Basic accounting unit2

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

OF BANKING &
FINANCIAL SERVICES
UIBFS
Overview of the accounting cycle
The following eight steps of the accounting cycle describe the accounting function for
an economic transaction, from the time it occurs until it is ultimately reflected in
the financial statements;
1. Identify transaction. i.e. from the source document(s)
2. Classify and analyze the transaction
3. Prepare Journals (journalizing)
4. Post journal to Ledger
5. Make adjusting entries
6. Make closing Entries
7. Prepare Trial Balance
8. Prepare final financial statements
Steps 1 and 2: Identifying, classifying and analyzing transactions
To do this, every bank has a chart of accounts. A Chart of Accounts is a list of accounts
classified according to their nature (that is; assets, liabilities, capital or equity,
revenue or income, expenditure) with peculiar account numbers. It provides
structure for the recording and reporting of all financial transactions for the
institution.
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OF BANKING &
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UIBFS
Step 3: Journalizing
Transactions are entered into the accounting system by means of a journal entry. A
general journal, book of original entry, is a daily diary listing all transactions in
chronological order. A journal entry is used to enter transactions into the
accounting system and records how each transaction affects an asset, liability,
equity, revenue and/or expense account. The concept of double entry applies at
this point in the accounting cycle.
Step 4: Posting to the Ledger
Posting is the process of copying journal entry information from the general journal
to the ledger. A general ledger is a record of transactions organized by account
number and account titles, beginning with the asset accounts and ending with
expense accounts. It is a summary of all transactions affecting individual account
changes in an asset, liability, equity, revenue and expense accounts. Each ledger is
recognized by its account name and number as stated in the chart of accounts.
Step 5: Accounting adjusting entries
Adjusting entries are made for transactions that have not been recorded through the
business operations in the period. Such transactions include loan loss provisions,
depreciation, prepaid expenses (e.g. rent, insurance) and accrued expenses.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Loan loss provisions and write offs and accrual of interest receivable adjustments
shall be discussed in detail in a later module.
Depreciation adjustments are usually passed periodically (monthly, quarterly, half
yearly or annually) depending on the organizational policy and involve the
amortization of capital assets overtime so that the amount equal to its useful life
is expensed.
Accrued expenses refer to the recognition of expenditure incurred by bank during the
accounting period but not yet paid.
Step 6: Closing Entries
Revenues and expenses are accumulated and reported by period; i.e. monthly,
quarterly or yearly.
To prevent revenues and expenses of one period being added to or commingled with
revenues and expenses of another period, they need to be closed out – that is,
given zero balances at the end of each period by transferring balances to the
income statement.
Their net balance represents the profit or loss for the period. Once revenue and
expense accounts are closed, the only accounts that have balances are the asset,
liability and owners equity accounts. Their balances are carried forward to the
next period.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Step 7: Prepare the Trial Balance
A Trail Balance is used to verify that the debits and credits are in balance (meaning
that the total of all debit entries and the corresponding total of all credit entries
add to the same figure). It is a summary of balances of all the accounts after
complete posting of all transactions.
The trial balance is prepared by:
1. Taking account balances from the ledger
2. Listing all debit balances in one column and credit balances in another column
3. Totaling the debit and credit balances and comparing them.
If all the postings were done well and all balances were accurately calculated and
taken to the Trial Balance, the totals should be in agreement.
The Trial balance tests the completeness and arithmetical accuracy of accounting
entries. However certain errors may not be detected through the trail balance.
If there should be unequal amounts of debits and credits or if an account appears to
be incorrect, the discrepancy or error is investigated and corrected.
5

OF BANKING &
FINANCIAL SERVICES
UIBFS
Step 8: Presentation of final financial
statements
From the above processes, the final
accounts or financial statements
(income statement, balance sheet
and the cash flow statement) are
prepared.
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 or precepts which
underlie the periodic financial
accounts of business enterprises.
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OF BANKING &
FINANCIAL SERVICES
UIBFS
Double entry book keeping
The principle used to post transactions into the ledger is called double entry book
keeping. The double entry principle is based on the fact that each transaction has
two effects which are equal but opposite. This is the dual effect of transactions.
Usually, this will affect two different accounts.
Double entry rules
It is necessary to always observe one important rule: every financial transaction gives
rise to two accounting entries, one a debit and the other a credit. An account is a
record of transactions (affecting a particular aspect or line item of assets,
liabilities, equity, revenue or expenses) between the institution/ organisation and
the third party. The total value of debit entries for all transactions must always
equal to the total value of the credit entries at any given time. The arithmetic
check of this is usually done by way of constructing a trial balance (systematic list
of all debit and credit balances) periodically.
• Each account has two sides, the left-hand side of which is called the debit side
(DR) and the right hand side of which is called the credit side (CR).
• When we talk of debiting an account we mean that the transactions details
should be recorded on the left hand side and crediting means recording on the
right hand side.
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OF BANKING &
FINANCIAL SERVICES
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8
Date Narrative Amount Date Narrative Amount
Stating
where the
double
entry is
posted
Debit side Credit side
The date of the transaction is recorded here
Title of Account
Table 1. Above is an example and format of a ‘T’ Account

OF BANKING &
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Which account receives the credit entry and which receives the debit
depends on the nature of the transaction. Before we consider the dual
effect on the main categories of accounts, let us first define an asset, a
liability and equity.
Assets: are all valuable possessions of the bank and represent what is owned
by the bank or owed to it by other entities.
Liabilities: represent what the bank owes other entities.
Equity: represents the capital or net worth of the Bank.
A more detailed discussion of assets, liabilities and equity is presented in unit
3.
Table 2 below shows the dual effect on the main categories of accounts
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OF BANKING &
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10
Account Type Debit Credit
Incomes, Gains,
Liabilities, Capital
Reduces in value Increases in value
Expenses, Losses,
Assets
Increase in value Reduces in value
An increase in revenue (income), e.g. loan interest received is a credit and a
decrease is a debit. The normal balance for revenue (income) is a credit.
An increase in an expense e.g. purchase of stationery is a debit and the decrease is a
credit. The normal balance of an expense account is a debit. An increase in assets
e.g. purchase of computers or furniture is a debit and a decrease is a credit.
The normal balance of an asset is a debit. An increase in a liability e.g. obtaining a
loan from another bank is a credit and a decrease is a debit. The normal balance for
a liability is a credit. An increase in capital e.g. cash injections for additional share
capital is a credit and a decrease is a debit. The normal capital account balance is a
credit.

OF BANKING &
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11
Main Account
Category
A debit to an
account will:
A credit to an
account will:
Normal
Balance will
be:
Revenue (Income) - Decrease + Increase Credit
Expenses + Increase - Decrease Debit
Assets + Increase - Decrease Debit
Liabilities - Decrease + Increase Credit
Capital - Decrease + Increase Credit
Table 3: A summary of debit and credit impact on different account types

OF BANKING &
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Below are the accounting entries for
typical bank transactions;
• When a customer deposits cash
DEBIT: Cash/Treasury account (with
amount deposited)
CREDIT: Customer’s account (with
amount deposited)
• When a customer withdraws cash
DEBIT: Customer’s account (with amount
withdrawn)
CREDIT: Cash (With the amount
withdrawn)
• When a loan is disbursed to a
Customer
DEBIT: Customer Loan Account
CREDIT: Customers’ Account or Cash
depending on the method of
disbursement
• Other Current Assets
The accounting treatment for other
assets is as follows;
DEBIT: Other Current assets (Balance
Sheet item)
CREDIT: Cash & Bank or the individual
accounts
• Purchase of a Fixed Asset e.g. Bank
car
DEBIT: Fixed Assets - Motor Vehicle
Account
CREDIT: Bank/Cash account with the
cost of the fixed asset
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OF BANKING &
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Fixed assets depreciation
Different methods of charging depreciation are used by different banking institutions.
The following methods are normally used when calculating depreciation;
• Straight line method – this is where a uniform annual depreciation charge is made
on the asset until the whole purchase value is reduced to zero. In some cases, a
residual value remains on the asset.
• Declining balance / reducing balance method– Under this method, the
depreciation rate is applied to an asset’s book/written down value of the previous
year.
Example: X Banking Ltd acquired a motor vehicle on 1st January 2011 at a cost of UGX
15 million. Depreciation charge per annum is 25%. What is the depreciation
charge under the straight line and reducing balance methods?
Straight line method;
The depreciation charge as at 31 December 2011 will be
25% × 15 million = 3,750,000.
This will be the annual depreciation for 4 years.
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OF BANKING &
FINANCIAL SERVICES
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• Reducing-balance method;
Value of Motor vehicle as at 1 January 2011 15,000,000
Less: Depreciation charge for first year (25%) 3,750,000
Book value as at 31 December 2011 11,250,000
Depreciation charge as at 31 December 2012 2,812,500 [25% x11,250,000]
To record depreciation expenses, the following entries are made;
DEBIT: Depreciation expense
CREDIT: Accumulated depreciation
• Disposal of fixed assets
To record the sale or disposal of a fixed asset, the cost and accumulated depreciation
of the fixed asset are transferred to a Fixed Assets Disposal Account as follows:
DEBIT: Accumulated Depreciation with the balance on the Accumulated Depreciation
Account
CREDIT: Fixed asset disposal with the balance on the Accumulated Depreciation
Account
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OF BANKING &
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Then,
DEBIT: Fixed Asset Disposal Account with fixed asset cost
CREDIT: Fixed Asset Account with fixed asset cost
The proceeds received on disposal are recorded as follows;
DEBIT: Bank or Cash with the selling price of the asset
CREDIT Fixed Asset Disposal A/C with the selling price of the asset
The balance on the fixed asset disposal account after passing the
above entries is transferred to the Profit/Loss on disposal of fixed
assets in the profit and loss account. A debit balance represents a
loss on disposal, whilst a credit balance represents a profit on
disposal
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OF BANKING &
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Permanent diminution in value of fixed assets
If, in the opinion of BANK management, a fixed asset suffers permanent diminution,
the asset is written off the books against the profit and loss account in the year
that the permanent diminution is first identified. The permanent diminution in
value may involve a partial or absolute loss in value. To record the permanent
diminution, the cost and accumulated depreciation of the fixed asset are
transferred to a fixed assets disposal account as follows;
DEBIT: Accumulated Depreciation A/C with the balance of the assets accumulated
depreciation
CREDIT: Fixed Assets Disposal A/C with the balance of the Asset’s accumulated
depreciation
DEBIT: Fixed Asset Disposal A/C with the cost of the Fixed Asset
CREDIT: Fixed Assets Cost A/C With the cost of the Fixed Asset
The net balance in the fixed assets disposal account after passing the above entries is
charged to the profit and loss account as follows:
DEBIT: Profit and Loss Account
CREDIT: Fixed Asset Disposal A/C
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Revaluation of Fixed Assets
• Revaluation of fixed assets should only be booked in BANKs books if the
revaluation is performed by professional valuers.
• The following entries are passed to record the revaluation:
DEBIT: Fixed Asset A/C (With the revaluation surplus)
CREDIT: Revaluation Reserve Account (with revaluation surplus)
• For a revaluation deficit, make the opposite of the above entries.
• The revaluation surplus or deficit is the difference between the value of the fixed
asset as determined by the valuer and its net book value.
• The net book value of an asset is its cost minus its accumulated depreciation.
• The revaluation surplus is a non-distributable reserve, meaning it cannot be paid
out a profits/surplus.
• The balance in the revaluation reserve is transferred to the profit and loss account
when the asset is disposed of.
• In addition, the excess depreciation arising on revaluation is debited to the
revaluation reserve and credited to the profit and loss account.
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OF BANKING &
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Example:
Suppose a bank acquires a vehicle on 1/1/2007 for UGX 15 million and depreciates it
over 4 years on a straight-line basis, with nil salvage value. On 1 January 2010 a
firm of professional valuers appointed by the bank re-values the asset at UGX 8
million. Bank management decides to recognize the revaluation in the accounting
records. At the time of the revaluation (1/1/2010), the net book value of the
vehicle was as follows;
UGX Cost: (1.1.2007) 15,000,000
Less: Accumulated depreciation 11,250,000 [3* 25%*UGX 15 million]
Net book value (31.12.2009) 3,750,000
The new valuation of the vehicle is UGX 8 million; therefore the revaluation surplus is
UGX 4,250,000 (8,000,000 – 3,750,000). The revaluation surplus would be
credited to the Revaluation Reserve Account and debited to the Motor Vehicle
Account.
The vehicle would still be depreciated over 4 years (until 31/12/2010). Any
additional depreciation (based on the revalued amount), would be reduced by an
equivalent transfer from the revaluation surplus account.
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OF BANKING &
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Maintenance of Fixed Asset Register
The FAR records the following details on
each Fixed Asset:
a. Nature of the asset (e.g. motor
vehicle, building, computer etc)
b. Unique serial number of the asset
(e.g. vehicle No 678 UCH)
c. Total cost
d. Date of acquisition
e. Vendor details (name and address)
f. Location
g. Estimated useful life
h. Depreciation rate
i. Estimated salvage value on disposal
j. Accumulated depreciation
(updated
k. Physical verification of fixed assets -
The physical verification of fixed
assets is aimed at:
l. Confirming the existence of BANK
fixed assets as recorded in the FAR
m. Determining whether BANK owns
any fixed assets which are not
recorded in the FAR
n. Determining the condition of the
fixed assets (e.g. damages or
obsolescence)
o. Confirming other details about the
fixed assets contained in the FAR.
p. Fixed assets unique identification:
q. Each asset should bear a unique
identification mark, which is also
recorded in the FAR.
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OF BANKING &
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Short Term & Long Term Loans Payable
When the bank receives a loan, the
following entries are made;
DEBIT: Cash or Bank Account with the
principal amount
CREDIT: The lender institution’s a/c
with the principal loan amount
Interest expense
When interest falls due:
DEBIT: Interest payable account
CREDIT: Lender institution
When the bank pays back,
DEBIT: The lender institution with the
principal and interest
CREDIT: The Cash or Bank Account with
the Principal and interest
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OF BANKING &
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Example
W Banking Ltd makes a loan to one of its customers at the following terms;
Principal amount UGX2 million
Interest rate 3% per month
Loan period 6 months (182 days)
The interest payable by the customer at the end of the first month will be computed
as follows;
UGX 2million × 3% = UGX 60,000
The following entries will be passed on W Banking Ltd. accounts to record the above
transaction:
To record the principal amount of the loan;
DEBIT: Customer’s loan account UGX 2,000,000
CREDIT: Customers’ Account UGX 2,000,000
To record the total interest receivable at the end of the first month;
DEBIT: Interest receivable UGX 60,000
CREDIT: Interest Income UGX 60,000
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To record interest payment by the borrower,
DEBIT: Cash or Customers Savings A/C - UGX 60,000
CREDIT: Interest Receivable A/C UGX 60,000
To record receipt of principal repayment installment from Customer;
DEBIT: Customers’ account or Cash account -UGX 383,197
CREDIT: Customers Loan account
If a loan is non–performing (based on Bank of Uganda standard regulations and W
Bank Ltd.’s credit policy), interest income is not recognized in the profit and loss
account. It is suspended on the balance sheet. As soon as a loan is classified as
non–performing, the outstanding interest receivable is reversed (reversal entries
in step 2 above) as follows;
DEBIT: Interest Income (with outstanding interest receivable)
CREDIT: Interest receivable
The following entries are then passed to record the interest in suspense;
DEBIT; Interest in suspense – asset
CREDIT: Interest in suspense – liability (With the outstanding / unearned interest
income at the time that the loan is classified non – performing)
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Other Payables, Accruals & Short Term Provisions
• Payables, accruals, and short term provisions are
liabilities to an institution. Their accounting
treatment is as follows;
DEBIT: The Expense Account to which they relate
CREDIT: Accruals or other payables (liabilities -
balance sheet items)
• Provisions are estimates debited to the P & L
Account during the accounting period. Examples
of provisions include bad debts, Audit fees,
depreciation and discounts.
Accounting treatment is as follows:
DEBIT: Profit & Loss Account
CREDIT: Provisions for these Accounts (assets -
Balance Sheet items)
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Basic accounting unit2

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