Session 20

Introduction to Accounting Part II

1

Accounting Records

Accounting records are any listings or book which records the transactions of a business in a logical manner.

Source documents are part of the business accounting records, but the information contained in them needs to be more clearly laid out by the use of the books of prime entry.

3

The route by which the transactions are recorded in the final output of the accounting system is as follows:

4

This is concerned with the collection of data relating to the transactions affecting the accounting entity

Transactions are reflected in documents like sales invoices, purchases invoices, receipts, bills, which provides the data required for accounting purposes

Analysis of transactions

A process concerned with determining the effect of each transaction on the business entity.

Transaction analysis determines the account to be debited and account to be credited.

5

Used to record the transactions before posting to the ledgers in form of a journal in terms of debit and credit

The ledger accounts

Transactions entered in the journal/day books are posted or transferred to the ledger.

While a journal is written each day, the ledger posting may be done less frequently, for example once per week

6

A trial a balance is a listing of ledger accounts, along with their net debit or credit balances.

It is prepared usually on monthly basis

It is used to portray the equality of debits and credits of the transactions.

Passing adjustments

At the end of accounting period, which is normally a period of twelve months after a trial balance has been prepared, several adjusting entries need to be made

7

Definition

Books of origin entry are books used to record all transactions on daily basis and in chronological order prior to posting to their relevant accounts in the ledgers.

Book of original entry is used specifically to record the details relating to different types of the business transaction.

8

Sales day book

The book of original entry for credit sales. All credit sales on a daily basis are listed and their totals are summed

The total is then posted as a single entry to the sales ledger, and also posted to a sales control account in a single total to tally with the corresponding sales ledger

9

A book of original entry used to record all details and amounts of all goods purchased on credit

As each credit purchase is recorded, the personal account of the credit suppliers in the ledger is credited

At the end of the month or other posting period, the total is ascertained and posted to the purchase account in the ledger. This is done to record the credit purchases in the ledger and also to complete the double entry.

10

A list of all returns of goods made to credit suppliers

A debit note is issued to the supplier stating the amount of allowance to which the firm returning the goods is entitled

Sales return book/returns inward

When a credit customer returns goods previously sold to him/her due to whatever reason, a credit note is issued in favour of that customer reducing the debt due from him/her

It is called credit note because the customer’s account will be credited with the amount of returns, thus reducing owing by him.

11

Do not conform to the order

Wrong specification delivered

Defective goods

Obsolete/outdated goods or wrong quality

12

Cash book is a book of original entry.

The first record of cash received or paid is made in this book.

The cash book also contains the account of the cash and bank transactions.

The entry made in the cash is one half of the double entry record, the other half of the corresponding entry is made in the concerned accounts.

Instead of maintaining two books, one for cash and another for bank account, both these amounts can be maintained in the cash book which is much more convenience to ascertain the amount of cash in hand and in the bank.

Therefore, the cash book is known as a two-column cash book

13

Book of original entry is used to record cash transactions of small and repetitive nature.

Examples of payments that are considered small and repetitive include the following: postage, telephone expenses, stationery, fax, transport expenses, electricity, tea and coffee, newspapers and magazines.

If all of these transactions (expenses) are recorded in the cash book, it will be very cumbersome and tedious.

Petty cash transactions can conveniently be recorded in the petty cash book

14

Equality of debit and credit

Every business transaction affects two sides

One is called debit and other is called credit in the double entry system

Equal debit and credit entries are made for every transaction

Classification of accounts

An account is a record of transactions of a particular type or with a particular person usually expressed in financial terms and maintained in the ledger

15

Personal accounts

Impersonal accounts

Real accounts

Nominal accounts

16

Such accounts are relating to transactions with persons

The transaction may be concerning the amount received or receivable, paid or payable to any person like: Kibaigwa health centre,. Omari, Morogoro Polyester Co, Limited, Capital account, Debtors and Creditors accounts.

17

The accounts which do not contain the name of any person or business are called impersonal accounts and are divided into real and nominal accounts

Real accounts

These are the accounts of assets

Things of value owned by the business which are expected to benefit future operations of the business are known as assets e.g. land, building, office furniture, stock of medicines

The balance of the real accounts is carried forward into a succeeding accounting year

Nominal accounts

Accounts relating to gains or losses and expenses such as the accounts of salaries, rent, interest, discount allowed, electricity expense, commission received or dividend received

The balances of such accounts are transferred to the income and expenditure account at the end of the accounting period

18

There are three cardinal rules of double entry system of bookkeeping

Rule of personal accounts: Debit the receiver, and credit the supplier

Rule of real accounts: Debit what comes in and credit what goes out

Rule of nominal accounts: Debit losses and expenses and credit gains and income

Alternatively, rules of double entry can be well understood by the following

Increases in assets are recorded by debits and decreases in assets are recorded by credits

Decreases in liabilities and owner’s equity (capital) are recorded by debit

Increases in liabilities and owner’s equity (capital) are recorded by credits

Expenses and losses are recorded by debits and Revenue and Income are recorded by credits

19

20

Preparation of financial statements

After adjusting entries are made in the journal and posted to the ledger, then; an adjusted trial balance is extracted to prepare financial statements.

The preparation of various financial statements involves

Income statement

Balance sheet

Cash flow statement

Statement of Changes in owners’ equity

Notices to the accounts

Accounting records are books which record the transactions of a business in a logical manner.

Categories of accounts are personal accounts, impersonal accounts, real accounts and nominal accounts.

Books of original entry are accounting books that are used to record all transactions on daily basis and in chronological order.

21

What is a cash book?

What is petty cash book?

What are the books of original entry?

What are the fundamental rules of accounting and double entry?

22