BOOK KEEPING AND ACCOUNTS
Definition: - Book Keeping is the process of recording and classifying business financial transactions.
Is the process of maintaining the records of a financial activity.
The objectives in book keeping is to create usage summary of financial transactions which provides a snap-shot of the business financial stability.
Accounting is the process of recording, summarizing, and interpreting a body of financial data.
Branches of accounting
- accounting is classified in five broad branches
i) Financial Accounting:
Refers to accounting for revenues, expenses, assets and liabilities.
It involves the basic accounting processes of recording, classifying and summarizing transactions.
ii) Cost Accounting
Is the branch of accounting dealing with the recording, classification, allocation and reporting of current and prospective cost.
iii) Managerial accounting
Is the branch of accounting designed to provide information to various management levels in the operation for the purpose of enhancing controls.
iv) Tax Accounting
Is the branch of accounting relating to preparation of filing of Tax with government agencies.
v) Auditing accounting
Is the branch of accounting involved in reviewing and evaluating documents, records and control systems.
Auditing may be external or internal.
Recording business transactions
In order to record business transactions, we need to know the transactions involved, double entry booking.
The principle of double entry booking is based upon every transaction having two aspects or two parts.
This is done by setting up various accounts and making debits and credits entries to those accounts.
The steps are:
(i) Decide which accounts are affected
(ii) Decide whether the entries to those accounts are debit or credit.
The types of accounts.
1. Asset Account
These are property acquired an organization or company.
Characteristics of assets.
(i) The probable future benefit involves a capacity slightly or with a combination with other assets in the case of profit oriented enterprises to contribute directly or indirectly to future net cash flows and in the case of non-profit making organizations to prevent services.
(ii) The entity can control access to the benefit.
(iii) The transaction of event giving rights to the entities right to all control of the benefit as already occurred.
Assets are classified into:-
i) Fixed assets
Also referred to as property, plant and equipment (PPE) or tangible assets.
There are purchased for continued for long term use in earning profit in a business.
These include plants, building, machinery, furniture, tools and certain wasting resources e.g. timberland and minerals.
They are written off against profits over the unanticipated life by charging depreciation expenses with exception of plant.
Intangible assets lack visible substance and usually hard to evaluate. They include pattern, copyright, goodwill, trademarks, trade names etc.
ii) Current Assets
Current assets are cash and other assets ready to be converted into cash, sold or consumed either in a year or in the operating site.
These assets are continually termed over in the course of a business during normal business activity.
Current assets include
Cash or cash equivalent.
It is the most cash asset which include currency, deposit accounts and negotiable instruments like money order, cheques and bank accounts.
Ø Short time investment
Ø Receivables (debtors)
Ø Inventory (debtors)
Ø Prepaid expenses
A liability is an obligation of an entity arising from past transactions or events, the settlement which will results in the use of assets, provisions of services or yielding of other economic benefit in the future.
Liabilities are categorized into two
i. Current Liabilities
These liabilities are reasonably expected to be liquidated within a year.
.They usually include payables, such as outstanding wages, taxes, accounts payables[creditors].Portion of long term loans to be paid this year, short term obligations.
ii. Long term liabilities
These liabilities are reasonably expected not to be liquidated within the year.
Include long term ponds, log term, payable leases, pension obligations and long term products warranties.
Liabilities of uncertain value or time are called provisions (contingent) liabilities awaiting an outcome of events for example insurance or court case.
3. Capital Account
This is the owner’s contribution usually at the start of a business.
It is also called share holders equity, share holders funds, shareholders capital employed.
4. Revenue Account
Is income a company receives its normal business activities normal from the sale of services and goods.
Some companies also receives venue from interest, dividends or loyalties paid to them by other companies
Profit or net income generally mean total revenue minus total expence in a given period.
5. Expenses account
Expenses are the cost of goods and services used to in the process of obtaining revenues e.g wages, rent, wear and tear (depreciation) adverticing and marketing expence and purchase of goods for resale.
Assets = capital + Liabilities
A = C+L
[IMG]file:///C:/Users/Atatork/AppData/Local/Temp/msohtmlclip1/01/clip_image001.gif[/IMG]Trading and profit loss Account
Opening stock xx
Cost of goods for sale xx
Less closing stock xx
Cost of sales xxx
Gross profit xx
Net profit xx
1. A = C + C A = C + L
500K = 200 C = A - L
500K-L = C + L L = A - C
500K+200K = C
300K = C
2. 500K = 300 + L
500K-C = L
500K-300K = L
200K = L
ACCOUNTING CONCEPTS AND CONVENTIONS
The body of doctrines commonly associated with the theory and procedure on accounting, serving as an explanation of current practices.
The rules governing formation of accounting axious and the principles that have risen from common experiences historical precedents, statements by individuals and professional bodies and regulation of government agencies.
These are postulates that is necessary assumptions or conditions upon which accounting is based.
These are customs or traditions used a guide in the preparation of accounting statements.
(1) Business entity concept.
The business entity concept provides the accounting of a business of an organization be kept separate from the personal affairs of its or any other business.
This means that the owner of a business should not place any personal asset on the balance sheet.
The balance sheet of the business of the business should reflect the financial position of the business alone.
Any personal expenditures of the owner are charged to the owner and are not allowed to affect the operating results of the business.
(2) the going concern concept (continuing concern concept)
this concept assumes that the business will continue to operate unless it is known that such is not the case.
(3) Periodic reporting
The time period concept provides that accounting takes place of a specific time period known as physical period.
This physical periods are of equal length and are used in measuring the progress of a business.
(4) monetary evaluation concept
business transactions are measured in monetary (money terms)
for our case in Kenya (Kenya shillings)
The consistency principle requires accountants to apply the same methods and procedures from period to period.
When they change a method from one period to another they must explain the change clearly on financial statements.
The readers of financial statements have the right to assume that consistency have been applied if there is no statement to the contrary.
The consistency principle prevents people from changing method from the sole purpose of manipulating figures on the financial statements.
2. materiality (Significant)
the materiality (Significant)
the materiality principle requires accounts to use generally accepted accounting principles (GAAP) except when to do so would be expensive difficult and where it makes it impossible if the rules are ignored.
3. conservatism (Prudence)
the principle provides that accounting for a business should be fair and reasonable.
Accountants are required in their work to make evaluations in their work and to select procedures.
Should do so in a way neither overstates nor understates the affairs of the business or the results of operations.
4. full disclosure
The principle states that any and all information that affects the full understanding of a company’s financial statements must be included in the financial statements.
The items might no affect the ledger directly.
This could be included in the form of a company notes.
Example of such items is
i. outstanding law shits
ii. tax disputes
iii. company take-over
5. cost benefit
The main aim of most business is to generate / make a profit
Profit = total revenue – total expenditure (expenses)
Whatever decisions that you make, the cost must be less than the revenue.
1. accrual basis
Accounting records or statements are based on accrual rather than cash basis.
Profit is therefore the difference between the revenue and the expenses incurred to achieve that revenue.
2. Substance over form
This is the legal position as opposed to possession we sometimes forget the legal and assume ownership for example mortgage, hire purchase and secured loans.
3. Revenue Realization / Recognition.
The Revenue recognition provides that Revenue be taken to account (recognized) at the time the transaction is completed.
This means recording Revenue when the bill for it is sent to the customer.
If it is a cash transaction, the Revenue is recorded when the sale is completed and the cash received.
4. The matching principle
States that each experience item related to revenue and must be recorded in the same account period as the Revenue held to run and if this not done, the financial records will not measure the results of the operations fairly.
5. Cost principle
The principle states the purchase must be at their cost price.
States that accounting will be recorded on the basis of objective evidence.
Objectives evidence means that different people looking at the evidence will arrive at the same values for the transactions.
That means the accounting entrance will not be based and personal opinions and feelings.
CAPITAL AND REVENUE EXPENDITURE
Capital expenditure is the amount used to acquire items of capital nature e.g. fixed assets and investment.
Revenue expenditure is amount used for routine activities of the business (Trading activities e.g. purchase of goods for resale, expenses of the business e.g. salaries and wages, electricity, rent etc.
Capital expenditure is non-routine expense.
Capital Receipt and Revenue Receipt.
Capital Receipt is amount received or proceeds from sale of capital item (Non-routine items e.g. sale of fixed assets or investments.
Revenue Receipt – is proceed of sales or income from normal business activities (trading activities usually from the sale of goods from the customer)
Source documents and books of original entry.
Source documents or underlying documents are documents which contain information to be recorded in the books of accounts.
These documents must always be present to support whatever transactions that have been made. They are sometimes called supportive document.
They also provide evidence of the financial transactions.
The first document is quotation.
A quotation is a document sent by suppliers giving the details of what they sell i.e.
iv. Price per unit etc.
Local Purchase Order
The second document is a local purchase order (L.P.O)
An order is a basic document initiating purchase of raw materials or finished goods for the business.
It is not a must that they are for resale
Once a suitable supplier has been established the purchasing offices or the buyer will place an order (L.P.O) to meet the business needs for
The L.P.O should be at least in duplicate indicating the
i. business name and address of the buyer
ii. details of the suppliers
vi. price per unit
vii. time and place of delivery
He will send you an advice note (done through email these days and done vice-versa.
3. an advice note
This is an advice not send by the supplier to advice receipt of order and indicating time and conditions of fulfillment.
It improves efficiency and the flow of good from the supplier to the buyer
From the advice note we have the delivery note.
4. delivery note (DN)
This is a document prepared by supplier (Seller) of goods to a company of the delivery of goods to the buyer.
It provides the transfer of goods (delivery) to the buyer who confirms / acknowledges receipt of the goods by signing of the delivery note.
The Delivery note gives details of
ii. No. of packages
iii. And nature of goods being delivered
The delivery is the source document for recording transaction in the stores books
5. Goods received note (GRN)
This is a document raised or prepared by the buyer of the goods received, inspected, approved and raise into stock.
The GRN details the
(iii) No. of packages
(iv) Description of good
(vi) Delivery note number.
6. Invoice (From the supplier)
Is a written demand for payment of goods purchased and sold on credit.
It is issued by the supplier into bracket (creditor) and sent to the customer (debtor)
An invoice will details
(i) date of issue
(ii) qualities and quantities
(iii) description, unit price and value of goods
(iv) Terms of the invoice i.e. credit period and trade discount if any.
(v) Net amount due on payable
An invoice is an important document which provides the source information such
(a) Credit sales during the period
(b) Credit purchases during the period
(c) Credit customers during the period
(d) Credit suppliers during the period.
Credit Note and Debit Note
This document is sent by the supplier to the buyer to correct an error of undercharge.
Sent to the buyer from the supplier used to correct an overcharge in an invoice or to certify the credit for the return of goods by the buyer the supplier.
Statement of Account
This is a document sent by one person to another periodically showing the amount due from one person to another.
We have two types of statements
(1) Statement of account sent by creditor to a debtor.
This is normally issued at the end of each month’s training.
i. It states the amount due at the beginning of the period.
ii. It includes sales and sales returns.
iii. Payments made by the end of the period
iv. The amount due at the end.
The statement provides information for reconciling the accounts of supplier for the customer in each other’s book.
Serves as a reminder to the debtor to settle an account which is due or overdue.
This is a statement issued periodically, monthly or quarterly, half year etc by a bank of a customer to inform of the financial status.
The customers account in his banker books
The customer used the bank statement to agree his records (Bank account in his own books with the bank statement) in a process called Bank Reconciliation.
This is a written acknowledgement of the money receipt in settlement of a debt issued by the supplier to his customer.
It is written evidence that money has been deposited into a bank account.
This is a written order from a bank account holder addressed to his bank to pay a certain person named on the order or its bearer.
Petty cash voucher
Used by a person handling petty cash in a firm to make petty cash payments.
It is a voucher stating the nature of
(iii) authority for payment
petty cash vouchers are the source documents for recording petty cash document in the petty cash book.
BOOK OF ORIGINAL ENTRY
A book of original entry where transaction are recorded as they occur on a daily and in a chronological order before they are deposited into a ledger using the principle of double entry system.
They are also known as books of price entry, subsidiary or minor to the ledger which is the main book of accounts.
Information from source documents is first recorded into the book of originally entry before posted to the ledger.
Information which is posted in the ledger is in summary from and in more details in the books of original entry. Let us look at this book.
CASH BOOK (CB)
Is a book of original entry for cash