BOOK KEEPING O LEVEL(FORM ONE) NOTES – INTRODUCTION OF BOOK KEEPING

Introduction of Book Keeping

Book keeping: can be defined as the art of recording financial business transactions in a set of books in terms of money or money’s worth. It is a systematic process that ensures all financial activities of a business are documented accurately and chronologically.

Objectives of Book Keeping

The following are the major objectives of book keeping:

1. To ascertain or determine the amount of profit or loss arising in the course of business. If the businessman or businesswoman keeps records properly, they should know whether the business is running at a profit or a loss.
2. Knowledge of credit dealings. To know the amount of debtors and creditors (customers and suppliers respectively). A businessman or businesswoman obtains knowledge of credit dealings through proper records.
3. Business control. A businessman or businesswoman can control their business effectively because they can follow proper records and monitor transactions.
4. Fair tax assessment. The income tax department requires proper records to determine a fair and reasonable tax charge.
5. To determine the financial position of the business. To know the value of property, the amount of capital, and capital efficiency, the businessman or businesswoman needs to keep records of owned assets and changes in capital.

Common Book Keeping Terms

1. Business: An undertaking, activity, or process involved in buying and selling goods and services for profit. It is an activity carried out with the intention of making a profit.
2. Capital: The amount of money with which a trader begins their business. It is the money or money’s worth provided by the owner to start the business.
3. Proprietor: The owner of a business who provides capital to the business.
4. Goods: Tangible items which can be seen and touched, and which a business can buy or sell.
5. Services: Activities performed by the businessman or businesswoman to earn money, e.g., shoe shining, teaching, treatment, transporting, clearing, etc.
6. Profit: The excess of income over expenses (income – expenses). It occurs when income is greater than expenses.
7. Loss: The excess of expenses over income (expenses – income). It occurs when expenses are higher than income (expenses > income).
8. Transactions: The movement of money or money’s worth (value) from one person to another.
   Example: Juma paid sh 1000/= to Hamis. This is a transaction because Tshs 1000/= has been moved from Juma to Hamis.
9. Debtor: A person who owes money to the business; usually customers who receive services on credit from the business.
10. Creditor: A person to whom money is owed by the business. This is the one who supplies or sells goods or renders services on credit to the business.

Business Transactions

Business transaction refers to the movement of money or money’s worth from one person to another or from one part to another.

Money’s worth means anything of monetary value, i.e., anything which can be bought or sold like soda, house, sugar, shoes, etc.

For something to be a transaction, there must be at least movement of either money, goods, or services from one party to another.

Examples of business transactions are:

1. Business bought goods and paid cash Tshs. 9,000.
   This is a transaction because it involves movement of money from the business to the supplier of goods and movement of goods from the supplier to the business.
2. Business paid cash Tshs. 500 for transport.
   This is a transaction because it involves movement of money from the business to the transporter and movement of service from the transporter to the business.

Note: It is not necessary for a single transaction to have two movements at one time. A single transaction can involve movement of money and goods, money and services, money only, goods only, or services only.

Analysis of Business Transactions

(i) Each transaction has two aspects: that of giving and that of receiving. These aspects may be represented by the movements discussed above. These aspects are the ones recognized and recorded in the books of accounts.

(ii) Each transaction has two parties involved, and one of these two parties is always the business because it is the business dealing with other parties. In teaching, the actor in each transaction is the business.

Examples:

From the following transactions, identify the two parties and two aspects involved.

Transaction 1
May 1. Business purchased goods for cash Tshs. 6000.

Solution:
– The action word in the above transaction is purchase, so the business is the one which made the purchase.
– The individual or business from whom goods are purchased is called the supplier.

Two parties involved in the above transaction are Business and Supplier. The transaction can be summarized as follows:

May 1.
Giving aspect by the business (payment of cash)
Receiving aspect by the business (receipt of goods)

Note: Whenever goods are purchased by the business for cash, the business receives the goods and pays money.

Transaction 2
May 2. Business sold goods for cash Tshs. 9,000.

Solution:
– The action word in the transaction is sale, so the business is the one which made the sale.
– Those people to whom goods are sold are called customers.

The two parties involved in the above transaction are Business and Customer. The transaction can be summarized as follows:

May 2.
Giving aspect by the business (delivery of goods)
Receiving aspect by the business (receipt of cash)

Transaction 3
May 4. Business paid cash Tshs. 1000 for transport.

Solution:
– The action word is pay, meaning that the payment was made by the business.
– Those individuals who provide transport are called transporters.

Two parties involved in the above transaction are the Business and Transporter. The transaction can be summarized as follows:

Giving aspect by the business (payment of cash)
Receiving aspect by the business (receipt of transport service)

Note: Whenever the business pays for something which cannot be seen or touched, that thing is a service.

The answers from the three transactions may be presented without narration as follows:

Activity

Answer the following questions:

1. Briefly explain what is meant by the term transaction.
2. Give three examples reflecting business transactions.
3. Indicate with a tick which of the following are not business transactions. Give reasons for your stand.
   (a) Juma sold goods worth Tshs. 4000.
   (b) Marketing officer attended a meeting of board of directors.
   (c) The business bought goods for cash.
   (d) Human resource manager wrote a warning letter to a worker.
4. For each of the following transactions, indicate the two parties involved and the two aspects carried. The first one is done for you.
   (a) The business bought goods for cash.
   (b) Business paid salary in cash.
   (c) Paid insurance.
   (d) Business made a cash sale.

Solution:
(a)