THE NATURE AND CONTEXT OF ACCOUNTANCY
Brief History of Accounting
Early references to accounting can be found in the works of certain ancient oriental writers. However, the systematic approach to the double-entry system of bookkeeping and accounting, as we know it today, dates back to the late thirteenth century. In 1494, Luca Pacioli, a Franciscan monk living in Italy, published his well-known work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita. This work was primarily a study of mathematics but also included a section on bookkeeping procedures, laying the foundation for modern accounting practices.
The Meaning of the Term “Accounting”
What is accounting?
Accounting is the art of recording, classifying, and summarizing financial transactions in a meaningful way, expressed in terms of money, and interpreting the results. It provides essential information for decision-making and financial management.
Branches / Fields of Accounting
There are three major fields of accounting:
- Financial Accounting
- Management Accounting
- Government Accounting
1. Financial Accounting
This field focuses on providing financial information about a business to external users such as investors, creditors, and regulatory authorities. It involves preparing financial statements that reflect the financial position and performance of the business.
2. Management Accounting
Management accounting provides accounting information to internal users, primarily the management of the firm. The financial reports and data generated help management in planning, controlling business operations, and making informed decisions to improve efficiency and profitability.
3. Government Accounting
This field deals with accounting for the government sector. It differs from other accounting fields due to the unique nature of government operations, budgeting, and accountability requirements. Government accounting ensures proper use of public funds and compliance with regulations.
Illustration
In July 2009, 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 a sewing machine worth 50,000/= and 3,000/= in cash.
- July 2: He bought thread, 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 did. He was promised payment of 300/= at the end of the month.
- July 5: He sewed a baby’s garment 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
- DR (Debit): What comes in
- CR (Credit): What goes out
- DR: Received
- CR: Given
Requirement
- Journalise the transactions.
- Open relevant ledger accounts.
- Draw a trial balance.
Answer
Journal Entries
Ledgers
SEWING MACHINE A/C
| July 1: Capital | 50,000 | July 31st: Bal. C/d | 50,000 |
| 50,000 | 50,000 | ||
| August 1: Bal b/d | 50,000 |
DR CASH A/C CR
| 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 |
| 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 | |||
| 1st August Balance b/d | 53,000 |
DR SEWING SUPPLIES A/C CR
| 2nd July: Cash | 500 | July 31st Bal. C/d | 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 Sales | 200 | 31st July 2009 Balance c/d | 3,100 |
| 900 | |||
| 1/1/2010 Balance b/d | 900 |
Trial Balance as at 31st December 2009
| Details | Debit | Credit |
|---|---|---|
| Cash | 3,100 | |
| Sales | 900 | |
| Capital | 53,000 | |
| Sewing equipment | 500 | |
| Debtors | 300 | |
| Chairs | 2,000 | |
| Sewing machine | 50,000 | |
| Mwenge Furniture | 2,000 | |
| Total | 55,900 | 55,900 |
Trading, Profit and Loss Account for the Year Ended 31st December 2009
| 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 transactions in journal entries, open ledgers, close ledgers, and prepare a trial balance:
- Purchase of Tshs. 100,000/= of goods on credit.
- Withdrawal of Tshs. 10,000 cash by the owner for his birthday party.
- Collection of Tshs. 10,000/= from Imamu Jones, a credit customer of the firm.
- Return of Tshs. 10,000/= of goods to a supplier because they are faulty. The original purchase was on credit terms.
- Payment of Tshs. 150,000/= by the business to a supplier on account of an amount due.
- Purchase of machinery for Tshs. 300,000/= on credit.
- Additional cash of Tshs. 100,000 invested in the business by the proprietor.
- Payment of Tshs. 120,000/= in cash for goods supplied.
- 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 7: Capital | 100,000 | July 5: Creditor | 150,000 |
| July 9: Loan (NBC) | 1,000,000 | July 8: Purchases | 120,000 |
DR PURCHASES A/C CR
| Creditors | 100,000 |
DR CREDITORS A/C CR
| Returns | 10,000 | 100,000 | |
| Cash | 150,000 | Machinery | 300,000 |
| Balance c/d | 250,000 | Cash | 10,000 |
| 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 | |
| Total | 1,360,000 | 1,360,000 |
Exercise
Daktari Jaribu, DDS, owns her own dental practice. Her books had the following accounts and balances as of 1st October:
- Cash Tshs. 341,200/=
- Debtors Tshs. 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 during October:
- Oct 1: Paid office rent for October Tshs. 80,000/=
- Oct 2: Purchased equipment on credit Tshs. 290,000/=
- Oct 3: Purchased X-ray film and other surgery supplies on credit Tshs. 25,000/=
- Oct 5: Received cash on account from patients Tshs. 472,500/=
- Oct 9: Paid cash to creditors Tshs. 175,000/=
- Oct 14: Paid cash for renewal of insurance policy Tshs. 51,000/=
- Oct 17: Paid from the business bank account Tshs. 170,000/= for personal and family expenses.
- Oct 20: Paid invoices for laboratory analyses Tshs. 31,500/=
- Oct 22: Cash received from cash-paying patients Tshs. 295,000/=
- Oct 24: Paid miscellaneous expenses Tshs. 11,200/=
- Oct 26: Paid electricity bills Tshs. 32,500/=
- Oct 30: Recorded all fees charged to credit patients for services performed during October Tshs. 571,500/=
- Oct 30: Recorded use of Tshs. 55,000/= worth of surgery supplies.
Required:
- Open ledger accounts and insert opening balances.
- Record the above transactions in a two-column journal.
- Post the journal to the ledger.
- Balance off the ledger.
- Extract a trial balance.
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