ACC 111: Financial Accounting

Lecture notes byJared Abongo ([email protected]) 0722252635/0735252635

These lecture notes are meant to aid in classroom instructions. They are only useful for
students who attend my class for further explanation and clarification. The notes are
released in 2 parts.

PART ONE

LECTURE ONE: INTRODUCTION

Book Keeping And Accounting

Book keeping is the branch of knowledge which explains to us how to keep a record of
financial transactions.

Man has poor memory.

Lack of precision over mount of money spent over a period of time as short as one day,
one week, a fortnight leave alone a month or a year.

In the absence of written records one fails to recall all the transactions he/she has
done.

Thus people ought to record all their earnings and spending

This helps to show the correct position relating to income and expenditure.

Definition (Accounting)
Accounting is language of business.

Communicate the result of business operations and its other aspects.

Accounting is an 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 financial
character and interpreting the results thereof.

Accounting is the process of identifying, recording and communicating information

that is relevant, reliable, and comparable. The goal of the accounting process is to
provide helpful information to users of financial information. Quality information may
help users reach more informed decisions.

Assignment: Explain the difference between book-keeping and accounting.

PURPOSE OF ACCOUNTING

1. to keep a systematic record

2. to ascertain the results of operations

3. to ascertain financial position of business.

4. to facilitate rational decision making

5. to satisfy requirement of law and useful in many respects.

6. To review business policies

7. Ensure control over expenses

Term Used In Accounting (Functions And Relationships Of Basic Business Documents)

Assets

These are economic resources of an enterprise that can be usefully expressed in

monetary terms. Assets are things of value used by the business in its operations.

· Fixed Assets : Fixed Assets are assets held on a long-term basis.

e.g. Land, Building, Machinery, Plant, Furniture and Fixtures, etc.

· Current Assets: Current Assets are assets held on a short-term basis.

e.g. Debtors, Bills receivable, Stock(Inventory), Cash and Bank balances, etc.

Liabilities

These are obligations or debts that the enterprise must pay in money or services at
some time in the future.

• Long-term liabilities : Long-term liabilities are those that are usually payable after
a period of one year. e.g. A term loan from a financial institution, debentures
(bonds) issued by a company.

• Short-term liabilities : Short-term liabilities are obligations that are payable within
a period of one year. e.g. Creditors, bills payable, overdraft from a bank for a
short period.

Capital

Investment by the owner for use in the firm is known as capital. Owner’s equity is the
ownership claim on total assets. It is equal to total assets minus total liabilities.
Revenue

These are the amounts the business earns by selling its products or providing services to
customers. Other titles and sources of revenue common to many businesses are: sales,
fees, commission, interest, dividends, royalties, rent received, etc.

Expenses

These are costs incurred by a business in the process of earning revenue. Generally,
expenses are measured by the cost of assets consumed or services used during an
accounting period. The usual titles of expenses are: depreciation, rent, wages, salaries,
interest, costs of heat, light and water, telephone, etc.

Capital and Revenue Expenditure

BASIC PRINCIPLE: All expenses and receipts of revenue nature are taken to trading
and profit & loss account. All expenditures and receipts of capital nature are taken to
balance sheet

Revenue receipts/payments : are smaller in size(relatively); are recurring in nature; the

benefits are over a shorter period (1 year); the purpose is to run the business on a day to
day basis; and maintain assets in working condition;

Capital receipts/payments: are usually large(relatively); are non-recurring in nature; the

benefits are over longer duration; and the purpose is to enhance productivity of the
assets

There are certain expenditures which are otherwise revenue in nature but sometimes
unusually large and whose benefit to the organization may accrue after few years.
These may be treated as deferred revenue expenditure, carried to the balance
sheet, and written off to the profit & loss account over a period of time.

Same is the case with certain receipts such as sale of assets, where the receipts upto
book value is deducted from the asset, and , if between book value & cost as
revenue receipt & above cost as capital receipt. However, it should be noted that
there is a thin line between capital & revenue classification. for instance repairs to
machinery which keeps the asset in working condition is charged to the p & l a/c
while betterment expense is capitalised.

examples of each type of classification:

capital nature:

 purchase of assets such as building, machinery, vehicles.

 expenditure in purchase /setting up of apital goods/assets
 excess of sale price of asset over its cost price
  funds raised thru banks/institutions
 funds raised thru issue of shares, & debentures

revenue nature:

 all transactions relating to nominal accounts

 even certain expenses of non-recurring nature based on materiality concept

 excess of sale value of asset over w d value upto cost of asset

deferred revenue expenditure:

 large advertising expenditure for(say) launch of a product

 expenditure for raising of funds including preparation of project report

 initial expenses for setting up of a company

Purchases

Purchases are total amount of goods procured by a business on credit and for cash,
and are meant for resale. In a trading concern, purchases are made of merchandise
for resale with or without processing.

In a manufacturing concern, raw materials are purchased, processed further into

finished goods and then sold. Purchases may be cash purchase or credit purchase.

Sales

Sales are total revenues from goods or services sold or provided to customers. Sales
may be cash sales or credit sales.

Stock

Stock (Inventory) is a measure of something on hand – goods, spares and other items –
in a business.

It is called stock on hand. In a trading concern, the stock on hand is the amount of
goods which have not been sold on the date on which the balance sheet is prepared.
This is also called closing stock. In a manufacturing concern, closing stock comprises
raw materials, semi-finished goods and finished goods on hand on the closing date.
Similarly, opening stock is the amount of stock at the beginning of the accounting year.

Debtors

Debtors are persons and/or other entities who owe to an enterprise an amount for
receiving goods and services on credit.
The total amount standing against such persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Debtors on the asset side.

Creditors

Creditors are persons and/or other entities who have to be paid by an enterprise an
amount for providing the enterprise goods and services on credit.

The total amount standing to the favour of such persons and/or entities on the closing
date, is shown in the Balance Sheet as Sundry Creditors on the liability side.

Users of Financial Statements

Investors

Need information about the profitability, dividend yield and price earnings ratio in order
to assess the quality and the price of shares of a company

Lenders

Need information about the profitability and solvency of the business in order to
determine the risk and interest rate of loans

Management

Need information for planning, policy making and evaluation

Suppliers and trade creditors

Need information about the liquidity of business in order to access the ability to repay
the amounts owed to them

BASIC ACCOUNTING CONCEPTS

Actually there are a number of accounting concepts and principles based on which
we prepare our accounts

These generally accepted accounting principles lay down accepted assumptions and
guidelines and are commonly referred to as accounting concepts

Money measurement concept

Meaning

All transactions of the business are recorded in terms of money. It provides a common
unit of measurement
Example: Market conditions, technological changes and the efficiency of
management would not be disclosed in the accounts

Business entity Concept

This concept separates the entity of proprietor from the business transaction. Capital
contributed by the owner is liability for business because business is different from
owner. Any money withdrawn by proprietor is drawings. Profit is liability and loss is an
asset. All entries are kept from the point of view of business and not from owner. An
enterprise is an economic unit separate from owner.

Realization concept

This concept tells us when revenue is treated as realized or earned. it is treated as

realized on the date when property in goods passes to buyer and he becomes legally
liable to pay. No future income is considered. Goods sold on approval will be included
in sales but on cost only.

Going concern concept

Meaning

The business will continue in operational existence for the foreseeable future. Financial
statements should be prepared on a going concern basis unless management either
intends to liquidate the enterprise or to cease trading, or has no realistic alternative but
to do so

Example

 Possible losses form the closure of business will not be anticipated in the
accounts
 Prepayments, depreciation provisions may be carried forward in the expectation
of proper matching against the revenues of future periods
 Fixed assets are recorded at historical cost

Dual aspect concept

Each transaction has two aspects, that is, the receiving benefit by one party and the
giving benefit by the other. This principle is the core of accountancy. For example, the
proprietor of a business starts his business with Cash sh.1,00,000/-, Machinery of
sh.50,000/- and Building of sh.30,000/-, then this fact is recorded at two places. That is
Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the
business is equal to the assets of the business.

Thus, the dual aspect can be expressed as follows: Capital + Liabilities = Assets or
Capital = Assets – Liabilities
Accrual concept

 Revenue reported when earned

 Expense reported when incurred

 Properly matches revenues and expenses in determining net income

 Requires adjusting entries at end of period

Matching concept

The matching concept supports reporting revenues and related expenses in the same
period

Materiality Concept

Meaning: Immaterial amounts may be aggregated with the amounts of a similar nature
or function and need not be presented separately. Materiality depends on the size and
nature of the item .

Example: Small payments such as postage, stationery and cleaning expenses should
not be disclosed separately. They should be grouped together as sundry expenses. The
cost of small-valued assets such as pencil sharpeners and paper clips should be written
off to the profit and loss account as revenue expenditures, although they can last for
more than one accounting period.

Cost concept

Meaning: Assets should be shown on the balance sheet at the cost of purchase instead
of current value

Example: The cost of fixed assets is recorded at the date of acquisition cost. The
acquisition cost includes all expenditure made to prepare the asset for its intended use.
It included the invoice price of the assets, freight charges, insurance or installation costs.

THE ACCOUNTING EQUATION

The basic accounting equation states that assets are equal to liabilities plus equity of a
company. The equation makes sense because in a general way it states that assets
must be equal to the claims against those assets. If you have an asset we can have two
broad categories of claims against that asset. First, we may have claims by creditors,
liabilities. Finally, after all creditor claims are satisfied, the residual owners, and
stockholders, have a claim on those assets.

Assets:
Assets may be viewed as resources owned or controlled by a company. They include
such items as cash, accounts receivable (amounts owed to the company by
customers), land, building and equipment, and supplies.

Liabilities

Liabilities represent the claims of creditors on the entity’s assets. Liabilities include
accounts payable (amounts we owe to creditors for assets purchased on account),
notes payable, taxes payable, and wages payable (amounts we owe to our
employees at the end of the accounting period).

Capital/Equity

The equities of an entity include investments by owners, contributed capital, and

payments to those owners (dividends). Retained earnings represents all of the
accumulated earnings of a corporation that have not been distributed to shareholders.

LECTURE TWO: THE LEDGER AND DOUBLE ENTRY

A ledger is a Book in which accounts are recorded. Every transaction has two aspects.
Crux of accountancy is to find out which two accounts are effected and which is to be
debited and which is to be credited.

CLASSIFICATION OF ACCOUNTS

There are three types of accounts:

Real Accounts: Records assets of business, tangible and identifiable. These are
accounts of assets or properties. Assets may be tangible or intangible. Real accounts
are impersonal which are tangible or intangible in nature. Eg:- Cash a/c, Building
a/c, etc are Real accounts related to things which we can feel, see and touch.
Goodwill a/c, Patent a/c, etc are Real Accounts which are of intangible in nature.

Personal Accounts: Are headed with the name of person/business/firm. debtors or

creditors. Accounts in the name of persons are known as personal accounts. Eg: Babu
A/C, Wangare & Co. A/C, Borabu A/C, etc.

Nominal Accounts: Records transactions of intangibles such as rent expenses. These

accounts are impersonal, but invisible and intangible. Nominal accounts are related to
those things which we can feel, but can not see and touch. All “expenses and losses”
and all “incomes and gains” fall in this category. Eg:- Salaries A/C, Rent A/C, Wages
A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.
DEBIT AND CREDIT

Each accounts have two sides – the left side and the right side. In accounting, the left
side of an account is called the “Debit Side” and the right side of an account is called
the “Credit Side”. The entries made on the left side of an account is called a “Debit
Entry” and the entries made on the right side of an account is called a “Credit Entry”.

RULES FOR DEBIT AND CREDIT

Personal Account Debit the Receiver

Credit the Giver
Real Accounts Debit what comes in
Credit what goes out
Nominal Accounts Debit all Expenses and Losses
Credit all Incomes and Gains
Steps for finding the debit and credit aspects of a particular transaction

STEP ONE: Find out the two accounts involved in the transaction.

STEP TWO: Check whether it belongs to Personal, Real or Nominal account.

STEP THREE: Apply the debit and credit rules for the two accounts.

Rules of Entry

Real : debit the account when we purchase an asset & credit when we sell or
depreciate.

Personal : debit the receiver of goods & credit the giver of goods.

Nominal : debit losses & expenses, credit incomes & gains.

N.B in a ledger, assets or losses have debit balance while liabilities or gains have credit
balance.

Debits and Credits

A T-account represents a ledger account and is a tool used to understand the effects
of one or more transactions.

T-Account
Left side Right side
(Debit) (Credit)

Remember: debits on the left, credits on the right!

MAKING ENTRIES TO LEDGER ACCOUNTS

Example: Matata started to deal in furniture with a capital of sh560,000 in January 3.

During the month the following transactions took place.

Jan 4: Purchases 2 tables @ sh28,000.

Jan 9: Purchase a motorcycle sh 87,000.

Jan 16: Sells 1 table @20,000.

Jan 20: Purchases wall unit sh59,000.

Jan 26: Sells table sh22,500

Jan 31: Pays shop attendant sh5,000 salary

Required: Make the necessary entries

Credit Transactions

Goods purchased and sold on credit. Cash is paid/received after a specified date

Credit transactions are recorded as follows:

Goods purchased on credit

DR: Purchases Account

CR: Creditors Account

Cash paid to Creditors

DR: Creditor’s Account

CR: Cash/Bank Account

Goods sold on credit

DR: debtor’s account

CR: Sales account

Cash Received from a debtor

DR: Cash account

CR: Debtor’s account

Example

Makori Started business on January 1 with capital of sh89,000 in the business bank
account.

Jan 5: Purchased a motor vehicle from CMC ltd sh570,000

Jan 11: Bought goods for re-sale sh46,000 on credit from Bogoria wholesalers.

Jan 21: Sold goods to Kinyua sh. 26,000.

Jan 28: Settled his account in full with Bogoria wholesalers.

Make the necessary entries

BALANCING OFF ACCOUNTS

At the close of the business, the difference of one side of any account is inserted and
carried down to the other side to start the following financial period. Consider the
above examples

TRIAL BALANCE

A trial balance is a statement of balances remaining in each and every ledger account
classified as to debit and credit entry balances. According to the principle of double
entry accounting system, the total of the debit side should be equal to the total of
credit side. If both sides of the Trial Balance agree, it is an indication that at least the
accounts prepared are arithmetically correct.

By the same principle it can be taken that a disagreement in the Trial Balance is an
indication that there are errors in the account prepared. However, it should be noted
that even an agreed Trial Balance is not a sure test of accuracy in the books of
accounts.

The rules to prepare the Trial Balance:

Total Debit Entries = Total Credit Entries

Debit Credit

Assets Income/ Revenue

Expenses Liabilities
Drawings Capital
LIMITATIONS OF A TRIAL BALANCE

Trial balance may balance even when:

1. a transaction is not journalized

2. a correct journal entry is not posted

3. a journal entry is posted twice

4. incorrect accounts used in journalizing or posting

5. offsetting errors are made in recording

TRIAL BALANCE (FORMAT)

DETAILS DR CR

LECTURE THREE: SOURCE DOCUMENTS AND BOOKS OF ORIGINAL ENTRY

The SOURCE DOCUMENT is the piece of paper on which the transaction is first noted.
Source document therefore include such documents as: Receipt, Invoice, Credit note,
Debit note, vouchers etc

The information on the source document would be entered in the book of original
entry. This is the journalizing stage. Books of original entry are also known as journals. The
JOURNAL is a book that collects all the details of many similar transactions.

Transaction Type Source Document Journal

Cash purchases & sales Receipt Cash Book

Credit purchases Invoice Purchases Journal

Credit sales Invoice Sales Journal

Return of goods by us to Credit Note Returns Outwards
suppliers (Purchases Journal (Purchases
Returns) Returns Journal)

Return of goods to us by Credit Note Returns Inwards Journal

customers (Sales Returns) (Sales Returns Journal)
BOOKS OF ORIGINAL ENTRY

1. General Journal
2. Special Journals

 Purchase day Book

 Sales Day Book
 Purchase Return Book
 Sales Return Book
 Bills Receivable Book
 Bills Payable Book
 Cash Book
 Petty Cash Book
Example

Enter the sales, purchases and returns day books from the following details then post
the individual items to the relevant ledger accounts.

May 1: Credit purchases; Ben sh260,000, Kyalo 165,000, Adoyo sh345,000.

May 5: Credit sales; Dan sh49,000, Warui sh99,000, Beth sh290,000.

May 7: Credit purchses; Tom 138,000, Ben46,000, Kyalo sh130,000.

May 9: goods returned to; Ben sh36,000, Kyalo 60,000.

May 10: Goods returned from; Warui sh26,000, Beth sh29,000.

May 12: Credit purchases; Tom 185,000, Ben240,000, Kyalo 90,000.

May 15: Credit sales; Warui sh160,000, Dan231,000

May 18: Goods returned to; Tom sh22,000, Kyalo sh11,000.

May 25: Goods returned from Warui sh22,000.

CASH JOURNALS

Mostly cash receipts and payments are recorded directly into the cash book. It means,
cash book is used as a book of original entry and all entries into the cash book are also
part of the double entry. For small cash payments, petty cash book is used which is a
further extension of the cash book. In addition to cash book and petty cash book, some
organizations may also use cash journals. The use of the cash journals is not very
common.

CASH PAYMENT JOURNAL

Cash payment journal records the cash payments made by a business enterprise. These
payments are recorded as original entry. They are then transferred to the respective
ledger accounts afterwards.

Example
Enter the following payments into the cash payment journals and post them into the
respective ledger accounts.
2015 Shs
March 1 Paid wages 45 000
March 2 paid rent 25 000
March 3 Paid electricity bill 5 000
March 10 Paid general expenses 3 500
March 15 Paid advanced wages 25 000
March 20 Bought goods and paid cash 34 000
CASH RECEIPTS JOURNALS

Cash receipt journals record the cash received by a business enterprise. These receipts
are recorded as original entry into the cash receipt journal. These amounts are
transferred to the respective accounts afterwards. The main purpose of maintaining a
cash receipts journal is to record all the details in a separate book and make one entry
of the total receipts into the cash book.

Example
Enter the following receipts into cash receipt journal and post these items into
respective ledger accounts.
2015 SHS
June 1 Cash received from M. Makau (debtor) 50 000
June 5 Cash sales 38 000
June 7 Sold an old motor vehicle for 170 000
June 10 Cash sales 18 000
June 15 Cash received from R. Kiwanuka (debtor) 27 000
June 20 Cash sales 29 000
June 30 Cash sales 53 000
THE GENERAL JOURNAL

The General Journal is the prime or original book of entry in which all transactions which
can not be appropriately recorded in any other subsidiary book are recorded. The
format is as follows.
 Date Particulars Folio Debit Credit Amount
Amount

ENTRIES IN THE GENERAL JOURNAL

i. Credit purchase or sale of items other than goods.

ii. Capital introduced by the owner in a form other than cash.
iii. Opening and closing entries (This will be explained after final accounts)
iv. Adjustment entries.
v. Correction of errors.

The general journal is different from other subsidiary books in the sense that it shows
both debit and credit entries separately which are posted to the ledger individually, not
in total. A brief description of the transaction is indicated in the journal. This is referred to
as a narration.

EXAMPLE 1

Enter the following transactions in the general Journal of Mrs Wakoli

Feb 1: Bought a motor vehicle on credit from Twiga motors sh1,250,000.

Feb 2:Sold an old equipment on credit to Maina sh36,000.

Feb 5: Moved furniture worth sh120,000 from her residence to be used in the business.

EXAMPLE 2

Mangla whose financial position on January 1 is as follows, decides to open a set of

books. Show the journal entries for Mangla.

DETAILS AMOUNT
Cash in hand 156,000
Cash at bank 1,350,000
Furniture and fittings 2,400,000
Stock of goods 1,750,000
Bank Loan 750,000
Debtors 520,000
Creditors 150,000
Capital 5,276,000

EXAMPLE 3

Journalize the closing entries on the transfer of the following balances to the trading
account and profit and loss account on December 31.

DETAILS AMOUNT (SHS)

Purchases 2,900,000
Sales 4,800,000
Stock at start 600,000
Salaries and wages 290,000
Expenses 260,000
Rent 190,000

LECTURE FOUR: CASH BOOK

Cash book is a book of original entry in which transactions relating only to

cash receipts and payments are recorded in detail. When cash is received it is entered
on the debit or left hand side. Similarly, when cash is paid out the same is recorded on
the credit or right hand side of the cash book.

BALANCING THE CASH BOOK

The cash book is balanced at the end of a given period by inserting the excess of the
debit on the credit side as “balance carried down" to make both sides agree. The
balance is then shown on the debit side by “ balance brought down" to start the next
period. As one cannot pay more than what he actually receives, the cash book
recording cash only can never show a credit balance.

SINGLE COLUMN CASH BOOK

Single column cash book records only cash receipts and payments. It has only one
money column on each of the debit and credit sides of the cash book. All the cash
receipts are entered on the debit side and the cash payments on the credit side.
While writing a single column cash book the following points should be kept in mind:

i. The pages of the cash book are vertically divided into two equal parts. The left
hand side is for recording receipts and the right hand side is for recording
payments.

ii. Being the cash book with the balance brought forward from the preceding
period or with what we start. It appears at the top of the left side as “ Balance
brought forward" or “ Capital" in case of a new business.

iii. Record the transactions in order of date.

iv. If any amount of cash is received on an account, the name of that account is
entered in the particulars column on the left hand side of the cash book.

v. If any amount is paid on account, the name of the account is written in the
particulars column on the right hand side of the cash book.

vi. It should be balanced at the end of a given period.

MAKING ENTRIES TO THE CASH BOOK

The balance at the beginning of the period is not posted but other entries appearing
on the debit side of the cash book are posted to the credit of the respective accounts
in the ledger, and the entries appearing on the credit side of the cash book are posted
to the debit of the proper accounts in the ledger.

EXAMPLE

Write the following transactions in the simple cash book.

2012 SHS
Jan. 1 :Cash in hand 15,000
" 6: Purchased goods for cash 2,000
" 16: Received from Akbar 3,000
" 18: Paid to Bartolimo 1,000
" 20: Cash sales 4,000
" 25: Paid for stationary 60
" 30 : Paid for salaries 1,000
" 31: Purchased office furniture 2,000
TWO COLUMN CASH BOOK

A double column cash book or two column cash book is one which consists of two
separate columns on the debit side as well as credit side for recording cash in hand
and cash at bank.
EXAMPLE
The following transactions took place in the month of May in Magadi ltd. s
May 1 balance brought down Cash / Bank 290,000/654,000(sh)
May 1Bought goods by cash, sh. 230,000
May 1 sold goods receiving a cheque of sh.60,000
May 1 Paid Okari sh. 20,000 by cash, Tika ltd sh 250,000 check
May 8 Received cash from willis sh. 150,000
May25 Paid wages bu cheque sh. 120,000
May28 Received a loan from bank in the account sh.1.5M.
May 29Bought a motor vehicle paying by cheque sh 1.3m
May 30 Received cash from Wanyonyi sh.129,000
May 31 Deposited all cash into the bank leaving a balance of sh 10,000.
Record the above transactions in a two column cash book
THREE COLUMN CASH BOOK

A three column cash book or treble column cash book is one in which there are three
columns on each side - debit and credit side. One is used to record discounts, the
second is used to record cash transactions, and third is used to record bank
transactions.

When a trader keeps is given a discount, it becomes necessary to record the amounts
in the discount column. For this purpose one additional column is added on each side
of the cash book.

WRITING A THREE COLUMN CASH BOOK

Opening Balance:

Put the opening balance (if any) on cash in hand and cash at bank on the debit side in
the cash book and bank columns. If the opening balance is credit balance (overdraft)
then it will be put in the credit side of the cash book in the bank column.

CHEQUE OR CASH RECEIVED

If a cheque is received from any person and is paid into the bank on the same date it
will appear on the debit side of the cash book. The amount will be shown in the bank
column. Cash received will be recorded in the usual manner in the cash column.

Payment By Cheque/Check or Cash

When we make payment by cheque, this will appear on the credit side and the
amount in the bank column. If the payment is made in cash it will be recorded in usual
manner in the cash column.
CONTRA ENTRIES

If an amount is entered on the debit side of the cash book, and the exact amount is
again entered on the credit side of the same account, it is called "contra entry".
Similarly an amount entered on the credit side of an account also may have a contra
entry on the debit side of the same account.

Contra entries are written when:

1. Cash is deposited into bank by office: It is payment from cash and receipt in
bank. Therefore, enter on credit side, cash column “ Bank" and on debit side
bank column “ Cash". The reason for making two entries is to comply with the
principle of double entry which in such transactions is completed and therefore,
no posting of these items is necessary. Such entries are marked in the cash book
with the letter "C" in the folio column

2. Cheque/Check is drawn for office use: It is payment by bank and receipt in

cash. Therefore, enter on the debit side, cash column “ Bank" and on credit side,
bank column “ Cash".

DISCOUNTS

Discount Allowed: A reduction given to customers who pay their accounts within the
time allowed.

Discount Received: A reduction given to us by a supplier when we pay his account

within the time allowed.

EXAMPLE

On January 1, 2012 Noor Stores cash book showed debit balance of cash sh. 150,500
and bank sh. 135,750. During the month of January following business was transacted.
Jan.1Purchased a laptop for cash sh75,000; cash sales sh. 315,000 Deposited cash sh.
300,000
" 4Received from A. Hussai n a cheque for sh.20,550 in part payment of his account
after allowing a discount of sh. 250
" 6Paid by cheque for goods purchased worth 100,025
" 8 withdrew from the bank sh. 67,000 for personal use.
." 10Received from Hasler a cheque for sh. 775,000 in full settlement of his account
after allowing 5% discount.
" 12Sold goods to Dingli Bros. for sh150,000 who paid by cheque which was deposited
in the bank.
" 16Paid Salome sh. 91,200 by cheque, discount received 6%
" 27Paid to Gullet by cheque sh. 65,000
" 30Paid salaries by cheque sh175,000
" 31 Paid Rono sh 16,000 cash, discount received 8%
" 31Drew from bank for office use 25,000.You are required to enter the above
transactions in a three column cash book and balance it off.
EXERCISE

Enter up a three-column cash book from the following details.

Balance off at the end of the month.
May 1 Started business with sh. 60,000 in the bank.
May 1 Bought fixtures paying by cheque sh.9,500.
May 3 Cash sales sh.4,070.
May 5 S. Mary paid us his account of sh2,200 by a cheque for sh. 2,100.
May 7 Paid K. Tonga sh. 800 owing to him by means of a cheque of sh760 in full
settlement.
May12 Paid rates by cheque sh. 4,100.
May16 Paid W. Maina his account of sh.1,200 by cash sh.1,140, having deducted sh.60
cash discount.
May20 T. Leteipa paid us a cheque for sh. 780, having deducted sh.20 cash discount.
May31 Cash sales paid direct into the bank sh.880.
PETTY CASH BOOK
Petty Cash Book records small cash payments. it is separated from the main Cash book.
Advantages of petty cash book
1. Daily tasks of handling small cash transactions can be done by junior staff.
2. It is convenient that only the total of each column of expenditure will be
transferred to general ledger at the period end.
3. By checking with the petty cash payment, it is easy to check whether there
are extravagant expenses.
VOUCHER
Voucher is a form which shows what a payment is for . A sample is shown below:

IMPREST SYSTEM

Imprest systems is a system by which a refund is made of the total paid out in a period.

EXAMPLE

Write up a petty cash book,with analysis columns for office expenses,motor expenses
,cleaning expenses and casual labour.The cash float brought down is sh60,000 and the
amount spent is reimbursed on 28 Feb.Show the balance carried down to 1 March .

Year 2015 sh
Feb 1 Letterheads 3,200
2 Lotodo-casual labour 1,500
2 Unique Motors- motor repairs 3,300
4 Petrol 2,700
5 Paper clips 1,000
8 Envelopes 1,200
9 Cleaning materials 1,500
11 Otieno- casual labour 2,700
13 Mwangi-cleaner 2,100
16 Printing cartrige 2,400
18 Motor repairs 6,000
21 Krop - casual labour 2,000
PRACTICE EXERCISE

2015

May 1 The cashier hands a cheque for sh100,000 to the petty

cashier to enable him to obtain cash for the
starting float of petty cash sh.
3 Stationery Voucher No. 1 5,600
5 Postage Voucher No. 2 8,700
8 Cleaning expenses Voucher No. 3 15,200
12 Payment of amount to K Sutton in the
purchases ledger Voucher No. 4 27,400
17 Postage Voucher No. 5 6,300
20 S-Small- travel exp. Voucher No. 6 4,500
23 Stationery Voucher No. 7 3,200
25 Cleaning expenses Voucher No. 8 12,400
27 Telephone phone bill Voucher No.9 1,200
29 Postage Voucher No. 10 6,300
31 The cashier reimburses the petty cashier the amount paid on 1st June.

ERRORS AND CORRECTION OF ERRORS

Errors can be classified into two:

1. Errors that are not disclosed by the Trial Balance

2. Errors that are disclosed by the Trial Balance

ERRORS THAT ARE NOT DISCLOSED BY THE TRIAL BALANCE

1. Errors of omission

2. Errors of commission

3. Errors of principle

4. Compensating errors

5. Errors of original entry

6. Errors of complete reversal

ERRORS OF OMMISSION

These are transactions that are completely omitted from the books of accounts.
Reasons may be that at the time of entering the books of accounts an invoice might
have been misplaced, blown away or duplicate copies were not made.
Example

A credit note for sh. 275,000 received from Hatari wholesalers was misplaced and not
recorded in the books. It was discovered two months later on 12st February, 2012.

ERRORS OF COMMISSION

This is where amounts are entered on the right side of the account but on the wrong
debtor or creditors account. This is may be due to the similarity in names.

Example

i. A credit sale of goods for sh. 720,000 to Chaka was erroneously debited to
Chuka a/c.
ii. A cheque for sh. 348,000 was received from Mbaya but erroneously credited
to Mbuya a/c

ERRORS OF PRINCIPLE

These errors offend against a basic idea or principle of separating revenue from capital
expenditure or income. Example, a calculator bought in business for use is entered in
the purchases account instead of office equipment account or sundries.

Example.

i. Furniture was bought on credit for sh. 250,000 to be used in the office. It was
debited to purchases a/c.
ii. Rent received from a tenant sh. 45,000 was credited to premises account.

ERROR OF ORIGINAL ENTRY

This is made in the books of prime entry and carried forward to the ledger accounts. If a
transaction is recorded at an incorrect amount in the subsidiary book, both the debit
and credit entries made subsequently in the ledger would be incorrect though equal in
figures. This will therefore not affect the trial balance.

If the transaction is recorded at less than the correct amount, the relevant ledger
account would be under-debited and under- credited (undercast). If the transaction is
recorded at more than the correct amount, the relevant ledger account would be
over-debited and over- credited (overcast).

Correction Entry

If a transaction is recorded at less than the correct amount;

DR: the account that has been under-debited with the difference
CR: the account that has been under-credited with the difference.

If a transaction is recorded in the subsidiary book at more than the correct amount:

DR: the account over-credited with Differenc

CR: the account over-debited with the difference.

Example

i. An invoice of sh. 476,000 issued to Lomrion was entered in the sales book as
sh. 467,000 and posted to the ledger accordingly.
ii. A cheque for sh. 239,000 received from Nthine was recorded in the cash
book and posted to the ledger as sh. 293,000.

COMPENSATING ERRORS

This is where an error on the debit side of an account has been compensated for by a
similar error on the credit side of another account

Example

The salaries and wages account was over added by sh. 35,000 and rent received
account had also been over added by sh. 35,000.

COMPLETE REVERSAL OF ENTRIES

This is where correct amounts are entered on the wrong side of each account.

Example

Interest charged by the bank sh. 148,000 was entered in the debit side of the cash book
and posted to the credit of the interest account.

ERRORS THAT ARE DISCLOSED BY THE TRIAL BALANCE

Errors which cause the Trial Balance to fail to balance are errors which affect only one
account involved in the double entry, that account has either:

i. An over-debit or an over-credit.
ii. An under-debit or an under credit.

When you cannot get the Trial Balance totals to agree: Make an entry called ‘Suspense
Account’ in the Trial Balance and enter the amount in whichever column makes the
totals agree. Now open up a Suspense Account in the ledger for that amount. When
the errors are found and corrected, the Suspense Account balance will be reduced to
zero.
Once the suspense account has been opened the correction entry must be a double
entry and always pass through the suspense account.

These errors include:

i. Mis-cast in the subsidiary book.

ii. Posting an entry on the wrong side of the account.
iii. Failure to post an entry to the ledger.
iv. Error in balancing an account.

MIS-CAST IN SUBSIDIARY BOOKS

If a subsidiary book is mis-cast, the account on which its total is posted would show an
incorrect amount, whereas the individual accounts posted from the subsidiary book
would sum up to a different accurate figure.

Example

i. The sales book is undercast by sh.10,000. The correct total is sh. 794,000.

ii. The sales book is overcast by sh. 1,000, the correct total is sh. 364,000.

POSTING A WRONG AMOUNT TO LEDGER

If a wrong amount is posted to the ledger from the subsidiary book, the effect would
be confined to that account.

Example

i. A credit note for sh. 45,000 issued to Karani was recorded correctly in the Return
inwards book but posted to the credit of his personal account as sh. 48,000.

ii. An invoice for sh. 13,800 issued to Muli was recorded correctly in the sales book
but posted to the Dr side of his personal account as sh. 18,300.

POSTING AN ENTRY ON THE WRONG SIDE OF THE ACCOUNT

If an entry is posted on the wrong side of the relevant ledger a/c, the effect would be
that both the entries relating to the transaction would be on the same side of the
ledger, thereby causing the trial balance not to agree.

Example

i. An invoice for sh. 52,000 issued to Gitau was entered correctly in the sales
book but posted to the credit side of his personal account in the ledger.
 ii. An invoice for sh. 243,000 received from Yana Tyres ltd was recorded
correctly in the purchases book but posted to the debit side of Yana Tyres ltd
a/c.

FAILURE TO POST AN ENTRY TO THE LEDGER

If a transaction is recorded in the subsidiary book, it is posted to the ledger by posting

individual entries to personal accounts and the total to the relevant nominal account. If
the total of the subsidiary book is posted to the ledger but one (or more) of the
individual entries are not posted to the ledger, the trial balance will clearly not agree.

Example

A credit note for sh. 21,600 received from Jambo wholesalers was recorded in the
returns outwards book but not posted to their personal account in the ledger.

ERROR IN BALANCING AN ACCOUNT

If an arithmetical error is made while balancing a ledger account, it will cause the two
sides of the trial balance to give different totals. This error may result in;

i. Either the account showing a larger balance than the correct balance i.e an
over-debit (if it is DR balance) or an over credit (if it is a credit balance)

ii. The account showing a smaller balance than the correct balance i.e an under-
debit or an under-credit.

To correct an over-debit or an under-credit we will need to credit the account with the
amount of difference. Similarly to correct an under-debit or an over-credit, we will need
to debit the account with the amount of difference. The corresponding entry in both
cases would be in the suspense account.

COMPREHENSIVE EXAMPLE

The trial balance extracted on 31st December from the books of a wholesaler failed to
agree and he placed the difference to suspense account. The trial balance totals
were: DR sh. 2,138,200, CR sh. 2,122,300. later the following errors were discovered.
a. An invoice for sh. 6,200 issued to Kuria was recorded in the sales book as sh.
16,200 and posted to the ledger accordingly.
b. Returns inwards book was overcast by sh. 1,000
c. A credit note for sh. 5,500 received from KFA was recorded correctly in the
appropriate subsidiary book but posted to the credit of KFA account.
d. A cheque for sh 17,800 received from Karanja was entered in the cash book but
not posted in his personal account.
e. A credit purchase of an office machine for sh. 12,500 was journalised through the
purchases book.
 f. A purchase of goods for sh. 53,400 from Jambo wholesalers was recorded
correctly in the purchases book but posted to their personal account as sh.
54,300.
g. Goods costing sh. 9,500 were taken by the owner for his personal use but no
entry was made in the books.
h. There was a mistake in balancing the salaries a/c. Its balance was shown as DR
sh. 162,300 instead of the correct balance DR. sh. 153,300.
Prepare the correction entries in the journal and a suspense account duly balanced.