Notesale: Turn your study into money

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Chapter 1

DEMAND

DEMAND AND SUPPLY

Demand is the quantity of a commodity that buyers are willing and able to buy at a given
price over a given period of time
...

Commodity refers to a good or service dealt in in a market
...
They lead to an increase or
decrease in demand
...
Price of the commodity
When the price of a commodity increases, its demand decreases
...

2
...
If
the income decreases, the demand will also decrease
...
There are some situations where an increase in level of income may not lead to an
increase in demand
...
g
...

3
...

Complimentary are goods that are used together e
...
a car and fuel
...

Substitutes are commodities that can beused instead of each other
...
g
...

An increase in price of Kimbo will result in a decrease in its demand while the demand for
Cowboy will increase as some consumers will want to buy it and vice versa
...
Changes in tastes, fashions and preferences of consumers
A change in taste in favour of a commodity, more of the commodity will be consumed
irrespective of the price
...
The demand for a commodity that is
out of fashion will decrease
...

5
...

These are as follows;
i
...

ii
...
The demand will therefore increase
with reduced prices
...
Legislation
These are laws that the government may pass to either encourage or discourage
consumption of certain commodities
...
g
...

iv
...
This ensures that the demand remain high
...
Changes in population
Population can influence demand in two ways
i
...

ii
...
For example a
population with more educate people will lead to an increase in demand for books
...
Future expectations of changes in prices and quantities supplied
If consumers expect a price increase or a shortage in supply in future, they will buy
more at present so as to avoid buying when price will high
...

8
...
For example demand for
umbrellas, gumboots and warm clothes will increase during cold and wet season than
in the hot season
...
The distribution of incomes
If income is distributed among many people, demand for goods and services will be
high than when incomes are in the hands of a few people
...
Terms of sale
Favourable terms of sale like selling on credit, giving discounts to consumers will
encourage consumers to buy more hence increasing demand and vice versa
...
For example if one needs eggs, he has to have a hen
...

Joint demand is demand for commodities that are consumed together
...

Demand schedule
This is a table showing quantities of a commodity that consumers are willing to buy at
different prices within a given period of time
...

Example;

Market demand schedule for bread in a week
Price per loaf (sh)

No
...

Demand curves

A demand curve is a graph showing the quantities demanded against the prices
...
demand curve is drawn
below

MOVEMENT ALONG AND SHIFT IN DEMAND CURVE

MOVEMENT ALONG A DEMAND CURVE

This is movement caused by changes in the price of a commodity
...
Point B is
the Price/Quantity combination
...
This is
called contraction of the demand curve
...
This is
called extension of the demand curve
Price
A
P1
B
P0
C
P2

Q1

Q0

Q2

Quantity demanded

Movement from B to A shows contraction of demand curve while movement from B to C
shows extension of the demand curve
SHIFT IN A DEMAND CURVE
A shift in the demand curve is caused by changes in factors other than the price of the
commodity in question
...
Two factors are important i
...


willingnessandability
...
They lead to an increase or
decrease in supply
...
Price of the commodity
When the price of a commodity increases, its supply also increases because sellers will need to
sell more to make profits
...

ii
...
To avoid this
producer will produce less
...
This will also lead to a decrease in supply
...
Availability of factors of production
In a situation where there is a shortage of factors of production, supply will decrease
...

iv
...
The supply of the other product will also increase
...
g
...

For those products that can be produced in place of the other, e
...
Carrots and
Cabbages which can be produced with one acre piece of land, an increase in price of
carrots, a farmer will want to produce more carrots than cabbages hence an increase
in price of one will cause a decrease in supply of the other
...
State of technology
Improved technology will lead to increase in supply
...

vi
...


 Subsidies-it is the payment the government gives producers so to meet the part of the

cost of production
...


 Quotas- are a limitation/restriction/ban by the government on the amount of
commodity to be supplied
...


Physical quantity of goods

ii
...
Commonly practiced in the international trade
...
Quotas
imposed reduce the supply of goods
...
eg
price of food staffs, price of petroleum products, price of drugs and price of alcohol
...


vii
...
Producers/ suppliers will increase the quantity of
the commodity supplied if they expect the future prices to decrease and they will hoard
(hold back in stores) the commodity, if they expect future prices to increase
...

viii
...
These factors may affect the supply/production of commodities positively or
negatively
...
(Impassable roads, cutting roads etc
...
Time
Certain commodities take long to be produced and supplied especially agricultural
goods
...

In the manufacturing industry, to increase supply means increasing installation of
more/extra machines which will take time
...
Entry of new firms into the industry
If existing firms produce a constant quantity of goods, then, if some will exit from the
market, supply will reduce
...

xi
...

Supply schedule
This is a table showing quantities of a commodity that producers are willing and able
to bring to the market at different prices over a given period of time
...

Price per loaf (Kshs)

No
...


45

1000

35

800

20

500

15

300

12

200

10

120

5

50

1

20

Supply curve
Plotting data on price and quantity supplied at different price levels a supply curve is
obtained
...

Movement along and shift in the supply curve
a) Movement along the supply curve
In a supply curve quantity supplied increases with an increase in price and decreases
with a decrease in price of the commodity
...

Price

P1

Y

P0
X
P2
Z

0

Q2

Q0

Q1

Quantity supplied

XY is a movement to the right along the supply curve caused by an increase in supply
from Q0 to Q1 due to an increase in price from P0 to P1
...

b) Shift in the supply curve

When other factors influencing supply change a new supply curve will be formed
...

The supply curve will shift to the right from S0S0 to S1S1 as shown in the figure below
...
A decrease in cost of production
...
Availability of factors of production
...
Increase in prices of other related products
...
Application of appropriate technology
...
Government policy- Removal of taxes, provision of subsidies and removal of quotas
...
Future expectation of decrease in prices
...
Favourable natural factors
...
Entry of new firms into the industry
Decrease in supply
...


S2

Price

S0

S0
S2
Quantity Supplied

This decrease in supply will be caused by;
i
...


ii
...

iii
...

iv
...

v
...

vi
...

vii
...

viii
...

Equilibrium price and quantity
Equilibrium price is the price art which all goods supplied by sellers are bought by the
consumers
...
)

Quantities demanded

Quantities supplied

10

200

100

20

180

180

30

100

300

 At a price level of Kshs 20, suppliers have supplied 180 loaves of which all have
been bought by consumers
...


 At a price above 20 i
...
Kshs 30, suppliers have supplied 300 loaves but only
100 have be bought
...
The sellers will reduce their
price so as to sell more
...
There will be excess demand in the market
...

 The price at which quantity demanded is equal to quantity supplied is known as
Equilibrium Price
...

 The interplay of demand and supply curves determines the Equilibrium price
and quantity
...
It shows that;
i
...


ii
...
e
...
) or surplus (if above the equil)
...


The equilibrium price will prevail in the market as long as there is no change in
the factors determine dd and ss
...
Occurs when price is set below the equilibrium i
...
P 2
to clear this, buyers will increase prices towards the equilibrium so as to attract more
supply
...
It occurs when price is set above the equilibrium i
...
P 1
...

Effects of shift in the supply curve and demand curve on the equilibrium
a) Change in demand- Increase in demand
Price

D2

S

D1

P2

E2

P2

E1
S

D2
D1

O

Q

Q2

Q1

An increase in dd will make the demand curve shift upwards increasing equilibrium
quantity and price
...

The equilibrium point will shift from E1 to E2
Decrease in demand
Price

D3

S

D4

P3

E3

P4

E4
S

D3

D4

O
Q4

Q3

Q

A decrease in dd will make the demand curve shift downwards decreasing equilibrium
quantity and price
...

The equilibrium point will shift from E3 to E4
b) Change in supply- Increase in Supply
S1

D
E1

S2

P1

E2

P2
S2
S2

D
Q

O

Q1

Q2

Increase in supply will cause a decrease in Equilibrium price and an increase in
Equilibrium quantity
...

Decrease in supply
...

Other methods of determining the price of a product

a
...

i
...
This
usually is done for essential goods this is done to encourage consumption
of some goods or protect consumers from exploitation
...


Taxation
To influence an increase in price the government will tax goods
...


iii
...
This will lead to a
decrease in prices
...
Haggling/Bargaining
The price is determined through negotiation
...
The seller will
reduce the price as the seller increases until they agree on a common price
...
Auction
Price is determined through bidding
...
The one who
suggests the highest price (Highest bidder) buys the commodity
...

d
...

Sellers may also be required to place their tenders in case a buyer wants to buy
from convenient suppliers
...


Chapter 2

SIZE AND LOCATION OF A FIRM

Concept of Firm and Industry
A Firm is a single unit of a business organization that combines the factors of production to
produce a commodity
...
g
...

A firm is usually a unit under one management and control
...
E
...
Co-operative Bank has branches allover a country
...

Example
Industry / Sector

Firm (s)

Sugar processing Industry

Mumias,

Sony,

Chemlil,

Transmara,

Muhoroni etc
...
Equity, Barclays,
National etc
...


Tea

Tendere, Nyamache, Nyakoba etc
...


Decision on What Goods and Services to Produce
A firm is started with an aim to produce, or distribute specific goods or services
...

b) Level of completion
Where there is least completion, firms should produce goods on that line
...

c) Availability of resources
The availability of factors of production will dictate the type of goods to produce
...
For e
...

avoid those whose tax is very high
...

e) Demand/Market for the goods
Products whose demand is high should be produced as they will fetch high profits
...
A firm should produce
such goods as it will be assured of high returns
...

A firm should produce commodities that will not have a negative impact on
environment
...

Since the people where the firm is will be the immediate consumers, the commodities
produce should be in line with their beliefs, attitudes and norms for them to buy the
commodities
...
E
...
affirm may decide to produce cement if it can access limestone,
which is a raw material for cement production
...
The less the cost of production the low the prices of goods and services produced
hence increased demand
...
E
...
equipment in tea factory cannot be used to produce sugar
...

L) Competition
The presence of and actions of competitors may influence the decision of the firm in terms of
what to produce
...
g
...


DETERMINING THE SIZE OF THE FIRM

 Size refers to the largeness or smallness of something
 The size of the firm relates to the scale of production in terms of quality of output and
techniques involved
...

 A firm is said to be small when it uses small a mounts of factors of production
...


Level of output-If the level of output is large, then the scale of production is large
meaning the firm is large and vice versa

ii
...
A firm with a large production
will require more employees and vice versa
...


iii
...
E
...

Equipment, machinery, premises and money)
...


iv
...
A firm is said to be large if it
commands a big share of the market for its products and vice versa
...


Sales Volume- if a firm’s sales (goods sold) is high, large then it is said to large and vice
versa
...


Methods of Production- large firms are associated with the specialization and division
of labour and application of modern technology
...


Floor area covered by premises- a firm whose premises cover a large area is said to be
large
...
Selecting where
a firm will be located will determine the success of firm
...


Availability of raw materials
Where raw materials are heavy and bulky it will be cost effective to locate firms near
as the cost of transporting finished products will be lower than the raw materials
...
g
...

Firms using perishable raw materials need to be located near the raw materials to
avoid spoilage if transported over long distances
...
g
...


ii
...

Firms that produce perishable and fragile commodities should also be located near the
market to avoid spoilage
...
g
...


iii
...

Firms that are labour intensive (Need many employees) will be located in areas where
there it is plenty and relevant
...


Availability of transport and communication network
...
Good contact with the customers and other business people need
to kept
...


v
...

Firms require power for running machines and water for cleaning, cooling and as raw
materials
...


vi
...

vii
...


Availability of auxiliary services

ii
...


Effects of the firm on environment

iv
...


Terrain of the land

vi
...

Factors that could influence Localization
i
...


ii
...


iii
...


iv
...


v
...
g
...


vi
...


Advantages of localization
i
...


ii
...
g
...


iii
...


iv
...
Firms can easily meet labour force requirements
...


Encourages creation of employment in the area
...


Localized firms attracts other firms which use finished products of established firms as
raw material hence creating market for localized firms
...


Causes negative impact on environment of the region e
...
air and water pollution
...


Can lead imbalanced regional development
...


iii
...


iv
...


v
...
Causing unemployment in towns and labour
deficiency in rural areas
...


Can cause a risky situation in times of war, earthquakes and terrorism activities
...


DELOCALIZATION

This is establishment of firms in different parts of the country
...

To encourage delocalization, the following can be done;

i
...


ii
...


Development of infrastructure

iv
...


Creating monopolies or patent rights
...


Provides employment to people in rural areas
...


Provides market for locally produced raw materials
...


Reduces rural urban migration
...


Reduces the effects caused by occurrence of war, terrorism attacks or natural
calamities e
...
earthquakes
...


Encourages regional balanced development
...


Provides market for locally produced raw materials
...


Development of social amenities e
...
schools, hospitals etc
...


Disadvantages of delocalization
i
...


ii
...


iii
...


iv
...


v
...


vi
...

Economies of scale
These are benefits that a firm enjoys due to increased scale of production
...


Internal economies

ii
...
They are as follows;
1
...
The firm can also sell in large quantities
and hence will incur less cost per unit in its expenses e
...
advertising
...
Financial economies
Firms are able to obtain loans at low interest rates as they can use their assets as
collaterals
...
Risk bearing economies
By diversifying their products in terms of types produced and different areas to
sell, a failure in one product can be offset by success of another
...
Managerial economies
The firm is able to employ services of qualified personnel hence enjoying
efficiency and increased production
...
Technical economies
The firm gets benefits accrued from specialization of labour both labour and
machinery since it is able to specialized labour and machinery
...
g
...


6
...

7
...

A large firm can afford incentives like recreation, health, education and
housing
...

b) External economies/ Advantages of localization of industries
These are benefits which a firm gets as a result of growth in whole industry
...
Firms may get skilled labour force
...
Improved infrastructure
...
Firms may be able to dispose of their waste products easily
...
Ready market may be available from the surrounding industries
...

There are two forms of diseconomies of scale;
a) Internal diseconomies of scale
b) External diseconomies of scale
a) Internal diseconomies of scale
...

They include;
i
...
This may be
caused by a high number of employees, long time taken to make important
decisions
...


ii
...


b) External diseconomies of scale
These are challenges that a firm gets due to expansion of the whole industry
...

b) Scramble for available labour
...

d) Non-availability of land for expansion
...

Existence of small scale firms in the economy
...
This has been necessitated by;
i
...

If the demand for the product is low, it will be served well by a small firm

ii
...

Some products dictate the size of firm
...


iii
...

Firms that wish to avoid managerial complexities will opt to keep their business small
...


Flexibility of small firms
One can easily change business activities when operating small firms
...
g
...


v
...
To avoid the lengthy decision making
procedures in large firms, small firms will be appropriate
...


Belief that small firms are more manageable since the owners believes that big
businesses are difficult to manage
...


Rising costs of production- firms will opt to remain to avoid negative effects of
diseconomies of scale
...


Legal constraintsSome laws imposed by the government may make some firms opt to produce in small
scale
...
To avoid paying such a tax firms will produce in small scale
...
The effects include;
a) Air pollution- caused by emission of poisonous gases into the atmosphere
...
The rain will destroy
forests, crops and house rooftops
...
This may lead to increased cases of skin
cancer
...
This may cause global warming causing extreme climatical
conditions
...

b) Water Pollution
Water pollution can be caused by;
 Dispose of industrial waste (effluents) into water bodies
...

c) Noise pollution
High levels of noise can make one develop hearing problems
...
Lumbering may lead to desertification
...

Maintaining a Healthy Environment
A healthy business environment is one that is conducive for businesses to thrive in
...


Can be done by avoiding activities that cause pollution through the following;

 Using non-polluting sources of energy like electricity to curb air
pollution
...

 Using proper methods of waste solid disposal like use of dustbins and
recycling the solid waste
...

 Providing workers with goggles to protect them from intense lights
...


Providing security
This can be achieved through the following;
 Ensuring that buildings, machines and equipment are well maintained to
avoid accidents
...

 Taking security measures like taking insurance policies, fencing the
premises and employing qualified security guards
...


Providing appropriate and adequate resources such as labour, finance,
technology and physical resources
...


Maintaining good interpersonal relations with employees, the local community,
the government, suppliers, other businesses and the customers
...
Firms always would like to
have all their goods and services that they produce sold
...

In some situations there may be few suppliers selling similar or differentiated products and
many buyers
...

Introduction
When buying and selling takes place buyers and sellers interact with each other
...

Different markets have different number of sellers and buyers of products which may be
similar or differentiated
...

It may also refer to interaction of buyers and sellers where exchange of goods and services is
involved
...


In a market, there must be:
(I) Presence of sellers
...

(iii) A product for sale
...

Product market
It refers to a particular market in which specific goods and services are sold and which has
peculiar features that distinguish it from other markets
...

Types of product markets
Perfect competition
It is a market structure where there are many firms which produce only a small fraction of
the total output required and none of the firms can influence the price in the market
...
Large number of buyers and sellers therefore the action of one seller/buyer has no effect in
the market
...
Goods sold are homogeneous [firms produce identical products]
...

3
...
Hence there is no unnecessary
competition
...
No government intervention
...

5
...
-it is free to join the market or leave the market
...
Factors of production are Mobile-meaning that the firms are able to change/switch the
factors of production
...

7
...
No special advantages for selling to particular buyers
or buying from particular sellers
...
No excess demand or supply in the market
...

9
...

From the above features, it can be seen that the demand curve and the supply curve are
normal
...


Price
(Shs)

D

Equilibrium
Point

S

Pe

S

D

Qe

Quantity ss& dd

Monopoly
This is market in which a single firm is the exclusive producer and seller of a particular
product, for example, Kenya Power and Lighting Company and Kenya Ports Authority
...
The firm is the industry
...
Hence no competition
...

• There are barriers to entry into the market
...

 There is a practice of price discrimination
...
e
...

Circumstances when price discrimination may be practiced
...


Consumers are in different markets and hence one cannot buy where it is cheap and
sell it where the price is high
...


The production of the commodity is done by a monopolist who is able to control
production
...


The cost of maintaining separate markets is not very high
...
Geographical – prices charged in home market may be different from foreign markets
especially in international trade
...
Income- The Seller may charge different prices for the same commodity to different
categories of consumers depending on their level of income
...

Economy class in air transport and the Executive class
...
Time- during peak period sellers may sell goods or provide services at a high price than
during the off-peak seasons
...

Monopolistic competition
This is a market structure with many sellers dealing with similar products but differentiated
either by branding, wrapping, packaging or colouring
...

Features of monopolistic competition
• There are many sellers in the market who operate independently
...

• There is free entry and exit of firms in the market
...

• There is presence of non – price competition, that is, product promotion is involved
...

The firms are relatively large and control a large market
...

Other examples are mobile phone service providers- Safaricom, Airtel, Yu, Orange,
Newspapers and textbook publishers
...
E
...
Companies that sell petroleum products
...


Features of oligopoly
• There are few firms producing the product
...

• Products are similar but differentiated
...

The Kinked Demand Curve
Because of the counter-reactions on actions taken by firms that are interdependent especially
on price, prices tend to remain stable
...

A firm faces two sets of demand curves;- one for prices above the determined price which is
fairly gentle and another below the determined price which is fairly steep
...

Price
(sh)

D𝑜

P

A

DI
O

Q

NB
...


Price charged byin the industry is P
...


ii
...
Is the Kinked demand curve
...


At Price above P where the curve is fairly steep a small reduction in price will create a
big sale of goods
...


At Price below P a small decrease in price leads to a little increase in sales
...


Explain five circumstances under which oligopoly market structure may arise
...
g
...

 Where a few firms may control the sources of raw materials for the production of a
product
...

 Where a few firms may hold patent rights that relate to a particular technique of
production of a product
...

 When a few firms may enjoy large economies of scale enabling them to produce at
lower costs
...

Duopoly
This is a market structure where only two firms constitute the industry
...

Features of duopoly
• The products produced are similar but differentiated
...

• There may be presence of non – price competition
...

• Sometimes they collude and operate like monopolists
...
The process
of moving products from the producer to the consumer is known as distribution
...
It therefore creates
place utility
...

CHANNELS OF DISTRIBUTION
 Distribution channels are the routes or paths which the products follow to move from the
producer to the consumer
...

a)

...

c)

...


Producer

Wholesaler

Wholesaler

Marketing
board

wholesaler

Wholesaler

Retailer

Consumer

Retailer

consumer

Retailer

Consumer

...


Producer

Wholesaler

Consumer

Producer

Retailer

Consumer

Producer

Retailer

Consumer


...


 All the organizations, traders or agents who stand in between consumers and the
producers are known as intermediaries or middle persons
...
As a result of
these expenses, they adjust the prices upwards in order to make up for the expenses as
well as make profit
...

 It also means that the more the expenses incurred the high the prices charged for those
products
...

CHANNELS OF DISTRIBUTION FOR THE VARIOUS PRODUCTS
The following are some of the various products that have special distribution channels:

i
...


FARMER (Producer)

Co-operative

Wholesaler

Marketing
Board
Marketing
Board

Marketing
Board

Wholesaler
Retailer

Retailer

Wholesaler

Retailer
Retailer

Retailer

CONSUMER

i
...

iii
...

v
...


Agricultural products have six different channels of distribution as shown in the diagram
...

Channel 2:
This channel involves only one intermediary; the retailer who buys from
the producer and sells to the consumer
...
The consumer buys directly from the producer
...

Channel 5:
This channel has three mediators; marketing board, wholesaler and
retailer before the produce reaches the consumer
Channel 6:
This channel involves marketing board and retailer before the product
reaches the final consumer
...


Distribution of locally manufactured goods
The diagram below summarizes the distribution channels for locally manufactured products

LOCAL MANUFACTURER (Producer)

Marketing Board

Wholesaler

Wholesaler
Retailer

Retailer
Retailer

Retailer

CONSUMER

Locally manufactured products have seven different channels of distribution as shown in the
diagram
...

Channel 1 A very short channel where the consumer buys directly from the manufacturer
...

Channel 2:
This channel involves two intermediaries; the wholesaler and the retailer
who buys from the producer and sells to the consumer respectively
...

Channel 3:
This is channel of distribution is where the wholesaler sells to the
consumer after buying from the producer
...

Channel 4:
This channel involves a retailer who buys from the manufacturer and then
sell to the consumer
...

Channel 5:
This channel has three mediators; The government agent, wholesaler and
retailer before the product reaches the consumer
vi
...

vii
...


iii
...

ii
...

iv
...

vi
...

The six are:
Channel 1 The producer appoints an agent who sells the product to the wholesaler then
retailer and finally the consumer
...

Channel 3:
This is the shortest channel of distribution in which an intermediary is not
involved
...

Channel 4:
This channel involves a representative who gets products from the
producer and then sells them to the wholesaler then to the retailer who in turn sells to the
consumer
...

Where there are no intermediaries

A

1A

B

1B

C

1C

D

1D

Without intermediaries transactions are many and costly
The diagram shows the many transactions which involve high distribution costs
...

Where there are intermediaries

1A

A

1B

B
Intermediary
C

1C

D

1D
With intermediaries transactions are few and less costly

In this diagram we can see how consumer get goods with very few transactions involved and
hence lower distribution costs
...
Examples are wholesalers buying in large quantities from the manufacturer and
retailers buying still larger quantities
...


PRODUCER

INTERMEDIA
RY

BUYER A

BUYER B

BUYER C

Breaking the bulk
c) Accumulating bulk
In this category we have intermediaries who buy from small producers and accumulate
bulk
...
The diagram below
illustrates the situation:

producer A

producer B

producer C

INTERMEDIARY

consumer

Accumulating the bulk
d) Taking risk
Intermediaries carry the burden of taking risk for any damage of loss that is likely to arise
as a result of his transactions
...
Their assistance
to the buyers is by giving credit and to the sellers by making advance payments
...
This information assists the producers to produce according to the taste and
demand of the consumers
...


g) Product promotion
The aim of product promotion is to stimulate demand
...


h) Transport and storage
Transporting and storage are other very useful services that intermediaries provide in
business
...


i) Providing a variety
Intermediaries stock wide range of products from many different producers
...


j) Availing goods to consumers
Intermediaries are able to avail goods and services to consumers so that they are easily
accessible
...


Factors influencing a choice of a distribution channel
a) Nature of the product
Nature of the product refers to either durability or bulkiness
...


b) Nature of the market
This factor focuses on the area where the customers are
...


c) Role of the intermediaries
Various intermediaries perform various duties to add value to the product
...


d) Resources and size of the firm
This is an important factor to consider given that the smaller firms have smaller markets
and hence channels with few intermediaries
...
Small firms
may find it a challenge financially
...


f) Government policy
The Government regulations on matters of competition
consideration when choosing a channel of distribution
...

Factors considered in choosing a particular channel of distribution
...

Where customers are few, the manufacturer may use his own sale force and for large
number of customers, the manufacturer would use intermediaries
...


iii
...


v
...


vii
...

ix
...


Geographic concentration of the market/Nature of the market
...

However, seller would use intermediaries, in less concentrated markets
...
The producers would use intermediaries to sell customers who
buy in small qualities
...

Perishability of the product – Products that are subjected to physical or fashion,
perishable must be sold through short, fast channels hence such goods mostly go
directly to the customers
...

Financial resources – A producer who is financially strong can afford to distribute
directly to consumers
...

Competitors – A firm wishing to have its produce compete directly with that of a
competitor
...

Environmental factors – For example the government laws and regulations may prohibit
manufacturers or their own outlets from selling directly to consumers i
...
appointments
of the independent distributors may be called for
...

When the total output for the factors of production have been valued in monetary terms and
added together, they give the national output
...

Hence National income is the same as National Output and is also called National product
...

It only consists of what is produced in a country by citizens and the foreigners
...

c) Gross National Product (GNP)
It is the total monetary value of all goods and services produced by individuals of a given
country
...

It is obtained by dividing the total national income divided by total population in a country
...
income
Total
...

Total income earned in a country is assumed to move in a circular manner between
individuals/households (those who own the factors of production and the firms that produce
goods and services using the factor inputs bought from households)
...
The money paid becomes expenditure for the
firms and an income for the households
...
This becomes expenditure to the households and income to the firms
...

This circular movement of income is referred to as circular flow of income
...


HOUSEHOLDS

2

Payment for
factors: Rent,
Wages,
interest
&profit

1

Factors of
production: Land,
Labour, capital&
Entrepreneurship
...

The outer line shows the flow of income (money) in the economy
...


Assumptions of the model of a two sector economy
i
...
e
...


ii
...


iii
...


iv
...


v
...
e
...


Injections and Withdrawals
In a normal economy the above assumptions do not exist
...
No economy exists on its own without buying from or selling to other
countries
...
Some of the
income is saved and other invested
...

These factors are referred to as injections
...


Factors affecting the circular flow of income
a
...
They reduce
income received by firms as they are withdrawn from the circular flow of income (Leakages)
...
Government
i
...
Hence forms a
leakage
...


Government expenditure- the government spends through; Payment of salaries and
wages, buying goods and services, giving subsidies etc
...


c
...
This increases the income to households using it to
buy more goods and services from firms
...

d
...

When the government imports goods from other countries it pays money to the
foreigners hence reducing the money in the circular flow (leakage)
...
The total injections are equal to
total withdrawals (leakages)
...


Measurement of National Income
National income is measured through three approaches;
a) Expenditure approach
b) Income approach
c) Output approach
a)

Expenditure approach

The expenditure on final goods and services (those can are ready for consumption- cannot be
used as raw materials) in the economy is summed together
...

i
...


ii
...

Types of investments
 Fixed capital investments: additional of durable goods to the existing durable
goods
...


iii
...


 Expenditure on factor services from households such as hiring civil servants
...


Expenditure on net exports
...
Denoted by (X-M)
...

N/B
...

Gross National Expenditure=C+I+G+(x-m)
 Export generates income domestically hence they are included
...

The expenditure approach method of measuring national income is at the market price
since it involves expenditure on final goods this means that indirect taxes and
subsidies have been included
...


The private sector does not keep accurate expenditure records
...


Subsistence sector is mere approximations since there are no records kept
...


Suffers from a problem of double counting
...


Difficult to differentiate between final and intermediate expenditure
...


Valuation of exports and imports will be a challenge due to fluctuation of the exchange
rates
...

It also includes money received by the government from its investments and the
retained profits
...
This income is referred to as transfer payments
...
Examples; national insurance
and social security benefits to individuals, students’ grants and pocket money
...
N
...

To get national income at market price, indirect taxes must be added while subsidies
should be subtracted
...

G
...
I=GDP + (X-M)
Net national income (National income) N
...
N
...

Problems associated with the income approach
...


It is difficult to compute the proportion of income constituted by the transfer of
payments
...


Inaccurate data as companies may give false information so as to evade data
...


The calculation of N
...


iv
...
g
...


c) Output approach (Value added)
The values of all final goods and services produced by firms is added together to get
the national income
...

Total value added at each stage equals the final value of output
...
6,000
...
8,000
...

10,000
...

Value Added=6,000 + 2,000 + 1,000=9,000
...
The Value added is the value of the final Product
...

i
...


ii
...


iii
...


iv
...
g
...


v
...


vi
...


Uses of National Income Statistics
National income statistics refer to all data collected from various sources which give
information about national income
...


As an indicator of the standards of living- this is done through thr per capita
income
...


ii
...
- A country with a
higher income is deemed to have a higher standard of living
...


Assessing the performance of an economy over time
...


iv
...
- this is done by comparing performance
of different regions or sectors in an economy
...


For making investment decisions
...
This will
help entrepreneurs to make wise decisions of the sectors to invest
...


Gives information on the relative sizes of various sectors
...


vii
...


Drawbacks of Using National income Statistics to compare the standards of
living in different countries
i
...


ii
...


iii
...


iv
...
As a result national income may not
give a true picture of the standards of living
...


Labour supply-a country with quality labour (skilled) and enough (quantity)
supply will be producing more goods and services hence increasing the national
income
...


Capital-a country with quality capital e
...
modern machinery will produce more
than one with simple production tools
...


Entrepreneurship-if a country has many entrepreneurs, the factors of
production will be organized fully for goods and services to be produced
...


iv
...
A country endowed with plenty of these resources will have a
higher income than one that doesn’t have
...


Level of technology-the higher the technology used in production the higher the
output hence higher national income

vi
...


vii
...
-a country with hardworking population will
translate to increased production resulting to increased level of national
income
...


Foreign investment-an increase in foreign investment will lead to increased
production of goods and services resulting to increased level of national
income
...


Size of the subsistence sector-a country with a high subsistence sector has a
low level of national income since the output may be underestimated
...

1
...

(10 marks)

Chapter 6

POPULATION AND EMPLOYMENT
Specific objectives
By the end of the topic, the learner should be able to;
i
...


Explain the implications of population size and structure on the development of a
country
iii
...

Discuss the various types and causes of unemployment
v
...

Introduction
Population is the total number of people living in a given area or region at a particular period
of time
...

Resources allocated in an area by the government determine the level of employment
...

a)
...


CBR 

Numberof live births
1000
Total Population

a)
...

b)
...

Factors determining a country’s fertility rate
i
...

ii
...

iii
...

iv
...

v
...

Government policies which may favour or discourage large families, e
...
free primary
education and medical care
...


Cultural Practices- where children are seen as security during old age
...

ii
...

iii
...

iv
...

v
...

vi
...

vii
...

Factors that may lead to decline in birth rates
i
...

ii
...

iii
...

iv
...

v
...
This has made so parents have fewer children
...

Decline in Mortality rate
...

c)
...

d)
...
It is also referred to as attrition rate
...

Mortality rate can be categorized according to specific age
...

ii)Child mortality rate:
This is the number of deaths of children aged between 1 and 5 years per 1000 live births
iii) Adult mortality:
Number of deaths of adults per 1000 of the population per year
...

ii) Absence of internal conflicts and wars in the country and stable government has greatly
reduced mortality rate
...


iv) Improved environment conservation and better hygiene has reduced contamination and
infections thus reducing death rate
...
There are two forms of migration:
i) Immigration - refer to movement of people into a given region
...

The difference between immigration and emigration is called net migration
...
Population can increase due to an increase in birth rate or reduce due to
an increase in death rate
...
For example a country may have natural resources but may lack the
appropriate labour force to exploit them
...

Low Birth rates- a country with a low birth rate, its population is likely to remain low
...

High Emigration rate-this will reduce the number of people from where people are
moving from
...

Epidemics and war- these when they occur may lead to decrease in population
...

Can lead to limited labour supply-as a small population may not provide enough people
required in production activities
...

The market for goods and services will be limited hence this may lead to closing down
of existing businesses
...

Resources may be under-utilized
...

iv
...

v
...

This will result in production of poor quality goods
...

Reduce phase of economic development since there will be less competition and
under-utilization of resources
...

Examples of such resources include, land and machinery
...

Increased market for goods and services produced
...

There will be better utilization of resources in a country as the demand for goods and
services will increase
...

iv
...


There will be enough labour force in a country
...

It enhances labour mobility as unemployment people tend to move from one place to
another searching for jobs
...

It can stimulate investments as many people create high demand for goods and
services so as to meet the increased demand
...

i
...

ii
...
As the income per capita may reduce due to
increased population while income remain constant
...

Can encourage rural-urban migration
...

iv
...

v
...
As overpopulation may cause excess
demand on goods and services which may lead to inflation
...

Food shortage – the amount of food produced may not be enough for the excess
population which may lead to scramble for the little food available
...

Increase in crime rate- many people will be unemployed making them unable to meet
the basic necessities
...

viii
...
E
...
clearing of forests to
create space for cultivation and human settlement
...

At optimum population highest standards of living is attained
...


Q
Output
Per
Capita

o

P

Population

Optimum population
P- Represents the optimum population which corresponds with highest possible output per
capita
...
represents the optimum per capita income
...

It is the population that can generate the highest standards of living
...

There is most efficient use of resources with maximization of the per capita output
...

A population below the optimum implies underutilization of resources leading to poor
standards of living
...

A population above the optimum will lead to overutilization of resources lowering the
standards of living
...
High
population of the ageing population is as a result of improved standard of living that lowers
the death rate
...

Less provision of mobile labour
...

Low labour supply as old people tends to be less productive
...

The dependency ration will increase on the working population
...

May lead to unemployment due to decrease in demand for goods and services which
may be required by the youth
...

The society may tend to be less inventive and innovative
...

The society will become less productive as the input of energetic youth will be lacking
...


Challenges of Young Population
i
...

ii
...
- as many young people may be entering into
the job market hence outstripping the available opportunities
...

There will be pressure on goods and services as the number of youth may exceed the
supply
...

Can cause reduction in the supply of labour as many may not have attained the working
age
...

Increased social evils/crimes- as a large number of youth may be idle hence may
engage in social crimes for means of survival
...

There may be a reduction in savings and investments- this will be caused by a high
consumption rate by young people which will in turn lead to reduced investments
...

The government may divert its expenditure from needy sectors to address the welfare
of the youth
...

Effects of declining population
i
...

The saved money can be used to improve quality of services it offers
...


It may lead to attainment of optimum population for a country that has been
overpopulated
...

Can lead to proper utilization of land and other resources as pressure created by
overpopulation will be reduced
...

iv
...

v
...

Implications of population size and structure on the development of a country
Population size is defined as the number of people in a given area at a given period of time
...

On the other hand population structure refers to the composition of people in reference to
sex, age and geographical distribution
...


The following are positive implications of a large population
(a) A country that has a large population leads to an increase in the supply of labour with
various cadres of skills
...

(c) High population leads to increased demand for goods and services (wide market)
(d) A country with a large population tends to be more creative and innovative thus leading to
technological advancement
(e) A large population may lead to maximum utilization of a country’s resources
...

(g) High population leads to increase in foreign trade thus creating wealth in the economy
The negative implications of a high population are as follows;
 High population leads to high unemployment levels in a country
 High population may lead to strain on social amenities like hospitals, schools and
recreational facilities
 High population may lead to over exploitation of natural resources resulting to
environmental degradation
...

Population structure
It refers to composition of the population according to age, sex, income distribution and levels
of literacy
...

Increase in market demand as the number of people increases, the demand for goods
and services will increase
...

There will be enough supply of labour which can lead to payment of low wages hence
investors will be attracted
...

Technological advancement- people will become more innovative as their population
will outstrip the available resources that may not be enough
...

Production of diverse talents
...
This could lead to production of quality goods and services
...

Can lead to decrease in per capita income- this happens when there is dependence on
one factor of production where the output may start declining after some time
...

Can lead to high dependence ration especially when there is high birth rate and low
mortality rate also with increased life expectancy
...

There could be reduction on savings and investments as a greater portion of ones’
income will be consumed leaving very little for savings and investments
...


v
...

vii
...
This can cause rural urban migration resulting to overcrowding and poor
living conditions
...

May lead to uneven distribution of income as larger families tend to be poorer due to
low savings compared to the rich
...

Can cause environmental degradation as a growing population will over-exploit the
natural resources
...
Vicious Circle of poverty
...

This is described in the table below
...


EMPLOYMENT AND UNEMPLOYMENT
Meaning of employment
This is a situation where an individual is involved in productive activities in order to earn
income
...

Self- employment is where an individual works for one’s self to generate income
...

Meaning of unemployment
Unemployment refers to a situation where an individual is capable and willing to work at the
wages being offered but cannot get a job or work
...

Types of unemployment
i
...
Example in construction industry and tourism
...

ii
...
When the contract is over an individual may take time before
getting another job
...

Disguised unemployment- this type of unemployment occurs when the number of
people employed exceeds the required
...

iv
...

v
...

vi
...
For example Automated Teller machines,
Vending machines among others
...

Real wage unemployment (voluntary unemployment)-it occurs when businesses are not
willing to employ all people seeking employment at prevailing wage rates and job
seekers are unwilling to take lower rates
...

viii
...

It can also occur in a situation where labour is not willing to move to areas where they
can find jobs
...

Cyclical unemployment- it occurs repeatedly at similar times
...

It is also called demand deficient or general unemployment
...

xi
...


ii
...

iv
...


vi
...

viii
...

x
...

Erratic (casual) unemployment- it occurs in sectors where the demand for labour is not
regular
...

Causes of Unemployment
Inadequate co-operant factor inputs- These are factors required for production to take
place
...
g
...
- these factors are insufficient in
developing countries
...

Inappropriate education system- in an education system where the knowledge and
skills do not match with the Job requirements, this will result in unemployment
...

Inappropriate education system: The training and education offered in schools may not
be compatible with the existing job opportunities
...
g
...

Ecological constraints/Seasonality in production- Seasonality in production, especially
in the agricultural sector and the tourism industry, causes seasonal unemployment
...

Trade Unions:
In their efforts to fight for better wages and better working conditions, trade unions
may cause unemployment
...

Low demand for goods and services: If the demand for goods and services is low,
investment will also be low
...

Rural-Urban Migration: Most of the labour force that goes to the urban areas after
leaving school tends to suffer from open unemployment
...


Measures to solve unemployment Problems
i
...

Adopting relevant education system that provides skills required in the labour
market
...

Creation of employment in private sector
iv
...

Increasing government expenditure
vi
...

vii
...


viii
...

x
...

Exporting of labour- the excess labour can be exported to other countries where
they can be working,
Provision of credit to investors so as to create employment from the business they
have invested in
...
At the
end of a trading period, the owner of a business determines the net worth of a
business by comparing its assets to its liabilities
...

OBJECTIVES
By the end of the topic the learner should be able to;
[a] explain the meaning of the terms assets, liabilities and capital
...

[c]prepare a simple balance sheet
...

[e]explain the meaning of net worth of a business
...
Business involves the selling of goods and services with
an aim of making profit
...

INTRODUCTION
MEANING OF TERMS
There are various forms used in net worth of business
...


Asset; asset are properties owned by the business such as ,building, furniture, motor
vehicles, equipment, machines ,stock ,debtors, cash in hand and cash at bank
...

[ii] Current asset
...
They are used to assist the
business in its day to day operations and not for resale
...


Current assets; these are the resources that are expected to remain in the business
for only a short period of time usually less than year
...

They
are
also
known
as
short
Examples include stock, debtors, cash at bank, cash in hand
...


Liabilities;
This refers to the debts that a business owes outsiders, that is, other businesses or
individuals
...

[1] Long term liabilities
...

Long term liabilities-; these are the debts whose period of repayment is long, usually
exceeding beyond a year
...

Short term liabilities
...
They are also called current liabilities
...


Capital; this refers to the money or property which is contributed by the owner of the
business to either start or keep business running
...
Capital represents the owner’s interest in the business
...
The book keeping equation is derived from the fact that all the resources of
a business (assets) should be equal to the total sum of the funds or money contributed
by the owner [capital] and the creditors [liabilities]
...

A= C + L
...
It is also known as
accounting
equation
or
balance
sheet
equation
...

Sh
...
250,000

Exercise
Complete the following table by determining the value of D, E, F and G
...
It lists the assets, capital and liabilities of the business
...


Format of balance sheet
The balance sheet is drawn up in the shape of capital letter “T”
At the top of the “T”, for instance above the horizontal line, there is the title which
contains the following:
• The name of the business/business persons
...

• The date when the balance sheet is prepared
...
The
right hand side of the balance sheet is used to list the capital and liabilities of the

business
...

• Both sides of the balance sheet have equal totals
...

• The totals of the balance sheet are written on the same horizontal line
...


Relationship between book-keeping equation and the balance sheet
Fromwhat we have learnt, it is clear the book-keeping equation and the balance sheet
are very closely related
...

After the resulting changes in value of assets, liabilities or capital affected have been
effected, the total assets will equal the total of liabilities and capital
...

Assets side = [capital + liabilities] on the liabilities side
...


Net worth of a business
Net worth is said to be the owners claim on the business
...

The net worth is thus arrived at by using the formula:
Net worth = A – L
A - Assets
L - Liabilities
The figure of net worth should therefore be equal to the owner’s contribution plus any
retained earnings
...
The following balances were extracted from the books of Kanini traders as at 31st December 2012
...

Stock
80,000
Debts due from Kanini traders
50,000
Land
120,000
Net worth
130,000
Furniture
75,000
Cash in hand
15,000
Debts due to Kanini traders
35,000
Long term loan
65,000
Bank overdraft
80,000
2
...

Item
Bank overdraft
Land
Accrued electricity bill
Stock

shs
80,000
200,000
50,000
10,000

Debtors
20,000
The business had drawings amounting to sh
...

Prepare a balance sheet to determine the net worth of the year
3
...
(4mks)
Capita (Shs)

Liabilities (Shs)

Assets(Shs)

290,000

(a)________

303 401

(b)_______

21,920

55,360

2400

1500

(c)__________

The following information was obtained from the books of Wambua and sons wholesalers on 30th June 2013
...

(4 marks)

Chapter 8
CHAPTER 8
...

The main type of business transactions are cash and credit
...

• Distinguish between cash and credit transactions
...

• Discuss causes of changes in capital
...

Background
• Different individuals have different needs in their daily lives
...

• Provision of goods and services by traders to consumers is facilitated through trade to enable
individuals get what they don’t produce
...

The exchange of goods and services between the buyers and sellers is facilitated through
money consideration
...

Meaning of a business transaction
This is the exchange of goods and services for money considerations between two parties
mainly a buyer and the seller
...

Cash transactions
This is when the payment for goods and services is done immediately after exchange
...

Credit transactions
This is when payment for the goods and services is done at a specified later date
...

Effects of business transactions on the balance sheet
The balance sheet comprises of assets, liabilities and capital
...

This therefore means, balance sheet of a business and the transactions that take place are
directly related
...

• It may decrease an asset and also a liability
...

• It may increase one liability and decrease another liability
...

Took loan worth Kshs
...

a This transaction will affect bank loan and the bank
...
50,000
...
50,000
...
Paid creditors Kshs
...
2,000
...
2,000
...
Bought goods worth Kshs
...
3,000
...
3,000
...
Borrowed bank loan worth Kshs
...
20,000
...
20,000
...

• It can be in form of liquid money or property that the owner or owners bring into the
business at the beginning
...

Transactions that result to increase in capital

• Additional investments

This refers to any addition of money or property into the business after its establishment, for
example, Musyoki’s business had capital of Kshs
...

After six months he introduced personal cupboard into the business as an asset worth Kshs
...

The total amount of capital is Kshs
...

• Profit
Profit is the gain made by the business from its activities
...

Profit realized by the business increases capital, for example, Musyoki bought bananas worth
Kshs
...
1,000
...
300
...
15,300
...

Such money, goods or services withdrawn or used for personal purposes reduce the capital,
for example, Musyoki took Kshs 5000 from the business and used it to fuel the family car
...
Therefore capital reduces to (15,000-5,000) = Kshs
...
Such situations may arise when goods bought for sale get damaged before they are sold
forcing the seller to sell them at a price lower than the cost at which they were bought
...
700 for Kshs
...

Therefore capital reduces to [15,000 – 500] = Kshs
...

Final capital refers to the business capital at the end of the trading period
...

These factors lead to initial capital either increasing or decreasing during a particular trading
period
...

• Capital as at 31st December, 2005, Kshs
...
400,000 for Kshs
...
70,000 into the business
• Took 10 loaves of bread, 20 Kgs of sugar, 5 packets of tea leaves amounting to Kshs 15,000
...

From the above information match the following items that relates to capital with their
appropriate amount
...

i
...
Payment of loan at interest increases capital

---------------------

iii
...
Owner deposited part of his salary into the business account increase ------------------Type the correct answer in the blank space provided
...
Identify the correct statements from the following:
A
...

B
...

C
...

D
...


PRACTICE EXERCISES
1
...


Capital (01
...
2011)
3,500,000
Profit
824,440
Drawings for the year
35,220
Capital (31
...
2012)
5,000,000
Required:
Calculate additional investments for the year
...
The following information belongs to Kethi traders between 10th and 15th January,
2013
...
15, 000 on credit
- Sold goods worth Kshs 5,000 for Kshs
...
(4mks)
3
...


Capital
Machinery
Trade debtors
Trade creditors
Stock
Cash at bank

Ksh
...
000
20,000
10,000
25,000
5,000

On March 2nd he had the following transactions:
- Purchased goods for Ksh
...

- Received a cheque for Sh
...

- Sold the machinery for Ksh
...

Prepare Otieno’s balance sheet as at 2nd March 2011
...
The following relates to Jaba business for the year ended 31-12-2006
Capital as at 31-12-2006
sh
...
13000
Net loss for the year
sh
...


sh
...
A ledger is a book
that contains different accounts and is used to record transactions in their appropriate accounts in the ledger
Objectives

By the end of the topic, the learner should be able to
• A]explain the meaning and purpose of a ledger
• B]explain the concept of double entry

• C]explain the meaning and format of a ledger account

• D]explain the rules of recording business transaction in ledger accounts
• E]record business transactions in various ledger accounts
• F]describe the procedure of balancing a ledger account
• G]balance off ledger accounts

• H]extract a trial balance from ledger account balances

• I]explain the purposes and limitations of a trial balance
• J]classify accounts

• K]discuss the various types of ledger
BACKGROUND
In our last topic we learned about business transactions and their effects on the balance sheet
...

INTRODUCTION;
Business transactions are recorded in the accounts of a business
...
The records show the increases or decreases in
value that occur in a particular item hence there is need to examine the process of recording transactions in
the ledger
...
It is actually the main book of accounts
...

For example capital account, cash account, bank account, purchases account, among others
...


It is important to note that debit entry is an entry made on the debit side while a credit entry is an entry made
on the credit side of an account
...

MEANING AND FORMAT OF LEDGER ACCOUNT
A ledger account has two sides namely; debit side and credit side
...

RULES OF RECORDING BUSINESS TRANSACTIONS IN A LEDGER ACCOUNT:

Normally transactions resulting in decreases are recorded on one side while those resulting to increases are
recorded on the other side as follows

The following steps should be be taken to consideration

•Identify each transaction in turn
• Determine the effects of the transaction bearing in mind that each transaction must have two items or
accounts
• Classify each of the affected item as asset, liability, capital
• Expenses or revenue
...


Exercise
Attempt this question
Mwende bought a motor vehicle worth one million on credit on 10th August, 2010
Identify the effects of the transaction as far as ledger account is concerned is
SOLUTION
1st step; there is only one transaction
...

5th step; motor vehicle account which is an asset is debited by one million whereas the creditors account
which is a liability is credited by one million
...

5] On 14th August Sold goods worth Ksh 2,000 to Otieno on credit
6] On 16th August Returned goods worth Ksh 100 to Mude stores
7] On 17th August Bellah returned goods worth Ksh 150 to Mwende
8] On 18th August Paid Ksh 1000 for electricity expense in cash
9] On 20th August Mwende received a commission of ksh 200 by cheque
...
It
is also called balance carried forward (c/ f)

• Confirm that totals of the two sides are equal by writing the totals at same level and double underline the two
totals
• The account balance to be written below the total on the side with the bigger total as balance brought
down[b/d],also called balance brought forward (b/f)
BALANCING OF A LEDGER ACCOUNT:
An account balance means the mathematical difference between the two totals of the debit and credit sides
which must be equal
...

Remember to double underline the two grand totals on both sides
Activity; [Exercise]
Balance the remaining account of Mwende business
...

EXTRACTING A TRIAL BALANCE FROM LEDGER ACCOUNT BALANCES
A trial balance is a statement prepared at a particular date showing all the debit balances on one side and all
the credit balances on the other side
...

A trial balance has two sides namely, the debit side and credit side
...

EXPLAIN THE PURPOSES OF A TRIAL BALANCE
T he purposes of a trial balance include the following;
• Checking the accuracy in the ledger accounts as to whether the double concept has been complied and
whether there are arithmetic errors in the ledger accounts
...

• Complete Reversal Of Entries ;Is an error which occurs when a transaction takes place and entries r are made
on the opposite side of the account affected for example a credit sale to Mwende’s is recorded by debiting
sales account and crediting Mwende’s account instead of debiting Mwende’s account and crediting sales
account
• Error Of Principle; occurs when a transaction is recorded in the wrong account of a different class from the
correct one; for example repairs to machinery being debited in machinery account instead of debiting repairs
account
...

CLASSIFICATION OF ACCOUNTS
Normally accounts are classified into
[i]personal accounts
[ii] Impersonal accounts
Personal accounts refer to accounts of persons mainly debtors and creditors
...

• Real accounts are accounts of tangible assets like land, buildings and cash
• Nominal accounts are accounts of items that relate to gains and losses
• Private accounts are accounts which a business considers confidential and only accessible to management
and the owners of the business like the capital, drawing ,trading profit and loss account or any other account
the business deems is confidential
...
for
this reason accounts are classified and each type of account is kept in separate ledger where the number of
ledgers kept depends on the size of the business
...

• PURCHASES LEDGER OR CREDITORS LEDGER; is also called the bought ledger which contains accounts of
creditors who are people or organizations from whom business has purchased goods on credit
• THE CASH BOOK; It contains the cash in hand and in bank accounts
• NOMINAL LEDGER; contains nominal accounts which are accounts of items that relate to gains and losses
such as rent expense /account and commission income account
...
personal accounts of debtors and creditors which do not arise out of sale or
purchase of goods are found in the general ledger
...
Enter the following transactions in the relevant ledger accounts
(4mks)
i)
Purchased a Delivery van from CMC Motors for sh
...

ii)
Atieno, a debtor, paid fully her account of sh
...

iii)
Deposited cash sh
...

Sold goods to Kemboi for sh
...

2
...
60,000 cash
2: Bought stationery for sh
...

3: Opened a bank account and deposited sh
...

4: Bought motor vehicle worth sh
...

Required: Record the transaction in the relevant ledger accounts
...
A business enterprise had the following transactions on 3rd June 2008
...
15,000 to Kombo traders
...

Required: Record the above transactions in the relevant ledger accounts
4
...

(b) Occurs where a transaction is not recorded at all in the books

Error type

(c) Occurs when entries are made in the wrong class of accounts

5
...
Rotich the bursary of Moi Siongiroi girls was preparing the trial balance of the school for the year 2013
...
Highlight any four errors that
Rotich would not be aware of
...

(d) Sold land and payment received by cheque
...


a/c to be Cr
...

The cash a/c and bank a/c are kept in the cash book
...


ii
...

iv
...

Hence they require a separate ledger
...
Hence
can be maintained directly by the proprietor so as to have direct control and
management over cash in the business
...

Facilitates division of labour in book keeping records
...
The use of word ‘‘cash’’ in this topic will be to mean cash in hand and ‘‘bank’’
to mean cash at bank

Types of cash books
a) Single Column Cash Book
b) Two Column Cash Book
c) Three Column Cash Book
d) Petty Cash Book
To be covered In Incomplete documents and books of
original entry
e) Analysis Cash book

a) Single Column Cash Book
It has a cash account and bank account on different pages
Each account has only one money column on each side
...

Date

Cr
...


Example
Enter the following transactions in a single common cash book for the month of
January 2010
...
1

balance of cash in hand Sh
...
60,000 in the bank
...
2

sold furniture for Sh
...


Jan
...
2000 for personal use
...
4

withdrew Sh
...


Jan
...
15,000

Jan
...
6,000 from Buyuka
...
10

purchased stationery Sh
...


Jan
...
25,000 paying by cheque
...
20

received Sh
...


Jan
...
10,000 from bank for office use
...
26

paid salaries by cheque Sh
...


Jan 31

paid rent Sh
...


Cash Account
Date

Particulars

f/l

Jan
...
3

Drawings

8,000

,,

5

Purchases

15,000

4,000

,,

10

Stationery

1,000

10,000

,,

31

Rent

1,000

,,

31

Balance

12,000

f/l

2,000

c/d

34,000
Feb
...
1

Balance

b/d

60,000

Jan
...
1

Balance b/d

,,

26

Salaries

,,

31

Balance

f/l

Amount
5,000
25,000

C

10,000
10,000

c/d

16,000
66,000

16,000

NB
...
such a transaction whose double entry is completed in one book is
referred to as a contra transaction
...


b) Two Column Cash Book
It has two money columns both on the debit side and the credit side
...

Format of a two column cash book
Dr
...


Date

Details

f/l

Cash

Bank

Date

Details

f/l

Cash

Bank

Example
On March, 1st, 2009, Doris had cash in hand Shs
...

250,000
...

March 2
3

Cash sales Shs
...
101,500 by cheque
...
76,000 from Henry
...
86,000
...
34,200 in cash
...
165,000 in respect of cash sales
...
25,000 in cash
...
32,000 from the bank for office use
...
4,000 cash for personal use
...
17,000 cash from Alvin in settlement of his account
...
24,000
...


Date

Details

f/l

Cash

Bank

2009

Date

Details

f/l

Cash

Bank

2009

March 1

Balance

”

2

Sales

”

7

Henry

”

20

Sales

’’

24

Bank

’’

29

Alvin

’’

31

Cash

b/d

87,000

March 3

Salaries

’’

13

Furniture

’’

17

Marita

34,200

165,000

’’

22

Wages

25,000

32,000

’’

24

Cash

17,000

’’

25

Drawings

’’

31

Bank

C

273,000

’’

31

balance

c/d

124,800

379,500

361,000

599,000

60,000
76,000

C

C

273,000

361,000
April 1

Balance

250,000

b/d

124,800

599,000

101,500
86,000

C

32,000
4,000

379,500

N/B
1
...
e
...
Such a balance is referred to as a bank overdraft
...

2
...
If there will be a credit balance, then
an error has been committed
...


Discount
A discount is an allowance on the cost of goods sold by a seller to a buyer
...


There are three types of discounts;


Quantity discount

It is given to encourage the buyer to buy in large quantities
...
It
enables the buyer to make a profit on selling the goods at the quoted price
...



Cash discount

It is an allowance to a debtor to encourage him/her pay the debt promptly
...

Cash discounts may either be discounts allowed or received
...
Since
receipts from debtors are recorded on the debit side of the cash book,
discounts allowed are also recorded on the same side in the discount allowed
column
...
They are recorded on the credit side in the discount received
column
...
87,000 and cash at bank
Shs
...

During the month, the following transactions took place
...

Cash sales Shs
...
101,500 by cheque
...
76,000 from Henry after allowing him a cash
discount of 5%
...
86,000
...
34,200 in cash, having deducted
Shs
...

20
Received a cheque for Shs
...

22
Paid wages Shs
...

24
Withdrew Shs
...

25
Withdrew Shs
...

29
Received Shs
...
1,000 cash discount
...
24,000
...

Dr
...

Date

Details

f/l

Disc
...


Disc
...


2009

2009

March 1

Balance

”

2

Sales

”

7

Henry

”20

Sales

’’24

Bank

’’29

Alvin

’’31

Cash

b/d

87,000

Balance

March 3

Salaries

’’

13

Furniture

’’

17

Marita

165,000

’’

22

Wages

32,000

’’

24

Cash

17,000

’’

25

Drawings

’’

31

Bank

C

273,000

’’

31

balance

c/d

124,800

60,000
4,000

C
1,000

76,000

C

273,000

5,000
April 1

250,000

b/d

361,000

599,000

124,800

379,500

101,500
86,000
800

34,200
25,000

C

32,000
4,000

800

361,000

379,500
599,000

EXERICES
1
...
6000
...
528
...

Oct 2: Paid wages of sh
...
410
Oct 3: Bought office pins for sh
...
890
Oct 4: Paid wages sh
...
Paid a credit supplier sh
...
600 and printer ink for sh
...
650
Required:
Prepare a petty cash book for Mauzo Poa enterprises, balance it off and show
replenishment of cash float on 8th October, 2009
...

Allo
...

Rece
...
Write up a three column cash book from the information given below, and then balance it
off at the end of April 2011
...
16,000
...
12,800
“
2 Cash sales Sh
...
18,000 who had deducted Sh
...
12,000, Patel Sh
...
19,000 from the office
“
16 Paid Insurance in cash Sh
...
6,800
“
24 Deposited Shs
...
10,000 from bank for office use
“
30 Drew a cheque Sh
...
8,000 and invested
the money into the business
...

Allo
...

Rece

---