Basic Mathematics Form Three Notes – Accounts

These Form Three Basic Mathematics notes cover relations, functions, statistics, rates, variations, sequences and series, circles, the earth as a sphere and accounts.

Topic: Accounts

Double Entry

The Meaning of Double Entry

Explain she meaning of double entry Businesses need to keep records of their transactions. ‘The process of keeping record is called bookkeeping. The simplest form of bookkeeping is single entry. Every transaetion is recorded once. This is unreliable bocouse:

an arithmetic mistake is made, itis very dificult to find and correet it
Ma transaction is omitted, itis difficult to find it

Now, # more reliable method of bookkeeping is double entry

Different Types of Ledger

Explain diferent types of ledger Businesses record their accounts in books called ledgers. A ledger is a main book that contains various accounts, There are three main ledgers +The sales ledger

The purchases ledger

+The general ledger The sales ledger: Is the ledger that records the accounts of debtors. The ledger is also known as the debrors’ ledger. A debior is 2 person who owes money to the business, that is 2 person to whom the business sold goods on credit. So when the business has a new customer, it will open an account in the sales ledger for that customer.

The purchases ledger: Is the ledger that records the accounts of creditors, This ledger is also known as the creditors” ledger. 4 crediter isa person whom the business owes money, tht i a <The general ledger. Is a ledger that records all accounts other than debtors’ and creditors’ accountants. Examples of accounts recorded all accounts other than debtors’ and creditors’ accounts are fixed assets and expense ledger. It is recorded on the left as debit (DR), and on the right as eredit (CR), Every transaction

involves the giving and receiving of a benefit.

A Ledger

Suppose that a company takes 50,000/- from the bank to pay wages.

‘The bank account gives the benefit, and so is credited 50,000/-
The wages account receives the benefit, and so is debited 50,000/-
ABC Limited has given the benefit, and so is credited 100,000/-
The fixed assets aecount has received the benefit, and so is debited 100,000/-

When transactions are writen in a ledger, they are said 0 be posted to the ledger Posting Entries in the Ledger Post entries in the ledger

Example 1

The transactions shown in the table below belong to XYZ Traders; Post them to the relevant ledgers June 1: Started business with capital 50,000 June 2: Bought furniture for cash 10,000 June 4: Purchased goods for cash 2.000 June 5: Bought goods from John on credit 4,000 June 5: Sold goods for cash 3,000 June 6: Paid rent 500 June 7. Sold goods to Pwagu on credit 5.000 June 8: Bought goods fiom Masatu on credit 6.000 June 9: Paid electricity bill in cash 1,000

June 10: Sold goods to Alvoce on credit 8,000 June 11: Received cash from Pwagu, 2,000 June 12: Withdrew cash for personal use 7,000 June 15: Paid cash to Masatu 3,000

Solution

In the frst transaction, money is taken from the capital account and placed cash account. Hence the capital account is credited and he cash account is debited. In the* Particular’ column, write the other account invotved in the transaction, In the second transaction, furmiture is bought for cash. So the cash account is credited and the furniture account is debited Pwagu and Aloyce are customers, so they each have aecounts in the sales ledger, John and

Masatu are suppliers, so they each have accounts in the purchases ledger. Other items are capital, eash, furniture, purchases, sales, rent, electricity and drawing, They all have accounts in the general ledger

GENERAL LEDGER

Capital account

[DR — CR CCCCC_Cid

Date Particular Folio Amount Date Particular Folio Amount

CT Tone Casa TT 50,000}

Cash account [Ri id Date [Particular [Folio [Amouat [Date Particular [Ameuat Tusei [Capital [ 30,000 Foruituce 10,000 [Sune 5 [Sales [3.000 [une 4 [Purchases [2,000 [June 11 [Pwagu [2.000 [June [Rent [S00 fo une’ PBtectnesty [1-000 [une 12 [Drawings [17.000 (ne 15 Masan [73.000 Furniture account POR [Date [Particular Folio Amount Date Particular Folio Amount a a Purchases account a Date Folio__ Amount [Date mount Tuned 2,000 [

June 5__ John _ [4,000 Tune 8 Masata 6,000 Sales account DR Daie__ [eaaient, [hate __ Bantseaias: oie [Amos Cc June 3 Cash [3.000 l [ane 10 Atoyes [8,000 ‘Rent account (pr (Date [Particular [Folio [Amount [Date Particular [Folio [Amount June6 [Cash [soo Electricity account

DR TTS a

[Date —[Paricular [Folio [Amount [Date Particular Folie [Amouat a Drawing accouat [BR ee [Date —[ Paricular [Folio [Amount [Date —[ Particular Foto —[Amouat [Bune12 [Cash [Tong

PURCHASES LEDGER

ee _— CR a Dato [Paria [Folio — [Amount Date — Particular Foto —[ Amount ne SY Preises [2000 Naan ct a [Date —[Pardewlar Folio —[Amowat Date —[Partewlar [Folio [Amount Sales ger on [px a a (dune 7—[Sales —15,000—[June iT [Cash 12000] aca RR [Date —[Partcular [Folio —[ Amowat [Date —[ Particular] Fotio [Amount [Bune 10 [Sates [8.000 TT Note: Check that for each transaction there are two equal entries, one for debit and one for credit,

June 11: Received cash from Pwagu, 2,000 -Pwagu’s account is credited 2,000 The cash account is debited 2,000 ‘This is what is meant by double entry

Closing the Simple Accounts

Close the simple accounts Closing the accounts is the process of balancing the accounts. This invalves determining the totals of the debits and credits, and finding the difference between the two sides. The difference is the balancing figure, which is placed in the side that is less. This makes the two sides equal

Example2

‘Consider the following a¢count from Example 1. Close this account. Cash account DE : x Date [Particular Folio [Amount Date Particular Folio Amount Jone} [Copia __—{'50,000_ Jane 2__ Fumiture 10,000 _ June 5 [Sales 3,000 [June Pucebases 2,000 [uae 1 [Pwago [2,000 [June 6 [Rent [500 une’ [Electricity [1.000 une 12 [Drawings [ 7.000_ (ne 15 Masai [3,000]

Solution

This account is closed as follows: ‘The total debit is 55,000/- The total credit is 23.500/- The difference is 31, 500 The c1edit side is less by 31, 500/-. Place this amount in the credit side using the words” balance cid’ (Cid means castied down) in the ‘Partculas’ and ‘Folio’ columns. This is shown in the following table.

Cash account

[DRO eR

[Date [Particular [Folio [Amount Date Particular Folio [fone 1 [Capital [50.000 [June2[Furmituce [ 10.000 [Zunes [Sates [ 3,000 June 4 Purchases 2,000 June 11 [Pwagu [ 2.000 [June 6 [Rent TT 500 Pp ne teary [000 [ 7,000 Sune 50 Balance Ted 131,500

a 5K A EC

Talp Balance [oe 31,500 ] 1 i a i a ei i a Wan other sds ofthe ede LE ae Glee of tts tes you Brn wit einen kept in each ledger 2:For och of te Flowing tanto ni th a soul be pat tnd water would bea craft dei

alorry bought for cash
podssoldto Me Sobaye fx cash

Post Foe eaions fr MEN andes te adenine hare i After June 1: Commenced business with 30,000/- June? Bought furniture 5.000 June 2: Purchased goods for cash 8,000 June 3 Bought motor vehicle 10,000/- June 5: Bought goods from Mambo on credit 15,000/- June 7. Sold goods for cash 40,000/- June & Paid rent in cash 2,000/- Tune 10: Sold goods for cash 13,0001.

June 11, Bought goods for cash 10,000. June 13° Paid insurance in cash 4,000/- June 14: Sold goods on eredit to Abu 20,000- June 15° Paid cash to Mambo 5,000/- Tune 20: Sold goods for cash 32,000/- Jane 21- Paid salaries in cash 15,000/- June 25. Received cash fiom Abu 8,000

Trial Balance

‘The Concept of Trial Balance Explain she concept of tial balance Trial balance isa statement which shows the balances of accounts extracted from the ledger. At the end of each trading period, the aecounis in the ledger are closed, that is the balance of each account is determined, These balances are then shown in the tral balance.

Below is the format ofa tral balance ‘TRIAL BALANCE as at 30 June 2005 Accounts with debit balances are posted in the DR column and those with credit balances in the CR column,

Functions of wial batance

The trial balance serves the following two major roles: amounts to debi wa rein, Therefore the tial balance ie expected to balance ifthe witha was conect IT there ia diference inthe totals of te debit and credit columns f the al inal ia atk i ei ‘extracted from the ledgers. This makes it easy to post the accounts to the final accounts.

Construction of Trial Balance

Look gain at Example tof XYZ Traders. The acsouns, fer being closed apetr a follows Capital account x [Date [Particular [Folio Amount [Date Particular Folio [Amount [June 30 [Balance id 30,000 [ume T [Cash [50.000 Tuly 1 Balance 30,000 Cash account oR [Date [Particular Folio [Amount Date Particular Folio Amount fuse [Gepaal [30.000 [use Forutuce [ 10000 [ase > Sales [3,000 [une Pachses [2,000] Tune Tt Pwagu [2,000 [Sune [Rem [500

ee 9 eg 900—] — Tune 12[Deawings [ 7,000] — Tane 15_ Manats .000 [tune 30 [Balance [eid 31,500 [5 p00 F800] July [Balance [od [3500 [TT Purchases account a [Bae — [Paria Fas —[Amoua {ste —[ PaetrFao [Amount [use T [Cask [ 2,000 [June 30 Bales [ed [12,000 [ese 3 [oka ——[ [000 [ua 8 —[Masats— [F000 J July 1 12,000 Sales accouat Dato Faricalar Folia —[hamoaat Date —[ Paricalar Fos —[Anzoant use 37 Wales [ed 16,000 [June [cask 13.000]

pen 7a [3.00 — a 1 aes [000 i ico [uty TT Balance [bid 116,000 SS Date — Paricaar [Folio —[Amowat Date —[ Particular [ Folio Aecoua Tune [ash S00— [Fe 30 Balance Ped 1500] [ a0 cm Tap — Bates — [wa — [200 Bley scount Re [Date —[Paricaiar [Fotis [Amount Date —[Partcuia Folio [Recount [use [Cash 1000 [une 30 [Balance [ed [1.000 — 1 a 0 (aie Batanee — Pa — P4900 NB. The balance bd deterrines whether he occout hus. adit or credit belance

nae Construct th tal balance for XYZ Traders of Example 1 m XYZ TRADERS TRIAL BALANCE as at 30 June 2005 DR cR = sa (T5000 73,600 Furniture 35,000 Motor vehicle 45,000 Sales 75,000 Purchases 44,000 Tnsurance 13,000 Cash 1,000

Discount Received 7,000

Discount allowed 4,000 e Debit Balances and Credit Balances.

DEBIT BALANCES

Cash account [oR Date [ Parteaar Folio [Amount Parieular [Foi [ Amount Tose 1[ Capit [150,000 fone Furmnre [110,000 [uses—[ Sales [3.000 —[ June Purehases_ 2,000] [ase 11_[Pwagu [2.000 —[ fone 6 [Rene [ 300] Pe ne 9 see T000—] Fite 1 Drags 7.000—] (Fie 15 Mist 3,000] Fi 30 ite — et [51,500] —> 350 33000 Fuly 1 Balance bid 31,500 Furniture account [oR [Date —[Partcular [Folio —[ Amount Date —[ Particular Folio [Amount

[use [Can [ 10.000 To.000, (uly 1 TBalance [od [10,000 TT Parchasesaccouat pe [Date [Partizular [Folio [Amowat Date] [use ¢ [Cask [2,000 [Jone 0 Balance [od 112,000 [ane 3 [ola [000 [Gua 8 —[Masats—[ 6000 J 6X a Tae — Banee [ad P15 00 J}

CREDIT BALANCES

ra pp a —

Date Particular Folio [Amount Date Particular Folio

[June 30 Balance [ed [4,000 June’S Pucbases _ 4,000 ee a ee el ee re ies re [5,900 } [Date [Particular [Folio Amount Date Particular [Folio [Amount Tone 15] Cash 3,000" [June © Parchases Te.000 Tine 30 Balance [ead [3,000 fT _ {sue tae 500 ee Sales account DR cR [Date Particular Folio [Amount Date Partiewlar Folio Amount [ace 30 [Balance [ed [16,000 [Tone [ Cas [ [3,000 a a a CS (Fie 10 Avoce [8.000] a 0 1 (Tati TT alance [ord 16,000

Checking the Balances

Check the balances Check the balances

Trading Profit and Loss

Gross Profit/Loss using Trading Account

The trading and profil and loss AIC sam account that is composed of two aosounty thn trading, AUC, and the profit and loss A/C The trading A/C is used to determine the gross profit of the goods sold: Gross profit = sales ~ cost of goods sold The profit and loss account (A/C) is the part of the account that determines the net profit oss Net profit = gross profit — expenses Net loss = expenses — gross profit In the profit and loss A/C, the gross profit and other revenues are credited to the account

while the operating expenses are debited. -We have net profit if the credit is greater than the debit and net loss if the debit is greater than the credit.

Example 4

‘The following is the trial balance of FMHN Trading Co. as at 31 December 2004. Prepare the trading and profit and loss accounts for the year 2004.

FMHN TRADING CO.

TRIAL BALANCE as at 31 December 2004

Account DR R

Capital 41,500 Machines 4550 Motor vehicle 5,520 Stock 24/970 Debtors 20,960 Creditors 16275 Cosh 758 Purchases 71, 630 Sales 90,370 Salaries 8417 Office expenses 1370 Discount allowed 563 Drawings 9,500 (8 235 T8235 The following information was available at 31 December 2004: (@ stock at 31 December 2004: 27. 340/- Gi) office expenses owing no’.

Git) Depreciation to be charged as motor vehicle 20% and machines 10%.

Solution

First, adjust the trial belance to include the three items above (@ Add the stock and the purchases, to obtain 96,600. Subiract the stock at the end of the period to obtain 69,260 This gives the cost of the stock sold (ji) Add 110 to the office expenses account, increasing it to 1,480 Gis) Motor: 20% of 5,520 is1 104 Machines. 10% of 4,550 is 455.

Include these under depreciation Set out the account as shown below The gross profit of 21,110 is found to be subsracting the cost of the stock (69, 260) from the sales 60.370), The net profit of 9,091 is found by subtracting the costs of the firm (salaries, office expenses, discount, and depreciation from the gross profit

FMHN TRADING CO.

TRADING AND PROFIT AND LOSS A/C For the year ending 31"December 2004 Opening stock 24.970 Purchases 71.630 Sales 90,370 Goods available for sale 96,500

Less: Closingstock 27.340

Cost of goods sold 69,260 Gross profit o/d 21110 90,370 90370 Salaries 8417 Gross profit b/é 21.110 Office expense 1.370 Add: Owing 110 1.480 Discount allowed 563 Depreciation: Motor vehicle 1,104 ‘Machines 455 Net profit 9.091 2110 21.110

Net Profit/Loss Account

Asceriain net profivtoss account When net loss is recorded, the profit and loss A/C appears as shown in the following example.

PROFIT AND LOSS AJC

For the year ending [Salaries 1300 [Gross promeb@ 12,500 Electricity 3400 Discountreceived 1,500 Rent 800 Advertising 2,700 Discouat allowed 4000 Netloss 4,000 Office expenses 5,600 18,000 1s.900 1 Explain the function of trading A/C.

The following is the trial balance of KOKU Traders as at 30% June 1990.

es 6 ):3 cR Capital Land and Buildings 10,000 35,148 ‘Advertisement 254 Motor van 1854 Furniture and Equipment 2.200 Debtors 9772 Creditors 16,810 Cash at hand 7588 Cosh in hand 704 Stock 1* July 24, 050 Insurance 384 Bad debts 2 Sales 147,668 Purchases 136970 Postage & Telephone a4 Electriesty 384 Wages 5674 300,226 200,226 m You are farther informed that: ‘Wages unpaid at the end of the month amounted to 200/- Stock at 30" June 1990 was 21.575/-

-Depreciations arc to be charged as: ‘Motor van 2.500/- Furniture & equipment 800/~ Prepare the trading and profit and loss A/C for the year ending 30* June 1990.

Balance Sheet

A Balance Sheet

Construct a balance sheet A\ balance sheet is a statement which shows the financial position of a business at a particular date It shows the assets on one side and abilities on the other Assots are divided into two: fixed assets and eurrent assets.

-Fixed assets are possessions of the business that assist the business in its operations, and benefit the business for more than one accounting period. Current assets are assets of the business used in generating income during the accounting period Liabilities ore also grouped into two: Long term liabilities, which are payable in more than one accounting period and current liabilities, which are payable within the accounting period

The following is the format of balance sheet showing the common items of the balance sheet.

XYZ TRADERS

BALANCE SHEET as at 31° December 2004

LONG TERM LIABILITIES FIXED

Capital 2% Motor vehicle xxx Add: Net profit. xx Less: Depreciation xz xk Less: Drawings xxx rou Furniture 2x Less: Depreciation xx xx Loan soo

(CURRENT LIABILITIES CURRENT ASSETS

Creditors ea Stock = (Owing expenses 2% Debtors 2 ose Prepaid so Bank =x Cash sox NB: Net loss is subtracted from the capital. Stock appearing on the balance sheet is the stock at the date of the balance sheet.

Posting Entries in Balance Sheets

Post eniries in balance sheets

Example S

Considering FMHN Trading Co. from above example, the balance sheet will be as

FMHN TRADING CO.

BALANCE SHEET as at 31* December 2004

LONG TERM LIABILITIES FIXED ASSESTS

Capital 44390 Machines 4.350 Add: Net profit 9,091 Less: Depreciation 455. 4,095 50,681 Less: Drawings 9500 41,161 Motorvehicle. 5,520 Less: depreciation 1,104 4416

(CURRENT LIABILITIES CURRENT ASSETS

‘Creditors 16.275 Stock 27,340

Office expenses owing = 110 Debtors 20,960

37.566 Cash BS

37.366 Generally, from the balance sheet, we gt the equation: Assets ~ Capital + Liabilities ‘This equation is called “The balance sheet equation” Interpreting Information fiom the Balance Sheet Interpret information from the balance sheet From the balance sheet, useful information concerning the business can be extracted. The interpretation then depends on the use ofthe information, The following ate some of the useful information provided by the balance sheet.

Capitak: ~ The capital available at the data of the balance cheet is shown after adjusting the

previous capital

Working capital: Working capital or circulating capita is given by

Current assets ~ curent liabilities

Liquidity ratio: The ratio measures the ability of the business to repay current liabilities

‘out of the cocent assets, The ratio ean be shown in two ways: arco acta ae Current liabilities: @ Quiae= Current liabilities.

Capital at 31* December 2004 is 41. 181/-
Working capital is given by:

= 32, 670/-

Geenent too Current liabilities

=O 2989

Qoeems = Current liabilities ~ 16385 Note: The liquidity ratio is favorable if it is greater than or equal to 1 Creditors 4,300 Premises 16,000

From the balance sheet constructed in question 2, determine the following

Summary

Jn double entry bookkeeping, every transaction i recorded twice, once as credit and once as debit Debit raceives the benefit. Credit provides the Bena -A rial balance finds the totals ofthe debits and eredits in al the accounts. The total debit should equal the toral credit. If they are not equal, a mistake has been made -The wading and profit and loss account determines there total profit or loss over a period.

“The balance sheer shows tho financial position of business at @ particular dato

Explainan advantage of double entry bookkeeping over single entry bookkeeping.

2, Givethree accounts that would be kept in the general ledger.

Define the quick liquidity rato,
Xis acustomer of company POR. Below are the transaction made by X over a month

Nov 34 Sold 34,000)- of goods to X on credits Nov st Sold 27,000/- – of goods to X on credit Nov 10" Received 35.000/– cash from X Nov 14t Sold 29,000/- – of goods to X on credit Nov 20% Sold 44,000/– of goods to X on credit Nov 258 Received 74,000/– cash from X

Post these transaction to X's account, the cash eccount anid the sales account
Close X’S account
The following table shows the closing balances of company PQR of question 4

[Account DR RT

[Capital 100,099 [Cash 98000 [Purchases [254,00 [Sates 179,909 [Supplier A 8.009 [SupphiesB Pf 102.000 [Customer 5.000 [Customer ¥ [12.009 6, Below is.a trial balance for Nyati Ltd. The closing stock was 1, 750,000/-, and the van was depreciated at 25%, Set up the trading and profit and loss aecount