Business transactions are recorded on source documents.

Examples include sales and purchase orders,

invoices and credit notes.

Quotation:
A document sent to a customer by a company stating the fixed price that would be charged to produce or
deliver goods or services.

Purchase Order:
A document of the company that details goods or services which the company wishes to purchase from
another company.

Sales Order:
A document of the company that details an order placed by a customer for goods or services.

Goods Received Note:

A document of the company that lists the goods that a business has received from a supplier.

Goods Despatched Note:

A document of the company that lists the goods that the company has sent out to a customer.

Statement:
A document sent out by a supplier to a customer listing the transactions on the customer's account, including
all invoices and credit notes issued and all payments received from the customer.

Credit Note:
A document sent by a supplier to a customer in respect of goods returned or overpayments made by the
customer. It is a 'negative' invoice.

Debit Note:
A document sent by a customer to a supplier in respect of goods returned or an overpayment made. It is a
formal request for the supplier to issue a credit note.
Remittance Advice:
Remittance advice is a letter sent by a customer to a supplier to inform the supplier that their invoice has been
paid.

Receipt:
This is a document confirming that a payment has been received. This is usually in respect of cash sales, e.g.
a till receipt from a cash register.

Invoices:
An invoice relates to a sales order or a purchase order.
(a) When a business sells goods or services on credit to a customer, it sends out an invoice. The details on the
invoice should match the details on the sales order. The invoice is a request for the customer to pay what they
owe.
(b) When a business buys goods or services on credit it receives an invoice from the supplier. The details on
the invoice should match the details on the purchase order.

What does an invoice show?

Invoices should be numbered, so that the business can keep track of all the invoices it sends out.
Information usually shown on an invoice includes the following.
(a) Name and address of the seller and the purchaser
(b) Date of the sale
(c) Description of what is being sold
(d) Quantity and unit price of what has been sold (e.g. 20 pairs of shoes at $25 a pair)
(e) Details of trade discount, if any (e.g. 10% reduction in cost if buying over 100 pairs of shoes)
(f) Total amount of the invoice including (usually) details any of sales tax
(g) Sometimes, the date by which payment is due, and other terms of sale
(h) Details of any cash, or settlement discount (e.g. 5% reduction of invoiced amount if paid within 10 days),
and the discounted amount.

Cash Transactions:
These are quite simple and easy to understand. The buyer orders goods or services and pays for them
immediately or on delivery. The seller provides the service or delivers the goods and often gives the customer
a receipt, which serves the purpose of evidence for payment.
Credit Transactions:
For any credit transaction, both parties to the transaction, buyer and seller, must agree what the credit
terms should be, such as span of time available for payment (credit period) and maximum borrowing amount
(credit limit).

QUESTION 1:
'Crockery Supplies sends out a . . . . . . . . . . . . to a credit customer in order to correct an error where a
customer has been overcharged on an . . . . . . . . . . . . .'

Books of Prime Entry:

Books of prime entry are books in which we first record transactions.

The main books of prime entry are as follows.

(a) Sales day book
(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal
(f) Cash book
(g) Petty cash book

The Sales Day Book:

The sales day book is the book of prime entry for credit sales.

The Purchase Day Book:

The purchase day book is the book of prime entry for credit purchases. A business also keeps a record in the
purchase day book of all the invoices it receives.

The Sales Returns Day Book:

The sales returns day book is the book of prime entry for credit notes raised.

Purchase Returns Day Book:

The purchase returns day book is the book of prime entry for credit notes received from suppliers.
Cash Book:
The cash book may be a manual record or a computer file. The cash book is the book of prime entry for cash
receipts and payments.

Petty Cash Book:

Some cash, in notes and coins, is usually kept on the business premises in order to make occasional
payments for odd items of expense. This cash is usually accounted for separately in a petty cash book.

Discount Allowed:
The discount allowed journal entry will be treated as an expense, and it's not accounted for as a deduction
from total sales revenue.

Discount Received:
A cash discount is received as an incentive for early payment. It is shown as an income in the Profit and loss
account.

Cash Discount Vs Trade Discount:

Trade discounts are adjusted with the sales prices and therefore, are not shown separately in any books of
accounts of the company. Cash discounts, on the other hand, are made later than the time of sales done,
therefore, is shown as an expense in the Profit and Loss statement of the company.
Imprest System:
Under imprest system, a fixed amount of money known as float is given to the petty cashier to meet petty
expenditures for an agreed period which usually consists of a week or month. At the end of agreed period, the
petty cashier submits the details of all expenditures incurred by him to the chief cashier. The total cash spent
by the petty cashier during the period is reimbursed to him and the total cash available to spend at the start of
the next period becomes equal to the original sum (i.e., float).
Question 2:

Question 3:

Question 4:

Ledger Accounts:
Ledger accounts summarise all the individual transactions listed in the books of prime entry.
The Nominal Ledger:
The nominal ledger is an accounting record which summarises the financial affairs of a business. The principal
accounts are contained in a ledger called the general or nominal ledger.

Examples:
Examples of accounts in the nominal ledger include the following:

(a) Plant and machinery at cost (non-current asset)

(b) Motor vehicles at cost (non-current asset)
(c) Plant and machinery, accumulated depreciation (liability)
(d) Motor vehicles, accumulated depreciation (liability)
(e) Proprietor's capital (liability)
(f) Inventories – raw materials (current asset)
(g) Inventories – finished goods (current asset)
(h) Total trade accounts receivable (current asset)
(i) Total trade accounts payable (current liability)
(j) Wages and salaries (expense item)
(k) Rent and local taxes (expense item)
(l) Advertising expenses (expense item)
(m) Bank charges (expense item)
(n) Motor expenses (expense item)
(o) Telephone expenses (expense item)
(p) Sales (revenue item)
(q) Total cash or bank overdraft (current asset or liability)

The Format of a Ledger Account:

There are two sides to a ledger account, and an account heading on top, and so they are often referred to as
T-accounts.

(a) On top of the account is its name.

(b) There is a left-hand side, or debit side.
(c) There is a right-hand side, or credit side
The Accounting Equation:
The accounting equation is Assets = Capital + Liabilities.
Further Subdivision:
Assets = Profit +Liabilities + Capital - Drawings
Business Equation
Closing Capital = Opening Capital + Capital Introduced + Profit - Drawings

Business Entity Concept:

Regardless of how a business is legally set up, for accounting purposes, a business is always treated
separately from its owner(s).

Drawings:
Drawings are amounts of money taken out of a business by its owner.

Payables and Receivables:

Trade accounts payable are liabilities. Trade accounts receivable are assets.

Double Entry Bookkeeping:

Double entry bookkeeping is the method by which a business records financial transactions. An account is
maintained for every asset, liability, income and expense. Every transaction is recorded twice so that every
debit is balanced by a credit.

The Rules of Double Entry Bookkeeping:

A debit entry will:

 Increase an asset

 Decrease a liability

 Increase an expense
A credit entry will:

 Decrease an asset

 Increase a liability

 Increase income
An increase in an expense (e.g. a purchase of stationery) or an increase in an asset (e.g. a purchase of office
furniture) is a debit.

 An increase in revenue (e.g. a sale) or an increase in a liability (e.g. buying goods on credit) is a credit.

 A decrease in an asset (e.g. making a cash payment) is a credit.

 A decrease in a liability (e.g. paying a creditor) is a debit.

The Journal:
The journal is the record of prime entry for transactions which are not recorded in any of the other books of
prime entry.
The journal is a clear and comprehensible way of setting out a bookkeeping double entry that is to be made
e.g.

 Year-end adjustments
 Depreciation charge for the year
 Irrecoverable debt write-off
 Movement in allowance for receivables
 Accruals and prepayments
 Closing inventory
 Acquisitions and disposals of noncurrent assets
 Correction of errors etc.

Question 5:

Question 6:
Question 7:

Question 8:

Question 9:
Trial Balance:
A trial balance is a list of ledger balances shown in debit and credit columns.
If the two columns of the list are not equal, there must be an error in recording the transactions in the accounts.
A list of account balances, however, will not disclose the following types of errors.

Balancing Ledger Accounts:

At the end of an accounting period, a balance is struck on each account in turn. This means that all the
debits on the account are totalled and so are all the credits. If the total debits exceed the total credits there is
said to be a debit balance on the account; if the credits exceed the debits then the account has a credit
balance.

(a) The complete omission of a transaction, because neither a debit nor a credit is made
(b) The posting of a debit or credit to the correct side of the ledger, but to a wrong account
(c) Compensating errors (e.g. an error of $100 is exactly cancelled by another $100 error elsewhere)
(d) Errors of principle (e.g. cash from receivables being debited to trade accounts receivable and credited to
cash at bank instead of the other way round)

Question 10:
ANSWERS TO QUESTIONS:
QUESTION 1:
Credit note; invoice.
QUESTION 2:

QUESTION 3: A
QUESTION 4: B
QUESTION 5: C
QUESTION 6: D
QUESTION 7: C
QUESTION 8: FALSE, FALSE, TRUE, FALSE
QUESTION 9:
QUESTION 10:

1,000