Basic accounting unit1

THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
1
Module 9: Basic Accounting

OF BANKING &
FINANCIAL SERVICES
UIBFS
LEARNING OBJECTIVES
By the end of this module, the students should be able to;
• Define accounting and explain its basic framework.
• Post and process transactions
• Explain the logic of and reasons for year-end adjustments
and provisions in accounting
• Prepare year-end financial statements
• Articulate the nature of published accounts as well the
common Financial Reporting Standards
• Calculate key financial ratios and construct simple financial
projections from relevant information
• Explain the basic principles of taxation in Uganda
2

OF BANKING &
FINANCIAL SERVICES
UIBFS
Accounting Framework
Posting and Processing Transactions
Year- End Adjustments and Provisions
Preparing Final Accounts
Introduction to Financial Reporting Standards
Published Accounts
MODULE COVERAGE
3
Financial Ratios and Projections
Elements of Taxation

OF BANKING &
FINANCIAL SERVICES
UIBFS
What is accounting?
• Accounting can be defined as the process of recording, classifying and
summarizing economic transactions in preparation of financial statements that
provide information about the financial position, performance and changes in an
enterprise or economic entity.
• Everyday, banks engage in thousands of business transactions, which result in
money or value changing hands. All these transactions need to be recorded
accurately otherwise the bank can easily lose track of its operations.
• The process of recording these financial transactions in the books of accounts and
summarizing the results is referred to as book keeping.
• Once the transactions have been recorded and summarized, they need to be
interpreted and communicated to the end users.
• Accounting is thus concerned with the interpretation and communication of the
financial information resulting from transactions through the financial reports.
• These financial reports include amongst others the Balance Sheet, Income
Statement and Cash flow Statements. Through these financial statements,
accounting provides most of the necessary financial information.
4

OF BANKING &
FINANCIAL SERVICES
UIBFS
The key objectives of accounting for every bank should be to;
1. Construct accurate records that are the starting point for
measuring performance and reporting progress
2. Provide information to facilitate high quality financial analysis by
various stakeholders
3. Avail factual information to aid clear well informed managerial
decisions
4. Reassure and inspire confidence to shareholders, lenders, the
regulator (Bank of Uganda) and the banking public
5. Users of accounting information
6. Accounting information is collected, processed and produced with
a focus on its users. Accounting is, in this sense, a clear and
standard way of producing financial information and
communicating it to internal and external users.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Below are typical users of accounting information and their respective needs
a. Shareholders: As owners of the bank, these are interested in prospects of
receiving dividends, capital growth and the safety of their assets in the
institution. It is in their best interest that the financial statements show that the
bank is run in a profitable, safe and sound way.
b. Board/Directors: The board members would like to interpret/ analyze financial
statements and operational statistics to better perform their key duty of
monitoring management performance and steering the bank towards attaining
its institutional objectives, which usually include profitability for improving
shareholder value and facilitating organic growth.
c. Creditors: The creditors would like to be assured that the bank will be able to
service its debts without difficulty. They are concerned with short term liquidity,
long term solvency and overall the level of indebtedness in relation to equity.
d. Management: Managers of a bank would like to know how they are performing
relative to prior periods and in comparison to targets. They use accounting
information to measure their performance with a view to boosting income and
lowering costs to continually improve.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
e. Regulators: For banks and other institutions in tier II and III, Bank of Uganda is
their regulator. In this capacity, Bank of Uganda would like to ensure that the
bank complies with all the relevant laws and regulations, is run professionally
and that its financial health remains robust
f. Customers and the general public: The banking public treasures the confidence
that a bank is in sound financial position and that it is running profitably. They
will usually get this information from the published accounts of the bank. This is
one of the reasons that banks are required to publish their audited financial
statements in the press and sometimes in their banking hall.
g. Employees also need these reports in making collective bargaining agreements
(CBA) with the management, in the case of labor unions or for individuals in
discussing their compensation, promotion and rankings.
h. Government entities (tax authorities especially URA) need financial statements
to ascertain the propriety and accuracy of taxes and other duties declared and
paid by the bank.
i. Vendors and Suppliers who extend credit to a business require financial
statements to assess the ability of the bank to pay for supplies more so timely.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Attributes of good accounting information
i. Relevant: i.e relating to the transactions in which the bank was a party.
ii. Reliable: i.e. verifiable, accurate/ truthful, neutral and demonstrates
representational faithfulness.
iii. Comparable: information must be measured and reported in a similar manner
for different institutions, especially if there is need to to compare their relative
performance. Banks and other businesses also need to present prior period
accounting information alongside the present period information to facilitate
trend analysis (compare this year’s accounts with prior year accounts).
iv. Consistent: the same accounting methods should be applied from period to
period. This also facilitates comparison of the financial performance of the bank
over a period of time since the same accounting policies would have been used
in the preparation of the accounting information being compared.
v. Comprehensible: The users of the accounting information (though not
accounting professionals, should be able to understand it and as a result make
informed economic decisions based on the information
vi. Timely: The accounting information should be produced on time to be used for
making decisions otherwise its value will not be realized.
vii. Objective: accounting information should not be biased but rather be prepared
on the basis of facts and good practice.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
International accounting bodies
The accounting profession is regulated internationally by the International Accounting
Standards Board (IASB) which issues accounting standards known as the
International Accounting Standards (IAS) and the International Financial Reporting
Standards (IFRS). There are presently 41 IASs and 8 IFRs (as at Oct 2011).
The objectives of IASB are:
i. To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements and to promote their world
wide acceptance and observance.
ii. To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of financial
statements.
The accounting standards have been adopted by many countries for the preparation
of financial statements by companies in the execution of their regulatory role.
The accounting profession in Uganda is regulated by the Institute of Certified Public
Accountants of Uganda (ICPAU) which is a member of the International Federation
of Accountants (IFAC). ICPAU has also adopted the IASs and IFRSs to be used in
Uganda. We shall therefore be using the IAS and IFRS in this module.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Accounting principles/ concepts
• Accounting information, in order to
be reliable, must be prepared
according to generally agreed
precepts also referred to as
accounting concepts or principles.
Accounting principles are the broad
basic assumptions which underlie the
periodic financial accounts of
business enterprises.
• Accounting concepts act as filters of
accounting data/facts collected from
the environment in which the
accounting information system
operates. They also govern the
processing stage and define what is
acceptable as output or information
to the users.
10

OF BANKING &
FINANCIAL SERVICES
UIBFS
The Accounting profession identifies the following four fundamental principles.
1. Going concern principle:
The institution is viewed as continuing in operation for the foreseeable future and the
accounts should be prepared on the assumption that the organization has neither
the intention nor the necessity of liquidating or of curtailing significantly the scale
of its operations.
2. Accruals’ principle (sometimes called the matching concept).
This requires that costs should be matched against revenues which are produced as a
result of those costs.
The Companies Act 1985 of the Laws of Uganda states that ‘all income and charges
relating to the financial year to which the accounts relate shall be taken into
account, without regard to the date of receipt or payment as long as the business
is entitled to it’.
In other words, if an expense has been paid in one financial period but the related
revenue does not arise until a later one the cost should be carried forward, and if
an expense is incurred in one financial period it should be charged against the
profit of that period, whether or not it has been paid for by the accounting date.
11

OF BANKING &
FINANCIAL SERVICES
UIBFS
3. The Principle of Prudence:
A person is said to be prudent when he gives the most cautious presentation of the
situation. In accounting a knowledgeable user assumes that the preparer has been
cautious to the extent that he has not anticipated any gains (all gains reported
have been realized) and any expenses or losses foreseen with reasonable certainty
have been recognized in the financial statements.
Income should not be anticipated in the accounts but rather only included when the
BANK is legally entitled to it. However, some expenses may not have been paid by
the balance sheet date and yet the services were used like for instance utilities
(water, electricity and telephone bills) in which case these expenses are accrued
(included in the accounts as expenses and the respective service providers
recognized as creditors of the business) at the balance sheet date.
4. Consistency Principle
The accounting treatment of like items should be consistent over successive
accounting periods. When policies are consistently applied, it helps facilitate
comparison of performance over a range of periods. In case the accounting
treatment of any item has changed from one period to another, details of such a
change should be disclosed in the notes to the accounts. The impact of the change
should be quantified and stated.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Besides the above four universally agreed fundamental principles or
concepts, there are other principles/ concepts;
Entity concept
This is the assumption that the affairs of an entity are treated as
separate from the other business activities of its owner. The only
time that the personal resources of the proprietor affects the
accounting records of the business is when the proprietor
introduces capital into the business, makes a drawing origin any
other transactions with the business.
Duality concept
Any given transaction will affect a minimum of two accounts within
assets, liabilities, or equity. If the accounting equation (ASSETS =
CAPITAL + LIABILITIES) is to remain in balance, any change in the
assets must be accompanied by an equal change in the liabilities or
equity, or by an equal but opposite change (increase or decrease)
in another asset account.
13

OF BANKING &
FINANCIAL SERVICES
UIBFS
Materiality concept
Under this concept, items are recorded
in financial statements only if they
are material.
Items are material if their omission or
misstatement would affect the
impact of the financial statements.
Materiality as a concept is relative but
some items disclosed in accounts are
particularly sensitive and even a very
small misstatement of such an item
would be seen as a material error for
example where the disclosure of the
absolute amount is a statutory
requirement like for instance the
extent of insider lending (loans to the
shareholders and persons related to
them) in a financial institution.
14

OF BANKING &
FINANCIAL SERVICES
UIBFS
Realization concept
This requires that revenue be recognized in the
accounting period it is earned, rather than
when it is collected in cash. It defines the
point at which revenue is recognized.
“Substance over form” Concept
It stipulates that items in the financial
statements need to be treated more in line
with their economic reality than just their
legal form, as long as this does not result in
violation of materiality. Accordingly, assets,
liabilities, income and expenditure items can
be grouped in some cases and reported as a
single item.
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Basic accounting unit1

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