S4: Financial Accounting

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• UNIT 1:GENERAL INTRODUCTION AND OVERVIEW OF ACCOUNTING

  

   Read the following case study and answer the given questions 
  using the knowledge acquired in entrepreneurship subject.

  Accounting is an essential function of any business entity. It gives the 
  framework to record all the business transactions and events that happen 
  during the working of the business entity. Accounting is the language 
  of business, with books of accounts being its script and debit-credit its 
  style, i.e., the way of expressing it.
  According to the American Accounting 
  Association, Accounting is the process of identifying, measuring, and 
  communicating information to permit judgment and decisions by the 
  users of accounts. According to the American Institute of Certified 
  Public Accountants, Accounting is the art of recording, classifying, and 
  summarizing in a significant manner and in terms of money, transactions, 
  and events, which are at least of a financial character and interpreting the 
  result thereof. 
  Accounting is an art as well as a science. Accounting is an art of 
  recording, classifying, and summarizing all business transactions. It is a 
  science as well as it follows certain guiding accounting principles and 
  standards. It records financial transactions only, which can be expressed 
  in terms of money. First, the transactions are recorded and then classified 
  and summarized to interpret the business’s financial performance and 
  position. One needs to keep in mind that Accounting and Accountancy 
  

  are two different concepts. 

  Experimenal version

  Accounting is the recording, classifying, and summarizing of business 
  transactions to ascertain the financial performance and position of the 
  business firm. On the other hand, Accountancy is the body of knowledge 
  based on principles for recording, classifying, and summarizing business 
  

  transactions to help in the decision-making function of management.

  1. Accounting gives the -------------- to record all the business 
  transactions.
  b) Framework
  c) Process
  d) Money 
  

  e) Classification

  2. Accounting is the art of recording, classifying, and summarizing in a 
  significant manner and in terms of money, transactions, and events 
  which are, in part at least of a financial character and interpreting 
  

  the result thereof. This accounting definition is given by:

  a) Institute of Certified Public Accountants of Rwanda
  b) American Accounting Association
  c) American Institutes of Certified Public Accountants
  d) International Financial Regulation System
  3. Accounting is called science because it follows certain guiding 
  -------------
  4. Accounting records only --------------------- transactions 
  

  5. Who are the users of accounting information?

  Experimenal version

  1.1 Meaning and Purpose of Accounting
  

  
  

   1.1.1 Meaning of accounting

  Accounting is defined as the process of identifying, recording, classifying and 
  summarizing economic data so as to come up with useful information to help 
  users make informed decisions. Many businesses carry out transactions. Some 
  of these transactions have a financial implication i.e. either cash is received or 
  paid out. Examples of these transactions include selling goods, buying goods, 
  paying employees and so many others.
  Accounting is involved with identifying these transactions measuring (attaching a 
  value) and reporting on these transactions. If a firm employs a new staff member 
  then this may not be an accounting transaction. However, when the firm pays 
  the employee salary, then this is related to accounting as cash involved. This has 
  an economic impact on the organization and will be recorded for accounting 
  purpose. A process is put in place to collect and record this information; it is 
  then classified and summarized so that it can be reported to the interested 
  parties.
  Accounting, as a preamble, could be termed the language of business. It is the 
  common media through which people of all walks can effectively communicate 
  

  business matters and understand one another equally. 

  Experimenal version
  

  It is the language accountants use to communicate i.e. record business 
  transactions and summarize results of business operations. Accounting is the art 
  of recording, classifying, and summarizing in a significant manner, and in terms 
  of money, transactions, and events of a financial character, and interpreting the 
  results thereof. It encompasses the recording of information of economic value 
  

  to a business. The information then forms the basis for judgment by the users.

  1.1.2 The objectives of accounting 
  

  Accounting has many objectives; including letting people and organizations 
  

  know: 
  

  – If they are making a profit or a loss;
  

  – What their business is worth;
  

  – What a transaction was worth to them;
  

  – How much cash they have;
  

  – How wealthy they are;
  

  – How much they are owed;
  

  – How much they owe to someone else;
  

  – Enough information so that they can keep a financial check on the 
  

  things they do.
  

  However, the primary objective of accounting is to provide information for 
  

  decision making. The information is usually financial, but can also be given in 
  

  volumes, for example the number of cars sold in a month by a car dealership 
  

  or the number of cows in a farmer’s herd herd (this kind of non-financial 
  

  information, however is more useful in management/managerial accounting than 
  

  it is in financial accounting). So, for example, if a business recorded what it 
  

  sold, to whom, the date it was sold, the price at which it was sold, and the date 
  

  it received payment from the customer, along with similar data concerning the 
  

  purchases it made, certain information could be produced summarizing what 
  

  had taken place. The profitability of the business and the financial status of the 
  

  business could also be identified, at any particular point in time. It is the primary 
  

  objective of accounting to take such information and convert it into a form that 
  

  is useful for decision making

  Experimenal version
  

  1.1.3 Branches of Accounting
  

  Accounting, in all its broadness, can be sub-divided into areas of specialization;
  a) Financial accounting; concerns itself with the collection and 
  processing of accounting data and reporting to interested parties 
  inside and outside the firm.
  b) Tax accounting; deals with the determination of the firm’s tax liability 
  which could be, Value-added tax (VAT), customs duty, Pay As You 
  Earn (PAYE), corporation tax, etc.
  c) Cost accounting; helps establish costs relating to the production of a 
  good or service and allocating it to the various factors that contributed 
  to the cost of production.
  d) Managerial accounting; deals with the generation of accounting 
  information to be used categorically by the firm’s internal management 
  in their day-to-day decision making.
  e) Auditing; concerns itself with the vouching and verification of 
  transactions from the financial accounting to determine that they are a 
  true representation of the business’ activity i.e. the true and fair view of 
  the company’s state of affairs.
  
  Other subdivisions of accounting include forensic accounting which combines 
  accounting, auditing, and investigative skills to examine the finances of an 
  individual or business, fiduciary accounting which is the recording of transactions 
  associated with a trust or estate and accounting information system which is a 
  computer-based method, it tracks accounting activity that has been combined 
  

  with information technology resources

  Application activity 1.1
  

  1. Explain the term accounting
  2. What do you understand by accounting information
  3. Mention two objectives of accounting
  4. State the uses of accounting information
  5. Mention five different branches of accounting
  6. State two differences between financial accounting and management 
  

  accounting

  Experimenal version

  1.2 Users of Accounting Information 
  

  Activity 1.2
  

  Refer to the knowledge acquired in Entrepreneurship and state who you 
  think need accounting information of a certain business.
  Today, more people than ever before recognize the importance of accounting 
  information and the profound effect that unethical and misleading financial 
  reports can have on a business, its owners, its employees, its lenders, and the 
  financial markets. 
  The people who use accounting information to make decisionscan be classified 
  into three categories:
  – Those who manage a business
  – Those outside a business enterprise who have a direct financial interest 
  in the business 
  – Those who have an indirect financial interest in a business
  These categories apply to governmental and not-for-profit organizations as well 
  as to profit-oriented ventures.
  Note that the users may also be classified into internal and external users of 
  accounting information. Internal users are those within an organization who use 
  financial information to make day-to-day decisions. External users are those 
  outside of the organization who use the financial information to make decisions 
  

  or to evaluate an entity’s performance and position

  1.2.1 Management

  Management refers to the people who are responsible for operating a 
  business and meeting its goals of profitability and liquidity. In a small business, 
  management may consist solely of the owners. In a large business, managers 
  are not necessarily the owners and thus may be agents of the owners. 
  Managers must decide what to do, how to do it, and whether the results match 
  their original plans. Successful managers consistently make the right decisions 
  based on timely and valid information. Note that managers and other employees 
  

  are internal users of accounting information.

  Experimenal version
  

  1.2.2 Users with a direct financial interest
  

  Another group of decision makers who need accounting information are those 
  with a direct financial interest in a business. They depend on accounting to 
  measure and report information about how a business has performed. Most 
  businesses periodically publish a set of general-purpose financial statements 
  that report their success in meeting the goals of profitability and liquidity. 
  These statements show what has happened in the past, and they are important 
  indicators of what will happen in the future. Many people outside the company 
  carefully study these financial reports. The two most important groups are 
  

  investors (including owners) and creditors.

  1.2.2.1 Investors

  Those are current and future stockholders who may invest in a business and 
  acquire a part ownership in it are interested in its past success and its potential 
  earnings. A thorough study of a company’s financial statements helps potential 
  investors judge the prospects for a profitable investment. After investing, they 
  must continually review their commitment, again by examining the company’s 
  financial statements.
  1.2.2.2 Creditors
  Most companies borrow money for both long- and short-term operating needs. 
  Creditors, those who lend money or deliver goods and services before being 
  paid, are interested mainly in whether a company will have the cash to pay 
  interest charges and to repay the debt at the appropriate time. They study a 
  company’s liquidity and cash flow as well as its profitability. Banks, finance 
  companies, mortgage companies, securities firms, insurance firms, suppliers, 
  and other lenders must analyze a company’s financial position before they make 
  a loan. Note that investors and creditors are primary external users of accounting 
  information.
  1.2.3 Users with an indirect financial interest
  In recent years, society as a whole, through governmental and public groups, has 
  become one of the largest and most important users of accounting information. 
  Users who need accounting information to make decisions on public issues 
  

  include tax authorities, regulatory agencies, and various other groups

  Experimenal version

  1.2.3.1 Tax Authorities
  

  Government at every level is financed through the collection of taxes. Companies 
  and individuals pay many kinds of taxes, including national, and city income 
  taxes; Social Security and other payroll taxes; excise taxes; and sales taxes. 
  Each tax requires special tax returns and often a complex set of records as well. 
  Proper reporting is generally a matter of law and can be very complicated. The 
  Internal Revenue Code, for instance, contains thousands of rules governing the 
  preparation of the accounting information used in computing federal income 
  

  taxes.

  1.2.3.2 Regulatory Agencies
  

  Most companies must report periodically to one or more regulatory agencies 
  at the national and local levels. For example, all publicly traded corporations 
  must report periodically to Capital Market Authority (CMA). (CMA) is a public 
  institution established by Law No.23 /2017 of 31/05/2017 responsible for 
  developing and regulating the capital markets industry, commodities exchange 
  and related contracts, collective investment schemes and warehouse receipts 
  system. Companies listed on Rwanda Stock Exchange (RSE) must meet 
  the special reporting requirements of their exchange. Another example of a 
  regulatory agency is the National Bank of Rwanda – All financial institutions are 
  

  required to report periodically to the National Bank of Rwanda. 

  1.2.3.3 Other groups 
  

  Labor unions study the financial statements of corporations as part of preparing 
  for contract negotiations; a company’s income and costs often play an important 
  role in these negotiations. Those who advise investors and creditors—financial 
  analysts, brokers, underwriters, lawyers, economists, and the financial press—
  also have an indirect interest in the financial performance and prospects of a 
  business. Consumer groups, customers, and the general public have become 
  more concerned about the financing and earnings of corporations as well as the 
  effects that corporations have on inflation, the environment, social issues, and 
  the quality of life.
  Note that a part from managers and employees who are internal users, all other 
  

  users are external users of financial information

  Experimenal version

  Application activity 1.2
  

  1. State three categories of users of accounting information
  2. Match the terms below with the type of user of accounting information 
  

  (Some answers may be used more than once):

  1. Tax authorities 
  2. Investors
  3. Management 
  4. Creditors
  5. Regulatory agencies
  6. Labor unions and 
  

  consumer groups

  a. Internal user
  b. Direct external user
  

  c. Indirect user

  3. Why the following are interested accounting information 
  a) Creditors
  b) Tax authorities 
  c) Investors
  

  d) General public

  Experimenal version

  1.3 Forms of Business Organizations
  

  Activity 1.3

  
  

  Read the following case study and answer the given questions 
  Kamariza, a bright final year student was waiting for her result to be 
  declared. While at home, she decided to put her free time to use. Having 
  a painting talent, she tried decorating clay pots and bowls with designs. 
  She was excited at the praise showed on her by friends on her work. She 
  even managed to sell few pieces of unique hand pottery for her home to 
  people living in and around her village. Operating from home, she was able 
  to save on rental payments. She gained a lot of popularity by word of mouth 
  publicity as a sole proprietor. She further perfected her skills of painting 
  pottery and created new designs. All this generated great interest among 
  her customers and provided a boost to the demand for her products. By 
  the end of summer, she found that she had been able to make a profit of 
  FRW 100,000. She felt motivated to take up this work as a career. She has, 
  therefore, decided to set up her own business. 
  She can continue running the business on her own as a sole proprietor, 
  but she needs more money for doing business on large scale. Her father 
  has suggested that she should form a partnership with her cousin to meet 
  the need for additional funds and for sharing the responsibilities and risks. 
  Besides, he believes that it is possible that the business might grow further 
  and may require forming a company.
  a) She is in a dilemma as to what form of business organisation she 
  should go in for? 
  b) Which factors to be considered in selecting an appropriate form 
  

  of business?

  Experimenal version

  To start a business, a potential owner must have a sufficient amount of capital 
  and must choose an appropriate form of business organization. The three basic 
  forms of business organization are the sole proprietorship, the partnership, 
  and the corporation. Accountants recognize each form as an economic unit 
  separate from its owners. Legally, however, only the corporation is separate 
  from its owners. The characteristics of corporations make them very efficient in 
  amassing capital, which enables them to grow extremely large. As even though 
  corporations are fewer in number than sole proprietorships and partnerships, 
  

  they contribute much more to the economy in monetary terms. .

  1.3.1 A sole proprietorship

  Sole means “single” or “one.” Proprietor means “owner.” A sole proprietorship, 
  therefore, is a business owned by one person. It is sometimes simply called a 
  proprietorship. Being a sole proprietor does not mean working alone. Based on 
  the operation’s size and scope, a sole proprietorship may have many managers 
  and employees. The oldest and most common form of business organization, 
  the sole proprietorship is the easiest business form to start. Little or no legal 
  paperwork (forms and documents) is required. The success or failure of the 
  

  business depends heavily on the efforts and talent of the owner

  A sole proprietorship advantages and disadvantages
  

  
  

  1.3.2 A partnership
  

  A partnership is a business owned by two or more persons, called partners, 
  who agree to operate the business as co-owners. The partners share the profits 
  and losses of the business according to agreed proportions.
  
  The partners share between them ownership of the business and the obligation to 
  manage its operations. Professional people, such as accountants, solicitors and 
  doctors, commonly organize their business activities in the form of partnerships. 
  Accounting statements are required as a basis for allocating profits between the 
  partners and, again, for agreeing tax liabilities with the Tax Revenue Authority. 
  Business partners usually enter into a written, legal agreement. This agreement 
  specifies each partner’s investment in money or property, responsibilities, 
  and percentage of profits and losses. Partnerships are often formed when a 
  business needs more capital than one person can invest. Partnerships are not 
  

  always small. 

  A Partnership advantages and disadvantages 

  
  

  1.3.3 A corporation

  A corporation, on the other hand, is a business unit chartered by the state 
  and legally separate from its owners (the stockholders). The stockholders, 
  whose ownership is represented by shares of stock, do not directly control 
  the corporation’s operations. Instead, they elect a board of directors to run the 
  corporation for their benefit. In exchange for their limited involvement in the 
  corporation’s operations, stockholders enjoy limited liability; that is, their risk of 
  

  loss is limited to the amount they paid for their shares. 

  Thus, stockholders are often willing to invest in risky, but potentially profitable, 
  activities. Also, because stockholders can sell their shares without dissolving the 
  corporation, the life of a corporation is unlimited and not subject to the whims 
  or health of a proprietor or a partner. The business owner(s) may “incorporate” 
  to obtain money needed to expand. To raise this money, organizers sell shares 
  of stock to hundreds or even thousands of people. These shareholders, or 
  stockholders, are the corporation’s legal owners.
  
  

  A Corporation advantages and disadvantages

  
  

   

  
  

  Other forms of businesses 

  A part from the above three main types of businesses we also have other forms 

  of entity that may not necessarily be referred to as businesses but they relate 

  to businesses and some authors refer to them as other forms of businesses. 

  Those are: 

  • Cooperatives: members come together to start the business to satisfy 
  their needs/common interest 
  • Not for profit entity: they are started to just offer a given service or 
  good mostly to their members or to a particular group of people with 
  common interest but they do not have profit as the motive. 
  

  • Parastatal: is a company wholly owned by the government 

  Application activity 1.3

  1. Mr. Gasagure is a sole proprietor. Over the past decade, his 
  business has grown from operating a neighborhood corner shop 
  selling different items to retail chain with three branches in the city. 
  Although he looks after the varied functions in all the branches, he 
  is wondering whether he should form a company to better manage 
  the business. 
  a) Explain two benefits of remaining a sole proprietor
  b) Explain two benefits of converting to a limited liability company 
  2. Match the descriptions on the left with the forms of business 
  

  organizations on the right: 

  1. Pays dividends 
  2. Owned by only one person
  3. Multiple co-owners
  4. Management appointed by 
  board of directors
  5. Most numerous but usually 
  small in size
  6. Biggest segment of the 
  

  economy

  (a) Sole proprietorship
  (b) Partnership
  

  (c) Corporation

  1.4 Accounting Concepts

  Activity 1.4
  

  Why do you think accounting concepts and conventions are important to a 

  business entity?

  Activity 1.4

  Accounting concepts, conventions, or principles are the basic ground rules that 
  must be followed when financial accounts are prepared and presented. They 
  are also referred to as assumptions or prepositions that underlie the preparation 
  

  and presentation of financial statements.

  1.4.1 Business entity assumption

  This concept states that business is regarded as a separate entity different/
  distinct from owners and managers. This means assets and liabilities of the 
  

  business should be separated from those of the owners. 

  1.4.2 Monetary unit assumption/ Money measurement 

  concept 

  This concept states that only items which can be expressed in monetary terms/
  value are to be recorded in book. An economic entity's accounting records 
  include only quantifiable transactions. For example, certain economic events 
  that affect a company, such as hiring a new chief executive officer or introducing 
  a new product, cannot be easily quantified in monetary units and, therefore, do 
  

  not appear in the company's accounting records. 

  1.4.3 Time period assumption

  This concept states that financial statements must be prepared on regular 
  intervals. Most businesses exist for long periods of time, so specific time periods 
  must be used to report the results of business activity. Depending on the type of 
  report, the time period may be a day, a month, a year, or another arbitrary period. 
  However, the most common reporting period is one year. Using artificial time 
  periods leads to questions about when certain transactions should be recorded. 
  For example, how should an accountant report the cost of equipment expected 
  to last five years? Reporting the entire expense during the year of purchase might 
  make the company seem unprofitable that year and unreasonably profitable in 
  subsequent years. Such issues like allocation of the cost of an asset over its 
  

  useful life are dealt with in subsequent units/levels. 

  1.4.4 Accrual basis accounting

  This concept states that a transaction is recorded when it occurs rather than 
  when cash is paid or received. In most cases, the principle requires the use of 
  accrual basis accounting rather than cash basis accounting. Accrual basis 
  accounting, which adheres to the revenue recognition, matching, and cost 
  principles discussed below, captures the financial aspects of each economic 
  event in the accounting period in which it occurs, regardless of when the cash 
  changes hands. Under cash basis accounting, revenues are recognized only 
  when the company receives cash or its equivalent, and expenses are recognized 
  only when the company pays with cash or its equivalent. 
  According to the accruals assumption, in computing profit revenue earned must 
  be matched against expenditure incurred in earning it. This is also known as 
  

  matching convention.

  1.4.5 Historical Cost principle

  The principle states that aAssets are recorded at cost, which equals the value 
  exchanged at their acquisition. Even if assets such as land or buildings appreciate 
  in value over time, they are not revalued for financial reporting purposes if they 
  

  are measured on historical cost basis. 

  1.4.6 Going concern principle

  Unless otherwise noted, financial statements are prepared under the assumption 
  that the company will continue in operation for the foreseeable future . Therefore, 
  it is assumed that the entity has neither the intention not the need to enter into 
  liquidation or to cease trading. If such a need or intention exists, the financial 
  statements will have to be prepared on a different basis and they would mention 
  

  such a basis. 

  1.4.7 Consistency Concept 

  Consistency refers to using the same methods for the same items (i.e. 
  consistency of treatment) either from period to period within a reporting entity 
  

  or in a same period across entities.

  1.4.8 Principle of conservatism/ prudence 

  As per the conceptual framework, prudence is described as the exercise of 
  caution when making judgements under conditions of uncertainty. The exercise 
  of prudence means that assets and incomes are not overstated and liabilities 
  and expenses are not understated. Accountants must use their judgment to 
  record transactions that require estimation. The number of years that equipment 
  will remain productive and the portion of accounts receivable that will never be 
  paid are examples of items that require estimation. In reporting such financial 
  data, accountants follow the principle of conservatism, which requires that 
  the less optimistic estimate be chosen when two estimates are judged to be 
  equally likely. For example, suppose a manufacturing company's Warranty Repair 
  Department has documented a three-percent return rate for product X during 
  the past two years, but the company's Engineering Department insists this 
  return rate is just a statistical anomaly and less than one percent of product X 
  will require service during the coming year. Unless the Engineering Department 
  provides compelling evidence to support its estimate, the company's accountant 
  must follow the principle of conservatism and plan for a three-percent return 
  rate. Losses and costs—such as warranty repairs—are recorded when they are 
  

  probable and reasonably estimated. Gains are recorded when realized. 

  1.4.9 Materiality principle

  Accountants follow the materiality principle, which states that the 
  requirements of any accounting principle may be ignored when there is no effect 
  on the users of financial information. Certainly, tracking individual paper clips or 
  pieces of paper is immaterial and excessively burdensome to any company’s 
  accounting department. Although there is no definitive measure of materiality, 
  the accountant’s judgment on such matters must be sound. Several thousand 
  francs may not be material to an entity such as BRALIRWA, but that same figure 
  

  is quite material to a small business. 

  1.4.10 Duality/ double entry concept 

  It requires a transaction to be recorded twice (dual recording). The dual aspect 
  rule is recognition that every transaction involves giving and receiving effect. 
  When somebody gives something, another must receive it. This is in effect a 
  requirement for double-entry bookkeeping. Double entry is a principle rule or 
  principle in accounting and is thoroughly explored in later chapters. For now, 
  it suffices to mention that the receiving account is debited while the giving 
  account is credited. Double-entry therefore means that one account is debited 
  while another is credited. The meaning of debit and credit are also explained in 
  

  later chapters. 

  Application activity 1.4

  1. The recognition that every transaction has two sides to it, is the leading 
  principle of 
  b) Accrual concept
  c) Duality concept 
  d) Matching concept
  e) Going concern concept
  2. The ------------- concept means that similar items in a set of accounts 
  should be given similar accounting treatment and it should be applied 
  from one period to another.
  a) Going concern
  b) Prudence 
  c) Consistency 
  

  d) Materiality 

  3. Accounting does not record non-financial transactions because of -----
  a) Economic entity concept
  b) Accrual concept
  c) Monetary unit concept
  d) Going concern concept
  4. Recognize the accounting concept in the following:
  a) The transactions are recorded at their original cost.
  b) The business will run for an indefinite period.
  c) Every transaction has two effects to be recorded in the books of 
  accounts.
  d) Accounting treatment once decided should be followed period 
  

  after period

  1.5 Accounting cycle 

  Activity 1.4
  

  Describe the Accounting cycle
  

  Accounting cycle is the process which is followed by accountants and 
  bookkeepers in processing raw financial data into output information in form of 
  financial statements. This process ranges from occurrence and documentation 
  of transactions up to the production of final accounts or financial statements. 
  It is called a cycle because the same procedure is repeated from one financial 
  year to another. When the financial year ends, books are closed and the financial 
  statements extracted, when the new financial year starts, the same books are 
  opened and the same procedure followed. It is therefore a cycle. 
  The accounting process or cycle is described below.
  Stage 1: Occurrence and documentation of business transactions
  Business transactions must be concluded first before anything is documented 
  and recorded. When a business transaction occurs, the immediate thing to 
  do is to prepare a business document to show evidence of the transaction. 
  Documents are means of accountability. Various parties including auditors will 
  want to ascertain whether the transactions took place and were authorized 
  by examining the documents. Besides for accountability, documents are also 
  

  important as sources of generating the information to be entered into books of 

  account. The key documents normally prepared are invoices, payment vouchers, 

  receipts, cheques, local purchase orders, delivery notes, goods received notes, 

  bank paying-in slips, etc.

  Stage 2: Entering transactions into journals

  Journals are books of original or prime entry. They are the first books to which 
  transactions are entered. Information entered into journals is generated from the 
  documents described above. There are several types of journals, the major ones 
  include the general journal, sales journal/sales day book, purchases journal/
  purchases day book and the cash book (the cash book is sometimes taken to 
  be part of the ledger). Details of these journals including their preparation will 
  be treated later.
  Stage 3: Posting of transactions to the ledger
  The information which had been entered into the journals is posted to the 
  ledger. It is therefore true to say that the journal feeds the ledger. A ledger 
  is a book which contains a collection of accounts. For easy of recording, the 
  ledger is sometimes subdivided into subsidiary ledgers. Detailed information on 
  preparation of the ledger will be seen later.
  Stage 4: Preparation of the trial balance
  At the end of a period, normally a month, all accounts are closed or balanced 
  off and the trial balance is extracted. A trial balance is a list of debit and credit 
  balances extracted from the ledger. Its purpose is to check the accuracy of 
  the double entry i.e. to check whether the double entry was complete and to 
  check whether no arithmetical errors of addition or subtraction were made in 
  the balancing of the ledger. If the double entry rule was not observed, the trial 
  balance will not balance, like wise if arithmetical errors were made, it will not 
  balance.
  Stage 5: End of year adjustments and preparation of financial 
  statements/ final accounts
  Financial statements are prepared from the trial balance. However, before 
  this is done, the trial balance needs to be adjusted at the end of the year in 
  order to make it up-to-date. The major adjustments or provisions made before 
  preparation of final accounts include, provision for depreciation, provision for 
  bad and doubtful debts, adjustments prepaid expenses and incomes, accrued 
  expenses and incomes, provision for corporation taxes, appropriations such as 
  

  provisions for dividend, transfers to reserve, etc

  Once the above adjustments have been made, financial statements are prepared. 
  The major financial statements include the income statement also called the 
  trading profit and loss account sometimes abbreviated as the profit and loss 
  account. This account or statement shows the profitability of the business. 
  Another major statement is the balance sheet which shows the assets of the 
  business and the claims against the assets. These claims are the owner’s equity 
  and liabilities. The third major statement is the cash flow statement which shows 
  the source of cash and how it was disbursed. These are the financiers of the 
  assets of the business. These financial statements will be treated in more details 
  later.
  Stage 6: Analysis and interpretation of financial statements
  This is not supposed to be the work of an accountant but is the domain of 
  the financial analyst. Strictly speaking, the work of an accountant stops at the 
  preparation of financial statements. However, an accountant could also analyze 
  and interpret his statements. Though it could be advisable to have another 
  independent person to analyze and interpret the accounts.
  Analysis and interpretation of financial statements makes the statements user 
  friendly. Lay people in accounting cannot read the figures in the financial 
  statements and the jargon used by accountants. These people need to be told in 
  simple terms whether the business is healthily operating in terms of profitability, 
  solvency/ liquidity etc. Analysis and interpretation of financial statements is 
  

  majorly done by the use of accounting ratios. 

  Application activity 1.5

  1. What is the accounting cycle?
  2. What is the main purpose of accounting cycle?
  3. What is the name of the book in which the transactions are initially 
  recorded with brief explanation of the debit and credit analysis?
  4. Which is the list of debit and credit balances of the ledger account?
  5. What is the main objective of preparing a financial statement?
  6. Why the specific process of accounting is called accounting cycle?
  7. In the accounting cycle, which step immediately comes before 
  

  analyzing transactions?

  1.6 Accounting equation
  

  
  

  The ability to read financial statements requires an understanding of the 
  items they include and the standard categories used to classify these items. 
  The accounting equation identifies the relationship between the elements of 
  accounting.
  A business owns properties. These properties are called assets. The assets are 
  the business resources that enable it to trade and carry out trading. They are 
  financed or funded by the owners of the business who put in funds. These funds, 
  including assets that the owner may put is called capital. Other persons who are 
  not owners of the firm may also finance assets. Funds from these sources are 
  called liabilities.
  The total assets must be equal to the total funding i.e. both from owners and 
  non-owners. If all the resources of the business are supplied by the owner, the 
  

  accounting equation will be presents as follows:

  Assets = Capital
  However, some of the assets normally have been provided by some other person 
  than the owner. This indebtedness of a firm is referred to as Liabilities. 
  

  Therefore, the equation is now referred to as:

  

  Each item in this equation is briefly explained below:

  Assets

  An asset is a present economic resource controlled by the entity as a result of 
  past events. An economic resource is a right that has the potential to produce 
  economic benefits. An example is if a business sells goods on credit then it has 
  an asset called a debtor. The past event is the sale on credit and the resource 
  is a debtor. This debtor is expected to pay so that economic benefits will flow 
  towards the firm i.e. in form of cash once the customers pays. 
  Current assets typically include cash and assets the company reasonably 
  expects to use, sell, or collect within one year. Current assets appear on the 
  balance sheet (and in the numbered list below) 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. 
  Assets are classified into two main types:
  a) Non-current assets (formerly called fixed assets)
  b) Current assets
  Non-current assets are acquired by the business to assist in earning revenues 
  and not for resale. They are normally expected to be in business for a period of 
  more than one year. Current assets are not expected to last for more than one 
  year. They are in most cases directly related to the trading activities of the firm. 
  Examples of non-current assets include:
  Major examples include:
  – Land and buildings
  – Plant and machinery 
  – Fixtures, furniture, fittings and equipment
  

  – Motor vehicles

  Current assets typically include cash and assets the company reasonably 
  expects to use, sell, or collect within one year. Current assets appear on the 
  balance sheet (and in the numbered list below) 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. 
  Current assets are not expected to last for more than one year. They are 
  in most cases directly related to the trading activities of the firm. Examples 
  include:
  – Stock of goods – for purpose of selling. 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. 
  – Accounts receivable are amounts owed to the company by customers 
  who have received products or services but have not yet paid for them. 
  – Other debtors – owe the firm amounts other than for trading.
  – Cash at bank
  – Cash in hand
  – Marketable securities include short-term investments in stocks, bonds 
  (debt), certificates of deposit, or other securities. These items are 
  classified as marketable securities—rather than long-term investments—
  only if the company has both the ability and the desire to sell them 
  within one year. 
  – 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
  A liability is a present obligation of the entity to transfer an economic resource 
  as a result of past events.
  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). 
  An example is when a business buys goods on credit, then the firm has a liability 
  called creditor. The past event is the credit purchase and the liability being the 
  creditor the firm will pay cash to the creditor and therefore there is an out flow 
  

  of cash from the business

  Liabilities are also classified into two main classes
  i) Non-current liabilities (or long term liabilities)
  ii) Current liabilities.
  Liabilities are generally classified as short-term (current) if they are due in one 
  year or less. Long-term liabilities are not due for at least one year. 
  Non-current liabilities are expected to last or be paid after one year. This 
  includes long-term loans from banks or other financial institutions. 
  Current liabilities last for a period of less than one year and therefore will be 
  paid within one year. Major examples:
  – Trade creditors/ or accounts payable: owed amounts as a result of 
  business buying goods on credit.
  – Other creditors: owed amounts for services supplied to the firm other 
  than goods
  – Bank overdraft: amounts advanced by the bank for a short-term.
  – Accrued expenses
  Capital (Equity)
  Equity is the residual interest in the assets of the entity after deducting all its 
  liabilities. Owner´s Equity represents the amount owed to the owner or owners 
  by the company. Algebraically, this amount is calculated by subtracting liabilities 
  from each side of the accounting equation. Owner's equity also represents 
  the net assets of the company. Items like introduced capital, profit/ loss and 
  drawings appear under equity. By rearranging the accounting equation, we can 
  define owner’s equity in this way::
  Owner’s equity = Assets – Liabilities
  In a sole proprietorship or partnership, owner’s equity equals the total net 
  investment in the business plus the net income or loss generated during the 
  business’s life. Net investment equals the sum of all investment in the business 
  by the owner or owners minus withdrawals made by the owner or owners. 
  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 FRW 10,000,000 to start a company but later 
  withdraws FRW 1,000,000 for personal expenses, the owner’s net investment 
  equals FRW 9,000,000. Net income or net loss equals the company’s revenues 
  less its expenses. Revenues are inflows of money or other assets received from 
  customers in exchange for goods or services. Expenses are the costs incurred 
  

  to generate those revenues.

  

  Example: Johnson Company had assets of FRW 140,000 and liabilities of FRW 
  60,000 at the beginning of the year, and assets of FRW 200,000 and liabilities 
  of FRW 70,000 at the end of the year. During the year, FRW 20,000 was 
  invested in the business, and withdrawals of FRW 24,000 were made. What 
  amount of income did the company earn during the year?
  Beginning of the year 
  Assets Liabilities Owner’s equity
  FRW 140,000 = FRW 60,000 + FRW 80,000
  During the year 
  Investment 20,000
  Withdrawals 24,000
  Net Income ?
  End of the year
  FRW 200,000 FRW 70,000 FRW 130,000
  Answer 
  Net income FRW 54,000
  Start by finding the owner’s equity at the beginning of the year. (Check: FRW 
  140,000-FRW 60,000 = FRW 80,000). 
  Then find the owner’s equity at the end of the year. (Check: FRW 200,000 – 
  FRW 70,000 = FRW 130,000).
  Then determine net income by calculating how the transactions during the 
  year led to the owner’s equity amount at the end of the year. (Check FRW 
  

  80,000+20,000 – FRW 24,000 +54,000 = 130,000)

  

  

  

  

   

  

  Note: The loan was deposited on the bank account and it is reflected as an 
  asset. Cash at bank is sometimes abbreviated as simply bank. The liabilities also 
  increases by 10,000,000 because of the loan acquired.
  

  9. Used 100,000 of the business to campaign for a local election.

  

  Balance sheet using the vertical format which is shown below:

   

  
  

  Please pay attention to the format. The Non-Current assets are listed in order 
  of permanence as shown i.e. from Land and Buildings to motor vehicles. The 
  Current Assets are listed in order of liquidity i.e. which asset is far from being 
  converted into cash. Example, stock is not yet sold, (i.e. not yet realized yet) 
  then when it is sold we either get cash or a debtor (if sold on credit). When the 
  debtor pays then the debtor may pay by cheque (cash has to be banked) or 
  cash. The current Liabilities are listed in order of payment i.e. which is due for 
  payment first. Bank overdraft is payable on demand by the bank, then followed 
  by creditors. 
  Note that in the vertical format, current liabilities are deducted from current 
  assets to give net current assets. This is added to Non-Current assets, which 
  give us net assets. Net assets should be the same as the total of Capital and 
  

  Non-Current liabilities

  

  Application activity 1.6

  1. Which of the following is not an asset?

  a) Building 
  b) Cash balance 
  c) Trade receivables
  d) Loan from Kamanzi
  2. Which of the following is a liability?
  a) Machinery 
  b) Trade payables for goods
  c) Moto vehicles 
  d) Cash at bank 
  

  3. Which of the following items are shown under the wrong headings:

  

  5. Which of the following is incorrect?

  

  You are required to prepare a simple Balance Sheet as at 31 
  December 2021
  7. Mukamana sets up a new business. Before he actually sells 
  anything he has bought motor vehicles of FRW 3,000, premises 
  of FRW 7,000, stock of goods FRW 2,000. He still owes FRW 
  800 in respect of stock purchased. He had borrowed FRW 4,000 
  from Kanyemera. After the events just described and before trading 
  starts, he had FRW 300 cash in hand and FRW 600 cash at bank.
  

  You are required to calculate the amount of his capital

  1. Mention two objectives of accounting?
  2. Mention five different branches of accounting?
  3. Why Creditors, Tax authorities, Investors, and general public are 
  interested in accounting information? 
  4. Match the terms below with the type of user of accounting information 
  

  (Some answers may be used more than once):

  

  7. Which of the following is a form of internal control that ensures the 
  ledger is balanced?
  a) Financial statements
  b) Sequentially numbered source documents
  c) Trial balance
  d) Journal entries
  8. In each of the following pairs of activities, tell which activity is done first 
  in the accounting cycle
  (a) Close the accounts or adjust 
  the accounts 
  (c) Record the transactions in the 
  journal or prepare the initial trial 
  balance 
  (b) Analyze the transactions or 
  post the entries to the ledger 
  (d) Prepare the post-closing trial 
  balance or prepare the adjusted 
  trial balance 
  

  9. You are to complete the gaps on the following table?

  

  10. Mugabowindekwe has the following items in his balance sheet as on 
  30 June 2021. Capital FRW 41,800, Creditors FRW 3,200, Fixtures 
  FRW 7,000, Motor Vehicles FRW 8,400, Stock of goods FRW 9,900, 
  Debtors FRW 6,560, Cash at bank FRW 12,900 and Cash in hand 
  

  FRW 240

  During the first week of July 2021:

  a) He bought extra stock of goods FRW 1,540 on credit.
  b) One of the debtors paid him FRW 560 in cash.
  c) He bought extra fixture by cheque FRW 2,000. 
  You are to draw up a balance sheet as on 7 July 2021 after the above 
  

  transactions have been completed

• UNIT 2:ACCOUNTING SOURCE DOCUMENTS

  Key unit competence: To be able to prepare accounting source 

  documents

  Introductory activity

  BYISHIMO met with a businessperson on church who requested him to 
  be supplied with bars of pieces of soap at a price of FRW 750 each bar. 
  When BYISHIMO delivered 50 boxes of pieces of soap and that, without 
  any evidence, he was not paid the full amount of money they agreed upon.
  1. Has this situation ever happened to you?
  2. When and what happened?
  3. What mistake did BYISHIMO make?
  4. Assume you were the one in such a situation, what would you do?
  5. What advice would you give to BYISHIMO and the businessperson?
  6. What lessons do you learn from the above situation?
  During the course of its business, a company sends out and receives many 
  source documents. The details on these source documents need to be recorded, 
  otherwise the business might forget to ask for some money, or forget to pay 
  some, or even accidentally pay something twice. In other words, it needs to 
  keep records of source documents – of transactions – so that it can keep tabs 
  on what is going on. The following sections explain some of the main source 
  

  documents

  2.1 Pro-forma Invoice

  Activity 2.1
  

  NYIRANGARAMA Enterprise, a manufacturer business, wants to purchase 
  green and yellow bananas as raw materials in producing “AKARUSHO”. It 
  has a number of potential suppliers of green and yellow bananas and it is 
  very hard and difficult to select one of them to deal with. 
  a) What is the accounting document which will be issued by potential 
  suppliers to be sent to NYIRANGARAMA Enterprise in order to select 
  the best supplier among the others?
  a) How does it look like?
  Activity 2.1
  A proforma invoice is a preliminary bill of sale sent to buyers in advance of a 
  shipment or delivery of goods. The invoice will typically describe the purchased 
  items and other important information, such as the transport charges. Proforma 
  invoice is different from a simple price quotation in that it is a binding agreement 
  although the terms of sale are subject to change. Most proforma invoices provide 
  the buyer with a precise sale price. It includes an estimate of any commissions 
  or fees, such as applicable taxes. Although the proforma invoice may be subject 
  to change, it represents a good faith estimate to avoid exposing the buyer to any 
  unexpected significant charges once the transaction is final.
  The purpose of a proforma invoice is to streamline the sales process. Once 
  you send the proforma invoice, the customer agrees to the price and then you 
  send the goods or services. Instead of being a demand for payment, proforma 
  invoices are good faith estimate that lets the customer know exactly what to 
  expect.
  Here are some of the other uses of a proforma invoice:
  • It is frequently sent to declare the value of goods for customs for a 
  smooth delivery process;
  • Proforma invoice is ideal when you don’t have all the details required for 
  a commercial invoice;
  • Some clients use it for internal purchase approval process.
  Although it contains exact cost details associated with the sale, it is not an 
  official demand for payment. No guidelines dictate the exact presentation or 
  format of a proforma invoice, and it may or may not resemble other commercial 
  

  invoices

  Application activity 2.1
  

  1. State the meaning of the proforma invoice
  2. Give the purpose of the proforma invoice
  3. Read the following statement and answer to the questions below:
  BANANA GROWERS Company is required to inform to NYIRANGARAMA 
  Enterprise how the following items may be supplied:
  • 10 tons of green banana
  • 20 tons of yellow banana
  Required: 
  

  Through which document this information is sent? Prepare it

  2.2 Purchase Order
  

  
  

  A purchase order is a document of a company which details goods and services 
  that a company wishes to purchase from another company. Two copies of the 
  purchase order are often made, one is sent to the company from which goods 
  and services will be purchased and the other is kept internally so that the 
  company can keep track of its orders. Purchase orders are often sequentially 
  numbered. 
  This allows buyers to place orders with suppliers without immediately making 
  payment.
  The seller uses purchase orders as a way to offer buyers credit without risk 
  because the buyer is legally obligated to pay for products and services when 
  they have been delivered. Once accepted by seller, a purchase order becomes 
  a legally binding contract. If there is not an existing contract that governs the 
  relationship between buyer and seller, the purchase order can take its place. 
  This offers legal protection for both buyer and seller.
  Purchase order plays an important role in case of conflict, it is a contract between 
  buyer and seller to deliver goods at the agreed price and the buyer must pay 
  within the due date. If any party misses its obligation, another party can use the 
  purchase order as the evidence in the court.
  Each purchase order has its own number, known as the purchase order number, 
  to assist both buyer and seller in tracking delivery and payment of each request.
  A purchase order will contain the order details including the following:
  • The company name of the buyer;
  • Vendor information including the seller’s company name;
  • The product(s) or service(s) to be purchased;
  • Purchase order number;
  • Quantity purchased;
  • Price per unit;
  • Delivery location;
  • Payment terms, when the invoice will be paid, such as on receipt of 
  delivery, net 30 of net 60, or a specific due date. 
  Both parties use this document as the reference during the business transactions, 
  buyers expected to receive the same goods at the same price as mentioned in 
  

  the purchase order. The seller expects to make a sale base on the buyer order.

  Application activity 2.2

  1. State the meaning of the purchase order
  2. Give the purpose of the purchase order
  3. Read the following statement and answer to the questions below:
  NYIRANGARAMA Enterprise orders to BANANA GROWERS Company 
  to supply the stated items:
  a) 10 tons of green banana
  b) 20 tons of yellow banana
  Required: (a) Through which document this order is sent? 
  

   (b) You are required to a purchase order

  2.3. Delivery note
  

  Activity 2.3
  

  Analyze the case study below and answer to the questions:
  BANANA GROWER Company, the supplier of green and yellow banana to 
  NYIRANGARAMA Enterprise, has supplied mentioned items to its customer 
  in terms and conditions with the order. This conformity is justified by the fact 
  that when delivering, the supplier has accompanied the items by written 
  evidence and the buyer proves this delivery by a goods received note.
  1. What are the activities made by the two people?
  

  2. What is the document prepared and sent to the receiver?

  Delivery note, also known as goods delivery note is a document prepared by 
  the seller to accompany the delivery of the goods to the buyer. It provides proof 
  of the physical transfer of goods to the buyer who himself/herself or his/her 
  authorised agent, signs the note to acknowledge delivery of the goods. It gives 
  a brief description of the goods as to quantity, number of packages, nature and 
  

  quality of goods being delivered.

  Whoever signs the note should ensure that the description of the goods as 
  to quantity, quality, etc. agrees with the goods actually delivered. A qualified 
  signature should be given if goods are opened or damaged on receipt. The 
  goods are then taken into stock and recorded in the store books for costing 
  purposes. The delivery note is therefore the source document for recording 
  transactions in the stores book.
  The delivery note certifies the delivery of goods to the buyer, who must sign 
  it to make it clear that the goods have been delivered in accordance with the 
  conditions established. When a customer places an order with you, you should 
  aim to send the goods as soon as you can. If a delivery note is created to send 
  with the shipment, it can be used as a checklist and, as previously mentioned, 
  it can serve as proof of delivery. Also, it is an added service that puts the 
  customer’s mind at ease. It is useful because, suppliers can confirm that every 
  think went as planned with the delivery and after it is being signed and returned, 
  it serves as proof that all goods were received and the recipient is satisfied. It 
  also gives customer an overview of the products they’ve ordered as it allows 
  

  them to cross check the products they received with their order

  Application activity 2.3

  1. What is the goods delivery note?
  2. State the importance of the goods delivery note.
  3. Draw up and fill in the goods delivery note basing on the following 
  data:
  – Name of the seller: BANANA GROWERS Company
  – Name of the buyer: NYIRANGARAMA Enterprise
  – Items supplied:
  * 10 tons of green banana for FRW 500 each kg
  * 20 tons of yellow banana for FRW 600 each kg
  – Issuance date : 24th March 2022
  

  – Number of the document: 12345

  2.4. Goods received note
  

  Activity 2.4
  

  Analyze the case study below and answer on the questions:
  BANANA GROWERS Company, the supplier of green and yellow banana 
  to NYIRANGARAMA Enterprise, has supplied mentioned items to its 
  customer in terms and conditions with the order. This conformity is justified 
  by the fact that when delivering, the supplier has accompanied the items 
  by the goods delivery note and the buyer proves this delivery by written 
  evidence. 
  a) What are the activities made by the two people?
  

  b) What is the document prepared and sent by the receiver (buyer)?

  Goods received note (GRN) is a document that of a company that lists the 
  goods that a business has received from the supplier. The goods received note 
  is usually prepared by a business’ own warehouse or goods receiving area. 
  It is also known as received note, which is used as the evidence that goods 
  are delivered and the customer already received. Moreover, both suppliers and 
  customers use goods received note to compare between order and delivery 
  quantity.
  However, the goods received note is the most important document both for 
  suppliers and customers. Goods received note ensures that the provided goods 
  are received by the customer, and at the time of billing the goods received note 
  is attached with the invoice for the cross-reference. It helps customers and 
  suppliers make and keep a binding agreement, and empower organizations to 
  keep stock of inventory levels. Here are its features:
  – Name of supplier’s organization
  – Product details such as name, size, type, technical specifications, etc.
  – Delivery time and date;
  – Product quantity;
  – Signature of the supplier’
  – Name and signature of the receiver;
  

  – Goods received note number.

  Application activity 2.4

  1. What is the goods received note?
  2. State the importance of the goods received note.
  3. Draw up and fill in the goods received note basing on the following 
  data:
  a) Name of the seller: BANANA GROWERS Company
  b) Name of the buyer: NYIRANGARAMA Enterprise
  c) Items received:
  – 10 tons of green banana for FRW 500 each Kg
  – 20 tons of yellow banana for FRW 600 each Kg
  d) Issuance date : 24th March 2022
  

  e) Number of the document: 54321

  2.5 Invoice 
  

  Activity 2.5

  Analyze the case study below and answer on the questions:
  BANANA GROWER Company, the supplier of green and yellow banana to 
  NYIRANGARAMA Enterprise, has supplied mentioned items to its customer 
  in terms and conditions with the order. This conformity is justified by the fact 
  that when delivering, the supplier has accompanied the items by the goods 
  delivery note and the buyer has sent goods received note as the delivery 
  confirmation. Then, the seller informs the buyer how much money he/she 
  has to pay for through a written supporting document.
  a) What are the activities made by the two people?
  

  b) What is the document prepared and sent by the seller?

  Invoice is a commercial document issued by the seller to the buyer, relating 
  to a sale transaction and indicating the products, quantities and agreed upon 
  prices for products or services the seller had provided the buyer.
  An invoice serves an important purpose in business accounting; it demonstrates 
  a client’s obligation to pay you for your services. An invoice offers verification in 
  writing, of the payment agreement between your business and its client. Invoices 
  set your payment terms and enable you to get paid faster for your services.
  The main elements that each invoice must include are the following:
  a) The word Invoice;
  b) Seller’s name and address, contact details and company registration 
  number (if any);
  c) Buyer’s name and address;
  d) Date: invoice issue date, payment due date, delivery date;
  e) A unique invoice reference number;
  f) Description of services or products including quantity, cost per unit 
  and total item cost;
  g) Total amount charged with tax information;
  h) Available payment methods, including bank account number and 
  reference code identifying the customer.
  Invoicing before delivering the goods or services is a practical option when 
  working on small orders. This approach comes with increased pressure to deliver 
  the goods or services, but eliminates the possibility of non-payment. Receiving 
  upfront payment helps improve cash flow, particularly in small businesses. 
  Invoicing after the delivery of goods requires a high level of trust and can be 
  risky. Rectifying instances of non-payment costs money in legal costs or debt 
  collection agency fees.
  Note that an invoice is primarily a demand for payment, but it is used for 
  other purposes as well. Most accounting software packages can generate an 
  invoices, however in smaller businesses with paper based systems, invoices are 
  produced on multi part stationary, or photocopied or carbon-copied. The top 
  copy will go to the customer and the other duplicates will be used by various 
  

  people within the business.

  Application activity 2.5

  1. What is the invoice?
  2. State the importance of the invoice.
  3. Draw up and fill in the invoice basing on the following data:
  a) Name of the seller: BANANA GROWERS Company
  b) Name of the buyer: NYIRANGARAMA Enterprise
  c) Items received:
  – 10 tons of green banana for FRW 500 each kg
  – 20 tons of yellow banana for FRW 600 each kg
  d) Issuance date : 24th March 2022
  e) Number of the document: 53100
  f) Trade discount applied : 3%
  

  g) VAT : 18%

  2.6 Receipt
  

  Activity 2.6
  

  Analyze the case study below and answer on the questions:
  As mentioned on the invoice above provided by the seller to its customer, 
  the buyer makes payment of the full amount of the invoice in cash, the seller 
  receives the paid amount. This payment is proved by a written document 
  provided by the seller and sent to the buyer.
  a) What are the activities made by the two people?
  

  b) What is the document prepared and sent by the seller?

  Receipt is mainly a document confirming that a payment has been received. 
  It is a written document triggered by the receiving of something of value from 
  a third party. This document acknowledges that the item has been received. A 
  receipt may contain the date of the transfer, a description of the item received, 
  the amount paid for the item, any sales tax charged as part of the transfer and 
  the form of payment (such as with cash or a credit card).
  Receipts are usually associated with the delivery of goods or services from 
  a supplier. They can be used for several reasons, including the following:
  1. To document the transfer of ownership to the buyer;
  2. As a control, so that the buyer has proof of the amount paid;
  3. To form the basis for an accounting entry to record the underlying 
  transaction;
  4. To document ownership for insurance purposes;
  5. As a proof of delivery from the supplier, in case goods are returned under 
  warranty;
  6. To provide evidence that a sales tax paid as part of the transaction, so 
  that the buyer is not liable to pay a use tax.
  The purposes of the receipt are many. First of all, it serves as accounting records. 
  Also, it gives the customer a written proof of the transaction in case they have a 
  claim in regard to the items being bought. Receipt can be issued to record that 
  something was transferred.
  A receipt may be automatically generated by the seller (such as by cash register) 
  or under more informal of low-volume circumstances, a receipt may be produced 
  

  manually by the seller.

  Application activity 2.6

  1. What is the receipt?
  2. State the importance of the receipt.
  3. Draw up and fill in the receipt basing on the following data:
  a) Name of the seller: BANANA GROWERS Company
  b) Name of the buyer: NYIRANGARAMA Enterprise
  c) Amount received: FRW19,458,200
  d) Reason for the payment: goods supplied
  e) Date of payment: 24th March 2022
  

  f) Number of the document: 1357

  2.7 Cheque
  

  Activity 2.7
  

  Analyze the case study below and answer the following questions:
  A number of people make transactions of depositing and withdrawing their 
  money to their bank account with a financial institution. Most of the time, 
  the depositing transaction is made between the financial institution and 
  any depositor to a specified bank account. The withdrawal transaction 
  sometimes involves paying attention because it may happen that it is not the 
  true beneficiary to receive cash from the bank. That is why the document 
  used to perform this transaction must contain full and correct information.
  a) What are the activities made by the different people with the 
  financial institutions?
  b) What are the documents used by the people at bank and those 
  

  issued by the financial institutions to their customers?

  A cheque is a written order from a bank current account holder, addressed 
  to his/ her bank to pay a stated sum of money to or to the order of the person 
  named on the order or to its bearer. Only a person operating a bank account 
  can use a cheque as a means of payment. The person writing the cheque, 
  known as the drawer, has a transaction banking account where the money is 
  held. The drawer writes the various details including the monetary amount, date 
  and the payee on the cheque and signs it, ordering his/ her bank, known as 
  the drawee, to pay that person or company the amount of money stated. The 
  cheque may also be defined as the negotiable instrument instructing a financial 
  institution to pay a specific currency from a specified transactional account held 
  in the drawer’s name with that institution. Both the drawer and payee may be 
  natural persons or legal entities. Cheques are important because they provide 
  alternative means of holding cash for the cash owner. A person cannot hold 
  money in the amount of millions. It would be too unsafe to carry or travel with 
  having money in bulk amount, in that case cheques provide easier and safer 
  medium to hold cash. 
  Cheques are a type of bill of exchange that was developed as a way to make 
  

  payments without the need to carry large amounts of money

  A cheque must have at least the following items:

  1. Drawer: the person or entity whose transaction account is to be drawn. 
  Usually, the drawer’s name and account is preprinted on the cheque and 
  the drawer is usually the signatory;
  2. Payee: is the person or entity who is to be paid the amount;
  3. Drawee: is the bank or other financial institution where the cheque can 
  be presented for payment. This is usually preprinted on the cheque;
  4. Amount: the currency amount usually must be written in words and in 
  figures. The currency is usually the local currency, but may be a foreign 
  currency;
  5. The word “cheque” in both text and title;
  6. An order to pay a specified sum of money;
  7. The place of payment;
  8. Date of drawing;
  9. Place of drawing;
  10. The account number of drawer;
  11. The signature of the drawer.
  Types of cheques
  There are various types of cheques which are used by the issuer according to 
  their requirements and terms of payments. Each type of cheque has its own 
  merits and demerits as per both drawers as well as drawee respective. Hence, 
  let us discuss each type of cheques along with their features and uses in brief.
  Bearer cheque
  The bearer cheques are those which can be redeemed in cash by anyone who 
  holds them or whose name is mentioned over the cheque. In other words, it is 
  negotiable financial instrument encased by anybody without endorsement who 
  present the cheque in the bank and doesn’t require identification as well and 
  this is because it is risky type of the cheque. Typically, such cheques are issued 
  by the owner to the most trustworthy and credible person or party. In case of 
  loss of bearer cheques, the issuer can cancel such cheque from the bank to 
  

  avoid the risk of fraud

  Order cheques
  When the term bearer is strike-off (cancelled) by the issuer, such cheques are 
  converted into order cheque. Order cheques are payable to the specific person 
  whose name is mentioned on the beneficiary column or any other person who is 
  endorsed by the original beneficiary.
  Self-cheque
  Whenever the issuer or account holder utilizes his own cheque for self-payment 
  or withdrawal of money from his own account, such cheque is known as self 
  cheque. In the case of self cheque, the beneficiary column is filled by the term 
  “SELF” instead of any other person’s name. Self-cheques are usually present 
  by the owner for the purpose of immediate and big withdrawal funds instead of 
  other methods like ATM, etc.
  Account payee/ crossed cheques
  When the issued cheque is crossed twice with two parallel lines at its top corner, 
  then such cheque is converted into account payee cheque. An account payee 
  cheque is only payable into the bank account of the beneficiary. Such cheque 
  is considered the safest type of cheque and is used mostly during business 
  transactions by traders to pay the salaries of employees, due invoices and other 
  expenses.
  Such cheques are also called “crossed cheques”, however, there are basically 
  three conditions of crossing as follows:
  a) Whenever the cheque is simply crossed by two parallel lines at the 
  top corner such crossing can be termed as a general crossing. Such 
  crossing indicates that payment should be credited in a bank account 
  only whether in payee or anyone else account endorsed by the original 
  beneficiary.
  b) If a cheque is crossed at the top corner by two parallel lines and at 
  the same time the term “account payee only” is also written between 
  such parallel lines, such crossing is known as Account payee crossing 
  which ensures the remittance of payment in the payee bank account 
  only.
  c) If the drawer wishes to pay a certain amount in any specific bank only, 
  he/she can simply mention the name of the bank between two parallel 
  lines over the body of cheque which ensures that the payment will be 
  done in the bank account of mentioned banks only. Such crossing is 
  

  known as a special crossing.

  Bankers cheque
  The banker’s cheque is issued either by the bank itself or on the behalf of its 
  customers for the purpose of clearing various outstanding or payments like rent 
  payment, electricity charges, maturity payments etc. in other words, the drawer 
  of the banker cheque is the bank itself or any other person or entities and the 
  payee could be anybody like the person, firms, company, etc.
  The payment of such cheque is guaranteed by the bank as unlike other types of 
  cheque, there is no need to deposit money to the issuer’s account. The banker 
  cheque cannot be transferred to anyone i.e. it is non-negotiable. 
  Travelers cheque
  A traveler’s cheque is nothing but a cheque which is used by the individuals 
  during travelling abroad and don’t want to carry a huge amount (cash) with 
  themselves to avoid the risk of theft. Such cheques can be encased or used 
  for the payment purpose abroad by the owner where the foreign currencies are 
  exchanged/accepted.
  Post-dated cheques
  If a cheque is drawn by the drawer to pay a specific amount to any person/firm 
  on a future specified date, in this case, a post-dated cheque is issued. A postdated cheque ensures the payment on a future specified date only; this means 
  it cannot be encashed before the mentioned date.
  Such cheques are used in the business where the goods or services are sold 
  on a credit basis, repayment of the debt, rent payment etc. a post-dated cheque 
  is also used as security during the delivery of goods from one party to another.
  Blank cheque
  A blank cheque is typically used during a business deal where a person of firm 
  signs a deal with the company for dealership/ invoices or any other services of 
  whenever the amount of funds and date of payment is not sure.
  A blank cheque neither contains the date of payment nor the sum of money 
  which are generally filled by the beneficiary itself after a mutual discussion in 
  a future specified date. However, it is risky to issue a blank cheque; the issuer 
  generally mentions a maximum limit over such cheque to minimize risk.
  Nominative cheque
  

  Nominative cheque represents a document that someone (considered a giver 
  or issuer) uses to make a payment to another (called a bearer or beneficiary) 
  without to use cash. The beneficiary or favored of that payment is the legal or 
  natural person whose name is on it. The nominative cheque is characterized 
  because it stipulates an amount that the natural person of legal entity named in 
  it will withdraw from the issuer’s bank. It is to be cashed or deposited exclusively 
  by the payee who is explicitly named on the cheque.
  It cannot be deposited into an account of a third person, other than of the 
  beneficiary. However, nominative cheque can be delivered or assigned to third 
  party through an endorsement. It must be taken into account that there are 
  nominative cheques that do not allow to be endorsed. If it is observed that the 
  cheque has a “to the order”, it means that it could be endorsed. On the contrary, 
  it cannot be endorsed if it has the stipulation “not to order”. In order to cash the 
  cheque, it must be presented at the bank, either to exchange it for cash or to 
  deposit it in an account in the name of the beneficiary, within a specified period 
  of time from the issue date indicated on the cheque.
  The issue of the cheque may avoid or revoke it if the indicated period of time is 
  exceeded and the cheque has not yet been presented at the bank for collection.
  Endorse a cheque.
  Endorsement of cheque means giving signature for transferring. The word 
  endorsement came from Latin word “indorsum”. Here “In” means above and 
  “dorsum” means backside. Even in this electronic age, the cheque is still the 
  payment method used by many employers. To deposit or cash a cheque it must 
  first be endorsed. There are three basic types of endorsement:
  a. Blank or general endorsement
  A blank endorsement is made when the payee named on the cheque supports 
  it by putting his/ her name on the cheque; signing the back of the cheque 
  completes the negotiation that allows the transfer of the money ordered by the 
  cheque. A blank endorsement is the most common type of endorsement and is 
  the least restrictive, as it does not limit marketability. Anyone else can negotiate 
  a cheque with a blank endorsement.
  b. Restrictive endorsement
  A restrictive endorsement is made by writing “deposit only” on the first line of 
  the cheque and then signing the name below.
  Restrictive endorsement limits marketability. “Deposit only” is the most common 
  form of restrictive endorsement and is used to avoid further negotiation of the 
  

  cheque. A cheque with a restrictive endorsement can only be deposited into

  account in the name of the signer. One of the ways for the casher to minimize 
  their risk of loss is by placing their restrictive endorsement on the cheque.
  c. Special endorsement
  A special endorsement allows a payee to make a cheque payable to another 
  person or entity. A cheque with a special endorsement is signed when you 
  want to deliver the cheque to someone else. It is different from a blank cheque 
  because the blank cheque can only be cashed or deposited by the person to 
  whom the cheque is being assigned. Make a special endorsement you must 
  write “pay to the order of [name of the person to whom the cheque will be 
  delivered]” and sign their name below.
  Advantages and disadvantages of a cheque
  Advantages 
  – It is more convenient than carrying cash around;
  – Payments can be stopped if necessary;
  – Cheques are safer crossed;
  – One does not have to count notes and risk making counting mistakes;
  – Cheques can be drawn anytime;
  – Some are negotiable and can be endorsed in favor of a third party;
  – They can be post-dated;
  – hey can be traced if lost;
  – They can be posted cheaply;
  – The customer is sent a statement at the end of each month.
  Disadvantages 
  - Cheques are not legal tender and other creditors may refuse to accept 
  them;
  - They may be valueless if the drawer has no funds on his/her account;
  - Depositing cheque into an account is time consuming;
  - Cheque can be tampered with or forged by changing the figures;
  - Cheques are not suitable for small amounts;
  - People without bank account will be inconvenienced by crossed cheques;
  

  - Bank charges are levied on cheque books and dishonored cheques.

  Dishonoring a cheque
  When a person presents a cheque in a bank and the bank refuses to make 
  payments as instructed, then we say that the cheque has been dishonored. In 
  most cases, we say the cheque bounced.
  Reasons for dishonoring a cheque:
  - When a cheque is not properly dated;
  - When a cheque is damaged i.e. some parts missing and can’t be read;
  - When it has been altered with some information changed;
  - When it’s stale cheque i.e. more than six months old;
  - If it is a post dated cheque i.e. if the date is a future date; e.g. a cheque 
  dated 25th March 2022 and presented 20th March 2022;
  - When the amount in figures differs from the amount in letters (in words);
  - Insufficient funds on the drawer’s account (cheque without provision);
  - When the account from which the cheque is issued has been already 
  closed;
  - Missing items on the cheque;
  - Signature is not matching, i.e. if the signature differs from the specimen, 
  

  the bank will suspect that it is forged.

  Application activity 2.7

  1. What is a cheque?
  2. State the importance of a cheque.
  3. What are the main items of a cheque?
  4. List out the types of a cheque
  5. Distinguish different forms of cheque endorsement
  6. State some advantages and disadvantages of using the cheque.
  2.8 Credit note
  Activity 2.8
  Analyze the case study below and answer the questions:
  BANANA GROWER Company, the supplier of green and yellow banana to 
  NYIRANGARAMA Enterprise supplied the stated items to its customer. At 
  delivery, the customer finds that some items don’t match with the order and 
  decides to return them to the supplier. On its return, the seller accepts the 
  return of the returned items and draw up document as an evidence of this 
  transaction.
  g) What are the activities made by the two people?
  

  h) What is the document prepared and sent by the receiver (buyer)?

  Credit note

  A credit note, also known as a credit memo, is another document originating 
  from the seller to the buyer. It is used to correct an overcharge on an invoice or 
  to certify the credit of set-off the return of goods by the seller. Where returns 
  goods to the supplier, his/ her liability is reduced and in this case the customer 
  should send back the goods, accompanied by a goods returned note, where 
  purchases return and consequently ask for a credit note from the supplier. 
  Credit notes issued during the period provide information on goods that have 
  been returned by the customer of sales returns, allowances for overcharges, 
  rebates, etc. and this information is recorded in the relevant books of account 
  for the period. By issuing a credit note, the seller promises to pay back the 
  reduced amount or adjust it in a subsequent transaction.
  The various reasons for the credit note may include the following:
  1. Sales return or certain goods or services rejected by the recipient;
  2. Goods damaged in transit of in some other way;
  3. Error in the price of goods or services in the original invoice;
  4. Over payment by the recipient on the original invoice;
  5. When the available discount has not been applied at the time of 
  preparation of the invoice;
  

  6. When the seller wants to cancel a payment pending from the buyer

  Application activity 2.8

  1. What is a credit note?
  2. State the importance of a credit note.
  3. Draw up and fill in a credit note basing on the following data:
  a) Name of the seller: BANANA GROWERS Company
  b) Name of the buyer: NYIRANGARAMA Enterprise
  c) Items returned/ damaged:
  – 50 Kg of green banana for FRW 500 each kg
  – 20 Kg of yellow banana for FRW 600 each kg
  d) Issuance date : 24th March 2022
  

  e) Number of the original invoice: 53100

  2.9 Debit note

  Activity 2.9
  

  Analyze the case study below and answer on the questions:
  BANANA GROWERS Company, a supplier of green and yellow banana 
  of NYIRANGARANA Enterprise, forgot to charge to its customer the cost 
  of transportation of the supplied items. It informs to the buyer the reason 
  of charging this cost through a written document. On its turn, after being 
  informed, the buyer accepts to pay this cost. 
  a) What are the activities made by the two people?
  

  b) What is the document prepared and sent by the seller)?

  A debit note is a document sent by the seller to the buyer to correct an undercharge 
  in an invoice. The effect of the debit note is to increase the customer’s account. 
  Debit notes provide information to correct undercharge on goods or in respect 
  of other charges and this information is then recorded in the relevant books of 
  

  account.

  This note is issued by the in goal to:

  i) Rectify a favorable mistake to buyer which it has been clearly fixed only 
  after the sending of an invoice.
  ii) Request additional payment as interests due a delay period made by the 
  buyer in the payment of this invoice
  iii) Charge the customer who fails to return the packaging cases or containers 
  not charged for in an invoice.
  Incoming debit notes are received from creditors, outgoing debit notes are sent 
  

  to debtors

  Application activity 2.9

  1. What is the debit note?
  2. State the importance of the debit note.
  3. Draw up and fill in the debit note basing on the following data:
  i) BANANA GROWERS Company sent a debit note concerning 
  the transport cost to NYIRANGARAMA Enterprise for goods 
  supplied on 24th March 2022
  ii) The transport cost is amounting to FRW 50,100 and were not 
  charged to the customer at the moment of issuing the invoice.
  iii) Issuing date: 25th March 2022
  

  iv) Number of the debit: 202020

  2.10 Petty cash voucher
  

  Activity 2.10
  

  NYIRANGARAMA Enterprise operates a number of transactions; the 
  cheque became a very important means of settling its business accounts, 
  such that most payments requiring sums of money are made by cheque. 
  Nevertheless, there are certain accounts that require small amounts for 
  settlement. Expenses for the kitchen, cleaning, postage etc. are settled by 
  small amounts of money which usually are not done by cheque. Sometimes, 
  items like stationery, travelling expenses, small ledger accounts, advances 
  to casual workers, etc. are required urgently and the procedure for preparing 
  a cheque for the purpose is rather long. The alternative is to keep some 
  cash to meet such minor and urgent payments. The amount of cash kept in 
  the office to meet minor and urgent expenses is called petty cash, float or 
  imprest. The clerk in charge of handling petty cash payments is known as 
  a petty cashier.
  a) From the case study above, state the source document which is 
  required.
  

  b) Give its format

  A petty cash voucher is an accounting term used to describe the form that is 
  used to record the transactions taken from a petty cash funds.
  The petty cash voucher is a specially designed form used by a petty cashier. It 
  states the nature of payment, the amount, date, the authority for the payment 
  and the person to be paid to. It also acts as evidence for receipt of such cash 
  as the recipient must sign it immediately after receiving the cash. It should be 
  numbered serially. Petty cash vouchers are used as a source of information for 
  recording the petty cash book, which records petty cash transactions.
  Petty cash voucher has on it the following features:
  a) Space for the date transactions are made;
  b) The amount of money disbursed;
  c) The name of the person being given the money;
  

  d) The reason why the money was given out;

  Importance of the petty cash voucher
  There are so many reasons why petty cash voucher is very important in many 
  businesses. The following are the major reasons why the petty cash voucher is 
  vital:
  a) These vouchers help to financially control the petty cash accounts in 
  order to make sure that no one can abuse or mismanage the funds in 
  the petty cash fund
  b) It can provide solid evidence when it comes the reconciliation of the 
  

  amount of cash that is left in the petty cash fund

  Application activity 2.10

  1. What is a petty cash voucher?
  2. State the importance of a petty cash voucher.
  3. Draw up and fill in a petty cash voucher basing on the following 
  data:
  – Company name: NYIRANGARAMA Enterprise
  – Purpose of expenditure: 
  • Travelling expense: FRW 30,000
  • Kitchen expenses: FRW200,000
  • Cleaning expenses: FRW 150,000
  • Casual labor expenses: FRW 45,000
  – Beneficiary name: KEZA
  

  – Date of payment: 26th March 2022

  Note that the above list does not exhaust all the source documents that you will 
  find in a business or any other organizational setting. Examples of other source 
  documents not described in details include quotation, statement, remittance 
  

  advice and many others. 

  End of unit assessment 

  1. What is a source document? 
  2. Explain concisely the following terms:
  (i) invoice
  (ii) credit note
  (iii) debit note
  (iv) cheque
  (v) receipt
  (vi) purchase order
  3. Among the documents commonly used in business are as follows:
  – Cheque
  – Petty cash voucher
  – Debit note
  Required: list under each of the above headings the details information 
  to describe the document
  4. Explain briefly but concisely the following business terms:
  a) Delivery note
  b) Goods received note
  5. What is the primary function of a sales invoice which a customer has 
  received from a supplier:
  a) It is a receipt for money paid;
  b) It is a demand for immediate payment by the supplier;
  c) It is a record of goods purchased by the customer;
  

  d) It is a demand for payment within an agreed time from the supplier

  6. Which of the following correctly describes the function of a credit 
  note issued by a supplier to one of its customers?
  a) A demand for payment;
  b) An agreed allowance which can be deducted from the nest 
  invoice payment;
  c) A loan available to the customer;
  d) A document used by the supplier to cancel part or all of a 
  previously issued invoice
  7. Which of the following correctly describes the term “debit note”?
  i) It is issued by a supplier to a customer to demand payment in full 
  for goods supplied
  ii) It is issued by a supplier to the customer to correct an undercharge
  iii) It is issued by a customer when goods are delivered
  iv) It is issued by a customer to a supplier to cancel an invoice 
  received
  8. The following transactions took place in the business of KALISA 
  Company, a sole trader. On 1stJanuary 2022, purchased the 
  following foods on credit from KARAKE Company, a sole trader:
  i) 5,000 kg of sugar at FRW 1,500 each
  ii) 15,000 kg of beans at FRW 700 each
  iii) 50,000 kg of rice at FRW 1,200 each
  You are required to design the appropriate source document from which 
  the above transactions were extracted, indicating the amount of money that 
  was actually due for payment considering that :
  • Trade discount applied is 5%
  • VAT applied is 18%
  

  • Number of the document: 505050

  

  
  

• UNIT 3:JOUNALIZING FINANCIAL TRANSACTION

  Key unit competence: To be able to journalize financial transactions 
  

  Introductory activity
  

  Peter MUGABONAKE is a sole trader in Muhanga, selling construction 
  materials. During the year 2021, he had made a number of transactions 
  and thought he had earned a good profit but did not know how much. 
  This is because he was not aware of sales realized during the period and 
  purchases made. He also had neither idea on other income nor expenditure 
  for the same period. Besides, it was very hard for him to know what to 
  plan for the forthcoming year. He advised himself to go for deep checking 
  on invoices for the period, but failed because some disappeared! Due to 
  that critical situation, he was late to declare and pay tax and consequently 
  charged and paid penalties. What was a mistake Peter MUGABONAKE 
  did? What is your advice to him? What do you think as a sustainable 
  answer to avoid that mistake from happening again?
  In principle, transactions must be recorded daily into the books or the accounting 
  system. For each transaction, there must be a document that describes the 
  business transaction. This unit describes first the double entry bookkeeping 
  system and later the books of original entry used before posting transactions 
  

  into ledgers which will be covered under unit 4.

  3.1. Double-Entry Bookkeeping System 

  Activity 3.1
  

  Suppose that you are hired as a book keeper of a given shop in your locality. 
  

  You are required to identify a suitable bookkeeping system that will help to 
  produce good financial reports and explain your choice.
  
  3.1.1 Meaning of Double Entry Bookkeeping System
  
  It is a recording system in which there is dual recording of transactions. Under 
  a double entry bookkeeping system, a transaction must be recorded twice ie. in 
  two accounts or books. The principle or the rule of the double entry states that 
  for every debit entry there must be a corresponding credit entry and for every 
  credit entry there must be a corresponding debit entry. For each transaction total 
  debits must equal total credits. Double entry is very important in accounting. 
  Failure to conform to the rule of double entry will mean that accounts including 
  the balance sheet will not balance.
  
  Debit and credit
  
  Under double entry system accounts are debited and credited. It is important at 
  this time to understand what these words mean. Debit and credit are means of 
  either increasing or decreasing an account. They replace plus or minus used in 
  arithmetic. Depending on the nature or type of an account, debiting or crediting 
  could mean either increasing or decreasing it. 
  An Account
  An account is a record in a summarized form and in chronological order of 
  transactions that took place in an organization. It is a heading under which 
  related transaction are brought together i.e. different transactions are classified 
  into their respective accounts.
  

  In manual accounting systems, accounts are recorded in “T” form.

  Eg:
  

  
  

  It is conventional that the left hand side of an account is the debit side while the 
  right hand side is the credit side. The words debit and credit may not have to 
  be reflected in the account because it is common knowledge that the left hand 
  side is debit and the right hand side is credit.
  In the computerized accounting system, an account is written with a running 
  

  balance as shown below:

  
  

  Classification of Accounts
  Accounts in the ledger are mainly classified into two categories namely:
  a) Personal accounts
  b) Impersonal accounts
  These accounts will be opened according to the requirements of the business.
  

  Below is an illustration to show the classification of accounts

  
  

  They are explained as below:
  

  Personal Accounts
  

  These are accounts, which have names of business, persons or firms. They 
  mainly fall under debtors’ accounts, creditors’ accounts, drawings and capital 
  accounts.
  a) Debtors’ accounts: These records the accounts of person or organization 
  to whom the business has sold goods on credit or to who the business 
  has extended another credit.
  b) Creditors’ accounts: These record the accounts of persons or 
  organizations from whom the business has bought goods on credit or 
  from whom a business has taken another credit.
  c) Drawings account: Drawings is a term used whenever the business 
  owner reduces: the business resources for his personal/ private use. 
  Drawings reduce business funds and therefore the drawings account is 
  treated as a reduction in capital. It is debited whenever a drawing is made. 
  At the end of financial period all entries of drawings are added up and the 
  total debited on the capital account. This implies that the capital account 
  (owner’s resources in the business) is reduced to the extent of drawings. 
  In addition, when the owner takes out some of the goods for his own use; 
  

  this debits drawings account and credits purchases account.

  d) Capital Account: This account will record the transactions of the 
  business and the proprietor/ owner. Thus any amount invested by the 
  proprietor is recorded in this account.
  Impersonal Accounts
  a) Real Accounts: These are accounts which record tangible items i.e. 
  physical items or things which we can see, touch or feel. They are 
  mainly assets accounts like Land, machinery, motor vehicles, cash, 
  stock, etc.
  b) Nominal Accounts: These are accounts which record intangible 
  items i.e. they record things which we cannot see physically, touch or 
  feel. They are either expenses or incomes accounts. Eg. Rent, Salaries, 
  interests received, discount received, sales, purchases, etc
  The following table is useful in understanding double entry
  
  
  Accounts and Double entry
  A classification of accounts enables us to establish rules for making double 
  entry. When completing double entry three points should be considered:
  a) What two accounts are affected?
  b) What types of accounts are they?
  c) Which account is to be debited and which account is to be credited?
  Nature of ledger balances
  Debit balances: These may be classified as assets, expenses or losses
  Credit balances: These are classified as liabilities, incomes and gains.
  Determination of the accounts affected and Description of the impact 
  on the accounts (increases or decreases)
  Example
  Identify the accounts affected by the following transactions and show action to 
  take when recording the accounts in the double entry system. 
  1. Owner puts cash into business
  2. Paid creditor KAGABO by cheque
  3. Bought goods on credit from Wellars 
  4. A debtor KARAKE paid us in cash
  5. Received rent payment in cash
  6. Owner withdraws cash from business for personal use
  7. Paid commission by cheque
  8. Bought furniture on credit from Omar
  9. Sold goods receiving cash payment
  

  10. Bought goods paying in cash

  11. Sold goods on credit to KARAKE
  12. Some of the goods bought from Omar were returned back to him for 
  default reasons
  13. KARAKE returned to us some of the goods bought, as they were in 
  

  excess of his order.

  

  

  

  Application activity 5.1

  1. Write short notes on the following:
  a) Personal account
  b) Real account
  c) Nominal account.
  2. From the following names of ledger accounts in the books of a 
  trader, rule columns headed assets, liabilities, Gains and expenses 
  

  in each column place the right items.

   

  4. Complete the following table, identify the accounts affected by 
  each transaction, and state whether the account is to be debited or 
  

  credited.

  
  
  3.2 General Journal
  Activity 3.2
  Referring to the knowledge gained from entrepreneurship O Level describe 
  the general journal and give its format.
  Activity 3.2
  This is the book of original entry also known as journal proper or principal 
  journal, which is used to record items of a non-routine nature which cannot be 
  recorded in other book of prime entry. Unlike the subsidiary books, transactions 
  in the general journal are entered on a double entry basis and in order of their 
  

  occurrence. It is ruled with columns for date, details, folio and debit and credit 

  amount columns and each transaction recorded therein is a true reflection of 
  how such a transaction will appear in the ledger. A debit entry in the journal is 
  still a debit entry in the ledger and likewise, a credit entry in the journal will be 
  a credit entry in the ledger for accounts concerned. Even though the journal 
  is operated on double entry lines like the ledger, it means subsidiary to the 
  ledger. Whatever is entered in the journal has to be transferred to the ledger for 
  permanent record.
  

  An illustration of a general journal format is as shown:

  

  A journal entry must have a narration which is a brief explanation of what has 
  taken place. The narration gives some reason why one account has to be 
  debited while the other is credited and also some reference as the origin of the 
  transaction.
  Notes: 
  Details/Account title: the name of the account involved in the transaction is 
  entered in this column plus a narration or explanation of the transaction.
  Folio: this column shows the reference where the account can be found in the 
  ledger especially the page number of the account in the ledger. At times instead 
  of using folio, LP standing ledger page is used. In real World, this column is 
  largely referred to as reference.
  Date: Dates at which transactions occurred are entered into this column.
  Use of a general journal
  The general journal serves many useful purposes such as the recording of:
  – Opening balances at the beginning of a financial period
  – Purchase or sale on credit of non-trading items like non-current assets.
  – Correction of errors made during the recording of transaction, balancing 
  and closing accounts in the ledger.
  – Transfer of amounts from one account to another in the ledger
  – Adjustments in accounts in respect of items relating to succeeding and 
  preceding periods not connected with the present accounting period, 
  which have not been taken into account.
  – Adjustments at the close of the period(e.g depreciation, bad debts, 
  interest on capital)
  – Closing accounts of a business at the end of its financial period.
  Preparation of the General Journal
  Illustration 
  The following transactions are for AKEZA LTD for the month of October 2021. 
  Enter them into a general journal.
  Oct. 1 Started business with FRW 20,000,000 cash
  Oct. 2 Purchase land for the business at FRW 3,000,000 by cash
  Oct.4 Purchased office equipment on credit from Equipment Suppliers Ltd at 
  FRW 2,000,000
  Oct. 5 Obtained bank loan of FRW 8,000,000 it was deposited to a bank A/C
  Oct.15: Made part payment of FRW 1,500,000 to Equipment Suppliers Ltd by 
  cheque.
  Oct. 17: Bought motor vehicle from TOYOTA RWANDA at a cost of FRW 
  15,000,000
  Made cash payment of FRW 10,000,000, paid FRW 3,000,000 by cheque and 
  promised to pay balance later
  Oct. 20: Sold a portion of land that was fully un-utilized for cash FRW 500,000
  Oct. 25: Fully settled the balance of FRW 2,000,000 by cheque due to TOYOTA 
  RWANDA for the motor vehicle
  Oct. 30: FRW 800,000 business cash was used to entertain relatives from 
  

  upcountry

  

  

  
  Record of opening balances
  The journal proper is used to record the opening balances of assets, liabilities 
  and capital before they are posted to the respective ledger accounts. Where 
  capital is not known at the start of the period and where assets and liabilities 
  are given the opening journal helps to ascertain that capital. The double entry 
  system establishes a balancing concept in accounting (i.e. total debits should 
  always equal to total credits). Therefore, Assets= Liabilities + Capital as assets 
  are debits whereas liabilities and capital are credits. The journal is thus debited 
  with assets items and credited with liabilities items. The amount needed to strike 
  the balance on the credit side is capital
  Example 1
  Miss KEZA, commenced business on January 2022 with a Toyota pick-up van 
  valued at FRW 27,500,000; land at FRW 50,000,000 and cash in hand FRW 
  100,000,000. She also owed FRW 7,000,000 to her sister SIFA for money lent. 
  

  You are required to record an opening entry for Miss KEZA

  

  Assets= Liabilities + Capital
  Assets: 27,500,000 + 50,000,000 + 100,000,000 = 177,500,000
  Liability = 7,000,000
  Capital = Asset - liability
  Capital = 175,000,000 - 7,000,000 = FRW 170,500,000
  Example 2
  Pass entries in the general journal to record the following transactions:
  a) Purchase a delivery van worth FRW 202,500,000 from 
  RWANDAMOTOR paying half amount by cheque
  b) Took out of stock of goods valued at FRW 100,000 for own use.
  c) A credit note issued to Jane B. for FRW 30,000 was posted to the 
  credit of Janine B.
  d) The bank statement indicated bank charges of FRW 15,000 which I 
  had not yet recorded in the books.
  e) An invoice received for a credit purchase of furniture for FRW 800,000 
  

  debited to purchases account

   

  

  
  3.2.1 Journal entries for VAT
  What is VAT?
  Value Added Tax (VAT) is a tax charged on the supply of goods and services in 
  Rwanda. The concept underlying VAT is that the tax is paid by ultimate consumer 
  of the goods or services but that everyone in the supply of chain must account 
  for and settle up the net amount of VAT they have received in the VAT tax period 
  usually one month. If they have received more in VAT than they have paid out in 
  VAT, they must send the difference to Rwanda Revenue Authority. If they have 
  paid out more than they have received, they will be reimbursed the difference 
  (known as VAT refund). The rate of VAT in Rwanda is 18%. The following exhibit 
  

  shows, through an example, how the system works

  

  
  

  In the above example,

  1. A manufacturer sells a table to a retailer for FRW 100 plus VAT of FRW 
  18
  2. The retailer pays the manufacturer FRW 118 for the table
  3. The VAT on that sale (FRW 18) is sent by the manufacturer to Rwanda 
  revenue Authority (RRA)
  4. The retailer sells the goods to customer (i.e. the consumer) for FRW 120 
  plus VAT of FRW 22.
  5. The customer pays FRW 142 to the retailer for table.
  6. The amount of VAT paid for the goods by retailer to the manufacturer 
  (FRW 18)is deducted from the VAT received by the retailer from the 
  customer (FRW 22) and the difference of FRW 4 is then sent to RRA.
  Only the ultimate consumer has actually paid VAT. Unfortunately, everyone in 
  the chain has to send the VAT charged at the step when they were in the role 
  of seller. In theory, the amount received in stages by Rwanda Revenue Authority 
  will equal the amount of VAT paid by the ultimate consumer in the final stage of 
  supply chain.
  VAT paid on inputs (purchases) is called input VAT or VAT deductible while 
  VAT received from sales is known as output VAT or VAT collectible
  The VAT Account
  All registered business must account for VAT on all the taxable supplies they 
  make and all the taxable goods and services they receive. They must also keep 
  a summary (called a VAT Account) on the totals of input tax for each VAT tax 
  period. All these records must be kept up to date.
  Journal entries for VAT
  Example 1
  A construction materials Shop (NYACOM) situated in Nyarugenge District 
  sold materials of construction to Mr KALIMA of MUHANGA District valued at 
  FRW 972,500 VAT included according to the information on the invoice No 
  075/C.M/2021 sent by NYACOM to Mr KALIMA.
  Required: Calculate the VAT charged and record the transaction in general 
  

  journal of NYACOM. 

  Answer:
  

  
  

  Example 2
  The following transactions have been made by MGK Ltd. You are required to 
  journalize them.
  a) 10/1/2022 Bought goods for FRW 16,520,000 inclusive of VAT on 
  credit to ABC Ltd. 
  b) 25/1/2022 Sold all the goods bought on 10/1 for FRW 18,000,000 
  before tax by cheque.
  c) 15/2/2022 Declared and paid the VAT to Rwanda Revenue Authority 
  (RRA) by cheque.
  Note: the VAT rate being 18%.
  Answer:
  a) VAT= 16,520,000x18/118= 2,520,000
  Net amount from VAT= 16,520,000- 2,520,000 = 14,000,000
  b) Net amount = 18,000,000
   Add: VAT 18%= 3,240,000
   Amount with VAT 21,240,000
  c) VAT payable = VAT collectible- VAT deductable 
  

   = 3,240,000 - 2,520,000 = 720,000

  
  

  3.2.2 Journal entries for payroll information
  Salaries and wages usually form a substantial part of a business's expenditure, 
  especially in service organisations. However, salaries and wages expenditure 
  does not arise in the same way as other cash and credit purchases.
  The entries in the accounting system that are made in respect of salaries and 
  wages are known as payroll transactions.
  To understand payroll transactions, you need to have a basic understanding 
  of the main statutory and voluntary transactions which are processed through 
  payroll.
  Gross pay: 
  Gross pay is the total amount that the employer owes the employee before any 
  deductions have been made.
  Statutory deductions:
  Income tax and employees' social security contributions are known 
  as statutory deductions from gross pay, because the law (statute) requires 
  employers to make these deductions from individuals' salaries.
  Employees pay their income tax under the income tax system. This means that 
  each time an employee is paid by their employer, the income tax for that period 
  (eg monthly) is deducted from their wages by the employer. At regular intervals 
  the employer then pays the income tax over to the tax collecting authority on the 
  employees' behalf.
  Employees must also pay employees' social security contributions to the tax 
  authorities. Social security contributions are just another form of tax, calculated 
  differently from income tax. An individual employee's social security contributions 
  are deducted from the employee's wages and paid over to the tax authorities, 
  together with the employee's income tax.
  Voluntary deductions
  An employee may choose to have other (voluntary) deductions made from gross 
  pay. These items can only be deducted from an employee's gross salary if the 
  employer has the employee's written permission to do so.
  For example, if an employee chooses to make pension contributions, this money 
  is deducted from gross pay and transferred to a pension administrator to provide 
  a pension for the employee on retirement.
  Other voluntary deductions include the repayment of a loan from the business 
  (for example, to repay a season ticket loan for travel to work).
  Net pay
  Once all deductions have been made, the amount paid to the employee is called 
  net pay. It is sometimes referred to as 'take home pay'.
  Employer's social security contribution (statutory)
  The employer is also required to pay an additional amount of social security 
  contributions for each employee, known as the employer's social security 
  contributions. This is yet another form of tax, but the difference is that it is only 
  suffered by the employer. There is no deduction from the employee's gross 
  pay for the employer's social security contributions. Employer's social security 
  contributions are paid by the employer to the tax authorities.
  Employer's pension contribution (voluntary)
  The employer may make a voluntary contribution to the employee's pension. 
  Again, this is in addition to the gross pay. Therefore, it increases the 'total cost' 
  of employing individuals. However, it is not deducted from the gross pay.
  Accounting for Payroll transactions 
  Payroll is accounted for using the double entry bookkeeping rules that we are 
  familiar with. The following example is a simple illustration of recording payroll 
  transaction in the context of Rwanda. Note that the example includes RSSB 
  maternity leave contribution which was not talked about in the above deductions, 
  

  however it is a common statutory deduction in Rwanda. 

  
  

  

  3.2.3 Types of discounts
  Discounts can be defined as follows:
  A trade discount is a reduction in the listed price of goods, given by a 
  wholesaler or a manufacturer to a retailer. It is often given in return for bulk 
  purchase orders. 
  A cash(settlement) discount is a reduction in amount payable in return for 
  payment in cash, or within an agreed period.
  Examples are given below
  i) Trade discount
  It is discount that you receive from the seller at the time of buying goods 
  (may be because of buying higher quantity or due to your business relations 
  with the seller etc) and the same is deducted or adjusted in the invoice. The 
  supplier’s invoice states the actual amount payable, net of trade discount.
  E.g: Gross sales: FRW 700,000
   Trade discount: 5%
  Calculation:
  Gross sales 700,000
  Trade discount (5%) 35,000
   Net sales 665,000
   Accounting treatment of trade discounts 
  Trade discounts are not recorded in the accounting books. The net amount of 
  invoice will be used in recording the goods purchased or sold.
  In the books of supplier:
  Dr: Debtor A/C 665,000
  Cr: Sales A/C 665,000
  In the books of debtor
  Dr: Purchases A/C 665,000
  

  Cr: Suppliers A/C 665,000

  ii) Cash discount
  It is a reduction allowed to a customer who pays before the end of credit period. 
  A credit period is a length of time that a customer is allowed to delay payment. 
  The customer qualifies for the cash discount only when he pays before the end 
  the credit period but within agreed period of time.
  Note: cash discount is always recorded in the books of accounts.
  Cash discount is in two types: Discount allowed and discount received.
  Discounts allowed: they occur when the company accepts the payment 
  from a customer of a lesser amount than the amount due because he paid 
  promptly. It is treated as an expense because it reduces the amount charged to 
  the customer.
  Dr: Discount allowed A/C
  Cr: Debtors A/C
  At the end of the accounting period, the balance on the discount allowed 
  account is transferred to the debit of the profit and loss account as an expense.
  Besides when it is received from the supplier, it is called discount received 
  and it is treated as an income because it reduces the obligation toward the 
  supplier and it is recorded as under:
  Dr: Suppliers A/C
  Cr: Discount received A/C
  Example 1
  Albert has sold goods to William on credit for FRW 5,000,000.it is then agreed 
  that if William pays within 20 days of his purchase, he can receive 10% as 
  discount. If William performed payment within 20 days, show the journal entries 
  for both parties.
  Answer:
  a) In the books of Albert (seller)
  Dr: Cash A/C 4,500,000
   Discount allowed 500,000
  

  Cr: Debtors (William) A/C 5,000,000

  b) In the books of William (buyer)

  Dr: Suppliers (Albert) A/C 5,000,000

  Cr: Cash A/C 4,500,000

   Discount received A/C 500,000

  Example 2

  On 20th January 2022, Denis purchased from Alfred 1000 units of item at FRW 
  5300 each. As Denis is a regular customer, Alfred has to offer 2% discount for 
  bulk purchase and 5% discount for immediate payment.
  Determine how much has invoiced to Denis and show the accounting entries 
  

  for both parties.

  Answer:
  Calculations: Total sales: 1000x5300 = 5,300,000
   Less trade discount (2%) 106,000
   5,194,000
   Less cash discount (5%) 259,700
   Net cash paid by Denis 4,934,300
  Journal entries
  a) In the books of Alfred ( the seller)
  Dr: Cash A/C 4,934,300
   Discount allowed A/C 259700 
  Cr: Sales A/C 5,194,000 
  b) In the books of Denis ( Customer)
  Dr: Purchases A/C 5,194,000
  Cr: Cash A/C 4,934,300
  

   Discount received A/C 259700 

  Application activity 3.2
  

  Enter the following transaction into the general journal properly showing 
  

  the double entry. The transactions are for AKANYANA Ltd for the month of 
  

  January 2022
  

  Jan.1 Bought goods on credit from Peter for FRW 400,000
  

  2 Bought goods on credit from Jane for FRW 200,000
  

  3 Sold goods to John on credit for FRW 1,000,000
  

  4 Sold goods to Mary on credit for FRW 400,000
  

  5 Returned goods worth FRW 50,000 to peter because they were defective
  

  10 Received part payment of FRW 800,000 cash from John for goods 
  

  taken on credit
  

  12 Made part payment to Peter FRW 80,000 cash
  

  14 Purchased goods for FRW 60,000 on credit from Jane
  

  15 Mary rejected and returned goods worth FRW 40,000
  

  16 Received a cheque of FRW 150,000 from Mary as part for payment for 
  

  goods taken on credit
  

  17 Paid rent cash FRW 100,000
  

  18 Returned goods worth FRW 50,000 to Jane because they were 
  

  defective
  

  17 Paid rent cash FRW 100,000
  

  18 Returned goods worth FRW 50,000 to Jane because they were 
  

  defective
  

  19 Paid Jane FRW 150,000 by cheque
  

  20 Sold goods to John on credit for FRW 800,000
  

  22 Bought goods for FRW 100,000 paying cash
  

  23 Sold goods cash FRW 500,000
  

  24 Sold goods for FRW 4,000,000 receiving payment by cheque 
  

  immediately.
  25 Purchased goods for FRW 100,000 from Peter
  26 Paid Peter FRW 80,000 cash
  27 John rejected and returned goods worth 100,000
  28 Received a cheque of FRW 200,000 from John for goods sold to him 
  on credit
  29 Paid for electricity FRW 50,000 by cheque and FRW 100,000 cash
  30 Paid rent FRW 60,000 by cheque
  

  31 Paid salaries FRW 150,000 cash and FRW 160,000 by cheque

  3.3 Sales Journal
  

  Activity 3.3
  

  Describe the books of original entry which records credit sales of goods
  Sales day book/Sales Journal
  This is the book of original entry in which daily credit sales are recorded from 
  copies of invoices issued to debtors before posting to the ledger. Each credit 
  sale is recorded in chronological order in the sales daybook, the personal 
  account of the customer in the ledger is debited with the amount of sale. At the 
  end of the week or month or any other posting period, the sales journal is totaled 
  to ascertain the total credit sales for the period. This total is then credited to the 
  sales account in the ledger, thus completing the double. If the posting is done 
  accurately, the sum of individual amounts to the individual customers’ accounts 
  in the ledger should agree with the amount of credit sales.
  

  Format of Sales Journal or Sales Daybook

  
  

  

  Example 1
  The following credit transactions took place in the firm of AKALIZA during the 
  month of February 2022.
  Feb. 2 Sold 50 sacks of Cement at FRW 10,000 each on credit to BAHIZI
  Feb. 2 Sold 70 sacks of cement at FRW 10,500 each on credit to Horizon Ltd 
  Feb 3 Sold 500 sacks of cement at FRW 10,500 each on credit to Fair 
  Constructors Ltd less a 2% trade discount.
  Feb 10 Sold 600 sacks of cement at 10,200 each on credit to Real Constructors 
  Ltd, receiving half the amount in cash.
  

  Answer

  
  

  Example 2

  A company sold goods to the following people on credit during the month of 
  September 2021:
  Sept. 1 John for FRW 450,000 Invoice No 301
  4 BAHATI for FRW 1,000,000 Invoice No 303
  6 Joseph for FRW 900,000 Invoice No 404
  

  7 Anitha for FRW 500,000 Invoice No305

  
  

  Application activity 3.3
  

  
  

  3.4 Purchases day book/ Purchases Journal
  

  Activity 3.4
  

  Referring to the competences acquired from senior two, describe the use 
  of purchases journal.
  This subsidiary book contains day-to-day records, in chronological order, of 
  information on purchases. As each credit purchase is recorded from the invoice 
  into the purchases day book, the personal account of the credit supplier in the 
  ledger is credited. At the end of the month or other posting period, the total in 
  the purchases day book representing total credit purchases for that period, is 
  ascertained and posted to the purchases account in the ledger to record the 
  credit purchases in the ledger and also to complete the double entry. This debit 
  total extracted from the purchases day book should agree with the sum of the 
  individual amounts credited to the individual creditors’ accounts in the ledger. In 
  the details column of the purchases account in the ledger, the word “totals” is 
  used to indicate that it is a summary total posted and in the folio column, PDB is 
  

  used to show that the total was extracted from the purchases day book.

  Format of Purchases Journal
  

  
  

  Example1

  During the month of February 2022 AKALIZA had the following transactions in 
  its business:
  February 1 Purchased 2000 sacks of cement at FRW 9,000 each on credit 
  from CIMERWA.
  2 Bought 2,500 sacks of cement at FRW 8,500 each on credit from SIMBA 
  

  cement less 2.5% trade discount

  13 bought 1000 sacks of cement at FRW 9,200 each from HIMA cement on 

  credit.

  Enter the above transactions in a purchases day book.

  
  

  Example 2
  Record the following transactions into the purchase journal
  Jan. 1 Bought goods on credit from Tom for FRW 2,000,000 Invoice No 199
  2 Bought goods on credit from Moses for FRW 4,000,000 Invoice No 200
  8 Bought goods on credit from Josias for FRW 5,000,000 Invoice No 201
  10 Bought goods on credit from Joy for FRW 10,000,000 Invoice No 202
  

  Answer

  
  

  Application activity 3.4
  

  
  

  3.5 Sales Returns/Returns Inwards Journal 
  

  Activity 3.5
  

  List as many reasons as you can think of why (a) retail customers and (b) 
  trade customers may return goods to the seller
  This book is used to record credit note issued for goods returned to the seller 
  his/her credit customer. The individual items are recorded in the sales returns 
  day book as credit notes issued, and are immediately posted to the credit of 
  the personal accounts of the customers concerned in the ledger. At the end of 
  the posting period, the total in the sales returns Journal representing total sales 
  returns is debited to the sales returns inwards account in the ledger to complete 
  

  the double entry and to record the sales returns in the ledger

  
  

  
  

  
  

  Example 2

  Record in a suitable book of prime entry the following transactions which took 
  place in the firm of AKALIZA for the month of February 2022
  Feb. 5 BAHIZI returned 5 sacks of Cement worth FRW 10,000each sold to him 
  on 2nd February, credit note No 005 issued.
  7 Horizon Ltd returned 3 defective sacks which they had bought on credit for 
  

  FRW 10,500 each, credit note No 006 issued.

  Answer
  

  
  

  3.6 Purchases Returns/Returns outwards Journal
  

  Activity 3.6
  

  Suppose that your company needs to keep the separate books of prime 
  entry according to its transactions. Discuss the book of original entry under 
  

  which credit notes received from your suppliers will be recorded.

  Activity 3.6

  This book is used to record particulars of all credit notes received from suppliers 
  

  in respect of goods returned by the buyer to the seller. Goods purchased 
  may be returned if they do not conform to the order as to quality, if they were
  damaged in transit and credit is claimed from each supplier. Individual credit 
  notes received for goods returned are recorded in the returns journal in a similar 
  to purchases. At the end of the period, the purchases returns journal is totaled 
  to ascertain the total credit notes received for the period. This is then credited to 
  the returns outwards account in the ledger. If the goods returned were subject 
  to a trade discount, the necessary adjustment should be made when preparing 
  

  the returns advice claim for dispatch to the supplier

  
  

  Example 2

  The following are MUYIZERE’s transactions which he carried out in the month 
  of March 2022. Prepare his purchases returns day book.
  1st March Bought goods from SULFO RWANDA 8 Cartons of Soap at FRW 
  87,500
  

  5th March Bought goods from Omar 7 cartons of Naomi at FRW 8,700; cartons 
  of OMO at FRW 7,500
  10th March Bought goods from 30 boxes of biscuits at FRW 2,500
  20th March Bought goods from KABANDA 5 bags of sugar at FRW 55,000
  25th March Returned to SULFO RWANDA 2 cartons of cowboy at FRW 9850 
  as damaged and 2 cartons of soap at FRW 87,500
  30th March returned to KABANDA 3 bags of sugar at FRW 55,000 as damaged 
  

  and 1 bag of salt at FRW 10,000.

  
  

  Application activity 3.6
  KAMUZINZI is a sole trader in Kigali, the following are transactions he 
  made during the month of June 2021.
  June 1st Credit purchases from: Bertin FRW 2,500,000; Mathew FRW 
  14,500,000 Andrew FRW 35,000,000
  4th Credit sales to: David FRW 41,000,000; Zouzu FRW 34,000,000; 
  Blaise FRW 27,000,000
  10th Credit purchases from: Thomas FRW 14,700,000; Bertin FRW 
  10,000,000; Mathew FRW 19,000,000
  12th Goods returned to Bertin FRW 3,500,000; Mathew FRW 5,000,000
  15th Goods returned by Zouzu FRW 2,500,000; Blaise FRW 3,000,000
  20th Credit purchases from: Thomas FRW 18,600,000; Bertin FRW 
  25,000,000; Mathew FRW 8,000,000 
  22nd Credit sales to: Zouzu FRW 15,000,000; David FRW 22,000,000
  25th Goods returned to: Thomas FRW 2,000,000; Mathew FRW 1,500,000
  30th Zouzu returned goods worth FRW 1,800,000
  

  You are required to prepare his returns outwards day book

  3.7 Cash Book 
  

  Activity 3.6
  

  KARUMUGABO a sole trader in your locality had numerous cash 
  transactions in his business, and needs to keep a separate book under 
  which cash and cheque transactions will be recorded, he asks you as 
  professional accountant to design a book that will help him to respond to 
  

  his need.

  3.7.1 Nature and purpose of a cash book

  Most of the numerous transactions of a trader involve the receiving and paying 
  of cash. There are many slogans displayed prominently in shop as “Pay Cash 
  Today, for Credit Come Tomorrow”. The commonest book of accounts is the 
  cashbook, which contains all records of payments and receipts of cash. Cash 
  here means bank notes, coins, money orders, credit transfers, cheques or other 
  form of monetary payment or receipt acceptable in settlement of business debts. 
  The cash book is said to be both a book of original entry and ledger. Thus, its 
  full name is cashbook ledger. It is a book of original entry because any receipt 
  or payment of cash is first recorded in this book before being posted to another 
  ledger account. It is important to note therefore that there is no subsidiary book 
  for cash transactions other than the cashbook, and credit transaction must not 
  be recorded in the cash book.
  The cashbook is a ledger account because for every debit or credit entry made 
  in it, there must be a corresponding credit or debit entry in other accounts in the 
  ledger. Further, once a record is made in the cashbook, it is permanently kept 
  therein. The double entry rule applicable to recording entries in the cash book 
  

  is debit receipts and credit payments, which is consistent with the double entry 

  principle of debiting the account that is receiving value and crediting the one 
  giving value.
  In brief, a business that keeps record of a cash book as an original book of entry 
  need not post separate bank and cash accounts into the ledger, as the cash 
  

  book serves the entire purpose. 

  3.7.2 Types of Cash Book

  i) One-column Cash Book

  One-column cash book is the simplest version of a cash book being a mere 
  ledger ruling with debit and credit columns and columns for dates, details, folio 
  and amounts as shown. On the debit side are entered all cash receipts and on 
  credit side the cash payments. This is a typical cash account for businesses 
  

  which do not use and accept cheques. 

  
  

  Example

  From the following transactions during the month of January, write Souzane’s one 
  column cash book. She started business on 1st January 2022 having transferred 
  FRW 9,600,000 from his private bank account to the business office.
  January 1st Paid FRW 480,000 for rent for the month and made purchase of 
  FRW 3,830,000.
  2nd Paid FRW 380,000 for stationery and FRW 192,000 for stamps
  4th Cash sales FRW 1,728,000
  7th Paid FRW 288,000 in respect of wages to assistant.
  10th Borrowed FRW 4,800,000 from Joyce, a friend.
  13th Bought a used Pick-up for FRW 9,216,000 from AKAGERA Garage 
  against FRW 1,920,000 deposit
  19th Cash sales FRW 4,224,000
  20th Paid wages for two weeks, FRW 576,000
  23rd Bought FRW 6,240,000 goods from ABC Wholesalers Ltd. on credit
  29th Drew FRW 2,880,000 for private use
  30th Cash sales FRW 2,688,000
  

  31st Paid another FRW 5,760,000 off pick-up account.

  Answer
  

  
  

  ii) Two-column Cash Book

  A two column cash book has two amount columns on each side of the book. On 
  the debit side, one column represents cash receipts, while the other represents 
  bank receipts. Similarly, the cash and bank columns appear on the credit side 
  to represent their respective payments. 
  The cash book is balanced by comparing totals of each account column on 
  either side in the same way the ledger accounts are balanced off. 
  Example 
  The following transactions were extracted from the books of KAGABO for the 
  period of March 2022.
  March 1st balance brought forward
  Cash FRW 2,400,000
  Bank FRW 3,840,000
  March 1st Paid rent cash FRW 240000
  2 Made payments for telephone and postage by cash FRW 38,400
  4 Paid cash for sundry expenses FRW 24000
  8 Sold goods and was paid by cash FRW 5,920,000
  10 Received payment by cheque from Naome MUKAMA FRW 384,000
  11 Deposited cash in bank FRW 2,880,000
  13 Payment by cheque was made to Barnabe FRW 2,025,000
  20 Paid for advertisement in cash FRW 115,200
  29 Sent cheque to William FRW 720,000
  31 Drew a cheque for own use FRW 480,000
  31 Paid FRW 1,248,000 cash into bank
  Required: Show the above transactions in a two column cash book, balance it 
  

  off and bring down the balances.

  Answer

  KAGABO

  
  

  
  

  iii) Three column Cash book

  A three column cash book has an additional column on the debit side, to 
  record discounts allowed and on the credit side the additional column records 
  discounts received.
  Every debit entry made in the cash book for discount allowed has a corresponding 
  credit entry in the debtor’s ledger, in the account of debtor being allowed the 
  cash discount. Similarly, every credit entry of discount received made in the cash 
  book, has a corresponding debit entry in the creditor’s ledger in the account of 
  the creditor from whom discount is received.
  At the end of accounting period, amounts in the discount column are separately 
  added up for each column. Note that the discount columns, unlike the cash 
  and bank columns are not balance off. Each discount column shows the actual 
  totals. The totals are then posted into the general ledger in the respective 
  

  discount accounts

  The total of discount allowed column is posted on the debit side of discount 
  allowed account. Likewise the total of the discount received columns are posted 
  on the credit side of the discount received account.
  It is important for you to understand the alternative method whereby a three 
  column cash book is used. In this case, each individual discount entry is made 
  in the general ledger, in the concerned account, instead of posting of posting in 
  it only total amounts. 
  Example
  Write up a three column cash book for KAREGEYA for details given below, 
  balance off at the end of the month and show the discounts accounts in the 
  

  general ledger in March 2022

  

  

  

  Note: Cheques drawn for own use must not be treated as a contra since this 
  is for personal use and not for office use; hence the debit entry is made in the 
  “Drawings Account”. A contra is also defined as the balance of an account that 
  represents a deduction from another account e.g. provision for depreciation, 
  

  bad debts, reserves, etc.

  Application activity 3.7

  From the following transactions enter the relevant transactions in 
  

  the cash book and open up the ledger for discount accounts

  
  

  3.8 Petty Cash Book 
  

  Activity 3.8

  BAHIZI is a Wholesaler in Nyarugenge Matheus, selling electronic items 

  import from CHINA. In order to avoid holding big amount of money in his 

  office, he uses cheques in all business transactions, including receipts and 

  payments. Few days later, he failed to handle small expenses which normally 

  require the use of cash other than cheques. In your groups, discuss the 

  simple way may be used to handle those small expenditure.

  3.8.1 Petty cash

  The cheque has become a very important means of settling business accounts, 
  such that most payment requiring large sum of money are made by cheque. 
  Nevertheless, there are certain accounts that require small amounts for 
  settlement. Expenses for the kitchen, cleaning, postage etc. are settled by small 
  amounts of money which usually are not done by cheque. Sometimes, items 
  like stationery, travelling expenses, small ledger accounts, advance to casual 
  workers, etc. are required urgently and the procedure for preparing a cheque for 
  the purpose is rather long. The alternative is to keep in the office to meet minor 
  and urgent expenses is called petty cash, float or imprest. The clerk in charge of 
  handling petty cash payments is known as a petty cashier
  3.8.2 Petty cash voucher
  This is a specially designed form used by a petty cashier. It states the nature of 
  payment the amount, date, the authority for the payment and the person to be 
  paid to. It also acts as evidence for receipt of such cash as the recipient must 
  sign it immediately after receiving the cash. It should be numbered serially. Petty 
  cash vouchers are used as source of information for recording the petty cash 
  book, which records petty transactions.
  3.8.3 The petty cash book
  This is the book of account in which petty cash transactions are recorded. The 
  petty cashier is provided with a strong cash box in which the petty cash is kept 
  and locked in a drawer. The patty cashier also keeps payment vouchers which 
  serve as source documents for information to be recorded in the petty cash 
  book. The vouchers state the date for payment brief details of the nature of 
  payment, the amount of payment, the recipient of the money, the authority for 
  payment, payments analysis etc.
  Each recipient of petty cash fund must fill in and sign a petty cash voucher 
  which is the checked and approved by the accountant before cash is paid out. 
  The petty cashier must retain the payment voucher as evidence of the payment. 
  At all times, the total of amount appearing in the payment vouchers and the 
  balance of cash in hand in the cash box should add up to the original amount of 
  money given to the petty cashier as petty cash.
  The petty cash book is a book of original entry and an account for petty cash 
  transactions. Petty cash transactions are first recorded in this book before being 
  posted to the ledger. It forms a separate ledger book. 
  The petty cash book is ruled in columns. The debit side has got columns for 
  date, folio, details and amount, while the credit or payment side has got columns 
  for date, details, folio, a total amounts column, plus analysis columns in which 
  various petty cash payments are analyzed such as sundry expense, stationery 
  and postage, telephone and telegrams etc. the debit side records the amount of 
  money received as petty cash plus any petty cash in hand brought forward from 
  previous period. The credit side records payments made out of petty cash and 
  each day’s payment is analysed in the relevant column. The daily total is posted 
  to the total payments column. At the end of the period, the amounts in the 
  analysis columns are added. The sum of the analysis column totals should agree 
  with the sum of the totals column. The difference between the sum of the total 
  payments column and the amount received column on the debit side represents 
  the balance of petty cash in hand carried forward to the next period. There is an 
  automatic check of the petty cash book as horizontal totals and vertical totals 
  must agree. The following example illustrates the ruling and preparation of the 
  petty cash book.
  MUVUNYI keeps a petty cash book. On 1st January 2022 his petty cash was 
  given as FRW 240,000 and he made the following payments in the course of 
  

  the month

  

  Required:

  a) Enter the above transactions in a suitable ruled petty cash book for the 
  month of January and show the balance of petty cash in hand on 31st
  January 2022. Use appropriate analysis columns.
  

  b) Post total columns to their relevant ledger accounts

  

  

  3.8.4 The Imprest System
  This is the modern system of keeping petty cash. Under the imprest system, a 
  petty cashier is provided with a fixed sum of money at the beginning of a given 
  period out of which petty cash payments are made. At the end of each balancing 
  period, the petty cashier is given a sum of money equal to the payments or 
  disbursements made during the period.
  Features of the Imprest System
  a) At any time, the sum of the petty cash in hand plus disbursements 
  as shown by the payment vouchers should always equal the original 
  amount given to the petty cashier
  b) The amount of money to the cashier to restore the imprest is the total 
  of the payment vouchers or disbursements. This amount plus the 
  petty cash in hand automatically restores the initial imprest. The act 
  of restoring the imprest is also called reimbursement, or renewing the 
  float, as imprest is also called sometimes.
  c) Total disbursements are equal to the cash or cheque debited in the 
  

  petty cash book to restore the imprest.

  d) Double entry is exercised between the petty cash book, the cash book 

  and nominal expenditures.

  1) Petty cash advance:

  Dr: Petty cash A/C

  Cr: Cash A/C 

  2) Monthly Payments:

  Dr: Nominal A/C

  Cr: Petty cash A/C

  3) Reimbursement:

  Dr: Petty cash A/C

  Cr: Cash A/C

  Advantages of the Imprest System

  1. It makes it easy to verify the arithmetical accuracy of the cash book by 
  using the horizontal and vertical analysis column totals; cross- casting.
  2. The petty cashier is always accountable for the imprest amount
  3. The system facilitates good internal control as at any given time the petty 
  cashier’s cash in hand plus the amount paid as shown by the payment 
  vouchers must always add up to the imprest amount.
  4. Deficiencies are limited at any time to the balance of imprest cash not 
  yet spent.
  5. Usage of the system allows for sound cash management.
  Advantages of Using Petty Cash System
  1. It allows the recording of cash items in the cash book to be more objective 
  yet tidy. The petty cash items, involves small amounts, which can cause 
  a lot of entries in the cash book that would make it hard to manage, 
  especially in a busy business environment.
  2. The use of this system allows limited cash to be in the business premises. 
  This ensures that only a limited amount may be lost in case of theft, as the 
  bulk of it will have been banked.
  3. It facilitates day to day activities to run smoothly since urgent issues 
  requiring small cash amounts can be handled quickly instead of waiting 
  for long process of approving and signing cheques for various payments. 
  4. It creates flexibility in the organization’s cash management.
  5. It saves time because the small cash payments are delegated to the petty 
  cashier while the accountant concentrates on other major issues in the 
  business entity.
  6. It helps to control the flow of expenditure easily, especially cash 
  expenditure.
  Amounts in the analysis columns for payments are posted to their respective 
  ledger accounts to complete the double entry. The balance in the petty cash 
  book appears in the trial balance as an asset and in the balance sheet among 
  current assets, proving further that the petty cash book is both a book of original 
  entry and a ledger book. 
  Example 2:
  HABINEZA maintains a petty cash book on the imprest system. The imprest 
  being FRW300,000. The following transactions took place in February 2022.
  Feb.1st Received imprest from the cashier of FRW 300,000
  3 Bought postage stamps of FRW 20,000
  7 Bought stationery FRW50,000
  8 Paid travelling allowance FRW 40,000
  10 Paid window cleaning expenses FRW 60,000
  12 Paid Runner’s account in the purchases ledger FRW 50,000
  14 Paid subscriptions for trade association FRW 20,000
  17 Paid office cleaning expenses FRW 20,000
  18 Received FRW 300,000 from the cashier
  19 Paid for travelling expenses FRW 100,000
  22 Bought electric light bulbs FRW 20,000
  25 Paid Runner’s account in the purchases ledger FRW 25,000
  26 Paid travelling expenses FRW 10,000
  27 Paid for sugar, tea and milk FRW 30,000
  

  Required:

  Enter the transactions into a petty cash book under the analysis column: Postage 
  and stationery, travelling expenses, sundries and a ledger column. Balance the 
  cash book showing the reimbursement required to restore the imprest and the 
  

  balance brought forward at 1st March 2022

  

  Application activity 3.8

  1. 1. State the advantages of using imprest system of petty cash
  2. 2. Mark NDUWAYEZU is a sole trader in a business know as MANDU 
  3. Traders Ltd. He keeps his petty cash on an imprest system, amount 
  4. being FRW 200,000. The following are the petty cash transactions 
  5. for the month of March 2022.

  
  
  

  Required: 

  1. Write up the petty cash book to record the above transactions, 
  showing the entries restoring the petty cash imprest amount
  2. Post relevant entries into the ledger.
  Notes : your analysis columns should show:
  a) Wages 
  b) Postage and telegrams
  c) Stationery 
  d) Ledger 
  End of unit assessment 
  MUGISHA commenced a stationery business on 1st January, 2022 with his 
  salary savings of FRW 50,000,000 which he was keeping with BANK OF 
  KIGALI. He transformed his personal account into a business account and 
  there after the salary had to be channeled to his account with I&M Bank. 
  He also took his sister as his assistant in the business and she was to be 
  paid a salary of FRW 500,000 per month. 
  During the month of January, he carried out the following transactions:
  Jan. 1 He withdrew FRW 10,000,000 for use in day-to-day operations of 
  the business.
  Jan. 2 Bought stationery worth FRW 15,000,000 from KBG Stationers 
  on credit, and also transferred his furniture worth FRW 10,000,000 from 
  home for use in the business.
  Jan. 3 Bought further stock of stationery at FRW 18,000,000 and paid by 
  cheque. He also paid FRW 1,500,000 for transporting the stationery to the 
  place of work paying cash.
  Jan. 5 Cash sales were FRW 8,000,000. He also sold stationery to Lycée 
  de Kigali at FRW 14,000,000 on credit.
  Jan. 7 Paid KBG Stationers FRW 9,000,000 by cheque for stationery 
  previously bought, and returned some spoilt stationery worth FRW 700,000 
  on the same day.
  Jan. 10 Bought Stationery at worth FRW 20,000,000 from Kigali Stationary 
  LTD on account.
  Jan. 13 Lycée de Kigali paid FRW 6,000,000 by cheque and returned 
  some items worth FRW 800,000 which had not been ordered for.
  Jan.20 Sold books worth FRW 23,000,000 to FAWE Girls School on 
  condition that payment is made before the end of the month.
  Jan. 25 Paid salary to his assistant by cheque.
  

  Required: To record the above transactions into the books of original entry

  
  

  

• UNIT 4:POSTING JOURNAL ENTRIES

  Key unit competence: To be able to post journal entries 

  Introductory activity 4

  
  

  Figure 4.1: Posting journal entries
  

  4.1 Meaning, types, and format of ledgers

  Explain the terms “posting” and “ledger”.

  Activity 3.8

  In unit 1 you leant that business transactions are recorded in the books of 

  account in two stages: (i) Journalizing, and (ii) Posting into the ledger. You have 
  learnt the first stage of journalizing various transactions in Unit 3. In this unit 
  you will learn about the second stage i.e. posting in the ledger. This involves 
  posting journal entries into various accounts in the ledger, and balancing off the 
  

  accounts.

  4.1.1 Meaning of ledger 

  A business may use many accounts in recording its transactions. Each account 
  is placed on a separate page in a bound or loose-leaf book, or on a separate 
  card in a tray of cards. If the accounts are kept in a book, the book is called 
  the ledger. Actually as used in accounting, the word ledger means a group of 
  accounts or place of storage of accounts. Transactions are posted from the 
  journal to the ledger. Posting simply means transferring journal entries to the 
  ledger accounts. An account was earlier defined as an accounting record of 
  increases and decreases in a specific asset, liability, or owner’s equity, revenues 
  and expenses. Ledger accounts summarize all transactions listed in the books 
  

  of prime entry.

  4.1.2 Types of ledgers

  Ledgers are broadly categorized under (i) General Ledgers and (ii) Subsidiary 
  Ledgers
  General Ledger
  The general ledger is also referred to as nominal ledger and it is the main ledger 
  of an organization. Whenever we use the term ledger, we are referring to the 
  general ledger, unless we specify otherwise. It is supposed to contain all the 
  ledger accounts of an organization used to update each account. In case there 
  are too many accounts in the organization, it is only the control accounts that 
  should appear in the general or main ledger and others are recorded in the 
  subsidiary ledgers. In manual accounting system, the general ledger is a big 
  bound book with hard covers. Each page in the book represents an account. 
  As observed above, the general ledger is supposed to contain all accounts of 
  the organization. However, for easy of recording and retrieval of accounts, the 
  general ledger is separated into subsidiary ledgers which are explained below.
  Subsidiary ledgers
  In order to avoid crowding of the general or main ledger with all accounts, 
  subsidiary ledgers are created. Subsidiary ledgers are subdivisions of the 
  general ledger. It is only the major accounts called control accounts that appear 
  in the general ledger. Details of the general ledger accounts can be seen in the 
  subsidiary ledgers.
  Types of subsidiary ledgers are (i) Debtors or sales ledger and (ii) Creditors or 
  

  purchase ledger.

  Debtors’ subsidiary ledger (Sales ledger)
  It is often difficult to show each and every debtor’s account and its transactions 
  in the general ledger. To overcome this problem, a debtor’s subsidiary ledger is 
  prepared. This subsidiary ledger shows the position of each debtor’s account. 
  The total of individual debtor’s account balances in the debtors or sales 
  subsidiary ledger should reconcile with the balance of debtors control account 
  in the general ledger.
  Creditors’ subsidiary ledger (Purchases ledger)
  The creditor’s subsidiary ledger shows the details of each creditor’s account. 
  It is not possible to show this in the general ledger. The total of individual 
  creditors’ account balances in the creditors’ or purchase subsidiary ledger 
  should reconcile with the creditors control account in the general ledger.
  The following diagram illustrates how transactions fall in the books of original 
  entry earlier discussed in the previous unit and then how the books of original 
  entry feed those transactions into ledgers
  

  A diagram of books commonly used

  
  

  4.1.3 Format of the ledger account

  A ledger account can be written in two ways.
  Format 1 T – Account Format 
  Organizations with manual accounting systems use T – Account format of the 
  ledger account. The simple T- account form used in accounting textbooks is 
  often very useful for illustration purposes. However, in practice, the account 
  forms used in ledgers are much more structured. The T – Account format 
  necessitates balancing off or closing the ledger account at the end of the period 
  because it has no running balance. This format is shown below. 
  
  In this account the date will show the opening period of the asset, liability, 
  capital, revenue or expense i.e. the balance brought forward. It will also show 
  the date when a transaction took place.
  The detail column (also called the particulars column) shows the nature of the 
  transaction and reference to the corresponding account. The Folio Column for 
  purpose of detailed recording shows the reference number of the corresponding 
  account. The amount column shows the amount of the asset, liability, capital, 
  revenue or expense.
  The left side of the account is called the debit side and the right side is called 
  the credit side. All assets and expenses are shown or recorded on the debit 
  side while all the liabilities, capital and revenues are recorded on the credit side. 
  Each type of asset, liability, revenue and expense must have its own account 
  whereby all transactions affecting then are recorded in this account. For the 
  double entry to be reflected in the accounts, every debit entry must have a 
  corresponding credit entry. The transactions affecting these accounts are 
  posted in the account as debit entry and credit entry to complete the double 
  entry.
  Format 2 With a running balance
  Most computerized accounting systems use this format. Whenever s debit 
  or credit is entered, the balance automatically adjusts. This format does not 
  necessitate balancing off or closing the ledger account. This format is shown 
  

  below.

  

  Application activity 4.1

  1. From which of the following a ledger account is prepared
  a) Transactions
  b) Journal 
  c) Events 
  d) None of above
  2. The process of transferring of items from journal to their respective 
  ledger accounts is called as.
  a) Entry 
  b) Arithmetic
  c) Balancing 
  d) Posting
  3. The left hand side of the ledger account is referred to as.
  a) Footing
  b) Credit side
  c) Debit side
  d) Balance 
  4. Ledger is a principle book that contains 
  a) Real accounts only
  b) Personal accounts only
  c) All accounts
  

  d) Nominal accounts only

  4.2 Posting entries to the ledger

  Activity 4.2
  

  Refer to Entrepreneurship Subject and answer the following 
  question.
  Mr. Mugabo commenced a business on 1 January 2021. All expenses 
  were paid by cheque and any cash received was banked daily. The 
  following is a summary of the transactions, which took place during the 
  first year of trading:
  a) On 1 January 2021, Mr. Mugabo commenced business with 
  FRW5,000 which he lodged to the business bank account 
  b) During the period, total purchases amounted to FRW4,000 
  and payments made to suppliers were FRW3,550. On 31 
  December, 2021 FRW450 was still due to suppliers in respect 
  of these purchases 
  c) Sales for the year totaled FRWF9,000 all on credit. Amounts 
  received from customers 101during the year were FRW8,100. 
  On 31 December, 2021, FRW900 was still owing from 
  customers 
  d) Mr. Mugabo purchased a van in December costingFRW2,500 
  e) Administration Expenses were FRW2,300 for the year 
  Required: Write up the ledger accounts for Mr. Mugabo
  Activity 4.2
  Transferring journal entries to the ledger accounts is called posting. This phase 
  of the recording process accumulates the effects of journalized transactions 
  into the individual accounts. The aim of this section is to make you understand 
  

  how the posting is done. Do not forget your knowledge of double entry. 

  
  

  The above diagram shows the posting from the journal to the ledger. In the ledger 
  account, before putting the figure, the title of the second account necessary 
  for the completion of the double entry is inserted. Eg. In the cash account, 
  capital is mentioned before the figure and likewise in the capital account, cash 
  is mentioned before the figure. 
  Illustration 1
  Let now complete posting all the transactions recorded in AKEZA Ltd’s general 
  

  journal into its ledger (Refer to general journal prepared by AKEZA in unit 3)

  AKEZA Ltd’s Ledger accounts

  
  

  
  

  
  

  
  

  Required: Record the above transactions in the appropriate accounts. 

  
  

  
  

  
  

  
  

  
  

  Application activity 4.2
  

  Refer to unit 3 in application activity 3.2 and post entries from AKANYANA 

  Ltd general journal into ledgers. 

  4.3 The sales journal and sales ledger

  What uses would the seller have for the copies of the sales invoice?

  Activity 4.3
  

  What uses would the seller have for the copies of the sales invoice?
  n unit 3, you learnt that, rather than having only one book of original entry and 
  one ledger, most businesses use a set journals and a set of ledgers. In this 
  section, you will learn more about sales journal also called Sales day book and 
  sales ledger. You will also learn how cash and credit sales are entered in these 
  books.
  4.3.1 Cash sales 
  As you have already learnt, when goods are paid for immediately, they are 
  described as “cash sales”, even where the payment has been made by cheque 
  or transfer of funds from the customer’s bank account into the seller’s bank 
  account. For accounting purposes, in such cases we do not need to know the 
  names of and addresses of neither customers nor what has been sold to them 
  

  and, as a result, there is no need to enter such sales in the sales journal. 

  Credit card payments
  When customers pay immediately by credit card, so far as recording details of 
  the customer is concerned, this is treated as if it were a payment made by cash. 
  No record is required for accounting purposes concerning the contact details 
  of the customer. However, it is still a credit transaction and it does result in a 
  debtor being created – the credit card company. The double entry would be a 
  credit to the sales account and a debit to the credit card company’s account in 
  the sales ledger.
  4.3.2 Credit sales 
  In all but the smallest business, most sales are made on credit. In fact, the sales 
  of many businesses consist entirely of credit sales. For each credit sale, the 
  selling business gives or sends a document to the buyer showing full details of 
  the goods sold and prices of the goods. As you leant in unit 3, this document is 
  an invoice. It is known to the buyer as a purchase invoice and to the seller as a 
  sales invoice. The seller keeps one or more copies of each sales invoice for his 
  own use.
  4.3.3 Making entries in the sales journal 
  Sales journal also called a Sales Day Book. It records all the sales invoices 
  issued by the firm during a particular period. The format is as follows (with 
  

  simple records of invoice)

  

  4.3.4 Posting credit sales to the sales ledger
  Instead of having one ledger for all accounts, we now have a separate sales 
  ledger for credit sale transactions. It was described in section 4.1.
  1. The credit sales are now posted, one by one, to the debit side of each 
  customer’s account in the sales ledger.
  2. At the end of each period, the total of the credit sales is posted to the 
  

  credit of sales account in the general ledger

  

  Example 1
  The sales journal in 4.3.3 is now shown again. This time, posting is made to the 
  sales ledger and the general ledger. Notice the completion of the folio columns 
  

  with reference to numbers

  

  The individual entries in the sales journal are posted to the debit side of the 
  debtor’s accounts in the sales ledger and the total is posted on the credit side 
  

  of the sales account in the general ledger

  

  

  
  
  Application activity 4.3
  You are to enter the sales journal from the following details. Post the items 
  to the relevant accounts in the sales ledger and then show the transfer to 
  

  the sales account in the general ledger.

  

  4.4 The purchases journal and purchases ledger 

  Activity 4.3

  Think back to what you learnt about the list of items contained in the sales 
  journal (sales day book). What do you think is the list of items recorded 
  in the purchases journal (purchases day book)?
  In this section, you will continue your look at the journals and ledgers by looking in 
  more detail at the purchases journal (or purchases day book) and the purchases 
  ledger. Having already looked at the sales side of transactions in section 4.3, 
  you are now going to look at them from the side of purchases. Much of what 
  you will learn in this section is almost identical to what you lean in section 4.3. 
  This should not come as a surprise. After all, you are looking once more at how 
  transactions are processed in journals and ledgers and the process ought to 
  be similar as you move from the sales side to the purchases side of similar 
  transactions. If it weren’t, accounting would be a far more complex subject than 
  

  it is.

  4.4.1 Making entries in the purchases journal 

  From the purchases invoices of goods bought on credit, the purchaser enters 
  the details in the purchase journal (purchases day book). There is no need 
  to show details of goods bought in purchases journal. This can be found by 
  looking at the invoices themselves. It has the following format (including records 
  

  of invoices).

  

  4.4.2 Posting credit purchases to the purchase ledger
  We now have a separate purchases ledger. The double entry is as follows:
  a) The credit purchases are posted one by one, to the credit of each 
  supplier’s account in the purchases ledger.
  b) At the end of each period the total of the credit purchases is posted to 
  the debit of purchases account in the general ledger.
  

  Posting credit purchases

  

  4.4.3 Examples of posting credit purchases
  Example 1
  The purchases journal shown in 4.4.1 is now shown again but, this time, posting 
  is made to the purchases ledger and general ledger. Note the completion of the 
  

  folio columns indicating that the posting had been completed

  

  Example 2
  Referring to AKANYANA Ltd’s general ledgers accounts in application activity 
  

  4.2, the following is AKANYANA purchases ledger.

  

  Application activity 4.4

  
  

  4.5 Balancing off (closing) Accounts

  Activity 4.5
  

  1. What is the purpose of balancing off accounts?
  2. Explain the process of balancing off accounts.
  At the end of specific period most often a month, all ledger accounts are closed 
  or balanced off. The purpose of doing this is to obtain the net balances on each 
  account at the end of the month. After the accounts have been closed, a trial 
  balance can be extracted. 
  Procedure for balancing off accounts
  1. Draw two lines below each side of an account. The upper line should be 
  single and the bottom lines should be double. Remember to leave one 
  blank line between the last figure and the first line closing the account. 
  This blank line is where the balance carried forward (c/f) or carried down 
  (c/d) will be put.
  2. Add up all the figures on both the debit and credit sides without inserting 
  the totals. Having ascertained the side with the greater total, that total is 
  put on both sides of the account.
  3. Determine the difference by which the two sides were not previously 
  agreeing and insert it on the deficient side and call that difference the 
  balance carried down or carried forward. You should remember that the 
  difference you obtain i.e. the balance carried down is put on the blank 
  line which you had reserved.
  4. In order to complete the double entry recording of the balances, the 
  balance brought down or brought forward is put on the opposite side 
  of the account below the totals. The date to be indicated is the opening 
  date of the following month.
  Note: Bal. c/f and bal. c/d mean the same thing and are used interchangeably. 
  They mean balanced at the end of the period. Likewise, bal. b/f and bal. b/d 
  are used interchangeably and mean the opening balances. With the above 
  knowledge, we are now ready to close or balance off the ledger accounts for 
  

  AKEZA Ltd as presented in section 4.2. 

  

  

  

  Loan A/C

  
  

  
  

  
  

  During the month of June 2021, the following transactions occurred. 
  June 
  1
  Bought goods on credit for FRW 6,500,000
  2 Sold goods on credit for FRW 8,000,000
  4 Received a cheque of FRW 5,000,000 from a debtor and banked it.
  7 Paid creditors FRW 1,500,000 cash and FRW 500,000 by cheque 
  10 Rejected and returned goods worth FRW 300,000 to a creditor
  12 A debtor rejected and returned goods worth FRW 1,00,000
  14 Banked FRW 1,500,000 cash
  16 Paid rent cash FRW 400,000 and FRW 800,000 by cheques and 
  electricity FRW 250,000 cash
  20 Withdrew FRW 1,000,000 from the bank and put into the cash box for 
  payment of cash expenses
  22 Paid FRW 2,000,000 by cheque in respect of retiring the loan
  25 Fearing the consequences of the land bill, he sold the land inherited 
  form his father for FRW 10,000,000 cash. He used FRW 5,000,000 
  for his marriage ceremonies and the rest of the money he put into his 
  business
  27 Received cash of FRW 100,000 and a cheque FRW 2,000,000 from 
  a debtor and banked both cash and cheque
  30 Used business cash of FRW 300,000 for a social evening with his 
  friends at a club.
   Required: Prepare Mukasa’s ledger accounts and extract balances on 
  

  30/6/2021 (Ignore subsidiary ledgers)

  Answer 

  Mukasa’s Ledger

  
  

  
  

  
  

  
  

  
  

  
  

  Application activity 4.5
  

  Refer to application activity 4.2, post the entries and balance off AKANYANA 

  Ltd ledger accounts. 

  End of unit assessment 
  

  You are required to enter the following transactions in the ledgers and 
  balance off the accounts 
   2010
  Jan. 01 Started business with $ 20 000 capital, which was deposited 
  in the bank
  Jan. 03 Paid rent for premises by cheque $ 1 000
  Jan. 04 Bought goods on credit from PPP for $ 580 and KAN for $ 
  2 400
  Jan. 04 Purchased motor van for $ 5 000 paying by cheque
  Jan. 05 Cash sales of $ 1 000
  Jan. 10 Paid motor expenses in bank $ 75
  Jan. 12 Paid wages in cash at bank $ 120
  Jan. 17 Bought goods on credit from PPP $ 670
  Jan. 18 Returned goods to PPP $ 70
  Jan. 20 Sold goods for $ 800, payment being received as a cheque, 
  which was banked immediately
  Jan. 24 Paid insurance by cheque $ 220
  

  Jan. 31 Paid wages in cash $ 135 and electricity by cheque $ 78

  
  

  
  

• UNIT 6:EXTRACTING A TRIAL BALANCE

  Key unit competence: To be able to extract a trial balance

  Introductory activity 4

  Observe the images below and answer the questions:

  

  a) Make a comparison between the above three images 
  b) What would happen if the content of the right side of the image 
  

  2 is increased without increasing the content of its left side?

  5.1 Meaning, purpose and limitations of Trial Balance

  Activity 5.1
  

  a) What does the book keeper do after balancing off ledger account? 
  b) How does he/she proceed?
  5.1.1 Meaning of trial balance
  A trial balance is simply a list of account balances. It can also be defined as 
  a statement of debit and credit totals of balances extracted from the various 
  accounts in the ledger with a view to test the arithmetic accuracy of books. It 
  may also be defined as a table in which all the ledger accounts are listed with 
  their corresponding balances with the purpose of controlling at the end of the 
  month the general equality of all the recordings in the journal and their posting 
  too the ledger accounts..
  5.1.2 Purpose of trial balance 
  i) It gives the balances of all the accounts of the ledger. The balance of any 
  account can be found from the trial balance without going through the 
  pages of the ledger;
  ii) It is the check on the accuracy of posting. If the trial balance agrees, it 
  proves:
  a. that both the aspects of each transaction are recorded;
  b. That the books are arithmetically accurate.
  iii) It facilitates the preparation of profit and loss account ant the balance 
  sheet.
  iv) Important conclusion can be delivered by comparing the balances of two 
  or more than two years with the help of trial balances of those years.
  Though agreement of the trial balance is not an absolute proof of the accuracy 
  of the books, disagreement is an obvious fact that an error has been committed. 
  You will see on the unit on error correction that there exist errors that do not 
  affect the trial balance. When such errors are made, the trial balance can still 
  

  balance despite those errors

  5.1.3 Limitations of the trial balance
  Agreement of the trial balance is not a sound proof that the book keeping has 
  been carried out perfectly. There are certain book-keeping errors that do not 
  affect the agreement of the trial balance. This limits the scope of a trial balance 
  as a financial statement. 
  The following are the important limitations of the trial balance:
  – The trial balance can be prepared only in those concerns where double 
  entry system of book keeping is adopted. This system is too costly.
  – A trial balance is not a conclusive proof of the arithmetical accuracy of 
  the books of account. If the trial balance agrees, it doesn’t mean that 
  now there are absolutely no errors in books. On the other hand, some 
  errors are not disclosed by the trial balance.
  – If a trial balance is wrong, the subsequent preparation of trading, profit 
  and long account and the balance sheet will not affect the true picture 
  

  of the concern

  Application activity 5.1

  a) What is the trial balance?
  b) What is its content?
  c) What is the main purpose of preparing the trial balance?
  d) How can you know that an error is committed when preparing the 
  trial balance?
  e) What are the limitations of the trial balance? 
  

  f) How would correct trial balance be?

  5.2 Preparation of the trial balance
  

  Activity 5.2
  a) What does the book keeper do after balancing off ledger account? 
  b) How does he/she proceed?
  As mentioned above, a trial balance is a list of debit and credit balances extracted 
  from the ledger and aimed at checking the accuracy of the accounting process. 
  Accounts with net debit balances i.e. before closing the account, the total on 
  the debit side was more than the total on the credit side. Meaning balance 
  carried down is on the credit side and balance brought down on the debit 
  side, will appear on the debit side of the trial balance. Likewise accounts with 
  net credit balances will appear on the credit side of the trial balance. Ideally, 
  all asset accounts (except bank in case of bank overdraft or debtors in case 
  of advance received), expenses accounts and drawings account are expected 
  to have debit balances. If you get credit balances on these accounts, it might 
  mean that your working was wrong. Similarly, all liability accounts, revenue or 
  income account, capital account and reserve accounts are expected to have 
  credit balances. If you get a debit balance on any of these accounts, then it is 
  an indication that you are wrong.
  In the trial balance, asset account balances are recorded in the debit column 
  while the accounts for liabilities and capital are recorded in the credit column. 
  The nominal accounts which relate to expenses and losses are recorded in the 
  debit column of the trial balance, but those that relate to items of income and 
  revenue are recorded in the credit column of the trial balance.
  When constructing a trial balance therefore, place assets (e.g. motor vehicles, 
  stock, cash in hand and at bank, debtors, etc.); expenses (e.g. salaries and 
  wages, rent and rates, discounts allowed, etc.), in the debit column and liabilities 
  (e.g. creditors, bank overdraft, unpaid salaries, etc.), revenues or incomes (e.g. 
  sales, discounts received, rent received, etc.), in the credit column.
  The following is the procedure to prepare the trial balance:
  • Before you start off with the trial balance, you need to make sure that 
  every ledger account is balanced off;
  • Prepare a worksheet. The column headers should be for the account 
  name and the corresponding columns for debit and credit balances;
  • For every ledger account, transfer to the trial balance worksheet the 
  account name along with account balance in appropriate debit or credit
  column
  • Add up the amounts of the debit column and the credit column. Ideally, 
  the totals should be the same.
  Illustration 1
  Referring to the application activity 4.5 above, prepare AKANYANA Ltd’s trial 
  

  balance knowing that the closing ledger balances are the following:

  

  

  Illustration 2

  

  

  

  Application activity 5.2

  a) How account balances are listed in the trial balance? 
  b) What are the main ledger accounts with debit balances?
  c) What are the main ledger accounts with credit balances?
  d) What does credit balance of bank account mean?
  e) The following are balances in the books of ISHEJA Plc for the period 
  ended 31st March 2010: FRW
  • Bank overdraft………...24,160
  • Sales…………………...131,340
  • Commission income…..13,670
  • Debtors…………………41,300
  • Postage and stationery... 6,000
  • Repairs to buildings…. 6,200
  • Heating……………….….2,130
  • Purchases……………..112,100
  • Cash in hand…………. 1,100
  • Creditors…………… 26,950
  • Premises………………269,000
  • Owner drawings…… 7,150
  Required: find out its capital and prepare the trial balance for the 
  

  period ended

  End of unit assessment 
  

  1. The following items were extracted from MUHIRE’S ledger account 

  for the year ending on 31st December 2014:

  
  

  Required: Calculate the level of the owner’s capital and then prepare 
  the trial balance for the period ended.
  2. Rewrite the following trial balance correcting any items you 
  

  consider to be incorrect

  

• UNIT 6:CORRECTION OF ERRORS

  Key unit competence: To be able to correct errors

  Introductory activity 4
  SHUMBUSHO is a sole proprietor whose business is to buy and 
  sale shoes made in local materials, operating in RUBAVU District. His 
  accountant is not qualified in recording financial transactions. At the end 
  of 2020, after recording transactions in the books and preparing a trial 
  balance, he was surprised to see that the total balances in the debit and 
  credit sides were not agreed. In the subsequent year, the trial balance 
  was agreed, but some source documents were not recorded.
  1. What were the causes of imbalance between debit and credit 
  sides of trial balance?
  2. If you are hired by SHUMBUSHO to help in the above two cases, 
  how can you assist him?
  While recording transactions, posting to the various accounts and extraction of 
  list of account balances, it is possible for errors to be committed. Such errors 
  may or may not affect the totals of the list of account balances. Recall that if 
  the totals of the list of account balances are equal, then this shows arithmetical 
  accuracy in recording and posting of transactions. Now it should be said, this 
  does not mean non-existence of errors. It is possible for some errors not to 
  affect the totals being equal for the list of account balances. Some errors can 
  affect too the total of list of account balances. There are two major types of 
  errors in accounts: 
  • Errors that do not affect the List of account balances (trial balance) 
  

  • Errors that do affect the List of account balances (trial balance).

  6.1 Errors that do not affect a trial balance

  Activity 6.1
  

  ABIKIZA is an accountant in the company of MUNEZERO Ltd specialized 
  in buying and selling milk in MUHANGA District. When closing the 
  period ended 2021, the trial balance agreed. After investigation, it was 
  found that there were some errors in source documents and others were 
  committed in recording. ABIKIZA thought that all errors committed must 
  affect the agreement of a trial balance. Required: As someone with skills 
  in identification and rectification of errors, what types errors committed by 
  ABIKIZA?
  These are errors not disclosed by the trial balance. Agreement of a trial balance 
  is not an absolute proof that the book-keeping has been correctly done. There 
  are certain book-keeping errors that do not affect the agreement of the trial 
  balance. It will actually balance even if such errors have been committed in the 
  course of book-keeping. These are: 
  Error of omission
  It occurs when entities for certain transaction are completely omitted from the 
  books, such that there is no record of such transaction in the firm’s ledger and 
  hence the error is not reflected in the trial balance. E.g. the purchases of goods 
  for FRW 1,000 from supplier not recorded in the purchases and the creditor’s 
  account is an example of an error of omission.
  Error of commission
  This type of error is committed when a book-keeper posts entries of a transaction 
  in a wrong account of the same class. E.g. if the goods sold to MUGISHA on 
  credit for FRW 5,000 are debited in the account of MAHORO then this will be 
  an error of commission.
  Error of compensating / Compensating error 
  This error is committed when two errors of the same magnitude on either side 
  of the ledger, are committed in the books, such that the errors counter-act or 
  cancel out each other. E.g. the purchases account was over added by FRW 50 
  and similarly, the sale account had also been over-added by FRW 50.
  Error of duplicating
  It is when one transaction is entered twice or more in the books. E.g. a sale 
  of goods to NIWEMWALI FRW 50,000 recorded two times in both sales day 
  books and debtors Account.
  Complete reversal of entries
  Under this, correct accounts are used but each item is shown on the wrong side 
  of the account. e.g. receipt of cash from Karenzi FRW 42,000 is entered on the 
  debits side of his account and credited in the cash book.
  Error of the original entry
  This error arises when an entry is incorrectly made in a book of original entry. e.g. 
  an invoice for FRW 12,000, MUKUNZI a creditor, is misread as FRW120,000. 
  This also includes error of transposition where numbers in the amount are 
  transposed e.g. 54 becomes 45. If the wrong amount is posted on both sides, 
  this will not be detected.
  Error of principle
  It arises when entries of transactions are posted to the wrong class of accounts. 
  e.g. purchases of motor van posted to the expenses account instead of machine 
  

  A/C.

  Application activity 6.1

  i) What do you understand by errors that do not affecting a trial balance?
  

  ii) List the errors not affecting the agreement of a trial balance

  6.2. Errors that affect a trial balance

  Activity 6.2

  BAHOZE, an independent auditor in HUYE District, was asked to conduct 
  an audit in CYUZUZO Co ltd dealing with cultivating and selling rice. While 
  auditing the books of prime entry and financial statements, she realized 
  that the trial balance total debit was different from credit balance. After 
  certain investigation, it was observed that some errors were committed in 
  recording. 
  1. How to call the errors committed by CYUZUZO Co Ltd accountant?
  2. Which types of these errors?
  These errors relate to incorrect additions, subtraction or entries made on wrong 
  side of the books. They are disclosed by a trial balance because the totals of 
  debit and credit sides do not agree. 
  Transposition errors 
  These are book keeping errors committed when the order of figures of amount 
  reversed. This affects the trial balance if the error is made on one side of the 
  transaction.
  e.g. IRANZI the book keeper, had posted correctly to the ledger FRW11,200 
  received from Mukono Ltd, but entered the amount in the cash FRW11,020 or 
  cheque for FRW43,000 received from a debtor was recorded incorrectly in the 
  cashbook FRW34,000.
  Arithmetical errors
  These are errors that result from wrong addition and subtraction of amounts in 
  books of original entry. Such errors are termed in the examination question as 
  either under cast or overcast. 
  e.g. The page in purchases daybook was overcast by FRW 750 
  Single entry errors
  These are book-keeping errors committed when the dual aspect of transactions 
  is not recorded along the principles of double entry system. An amount 
  is recorded only in one side, either as a debit entry or a credit entry without 
  completing the double entry. E.g. a cheque off FRW 27,240 received from a 
  debtor was returned by the bank unpaid. This fact was recorded in his personal 
  account in the ledger but not in the cashbook.
  Omission of ledger balances from the trial balance
  When extracting a trial balance from the ledger balances, and where a balance 
  of items is omitted, the trial balance total will obviously not agree.
  Mis-posting errors
  These errors may arise in the following circumstances:
  i) An account is debited instead of being credited or vice versa. E.g. a 
  cheque of FRW 5,600 received from a debtor was entered correctly in 
  the cashbook but was posted to the debit side of his personal account in 
  the ledger
  ii) An amount is posted into an account twice. Also, when it is debited or 
  credited twice. Example a credit sale of goods to Willy for FRW 13,800 
  was posted on the credit of his personal account twice.
  iii) An expense transaction is credited as income or an income transaction is 
  debited as an expense. Example: discounts allowed FRW 8,400 has been 
  posted to credit side of discounts received account.
  iv) Error of transferring balances from the general ledger to the trial balance
  v) Omission of a general ledger account
  Location of trial balance errors
  Errors that cause a trial balance to disagree should be located and corrected in 
  order to agree the trial balance. The following logical procedure is followed to 
  trace such errors:
  1) Check the arithmetical accuracy of the debit and credit column totals of 
  the trial balance
  2) Divide the difference on the trial balance by 2, look for this as a separate 
  entry on the greater side of the trial balance as a wrong entry. If located, 
  correct by entry below the existing totals.
  3) Check entries of amounts transferred from the various ledgers if correct
  4) Check the preliminary balancing totals in the various ledgers if 
  arithmetically correct.
  5) Check if ledger postings have been made correctly from the various day 
  books and other source documents.
  

  6) Check totals and sub-totals in the daybooks, petty cash book

  Application activity 6.2

  1. Name the error committed to each of the following:
  i) Sales under-casted
  ii) Discount allowed credited in discount received
  iii) Cash payment to a creditor entered in the cashbook only
  2. Francis made one error when he posted the total value of invoices 
  from the purchases daybook to the general ledger. He posted 
  FRW 274,865,000 to the debit side of the purchases account. 
  The correct total was FRW 274,685,000. The credit entries were 
  entered correctly. How is the trial balance affected by this error?
  i) The total of the debit balances and the total of credit balances will 
  agree, but will be over casted
  ii) The total of the debit balances and the total of the credit balances 
  will agree, but will be understated 
  iii) The total of the debit balances will exceed the total of the credit 
  balances
  iv) The total of the credit balances will exceed the total of the debit 
  

  balances

  6.3. Correction of errors that do not affect the trial balance

  Activity 6.3
  

  You are given the following errors:
  1. Invoice from a seller ALICE not recorded in the books of prime entry
  2. Goods purchased from Umwali credited in Umulisa’s account
  3. Electricity bill of FRW 7,500 recorded as FRW 5,700 in both 
  electricity and cash a/c.
  Required: 
  i) What is the relationship between those errors?
  

  ii) How to correct those errors?

  6.3.1. Record journal entries in the general ledger to correct 

  errors not disclosed by the trial balance.

  The errors which do not affect the agreement of the trial balance totals are 
  corrected by passing journal entries. The correction of these errors must still 
  follow the double entry principle.
  In this case:
  DR: The account wrongly credited
  CR: The correct account
  OR
  DR: The correct account
  CR: The account wrongly debited
  Error of omission
  Example 1
  A record of purchases of machinery by cheque FRW 48,000 was completely 
  omitted from the books. 
  Answer 
  The journal entries for the correction:
  
  Error of complete reversal
  Example 3
  A payment of cash FRW1,500 to ISHIMWE was entered on the receipt side of 
  the cash A/C, and also by error credited to ISHIMWE A/C. 
  The journal
  ISHIMWE 3,000
   Cash 3,000
  Duplication error
  Example 4
  A purchase of goods by cash FRW 16,500 was by error recorded twice. 
  Cash A/C 16,500
   Purchases 16,500
  Compensating errors
  Example 5
  The purchases account was over added by FRW 50 and similarly, the sale 
  account had also been over-added by FRW 50.
  Dr Sales A/C 50
   Cr Purchases A/C 50
  Error of the original entry
  Example 6
  An invoice for FRW 12,000, MUKUNZI a creditor, is misread as FRW 120,000.
  Dr MUKUNZI 100,000
   CR Purchases 100,000
  Errors of principle
  Example 7 
  Purchases of motor van posted to the expenses account instead of motor van 
  A/C.
  Dr Motor Van A/C
  

   CR Expenses A/C

  Exercises
  1. Prepare journal entries necessary to correct the following errors:
  The auditor of the books of accounts of Ntugasaze’s business for the year 
  ending 31st December 2011 revealed the following errors:
  b) Furniture purchased for FRW 2,000 had been debited to the purchases 
  account
  c) Goods purchased from Rwanda Group of companies for FRW 2,500 
  were credited to the account of Rwanda and company
  d) An invoice from Kanimba firm for FRW 7,800 was omitted
  e) Goods sold to Umutoni for FRW 1,750 were entered in the sales daybook 
  or sales book as FRW 1,570.
  f) The salaries and wages account was over added by FRW 350 and the 
  rent received account had been over added by FRW 350.
  Answer 
  a) Dr Furniture A/C FRW 2,000
   Cr Purchases’ A/C FRW 2,000
  b) Dr Rwanda and Company A/C FRW 2,500
   Cr Rwanda group of Companies FRW 2,500
  c) Dr Purchases A/C FRW 7,800
   Cr Kanimba A/C FRW 7,800
  d) Dr Umutoni FRW 180
   Cr sales FRW 180
  e) Dr Salaries and wages A/C FRW 350
   Cr Rent received A/C FRW 350
  2 Listed below are five errors which were used as examples earlier in this 
  topic. Write out the journal entries which would correct these errors.
  a) A business receives an invoice for FRW 250,000 from a supplier 
  which was omitted from the books entirely.
  b) Repairs worth FRW 150,000 were incorrectly debited to the noncurrent asset (machinery) account instead of the repairs account.
  c) The bookkeeper of a business reduces cash sales by FRW 280,000 
  because they were not sure what the FRW 280,000 represented. In 
  fact, it was a withdrawal on account of profit. 
  d) Telephone expenses of FRW 540,000 are incorrectly debited to the 
  electricity account.
  e) A page in the sales day book has been added up to FRW 28,425,000 
  instead of FRW 28,825,000.
  Answer
  a) DEBIT Purchases FRW 250,000
  CREDIT Trade payables FRW 
  250,000
  A transaction previously omitted 
  b) DEBIT Repairs A/C FRW 150,000
  CREDIT Non-current asset Machinery A/C FRW 
  150,000
  The correction of an error of principle: Repairs costs incorrectly added 
  to non-current asset costs
  c) DEBIT Drawings FRW 280,000
  CREDIT Revenue FRW 
  280,000
  An error of principle, in which sales were reduced to compensate for 
  cash withdrawals not accounted for
  d) DEBIT Telephone expenses FRW 540,000
  CREDIT Electricity expense FRW 
  540,000 
  Correction of an error of commission: telephone expenses wrongly 
  charged to the electricity account
  e) DEBIT Trade receivable FRW 400,000
  CREDIT Revenue FRW 
  400,000
  The correction of a casting error in the sales day book 
  (FRW 28,825,000 - FRW 28,425,000) = FRW 400,000
  Application activity 6.3
  The books of Kamali on 31st December 2016 revealed the following errors:
  i) A machine purchased for FRW 15,000,000 had been debited to the 
  purchases account
  ii) Goods sold to MAHIRWE for FRW 3,000,000 had been recorded in 
  MAHORO’s account
  iii) A purchase of goods by cash for FRW 6,500,000 had been recorded 
  both on the debit and credit as FRW 5,600,000
  iv) The wages account was understated by FRW 2,000,000 as also the 
  sales account by the same amount.
  v) A sale of goods by cheque for FRW 5,000,000 had been completely 
  omitted from the books.
  vi) Cash received from a debtor for FRW 4,000,000 was debited in the 
  

  debtors account and credited in the cash account

  6.4 Correction of errors that affect the trial balance

  Activity 6.4
  

  The book keeper of a certain business has committed the following errors:
  

  1. Cash payment was entered correctly in cash but no corresponding 
  

  entry made
  

  2. Motor insurance was credited to distribution expenses
  Required: How to correct the above errors
  6.4.1. Journal entries to correct errors affecting a trial balance
  For the correction of these errors, a suspense account is opened and the 
  difference in the trial balance is posted in this account, if the debit side of a 
  trial balance is smaller than this amount is debited in the suspense account and 
  vice versa. When the errors are discovered, they are corrected by double entry 
  through the suspense account. When all the errors have been discovered and 
  corrected, the balance on the suspense account is eliminated. In this case:
  a) DR: Respective account if omitted 
   CR: Suspense A/C
  b) DR: Suspense A/C
   CR: respective account if omitted
  c) If any debit entry has been made on credit side then to correct it, 
  double amount must be debited and vice versa.
  Example 1
  In IRAKOZE books at year end, an imbalance in the list of account balances was 
  revealed. Investigation revealed the following errors.
  i) A sale of goods on credit for FRW 1,000,000 had been omitted from the 
  sales account
  ii) Delivery and installation costs of FRW 240,000 on a new item of plant had 
  been recorded as a revenue expense.
  iii) Settlement discount of FRW 150,000 on paying a supplier, had been 
  taken, even though the payment was made outside the time limit.
  iv) Inventory of stationery at the end of the period of FRW 240,000 had been 
  ignored.
  v) A purchase of raw materials of FRW 350,000 had been recorded in the 
  purchases account as FRW 850,000. 
  vi) The purchase returns day book included a sales credit note for FRW 
  230,000 which had been entered correctly in the account of the receivable 
  concerned, but included with purchases returns in the general ledger.
  Required: Prepare journal entries to correct each of the above errors. Narratives 
  

  are not required.

  

  Example 2
  An accountant of KAZUNGU LTD prepared a trial balance for his company for 
  the month of December 2017, but failed to balance. The total on the debit side 
  was more than the total on credit side by FRW 33,000. He opened a suspense 
  account for the difference and proceeded to prepare final accounts. 
  During the month of January 2018 he discovered the following mistakes which 
  had been made in December 2017:
  1. Purchases account had been under cast by FRW 2,000
  2. Payment of FRW 555,000 by cheque for insurance was properly recorded 
  in the cash book but was posted to insurance account by mistake as 
  FRW 515,000
  3. A sales invoice of FRW 300,000 was not recorded in the sales day book 
  and therefore not posted to the ledger
  4. The credit side of the sales account was under added by FRW 4,000
  5. Motor vehicle repairs costing FRW 50,000was debited to Motor Vehicle 
  account
  6. Payment of FRW 680,000 cash to John a creditor was properly recorded in 
  John’s account but was wrongly recorded in cash book as FRW 670,000
  7. The bookkeeper had made a mistake by debiting ledger fee of FRW 
  15,000 to the cash book but properly recorded in the ledger fee account
  

  8. Sale of goods for FRW 600,000 on credit to Mbabazi was properly 
  

  recorded in the sales account but was wrongly recorded in Uwimbabazi 
  

  account
  

  9. The bank column of the cash book credit side was over added by FRW 
  1,000
  10. A credit note issued for FRW 800,000 was properly recorded in the 
  customer’s account but was wrongly recorded in the other account 
  necessary for completion of double entry as FRW 820,000
  11. Discount received of FRW 6,000 was debited to discount allowed 
  account
  Required: prepare journal entries to correct all the errors
  Solution
  

  KAZUNGU LTD general journal for correction of errors

  

  6.4.2. Opening, preparing and clearing Suspense account
  For the correction of errors affecting trial balances a suspense account is opened 
  and the difference in the trial balance is posted in this account. If the debit side 
  of a trial balance is smaller, then this amount is debited in the suspense account 
  and when the credit side is smaller, then this amount is credited in suspense 
  account.
  Definition 
  A suspense account is a ledger account in which items owing to insufficient data 
  are temporarily recorded i.e. when a difference in a trial balance is disclosed. For 
  example, suppose that an accountant draws up a trial balance and finds that, 
  for some reason they cannot immediately discover why the total debits exceed 
  total credits by FRW 162,000.They know that there is an error somewhere, but 
  for the time being they open a suspense account and enter a credit of FRW 
  162,000 in it. This serves two purposes:
  1. Because the suspense account now exists, the accountant will not forget 
  that there is an error (of FRW 162,000) to be sorted out.
  2. Now that there is a credit of FRW 162,000 in the suspense account, the 
  list of account balances.
  When the cause of the FRW 162,000 discrepancy is tracked down, it is 
  corrected by means of a journal entry. 
  It must be stressed that a suspense account can only be temporary. Postings to 
  suspense account are only made when the bookkeeper does not know yet what 
  to do, or when an error has occurred. Mysteries must be solved, and errors must 
  be corrected. When all these errors are discovered and corrected, the balance 
  on the suspense account is eliminated.
  Example 1
  Suppose it turned out that the accountant had accidentally failed to make a 
  credit of FRW 162,000 to purchases. The journal entry would be:
  DEBIT Suspense a/c FRW 162,000
  CREDIT Purchases a/c FRW 162,000
  

  To close off suspense a/c and correct error

  Example 2
  The bookkeeper of MURINZI Co made a transposition error when entering an 
  amount for sales in the sales account. Instead of entering the correct amount of 
  FRW 37,453,000 they entered FRW 37,543,000 transposing the 4 and 5. The 
  trade receivable were posted correctly, and so when total debits and credits on 
  the ledger accounts were compared, it was found that credits exceeded debits 
  by FRW (37,543,000-37,453,000) = FRW 90,000
  The initial step is to equalize the total debits and credits by posting a one sided 
  debit entry of FRW 90,000 to a suspense account.
  When the cause of the error is discovered, the double entry to correct it should 
  be logged in the journal as:
  DEBIT Revenue FRW 90,000
  CREDIT Suspense FRW 90,000
  To close off suspense a/c and correct transposition error
  1) Typically, they are two main reasons why suspense accounts may be 
  recorded.
  2) On the extraction of the trial balance, the debits are not equal to the 
  credits and the difference is put to a suspense account.
  3) Of course, the other one is when the book keeper performing double 
  entry is not sure where to post one side of an entry he may debit or credit 
  a suspense account.
  Example 3: 
  

  From the above example of KAZUNGU LTD, prepare a suspense account

  

  Application activity 6.4
  You are assisting the accountant of Nara ltd in preparing the accounts for 
  the year ended 31st December 2020. You draw up a trial balance and you 
  notice that the credit side is greater than the debit side by FRW 5,608,000. 
  You entered this difference in a suspense account.
  On investigation, the following errors and omissions are found to have 
  occurred.
  a) An invoice of FRW 1,328,000 for general insurance has been 
  posted to cash but not to the ledger account.
  b) A customer went into liquidation just before the year end, 
  owing Nara Ltd FRW 428,000. The amount was taken off trade 
  receivables but corresponding entry to expense the irrecoverable 
  debt has not been made. 
  c) A cheque paid for purchases has been posted to the purchases 
  account as FRW 5,296,000 when the cheque was made out for 
  FRW 5,926,000
  d) Motor insurance for the year for FRW 1,611,000 was credited to 
  distribution expenses.
  Required: 
  i) Show the journal entries required to clear the suspense account
  

  ii) Show the suspense account in ledger account form

  Skills Lab 
  Preparing the trial balance as at 31st March 2020, the difference was 
  FRW 130,000 debit. Following on your inquiry, the following errors and 
  omissions were rectified in the relevant accounts.
  i) A balance on a customer’s account who owed FRW 10,000 had been 
  listed as FRW 100,000
  ii) A sum of FRW 20,000 which was part of the bad debts amount w/o 
  in 2019 was recovered in January 2020 and had been debited to bad 
  debts account.
  iii) Rates paid in advance at 1st April 2019 of FRW 15,000, correctly dealt 
  within the previous year’s accounts, had not been entered in the rates 
  account for the current year. 
  iv) Closing stock at cost FRW 150,000 had been wrongly entered on 
  stock-sheets as FRW15,000
  v) Goods returned by a customer valued at FRW 10,000 had been entered 
  in the sales ledger only.
  vi) Discounts received correctly entered in the cash book at FRW 25,000 
  had not been transferred to the discounts received account.
  REQUIRED:
  Preparation of suspense account to reflect the correcting entries 
  

  End of unit assessment 

  1. When posting an invoice for car repairs, FRW 870,000 was entered 
  on the correct side of the motor expenses account. The invoice was 
  for FRW 780,000. What correction should be made to the motor 
  expenses account?
  i) Debit FRW 90,000
  ii) Credit FRW 90,000
  iii) Debit FRW 1,650,000
  iv) Credit FRW 1,650,000
  5. A suspense account shows a credit balance of FRW 130,000. This 
  balance could be due to which of the following?
  i) Omitting a sale of FRW 130,000 from the receivables account
  ii) Recording a purchase of FRW 130,000 twice in the purchases 
  account
  iii) Failing to write off a bad debt of FRW 130,000
  iv) Recording an electricity bill paid of FRW 65,000 by debiting the 
  bank account and crediting the electricity account.
  5. UWAYO’s trial balance includes a suspense account with a credit 
  balance of FRW 280,000. She has discovered that a supplier’s 
  invoice for FRW 140,000 was entered twice in the purchases day 
  book. What is the balance on the suspense account after this error is 
  corrected?
  A FRW 0
  B FRW 140,000 credit
  C FRW 280,000 credit
  D FRW 420,000 credit
  
  

• UNIT 7:CONTROL ACCOUNTS

  Key unit competence: To be able to prepare control accounts

  Introductory activity

  While preparing a trial balance after drawing up UMULISA’s lists of debtors’ 
  and creditors’ balances at the end of the period, it was challenging to 
  have the debtors’ and creditors’ balance carried down to be included in a 
  trial balance as they are drawn from several personal ledger accounts. It 
  was further noticed that some errors were committed due to UMULISA’s 
  insufficient skills in bookkeeping. Required: (i) Which approach UMULISA 
  can use to ensure that the information provided don’t contain errors that 
  could be very difficult to find (ii) As someone with accounting skills, advise 
  her on what to do in order to find out the appropriate balances to be 
  

  recorded in a trial balance.

  7.1 Meaning and purpose of control account

  Activity 7.1

  Sales day book and purchases day books are totaled periodically (often a 
  month). The individual entries in day books will have been entered one by 
  one in the appropriate personal accounts contained in the receivables and 
  payables ledgers. As these personal accounts are not part of the double 
  entry system, their appropriate balance or total of day books are posted to 
  other accounts to check the accuracy of entries made in the debtors and 
  creditors personal accounts. 
  1. How do we call those accounts in which these balances are posted?
  2. What is the purpose of preparing those accounts?
  7.1.1. Meaning of Control Account 
  Control account is a summary account appearing in the general ledger for the 
  purpose of controlling all the detailed entries in the ledger to which it relates. It 
  is a total account inserted in a ledger to make itself balancing. Control accounts 
  are also referred to as total accounts because it is only totals from day books or 
  other subsidiary books of account which are posted to them. 
  The balance in a control account should be the same as the total of the 
  individual balances extracted from the related subsidiary ledger giving proof of 
  the arithmetical accuracy of the book-keeping entries in the ledger.
  Control accounts in the general ledger represent the total of all the accounts 
  in some other ledgers. The accuracy of these ledgers is proved by the control 
  accounts and they are also called as self-balancing ledger or adjustment 
  accounts. Control accounts are used chiefly for receivables and payables.
  7.1.2. Purpose of control accounts
  Check the accuracy of entries made in the personal accounts
  They provide a check on the accuracy of entries made in the personal accounts 
  in the receivables ledger and payables ledger. It is very easy to make a mistake 
  in posting entries, because there might be hundreds of entries to make. Figures 
  might get transposed. Some entries might be omitted altogether, so that an 
  invoice or a payment transaction does not appear in a personal account as it 
  should.
  a) Compare the total balance on the receivables control account with the 
  total of individual balances on the personal accounts in the receivables 
  ledger.
  b) Compare the total balance on the payables control account with the 
  total of individual balances on the personal accounts in the payables 
  ledger.
  It is possible to identify the fact that errors have been made.
  Assist in the location of errors
  Where postings to the control accounts are made daily or weekly, or even 
  monthly, the control accounts could also assist in the location of errors. If 
  errors are made in the ledger, the control A/C will not reconcile with individual 
  balances extracted from the subsidiary ledgers. When a control account does 
  not reconcile with the sum of individual balances extracted from the subsidiary 
  

  ledger, it may be an indication that some errors were made.

  Detection of fraud
  Since all entries pass through the control A/C, it is very easy to detect fraud 
  committed by manipulation of accounts in the ledger. Control accounts are 
  normally under the charge of senior or responsible officials who have the 
  responsibility of controlling fraud. If a control account balance is different from 
  the sum of individuals’ accounts, then either fraud or mistakes were committed. 
  Control accounts strengthen an organization’s internal control by detecting and 
  checking fraud and also location and therefore correction of errors.
  Internal check where there is separation of bookkeeping duties
  Where there is a separation of clerical (bookkeeping) duties, the control account 
  provides an internal check. The person posting entries to the control accounts 
  will act as a check on a different person whose job is to post entries to the 
  receivables and payables ledger accounts.
  A balance can be extracted quickly for producing a trial balance or 
  statement of financial position
  To provide receivables and payables’ balances more quickly for producing a 
  trial balance or statement of financial position, a single balance on a control 
  account is obviously extracted more simply and quickly than many individual 
  balances in the receivables or payables ledger. This means also that the number 
  of accounts in the double entry bookkeeping system can be kept down to a 
  manageable size, since the personal accounts are memorandum accounts only 
  and the control accounts instead provide the accounts required for a double 
  entry system.
  Note that while this may be an arrangement, control accounts are the accounts 
  that serve the role of memorandum account
  Enhancing management efficiency
  Control accounts enhance management efficiency because creditors’ and 
  debtors’ balances can be obtained at first glance on a duly balanced-off (closed) 
  control accounts. The speed at which these figures are obtained is faster. This 
  saves time wasted in balancing-off and adding up all individual debtors’ or 
  creditors’ balances.
  Determination of credit sales and credit purchases
  In single entry and incomplete records and in Receipts and Payments accounts, 
  the credit sales and credit purchases are often missing. These figures can be 
  

  determined by constructing control accounts

  Application activity 7.1

  Referring to the activities of previous lessons:
  i) What is a control account?
  ii) Why is it necessary to have control accounts in a business 
  

  organization? Justify your answer.

  7.2 Sales Ledger control account/ Debtors’ control account
  

  Activity 7.2
  

  Below are the total balances from total lists of individual debtors accounts 
  

  in the books of MURENZI Enterprises operating in Muhanga District:

  
  

  7.2.1 Meaning of Sales ledger control account / Debtors’ control account
  Debtors control account reflects the total amount owed by all individual debtors. 
  The balance of the debtors control account must be equal to the total of debtors 
  list, which represents the amounts owed by the individual debtors obtained 
  from the individual balances in the various subsidiary ledger accounts for each 
  debtor. This subsidiary ledger is known as the debtor’s ledger.
  The debtors’ control account or accounts receivable control account balance 
  should reconcile with the sum of all individual debtors’ balances extracted 
  

  from debtor’s subsidiary ledgers also known as the sales ledger.

  7.2.2 Information for debtors’ control account

  
  

  
  

  
  

  Required: Prepare a debtors’ control account.

  Answer 

  
  

  ILLUSTRATION 2

  The following details were extracted from the books of ABC Ltd Company for 
  

  the year ended 31st/12/2016

  
  

  Application activity 7.2
  

  1. A business maintains a receivables ledger control account. A debt of 
  FRW 1,500,000 is to be written off. Which of the following entries 
  is correct (ignore VAT)?
  a) Debit: Personal account of the customer, credit irrecoverable 
  debts expense, FRW 1,500,000
  

  b) Debit: irrecoverable debts expense, credit: receivables ledger 
  control, FRW 1,500,000
  c) Debit: receivables ledger control, credit: irrecoverable debts 
  expense, FRW 1,500,000
  d) Debit: irrecoverable debts expense, credit: personal account of 
  the customer, FRW 1,500,000
  2. The following information was extracted from the books of Mugisha 
  

  and Co. Ltd for the month of June 2020

  

  7.3 Creditor’s control account/ purchases ledger control 
  

  account

  Activity 7.3
  

  
  

  7.3.1.Meaning of Creditor’s control account/ purchases ledger control account
  Creditors’ control account reflects the total amount owed to all the individual 
  creditors. The balance of the creditors control account must equal the total of 
  the creditors list, which represents the amounts owed by the individual creditors 
  obtained from the individual balances in the various subsidiary ledger accounts 
  for each creditor. This subsidiary ledger is known as the creditors’ ledger.
  The creditors control account balance should reconcile with the sum of all 
  creditors’ balances extracted from the creditors subsidiary ledger (purchases 
  ledger). In this way, a creditors’ control account is like a trial balance for the 
  

  subsidiary ledger to which it relates.

  7.3.2 Information for creditors’ control account
  

  
  

  
  

  
  

  Required: Prepare creditors’ control account.

  Answer

  
  

  debtor A/C, then the balance on the creditors A/C cannot be noted off 
  and it must therefore remain in the debtors’ ledger as the credit balance 
  (contra). This scenario can also happen in the creditor’s A/C. Hence, it 
  is also common in control A/Cs to find a creditor’s A/C has a small debit 
  balance and a bigger credit balance. 
  2. When writing up control accounts imagine you are writing up the personal 
  accounts but in totals. It means items debited in a personal account will 
  be debited in the control account also and vice versa. It is clear that the 
  final balance of the control accounts for particular sales and purchases 
  should agree with the total of the balances in the individual accounts in 
  the ledger. 
  3. Control accounts are prepared on monthly basis. Control a/c balances 
  are shown in the trial balance on the assumption that all entries in the 
  debtors’ and creditors’ ledger are correct and later transferred to the 
  balance sheet either as current Assets (Debtors) and current liabilities 
  for (creditors).
  4. Credit balance in the debtor’s ledger and debit balance in the Creditor’s 
  ledger: sometimes, a debtor’s account might have a credit balance and a 
  Creditors a/c a debit balance. Such a situation would arise due to more 
  cash received from debtors or paid to creditors. Any credit balances 
  on accounts in the debtors’ ledger will be shown as credit balance on 
  debtors control account. Any debit balances on accounts in the creditor’s 
  

  ledger will be shown as a debit balance on the creditors control a/c.

  Application activity 7.3
  

  The following information was extracted from the books of CYUSA 
  

  Ltd for the month of January 2021

  
  

  Prepare a sales ledger control account
  

  7.4 Control account reconciliation
  

  Activity 7.4
  

  UWAMAHORO is a sole trader operating her business in Rubavu District 

  buying and selling fish. When preparing the debtors’ and creditors’ control 

  accounts at the end of a month, their balances failed to agree with the total 

  debtors’ and creditors personal individual accounts due to lack of sufficient 

  accounting skills.

  1. What may be the causes of disagreement between control account 

  and personal ledger accounts?

  2. Advise UWAMAHORO on what to do in order to get the same 

  balance in debtor’ and creditors’ personal ledger accounts with 

  control accounts

  Activity 7.4

  7.4.1 Importance of sales account/purchases account control 

  reconciliation 

  A control account, as earlier explained, acts as a trial balance or a check to correct 
  double entries in the ledger. It follows therefore that the balance carried down 
  on a control account must equal the total of list of balances in the concerned 
  ledger account. For instance, the balance carried down in the creditors’ or 
  debtors’ control account. Where a difference occurs, it is an indication of an 
  error. If the error is located, an attempt is made to reconcile both balances by 
  correcting the double entries as required.
  ILLUSTRATION 3
  An accountant prepared a debtors control account. The balance on the account 
  was FRW 27,000,000 on 31/12/2019. The list of balances from individual 
  debtors’ ledger accounts amounted to FRW19,600,000 on 31/12/2019.
  The following errors were located:
  a) Cash of FRW 540,000 received from debtors was correctly entered in 
  the cash book but entered as FRW 1,540,000 in the control account.
  b) Sales returns of FRW 600,000 were entered on the wrong side of the 
  debtors control account.
  c) A cheque of FRW 500,000 received from a debtor was dishonored. 
  This was entered only in the sales ledger and not in the control account.
  d) Bad debts amounting to FRW 2,000,000 were written off in the sales 
  ledger but no entry was made in the control account.
  e) A sale of goods to James for FRW 1,500,000 on credit was omitted 
  from the control account 
  f) On a certain day, the sales day book’s total was FRW 20, 800,000 but 
  was posted to control account as FRW 28,000,000.
  Required: Make corrections to the control accounts so that the adjusted 
  

  control account balance reconciles with the list of individual debtors’ balances

  

  Note: the control account should have shown a balance of FRW 19,600,000 on 
  31/12/2019 which reconciles with the total of individual debtors’ balances on 
  the same day. The closing balance of FRW 27,000,000 in the control account 
  

  is wrong.

  ILLUSTRATION 4
  MAHORO operates control accounts in the nominal ledger. On June 30 2004, 
  the following amounts were obtained from his ledger.
  Debtors control accounts balance (debit) FRW 960,000
  Creditors control account balance (credit) FRW 375,000
  A list of balances from debtors and creditors on 30 September 2004 were as 
  follows:
  Total debtor’s balances FRW 829,000
  Total creditors balances FRW 320,000
  The following errors were later discovered:
  1) The sales day book had been overcast by FRW 115,000 and purchases 
  day book under cast by FRW 63,000.
  2) Returns inwards totaling FRW 33,000 for the month of September had 
  not been posted to the control account.
  3) A credit balance in the purchases ledger of FRW 25,000 had been 
  omitted from the list of balances.
  4) An amount of FRW 28,000 in the purchases ledger has been set off 
  against a contra account in the sales ledger but this is not recorded in 
  either of the control accounts.
  5) A sum of FRW 13,000 being discount received was correctly entered 
  in the cash book but was over casted by FRW 64,500 in the respective 
  personal account.
  6) A dishonored cheque of a customer for FRW 45,000 had not been 
  entered in the control accounts.
  Required: 
  i) Entries in the debtors control account and creditors control account.
  ii) A corrected statement showing the total of the debtors and creditors 
  

  balances

  Solution

  
  

  
  

  Skills Lab
  The following figures were extracted from the books of MUTESI Ltd for the 
  

  month of June 2017

  
  

  Required: From the above information, prepare the Debtors Ledger and 
  

  Creditors ledger control accounts

  End of unit assessment 

  1. Define a control account
  2. Which of the following items will appear as an item posted to the 
  payables ledger?
  a) Irrecoverable debts written off
  b) Returns inwards of the period
  c) Trade discounts received in total in the period
  d) Settlement discounts received in total in a period
  3. The following entries appeared in the receivables ledger control 
  account for June. Balance b/f 1 June FRW 7,500,000, sales FRW 
  20,000,000, receipts from customers FRW 8,000,000, irrecoverable 
  debts written off FRW 900,000. What was the balance at 30 June?
  a) FRW 3,600,000
  a) FRW 19,500,000
  b) FRW 20,400,000
  c) FRW 18,600,000
  4. The trial balance of MULIHANO, a trader taken out on 30th 
  September, 2019 failed to agree. To help locate the error, he 
  prepared sales and purchases control accounts from the following 
  

  information:

  

  

  

• UNIT 8:RECEIVING MONEY AND THE BANKING SYSTEM

  Key unit competence: To be able to explain banking system

  Introductory activity 

  
  

  Observe the above picture and answer the questions below.
  1. Enumerate the components of banking system in Rwanda
  2. Define clearing system
  3. State the procedures for preparing pay-in-slip
  4. What are the factors to be considered by a teller before processing 
  

  cheques of bank customers?

  8.1 The banking system
  

  Activity 8.1
  

  The Central Bank supervises and controls the operations of the formal 
  financial sector. There are currently 16 commercial banks in Rwanda 
  and a number of microfinance institutions and rural savings and credit 
  co-operatives. You are required to differentiate commercial banks with 
  Microfinance institutions.
  Activity 8.1
  8.1.1 Banking system in Rwanda
  There are various ways that business can receive money, the main methods are:
  – Cash
  – Cheque
  – Credit and Debit cards
  – Electronic receipts
  Banking procedures for various kinds of receipts should be fully understood and 
  you should observe whenever transactions are possible. This lesson concerned 
  with the practical aspects of banking the payments received by business. Before 
  dealing with these aspects however it would be useful to understand some 
  background details about the clearing bank system. 
  The banking system in the Rwanda consists of the following components:
  a) The national bank of Rwanda (BNR) is the central bank which regulates 
  and play a supervisory role over the banking industry 
  b) Clearing banks, retails banks or banks which provide microfinance 
  service include:
  i) Urwego Opportunity bank 
  ii) Copedu ltd
  iii) Equity bank Rwanda limited 
  iv) Banque populaire du Rwanda ltd
  v) Bank of Kigali
  Note: Note: this is not an exhaustive list of Rwandan banks – Rwanda has 
  around 16 banks including development bank and cooperative banks. 
  We also have currently above 400 institutions that provide microfinance 
  services including Umurenge SACCOs. There is currently an initiative 
  aiming at consolidating these microfinance institutions to reduce them 
  down to 30 institutions across the country
  c) Microfinance services which are a type of banking service that is 
  provided to unemployed or low income individuals or group who 
  otherwise have no access to financial services. Small loans are made 
  so that people can start and operate a business. The borrowers pay 
  back the loan over time. 
  Banking financial intermediaries and non-banking financial 
  intermediaries
  Banking financial intermediaries are financial institutions that accept 
  deposits and create credit or extra deposits by use of cheques. They extend 
  loans to borrowers using part of primary deposits and extra deposits created. 
  Commercial banks are an example of banking financial intermediaries. 
  Non-banking financial intermediaries: these are financial institutions which 
  do not create credit or extra deposits by use of cheques or which do not receive 
  deposits at all. 
  They extend loans to the borrowers using primary deposits got from surplus 
  lending units
  Example of non-banking financial intermediaries 
  – Insurance companies 
  – Pension funds
  

  – Development ban

  

  8.1.2 The clearing system 

  Clearing is the mechanism for obtaining payment for cheques.
  Banks settle cheques and credits through the clearing system. Once the values 
  of cheques passed between the banks at the end of particular day’s clearing 
  have been determined, the resulting debts arising between the banks need to 
  be settled. 
  For Example, Urwego Opportunity bank may be asking for settlement of 
  equivalent of frw 20,000 million worth of cheques drawn on Copedu Ltd bank 
  

  paid in by its customers into their accounts at local branches. In turn Copedu 

  

  8.1.3 Banking Services

  Retail banking
  Traditionally the main services offered by banks to their customers were current 
  accounts and savings accounts. In recent years however the range of services 
  has expanded so that now the retail banks may offer.
  - Credit cards
  - Investments
  - Share dealing 
  - Loans
  - Home insurance 
  - Travel insurance 
  - Foreign currency 
  - Pet insurance 
  - Wealth management
  In addition, branches will have specialist accounts and services for business 
  customers and may have advisors available to deal with the requirements of 
  

  large and small commercial enterprise.

  Application activity 8.1

  1. What is the bank clearing system?
  A It is the mechanism for obtaining payment for Cheques
  B It moves cash between banks 
  C It sets credit levels for banks’ business customers
  D It arranges long term loans for bank customers
  2. Groupe Scolaire Mater Dei Nyanza is a Boarding School located 
  in Southern Province; Nyanza District. It has a bank account in bank 
  populaire, its checques equivalent to Frw 12,000,000 was drawn 
  in Bank of Kigali, and in turn, bank populaire have paid Cheques of 
  client of bank of Kigali equivalent to Frw 18,000,000.
  

  How much each bank should be reimbursed?

  

  Activity 8.2

  Observe the picture above and answer the following questions
  1. Which of the following statements is true with respect to a remittance 
  advice note?
  A It is sent to a customer to advise them of the amount due
  B It is sent to the bank to instruct them to make a payment
  C It is sent to a supplier to advise them of the amount being paid 
  D It is an internal document recording amounts received from 
  2. Anna sends cheques to a supplier and encloses with it a document 
  detailing the invoice being paid. What is this document called?
  A Supplier’s statement
  B Debit note
  C Remittance advice 
  D Remittance list
  3. Narvinda buys goods from Jamal for $ 2,500. He returns half of 
  the goods on 15 May. Which of the following documents would be 
  issued by Jamal for the return of the goods?
  A Invoice 
  B Credit note
  C Debit note 
  D Remittance advice
  4. Malindra sent a payment to Nicholas along with a document detailing 
  the items and invoices the payment related to. What is this document 
  known as?
  A Debit note
  B Credit note
  C Remittance advice
  D Delivery note
  5. What is the document that a business sends to customers to 
  summarise transactions at the end of an accounting period?
  A Remittance advice
  B Statement of account 
  C Credit note 
  D Invoice
  6. What is the purpose of a remittance advice? 
  A It provides details of amounts being paid 
  B It identifies goods that have been received by the business 
  C It identifies goods that have been dispatched by the business
  D It provides details of Cheques to be issued
  Receipts will be accompanied by documentation. This enables the receiving 
  business to check that the correct amount is accurately processed and 
  recorded. For example, Tax revenues will be recognized in the books of accounts 
  when cash is received. Cash is considered as received when notification of tax 
  remittance is received.
  Documentation Advices
  Documents which are used to record transactions in the books of account of 
  the company are called source documents. Source documents were covered 
  in details in detail in unit 1 of this text. When a cheque arrives from a trade 
  (business) customer, it is usually accompanied by a remittance advice.
  A remittance advice shows which invoices a payment covers.
  For example, LB Company sends a cheque payment of RWFFRW 37,360,000 
  to NT Company this payment is accompanied by remittance advice note 
  

  explaining the invoice and credit note that the payment relates to

  Application activity 8.2

  1. J. Savério has a key customer, Cyprien Rugamba. The terms of the 
  agreement are that Cyprien Rugamba settle amounts due to J. Savério 
  on the last day of the month following the month of invoice, with credit 
  notes being settled in that same period too.
   A remittance advice note must accompany payments. 
  Below is an extract from J. Savério’s sales ledger showing recent transactions 
  with Cyprien Rugamba and an uncompleted remittance advice note.
  

  Cyprien Rugamba

  
  

  2. Cyami Ltd sold FRW 100,000 worth of goods to Maso Co in November 
  2020 and the sales to Maso will grow at the rate of 10% per month. All 
  sales made by Cyami Ltd to Maso Co are on credit and it is estimated that 
  60% of sales made to Maso Co will be paid in the month following sale; 
  the remaining will be paid two months after sale. All Payment from Maso 
  Co to Cyami Ltd are done by end of month and these are accompanied 
  by a remittance advice. How much will appear on the remittance advice 
  as at 28 February 2021
   A FRW 133,100
   B FRW 106,000
   C FRW 116,600
  

   D FRW 128,260

  

  Activity 8.3

  From the picture answer the following questions

  1. What are the qualitative characteristics of paying in slips?

  2. State Procedures for preparing a paying-in slip

  Activity 8.3

  8.3.1 The paying-in slips
  When a business or an individual wants to pay money into the bank, then 
  normally a paying-in slip must be used. The bank treats this as a kind of summary 
  document which ‘totals up’ the cash (or other forms of money) which is being 
  banked. 
  A paying-in slip will look similar to the one shown above.
  Pay-in-slip is an outline presented in banks and is used to deposit money 
  into a bank account. Each pay-in-slip has a counterfoil which is returned to 
  the depositor accordingly sealed and signed by the bank officer. This source 
  document relates to bank transactions. When an individual needs to deposit 
  checks or cash in his bank account he usually fills out a slip to show the number 
  of his account, the date, and the details of the deposit. Some deposits will 
  consist of checks, and the depositor will list each check with the check number 
  and the whole amount of the deposit. Pay-in-slip gives details regarding date, 
  account number, the amount deposited (in cash or cheque), and the name of 
  the account holder and approval.
  The Importance of the Paying –In Slip
  – Bank printed pay-in-slip provided by the bank free of charge is used by 
  the account holder for depositing cash as well as cheque into his bank 
  account 
  – Copy of pay-in-slip remains with the bank after depositing cash or 
  cheque into the bank. This part of the pay –in –slip is used by the bank 
  for making entries in the registers of the bank. 
  – Pay-in-slip can be used as legal evidence or documentary proof of cash 
  or cheque deposited into the bank
  – Business and company can use pay-in-slip for entries in cashbook 
  

  – Pay-in-slip is useful to the auditor to verify the entries passed in the cashbook

  8.3.2 Procedure for Preparing a Paying –In-Slip

  The following procedures are good practice to follow when preparing money 

  for banking

  Step 1 Count the cash as described above.

  Step 2 Add up, on a separate piece of paper, how much cash you are banking.

  Step 3 Compare the calculated total to the total according to the cash register.

  Step 4 Calculate any discrepancy between the cash counted and the cash 

  register total. If it is large then it should be investigated, but if it is small 

  then it may be ignored, depending on company Policy.

  Step 5 Enter the total for each denomination of note in the appropriate place 

  on the paying in slip.

  Step 6 Add up the numbers again to check the total and enter it in the ‘total 

  cash’ box.

  8.3.3 Security 
  Holding cash creates problems and careful Security procedures are required
  Theft by staff
  This risk can be reduced by being careful about the people the business 
  employs; their references should be checked properly and they should be 
  monitored closely for their first few months of work
  Cash register security
  The cash register should be secure, with keys needed to operate it. Staff should 
  be trained to make them aware of the importance of keeping their keys safe and 
  of not leaving the cash register open. Cash registers which are activated by 
  different keys unique to each member of staff can give a breakdown of sales by 
  staff member. This is another aid to preventing theft, as it will indicate staff who 
  are not entering sales and pocketing the customer’s money.
  Safes
  If possible, cash should be removed from the till regularly (so that there is only 
  a relatively small amount in the till) and stored in a safer place. The ideal place 
  would be a safe.
  The safe should be in a place out of view of the customer. The number of safe 
  

  keys should be kept to a minimum and access to the keys should be restricted.
  Frequent banking
  In general, cash should be taken to the bank on a regular and frequent basis; 
  this minimizes the amount of money on the business premises. This may be 
  particularly important if the amount of money the business can hold is limited 
  under its insurance policy.
  It is not a good idea to let the same person go to the bank every day at the same 
  time. For security reasons it is better to vary the member of staff who takes the 
  money to the bank and the time of day it is taken.
  Cash should never be sent by post, if it is lost or stolen there is no way to trace 
  or recover it
  

  Application activity 8.3
  You are preparing the day’s takings for banking. When you have sorted and 
  counted the notes you find you have the following.
  (a) Five FRW 5,000 notes 
  (b) Twenty FRW2,000 notes
  (c) Thirty-five FRW1,000 notes
  (d) Sixty FRW 500 notes 
  (e) Six bags each containing thirty 100 franc coins
  (f) Two bags each containing ten 50 franc coins
  (g) Ten bags each containing fifty 20 franc coins
  Other coins worth FRW10,500 in total 
  

  Prepare the paying in slip so that the cash can be banked.

  

  Activity 8.4

  From the picture above, answer the following question
  Rwanda Education board (REB) has issued a purchase order to ABC Ltd 
  hotel for a meeting room and catering for 50 persons involved in curriculum 
  development. The purchase order was composed by one meeting room, 
  breakfast and lunch. At the end of assignment ABC hotel provided an invoice 
  to REB amounted to FRW 1,000,000. An Accountant of REB processed 
  the payment by Cheque. What is the information to be contained on a valid 
  cheque?
  Activity 8.4
  A cheque is an unconditional order in writing addressed by a person to a bank, 
  signed by the person giving it, requiring the bank to pay on demand a sum 
  certain in money to or to the order of a specified person or bearer.
  When a firm opens a current account with the bank, a cheque book containing 
  cheques is issued. The cheques allow the firm to make payments against 
  the account with the bank. When a firm issues a cheque to its creditors for 
  payments, it authorizes the bank to honour payments against the firm’s account 
  with the bank.
  8.4.1 Format of Checques 
  Cheques are a reasonably common method of payment. They are a written 
  order to the bank, signed by the bank’s customer to pay a certain amount to 
  another person or company. The cheque must be banked by the payee and then 
  clear into their account before the money is available for use.
  Generally, it takes around three working days for a cheque paid into a bank 
  account to clear into that account. At this point, the funds can be drawn on by 
  the recipient of the cheque. The clearing system is used for this process.
  There are three parties involved in a cheque:
  Drawee: The bank that has issued the cheque and will have to pay the cheque
  Payee: The person to whom the cheque is being paid (eg the supplier)
  Drawer: The person who is writing and signing the cheque in order to make a 
  payment (eg the customer).
  When cheques are paid into a bank account (using a paying-in slip) they will 
  appear as a counter credit’ on the bank statement of the business receiving the 
  money.
  8.4.2 Receiving cheques
  It is best practice to follow these procedures when an individual customer pays 
  by cheque.
  Step 1: Examine the face of the cheque to ensure all the details are correct.
  - Date (including the year)
  - Payee name
  - Amount in both words and figures
  Step 2: Make sure that the cheque is signed by the drawer.
  8.4.2 Banking cheques
  The details required on the paying-in slip when cheques are banked include:
  - Name of drawer (or endorser)
  - Amount of cheque
  - Total value of cheques banked
  8.4.3 Returned/dishonoured cheques
  After a cheque has been received and banked, the bank may find it necessary 
  to return the cheque to the payee and to remove its amount from the payee’s 
  bank account. This is because the cheque has been dishonoured for payment. 
  A cheque would be dishonored because:
  – Stale cheques
  – Post – dated cheques
  – Insufficient funds
  

  – Differences in amounts in words and figures

  Application activity 8.4

  1. Complete the following statements by selecting from the picklist below.
  

  
  

  Activity 8.5

  From the picture above, answer the following questions 
  1. State feature of visa card?
  2. Where does debit card and credit card used?
  Debit and credit card payments have become progressively more popular as 
  methods of payment over the last few years. They are used primarily by individuals 
  rather than by companies (although companies do own credit cards which are 
  generally allocated to members of staff for their use to pay business expenses). 
  Most retail outlets which accept credit and charge cards now use an electronic 
  system known as EFTPOS (Electronic Funds Transfer at Point of Sale)
  8.5.1 Debit and credit cards
  

  A typical card would look like this and the letters (a) and (j) are explained below.

  

  

  There are two main types of card, and we will look at them in turn.
  – Credit cards
  – Debit cards
  Credit cards
  A credit card payment involves three transactions and three parties (see 
  below). Whilst credit is involved, for a supplier receiving payment in this way, 
  

  credit card payments are treated as cash.

  

  Card issuers often charge a flat yearly membership fee as well as charging 
  interest. Most banks and finance houses issue either Visa or MasterCard credit 
  cards, some issue both. American Express issues its own credit card (Optima).
  Accepting a credit card receipt
  Credit card transactions can be accepted remotely over the telephone or 
  via the internet or at point of sale. Retailers using a point-of-sale system will 
  have a checkout terminal that includes a credit card swiper or NFC (near-field 
  communication) reader to enable contactless payments for systems such as 
  Apple Pay or Android Pay. Some businesses, such as restaurants, have mobile 
  credit card processors. A credit card isn’t linked to your current account and is 
  a credit facility that enables you to buy things immediately, up to a pre-arranged 
  limit, and pay for them at a later date. The cost of the purchase is added to your 
  credit card account and you get a statement every month.
  Debit cards
  The same procedures are used for debit card receipts. For the Customer, the 
  difference is that debit card payments are made directly from their bank account. 
  Debit cards are used to pay for goods in shops and to withdraw money at cash 
  machines. The money is automatically taken from your current account when 
  you spend it, so you must have enough money in your account or an agreed 
  

  overdraft to cover the transaction

  Application activity 8.5

  1. A customer wants to pay for items bought over the internet from a 
  supplier used infrequently by the business. Which payment method 
  is most appropriate? 
  Credit card
  Debit card
  A cheque
  

  Cash

  8.6 Electronic receipts and retention of documents
  

  Activity 8.6
  

  1. What is POS machine and where can be used?
  2. Peter works in a public hospital as an Accountant and he is a student 
  at master’s level in project management in one of private universities. 
  He uses part of his salary to pay tuition fees. What is an appropriate 
  method of transferring his tuition fees; Frw 150,000 per month to 
  account number of university? 
  Customers may chose to transfer money owed to another business by other 
  electronic methods of transfer. Electronic transfers methods include BACS 
  

  direct credit, CHAPS and faster payments.

  8.6.1 BACS direct credit
  A direct credit is a deposit of money by a payer directly into a payee’s bank 
  account. Direct credit payments are usually made electronically. This method 
  may be used by businesses when they pay salaries and suppliers. When making 
  payments, details of each recipient’s bank account and the amount to be paid 
  are submitted to the BACS clearing centre. The payments are then taken directly 
  from the business’s bank account and paid in to each recipient’s bank account.
  Tools Used For Direct Credit
  Mobile Banking: Keeping money exchange transactions through a cell phone, 
  mobile Banking refers to provision Banking and Financial service with the help 
  of mobile telecommunication devices.
  Point of sales (POS) is portable machine that allows businesses to receive 
  cash payments with bank card like debit card.
  8. 6.2 CHAPS (Clearing House Automated Payment System)
  Payment by direct credit reduces the payer’s bank balance on the date the 
  payment is made. Unlike a cheque, the funds transfer is performed instantaneously 
  so there is no chance for the business to stop the payment, and the bank cannot 
  refuse payment once it has been made, due to insufficient funds. CHAPS 
  transfers are commonly used for large amounts such as transferring funds to 
  solicitors for the purchase of property. Payment by CHAPS reduces the payer’s 
  bank balance on the date the payment is made.
  8. 6.3 Faster payments
  Most large banks now allow their customers to make small and medium-sized 
  payments via the internet using the faster payments system. This system 
  enables customers to send same-day payments from their bank account to the 
  recipient’s bank account, The business must follow various security procedures 
  to access its bank account online, then enter the recipient’s details and authorize 
  the payment. Usually the payment is deducted immediately from the business’s 
  account, and is available almost immediately in the recipient’s account (around 
  two hours). A faster payment reduces the business’s bank balance on the date 
  of payment.
  8.6.4 Retention of documents
  In the event of queries regarding individual transaction or bank account credits, 
  the retailer will need to produce relevant copies of the receipts. It is therefore 
  essential that all copy receipts are kept in a safe place, preferably in date order, 
  

  for a minimum period of six months and sometimes even longer.

  Application activity 8.6

  1. Which of the following is an example of a payment which is most 
  appropriate for settlement using BACS?
  A Paying a regular sum to a supplier
  B Paying a regular, but variable sum to a supplier 
  C Paying wages and salaries to employees
  D Making irregular payments to overseas suppliers
  2. For a large organization which of the following transactions would 
  be most efficiently made by online transfer? 
  A Quarterly utility bills
  B Purchase of office sundries 
  C Monthly employee salaries 
  D Refunds to customers
  
  

  End of unit assessment 

  1. Which of the following is not a method of payment by a customer?
  A A cheque
  B A journal
  C A credit card 
  D A debit card
  2. Which of the following are services banks may offer?
  i) Investments
  ii) Paying accounts payable on behalf of a business. 
  iii) Share dealing
  iv) Posting entries to the general ledger.
   A (i), (ii), (iii)
   B (i), (iii)
   C (ii), (iii), (iv)
   D (i), (iv)
  3. A customer wants to pay for items bought over the internet from a 
  supplier used infrequently by the business. Which payment method is 
  most appropriate?
  A Credit card
   B Debit card
   C A cheque
   D Cash
  4. What is the bank clearing system?
  A It is the mechanism for obtaining payment for Cheques
  B It moves cash between banks
  C It sets credit levels for banks’ business customers 
  D It arranges long term loans for bank customers
  5. Which of the following are reasons for a bank returning or dishonouring 
  a cheque?
  i) Words and figures differ
  ii) Cheque less than guaranteed amount
  iii) Cheque and guarantee card stolen 
  iv) Cheque unsigned
   A (i), (ii), (iii), (iv)
   B (i), (iii), (iv)
   C (i), (ii), (iv) 
   D (ii), (iii), (iv)
  6. When a business or an individual hands over cash to be paid into their 
  bank account, which of the following documents should be prepared?
  A Cheque
  B Credit card mandate 
  C Paying-in slip
  D Remittance advice
  7. Alfredo is the Managing Director of a large engineering company. He 
  signs his name on a company cheque for FRW 260,000 in accordance 
  with the bank mandate. The company name appears on the cheque. If 
  the bank dishonours the cheque as the company has insufficient funds 
  in the account, who is liable for the FRW 260,000?
  A The engineering company
  B Alfredo 
  C The bank
  D No one
  8. Selina receives a cheque from a customer. What term describes Selina’s 
  role in this transaction?
  A Payer
  B Drawer 
  C Payee 
  

  D Drawee

• UNIT9: CASHBOOK AND BANK RECONCILIATION

  Key unit competence: To be able to reconcile cash book and bank 

  statement balances

  Introductory activity

  Suppose that you are hired as an account clerk at your school. At the end 
  of the month you find that there is disagreement between the cash book 
  balance and the balance on the bank statement.
  a) What are the reasons do you think are basis of those discrepancies?
  b) What do you suggest as an answer for those discrepancies to 
  

  ensure the balance to be reported in financial statement?

  9.1: Cash Book and Bank Statement
  

  Activity 9.1
  

  Carry out the research on the difference between cash book and bank 

  statement
  9.1.1 Nature and purpose of a cash book
  A book in which cash receipts and payments are recorded is known as a cash 
  book. A cash book is a part of ledger as well as a book of original entry. All 
  receipts and payments are recorded in the cash book directly. Any entry made 
  in the cash book is part of double entry. It means if a debit entry is made in the 
  cash book then only corresponding credit entry is to be made in the respective 
  ledger account. Similarly, if a credit entry in the cash book then only debit entry 
  is to be made in the respective ledger account
  We can maintain cash account and bank account in a cash book. A cash account 
  records the receipt and payment on cash, and the bank account records receipts 
  and payments of money by cheque.
  Note: Recording transaction in the cash book and types of cash books had 
  been discussed on in the Unit 3.9
  9.1.2 Bank statement
  Bank statement is sent by a bank to its short- term receivables and payables 
  (customers with bank overdrafts and customers with money in their accounts) 
  itemizing the balance on the account at the beginning of the period, receipts 
  into the account and payments from the account during the period, and the 
  balance at the end of the period. These statements may be produced monthly, 
  weekly or even daily depending on the volume of transactions going through the 
  account.
  You should be clear on one point. If a customer has money in their account, the 
  bank owes them that money, and the customer is therefore an account 
  payable of the bank. This means that if a business has FRW 5,000,000 cash 
  in the bank, it will have a debit balance in its own cash book, but the bank 
  statement, if it reconciles exactly with the cash book, will state that there is a 
  credit balance of FRW 5,000,000 in the bank’s payables account. (The banks 
  records are a mirror image of the customers’ own records, with debits and 
  

  credits reversed.)

  What does a bank statement look like?

  
  

  The following points refer to the circled letters on the bank statement.
  

  
  

  
  

  Application activity 9.1
  

  1. What is a cash book?

  2. State the components of bank statements

  9.2 Bank reconciliation
  

  Activity 9.2
  

  Discuss the purpose of preparing bank reconciliation statement
  9.2.1 The meaning of bank reconciliation statement
  Bank reconciliation statement may be defined as a detailed statement reconciling 
  at a given date the cash balance reported by the bank with that shown in the 
  records of a business. 
  These days almost all businessmen operate bank account. All the transactions 
  in a bank account are recorded in the cash book in the bank column. The bank 
  accounts opened by businessmen are normally current accounts. In this account, 
  the customers of the bank can deposit or withdraw money whenever they like. 
  The relationship between a bank and its customers is one the debtor and the
  creditor. If a trader has deposited FRW 20,000,000 into his bank account then 
  the bank is the debtor of the trader and from the bank’s points of view, the trader 
  is a creditor.
  9.2.2 Importance of Bank Reconciliation
  • Bank reconciliation strengthens an organization’s internal control 
  system through detection and prevention of fraud. An accountant or 
  cashier who embezzles his/her employer’s funds and manipulates the 
  cash book will be discovered if bank transactions (cheques) were 
  involved. It is therefore advisable to receive and make payments by 
  cheque because such transactions are easier to trace in the bank 
  statement than if they were cash.
  • Bank reconciliation leads to accuracy in records. This is because the 
  cash book and bank statement are synchronized. A mistake in either 
  the cash book or bank statement will be detected and corrected during 
  bank reconciliation.
  9.2.3. Reasons for discrepancy between cashbook and bank 
  statement balances
  i. Un-credited Cheques and Deposit in Transit
  These are cheques that are deposited or ledger into the bank account at the 
  bank, but take time before being posted to the trader’s account by the bank. 
  The cash book will thus show a record of these cheques, which may not appear 
  on the bank statement. Also banks accept cheques for collection whereby 
  customers accounts are credited only when money is actually received from the 
  banks against which cheque were drawn
  ii. Un-presented Cheques
  These are cheques issued to creditors and immediately credited to the bank 
  account in the cash book but take time before they are actually presented to the 
  bank for payment. The trader’s cash book thus reflects the payment, which is 
  not shown by the bank statement.
  iii. Standing Orders 
  These are instructions issued by a trader to the bank to make certain payments 
  on his/her behalf, such as insurance premiums, rent to landlord etc. The bank 
  continually pays according to trader’s last instructions without contacting him/
  her as often.
  Such payments appear in the bank statement as debit entries but do not appear in the cash book as the trader has no proof that they have been made, 
  until when in receipt of the statement.
  iv. Direct credit/ Direct Remittances
  This refers to deposits directly lodged into the customer’s bank current 
  account without his/her knowledge. It could comprise dividends received from 
  investments, interest received on fixed bank deposits, or a debtor’s payment by 
  credit transfer etc. Such information is shown in the bank statement and not in 
  the trader’s book.
  v. Dishonoured Cheques
  A cheque deposited in the trader’s bank account is returned by the bank as 
  unpaid or dishonoured for reasons such as:
  • When the funds on the drawers account are not sufficient the cheque 
  will be labelled (IF) insufficient Fund or R/D Refer to the drawer
  • Amount in words differing from the amount in figures
  • Drawer’s signature being different from the specimen signature 
  available at the bank.
  • Cheque is presented earlier than that face date (post dated).
  • Cheque presented beyond two months of the date of issue (stale 
  cheque)
  
  The bank statement thus shows amounts of dishonoured cheques on the debit 
  side. The cash book does not show the credit entry of dishonoured cheques, 
  as this information will not yet have been communicated to the trader. He only 
  gets informed of the information thereof when he receives the bank statement.
  vi. Bank charges
  The bank charges its customers for banking services. These are debited straight 
  away to the customer’s bank account without having to contact the customer. 
  The customer is ignorant of the bank charges, until when in receipt of the bank 
  statement.
  vii. Errors or mistakes
  Errors or mistakes made either in posting the cash book or bank statement 
  as shown in the bank statement, may also cause disagreement between the 
  two accounts. For instance, the cash book is debited with a cheque issued to 
  a creditor, or the bank erroneously debits the trader’s account with dividends 
  

  received by the bank on his/her behalf.

  Application activity 9.2

  1. Explain the following terms
  a) Bank reconciliation statement
  b) Un credited cheques
  c) Un presented cheques
  d) Direct remittances
  2. What are causes for discrepancy between cash book and bank 
  statement balances
  

  3. Discuss the importance of bank reconciliation

  9.3 Preparation of bank reconciliation statement
  

  Activity 9.3
  

  KARANGWA is a sole trader in MUHANGA CITY; he keeps the books 
  of accounts regularly. At the end of January 2022 just after receiving the 
  bank statement, he realized discrepancy between the cash book and bank 
  statement balances. He is asked to carry out the bank reconciliation, but 
  he doesn’t have enough skills in preparing that statement. Suppose you 
  are hired as an Accountant, what are procedures will you follow to perform 
  

  that assignment? 

  9.3.1 Bank reconciliation procedures
  Bank reconciliation statement is prepared at any particular date to reconcile the 
  cash book, and bank balance usually at the end of every month. This is because 
  the cash book is balanced at the end of the month likewise bank statement is 
  issued at the end of the month. When preparing a reconciliation statement we 
  can start with a balance either on the cash book or bank statement
  The following are procedures when preparing bank reconciliation:
  Step 1- Compare the ending balance on the cash book and bank statement and 
  see if there are equal or not.
  Step 2 – Tick off the items in both cash book and bank statement.
  Step 3 – Up date the cash book from the bank statement
  Step 4 – Balance the cash book bank columns to produce an updated balance
  Step 5 – Identify the remaining un- ticked items from the cash book
  Step 6 – Preparation of the bank reconciliation statement
  9.3.2 Method of bank reconciliation
  There are three principal methods of preparing a bank reconciliation 
  statement
  1. Beginning with the cash book balance, adjusting, updating or correcting 
  the cash book and then preparing a bank reconciliation statement. The 
  ultimate aim of this method is to arrive at or prove the bank statement 
  balance.
  2. Beginning with the bank statement balance and working towards proving 
  the cash book balance.
  3. Adjusting the cash book balance and also adjusting the bank statement 
  balance. The aim is to show whether the two adjusted balances agree.
  Example1.
  The following cash book and the bank statement for KBG Ltd for the month of 
  

  January 2022

  

  

  Adjusted (corrected cash book)

  
  

  
  

  
  

  
  

  Example 2

  Mupenzi’s cash book showed a debit balance of FRW 3,000,000 on 31 March 
  2022. His bank statement showed a credit balance of FRW 2,212,480 on the 
  same date. A careful examination of the two records revealed that the difference 
  was due to the following:
  a) A cheque for FRW 82,410 issued by Murenzi, another customer at the 
  bank, was wrongly debited by the bank in the Mupenzi’s bank account
  b) The bank had paid FRW 53,390 to Mupenzi’s insurance company as per 
  standing order 
  c) John who was Mupenzi’s tenant had paid rent FRW 145,000 direct into 
  Mupenzi’s bank account
  d) Cheques for FRW 432,750 deposited by Mupenzi on 29 March were 
  returned unpaid but no entry had been made in the cash book to record 
  the return. 
  e) Cheques totaling FRW 1,344,020 issued by Mupenzi to his creditors did 
  not appear on the bank statement. One of these cheques for FRW 100,000 
  is dated 10 June 2017.
  f) The cashier, in totaling the cash book pages, overstated the debit balance 
  of the cash book by FRW 200,000.
  g) Bank charges amounting to FRW 52,910
  h) Cheques totaling FRW 1,455,080 deposited by Mupenzi on 29 March 
  were credited by the bank on 2 April.
  Required: (i) Adjustment of the cashbook balance (ii) A bank reconciliation 
  

  statement as at 31 March 2009

  Answer

  

  Method 2: Beginning with the bank statement balance and working towards 
  

  proving the balance as per cash book

  

  

  Application activity 9.3

  
  

  You are required to:

  a) Update the cash book to take into account all necessary items 
  into account 
  b) Draw up a bank reconciliation statement as on 31 December 
  

  2021 

  End of unit assessment
  

  The following is the cash book (bank column) of Mr MUGABE for November 

  2021

  

  Prepare:
  • The amended cash book
  

  • Bank reconciliation statement

  
  

• UNIT 10:FINANCIAL STATEMENTS OF SOLE TRADERS

  Key unit competence: To be able to prepare financial statements of a 
  

  
  

  Introductory activity
  AMANI is a sole trader selling purified mineral water, juice, and milk. He 
  has invested money in acquiring the assets, including buildings and motor 
  vehicles, some by cash and others on credit. In his first year of trading, 
  he has enjoyed an increased number of customers. Though AMANI is not 
  sure whether he earned profit or loss comparing business expenses and 
  revenues, he is also not aware of his business’s financial position. 
  Required: What kind of financial reports to be prepared by AMANI 
  that provide the information on his business’s performance and financial 
  

  position?

  10.1. Meaning, objectives and qualitative characteristics of 

  financial statements

  Activity 10.1

  CYUSA, a sole trader in Rwamagana, has been requested by Revenue 
  Authority to report his business financial information, but he is persisting 
  as why? You are required to help him by answering the following questions. 
  1. What is the objective of financial statements?
  

  2. What are the characteristics of useful financial information?

   10.1.1. Meaning of financial statements

  Financial statements are a collection of summary level reports about an 

  organization’s financial performance, financial position, and cash flows. The 

  main ones are:

  – Statement of Profit or Loss (Income statement)

  – Statement of financial position (Balance Sheet)

  – Statement of Cash flow (Cash flow statement)

  10.1.2. Objectives of financial statements

  – To provide information about the financial position (Balance sheet)

  – To provide information about financial performance (income statement)

  – To provide information about changes in financial position of an entity 

  (cash flow statement)

  – To determine whether a business has the capacity to pay back its debts.

  – To derive whether financial ratios from the statements can indicate the 

  condition of the business.

  – To use as the basis for an annual report, which is distributed to investors 

  and the investment community?

  10.1.3. Qualitative characteristics of financial statements
  The qualitative characteristics of useful financial reporting identify the types of 
  information are likely to be most useful to users in making decisions about the 
  reporting entity on the basis of information in its financial report. The qualitative 
  characteristics apply equally to financial information in general purpose financial 
  reports as well as to financial information provided in other ways.
  Fundamental qualitative characteristics
  Relevance and faithful representation are the fundamental qualitative 
  characteristics of useful financial information.
  Relevance
  Relevant financial information is capable of making a difference in the decisions 
  made by users. Financial information is capable of making a difference in 
  decisions if it has predictive value, confirmatory value, or both. The predictive 
  value and confirmatory value of financial information are interrelated.
  

  Materiality 
  

  Information is material if omitting it or misstating it could influence decisions 
  that the primary users of general purpose financial reports make on the basis 
  of those reports, which provide financial information about a specific reporting 
  entity. 
  Faithful representation
  This fundamental characteristic seeks to maximize the underlying characteristics 
  of completeness, neutrality and freedom from error. 
  Enhancing qualitative characteristics
  Comparability, verifiability, timeliness and understandability are qualitative 
  characteristics that enhance the usefulness of information that is relevant and 
  

  faithfully represented.

  Application activity 10.1

  i) Define financial statements
  ii) What are the main financial statements? 
  iii) List the qualitative characteristics of financial statements
  

  iv) What are the main objectives of financial statements?

  10.2. Statement of profit or loss/ Income statement
  

  Activity 10.2

  The following information relates to the financial year ended 2020 in the 
  business of Alice, a sole proprietor in Kigali city:
  FRW
  Sales 100,000
  Wages 20,000
  Purchases 70,000
  Discount received 12,000
  Discount allowed 11,000
   Alice wants to know the business’s financial performance.
  Required:
  i) Using the skills got from O level entrepreneurship, which financial 
  statement to be used in order to get the business financial 
  performance?
  

  ii) Which formula used to get the financial performance of a business?

  10.2.1 Meaning of Income Statement 
  Income statement is a financial statement prepared to provide information about 
  financial performance of a business. Many businesses try to distinguish between 
  a gross profit earned on trading, and a net profit. They therefore prepare the 
  statement of profit or loss in two parts.
  In the first part (Trading Account) of the statement revenue from selling goods 
  and services is compared with direct costs of acquiring, producing or supplying 
  the goods sold to arrive at a gross profit figure. From this, deductions are made 
  in the second half of the statement (profit and Loss Account) in respect of 
  indirect costs (referred to as expenses in financial accounting) to arrive at a net 
  profit figure.
  The statement of profit or loss normally covers a one-year accounting period but 
  this is not always the case; other accounting periods are permissible in certain 
  circumstances.
  Elements of statement of profit and Loss are incomes and expenses and the 
  Source of data is a Trial balance.
  Heading of income statement is composed by:
  – Name of the sole trader
  – Name of income statement
  – Period of income statement
  10.2.2 Format of income statement 
  There are two formats of preparing the income statement, the Horizontal or 
  

  T-account format and the Vertical or narrative format

  

  Vertical format

  Income statement
  

  
  

  
  

  NOTES:

  1. The list of expenses above is not exhaustive. 
  2. The net profit is for the period, and it is transferred to the proprietor’s 
  capital account in the statement of financial position which will be 
  discussed in the following contents.
  3. Drawings are withdrawals of profit and not expenses. They may be cash 
  drawings (when cash is drawn) or stock drawings (when stock is drawn). 
  They must not be included in the statement of profit or Loss. These are 
  shown as a reduction in the capital account figure on the face of the 
  statement of financial position and also a reduction of assets.
  4. Carriage inwards and carriage outwards are both expenses of 
  the business. Carriage inwards means transport charges regarding the 
  goods purchased and it is added to the purchases to increase the cost 
  of goods sold, while carriage outwards are transport charges regarding 
  

  the goods sold and are considered as part of the operating expenses.

  5. Returns inwards and Returns outwards
  

  Returns inwards refer to sales returns and are deducted from total sales for the 
  period to determine net income from sales, also known as turnover. Returns 
  outwards on the other hand refer to purchases returns, and they are deducted 
  from total purchases for the period to determine net purchases and cost of 
  goods sold. The alternative terms used are “returns in” and “returns out”
  The statement of Profit or loss shows both the gross profit and the net profit for 
  the accounting period.
  

  10.2.3 Meaning of related terms

  – Trading account is an account usually prepared to ascertain the 
  Gross profit or gross Loss. (This includes all expenses directly incurred 
  in the trading process) at the end of a trading period.
  – Cost of goods sold: is derived by adding purchases to the opening 
  stock minus closing stock or (cost of goods available for sales- closing 
  stock) i.e. opening stock +purchases – closing stock)
  – Cost of goods available for sale: is opening stock plus the total 
  purchases for the period. (Opening stock +purchases)
  – Gross profit is the difference between the value of revenue (sales) 
  and the cost of goods sold. It is an excess of selling price of goods 
  over their cost price. It represents the difference between sales revenue 
  and purchase price of goods sold
  – Gross Loss: If the cost of goods sold exceeds the sales, the difference 
  will be a gross loss. The main items in the trading account are sales, 
  purchases, opening stock and closing stock. A trading account or any 
  other accounts also has a heading which is stated in these forms.
  – Net profit is calculated as Gross Profit plus any other income 
  generated by the business, such as on the sale of non-current assets 
  and less all other expenses incurred in running the business.
  – Net profit may be defined as an excess of gross profit over the expenses 
  of the business incurred to conduct the business transactions. There 
  will be a net loss when gross profit is less than the expenses. 
  – Closing stock: This is the stock at the end of the trading period. This 
  stock is an asset to the business and is shown as a current asset in the 
  balance sheet. Closing stock will be shown as additional information on 
  

  the trial balance i.e. it will be out of the trial balance items.

  10.2.4 Gross profit percentage 
  Gross profit percentage may be given as percentage of cost price or sale price. 
  If this percentage is given on the cost price and instead of cost price, the sales 
  figure is given then this percentage must be changed accordingly and vice 
  versa. Gross profit as percentage to cost price is known as mark-up and as a 
  percentage to a sale price ‘margin’. 
  Example 1
  Calculate Mugisha’s Gross profit if the cost of goods sold is FRW 300,000 and 
  a profit mark-up is 20%.
  Solution
  Gross Profit = FRW 300,000*20%= FRW 60,000
  Example 2
  Calculate a Gross profit if the sales are FRW 400,000 and a profit margin is 
  20%.
  Solution
  Gross profit = FRW 400,000 * 20% = FRW 80,000
  102.5. Forms of financial statement 
  Single step income statement
  A single step income statement is one of two commonly used formats for the 
  income statement or profit and loss account. The single step format uses only 
  one subtraction to arrive at net income.
  NET INCOME= (REVENUES+GAINS)- (EXPENSES +LOSSES)
  An extremely condensed income statement in the single step format would look 
  

  like this:

  

  Multiple step income statement 
  Multi step Income statement segregates the operating revenues from the nonoperating revenues and operating expenses from non-operating expenses, 
  gains and losses.
  The difference between single step income statement and multiple step income 
  statement is that multiple step reveals the company’s gross profit whereas 
  single step directly calculates the Net Profit. The format given above on vertical 
  format is a multiple step income statement.
  Example 3
  Mr. Samuel has given you the following balances extracted from his books as at 
  30th September, 2020
  
  Required: 
  From the above balances, prepare a statement of profit and Loss (or income 
  statement)
  

  ANSWER

  Mr Samuel

  Statement of profit and Loss for the year ended 30th September 2020

  
  

  Example 4
  On 1st October 2021. Shema Started trading as a snack vendor, selling hot and 
  cold food from a van which she packs by a road side. 
  He borrowed FRW 2,000,000 from her bank, and the interest cost of the loan 
  was FRW 50,000 per month.
  a) He rented the van at a cost of FRW 800,000 for 3 months. Running 
  expenses for the van averaged FRW 150,000 per month.
  b) He hired a part time helper at a cost of FRW 120,000 per month.
  c) His main business was to sell food to customers who stop their cars 
  by his van, but he also did some special catering arrangements for 
  business customers, supplying food for office parties. Sales to these 
  customers were usually on credit.
  d) For the three months to 31st December 2021, his total sales were:
  i) Cash sales FRW 6,000,000
  ii) Credit sales FRW 2,000 (all paid by 31st December 2021)
  e) He purchased food from a local food wholesaler, Best Stores. The 
  cost of purchases in the three months to 31st December 2021 was 
  FRW 4,250,000, and at 31st December she had sold all of it. He still 
  owed FRW 850,000 to Best Stores for unpaid purchases on credit.
  f) He used his own home for his office work. Telephone and postage 
  expenses for the three months to 31 December were FRW 100,000.
  g) During the period he paid himself FRW 250,000 per month.
  Required: Prepare a statement of Profit or Loss for the three months 1 
  

  October-31 December 2021.

  
  

  Application activity 10.2
  

  1. Which of the following statements relating to the statement of profit 
  or loss is false?
  i) It shows in detail how the profit or loss of a period has been 
  made
  ii) It shows the value of sales less total expenses as net profit
  iii) It represents the financial position at a point in time
  

  iv) It is one of the key accounting statements of any business

  

  10.3 Effect of errors on the calculation of the profit

  Activity 10.3

  Examine the following errors and show their effects on net profit:
  Furniture purchased for FRW 2,000 had been debited to the purchases 
  account
  Goods purchased from Rwanda Group of companies for FRW 2,500 were 
  credited to the account of Rwanda and company
  An invoice from Kanimba firm for FRW 7,800 was omitted
  Goods sold to Umutoni for FRW 1,750 were entered in the sales daybook 
  or sales book as FRW 1,570.
  i) The salaries and wages account was over added by FRW 350 and 
  the rent received account had been over added by FRW 350.
  As you have seen in unit 6, some types of errors will cause an imbalance in the 
  trial balance. The bookkeeper will then know that an error has been made and 
  will look for it and correct it. In this case, the trial balance will balance but the 
  statement of profit or loss may be incorrect. You may be asked to consider how 
  errors, and correction of errors, affect the statement of profit or Loss.
  Examination questions frequently require a net profit figure to be corrected. To 
  arrive at the correct net profit figure, the errors are corrected first and then the 
  effect of these corrections on net is determined. These adjustments are added 
  or subtracted from the net profit figure given in the question to find out the 
  

  adjusted net profit. For this purpose, the following format may be adopted.

  

  NDAMAGE Enterprise makes up its annual accounts to 31st December. Her 
  trial balance at 31st December 2012 showed the shortage on the debit side of 
  FRW 1,050. This difference was posted to a Suspense account.
  The following errors were then discovered.
  i) The purchases journal had been under cast by FRW56,300
  

  ii) The sale of office equipment had been posted to the sales account, 
  FRW13,205
  iii) Received from Kwizera Florien FRW 66,700, a debtor, was correctly 
  entered in the Cash Book, but had been wrongly posted to the Debtors 
  Ledger as FRW6,600.
  iv) Discount allowed of FRW1,500 had been entered in the cash book, but 
  was not posted in the customer’s account.
  v) Machinery was purchased on credit from Ruvubu Factory for FRW250,000 
  but no entry had been made in the Enterprise’s books.
  Required: 
  1. For each error state how the net profit will be affected when the errors 
  are corrected
  2. Calculate the corrected net profit if the reported profit was FRW 87,000.
  Answer
  1. (I) decrease on net profit, (ii) decrease, (iii) no effect, (iv) no effect, (v) no 
  

  effec

  

  Example 2

  The accountant KAZUNGU prepared a trial balance for his business for the 
  month of December 2017 but it failed to balance. The total on the debit side 
  was more than the total on credit side by FRW 33,000. He opened a suspense 
  account for the difference and proceeded to prepare final accounts. He reported 
  a net profit of FRW 1,400,000.
  During the month of January 2018 he discovered the following mistakes which 
  had been made in December 2017:
  1. The purchases account had been under cast by FRW 2,000
  2. Payment of FRW 555,000 by cheque for insurance was properly recorded 
  in the cash book but was posted to insurance account by mistake as 
  FRW 515,000
  

  3. A sales invoice of FRW 300,000 was not recorded in the sales day book 
  and therefore not posted to the ledger
  4. The credit side of the sales account was under added by FRW 4,000
  5. Motor vehicle repairs costing FRW 50,000was debited to Motor Vehicle 
  account
  6. Payment of FRW 680,000 cash to John a creditor was properly recorded 
  in John’s account but was wrongly recorded in cash book as FRW 
  670,000
  7. The bookkeeper had made a mistake by debiting ledger fee of FRW 
  15,000 to the cash book but properly recorded in the ledger fee account
  8. Sale of goods for FRW 600,000 on credit to Mbabazi was properly 
  recorded in the sales account but was wrongly recorded in Uwimbabazi 
  account
  9. The bank column of the cash book credit side was over added by FRW 
  1,000
  10. A credit note issued for FRW 800,000 was properly recorded in the 
  customer’s account but was wrongly recorded in the other account 
  necessary for completion of double entry as FRW 820,000
  11. Discount received of FRW 6,000 was debited to discount allowed 
  

  accoun

  Required: Statement of corrected net profit

  

  Application activity 10.3

  An accountant of MUYANGO extracts a trial balance which fails to agree 
  

  by a figure of FRW 2,400,000. He places the difference in Suspense 
  

  account and then proceeds to prepare draft Trading and Profit and Loss 
  

  Account for the year ended 31st May 2018 which results in a net profit of 
  

  FRW 64,000,000. Later he attempts to find the errors which had caused 
  

  his trial balance to disagree. The following errors are found:

  
  

  10.4 Statement of financial position/ Balance sheet 
  

  Activity 10.4

  

  A balance sheet is a financial statement which shows the financial position of an 
  organization at a particular date with regards to its assets, liabilities and owner’s 
  equity. When a balance sheet balances, it means that the accounting equation 
  has been satisfied. 
  Heading of balance sheets:
  • Name of the sole trader
  • Name of balance sheets
  • End period of balance sheets
  Format of balance sheets: 
  • Horizontal format
  • Vertical format
  Elements of balance sheets 
  - Assets: Assets represent the resources owned by the business. These 
  are resources controlled by the entity as a result of past events. Assets are 
  classified into current and non-current assets.
  • Current assets: Current assets are the assets acquired by a firm and 
  stay in the firm for a short period of time, usually less than one year. The 
  current assets are:
  - Cash and cash equivalent (bank, petty cash)
  - Marketable securities/short term securities
  - Account receivables 
  - Bills receivable
  - Inventory (stock of goods, stock of raw materials and supplies, 
  stock of work in progress, stock of finished goods and semifinished goods)
  - Prepaid expenses 
  - Accrued income
  • Fixed assets/ Non-current assets 
  - Investment 
  - Tangible assets: They are those assets which have physical 
  existence and which are in use in an enterprise for a period of 
  one year and above. They are mainly: premises, land, buildings, 
  plant and machinery, equipment, furniture, fixture and fittings, 
  motor vehicle, long term securities in portfolio etc
  - Intangible assets: intangible fixed assets are assets which do 
  not have physical existence. They are mainly: leasehold, patent, 
  Goodwill, Trade mark, organization cost at creation of the 
  company, copyright and license.
  - Liabilities: Present obligations of an entity as a result of past event. 
  Liabilities are classified into current and non-current liabilities. 
  • Current liability: These are obligations of payments maturing in less 
  than one financial year. They are: 
  - Note payable 
  - Creditors 
  - Overdraft 
  - Tax payable 
  - Unearned revenues 
  - Prepaid income
  - Accrued expenses
  • Non-current liability: they are obligations of payments maturing in 
  more than one financial year. They are: long term bank loans, bonds 
  (debenture) loans.
  • Equity 
  Equity is the net amount of funds invested in a business by its owners, plus any 
  retained earnings (Net profit): 
  Owner’s equity = capital plus net profit minus drawings
  Accounting equation: 
  Assets = Liabilities + Owner’s Equity
  OR
  Owner’s equity= capital +Net profit - Drawings.
  Importance of a balance
  a) The balance sheet helps to know the three origins of economic 
  resources used by a firm:
  • Contribution of shareholders or owners
  • Long, medium and short term liabilities
  • Internal financing (retained earnings and reserves)
  Sources of capital used by a business are:
  - Personal resources
  - Borrowing from friends or banks
  - Trade credits
  - Bank overdraft
  b) The balance sheet helps to know the use of economic resources
  The uses are: 
  • Fixed assets (Fixed capital)
  • Current assets (stocks, receivables, cash)
  Structural equilibrium of the enterprise
  The structural equilibrium is based on the following general principles:
  1. Owner’s equity should be greater than liabilities. 
  2. Capital employed (owner’s equity plus long term liabilities) should cover 
  the fixed assets and part of current liabilities. 
  3. Current liabilities should be invested only into current assets and basically 
  

  in cash and receivables so to be easily reimbursed.

  FORMAT

  Balance sheet as at……

  
  

  
  

  Example 1

  Mr. Samuel has given you the following balances extracted from his books as at 

  30th September,2020

  
  

  You are required to prepare the statement of financial position as at 30th
  September 2020
  Solution
  Mr Samuel
  

  Statement of financial position as at 30th September 2020

  

  Mr Samuel
  

  Statement of financial position as at 30th September 2020

  

  EXAMPLE 2

  The following monthly Trial balance was extracted from the books of Ben on 31st

  May,2019:

  

  Required:

  a) Statement of Profit and Loss for the period ended 31st May 2019

  b) Statement of financial position as at 31st May 2019

  ANSWER 

  Ben

  Statement of profit and loss for the period ended31st May 2019

  

  

  Application activity 10.4

  1) Which of the following statements relating to how a five-year bank 
  loan is shown in the statement of financial position is true: 
  i) It should be shown as a non-current asset
  ii) It should be shown as a non-current liability
  iii) It should be split into a current liability and non-current liability
  iv) It should be shown as a current liability
  2) Which of the following statements correctly describes the contents 
  of the statement of financial position?
  i) A list of ledger balances shown in debit and credit columns
  ii) A list of all the assets owned and all the liabilities owed by a 
  business
  iii) A record of income generated and expenditure incurred over a 
  given period
  iv) A record of the amount of cash generated and used by a company 
  in a given period.
  3) From the following information, prepare a statement of financial 
  

  position

  
  

  
  

  10.5 Effect of errors on the balance sheet
  

  Activity 10.5
  

  After extracting the trial balance and financial statements of MUHIRE, an 

  investigation revealed the following errors: 

  1. Debtors account over casted by FRW 30,000
  2. Rent received debited in discount allowed FRW 40,000
  3. Purchases of machinery completely omitted
  4. Cash received from a debtor FRW 215,000 recorded in both 
  accounts as FRW 151,000
  REQUIRED: Show the effect of each error on the balance sheet
  When correcting errors, you may be asked to consider how errors, and 
  correction of errors, affect the statement of financial position. Examination 
  questions frequently require a balance sheet to be corrected. To arrive at the 
  correct balance sheet, the errors are corrected first and then the effect of these 
  corrections on balance sheet is determined. These adjustments are used to 
  correct the balance sheet.
  Example 
  

  Set out below is the draft Balance Sheet of KAZUNGU as at 31st March 2020

  

  

  After correcting the errors that caused the suspense account to take place and 
  

  preparing a statement of corrected net profit, the following results was obtained:

  

  

  Application activity 10.5

  Below are particulars regarding Odile’ final accounts: 
  The net profit per the accounts is found to be FRW 154,000. The Balance 
  Sheet when drawn up appeared to be as follows:
  Odile
  

  Draft balance as at 31st/12/2021

  
  

  The following errors were subsequently detected and corrected:
  a) cash sales entry entered in cash book only FRW 6,000
  b) Drawings (cash) completely omitted from books FRW 1,000
  c) Rent account under cast FRW 2,000
  d) Creditor BARASA paid, but entry in his ledger account only FRW 5,000
  Required:
  Draw up statement of adjusted net profit and revised balance sheet at 31st
  

  December 2021

  10.6 Statement of cash flow

  Activity 10.6
  

  
  

  10.6.1 The meaning of statement cash flow and related terms

  The term cash is used to mean fund or cash on hand and demand deposit.
  Cash equivalent are short term, highly liquid investments that are readily 
  convertible to known amounts of cash and which are subject to an insignificant 
  risk of changes in value.
  Cash flows are inflows and outflows of cash and cash equivalent.
  Cash and cash equivalent: These are items which are not held for investment 
  or other long term purposes, but rather to meet short term cash commitments. An 
  investment’s maturity date should normally be three months from its acquisition 
  date. 
  A cash flow statement is a financial statement that shows us the exact source 
  (inflows) of the business fund obtained during a period and the use to which the 
  business funds are applied (outflows)
  Statements of cash flows are a useful addition to the financial statements of a 
  company because accounting profit is not the only indicator of performance. 
  They concentrate on the sources and uses of cash and are a useful indicator of 
  a company’s liquidity and solvency.
  It has been argued that “profit” does not always give a useful or meaningful 
  picture of a company’s operations. Readers of a company’s financial statements 
  might even be missed by a reported profit figure. 
  Statements of cash flows are frequently given as an additional statement, 
  supplementing the statement of financial position, statement of profit or loss 
  and related notes. 
  Statement of cash flows indicates the changes that took place in the cash 
  balances between two balance sheet dates. It provides historical information 
  about cash and cash equivalents, classifying cash flow from operating, investing 
  and financing activities.
  The cash flow statements presented by companies contain information on three 
  parts:
  Cash from operating activities
  Cash flow from financing activities
  Cash from investing activities
  The manner of presentation of cash flows from operating, investing and financing 
  activities depends on the nature of the enterprise. By classifying cash flows 
  between different activities in this way, users can see the impact on cash and 
  cash equivalents of each one, and their relationship with each other.
  10.6.2 Benefits statement of cash flow 
  1. Useful for short term planning: it will enable the business to ensure cash 
  is available to meet its financial obligations.
  2. Helps in efficient cash management: projected cash flow statement will 
  help on planning and coordinating sources and application of cash.
  3. Helps in internal finance management 
  4. Disclose the movement of cash showing the increase or decrease in 
  cash and hence explaining the decreases or increases of cash
  5. Discloses success or failure of cash planning comparison between the 
  projected cash flow statement and the actual cash flow statement will 
  indicate success or failure.
  6. Statement of cash flow enhance comparability: as they are not affected 
  by differing accounting policies used for the same type of transactions 
  or events.
  10.6.3 Distinguish among operating, investing, and financing 
  activities. 
  The statement of cash flow is portioned into three segments, namely: cash flow 
  resulting from operating activities, cash flow resulting from investing activities, 
  and cash flow resulting from financing activities.
  Operating activities 
  Operating activities include the production, sales and delivery of the company’s 
  product as well as collecting payment from its customers. This could include 
  purchasing raw materials, building inventory, advertising, and shipping the 
  product. Cash flows from operating activities are primarily derived from the 
  principal revenue-producing activities of the entity. Most of these components 
  will be those items which determine the net profit or loss of the enterprise.
  Operating cash flows include (Examples):
  • Receipts from the sale of goods or services
  • Receipts for the sale of loans, debt or equity instruments in a trading 
  portfolio 
  • Interest received on loans
  • Dividends received on equity securities
  • Payments to suppliers for goods and services
  • Payments to employees or on behalf of employees
  • Interest payments 
  Investing activities
  The cash flows classified under this heading show the extent of new investment 
  in assets which will generate future profit and cash flows.
  The standard gives the following examples of cash flows arising from investing 
  activities:
  • Purchases or sale of fixed asset (assets can be land, building, equipment, 
  marketable securities, etc)
  • Cash payments to acquire shares or loan notes of other entity
  • Cash receipts from sales of shares or loan notes of other entities
  • Cash advances and loans made to other parties
  • Cash receipts from the payment of advances loans and loans made to 
  other parties
  • Payments related to mergers and acquisitions
  Financing activities 
  Financing activities include the inflow of cash from investors such as banks and 
  shareholders, as well as the outflow of cash to shareholders as dividends as the 
  company generates income. This is an indicator of likely future interest and 
  dividend payments. Other activities which impact the long term liabilities and 
  equity of the company are also listed in the financing activities section of the 
  cash flow statement. 
  The standard gives the following examples of cash flows which might arise 
  under these headings: 
  • Proceeds from issuing loans, bonds, mortgages and other short term 
  or long term borrowings
  • Payments of dividends
  • Payments to owners to acquire or redeem the entity’s share of company 
  shares 
  • Repayment of debt principal, including capital leases
  • For non-profit organizations, receipts of donor-restricted cash that is 
  limited to long term purposes.
  • Interest payments can also be considered under this activity if not 
  considered under operating activities – However, interest payments 
  of financial institutions should always be classified under operating 
  activities
  Items under the financing activities section include:
  • Dividends paid
  • Sale or repurchase of the company’s stock 
  • Net borrowings
  • Payment of dividend tax
  10.6.4 Net cash position
  This is a difference between the cash inflows and cash outflows. That is the 
  cash at the beginning plus total cash inflows less total cash outflows. When 
  it is with a positive result it is called a SUPLUS whereas a negative result is a 
  DEFICIT
  How to deal with surplus
  Positive cash flow indicates that a company has more money flowing into the 
  business than out of it over a specified period. This is an ideal situation to be in 
  because having an excess of cash allows the company to:
  • Expand business activities
  • Settle debt payments
  • Reinvest in itself and its shareholders
  • Acquire new fixed assets
  • Increase credit sales and decrease cash sales
  • Increase cash purchases and decrease credit purchases
  Positive cash flow does not necessarily translate to profit, however. Your 
  business can be profitable without being cash flow-positive, and you can have 
  positive cash flow without actually making a profit.
  How to deal with deficit
  • Increase cash sales and decrease credit sales
  • Increase credit purchases and decrease cash purchases
  Net cash flows
  It indicates whether a business has enough cash to cover the expected cash 
  payment (surplus) it means cash inflows are greater than cash outflows or not, 
  it means cash outflows are greater than cash inflows. 
  10.6.5 Components of cash and cash equivalent
  Cash and cash equivalents consist of cash on hand and balances with banks, 
  and investments in money market instruments. 
  10.6.6 Formats of cash flow statement
  The standard offers a choice of method for this part of statement of cash flows.
  Direct method: Discloses major classes of gross cash receipts and gross 
  cash payments.
  Indirect method: net profit or loss is adjusted for the effects of transactions 
  of a non-cash nature, any deferrals or accruals of past or future operating cash 
  

  receipts or payments, and items of income or expense associated with investing 
  or financing activities.
  Direct method discloses information not available elsewhere in the financial 
  statement, which could be of use in estimating future cash flows. However, the 
  indirect method is simpler, more widely used and more likely to be examined. 
  Direct method 
  FORMAT
  Cash flow statement as at……
  
  NOTE: This format does not to separate operating cash flow, investing cash 
  

  flows and financing cash flows.

  OR

  Cash flow statement as at……

  
  

  
  

  SOLUTION

  CASH FLOW STATEMENT (DIRECT METHOD)

  
  

  Example 2

  Mugabo had the following information in 2014:

  
  

  Application activity 10.6
  

  1. Define cash and cash equivalent.
  2. Which of the following headings is not classification of cash flow?
  a) Operating 
  b) Investing 
  c) Administration
  d) Financing 
  3. Umuhoza had the following transactions during the year.
  a) Cash received from customers 32,900
  b) Cash paid to suppliers 17,950,000
  c) Cash paid to employees 11,250
  d) Interest paid 2,100
  From the following information, calculate the cash flow from operating 
  

  activities. 

  4. Use the following data to construct a statement of cash flows using 
  

  the direct method.

  
  

  During 2000 declared and paid dividends of FRW 2,500
  During 2000, ABC paid FRW 46,000 in cash to acquire new fixed assets. 
  The account payable was used only for inventory. No debt was retired 
  

  during 2000.

  10.7 Accounting records for incomplete information

  Activity 10.7
  

  Maurice has a small business buying and selling energy drinks. This 
  business does not write its accounts in double entry form due to lack of 
  accounting skills. Besides, given the size of his business, it is not mandatory 
  for him to keep the books of accounts. Maurice records its cash transaction 
  (not necessarily in a professionally written cash book) and simply lists its 
  debtors and creditors. Only single records are made, important records for 
  conformity to double entry are omitted and therefore incomplete. Figures 
  for credit sales, credit purchases, opening capital etc. are missing.
  From the above scenario, answer the following questions:
  1. How Maurice ltd records are called?
  2. Is this book-keeping suitable? Justify your answer.
  10.7.1 Meaning of accounting for incomplete record or single 
  entry accounting
  Single entry accounting may be defined as a system of book keeping in which the 
  dual aspect of transactions is ignored and in which personal accounts only are 
  maintained. It means any system which is single entry system. In the questions 
  based on incomplete records, some information is provided and some missing 
  information is to be found. 
  Obviously this book-keeping system is unsuitable. It is impossible to extract any 
  trial balance. Financial statements cannot therefore be prepared from information 
  supplied under single entry and incomplete records because some key figures 
  for financial statements preparation are missing and the trial balance cannot be 
  prepared. No set of single rules can be given as short cut to the understanding 
  of the principles involved. These figures are obtained by applying the basic 
  principles of the double entry.
  There are two main kinds of the questions based on incomplete records:
  a) Those requiring a computation of profit based on increase in net assets 
  b) Those requiring the production of the final accounts from a cash book
  The following steps are followed when attempting to re-organize and prepare 
  final accounts/financial statements from single entry and incomplete records.
  Step 1
  Calculation of the opening capital 
  In many cases, the sole trader may not know with how much capital he/she 
  started business. The opening capital can be determined by preparing the 
  statement of affairs. A statement of affairs is simply an opening balance sheet. 
  Step 2
  Re-writing the cash book
  Sometimes it may be necessary to re-write the cash book professionally in a 
  columnar form applying double entry system. This especially necessary where 
  the closing cash/bank balances are not provided. Re-writing the cash book may 
  also reveal ‘hidden’ drawings etc. it is also necessary to complete the double 
  entry for all items entered into the cash book. 
  Step 3 
  Calculating credit sales and credit purchases
  Since in single entry, debtors and creditors are simply listed, credit sales and 
  credit purchases cannot easily be ascertained. There are no purchases or sales 
  A/Cs maintained in a double entry fashion. These key figures can be determined 
  by preparing control accounts. Debtors control account for credit sales and 
  creditors control accounts for credit purchases. In some instances, credit sales 
  and credit purchases could be computed from accounting ratios (mark up and 
  

  margin).

   

  Step 4
  Adjusting some expense accounts
  Some expense accounts may require to be adjusted. This is because in these 
  accounts information is scattered and disorganized. It may occur that in the 
  same case expense account there were prepayments and/ or accruals and 
  cash payments during the year. This scattered information needs to be brought 
  together so that the figures to be posted to the profit and loss account are 
  

  determined. This step will require opening T Account

  

  Step 5 
  Preparation of the trial balance 
  Previously it was impossible to prepare the trial balance when the entries were 
  single form and some key figures were missing. Having transformed single entry 
  records into double entry, all the ledger accounts created for completion of 
  double entry and cash book are balanced off or closed and together with the 
  previously missing figures for credit sales, credit purchases, opening capital 
  etc, a trial balance can be prepared
  Step 6
  Preparation of financial statements
  Once the trial balance has agreed, final accounts/financial statements can be 
  prepared. The financial statements that are prepared by sole traders are income 
  statements and balance sheet.
  NOTE 
  In examinations some of the above steps may be omitted especially step V 
  above.
  Computing of profit 
  The net assets basis uses the principles of fundamental accounting equation 
  to build up a set of accounts and to calculate the profit figure. The accounting 
  equation is:
  Profit = Increase in assets +drawings – Additional Capital – Increase in other 
  liabilities. 
  The net worth of a business means the net value of assets which belongs to the 
  proprietor. Any increase in capital represents the increase in net value of assets. 
  If there are no drawings and no additional capital is introduced by the proprietor, 
  then this increase is due to the net profit earned during particular year. 
  Drawings reduce the value of assets so there are added into assets to find 
  actual profit similarly, an additional capital introduced by the proprietor results 
  in the increase in assets but this has not come about as a part of profit thus it is 
  deducted to arrive at the figure of true profit. Any increase in outside liabilities 
  like bank loan is also deducted
  Example 4
  The records of UWERA provide the following information for the year ending 
  31st December 2015.
  Capital January FRW 5,600,000
  Capital 31ST December FRW 8,500,000
  Drawings FRW 2,500,000
  New capital introduced by UWERA FRW 1,500,000
  Calculate UWERA’s net profit on the basis of these figures.
  Profit= FRW 2,900 + 2,500-1,500= FRW 3,900
  Note: Increase in assets is the increase in capital from 1st January to 31st
  December 2015.
  10.7.2 Final accounts from incomplete records 
  To prepare the final accounts from incomplete records, the following steps are 
  taken: 
  a) Statement of affairs 
  b) Reconstruction of accounts
  Statement of affairs
  In order to find out the opening capital, a statement of affairs is prepared. 
  Total assets and total liabilities are taken into consideration and the difference 
  between these two is taken as capital at the start of accounting period. 
  Example 5
  CYUBAHIRO does not keep proper records of his business transactions but he 
  

  gives the following information as at 1st January 2016.

  

  Required: Prepare the statement of affairs to find his capital as at 1st January 

  2016.

  

  Reconstruction of accounts 
  From the given information, the missing figures are obtained by reconstructing the 
  control accounts. These accounts are reconstructed by applying the principles 
  of double entry to the available information. Normally, creditors’ accounts are 
  prepared to find out the figures of purchases and sales and those are prepared 
  in step IV. The cash or bank account is constructed to find out the balance at 
  bank. Similarly, nominal accounts can be constructed as required. 
  An important aspect of these accounts is to build up the whole of the answer on 
  

  simultaneous basis rather than completing one account at a time.

  Illustration 6

  James is a sole trader and does not maintain a full set of accounting records

  The following information regarding his cash and bank transactions was obtained 

  for the year ended on 31st/12/2017

  

  The bank loan was obtained on 31/6/2017 and it is at interest rate of 20%p.a. 
  interest for the period accrued. 
  Vehicle is to be depreciated by 20%p.a. on cost.
  Required: 
  i) Determine James’ opening capital on 1/1/2017
  ii) Write up a cash book
  iii) Prepare a set of final accounts that can be prepared from the above 
  

  information for the year ended on 31st December 2017.

  Answer 

  James

  Statement of Affairs as at 1/1/ 2017

  
  

  James

  Cash book

  
  

  
  

  
  

  
  

  
  

  Application activity 10.7
  1. When Ossie completed his extended trial balance the totals were:
  

  Statement of profit or Loss columns

  
  

  What is Ossie’s profit or Loss for the period?
  A A loss of FRW 7,209,000
  B A loss of FRW 12,318,000
  C A profit of FRW 7,209,000
  D A profit of FRW 12,318,000
  2. In the last 12 months, Joanna’s capital balance increased by FRW 
  6,798,000. In the year her drawings totaled FRW 14,600,000 and 
  she introduced additional capital of FRW 2,900,000.
  What is Joana’s net profit or loss for the year?
  a) FRW 4,902,000 loss
  b) FRW 18,498,000 loss
  c) FRW 4,902,000 profit
  

  d) FRW 18,498,000 profit

  Skills Lab 

  1. Referring to AKEZA ledger accounts (Unit 4.5), prepare a trial 

  balance and a balance sheet.

  
  

  
  

  End of unit assessment 
  

  1. Clement’s trial balance includes balances for: insurance, trade 
  payables, trade receivables.
  Which of the following statement is correct?
  a) Insurance is a current asset, trade payables is an expense, trade 
  receivables is a current liability
  b) Insurance is an expense, trade payables is a current liability, trade 
  receivables is a current asset
  c) Insurance is an expense, trade payables is a current asset, trade 
  receivables is a current liability
  d) Insurance is a current liability, trade payable is an expense, trade 
  receivables is a current asset.
  2. At 31st October 2016 Jane owed her suppliers FRW 13,856,000. 
  During the year to 31ST October 2017 she owed FRW 11,552,000.
  What was the value of Jane’s credit purchases for the year to 31 October 
  2017?
  a) FRW 70,478,000
  b) FRW 93,582,000
  c) FRW 98,190,000
  d) FRW 121,294,000
  3. At 30 November 2013, John’s bank current account was overdrawn. 
  He also had a bank loan on which monthly capital repayments were 
  due to commence in February 2015.
  How should these balances be reported on his statement of financial 
  

  position at 30 November 2013?

  

  Where should these items ultimately appear in the financial statements?
  a) Both items should appear in the statement of profit or loss
  b) Item (i) in the statement of financial position and item (ii) in the 
  statement of profit or Loss 
  c) Both items should appear in the statement of financial position
  

  d) Item (i) in the statement of profit or loss and item (ii) in the 
  statement of financial position
  5. From the following particulars relating to Silas, a sole trader, you 
  are required to prepare his statement of profit or Loss for the year 
  

  ending 30th June, 2020 and a Balance sheet as on that date.

  Trial balance as at 30th June 2020

  

  Stock at 30stJune 2020 was valued at FRW 6,000

  REFERENCES
  Belverd E.D. (2011). Principles of Financial Accounting (11th edition). USA: 
  Cengage learning.
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  Ltd.
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  Prentice-Hall

  
  

  
  

  
  

  
  

  
  

  
  

   

  
  

  
  

• Topic 11
• Topic 12
• Topic 13
• Topic 14