BOOK KEEPING FORM ONE NOTES

Chapter One: Recording Cash Transactions

Introduction

Keeping records of cash transactions is necessary to everyone. To manage your pocket money properly, for example, you need to keep some records of your personal transactions. Businesses have systems to record receipts and payments of cash that form part of their day to day operations. In this chapter, you will learn about recording cash transactions in cash books of different types. You will therefore learn how to prepare single column, two-column, three-column and the analytical petty cash book. The competencies developed in this chapter will enable you to record cash transactions in different types of cash book and determine the balance of cash to be reported in the financial statements.

Cash Book and Its Purpose

Cash book is a book used to record movement of cash into the business and out of the business. In other words, cash book is a collective name of all accounts that record receipts and payments of cash for a business. Book-keeping practice recognizes cash book both as a book of original entry and as a ledger, and this book maintains that view. It is therefore important to note at this stage that reference to cash book in this book will be applicable to both the case where the intended record is a journal and the case where it is a ledger. The purpose of the cash book is to ensure that up to date records of cash status are available at any point in time. When the cash status is readily available, it assists the management of the business to:

• Properly plan for different transactions.
• Know the financial position of the business.
• Decide on whether they can make business expansion.
• Decide on whether they need a loan from external sources.

Types of Cash Books

The most traditional version of cash book is the cash account. Development in modern payment systems and controls has brought about a necessity to have different types of cash books. We now have the following types of cash books:

• Single column cash book
• Two column cash book
• Three column cash book
• Petty cash book

Cash Account

You may recall that you probably used some cash for bus fare to school this morning. You also probably spent some cash to buy some tea or snack during your tea break, and you hopefully enjoyed that! Didn't you? What you did was payment of cash to the tea vendor or service provider in return for goods or services. On the other hand, the tea vendor received cash from you and gave you a cup of tea. Many small businesses have a significant part of their transactions conducted on cash basis. When buying goods for sale, and when paying for rent, electricity, water and other utilities for their businesses, these traders make quite a number of cash payments. They also collect cash from different transactions involving selling of goods or services. Records for such cash receipts and payments are kept in a cash account. This is not a new account to you! You have seen it when doing your form one book- keeping. Let us have a quick reminder.

This account, like any other ledger account has a debit side and a credit side. Being an asset account, the double entry rule for recording transactions in the cash account is:

• Debit cash account for receipts of cash (increase in asset)
• Credit cash account for payment of cash (decrease in asset).

Example 1.1

Monica opened a new business dealing with second-hand clothes on a wholesale basis. She started the business on 1st July 2021 with a capital of TZS 40,000,000 in cash.

Date	Transaction	TZS
July 1	Paid cash for six months' rent of the shop	900,000
July 2	Bought clothes in cash	16,500,000
July 2	Paid transport charges in cash	120,000
July 3	Bought packaging materials in cash	80,000
July 6	Sold clothes in cash	7,200,000
July 8	Purchased clothes in cash	4,800,000
July 15	Paid wages and commissions in cash	1,200,000
July 18	Cash sales	15,200,000
July 22	Cash purchases	5,400,000
July 25	Cash sales	10,000,000
July 26	Paid for stationeries in cash	200,000

Required: Enter the above transactions in a cash account and balance the account as at 31st July 2021.

Solution:

Monica - Cash Account
Date	Details	Folio	TZS
1/07/2021	Capital		40,000,000
6/07/2021	Sales		7,200,000
18/07/2021	Sales		15,200,000
25/07/2021	Sales		10,000,000
			72,400,000

Date	Details	Folio	TZS
1/07/2021	Rent		900,000
2/07/2021	Purchases		16,500,000
2/07/2021	Transport charges		120,000
3/07/2021	Packaging materials		80,000
8/07/2021	Purchases		4,800,000
15/07/2021	Wages and commissions		1,200,000
22/07/2021	Purchases		5,400,000
26/07/2021	Stationeries		200,000
31/07/2021	Balance	c/d	43,200,000
			72,400,000
1/08/2021	Balance	b/d	43,200,000

Activity 1.1

You are a student in form 2A class in your school. Apart from the general subjects that each student must take, your class studies commercial subjects (Book-keeping and Commerce), while your fellow students in form 2B specialize in science subjects. Your friend, Kanji who is in form 2B has seen your notes on cash book and commented that cash account is only useful for rich businesspersons with a lot of cash, and it cannot be of any relevance to a student. You have shared it to your fellow form 2A students and some agree with Kanji, while some do not.

Required: Write down the points that you are going to use to convince Kanji on the usefulness of cash account to students and any other person who is not a rich businessperson.

Bank Account

For many small businesses, it is common that receipts and payments for goods and services traded are made through receiving and paying cash physically. A cash account like the one we have discussed above would be enough to record receipts and payments made by the business. However, conducting business by always paying and receiving physical cash may not be possible or feasible for some businesses. This is because of both safety and convenience considerations. One of the closest traditional alternatives to using cash in making payments to suppliers or service providers and receiving money from customers is transacting through bank systems. Businesses have a choice to open different types of bank accounts. The most convenient and popular type of bank account that a business would prefer is a current account. A current account is an account in which withdrawal of cash is made using a cheque. A cheque is an instruction issued to a bank to pay a specified amount of money to a specific person or a bearer. A cheque has three main persons or parties involved. The parties are the drawer, the payee and the drawee. These are briefly described as follows:

• Drawer - is the person (bank account holder) who writes or issues a cheque. By issuing or drawing the cheque, the drawer instructs the bank to pay money from the bank account.
• Drawee - is the drawer's bank that receives instruction to pay the amount stated on the cheque. The bank issues a cheque book to the current account holder. Each time the current account holder wants to issue a cheque, he uses one leaf from the cheque book and fills in the particulars of the payment.
• Payee - this is the person who is paid the amount written on the cheque. A Cheque instructs the bank to pay this person. A cheque would therefore normally mention the name of the payee, although it is also possible for the drawer to write cash instead of the payee's name. A 'cash' cheque is presented to the bank by the designated person who is responsible to handle business cash, and is used to withdraw cash that the business will use to pay for transactions that are settled in cash.

Figure 1: Bearer Cheque

BIASHARA Bank Ltd

PAY......OR BEARER

Shillings One Hundred Thousand Only

TZS 100,000

A/C. No. 11001100987654

AUTHORISED SIGNATORIES

The drawer has an option to issue an open cheque or a crossed cheque. An open cheque instructs the drawer's bank (drawee) to pay the amount stated to the payee. The payment can either be made in cash or by transferring (depositing) the amount in the payee's bank account.

Figure 2: Open Cheque

BIASHARA Bank Ltd

PAY......Lugano Monbiboto

Shillings One Hundred Thousand Only

TZS 100,000

A/C. No. 11001100987654

AUTHORISED SIGNATORIES

On the other hand a crossed cheque instructs the bank to deposit the amount stated on the cheque to the payee's account, with no option for the drawee to pay the amount in cash to the payee. Crossing is normally done by having two vertical lines on the face of the cheque. Some banks may add the words 'A/C payee only' which simply insist that the amount has to be deposited/ transferred to the payee's account. For security purposes, most banks would by default have the cheques crossed, but give the drawer an option to 'open' the cheque by signing on the vertical lines that cross the cheque.

Figure 3: Crossed Cheque without the words 'A/C payee only'

BIASHARA Bank Ltd

PAY......Lugano Monbiboto

Shillings One Hundred Thousand Only

TZS 100,000

A/C. No. 11001100987654

AUTHORISED SIGNATORIES

Figure 4: Crossed Cheque with the words 'A/C payee only'

BIASHARA Bank Ltd

PAY......Lugano Monbiboto

Shillings One Hundred Thousand Only

A/C PAYEE ONLY

TZS 100,000

A/C. No. 11001100987654

AUTHORISED SIGNATORIES

Transacting using cheques is safe and convenient in the sense that the trader doesn't have to deal with a lot of cash when making payments or collecting money from customers. Rather, the trader will be mostly issuing cheques to suppliers and collecting cheques from customers. Banks normally keep records of transactions on each of the customers' bank accounts. On the other hand, the customers will also have to make their own records of transactions with banks. Transactions made by the business through cheques, and other transactions between the business and the bank are recorded in a bank account.

Recording Transactions in the Bank Account

A bank account is therefore a type of cash account in which transactions with a bank are recorded. It therefore applies the same rules of debit and credit that apply in recording transactions in the cash book. These are:

• Debit the bank account for transactions that increase the bank balance, for example, deposits of cash and cheques
• Credit the bank account for transactions that decrease the bank balance, for example issue of cheques.

Balancing the Bank Account

Balancing a bank account follows the same procedure that business follows when balancing the cash account or any other ledger account. Like the cash account or any other asset account, the normal balance for a bank account is a debit balance. A debit balance in the bank account means that the business has money in the bank. However, it is possible for a business to have a credit balance in the bank account in some situations. This happens when the business has withdrawn more money than the amount available in the account. The credit balance on the bank account is known as an overdraft. Many banks allow customers to have an overdraft, as one of the forms of loan once a customer has fulfilled some conditions.

Example 1.2

On 1st February 2022, Haule started a business with a capital of TZS 7,200,000 in bank account and proceeded as follows during the month:

Date	Transaction	TZS
1/02/2022	Paid rent by cheque	480,000
3/02/2022	Bought a computer for use in the business by cheque	1,080,000
4/02/2022	Purchased goods by cheque	6,720,000
6/02/2022	Purchased goods on credit from Bamba	4,836,000
9/02/2022	Sold goods on credit to Mokiwa	4,800,000
12/02/2022	Issued a cheque to Bamba	4,836,000
15/02/2022	Sold goods and received a cheque	6,840,000
17/02/2022	Received a cheque from Mokiwa	4,800,000
20/02/2022	Paid wages by cheque	1,500,000
23/02/2022	Sold goods on credit to Mutabuzi	1,850,000
25/02/2022	Paid insurance by cheque	300,000
26/02/2022	Paid electricity bills by cheque	625,000
28/02/2022	Sold goods and received a cheque	4,500,000
28/02/2022	Received a cheque from Mutabuzi	1,850,000

Required: Record the above transactions in the bank account of Haule and balance off the account at 28th February 2022.

Solution:

Haule - Bank Account
Date	Details	Folio	TZS
1/2/2022	Capital		7,200,000
15/2/2022	Sales		6,840,000
17/2/2022	Mokiwa		4,800,000
28/2/2022	Sales		4,500,000
28/2/2022	Mutabuzi		1,850,000
			25,190,000

Date	Details	Folio	TZS
1/2/2022	Rent		480,000
3/2/2022	Computer		1,080,000
4/2/2022	Purchases		6,720,000
12/2/2022	Bamba		4,836,000
20/2/2022	Wages		1,500,000
25/2/2022	Insurance		300,000
26/2/2022	Electricity bill		625,000
28/2/2022	Balance	c/d	9,649,000
			25,190,000
1/3/2022	Balance	b/d	9,649,000

Two Column Cash Book

Many businesses that use current account to transact with their customers and suppliers would still have some transactions done using physical cash. In this case the business will have both a cash account and a bank account. To have clearer and comprehensive view of the transactions, it may be useful to have all the transactions involving receipts and payments recorded in the same cash book. This will involve having a cash book that records both the transactions done through the bank (using cheques and transfers) and the transactions involving physical cash.

Meaning of a Two Column Cash Book

A cash book with two amount columns is called a two column (or double column) cash book. It is called two column cash book because it has two amount columns on each side, one column to record cash transactions, and the other to record bank transactions.

The bank column records transactions made through cheques, cash deposits into the bank and other transfers of funds into the bank. On the other hand, the cash column records receipts and payments made using physical cash, together with cash deposits and cash withdrawals from bank.

Usefulness of a Two Column Cash Book

The two column cash book is useful because:

• It makes it easier to monitor cash transactions by having all the cash movements viewed on the same place.
• The business manager or operator can see the cash and bank balance at any point in time and make appropriate decision. This can be possible with the use of technology, for example, computer systems in preparing a two column cash book.

Preparation of a Two Column Cash Book

This cash book operates in the same way that the cash account and the bank account would separately operate, with the only difference being that two separate amount columns are used, both on the debit side and on the credit side. The cash column is used for cash transactions and the bank column is used to record bank transactions. The other columns remain the same as in separate cash/ bank accounts or any other ledger account.

Activity 1.2

You have just started a lesson on two column cash book and your friend Jabir who was late to the class has difficulty in understanding the concept of two columns cash book. What he understands is that, the cash account and any other account are supposed to have eight columns. He is therefore troubled with how these columns can be 'reduced' to two.

Required: Explain the concept of two columns to Jabir: In your explanation, include a drawing illustrating a two column cash book.

Posting Transactions to the Two Column Cash Book

Recording transactions in the two column cash book uses the double entry principle like any other ledger account. This means all transactions representing increase of cash balance and bank balance are recorded on the debit side of the cash column and the bank column respectively. Similarly, all transactions leading to decrease of the cash balance and bank balance are recorded on the credit side of the cash column and bank column respectively.

Example 1.4

Makonde started a furniture business in 2021. He had a balance of TZS 2,065,000 in the cash account on 1st January 2022, while his bank balance was TZS 29,680,000 on that date. You are given the following details from Makonde's business for the month of January 2022:

Date	Transaction	TZS
2/01/2022	Bought machine by cheque	1,270,000
3/01/2022	Purchased goods by cheque	2,170,000
5/01/2022	Sold goods and received cheque	1,358,000
6/01/2022	Paid transport charges in cash	560,000
9/01/2022	Paid Ponela, a creditor, by cheque	658,000
10/01/2022	Bought goods by cheque	2,560,000
15/01/2022	Received cheque from Mkoleni, a debtor	805,000
20/01/2022	Sold goods in cash	3,010,000
21/01/2022	Paid electricity bill by cheque	567,000
23/01/2022	Received cash from Walele as a loan to the business	10,500,000
24/01/2022	Received a cheque from Katondo, a debtor	1,218,000
25/01/2022	Purchased goods and paid by cheque	2,105,000
26/01/2022	Paid motor expenses in cash	245,000
28/01/2022	Paid wages in cash	2,800,000
29/01/2022	Sold goods for cash	1,950,000
30/01/2022	Paid office expenses by cheque	1,050,000

Required: Prepare the following for Makonde in respect of the Month of January 2022:

• Cash account
• Bank account
• Two column cash book

Solution:

Makonde - Cash Account
Date	Particular	Folio	TZS
1/01/2022	Balance	b/d	2,065,000
20/01/2022	Sales	GL	3,010,000
23/01/2022	Walele (Loan)	GL	10,500,000
29/01/2022	Sales	GL	1,950,000
			17,525,000

Date	Particular	Folio	TZS
6/01/2022	Transport	GL	560,000
26/01/2022	Motor expenses	GL	245,000
28/01/2022	Wages	GL	2,800,000
31/01/2022	Balance	c/d	13,920,000
			17,525,000
1/02/2022	Balance	b/d	13,920,000

Makonde - Bank Account
Date	Particular	Folio	TZS
1/01/2022	Balance	b/d	29,680,000
5/01/2022	Sales	GL	1,358,000
15/01/2022	Mkoleni	SL	805,000
24/01/2022	Katondo	SL	1,218,000
			33,061,000

Date	Particular	Folio	TZS
2/01/2022	Machine	GL	1,270,000
3/01/2022	Purchases	GL	2,170,000
9/01/2022	Ponela	PL	658,000
10/01/2022	Purchases	GL	2,560,000
21/01/2022	Electricity	GL	567,000
25/01/2022	Purchases	GL	2,105,000
30/01/2022	Office expenses	GL	1,050,000
31/01/2022	Balance	c/d	22,681,000
			33,061,000
1/02/2022	Balance	b/d	22,681,000

Makonde Furniture - Two Column Cash Book
Date	Particular	Folio	Cash (TZS)	Bank (TZS)
1/01/2022	Balance	b/d	2,065,000	29,680,000
5/01/2022	Sales	GL		1,358,000
15/01/2022	Receivables (Mkoleni)	SL		805,000
20/01/2022	Sales	GL	3,010,000
23/01/2022	Loan - Walele	GL	10,500,000
24/01/2022	Receivables (Katondo)	SL		1,218,000
29/01/2022	Sales	GL	1,950,000
			17,525,000	33,061,000

Date	Particular	Folio	Cash (TZS)	Bank (TZS)
2/01/2022	Machine	GL		1,270,000
3/01/2022	Purchases	GL		2,170,000
6/01/2022	Transport	GL	560,000
9/01/2022	Payables (Ponela)	PL		658,000
10/01/2022	Purchases	GL		2,560,000
21/01/2022	Electricity	GL		567,000
25/01/2022	Purchases	GL		2,105,000
26/01/2022	Motor expenses	GL	245,000
28/01/2022	Wages	GL	2,800,000
30/01/2022	Office expenses	GL		1,050,000
31/01/2022	Balance	c/d	13,920,000	22,681,000
			17,525,000	33,061,000
1/02/2022	Balance	b/d	13,920,000	22,681,000

Contra Entries in the Two Column Cash Book

We notice from example 1.4 that the posting of entries in two column cash book is done the same way as in the separate accounts for cash and bank. One peculiar or exceptional issue that we need to take into account is that we may have a transaction that affect both the cash account and the bank account. In this case the transaction simply involves a transfer of cash into bank or cashing funds from the bank. A double entry made in such a case is called a 'contra' entry. 'Contra' is a Latin word for 'opposite'. A contra entry can therefore be defined as an entry made on both sides of a two column cash book, but on separate columns. It may either include a debit in the cash column and a credit in the bank column (drawing of cash from bank for business use), or a debit in the bank column and a credit in the cash column (depositing business cash into bank). It is called contra entry because the two entries are made on the opposite sides of the cash book.

For contra entries, there is no need for more posting to complete the double entry. This means that the entry in the cash column has its corresponding entry on the bank column on the opposite sides of the two column cash book. The vice versa is also true.

Three Column Cash Book

We have just looked at a two column cash book. Apart from learning how to operate the two column cash book, a great lesson has been learnt. Can you guess the lesson? Well, the lesson is that, if we can have a second column in the cash book, we can also add more and more columns depending on the business needs. One simple consideration is that the business could have more than one bank account (many businesses actually do). You would not want to mix your transaction involving two or more banks in the same column. Doing that would make it impossible to use your cash book as a source of information for knowing your balances with different banks. We therefore need to have more than one bank column in a cash book, and the number of such columns will depend on the number of bank accounts that a business has. There are also cases where businesses would have transactions conducted through mobile money transfer and payment services. A good example of this is the use of 'Lipa namba'. Such transactions will also have to be reflected in cash records, and the best way is to also introduce a column or columns for them in the cash book. The mechanisms on how entries are made in such multiple column cash books are the same as the ones we discussed under two column cash book.

Activity 1.3

You have just completed your lessons on double column cash book and started a new discussion on three column cash book. Nathan, your classmate has just picked a line from the introduction that when one has more than one bank account, there could be more than two or three columns in the cash book. He is now confused, as he imagines what will happen to a business with six bank accounts. His idea is that there would be too many columns if the cash book will have a column for each of the bank accounts. He suggests that one bank column can be used to record all the bank accounts transactions. He is also of the opinion that there must be a maximum number of columns in the cash book and businesses should not exceed such maximum.

Required: Give explanations to Nathan in relation to:

• The maximum number of columns in the cash book
• Recording of transactions with different banks in the same column of the cash book

Meaning of Three Column Cash Book

A three column cash book is a cash book that is prepared with three amount columns on both the debit side and the credit side. It has one additional column, starting from what we had in two column cash book. The third column is dedicated to record cash discount. The three column cash book is therefore a cash book with three amount columns, the cash column, bank column and discount column.

Discounts, Cash Discount and Credit Terms

The most common use of the term discount in business is in relation to a reduction in price that one enjoys while dealing with a business, mostly by purchasing a product. There are various reasons for which businesses give discounts to customers, including:

• Encouraging purchase on large quantities - in this case, a business may have a policy of giving some price cut (mostly expressed in percentage) to all customers purchasing goods exceeding a certain quantity or a certain value. Such a price cut is called a quantity discount.
• Psychological attraction of customers - in this case, traders may give price reduction to customers. This may be communicated using price tags that show original price and reduced price (sometimes indicating percentage of price reduction) and thus attracting customers to the shop. This kind of discount is called a trade discount.
• Encouraging credit customers to pay promptly. Most traders will give credit terms to customers. Credit terms specify the latest date on which the customer must pay the amount due to the trader. However, to encourage early payment (payment before the due date) it is common for businesses to offer cash discount. This is the discount that will be recorded in the three column cash book. The other two discounts are not recorded in the books of accounts. This is because for those two (trade discount and quantity discount) the actual price (net of the discount) is the one that is shown in the invoice, which acts as a source document to record the transactions in the books.

Credit/Payment Terms and Cash Discount

When goods are sold on credit, the seller has to specify credit terms to the customer. Such credit terms specify the date to which the amount on the invoice must be paid. They may also include a cash discount as an incentive to pay before the due date. A cash discount is basically a reduction from the invoice price when a customer pays within a period specified to qualify for the discount. There are two main types of credit terms. We can have credit terms that do not involve cash discount and credit terms that involve cash discount.

Credit Terms Without Cash Discount

These are credit terms that do not include cash discount. In other words, there is no difference between the customer who pays within one day and the one who pays after two months, as long as payment is made within the specified period. The terms can either be stated in a sentence like 'payment within 30 days' or use abbreviations such as f/30, meaning the full amount is payable within 30 days.

Credit Terms With Cash Discount

These are credit terms that in addition to stating the latest date at which the payment should be made, specify a discount (usually in percentage) to be enjoyed if payment is made within a certain period. An example of such terms could be expressed as, '5% discount if payment is made within 10 days, full amount payable within 60 days'. This can also be expressed in abbreviated form as "5%/10, f/60". This means that if the business sold goods for TZS 100,000 and offered a "5%/10, f/60" terms on the invoice, the customer will pay full TZS 100,000 if payment is done any time after the 10 days discount period. However, if the customer pays within the discount period, the amount paid is only TZS 95,000. This is because 5% of the TZS 100,000 amount invoiced i.e. TZS 5,000 is deducted from the invoice amount.

Preparation of a Three Column Cash Book

The only difference between the three column cash book and the two column cash book is the addition of a discount column. The three column cash book will be prepared using the following format:

Three Column Cash Book for the Month of June 2021
Date	Details	F	Discount	Cash	Bank

Discount Allowed and Discount Received

Our discussion on discounts so far indicates that discount can be given by the business or given to the business. We therefore need to be able to distinguish between discount allowed and discount received.

Discount allowed is the reduction allowed on the invoice price by business on credit customers who pay within the discount period specified on the invoices. On the other hand, discount received is the reduction allowed to the business by its suppliers when the business pays amounts due within the discount period specified on the suppliers' invoices, like paying for purchases.

Petty Cash Book

Imagine a bakery business that uses its van to distribute products (mainly bread and cakes) to different shops within your town. There would be payment of parking fees on different locations where the van is parked for off-loading the products. For practical and convenience purposes, such payments may have to be made in cash, and probably be done by the driver. This tells us that even if a business wishes to have all transactions conducted through the bank, there would be cases where it becomes difficult to do so. Imagine also that if such individual parking fees are recorded in the cash book (even if it is the cash column), there would be too much a number of transactions per day, week or month and it may be difficult for one to manually scan through the cash book for the purpose of viewing different transactions. This may compromise the usefulness of the cash book. How do we address this?

This can be addressed by preparing a special cash book to be used in recording such kinds of payments. Many businesses therefore maintain a petty cash book to record and manage 'petty' payments.

Meaning of a Petty Cash Book

A petty cash book is a separate cash book specifically maintained to record small cash payments, also known as petty payments. This book is usually operated by a specific cashier who deals with such payments. The cashier responsible for operating the petty cash book is known as petty cashier. The petty cash book records petty payments using columns that are dedicated to each category of expenses that the business may pay for using the petty cash fund. When setting up the petty cash system, the business would normally have a policy that states which types of payments are settled using petty cash fund. It is usually a common practice for the policy to state the limit of the amount of any single payment to be made through petty cash, as well as the petty cash period. The petty cash period is the period between receiving the petty cash float and petty cash replenishment.

The Imprest System

The petty cash system best works where the main cashier delegates petty cash payments to the petty cashier. The petty cashier is therefore provided with an agreed amount of cash (known as petty cash float) for the purpose of making petty cash payments. The cashier continues to use the petty cash for making various payments and records the transaction until the end of the period, or until the amount is finished. At the end of this, the petty cashier submits the details of payments and relevant source documents to the main cashier. The main cashier then makes a replenishment of the amount spent by the petty cashier so that a new petty cash period can begin. The replenishment of the petty cash float is also known as reimbursement. This kind of operation is known as an imprest system, and the petty cash float is also referred to as imprest amount. The name imprest is historically associated with a Latin word 'imprestare', meaning 'to lend'. Use of imprest system is not only used in processing petty cash transactions. Many businesses use imprest system for larger transactions whose amounts are advanced to staff responsible for making payments for different stages of an activity.

The Imprest system is the system in which the petty cashier periodically receives a specified amount of cash from chief cashier. The petty cashier will be required to maintain all the documents (vouchers and receipts) that evidence payment from such amount and the amount to be restored by the chief/main cashier. In other words, the chief or main cashier 'lends' the petty cashier a specific amount of cash for use in various cash transactions. It remains as an imprest (loan) until evidence in terms of documents (petty cash vouchers and receipts) is submitted to the chief cashier to justify the payments. Ideally, the petty cashier will have to refund the money to the chief cashier when she or he fails to provide evidence (source documents) for the expenditure. Traditionally, many businesses use the petty cash voucher (abbreviated as PCV) as a source document for payments from the petty cash, although the PCV can be complemented with receipts or other documents from third parties (the ultimate payees for the amounts).

Usefulness of Petty Cash Book and the Imprest System

The use of petty cash book and the imprest system is important for the following reasons:

• It assists in the regulation of petty expenses. This is because each petty payment will be associated with a petty cash voucher that is backed up with evidence for the payment.
• It enables easy detection of errors. If there is an error in petty payments it is detected within the petty cash system. This would have otherwise been difficult to detect when all payments are handled through the main cash book.
• It reduces burden to the chief cashier, who would have otherwise been responsible to record every tiny payment.
• It helps in detection of fraud (improper use of cash). This is because the chief cashier will be able to verify the petty cash book with the petty cash vouchers and other relevant supporting documents.
• It saves time in posting transactions. This is because the petty expenses are batched up and posted periodically for example weekly to the respective ledger accounts.
• It helps in training junior accounting staff to handle cash responsibilities.

Activity 1.4

You are volunteering in a factory located in your village during your mid-term holidays. You happen to talk to Anitha, the cashier of the factory and she is having problems with how the petty cashier records transactions. They are actually disagreeing on which items of expenses should be treated as petty cash. Knowing that you have just studied about petty cash book in your book-keeping, she requests you to clarify on items that are supposed to be recorded in the petty cash book. She has been given a policy on petty cash payments that states the limit of petty cash transactions as TZS 600,000. It also specifies that only payments for expenses are considered, meaning that expenditure on buying non-current assets of whatever value is not considered. It is the factory policy that employees meet their own cost of transport between office and home.

Anitha gives you the following list of expenditure for a period and requests you to clarify on which among them she should authorize as petty cash payment:

1. Motor van repair TZS 187,000
2. Parcel postage TZS 120,000
3. Machine repair TZS 315,000
4. Postage stamps TZS 80,000
5. Purchase of stationeries TZS 516,000
6. Monthly transport charge from home to work TZS 212,000
7. Purchase of drawing pins TZS 158,500
8. Seal tape for private use TZS 58,700
9. Purchase of motorcycle TZS 1,950,000

Required: From the above transactions identify and write down the item(s) that would not be treated as petty cash payment.

Columns in the Petty Cash Book

For a proper record of different expenses dealt with in the petty cash book, it is important for the book to be logically organized. The best way to organize it is to dedicate a column for each major category of repetitive transactions made using the petty cash. There may therefore be a column for transport, stationeries, refreshments, etc. A typical page in a petty cash book can be prepared as follows:

Receipts	Folio	Date	Details	PCV No.	Total	Cleaning	Motor expenses	Stationeries	Travelling	Other expenses

Note: PCV – Petty cash voucher

As we can see above, the petty cash book has a separate column assigned to each specific category of expenses. These columns are commonly called analytical expense columns. It also has a column for other expenses, which is used to record expenses that do not fall within any of the analytical columns. When entering a transaction (payment) in an analytical expense column, the petty cashier also records the same in the total column. The identity of the source document, in this case, the petty cash voucher (PCV) number is recorded in the specific column for it. The receipt column deals with recording the receipt of cash, normally petty cash reimbursement. This is done either at the end of each petty cash period, or after spending the whole amount of the petty cash interest.

Recording Transactions and Balancing the Petty Cash Book

This involves recording the following:

• Receipt of the petty cash float from the main cashier - This is recorded on the receipts column of the petty cash book, and its corresponding entry is made on the payments side of the main cash book.
• Making different payments from the petty cash - Each payment is recorded on the appropriate analytical expense column. A record is also made on total column on the payments side of the petty cash book.
• Receipt of reimbursement from the main cashier - This is recorded on the receipt side of the petty cash book, and its corresponding entry is made on the credit side of the main cash book. Reimbursement can be made at the end of the interest period or at the beginning of the next interest period.
• Balancing of the petty cash book - The petty cash book is balanced in the same manner like any other cash book. An important thing to note is that we balance the receipts column against the total column of the payment side. If the reimbursement is done at the end of the interest period, the balance of the petty cash book will be equal to the interest amount. This is because recording the reimbursement will restore the balance to the interest amount. On the other hand when the reimbursement is done at the beginning of the following (next) interest period, balance of the petty cash book at the end of the period will be the amount of interest not spent during the period. This will be restored at the beginning of the next period before petty cash payments are made for that period.

Cash Balance in Financial Statements

Cash is an asset that we need to report in the financial statements, specifically, the statement of financial position. The balance of cash for use in the financial statements will be the sum of balances from all the cash books (all columns), including the petty cash book. It will also include balances in all the mobile money accounts that the business has at the date of the financial statements.

Chapter Summary

The content of this chapter was aimed at extending your knowledge on cash books from the basic cash account, which we can now call single column cash book. It has come with appreciation that nature of businesses creates need to have more detailed cash books, and that such details are best accommodated in columnar cash books. What is important is to study the nature of the business cash and bank transactions and prepare relevant cash book or books that suit the needs of the business. The process of recording cash transactions serves two main purposes, namely: providing cash balance details for financial statements purpose, and ensuring control of cash in the business. Both purposes are partly addressed in this chapter, but they are both going to be detailed in Chapter Two.

Chapter Two: Bank Records and Personal Records and Reconciliation

Introduction

Businesses that conduct transactions through the banking systems need to have in place a system to constantly check the records of their bank transactions. This is facilitated by periodically comparing the bank column of their cash book against the statement received from the bank with details of transactions on their bank account. For any differences in entries and balances, an appropriate explanation will have to be sought and clarified. In this chapter you will learn about the differences between customer's records and bank's records of transactions, the identification of reconciling and adjusting items, as well as performing bank reconciliation under different situations. The competencies developed in this chapter will enable you to compare bank statement and cash book, make appropriate adjustments in the cash book, and prepare a bank reconciliation statement. You will also be able to determine the appropriate bank balance to be reported in the financial statements.

Bank Records and Personal Records

We are now aware that businesses would normally have bank accounts and use such accounts to make different transactions. We also know that businesses maintain records of their transactions with the bank in their cash books, whether a separate bank account, within a two columns cash book, or even multiple columns in case of more than one bank account. These records are supposed to show the balance of the account, as well as details of transactions that have been undertaken between the business and the respective bank or banks. On the other hand, the bank will also keep records of its transactions with the business. This helps the bank to ensure that it has an up to date record of the customer's affairs, including the balance.

At one point or another, the customer may request the bank for a balance, and this can be used to confirm the balance that the customer has from her/ his own records. The customer can also ask for a bank statement at any date to cover specific periods. For customers with a large number of bank transactions, bank statements can be asked on a monthly basis.

This understanding implies that at any point in time there is a possibility of a business to have two sets of monthly record transactions between the business and the bank. One record maintained by the business as part of its book-keeping process, and another maintained by the bank as part of its main or core function of maintaining customers' records. You expect these records to be identical, don't you? Well, wait!

For a start, the posting of items in the bank as portrayed in the bank statement will be literally the opposite of the posting that the business makes in its cash book. This is because, from the bank's point of view, when a customer deposits money into bank, the amount deposited becomes a liability to the bank, while the same amount is an asset to the customer. A withdrawal will therefore lead to a decrease in asset in the customer's records, while to the bank this will be a decrease in liability. The recording in the bank statement is therefore be such that increases (deposits) are credited and decreases (withdrawals and others) are debited. Simply stated, when one has a cash book (bank column) and a bank statement for any particular period, the debits in the cash book would be reflected as credits in the bank statement. The vice versa is also true. But is it so straightforward? Maybe we need a closer look at this!

Bank Statement

As stated before, this is a statement that shows transactions between the bank and its customer for a particular period as recorded by the bank. It is traditionally issued monthly by the bank, but may be issued at different intervals or at a specific date on customer's request. Unlike the cash book, the bank statement usually has columns for date, details or description, debit, credit and balance. The balance column shows a balance of the customer's account after every transaction. In other words, the balance is updated in real time after every transaction.

Example: Bank Statement Format

Customer: Bitekerezo Makusaro
Account number: 0268780001
Period: 1st December 2021 – 31st December 2021

Date	Description	Debit (TZS)	Credit (TZS)	Balance (TZS)
1/12/2021	Balance			2,678,943
2/12/2021	Cheque 12648	1,647,500		1,031,443
7/12/2021	Amani: Cheque 21643		4,372,000	5,403,443
9/12/2021	Cash deposit		11,189,500	16,592,943
12/12/2021	Cheque 12649	10,245,900		6,347,043
17/12/2021	Judy: Cheque 00186		3,134,500	9,481,543
18/12/2021	Mariam Traders: Cheque 00058		8,954,000	18,435,543
21/12/2021	Cash deposit		8,635,000	27,070,543
24/12/2021	Cheque 12650	4,675,900		22,394,643
29/12/2021	Dividend		65,400	22,460,043
30/12/2021	NHC Standing order – rent	350,000		22,110,043
30/12/2021	Salaries cheque 12651	6,486,000		15,624,043
31/12/2021	Bank charges	3,200		15,620,843

Activity 2.1

Your uncle operates a wholesale business dealing with distribution of soft and hard drinks to various areas in Iringa municipality. He has received a statement from his bank for the first month after opening a current account. He had previously learnt from you that when recording cash transactions, cash increases are debited and cash decreases are credited. Further, he knows that this applies to the bank account as well, that is debit entries for deposits and credit entries for withdrawals. He is however surprised that what has been done in the bank statement in terms of recording deposits and withdrawals looks exactly the opposite of what he expected would have been done. Further, when he opened a bank account, he stopped preparing cash book because the bank promised to issue him monthly bank statements. This caused him to consider preparation of the cash book (bank column) a duplication of efforts and wastage of time.

Required:

1. Clarify to your uncle on the sides used by the bank when posting deposits and withdrawals in the bank statement.
2. Advise your uncle on the importance of having a cash book even where periodic bank statements are available.

Need for Reconciliation

'Reconciling' is taken to mean bringing into agreement two sides, groups, or persons that are in a disagreement of one kind or another. You would wonder, what is being reconciled here? Well, it's about the cash book and the bank statement balances. Yes! These two need to be reconciled. Still puzzled? Let us have a closer look. Whenever you have two different persons making records for something, you may need to have some reconciliation at one point or another. This is done in order to have an appropriate record for the item, and avoid losses that may result from inappropriate recording.

Imagine that your school has a gardening project and 20 form two students are required to carry 100 watering buckets (5 buckets each) from the store to the gardens. Suppose that there is a school storekeeper, Ms. Dorina issuing the buckets to the students at the store and there is Abdul, the gardening prefect who receives the buckets at the garden. Suppose that both Dorina and Abdul keep records related to the issuing of buckets and receiving of the buckets respectively in sheets prepared for that purpose. At any point in time the sheet kept by Dorina will show the number of buckets already issued and the number of buckets remaining at the store. On the other hand, the sheet maintained by Abdul will show the number of buckets received, and the number of buckets at the garden. As soon as Dorina issues the first five buckets to the first student, she records the issue and shows that she has 95 buckets remaining. However, between this time and when the buckets reach the garden, Abdul will still have Zero buckets. If one has to check Abdul records at that time, they will show that he has zero buckets, whereas Dorina's records will show that she has 95 buckets and that 5 buckets have been issued to Abdul. This will be the case at any time in between, until all the buckets issued from the store have reached their intended destination, the garden. Anytime in between, the two figures may have to be reconciled to take care of those buckets that are somewhere between the garden and the store. We can relate this scenario with the relationship between the cash book and the bank statement.

When comparing the cash book (transactions and balance) and the bank statement (transactions and balance) for any particular period, there will often be some differences. Part of the differences may result from errors made either by the bank or the customer in recording different transactions. But even in absence of errors, the timing differences between bank's records and business' records will in many cases result in variation of bank balances shown in the two records at a certain point in time. There would also be other reasons for the differences, and they can collectively be identified as either reconciling items or adjusting items.

Issues in Bank Records and Personal Records

To understand the reconciling and adjusting items, we need to first understand some basics on the common day-to-day operations of a business bank account, specifically the current account. We learnt a little bit about this in chapter one, but we need to learn some more, specifically on how the cheque system works, charges for operating the account, other services such as standing orders as well as the possibility of direct deposits or transfers into the account.

Cheque System

Withdrawal of money from the current account is made using cheques. When a business wants to withdraw cash from the current account for office use for example, petty cash transactions, it issues a cheque that is presented to the bank by the business' cashier. Such cheque would simply be written 'cash' in the space meant to mention the payee and it is usually referred to as a 'cash' cheque. More frequently, a business will issue cheques to its suppliers for goods and utilities. When the business issues a cheque, it credits the amount in its cash book (remember we are talking about the bank column here). However, the bank will only debit the business bank statement when such cheque is cleared after being presented by the payee. This means that when a business issues a cheque and asks for a bank statement before the cheque is presented to the bank by the payee and cleared, there will be a difference between the business records and the bank records.

Another important practice in relation to operation of the cheque system is that, when a business receives a cheque, it normally deposits it into its bank account and makes a debit entry in the cash book. On receipt of the cheque, the bank will communicate with the drawer's bank and have funds transferred to the payee's account. Once the transfer is made, the amount will be reflected in the payee's bank statement. The process undertaken between the drawer's bank and the payee's bank from the time the cheque is presented to the time the funds are transferred to the payee's bank account is called clearing or clearance of cheques. This clearing may take some time, and it means that a bank statement and the cash book will have differences between the time the cheque is deposited or presented and the time it is cleared.

Dishonor of a Cheque

In some situations, the cheque received by the business may not be cleared at all when deposited into bank. This is because the issuer/ drawer's bank for one reason or another is unable to make payment or transfer from the drawers account. Such cheques are called dishonored cheques. When this happens the record made in the cash book will not have its matching record in the bank statement. Cheques are dishonored for the following reasons:

• The drawer has insufficient funds with the bank, for example the drawer has a bank balance of TZS 1,240,000 and has issued a cheque for TZS 1,500,000.
• The cheque has an error(s) on it, for example amount in words differs with amount in figures.
• It is not signed by the drawer, or the signature does not match with the signature in the bank records.
• If the payee has not signed at the back of the cheque (endorsed) before presenting it to the bank. For some customers, the bank may want the payee or the drawer to stamp at the back of the cheque.
• It is post-dated. A post-dated cheque is a cheque presented for payment before the issue date (date written on the cheque). An example of post-dated cheque is a cheque that the date of drawing or issue is written as 1st June 2021 but presented for payment on 31st May 2021.
• It is stale. A stale cheque is a cheque that is presented for payment at a date later than six months from the issue date or from the date it was drawn. An example of a stale cheque is a cheque drawn on 20th September 2021 but presented to the bank for payment on 1st April 2022.

Charges for Operating a Bank Account

A bank doesn't offer its services for free. Nobody does! There would normally be monthly charges for operating a bank account. In addition to this, there may be specific charges for services such as requesting bank balance, issuing bank statement, special clearance and other services. Collectively, charges made by the bank for different services related to operations of the account are known as bank charges. Bank charges are directly debited in the business' bank statement, but they are normally not reflected in the cash book until the business receives a bank statement. This is because it is at this time that the business becomes aware that the charges have been debited. However, with modern banking systems, bank customers would receive alerts from the bank whenever a transaction is done. This may potentially reduce the need to wait for the bank statement before reflecting such charges in the cash book. This will, however, depend on the accounting procedures of the business. Some businesses may have a policy that requires a stamped statement from the bank as the only acceptable evidence to record bank charges in the cash book.

Standing Orders

One of the services that an account holder may enjoy is where an account holder instructs the bank to make, on behalf of the customer, some regular or recurring payments periodically from the customer's account. Such payment may be for regular amounts such as rent, security services, and any other regular payments for which the business may find it useful to effect payments under this arrangement. The instruction to make such payments is called a standing order. It is called a standing order because once the instruction or order is made by the customer; the bank will continue to implement it (the order will stand) as instructed until the customer instructs the bank to stop implementing it. When a bank makes payment as a result of a standing order, it will reflect it in the bank statement. Some businesses, even if aware of the payment through mobile alert or any other way, may have to wait until they receive a statement from the bank to reflect such payment in the cash book.

Direct Deposits and Transfers

Not all business customers pay using cheques. Some customers may make cash deposits directly to the business' bank account. Other customers have accounts that can make direct transfer of money/ funds to the business bank account from their own bank accounts. The transfer may be made either using manual documents or using electronic fund transfer. An electronic fund transfer (EFT) is a transfer of funds in which the customer makes electronic commands to the bank to transfer funds from the customer's account to another account, for example a supplier's account. The transfer may be made to an account within the same bank or another bank, without the need to use manual documents or a visit to the bank. Whatever the form of transfer or deposit made to the business account, it will only be reflected in the bank statement but not in the cash book until the business is notified and has evidence that such deposit has been made to its account. With modern technology, the notification could be an instant mobile alert and for some businesses this will be enough to record the transaction in the cash book. However, some businesses may maintain the traditional practice of having to take periodic bank statements before reflecting the transaction in the cash book.

Bank Overdrafts

Most banks offer overdraft facilities to their customers under special arrangements. An overdraft is a service under which the bank allows its customers to withdraw amounts that are beyond the customer's balance. For example, a customer having a balance of TZS 250,000 could be allowed to issue a TZS 700,000 cheque. This will leave the customer with a 'negative balance' of TZS 450,000 which is TZS 250,000 – TZS 700,000. This negative balance is called an overdraft, because the customer has overdrawn his/her balance, or withdrawn an amount above the amount available. Later on, when the customer makes further deposits and other transactions, the balance will be restored to a normal balance. It is therefore possible, at some points in time, including the end of month, or year, for a business to have an overdrawn balance, or simply an overdraft. When the business has an overdraft with a bank, its cash book will show a credit balance while the bank statement will show a debit balance. These balances are simply the opposite of the normal balances expected of these records. For the purpose of this book, we will refer overdraft as an unfavorable balance, as opposed to a favorable balance, where a business has a positive balance.

Adjusting and Reconciling Items

Because of the above matters relating to operation of a bank account, the bank balance as per the cash book and the balance as per bank statement will often be different. The reasons for the differences between such balances are summarized in the following few paragraphs.

Unpresented Cheques

An unpresented cheque is a cheque which the payee has not yet presented to the bank for payment. Cheques issued by the business during the month and not yet presented for payment within the month will cause a difference between the cash book balance and the bank statement balance at the end of the month. This is because such cheques will only appear in the cash book, but would not appear in the bank statement. Unpresented cheques are therefore one of the reasons for the difference between the bank statement balance and the cash book balance at any point in time. Another name for unpresented cheques is outstanding cheques.

Uncredited Cheques

An uncredited cheque is a cheque which the business has received and deposited into the bank, but the bank has not yet completed clearing these cheques with the drawer's bank. The amount must have been debited in the cash book when the cheque was lodged to the bank, but will not appear on the credit side of the bank statement until when the respective cheques are cleared. Uncredited cheques are also called uncleared cheques, uncleared deposits or deposits in transit. These will result in the difference between the bank statement balance and the cash book balance.

Dishonored Cheques

A dishonored cheque is a cheque that the bank refuses to pay (to honor) for various reasons as explained before. Any dishonored cheque would have already been recorded in the cash book, but not in the bank statement. They will therefore cause a difference between a cash book balance and the bank statement balance, until the business becomes aware that the cheques are dishonored and reflect them in the cash book. If we are doing business and operate a current account, dishonored cheques may happen in two sides, namely:

1. Cheques that the business has received and deposited to the bank but dishonored by the drawer's bank(s); and
2. Cheques that the business has issued to different payees and dishonored by its bank.

It is very important to recognize the difference between the two, in terms of identifying them from the records, and making appropriate treatment for each when performing bank reconciliation.

Bank Charges

These charges would normally not be recorded in the cash book until the business receives the bank statement, in which case a debit entry for the charges will be observed.

Standing Orders

Payments through standing orders will appear only in the bank statements at the time they are made by the bank. They would not be reflected in the cash book until the business confirms their execution through receiving the bank statement or any other way of notification that the business considers formal and acceptable for recording transactions in its books.

Direct Deposit and Transfers (Direct Credit)

These will result in a difference between the balances when such deposits or transfers are made and the business has not received a bank statement and updated the cash book.

Errors

There could be errors either in posting transactions to the cash book or bank statement. These would definitely lead to difference between the two records, unless there is a coincidence that the same error is made in both the bank statement and the cash book.

Performing Bank Reconciliation

Reconciliation of the bank statement and the cash book balances is completed by preparing a bank reconciliation statement. A bank reconciliation statement is a statement prepared for the purpose of reconciling the bank balance as per cash book and the bank balance as per bank statement. A typical bank reconciliation statement begins with the cash book balance, adds and subtracts the relevant reconciling items and ends with the bank statement balance. The statement can also start with the bank statement balance and finish with the cash book balance. We will see the actual structure of a bank reconciliation statement when we make the actual reconciliation in the next few sections.

Steps in Performing Bank Reconciliation

The bank reconciliation process involves the following steps:

1. Balancing the cash book at the specified date. This can be an end of month or any other date where reconciliation is specifically required.
2. Obtaining a bank statement to the date of reconciliation. The bank statement should be covering the same period as the cash book prepared in step (a) above.
3. Comparing entries in the cash book prepared in step (a) above with the entries in the bank statement obtained in step (b) above to identify the adjusting and reconciling items.
4. Adjusting the cash book using the cash book balance and the adjusting items obtained in step (c) above.
5. Preparing the bank reconciliation statement.

For the purpose of this book, it is assumed that the cash book (bank column) has already been prepared and the bank statement has already been received from the bank. Focus is therefore made on the steps c, d, and e of the reconciliation process.

Identification of Adjusting and Reconciling Items

This is done by making a comparison between the cash book and the bank statement. The comparison is made on each individual entry in the cash book as well as each entry made in the bank statement. Since the rules for recording transactions in the cash book and the bank statement are the opposite of each other, comparison is made between entries on the opposite sides of the records. This means a comparison is made between entries on the debit side of the cash book and the credit side of the bank statement. Comparison is also made between entries on the credit side of the cash book and the debit side of the bank statement.

With exception of errors in either of the two records, the following would be the results of the comparison:

• Items on the debit side of the cash book not matched by items on the credit side of the bank statement. These would represent uncredited cheques and cheques that the business had received and deposited during the period but dishonored by the drawers' bank(s).
• Items on the credit side of the cash book not matched by items on the debit side of the bank statement. These would represent unpresented cheques. These may also include cheques that the business has issued but the bank has dishonored for one reason or another.
• Items on the credit side of the bank statement not matching with items on the debit side of the cash book. These would normally represent direct deposits and transfers made to the business bank account. They could also include interest income from the bank.
• Items on the debit side of the bank statement not matching with items on the credit side of the cash book. These would normally represent direct debit for standing orders and bank charges made to the business bank account.
• Items that are matched in terms of description but have different figures in the two records.

Items in (a) and (b) with exception of dishonored cheques are referred to as reconciling items. Items falling under (c) and (d), as well as dishonored cheques are referred as adjusting items. Items under (e) represent items that would require correction in either the cash book or the bank statement, depending on which of the figures is correct. The correct figure would normally be discovered by tracking the transaction to the source documents.

Example 2.1

The following is a bank statement and a cash book of Bitekerezo Makusaro for the Month of December 2021:

Account name: Bitekerezo Makusaro
Bank statement 1st December 2021 – 31st December 2021

Date	Description	Debit (TZS)	Credit (TZS)	Balance (TZS)
1/12/2021	Balance			2,678,943
2/12/2021	Cheque 12648	1,647,500		1,031,443
7/12/2021	Cheque 21643		4,372,000	5,403,443
9/12/2021	Cash deposit		11,189,500	16,592,943
12/12/2021	Cheque 12649	10,245,900		6,347,043
17/12/2021	Judy: Cheque 00186		3,134,500	9,481,543
18/12/2021	Cheque 00058		8,954,000	18,435,543
21/12/2021	Cash deposit		8,635,000	27,070,543
24/12/2021	Cheque 12650	4,675,900		22,394,643
29/12/2021	Dividend		65,400	22,460,043
30/12/2021	NHC Standing order - rent	350,000		22,110,043
30/12/2021	Salaries cheque 12651	6,486,000		15,624,043
31/12/2021	Bank charges	3,200		15,620,843

Bitekerezo Makusaro - Cash Book (Bank Column)

Date	Details	F	TZS
1/12/2021	Balance	b/d	2,678,943
9/12/2021	Cash		11,189,500
11/12/2021	Ambrose: Cheque 21643		4,372,000
16/12/2021	Judy: Cheque 00186		3,134,500
16/12/2021	Mariam Traders: Cheque 00058		8,954,000
21/12/2021	Cash		8,635,000
28/12/2021	Kabadi: cheque 212		6,940,000
			45,903,943

Date	Details	F	TZS
1/12/2021	Kimanya: Cheque 12648		1,647,500
10/12/2021	Habiba: Cheque 12649		10,245,900
29/12/2021	Yaredi: Cheque 12650		4,675,900
30/12/2021	Salaries: Cheque 12651		6,486,000
31/12/2021	Kamara: Cheque 12652		3,200,000
31/12/2021	Balance	c/d	19,648,643
			45,903,943

Comparison Between the Cash Book and the Bank Statement

A comparison can be made between the cash book and the bank statements. The approach is simple. We start with the ideal situation where there are no timing differences for items recorded in either the cash book or the bank statement at the time of comparison. In this situation, each item on the credit side of the cash book will be reflected on the debit side of the bank statement. Similarly, we will have each item on the debit side of the cash book appearing on the credit side of the bank statement. We therefore have to compare between:

• The credit side of the cash book against the debit side of the bank statement.
• The debit side of the cash book against the credit side of the bank statement.

Activity 2.2

You have just met Kabadi, your friend, who works as a part time assistant to the cashier with a modern car garage in your street. He has been instructed by the cashier to compare the cash book and the bank statement for the purpose of reconciliation for the month. He has forgotten about the process and approached you to guide him on how to make the comparison. A quick check of the records shows that the cash book balance is TZS 10,565,000 and the bank statement at the same date is TZS 9,100,000.

Assist Kabadi by explaining the reasons for the variations and guide him on how the comparison can be made between the items recorded in the cash book and the ones recorded in the bank statement.

Exercise 2.1

1. Explain the meaning of bank reconciliation.
2. Assume that you are a student at Fuoni Secondary School. Your school bursar has given you the school cash book (bank column) and bank statement for the month of March 2022 to compare for the purpose of bank reconciliation. List and explain the possible items that can cause disagreement between the balance in the bank statement and that of the cash book.

Adjusting the Cash Book

Once a comparison has been made, we can go further and make an adjustment of the cash book. An adjusted cash book is a cash book that is prepared to ensure the real bank balance is reported. The real bank balance reflects the transactions that the bank has completed on behalf of the account holder such as bank charges. In cases where errors exist in the cash book, the adjustment of the cash book will also include correction of such errors. Adjustment in the cash book will give the adjusted cash book balance.

The adjusted cash book balance is up to date and is reported as a bank balance in financial statements. The main items involved in adjusting the cash book are those that the bank has recorded as direct debits and direct credits.

Example: Adjusted Cash Book

Bitekerezo Makusaro - Adjusted Cash Book (bank column)

Date	Details	F	TZS
31/12/2021	Unadjusted balance	b/d	19,648,643
31/12/2021	Dividends		65,400
			19,714,043

Date	Details	F	TZS
31/12/2021	NHC standing order – rent		350,000
31/12/2021	Bank charges		3,200
31/12/2021	Balance	c/d	19,360,843
			19,714,043

From the adjusted cash book, you may notice that the figure of dividends credited in the bank statement, has now been reflected in the cash book by making a debit entry. This will be the case with all adjusting items appearing on the credit side of the bank statement. On the other hand, the figures for standing order and bank charges have been reflected by crediting the cash book. This will be the case for all adjusting items that were debited in the bank statement. In absence of any errors in the cash book, we have already obtained the bank balance to report in the financial statements, and thus achieved one of the objectives of the bank reconciliation process.

Preparation of Bank Reconciliation Statement Using Adjusted Cash Book Balance

When the adjusted cash book has already been prepared, we only deal with reconciling items when preparing the bank reconciliation statement. These are items already recorded in the cash book, but due to time lag differences and the bank processes, have not yet been recorded in the bank statement. You surely should be able to list these items now! Yes, these are the unpresented cheques and uncredited cheques. Remember we are reconciling two balances here, that is the adjusted cash book balance and the bank statement balance. The bank reconciliation statement shows how the difference between these two balances is explained using the reconciling items. The bank reconciliation statement can be prepared starting with the adjusted cash book balance and ending with the bank statement balance. It can also be prepared by starting with the bank statement balance and ending with the adjusted cash book balance. Whichever balance we have chosen to start with, we should appropriately reflect the effects of the reconciling items to arrive at the other balance.

Starting with Adjusted Cash Book Balance

The treatment of reconciling items is derived from the effect that each reconciling item has on the relationship between the cash book balance and the bank statement balance. For example, a cheque that has not been presented (already credited in the cash book but not yet debited in the bank statement) will cause the cash book to have a lower balance than the bank statement. This will mean that when preparing a bank reconciliation statement, we will have to add the unpresented cheques to the adjusted cash book balance. On the other hand, the uncredited cheques cause the cash book balance to be higher than the bank statement balance. This is because the amount has already been debited in the cash book (increased the cash book balance), while the same amount has not yet been credited by the bank (increased the bank statement balance). For this reason, preparing a bank reconciliation statement starting with adjusted cash book balance will involve deducting (subtracting) uncredited cheques from such cash book balance.

Bank Reconciliation Statement Format (Starting with Adjusted Cash Book Balance)

Description	Amount (TZS)
Adjusted balance as per cash book	XXX
Add: Unpresented cheques/outstanding cheques	XX
	XXX
Less: Uncredited cheques/ deposits in transit/ uncleared deposits	XX
Balance as per bank statement	XXX

Example from Bitekerezo Makusaro:

Description	Amount (TZS)
Adjusted balance as per cash book	19,360,843
Add: Unpresented cheques	3,200,000
	22,560,843
Less: Uncredited cheques	6,940,000
Balance as per bank statement	15,620,843

Starting with the Bank Statement Balance

We now understand how the bank reconciliation statement is prepared. When we start with the bank statement balance, we need to remember now that the treatment of reconciling items will be different from the treatment adopted when starting with adjusted cash book balance. This time around, the uncredited cheques are added, because their presence causes the bank statement to report a lower balance than the cash book. On the other hand, unpresented cheques will therefore be deducted from the bank statement balance to arrive at the adjusted cash book balance, because the unpresented cheques cause the bank statement to have a higher balance than the cash book.

Bank Reconciliation Statement Format (Starting with Bank Statement Balance)

Description	Amount (TZS)
Balance as per bank statement	XXX
Add: Uncredited cheques/ deposits in transit/ uncleared deposits	XX
	XXX
Less: Unpresented cheques/outstanding cheques	XX
Adjusted balance as per cash book	XXX

Example from Bitekerezo Makusaro:

Description	Amount (TZS)
Balance as per bank statement	15,620,843
Add: Uncredited cheques	6,940,000
	22,560,843
Less: Unpresented cheques	3,200,000
Adjusted balance as per cash book	19,360,843

Exercise 2.2

The following is a cash book (Bank column) of Mr. Makame for December 2021:

Dr Cash Book (Bank Column) Cr
Date	Details	F	TZS
1/12/2021	Balance	b/d	1,560,000
6/12/2021	Shaame		3,120,000
19/12/2021	Cash		2,400,000
31/12/2021	Kinoge		1,245,000
31/12/2021	Kidawa		1,635,000
			9,960,000

Date	Details	F	TZS
2/12/2021	C. Makweta		2,385,000
11/12/2021	L. Msangwa		1,725,000
24/12/2021	D. Ndesha		1,305,000
29/12/2021	Saumu		225,000
31/12/2021	Balance	c/d	4,320,000
			9,960,000
1/01/2022	Balance	b/d	4,320,000

The bank statement received by Makame from the bank for December 2021 was as follows:

Date	Details	Dr (TZS)	Cr (TZS)	Balance (TZS)
1/12/2021	Balance b/d			1,560,000
5/12/2021	C. Makweta	2,385,000		825,000
6/12/2021	Cheque		3,120,000	2,295,000
10/12/2021	Cash		2,400,000	4,695,000
15/12/2021	L. Msangwa	1,725,000		2,970,000
29/12/2021	Standing order	750,000		2,220,000
30/12/2021	Credit transfer		1,335,000	3,555,000
30/12/2021	Bank charges	72,000		3,483,000

Required:

1. Write up an adjusted cash book to make the balance up to date.
2. Prepare a bank reconciliation statement as on 31st December 2021:
   • Starting with the adjusted cash book balance.
   • Starting with the bank statement balance.

Importance of Bank Reconciliation

Now that we have seen the mechanics of the process of bank reconciliation under different situations, we can easily reflect and appreciate how important this process is for a business. The importance of bank reconciliation can be summarized in the following points:

• It helps in identifying possible errors in transactions. These include errors in the cash book as well as the ones in the bank statement.
• It helps to check against fraud that might be committed by unfaithful bank cashier, for example consistent and unjustified delays in crediting deposits.
• It makes possible for the business to have an updated cash book and determine the bank balance to be reported in the financial statements.
• It is useful in tracking of receipts (for example direct credits) and expenses (for example bank charges, penalties) and update the ledger accordingly.
• It may assist in discovering 'difficult' customers. Such customers might have a tendency to delay payment through technicalities such as issuing post-dated cheques or erroneous cheques. It is possible to discover this when a business experiences and investigates a tendency of dishonored cheques from one customer.
• It helps to detect fraud, for example stolen cheques cashed without the knowledge of the account holder, or altered/changed cheques. To get maximum benefits of this, the bank reconciliation process should be done by a different person other than the cashier who is responsible to handle cheques.
• Bank reconciliation is also a required standard control procedure or activity for cash management.

Bank Balance in the Financial Statements

The bank balance shown in the financial statements is the adjusted cash book balance. This is because the reconciling items will eventually be settled. The cheques already issued are out of control of the business and it is a matter of time before they are presented for payment, unless for some valid reasons the business issues a 'stop payment order'. As for uncredited cheques, it is again just a matter of time before the bank clears such cheques with the respective drawers.

Activity 2.3

You have just completed narrating and demonstrating to Aminatha, your aunt, about how the cash book and bank statement are reconciled. In your demonstration, you have included explanations on adjusting the cash book and that bank balance at the end of the year can either be a favorable balance or an overdraft. She is trying to draft her statement of financial position and she consults you to advise her on the bank balance that she should report in the statement of financial position.

Required: Advise aunt Aminatha on the appropriate bank balance as requested, giving appropriate reason(s) and clarification on the advice.

Chapter Summary

This chapter has exposed you to the practical aspects on bank account records and reconciliation. It has demonstrated why the bank statement and the cash book would have a different balance at a particular date, and how a bank reconciliation statement can be prepared to explain the difference. It has also shown the importance of reconciliation, which happens to be an important area of business internal controls. The chapter extends the aspects learnt on chapter one that dealt with recording cash transactions, not only in the sense that the bank balance as per cash book will have to be reconciled with the bank statement balance, but also the determination of the appropriate bank balance to be reported in the statement of financial position.

Chapter Three: Correction of Book-Keeping Errors

Introduction

Books of accounts may contain errors. Book-keeping errors may originate from the source documents, but may also start with entries in the books of prime entry, ledger posting, or any other stage in the accounting cycle. When we have errors in the book-keeping records, the financial statements will be affected as they will not show the true view of the financial performance and position of the business. Businesses need to make efforts to prevent, detect and correct book-keeping errors. Using the trial balance may be useful in detecting errors. However, some errors may not be detected using the trial balance. Once errors are detected they should be corrected. In this chapter, you will learn about different types of book-keeping errors and how to correct them at different stages of processing accounting records and towards preparation of financial statements. The competencies developed in this chapter will enable you to make journal entries and relevant ledger postings to correct errors and to prepare a corrected trial balance. You will also be able to identify and deal with implications of errors on the financial statements, including correcting the profit or loss figure and different items in the statement of financial position.

Meaning and Sources of Book-Keeping Errors

Book-keeping errors are errors made at any stage in the book-keeping process. They can be made by entering a wrong amount in the books of original entry, entering a transaction in the wrong book of original entry, inappropriate posting to the ledger, wrong computation of ledger balances, or even wrong preparation of the trial balance. In any case, the effect of book-keeping errors is that the affected account balances will not reflect the transactions that have taken place in the business during the period. Every transaction made by the business is supposed to be entered and posted using the double entry system. The amount entered for each transaction must also be appropriate as per respective source document. Further, each ledger account is supposed to be appropriately balanced, and the general ledger balances are normally summarized in the trial balance from time to time. At the end of the financial year, adjustments are made to the balances for some items, after which, the balances are used in the preparation of financial statements. When we have book-keeping errors at any stage, the resulting financial statements will be misleading if such errors are not corrected.

Sources of Book-Keeping Errors

Specifically, book-keeping errors can result from:

• Failure to record the correct amount from source documents
• Omitting (not recording) some items from the source documents when entering transactions in the books of prime entry
• Making entries to a wrong account
• Failure to make appropriate application of the double entry principle
• Making arithmetical (casting) mistakes when summing up amounts in special journals/daybooks or when calculating balances for different ledger accounts

Detection of Book-Keeping Errors

How will a business know that there are errors in its records? Important steps to take in ensuring that errors are discovered include having the source documents systematically numbered, arranged and filed. It also includes extracting a trial balance at frequent intervals. Errors can be discovered and identified through the following process:

1. Making sure that source documents exist for each transaction and are systematically arranged or filed
2. Tracing each transaction from source document to the relevant journal
3. Vouching each journal entry to the source document
4. Verifying every ledger entry with originating journal entry
5. Tracing every journal entry to ledger accounts
6. Verifying balances in the ledger accounts
7. Extracting a trial balance

Undertaking these processes requires a good understanding of the double entry principle. This is something you should also be able to perform for a business with your knowledge of book-keeping so far.

Types of Book-Keeping Errors

We have seen the different causes of errors in books of accounts. For the purpose of making appropriate correction of errors, it may be useful to understand the type of each error once it is discovered. There are typically two broad categories of errors which are categorized depending on how they affect the trial balance agreement. We therefore have:

• Errors that do not affect trial balance agreement; and
• Errors that affect trial balance agreement

Book-Keeping Errors That Do Not Affect Trial Balance Agreement

You will remember that the general reason why a trial balance agrees is that the total of debit entries made equals the total of credit entries made. This implies that the trial balance will agree even if some types of book-keeping errors exist in the books of accounts, provided that the total of debit entries made is equal to the total of credit entries made. This will also happen whenever the total of credit balances listed in the trial balance is equal to the total of debit balances, irrespective of the correctness of such balances. Trial balance will therefore agree even with existence of one or more errors because:

• There is an error that affects both a debit balance and a credit balance by the same amount, or
• There is an error in which an entry has not been made in the books at all for a particular transaction, or
• There are two independent errors that cancel each other (with equal amount on debit and credit side)

Considering these situations, we have six types of book-keeping errors that do not affect trial balance agreement:

1. Error of Omission

This is an error where a transaction has not been recorded in the books at all. For example, a purchase of goods for cash TZS 345,000 has not been recorded in the books. This transaction should have been recorded by making a debit entry of TZS 345,000 in the purchases account and a credit entry of TZS 345,000 in the cash account. When this is not done, the trial balance will agree because the entries are omitted from the purchases account (debit side) and the cash account (credit side). This kind of error can be detected by tracing source documents (in this case the cash payment vouchers) to the journal and to the ledger.

2. Error of Commission

This is an error in which an entry is made to a wrong account that happens to be in the same class of account as the correct account in which it should have been made. A common example of this is an error in either the sales ledger or purchases ledger, where a transaction is entered in a wrong personal account of a debtor or creditor, especially where the names of such persons have close similarity. For example, a TZS 250,000 sale of goods to Hawa Mwalimu has been debited in the account of Hawa Maalim, who also happens to be in the sales ledger of the business. This transaction was supposed to be debited in Hawa Mwalimu's account, but was posted to Hawa Maalim instead. The posting to the general ledger, in this case the trade receivables account and the sales account will not be affected by this error. The trial balance will therefore agree even if this error has been made in the subsidiary ledger accounts of Hawa Mwalimu and Hawa Maalim. This error can be discovered by vouching subsidiary ledger entries to special journal entries and to the source documents (invoices and respective payment documents) and confirm whether the names in the source documents match with those in the books.

3. Error of Principle

Unlike the error of commission above, this kind of error happens when an entry is made not only to a wrong account, but also to an account in a different class of accounts from the class where the correct account belongs. This does not affect trial balance agreement, because a debit entry and a credit entry have been made; but one of the entries is made to a wrong class of account. An example of an error of principle is a situation where a shop owner has bought shelves for use in the business and debited the transaction in the purchases account instead of shop furniture account. Doing this will overstate the figure of purchases and understate the figure of non-current assets of the business. Although not affecting trial balance agreement, an error of principle would lead to misleading figures in the financial statements. To discover an error of principle, one can vouch entries in the books to the source documents and trace source documents to journal and ledger entries.

4. Error of Original Entry

This is an error where the original journal entry and ledger posting have been completed in the appropriate accounts, but the amount recorded is wrong. An example of this is where payment of cash TZS 100,000 for wages is entered in the journal and posted to the ledger as TZS 1,000,000. This will mean that the transaction appears in both the wages account and cash account as TZS 1,000,000 instead of TZS 100,000. The error of original entry would in many cases be a result of additional (or omitted) zero in the figure. It could also occur as a result of transposing two digits in the figure, for example TZS 980,000 recorded as TZS 890,000. The trial balance would still agree in this case, since the problem starts with the original (journal) entry, meaning that the same incorrect amount will be used in both the accounts affected by the transaction.

5. Error of Complete Reversal of Entries

Reversal of entries means that a debit entry is made in the account that should have been credited, and a credit entry is made in an account that should have been debited. If this is done, the trial balance will still agree, because total debit entries and balances will be the same as the total credit entries and balances. An example of this is where a receipt of cash TZS 204,000 from a debtor is debited to the trade receivables account (which should have been credited) and credited to cash account (which should have been debited). This can be discovered by tracing source documents to the journal entries.

6. Compensating Errors

These are two or more errors whose effects on the credit and debit balances happen to cancel each other. This is a situation when there are errors in the balances of two accounts, for example, an undercast of a debit balance and an overcast of another debit balance. Another situation is where there is an undercast of a debit balance and an undercast of a credit balance. What is important is that the errors involve the same amounts and thus cancel each other. An example is where there is an error in balancing accounts, where a rent expense account balance is TZS 45,000 more than it should have been, while at the same time wages expense account has a balance undercasted with TZS 45,000. The trial balance would still agree since the errors cancel each other. Such errors are discovered by both tracing and vouching, together with recasting the ledger accounts (repeating the calculation of balances in the ledger).

Note: Looking at the example above, it will seem that compensating errors are not a common thing in accounts. This is because it is very rare to have such errors involving equal amounts and affecting opposite sides. However, we have one common situation where we can find compensating errors. This happens when there is an error in calculating the totals on a special journal.

Activity 3.1

Your cousin Sharifa has a kiosk and you have assisted her to record transactions and extract a trial balance. You have just told her that the next stage before preparing financial statements is to check whether the trial balance has errors. She is confused with this because your earlier conversation led her to believe that when the trial balance totals agree there cannot be errors in the accounting records.

Required: Write down the explanation that you will give to Sharifa. In your explanations, give examples of at least four possible transactions in her books of accounts that could be wrongly recorded but still have the trial balance agreeing.

Exercise 3.1

You are given the following table with errors that occurred in recording transactions of a business. You are required to identify the types of error in recording each of the transactions and write it in the space provided as per the given example.

S/n	Transaction	Type of Error
e.g.	The account of Juliana was erroneously debited in respect of goods sold on credit to Julieth.	Error of Commission
(i)	An invoice for TZS 8,190,000 for the purchase of computer for office use was entered in the purchases account.
(ii)	The owner of the business had withdrawn TZS 2,800,000 from the firm's bank account for personal use. This was not recorded in the books of accounts.
(iii)	The business bought equipment on credit for use in the business TZS 5,460,000 from Keko store. The transaction was entered in both accounts concerned as TZS 6,110,000.
(iv)	A cash payment of TZS 780,000 for the purchase of stationeries had been credited to stationeries account and debited to the cash account.
(v)	The sales journal has been undercast by TZS 450,000.

Book-Keeping Errors That Affect Trial Balance Agreement

The double entry principle requires every debit entry to have a corresponding credit entry. A corresponding entry is an entry involving the same amount made on the opposite side of the other account relating to the transaction. There are errors that when made, the trial balance extracted at a particular date would not agree. Whenever the total amount in debit entries made is not the same as the total amounts of credit entries made, the trial balance will not agree. Any book-keeping error that affects trial balance agreement would therefore be a unilateral error. An error is unilateral when it affects only one part of the double entry required for a transaction, or only one account in the ledger. While it is difficult to imagine all the possible errors that would cause a trial balance not to agree, it is possible to have some general categories of such errors. These categories are:

1. Single Entry Made for a Transaction (Omission in One Account)

In this error, either a debit entry is made without a corresponding credit entry, or a credit entry is made without a corresponding debit entry. A trial balance will not agree when this is done. This is because balancing of a trial balance depends on the application of double entry system. An example of this is where receipt of cash TZS 34,000 from Twilumba, a credit customer, has been recorded only in the trade receivables account. This transaction should have been debited in the cash account and credited in the trade receivables account. Recording it only in the trade receivables account leaves an error on the cash account. This will cause the trial balance not to agree.

2. Use of Different Amounts to Make 'Double Entry'

In this error, both a debit entry and a credit entry for a transaction are made. However, the amount debited is different from the amount credited (in many cases one of them is correct, but it may also happen that they are both incorrect). In any case, as long as the amount debited is different from the amount credited, the trial balance will not agree. As a matter of fact, the entry made is not even supposed to be called a double entry, because the transactions are not recorded in equal amounts. An example of this would be where a credit sale of TZS 58,000 is recorded in the sales account at TZS 58,000, while TZS 58,800 is recorded in the trade receivables account. In this case the trial balance will not agree.

3. Completing 'Double Entry' in the Same Side of Both Ledgers Concerned

This happens when a transaction is recorded in two accounts concerned, but either debited in both accounts or credited in both accounts. Again, this kind of recording is not double entry because corresponding entries must be made on opposite sides of accounts. When this happens the trial balance will not agree because there will either be too much of the credit balances, or too much of the debit balances. For example, a receipt of interest from bank may be debited in both the cash book and the interest income account.

4. Errors in Balancing Ledger Accounts or Extracting Balances to the Trial Balance

Addition or balancing errors may happen when balancing ledger accounts. These are also called casting errors. In book-keeping, the word 'casting' means to add up a column of figures. So the addition error in which the total shown is higher than the correct sum is called overcasting error. The opposite is an undercasting error. When there is a casting error in balancing accounts the trial balance will not agree, unless there is a coincidence of two casting errors that cancel each other. It is also possible to have correct balances in the ledger, and a mistake arises in picking the balances during manual extracting to the trial balance, by picking an incorrect amount, e.g. a total instead of a balance, or transposing digits in the balance. When this happens, the trial balance would not agree. An example of such errors is where the totals on the credit side and debit side of the trade payables account are TZS 860,000 and 675,000 respectively and the balance recorded is TZS 165,000 instead TZS 185,000. Another example is where a TZS 650,000 balance on equipment account is shown in the trial balance as TZS 560,000.

5. Errors in Placing Ledger Balances in the Trial Balance

This would happen when, in extracting the trial balance, a debit balance extracted from the ledger is taken to the credit side of the trial balance, or the vice versa. An example of this is where a correct balance of sales account is placed in the debit side of the trial balance. The trial balance will not agree unless there is a coincidence that another balance of the same amount is also erroneously placed on the credit side.

General Approach in Undertaking Correction of Book-Keeping Errors

Deliberate efforts should be made to identify book-keeping errors in the accounting records. Once identified, the errors should be corrected. Well, we can share one secret at this point! Interested? Make sure you have a good mastery of the double entry rules for every type of transaction, and the normal balance for different elements of financial statement. You can always refresh your knowledge of these from Book One, and please do! Once you are comfortable with these, we are good to go as far as the journey on correction of errors would lead us to.

General Approach to Error Correction

The general approach in correcting errors requires the following to be done in respect of each error:

1. Identify the correct entries that should have been made for the transaction
2. Find out the entries that were made
3. Make journal entries to make necessary correction(s)

The correcting entry to be made will involve a double entry whose effect is to both offset the erroneous entry made and make the correct entry. After the correction, the books should show a position as if the correct entry had been made in the first place. For the purpose of this book, we will focus on the correction of general ledger balances, except for situations where we are dealing with an error that affects only the subsidiary ledger, for example, when correcting an error of commission.

Correction of Book-Keeping Errors That Do Not Affect Trial Balance Agreement

Correcting an Error of Omission

Correction of this error is simple and straightforward. This is because no entry has been made in respect of the transaction. One is supposed to make the required entry.

Example 3.1

A credit purchase of TZS 50,000 worth of goods from Daudi Salum has been completely omitted from the books.

To correct this error we must make the missing double entry to record both the purchases and the trade payables account in the books.

The journal entry for the correction is:

Date	Details	Dr (TZS)	Cr (TZS)
	Purchases	50,000
	Trade payables		50,000
	Being error of omission now corrected

Correcting an Error of Commission

In this case, one of the entries has been made in a wrong account. The correcting double entry should be made such that:

• It cancels or offsets the entry made in the wrong account; and
• It records the transaction in the appropriate account.

Example 3.2

A credit sale of goods for TZS 100,000 to K. Mrema is entered in the account of K. Mremi. This sale was supposed to be debited in K. Mrema's account. It was instead debited to K. Mremi's account. To correct this error, we must make a double entry such that the record is cancelled from the book of K. Mremi and entered to the K. Mrema account.

Date	Details	Dr (TZS)	Cr (TZS)
	K. Mrema	100,000
	K. Mremi		100,000
	Being an error of commission now corrected

Correcting an Error of Principle

In this case, one of the entries has been made in a wrong account that also happens to fall in a different class of accounts. The correcting double entry should be made such that:

• It cancels or offsets the entry made in the wrong account; and
• It records the transaction in the appropriate account.

Example 3.3

The business issued a TZS 7,000,000 cheque to purchase a Suzuki van for use in delivering goods to customers. This transaction was debited to the purchases account and credited to the bank account. To correct this error, we must cancel the entry in the purchases account. This is done by crediting the purchases account. We must then make an entry to now record the transaction in the appropriate asset account, the delivery van account. This is done by debiting the delivery van account.

Date	Details	Dr (TZS)	Cr (TZS)
	Delivery van	7,000,000
	Purchases		7,000,000
	Being error of principle now corrected

Correcting an Error of Original Entry

In this case, the aim is to make sure that the wrong original entry is rectified. If the figure recorded was higher than the correct amount, a double entry should be made to correct it. If on the other hand, the figure recorded is lower than the correct amount, an entry should be made to correct it. In any case, since both the accounts have an error of the same amount, the correcting entry will be a double entry.

Example 3.4

A credit sale of goods TZS 380,000 to Ally Salehe was entered in the books as TZS 280,000. This means that the amount entered in both the trade receivables account and the sales account is TZS 100,000 lower than the correct amount. Double entry is necessary to correct the amount. We therefore need to make entries with a TZS 100,000. This will increase both the amount debited to trade receivables account and the amount credited to sales account to the correct figure i.e. TZS 380,000. The double entry to correct this will be:

Date	Details	Dr (TZS)	Cr (TZS)
	Trade receivables	100,000
	Sales		100,000
	Being error of original entry now corrected

Example 3.5

A credit purchase of goods from Sarinjo TZS 56,000 was entered in the books as TZS 65,000. Figure out the analysis of this error, as we did together in example 3.4 above. The correcting entry will be:

Date	Details	Dr (TZS)	Cr (TZS)
	Trade payables	9,000
	Purchases		9,000
	Being transposition error of original entry now corrected

Correcting an Error of Complete Reversal of Entries

Correcting this error needs to make entries that will:

• offset the records made on the wrong sides; and
• record the transaction on the appropriate sides.

This will require debiting the account that was credited with an amount equal to two times the amount credited. It will also require crediting the account that was debited with an amount equal to two times the amount debited.

Example 3.6

Purchase of goods on credit for TZS 600,000 was debited to trade payables account and credited to purchases account.

You see! What has been done to record the transaction is exactly the opposite of what should have been done. If we only Debit TZS 600,000 to purchases account and credit trade payables account we will be simply cancelling what has been recorded. That leaves the transaction unrecorded. We therefore need to make another TZS 600,000 debit to purchases account and TZS 600,000 credit to trade payables account. For this kind of error we therefore need to double the amount involved in the transaction (i.e. TZS 600,000) and thus make a double entry of TZS 1,200,000 using the correct sides, i.e. Debit to purchases account and credit to trade payables account. The entries will be made to the debit and credit of purchases account and trade payables account respectively.

Date	Details	Dr (TZS)	Cr (TZS)
	Purchase	1,200,000
	Trade payables		1,200,000
	Being error of complete reversal entry now corrected

Correcting Compensating Errors

Since these are two or more errors, each error is corrected separately by debiting the account which had an excessive credit balance as a result of the error, and crediting the account that had an excessive debit balance as a result of the error. As long as they both involve the same amounts and the errors are made on the opposite sides of accounts, the correcting entry will obviously be a double entry.

Example 3.7

The balance of sales account has been overstated by TZS 120,000. The wages account was overcast by TZS 120,000. As we see, it is just a coincidence that the same amount is involved in the two errors, both overstating the accounts, where one has a normal credit balance and the other has a normal debit balance. To correct this error we have to debit sales account by 120,000 and credit wages account by TZS 120,000.

Date	Details	Dr (TZS)	Cr (TZS)
	Sales	120,000
	Wages		120,000
	Being compensating errors now corrected

Chapter Summary

In this chapter, we have explored the various types of book-keeping errors that can occur in accounting records and the appropriate methods for correcting them. We learned that errors can be categorized into two main groups: those that affect the trial balance agreement and those that do not. The chapter provided detailed explanations and examples for correcting different types of errors including errors of omission, commission, principle, original entry, complete reversal of entries, and compensating errors. Understanding how to identify and correct these errors is crucial for maintaining accurate financial records and preparing reliable financial statements.

The key takeaway is that regardless of the type of error, the correction process involves analyzing what should have been recorded versus what was actually recorded, and then making the appropriate journal entries to rectify the situation while maintaining the integrity of the double-entry system.

Chapter Four: Concepts in Public Sector Budgeting and Accounting

Meaning and Role of Public Sector

The public sector refers to the part of the economy that is controlled and operated by the government. It includes all government departments, ministries, agencies, and public enterprises that provide services to the public. The public sector plays a crucial role in the economic and social development of a country by providing essential services that may not be adequately provided by the private sector.

Characteristics of the Public Sector

• Government Ownership and Control: Public sector organizations are owned and controlled by the government
• Service Orientation: Primary focus is on providing services rather than making profits
• Public Accountability: Responsible to the public through elected representatives
• Funding from Public Resources: Financed mainly through taxes, levies, and other government revenues
• Legal Framework: Operates under specific laws and regulations

Structure of the Public Sector in Tanzania

The public sector in Tanzania is organized into three main levels:

Level	Components	Examples
Central Government	Ministries, Departments, and Agencies (MDAs)	Ministry of Finance, Tanzania Revenue Authority, Bank of Tanzania
Local Government	Local Government Authorities (LGAs)	City Councils, Municipal Councils, District Councils
Public Enterprises	State-owned corporations and companies	TANESCO, TANROADS, ATCL, TRL

Public Sector Budgeting and Its Role

Public sector budgeting is the process of planning, preparing, approving, and executing the government's financial plan. It involves estimating revenues and allocating resources to various programs and activities to achieve government objectives.

The Budget Cycle

The public sector budget cycle typically involves four main stages:

1. Budget Preparation: Ministries and departments prepare their budget estimates based on their strategic plans and submit them to the Ministry of Finance
2. Budget Approval: The budget is presented to Parliament for debate, amendment, and approval
3. Budget Execution: Implementation of the approved budget through spending and revenue collection
4. Budget Monitoring and Evaluation: Tracking budget performance and assessing results against objectives

Roles of Public Sector Budgeting

• Resource Allocation: Distributing limited resources among competing needs and priorities
• Economic Management: Using fiscal policy to influence economic growth, employment, and price stability
• Accountability: Providing a framework for monitoring government performance and ensuring proper use of public funds
• Planning: Setting priorities and translating government policies into actionable programs
• Control: Establishing spending limits and ensuring compliance with authorized expenditures

Government Revenue

Government revenue refers to all income received by the government from various sources. These revenues are used to finance public expenditures and implement government programs.

Type of Revenue	Description	Examples in Tanzania
Tax Revenue	Compulsory payments to government without direct benefit to payer	Income Tax, VAT, Excise Duty, Import Duty
Non-Tax Revenue	Revenue from sources other than taxes	Fees, Licenses, Fines, Royalties, Dividends from public enterprises
Grants and Aid	Voluntary transfers from other governments or international organizations	Budget support grants, Project grants from World Bank, IMF
Borrowing	Funds raised through domestic and external borrowing	Treasury Bonds, Loans from international financial institutions

Note: The Tanzania Revenue Authority (TRA) is the main agency responsible for collecting tax revenues in Tanzania.

Government Expenditure

Government expenditure refers to all spending by the government to provide public services, implement development projects, and meet other public obligations.

Type of Expenditure	Description	Examples
Recurrent Expenditure	Day-to-day operational expenses	Salaries, Utilities, Office supplies, Maintenance
Development Expenditure	Spending on capital projects and long-term development	Road construction, School buildings, Hospital equipment
Transfer Payments	Payments to individuals or other entities without receiving goods or services in return	Pensions, Subsidies, Social welfare payments
Debt Servicing	Payment of interest and principal on government debt	Interest on treasury bonds, Loan repayments

Budget Classification in Tanzania

In Tanzania, government expenditures are classified using the following structure:

• Administrative Classification: By ministry, department, or agency
• Economic Classification: By type of expenditure (personnel emoluments, goods and services, etc.)
• Functional Classification: By purpose or function (education, health, defense, etc.)
• Program Classification: By specific programs and projects

Public Sector Accounting

Public sector accounting refers to the process of recording, classifying, summarizing, and interpreting financial transactions of government entities. It differs from private sector accounting in several important aspects.

Differences Between Public and Private Sector Accounting

Aspect	Public Sector Accounting	Private Sector Accounting
Objective	Service delivery and accountability	Profit maximization
Basis of Accounting	Cash basis or modified accrual basis	Accrual basis
Budget Emphasis	Budgetary control is central	Budget is internal planning tool
Reporting Focus	Stewardship and compliance	Profitability and financial position
Funding Source	Taxes and other government revenues	Share capital and loans

Key Principles of Public Sector Accounting

• Budgetary Accounting: Recording and monitoring budget allocations and expenditures
• Fund Accounting: Separating resources according to their designated purposes
• Compliance Emphasis: Ensuring adherence to laws, regulations, and budgetary authorizations
• Transparency: Making financial information accessible to the public
• Accountability: Being answerable for the use of public resources

Terminologies in Public Sector Accounting and Budgeting

Appropriation

Authorization by Parliament for government to spend public funds for specific purposes. It sets the maximum amount that can be spent on each vote.

Vote

A unit (ministry, department, or agency) for which a separate budget is allocated and which is responsible for managing those funds.

Warrant

Official authorization issued by the Treasury to allow a vote holder to incur expenditures up to a specified limit.

Exchequer

The government's treasury or account where public revenues are deposited and from which expenditures are made.

Virement

Transfer of funds from one budget line to another within the same vote, usually requiring approval from higher authorities.

Supplementary Estimates

Additional budget allocations requested during the financial year to meet unforeseen expenditures that were not provided for in the original budget.

Excess Expenditure

Spending that exceeds the authorized appropriation, which is illegal unless regularized through supplementary estimates.

Contingency Fund

A reserve fund for meeting unforeseen and urgent expenditures that cannot wait for normal budgetary processes.

Functions and Roles of Persons Involved in Public Sector Accounting

Accounting Officer

Responsibilities:

• Overall responsibility for financial management in a ministry, department, or agency
• Ensuring proper use of public funds and compliance with financial regulations
• Signing off on financial statements and returns
• Appearing before parliamentary committees to answer for financial management

Examples: Permanent Secretaries, Directors General, Chief Executive Officers of public agencies

Chief Finance Officer

Responsibilities:

• Managing the finance department and accounting functions
• Preparing budgets and financial reports
• Maintaining accounting records and internal controls
• Advising the accounting officer on financial matters

Internal Auditor

Responsibilities:

• Reviewing internal controls and systems for effectiveness
• Conducting regular audits of financial transactions
• Identifying weaknesses and recommending improvements
• Investigating cases of suspected fraud or misuse of funds

Treasury Officer

Responsibilities:

• Managing cash flows and banking operations
• Processing payments and receipts
• Maintaining treasury records
• Preparing cash flow forecasts

Budget Officer

Responsibilities:

• Coordinating the budget preparation process
• Monitoring budget implementation
• Preparing budget performance reports
• Analyzing variances between budget and actual expenditures

Storekeeper/Inventory Controller

Responsibilities:

• Managing government stores and inventory
• Maintaining stock records and conducting physical counts
• Issuing and receiving stores items
• Preparing stores reports and returns

Activity 4.1

You have been selected to participate in a school visit to your local district council offices. During the visit, you meet the District Finance Officer who explains the budget process for the district. She mentions several terms that are new to you, including "appropriation," "virement," and "supplementary estimates."

Required: Write a brief explanation of these three terms in your own words, and explain how they relate to each other in the public sector budgeting process.

Exercise 4.1

Match the following public sector accounting roles with their primary responsibilities:

Role	Responsibilities
1. Accounting Officer	A. Managing cash flows and banking operations
2. Chief Finance Officer	B. Reviewing internal controls and systems
3. Internal Auditor	C. Overall responsibility for financial management
4. Treasury Officer	D. Managing government stores and inventory
5. Storekeeper	E. Managing the finance department and accounting functions

Activity 4.2

Your school is planning to establish a student government with a small budget to manage student activities. The principal has asked your class to design a simple budgeting and accounting system for the student government.

Required: In groups, design a simple budgeting process and identify at least three key controls that should be put in place to ensure proper use of student funds. Explain how these controls relate to principles of public sector accounting.

Chapter Summary

In this chapter, we have explored the fundamental concepts of public sector budgeting and accounting. We learned that the public sector encompasses all government entities that provide services to the public and is characterized by service orientation, public accountability, and funding from public resources.

Key aspects covered include:

• The structure of the public sector in Tanzania, including central government, local government, and public enterprises
• The budget cycle and the important role of budgeting in resource allocation, economic management, and accountability
• Sources of government revenue, including tax revenue, non-tax revenue, grants, and borrowing
• Types of government expenditure, including recurrent, development, transfer payments, and debt servicing
• Differences between public and private sector accounting, emphasizing the unique principles of public sector accounting
• Key terminologies used in public sector budgeting and accounting
• Roles and responsibilities of various personnel involved in public sector financial management

Understanding these concepts is essential for anyone interested in how government manages public resources and delivers services to citizens. The principles of transparency, accountability, and proper financial management that underpin public sector accounting are crucial for good governance and effective public service delivery.

Note: This chapter provides a foundation for understanding public financial management. Students interested in pursuing careers in public service, accounting, or finance will find these concepts particularly relevant.