a L * SOURCE DOCUMENTS AND BOOKS OF ORIGINAL ENTRY ‘These are document s containing the information that makes basis of making entries in the books of accoun ts, They act as evidence that the transaction actually took place. They includes. * Cash sale receipt: - a document that shows that cash as been received or paid out of the business e ither in form of cash or cheque. itis a source document that is mainly used in making records in the cash journals cash book, cash accounts or bank accounts. If the receipt is received, t means payme nts has been made and therefore will be credited in the above accounts, or taken to cash disbursem ent/payment journals, while when issued, it means cash/ cheque has been received and therefore will be debited in the above accounts or taken to cash receipt journals * Invoice:- a document issued when the transaction was done on credit to dermand for their payment. If the invoiceis an incoming invoice/invoice received, then it implies that the purchases were made o credit, and if itis an outgoing/invoice issued then it implies that sales were made on credit. The incoming invoice will be used to record the information in the purchases journals/diary, while an outgoing invoice will be used to record information in sales journals/ diaries * Credit note:~ a document issued when goods are returned to the business by the customer or the b usiness return goods to the supplier and to correct any overcharge that may have taken place. If it is received, then ft means part of the purchases has been retuned and therefore the information will b eused to record information in the purchases return journals, while if issued then it means the part of sales has been returned by the customers and therefore used to record the information in the sale s return journals/diaries * Debit note:- a document used to correct an undercharge that may have taken placetoinformthed ebtor to pay more, It therefore acts as an additional invoice * Payment voucher. - a document used where itis not possible to get a receipt for the cash/cheque th at has been received or issued. The person being paid must sign on it to make it authentic. It is there fore used to record information just as receipts Books of original entries/ Joumals/Diaries/day’s books/Subsidiary books ‘These are books where the transactions are listed when they first occur, with thei entries being made on a d aly basis before they are posted to their respective ledger accounts. The information in the source documen ts are used to make entries in these books. The books of original entries include: * Salesjournals Sales retum journals/Retum inwards journals Purchases journals’ creditors journals/bought journals Purchases return journals/return outwards journal Cash receipt journals Cash payment/cash disbursement journals Three column cash book The petty cash book ‘Analysis cash book General journals/journal proper * Salesjoumals ‘This is used to record credit sales of goods before they can be recorded in their various ledgers. The informa tion obtained in the out going invoice/invoice issued is used to record the information in this journal as the s ource document 1 Mburugu Ken |L The overall total in the sales journal is therefore post ed in the sales account in the general ledger on credit si deand debtors account in the sales ledger as a debit entry Sales journal amount f Date i Particulars/details Invoice no Ledger Folio Example: The following information relates to Tirop traders for the month of June 2010 June 1: Sold goods to wafula on credit of ksh 200, invoice no 0114 2; Sold to the following debtors on credit; Wanjiru ksh 400, Musyoka ksh 300, Wafula ksh 3 00 5: sold goods on credit to Wanjiru of ksh 300, 110: Sold goods to the following on credit Kanini ksh 100, Wafula ksh 500, Wanjiru ksh 600 112: Sold goods on credit to musyka of ksh 350 Required Prepare the relevant day book for the above transactions; hence post the various amounts t o their respective individual accounts Sales journal Date Particulars/detais Invoiceno | Ledger folio amount Tune 2070: 1 Wafula 0114 SL 200 2 Wanjiru Ss 400 2 Musyoka SL 300 2 Wafula SL 300 5 Wanjiru SL 300 10 Wanjiru SL 600 10 Wafula SL 500 10 Kanini SL 100 12 Musyoka sl 350 15 Totals posted to the sales acco unt (Cr) GL 3050 (Post the rest to their individual debtors account) * Sales Retum Journals/Return inwards journals This is for recording the goods that the custorners/debtors have returned to the business. It uses the inform ation in the credit note issued as a source document to prepare it. The information is therefore recorded to t he retum inwards account in the general ledger while the individual's entries are reflected (credited) also in t heir respective debtors account for double ent yy to be completed. It takes the following format Sales retum journal [Date |___ Partioulars/detals Credit noteno | Ledger foro For example; Record the following transaction for the 2007 in their relevant diaries, hence post them to their respective le dger accounts; May 1: goods that had been sold to M Okondo of shs 2600 on credit was retumed to the business £ 2:G. Otuya returned good worth shs 1320 that was sold to himon credit to the business 8: the following returned goods that had been sent to them on credit to the business H Wati shs 3500, Muya shs 4700 M Okondo shs 2900 Mburugu Ken -l L {12:6 Otuya retumed goods worth shs $400 that were sold on credit to the business 30: Goods worth sh 8900 that had been sold on credit to G Otuya were returned to the business Sales Return joumal Date Particulars/detais Creditnoteno | Ledger folo amount May 2007: 1 M Okondo st 2600 2 6 Otuya SL 1320 8 H Wati SL 3500 8 Muya SL 4700 8 M Okondo SL 2900 2 G Otuya st 5400 30 G Otuya SL 8900 Totals posted to Return Inwar dsa/c(Or) ou 29320 (Post the entries to the individual ledger a/c!’ (Cr)) Purchases Joumal ‘This is used to record the credit purchase of goods. The totals are then debited in the purchases account in the general ledger, while the individual!s creditors accounts are credited. It used the invoices received /incom. ing invoices as tt source documnent. It takes the following format; Purchases journal Date Particulars/detals Invoiceno Ledger folio ‘amount For example The following information relates to Mikwa Traders for the month of April 2017. Record themin their relevan 1 days book, hence post the entries to their relevant ledger accounts. ‘April2011; £2. Bought goods worth shs 25 000 on credit from Juma, Invoice no 3502 3. Bought goods worth shs 16 500 fromkamau on credit, invoice no 2607 6. Bought goods worth shs 12 700 from Jura on credit, invoice no 3509 8. Purchased goods of shs 25 200 from juma, invoice no 3605; shs 17 500 from Kamau, invoice no 3700; shs 45 000 from Wamae wholesalers, invoice no 3750 15. Purchased goods of shs 9 200 from Wamae wholesalers on credit, invoice no 3762 18. Bought goods of shs 17 000 fromKamau on credit, invoice no 3802 24, Purchased goods of shs 36 000 from Juma suppliers on credit, Invoice no 3812 Purchases Day book 3 Mburugu Ken Particulars/ details Juma Kamau Juma Juma Kamau Wamae Wamae Kamau Juma Tnvoiceno 3502 2607 3509 3605 3700 3750 3762 3802 3812 Ledger folio PL PL PL PL PL PL PL PL PL, ‘amount 25000 16 500 12700 25 200 17500 45000 9200 17000 36 000,Totals posted to the Purchase account (Dr) GL 204100 (Post the individual entries to their relevant accounts in the ledger (crediting)) * Purchases Retum Joumals/Retum outwards Journals This is used to record goods that have been returned to the creditors by the business, reducing the value of t he goods that had been purchased. It uses the credit note received as the source documents, with thetotals being in the purchases return account while the individual creditor's accounts are debited in their respective ledger accounts. t takes the following format Purchases return joumal {Date Particulars/det als Credit noteno [Ledger folio amount For example; Record the following transaction in the purchases return day book for Njrus traders for the month of June 2010, hence post the information into their relevant ledger accounts, June 2010; 3. Returned goods worth shs 400 that had been bought from Nairobisstores, credit note no 56 8. Return goods of shs 1.200 to Matayos store, Credit no 148 "19, Had some of their purchases returned to the folowing; Noka enterprises shs 700, credit note n © 205, Nairobi Stores shs 600, credit note no $8, Matayos store shs 1 000 credit note no 197 26, Returned goods worth shs 1 8 00 to Njoka enterprise credit noteno 210 30, Return goods worth shs 1 020 to Matayos store, credit note no 200 * Cash receipt Diaries ‘This is used to record all the cash and cheques that have been received in the business. They may be many t hat posting ditectly in the cash book may be tedious and are therefore first recorded here. It totals are poste dito the cash and bank accounts in the general ledger (Dr), while the individual accounts are credited in their respective accounts in the ledger. It uses the cash receipt issued and bank slips received as the source docu ments. It takes the following format; Cash receipt joumal [Date 7 Particulars/details Receipt no Ledger folio [Disc allowed cash bank * Cash payment Journals This is used to record cash and cheques that have been issued to the creditors/out of the business. its total are credited (Cr) in the cash and bank account and the individual accounts are debited (Dr) in ther respect ive accounts it uses the ca sh receipt recelved and bank slips issued as the source documents. It takes the fo lowing format; Cash Payment journal [Date T_Particulars/details | Receiptno | Ledger folio | Discreceived | cash bank. For example: Record the following transactions into their relevant day books of Onyango traders, hence post the entries t o their respective ledger accounts and balance them off May 2071 4 Mburugu Ken 4 —#1, Cash sales amounting to ksh 3 000, receipt no 0112. 2. Paid the following creditors by cheque after having deducted a cash discount of 10% in each ca se: H. Mwangi ksh 1.500, J. Mwaniki ksh 1 600, N. Mugo ksh 1 200 3. Receive the following Chaques from debtorsin settlement of their debts after having deducted 5% cash discount in each case; Lucy kshs 22 800 cheque no 0115, Otieno kshs 8 550 chequeno 0011, Martha ksh 1.330 cheque no 0016 '5, Paid for repairs in cash kshs 16 000, receipt no 0251 ‘10. Paid Juma in cash kshs 9 500, receipt no 0295, "14, Cash sales kshs 17 000, receipt no 02714 115, Banked kshs 6 000 from the cash till "15, Received cash fromMary of kshs 13 500, receipt no 0258 "16. Cash sales of kshs 26 400 was directly banked, bank sip no 40152 20. Cash purchases of kshs 8 920, receipt no 117 22. Cash purchases of kshs 15 200 was paid for by a cheque, chequeno 512 Cash receiptjoumal L Date Particulars/detalls | Documentno | Ledgerfoli [ Discallow] cash | bank ° ed May 2077 1 Sales oz cL 3000 3 Lucy 011s su 1200 22800 3 Otieno 0011 su. 450 8.550 3 Martha 0016 st 700 1330 14 | Sales o274a GL 17.000 15 | Cash bc 6 000 15 | Mary 0258 st 13.500 16 — | Sales 40152 GL 26400 Totalsto be posted to t he cash and bank a/c (OA, 2350 _| 33500 | 65080 (Post the totals and the entries to their respective accounts) Cash Payment journal Date fars/detalls | Document no | Ledger foli | DiscRecei ] cash | bank ° wed May 2071 2 H. Mwangi PL 166.70 1500 2 J. Mwaniki PL 17.70 1600 2 N. Mugo PL 133.30 1.200 5 Repairs 0251 GL 16000 10 | Juma 0295 PL 9 500 15 | Bank c 6 000 20 | Purchases 7 GL 8.920 22 | Purchases 512 GL 15200 Totals to beposted tot he cash and bank a/c (@) 477.30 _| 40420 | 19500 Mburugu Kena L (Post the totals and the entries to their respective accounts) * The petty Cash book ‘This is used to record money that has been set aside to make payments that does not require large amount s,such as cleaning, staff tea, posting letters, etc. itis always kept by the petty cashier, under the supervision of the main cashier. The amount received by the petty cashier is always debited, while the payments made fr omthe sameis credited. The credit side also contains the analytical colurmns for various items of expenditur e. The amount credited is also extended to the analysis colurm for the specific item. At the end of the stated petiod, the petty cash book is balanced, and the totals are posted to their individual accounts. The individual 's accounts are debited with the totals of the analytical colurms, while the cash account is credited by the main cashier for the total that was spent in the petty cash book. Petty cash book can also be operated on an imprest system, where the petty cashier receives a given amou nt of money at an intervals (imprest) to spend, and report back to the main cashier at the end of the period on how the money has been spent and the balance still remaining for restocking (reimbursed), and only the amount spent can be reimbursed so that at the beginning of the period the petty cashier willa ways haveth full amount (cash float) For example: ‘A petty cashier of sina chuki traders operate a petty ca sh bock on an imprest of kshs 2 500 on a monthly b asis. On 1st February 2070, shehad cash in hand of shs 150 and was reimbursed the difference by the main cashier to restore her cash float. The following payments were made during the month of February 2010 Feb; 1. Travelling expenses kshs110 2. Correcting fluid kshs 200 3. Sugar for staff tea ksh 180 4, Stamps kshs 255, 10. Telephonekshs 255 15, Entertainment kshs 130 18, Postage stamps kshs 100 20. Bread for staff tea kshs 148 25. Farekshs 200 26. Duplicating ink kshs 250 27. Entertainment kshs 400 28, Telephone kshs 100 28. Atieno a creditor was paid ksh 150 Required; Prepare a petty cash book from the above information and post the totals to the relevant ledger ace ounts, Sina Chuki Traders Petty Cash Book For month of Feb. 2010 Recei| LF | Date | Details Vou ] Tot] Trav | Offic | Stat postag | Telephy Ent. | Ledger pt sh hno Jals|elex/eep|ftele one ale h_|p a 2010 150 Feb | Bal b/d 2350 |c .| 1 | Reimburseme B | 1 {ot 10 | 110 1 | Travelling exp 200 200 2 | Correcting fui 180 180 3_|d 255 255 6 Mburugu Ken4 | Sugar 255 255 10 | stamps 130 130 15. | Telephone 100 100 18 | Entertainmen 148 148 20 |t 200 | 200 25 | Stamps 250 250 26 | Bread 400 400 27 | Fare 100 100 28. | Duplicating in 150 150 28 |k 247| 310 |450 |s28) 355/355 | 530 | 150 Entertainmen 8 2500 t 2 2 Telephone 250 Atieno 0 Totals Bal oid Bal b/d The totals in the analytical columns are Debited in the individual accounts, with the petty cash book totals being credited in the cash account. * The general Journal/Journal proper This one is used to record purchases or sales of fixed assets of the business on credit. These assets do not f orm part of the stock since the business does not deal in them, however the business may decideto buy or sellthem for one reason or the other In this journal, the account to be debited begins at the margin, whiethe account to be credited is indented fr omthe margin, with a narration below them putin brackets. The narration simply explains the nature of the transaction that has taken place. The individual entries are then posted to their respective accounts by eithe 1 debiting or crediting depending on the transactions, it takes the following format; General journal Date Particulars/details Ledger folio. Drshs Crshs For example; Journalise then following transactions which took place in the business of J Opuche during the month of M arch 2005 March 5; Purchased office furniture on credit for shs 25 000 from miugiza Fumiture Limited 110; Sold old duplicating machine for shs 15 000 to samba acaderry on credit 115; Bought a new motor vehicle for shs 800 000 from explo motors Ltd, paying shs 300 000 in cash and balance was to be settled at a later date 18; Sold old vehicle to Mara Secondary school for shs 500 000 on credit 25;The owner converted personal electronic calculator valued at shs 9 000 into business asset 27; Sold cld computers valued at shs 20 000 for shs 15 000 on credit to Mara secondary school 30; Sold old dining chairs worth shs 10.000 to Maendeleo for shs 15 000 on credit General journal Date Particulars/details, Ledger fol Dr shs Crshs io Mburugu Ken |March 2005 5 Office Furniture a/c 25000 Miugiza a/c 25000 (Being a credit purchase of office furniture 10 | fromMiugiza) Samba Accademy a/c 15000 Duplicating Machinea/e 15000 (Being credit sales of duplicating machine ‘to Samba academy) 15 | Motor vehicle a/c Cash a/c 800000 Explo Motors a/c 300000 (Being purchase of motor vehicle from exp 500 000 Jo, motors, paying part in cash and part 0 18 | ncredit) Mara Sec sch ae 500000 Motor vehiclea/e 500000 (being the credit sale of old motor vehicle t 25 | omara sec sch) Calculators a/c 9000 Capital a/c 9000 (being conversion of private calculator to 27 | business asset) Mara Sec. Sch. a/c 15000 Loss on disposal a/c 5000 Computer a/c 20000 (being credit sale of old computers to Mar 30 | aschoolat a loss of 5 000) Maendeleo a/c 15000 Furniture a/e 10000 Gain on disposala/c 5.000 (being the credit sale of dining chairs to m aendeleo ata gain of 5 000) 71.384 000 1.384.000 ‘The entries are then transferred to their respective accounts in the ledger, with the ones debited in the journ als being debited and the ones credited being credited ‘The Journal proper can also be used to show the opening entries and the closing entries. That is; * pening entries ‘The opening entries are the entries of the assets and liabilities at the beginning of the trading periods to facil itate the opening of different accounts for ther. They are the balance b/d for the assets and liabilities of the business. The assets to be debited are recorded first, followed by the liabilities and capital to be credited. Incase the ca pital is not given, it can be calculated using the book keeping equation, that is A= C +L. the narration then f ollows the entries. ‘The opening entries are necessary when; *" Abusiness that did not keep complete accounting records would iketo start keeping * Opening up new sets of accounting books, after closing the old ones 8 Mburugu Kenl L * Starting accounting records for a business which has been bought, though was in full operation For example; ‘The following balances were extracted from Martine’s store that did not keep complete records, and ‘would like to start keeping on 1" January 2011. Prepare for them their relevant subsidiary book to s how the balances, Shs Motor vehicles 230 000 Machinery 40 000 Creditors 10 000 Debtors 5000 Cash inhand 20 000 Stock 10 000 Insurance prepaid Bank 25 000 Premises 335 000 Capital 660000 5.000 Martinels Store General journal On 1stJanuary 2011 Date Particulars/details Ledger folio Drshs Crshs 2011 Janua | Premises 335 000 ty1— | Motorvehicle 230 000 Machinery 40.000 Debtors 5.000 Cash 20000 Insurance prepaid 5.000 Bank 25000 Stock 10000 Capital 660 000 Creditors 10000 (being the records of assets, abil ‘tyand capital at the beginning of new period) 670.000 670 000 9 * Closing entries ‘Atthe end of the trading period the business asses how it carried out its trade and the amount of profit i ‘tmade by preparing the Trading profit and loss account and the balance sheet to show its financial posi tion. These are prepared by the information obtained fromthe ledgers. That is, allthe nominal accounts (sale, purchase, expenses and revenue accounts), both opening and closing stocks are transferred to th trading profit and loss account through the trial balance and general journals, while the rest are taken to the balance sheet, Uses of general journal * To record purchases of fixed assets on credit * Torecord sales of fixed assets on credit Mburugu KenTo correct errors by checking the balances To record the opening and closing entries Towrite off bad debts To record the inter ledger transfers In thetable below, indicate the books of original entry that the information obtained fromthe given source d ocuments are used to prep are To issues shares and debentures in companies ‘To make end of the year adjustments for the final accounts Source Document Books of Original entry Sales Invoice/invoice issued/ Invoice retained/invoice ¢ opy Purchases Invoice/invoioe recelved/Original nvowe Sales jpumals Purchases journals Credit note issued/Credit note retained/Credit note cop y Return inwards/Sales return joumals| Credit note received credit nate original Return outwards/purchases retum jou mals Original receipt /Receipt received Cash payment/ Analysis cash Book Ca sh book Receipt copy/Retained receipt Petty cash voucher Uses of Journals * To relive ledger of many details Cash receipt journal/Analysis cash boo kycash book Petty cash book * To record more details about the transaction that are not found in the ledger * To facilitate tracing of errors * To facilitate the preparation of control accounts * To curb frauds and promote efficiency, since they are prepared by different people fromthe ones ha idling ledgers Assignment: (Gxercise 78 pages 50 and 51, NosT6 and 18 in Inventor book 4, KLB Students book) 10 Mburugu KenFINANCIAL STATEMENTS ‘These are prepared at the end of a given trading period to determine the profit and losses of the business, a ind also to show the financial position of the business at a given time. ‘They includes; trading account, profit and loss account, trading profit and loss account and the balance she et. They are also referred to as the final statements, ‘The trading period is the duration through which the tra ding activities are carried out in the business before + decides to determines it performances in terms of profit or loss. It may be oneweek, month, six months or even a year depending on what the owner wants. Most of the business use one year as their trading period. Itis also referred to as the accounting period ‘At the end of the accounting period, the following takes place; * Al'the accounts are balanced off * Atrial balance is extracted * Profit orlossis determined * The balance sheet is prepared Determining the profit or loss of a business When a business sells its stock above the buying price/cost of acquiring the stock, it makes a profit, while f 1 sells below it makes a loss, The profit realized when the business sellit stock beyond the cost is what is ref erred to as the gross profit, while ifit isa loss then it is referred to as a gross loss, It is referred to as the gross profit /loss because it has not been used to cater for the expenses that may ha vebeen incurred in selling that stock, such as the salary of the salesman, rent for the premises, water bills, e to. it therefore implies that the businessman cannot take the whole gross profit for its personaluse but mus t first deduct the total cost of all other expenses that may have been incurred. ‘The profit realized after the cost of all the expenses incurred has been deducted is what becornes the real pr ofit for the owner of the business, and is referred to as Net profit. The net profit can be determined through calculation or preparation of profit and loss account. Incaleulating the ofoss prof, the folowing adustments are putin place Return inwards/ Sales return: -these are goods that had been sold to the customers, but they haveretur ned themto the business for one reason or the other. It therefore reduces the value of sales, and is there fore subtracted from sales to obtain thenet sales Therefore Net sales = Sales || Return inwards * Return outwards/purchases return: - these are goods that had been bought from the suppliers to the bu siness and have been returned to them for one reason or the other. It reduces the purchases and is ther efore subtracted from the purchases to obtain the net purchases. * Drawings: - this refers to goods that the owner of the business has taken from the business for his own use. It reduces the value of purchases, andis therefore subtracted from purchases when determining th enet purchases. It is different from the other drawing in that itis purely geods and not money * Carriage inwards/Carriage on purchases: this is the cost incurred by the suppliers in transporting the g ods from: his premises to the customers business. its treated as part of the purchases, and therefore creases the value of purchases. it is added to purchases to determine the actual value of purchases/N et purchases, ” Mburugu Ken -a L Therefore Net Purchases = Purchases + Carriage inwards i Retum Out wards - Drawings * Carriage outwards/Carriage on sales:- this is the cost that the business has incurred in transporting go ods from its prerrises to the customers premises. The cost reduces the business profit that would have been realized as a result of the sale, and is therefore treated as an expense and is subtracted from the g ross profit, before determining the net profit. * Opening stock is the stock of goods at the beginning of the trading period, while the closing stock is the stock of the goods at the end of the trading period Gross profit is therefore calculated as follows; Gross Profit = Sales i Return inwards |i (Opening stock + Purchases + carriage inwards ‘i Return outwards ii Closing stock) or Gross profit = Net sales ‘i Cost of Goads Sofd (COGS) COGS = Opening Stock + Net Purchases i! Closing stock Net Profit = Gross proft \i Total expenses Trading Account This is prepared by the business to determine the gross profit/loss during that tra ding period It takes the following format; Name of the business Trading Account Dr For the period (date) cr Shs Shs Shs Shs Opening stock x20 Sales 0000 add Purchases 100K Less Return inwards xx add Carriage inwards xxx Net sales 10000 less Return Outwards xxx less Drawings x xx Goods available for sale 190K, Less Closing Stock 2K Cost Of Goods Sold (COGS) WoeKKRK Gross profit o/d 0KK x00 00K. Gross profit b/d X20 ‘Thetrading account is completed by the time the gross profit b/d is determined For example ‘The following balances were obtained fromthe books of Ramera Trader's for the year ending may 31% 2010 Sales 670000 Purchases 380 000 Return inwards 40000 Carriage outwards 18000 Return outwards 20000 Carriage inwards 10000 ‘Additional information; 12 Mburugu Ken* During the year the owner took goods worth sh 5 000 for his family use * The stock as at 15tJune 2009 was shs 60 000, while the stock as at 31% May 2011 was shs 70 000. Required; Prepare Ramera Traders trading account for the period ending 31" May 2010 Ramera Traders Trading Account Or For the period ending 31/5/2010 or Shs Shs Shs Shs Opening stock 60 000 Sales 670000 add Purchases 380.000 Less Return inwards 40 000 add Carriageinwards 10 000 Net sales 630 000 less Return Outwards 20 000 less Drawings 5000 365000 Goods avaliable for sale 425000 Less Closing Stock 70.000 Cost Of Goods Sold (COGS) 385,000 Gross profit o/d 275,000 630,000 630000 Gross profit b/d 275000 NB:Carrlage outwards is not an temof Trading account, but profit and loss account as an expense Importance of Trading account * {tis used to determine the gross profit/loss for a given tra ding period for appropriate decision making b y the management. * {tis used in determining the cost of goods that was sold during that particular accounting period. * {tis used to reveal the volume of turnover ienet sales * May beused to compare the performance of the business in the current accounting period and the previ ous periods. It can also compareits performance with other similar businesses * ft faciitates the preparation of profit and loss account, since the gross profit is carried forward to the pr ofit and loss account. Profit and Loss account In preparation of this account, the gross profit is brought down on the credit sides, with all other revenues, come of the business being credited and the expenses together with thenet profit being debited. Net profit = Total Revenues (including Gross Profit) Total expenses Name of the business Profit and Loss Account Dr For the period (date) cr Shs Shs Expenses Gross profit b/d 900K Insurance xx Discount received ea Electricity 00K Rent income 00K Water bills 0x Commission received 0% Cartiage Outwards 0x ‘Any other income received xx General expenses 100 Provision for Depreciation 100K Discount allowed 10K Comission allowed 1008 Rent paid 90 ‘Any other expense 20K Net profit c/d 2000 290010 .0000K 13 Mburugu Ken[ Net profit b/d X00 ‘The Profit and Loss Account is complete when net profit b/d is obtained. In the trial balance, the revenues/i ncomes are always credited, while the expenses are debited, and the same treatment is found in the Profit a nd Loss Account. (Any item that is taken to the Profit and Loss Account with a balance appearing in the De bit (Dr) side of a trial balance is treated as an expense, while those appearing in the Credit (Cr) side are reve nue... discount balance appearing in the Dr Sideis Discount Allowed, while the oneon Cr sideis Discount Received) Forexample The following information relates to Akinyi’s Traders for the period ending March 28% 2010. Use it to prepar e profit and loss account. Gross profit 100 000 Discount receved 12.000 Salaries and wages 20000 Power and lighting 10000 Opening stock 150 000 Rent income 10000 Commission alowed 15000 Commission received 16 000 Repairs 10000 Discount allowed 8.000 Provision for depreciation 6000 Carriageoutwards 4000 Akinyi Traders Profit and Loss Account Dr For the period ending 28» March 2010 cr ‘Shs Shs Expenses Gross profit b/d 100 000 Power and lighting 70 000 Discount received 12000 Carriage Outward s 4000 Rent income 10000 Salaries and wages 20000 Commission received 16000 Provision fer Depreciation 6 000 Discount allowed 8000 Commission allowed 15000 Repairs 10000 Net profit o/d 65000 138000 138 000 Net profit b/d 65.000 Incase the expenses are more than the income, then the business shall have made a net loss, and the loss w ill be credited Net profit/loss can aso be found through calculation as follows; Net profit/loss = Gross profit + Total other revenues ! Total expenses For the above example; Tota other revenue: 2.000 + 10.000 + 16000 = 38000 Total expenses = 10 000 + 4000 +20 000 +6 000+ 8 000+ 15000+10000 = 73000 Therefore; Net profit = Gross profit + Total other revenues Total expenses (00 000 + 38 000 73.000 65000 Importance of Profit and Loss account * it shows the revenue eared, and all the expenses incurred during the accounting period 14 Mburugu Ken* ftused to determine thenet profit/net loss of a given trading period * {tis a requirement by the government for the purpose of taxation * May beused by the employees to gauge the strength of the business, in terms of its ability to pay them well L * tis vital for the prospective investor in the business, in terms of determining the viability of the business * The creditors or loaners may useit to asses the business abilty to pay back their debts * {tis used by the management to make a decision on the future of their business, Trading, Profit and Loss Account This is the combination of trading account and trading profit and loss account to forma single document. It ends when thenet profit/loss brought down has been determined. That is, Name of the business Trading, Profit and Loss Account Dr For the period (date) cr Shs Shs Shs Shs Opening stock 90000 Sales 000K add Purchases 90K Less Retum inwards xxx add Carriageinwards xxx Net sales 01008 less Return Outwards xxx less Drawings % KKK Goods avaliable for sale 290000 Less Closing Stock 100% Cost Of Goods Sold (COGS) »00xxx Gross profit e/d 90K Xrov0K 79000 Gross profit b/d KX Expenses Insurance 00x Discount received 10K Electricity 00 Rent income 0K Water bills 1x Commission received xx Cartiage Outward s 10K ‘Any other income received 10K General expenses 0K Provision for Depreciation 000K Discount allowed 10x Commission allowed 000% Rent paid 000% ‘Any other expense 1008 Net profit o/d 200K 20000K 00K Net profit b/d 20K End Year Adjustments ‘The following iterns may require to be adjusted at the end of the trading period * Revenues/ income 15 fee Ken _a L * Expenses * Fixed assets ‘Adjustment on revenues ‘The revenue may have been paid in advance in part or whole (prepaid revenue) or may be paid later after th e trading period (accrued revenue). Prepaid revenue is subtracted fromthe revenue/income to be received and the difference is what is treated i nthe profit and loss account or trading profit and loss account as an income, while the accrued revenueis a ded to the revenue/income to be received and the sum is what is treated in the above accounts as the actu alrevenue. Only the prepaid amount and the accrued amounts are what are then taken to the balance sheet. Adjustment on the expenses ‘The expenses may have been paid for in advance in part or whole (prepaid expenses) or may be paid for late rafter the trading period (accrued expenses). Prepaid expenses is subtracted from the expenses to be paid for and the difference is what s treated in the profit and loss account or trading profit and loss account asain expense, while the accrued expenses is add ed to the expenses to be paid for and the sum is what is treated in the above accounts as the actual expens es. NB: Only the prepaid amount and the accrued amounts are what are then taken to the balance sheet. Adjustment on fixed assets ‘The fixed assets may decrease in value, due to tear and wear. This makes the value to go down over time, w hat is referred to as depreciation. The amount of depreciation is always estimated as a percentage of cost. ‘The amount that shall have depreciated is treated in the profit and loss account or T,P&L as an expense, whi lethe value of the asset is recorded in the balance sheet, less depreciation. Forexample; * 1997 The following Trial balance was prepared fromthe books of Paka Traders as at 31:' December 199 5. Trial balance December 3151995 Dr. (shs) Cr. (shs) Sales 980,000 Purchases 600,000 Returns 80,000 20000 Carriagein 40,000 Carriageout 3,000 Stock (Jan 151999) 120,000 Rent 60,000 45000 Discount 15,000 25000 Motor vehicle 150000 Machinery 250.000 Debtors 120,000 Salaries 18,000 Commission 7,000 12000 Capital 178,000 Insurance 15000 Creditors 240,000 Cash 122 000 1540 000 1 540000 16 Mburugu Kena L Additional information * Stock as at 315 December was 100,000 * the provision for depreciation was 10% on the cost of Motor vehicle, and 5% on the cost of Machinery Required: Prepare trading profit and loss account for the period ending 31: December 1999 Adjustments: Provision for depreciation; Machinery = = 7 500 (New balance of machinery = 250 000 7 500 = 242 500, The 242 500 is taken to the balance as Machinery (fixed asset), while 7 500 is taken to the trading profit and loss account as expenses) Motor vehicle = = 15 000 (New balance of Motor Vehicle = 150 000! 15 000 = 135000, The 135 000 is taken to the balance as Motor Vehicle (fixed asset), while 1 000 is taken to the trading profit and loss account as expenses) Paka Traders ‘Trading, Profit and Loss Account Dr__For theperiod 31/12/1995 cr Shs Shs ‘Shs Shs Opening stock 120000 | Sales 980 000 add Purchases 600 000 Less Return inwards 80 000 add Carriageinwards 40 000 Net sales 900 000 less Return Outwards 20000 620000 Goods available for sale 740.00 Less Closing Stock 100 000 Cost Of Goods Sold(COGS) 640 000 Gross profit o/d 260 000 900 000 900 000 Expenses Gross profit b/d 260 000 Insurance 715000 Discount received 25000 Carriage Outward s 30000 Rent income 45000 Salaries 18.000 Commission received 12.000 Provision for Depreciation Motor vehicle 15000 Machinery 7500 22500 Discount allowed 15000 Commission allowed 7000 Rent paid 60 000 Net profit o/d 174 500 342 000 342 000 Net profit b/d 174 500 ‘The net profit/loss may be taken to the balance sheet. The items that have been adjusted will be recorded in the balance sheet less the adjustment. The Balance Sheet The balance sheet will show the business financial position in relation to assets, capital and liabilities. The a djustment that can be made will be on Fixed assets and capital only. That is; Fixed assets are recorded less their depreciation value (should there be provision for depreciation) asthe act 17 Mburugu Ken |a L ualvalue. Actual value of assets = Old value si depreciation Capital is adjusted with the following; Net capital, Drawings and additional investment. i.e. Closing Capital/Net capital (C.C) = Opening/initial capital (0.C) + Additional Investment (1) + Net profit (NP) or (less Net Loss) s Drawings C= OC +/+ NPD Where: Opening Capital:- the capital at the beginning of the trading period Closing capital: -the capital as at the end of the trading period ‘Additional Investment: - any amount or asset that the owner acids to the business during the tra ding period Net profit:-the profit obtained from the trading activities during the petiod. Incase of a loss, it is subtracted. ‘Types of Capital ‘The capital inthe business can be lassiied as follows Capital Owned/Ownert’s Equity/Capital invested; - this is the capital that the owner of the business has contributed to the business. itis the Net capital/Closing capital of the business (C = AL) * Borrowed capital:- the resources brought into the business fromthe outside sources. They arethe long ‘ermiiabilties of the busin ess. * Working capital: - these are resources in the business that can be used to meet the immediate obligation of the business. It is the difference between the total current assets and total current liabilities Working Capital = Total Current Assets |! Total Current Liabilities * Capital employed: - these are the resources that has been put in the business for a long term ie Capital Employed = Total Fixed assets + Working Capital or Capital employed = Capital invested + Long term liabiities Name of the business Balance Sheet As at (date) Shs shs Shs chs Fired Assets Land 0000 Capital 900Kx Buildings 00K ‘Add Net profit 000% Mot or Vehicle aK ‘Add additional investt xxx Any other fixed assets ¥900x wo HKK Less drawings 00K Current Assets Net Capital yoo Stock 2008x Long term liabilities Debtors 103K Longtermloan 000 Bank 008K Any other 9K 2000 Cash 000K Current liabilities Prepaid Expenses xxx Creditors 00 Accrued revenues wane Shorttermloan x0 Any other current assets xxx xXxxKx ‘Accrued expenses xox Prepaidrevenues xx Any other KK _ 000K 18 Mburugu Ken100K HO Example 00A: The following information were extracted from the trial balance of Mwema traders on 31" De cember 2010 Sales 750 000 Furniture 288 000 Purchases 540 000 Electricity expenses 16000 Sales return 24000 Motor vehicle 720.000 Return outwards 30000 Rent expenses 2500 General expenses 72.000 Capital 842 500 Commission received 24.000 Bank Loan 250000 Cash 156 000 Creditors 216000 Debtors 244 000 ‘Additional Information * Stock as at 31/12/2010 was ksh 72.000 * Electricity prepaid was shs 4.000 * Rent expenses accrued shs 3500 * Depreciation was provided foras follows Motor Vehicle 15% p.a. on cost Fumiture 6% p.a. on cost Required * "Prepare Trading, profit and loss account for the year * Prepare balance sheet as at 31st December 2012 * Determine the followin g Owners equity Borrowed capital -Working capital -Capital employed Adjustment Motor Vehicle = = 108 000 Therefore Motor vehicle = 612 000 Fumiture = = 17280 ‘Therefore furniture = 270 720 Mwema Traders ‘Trading, Profit and Loss Account Dr For the period 31/12/2010 cr Shs Shs Shs Shs Purchases 540.000 Sales 750 000 less Return Outwards 30000 510000 Less Retum inwards 24000 Goods available for sale 510000 Net sales 726 000 Less Closing Stock 72.000 Cost Of Goods Sold (COGS) 438.000 Gross profit o/d 288 000 726 000 726 000 Expenses Gross profit b/d 288000 General expenses 72,000 Commission received 24000 Electricity expenses 16 000 Less Electricity prepaid 4000 12000 Rent expenses 2.500 Accrued rentexp 3500 6 000 Provision for Depreciation Motor vehicle 108 000 Furniture 17280 125280 Net profit cfd 96 720, 19 Mburugu Ken312 000 312.000 Net profit b/d 96720 Mwema Traders Balance Sheet Asat 31/12/2010 Shs shs Shs chs Fixed Assets Capital 842 500 Motor Vehicle 612000 ‘Add Net profit 96 720 Furniture 270720 882720 Net Capital 939 220, (Current Assets Long term liabilities Stock 72000 Bank Loan 250 000 Debtors 244.000 Electricity prepaid 4000 Current liabilties Bank 50000 Creditors 216000 Cash 156000 526 000 Accrued rent 3500219500 1.408 720 1.408720 Basic Financial Ratios Axratiois an expression of one itemin relation to the other. It is used to compare the groups of related items in the business, for the purpose of assessing the performance of the business. They include: * Mark-up. ‘This is the comparison of gross profit as.a percentage of cost of goods sold. i.e Mark-up = 100 For example: in (exarnple GOA) above, determine the mark-up of the business. Markup Gross profit = 288 000 COGS = 438 000 Markup = 100 = 65.75% (This implies that the Gross profit of the business is 65.75% of its cost of goods sold) * Margin ‘This is the expression of the gross profit as a percentage of net sales. That is: Margin = 100 For example: in (example GOA) above, determine the margin of the business = 288 000 Net sales = 726 000 100 = 39.67% (This implies that the gross profit of the business is 39.67% of the net sales) 20 Mburugu Ken |l Relationship between margin and mark-up Since margin and mark-up are all the expression of Gross profi, itis possible to change oneto the other. * Changing mark-up to margin Mark-up can be changed to rrargin as follows: * Convert the mark-up percentage as a fraction in its simplest form. * Add the value of the numerator of the fraction to the denominator to come up with the new fraction (ma rgin fraction) that is If the mark-up fraction = Mar gin fraction = * Convert the margin fraction asa percentage to obtain margin For example: in the above example, Mak (up = 65.75% Ma gin fraction = * Changing margin to mark-up * Convert the margin percentage as a fra ction in ts simplest form * Subtract the value of the numerator of the fraction fromthe denominator to come up with the new fr action (markup fraction) that is If the margin fraction = Markup fraction = * Convert the mark-up fraction as a percentage to obtain mark-up For example: in the above example, Margin = 39.67% Markup fraction x 100 = 65.75% * Current ratio/working capital ratio This is the ratio of the current assets to current liabilities. It can also be expressed asa percentage. That is: Current ratio = = current assets: current liabilities or Current ratio = x 100 For examples: in (example OOA) above, det ermine the current ratio; Current assets = 526 000 Current liabilities = 219 500 Current ratio = a Mburugu Ken |= = 1052:439 or = x10 239.64% * Rate of stocktumover This is the rate at which the stock is bought or sold within a given period of time. It is obtained by; Rate of stock turnover (ROST) = ‘Average stock = In (example OOA) above, determine the rate of stock turnover; ‘The cost of goods sold = 438 000 ‘The closing stock = 72.000 ‘The opening stoc! ‘Therefore ‘The average stock = Rate of stock turnover (ROST) = = 12.17 Times * Retum on capital ‘This is the expression of net profit asa percentage of the capital invested. That is; Return on capital = x 100 It can be given as a ratio or a percentage. For example: in (example OOA) above, determine the return on capitalof the business Net Profit = 96 720 Capital invested/owner!’s equity = 939 220 Return on capital = x 100 = x100 = 10.33% * Acid test ratio/quick ratio This shows how fast the business can convert its current assets excluding stock to settle its current liabilitie 8. That is, Quick ratio = It isgiven in ratio form. For example: in above (example OA), determine the quick ratio; Current assets = 526 000 Stock = 72 000 Current liabilities = 219 500 Quick ratio = = 2.07 (or 207: 100) Importance of Financial Ratios Markup and margin helps in the following; setting the selling price, calculating profit or losses and d etermining the sales for a given period of time Mburugu Ken |* Working capital and acid test ratio help in showing whether the business is in a position to meet its s hort termobligations and checking whether the business is utlizing its resources properly. That is hi gh working capital ratio shows that most of the resources are idle * Return on capital shows the following * The performance of the business in relation to other similar businesses * Comparison of the performance of the business over different periods * Whether the business fin ances have been invested or not * Help the potential investors on the decision on where to invest * Rate of stock turnover also help in determining how fast or slow the stock is moving, It also helps in computing the gross profit or loss. MONEY AND BANKING Barter trade This isa form of trade where goods and services are exchanged for other goods and services Benefits * Satisfaction of wants: And individual is able to get what he or she needs. * Surplus disposal: an in dividual or county is able to dispose off its surpluses. * Social relations:'it prorrotes social links since the communities trade together. * Specialization: some communities shall specialize in a particular commodity. * Improved living standards:this is enhanced by receiving what one is unable to produce: Limitations of Barter trade * Lack of double coincidence of wants:- itis difficuk to find two people with the need for each other's pr oduct at the same time. * Lack of store of value/ perishability of some commodities: - some goods are perishable thus their value cannot be stored for a long time for fut ure purposes eg. one cannot store vegetables for exchange purp oses in future. * Indivisibility of some commodities:-iis difficult to divide some products like livestock into smaller units to be exchanged with other commodities. Lack of standard measure of value:-It is not easy to determine how much one commodity can be excha nged for a given quantity of another commodity. * Transportation problern: It is difficult to transport buky goods especially when there is no faster means of transport. * Lack of a standard deferred payment:- The exchange of goods cannot be postponed since by the time t he payment is made, there co.uld be fluctuation in value, demand for a commodity may not exist and the Mburugu Ken -_t nature and quality of a good may not be guaranteed. it may be therefore difficult what to decide what to ac cept for future payment. * Lack of specialization: Everyone strives to produce all the goods he or she needs due to the problem of double coincidence of wants. * Lacks unit of account- iis diffcult to assess the value of commodities and keep their record MONEY SYSTEM Money is anything that is generally accepted and used as a mediumoof exchange for goods and services. Features/ characteristics of Money For anything to serve as money, it must have the folowing characteristics: * Acceptability: The itemmust be acceptable to everyone * Durability. The material used to make money must be able to last long without getting torn, defaced or! osing its shape or texture * Divisibility: Money should be easly divisible into smaller units (denorrinations) but still maintains it valu e * Cogniability: The material used to make money should be easily recognized. This helps reduce chances of forgery. It also helps people to differentiate between various denominations, * Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk of confusion and forgeries. Portability: Money should be easy to carry regardless ofits value Stability in value: The value of money should remain fairly stable over a given time period it should be easily convertible to other forms of wealth (assets). -It should be limited in supply. If itis abundantly available its value will reduce. Malleability-the material used to make money should be easy to cast into various shapes. ‘ot easy to forge- money should not be easy to imitate Funetions of Money * Medium of exchange: It is generally acceptable by everyone in exchange of goods and services, Itthus e liminates the need for double coincidence of wants. * Store of value: is used to keep value of assets e.g. surplus goods can be sold and then money kept for future transactions * Measure of value Value of goods and services are expressed in money form, Performance of businesse sis measured in terms of money. * Unit of account: It is a unit by which the value of goods and services are calculated and records kept. * Standard of deferred payment:it is used to settle credit transactions. * Transfer of immovable items (assets): Money is used to transfer assets such as land from one person t O another. DEMAND FOR MONEY This is the tendency or desire by an individual or general public to hold onto money instead of spending it. It also refers to as liquidity preference Money is held by people in various forms: * Notes and coins * Securities and bonds * Demand deposits such bank current account balances. * Timedeposits such as fixed account balances REASONS (MOTIVES) FOR HOLDING MONEY 1. Transaction Motive: Money is held with a motive of meeting daily expenses for both the firms and in 24 Mburugu Ken |a L dividuals. The demand for money for transaction purpose by individuals depends on the fallowing factor s: * Size/level of individual's income: The higher the income of and individual, the more the number of transa ctions thus high dernand for transactions. * Interval between pay days/ receipt of money: if the interval is long, then high amount of money will be h eld for transaction reasons. * Price of commodities: if the prices are high, the value of transactions will also increase thus more money balances required * Individuals spending habit speople who spend a lot of money on luxuries will hold more money than tho se whe only spend money on basics. * Availability of credit-people who have easy access to credit facilities hold little amount of money for daily transactions than those who do not have easy access to credit. ‘The transaction motive can further be divided to; * Income motive i.e. holdin g money to spend on personal/ family needs. * Business motive i.e. holding money to meet business recurring needs such as paying wages, posta ge, raw materials. Etc 2. Precautionary Motive: Mon ey is held in order to be used during emergencies such as sicknesses, The amount of money held for this motive will depend on the factors such as * Level of income- the higher the income the higher the amount of money held for precautionary motive * Family status: high class families tend to hold more money for precautionary motive than low class fa ilies. * Age of the individual- the aged tend to hold more money for precautionary motive than the young since they have more uncertainties than the young. * Number of dependant- the more the dependants one has, the more the money they are likely to hold for precautionary motive * individual's temperament- pessimists tend to hold more money for precautionary motives than the opt imists because they normally think things will go wrong * Duration between incomes: those who earn money after a short time are likely to keep less money than those who eam money after a long time 3. Speculative Motive: Money is held to be used in acquiring those assets whose values are prone to fluctu ations such as shares/ money is held anticipating fallin prices of goods and services. This depends on the f ollowing * The wealth of an individual * Therate of interest on government debt instruments * Interest on money balances held in the bank * How optimistic or pessimistic a per som is. SUPPLY OF MONEY This is the amount of money/ monetary items that arein circulation in the economy at a particular period of time. They include the following, * Total currency ie. the coins and notes issued by the centralbank. * Total demand deposits: money held in current accounts in banks and are therefore withdrawable on de mand Factors influencing supply of money * Government policies: if there is more money in the economy, the government will put in place measures ‘to reduce the supply such as increasing interest rates. * Policies of commercial banks: The more the loans offered by commercial banks, the more the amount o money in circulation. * Increase in national income: increase in national income means that more people wil be liquid due to inc rease in economic activities.] Mburugu Ken |a L * increasein foreign exchange: The foreign exchange reserves will increase thus supply increases, BANKING ‘This is the process by which banks accept deposit from the public for safe keeping and lending out the depo sitsin formof loans A bank isa financial institution that accept s money deposits fromthe public for safe keeping and lending ou + in terms of loans. COMMERCIAL BANKS ‘These are financial institutions that offer banking services with a profit motive. Their activities are regulated by the Central bank Functions of commercial banks * Accepting deposits. They accept deposit from members of the public inform of current accounts, saving account and fixed deposit accounts. Such accounts help individuals to keep money safely. * Provision of safe means of payments: They provide safe and reliable means of payment such as cheque s, bank drafts, credit transfers, electronic funds transfers etc. * Provision of foan facilities: They provide loans to members in form of short term and long term. These | cans are repayable with interests thus income to the banks. * facilitates foreign exchange payments: They provide foreign exchange that is used in international trad . They also make payments on behalf of their customers. Provision of safe keeping of valuables: Th ey provide security for valuables to their customers at a fee Discounting bills of exchange: This is process by which a bank accepts bills of exchange and promissor y notes fromits customers in exchange of cash less than the face value of the bill or note. * Provision of financial information: - They advice their clients on financial matters affecting their busines ses such as investment option and wise use of loans. * Money transfer:- They provide varied, safe and reliable means of money transfer. Such means include ch eques, standing orders, credit transfers, bank drafts, letters of credit, credit cards, travelers cheques etc. * Act as guarantors and referees:- They act as guarantors to their customers who want to acquire credit facilities fromoother financial institutions, Act as intermediaries: - They act as a link between the savers and borrowers. Credit creation:- This s the process of creating money from the customer deposits through lending Provision of trusteeship:- They can manage a business on behalf of the client especially if the client doe snot have managerial skils. They can also manage the asset s of the deceased client if there was no wil l TYPES OF ACCOUNTS OFFERED BY COMMERCIAL BANKS * Current account This is an account where money deposited can be withdrawn on demand by the customer by means of a ch eque, This means that money can be withdrawn at any time during the official working hours so long as the account has sufficient funds. This account is also referred to as demand deposits. Features characteristics of current accounts Deposits of any amount can be made at any time. Balances in this account do not earn any interest. “The account holder is not required to maintain a minimum cash balance in this account Withdrawals can be at any time without giving and advance notice as long as the customer has sufficie nt funds, * Cheque books are issued to the account holder to be used as a means of payment/ cheques are usually used to withdraw money from the account. * Monthly bank statements are issued to the account holder. 26 Mburugu Ken |* Overdraft facilities are offered to the account holders! ie the bank can allew customers to withdraw mo. remoney than they haven their accounts. Advantages of current account * No minimum balance is maintained hence the account holder can access all his/her money. * Withdrawals can be made at any time. * Transactions are made easier by use of cheques for example; one does not have to goto the bank in ord er to make payment. * Overdraft facilties are available. * {tis possible to deposit any amount at any time during the office hours * Use of cheques as means of payment serves as evidence of payments made. * Payments can be done even if there are insufficient funds in the account using post dated cheques. * The account holder can withdraw any amount at any time. without notice as long as there are sufficient funds in the account. Disadvantages of current account * Lengthy procedures of opening the account. * The account holder doesnot earn any income since the balances in the current account does not earn in terest. * Initial deposit when opening the account is usually high hence discourages prospective customers. * Customers arenot encouraged to save since they can acoess their money at any time. * Ledger fees are charged on the account making the operations of the account expensive. + Savings account (deposit account) ‘This is an account operated by individuals and firms that have money to save. Features of Savings account * ‘There is minimum initial deposit that varies from bank to bank. * Aminirum balances maintained at all times. * Thewithdrawals are up to a certain maximumwithin a given period. Withdrawal above this maximum wi require notice * Account holders are issued with a pass book or a debit card (ATM card) for deposits and with drawals, * Overdraft facilities arenot allowed * Ordinarily, withdrawals across the counter can only be done by the account holder. * The balance on the account above a certain minimum earns some interest. Advantages of Savings account * Customers are encouraged to save because of the restricted withdrawals. * There are relatively low banking charges. * Initial deposit is usualy low as compared to other accounts. * The balances eam interest to account holder hence an incentive to save. * ATM facilites havemmade account operations very convenient to customers. Disadvantages Savings account * Aminimum balance must be maintained at all times and the customer is denied access to that money. * For across the counter withdrawals, it is only the account holder who can withdraw cash. * Withdrawals are restricted and sufficient notice is required before large amounts are withdrawn * The account holders do not enjoy services such as cheque books and overdraft facilities like the current account holders * Easy access to themoney through ATM cards encourages overdrawals. * Anybody whe knows the pin of the card (ATM card) can withdraw money fromthe account. Requirements for opening an account The following are some of the requirements for opening either a current account ora savings account: Mburugu Ken |* Photocopies of identification documents such as National Identity Card or Passport. * Passport size photographs (number varies from bank to bank). Some banks are nowadays taking the p hotographs instead of the customers providing them, * For current account holders, an introductory letter from an existing customer fromthe prospective cust omeriis employer. * Elling in the application form provided by the bank. * Signing of the specimen signature cards. Usually two. NB: Once these requirements are fulfilled, the bank allocates the customer an account number, upon payme nt of an initial deposit. + Fixed deposit account This account is also known as time Deposit acco unt. itis rraintained by those who have money not meant for immediate use. Once money is deposited, there aremno withdrawals until the time expires, Advantages of Fixed deposit account * Interest earned is relatively high as compared to savings account. * There are no bank charges to the account holder * Money held in fixed deposit account can be used as security to acquire bank loans, * Restricted withdrawals encourage savings. ‘The account holder has timeto plan for the deposited money. Disadvantages of Fixed deposit account ‘Access to money is not allowed until the end of the agreed period * Interest is forfeited if theres pre-mature withdrawal * The minimum amount of money for this account is high: * The customer is not allowed to deposit more money in this account. * Anotice is required if the customer wants to terminate the contract before expiry date. * The customer is denied the use of the deposited funds before the expiry of the period. REQUIREMENTS TO OPEN AND OPERATE A BANK ACCOUNT Identification documents such as National Identification Card, Pass port and Driving License. Reference letter from employer or and existing customer. Filing an application form giving the information about the customer. Submission of a specimen signatureto be held by the bank ‘An initial deposit is paid and the account becomes operational NON- BANK FINANCIAL INSTITUTIONS ‘These are financial institutions that offer finances for development purposes to individuals and organization s. ‘These institutions address thems elves to the needs of specific sectors in the econony. ‘They offer the finances inform of either short term or long term loans. The following are some of the non-bank financial institutions in Kenya * Development banks * Building societies * Financehouses * Savings and Credit Co-operative Societies * Micro finance organizations 28 Mburugu Ken |a L * Insurance companies * Pension Funds? Organizations * Hire Purchase Firms * Housing Finance Companies ‘They are mainly formed to finance housing activities that is they either put up houses and sell to the individu als or offer mortgage finance to those who wish to put up their own houses. They includes Housing Finance Corporation of Kenya (HFCK), National Housing Corporation (NHC) * Development Finance Institutions ‘These are development banks which are formed mainly to provide medium term and long term finances, esp ecially tothe manufacturing sector. They perform the folowing functions Financing people who wishes to start either commercial of industrial enterprises, as well as the existing enterprises in the above sectors for expansion * Offering training services through seminars and workshops to equip the entrepreneurstwith the relevan t skill in industrial and commercial sectors * Offer advisory services to those people wanting to start or expand their businesses * Acting as guarantors to people wishing to takeloan from other lending institutions to help them expand their business ‘They includes the following Kenya Industrial Estates (KIE), Development Finance Company of Kenya (OF CK), Industrial Development Bank (IDB), Industrial and Commercial Development Corporation (ICDC) * Savings and Credit Co-operative societies ‘These are co-operative societies that are formed to enable members save and obtain loans at most convent ently and favorable conditions. They are formed by those engaged in sirilar activities. They includes: Mwali mu Savings and Credit Co-operative Societies; Afya Savings and Credit societies; Harambee Savings and Cre dit Societies * Insurance companies ‘These are companies that assist in creating confidence and sense of security to their clients as well as offeri ng financial assistance to ther cltents, Thelr functions include Enable the policy holders to save through their schemes, * Providefinances to their policy holders in form of loans * Offer guarantee services to the policy holders wishing to obtain loans from other non-bank financial inst itutions * Provide advisory services to the policy holders on security matters * Provide finances to meet the expenses incases of loans They includes the following: Stallion Insurance Company; Madison insurance company; Blue shield insurance ecompany * Micro Finance Companies ‘These are financial companies formed to provide small scale and medium size enterprises with finance. The y also carry out the following fun tions * Offer advisory services to their clients in matters such as business opportunities available and how to. perate them. * Encourage the clients to carry out business activities by offering loans to them * They encourage the savings by advancing loans to the individ ual member of a certain group * They supervise, monitor and advise those whom they have given loa ns “They includes the following: Kenya Women finance Trust (KWFT), Faulu Kenya * Agricultural Finance Houses ‘These are institutions formed to promote the agricukural sector. They carry out the following 29 Mburugu Ken |