Exam Date - Wednesday, December 6(8:35 to 10:20)

1. Introduction to Accounting – book- keeping, accounting, importance of Accounting and Users of

Accounting information
2. The Accounting Equation – define the components of the accounting equation, give examples of each,
calculate the component of each, effect of various transactions on the accounting equation
(increase/decrease)
3. The Double Entry System – double entry for assets, liabilities, capital, expenses, revenues and the stock
movement accounts, balancing off accounts, types of accounts (real, nominal, personal), effect of
transactions on each account (increase/decrease)
4. . Preparation of Financial Statements – compute gross profit and net profit via an Income Statement,
classifications in a Balance Sheet/Statement of Financial Position

STRUCTURE OF THE EXAM

SECTION A 30 Multiple choice items
SECTION B 3 Structured questions
Total 100 marks

Introduction to Accounting
● Bookkeeping is the recording of financial transactions in a systematic manner
● It is a part of the process of accounting
● It is usually performed by a book-keeper
● A bookkeeper is the person who records the day to day financial transactions of a business
 ● He or She has responsibility for writing up the various accounting books such as the sales and purchases
journals and ledgers
● He has to ensure that all business transactions are recorded and that they are recorded in the correct
books.
● Accounting is the process of systematically recording, measuring, analysing and communicating financial
information so that users can make more informed decisions.
● It is a system of providing quantitative information about a business or person’s financial position.

Importance of accounting
1. Record
● Organizations need to have a reliable and systematic way of recording financial information.
● Accounting is necessary to ensure that those running the business have a reliable record of financial
transactions.
2. Legal
● Accounting helps organizations to determine their financial rights and obligations. Without proper
accounting, it would be very difficult for a business to calculate, for example, the exact amount owed
to a supplier or the amount to be paid in taxes to the government.
○ Maintaining accounting records and preparing financial statements is also often a legal
responsibility for businesses above a certain size
3. Performance
● Accounting information is summarized to produce financial statements which provide an overview of
the financial activities of a business during a period as well as information about its financial position
on a specific date.
 ○ Financial Statements help owners in assessing the profitability, liquidity and general financial
health of their business.
4. Planning and Control
● Accounting helps organizations to plan their finances by developing budgets and forecasts.
● This process helps organizations in planning their finances ahead and controlling any deviations from
the budgets. This ensures the efficient operation of the business
5. Decision
● Accounting provides a basis for decisions by internal and external users.

Users of Accounting
● Internal Users - People within the business
○ Owners - Is interested in making a return on his investment, having taken the risk to make the
investment in the first place.
○ Employees are interested in:
■ Job Security
■ Scope for promotion/Upward mobility
■ Wages and salaries negotiations
■ Retirement benefits
○ Managers
■ They need information about the firm’s activity
■ Exercise stewardship over the business’ operations
■ Plan, budget, monitor operations and make business decisions
■ Have the responsibility of and are interested in ensuring that the owner makes a return on his
investment
● External Users - People outside the business
○ Tax Authorities - To determine an enterprise’s tax liabilities, tax authorities need information. In order
to compare the information on tax returns with the supporting accounting records, tax authorities
occasionally audit the returns filed by firms. The accounting records of suppliers and customers are
also cross-checked by tax authorities to spot suspected tax evasion.
○ Public - The public is impacted by businesses in a number of different ways. For instance,
businesses may have a significant positive impact on the community’s economy through their
employment of locals and the use of their suppliers. Financial statements can help the public by
informing them of recent changes and trends that have affected the enterprise’s success and the
scope of its activities.
○ Customers - Customers are curious about an organisation’s future, especially if they depend on it or
have a long-standing relationship with it. Accounting information increases or decreases a firm’s
goodwill amongst its customers.
○ Auditors - Auditors examine financial statements and underlying accounting records to form an audit
opinion. Investors and other interested parties rely on external auditors’ independent assessment of
the correctness of financial records
○ Financial Analysts and Advisors
■ Are interested in the operating performance of a business
■ Their aim is to identify investment opportunities on behalf of their clients.
○ Regulatory Bodies
■ Include the Stock Exchange Commission and the Financial Services Commission.
■ Are interested in ensuring compliance with its reporting requirements and Generally Accepted
Accounting Principles (GAAPs)
 ■ Eg. Use of recommended standards, audited financial statements.
○ Government
■ Collects taxes as a source of revenue, used to run the country
■ Is interested in assessing the published financial statements of a business.
■ Assesses whether or not the business is complying with tax regulations and are paying the
correct amount of taxes.
■ They are also interested in the allocation of resources
○ Lenders
■ Include banks, building societies and other lending institutions
■ Are interested in the creditworthiness of the business to help decide whether or not to grant
loans
○ Creditors/Suppliers - In order to decide whether to prolong, sustain, or restrict the flow of credit to a
specific firm, short and long term creditors need to know if the amount owed to them will be paid
when due. To ascertain if their principal amounts and interest accrued will be paid when due
■ Solvency – ability to pay debts when they fall due
■ Are also interested in the creditworthiness of the business.
○ Investors/Shareholders
■ Would have invested by purchasing shares in the business
■ Are interested in assessing investment risk and making a return on their investment in the form
of dividends.

Accounting Equation
Assets = Capital + Liabilities

An asset refers to an item which is owned by the business which has value and is available to provide a future
benefit. It is anything that the business owns.
Examples:
● Cash
● Bank
● Stock/ Inventory
● Furniture
● Debtors/Accounts receivable – a person or firm which owes money to the business for goods sold on
credit.
● Buildings’
● Fixtures
● Equipment
● Machinery
A liability is anything that a business owes to a third party, usually a sum of money, which is expected to be
paid/repaid in the future.
Examples:
● Loans
● Bank overdraft:- Where the business, with the permission of the bank, is allowed to withdraw more money
than it has in its account
● Creditors/Account Payable - a person or company to whom/which money is owed, usually for goods
bought on credit.
● Mortgage - loan on building

Capital is anything that has been put into the business by the owner/proprietor. This can be by money or other
assets invested into the business.

ALSO KNOWN AS OWNER’S EQUITY OR NET WORTH.

When liabilities and capital increases, assets also increase

Eg. If the owner invests $10 in the business(Capital), the business will have $10 in cash(Asset)
If the business gets a loan of $50(Liability), the business will have $50 in cash(Asset)

Likewise, if liabilities and capital decrease, then assets will also decrease

Double Entry
Double entry is the process of showing the effect that a financial transaction has on the two accounts affected.
It is the process of showing the two-fold effect of a business transaction.
● Each business transaction affects two accounts.
● One account must be debited and the other must be credited
● The debit side of an account is the left hand side
● The credit side of an account is the right hand side.
● An account must be opened for each asset, each liability and for capital.
Balance c/d is at the last day of the month
Balance b/d is at the first day of the next month

Eg. Bal c/d would be at 30 November, 2023

Bal b/d would be at 1 December, 2023

The bal b/d is used on the Trial balance

 ● When assets increase, they are debited and when they decrease, they are credited
● When liabilities increase, they are credited and when they decrease, they are debited
● When capital increases, it is credited, when it decreases, it is debited.
● Expenses are debited when they increase and crebited when they decrease
● Revenues are credited when they increase and debited when they decrease
● Drawings is when the owner takes money from the business for personal use, you would debit drawings
and credit Cash(Or whatever asset they are taking). You would not debit Capital

● Stock accounts are maintained to show the different movements of stock:

● It can be bought
● It can be sold
● It can be returned to the business by customers
● It can be returned by the business to suppliers

1. PURCHASES ACCOUNT
This account only records the purchase of goods that were bought for resale.
Eg. Bought goods by cash

The double entry is:

Debit - Purchases a/c
Credit - Cash a/c
2. SALES ACCOUNT
This account records the sale of those goods which were previously bought for resale.
Eg. Sold goods for cheque

The double entry is:

Debit - Bank a/c
Credit - Sales a/c

3. RETURNS INWARDS ACCOUNT

This account records the return of goods by debtors.
Eg. Debtor-J. Lyn returned goods to us

The double entry is:

Debit Returns Inwards a/c
Credit Debtor- J. Lyn a/c

4. RETURNS OUTWARDS ACCOUNT

This account records the return of goods by the business to creditors.
Eg. We returned goods to M. Nyle

The double entry is:

Debit Creditor – M. Nyle a/c
Credit Returns Outwards a/c
DO NOT
● Open an account called “Stock a/c” or “Goods a/c”
● Record the purchase of any other asset eg. Motor vehicle in the Purchases account
● Record the sale of any other asset eg. Furniture in the Sales account
● Record the return of any other asset in the Returns Inwards or the Returns Outwards account.

DOUBLE ENTRY + TRIAL BALANCE EXAMPLE

Ignore the Bank account in the second image
Note: The totals on each side of the double entry should always be on the same level

Classification of accounts
Personal Account
Natural Persons - These are accounts having the name of people(Humans beings)
Eg. D. Bury, J. Buchanan
Artificial or Legal Persons - Considered a person in the eyes of the law
Eg. Public and Private Limited Companies, Firms, Co-operatives
Representative person - These accounts represent a person
Eg. Capital, Debtors

Bank account is a personal account

Impersonal Account
Any account that is not considered personal
Real Account
Properties and Assets
Physical Assets - Furniture, machinery, buildings, Cash
Non Physical Assets - Copyright, Trademark, Patent, Goodwill

Nominal Account - Accounts that relate to income, expenses, profits and losses
Eg.
Income - Commission Received, Interest received, discount received, etc
Expense - Salaries, Rent paid, etc
Profit - Profit on sale of asset, etc
Loss - Loss on sale of asset, etc

Purchases and Sales are Nominal accounts

Note: The income statement only includes nominal accounts and the balance sheet consists of personal and real
accounts

Income Statement
An income statement, also known as a profit and loss statement, is a financial report that shows a company's
revenues, expenses, and profits over a specific period, typically quarterly or annually. It provides a
comprehensive overview of a company's financial performance, indicating whether it has made a profit or
incurred a loss during the stated period.

The purpose of the Income Statement is to determine the gross profit and the net profit of a business.
Gross Profit is the profit made from buying and selling of goods/services before expenses are deducted.
Gross Profit = (Net) Sales - Cost of Goods Sold
Net Profit is the final profit of a business after deducting all expenses.
Net Profit = Gross Profit - Total Expenses

INCOME STATEMENT FORMAT(3 Column Method)

Returns inwards shoul be 30

Income Statement Format(2 column method)

Closing Inventory/Stock - The stock that you have at the end of the year
Revenues - The money received from business operations
Eg. Commission Received/Revenue, Discount Received, Rent Received/Revenue, Interest Received
Expenses - They are payments needed to run a business
Eg. Rent, Utilities, Carriage Outwards, Insurance, Stationery, Wages, Salaries, Maintenance, transportation,
interest paid, advertising, discount allowed, Commission paid, etc

Do not mix up Commission Received and Commission paid

Returns Inwards - Refers to goods returned by others to the business

Returns Outwards - Refers to goods that the business returns to other outside the business
Carriage Inwards - This is transportation cost to bring the goods purchases to the business place, It increases
the cost of the purchases
Carriage Outwards - This is the cost of transporting goods to the customers. Same as delivery expenses

Balance Sheet/Statement of Financial Position

Is prepared to show the value of assets owned by the business, the liabilities owed and the net worth (capital) of
the owner.

FIXED ASSETS/NON-CURRENT ASSETS

These are long term assets that are bought to be used in the business NOT for resale.
Eg. Premises, equipment, motor vehicles.

CURRENT ASSETS
These are assets whose values change regularly and are expected to be on the balance sheet for at least one
year.

Eg. Cash at bank, cash in hand, stock(inventory),

Accounts receivable(debtors).

LONG TERM/ Non- Current LIABILITIES

These are debts owed by the business which will be repaid over more than one accounting period.
Eg. Mortgages, long term loans

CURRENT LIABILITIES
These are debts owed by the business which must be paid within one year of the balance sheet date.
They are short term debts.

Eg. Accounts payable (creditors), bank overdraft, loan (under one year).

Balance Sheet Format

The balance sheet should always be done in the order of permanence, shown above
Accounts Receivable - Debtors
Accounts Payable - Creditors