BAC 200: ACCOUNTING FOR ASSETS
COMPILED BY: DR. FRANCIS K GITAGIA
MR: JAMES MUTURI
1
,Table of Contents
LESSON ONE................................................................................................................................8
CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING.....................................8
AND REPORTING.....................................................................................................................8
Objectives....................................................................................................................................8
......................................................................................................................................................8
By the end of this lesson, the learner should be able to:.............................................................8
Understand the objectives of financial reporting.........................................................................8
Describe the usefulness of a conceptual framework...................................................................8
Identify the qualitative characteristics of accounting information.............................................8
Describe the basic assumptions of accounting............................................................................8
Describe the impact that constraints have on reporting accounting information........................8
1.0 Introduction............................................................................................................................8
A conceptual framework is like a constitution. It is a coherent system of interrelated objectives
and fundamentals that can lead to consistent standards and that prescribe the nature, function and
limits of financial accounting in financial statements. A conceptual framework is essential in that
to be useful, standard setting should be built on and relate to an established body of concepts and
objectives. In addition new and emerging practical problems should be quickly solved by
reference to an existing framework of basic theory.........................................................................8
1.1 Development of a conceptual framework..............................................................................8
Over the years numerous organizations, committees and interested individuals have developed
and published their own conceptual frameworks. But no single framework has been universally
accepted and relied on in practice. In general however a conceptual framework for financial
reporting is based on the three levels...............................................................................................9
2
,The first level which relates to the goals and purposes of accounting thus basically dealing with
the objectives of financial reporting................................................................................................9
1.1.1 First level:...............................................................................................................................9
Objectives of financial reporting and financial statements..............................................................9
Qualitative Characteristics of Accounting Information.................................................................10
Neutrality.......................................................................................................................................11
Secondary characteristics...............................................................................................................12
Constraints to useful accounting information................................................................................13
Monetary unit assumption..............................................................................................................17
Periodicity assumption...................................................................................................................17
Basic accounting principles...........................................................................................................18
Four basic principles of accounting are used to record transactions. They include;.....................18
Matching Principle.........................................................................................................................18
Disclosure Principle.......................................................................................................................18
Historical cost principle.................................................................................................................19
Revenue recognition principle.......................................................................................................20
LESSON TWO..............................................................................................................................21
CASH.............................................................................................................................................21
Objectives..................................................................................................................................21
2.0 Introduction..........................................................................................................................21
2.1 Management of cash............................................................................................................22
Sometimes, it may be necessary to adjust the cashbook before preparing the reconciliation
statement. To carry out this task, all the items appearing in the bank statement that need also to
feature in the trader’s cashbook and have not been recorded need to be transferred. The adjusted
cashbook balance is then reconciled towards the bank statement balance....................................26
LESSON THREE:.........................................................................................................................29
SHORT TERM INVESTMENTS.................................................................................................29
Objectives......................................................................................................................................29
3.0 Introduction..........................................................................................................................29
3.1 Recording transactions in short-term investments...............................................................30
Illustration......................................................................................................................................30
Solution..........................................................................................................................................31
Kshs.......................................................................................................................................31
Market price of bonds (Kshs 104,000*100) 10,400,000......................................................31
Add: accrued interest for 2 months on Kshs 10M at 10% 166,667......................................31
Journal entries required in the books of Ruiru Limited.................................................................31
Kshs Kshs......................................................................................................................................31
Short-term investments 11,400,000..............................................................................................31
Accrued interest receivable 166,667.............................................................................................31
Cash 11,566,667............................................................................................................................31
Kshs.......................................................................................................................................31
Journal entries required in the books of Ruiru Limited.................................................................31
Statement of financial position presentation of cash and short term investments.........................32
LESSON FOUR.............................................................................................................................33
RECEIVABLES............................................................................................................................33
Objectives..................................................................................................................................33
3
, 4.0 Introduction..........................................................................................................................33
4.1 Classification of receivables................................................................................................34
4.2 Accounts Receivable............................................................................................................34
4.3 Methods for Recording Uncollectibles:...............................................................................35
4.3.1 Direct write-off method....................................................................................................35
4.3.2 Allowance Method............................................................................................................35
4.4 Notes Receivable.................................................................................................................36
Face value of the note 2,000,000...........................................................................................37
Present value of the interest...................................................................................................37
(a) Zero-Interest Bearing Notes.....................................................................................................37
Illustration..................................................................................................................................38
The entry to record the transaction is as follows:-.................................................................38
Note:.......................................................................................................................................38
The Discount on Notes Receivable is a valuation account and is reported on the................38
Note:.......................................................................................................................................39
Interest Revenue (column II)= carrying amount (IV) * 9%..................................................39
Discount on Notes receivable 69,496....................................................................................39
Interest Revenue 69,496........................................................................................................39
Note................................................................................................................................................39
Notes issued at a discount..............................................................................................................40
Solution......................................................................................................................................40
Notes Issued at a Premium.........................................................................................................42
Illustration..................................................................................................................................42
Solution......................................................................................................................................42
4.5 Sale of receivables...............................................................................................................44
Sale without re-course....................................................................................................................44
Sale with re course.........................................................................................................................44
LESSON FIVE..............................................................................................................................49
INVENTORIES.............................................................................................................................49
Objectives..................................................................................................................................49
5.0 Introduction..........................................................................................................................49
5.1 Inventory Procedures:..........................................................................................................50
(ii) Periodic Inventory System:..............................................................................................52
Illustration:.............................................................................................................................53
Solution..........................................................................................................................................54
FIFO -Perpetual Inventory.....................................................................................................54
LESSON SIX.................................................................................................................................60
SPECIAL VALUATION METHODS..........................................................................................60
Objectives..................................................................................................................................60
6.0 Introduction..........................................................................................................................60
6.1 Retail method.......................................................................................................................61
6.1.1 Uses of the retail method......................................................................................................61
6.1.2 Special items relating to retail method..................................................................................62
6.1.3 Retailing Terminology......................................................................................................63
Illustration......................................................................................................................................63
Retail Method - Valuation at Average Cost...................................................................................64
4
COMPILED BY: DR. FRANCIS K GITAGIA
MR: JAMES MUTURI
1
,Table of Contents
LESSON ONE................................................................................................................................8
CONCEPTUAL FRAMEWORK FOR FINANCIAL ACCOUNTING.....................................8
AND REPORTING.....................................................................................................................8
Objectives....................................................................................................................................8
......................................................................................................................................................8
By the end of this lesson, the learner should be able to:.............................................................8
Understand the objectives of financial reporting.........................................................................8
Describe the usefulness of a conceptual framework...................................................................8
Identify the qualitative characteristics of accounting information.............................................8
Describe the basic assumptions of accounting............................................................................8
Describe the impact that constraints have on reporting accounting information........................8
1.0 Introduction............................................................................................................................8
A conceptual framework is like a constitution. It is a coherent system of interrelated objectives
and fundamentals that can lead to consistent standards and that prescribe the nature, function and
limits of financial accounting in financial statements. A conceptual framework is essential in that
to be useful, standard setting should be built on and relate to an established body of concepts and
objectives. In addition new and emerging practical problems should be quickly solved by
reference to an existing framework of basic theory.........................................................................8
1.1 Development of a conceptual framework..............................................................................8
Over the years numerous organizations, committees and interested individuals have developed
and published their own conceptual frameworks. But no single framework has been universally
accepted and relied on in practice. In general however a conceptual framework for financial
reporting is based on the three levels...............................................................................................9
2
,The first level which relates to the goals and purposes of accounting thus basically dealing with
the objectives of financial reporting................................................................................................9
1.1.1 First level:...............................................................................................................................9
Objectives of financial reporting and financial statements..............................................................9
Qualitative Characteristics of Accounting Information.................................................................10
Neutrality.......................................................................................................................................11
Secondary characteristics...............................................................................................................12
Constraints to useful accounting information................................................................................13
Monetary unit assumption..............................................................................................................17
Periodicity assumption...................................................................................................................17
Basic accounting principles...........................................................................................................18
Four basic principles of accounting are used to record transactions. They include;.....................18
Matching Principle.........................................................................................................................18
Disclosure Principle.......................................................................................................................18
Historical cost principle.................................................................................................................19
Revenue recognition principle.......................................................................................................20
LESSON TWO..............................................................................................................................21
CASH.............................................................................................................................................21
Objectives..................................................................................................................................21
2.0 Introduction..........................................................................................................................21
2.1 Management of cash............................................................................................................22
Sometimes, it may be necessary to adjust the cashbook before preparing the reconciliation
statement. To carry out this task, all the items appearing in the bank statement that need also to
feature in the trader’s cashbook and have not been recorded need to be transferred. The adjusted
cashbook balance is then reconciled towards the bank statement balance....................................26
LESSON THREE:.........................................................................................................................29
SHORT TERM INVESTMENTS.................................................................................................29
Objectives......................................................................................................................................29
3.0 Introduction..........................................................................................................................29
3.1 Recording transactions in short-term investments...............................................................30
Illustration......................................................................................................................................30
Solution..........................................................................................................................................31
Kshs.......................................................................................................................................31
Market price of bonds (Kshs 104,000*100) 10,400,000......................................................31
Add: accrued interest for 2 months on Kshs 10M at 10% 166,667......................................31
Journal entries required in the books of Ruiru Limited.................................................................31
Kshs Kshs......................................................................................................................................31
Short-term investments 11,400,000..............................................................................................31
Accrued interest receivable 166,667.............................................................................................31
Cash 11,566,667............................................................................................................................31
Kshs.......................................................................................................................................31
Journal entries required in the books of Ruiru Limited.................................................................31
Statement of financial position presentation of cash and short term investments.........................32
LESSON FOUR.............................................................................................................................33
RECEIVABLES............................................................................................................................33
Objectives..................................................................................................................................33
3
, 4.0 Introduction..........................................................................................................................33
4.1 Classification of receivables................................................................................................34
4.2 Accounts Receivable............................................................................................................34
4.3 Methods for Recording Uncollectibles:...............................................................................35
4.3.1 Direct write-off method....................................................................................................35
4.3.2 Allowance Method............................................................................................................35
4.4 Notes Receivable.................................................................................................................36
Face value of the note 2,000,000...........................................................................................37
Present value of the interest...................................................................................................37
(a) Zero-Interest Bearing Notes.....................................................................................................37
Illustration..................................................................................................................................38
The entry to record the transaction is as follows:-.................................................................38
Note:.......................................................................................................................................38
The Discount on Notes Receivable is a valuation account and is reported on the................38
Note:.......................................................................................................................................39
Interest Revenue (column II)= carrying amount (IV) * 9%..................................................39
Discount on Notes receivable 69,496....................................................................................39
Interest Revenue 69,496........................................................................................................39
Note................................................................................................................................................39
Notes issued at a discount..............................................................................................................40
Solution......................................................................................................................................40
Notes Issued at a Premium.........................................................................................................42
Illustration..................................................................................................................................42
Solution......................................................................................................................................42
4.5 Sale of receivables...............................................................................................................44
Sale without re-course....................................................................................................................44
Sale with re course.........................................................................................................................44
LESSON FIVE..............................................................................................................................49
INVENTORIES.............................................................................................................................49
Objectives..................................................................................................................................49
5.0 Introduction..........................................................................................................................49
5.1 Inventory Procedures:..........................................................................................................50
(ii) Periodic Inventory System:..............................................................................................52
Illustration:.............................................................................................................................53
Solution..........................................................................................................................................54
FIFO -Perpetual Inventory.....................................................................................................54
LESSON SIX.................................................................................................................................60
SPECIAL VALUATION METHODS..........................................................................................60
Objectives..................................................................................................................................60
6.0 Introduction..........................................................................................................................60
6.1 Retail method.......................................................................................................................61
6.1.1 Uses of the retail method......................................................................................................61
6.1.2 Special items relating to retail method..................................................................................62
6.1.3 Retailing Terminology......................................................................................................63
Illustration......................................................................................................................................63
Retail Method - Valuation at Average Cost...................................................................................64
4
