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Infonet College
ACCOUNTS AND BUDGET SUPPORT
LEVEL IV

Learning Guide
Unit of Competence Evaluate and Authorize Payment
Requests
Module Title Evaluating and Authorizing Payment
Requests
LG Code: BUF ACB4 07 0812

TTLM Code: BUF ACB4M 07 0812

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INTRODUCTION

Welcome to the module “Evaluate and Authorize Payment

Requests”. This learner’s guide was prepared to help you achieve the required
competence in “Accounts and Budget Support Level IV ”. 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:- . Verify validity and accuracy of payment request

Lo2:- . Prepare payment documentation
Lo3:- Authorized payment

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:VERIFY VALIDITY AND ACCURECY OF

PAYMENT ENQUES
Information Sheet One
1.1. Recognition of Expenses and Losses
Expenses are outflows of cash or other using up of assets or
incurrence’s of liabilities during an accounting period from the sale of goods
or rendering of services.
Initially, costs are incurred to acquire assets, and as the assets are
consumed, they become expenses with the passage of time.

Losses are decreases in a business enterprise’s owners equity from

incidental transactions and other events except those that result from
expenses or distributions to owners.

Losses result when assets are consumed, costs are expired or liabilities
are incurred without producing any benefit for either the current or any
future accounting period; this losses are not deferred because they have
not future service potential.

Expenses and losses generally are recognized in the accounting records

when a business enterprise economic benefits are consumed in revenue-
earning activities or if it becomes more evident that previously recognized
future economic benefits of assets have been reduced or eliminated or that
liabilities have been incurred without associated economic benefits.

In the measurement of net income, the principles recognized the

recognition of expenses and losses are as important as the principles for
the recognition of revenues and gains.

1.2.1. Principles of expense recognition

The expenses incurred by a business enterprise during an accounting
period may be classified in the following three groups.
a) Costs directly associated with revenue recognized in the period.

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b) Costs associated with the period on the period other than a direct
relationship with the revenue.
c) Cost that cannot reasonable be associated with any other period.
The principles that provide accountants with guidelines with the
recognition of expenses are:
a) associating cause and effect,
b) systematic and rational allocation, and
c) immediate recognition,
Associating cases and effect
Cost may be recognized as expenses based on a direct association
with specific revenues. Costs that appear to be related to specific revenue
are recognized as expense with the recognition of the related revenue.
Examples of costs related to specific revenue include the direct costs
of goods sold or services provided, sales commission and direct cost
incurred in relation to construction type contracts.
Systematic and rational allocation
If a direct means is not available to associate cause and effect, costs
may be recognized as expenses based on an orderly allocation to the
accounting periods in which the costs appear to expire and a provide
benefits.
This approach involves assumptions as to the pattern of benefits and as to
the relationship between costs and benefits received.
Examples of costs that are recognized as expenses under this principle are
depreciation of plant assets, amortization of intangible assets, and
allocated amounts of property taxes and insurances.
Immediate recognition
Expenses are recognized in the current accounting period when
i) Costs incurred in the current period are not expected to provide any
future benefits
ii) Costs deferred as assets in earlier periods no longer provide benefits
and
iii) Allocation of costs to revenues or to accounting periods is impractical or
is considered to serve no useful purpose.
This principle requires research and development cost, general and
administrative costs and amounts paid to settle litigation to be recognized
as expenses in the period they are incurred.
Costs deferred in earlier periods that have lost their service potential
are written-off as soon as the loss becomes evident and measurable.

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Application of these expense recognition principles require costs to be

associated, if possible, with revenue on the basis of cause and effect; if
such an association is not practical, a systematic and rational allocation of
the cost is attempted; if neither of these two procedures is feasible, costs
are expensed as incurred or as soon as expiration of the service potential
of the costs becomes evident.

Under the accrual basis of accounting losses recognized in the

accounting period in which they occur. Losses resulting from the disposal
of assets or the retirement of debt are readily recognizable and
measurable.

The standards for recognition of losses are less sever than the
standards for the recognition of gains.

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LO2: PREPARE PAYMENT DOCUMENT

INFORMATION SHEET TWO

. Alternative forms of the income statement

There are two alternative forms of an income statement. These are:
a) the multiple-step, and
b) the single-step.
The choice between the multiple step and the single step form of income
statements is an unsettled question in the income reporting.
Multiple-step income statement:
In the multiple-step form of income statement, various intermediate
balances such as gross profit on sales, income from operations, income
before income taxes, income after income taxes and net income are
computed and leveled in the statement.
Some compenents referred to as sections and subsections with in the
multiple-step form of the income statement are stated below.
i) Operating sections:
This section is a report of the revenues and expenses of the
company’s principal (major) operations and it includes the following
subsections
a) The sales revenue section. This section includes the following items:
Gross sales ----------------------------------------------------------xxxxxxxx
Less: sales returns and allowances -------------xxx
Sales discounts -----------------------------xxx ----------------( xxxx)
Net sales ---------------------------------------------------===--------- xxxxxx
b) The cost of goods sold section: This section includes the following items.
Beginning merchandise inventory -----------------------------------xxxxxx
Add: Gross purchases -----------------------------------------xxx
Add: -fright in --------------------------------------------------xxx
-Delivered cost of merchandise ------------------------xxxxx
Less:-Purchase returns and allowance -------(xxx)--------
-Purchase discounts ------------------------(xxx)------- (xxx)
Net purchases -------------------------------------------------------------xxxxxxx
Merchandise available for sale----------------------------------xxxxxxxx
Less: Ending merchandise inventory ---------------------------------- (xxxx)

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Cost of merchandise sold --------------------------------------- xxxxxx

c) Operating expenses section: -

This section includes the following sub-sections:
a) Selling (marketing) expenses section and
b) General and administrative section
a) Selling or marketing section: In this section, all expenses incurred in
making a sales effort are reported.
Sales salaries expense --------------------------------------------------xxxx
Commissions expense --------------------------------------------------xxxx
Advertising and promotion expense ----------------------------------xxxx
Fright out(transportation expense) (delivery expense)-------------xxxx
Depreciation expense of sales equipment ----------------------------xxxx
Depreciation expense of delivery truck ------------------------------ -xxxx
Store supplies expense --------------------------------------------------xxxx
Other selling expense ---------------------------------------------------xxxx
Total selling/marketing/expenses --------------------------------- xxxxxxxxx
b) General and administrative expense
This section includes all expense incurred in the general
administration of the company’s operations.
Office salaries expenses ---------------------------------------------------xxxx
Legal and professional services ------------------------------------------ xxxx
Utilities expenses ----------------------------------------------------------xxxx
Insurance expense-general -----------------------------------------------xxxx
Depreciation expense of building ----------------------------------------xxxx
Depreciation expense of equipment -------------------------------------- xxx
Uncolletible accounts expense -------------------------------------------- xxx
Stationery expense ---------------------------------------------------------xxx
Office supplies expense --------------------------------------------------- xxx
Postage expense ------------------------------------------------------------xxx
Property tax expense ------------------------------------------------------xxx
Other general and administrative expense -----------------------------xxx
Total general and administrative expense ------------------------------xxxx
Total selling and general and administrative expenses -------- xxxxxxx
ii. Non-Operating Section:-
This section reports revenues and expenses resulting from the
secondary activities of the business.
This section has two subsections:
a) Other revenues and gains section and

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b) Other expenses and losses section

a) Other Revenues and gains section: this section includes a list of
revenues and gains earned from non-operating transactions. In this section
the following items are includes.
Interest income -------------------------------------------------------xxx
Dividends revenue ---------------------------------------------------xxx
Rental revenue ------------------------------------------------------- xxx
Royality revenue ------------------------------------------------------xxx
Gain on disposal of plant assets ------------------------------------ xxx
Total other revenues and gains -------------------------------------xxxx
b) Other expenses and losses: this section includes a list of expenses
and losses incurred from non operating transactions.
The multiple-step form is more likely to be found in more detailed in
financial statements prepared for the use of management, bankers, and
other creditors; it is particularly appropriate when financial statements are
prepared for both internal and external users.
To illustrate the presentation of a multiple –step income statement, assume
the following data for ABC company for its operations for the year ended
Dec-31-1997.
1. Employers pension contribution birr 290,000
2. Delivery expense 425,000
3. Depreciation expenses delivery truck 29,000
4. Depreciation expenses office building 20,000
5. Depreciation expenses office equipment 15,000
6. Depreciation expenses store equipment 25,000
7. Dividends 150,000
8. Dividends revenue 5,000
9. Uncollectible accouexpense 22,000
10. Income tax rate 40%
11. Fright in 145,000
12. Gain on sale of office equipment 10,000
13. Interest revenue 1,500
14. Loss on sale of delivery truck 50,000
15. Loss from writing off of obsolute inventory 125,000
16. Inventory on January 1-1997 (beginning inventory) 1,050,000
17. Other general expenses 45,000
18. Other selling expenses 50,000
19. Officers and office salaries 950,000
20. Purchase discounts 47,700

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21. Purchase returns and allowances 30,500

22. Purchases 4,633,200
23. Retained earnings on January 1-1997(beginning) 550,000
24. Sales 9,125,000
25. Sales discounts 55,000
26. Sales returns and allowances 95,000
27. Sales salaries 601,000
28. Property taxes 100,000
29. Store supplies expense 50,000
30. Interest expense 7,000
31. Royalties revenue -------------------------------------------------------- 28,000

Additional data
1) Inventory on dec-31-1997 (ending merchandise inventory) was valued at
birr 750,000
2) The company has 100,000 shares of common stock outstanding and
has no preferred stock holders
Required:
a) Prepare a multiple-step income statement for ABC-company
b) Prepare a retained earnings statement
c) Prepare a combined statement of income and retained earnings for
the given period.
ABC-Company
Multiples step income statement
for the year ended 31-Dec-1997
1) Sales revenue:
Gross sales ----------------------------------------------------------------------------
9,125,000
Less: Sales returns and allowances ------------------------------------95,000
Sales discounts --------------------------------------------------55,000
-----------(150,000)
Net sales ---------------------------------------------------------------------------------------
8,975,000
2) Cost of merchandise sold:
Beginning merchandise inventory ---------------------------1,050,000
Purchases ----------------------------------------4,633,200
Add: Fright –in----------------------------------------- 145,000
Delivered cost of merchandise--------------------------4,778,200 +
_
Less: purchases returns & allowance----30,500
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Purchase discounts -----------------47,700-------(78,200)

Net purchase ------------------------------------------------------------4,700,000
Merchandise available for sale ----------------------------------------5,750,000
Less: Ending merchandise inventory --------------------------------(750,000)
Cost of merchandise sold
--------------------------------------------------------------------(5,000,000)
Gross profit ------------------------------------------------------------------------------------
3,975,000
3) Operating expenses
i) Selling expenses
Delivery expense ------------------------------------------- 425,000
Depreciation expense of delivery truck -------------------29,000
Depreciation expense of store equipment -------------- -25,000
Sales salaries expense -------------------------------------601,000
Store supplies expense -------------------------------------50,000
Other selling expense ---------------------------------------50,000
Total selling expense ------------------------------------------------------1,180,000
_
ii) General &administrative expense:
Employers pension contribution-------------------------290,000
Depreciation expense of office equipment ------- ------15,000
Depreciation expense of office building ----------------20,000 +
Uncollectible accounts expense -------------------------22,000
Officers and office salaries ------------------------------950,000
Property tax expense-------------------------------------100,000
Other general and administrative expense--------- ----45,000
Total general and administrative expense------------------------- - --
1,442,000
Total selling and general expenses
--------------------------------------------------------------(2,622,000)
Income from operations -------------------------------------------------------------------
1,353,000
4) Other revenues and gains:
Dividend revenues ---------------------------------50,000
Gain on sale of office equipment -----------------10,000
+
Interest income --------------------------------------1,500
Royalities revenue ------------------------------- --28,000
Total other revenues and gains
----------------------------------------------------------44,500
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Income from operation and other revenues and gains

------------------------------1,397,500
5) Other expenses and losses:
Loss on sale of delivery truck---------------------50,000
Loss from written off of obsolte inventory-----125,000
Interest expense ------------------------------------7,000
Total other expenses ------------------------------------------------------------------
(182,000)
Income before income tax ------------------------------------------------------------
1,215,500
Less: income tax expense (40% x 1,215,500)
----------------------------------------(486,200)
Net income for the year ended Dec-31-
1997------------------------------------------729,300
Earnings per share(EPS) of common=
Net income for common 729,300
= = $7.293/ Share
No of shares of common 100,000
B) Statement of retained earnings

The statement of retained earnings generally is included with every

set of financial statements, though it is not considered to be one of the
major financial statements.
The typical statement of the retained earnings includes the beginning
retained earnings balance, the net income or net loss resulted from the
period’s operations(if net income addition, if net loss deduction), and the
dividends as deductions and concludes with the ending balance of retained
earnings. Generally the statement of retained earnings shows, the
beginning balance on the retained earnings, the changes made as a result
of additional investments, dividends (withdrawals) net income or net loss
from operations and the end retained earnings balance.

LO3: OUTHARIZE PAYMENT

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INFORMATION SHEET THREE

A statement of retained earnings for a sample company of ABC-for the data
given earlier is presented below.

ABC –Company
Statement of Retained Earnings
for the Year Ended Dec-31-1997

Beginning retained earnings(January 1-1997) -----------------------550,000

Add: Net income from operations -------------------729,300
Less: Dividends paid during the year ---------------(150,000)
Change in retained earnings(increase) ----------------------579,300
Ending retained earnings (Dec-31-1997) -------------------1,129,300

ABC – Company
Combined Statement of Income and Retained Earnings
for the Year Ended Dec –31-1997
Net sales and other revenues and gains -------------------------------- 9,019,500
Less: Costs, expenses and losses ------------------------------------ (7,804,000)
Income before income tax ----------------------------------------------- 1,215,500
Less: Income tax expense(40% of 1,215,500) ----------------------- (486,200)
Net income ----------------------------------------------------------- 729,300
Less: Dividends ------------------------------------------------------------ (150,000)
Change in retained earnings during the year -----------------------------579,300
Add: Beginning retained earnings ---------------------------------------- 550,000
Ending Retained earnings----------------------------------------1,129,300.00

The Single Step Form of an Income Statement

The single step form presents a grouping of revenue in one category,
all expenses in an other and drives a single net income figure. This form of
income statement is widely used by publicity owned companies. The
single-step income statement maintains that net income emerges as the
over all amount by which a business enterprise is better off after taking in to
account all revenue and all expenses incurred in producing that revenue.
The single-step form of income statement for ABC-company is given below.

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ABC Company
Single-Step Income Statement
For the Year Ended Dec-31-1997
1) Revenues:
Net sales --------------------------------------------------8,975,000
Dividends Revenue------------------------------------------50,000
Gain on sale of office equipment ---------------------------10,000
Interest income ------------------------------------------------1,500
Royalities revenues ------------------------------------------28,000
Total revenues -------------------------------------------------------------9,064,500
2) Costs and expenses:
Cost of merchandise sold --------------------------------5,000,000
Selling expenses -------------------------------------------1,180,000
General and administrative expenses -------------------1,442,000
Loss on sale of delivery truck -------------------------------50,000 _
Loss from written-off of obsolute inventory--------------125,000
Interest expense -----------------------------------------------7,000
Income tax expense -------------------------------------486,200
Total costs and expenses ----------------------------------------------------
(8,335,200)
Net income ---------------------------------------------------------------------729,300
$ 729,300
= $7 .293/ share
Earnings per share of common = 100, 000

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