BOOK-KEEPING AND ACCOUNTS

OBJECTIVE OF THE COURSE:

To give the student a basic or working knowledge of accounts, that is to
be able to read and understand the financial statements of a business
enterprise. The course, as with most of the courses you will do at ZIALE,
will concentrate on the practical aspects of bookkeeping and accounts.
SYLLABUS: (handed out)
READING LIST
Bookkeeping and Accounts - Frank Wood 5th Edition and the list
indicated in copy of syllabus
We will cover as much of it as time will allow. The exam at the end of
the year will be on the materials we will have covered. I will set it so
there will be no unpleasant surprises.
INTRODUCTION
Objective:
1. Importance of accounting to business management
2. Identify users of accounting information
3. Distinguish between the different types of business organisations
The aim of a business:
Is to make money for the owners. To achieve this there is need to trade
with other people/businesses i.e. selling goods and services. Money is a
medium of exchange in trading; it allows monetary value to be given to
goods/services. Control of money is thus important if a business is to be
successful. Owners of a business need to know how much money is going
out and how much is coming in. This process is known as accounting.
Refer to Exhibit 1.1 the basis of a business
1 business is formed
2 trading with others involves money
3 control of money is essential
4 good financial control leads to profitability and success and bad
financial control leads to losses and failure
What is bookkeeping?
F. Wood: Bookkeeping and Accounts 5th Edition
“The process of recording, in books or on computer, the financial effect
of business transactions and managing such records”
J. Paul: Principles of bookkeeping and Accounts
The art of recording business transactions in a systematic way so that
the financial position of the undertaking can be ascertained readily
F. Wood: Bookkeeping and Accounts 5th Edition defines accounting as:
“The skill or practice of maintaining accounts and preparing reports to
aid the financial control and management of a business”.
The main purposes of accounting are:
1. Measuring past performance
2. Controlling resources
3. Planning future programmes
Bookkeeping and accounts are concerned with the same process at
different levels. Technically they are different and signify two different
stages in the accounting system:
The first stage - bookkeeping
a. Is the preparation of the basic accounting records i.e. the recording of
business transactions in books of account
The second stage - accounting
b. Accounting is concerned with the interpretation of the information
and figures in the accounts to explain the financial condition of the
business
Importance and need for accounting:
The financial statements produced by an accounting department of a
business will show the profit or loss that has been made for the period
and the financial position of the business.
The two most important statements are:
The trading and profit and loss account
The balance sheet
Accounting Sequence
1. Record accounting data (need to install system to collect data).
2. Classify data (into activities to e.g. know sales and cost figures for
each activity)
3. Summarise data (provide concise management information)
4. Communicate information (after the 3 stages above need to present
it in a formal way as reports)
Users of accounting information
The financial statements contain information, which is useful to:
• Investors
• Customers
• Suppliers
 • Employees
• Tax authorities, Etc

Types of organisations using accounting information

• Sole trader - trading alone in his/her name or under a recognised
trading name. Liable for all business debts and enjoys all profits.
• Partnership - a group of two or more people and not more than 20
• Limited company - private and public
• Non- trading organisations e.g. clubs, associations and other non
profit making organisations

SUMMARY
Principal objects of bookkeeping:
a. To keep records of Income and Expenses so that the profit earned
or loss made during any particular period can be easily ascertained.
b. To keep records of Assets and Liabilities of the business so as to
ascertain the financial position of the business at any point in time.
What can a bookkeeping system tell us?
a. Sales to date
b. Purchases to date
c. Expenses such as wages, water, electricity, telephone,
etc
d. The gross or net profit or losses for the year
e. Total of money owed to the business - debtors
f. Total of money owed by the business - creditors
g. Cash to hand and at the bank or overdraft
h. The business’s assets; buildings, vehicles, machinery,
etc
i. The amount invested in the business - capital
j. The amount of money drawn by the owner of the
business
THE ACOUNTING EQUATION AND THE BALANCE SHEET
To set up and start trading a firm needs resources. These will be provided
by the owner in total or with money borrowed from other sources. If only
the owner provides the resources the accounting equation would be:
CAPITAL = TOTAL ASSETS:
The amount of resources supplied by the owner is called capital these are
employed to acquire assets. However, as is usually the case, some one
else supplies some of the assets. The amount owing to this person for
supplying these assets is called liabilities. The normal equation is thus:
ASSETS = LIABILITIES + CAPITAL (OWNERS EQUITY)
The two sides of the equation always balance. It can be restated as
Capital = Assets – Liabilities Or Liabilities = Assets – Capital
Complete the gaps
ASSETS LIABILITIES CAPITAL
50,000,000 ? 30,000,000
20,000,000 16,000,000 ?
? 25,000,000 10,000,000

THE BALANCE SHEET AND THE EFFECTS OF BUSINESS

TRANSACTIONS
The accounting equation is expressed in a financial statement called the
balance sheet.
Example
1. Introducing capital
Jan 1 Mulenga starts a business with K50m he opens a bank account to
deposit the money for the business. His balance sheet would appear as:
MULENGA
Balance Sheet as at 1 Jan 2004
Assets K Capital K
Cash at bank 50,000,000 Capital 50,000,000
50,000,000 50,000,000
2. Purchase of asset by cheque
Jan 4 he buys a van for the business for K30m
MULENGA
Balance Sheet as at 4 Jan 2004
Assets K Capital K
Van 30,000,000 Capital 50,000,000
Cash at bank 20,000,000
50,000,000 50,000,000
3. Purchase of an asset and the incurring of a liability
Jan 8 he buys goods from Patel for K500,000 to be paid for later ( credit)
MULENGA
Balance Sheet as at 8 Jan 2004
Assets K Capital& Liabs. K
Van 30,000,000 Capital 50,000,000
Goods 500,000 Patel (creditor) 500,000
Cash at bank 20,000,000
50,500,000 50,500,000
4. Sale of an asset on credit
Jan 10 he sells some goods worth K100,000 on credit to Zulu
MULENGA
Balance Sheet as at 10 Jan 2004
Assets K Capital & Liab. K
Van 30,000,000 Capital 50,000,000
Goods 400,000 Patel (creditor) 500,000
Zulu (Debtor) 100,000
Cash at bank 20,000,000
50,500,000 50,500,000
5. Sale of an asset for immediate payment
Jan 12 he sells goods worth K50,000 to Chanda who pays him by cheque
MULENGA
Balance Sheet as at 12 Jan 2004
Assets K Capital & Liab K
Van 30,000,000 Capital 50,000,000
Goods 350,000 Patel (creditor) 500,000
Zulu (Debtor) 100,000
Cash at bank 20,050,000
50,500,000 50,500,000
6. Payment of a liability
Jan 14 he pays Patel 200,000 as part payment for the amount owing
MULENGA
Balance Sheet as at 14 Jan 2004
Assets K Capital & Liab K
Van 30,000,000 Capital 50,000,000
Goods 350,000 Patel (creditor) 300,000
Zulu (Debtor) 100,000
Cash at bank 19,850,000
50,300,000 50,300,000
7. Collection of an asset
Jan 20 Zulu pays him K75, 000 by cheque
MULENGA
Balance Sheet as at 20 Jan 2004
Assets K Capital & Liab K
Van 30,000,000 Capital 50,000,000
Goods 350,000 Patel (creditor) 300,000
Zulu (Debtor) 25,000
Cash at bank 19,925,000
50,300,000 50,300,000
Example of transactions Effect Assets Liabs
1. Buy goods on credit Increase asset Increase + +
(Stock of liability
goods) (Creditors)
2. Buy goods by cheque Increase asset Decrease asset +_
(Stock of (Bank)
goods)
3. Pay creditors by cheque Decrease asset Decrease _ _
(Bank) liability
(Creditors)
4. Owner pays more capital into bank Increase asset Increase capital + +
(Bank)
5. Owner takes money out of the business Decrease asset Decrease _ _
bank account for his own use (Bank) capital
6. Owner pays creditor from private Decrease Increase capital +_
Money outside the firm liability
(Creditors)
NB every transaction has affected two items and each transaction has maintained the
same total for assets as for capital + liabilities

HORIZONTAL AND VERTICAL PRESENTATION

MULENGA
Balance sheet as at 20 January 2005

FIXED ASSETS K’000 K’000 K’000

Van 30,000
CURRENT ASSETS
Goods 350
Debtors 25
Cash at bank 19,925 20,300
CURRENT LIABS
Creditor 300 300 20,000
Net current assets 50,000

Financed by
CAPITAL
50,000

Exercise: Phiri decides to start a business making furniture. His father in

law lends him K60,000,000.00 to help in setting up the business. He buys
premises for K100,000,000.00, wood processing machinery for
K20,000,000.00 and timber worth K10,000,000.00. He pays
K4,200,000.00 towards the timber. After the events mentioned above and
before he starts trading, Phiri has K200,000 cash in hand and
K14,000,000.00 in the business bank account.
You are required to calculate Phiri’s his capital.
 Draw up Mulenga’s balance sheet, using the vertical presentation
method, from the following information as at 31 December 2004.
K’000
Premises 48,000
Machinery 43,568
Stock 16,880
Creditors 50,604
Debtors 34,560
Cash at bank 46,888
Capital 139,292
Phiri decides to start a business making furniture. His father in law lends
him K60,000,000.00 to help set up the business. He buys premises for
K100,000,000.00, wood processing machinery for K20,000,000.00 and
timber worth K10,000,000.00. He pays K5,800,000.00 towards the
timber. After these events and before he starts trading, Phiri has
K200,000 cash in hand and K14,000,000.00 in the business bank account.
Assets K’000
Premises 100,000
Machinery 20,000
Timber 10,000
Bank 14,000
Cash 200
144,200
Liabilities
Loan 60,000
4,200 64,200
Capital introduced 80,000

Draw up Mulenga’s balance sheet, using the vertical presentation method,

from the following information as at 31 December 2004.
K’000
Premises 48,000
Machinery 43,568
Stock 16,880
Creditors 50,604
Debtors 34,560
Cash at bank 46,888
Capital 139,292
 MULENGA
Balance sheet as at 31 December 2004
Fixed Assets K’000 K’000 K’000
Premises 48,000
Machinery 43,568 91,568

Current Assets
Stock 16,880
Debtors 34,560
Cash at bank 46,888 98,328

Current Liabilities
Creditors 50,604
Net current assets 47,724
139,292
Financed by:
Capital 139,292
DOUBLE ENTRY SYSTEM
Nature of a transaction
A transaction is an event that changes two items in a balance sheet. E.g.
request for a price without buying as contrasted with a request for a price
and then buying.
The ledger accounts and Double entry.
In the previous section we looked at the effect on the balance sheet
transaction by transaction and that each transaction changed the balance
sheet. In real life situations it is impractical to record each balance sheet
change in this manner. In practice it is necessary to summarise all
categories of transactions so that the balance sheet is only produced at
intervals usually of 12 months. The approach used is called the double
entry system.
The theory of double entry
As already seen, every transaction affects two items in the balance sheet.
To follow the rules of double entry, every time a transaction is recorded,
both aspects must be taken into account. Traditionally one aspect is
referred to as the debit side of the entry (Dr) and the other as the credit
side of the entry (Cr)
Ledger accounts
Each aspect is recorded in the relevant ledger account.
 Ledger account
Debit side (DR) K Credit side (Cr) K
For each transaction it is necessary to (i) identify the two effects of the
transaction (ii) the two accounts affected and (iii) decide which ledger
account has the debit entry and which has the credit entry.
Rules of Double Entry
1. Every entry affects two things and must therefore be entered twice,
once on the Debit side and once on the Credit side
2. The order in which this items are entered does not matter; you can
start by crediting one account and debiting the other or the other
way round
3. Debit entry is always an asset, expense or loss. The Credit entry
is a liability, capital, income or profit

Entries on the DEBIT side Entries on the CREDIT side

Assets Capital
Expenses Liabilities
Losses Income or profit
4. To increase or decrease assets, liability or capital the double entry
rules are:
Accounts To record Entry in the accounts
Assets ↑An increase Debit
↓A decrease Credit

Liabilities ↑An increase Credit

↓A decrease Debit

Capital ↑An increase Credit

Debit
↓A decrease

Consider the accounting equation:

Assets = Liability + Capital
Assets Liability Capital
To increase each item Debit Credit Credit
To decrease each item Credit Debit Debit
Worked examples on Debiting and Crediting
Ledger account
Date Details Amount Date Details Amount

Jan 1 start business with K50,000,000.00 cash

EFFECT ACTION
(a). Increase the asset of cash Debit cash account

(b). Increase capital Credit capital account

Cash Account
Date Details K’000 Date Details K’000
Jan 1 Capital 50,000
acc
Capital Account
Date Details K’000 Date Details K’000
Jan 1 Cash acc 50,000
One fundamental ledger account in a bookkeeping system is the Cash
Account. It records the cash received and paid by the business. When we
spend cash at is for three reasons:
1. to buy an asset
2. to pay an expense
3. to repay a debt or liability
The bookkeeping entry to record a payment of cash is on the credit side
of the Cash Account and on the debit side of the other account affected.
Repeat ledger accounts as for each transaction as above
Jan 2 bought van for K15,000,000.00 cash
EFFECT ACTION
Decrease the asset of cash Credit cash account
Increase the asset of van Debit van account

Jan 3 bought furniture on credit from Furniture World for K 10,000,000

EFFECT ACTION
Increase the asset of furniture Debit furniture account
Increase the liability Credit Furniture World account
Jan 30 paid amount owing to Furniture World
EFFECT ACTION
Decrease the asset of cash Credit cash account
Decrease Liability Debit Furniture World account

2005
1. Started business with K30,000,000.00 in the bank
2. Bought van paying by cheque K15,000,000.00
3. Bought furniture on credit from Office World for K8,000,000.00
4. Bought another van on credit from Dulys for K12,000,000.00
5. Took K5,000,000.00 from the Bank for office use
6. Bought furniture cash for K2,500,000.00
7. Obtain a loan from Chanda for K7,000,000.00
8. Paid Office World cheque for K8,000,000.00
9. Paid K2,000,000.00 cash in hand into the bank account
10.Bought stationery for 500,000 paid cash

Bought office equipment on credit for K3,000,000.00 from Amin & Sons