PUBLIC FINANCE - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

27/5/2018

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OBJECTIVES

PUBLIC FINANCE

SPECIFIC OBJECTIVES

By the end of the topic, the learner should be able to:

explain the meaning and purpose of public finance
describe the various sources of public finance
categorize government expenditure
explain the principles of government expenditure
explain the meaning and purpose of taxation
explain the principles of taxation
classify taxes
explain the merits and demerits of each type of tax.

COURSE OUTLINE

CONTENT

Meaning and purpose of public finance
Sources of public finance
Categories of Government expenditure
Principles of Government expenditure
Meaning and purpose of taxation
Principles of taxation
Classification of taxes
Merits and demerits of each type of tax

PUBLIC FINANCE

Public finance refers to the activities carried out by the government associated with raising of finances and the spending of the finances raised (it is the study of how government collects revenue and how it spends it)
The components of public finance are;

Public revenue
Public expenditure
Public debt
1. Public revenue-refers to the revenues (income) and resources received by the government from different sources.
2. Public expenditure-refers to the resources spent by the government.
3. Public debt-refers to the money and resources borrowed by the government.

Purpose of public finance

Provision of essential goods and services. The government has a responsibility of providing its citizens with essential goods and services such as security, health, schools, drought control, law etc. such facilities and services may not be adequately covered by the private sector because of the high costs involved and risks.
Encouraging consumption of certain commodities-The government may encourage consumption of certain commodities e.g. maize by subsidizing on their productions or lowering their taxes.
Controlling consumption of certain commodities-The government may also encourage consumption of some commodities e.g. cigarettes and alcohol by imposing heavy taxes on them.
Promotion of Balanced regional development-This may be done by initiating economic projects in areas that are under developed/lagging behind.
Wealth Redistribution-This is done by heavily taxing the rich and using the money raised to provide goods and services that benefit the poor
To promote economic stability-Economic instability may be caused by factors such as unemployment. Such problems can be solved through public expenditure in projects that generate employment such as ‘kazi kwa vijana’
Creation of a conducive Business Environment-Through public expenditure, the government may develop infrastructure such as roads, electricity, and security etc. thereby creating a conducive environment for businesses to thrive in.
To raise government revenue-Through public finance, the government raises revenue which it uses in provision of essential goods and services to the public.
Improving balance of payment-This may be done by improving heavy taxes such as customs duty to discourage importation.

Sources of public finance

There are two major sources of public finance i.e.

Public revenue
Public debt (government borrowing)

Public revenue
This is the income that the government gets from its citizens. The main sources of public revenue are:

Tax - This is a compulsory payment levied by the government on individuals and firms without any direct benefit to the payer.
Fines and penalties - These are the charges imposed on individuals, firms and corporations who break the laws of the country.(offenders)
Fees - These are the payments charged by the government for the direct services it renders to its people e.g. road license fee, marriage certificate fee and import licence fee.
Rent and rates - Charged on use of government properties e.g. game parks, forests etc.
Eschiats - Income obtained from properties of persons who die without legal heirs or proper wills. Such people’s properties are taken over by the state.
Dividends and profits - These are the income received from the government direct investments e.g. income/surplus from public corporations.
Interest from loans - This is the interest on loans advanced by the government to firms and individuals through its agencies such as ICDC, AFC etc.
Proceeds from scale of government property.
Public debt (Government borrowing) -This is the money that the government borrows when public revenue is insufficient to meet all its financial obligations. Government borrowing is also referred to as national debt. It includes all outstanding borrowing by the central government, local authorities and government corporations.

These are two majorly two sources of public debts:

Internal borrowing
External borrowing

Internal borrowing
This refers to borrowing by government from firms and individuals within the country. This may be done through:
Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from.
External borrowing

This refers to government borrowing from external sources. It may either be on a bilateral or multilateral basis.
Bilateral borrowing is where the government borrows directly from another country.
Multilateral borrowing is where the government borrows from international financial institutions such as international monetary fund (IMF), World Bank, African Development bank etc. such bodies get finances from various sources which they lend to their member countries who are in need of such funds.
Generally, external borrowing has strings attached. The borrowing country is expected to meet some set conditions, sometimes adversely affecting some sectors of the economy.
The total internal borrowing (internal debt) added to the total external borrowing (external debt) constitutes the national debt.

Classes of public (National debt)

These are two classes of national debt:

Reproductive debt
Dead-weight debt.

Reproductive debt
This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self-sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production etc.
Dead-weight debt
This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief etc.
Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment.
Factors to consider before the government decides whether to borrow internally or externally
This refers to how the government spends the finances it has raised on behalf of its citizens.
Categories of government expenditure

Recurrent expenditure
Development expenditure
Transfer payments.

Recurrent expenditure
This refers to government spending that takes place regularly e.g. payments of salaries to civil servants, fuelling of government vehicles e.g.
Every financial year, the government must allocate funds to meet such expenditure.
Recurrent expenditure is also known as consumption expenditure.
Development expenditure
This is also referred to as capital expenditure .It is government spending on projects that facilitate economic development. Such projects includes construction of railway lines, roads, airports, rural electrification etc.
Once completed expenditure on such projects ceases and may only require maintenance.
Transfer payments
This is expenditure on things/people who do not directly contribute to a country’s national income. Such expenditure include money spent on famine relief, pension, bursaries etc.

Principles of Public/Government Expenditure

These are the considerations that are necessary before any expenditure can be incurred by the government.
They include:

Sanctions: Every public expenditure must be approved by the relevant authority like parliament.
Maximum social benefit: Any public expenditure must be incurred in such a way that majority of the citizens are able to reap maximum benefit from it e.g. improved living standards and quality of life.
Flexibility /elasticity-The policy on public expenditure should be flexible enough to meet prevailing economic situations i.e. it should be possible to increase or decrease the expenditure on projects depending on the prevailing circumstances e.g. during drought, it should be possible to spend on famine relief.
Economy-public expenditure should be planned carefully and prudently to avoid any possible waste.
Proper financial management (Accountability)-public funds should be well managed. This should be facilitated by maintenance of proper records which should be audited as required.
Productivity-The biggest proportion of public expenditure should be spent on development projects and less on non-development projects.
Equity-Government expenditure should be distributed equitably to all sectors of the economy in order to reduce income and wealth inequalities.
Surplus-Surplus revenue collected should be saved for emergencies or for when collection of revenue is below projections.

Taxation

Tax: is a compulsory payment by either individuals or organizations to the government without any direct benefit to the payer.
Taxation-refers to the process through which the government raises revenue by collecting taxes.
Purposes/reasons for taxation

Raising revenue for government expenditure. This is the main reason for taxation.
Discouraging /controlling consumption of certain commodities e.g. alcohol and cigarettes which are considered to be harmful.
Discouraging importation of certain commodities in order to protect local industries. This is done by imposing heavy taxes on such commodities.
Controlling inflation. Taxation reduces money supply by reducing peoples ‘disposable’ income thereby controlling inflation.
Reducing inequality in income distribution; this is done by taxing the rich heavily and using the finances raised in provision of goods and services that benefit the poor.
Influencing locations of businesses. This is done by taxing businesses located in urban areas heavily and those in rural areas lightly hence businesses moving to rural areas.
Correcting unfavorable balance of payments. High taxes are imposed on imported commodities thereby discouraging their importation leading to an improvement in the balance of payments.
To protect the key selectors of the economy such as the agricultural sector, by stimulating their growth.

Factors that determine the amount of money raised through taxation

Distribution of incomes
Social and political factors
Honesty and efficiency of tax authorities
Citizens level of real income
Economic structure of the country i.e. relative size of the country’s commercial and subsistence sectors.

Principles of taxation

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Discuss five principles of taxation

Equitable/principle of equity-Every subject of the state should pay tax in proportion to their income. A tax system should therefore have horizontal and vertical equity.
Horizontal equity means that those at the same level of income and circumstances should pay the same amount of tax. Vertical equity means that those earning higher incomes should pay proportionately higher amounts of tax than those earning less.
Certain/principle of certainty-The tax that an individual should pay should be clear in terms of the amount, time and manner in which it should be paid. The government should also be fairly certain of the amount of tax expected so that planning can be easier.
Convenient/principle of convenience-Tax levied ought to be convenient to both the contributor and collector, it should be levied at a time when the payer has money and mode of payment should be convenient to both the payer and the payee.
Economical/principle of economy-The cost of collecting and administering the tax should be lower than the tax so collected.
Flexible/principle of flexibility-It should be readily adaptable to changing economic times i.e. when the economic conditions of the people improve it should give raised revenue e.g. VAT
Ability to pay/non-oppressive-A tax system should be designed in a way that the amount charged is not too high to the extent that the contributors are unable to pay or is discouraged from working hard.
Diversified/principle of diversity-There should be different types of taxes so that the tax burden is on different groups in the society. This also ensures that the government has money at all times.
Simplicity-A good tax system should be simple enough to be understood by each tax payer. This will motivate them to pay tax.
Elastic/principle of elasticity-The tax system should be able to generate more revenue for the government by targeting items of mass consumption.

Outline five sources of non-tax public revenue

Fines and penalties imposed on law breakers.
Income from government properties e.g. land.
Fee from direct services.
Government borrowing (internally and externally)
Interest earned on government investments.

Explain five principles of public expenditure

Sanctions; every public expenditure must be approved by the relevant authority like parliament.
Maximum social benefit; any public expenditure must be incurred in such a way that majority of the citizens are able to reap maximum benefit from it e.g. improved living standards and quality of life.
Flexibility /elasticity-The policy on public expenditure should be flexible enough to meet prevailing economic situations i.e. it should be possible to increase or decrease the expenditure on projects depending on the prevailing circumstances e.g. during drought, it should be possible to spend on famine relief.
Economy-public expenditure should be planned carefully and prudently to avoid any possible waste.
Proper financial management (Accountability)-public funds should be well managed. This should be facilitated by maintenance of proper records which should be audited as required.
Productivity-The biggest proportion of public expenditure should be spent on development projects and less on non-development projects.
Equity-Government expenditure should be distributed equitably to all sectors of the economy in order to reduce income and wealth inequalities.
Surplus-Surplus revenue collected should be saved for emergencies or for when collection of revenue is below projections.

Highlight five reasons for imposition of tax by the government

To raise revenue for the government
To discourage consumption of some products
To reduce inequality income distribution
To discourage importation of some products
To stabilize prices

Discuss five characteristics of a good tax system

Simplicity
Equitable.
Difficult to evade.
Economical.
Convenient.

Outline five reasons why the Kenya government must impose tax

To generate revenue
To control import
To distribute income from the rich to the poor.
To maintain price stability
To influence consumption pattern

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MONEY & BANKING - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

14/5/2018

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CONTENTS
NOTES
Q & A

MONEY AND BANKING

SPECIFIC OBJECTIVES

Meaning and limitations of barter trade
Meaning and characteristic of money
Functions of money
Demand for and supply of money
Meaning of banking
Development of banking
Functions of commercial banks
Types of accounts offered by commercial banks
Functions of non-bank financial institutions
The functions of the Central Bank in an economy
Trends in banking

SPECIFIC OBJECTIVES

By the end of the topic, the learner should be able to:

explain the meaning and limitations of barter trade
explain the meaning and characteristics of money
explain the functions of money
explain demand for and supply of money
describe the meaning of banking
describe the development of banking
explain the functions of commercial banks
explain the main types of accounts offered by commercial banks
explain the functions of non-bank financial institutions
distinguish between commercial banks and non-bank financial institutions
explain the functions of a Central Bank in an economy.
discuss trends in banking.

Money and Banking
Barter trade

This is a form of trade where goods and services are exchanged for other goods and services.

Benefits

Satisfaction of wants: And individual is able to get what he or she needs.
Surplus disposal: an individual or country is able to dispose of its surpluses.
Social relations: it promotes social links since the communities’ trade together.
Specialization: some communities shall specialize in a particular commodity.
Improved living standards: this is enhanced by receiving what one is unable to produce.

Limitations of Barter trade

Lack of double coincidence of wants: - it is difficult to find two people with the need for each other’s product at the same time.
Lack of store of value/ perishability of some commodities: - some goods are perishable thus their value cannot be stored for a long time for future purposes e.g. one cannot store vegetables for exchange purposes in future.
Indivisibility of some commodities: - it is difficult to divide some products like livestock into smaller units to be exchanged with other commodities.
Lack of standard measure of value: - It is not easy to determine how much one commodity can be exchanged for a given quantity of another commodity.
Transportation problem: It is difficult to transport bulky goods especially when there is no faster means of transport.
Lack of a standard deferred payment: - The exchange of goods cannot be postponed since by the time the payment is made, there could be fluctuation in value, demand for a commodity may not exist and the nature and quality of a good may not be guaranteed. It may be therefore difficult what to decide what to accept for future payment.
Lack of specialization: - Everyone strives to produce all the goods he or she needs due to the problem of double coincidence of wants.
Lacks unit of account - it is difficult to assess the value of commodities and keep their record.

Money System

Money is anything that is generally accepted and used as a medium of exchange for goods and services.
Features/ characteristics of Money
For anything to serve as money, it must have the following characteristics:

Acceptability: The item must be acceptable to everyone.
Durability: The material used to make money must be able to last long without getting torn, defaced or losing its shape or texture.
Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it value.
Cognizability: The material used to make money should be easily recognized. This helps reduce chances of forgery. It also helps people to differentiate between various denominations.
Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk of confusion and forgeries.
Portability: - Money should be easy to carry regardless of its value.
Stability in value: The value of money should remain fairly stable over a given time period.
Liquidity: - it should be easily convertible to other forms of wealth (assets).
Scarcity: - It should be limited in supply. If it is abundantly available its value will reduce.
Malleability- the material used to make money should be easy to cast into various shapes.
Not easy to forge- money should not be easy to imitate.

Functions of Money

Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus eliminates the need for double coincidence of wants.
Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for future transactions.
Measure of value: Value of goods and services are expressed in money form. Performance of businesses is measured in terms of money.
Unit of account: It is a unit by which the value of goods and services are calculated and records kept.
Standard of deferred payment: it is used to settle credit transactions.
Transfer of immovable items (assets): Money is used to transfer assets such as land from one person to another.

Demand for Money

This is the tendency or desire by an individual or general public to hold onto money instead of spending it. It also refers to as liquidity preference.
Money is held by people in various forms:

Notes and coins
Securities and bonds
Demand deposits such bank current account balances.
Time deposits such as fixed account balances

Reasons (Motives) For Holding Money Transaction Motive:

Money is held with a motive of meeting daily expenses for both the firms and individuals. The demand for money for transaction purpose by individuals depends on the following factors:

Size/level of individual’s income: The higher the income of and individual, the more the number of transactions thus high demand for transactions.
Interval between pay days/ receipt of money: if the interval is long, then high amount of money will be held for transaction reasons.
Price of commodities: if the prices are high, the value of transactions will also increase thus more money balances required.
Individuals spending habits - people who spend a lot of money on luxuries will hold more money than those who only spend money on basics.
Availability of credit - people who have easy access to credit facilities hold little amount of money for daily transactions than those who do not have easy access to credit.

The transaction motive can further be divided to;

Income motive i.e. holding money to spend on personal/ family needs.
Business motive i.e. holding money to meet business recurring needs such as paying wages, postage, raw materials. Etc.

Precautionary Motive:

Money is held in order to be used during emergencies such as sicknesses. The amount of money held for this motive will depend on the factors such as:

Level of income- the higher the income the higher the amount of money held for precautionary motive.
Family status- high class families tend to hold more money for precautionary motive than low class families.
Age of the individual- the aged tend to hold more money for precautionary motive than the young since they have more uncertainties than the young.
Number of dependants- the more the dependants one has, the more the money they are likely to hold for precautionary motive.
Individual’s temperament- pessimists tend to hold more money for precautionary motives than the optimists because they normally think things will go wrong.
Duration between incomes- those who earn money after a short time are likely to keep less money than those who earn money after a long time.

Speculative Motive:

Money is held to be used in acquiring those assets whose values are prone to fluctuations such as shares/ money is held anticipating fall in prices of goods and services. This depends on the following:

The wealth of an individual
The rate of interest on government debt instruments
Interest on money balances held in the bank.
How optimistic or pessimistic a person is.

Supply of Money

This is the amount of money/ monetary items that are in circulation in the economy at a particular period of time. They include the following;

Total currency i.e. the coins and notes issued by the central bank.
Total demand deposits: money held in current accounts in banks and are therefore withdrawable on demand.

Factors influencing supply of money

Government policies: If there is more money in the economy, the government will put in place measures to reduce the supply such as increasing interest rates.
Policies of commercial banks: The more the loans offered by commercial banks, the more the amount of money in circulation.
Increase in national income: increase in national income means that more people will be liquid due to increase in economic activities.]
Increase in foreign exchange: The foreign exchange reserves will increase thus supply increases.

Banking

This is the process by which banks accept deposit from the public for safe keeping and lending out the deposits in form of loans.
A bank is a financial institution that accepts money deposits from the public for safe keeping and lending out in terms of loans.

Commercial Banks

These are financial institutions that offer banking services with a profit motive. Their activities are regulated by the Central bank.

Functions of commercial banks

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FINANCIAL STATEMENTS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

6/5/2018

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CONTENTS
NOTES
Q & A

FINANCIAL STATEMENTS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

Financial Statements
1. Trading account
2. Profit and loss account
3. Trading, profit and loss account
4. Balance sheet
Importance of the financial statements
Concept of trading period
Preparation of simple financial statements
Types of capital
1. Working capital
2. Borrowed capital
3. Capital owned
4. Capital employed
Calculating basic financial ratios e.g
1. Margins and mark-ups
2. Current ratio/ working capital ratio
3. Rate of stock turn-over
4. Return on capital
Importance of financial ratios

SPECIFIC OBJECTIVES

By the end of the topic, the learner should be able to:

identify the various financial statements
explain the importance of each of the financial statements
explain the concept of trading period
prepare simple Financial Statements
explain the various types of capital
calculate basic ratios from financial statements
explain the importance of each of the basic financial ratios.

Financial Statements

These are prepared at the end of a given trading period to determine the profit and losses of the business, and also to show the financial position of the business at a given time. They includes; trading account, profit and loss account, trading profit and loss account and the balance sheet. They are also referred to as the final statements.
The trading period is the duration through which the trading activities are carried out in the business before it decides to determines it performances in terms of profit or loss. It may be one week, month, six months or even a year depending on what the owner wants. Most of the business use one year as their trading period. It is also referred to as the accounting period.
At the end of the accounting period, the following takes place;

All the accounts are balanced off
A trial balance is extracted
Profit or loss is determined
The balance sheet is prepared

Determining the profit or loss of a business

When a business sells its stock above the buying price/cost of acquiring the stock, it makes a profit, while if it sells below it makes a loss. The profit realized when the business sell it stock beyond the cost is what is referred to as the gross profit, while if it is a loss then it is referred to as a gross loss.
It is referred to as the gross profit /loss because it has not been used to cater for the expenses that may have been incurred in selling that stock, such as the salary of the salesman, rent for the premises, water bills, etc. it therefore implies that the businessman cannot take the whole gross profit for its personal use but must first deduct the total cost of all other expenses that may have been incurred.
The profit realized after the cost of all the expenses incurred has been deducted is what becomes the real profit for the owner of the business, and is referred to as Net profit. The net profit can be determined through calculation or preparation of profit and loss account.
In calculating the gross profit, the following adjustments are put in place

Return inwards/Sales return: - these are goods that had been sold to the customers, but they have returned them to the business for one reason or the other. It therefore reduces the value of sales, and is therefore subtracted from sales to obtain the net sales
Therefore Net sales = Sales – Return inwards
Return outwards/purchases return: - these are goods that had been bought from the suppliers to the business and have been returned to them for one reason or another. It reduces the purchases and is therefore subtracted from the purchases to obtain the net purchases.
Drawings: - this refers to goods that the owner of the business has taken from the business for his own use. It reduces the value of purchases, and is therefore subtracted from purchases when determining the net purchases. It is different from the other drawing in that it is purely goods and not money
Carriage inwards/Carriage on purchases: - this is the cost incurred by the suppliers in transporting the goods from his premises to the customers’ business. It is treated as part of the purchases, and therefore increases the value of purchases. It is added to purchases to determine the actual value of purchases/Net purchases.
Therefore Net Purchases = Purchases + Carriage inwards – Return Outwards - Drawings
Carriage outwards/Carriage on sales: - this is the cost that the business has incurred in transporting goods from its premises to the customer’s premises. The cost reduces the business profit that would have been realized as a result of the sale, and is therefore treated as an expense and is subtracted from the gross profit, before determining the net profit.
Opening stock is the stock of goods at the beginning of the trading period, while the closing stock is the stock of the goods at the end of the trading period
Gross profit is therefore calculated as follows;
Gross Profit = Sales – Return inwards – (Opening stock + Purchases + carriage inwards – Return outwards – Closing stock)
Or
Gross profit = Net sales – Cost of Goods Sold (COGS)
COGS = Opening Stock + Net Purchases – Closing stock
Net Profit = Gross profit – Total expenses

Trading Account

This is prepared by the business to determine the gross profit/loss during that trading period
It takes the following format

The trading account is completed by the time the gross profit b/d is determined
For example
The following balances were obtained from the books of Ramera Traders for the year ending may 31st 2010

Sales 670 000
Purchases 380 000
Return inwards 40 000
Carriage outwards 18 000
Return outwards 20 000
Carriage inwards 10 000

Additional information:

During the year the owner took goods worth shs 5 000 for his family use
The stock as at 1st June 2009 was shs 60 000, while the stock as at 31st May 2011 was shs 70 000

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PUBLIC FINANCE - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

PUBLIC FINANCE ​

SPECIFIC OBJECTIVES

CONTENT

PUBLIC FINANCE

Purpose of public finance

Sources of public finance

Classes of public (National debt)

Principles of Public/Government Expenditure

Taxation

​Principles of taxation

question & answer session

READER'S DIGEST

MONEY & BANKING - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

MONEY AND BANKING

​SPECIFIC OBJECTIVES

SPECIFIC OBJECTIVES

Money and Banking Barter trade

Benefits

Limitations of Barter trade

Money System

Functions of Money

Demand for Money

Reasons (Motives) For Holding Money Transaction Motive:

​Precautionary Motive:

​Speculative Motive:

Supply of Money

Factors influencing supply of money

Banking

Commercial Banks

​Functions of commercial banks

MONEY & BANKING Q & A

READERS' DIGEST

FINANCIAL STATEMENTS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

FINANCIAL STATEMENTS - KCSE BUSINESS STUDIES NOTES, AUDIOVISUALS, QUESTION AND ANSWER

CONTENTS

​SPECIFIC OBJECTIVES

Financial Statements

Determining the profit or loss of a business

Trading Account

financial statements questions & answers

Business Studies Notes Form 1 - 4

Categories

Archives

Author

PUBLIC FINANCE

Principles of taxation

SPECIFIC OBJECTIVES

Money and Banking
Barter trade

Precautionary Motive:

Speculative Motive:

Functions of commercial banks

SPECIFIC OBJECTIVES