Topic 1: Nature And Context Of Accounting - Accountancy Notes Form 5 & 6
A brief history of Accounting
The history of accounting is thousands of years old and can be traced to ancient civilizations. The early development of accounting dates back to ancient Mesopotamia and is closely related to developments in writing, counting, and money
There is also evidence of early forms of bookkeeping in ancient Iran, and early auditing systems by the ancient Egyptians and Babylonians. By the time of Emperor Augustus, the Roman government had access to detailed financial information.
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe. With the development of joint-stock companies, accounting split into financial accounting and management accounting.
The Meaning of the term “Accounting”:
What is accounting?
Accounting or accountancy is the measurement, processing, and communication of financial and nonfinancial information about economic entities such as businesses and corporations.
Accounting, which has been called the “language of business “measures the results of an organization’s economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators.
Practitioners of accounting are known as accountants. The terms “accounting” and “financial reporting” are often used as synonyms.
Accounting can be divided into several fields including:-
- 1. Financial Accounting.
- 2. Management Accounting.
- 3. Government Accounting.
1. Financial Accounting:-
is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.
2. Management Accounting:-
One simple definition of management accounting is the provision of financial and non-financial decision-making information to managers.
According to the Institute of Management Accountants (IMA): “Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy”.
Management accountants (also called managerial accountants) look at the events that happen in and around a business while considering the needs of the business. From this, data and estimates emerge.
Cost accounting is the process of translating these estimates and data into knowledge that will ultimately be used to guide decision-making.
3. Government Accounting:-
Sometimes an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency.
There is a notable variety of agency types. Although usage differs, a government agency is normally distinct both from a department or ministry, and other types of public body established by government.
The functions of an agency are normally executive in character, since different types of organizations (such as commissions) are most often constituted in an advisory role—this distinction is often blurred in practice however, it is not allowed.
A government agency may be established by either a national government or a state government within a federal system. The term is not normally used for an organization created by the powers of a local government body.
Agencies can be established by legislation or by executive powers. The autonomy, independence and accountability of government agencies also vary widely.
ILLUSTRATION
In July 2009 a Rajabu started a tailoring shop. The following are his transactions for the first week.
July 1: He opened the shop with invested capital consisting of sewing machine of 50,000/= and 3,000/= in cash
July 2: He bought tread, needles and other sewing supplies costing 500/=
July 3: He completed a shirt for a customer and received 400/= for his Services.
July 4: His neighbor Mr. Jumanne asked him to repair 2 pairs of trousers which he has done. He was promised to be paid 300/= at the end of the month.
July5: He sewed a baby’s and was paid 200/= by the baby’s mother.
July 6: He bought chairs for his shop from Mwenye Furniture for 2,000/= on credit.
POINT TO NOTE:-
1. We DR: What comes in
CR: What goes out
2. We DR: received
CR: giver
- Requirement:
1. Journalise
2. Open relevant ledger a/c
3. Draw a trial balance
ANSWER
JOURNAL ENTRIES
LEDGERS
DR. SEWING MACHINE A/C CR
| July 1: Capital | 50,000 | July 31st: Bal. C/d | 50,000 |
| 50,000 | 50,000 | ||
| August 1: Bal b/d | 50,000 | ||
DR CR CASH A/C
| July 1: Capital | 3,000 | July 2nd Sewing equipment | 500 |
| 3rd July Sales | 400 | ||
| 5th July Sales | 200 | 31st July 2009 Balance c/d | 3,100 |
| 3600 | 3,600 | ||
| August 1: Bal b/d | 3,100 |
DR CAPITAL A/C CR
| 31st July Balance c/d | 53,000 | 1st July Sewing machine | 50,000 |
| 1st July Cash | 3,000 | ||
| 53,000 | 53,000 | ||
| 1st August Balance b/d | 53,000 |
DR SEWING SUPPLIES A/C CR
| 2nd July: Cash | 500 | July 31st Bal. C/d | 500 |
| 500 | 500 | ||
| 1st August Balance b/d | 500 | ||
DR. SALES A/C CR
| 31st July 2009 Shirt Bal c/d | 900 | 3rd July Cash | 400 |
| 4th July Debtors | 300 | ||
| 5th July | 200 | ||
| 900 | 900 | ||
| 1/1/2010Balance b/d | 900 | ||
TRIAL BALANCE AS AT 31ST DECEMBER 2009
DETAILS | DEBIT | CREDIT |
Cash Sales Capital Sewing equipments Debtors Chairs Sewing machine Mwenge Furniture | 3,100 500 300 2,000 50,000 55900 | 90053,000 2,000 55900 |
DR. TRADING, PROFIT AND LOSS A/C FOR THE YEAR ENDED 31ST DEC 2009 CR
| Purchases | 500 | Sales | 900 |
| Gross profit c/d | 400 | ||
| 900 | 900 | ||
| Net profit | 400 | Gross profit b/d | 400 |
BALANCE SHEET (EXTRACT)
| Capital | 53,000 | Fixed Assets:- | |
| Add: Net profit | 400 | Machine | 50,000 |
| 53,400 | Chairs | 2,000 | |
| Liabilities:- | Current Assets: | ||
| Trade creditors | 2,000 | Debtors | 300 |
| Cash | 3,100 | ||
| 55,400 | 55,400 | ||
EXAMPLE
Record the following transaction in journal entries, open ledgers, close ledgers, prepare trial balance :-
1. Purchase of Tshs. 100,000/= of goods on credit.
2. Withdrawal of Tshs. 10,000 cash by the owner for his birthday party.
3. Collection of Tshs. 10,000/= from Imamu Jones who is a credit customer of the firm.
4. Return of 10,000/= of goods to a supplier because there are faulty. The original purchase was on credit terms
5. Payment of Tshs. 150,000/= by the business to a supplier or account of an amount due to the supplier.
6. Purchase of machinery for Tshs. 300,000/= on credit
7. Additional cash of Tshs. 100,000 invested in the business by the proprietor
8. Payment of Tshs. 120,000/= in cash for goods supplied
9. Got a loan of Tshs.1,000,000/= from NBC through a bank account at Ubungo branch.
JOURNAL ENTRY
LEDGERS
DR CASH A/C CR
| July 1st Imamu Jones | 10,000 | July 2 Drawing | 10,000 |
| July 7Capital | 100,000 | July 5 Creditor | 150,000 |
| July 9 Loan(NBC) | 1000,000 | July 8 Purchases | 120,000 |
| July 31 Balance c/d | 830,000 | ||
| 1,110,000 | 1,110,000 | ||
| Aug 1 Balance b/d | 830,000 | Balance b/d |
DR PURCHASES A/C CR
| Creditors | 100,000 | ||
| Cash | 120,000 | Balance c/d | 220,000 |
| 220,000 | 220,000 | ||
| Balance b/d | 220,000 |
DR CREDITORS A/C CR
| Returns | 10,000 | 100,000 | |
| Cash | 150,000 | Machinery | 300,000 |
| Balance c/d | 250,000 | Cash | 10,000 |
| 410,000 | 410,000 | ||
| Balance b/d | 250,000 |
TRIAL BALANCE EXTRACT
DETAILS | DEBIT | CREDIT |
| Cash | 830,000 | |
| Purchases | 220,000 | |
| Creditors | 250,000 | |
| Loan (NBC) | 1,000,000 | |
| Machinery | 300,000 | |
| Return outward | 10,000 | |
| Capital | 100,000 | |
| Drawings | 10,000 | |
| 1,360,000 | 1,360,000 |
EXERCISE
DaktariJaribu , DDS , her own dental practice . Her books had the followings accounts and balances as of 1st October.
Cash Tshs. 341,200/=, Debtors Sh. 597,500/=, office supplies Tshs. 39,000/=, Equipment Tshs. 3,012,500/=, Surgery supplies Tshs. 155,000/=, Creditors Tshs. 96,500/=, Capital Tshs. 4,048,700.
Following are the transactions in the practice of her profession during October.
Oct. 1: Paid office rent for October Tshs. 80,000/=
2: Purchased equipment on credit Tshs. 290,000/=
3: Purchased X – ray film and other surgery supplies on credit Tshs. 25,000/=
5: Received cash on account from patients Tshs, 472,500/=
9: Paid cash to creditors Tshs. 175,000/=
14: Paid cash for renewal of insurance policy Tshs. 51,000/=
17: Paid from the business bank account Tshs. 170,000/= being personal and family expenses.
20: Paid invoices for laboratory analyses Tshs. 31,500/=
22: Cash received from cash paying patients Tshs 295,000/=
24: Paid miscellaneous expenses Tshs. 11,200
26: Paid electricity bills Tshs. 32,500/=
30: Recorded all fees charged to credit patients for service performed during October Tshs. 571,500/=
30: Recorded use of Tshs. 55,000/= worth of surgery supplied.
Required:–
(a) Open ledger accounts and insert opening balances.
(b) Record the above transactions in a two column journal
(c) Post the journal to the ledger and
(d) Balance off the ledger
(e) Extract a trial balance