Nature & purpose of Accounting

Accounting is the language of business. Accounting can be defined as the process of identifying, measuring, and reporting economic information to the users of the accounting information to permit informed decision making.
Accounting falls into two distinct categories; financial accounting and management accounting. Financial accounting is concerned with the recording of data, classifying, and summarizing the recorded data and communicating the results thereof to interested parties.
Management accounting on the other hand analyses and interprets financial statements in order to make managerial decisions that affect the financial position of the firm. Management accounting begins where financial accounting ends.
Some of the functions of accounting include;
Accumulation, selection, and recording of data.
Summarizing, analyzing, and interpreting financial information.
Planning and controlling the day-to-day operations & activities of the business enterprises.
Making proper decisions that affect the financial position of the enterprises.

Financial statements that is comprised of income statements (T, P&L), statement of financial position (B/S), cash flow statement, and notes to the accounts; accounts and proper book keeping records are designed to fulfill the following objectives;
Provide and communicate useful info to various interested parties such as investors, creditors, money lenders, employees, trade unions, management, etc. to aid in making rational business and investment decisions.
Provide and information bank about the past and future prospects of the enterprise as regards to its ability to generate net cash inflows through its earning and financial activities.
Provide speedy and objective information on the activities of the enterprise in order to permit informed judgement and decisions.
Provide information about the volume of economic resources available to the enterprises (Assets),obligations to other parties (liabilities), changes in financial position , firms financial plan budgets.
Provides interpretative information to allow prediction, comparison, and evaluation of the performance in terms of its earning power, solvency, gearing, efficient utilization of time and resources.
Account for resources placed at the disposal of management to those who entrusted them with the resources.
Financial statements must have certain basic minimum qualities in form of content, measurement, analysis, communication, etc. in order to meet the objectives. The following are key qualities of as set of good financial statements.
Accounting should provide information which is valid, verifiable, and which is based on objective evidence. Information contained in the financial statements should be free from preparers biasness. The intended users of accounting information should find it easier to understand to facilitate sound decision making.


Accounting information should meet the needs of user(s) in order to enable them make an informed judgement and decision. The information contained in the accounting statement should influence the decision making process of the user.
Matters that are materially significant to the financial position and performance of the enterprise should be reported. Information is material if its omission or mis-statement would influence the economic decisions of users on the basis of the financial statements.
The accounting information in the financial statements should be free of errors, bias, and mis-statements, as its to be relied upon for rational decision making. Information is neutral if it is free from bias.
All transactions and other events for the period of reporting must be faithfully represented.
The information contained in the financial statements should be capable of being understood by users with a reasonable, knowledge of business and economic activities and accounting.

Financial statements should not overstate assets and incomes nor understate liabilities, expenses, and losses.
Time is money and financial statements should be timely and promptly presented to users to enable decisions to be made rapidly on the basis of up to date information. Monthly, Quarterly, half yearly, and annual accounts and statements should be prepared and presented to users as and when they are required.
Accounting policies upon which financial statements are prepared should be consistent from year to year. These accounting policies adopted by an organization should be disclosed.
The information in financial statements should permit comparison with information about alternative opportunities and past experience. The users should be able to compare the position of the firm over time with similar businesses.
The users of financial accounting information are many and varied. Each user has his or her peculiar objective.
The users of financial accounting information include;
Investors/proprietors/shareholders:- They use financial information to decide on the amount of capital to invest and also check on profitability of the firm.
Suppliers and trade creditors:- They base the ability of the firm to pay their accounts and firms creditworthiness on financial statements.
Customers:- They use financial statements to study the reliability of the firm to supply, especially in bulk purchases/sales.
Trade unions:-The information contained in the financial statements helps the trade unions in making collective bargaining of their member employees salaries, pensions, fringe benefits, redundancy, scheme, etc. The employees must be members of the union.
Financial analyst and statisticians:- They use financial statements information to analyze the firm and evaluate their credit rating in order to provide reference to their clients.
Tax and other regulatory authorities:- They use financial information to determine amount of tax to impose on a firm, the tax authorities assess the financial position and income statement.
Employees:- They study the current remunerative policies and generally decide on other employment opportunities.
Loan creditors:-The firm will use the financial statements to apply for loans. The loaning institutions assess the firms ability to pay back the loan using these statements.

Term of the day: profit & loss(p&l).

What is the ‘Profit and Loss Statement (P&L)’

A profit and loss statement (P&L) is a financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter or year. These records provide information about a company’s ability – or lack thereof – to generate profit by increasing revenue, reducing costs, or both. The P&L statement is also referred to as “statement of profit and loss”, “income statement,” “statement of operations,” “statement of financial results,” and “income and expense statement.”

Read more: Profit and Loss Statement (P&L)
Follow us: Investopedia on Facebook

Term of the day.

What is ‘Working Capital’

Working capital is a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as:

Working Capital = Current Assets – Current Liabilities

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.  Also known as “net working capital”.

Read more: Working Capital
Follow us: Investopedia on Facebook

SAVE KES19,648 TODAY!!!!

SAVE KES19, 648 TODAY!!!!!

Kenya revenue authority (KRA) has raised the fine for late filing of annual income tax returns from kshs1, 000 to kshs20, 000.

Taxes paid during the year 2016 must be filed on or before 30th June 2017, if it is not filed by the due date, the taxpayer (you) will be required to pay KRA a fine of shs20, 000 or 5% of the tax due, whichever is higher. Those who have not filed 2014/2015 returns should do so; you will be charged a penalty of kshs1, 000 and some interest.

Those who need tax compliance certificates must ensure that they have filed all their taxes and paid the tax due, penalties, fines or interests due to them.


You can read more about increase on late tax filing penalty here:


The good news is, these taxes can be filed now. Avoid the last minute rush and file your tax using the guide in this link

Those of us, who were working last year, kindly ask your employer to provide you with your P9-A form as soon as possible. P9-A is the main ingredient in filing your returns.

All people with KRA PIN has to file returns. Save yourself from paying a fine and file your returns today or on time.

Also, inform your relatives on the need to file returns on time.

At Jamii Imara Investments Limited we offer these services at kes327 per return filed.

Reach us on 0715 2645 481 and save kes19, 648 today.







  • Rental income tax was introduced by Finance Act of 2015
  • Rental income tax is 10% of gross rent
  • It is a monthly tax payable by resident individual/person for rental income earned from use or occupation of residential property and which does not exceed kshs 10 million per annum.
  • The effective date was 1st January 2016 and the first returns were filed on or before 20th February 2016.
  1. Filing of Return
  • Log on to
  • Go to ‘Returns’ menu
  • Select the ‘Tax Obligations’ (Rent Income)
  • Download the return
  • Declare your property and tenant details ( if more than one property/tenant then please click on ‘Add Rows’). This can be done online or offline.
  • Upload the return and submit. Itax system will automatically compute tax payable based on the gross rent income declared for the month.
  1. Payment of Tax Due
  • Go to ‘Payments’ menu
  • Select ‘ Payment Registration’
  • Click ‘Next’. The system will take you to pre-payment registration details
  • Select the ‘Tax Head’ (Income Tax)
  • Select the ‘Tax Sub Head’ (Rental Income)
  • Select the tax period. The system will auto populate the liability details
  • Click on ‘Add’ and go to the ‘How do you want to pay’ section
  • Select ‘ mode of payment’ as either cash (including mobile money), cheque or RTGS
  • Select the ‘Receiving Bank Name’ from the list of appointed banks
  • Click on ‘submit’ button to generate payment registration slip (E-Slip)
  • Make payment at the selected ‘Receiving Bank’ by presenting the e-slip or;
  • Pay via Mpesa;-
  • Use the KRA Pay Bill Number 572572 and the Account Number is Payment Registration Number quoted at the top right corner of the generated E-Slip
  • Pay via Airtel:-
  • Dial KRA USSD code *572# to access the menu and select the E-Slip generation self-service menu. Proceed to make payment using the E-Slip number.
    Note: To be able to file online, you need to first register with iTax via the iPage facility on the KRA website

For further clarification, please contact


David on 0771808925 or
Enquiries can also be directed to the KRA Call Centre; Tel: +254
(020)4999999/+254 (0711) 099 999 or via email: You
may also contact the KRA Help Desk on Tel: +254 (020) 2816095 or visit the Desk at
Times Tower Building, Ground Floor or the nearest KRA Station for assistance. You can also communicate with KRA via email;
For more details on the Residential Rental Income Tax visit the KRA website; (web page named; 2015 landlords legislation)

Taxation: questions

Answer ALL questions. Marks allocated to each questions are shown at the end of the question. Show ALL your workings. Any assumptions made must be stated.
(a)(i)Distinguish between a direct and indirect tax. ( 4 marks)
(ii)Is Value Added Tax (VAT) a direct or indirect tax? Explain ( 2 marks)
(b)What are the rules governing the payment of VAT? Specify the additional tax that may arise from failure to comply with those rules. ( 6 marks)
(c)(i)Mr. Mali Mingi is a hardware merchant. He purchases cement from Athi Cement Ltd. which
he then sells to his customers. Both Mali Mingi and Athi Cement Ltd. require a profit margin of 20% on cost. Cement attracts 18% VAT. If the cost of production by Athi Cement Ltd. is Sh.220 per bag of 50Kg. At what price should Mali Mingi sell a bag of cement including VAT? ( 5 marks)
(ii)What VAT is payable to the Collector of VAT by Mr. Mali Mingi per 50 Kilogramme bag?(3 marks)
(Total: 20 marks)
(a)Many farmers in the rural areas are unaware of the benefits accorded to them in form of capital allowances under the Income Tax Act. Write a brief summary on capital allowances which may be available to the farmer. ( 6 marks)
(b)On 1 January 2003, Pesa Limited brought into full operation its Limuru Factory of producing bottle tops. The following expenditure had been incurred up to that date.

Factory building
(including store and showroom of Sh.600,000 and 800,000 respectively) 5,600,000
New machinery installed: Fixed 8,000,000
Moveable 2,000,000
Delivery trucks (6980cc each) 4,800,000
Office furniture 1,600,000
Computers 2,400,000
Workers’ canteen 800,000
In 2005, additional machinery worth Sh.1,200,000 was purchased and installed in the store at a cost of Sh.320,000. It was brought to use on 1 January 2005 to produce can tops. A saloon car worth sh.600,000 was also purchased.
Compute the capital allowances due to the company in 2003, 2004 and 2005.
(Total: 22 marks)
(a)Explain clearly the nature of a public good with specific reference to provision of education in Kenya today and the role taxes play under such circumstances. (10 marks)
(b)What is the principle of cost sharing and to what extent does it influence the level of taxation?
( 8 marks)
(Total: 18 marks)

(a)List and explain any three deductions that may be available against gains or profits from employment. ( 3 marks)
(b)Mr. Matata has approached you with a view to obtaining help in determining his taxable income for 2005. He has supplied the following information:
1.Business Income
He runs a small garage that generate taxable income of Sh.60,000. In 2004, he had a tax loss of Sh.40,000 from this business.
2.Wife’s Income
His wife was employed by Mafuta Ltd. as the Finance Director. Her salary was sh.52,000 p.m. Additional benefits include:
Company car 1800 cc.
House at New Muthaiga (market value of rent Sh.20,000 per month)
Staff gifts of oil products worth Sh.1000 p.m
3.Capital Gains
In the course of the year, the Matatas sold one plot they owned in Nairobi for Sh.1,200,000. This represented a gain of Sh.600,000 which they used to take a holiday to Mombasa.
4.Investment Income

Withholding Tax Net shs 2000 Sh.Dividends:  18,000
Kenya Breweries Ltd 1000 36,000
HFCK Ltd. 4,000 9,000
CMC Ltd.
Kenya Commercial Bank Savings Account 2,000 18,000
HFCK – Housing Development Bond 7,000 63,000
Post Office Savings Bank – 20,000
15% 2010 Treasury Bonds. 1,500 13,500
5.Employment Income – Mr. Matata
He was employed by Utajiri Limited as the General Manager – Sales. His salary was Sh.40,000 per month and a bonus of 2% on total sales revenue. He had a car of 2000cc which he used to visit customers otherwise his wife would pick and drop him at the place of work each day using her official car.
6.Utajiri Limited insures all its sales against default from customers. The cost of the insurance was Sh.10,000 which represents 0.001 percent of sales. The company also paid sh.20,000 to cover the life of Matata and his household items.
7.PAYE of Sh.130,000 was deducted from Matata’s pay but due to an oversight in the part of the Chief Accountant the tax was not paid to the Collector of Income tax. His wife’s PAYE was Sh.180,000 in the year.
(i)Compute total income chargeable to tax and show the tax payable thereon. (15 marks)
(ii)Comment on any information not used for computing taxable income above. (2 marks)
(iii)Is Matata to blame for failure of the company to pay his PAYE? Explain. (2 marks)
(Total: 22 marks)

(Total: 18 marks)