Lecture 4-Business Planning & Basics in Accounting Jan 2024

Course : 4.2 & 4.
1 Groups
Class: Bsc Civil Engineering & Bsc Civil
Engineering
Unit Title: Principles of
Entrepreneurship & Marketing
Unit Code: BCM2240
Facilitator: Dr. Rosemary Kagondu
1
Students Own personal Research Work
• Read and make notes on the following

• Forms of business ownership
Sole proprietorship
Partnerships
Limited companies
Joint ventures
How do companies go public /get listed
Dedan Kimathi University of Technology

Better Life Through Technology 2
Business Planning
A business plan is a very important and

strategic tool for entrepreneurs.
A good business plan not only helps
entrepreneurs focus on the specific steps
necessary for them to make business ideas
succeed, but it also helps them to achieve
short-term and long-term objectives.

PLANNING ? WHAT FOR ?
SMEs are the back bone of developed

& developing economies around the
world.
Research shows the sector has not
provided desired level of
contribution and suffers from high
failure rate worldwide.

KNBS (2022) statistics stipulated that in
Kenya there are 7.14 Million SMEs in
Kenya and 70 % of these fail
The KNBS report projected that 70 % of
employment opportunities come from
the SME sector.
In 2022, the business daily reported that
6 of Kenya’s -based start-ups closed
Reasons for closure ranged from lack of
financing, pandemic woes, and a tough
economic
Dedan Kimathienvironment.
University of Technology
Most were tech companies, hurting the
country’s vision of Silicon Savanah of Africa,
a version of America’s Silicon Valley that has
given birth to such tech giants as Facebook,
Twitter and Uber
Over time however, financing of startups is
no longer a challenge. Many funding
agencies are now available – in Kenya we
have National Youth Development Fund,
Women Enterprise Devt Fund, Hustler Fund,
Many accelerators (Konza city, DeKUT STP)
etcDedan Kimathi University of Technology
Research has increasingly shown that
business planning contributes greatly to
business success
A business plan is a very important and
strategic tool for entrepreneurs.
Business plan is the GPS for a startup

Many of us use smartphones’ or navigation
systems’ Global Positioning System (GPS)
to get us from point A to point B.
We can input our preferences into the
system (i.e., shortest distance, most use of
freeways, etc.) and the system will then
select the best route.
When we use a GPS, we have the added
confidence that we will not lose our way
and that we will get to our destination as
planned with few or no surprises
It only makes sense that we should plan as
carefully for our businesses so that we can be
sure we are headed in the right direction.
A well documented business plan helps you
map out the journey to take your company
from where it is today to where you want it
to go—identifying milestones, obstacles, and
desired routes along the way
Benjamin Franklin once said, "If you fail to
plan, you are planning to fail." (Benjamin Franklin).

What a Business Plan Must Answer
The primary purpose of your business
plan is to define your business, identify
your goals, and create a financially
sustainable business.
It is a means to keep you on track and
help you make the right decisions for your
firm.

As you develop your plan, carefully consider
the core questions as follows:
 What business are you  What motivates your customers
really in? to buy from you?
 What is the overall  How will you reach potential
mission of your company customers and retain the
and what are your existing ones?
corporate values?  How will you structure your
 What products and operation for success today and
services do you offer? in the future?
 Who are your potential  How will you achieve enough
customers and what are profit to sustain and grow your
your target markets? business?
 What distinguishes you  How will you ensure
from your competitors? conformity to industry best
practices?
A business plan is a blueprint a business
promoter prepares for a new (or
existing/expanding) business that gives the
reader an overview of what he/she intends
the business to look like, how it will operate
and what activities must take place in order
to reach the final goal.
Hence, it is an organization’s tool that helps
structure, communicate and sell a business
promoter’s idea and convert it into reality.

WHY WRITE A BUSINESS PLAN?-PURPOSE
A Business Plan helps you evaluate the

feasibility of a new business idea in an
objective, critical, and unemotional way.
Marketing – Is there a market? How much
can you sell?
Management – Does management team
have the skill?
Financial – Can the business make a profit?

It provides an operating plan to assist you in
running the business & improves your
probability of success.
Identify opportunities and avoid mistakes
Develop production, administrative and
marketing plans
Create budgets and projections to show
financial outcomes

It communicates your idea to others,
serves as a “selling tool,” and provides the
basis for your financing proposal.
Determine the amount and type of
financing needed
Forecast profitability and investor return
on investment
Forecast cash flow, show liquidity and
ability to repay debt

Who will use the plan?
If you won't use the plan to raise money,
your plan will be internal and may be less
formal.
If you are presenting it to outsiders as a
financing proposal, presentation quality
and thorough financial analysis are very
important.

PREPARATION OF BUSINESS PLAN
Many people think of their budget as their
business plan, but it most certainly is not!
 An effective business plan serves as a tool
to ensure that your financial decisions and
your budget are in synch with your goals.

BUSINESS PLAN KEY COMPONENTS
EXECUTIVE SUMMARY
The purpose of the executive summary is
to get the reader’s attention by
summarizing the key elements of the
business plan.
It must be short, to the point and very well
written.
This is arguably the most important part of
the business plan. The Introduction must
make your reader want to keep reading
• Executive should show :
i) Business Concept
ii) Ownership and Management team
ii) Financial requirements
Tell the reader what you want (e.g. a
business loan for a specific amount to e.g
purchase equipment).
State your sales, production and profit
goals. Be specific in amount and time line.

CH. 1: INTRODUCTION
Introduce the business

 Justification of the Business
 The product /service
 Legal structure of the business
 Name and business Location
 The Business Purpose
 History of the business or industry
 State Why This Business Should Exist

CHAPTER 2. INTRODUCE THE DETAILS
OF THE PRODUCT OR SERVICE
The product/service section Details exactly
what your business does for the customer &
what makes these oﬀerings desirable.
• Product Oriented Businesses
• Service Businesses
Products and services
A. Describe the product or service the company will market in a technically
accurate manner. (Include the standard industrial classification (sic) code for
financial proposals.)
B. Provide a summary of the product line or a description of the services
offered. (Include a photograph or drawing, if possible.)
C. Emphasize the difference between your competitors and your company's
offerings.

CHAPTER III. Manufacturing And/
Operations Plan (include picture of plan)
Describe the location, physical facility,
space requirements, major equipment, labor
force, sources of supply, layout and floor
plan that are required to provide for the
product or service

Areas to focus on include
For a manufacturing business, emphasis
should be given to the production process,
the inventory control system, and the
purchasing and production control
systems
Location of the business
Physical facilities (discuss existing status
and required changes)
Labour & Supply of raw materials (inputs
) (cost the inputs )
Provide layout of floor plan ( appendix)
CHAPTER IV. MARKET ANALYSIS
Scan the business environment to identify
factors that influence your business
Macro environmental trends (PESTEL
Analysis) (Highlight the trends) in PESTEL
analysis
Micro Economic situation analysis (Key
variables would be
• Labor markets Trade unions
• Customer profiles Suppliers
Industry Analysis (overview)
 Degree of competition in the industry
 dominant economic features of the
industry,
 Drivers of change in the industry
 What stage of the product/service life cycle
will your business be entering the market?
(Introduction, growth, maturity, saturation,
or decline)

Summarize the opportunities and threats
from the macro, micro and industry
variables and strategic responses
applicable

INTERNAL ENVIRONMENT
 Management & governance -How is
it /will it be done & Culture
Resources and capabilities of the
business : Physical resources, Human
resources , Technological resources ,
Financial resources
. SWOT internal environment and
prepare strategic responses
MARKET ANALYSIS
SECTION A
Description of Total Market ( To generate
a consistent and increasing sales flow, the
entrepreneur should be knowledgeable
about the market ( the people, businesses,
or public institutions who might buy the
product or service)
Present size of the entire market (Total
available market)
Target Market
 segment of the total market who are likely
or potential customers
 What is the size of your target market?
 What percentage of the target market do
you anticipate?
 How will you attract and keep this
market?
 How can you expand your market?

Product/Service Differentiation (Unique
Selling Proposition)
 What unique niche of the market will this
business fill?
 Has anyone attempted to fill this niche? If
not, why?
 Is there a patent, trademark, copyright, or
trade. Secret that will give you a head-start
on the competition?
 Where do you believe you have a business
advantage? (Product, price, service, delivery
time, other)
CHAPTER IV-SECTION B
show projected budgets)
• Pricing policy
• Distribution strategy
• Communication Strategy
• Promotional efforts E.g

CHAPTER V: GOVERNANCE &
MANAGEMENT PLAN
Personal history of key participants
 Business background
 Management experience
 Education (formal and informal learning
experiences)
 Relevant Personal data

CHAPTER V: OTHER SERVICE PROVIDERS –
FOR MANAGEMENT
 Service providers
 Do you have the marketing, management,
and financial skills to do it all yourself? If
not, then show relationships that fill the
gaps to create a fully capable business
enterprise
 Professional (lawyer etc.)
 Insurance
 Consultants
CHAPTER VI: FINANCIAL ANALYSIS
Provide Start Up Costs ( attach supporting documents e.g.
Sales Agreement
DESCRIPTION AMOUNT
Land $ 5,000
Building 40,000
Remodeling/Improvements 15,000
Inventory 15,000
Furniture 400
Fixtures & Equipment 9,300
Utility Deposits 1,000
Licenses and Permits 500
Outdoor Sign 1,400
Advertising 2,000
Association Fee 180
Office/Operating Supplies 220
Working Capital 10,000
TOTAL STARTUP COSTS $100,000

CHAPTER VII ASSUMPTIONS USED & RISK
ANALYSIS IN THE CASH FLOW PROJECTIONS
Every business is prone to facing certain

business risks. which might appear very
critical in the real world.
As a business person. you must be able to
spend sufficient time in drafting your
business plan so that it is capable of
addressing the critical risks and
assumptions that your business might face

Assumptions and risks in business plan will assist
you in developing a sound risk management plan
Our ability to access the public debt capital and
bank credit markets may be negatively affected by
the adverse conditions prevailing in such markets in
future. Think of those who hoped to do something
under the laptop project by former Govt –BIG 4
AGENDA & CHANGE OF GOVT
Implicit assumptions are those assumptions that you
make because of your prior knowledge of the
industry / business / market. Explicit are the ones
that you think impact the business directly and are
highlighted / made aware to a person looking at
your business
Dedan plan. of Technology
Kimathi University
OVERVIEW OF THE FINANCIAL PLAN IN A
BUSINESS PLAN
 A key part of the Business plan is the financial
statements. These statements determine how your
business plan sells/appeals to funders .
 You may need several different types of statements,
depending on the requirements of the institution
financing your business.
 The statements you will certainly need are:
 A startup budget
 A startup costs worksheet
 A pro forma (projected) profit and loss statement
 A pro forma (projected) balance sheet
 Sources and uses of funds statement/ or cash flow statement
 Break-even analysis

Classification of Budgets

1. Based on time
• Long-term Budget: The budget designed by the

management for a long-term, i.e. three to ten years is
called as long-term budget.
• Short-term Budget: As the name suggests, the budget
which is prepared for a period ranging from 1 to 2 years,
is called short-term budget

2. Based on Capacity
• Fixed Budget: The budget created for a fixed activity

level, i.e. the budget remains constant regardless of the
level of activity, is called as fixed budget.
• Flexible Budget: The budget which changes with the
change in the level of activity is a flexible budget. It
identifies the fixed cost, semi-variable cost and variable
cost, to show the expected results at different volumes

3. Based on Scope
Functional Budget: The budget which is concerned with

the business functions is called a functional budget. It can
be further classified as:
Sales Budget: Sales budget is used to determine the
quantity of anticipated sales & the expected selling price
per unit.
Production Budget: It is prepared to indicate the
production for the specified period and is expressed in the
units of outputs produced.
Materials Budget: The budget prepared to show the
quantities of direct material and raw material required to
manufacture the finished product.

Purchase Budget: Purchase budget is designed to estimate the
quantity and value of different items to be bought at different
points of time, considering the production schedule and
inventory required.
Cash Budget: The budget highlights the cash needed by the
business in a specified period, taking into account all the
receipts and payments of the business.
There are other functional budgets also, i.e. plant utilization
budget, direct material usage budget, factory overhead
budget, production cost budget, cost of goods sold budget,
selling and distribution cost budget,
Master Budget: Once all the functional budgets are created,
the master budget is prepared. It is an integrated budget that
reflects the estimated profit and loss and financial position
using Budgeted P& L Acct and Budgeted Balance Sheet of the
concern.
The Budgeting
 A start-up budget
 There are different types of budgets. We shall focus on
operating budget
 What Is Operating Budget? - Definition & Examples
 An operating budget is a set of detailed plans that estimate the
income and expenses for a company's different business
departments for a period of time.
 Maintaining a healthy business requires careful financial
planning and budgeting. Companies use a master budget to
manage their cash and other assets, and to estimate their
future sales and expenses.

Budgeting
 Master budgets are made up of two parts that work together:
financial budgets and operating budgets.
 Financial budgets focus on cash and capital expenditures. They
make sure that the business has the cash it needs to fund its
operations and to maintain and/or upgrade its buildings and
equipment.
 Operating budgets are detailed plans that estimate how much
income a company expects to make and what it thinks its expenses
will be in the short-term, typically within a year. Companies
normally use separate operating budgets to create plans for each
area of their business. Examples of commonly used operating
budgets are sales, production or manufacturing, labour, overhead,
and administration.

Why budgeting is crucial to success
 Developing a startup budget helps the entrepreneur avoid early

financial missteps and make informed decisions in the long run
 You can determine when to hire employees, buy equipment, and
otherwise invest in your business.
 You can finance to scale using actual business data and avoid
fundraising too early or over-borrowing.
 You can better estimate your break-even point and adjust variables
as needed.
 You can predict cash shortfalls and line up funds or negotiate with
suppliers and lenders early.
 You can identify retained earnings ahead of time and develop a plan
for them.
 You can pinpoint extra cash to build your startup’s emergency fund.
 You can generate accurate financial statements, like a balance sheet
or income statement to share with investors and lenders.
Types of Operating Budget
• There are mainly three types (components) which are

as follows:
 Revenue Budgets: These are those budgets that forecast
the expected revenues from the business over a set
period.
 Expenses Budgets: Budgets that forecast the expenses
which are to be incurred over that set period are
expenses budgets.
 Profit Budget: It is a difference between the above two
budgets, i.e., when we subtract the revenue budget from
the expenses budget, we get a profit budget
•

COMPONENTS OF AN OPERATING BUDGET
 The main components of an operations budget are as outlined

below. Each business however is unique and every industry has its
own outlay of common classification of these components but these
items are general enough to apply to most industries.
 REVENUE
 Revenue is usually broken down into its drivers and components.
It’s possible to forecast revenue on a year-over-year basis, but
usually, more detail is required by breaking revenue down into its
underlying components.
 Revenue drivers typically include:
 Volume (units, contracts, customers, products, etc.)
 Price (average price, per unit price, segment price, etc.)
 VARIABLE COSTS: After revenue, variable costs are determined.
These costs are called “variable” because they depend on revenue,
and are often calculated as a percentage of sales.
VARIABLE COSTS (VC)
Definition: Is a corporate expense that changes
in proportion to production output. VC increase
or decrease depending on a company's
production volume; they rise as production
increases and fall as production decreases
Variable costs often include:
 Cost of goods sold Direct selling costs
 Sales commissions Payment processing
fees Certain aspects of marketing
 Direct labor

Fixed costs
These expenses typically do not vary with
changes in revenue and are mostly
constant, at least within the time frame of
the operating budget.
Examples of fixed costs include:
Rent
Insurance
Telecommunication
Management salaries and benefits
Non-cash expenses and Non-operating expenses
• Non-cash expenses
• An operating budget often includes non-cash expenses, such as
depreciation and amortization. Even though these expenses don’t
impact cash flow (other than taxes), they will impact financial
reporting performance (i.e. the figures a company reports at the end
of the year on their income statement).
• Non-operating expenses
• Non-operating expenses are those that fall below the earnings
Before Interest and Taxes (EBIT) or Operating Income. Examples of
expenses that may be included in a budget are:
• Interest
• Gains or Losses made on disposal of an asset
• Taxes
•

Sales Forecasting
Forecasting sales is the most difficult aspect of budgeting.
How do we forecast sales?
Sales staff
Market researchers
Delphi technique
Trend analysis
Econometric models

Forecasting by Sales Staff
After evaluating the sales forecasts derived from

various sources, the budgeting task force at Destiny
Ltd arrived at the following sales budget for the next
budget year:

Forecasting Production
Develop production and cost budgets.
A production budget is a plan of resources needed to meet current

sales demand and ensure that inventory levels are sufficient for future
sales.
Basic inventory formula

Beginning balance Transfers in Transfers out
+ – = Ending balance
BB TI TO
For inventories, production, and sales

Units in beginning Required Budgeted Units in ending
+ – =
inventory production sales inventory

Production Budget
Rearranging for required production:

Budgeted Units in ending Units in beginning Required
+ – =
sales inventory inventory production
• Destiny’s sales budget is 160,000 units
• Management estimates that there will be 5,000 units

in beginning inventory and 15,000 in ending inventory.
160,000 15,000 5,000 170,000

+ – =
units units units units

Production Budget
Destiny Ltd
Production Budget
For the year ended December 31st 2022
In units Ksh
Estimated Sales 160000
Add : Desired inventory of finished goods 15000
Total needs 175000
Less: Beginning inventory of finished goods 5000

Units to be produced 170000

Example of Operating Budget
• Suppose ABC Ltd wants to prepare its operating budget

for 2020based upon the actual data of the business in the
past two years given below:

Solution
 From the above-given data, the budget for the year 2023
is as follows:

How to Prepare Operating Budget
 The steps to prepare this budget are as follows:
1) Gather the actual data for at least the past two years.
2) Observe the trend of increase or decrease in revenue or expenses of
the business.
3) Check trends of the industry in which the entity operates, i.e.,
industry norms and new government policies which have a
significant impact on the activities of the business.
4) Observing the above parameters, analyzing the market, and
observing the prospective customers and market cap would help us
analyze the percentage increase in revenue and expenses
accordingly.
5) Accordingly, prepare the operating budget by taking an expected
increase or decrease in figures from the previous year’s actual
figures. After that, it calculates the expected profits
•
Class Exercise –Budgets
• Income: • VARIABLE EXPENSES
• A Client Hourly Earnings: 5000 • Sales commissions: 2000
B Client Hourly Earnings: 4500 Contractor wages: 500
C Client Hourly Earnings 6000 Electricity bill: 125
Product Sales 1500 Gas bill: 75
Loans: 1000 Water bill: 125
Savings: 1000 Printing services: 300
Investment Income: 500 Raw materials: 200
• Total Income: Digital advertising costs: 750
19500 Travel and events: 0
• Expenses: Transportation 50
• FIXED COSTS • Total Variable Expenses: 4125
• Rent: 1000 • ONE-TIME SPENDS
• Internet: 50 • Office furniture: 450
• Payroll costs: 5000 • Office supplies for new location: 300
• Website hosting: 50 • December business retreat: 1000
• Insurance: 50 • New time tracking software: 500
• Government and bank fees: 25 • Client gifts: 100
• Cell phone: 50 • One-Time Spends (others ): 2350
• Accounting services: 100 • Total Expenses: 12900
• Legal services: 100
•
• Total Fixed Costs: 6425
Cell A B C D E$
INCOME
Water bill 125
Client Hourly Earnings 5000 Printing services 300
B Client Hourly Earnings 4500
Raw materials 200
C Client Hourly Earnings 6000
Digital advertising costs 750
Product Sales 1500 Travel and events
Loans 1000
Savings 1000 Transportation 50
Investment Income 500
TOTAL VARIABLE COSTS 4125
TOTAL INCOME 19500
ONE-TIME SPENDS
EXPENSES
FIXED COSTS
Office furniture 450
Rent 1000 Office supplies for new 300
Internet 50
Payroll costs: 5000
location
Website hosting 50 December business retreat 1000
Insurance 50
Government and bank 25
New time tracking 500
fees: software
Cell phone 50
Accounting services 100
Client gifts: 100
Legal services 100 TOTAL ONE TIME SPENDS 2350
TOTAL FIXED COSTS 6425
VARIABLE EXPENSES
TOTAL EXPENSES 12900
Sales commissions 2000
Contractor wages 500 Budget Surplus/Deficit 6600
Electricity bill 125
Gas bill 75

WHAT IS THE ACCOUNTING EQUATION
 The accounting equation is a basic principle of accounting

and a fundamental element of the balance sheet.
 The equation is as follows:
Assets = Liabilities + Shareholder’s Equity
 This equation sets the foundation of double-entry
accounting and highlights the structure of the balance
sheet.
 Double-entry accounting is a system where every
transaction affects both sides of the accounting equation.
 For every change to an asset account, there must be an
equal change to a related liability or shareholder’s equity
account.
ILLUSTRATION EXERCISES
Example 1
 You just started your software business after a year of
saving $10,000 to contribute to your new company. The
$10,000 is now your equity in the business; hence there is
an increase in your assets.
 The equation looks like this:
$10,000 Assets = $0 Liabilities + $10,000 Equity

Example 2
 Now that you have started your company, you need to
purchase two computers and other equipment. So, you
decide to purchase $2,000 worth of equipment on your
company credit card.
 That $2,000 credit card purchase is both a liability (debt)
and an asset.
 Both assets and liabilities increase by $2,000, so the
equation looks like this:
$2,000 Assets = $2,000 Liabilities + $0 Equity

Components of the Accounting Equation
 Assets : An asset is anything a company owns. Assets

typically hold positive economic value and can be liquified
(turned into cash) in the future. However, some assets are
less liquid than others, making them harder to convert to
cash. For example, inventory is very liquid — the company
can quickly sell it for money. Real estate, though, is less
liquid — selling for cash is time-consuming and sometimes
difficult, depending on the market.
 Some examples of assets include:
Cash Prepaid expenses
Equipment and machinery Inventory
Buildings or property

 Liabilities
 Liabilities are amounts of money that the company owes
to others. Sometimes, liabilities are called obligations —
the company has an obligation to make payments on
loans or mortgages, or they risk damage to their credit
and business.
 Some examples of liabilities include:
• Deferred revenue
• Accounts payable (money owed to lenders or customers)
• Loan payments
• Mortgages
• Accrued expenses

 Equity
 There are two ways to look at equity. One is to consider
equity as any assets left over after deducting all liabilities
 The equation for determining how much equity a company
has is subtracting the company’s liabilities from its assets.
 However, equity can also be thought of as investments into
the company either by founders, owners, public
shareholders, or by customers buying products leading to
higher revenue.
 Some examples of equity include:
• Owner contributions
• Net profits
• Investments from shareholders

Show that the accounting equation is
satisfied after taking into consideration
each of the following transactions in the
books of Mr. Nony
1. Started business with capital 100,000
2. Bought furniture 25,000
3. Bought goods for cash 20,000
4. Bought goods from Ram on Credit
5,000
5. Sold goods for cash for 15,000
6. Sold goods to Shyam on credit 8,000
7. Paid cash to Ram 4,000
8. Received cash from Shyam 5,000
9. Paid Cash into Bank 25,000
10. Withdrawn from bank 10,000

Show that the accounting
equation is satisfied after taking
into consideration each of the
following transactions in the
books of Mr. Nony
6.Started business with capital
1,00,000
7.Bought furniture 25,000
8.Bought goods for cash 20,000
9.Bought goods from Ram on
Credit 5,000
10.Sold goods for cash for 15,000

 Assets = Liabilities + Equity
 The debit and credit rules in double-entry bookkeeping
 When making journal entries in your general ledger, debit
is an entry on the left side of an account and credit is an
entry on the right side of an account.
nnnnnnnnnn
 The T Account is used to analyze the transactions.
 Debit is commonly abbreviated Dr.
 Credit is commonly abbreviated Cr.
 Footings, the total of each side are computed.
 The difference between the debit side and the credit side is
the account balance, either debit or credit.
 Credits increase revenue, liabilities, and equity accounts,
whereas debits increase assets and expense accounts.
 Debits must be equal credits. For each transaction, the total
of the debit amounts must be the same as the total of credit
amounts

WHAT IS A TRIAL BALANCE?
 A trial balance is a report that lists the balances of all the

general ledger accounts in the books of a company at a
certain point in time.
 The accounts reflected on a trial balance are
related to all major accounting items, including
assets, liabilities, equity, revenues, expenses, gains, and
losses.
 It is primarily used to identify the balance of debits and
credits entries from the transactions recorded in the
general ledger at a certain point in time.

Purpose of a Trial Balance
 Trial Balance acts as the first step in the preparation of
financial statements.
 It is a working paper that accountants use as a basis
while preparing financial statements.
 Trial balance ensures that for every debit entry recorded,
a corresponding credit entry has been recorded in the
books in accordance with the double entry concept of
accounting.
 If the totals of the trial balance do not agree, the
differences may be investigated and resolved before
financial statements are prepared.

Illustration on Trial Balance with the following
information
Balance Balance
Sr. No Name of Account Sr. No Name of Account
(₹) (₹)
(i) Capital 2,00,000 (ii) Stock 70,000

(iii) Cash 1,80,000 (iv) Debtors 3,00,000
(v) Creditors 1,00,000 (vi) Bank Loan 1,50,000
(vii) Sales 3,00,000 (viii) Purchases 2,00,000
Trial Balance
Debit Credit
S. No. Account Title Balance Balance
(Ksh ) (Ksh )
(i) Capital 2,00,000
(ii) Stock 70,000
(iii) Cash 1,80,000
(iv) Debtors 3,00,000
(v) Creditors 1,00,000
(vi) Bank Loan 1,50,000
(vii) Sales 3,00,000
(viii) Purchases 2,00,000
7,50,000 7,50,000

Accrual Accounting
 Accrual accounting is a financial accounting method that

allows a company to record revenue before receiving
payment for goods or services sold and record expenses as
they are incurred.
 In other words, the revenue earned and expenses incurred
are entered into the company's journal regardless of when
money exchanges hands. Accrual
 accounting is usually compared to cash basis of
accounting, which records revenue when the goods and
services are actually paid for.
 In order to meet their objectives, financial statements are
prepared on the accrual basis of accounting.

 Under this basis, the effects of transactions and other events
are recognized when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in the
accounting records and reported in the financial statements
of the periods to which they relate.
 Financial statements prepared on the accrual basis inform
users not only of past transactions involving the payment
and receipt of cash but also of obligations to pay cash in
the future and of resources that represent cash to be
received in the future.
 They provide information about past transactions and other
events that is most useful to users in making economic
decisions.”

Exercise on trial balance
Q: The following transactions have been
journalized and posted to the proper
accounts:
i. Edward Wilson invested $8,000 cash in

his new landscaping business.
ii. The business paid the first month's rent
with $300 cash.
iii. The business purchased equipment by
paying $2,000 cash and executing a note
payable for $3,000.
iv. The business purchased supplies for
$200 cash.
v. The business billed clients for a total of
$1,000 for design services rendered.
vi. The business received $750 cash from
clients for services rendered above.
vii. The owner took a withdrawal of $2,000.
Prepare the T-accounts and trial balance

TRADING , PROFIT AND LOSS ACCOUNT
 The purpose of the profit and loss account is to:

 Show whether a business has made a PROFIT or LOSS over a
financial year.
 Describe how the profit or loss arose – e.g. categorising costs
between "cost of sales" and operating costs.
 A profit and loss account starts with the TRADING ACCOUNT and
then takes into account all the other expenses associated with the
business.
 Trading account is used to determine the gross profit or gross loss of
a business which results from trading activities. Trading activities
are mostly related to the buying and selling activities involved in a
business.
• The trading account shows the income from sales and the direct
costs of making those sales. It includes the balance of stocks at the
start and end of the year.

 The following items usually appear on the debit and
credit sides of a trading account.
 On the Debit Side

 Stock in hand at the beginning (opening stock).
 Net purchases made during the year (total purchases
less purchases returns).
 All direct expenses.
 On the Credit Side
 Net sales (total sales less sales returns).
 The value of the closing stock of goods

 This account comprises items directly related to trading,
i.e., net sales + closing stock minus opening stock + net
purchases + direct expenses = gross profit or gross loss.
 If the net sales + closing stock value is more than the

opening stock, net purchases, and direct expenses, the
difference is gross profit. If it is vice versa (i.e., less than),
the difference is gross loss.
 The equation is:
 Net sales - Cost of goods sold = Gross income or Gross
profit
 Cost of goods sold - Net sales = Gross loss

 where,
 Cost of goods sold = Opening stock + Net purchases +
Direct expenses - Closing stock
 Direct expenses include carriage inward, freight, customs
duty clearing charges, import duty and dock charges, coal,
gas, and fuel, and expenses with a direct bearing on the
procurement of merchandise or production in a
manufacturing plant
 Net purchases = purchases - purchase returns or returns
outwards
 Net sales = sales - sales returns or returns outwards
 The trading account is prepared by debiting opening stock,
purchases less returns, direct expenses and crediting sales
less returns, and closing stock.
AN EXAMPLE OF A SIMPLE TRADING ACCOUNT OF A
BUSINESS
• Note that the closing stock figure would appear in the balance sheet
under Stock.

PROFIT AND LOSS ACCOUNT
 The trading account now has all the other expenses now deducted.
 It would look like the table below:
• Trading, profit and loss account for XYZ Ltd for the year ended 31
March 20X5

• NOTES ON THE ITEMS IN THE PROFIT AND LOSS
ACCOUNT:
 Sales: the amount of money generated by sales
 Cost of sales: the cost of making the goods or buying them
 Gross profit: sales less direct costs of sales
 Overheads and expenses: Costs not directly involved in the
production process (indirect costs) e.g.
•
 Cost of premises e.g. rent, insurance, repairs
 Office costs e.g. stationery, postage, computer maintenance, staff
salaries and wages
 Sales and marketing costs e.g. salaries of salesmen, advertising
 Finance costs e.g. bank charges, interest on bank loans

CLASS EXERCISE: TO BE READY BY THE NEXT
LESSON
 Beta Ltd has the following records. Prepare a Trading, Profit and Loss
Account for the Company for the year ended 31st December 2019
 Net Sales 100,000
 Net Purchases 46,000
 Beginning inventory 8,000
 Ending inventory 9,000
 Expenses 48,000
 Other income 5,000
Required: Show the Cost of goods sold, the gross profit and net income of Beta Ltd


Lecture 4-Business Planning &amp; Basics in Accounting Jan 2024

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Course : 4.2 & 4.

Facilitator: Dr. Rosemary Kagondu

• Read and make notes on the following

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A business plan is a very important and

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SMEs are the back bone of developed

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A Business Plan helps you evaluate the

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Introduce the business

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Every business is prone to facing certain

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• Long-term Budget: The budget designed by the

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• Fixed Budget: The budget created for a fixed activity

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Functional Budget: The budget which is concerned with

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 Developing a startup budget helps the entrepreneur avoid early

• There are mainly three types (components) which are

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 The main components of an operations budget are as outlined

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Forecasting sales is the most difficult aspect of budgeting.

How do we forecast sales?

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After evaluating the sales forecasts derived from

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Develop production and cost budgets.

A production budget is a plan of resources needed to meet current

Basic inventory formula

For inventories, production, and sales

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Rearranging for required production:

• Destiny’s sales budget is 160,000 units

• Management estimates that there will be 5,000 units

160,000 15,000 5,000 170,000

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Less: Beginning inventory of finished goods 5000

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Lecture 4-Business Planning & Basics in Accounting Jan 2024

Lecture 4-Business Planning & Basics in Accounting Jan 2024