ACCOUNTING

Chapter 1 Introduction of Accounting

Two sections of Accounting BOOKKEEPING + ACCOUNTING

Bookkeeping = the process of detailed recording of all the financial transactions of a business.

- Make a record of every transaction!

The basis of maintaining detailed records is double entry double keeping.

Accounting = uses the bookkeeping records to prepare financial statements at regular intervals.

- Know whether the business is making profit or a loss.

Periodically (often at yearly intervals), an income statement (trading, profit and loss
account) is drawn up show calculation of profit or loss by the business.

If owner aint receiving any return on their investment and funds are not available for running
or maintaining, business may eventually close down.

Owner of business needs to know the financial position at regular intervals so a balance sheet is
prepared. Shows what they OWN (assets) and OWES (liabilities).

Financial statements (accounts) collective name for income statement and a balance sheet.

Measure progress of business comparing financial statements one year with previous years.
Calculation of accounting ratio is used to measure the relationships between figures within a set of
financial statements used for comparison purpose.

Financial statements shows the owner of the business what has happened during a certain period of
time and helps in monitoring the progress of the business. Planning for the future.

Assets, Liabilities and Capital

To start a business have to provide necessary funds (resources). (often monetary funds) may be
buildings, motors, goods.

Resources provided by business owners CAPITAL

Capital represents amount owed by the business to the owner of that business.

The Accounting Equation (balanced sheet equation)

Two sides of equation will always be equal

Formula: Assets = Capital + Liabilities Capital is sometimes referred to

OR Assets = Owners equity + Liabilities owners equity

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Assets = resources used by a business. Capital resources provided for the business by others.

The Balance Sheet

- A statement of the financial position of a business on a certain date

Three elements of the accounting equation assets, capital, liabilities.

Necessary to prepare balance sheet after every transaction

Day-to-day business transactions are recorded using double entry bookkeeping. Balance sheet is
only prepared periodically.

Chapter 2 Double Entry Bookkeeping part A

Double entry system of bookkeeping

Double entry two effects of a transaction (giving and receiving) both recorded in the ledger.

A business maintains a separate ledger account for each type of asset, expense, liability and income
and also for each individual debtor and creditor. Every transaction is recorded in the ledger account
relating to that particular item or person.

Ledger traditionally a bound book where each account appears on a separate page.

Layout of Ledger accounts: Account Name

Date Details Folio $ Date Details Folio $

Left side DEBIT (dr) Right side CREDIT (cr)

$ = amount of each transaction.

In order to record the two aspects of every The accounting which is receiving or gaining the
transaction, EVERY transaction is entered value is debited and the account which is giving
TWICE debit side of one and credit side of the value is credited.
another account.

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It is important that a double entry is made for every transaction.

Double Entry Records for Assets and Liabilities + Double Entry Records for Expenses and Incomes

A ledger account is opened for each type of -Account receiving money is debited.
assets and liability. Applying the double entry Account giving the money is credited.
principles, every transaction is entered twice.
Ledger account is opened for each type of expense and income.

The same double entry principles applied to assets and liabilities are applied to expenses and incomes.

Double Entry Records for Drawings

Drawings - when the owner of a business takes value from the business for their own use.

Drawings value may be forms in money, non-current assets, or goods from inventory held by the
business.

- Opening drawings account to record these values so that the capital account does not have a
large number of entries.

Any drawings are debited in the drawings account show the value going into that account. The
credit entry will be in the accounting giving the value.

When money is withdrawn either the cash or bank account will be credited. When a non-asset is
withdrawn, the appropriate non-current asset account will be credited. When goods are withdrawn,
the purchase account will be credited. This is because the goods were originally purchased for resale
and the amount of goods available for resale is reduced when goods are taken by the owner.

At the end of the financial year, the total of the drawings account is transferred to the capital account.
reduces the amount owned by the business of the business owner.

Balancing Ledger Accounts

At the end of each month it is usual to balance any account of assets and liabilities that contain more
than one entry. The balance is the difference between the two sides of the account and represents
the amount which is left in that account.

Double Entry Records for Sales, Purchases and Returns

Necessary to open an account to record goods Necessary to record them in separate accounts
that are purchased for resale AND an account as the purchases will be at cost price and the
to record goods that are sold by the business. sales at selling price.

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 ACCOUNTING

A purchases account and a sales account are used rather than a goods account. An inventory
account is only used to record the goods left at the end of the financial year and not for day-to-day
transactions.

The same double entry principles applied to assets and liabilities are applied to purchases, sales and
returns.

Purchases

Goods purchased for cash or cheque = When Double entry will be credited, either in cash or
goods are purchased, purchased account will bank account depending paid in cash or
be debit (goods coming into the cheque.
business/purchases acc receiving that value).

Goods purchased on credit = purchases account Whenyeahhhhhhhh

Baby payment is made
are to the supplier,
u listening what bank
crazt
will be debited. Credit entry will be made in or cash account -credited. (value going OUT
where
suppliers account of the goods show value of that acc) and the account of the supplier -
coming from that person. The supplier of goods debited (value going IN to the acc).
is known as a trade creditor.

Sales

Goods sold for cash or cheque = When goods are sold, sales account - credited and sales account is
giving out that value. Double entry debit in either cash or bank account depending received in cash or
by cheque.

Goods sold on credit = sell goods on credit.

When payment is received from debtor,
Sales account will be credited. Debit entry will
bankyoure
Now or cash
all account is debited
in the past (coming
dont talk I aint
be made in that account of the customers to
into that acc) and the
coming back caught you updebtors account will
whom the goods were sold to show the value
be credited (going out of that acc).
going to that person. Customer who bought
goods on credit = trade debtor.

Returns

Faulty, damaged or not, sometimes goods that have been purchased are returned to the supplier
purchases returns or returns outward. Any returns are credit to this account (value going out). The
debit entry will be made in suppliers account (whom goods are being returned to- show value going
into that person).

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Goods that customers return to the business- sales returns or returns inwards.

Double Entry Records for Carriage Inwards and Carriage Outwards

Carriage the cost of carrying or transporting goods.

Carriage inwards part of the cost of Carriage outwards selling expenses when
purchasing goods when a business has to pay business pays for goods to be delivered to the
for goods it has purchased to be delivered to its customers premises.
premises.
=These should be treated in separate accounts.

Applying double entry principle to carriage inwards, the carriage inwards is debited (acc receiving money).
The cash or bank account is credited (money is coming from this acc).
Cash outwards- credited. Cash inwards- debited.

Three Column Running Balance Accounts

Another ledger account form = T account format. Another commonly used on computer generated
accounts = three running balance format. uses only one column for dates, details and folios & has
three money columns side-by-side (one for debit, credit and balance after each transaction)

Date Details Folio Debit Credit Balance

$ $ $

Advantage shows balance of the account after every transaction.

****At the end of the period, the accounts of assets and liabilities that contain more than one entry should be
balanced****

Chapter 3 The Trial Balance

A trail balance is a list of the balances on the accounts in the ledger at a certain date.

- Is prepared to check the arithmetical accuracy of the double entry bookkeeping.

- Balance on each account Is shown according to whether it is a debit or credit balance.
- Show if the total of debit balances is equal to the total credit balances.
- Is headed with trial balance along with the date* when it was prepared.

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 ACCOUNTING

Trial balance is NOT a part of the double entry system of bookkeeping.

Layout of trial balance:

Trial Balance at .. *
Details Folio Debit Credit
$ $

The Purpose of a Trial Balance

1. Can help in locating arithmetical errors. However, the balancing of the trial balance is not
proof that the entries in the ledger accounts are completely free from errors.
2. Is useful in preparing financial statements.

The Preparation of Trial Balance

Ledgers account that still has amount of money showing in the account (open) are listed together w/
the balance on each account. If debit side of the acc is larger in money than the credit side, the acc has
a debit balance and the amount of the balance (or difference) is entered in debit column. Same goes
with credit side, if more amount of money on credit than debit; it is entered in the credit column.

Debit and Credit column totalled together should agree, indicating that the double entry bookkeeping
is arithmetically correct.

*** Necessary to know the type of accounts which have a debit balance and those which have a
credit balance. These are shown in the table below:

Debit balances Credit balances

Assets Liabilities
Expenses Incomes
Drawings Capital
Purchases Sales
Sales returns Purchases returns

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The Trial Balance and Errors

Errors made in somewhere Check list for locating errors

-An error of addition within the trial
balance
- Addition within one of the ledger
accounts
- Entering a different figure on the credit
to that entered on the debit when making
a double entry
- Making a single entry rather than double
entry
- Entering a transaction twice on the same
side of ledger.
- Check the addition of the trial balance
- Check ------------ balance on each ledger acc.
- that each ledger acc balance has been entered in
the correct column of the trial balance.
- every ledger acc balances has been entered in the
trial balance.
- look for transaction equal to the difference in the
trial balance// double entry has been made.
..
-check the double entry for every transaction
entered in the books since the date of the last trial
balance.

Name of error Description of error

Error of. Occurs when
Error of Commission Occurs when a transaction is entered using the correct amount on
the correct side, but in the wrong account of the same class.
Complete reversal When the correct amount is entered in the correct accounts, but
entry has been made on wrong side of each account.
Omission When a transaction has been completely omitted from the
accounting records. Neither debit or credit entry has been made.
Original entry When an incorrect figure is used when a transaction is first entered in
the accounting records. The double entry will therefore use in the
incorrect figure.
Principle When a transaction is entered using the correct amount and on the
correct side but in the wrong class of account.
Compensating errors When two or more errors cancel each other out.

Chapter 4 Double Entry Bookkeeping Part B

As the business grows, the number of ledger accounts grows. Necessary to divide the ledger into
different sections. making it more convenient to use as the same type of account can be kept
together, maintain the leger and can be divided between several people.

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The ledger is usually divided into the following specialised areas:

Sales Ledger Aka debtors ledger. All personal acc of debtors are kept in the sales ledger.
Purchases Ledger Aka creditors ledger. All personal acc of creditors (credit suppliers) are kept in
the purchases ledger.
Nominal Ledger Aka General ledger. All remaining acc apart from debtors and creditors are
kept in the nominal ledger. This ledger will contain acc of assets (real),
liabilities, expenses, incomes, sales, purchases and returns. (nominal).
Cash books Contains the main cash book and the petty cash book.

The Two Colum Cash Book

Cash and Bank account are maintained to record the movements of the money. They appear side-by-
side in the cash book. Cash book is part of the double entry system.

Any money paid out = credited in the cash book

Money paid in cash = entered in the cash column
Paid out of bank = entered in bank column.
Contra entries
Sometimes surplus cash is paid into the bank, or money may be withdrawn from the bank to place the
cash. Such transaction: contra entries. They appear on both sides of cash book. Debit on one,
credit to the other.

To record surplus cash paid into the bank To record cash withdrawn from the bank for
Debit the bank acc and write cash in the office use
details column Debit the cash acc and write bank in the
Credit the cash acc and write bank in the details column
details column. Credit the bank acc and write cash in the
details column.

In each cash, c is usually entered in the folio column, indicating that the double entry is on the opposite side of
the same book.

Bank overdraft
The balance on the cash column will always be brought down as debit balance at the start of the next
trading period. Only except is when there is no cash left in the cash account.

Possible to have a credit balance on a bank account. The bank may allow the business to have a bank
overdraft. Meaning, the bank allows the business to pay out more from the bank than is put into the
bank (interest will be charged by the bank on the amount overdrawn).

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The Three Column Cash Book

- Three column cash book has extra money on each side to record cash discount rather than a
two column cash book.

Cash discount = an allowance given to customer when an account is settled with a time limited
set by the supplier. (does not have to be paid in cash to qualify for cash discount).
- A means of encouraging customers to pay their accounts promptly.

Discount allowed is the discount a business allows its credit customers (debtors) when they pay their
accounts within a set time.
Discount received is the discount a business receives from its credit suppliers (creditors) when it pays
their accounts within a set time.

1. When an account is paid by a debtor and a discount is At the end of trading period, the
allowed. totals must be transferred to
2. When an account of a creditor is paid and a discount is the double entry system.
received.

Dishonoured by cheque a cheque received, which debtors bank refuses to pay.

Chapter 5 Petty Cash Books

Petty Cash book used to record low-valye (petty) cash payments.

- Maybe include: postages and stationary, cleaning, travel expenses and even small cash
payments to credits.

Two purposes = lists the transactions for transferring to the ledger accounts.
= also acts as a ledger account for petty cash transactions.
(petty cash book is a book of prime entry and is a part of the double entry, and is also a ledger acc)

Petty cash voucher is proved for member of staff (presented in the petty cashier) allowing the purpose
for which the money is required, date and signature of the person receiving the cash. Check petty
cashier in regular intervals against the total cash spent.

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The Imprest System

Most petty cash books are maintained using the imprest system. Under this system, the petty cashier
starts each period (week, fortnight, month etc) with a fixed amount of money. aka imprest amount
or the float. The amount of imprest can be adjusted.

The Layout of a Petty Cash Book

A petty cash book resembles a ledger account with several money columns on the credit side aka
analysis columns and are used to divide the payments into different categories.

Preparation of a Petty Cash Book

During the period At the end of the period
1. Money received (book page 64)
2. Money paid

Chapter 7 Books of Prime Entry

Businesses use books of prime entry (aka books of original entry or subsidiary books) to record goods
sold on credit, goods purchased on credit, sales returns and purchases returns. Bookkeeping
can be divided between several people.

The books of prime entry are:

Cash book, Petty Cash Book, Sales Journal, Purchases journal, Sales returns journal,
Purchases returns journal, General journal.

Sales Journal (sales book/ sales day book) list of name of business to which credit sales were
made, the value of the sales, and the dates on which the sales were made.
Is written up using the copies of the invoices sent to the customers. =when goods are
sold on credit and at the end of the month.

Sales Returns Journal (sales returns book/ returns inwards book/ returns inward journal) list of
the names of businesses, value of goods returned and dates on which the returns were made.
Is written up using the copies of the credit notes sent to the customers. =when goods
are returned by a credit customer and at the end of the month.

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Purchases Journal (purchases book/ purchases day book) list of names of the businesses from
which credit purchases were made, value of purchases, dates on which the purchases were made.
Is written up using the invoice received from the suppliers. = when goods are
purchased on credit and at the end of the month.

Purchases Returns Journal ( purchases returns book/ returns outward book/ returns outward
journal) list of names of businesses, value of goods returned and dates on which the returns
were made.
Is written up using the credit notes received from suppliers. = when goods are
returned to a credit supplier and at the end of the month.

*** All transactions should be entered in a book of prime entry before they are entered in the
ledger.***

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