CONTENTS
ACKNOWLEDGMENT ............................................................................ Error! Bookmark not defined.
INSTRUCTIONS FOR STUDENTS ........................................................ Error! Bookmark not defined.
FINANCIAL ACCOUNTING I COURSE DESCRIPTION .................... Error! Bookmark not defined.
LESSON ONE....................................................................................................................................... 1
INTRODUTION TO ACCOUNTING ................................................................................................................... 1
LESSON TWO .................................................................................................................................... 32
FINAL ACCOUNTS ...................................................................................................................................................32
LESSON THREE................................................................................................................................ 68
ACCOUNTING THEORY .......................................................................................................................................68
LESSON FOUR................................................................................................................................... 81
ADJUSTMENTS TO FINAL ACCOUNTS ..........................................................................................................81
LESSON FIVE .................................................................................................................................. 136
FURTHER ADJUSTMNETS TO ACCOUNTS ................................................................................................ 136
LESSON SIX ..................................................................................................................................... 176
OTHER ASPECTS OF FINAL ACCOUNTS.................................................................................................... 176
LESSON SEVEN .............................................................................................................................. 231
PARTNERSHIPS ...................................................................................................................................................... 231
LESSON EIGHT............................................................................................................................... 287
COMPANY ACCOUNTS ....................................................................................................................................... 287
LESSON NINE ................................................................................................................................. 401
REVISION AID ........................................................................................................................................................ 401
,
,Lesson One 1
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the
users of this information to permit informed judgment
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 purposes. 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.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These financial statements provide
information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners
and others.
The financial performance reflects how the business has performed, whether it has made profits or
losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the
information contained in the financial statements will affect the decision making process.
The following are the users of accounting information:
i. Owners:
They have invested in the business and examples of such owners include sole traders, partners
(partnerships) and shareholders (company). They would like to have information on the financial
performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing
whether the business is profitable or not and whether to make drawings or put in additional capital.
ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is
performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
FINANCIAL ACCOUNTING 1
, 2 Introduction to Accounting
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like
to have information on the financial performance and position so as to assess whether the business would be
able to pay up for the goods and services provided as and when the payments falls due.
iii. Managers
The managers are involved in the day-to-day activities of the business. They would like to have
information on the financial position, performance and changes in financial position so as to
determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to
ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks
and other financial institutions. They would like to have information on the financial performance
and position of the business to assess whether the business is profitable enough to pay the interest
on loans and whether it has enough resources to pay back the principal amount when it is due.
v. The Government and its agencies
The Government is interested in the financial performance of the business to be able to assess the
tax to be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the
business to be able to come with National Statistics. This statistics measure the average performance
of the economy.
vi. The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples include stockbrokers
who advise investors on shares to buy in the stock market and other professional consultants like
accountants. They are interested with the financial position and performance of the firm so that they
can advise their clients on how much is the value their investment i.e. whether it is profitable or not
and what is the value.
Others advisors would include the press who will then pass the information to other relevant users.
vii. The Employees
They work for the business/entity. They would like to have information on the financial position
and performance so as to make decisions on their terms of employment. This information would be
important as they can use it to negotiate for better terms including salaries, training and other
benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are
secure.
viii. The Public
Institutions and other welfare associations and groups represent the public. They are interested with
the financial performance of the firm. This information will be important for them to assess how
socially responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and
the effect of firm‟s activities on the environment.
ACKNOWLEDGMENT ............................................................................ Error! Bookmark not defined.
INSTRUCTIONS FOR STUDENTS ........................................................ Error! Bookmark not defined.
FINANCIAL ACCOUNTING I COURSE DESCRIPTION .................... Error! Bookmark not defined.
LESSON ONE....................................................................................................................................... 1
INTRODUTION TO ACCOUNTING ................................................................................................................... 1
LESSON TWO .................................................................................................................................... 32
FINAL ACCOUNTS ...................................................................................................................................................32
LESSON THREE................................................................................................................................ 68
ACCOUNTING THEORY .......................................................................................................................................68
LESSON FOUR................................................................................................................................... 81
ADJUSTMENTS TO FINAL ACCOUNTS ..........................................................................................................81
LESSON FIVE .................................................................................................................................. 136
FURTHER ADJUSTMNETS TO ACCOUNTS ................................................................................................ 136
LESSON SIX ..................................................................................................................................... 176
OTHER ASPECTS OF FINAL ACCOUNTS.................................................................................................... 176
LESSON SEVEN .............................................................................................................................. 231
PARTNERSHIPS ...................................................................................................................................................... 231
LESSON EIGHT............................................................................................................................... 287
COMPANY ACCOUNTS ....................................................................................................................................... 287
LESSON NINE ................................................................................................................................. 401
REVISION AID ........................................................................................................................................................ 401
,
,Lesson One 1
LESSON ONE
INTRODUTION TO ACCOUNTING
a) NATURE OF ACCOUNTING
Accounting is defined as the process of identifying, measuring and reporting economic information to the
users of this information to permit informed judgment
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 purposes. 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.
b) USERS OF ACCOUNTING INFORMATION
Accounting information is produced in form of financial statement. These financial statements provide
information about an entity financial position, performance and changes in financial position.
Financial position of a firm is what the resources the business has and how much belongs to the owners
and others.
The financial performance reflects how the business has performed, whether it has made profits or
losses. Changes in financial positions determine whether the resources have increased or reduced.
The users of accounting information have an interest in the existence of the firm. Therefore the
information contained in the financial statements will affect the decision making process.
The following are the users of accounting information:
i. Owners:
They have invested in the business and examples of such owners include sole traders, partners
(partnerships) and shareholders (company). They would like to have information on the financial
performance, financial position and changes in financial position.
This information will enable them to assess how the managers of the business are performing
whether the business is profitable or not and whether to make drawings or put in additional capital.
ii. Customers
Customers rely on the business for goods and services. They would like to know how the business is
performing and its financial position.
This information would enable them to assess whether they can rely on the firm for future supplies.
FINANCIAL ACCOUNTING 1
, 2 Introduction to Accounting
Suppliers
They supply goods or services to the firm. The supplies are either for cash or credit. The suppliers would like
to have information on the financial performance and position so as to assess whether the business would be
able to pay up for the goods and services provided as and when the payments falls due.
iii. Managers
The managers are involved in the day-to-day activities of the business. They would like to have
information on the financial position, performance and changes in financial position so as to
determine whether the business is operating as per the plans.
In case the plan is not achieved then the managers come up with appropriate measures (controls) to
ensure that the set plans are met.
iv. The Lenders
They have provided loans and others sources of capital to the business. Such lenders include banks
and other financial institutions. They would like to have information on the financial performance
and position of the business to assess whether the business is profitable enough to pay the interest
on loans and whether it has enough resources to pay back the principal amount when it is due.
v. The Government and its agencies
The Government is interested in the financial performance of the business to be able to assess the
tax to be collected in the case there are any profits made by the business.
The other government agencies are interested with the financial position and performance of the
business to be able to come with National Statistics. This statistics measure the average performance
of the economy.
vi. The Financial Analyst and Advisors
Financial analyst and advisors interpret the financial information. Examples include stockbrokers
who advise investors on shares to buy in the stock market and other professional consultants like
accountants. They are interested with the financial position and performance of the firm so that they
can advise their clients on how much is the value their investment i.e. whether it is profitable or not
and what is the value.
Others advisors would include the press who will then pass the information to other relevant users.
vii. The Employees
They work for the business/entity. They would like to have information on the financial position
and performance so as to make decisions on their terms of employment. This information would be
important as they can use it to negotiate for better terms including salaries, training and other
benefits.
They can also use it to assess whether the firm is financially sound and therefore their jobs are
secure.
viii. The Public
Institutions and other welfare associations and groups represent the public. They are interested with
the financial performance of the firm. This information will be important for them to assess how
socially responsible is the firm.
This responsibility is in form the employment opportunities the firm offers, charitable activities and
the effect of firm‟s activities on the environment.
