FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools Student’s Book Form Three Tanzania Institute of Education FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools ii Tanzania Institute of Edu cation © Tanzania Institute of Education 2023 Published 2023 ISBN: 978-9987-09-610-7 Tanzania Institute of Education P.O. Box 35094 Dar es Salaam, Tanzania Mobile numbers: +255 735 041 168 / 735 041 170 E-mail: director.general@tie.go.tz Website: www.tie.go.tz All rights reserved. No part of this textbook may be reproduced, stored in any retrieval system or transmitted in any form or by any means whether electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the Tanzania Institute of Education. FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE iii Student’s Book Form Three Tanzania Institute of Education Table of Contents Page Abbreviations and Acronyms .................................................................vi List of Figures .........................................................................................vii List of Tables......................................................................................... viii Acknowledgments ...................................................................................ix Preface .......................................................................................................x Chapter One: Adjustments for accruals and prepayments .......................1 The concept of adjustments ...................................................................................... 1 Accrual, and cash basis of accounting and the matching concept ........................... 1 The concept of adjustments in relation to the accrual and matching concepts ........ 2 Accruals and prepayments ....................................................................................... 2 Recording accruals and prepayments ....................................................................... 4 Revision exercise 1 ................................................................................................ 13 Chapter Two: Adjustments for depreciation of non-current assets ........16 The concept of depreciation of non-current assets ................................................. 16 Non-current assets .................................................................................................. 16 Capital and revenue expenditures .......................................................................... 17 Capital expenditure ................................................................................................ 17 Revenue expenditure .............................................................................................. 19 Differences between capital and revenue expenditure ........................................... 20 Effects of capital and revenue expenditure on financial statements ....................... 22 Depreciation ........................................................................................................... 23 Reason for depreciation.......................................................................................... 23 Methods of calculating depreciation ...................................................................... 23 Recording of non-current assets acquisition .......................................................... 35 Accounting records for depreciation ...................................................................... 36 Disposal of non-current assets ............................................................................... 47 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools iv Tanzania Institute of Edu cation Revision exercise 2 ................................................................................................ 58 Chapter Three: Adjustments for bad debts and doubtful debts .............61 Adjusting for Bad debts and allowance for doubtful debts .................................... 61 Bad debts ................................................................................................................ 61 Allowance for doubtful debts ................................................................................. 66 Accounting entries for allowance for doubtful debts ............................................. 67 Preparation of comprehensive financial statements with adjustments ................... 73 Revision exercise 3 ................................................................................................ 86 Chapter Four: Control accounts ............................................................90 The concept of control accounts ............................................................................ 90 The importance of control accounts ....................................................................... 91 Advantages and disadvantages of control accounts ............................................... 92 Preparing records for control accounts .................................................................. 92 Sales ledger control account................................................................................... 93 Purchases ledger control account ........................................................................... 98 Set-off between sales ledger and purchases ledger .............................................. 101 Revision exercise 4 .............................................................................................. 105 Chapter Five: Accounting for incomplete records ...............................110 The Concept of incomplete records ......................................................................110 Reasons for incomplete records ............................................................................112 The role of double entry in incomplete records ....................................................113 Strengths and weaknesses of incomplete records .................................................113 Profit or loss determination and missing figures ...................................................115 Computation of profit or loss using change in net worth ......................................115 Determination of missing information to facilitate preparation of financial statements ............................................................................................................. 124 Preparation of financial statements ...................................................................... 137 Revision exercise 5 .............................................................................................. 151 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE v Student’s Book Form Three Tanzania Institute of Education Chapter Six: Accounting for not-for-profit organisations ....................159 Nature of not-for-profit organisations .................................................................. 159 The difference between not-for-profit and profit-making organisations .............. 159 Source of funds for not-for-profit organisations ................................................... 160 Need for accounting records for not-for-profit organisations .............................. 160 Book-keeping records of a not-for-profit organisations ....................................... 162 Receipts and payments account ........................................................................... 162 Accumulated fund account ................................................................................... 166 Statement of affairs ............................................................................................... 166 Financial statements of not-for-profit organisation .............................................. 167 Income and expenditure statement ....................................................................... 167 Income statement for a special purpose ............................................................... 168 Treatment of items in the financial statements of not-for-profit organisations......................................................................................................... 169 Treatment of expenses in a not-for-profit organisations ....................................... 171 The statement of financial position for not-for-profit organisations .................... 175 Revision exercise 6 .............................................................................................. 185 Glossary ................................................................................................................... 196 Bibliography ............................................................................................................ 198 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools vi Tanzania Institute of Edu cation Abbreviations and Acronyms Dr Debit Cr Credit COGS Cost of Goods Sold IASB International Accounting Standard Board IAS International Accounting Standard MNMA The Mwalimu Nyerere Memorial Academy PPE Property, Plant and Equipment SUA Sokoine University of Agriculture TIE Tanzania Institute of Education TZS Tanzanian Shilling XYZ Dummy enterprise UDOM University of Dodoma UDSM University of Dar es Salaam FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE vii Student’s Book Form Three Tanzania Institute of Education List of Figures Page 2.1: Examples of capital expenditure ....................................................................17 2.2: Examples of revenue expenditure ...................................................................19 5.1: Known Mark-up ...........................................................................................132 5.2: Known Margin .............................................................................................132 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools viii Tanzania Institute of Edu cation List of Tables Page 2. 1: The differences between capital and revenue expenditures ........................... 20 2. 2: The depreciation, accumulated depreciation and book value ....................... 25 2. 3: The depreciation charge for each year .......................................................... 28 2. 4: The depreciation, accumulated depreciation and book value of asset for year ........................................................................................................... 29 2. 5: The summary of depreciation calculation in example 2.4 ............................. 31 2. 6: The depreciation, accumulated depreciation and book value of the per year ......................................................................................................... 32 2. 7: The depreciation schedule for machinery: reducing balance method ........... 43 2. 8: The depreciation schedule for motor vehicle: straight line method .............. 50 2. 9: The depreciation schedule for building: straight line method – 25% ........... 54 4. 1: Sales ledger control account information ...................................................... 93 4. 2: Purchases ledger control account information .............................................. 98 5. 1 : The difference between statement of affairs and statement of financial position ........................................................................................................ 119 6. 1 : Books of accounts of not-for-profit and profit-making organisations ............................................................................................. 161 6. 2 : The differences between not-for-profit and profit-making organisations .............................................................................................. 162 6. 3 : Comparison of terminologies used in financial statements .................... 168 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE ix Student’s Book Form Three Tanzania Institute of Education Acknowledgments The Tanzania Institute of Education (TIE) would like to acknowledge the contributions of all the organisations and individuals who participated in designing and developing this textbook. In particular, TIE wishes to thank the University of Dar es Salaam (UDSM), the Mwalimu Nyerere Memorial Academy (MNMA), Waningo Secondary School, Morogoro Secondary School, Viwandani Secondary School and Mwayunge Secondary School. Besides, the following individuals are acknowledged: Writers: Mr January J. Timanywa (TIE), Dr Kamugisha A. Rwechungura (MNMA), Justo M. Lemesaya (UDSM), Gerado J. Onding’o (Waningo Secondary School), Godfrey F. Luanda (Morogoro Secondary School), Sylvia K. Benedict (Viwandani Secondary School) & Lucy B. Mgalla (Mwayunge Secondary School) Editors: Dr Patrick R. Mbwile (UDSM), Mr Mashiku M. Makwani (UDOM), Ms Sarah D. Nkanzaga (Makurumla Secondary School) & Dr Hashim I. Mohamed (Language - SUA) Designers: Mr Silvanus A. Mihambo & Ms Rehema H. Maganga Coordinator: Mr January J. Timanywa TIE also appreciates the contributions of the secondary school teachers and students who participated in the trial phase of the manuscript. Likewise, the Institute would like to thank the Ministry of Education, Science and Technology for facilitating the writing and printing of this textbook. Dr Aneth A. Komba Director General Tanzania Institute of Education FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools x Tanzania Institute of Edu cation Preface This textbook, Book-Keeping for Secondary Schools, is written specifically for Form Three students in the United Republic of Tanzania. It is written in accordance with the 2016 Book-Keeping Syllabus for Ordinary Secondary Education Form I-IV, issued by the Ministry of Education, Science and Technology. The book consists of six chapters, namely Adjustments for (accruals and prepayments; depreciation of non-current assets; bad debts and allowance for doubtful debts), Control accounts, Accounting for incomplete records and Accounting for not-for-profit organizations . Each chapter contains text, activities and exercises. You are encouraged to do all the activities, exercises and other assignments provided by your teacher. Doing so will enable you to develop the intended competencies. Tanzania Institute of Education FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE 1 Student’s Book Form Three Tanzania Institute of Education The concept of adjustments The concept of adjustments in accounting requires an enterprise to carry out important adjustments on its financial record, in order to prepare financial statements that portray a true and fair view. This is because, some of the expenses incurred by the enterprise in one accounting period may be paid for in the next accounting period. Similarly, cash for some of the revenues earned in one accounting period may be received in the next period. Also, enterprises will find themselves in a situation where they have to pay for expenses that are not yet incurred and cash received for goods they have not yet sold or for service they have not yet rendered. In these cases, adjustments in the accounting records are important in dealing with such incidences. By doing so, the matching concept of accounting and the accrual concept of accounting are all met. Accrual, and cash basis of accounting and the matching concept In accounting, the accrual basis of accounting is a practice whereby revenue is recognized when earned, not when cash is received; and expenses are recognized when incurred not when paid for. On the other hand, the cash basis of accounting is the practice of recognizing revenue when cash has been received, and expenses when cash has been paid. Thus, the difference between accrual and cash basis of accounting lies in the timing when revenue and expenses are recognized in the books of accounts. Matching concept in book-keeping is a practice whereby Chapter One Adjustments for accruals and prepayments Introduction In this chapter, you will learn the concept of adjustments and adjustments for accruals and prepayments. The competencies developed in this chapter will enable you to prepare a complete set of financial statements by considering adjustments for accruals and prepayment. FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools 2 Tanzania Institute of Edu cation enterprise recognize revenue and their related expenses in the same accounting period. The enterprise should prepare income statements along with the expenses that were exactly incurred to generate the reported income. The main purpose of the matching concept is to avoid misstating earnings for an accounting period. Professionally, every enterprise is required to maintain its accounting records using the accrual basis of accounting. This has been put forward by the International Accounting Standard Board (IASB), which is the board responsible for regulating the accounting practice internationally. The International Accounting Standards (IAS) which are recommended to you are IAS 1 (Presentation of Financial Statements), IAS 7 (Statement of Cash Flows) and IAS 16 (Property, Plant and Equipment). IAS 1 which was issued by the IASB requires every enterprise to prepare its books of accounting under the accrual basis of accounting. However the board responsible for public sector accounting standards is the International Public Sector Accounting Standards Board (IPSASB). The concept of adjustments in relation to the accrual and matching concepts Adjustments of accounting records enable enterprises to prepare their financial statements by meeting the accrual and matching concept of accounting. These accounting concepts are related to the concept of adjustment in the sense that the accrual concept of accounting requires the enterprise to recognize revenues when earned not when cash is received and expenses when incurred, not when paid for. On the other hand, matching concept of accounting requires business enterprises to match revenues earned against expenses incurred in the process of generating that revenue in the same accounting period when ascertaining its performance and its financial position. Adjustments of accounting entries enable the enterprise to determine its actual revenue and expenses that must be reported in the same accounting period when preparing its financial position at the year end. Without carrying out adjustments on accounting records, it would be difficult to determine the actual revenue earned and the expenses incurred in the accounting period, hence failing to adhere to accrual and matching concepts. Accounting adjustments refers to the action of passing adjusting entries in the books of accounts so as to make financial statements reflect more accurately the earned income and the incurred expenses under the accrual basis. Normally, adjustments are made at the end of the accounting period which can be at the end of the month or year. There are six common types of adjusting entries which include deferred revenue (unearned revenue), prepaid expenses, accrued revenue, accrued expenses, depreciation expenses and adjustments for bad and doubtful debts. These adjustments will be covered later in this book. Accruals and prepayments Accrual basis of accounting requires an accountant to recognise revenue when FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE 3 Student’s Book Form Three Tanzania Institute of Education it is earned, not when it is received; and expenses when incurred, not when they are paid for. In accounting, there is a difference between earning and receiving revenue. Earning revenue occurs when services or goods have been consumed by a customer while receiving revenue occurs when we receive payments related to services or goods provided to customers. More over, there is a difference between incurring and paying an expense. An expense is incurred when we consume or use a service such as water or electricity services irrespective of whether we have paid for or not while an expense is paid for when actual payment is made. Prepayment and accruals are concepts related to the accrual basis of accounting. Prepaid revenue refers to revenue received in advance (before it is earned). A prepaid expenses refer to expenses paid in advance (before they are incurred) for goods or services to be received in the future. Hence, there are two types of prepayments which are prepaid revenue and prepaid expenses. On the other hand, accruals refer to revenues not yet received (after being earned) and expenses not yet paid (after being incurred). Hence, there are two types of accruals which are accrued revenue and accrued expenses. These concepts are further elaborated below: Accrued income This occurs in situation where the company has provided the service has been provided but have not yet received the income from the customer. When preparing financial statements such amounts receivable from customers are treated as accrued income. A good example of this situation is: suppose, rent receivable per year is TZS 120,000 and the actual cash received for rent from tenants is TZS 50,000 for the year. At the end of the year, TZS 70,000 is accrued rent. • Accrued income is a current asset (which is recorded in the statement of financial position) • The amount of revenue earned for the period, that is, TZS120,000 (and not TZS50,000) should be transferred to the income statement. Prepaid revenue or income This is a revenue or income received in advance before it is earned. This happens when cash has been received for a particular service before rendering the service and thus, the revenue has not yet been earned. A good example of this situation is where, rent receivable per year is TZS 120,000 and the actual cash received for rent from tenants is TZS 150,000 for the year. At the end of the year, TZS 30,000 is a prepaid rent. • Prepaid income is a current liability (it is recorded in the statement of FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools 4 Tanzania Institute of Edu cation financial position). • The amount of revenue earned for the period should be transferred to the income statement. Accrued expenses These are expenses not yet paid but have been incurred. It occurs when cash has not been paid for a particular expense however, it is already incurred. Accrued expenses occur where an entity has already incurred expense such as salaries, wages but the payment for such expenses has not yet been made. The amounts remain outstanding at the end of the accounting period. Example, rent payable per year is TZS 120,000 and the business has paid rent of TZS 100,000 only. Then TZS 20,000 is accrued rent expense • Accrued expense is a current liability (it is recorded in the statement of financial position) • The amount incurred for the period should be transferred to the income statement under expenses section. Prepaid expenses These are expenses paid for but not yet incurred. These occur when cash has been paid for a particular service before such service has been rendered to the business. Prepaid expenses occur in situations where payments for different expense items are made before the business has actually incurred. It is common to have such prepayments in expenses such as rent, electricity or mobile communication charges. A good example of this situation is where, rent payable per year is TZS 120,000 and the business has paid cash for rent of TZS 200,000 for the year. Then, at the end of the year, TZS 80,000 is prepaid rent expense. • Prepaid expense is a current asset (it is recorded in the statement of financial position) • The amount of expense incurred for the period should be transferred to the income statement under expenses section Recording accruals and prepayments There are two approaches to recording accruals and prepayments FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE 5 Student’s Book Form Three Tanzania Institute of Education Approach I The rule of recording accruals and prepayments Balance of Account Where to record 1. Prepaid/advance brought down Debit side for expenses, Credit side for revenue 2. Accrued/outstanding/owing brought down Opposite side (Credit side for expenses, debit side for revenue) 3. Prepaid/advance carried down Credit side for expenses, debit side for revenue 4. Accrued/outstanding/owing carried down Opposite side (debit side for expenses, Credit side for revenue) Dr Expenses account Cr Date Details Amount (TZS) Date Details Amount (TZS) Prepaid expenses b/d xxx Accrued expenses b/d xxx Cash xxx Prepaid expenses c/d xxx Accrued expenses c/d xxx Income statement xxx xxx xxx Prepaid expenses b/d xxx Accrued expenses b/d xxx Dr Revenue account Cr Date Details Amount (TZS) Date Details Amount (TZS) Accrued revenue b/d xxx Prepaid revenue b/d xxx Prepaid revenue c/d xxx Cash xxx Income statement xxx Accrued revenue c/d xxx xxx xxx Accrued revenue b/d xxx Prepaid revenue b/d xxx Note: The balance of an account can be either prepaid or accrued balance. Prepaid or accrued balance brought down. This is a balance brought down at the beginning of the period. Prepaid or accrued carried down. This is a balance carried down at the end of the period. FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools 6 Tanzania Institute of Edu cation Approach II There is an alternative approach of recording prepayments and accruals in the books of accounts. (a) For prepaid revenue (i). When payments are received for example, rent is received Date Details Debit Credit Cash Rent revenue account To record cash received from rented premises xxx xxx (ii). When there is a prepaid revenue (for example, prepaid rent revenue) Date Details Debit Credit Rent revenue account Prepaid rent revenue account To record part of rent received relating to the future period xxx xxx (b) For accrued revenue (i) When payments are received for example, is rent received: Date Details Debit Credit Cash Rent revenue To record cash received from rented premises xxx xxx (ii) When there is an accrued revenue (for example accrued rent revenue) Date Details Debit Credit Accrued Rent revenue account Rent Revenue account To record the amount of rent earned but not yet paid for xxx xxx FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE 7 Student’s Book Form Three Tanzania Institute of Education Example 1.1 Accrued Income The rent received during the year amounted to TZS 680,000 and the accrued rent receivable amounted to TZS 375,000 as at 31 st December 2021. Show the necessary accounting entries in the books of Chumbe Enterprise. Approach I (using two accounts to record rent) Dr Rent income account Cr Date Details Amount (TZS) Date Details Amount (TZS) 31/12/2021 Income statement 1,055,000 Cash 680,000 31/12/2021 Accrued rent income 375,000 1,055,000 1,055,000 1/1/2020 Accrued rent income 375,000 Dr Accrued rent income account Cr Date Details Amount (TZS) Date Details Amount (TZS) 31/12/2021 Rent income 375,000 31/12/2021 Balance c/d 375,000 375,000 375,000 1/1/2022 Balance b/d 375,000 Approach II (Mixed accounts approach) Dr Rent income account Cr Date Details Amount Date Details Amount (TZS) 31/12/2021 Income statement 1,055,000 Cash 680,000 31/12/2021 Balance c/d 375,000 1,055,000 1,055,000 1/1/2022 Balance b/d 375,000 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE Book-Keeping for Secondary Schools 8 Tanzania Institute of Edu cation Financial statements (for both Approaches I and II) Chumbe Enterprise Income Statements (extract) for the year ended 31 December 2022 TZS Gross profit xxxxxxxx Add: Rent income 1,055,000 Discount received xxxxxx Chumbe Enterprise Statement of financial (extract) position as at 31 December 2022 TZS TZS Current assets Accrued rent income 375,0000 Inventory xxxxxx Example 1.2 (a) Prepaid revenue The rent received during the year ending 31 st August 2020 is TZS 200,000. At the end of the year, the prepaid rent revenue amounted to TZS 50,000. Account for the above entries in the books. Dr Rent revenue account Cr Date Details Amount (TZS) Date Details Amount (TZS) Prepaid rent revenue 50,000 Cash 200,000 Income statement 150,000 200,000 200,000 FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE 9 Student’s Book Form Three Tanzania Institute of Education Dr Prepaid rent revenue account Cr Date Details Amount (TZS) Date Details Amount (TZS) 31/8/202 Balance c/d 50,000 Rent revenue 50,000 50,000 50,000 1/7/2020 Balance b/d 50,000 The balance of prepaid rent revenue account is transferred to the statement of financial position (b) For prepaid expenses (i) When payments are made for example, Salary expense Date Details Debit Credit Salary expense Cash/Bank To record salaries paid for the month/year. xxx xxx (ii) When there is prepaid Expense (for example, prepaid salary expense) Date Details Debit Credit Prepaid Salary expense Salary expense To record salaries paid in advance. xxx xxx (c) For accrued expenses (i) When payments are made for, example: Salary expense Date Details Debit Credit Salary expense Cash/Bank To record salaries paid for the month / year. xxx xxx FOR ONLINE USE ONLY FOR ONLINE USE ONLY DO NOT DUPLICATE