TOPIC ONE

BOOK KEEPING

1.0 INTRODUCTION

This topic introduces you to the general concept of record keeping. It introduces you to the basic
tenets of recording transactions and how to summarize transactions. Further, we shall learn how
to prepare the final statements from the transaction and finally determine the viability of the
investment.

1.1 SPECIFIC LEARNING OUTCOMES

By the end of this topic, you should be able to:

 Define basic terms used in book keeping
 Record transactions in the relevant books of accounts
 Extract a Trial balance from the books of accounts

1.2 SECTIONS OF THE TOPIC

In this topic, we shall cover the following sections:

Section 1: definition of terms
Section 2: recording transactions
Section 3: trial balance

These sections are discussed as hereunder.

Definition of book keeping/business records

Book- keeping plays a dynamic role in success of any business enterprise. The purpose of any
business is to increase wealth by making business transactions. There are three main types of
business enterprise. These are;

i) Sole proprietor
ii) Partnership
 iii) Limited Company.

A business is considered to be an entity on its own separate from the owners for accounting
purposes. The importance of Book keeping is outlined below.

Importance of Book-keeping

i) Ascertainment of Profit and Loss. The main purpose of any business enterprise is to make
profits and booking generates the basic data required to determine profit/and losses of a business.

ii) Book-keeping records are required to determine the credit worth of business as a requirement
for borrowing funds.

iii) Book-keeping records must be kept as a requirement for determination of Tax payable to
Government.

iv) Book-keeping records help to determine the value of Assets and Liabilities and therefore
network of a business.

v) Book-keeping can be effectively used as a tool to exercise controls of expenses and increase
profitability.

Types of business records

(a) Balance sheet

(b) Ledger

(c) Income statement

The Balance Sheet: A Balance sheet is a financial statement of Assets and Liabilities of an
individual or business as at a given date. The Balance Sheet Equation

The Balance sheet equation is expressed as: Assets = Capital + Liabilities, or Capital =
Assets – Liabilities, or Liabilities = Assets – Capital

The values of Assets, liabilities and capital may change from time to time due to transactions but

the equation remains constant.

1.2.1 DEFINITION OF TERMS

Before we discuss recoding transactions, let us briefly have an overview to book keeping. We
define book keeping as a systematic way of recording transactions for analysis and decision
making. In order to understand the concept of book keeping appropriately, let us define some
basic terms associated with it.

A record: This is a form of stored information which is referred to at a

later date and it used in making decisions. Records can be classified as official and non-official.
Official records are those records kept by a particular organization e.g. the government,
institutions like schools or a business firm. These are usually standard in form depending on the
needs of a particular organization. Such records are standardized since they are usually used by
many people. Non official records on the other hand are those kept by individuals and may vary
from one person to another depending on the individuals taste. Such records have no standard
way of entering information but depend on the individual’s interests. They are only useful to a
particular person.

In general, records serve the following purposes: (In addition to above importance)
1 Records help in making decisions.
2 Records indicate efficiency and professional experience/competence. Especially at personal
level.
3 They indicate evidence of efficiency by showing the relationship between inputs and outputs
of a business firm or institution. Therefore, they indicate whether improvement is essential or
not.
4 Records help in making accurate conclusions. They show or tell whether a business is credit
worthy.
5 They are used for future references and hence useful tools for research.
6 Records serve as a legal requirement especially for transaction purposes.
7 Records in a busy firm help the proprietor to be in touch with his/her business. He can spot
check the business, keeps control of costs, manage credit, debt and control business assets.

State any other reasons for keeping records?

?
Business records -these are records that result from business transactions. A business transaction
is any event expressed in terms of money that is related to a business and affects the assets,
liabilities and owners’ equity of that business. Examples of business transactions are: cash
purchases, sales, credit purchases, borrowing money, payment of expenses and withdrawal of
earnings by owners, depreciation and new investment in the business. For all business
transactions, the following equation maintains equality. Assets equals’ liabilities plus capital
(ASSETS = LIABILITIES + CAPITAL). This is known as the fundamental accounting equation.
In most financial statements, the terms: assets, liabilities and capital are used. These are defined
as hereunder.

Assets: Assets can be classified as Fixed Assets and Current Assets.

Current Assets are assets in cash form or a current asset is a resource owned by a business which
the business expects to consume or convert to cash in a relatively short time (usually within a
year). Examples of current assets include cash in bank; stock in hand, debtors, accounts
receivable, notes receivable and pre-paid expenses. Fixed Assets are properties of the business
which have a longer life in the business and are not subject to regular changes. Examples are
Land and Buildings, Motor vehicles, Plant and Machinery, office equipment, furniture and
fittings. These are all business’s possessions and rights that have money value. They are
resources which are owned by the business and are either fixed or current.

Accounts receivable mean that the business has given someone else goods and services for which
it is owed money by that person or that business. Similarly notes receivable mean that the
business has given someone money or credit and that the person has given the business a written
promise to pay.

Fixed assets are sometimes known as plant assets. These are assets intended to be held over a
relatively long period of time- usually more than a year by a business. They are resources owned
by a business which are expected to be consumed or converted to cash in a relatively long time.
Examples of fixed assets include premises, land, trucks, fittings and equipment. It is noteworthy
that all fixed assets except land, depreciate or lose their deported value over a period of time.
This means that a fixed asset except land is expected to lose some of its usefulness as it gets
older.

In general, each fixed asset has the following characteristics:

1. It is actively used in the operation of a business.

2. It is supposed to yield service over a number of years.
3. It physically exists (tangible).
4. It is not held for re-sale but as an investment.

Assets are further classified as follows:

Intangible Assets – these are assets you cannot easily touch but they exist. These assets include
good will; copy rights and Trade marks (trade names). These intangible assets have the potential
of generating some income for a business and have the following characteristics:

1. They are either purchased or developed by a business.

2. Their ownership confers exclusive rights.
3. They provide future benefits to operation
4. They are relatively long lived.

Wasting Assets – these are those assets that are exhausted with use e.g. mines and quarries.

Fictitious Assets – these are those assets that are preliminary expenses in company e.g discount
on issue of shares, debit balance of the profits & loss accounts.

Liabilities: Liabilities can be classified as Current (Short term)

Liabilities and Long-Term liabilities. Current liabilities constitute short-term borrowings. Long
Term Liabilities include long-Term borrowings by the business. These include Loans and
Mortgages that are repayable over a long period of time at least exceeding 1 year. These are
claims which are long term or current against the business. They are debts of a business. Current
Liabilities are debts of the business which are payable in a relatively short period of time, usually
less than one year. Examples of Bank Overdrafts, Creditors, outstanding expenses, accounts
payable or creditors and expenses (wages, salaries, taxes payable etc). Long term liabilities are
debts of a business that are payable in a long period of time, usually more than one year. This
includes mortgage on building or land, long term bank loans and equipment loans.

Capital: Capital is the Owners Contribution to the business. It can be

increased due to profits or reduced due to losses or drawings. Drawings refer to the Owners
withdraw of funds invested by him/her in the business. This is also commonly called the net
worth of a business. It is the owners claim against the assets of a business after the liabilities
have been deducted. In record keeping for a business, the business is regarded as a separate body
from the proprietor. The business is treated as a person who can borrow and rent money, pay
wages, purchase supplies, rent office space etc. capital can be classified either equity capital or
loan capital. Equity capital is the amount provided by the owners of the business and any other
profits attributed to the owners while loan capital is that amount that is borrowed by the business
whose providers are paid a fixed rate of interest and do not share the profits of the business. It is
in this regard that capital is considered as a special liability because it contributes to the owners
claim to assets of the business and also it can only be paid if the business is winding up.