BCT 2105 : ACCOUNTING SOFTWARE SECTION A : COMPULSORY (30 marks)

QUESTION ONE (30 MARKS) (a) Give four reasons why businesses needs to keep records of their transactions. [4marks] i. To determine if the business is trading profitably or lose ii. To determine the business worthiness iii. To know how much is owed to business, and how much the business owe iv. Use the records to help make decisions on how to improve the performance of the business to make it more profitable. v. Its a legal requirement for businesses to keep accounts for the purpose of inspection. (b) Explain the following concepts: [10marks] (i) Account: A record of all transactions of a particular type, for example stock, or relating to a particular customer, supplier and so on. (ii) Ledger : A collection of accounts of a similar type, containing the totals from all the journals (iii) Journal: A book in which transactions are recorded as they occur. It provides a chronological record of all business activities. (iv) Control Account: An account that shows the total of transactions entered in an individual ledger. Control Accounts are built into Sage Accounts to allow automatic double-entry to take place. For example, the Debtors Control Account shows a summary of all the transactions posted to the Sales Ledger. (v) Balance Sheet: A report that shows the total of your assets and your liabilities. It also displays your companys capital this is the difference between the assets and liabilities and is also known as the net assets or net worth of the business. (c) Apart from Sage Accounting, Name other four accounting softwares in the market. [4marks] QuickBooks, Pastel, Systematic, Scalar.

(d)

(e)

Explain how Sage Accounts deal with Double-Entry. [5marks] Sage Accounts uses the traditional double-entry system to record a debit and a credit entry for every transaction you enter. It records these entries for you automatically according to the type of transaction you enter, so that you dont need to worry about affecting the correct accounts or balancing the entries yourself. Sage Accounts also takes care of the VAT element of your taxable transactions by recording the VAT amount in a separate account specifically for VAT. For example, if you enter a sales invoice onto the system to record the sale of goods to a customer, Sage Accounts automatically makes the following postings: (i) A debit to the Debtors Control account for the gross amount of the invoice to show the increased asset to your business. (ii) A credit to the Sales account for the net amount of the sale to show the increase in revenue. (iii) A credit to the Sales VAT Control account for the VAT element. Explain the role of Journal entry in Sage Accounts. Name any three transactions that are recorded in the journal entry. [5mamks] The 'journal' is used for recording non-regular transactions. It also used to make transfers between any of your nominal account types: Asset, Liability, Income or Expense accounts. Examples of transactions are: (i) Entering opening figures of a new business. (ii) Depreciation of fixed assets. (iii) Error corrections in your accounts. (iv) Purchase and sale of fixed assets. (v) Writing off bad debts. Differentiate between Debit and Credit [2marks] Debit - An entry which increases an expense or asset account, or decreases an income, liability or net worth account. The debit is one side of the double-entry bookkeeping process.

(f)

SECTION B : Attempt ANY TWO questions

QUESTION TWO (20 MARKS)
(a)

Credits - An entry which increases an income, liability or net worth account, and decreases an expense or asset account. The credit is one side of the double-entry bookkeeping process.

Sage Accounting provides the traditional facility whereby an accountant can tailor his/her accounts in nominal ledgers so long he adheres to strict double-entry book keeping principles of accounts These ledger accounts are classified into six categories. Describe these classifications and give one example of a transaction that can be posted in each classification. Indicate the range of the account numbers (A/C) for each type of Account. [12marks] i.
ii. iii. iv. v.

Assets Accounts: 0001 1999 for recording assets. E.g Company Vehicles Liability Accounts : 2000 3999 - For recording business liabilities E.g. Loans Income Account: 4000 -4999 - For recording business income e.g sales. Purchase Accounts: 5000- 5999 Posting any form of purchase e.g. new stock. Direct Expenses: 6000 6999 those that are directly associated with the production of goods for sale or that directly contribute in some way to the generation of income for your business. Overheads: 7000 9999 Overheads relate to all the other expenses of running your business and remain fairly constant over time. Examples of overheads include: Rent and rates, heating, lighting and water.

vi.

(b)

In reference to nominal ledgers account explain how you understand the following terms: [4marks]
i. ii.

Prepayments Refers to payments received in advance Accruals - Refers to payments made in arrears.

Explain the term liability as used in business and outline two major types of liabilities. [4marks] Liabilities are those amounts that you owe to third parties including banks, suppliers, tax authorities and employees. (i) Current Liabilities Current liabilities are those that are due for payment within a relatively short period of time. They include your creditors, overdrafts and hire purchase or lease payments due within the next twelve months. (ii) Long Term Liabilities Are obligations that will not become due for a comparatively long period of time, usually not within the next twelve months. They include mortgages, other loans and hire purchase or lease agreements that do not have to be paid within one year.
(c)

QUESTION THREE (20 MARKS) (a) Briefly discuss the following types of management reports identifying the core features. [9marks] i. Trial Balance Report The Trial Balance report lists the balances on all of the nominal accounts, listing debit balances in a column on the right and credit balances in a separate column on the left-hand side. The total of the debit column should equal the total of the credit column; in other words, the Trial Balance 'balances'. ii. The Profit and Loss Report The Profit and Loss report shows your companys profit or loss for a specified accounting period, such as a month or a year. The Profit and Loss report is made up of the balances of each of your income and expenditure nominal accounts, grouped into categories. It shows sub-totals for sales, purchases, direct expenses and overheads, together with the amount of gross profit and the net profit or loss made. iii. Balance Sheet Report The Balance Sheet provides a snapshot of your business at a specific point in time. You will usually need to produce your

Balance Sheet at the close of business on a certain day, such as the last day of each month. Your companys Balance Sheet represents the position of your business at the time that you produce the report, as your assets and liabilities vary day-to-day. The report shows the difference between what you owe and what you own - this difference shows you what your company is actually worth. (b) Explain the following details which need to be captured when recording new product in Sage Accounting System: [10marks] i. Unit of Sale e.g. single, Dozen, Packet etc. ii. Stock take Date The date when last stock taking was done iii. In Stock Quantity of products currently in stack iv. Allocated - Quantity of products which have already been allocated to customers v. On order Quantity already ordered by customers.

(d)

Explain the term Chart of Accounts - organizes the nominal accounts into various groups called 'categories'. [1mark]

QUESTION FOUR (20 MARKS)

(a)

Differentiate between the following terms as used in accounting system. [8marks] i. Bank payment and bank receipts Bank payment Refers to any payment made from the bank account. It reduces the amount in the bank. Bank receipts- Refers to any payment received on the bank account. It increases the amount in the bank. ii. Invoice and credit note. Invoice- Issued to request customer to make payment after service is offered or product sold. Credit note Issued to customer when products or services is offered on credit terms.

iii. Purchase order and sales order. Purchase order- Document generated by company requesting purchase of goods from the supplier. Sales order - Document generated by company to customer for the goods the want to purchase from the company. iv. Fixed assts and Current assts Fixed assts - Fixed assets are those that are used in the running and operating of the business and that the business will normally retain for at least a year. They include land and buildings, plant and equipment, fixtures and fittings and vehicles. Current assets - are those that the business uses on a day-to-day basis and that can quickly be converted into cash. They are also known as liquid assets, as they can be quickly liquidated into cash. Examples of current assets include cash in hand, money in the bank, debtors, stock and work in progress.

(b)

Explain the following concepts as related to banking transactions. Give three important details which must be provided for each transaction to be successful. [12marks] i. Bank transfer Refers moving money from one account to another. Details required Source Bank account, Destination Bank account, Amount to transfer. ii. Bank Reconciliation Checks the Bank statement records if they are matching with the Accounting system records. Allows to do the relevant adjustment if there is any disparity. Details required - Date of reconciliation, End Statement balance, Opening Balance, Book balance at date.
iii.

Bank Statement Printed report showing all the transaction carried out on a particular bank account within a specified period of time. Details Transaction date range, Bank Account. Ref range, Nature of Output required Printed or preview or save as file.

QUESTION FIVE (20 MARKS) Explain the term depreciation. [2marks] Depreciation is the reduction of the 'Book' value due to wear and tear, or because of a reduction in the resale value. (For example, if the asset is new, the book value is the same as the cost price. If the asset is not new, the book value is the cost price minus the depreciation). Depreciation of your fixed assets, over time, reduces their book value, reduces the profit to your company and increases the loss. (b) Explain the major types of depreciation methods applicable in Sage Accounting. [4marks] (a)

Given that the Initial Cost value of a Office table is Kshs.10,000 and the depreciation rate is 25% per annum, calculate the depreciation amount annually up to the 4th year. Also calculate the current Book value for each year after depreciation. NB: Use the two types depreciation methods named in 5 (b). [12 marks] Using Straight Line method.
(c)

Year 1 Year 2 Year 3 Year 4

Cost Price Kshs.10,0 00 Kshs.10,0 00 Kshs.10,0 00 Kshs.10,0 00

Dep. Dep. Rate Amount 25% 25% 25% 25% 2,500 2,500 2,500 2,500

New Book Value Kshs.7,500 Kshs.5,000 Kshs.2,500 Kshs.0

Using Reducing balance method.

Year 1 Year 2 Year 3 Year 4

Book Value Kshs10,0 00 Kshs 7,500 Kshs 5,625 Kshs 4,219

Dep. Rate 25% 25% 25% 25%

Dep. Amount

New Book Value

Kshs 2,500 Kshs 7,500 Kshs 1,875 Kshs 5,625 Kshs 1,406 Kshs 4,219 Kshs 1,054 Kshs 3,165

(d) Explain what you understand by Writing off fixed asset. [2 marks] Asset is written off when no longer has any value. When you write off your asset, the book value is reduced to zero and it is written off in your accounts.