CXC Accounts Notes

Concept Of Accounting
Accounting is the process of identifying, recording, measuring and communicating financial information which allows
balanced judgement and sound financial management decisions. Account systems have been used throughout history as long
as there was need to make financial decisions.
Accounting:
-Identifies, records, measures and communicates information on the finances of a business.
-Focuses or communicates information about entities in monetary terms.
-Provides general financial information which may be used for specific functions by relevant entities in need of financial
information.
-Has the intended effect of assisting the organization in reaching its objectives.
-Illuminates what is being measured, as well as providing summarized information for general management decision
making.

Users of accounting information

Internal users
-Owners of the business to assess the results of their investment in the business.
-Managers to plan, control, analyse, and evaluate activities and performance in order to strengthen policies.
-Employees to look at the stability of the business, job security and adequacy of salary.
External users
-Government to ensure that legal conformity and tax obligations are met by businesses; to assess impact of business
activities on the economy.
-Competitors to make performance comparisons and strengthen weak areas.
-Suppliers to determine the credit history of potential customers before committing to supply.
-Customers To provide after-sales support.
 Types Of Business Organizations
A business is an economic entity that engages in activities for financial gain or profit. The structure of a business in terms of
the ownership and management is one of the important tasks of the entrepreneur. Therefore, the form of organization must
be chosen with careful thought. Factors to be considered are:
The Nature of the activities of the Business
The selection of a particular type of organizational structure is dependent upon the type of business activity. A partnership or
Sole Proprietorship is ideal for a service oriented business, but a Company or partnership would be better for a
manufacturing concern.
Scale of Operation
If the scale of operation is small, a sole proprietorship or partnership form is ideal. But a company would be better if the
scale of operation was very large.
Area of Operation
If the operation of entity is spread over a wide geographic area, the company structure is better, but if it is confined to a
specific region, other forms may be ideal.
Finance
If the initial capital outlay and daily operational costs are very large, a company structure may be the best option.
Ownership and Control
One should go for a sole proprietorship or partnership when direct control over the business is ideal, instead of company or
co-operative Structure.
Liability
An individual who does not wish for unlimited liability, he may opt for a company but if he can bear the unlimited liability of
business can go for sole proprietorship or partnership.

Sole Trader
Sole proprietorship is a basically a one person owned business. It is a form of business organization in which an individual
invest his own resources, uses his own organizing abilities in management and decision making some small business start
out as sole traders. Sole Traders sometimes are small or micro- enterprises which need little capital to start up and may
therefore be easy to establish and operate.
Advantages
-Easier establish and manage than a company
-Decision making is speedy due to its solo nature
-Customers receive special attention due to economies of scale
-Profits are not shared but goes to the sole owner
Disadvantages
-Unlimited liability by the owner
-Problem in raising capital when needed sometimes due to scale of operation and capital outlay
-Sometimes limited managerial skills due to lack of team management
-Lack of competitiveness
-Lack of continuity when owner dies
-Long working hours due to economies of scale
 Partnership
A partnership is a form of organization where two to twenty persons are associated to operate a business entity with a view to
earn profit. Each member of such a group is individually known as partner and collectively the members are known as a
partnership firm.
In order to avoid misunderstandings about how profits/losses are shared, the responsibilities of each partner, and other
ownership, management, and operating decisions the partners usually have a formal legal partnership agreement which sets
out the rights and obligations of each partner.
Some factors to consider in a partnership deed
-The number of partners needed
-Capital invested by each partner
-Interest on capital paid to each partner
-Profit or loss sharing ratio between or among partners
-Salaries paid to partners
-Admission of a new partner
-Dismissal or withdrawal of a partner
Advantages of Partnerships
-Easily formed
-More people to contribute capital than sole trader
-Greater continuity than sole trader
-Expenses and management of the business are shared
Disadvantages of Partnerships
-Generally unlimited liability of partners
-Possible disagreement among partners
-Each partner is liable for the debt of the business
-Membership limit of twenty partners may sometimes restrict the capital resources of the business depending on the nature
and scale of operations

Co-Operative Society
The co-operatives are formed primarily to render services to its members. Generally it also provides some service to the
society. When the purpose of business is to provide service than to earn profit and to promote common economic interest,
the co-operative society is the only alternative.
The main objectives of co-operative societies are:
-rendering service rather than earning profit
-mutual help instead of competition
-self help in place of dependence
On the basis of these objectives, various types of co-operatives can be formed with the objective of providing different
benefits to their members. Some types of co-operatives are outlined below.
Types of Cooperatives
Consumer co-operatives
These are formed to protect and strengthen the specific interests of ordinary consumers of society by making consumer
goods available at a fair price.
Producer co-operatives
These societies are set up to strengthen producers who operate on a small scale who face challenges related to resources for
raw material and available markets for finished goods.
Marketing co-operatives
These are formed by producers and manufactures. Marketing co-operatives eliminate exploitation of the middlemen when
marketing their product.
Credit Co-operatives
These societies are formed to provide financial help to its members.
Farming Co-operatives
These are formed by small farmers who carry on work together to operate on a larger scale and thereby share the benefits of
large scale farming.
Besides these types, other co-operatives can be formed with the objective of providing different benefits to its members, like
the construction co-operatives, transport co-operatives, co-operatives to provide education etc.
Characteristics of Co-operatives
Members Voluntary Association
Individuals with common interest may come together to form a co-operative society. Any person can become a member of
such a co-operative.
Membership
The minimum number of individuals required to form a co-operative society is ten and the maximum number is unlimited.
Body Corporate
Registration of a society under the Co-operative Societies Act is a must. Once it is registered, it becomes a body corporate
and enjoys certain privileges just like a joint stock company.
Some of the privileges are:
-It can sue others in court of law.
-It can enter into contract with others
-It has its own common seal.
-It can own property in its name.
-It can enter into contract with others.
-The society enjoys perpetual succession
-It has its own common seal.
-It can own property in its name.
Service Motive
The main motive of any co-operative organization is to provide specific services to its members in particular and to the
society in general.
Democratic Set Up
Every member has a right to take part in the management of the society. Each member has one vote. The Executive
Committee, who is elected and responsible to members, look after the daily operations of the organization.
Sources of Finances
Co-operative organizations have units of investments called shares which are contributed by members It can also raise loans
and obtain grants from the government.
Return on capital
The profit earnings on capital subscribed by the members is in the form of a fixed rate of dividend after deduction from the
profit of the co-operative.
Advantages of Co-operative Society
Easy Formation
Formation of a co-operative society is relatively easy as compared to a company. Any 10 persons can form an association and
get the entity registered.
Limited Liability
The liability of the members is only limited to the extent of capital contributed by them.
Open Membership
Any member of society may become a member of a co-operative.
State Assistance
Co-operatives may have the advantage of patronage in the form of exemptions and tax concessions and financial assistance
from the governments.
Middlemans Profit Eliminated
Consumers benefit and the profit is maximized. Through the co-operative the consumer members control their own supplies
and by this means the middlemans profit is eliminated.
Management
Decision making by members on specific terms are democratized.. Each member has only one vote.
Winding up
A co-operative has a fairly stable life. The dissolution of a co-operative firm is quite difficult. It does not cease to exist in the
case of the death, or insolvency or resignation of any member.
Disadvantages of Co-operatives
Limited Capital
Due to the specificity of co-operatives the amount of capital that can be generated may sometimes be limited. This is because
of the membership remaining confined to a geographic area or a particular group of people.
Lack of Motivation
Co-operatives are basically service oriented more than profit motivated. There might not be sufficient motivation to manage
the co-operatives effectively.

Corporations
A corporation is an organization that is made up of many owners who normally are not active in the decision making and
operations of the business. The capital of a limited liability company is divided into shares which are certificates of
ownership (stock) issued by the corporation. The owners of these shares are called shareholders and the capital of the
company referred to as share capital. Corporations must have at least one shareholder. Corporations are incorporated
businesses, are considered as a separate entity, and this often provide a measure of legal and financial protection for the
shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over
the amount of profits Suitability of Joint Stock Company:
A Limited Liability Company may be suitable where the volume of business is quite large, the area of operation is
widespread, the risk involved is heavy and there is a need for huge financial resources and manpower. It is also preferred
when there is need for professional management and flexibility of operations.
Characteristics of Limited Liability Companies
Artificial Person
A Joint Stock Company is an artificial person in the sense that it is created by law and does not possess physical attributes of
a natural person. However, it has a legal status.
Separate Legal Entity
Being an artificial person, a company has an existence independent of its members. It can own property, enter into contract
and conduct any lawful business in its own name. It can sue and can be sued in the court of law. A shareholder cannot be
held responsible for the acts of the company.
Common Seal
Every company has a common seal by which it is represented while dealing with outsiders. Any document with the common
seal and duly signed by an officer of the company is binding on the company.
Perpetual Existence
A company once formed continues to exist as long as it fullfils the requirements of law. It is not affected by the death, lunacy,
insolvency or retirement of any of its members.
Limited Liability
The liability of a member of a Joint Stock Company is limited by guarantee or the shares he owns. In other words, in case of
payment of debts by the company, a shareholder is held liable only to the extent of his share.
Transferability of Shares
The members of a company are free to transfer the shares held by them to anyone else.
Formation
A Jamaican company for example, comes into existence only when it has been registered, after completing the formalities
prescribed by The Registrar of Companies of Jamaica.
Membership
A company having a minimum membership of two persons and maximum fifty is known as a Private Limited Company. In
the case of a Public Limited Company, the minimum is seven and the maximum membership is unlimited.
Management
Limited Liability Companies have democratic management and control. Even though the shareholders are the owners of the
company, all of them cannot participate in the management process. The company is managed by the elected representatives
of shareholders known as Directors.
Capital
A Limited Liability Company generally raises a large amount of capital through issue of shares.
Advantages of Limited liability Companies
Limited Liability
In a Joint Stock Company the liability of its members is limited to the extent of shares held by them. This attracts a large
number of small investors to invest in the company. It helps the company to raise huge capital. Because of limited liability, a
company is also able to take larger risks.
Continuity of existence
A company is an artificial person created by law and possesses independent legal status. It is not affected by the death,
insolvency etc. of its members. Thus it has a perpetual existence.
Benefits of large scale operation
It is only the company form of organization which can provide capital for large scale operations. It results in large scale
production consequently leading to increase in efficiency and reduction in the cost of operation. It further opens the scope
for expansion.
Professional Management
Companies, because of complex nature of activities and operations and large volume of business, require professional
managers at every level of organization. And because of their financial strength they can afford to appoint such managers.
This leads to efficiency.
Social Benefit
Corporations offer employment to a large number of people. It facilitates promotion of various ancillary industries, trade and
auxiliaries to trade. Sometimes it also donates money for education, health, community service and renders help to
charitable and social institutions.
Research and Development
A company generally invests a lot of money on research and development for improved processes of production, designing
and innovating new products, improving quality of product, new ways of training its staff, etc.
Disadvantages of Limited liability Companies
Formation is not easy
The formation of a company involves compliance with a number of legal formalities under the companies Act and
compliance with several other Laws.
Control by a Group
Companies are controlled by a group of persons known as the Board of Directors. This may be due to lack of interest on the
part of the shareholders who are widely dispersed; ignorance, indifference and lack of proper and timely information. Thus,
the democratic virtues of a company do not really exist in practice.
Speculation and Manipulation
The shares of a company are purchased and sold in the stock exchanges. The value or price of a share is determined in terms
of the dividend expected and the reputation of the company. These can be manipulated.
Excessive government control
A company is expected to comply with the provisions of several Acts. Non-compliance of these invites heavy penalty. This
affects the smooth functioning of the companies.
Delay in Policy Decisions
A company has to fulfill certain procedural formalities before making a policy decision. These formalities are time
consuming and, therefore, policy decisions may be delayed.

NonProfit
Nonprofit Organizations are corporations formed for a charitable, civic, or artistic purpose. Nonprofits are generally exempt
taxation on their income, and so they are often called exempt organizations. Nonprofits have substantial responsibilities
for reporting their activities, income, and assets to ensure that they are in compliance with government laws governing
charities.
 Financial Statements
What is a financial statement? What does it tell us? Why should we care? These are good questions and they deserve an
answer.
Financial Statements are summary accounting reports prepared periodically to inform the owner, creditors, and other
interested parties as to the financial condition and operating results of the business. The purpose of financial statements is to
communicate the Groups financial information to its stakeholders, especially shareholders, investors and lenders. Financial
Statements uses the summarized data contained in the Trial Balance to prepare the businesss financial reports.
Financial Statements provide relevant financial information in a format that is useful in making important business
decisions. Each financial statement tells its own story. Together they serve many purposes. They form a comprehensive
financial picture of the company, the results of its operations, its financial condition, and the sources and uses of its money.
They also allow comparison of different companies with each other, or to evaluate different years performance within the
same company. Evaluating past performance helps managers identify successful strategies, eliminate wasteful spending and
budget appropriately for the future. It can also help a bank or creditor evaluate the company for a loan or charge account.
And the Government will be interested in collecting the appropriate amount of income tax. Armed with this information,
business managers will be able to make necessary business decisions in a timely manner.
Financial statements have generally agreed-upon formats. There are three main financial statements:
-Trading and Profit and Loss Account
-Balance Sheet
-Statement of Cash Flows
The Income Statement
At the end of a financial period, all expense and revenue accounts are closed to a summarizing account usually called an
Income Statement. This is the financial statement that summarizes revenues and expenses for a specific period of time,
usually a month or a year. This statement is also called a Profit and Loss Statement. For this reason, all income statement
accounts are considered to be temporary or nominal.
-The Profit and Loss Account reflects a Period of Time month, quarter and year. It shows financial the activity of a
business during that period and indicates any profit or loss earned.
-Revenue - the value of your goods and services which have been delivered to customers
-Expenses - costs incurred in earning these revenues.
-Net Profit - the excess of Revenue over Expenses, on the Profit and Loss Account.
-Net Loss - the excess of Expenses over Revenue, on the Income Statement.
The Balance Sheet
The statement of financial position of a business sums up its economic resources, obligations (debts and other non-current
liabilities) and owners capital at a particular point of time. It also shows how the economic resources contributed by lenders
and shareholders are used in the business.
Balance sheet items are classified as assets, liabilities, or capital, and the amount and nature of these items are shown at a
specific date in time.
-Assets Something the company owns that has value
-Liability Money the company owes to creditors
-Capital This is the portion that remains after liabilities are subtracted from assets. Capital includes profit or Loss from the
business.
-Drawings Represent assets taken out by owners of the business
The Balance sheet:
-Reflects a Moment in Time.
It indicates Assets, Liabilities and Equity of business as of a specific date.
-Shows Financial Position of Business as of specific date:
Financial Position what you have/what you owe/what your stockholders have
Have Owe = Value to Owner
-Value of Business to Owners.
Assets Liabilities = Capital
Statement of Cash Flows
The Statement of Cash Flows is the third financial statement. The Cash Flow statement shows the inflows and outflows of
Cash over a period of time, usually one year. The time period will coincide with the Income Statement. The accounts are
analyzed to determine the Sources (inflows) and Uses (outflows) of cash over a period of time The Statement of Cash Flows
removes all accruals, deferrals and other non-cash adjustments,. An Income Statement might show a Profit or a Loss, but
that says nothing about how the companys Management managed the companys money.
Cash Flow Statement:
-Reflects a Period of Time Month, Quarter, Year
-Shows cash inflows and outflows during period
-Indicates solvency of company during period

The Accounting Cycle

The Accounting Cycle is a sequence of procedures used to record, classify and summarize and processing accounting
information to generate financial statements, on a regular basis. The accounting cycle during each period starts from
recording individual transactions in the books of accounting and ends at the preparation of financial statements and closing
processes.
Steps in the Accounting Cycle
-Capture and Record business activities.
Identify and analyze transactions that need to be recorded, journalize (record) the transactions in the proper journal.
-Classify transactions into appropriate Accounts.
Post from the journals to the General Ledger and Subsidiary Ledgers.
-Prepare an unadjusted Trial Balance
Enter Trial Balance Information from General Ledger
-Make adjusting entries at the end of the period
Review accounts and other information to determine if any Adjusting Entries are necessary
-Prepare an Adjusted Trial Balance.
This is a Trial Balance after adjusting entries have been made.
-Prepare final accounts
Summarize and Report the balances of Ledger Accounts in financial statements.
-Journalize and post closingentries
Record our closing Entries in our General Journal Post our entries from our General Journal to our General Ledger.
-Prepare a Closing Trial Balance
The Accounting Cycle
 Accounting Concepts And Conventions
Accounting concepts and conventions as used in accountancy are the rules and guidelines by which the accountant lives. All
accounts and accounting statements should be created, preserved and presented according to the concepts and conventions.
-These generally accepted accounting principles are a set of rules and practices that are recognized as a general guide for
financial reporting purposes.
-Generally accepted means that these principles must have substantial authoritative support.
Accruals Concept
The Accruals concept assumes that revenue and expenses are taken account of when they occur and not when the cash is
received or paid out. The purpose of this concept is to make sure that all revenues and costs are recorded in the appropriate
statement at the appropriate time. The accrual concept under accounting assumes that revenue is realised at the time of sale
of goods or services irrespective of the fact when the cash is received. Similarly, expenses are recognised at the time of
services provided, irrespective of when cash is paid.
In brief, accrual concept requires that revenue is recognised when realized, and expenses are recognised when they become
due and payable without regard to the time of cash receipt or cash payment. Thus, when a profit statement is compiled, the
cost of goods sold relevant to those sales should be recorded accurately and in full in that statement. Costs concerning a
future period must be carried forward as a prepayment for that period and not charged in the current profit statement. For
example, payments made in advance such as the prepayment of rent would be treated in this way. Similarly, expenses paid in
arrears must, although paid after the period to that they relate, also be shown in the current periods profit statement: by
means of an accruals adjustment.
Matching concept states that the revenue and the expenses incurred to earn the revenue must belong to the same accounting
period. Therefore, the matching concept implies that all revenues earned during an accounting year, whether received/not
received during that year and all cost incurred, whether paid/not paid during the year should be taken into account while
ascertaining profit or loss for that year. It guides how the expenses should be matched with revenue for determining exact
profit or loss for a particular period.
Accruals Concept
Revenue should be recognized in the accounting period in which it is earned.
Matching Concept
Expenses should be matched with revenues in the period in which the revenues are earned. (i.e. the need for prepaid
expenses)
Significance:
-It helps in knowing actual expenses and actual income during a particular time period.
-It helps in calculating the net profit of the business.
Prudence Concept or Concept of Conservatism
It is this concept more than any other that has given rise to the idea that accountants are pessimistic boring people!!
Basically the concept says that whenever there are alternative procedures or values, the accountant will choose the one that
results in a lower profit, a lower asset value and a higher liability value. The concept is summarised by the well known phrase
anticipate no profit and provide for all possible losses.
Revenue and profits are included in the balance sheet only when they are realized (or there is reasonable certainty of
realizing them) but liabilities are included when there is a reasonable possibility of incurring them.
The Prudence Concept assumes:
-Assets should not be overvalued
-Liabilities should not be undervalued
-The financial statements does not reflect overstatement or understatement of gains or losses but neutral
-Profit or revenue only recorded when they are realized.
Consistency Concept
Because the methods employed in treating certain items within the accounting records may be varied from time to time, the
concept of consistency has come to be applied more and more rigidly. Because of these sorts of effects, it is now accepted
practice that when an entity chooses to treat items such as depreciation in a particular way in the accounts it should continue
to use that method year after year. If it is NECESSARY to change the accounting method being employed then an
explanation of the change and the effects it is having on the results must be shown as a note to the accounts being presented.
Separate Entity Concept
The business entity concept states that a business and the owner(s) are two separate Legal Entities.
Being an artificial person, a company has an existence independent of its members. It can own property, enter into contract
and conduct any lawful business in its own name. It can sue and can be sued in the court of law. A shareholder cannot be
held responsible for the acts of the company.
The best example here concerns that of the sole trader or one man business: in this situation you may have the sole trader
taking money by way of drawings: money for his own personal use. Despite it being his business and apparently his money,
there are still two aspects to the transaction: the business is giving money and the individual is receiving money. So, the
affairs of the individuals behind a business must be kept separate from the affairs of the business itself.
This concept restrains accountants from recording of owners private/ personal transactions. It also facilitates the recording
and reporting of business transactions from the business point of view.
Conclusions
These, then, are some basic concepts and conventions on which the accountant bases all of his accounting work. We can see
evidence of such work in the published annual reports and accounts that all publicly quoted companies are required to
prepare and publish. The concepts and conventions also apply to the millions of businesses world wide that do not publish
their accounts.

Accounting Processes
All accounting information historically has been done manually. In modern society we now have access to computers that
actually performs the same tasks with much improvement.
Computerised accounting systems may be obtained in modular packages or be fully integrated. Modules include Stock
control, sales order processing, purchases order processing, pay roll, fixed assets, Sales Ledger, Purchases Ledger, debtors
and creditors schedule, and general ledger. These accounting systems follow the basic rules of double entry.
Most accounting software has these common modules which can be used each by themselves or combined with other
modules in the same packages.
Accounts receivable where the business enters money receivable from activities
Accounts payable - business records and discharges its financial obligations
General ledger the companys books
Billing where the company creates invoices to customers
Stock/Inventory - the business maintains inventory management
Purchase Order Goods are order as required
Sales Order the business records customer orders for stock items they need
Cash Book the business records money collected and paid out.
 Accounting Softwares
As technology improves, software vendors have been able to offer increasingly advanced software at lower prices.
Different Types of Accounting Software Packages
There are different types of Accounting Software Packages that are designed to cater the different needs of different
businesses. Below are some of the popular and general types of accounting software.
Accounting Software for Personal Use
This kind of private software is meant for home use. The applications here are adequate and simple and are meant to meet
with all the basic accounting requirements such as, budget planner, accounting spreadsheets, diagrams, bookkeeping, etc.
Accounting Software for Small Business
These accounting softwares fulfill the accounting needs of small businesses, such as, creating invoices, financial reporting,
merging accounts and payrolls.
Accounting Software for Big Business
These expensive software allow have a large number of applications which can be that can be accessed from anywhere. These
softwares can be very complex and extremely functional.
List of Accounting Softwares
There are a wide range of accounting software for different needs. Below is a list of softwares used.
-Vision Point
-QuickBooks Pro
-Peachtree Complete Accounting
-MYOB
-Account Edge
-Dac Easy
-CYMA Accounting for Windows
-Netsuite Small Business
-Cougar Mountain
-Accpac from Sage
-Syspro 6.1
Advantages of using computers in accounting
(1) Faster and efficient in processing of information.
(2) Automatic generation of accounting documents like invoices, cheques and statement of account;
(3) With the larger reductions in the cost of hardware and software and availability of user-friendly accounting software
package, it becomes relatively cheaper;
(4) More timely information can be produced;
(5) Many types of useful reports can be generated for management to make decisions
(6) Increased accuracy of information
(7) Improved reporting and analysis
(8) Greater flexibility of use of information
(9) Internal control system of increased productivity
(10) Easy back up and restoration of records
Disadvantages of using computers in accounting
 (1) Power failure, computer viruses and hackers are the inherent problems of using computerized systems;
(2) Some accounting system may not be properly set up to meet the requirement of the business due to badly programmed or
inappropriate software or hardware or personnel problems can caused more havoc.
(3) There is the constant threat of computer fraud or computer damage due to virus. It means that appropriate types of
monitoring and control and security features need to be constantly in place.

Balance Sheet
Assets, Liabilities & Capital

Definition & Purpose of Balance Sheet

Balance Sheet Equation

Balance Sheet Headings

Arrangement of Assets and Liabilities

Effect of Transactions on the Balance Sheet

Assets, Liabilities & Capital

Assets
Assets are things that a company owns and are sometimes referred to as the resources of the company.
The properties used in the operation or investment activities of a business.
Assets include tangible and intangible items. Tangible items can be physically seen and touched such as vehicles, equipment
and buildings. Intangible items are like pieces of paper (sales invoices) representing loans to your customers where they
promise to pay you later for your services or product. Some examples of business type assets are cash, debtors, stock of
goods, land, and equipment.
Liabilities
Liabilities are obligations of the company; they are amounts the business owes to others as of the balance sheet date.
Another liability is money received in advance of actually earning the money.
Usually one of a businesss biggest liabilities is to suppliers where a business has bought goods and services and charged
them. Some examples of business liabilities are outstanding expense accounts, creditors, and mortgages.
Capital
It represents the owners rights to the property (assets) of the business. Capital is the monetary value of the part of the
business which belongs to the proprietor. In other words what the business owes the owner, that is the amount left for the
owner after all liabilities (amounts owed) have been paid.

Definition & Purpose Of Balance Sheet

The Balance Sheet is a statement of financial position of a business at a specific point in time usually at the end of the month
or year. By analyzing and reviewing this financial statement the current financial health of a business can be determined.
The Balance Sheet sums up the economic resources (assets), obligations (debts and other long-term liabilities) and the
owners Capital at a particular point of time. It also shows how the economic resources contributed by lenders and
shareholders are used in the business. This statement is called a balance sheet because at any given time, Assets must
equal Liabilities plus Capital, in other words, be in balance.
 Balance Sheet Equation
There are three main sections of a Balance Sheet: Assets, Liabilities, and Capital just like the accounting equation. The
balance sheet is derived from our accounting equation and is a formal representation of our equation.
Items are listed in the Balance Sheet just as in the accounting equation:
Assets = Liabilities + Capital

Assets are normally listed on the left hand side.

Capital is entered on the right hand side.
Liabilities are entered on the left hand side.
Preparation of the Balance Sheet
The balance sheet heading contains the name of the company, the title of the statement, and the date of the statement.
Entries in the balance sheet are made from transfers from the trial balance. A debit balance in the trial balance must be
transferred to the debit side in the balance sheet; similarly a credit balance in the trial balance must appear only on the credit
side of the Balance Sheet.
There are two basic formats for balance sheet presentation:
-The Horizontal Form
In this form the major categories are presented side by side.
-The Vertical Form
In this form the major categories are stacked on top of each other.
 Balance Sheet Headings
Fixed Assets
These are items bought in the business not for resale but to be used over a period of several years. These assets are of a long
term nature. Examples of Fixed Assets would include machinery, building and furniture.
Current Assets
These are items in the business which are used up and change daily in the normal operation of the business. These are the
revenue generating assets and they are of a temporary nature. Examples of Current assets would include stock of goods for
sale, debtors and business cash.
Liability Accounts
Liability Accounts are usually classified (put into distinct groupings, categories, or classifications) on the balance sheet.
The liability classifications and their order of appearance on the balance sheet are:
-Current Liabilities
These represent money which the business owes and is obligated to settle within one year. Examples of current liabilities
would include Creditors for goods purchases, and unpaid utility expenses
-Long Term Liabilities
These represent money which the business owes and is obligated to settle within one year. Examples of long term liabilities
would include Loan to buy motor vehicle, Mortgage.
Capital
Lets illustrate this statement with a simple equation.
Capital at End = Capital at Beginning + Additional Capital Contributed + Profit or ( Loss ) Draws
Capital is increased by money or property contributed and any profits the business earns from operation.
Capital is decreased by withdrawals made by the owner or loss by the business.
Drawings represent amounts the owner withdraws from his business for personal use.
 Arrangement Of Assets And Liabilities
Assets may be listed based on how quickly they can be converted into cash which is called the order of liquidity. In other
words, theyre ranked. The asset most easily converted into cash is listed first followed by the next easiest and so on. Of
course since cash is already cash its the first asset listed.
Assets may be listed based on the difficulty with which they can be converted into cash, called the order of permanence.
These assets are ranked in the opposite order of liquidity; they are ranked from most difficult to convert to cash, to least
difficult to convert to cash.
 Effect Of Transactions On The Balance Sheet
Every transaction affects two accounts or items. One account is always debited and the other account credited.
This means that a balance is always maintained in the records. This is also reflected in the Balance Sheet where every
transaction may affect two items, and a balance is always maintained.
Illustration of how transactions affect the balance sheet
(A)Owner puts $5,000 in the business bank account.
(B)Borrowed $ 4000 cash from E. Dennis.
(C)Bought Motor van for $459 cash
(D)Received cash of $150 from debtor V. Ryan.
(E)Bought Fixtures by cheque of $257.
 Books Of Original Entry
Uses of Books of Original Entry

Cash & Credit Transactions

Source Documents

Recording Transactions from Source Documents

General Journal

Sales Journal

Purchases Journal

Returns Inwards Journal

Returns Outwards Journal

Cashbook

Petty Cashbook

Quiz

Uses Of Books Of Original Entry

A Journal is an accounting record that is used to record the different types of transactions in chronological order or date
order. Journals are often called or referred to as the books of original entry. The reason is that this is the first place that
business transactions are formally recorded. You can think of a Journal as a Financial Diary.
Specialized Journals are journals used to initially record special types of transactions such as sales and purchases. All these
journals are designed to record special types of business transactions and post the totals accumulated in these journals to the
General Ledger periodically (usually once a month).
The General Journal
The Journal is a textual record of events (Debit and Credit) that is characterized by the fact that all the records it contains are
in a sequential chronological order. The General Journal is used to record unusual or infrequent types of transactions. Type
of entries normally made in the general journal include depreciation entries, correcting entries, and adjusting and closing
entries.
The Cash Book
The Cash Book is used to record the receipt and payment of money by the business in the form of cash, or through the
business bank account. It contains the cash and bank accounts.
Sales Journal
The Sales Journal is a special journal where Credit sales to customers are recorded. Another name for this journal is the
Sales Book or Sales Day Book.
Purchases Journal
The Purchases Journal is a special journal where Credit purchases from customers are recorded. Another name for this
journal is the Purchases Book or Purchases Day Book.
Returns Inwards Journal
The Returns Inwards Journal is a special journal that is used to record the returns from debtors and allowances of goods sold
on credit. Another name for this journal is the Sales Returns Book.
Returns Outwards Journal
The Returns Outwards Journal is a special journal that is used to record the returns to creditors and allowances of goods
purchased on credit. Another names for this journal is the Purchases Returns Book.

The Petty Cash Book

This is just a fancy name that describes a special fund that is set up and used for minor and unanticipated cash expenses
where a cheque cant be written or the amount is so small that you dont want to write a cheque. The petty cash account is
based on the Imprest System which is a system of cash disbursement, cash expenditure and reimbursement of that
expenditure.

Cash & Credit Transactions

Cheques
A Chequeis a document/instrument (usually a piece of paper) that orders a payment of money from a bank account.
Technically, a cheque is a negotiable instrument instructing a financial institution to pay a specific amount of a specific
currency from a specified transactional account held in the drawers name with that institution. Both the drawer and payee
may be natural persons or legal entities.
The person writing the cheque, the drawer, usually has a current account where their money was previously deposited. The
drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their
bank, known as the drawee, to pay that person or company the amount of money stated. Cheques are a type of bill of
exchange and were developed as a way to make payments without the need to carry large amounts of gold and silver
Credit Cards
Think of credit as borrowed money. This money is made available to you, but it must be repaid within an agreed amount of
time. Credit cards provide a line of revolving credit. Credit cards eliminate the need for carrying cash or checks. A typical
plastic card includes the customers name and a series of numbers that represent the applicable network, bank and account.
The numbers in aggregate are referred to as the account number or card number. The front also features the cards
expiration date and the issuers logo.
The back of the card has a horizontal magnetic strip and a signature box that must be signed by the card holder. The account
number and a three- to four-digit card identification number or security number are often listed as well.
Credit cards enable you to reserve a hotel room, airline tickets and concert tickets, replace lost or stolen items in person, over
the phone or through email. They offer convenience and some special perks for using them, such as travel insurance and gift
certificates. They can be used almost everywhere.
Types Of Credit Cards
Credit card products come in a wide assortment these days. Some credit card programs will ease their terms and conditions
and offer perks for people with stellar credit, such as travel insurance, concierge service and free entertainment. Other credit
card program may help a person re-establish their credit.
Not all cards are for everyone. The ability to get a credit card will depend on whether you qualify. This is determined by
whether you have a history of establishing credit and your ability to pay bills on time.
Here are the most common types of credit cards:
-Standard Credit Cards
-Reward Cards
-Secured Credit Cards
Credit Cards: Pros and Cons
Pros
-You can use them practically everywhere, especially overseas.
-They can boost your purchasing power because they can be used to buy goods and services over the phone, through the mail
and online.
-They provide financial backup in the event of an emergency, such as an unexpected healthcare cost, job loss or auto repair.
-They allow you to purchase items and pay them off in monthly installments. They offer discounts at stores and rewards. For
instance, when you make purchases using the credit card you can collect points; these points accumulate and can be used to
get free items, such as airline tickets.
-Some cards may offer cash back as an incentive to use the card.
-They can help build your credit history.
-They keep a record of your expenses, helping you to monitor your financial activities.
-They help raise your credit score, when you pay balances down by the due date. This improved credit history paves the way
for lower rates borrowing rates on other loans, including a mortgage.
-Credit cards allow you the right to dispute billing errors and defective merchandise.
-They allow you withhold payments.
Cons
-Credit cards can have their disadvantages, though, especially when theyre used in an unwise manner.
-Some consumers feel compelled to spend more money than they have.
-Consumers may continuously roll over a balance for several months.
-When you default on credit card payments, you are charged with late fees and interest, increasing your debt load.
-Carrying a large amount of credit cards also isnt too favorable in the eyes of lenders.
-Acquiring too much credit card debt can ruin your credit score.
-Studies have indicated credit card debt as a significant factor in consumer bankruptcies.
-Credit card fraud is a possibility.
Debit Cards
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial
institution. Some cards have a stored value with which a payment is made, while most relay a message to the cardholders
bank to withdraw funds from a designated account in favor of the payees designated bank account. The card can be used as
an alternative payment method to cash when making purchases
In many countries the use of debit cards has become so widespread that their volume of use has overtaken the cheque and, in
some instances, cash transactions. Like credit cards, debit cards are used widely for telephone and Internet purchases.
However, unlike credit cards, the funds paid using a debit card are transferred immediately from the bearers bank account,
instead of having the bearer pay back the money at a later date.
Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash and as a check
guarantee card. Merchants may also offer cashback facilities to customers, where a customer can withdraw cash along with
their purchase.
The widespread use of debit and check cards have revealed numerous advantages and disadvantages to the consumer and
retailer alike.
Advantages of debit cards
-A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a
debit card, allowing him/her to make plastic transactions. For example, legislation often prevents minors from taking out
debt, which includes the use of a credit card, but not online debit card transactions.
-For most transactions, a check card can be used to avoid check writing altogether. Check cards debit funds from the users
account on the spot, thereby finalizing the transaction at the time of purchase, and bypassing the requirement to pay a credit
card bill at a later date, or to write an insecure check containing the account holders personal information.
-Like credit cards, debit cards are accepted by merchants with less identification and scrutiny than personal checks, thereby
making transactions quicker and less intrusive. Unlike personal checks, merchants generally do not believe that a payment
via a debit card may be later dishonored.
-Unlike a credit card, which charges higher fees and interest rates when a cash advance is obtained, a debit card may be used
to obtain cash from an ATM or a PIN-based transaction at no extra charge, other than a foreign ATM fee.
Disadvantages of debit cards
-Use of a debit card is not usually limited to the existing funds in the account to which it is linked, most banks allow a certain
threshold over the available bank balance which can cause overdraft fees if the users transaction does not reflect available
balance.
-Many banks are now charging over-limit fees or non-sufficient funds fees based upon pre-authorizations, and even
attempted but refused transactions by the merchant (some of which may be unknown until later discovery by account
holder).
-Many merchants mistakenly believe that amounts owed can be taken from a customers account after a debit card (or
number) has been presented, without agreement as to date, payee name, amount and currency, thus causing penalty fees for
overdrafts, over-the-limit, amounts not available causing further rejections or overdrafts, and rejected transactions by some
banks.

Source Documents
Source Documents are the original sources of information that provide documentation (proof) that a transaction has
occurred such as sales invoices (tickets), invoices from suppliers, contracts, checks written and checks received , promissory
notes, and various other types of business documents. These documents provide us with the information needed to record
our financial transactions in our bookkeeping records. If you recall, a transaction is any event or condition that must be
recorded in the books of a business because of its effect on the financial condition of the business, such as buying and selling.
Source documents detail the particulars of transactions that include the date, name, address, terms, and product description
among other relevant pieces of information. Types of source documents include cash receipts, canceled checks and invoices.
Source documents may be paper-based business forms or electronic documents.
-They are used for initial input to the accounting system. The transactions they record can be entered into the first of the
accounting records the journals.
-They assist internal control of the resources of the business making sure that there is documentary evidence that a
transaction took place such as the purchase or sale of items and the receipt and payment of money (that is, it makes it more
difficult for people to misappropriate or steal cash or other items).
-They are part of the audit trail for as long as those documents are required to be kept by law or policy. Of such, they are a
part of the record keeping process.
Here is a summary of some types of sources documents and their uses:
Sales Invoice
This document is sent to request payment for monies owed, for goods that were delivered, or services that were rendered.
Features of invoice
Invoices are numbered to keep track of sent invoices
Invoice usually includes the following information:
-Name, address of seller and purchaser
-Date of sale
-Description of sale (goods or services)
-Quantity and unit price of what has been sold
-Details discount if it is provided
-Total amount of invoice plus sales tax if applicable
-Other (date of payment, terms of sale)
Purchases Invoice
This document is received in request payment for monies owed, for goods that were delivered, or services that were
rendered. It is identical to The Sales Invoice but is called a Purchases Invoice when the purchaser receives it.
Credit Note
This document is sent by a supplier to a customer to reduce the liability of the customer. In essence it is a negative invoice
that is issued when goods are returned, when there was an overpayment, or when some other event has occurred that has the
effect of reducing the amount that the customer owes to the supplier.
Debit Note
This document is sent from a customer to a supplier to request a credit note in respect to an overpayment or return of goods.

Receipt
This is a written document that confirms that money has been received as a down payment, account settlement or
installment.
Petty Cash Voucher
This Document records in numeric order the specific amounts paid out in petty cash, to whom the payments are made and
for what purpose.
 Recording Transactions From Source Documents
Journals use the information from the source documents to create a chronological listing of all business transactions and
detailed information about each transaction.
Journals are preliminary records where business transactions are first entered into the accounting system. The journal is
commonly referred to as the book of original entry. Specialized Journals-are journals used to initially record special types of
transactions such as sales and purchases in their own journal
Why Use Special Journals
-Groups and records transactions of a like nature. A familiar example is recording all cash received by a business in one
place.
-Saves time with summary and less frequent postings to the General Ledger.
-Allows a business to have different individuals responsible for different journals thereby increasing internal controls and
allocating the record keeping workload.

General Journal
The Journal is a textual record of events (Debit and Credit) that is characterized by the fact that all the records it contains are
in a sequential chronological order.
Debit and Credit
Journals can be viewed as pages of a book. Each page has lines and columns. A journal page has columns for the date,
account name, and two columns for dollar amounts, referred to as the Debit and Credit columns.
Entries are transferred (Posted) from the journal to the ledger pages on a regular basis.
When do we use Debit or Credit?
When to use a debit or credit to record a journal entry is one of the biggest problems for beginning accounting students. It
doesnt have to be difficult, if you remember a few simple rules.
All journal entries follow the rules of debit and credit. Remember the Accounting Equation?
-Increase in assets is reported on the debit side of a journal entry.
-Decrease in assets is reported on the credit side of a journal entry.
Functions of the General Journal
-Buying and selling of fixed assets on credit
2009 June 1, Bought furniture on credit from Kull dunne for $1 000.
-Return of Fixed Assets
2009 June 5, $1,000 Furniture returned to Kull Dunne.
-Transfer of Creditors
We owed Bee Bobby $500. On June 10 2009 Bee Bobbys business is taken over by Rune Crumbe who we will know owe the
$500.
-Settlement of Debt
2009 June 15 We receive machinery valued $250 from Carl reeves in settlement of his debt of $500.
-Opening Entries
On July 1 2009 V. Nemhard Opens his books of accounting to start business. At that date His records reflect:
Assets:
Premises $2 000
Fixtures and Fittings $1 000
Machinery $600
Motor Vehicle $400
Stock of goods $200
Debtors:Vanne Style $100
Pryce Goonie $60
Bank $40
Cash $50
Liabilities:
Creditors: Evelyn Dianne $250
Devlin Cole $200
Capital:
$4 000
The Above transactions are journalized by date order below.
 Sales Journal
The Sales Journal is a special journal where Credit sales from customers are recorded.
Steps in journalising Credit sales

The following credit sales transactions are Journalised below:

2009
July 3 Sold goods on credit to Yule Terry for $!00
July 10 Credit sales to jerry Hulle $200
July 20 Sold stock for credit $300 to Larry Hadman
 Purchases Journal
The Purchases Journal is a special journal where Credit purchases from suppliers are recorded.
Steps in journalising Credit Purchases
The following credit purchases transactions are Journalised below:
2009
July 5 Credit purchases from Karnot Webb $400
July 7 Goods purchased on credit $500 from Harlot Mcqueen
July 15 Bought goods on credit 4600 from Clement Rhoden.

Returns Inwards Journal

The Sales Return & Allowances Journal is a special journal that is used to record the returns and allowances of goods sold on
credit.
Steps in Journalizing Returns Inwards
The following Returns Inwards transactions are Journalised below:
2009
July 6 Goods returned from Yule Terry $ 10
July 13 Returned goods from Jerry Hulle $20
July 26 Returns Inwards from Larry Hadman $30

Returns Outwards Journal

The Purchase Returns and Allowances Journal is a special journal that is used to record the returns and allowances of
merchandise purchased on account.
Steps in journalising Rturns Outwards

The following Returns Outwards transactions are Journalised below:

2009
July 9 Goods returned to Karnot Webb $40
July 14 Returned goods to Harlot Mcqueen $50
July 31 Returns Outwards to Clement Rhoden $60
 Cashbook
The Cash Book is used to record the receipt and payment of money by the business in the form of cash, or through the
business bank account. It contains the cash and bank accounts.
Columns are set up for:
-The Date
-Details
Entries are made for the other account to enter to complete double entry
-Folio
The reference is entered for the book and page number for the other account to complete double entry
-Discount Allowed
This is an incentive for speedy settlement of credit sales. All Discount Allowed merely listed here.
-Discount Received
This is an incentive for speedy settlement of credit Purchases. All Discount Received merely listed here.
-Cash and Bank Receipts
Types of Transactions Recorded:
Cash product sales / fees
Cash collected on customer accounts
Any other receipt (source) of cash
-Cash and Bank Payments
Types of Transactions Recorded:
Cash paid for expenses
Cash payments to our suppliers on account or cash purchases
Cash purchase of supplies
Any other cash payment
The following Cash Book transactions are entered below:
2009
May 1 Balances brought forward for Cash $100 and Bank $2 000
May 2 Cash sales $250. paid directly into the bank
May 3 Bought motor van for cash $200
May 5 Cash sales $ 250
May 8 Paid rent by cheque $150
May 10 Paid wages by cheque $120
May 18 Received cheque of $90 from debtor B.Butler, Discount Allowed $10
May 19 Paid cheque $200 to creditor C. Bare. Discount Received $20
May 22 Received cheque of $50 from debtor S.Combs, Discount Allowed $5
May 24 Paid cheque $30 to creditor V. Bryan, Discount allowed $30
May 24 Withdrew cash from the bank $20 for personal use
May 28 Cash of $20 was deposited to the bank account
 Petty Cashbook
Another name that is sometimes used to refer to Petty Cash is an imprest fund. This is just a fancy name that describes a
special fund that is set up and used for minor and unanticipated cash expenses where a cheque cant be written or the
amount is so small that you dont want to write a cheque. Some examples include buying pizza for the staff, postage stamps,
minor office supplies, paper towels, and cleaning supplies. A pre-numbered voucher or ticket should be filled out and
approved for each expenditure. When the balance in the fund becomes low a check from your regular bank account should
be issued and cashed to replenish the fund and the expenses recorded in your accounting records. Surprise counts of petty
cash should occasionally be done to make sure that employees are not borrowing from this source of cash. Counting the
fund is very easy. The total amount of the tickets and the cash on hand should equal to the funds established balance.
The petty cash (actual cash and all the supporting vouchers and receipts) is normally kept in a locked drawer or box and one
individual is assigned or designated as the custodian of the fund. The custodian is responsible for all the petty cash activity.
Individuals should also be designated who have the authority to approve payments using petty cash. This could also be the
custodian of the fund.
How do you set up a Petty Cash Fund?
Determine the balance or amount of cash needed during a month to handle cash payments for such items as stamps, COD
shipments, office supplies, or any other types of payments where writing a check is not practical. This balance is referred to
as a float.
Designate an individual or petty Cashier to handle the petty cash book.
Payment is made to the Petty cashier for the amount determined to be needed (The Cash Float), who then places the funds in
a locked drawer or box. The accounting records would be to debiting Petty Cash and crediting Cash in the Cash Book.
How do you operate the Petty Cash Fund?
All petty cash disbursements are made from this fund. A book or worksheet is maintained that records all the payments
made and why and what for they were made. Your chart of accounts is used to determine what account(s) to charge the
payment to.
A pre-numbered ticket or voucher is approved, signed by the person receiving the cash, and prepared for each expenditure
made from the fund and any supporting documents such as an invoice or receipt is attached when the voucher is settled for.
The total of the cash in the fund plus the total of all the tickets and vouchers should always equal the balance established for
the fund. In other words if your petty cash fund amount is $500, the total of the tickets paid and the currency on hand
should equal $500.
Surprise counts of petty cash should occasionally be performed in order to make sure that employees are not borrowing
this cash.
How do you replenish the Petty Cash Fund when it runs out of cash?
At the end of a month or whenever the amount of currency (actual cash) in the fund becomes low a summary is prepared of
all the settled vouchers assigning the payments made to the appropriate expense or other categories (accounts) which is used
to record the debits to the expense and other accounts and the total credit to the cash account in the Cash Disbursements
Journal.
The current balance of the fund should also be checked by adding up all the currency still on hand and the total of all the
vouchers and tickets. This total should agree with the balance assigned to the fund. In other words, if the funds assigned
balance is $500 the total of all the tickets and vouches and currency should equal to $500.
A cheque is then prepared and made payable to the Petty Cash Custodian and recorded in the Cash book.
How do you increase or decrease the Float?
To increase the Petty Cash fund balance, you simply prepare a check made out to the Petty Cash Custodian for the amount of
the increase to the Petty Cash Fund. For example, if your current fund balance is $100.00 and you want to increase the Petty
Cash fund to a balance of $200.00, you would issue a check for $100.00 and record the cheque in your Cash Disbursements
Journal as a debit to your Petty Cash Account and a credit to your Cash In Bank Account.
The following Petty Cash Book transactions are entered below:
2010
November 1 Cash of $5 000 deposited to Petty Cash account from cash book
November 2 Wages of $100 paid to casual Labourer
November 3 Stamps were bought for $300.
November 5 Floor Polish bought for $50
November 6 Office Worker paid Taxi Fare to travel to special meeting
November 7 Painter paid wages for repainting wall in kitchen
November 10 Office Worker paid Bus Fare to travel to special meeting
November 12 Paper bought for general office purpose
November 19 Bought brushes $60 to clean canteen and office floors
November 21 Ink bought for office use
November 22 Paid a creditor Paul Freddy $400 out of Petty Cash
November 30 Cash of $1 700 deposited to Petty Cash account from cashbook as reimbursed of cash used throughout the
month of November Petty Cash Float balance remains $5 000
 Quiz
Question 1
On December 31, 2010, John Henry found that the debit side of his trial Balance exceeded the credit side by $492. The
difference was put to a suspense account. February 11 of 2011 the following errors were discovered in the books:
1. $165 paid for the purchase of Fixtures had been entered to Purchases account.
2. Commissions received of $112 was debited to the Commissions received account.
3. The Returns Inwards Book was overcast by $57 and the wrong amount was entered to the Returns Inwards account.
4. $ 217 cash paid to Mike Collester was debited to his account as $271.
5. $15 goods sold to Lee Gray was debited to Lee Mays account.
6. A cheque for $157 received from M. Ruddock was not entered to his account.
Required:
(a) State one purpose of the Trial Balance.
(b) Prepare the necessary Journal entries to correct the above mistakes.
(c) Enter up the Suspense Account.
(d) Identify from the above, ONE error of principle and ONE error of commission.
Solution
(a) The Trial Balance acts as a statement which arithmetically proves that proper double entry is observed in making
accounting entries. There are several errors which will not be revealed by the Trial Balance.
(b)

(c)
(d)(i) Error of Principle occurred in error # 1 where $165 paid for the purchase of Fixtures had been entered to Purchases
account.
(ii) Error of Commission occurred in error # 5 where $15 goods sold to Lee Gray was debited to Lee Mays
account.
Question 2
R. Guberman keeps a three column Cash Book. All cheques received are banked immediately. All small payments of $20 or
less are paid out of a petty cash float of $50 and recorded in a Petty Cash Book with four analysis columns: Postage,
Travelling, Sundry Expenses, and small purchases of stock.
Using the following information, you are required to:
1. Write up his Cash Book and balance it.
2. Write up the Petty Cash Book and balance it.
October 16 Balances: Bank 574
Cash 126
Petty Cash 19
17 Reimbursed petty Cash Float
17 E Winters settled his debt of $580 by cash
less 5% discount.
19 Received cheque from A. Adam 675
19 Paid for stock by cheque. 473
20 Bank charges for services. 3
21 Cash sales for the week 720
21 Purchased postage stamps 12
21 Purchased small items of stock 17
22 Banked cash 500
22 Paid for stock by cheque 650
23 Drew cheques for wages. 300
23 Paid taxi fare for errands 7.65
24 Sent R. Boone a cheque to settle a debt
of $750 , less 4% cash discount.
26 Reimbursed petty cash float
26 Paid for postage of package. 18
28 Cash sales for the week 1,275
28 Banked cash 1,553.35
30 A. Adams cheque for $675 marked
Dishonoured was returned.
31 Paid for cleaning and painting. 15
Solution
1.

2.
Question 3
The following were transactions for Green Food Enterprises for the month of June 2007.
$
September 1 Sold Goods to V. Bentley 4,500
September 6 V. Bentley returned goods to us 1,200
September 9 Bought goods on credit from M. Mickey 8,400
September 11 Sold goods on credit to C. Ryan 2,400
September 17 Credit purchases from Discount Wholesalers 3,000
September 22 Returned goods to M. Mickey 400
September 24 Bought Fixtures from Best Furnishings for use in the business 4,900
September 28 Sold goods on credit to B. Gumby 1,350
Required:
(A) Make Entries in the books of original entry (subsidiary books) for Green Food Enterprises.
(B) Post the books of original entry to the ledger at the end of the month.
Solution
(A)

(B)
 Ledgers And The Trial Balance
The Accounting Equation

Classification of Accounts

Accounts Rules for Double Entry

Asset of Stock

Expense and Revenue Accounts

Capital and Revenue Expenditure

Basic Double Entry

Balancing of Accounts

The Trial Balance

Quiz

The Accounting Equation

We have often heard the expression the books are in balance in reference to the accounting records of a business. This
relates to the use of the double-entry system of accounting, which says that every transaction will affect two accounts.
Because the monetary values are equal we say the transaction is in balance. Accounting is based on a simple rule, called the
accounting equation.
Using a two pan scale as illustration, the Accounting Equation is really:

The accounting Equation describes items owned by the business on one hand, and the financing of these items on the other
hand.
Assets are the items owned by the business and are represented on the left side of the equation.
Capital and Liabilities represent the financing activities of the business and are represented on the right side of the equation
Assets may include land and buildings, machinery, motor vehicles, fixtures, cash on hand and money in the bank, as well as
debts owed by customers.
Liabilities represent money owed by the business due to borrowings and credit arrangements including amounts owed by
the business for goods and services supplied and unpaid expenses incurred by the business.
Capital is the amount of resources supplied by the owner. This includes investments by the owner as well as retained profits
from ongoing business operations.
The accounting equation uses simple math and involves only addition and subtraction.
Regardless of the number of transactions, the Accounting Equation will always balance. The respective values of assets,
capital and liabilities may change but total assets will always be equal to the total of capital and liabilities. This is because:
Assets = Capital and Liabilities
any item owned by the business must come from some source of financing
Types of Ledgers
Accounting entries are made in books called Ledgers. Most businesses use the following ledgers:
-Sales Ledger: This book contains the personal accounts for customers or debtors.
-Purchases Ledger : This book contains the personal accounts for suppliers or creditors.
-General Ledger: The remaining double-entry accounts such as those related to capital, fixed assets, expenses and revenues (
except for cash account and bank account ) are entered in the general ledger.

Classification Of Accounts
All accounts may be grouped in two broad categories or classifications. These are personal and impersonal.
Personal Accounts: These are the accounts that have the names of debtors (customers) or creditors (suppliers). They are
therefore personal to this extent.
Impersonal Accounts: These non-personal accounts may be divided into Real Accounts and Nominal Accounts.
-Real Accounts - These accounts are tangible in nature and represent accounts that records possession such as machinery,
furniture, premises and stock.
-Nominal Accounts These accounts are intangible in nature and represent accounts that in which expenses, revenues and
capital are recorded.
CLASSIFICATION OF ACCOUNTS

Rules of Entry for general Accounts

An account is divided into two sides, a left side called the debit side and a right side called the credit side. The title of the
account is written in the center at the top of each

ccounts Rules For Double Entry

-When increasing an asset account we make a debit entry.
-When decreasing an asset account we make a credit entry.
-When increasing a capital/liability account we make a credit entry.
-When decreasing a capital/liability account we make a debit entry.
Illustration of basic accounting entries
2009
June 1 Owner started business ToyWare with $5,000 cash in hand.
June 5 The business borrowed $10,000 cash from C.Wuggot.
 Asset Of Stock
Stock refers to all items that a business normally engages in buying or selling to make a profit. Stock is an asset because it
represents goods owned by the business .In accounting certain terms have specific or restricted meaning but these terms
may have a different meaning outside the context of accounting. In Accounting the term Purchases refers to buying of stock
only. Sales refer to selling of stock only. There are items which may occasionally be bought and sold by a business which are
not stock. These items are fixed assets which are bought not for resale but to be used in the business for a long time.
Goods may be bought and sold for cash or on a credit basis. When goods are sold on credit the customer becomes indebted
to the business and is called debtors. Debtors are a form of asset and represents customers who owe the business money
usually for items sold on credit. When goods are bought on credit the business becomes indebted to the supplier and is called
creditors. Creditors are a form of liability and represents suppliers to whom the business owes money usually for items
bought on credit.
There are four basic movements of stock, two representing increases in the asset of stock and two representing decreases in
stock; Each movement requiring its own accounting entry. These movements are:

Increase of Stock
-Purchases of stock: The Purchase Account will be debited because purchases represent increases in the asset of stock.
-Returns Inwards of stock: Returns Inwards represent goods returned to the business by customers. These goods were
previously sold so they are also referred to as sales returns. The asset of stock will increase by the goods returned in,
therefore the Returns Inwards (or Sales Returns) Account will be debited. Goods are sometimes returned due to excess
amount received by customers, wrong type, damaged goods, or inferior quality.
Decrease of Stock
-Sale of stock: The Sales Account will be credited because sales represent decrease in the asset of stock due to the leaving
of stock.
-Returns Outwards of stock: Returns Outwards represent goods returned out to suppliers by the business. These goods
were previously purchased so they are also referred to as purchases returns. The asset of stock will decrease by the goods
returned out, therefore the Returns Outwards (or Purchases Returns) Account will be credited.

Expense And Revenue Accounts

Expenses
These represent the daily cost to keep the business in effective operation. Expenses would include light , water bills,
telephone charges, wages and salaries, cleaning, transportation, stationery used, and insurance. All expense accounts are
debited.
Revenues
Revenues represent the monetary value of goods and services that have been delivered to customers. Revenues would
include rent received, commissioned received and discount received. All revenue accounts are credited.
Profit
Profit is the excess of revenues over expenses for an accounting period. It is represented by revenues minus expenses for
the accounting period. Profits will have an increasing effect on increase capital.
Loss
Loss is the excess of expenses over revenues for an accounting period. Loss will decrease capital.
Drawings
Drawings represent the monetary of any asset which the owner takes out of the business for his personal and private use.
The drawings account is debited.

Capital And Revenue Expenditure

Capital Expenditure is directly related to fixed assets in that it is incurred when money is spent by a business to either:
-Buy a fixed asset, or
-Increase the value of a fixed asset in existence.
Revenue Expenditure is not directly related to acquiring fixed assets, but relates to the everyday cost to operate a
business. Revenue expenditure is chargeable to the Trading and Profit and Loss Account as an expense, while capital
expenditure will reflect increase value for fixed assets in the balance sheet. If the two classification are done incorrectly then
the error will affect reported profit, and the closing capital and value of assets in the balance sheet.

Basic Double Entry

2010
May 1 Owner started business Gummy Sweets with $5 000 cash in hand.
May 3 The business borrowed $10 000 from C. Wuggot which was put to the bank account.
May 4 Bought goods on credit for $400 from M. Dyall.
May 6 Goods returned to M. Dyall $50.
May 11 Rent Received by cheque $200
May 14 Paid wages by cheque $30
May 16 Owner took $ 250 cash from business for personal use
May 19 Sold goods on credit to H. Hannis for $200.
May 23 Goods returned from H. Hannis $20.
May 26 Paid M. Dyall $150 by cheque.
Posting Entries to the General and Subsidiary Ledgers
 Balancing Of Accounts
The respective accounts for most businesses are closed off at the last day of each month and reopened for the first day of the
following month. The steps by which this is done is referred to as balancing off the accounts. An account balance is the
difference between the totals on the debit side, and the totals on the credit side of the account of the same account. The
account balance always belongs to the greater side.
The account balance is entered on the lesser side at the end of the month as a balance carried down. This may be written as
balance c/d. When the account is reopened the first day of the following month the same balance is entered on the opposite
side as a balance brought down. This may be written as balance b/d.
If the debit side exceeds the credit side, the account is said to have a debit balance. If the credit side exceeds the debit side,
the account is said to have a credit balance.
 The Trial Balance
The double entry system of accounting states that every transaction will affect two accounts. If the first account is debited
then the second one will be credited or vice versa. It means that every value that is placed on the debit side of a first account
must be placed on the opposite credit side of a second account.
To ensure that a proper matching credit entry for every debit entry is being observed a Trial Balance is prepared. A trial
Balance is said to be a statement of arithmetic proof to ensure that proper double entry is being done. This statement is
made of a list of account balances arranged according to whether they are debit balances or credit balances.
Steps to Trial Balance Entry
-The accounts should first be entered.
-The accounts should secondly be balanced off.
-The accounts balances should be entered in the Trial Balance on the same side as the balance b/d in the accounts.
-Total both debit and credit columns.
If the totals of both columns are not equal then it means that there may be one or more accounting errors. If both column
totals are in agreement then it is assumed that proper double entry was observed.
The Uses and limitations of the Trial Balance
-The Trial Balance assists in detecting accounting errors
-It provides closing balance figures for accounts to enter for Final Accounts
-It provides a summary of relevant accounts to assist management in making decisions.
The trial Balance will only detect some types of accounting errors. There are roughly seven errors which will not be revealed
by the trial balance. These errors will be looked at separately a little later.
Question
Garvey had the following transactions for the month of January 2007.
2007 $
January 1 Started business with cash 50,000.
January 1 Paid cash for rent 500
January 2 Paid cash for fixtures. 5,000
January 3 Purchased on credit goods from
E. John. 475
January 5 Cash Purchases 1599
January 13 Cash sales 300
January 18 Sold goods on credit to A. Goodman 742
January 27 Received cash from A. Goodman 500
January 31 Stock of goods sold for cash 520
Required:
(A)Record and balance transactions in the relevant accounts including a cash account in the ledger of A. Garvey.
(B)Extract a Trial Balance.
Solution