Lesson 1: Accounting Equation & Double Entry

Objective: Explain Assets = Liabilities + Owner's Equity and the double-entry rule (every debit has a credit).

• Assets: things the business owns (cash, stock, equipment).
• Liabilities: amounts the business owes (bank loans, trade creditors).
• Owner's equity: owner's investment (capital) minus drawings plus retained profit.

Example: Owner invests KES 50,000 cash. Effect: Cash (asset) +50,000; Capital (equity) +50,000.

Practice: If the business borrows KES 20,000 from Equity Bank, show the effect. Answer: Cash +20,000; Loan (liability) +20,000.

Lesson 2: Effects on Assets

Objective: Identify increases and decreases in assets and the corresponding accounts changed.

When an asset increases, another asset may decrease or a liability/equity may increase. When it decreases, either another asset increases or equity/liability decreases.

Example: Buy a refrigerator for your shop for KES 15,000 in cash. Cash -15,000 (asset), Equipment +15,000 (asset). Overall assets unchanged but composition changes.

Practice: Pay KES 4,000 rent in cash. Answer: Cash -4,000 (asset), Rent expense +4,000 (reduces equity via profit).

Lesson 3: Effects on Liabilities

Objective: Show how taking or repaying loans affects the statement of financial position.

Borrowing: Liability +, Cash (asset) +. Repayment: Liability -, Cash -.

Example: The business buys stock on credit (from a supplier) worth KES 8,000. Inventory (asset) +8,000; Trade creditors (liability) +8,000.

Practice: Pay KES 8,000 to the supplier. Answer: Cash -8,000; Trade creditors -8,000.

Lesson 4: Owner's Equity — Capital & Drawings

Objective: Recognise how owner’s investments and withdrawals (drawings) change net worth.

Owner invests: Capital + (increases equity). Owner withdraws for personal use: Drawings + (reduces equity, also reduces assets like cash).

Example: Owner withdraws KES 2,000 for personal use. Cash -2,000; Drawings +2,000 (equity down).

Practice: Owner adds a bicycle to the business worth KES 6,000 as capital. Answer: Equipment +6,000; Capital +6,000.

Lesson 5: Revenues and Expenses — Effect on Equity

Objective: Explain how sales (revenue) and expenses affect owner's equity (through profit or loss).

Revenue increases equity (profit). Expenses reduce equity (loss).

Example: Sell goods for KES 12,000 cash (cost KES 7,000). Cash +12,000; Sales revenue +12,000 (equity up). Reduce inventory by 7,000 and record cost of sales 7,000 (equity down). Net effect: equity up by profit KES 5,000.

Practice: Pay staff wages KES 3,000. Answer: Cash -3,000; Wages expense +3,000 (equity down).

Lesson 6: Recording Transactions — Journals & Ledgers

Objective: Record transactions in journal entries and post to ledger accounts to see effects on the statement of financial position.

Simple journal format: Date — Debit account — Credit account — Amount. Post totals to ledger T-accounts to find balances.

Example journal: 2026-03-01 Owner invested cash KES 40,000. Debit Cash KES 40,000; Credit Capital KES 40,000.

Practice: Record buying stationery KES 1,200 cash. Answer: Debit Stationery expense 1,200; Credit Cash 1,200.

Lesson 7: Trial Balance and Checking Balances

Objective: Prepare a trial balance to check that total debits = total credits before preparing financial statements.

A correct trial balance does not guarantee there are no errors, but it helps to check arithmetic posting mistakes.

Mini trial balance example (KES): Cash 30,000 (Dr), Inventory 10,000 (Dr), Capital 35,000 (Cr), Loan 5,000 (Cr). Debits = 40,000; Credits = 40,000.

Practice: If Sales KES 12,000 (Cr) is missing, what happens? Answer: Credits less; trial balance will not balance.

Lesson 8: Adjusting Entries — Accruals & Prepayments

Objective: Make adjustments for accrued expenses/revenues and prepayments and understand their effect on the statement of financial position.

Accrued expense: expense recorded but not yet paid → liability (accrued expense) + and expense + (reduces equity). Prepayment: expense paid in advance → asset (prepaid expense) + and cash -.

Example: Electricity bill KES 1,200 used but not yet paid at year-end. Accrual: Electricity expense +1,200; Accrued utilities (liability) +1,200.

Practice: Paid KES 2,400 insurance for 12 months on 1 July; at 31 Dec adjust for 6 months used. Answer: Prepaid insurance asset reduces and insurance expense increases by KES 1,200.

Lesson 9: Depreciation — Reducing Non-current Assets

Objective: Calculate depreciation and record its effect on assets and owner’s equity.

Depreciation reduces the book value of an asset and is recorded as an expense (reducing equity). Often shown as accumulated depreciation (contra-asset).

Example (Straight-line): Buy a motorbike KES 60,000 with useful life 5 years. Annual depreciation = 60,000 ÷ 5 = KES 12,000. Entry: Depreciation expense +12,000; Accumulated depreciation +12,000 (asset net reduced).

Practice: After 1 year, what is net book value? Answer: 60,000 - 12,000 = KES 48,000.

Lesson 10: Bad Debts & Allowance for Doubtful Debts

Objective: Recognise how uncollectible receivables affect assets and equity and how to provide for doubtful debts.

Writing off a receivable: Debtor (asset) - and Bad debt expense + (equity down). Provision: Allowance for doubtful debts (contra-asset) increases and bad debts expense increases.

Example: Customer Owes KES 2,000 but cannot pay. Write off: Accounts receivable -2,000; Bad debt expense +2,000.

Practice: If total receivables KES 10,000 and allowance 5%, what is net receivables? Answer: Allowance = 500; Net = 9,500.

Lesson 11: Inventory Adjustments & Cost of Sales (Trader)

Objective: Adjust closing stock and understand its effect on profit and the statement of financial position.

Closing stock is shown as an asset on the statement of financial position and affects cost of sales in the income calculation (hence profit and equity).

Example: Opening stock KES 5,000; purchases KES 25,000; closing stock counted KES 4,000. Cost of goods sold = 5,000 + 25,000 - 4,000 = 26,000.

Practice: Explain effect of higher closing stock. Answer: Higher closing stock → lower cost of sales → higher profit → higher equity.

Lesson 12: Preparing Statement of Financial Position after Adjustments

Objective: Prepare a statement of financial position (balance sheet) after making adjustments to find the net worth.

1. Make all adjusting entries (accruals, prepayments, depreciation, bad debts, inventory).
2. Update ledger balances and prepare an adjusted trial balance.
3. Prepare the statement of financial position: classify items as non-current assets, current assets, equity, non-current liabilities, current liabilities.

Worked example (simple):

Practice: Using your tuckshop records, prepare an adjusted statement of financial position and state the net worth (owner’s equity).