Afa Handout

Rift Valley University, Kaliti Campus Unit: Administrate Financial
Accounts
Training, Teaching and Learning Materials Development
Concept of business
The term business refers to an organization or enterprising entity engaged in commercial,
industrial, or professional activities. The purpose of a business is to organize some sort of
economic production of goods or services. Businesses can be for-profit entities or non-
profit organizations fulfilling a charitable mission or furthering a social cause. Businesses range
in scale and scope from sole proprietorships to large, international corporations.
The term business also refers to the efforts and activities undertaken by individuals to produce
and sell goods and services for profit.
Same common difintions of business are the following
 A business is defined as an organization or enterprising entity engaged in commercial,

industrial, or professional activities.
 Businesses can be for-profit entities or non-profit organizations.
 Business types range from limited liability companies to sole proprietorships,
corporations, and partnerships.
 Some businesses run as small operations in a single industry while others are large
operations that spread across many industries around the world.
Taypes of business.
Based on therir opration business is divided into three tayepes
 Manfacturing.
 Merchanidising
 Service giving business.
a. Manfacturing business.
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A manufacturing business is any company that uses raw materials or components to create
finished goods.
Examples of manufacturing include automotive companies, bakeries, shoemakers and tailors,

flour Manfacturin Company as they all create products, rather than providing services. However,
for example, logging or mining are not manufacturing, as they do not change goods into new
products.
b. Merchanidising type of business
A merchandising firm is one of the most common types of businesses. A merchandising firm is a
business that purchases finished products and resells them to consumers. Consider your local
grocery store or retail clothing store. Both of these are merchandising firms. Merchandising
Business Examples Some of the examples are clothing stores, grocery stores, and bookstores.
These businesses function by taking lots of products from either wholesalers or manufacturers at
a discount and then reselling the products to make profits.
c. Service type of business
A service business provides a skilled service, personal labor, or expertise instead of a

physical product. This includes hairstylists, accountants, plumbers, doctors, and many more
examples. These services exist to help people who don't have the time, knowledge, or skills
to complete the tasks themselves.
1.2. Form of business.
There are three common forms of businesses
Sole proprietorship
If you want to start a one-owner business, the simplest and fastest way is through a sole
proprietorship. Sole proprietorship begins when you begin conducting business. It doesn’t
require filing federal or state forms and has few regulatory burdens, making it an ideal way for
self-employed people to start out.
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A sole proprietorship is very different from a corporation, a limited liability company (LLC) , or
a limited liability partnership (LLP) , in that no separate legal entity is created. As a result, the
business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.1
Partnership What is Partnership? A partnership is a kind of business where a formal

agreement between two or more people is made who agree to be the co-owners, distribute
responsibilities for running an organization and shares the income or losses that the business
generates.
Corporation A corporation is a legal entity that is separate and distinct from its owners.
Under the law, corporations possess many of the same rights and responsibilities as individuals.
They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets,
and pay taxes.
A corporation's distinguishing characteristic is limited liability. Shareholders profit through

dividends and stock appreciation but are not personally liable for the company's debts. Almost
all large businesses are corporations, including Microsoft Corp. and Coca-Cola Co. Some
corporations do business under their names and separate business names, such as Alphabet Inc.,
which does business as.
 Corporations possess many of the same legal rights and responsibilities as individuals.
 Limited liability of a corporation means that its shareholders are not personally
responsible for the company's debts.
 A corporation may be created by an individual or a group of people .
What Is Accounting?
Accounting is the process of recording, classifying and summarizing financial transactions. It

provides a clear picture of the financial health of your organization and its performance, which
can serve as a catalyst for resource management and strategic growth.
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Accounting eqution
Accounting eqution is the base of accountin recoreds
Asset= Liability + equity
1. Asset is all resoures in the business. Two types of asset are current and non current
assetes.
Current assets are asset that its can be relized by the business when its normal oprating cycle
usually 12 mounthes and easely converted into cash.
Non current assetes all other asset that are not current.
2. liability all obiligation/debits of the business.
liability expected to be settled within the normal opreting cycle of the business, usually 12
monthes.
Non current all liability that can not be current.
3. Equity /capital- referes to the investemant of the owener

4. Revenue all profite of the business from its day to dayoprations.
5. Expense all cash outflows and cost incured by the business
Account number account name
101-----199 asstes
201----299 liability
301----399 equity
401----499 revenues
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501----599 expences
Assetes
Current assets non current assets
Cash equpimentes
Account recivabel machineries
Supples propertes and others
Prpaid rant others
Liability
current liability all payebel their maturity date is less than 12 mounthes
Account payebel.
Interst payebel.
Non- current liability all payebels/obiligations mor than 12 monthes.
Bond payebels
Morege payebel. Long term liability.
Equity /capiatal is intial investemens that are oweners
Accounting cycle
Record Transactions in a Journal
Identify Transactions Post to ledger
.
Closing the
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ACCOUNTING CYCLE
Adjusting Work sheet Udjeste trial

Journal balance
Financial Entries
Stetement
The above egith most common account stepes are
The 8 Steps of the Accounting Cycle

The eight steps of the accounting cycle include the following:
Step 1: Identify Transactions
The first step in the accounting cycle is identifying transactions. Companies will have many
transactions throughout the accounting cycle. Each one needs to be properly recorded on the
company’s books.
Recordkeeping is essential for recording all types of transactions. Many companies will use
point of sale technology linked with their books to record sales transactions. Beyond sales, there
are also expenses that can come in many varieties.
Step 2: Record Transactions in a Journal
The second step in the cycle is the creation of journal entries for each transaction. Point of sale
technology can help to combine steps one and two, but companies must also track their
expenses. The choice between accrual and cash accounting will dictate when transactions are
officially recorded. Keep in mind that accrual accounting requires the matching of revenues
with expenses so both must be booked at the time of sale.
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Cash accounting requires transactions to be recorded when cash is either received or paid.
Double-entry bookkeeping calls for recording two entries with each transaction in order to
manage a thoroughly developed balance sheet along with an income statement and cash flow
statement.
Generally accepted accounting principles (GAAP) require public companies to utilize accrual
accounting for their financial statements, with rare exceptions.
With double-entry accounting, each transaction has a debit and a credit equal to each
other, common in business-to-business transactions . Single-entry accounting is comparable to
managing a checkbook. It gives a report of balances but does not require multiple entries.
When sales are made on credit, the journal entry for accounts receivable is
debited, and the sales account is credited.
If cash sales happen, then the cash account is debited.
Step 3: Posting
Once a transaction is recorded as a journal entry, it should post to an account in the general
ledger. The general ledger provides a breakdown of all accounting activities by account. This
allows a bookkeeper to monitor financial positions and statuses by account. One of the most
commonly referenced accounts in the general ledger is the cash account which details how
much cash is available.
The ledger used to be the gold standard for recording transactions but now that almost all
accounting is done electronically, the ledger is less of an active concern as all transactions are
automatically logged.
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Step 4: Unadjusted Trial Balance
At the end of the accounting period, a trial balance is calculated as the fourth step in the
accounting cycle. A trial balance tells the company its unadjusted balances in each account. The
unadjusted trial balance is then carried forward to the fifth step for testing and analysis.
This is the first step that takes place once the accounting period has ended and all transactions
have been identified, recorded, an] posted to the ledger (this is usually done electronically and
automatically, but not always).
The purpose of this step is to ensure that the total credit balance and total debit balance are
equal. This stage can catch a lot of mistakes if those numbers do not match up.
Step 5: Worksheet
Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A
worksheet is created and used to ensure that debits and credits are equal. If there are
discrepancies then adjustments will need to be made.
In addition to identifying any errors, adjusting entries may be needed for revenue and expense
matching when using accrual accounting.
Step 6: Adjusting Journal Entries
In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries
where necessary.
Step 7: Financial Statements
After the company makes all adjusting entries, it then generates its financial statements in the
seventh step. For most companies, these statements will include an income statement, balance
sheet, and cash flow statement.
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Step 8: Closing the Books
Finally, a company ends the accounting cycle in the eighth step by closing its books at the end
of the day on the specified closing date. The closing statements provide a report for analysis of
performance over the period.
After closing, the accounting cycle starts over again from the beginning with a new reporting
period. Closing is usually a good time to file paperwork, plan for the next reporting period, and
review a calendar of future events and tasks.
What Is the Difference Between the Accounting Cycle and the Budget Cycle?
The main difference between the accounting cycle and the budget cycle is the accounting cycle
compiles and evaluates transactions after they have occurred. The budget cycle is an estimation
of revenue and expenses over a specified period of time in the future and has not yet occurred.
A budget cycle can use past accounting statements to help forecast revenues and expenses.
What Are the Steps of the Accounting Cycle in Order?

The steps in the accounting cycle are identifying transactions, recording transactions in a
journal, posting the transactions, preparing the unadjusted trial balance, analyzing the
worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing
the books.
Recording Transactions
We now return to our company example of ABC Eucational service company. We will analyze and
record each of the transactions for her business and discuss how this impacts the financial
statements. Some of the listed transactions have been ones we have seen throughout this chapter.
More detail for each of these transactions is provided, along with a few new transactions in apriel
2023 intial capital cash 200,000 birr and 150, educational materials.
1. On apriel 1, 2023, paid cash school rent $20,000 birr.
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2. on apriel 3 peripaid insurance birr 40,000

3. pureches office equpiment on apriel 5 birr 10,000
4. recived cash in advance from YZ company on apriel 7 birr 7,000
5. purches stationary on accounton apriel 12 birr 15,000
6. piad micellanous expence birr on apriel 15 5000 bir
7. recived cash from coustomer on apriel 17 cash 90,000
8. paid cash to apriel 12 purches of stationery on april 19
9. recived cash from coustomer on apriel 21 birr 70,000
10. paid superviors home rent in 4000 birr on 25
11. paid electric bill birr 300 birr on apriel 27
12. paid salery expence birr 45,000 birr on april 27
13. paid allowance in apriel 30 birr 2500
Task 1 Journalize the above transaction
ON april 1, 2023 cash......................................................................200,000
Equpiment ..........................................................................................150,000
Equity/.............................................................................................................................350,000
Rent expence ..............................................................................................20,000
Cash...................................................................................................................................20,000
April 3 pripaid insurance........................................................................40,000 birr
Cash...................................................................................................................................40,000
April 5 equpiment ..................................................................................10,000 birr
Cash ...........................................................................................................................10,000 birr
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April 7 Cash ..............................................................................................7000
Unerned revenue...........................................................................................................7000
April 12 stationery ..................................................................................15000
Account payeble..........................................................................................................15000
April 15 misseclanous expence ...............................................................................................5000
Cash ........................................................................................................................................................................5000
April 17 cash ...............................................................................................................................90,000 birr
Service revenue..................................................................................................................................................90,000 birr
April 19 account paybel ............................................................................................................15000
Cash ......................................................................................................................................................................15000
April 21 cash ................................................................................................................................70,000
Service revenue ......................................................................................................................................................70,000
April 25 rent expence......................................................................................................................4000
Cash .....................................................................................................................................................................................4000
April 27 salery expence .....................................................................................................................45000
Cash ................................................................................................................................................................................45000
Electric expence .....................................................................................................................................300
Cash ....................................................................................................................................................................................300
Allowance expence ..........................................................................................................................2500
Cash.....................................................................................................................................................................................2500
Post to ledger
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Cash 101 peripaid Insurance 102
date debit credi balance

1-Apr 200000
20,000 180,000
3 40000 140,000
date debit Crdit balance
3-Apr 40,000 40,000
stationery 103
date debit Crdit balance
15-Apr 15,000 15,000
equpiment 104
date debit Crdit

1-Apr 150,000
10,000 160,000
Liability
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accunt payebel unerned revenue
date debit credit balance date debit credit balance

15000 7000 7000
15000 0
ABC Educational plc equity
Date debit credit Balance

350,000 350,000
Service revenue
Date debit credit Balance

70,00
0
90000 160,000
Expence
Salary expence rent expence
Date debit credit balance Date debit credit balance

45000 45000 20,000
4000 24000
Allowance misslanouce expence
Date debit credi balance Date debit credit balance

t
2500 2500 5000 5000
Electric expence
Date debit credi balance

t
300 300
3rd step unaduste d trial balance

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ABC educational service plc
Unadusted trial balance
For the monthe endede april 2023
Account catagory Debit credit

Asset
Cash 225,200
Satationery 15,000
Pripad insurance 40,000
Equpiment 160,000
Liability
Account payebel 0
Unerned revenue 7,000
Equtiy
ABC capital 350,000
Revenue
Service revenue 160,000
Expence
Salery expence 45,000
Allowance expence 2500
Misslanece expence 5000
Rent expence 24000
Electric expenece 300
Balance 7680076800 76800
4rth steps adustement In the above transaction unerned revenue and prpaid insurance to be make that are not
only themounth expence.
Peripaid insurance paid for three mounthes not for one mounthe that meane 40,000 birr diveded by three
That i,e 13,333,34 for tha mounthe insurance expence
Prepaid Insurance.................................................................. 26,666,67
Innsurance expence....................................................................13,333.34
Cash.........................................................................................................................................40,000
Cash ........................................................................................7,000
Unerned revenue ............................................................................................................................3500
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Service revenue ..................................................................................................................................3500
ABC educational plc
Incame stetement
For the mounth ended 2023
Revenue
Service revenue 163500
Expence
Salery expence 45,000
Allowance expence 2500
Misslanece expence 5000
Insurance expence 13,333.33
Rent expence 24000
Electric expenece 300
Net Incame 73,366.67
ABC Educational plc
Retien erining
For the mounth endede april 2023
Biggining ABC capital ..............................................................................................350,000
Add net income ..............................................................................................................73,366.67
Less cash withdral........................................................................................................0
Ending balance ABC Capital...............................................................................................423,366
ABC Educational plc
Balance sheet
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For the mounth ended april 2023
Account catagory Debit Credit

Asset
Cash 225,200
Satationery 15,000
Pripad insurance 26,666
Equpiment 160,000
Liability
Account payebel
Unerned revenue 3500
Equtiy
ABC capital 423,366
Balance 4268664268 423366
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Lo1:- Allocate customer payments
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Authorised personnel may include: dispute resolution officer

 employees
 supervisors and managers
Information Sheet – 1 services on account
Business organizations sell their items or services on cash or on account. It is common for these
organizations to sell their items or services on account to increase sales volume. In this case
receivables are created. The term receivables include all money claims against people,
organizations, or other debtors. Receivables are required by a business enterprise in a various
kinds of transactions, the most common being the sale of merchandise or services on a credit
sale.
Classification of Receivables
Receivables can be classified broadly as trade receivables and other receivables.
Trade Receivables: are resulted from revenue producing activities such as sale of goods or
services. Under this classification examples included are accounts receivable
& notes receivable. A promissory note frequently referred to, as a notes
receivable, is a written promise to pay a sum of money on demand or at a
definite time. Notes are more secured than accounts receivables. It is also
more liquid (easily changed into cash) than accounts receivable.
Other receivables: are resulted from transactions not directly related to sales. Here included are
interest receivables, loans to employees or loans to companies.
Note: that all receivable that are to be collected within a year are presented in the current asset
section of the balance sheet. Others such as long-term loans are to be listed under
investment account below the current asset section of the balance sheet.
Controls over Receivables
The control procedures over the receivables include two broad mechanismsSeparation of the
business operations adjustments, such as credit approval, credit collection, credit handling of
receivables etc. and the accounting for receivables such as handling of the accounts receivable
subsidiary ledger and general ledger; and
a) Separation of duties for related functions.

Notes Receivable. (A note)
Definition: A note is a written promise to pay a sum of money on demand or at a definite time.
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Characteristics: a note has different characteristics that have accounting implications, which are
explained in the following ways:
Parties: In notes receivable there are two parties involved. The one to whose order the note is
payable (the holder or the receiver of the note) is called the payee (the seller); and the
one making the promise/ issuer of the note or the buyer is called the maker.
Due Date: is the date at which the note is retired or paid. It is also called the maturity date.
Issuance date: is the date at which the note is written or issued.
Maturity value: is the amount that is due at the maturity or due date.
Maturity value = Principal + interest
Types: There are two types of notes. Interest bearing (Interest = Principal * Rate of interest *
Time) the time period can be expressed in terms of days, months or weeks; and non-interest
bearing which has no interest on it but other indirect charges may be there.
To illustrate the above characteristics consider the following examples:
a) Br.10, 000, 10% interest, 120 days note dated March 16.
b) Br.12,000, 10% interest, 4 months note dated June 5.

Required: calculate the interest, the maturity value and determine the due date of each note.
Solution: a) Interest = Principal * Rate * Time
= Br.10, 000 *10% * 120 days = Br.333.30
360 days
Maturity value = Principal + Interest
= Br.10, 000 + 333.33 = Br.10, 333.33
Due date: Term of the note............................................... ------120 days
Days in March ........................ 31
Less: Term date (issuance date) 16 15
105 days
Days in April.......................... 30
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Days in May ........................... 31
Days in June ........................... 30
Total 91 days
The due date is July 14
Remark:
January is a month of 31 days
February is a month of 28 days
March is a month of 31 days
April is a month of 30 days
May is a month of 31 days
June is a month of 30 days
July is a month of 31 days
August is a month of 31 days
September is a month of 30 days
October is a month of 31 days
November is a month of 30 days
December is a month of 31 day
b) I = P * R * T
= 12,000 * 12 * 4 months = Br. 480
100 12 months
Maturity value = P + I
= Br.12,000 + Br. 480 = Br.12,480
Due date: June6 – July5 = 1 month
July 6 – Augusts = 1 month

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August 6 – September 5 = 1 month
September 6 – October 5 = 1 month
4 months
Therefore, the due date is October 5.

Information Sheet Open customer account
Information provided to customer may include descriptions of:

 accounts geared to the needs of particular groups such as:
 customer deeming accounts
 youth accounts
 investment accounts
 retirement accounts
savings accounts.
Accounting for Receivables
In a business organization notes may be received or created when:
 Items/ services are sold on long-term credit, usually greater than 90-days.
 Cash is lent to an entity (individuals, business organizations etc.).
 The account of a customer becomes delinquent (a delinquent accounts receivable is an
account receivable which is not paid on its last payment date and changed to notes
receivable).
When a note is received from a customer to apply on account, the facts are recorded by debiting
the notes receivable account and crediting the accounts receivable controlling account
(delinquent account) and the account of the customer from whom the note is received.
Example: Assume that the account of Glenn Enterprise, which has a balance of Br.9,200, is past
due (delinquent). A 90 -day non-interest bearing note for that amount dated May 16,1990, is
accepted in settlement of the account. The notes receivable is recorded at its face value and the
entry to record the transaction is as follows.
May 16. Notes Receivable ................................ 9200
Accounts Receivable ....................... 9200
When the amount is collected on the due date (August 14)

Cash ........................................ 9200
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Notes Receivable .............. 9200

Interest bearing note: If a note received from a customer on account is interest bearing, interest
must be recorded as appropriate.
Self-check
1., assume that the account of X-company that has a debit balance of Br.6,000 is past due. A 30 -
day, 12% note for that amount dated December 31, 2001 is accepted in settlement of the account.
Assume the end of the year is December 31, 2001. Assume a 360- days year.
Required: a) Determine the due date
b) Prepare journal entries to record
I) Receipt of the note
ii) Accrual of interest (adjusting entries) on December 31, 2001
iii) Reversing entry on January 1, 2001
iv) Collection of cash at maturity.
ii) According to the accrual basis of Accounting revenues should be recognized of reported
on the date they earned. If not recorded on that date using adjusting entries they should
be updated or adjusted at the end of the year. For this example, there, for interest
income revenue for the period December 21 to December 31 is 20 days revenue (31-21
= 20 days). The total interest is computed as follows:
I = Br.6, 000 * 12% * 30 days = Br. 60
360
From the total amount Br.60 interest Br.20 (Int. = Br.6, 000 * 12% * 10 days = Br.20) is
360
The 2001 interest. But Br.40 (Int. =Br.6000 * 12% * 20 days = Br.40) is the coming
360 days
Year’s, 2002 interest.
Interest receivable ............................... Br.20
Interest income ..................................... Br.20

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The interest income is reported on the income statement on the other income section, and
the interest receivable is reported on the balance sheet of the organization in the current
assets section.
iii) Reversing entry, which is optional, and the exact reverse of the adjusting entry. It is
employed to avoid inconveniencies at the beginning date of the upcoming accounting
year. For our example, the upcoming fiscal year begins on January 1, 2002. So the
entry on that date is:
Interest income .............................. Br. 20
Interest Receivable ........................... Br. 20
iv) The due date is January 20, 2002. The maturity value is Br.6060 (Br.6000 + Br.60 =
Br.6060). Assuming that the whole amount is collected on the due date. The entry is
recorded as follows.
Cash ............................................. Br. 6060
Notes Receivable ............................ Br. 6000
Interest income ................................ 60
OPERATION SHEET 1: Describe team role and scope
Purpose:
This learning outcome aims to provide trainees with the knowledge, skill and attitude teamwork.
Understanding the concept of teamwork helps to make easy the daily work activity.
Equipment, Tools and Materials:
 Computer
 Projector
 White board
 White board marker &Duster
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 Lecture room
 Printer
Condition:
Students and trainers are legally required to lock the health and safety of trainer. This applies to
all organizations and including voluntary organizations.
 Students must provide safe working environment.
 Students must not put themselves or others at risk.
Procedure:
 Need to establish a team

 Identify the team objective
 Prepare effective common plan
 Apply practically
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INFOLINK University, W/SODO Campus Unit: Administrate Financial Accounts
Lo2: Reconcile accounts
 Information required for opening accounts may include: amount of initial deposit
 other signatories to the account
 primary account holder's:
 name
 address
 contact details
 purpose for which the account will be used
required links to other accounts held.
Information Sheet Discounting Notes Receivable
If the holder of the note is in need of more funds/ cash for current operation, it may be endorsed
or transferred to a bank or any financial agency. This process if called discounting notes
receivable.
When a note is discounted at bank, the bank charges an interest on the maturity value of the note.
This interest is called discount and it is computed using the following formula.
Discount = Maturity value * Discounting rate * Discounting period/time
The amount of money paid to the endorser/ holder of the note who transfers it to the bank
because of high need of cash, is called proceeds/ balance. It is the excess of the maturity value
over the discount, i.e., Proceeds = Maturity value – Discount.
To illustrate a discounting notes receivable, assume that a 90-day, 12% notes receivable for
Br.1800, dated November 8, 2001, is discounted at the bank on December 31, 2001 at the
discounting rate of 14%. Assume a 360-days year.
Required:
1) Determine the due date, discounting period, Interest, the discount, maturity value,
and proceeds.
2) Prepare entries to record discounting of the note.
Solution:
1) Interest = Principal * Rate * Time
= Br. 1800 * 12% * 90 days = Br. 54
360
INCTROCTOR DANIEL B PHONE +251915689574 Page 24

Maturity value = Principal + interest
= Br.1800 + Br.54 = Br. 1854
Due date = Terms ........................................ 90 days
Days in November (30-8) 22
Days in December 31
Days in January 31 84
Due date is February 6
Discount period:
December (31-3) 28
January 31
February 6
65 days
November 8 December 3 February 6
(Issuance date) (Discounting date) (Due date)
Discount = Maturity value * Discounting rate * Discounting period
= Br. 1854 * 14% * 65/360 = Br. 46.87 this is the amount to the bank as
an interest.
Proceeds = Maturity value – Discount
= Br. 1854 - Br. 46.87 = Br. 1807.13 this is the amount the holder of the
note will receive from the bank in exchange of the note.
2) Entries on December 3, when the note is endorsed to the bank is (to record the proceeds)
Cash ..................................... Br. 1807.13
Notes Receivable ............................. 1800
Interest income (Br.54 - Br. 46.87) ... 7.13

Note that if the proceeds are greater than the face value of the note, there will be an interest
income to the organization. Otherwise, there will be interest expense. Or if the interest is
greater than the discount the difference is interest income to the discounting notes but if the
interest is less than the discount the difference is charged to interest expense account to the
organization, which discounts the note at bank.
Lo3:- Maintain customer details
Dishonored notes
In business organizations, the maker of the note may fail to pay the debt on the due date. Here, in
this case, the note is said dishonored, which is not longer negotiable or transferable. For this
reason the holder usually transfers the claim, including any interest due, to the accounts
receivable. To illustrate this fact, assume a Br. 12,000, 30-days, 12% notes receivable on
December 31, 2001, had been dishonored at the due date (January 20, 2002
Required: 1)Calculate the maturity value.
2)Record entries occurred on the issuance date and maturity date?
Solutions:
1) Interest = Br.12,000 * 12% * 30/360 = Br.120

Maturity value = Br.12,000 + Br.120 = Br.12,120
2) Entries on the issuance date (December 21, 2001)

Notes Receivable ......................... Br. 12,000
Accounts Receivable ................................... Br. 12,000
Entries on the maturity Date (January 20, 2002)
Accounts Receivable ............................. Br. 12,120
Notes Receivable ...................................... 12,000
Interest income .......................................... 120
Dishonored Discounted notes
When a discounted note receivable is dishonored, the holder usually notifies the endorser of such
fact and asks for payment. If the request for payment and notification of dishonor are timely, the
endorser is legally obligated to pay the amount due on the note. The entire amount paid to the
holder by the endorser, including interest, should be debited to the account receivable of the
maker. To illustrate this fact assume that a 60-day, 12% Br. 42,00 note dated November 8,
2001, discounted on December 3, 2001 at 14% discounting rate is dishonored at maturity by the

maker. Assume, the bank charged Br.50 as penalty for the failure (called protest fee). Assume
further a 360-days accounting year ending on December.
Required: Record all the necessary transactions & compute all the amounts required.
Due date:
Solutions: Term period .......................................................... 60 days
Days in November (30-8) .................................... 22
38
Days in December ................................................ 31
January 7 is the due date ....................................... 7
Discounting period:
Days in December (31-3) ..................................... 28
January ................................................................. 7
35 day
Interest = Br. 42,000 *12% * 60/360 = Br. 840
Maturity value = Br. 42,000 + Br. 840 = Br. 42,840
Discount = Br. 42, 840 * 14% * 35/360 = Br. 583.10
Proceeds = Br. 42,840 - Br. 583.10 = Br. 42,256.90
Entries: On November 8 (issuance date:

Notes Receivable .............................. Br. 42,000
Accounts Receivable .......................... Br. 42,000
On December 3, 2001 to record the proceeds.
Cash ...................................... Br. 42,256.90
Notes Receivable ..................... Br. 42,000
Interest income ......................... 256.90
On January 7,2002, to record the dishonored discounted note.

Accounts Receivable (42,840 + 50) ................. 42,890
Notes Receivable ............................................. 42,890
Organisational  conducting the 100 point check of personal identification

procedures for  Identifying and matching customer with existing accounts held
customer identification within own financial institution.
may include:
Uncollectible Receivables
Regardless of the care used in granting credit and the effectiveness of collection procedures used,
a part of the claims against customers usually proved to be uncollectible. This could be because
of bankruptcy, closing of the debtors business of failure of repeated attempts to collect. In any
way, the operating expense incurred because of the failure to collect receivables is called an
expense /a loss from uncollectible accounts/ doubtful accounts or bad debt Expense.
There are two methods of accounting for receivables that are believed to be uncollectible.
a) The allowance method (reserve method)

b) The direct write-off (direct charge-off method)
A) The allowance method: This method provides in advance for uncollectible receivables. The
advance provision or estimation for future uncollectibility is made by an adjusting entry at
the end of the fiscal year. It reduces the value of receivables to the amount of cash expected
to be realizable from customers in future. It matches current expense with current revenue.
Example: ABC-company started its operation on January 1, 2001 and chooses to use the
calendar year as its fiscal year. The accounts receivable, has a balance of Br. 200,000
at the end of the period in total.
At this period no specific accounts are believed to be wholly uncollectible. But it seems likely
that some will be collected only in part and that others are likely to become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will eventually proved to
be uncollectible. Then,
i) What is the expected realizable accounts Receivable.
ii) Journalize the entry to record the estimated bad debt expense
iii) what do you think will be the effect of not recording such corrections?
Solution:
i) Net realizable value = Br. 200,000 - Br. 8000 = Br. 192,000

ii) Bad debt expense ........................ Br. 8000

Allowance for uncollectible.................... Br. 8000
The bad debt expense is reported on the income statement but the allowance for
uncollectible is reported on the balance sheet as contra of accounts receivable.
iii) The effect is understating expenses and overstatement of net income, capital and asset
amounts.
Note that the Br. 8000 reduction in accounts receivable cannot yet be identified with a specific
customer accounts in the subsidiary ledger and should, therefore, not be credited to accounts
receivable but to allowance for doubtful account, which is a contra asset account.
Write-offs to the allowance account.
When an account is believed to be uncollectible, the amount is transferred from the allowance for
doubtful account to the accounts receivable.
Self check
1., assume Br. 2000 of the accounts receivable of customer – x of ABC company has been
determined to be uncollectible during 2002. The adjusting entry to write-off the allowance would
be:
2. If an accounts receivable that has been written-off against the allowance account is later
collected, the account should be re-instated by an entry that is exact reverse of the write-offs
entry:
Assume that ABC company’s customer-x has paid the Br.2000. Record the entry.
Administer the process

Information Sheet
This is entry to record collection of cash
The accuracy and  authenticity of signatures

sufficiency of  checks against or links to existing customer account information
information provided  completeness of documentation
includes ensuring:  provision of sufficient documentary evidence (points) to meet the
requirements for establishing a new account

Estimating uncollectibles
The estimates of uncollectibles at the end of the fiscal period is based on past experiences and
forecasts of future business activities. It is based on either:
a) The amount of sales for the entire period (called an income statement approach) or
b) The amount and age of receivables account at the end of the fiscal period. (called
balance sheet approach).
a) Income statement approach:
Formula:
Estimated = Net credit sales * Percentage of estimated
Bad debt expense to be uncollectible.
- The amount of this estimate is added to whatever balance exists in the allowance for
doubtful account.
Examples: Assume net credit sales on December 31, 2001 for ABC organization is Br.200,
000, estimated uncollectible ..................................... 1.5%
Required: Record the entry
Bad debt expenses (200,000 * 1.5%) ............... 3000
Allowance for uncollectible ............................. 3000
c) Balance sheet approach: The process of analyzing the receivable accounts in terms of
the length of time past due is sometimes called aging of the receivable. The due date of
the account is the base point for determining age. In this method accounts are categorized
individually based on the length of time they have been outstanding and apply the
expected percentage of uncollectible.
Example: At the end of 2001 accounts receivable ledger of ABC company has the balance of
Br.200,000 which can be categorized as follows:
Age group amount Estimated percentage Estimated amount of
(a) of uncollectible uncollectible
(b) C=a*b
Not yet due Br. 80,000 0.5% Br. 400
1-30 days past due 25,000 1% 250
31-60 days past due 20,000 2% 400

61-120 days past due 60,000 5% 3000
More than 120 days
past due 15,000 20% 3000
Br.200,000 Br.7050
The Br.7050 amount is the desired balance of allowance account after adjustment; and to be
deducted from accounts receivable to determine the net realizable value. Assuming that the
allowance for uncollectible account had no balance, the entry to record this new amount is:
Bad debt expense .............................. Br.7050
Allowance for uncollectible ...................... Br.7050
Note that if the allowance account has a debit or credit balance before adjustment, it must be
considered accordingly when the base of the estimation is the balance sheet approach.
B) Direct write off, method
Under this method of accounting for receivables no valuation of allowance for accounts
receivable is used. The business recognizes no uncollectible account expense until specific
receivables are determined to be worthless. Thus, receivables are not stated at net realizable
value. This method lacks to follow the matching principle.
The entry to record the write-off the uncollectible account is:
Bad debt expense .............................. xxx
Accounts receivable ............................ xxx
To record the recovery of accounts previously written-off is:
Accounting receivable ............................ xxx
Bad debt expense ................................... xxx and
Cash ......................................... xxx
Accounts receivable ....................... xxx
Transaction processing  manual or electronic and may involve:

may be:  accurate data entry of transactions into relevant database
 accurate completion of customer application forms and
transaction receipts

Customer account details may include Electronic Fund Transfer disputes

 electronic bill and other payments
 fees charged
 insurance
 investment, retirement savings
 payroll:
 member chequeing
 direct debit
 periodical payments
 transfers from other accounts
 visas and other plastic cards.
Required information  account details to enable transfer of remaining funds
to transfer or close an  details of possible complaints relating to the account
account may include:  reasons for transfer or closure of accounts
Self check
1) assume Br. 2000 of the accounts receivable of customer – x of ABC company has been
determined to be uncollectible during 2002.
Required : The adjusting entry to write-off the allowance would be:
2) Assume that ABC company’s customer-x has paid the Br.2000. Record the entry.
Required : prepare the necessary journal entries
3) ABC-company started its operation on January 1, 2001 and chooses to use the calendar
year as its fiscal year. The accounts receivable, has a balance of Br. 200,000 at the end of
the period in total.
At this period no specific accounts are believed to be wholly uncollectible. But it seems likely
that some will be collected only in part and that others are likely to become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will eventually proved to
be uncollectible. Then,
i) What is the expected realizable accounts Receivable.
ii) Journalize the entry to record the estimated bad debt expense
iii) what do you think will be the effect of not recording such corrections?


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Rift Valley University, Kaliti Campus Unit: Administrate Financial

Same common difintions of business are the following

 A business is defined as an organization or enterprising entity engaged in commercial,

Based on therir opration business is divided into three tayepes

Examples of manufacturing include automotive companies, bakeries, shoemakers and tailors,

b. Merchanidising type of business

c. Service type of business

A service business provides a skilled service, personal labor, or expertise instead of a

1.2. Form of business.

There are three common forms of businesses

Partnership What is Partnership? A partnership is a kind of business where a formal

A corporation's distinguishing characteristic is limited liability. Shareholders profit through

Accounting is the process of recording, classifying and summarizing financial transactions. It

Accounting eqution is the base of accountin recoreds

Asset= Liability + equity

2. liability all obiligation/debits of the business.

Non current all liability that can not be current.

3. Equity /capital- referes to the investemant of the owener

Account number account name

Current assets non current assets

Account recivabel machineries

Supples propertes and others

Prpaid rant others

Non- current liability all payebels/obiligations mor than 12 monthes.

Morege payebel. Long term liability.

Equity /capiatal is intial investemens that are oweners

Adjusting Work sheet Udjeste trial

The above egith most common account stepes are

The 8 Steps of the Accounting Cycle

Step 1: Identify Transactions

Step 2: Record Transactions in a Journal

If cash sales happen, then the cash account is debited.

Step 4: Unadjusted Trial Balance

Step 6: Adjusting Journal Entries

Step 7: Financial Statements

Step 8: Closing the Books

What Are the Steps of the Accounting Cycle in Order?

1. On apriel 1, 2023, paid cash school rent $20,000 birr.

2. on apriel 3 peripaid insurance birr 40,000

Task 1 Journalize the above transaction

ON april 1, 2023 cash......................................................................200,000

Rent expence ..............................................................................................20,000

April 3 pripaid insurance........................................................................40,000 birr

April 5 equpiment ..................................................................................10,000 birr

Cash ...........................................................................................................................10,000 birr

April 7 Cash ..............................................................................................7000

April 12 stationery ..................................................................................15000

April 15 misseclanous expence ...............................................................................................5000

April 17 cash ...............................................................................................................................90,000 birr

Service revenue..................................................................................................................................................90,000 birr

April 19 account paybel ............................................................................................................15000

April 21 cash ................................................................................................................................70,000

Service revenue ......................................................................................................................................................70,000

April 25 rent expence......................................................................................................................4000

April 27 salery expence .....................................................................................................................45000

Electric expence .....................................................................................................................................300

Allowance expence ..........................................................................................................................2500

Cash 101 peripaid Insurance 102

date debit credi balance

15-Apr 15,000 15,000

date debit Crdit

accunt payebel unerned revenue

= Br.10, 000 10% 120 days = Br.333.30