Basic accounting unit4

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Accounting Framework
Posting and Processing Transactions
Year- End Adjustments and Provisions
Preparing Final Accounts
Introduction to Financial Reporting Standards
Published Accounts
MODULE COVERAGE
1
Financial Ratios and Projections
Elements of Taxation

2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Rationale for provisions
By end of every accounting period, there will be certain expenses incurred for
the future period, expenses incurred for the current period but not paid
for, and some non-cash expenses representing a diminution of value
assets. Such require adjustments for the final accounts to be true and fair.
Typical provisions
• Provision for bad & doubtful debts (Loan Loss Provisions)
The decision whether to provide against loans losses and the magnitude of
any provisions made will be based on qualitative and quantitative factors
stipulated in BoU regulations.
Qualitative factors include the repayment performance of the customers, his/
her business performance, on going discussions with the customer, nature
of the security provided by the customer and strength and credit history.
These factors are largely unquantifiable, but affect the quality of the loan.
Quantitative factors are measurable, and include the age of the facility,
‘days past due’, and the date of last credit / debt service.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Example:
• The following provisioning guidelines for W Banking Ltd are based on the
“days past due date”. However in deciding whether or how to provide, and
how much to provide for, the management of W Banking Ltd. is guided by
both qualitative factors referred to above and the ‘days past due’.
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Number of days past
due date
Category Required provision
Below 90 Performing 1%
90– 180 Substandard 25%
181–270 Doubtful 50%
271 – 360 Loss 100%
Over 360 Loss Write off

4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Loans under the, sub-standard, doubtful and loss categories are considered
non-performing.
• The general guidelines for accounting for bad and doubtful debts are:
• Once the decision is made to provide against a loan, the profit and loss
account is debited immediately with the amount of the provision whilst
the credit is posted to a loan loss reserve account (a balance sheet item)
• Provisions are made as a percentage (20%, 50%, 75% or 100%) of the
outstanding principle amount
• Normally no further provisions are required in respect of interest income.
Any outstanding/unearned interest is reversed and suspended as already
illustrated above.
• Provisions for bad and doubtful debts may only be reversed (written back)
to the extent of the reduction (repayment) of the outstanding loan. For
example, if W Ltd recovers Shs.500,000 from a customer classified
“doubtful”, then only Shs.375,000 (75% of 500,000) can be reversed from
the provision account.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• On a yearly or half yearly basis, the provisions are done in line with the procedure
explained above.
• The resulting figure of total provision is called the Loan Loss Reserve, and is
deducted from the Gross Loan Portfolio in the balance sheet to get the Net Loan
Portfolio. Incremental provisions are taken to the P&L.
• Accounting treatment for the loan loss provisioning is;
DEBIT: Loan Loss Provision Expense Account (P&L item)
CREDIT: Loan Loss Reserve Account (Negative Asset)
Prepayments
• Prepayments are the amounts paid during the accounting period for expenses that
will be incurred in the future period. They are categorized as assets in the balance
sheet. It is an asset as long the service paid for has not yet been utilized.
• The payment is made yet it’s an expense for a future financial period. Banks for
instance pay their insurance and rent expenses in advance.
• Accounting treatment for a prepayment is;
DEBIT: Prepayment Account (Balance Sheet item)
CREDIT: Cash or Bank Account
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
• Once the period to which the payment relates has passed, the prepayment
account is then written down amortized and the amount transferred to the income
statement as an expense.
• Accounting treatment for the amortization of the prepayment is;
DEBIT: Appropriate Expenses Account (P&L Account)
CREDIT: Prepayment Account (Balance Sheet item)
Accrued expenses
• Accruals are expenses that were incurred during the accounting period but not yet
paid for by the close of the period.
• The accruals concept requires that these expenses are recognized in the income
statements.
• The accounting treatment is as follows:
DEBIT: The expense account to which the accrued amount relates
CREDIT: Accruals or other payables (balance sheet items)
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Balancing off accounts
After the transactions have been recorded into the accounts, these accounts do not
remain open but need to be closed at the end of the period. Closing an account
refers to establishing the account balance (difference between total debits and
total credits) at the end of the period.
At the close of an accounting period, the various accounts are closed off in order to
prepare the financial statements. If the total debits exceed the total credits there
is said to be a debit balance on the account: if the credits exceed the debits then
the account has a credit balance.
Procedure of balancing –off accounts
1. Generally the following steps are taken when balancing off accounts:
2. Add up the debit side of the account and then the credit side
3. Decide which side adds up to the greater figure
4. The difference will go on the other side, so write it in and call it balance c/d. If
there is no balance, do not enter one!
5. Write –in the totals (which must equal each other) on the same line. Do not put
any description beside the totals.
6. Rewrite the balance underneath the total on the opposite side to the balance
c/d and call this one balance b/d.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Preparation of the Trial Balance
• We already know from the study of the chart of accounts that the main categories
of accounts are revenue, expenses, assets, liabilities and capital.
• We have also learnt from our previous study on closing off accounts that revenue
and expense accounts are closed off to the profit and loss account and that the
assets, liabilities and capital accounts are closed off to the balance sheet at the
close of an accounting period.
• Before transferring the relevant account balances to the profit and loss account
and to the balance sheet, it is ideal to test the accuracy of the double entry
bookkeeping records by preparing a trial balance.
• The trial balance is a list of the account balances (debit and credit) at the close of
an accounting period. The debit and credit account balances are summed up
separately.
• The credit and debit totals should be equal otherwise an error would have
occurred during the double entry posting or balance calculations.
• Where the debit and credit total in the Trial Balance do not balance (are different),
a suspense account is opened to balance the two sides.
• The errors are then investigated and corrected. With the errors corrected, the
sides should agree.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
You can prepare the trial balance by
following these steps:
i. Take the account balances from
the ledger.
ii. List the accounts having debit
balances in one column and those
having credit balances in the other
column.
iii. Total the debit balances up
iv. Total the credit balances up
v. Compare the sum of the debit
balances and that of the credit
balances
vi. The sums should be equal in order
for the ledger accounts to be in
balance.
vii. Remember that a trial balance is a
first test of accurate posting and
balance calculations in the ledgers.
Tips on finding trial balance errors
i. Re-add the entries on the debit and
those on the credit side, to ensure
the additions were right.
ii. Check that the numbers on your trial
balance are the same numbers
shown in your general ledger.
iii. Check to see if you properly classified
amounts as debits or credits on your
trial balance.
iv. Check that each General ledger
account was properly totaled up on
both the debit and credit sides, and
that the right balances were taken to
the trial balance
v. Check that the journal totals were
properly posted to the general ledger.
(correct amounts posted) Were they
properly classified as debits or
credits?
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
vi. Go back to each journal. Look at the totals that were posted to the general
ledger. Do total debits equal total credits in each journal?
vii. Go back to each journal. Did you foot (total) each column on each page of the
journal? Did you carry forward all column totals to the next page?
viii. Did all the items entered in the “miscellaneous” column get posted to the
general ledger?
ix. Is the difference divisible by 9? If so, it could be a simple transposition error.
For example, writing down 540 instead of 450 results in a difference of 90.
Writing 26 instead of 62 results in a difference of 36. Notice that both of these
differences are divisible by nine.
x. If the difference between debits and credits is divisible by nine, go back to the
journals, looking for the error. Knowing that it may be the result of transposed
numbers should help you find it.
xi. Is the difference between debits and credits a round figure like1100 or 1,000 or?
If so, it is probably an addition or subtraction error.
xii. Divide the difference by two. Is the resulting number shown on your trial
balance? If so, check to see if you have incorrectly classified the amount as a
debit or credit.
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