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ACCOUNTS AND BUDGET SUPPORT LEVEL III

Learning Guide
Unit of CompetencePerform Financial Calculations
Module TitlePerforming Financial Calculations
LG Code: BUF ACB3 03 0812

TTLM Code: BUF ACB3M 03 0812

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:

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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.

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.
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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
DrCr Dr Cr Dr CrDr Cr Dr Cr Dr Cr

+ - - + - + + - - + + -
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

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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
(1) + 10, 000 +10, 000

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
(2) -7, 500+7,500
Balance 2, 500 7,500 10,000

Transaction (3)
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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) ____ +850 _____ +850 _______
Transaction
Bal 2,500 (4) 850 7,500 850 10,000
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 _______
Bal. 2, 100 850 7,500 450 10,000
Transaction (5)

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

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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
(5) +4,500 ___ _____ ____ +4, 500 Fares earns
Bal. 6,600 850 7,500 450 14,500

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

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
-150 utilities expense
-75 misc. expense
Bal 4,400 850 7,500 450 12,300

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 7,500 450 11700

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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. 3,4002507, 500 450 10, 700

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 -

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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.

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.

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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 asaccount 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

B. report form
Perez Inc.
Balance sheet
August 31, 1999

Asset
                   Cas
h 3400
                         Supplies 250
Land 7500
11,250

                       Liability and Capital

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Accounts payable 450
Perez Inc. Capital 10,700
Total 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
Miscellaneous expense 75.00
2,800.00
Total operating expenses
1,700.00
Net income

Lo3:- Check calculations and record outcomes

Capital statement: isa 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

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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
1, 000.00
Less withdrawal
Increase in capital 700.00
Br. 10, 700.00
Capital, August 31, 1999
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.
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

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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.
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 ______

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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
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
7,1731,22598011,4502,15518,673

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

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Truce Expense 250.00
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
Owner’s equity
M.A Morgan, Capital 18, 673.00

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

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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
4. Statement of cash flows

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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.
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
5. Paid advertising expense Br. 750
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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

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f) _____ +1,250 ____ ____ +1,250 Fees earned
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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