Form 3 Mathematics – ACCOUNTS

Accounts is a place in a ledger where all the transactions are relating to a particular asset, liabilities and capital, expenses,or revenue items were recorded. 

Accounts is a wider concept with identifying measuring and communicating economic information to permit informed judgments and decisions by users of the information. The part of accounting that is concerned with recording data is known as book keeping. 

Book keeping – is the art of recording financial business transactions on a set of books in terms of money or money‘s worth.

Why do we need to keep business records?

  •To determine whether the business is making profit or loss.

To determine financial strength of the business.

   •To enable the government to access reliable resources.

  •To enable different stake holders to make reliable decisions about the business i.e. investors, bankers, customers etc.

THE DOUBLE ENTRY SYSTEM

Before looking at the system of double entry let us look at the meaning of business transactions. Transactions means movements of money,goods or services from one part/person to another. For example: Selling goods in cash Tshs 10,000/= or selling goods worth Tshs 10,000 on credit to Aisha.

The double entry system – Is the process of recording these business transactions twice.

LEDGERS

A ledger is a main principle book of accounts in which business transactions are recorded in double entry system.

The ledger contains section called “Accounts” which contain detail of transactions for specific items each account bears a title and a number called folio i.e. page of the ledger.

Each account should be shown on a separate page. The double entry system divides each page into two values;
a. The left hand side is called the debit side
b. The right hand side is called the credit side.

The title of each account is written across the top of the account at the center so double entry system needs every debit entry should have corresponding credit entry. An example of a ledger;

                       NAME OF THE ACCOUNTS                                                            

Each side of account should have four column i.e. date, particulars, folio and amount.

Use of columns;

i)              Date column
For writing year, month and date.

ii)            Particulars
For short descriptions of the transactions

iii)          Folio column
For pages of reference

iv)          Amount column
For writing amount of money

Worked examples on how to record transactions in double entry system;

1. Juma starts business with Tshs 20,000/= in cash on 1^st January 2006. The transaction needs to debit cash account and credit capital account as follows.

  Dr                                                    CASH ACCOUNT                                                       Cr

  Dr                                               Capital account                                                     Cr

2. John started a business on 1^st Jan 2000 with capital at Tshs 5,000,000 in cash

January

2)            2 purchased goods and paid in cash T.shs. …………              1,000,000/=

3)         3  Brought goods for cash. …………………                              500,000/=

5     paid wages in cash ……………                                       50,000/=

7     sold goods in cash ……………                                        300,000/=

8     brought goods in cash ……….                                      800,000/=

9     received loan from C.R.D.B…………..                             70,000/=

12   bought parking materials in cash……..                         20,000/=

28   paid transport charges ………                                       30,000/=

28   drew cash for burial Tshs………..                                   10,000/=
Enter the above transaction in the ledger and complete the double entry

                                               Solution

     

EXERCISE

1. Mark commenced business on 1^st June 2001 with capital Tshs. 1,000,000.

  June 2 bought for cash………                                  500,000/=

          2  paid transport charges…………..                   50,000/=

          3  bought parking charges…………..                  10,000/=

          4   sold goods for cash ………….                      300,000/=

          5    sold goods for cash……………                     100,000/=

          6   purchased goods and paid cash…              180,000/=

          8  paid wages …….                                        38,000/=

        10   cash sales……                                          200,000/=

        12   cash purchases………….                             180,000/=

        15 cash sales to date ………..                           250,000/=

        20    paid rent ………….                                     50,000/=

Enter the above transactions in the cash account complete the double entry balance the accounts at the end of the month and extract a trial balance

 

      

TRIAL BALANCE AT THE END OF THE MONTH 30^TH JUNE 2001

FIRMS NAME

           DR              Trading account for the year ended        CR

PROFIT AND LOSS ACCOUNT

This is an account prepared in order to ascertain the net profit and loss by the business.  All expenses are debited to this account while gains or profits are credited to this account and debited with all incurred expenses.

Note

If the business has made profit it increases the capital and if it has suffered loss it reduces the capital.

It’s lay out;

FIRM’S NAME

         DR      PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED       CR

                          xxx 

Gross profit b/d from trading account         xxx

Other gains [income]                                xxx

                                                                           xxx

Note

The excess of expenses over incomes is formed as net profit.

Example 

1. From the following trail balance you are required to prepare a trading profit and loss account. For the year ended 30^th June 2006 B Samanga.

                                 Trial balance as at 30^th June 2006

Note

Closing stock was valued at Tshs 300. B Samanga and profit account.

  DR                         TRADING ACCOUNT B SAMANGA AS AT 30^TH JUNE 2006             CR

       BALANCE SHEET FOR THE YEAR ENDED 30^TH JUNE 2006