Topic 2: Basic Principles of Book-Keeping - Book Keeping Notes Form One New Syllabus

Topic 2: Basic Principles of Book-Keeping – Book Keeping Notes Form One New Syllabus

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Book-Keeping Form One Notes New Syllabus, Topic 7: Basic Financial Statements - Book Keeping Notes Form One New Syllabus, Trial Balance, Meaning of Books of Prime Entry: Books of prime entry: Are the books in which transactions are recorded before being posted to their respective ledgers. Books of prime entry: Are the books of account that are used to record any transaction for the first time. When a particular transaction has occurred for the first time in a business should be entered into the primary books known as books of prime entry/books of original entry/ subsidiary books/daily books/ journals before being posted to their respective ledger accounts. The word Journal is adopted from a French word which means “daily recording” THE TYPES OF BOOKS OF PRIME ENTRY: There six (06) types of books prime entry which are; Purchases day book (purchases journal) Sales day book (sales journal) Purchases returns day book (Returns outwards journal) Sales returns day book (Returns inwards journal) Cash book Journal proper (General journal) USE OF BOOKS OF PRIME ENTRY: The following are brief descriptions and purpose of each of the book of prime entry: Purchases day book (purchases journal) this journal is used to record details of goods bought by the business with the promise that payment will be made in the future. Purchase returns daybook (purchase returns journal): the purchase returns daybook is used to record transactions related to purchase returns, or returns of goods to suppliers who supplied goods on credit (creditors). Sales day book (sales journal): is the journal used to record details of goods sold on credit with the promise that payment will be received in the future. Sales returns daybook (sales returns journal): this book is used to record details of transactions related to sales returns, or returns of goods from customers to whom goods were sold on credit (debtors). Cash book: is the book used to record transactions related to receipt and payment of cash as well money placed into the bank (bank deposits) and those taken from the bank (bank withdrawals). Cash book is divided into different categories which are Single columns cash book. Two columns’ cash book. Three columns’ cash book. Petty cash book General journal (journal proper) this book of prime entry is used to record transactions related to other items, which according to their nature are not recorded in any other books of prime entry. SOURCE DOCUMENTS/ACCOUNTING INFORMATION: These are documents from which transactions to be recorded in the books of prime entry are extracted. They are documents used in the books of prime entry. These documents are used in the books of prime entry. Source documents can be summarized as follows INVOICE This is a document issued when goods are sold or bought on credit. Sales invoice is issued when goods are sold on credit whereas purchases invoice is issued when credit purchases are made. Invoices are used in preparation of sales day book and purchases day book. DEBIT NOTE is the document prepared and sent by the seller to the buyer to adjust undercharges on the invoice. This document is used by the buyer in preparation of Purchases returns day book/ Returns outwards journal CREDIT NOTE is the document sent by the seller to the buyer to correct an overcharge on an invoice. This document is used in preparation of sales returns day book/ returns inwards journal. CHEQUE: This is a written order by a customer to his/her bank to pay a specified sum of money to the named person at a specific period of time. Is the document used by the drawer to withdraw cash from his or her account. This document is used in preparation of a cash book. PAY-IN-SLIP: This is a bank deposit form filled in by depositor and stamped by a teller as evidence of accepting the deposit. WITHDRAW SLIP: This is a document filled by a person withdrawing money from the bank upon being accepted by the bank teller. CASH RECEIPT/ CASH RECEIPT VOUCHER: is the document that acts as proof that cash has been received. Money could be received from customer for cash sale of goods or goods, or cash received when a credit customer settles his or her debt with the business. PAYMENT VOUCHER: is the document that presents evidence that money has been paid. Money might be paid to the supplier for cash purchase of goods or service or settlement of account payable for goods previously bought on credit. PETTY CASH VOUCHER: is the document used by a petty cashier as evidence for making small payment from petty cash fund. This document is used in preparation of Petty Cash Book. STATEMENT OF ACCOUNT: is the document sent by the seller to the buyer at the end of every period (usually each month) acting as a reminder to the buyer to pay the outstanding balance. JOURNAL VOUCHER: is the document that provide evidence of authorization for all transaction other than those which are evidenced by the previously mentioned source documents. This document is used in the preparation of General journal or Journal proper. PREPARATION OF BOOKS OF PRIME ENTRY: As per the accounting cycle or process introduced in chapter one, once transactions are identified they are entered in the books of prime entry, followed by posting the entries to relevant ledgers account. In section, you are going to learn the six special journal and how information from source documents is entered followed by the general journal. CASH BOOK: This is a book where receipts or payments are recorded. This book is both a ledger and a book of prime entry. Receipts and payments entered in on debit side and credit side respectively. Receipt/cheque: are documents which are used to obtain information to prepare Cash book. Moreover, an account has four columns in both Dr and Cr sides of account namely: The format of a Cash account is illustrated below; DR CASH BOOK CR Date Particulars Folio Amount Date Particulars Folio Amount Date column: Is the column used to record the date at which the given transaction took place. Particulars/narration/details: Is the column used to record a short description of the transactions that took place. Folio column: is the column used to record the reference page in books of account. Amount column: is the column used to record the amount of money that used in purchasing or selling the goods. Example 1: Kafuku commenced business on 1st January 2022 with Capital in cash TZS 200,000. Her transactions during the month were as follows: January 2. Purchased goods for cash 40,000 3. Sold goods for cash 10,000 3. Paid rent for cash 60,000 4. Cash purchases 16,000 6. Paid postage charger 1,000 13. Commission received for cash 50,000 17. Paid salaries for cash 9,600 19. Paid adverting expenses for cash 7,000 24. Bought furniture for cash 10,000 28. Paid wages for cash 16,000 Required: Draw up a cash book, balance it and bring down the balance to the following months DR. CASH BOOK CR. Date Particulars Folio Amount Date Particulars Folio Amount 2022 2022 Jan. 1 Capital 2 200,000 Jan. 2 Purchases 3 40,000 3 Sales 4 10,000 3 Rent 5 60,000 13 Commission 7 50,000 4 Purchases 3 16,000 Received 6 Postage 6 1,000 Charges 17 Salaries 8 9,600 19 Advertising 9 7,000 Expenses 24 Furniture 10 10,000 28 Wages 11 16,000 31 Balance c/d 100,400 260,000 260,000 Feb. 1 Balance b/d 100,400 Example 2: Moshi & his Son Islam started business with a capital of Tsh 60000, on 1st September 2022. During the month the following transaction took place: – Sept 2, Purchased of goods for cash Tsh 3000 Sept 4, Paid carriage charge Cash Tsh 2000 Sept 6, Paid Transport charge Cash Tsh 4000 Sept 8, Bought Motor Vehicle for cash Tsh55000 Sept 10, Cash Sales Tsh 44000 Sept 12, Paid Rent for Cash Tsh1500 Sept 15, Paid commission charge Tsh 1000 Required: Records the above transaction into Cash book account and bring down the balance as on 30th September 2022. DR CASH ACCOUNT CR SALES DAY BOOK Sales day book is in which sales made on credit are recorded. It is a book of original entry that contains the list of credit sales made in a business. It is also known as sales journal Sales invoice: is a document prepared and issued by a seller to the buyer containing information about goods sold on credit. This information includes name, quantity and prices of the products sold. Format of the sales day book: The sales day book has six columns which are: Date: this column is used to write the date, month, and the year of the transaction. Generally, it shows when the transaction took place. Particulars: this column gives a short description of the entry for the transaction recorded. Folio: this column records page of reference in books of accounts.it indicates in what ledger and on what page the transaction has been posted. Invoice number: this column records the details of the invoice number which identify the invoice received when a particular transaction was made. Invoice details: this column records the details of the invoice involved in the transaction. Invoice total: this column records the total amount of money being transacted. SALES DAY BOOK Date Particulars Folio Invoice Details Invoice Total Example 1. Co-operative shop made the following purchases during the month of August, 2021. August 1. Credit sales to Mwangomo 100 bags of Rice @ 550/= 50 bags of sugar @ 750/= August 5. Sold to Dons and Sons Ltd. 10 boxes of cooking fat @ 320/= 12 pairs of sandals @ 150/= August 10. Credit sales to Shilabela Traders. 20 pairs of bed sheets @ 170 50 shirts @ 350/= August 15. Sold to Michael and Sons Ltd 2 cartons of Malaika soap @ 500/= Required: Draw up the Sales journal for the months. SALES DAY BOOK/SALES JOURNAL Example 2. On 1stDecember 2022 Mr. Kasoma started the business and the Transaction during the year was as follows: Dec 1stSold the following goods to Kimatah Gilagiza companies 5 Crown colour each Tshs 7,000 11 Cement each Tshs 22,000 4 Cartons of Nyati cola each Tshs 11,000 10th Dec 2022. Said Mrisho Kanyegeli supplier of Mwamgongo village received the following item sold to him. 6 Boxes of cigarette @ 5000 9 Carton of shoes shs 4500 per carton 10 Boxes of Tanga milk shs 9000 @ 16th Dec 2022, Sold the following items to Mwimbe General Supplier 15 Boxes of shoes @ Shs 12,000 60 Crates of Coca-Cola @ 23,00 10 Breads @ 850 and 6 cakes @ 2,500. Required: Enter the above transactions in the Sales Journal Answer Mr. KASOMA SALES JOURNAL PURCHASES DAY BOOK/ PURCHASES JOURNALS This is a book of original entry where credit purchases are recorded before being posted to the ledger. It contains amount of goods are bought on credit. Purchases invoice: is the document that used in preparation of purchases day book. Note: Cash Purchases are not entered in the purchases journal. Format of the purchases journal: The sales day book has six columns which are: Date: this column is used to write the date, month, and the year of the transaction. Generally, it shows when the transaction took place. Particulars: this column gives a short description of the entry for the transaction recorded. Folio: this column records page of reference in books of accounts.it indicates in what ledger and on what page the transaction has been posted. Invoice number: this column records the details of the invoice number which identify the invoice received when a particular transaction was made. Invoice details: this column records the details of the invoice involved in the transaction. Invoice total: this column records the total amount of money being transacted. PURCHASES DAY BOOK, Application of the Double Entry System, The accounting equation Accounting equation is the equation that shows resources owned by a business against those due to others (liabilities). Accounting equation is the equation that show the relationship between assets, capital and liabilities. Assets: are resources that an enterprise controls and uses to conduct its business. Capital or owner equity: is the amount of resources contributed by the owner. Liabilities: are resources in the business supplied by non-owners of the business. They are obligations that a business has to settle by means of transferring resources to other persons or business. At a point when the business has just started, the total value of assets equals the value of capital: When a business has resources supplied by the owner of the business and others who do not own the business, the accounting equation changes as follows: The equation can also be changed or written in words as follows: Example 1. Complete gaps in the following table. S/n Assets TZS Liabilities TZS Capital TZS a) 5000,000 720,000 ? b) 1,120,000 196,000 ? c) 6,720,000 ? 5,000,000 d) 7840,000 ? 6,580,000 e) ? 4,660,000 1,580,000 f) 2,520,000 7,680,00 ? Solution: From the accounting equation which state that Question 1; Complete the following table STATEMENT OF AFFAIRS: is the statement which shows the list of all assets and liabilities (together with their financial value) at a particular date to enable one calculate value of capital. STATEMENT OF AFFAIRS: Is the statement shows the figures of assets and liabilities to determine the amount of capital. This approach is specifically helpful in a situation where one knows the assets and liabilities of the business and wants to calculate the figure if capital. The effects of revenue and expenses on the equity element of accounting can lead to an extended accounting equation which appears as follows Arithmetically, this equation can be re-arranged. Foe ease of understanding the double entry principle, the re-arrangement of the extended accounting equation is as follows: FORMAT OF A STATEMENT OF AFFAIRS: Statement of Affairs as at (date, Month, Year) Example 1. Kyela Business Enterprise has invested in farming activities. They do not keep complete books of accounts. However, the following information is available as at 31st December 2020. Prepare statement of affairs to calculate amount of capital. Example 2. Mr. Salim has the following transaction took place during the year 2023 December 31st. you are required to calculate capital and prepare the initial statement of the affairs. CONCEPT OF DOUBLE ENTRY: The accounting equation is the foundation of the concept of double entry. Double entry deals with the recording and posting of business transactions in the books of accounts. Business transactions are posted to ledger accounts following principle of double entry. Meaning of double entry system: This is the principle which calls for recording each business transactions twice in the books of accounts. The principle of double entry states that, every business transaction should be recorded twice, that is, every debit entry must have its corresponding credit entry of the same amount. Therefore, one side of the account receives while the other side gives depending on the nature of transaction. Double entry is the most commonly used system of book keeping based on the principle that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice. IMPORTANCE OF DOUBLE ENTRY:, Basic Principles of Book-Keeping, Introduction to Book-Keeping
   

Topic 2: Basic Principles of Book-Keeping – Book Keeping Notes Form One New Syllabus

Introduction

The basic principles of book keeping provide students with the necessary skills and knowledge of maintaining appropriate financial records, complying with regulations and making informed decision.

Basic Accounting Concepts and Principles

Accounting concepts

These are guidelines that are concerned with recording of transactions and preparation of financial statements. lay down the foundation for accounting principles.

Accounting principles

Are the rules of action or conduct which are generally accepted and adopted by accountants worldwide in theory and procedure of recording accounting transactions.

They are basic guidelines that provide standards for specific accounting practices and procedures. They assure uniformity and understandability.

Book keeping Principles

Refers to the various frameworks which guide the practice of accounting.

Regulatory framework governing financial accounting practices

1. FASB (financial Accounting, Standards Board): is the organization responsible for setting accounting standards in the United States.

2. (GAAP) General Accepted Accounting Principles

refers to a common set of accounting rules, standards, and procedures used for financial reporting in a specific country, mainly in the United States.

3. (IFRS) International Financial Reporting Standards

these are sets of global accounting rules that guide how companies prepare and present their financial statements.

4. (IAS) International Accounting Standards

are set of rules and guidelines for financial reporting that aim to make company accounts understandable, comparable and transparent across different countries.

5. (NBAA) National Board of Accountants and Auditors

is the board responsible for reviewing and checking the quality of works done by accountants if they meet all the established quality standards. This board is found in Tanzania Only.

  • NBAA also involve in authorize and approval professional accountants in the country though attend several examination The highest level of qualification is known as Certified Public Accountant (CPA).

The following are the most important accounting concepts that an accountant must know and follow while recording business transactions and preparing the financial statements;

1. MONETARY UNIT CONCEPT/ MONEY MEASUEREMNT CONCEPT

According to this concept, a business transaction will always be recorded and can be expressed in terms of money. most countries would require that financial statements are presented in their local currency, example Tanzanian Shillings (TZS).

  • This principle implies that only measurable and quantifiable economic events should be recognized and reported in the financial statements.
  • Items that cannot be quantified in monetary in monetary terms are not recorded in financial statements
  • It ensures that financial information is recorded, measured, and reported consistently, allowing for meaningful analysis and decision-making.

2. BUSINESS ENTITY CONCEPT

According to this concept, the owner or proprietor of a business is always separated and distinct from the business or enterprise.

  • Eg. the business and the proprietor who own the business are regarded as two separate parties.
  • Therefore, the transactions between the owners and the business are also recorded. For example, when a person brings capital into the business or withdraws capital from business are recorded.
  • Amounts due from the business to the owners are shown as a liability from the business to the owners, i.e., capital contributed by the owners.
  • Personal assets and liabilities as well as income and expenses are not recognized in the business financial statements. The statement of financial position will only show business assets and liabilities.

3. MATCHING CONCEPT

This concept implies that revenues should be matched against expenses/costs in order to determine the profit or loss for the particular accounting period.

  • The principle aims to achieve a proper matching of expenses with the revenues earned during a specific period.

4. REALIZATION CONCEPT/REVENUE RECOGNITION CONCEPT

According to this concept revenue is recognized when a sale is made or an accountant only recognizes a profit when the goods are sold or services are rendered.

Revenue should be recognized when it both realized or realisable and earned. This occurs when the following criteria met:

  • Identification of the contract: there should be a legally enforceable agreement between the seller and the buyer, outlining the rights and obligations of both parties.
  • Delivery of goods or services: the seller has transferred control of the goods or services to the buyer.
  • Determination of the transaction price: it includes consideration received or expected to be received from the buyer in exchange for the goods or services.
  • Collectability probability: it is probable that the seller will collect the amount he or she is entitled to receive from the buyer.
  • It provides guidance on when to recognize revenue and how to measure
  • It ensures that revenue is reported accurately and in the appropriate

5. PERIODICITY CONCEPT/ TIME PERIOD CONCEPT

This concept state that the financial activities of a business should be divided into specific and meaningful time periods for reporting purposes.

  • Under this principle, the financial year is divided into shorter periods, such as months, quarters or years, depending on the reporting requirements and industry practices.
  • This concept helps to facilitate the analysis and comparison of financial information over different periods
  • It allows stakeholders to assess the business performance, identify trends, and make informed decisions based on up-to-date information.

6.  DUAL ASPECT CONCEPT/DUALITY CONCEPT

This basic concept in accounts which states that every transaction must be recorded twice. This is the basic concept in accounting.

  • According to this concept every business has two aspects namely; the receiving and giving aspect.
  • The business is represented by assets and liabilities but they are always opposite and equal, and each transaction that an entity enters into affects the financial records in two ways.
  • These two effects are equal and opposite and, as such, the following fundamental accounting equation will always be maintained.
  • The accounting equation is a fundamental expression of the fact that any point in time the assets of the entity will be equal to its liabilities plus its equity(capital).

Assets = Capital + Liabilities

7.  GOING CONCERN CONCEPT/CONTINUITY ASUMPTION

According to this concept, it is assumed that the business will continue to operate for the foreseeable future.

  • It means that the business will continue to operate or exist for the long period of There is no intention or necessity of closing down the business in near future.
  • The going concern principle is significant in assessing the financial health and viability of a business.
  • It allows stakeholders to make informed decisions based on the assumption that the enterprise will continue its operations in the foreseeable future.

8. HISTORICAL COST CONCEPT/COST CONCEPT

This concepts state that, assets should be recorded and reported at their original cost when acquired by an enterprise.

  • According to this concept, transactions are records in the books of accounts at the amount actually involved or incurred.
  • It reflects the actual resources expended by the enterprise at the time of acquisition in the financial position.
  • It avoids general estimates of an assets value and prevents manipulation of reported figures based on market fluctuations.
  • However, critics argue that the historical cost concept may not provide a relevant and accurate representation of an assets true value, particularly for long assets like property, plant, and equipment.

9. VERIFIABILITY CONCEPT

This concept requires that accounting data are subject to verification by any person in the future and the data are the proof or evidence of the specific transaction.

  • So, for the best interest of the business there must be some documentary evidence for each and every transaction of an enterprise for future reference and only then those data may be considered as reliable.

10.  PRUDENCE CONCEPT/CONSERVATISM PRINCIPLE

This concept states that an entity must not overestimate its revenues, assets and profits besides this it must not underestimate its liabilities, losses and expenses.

  • In other words, it is better to make mistakes on the side of understating assets and revenues or overstating liabilities and expenses rather than overstating assets and revenues or understating liabilities and expenses.
  • Prudence principle helps to ensure that financial statements are not too optimistic or
  • By recognizing potential losses or risks more quickly and being cautions in revenue
  • The principle aims to balance between caution and providing a true and fair view of an entity’s financial position and performance.

11.  ACCRUAL CONCEPT

This concept state that revenue is recognized when they are earned, and expenses are recognized when they are incurred. Regardless of when cash is received or paid. The key principles of accrual basis of accounting include:

(a) Revenue recognition:

Revenue is recognized when it is earned, meaning when goods are delivered, services are rendered or contractual obligations are fulfilled.it is recognized even if payment is not received at that time.

  • This principle ensure that revenue is matched with the period in which it is

(b)  Expenses recognition:

Expenses are recognized when they are incurred. Meaning when goods or services are received or consumed, regardless of when payment is made.

  • This principle ensures that expenses are matched with the related revenue or the period in which they contribute in generating revenue.

12.  MATERIALITY CONCEPT

Means that all important information that could influence the decisions of the user like investors, creditors or management should be included in the financial statements.

  • It allows accountants to focus on reporting information that is relevant and
  • If an item is material, it must be reported. If its immaterial (too small or insignificant) it can be ignored or grouped with other items.
  • This principle encourages someone to exercise professional judgement in determining material information that requires clear and transparent disclosure in the financial

13.  FULL DISCLOSURE PRINCIPLE

Suggests that, every financial statement should fully disclose all relevant information for all interested parties like investors, lenders, creditors and shareholders to see.

  • Full disclosure means that, there should be full, fair and adequate disclosure of accounting information.
  • Adequate means; sufficient set of information to be Fair indicates an equitable treatment of users.
  • Full refers to complete and detailed presentation of information.
  • This is important because shareholders would like to know profitability of the firm while the creditors would like to know the solvency of the business.

14.  CONSISTENCY PRINCIPLE

It states that an entity should not change its accounting methods frequent from one period to another.

  • state that once an accounting method has been chosen and applied, it should be consistently used for similar transactions and events is subsequent periods.
  • Consistency in accounting allows for better comparability of financial
  • Enable users to make meaningful comparisons and assessments of an entity financial performance and position over time.
  • It is important to note that the consistency principle does not mean that accounting methods cannot be changed or updated.
  • Changes should be made with careful consideration and with the aim of improving the relevance and reliability of financial information.

RELEVANCE OF ACCOUNTING CONCEPTS AND PRINCIPLES IN BOOK-KEEPING

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