Accounts Set 1

Team Tent Discussion group
Department of Electrical and Computer Engineering
COE3200- FUNDAMENTAL ACCOUNTS PRINCIPLES
General overview and the Accounting Equation
Question 1
The accounting equation is stated as ASSETS = EQUITY + LIABILITIES. Discuss the various
components under each of the items within the accounting equation.
Solution:
ASSETS
An asset is a resource that is owned or controlled by the company to be used for future benefits.
Some assets are tangible like cash while others are theoretical or intangible like goodwill or
copyrights.
Tangible assets are generally divided into three major categories: current assets (including
cash, marketable securities, accounts receivable, inventory, and prepaid expenses); property,
plant, and equipment; and long-term investments.
Intangible assets lack physical substance, but they may, nevertheless, provide substantial
value to the company that owns them. Examples of intangible assets include patents, Goodwill,
copyrights, trademarks, etc.
Fixed /non-current Assets
 Property, plant, and equipment is the title given to long-lived assets the business uses
to help generate revenue.
Examples include land, natural resources such as timber or mineral reserves, buildings,
production equipment, vehicles, and office furniture. With the exception of land, the cost
of an asset in this category is allocated to expense over the asset's estimated useful life.
 Long-term investments include purchases of debt or stock issued by other companies

and investments with other companies in joint ventures.
Long-term investments differ from marketable securities because the company intends
to hold long-term investments for more than one year or the securities are not
marketable.
Current Assets:
These include cash and assets the company reasonably expects to use, sell, or collect within
one year. Current assets appear on the balance sheet in order, from most liquid to least liquid.
Liquid assets are readily convertible into cash or other assets, and they are generally accepted
as payment for liabilities.
 Cash includes cash on hand, bank balances and cash equivalents.
Cash equivalents are highly liquid investments, such as certificates of deposit and
treasury bills, with maturities of ninety days or less at the time of purchase.
 Accounts receivable/debtors are amounts owed to the company by customers who
have received products or services but have not yet paid for them.
 Inventory is the cost to acquire or manufacture merchandise for sale to customers.
Although service enterprises that never provide customers with merchandise do not use
this category for current assets, inventory usually represents a significant portion of
assets in merchandising and manufacturing companies.
 Prepaid expenses are amounts paid by the company to purchase items or services that
represent future costs of doing business.
Examples include office supplies, insurance premiums, and advance payments for rent.
These assets become expenses as they expire or get used up.
LIABILITIES
Liabilities are the company's existing debts and obligations owed to third parties.
Examples include amounts owed to suppliers for goods or services received (accounts payable), to
employees for work performed (wages payable), and to banks for principal and interest on loans
(notes payable and interest payable).
Liabilities are generally classified as short-term (current) if they are due in one year or less like
bank overdraft and long-term liabilities are not due for at least one year like 5 year bank loan.
EQUITY
Owner's equity represents the amount owed to the owner or owners by the company.
Equity represents the portion of company assets that shareholders or partners own. In other
words, the shareholders or partners own the remainder of assets once all of the liabilities are
paid off. Owner's equity also represents the net assets of the company.
In a sole proprietorship or partnership, owner's equity equals the total net investment which is
the owner’s capital- Owner’s drawings) in the business plus the net income or loss generated
during the business's life.
The owner's investment is recorded in the owner's capital account, and any withdrawals are
recorded in a separate owner's drawing account. For example, if a business owner contributes
$10,000 to start a company but later withdraws $1,000 for personal expenses, the owner's net
investment equals $9,000. Net income or net loss equals the company's revenues less its
expenses.
In a corporation, ownership is represented by shares of stock, so the owners' equity is called
stockholders' equity or shareholders' equity.
Corporations use several types of accounts to record stockholders' equity activities: preferred stock,
common stock, paid-in capital (these are often referred to as contributed capital), and retained
earnings. Contributed capital accounts record the total amount invested by stockholders in the
corporation.
If a corporation issues more than one class of stock, separate accounts are maintained for each
class. Retained earnings equal net income or loss over the life of the business less any amounts
given back to stockholders in the form of dividends. Dividends affect stockholders' equity in the
same way that owner withdrawals affect owner's equity in sole proprietorships and partnerships.
Question 2
The following transactions transpired during the month of December 2023 in the Books of Chrispus
December 1 Started business with Shs 40,000,000 in bank and cash of Shs 8,600,000
December 2 Withdrew cash of Shs 8,000,000 from the Bank for use in business
December 2 Bought goods on credit for Shs 5,000,000
December 3 Sold 50% goods at 3,000,000, collecting cash 2,000,000 and the balance on credit.
December 14 Paid motor Expenses in cash 100,000
December 15 Cash drawings Shs 210,000
December 20 Paid 800,000 cash to suppliers and received cash payment of 500,000/= from debtors
December 24 Bought Machinery for 3,000,000/=, paid 1,000,000/= by cheque and 1,000,000/= cash
December 26 Paid salaries by cheque Shs 50,000
December 28 Obtained a Bank loan Shs 5,000,000 from GT Bank payable after 3 years
Required: Prepare a set of accounting equations from December 1 2023 to December 30th,
2023 incorporating the above transactions.
Solution:
1. Dec 1
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash 8,600,000 Capital 48,600,000

Bank 40,000,000
48,600,000 48,600,000
2. Dec 2
Cash 16,600,000 Capital 48,600,000
Bank 32,000,000
48,600,000 48,600,000
3. Dec 2
Cash 16,600,000 Creditors 5,000,000 Capital 48,600,000
Bank 32,000,000
Stock 5,000,000
53,600,000 5,000,000 48,600,000
4. Dec 3
Bank 32,000,000 Profit 500,000
Stock 2,500,000
Debtors 1,000,000
54,100,000 5,000,000 49,100,000
5. Dec 14
Bank 32,000,000 Profit 400,000
Stock 2,500,000
Debtors 1,000,000
54,000,000 5,000,000 49,000,000
6. Dec 15
Bank 32,000,000 Profit 400,000
Stock 2,500,000 Drawings (210,000)
Debtors 1,000,000
53,790,000 5,000,000 48,790,000
7. Dec 20
Bank 32,000,000 Profit 400,000
Stock 2,500,000 Drawings (210,000)
Debtors 500,000
52,990,000 4,200,000 48,790,000
8. Dec 24
Machinery
Bank 31,000,000 1,000,000 Profit 400,000
Loan
Stock 2,500,000 Drawings (210,000)
Debtors 500,000
Machinery 3,000,000
53,990,000 5,200,000 48,790,000
9. Dec 26
Machinery
Bank 30,950,000 1,000,000 Profit 350,000
Loan
Stock 2,500,000 Drawings (210,000)
Debtors 500,000
Machinery 3,000,000
53,940,000 5,200,000 48,740,000
10. Dec 28
Machinery
Bank 35,950,000 1,000,000 Profit 350,000
Loan
Stock 2,500,000 Bank loan 5,000,000 Drawings (210,000)
Debtors 500,000
Machinery 3,000,000
58,940,000 10,200,000 48,740,000
Question 3
Construct accounting equations for each of the following transactions and prepare a simple balance
sheet at the conclusion of all of them.
1. An individual started business with 45,000,000/= cash at hand and 15,000,000/= cash at
bank
2. Borrowed 23,500,000/= from Stanbic Bank to be re-paid in ten years' time.
3. Purchased stock of goods for 12,000,000/= paying 20% cash and 80% on credit.
4. Sold 1/5 of the goods at 5,500,000/= cash
5. Sold a 1/4 of the remaining goods at 3,500,000/= credit.
6. Paid for Rent of 90,000/= cash
7. Paid 700,000 cash to suppliers and received cash payment of 900,000/= from debtors.
8. Bought Machinery for 4,000,000/=, paid 3,000,000/= by cheque and 1,000,000/= cash.
9. Sold a quarter of the remaining stock of goods for 3,000,000/= collecting 2,000,000/= cash
balance to be received later.
10. Paid rent of 25,000/= by cheque.
11. At Christmas, used business cash to buy a Home theatre costing of 700,000/= for his home
and his secretary a phone of 110,000/=.
Solution:
Accounting equations
1.
Cash 45,000,000 Capital 60,000,000
Bank 15,000,000
60,000,000 60,000,000
2.
Cash 45,000,000 Bank loan 23,500,000 Capital 60,000,000
Bank 38,500,000
83,500,000 23,500,000 60,000,000
3.
Bank 38,500,000 Creditors 9,600,000
Stock 12,000,000
93,100,000 33,100,000 60,000,000
4.
Bank 38,500,000 Creditors 9,600,000 Profits 3,100,000
Stock 9,600,000
96,200,000 33,100,000 63,100,000
5.
Stock 7,200,000
Debtors 3,500,000
97,300,000 33,100,000 64,200,000
6.
Stock 7,200,000
Debtors 3,500,000
97,210,000 33,100,000 64,110,000
7.
Stock 7,200,000
Debtors 2,600,000
96,510,000 32,400,000 64,110,000
8.
Stock 7,200,000
Debtors 2,600,000
Machinery 3,000,000
96,510,000 32,400,000 64,110,000
9.
Stock 5,400,000
Debtors 3,600,000
Machinery 3,000,000
97,710,000 32,400,000 65,310,000
10.
Stock 5,400,000
Debtors 3,600,000
Machinery 3,000,000
97,685,000 32,400,000 65,285,000
11.
Stock 5,400,000 Drawings (810,000)
Debtors 3,600,000
Machinery 3,000,000
96,875,000 32,400,000 64,475,000
Balance sheet
ASSETS Amount (Shs) EQUITY & LIABILITIES Amount (Shs)
Non-current assets Capital and reseves

Machinery 3,000,000 Capital 60,000,000
Current assets Add: Net Profit 5,285,000
Cash 48,400,000 Less: Drawings 810,000
Bank 36,475,000 Non-Current liabilities
Stock 5,400,000 Bank loan 23,500,000
Debtors 3,600,000 Current liabilities
Creditors 8,900,000
Total Assets 96,875,000 Total Equity and Liabilities 96,875,000
Question 4
Briefly explain the meaning and significance of the following accounting concepts/ principles/
conventions.
1. The duality/ double entry concept

Solution:
The underlying idea in the concept is the fact that, every time something is given someone
(something) else receives it. i.e., every time a transaction takes place, there is always a twofold
effect (or two parties are involved – giver and receiver).
Hence the principle requires that all transactions should be recorded in such a way that they
capture the giving and receiving effect of each transaction.
Thus, the duality concept is commonly expressed in terms of fundamental accounting equation:
Assets = Liabilities + Capital
The above accounting equation states that the assets of a business are always equal to the claims
of owner/owners and the outsiders. This claim is also termed as capital or owners’ equity and that
of outsiders, as liabilities or creditors’ equity.
The implication of dual aspect concept is that every transaction has an equal impact on assets and
liabilities in such a way that total assets are always equal to total liabilities.
Example: Purchase of machinery on credit, increase the number of assets but at the same time
increases the number of liabilities since the business owes money to creditors.
Significance
 This concept helps accountant in detecting error.
 It encourages the accountant to post each entry in opposite sides of two affected accounts.
2. The business entity concept
Solution:
The Business entity assumption means that, the activity of a business enterprise can be kept
separate and distinct from its owners and any other business unit. Hence, in preparing books of
accounts, the personal transactions of the owners, and managers should not be mixed up with
those of their business, as this would render the determination of the operating results and
financial position of the organization impossible.
Revenue and expense should be kept separate from personal expenses.

Example: if the activities and elements of General Motors could not be distinguished from those
of Ford, then it would be impossible to know which company financially outperformed the other
two in recent years.
The following points highlight the significance of business entity concept:
 This concept helps in ascertaining the profit of the business as only the business expenses
and revenues are recorded and all the private and personal expenses are ignored.
 This concept restraints accountant from recording of owner’s private/ personal transactions.
3. The money measurement concept/ monetary unit
Solution:
All accounting transactions are recorded in terms of monetary value. It would be very cumbersome
to record information in terms of quantifiable amounts.
It would also be impossible to make any fair comparisons between various types of property. e.g.
number of vehicles with number of buildings.
In order to make meaningful comparisons, there is need to convert the data into a common and
recognizable measure.
Hence, since most quantifiable information is capable of being translated into monetary terms there
is usually no difficulty in adopting the principle.
Significance
 This concept guides accountants on what to record and on what not to record.
 It helps in recording business transactions uniformly.
 If all the business transactions are expressed in monetary terms, it will be easy to
understand the accounts prepared by the business enterprise.
Examples of items to record and not to record
 Health of a managing director
 Purchase of factory building UGX.10M
 Rent paid UGX100,000
 Delay in supply of raw materials
4. Going concern
Solution:
Books of accounts should be prepared on the assumption that the entity will continue in existence
indefinitely This is an important assumption of accounting, as it provides a basis for showing the
value of assets in the balance sheet.
We assume, unless there is evidence to the contrary, that the company is not going bankrupt.
Depreciation and amortization policies are justifiable and appropriate only if we assume some
permanence to the enterprise.
Significance
 On the basis of this concept, depreciation is charged on the fixed asset.
 It is of great help to the investors, because, it assures them that they will continue to get
income on their investments. iii.
 In the absence of this concept, the cost of a fixed asset will be treated as an expense in the
year of its purchase.
5. Full disclosure
Solution:
Full disclosure means that there should be full, fair and adequate disclosure of accounting
information. Adequate means sufficient set of information to be disclosed. Fair indicates an
equitable treatment of users. Full refers to complete and detailed presentation of information.
Information about financial position, income, cash flows, and investments can be found in one of
three places: (1) within the main body of financial statements, (2) in the notes to those statements,
or (3) as supplementary information.
Example: an entry is made immediately in the books for an invoice received for good purchased
Significance
 It helps in meaningful comparison of financial statements of the different business units.
 This can also help in the comparison of financial statements of different years of the same
business unit.
 This convention is of great help to investor and shareholder for making investment decisions.
6. Matching concept
Solution:
Income earned and related expenses incurred must be accounted for in the same accounting period
and financial statements.
Thus, both costs and revenues are assigned to periods of time, i.e. the accounting period, for the
purpose of computing the profit or loss for that period.
Thus, expense recognition is tied to revenue recognition and this practice is referred to as the
matching principle because it dictates that efforts (expenses) be matched with accomplishment
(revenues) whenever it is reasonable and practicable to do so.
Therefore, the matching concept implies that all revenues earned during an accounting year,
whether received/not received during that year and all cost incurred, whether paid/not paid during
the year should be taken into account while ascertaining profit or loss for that year.
Example: Cost of sales is paid in cash, but the sales is only received in the following accounting
period, the sales and cost of sales are accounted for in the same accounting period.
Significance
 It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
 It is very helpful for the investors/shareholders to know the exact amount of profit or loss
of the business
 This imposes the responsibility to reveal all significant data of a material nature that relate
to the business' financial position and operating results.
7. Materiality concept
Solution:
Financial reports should be prepared with the minimum of bias. The measure used should be that
which gains consensus of opinion rather than using one's own measure which might conflict with
other people's opinion.
Hence, the information in financial reports must be objective; the underlying element is verifiability,
i.e., the agreement of competent persons as to what has been observed or experienced.
The principle suggests that accounting entries must be based on facts, which can be verified by
independent experts. Objective evidence consists of anything that can be physically verified such
as a bill, check, invoice, or bank statement.
Example: a significant fine incurred by an entity is disclosed separately in the financial statement.
It cannot be grouped with general expenses for instance.
8. Historical cost
Solution:
Requires that transactions should be recorded at their original or historical cost, because what is
paid is past that is to say all assets are recorded in the books of accounts at their purchase price,
which includes cost of acquisition, transportation and installation and not at its market price.
It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the
books of accounts at a price paid for them.
Example: A machine was purchased by Hakim Limited for UGX500, 000, for manufacturing shoes.
An amount of UGX1, 000 was spent on transporting the machine to the factory site.
In addition, UGX.2000 was spent on its installation. The total amount at which the machine will
be recorded in the books of accounts would be the sum of all these items i.e. UGX.503000. This
cost is also known as historical cost.
Suppose the market price of the same is now UGX. 900,000 it will not be shown at this value.
Further, it may be clarified that cost means original or acquisition cost only for new assets and for
the used ones, cost means original cost less depreciation.
Significance:
 This concept requires asset to be shown at the price it has been acquired, which can be
verified from the supporting documents.
 It helps in calculating depreciation on fixed assets.
 The effect of cost concept is that if the business entity does not pay anything for an asset,
this item will not be shown in the books of accounts.
9. Prudence
Solution
This convention is based on the principle that “Anticipate no profit, but provide for all possible
losses. The main objective of this convention is to show minimum profit. Profit should not be
overstated.
Thus, this convention clearly states that profit should not be recorded until it is realized. But if the
business anticipates any loss in the near future provision should be made in the books of accounts
for the same.
When a policy of conservatism is followed, assets and income tend to be understated. For instance,
depreciation expenses are often accelerated causing lower book values for plant assets.
Example: The account of a debtor who is experiencing financial challenges is written off.
Significance
 It helps in ascertaining actual profit.
 It is useful in the situation of uncertainties and doubts.
 It helps in maintaining the capital of the enterprise

10. Accrual concept/ revenue recognition
Solution:
Regardless of the cash movements, transactions must be recorded in the accounting records and
shown in the financial statements in the financial period in which they occur.
For revenue to be treated as realised or earned it need not be collected in cash; the cash may be
received at a later period (or for that matter, it may have been received in earlier periods). This way
of accounting is called accrual basis accounting.
Example: A firm sells goods for UGX 55000 on 25th March 2010 and the payment is not received
until 10th April 2010, the amount is due and payable to the firm on the date of sale i.e. 25 th March
2010. It must be included in the revenue for the period ending 31st March 2010.
Significance
 It helps in knowing actual expenses and actual income during a particular timeperiod.
 It helps in calculating the net profit of the business.
11. Consistency
Solution:
Accounting rules and policies should not be amended unless there is a fundamental change in
circumstances that necessitates a reconsideration of the original rules and policies.
This implies that a particular accounting method, once adopted, will not be changed from period
to period. This is vital because it assists users of financial reports in analyzing and interpreting
changes in the operating results and financial position.
When there is any change in an accounting method, its effect must be fully disclosed and the
reasoning explained in notes to financial statements. If businesses were allowed to change
accounting principles whenever they wished, the amount of net income reported could
continuously be manipulated.
Example: The method and rate of depreciation on machinery is expected to be the same as the
previous years.
12. Materiality
Solution:
The significance of an item should be considered when it is reported. Accounting is primarily
concerned with significant information and not overly concerned with those items, which have little
effect on financial reports. An item is material if there is reasonable expectation that knowledge of
it would influence the decisions of rational users of financial reports.
 It helps in minimizing errors in calculation.
 It saves time and resources.
13. Periodicity
Solution:
Financial reports should be prepared at the end of a defined period of time, and this period should
be adopted as the regular period of accounting.
At regular accounting periods financial statements showing the operating results and the financial
position of an organisation are made. In other words; this concept requires that a balance sheet
and profit and loss account should be prepared at regular intervals.
This is necessary for different purposes like, calculation of profit, ascertaining financial position,
tax computation etc.
These statements are the basis for decisions on how to improve performance.
Example: If financial statements are prepared at the end of every 30 days, this period must be used
consistently in the preparation of books of accounts.
Significance
 It helps in calculating tax on business income calculated for a particular time period.
 It also helps banks, financial institutions, creditors, etc to assess and analyze the
performance of business for a particular period.
 It also helps the business firms to distribute their income at regular intervals as dividends.
14. Substance over form

Solution:
In this principle, transactions and other events are accounted for and presented in accordance with
their substance and economic reality and not merely their legal form.
Substance over form tends to be applied to transactions which are fairly complicated, and you are
therefore unlikely to have come across its application much until now.
It is very important because it acts as a ‘catch-all’ to stop enterprises distorting their results by
following the letter of the law instead of showing what the enterprise has really been doing.
Question 5
Accounting plays an important and useful role, and as such it benefits management in many ways.
Accounting involves recording transactions and compiling them in reports.
(a) State the advantages of accounting to a business
Solution:
Financial Reporting: Accounting provides businesses with a structured way to record financial
transactions and prepare financial statements such as the income statement, balance sheet, and
cash flow statement. These reports offer insights into the financial health and performance of the
business, aiding decision-making by management, investors, creditors, and other stakeholders.
Decision Making: Accounting information enables management to make informed decisions

regarding resource allocation, pricing strategies, investment opportunities, and other aspects of
business operations. By analyzing financial data, managers can identify trends, assess profitability,
and evaluate the effectiveness of various strategies.
Performance Evaluation: Accounting allows businesses to assess their performance over time by
comparing financial results across different periods. This helps management identify areas of
strength and weakness, set performance targets, and implement strategies for improvement.
Compliance: Accounting helps businesses comply with legal and regulatory requirements related
to financial reporting and taxation. Accurate and transparent financial records are essential for
fulfilling obligations to government authorities, shareholders, and other stakeholders.
Facilitates Planning and Budgeting: Accounting provides essential information for strategic
planning and budgeting processes. By analyzing historical financial data and forecasting future
trends, businesses can set realistic goals, allocate resources effectively, and monitor progress
towards achieving objectives.
Risk Management: Accounting helps businesses identify and mitigate financial risks such as
liquidity risk, credit risk, and market risk. By monitoring financial indicators and performance
metrics, management can anticipate potential challenges and take proactive measures to minimize
adverse effects.
Facilitates Communication: Accounting serves as a common language for communicating

financial information to internal and external stakeholders. Clear and accurate financial reports
enable effective communication between management, investors, creditors, employees, and other
parties interested in the business's financial affairs.
(b) Explain the limitations of accounting
Solution:
Subjectivity: Accounting involves the use of estimates, judgments, and assumptions, which can
introduce subjectivity and potential bias into financial reporting. Different accounting methods and
choices may lead to varying interpretations of the same financial data.
Historical Perspective: Financial statements are based on historical transactions and events,
providing a snapshot of the business's past performance. While historical data are useful for
analysis and decision-making, they may not fully capture future trends, risks, or opportunities.
Complexity: Accounting standards

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Team Tent Discussion group

Department of Electrical and Computer Engineering

COE3200- FUNDAMENTAL ACCOUNTS PRINCIPLES

General overview and the Accounting Equation

 Long-term investments include purchases of debt or stock issued by other companies

2023 incorporating the above transactions.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 8,600,000 Capital 48,600,000

58,940,000 10,200,000 48,740,000

ASSETS Amount (Shs) EQUITY & LIABILITIES Amount (Shs)

Non-current assets Capital and reseves

1. The duality/ double entry concept

Revenue and expense should be kept separate from personal expenses.

The following points highlight the significance of business entity concept:

14. Substance over form

(a) State the advantages of accounting to a business

Decision Making: Accounting information enables management to make informed decisions

Facilitates Communication: Accounting serves as a common language for communicating

(b) Explain the limitations of accounting

Complexity: Accounting standards

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