ACCOUNTING FOR LAWYERS

Definition:
1. Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the information.
2. Accounting can be defined as an information system that provides reports to users
about the economic activities and condition of a business.

Management Accounting:
The area of accounting that provides internal users with information is called managerial
accounting or management accounting. Internal users of accounting information include
managers and employees. These users are directly involved in managing and operating the
business. The objective of managerial accounting is to provide relevant and timely
information for managers’ and employees’ decision-making needs. Often, such
information is sensitive and is not distributed outside the business.

Financial Accounting:
The area of accounting that provides external users with information is called financial
accounting. External users of accounting information include investors, creditors,
customers, and the government. The objective of financial accounting is to provide relevant
and timely information for the decision-making needs of users outside of the business. For
example, financial reports on the operations and condition of the business are useful for
banks and other creditors in deciding whether to lend money. Financial accounting is
concerned with how accountants use bookkeeping data.

Bookkeeping:
Until about one hundred years ago, records of all accounting data was kept manually in
books. This is why the part of accounting that is concerned with recording data is often
known as bookkeeping. Nowadays, although hand written books may sometimes be used
(particularly by very small entities), most accounting data is recorded and stored
electronically. Bookkeeping is the process of recording data relating to accounting
transactions in the accounting books.
 Structure & Roles of International Foundation Reporting Standards
Foundation

 
Group Role Formed

Governance
IFRS Foundation Oversees the work of the IASB, the 8 March 2001
structure, and strategy, and has fund
raising responsibility.

Due Process Oversight Committee Trustee committee responsible for 2006

(DPOC) the Trustee's oversight function
under the IFRS Foundation
Constitution.

Monitoring Board Oversees the IFRS Foundation 1 February 2009

Trustees, participates in the Trustee
nomination process, and approves
appointments to the Trustees.

Technical
International Accounting Standards Sole responsibility for establishing 1 April 2001 (1)
Board (IASB) International Financial Reporting
Standards (IFRSs).

IFRS Interpretations Committee (2) Develops interpretations for 1 April 2001 (2)

approval by the IASB, and
undertakes under tasks at the request
of the IASB

Working groups Expert task forces for individual Formed as needed

agenda projects
Advisory
Accounting Standards Advisory Advises on the technical standard- Announced 1 February 2013
Forum (ASAF) setting activities of the IASB

IFRS Advisory Council (3) Advises the IASB and the IFRS 25 June 2001
Foundation

Specialised advisory groups Capital Markets Advisory 2003

Committee (4)

Effects Analyses Consultative Group 2012

Emerging Economies Group 26 July 2011

Financial Crisis Advisory Group 30 December 2008

(jointly with FASB)

Global Preparers Forum

IFRS Taxonomy Consultative Group 29 April 2014

Joint Transition Resource Group for June 2014

Revenue Recognition

SME Implementation Group 2010

(SMEIG)

Transition Resource Group for August 2014

Impairment of Financial Instruments
 Transition Resource Group for IFRS September 2017
17

The IASB replaced the IASC Board of the International Accounting Standards
Committee (IASC) with effect from this date.  The IASC was formed in 1973. Until 31
March 2010, the IFRS Interpretations Committee was named the International Financial
Reporting Interpretations Committee (IFRIC).  IFRIC replaced the Standards Interpretations
Committee (SIC) of the IASC with effect from 1 April 2001.  The SIC was part of the
original IASC structure formed in 1973. Until 31 March 2010, the IFRS Advisory Council
was named the Standards Advisory Council (SAC). Formerly the Analyst Representative
Group (ARG).

Accounting Policies/Principles & Accounting Estimates

• Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements
• Accounting estimates are the methods used to arrive at a numeric value when it is
impossible or impractical to provide exact numbers
 • A principle determines how information should be reported, while an estimate is used
to approximate information
• Accounting policy is concerned with:
– Recognition
– Measurement
– Presentation
of financial information
• However, what guides the policies to be used in a particular entity?
1. Professional standards
2. National Legislation

Users of Financial Accounting Information

•Managers. These are the day-to-day decision makers. They need to know how well things
are progressing financially and about the financial status of the business.
•Owner(s) of the business. They want to be able to see whether or not the business is
profitable. In addition they want to know what the financial resources of the business are.
•A prospective buyer. When the owner wants to sell a business the buyer will want to see
such information.
•The bank. If the owner wants to borrow money for use in the business, then the bank will
need such information.
•Tax inspectors.They need it to be able to calculate the taxes payable.
•A prospective partner. If the owner wants to share ownership with someoneelse, then the
would-be partner will want such information.
•Investors, either existing ones or potential ones. They want to know whether or not to invest
their money in the business.
•Creditors. They want to know if there is any risk of not being paid what they are due.

Principles of Accounting
A number of basic accounting principles have been developed through common usage. They
form the basis upon which the complete suite of accounting standards have been built. The
best-known of these principles are as follows:
 Fair presentation and compliance with IFRSs. The financial statements must
"present fairly" the financial position, financial performance and cash flows of an
 entity. Fair presentation requires the faithful representation of the effects of
transactions, other events, and conditions in accordance with the definitions and
recognition criteria for assets, liabilities, income and expenses set out in the
Conceptual Framework for Financial Reporting (provides for the qualitative
characteristics of financial info).
IAS 1 - requires an entity whose financial statements comply with IFRSs to make an
explicit and unreserved statement of such compliance in the notes

IAS 1 - Inappropriate accounting policies are not rectified either by disclosure of

the accounting policies used or by notes or explanatory material.

IAS 1 acknowledges that, in extremely rare circumstances, management may

conclude that compliance with an IFRS requirement would be so misleading that
it would conflict with the objective of financial statements set out in the
Framework. In such a case, the entity is required to depart from the IFRS requirement,
with detailed disclosure of the nature, reasons, and impact of the departure.

 Accruals principle. This is the concept that accounting transactions should be

recorded when they actually occur, rather than in the periods when there are cash
flows associated with them. This is the foundation of the accrual basis of accounting.
It is important for the construction of financial statements that show what actually
happened in an accounting period, rather than being artificially delayed or accelerated
by the associated cash flows. For example, if you ignored the accrual principle, you
would record an expense only when you paid for it, which might incorporate a
lengthy delay caused by the payment terms for the associated supplier invoice.

 Conservatism principle. This is the concept that you should record expenses and
liabilities as soon as possible, but to record revenues and assets only when you are
sure that they will occur. This introduces a conservative slant to the financial
statements that may yield lower reported profits, since revenue and asset recognition
may be delayed for some time. Conversely, this principle tends to encourage the
recording of losses earlier, rather than later. This concept can be taken too far,
where a business persistently misstates its results to be worse than is realistically the
case.
 Consistency principle. This is the concept that, once you adopt an accounting
principle or method, you should continue to use it until a demonstrably better
principle or method comes along. Not following the consistency principle means that
a business could continually jump between different accounting treatments of its
transactions that makes its long-term financial results extremely difficult to discern.

 Cost principle. This is the concept that a business should only record its assets,
liabilities, and capital investments at their original purchase costs. This principle is
becoming less valid, as a host of accounting standards are heading in the direction of
adjusting assets and liabilities to their fair values.

 Business entity concept. This is the concept that the transactions of a business
should be kept separate from those of its owners and other businesses. This
prevents intermingling of assets and liabilities among multiple entities, which can
cause considerable difficulties when the financial statements of a fledgling business
are first audited.

 Prudence. This is the concept that you should include in or alongside the financial
statements of a business all of the information that may impact a reader's
understanding of those statements. The accounting standards have greatly amplified
upon this concept in specifying an enormous number of informational disclosures.

 Going concern principle. This is the concept that a business will remain in
operation for the foreseeable future. It is assumed that the entity has neither the
intention nor the need to liquidate or curtail materially the scale of its operations.
This means that you would be justified in deferring the recognition of some expenses,
such as depreciation, until later periods. Otherwise, you would have to recognize all
expenses at once and not defer any of them. Assets should not be valued at their
break-up value.

 Duality principle. This is the concept that, when you record revenue, you should
record all related expenses at the same time. Thus, you charge inventory to the cost of
 goods sold at the same time that you record revenue from the sale of those inventory
items. This is a cornerstone of the accrual basis of accounting. The cash basis of
accounting does not use the matching the principle.

 Materiality principle. This is the concept that you should record a transaction in
the accounting records if not doing so might have altered the decision making
process of someone reading the company's financial statements. This is quite a
vague concept that is difficult to quantify, which has led some of the more picayune
controllers to record even the smallest transactions.

 Monetary unit principle. This is the concept that a business should only record
transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to
record the purchase of a fixed asset, since it was bought for a specific price, whereas
the value of the quality control system of a business is not recorded. This concept
keeps a business from engaging in an excessive level of estimation in deriving the
value of its assets and liabilities.

 Reliability principle. This is the concept that only those transactions that can be
proven should be recorded. For example, a supplier invoice is solid evidence that an
expense has been recorded. This concept is of prime interest to auditors, who are
constantly in search of the evidence supporting transactions.

 Revenue recognition principle. This is the concept that you should only recognize
revenue when the business has substantially completed the earnings process. So many
people have skirted around the fringes of this concept to commit reporting fraud that a
variety of standard-setting bodies have developed a massive amount of information
about what constitutes proper revenue recognition.

 Time period principle. This is the concept that a business should report the results of
its operations over a standard period of time. This may qualify as the most glaringly
obvious of all accounting principles, but is intended to create a standard set of
comparable periods, which is useful for trend analysis.
 Qualitative Characteristics of Accounting Information
Relevance (Predictive or Confirmatory Value)
Relevance refers to how helpful the information is for financial decision-making
processes. For accounting information to be relevant, it must possess:
1. Confirmatory value – Provides information about past events
2. Predictive value – Provides predictive power regarding possible future events
Therefore, accounting information is relevant if it can provide helpful information about past
events and help in predicting future events or in taking action to deal with possible future
events. For example, a company experiencing a strong quarter and presenting these improved
results to creditors is relevant to the creditors’ decision-making process to extend or enlarge
credit available to the company.
 
Faithful Representation
Representational faithfulness, also known as reliability, is the extent to which information
accurately reflects a company’s resources, obligatory claims, transactions, etc. To help,
think of a pictorial depiction of something in real life – how accurately does the picture
represent what you see in real life? For accounting information to possess representational
faithfulness, it must be:
1. Complete – Financial statements should not exclude any transaction.
2. Neutral – The degree to which information is free from bias. Note that there are
subjectivity and estimation involved in financial statements, therefore information
cannot be truly “neutral.” However, if a company polled 1,000 accountants and took
the average of their answers, that would be considered neutral and free from bias.
3. Free from error – The degree to which information is free from errors.
 
Verifiability
Verifiability is the extent to which information is reproducible given the same data and
assumptions. For example, if a company owns equipment worth $1,000 and told an
accountant the purchase cost, salvage value, depreciation method, and useful life, the
accountant should be able to reproduce the same result. If they cannot, the information is
considered not verifiable.
 
Timeliness
Timeliness is how quickly information is available to users of accounting information. The
less timely (thus resulting in older information), the less useful information is for
decision-making. Timeliness matters for accounting information because it competes with
other information. For example, if a company issues its financial statements a year after its
accounting period, users of financial statements would find it difficult to determine how well
the company is doing in the present.
 
Understandability
Understandability is the degree to which information is easily understood. In today’s society,
corporate annual reports are in excess of 100 pages, with significant qualitative information.
Information that is understandable to the average user of financial statements is highly
desirable. It is common for poorly performing companies to use a lot of jargon and difficult
phrasing in its annual report in an attempt to disguise the underperformance.
 
Comparability
Comparability is the degree to which accounting standards and policies are consistently
applied from one period to another. Financial statements that are comparable, with
consistent accounting standards and policies applied throughout each accounting period,
enable users to draw insightful conclusions about the trends and performance of the company
over time. In addition, comparability also refers to the ability to easily compare a company’s
financial statements with those of other companies.
The qualitative characteristics of accounting information are important because they make it
easier for both company management and investors to utilize a company’s financial
statements to make well-informed decisions.

The Accounting Equation

The amount of the resources supplied by the owner is called capital. The actual resources
that are then in the business are called assets. This means that when the owner has supplied
all of the resources, the accounting equation can be shown as:

Capital = Assets
Usually, however, people other than the owner have supplied some of the assets. Liabilities
is the name given to the amounts owing to these people for these assets. The accounting
equation has now changed to:

Capital = Assets — Liabilities

Assets = Capital + Liabilities

It is a fact that no matter how you present the accounting equation, the totals of both sides
will always equal each other, and that this will always be true no matter how many
transactions there may be. The actual assets, capital and liabilities may change, but the total
of the assets will always equal the total of capital + liabilities. Or, reverting to the more
common form of the accounting equation, the capital will always equal the assets of the
business minus the liabilities.

Assets - An asset is a resource with economic value that an individual, corporation, or

country owns or controls with the expectation that it will provide a future benefit.
consist of property of all kinds, such as buildings, machinery, inventories (stocks) of
goods and motor vehicles. Other assets include debts owed by customers and the amount of
money in the business's bank account.

Liabilities - A liability is something a person or company owes, usually a sum of money.

Liabilities are settled over time through the transfer of economic benefits including money,
goods, or services. 
include amounts owed by the business for goods and services supplied to it and for expenses
incurred by it that have not yet been paid for. Liabilities also include funds borrowed by the
business.

Capital - is often called the owner's equity or net worth. It comprises (i) the funds invested in
the business by the owner plus (ii) any profits retained for use in the business less (iii) any
share of profits paid out of the business to the owner. It is the residual interest in the assets of
the entity after deducting all its liabilities.

• Income
 – Income is increases in economic benefits during the accounting period
– Sales are a form of income
– Revenue is the sum total of all income streams
• Expense
– Expenses are decreases in economic benefits during the accounting period
– For the purpose of bookkeeping, purchases (goods for resale) are recognized
separately from expenses
• Asset
– An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity
– Amounts owed to the business are also considered assets
• Liability
– A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits
– Amounts owed by the business are considered liabilities.

Revenues & Expenses

Income - Income is increases in economic benefits during the accounting period. Sales are a
form of income. Revenue is the sum total of all income streams
Expense - Expenses are decreases in economic benefits during the accounting period. For
the purpose of bookkeeping, purchases (goods for resale) are recognized separately from
expenses.

• A debtor is a person or enterprise that owes money to another party.

• The Trade Receivable or Account Receivable is a debtor arising from regular
business activities
• A creditor is a person, bank, or other enterprise that has lent money or extended
credit to another party.
• The Trade Payable or Account Payable is the a creditor relationship arising
from regular business activities
Transactions
Transaction involves two things: The Item exchanged and a Form of settlement that is either
cash, credit, or capital. ('Capital' is what has been invested by the owner in a business.) These
two things are called the 'elements of a transaction'. If there is no Item exchanged (i.e. bought
or sold), there is no transaction.

Source Documents
These are transaction documents that would normally have the following information:
1. Date of transaction
2. Details of transaction
3. Type of transaction
4. Reference number
5. Beneficiary of transactions
6. Mode of payment
7. Execution officer
8. Authorization officer

Source documents of a Credit Sale

Give customer goods Customer Invoice

+ Issue Invoice

Customer Pays +
Sales Receipt
Issue Receipt

Customer was over-

Credit note
charged

Source documents of a Credit Purchase

 Receive Goods Goods Received Note
from supplier Supplier Invoice

Pay supplier Purchase Receipt

Customer was Credit note

under-charged
The Accounting Cycle

Source Documents Books of Original Entry Ledgers

Invoice Purchases Journal/Day Book General Ledger
Goods Returned Note Sales Journal/Day Book Sales Ledger
Delivery Note Purchases Ledger
Receipt

Trial Balance Financial Statements

Books of Original Entry

Sales Day Book
• A book of original entry which records credit sales as they are made. Ideally a sales
journal should be recorded and summarized on a daily basis
• However, this may not be appropriate especially if the volume of credit sales is low
• The sequence of the invoice numbers the completeness of credit sales records is
confirmed.
• It does not summarize the sales and payments by individual credit customers, and this
is captured in a separate record, the sales ledger.
 • A Sales book is a record of all credit sales made by a business. It is one of the
secondary book of accounts and unlike cash sales which are recorded in cash book,
sales book is only to record credit sales. The amount entered in the sales book is on
behalf of invoices supplied to purchasers. A Sales book is also called Sales Journal or
Sales Day Book.
For example, the following entries of sales appear in the books of ABC Ltd.
• Jan 7 – Sold 10 Keyboards to A & Co. for 300 each.
• Jan 24 – Sold 5 headphones to X & Co. for 200 each.
Sales book of ABC ltd will appear as follows:
Sales Book

Date Particulars LF Amount

7 Jan A & co. 3000

24 Jan X & co. 1000

4000

Purchases Day Book

Also known as the Purchase journal, Invoice book or Purchase day book, a purchase book is a
special purpose subsidiary book.  It is prepared by a business to record all the credit
purchases made by the firm. Purchases are recorded only for goods or items that are related to
the core business operations of a company, that is, goods which are procured for resale.

General Ledger/Journal
Generally speaking, the general ledger does not fall under the category of a book of original
entry. This is so because it only contains summarized entries posted to into it from one of the
accounting journals. However, if one records the transactions directly into the general ledger,
it then becomes one of the books of original entry.
A general ledger account is an account or record used to sort, store and summarize a
company's transactions. These accounts are arranged in the general ledger (and in the chart of
accounts) with the balance sheet accounts appearing first followed by the income
statement accounts.
It records all other transactions not included in the sales or purchases journal. The records are
done through a series of accounts.

Types of Accounts
• Personal account is the account which records all the transactions related to a person
or in the name of person.
– Example: Mwangi's Account, Rehema’s Account etc. All the transactions
related to them are recorded in their accounts.
• Real Account is the account which records all the transactions pertaining to tangible
items which can be measured in terms of money
– Example: Machinery etc.
• Nominal account is the account which records all the transactions related to losses,
expenses, gains, incomes
– Example: Sales a/c, Rent a/c etc.

Returns Inward (debit)- expense

• These are goods (from previous sales) that have been returned by customers due to
various reasons e.g. The goods are of a wrong size, colour, and model, the goods are
damaged etc.
• EFFECT: The asset of stock is increased by goods returned hence a debit is needed.
• Open returns inwards account and debit it.
• Credit trade a/c recivables account if it was a credit sale or credit cash a/c if it was
a cash sale since the amount is refunded.
Returns Outward (credit) - income
• These are goods returned to suppliers due to the same reasons given above
• If purchases made were cash purchases:
– Debit- Cash a/c (cash refunded by the supplier)
– Credit- returns outwards account
• For credit purchases
– Debit-trade payable a/c to reduce the liability.
– Credit –return outwards account.
Discounts Received (credit) -income
 • Is an allowance by the creditors to the firm to encourage the firm pay the amount dues
within the agreed time.
• When a discount is given by the supplier then we;
– Credit- Discount received a/c (income a/c hence credit it).
– Debit- Account Payables account
• Example:
• ABC limited sells some goods on credit to B ltd worth Shs 10,000 under the terms of
sale; B Ltd will receive a discount of 5% if they pay the amount due within one month
• B decides to take up the offer & therefore pays the amount within the given tie
Discount Allowed (debit) - expense
• These are allowances made by a firm on the amounts receivable from the customers to
encourage prompt payment.
• The amount is deducted from the sales invoice.
– Debit- discount allowed a/c (expense)
– Credit-trade a/c receivable a/c (to reduce the amount of debt)
Drawings (debit) - expense
• Drawings from business by the owner may be in form of cash, bank money, goods
taken from the business for personal use, personal expenses paid by the business.
• When a drawing is taken by the business owner, we;
– Debit- Drawings account
– Credit- Relevant Asset a/c

Double Entry Bookkeeping

Every time you record a transaction, you debit one account, and you credit another account.
The amount you debit to the first account will always be equal to the amount you credit to
the other account. This is why we call this form of bookkeeping, 'double entry'.

Debit ALWAYS equals Credit

When recording a transaction, you need to decide which account to debit and which account
to credit for each entry. In order to do so, there are two things that are always correct:
1 an increase in a possession is always a debit
2 an increase in capital is always a credit.
Any increase in something that belongs to the business is a debit. You should remember that
in accounting we call all these items that belong to the business 'assets'.

P - Purchases
E - Expenses
A - Assets
R - Revenues
L - Liabilities
S - Sales
 INCOME / PROFIT OR LOSS STATEMENT
This is a list of revenues and expenditures arranged so as to produce figures for gross profit
and net profit for a specific period of time. The income statement is used by traders to
calculate the profit or loss that the business has incurred. The income statement is comprised
of a trading account which is used to calculate gross profit and a profit and loss account
which is used to net profit. While these two accounts are part of the double entry system,
interestingly, the statement of profit or loss/income is not part of the double entry system.

Trading Account
Gross profit is the excess of sales revenue over the cost of goods sold (cost of sales).
Gross Profit = Sales Revenue – Cost of Goods Sold/Cost of Sales.
Sales Revenue = Sales - Returns Inwards
Cost of Goods Sold = Purchases – Closing inventory
Profit and Loss Account
Net profit is the gross profit plus any other revenue, such as rents received or commissions
earned, minus the other costs, other than those already included in the 'cost of goods sold'.
Sales Revenue – Cost of goods – Expenses = Net Profit

NAME OF BUSINESS
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED XX.XX.XXXX
SHS SHS
Sales XX
Returns Inwards (XX)
Net Sales XX
COST OF SALES
Opening Inventory/Stock XX
Purchases XX
Carriage Inwards XX
Returns Outwards (XX)
Closing Inventory/Stock (XX) (XX)
GROSS PROFIT XX
OTHER INCOMES
Discounts Received XX
Bank Interest Received XX XX
EXPENSES
Salaries and Wages XX
Electricity XX
Discounts Allowed XX
Carriage Outwards XX (XX)
NET PROFIT XX

STATEMENT OF FINANCIAL POSITION

This is a list of balances arranged according to whether they are assets, capital or liabilities
and so depict the financial situation on a specific date.

The equation that summarizes the information held in the statement of financial position is:
 Net Assets = Capital - Liabilities
or
Non-Current Assets + Current Assets - Current Liabilities = Capital + Non-Current Liabilities

Non-Current Assets are assets that:

1. were not bought primarily to be sold; but
2. are to be used in the business; and
3. are expected to be of use to the business for a long time.
Examples: buildings, machinery, motor vehicles, fixtures and fittings.
NB: Non-current assets are listed first in the statement of financial position starting with
those the business will keep the longest, down to those which will not be kept so long.

Current Assets: are assets that are likely to change in the short term and certainly within
twelve months of the date of the statement of financial position. They include items held for
resale at a profit, accounts receivable, cash in the bank, and cash in hand.
NB: These are listed in increasing order of liquidity, starting with the asset furthest away
from being turned into cash and finishing with cash itself.

Current Liabilities: are items that have to be paid within a year of the date of the statement
of
financial position. Examples: bank overdrafts, accounts payable resulting from the purchase
on time of goods for resale.

Capital/Equity: In the statement of financial position the calculation of capital involves the
addition of the starting capital to the net profit from the period ended and any other injection
of capital minus the drawings.
Therefore, it can look like:
Capital = Initial Capital + New Capital + Net Profit - Drawings
Non-Current Liabilities: are items that have to be paid more than a year after the date of the
statement of financial position.
Examples: bank loans, loans from other businesses.

NAME OF BUSINESS
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED XX.XX.XXXX
SHS SHS
Sales XX
Returns Inwards (XX)
Net Sales XX
COST OF SALES
Opening Inventory/Stock XX
Purchases XX
Carriage Inwards XX
Returns Outwards (XX)
Closing Inventory/Stock (XX) (XX)
GROSS PROFIT XX
OTHER INCOMES
Discounts Received XX
Bank Interest Received XX XX
EXPENSES
Salaries and Wages XX
Electricity XX
Discounts Allowed XX
Carriage Outwards XX (XX)
NET PROFIT XX

ADJUSTMENTS

Returns
Returns Inwards: The sales account and the returns inwards account deal with goods sold
and goods returned by customers.
Returns Outwards: The purchases account and the returns outwards account deal with
goods purchased and goods returned to the supplier respectively.
These two accounts have a bearing on the gross profit calculated in the trading account. The
formula to calculate gross profit when returns inwards and outwards have been taken into
consideration is:
(Sales - Returns inwards) - (Cost of goods sold - Returns outwards) = Gross profit

Carriage
Carriage Inwards: When the cost of delivery for goods purchased by a business is
met/absorbed by the business owner, it is called carriage inwards.
For example, where a business purchases goods from a supplier for 195,000 but then has to
pay 5,000 for the goods to be delivered. The 5,000 would be the amount considered carriage
inwards. It would not be prudent to leave out the carriage inwards in the income statement.
Carriage inwards is always added to the cost of purchases in the trading account.

Carriage Outwards: When the cost of delivery for goods sold to a customer is met by the
business, this is called a carriage outward.
For example, where a business sells goods to a customer for 100,000 and agrees to meet the
cost of delivery at 10,000. This cost should be included in the income statement.
Carriage outwards is always entered in the other costs section of the statement of profit or
loss. It is never included in the calculation of gross profit.

Bad & Doubtful Debts:

Bad Debts: Businesses often operate by making sales on credit. However, not all
customers/purchasers pay for goods sold on credit. Therefore, businesses often have to make
provisions for these bad debts, that they expect will not be paid.

Provisions for bad debts have two effects:

1. They must be charged to the income statement as an expense when calculating the
net profit or loss for the period.
2. The other thing that needs to be done is to remove the bad debt from the trade
receivables asset account.
The provision for bad debts has an effect on the double entries. One has to debit the bad
debt account with the amount of the bad debt and credit the debtor's account in the sales
ledger to complete the double entry.
Bad debts account: This expense account is used when a debt is believed to be irrecoverable
and is written-off.

Doubtful Debts: Most businesses will experience some kind of non-payment for goods sold
on credit. Therefore, it is prudent to make allowances for doubtful debts. This often involves
applying a percentage to the overall balance of accounts receivable (after deducting the bad
debts).

The accounting entries needed for the allowance for doubtful debts are;
Year in which the allowance is first made:
1 Debit the profit and loss account with the amount of the allowance (i.e. deduct it from
gross profit as an expense).
2 Credit the allowance for doubtful debts account.
Allowance for doubtful debts account: This account is used only for estimates of the amount
of debt remaining at the year-end after the debts have been written off that are likely to finish
up as bad debts. (This account is also known as the 'allowance for bad debts account'.)

Increase in the Allowance for Doubtful Debts:

1 Debit Profit and Loss Account with the increase in the allowance (i.e. deduct it from gross
profit as an expense).
2 Credit the Allowance for Doubtful Debts Account.
NB: we are only debiting and crediting the amount that the allowance has increased by.

Decrease in the Allowance for Doubtful Debts:

1 Debit Allowance for Doubtful Debts Account.
2 Credit Profit and Loss Account (i.e. add it as a gain to gross profit).

Recovery of Bad Debts:

Reinstate the debt by making the following entries:
1 Debit- Debtor's account.
2 Credit- Bad debts recovered account.

Depreciation:
Depreciation is an expense that reflects the decrease in the economic value of a non-current
asset over a period of time.
Accounting regulations forbid you from making the entry for depreciation in the account for
the possession (asset) that is being depreciated. Instead, you must make it in an accumulated
depreciation account.

Effect of a depreciation:
Debit the profit and loss account (add to expenses in the profit and loss account).
Credit the accumulated provision for depreciation account (minus/deduct from the cost of
the specific depreciating non-current asset in the statement of financial position).
NB: we are only debiting the amount that the provision has increased by.

At the end of the period, you calculate the depreciation for the period and make the following
double entries:
1. Debit the depreciation account
Credit the accumulated provision for depreciation account
2. Debit the profit and loss account
Credit the depreciation account

Accruals:
Accrued Expenses:
For many businesses, they may not finish paying up their expenses by the end of the
accounting period. Yet, these expenses are put forth in their full amount in the income
statement. The accrued expenses come to adjust these figures for expenses to reflect the
reality of how much has been paid and what is yet to be paid by a business.

A double entry is required to adjust the expenses in order to capture the accrued expenses.
This will involve:
Debit the accrued expenses account
Credit the profit and loss account/accrued expenses account (add to the specific expense in
the income statement).

Accrued Income:
 This is income that relates to the current accounting period, but cash has not yet been
received.
An accrued income is/should be reported in the income statement and the same income will
be shown in the statement of financial position as a current asset.
Example:
A firm lets out part of its property and receives rent of $ 2,000 per month.
Assuming that this is the 1st year of renting and the rent is received in arrears i.e. rent for
January is received early February
On 31st January, there would be accrued income of $ 2,000

Pre-Payments
Pre-Paid Expenses:
These are expenses which have already been paid but relate to a future accounting period.
They should not be charged in the income statement but should be carried forward to the next
financial period and shown in the statement of financial position as a current asset
Assume that in the prepaid income illustration that all the facts are as stated except rent is an
expense.

Pre-Paid Income:
It is income that is not yet due, but cash has been received for it e.g. when a customer gives
you a down payment.
A pre-paid income should not be reported in the current financial period as an income in the
income statement, but it is carried forward and reported in the period it relates to.
It is reported in the statement of financial position as a current liability.

Income SFP/Balanc
statement e Sheet
(Current
Period)
Report as income Current
Accrued asset
portion
income
Prepaid Not reported Current
portion liability
Accruals/prepayments

Accrued Report as expense Current

portion liability
expenses
 portion reported asset

ERRORS
Errors that do not affect the trial balance:

Transposition Error:
This occurs when digits in an amount are accidentally recorded the wrong way around, i.e,
the wrong sequence of the individual characters within a number was entered
e.g. if a purchase of goods is recorded in the purchases account as Kshs1,492 instead of Kshs
1, 942.the balance in the purchases account will therefore be understated by Kshs 450
The cash account is correctly credited with the right amount of Kshs 1,942.
In the trial balance the debit side will also be understated.

Errors of Omission:
It occurs when a transaction is completely omitted from the books
Example:
A sales invoice of Kshs 400 is not posted in the sales journal but no entry is made in the
trade account receivables and also in the sales account.
The effect of the error is to understate both the trade account receivables and the sales
account.

Errors Commission:
It occurs when:
Either debit or credit an entry in the wrong account but the account is of the same
class/group.
• Example;
• A credit sale to T. Thompson is posted to L Thompson’s account with amount of Kshs
200
 • Instead of debiting T Thompson you debit L Thompson and the corresponding sales
entry is correct.
• Although the debit entry is made into the wrong account the two accounts are of the
same class i.e. trade account receivables to correct this error. You debit T.Thompson
and credit L.Thompson.

Error of Principle:
In this type of error, a transaction is posted not only to the wrong account but also to an
account of a different class. It mostly involves treating revenue expenses as capital
expenditure or vice-versa.
Example:
When you buy a motor vehicle and instead of debiting motor vehicle you debit purchases
When you buy a motor vehicle instead of debiting motor vehicle account you debit motor
vehicle expense account.
In this case the motor vehicle account is non-current asset account and the motor vehicle
expense account is an expense.

Compensating Error:
They are coincidentally equal and opposite to one another .These are errors that tend to
cancel out each other i.e. if the effect of one error is to understate the debit then another error
may take place to overstate debit by the same amount thus canceling each other and vice
versa.
Example;
If the balance carried down of the purchases account is Kshs 3,980 but show in the trial
balance as Kshs 3,890 and another error has occurred whether by the value of fixtures of
Kshs 4,450 has been recorded as Kshs 4,540.

Complete reversal of Entries:

A transaction is posted to the correct accounts but to the wrong side of the account i.e. a debit
is posted as a credit and credit is posted as a debit.
Example;
Cash drawn from the bank of Kshs 150 for business use is posted as a debit in the bank
account and credit cash in hand.
To correct this error: two entries are made
 – Correct the error
– Post the transaction correctly.

Errors Affecting the Balancing of the Trial Balance:

a) A transaction is posted on one side of both accounts i.e. the two debits or 2 credits
Example:
– A payment to an account payable of £300 is credited in the cash book also in
the account payable account.
b) Error on balances of accounts or ledger i.e. understatement or overstatement of an
account balance due to mathematical errors. – The error is corrected by debiting or
crediting the erroneous account and debiting or crediting the suspense account.
c) The balance on an account is shown on the wrong side of the account when opening
the ledger account or when taken to the trial balance. – The error is rectified by
debiting or crediting the erroneous account and debiting or crediting the suspense
account.
d) A balance is omitted from the trial balance. – The error is rectified by debiting or
crediting the suspense account.

Methods of Correction:
1. If the correction involves a double entry, then it is corrected by the use of a journal
entry in the journal. That is, if the trial balance is still in balance.
2. When the error breaks the rule of double entry, it is corrected by the use of a suspense
account as well as a journal entry.
Journal Entries:
Journal entries are made when errors are discovered and need correction or if there is need for
adjustments
It explains the type of entries that will be made in the ledger accounts giving a reason for
these entries.
Date Details Debit Credit
  A/c to be debited XX  
xx/xx/xx A/c to be credited  XX

(narrative)

The reason is known as a narrative.

Suspense Accounts:
A suspense account is used to correct errors that result to an imbalance between the total
debits and credits in the ledger accounts/trial balance.
E.g, When there is a credit entry in one account and the corresponding debit entry is missing.
A suspense account is temporary and not intended to be carried as a ledger account.

Control Accounts
A control account is an account held in a ledger, which summarizes the entries and balances
of all the accounts in the same or another ledger
Benefits of Control Accounts:
Benefit 1: Gives a brief and concise summary
It shows at a glance the total value and balances contained in the ledger to which it pertains
It would be a very tedious exercise to try to trace the totals of says sales, purchases and
payments from subsidiary ledgers.

Benefit 2: Serves as a ‘Trial Balance’

The control accounts serve as trial balance for the subsidiary ledgers. It is a check on the
accuracy of the entries made in the individual accounts
One only needs to take the totals from the individual accounts in the ledgers and compare
them with the totals in the control accounts
If there is any difference, then there must be an error or a group of errors.

Benefit 3: Location of errors

Control accounts make location of errors easier and the accuracy of ledger is easily proved
Errors in the trail balance can easily be zeroed down to a specific ledger, making it easier to
locate them.
Benefit 4: Segregation of duties
Control accounts helps to segregate the duties between the accountant responsible for ledgers
and another for controls
This is a good means of helping the management to detect fraud and provides an effective
control over the work of employees who writes the books of accounts
Benefit 5: Speeds up the preparation of final accounts
Control accounts provide totals that will be used to draw the financial statements.
A single balance in the control accounts is more easily extracted than aggregate of balances
from the subsidiary ledger.

The Sales (Debtors) Ledger Control account

It contains the following elements wrt Trade Receivables:
a) Balances brought forward into the current period (debit or credit)
b) Balances carried forward into the next period
c) Returns inwards
d) Bad debts
e) Dishonoured cheques
f) Discounts allowed.
g) Inter- account settlements with suppliers (contra)
h) Any errors that could affect the total debtors balances
i) Any additional information that changes the amount receivable from debtors

The Purchases (Creditors) Ledger Control Account

It contains the following elements wrt Trade Payables:
a) Balances brought forward into the current period (debit or credit)
b) Balances carried forward into the next period
c) Returns outwards
d) Dishonoured cheques
e) Discounts allowed.
f) Inter- account settlements with customers (contra)
g) Any errors that could affect the total creditor balances
h) Any additional information that changes the amount payable to creditors
 BANK RECONCILIATION
Bank reconciliation statement: A statement prepared to link the bank balance shown in the
cash book with the balance shown on the bank statement.
Timing differences: Differences between the bank statement and the cash book that will be
corrected over time

Often when a comparison is made there is a difference between the two balances. This is
either due to a time lag or errors. It is for this reason that a bank reconciliation stmt is
prepared. The reconciliation may identify error that may have been made in either the firm’s
cashbook or in the banks records. A bank stmt is a copy of the business bank account
transactions as recorded by the bank.

Causes of Differences Between Cash and Bank Balance

• The difference between the cash book and the bank stmt balance results from two
factors:
i. Timing difference in recording of transactions
ii. Errors made by either the business or by the bank in recording transactions.
Timing Differences
• These are differences caused by time lag in the receipt of information or recording of
a transaction between the bank and the business.
• Examples Include:

Unpresented Cheques
Paid out by the business but the recipients have not presented them to the bank for payment .
The cashier will have recorded the payments in the cash book. However, the bank records
will only show the cheques that have actually been paid.
Therefore, while the unpresented cheques appear as a payment in the cash book they would
not appear in the bank stmt.
Uncredited Cheques
These are cheques received by the business but not credited into the bank account.
E.g. the business records a receipt in the cash book from the bank paying –slip. However, the
bank may not record the receipt for a day or so, particularly if it is paid in late in the day or
paid at a different branch from which the account is maintained.

Direct Credits
A timing diff may occur when the bank has received a direct payment for the business.
Here, the bank would have recorded the receipt in the business’s account at the bank but the
business will be unaware if the payment and will therefore, not have recorded the receipt in
the cash book. E.g.
Standing order for incoming payments received on the business account when not advised b
the business.
Interest and refunds credited b the bank.

Bank Charges
Fees charges by the bank for maintaining the account and for executing transaction. They
include ledger fees, commission and other levies.
The business would not know the charges until they receive the bank statement but not in the
cash book.
Payment standing order
These are instructions to the bank to execute payment on behalf of the business. Normally
periodic payments like insurance are best executed by way of standing order.
The business would not know about the execution of the payment until the receipt of bank
stmt.
The standing order will appear in the bank stmt but not in the cash book.

Unpaid Cheques
These are paid to or out of the business but are either stopped by the drawer or are returned as
dishonored (bounced).
When a bank stmt is received any queries/errors are rectified before reconciliation is done.
The reconciliation of the difference between the cash book balance and the bank balance is
carried out as follows:
STEP 1: Identify the differences by ticking off the items that appear in both the cash book
and the bank stmt.
STEP 2: The unticked items on the bank statement include bank charges, direct credits and
payment standing orders.
These are entered into the bank columns of the cash book to bring it up to date.
In other words the cash book balance is adjusted to reflect these items.
STEP 3: The unticked items from the cashbook are the result of timing differences and are
used to prepare the bank reconciliation statement as shown below:

Cash Book Adjustments

Amount (Shs)
Balance as per cash book xxx
Direct credits xxx
Bank Charges (xxx)
Standing order (xxx)
Adjusted cash book balance xx

Bank reconciliation statement as at…(date)

Adjusted cash book balance xxx
Add: unpresented cheques xx
Less: uncredited cheque (xx)
Balance as per bank statement xxx

Property Plant and Equipment

Held by the business and are expected to be used for more than one accounting period. These
assets are therefore, long term in nature.
There are two main methods of computing depreciation:
1. Straight line method
2. Reducing balance method:
a) Fixed rate of reducing balance
b) Double- declining balance method
c) Usage method
d) Sum of digits method
e) Revaluation method
 Advocates Accounts
Lawyers maintain the clients account for recording all the transactions relating to the clients.
Transactions relating to the balance sheet are recorded in the office account. The client
account is opened in the clients name in a recognized bank recording:
– a)  Deposits and withdrawals on behalf of the client
– b)  Payments of expenditure on behalf of the client
– c)  Withdrawal of professional fees as authorized by the client.
Office account
• An account that records transactions relating to the client. They include;
Disbursements, fees paid to client, amount paid &reimbursed by client.
Client account
• An account that records transactions relating to clients. They include cash received on
behalf of clients, payments made on behalf of clients and any transactions made as
authorized by client.
Costs charged to client
•  Are fees charged to clients for services rendered.

Clients Account:
• This is an account that records all transactions relating to the client
• Where all the clients’ accounts are maintained in one account, the client account is
maintained in two columns in order to separate clients with sufficient funds in the
account and those with insufficient funds.
Office account
• An account that records transactions relating to the client.
• These transactions include; Disbursements, fees paid to client, amount paid &
reimbursed by client
Disbursements:
• These are payments made on behalf of the client with insufficient funds
• Such reimbursements are to be reimbursed by the client
Accounting Entries:
a) To record funds received on behalf of the client:
– Dr. Cash book – Client column
– Cr. Client – Client Column
 b) To record payments on behalf of the clients (With sufficient funds)
– Dr. Client account – Client column
– Cr. Cashbook – Client column
c) To record payments on behalf of the clients (With insufficient funds)
– Dr. Client account – Office column
– Cr. Cashbook – Office column
d) To record fees charged to the client
– Dr. Client account – Office column
– Cr. Fees Income
e) To record cash received from the client (fees charged and disbursements)
– Dr. Cashbook – office column
– Cr. Client account – office column
f) To record office expenses
– Dr. Expenses
– Cr. Cash book – Office column
Accounting Entries (Period End)
• To record transfer of funds from clients account to office account (Authority Granted)
a) Transfer from client to office account
– Dr. Cashbook – Office Column
– Cr. Cash – Client Column
b) Contra entry – set off
– Dr. Client account – Client column
– Cr. Client account – Office column