Introductory Accounting

Chapter One
Introduction to Accounting Concepts

and Structure
Brief history of accounting
Accounting has its root in the verb "account". A standard dictionary meaning of the word is to give a
satisfactory record of money. In pre-industrial revolution feudal societies, there were landlords who owned
huge areas of land in many distant locations which were far apart. Since a landlord could not be at all these
locations for long periods of time, there arose the need to appoint stewards at these distant locations who
would look after the landlord's interests. This resulted in the separation of ownership from control, as for
most part of the year the landlord (owner) did not get involved in operations in his lands.
Stewards had to account to the landlord and so were required to keep written records of transactions
and were required to report on all activities. This function laid the foundation for the accountancy discipline,
as we know it today. Early references to the subject of accounting are found in the works of some ancient
oriental writers. However, the systematic approach to double entry system of bookkeeping and accounting
as known today has dated back to the late thirteenth century. In 1494, Luca Pacioli a Franciscan monk
living in Italy, published his well-known work, 'Summa de Arithmetica, Geometria, Proportione et
Proportionalita'. It was primarily a study of mathematics but it also included a section on bookkeeping
procedures. Since then, accountancy has grown to become a world-renowned activity important to the
functioning of the world economy.
In Tanzania, at the time of independence in 1961, there were very few non-Europeans in professional
fields including accountancy. In recognition of the need to alleviate the shortage of accountants and to
develop a domestic accountancy profession, the government undertook a program of training Tanzanians
overseas. Later in 1972 it developed a structure designed to regulate and oversee the development of
accounting in the country. This resulted in the establishment of the National Board of Accountants and
Auditors (NBAA) by an Act of Parliament in 1972. NBAA has all the statutory powers to regulate the
accounting profession in Tanzania. Its activities relate to all accounting related disciplines, including
government accounting, management accounting, financial accounting and auditing.
In fulfillment of its functions, NBAA releases Statements of Standard Accounting Practices and
Guidelines on accounting and auditing. The first was issued in June 1983 titled Tanzania Statements of
Standard Accounting Practice (TSSAP). Subsequently, a number of guidelines have also been issued.
Currently Tanzania has adopted in full the application of International Financial Reporting Standards (IFRS).
2 Introductory Financial Accounting
NBAA has also developed a Code of Ethics for Accountants and Auditors and ensures that
practitioners comply with it. It conducts examinations at all professional levels, organizes short term training
programs and seminars, and maintains a register of Certified Accountants and Auditors.
Graduates of all accountancy training institutions must be conversant with standards and guidelines
issued by NBAA.
Need for accounting information
When a business is relatively small, for example, a small shop, the owner can easily manage the
business operations as well as keep record of the day to day transactions. However, as the business
organization grows complex, for example, from a small shop to a supermarket, the owner will need to hire
employees to carry out the different functions of selling, procuring supplies, record-keeping, etc. The owner
may continue to manage the business personally, but to be able to do this effectively, he will need accounting
information. This will enable him to plan and make decisions regarding business operations. Therefore,
periodic statements and reports prepared from the accounting records are very essential to good
management. In principle therefore, accounting information is needed to aid decision-making. There a
number of people, in addition to the owner, who make decisions regarding businesses. These are collectively
known as the users of accounting information.
Users of accounting information
Users of accounting information are the various parties which need accounting information in order
to make decisions, which are then communicated to others. It is for this reason that accounting is often
described as the "language of business" because it is the medium of communication between the various
parties interested about financial activities of a business. These include:
(a) Owners/Shareholders
This group's interest in accounting information lies in the fact that it is their money which is invested
in the firm. They would like to ensure that they are getting a good return on their investment. This
is assessed by how much profit the firm is making and whether their investment is increasing in
value. For shareholders in companies this means they will get good dividend and the market value
of their shares will increase and they can make capital gains if these were sold.
(b) Management
Introduction to Accounting Concepts and Structure 3
Boards of Directors and Managers use accounting information for making internal decisions and in
planning business operations. They are responsible to the owners/shareholders in carrying out
policies and directives, and in running the business efficiently and effectively.
(c) Banks/loan companies
This group is interested not only in the firm's profitability but also in its ability to repay loans. They
rely on the financial reports as the basis of assessing the firm's liquidity position and the firm's long
term likelihood of survival.
(d) Employees
They are part of the organization and feel that their efforts contributed to the firm's profits.
Accounting information will be their basis for claiming bonus and salary increases. A stable
financial position of the firm also gives an indication of job security.
(e) Suppliers
Suppliers usually extend credit to the firm for goods supplied and they want to be assured of timely
payments of accounts due. Their interest in accounting information will be similar to that of the
banks and loan companies, that is, has the firm sufficient funds to pay its maturing obligations?
(f) Customers
The regular customers of the firm usually rely on it for steady supply of their merchandise for re-
sale or of raw materials in case of manufacturing firms. Therefore, they are interested to know if
the firm is able to continue its operations on a long-term basis and is capable of meeting its
customers' demand for goods.
(g) Prospective Investors/Analysts
These are interested in a firm's profitability and potential for growth. Prospective investors rely on
accounting information in making their investment decisions. In giving advice to prospective and
existing investors, analysts also make use of accounting information.
(h) Government
Various ministries and departments have interest in the firm's accounting reports as the basis for
taxation, enactment of laws for the industry and provision of social services to the public. The
government may also want to ensure that the firm complies with laws on, for example, wage
payments and employee benefits.
Users of accounting information fall into two broad categories; internal users and external users.
External users are those who are external to the day to day operations of the business. Internal users are, on
the other hand, those involved in the day to day operations of a business. Bankers, Investors and Suppliers
are examples of external users while managers of an entity at all levels are internal users.
External users obtain accounting information on a business through published financial statements.
The principal published financial statements are:
(a) the Income Statement (Profit and Loss Account) which shows whether the business is earning
profits or sustaining losses.
(b) the Balance Sheet which shows the value of assets owned by the business, and how the assets have
been financed through debts and owner's equity.
(c) the Statement of Source and Application of Funds which shows the changes that have taken place
in the working capital of the firm, as well as the source and use of the working capital during the
accounting period. This statement is now subordinated to the cash flow statement which takes as
funds only cash and cash equivalents.
Internal users receive information in excess to what are contained in published financial reports.
Examples of these are reports on productivity levels, labour turnover, spoilage and damages, etc. The
accounting discipline has evolved specializations along the information needs of external and internal users.
The activities which focus on internal users is Management Accounting while that which focuses on
providing information to external users is known as Financial Accounting.
Financial Accounting
This field of accounting is primarily concerned with the provision of financial information about the
business firm mainly to external users. As explained in the previous section these users of financial data have
diversity of interests, so that financial accounting caters to the common rather than the specific information
needs of a particular group. For this reason the financial statements are general purpose in nature, and the
accountant must adhere to prescribed standards and principles in preparing them.
Management Accounting
This branch of accounting is mainly concerned with the provision of accounting information to
internal users, that is, the management of the firm. The kinds of financial reports and data which management
accounting offers are aimed to help management in planning and controlling business operations, and in
decision - making. Cost accounting is a sub-set of management accounting and has evolved because of the
needs of management for accounting information regarding the costs of production, pricing of products, etc.
Although used mostly by manufacturing firms, cost accounting is now in application in businesses which
provide services.
Basic accounting concepts
Since there are many users of accounting information and their interests are not exactly similar, it is
important that information they are provided with is uniform and containing figures all can generally agree on.
Furthermore, as these users look at information from different businesses and over different periods of time,
they need some assurance that information provided is, within reason, accurate and comparable. This can be
achieved only if financial statements are prepared using similar approaches across businesses and over time.
For this purpose, some basic ground rules, more commonly known as accounting principles, have
been developed. Financial statements are prepared on the assumption that these rules have been complied
with.
The important basic concepts are as follows:
(a) Business entity - This concept states that the business exists separately and distinct from its owners.
Its books of accounts and records should reflect only those transactions which pertain to the firm
and should not include personal transactions and activities of the owner. If the owner buys a new
pair of shoes, it is incorrect to record this in a firm's books of account.
(b) Going concern - The business is assumed to continue in its operations indefinitely unless there is
evidence which indicates otherwise. In this context, the business should continue to value all its
fixed assets at original cost as it is not foreseen that they will be sold.
(c) Accrual - Revenue should be recognized when earned rather than when cash is collected, and
expenses should be recognized when goods and services are consumed regardless of when they are
paid for.
(d) Matching Concept - In determining profit or loss at all times, revenues should be matched against
expenses incurred in the process of generating that revenue in the same period. It is necessary to
recognize all the revenue/income earned during a period regardless of when money is received. In
the same way, all expenses incurred by the business should be included regardless of when money is
paid for them.
(e) Prudence - The business is encouraged to take a conservative approach in reporting its affairs. If the
accountant is faced with a choice of figures which are both acceptable to use in the financial
statements he should take a pessimistic rather than an optimistic approach. This is also known as the
conservatism principle.
(f) Cost - Assets of a business must be recorded at their original cost. Cost is determined through an
arms-length transaction and in most cases this is the most objective figure to use as long as the
going concern assumption holds.
(g) Unit of measure - Accounting is concerned with activities capable of being measured in monetary
terms. Therefore, money is used as a unit of measure in recording and reporting all transactions of
the business. Inherent in this concept is the assumption that currency will remain stable in value.
(h) Accounting Period - Although a business is assumed to continue to exist indefinitely, its life can be
broken into periods of time, usually twelve months, during which results can be measured. The
significance of this concept is that users do not have to wait until cessation of business to determine
profit or loss.
(i) Consistency - When there are alternative accounting methods or policies which a business may use,
it is important that whichever method or policy is adopted it is used consistently from one
accounting period to another, as well as within one accounting period. If for some good reason the
method has to be changed, this should be clearly stated so that users are aware of the reason and
impact of the change.
(j) Materiality - Only significant items should be considered when preparing financial statements.
These are items whose omission or non-disclosure will result in a distorted view of the financial
statements and will mislead the users of these financial statements. Items may be considered
significant in amount or importance depending on the nature and size of the firm. For example, a
miscellaneous expense of shs. 10,000/= may be significant for a sole trader but may not be
significant for a large insurance company.
Qualitative attributes of accounting information
In addition to complying with the basic concepts, accounting information must have certain qualities
for its users to attain maximum benefit from it. These qualities are:
(a) Timeliness
To have the intended benefits, accounting information should be available to the user at the
appropriate desired time so that it is incorporated in decision-making processes.
(b) Relevance
Since the volume of accounting data which can be generated is infinite, it is important that the
accountant selects from all data available only those which are most likely to meet needs of the
general body of users of accounting information. Inclusion of irrelevant data results in wastage of
resources.
(c) Quantifiability
Accounting information should be able to be quantified. Quantification is usually in monetary terms
although quantities other than currency are employed by accountants. This however, does not mean
exclusion of non-quantifiable qualitative factors in management decision making.
(d) Verifiability/Objectivity
Accounting information should be measured in such a manner that two or more accountants of
equal competence should be able to measure the same data and arrive at approximately similar
results. Verifiable, objective information is also reliable.
(e) Understandability
Accounting information to be useful must be understood by the different users. It has to be
presented concisely and with clarity.
Definition of accounting
There are many definitions of accounting by a number of professional bodies and authors. They all
however, revolve around the activities of generating and providing accounting information to users so that
they can make informed decisions.
The Committee on Terminology of the American Institute of Certified Public Accountants (AICPA),
defined accounting as the "art of recording, classifying, and summarizing in a significant manner and in terms
of money, transactions and events which are, in part at least, of a financial character, and interpreting the
results thereof."
This definition captures the various aspects that make-up the accounting process as follows:
(a) Recording of transactions and events in books of original entry.
(b) Classifying transactions through the process of posting from the books of original entry to the
different accounts in the ledger.
(c) Summarizing the results periodically in financial reports.
(d) Interpreting the results of the business operation through the analysis of financial statements.
Bookkeeping and accounting
Bookkeeping is an activity within the broader activities of accounting. It is mainly concerned with the
recording of routine business transactions on a day to day basis. It is the record keeping part of accounting
and through this activity a business is able to determine the results of its operations. The nature of a
bookkeeper's work is clerical and may be done using electronic equipment. A bookkeeper may be
responsible for keeping all or some of the records of a firm.
Accounting on the other hand, is concerned not only with the recording function but also with other
activities including the designing of the accounting system itself. Accountants are responsible for preparation
of financial reports and statements, as well as in the analysis and interpretation of the reports. Accountants
usually supervise the work of bookkeepers, and are expected to have acquired a level of training and
qualification commensurate to this position.
The accounting system
A system is defined in the Oxford Advanced Learners Dictionary as simply "a set or assemblage of
things connected, or interdependent, so as to form a complex unity; a whole composed of parts in orderly
arrangement according to some scheme or plan."
An accounting system is, in that context, basically composed of:
(a) a set of interrelated activities involving the originating, processing and reporting of financial and
other data.
(b) written records and reports necessary to collect, process, store, and transmit information.
(c) equipment and devices used in the system to expedite the work and provide better control.
(d) personnel directly involved in the accounting activities.
The above components link to form an accounting system which is also influenced by variables
external to it, for example, professional accountancy organizations' influences, government directives and
new developments in the accounting discipline in other countries.
Objectives of an Accounting System
Accounting systems are designed to attain the following objectives:
(a) To provide a means by which interested parties may be given information on the financial position
and results of operations of a business organization.
(b) To facilitate management planning, control and decision-making.
(c) To comply with various laws and government requirements.
(d) To protect the business and safeguard its assets.

References
Bassett, P.H Computerised Accounting, NCC Blackwell, Manchester, 1992.

Hornby, A.S Oxford Advanced Learners Dictionary, Oxford University Press, 1991.
Hornsby, C.R in Private Enterprise and The East Africa Company, ed. Thomas, P.A, Tanzania
Publishing House, 1969.
Pacioli, L Summa de Arithmetica, Geommetria, Proportione et Proportionalita, 1494.
Koontz, H and O'Donnell,C. Essential of Management, McGraw Hill, 1974.
Musselman, VA and Hanna, JM, Teaching Bookkeeping and Accounting, Mc Graw-Hill, 1960.
NBAA, Tanzania Statement of Standard Accounting Practice 1-3, National Board of Accountants and
Auditors, 1983.
Review questions
1. Define accounting. Why is accounting often called the language of business?
2. Why is the accounting function in a small shop different from a supermarket complex?
3. Why are financial statements and reports produced periodically?
4. List main groups of users of accounting information.
5. What are the qualities of good accounting information?
6. What is the relationship between bookkeeping and accounting?
7. Why are accounting principles, concepts and standards important to the accounting function?
8. List any 10 accounting concepts you have read in the chapter.
9. Give a brief description of each of the 10 concepts you have listed above.
10. What is an accounting system and what is it designed to achieve?
Exercises
1. Why is a knowledge of accounting terms and concepts useful to persons other than accountants?
2. Information available from accounting records provides a basis for making many business decisions.
Can you list five examples of such decisions?
3. Comment briefly on each of the following statements. Your comments should indicate whether you
agree or disagree with the statement as well as reasons for your position.
(a) An accountant is merely another name for a bookkeeper. The only difference is that an
accountant goes through a college while a bookkeeper learns through experience.
(b) Accounting information is essentially historic in nature. Thus accounting data are useful in
determining the past, but of little use in projections concerning the future.
(c) Computers will eventually replace the accountant.
4. Walter Milulu works for Jaribu Enterprises as an accountant. He has to make a decision as to how
stocks will be valued. Several methods are acceptable. Because one of his friends owns the
business, Walter chooses the method which results in the highest valuation. He thinks that will put
the business in a better position when applying for a loan from the National Bank of Commerce.
Required:
Discuss this situation in terms of accounting standards covered in the chapter.
Problems
1
1. AC 100: Principles of Accounting has been a compulsory course for all business and economics
students at the University of Dar es Salaam for many years. The economics student representatives
are lobbying the heads of the business and economics schools to eliminate AC 100: Principles of
Accounting from the economics programme. They have presented the following arguments in
support of their position:
i) Offices are becoming highly specialised, and the majority of economists are not required
to keep any accounting records.
ii) Computerisation is rapidly taking over the accounting function in business and the need
for workers trained in bookkeeping is certain to decrease.
1
This problem is an adapted version of a case problem from Teaching Bookkeeping and Accounting, Musselman,
VA and Hanna, JM, McGraw-Hill, 1960.
iii) The time the economics students now spend in the accounting course could be more
profitably spent in an additional econometric course.
iv) The accounting course has proved very difficult for many economics students. Because of
the difficulty they had with the accounting course, some students have become
discouraged and even been discontinued in their studies.
Required
Assume that you are the lead advisor to the heads of the business and economics schools. What is
your reaction to the arguments the representatives presented? Give reasons to support your point of
view.
Chapter Two
The Accounting Equation and Double entry System
The accounting equation
In its simplest form, the accounting equation states that Total Assets equal Total Capital. Total
capital is made up all funds which finance all resources or assets of a business. Total assets of a business are
financed by the owner who injects capital. Often, the owner is unable to finance all activities of a business
single-handedly, particularly for large businesses. Some other parties who do not have ownership interest also
finance activities of a business by extending credit and loans. These are known as liabilities. Total capital
therefore, consists of liabilities and owner's equity.
Assets are resources of value the firm utilizes in conducting business. Two common distinctions are
made between Fixed assets and Current assets. Fixed assets are those resources acquired by the business not
for the intention of re-selling but are kept in the business. Usually they retain their form, have long lives and
cost substantial amounts of money. Examples of fixed assets are Land, Buildings, Machinery, Motor
Vehicles, Furniture and Equipment.
Current assets are those resources acquired by the business and which change from one form to
another within an accounting cycle as a result of business activities. Stocks in the stores are converted into
Debtors when they are sold on credit. Debtors are then converted into Cash when outstanding amounts are
settled. Cash can then be converted into Stocks again. Stocks, Debtors and Cash are therefore, examples of
current assets.
Liabilities are what other individuals and firms have temporarily contributed towards financing
assets of the firm and amounts that are owing to parties external to the firm. These are distinguished between
current and long term liabilities. Current liabilities are those obligations which have to be repaid within one
accounting cycle, usually 12 months. Long-term liabilities are those obligations which do not have to be met
within one accounting cycle. These extend over twelve months. Examples of current liabilities are Trade
Creditors, Unpaid electricity bills, Bank overdrafts, etc. Examples of long term liabilities are Bank loans
extending over one year, long term lease financing obligations, etc.
The accounting equation can at this stage be expressed as:
Assets = Liabilities + Owner's Equity
This equation may be proved with a number of simple examples.

Accounting Equation and Double Entry System 15
Assets Liabilities Owner’s

Equity
Owner puts shs. 50,000 cash to start business +50,000 +50,000
Firm buys lorry for cash shs. 10,000 - 10,000 cash
+10,000 lorry
Firm borrows shs. 30,000 from a bank +30,000 cash + 30,000 loan
Firm buys shs. 20,000 +20,000 stock + 20,000 creditor
stock on credit from a supplier
Total Assets, Liabilities and Capital +100,000 + 50,000 + 50,000
Note that up to this point no sales have been made.
Owner's Equity is increased by additional capital contributions and profits. Profits is the excess of
revenues over expenses. Owner's equity is decreased by capital withdrawals and losses. Losses occur when
revenues are unable to cover expenses.
The expanded accounting equation can be shown as follows:
Assets = Liabilities + Owner's Equity + (Revenues - Expenses)
The example may be extended to consider the following independent cases:
(a) All of the stock was sold for shs. 20,000 cash.
(b) All of the stock was sold on credit for shs. 20,000.
(c) All of the stock was sold for shs. 30,000 cash.
Before considering (a), (b) and (c) above a summary of assets, liabilities and owner’s equity is as
follows:
Assets Liabilities Capital
Cash 70,000 Loan 30,000

Stocks 20,000 Creditor 20,000 50,000
Lorry 10,000
100,000 50,000 50,000

Case (a)
In this case cash increases by shs. 20,000 while stocks decrease by a similar value. Since cash and stocks are
all assets by definition, this transaction does not affect the total assets figure.
Case (b)
This situation results in a decrease in stocks by a value of shs. 20,000. Although this is also a sale as in
situation (a), no cash is received. Instead the firm is promised to be paid at a later date. Such a transaction
results in creation of an asset in the form of a debt. Again there is no change in total assets as this is also a
swap between two forms of assets, that is stocks and a debtor.
Case (c)
In this case a difference is encountered because stock was sold at a profit, that is, at a price more than it cost
to the firm to acquire. Stocks decreased by a value of shs. 20,000 but cash increased by a larger value of shs.
30,000. The net change in total assets was an increase of shs. 10,000. Since profits increase capital, the profit
of shs. 10,000 increased owner's equity. Profits always increase owner's equity, if not withdrawn.
The ending position of the equation would be as follows, assuming transaction (c) was effected:
Assets Liabilities Capital
Cash 100,000 Loan 30,000 50,000

Lorry 10,000 Creditor 20,000 10,000
110,000 50,000 60,000
In addition to cost of stock, firms incur expenses in the course of conducting business; these must
also be deducted from Revenues.
Using the accounting equation, the dual aspects or compensating effects of every transaction in the
different categories of accounts may be summarized as follow:
(a) An increase in an asset will result in:

an increase in a liability or
an increase in owner's equity or
a decrease in another asset.
(b) a decrease in an asset will result in:

a decrease in a liability or
a decrease in owner's equity or

an increase in another asset
(c) An increase in liability will result in:

an increase in an asset or
a decrease in owner's equity or
a decrease in another liability
(d) a decrease in a liability will result in:

a decrease in an asset or
an increase in owner's equity or
an increase in another liability.
(e) an increase in owner's equity will result in:

an increase in an asset or
a decrease in a liability or
a decrease in another form of owner's equity
(f) a decrease in owner's equity will result in:

a decrease in an asset or
an increase in liability or
an increase in another form of owner's equity
It can be observed from the above summary that to maintain the equality of the accounting
equation: Assets = Liabilities + Owner's equity; an increase on one side of the equation will have the
corresponding effect of either:
(i) an increase on the other side or

(ii) a decrease on the same side.
In the same way a decrease on one side of the equation will have the corresponding effect of either:
(i) a decrease on the other side or
(ii) an increase on the same side.
Transaction Analysis
A typical business engages in numerous activities and transactions each day. Some of these are
financial in nature and are eventually classified as accounting data. The main objective of the accounting
process is to sort out these accounting data by recording and classifying them. Transaction analysis shows
how a transaction affects the specific elements of the accounting equation.
An accounting transaction is primarily an exchange in value. Therefore, it may be expected that it

will result in either an increase or decrease in the items affected. For example, when furniture is bought for
cash the two items affected are cash and furniture. Cash is given out which results in a decrease in this asset
and at the same time a piece of furniture is received which results in an increase in this asset. Both cash and
furniture are assets. Therefore, this particular transaction shows that an increase in one class of asset
(furniture) results in a corresponding decrease in another class of asset (cash).
The account
The accounting equation, although useful in showing the effect of transactions cannot be employed
as a tool for recording business transactions. If there are numerous transactions, each has to be recorded
separately and if these were to be recorded through the accounting equation, it would consume excessive
paper and time. The probability of making arithmetic errors also multiplies. The use of the "account" was
consequently developed over time for the purpose of recording the effects of transactions because it proved
to be a better tool. It is the basic component of the formal accounting system.
An account is a record which shows increases, decreases and net change (balance) in assets,
liabilities, capital, revenues or expenses. In a manually operated accounting system each account is placed in
a separate page or card of a bound or loose - leaf book called a ledger. A ledger could also be maintained in
computer files. An account in a ledger will be identified by a title and a reference number.
A two-column account form is illustrated below. This format is often used in a manually
maintained record keeping system.
Cash Account Account no. 00
Date Details Fol. Debit Date Details Fol. Credit
Such an account has a left side and a right side. The left side is the debit side, abbreviated "Dr";
and the right side is the credit side, abbreviated "Cr".
A simplified form of an account is called 'T' account because it resembles the letter “T”. It is often
used to illustrate the dual effect of accounting transactions. The left side records all the debit entries and the
right side records all the credit entries.
Cash Account
The conventional account as seen above has two sides which have identical contents (date, details,
folio and amount). With the advances in computerisation, it was observed that the conventional format could
be modified and the duplication avoided. This resulted in a leaner account format which looks as follows:
Date Details Folio Debit Credit Balance
This format has now become popular even in manual accounting systems but will still be
conveniently referred to as the computer format. Advantages of this layout are that first, it can be displayed
easily on a standard 80-column Video Display Unit(VDU). Secondly, it can be printed also quite easily on a
standard 80-column printer.
The double entry system
Accounting entries are made on the left side and right hand sides of an account. When an amount
is entered on the left side, the account is said to be debited, and when an amount is entered on the right side
the account is said to be credited. The difference between the total debits and total credits is the balance of
the account. The balance may be either a debit balance if the debit side exceeds the credit side; or a credit
balance if the credit side exceeds the debit side. When the total debits equal the total credits, the account is
said to have nil or zero balance.
The words "debit" and "credit" should not be confused with "increase" or "decrease". Certain
accounts may increase when debited and other accounts may increase when credited depending on the type
of account involved.
In the accounting equation Assets = Liabilities + Owner's Equity, assets are on the left side
of the equation. Asset accounts also ordinarily have debit balances. Therefore, asset accounts are increased
when they are debited and the opposite is true; asset accounts are decreased when they are credited.
Example
On 1st July a firm has cash balance shs. 200,000 and on 3rd July shs. 10,000 is used to buy office furniture.
Since both cash and office furniture are asset accounts, this transaction will be recorded in the respective
accounts as follows:
Cash Account
July Balance 200,000 July Office Furniture 10,000
1 3
Office Furniture Account

July Cash 10,000
3
The cash account shows the opening balance on July 1st shs. 200,000 on the debit side. The shs.
10,000 used to buy office furniture is a decrease in cash and entered on the credit side. After this transaction
cash will have a remaining debit balance of shs. 190,000.
On the other hand, this transaction resulted in an increase of shs. 10,000 in the office furniture
account, which had a nil balance on 1st July. This increase is shown on the debit side of the office furniture
account. The effects of this transaction are an increase in the asset office furniture and a decrease in the asset
cash.
The fundamental rule of double entry accounting requires that a debit entry should always have a
corresponding credit entry.
Again going back to the accounting equation; usually Liabilities and Owner's Equity are on the
right side of this equation. These categories of accounts ordinarily have credit balances. Therefore increases
in these accounts are entered on credit side; while decreases are entered on the debit side. This may be seen
in the following example.
Example
On July 5, merchandise costing shs. 20,000 was bought on credit.
Stock Account
July Trade Creditor 20,000
5
Trade Creditor Account

July Stock 20,000
5
This transaction resulted in an increase of shs. 20,000 in the asset stock which was debited.
Correspondingly, the liability to Trade Creditors is increased by the same amount, so this account was
credited.
Note: (i) The increase in the Asset (left side of the equation) equals the increase in the
liability (right side of the equation).
(ii) The debit to stock account has a corresponding credit in the Trade Creditor
account.
When all transactions are recorded in this manner, the equality of the accounting equation is always
maintained.
The expanded accounting could now be depicted as :
Assets = Liabilities + Owner's Capital + (Revenues - Expenses) - Drawings
The equation could be re- arranged as follows:
Assets + Expenses + Drawings = Liabilities + Owner's Capital + Revenues
The rules for recording of transactions for items on the left of the equation are exactly the same. For
these items, increases are recorded as debits (which is incidentally the left side of the account), and decreases
are recorded as credits.
There are in principle similarities between assets, expenses and drawings. Assets are resources of
value available in the business for the purpose of generating profits. Expenses and drawings are all expended
resources, while expenses are resources expended in the interest of the business, drawings are business
resources consumed in the owner's personal interest. For items on the right side of the equation the rule of
recording transactions is, increases are recorded on the credit side of the account and decreases are recorded
on the left side of the account. In summary, the simple rules for recording transactions under a double entry
system are as follows:
Assets - Debit for increases and credit for decreases
Liabilities - Debit for decreases and credit for increases.
Owner's Equity - Debit for decreases and credit for increases.
Revenues - Credit for increases and debit for decreases.
Expenses - Debit for increases and credit for decreases.
Drawings - Debit for increases and credit for decreases.

Review questions
1. Define an asset, a liability, owner's equity, revenue and an expense giving three examples of each.
2. What is the difference between Liabilities and Owner's equity?
3. What is an account? And what are the two sides of an account?
4. Why is a double - entry system so called?
5. Give the rules of debit and credit for asset accounts, liability accounts and owner's equity.
6. Why is the rule of debit and credit the same for liability and owner's equity.
7. If the owner of a business withdrew cash for personal use, will owner's equity be affected?
8. Do the terms 'debit' and 'credit' signify increase or decrease, or may they signify either? Explain.
Exercises
1. The income statement of a sole trader for the month of June indicates a net income of shs. 310,000.
During the same period the owner withdrew shs. 400,000 in cash from the business for personal
use. Would it be correct to say that the owner suffered a net loss of shs. 90,000 during the month?
Explain.
2. Describe how the following business transactions affect the three elements of the accounting
equation.
(a) Owner invested cash in the business

(b) Purchased Office Supplies on credit
(c) Received cash for services rendered
(d) Paid for electricity consumed during the period.
3. Using the accounting expression of 'debit' and 'credit', describe how an account is increased and
decreased, and state its normal balance by completing the following schedule;
Type of Account Increase Decrease Normal balance

(a) Assets
(b) Liabilities
(c) Capital
(d) Revenues
(e) Expenses
4. Analyse the following transactions and state the dual effect of each one on the accounting equation:
Assets = Liabilities + Owner's equity
(a) The owner invested an additional shs. 1,000,000 cash into the business.
(b) Merchandise costing shs. 600,000 was purchased on credit.
(c) Bought a typewriter for shs. 250,000 cash.
(d) Sold merchandise for cash shs. 100,000, these had cost shs. 80,000.
(e) A trade creditor was paid shs. 160,000 cash of the amount owing.
(f) Borrowed shs. 500,000 from the bank.
(g) Paid salaries of employees amounting to shs. 120,000.
5. Describe a transaction that will:
(a) Increase an asset and increase a liability

(b) Increase an asset and decrease another asset
(c) Decrease an asset and decrease owner equity
(d) Decrease an asset and decrease a liability
(e) Increase an asset and increase owner equity.
Problems
1. Record the following transactions completed during August of the current year using 'T' accounts
in the books of Joha.
Aug. 1 Obtained a Loan from NBC of shs. 500,000.

1 Paid rent for the month shs. 45,000.
2 Purchased desk calculator on credit from Bambi shs. 80,000.
8 Made cash purchases shs. 40,000.
10 Paid advertising expenses shs. 7,000.
12 Sold goods on credit to customers shs. 60,000.
14 Sold goods in cash shs. 30,000.
15 Paid Bambi shs. 80,000.
20 Withdrawal by Joha of shs. 7,000 cash for her personal use.
22 Received from credit customers shs. 40,000 cash.
24 Received and paid electricity bill for the month shs. 3,000.
26 Sold to credit customers items worth shs. 30,000.
28 Received from customers on account shs. 20,000.
30 Paid wages for office worker shs. 20,000.
2. Kopa started business as a seller of clay flowerpots on 1st September, 200X. He transferred shs.
850,000 from his personal bank account to a newly opened business bank account. Transactions
from the first day of business were as follows:
Sept. 2 Paid by cheque, rent of shop premises for the month shs. 20,000.
4 Bought on credit from Fanicha Kwetu, fixtures and fittings for the shop,
amounting to shs. 100,000.
6 Bought on credit from Mfinyanzi Supplies 400 clay pots each shs. 160.
8 Bought by cheque, 200 clay pots at shs. 140 each. Also shs. 500 was paid by
cheque for carriage of the pots to the shop.
10 Sold on credit to Maua & Co. 20 clay pots at shs.200 each.
12 Sold on credit to Waridi, 10 clay pots at shs. 200 each.
14 Sold for cash, 100 clay pots for shs. 200 each.
16 Sold for cash 80 clay pots at shs. 190 each.
20 Kopa took shs. 10,000 from the cash box for own use.
22 Received from Maua & Co. the whole amount due.
24 Paid Mfinyanzi Supplies shs. 10,000 by cheque.
26 Paid Fanicha Kwetu shs. 80,000 by cheque.
27 Sold on credit 50 clay pots to Tegemea Gardeners at shs.180 each
28 Bought 100 clay pots from Mfinyanzi Supplies on credit at shs. 150 each.
29 Paid by cheque Fanicha Kwetu the balance owing in their account.
30 Paid sales attendant wages shs. 15,000 and miscellaneous expenses shs. 10,000.
Issuing cheques for these amounts.
Required:
(a) Record these transactions in 'T' accounts

(b) Show that at the end of the month the accounting equation was in balance.
Chapter Three
The Accounting Cycle
Steps in the accounting cycle
There are several steps which are usually followed in the accounting process within an
accounting period. These are repeated every accounting period during the 'life' of the business. They
make up what is known as an accounting cycle. Figure 3.1 presents a graphic illustration of the accounting
circle.
The successive steps which consist one accounting cycle are;
(a) Journalizing - From source documents the dual effect of each transaction is analyzed and recorded
in chronological order in books of prime entry or journals.
(b) Posting – This is the process of transferring the debit and credit entries from the journals to the
respective accounts in the ledgers.
(c) Preparing a Trial Balance - A list of the balances of all accounts in the ledger is extracted at a
particular date in order to check the equality of the debit and credit balances and to provide a
summary of the data from the ledger.
(d) Preparing Adjusting Entries - End-of-period adjustments are made by journalizing and posting
events which need to be included at the end of the period in order to update the accounts. An
adjusted trial balance is normally prepared after adjusting entries have been made.
(e) Preparing Financial Statements - Usually an income statement (profit and loss account) and
balance sheet are prepared from the adjusted trial balance. A cash flow statement is prepared from
details of the income statement and the balance sheet.
(f) Preparing Closing Entries - Entries are made to close temporary accounts like revenue and
expense accounts. Closing entries reduce the balance of these accounts to zero.
Journals or books of prime entry
The primary function of journals is to provide a chronological history of the transactions of a

business. Journals serve as a formal connecting link between the source document of a transaction and the
appropriate ledger accounts. Journals provide more information regarding a transaction than the ledger
accounts, and they show clearly the dual effect of each transaction. The term journalize is used to describe the
process of recording the various aspects of a transaction in one or more books of prime entry.
A journal entry should include the following information:
(a) Date of the transaction

(b) Titles of the accounts to be debited and credited
(c) Amounts to be debited or credited
(d) A brief narration or explanation of the transaction, where relevant.
The Accounting Cycle 29
The journals will also contain a column for posting reference or folio. This column will show to
which account numbers in the ledger the various journal entries have been posted. A firm will have a number
of books of prime entry or journals. The most basic starting point is however, the General Journal, sometimes
also known as the Journal Proper. The general journal is the simplest form of a journal and uses a two-
column format. In a small business organization a general journal may serve the purpose of recording all
accounting transactions.
General Journal page no.

Date Details Folio Debit Credit
As shown above, the general journal contains the following columns:
(a) Date - The date of the transaction is entered in this column; the year, month and day. It is not
necessary to repeat the year and month on the same journal page.
(b) Details - This column contains the titles of accounts to be debited and credited and a brief narration
of the transaction. The account debited is written first and the account credited is written on the
following line, indented a little bit so as to distinguish it from the debit account. On the next lines a
concise narration of the transaction is written.
(c) Folio - This is a posting reference column. It contains the ledger pages or reference numbers of the
accounts into which the journal entry has been posted. This column is left blank at the time of
journalizing and is filled only when the posting is done from the journal to the ledger accounts.
(d) Debit - This column is for the amount debited.
(e) Credit - This column is for the amount credited.
Example
In July 200X, A. Raisi started a tailoring shop. Following are his transactions for the first week.
July 1 He opened the shop with capital consisting of a sewing machine costing shs. 50,000 and
shs. 3,000 in cash.
2 He bought thread, needles and other sewing supplies costing shs. 500.
3 He completed a shirt for a customer and received shs. 400 for his services.
4 His neighbour M. Jumanne asked him to repair two pairs of trousers which he has done.
He was promised to be paid shs. 300 at the end of the month.
5 He sewed a baby's dress and was paid shs. 200 by the baby's mother.
6 He bought chairs for his shop from Mwenge Furniture Mart for shs. 2,000 on credit.
These transactions are recorded as follows:
General Journal page 1

Date Description Folio Debit Credit
200X
July 1 Cash 3,000
Sewing Equipment 50,000
A. Raisi, Capital 53,000
Owner's initial investment in the
business
2 Sewing Supplies 500

Cash 500
Bought sewing supplies for cash
3 Cash 400
Sewing Income 400
Payment received for services rendered.
4 M. Jumanne 300
Sewing Income 300
Amount receivable for services
rendered
5 Cash 200
Sewing Income 200
Amount received for sewing a dress
6 Shop Furniture 2,000

Mwenge Furniture Mart 2,000
Bought chairs for the shop on credit
Posting to ledger accounts
Posting of journal entries to ledger accounts is aided by the use of a chart of accounts. A chart of
accounts is a list by classification of all accounts in the ledger. There are different ways of classifying
accounts, the most commonly used classification is one that categorizes between Assets, Liabilities, Capital,
Revenues and Expenses. These could further be broken down into sub categories. Assets for example, could
be broken into fixed and current; liabilities between current and long term, etc..
A. Raisi Tailoring Shop uses the following Chart of Accounts for its General Ledger.
Chart of Accounts
Account title Account number
Assets:
Fixed Assets
Sewing Equipment 01
Shop Furniture 02
Current Assets
Debtors - M. Jumanne 11
Cash 12
Liabilities:
Creditors – Mwenge Furniture Mart 21
A. Raisi, Capital 31
Sewing Income 41
Sewing Supplies 51
The journal entry of 1st July will be posted to the respective ledger accounts as follows:
General Journal page 1

Date Description Folio Debit Credit
200X
July 1 Cash GL 12 3,000
Sewing Equipment GL 01 50,000
A. Raisi, Capital GL 31 53,000
Owner's initial investment in the
business
Sewing Equipment Account no. 01
200X
Jul 1 Capital GJ1 50,000
Cash Account no. 12
200X

A. Raisi, Capital Account no. 31
200X
Jul 1 Cash GJ1 3,000
1 Equipment GJ1 50,000
It is noticed that the same date in the journal entry is used in posting to the accounts. The debits of
shs. 3,000 to cash and shs. 50,000 to sewing equipment in the journal are posted to the debit sides of the
Sewing Equipment Account and Cash account; whereas the total credit of shs. 53,000 to A. Raisi, Capital in
the journal was transferred to the credit side of that account in the ledger.
During the posting procedure, the folio column is filled after each amount in the journal is
transferred to the ledger account. The folio column of the journal contains the ledger account reference
numbers for Cash (GL 12), Sewing Equipment (GL 01) and A. Raisi Capital (GL 31). On the other hand,
the folio columns of these accounts in the ledger show “GJ 1” which is the page number of the journal where
the transaction was originally recorded. A transaction can always be traced from the ledger to the journal or
from the journal to the ledger. This is what cross-referencing is all about, the ease with which one can trail a
transaction.
The details column of each ledger account shows the corresponding account where the particular
entry has been recorded. For example, the debit entry in cash account has a corresponding credit entry in the
capital account.
After all the journal entries of the first week of July have been posted, the general ledger will look as
shown below:
General ledger
Sewing Equipment Account no. 01
200X
Shop Furniture Account no. 02
200X
Jul 6 Mwenge Furniture Mart GJ1 2,000
M. Jumanne Account no. 11
200X
Jul 4 Sewing Income GJ1 300
Cash Account no. 12
200X 200X
Jul 1 Capital GJ1 3,000 Jul 2 Sewing Supply GJ1 500

Creditor Mwenge Furniture Mart Account no. 21
200X
Jul 6 Shop Furniture GJ1 2,000
A. Raisi, Capital Account no. 31
200X
Jul 1 Cash GJ1 3,000
Jul 1 Equipment GJ1 50,000
Sewing Income Account no. 41
200X
Jul 3 Cash GJ1 400
Jul 4 M. Jumanne GJ1 300
Jul 5 Cash GJ1 200
Sewing Supply Account no. 51
200X
Jul 2 Cash GJ1 500
At this point A. Raisi could check the equality of debits and credits to ensure that the double entry
system has been followed by preparing a trial balance, the third step in the accounting cycle. A Trial balance is
a list of all balances extracted from the ledger. Depending on the nature of the accounts some will have debit
balances and others credit balances. An account is balanced by summing separately each of the debit and
credit amount columns. If debit column amount total exceeds the credit column total, the difference is known
as a debit balance. If the credit amount column exceeds the debit amount column, the difference is known as
a credit balance. The trial balance for the illustration on 6th July, 200X is as seen below:
A. Raisi Tailoring Shop

Trial Balance as at 6th July, 200X
Account title Debit Credit

Shop Furniture 2,000
Debtor - M. Jumanne 300
Cash 3,100
Creditor - Mwenge Furniture Mart 2,000
Sewing Income 900
Sewing Supply 500
Total 55,900 55,900
The trial balance shows that the debit total equals the credit total. However, this does not
guarantee that no error has been committed. The intricacies related to errors in the trial balance will be
discussed in depth in a later chapter.
A. Raisi could also find out how much profit he made in the first week of operation by preparing an
income statement or a profit and loss account. Adjusting entries are ordinarily prepared at the end of an
accounting period. Therefore this step in the accounting cycle is not illustrated here. A simple Income
Statement for A. Raisi Tailoring Shop is shown below:

Income Statement
For the week July 1-6-200X
Shs.
Sewing Income 900
less: Sewing Supply expense 500
Net Profit 400
The Net profit of shs. 400 will increase A. Raisi's net worth or equity in the business. At the end of
the first week on 6th July, 200X, the assets, liabilities and owner's equity of the Tailoring Shop may be
summarized in a balance sheet as follows:

Balance Sheet
as at 6th July, 200X
Shs. Shs.
Assets:
Fixed Assets
Total Fixed Assets 52,000
Current Assets:
Cash 3,100
Debtor - M. Jumanne 300
Total Current Assets 3,400
Total Assets 55,400
Liabilities:
Creditor - Mwenge Furniture Mart 2,000
Owner' Equity:
add: Net Profit 400
Total Owner's Equity 53,400 53,400
Total Liabilities and Capital 55,400
This balance sheet shows the financial position of A. Raisi Tailoring Shop at 6th July, 200X.
Although it is possible to prepare financial statements anytime, these statements are required at least once, at
the end of an accounting period.
The foregoing example illustrated a business which offers services. Business firms engaged in
trading, manufacturing or other business lines follow the same steps in the accounting cycle.
Review questions
1. What is the ledger and how does one balance the accounts in the ledger?
2. Why is it necessary to prepare a trial balance before financial statements are finalized?
3. If you were actually to inspect the accounts maintained by a business, would you expect to find “T”
- accounts?
4. Briefly explain the nature of a journal entry.
5. What are the main differences between an account and a journal entry?
6. Could entries to the general ledger accounts be made directly from the source documents? What do
you think are advantages of this approach? And what would be the disadvantages?
7. List the steps of the accounting cycle described in this chapter.
Exercises
1. I. Jaha extracts the following balances from his ledger on 31st December. Present them in a form of
a Trial Balance.
Account titles Amount shs.

Cash in hand 25,000
Cash at bank 625,000
Sales 7,265,000
Purchases 2,350,000
Motor vehicles 1,250,000
Rent and rates 125,000
Light and electricity 60,000
Carriage inward 50,000
Carriage outward 35,000
Opening stock, 1st January 1,825,000
Miscellaneous income 130,000
Capital 8,000,000
Drawings 850,000
Laborers wages 1,520,000
Office salaries 980,000
Debtors 2,365,000
Creditors 565,000
Furniture 800,000
Land and buildings 4,600,000
Loan from NBC 1,500,000
2. Heri started business on 1 July 200X. The following transactions took place during the month of
July.
July
1 Introduced shs. 4,000,000 and a car valued at shs. 1,750,000.
2 Bought goods for cash at a cost of shs. 1,130,000.
8 Paid wages of shs. 13,000 and miscellaneous expenses of shs. 2,000.
9 Sold goods on credit to Vishindo for shs. 190,000.
14 Sold goods on credit to Somo for shs. 240,000.
18. Bought goods on credit from Walei for shs. 85,000.
22 Bought office furniture at a cost of shs. 350,000 cash.
25 Paid wages of shs. 38,000 cash.
26 Paid drawings to himself of shs. 80,000.
31 Vishindo paid the full amount owing.
31 Paid rent of shs. 50,000 cash.

Required:
(a) Prepare journal entries to record the above transactions for the month of July.
(b) Post the journal entries to the relevant ledger accounts.
(c) Balance off the accounts and extract a trial balance at 31st July 200X.
Problems
1. Emma owns a shop and had been in business for two months when her balance sheet at 30th June
200X was as shown below:
shs shs
Assets:
Fixed Assets
Buildings 3,000
Total Fixed Assets 6,000
Current Assets:
Cash 700
Debtor - Perry 300
Total Current Assets 1,000
Total Assets 7,000
Liabilities:
Creditor - Gro-fit 1000
Creditor - Super-fit 1500
Owner' Equity:
Capital 7,000
Total Liabilities and Capital 7,000
Following are Emma’s business transactions for the month of July:
July 1 Purchased goods on credit from Gro-fit for shs. 500,000

2 Cash Sales shs. 1,000,000.
3 Sold items of shs. 300,000 on credit to Lea.
4 Paid Gro-fit shs. 300,000.

5 Perry paid shs. 300,000.
8 Cash sales shs. 900,000.
9 Purchased furniture shs. 350,000 cash.
10 Sold goods on credit to Perry for shs. 400,000.
11 Sold goods on credit to Maneno for shs. 150,000.
16 Purchased goods on credit from Super-fit for shs. 2,000,000.
17 Purchased items from Gro-fit on credit for shs. 1,000,000.
19 Paid Super-fit shs. 3,300,000.
21 Maneno paid shs. 150,000 in settlement of his account.
28 Made cash sales shs. 2,300,000.
31 Paid Gro-fit shs. 900,000.
Required:
(a) Record the above transactions in the journal and post to the ledger accounts.
(b) Balance off the accounts in the ledger
(c) Extract a trial balance at 31st July 200X.
2. Write up all the accounts necessary to record the following transactions in the books of G. Tembo,
and show the balance sheet at the end of December.
200X
Dec. 1 Started business with 2,500,000 cash.
2 Bought office furniture cash shs. 15,000.
3 Bought machinery shs. 75,000 on credit from Mipango & Co.
5 Bought a motor van paying shs. 600,000.
8 Bought goods for resale from Adela Enterprises shs. 200,000 on credit.
15 Sold goods on credit to Kelia shs. 300,000.
17 Paid the amount owing to Mipango & Co. shs. 750,000 by cheque.
23 Received the amount due from Kelia shs. 300,000 in cash.
31 Bought more machinery by cash shs. 280,000.
31 Drew out shs. 100,000 for own use.
3. Using a general journal, record the following transactions and post the entries to appropriate
accounts in the general ledger.
Mar. 1 Invested shs. 50,000 cash in the business.

3 Bought merchandise on credit, shs. 18,000.
6 Paid cash for shop supplies, shs. 3,000.
7 Sold merchandise for cash, shs. 10,000.
10 Paid shs. 5,000 to a trade creditor.
11 Sold merchandise on credit, shs. 16,000.
14 Bought merchandise for cash shs. 7,000.
17 B. Asha took shs. 2,500 for personal use.
25 Collected shs. 6,000 from trade debtors.
30 Received and paid electricity bill shs. 1,500.
4. Record the following transactions as journal entries.
(a) Purchase of shs. 100,000 of goods on credit.

(b) Withdrawal of shs. 10,000 cash by the owner for his daughter’s birthday party.
(c) Collection of shs. 10,000 from Imamu Jones who is a credit customer of the firm.
(d) Return of shs. 10,000 of goods to a supplier because they are faulty. The original
purchase was on credit terms and has not been settled.
(e) Payment of shs. 150,000 by the business to a supplier on account of an amount due.
(f) Purchase of machinery for shs. 300,000 on credit.
(g) Additional cash of shs. 100,000 invested in the business by the proprietor.
(h) Payment of shs. 120,000 in cash for goods supplied.
(i) Obtained a loan of shs. 1,000,000 from NBC through a bank account at Ubungo Branch.
5. Daktari Jaribu, DDS has her own dental practice. Her books had the following accounts and
balances as of 1st October.
Cash shs. 341,200, Debtors shs. 597,500, Office Supplies shs. 39,000, Equipment shs. 3,012,500,
Surgery Supplies shs. 155,000, Creditors shs. 96,500, and Capital shs. 4,048,700.
Following are transactions in the practice of her profession during October.
Oct. 1 Paid office rent for October shs. 80,000.

2 Purchased equipment on credit shs. 290,000.
3 Purchased X-ray film and other surgery supplies on credit shs. 25,000.
5 Received cash on account from patients shs. 472,500.

9 Paid cash to creditors shs. 175,000.
14 Paid cash for renewal of insurance policy shs.51,000.
17 Paid from the business shs. 170,000 being personal and family expenses.
20 Received and paid October invoices for laboratory analyses shs. 31,500.
22 Cash received from cash paying patients shs. 295,000.
24 Paid miscellaneous expenses shs. 11,200.
26 Received and paid October electricity bill shs. 32,500.
30 Recorded all fees charged to credit patients for services performed during
October shs. 571,500.
30 Recorded use of shs. 55,000 worth of surgery supplies.
Required:
(a) Open ledger accounts and insert opening balances

(b) Record the above transactions in a two-column journal
(c) Post the journal to the ledger and
(d) Balance off the ledger.
(e) Extract a trial balance

Introductory Accounting

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Introductory Accounting

Uploaded by

Copyright:

Available Formats

Chapter One

Introduction to Accounting Concepts

Brief history of accounting

Need for accounting information

Users of accounting information

(c) Banks/loan companies

(g) Prospective Investors/Analysts

Basic accounting concepts

The important basic concepts are as follows:

Qualitative attributes of accounting information

(a) Recording of transactions and events in books of original entry.

(c) Summarizing the results periodically in financial reports.

Bookkeeping and accounting

The accounting system

An accounting system is, in that context, basically composed of:

(d) personnel directly involved in the accounting activities.

Objectives of an Accounting System

Accounting systems are designed to attain the following objectives:

(b) To facilitate management planning, control and decision-making.

(c) To comply with various laws and government requirements.

(d) To protect the business and safeguard its assets.

Bassett, P.H Computerised Accounting, NCC Blackwell, Manchester, 1992.

1. Define accounting. Why is accounting often called the language of business?

3. Why are financial statements and reports produced periodically?

4. List main groups of users of accounting information.

5. What are the qualities of good accounting information?

6. What is the relationship between bookkeeping and accounting?

8. List any 10 accounting concepts you have read in the chapter.

10. What is an accounting system and what is it designed to achieve?

Discuss this situation in terms of accounting standards covered in the chapter.

The Accounting Equation and Double entry System

The accounting equation

The accounting equation can at this stage be expressed as:

Assets = Liabilities + Owner's Equity

This equation may be proved with a number of simple examples.

Assets Liabilities Owner’s

Note that up to this point no sales have been made.

The expanded accounting equation can be shown as follows:

Assets = Liabilities + Owner's Equity + (Revenues - Expenses)

The example may be extended to consider the following independent cases:

Assets Liabilities Capital

Cash 70,000 Loan 30,000

100,000 50,000 50,000

Assets Liabilities Capital

Cash 100,000 Loan 30,000 50,000

110,000 50,000 60,000

(a) An increase in an asset will result in:

(b) a decrease in an asset will result in:

a decrease in owner's equity or

(c) An increase in liability will result in:

(d) a decrease in a liability will result in:

(e) an increase in owner's equity will result in:

(f) a decrease in owner's equity will result in:

(i) an increase on the other side or

An accounting transaction is primarily an exchange in value. Therefore, it may be expected that it

Cash Account Account no. 00

Date Details Fol. Debit Date Details Fol. Credit

Date Details Folio Debit Credit Balance

The double entry system

Office Furniture Account

On July 5, merchandise costing shs. 20,000 was bought on credit.

Trade Creditor Account

The expanded accounting could now be depicted as :