Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

ARDHI UNIVESRITY

School of Real Estate studies

Bsc in Real Estate Finance and Investments

COURSE CODE: RN 359 YEAR III

COURSE TITLE: BUSINESS ACCOUNTS

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

BUSINESS ACCOUNTS RE359

Course Objectives

The overall objective of the course is to introduce elementary bookkeeping to enable

students understand and interpret final accounts, particularly the Income Statement (or
profit and loss Account) and the Balance Sheet

Learning Outcomes

At the end of the course, participants should be able to:

(i) explain the meaning of bookkeeping
(ii) explain the importance of bookkeeping
(iii) apply the fundamental accounting equation
(iv) define and apply the concepts of debit, credit, an account, and chart of
accounts
(v) explain and apply the double entry rule of bookkeeping
(vi) define and apply a general journal
(vii) prepare journal entries
(viii) post journal entries into the respective accounts
(ix) prepare a trial balance
(x) prepare an income statement
(xi) prepare a balance sheet
(xii) interpret the final accounts using selected key ratios

Course Contents

Elements of Bookkeeping
Basic Principles of double entry system
Understanding final accounts: Trial Balance, Profit and Loss Account, and Balance Sheet
Use of various yardsticks to measure performance from balance sheet, e.g., ratios

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

Introduction to Accounting I
Lecture Notes 1

1 INTRODUCTION TO BOOKKEEPING AND ACCOUNTING

1.1 The Nature and understanding of Bookkeeping Accounting

1.1.1 What is bookkeeping?

Bookkeeping is the recording of financial transactions. Transactions include sales,

purchases, income, and payments by an individual or organization. Bookkeeping is
usually performed by a bookkeeper. Bookkeeping should not be confused with
accounting.

A bookkeeper (or book-keeper), also known as an accounting clerk or accounting

technician, is a person who records the day-to-day financial transactions of an
organization. A bookkeeper is usually responsible for writing the "daybooks and General
Journal." The daybooks consist of purchase, sales, receipts, and payments. The
bookkeeper is responsible for ensuring all transactions are recorded in the correct
daybook, General Journal, suppliers ledger, customer ledger and general ledger. The
bookkeeper brings the books to the trial balance stage at most.

1.1.2 What is Accounting

Accounting is the process of recording, summarizing, analyzing, and

interpreting
financial (money-related) activities to permit individuals and organizations to
make
informed judgments and decisions.

The accounting process is usually performed by an accountant. The accountant

creates reports from the recorded financial transactions recorded by the
bookkeeper and files forms with government agencies. An accountant
ultimately prepare the income statement and balance sheet using the trial
balance and ledgers prepared by the bookkeeper

1.1.3 Where do we Apply Bookkeeping and Accounting in Real Life?

Investment and operating decisions of firms and other forms of institutions are based on
accounting information for profit and non-profit companies alike. In addition, government
revenue services (TRA Or IRS), banks and financial institutions, and other creditors
critically use financial information. Consequently various regimes legislate laws requiring
all businesses to keep accounting records.

There are different forms of business organizations:

Private business — object is to earn a profit

Sole Proprietorship — owned by one person

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

Partnership — co-owned by two or more persons

Corporation — owned by investors called stockholders (The business—not the

owners — are responsible for the company’s obligations.)

There are different types of business organizations:

Service business — Banks and financial institution, doctors, lawyers, barber shop,
etc. Services are provided with profit motives

Merchandising business — purchases goods for resale

Manufacturing business — produces a product to sell

Service nonprofit for — Services are provided without a profit motive: Local
Government Authorities, NGO, etc

FOOD FOR THOUGHT

Who uses financial information which is prepared by bookkeepers and accountants?

1.2 Introducing the Fundamental Accounting Equation

1.2.1 What is the Fundamental Accounting Equation?

(i) In order to understand the fundamental accounting equation, we must answer

three key questions:

How does the bookkeeper write the books of accounts?

How does the accountant prepare the balance sheet?

Are there specific concepts that are used in writing the books of accounts by a
bookkeeper?

(ii) Elements of the Fundamental Accounting Equation

The fundamental accounting equation is constructed using three elements 1 viz. assets,
liabilities, and owners equity. The Financial Accounting model is constructed as follows:

Assets = Liabilities + Owner’s

Equity
A = L + OE
This equation must always balance! Why should it? This is a big question!

(a) Assets – What are they?

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In this context, an element is a constituent part of a whole.

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

Assets are resources (or items) with money values that are owned by a
business for using them in carrying out the functions of the specific firm or
institution or enterprise, or an individual. Some examples are: cash, accounts
receivable (selling goods or services on credit), inventories, supplies, land, buildings,
equipment, motor vehicles, etc.

FOOD FOR THOUGHT

List different types of assets that are known to you.

(b) LIABILITIES

Liabilities are debts owed by the specific firm or institution or enterprise, or an

individual, and must be paid at the time agreed in a contract (written, verbal,
or implied after receiving the services or goods from the supplier). There are
various types of liabilities; some payable after a year or more (long-term liabilities) and
some payable within one year period (current liabilities).

Paying cash is often not possible or convenient, so businesses purchase goods and
services on credit. The name of the account used is Accounts Payable. Another type of
liability is Notes Payable. This is a formal written promise to pay a specific amount of
money at a definite future date.

FOOD FOR THOUGHT

List the types of liabilities an organization/institution might have?

(c) OWNER’S EQUITY

Owner’s equity basically is the resource in money value injected by the owners when
forming the specific firm or institution or enterprise PLUS additions by owners
or through profitable operations. According to the fundamental accounting equation,
the difference between Assets and Liabilities is Owner’s Equity. The can also be called
capital, proprietorship, or net worth.

FOOD FOR THOUGHT

Q1 The Assets of Kibena Corp are worth Tshs 15 mil. Its equity is Tshs 3 mil. How
much are the liabilities of Kibena Corp? If 50% of the liabilities are long term debt,
what is the amount of short-term (Current) liabilities?

Q2 The shareholders or owners of Mansese Ltd contributed Tshs 10 mil in form of

owners’ equity. Before launching their operations, they had to borrow Tshs 15 mil.
What is the value of the assets of Mansese Ltd? If 80% of the assets are in the
category of “fixed assets, how much assets are categorized as current assets?

1.2.3 Applying the Fundamental Accounting Equation

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

(i) The Fundamental Accounting Equation must always balance! Why should it?

This is a big question! Consider the following analogies in the chart 2:

Chart 2: explaining the balancing fundamental accounting equation

(a) Assets represent one side of a Tsh 1, 100, and 200 coins; and liabilities and
owners’ equity is the second side of the coin: none of the two sides is more
valued than the other!
(b) An asset bought from an open market for Tshs 5 mil, cannot be worth more
than 5 mil; i.e., 6 mil, 8 mil., etc.
(c) Tshs 20 mil borrowed from the bank cannot be more than the principle debt
(a) fromSimply
the bank! saying, when business firms/companies are formed, funds
Simplyor cashwhen
saying, raised is used
business to buy assets!
firms/companies If so how
are formed, fundscould assets
or cash raised be
is usedworthier than the cash/funds used to acquire them?
to buy assets!

(b) Funds or cash are raised from owners (owners’ equity) or shareholders
(shareholders’ equity) and from borrowing (debt) culminating into
liabilities. There after these funds are used to acquire/buy (invested in)
assets.

(c) The listing of assets shows us what things or items the business owns; and
the listing of liabilities and owners equity tells us who supplied the funds
for buying the assets and how much each group supplied.

(ii) Playing with the Fundamental Accounting Equation

Since Assets = Liabilities + Owner’s Equity:

(a) Assets increase either when liabilities increase or when owners’ equity
increase or when both liabilities and owners’ equity increase

(b) Assets decrease either when liabilities decrease or when owners’ equity
decrease or when both liabilities and owners’ equity decrease

(c) The Fundamental Accounting Equation is also called the Balance Sheet
Model or the Balance Sheet Equation

FOOD FOR THOUGHT

Question 1

Ms Amina, a real estate broker, decided to start a real estate business in her own, known
as Aminas Real Estate Company. The operations of the business consist of listings of
houses being offered for renting, or sale by owners; advertising these houses; and
showing them to prospective buyers. Aminas Real Estate Company receives a
commission of equal to 6% of the sales proceeds of each house sold.
The events of the company during September 2009 were as follows:

Date Sept 2009 Event

September 2009 01 Began business by depositing Tshs 600,000 in a
company bank account

3 Purchased land for Tshs 210,000 cash

5 Purchased a building for 360,000, paying Tshs 150,000

cash; and incurring a liability of Tshs 210,000

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

Date Sept 2009 Event

10 Sold part of the land at a price equal to cost of Tshs
60,000; collectible within three months
September 2009
14 Purchased office equipment on credit for Tshs 54,000

20 Received Tshs 15,000 cash as partial collection of the

Tshs 60,000 account receivable

30 Paid Tshs 30,000 on account payable

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 Business Accounts Dr Kasilo and Mr Luambano 2010/11 Ardhi University

Required for each event to:

(i) identify which of the elements of the fundamental equation is affected, and
whether it is increased or decreased
(ii) reflect the changes arising from (i) and ensure that Assets = Liabilities +
Owners Equity

Question 2

What is the difference amongst the following disciplines constituting the Accountancy
Profession in Tanzania generally?
 Financial accounting,
 Cost accounting,
 Auditing, and
 Financial management

Question 3

Do more exercises on the fundamental Accounting Equation

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