Rift Valley University

Training, Teaching and Learning Materials Development

RIFT VALLEY UNIVERSITY

GOTERA CAMPUS

The Ethiopian TVET-System

Accounts & Budget Support

Level-III

LEARNING GUIDE # 1

Unit of Competence: Perform Financial Calculations

Module Title: Perform Financial Calculations

LG Code: BUF ACB3 03 0812

TTLM Code: BUF ACB3M 03 0812

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INTRODUCTION

Welcome to the module “Perform Financial Calculations”. This learner’s

guide was prepared to help you achieve the required competence in “ Accounts
and Budget Support Level III”. This will be the source of information for you to
acquire knowledge attitude and skills in this particular occupation with minimum
supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- Obtain data and resources for financial calculations

Lo2:- Select appropriate methods and carry out financial calculations

Lo3:- Check calculations and record outcomes

How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections

that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation
Sheets. Ask your trainer to show you the correct way to do things or
talk to more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment
and provide you with feedback from your performance.

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Lo1:- Obtain data and resources for financial calculations

1.5 Business transactions and the accounting equation
1.5.1 Business transactions
A business transaction is the occurrence of an event or of a condition that must be recorded. For
example the payment of a monthly electricity bill of Br. 60, the purchase of Br. 2,000 of merchandise on
cash or on credited, and the acquisition of machinery, building and land for Br. 350, 000 are illustrative
of the variety of a business transactions.
A particular business transaction may lead to an event or a condition that result in another transaction.
For example the purchase of merchandise on credit will be followed by a payment to the creditor, which
is another transaction.
Transaction is not limited to the event made between the business and an outsider. The fact that the life
of the building is limited must also be shown in the records. The wearing out of the building is not an
exchange of goods and services between the business and an outsider, but it is nevertheless significant
condition that must be recorded. Transaction of this type, as well as others are not directly related to
outsider, are some time’s referred to as internal transactions.
1.5.2 The Accounting equation
In double – entry system, for every debit there must be a credit and vice-versa. This leads us, then, to
the basic equation in accounting: Assets equal liability plus capital or owner’s equity. That means:

Assets =
Liability +
Stockholders’ equity

The following illustration expands this equation to show the accounts that comprise stock- holders’
equity. In addition, the debit or credited rules and effects on each type of account are illustrated. The
expanded basic equation helps to understand the fundamentals of the double- entry system. Like the
basic equation, the expanded basic equation must be in balance (total debits equal total credits)

Basic

Equation Assets = Liabilities + Stock holders equity

Expanded Assets = liabilities + Capital – with drewal + revenue – Expense

Basic equation

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

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Assets, liabilities, and capital

Assets are the properties owned by a business enterprise and equities refer to the rights or claims to the
properties. If the assets owned by a business amount to Br. 50, 000 the equities amounted to Br.50, 000,
and the relationship between the two may be stated in the form of an equation, as follows.

Assets = equities
Equities may be subdivided in the two principal types: the rights of creditors and the rights of owners’.
Liabilities refer to the equities of creditors or debts of the business and capital refers to the equity of the
owners. Expansion of the equation to give recognition to the two basic types of equities yields the
following, which is known as the accounting equations.

Assets = Liabilities + capital

It is customary to place “liabilities” before “capital” in the accounting equation because creditors have
preferential rights to the assets. The residual claim of the owner or owners is called owner’s equity and
is given greater emphasis by transposing liabilities to the other side of the equation, yielding:

Assets – Liabilities = Owner’s equity

1.5.2 Transactions and accounting equation
Every time a transaction occurs, the elements of the equation change, but the basic equality remains
unchanged. As the basis of illustration, assume that Perez Inc. establishes a sole proprietorship. Each
transaction or group of similar transaction during the first month of operations is described, followed by
an illustration of its effect on the accounting equation

Transaction (1)

Perez Inc. deposit Br. 10, 000 in a bank account in the name of Perez Inc. The effect of this transaction is
to increase the asset (cash) by Br. 10, 000 and to increase capital by Br.10,000

Assets = Liabilities + Capital

Cash Perez inc. capital

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Transaction (2)

Perez Inc. next transaction is to purchase land as a future building site, for which Br. 7, 500 in cash is
paid. This transaction changes the composition of the assets but does not change the total amount. The
items in the equation prior to this transaction, the effects of this transaction, and the new balances after
the transaction are as follows.

Assets = Capital

Cash + Land + Perez inc. capital

Balance 10,000 10,000

Transaction (3)

During the month Perez purchases Br. 850 of gasoline, oil, and other supplies from various suppliers,
agreeing to pay in the near future. This type of transaction is called a purchase on account and the
liability created is termed as account payable. Consumable goods purchased, such as supplies, are
considered to be prepaid expenses, or assets. The effect is to increase assets and liabilities by Br. 850, as
follows.

Assets = Liabilities + Capital

Cash + Supplies + Land = Account payable + Perez inc. capital

Bal 2,500 7,500 10, 000

(3) ____ (4) +850

Transaction _____ +850 _______

During the month Br. 400 is paid to creditors on account, there by, reducing both assets and liabilities.
The effect on the equation is as follows
Asset = Liabilities + Capital

Cash + supplies + land Accounts payable Perez inc. capital

Bal 2,500 850 7,500 = 850 10,000

(4) – 400 ___ _____ -400 _______

Transaction (5)

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The principal objective of the owner of a business enterprise is to increase capital through earnings. For
Perez Income to means that the cash and other assets acquired through the sale of taxi services must be
greater than the cost of the gasoline and other supplies used, the wages of drivers, the rent, and all of
the other expenses of operating the business.
In general, the amount charged to customer for goods or services sold to them is called revenue. Other
terms may be used for certain kinds of revenue, such as sales for the sale of merchandise or business
services, fees earned for charges by physician to patients, rent earned for the use of real estate or other
property, and fees earned for Perez income.

Expenses are the amount of assets consumed or services used in the process of earning revenue would
include supplies used, wage of employees, and other assets and services used in operating business. In
addition, net income or profit is the excess of the revenue over the expenses incurred in earning the
revenue. And net loss is the excess of the expenses of the enterprise over the revenue.

During the first month of the operations Perez Inc. earned fares of Br. 4, 500 and to yield revenue in the
same amount. The revenue can be viewed as though is affected a Br. 4, 500 increase in capital. At the
time expenses of the business are incurred, they are treated as offsets against revenue and hence as
reductions in capital. In terms of the accounting equation, the effect of the receipt of cash for services
performed is as follows
Assets Liabilities + Capital

Cash + Supplies + Land Accounts payable + Perez Inc. Capital

Bal. 2,100 850 7,500 = 450 10,000

Transaction (6)

Various business expenses incurred and paid during the month were as follows. Wages, Br. 1,125, rent,
Br. 850, utilities, Br. 150, miscellaneous, Br. 75. The effect of this group of transaction is to reduce cash
and to reduce capital, as indicated in the following manner

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Assets Liabilities + Capital

Cash + supplies + land Accounts payable +Perez inc. capital

Bal 6,600 850 7,500 = 450 10,000

b)-2,200 -1,125Expense

-850 Rent expense

Transaction (7)

At the end of the month it is determined that the cost of supplies on hand Br. 250, the remainder (Br.
850-Br. 250) having been used in the operations of a business. This illustration of Br. 600 in supplies and
capital may be shown a follows:
Assets Liability + capital

Cash + supplies + Land = account payable + perez income capital

Bal.4400 850 7, 500 450 12, 300

(7) - -600 - -600 supp. expense

Bal 4400 250 7,500450 11700

Transaction (8)

At the end of the month Perez inc withdraws from the business Br. 1,000 in cash for his personal use.
This transaction, which affects a decrease in cash and decrease in capital, is the exact opposite of an
investment in the business by the owner. The withdrawal is not a business expense, and it should be
excluded from consideration in determining the net income from operations of the enterprise. The
balance in the equation, the effect of the Br. 1, 000 withdrawals and the new balance are as follows.
Assets Liabilities + Capital
Cash + supplier + Land Accounts payable Perez capital
Bal. 4,400 250 7, 500 = 450 11, 700
(7) – 1000 ____ ____ ____ -1, 000 withdrawal
Bal. 3,400 250 7, 500 450 10, 700

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Summery
The business transactions of Perez Inc. are summarized in tabular form as follows. The transactions are
identified by number, and the balance of each item is shown after each transaction.
Assets = Liabilities + Capital
Cash + supplies + land = accounts payable + Perez income capital
1 +10,000 - - - +10,000
2 –7,500 - +7,500 - -
Bal. 2,500 - 7,500 - 10,000
3 - +850 - +850 -
Bal 2,500 850 7,500 850 10,000
4-400 - - -400 -
Bal 2,100 850 7,500 450 10,000
5 +4,500 - - - +4500 Fares earned
Bal 6, 600 850 7, 500 450 14500
6 -2200 -1125 wages expense
-850 rent expense
-150 utilities expense
-75 misc. expense
Bal 4,400 850 7,500 450 12,300
7 _____ -600 ____ ___ -600 supplies expense
Bal4, 400 250 7,500 450 11,700
8 –1000 ___ ____ ___ -1,000 withdrawal
Bal3, 400 250 7,500 450 10,700

The following observations which apply to all types of a business should be noted:

1. The effect of every transaction can be stated in terms of increases and /or decreases in one or
more of the accounting equation elements.
2. The equality of the two sides of accounting equations is always maintained.
3. The owner’s equity is increased by amounts invested by the owner and is decreased by
withdrawals by the owner.

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Lo2:- Select appropriate methods and carry out financial calculations

Accounting statements
The principal financial statements in a business firm are the income statement, the statement of
owner’s equity and the balance sheet. They are usually accompanied by a less important, but
nevertheless useful note.

Balance sheet: It is a list of the assets, liabilities, and capital of a business entity as a specific
date, usually of the close of the last day of a month or a year. All financial statements should be
identified by the name of the business, title of the statement and date.
There are two kinds of balance sheet forms: they are report forms and accounts forms. Report from is a
form of balance sheet, with liability and owner’s equity sections presented below the asset section,
where as account form lists, the assets on the left and the liabilities and the capital account on the right
side.

For example the account form and the report form of the balance sheet for Perez Inc. are given

A. account form

Perez Inc.

Balance sheet

August 31 1999

Asset Liability

Cash Br.3400 00 Account payable Br. 450 00

Supplies 250 00

Land 7,500 00 450 00

Capital

Perez capital 10700 00

Total asset Br.11,250 00 Total liability and capital Br.11,150 00

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B. report form
Perez Inc.

Balance sheet

August 31, 1999

Asset
                   Cash
                         Supplies 3400
Land 250
7500
11,250
                       Liability and Capital
Accounts payable
Perez Inc. Capital 450
Total 10,700
11,250

Income statement: It is the summary of the revenue and the expense of a business entity for a
specific period of time, such as a month or a year. Revenue earned and expanses incurred during
the month were recorded in the equation as increases and decrease in capital respectively.
The excess of the revenue over the expense incurred in earning the revenue is called net income or net
profit. If the expenses of the enterprise exceed the revenue the result is loss. It is ordinary imposable to
determine the exact amount of expense incurred in connection with each revenue transaction.
Therefore, it is considered satisfactory to determine the net income or the net loss for a year, rather
than for each sale or small group of sales.

Perez Inc.

Income statement

For the month ended August 31, 1999

Fares earned 4,500.00

Operating expense

Wages expense 1125.00

Rent expense 850.00

Supplies expense 600.00

Utility expense 150.00

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Miscellaneous expense 75.00

Total operating expenses 2,800.00

Net income 1,700.00

Lo3:- Check calculations and record outcomes

Capital statement: is a summary of change in capital of a business entity that have occurred
during a specific period of time, such as a month or a year

Comparison of the original Investment Br. 10,000 at the beginning of the month with the 10, 700 of
capital reported in the balance sheet at the end of the month reveals an increase in capital of Br. 700.
This net increase is composed of two significant changes in capital that occur during the period:

1. The net income of Br. 1, 700 and

2. A withdrawal of Br. 1,000 by the owner
Perez Inc.

Capital statement

For the month ended august 31, 1999

Capital, August 1, 1999 Br. 10,000.00
Net income for the month
Br. 1, 700.00
Less withdrawal
Increase in capital 1, 000.00

Capital, August 31, 1999

700.00

Br. 10, 700.00

Cash flow statement

It is customary to report cash flows (cash receipts and cash payments) in three sections:
1. operating activities
2. investing activities
3. financing activities
The cash flows from operating activities section includes cash transaction that enter in to the
determination of net income.

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The cash flows from investing activities section reports the cash transactions for the acquisition and sale
of relatively long term or permanent type assets.

The cash flows from financing activities section reports the cash transactions related to cash
investments by the owner, and borrowings and cash withdrawals by the owner.

Illustration: The assets and liabilities of Morgan Dry Cleaner on october1, of the current year
are as follows: cash Br. 1000, account receivable Br. 220, supplies 850, land Br. 11,450, account
payable Br. 2030. A Morgan dry cleaner is a proprietorship owned and operated by M.A
Morgan. Currently, a building, delivery truck, and equipment are being rented, pending
expansion to new facilities. The actual work of dry cleaning is done by another company at
wholesale rates. Business transactions during October are summarized as follows:
a. Received cash from cash customers for dry cleaning sales Br. 4928
b. Paid creditor on account Br. 1,755
c. Received cash from M.A Morgan as an additional investment Br. 3700
d. Paid rent for the month Br. 1,200
e. Charged customers for dry cleaning sale on accounts Br. 1,025
f. Purchase supplies on account Br. 245
g. Received cash from customers on account Br. 2,000
h. Received monthly invoice For dry cleaning expense for October (to be paid on November 10) Br.
1, 635.
i. Paid the following wages expense, Br. 850; truce expense Br. 250; utilities expense Br. 325;
miscellaneous expanse Br. 75
j. Determined, by taking an inventory, the cost of supplies used during the month, Br. 115.
Instructions

1. Determine the amount of owner’s equity (M.A margins capital) as of October 1 of the
current year.
2. State the assets liabilities, and owner’s equity as of october1, in equation form similar to
that shown as illustration in this chapter. In tabular form below the equation, indicate
the increases and decreases resulting from each transaction and the new balances after
each transaction. Explain the nature of each increase and decrease in owner’s equity by
an appropriate notation (using the + or - signs) at the right of the amount.

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3. Prepare:
a. An income statement for October
b. A statement of capital for October
c. Balance sheet of October 31
Solution
1. Assets – liabilities = owner’s equity (M.A margin, capital)

Br. 15, 500- Br. 2, 030= owner’s equity (M.A margin, capital)

Br. 13470= owner’s equity (M.A margin, capital)

Assets = liability + owners equity

Cash + A/R + supplies + land = Acc. Payable M.A Morgen capital

Bal. 1000 2,200 850 11,450 2,030 13,470

a) +4,928 _____ _____ _____ _____ +4,928 dry dean. Sales

Bal. 5,928 2,200 850 11,450 2,030 18,398

b) -1755 _____ _____ _____ -1755 ______

Bal. 4,173 2,200 850 11,450 275 18,398

c) +3,700 _____ ____ ______ -1755 +3,700 Add. Investment

Bal. 7, 873 2,200 850 11, 450 275 22,098

d) –1,200 _____ ____ ______ ____ -1,200 Rent expense

bal 6,673 2,200 850 11,450 275 20,898

e) ____ +1,025 _____ ______ ____ +1,025 dry cle.sale

bal 6,673 3,225 850 11,450 275 21,923

f) _____ _____ +245 _____ +245 ______

Bal. 6,673 3,225 1,095 11,450 520 21,923

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g) +2000 -2000 _____ _____ ____ ______

Bal. 8,673 1,225 1,095 11,450 520 21, 923

h) _____ _____ _____ _____ +1,635 -1, 635 Dry cle. Expense

Bal. 8,673 1,225 1,095 11,450 2, 155 20,288

i) -1500 -850-wage Expense

-250-truck Expense

-325 utilities Expense

-75 misce. Expenses

Bal. 7,173 1,225 1,095 11,450 2,155 18,788

j) _____ ____ -115 _____ _____ -115 supplies expense

7,173 1,225 980 11,450 2,155 18,673

a) Morgan dry cleaners

Income statement
For the month ended, October 31 1919
Dry cleaning Br.5,955.00

Operative Expense

Dry cleaning Expense Br.1, 635.00

Rent Expense 1, 200.00

Wages Expense 850.00

Utilities Expense 325.00

Truce Expense 250.00

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Supplies Expense 115.00

Miscellaneous expense 75.00

Total operating 4,450.00

Net income 1503.00

b) Morgan dry cleaners

Statement of capital
For the month ended, October 31 1919

M.A Morgan capital, October 1, 1999 13,470.00

Additional investment by owner Br. 3,700.00

Net income for the month 1,503.00

Increase in owner’s equity 5,203.00

M.A Morgan, capital, October 31,1999 Br. 18,673.00

c) Morgan dry cleaners

Balance sheet

October 31 1919

Assets
Cash Br. 7,173.00

Account receivable 1,225.00

Supplier 980.00

Land 11,450.00

Total assets Br. 20, 828.00

Liabilities
Account payable Br.2, 155.00

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Owner’s equity
M.A Morgan, Capital 18, 673.00

Total liabilities and owner’s equity Br. 20, 828.00

Self test - 1
1. Distinguish between private accounting and public accounting.
2. (A) If the assets owned by a business enterprise total Br. 275,000. What is the amount of the
equities of the enterprise? (B) What are the two principal types of equities?
3. (A) An enterprise has assets of Br. 250,000 and liabilities of Br. 175,000 what is the amount of its
owner’s equity?
(B) An enterprise has assets of Br. 480,000 and owner’s equity of Br. 200,000.what is
the total amount of its liabilities?

(C) A corporation has assets of Br. 995,000, liabilities of Br. 590,000, and capital stock
of

Br. 250,000. What is the amount of its retained earnings?

(D) An enterprise has liabilities of Br. 500,000 and owner’s equity of Br. 300,000. what                   is
the total amount of its assets?

4. Indicate whether each of the following types of transactions will (a) increase owner’s
equity or (b) decrease owner’s equity:

1. Owner’s investments
2. Owner’s withdrawals
3. Expenses
4. Revenues
5. Indicate whether the data in each of the financial statements (a) covers a period of time

(b) Is for a specific date:

1. Incomes statement
2. Balance sheet
3. Statement of owner’s equity
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4. Statement of cash flows

6. Following are the amount of assets and liabilities of Cole Personnel Service, a sole
proprietorship, at June 30, the end of the current year, and its revenue and expenses for the
year ended on that date. The capital of A.C. Cole owner was Br. 13,350 at July 1, the
beginning of the current year, and the owner withdrew Br. 14,000 during the current year.
Cash received from customers was Br. 74,500 and cash paid for expenses and to creditors      was
Br. 56,900.
Cash …………………………………………….. Br. 6,125
Accounts receivable ………………………………….7, 600

Supplies ……………………………………………...….675

Prepaid insurance ……………………………………….650

Accounts payable ……………………………………..1,100

Salaries payable …………………………………………300

Fees earned …………………………………………..68,775

Salary expense. ……………………………………….28,900

Rent expense……………………………………………9,000

Advising expense ……………………………………….5,950

Utilities expense ………………………………………...4,500

Supplies expense ………………………………………..2,600

Taxes expense …………………………………………..1,800

Insurance expense …………………………………………900

Miscellaneous expense …………………………………….825

Instructions

1. Prepare an income statement for the current year ended June 30.

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2. Prepare a statement of owner’s equity for the current year ended June 30.
3. Prepare a balance sheet as of June 30 of the current year
4. Prepare a statement of cash flows for the current year ended June 30. The cash balance on July
1, beginning of the current year, was Br. 2, 525.

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Activity – One
I. Multiple choice
1. A profit making business that is a separate legal entity and in which ownership is divided into
shares of stock is known as a:
A. sole proprietorship C. partnership
B. single proprietorship D. corporation
2. the properties owned by a business enterprise are called:
A. assets C. stockholder’s
B. liabilities D. owner’s equity
3. A list of assets, liabilities and owner’s equity of a business entity as of a specific date is:
A. A balance sheet C. a statement of owner’s equity
B. An income statement D. a retained earnings statement

4. if total assets increased Br. 20,000 during a period of time and total liabilities increased by Br.
12,000 during the same period, the amount and direction (increase or decrease) of the period’s
change in owner’s equity is:
A. Br. 32,000 increase C. Br. 8, 000 increase
B. Br. 32,000 decrease D. Br. 8, 000 decrease

5. if revenue was Br. 45, 000, expenses were Br. Br. 37, 500, and the owner’s withdrawals were Br.
10,000, the amount of net income or net loss was:
A. Br. 45,000 net income C. Br. 37,500 net loss
B. Br. 7,500 net income D. 2,500 net loss

II. Exercise

A) The following selected transactions were completed by Lopez delivery service during June:

1. Received cash from owner as additional investment Br. 10,000

2. Purchased supplies of gas and oil for cash Br. 850
3. Billed customer for delivery services on account, Br. 900
4. Received cash from cash customers Br. 1,750
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5. Paid advertising expense Br. 750

6. Paid rent for June, Br. 1, 500
7. Paid creditors on account Br. 350
8. Received cash from customers on account Br. 700
9. Paid cash to owner for personal use Br. 1,000
10. Determined by taking an inventory that Br. 575 of supplies of gas and oil had been used during
the month.
Indicate the effect of each transaction on the accounting equation by listing the numbers identifying the
transaction (1) through (10) in a vertical column, and inserting at the right of each number the
appropriate letter from the following list.

a. Increase in one asset, decrease in another asset

b. Increase in an asset, increase in a liability
c. Increase in an asset, increase in owner’s equity
d. Decrease in an asset, decrease in a liability
e. Decrease in asset, decrease in owner’s equity
B). Joan Bowan established Joan Bowan services on July 1 of the current year. The effect of each
transaction and the balances each transaction for July are as follows:

Assets = liabilities + owner’s equity

Accounts Accounts Joan Bowan

Cash + Receivable + Supplies = payable + Capital
a) +3,000 +3,000 investment
b) –2,000 -2,000 Rent expense
Bal 1,000 1,000
c) _____ +550 +550
Bal. 1,000 550 5501,000
d) +4,500 _____ _____ +4,500 Fees earned
Bal. 5,500 550 550 5,500
e) – 250 _____ -250 ____
Bal. 5,250 550 300 5,500
f) _____ +1,250 ____ ____ +1,250 Fees earned

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Bal.5, 250 1,250 550 300 6,750

g) –655 -380 Auto expense
_____ ______ _____ ____ - 275 Misc. expenses
Bal. 4,595 1,250 550 3006,095
h) –1,000 ____ ____ _____-1,000 Salaries expense
Bal 3,595 1,250 550 3005,095
i) _____ _____ -125 _____
Bal 3,595 1,250 425 3004,970
j) -1,200 _____ ____ _____
Bal. 2,395 1,250 425 3003,770

Instructions
1. Prepare an income statement for the month ended July 31.
2. Prepare a statement of owner’s equity for the month ended July 31
3. Prepare a balance sheet as of July 31

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