Education Limited
What is Accounting?

The American Accounting Association (AAA) defined accounting as 'the

process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of
information'.

The American Institute of Certified Public Accountants defined 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”.

Objectives of Accounting
The following are the main objectives of accounting: -

1. To keep Systematic Records

The main objective of accounting is to keep a systematic record of financial
transactions which helps the users to understand the day to day transactions
systematically to gain knowledge about overall business.

2. To Protect Business Properties

Accounting provides protection to business properties from unjustified and
unwarranted use. Information about the above matters helps the proprietor in
assuring that the funds of the business are not necessarily kept idle or
underutilized.

3. To Ascertain Profit
Another objective of accounting is that it helps in ascertaining the net profit
earned or loss suffered on account of carrying the business which is done by
keeping a proper record of all books of accounts for revenues and expenses of a
particular period.

4. To Ascertain the Financial Position

The accounting helps owners and other stakeholders know their business's
financial position. These are the business's assets and liabilities on a particular
date. It serves as a tool for ascertaining the financial health of the business.
5. To Facilitate Decision Making
Accounting also helps in the collection, analysis, and reporting of information
at the required points of time to the required levels of authority in order to
facilitate rational decision-making.

6. Information System
Another objective of accounting is that it can be defined as accounting functions
as an information system for collecting and communicating economic
information about the business enterprise. This information helps the
management in taking appropriate decisions.

Users of Accounting Information

Users of accounting information

Accounting information of a business enterprise is used by many
stakeholders. Different parties use this information for different purposes
depending on their needs. Therefore, the accounting information system of a
business enterprise must be designed in a way that can generate the reports
to satisfy the information needs of every interested party.

We can broadly divide the users of accounting information into two groups
– internal users and external users. Internal users include managers and
owners of the business whereas external users include investors, creditors of
funds, suppliers of goods, government agencies, general public, customers
and employees.

Internal users
Internal users use a mix of management and financial accounting
information. Some internal users of accounting information and their needs
are briefly discussed below:

1. Management
Management uses accounting information for evaluating and analyzing
organization’s financial performance and financial position, for taking
important decisions and appropriate actions to improve business
performance in terms of profitability, financial position and cash flows. As
many popular management accounting books make clear, one of the major
roles of management is to set rules and procedures to achieve organizational
goals. For this purpose, management uses information generated by financial
as well as managerial accounting systems of the organization.

2. Owners
Owners invest capital to start and run a business with the primary objective
to earn profit. They need accurate financial information to know what they
have earned or lost during a particular time. Based on accounting
information, they decide their future course of action such as expansion or
contraction of business.
In small businesses (like sole proprietorship and partnership) owners
themselves perform the function of management.

External users
External users normally use only financial accounting information. Some
external users of accounting information and their needs are briefly discussed
below:
1. Investors
In corporate form of business, the ownership is often separated from the
management. Normally investors provide capital and management runs the
business of the entity.

The accounting information is used by both actual and potential investors.

Actual investors use this information to know how their funds are being used
by the management and what is the expected performance of the business in
future in terms of profitability and growth. Based on this information, they
decide whether to increase or decrease their investment in future. Potential
investors use accounting information to decide whether or not a particular
corporation is suitable for their investment needs.

2. Lenders
Lenders are individuals or financial institutions that normally lend money to
businesses and earn interest income on it. They need accounting information
to assess both financial performance and financial position of the business,
and to have a reasonable assurance that the entity to whom they are going to
lend money would be able to return their principal amount as well as pay
interest thereon.

3. Suppliers
Suppliers are business individuals or organizations that normally sell
merchandise or raw materials to other businesses on credit. They use
accounting information to get an idea about the future creditworthiness of the
business and to decide whether or not to continue providing goods on credit.

4. Government agencies
Government agencies use financial information of businesses for the purpose
of imposing taxes and regulations.

5. General public
General public also uses accounting information of business organizations.
For example, accounting information is:

• a source of education for students of accounting and finance.

• a source of valuable data for those researching about organizational
impact on individuals and economy as a whole.
• a source of information for the people looking for job opportunities.
• a source of information about the future of a particular enterprise.
6. Customers
Accounting information provides important information to customers about
current position of a business organization and to make a judgment about its
future. Customers can be divided into three groups – manufactures or
producers at various stages of production, wholesalers & retailers, and end
users or final consumers.

Manufacturers or producers at any stage of processing need assurance that

the organization in question will continue providing inputs such as raw
materials, parts, components and support etc. The wholesalers and retailers
must be assured of a consistent supply of merchandise inventory. The end
users or final consumers are interested in the continuous availability of
products and related accessories. Because of these reasons, accounting
information is of significant importance for all three types of customers.

7. Employees
Employees who do not have a hand in core management of the business are
considered external users of accounting information. They are interested in
financial information because their present and future is tied up with the
success or failure of the business. The success and profitability of business
ensure job security, better remuneration, job promotion and retirement
benefits.

The Parable of the Talents and its Linkages to Business and

Accounting

The Parable of the Talents, found in the Bible in Matthew 25:14-30, tells the
story of a master who entrusts his property to his servants before going on a
journey. Each servant is given a different number of talents (a form of money)
based on their abilities. The first servant was entrusted with five talents, the
second two talents, and the last one only one talent. When the master returns,
he finds that the servants who received five and two talents have doubled their
money, while the servant who received one talent hid it and returned only
what he had been given. The master rewarded the servants who increased
their talents and punished the one who did not.

This parable has several implications for business and accounting:

1. Stewardship and Responsibility

Business:

• Entrusted Resources: Business leaders and managers are entrusted

with resources (capital, assets, human resources) and are responsible
for using them effectively to generate value.
 • Accountability: Employees and managers are accountable for how
they manage and invest company resources. Like the servants, they
must demonstrate responsible stewardship.

Accounting:

• Financial Stewardship: Accountants are responsible for accurately

recording and reporting financial transactions, ensuring resources are
managed and accounted for correctly.
• Transparency: Financial statements must be clear and transparent to
reflect the true financial position of the company, similar to the master
expecting a clear account from his servants.

2. Risk and Investment

Business:

• Taking Calculated Risks: The servants who invested their talents took
calculated risks to achieve a return. In business, taking informed and
strategic risks is essential for growth and innovation.
• Value Creation: Businesses must invest their resources wisely to
create value for stakeholders. Avoiding investment out of fear of loss,
like the servant who hid the talent, can lead to missed opportunities.

Accounting:

• Investment Analysis: Accountants must analyze potential

investments and assess their risks and returns, guiding business
decisions.
• Risk Management: Proper accounting practices involve assessing
financial risks and implementing controls to mitigate them.

3. Performance and Reward

Business:
 • Performance-Based Rewards: The master rewards the servants based
on their performance. In business, performance appraisals and
incentives should be aligned with contributions and achievements.
• Meritocracy: Rewarding employees based on their performance
encourages a culture of meritocracy, motivating employees to work
harder and smarter.

Accounting:

• Performance Metrics: Accountants develop and use performance

metrics to evaluate the financial health and efficiency of business
operations.
• Incentive Structures: Designing financial incentive structures based
on performance metrics can drive better results and accountability.

4. Innovation and Growth

Business:

• Encouraging Innovation: The parable emphasizes the importance of

using available resources to generate growth. Businesses should
encourage innovation and the effective use of resources to stay
competitive.
• Avoiding Complacency: Like the servant who buried the talent,
businesses that become complacent and avoid innovation may fall
behind.

Accounting:

• Supporting Business Growth: Accountants play a crucial role in

supporting business growth by providing financial insights and
facilitating strategic planning.
• Financial Planning and Analysis: Through financial planning and
analysis, accountants help businesses identify opportunities for
innovation and growth.

5. Ethics and Integrity

Business:
 • Ethical Responsibility: The parable underscores the ethical
responsibility of managing resources honestly and diligently.
Businesses must uphold high ethical standards in all operations.
• Corporate Governance: Good corporate governance involves ethical
decision-making, accountability, and integrity, ensuring that resources
are used responsibly.

Accounting:

• Ethical Standards: Accountants must adhere to ethical standards,

ensuring accuracy, honesty, and integrity in financial reporting.
• Regulatory Compliance: Compliance with accounting regulations and
standards is essential to maintain trust and accountability.

Conclusion

The Parable of the Talents offers valuable lessons for business and
accounting, emphasizing responsible stewardship, risk management,
performance-based rewards, innovation, and ethical integrity. These
principles are fundamental for effective management and financial practices,
guiding businesses and accountants in their roles and responsibilities. By
applying these lessons, organizations can achieve sustainable growth,
accountability, and ethical excellence.

Branches of Accounting
The technological advancement and industrial and economic development
have resulted in the evolution of various types or branches of accounting over
time. Some popular types or branches of accounting are briefly discussed
below:

1. Financial accounting

Financial accounting is concerned with the preparation of periodic financial

reports by using historical data of a business enterprise. The basic purpose
of these reports is to provide useful and timely information about an
Accounting entity’s financial position and its operating results to owners,
managers, investors, creditors and government agencies etc. Financial
position refers to the resources and obligations of a business at any given
point of time and operating results means the net profit earned or net loss
incurred by a business enterprise during a particular period of time.

There are certain rules known as “generally accepted accounting principles

(GAAP)” or standards that each business enterprise must follow while
preparing its financial reports to ensure that the financial information
published by it is useful, reliable and comparable with other companies.
Financial accounting is also termed as the “general purpose accounting”
because the information generated by it is published for the use of everyone
connected with the business enterprise.

2. Cost accounting
The cost accounting is concerned with categorizing, tracing and collecting
costs of an entity. The cost data collected so is used by management in
planning and control. A well-established cost accounting system is essential
for every business enterprise to have a proper control over its costs. In
summary, cost accounting is about implementing effective controls in
order to minimize costs for efficient decision-making.

3. Management accounting
Management accounting system uses historical as well as estimated data to
generate useful reports and information to be used by internal management
for decision making purpose. Unlike financial accounting, the information
generated by management accounting is not published for external parties
but is used by managers to perform their core functions such as evaluation
of various products and departments in terms of profitability, selection of the
best available alternatives and making other business decisions to achieve
organizational goals. As the reports generated by management accounting are
not accessed and used by any external party, the business enterprises don’t
need to take care of GAAP while drafting them. In summary, management
accounting is about using cost and other information to make informed
decisions that add value to the organization.

4. Tax accounting
Tax accounting deals with tax related matters of a business enterprise. It
includes computation of taxable income and presentation of financial or other
information to tax authorities as required by tax laws and regulations of a
country.

The reports and information generated by financial accounting system satisfy

the needs of external parties to great extent. However, the rules and methods
followed by a company for preparing its financial accounting reports may
slightly differ from those required by tax laws. The work of a tax accountant
is to adjust the net operating results and rearrange the information generated
by financial accounting to conform with the tax reporting requirements of a
country. Besides it, tax accountants also help companies minimize their tax
obligations. Because of these functions, tax accountants need to have an
updated knowledge about tax laws and regulations.

Tax accounting is also important for managers because taxes usually have a
significant impact on the expected outcomes of proposed decisions.

5. Not-for-profit accounting
Not-for-profit accounting fulfills the accounting needs of not-for-profit
organizations (also known as non-trading concerns). It is concerned with
recording events, preparing reports, and planning operations of not-for-profit
organizations such as charities, churches, educational institutions, hospitals,
government agencies and clubs etc. The basic accounting principles and
concepts used while applying not-for-profit accounting are the same as used
in regular or general purpose financial accounting.

6. International accounting
International accounting deals with the issues and complications involved
in doing trade in world or international markets. Many companies have
expanded their business internationally. Such companies need to employ
accountants who possess detailed knowledge about accounting. custom and
taxation laws applicable in different countries.

7. Government accounting
Government accounting is concerned with the allocation and utilisation of
government budgets. It ensures that the central or state government funds
released for various purposes are being utilized efficiently. The proper record
keeping makes the audit of completed projects possible.

8. Auditing
The term auditing generally refers to review, examination, verification,
evaluation or inspection of historical data, records or events belonging to an
entity. The person who performs the work of audit is known as auditor. In
accounting and business, there are two types of auditing – external auditing
and internal auditing.

External auditing refers to the independent examination of an entity’s

financial statements and other accounting records that an entity publishes
for the use of various stakeholders. The auditor gives his opinion about the
fairness of all accounting information examined by him. An important element
of “fairness” is the compliance of financial statements with the generally
accepted accounting principles (GAAP).

Internal auditing is performed to determine whether or not the policies and

procedures set by management are being followed. An important purpose of
internal auditing is to evaluate whether the activities performed by the
employees at various levels are in line with the goals set by management.
Internal auditing may be performed by the existing accountants. However
many companies employ special staff for this purpose.

9. Social accounting (Corporate Social Accounting)

Social accounting is concerned with analyzing and evaluating organizational
impact on society and its environment. It measures the social costs and
benefits of various organizational activities. For example, accountants in this
area might analyze and evaluate the use of government land or the use of
welfare funds in a large city. Other accountants might analyze and evaluate
the environmental impact of acid rain.
10. Forensic accounting
Forensic accounting deals with legal issues faced by business enterprises.
Accountants in this area use their knowledge, skills and techniques to deal
with legal matters such as dispute resolution, claim settlement, fraud
investigation, court and litigation cases etc.

11. Fiduciary accounting

Fiduciary accounting refers to the management of financial records by a
person to whom the custody and management of some property has been
entrusted for the benefit of another person. Estate accounting, trust
accounting, and receivership are some examples of fiduciary accounting.

What is bookkeeping?

Bookkeeping is broadly defined as the recording of financial transactions for

a business. It is part of a business’s overall accounting process. Bookkeeping
can be done as frequently as daily or as infrequently as once per year. Modern
bookkeeping was formally established in the late 15th century when Italian
mathematician and Franciscan monk Luca Pacioli described double-entry
bookkeeping in his book, Review of Arithmetic, Geometry, Ratio and
Proportion.

Differences between Accounting and Bookkeeping

Parameter of
Bookkeeping Accounting
Comparison

Bookkeeping is related to the Accounting is the process wherein

recording, measuring, and the company’s financial data is
Definition
identifying the financial data summarized, and a report is
of a company. prepared for the same.

Management doesn’t take any Management decides upon

financial decisions by financial decisions after reading
Management
analyzing the records of the summary report obtained by
bookkeeping. accounting.

To analyze the financial data and

To store and organize the
Purpose make future financial decisions
financial data of a company
accordingly.
 The financial statement is not
The financial statement is
Financial prepared using the
prepared using accounting
statement information obtained from
information.
bookkeeping.

Bookkeeping doesn’t need the An accountant needs special

bookkeeper to have any skills to record, interpret, and
Skills
special skill set to handle and analyze the financial data to
manage the financial records. prepare reports.

Accounting uses the record from

Analysis No analysis is carried. bookkeeping to analyze the
financial data to prepare reports.

Cost accounting and managerial

Types Single entry and double entry.
accounting

An accountant oversees the An accountant that is certified

Employee
work of a bookkeeper. doesn’t need guidance.

The accountant prepares the

A bookkeeper records the financial summary at the end of
Entry financial data on a daily the month or on a yearly basis,
basis. depending on the type of report
and demands of the company.

Accounting Cycle

Accounting cycle refers to the collective process of recording and

processing the accounting events of a company. The series of steps
begin when a transaction occurs and end with its inclusion in the
financial statements. An accounting cycle makes sure that all of
the money passing through your business is actually “accounted”
for. The six steps of an accounting cycle are:

1. Analyze and record transactions

2. Post transactions to the ledger
3. Prepare an unadjusted trial balance
4. Prepare adjusting entries at the end of the period
5. Prepare an adjusted trial balance
6. Prepare financial statements
Step 1: Analyse and record transactions

In the first step of the accounting cycle, gather all accounting records of your
business transactions—receipts, invoices, bank statements, things like that—
for the current accounting period. These records are raw financial information
that needs to be entered into the accounting system to be translated into
useful information. Recording entails noting the date, amount, and location
of every transaction.

Step 2: Post transactions to the ledger

Use the general ledger to record all of the financial information gathered in
step one. The ledger is a large, numbered list showing all your company’s
transactions and how they affect each of your business’s individual accounts.

Step 3: Prepare an unadjusted trial balance

At the end of the accounting period, prepare an unadjusted trial balance. The
first step to preparing an unadjusted trial balance is to sum up the total
credits and debits in each of the business’s accounts. These are used to
calculate individual balances for each account.

Step 4: Prepare adjusting entries at the end of the period

Adjusting entries make sure that the financial statements only contain
information relevant to the particular period of time. There are four main
types of adjustments: deferrals, accruals, tax adjustments, and missing
transaction adjustments.

Step 5: Prepare an adjusted trial balance

This new trial balance is called an adjusted trial balance, and one of its
purposes is to prove that all of your ledger’s credits and debits balance after
all adjustments.

Step 6: Prepare financial statements

The last step in the accounting cycle is preparing financial statements. These
include statement of:
1. profit and loss and other comprehensive income for the period
2. financial position as at the end of the period
3. changes in equity for the period
4. cash flows for the period
Accounting Concepts and Conventions (Principles) and
Accounting Bases
Accounting principles may be defined as those rules of action or conduct,
which are adopted by the Accountants universally while recording accounting
transactions. International Accounting Standard (IAS) 1 defined Accounting
principles as “a body of doctrines commonly associated with theory and
procedures of Accounting, serving as an explanation of current practices and
as a guide for selection of conventions or procedures where alternatives exist”.
To ensure acceptance, accounting principle must be capable of coping with
practical recording problem, it must be reasonably objective and feasible, it
must not be expensive to apply and should lead to similar answers in the
hands of practitioners. Accounting principles can be classified into two
categories, namely, accounting concepts and accounting conventions.

Accounting Concepts
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.
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
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 following 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 statements. Similarly, it is required that
accounting reports should be prepared not to favour any group or
segment of society.

Accounting Methods/Bases
An accounting method is the medium through which the fundamental
accounting concepts and conventions are applied to financial transactions,
and to the preparation of financial statements. They are:

(i) Accrual basis: Under this basis, revenue and expenses are recognized in
the accounting period to which they relate and in which they are earned
and incurred and not when they are actually paid or received. That is, it is
the revenues earned and expenses incurred that are recorded, rather than
cash receipts and payments in cheque or cash form.

The accrual basis is referred to as the accrual concept, the concept makes
the distinction between the receipt of cash and the right to receive cash;
and the payment of cash and the legal obligation to pay cash, because in
practice, there is usually no coincidence in time between cash movements
and the legal obligations to which they relate.

(ii) Cash basis: Under this basis, only revenue actually received in cash and
expenses actually paid in cash during the accounting period are recognized
in that period.

Types of business entity

There are three main types of business entity.

1. Sole traders
2. Partnerships
3. Limited liability companies

Sole traders

Sole traders are people who work for themselves. Examples include the local
shopkeeper, a plumber and a hairdresser. The term sole trader refers to the
ownership of the business; sole traders can have employees.

Advantages of a Sole Proprietorship

• A sole proprietor has complete control and decision-making power over the
business.
• Sale or transfer can take place at the discretion of the sole proprietor.
• No corporate tax payments
• Minimal legal costs to forming a sole proprietorship
• Few formal business requirements

Disadvantages of a Sole Proprietorship

• The sole proprietor of the business can be held personally liable for the
debts and obligations of the business. Additionally, this risk extends to any
liabilities incurred as a result of acts committed by employees of the
company.
• All responsibilities and business decisions fall on the shoulders of the sole
proprietor.
• Investors won't usually invest in sole proprietorships.

Partnerships

Partnerships occur when two or more people decide to run a business

together. Examples include an accountancy practice, a medical practice and
a legal practice.

Advantages of a Partnership
Working with someone else in a partnership does have advantages. Besides
having the combined knowledge of two or more individuals, there are other
advantages of going into business with somebody else:

• Working together may improve the efficiency of the business,

particularly as partners will have a shared vision for success
• Partnerships are generally less expensive than companies, and easier to
set up
• Partners are equally responsible for the business
• Partners have the advantage of flexibility
• The structure can always be changed later
 • Partners will share in the net profits of the business as well as having
equal say in how the business is run

Disadvantages of a Partnership
Different business structures will have disadvantages. Partnerships are no
different, obviously the main difficulty will be working alongside another
individual who will have different opinions. Besides this, there are a few
other disadvantages:

• Disagreement and friction between partners in decision making may

cause risk to the business;
• Partnerships are not their own legal entity, therefore they have unlimited
liability which is spread across all partners, partners that do not pay
their share of debt will leave other partners liable; and
• Partners are considered ‘agents’ for other partners, their actions may
leave other partners liable.

Limited liability companies

Limited liability companies are incorporated to take advantage of 'limited

liability' for their owners (shareholders). This means that, while sole traders
and partners are personally responsible for the amounts owed by their
businesses, the shareholders of a limited liability company are only
responsible for the amount to be paid for their shares.

In law sole traders and partnerships are not separate entities from their
owners. However, a limited liability company is legally a separate entity from
its owners and it can issue contracts in the company’s name.

For accounting purposes, all three entities are treated as separate from their
owners. This is called the business entity concept.

Advantages of trading as a limited liability company

a) Limited liability makes investment less risky than investing in a sole

trader or partnership. However, lenders to a small company may ask
for a shareholder's personal guarantee to secure any loans.
b) It is easier to raise finance because of limited liability and there is no
limit on the number of shareholders.
 c) A limited liability company has a separate legal identity from its
shareholders. So a company continues to exist regardless of the
identity of its owners. In contrast, a partnership ceases, and a new one
starts, whenever a partner joins or leaves the partnership.
d) There are tax advantages to being a limited liability company. The
company is taxed as a separate entity from its owners and the tax rate
on companies may be lower than the tax rate for individuals.
e) It is relatively easy to transfer shares from one owner to another. In
contrast, it may be difficult to find someone to buy a sole trader's
business or to buy a share in a partnership.

Disadvantages of trading as a limited liability company

a) Limited liability companies have to publish annual financial

statements. This means that anyone (including competitors) can see
how well (or badly) they are doing. In contrast, sole traders and
partnerships do not have to publish their financial statements.
b) Limited liability company financial statements have to comply with
legal and accounting requirements. In particular, the financial
statements have to comply with accounting standards. Sole traders and
partnerships may comply with accounting standards, but are not
compelled to do so.
c) The financial statements of larger limited liability companies have to be
audited. This means that the statements are subject to an independent
review to ensure that they comply with legal requirements and
accounting standards. This can be inconvenient, time consuming and
expensive.
d) Share issues are regulated by law. For example, it is difficult to reduce
share capital. Sole traders and partnership can increase or decrease
capital as and when the owners wish.

The Regulatory Framework of Accounting

The regulatory framework of accounting consists of a set of rules, standards,

and guidelines that govern the preparation and presentation of financial
statements. This framework ensures transparency, consistency, reliability,
and comparability of financial information. The primary components of the
regulatory framework include accounting standards, regulatory bodies, and
various laws and regulations.

Components of the Regulatory Framework

1. Accounting Standards:
 o Generally Accepted Accounting Principles (GAAP): A set of
accounting principles, standards, and procedures that
companies use to compile their financial statements in the U.S.
o International Financial Reporting Standards (IFRS): A set of
global accounting standards developed by the International
Accounting Standards Board (IASB) for use in financial reporting
by multinational companies.
2. Regulatory Bodies:
o Financial Accounting Standards Board (FASB): The U.S.
organization that establishes GAAP for public and private
companies and non-profit organizations.
o International Accounting Standards Board (IASB): An
independent international body that develops and approves IFRS.
o Securities and Exchange Commission (SEC): A U.S. federal
agency that oversees securities transactions, activities of
financial professionals, and mutual fund trading to prevent fraud
and intentional deception.
o Public Company Accounting Oversight Board (PCAOB): A U.S.
non-profit corporation established by Congress to oversee the
audits of public companies.
3. Laws and Regulations:
o Sarbanes-Oxley Act (SOX) of 2002: U.S. federal law enacted to
protect investors by improving the accuracy and reliability of
corporate disclosures.
o Dodd-Frank Wall Street Reform and Consumer Protection
Act: A U.S. federal law that aims to reduce risks in the financial
system through comprehensive financial reform.
o
4. Some of the Professional Accounting Organisations:
o The Institute of Certified Public Accountants of Uganda
(ICPAU). A professional accounting body that regulates
accounting practice in Uganda.
o American Institute of Certified Public Accountants (AICPA):
The national professional organization of Certified Public
Accountants (CPAs) in the U.S., which sets ethical standards and
auditing standards for private companies.
o Institute of Management Accountants (IMA): A professional
organization focused on advancing the management accounting
profession.
o The Association of Chartered Certified Accountants (ACCA) .
This is a globally recognized professional accounting body
offering the Chartered Certified Accountant qualification. It is one
of the largest and fastest-growing global accountancy bodies,
with a strong emphasis on ethics, professional skills, and
knowledge relevant to a modern accountant.
 o The Institute of Chartered Accountants in England and Wales
(ICAEW). The ICAEW is one of the leading professional
membership organizations for chartered accountants in England
and Wales.
o The Institute of Chartered Accountants of India (ICAI) is the
national professional accounting body in India.
o Certified Public Accountants (CPA) Kenya is the national
professional body responsible for regulating and promoting the
accounting profession in Kenya. The organization is tasked with
ensuring that accounting standards are upheld and providing
support and certification to accounting professionals.
5. Ethical Standards:
o Code of Ethics for Professional Accountants: Developed by the
International Ethics Standards Board for Accountants (IESBA), it
provides guidance on ethical behavior for professional
accountants globally.

Objectives of the Regulatory Framework

1. Protect Investors: Ensure that financial statements provide accurate

and complete information to help investors make informed decisions.
2. Maintain Market Confidence: Enhance the integrity and efficiency of
capital markets by ensuring consistent and reliable financial reporting.
3. Promote Economic Stability: Facilitate the smooth functioning of
financial markets and the economy by ensuring that financial
information is trustworthy.
4. Standardize Accounting Practices: Promote uniformity in accounting
practices across different entities and jurisdictions to enhance
comparability.
5. Enhance Accountability: Hold management accountable for the
financial performance and position of the entity.

Key Elements of the Regulatory Framework

1. Conceptual Framework:
o A theoretical foundation that provides guidance on the
preparation and presentation of financial statements. It includes
objectives of financial reporting, qualitative characteristics of
useful financial information, and definitions of elements of
financial statements (e.g., assets, liabilities, equity).
2. Standards and Interpretations:
o Specific accounting standards and interpretations issued by
regulatory bodies such as FASB and IASB that provide detailed
rules and guidance on various accounting issues.
3. Guidance and Practice Statements:
 o Additional guidance and practice statements issued by
professional organizations and regulatory bodies to help
accountants apply standards in practice.

The Role of Auditors

• External Auditors: Independent auditors who examine the financial

statements of an entity to provide an opinion on whether they are
presented fairly in accordance with the applicable accounting
standards.
• Internal Auditors: Employees of the entity who provide ongoing
monitoring and evaluation of the entity's internal controls, risk
management, and governance processes.

Conclusion

The regulatory framework of accounting plays a vital role in ensuring the

credibility and reliability of financial information. It encompasses accounting
standards, regulatory bodies, laws, and professional guidelines that
collectively provide a structured approach to financial reporting. Adherence
to this framework is essential for maintaining investor confidence, promoting
economic stability, and ensuring the integrity of financial markets.
The Institute of Certified Public Accountants of Uganda
(ICPAU)

The Institute of Certified Public Accountants of Uganda (ICPAU) is the national

professional accountancy body in Uganda. Established to regulate and
maintain the standards of accountancy practice in the country, ICPAU plays
a crucial role in promoting the accounting profession, ensuring ethical
conduct, and protecting the public interest.

Overview

• Established: 1992
• Legal Basis: The Accountants Act, Cap 266
• Headquarters: Kampala, Uganda
• Membership: Open to qualified accountants who meet the criteria set
by the institute.

Objectives

1. Regulation of the Profession:

o To regulate and maintain the standards of accountancy practice
in Uganda.
o To ensure that all practising accountants comply with the set
standards and ethical guidelines.
2. Promotion of Professionalism:
o To promote the highest standards of professional competence and
ethical conduct among its members.
o To ensure continuous professional development for accountants.
3. Education and Certification:
o To provide education, training, and certification for aspiring
accountants.
o To ensure that the certification process is rigorous and up to
international standards.
4. Public Interest Protection:
o To protect the public interest by ensuring that financial
information provided by accountants is accurate, reliable, and
transparent.

Key Functions

1. Standard Setting:
o Developing and enforcing accounting standards in Uganda.
o Ensuring that Ugandan accounting standards are in line with
international best practices.
2. Licensing and Regulation:
o Licensing qualified accountants to practice in Uganda.
 o Regulating the practice of accounting to ensure compliance with
professional standards and ethics.
3. Education and Training:
o Offering professional accountancy courses and examinations.
o Providing continuous professional development (CPD) programs
for members.
4. Advocacy and Representation:
o Representing the interests of the accountancy profession in
Uganda.
o Engaging with government, regulatory bodies, and other
stakeholders on matters affecting the profession.
5. Enforcement and Discipline:
o Investigating and disciplining members who breach professional
standards and ethical guidelines.
o Ensuring that the disciplinary process is fair and transparent.

Membership Categories

1. Certified Public Accountant (CPA):

o Individuals who have passed the ICPAU exams and meet the
required professional experience.
2. Associate Member:
o Accountants who are in the process of qualifying as CPAs and
have met certain criteria.
3. Fellow Member (FCPA):
o Distinguished members who have made significant contributions
to the profession and have been members for a specified period.
4. Student Member:
o Individuals enrolled in the ICPAU accountancy courses.

Education and Certification

• Courses Offered:
o CPA Uganda Course: A comprehensive program that includes
various levels and subjects, designed to equip students with the
knowledge and skills needed to become certified public
accountants.
o Continuous Professional Development (CPD): Regular training
programs and workshops to keep members updated on the latest
developments in the accounting profession.
• Examinations:
o Conducted periodically to assess the competence of candidates.
o Rigorous exams that test knowledge in areas such as financial
accounting, management accounting, taxation, audit, and ethics.
Professional Standards and Ethics

• Code of Ethics:
o ICPAU has established a Code of Ethics that all members must
adhere to, which emphasizes integrity, objectivity, professional
competence, confidentiality, and professional behavior.
• International Standards:
o ICPAU aligns its standards with international accounting
standards such as International Financial Reporting Standards
(IFRS) and International Standards on Auditing (ISA).

Conclusion

The Institute of Certified Public Accountants of Uganda (ICPAU) is integral to

the development and regulation of the accounting profession in Uganda. By
setting high standards for education, certification, and ethical conduct,
ICPAU ensures that accountants in Uganda are well-equipped to meet the
demands of their profession and contribute to the economic development of
the country. The institute's commitment to continuous professional
development and adherence to international standards helps maintain the
credibility and reliability of financial information in Uganda.