ADMAS UNIVERSITY

The Ethiopian TVET-System

ACCOUNTS AND BUDGET SERVICE LEVEL IV

Learning
Guide
Unit of Competence Establish and Maintain an Accrual Accounting System
Module Title Establishing and Maintaining an Accrual Accounting System

LG Code: EIS ABS4 14 0812

TTLM Code: EIS ABS4M 14 0812
 INTRODUCTION
Welcome to the module “Establish and Maintain an Accrual Accounting
System”. This learner’s guide was prepared to help you achieve the required
competence in “Accounts and Budget Support Level IV”. This will be the source of
information for you to acquire knowledge attitude and skills in this particular
occupation with minimum supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- .Manage the chart of accounts

Lo2:- Process invoices, adjustment notes and other general ledger transactions
Lo3:- Manage contra entries
Lo4:- Identify and process bad debts
Lo5:- Manage debt recovery
Lo6:- Prepare and produce reports and trial balance

How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections
that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.
Occupational Standard: Accounts and Budget Service Level IV

Unit Title Establish and Maintain an Accrual Accounting System

Unit Code EIS ACB4 14 0812

Unit Descriptor This unit describes the performance outcomes, skills and
knowledge required to establish debtors and creditors, bad
debt and contra entries, perform reconciliations, review
compliance terms and conditions, plan a recovery action and
prepare reports to set up and maintain a manual and
computerised accrual accounting system.

Elements Performance Criteria

1. Manage the 1.1 Chart of accounts is adjusted to incorporate and establish

chart of debtors and creditors as they arise
accounts
1.2 Debtors and creditors subsidiary ledgers are established
as required
2. Process 2.1 Invoices to debtors are raised and invoices to creditors
invoices, are allocated with source documents coded and
adjustment processed
notes and other
general ledger 2.2 Payments from debtors are received, processed and
transactions banked in accordance with organisational policies and
procedures
2.3 Payments to creditors are made and processed in
accordance with organisational policies and procedures
2.4 Adjustments are raised and allocated to correct invoices
2.5 Credit notes are raised for adjustments to invoices and
other transactions are entered into the general ledger
3. Manage contra 3.1 Relevant persons are contacted and liaised with to
entries verify contra deals
3.2 Reporting procedures and documentation for contra
entries are completed in accordance with organisational
policies and procedures and contra entries processed to
update debtors, creditors and general ledgers
4. Identify and 4.1 Bad debt status is verified through liaison with relevant
process bad persons and following attempts to work with debtors to
debts clear debts
4.2 Reporting procedures and appropriate documentation are
completed in accordance with organisational policies and
procedures and bad debts processed to update debtors
and general ledgers
5. Manage debt 5.1 Activities and communication with debtors are reviewed
recovery in conjunction with relevant persons, if applicable, to
establish adequacy of follow-up
5.2 Measures are undertaken to collect monies, including the
initiation of legal action and the seeking of expert advice,
in accordance with organisational policies and
procedures
6. Prepare and 6.1 Reports are produced and transactions in report are
produce reports validated
and trial balance
6.2 Debtors and creditors are reconciled and relevant reports
are produced with any necessary corrections made
6.3 Trial balance is produced and reports are presented and
explained where necessary to relevant persons

Variable Range

Organisational  manual or computer system documentation

policies and  internal control guidelines
procedures may  legal obligations
include:  operations manuals
 organisational policies and procedures including:
 working with others
 participating in ongoing learning
 monitoring and evaluating own performance
 managing own time and priorities
 applying goals and visions
 suspension of credit facilities
 trading terms and credit limits
Other transactions  assets
may include:  capital
 interest
 loans
 one-off purchases
 private usage
 taxes
Relevant persons  accountants
may include, but  debtors
are not limited to:  directors
 managers
 owners
 staff members
Evidence Guide

Critical aspects of Evidence of the ability to:

Competence  interpret and comply with relevant legislation
 review accounts receivable and payable processes and
identify bad and doubtful debts
 deal with debtors in an empathetic manner
 plan recovery actions in accordance with legal
requirements
 produce a trial balance
Underpinning Demonstrates knowledge of:
Knowledge and
Attitudes
 legal systems and procedures relevant to debt recovery
and necessary preliminary steps, timing and acceptable
avenues for recovering debts
 differences between cash and accrual accounting
 relevant industry codes of practice
 relevant organisational policies, procedures and guidelines
related to the processing of transactions and records
 relevant statutory, legislative and regulatory requirements
specifically with relation to ensuring that all bookkeeping
activities undertaken meet requirements related to Activity
Statements
 manual and computerised accounting systems
 concepts of double-entry accounting
Underpinning Skills Demonstrates:

 communication skills to:

 build relationships, determine and confirm client
requirements, using questioning and active listening as
required
 deal with debtors in an empathetic manner to clear
debts if possible
 liaise with others, share information, listen and
understand
 use language and concepts appropriate to cultural
differences
 numeracy and IT skills to:
 accurately analyse, code, record and store data in
accordance with organisational requirements
 access and use appropriate financial management
software, spreadsheets and databases
 use internet information
 analysis for accessing, interpreting and managing
relevant financial data
 literacy skills for interpreting documentation and compiling
 reports
 self-management skills for complying with ethical, legal
and procedural requirements
 problem solving skills to identify any issues that have the
potential to impact on the debt recovery process or
outcome and to develop options to resolve these issues
when they arise or refer to other professionals as
appropriate
 organisational skills, including the ability to plan and
sequence work to provide a timely and professional
service
 teamwork skills to identify activities required with business
owners and other relevant persons
Resources Access is required to real or appropriately simulated situations,
Implication including work areas, materials and equipment, and to information
on workplace practices and OHS practices.

Assessment Methods Competency may be assessed through:

 Interview / Written Test / Oral Questioning

 Observation / Demonstration
Context of Competency may be assessed in the work place or in a simulated
Assessment work place setting.
 Lo1:- . Manage the chart of accounts

- Chart of accounts - is a listing of the account titles and account numbers being used by a
given business. In numbering accounts in the ledger it is preferable to use a flexible system
of indexing so that it permits a later insertion of new accounts in their proper sequence
without distributing the other account numbers.
A lit of account in the ledger is called chart of
account. Example - the chart of Account Nilexs
computer center - Chart of Accounts
Balance sheet Accounts
1. Asset 2. Liabilities
11 cash 21. A/P
12. A/R 23. Unearned Rent
14. Supplies 3. Owner’s Equity
15. prepaid insurance 31. Habte, capital
17. Land 32. Habte, Drawing
18. Office Equipment

Income statements Account

4. Revenue
41 fees earned
5. Expenses
5.1 Wages Expenses
52. Rent Expenses
54 utilities expenses
55 supplies epees
59 miscellaneous expenses

 The number and name of accounts used by an organization depends on the nature of its operation.
The list of accounts used by an organization and their codes is called the chart of accounts. Look at
the following chart of accounts of Bati Transport.

Bati Transport

Chart of Accounts

Asset Account number

Cash--------------------------------------------------------------------------11

Accounts Receivable------------------------------------------------------ 12
Supplies----------------------------------------------------------------------13

Prepaid Insurance-----------------------------------------------------------14

Equipment------------------------------------------------------------------- 15

Accumulated Depreciation –Equipment---------------------------------16

Truck--------------------------------------------------------------------------17

Accumulated depreciation – Truck----------------------------------------18

Liabilities

Accounts Payable-------------------------------------------------------------21

Notes Payable-----------------------------------------------------------------22

Owners Equity

Yimer Adem, Capital----------------------------------------------------------31

Yimer Adem Drawing-------------------------------------------------------32

Income Summary-------------------------------------------------------------33

Revenue

Service income----------------------------------------------------------------41

Expense

Salaries Expense --------------------------------------------------------------51

Rent Expense ------------------------------------------------------------------52

Utilities Expense---------------------------------------------------------------53
Supplies Expense--------------------------------------------------------------54

Insurance Expense-------------------------------------------------------------55

Maintenance Expense---------------------------------------------------------56

Depreciation Expense---------------------------------------------------------57

Truck Expense-----------------------------------------------------------------58

Miscellaneous expense--------------------------------------------------------59

 In the chart of accounts, the asset accounts are listed according to their liquidity. Liquidity is the ease
with which an asset can be converted in to cash. Cash is the most liquid asset so it is listed first.
Accounts other than cash will be listed in their frequency of use or in alphabetical order.

 The account number is a code to identify accounts. The number could be a two digit, three digit or
more digits. In the above example a three – digits code is used.

 When the chart of accounts is prepared in an organization we say the ledger is opened.

Lo.2. Process invoices, adjustment notes and other

general ledger transactions

What is an invoice?
An invoice is a request or a bill for payment in a transaction. It is issued by the person selling the goods
and/or services or the vendor to the person buying these goods or services or the customer.

The most important thing to note about the invoice is that it is a legally enforceable document. In other
words, the vendor can use the invoice issued for a particular good or service to legally ensure that the
payment on that is made.

However, an invoice isn’t just about requesting for payment.

It also lists out many pertinent details such as the names of the vendor and customer, the address, phone
number, email address and fax number of the vendor, the services or goods transacted, the quantities, the
prices, the date the invoice was issued, the invoice number and the total payment to be made.

What an invoice is not is a purchase order, which is basically a document issued by the customer to the
vendor detailing the items or services desired, the quantities and the agreed prices.
  an invoice basically requests that a payment be made
 An invoice is issued before the payment is made.
 The invoice lists the total amount that is due or has to be paid.
 If a vendor issues an invoice and the payment hasn’t yet been made, the vendor will enter
the payment as a Credit to Sales and a Debit under Accounts Receivable.
 If a customer receives an invoice but hasn’t made the payment yet, the customer enters the
payment as a Credit under Accounts Payable and a Debit under either an expense
account or an asset account.
 An invoice goes to the customer who has to make the payment
 An invoice is used to keep track of goods or services sold.

Uses
Invoices are first and foremost used to make a request for payments from customers. However, they also
help in the delivery of goods, keeping track of the goods and services sold, estimate future revenues and
even for customer service by offering discounts on early payments and extended period for payment.

Credit Note
A credit note is a document sent by a seller to its buyer or, in other words, a vendor to the
customer, notifying that a credit has been provided to their account against the goods returned by
the buyer.

It reduces the amount due to be paid by the customer, (if the amount due is Nil) then it allows
further purchases in lieu of the credit note itself.

A credit note is issued for the value of goods returned by the customer, it may be less than
or equal to total amount of the order. 

Example – Company-B sells goods worth 1,00,000 to Company-A, however, 10,000 worth of

goods were found damaged due to some reason & this is notified to Company-B at the time of
actual delivery.

Company-B (seller) issues a credit note for 10,000 in the name of Company-A (buyer). This
reduces the receivables of the seller by 10,000 and the buyer is only required to pay 90,000.
 

Important Characteristics

1. It is sent to inform about the credit made in the account of the buyer along with the reasons.

2. The sales return book is updated on its basis. (In case of return of goods)

3. It is usually sent by the seller if the goods are found incomplete, damaged or incorrect at buyer’s
end.

4. It shows a negative amount.

Journal Entry for Credit Note

In the books of buyer

Goods returned by the buyer are purchase return, the action of returning goods by the buyer
leads to;

1. A decrease in liability to pay the respective creditor.

2. A decrease in expense previously incurred to purchase those goods.

Creditor’s A/C Debit

 To Purchase Return A/C Credit

 

In the books of seller

Goods returned to the seller are sales return, the action of returning goods to the seller leads to;

1. A decrease in revenue previously booked as sales.

2. A decrease in assets as the payment will not be made by the debtor anymore.

Sales Return A/C Debit

 To Debtor’s A/C Credit

Credit or Adjustment Note
Adjustment notes, credit notes, and refunds are issued to customers for damaged, returned or undelivered
goods. Customers may elect to receive a refund immediately or take the refund payable as a credit on their
account (commonly used for overpayments). It depends on your regulatory requirements and your
organization’s policy and procedures regarding returns.
 Lo3:- Manage contra entries

What is a contra entry?

 you may have a customer who is also a supplier
 sometimes your customer will deduct an amount you owe them before making payment
to you
 Or you may deduct what a supplier owes you make a payment to them
 offsetting the supplier amount against the customer amount is called a contra entry
 Contra entries are those entries in which same account can be debited and credited in contrary
situation. For example we debit Bank account when depositing cash. At the same time we credit bank
account when withdrawing money from bank. In manual accounting Contra entry is recorded in the
journal by marking (C) in the Particulars column after ledger name. or in other words contra entry
is Bookkeeping entry that is entered on the opposite side of an earlier entry to cancel its effect on the
account balance.

Situation: Deposit money into bank 5000

 Debit: Bank Account : 5000.00

 Credit: Cash               : 5000.00
Contrary Situation: Withdraw money from bank
 Debit: Cash                 : 5000.00
 Credit: Bank Account: 5000.00
Contra entry has no ultimate affect in the business. When a contra entry is made, the affect is transferred
from one account to another. But no result is created in the business. For example when cash is deposited to
bank, It is just moving of fund (current asset) from cash account to bank account. Hence in the balance sheet,
amount is floated from one item to another on the same side.

Examples of contra entry transactions?

In the following situations we use contra entries.
 When cash is deposited to bank.
 When cash is withdrawn from bank.
  When fund is transferred from one bank to another
 When cash is transferred to one cash account to another.

1. Fund transferred from BANK X to BANK Y

Debit: Bank Y
Credit: Bank X
2. Fund transferred from BANK Y to BANK X
Debit: Bank X
Credit: Bank Y
3. Fund transferred from BANK Y to Cash account. or withdrawal of cash.
Debit: Cash A/c
Credit: Bank Y
4. Fund transferred from Cash a/c to Bank Y. or Cash deposit in to bank account.
Debit: Bank Y
Credit: Cash
 When cash is transferred from one cash-in-hand account to another. For example cash
account to petty cash account.
Debit: Petty cash
Credit: Cash

Contra Entry

In the dual entry accounting system, a contra entry is an entry which is recorded
to reverse or offset an entry on the other side of an account. If a debit entry is recorded in an
account, it will be recorded on the credit side and vice-versa. Debit and credit aspects of a single
transaction are entered in the same account but in different columns. Each entry, in this case, is
viewed as a contra entry of the other. Remember the word contra as “Against” or “Opposite”.

  Examples of Contra Entry

1. Cash 50,000 withdrawn for an official purpose from the bank. Journal entry for
this transaction will be

Cash A/C 50,000

 To Bank A/C 50,000

In the above example, both entries, debit, and credit, are a contra entry of each other, they both
offset each other. The narration is not required for such an entry and only a “C” is written in the left
column which depicts that it is a contra entry.

2. Cash 10,000 received from a debtor is deposited into the bank

Bank A/C 10,000

 To Cash A/C 10,000

The above amount is recorded in the bank column (debit) side of the double column cash book.

A contra entry is also used in the Intercompany netting to offset receivables and payables

between 2 different legal entities/subsidiaries of a company so that one final (net) amount
remains.
 Lo4:- . Identify and process bad debts

What is Bad Debt?

Sometimes, at the end of the fiscal period, when a company goes to prepare its financial statements, it needs
to determine what portion of its receivables is collectible. The portion that a company believes is
uncollectible is what is called “bad debt expense.” The two methods of recording bad debt are:-

1) Direct write-off method and

2) Allowance method.

 
1) Bad Debt Direct Write-Off Method
 Under the direct write-off method, bad debt expense serves as a direct loss from uncollectibles, which
ultimately goes against revenues, lowering your net income. For example, in one accounting period, a
company can experience large increases in their receivables account. Then, in the next accounting
period, a lot of their customers could default on their payments (not pay them), thus making the
company experience a decline in its net income. Therefore, the direct write-off method can only be
appropriate for small immaterial amounts. 

 The seller only recognizes a bad debt expense when it can identify a specific invoice that will not be
paid. Under this approach, the accountant debits the bad debt expense and credits accounts
receivable (thereby avoiding the use of an allowance account). It is not the preferred method for
recording bad debts, because it introduces a delay between the recognition of a sale and the
recognition of any related bad debt expense (which violates the matching principle).

E.g At the end of 2015, shola co. had birr 5000 account receivable the deemed uncollectible. the journal
entry for this trxn will be:

Bad debt expense……. 5000

Account receivable……………5000
 2) Bad Debt Allowance Method
When it comes to large material amounts, the allowance method is preferred compared to the direct write-off
method. However, many companies still use the direct write-off for small amounts. The reason for the
preference is because the method involves a contra asset account that goes against accounts receivables.

For example, ABC International invoices $1 million of invoices to various customers in January and
estimates that $40,000 of this amount will not be paid. Accordingly, it records the following entry to create
a bad debt reserve:

  Debit Credit

Bad debt expense 40,000  

     Allowance for doubtful accounts   40,000

The three primary components of the allowance method are as follows:

1. Estimate uncollectible receivables.

2. Record the journal entry by debiting bad debt expense and crediting allowance for doubtful accounts.

3. When you decide to write off an account, debit allowance for doubtful accounts and credit the
corresponding receivables account

e.g Allowance for doubtful account……. 40000

Account receivable……………………..40000

Sometimes, people or businesses pay back the amount but at a later date, which means that you
need to reverse the write off you made and record the collection of the receivables. It would
involve the following entry:
1. Journal entry to reverse write off

Account receivable……………………..40000
Allowance for doubtful account……. 40000
 2. Journal entry to record the collection
Cash………….….. 40000

Account receivable……………………..40000

Estimate Accounts Receivables

 The amount of receivables that is uncollectible is usually estimated. Why? This is because it is hard,
almost impossible, to estimate a specific value of bad debt expense. Companies cannot control how
or when people pay. Sometimes people encounter hardships and are unable to meet their payment
obligations, in which case they default. The same thing happens to companies as well. Therefore,
there is no guaranteed way to find a specific value of bad debt expense, which is why we estimate it
within reasonable parameters.

The two methods used in estimating bad debt expense are 1) Percentage of sales and 2) Percentage of
receivables.

 1. Percentage of Sales

Percentage of sales involves determining what percentage of net credit sales or total credit sales is
uncollectible. It is usually determined by past experience and anticipated credit policy. Once management
calculates the percentage, they multiply it by their net credit sales or total credit sales to determine bad debt
expense. Here’s an example:

On March 31, 2017, Corporate Finance Institute reported net credit sales of $1,000,000. Using the
percentage of sales method, they estimated that 1% of their credit sales would be uncollectible.

March 31, 2017 Bad debt expense……….10000

Allowance for doubtful account……..10000

 Lo5:- Manage debt recovery

What is Debt Recovery?

Debt recovery and debt collection are similar terms with one small, but very important distinction. The
difference is who is trying to retrieve a debt.

Debt collection is a creditor’s attempt to recover consumer credit and loans that have not been paid back by a
customer.

Debt recovery is when a loan—such as a credit card balance—continues to go unpaid, and a creditor hires a
third party, known as a collection service, to focus on collecting the money.

Debt recovery is important because it is directly correlated to your credit score. If you are being contacted by
a debt recovery service, it means there is a record that you have defaulted on a loan and currently have
delinquencies. These delinquencies get reported to the credit bureaus, damaging your credit score, which can
potentially hurt any future loan opportunities.

There are several steps in the debt recovery process and it is important to know what to expect when you are
contacted by a debt recovery agent. In fact, because financial debt can be a sticky situation, legislation has
been established to guide the debt recovery process and ensure that consumers are protected from harassing
debt recovery practices.

Debt Recovery Terminology

 Debtor: person obligated to pay back money that was borrowed

 Creditor: person who extends credit with an agreement that the money loaned will be paid back

 Third party collector: person or service that is contracted to collect debts for a creditor
Debt Recovery Process

Once the debt belongs to a collection agency, the creditor will send the claim information and supporting
documentation to the debt collector noting your failure to pay according to the terms of the agreement. After
the claim is reviewed and accepted by the debt collection service, the recovery process begins with a demand
letter being sent to the debtor and an acknowledgement letter being sent to the client (creditor who enlisted
the collection service).

The debt recovery efforts involve the following:

 Telephone contact begins in attempt to arrange payment for the outstanding balance and ensure
that the payments are realized.

 If the debtor does not cooperate with resolving the debt, the debt collection service updates the
client with details on forwarding the claim to the affiliated attorneys.

 Forwarded claim is signed by the client and sent to the affiliated attorneys, and if attorneys
recommend legal action, suit requirements are provided.

 If client authorizes the legal action and agrees upon suit requirements, the lawsuit is prepared and
filed. If the client doesn’t want to pursue legal action, the claim is worked on for an additional 60
days by the debt collection service and then closed.

 Complaint is served. If debtor files a response, the discovery process begins and a trial date is set. 
If debtor does not respond, a default judgment is filed by the attorneys.

 If a judgment is awarded in the client’s favor, attorneys will file a Writ of Attachment, attempt to
locate debtor’s assets, and initiate steps to satisfy the judgment (bank levies, garnishments, liens,
etc.).
Lo6:- Prepare and produce reports and trial balance

1. Prepare adjusting entries on January 31 for each item below

A. office supplies used $64,290. Acquisitions of office supplies were recorded in the
inventory of office supplies ledger account.
B. Rent Revenue received in advance, $ 16200. Advance rent received is credited to the
Rent Revenue ledger account.
C. Royalty revenue accrued from licensing a patent, $4,500.

2. On June 30, the end of its fiscal year, an enterprise owed salaries of $ 12,500 for an
incomplete payroll period. On the first payday on July, salaries of $ 20,900 are paid;
(a) Is the $ 12,500 a deferral or an accrual as of June 30?
(b) Which of the following types of accounts will be affected by the related adjusting entry:
(1) assets (2) liability, (3) revenue, (4) expense?

3. On January 2, an enterprise receives $ 24,000 from a tenant as rent for the current calendar
year. The fiscal year of the enterprise is from April 1 to March 31.
(a) Which of the following types of accounts will be affected by the adjusting entry as of
March 31: (1) assets (2) Liabilities, (3) revenue, (4) expense?
(b) How much of the $ 24,000 rent should be allocated to the current fiscal year ending
March 31?
Solution
1. A. Office Supplies Expense……………………………….64,290
Office Supplies…………………………………… 64,290

B. Unearned Rent…………………………………………16,200
Rent Revenue…………………………………….. 16,200

C. Royalty receivable……………………………………..4,500
Royalty revenue………………………………….. 4,500

2. A. Accrual
B. Liabilities and Expense

3. A. Liabilities and Revenue

B. $6,000