Course: S4: Financial Accounting

Topic outline

General
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. State the advantages of using imprest system of petty cash
2. Mark NDUWAYEZU is a sole trader in a business know as MANDU
Traders Ltd. He keeps his petty cash on an imprest system, amount
being FRW 200,000. The following are the petty cash transactions
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
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Topic 11
Topic 12
Topic 13
Topic 14

Topic outline

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